Ambit Economy&Strategy ExportThematic 09sept2015

ECONOMY &
STRATEGY
September 2015
E IN
A K IA
M IND
Cummins India
AIA Engineering
Bharat Forge
Atul Industries
Bajaj Auto
Aarti Industries
PI Industries
Himatsingka Seide Indo Count Industries
Sundaram Fasteners Kitex Garments
Balkrishna Industries Vardhman Textiles
INDIAN
EXPORTER
Indias top light industrial export plays

Analysts:
Saurabh Mukherjea, CFA Ashvin Shetty, CFA Sumit Shekhar
saurabhmukherjea@ambitcapital.com ashvinshetty@ambitcapital.com sumitshekhar@ambitcapital.com
Tel: +91 22 3043 3174
Nitin Bhasin Ritesh Gupta, CFA Karan Khanna
nitinbhasin@ambitcapital.com riteshgupta@ambitcapital.com karankhanna@ambitcapital.com
Gaurav Mehta, CFA Bhargav Buddhadev Aditya Bagul

gauravmehta@ambitcapital.com bhargavbuddhadev@ambitcapital.com adityabagul@ambitcapital.com
Economy & Strategy
CONTENTS
Indias top light industrial export plays ...3
Section 1: The macroeconomic backdrop4
Section 2: Identifying export-oriented sectors..15
Section 3: Auto and Auto Ancillaries .17
Section 4: Capital goods and light industrials .20
Section 5: Textiles ..21
Section 6: Specialty Chemicals 26
Stock-specific sections...31
COMPANIES
Bajaj Auto (SELL).33
Bharat Forge (NOT RATED)..37
Balkrishna Industries (SELL)..41
Sundram Fasteners (NOT RATED) ..45
Cummin India (SELL) .49
AIA Engineering (SELL) ..53
PI Industries (BUY) .57
Atul Industries (NOT RATED) 61
Aarti Industries (NOT RATED) ..65
Indo Count Industries (NOT RATED) ..69
Kitex Garments (NOT RATED)..73
Vardhman Textiles (NOT RATED) 77
Himatsingka Seide (NOT RATED)81
September 09, 2015 Ambit Capital Pvt. Ltd. Page 2

