Ambit Strategy Thematic TheSensexin2025 22jun2015

STRATEGY
June 2015
Exits Entrants
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The Sensex in 2025
Analysts:
Rakshit Ranjan, CFA Aditya Khemka
Saurabh Mukherjea, CFA
rakshitranjan@ambitcapital.com adityakhemka@ambitcapital.com
saurabhmukherjea@ambitcapital.com
Nitin Bhasin Pankaj Agarwal, CFA Ritesh Gupta, CFA,
nitinbhasin@ambitcapital.com pankajagarwal@ambitcapital.com riteshgupta@ambitcapital.com
Gaurav Mehta, CFA Sagar Rastogi Ritika Mankar Mukherjee, CFA
gauravmehta@ambitcapital.com sagarrastogi@ambitcapital.com ritikamankar@ambitcapital.com
Karan Khanna Ashvin Shetty, CFA Consultant: Anupam Gupta
karankhanna@ambitcapital.com ashvinshetty@ambitcapital.com anupam.gupta@aavanresearch.com
Strategy
CONTENTS
Strategy: The Sensex in 2025.. 3
Executive summary 4
Section 1: Sensex churn set to rise.. 12
Section 2: Plotting the past 15
Section 3: How does the headline equity index evolve18

as the economy changes?
Section 4: Predicting the next 15 entrants. 32
COMPANIES
HCL Technologies (BUY) 45
Kotak Mahindra Bank (SELL) . 49
Asian Paints (SELL) 53
Nestle (SELL) 57
Eicher Motors (SELL) . 61
IndusInd Bank (BUY) 65
Pidilite Industries (SELL) .. 69
Page Industries (BUY) .. 73
Torrent Pharma (BUY) ..77
PI Industries (BUY) .81
Appendix 1: Indices used in each country. 85
Appendix 2: Sensex Exits 88
June 22, 2015 Ambit Capital Pvt. Ltd. Page 2

Strategy
THEMATIC June 22, 2015
The Sensex in 2025 Sensex Entry Candidates (FY16-25)

Name Ticker
Mcap 6m ADV
(US$mn) (US$mn)
As the Indian economy transforms, we expect 15 replacements in the HCL Tech HCLT IN 19,838 37.5
Sensex in the coming decade. Having identified the exit candidates in Kotak Mahindra
KMB IN 18,322 25.1
our May 2015 report Sensex exits: The decadal story, we now identify Bank
the likely entrants. We use historical data from India and other Asian Paints APNT IN 10,528 20.3
emerging markets (EMs) to identify the key trends and themes. We then Nestle India NEST IN 8,683 6.1
apply our proprietary Ambit filters on listed stocks for a shortlist of ten
Eicher Motors EIM IN 7,797 28.5
entrants. For the remaining five unlisted stocks, we choose from large
IndusInd Bank IIB IN 6,794 13.9
sectors which are relatively unrepresented in the Sensex such as e-
commerce, insurance, consumer discretionary services and defence. Pidilite Industries PIDI IN 4,197 4.1
Page Industries PAG IN 2,506 2.8
Sensex churn is set to rise
Our 5th May 2015 report, Sensex exits: The decadal story highlighted two Torrent Pharma TRP IN 3,310 2.1
critical aspects on Sensex churn: (a) The constitution of the BSE Sensex is PI Industries PI IN 1,350 2.0
dynamic and Indias churn ratios are higher than other large markets; and (b) Flipkart N/A N/A N/A
Modis resets will transform Indias economy, sending Sensex churn higher Paytm N/A N/A N/A
from its recent lows. After peaking at 67% (or 20 replacements in a 30-stock
I-Pru Life N/A N/A N/A
index) in the years following the 1991 reforms, Sensex churn fell to a low of
27% (8 replacements) from 2004 to 2014. We expect a reversion to 50% churn, Caf Coffee Day N/A N/A N/A
implying that 15 companies will exit the Sensex in the next decade. Having Hind. Aeronautics N/A N/A N/A
identified the exit candidates (see pg 5), we now identify the entrants over the Source: Bloomberg, Ambit Capital Research. Note: N/A
= data not available since companies are not yet listed
next decade.
and getting the entrants right can be rewarding
Our profiling analysis reveals the following trends for Sensex entrants since
1995: (a) half the entrants came from the top-100 listed stocks based on the
beginning-period market capitalisation; (b) ~10% came from the next 100
stocks by market-cap; (c) ~6% came from below the top-200 stocks by market-
cap, and (d) the remaining one-thirds entered on account of fresh listings. As
expected, the lesser-known entrants from the sub-200 stocks delivered stellar
returns over the subsequent ten-year period (60% CAGR vs 22% CAGR for top-
100); examples include Dr. Reddys, Cipla and Infosys.
Lessons from other markets
Provided the Indian economy simply replicates its performance of the past ten
years over the next ten years, per capita income should double to US$4,000
from the current level of around US$2,000. Based on the history of other
countries that made such a transition, we expect four big shifts within the Sensex
over the next decade: (a) the share of the consumer staples sector will decline;
(b) the share of the consumer discretionary sector will rise; (c) the share of
Banking and Financial Services (BFSI) will also rise; and (d) the share of
industrials may not necessarily rise.
Predicting the 15 entrants
To predict the 10 entrants from the listed universe, we applied our proprietary
Ambit filters like the greatness score, Coffee Can Portfolio and P-75 Index. The Analyst Details
entrants from the listed world are: Page Industries, Eicher Motors, Asian Paints, Saurabh Mukherjea, CFA
Nestle and Pidilite (from Consumer Staples/Discretionary), HCL Tech (IT +91 22 3043 3174
Services), and Kotak Mahindra Bank and IndusInd Bank (BFSI). To these eight saurabhmukherjea@ambitcapital.com
stocks from the top-100 by market-cap, we add Torrent Pharma and PI
Industries from the next 100 by market-cap. For the remaining five stocks that Gaurav Mehta, CFA
will enter through IPOs, we pick from four themes that will dominate the next +91 22 3043 3255
decade: (a) E-commerce (Flipkart and Paytm); (b) Insurance (ICICI Prudential gauravmehta@ambitcapital.com
Life Insurance); (c) Consumer Discretionary Services (Caf Coffee Day); and (d)
Disinvestment (Hindustan Aeronautics Limited). Consultant
Anupam Gupta
anupam.gupta@aavanresearch.com
Ambit Capital and / or its affiliates do and seek to do business including investment banking with companies covered in its research reports. As a result, investors should be aware that Ambit Capital
may have a conflict of interest that could affect the objectivity of this report. Investors should not consider this report as the only factor in making their investment decision.
Strategy
Executive summary
The transformation of the Indian economy will increase Sensex churn to 50% over the
next decade from 30% over the past decade. Our May 2015 thematic, Sensex exits:
The decadal story identified the companies that are likely to exit the Sensex over the
next ten years. This thematic report takes our work to its logical conclusion by
identifying the entrants.
We begin by analysing the nature of Sensex churn and recapping our list of Sensex
exit candidates. For identifying Sensex entrants, we use historical data from India and
other emerging markets (EMs) to identify the key trends and themes. We then apply
our proprietary Ambit filters on the listed stocks for a shortlist of ten entrants. For the
remaining five unlisted stocks, we choose from large sectors that are largely
unrepresented in the Sensex.
Sensex churn set to rise

Note that the constitution of the Sensex is extremely dynamic, and churn in the Indias churn ratios are higher than
Sensex is in fact the only constant. Furthermore, churn ratios in India are higher those in other markets
than that of other developed as well as emerging markets. Our analysis of Sensex
churns over a 10-year window from 1986 to date (ie: 1986-1996, 1987-1997 and so
on, to 2004-2014) shows that the churn ratio of the Sensex tends to rise when the
economy is undergoing irreversible structural changes.
Exhibit 1: The Sensex churn ratio has a tendency to rise when the economy undergoes
structural changes
Sensex churn - 10-year window

70%
Sensex companies churned
out over the next 10 years
60%
50%
40%
30%
20%
10%
0%
86-96
87-97
88-98
89-99
90-00
91-01
92-02
93-03
94-04
95-05
96-06
97-07
98-08
99-09
00-10
01-11
02-12
03-13
04-14
Source: Ambit Capital research, Bloomberg. Note: Sensex churn has been calculated as the percentage number
of companies forming a part of the Sensex in year t that get exited from the index by year t+10. For example,
50% in the 1986-96 period suggests 15 of the 30 Sensex constituents in Dec86 were no longer part of the index
10 years later, i.e. Dec 96
The current economic-political environment will usher in an era of change which will
drive Sensex churn higher. We have focused on this theme in detail in our report
Sensex exits: The decadal story, dated 5 May 2015 (click here for details). Please
refer Appendix 1 on Pg 85 for a detailed summary.
In this report, we have posited that Sensex churn, which has fallen to historical lows, Modis resets will disrupt the way
will now rise driven by Prime Minister Narendra Modis resets to the Indian economy. business was traditionally done in
To recap, these resets are: India
Reset 1: Shifting Indias savings landscape away from gold and land towards the
formal financial system
Reset 2: Disrupting crony capitalism in India
Reset 3: Re-defining Indias subsidy mechanisms
Thus, we expect Sensex churn to rise to 50% in the next decade (2015 to 2025) from Sensex churn currently at
historical lows of 27% during the most-recent decadal bucket (2004 to 2014). This historical lows is set to rise in the
means that 15 stocks will be replaced in the Sensex in the upcoming decade. In our next decade

Strategy
Sensex exits: The decadal story report, we elaborated on a framework to identify 15

stocks that would exit (see the exhibit below).
Exhibit 2: Exit candidates from Sensex over the next decade**
Mcap 6M ADV
Name Ticker Exit hypothesis
(US$ bn) (US$ mn)
Uncertainty on profitability of large investments in retail and telecom; downstream margins likely to
Reliance Industries RIL IN 47 54
remain muted
Falling subsidies unlikely to aid profitability; uncertainty on production growth makes earnings
ONGC ONGC IN 41 26
growth a challenge
Relaxation of Government protection, rising capital requirements and competition from stronger
State Bk of India SBIN IN 30 89
private sector peers and introduction of new players
High spectrum costs, new competition from Jio will weigh on Indian business profitability; African
Bharti Airtel BHARTI IN 26 32
business will remain a drag on consolidated profits
High competitive intensity in a fragmented industry, no discernible competitive advantages in most
Larsen & Toubro LT IN 25 53
sectors; L&Ts large size will be a constraint
Increase in competition from private sector, decline in power deficit and end of preferential
NTPC NTPC IN 18 15
treatment from Coal India for fuel linkages
Utility vehicle business under threat from foreign car companies superior offerings; tractor business
M&M MM IN 12 23
bearing the brunt of slowdown in rural demand
Rising competitive intensity in domestic and export markets; exports further hit from macro-
Bajaj Auto BJAUT IN 11 16
economic challenges in key geographies
Boiler-turbine-generator industry in structural downturn; over-capacity issues (and thus greater
BHE L BHEL IN 9 18
competition) will plague BHEL and its peers
RoEs will trend lower towards global peers; mine acquisition costs will rise under MMDR Act as
Vedanta* SSLT IN 8 17
global iron ore and steel demand stays weak
Over-dependence on legacy models, uncertain indigenous technology, shift towards scooters and
Hero Motocorp HMCL IN 8 35
rising competition from Honda
Downturn in steel prices to hurt global business; loss of low-cost raw material advantage under
Tata Steel TATA IN 5 33
MMDR Act to hurt domestic business
Weak aluminium prices and premiums to hurt global business; lack of cheap captive coal will mute
Hindalco Industries HNDL IN 4 19
RoCEs of new domestic smelters
RoEs will remain lower than cost of equity; rise in coal prices and structural changes in sale of power
Tata Power Co. TPWR IN 3 5
will impact long-term prospects
Source: Bloomberg, Ambit Capital research. Note: *This is Sesa Sterlite; Market-cap data is as of 17 June 2015. ** For internal compliance reasons, one of the 15
companies in this table has been taken out.
Historically, where have Sensex entrants come from?

Intuitively, the size of a company at the beginning of the decade should play an Intuitively, size at the beginning
important role in determining whether or not the company will be in the index a should play an important role in
decade later. To put a number to the probability of being included in the Sensex a determining whether or not a
decade hence, we analyse the historical Sensex entrants on a rolling ten-year basis company will be in the index a
beginning with the year 2000, on the basis of their market-caps as of the beginning decade later
of the decade (which in turn implies examining data going back until 1990). Basis
this, we categorise these entrants into four buckets:
The top-100 bucket which comprises the entrants that belonged to the top-100
firms on market-cap as of the beginning of the decade;
The 101-200 bucket which comprises the entrants that belonged to the next
100 firms on market-cap as of the beginning of the decade;
The beyond top-200 bucket which comprises the entrants that belonged to the
listed universe outside of the top 200 on market-cap as at the beginning of the
decade; and
The fresh issuances bucket that comprises firms that were not listed as at the
beginning of the decade but have entered the index on account of fresh listings.
Our analysis of these fresh entrants starting from the year 1990 to date has been
reproduced in Exhibit 3 below.

Strategy
Exhibit 3: Nearly half the entrants historically have come from the top-100 stocks as
at the start of the decade
% entrants coming from:
'Beyond top-200' 'Fresh issuances'
Period 'Top-100' bucket '101-200' bucket
bucket bucket
1990-00 33% 11% 6% 50%
1991-01 33% 6% 11% 50%
1992-02 47% 16% 11% 26%
1993-03 45% 20% 15% 20%
1994-04 60% 10% 10% 20%
1995-05 50% 25% 5% 20%
1996-06 50% 7% 7% 36%
1997-07 46% 8% 0% 46%
1998-08 38% 8% 0% 54%
1999-00 43% 0% 7% 50%
2000-10 44% 0% 13% 44%
2001-11* 44% 6% 6% 44%
2002-12* 57% 7% 7% 29%
2003-13* 56% 11% 0% 33%
2004-14* 75% 13% 0% 13%
Average 48% 10% 6% 36%
Source: Bloomberg, Capitaline, Ambit Capital research. Note: * indicates this is on a free float market-cap basis.
Key findings from Exhibit 3 are summarised below:

~48% of the entrants historically have come from the top-100 stocks based on Nearly half the entrants come from
market-cap as of the beginning of the decade. This suggests that nearly half the the top-100 stocks on beginning-
fresh entrants over a ten-year window belong to the top-100 stocks on period market-cap
beginning-period market-cap;
~10% stocks come from the next-100 stocks (i.e. beginning-period market-cap
rank between 101-200);
~6% of the entrants come from the listed universe outside of the top-200 stocks;
and
The remaining 36% of the stocks entered the index on account of fresh listings.
This suggests that nearly one-thirds of all the fresh entrants enter the index on
account of mega IPOs over the decade.
Owning a future Sensex entrant has been a winning proposition

On an average, firms entering the index have delivered 29% returns (in CAGR terms)
over the decade. However, what is more interesting is the composition of these Firms that enter the index from
returns. Whilst firms that enter the index from the top-100 bucket (basis beginning- outside of the top-200 stocks tend
period market-cap) have managed to deliver 22% CAGR returns historically, firms to be blazing winners
entering the index from the next 100 bucket have managed to deliver an impressive
36% CAGR return. Following this logic further, firms that enter the index from outside
the top-200 stocks, however, have been blazing winners (having delivered 60%
CAGR returns over the ten-year period).

Strategy
Exhibit 4: The further an entrant is from the Sensex at the beginning of the decade,
the higher its investment returns over the course of the decade
Average share price returns over the decade for stocks coming from:
bucket bucket
1990-00 18% 25% 64% N/A
1991-01 13% 4% 50% N/A
1992-02 10% 34% 35% N/A
1993-03 12% 43% 57% N/A
1994-04 17% 28% 57% N/A
1995-05 24% 42% 67% N/A
1996-06 43% 35% 75% N/A
1997-07 35% 49% N/A N/A
1998-08 22% 39% N/A N/A
1999-00 23% N/A 65% N/A
2000-10 24% N/A 70% N/A
2001-11* 24% 68% 63% N/A
2002-12* 28% 54% 60% N/A
2003-13* 22% 30% N/A N/A
2004-14* 21% 24% N/A N/A
Average 22% 36% 60% N/A
Source: Bloomberg, Capitaline, Ambit Capital research. Note: This is the average share price performance over
the decade for firms entering the sensex by the end of the decade. * indicates this is share price performance for
firms belonging to the respective buckets constructed on a free float market-cap basis.
Thus, close to half of the 15 Sensex entrants of the next decade are likely to come
from the top-100 stocks ranked by market-cap today. Another 10% are likely to come
from the next 100 stocks by market-cap (below the top 100). About 6% should come
from the universe beyond the top-200. Finally, a third of the entrants are likely to be
new offerings.
Established trends from other emerging markets

The key takeaways from analysing trends in other countries that went from US$2K
per capita income to US$4K per capita income point to the following changes in
sectoral market capitalisation shares in Indias benchmark equity index.
Insight #1: The market-cap share of Indias Consumer Staples sector is set to The share of Consumption in GDP
decline over the next decade. declines as per capita incomes rise
Exhibit 5: Cross-country evidence suggests that the Consumer Staples sectors
market-cap (as a share of the broader markets market cap) declines as per capita
incomes rise
40% R = 0.4599
Share of consumer staples
30%
(as a % of total)
market-cap
20%
10%
0%
- 2,000 4,000 6,000 8,000 10,000 12,000
Per capita income (in current USD)
Source: CEIC, World Bank, Ambit Capital research, Note: Countries covered include Malaysia (CY94-13),
Indonesia (CY96-13), India (CY94-13), Thailand (CY94-13) and Philippines (CY94-13).

Strategy
Insight #2: The market-cap share of Indias Consumer Discretionary sector is set The Consumer Discretionary
to rise over the next decade. sectors market-cap first falls but
Exhibit 6: Cross-country evidence suggests that the Consumer Discretionary sectors then secularly rises as per capita
market-cap (as a share of the broader market) secularly increases incomes rise
30% R = 0.3248
discretionary market-cap
Share of consumer
(as a % of total)
20%
10%
0%
- 5,000 10,000 15,000 20,000 25,000 30,000
(Per capita income in current USD)
Source: CEIC, World Bank, Ambit Capital research, Note: Countries covered include India (CY94-13), Thailand
(CY94-13) and Korea (CY94-13). We have included Korea in this section owing to data insufficiency problems in
other countries that are part of our preferred sample set i.e. for Indonesia, Philippines and Malaysia.
The share of Savings in GDP

initially increases as per capita
Insight #3: The market-cap share of Indias Financial Services sector is set to
incomes rise but starts declining
rise over the next decade.
after a certain level
Exhibit 7: Financial sectors market-cap rises as per capita income rises
60% R = 0.1599
Share of financial sector
(as a % of total)
40%
index
20%
0%
- 2,000 4,000 6,000 8,000 10,000 12,000
Source: CEIC, World Bank, Ambit Capital research, Note: Countries covered include Indonesia (CY96-13), India
(CY94-13), Thailand (CY94-13, Malaysia (CY94-13) and Turkey (CY04-13). We have included Turkey in this
section owing to data insufficiency problems in other countries in our preferred sample set i.e. for the Philippines.
Insight #4: The market-cap share of Indias Industrials sector may not
necessarily rise.

Strategy
Exhibit 8: At low levels of per capita income, market-cap Exhibit 9: and so is the case at higher per capita income
share of Industrial appears unclear...
20%
Share of industrial sector

30%
(as a % of total)
(as a % of total)
index GDP
20%
index GDP
10%
10%
0% 0%
- 1,000 2,000 3,000 4,000 - 5,000 10,000 15,000
Per capita income (current USD)
Per capita income (current USD)
Source: CEIC, World Bank, Ambit Capital research, Note: Countries covered Source: CEIC, World Bank, Ambit Capital research, Note: Countries covered
include Malaysia (CY94-13), Indonesia (CY96-13), India (CY94-13), Thailand include Malaysia (CY94-13) and Thailand (CY94-13)
(CY94-13) and the Philippines (CY94-13)
Predicting the next 15 entrants

Having established the broad shape of where the entrants will come from (both in New entrants via IPOs will come
terms of size and in terms of sector), we proceed to identify the likely entrants. from sectors that are not
represented in the Sensex
We believe five entrants will list through IPOs and these will come from sectors that
are significantly under-represented in the Sensex.
Exhibit 10: The five stocks that will enter the Sensex through IPOs
Name Sector Rationale
Already India's biggest e-commerce company in terms of
Flipkart E-commerce
valuations; poised to benefit from the boom in e-commerce
Increasingly taking on banks in the digital payments space;
Paytm Digital Payments
strong parentage with investment from Alibaba (China)
Play on increasing share of BFSI in general and insurance in
ICICI Prudential Life Life Insurance
specific as economic growth increases
Well placed to benefit from the shift towards consumer
Coffee
Caf Coffee Day discretionary from consumer staples; largest coffee
Conglomerate
conglomerate in India.
Government-owned defence major; key beneficiary of the
Hindustan Aeronautics
Defence 'Make in India' theme; ideal candidate for a big-bang
Ltd (HAL)
disinvestment-led IPO
Source: Ambit Capital research
Within the listed universe, we use our proprietary filters such as the greatness
framework, Coffee Can Portfolio and P-75 list of connected companies to arrive at
the other ten stocks (see the exhibit below).

Strategy
Exhibit 11: The most likely Sensex entry candidates over the coming decade
Mcap 6M ADV FY16 FY16
Company Name Ticker Entry hypothesis
(US$ mn) (US$ mn) P/E P/B
Top 100 stocks on free-float mcap
Leader in Infra management services; scores high on our capital allocation,
HCL Tech HCLT IN 19,838 37.5 15.8 4.3
portfolio mix, operational excellence and management framework
Among the best-run private sector banks; loan book growth will increase post
Kotak Mahindra Bank KMB IN 18,322 25.1 25.8 3.7
the ING Vysya integration
Enduring leadership position set to sustain led by supply-chain and scale
Asian Paints APNT IN 10,528 20.3 37 12
efficiencies, market share gains and proven management
Established brand equity and pricing power position; will gain from shift in
Nestle NEST IN 8,683 6.1 42.2 17.5
consumer spend towards discretionary segment
Leader in niche motorcycle segment; well placed to gain from rise in consumer
Eicher Motors EIM IN 7,797 28.5 49 14.6
discretionary spend
Leader in CV financing; expansion in new areas led by strong franchise will drive
IndusInd Bank* IIB IN 6,794 13.9 19.1 3.5
market share gains and above-system loan book growth
Sustainable brand leadership and superior fundamentals make Pidilite a high-quality
Pidilite Industries PIDI IN 4,197 4.1 42.7 10.2
defensive play in the consumer sector
Greater growth longevity than most consumer companies; sustained competitive
Page Industries PAG IN 2,506 2.8 57.3 32.2
advantages will support premium valuations
Next 100 stocks on free-float mcap
Increasing presence in generics (US, Europe) and branded markets (India and EMs);
Torrent Pharma TRP IN 3,310 2.1 21.6 6.6
new management driving high RoCEs
Leading agro-chemical player with proven track record; entry into new specialty
PI Industries PI IN 1,350 2 28.5 7.6
chemicals areas for custom manufacturing should sustain high growth phase
Unlisted
Already India's biggest e-commerce company in terms of valuations; poised to
Flipkart N/A N/A N/A N/A N/A
benefit from the boom in e-commerce
Increasingly taking on banks in the digital payments space; strong parentage
Paytm N/A N/A N/A N/A N/A
with investment from Alibaba (China)
Play on increasing share of BFSI in general and insurance in specific as economic
I Pru Life N/A N/A N/A N/A N/A
growth increases
Well placed to benefit from the shift towards consumer discretionary from consumer
Caf Coffee Day N/A N/A N/A N/A N/A
staples; largest coffee conglomerate in India
Government-owned defence major; key beneficiary of 'Make in India' theme; ideal
Hind. Aeronautics N/A N/A N/A N/A N/A
candidate for a big-bang disinvestment-led IPO
Source: Bloomberg, Capitaline, Ambit Capital research. Note: We have also filtered this list for clean accounting quality using our forensic accounting framework.
* Whilst IndusInd Bank meets the RoA cut-off of 1.1% in six out of the last ten years, we have included the bank as it is ranked the best bank on our greatness
framework.
Looking at the 15 entrants (currently listed plus fresh listings in totality), we can
classify them into the following sectors:
Automobile (Consumer Discretionary): Eicher Motors
Chemicals: PI Industries
Consumer/Retail (includes Consumer Discretionary): Asian Paints, Nestle India,
Pidilite, Page Industries and Caf Coffee Day
Banking and Financial Services: Kotak Mahindra Bank, IndusInd Bank and ICICI
Prudential Life Insurance
Defense: Hindustan Aeronautics Limited
Healthcare: Torrent Pharmaceuticals
Technology: HCL Tech, Flipkart and Paytm

Strategy
Pulling it all together

Pulling all of this together gives us the Sensex in 2025 (see the exhibit below).
Exhibit 12: Sensex 2015 versus Sensex 2025 In the next decade, the Sensex will
Sensex Today Sensex in 2025 see huge changes in its
Automobile Automobile composition
Tata Motors Tata Motors
Maruti Suzuki Maruti Suzuki
M&M Eicher Motors
Bajaj Auto
Hero Moto
Banking / Financial Services Banking / Financial Services
HDFC Bank HDFC Bank
State Bank of India Kotak Mahindra Bank
HDFC IndusInd Bank
ICICI Bank ICICI Bank
Axis Bank Axis Bank
ICICI Prudential Life
Chemicals
PI Industries
Consumer / Retail Consumer / Retail
ITC ITC
Hindustan Unilever Hindustan Unilever
Asian Paints
Nestle India
Pidilite Industries
Page Industries
Caf Coffee Day
E&C / Infra / Industrials Defense
L&T Hindustan Aeronautics
Healthcare Healthcare
Sun Pharma Sun Pharma
Dr Reddy Dr Reddy
Cipla Cipla
Torrent Pharmaceuticals
Metals & Mining / Oil & Gas Metals & Mining / Oil & Gas
Reliance Ind Coal India
Coal India
ONGC
Vedanta
Tata Steel
Hindalco
Power Utilities / Capital Goods Power Utilities / Capital Goods
NTPC GAIL
BHEL
GAIL
Tata Power
Technology Technology
TCS TCS
Infosys Infosys
Wipro Wipro
HCL Tech
Telecom Internet
Bharti Airtel Flipkart
Paytm
Source: Bloomberg, Ambit Capital research.

Strategy
Section 1: Sensex churn set to rise

"Markets are constantly in a state of uncertainty and flux and money is made
by discounting the obvious and betting on the unexpected."
- George Soros (as quoted by The Telegraph in January 2015 on his retirement)
The constitution of the Sensex makes it dynamic, and Indian churn ratios are
higher than those in developed and emerging markets. Further, structural
changes in Indias economy drive up Sensex churn, as was seen in the 1990s
at the end of the Licence Raj era. With Prime Minister Modi driving similar
structural changes in the Indian economy over the next decade, we expect
Sensex churn to revert to higher levels of 50%, after reaching historical lows
of 30% during 2004-2014.
Churn is the only constant in the Sensex.
Note that the constitution of the Sensex is extremely dynamic, and churn in the Indias churn ratios are higher than
Sensex is in fact the only constant. This aspect has been discussed in detail in our those in other markets
earlier report, Decadal changes in the Sensex dated June 28, 2012 (click here for
details) and also in our recent report Sensex exits: The decadal story dated May 5,
2015 (click here for details). Furthermore, churn ratios in India are higher than that
of other developed as well as emerging markets (see the exhibit below).
Exhibit 13: The Indian market is characterised by a high churn ratio*
70
60
60 53 52
48
50
Churn (%)
39
Data not available
40 36
33 30
30 23
20
10
0
Sensex (India) DJIA (US) Hang Seng Bovespa (Brazil) Average
(Hong Kong)
Market
1992-2002 2002-2012
Source: Bloomberg, Ambit Capital research. Note: * Churn is defined as the number of companies which get
ejected from the index over a given period of time / total number of companies in the index. This chart has been
reproduced without any changes from our June 28, 2012 note: Decadal changes in the Sensex
Our analysis of Sensex churns over a 10-year window from 1986 to date (ie: 1986- Sensex churn rises when the
1996, 1987-1997 and so on to 2004-2014) shows that the churn ratio of the Sensex economy is undergoing irreversible
tends to rise when the economy is undergoing irreversible structural changes. For structural changes
instance, the 10-year period spanning 1992-2002, when the era of the Licence Raj
came to an end, saw the Sensexs churn ratio rise to 60% (vs the 53% churn ratio in
the Sensex over 2002-12). In light of the three resets that Modi is likely to engineer,
the next ten years in India appear likely to be akin to the 1990s rather than the
noughties, as the period spanning 1992-2002 too was a decade defined by
irrevocable structural changes being administered by the political leadership.
(Note: We have calculated the Sensexs churn ratio in the following manner - 18 of
the 30 constituents of the Sensex in 1992 were no longer part of the index in 2002.
Thus, Sensex saw a churn of 60% over the 1992-02 period. Similarly, 16 of the 30
constituents of the Sensex in 2002 exited the index by 2012. Consequently, churn
over the 2002-12 period was at 53%.)

