Ambit - Strategy Errclub Demonetised Disruption

Strategy
THEMATIC
November 23, 2016
Demonetised Disruption
Research Analysts
Nitin Bhasin
The demonetisation-driven cash crunch will impact most sectors in

2HFY17; sectors with real-estate linkage and discretionary in nature
(home building, jewellery, durables) could see weak demand continue
in FY18 as well. Loss-of-wealth and income-uncertainty (for informal
sector promoters/ employees) will be the key deterrents to an
immediate recovery in consumption; however, the elevated pace of
formalisation of the Indian economy over FY18/19 could be the key
reliever. The near-term impacted companies could come out stronger
as many sectors witness increased formalisation; however, some sectors
could find new entrants capitalising on formalisation. The BFSI sector
will witness a major change the shift in favour of financial savings
and formalisation bodes well for banks whilst MFIs are staring at
material disruption and NBFCs could see a sharp slowdown in growth
and rise in NPAs. Hence, we expect material downward revisions and
downgrades to our stance in the BFSI sector.
nitin.bhasin@ambit.co
Tel: +91 22 3043 3241
Research Team
ambitreseach@ambit.co
Tel: +91 22 3043 3000
Summary table (Continues on next page)

Till FY18
Impact
On
Autos
Supply
Chain
Earnings
Cut
Demand
Supply
Chain
Industry
Structure
Long Term
Winners
()
()
()
<->
<->
()
PI, Rallis,
Dhanuka, Bayer
()
()
()
()
()
()
<->
<->
()
<->
<->
<->
NA
Seeds
Fertilizers
<->
<->
<->
<->
()
2W
<->
<->
<->
<->
<->
<->
4W
()
()
()
<->
()
()
()
()
()
()
<->
Maruti Suzuki
<->
()
()
Ashok Leyland
<->
<->
<->
Batteries
Large Banks
Small Banks
Small Finance Banks
Pipes
()
()
()
()
()
<->
<->
<->
<->
()
<->
()
Amara Raja,
Exide
<->
()
()
()
()
()
()
<->
<->
()
()
()
()
()
()
<->
<->
<->
<->
<->
()
Supreme, Astral
<->
<->
()
<->
Near-term:
Century
Near-term:
Kajaria, Cera
()
()
()
()
()
()
???
()
()
()
()
()
()
???
()
<->
()
<->
<->
<->
Astral
()
()
()
()
<->
Cummins
()
()
()
()
Auto engines
()
()
()
Greaves Cotton
BTG
<->
<->
<->
<->
<->
<->
Ply/ Laminates
Building Materials Tiles/ Sanitaryware
Adhesives/
Construction
Chemicals
Gensets
Cement
NA
<->
Tyres
Capital Goods
Kaveri Seeds
Specialty Chemicals
B2B
Banks
At Maximum
Risk
Aarti, Vinati, Atul,

SRF
CV
Auto
Components
Key Stocks
Demand
Agrochem
Agri Inputs/
Chemicals
Structural
()
Cement
Source: Ambit Capital research; Note:
()
<->
Large negative impact;
()
()
()
<->
()
Near-term: Shree
Dalmia Bharat Cement, Orient
Cement
Some negative impact; <-> No impact;
( )
Some positive impact;
() Large positive impact

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
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Strategy
Summary table
Till FY18
Impact
On
Demand
Earnings
Cut
()
()
()
()
()
()
()
()
()
()
Home & Personal
()
()
Food & Beverage
()
Tobacco
Alcohol
()
()
Paints
Industry
Structure
()
()
()
()
()
()
()
()
PVR, Wonderla
()
<->
()
()
HUL, Dabur,
Colgate, Marico
Emami
()
()
<->
()
()
Britannia
GSK Consumer,
Nestle
()
()
()
<->
<->
<->
ITC
<->
<->
<->
United Spirits
United Breweries
()
()
()
()
()
()
()
Asian Paints
Akzo Noble
Engineering &
construction
<->
()
<->
<->
()
()
Infrastructure
()
<->
()
<->
<->
<->
Domestic
()
<->
()
<->
<->
<->
NA
NA
Export
<->
<->
<->
<->
<->
<->
NA
NA
API / CRAMS
<->
<->
<->
<->
<->
<->
NA
NA
B2C products
()
()
()
()
<->
()
()
<->
()
()
Havells
B2B products
()
()
Havells, Finolex
Television
broadcasters
()
<->
()
()
<->
()
ZEEL
NA
DPOs - DTH
()
()
()
()
()
()
()
()
()
()
()
Dish TV
NA
<->
()
()
<->
NA
NA
()
<->
()
NA
()
()
()
()
()
()
()
()
()
()
()
()
()
()
()
()
()
()
()
()
<->
()
Upstream
<->
<->
<->
<->
<->
<->
NA
OMCs
<->
()
()
()
NA
HPCL
<->
()
()
<->
Gas stocks
()
()
<->
<->
NA
PLNG, GAIL
IT services
<->
<->
<->
<->
<->
<->
NA
NA
Telcos
<->
<->
<->
<->
()
<->
NA
NA
Towercos
<->
<->
<->
<->
<->
<->
NA
NA
Generators
()
<->
<->
<->
<->
JSW Energy
Discoms
()
()
()
impact; ()
()
()
()
<->
Torrent Power
Apparel & Footwear

Leisure
Consumer Staples
E&C/ Infra
Healthcare
Light Electricals
Media
DPOs- Cable MSOs

Newsprint
HFCs
NBFCs
Auto NBFCs
SME financers
MFIs
Oil and Gas
Technology
Telecom
Utilities
Key Stocks
Supply
Chain
Jewellery
Consumer
Discretionary
Structural
Supply
Chain
Source: Ambit Capital research; Note:
()
<->
Large negative
Demand
<->
Long Term
Winners
At Maximum
Risk
Titan
Trent, ABFRL
NA
LICHF
MMFS
BAF
Some negative impact; <-> No impact;
( )
Some positive impact;
() Large positive impact
November 23, 2016
Ambit Capital Pvt. Ltd.
Page 2
Strategy
Macroeconomic impact of
demonetization: M+R+T resets to
the fore
Exhibit A: 87%of all transactions in

India took place in cash-form in
FY12
Payment Type
FY10 FY11 FY12
Card Payment
Transactions (Excluding
3%
4%
4%
Commercial)
Electronic Direct / ACH
5%
6%
7%
Transactions
Cash Transactions
90% 88% 87%
Other Paper
Transactions (Checks,
3%
3%
3%
Demand Drafts)
Real GDP growth

(YoY change, in %)
The demonetisation-driven cash crunch that is playing out in India will

paralyse economic activity in the short term. Hence, we expect GDP growth to
decelerate from 6.4% in 1HFY17 (as per Ambit est.) to 0.5% YoY in 2HFY17
with a distinct possibility of GDP growth contracting in 3QFY17. However,
from 3QFY17 until 4QFY19, we expect a strong formalisation effect to play
out as nearly half of the non-tax paying businesses in the informal sector Source: Euromonitor, Ambit Capital research.
(40% share in GDP) become unviable and cede market share to their
organised sector counterparts. We expect this dynamic to crimp GDP growth
in India in FY18 as well and hence we cut our FY18 GDP growth estimate to Exhibit B: We cut our GDP forecast
5.8% YoY (from 7.3%). We also scrap our March 2017 Sensex target of 29,500 for FY17 and FY18
and unveil our March 2018 Sensex target of 29,000.
9%
6.8%
7.3%
The three effects that will be triggered by the demonetisation move

5.8%
6%
The demonetisation affected by the Government on November 8, 2016 will trigger
3.5%
three sets of effects. Effect #1 will be the transactional hit created by a hard cash
3%
deficit as banks are unable to replace the demonetised cash expeditiously. This effect
will be temporary and will kill business activity mainly over 2HFY17. Effect #2 will
0%
entail an adverse structural hit: (1) to non-tax paying businesses in the informal
FY17 FY17 FY18 FY18
sector that become unviable; and (2) to the real estate sector where 30-40% of the
(old) (new) (old) (new)
value of purchases is funded using black money. Finally, effect #3 is likely to be a
structural boost to tax-paying businesses in the formal sector which are able to Source: CEIC, Ambit Capital research
capture the market share vacated by the informal sector.
Exhibit C: We expect the RBI to cut
Investment Implications
In the light of negative effects of the recent steps taken by the NDA Government and
with just 4 months to go before FY17 comes to a close, we scrap our current Mar17
Sensex target of 29,500 and unveil our Mar18 Sensex target of 29,000.
As highlighted in our November 10, 2016 note the Governments latest move to
squeeze the economy will disrupt economic activity in the short term, especially those
segments where cash-based transactions are the norm like real estate, unsecured
lending, real estate construction services and building materials. Whilst in the near
term we expect these businesses to suffer, over the next couple of years the strongest
players in these sectors will gain market share as competition from
unscrupulous/unorganised players reduces. For more details on our GPD growth
estimates, click here for our November 18, 2016.
November 23, 2016
4QFY15
1QFY16
2QFY16
3QFY16
4QFY16
1QFY17
2QFY17
3QFY17 (E)
4QFY17 (E)
Repo rate cut per

quarter
(in bps)
We cut our GDP growth est. for FY17 by 330bps, FY18 by 150bps
rates by 25-50bps in 2HFY17
Owing to effect #1 (i.e. the transactional impact created by the cash deficit) we
75
expect real GDP growth in 2HFY17 to come under meaningful pressure. In specific,
50
50
we expect GDP growth to decelerate from the 6.4% YoY growth recorded in 1HFY17
50
as per Ambit estimates (vs Government estimate of 7.1% YoY in 1QFY17) to 0.5%
25
25
25 25
25
YoY in 2HFY17. Furthermore, we highlight the distinct probability of GDP growth
0 0
0
contracting in 3QFY17. As regards FY18 we cut our GDP growth estimate to 5.8%
0
YoY from 7.3% YoY. We build in far stronger growth in FY18 as compared to 2HFY17
mainly as we expect effect #3 (i.e. the structural market-share booster received by
tax-paying businesses in the formal sector) to propel GDP growth higher in FY18.
As a response to the slowing GDP growth, we expect the RBI to consider rate cuts of
25-50bps over 2HFY17 itself. Furthermore, we highlight the distinct risk of fiscal
slippage materializing in FY17 (to a lesser extent) and FY18 (to a greater extent) as Source: CEIC, Ambit Capital research
against the stated target of 3.5% and 3% of GDP as the Government is expected to
provide support to the lowest economic strata in the form of fiscal transfers.
Research Analysts
Ritika Mankar Mukherjee, CFA
+91 22 3043 3175
ritika.mankar@ambit.co
Sumit Shekhar
+91 22 3043 3229
sumit.shekhar@ambit.co
Prashant Mittal, CFA
+91 22 3043 3218
prashant.mittal@ambit.co
Page 3
Strategy
Agri Inputs
POSITIVE
Moderate demand weakness; working capital cycles

could be extended
Key Recommendations
Demonetisation will adversely affect demand in the near term. Channel

checks suggest: a) low liquidity among farmers due to delay in kharif
payouts; b) wholesalers/retailers are not extending credit given paucity of
cash; and c) debtor days for companies could increase due to delayed kharif
payouts. Given short-term liquidity-led delays in offtake, 2HFY17 growth will
be somewhat affected. However, there are no structural issues as agri input
demand is non-discretionary and farmers have to spend to save crops. In the
long term, shift to cheques and online transfers alongside GST will create
barriers for unorganised players. Given 30-40% of agrochem demand is
unorganised, we expect organised players (Bayer India, PI, Dhanuka, Rallis)
to benefit. In chemicals, exporters like PI Industries, SRF, Aarti and Vinati
Organics will not be hit as 70-80% of earnings driven by B2B exports. Our
top ideas are SRF (TP Rs1850, 29% upside) and PI (TP Rs1100, 44% upside).
PI Industries
BUY
SRF Limited
BUY
Rallis India
SELL
Research Analyst
Ritesh Gupta, CFA
riteshgupta@ambit.co
Tel: +91 22 3043 3242
Summary table
Exhibit 1: Demonetisation impact on agri inputs and chemicals players
Segment
Particulars
Demand Outlook
Agro Chemicals
Supply chain change

Industry structure
Demand Outlook
Seeds
Supply chain change

Industry structure
Demand Outlook
Fertilisers
Supply chain change

Industry structure
Demand Outlook
Specialty
Chemicals
Exporters
Supply chain change

Industry structure
2HFY17
FY18
Structural
No wealth destruction for
Demand would moderate due to cash
Demand would normalise by
end-user as agri income is
crunch in the near term
FY18 if monsoons are normal.
tax exempt
No significant changes given low dependence on informal channels (vendors/ distributors)
Unorganized players may lose market share given return ratios
Creditor days could increase, thereby
will get impacted due to higher tax outgo. Number of dealers in
impacting near-term ROCE
the channel may also shrink, posing challenges for tier 3- tier 4
players.
Demand may be affected as farmers may
downtrade or use saved seeds given cash No impact on medium/long-term No impact on medium/longcrunch. Most rabi seed sales happen
demand
term demand
around this time.
The proportion of black money transactions in seeds is very high for domestic players. Would create longer a
longer cash crunch and impact ROCE
MNCs will gain market share as white transactions increase;
Inventory/creditor build-up can impact
domestic players will face difficulties given most of transactions
working capital/RoCE
are cash
Demand is likely to be hit due to cash
No change
No change
crunch in the near term
No significant change given low dependence on informal channels (vendors/distributors)
Fertilisers is very organised given it is controlled by government agencies at many levels of the supply chain.
No change in industry structure.
No impact on demand for
No impact on demand for exports
No impact on demand for exports
exports
No impact on demand
We should see positive benefits for domestic sales of these companies as smaller players get weeded out.
However, the proportion of domestic sales is smaller in most of these companies except Indian subsidiaries of
MNCs
Source: Ambit Capital research
Channel checks suggest a mixed picture
Western India dealer: This has impacted cash sales. Farmers havent been able
to sell their cotton and soybean from the kharif season.
Gujarat-based dealer: Most of our sales are now happening in credit. Now,
80% of sales is on credit vs 20% earlier.
Punjab based dealer: This is not the season for purchasing pesticides and
hence do not do expect a major impact; but earlier credit not yet cleared because
of lack of funds with farmers. Pesticide consumption will start a month down the
line, hopefully by that time demand will revive.
North-based retailer: Everybody is in a state of panic. In the North, farmers got

cash given harvest was before the demonetisation drive and, hence, that area is
less affected.
November 23, 2016
Page 4
Strategy
How are companies/industry reacting to the disruption?
Given this is a relatively lean season (as kharif is behind and rabi is just starting),
most companies havent yet rolled out any major help to dealers. Companies
believe that while demand has been affected, it will pick up as the liquidity
position eases.
This period of the year is post-kharif cash collection time for most companies.
However, given the recent liquidity crunch, they havent been pushing for cash
collection.
Impact on demand over the following periods

2HFY17: We expect demand growth to moderate. Demand would improve once the
cash crunch is resolved. With healthy reservoir levels, we had expected ~15% growth
in agrochemicals in 2HFY17; this could moderate to high single-digit. Increase in
cash withdrawal limit for APMC traders and farmers should improve liquidity in the
channel. The Government has also allowed farmers to buy seeds with old Rs500
notes, which would boost seed demand. However, seeds and fertilisers are likely to
be hit more than agrochemicals as their usage is more widespread.
FY18: There would be no material impact on agri input demand beyond 2HFY17. As
agri inputs are non-discretionary for farmers, demand would normalise if monsoons
are normal and crop prices and pest infestation levels remain the same.
Beyond FY18: Organised players would gain market share from unorganised players
as the increase white transactions could reduce return ratios for unorganised private
players by 500-700bps. Unlike in consumer goods, farmers will not be impacted by
the demonetisation wave over the medium to long term as: a) farm income is tax
exempt, and b) agri input demand is non-discretionary. There is a high likelihood of
rural stimulus as the Government redistributes the dividend gains from
demonetisation to rural areas. This would have a long term positive impact on rural
demand.
Biggest changes to the industry structure
2HFY17: Debtor days for agri inputs companies would get stretched as receivables
from sales in this years kharif season would be delayed. Note that debtor days for
seeds/agrochemicals are higher than those of fertilizers.
FY18: Debtor days would remain extended in FY18 as credit to farmers may remain
constrained. For some dealers, the cost of capital might increase as they move from
black working capital to white working capital.
Long term: We expect some channel consolidation as a few dealers may no longer
be competitive given higher tax incidence and increased cost of capital for white
money; however, end-demand wont be impacted.
From the companies perspective, there could be delays in normalisation of debtor
days as some channel working capital is funded by credit from companies.
In the long term, improved credit access and lower credit cost will improve overall
investments by farmers.
Unorganised players will find it difficult to survive given high working capital required
to support all-white transactions and higher tax incidence. Domestic seeds players
would face difficulties as all their transactions had been in cash. They typically get
cash from farmers as advances and pay in cash to farmers who sow their seeds.
What factors should investors consider in picking winners/losers?
We recommend focusing on companies with: a) higher share of exports; and b) tight
working capital management as debtor days are likely to increase. We prefer
agrochemicals over seeds as the proportion of black money transactions is less in the
former. MNC seed companies would benefit from the crackdown on black money and
would gain market share. In agrochemicals, top tier players such as PI Industries,
Dhanuka and Rallis will benefit from these changes over the long term as they have a
better dealer base and would benefit from inevitable industry consolidation. Our top
picks are PI Industries (44% upside, TP Rs1100) and SRF (29% upside, TP Rs1850).
November 23, 2016
Page 5
Strategy
Exhibit 2: Relative valuation table
Mcap
(USD
mn)
Company Name
P/E
P/B
EV/EBITDA
ROE
ADVT-6m
(USD mn) FY17E FY18E FY19E FY17E FY18E FY19E FY17E FY18E FY19E FY17E FY18E FY19E
CAGR (FY16-FY19)
Sales EBITDA
EPS
Global Agri Majors

Monsanto
44,396
6.1
21.4
18.4
15.2
9.1
8.0
8.5
13.2
11.8
10.4
41.0
40.2
36.4
5.9
16.9 30.3
Dow Chemicals
60,555
5.0
14.8
13.5
12.8
2.4
2.1
2.0
8.3
7.7
7.4
17.3
17.7
17.4
2.2
10.6 (13.2)
FMC Corp
7,289
0.8
19.3
16.6
15.0
3.3
2.8
2.9
12.9
11.7
10.9
17.0
17.0
17.4
3.6
134.3 (0.3)
Syngenta
35,567
1.4
23.3
20.5
18.4
4.1
3.9
3.7
14.8
13.3
12.2
17.0
19.1
20.2
2.4
9.5 13.0
Bayer AG
79,971
3.3
12.3
11.3
10.5
2.9
2.6
2.4
8.4
7.9
7.5
22.2
21.7
21.9
3.2
8.8 20.4
BASF
78,271
2.6
16.9
15.6
14.3
2.4
2.3
2.2
8.5
8.0
7.5
13.8
14.7
15.6
(4.1)
1,558
1.4
26.4
21.1
16.9
7.6
6.3
5.2
19.7
15.7
12.7
31.1
32.3
33.3
18.5
25.5 25.5
522
1.1
19.0
17.2
14.8
3.3
2.9
2.5
12.2
10.3
8.4
19.1
18.9
20.2
15.0
19.3 23.5
2.4
9.0
Domestic Agchem
PI Industries
Rallis India
Bayer CropScience
1,969
1.0
33.1
26.8
22.7
6.4
5.4
4.5
23.6
19.3
16.3
21.0
22.0
22.5
9.3
24.1 26.1
UPL Ltd
4,523
16.8
16.7
13.8
11.4
3.4
2.8
2.3
10.9
9.5
8.1
22.5
22.1
22.5
16.2
16.9 20.8
Dhanuka Agritech
502
0.5
27.2
22.0
17.9
6.1
5.1
4.1
19.2
15.6
12.8
23.8
24.9
25.1
17.1
23.8 21.4
Insecticides India
133
0.2
16.1
12.2
10.6
2.0
1.7
1.5
9.1
7.4
6.9
13.1
15.2
15.3
15.4
19.4 29.8
Kaveri Seeds
374
3.6
12.9
10.4
9.6
2.4
2.1
1.8
9.9
8.1
6.9
20.3
21.8
23.0
3.4
16.1 15.5
Monsanto India
568
2.9
30.1
25.3
N/A
N/A
N/A
N/A
27.1
23.0
N/A
29.8
30.7
N/A
N/A
Domestic Seeds
N/A
N/A
Source: Company
November 23, 2016
Page 6
Strategy
Auto OEMs
NEGATIVE
Near-term hit for 2Ws; longer struggle for PVs/CVs
Key Recommendations
Near-term demand across categories could be significantly affected. In 2Ws,

a high proportion of transactions are in cash. In PVs, impact will be largely
felt on downpayments and consumer sentiment. MHVC sales may not be hit
but high dependence on cash for operations will impact the value chain. In
FY18 and beyond, we expect 2W demand to recover (low-ticket, utility-driven
purchases) while risk aversion and wealth impact could affect replacement
purchases/upgrades (~50% of sales) in PVs. Similarly, weak end-user
segments like real estate (10% of sales) and any prolonged weakness in
resale truck markets (important source of liquidity/profitability for fleet
operators) could impact MHCV sales. We envisage certain changes to
industry structure like rising financing penetration in 2Ws, downtrading in
PVs and consolidation of fleet operators in CVs. There would be no clear
winner amongst auto OEMs due to demonetisation but 2W players will fare
better than PV/CV peers. Any significant government stimulus could be a key
surprise factor, especially for 2Ws.
Tata Motors
BUY
Maruti Suzuki
SELL
Research Analysts
Ashvin Shetty, CFA
ashvin.shetty@ambit.co
Tel: +91 22 3043 3285
Gaurav Khandelwal, CFA
gaurav.khandelwal@ambit.co
Tel: +91 22 3043 3132
Exhibit 3: Demonetisation impact on auto OEMs

Segment
Particulars
Demand Outlook
Two-wheelers Supply chain change

Industry structure
Demand Outlook
Passenger
vehicles
Supply chain change

Industry structure
Medium &
Heavy
commercial
vehicles
Demand Outlook
Supply chain change
Industry structure
2HFY17
FY18
Structural
Given high proportion of cash
Being low-ticket 'utility driven'
No structural impact on demand;
transactions, demand will be significantly purchases, no meaningful impact
scooters should continue to gain
impacted
on FY18 demand
ground
No significant changes given low dependence on informal channels (vendors/distributors)
Increase in finance penetration may entail higher investments in
Inventory build-up can impact working
captive finance ventures by Hero MotoCorp and TVS Motor which may
capital/RoCE
impact consolidated RoCE.
Weak consumer sentiment and
Risk aversion/wealth destruction to
downpayment requirement (about 10impact replacement/upgrade
Same as FY18
15%) to impact demand
purchases (~50% of industry sales)
Trend towards upgradation in recent years could reverse and then pick
capital/RoCE
up slowly over the next 2-3 years
Certain end-user segments like
Prolonged weakness in resale
Demand impacted by weak freight/cash
real estate (10% of new CV sales)
markets (wealth destruction)
restrictions. Significant risks emerging to
could witness prolonged demand
could impact longer-term
pre-buying that was expected in 4QFY17
weakness
demand
Demonetisation along with implementation of GST could result in
consolidation of fleet operators. This may shift demand shift towards
capital/RoCE
heavier trucks.
Channel checks
Two-wheelers (2Ws)demand picking up gradually but still down: About
60-65% of 2W purchases are in cash, so the cash crunch would impact sales.
Demand has started recovering from the lows of initial days of demonetisation
announcement but is still significantly lower (~50%) compared to the normal
projected sales levels. Most 2W dealers believe that as 2Ws are low-ticket items,
the impact may not last beyond the near term.
Four-wheelers (4Ws)financing challenges impacting demand; no
cancellations, but rising inventory: While the financing proportion is high (6065%), the cash crunch has impacted the ability to make downpayment (75% of
the vehicle value). Further, consumer sentiment has been at one of the lowest
levels in recent times. However, dealers have not reported any significant
cancellations so far. There is risk of higher discounts in the four-wheeler industry
due to inventory build-up.
Medium and heavy commercial vehicles (MHCVs)slump in freight rates;

risk to pre-buying: Lack of cash availability is putting a significant strain on fleet
operators operations as most expenses (besides toll, petrol) are cash-based.
Freight movement is weak and, hence, freight rates are down by 15-20% across
India. Cash crunch has also impacted the truck body-building segment, which
works primarily on cash (85% of the body-building industry is unorganised).
November 23, 2016
Page 7
Strategy
How are
disruption?
companies/industry
reacting
to
the
There exist significant uncertainties amongst auto OEMs on the potential impact of
the demonetisation. As of now, almost all companies are in wait-and-watch mode.
No production cuts have been announced so far and most measures are restricted to
tide over the near-term cash availability crisis.
2Ws: Dealers/companies are attempting to tide over the near-term cash crisis by
accepting cheques (after verifying bank statements), reducing downpayment
requirements, waiving off credit card and debit card swap charges among other
such measures.
4Ws: PV players are now accepting cheques as well as debit/credit card

payments and e-wallet transactions at their dealerships. In addition, service
centres of certain OEMs are providing free pick-up and drop of vehicles from
customers.
MHCVs: Since 70-75% of MHCV transactions are conducted in the last week of
the month, CV OEMs are currently in wait-and-watch mode and would assess the
market condition at the end of November 2016 before taking appropriate steps.