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Exhibit 14: The Sensex churn ratio shows a tendency to rise when the economy
undergoes structural changes
Sensex churn - 10-year window

70%
Sensex companies churned
out over the next 10 years
60%
50%
40%
30%
20%
10%
0%
86-96
87-97
88-98
89-99
90-00
91-01
92-02
93-03
94-04
95-05
96-06
97-07
98-08
99-09
00-10
01-11
02-12
03-13
04-14
The churn in the Sensex peaked in the four years following the momentous reforms Sensex churn peaked in the four
launched by PV Narsimha Rao (as PM) and Manmohan Singh (as Finance Minister). A years following the structural
whole host of businesses which had flourished behind the protectionist barriers reforms in 1991..
created by the Licence Raj in industries were ejected from the Sensex. These
industries include: (1) Textiles (Aditya Birla Nuvo, Bombay Dyeing, Century Textiles
and Future Polyester), (2) Automobiles (Hindustan Motors and Premier), (3) Steel
(Mukand Limited), (4) Paper (Ballarpur Industries), and (5) Heavy engineering (Bharat
Forge, Cummins India, Siemens and Voltas (although this final group of companies
subsequently adapted well in the post-Licence Raj period).
Post-1995, Sensex churn has fallen remarkably relative to the volatile era of the early and from those levels, Sensex
1990s. Sensex incumbents grew rapidly in size, and we attribute this to the following churn fell as incumbents
reasons: entrenched themselves in the post-
a) Large business groups ramped up domestic capacities in a licence-free era and liberalisation era
followed them up with large acquisitions in the noughties (Reliance, Tata Steel
and Hindalco).
b) Export-led companies like software (Infosys and TCS) and pharmaceuticals
expanded.
c) The noughties also saw the rise of infrastructure companies (L&T) and
banks/financial institutions which funded their expansion (ICICI Bank) and also
benefited from the rise in overall GDP growth (HDFC Bank) from 3.9% in FY03 to
8% in FY04, 7.1% in FY05, 9.5% in FY05 and 9.6% in FY01.
d) Finally, towards the end of the noughties, the rise in rural-led consumption
benefited auto (Hero MotoCorp, Bajaj Auto, M&M and Maruti) and FMCG (HUL
and ITC) stocks.
and churn is now set to rise
The current economic-political environment will usher in an era of change which will
drive Sensex churn higher. We have focused on this theme in detail in our report
Sensex exits: The decadal story dated 5 May 2015 (click here for details). Please
refer Appendix 1 on Pg 85 for a detailed summary.
In this report, we have posited that Sensex churn which has fallen to historical lows Modis resets will disrupt the way
will now rise driven by Prime Minister Narendra Modis resets to the Indian business was traditionally done in
economy. To recap, these resets are: India
Reset 1: Shifting Indias savings landscape away from gold and land towards the
formal financial system;
Reset 2: Disrupting crony capitalism in India; and

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Reset 3: Re-defining Indias subsidy mechanisms.

Thus, we expect Sensex churn to rise to 50% in the next decade (2015 to 2025) from Sensex churn currently at
historical lows of 27% during the most-recent decadal bucket (2004 to 2014). This historical lows is set to rise in the
means that 15 stocks will be replaced in the Sensex in the upcoming decade. next decade
In our Sensex exits: The decadal story report, we elaborated on a framework to Our framework to identify exit
identify 15 stocks that would exit (see the exhibit below). candidates was based on Ambit
Exhibit 15: Sensex exits in the next decade* proprietary filters such as Coffee
Number Stock name Market Cap (`bn) Can Portfolio, Greatness
Framework and P-75 Index
1 Reliance Inds 3,014
2 ONGC 2,618
3 State Bank of India 1,930
4 Bharti Airtel 1,688
5 L&T 1,592
6 NTPC 1,130
7 M&M 779
8 Vedanta 512
9 BHEL 589
10 Bajaj Auto 686
11 Hero Moto 504
12 Tata Steel 296
13 Hindalco 245
14 Tata Power 197
Source: Bloomberg, Ambit Capital research. Note: Market cap data is as of 17 June 2015. * For internal
compliance reasons, the name of the 15 stocks on the exits list has been removed from this report.
We now bring this investment theme to its logical conclusion by identifying 15 stocks
that will replace these outgoing candidates in the next decade. We begin with
analysing past trends which show us the source of entrants into the Sensex.

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Section 2: Plotting the past

"I always remind myself that what one observes is at best a combination of
variance and returns. Not just returns."
- Nassim Nicholas Taleb (Fooled by Randomness, 2001)
Summary: Basis our analysis of Sensex entrants over the past 25 years, the key
takeaways from this section are:
Nearly half of the Sensex entrants over a ten-year window come from the top
100 stocks based on beginning-period market-cap;
Nearly one-thirds of the fresh entrants primarily enter the index on account of
mega IPOs over the decade;
The remaining 16% stocks that enter the index belong to the universe outside of
the top-100 stocks on beginning-period market-cap (with 10% coming from the
101-200 universe and 6% coming from the beyond top-200 universe); and
Firms that enter the index from outside of the top-200 stocks tend to be blazing
winners.
Background
From our discussions in the previous section, we note that churn in the Indian
markets has historically been relatively high. Further, after having peaked at 67% in
the years following the 1991 reforms (implying 20 replacements in a 30-stocks
index), this churn has fallen to historical lows of 27% (i.e. 8 replacements) in the most
recent ten-year period (2004-14). With the structural changes emanating from the
three resets likely changing the way in which business is conducted in India (much the
same way as the 1991 liberalisation measures ended the Licence Raj), even a
conservative assumption of 50% churn in the index over the next decade would mean
that as many as 15 of the current Sensex constituents are likely to be replaced over
the coming years. The logical question then that follows would be which are the likely
15 companies that will replace these 15 stocks discussed earlier?
Where do Sensex entrants come from?

In order to answer this question, we turn to history as a guide and analyse where the
past Sensex entrants have come from.
Intuitively, the size of a company at the beginning of the decade should play an
important role in determining whether or not the company will be in the index a Intuitively, size at the beginning
decade later. This is also a point we had highlighted in our 20 November 2012 note, should play an important role in
The Nifty in 2022. To put a number to the probability of being included in the determining whether or not a
Sensex a decade hence, we analyse the historical Sensex entrants on a rolling ten- company will be in the index a
year basis beginning with the year 2000, on the basis of their market-caps as of the decade later
beginning of the decade (which in turn implies examining data going back until
1990).
For example, for the 1990-2000 period, we first look at all the fresh entrants that
were included in the index in the decade leading up to December 2000. Next, we We categorise the entrants into
rank these firms on the basis of their market-cap at the beginning of the decade, i.e. four buckets based on beginning-
as of December 1990. Basis this, we categorise these entrants into four buckets: period market-cap
The top-100 bucket which comprises the entrants that belonged to the top-100
firms on market-cap as of the beginning of the decade;
The 101-200 bucket which comprises the entrants that belonged to the next
100 firms on market-cap as of the beginning of the decade;
The beyond top-200 bucket which comprises the entrants that belonged to the
listed universe outside of the top 200 on market-cap as at the beginning of the
decade; and
The fresh issuances bucket that comprises firms that were not listed as at the
beginning of the decade but have entered the index on account of fresh listings.

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Our analysis of these fresh entrants starting from the year 1990 to date has been
reproduced in Exhibit 16 below.
Exhibit 16: Nearly half the entrants historically have come from the top-100 stocks as
at the start of the decade
% entrants coming from:
bucket bucket
1990-00 33% 11% 6% 50%
1991-01 33% 6% 11% 50%
1992-02 47% 16% 11% 26%
1993-03 45% 20% 15% 20%
1994-04 60% 10% 10% 20%
1995-05 50% 25% 5% 20%
1996-06 50% 7% 7% 36%
1997-07 46% 8% 0% 46%
1998-08 38% 8% 0% 54%
1999-00 43% 0% 7% 50%
2000-10 44% 0% 13% 44%
2001-11* 44% 6% 6% 44%
2002-12* 57% 7% 7% 29%
2003-13* 56% 11% 0% 33%
2004-14* 75% 13% 0% 13%
Average 48% 10% 6% 36%
Source: Bloomberg, Capitaline, Ambit Capital research. Note: * indicates this is on a free float market-cap basis.
Key findings from Exhibit 16 are summarised below:

~48% of the entrants historically have come from the top-100 stocks based on Nearly half the entrants come from
market-cap as of the beginning of the decade. This suggests that nearly half of the top-100 stocks on beginning-
the fresh entrants over a ten-year window belong to the top-100 stocks on period market-cap
beginning-period market-cap;
~10% stocks come from the next 100 stocks (i.e. beginning-period market-cap
rank between 101 and 200);
~6% of the entrants come from the listed universe outside of the top-200 stocks;
and
The remaining 36% of the stocks entered the index on account of fresh listings.
This suggests that nearly one-thirds of all the fresh entrants enter the index on
account of mega IPOs over the decade.
Owning a future Sensex entrant has been a winning

proposition
Firms that enter the index over a decade do so after a prolonged period of
outperformance. Whilst this is intuitive, an empirical assessment reinforces the
conclusion as well. Exhibit 17 below demonstrates the share price returns of firms
entering the index over a ten-year window, starting from the year 1990.
On an average, firms entering the index have delivered 29% returns (in CAGR terms)
over the decade. However, what is more interesting is the composition of these Firms that enter the index from
returns. Whilst firms that enter the index from the top-100 bucket (basis beginning- outside of the top-200 stocks tend
period market-cap) have managed to deliver 22% CAGR returns historically, firms to be blazing winners
entering the index from the next 100 bucket have managed to deliver an impressive
36% CAGR returns. Following this logic further, firms that enter the index from
outside the top-200 stocks, however, have been blazing winners (having delivered
60% CAGR returns over the ten-year period).

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Exhibit 17: The further an entrant is from the Sensex at the beginning of the decade,
the higher its investment returns over the course of the decade
Average share price returns over the decade for stocks coming from:
bucket bucket
1990-00 18% 25% 64% N/A
1991-01 13% 4% 50% N/A
1992-02 10% 34% 35% N/A
1993-03 12% 43% 57% N/A
1994-04 17% 28% 57% N/A
1995-05 24% 42% 67% N/A
1996-06 43% 35% 75% N/A
1997-07 35% 49% N/A N/A
1998-08 22% 39% N/A N/A
1999-00 23% N/A 65% N/A
2000-10 24% N/A 70% N/A
2001-11* 24% 68% 63% N/A
2002-12* 28% 54% 60% N/A
2003-13* 22% 30% N/A N/A
2004-14* 21% 24% N/A N/A
Average 22% 36% 60% N/A
Source: Bloomberg, Capitaline, Ambit Capital research. Note: This is the average share price performance over
the decade for firms entering the sensex by the end of the decade. * indicates this is share price performance for
firms belonging to the respective buckets constructed on a free float market-cap basis.
Thus, close to half of the 15 likely entrants in the index over the past decade are
likely to be from the top-100 stocks on market-cap today. Another 10% should likely
come from the next-100 stocks on market-cap below the top-100 today. About 6%
should come from the universe beyond the top-200 whilst a good one-third of the
entrants are likely to be new offerings.
Before moving on to a discussion on the most likely Sensex entry candidates, we first
discuss the likely sectoral make of the index a decade hence, basis the underlying
changes in the economy, in the next section.

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Section 3: How does the headline equity

index evolve as the economy changes?
"Countries have choices, and those choices have substantially determined
whether they succeeded or failed."
- Alan Beattie, False Economy A Surprising Economic History of the World (2009).
The key takeaways from analysing the trends in other countries that went
from US$2K per capita income to US$4K per capita income point to the
following changes in sectoral market capitalisation shares in Indias
benchmark equity index:
Insight #1: The market-cap share of Indias Consumer Staples sector is
set to decline over the next decade.
Insight #2: The market-cap share of Indias Consumer Discretionary
sector is set to rise over the next decade.
Insight #3: The market-cap share of Indias Financial Services sector is
set to rise over the next decade.
Insight #4: The market-cap share of Indias Industrials sector may not
necessarily rise.
Economies change as per capita income grows

As economies differ from one another along multiple dimensions such as resource
endowments, social structures and political development, the paths to economic
development that various countries follow also tends to be different. For instance, an
increase in a countrys per capita income from say, US$1K to US$5K, may take a few
years or decades, may or may not be accompanied by increased profitability of listed
firms, may or may not be accompanied by a reduction in inequalities and so on and
so forth.
However, history suggests that as a country transitions from a per capita income of
US$2K to US$4K, certain striking similarities seem to repeat themselves across
countries. These similarities primarily relate to:
The demand-side constitution of GDP i.e. the share of consumption,
investments and savings in GDP; and
The corresponding shares of listed B2C companies, industrials and
financial services providers in total market capitalisation.
Moreover, despite the vast dissimilarities that exist in the manner a country develops,
this transition feels remarkable for the reasons described below.
Living in a developed country like Korea in the 1970s felt a lot like living in
India today
Whilst Korea today is a developed country with a per capita income of US$26K, it Despite the vast dissimilarities that
made this critical transition from a US$2K to US$4K per capita income country over exist in the manner a country
seven years beginning CY82. Before this transition (i.e. in the 1970s and 1980s), develops, this transition feels
South Koreas per capita income was similar to that of Indias in the noughties. remarkable
Moreover, living in the capital city of Seoul in the 1970s felt a lot like living in
suburban India today, as evinced by the account of Ha-Joon Chang, a Korean
development economist who was born in 1963 and who teaches at the University of
Cambridge.
The house I was born and lived in until I was six was in what was then the north-
western edge of Seoul, Koreas capital city. It was one of the small (two-bedroom) but
modern homesIt was made with cement bricks and was poorly heated, so it was
rather cold in winterthe temperature in Koreas winter can sink to 15 or even 20
degrees below zero. There was no flushing toilet, of course: that was only for the very
rich.

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Yet my family had some great luxuries that many others lacked, thanks to my father, an
elite civil servant in the Finance Ministry....We owned a black-and-white TV set, which
exerted a magnetic pull on our neighbours. One family friend, an up-and-coming
young dentist at St Marys, one of the biggest hospitals in the country, somehow used to
find the time to visit us whenever there was a big sports match on TVostensibly for
reasons totally unrelated to the match. In todays Korea, he would be contemplating
upgrading the second family TV in the bedroom to a plasma screen.
A cousin of mine who had just moved from my fathers native city of Kwangju to Seoul
came to visit on one occasion and quizzed my mother about the strange white cabinet
in the living room. It was our refrigerator (the kitchen being too small to accommodate
it).
Ha-Joon Chang, Bad Samaritans (2007)
Clearly, the South Korean economy underwent dramatic economic changes in the
decades that followed (see the exhibit below).
Exhibit 18: Area around Gangnam bus terminal, Seoul in Exhibit 19: Modern day area around the Gangnam district,
the 1980s Seoul
Source: The Korea Herald, Ambit Capital research Source: The Korea Herald, Ambit Capital research
Whether India will be able to make this sort of transition into a developed country is Given Indias current economic
unclear, given Indias current economic structure; however, it is relatively certain that structure, it is relatively certain that
Indias per capita income will double from US$2K to US$4K over the coming decade. Indias per capita income will
Over the past decade, Indias GDP per capita in current US dollars has compounded double from US$2K to US$4K over
at 8% and currently stands at US$1,627, according to the IMF. If we assume that the the coming decade
rate of compounding stays at 8%, Indias GDP per capital should be around
US$3,925 a decade hence.
Given the extraordinary commonalities experienced by other countries that undergo
this per capita transition, these common trends can be used to discern profitable
investment opportunities in India over the coming decade.

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Section 3.1: The transition from a per capita income of

US$2K to US$4K is accompanied by critical economic
changes
The last three decades have seen a range of countries transitioning from being
characterised by a US$2K per capita income (PCI) to US$4K PCI (see the exhibit
below).
Exhibit 20: A range of countries transitioned from being characterised by a US$2K per
capita income (PCI) to US$4K over the last three decades
Time taken to double PCI from
Country Starting year
US$2K to US$4K (in yrs)
Russia CY01 4
China CY06 5
Poland CY91 6
Korea CY82 7
Sri Lanka CY08 7
Indonesia CY07 8
Malaysia CY88 8
Turkey CY80 13
Chile CY80 15
Thailand CY93 16
Average 9
Source: IMF, Ambit Capital research.
Whilst the time period over which these countries made the transition varied from 4 Whilst the time period over which
years (Russia over CY01-04) to 16 years (Thailand over CY93-08), the average time these countries made the transition
taken by this sample of 10 countries amounted to approximately a decade. varied from 4 years (Russia) to 16
A focus on the 5 countries that took 7-13 years to complete this per capita income years (Thailand), the average time
transition namely Korea, Sri Lanka, Indonesia, Malaysia and Turkey (see rows taken by this sample of 10
highlighted in red in the exhibit above) yields four critical insights: countries was approximately a
decade
(1) Average GDP growth recorded over the period when the countrys PCI doubled
from US$2K to US$4K was meaningfully higher than the previous decade (see
the exhibit below).
Exhibit 21: The doubling of a countrys per capita income from US$2K to US$4K is
accompanied by a pick-up in GDP growth rates
12% 11%
Avg. real GDP growth
9%
10% 9%
8% 7%
6% 6%
(in %)
6% 5%
5% 4%
4% 3%
2%
0%
Malaysia Sri Lanka Indonesia Korea Turkey
GDP growth rate when PCI doubled from US$2K-US$4K

GDP growth rate in the previous decade
Source: CEIC, IMF, Ambit Capital research. Note: PCI refers to per capita income.
(2) The share of savings in GDP rises on an average by 700bps over the period when
a countrys PCI doubles from US$2K to US$4K (see the exhibit below).

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accompanied by a pick-up in the countrys savings ratio
50%
40%
Domestic savings
(as % of GDP)
40% 36%
34%
32%
29%
30% 26%
24%
20%
20% 18%
11%
10%
PCI at US$2K PCI at US$4K
Source: CEIC, IMF, Ambit Capital research. Note: PCI refers to per capita income
(3) The share of investment in GDP rises on average by 800bps over the period
when a countrys PCI doubles from US$2K to US$4K (see the exhibit below).
also accompanied by a pick-up in the countrys investment ratio
50%
44%
40%
32%
(as % of GDP)
Investments
30%
30% 28% 28% 27%
25% 25% 26%
20% 16%
10%
0%
(4) The share of consumption in GDP falls on average by 700bps over the period
when a countrys PCI doubles from US$2K to US$4K (see the exhibit below).
accompanied by a fall in the countrys consumption to GDP ratio
90% 87%
Private consumption
80%
77%
(as % of GDP)
70% 67%
63% 63%
59%
52% 54%
48%
50%
30%

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Furthermore, the share of food in consumption declines as a countrys per capita

income moves from US$2K to US$4K whilst the share of the non-food component
declines (see the exhibit below).
Exhibit 25: The share of food in total consumption Exhibit 26: as has been the case in India as well
expenditure has been declining in Korea as its per capita
income has been increasing
100% 80%
Share in total consumption

80%
60%
60%
40%
(in %)
(in %)
40%
20%
20%
0% 0%
1970
1974
1978
1982
1986
1990
1994
1998
2002
2006
2010
2014
1951
1956
1961
1966
1971
1976
1981
1986
1991
1996
2001
2006
2011
Food Non-Food Food Non Food
Source: CEIC, Ambit Capital research Source: CEIC, Ambit Capital research
Interestingly, most countries that undergo this per capita income transition display the
above-mentioned characteristics irrespective of the structure of their economies from
a supply-side perspective i.e. the share of agriculture, industry and services in their
GDP varies considerably (see the exhibit below).
Exhibit 27: Malaysia, Sri Lanka, Indonesia, Korea and Turkey had variable economic
structures from a supply-side perspective when their per capita income was US$2K
80%
Share in GDP at PCI of
57%
60% 51%
47% 50%
42%
US$2k
(in %)
38% 39%
40% 36%
29% 27%24%
20%
20% 13% 14% 13%
0%
Share of Agriculture Share of Industry Share of Services
Source: CEIC, IMF, Ambit Capital research, Note: PCI refers to per capita income
The above-mentioned insights are relevant because India is expected to make this India is likely to transition from a
pivotal transition from a country with a per capita income of US$2K currently to a country with a per capita income of
country with a US$4K per capita income over the coming decade. US$2K currently to a country with a
Over the past ten years, Indias per capita income has risen from US$830 in CY05 to US$4K per capita income over the
US$1808 in CY15, a CAGR of 8%. From hereon, according to IMF estimates, Indias coming decade
per capita income is set to double from this level to US$3,900 in CY25 (implying a
CAGR of 8%).

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Exhibit 28: The IMF expects Indias per capita income to increase 2x and hit ~US$4K
by CY25 over the next decade
5
India's per capita income
3.9
4
(in US$1000)
1.8
2
0
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
Source: IMF, CEIC, Ambit Capital research, Note: This is based on the assumption that Indias real GDP growth
rate over CY16-25 will be recorded at an average of 9% YoY (vs 7.5% YoY over CY05-14 as per the old GDP
series).

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Section 3.2: What will be the corresponding change in

Sensex composition?
As India transitions from being a US$2K per capita income country to a US$4K per
capita income country, like other countries that have undergone this transition, India
too is likely to experience: (1) a pick-up in its GDP growth rate; (2) a rise in its savings
as well as investment ratio; and (3) a decline in its consumption to GDP ratio (with
the share of non-food consumption increasing).
These patterns have been repeated in other countries as well and can be used to India too is likely to experience: (1)
forecast the likely changes that Indias economy will undergo as its per capita income an increase in its GDP growth rate,
doubles over the next decade. More pertinently, this dynamic can be used to forecast (2) a rise in its savings as well as
changes in sectoral market capitalisation shares in Indias benchmark equity index. investment ratio, and (3) a decline
The subsequent note comprises four key insights: in its consumption to GDP ratio
(with the share of non-food
Insight #1: The market-cap share of Indias Consumer Staples Index is set to consumption increasing)
decline over the next decade.
Insight #2: The market-cap share of Indias Consumer Discretionary Index is set
to rise over the next decade.
Insight #3: The market-cap share of Indias Financial Sector Index is set to rise
over the next decade.
Insight #4: The market-cap share of Indias Industrials Index may not necessarily
rise.
A note on the sample of countries used
The cross-country analysis below is based on macro and market capitalisation data for
Malaysia (CY94-13), Indonesia (CY96-13), India (CY94-13), Thailand (CY94-13) and
the Philippines (CY94-13). Data sufficiencyrelated problems led us to eliminate certain
countries. For instance, Korea (which completed its transition from a US$2K per capita
income country to a US$4K per capita income country over CY82-90) had to be
eliminated, as its market-cap data for this period by sector is not available.
Thailand and Indonesia have been included, as macro and market-cap data are
available when these two countries underwent this transition.
Malaysia underwent this transition in the seven-year period beginning CY82. Given
that market-cap data for this period is not available, we have focussed on the time
period spanning CY94-13 to understand trends beyond the US$4K threshold.
India and the Philippines are yet to undergo this transition and are currently in the
midst of this transition. We have focussed on the time period spanning CY94-13 for
both these relatively less-developed countries to understand the trends in the run-
up to the US$2K threshold.
Refer to Appendix 2 on Pg 88 for details regarding sectoral as well as headline
indices used in each country.

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Insight #1: The market-cap share of Indias Consumer Staples Index is set to
decline over the next decade
Cross-country evidence suggests that the share of Consumption in GDP declines as The share of Consumption in GDP
per capita incomes rise (see the exhibit below). declines as per capita incomes rise
Exhibit 29: Cross-country evidence suggests that the share of Consumption in GDP
declines as per capita incomes rise (PFCE stands for Private Final Consumption
Expenditure)
90%
R = 0.5139
Share of PFCE in GDP
70%
(in %)
50%
30%
- 2,000 4,000 6,000 8,000 10,000 12,000
Source: CEIC, World Bank, Ambit Capital research, Note: Countries covered include Indonesia (CY96-13),
India (CY94-13), Thailand (CY94-13), the Philippines (CY94-13) and Malaysia (CY94-13).
Furthermore, the share of food in consumption declines as a countrys per capita

income increases whilst the share of the non-food component (which includes
consumer discretionary goods such as 2Ws and 4Ws) increases (see the exhibit
below).
Exhibit 30: The share of food in total consumption Exhibit 31: as has been the case in India as well
expenditure has been declining in Korea as its per capita
income has been increasing
100% 100%
80% 80%
60% 60%
(in %)
(in %)
40% 40%
20% 20%
0% 0%
1970
1974
1978
1982
1986
1990
1994
1998
2002
2006
2010
2014
1951
1956
1961
1966
1971
1976
1981
1986
1991
1996
2001
2006
2011
Food Non-Food Food Non Food
Source: CEIC, Ambit Capital research Source: CEIC, Ambit Capital research
Correspondingly, cross-country evidence suggests that the Consumer Staples sectors

The Consumer Staples sectors
market-cap (as a share of the broader market) secularly declines as per capita
market-cap secularly declines as
incomes rise (see the exhibit below).
per capita incomes rise

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Exhibit 32: Cross-country evidence suggests that the Consumer Staples sectors
market-cap (as a share of the broader markets market cap) declines as per capita
incomes rise
40% R = 0.4599
Share of consumer staples
(as a % of total)
30%
market-cap
20%
10%
0%
- 2,000 4,000 6,000 8,000 10,000 12,000
Source: CEIC, World Bank, Ambit Capital research, Note: Countries covered include Malaysia (CY94-13),
Indonesia (CY96-13), India (CY94-13), Thailand (CY94-13) and Philippines (CY94-13).
The above exhibit also suggests that even after per capita incomes breach a relatively
high threshold, the share of the Consumer Staples sectors market-cap, as a share of
the broader markets capitalisation, continues to decline (see the exhibits above).
Indias own experience so far has been reflective of this broader cross-country trend
whereby the share of Consumption in GDP as well as the share of the Consumer
Staples sectors market-cap has been declining as Indias per capita income has
increased from US$380 to US$1500 over CY94-13 (see the exhibits below).
Exhibit 33: The share of Consumption in India declined as Exhibit 34: ... with the share of the Consumer Staples
per capita income rose... sectors market-cap also declining over this period
70% 40%
R = 0.7186
Share of PFCE in GDP (in
Share of Consumer Index
R = 0.8509
Market-Cap (as a % of
total)
60% 20%
%)
50% 0%
0 500 1,000 1,500 2,000 0 500 1,000 1,500 2,000
Per capita income (in USD) Per capita income (in USD)
Source: CEIC, World Bank, Ambit Capital research, Note: The time period Source: CEIC, World Bank, Ambit Capital research, Note: The time period
covered is CY94-13; PFCE stands for Private Final Consumption Expenditure covered is CY94-13.
The same trend was also visible in Indonesia, a country which is the closest peer to
India in terms of per capita incomes (see the exhibit below).