We expect significant near-term impact across automobile categories. However, in
FY18 and beyond, we expect demand for 2Ws to be relatively immune to disruption
as compared to PVs and MHCVs.
2Ws: No structural issues
2HFY17: Since 60-65% of the industry transactions are in cash the impact is
expected to be quite pronounced, particularly in Nov and Dec 2016.
FY18: However, being a low-ticket, utility-oriented purchase, we do not see the

negative impact persisting in FY18 due to remonetisation.
Longer term: We do not see any long-term structural impact on 2W demand.

We continue to expect that scooters would continue to gain share in the
domestic 2W space.
4Ws: Impact on replacement purchases could be profound
2HFY17: While financing penetration is high in the case of PVs, weak consumer
sentiment towards discretionary purchases and requirement of downpayments
are likely to impact demand in the near term.
FY18 and beyond: In FY18, due to risk aversion and wealth destruction,
demand for the replacement segment (vs first-time buyers and those used for
commercial segments) would continue to be affected. Our channel interaction
indicates that replacement/upgrade purchases account for ~50% of industry
purchases and more prominently for price points above Rs7mn.
MHCVs: Real estate slowdown and weak resale market could prolong
demand weakness
2HFY17: Given significant demand reduction in most sectors, freight

demand/freight rate is expected to witness sharp reduction in the near term.
Given remonetisation is taking longer than expected, there is a possibility that
demand may not return fully by 4QFY17. This, together with rather subdued
sentiment amongst fleet operators, could impact pre-buying that we expect to
play out in 4QFY17.
FY18: Demand could be strong in certain user industries like real estate, which
contributes close to 10% of total MHCV sales.
Longer term: Besides structural weakness in certain user segments like real
estate, prolonged slowdown in resale markets (which serve as an important
revenue source for fleet operators) could also weigh on long-term demand.
November 23, 2016
Page 8
Strategy
Changes to the industry structure

Given the likelihood of inventory build-up, we expect working capital and RoCE to be
impacted across automobile categories/companies. Beyond this short-term impact,
some sector-specific implications are:
2Ws: In the long term, as customers move away from cash-based transactions to
more formal payment channels like banks, cards, etc. the finance penetration of
the 2W industry would increase (currently 35-40%). This may entail higher
investments in captive finance ventures by Hero MotoCorp and TVS Motor, which
may impact consolidated RoCE.
4Ws: In the last five years, there was a clear trend of uptrading in the domestic
4W industry with declining share of entry-level cars such as Alto and Wagon R.
Demonetisation can have a negative impact on customers risk aversion, which
may reverse the uptrading trend for the next 2-3 years.
MHCVs: Implementation of GST in the longer term will result in reduced share of
unorganised players. This, together with higher impact of demonetisation, could
result in consolidation of fleet operators. This consolidation in favour of larger
fleet operators may result in demand shift towards heavier trucks.
What are the factors investors should consider to pick

winners and losers?
There would be no clear winner amongst the auto OEMs due to demonetisation
measures, both from short-term and long-term perspectives. Certain
categories/players (within a category) could be less impacted than others.
We believe the 2W category would be relatively immune than passenger vehicles

and commercial vehicles as it is a low-ticket, utility purchase.
Within PVs, positive benefits of higher market share to Maruti from downtrading
would be offset by negative impact from lower sales realisation/profitability due
to weaker product mix (note that Maruti was finding increasing traction in highervalue cars such as Baleno, Brezza and Ciaz in the recent years).
Surprise factors
Uncertainty around Government stimulus or income redistribution measures.

These may have a positive impact on demand, particularly for 2Ws.
Any increase in the pace of Government infrastructure development. This can

significantly offset any end-user demand weakness in the MHCV sector.
Exhibit 4: Relative valuation sheet

Company
Mcap
US$ mn
Stance
EV/EBITDA (x)
FY16 FY17 FY18
P/E (x)
CAGR (FY16-18)
FY16 FY17 FY18
Sales EBITDA
EPS
EBITDA Margin (%)

FY16
FY17
FY18
RoE (%)
FY16 FY17 FY18
Tata Motors*
20,661
BUY
5.3
4.9
3.7
12.8
13.3
9.0
18%
20%
20% 10.6%
9.2% 10.9%
23%
18%
20%
Maruti Suzuki
20,561
SELL
14.5
11.6
10.5
31.8
19.5
17.5
19%
18%
35% 15.5% 16.0% 15.3%
18%
25%
23%
M&M
10,159
SELL
8.5
7.5
6.5
15.2
13.4
11.6
12%
14%
13% 13.2% 13.5% 13.7%
15%
15%
16%
Bajaj Auto
10,820
SELL
12.9
12.1
10.7
20.6
18.8
16.3
11%
10%
12% 21.7% 21.7% 21.4%
31%
30%
32%
Hero MotoCorp
8,660
SELL
12.4
10.8
9.8
18.5
16.4
15.0
10%
13%
11% 15.5% 16.3% 16.3%
44%
41%
38%
Eicher Motors**
8,194
SELL
28.0
18.5
15.3
54.4
32.7
26.8
15%
35%
42% 15.6% 17.3% 17.2%
39%
46%
41%
Ashok Leyland
2,986
BUY
10.5
9.5
8.1
19.4
17.0
13.2
13%
14%
21% 11.5% 11.3% 11.5%
25%
23%
25%
TVS Motor
2,429
SELL
23.0
18.0
13.0
37.4
27.6
19.9
19%
33%
37%
8.3%
24%
28%
32%
12.7
11.2
10.2
20.0
17.9
15.7
14%
16%
21% 14.4% 14.8% 14.5%
25%
27% 29%
Median
6.7%
7.5%
Source: Bloomberg, Company, Ambit Capital research. Note: Multiples and return ratios computed on Ambit estimates. *Tata Motors figures are arrived at by
adjusting EBITDA/PAT for normalised R&D spends (by expensing 70% of R&D costs instead of current 20%); ^excluding investments in listed entities; **The
company has changed its accounting year-end from December to March; hence FY16 is for the 15 months ended March 31, 2016. FY16 and FY17 YoY growth
has been adjusted and annualised.
November 23, 2016
Page 9
Strategy
Auto Components
NEGATIVE
Mixed picture
Key Recommendations
Given deceleration in auto OEM growth and impact of cash crunch on

replacement segment sales, we expect near-term demand to be impacted
across B2B and B2C auto component players. We expect B2B players with
higher exposure to 2Ws (Endurance Technologies, Fiem Industries and
Gabriel) to be better placed than peers with higher exposure to CVs/PVs
(Bosch, Wabco). In the B2C space, we expect battery players like Amara Raja
and Exide (higher exposure to 2W/PV replacement segments and opportunity
to gain share from the unorganised sector) to be better placed than tyre
makers (higher exposure to truck segment).
Mahindra CIE
BUY
Amara Raja
SELL
Research Analysts
Ashvin Shetty, CFA
Tel: +91 22 3043 3285
Tel: +91 22 3043 3132
Exhibit 5: Demonetisation impact on automobile ancillary companies

Segment
B2B Auto
component
Particulars
2HFY17
Demand Outlook
We expect 2W demand to be relatively immune vs. PV and CV demand.

Weak demand across Auto OEMs to
Hence, auto OEMs with higher exposure to domestic 2Ws will be better
impact demand
placed than ones with higher exposure to PV/CVs.
Supply chain change
Most of the large B2B auto component players have relatively low exposure to unorganised vendors.
Industry structure
No major changes envisaged
Demand Outlook
Battery players
Supply chain change
Industry structure
Demand Outlook
Tyre companies
Supply chain change

Industry structure
FY18
Structural
No impact on the automotive battery replacement demand as battery is a

low-ticket requirement for vehicles.
Battery purchases are mostly made
Industrial battery segment would recover quickly as most of the end-user
in cash; liquidity crunch to weaken
segments (telecom, investors and UPS) are immune to demonetisation
demand
impact.
Auto OEM battery segment would track auto OEM volume recovery
No significant disruption in the supply chain as dependence on small vendors is low (lead is mostly imported).
Demonetisation along with implementation of GST could result in fasterNo significant impact
than-expected shrinkage of unorganised players in the automotive
replacement segment.
We expect negative impact across
On the replacement side, we expect 2W and PV sub-segments to recover
OEM and replacement subin FY18 but truck tyre sub-segment would take a longer time. Auto OEM
segments in the near term.
sub-segments to track Auto OEM volume recovery.
No significant dependence on unorganised channels and, hence, no impact.
Share of Chinese imports could come down in near term, but there is uncertainty surrounding the same over the
medium to longer term
Reactions from
disruption
channel
and
companies
to
the
B2B auto ancillary companies

So far there has been no impact on production or any intimation from the auto
OEMs. However, companies are expecting production cuts to be announced given
weak demand environment for OEMs.
Companies continue to adopt a wait-and-watch policy and would respond
accordingly to any measures taken at the auto OEM level. The general expectation
amongst auto ancillary players is that there could be only short-term disruption
and auto demand should recover in the next few months.
Battery companies
The demand for automotive replacement batteries has been impacted because of
the cash crunch. However, the situation is better in Metros and Tier-I cities, where
cheques and credit/debit cards are also used for transactions.
In the short term, demand for inverter batteries can see some moderation.
However, November-February is a seasonally weak period for inverters and
hence impact on overall sales is not expected to be significant.
November 23, 2016
Page 10
Strategy
Battery players like Amara Raja have increased the credit period allowed to
dealers/distributors by 5-6 days (from 7-8 days of credit allowed prior to
demonetisation) to ease liquidity pressure on their distributors and dealers.
Tyre companies
While the demand has been clearly impacted in the replacement segment, the
companies are currently adopting a wait and watch policy.
How would demand shape up over the near-term and

the long-term?
2HFY17: Given weak demand outlook for automobile OEMs (due to cash crunch,
weak consumer sentiments), we expect demand for B2B auto ancillary companies
to be impacted.
FY18 and beyond: As discussed in the section on auto OEMs, we expect longer
term demand for 2Ws to be relatively immune to disruption as compared to PVs
and MHCVs. As a result, we expect vendors exposed to 2W segment would be
relatively better placed than companies having significant exposure to domestic
PVs/CVs.
Battery companies
2HFY17: Since automotive replacement and inverter batteries are generally

bought in cash, demand may see some moderation over 2QFY17
FY18 and beyond: In the longer term, however, we see negligible impact on the
replacement demand for automotive batteries, since batteries are low-ticket items
necessarily required for vehicles in use. Further, we expect, Industrial battery
segment to recover as most of the end user segments (telecom, investors and
UPS) are immune from demonetisation impact. Auto OEM battery segment will
track Auto OEM volumes in the longer term.
Tyre companies
2HFY17: We expect impact across OEM and replacement sub-segments in the

near term.
FY18 and beyond: As discussed in the auto OEM section, we expect PVs and
MHCVs to remain impacted in FY18 on the back of weak sentiment among
consumers and fleet operators. On the replacement side, while 2W and PV subsegments would recover, we expect a slow recovery in truck tyre replacement as it
is a highly cost-sensitive segment.
Biggest change to the industry structure
B2B auto ancillary companies no major change envisaged

Our interaction with managements of most large B2B auto component companies
indicates that exposure to unorganised vendors is relatively small and hence no
major change in supply chain is expected. Furthermore, the presence of
unorganised competitors is also negligible across most B2B auto component
suppliers.
Battery companies unorganised to organised shift could accelerate

Demonetisation will accelerate the shift from unorganised (who predominantly
transacted through cash in order to avoid taxes) to organised battery
manufacturers. Unorganised manufacturers constitute one-third of the twowheeler and automotive (mostly commercial vehicle and tractors) battery
replacement volumes and together constitute 41% of the battery industry size.
With the implementation of GST, the unorganised players would no longer
remain cost competitive.
November 23, 2016
Page 11
Strategy
Tyre companies share of Chinese imports could fall in near term, low
visibility in medium to long term
The domestic tyre industry is oligopolistic with market share concentrated in the
top five players. The share of Chinese imports has been rising in recent years but
there could be some negative impact on share of the Chinese imports due to
higher concentration amongst smaller fleet operators. However, there is
uncertainty surrounding how the Chinese imports would trend over the medium
to long term. This is because, on one hand, there could be consolidation of fleet
operators which could favour Indian tyre makers; but on the other hand
prolonged demand weakness could lead to downtrading which favour Chinese
tyre makers.

winners/losers?
While there will be no clear winners of the demonetisation drive, we believe

amongst the domestic-focussed auto component players those with higher
exposure to the domestic 2W segments would fare better than those with high
exposure to the domestic CV and PV segments.
Amongst the frontline domestic-focussed auto OEM companies, Endurance

Technologies, Gabriel and Fiem Industries with 55-60%, 55% and 80-85%
revenues from the domestic 2W segment, respectively, appear to be better placed
than Wabco (65-70% of revenues from domestic CVs) and Bosch (50% of
revenues from domestic CV and PV segments).
Battery companies
Organised players like Amara Raja and Exide industry will be the biggest
beneficiaries of formalisation of the industry.
In case of a slowdown in the automobile OEM segment, Amara Raja is better

placed since it derives only 15% of revenues from this segment as against Exide
which derives 24% (FY16).
Tyre companies
Players with the highest exposure to domestic CVs would be worst impacted.
Amongst the listed tyre companies, JK Tyres (55-60% of consolidated revenues
from domestic CV segment) appears the most vulnerable.
Surprise factors
Uncertainty surrounding the impact of demonetisation on Chinese tyre imports.
November 23, 2016
Page 12
Strategy
Exhibit 6: Relative valuation
Mcap
Company
EV/EBITDA (x)
US$ Stance
mn
P/E (x)
CAGR (FY16-18)
FY16 FY17
FY18 FY16
FY17
FY18
Sales EBITDA
EBITDA Margin (%)
EPS
FY16
RoE (%)
FY17 FY18 FY16 FY17 FY18

Bosch
8,483
NA
29.7 26.8
20.8
46.4
34.8
29.2
14%
18%
26%
18%
18%
23%
16%
19%
19%
Motherson Sumi
5,772
NA
10.8
9.9
8.0
29.1
23.4
17.9
15%
18%
27%
10%
10%
13%
34%
31%
31%
Bharat Forge
2,932
NA
15.2 15.9
13.2
30.7
30.7
23.3
4%
7%
15%
19%
18%
23%
19%
17%
19%
WABCO India
Endurance
Technologies
Mahindra CIE
Automotive*
Suprajit Engineering
1,394
NA
30.8 22.0
18.5
46.4
33.3
27.5
20%
29%
30%
16%
18%
23%
21%
23%
22%
1,080
NA
11.7
NA
NA
25.4
NA
NA
NA
NA
NA
13%
NA
NA
22%
NA
NA
1,007
BUY
14.4 11.8
9.9
19.9
22.5
14.9
-6%
7%
4%
10%
11%
12%
11%
12%
15%
349
NA
15.3 12.7
10.4
30.5
21.7
17.6
22%
21%
31%
17%
17%
18%
21%
23%
24%
FIEM Industries
200
NA
11.8 10.3
8.6
21.7
21.3
16.9
18%
17%
13%
13%
13%
15%
23%
17%
18%
Gabriel India
215
NA
11.3
9.6
8.2
19.5
17.4
14.5
12%
18%
16%
9%
10%
11%
21%
20%
21%
14.4 12.3
10.2
29.1
23.0
17.8
15%
18%
21%
13%
15%
17%
21%
20%
20%
Median
Battery companies
Amara Raja*
2,337
SELL
19.0 16.9
15.1
32.7
29.8
26.0
12%
12%
12%
17%
17%
17%
25%
23%
24%
Exide Industries*
2,158
SELL
15.8 14.3
13.0
23.4
20.7
18.8
10%
11%
12%
15%
15%
15%
23%
23%
22%
17.4 15.6
14.1
28.1
25.3
22.4
11%
12%
12%
16%
16%
16%
24% 23% 23%
11.8
11.1
10.3
10%
3%
7%
25%
22%
24%
19%
22%
21%
Median
Tyre companies
MRF
2,905
NA
5.8
6.1
5.5
Apollo Tyres
1,356
NA
5.5
5.3
4.8
8.5
8.5
8.1
12%
7%
2%
17%
15%
17%
19%
16%
15%
Balkrishna Industries*
1,365
SELL
9.4
9.1
8.5
16.6
16.0
14.5
8%
8%
5%
31%
31%
30%
22%
19%
18%
Ceat
687
NA
5.7
6.9
5.6
10.5
11.8
9.2
11%
1%
7%
16%
12%
15%
24%
17%
19%
JK Tyre & Industries
378
NA
4.7
4.0
3.5
5.6
5.4
4.5
14%
15%
11%
16%
17%
21%
29%
25%
24%
TVS Srichakra
349
NA
8.1
NA
NA
12.1
13.5
11.7
13%
12%
2%
15%
15%
NA
57%
34%
29%
5.8
6.1
5.5
11.2
11.5
9.75
12%
8%
6%
17%
16%
21%
23%
21%
20%
Median
Source: Bloomberg, Company, Ambit Capital research. Note: Multiples and return ratios computed on Ambit estimates.
November 23, 2016
Page 13
Strategy
Building Materials
POSITIVE
Likely product down-trading in high growth categories
Key Recommendations
The near-term demand across all building material categories will be

severely affected. Sales would most likely decline over 2HFY17/1HFY18,
however, it should recover in 2HFY18 due to a low base. Weakness in
demand would magnify and prolong across discretionary categories, such as
ply, laminates and tiles. However, accelerated formalisation in these
categories would benefit the organised players. With the adoption of GST,
and exit of the unorganized and a likely consolidation in categories such as
ply, the fight would remain between organized and potential new entrants;
over next couple of years changing cost structures would change for
formalization of channel and rise in A&P spends. Further, the organised
players would have to introduce products at lower price points to fill gaps
vacated by the unorganised players and this might reduce the blended
realisations of industry participants (a key risk for the Ply sector) a pertinent
risk for ply industry. We expect material earnings cuts for FY17/18 for
Century.
Supreme Ind
BUY
Century Ply
BUY
Research Analysts
Nitin Bhasin
Tel: +91 22 3043 3241
Girisha Saraf
girisha.saraf@ambit.co
Tel: +91 22 3043 3211
Exhibit 1: Summarising the impact of demonetisation on building materials