Strategy
Exhibit 35: Indonesia too saw the share of Consumption in Exhibit 36: ... with the share of the Consumer Staples
GDP decline as its per capita income rose... sectors market-cap also declining over this period
80% 30% R = 0.5084

R = 0.5153
Share of PFCE in GDP (in
Share of Consumer Index

70% 20%
total)
%)
60% 10%
50% 0%
0 2,500 5,000 0 2,500 5,000
Source: CEIC, World Bank, Ambit Capital research, Note: The time period Source: CEIC, World Bank, Ambit Capital research, Note: The time period
covered here is CY96-13. PFCE stands for Private Final Consumption covered here is CY96-13.
Expenditure.
Insight #2: The market-cap share of Indias Consumer Discretionary Index is

set to rise over the next decade
As highlighted earlier, the share of food in consumption declines as a countrys per
capita income increases whilst the share of the non-food component (which includes
consumer discretionary goods such as 2Ws and 4Ws) increases (see the exhibit
below).
Correspondingly, cross-country evidence suggests that the Consumer Discretionary The Consumer Discretionary
sectors market-cap secularly rises as per capita incomes rise (see the exhibit below). sectors market-cap first falls but
Exhibit 37: Cross-country evidence suggests that the Consumer Discretionary sectors then secularly rises as per capita
market-cap (as a share of the broader market) secularly increases incomes rise
30% R = 0.3248
discretionary market-cap
Share of consumer
(as a % of total)
20%
10%
0%
- 5,000 10,000 15,000 20,000 25,000 30,000
(Per capita income in current USD)
Source: CEIC, World Bank, Ambit Capital research, Note: Countries covered include India (CY94-13), Thailand
(CY94-13) and Korea (CY94-13). We have included Korea in this section owing to data insufficiency problems in In India, the share of the
other countries that are part of our preferred sample set i.e. for Indonesia, Philippines and Malaysia. Consumer Discretionary sectors
Indias own experience corroborates this broader cross-country trend whereby the market-cap declined until CY06
share of the Consumer Discretionary sectors market-cap declined until CY06 (when and has been rising since then
Indias per capita income breached the US$1000 mark) and has been rising since
then (see the exhibits below).

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Exhibit 38: The share of the Consumer Discretionary Exhibit 39: The share of Transport Equipment in Korea
sectors market-cap first fell and then has been rising has been systematically rising
since Indias per capita income hit US$1K
30% 20% R = 0.8741
Equipment Index Market-

R = 0.3859
Share of Consumer
Discretionary Index
25%
Cap (as a % of total)

Share of Transport
15%
20%
total)
15% 10%
10%
5%
5%
0% 0%
0 500 1,000 1,500 2,000 5,000 15,000 25,000 35,000
Source: CEIC, World Bank, Ambit Capital research Source: CEIC, World Bank, Ambit Capital research
The same trend was also visible in Korea, a country with much higher per capita
incomes than India (see the exhibit above). This in turn suggests that the share of
consumer discretionary goods in GDP is likely to rise systematically even beyond the
US$4K level.
Insight #3: The market-cap share of Indias Financial Sector Index is set to
rise over the next decade
The share of Savings in GDP
Cross-country evidence suggests that the share of Savings in GDP initially increases initially increases as per capita
as per capita incomes rise (see the exhibit below). However, after breaching a certain incomes rise but starts declining
per capita income level, the share of Savings in GDP starts declining (see the exhibit after a certain level
below). The inflexion point at which this rise becomes a decline is sufficiently high
and in this case amounts to about US$6000.
Exhibit 40: Cross-country evidence suggests that the share of Savings in GDP
initially rises as per capita incomes rise and then declines after a certain threshold of
per capita income is hit
60%
R = 0.4453
Share of savings in GDP
40%
(in %)
20%
0%
- 2,000 4,000 6,000 8,000 10,000 12,000
Source: CEIC, World Bank, Ambit Capital research, Note: Countries covered include Indonesia (CY96-13), India
(CY94-13), Thailand (CY94-13, Malaysia (CY94-13) and the Philippines (CY94-13).
Correspondingly, cross-country evidence suggests that the Financial Services sectors

market-cap (as a share of the market-cap of the broader market) initially rises and as
per capita incomes rise (see the exhibits below).

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Exhibit 41: Financial sector market-cap rises as per capita income rises
60% R = 0.1599
Share of financial sector
(as a % of total)
40%
index
20%
0%
- 2,000 4,000 6,000 8,000 10,000 12,000
Source: CEIC, World Bank, Ambit Capital research, Note: Countries covered include Indonesia (CY96-13), India The share of savings in GDP as
(CY94-13), Thailand (CY94-13, Malaysia (CY94-13) and Turkey (CY04-13). We have included Turkey in this
section owing to data insufficiency problems in other countries in our preferred sample set i.e. for the Philippines. well as the share of the Financial
Services sectors market-cap has
Indias own experience so far corroborates this broader cross-country trend whereby been increasing as Indias per
the share of savings in GDP as well as the share of the Financial Services sectors capita income has been increasing
market-cap has been increasing as Indias per capita income has increased from
US$380 to US$1500 over CY94-13 (see the exhibits below).
Exhibit 42: The share of Savings in India increased as per Exhibit 43: ... with the share of the Financial Services
capita income rose... sectors market-cap also rising over this period
40% R = 0.8712 30% R = 0.7445

Share of Financial sector
Share of savings in GDP
Index (as a % of total)
30% 20%
(in %)
20% 10%
10% 0%
0% -10%
0 500 1,000 1,500 2,000 0 500 1,000 1,500 2,000
Source: CEIC, Bloomberg, Ambit Capital research, Note: The time period Source: CEIC, Bloomberg, Ambit Capital research, Note: The time period
covered is CY94-13 covered is CY94-13
Insight #4: The market-cap share of Indias Industrial Sector Index may not
necessarily rise
The share of Investments in GDP
Cross-country evidence suggests that the share of Investments in GDP initially rises
initially rises as per capita incomes
as per capita incomes rise. However, after breaching a certain per capita income
rise
level, the share of Investment in GDP follows no specific trend (see the exhibit below
on the right).

Strategy
Exhibit 44: Cross-country evidence suggests that the share Exhibit 45: but the trend is ambiguous at higher levels of
of Investment in GDP initially rises as per capita incomes per capita income
rise...
45% 60%
Share of investments in GDP
Share of investments in GDP

R = 0.1379
40%
30%
(in %)
(in %)
20%
15% 0%
- 1,000 2,000 3,000 4,000 - 5,000 10,000 15,000
Per capita income (current USD) Per capita income (current USD)
include Malaysia (CY94-13), Indonesia (CY96-13), India (CY94-13), Thailand include Malaysia (CY94-13) and Thailand (CY94-13).
(CY94-13) and the Philippines (CY94-13).
As regards the Industrial sectors market-cap (as a share of the market-cap of the The Industrial sectors market-cap
broader market), cross-country evidence suggests that the Industrial sectors market- follows no specific trend at low
cap follows no specific trend at low levels of per capita income as well as at high per levels of per capita income
capita income levels (see the exhibits below).
Exhibit 46: At low levels of per capita income, the market- Exhibit 47: and so is the case at higher per capita
cap share of the Industrial appears unclear... income
40% 20%

(as a % of total)
(as a % of total)
index GDP
index GDP
20% 10%
0% 0%
- 1,000 2,000 3,000 4,000 - 5,000 10,000 15,000
Per capita income (current USD) Per capita income (current USD)
include Malaysia (CY94-13), Indonesia (CY96-13), India (CY94-13), Thailand include Malaysia (CY94-13) and Thailand (CY94-13)
(CY94-13) and the Philippines (CY94-13)

Strategy
Indias own experience so far has been reflective of this broader cross-country trend
whereby the share of Investments in GDP has been rising as Indias per capita The share of Investments in GDP
income rose from US$380 to US$1500 over CY94-13 (see exhibit below). However, has been rising as Indias per
the share of the Industrials sectors market-cap has followed no specific pattern (see capita income rose from US$380 to
the exhibit below). US$1500
Exhibit 48: The share of Investments in India rose as per Exhibit 49: but the trend regarding the market-cap
capita income rose... share of Industrials in the broader market remains
ambiguous
40% R = 0.9185 20%

Share of investments in
Index (as a % of total)

30%
(in %)
GDP
20% 10%
10%
0% 0%
0 500 1,000 1,500 2,000 0 500 1,000 1,500 2,000
Source: CEIC, Ambit Capital research, Note: The time period covered is CY94- Source: CEIC, Ambit Capital research, Note: The time period covered is CY94-
13. 13.

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Section 4: Predicting the next 15 entrants

"Coming up with names is not the problem. Its deciding which to discard and
which to buy and how long to hold on to them that takes the work."
- Ralph Wanger and Everett Maitlin in A Zebra in Lion Country (1999).
Summary: Having established the broad shape of where the entrants will come (both
in terms of size and in terms of sector), we proceed to identify the likely entrants. We
believe five entrants will list through IPOs and these will come from sectors that are
significantly under-represented in the Sensex. Within the listed universe, we use our
proprietary filters such as the greatness framework, Coffee Can Portfolio and P-75
list of connected companies to arrive at ten stocks that are set to enter the Sensex in
the next decade.
In this section we first discuss the five potential mega IPOs headed for the Sensex
followed by a discussion on ten Sensex bound stocks from the currently listed
universe.
Mega IPOs to look forward to

In order to identify five stocks, we start with underlying themes that will gain traction
in the next decade. The sweeping changes in the economy, triggered by the Modi We identify five, as yet unlisted,
reset, could potentially result in new sectors listing on the bourses in the next decade. companies that can potentially
We see three specific themes playing out: enter the Sensex
1. Sectors with significant Private Equity funding:

Indias e-commerce industry has attracted the attention of Venture Capital (VC) and Indias e-commerce market is
Private Equity (PE) funding. Along with the overall economic growth story (as detailed currently witnessing a VC/PE-
in Section 2 of this report), Indias e-commerce opportunity is also being driven by a funded boom
rapid increase in Internet users in general (267mn users as at December 2014, up
from 19mn in December 2010) and broadband access in particular (86mn from
11mn during the same period). Mobile penetration which is instrumental in
increasing e-commerce adoption via apps on smartphones is now nearing 100% in
India with 970mn wireless subscribers (March 2015) and a population of 1.21bn
(Census 2011).
NASSCOM pegs Indias e-commerce revenues in FY14 at US$10.5bn and estimates it
to grow at 33% in FY15 to US$14bn (Source:
http://www.financialexpress.com/article/industry/companies/nasscom-pegs-e-
commerce-revenue-growth-at-33-to-14-billion-in-fy15/41450/)
VC and PE players have chased this growth rapidly by funding e-commerce startups
in India. This funding has led to a proliferation of e-commerce platforms and the
emergence of brands such as Flipkart, Ola and Snapdeal in the past few years. With
every round of funding, the valuations of these e-commerce companies have risen
steadily. There are currently seven Indian companies that are part of the Wall Street
Journals Global Billion Dollar Startup Club (see Exhibit 50 below).
Exhibit 50: The Indian companies in WSJ's Billion Dollar Startup Club
Company Valuation (US$bn) Total Equity Funding (US$ mn) Last Valuation WSJs elite club of startups features
seven Indian companies
Flipkart 15.0 3,000 April 2015
Ola Cabs 2.5 677 April 2015
InMobi 2.5 216 Dec 2014
Snapdeal 2.0 1,000 Oct 2014
Paytm (One97 Comm) 1.9 593 March 2014
Quikr 1.0 350 Sept 2014
Zomato 1.0 163 March 2015
Source: Wall Street Journal website, The Billion Dollar Startup Club section as on 11 June 2015, Ambit Capital
research

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At an estimated valuation of US$15bn, Flipkart is already larger than 11 of the listed Flipkart is already larger than
Sensex stocks, as can be seen in the exhibit below. many Sensex stocks
Exhibit 51: Flipkart vs select Sensex stocks
Company Market-cap (US$bn)
Flipkart 15.0
M&M 12.1
Bajaj Auto 10.7
BHEL 9.2
Dr Reddys 8.9
Vedanta 8.0
Hero Moto 7.9
Cipla 7.7
GAIL 7.9
Tata Steel 4.6
Hindalco 3.8
Tata Power 3.1
Source: WSJ, Bloomberg, Ambit Capital research. Note: Flipkart valuation is based on the WSJ Billion Dollar
Startup Club as per 17 June 2015. Market-cap for Sensex stocks is as per 17 June 2015.
As these companies grow larger, VC/PE funds could likely seek an exit. Whilst SEBIs
VC/PE investors will seek to exit in
current listing norms appear restrictive with regards to profits (track record of
the next decade, providing an
distributable profits for at least three out of the immediately preceding five years) and
opportunity for a public listing of
promoter holding (locked in for three years), SEBI is reportedly mulling a new
these startups
platform aimed at helping start-ups (Source: http://goo.gl/Gy6nOz). Moreover, a
NASDAQ listing is always an option for these start-ups and has been utilised in the
past by tech companies such as MakeMyTrip (in August 2010) and much earlier by
Rediff (in 2000).
Thus, whilst under current norms, a listing appears unlikely in the near term, we Current listing norms could turn
believe that in the next decade, these startups will look at an IPO to: (a) fund their more amenable in the next decade
growth on a larger scale; (b) provide exits to their PE investors; and (c) compete on a
global platform. We highlight that, Alibaba, the Chinese-owned global e-commerce
major, holds the record for the biggest IPO in the world, raising US$25bn in 2014,
topping the Agricultural Bank of Chinas 2010 IPO of US$22bn (Source:
http://goo.gl/9fzKSF).
Most likely Sensex entry candidates: As outlined above, we expect the large e- Our choices: Flipkart and Paytm
commerce startups to list in the coming decade. Out of these, we choose Flipkart
and Paytm for their leading positions (both in terms of scale and valuation) among
competition.
2. Sectors that will come into play via disinvestment:
In the current Sensex, eight of 30 stocks had issued shares through an IPO in the past Big-ticket disinvestment will return
15 years (i.e. after 2000). Out of these eight stocks, we note that five (Coal India, under the current Government
ONGC, Maruti, NTPC and GAIL) were driven by Government-led disinvestment. The
listing of these stocks provided investors with stocks to play meaningful investment
themes, ranging from passenger cars to coal mining. Their IPOs were also large and
eventually these stocks were included in the Sensex.

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Exhibit 52: Large IPOs since 2000 that resulted in Sensex stocks
Company Year of IPO IPO Size (`bn) Entered Sensex in
Coal India Oct 2010 150 2011
ONGC March 2004 95 2003
Cairn India Dec 2006 58 2007
TCS Aug 2004 54 2005
NTPC Oct 2004 54 2005
Bharti Airtel Jan 2002 8 2003
Maruti Suzuki June 2003 10 2004
GAIL India Feb 2004 16 2012
Source: SEBI, BSE, Bloomberg, Ambit Capital research
In FY04, the last year of the then BJP-led National Democratic Alliance, the
Government raised `155bn, a record at that time, and among only four of 12
instances where the actual disinvestment receipts exceeded targets.
Exhibit 53: Disinvestment trends from FY92 to FY04 The BJP-led NDA Government has
a track record for big-ticket IPOs of
(` bn)
Target Receipts Actual Receipts public sector companies
180 Disinvestment receipts
160 touched a new record in FY04
140
120
100
80
60
40
20
0
FY92 FY93 FY94 FY95 FY96 FY97 FY98 FY99 FY00 FY01 FY02 FY03 FY04
Source: Department of Disinvestment, Ambit Capital research
Over the next decade, we expect the current NDA Government to aggressively divest and has set a steep target for
its stake in certain Central Public Sector Enterprises (CPSEs). For FY16 alone, the FY16
Government has set a steep target of `695bn and recently, Finance Minister Arun
Jaitley reiterated plans to stick to these targets (Source: http://goo.gl/x1Sss2).
As most of the large (Maharatna and Navratna) CPSEs are already listed (except Almost all CPSEs are listed, but
Hindustan Aeronautics Limited and Rashtriya Ispat Nigam Limited), the Government many options exist among smaller
would look at Follow-up Public Offers (FPOs) for raising funds. For new issues, the ones
Government could choose from smaller CPSEs (Miniratna Category I with 55
companies and Category II with 17 companies). These include Airports Authority of
India, Housing & Urban Development Corporation (HUDCO), India Tourism
Development Corporation (ITDC), Indian Railway Catering & Tourism Corporation
(IRCTC) as some of the interesting CPSEs that could open up new investment themes
if they were listed in the next decade. We highlight recent media reports citing
Government plans to corporatise and sell shares of the Airports Authority of India
(AAI) (Source: http://goo.gl/gMgpah)
Most likely Sensex entry candidate: We believe that the current NDA Government Our choice: Hindustan Aeronautics
would opt for at least one large IPO in the next decade to convey its commitment to Limited
divestment. Of the two remaining Navratna CPSEs yet to list, we choose Hindustan
Aeronautics Limited (HAL) as the mostly likely among Government-led
disinvestments to make it into the Sensex in the next decade. We see HAL as a play
on the role of defense in Prime Minister Modis Make in India theme.

Strategy
3. Sectors where regulatory hurdles may potentially ease:

Increasing clarity on regulatory issues in sectors such as insurance and real estate
could boost IPOs from these sectors and provide potential entrants into the Sensex.
In insurance, the Indian Parliament passed the Insurance Bill in March 2015 (Lok With regulatory hurdles lifted,
Sabha on 4 March 2015 and Rajya Sabha on 12 March 2015), paving the way for a Indias insurance sector could see a
hike in the FDI limit in insurance companies to 49% from 26%. This will pave the way few big-ticket listings
for large Banking and Financial Services (BFSI) entities like ICICI Bank and SBI to list
their insurance joint ventures. As highlighted in our thematic report, Demergers and
alpha generation dated March 10, 2015 (click here for details), the contribution of
the life insurance businesses of these entities ranges from 6% to 10% of the sum-of-
the-parts valuation of the listed parent (see Exhibit 54 below). Whilst this may not
seem much from the parents perspective, the listing of the insurance sector will
provide a meaningfully large theme for investors in the next decade.
Exhibit 54: Contribution from non-lending business is negligible in the SOTP
valuations for these banks and NBFCs
% contribution of different
ICICI Kotak
businesses in Consolidated SBI Valuation Methodology
Bank Mahindra
valuation
Standalone lending business 77% 77% 75% Excess return to equity model
Excess return to equity model; P/B
Other Lending business 12% 6% 12%
multiple
Multiple of NBAP profits;
Life Insurance 6% 10% 2%
Embedded value
Asset Management 1% 2% 2% % of AUM
Investment Banking/Broking 2% 2% 9% P/E multiple
Others 2% 3% 0%
Total 100% 100% 100%
Source: Company, Ambit Capital research.
In real estate, SEBI approved Real Estate Investment Trusts (REITs) in 2014. Whilst Listing of REITs could also open up
this was seen as a positive for rolling out REITs in India, doubts persist on taxation a new theme for investing
issues such as minimum alternate tax and distribution tax of these entities. As and
when these doubts are cleared by the Government, listing of REITs could provide an
interesting investment theme for investors.
Most likely Sensex entry candidate: From the above, we choose ICICI Prudential Our choice: ICICI Prudential Life
Life Insurance as the most likely candidate to enter the Sensex in the next decade.
Whilst HDFC Life will also likely list, we see higher probability of ICICI Prudential Life
making it into the Sensex due to its larger size (ICICI Prudential is larger in terms of
premiums at `153bn vs `148bn for HDFC Life, as well as assets under management
at `1trn vs `670bn for HDFC Life.
Finally, we add Caf Coffee Day (CCD) as our fifth Sensex entry candidate through We add Caf Coffee Day as a
an IPO. CCD is Indias largest coffee conglomerate and a play on consumer Consumer Discretionary play
discretionary which, as Section 2 shows, will increase in size over the longer term.
We summarise our choices of companies that will enter the Sensex through IPOs in
the next decade in the following exhibit.
Exhibit 55: Five stocks that will enter the Sensex through IPOs
Name Sector Rationale
Already India's biggest e-commerce company in terms of
Flipkart Ecommerce
valuations; poised to benefit from the boom in ecommerce
Increasingly taking on banks in the digital payments space;
Paytm Digital Payments
strong parentage with investment from Alibaba (China)
Play on increasing share of BFSI in general and insurance in
ICICI Prudential Life Life Insurance
specific as economic growth increases
Well placed to benefit from the shift towards consumer
Coffee
Caf Coffee Day discretionary from consumer staples; largest coffee
Conglomerate
conglomerate in India
Government-owned defence major; key beneficiary of 'Make
Hindustan Aeronautics Ltd
Defence in India' theme; ideal candidate for a big-bang disinvestment-
(HAL)
led IPO
We now provide a snapshot of these companies along with their financials (where
available):

Strategy
Flipkart
Introduction: Formed in September 2007 by Sachin Bansal and Binny Bansal, Valued at US$15bn, Flipkart is the
Bengaluru-based Flipkart is the largest e-retail company in India, with a gross highest-ranked Indian startup in
merchandise value (GMV) run-rate of US$4bn. With more than 10 million downloads the WSJ elite startup list
on the Android store, it is the eighth most-downloaded free app in India. The
company stocks 20 million products across more than 70 categories and has 26
million registered users and 20,000 employees.
Financials: Flipkart is registered in Singapore and its financials are therefore not in
the public domain. Its current gross merchandise value (GMV) run-rate is US$4bn
and the company aims to increase that to US$8bn by December 2015. This is higher
than peers such as Snapdeal and Amazon India. Flipkarts various Indian subsidiaries
reported revenues of `30.3bn and losses of `7.2bn in FY14 (http://goo.gl/lj8YPy).
Funding: Flipkarts largest investors are Tiger Global and Intervision Services
Holding (Naspers, South Africa), which between them hold close to 50% in the
Singapore entity, whilst Sachin Bansal and Binny Bansal hold 8.7% each
(http://goo.gl/8txtbB). Flipkart raised US$1.9bn in 2014 (from DST Global, Tiger
Global and Naspers) and raised a further US$550mn in March 2015
(http://goo.gl/OMYUIu, http://goo.gl/OYZuMp).
Rationale for inclusion as a Sensex entry candidate: Flipkarts current size Given its size and growth path,
(US$15bn valuation, as per WSJs Billion Dollar Startups) already places it ahead of Flipkart is well placed as a
many Sensex stocks. E-retail is already a compelling theme among private investors potential Sensex entrant
and, in the next decade, should move to the public investment domain. According to
BCG, the Indian e-commerce markets GMV is likely to increase from US$16bn-17bn
in 2014 to US$60bn-70bn in 2019, an annual growth rate of more than 30-34%. As
it grows larger in size and achieves profitability, Flipkart has a good chance of finding
its way into the Sensex in the next decade.
Paytm
Introduction: Paytm is the flagship brand of One97 Communications, a digital Paytm is making rapid strides in
goods and mobile commerce company founded by Vijay Shekhar Sharma. In FY13, the digital payments space
Paytm received a licence from the RBI for semi-closed digital wallet which it launched
in FY14. It also provides an online B2C marketplace. As of June 2015, the company
claims that there are 50 million wallets registered on its platform. Headquartered in
New Delhi, One97 has an employee strength of 1,200.
Financials: One97 has provided financial statements for FY14, a snapshot of which
is provided in the exhibit below. Founder, Vijay Shekhar Sharma held a 37% stake in
the company, whilst SAIF III Mauritius Company held 35%, as at March 31, 2014. On
the e-retail marketplace, Paytm reported a GMV run-rate of US$1.5bn in June 2015
and plans to achieve GMV of US$3bn-4bn by end-FY16 (http://goo.gl/NqJble).

Strategy
Exhibit 56: One97 Summary Financials

(` mn)
Profit & Loss Account FY13 FY14
Total Revenue 2,233 1,978
Total Expenses (1,499) (1,744)
EBIDTA 733 235
Depreciation, amortization (234) (182)
Finance expenses (5) (11)
PBT 495 41
Tax (142) (21)
PAT 352 20
Balance Sheet FY13 FY14
Liabilities
Shareholder funds (incl. share application money) 2,980 3,000
Non-current liabilities 36 23
Current liabilities 496 564
Total Liabilities 3,512 3,586
Assets
Fixed Assets 480 403
Non-current assets 206 205
Deferred Tax assets (net) 34
Loans and advances 60 224
Other non-current assets 384 16
Current Assets 2,766 2,704
Total Assets 3,895 3,586
Source: Company, Ambit Capital research
Funding: Paytm shot into the limelight in February 2015 when it raised funding from
Alipay Financial (part of Alibaba, the Chinese e-commerce company) for its mobile
commerce and digital wallet operations. In March 2015, Ratan Tata, Chairman
Emeritus, Tata Sons, joined Paytm as an advisor and made a minor investment in the
company.
Rationale for inclusion as a Sensex entry candidate: One97 also features on the Paytm can potentially disrupt
WSJs Billion Dollar Startup Club (see Exhibit 50), with an estimated valuation of Indias payment infrastructure over
US$1.9bn. Given its convenience over cash and ease of use via mobile apps, digital the longer term
wallets are witnessing rapid growth. Paytm is already a large player (50mn digital
wallets) in this space. Moreover, using its platform, it can potentially provide a wider
array of financial services. For instance, it can distribute financial products such as
mutual funds. When it lists, it will likely be a significant Indian financial services
company. The presence of Alibaba provides a competitive edge.

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ICICI Prudential Life Insurance

Introduction: ICICI Prudential Life Insurance Company (IPLIC) is a joint venture ICICI Prudential is among Indias
between ICICI Bank and Prudential (UK). As at end-FY15, ICICI Bank held a 74% foremost insurance companies
stake in the venture, whilst Prudential held the remaining 26%. IPLIC was among
India's first private sector life insurance companies when the Insurance Regulatory
Development Authority of India (IRDA) was formed, and approvals were given to
private players in 2000. In FY15, IPLIC became the first private life insurer in India to
achieve Assets Under Management (AUM) of `1 trillion. On a Retail Weighted
Received Premium (RWRP) basis, IPLIC is the leading player among private life
insurance companies.
Exhibit 57: Financials - Key financial parameters
(`bn) FY13 FY14 FY15
Retail Weighted Received Premium 33.1 32.5 46.0
Profit After Tax 15.0 15.7 16.3
New Business Profit 5.3 4.3 5.3
Solvency ratio (%) 396.0 372.0 337.0
Assets under Management 741.6 806.0 1,001.8
Return on Equity (%) 31.2 32.7 33.9
Rationale for inclusion as a Sensex entry candidate: As written by our BFSI Team ICICI Prudential Life is our pick as a
in the Demergers and Alpha Generation report dated March 10, 2015, consensus new theme insurance in Indias
values the life insurance business of banks at ~2.5-3.5x of embedded value. This is BFSI sector
also well supported by deals (Max India, Bajaj Finserve and HDFC Life) in the sector.
Whilst the growth rates in the sector have sobered (4% growth in new business
premium over FY08-14) relative to the past (53% over FY05-08), we believe a listing
from the insurance sector has a high probability given that regulatory uncertainty has
lifted, with the passage of the Insurance Bill. Given IPLICs dominant position in the
sector and our thesis of BFSI maintaining its share in overall GDP (as outlined in
Section 2), we expect the company to stand a good chance of entering the Sensex in
the next decade.
Caf Coffee Day

Introduction: Caf Coffee Day (CCD) was founded by entrepreneur VG Siddhartha CCDs huge retail network is a key
and is part of Coffee Day Global Limited. CCD opened its first outlet in 1996. As per competitive advantage
its website, CCD has more than 1,423 cafes spread across 200 cities/towns in India.
CCDs founder VG Siddhartha has varied interests including financial services
(Way2wealth) and logistics (SICAL). CCDs group companies include Coffee Day
Beverages (dispensing machines), Coffee Day Fresh & Ground (retail stores), Coffee
Day Exports (exporting green coffee) and Coffee Day Hotels & Resorts (resorts).
Financials: Being a privately held company, CCD has not yet publicly released its
financial statements. As per news reports, CCD had revenues of `15bn (Source:
http://goo.gl/kWHjOZ). In 2010, a group of investors (KKR India Advisors, New Silk
Route PE Asia Fund and Standard Chartered Equity PE Fund) had invested US$149mn
in CCDs holding company. News reports suggest that CCD is preparing for an IPO to
raise `11.5bn in the near to medium term, ahead of which earlier this year, CCD had
reportedly done a pre-IPO placement among domestic investors (Source:
http://goo.gl/OCt4PN).
Rationale for inclusion as a Sensex entry candidate: CCDs founder, VG CCD is a unique play on Consumer
Siddhartha has aggressive growth plans for CCD. As far back as 2011, he was Discretionary Services
quoted as saying that he wanted CCD to be in the top four retail coffee brands in
the world. (Source: http://goo.gl/SMb6rB). We believe CCDs IPO could provide an
interesting new theme in the Quick Service Restaurant (QSR) sector, which is itself a
play on overall Consumer Discretionary Services.