Category
Impact
2HFY17
FY18
Decline in plumbing pipe volume

due to reduction in real estate
Decline in 1HFY18; volume rebound
construction mainly projects; sharp
in 2HFY18 due to low base effect
adverse
impact on agri (cash
customer); expect flat to 5% decline
Cash transactions within agri pipes to
Pipes
decrease
as
channel
educate
Supply chain Channel in inventory liquidation
farmers; plumbing historically nonchange
phase; very low restocking
cash given; adoption of banking till
the last mile retailer
No major change though some
Industry
No major change
smaller unorganised players should
structure
start losing ground
Decline in 1HFY18; slight recovery in
Significant volume decline due to 2HFY18 due to low base effect;
Demand
discretionary nature of spends; though industry size to start shrinking
Outlook
down-trading by the customer
as customers trade down and MDF
adoption picks up
Ply/
Channel in inventory liquidation Increase in dealing through formal
Supply chain
laminates
phase, very low restocking (from banking channel and organised
change
organised/ unorganised)
players; shrinkage of retailers
First leg of industry consolidation,
No major change due to minimal
Industry
with the implementation of GST;
restocking; some small players to
structure
capital intensity to increase with use
suspend operations
of low-cost substitutes like MDF
Significant volume decline due to
Demand
discretionary nature of spends and Decline in 1HFY18; slight recovery in
Outlook
high dependence of organised real 2HFY17 due to low base effect
estate construction (esp high end)
Channel in inventory liquidation Increase in dealing through formal
Tiles/
Supply chain phase, very low re-stocking (from banking channel and organised
Sanitary ware change
neither org or unorg); working players; working capital intensity to
capital intensity to rise
rise
Demand
Outlook
Major
change
as
minimal
restocking; some small players to
suspend operations
Industry
structure
Demand
Outlook
Adhesives/
Construction
chemicals
Supply
change
Volume decline due to low liquidity

with consumer/weak real estate
demand
chain Channel in inventory liquidation
phase, very low restocking
Industry
structure
No major change
Structural
No major impact, will recover with
housing demand low ticket, staple
product unlike other discretionary home
building products
No major change except increase in
non-cash dealings; adoption of banking
till the last mile retailer
No structural change because largely
organised industry; unorganised to
reduce from present 30%
Discretionary home furnishing spend to
decline; demand to increase for lowcost substitutes; use of pre-lam MDF to
impact laminates market
Majority transactions to become noncash
Small unorganised players to either exit
or their capacities to be acquired; share
of organised to materially increase from
current 30%; industry size to shrink
Discretionary home furnishing spend to
decline; increase use of low cost
varieties
Majority transactions to become noncash; unless the bank credit like

electricals and pipes doesnt get
adopted, WC cycles will increase.
Industry consolidation; increase in JVs
First leg of industry consolidation, with or absorption of Morbi players;
with the implementation of GST
sanitary ware (only 30% unorganised)
least imapcted
No major impact, will recover with
Decline in 1HFY18; volume growth in
housing/consumer demand low ticket,
2HFY17 due to low base effect
staple product
Formalisation of certain product No major change except increase in
categories (e.g. waterproofing)
non-cash dealings
No structural change because largely
No major change
organised industry; local unbranded
players should gradually exit
November 23, 2016
Page 14
Strategy
Channel checks
Apart from weak demand (for both new construction and refurbishment), our
channel checks across building material categories commonly suggest change in
working capital structure of dealers due to increased recovery, and in some cases
advance payments from debtors. Though this might seemingly indicate only little
liquidity support required from the organised companies, it is not the case
because, despite recovery of debtors, dealers have not been able to deposit the
payments into the formal banking channel; thus implying liquidity crunch with
dealers.
Pipes: Demand for plumbing pipes is gradually picking up, but still very low
compared to pre-demonetisation days (~20% lower). Demand from projects has
come to a standstill; whatever sales made are from small-scale retailing.
The situation is worse with agri pipes, due to chaos in the rural areas regarding the
whole demonetisation scheme. Further, given that spends per customer on agri pipes
is larger (compared to that on plumbing pipes) and more of a business investment,
impact on purchases is more severe.
Ply/laminates/tiles/sanitaryware: Current inventory is getting partially

liquidated because the channel still accepting old currency notes at a 10-15%
premium; this is expected to continue till the end of November. This occurrence is
more prevalent in these categories because of a large unorganised sector
working on cash.
Real estate has traditionally been used to park black money. With fall in property
prices and interest rates (expected), real estate will increasingly be purchased by
real home buyers; this would increase demand for home interiors (ply, laminates,
tiles, sanitary ware)
Imports have become more expensive; rates of all building materials and
hardware products that are imported from China are drastically increasing (2030% up already). This is because now with the use of black money not being an
option, all material imports will have full import duty.
Adhesives: Manufacturers/companies are only fulfilling old (pre Nov-9) orders at the
moment, and the order book is not replenishing; hence in the coming few months the
industry might take a hit.
The problem lies at the distributor level; even though retailers/dealers might be
recovering from debtors, the same does not seem to be reaching the distributors. The
distributors are under severe liquidity crunch, and hence unable to place any new
orders.
How are companies/industry reacting to disruption?
Currently the industry seems to be at a standstill; organised manufacturers

suggest a wait and watch approach. Barring paints, we hear little effort from
companies to quickly move the channel to non-cash mode of dealings.
Though building material companies do not seem to have officially announced

any working capital support to the channel yet, company managements suggest
willingness to do so if and when the need arises.
We hear that a large number of unorganised ply players have currently

suspended operations, and are currently too focused on recovery and
disbursements.
November 23, 2016
Page 15
Strategy
Impact on demand over various time periods

We expect near-term impact across all building material categories. Revenue growth
for building material (incl. paints and light electrical) companies to further decline
from 5% in 1HFY17 given weak retail/institutional demand and inventory destocking.
However, FY18 and beyond, we expect quicker recovery in the pipes and adhesives
categories, as compared to ply, laminates, tiles and sanitaryware.
Pipes: Expect quicker recovery
2HFY17: Plumbing pipe volumes to decline due to weak real estate construction
and some slowdown in projects. Given that agriculture pipes are sold on cash (to
farmers), the impact to be far more adverse. Overall, we expect flat to 5% decline
in pipe volume sales.
FY18: Volume growth to decline YoY in 1HFY18; however, volume should

rebound in 2HFY17 due to low base effect.
Beyond FY18: No major impact on demand beyond FY18. The plumbing pipes
market, in particular, should recover with housing demand, given that plumbing
pipe is a low-ticket (~Rs6k spent on internal piping in a bathroom), staple-like
product used in buildings. The agriculture pipes market should recover once
farmers adopt the formal banking channel for transactions.
Ply/Laminates: Profound impact and prolonged recovery
2HFY17: Volumes to significantly decline due to discretionary nature of spend on

ply and laminates. Further, we expect material down-trading by the customer.
FY18: Volume growth to decline YoY in 1HFY18; slight recovery expected in

2HFY17 due to low base effect. However, the industry size might start shrinking
as customers trade down and MDF adoption picks up.
Beyond FY18: Discretionary spend on home furnishings to decline. Further, the

demand for low cost substitutes to ply is expected to increase. The use of pre-lam
MDF might impact laminates market.
Tiles/Sanitaryware: Profound impact and prolonged recovery
2HFY17: Volumes to significantly decline due to: (a) discretionary nature of the
spends on these categories; and (b) high dependence of industry participants on
organised real estate construction (high-end products in particular).
FY18: Volumes to decline in 1HFY18; however, slight recovery is expected in

2HFY17 due to low base effect.
Beyond FY18: Discretionary spends on home furnishings to decline, with

increase in use of low cost varieties.
Adhesives/Construction chemicals: Expect quicker recovery
2HFY17: Volumes to decline due to: (a) low liquidity with consumer; and (b)
weak real estate demand.
FY18: Sales to decline in 1HFY18; however, growth expected in 2HFY17 due to

low base effect.
Beyond FY18: No major impact beyond FY18. Given that adhesives and
construction chemicals are low-ticket items, we expect demand to will recover
with consumer/housing demand.
November 23, 2016
Page 16
Strategy
Given the short time horizon, we do not foresee any change to industry structure
in 2HFY17. Moreover, during this period retailers/distributors are liquidating their
current inventory (from both organised and unorganised players).
In FY18 and beyond, we expect some degree of industry consolidation given that
unorganised players: (a) will no longer be cost competitive (since they will have to
operate through formal channels and thus pay tax); and (b) have weaker balance
sheets making their business unviable during the downturn.
Pipes: No structural change

No structural change because largely organised industry; unorganised to reduce
from present 30%.
Ply/Laminates: Industry consolidation, shrinkage in industry size
Expect the first leg of industry consolidation with the implementation of GST in
FY18.
Small unorganised players to either exit or their capacities acquired by larger

players (share of organised sector to materially increase from current 30%).
Industry size to decline due to increased use of low-cost substitutes like MDF;
capital intensity to increase with adoption of MDF/other engineered substitutes
Tiles/Sanitaryware: Industry consolidation within tiles
Expect the first leg of industry consolidation with the implementation of GST in
FY18.
Large organised players to either increase JVs with or absorption of small morbi
players. Larger players in morbi, on the other hand, will get organised to build
pan-India brands.
Given that only 30% of the sanitaryware market is unorganised, structural impact
to be limited.
Adhesives/Construction chemicals: No structural change

No structural change because adhesives is largely an organised industry.
However, some local unbranded players might gradually leave the industry.

winners and losers in a sector?
At the category level, we advise investors to play the demonetisation theme on
building materials with a large proportion of unorganised sector. Informal players will
not only see cost of operations rise but in many cases find business becoming
unviable; ply should benefit most from formalisation but only after surpassing tough
FY18. Sectors, such as tiles could see rise in WC though gradually we expect the bank
funding for channel to start (akin to pipes and electricals). This should gradually
increase share of organised players; we expect larger morbi players to create larger
brands with the exit of some smaller players
Amongst all the building material categories, the wood substrate market, i.e.,
plywood, would be the most affected by the more to a cashless economy. Given
materially higher share of unorganised and small-scale units, the channel has had a
penchant for operating on cash in order to improve RoI through pushing tax-evading
higher margin unorganised products. The clampdown on cash transaction will impose
severe liquidity constraints on the channel as well as on the operations of the
unorganised players.
November 23, 2016
Page 17
Strategy
Add to this the impending GST adoption, we are ready to see a major dislocation in
the industry structure; inevitable exits of smaller players and potential
acquisition/partnership possibilities will help strong brands like Century and
Greenply. However, on a company/stock-specific level, this longer term win will be a
factor of the intent/capability of these brands improve their processes and build
dealer trust.
Surprise factors
Interest rate cuts, along with collective slash in prices of high rise buildings by
builders (who have been resisting price cuts on new construction over the past 23 years in hope for recovery), might boost housing demand more than expected.
Continued liquidity crunch in the rural areas, and slower adoption of cash-less
economy might impact demand from farmers (affecting agriculture pipes in
particular).
Exhibit 2: Relative valuation of building material companies

Company
Mcap
US$ mn
Stance
EV/EBITDA (x)
P/E (x)
FY16-18 CAGR (%)
FY16
FY17
FY18
FY16
FY17
FY18
Sales EBITDA
EBITDA Margin (%)
RoE (%)
EPS
FY16
FY17
FY18
FY17
FY18
Adhesives
Pidilite Industries*
614
BUY
27.1
28.1
22.6
44.8
43.8
34.6
15.2
16.5
18.0
21
21
22
27.2
28.7
Supreme Industries*
789
BUY
14.5
14.7
11.9
26.3
27.8
21.2
18.7
17.5
19.6
17
16
17
28.3
30.0
Astral Poly
409
NR
24.6
19.2
15.0
48.3
34.8
25.3
18.9
28.4
38.1
12
13
14
16.4
19.2
Finolex Inds
417
NR
13.8
11.9
10.6
22.1
19.3
16.6
9.4
14.1
15.6
16
15
15
25.6
26.6
14.2
14.7
11.9
26.3
27.8
21.2
18.7
17.5
19.6
16
15
15
25.6
26.6
15.2
17.7
15.2
23.4
31.5
22.8
24.8
13.1
21.3
17
17
14
28.9
31.1
Pipes
Median
Plyboard
Century Plyboards*
176
BUY
Green Ply
260
NR
Median
13.2
12.2
10.3
24.0
21.7
17.2
12.2
13.2
18.1
15
15
15
20.5
19.2
14.2
15.0
12.8
23.7
26.6
20.0
18.5
13.2
19.7
16
16
15
24.7
25.2
Tiles
Kajaria Ceramics
465
NR
16.2
14.3
12.2
32.3
26.8
22.0
13.1
15.1
21.0
19
20
20
26.5
26.6
Somany Ceramics
515
NR
15.8
13.0
10.1
31.7
23.8
18.8
11.9
24.6
29.8
10
11
19.1
20.2
16.0
13.7
11.2
32.0
25.3
20.4
12.5
19.9
25.4
14
15
16
22.8
23.4
17.4
13.9
11.5
29.9
23.3
19.1
16.6
23.0
25.3
15
16
17
22.5
22.6
8.5
7.9
6.6
23.7
17.1
12.8
12.3
13.7
36.1
16
16
16
9.2
11.4
13.0
10.9
9.1
26.8
20.2
16.0
14.5
18.4
30.7
16
16
17
15.9
17.0
Median
Sanitary Ware
Cera Sanitaryware
HSIL
Median
1,921
NR
292
NR
Source: Bloomberg, Company, Ambit Capital research. Note: *Multiples and return ratios computed on Ambit estimates for others Bloomberg estimates have been
used.
November 23, 2016
Page 18
Strategy
NEGATIVE
Banks
Disruption before the opportunity arises
Slowdown in loan growth and increase in NPAs (particularly in SME, retail
and agri segments) will be the key near-term adverse impacts of
demonetisation. The fall in G-sec yields will drive treasury gains but wont be
enough to offset the negatives. The current surge in CASA deposits is
temporary and would reverse as a significant part of deposits flow back into
the economy. Muted loan growth (more so in higher yielding SME/retail
segments) means that NIMs would be under pressure. Overall, banks with
higher share of SME/retail loans look vulnerable in FY17/18. We will have to
significantly decrease our earnings estimates for FY17/FY18 and target prices
for stocks under coverage. Over the longer term, the shift in favour of
financial savings and the formalisation of the Indian economy bode well for
banks. For MFI companies transitioning into small finance banks, the
disruption in core businesses could not have come at a worse time given that
costs were in any case accelerating during the transition.
Research Analysts
Pankaj Agarwal, CFA

Tel: +91 22 3043 3206
pankaj.agarwal@ambit.co
Ravi Singh
Tel: +91 22 3043 3181
ravi.singh@ambit.co
Rahil Shah
Tel: +91 22 3043 3217
rahil.shah@ambit.co
Exhibit 7: Impact of demonetisation on banks

2HFY17
Large
banks
Small
banks
Small
finance
banks
FY18
Structural
Growth Outlook
Fall in disbursements and rise in

prepayments to stall growth in retail
and SME segments. With corporate
loan growth already weak, growth in
disbursements would take a major hit
in 2HFY17.
Growth should gradually improve in line with

normalisation in economic activity. However,
lower GDP growth and lower discretionary spends
should lead to lower than expected loan
retail/SME growth.
Formalisation of economy would drive

market share gains for banks from
NBFCs/informal sector.
A
possible
government stimulus in FY18 should
induce capex cycle, leading to improving
growth from FY19.
Asset quality
Delinquency to rise in SME/retail/agri

segments due to cash crunch.
Regulatory
forbearance
would,
however, help NPA recognition in
2HFY17.
NPA increase in SME and retail segments due to

struggling economy and structural impact on Long-term structural asset quality
wealth and income of some segments of reflect underwriting standards.
retail/SME.
Margins/Bond
Gains
Flow of low cost deposits would be

offset by fall in loan disbursements
(falling CD ratio). Thus, impact on
margins will be neutral. G-sec yields
will lead to healthy treasury gains.
Monetary stimulus would lead to rate cuts.

Subdued loan growth, high competition and faster
re-pricing of assets than funds will negatively No structural impact on NIMs.
impact NIM. Treasury gains to continue with
further fall in G-sec yields.
Industry
structure
No changes in industry structure are

anticipated in the short term.
Over the long term, banks will take

No changes in industry structure are anticipated in
market share from NBFCs and informal
the medium term.
lending segment.
Growth Outlook
Sector and geographical concentration

Long-term outlook is better than that of
Banks with higher SME exposure to continue
could lead to sharper slowdown in
large banks as small businesses shift to
seeing muted growth due to continued disruption.
growth than that for large banks.
the formal economy.
Asset quality
NPAs to rise meaningfully in the SME NPA overhang for longer as the value chain of Long-term structural asset quality
segment.
SMEs undergoes disruption.
reflect underwriting standards.
Margins/Bond
Gains
Higher share of wholesale/non-CASA funding will

Fall in credit demand would impact
Long-term margins to be more resilient
benefit from monetary easing, offsetting pressure
loan yields and, hence, margins. G-sec
than that of large banks due to niche
on yields. Treasury gains to continue with further
yields would support treasury gains.
positioning allowing better pricing power.
fall in G-sec yields.
Industry
structure
No changes in industry structure are

anticipated in the short term.
Growth Outlook
Higher welfare support and economic

Growth at a standstill due to cash Subdued cash economy means demand recovery
stimulus to drive growth recovery in the
crunch impacting disbursements.
will be gradual.
longer term.
Asset Quality
NPA overhang for a longer time as value chain of

Long-term structural asset quality
NPAs to rise meaningfully in MFI/SME. economically
active
poor/SMEs
undergoes
reflect underwriting standards.
disruption.
Margins/Bond
Gains
No meaningful benefit of better

Despite a secular shift to financial
deposit flow because of limited branch Fall in cost of funds (due to monetary stimulus) to
savings, customer segment focus limits
network.
Bond gains
are
not support margins.
gains on liability side.
applicable.
Industry
structure
Aggressive lenders could witness high

defaults and deep disruptions,
challenging their survival.
to
Market share gain from informal

No changes in industry structure are anticipated in segment, but competition to intensify
the medium term.
from larger banks for small business
lending.
Under-stress customer segment may lead to

consolidation among struggling lenders.
to
There is opportunity to take market share

from informal lenders, but competition to
intensify from banks/NBFCs.
November 23, 2016
to
Page 19
Strategy
Our channel checks
There is complete disruption in fresh disbursements due to weak demand.

Prepayments have risen; customers are paying in cash using old notes (given that
banks can absorb the old currency).
Severe cash crunch has led to a drop in economic activity, particularly in

segments where cash transactions were high, including vehicle finance and small
businesses.
While the cash crunch is easing, if it continues for longer than 2-3 weeks defaults
would rise in MFI, vehicle finance and SME loans.
How are the companies/industry reacting to disruption?
Banks are currently focusing on cash deposits and conversion and meeting
currency demand.
To capture long-term trend of shift away from the cash economy, banks are trying
to popularise alternative distribution channels like cards, digital banking and
mobile banking.
Banks, in general, are confident of protecting asset quality of their LAP/SME

books from deterioration due to low LTV, ticket sizes and self-occupied property
as collateral.

2HFY17: Loan growth would slow down due to weaker disbursements and higher
prepayments. The slowdown will be sharper in loan segments such as auto loans,
home loans, microfinance and SME loans due to weak consumer sentiment and
unavailability of cash. Delay in home buying decisions, subdued consumer sentiment
impacting sales across auto categories and consumer products would hit growth.
FY18: Segments such as real estate and home loans, vehicle loans and small
businesses would continue to struggle due to subdued consumer sentiment. However,
with significant fiscal and monetary stimuli in FY18, economic activity will likely pick
up with a lag in FY18, leading to recovery in credit demand by end-FY18.
Beyond FY18: With the effects of the expected economic stimulus from the
Government settling in and continued crackdown on the black economy, the
formalisation of the Indian economy will gain pace. Thus, over the longer term, the
size of the opportunity for banks will increase at the expense of the informal
economy.
2HFY17: Except for microfinance lenders, where severe customer stress could lead to
the existence of a few aggressive lenders being challenged, banks should not see any
significant shift in industry structure in the near term. Due to lower dependence on
cash disbursements/collections, banks are better placed than NBFCs to weather the
cash crunch even as loan growth slows due to muted demand.
FY18: The continued clampdown on the black economy will support the ongoing shift
from physical savings to financial savings. The larger PSU and private sector banks,
with wide distribution networks, would be better placed to garner deposits inflows
and compete on loan-pricing to consolidate their position in the corporate and retail
segments.
Beyond FY18: The banking sector as a whole will benefit from growing opportunities
arising from the economy migrating to the formal segment. Banks will get more
opportunities in self-employed, SME and low income customer segments. Banks will
take market share away from both NBFCs (as more of borrowers businesses get
captured in their reported financials) and informal lenders (who will come under
pressure as it becomes harder to evade taxes in India).
November 23, 2016
Page 20
Strategy
Factors investors should consider to pick winners and losers
With higher retail/SME loan portfolios, banks such as IndusInd Bank, Kotak Mahindra
Bank and HDFC Bank would witness greater incremental pressure on growth and
asset quality in 2HFY17 and FY18. Over the long term, banks with wide traditional
and alternate distribution channels (HDFC Bank, ICICI Bank, SBI and Axis Bank) are
placed better to benefit from a shift from physical to financial savings. Specialist
lenders for SME/retail (IndusInd Bank and City Union Bank) would, over the long
term, benefit more by taking market share away from NBFCs and informal lenders.
Exposure to impacted sectors
Given the disruption in certain segments (e.g. vehicle finance, small businesses and
MFI) which rely heavily on cash disbursements/collections, banks (IndusInd Bank,
Equitas and Ujjivan) that have greater exposure to these segments will see deeper
impact on growth and asset quality. With market interest rates likely to fall, banks
with bigger fixed rate loan books (HDFC Bank and IndusInd Bank) are better placed
in protecting NIMs.
Shift to formal lending
With more and more small businesses and consumer transactions (auto, consumer
durables) shifting to formal financing, banks stand to gain market share from NBFCs
and informal lenders. Banks with specialist knowledge and track records in these
customer segments (Axis Bank, IndusInd Bank and City Union Bank) are better placed
to expand and rebound from near-term growth and asset quality headwinds.
What could surprise us?
A stronger-than-expected economic stimulus (a large PSU banks recap or sharp
monetary easing) can surprise positively. Amongst the PSU banks, the biggest
beneficiaries would be SBI (strong distribution network) and PNB (relief on capital
position and low-cost deposits franchise).
Further, while it is expected that a large part of informal economy will continue to
face structural headwinds, it is not clear what the banks direct and indirect exposures
to these struggling segments of economy are (e.g. small businesses surviving on tax
arbitrage). While banks have low direct exposure than NBFCs, the value-chain links
and indirect impact are difficult to gauge at this stage.
Exhibit 8: Relative valuations
Mcap
Price
P/B
P/E
EPS CAGR
ROA
ROE
US$bn
Rs
FY17E
FY18E
FY17E
FY18E
FY16-18E
FY17E
FY18E
FY17E
FY18E
HDFC Bank
44.5
1,199
3.61
3.11
20.5
17.1
20%
1.92%
1.94%
18.9%
19.5%
ICICI Bank*
22.3
261
1.06
0.78
10.6
7.8
13%
1.00%
1.20%
10.1%
12.8%
Kotak Mahindra Bank
20.5
763
3.76
3.33
30.6
25.0
27%
1.46%
1.52%
12.9%
14.1%
Axis Bank
16.3
466
1.93
1.68
21.2
10.6
13%
0.91%
1.53%
9.4%
16.9%
9.3
1,059
3.19
2.73
21.5
16.2
28%
1.87%
1.99%
15.8%
18.1%
Yes Bank
6.9
1,113
2.62
2.21
15.2
12.2
24%
1.76%
1.79%
19.5%
19.8%
IDFC Bank
3.4
68
1.60
1.50
23.2
19.1
56%
1.13%
1.06%
7.0%
7.9%
RBL Bank
1.8
334
2.90
2.38
28.6
23.0
27%
0.91%
0.92%
11.8%
11.8%
DCB Bank
0.4
106
1.56
1.36
15.4
12.4
20%
0.93%
0.94%
10.5%
11.6%
2.47
2.12
20.8
15.9
25%
1.32%
1.43%
12.9%
14.7%
2.22
2.00
24.9
19.4
12%
2.27%
1.96%
11.2%
10.8%
Banks
New Private
IndusInd Bank
Average
Small Finance Banks
Equitas Holdings
0.7
150
Ujjivan Financial
0.6
341
Average
November 23, 2016
2.28
2.03
18.6
17.0
7%
3.10%
2.33%
14.7%
12.6%
2.25
2.01
21.7
18.2
9%
2.69%
2.15%
12.9%
11.7%
Page 21
Strategy
Mcap
Price
P/B
P/E
EPS CAGR
ROA
ROE
US$bn
Rs
FY17E
FY18E
FY17E
FY18E
FY16-18E
FY17E
FY18E
FY17E
FY18E
29.3
257
1.00
0.93
12.3
9.9
22%
0.50%
0.54%
8.1%
9.4%
5.4
161
0.94
0.88
15.5
7.1
n.a.
0.35%
0.70%
6.5%
13.0%
Punjab National Bank
4.3
136
0.72
0.67
11.5
8.8
n.a.
0.37%
0.45%
6.6%
7.9%
Bank of India
1.8
117
0.44
0.45
-3.4
-33.4
-78%
-0.47%
-0.05%
-12.1%
-1.3%
Union Bank of India
1.5
149
Large PSUs
State Bank of India*
Bank of Baroda
Average
0.50
0.46
7.5
5.8
14%
0.33%
0.41%
6.7%
8.3%
0.72
0.68
8.7
-0.4
-14%
0.21%
0.41%
3.2%
7.4%
Old Private
Federal Bank
1.7
67
1.32
1.22
13.3
10.5
52%
0.87%
0.94%
10.3%
12.1%
Karur Vysya bank
0.8
88
0.22
0.20
1.9
1.5
13%
0.90%
1.03%
11.6%
14.1%
South Indian Bank
0.4
20.9
0.70
0.64
6.7
5.5
24%
0.63%
0.68%
10.9%
12.1%
City Union Bank
1.1
130
2.24
1.94
14.7
11.6
23%
1.59%
1.70%
16.2%
17.9%
1.12
1.00
9.1
7.3
28%
1.00%
1.09%
12.3%
14.0%
Average
Source: Bloomberg, Ambit Capital research; Note: * We have adjusted valuation of SBI and ICICI Bank for standalone bank multiples; we have used Bloomberg
estimates for companies not under our coverage
November 23, 2016
Page 22
Strategy
Consumer Discretionary
NEUTRAL
The small ticket to resilience
Key Recommendations
Demonetisation will impact the discretionary sector in varying degrees

depending on ticket size and nature of offering. Low-ticket and consumptionoriented offerings like multiplexes, apparel (non-luxury), and leisure parks
will see short-term disruption in demand while high-ticket and investmentmotivated (jewellery, luxury watches, etc.) items will witness market size
shrinkage by up to 30%. While opportunity to gain market share in jewellery
is high, it may not be enough to offset sales lost due to market share gains.
Our channel checks suggest that demand for jewellery has been severely
affected while other categories like apparel and movies are showing early
signs of recovery. The disruption is likely to be the longest in jewellery
(extending into FY18), whereas other categories would recover in FY18. We
like companies like PVR (TP Rs1,594; upside 43%), Trent (TP Rs221; upside
21%) and Wonderla (TP Rs515; upside 60%) given their strong balance
sheets, low ticket sizes and proven execution.
Trent
BUY
PVR
BUY
Titan
SELL
Arvind
SELL
Research Analysts
Abhishek Ranganathan, CFA
abhishek.r@ambit.co
Tel: +91 22 3043 3085
Mayank Porwal
mayank.porwal@ambit.co
Tel: +91 22 3043 3214
Exhibit 9: Impact of demonetisation on Consumer Discretionary

2HFY17
Jewellery
Apparel & Footwear
Leisure
FY18
Structural
Demand Outlook
Investment demand to take a

Demand to take a hit as gold
Expected to pick up in 2HFY18
hit; purchases will be
loses its value as a black money led by adornment jewellery due
dominated by adornment
parking vehicle.
to low base and festive season.
jewellery
Supply chain change
Depends on informal sector for

manufacturing with payments
in cash
Shift will be towards

Informal sector may seek digital
compliance and, hence, higher
payments and create a trail
making charges
Industry structure
Industry will shrink by 20-30%

with increasing cost of
compliance.
Industry may shrink by 10-15%

will mean unorganised
but will accelerate shift from
players lose advantage of lower unorganised to organised
making charges
sector with more focus on lowticket size fashion jewellery.
Demand Outlook
Frequent trips to banks/ATMs

for cash withdrawals will result
in postponement of demand
Footfalls expected to be driven

by discounts and EoSS
in1HFY18. Expect 2HFY18 to be
better due to low base and
festive season.
Supply chain change
Near term disruption in

operations of players whose
distribution chain is cash
driven; implies inventory issues.
Destocking expected to happen

Normalcy in entire supply chain
in FY18 which will hit margins
along with transactions
in 1HFY18; 2HFY18 will see
becoming cashless.
uptick in margins.
Industry structure
Unorganised players whose

Value fashion players will gain
purchases and sales are in cash from disruption of unorganised
will get affected
players.
Demand Outlook
To be muted as consumers cut

back on spending.
Demand expected to pick up as

everything is restored to
NA
normal.
Supply chain change
NA
NA
NA
Industry structure
NA
Entertainment tax and multiple

taxes at state level to be
subsumed by GST.
GST to be a game changer for

the multiplex industry.
Higher cost of compliance for

unorganised players will
accelerate the shift towards
organised players.
Unorganised players (mostly in

womens wear) are likely to
come under GST, thus eroding
their value proposition and
aiding shift towards organised.
November 23, 2016
Page 23
Strategy
Exhibit 10: Low-ticket and urban, white-collar-centric categories will be resilient
Multiplex
Impact of
Ticket Size
Average ticket size Rs170
Urban/white
With 62% screens in top 8 cities,
collared
the customer base is wide and
customer base
has a large portion of whitecollar/urban consumers.
Share of cash
Amusement Parks
Jewellery
Average ticket size Rs720
Average ticket size Rs70,000
Apparel
Average ticket size Rs1,860
With 40% stores in top 8 cities,

the customer base is wide and
has a large portion of whitecollar/urban consumers.
With most amusement parks in With nearly half the customers in

top 4 cities the customer base is non-urban locations the customer
wide and has large portion of
base while wide includes nonwhite collared/urban consumers. white collared customer base.
With nearly 60% of revenues

Leisure park tickets are bought
With nearly 50% of revenues
Over 70% of sales are in cash.
through digital along with low
on site as visit decisions are
through digital along with low
Given implicit investment motive,
ticket size, it is less vulnerable to
made based on weather
ticket size, it is less vulnerable to
significant portion of revenues
disruption. Channel checks
conditions. The relatively small
such disruption. Cash purchases
are from unaccounted income.
suggest customers who made ticket size and urban locale make
would be largely on account of
This makes it most vulnerable to
cash purchases have moved
it less vulnerable to disruption
food and beverages.
demonetisation.
seamlessly to cards.
from demonetisation.
Source: Ambit Capital research . Note: Note:
- Very High;
- High;
- Moderate;
- Low
Channel checks
Jewellery
o
Cash purchases have reduced by 20-30%; card sales have shot up and most
of the purchases are by the corporate clientele.
Credit card customers, too, are restricting purchases so as to cover their basic
needs. Customers have other priorities such as managing cash and daily
essentials; hence, footfalls are low.
Deposit schemes run by various jewellers have taken a hit to the extent that
instead of redeeming gold, customers are asking for refund of deposited
amounts.
Apparel & Footwear

o
Customers have other priorities such as managing cash and daily essentials;
hence, footfalls are low.
Footfalls which had reduced by around 45-50% at stores across the country
post the demonetisation have started recovering across apparel brands and
departmental stores.
Credit card sales have seen an upswing; have reversed for some of the stores
from 60% cash sales to 60% card sales. However, overall sales have fallen by
20-30%.
Wedding-related purchases have not been postponed but have been

significantly curtailed and, as a consequence, November sales have been
dented severely.
Leisure
o
Impact was evident in the week in which demonetisation was announced Rock On 2 was a washout; but the movie received at best average reviews.
However, Force 2, which released in the following week garnered an
encouraging response in its first weekend, an indication that demonetisation
is unlikely to have a pronounced impact on the multiplex industry.
Jewellery
o
Organised jewellers such as Titan are focusing on controlling costs and

improving gross margins through studded jewellery to protect profitability.
We expect leading brands with strong balance sheets to lower making

charges to accelerate market share gains from unorganised jewellers.
November 23, 2016
Page 24
Strategy
Apparel & Footwear

o Since purchasing had come to a standstill, channel checks suggest that
stores/brands are considering rolling out discounts in the near term
(indicating longer EoSS) to enable destocking (especially those that have long
supply chains) and drive footfalls.
o Companies plan to extend longer credit periods to distributors to counter the
cash crunch.
Leisure
o Payment wallets are offering incentives on booking tickets online in the form
of discounts on F&B and waiver of convenience fees on direct booking in
order to drive footfalls to cinema halls.
Impact on demand over 2HFY17, FY18 and beyond
Jewellery Market size shrinkage will be tough to offset

o 2HFY17: Demand expected to be weak (down by 20%) in the near term as
jewellery, which used to be a vehicle to park black money, loses its utility.
However, demand will be led by recycling of jewellery and adornment
jewellery.
o FY18: Consumer sentiment is expected to be muted in 1HFY18. However,
2HFY18 is expected to fare better due to festive season, marriages and low
base effect.
o Beyond FY18: Organised players like Tanishq would benefit in the near term
from market share gains.
Apparel and Footwear Small ticket size and urban centricity will aid
quick recovery
o 2HFY17: Companies will have a weak 2HFY17 despite the presence of an
elongated wedding season. Discounts and elongated end-of-season sales
(EoSS) driven by unsold inventory could impact margins in 4QFY17.
o FY18: Footfalls in 1HFY18 are expected to be discount-driven. However,
2HFY18 is expected to see an uptick due to festivals and marriages and low
base effect.
o Beyond FY18: Parity is expected to be restored as quite a few customers who
used to pay by cash are expected to have shifted to cashless transactions.
Leisure Smaller ticket size will driver recovery

o 2HFY17: Footfalls are expected to decline in the amusement park space in
the near term given the costs involved for a one-day outing. Multiplexes are
not expected to see a major decline in footfalls given the relatively low
average ticket size (Rs170).
o FY18 and beyond: No impact in the longer term given the low ticket sizes.
Jewellery Making charges to increase

o 2HFY17: The industry is expected to shrink in the near term by 20-30% as
unorganised players bear the brunt of increased cost of compliance.
o FY18: The above might lead to consolidation in the industry with unorganised
players losing their advantage of lower making charges.
o Beyond FY18: Making charges will increase for unorganised players due to
higher cost of compliance. Consequently, organised players like Tanishq will
gain market share. Also, GST will bring the unorganised players in the tax
net, reducing their competitive advantages. The drive against black money
will also impact diamond traders who have attempted to enter the jewellery
industry. With erosion of their wealth, increased scrutiny and compliance, the
jewellery business will see fewer new entrants.
November 23, 2016
Page 25
Strategy
Apparel and Footwear Decreasing competitiveness of unorganised

players
o
2HFY17: Unorganised players entire chain - from procurement to sales - will

be affected. This will erode local area competition, especially in womens
ethnic wear.
FY18: Operations and inventory levels should normalise in FY18E.
Beyond FY18: While GST can result in efficient taxation (due to set-offs
between input and output credits), the rates, which are not declared yet, will
also be important to evaluate net gains/loss from GST. With the entire chain
coming under the tax net, it will be difficult to generate unaccounted
revenues. This will erode local area competition, especially in womens ethnic
wear. Global brands perception of ease of doing business would improve
and they might enter/expand in India.
Leisure GST the big game changer

o
2HFY17: No near-term impact on the industry.
FY18 and beyond: However, countrywide multiplex chains like PVR are
expected to benefit in the GST regime as taxes under various states will be
subsumed under GST; outgo of entertainment tax is expected to significantly
decline.

Strong balance sheet: This will help sustain near-term working capital pressures
from inventory/debtor build-up.
Low ticket size: Low ticket size items such as movies, apparel and footwear will be
unaffected given their purely consumption nature (unlike jewellery) and high share of
card-driven business
Low share of organised: Unorganised players will not only be stretched for working
capital (given wealth erosion) but will also have higher cost of compliance thus,
eroding their competitiveness.
Which sub-sectors would be better placed?
Apparel and leisure companies (multiplexes and leisure parks) are better placed in
this sector given their strong balance sheets, cash generation and low ticket size.
Accelerated market share gains in jewellery by organised players, which will offset
the impact of the shrinking market.
November 23, 2016
Page 26
Strategy
Mcap
TP Stance
US$
mn
Rs
Trent
914
221
Shoppers Stop
384
NA
Arvind
1,301
ABFRL
EV/EBITDA (x)
P/E (x)
CAGR (FY16-19)(%)
RoE(%)
RoCE(%)
FY17E
FY18E
FY17E
FY18E
Revenue
EBITDA
FY16
FY17E
FY18E
FY15
FY16
BUY
22.3
15.8
35.8
27.1
27.4
48.9
4.6
11.2
NA
13.6
11.1
44.4
30.5
14.3
17.8
3.2
7.8
13.4
5.3
7.6
10.4
12.4
7.8
311
SELL
10.0
8.0
21.0
14.3
12.5
13.5
11.6
13.5
14.7
11.0
9.3
1,513
182
BUY
24.8
20.9
788.5
92.4
14.5
24.8
1.3
7.6
18.8
NA
2.1
3,970
312
SELL
23.4
20.1
37.6
31.5
9.7
920
NA
NA
8.5
7.5
14.7
13.3
19.5
15.5
24.6
21.8
23.1
25.2
25.8
22.7
18.6
18.5
17.4
60.0
37.6
Bata
806
382
SELL
17.1
15.3
31.4
28.1
Relaxo
722
NA
NA
17.3
14.6
35.8
22.1
7.5
7.9
13.9
14.7
14.9
36.7
23.7
18.5
18.0
28.4
22.7
21.1
19.7
16.1
PVR
745
1,594
BUY
14.2
11.2
36.5
27.8
19.5
22.9
14.4
14.3
17.7
7.2
11.7
Wonderla
281
515
BUY
19.8
13.7
40.1
26.1
24.1
24.8
15.8
10.7
14.9
26.6
16.5
Retail
Jewellery
Titan
PC Jewellers
Footwear
Leisure
Source: Bloomberg, Ambit Capital research
November 23, 2016
Page 27
Strategy
Capital Goods
POSITIVE
Interest rate sensitives ; real estate exposed
Key Recommendations
In the near term, genset sales will decline significantly given real estate
accounts for ~50% of sales. Working capital cycle is likely to get stretched
given the severe credit crunch in the channel. Genset industry is unlikely to
face any structural change given high share of organised players. For the 3W
auto engine players, volumes are likely to decline in the near term with a
decline in replacement demand (~50% of the market) due to liquidity crunch.
However, replacement demand is likely to recover post FY18 fiscal stimulus
and any cut in interest rates. BTG sector will be unaffected. We prefer
companies with high correlation of revenue and interest rate cycle (Greaves
Cotton); avoid companies with high exposure to real estate (Cummins).
Greaves Cotton
BUY
Cummins
SELL
NTPC
SELL
Research Analysts
Bhargav Buddhadev
bhargav.buddhadev@ambit.co
Tel: +91 22 3043 3252
Deepesh Agarwal, CFA
deepesh.agarwal@ambit.co
Tel: +91 22 3043 3275
Exhibit 12: Impact of demonetisation on Capital Goods
Genset
Particulars
2HFY17
Demand outlook
Sales are likely to decline as ~50% of

gensets are sold to real estate.
Supply chain
change
Industry structure
Demand outlook
3W engine
Increase in working capital due to

liquidity crunch in the channel.
Players with strong balance sheets to
gain market share.
Sales to decline led by decline in
replacement demand due to liquidity
crunch.
Supply chain
change
Inventory build-up due to sales

decline
Industry structure
Organised players to gain
BTG
No impact
FY18
Structural
Weakness to continue due to weak

real estate
Application of gensets to shift from

low KVA to medium KVA
Working capital to ease with

improvement in liquidity.
Organised players to gain market
share
Large genset OEM partners like

Powerica to gain market share
MNC players to enter with rising
share of organised players
Sales growth in high single digit led

by pick-up in replacement demand
due to interest rate cut.
Strong growth as pace of

urbanisation picks up given low
penetration across smaller cities
Normalisation of inventory with

volume growth kicking in.
Greaves market share to increase as
unorganised players get
marginalized.
No impact
Unorganised 3W OEM to lose market

share to organised
Spares business to become lucrative
as share of unorganised players
declines.
No impact
2HFY17: Genset sales would decline in 2HFY17 as ~50% of gensets are sold to
real estate, where demand is decreasing with decline in power deficit to 1%. 3W
auto engine sales will decrease due to decline in replacement demand (~50% of
sales) due to liquidity crunch. There would be no impact on BTG companies.
FY18: Unless infra spending recovers, genset sales will remain weak.
Replacement demand for 3Ws should revive on fiscal stimulus and rate cuts.
Beyond FY18: Demand for 3Ws could accelerate as pace of urbanisation picks
up. For gensets, we believe the industry is facing a structural decline.

We prefer companies with high correlation between revenue growth and interest rate
cycle. As per our economy team, post demonetisation, the interest rate is expected to
be cut by 50bps in 2HFY17. Greaves should benefit from the cut in interest rates as
replacement demand, which accounts for ~50% of 3W sales (~50% of Greaves
revenue), would pick-up with the EMI for the 3W buyer declining (~80% of 3W
purchases are financed by loan).
Avoid Cummins as real estate forms a high 50% share of domestic powergen
revenue.
Delay in pick-up in replacement demand in 3Ws beyond FY18 is a risk to our
expectation of revenue growth for Greaves.
November 23, 2016
Page 28
Strategy
Exhibit 13: Relative valuation Capital Goods
CAGR (%) over
FY16-18
CMP
Mcap
(Rs)
($ mn)
FY17E
FY18E
FY17E
FY18E
FY17E
FY18E
FY16
FY17E
FY18E
Revenue
EPS
125
4,826
31.9
13.3
0.9
0.9
32
(3)
9.5
N/A
Cummins
765
3,217
27.7
25.2
5.9
5.2
27
23
25
23
22
10.4
5.8
Thermax
847
1,458
39.9
30.4
3.9
3.5
24
19
10
12
(3.9)
4.2
Inox Wind
178
591
7.3
9.9
2.0
2.0
29
28
20
1.8
(8.5)
Greaves Cotton
123
448
15.0
13.5
3.2
2.9
11
21
22
22
10.9
12.6
24.4
18.5
3.2
2.9
20.0
13.6
16.1
17.2
16.7
5.7
3.5
Company
BHEL
Average
P/E (x)
P/B (x)
EV/ EBITDA (x)
RoE (%)
Source: Bloomberg, Ambit Capital research, Note prices as on 22 November 2016
November 23, 2016
Page 29
Strategy
Cement
POSITIVE
Another year of 5% demand in FY18
Key Recommendations
Sharp decline in cement demand (40-80% decline in the last 10 days) is

driven by liquidity issues and should normalise over the next month. On a
structural note, we believe ~15% of total cement demand is exposed to risks
from income/wealth effect of demonetisation (largely real estate in semiurban and urban areas); demand in this segment could decline by 10-20%.
Demand should grow by 0-4% in the last 4 months of FY17 and 4-5% in FY18
(vs ~8% estimated earlier); North and Central India will be the worst
impacted while South India will be largely resilient. However, pricing
discipline would be maintained; companies have surprisingly raised prices in
some regions last week. We do not rule out production cuts in the short term
to protect overall EBITDA amid demand weakness. Orient Cement, Shree
Cement and UltraTech are most exposed to estimate cuts. We prefer regional
players such as Dalmia Bharat and Ambuja amongst the large caps.
Dalmia Bharat
BUY
Ambuja Cement
BUY
Shree Cement
SELL
UltraTech
SELL
Research Analysts
Nitin Bhasin
Tel: +91 22 3043 3241
Parita Ashar, CFA
parita.ashar@ambit.co
Tel: +91 22 3043 3223
Exhibit 14: Demonetisation impact on Cement

Segment
Particulars
2HFY17
Demand Outlook
Lack of liquidity (cash) with individual

house builders (urban or rural) as well as
real estate developers to drive 15-25%
decline in cement sales over Nov-Dec
2016; this should recover to 0-4% over
Dec-Mar 2016.
Cement
Supply chain change
Industry structure
FY18
Structural
Income/wealth effect to impact

~45% of Indias cement
~15% of demand structurally.
demand is driven by semiAssuming this 15% declines by
urban IHBs and organised real
~20%, overall demand should
estate developers. A third of
grow by ~5% (vs 8% earlier);
this (15% of total demand) is
however, Government capex led
exposed.
demand could be the real driver
~70% of Indias cement sales are through the trade channel (retail), where customers pay cash to dealers.
However, payments from dealer to distributor to cement companies are 100% through the banking route and,
hence, imply no major impact on the supply chain.
No major change in structure as cement production in India is completely organised.
Channel checks
Our interaction with industry participants suggests that cement sales in the trade
segment are down 40-80% over the last 10 days due to lack of liquidity with
individual house builders.
Non-trade sales to institutional buyers retain the same pace as in the premonetisation period.
Collections from dealers/distributors have picked up significantly.
How are companies/industry reacting to demonetisation disruption?
Whilst managements of most cement companies suggest that dispatches have not
declined, we expect dispatches to see a slowdown in the next 1-2 weeks given
inventory in the channel is rising.
Hence, we expect cement companies to take production cuts in the next 1-2
weeks to maintain inventory and minimise inventory losses.
Structurally, we expect cement companies to maintain pricing discipline by

adjusting production.
November 23, 2016
Page 30
Strategy
How would demand shape up?