Strategy
Hindustan Aeronautics Limited

Introduction: Incorporated in 1940, Hindustan Aeronautics Limited (HAL) is fully HAL is currently owned and run by
owned by the Government of India. HAL operates under the administration of the the Government of India
Ministry of Defense and Department of Defense Production and manufactures,
assembles and maintains various types of fighter jets, helicopters, etc. HAL also
makes equipment for structures for aerospace launch vehicles and satellites of the
Indian Space Research Organization. HAL is based in Bengaluru and its employee
strength was 32,108 as of March 31, 2014.
Exhibit 58: Summary Financials for HAL (` mn)
Profit & Loss Account FY13 FY14
Total Revenue 1,76,435 1,77,533
Total Expenses (1,35,452) (1,35,730.64)
EBIDTA 40,983 41,802
Depreciation, amortization (6,013) (6,025)
Finance expenses - -
PBT 34,970 35,777
Tax (5,001) (8,852)
PAT 29,969 26,925
Balance Sheet FY13 FY14
Shareholder funds 1,33,782 1,50,146
Non-current liabilities 86,077 74,194
Current liabilities 3,55,428 4,14,443
Total Liabilities 5,75,287 6,38,784
Fixed Assets 21,111 22,729
Non-current Investments 7,073 7,074
Loans and advances 1,355 1,332
Other non-current assets 1,19,431 61,803
Current Assets 4,26,316 5,45,846
Total Assets 5,75,287 6,38,784
Rationale for inclusion as a Sensex entry candidate: The NDA Government HAL can provide a meaningful
raised FDI in Indias defense sector to 49% from 26% in August 2014. This was soon exposure to the defense theme in
followed by the ambitious Make in India campaign launched by the Government in India
September 2014 which focuses on boosting manufacturing infrastructure across
various sectors, including defense manufacturing. India has the third-largest armed
forces in the world and meets 60% of its requirements by imports. The Government
plans to invest `250bn over the next 7-8 years. HAL is well placed to be a key
beneficiary of this initiative given its long history and manufacturing capabilities.
News reports also suggest that the Indian Government has revived plans to list HAL
to help meet its disinvestment target of `695bn in FY16. HALs listing could provide a
new investment theme on defense manufacturing. As it grows in size, we believe,
HAL is a likely candidate for entering the Sensex in the next decade, following its
listing.
Sensex-bound stocks from the currently listed universe

To identify potential Sensex entrants from the current listed universe, we use a five We use a five-step process to
step process to identify ten firms that are most likely to enter the index over the identify the ten firms from the
coming decade. current listed universe
Step 1: Efficient capital allocation
Over the past four years, we have successfully used our greatness framework to
measure the efficiency of a firms capital allocation. The framework looks for firms
that judiciously invest capital and turn those investments into sales, profits, balance
sheet strength and most importantly free cash flows which then feed back into the
future growth needs of the firm.

Strategy
Exhibit 59: The greatness framework
a. Investment (gross b. Conversion of

block) investment to sales
(asset turnover, sales)
c. Pricing discipline
(PBIT margin)
e. Cash generation d. Balance sheet

(CFO) discipline (D/E, cash We start with our greatness
ratio) framework to identify the most-
efficient capital allocators
This framework has been the basis of stock selection for both our tenbagger and
Good & Clean portfolios. For more details on the framework please refer to our latest
tenbagger note here.
For a firm to be considered for Sensex inclusion, the greatness score should be 67%
or higher. Thus, at the first step, we weed out all firms that fail to meet this cut-off.
We however make an exception for Asian Paints. Whilst the company fares
reasonably well on 'greatness' over FY09-14, (the company's greatness score is 58%),
using the financials of the last ten years, the company fares well on all the
parameters on 'greatness'. Further, on a ten-year basis, the company's greatness
score is far more superior to both Berger Paints and Pidilite Industries. Thus, given the
company's size and given the company's historical track record, we make this the only
exception to the greatness cut-off.
Step 2: Consistent financial performance

Once filtered for greatness, we test the universe for consistency of financial
performance using our twin filters of growth and profitability (we had used these
same filters for creating our Coffee Can Portfolio in November last year).
a) Consistent sales growth of more than 10%: With the countrys nominal GDP We check the resultant firms for
having grown at 15% per annum on average over the last several years, we consistency in financial
measure the consistency of growth by using a more relaxed filter of 10% sales performance using our twin filters
growth in at least seven of the past ten years. of growth and profitability
b) Consistent RoCE of over 15%: With 15% being the approximate cost of capital
in the country, we use a profitability filter of 15% or more on pre-tax ROCE in at
least seven of the past ten years.
For the Financials space, we modify the filters on RoCE and sales growth as follows:
a) RoAs of 1.1% for banks (and RoEs of 15% for non-banking financials):
Whilst we have used RoE (net profit to average equity) as the return measure for
NBFCs, we have used RoA (net profit to average assets) for banks. Whilst the
underlying profitability of operations reflects in both RoA and RoE, RoE is also
impacted by the leverage or capital position of the bank. Historically, many banks
(especially PSU banks) have delivered high RoEs due to high leverage despite
weak underlying profitability. Therefore, for banks RoAs is a better metric to use.
We identify banks that have delivered RoAs in excess of 1.1% (and NBFCs that
have delivered RoEs in excess of 15%) in at least seven out of the last ten years.
b) Loan growth of 15%: We believe consistency of loan growth is an indication of
a lenders ability to lend over business cycles. Strong lenders ride the down-cycle

Strategy
better, as their competitive advantages surrounding their origination, appraisal

and collection process ensure that they continue their growth profitably either
through market share improvements or upping the ante in sectors which are
resilient during a downturn. Therefore, we identify banks/financial institutions
that have managed to deliver 15% loan growth in at least seven of the past ten
years.
Step 3: Ambits P-75 companies
As the next step, we screen the residual universe to eliminate stocks that are part of
Ambits P-75 companies i.e. companies whose core competitive advantage is
politically connectivity.
We believe such companies are on a weaker footing given the impact of Modis three We carve out firms that are
resets, especially the one pertaining to disruption of crony capitalism. politically connected
Our P-75 index, the index of the 75 most politically connected companies in India,
neatly captures the demise of the connected company model in India.
Whilst this connected company model worked well until October 2010, the share
prices of these connected companies plummeted post the 2G spectrum allocation
report publication. Further, even the brief pre-General Election rally was snuffed out
once the market realised that Modi was in no way going to favour the crony
capitalists (see the exhibit below).
Exhibit 60: The connected companies index has consistently underperformed the
BSE500 since the release of the CAG report in October 2010
340
300
Publication of CAG report in
260 Oct' 10 was an inflection point
220
180
140
100
60
Jan/09
May/09
Sep/09
Jan/10
May/10
Sep/10
Jan/11
May/11
Sep/11
Jan/12
May/12
Sep/12
Jan/13
May/13
Sep/13
Jan/14
May/14
Sep/14
Jan/15
May/15
Ambit Connected Cos Index BSE 500
Source: Bloomberg, Ambit Capital research
Thus, any company in our universe that is part of Ambits P-75 companies
automatically is disqualified from becoming a probable Sensex entrant.
Step 4: Market-cap buckets
The fourth filter that we use pertains to the size of the company as at the beginning of
the period. From our previous discussions, we note that nearly half of the Sensex The fourth filter relates to the size
entrants historically have been firms belonging to the top-100 stocks on free float of the company at the beginning of
market-cap as of the beginning of the period. This would mean that around eight of the decade
the ten entrants from the current listed universe should belong to the top-100 stocks
on free-float market-cap as of today.
Further, the remaining 16% entrants come from the universe outside of the top-100
companies. This would mean that the remaining two companies should belong to the
residual universe (outside of the top-100 companies).
Step 5: Pick and choose from the short-list
Finally, we short-list stocks where
In the final step, from the stocks that clear all our filters, we choose the ones where
we have the maximum conviction
we have the maximum conviction.
Stocks from the top-100 universe on free-float market-cap that clear all our filters
have been shown in Exhibit 61 below. Out of these, stocks which we believe would
likely enter the Sensex ten years hence have been shown in Exhibit 62 below.

Strategy
Exhibit 61: Stocks from the top-100 universe that Exhibit 62: Likely Sensex entrants over the next decade
clear all our filters Company name Ticker
Company name Ticker
Kotak Mahindra Bank Ltd. KMB IN
Kotak Mahindra Bank Ltd. KMB IN
HCL Technologies Ltd. HCLT IN
HCL Technologies Ltd. HCLT IN
IndusInd Bank Ltd. IIB IN
Lupin Ltd.* LPC IN
Asian Paints Ltd. APNT IN
IndusInd Bank Ltd. IIB IN
Asian Paints Ltd. APNT IN Nestle India Ltd. NEST IN
Nestle India Ltd. NEST IN Eicher Motors Ltd. EIM IN
Eicher Motors Ltd. EIM IN Page Industries Ltd. PAG IN
Titan Company Ltd. TTAN IN Pidilite Industries Ltd. PIDI IN
Britannia Industries Ltd. BRIT IN Source: Bloomberg, Capitaline, Ambit Capital research. *Whilst IndusInd Bank
Shriram Transport Finance Company Ltd.# SHTF IN meets the RoA cut-off of 1.1% in six out of the last ten years, we have included
the bank as it is ranked the best bank on our greatness framework. We have
LIC Housing Finance Ltd.# LICHF IN
also filtered this list for clean accounting quality using our forensic accounting
Sundaram Finance Ltd.# SUF IN framework.
Rural Electrification Corporation Ltd.# RECL IN
Power Finance Corporation Ltd.# POWF IN
Page Industries Ltd. PAG IN
Pidilite Industries Ltd. PIDI IN
Source: Bloomberg, Capitaline, Ambit Capital research. Note: * Lupin
is already entering the Sensex on 22 June and hence has not been
considered. # indicates we do not have a greatness framework for
these firms. We have also filtered this list for clean accounting quality
using our forensic accounting framework.
Similarly, stocks from the next 100 universe on free-float market-cap that clear all our
filters and which we believe would likely enter the index a decade later have been
shown in Exhibits 63 and 64 below.
Exhibit 63: Stocks from the 101-200 universe that Exhibit 64: Likely Sensex entrants over the next decade
clear all our filters Company name Ticker
Company name Ticker
Torrent Pharmaceuticals Ltd. TRP IN
Mahindra & Mahindra Financial Services Ltd.# MMFS IN
PI Industries Ltd. PI IN
Shriram City Union Finance Ltd.# SCUF IN
Source: Bloomberg, Capitaline, Ambit Capital research. We have also filtered
Amara Raja Batteries Ltd. AMRJ IN
this list for clean accounting quality using our forensic accounting framework.
Glaxosmithkline Consumer Healthcare Ltd. SKB IN
Emami Ltd. HMN IN
City Union Bank Ltd. CUBK IN
Torrent Pharmaceuticals Ltd. TRP IN
Ipca Laboratories Ltd. IPCA IN
Dewan Housing Finance Corporation Ltd.# DEWH IN
PI Industries Ltd. PI IN
Persistent Systems Ltd. PSYS IN
Berger Paints India Ltd. BRGR IN
Gruh Finance Ltd.# GRHF IN
Vakrangee Ltd. VKI IN
The South Indian Bank Ltd. SIB IN
Source: Bloomberg, Capitaline, Ambit Capital research. Note: #
indicates we do not have a greatness framework for these firms. We
have also filtered this list for clean accounting quality using our
forensic accounting framework.

Strategy
The final list

We present the results of our five-step screening of the listed companies universe to
identify the most likely Sensex entry candidates over the next ten years in Exhibit 65
below.
Exhibit 65: The most likely Sensex entry candidates over the coming decade
Mcap 6M ADV FY16 FY16
Company Name Ticker Entry hypothesis
(US$ mn) (US$ mn) P/E P/B
Top 100 stocks on
free-float mcap
Leader in Infra Management Services; scores high on our capital allocation, portfolio mix,
HCL Technologies Ltd. HCLT IN 19,838 37.5 15.8 4.3
operational excellence and management framework
Kotak Mahindra Bank Among the best-run private sector banks; loan book growth will pick up post ING Vysya
KMB IN 18,322 25.1 25.8 3.7
Ltd. integration
Enduring leadership position set to sustain led by supply-chain and scale efficiencies, market
Asian Paints Ltd. APNT IN 10,528 20.3 35.9 11.9
share gains and proven management
Established brand equity and pricing power position; will gain from shift in consumer spend
Nestle India Ltd. NEST IN 8,683 6.1 42.2 17.5
towards discretionary segment
Leader in niche motorcycle segment; well placed to gain from rise in consumer discretionary
Eicher Motors Ltd. EIM IN 7,797 28.5 49 14.6
spend
Leader in CV financing; expansion in new areas led by strong franchise will drive market share
IndusInd Bank Ltd.* IIB IN 6,794 13.9 19.1 3.5
gains and above-system loan book growth
Sustainable brand leadership, superior fundamentals make Pidilite a high-quality defensive
Pidilite Industries Ltd. PIDI IN 4,197 4.1 40.3 9.8
play in consumer sector
Greater growth longevity than most consumer companies; sustained competitive advantages
Page Industries Ltd. PAG IN 2,506 2.8 61.3 31.9
will support premium valuations
Next 100 stocks on free-float mcap
Torrent Pharmaceuticals Increasing presence in generics (US, Europe) and branded markets (India and EMs); new
TRP IN 3,310 2.1 21.6 6.6
Ltd. management driving high RoCEs
Leading agro-chemical player with proven track record; entry into specialty chemicals should
PI Industries Ltd. PI IN 1,350 2 28.5 7.6
sustain high growth phase
Unlisted
Already India's biggest e-commerce company in terms of valuations; poised to benefit from the
Flipkart N/A N/A N/A N/A N/A
boom in e-commerce
Increasingly taking on banks in the digital payments space; strong parentage with investment
Paytm N/A N/A N/A N/A N/A
from Alibaba (China)
Play on increasing share of BFSI in general and insurance in specific as economic growth
I Pru Life N/A N/A N/A N/A N/A
increases
Well placed to benefit from the shift towards consumer discretionary from consumer staples;
Caf Coffee Day N/A N/A N/A N/A N/A
largest coffee conglomerate in India
Government-owned defence major; key beneficiary of 'Make in India' theme; ideal candidate
Hind. Aeronautics N/A N/A N/A N/A N/A
for a big-bang disinvestment-led IPO
Source: Bloomberg, Capitaline, Ambit Capital research. Note: We have also filtered this list for clean accounting quality using our forensic accounting framework.
*While IndusInd Bank meets the RoA cut-off of 1.1% in six out of the last ten years, we have included the bank as it is ranked the best bank on our greatness
framework.
Note that in Exhibit 65 above we have only considered firms from the top-200
companies on free-float market-cap as of today. Historical trends suggest that ~6%
of the fresh entrants belong to the universe outside of the top-200 companies. Thus,
in todays context, this would mean that 1 of the likely 15 entrants may be from this
universe. However, given that we do not cover most of these names (in the universe
outside top 200), we could not pick a name to be included in the list of entrants. We
however present the universe outside of the top-200 companies that clear all our cut-
offs in Exhibit 66 below.

Strategy
Exhibit 66: The list of firms outside of the top-200 companies that meet our criteria for
inclusion
Mcap 6M ADV
Company Name Ticker FY16 P/E FY16 P/B
(US$ mn) (US$ mn)
Abbott India Ltd. BOOT IN 1,288 0.3 29.9 7.1
Hexaware Technologies Ltd. HEXW IN 1,229 6.9 20.1 5.8
Balkrishna Industries Ltd. BIL IN 1,058 1.5 12.6 2.4
eClerx Services Ltd. ECLX IN 738 1.1 17.0 5.7
Astral Poly Technik Ltd. ASTRA IN 718 0.8 32.2 6.8
Kitex Garments Ltd. KTG IN 678 2.1 34.1 12.1
Dhanuka Agritech Ltd. DAGRI IN 456 0.3 23.6 5.8
Cera Sanitaryware Ltd. CRS IN 400 0.6 30.6 6.1
Vinati Organics Ltd. VO IN 400 0.3 19.3 4.8
Ratnamani Metals & Tubes Ltd. RMT IN 386 0.3 12.2 2.3
Kewal Kiran Clothing Ltd. KEKC IN 411 0.1 33.5 7.3
Poly Medicure Ltd. PLM IN 339 0.3 39.1 9.1
Mayur Uniquoters Ltd. MUNI IN 290 0.4 23.2 5.4
Huhtamaki PPL Ltd. HPPL IN 256 0.2 DNA DNA
Suprajit Engineering Ltd. SEL IN 229 0.2 19.6 4.9
Source: Bloomberg, Capitaline, Ambit Capital research. Note: We have also filtered this list for clean accounting
quality using our forensic accounting framework.
Of this list we only cover Balkrishna Industries and eClerx Services with SELL ratings
on both. Further, we do not think that either of these can compound at 37% CAGR
for the next ten years.
(Assuming that the smallest constituent of the Sensex currently, i.e. Hindalco,
compounds at 15% over the next ten years, its free-float market cap would have
grown to `680bn. The largest company on free float market-cap from the universe
outside the top 200 listed above is Balkrishna Industries. For Balkrishna to reach this
milestone, it will have to compound at ~37% over the next ten years.)
In the next section, we move into company-specific discussions on the likely entrants
along with our bottom-up views on why these companies are headed for the Sensex.

HCL Technologies
BUY
COMPANY UPDATE HCLT IN EQUITY June 22, 2015
Well-positioned in Infrastructure Management Services (IMS)

Technology
HCL Technologies is the fourth-largest India listed IT services company with
revenues of US$6bn (FY15E). The company has received a high score on our
Recommendation
proprietary CAPOM (Capital allocation, portfolio mix, operational excellence,
management) framework due to its prudent capital allocation (FY15E RoE of Mcap (bn): `1,274/US$20
40%), excellent portfolio mix (IMS, engineering), tight execution and a relatively 6M ADV (mn): `2,403/US$37
stable senior management team. Over the last ten years, the companys shares CMP: `906
have compounded annually at 25% vs 15% for the Sensex. TP (12 mths): `1,100
HCLTs key parameters Upside (%): 21
Parameter Result Comment
RoCE troughed in FY11, as the company Flags
RoCE FY09: 28%, FY10: 20%, FY11: 24% invested heavily in new projects, resulting in
Trajectory FY12: 29%; FY13: 38%; FY14: 44% EBIT margin compression. Over FY12-14, it
Accounting: GREEN
has benefitted from this strategy. Predictability: AMBER
Strong revenue growth in FY11 was Earnings Momentum: AMBER
Sales (US$) accompanied by margin contraction. Since
FY09: 17%, FY10: 24%, FY11: 31%
Growth then, even though growth rates have
FY12: 17%; FY13: 13%; FY14: 14% Performance (%)
Trajectory tapered, the companys profitability has
increased materially
Due to strong margin expansion over FY11- 150
EPS Growth FY09: 27%, FY10: -6%, FY11: 29% 140
14, the companys EPS growth has been
Trajectory FY12: 46%; FY13: 66%; FY14: 61% 130
above 45% in each of the last three years.
120
Due to the strong growth in EPS, the
Share price 110
companys three-year return has been 100
returns 3yr/5yr/10yr 55%/36%/25%
upwards of 50%. HCLT has outperformed the 90
(CAGR)
Sensex in the last three, five and ten years.
Dec-14
Feb-15
Jun-14
Oct-14
Apr-15
Jun-15
Aug-14
Greatness HCLT performs well on almost all parameters
FY10-14:
Model which include balance sheet discipline, sales
D1*
(decile) improvement and pricing discipline. SENSEX HCLT
Source: Company, Bloomberg, Ambit Capital research; *Note: D1 is the best decile followed by D2, D3,
Improved profitability after a period of investments in new projects Source: Bloomberg, Ambit Capital research
In the past decade (FY05-14), HCLTs revenues (organic)/EPS have increased by
23% each. RoCE has remained above 19% and has accelerated from 24% in
FY11 to 44% in FY14, due to EBIT margin improvement from 16% over FY05-11
(average) to 20% over FY12-14 (average). EBIT margins suffered over FY09-11,
as it took on new projects which were margin-dilutive initially (re-badged
employee costs, high onsite proportion) but became profitable over time.
HCLT has comfortably outperformed the index on returns
HCLTs share price has outperformed the Sensex by 12% CAGR in the last ten
years led by strong revenue/EPS growth. The companys corporate governance
track-record is reasonably good. However, minorities were unfairly treated by
HCL Infosystems, a sister concern in 2005-06 (see Exhibit 7 on the next page).
Strong positioning in IMS and engineering services to support growth
HCLT has the highest exposure (34% of FY14 revenues) to the IMS segment; it
also has a leadership position in this segment. Cost pressures and a large
underpenetrated market (<5% vs ~10% for overall IT services) have led to
faster growth in this service-line (20% vs 11% for industry, FY15, USD, YoY). It is
also the largest player in engineering services, which is emerging as a high
growth segment (13% growth LTM YoY). Emergence of the public cloud is the
key risk to its IMS business. Analyst Details
Slightly under-valued Sagar Rastogi
HCLT is currently trading at 16x FY16E EPS, a 15% premium to its five-year +91 22 3043 3291
average multiple which is justified given its improved profitability and scale. sagarrastogi@ambitcapital.com
Given the companys strong track record of cash conversion (FY10-14 pre-tax
CFO/ EBITDA of 97%), good capital allocation, strong competitive advantages Utsav Mehta, CFA
in the fast-growing IMS space and its FY15-17E EPS CAGR of 14% (second- +91 22 3043 3209
highest after TechM on an adjusted basis), we believe there is scope for further utsavmehta@ambitcapital.com
re-rating. Our TP of `1,100 implies an FY17E P/E of 17x.
HCL Tech
Exhibit 1: Margins have improved in the last three years Exhibit 2: resulting in sharp improvement in profitability
(FY12-14)
Revenues (Rs bn) (LHS) EBIT margin (RHS) 50%

350 28% 45%
300 40%
250 24%
35%
200
20% 30%
150
100 16% 25%
50 20%
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
0 12%
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14 RoE RoCE

Source: Company, Ambit Capital research Source: Company, Ambit Capital research
Exhibit 3: HCLTs funds have been largely accrued Exhibit 4: Dividend has accounted for the largest share of
internally in the last ten years (FY05-14) funds deployed (FY05-14)
Equity Debt raised
Other raised Increase in Interest
1% paid
income 3% cash
6% 2%
6%
Dividend
paid
Investments 28%
25%
Acquisition Capex
CFO 15% 24%
90%
Exhibit 5: HCLT is justifiably trading at a premium to its Exhibit 6: and on a EV/ EBITDA basis
four- and six-year average on a P/E basis
24 1-year forward P/E 20 1-year forward EV/EBITDA
22 18
20 (consensus) (consensus)
18 16
16 14
14 12
12 10
10 8
8
6 6
4 4
Sep-05
Mar-06
Sep-06
Mar-07
Sep-07
Mar-08
Sep-08
Mar-09
Sep-09
Mar-10
Sep-10
Mar-11
Sep-11
Mar-12
Sep-12
Mar-13
Sep-13
Mar-14
Sep-14
Mar-15
Sep-05
Mar-06
Sep-06
Mar-07
Sep-07
Mar-08
Sep-08
Mar-09
Sep-09
Mar-10
Sep-10
Mar-11
Sep-11
Mar-12
Sep-12
Mar-13
Sep-13
Mar-14
Sep-14
Mar-15
P/E 6 yr avg 4 yr avg EV/EBITDA 6 yr avg 4 yr avg
Exhibit 7: Explanation for our flags

Segment Score Comments
HCLT has a stable depreciation rate, high capex productivity and strong cash flow generation. As a result, the company ranks in the top
Accounting GREEN
quartile within the Indian IT universe in our accounting framework.
Unlike certain peers, the company does not provide specific annual or quarterly guidance on revenues or margins. It also has not indicated
medium-term top-line growth targets and the associated timeframe. HCLTs quarterly EPS has been a significant surprise, with an average
Predictability AMBER
surprise of 9% in the last eight quarters. However, its sales figures have been largely in line with consensus expectations (revenue surprise of
1% over the same period).
Minorities were treated unfairly by HCL Infosystems, a sister concern belonging to the same promoter group as HCLT. HCL Infosystems,
among other things, was a reseller of Nokia phones in India. The promoters reduced their stake in HCL Infosystems from 61% in June 2005
Treatment of
AMBER to 57% in December 2005. In February 2006, Nokia decided to set up its own distribution channels in India and as a result, HCL
minorities
Infosystems market share reduced to 50% from 100%. This led to the stock price correcting by about 30%. There has been no other such
incident over the past eight years.