About 15% of total cement consumption is exposed: About 30% of Indias total
cement demand comes from individual house buyers in rural India, which is largely
dependent on agriculture and allied activities and, hence, unaffected by
demonetisation except in the intermittent period. Another 25% of demand is driven
by infrastructure and corporate capex, which is also largely immune to
demonetisation. The remaining 45% is driven by individual home builders in semiurban towns and organised real estate. Industry participants suggest that ~30% are
pure white money transactions either because the buyers have white money (more so
in South India) or circle rates are closer to market value of rates. Hence, only ~15%
of cement demand is exposed to income/wealth effect of demonetisation and could
see a decline. As liquidity in the economy improves over the next 1-2 months, retail
sales are expected to normalise by Jan 2017.
Exhibit 15: Segment-wise demand components
IHB - Rural, 30%
Largely white
30%
Industrial capex,
5%
Semi Urban /
Urban
(IHB / Organised
Real Estate)
45%
Exposed to
demonetisation risk
15%
Infrastructure, 20%
Source: Ambit capital research
10-30% decline in Nov-Dec 2016: Lack of liquidity with retail consumers would
result in a 10-30% decline in cement demand in Nov-Dec.
0-4% demand growth in 4QFY17: Assuming 85% of the market which is immune
to demonetisation grows at ~6% and the 15% of the market which is exposed
declines by 30%/20%/10%, cement demand would still grow by 0-4% in the last four
months of the year.
Demand to recover to 4-5% in FY18: Even if the impacted 15% of demand (real
estate) declines by another 10% in FY18, we expect demand to normalise to 4-5%,
supported by: (a) pick-up in housing demand due to good monsoons in CY16 and
possibly higher spends by the Government for rural India; and (b) pick-up in
infrastructure spend by the Government.
Exhibit 16: Demand to recover to 4-5% in FY18E
Demand drivers
FY18
Housing + Organised real estate (75% of market)

---- 60% immune grows at 6%
3.6%
---- 15% impacted declines another 10%
-1.5%
Infrastructure (20%) grows at 15%
3.0%
Industrial (5%) grows at moderate 4%
0.3%
FY18 growth
~5%%
Source: Ambit capital research;

We do not expect any major change to the cement industry structure as cement
production in India is completely organised.
November 23, 2016
Page 31
Strategy

The impact of demonetisation would be different across various parts of the
country. We expect
North India (20% of the market) and Central India (18% of the market) to be the
most severely impacted given high share of cash transactions; and
East India (18% of the market) and West India (20% of the market) would be the
next in order;
South India (25% of the market) would be least impacted as it is largely a white
money economy (in real estate), demand growth in AP/Telangana is holding up
due to large infrastructure spends, and there are no issues of a real estate bubble
like in other states.
In our coverage universe, we expect Shree Cement (North India, NCR dependence) to
be impacted the most, followed by ACC, Ambuja and UltraTech. Dalmia Bharat is the
best placed followed by Orient. We prefer regional players such as Dalmia Bharat
and Orient Cement and maintain our SELL stance on Ultratech and Shree Cement.
Ambuja remains our preferred play in the large-cap space.
Exhibit 17: Shrees exposure to North and East India makes it the most vulnerable to
volume cuts
Company
Central
North
West
23%
25%
22%
ACEM
SRCM
ACC
South
East
22%
75%
25%
18%
22%
22%
18%
20%
UTCEM
11%
21%
31%
18%
19%
ORCMNT
10%
55%
35%
10%
40%
DBL
50%
Surprise factors
A sharp increase in the Governments fund allocation towards Housing for all or
increase in subsidies to rural India will be positive and remains an upside risk to our
FY18 cement demand estimate of 5%.
November 23, 2016
Page 32
Strategy
Exhibit 18: Relative valuation of Indian cement companies
Capacity
(mn tonnes)
FY17
Advt
6m
Mcap
Rating
FY18
EV/EBITDA
(x)
P/E
(x)
EV/tonne
Rs
(Rs
US$ mn US$ mn
bn)
FY17
FY18
FY17
FY18
FY17
FY18
CAGR (FY16-18)
Sales EBITDA
ROE
(%)
EPS
FY17
FY18
Our estimates for Covered companies

UltraTech
69.6
69.6
SELL
939 13,776
15.5
17.9
15.2
36
28
13,293
13,293
15
22
12
13
Shree Cement **
26.6
29.5
SELL
517
7,587
3.6
18.2
16.3
42
35
17,504
15,783
15
30
52
17
18
Ambuja
31.7
32.7
BUY
388
5,692
11.9
13.4
10.4
33
25
7,707
7,464
22
23
ACC
34.1
34.1
BUY
243
3,561
9.6
13.0
9.8
29
20
6,940
6,736
24
28
10
13
8.0
8.0
BUY
27
396
0.7
18.8
9.1
(153)
19
5,052
5,052
23
56
51
-2
13
25.0
25.0
BUY
127
1,888
2.0
11.4
9.4
39
22
7,900
7,900
14
16
75
13
UltraTech
69.6
69.6
SELL
939 13,776
15.5
16.9
13.5
31
24
13,632
13,632
15
21
34
14
15
Shree Cement **
26.6
29.5
SELL
517
7,587
3.6
18.8
15.4
32
25
19,638
17,707
22
42
91
23
23
NA
NA
NR
371
5,514
11.1
5.9
4.9
11
11
19
30
12
13
Ambuja*
31.7
32.7
BUY
388
5,692
11.9
17.3
13.1
28
22
10,710
10,382
14
29
30
10
11
ACC*
34.1
34.1
BUY
243
3,561
9.6
15.4
11.8
33
24
6,727
6,727
12
32
12
Ramco Cements **
13.5
13.5
NR
130
1,934
1.8
12.6
10.6
21
18
11,350
11,350
12
12
16
19
19
Dalmia Bharat #@
25.0
25.0
BUY
127
1,888
2.0
9.9
8.5
34
21
7,503
7,503
16
18
70
10
14
Century Tex#
12.8
12.8
NR
76
1,131
16.4
12.6
NA
105
NA
9,162
9,162
NA
NA
NA
NA
8.0
8.0
NR
44
653
0.7
12.3
8.8
37
16
8,127
8,127
38
NA
12
24
JK Cement
10.8
10.8
NR
44
661
0.4
10.4
22
12
6,767
6,767
15
29
144
12
19
Jk Lakshmi Cement
11.0
11.0
NR
40
599
0.9
10.9
7.5
34
15
4,961
4,961
22
64
NA
18
Orient Cement
Dalmia Bharat #@
Large cap
Grasim^
Mid cap
Prism Cement #
Small Cap
Birla Corp #
10.5
10.5
NR
50
744
1.3
9.2
6.9
16
12
4,534
4,534
16
55
64
11
13
OCL India
6.7
6.7
NR
40
594
0.4
6.6
5.6
12
5,777
5,777
10
39
21
21
Orient Cement
8.0
8.0
BUY
27
396
0.7
13.7
7.8
47
13
4,941
4,941
27
66
83
18
India Cements
18.5
18.5
NR
35
516
10.3
7.1
6.2
16
11
3,651
3,651
10
12
58
6.0
6.0
NR
24
359
0.6
10.0
7.8
27
15
5,055
5,055
10
24
104
10
15
Mangalam Cement
3.5
3.5
NR
92
0.4
6.9
5.1
11
2,725
2,725
19
106
NA
15
Sagar Cement
3.5
3.5
NR
10
153
0.3
7.5
5.9
23
11
3,516
3,516
20
29
41
14
Heidelberg India
Source: Company, Ambit Capital research
November 23, 2016
Page 33
Strategy
Consumer
POSITIVE
Resilience of small-ticket consumption will hold
Key Recommendations
Demonetisation will cause disruption in the near term through: 1) supply

chain issues at wholesaler/retailer level and 2) demand compression as
consumers delay purchases to conserve cash. Near-term impact on subsegments will be lowest on home and personal care (HPC) followed by
tobacco, food & beverages (F&B), alcohol and paints. However, structurally
this will be a positive as 1) efficiency of supply chain improves as companies
reduce reliance on wholesale; 2) use of IT to support transition to cashless
supply chain increases sales visibility; 3) increase in fiscal/monetary stimulus
will drive consumption, offsetting potential impact from job losses in the
informal sector; and 4) shift of market share to organised players from
unorganised players who will struggle due to lack of liquidity and higher cost
of doing business. Biggest beneficiaries will be companies with 1) higher
direct distribution, 2) IT-supported, streamlined supply chains, and 3)
exposure to categories with low ticket size, large unorganised segment and
low price differential with unbranded products.
HUL
BUY
Asian Paints
BUY
GCPL
SELL
GSK Consumer
SELL
Research Analysts
Rakshit Ranjan, CFA
+91 22 3043 3201
rakshit.ranjan@ambit.co
Ritesh Vaidya, CFA
Ritesh.vaidya@ambit.co
Tel: +91 22 3043 3246
Dhiraj Mistry, CFA
+91 22 3043 3264
dhiraj.mistry@ambit.co
Exhibit 19: Exhibit 1: Quick summary table

Sub
sectors
Particulars
2HFY17
FY18
Supply chain change
Essential nature and small ticket size

limits demand impact
Wholesale (30-40% of sales) is hit
Industry structure
Unorganised market disrupted

Discretionary and Impulse F&B hit
Slowdown at Premium end.

entry/mid-level normalise
Supply chain normalises.
Unorganised players start closing
down
Relative slowdown in Discretionary
Channel less impacted
Channel unaffected
Large Unorganised segment struggling
Unorganised starts shrinking
Demand Outlook
HPC
Demand Outlook
Foods & Supply chain change
Beverages
Industry structure
Demand Outlook
Paints
Wholesale will lose share.

Unorganised market to shrink and
share shift to Organised.
Demand normalises
Wholesale will lose share
Unorganised market to shrink and
share shift to Organised
Growth recovers on a smaller base
Demand Outlook
Supply chain change
Govt-controlled channel remains normal Channel remains normal
Industry structure
Country / Illicit segment struggling
Supply chain change
Demand Outlook
Supply chain change
Industry structure
Alcohol
Premiumisation to slowdown.
Sharp slowdown
Slow demand recovery
Channel jammed on large share of cash Channel gradually shifts to lower
Channel clean up helps market leaders
based transactions
cash
Unorganised segment largely wiped
Unorganised segment stalled
Unorganised unlikely to revive
out.
Cigarette volumes could remain flat vs
Do not expect significant reduction in sales of illegal cigarettes or bidis
expectations of 3-4% YoY growth
Supply chain impacted as consumers and
Supply chain will normalise
No impact over the longer term
channel partners deal mostly in cash
Do not expect structural changes due to demonetisation or GST as we expect marginal impact on sales of bidis or illegal
cigarettes
High ticket size hurting demand
Demand recovery complete
Marginal impact at Premium end
Industry structure
Tobacco
Structural
Transparency within channel improves
Country struggles but Illicit recovers Share of Country Liquor comes down
Our channel checks
In the first few days of demonetisation starting 8 Nov, demand fell by 40-50% for
distributors and by 70-80% for wholesalers.
This demand slump was both due to working capital constraints in the channel as
well as due to households delaying consumption of even staples by a few days.
Channel partners see demand destruction in November across both staples and
small-ticket discretionary, with no visibility yet on the pace and timing of revival.
November 23, 2016
Page 34
Strategy
Many large companies like Marico, Dabur, Asian Paints and Berger have
extended credit in the channel to help ease liquidity constraints. This has helped
revive demand partially over the last few days.
A few firms (e.g. Berger in the paints industry) have undertaken initiatives to help
their dealers set up infrastructure for accepting payments through credit/debit
cards and mobile wallets.
In order to reduce the adverse impact on earnings from operating leverage, many
consumer companies have decided to cut down on TV advertising and deployed
these savings to offer higher trade promotions.

2HFY17: FMCG especially Home and Personal Care products at entry to mid-levels
and Tobacco should have low impact (<10% decline) due to small ticket size and
essential nature. Sales in Pharmacy channel would have been buoyant as well
benefiting from channel being allowed to accept old notes. Premium FMCG, Food &
Beverages and Alcohol are impacted more (10-15% decline) due to larger ticket size
and discretionary/impulse positioning. Impact on Paints will be highest (>15%
decline) due to larger ticket size, deferments and stalling of real estate development.
FY18: FMCG, tobacco and alcohol should recover completely but premiumisation will
slow down due to negative wealth effect for consumers losing out from
demonetisation. We believe fiscal and monetary stimulus should offset negative
impact of job losses from shrinking of informal economy. This should drive overall
consumption. F&B will remain impacted (5% decline) due to its discretionary
positioning. Paints will be weak (5-10% decline) as negative wealth effect is more
pronounced and recovery in real estate development can take long.
Beyond FY18: For FMCG (HPC and F&B), lower tax rate post GST implementation
combined with demand support from increased fiscal/monetary stimulus can aid
demand. Also, as economy turns increasingly cashless, e-wallet and cards
penetration will increase and drive propensity to spend. Premiumisation and highticket spending like paints will also revive the growth trends but on a new smaller
base. Long-term impact on alcohol and tobacco would be only marginally positive as
large price gap between unorganised and organised will prevent migration of
demand and closure of any illicit supply will shrink the unorganised sector without
benefiting organised segment.
2HFY17: Wholesale (30-40% of sales) is facing a liquidity crunch as the channel
largely deals in cash. There are also issues at the distributor-retailer level as this
transaction has a large cash component. However, credit period extension and
moving to non-cash transactions are easing the trade. Also, unorganised segment
that ranges from 10-20% for HPC and tobacco, 30-40% for F&B and paints and 50%
for alcohol (country and illicit liquor) is stalled due to lack of cash.
FY18: Companies should be able to reduce reliance on wholesale and work with
distributors to reduce cash dealings and enhance IT integration. Implementation of
GST will allow tax offsets through the value chain and reduce incentive for cashbased transactions. Smaller/marginal unorganised players are likely to start
struggling as higher cost of doing business and lack of liquidity will force them to
raise prices and make them less attractive to customers. Sub-segments which will
witness the largest benefit are HPC (lower price gap with unorganised), paints
(unorganised is a large market) and F&B (low price gap with unorganised products).
Impact will be lower on tobacco (as illicit cigarettes are already illegal but still thrive)
and alcohol (controlled distribution, large price gap with unorganised).
Beyond FY18: Market leading players with stronger control over supply chain and
channel will emerge with higher market share. Reduction of cash-based transactions
and greater IT integration within the channel will increase efficiency by bringing more
visibility on sales and inventory levels within various layers of channel. Unorganised
November 23, 2016
Page 35
Strategy
segment will lose its cost advantage and price gap between organised and
unorganised will narrow. This will lead to large-scale closure of unorganised
businesses as: 1) demand shrinks at the lower end as affordability reduces due to
price rise; and 2) at the higher end, lower price gap between organised and
unorganised will drive market share shift towards organised.
Factors investors should consider to pick winners and losers?
Businesses with the following attributes are likely to emerge winners: 1) lower
reliance on wholesale, 2) more control (through better servicing, larger product
portfolios) over distributors to shift them from cash to non-cash and push for greater
IT integration; 3) higher presence in categories with greater share of unorganised
segment; and 4) higher presence in categories where price gap between branded
and unbranded products is low.
Based on these criteria, we believe HPC will do well due to improvement in
distribution. Paints and F&B will benefit due to large unorganised segments, which
should help organised players gain significant market share. For alcohol and tobacco,
while unorganised remains a large segment, benefit is likely to be lower due to large
price gap and lower control over distribution which will prevent large scale migration.
Wealth effect of consumers impacted by demonetisation could turn out to be positive
(vs our expectation of negative impact) as the residual wealth of such consumers will
become a part of the formal economy and can be spent more freely. Also, more cash
joining the formal economy instead of being stashed away unproductively can have a
multiplier effect and lead to higher-than-expected positive impact on economic
growth and, hence, consumption growth. On the negative front, channel disruption
and demand suppression from lack of cash can continue for a longer duration than
currently anticipated.
Exhibit 20: Exhibit 2: Relative valuation table

P/E based on
CMP
EV/EBITDA
ROCE (%)
Implied P/E
based on TP
FY17E FY18E
FY17E FY18E
FY17E FY18E
FY17E FY18E
Div.
Yield
(%)
Rev
growth
EPS
Growth
CMP
Mcap
(Rs)
(LC bn)
803
1,738
BUY
925
15%
37.3
31.1
25.9
21.7
119.7
136.0
42.9
35.8
2.0%
12.6%
19.0%
Nestle
5,882
567
SELL
6,100
4%
51.5
37.4
29.2
21.6
35.2
43.7
53.4
38.8
0.7%
16.9%
19.1%
GSK Consumer
4,960
209
SELL
5,300
7%
29.2
26.6
26.7
22.5
28.5
27.2
31.2
28.4
1.4%
10.8%
9.7%
Relative
valuations
Stance
TP
Up /
Down
FY16 FY16-19 FY16-19
Staples
HUL
Colgate
Godrej Consumer
Dabur
Marico
Britannia
ITC
917
250
SELL
900
-2%
36.8
31.7
23.1
19.5
60.2
60.1
36.1
31.1
1.1%
14.8%
16.2%
1,421
484
SELL
1,150
-19%
36.4
33.2
26.5
22.8
17.0
16.2
29.5
26.9
0.4%
13.0%
13.1%
278
490
SELL
282
1%
35.8
30.6
27.6
23.3
26.0
26.6
36.2
31.0
0.8%
14.0%
14.3%
250
323
BUY
298
19%
37.0
30.1
24.7
20.5
36.5
38.2
44.1
35.9
1.0%
13.4%
22.5%
2,903
348
SELL
2,700
-7%
38.2
32.6
24.5
20.3
44.6
42.7
35.5
30.3
0.7%
14.0%
16.3%
228
2,750
BUY
285
25%
25.6
22.6
16.6
14.3
29.5
30.7
32.0
28.2
2.5%
13.9%
12.1%
4%
36.8
31.1
25.9
21.6
35.2
38.2
36.1
31.0 1.0%
13.9%
16.2%
Median
Consumer Discretionary
Asian Paints
908
871
BUY
1,270
40%
39.8
30.9
24.9
19.4
34.2
36.5
55.6
43.3
0.8%
17.7%
24.3%
Berger Paints
187
182
BUY
296
58%
32.8
26.8
19.7
16.2
29.5
31.2
52.0
42.5
0.6%
18.2%
30.7%
49%
36.3
28.9
22.3
17.8
31.8
33.9
53.8
42.9 0.7%
17.9%
27.5%
Median
November 23, 2016
Page 36
Strategy
Media
NEGATIVE
B2B income to suffer
Key Recommendations
The B2C income, subscription for distribution platforms (DPOs: Cable MSOs
and DTH) and the circulation income for newspaper publishers remain
unaffected by demonetisation given low-ticket (Rs200-500/month) spend.
However, channel checks indicate downward revision in the B2B income
comprising advertising (60% of broadcast income/80% of newsprint income).
Thus, the industrys advertising spends outlook for 2HFY17 (currently 13% as
per Pitch Madison) would move downwards in line with the nominal GDP
growth. Print media would face a greater adverse impact (than TV) in
2HFY17 given higher contribution from cyclical categories (real
estate/jewellery/retail). In this period, strong balance sheets and access to
credit allows the organised players (DB Corp, Dish TV and ZEEL) to gain
market share from the unorganised ones. The formalisation effect will
support long-run advertising growth as the organised players step-up
advertising to build strong brands. DPOs subscription growth is driven by
penetration gains, which is supported by DBT-based transfers to rural
consumers.
Dish TV
BUY
Hathway Cable
SELL
Zee Entertainment
SELL
Research Analysts
Vivekanand Subbaraman, CFA
Tel: +91 22 3043 3261
vivekanand.s@ambit.co
Exhibit 21: Summary
Demand outlook
Television broadcasters Supply chain changes
Industry structure
Demand outlook
DPOs - DTH operators Supply chain changes
Industry structure
Demand outlook
Supply chain changes
DPOs - Cable MSOs
Industry structure
Demand outlook
Newsprint
Industry structure
2HFY17
FY18
Advertising revenue growth

challenged by weak macro
Advertising could bounce back, in

Long-run advertising growth
line with GDP growth. Delayed
could be boosted by the
digitisation could hurt
'formalisation effect.'
subscription
Considering that television

attracts large organised
No change
advertisers, we dont foresee any
liquidity impact
Small/niche broadcasters lose
market share as large
No change
broadcasters are able to weather
challenging 2HFY17
No change in subscription
income given small ticket size,
prepaid nature of product
Slowing STB deployment owing
to liquidity crunch and delayed
digitisation
Owing to its prepaid nature, DTH
to weather the challenges of
demonetisation better than cable
MSOs
No change in subscription offtake given small-ticket spending
Balance sheet stress due to
delayed cash collections from
LCOs.
No change
Delays in digitisation to continue
No change
No change
Delays in digitisation to continue
Weak MSOs exit the business;

ceding ground to DTH operators
No change
Sharp deceleration in advertising
outlook given dominance of
cyclical categories (real estate,
retail). No impact on circulation
income
Stretched working capital cycles
owing to advertisers facing
liquidity challenges
Weak players (Punjab Kesri,
Prabhat Khabar) lose market
share as they are unable to offer
credit to advertisers
Structural
No change
Small/niche broadcasters are
unable to sustain investments
and there is further industry
consolidation
Rural-centric DTH operators
could get a fillip owing to
demand tailwinds from DBT
transfers
Higher proportion of online
recharges to result in reduced
channel commission
Doesn't change our long-term
stance of DTH consolidating the
TV distribution landscape
No change
Given the high leverage of the
sector, reduced interest rates to
result in significant easing.
No change to our long-term view
of unorganised cable MSOs
being unable to digitise rural
markets
Continued crackdown on black

money further pressures real
estate; unlikely to see strong
advertising bounce back
Long-run advertising growth

could be boosted by the
'formalisation effect.'
No change
No change
Organised newsprint companies

continue to gain market share
Exit/consolidation of weaker
players as they are unable to
sustain market-share losses to
organised players.
November 23, 2016
Page 37
Strategy
Channel feedback
Broadcasters/FMCG advertisers: Given demand uncertainties, there is

curtailment of advertising spends, even for steady advertisers, such as
FMCG/staples.
DPOs: No impact on cash collections given the low-ticket nature of spends. Also,
given that cash collections are monthly, it is too early to ascertain the impact of
this move.
Print media: Real estate, jewellery, local retail and even FMCG are cutting
advertising spends.
Strong balance sheet the key differentiator
Broadcasters/print companies: Companies with strong balance sheets are

likely to extend credit to liquidity-constrained advertisers and gain market share
from small/poorly-funded rivals.
DPOs: The set-top box (STB) deployment challenges are lower for DTH vis--vis
cable multiple-system operators (MSOs) given that the former has significant STB
inventory, which can be leveraged.
Sluggish demand trends are transient
Broadcasters/print media companies

o
2HFY17: Advertising income is likely to be affected due to sluggish nominal

GDP growth trends. Subscription/circulation and low-ticket spends are
unlikely to be affected.
FY18: Advertising growth could bounce back, in line with the GDP growth.
The governments black money crackdown is likely to result in sustenance of
weak advertising demand from real estate, which affects print media much
more than television. Delayed digitisation could affect subscription growth
trajectory.
Beyond FY18: Long-run advertising growth trajectory could improve due to

formalisation effect. Also, streamlined supply chain for consumer goods will
result in below-the-line spends getting redeployed to discretionary brand
building advertising spends.
DPOs: Cable MSOs/DTH

o
2HFY17: No impact on subscription income given low-ticket spends. Both

DTH and MSOs will witness sluggish STB deployment given liquidity
constraints. MSOs to further witness balance sheet stress owing to delayed
local cable operator (LCO) payments.
FY18: Digitisation delays persist, affecting STB deployment. However, there is

no change in subscription revenue trajectory.
Beyond FY18: No change to our long-term view as unorganised cable MSOs

would not be able to digitise rural markets. We expect DTH to consolidate
Indias Pay TV distribution landscape.
Industry structure changes
Broadcasters/print media companies; consolidation hastened

o
2HFY17: Given the challenges to advertising growth, we expect large

organised players to leverage their balance sheets to gain market share.
FY18: We expect small and weak players to exit by selling out to large
players.
Beyond FY18: Both broadcast and print media are likely to undergo industry
consolidation a trend that we expect to sustain given that small regional
players can no longer sustain against deep-pocketed pan-India rivals.
November 23, 2016
Page 38
Strategy
DPOs: DTH to consolidate the market as small cable MSOs exit

o
2HFY17/FY18: We dont foresee any meaningful change in the industry

structure given persistent delays in digitisation.
Beyond FY18: We expect DTH to consolidate the Pay TV content distribution

landscape given: (a) strong balance sheet; (b) credible rural-focused products;
(c) inability of small and fragmented MSOs to digitise their subscribers.
How to pick winners?
Broadcasters/print media companies; prefer broadcasting: The print media

has higher dependence on sectors, such as real estate (~6% of advertising) and
education (~7% of advertising), which are vulnerable to the clampdown of black
money. TV, on the other hand, derives ~70% of advertising revenue from sectors
which witness streamlining of supply chains (auto and FMCG), and hence
sustained improvement in advertising growth. Thus, we prefer television over
print media.
DPOs; prefer DPOs with strong balance sheets and healthy cash flows:
Among DPOs, we view strong balance sheets and healthy operating cash flows as
key differentiators, enabling platforms to consolidate the Pay TV distribution
landscape. We prefer DTH over cable MSOs.
Exhibit 22: Valuation summary