HCL Tech
Income statement (US GAAP)

(` bn) FY13 FY14 FY15E FY16E FY17E
Revenue (US$ mn) 4,687 5,360 5,958 6,789 7,863
Growth 12.9% 14.4% 11.2% 13.9% 15.8%
Revenue 257.3 329.6 369.3 420.9 487.5
Cost of goods sold 172.4 209.7 240.0 274.2 317.9
SG&A expanses 34.5 40.4 45.8 54.1 62.4
EBITDA 57.1 86.8 88.0 98.3 114.2
Depreciation 6.7 7.3 4.5 5.8 7.0
EBIT 50.4 79.4 83.5 92.6 107.2
EBIT Margin 19.6% 24.1% 22.6% 22.0% 22.0%
Other Income 1.6 (0.2) 8.9 10.6 11.8
PBT 52.0 79.3 92.4 103.1 119.0
Tax 12.2 15.5 20.0 22.2 25.6
Rate (%) 23.5% 19.5% 21.6% 21.5% 21.5%
Reported PAT 39.8 63.8 72.4 81.0 93.4
Diluted Adj EPS 28.2 45.1 51.3 57.4 66.2
Balance sheet (US GAAP)

Balance sheet (` bn) FY13 FY14 FY15E FY16E FY17E
Net Worth 142.9 200.0 239.2 288.0 345.1
Other Liabilities 22.1 22.0 18.2 18.2 18.2
Capital Employed 165.1 222.0 257.4 306.2 363.3
Net Block 76.9 82.6 88.0 95.7 104.3
Other Non-current Assets 23.0 23.5 29.9 29.9 29.9
Curr. Assets 130.7 197.5 224.6 277.6 341.4
Debtors 44.6 56.6 65.3 74.4 86.2
Unbilled revenues 17.1 20.2 30.5 34.7 40.2
Cash & Bank Balance 49.8 99.6 102.8 138.8 180.6
Other Current Assets 19.1 21.2 26.1 29.7 34.4
Current Liab. & Prov 65.4 81.6 85.1 97.0 112.4
Net Current Assets 65.2 115.9 139.5 180.6 229.1
Application of Funds 165.1 222.0 257.4 306.2 363.3
Cash flow statement (US GAAP)
Cash flow (` bn) FY13 FY14 FY15E FY16E FY17E
Net Income 41.0 63.8 72.3 81.0 93.4
Depreciation 6.7 7.3 4.4 5.3 6.5
CF from Operations 47.7 68.7 73.3 86.7 100.4
Cash for Working Capital (1.9) (1.9) (22.9) (5.1) (6.6)
Net Operating CF 45.8 66.8 50.4 81.6 93.8
Net Purchase of FA (5.8) (6.5) (12.7) (13.5) (15.6)
Others (18.9) (45.3) 0.1 (0.0) (0.0)
Net Cash from Invest. (24.7) (51.8) (12.6) (13.5) (15.6)
Proceeds from Equity & other 0.3 0.3 0.1 - -
Dividend Payments (8.1) (13.1) (31.4) (32.2) (36.3)
Cash Flow from Fin. (20.0) (12.2) (34.3) (32.2) (36.3)
Free Cash Flow 40.0 60.3 37.7 68.1 78.2
Opening cash balance 25.1 51.6 103.0 102.9 138.8
Net Cash Flow 1.1 2.9 3.5 35.9 41.8
Closing Cash Balance 46.1 102.2 102.8 138.8 180.6

HCL Tech
Ratios (US GAAP)

FY13 FY14 FY15E FY16E FY17E
Growth
Revenue growth (US$) 12.9% 14.4% 11.2% 13.9% 15.8%
EBIT growth (`) 50.3% 57.6% 5.1% 10.9% 15.8%
Valuation (x)
P/E 32.2 20.1 17.7 15.8 13.7
EV/EBITDA 20.7 13.6 13.4 12.0 10.4
EV/Sales 4.6 3.6 3.2 2.8 2.4
Price/Book Value 9.0 6.4 5.4 4.4 3.7
Dividend Yield (%) 0.7% 1.2% 1.9% 2.2% 2.4%
Return Ratios (%)
RoE 32% 37% 33% 31% 30%
RoCE 25% 33% 27% 26% 25%

Kotak Mahindra Bank
SELL
COMPANY UPDATE KMB IN EQUITY June 22, 2015
Structural play on Indian financial services

Kotak Mahindra Bank (KMB) is a diversified financial services firm and one of the BFSI
best-run banks in India. Over the last ten years, the companys shares have
compounded annually at 33% vs 15% for the Sensex and 18% for the Bankex Recommendation
Index. The recent merger of ING Vyasa Bank has allowed KMB to fill some gaps Mcap (bn): `1,177/US$18.3
in the business. Given the current size, KMB can continue growing its balance 6M ADV (mn): `1,611/US$25.1
sheet and earnings faster than its peers. CMP: `1,298
TP (12 mths): `960
Key Parameters
Downside (%): 26
Lower credit cost and operational
FY10:1.70%, FY11:1.85%, FY12:1.86% Flags
RoA Trajectory efficiency
FY13:1.83%; FY14:1.75%; FY14:1.93%
supported strong RoAs Accounting: GREEN
Barring FY14, KMB has generated >24%
Sales Growth FY10: 25%, FY11: 41%, FY12: 33% Predictability: GREEN
loan
Trajectory FY13: 24%; FY14: 9.4%; FY14: 25%
growth by skilfully managing loan mix Earnings Momentum: GREEN
EPS Growth FY10:102%, FY11: 38%, FY12: 32% Low credit cost has been the key drivers of
Trajectory FY13: 25%; FY14: 7%; FY14: 24% superior EPS growth
Share price Performance (%)
Strong share price return over the last 3
returns 3yr/5yr/10yr 42%/39%/33% 160
years 150
(CAGR)
Greatness 140
Model FY09-13: NA FY10-14: NA 130
120
(decile) 110
Source: Company, Bloomberg, Ambit Capital research 100
90
RoA of more than 1.7% in the last six years
Jun-14
Oct-14
Dec-14
Feb-15
Apr-15
Jun-15
Aug-14
Over FY05-15, KMBs loan book has expanded at 32% CAGR. The bank has
generated average RoA of 1.5% and RoE of 13% which is above average in
KMB IN SENSEX
Indian context. Over the last six years, KMB has generated RoA above 1.7% due
to low credit costs and improving non-interest income. KMB has also increased
its CASA ratio from 19% in FY06 to ~36% in FY15.
Well-run franchise has been sufficiently rewarded
Over the last ten years, KMBs shares have delivered annualised returns of 33%
vs the Sensex return of 15% and the Bankex return of 18%. The bank has strong
franchise in car, commercial vehicles, tractor finance and business banking,
supporting strong margins of 4.7-4.9%. Low exposure to stressed sectors, such
as infra, has led to strong asset quality performance and low credit costs. RoAs
thus have been strong, averaging at 1.8% in FY10-15. Strong capital ratios (16%
on an average in FY10-15) have capped the leverage, leading to RoA of ~14%.
Strong franchise + Merger synergy = Growth above industry
Whilst we believe integration of the acquired ING Vysya Bank with KMB has its
challenges in a muted economic environment, the merger does fill some gaps in
KMBs geographic presence and business offering. Over the longer term, once
the integration is behind the bank, we expect that KMB can continue to grow its
loan book ~5 percentage points faster than the Indian banking system, thanks
to the high-quality management team, strong profitability and currently small Analyst Details
market share (<1%). Whilst we expect RoAs to moderate from current levels,
Pankaj Agarwal, CFA
these will remain comparable with the best in its peerset (like IIB and Axis).
+91 3043 3206
We are SELLers due to the elevated multiple at which the bank trades Pankajagarwal@ambitcapital.com
Our SOTP valuation of the bank is `960 (implied consolidated FY16E P/B of 2.6x
and consolidated FY16E P/E of 20.2x). The bank is currently trading at a 15% Ravi Singh
and 17% premium to its historical P/B and P/E. It is trading at a 29% premium +91 22 3043 3181
and 70% premium to its peers on P/E and P/B respectively. Over the long term, ravisingh@ambitcapital.com
we expect earnings growth to be the key driver of share price return, even as the
Aadesh Mehta, CFA
valuation multiple moderates closer to those of its peers.
+91 22 3043 3239
aadeshmehta@ambitcapital.com
Kotak Mahindra Bank
Exhibit 1: Volatile loan growth and NIMs Exhibit 2: RoA and RoE are stable
Loan growth % NIM % (RHS) RoE RoA (RHS)
80% 6.5% 16% 2.7%

70%
6.0% 14%
60% 2.2%
50% 5.5% 12%
40% 1.7%
30% 5.0% 10%
20% 1.2%
4.5% 8%
10%
0% 4.0% 6% 0.7%
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
Exhibit 3: Stable Gross NPAs Exhibit 4: The bank has strong Tier I capital
4.1%
18.0%
17.9%
3.6%
16.2%
16.0%
5%
15.7%
15.2%
20%
14.7%
14.5%
4%
2.8%
4%
2.5%
3% 15%
2.0%
2.0%
1.9%
8.8%
1.6%
1.5%
3%
2% 10%
2%
1% 5%
1%
0%
0%
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
Gross NPAs Tier I ratio
Exhibit 5: KMB is trading at its peak P/E Exhibit 6: and also P/B
1,500 1,500 4.1x
26.6x
1,250 1,250
20.8x 3.1x
1,000 1,000
15.0x
750 2.1x
750
500 500
250 250
0 0
Sep-05
Mar-07
Dec-07
Sep-08
Mar-10
Dec-10
Sep-11
Mar-13
Dec-13
Sep-14
Jun-06
Jun-09
Jun-12
Jun-15
Sep-05
Sep-08
Sep-11
Sep-14
Jun-06
Mar-07
Dec-07
Jun-09
Mar-10
Dec-10
Jun-12
Mar-13
Dec-13
Jun-15

We did not find anything unusual in the accounts of the bank and we believe that the reported numbers are a
Accounting GREEN true reflection of the profitability of the bank. The bank has made adequate disclosures of its ESOP accounting
and revenue recognition norms.
Predictability GREEN The bank has one of the best track records of long-term profitability.
After consolidating loan book growth for a while (FY14 loans up 9% YoY), KMB is now accelerating loan book
Earnings Momentum GREEN growth (up 25% YoY in FY15). The bank is likely to continue with a similar momentum in the near term and
medium term.

Kotak Mahindra Bank
Balance sheet (standalone)

Year to March (` mn) FY13 FY14 FY15 FY16E FY17E
Networth 94,470 122,751 141,411 243,368 274,638
Deposits 510,288 590,723 748,603 1,491,567 1,834,627
Borrowings 204,106 128,956 121,497 274,719 313,600
Other Liabilities 28,073 33,424 48,610 84,549 93,001
Total Liabilities 836,937 875,853 1,060,121 2,094,203 2,515,867
Cash & Balances with RBI/Banks 36,892 59,799 62,624 113,486 115,157
Investments 288,734 254,845 304,211 598,658 725,819
Advances 484,690 530,276 661,607 1,300,927 1,580,938
Other Assets 26,621 30,933 31,679 81,132 93,953
Total Assets 836,937 875,853 1,060,121 2,094,203 2,515,867
Income statement (standalone)

Interest Income 80,425 87,671 97,199 181,784 212,585
Interest Expense 48,368 50,471 54,961 107,690 126,091
Net Interest Income 32,057 37,200 42,237 74,094 86,494
Total Non-Interest Income 11,607 13,997 20,285 34,420 40,937
Total Income 43,663 51,198 62,522 108,514 127,430
Total Operating Expenses 22,097 25,426 32,547 58,691 68,392
Employees expenses 10,751 11,722 14,497 27,804 31,946
Other Operating Expenses 11,346 13,705 18,050 30,887 36,446
Pre Provisioning Profits 21,566 25,772 29,975 49,824 59,038
Provisions 1,822 3,047 1,645 5,910 7,694
PBT 19,745 22,725 28,330 43,913 51,344
Tax 6,113 7,699 9,670 14,052 16,430
PAT 13,631 15,025 18,660 29,861 34,914
Ratio analysis (standalone)

Year to March FY13 FY14 FY15 FY16E FY17E
Credit-Deposit (%) 95.0% 89.8% 88.4% 87.2% 86.2%
CASA ratio (%) 29.2% 31.9% 32.1% 32.4% 32.6%
Cost/Income ratio (%) 50.6% 49.7% 52.1% 54.1% 53.7%
Gross NPA (` mn) 7,581 10,594 12,372 23,028 27,379
Gross NPA (%) 1.55% 1.98% 1.85% 1.75% 1.71%
Net NPA (` mn) 3,114 5,736 6,091 9,672 11,499
Net NPA (%) 0.64% 1.08% 0.92% 0.74% 0.73%
Provision coverage (%) 58.9% 45.9% 50.8% 58.0% 58.0%
NIMs (%) 4.44% 4.49% 4.51% 3.99% 3.90%
Tier-1 capital ratio (%) 14.7% 17.9% 16.2% 14.6% 13.5%

Kotak Mahindra Bank
Du-pont analysis (standalone)

NII / Assets (%) 4.3% 4.3% 4.4% 3.8% 3.8%
Other income / Assets (%) 1.6% 1.6% 2.1% 1.8% 1.8%
Total Income / Assets (%) 5.8% 6.0% 6.5% 5.6% 5.5%
Cost to Assets (%) 3.0% 3.0% 3.4% 3.0% 3.0%
PPP / Assets (%) 2.9% 3.0% 3.1% 2.6% 2.6%
Provisions / Assets (%) 0.2% 0.4% 0.2% 0.3% 0.3%
PBT / Assets (%) 2.6% 2.7% 2.9% 2.3% 2.2%
Tax Rate (%) 31.0% 33.9% 34.1% 32.0% 32.0%
ROA (%) 1.8% 1.8% 1.9% 1.6% 1.5%
Leverage 8.6 7.9 7.3 8.4 8.9
ROE (%) 15.7% 13.8% 14.1% 13.0% 13.5%
Valuation parameters
Consolidated EPS (`) 29.3 32.1 39.4 48.9 57.8
EPS growth (%) 19% 10% 23% 24% 18%
Consolidated BVPS (`) 205.0 247.6 287.3 371.2 425.0
P/E (x) 48.6 44.3 36.1 29.1 24.6
P/BV (x) 6.94 5.75 4.95 3.83 3.35

Asian Paints
SELL
COMPANY UPDATE APNT IN EQUITY June 22, 2015
Strong competitive advantages ensure enduring leadership position Consumer

Asian Paints best-in-class supply chain is the biggest driver of its competitive
advantage in the paints sector. This, backed by the high-quality middle-
Recommendation
management team and scale advantages around distribution expansion and
advertisement spend, will allow the firm to continue to gain market share from its Mcap (bn): `676/US$10.5
peers in the future. Over the last ten years, the companys shares have 6M ADV (mn): `1302/US$20.3
compounded annually at 37% vs 16% for the Sensex. CMP: `708
Key Parameters TP (12 mths): `680
Parameter Result Comment Downside (%): 4
FY09: 45%, FY10: 71%, FY11: 55% Stable RoCE performance despite improving
RoCE Trajectory margin profile indicates less than optimal Flags
FY12: 50%; FY13: 47%; FY14: 45% capital allocation
Sales Growth FY09: 25%, FY10:22%, FY11: 15% Market share gains and product mix Accounting: GREEN
improvement leads to consistent revenue Predictability: GREEN
Trajectory FY12: 25%; FY13: 15%; FY14: 17% growth
Earnings Momentum: AMBER
EPS Growth FY09: -3%, FY10: 110%, FY11: 1% Volatility in the earnings growth primarily due
Trajectory FY12: 17%; FY13: 13%; FY14: 9% to volatility of the input prices
Share price Performance (%)
returns Stellar fundamentals drive consistent stock
3yr/5yr/10yr 36%/32%/35% 30,000 900
returns
(CAGR)
The company fares well on cash conversion; 800
Greatness 28,000
FY10-14: D4 however, lower capacity utilisation has 700
Model (decile)
impacted return ratios. 26,000
600
Source: Company, Bloomberg, Ambit Capital research. *Note: D1 is the best decile followed by D2, D3, D4
and so on. 24,000 500
Feb-15
Jun-14
Oct-14
Jun-15
Market share gains/margin expansion drive 24% earnings CAGR
Supply chain efficiencies along with strong brand recall helped Asian Paints
improve its market share in the organized decorative segment from 44% (FY05) to Sensex (LHS) APNT (RHS)
over 57% currently, generating a stable revenue CAGR of ~19%. EBITDA margins
have expanded by ~300bps over the last 10 years, generating earnings CAGR of
~24% and average RoCEs of ~35%. Efficient working capital management has Source: Bloomberg, Ambit Capital research
ensured healthy cash conversion of over 80% over FY05-14.

37% share price CAGR on ~24% earnings CAGR (FY05-15)
Strong earnings growth along with improving market share has led to the stock
outperforming the Sensex by ~20% points per annum in the last 10 years.
However, the recent rally (~30% rise: Oct14- Apr15) possibly due to the benefits
expected from the crude price fall seems unjustified (click here for detailed note).
The company fares well on corporate governance checks.
Market share gains to continue, capital misallocation overhang remains
Asian Paints will continue to gain market share by 100bps pa over the next 3-5
years from Kansai Nerolac and Akzo Nobel especially in the premium segment
due to: (a) continued improvement in supply chain, (b) scale advantages around
advertisement spends, and (c) a superior management team. We highlight capital
misallocation risks (RoCE impact of ~10ppts), as the company explores investment
opportunities (which have substantially lower profitability vs Indian decorative
business) like: (a) African countries which may be good growth stories 10-20 years
from now, (b) expansion in the Middle East; and (c) expansion in home
improvement through prospective acquisitions in India (beyond Sleek and Ess Ess).
Euphoria around benefits from softening crude prices overdone
We expect Asian Paints to deliver revenue/ earnings CAGR of 17%/23% with
average RoCE of 34% over FY15-19 due to strong competitive advantages around Analyst Details
supply chain, premium brand recall and superior management team. The stock
rallied meaningfully in 2HFY15 due to consensus earnings upgrades on the back Rakshit Ranjan, CFA
of fall in crude oil price, which we believe was over exaggerated. Our DCF-based +91 22 3043 3201
valuation model generates a fair value of `680 (~4% downside) with an implied rakshitranjan@ambitcapital.com
multiple of 30x FY17E EPS. Asian Paints is currently trading at 37x/31x
Aditya Bagul
FY16/FY17E EPS and at a 10-15% premium to other paints companies which we
believe is justified given the sustained competitive advantages of the firm. +91 22 3043 3264
adityabagul@ambitcapital.com
Asian Paints
Exhibit 1: EBITDA margins and revenue growth over the last Exhibit 2: RoCE and RoE over the last ten years (FY05-
ten years (FY05-15) 15)
60% 60%
140,000 20%
120,000 50% 50%
100,000 15%
80,000 40% 40%

10%
60,000
30% 30%
40,000 5%
20,000
20% 20%
- 0%
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
Revenue (Rs mn) EBITDA Margin % (RHS) ROCE (%) ROE (%) (RHS)
Exhibit 3: Sources of funds over the last ten years (FY05-15) Exhibit 4: Utilisation of funds over the last ten years
(FY05-15)
Dividend Increase in Debt
Interest
cash and repayment,
Debt raised, received, 1%received, 4%
cash 3%
4%
equivalents,
9%
Dividend
Purchase of paid, 36%
Investments
, 10%
Net Capex,
38% Interest
CFO, 92% paid, 4%
Exhibit 5: Forward P/E evolution Exhibit 6: Forward P/B evolution
50 15
40
10
30
20
5
10
- -
Mar-05
May-06
Dec-06
Jul-07
Feb-08
Sep-08
Apr-09
Nov-09
Jan-11
Aug-11
Mar-12
May-13
Dec-13
Jul-14
Feb-15
Oct-05
Jun-10
Oct-12
Mar-05
Nov-05
Jul-06
Mar-07
Nov-07
Jul-08
Mar-09
Nov-09
Jul-10
Mar-11
Nov-11
Jul-12
Mar-13
Nov-13
Jul-14
Mar-15
1 Yr Forward P/E 4 Yr Avg 6 Yr Avg 1 yr Forward P/B 4 yr Avg 6 Yr Avg

Asian Paints has, in the past, reported high cash conversion, efficient management of working capital and low levels of
Accounting GREEN
loans and advances and contingent liabilities. Consequently, we give a high rating to the quality of its accounting.
Due to a combination of high pricing power, presence across products, categories and SKUs, and predominant exposure to
Predictability GREEN
consumer-activity-led sectors of the economy, we expect earnings to remain stable for Asian Paints.
Our accounting analysis does not raise any major red flags with respect to dubious transactions by promoters. However,
Treatment of
AMBER we raise concern over the capital allocation of the firm, as it continues its inorganic growth aspirations with recent
minorities
acquisitions like Sleek and Ess Ess, which along with increasing contribution of overseas business will be RoE-dilutive.

Asian Paints
Balance Sheet
Net Worth 33,843 40,392 47,424 56,843 68,217
Total Debt 2,377 2,400 4,099 2,500 2,500
Others 3,152 4,338 4,438 4,808 5,234
Current Liabilities 28,495 33,242 33,164 41,390 48,927
Total Liabilities 67,866 80,372 89,125 105,540 124,877
Fixed Assets 25,002 26,332 28,560 29,786 28,849
Investments 2,807 7,212 15,878 4,000 4,000
Current Assets 40,058 46,829 44,684 71,752 92,026
Total Assets 67,866 80,372 89,122 105,538 124,875
Source Ambit Capital research
Income Statement
Net Income 109,707 127,148 141,827 160,715 189,981
% Growth 14% 16% 12% 13% 18%
Gross Profit 45,323 53,741 62,113 70,892 82,493
EBITDA 17,319 19,979 22,353 28,415 33,914
PBIT 16,919 18,865 21,391 27,660 33,381
PBT 16,552 18,442 21,044 27,198 33,031
PAT 11,139 12,288 14,226 18,397 22,035
EPS 11.6 12.8 14.8 19.2 23.0
EPS Growth 13% 10% 16% 29% 20%
Cashflow statement
EBIT 16,919 18,864 21,391 27,660 33,381
Depreciation 1,546 2,556 2,659 2,774 2,937
Others (5,010) (5,739) (6,495) (8,431) (10,570)
Change in working capital (1,587) (1,682) (5,206) 3,752 (1,042)
Cash flow from operations 11,868 14,000 12,349 25,755 24,705
Cash flow from investments (4,843) (6,029) (13,553) 7,878 (2,000)
Cash flow from financing (6,007) (6,259) (5,494) (11,039) (11,011)
Change in cash 1,018 1,712 (6,699) 22,595 11,694
Free cash flow 5,501 11,664 7,461 21,755 22,705
Ratio/ Valuation Parameters

Gross margin (%) 41.3% 42.3% 43.8% 44.1% 43.4%
EBITDA margin (%) 15.8% 15.7% 15.8% 17.7% 17.9%
Net profit margin (%) 10.2% 9.7% 10.0% 11.4% 11.6%
Net debt: equity (x) (0.2) (0.2) 0.0 (0.4) (0.5)
RoCE (%) 35.3% 30.7% 30.7% 33.8% 34.3%
RoE (%) 36.3% 33.1% 32.4% 35.3% 35.2%
P/E (x) 61.1 43.5 47.9 37.0 30.9
Price/Sales (x) 6.2 5.4 4.8 4.2 3.6
EV/EBITDA (x) 37.0 34.2 28.5 22.5 18.8

Asian Paints
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Nestle
SELL
COMPANY UPDATE NEST IN EUITY June 22, 2015
Indias leading packaged foods company

Consumer Staples
Nestle India is one of Indias largest packaged companies, with a presence in
milk products and nutrition, chocolates and confectionery, prepared dishes &
Recommendation
cooking aids, and beverages. Its key brands include Nescaf, Maggi, Everyday,
KitKat and Cerelac, most of which are market leaders in their respective Mcap (bn): `558/US$8.7
categories. Over the last ten years, the companys shares have compounded 3M ADV (mn): `571/US$8.9
annually at 24% vs 15% for the Sensex. CMP: `5,785
TP (12 mths): `5,100
Key Parameters Downside (%): 13
Starting CY11, Nestle more than doubled Flags
CY09: 174%, CY10: 159%, CY11: 70%
RoCE Trajectory its capex plans to augment capacity. This
CY12: 45%; CY13: 40%; CY14: 35% Accounting: GREEN
led to a reduction in RoCEs.
Nestle pruned its product portfolio over Predictability: AMBER
Sales Growth CY09: 19%, CY10: 22%, CY11: 20%
this period in order to drive margin
Trajectory CY12: 11%; CY13: 9%; CY14: 8% Treatment of minorities: AMBER
expansion instead of volume growth.
Slowdown in sales growth coupled with
EPS Growth CY09: 23%, CY10: 25%, CY11: 18%
margin contraction has led to slow down Performance (%)
Trajectory CY12: 11%; CY13: 3%; CY14: 7%
in EPS growth.
Slowdown in volume growth and loss in 150
Share price market share over the last three years 140
3yr/5yr/10yr 9%/15%/24%
returns (CAGR) have led to slower share price appreciation 130
vs the prior period. 120
Deterioration in RoCE over the last three 110
Greatness
CY09-13: D3* years has led to a lower ranking on the 100
Model (decile)
greatness framework. 90
Jun-14
Oct-14
Dec-14
Feb-15
Apr-15
Jun-15
Aug-14
Source: Company, Bloomberg, Ambit Capital research. *Note:D1 is the best decile followed by D2, D3, D4
and so on.
A tale of two halves: CY05-10/CY11-14 sales CAGR of 20%/9% Sensex Nestle
Over CY05-10, Nestle reported sales/EPS CAGR of 20%/21%, as the premium
positioning of Nestles product portfolio benefited from an increase in consumer Source: Bloomberg, Ambit Capital research
demand over this period. However, over CY11-14, sales/EPS CAGR slowed down
to 9%/7% due to slowdown in consumer spending and the companys flawed
change in strategy to focus on profitability instead of volume growth. Since CY11,
Nestle has almost doubled its capacity. However, the slowdown in consumer
spending has impacted the utilisation of these new facilities, resulting in RoCEs
falling from ~170% in CY09 to ~40% in CY14.
Outperformance over 10 years led by robust EPS growth
Nestle has outperformed the Sensex, as its share price increased at 24% CAGR
over the last ten years. Most of this outperformance was front-ended, as the
company delivered robust 21% EPS CAGR over CY05-10. However, over the last
three years, Nestle (9% CAGR) has underperformed the Sensex (15% CAGR) due
to a marked slowdown in its EPS growth to 7% CAGR over CY11-14.
Market leadership + premium positioning = 13% EPS CAGR over 10 years
We estimate that around 70% of Nestls revenues relate to products where it is
a market leader and also has a premium positioning. This, we believe, lends the
company significant brand equity and pricing power to maintain/gain share to
deliver 5-6% volume growth and pass on 6-7% price hikes thus delivering ~13%
EPS CAGR over the next ten years. From CY15 the management has indicated a
shift in focus on volume growth instead of its earlier focus on margin expansion. Analyst Details
Premium valuations to continue over the longer term Rakshit Ranjan, CFA
Nestl deserves to trade at a premium to the FMCG sector given its strong cash +91 22 3043 3201
generation, superior brand recall and leadership control over some of the rakshitranjan@ambitcapital.com
fastest-growing aspirational consumption sectors currently in India. However, at
current valuations of 51.3/38.3x CY15/16E P/E, the valuations remain stretched Ritesh Vaidya
particularly in spite of the Maggi controversy. We remain SELLers. +91 22 3043 3246
riteshvaidya@ambitcapital.com
Nestle
Exhibit 1: EBITDA margins and revenue growth over the Exhibit 2: RoCE and RoE over CY05-14
CY05-14
Revenues (Rs mn) EBITDA margin (% RHS) RoCE (%) RoE (%, RHS)
120,000 22.0% 180.0% 130.0%

21.5% 160.0%
100,000 110.0%
21.0% 140.0%
80,000 20.5% 120.0%
90.0%
60,000 20.0% 100.0%
19.5% 80.0% 70.0%
40,000
19.0% 60.0%
20,000 18.5% 40.0% 50.0%
CY05
CY06
CY07
CY08
CY09
CY10
CY11
CY12
CY13
CY14
CY05
CY06
CY07
CY08
CY09
CY10
CY11
CY12
CY13
CY14
Exhibit 3: Sources of funds over the last ten years (CY05-14) Exhibit 4: Utilisation of funds over the last ten years (CY05-
14)
Interest Increase in
received, Purchase of cash, 4%
Investments Debt
Debt 5% repayment,
raised, 10% , 6%
10%
Net Capex,
39% Dividend
paid, 41%
CFO, 85%
Interest
paid, 1%

70.0 40.0
60.0 35.0
50.0 30.0
40.0 25.0
30.0 20.0
20.0 15.0
Jun 05
Jun 06
Jun 07
Jun 08
Jun 09
Jun 10
Jun 11
Jun 12
Jun 13
Jun 14
Jun 15
Jun 05
Jun 06
Jun 07
Jun 08
Jun 09
Jun 10
Jun 11
Jun 12
Jun 13
Jun 14
Jun 15
NEST 1-yr Fwd P/E 10 yr Avg 5 yr Avg NEST 1-yr Fwd P/BV 10 yr Avg 5 yr Avg

In the past, Nestl has reported excellent cash conversion, efficient management of working capital, and low levels of
Accounting GREEN
loans and advances and contingent liabilities. Consequently, we give a high rating to its accounting quality.
With discretionary spending under pressure over the past few quarters, Nestls revenue growth has been well below the
FMCG average and consensus estimates. However, EBITDA margins have been more stable, within a 200bps band.
Nestle reduced its dividend payout ratio from ~90% in CY08 to ~50% in CY13 to fund the companys capex plans.
Treatment of
AMBER However, in March 2013, the company announced a staggered increase in its royalty rate from 3.5% to 4.5%, resulting in
minorities
higher payments to the parent but impacting Nestle Indias profits.

Nestle
Balance sheet (` mn)

Year to December CY13 CY14 CY15E CY16E CY17E
Shareholders' equity 964 964 964 964 964
Reserves & surpluses 22,723 27,408 29,897 34,980 40,902
Total networth 23,688 28,372 30,861 35,944 41,866
Minority Interest - - - - -
Debt 11,895 196 - - -
Deferred tax liability 2,155 2,227 2,227 2,227 2,227
Total liabilities 37,737 30,795 33,088 38,171 44,093
Gross block 49,032 50,090 51,590 53,090 54,590
Net block 33,693 31,766 29,553 26,969 23,977
CWIP 2,947 2,448 2,947 2,947 2,947
Goodwill - - - - -
Investments 8,511 8,118 8,118 8,118 8,118
Cash & equivalents 7,494 4,458 8,485 18,305 29,454
Debtors 843 991 1,068 1,211 1,360
Inventory 7,359 8,441 8,275 9,387 10,541
Loans & advances 2,258 1,820 2,135 2,422 2,720
Other current assets 38 152 - - -
Total current assets 17,992 15,863 19,962 31,325 44,076
Current liabilities 11,333 11,383 12,812 14,534 16,322
Provisions 14,073 16,017 14,681 16,654 18,702
Total current liabilities 25,406 27,400 27,493 31,188 35,025
Net current assets (7,414) (11,537) (7,531) 137 9,051
Total assets 37,737 30,795 33,088 38,171 44,093
Income statement (` mn)

Operating income 90,619 98,063 97,426 110,522 124,116
% growth 9.1% 8.2% -0.6% 13.4% 12.3%
Operating expenditure 71,535 78,230 78,865 86,261 96,748
EBITDA 19,084 19,832 18,560 24,260 27,369
% growth 6.4% 3.9% -6.4% 30.7% 12.8%
Depreciation 3,300 3,375 3,713 4,084 4,493
EBIT 15,785 16,457 14,847 20,176 22,876
Interest expenditure 365 142 30 - -
Non-operating income 1,222 1,359 1,525 1,722 1,958
Adjusted PBT 16,642 17,674 16,342 21,898 24,833
Tax 5,609 5,897 5,393 7,226 8,195
Adjusted PAT/ Net profit 11,033 11,777 10,949 14,672 16,638
% growth 3.3% 6.7% -7.0% 34.0% 13.4%
Extraordinaries 138 70 - - -
Reported PAT / Net profit 11,033 11,777 10,949 14,672 16,638
Minority Interest - - - - -
Share of associates - - - - -
Adj. Consol net profit 11,033 11,777 10,949 14,672 16,638
Reported Consol net
11,033 11,777 10,949 14,672 16,638
profit

Nestle
Cash flow statement (` mn)

EBIT 17,007 17,816 16,372 21,898 24,833
Depreciation 3,300 3,375 3,713 4,084 4,493
Others 169 (70) (30) - -
Tax (5,609) (5,897) (5,393) (7,226) (8,195)
(Incr) / decr in net working capital 3,513 1,088 20 2,153 2,235
Capex (4,456) (949) (1,999) (1,500) (1,500)
(Incr) / decr in investments (4,862) 393 - - -
Others - - - 1 2
Cash flow from investments (9,318) (557) (1,999) (1,500) (1,500)
Net borrowings 1,393 (11,699) (196) - -
Interest paid 365 142 30 - -
Dividend paid (5,471) (7,107) (8,460) (9,589) (10,717)
Others (224) (128) (30) - -
Net change in cash 5,124 (3,035) 4,026 9,820 11,149
Closing cash balance 7,494 4,458 8,485 18,305 29,454
Free cash flow 13,923 15,364 12,683 19,409 21,866
Ratio analysis
Gross margin (%) 54.5% 53.9% 55.6% 56.2% 56.5%
EBITDA margin (%) 21.1% 20.2% 19.1% 22.0% 22.1%
EBIT margin (%) 18.8% 18.2% 16.8% 19.8% 20.0%
Dividend payout ratio (%) 49.0% 60.0% 77.3% 65.4% 64.4%
Net debt: equity (x) 0.2 (0.2) (0.3) (0.5) (0.7)
Working capital turnover (x) (6.1) (6.1) (6.1) (6.1) (6.1)
Gross block turnover (x) 1.8 2.0 1.9 2.1 2.3
RoCE (%) 33.2% 34.6% 34.3% 41.2% 40.5%
RoE (%) 53.0% 45.2% 37.0% 43.9% 42.8%
EPS (`) 114.4 122.1 113.6 152.2 172.6
Diluted EPS (`) 114.4 122.1 113.6 152.2 172.6
Book value per share (`) 245.7 294.3 320.1 372.8 434.2
Dividend per share (`) 48.5 63.0 75.0 85.0 95.0
P/E (x) 50.9 47.7 51.3 38.3 33.8
P/BV (x) 23.7 19.8 18.2 15.6 13.4
EV/EBITDA (x) 29.7 28.1 29.8 22.4 19.4
Price/Sales (x) 6.2 5.7 5.8 5.1 4.5

Eicher Motors
SELL
COMPANY UPDATE EIM IN EQUITY June 22, 2015
Dominant player in the niche leisure bike segment

Eicher Motors has built a strong presence in the niche leisure bike segment and Auto & Auto ancillaries
enjoys a dominant position in the 250-500cc domestic motorcycle space (98%
market share). It is also the third-largest player in the Medium and Heavy Recommendation
Commercial Vehicles (MHCV) segment, with a market share of 11% in domestic Mcap (bn): `489/US$7.6
trucks. Over the last ten years (FY05-CY14), the companys shares have 3M ADV (mn): `2,374/US$37.1
compounded annually at 48% vs 16% for the Sensex. CMP: `18,027
Key Parameters TP (12 mths): `15,800
Parameter Result Comment Downside (%): 12
Strong sales growth in Royal Enfield (RE)
RoCE Trajectory
CY09: 13%, CY10: 63%, CY11: 65% was offset to some extent by weak demand Flags
CY12: 33%; CY13: 27%; CY14: 28% in the commercial vehicle segment, leading
to lower RoCEs in recent years. Accounting: GREEN
Strong demand for RE bikes led to Predictability: AMBER
Sales Growth CY09: 28%, CY10: 50%, CY11: 29%
superlative performance in the last five Earnings Momentum: AMBER
Trajectory CY12: 13%; CY13: 7%; CY14: 28%
years.
EPS Growth CY09: 152%, CY10: 140%, CY11: 62% EPS growth driven by strong sales growth
Trajectory CY12: 5%; CY13: 21%; CY14: 56% and EBITDA margin expansion. Performance
Share price 270
Share price performance has largely
returns 3yr/5yr/10yr 102%/89%/48% 240
tracked the fundamentals.
(CAGR) 210
Greatness Model Eicher scores relatively well on all 180
FY09-14: D1*
(decile) parameters of the greatness model. 150
Source: Company, Bloomberg, Ambit Capital research. *Note: D1 is the best decile followed by D2, D3, 120
D4 and so on. 90
Sep-14
Jun-14
Jul-14
Oct-14
Nov-14
Dec-14
Jan-15
Feb-15
Mar-15
Apr-15
May-15
Aug-14
Strong demand for RE bikes led to strong performance in last five years
Over the past 10 years (FY05-CY14), Eichers consolidated revenues have
recorded a CAGR of 16% with an average EBITDA margin of only 6.8% and Sensex Eicher Motors
RoCE of 25%. However, RE (Royal Enfield) bikes have reported strong demand
on the back of product improvements, broadening user base and strong pull
created in favour of leisure bikes from Harley Davidson/Triumph; thus, Eichers Source: Bloomberg, Ambit Capital research
consolidated revenue CAGR was at 24% with an average EBITDA margin of

9.1% and RoCE of 38% over CY09-14. The companys cash conversion
(CFO/EBITDA) has remained strong and has averaged at 144% over CY09-14.
Share price performance has largely tracked the fundamentals
Eichers share price has delivered 48% CAGR over the last 10 years and a
stronger 89% CAGR and 102% CAGR over the last 5 years and 3 years,
respectively. This reflects the trends in its financial performance.
REs domestic volumes to touch 1mn units by FY20
We expect REs strong volume momentum to continue and clock 45% CAGR over
CY14-FY17 and touch 1mn units by FY20 on the back of strong dealer roll-out,
product portfolio expansion and limited competition. For the CV business, whilst
the market share of Volvo Eicher Commercial Vehicles (VECVs) in the heavy
trucks (HD) segment declined from 4.6% in CY13 to 3.9% in CY14, we expect
the new Pro-series truck launch and distribution expansion to lead to market
share gain. However, VECVs market share of 7.0% by FY18 would be much
lower than the managements target of 15.0%. Overall, we expect consolidated
revenues, EBITDA and net earnings to deliver 30%, 37% and 37%, respectively
over CY14-FY20. Analyst Details
Ashvin Shetty, CFA
Trading at a significant premium to peers and historical average
+91 22 3043 3285
We value RE at `13,100/share, implying 30.0x FY17 core net earnings and a
100% premium to Hero/Bajajs multiples. We value VECV (Eichers share) at ashvinshetty@ambitcapital.com
`2,700/share, implying 10.7x FY17E EBITDA and a 20% premium to Ashok Ritu Modi
Leyland. We believe Eichers current valuation multiple (28.4x FY17E EPS) fully
+91 22 3043 3292
captures in the long-term domestic potential for Royal Enfield and market share
ritumodi@ambitcapital.com
gains in heavy commercial vehicles.
Eicher Motors
Exhibit 1: EBITDA margins and revenue growth over FY05- Exhibit 2: RoCE and RoE over FY05-CY14
CY14
100,000 14.0% 40% 80%
70%
12.0%
80,000 30% 60%
10.0% 50%
60,000 8.0% 20% 40%
30%
40,000 6.0% 10% 20%
4.0% 10%
20,000 0% 0%
2.0% -10%
- 0.0% -10% -20%
FY05
FY06
FY07
FY08
9MDec08
CY09
CY10
CY11
CY12
CY13
CY14
FY05
FY06
FY07
FY08
9MDec08
CY09
CY10
CY11
CY12
CY13
CY14
Revenue (Rs mn) EBITDA margin (RHS) RoE RoCE (Post tax) - RHS
Exhibit 3: Capital allocation of Eicher Motors over the last ten years (FY05-CY14)

Exhibit 4: Forward P/E evolution Exhibit 5: Forward EV/EBITDA evolution
50.0 25.0
45.0
40.0 20.0
35.0
30.0 15.0
25.0
20.0 10.0
15.0
10.0 5.0
5.0
-
Sep-10
Sep-14
Jan-10
May-10
Jan-11
May-11
Sep-11
Jan-12
May-12
Sep-12
May-13
Sep-13
Jan-13
Jan-14
May-14
Jan-15
May-15
Sep-10
Sep-14
Jan-10
May-10
Jan-11
May-11
Sep-11
Sep-13
Jan-12
May-12
Sep-12
Jan-13
May-13
Jan-14
May-14
Jan-15
May-15
Eicher 1-yr fwd P/E Avg 1-yr fwd P/E Eicher 1-yr fwd EV/EBITDA Avg 1-yr fwd EV/EBITDA

Eichers key accounting ratios such as CFO to EBITDA stand out amongst its peers (for CY14, Eichers CFO as a percentage
Accounting GREEN of EBITDA at 119% is much higher than the average 95% of listed peers, namely Tata Motors and Ashok Leyland). On
Ambits forensic accounting, Eicher is categorised in the 2nd decile of the Auto universe (comprising eight companies).
Whilst the volumes are reported by the company on a monthly basis (in line with the industry practice), the margin
Predictability AMBER performance reported in the quarterly earnings tends to be unpredictable due to the high nature of fixed costs involved in
the business. However, this is an industry-wide phenomenon.
Earnings
AMBER Bloomberg shows no significant upgrades/downgrades to consensus numbers in recent weeks.
momentum

Eicher Motors
Balance sheet (consolidated)*

Year to December (` mn) CY12 CY13 CY14 FY16E FY17E
Reserves & surpluses 17,279 20,284 24,888 36,907 50,716
Total networth 17,549 20,554 25,159 37,178 50,987
Minority Interest 9,485 10,397 10,851 12,677 14,974
Debt 389 839 584 584 584
Deferred tax liability 1,232 1,805 2,394 2,394 2,394
Gross block 15,260 22,993 31,609 47,900 53,299
Net block 9,918 16,561 23,199 35,643 37,482
CWIP 6,197 5,551 5,867 2,500 1,131
Cash & Cash equivalents 14,481 15,151 15,553 26,094 42,396
Debtors 4,459 5,125 5,622 10,906 11,247
Inventory 4,888 5,268 6,455 12,617 13,316
Loans & advances 4,771 5,709 7,380 14,514 15,113
Provisions 1,704 2,159 3,213 5,872 6,082
Net current assets 12,540 11,482 9,920 14,717 30,355
Total assets 28,655 33,595 38,986 52,832 68,939
Source: Company, Ambit Capital research; Note: The company has changed its accounting year-end from
December to March, and hence FY16 is for 15 months ended March 31, 2016
Income statement (consolidated)*

Net Sales 63,899 68,098 87,383 167,034 175,827
% growth 13% 7% 28% 53% 32%
EBITDA 5,490 7,132 11,148 25,985 29,101
% growth -1% 30% 56% 86% 40%
Depreciation 822 1,300 2,198 3,846 3,560
EBIT 4,669 5,831 8,950 22,139 25,541
Interest expenditure 38 79 98 76 61
Non-operating income 1,366 545 666 1,748 1,879
Adjusted PBT 5,997 6,298 9,518 23,811 27,359
Tax 1,249 1,452 2,909 6,741 7,831
Adjusted PAT before minority
4,749 4,846 6,609 17,069 19,528
interest
% growth -5% 2% 36% 107% 43%
Minority Interest 1,506 1,314 864 2,243 2,832
Adjusted PAT after minority
3,243 3,531 5,746 14,827 16,696
interest
Reported PAT after minority interest 3,243 3,531 5,746 14,827 16,696

Eicher Motors
Cashflow statement (consolidated)*

Net Profit Before Tax 5,997 6,706 9,926 23,811 27,359
Depreciation 822 1,300 2,198 3,846 3,560
Others (1,308) (819) (833) (1,671) (1,818)
Tax (1,077) (1,504) (2,810) (6,741) (7,831)
(Incr) / decr in net working capital 391 1,491 2,020 4,557 581
Capex (net) (7,820) (7,054) (9,682) (12,924) (4,030)
(Incr) / decr in investments - - - (6,000) (1,000)
Other income (expenditure) 1,051 731 598 1,748 1,879
Cash flow from investments (6,769) (6,324) (9,084) (17,176) (3,151)
Net borrowings (43) 610 (255) - -
Issuance/buyback of equity 4 17 79 (0) 0
Interest paid (40) (80) (98) (76) (61)
Dividend paid (895) (1,020) (1,348) (2,008) (3,337)
Cash flow from financing (974) (474) (1,622) (2,085) (3,398)
Net change in cash (2,918) 377 (205) 4,541 15,301
Free cash flow (2,995) 120 820 10,877 17,821
Ratio analysis (consolidated)*

Year to December (%) CY12 CY13 CY14 FY16E FY17E
EBITDA margin (%) 8.6% 10.5% 12.8% 15.6% 16.6%
EBIT margin (%) 7.3% 8.6% 10.2% 13.3% 14.5%
Net profit (bef min. int.) margin (%) 7.4% 7.1% 7.6% 10.2% 11.1%
Dividend payout ratio (%) 17% 21% 22% 17% 15%
Net debt: equity (x) (0.4) (0.3) (0.2) (0.2) (0.5)
Working capital turnover (x) (51) (35) (26) (27) (20)
Gross block turnover (x) 5.1 3.6 3.2 4.2 3.5
RoCE (pre-tax) (%) 41.3% 34.0% 40.2% 64.7% 86.3%
RoIC (%) 32.7% 26.6% 28.4% 46.4% 61.6%
RoE (%) 29.2% 27.6% 30.7% 43.8% 44.3%
Valuation parameters (consolidated)*

Year to December CY12 CY13 CY14 FY16E FY17E
EPS after minority interest (`) 120 146 227 547 617
Diluted EPS (`) 119 145 226 545 613
Book value per share (`) 650 760 928 1,372 1,881
Dividend per share (`) 20 30 50 93 95
P/E (x) 151.0 124.3 79.7 41.4 29.4
P/BV (x) 27.7 23.7 19.4 13.1 9.6
EV/EBITDA (x) 87.9 67.7 43.3 23.2 16.6
EV/EBIT (x) 103.3 82.7 53.9 27.2 18.9

IndusInd Bank
BUY
COMPANY UPDATE IIB IN EQUITY June 22, 2015
Premium CV financier; scaling-up other businesses as well

IndusInd Bank (IIB) is the best-in-class vehicle financier with unmatched reach BFSI
and a unique business model. Further, it has been filling gaps in its liability
franchise and product suites in other segments (like loan against property, tractor Recommendation
loans and credit cards). The improving outlook for vehicle financing, along with Mcap (bn): `436/US$6.8
rising CASA ratio and fee income, should help IIB deliver industry-leading 6M ADV (mn): `895/US$13.9
earnings growth. Over the last ten years, the banks shares have compounded CMP: `818
annually at ~35%, vs Bankex return of ~18% and Sensex return of ~15%. TP (12 mths): `1030
Upside (%): 26
Key Parameters
FY10: 1.1%, FY11: 1.4%, FY12: 1.6% Flags
Lower credit cost and support of
RoA Trajectory FY13: 1.6%; FY14: 1.8%; FY15: Accounting: AMBER
fee income helped post strong RoAs
1.8%
Predictability: GREEN
Strong CV business and scale-up of
Loan Growth FY10: 30%, FY11: 27%, FY12: 34% Earnings Momentum: GREEN
franchise have supported loan book
Trajectory FY13: 26%; FY14: 24%; FY15: 25%
CAGR of 25% over 10 years
EPS Growth FY10:104%, FY11:45%, FY12: 39% Improving NIMs and fee income have
Trajectory FY13: 18%; FY14: 32%; FY15: 26% driven EPS growth
Performance (%)
Share price returns Superior loan growth and expanding RoAs 185
3yr/5yr/10yr 42%/39%/33% 170
(CAGR) have led to share price out-performance
Greatness Model 155
FY09-13: NA FY10-14: NA 140
(decile)
125
Source: Company, Bloomberg, Ambit Capital research 110
10-year loan book CAGR at 25%; RoAs have also improved 95
Oct-14
Feb-15
Apr-15
Aug-14
Jun-14
Dec-14
IIB has a competitive edge in terms of geographical reach and the business
model of its CV finance business. Since the new management took charge in
FY08, the bank has been filling gaps in its liability franchise and product suites in IIB IN SENSEX
other segments. Since end-FY10, when IIB accelerated its network expansion,
the number of branches has more than tripled and CASA as a percentage of
total borrowed funds has risen from 20% (in FY10) to 34% currently. Since FY08,
loan book has expanded at a CAGR of 27%, with RoA expanding from 0.3% in
FY08 to 1.8% in FY15.
IIB outperformed the Sensex/Bankex by ~20%/17%
Over the last ten years, IIB has outperformed the Sensex by 20% and Bankex by
17%. Its new-generation private sector banking peers (e.g. HDFC, Axis, ICICI,
Kotak) have delivered annualised return of 27%, and IIB has delivered ~35%. Its
superior loan growth, improving liability franchise, strength in CV lending and
momentum in fee income have helped the bank to generate superior earnings
growth and share price returns.
Known for CV lending, now strengthening other businesses
IIB has been diversifying its presence into other retail products and wholesale
banking. The bank has scaled-up its LAP, credit card, home loan distribution in
recent years. The recent acquisition of RBS's diamond & jewellery financing
business is an example of a targeted scale-up in wholesale banking. We expect
the bank to continue delivering a loan book growth 5-10 percentage points
higher than banking system growth over the next 5-10 years, with stable Analyst Details
profitability. It has been a turnaround and scale-up story and the bank would
Ravi Singh
continue to seek selective market share gain (it still accounts for <1% credit
market share). +91 22 3043 3181
ravisingh@ambitcapital.com
Superior earnings growth justify the valuations
Our target price of `1,030 values the bank at 19.2x P/E and 3.8x P/B (both Pankaj Agarwal, CFA
FY17). At 19.4x FY16E EPS, the current valuation reflects the earnings growth +91 3043 3206
potential. We expect earnings CAGR of 25% along with sustained valuation Pankajagarwal@ambitcapital.com
multiple to drive share price return. The stock is trading at a ~10% discount to
peers average (HDFC Bank & Kotak). However, relative to its peers, IIB is likely to Aadesh Mehta, CFA
deliver superior earnings growth (25% EPS CAGR in FY15-17E). +91 22 3043 3239
aadeshmehta@ambitcapital.com
IndusInd Bank
Exhibit 1: Loan growth of 26% (FY07-15 CAGR) Exhibit 2: RoAs have expanded in last seven years
Loan growth % NIM % (RHS) RoE RoA (RHS)
40% 4.0% 25% 2.5%

35% 3.5%
30% 20% 2.0%
25% 3.0%
15% 1.5%
20% 2.5%
15% 10% 1.0%
2.0%
10% 5% 0.5%
5% 1.5%
0% 1.0% 0% 0.0%
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
Exhibit 3: Stressed assets have decreased and are now Exhibit 4: The bank has sufficient and stable Tier-I buffer
stable
13.8%
3.1%
3.0%
12.7%
Gross NPAs Tier I ratio
12.3%
4% 16%
11.4%
11.2%
3% 14%
9.7%
3% 12%
7.5%
1.6%
7.3%
6.7%
10%
2%
1.2%
1.1%
1.0%
8%
1.0%
1.0%
0.8%
2%
6%
1% 4%
1% 2%
0% 0%
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
Exhibit 5: P/E band chart Exhibit 6: P/B band chart

900
19.3x 900
750 3.1x
725
600 14.4x
550 2.2x
450
9.6x
300 375 1.4x
150 200
0
25
Sep-05
Mar-07
Dec-07
Sep-08
Mar-10
Dec-10
Sep-11
Mar-13
Dec-13
Sep-14
Jun-06
Jun-09
Jun-12
Jun-15
Mar-05
Dec-05
Sep-06
Jun-07
Mar-08
Dec-08
Sep-09
Jun-10
Mar-11
Dec-11
Sep-12
Jun-13
Mar-14
Dec-14

Compared with some of its peers, IIBs revenue recognition policy for guarantees (excluding deferred payment guarantees)
and LC (letter of credit) appears aggressive, as it books on transaction date/when due rather than amortising the income
Accounting AMBER
over the life of the product. However, the short tenor (~6 months) of such instruments implies that the impact on the
reported annual numbers is unlikely to be significant.
Low exposure to stressed segment on the corporate book and long-term track record in the retail CV book lends
predictability to earnings in the current environment.
Earnings We expect earnings momentum to pick up for IIB in the future with a pick-up in the CV cycle and decrease in interest rates;
GREEN
Momentum we expect ~25% EPS CAGR in FY15-17E.

IndusInd Bank
Balance sheet
Networth 74,069 86,347 102,451 121,002 145,058
Deposits 541,167 605,023 741,344 937,800 1,191,006
Borrowings 94,596 147,620 206,181 253,089 309,216
Other Liabilities 21,107 27,297 37,330 46,628 58,249
Total Liabilities 730,938 866,287 1,087,306 1,358,517 1,703,530
Cash & Balances with RBI/Banks 68,487 67,694 107,791 132,445 163,020
Investments 196,542 215,630 248,594 315,468 391,872
Advances 443,206 551,018 687,882 869,331 1,099,496
Other Assets 22,703 31,944 43,039 41,274 49,141
Total Assets 730,938 866,287 1,087,306 1,358,517 1,703,530
Income statement
Interest Income 69,832 82,535 96,920 118,052 146,369
Interest Expense 47,504 53,628 62,717 75,737 92,900
Net Interest Income 22,329 28,907 34,203 42,315 53,469
Total Non-Interest Income 13,630 18,905 24,039 30,058 37,590
Total Income 35,958 47,812 58,242 72,372 91,060
Total Operating Expenses 17,564 21,853 27,259 33,815 41,925
Employees expenses 6,615 8,093 9,805 11,997 14,652
Other Operating Expenses 10,949 13,760 17,455 21,818 27,273
Pre Provisioning Profits 18,395 25,960 30,982 38,557 49,134
Provisions 2,631 4,676 3,891 5,720 6,778
PBT 15,764 21,283 27,092 32,837 42,356
Tax 5,152 7,203 9,155 10,836 13,978
PAT 10,612 14,080 17,937 22,001 28,379
Ratio analysis
Credit-Deposit (%) 81.9% 91.1% 92.8% 92.7% 92.3%
CASA ratio (%) 29.3% 32.5% 34.1% 35.1% 35.6%
Cost/Income ratio (%) 48.8% 45.7% 46.8% 46.7% 46.0%
Gross NPA (` mn) 4,578 6,208 5,629 8,352 11,677
Gross NPA (%) 1.03% 1.12% 0.81% 0.96% 1.06%
Net NPA (` mn) 1,368 1,841 2,105 3,257 4,671
Net NPA (%) 0.31% 0.33% 0.31% 0.37% 0.42%
Provision coverage (%) 70.1% 70.4% 62.6% 61.0% 60.0%
NIMs (%) 3.54% 3.75% 3.64% 3.58% 3.60%
Tier-1 capital ratio (%) 13.8% 12.7% 11.2% 10.8% 10.3%

IndusInd Bank
Du-pont analysis
NII / Assets (%) 3.4% 3.6% 3.5% 3.5% 3.5%
Other income / Assets (%) 2.1% 2.4% 2.5% 2.5% 2.5%
Total Income / Assets (%) 5.5% 6.0% 6.0% 5.9% 5.9%
Cost to Assets (%) 2.7% 2.7% 2.8% 2.8% 2.7%
PPP / Assets (%) 2.8% 3.3% 3.2% 3.2% 3.2%
Provisions / Assets (%) 0.4% 0.6% 0.4% 0.5% 0.4%
PBT / Assets (%) 2.4% 2.7% 2.8% 2.7% 2.8%
Tax Rate (%) 32.7% 33.8% 33.8% 33.0% 33.0%
ROA (%) 1.6% 1.8% 1.8% 1.8% 1.9%
Leverage 10.9 10.0 10.3 10.9 11.5
ROE (%) 17.8% 17.6% 19.0% 19.7% 21.3%
EPS (`) 20.3 26.8 33.9 41.6 53.6
EPS growth (%) 18% 32% 26% 23% 29%
BVPS (`) 141.7 164.3 193.5 228.5 274.0
P/E (x) 40.4 30.6 24.2 19.7 15.3
P/BV (x) 5.78 4.99 4.23 3.58 2.99

Pidilite Industries
SELL
COMPANY UPDATE PIDI IN EUITY June 22, 2015
Sustained competitive advantages; capital allocation less than optimal
Consumer
Pidilite has cemented its position as the leader in Indias adhesive market
through its flagship brand, Fevicol. Pidilites strong brand and distribution make
it a high-quality defensive play in the consumer space. However, capital Recommendation
allocation in its international subsidiaries and uncertainty over the final outcome Mcap (bn): `270/US$4.2
of the elastomer project have been an overhang on the companys growth 6M ADV (mn): `264/US$4.1
prospects. Over the last ten years, the companys shares have compounded CMP: `526
annually at 39% vs 16% for the Sensex. TP (12 mths): `390
Key Parameters Downside (%): 26
Stable RoCE performance with stable
FY09: 14%, FY10: 26%, FY11: 32% Flags
RoCE Trajectory margins and a less than optimal capital
FY12: 31%; FY13: 35%; FY14: 33% Accounting: GREEN
allocation in international subsidiaries
Sales Growth FY09: 16%, FY10: 10%, FY11:21% Strong brand recall and continual Predictability: AMBER
improvement in distribution has led to Earnings Momentum: AMBER
Trajectory FY12: 18%; FY13: 18%; FY14: 16% consistent revenue growth
EPS Growth FY09: -36%, FY10: 146%, FY11: 12% Earnings volatility primarily due to
Trajectory FY12: 5%; FY13: 33%; FY14: 6% fluctuation in input costs Performance (%)
Share price returns Consistent compounding on strong 30,000 700
3yr/5yr/10yr 52%/39%/40% fundamentals, recent rally on impact of 600
(CAGR) 28,000
crude price drop not completely justified 500
Greatness Model Pidilite scores well on growth and pricing 400
FY10-14: D2* discipline but misses out on capital 26,000
(decile) 300
allocation and balance sheet discipline 24,000 200
Feb-15
Aug-14
Jun-14
Oct-14
Dec-14
Apr-15
Jun-15
Source: Company, Bloomberg, Ambit Capital research. *Note: D1 is the best decile followed by D2, D3,
D4 and so on.
Brand recall/strong distribution network drives consistent performance
Sensex (LHS) Pidilite (RHS)
Supply chain efficiencies and strong brand recall for its flagship product,
Fevicol, (~50% of revenue) have helped Pidilite generate stable revenue CAGR
of ~19%. EBITDA margins have remained stable at ~15% over the last 10 years, Source: Bloomberg, Ambit Capital research
generating ~22% earnings CAGR and ~29% average RoCEs. Efficient working
capital management has ensured healthy cash conversion of >90% in FY05-14.
39% share price CAGR on ~22% CAGR earnings growth (FY05-15)
Pidilites share price has rallied recently by ~34% (Oct14-Apr15) possibly due
to the anticipated benefits from the fall in crude prices. Whilst this rally looks
overdone, strong earnings growth over the longer term alongside improving
market share have led to the stock outperforming the Sensex by ~20% CAGR in
the last 10 years. Pidilite fares well on our corporate governance checks.
Competitive strengths intact; capital misallocation overhang remains
Due to Pidilites strong brand recall in the Indian adhesives and sealants
segment, lack of organised competition for its flagship product (Fevicol)
(accounting for >50% of total sales), and high customer loyalty, we continue to
view Pidilite as a high-quality defensive play in the consumer sector. It has
reported 17% revenue CAGR in FY10-15 and we expect this revenue growth
momentum to continue in FY15-18. However, the performance of its
international subsidiaries, uncertainty over the final outcome of the elastomer
project, and rising competition in construction chemicals from Berger and Asian
Paints, may have a material impact on Pidilites performance in the future.
Punchy valuations more than adequately factor in business strengths
Due to the strong fundamentals including brand recall and distribution strength, Analyst Details
we estimate earnings CAGR of 22% for Pidilite over FY15-18E, which promises a
consistent compounding of shareholder returns over the longer term. The stock Rakshit Ranjan, CFA
is currently trading at 43x/35x FY16/FY17E, which: (a) more than adequately +91 22 3043 3201
factors in the tailwinds from commodity prices; and (b) does not fully appreciate rakshitranjan@ambitcapital.com
the overhang from lower RoCE businesses. Pidilite trades at a ~15% premium to
Aditya Bagul
Asian Paints which we believe is unjustified given Asian Paints superior
competitive advantages and scale benefits. +91 22 3043 3264
Pidilite Industries
Exhibit 1: EBITDA margins and revenue growth over the Exhibit 2: RoCE and RoE over the last ten years
last ten years (FY05-15) (FY05-15)
50,000 20% 40% 40%
40,000
15% 30% 30%
30,000
10% 20% 20%
20,000
5% 10% 10%
10,000
- 0% 0% 0%
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
Revenue (Rs mn) EBITDA margin (%) RoCE (%) ROE% (RHS)
Exhibit 3: Sources of funds over the last ten years (FY05- Exhibit 4: Utilisation of funds over the last ten years (FY05-
15) 15)
Debt Increase Debt
raised, in cash repayment
16% and cash , 19%
equivalent
Purchase s, 2%
of
Investmen
ts, 14%
Dividend
paid, 24%
Net
CFO, 84% Capex,
47%

50 15
40
30 10
20
10 5
-
Mar-05
Nov-05
Mar-07
Nov-07
Mar-09
Nov-09
Mar-11
Nov-11
Mar-13
Nov-13
Mar-15
Jul-06
Jul-08
Jul-10
Jul-12
Jul-14
-
Mar-05
Nov-05
Jul-06
Mar-07
Nov-07
Jul-08
Mar-09
Nov-09
Jul-10
Mar-11
Nov-11
Jul-12
Mar-13
Nov-13
Jul-14
Mar-15
1 Yr Forward P/E 4 Yr Avg 6 Yr Avg

1 yr Forward P/B 4 yr Avg 6 Yr Avg

Pidilite has, in the past, reported high cash conversion, efficient management of working capital and low
Accounting GREEN levels of loans and advances and contingent liabilities. Consequently, we give a high rating to the
quality of its accounting.
Pidilites competitive advantages ensure high pricing power; despite its strong presence across product
categories, the companys earnings are subject to volatility in input costs (crude and VAM).
Our accounting analysis does not raise any major red flags with respect to dubious transactions by
Treatment of minorities AMBER promoters. However, we raise concern over the capital allocation of the firm, as the elastomer project
remains on hold and incremental investments in international subsidiaries are RoCE-dilutive.