Company
M-Cap
(US$ Stance
mn)
P/E
RoE (%)
FY16-18 CAGR (%)
FY17E
FY18E
FY19E
FY17E
FY18E
FY19E
Sales
EBITDA
EV/EBITDA (x)
EPS
FY17E
FY18E
FY19E
Zee Entertainment
7,069
SELL
40.3
26.6
18.9
20.3
22.3
26.5
11.3
31.4 31.7
22.5
16.4
12.2
Dish TV^
1,425
BUY
45.9
25.3
22.6
NM
NM
NM
9.1
13.3 40.5
11.3
9.8
8.1
370
SELL
NM
NM
NM
NM
NM
NM
12.4
76.9
NM
28.5
20.6
12.6
VDTH
834
NR
NM
38.3
NA
5.6
17.6
NA
14.5
25.7
NM
5.3
4.5
NA
Siti Cable
420
NR
NM
NM
NA
7.3
21.1
NA
25.5
42.2
NM
9.2
5.4
NA
Hathway Cable~
Den Networks
213
NR
NM
NM
NA
(5.8)
(8.2)
NA
19.0
57.6
NM
5.9
5.3
NA
1,019
NR
14.6
12.7
NA
26.7
27.7
NA
13.5
23.0 25.6
9.9
8.5
NA
Jagran Prakashan
896
NR
13.4
12.3
NA
23.3
23.9
NA
11.3
13.3
0.4
9.1
8.1
NA
HT Media
274
NR
9.8
9.4
NA
7.7
8.3
NA
7.8
(21.4)
5.6
7.2
6.5
NA
HMVL
318
NR
9.2
9.0
NA
18.9
18.1
NA
9.7
(0.8) 12.9
8.8
7.7
NA
DB Corp
Source: Company, Bloomberg, Ambit Capital research; ^ For Dish TV, we consider licence fee provisions as debt; ~ For Hathway, we compute ratios on recurring
EBITDA; For Siti, Den, DB Corp, Jagran, HT Media and HMVL, estimates are taken from Bloomberg
November 23, 2016
Page 39
Strategy
E&C/Infrastructure
NEGATIVE
Diverging fortunes
The typically resilient contracting industry should adapt to the new norms
quickly in terms of operations; our checks indicate no material decline in the
pace of project execution. However, fortunes will be split; Government
contractors will have better execution and project visibility as private sector
capex could teeter further. Organised players may emerge stronger in the
longer run as local players get marginalised by an expanding tax net. In the
infra space, road developers are likely to be the most impacted; Nov-16 loss
of revenue aside, weaker economic activity and traffic decline in FY18 could
result in balance sheet stress. Look for players with most A-rated assets. This
could also be an ideal time for financial players to enter the asset ownership
space backed by lower cost of funds. PGCIL, with fixed, annuity revenue
streams and helped by lower interest rates, is the clear winner.
Key Recommendations
Power Grid
BUY
Techno E&E
BUY
Engineers India
SELL
NBCC(India))
SELL
Exhibit 23: Impact on E&C/Infra - Fate to be linked to the end-client market that is serviced by the contractors
Segment
2HFY17
FY18
Government-driven projects likely

to continue; awards may pick up if
social infra focus increases.
Demand Outlook
Real estate construction will

decline.
Construction
Government orders may pick up if

the Centre increases funding for
social infrastructure.
Private sector capex is unlikely to
recover if economic growth is
weak.
No structural impact on demand.
Real estate construction will

decline.
Liquidity crunch at the

subcontracting/labour market
level; vendor funding by listed
players could increase.
This should normalise soon as

channels will adapt to the new
normal; subcontracting may
become more expensive.
Subcontracting may become more

expensive as unorganised players
get taxed.
Industry structure
Increased competition in
unaffected segments like roads
from contractors that operated
elsewhere
Same as in 2HFY17.
Local, unorganised players will be

marginalised as tax net widens
Demand Outlook
Depends on end-market; if linked

to economic activity, then expect a
decline in revenue and poorer
interest coverage; transmission not
affected.
If traffic declines materially,

balance sheet health could
deteriorate rapidly.
No material impact.
Supply
change
No material impact
Competition could reduce if
balance sheet health deteriorates
on the back of traffic decline.
Prevalence of financial players will

increase as the cost of funds
reduces with balance sheet stress
at contractor-cum-developer level.
Supply
change
Infrastructure
Private sector capex may be

delayed if the economic slowdown
hits capacity utilisation and health
deteriorates.
Structural
chain
chain
Industry structure
No immediate impact
Research Analysts
E&C: Our channel checks suggest no material impact on operations in the near
term. Pace of construction has not slackened materially. Companies are providing
more facilities to labourers in the form of enabling banking support and paying
for on-site expenses. Subcontractors are pre-paying salaries to labourers.
Companies currently disagree that funding vendors through their own balance
sheet is required. However, we do expect this to happen if the cash crunch gets
acute.
November 23, 2016
Nitin Bhasin
Tel: +91 22 3043 3241
Utsav Mehta, CFA
Utsav.mehta@ambit.co
Tel: +91 22 3043 3209
Shrenik Bachhawat
shrenik.bachhawat@ambit.co
Tel: +91 22 3043 3234
Page 40
Strategy
Infrastructure: The main impact is from stoppage of tolling for over a week
throughout the country. Road companies have applied to NHAI for compensation
of traffic loss in Nov-16. However, timing of the payment is unclear as various
participants indicate varying timelines. Road companies are finding new ways of
collecting toll like prepaid cards, installing point-of-sale machines and cashless
transfers. No impact on transmission players.
How would demand shape up over FY17-19?
E&C: The sector is completely dependent on the end-market serviced. For

Government contracts, the pace of execution and new order awards will not
change materially. It could accelerate if the social stimulus package involves a
thrust on social infra. Private sector over-capacity is likely to sustain, thereby
causing further delays to capex plans. Real estate oriented contractors could
struggle. However, infra/asset creation in the country could be boosted by
declining interest rates. Therefore, we expect the demand scenario to improve
towards FY18-end. There would be no impact on transmission.
Infrastructure: Traffic declined by 15-20% in Nov-16. Whilst this is likely to

normalise, we expect growth to be subdued. The key risk here is the extent of
decline in 2HFY17. In the longer run, total economic activity will normalise.
E&C: In the near term, there could be migration of contractors from allied,
struggling segments into Government-facing infra projects. For instance, stateowned consultants such as MECON may vie for infra projects. In the longer run,
smaller, unorganised players may get marginalised. Lack of tax coverage and
easy access to funds through unaccounted cash made these players competitive,
an advantage that should fade.
Infrastructure: In the near term, traffic decline could impact interest coverage
ratios and, therefore, competitive intensity could subside. This could enable
financial players (like pension funds) to play a more prevalent role in the industry
backed by lower cost of funds.

In the E&C space, winners will be contractors that participate in Government projects
and subcontract the least. In the roads sector, companies that have the most
headroom in terms of debt service coverage ratio (DSCR) should be the most secure.
Companies that are rated A or higher should have a headroom of absorbing 15-20%
traffic decline whilst those rated lower would have lesser headroom. PGCIL is the
clear winner here due to declining interest rates and a revenue stream not impacted
by weakness in economic activity.
November 23, 2016
Page 41
Strategy
Exhibit 24: Ratings of SIPL and ASBLs assets
Rating agency
Name
Crisil
CARE
ASBL
Ashoka Dhankuni Kharagpur
BBB-
Belgaum Dharwad
BBB
Sambalpur
BBB
Bhandara
A-
Mudhol Nipani
BBB
SADE
Bijapur Hungund
Aurangabad Jalna
CARE A
Ahmedabad ring road
CARE A+
Nagpur Seoni
CARE AAA
Dhule Palesner
CARE A
Hyderabad Yadgiri
CARE BBB
Maharashtra Border check post
CARE A-
Rohtak Panipat
CARE BBB-
Shreenathji Udaipur
CARE BBB
Source: CARE, Crisil
A pick-up in private capex due to low cost of funds would be a major positive for
the sector.
Stalled/defunct construction projects which have funding issues may resume due
to increased accessibility to funds.
Exhibit 25: Relative valuations

Mcap
6M ADV
US$ mn
Rs bn
Larsen & Toubro*
18,745
1,277
42
Larsen & Toubro
18,745
1,277
42
Engineers India*
1,402
96
Voltas
CAGR (FY13-16)
US$ mn Revenue
5%
CAGR (FY16-18)
EBITDA Revenue
EBITDA margin
PAT margin
EBITDA
FY17E
FY18E
FY17E
FY18E
7%
7%
6%
22%
23%
11%
12%
11%
8%
12%
11%
12%
12%
5%
5%
-16%
-35%
14%
53%
18%
20%
22%
22%
1,421
97
2%
27%
11%
13%
8%
9%
7%
7%
VA Tech Wabag
398
27
16%
13%
20%
25%
9%
9%
4%
5%
KEC International
525
36
8%
21%
9%
13%
8%
9%
3%
3%
Kalpataru Power*
529
36
10%
22%
19%
6%
11%
11%
5%
5%
95
-28%
-195%
NA
NA
NA
NA
NA
NA
HCC*
360
25
2%
30%
13%
9%
18%
18%
2%
3%
NCC*
644
44
13%
15%
8%
10%
9%
9%
3%
3%
J Kumar Infra*
203
14
12%
29%
24%
2%
17%
17%
7%
8%
Simplex Infrastructure*
222
15
0%
10%
8%
7%
11%
11%
1%
2%
Techno Electric
492
34
17%
-2%
27%
27%
22%
20%
13%
14%
525
36
8%
13%
13%
12%
11%
11%
5%
5%
3,368
229
4%
-4%
16%
17%
13%
13%
7%
7%
Punj Lloyd
Median
Mean
November 23, 2016
Page 42
Strategy
Mcap
6M ADV
CAGR (FY13-16)
US$ mn
Rs bn
FY17E
FY18E
Larsen & Toubro*
14
12
14
24.6
20.2
Larsen & Toubro
12
11
13
24.0
19.5
15.8
13.2
2.7
2.5
16.8
14.1
2.6
2.4
Engineers India*
10
12
15
26.9
21.4
24.1
17.7
3.4
3.3
Voltas
17
17
17
VA Tech Waba
10
13
15
22.5
18.9
17.7
14.8
3.6
3.1
19.3
14.9
10.3
8.4
2.4
2.2
KEC International
13
16
Kalpataru Power*
11
16
14.0
11.7
7.7
6.9
2.1
1.8
12
13.8
11.6
7.0
6.0
1.4
1.3
NA
NA
NA
NA
NA
NA
NA
NA
NA
HCC*
NCC*
34.6
15.5
8.5
7.2
1.1
1.0
17.9
13.8
7.6
6.8
1.2
1.1
10
10
12
10.9
8.3
5.7
4.5
1.0
0.9
16.2
10.5
7.1
6.5
0.9
0.9
15
18
19
18.3
14.7
11.9
10.4
2.9
2.5
Median
10
12
13
18.8
14.8
9.4
7.8
2.2
2.0
Mean
11
11
13
20.2
15.1
11.7
9.7
2.1
1.9
J Kumar Infra*
Simplex Infrastructure*
Techno Electric
EBITDA Revenue
EBITDA margin
EBITDA
Punj Lloyd
US$ mn Revenue
CAGR (FY16-18)
PAT margin
FY17E
FY18E
Source: Company, Bloomberg, Ambit Capital research. Note: * indicates standalone
November 23, 2016
Page 43
Strategy
Healthcare
POSITIVE
No material impact
Key Recommendations
The recent demonetisation drive has little impact on the pharma sector (in
terms of change in industry structure or demand pattern) as consumption is
need-based. Our channel checks suggest trends of forward buying by
consumers, albeit limited, due to acceptance of old notes at pharmacies as
per government directives. Lumpy sales are expected in 3QFY17, specifically
in chronic therapies for lifestyle related diseases. However, these purchases
would be offset in subsequent quarters. Also, discussion with industry
participants suggests that working capital cycle would be extended in 2HFY17
as stockists have requested for additional 10-15 days of credit period. For
export-driven companies (50-75% of revenues), we expect tailwind of rupee
depreciation. A sensitivity analysis suggests that for every percentage point
appreciation/depreciation in INR/USD, pharma companies net profit
decreases/increases by 1-2%. For B2B businesses like API, CRAMS and CRO,
we do not expect any impact of demonetisation.
Lupin
BUY
Cadila
BUY
Research Analyst
Paresh Dave, CFA
paresh.dave@ambit.co
Tel: +91 22 3043 3212
Exhibit 26: Quick summary table

2HFY17
FY18
Structural
Forward buying in chronic therapies;

extended credit period for stockists
No impact of the structure of the

industry due to needs based
consumption
Need based consumption, do not

expect any structural change
Export pharma
Depreciation in rupee to aid exports,

sensitivity of 1-2% for every 1% change
in USD/INR
Prolonged period of rupee depreciation Impact of rupee depreciation to

to provide windfall gains
provide tailwind to export revenues
API / CRAMs / CROs
No major impact due to B2B business.
Demand environment unaffected
Domestic pharma
Do not expect any structural change
Our channel checks
No impact on demand for medicines due to necessity-based consumption.
Stockists have requested pharma companies to provide additional credit period of

10-15 days.
In pharmacies, where old notes are being accepted, there is forward purchase by
consumers, in some instances up to one year, especially in the case of chronic
therapies like diabetes, cardiac and central nervous system.
Chronic-heavy domestic portfolio companies are expecting marginal increase

sales in the near term due to forward buying by consumers.
We do not expect the demonetisation to change the demand pattern for pharma
products.
Decline in yields and depreciation in rupee could provide tailwinds as pharma

companies earn 50-75% of revenues from the export market.

2HFY17: Chronic therapies pertaining to lifestyle-related disease will see marginally
higher growth. Working capital would increase due extended period of credit
provided by pharma companies to stockists. Demand environment will remain
unaffected due to need-based consumption. With depreciation in INR, we expect
windfall gain in export revenues, which contribute 50-75% to total revenues.
FY18: Chronic therapies would report lower than IPM (Indian pharmaceutical market)
growth due to forward buying by consumers in 2HFY17. We do not expect demand to
be impacted by demonetisation. Sustained pressure on INR will improve revenues
from the export market. API business is B2B and, hence, unaffected.
November 23, 2016
Page 44
Strategy
Beyond FY18: Domestic pharmaceutical consumption would remain unaffected.
2HFY17: Apart from extended working capital cycle, we do not expect the industry
structure to change. With rupee depreciation, we expect companies to earn windfall
gains as 50-75% of total revenue is derived from exports. A sensitivity analysis
suggests that for every percentage point appreciation/depreciation in INR/USD,
pharma companies net profit decreases/increases by 1-2%.
FY18: We expect IPM to report growth of 12-15% post NLEM and FDC impact in
FY17. Whilst chronic therapies could report lower growth, it would largely be
restricted to lifestyle-related drugs consumed regularly (<15% of overall IPM).
Extended period of depreciation in rupee augur well for exports.
Beyond FY18: No material impact or change in structure given consumption is
necessity-based.
Factors investors should consider in picking winners and losers
Companies with higher chronic revenues from the domestic market will gain in the
near term due to forward buying of lifestyle-related chronic therapy drugs. However,
the increase in revenue in 2HFY17 will be offset in FY18.
Companies with higher exposure to the export market will benefit from currency
depreciation.
API and CRAMs businesses are B2B; hence, we do not expect any material impact of
demonetisation.

Extended periods of payment terms with stockists and any write-off of debtors due to
their inability to make payments would be negative for pharma companies.
Sharp depreciation in INR would be beneficial for pharma companies as they earn
50-75% of revenue from exports.
November 23, 2016
Page 45
Strategy
CMP
Rating
Consensus Upside
TP
(%)
Mcap
EV/EBITDA
(x)
P/E (x)
P/B (x)
EV/Sales (x)
US$ mn FY17E FY18E FY17E FY18E FY17E FY18E FY17E FY18E
CAGR
(FY16-18)
EBITDA EPS
ROE (%)
FY16 FY17E FY18E
Large caps
Sun Pharma
687
NR
850
Lupin*
1,404
BUY
Dr. Reddy's*
3,144
SELL
545
SELL
Cipla*
GSK Pharma
Aurobindo Pharma
Cadila*
24
24,266
14.9
13.5
22.4
19.6
4.4
3.6
5.1
4.6
19
34
17
21
20
1,851
32
9,286
15.2
11.2
21.5
15.5
5.1
4.0
4.1
3.2
29
34
23
24
27
2,793
(11)
7,644
17.2
12.5
31.1
21.4
3.6
3.1
3.4
2.9
12
17
13
16
3.6
3.2
3.1
2.7
21
20
13
14
15
7.0
6.2
NA
NA
21
25
34
516
(5)
6,427
16.3
13.9
24.3
20.5
2,670
NR
2,815
3,319
39.9
28.9
54.2
41.0
717
NR
959
34
6,157
11.9
10.2
17.1
14.4
4.5
3.5
2.8
2.5
18
21
32
29
27
365
BUY
430
18
5,483
14.2
11.2
18.9
14.9
5.7
4.5
3.4
2.7
21
28
32
33
32
Divi's Laboratories
1,167
NR
1,286
10
4,547
18.3
15.0
24.7
20.6
6.1
5.1
6.9
5.8
19
16
29
27
27
Torrent Pharma
1,311
NR
1,618
23
3,257
14.6
12.3
21.9
17.7
5.4
4.4
3.7
3.3
(18) (15)
884
NR
1,032
17
3,659
12.0
11.0
18.9
16.8
4.6
3.6
2.9
2.6
14.9
12.3
22.3
17.9
4.8
3.9
3.9
3.4
Glenmark
Average
59
27
27
32
45
19
27
24
Mid caps
IPCA Laboratories
Biocon
Sanofi India
Wockhardt
Alembic Pharma
538
NR
573
996
14.3
11.1
28.3
18.8
2.7
2.4
2.2
1.9
35
97
10
13
849
NR
861
2,492
17.8
14.9
29.7
25.7
3.7
3.4
4.3
3.7
17 (14)
24
13
13
4,132
NR
5,563
35
1,397
16.5
14.1
28.1
24.1
5.0
4.3
3.7
3.3
17
11
21
20
22
703
NR
896
27
1,140
18.5
10.1
23.5
14.2
1.9
1.6
2.0
1.7
35
29
16
610
NR
698
14
1,688
17.3
13.6
25.8
20.1
6.0
4.9
3.5
3.1
(9) (11)
58
25
26
1,749
NR
2,075
19
2,259
20.7
16.7
29.7
23.9
9.6
7.4
7.2
5.8
24
40
35
33
Pfizer Ltd
1,798
NR
2,130
18
1,207
15.0
12.6
29.1
23.6
3.5
3.1
3.2
2.9
NA
11
12
14
Abbott India
4,475
NR
4,480
1,396
19.0
29.3
24.2
7.2
6.0
2.8
2.4
NA
NA
25
26
27
614
NR
752
23
1,434
8.9
7.8
15.8
12.6
2.8
2.3
2.2
1.9
NA
NA
16
19
19
Strides Arcolab
1,025
NR
1,297
26
1,344
14.9
11.9
24.0
17.1
2.8
2.4
2.8
2.4
NA
NA
10
12
15
Natco Pharma
591
NR
581
(2)
1,511
45
58
14
22
21
Ajanta Pharma
Jubilant
Sciences
Life
Average
21.1
17.9
31.3
26.2
6.5
5.3
6.4
5.4
16.7
13.1
26.8
20.9
4.7
3.9
3.7
3.1
27
Small caps
FDC Ltd
212
NR
NA
NA
553
11.6
10.1
15.7
13.6
3.1
2.6
3.1
2.8
NA
NA
16
21
21
Unichem Labs
252
NR
331
31
336
11.3
8.7
18.0
13.1
2.2
1.9
1.5
1.3
28
27
12
13
15
Indoco Remedies
282
NR
314
11
381
13.7
11.0
22.4
18.0
3.9
3.3
2.4
2.0
19
32
15
Merck
890
NR
990
11
217
7.7
6.7
15.9
12.6
2.0
1.8
1.1
1.0
NA
NA
Dishman Pharma
231
NR
279
21
546
9.7
8.5
18.2
14.4
2.3
2.0
2.6
2.4
13
23
11.6
9.6
18.6
14.8
2.9
2.5
2.4
2.1
Average
13
18
20
12.9
14.8
13
13
Source: Company, Bloomberg, Ambit Capital research. Note: * indicates Ambit Capital estimates
November 23, 2016
Page 46
Strategy
Light Electricals
POSITIVE
The darkness before the dawn
Key Recommendations
Demonetisation will cause disruption in the near term through (a) decline in
fresh project announcements in real estate; and (b) demand compression as
consumers delay purchases to conserve cash. Near-term impact on B2B
products (cables & wires, switchgears) will be lowest as the execution of
ongoing projects has not slowed down materially. However, with no fresh
project announcements, demand weakness would intensify in FY18. Sales for
B2C products (fans, appliances, lighting) has declined by 30-35%; however, it
should recover in 1QFY18 as the new currency circulation increases. From a
long-term perspective, demonetisation is a positive as market share shifts to
organised players; albeit competition may also increase as MNC/Chinese
players enter with market becoming organised. Havells and Finolex should
emerge as the biggest beneficiaries given high share of revenue from cables
& wires, where share of unorganised is the highest at 40-45%. Bajaj should
also benefit given its leadership in appliances, where the share of
unorganised is also a high 40%.
Havells
BUY
Finolex Cables
BUY
Crompton Consumer
SELL
Research Analysts
Bhargav Buddhadev
Tel: +91 22 3043 3252
Tel: +91 22 3043 3275
Exhibit 28: Impact of demonetization on Light Electricals

Particulars
Demand outlook
Cables and wires,
switchgear (B2B
Supply chain
products)
change
Industry
structure
Demand outlook
Fans, small
appliances, lighting
(B2C products)
2HFY17
FY18
Structural
Single-digit volume decline given

execution of ongoing projects has
not slowed-down.
1HFY18: double-digit decline as

new projects announcement is
weak; 2HFY18: high single-digit
growth (base effect)
Margins to improve led by

consolidation in the sector and
higher share of organised players
Channel inventory liquidation due

to cash crunch; companies working
capital to get stretched
Inventory re-stocking from 2HFY18

as channel liquidity improves
Players with strong balance sheets

to gain market share
Organised players to gain market

share from unorganised
Significant volume decline led by

liquidity crunch at consumers;
purchases would get deferred
1HFY18: Volume decline to

moderate to single digit led by
liquidity improvement
2HFY18: Strong recovery assuming
Govt. fast-tracks social spending
Supply chain
change
Same as above
Inventory re-stocking, especially in

2H
Industry
structure
Same as above
Same as above
Share of e-commerce as an
alternative channel will increase
with share of digital transactions
rising
Companies with strong balance
sheets will dominate given capital
intensive nature of business
Industry size can increase in
underpenetrated products like small
appliances with share of ecommerce rising. For matured
products, premiumisation will
increase
Consolidation as several
unorganised players become
vendors
Entry of MNC and Chinese brands
given rising share of organised
players
Our channel checks

B2C product category most impacted: Sales of appliances, fans and water
heaters are the most impacted given high percentage of retail transactions. First
week of demonetisation saw sales declining 80-90%, however now they are
down only 50 to 60% with Rs2,000 notes coming into circulation. Once Rs500
notes come into circulation, recovery is likely to be faster.
B2B category doing better: Cables & wires and switchgears are doing better
with sales down just 10-15%. This is because the real estate projects which are
closer to completion are seeing continued execution. Also, copper prices have
increased by 10-15%, which has allowed distributors to liquidate old inventory at
higher prices.
East India, UP, NCR, Gujarat and Kerala most impacted: East India, UP and
NCR seems to be the most impacted given high dependence on cash. Gujarat
and Kerala are also impacted given the dominance of large co-operative banks
(not getting new currency from the RBI). Also, there are a lot of hawala
transactions which happen herein in the form of NRI remittances.
November 23, 2016
Page 47
Strategy
Things should normalise from April: Consensus seems to be that things

should normalise by April as currency will get recalibrated by then. Also, there is
an expectation of fiscal stimulus in Jan-Feb which can boost demand.
Several companies have agreed to bear charges levied by credit card companies
to promote the channel to go digital. Crompton was the first company to take this
initiative.
By end-November, we expect companies like Havells, Crompton, V-Guard and

Bajaj to announce extension of credit cycle to the channel; in electricals, the bulk
of trade happens in the last week of the month. Havells can be the most
aggressive given it has the strongest balance sheet (net cash of Rs11.4bn as on
30 September).
Ad-spend may decline significantly as companies may choose to spend more on

promotions to win the trust of the channel.
2HFY17: In 3QFY17, we expect 5-10% decline in sales of B2B products like cable
& wires and switchgears and 15-20% decline for B2C products like fans,
appliances and water heaters. Secondary sales impact may be higher given the
channel is presently stocking inventory led by relaxed working capital terms from
various companies. If the liquidity crunch persists for another month companies
may report significant decline in 4QFY17 given the channels inability to stock
more inventory.
FY18: B2C products may recover much early as and when liquidity returns given
these are low-ticket items. Any fiscal stimulus from the Government should see
strong growth for this category as bulk of the demand is replacement and, hence,
not much linked to the slowdown in new housing. B2B products, on the other
hand, may take time to recover unless demand for new housing recovers. This
looks unlikely in the near term given negative wealth effect for consumers.
Beyond FY18: Organised industry should benefit a lot from demonetisation

given their share is still low, at 65%. Given the share of cash transaction for
unorganised players is high, at ~65%, these players will take a lot of time to
come back to normalcy. A large portion of their wealth has vanished overnight
post demonetisation. If GST is also implemented soon, the pace of shift from
unorganised to organised can significantly accelerate as tax arbitrage fades.
Amongst the various categories, we see cables & wires players to emerge as the
biggest beneficiary given the segment has the highest share of unorganised
market, at 40-45%, followed by small appliances, lighting and switches whose
share of unorganised players is also high, at ~40%, ~40% and ~30%.
2HFY17: We expect players with strong balance sheets to gain market share as
they will be offering the most lucrative deals, be it higher credit periods or higher
commissions.
FY18: Market leading players with strong channel connect and stronger control
over supply chain will emerge with higher market share. Reduction of cash-based
transactions and greater IT integration within the channel will increase efficiency
by bringing more visibility on sales and inventory levels within various layers of
the channel. The unorganised segment will lose its cost advantage and the price
gap between organised and unorganised will narrow. This will lead to large-scale
closure of unorganized businesses, as 1) demand shrinks at the lower-end as
affordability reduces due to price rise, and 2) lower price gap between organised
and unorganised at the higher end will drive market share shift towards
organized.
November 23, 2016
Page 48
Strategy
Beyond FY18: We expect a lot of new foreign companies to enter India with
trade becoming more organised. Categories like appliances, water heaters and
fans can see a lot of entrants; these categories already have foreign entrants like
Panasonic, Kenwood, Koryo, Ninja and Black & Decker in appliances; Artemis,
Airfusion and Westinghouse in fans; and Panasonic and Nova in irons. As the
share of e-commerce increases with the share of digital transactions rising,
foreign players will be the biggest beneficiaries as the requirement of having a
distribution network gets bypassed. We dont see B2B categories like cables &
wires to see more competition given the requirement of setting up factories. Also,
we dont see much competition in domestic switchgears given the industry size is
small at ~Rs17bn and 80% is already organised.
Factors investors should consider to pick winners/losers

Over the longer term, all organised light electrical companies would benefit from the
demonetisation as the share of unorganised players is high, at 35%. With the
demonetisation and likely implementation of GST in FY18, unorganised players
would lose market share as their competitive advantage of tax evasion by dealing in
cash would fade.
Within electricals, we prefer companies with a high share of revenue from cables &
wires and small appliances as the share of unorganised in these products is higher, at
40-45%. Havells/Finolex with 41%/84% revenue from cables & wires and Bajaj with
~46% of consumer revenue from small appliances are the key beneficiaries.
Crompton is unlikely to benefit materially given: (a) 44% revenue comes from fans,
where the share of unorganised is just 10%, and (b) 30% revenue comes from
lighting, where the unorganised share is high in B2B. We believe the opportunity is
more in the replacement market on account of the shift from CFL to LED.
V-Guard is most likely to get impacted in the near term given ~45% revenue comes
from Kerala, where near-term demand disruption from the demonetisation is the
highest. Co-operative banks which dominate Keralas banking system are facing RBI
restrictions in exchanging currency notes given they do not have records on core
banking system (https://goo.gl/QCSbn1). Moreover, there could be significant job
losses given a large proportion of jobs are in real estate and jewellery.
Revenue decline in 2HFY17 vs our estimate of 3% growth is a risk. The feedback from
the channel across India is divergent. Whilst the channel partners in West are seeing
only marginal deceleration in growth, those in the North are facing a decline.
CMP Rating
(Rs)
TP
MCap
P/E (X)
P/B (X)
CAGR over
FY16-19
RoE (%)
(Rs) (US$ mn)
FY17
FY18
FY19
FY17
FY18
FY19
FY16
FY17
FY18
FY19
Revenue
EPS
Havells
317
BUY
454
2,955
34.9
29.9
24.0
6.8
6.1
5.6
20.4
20.4
21.5
24.3
12.1
17.4
V-Guard
168
SELL
145
752
32.6
28.6
23.2
8.6
7.1
5.9
26.4
29.2
27.3
27.7
14.2
24.4
Bajaj (consumer)
231
BUY
312
347
25.2
19.2
13.2
NA
NA
NA
36.7
31.0
38.6
57.3
6.5
17.7
Finolex (core)
390
BUY
465
890
15.5
13.6
12.9
3.9
3.3
2.9
28.9
28.0
26.3
23.6
13.0
10.9
Crompton
150
SELL
119
1,403
32.7
28.5
24.2
18.2
14.4
11.9
106.0
77.2
56.5
53.9
12.3
15.8
25.5
21.8
17.8
7.3
6.1
5.2
35.7
31.7
29.5
32.3
11.6
18.2
Average
Source: Ambit Capital research, Note prices as on 22 November 2016; Note Valuation is as on 10 November 2016, Note we calculate P/E of consumer
business by assuming that E&P business trades at our fair value of `90/share (implied FY18 P/E of10.3x) and the net debt is valued at FY16 book value at
`66/share
November 23, 2016
Page 49
Strategy
NBFCs
NEGATIVE
Bumpy ride ahead

Demonetisation spells slowdown in growth and increase in NPAs for NBFCs
both in the near term and the long term. Segments with high cash collections
(auto loans, microfinance) would be hit the most in the near term. Housing
finance companies are vulnerable over the longer term due to multiple
structural headwinds to: (i) growth, owing to ticket sizes, weak consumer
sentiment in primary market; and (ii) worsening asset quality in segments
like developer loans, LAP and under-construction home loans. Moreover,
growth for NBFCs in the discretionary and prime auto loan segments is also
likely to slow down in the near term given weak consumer sentiment and as
well as structurally due to market share loss to banks. Declining funding
costs due to lower interest rates would offer only offer marginal respite to
profitability. We will have to significantly decrease our earnings estimates for
FY17/18 and TPs for stocks under coverage.
Research Analysts
Pankaj Agarwal, CFA
Tel: +91 22 3043 3206
Aadesh Mehta, CFA
Tel: +91 22 3043 3239
aadesh.mehta@ambit.co
Exhibit 30: Impact of demonetisation across product segments

2HFY17
Growth
Outlook
Investors and end-users would

avoid buying homes due to lack of
cash as most transactions involved
cash payment. Hence, growth will
get impacted.
NIMs
NIM expansion due to fall in

borrowing costs.
Asset Quality
Working capital disruption in the

informal economy would lead to
lower collections in self-employed
home loans. Salaried segment is
relatively immune.
HFCs
Industry
structure
No changes in industry structure

in the short term.
Growth
Outlook
Wealth erosion and working

capital disruption have led to
slowdown in sales and, hence,
financing demand.
NIMs
NIMs should expand owing to

fixed rate assets and fall in
funding costs.
Asset Quality
Working capital disruption in the

informal economy would lead to
cash flow pressures and
deteriorating collections in auto
loans. Hence, NPAs should rise in
the sector.
AutoNBFCs
Industry
structure
November 23, 2016

are anticipated in the short term.
FY18
Wealth erosion coupled with anticipation
of further decline in real estate prices
would lead to people postponing their
home buying decisions. Decline in real
estate prices would decrease ticket sizes
of home loans, impacting loan growth.
NIM expansion should be limited as the
bank lending rates fall with a lag in the
segment.
Asset quality in developer loans would
worsen due to slowing offtake,
disruption in working capital and wealth
erosion. Asset quality in self-employed
home loans should get impacted by
erosion of wealth and income of this
segment.
Core segment of HFCs/NBFCs, the selfemployed segment, would see continued
stress and underperform on growth and
asset quality compared to other
segments.
Wealth erosion should hit demand for
discretionary loans (cars and UVs). Lower
GDP growth and economic activity
should lead to lower demand for CVs
and tractors as well.
Declining rates and fixed rate asset book
means that NIMs should expand.
However, migration to 90dpd NPA
norms and increase in NPAs could offset
the gains from lower funding costs.
Asset quality pain would sustain in car
and UV loans due to wealth erosion in
self- employed segment. Lower
economic growth and secondary impact
of slowdown in certain sectors (e.g.
construction) means that delinquencies
should increase in CVs and tractors as
well.
Core segment of NBFCs, the selfemployed segment, would see continued
stress and underperform on growth and
asset quality compared to other
segments.
Structural
Decline in real estate prices would lead to
average home loan ticket sizes coming
down, implying growth rates in the sector will
structurally decline.
NIMs for HFCs will face structural pressures
due to increasing competitive intensity.
Home loans against under-construction

projects could see asset quality pressures due
to delayed competition.
HFCs that source most of their loans from

developers should see structural pressure on
growth as buyers prefer the secondary
market due to steeper correction in prices.
With unorganised players (major customers
of NBFCs) in commercial vehicle industry
being at a disadvantage post GST, growth
could structurally come down for NBFCs.
With more NBFC customers becoming part of
the banking system, there should be some
erosion in NIMs for NBFCs.
No structural pressure on asset quality as

most recognition should happen in FY18
itself.
NBFCs would continue to lose market share

to banks in prime segments like CV/car/UV
loans due to better access to data.
Page 50
Strategy
2HFY17
FY18
Growth
Outlook
Disruption in economic activity

means that demand for such
loans should come down in the
near term.
NIMs
NIM expansion due to fall in

borrowing costs.
Declining real estate prices will lower the

eligible loan amount (declining collateral
values), leading to lower growth in the
segment.
NIM improvement should continue due
to cost of funding further falling, but
competitive intensity would decline due
to risk averseness by the lenders.
Asset quality
High exposure to informal

segment has worsened collections
in LAP and unsecured loans. This
is due to a combination of wealth
erosion and disruption of working
capital.
Lower collateral values, higher LTVs and

disruption in working capital mean that
delinquencies will continue to increase.
Declining collateral values imply that haircuts

on liquidation recovery will be higher.
Moreover, abrupt end to refinancing could
reveal the mounting stress in LAP and
unsecured loans.
Industry
structure

are anticipated in the short term.
NBFCs are likely to grow slower than

banks as they go slow on their riskier
exposures.
Banks would gain market share in LAP and

unsecured loans from banks as borrower
cash flows become more accessible.
Subdued informal economy due to

working capital disruption means growth
recovery will be gradual.
Higher welfare support and economic

stimulus could drive growth recovery over the
longer term.
High delinquencies could lead to

increased risk perception for the sector
from lenders, putting pressure on NIMs.
If asset quality worsens in the sector, NIMs

could structurally decline due to lower
securitisation.
A prolonged disruption in the operations

of MFIs could meaningfully impact asset
quality, raising the probability of largescale defaults.
No structural impact as most NPAs, if any,

would surface in FY18 itself.
Under-stress customer segment may

lead to consolidation among struggling
MFIs or portfolio buyouts by banks or
larger MFIs.
There is opportunity to take market share

from informal money lenders as they get
impacted by the demonetisation.
SME
Financers
Growth
Outlook
NIMs
Most of the disbursements of MFIs

happen in cash. Growth is at a
standstill with cash crunch
impacting disbursements.
High delinquencies could lead to
interest income write-backs over
2HFY17, leading to NIM pressure.
MFIs
Asset quality will take a

meaningful hit in microfinance
Asset quality
loans due to inability of lenders to
lend new money and collect old
currency.
Aggressive lenders could witness
Industry
high defaults and deep
structure
disruptions questioning their
survival.
Structural
More tax compliance from SMEs means that
they should be eligible for bank loans,
impacting growth of NBFCs.
Margins are likely to be under pressure in
SME loans (both LAP and unsecured) as it
becomes easier for banks to assess these
borrowers due to better tax compliance.
Our channel checks
Rural cash flows are stretched due to: i) inability of farmers to sell their harvest in
the market; ii) contracting work has come to a standstill; and iii) new currency
notes are taking a longer time to reach rural India.
Disruption in the working capital of the informal economy brought collections to a

standstill in segments that are closely linked to the informal economy (e.g. auto
loans and microfinance).
Both retail and wholesale traders are cash- strapped and instance of cheques
bouncing have increased in LAP/SME loans.
NBFCs/HFCs cant accept old currency, so they are directing their customers to a
bank branch and asking them to deposit the old currency in the account of the
NBFCs.
NBFCs/HFCs are trying to convince regulators to allow them to accept old

currency but it looks unlikely that the RBI will cede.
Lenders are now more cautious in disbursing new loans with only declared
income being considered for loan eligibility rather than the earlier practise of
taking estimated income for loan eligibility.

2HFY17: Weak consumer sentiment, disruption in cash flows of the informal
economy and wealth erosion have hit loan growth in auto loans, home loans,
microfinance and SME loans. Moreover, growth in MFIs has come to a standstill due
to the inability to disburse owing to a shortage of cash.
November 23, 2016
Page 51
Strategy
FY18: Growth should remain under pressure in FY18 as well across product
segments. Wealth erosion and decrease in home loan prices should lead to weak
growth in the segment. Auto loans could also struggle to report a pick-up in growth
as demand for discretionary items like cars and UVs would remain muted due to
wealth erosion. Moreover, declining real estate prices will lower the eligible loan
amount (declining collateral values) and increase probability of default (increase in
LTVs). Consequently, we expect lenders to be averse in this segment and go slow on
growth. With lower GDP growth and economic activity, demand for trucks/tractors
would be muted too.
Beyond FY18: Growth could structurally slow down for segments closely linked to
real estate for a prolonged time (home loans, developer loans and SME loans).
Growth in home loans could moderate as declining real estate prices further
decelerate ticket-size growth for lenders. Growth in LAP and unsecured loans could
also come off structurally due to declining loan eligibility (due to lower collateral
values and cash flows) and market share loss to banks due to improving ability to
appraise SME loans (due to higher transparency owing to better tax compliance).
2HFY17: We do not anticipate any change in industry structure immediately as both
banks and NBFCs struggle to grow and are fire-fighting on the asset quality front.
However, MFIs could see their existence being questioned due to high defaults.
FY18: Wealth erosion and disruption in working capital will disproportionately impact
the core lending constituency of NBFCs the self-employed segment. Consequently
NBFCs are likely to underperform on growth and asset quality across the retail
segments (home loans, SME loans and auto-loans) versus banks.
Beyond FY18: The improving tax compliance of the self-employed segment would
make cash flows more transparent and, thus, banks would find it easier to appraise
such customers. Consequently, banks could gain further market share in prime
segments in home loans, larger-ticket LAP/SME loans and new CV/car loans. Also, in
home loans, HFCs that were hitherto growing robustly by virtue of builder tie-ups
(e.g. LIC Housing Finance) could see a structural slowdown in growth as buyers will
prefer buying homes from the secondary market due to a steeper price correction
(black money component is higher in the value of resale property). However, NBFCs
could still hold their turf in certain sub-prime segments like smaller-ticket LAP/SME
loans (lower collateral quality), used CV/used car loans (difficulties in collateral
valuation and high cost origination). In microfinance, whilst there is opportunity to
take market share from informal money lenders, competition from banks/NBFCs
would intensify further.
The entire NBFC spectrum would be impacted in the near term as well as in FY18; we
do not see a single winner amongst NBFCs led by the demonetisation. That said,
lenders closely linked to structurally impacted sectors like real estate (HFCs, SME
lenders) could lose more than others. Moreover, improving tax compliance of the selfemployed segment would make their cash flows more transparent, resulting in
market share gains for banks across the prime segments of home loans, larger-ticket
LAP/SME loans and new CV/car loans. So, we would be wary of HFCs and SME
lenders with heavy concentration in real estate in the form of collateral (developer
loans, e,g. HDFC; LAP, e.g. BAF; and home loans, e.g. LICHF, in that order).
Moreover, we would also avoid lenders with high exposure to discretionary and prime
segments in auto loans as they would continue to witness slowdown in growth due to
weak sentiment and market share loss to banks. That said, lenders with high
exposure to segments with high entry barriers like used CVs/cars (e.g. CIFC and
SHTF) should see more moderate structural pressure and their growth and asset
quality could improve beyond FY18.
November 23, 2016
Page 52
Strategy
Declining real estate prices will have prolonged impact on growth and asset
quality
Declining real estate prices will impact both the asset quality and growth of HFCs.
Growth would be impacted as ticket-size growth for lenders would decline going
forward (which used to contribute to 50-60% of growth in home loans over a
decade). Moreover, asset quality will come pressure structurally as delay in project
completion would increase asset quality risks in under-construction properties lent at
very high LTVs for HFCs (as high as ~60% of home loans for certain HFCs).
Moreover, in LAP, borrowers ability and willingness to service the loan will come
down as: i) pressures on the informal economy will spill over to the self-employed
segment; ii) declining refinancing due to lower property rates; and ii) with lower skin
in the game due to higher LTVs, the borrower may be better off defaulting on the
loan.
Growth slowdown for NBFCs in discretionary and prime auto-loans segments
Demonetisation has severely hit large-ticket consumption in the rural economy due to
wealth erosion and weakening of sentiment. This would meaningfully slow down
purchases of cars/UVs etc. in the rural areas. Moreover, better data transparency
would also result in easier appraisal of borrower cash flows and could trigger market
share gains in a segment where origination for banks is not difficult (e.g. car/UV/new
CV loans). Consequently, growth for NBFCs is likely to be weaker in discretionary and
prime auto-loan segments. This would particularly impact MMFS as ~55% of its book
is exposed to such products.
A stronger-than-expected economic stimulus (e.g. increased infra spend and
construction activity) could lead to faster-than-anticipated pickup in financing in CVs,
tractors and CEs.
Moreover, regulatory forbearance in asset classes that will struggle in the near term
(e.g. allowing cash collections of illegal tender) could alleviate NBFCs expected nearterm pain and can surprise positively at least on the asset quality front. Moreover, in
home loans, rapid customer growth to take advantage of a steep decline in prices
could surprise us in terms of growth of home loans.
November 23, 2016
Page 53
Strategy
Exhibit 31: Relative valuation snapshot
Mcap
Price
P/B
P/E
EPS CAGR
ROA
ROE
US$bn
Rs
FY17E
FY18E
FY17E
FY18E
FY16-18E
FY17E
FY18E
FY17E
FY18E
28.3
1,222
5.1
4.6
25.3
22.5
14%
2.5%
2.4%
21.4%
21.3%
3.7
501
2.4
2.1
13.3
12.5
10%
1.5%
1.4%
19.2%
17.7%
Indiabulls Housing Finance
4.0
653
2.3
2.1
10.2
8.6
17%
3.4%
3.3%
24.0%
25.8%
Gruh Finance
1.5
287
10.4
8.4
35.8
29.2
21%
2.3%
2.3%
31.7%
31.9%
Dewan Housing Finance
1.0
220
1.2
1.0
7.3
6.0
19%
1.2%
1.3%
16.8%
17.5%
Housing Finance Companies