Pidilite Industries
Balance Sheet
Net Worth 16,515 19,526 22,706 26,690 31,585
Total Debt 510 459 584 - -
Others 508 579 617 617 617
Current Liabilities 8,219 8,719 9,240 11,127 13,078
Fixed Assets 10,747 11,872 14,403 14,796 15,169
Investments 2,931 2,603 3,599 3,639 3,679
Current Assets 12,074 14,809 15,146 20,000 26,431
Total Assets 25,752 29,284 33,148 38,435 45,280
Income Statement
Net Income 36,781 42,832 48,441 56,728 66,516
% Growth 18% 16% 13% 17% 17%
Gross Profit 16,700 19,171 21,627 25,641 30,065
EBITDA 6,002 6,667 7,678 9,559 11,441
PBIT 6,021 6,304 6,986 9,034 11,013
PBT 5,866 6,141 6,830 9,034 11,013
PAT 4,292 4,515 5,125 6,364 7,749
EPS 8.4 8.8 10.0 12.4 15.1
EPS Growth 32% 5% 14% 24% 22%
Cashflow statement
Year to March (` mn) FY13 FY14E FY15 FY16E FY17E
EBIT 6,021 6,304 6,986 9,034 11,013
Depreciation 686 812 1,178 1,107 1,127
Others (1,337) (1,816) (1,851) (2,710) (3,304)
Change in working capital (961) (1,969) (727) 823 (516)
Cash flow from investments (3,266) (1,936) (3,709) (1,500) (1,500)
Change in cash (1,373) (262) 277 3,791 3,965
Free cash flow 1,142 1,394 1,877 6,754 6,819
Ratios and Valuation Parameters

Gross margin (%) 45.4% 44.8% 44.6% 45.2% 45.2%
EBITDA margin (%) 16.3% 15.6% 15.9% 16.9% 17.2%
Net debt: equity (x) (0.1) (0.1) (0.0) (0.2) (0.3)
RoCE* (%) 37.9% 34.1% 32.3% 36.1% 37.8%
RoE (%) 28.8% 25.1% 24.3% 25.8% 26.6%
P/E (x) 63.3 60.2 53.0 42.7 35.1
Price/Sales (x) 7.4 6.3 5.6 4.8 4.1
EV/EBITDA (x) 45.2 40.6 35.4 28.0 23.0

Pidilite Industries

Page Industries
BUY
COMPANY UPDATE PAG IN EQUITY June 22, 2015
Largest branded innerwear player in India
Page operates in the mid/premium innerwear market, with a market share of Consumer
~30%/~8% in the men's/womens segments; it has seen rapid expansion in the
leisurewear segment over FY10-15 (~48% CAGR). Over the last eight years, the Recommendation
companys shares have compounded annually at 60% vs 11% for the Sensex. Mcap (bn): `157/US$2.5
Key Parameters 6M ADV (mn): `180/US$2.8
Parameter Result Comment CMP: `14,950
FY09: 42%, FY10:44%, FY11: 46% Efficient capital allocation and improving TP (12 mths): `16,500
ROCE Trajectory
FY12: 54%; FY13: 57%; FY14:58% EBITDA margins have led to superior RoCE Upside (%): 10
FY09: 32%, FY10: 36%, FY11:
Sales Growth
42% Market share gains + ~17% category value
FY12: 42%; FY13: 26%; FY14: CAGR + launch of leisurewear segment Flags
Trajectory
36% Accounting: GREEN
EPS Growth FY09:33%, FY10: 25%, FY11: 48% Improving EBITDA margin profile driven by
FY12: 54%; FY13: 25%; FY14: mix change towards leisurewear and pricing Predictability: GREEN
Trajectory power Earnings Momentum: GREEN
37%
Share price Consistent performance despite weak macro
3yr/5yr/10yr 72%/76%/NA
returns (CAGR) has led to meaningful re-rating of the stock Performance (%)
Greatness Model
FY09-14: D1* Page scores well across all parameters
(decile) 30,000 20000
D4 and so on. 28,000 15000
Brand + Distribution + Integrated manufacturing = Recipe for success 26,000 10000
Over the past 10 years, Pages revenues have reported a CAGR of ~36%, with
an average EBITDA margin of ~20% and RoCE of ~35%. This strong 24,000 5000
Aug-14
Jun-14
Oct-14
Jan-15
Mar-15
May-15
performance can be attributed to: (a) aspirational brand recall for Jockey; (b)
well-incentivised distribution network generating a push for new product
launches; (c) product innovation with in-house manufacturing; and (d) tailwinds
Sensex Page Industries
from low penetration
60% share price CAGR levels in theCAGR
on ~36% mid/premium
earnings segment. Efficient working
growth (FY07-15)
Aided by strong fundamentals of the company, the shares have re-rated and
delivered over 60% CAGR returns over the last 8 years with an average dividend
payout ratio of 56%. Page has delivered consistent earnings growth over the
past decade despite a volatile macro demand environment. The firm fares well
on our corporate governance checks.
Greater growth longevity than most other consumer companies
Tailwinds from low category penetration (click here for detailed note), launch of
new product categories (eg kidswear) and innovation-led new product launches
lead us to expect revenue CAGR of ~31% (FY15-21). Implementation of various
IT initiatives and further improvement in the distribution network along with
strict control over working capital will, we believe, enable the company to
improve its working capital and EBITDA margins and deliver RoCEs of >60%
over this period. Based on our understanding of the macro potential, even in
FY20, the penetration levels in the mid/premium segment would be ~15% (vs
~10% currently), with Page commanding a market share of ~35% in FY20.
Sustained competitive advantages support punchy valuations
Page Industries has re-rated from ~35x earnings to 55x over the last 12-18
months which is justified, given the: (a) entry into new product categories
enhancing the growth visibility and (b) continual improvements in systems and
processes, enabling the company to improve its margin profile. Page is currently Analyst Details
trading at 57x/42x FY16/FY17E EPS. Pages exemplary financials (37% EPS
Rakshit Ranjan, CFA
CAGR in FY15-21E and ~57% RoCE) support the valuation premium vs most
+91 22 3043 3201
consumer companies. We retain BUY (TP of `16,500; implied multiple of
63x/46x FY16/FY17E EPS respectively). Competitive threats to Pages leadership rakshitranjan@ambitcapital.com
are low (in a large growing opportunity, due to: (a) Rupas/Maxwells lack of Aditya Bagul
control on distribution and manufacturing with poor aspirational connect; and
+91 22 3043 3264
(b) hurdles for international brands like FCUK, Calvin Klein, USPA and Hanes to
build a strong distribution network beyond modern retail into hosiery stores.
Page Industries
last ten years (FY05-15) (FY05-15)
Revenue (Rs mn) EBITDA margin (RHS) ROCE ROE(RHS)

60% 130%
12000 24%
10000 22% 110%
50%
20%
8000 90%
18%
6000 40%
16% 70%
4000
14% 30%
2000 50%
12%
0 10% 20% 30%
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
Exhibit 3: CFO and debt primary sources of funds (FY05-15) Exhibit 4: Rational capital utilisation through capex and
dividend (FY05-15
Interest Dividend Increase Debt
received, received, in cash repayment
2% 0% and cash 8%
equivalent
s
Debt 5%
raised,
24% Net Capex
37% Dividend
Proceeds CFO, 66% paid
from 44%
shares,
7% Interest
paid
6%

60 40
50
30
40
30 20
20
10
10
- -
Mar/07
Oct/07
May/08
Dec/08
Jul/09
Feb/10
Sep/10
Apr/11
Nov/11
May/15
Mar/07
Jun/12
Jan/13
Aug/13
Mar/14
Oct/14
Oct/07
May/08
Dec/08
Jul/09
Feb/10
Sep/10
Apr/11
Nov/11
Jun/12
Jan/13
Aug/13
Mar/14
Oct/14
May/15
PE 4 yr Avg 6 yr Avg P/B 4 yr Avg 6 yr Avg

Segment Score Comment
Page Industries' cash conversion has remained healthy and this has resulted in cumulative CFO (pre-tax)/EBITDA of
Accounting GREEN above 70% in FY05-15. Page has maintained effective control on the working capital (WC) cycle, and hence despite high
sales growth, WC days have increased marginally from 63 days in FY09 to 65 days in FY15E.
Historically, Page Industries has beaten consensus estimates on net profit most of the time. The company has either
missed consensus revenue estimates by less than 1% or it has beaten revenue estimates by 1-4%.
Earnings Our accounting analysis does not raise any major red flags with respect to dubious transactions by promoters.
GREEN
momentum Also, with the high levels of cash generation, the company has returned the excess cash to the shareholders.

Page Industries
Balance Sheet
Shareholders funds 2,135 2,890 3,868 5,178 6,984
Borrowings 1,007 1,632 1,344 1,350 1,350
Net Fixed assets (incl. CWIP) 1,459 1,764 2,174 2,748 3,279
Inventories 2,350 3,626 4,435 4,816 6,169
Cash and cash equivalents 46 35 44 362 768
Working Capital 1,730 2,853 3,152 3,784 5,057
Source: Ambit capital research
Income Statement
Net Sales 8,758 11,876 15,424 20,441 27,129
Raw materials cost 4,203 5,659 7,212 9,710 12,886
Employees cost and comm. on sales 1,436 1,881 2,585 3,163 4,083
Other Admin, S&D expenses 640 906 1,228 1,467 1,880
EBITDA 1,766 2,511 3,171 4,463 6,078
Depreciation 114 139 176 218 263
Interest expense 80 104 155 105 105
PBT 1,657 2,334 2,933 4,283 5,900
Tax expenses 531 797 973 1,371 1,888
Net profit (excl. exceptional items) 1,125 1,537 1,960 2,913 4,012
EPS (`) 100.9 137.8 175.7 261.1 359.7
Cash flow Statement
Changes in Working Capital (457) (1,051) (290) (314) (867)
Cash flow from operating activities 871 740 1,908 2,779 3,323
Capex (449) (473) (721) (792) (795)
Cash flow from investing activities (419) (441) (627) (649) (605)
Dividend paid (596) (756) (940) (1,602) (2,206)
Cash flow from financing activities (438) (310) (1,382) (1,701) (2,312)
Free cash flow 430 280 1,281 2,130 2,718
Valuation Ratios
P/E (x) 148.2 108.5 85.1 57.3 41.6
ROE (%) 59.3 61.2 58.0 64.4 66.0
Net debt/equity (x) 0.5 0.6 0.3 0.2 0.1
Asset turnover excluding cash (x) 3.2 3.1 3.2 3.5 3.7
Gross margin (%) 52.0 52.3 53.2 52.5 52.5
EBITDA margin (%) 20.2 21.1 20.6 21.8 22.4
Net profit margin (%) 12.8 12.9 12.7 14.2 14.8
Dividend yield (%) 0.3 0.4 0.5 0.8 1.1

Page Industries

Torrent Pharma
BUY
COMPANY UPDATE TRP IN EQUITY June 22, 2015
Moving closer to large-cap peers
Torrent Pharma (TRP) is one of Indias major pharmaceutical companies, with a Healthcare
presence in generic markets like US and Europe, branded markets like India and
emerging markets (EMs) like Brazil and Philippines. Over the last ten years, the Recommendation
companys shares have compounded annually at 36% vs 16% for the Sensex. Mcap (bn): `216/US$3.4
Key Parameters 6M ADV (mn): `135/US$2.1
Parameter Result Comment CMP: `1279
Torrents RoCEs have declined from the peak of FY09 TP (12 mths): `1477
FY09: 23%, FY10: 30%, FY11: 25% due to significant infrastructure build-in EMs. But RoCE
RoCE Trajectory Upside (%): 15
FY12: 26%; FY13: 30%; FY14: 33% has recovered in FY14 owing to the Cymbalta launch in
the US and operating leverage in India and Brazil.
Consistent sales growth from India and EMs (especially
Sales Growth FY09: 20%, FY10: 15%, FY11: 15%
Trajectory FY12: 22%; FY13: 17%; FY14: 32%
Brazil) coupled with entry in the US generics market led Flags
to sales CAGR of 20.5% over FY0-14.
Consolidated PAT growth has increased as the India Accounting: GREEN
EPS Growth FY09: 27%, FY10: 18%, FY11: (23)% business grew faster (resulting in positive operating Predictability: AMBER
Trajectory FY12: 5%; FY13: 52%; FY14: 53% leverage) led by management change and one-off
sales in the US. Earnings Momentum: GREEN
Share price Torrent has outperformed the Sensex over FY05-14 and
returns 3yr/5yr/10yr 62%/36%/36% has provided healthy returns over the near term (FY11-
(CAGR) 15). Performance (%)
Torrent receives a high score on our greatness model 250
Greatness Model
FY09-14: D2* on account of improvement in sales, pricing discipline
(decile)
and return ratios. 200
Source: Company, Bloomberg, Ambit Capital research. *Note: D1 is the best decile followed by D2, D3, D4
and so on. 150
RoCEs in upward trajectory post management turnaround 100

Over the past decade (FY05-14), Torrents revenues have expanded at 26% 50
May-14
Aug-14
Oct-14
Jan-15
Mar-15
CAGR led by improving domestic sales, brand establishment in emerging
markets and key product launches in US generics. Post the management
turnaround in FY11, profitability and RoCEs have shown a steady upward trend;
focus on creating bigger brands and low new product launches, and change in Sensex Torrent Pharma
the incentive programme for Medical Representatives (M`) led to RoCEs
improving from 25.4% in FY11 to 32.9% in FY14. The company has an excellent Source: Bloomberg, Ambit Capital research
capital allocation track record due to high returns from investments in India,
Brazil, the US and other Asian markets. TRP was one of the very few Indian
pharma companies to enter in the branded EM markets whilst the other
companies focused on US generics.
Outperformance to Sensex led by creation of moats around its business
Torrent has outperformed the Sensex by 26% over FY05-14, as it has created
moats around its business by expanding its footprint in the domestic market and
has established itself as a brand in key emerging markets like Brazil and the
Philippines. Furthermore, with its entry in the US markets with key products like
Cymbalta and Abilify, the company has further de-risked its revenue portfolio.
Investments in innovation A foot forward
As per the management, the company is working on New Chemical Entities
(NCEs) on three products. Two products are in Phase 1 and two products are in
Phase 2 (in the cardiology segment). The company has no intention of out-
licensing the product, and it will conduct all the required clinical trials and also
commercialise the product. Also, Zyg Pharma (derma filings in the US) and
Analyst Details
Reliance LS (biosimilars in India) add to longer-term visibility to earnings.
Aditya Khemka
About to graduate from a mid-cap to a large-cap
We value Torrent at `1,477, implying 19.4x FY17E EPS vs the current trading +91 22 3043 3272
multiple of 18.6x FY16E EPS (ex-Abilify). It is trading at a 30% discount to the adityakhemka@ambitcapital.com
large-cap average FY16E forward P/E. On an mcap-to-FCFE basis, it is trading at Paresh Dave, CFA
29x FY17E vs 36-51x for Sun Pharma, Lupin and Dr Reddys. We have chosen
+91 22 3043 3212
mcap-to-FCFE, as it keeps taking unquantified one-off hits (forex loss and one-
off revenue from Cymbalta in the US) on its P&L to keep the balance sheet clean. pareshdave@ambitcapital.com
Torrent Pharma
last ten years (FY05-FY14) (FY05-FY14)
Revenue (Rs Mn) EBITDA margins (% RHS) 45% RoE RoCE, RHS 35%
50,000 30%
40%
25% 30%
40,000 35%
20% 30% 25%
30,000
15% 25% 20%
20,000
10% 20%
15%
10,000 5% 15%
- 0% 10% 10%
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
Exhibit 3: Sources of funds over the last ten years (FY05 Exhibit 4: Utilisation of funds over the last ten years (FY05-
FY14) FY14)
Interest Increase
Debt in cash
received,
raised, and cash
4.4%
26.3% equivalent
Dividend , 26.1% Net
received, Capex,
0.2% Interest 47.5%
paid, 7.2% Dividend
CFO,
paid,
68.8%
19.1%

25.0 8.0
TRP 1 yr fwd PE 7.0 TRP 1 yr fwd PB
20.0
6.0
15.0 5.0
4.0
10.0 3.0
2.0
5.0
1.0
0.0 0.0
Mar-05
Mar-06
Mar-07
Mar-08
Mar-09
Mar-10
Mar-11
Mar-12
Mar-13
Mar-14
Mar-15
Mar-05
Mar-06
Mar-07
Mar-08
Mar-09
Mar-10
Mar-11
Mar-12
Mar-13
Mar-14
Mar-15
TRP P/E 4 yr Avg 6 yr Avg TRP P/E 4 yr Avg 6 yr Avg


Field Score Comments
In our forensic analysis of 360 companies, Torrent scores higher than the pharma industry average (comprising
26 companies). Torrent scores high on ratios of: (a) gross block conversion; (b) change in depreciation rates; (c)
Accounting GREEN
audit fees; and (d) non-operating expenses. However, Torrent has weaker scores on: (a) cash yield; and (b)
volatility in sales and distribution costs.
Overall, the management has made timely announcements in its earnings calls, meetings and interviews
Predictability AMBER regarding product filings, acquisitions and business outlook. However, the unpredictability of emerging markets
and innovative projects make us assign an AMBER flag on predictability.
Consensus FY16 EBITDA and EPS have been upgraded by 6.8% and 11.5% respectively; and consensus FY17
Earnings momentum GREEN
EBITDA and EPS have been upgraded by 1.0% and 5.2% respectively over the past three months.

Torrent Pharma
Revenue mix (` mn)

Year-ended 31 Mar FY13 FY14 FY15E FY16E FY17E
Domestic formulations 10,240 11,610 16,185 19,775 22,947
Exports 18,280 26,290 27,385 40,230 42,649
Brazil 5,020 5,330 6,058 6,967 8,360
US 3,550 4,738 6,856 13,285 18,946
One off - 3,022 1,464 6,133 -
ROW 3,210 3,900 3,767 4,144 4,972
Rest of Europe 2,577 3,495 3,495 3,670 4,037
Germany 3,923 5,805 5,745 6,032 6,334
Others 610 700 90 100 100
Insulin 3,000 3,230 2,480 2,604 2,734
Total 32,130 41,830 46,140 62,709 68,430
Income statement
Year to March (in ` mn) FY13 FY14 FY15E FY16E FY17E
Net revenues 32,111 41,847 46,530 63,432 69,184
Material Cost 9,258 12,435 14,150 17,889 21,362
General Expenses 9,650 11,644 14,100 16,590 19,393
Employee cost 6,233 7,411 8,420 9,683 11,135
Core EBITDA 6,970 10,357 9,860 19,269 17,294
Depreciation 827 870 1,910 2,044 2,169
Interest expense 338 586 1,750 1,894 1,669
Adjusted PBT 6,191 8,440 9,400 16,331 14,034
Tax 1,467 1,801 1,890 3,284 2,822
Reported net profit 4,724 6,639 7,510 13,048 11,212
Balance Sheet
Total Assets 37,528 50,042 74,172 84,603 91,082
Fixed Assets 11,051 14,095 34,950 37,906 38,236
Current Assets 25,633 33,483 36,758 44,234 50,382
Investments 844 2,464 2,464 2,464 2,464
Reserves & surplus 13,796 18,179 23,053 31,521 38,798
Total networth 14,219 19,025 23,899 32,367 39,644
Total debt 7,030 11,418 25,040 21,040 16,040
Deferred tax liability/(asset) 258 -182 -182 -182 -182

Torrent Pharma
Cash Flow statement

PBT 5,816 8,440 9,400 16,331 14,034
Depreciation 827 870 1,910 2,044 2,169
Tax (1,325) (2,617) (1,890) (3,284) (2,822)
Net Working Capital (4,218) (1,197) (1,577) (1,952) (1,877)
CFO 1,535 5,994 6,734 14,034 12,596
Capital Expenditure (2,844) (3,982) (22,650) (5,000) (2,500)
Investment 427 424 2,860 1,000 578
Other investments - - - - -
CFI (2,417) (3,558) (19,790) (4,000) (1,922)
Issuance of Equity - - - - -
Inc/Dec in Borrowings 1,340 4,141 13,622 (4,000) (5,000)
Net Dividends (831) (2,667) (990) (2,636) (4,580)
Other Financing activities (312) (610) (1,750) (1,894) (1,669)
CFF 197 864 10,882 (8,529) (11,248)
Net change in cash (685) 3,300 (2,174) 1,504 (574)
FCF 1,030 6,427 (14,823) 10,077 11,173
Valuation Parameters
Year to March FY13 FY14 FY15E FY16E FY17E
EPS 25.6 39.2 44.4 77.1 66.3
Book Value ( per share) 168.0 112.4 141.2 191.3 234.2
P/E (x) 49.4 32.2 28.5 16.4 19.1
P/BV (x) 7.5 11.2 9.0 6.6 5.4
EV/EBITDA(x) 30.8 21.0 23.7 11.8 12.9
EV/Sales (x) 6.9 5.2 4.6 3.4 3.1
EV/EBIT (x) 32.6 23.5 19.0 11.6 13.5
Ratios
Revenue growth 17.7 32.2 13.6 36.3 9.1
Core EBITDA growth 33.6 48.6 (4.8) 95.4 (10.3)
APAT growth 52.4 53.4 13.1 73.7 (14.1)
EPS growth 52.4 53.4 13.1 73.7 (14.1)
Core EBITDA margin 21.7 24.8 21.2 30.4 25.0
PBT margin 19.3 20.2 20.2 25.7 20.3
Net profit margin 14.7 15.9 16.1 20.6 16.2
ROCE (%) 25.5 27.5 22.4 28.5 23.0
Reported RoE (%) 36.1 39.9 35.0 46.4 31.1
Net Debt Equity ratio (X) 0.1 0.2 0.8 0.4 0.2
CFO/EBITDA (x) 0.2 0.6 0.7 0.7 0.7
Gross Block turnover (x) 2.5 3.0 1.8 1.6 1.6
Working Capital Turnover (x) 9.3 6.8 7.7 10.5 8.1
Current Ratio 1.6 1.7 1.4 1.4 1.4

PI Industries
BUY
COMPANY UPDATE PI IN EQUITY June 22, 2015
Firing on twin growth engines Agri Inputs
PI is a leading agrochemicals company in India with two lines of business: (1)
domestic agrochemicals (40% of revenues); and (2) custom synthesis and Recommendation
manufacturing (CSM) business (60% of revenues). Under the CSM business, the
Mcap (bn): `87/US$1.4
company offers process research and caters to the customised manufacturing
6M ADV (mn): `130/US$2.0
needs of agrochemical giants In the domestic business, it has been focusing on
niche in-licensed molecules marketed through nationwide distribution network. CMP: `635
TP (12 mths): `825
Key Parameters
Upside (%): 30
RoCEs have improved due to: (a) improving asset
FY09: 14%, FY10: 17%,
FY11: 20%
turns led by continuous improvement in product Flags
RoCE Trajectory mix and process efficiencies, & (b) improving margins
FY1: 18%; FY13: 16%; Accounting: GREEN
due to rising share of CSM business and better
FY14: 24% Predictability: GREEN
domestic margins
FY09: 25%, FY10: 17%, PI commercialised nearly 18 molecules over the last Earnings Momentum: GREEN
Sales Growth FY11: 33% 6-8 years. This aided growth in the CSM business
Trajectory FY12: 22%; FY13: 31%; (~45% CAGR). On the domestic side, success of new
FY14: 39% products aided significant growth of ~16% CAGR. Performance (%)
FY09: 163%, FY10: 73%,
EPS growth has been led by consistent expansion in 260
EPS Growth FY11:56%
EBITDA margins from 9% in FY08 to ~20% in FY15
Trajectory FY12: 25%; FY13: 17%; 210
and reduction in debt.
FY14: 83%
160
Stock has seen significant re-rating over the last two
Share price returns 82%/85%/64
3yr/5yr/10yr years led by improving RoCEs and consistent delivery 110
(CAGR) %
ahead of consensus expectations.
60
Greatness Model FY10-14: PI scores well across all our parameters owing to a
Jul-14
Oct-14
Nov-14
Jan-15
Feb-15
Apr-15
May-15
Aug-14
Sep-14
Jun-14
Dec-14
Mar-15
FY09-13: D1*
(decile) D1* good capital allocation and accounting scores,
D4 and so on.
PI Inds. Sensex
Exemplary execution driving superior financial performance
Over the past decade (FY05-14), we credit the management for strong
execution22%/30%/38% sales/EBITDA/PAT CAGR driven by 16%/45% CAGR
in the domestic/CSM business. PIs RoCE improved from 10% to 26% driven by Source: Bloomberg, Ambit Capital Research
improvement in asset turnover and EBITDA margins over the last decade,
alongside superior cash conversion (90% CFO/EBITDA).
After two decades of sowing, the reaping has just begun
PIs share price has outperformed the Sensex by 50% over FY05-15 driven by
superior PAT CAGR of 38% and earnings P/E multiple expansion. Global talent
on PIs Board has helped build a sound risk-mitigated business model to direct
its growth effectively. PIs recent performance should be considered an outcome
of the promoters superior execution and good foresight (over the last two
decades) to build a credible CSM business. We expect PI to continue to deliver
superior earnings driven by superior execution amidst a fairly large, CSM
opportunity and under-penetrated Indian agrochem space.
Entry into other specialty chemical segments to drive growth
PI is widening its ambit from agrochemicals to other speciality chemicals which
will expand its addressable market. Whilst PIs current market share in the
global agrochem CSM (pegged at ~US$5-6bn) is relatively small (low single
digit), we expect the CSM business to report ~20% sales CAGR over the next
decade. On the domestic side, we expect continued new product launches will
drive 15-20% sales CAGR over the next 5-10 years. Margin expansion and
improved asset turnover should drive better earnings growth and return ratios.
Earnings multiples to re-rate with consistent rise in RoCEs
Our DCF-based 12-month target price of `825 implies 25x P/E multiple which is
fair given earnings growth expectations of ~35% over FY15-FY17 and Analyst Details
sustainable RoCEs of ~30%. PIs multiples have significantly re-rated with high Ritesh Gupta
earnings growth trajectory and improved RoCEs. Current multiples of 20x are in +91-22-30433242
line with its peers Rallis/Dhanuka but at a discount of ~20% vs Bayer. PI should
riteshgupta@ambitcapital.com
command better multiples given its superior execution and return ratios.
PI Industries
Exhibit 1: Superior growth on both revenues and EBITDA Exhibit 2: RoCE has been consistently expanding driven by
margins improved margins and better asset utilisation
Revenue (Rs mn) EBITDA Margin (% RHS) ROCE ROE ( % RHS)
25,000 25% 30% 40%