HDFC Ltd.
LIC Housing Finance
Repco Home Finance
0.5
573
3.3
2.7
19.6
15.6
24%
2.1%
2.1%
17.7%
19.2%
Can Fin Homes
0.6
1,523
3.8
3.1
18.6
14.5
36%
1.8%
1.8%
22.3%
23.8%
4.1
3.4
18.6
15.6
20%
2.11%
2.1%
21.9%
22.4%
Average
Asset Financers
Shriram Transport
2.8
829
1.6
1.4
11.0
8.7
36%
2.2%
2.4%
15.6%
17.3%
M&M Finance
2.2
265
2.1
1.9
17.2
13.1
22%
1.9%
2.2%
11.9%
14.3%
Magma Fincorp
0.3
96
1.0
0.8
8.8
6.5
28%
1.4%
1.7%
11.2%
13.7%
Sundaram Finance
2.0
1,227
3.7
3.3
26.6
23.2
11%
2.6%
2.7%
14.5%
14.9%
Cholamandalam
2.3
984
3.6
3.0
20.1
15.5
30%
2.3%
2.4%
19.3%
20.9%
2.4
2.1
16.8
13.4
26%
2.1%
2.3%
14.5%
16.2%
Average
Consumer finance
Bajaj Finance
6.6
832
5.0
4.2
26.9
22.1
25%
3.3%
3.0%
20.5%
20.6%
Shriram City Union Finance
1.8
1,848
2.2
2.0
17.5
14.0
28%
3.2%
3.2%
14.4%
15.9%
Manappuram
0.9
70
1.9
1.6
10.0
7.8
62%
4.3%
4.6%
18.8%
21.7%
Muthoot Finance
1.7
289
1.8
1.6
10.7
9.2
30%
3.9%
3.8%
17.7%
18.2%
Bharat Financial Inclusion (SKS)
1.4
675
3.3
2.6
13.7
12.3
52%
6.3%
5.1%
30.2%
23.0%
Capital First
0.7
488
2.3
2.0
19.3
14.2
38%
1.4%
1.6%
12.6%
15.2%
2.8
2.3
16.4
13.3
39%
3.73%
3.5%
19.0%
19.1%
447
3.9
3.3
22.0
16.4
50%
10.7%
14.6%
18.9%
21.7%
Average
Broker/NBFCs
Motilal Oswal
0.9
Edelweiss
1.1
88
1.8
1.5
13.3
10.5
29%
1.5%
1.5%
15.4%
16.9%
India Infoline
1.1
244
1.8
1.5
11.3
10.4
16%
3.2%
3.1%
21.2%
19.0%
2.5
2.1
15.5
12.4
32%
5.10%
6.4%
18.5%
19.2%
Average
Source: Bloomberg, Ambit Capital research; Note: We have used Bloomberg estimates for companies not under our coverage
November 23, 2016
Page 54
Strategy
Technology
NEUTRAL
No material impact of demonetisation
Key Recommendations
Our coverage universe has no exposure to the informal economy, either in

terms of customers, competitors or intermediaries. So there is no business
impact of demonetisation in the short term or the long term. Even if small
Indian firms shift to the formal economy and start spending on IT (e.g. ERP
implementation), our coverage universe would not cater to this spend as they
work only for large companies (revenue >US$1bn). However, our coverage
universe could see a small dip in interest income due to reducing yields. We
estimate 1% reduction in yield to hurt reported EPS by 0.1-2.3% in 2HFY17
and 0.2-2.7% in FY18, with Persistent Systems (SELL) being the most affected
and Mindtree (SELL) the least. However, this would not impact our DCF-based
target prices. TCS (best-in-class, attractive 15x FY18E P/E) and TechM
(improvement in telecom revenue growth and profitability; attractive 12x
FY18E P/E) remain our top BUYs.
TCS
BUY
Tech M
BUY
Wipro
SELL
Research Analysts
Sagar Rastogi
sagar.rastogi@ambit.co
Tel: +91 22 3043 3291
Sudheer Guntupalli
sudheer.guntupalli@ambit.co
Tel: +91 22 3043 3203
Exhibit 32: No material impact on Indian IT service companies in short term or in long term
2HFY17
IT services
FY18
Demand outlook No change.

Supply chain change No change.
Industry structure No change.
Structural
Demand outlook No change as Indian IT firms will

not cater to small Indian enterprises, even if they
Demand outlook No change.
increase IT spend.
Supply chain change No change. Supply chain change No change as hiring
Industry structure No change.
requirements are already reducing and the supply of
graduate engineers remains very high.
Industry structure no change.
The companies in our coverage universe have a significant part of their total assets
(7-43%) parked in the form of cash and current investments. We expect 100bps
decline in cash yields on the back of demonetisation driven liquidity in the Indian
banking system. Accordingly, we reckon 0.1-6% decline in EPS in our coverage
companies for 2HFY17 and 0.2-6.1% decline in EPS over FY18. However, our target
prices remain the same as we use a DCF-based methodology.
Exhibit 33: Sensitivity of our coverage universe EPS to 100bps decline in cash yields
Current EPS
New EPS
Change (%)
2HFY17
FY18
2HFY17
FY18
2HFY17
FY18
66.7
144.2
65.9
142.0
-1.2%
-1.5%
Infosys
30.1
64.4
29.6
63.3
-1.7%
-1.8%
Wipro
17.4
34.8
17.0
34.1
-2.3%
-2.0%
HCLT
28.0
62.2
27.7
61.4
-1.3%
-1.3%
TechM
17.8
37.4
17.8
37.4
-0.1%
-0.2%
Mindtree
16.2
32.7
16.1
32.3
-0.8%
-1.0%
LTI
26.2
56.2
25.6
54.8
-2.0%
-2.6%
Persistent
19.8
43.7
19.4
42.5
-2.1%
-2.7%
eClerx
44.1
99.6
43.4
98.4
-1.6%
-1.3%
TCS
Source: Ambit Capital research, company
November 23, 2016
Page 55
Strategy
Telecom
NEGATIVE
Demonetisation not an issue
Key Recommendations
Telcos consumer spends are unaffected given low-ticket spends. Channel

checks indicate that the temporary disruptions in the supply chain are being
tided over as telcos provided temporary credit. Towercos earning B2B income
from telcos also remain unaffected by demonetisation. Despite high
leverage, telcos are unlikely to benefit from reducing interest (over
2HFY17/FY18) as bulk of their debt comprises flexible borrowings from the
government for spectrum payments at fixed rates (9.5-10% per annum). With
net cash balance of Rs50bn (7% of Infratels market cap), 1% reduction in
yield will hurt reported EPS by 1% and 2% in 2HFY17 and FY18. Our negative
stance on the telecom sector and DCF-based target prices remain unchanged.
Idea Cellular
SELL
Bharti Airtel
SELL
Research Analysts
Tel: +91 22 3043 3261
Exhibit 34: Summary
Telcos
Towercos
2HFY17
FY18
Structural
Demand outlook
No change
No change
No change
No change
No change
Increased online recharges will

result in reduced trade
commissions
Industry structure
No change
No change
No change
Demand outlook
No change
No change
No change
No change as spends on power

and fuel happen through vendors No change
who use cash for diesel purchases
No change
Industry structure
No change
No change
No change
Exhibit 35: Valuation summary

Company
M-Cap
Stance
(US$ mn)
P/E
RoE (%)
FY17E
FY18E
FY19E
FY17E
FY18E
FY16-18 CAGR (%)

FY19E
Sales
EBITDA
EPS
EV/EBITDA (x)
FY17E
FY18E
FY19E
Bharti Airtel
17,978
SELL
21.3
24.8
18.8
8.2
6.8
8.5
5.4
7.9
1.1
6.1
5.6
5.3
Bharti Infratel
10,179
SELL
25.5
22.6
19.4
14.9
16.7
19.4
11.4
12.6
14.1
10.8
9.3
8.1
Idea Cellular
3,843
SELL
51.3
(96.2)
21.7
1.9
(1.0)
4.5
6.6
(8.3)
NM
5.2
5.6
4.5
November 23, 2016
Page 56
Strategy
Utilities
POSITIVE
Power demand to improve
Key Recommendations
In the near term, power demand will decelerate due to slowdown in

industrial activity caused by demonetisation (GDP growth likely to decelerate
from 6.4% in 1HFY17 vs 0.5% in 2HFY17). However, in the long run, power
demand would accelerate with the increase in mechanisation led by increase
in market share of organised players. Discoms are beneficiaries of
demonetisation as: (a) in the near term their working capital cycle would
improve as customers line up to pay pending utility bill through old currency
notes; (b) in the long run, AT&C losses would decline with the shift in the
economy from unorganized (highest contributors to power theft) to
organised. Prefer Torrent Power given presence in distribution business as it
benefits from decline in AT&C losses in its Agra/Bhiwandi distribution
franchise. Avoid JSW Energy as weak power demand would impact merchant
tariff.
Torrent Power
BUY
Tata Power
BUY
NTPC
SELL
Research Analysts
Bhargav Buddhadev
Tel: +91 22 3043 3252
Tel: +91 22 3043 3275
Exhibit 36: Impact of demonetisation on Utilities

2HFY17
FY18
Structural
Power generation
Power demand growth to decelerate by

250-400bps given slowdown in industrial
activity (41% of power consumption).
Power demand growth to improve from

2HFY18 led by higher demand from
discoms (stronger balance sheet)
Power demand growth would

accelerate with shift in economy
to organised (higher
mechanisation)
Power distribution
Discoms balance sheets can improve as a

lot of customers are lining up to make
pending payments; old currency notes are
valid for making utility bill payments up to
24 November
T&D capex can accelerate with

improvement in discom balance sheets
AT&C losses would decline

substantially with the shift from
unorganised (high proportion of
power theft) to organised
2HFY17: Power demand growth

slowdown in industrial activity;
consumption. However, discoms
customers are making advance
currency until 24 November.
FY18: Power demand growth should improve from 2HFY18 led by higher
demand from discoms, which until recently were cash strapped.
Beyond FY18: Power demand growth would accelerate with a shift in the
economy towards organised players as they deploy higher capital on mechanised
manufacturing than unorganised players.
would decelerate by 250-400bps led by the

industries account for 41% of total power
working capital cycles would improve given
payments because discoms will accept old

The health of SEBs would improve led by a reduction in AT&C losses; unorganised
players, which are likely to lose market share, are the key contributors to power theft.
Also, average realisation would improve as organised players pay higher power
tariffs (Rs6-15/unit).
We prefer power utilities with presence in the distribution business as AT&C losses
would now decline at an accelerated pace. Within our coverage, Torrent Power would
be the biggest beneficiary of the reduction in AT&C losses as its profitability in Agra
and Bhiwandi circle (due for renewal in Jan17) is directly linked to the decline in
AT&C losses. Tata Power is unlikely to benefit from the reduction in AT&C losses given
the regulated model in Mumbai and Delhi distribution.
Avoid merchant players such as JSW Energy given the weakness in the merchant
market would intensify with slowdown in industrial activity. Also, the price of imported
coal has surged by ~40% since July16.
November 23, 2016
Page 57
Strategy
We also caution investors from buying NTPC (assured RoE) as a proxy to bond
investments given the regulator would trim NTPCs regulated RoE in its 2019 tariff
regulation at least equivalent to the cut in ten-year G-sec yield (down 250bps since
the announcement of the last tariff regulation).
P/B (x)
P/E (x)
RoE (%)
CAGR (FY16-18) (%)
CMP
Mcap
(US$mn)
FY17
FY18
FY17
FY18
FY16
FY17
FY18
Revenue
EPS
CESC
575
1,114
1.2
1.0
11.7
7.8
5.9
9.7
12.8
9.9
NA
KSK
167
1,174
NA
NA
15.8
NA
14.3
6.6
NA
NA
NA
JSPL
54
1,302
1.0
0.9
8.6
7.1
15.6
11.4
12.6
3.5
0.5
141
NA
NA
NA
NA
NA
81.9
43.6
37.2
9.5
NHPC
25
4,112
0.9
0.8
10.0
9.0
8.2
8.9
9.6
8.2
(8.7)
Adani Power
24
1,199
1.1
1.1
NA
NA
(18.9)
0.2
7.8
4.2
NA
Torrent Power
167
80
1.0
0.9
12.9
10.8
12.4
7.9
8.7
(9.6)
(7.7)
Company
Lanco
JSW Energy
54
89
1.0
0.9
8.5
6.7
16.1
11.7
13.7
(0.6)
0.9
Tata Power
69
187
1.2
1.0
12.5
7.4
8.8
10.3
14.8
4.1
47.9
154
1,270
NTPC
Sector median
Divergence
1.3
1.2
13.8
11.2
14.8
10.0
11.4
15.8
(5.1)
1.1
1.0
11.7
7.6
8.8
9.3
12.6
4.2
0.7
26%
28%
18%
48%
600bps
70bps
-120bps
1160bps
-580bps
Source: Bloomberg, Ambit Capital research, Note prices as on 22 November 2016
November 23, 2016
Page 58
Strategy
Institutional Equities Team

Saurabh Mukherjea, CFA
Pramod Gubbi, CFA
CEO, Institutional Equities

Head of Equities
(022) 30433174
(022) 30433124
saurabh.mukherjea@ambit.co
pramod.gubbi@ambit.co
Research Analysts
Name
Industry Sectors
Nitin Bhasin - Head of Research

Aadesh Mehta, CFA
Abhishek Ranganathan, CFA
Anuj Bansal
Aditi Singh
Ashvin Shetty, CFA
Bhargav Buddhadev
Dhiraj Mistry, CFA
Girisha Saraf
Karan Khanna, CFA
Mayank Porwal
Pankaj Agarwal, CFA
Paresh Dave, CFA
Parita Ashar, CFA
Prashant Mittal, CFA
Rahil Shah
Rakshit Ranjan, CFA
Ravi Singh
Ritesh Gupta, CFA
Ritesh Vaidya, CFA
Ritika Mankar Mukherjee, CFA
Ritu Modi
Sagar Rastogi
Sudheer Guntupalli
Sumit Shekhar
Utsav Mehta, CFA
E&C / Infra / Cement / Industrials

Banking / Financial Services
Retail
Mid-caps
Economy / Strategy
Automobile
Power Utilities / Capital Goods
Power Utilities / Capital Goods
Consumer
Automobile
Mid-caps / Small-caps
Strategy
Retail
Healthcare
Metals & Mining / Aviation
Strategy / Derivatives
Consumer
Oil & Gas / Chemicals / Agri Inputs
Consumer
Economy / Strategy
Automobile
Technology
Technology
Economy / Strategy
E&C / Industrials
Media
Desk-Phone E-mail
(022) 30433241
(022) 30433239
(022) 30433085
(022) 30433122
(022) 30433284
(022) 30433285
(022) 30433252
(022) 30433275
(022) 30433264
(022) 30433132
(022) 30433211
(022) 30433251
(022) 30433214
(022) 30433206
(022) 30433212
(022) 30433223
(022) 30433218
(022) 30433217
(022) 30433201
(022) 30433181
(022) 30433242
(022) 30433246
(022) 30433175
(022) 30433292
(022) 30433291
(022) 30433203
(022) 30433229
(022) 30433209
(022) 30433261
aadesh.mehta@ambit.co
abhishek.r@ambit.co
anuj.bansal@ambit.co
aditi.singh@ambit.co
dhiraj.mistry@ambit.co
girisha.saraf@ambit.co
karan.khanna@ambit.co
mayank.porwal@ambit.co
paresh.dave@ambit.co
parita.ashar@ambit.co
prashant.mittal@ambit.co
rahil.shah@ambit.co
rakshit.ranjan@ambit.co
ravi.singh@ambit.co
ritesh.gupta@ambit.co
ritesh.vaidya@ambit.co
ritika.mankar@ambit.co
ritu.modi@ambit.co
sagar.rastogi@ambit.co
sudheer.guntupalli@ambit.co
sumit.shekhar@ambit.co
utsav.mehta@ambit.co
Sales
Name
Regions
Sarojini Ramachandran - Head of Sales

Dharmen Shah
Dipti Mehta
Krishnan V
Nityam Shah, CFA
Parees Purohit, CFA
Punitraj Mehra, CFA
Shaleen Silori
UK
India / Asia
India
India / Asia
Europe
UK
India / Asia
India
Desk-Phone E-mail
+44 (0) 20 7886 2740
(022) 30433289
(022) 30433053
(022) 30433295
(022) 30433259
(022) 30433169
(022) 30433198
(022) 30433256
sarojini.r@ambit.co
dharmen.shah@ambit.co
dipti.mehta@ambit.co
krishnanv@ambit.co
nityam.shah@ambit.co
parees.purohit@ambit.co
punitraj.mehra@ambit.co
shaleen.silori@ambit.co
Singapore
Praveena Pattabiraman
Shashank Abhisheik
Singapore
Singapore
+65 6536 0481

+65 6536 1935
praveena.pattabiraman@ambit.co
shashankabhisheik@ambitpte.com
USA / Canada
Ravilochan Pola CEO
Hitakshi Mehra
Americas
Americas
+1(646) 793 6001

+1(646) 793 6002
ravi.pola@ambitamerica.co
hitakshi.mehra@ambitamerica.co
Production
Sajid Merchant
Sharoz G Hussain
Jestin George
Richard Mugutmal
Nikhil Pillai
November 23, 2016
Production
Production
Editor
Editor
Database
(022) 30433247
(022) 30433183
(022) 30433272
(022) 30433273
(022) 30433265
sajid.merchant@ambit.co
sharoz.hussain@ambit.co
jestin.george@ambit.co
richard.mugutmal@ambit.co
nikhil.pillai@ambit.co
Page 59
Strategy
Explanation of Investment Rating
Investment Rating
Expected return (over 12-month)
BUY
>10%
SELL
NO STANCE
<10%
We have forward looking estimates for the stock but we refrain from assigning valuation and recommendation
UNDER REVIEW
NOT RATED
We will revisit our recommendation, valuation and estimates on the stock following recent events
We do not have any forward looking estimates, valuation or recommendation for the stock
POSITIVE
We have a positive view on the sector and most of stocks under our coverage in the sector are BUYs
NEGATIVE
We have a negative view on the sector and most of stocks under our coverage in the sector are SELLs
Disclaimer
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November 23, 2016
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Ambit - Strategy Errclub Demonetised Disruption

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Strategy

November 23, 2016

The demonetisation-driven cash crunch will impact most sectors in

Summary table (Continues on next page)

Aarti, Vinati, Atul,

Source: Ambit Capital research; Note:

Large negative impact;

Some negative impact; <-> No impact;

Some positive impact;

() Large positive impact

Home & Personal

Food & Beverage

Apparel & Footwear

DPOs- Cable MSOs

Oil and Gas

Source: Ambit Capital research; Note:

Some negative impact; <-> No impact;

Some positive impact;

() Large positive impact

November 23, 2016

Ambit Capital Pvt. Ltd.

Exhibit A: 87%of all transactions in

FY10 FY11 FY12

Real GDP growth

The demonetisation-driven cash crunch that is playing out in India will

The three effects that will be triggered by the demonetisation move

November 23, 2016

Ambit Capital Pvt. Ltd.

Repo rate cut per

Moderate demand weakness; working capital cycles

Demonetisation will adversely affect demand in the near term. Channel

Supply chain change

Supply chain change

Supply chain change

Supply chain change

Source: Ambit Capital research

Channel checks suggest a mixed picture

North-based retailer: Everybody is in a state of panic. In the North, farmers got

Ambit Capital Pvt. Ltd.

Impact on demand over the following periods

Ambit Capital Pvt. Ltd.

Global Agri Majors

November 23, 2016

Ambit Capital Pvt. Ltd.

Near-term hit for 2Ws; longer struggle for PVs/CVs

Near-term demand across categories could be significantly affected. In 2Ws,

Exhibit 3: Demonetisation impact on auto OEMs

Two-wheelers Supply chain change

Supply chain change

Source: Ambit Capital research

Medium and heavy commercial vehicles (MHCVs)slump in freight rates;

Ambit Capital Pvt. Ltd.

4Ws: PV players are now accepting cheques as well as debit/credit card

Impact on demand over the following periods

FY18: However, being a low-ticket, utility-oriented purchase, we do not see the

Longer term: We do not see any long-term structural impact on 2W demand.

4Ws: Impact on replacement purchases could be profound

2HFY17: Given significant demand reduction in most sectors, freight

Ambit Capital Pvt. Ltd.

Changes to the industry structure

What are the factors investors should consider to pick

We believe the 2W category would be relatively immune than passenger vehicles

Uncertainty around Government stimulus or income redistribution measures.