25% 35%
20,000 20% 30%
20% 25%
15,000 15%
15% 20%
10,000 10% 15%
10%
10%
5,000 5% 5% 5%
- 0% 0% 0%
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
Exhibit 3: Operating cash flows have been the primary Exhibit 4: which have been judiciously utilised for
source of cash capacity building
Dividend Increase in
Borrowings Paid cash
Equity 5.5% 5.7% 3.9%
shares
issued Interest
20.0% Paid
18.7%
Interest and
dividend Investments
income 0.0%
3.6%
CFO Capex
70.8% 71.7%
Exhibit 5: P/Es have re-rated consistently driven by Exhibit 6: : Forward P/B also has followed similar trend
superior earnings growth and improving return ratios alongside improved utilisation of assets
35 10.0
30
8.0
25
20 6.0
15 4.0
10
2.0
5
- -
Apr-06
Oct-06
Apr-07
Oct-07
Apr-08
Oct-08
Apr-09
Oct-09
Apr-10
Oct-10
Apr-11
Oct-11
Apr-12
Oct-12
Apr-13
Oct-13
Apr-14
Oct-14
Apr-06
Oct-06
Apr-07
Oct-07
Apr-08
Oct-08
Apr-09
Oct-09
Apr-10
Oct-10
Apr-11
Oct-11
Apr-12
Oct-12
Apr-13
Oct-13
Apr-14
Oct-14
Apr-15
One-yr fwd P/E 4-yr avg P/E 6-yr avg P/E One-yr fwd P/B 4-yr avg P/E 6-yr avg P/E

On our forensic accounting screener of 16 agrochemicals and seeds stocks, PI ranks in the top quartile due to high
Accounting GREEN
CFO/EBITDA (90% conversion ratio), low audit fees and no material unclassified loans or contingent liabilities.
Predictability GREEN PIs management has been guiding conservatively and has mostly delivered results that were better than expectations.
Earnings
GREEN Consensus EPS estimates recently saw upward revisions post the 4Q results.
momentum

PI Industries
Income statement Summary

Year to March (` mn) FY13 FY14 FY15E FY16E FY17E
Net Sales 11,514 15,955 19,403 23,506 29,384
% growth 31.0% 38.6% 21.6% 21.2% 25.0%
EBITDA 1,826 2,910 3,727 4,691 6,399
% growth 26.0% 59.4% 28.1% 25.9% 36.4%
Depreciation 220 316 498 552 635
EBIT 1,606 2,595 3,230 4,139 5,764
Interest expenditure 238 139 97 98 58
Non-operating income 82 158 420 250 275
Adjusted PBT 1,450 2,613 3,552 4,291 5,981
Tax 477 733 1,094 1,202 1,555
Adjusted PAT 974 1,912 2,459 3,090 4,426
% growth 19.7% 96.2% 28.6% 25.7% 43.2%
Extraordinary income/ (expense) (1) (44) - - -
Reported PAT after minority interest 973 1,880 2,459 3,090 4,426
Balance Sheet Summary

Reserves and surpluses 5,182 6,809 8,795 11,417 15,218
Total net worth 5,317 6,945 8,931 11,553 15,354
Debt 2,172 1,223 1,223 223 (0)
Deferred tax liability 483 437 437 437 437
Gross block 6,178 6,829 8,329 10,079 11,079
Net block 4,781 5,267 6,269 7,467 7,832
CWIP 605 425 425 425 425
Investments (non-current) 5 5 5 5 5
Cash & cash equivalents 161 438 611 1,134 3,618
Debtors 2,625 2,568 3,827 3,671 4,589
Inventory 2,418 3,188 3,243 4,122 5,152
Loans & advances 695 1,194 1,168 1,346 1,603
Provisions 224 324 555 633 789
Net current assets 2,650 2,951 3,935 4,359 7,572
Miscellaneous expenditure - - - - -
Total assets 7,972 8,605 10,591 12,213 15,791

PI Industries
Cash flow Statement Summary

Net profit before tax 1,450 2,613 3,552 4,291 5,981
Depreciation 220 316 498 552 635
Others 155 84 (323) (152) (217)
Tax (380) (743) (1,094) (1,202) (1,555)
(Incr)/decr in net working capital (425) (81) (810) 99 (729)
Capex (net) (1,510) (640) (1,500) (1,750) (1,000)
(Incr)/decr in investments - - - - -
Other income (expenditure) 63 138 420 250 275
Cash flow from investments (1,447) (502) (1,080) (1,500) (725)
Net borrowings (402) (1,097) - (1,000) (223)
Issuance/buyback of equity 4 (6) (82) (0) 0
Interest paid (251) (115) (97) (98) (58)
Dividend paid (76) (272) (390) (468) (625)
Cash flow from financing 452 (1,451) (570) (1,566) (905)
Net change in cash 25 236 174 523 2,484
Free cash flow (before investments) (490) 1,548 324 1,839 3,114
Ratio analysis
PBT margin (%) 12.6% 16.4% 18.3% 18.3% 20.4%
Net profit margin 8.5 12.0 12.7 13.1 15.1
Dividend payout ratio (%) 13.1% 14.2% 13.8% 13.2% 12.3%
Net debt/Equity(x) 0.38 0.11 0.07 (0.08) (0.24)
RoCE (post-tax) (%) 16.2% 23.9% 26.3% 27.7% 31.9%
RoIC (%) 16.5% 24.8% 27.9% 30.0% 38.5%
Working Capital Turnover 6.0 8.7 8.9 9.0 10.4
Gross Block Turnover 2.2 2.5 2.6 2.6 2.8
EPS (`) 7.7 14.0 18.1 22.7 32.5
Diluted EPS (`) 7.6 14.0 18.1 22.7 32.5
Dividend per share (`) 1.0 2.0 2.5 3.0 4.0
P/E (x) 83.6 45.2 35.1 28.0 19.5
P/BV (x) 16.2 12.4 9.7 7.5 5.6
EV/EBITDA (x) 48.4 30.0 23.4 18.6 13.6
EV/EBIT (x) 55.1 33.6 27.0 21.0 15.1
EV/Sales (x) 7.7 5.5 4.5 3.7 3.0

PI Industries
Appendix 1: Sensex Exits

Our thematic report, Sensex Exits: The decadal story, dated May 5, 2015 (click here Sensex churn set to revert to higher
for details) made a case for a rise in Sensex churn driven by the economic changes of levels, led by Modi resets
the current National Democratic Alliance (NDA) Government and identified 15 stocks
that would exit the Sensex in the next decade. We made our case on the following
thesis:
Modi resets will transform the Indian economy
Indias Prime Minister, Narendra Modi, is likely to engineer three critical resets over
the next four years to the Indian economy. We have detailed our work on this topic in
our report titled Modi hits the reset button, dated 23rd March 2015 (click here for
details). To summarise, these changes are as follows:
Reset 1: Shifting Indias savings landscape away from gold and land towards Reset 1: Shift in savings towards
the formal financial system: This will be led by a crackdown against black money financial savings
a process which began in the Union Budget which contained measures explicitly
aimed to disincentivise the black economy and curb the demand for gold. Modi also
aims to expand the white economy, by exponentially increasing the number of
households with access to banking services through the ambitious Prime Ministers
Jan Dhan Yojana (PMJDY) which was launched in August 2014.
Reset 2: Disrupting crony capitalism in India: Prime Minister Modi is keen to Reset 2: Attacking corruption at
disrupt the crony capitalist model in sectors ranging from food and real estate to every level
improve the standard of living for the electorate. Measures to achieve this include: a)
curbing corruption in the Government machinery (e.g. widening direct benefit
schemes to increase the number of beneficiaries and crackdown on corrupt
bureaucrats and politicians); and b) taking on business groups on issues like gas
pricing (Reliance Industries), corporate espionage (prominent corporates that are part
of Ambits P-75 list of connected companies) and coal block allocation (Jindal Steel &
Power).
Reset 3: Re-defining Indias subsidy mechanisms: The Modi-led Government Reset 3: Overhaul of Indias
will: (a) compress the quantum of subsidies that the Central Government pays for, as subsidy system
is already evident from the last two budgets that this Government has prepared; and
(b) improve targeting of subsides in India by creating and then using the direct
benefit transfer (DBT) platform. Over and above this, Modi has also halted other
large-scale fiscal transfers towards rural India. The most important amongst these is
the Food Corporation of Indias enormous programme for buying food grains at
Minimum Support Prices (MSPs). As a result, the FCIs transfer of resources from the
Centre to the states has halted in large parts of the country.
These three resets will disrupt the way business is conducted in India in much the A disruption in business as usual
same way that the liberalisation measures of 1991 ended the License Raj. In is imminent
particular, we expect the resets to have three significant impacts:
Inflation should fall structurally;
GDP growth will be adversely impacted in the short term; and
The cost of factors of production should decline thus making it easier for entrants
to go head-to-head with entrenched incumbents.
Why Sensex Churn will rise
Our analysis of Sensex churns over a 10-year window from 1986 to date (i.e. 1986- Sensex churn rises when the
1996, 1987-1997 and so on to 2004-2014) shows that the churn ratio of the Sensex economy is undergoing irreversible
tends to rise when the economy is undergoing irreversible structural changes. For structural changes
instance, the 10-year period spanning 1992-2002, which saw the era of the License
Raj coming to an end, saw the Sensexs churn ratio rise to 60% (vs the 53% churn
ratio in the Sensex over 2002-12).

PI Industries
Exhibit 1: Sensex churn ratio shows a tendency to rise when the economy undergoes
structural change
Sensex churn- 10 yr window

70%
% of sensex cos. churned out
60%
over the next 10 yrs
50%
40%
30%
20%
10%
0%
Jan-86
Jan-87
Jan-88
Jan-89
Jan-90
Jan-91
Jan-92
Jan-93
Jan-94
Jan-95
Jan-96
Jan-97
Jan-98
Jan-99
Jan-00
Jan-01
Jan-02
Jan-03
Jan-04
Owning a Sensex exit candidate is a losing proposition

Stocks that eventually exit the Sensex do so after a long period of underperformance. A long period of underperformance
Indeed, this is among the reasons why they lose their relevance to their benchmark usually precedes the stocks exit
before eventually bowing out. Whilst on an average these stocks have from the Sensex
underperformed the Sensex by ~7% on a CAGR basis over the next decade, what is
more interesting is its performance and underperformance until the time of exit from
the Sensex. On an average, these stocks have delivered -10% CAGR returns until the
time of exit. Further, relative to the Sensex, the underperformance (until the time of
exit from the Sensex) is as high as -20% (in CAGR terms).
Exhibit 2: Sensex exit stocks - Massive underperformance until the time of exit from the Sensex
Median underperformance Median underperformance
Median performance Median performance of
Number of exits (rel. to the Sensex) (rel. to Sensex) of exiting
Period of exiting stocks exiting stocks until exit
from the Sensex of exiting stocks stocks until exit from the
over the decade from the Sensex
over the decade Sensex
1991-01 18 -15% -20% -12% -23%
1992-02 19 -8% -11% -9% -17%
1993-03 20 -1% -6% -16% -14%
1994-04 20 -2% -7% -27% -18%
1995-05 20 5% -6% -24% -33%
1996-06 14 8% -7% -21% -25%
1997-07 13 10% -8% -22% -31%
1998-08 13 6% -6% -6% -18%
1999-09 14 9% -5% -9% -11%
2000-10 16 13% -5% -3% -16%
2001-11 16 13% -4% 7% -17%
2002-12 14 21% 2% 14% -19%
2003-13 9 6% -8% 0% -11%
2004-14 8 13% -2% -9% -25%
Average 15 6% -7% -10% -20%

PI Industries
Identifying 15 Sensex Exit candidates

We summarise our four-step process of identifying a Sensex exit candidate in the
checklist below.
Exhibit 3: Checklist for Sensex exit candidates Our four-step process screens for
Step Criteria Parameters stocks that are most likely to exit
1 Coffee Can filters in reverse
Non BFSI: Highest number of years within FY05-14 where sales the Sensex
growth was <10%
Non BFSI: Highest number of years within FY05-14 where RoCE was
<15%
Banks and financials: Highest number of years within FY05-14 where
loan growth was <15%
Banks: Highest number of years within FY05-14 where RoA was
<1.2%
NBFCs: Highest number of years within FY05-14 where RoE was
<15%
2 Greatness Framework* Featuring in the lowest decile
3 Politically Connected Company Part of Ambit's P-75 Index
Belongs to a sector that is unnaturally insulated from Foreign
4 Benefits from distortions in economy
Competition
Source: Ambit Capital research.
Identifying the Sensex exit candidates

We present the results of our four-step screening of potential Sensex exit stocks over
the next 10 years.
Exhibit 4: Exit candidates from Sensex over the next decade*
6M ADV
Name Ticker Mcap (US$ bn) Exit hypothesis
(US$ mn)
Uncertainty on profitability of large investments in retail and telecom;
Reliance Industries RIL IN 47 54
downstream margins likely to remain muted
Falling subsidies unlikely to aid profitability; uncertainty on production growth
ONGC ONGC IN 41 26
makes earnings growth a challenge
Relaxation of Government protection, rising capital requirements and competition
State Bk of India SBIN IN 30 89
from stronger private sector peers and introduction of new players
High spectrum costs, new competition from Jio will weigh on Indian business
Bharti Airtel BHARTI IN 26 32
profitability; African business will remain a drag on consolidated profits
High competitive intensity in a fragmented industry, no discernible competitive
Larsen & Toubro LT IN 25 53
advantages in most sectors; L&Ts large size will be a constraint
Increase in competition from private sector, decline in power deficit and end of
NTPC NTPC IN 18 15
preferential treatment from Coal India for fuel linkages
Utility vehicle business under threat from foreign car companies superior
M&M MM IN 12 23
offerings; tractor business bearing the brunt of slowdown in rural demand
Rising competitive intensity in domestic and export markets; exports further hit
Bajaj Auto BJAUT IN 11 16
from macro-economic challenges in key geographies
Boiler-turbine-generator industry in structural downturn; over-capacity issues (and
BHE L BHEL IN 9 18
thus greater competition) will plague BHEL and its peers
RoEs will trend lower towards global peers; mine acquisition costs will rise under
Vedanta* SSLT IN 8 17
MMDR Act as global iron ore and steel demand stays weak
Over-dependence on legacy models, uncertain indigenous technology, shift
Hero Motocorp HMCL IN 8 35
towards scooters and rising competition from Honda
Downturn in steel prices to hurt global business; loss of low-cost raw material
Tata Steel TATA IN 5 33
advantage under MMDR Act to hurt domestic business
Weak aluminium prices and premiums to hurt global business; lack of cheap
Hindalco Industries HNDL IN 4 19
captive coal will mute RoCEs of new domestic smelters
RoEs will remain lower than cost of equity; rise in coal prices and structural
Tata Power Co. TPWR IN 3 5
changes in sale of power will impact long-term prospects
Source: Bloomberg, Ambit Capital research. Note: *This is Sesa Sterlite; Market-cap data is as of 17 June 2015. * For internal compliance reasons, the name of
the 15 companies on the exits list has been removed from this report.
We have chosen 15 exit candidates from this list on the following basis:
The top nine companies with scores of less than 45 qualify automatically for
exiting the Sensex, based on our framework detailed above. These nine
companies are Tata Power, NTPC, Hindalco, Tata Steel, Hero Motocorp, State
Bank of India, Sesa Sterlite (Vedanta), Bharti Airtel and Reliance Industries.
The remaining six candidates have been chosen from companies with a score of
45-50, based on our analysts conviction of the long-term prospects of these
companies against the backdrop of the Modi reset. These six companies are
M&M, L&T, Bajaj Auto, BHEL and ONGC. (For internal compliance reasons, the
name of one of the companies on the exits list has been removed from this
report.)

PI Industries
Appendix 2: Indices used in each country

Exhibit 5: Consumer staples index
Country Exchange Years Description
For consumer staples we have included stocks such as HUL and ITC included in the
India Bombay Stock Exchange (BSE) CY94-13
BSEs Sensex which consists of 30 blue-chip stocks.
The Consumer Goods Industry Index contains all listed companies that are engaged
Indonesia Stock exchange (Bursa Efek in Indonesia's consumer goods sector. This sector is further subdivided into: foods
Indonesia CY96-13
Indonesia) and drinks, tobacco, pharmaceuticals, cosmetics and household products,
and household appliances.
The Consumer Goods Industry in Bursa Malaysia contains all the consumer-focused
Malaysia Bursa Malaysia CY94-13
companies such as British American Tobacco Malaysia and Nestle Malaysia Berhad.
We have included the agri-business and food and beverages index from the Stock
Thailand Stock Exchange of Thailand (SET) CY94-13
Exchange of Thailand.
Source: CEIC, Bloomberg, Ambit Capital research
Exhibit 6: Consumer discretionary index

For consumer discretionary we have included stocks such as Bajaj auto, Hero
India Bombay Stock Exchange (BSE) CY94-13 MotoCorp, Mahindra and Mahindra, Maruti Suzuki India Ltd and Tata Motors Ltd in
the BSEs Sensex which consists of 30 blue-chip stocks.
Korea KOSPI CY94-13 We have included the Transport Equipment Index from the KOSPI.
Thailand Stock Exchange of Thailand (SET) CY94-13 We have included the Automotive index in the Stock Exchange of Thailand.
Exhibit 7: Financial sector index

For the financial sector, we have included stocks such as HDFC Bank, Axis Bank Ltd,
ICICI Bank and SBI in the BSEs Sensex which consists of 30 blue-chip stocks.
Indonesia Stock exchange (Bursa Efek The financial sector index contains all the financial sector stocks listed in Indonesian
Indonesia CY96-13
Indonesia) Stock Exchange.
The financial sector index contains all the financial sector stocks listed in Bursa
Malaysia.
The financial sector index contains all the financial sector stocks listed in the Stock
Thailand Stock exchange of Thailand (SET) CY94-13
Exchange of Thailand (SET)
The financial sector index contains all the financial sector stocks listed in the
Philippines Philippines Stock Exchange CY94-13
Philippines Stock Exchange
The financial sector index contains all the financial sector stocks listed in Borsa
Turkey Borsa Istanbul CY04-13
Istanbul.
Exhibit 8: Industrial sector index

For the industrial sector, we have included stocks such as L&T and BHEL in the BSEs
Sensex which consists of 30 blue-chip stocks.
Indonesia Stock exchange (Bursa Efek We have included Basic Industries index which contains industrial stocks listed in
Indonesia CY96-13
Indonesia) Indonesia Stock Exchange.
We have included Industrial products index which contains industrial stocks listed
in Bursa Malaysia.
We have included stocks under Industrial materials and machinery listed in Stock
Thailand Stock exchange of Thailand (SET) CY94-13
Exchange of Thailand.
Philippines Philippines Stock Exchange CY94-13 We have included stocks under Industrial listed in Philippines Stock Exchange.

PI Industries
Institutional Equities Team

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

PI Industries
HCL Technologies Ltd (HCLT IN, BUY)
1,200
1,000
800
600
400
200
0
Jun-12
Aug-12
Oct-12
Dec-12
Feb-13
Apr-13
Jun-13
Aug-13
Oct-13
Dec-13
Feb-14
Apr-14
Jun-14
Aug-14
Oct-14
Dec-14
Feb-15
Apr-15
Jun-15
HCL TECHNOLOGIES LTD
Kotak Mahindra Bank Ltd (KMB IN, SELL)
2,000
1,500
1,000
500
0
Jun-12
Aug-12
Oct-12
Dec-12
Feb-13
Apr-13
Jun-13
Aug-13
Oct-13
Dec-13
Feb-14
Apr-14
Jun-14
Aug-14
Oct-14
Dec-14
Feb-15
Apr-15
Jun-15
KOTAK MAHINDRA BANK LTD
Asian Paints Ltd (APNT IN, SELL)
1,000
800
600
400
200
0
Dec-12
Dec-13
Dec-14
Jun-12
Aug-12
Oct-12
Feb-13
Apr-13
Jun-13
Aug-13
Oct-13
Feb-14
Apr-14
Jun-14
Aug-14
Oct-14
Feb-15
Apr-15
Jun-15
ASIAN PAINTS LTD

Nestle India Ltd (NEST IN, SELL)
8,000
6,000
4,000
2,000
0
Dec-12
Feb-13
Apr-13
Dec-13
Feb-14
Apr-14
Dec-14
Feb-15
Apr-15
Jun-12
Aug-12
Oct-12
Jun-13
Aug-13
Oct-13
Jun-14
Aug-14
Oct-14
Jun-15
NESTLE INDIA LTD

PI Industries
Eicher Motors Ltd (EIM IN, SELL)
25,000
20,000
15,000
10,000
5,000
0
Aug-12
Dec-12
Feb-13
Apr-13
Aug-13
Dec-13
Feb-14
Apr-14
Aug-14
Dec-14
Feb-15
Apr-15
Jun-12
Oct-12
Jun-13
Oct-13
Jun-14
Oct-14
Jun-15
EICHER MOTORS LTD
Indusind Bank Ltd (IIB IN, BUY)
1,000
800
600
400
200
0
Dec-12
Dec-13
Dec-14
Jun-12
Aug-12
Oct-12
Feb-13
Apr-13
Jun-13
Aug-13
Oct-13
Feb-14
Apr-14
Jun-14
Aug-14
Oct-14
Feb-15
Apr-15
Jun-15
INDUSIND BANK LTD

Pidilite Industries Ltd (PIDI IN, SELL)
800
600
400
200
0
Aug-12
Dec-12
Feb-13
Apr-13
Aug-13
Dec-13
Feb-14
Apr-14
Aug-14
Dec-14
Feb-15
Apr-15
Jun-12
Oct-12
Jun-13
Oct-13
Jun-14
Oct-14
Jun-15
PIDILITE INDUSTRIES LTD
PI Industries Ltd (PI IN, BUY)
800
600
400
200
0
Dec-12
Feb-13
Apr-13
Dec-13
Feb-14
Apr-14
Dec-14
Feb-15
Apr-15
Jun-12
Aug-12
Oct-12
Jun-13
Aug-13
Oct-13
Jun-14
Aug-14
Oct-14
Jun-15
PI INDUSTRIES LTD

PI Industries
Torrent Pharmaceuticals Ltd (TRP IN, BUY)
1,500
1,000
500
0
Aug-12
Dec-12
Feb-13
Apr-13
Aug-13
Dec-13
Feb-14
Apr-14
Aug-14
Dec-14
Feb-15
Apr-15
Jun-12
Oct-12
Jun-13
Oct-13
Jun-14
Oct-14
Jun-15
TORRENT PHARMACEUTICALS LTD

PI Industries
Explanation of Investment Rating

Investment Rating Expected return (over 12-month)
BUY >10%
SELL <10%
NO STANCE We have forward looking estimates for the stock but we refrain from assigning valuation and recommendation
UNDER REVIEW We will revisit our recommendation, valuation and estimates on the stock following recent events
NOT RATED We do not have any forward looking estimates, valuation or recommendation for the stock
Disclaimer
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STRATEGY

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Section 1: Sensex churn set to rise.. 12

Section 2: Plotting the past 15

Section 3: How does the headline equity index evolve18

Section 4: Predicting the next 15 entrants. 32

HCL Technologies (BUY) 45

Kotak Mahindra Bank (SELL) . 49

Asian Paints (SELL) 53

Eicher Motors (SELL) . 61

IndusInd Bank (BUY) 65

Pidilite Industries (SELL) .. 69

Page Industries (BUY) .. 73

Torrent Pharma (BUY) ..77

PI Industries (BUY) .81

Appendix 1: Indices used in each country. 85

Appendix 2: Sensex Exits 88

June 22, 2015 Ambit Capital Pvt. Ltd. Page 2

THEMATIC June 22, 2015

The Sensex in 2025 Sensex Entry Candidates (FY16-25)

Sensex churn set to rise

Sensex churn - 10-year window

June 22, 2015 Ambit Capital Pvt. Ltd. Page 4

Sensex exits: The decadal story report, we elaborated on a framework to identify 15

Historically, where have Sensex entrants come from?

June 22, 2015 Ambit Capital Pvt. Ltd. Page 5

Key findings from Exhibit 3 are summarised below:

Owning a future Sensex entrant has been a winning proposition

June 22, 2015 Ambit Capital Pvt. Ltd. Page 6

Established trends from other emerging markets

June 22, 2015 Ambit Capital Pvt. Ltd. Page 7

The share of Savings in GDP

June 22, 2015 Ambit Capital Pvt. Ltd. Page 8

Share of industrial sector

Predicting the next 15 entrants

June 22, 2015 Ambit Capital Pvt. Ltd. Page 9

June 22, 2015 Ambit Capital Pvt. Ltd. Page 10

Pulling it all together

June 22, 2015 Ambit Capital Pvt. Ltd. Page 11

Section 1: Sensex churn set to rise

June 22, 2015 Ambit Capital Pvt. Ltd. Page 12

Sensex churn - 10-year window

June 22, 2015 Ambit Capital Pvt. Ltd. Page 13

Reset 3: Re-defining Indias subsidy mechanisms.

June 22, 2015 Ambit Capital Pvt. Ltd. Page 14

Section 2: Plotting the past

Where do Sensex entrants come from?

June 22, 2015 Ambit Capital Pvt. Ltd. Page 15

Key findings from Exhibit 16 are summarised below:

Owning a future Sensex entrant has been a winning

June 22, 2015 Ambit Capital Pvt. Ltd. Page 16

June 22, 2015 Ambit Capital Pvt. Ltd. Page 17

Section 3: How does the headline equity

Economies change as per capita income grows

June 22, 2015 Ambit Capital Pvt. Ltd. Page 18

June 22, 2015 Ambit Capital Pvt. Ltd. Page 19

Section 3.1: The transition from a per capita income of

GDP growth rate when PCI doubled from US$2K-US$4K

June 22, 2015 Ambit Capital Pvt. Ltd. Page 20

PCI at US$2K PCI at US$4K

PCI at US$2K PCI at US$4K

PCI at US$2K PCI at US$4K

June 22, 2015 Ambit Capital Pvt. Ltd. Page 21