Economy & Strategy
THEMATIC September 09, 2015
Indias top light industrial export plays Exhibit A: The profiled exporters
Auto & Auto Ancillaries
Indias manufactured exports sector (excluding Pharma) has grown at a Bajaj Auto
healthy rate (FY10-15 gross exports CAGR of ~18%) and it possesses BJAUT IN Our stance: SELL
formidable competitive advantages not just around cost but also around Mcap (US$ bn): 9.6 ADV - 6m (US$ mn): 14.9
access to engineering talent. In particular, in light industrial manufacturing Bharat Forge
sectors like Auto & Auto Ancillaries, Castings, Chemicals and Textiles India BHFC IN Our stance: NR
seems to have a handful of relatively well-established companies with Mcap (US$ bn): 3.6 ADV - 6m (US$ mn): 20.2
substantial export franchises. In this thematic, we identify 13 promising Balkrishna Industries
manufactured export plays from these four sectors. BIL IN Our stance: SELL
The core thesis for Indias manufactured exports remains the same Mcap (US$ bn): 1 ADV - 6m (US$ mn): 1.3
Sundaram Fasteners
Over the past three years, even as Indias overall export growth has sagged (FY14
SF IN Our stance: NR
growth: 4.7%; FY15 growth: -1.5%) we have published three thematics on
Mcap (US$ bn): 0.5 ADV - 6m (US$ mn): 0.2
manufactured export plays the first on 12 July 2012 (click here), the second on 30
July 2013 (click here) and the third on 30 September, 2014 (click here). Our central Light Engineering
arguments in favour of Indias manufactured goods exporters remain what it was in Cummins India
these thematics, namely: KKC IN Our stance: SELL
Over the past eight years, not only has the INR depreciated by over 91% AIA Engineering
against the renminbi, it has also depreciated by 59% against the USD. None of AIAE IN Our stance: SELL
the other Asian currencies has depreciated to such an extent against these two Mcap (US$ bn): 1.3 ADV - 6m (US$ mn): 1.7
currencies, implying that entire swathes of Indian exporters have received a Chemicals
major competition booster (see pages 7-10). PI Industries
Whilst Chinas manufactured exports continue to be 10x the size of Indias, PI IN Our stance: BUY
China is losing its competitiveness due to high wage inflation (in excess of Mcap (US$ bn): 1.4 ADV - 6m (US$ mn): 2.3
20%) and due to rising environmental compliance costs. As a result, Indias Atul Industries
exports growth has exceeded that of Chinas for the past five years. The space ATLP IN Our stance: NR
vacated by China will be distributed amongst various nations, depending on each
countrys competitive advantage (see page 12).
Aarti Industries
Indias high cost of capital and weak physical infrastructure make it near ARTO IN Our stance: NR
impossible for, both, heavy engineering companies and labour-intensive Mcap (US$ bn): 0.5 ADV - 6m (US$ mn): 0.7
companies to succeed abroad (the high cost of capital kills the competitiveness of
Textiles
both types of plays). However, India has a natural advantage in the
Indo Count Industries
knowledge-intensive, medium-technology, light industrial plays given the
ICNT IN Our stance: NR
availability of skilled engineers and given the low capital requirements of such
companies (see pages 13-16). Note: Indias FY10-15 exports CAGR in light
Kitex Garments
industrial manufacturing sectors such as auto, agrochemicals and castings is
KTG IN Our stance: NR
startlingly strong at 24%, 19% and 29% respectively. Further, capital goods and
Mcap (US$ bn): 0.5 ADV - 6m (US$ mn): 3
textiles (that were net importers in FY10) too have seen robust growth in exports
Vardhman Textiles
over the last five years. As a result, the stocks profiled in all three of our exports
VTEX IN Our stance: NR
thematics have fared remarkably well (see pg 31).
13 promising plays on manufactured exports Himatsingka Seide
Auto & Auto Ancillaries: Our export plays are Bajaj Auto, the poster boy of India HSS IN Our stance: NR
manufactured exports; Bharat Forge, the global leader in forgings; Balkrishna Mcap (US$ bn): 0.3 ADV - 6m (US$ mn): 2.2
Industries, Indias largest tyre exporter; and Sundaram Fasteners, the leading Source: Bloomberg, Ambit Capital research. NR
player in its sector. stands for Not Rated.
Light Engineering: We focus here on two companies which have built meaningful
export franchises Cummins India, the Indian subsidiary of the dominant American Analyst Details
genset manufacturer; and AIA Engineering, the #2 player globally in high-chrome
Saurabh Mukherjea, CFA
grinding media.
+91 22 3043 3174
Chemicals: We highlight the two most appealing export plays in Specialty Chemicals saurabhmukherjea@ambitcapital.com
PI Industries, the best-positioned listed company in agrochemicals; Aarti
Nitin Bhasin
Industries, one of the leading suppliers of Specialty Chemicals to global
+91 22 3043 3241
manufacturers, and Atul Industries which is at a potent confluence of manufacturing
nitinbhasin@ambitcapital.com
capabilities alongside strong process chemistry knowledge
Textiles: Kitex Garments, Himatsingka Seide and Indocount industries are key Sumit Shekhar
export plays have built strong competitive advantages through innovation led product +91 22 3043 3229
sumitshekhar@ambitcapital.com
differentiation in their niche categories as also is Vardhman Textiles which is one of
the largest yarn manufacturers
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.
Economy & Strategy
Section 1: The macroeconomic backdrop

How small is Indias merchandise exports sector?
Indias merchandise exports sector is indeed small, as is evident from the sectors size
when measured through a range of metrics. In absolute terms, Indias merchandise
exports sector is substantially smaller than that of all the three leading exporters in
Asia (namely China, Japan and Korea). In fact, Indias merchandise exports sector is
less than one-seventh the size of Chinas exports sector (see the exhibit below).
Even if one were to eliminate both China and Japan from this comparison (given that
Indias merchandise exports
Chinas GDP is 5x Indias GDP, Japans GDP is 3x Indias GDP and only Koreas GDP
sector is less than one-seventh
is comparable to that of India), even then Indias merchandise exports franchise
the size of Chinas exports sector
appears smaller than that of Koreas (see the exhibit below).
Exhibit 1: Indias merchandise exports are less than a Exhibit 2: Even as a percentage of GDP, Indias
seventh of Chinas merchandise trade is half of that of Koreas
2,500 2,343 100%
Merchandise trade
Merchandise exports in
80%
(as % of GDP)
2,000
60%
(in US$ bn)
1,500
CY14
40%
1,000 20%
684
573
0%
500 317
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
-
China Japan Korea India Korea India
Source: CEIC, Ambit Capital research Source: CEIC, Ambit Capital research
Furthermore, in terms of the composition of Indias exports, manufactured goods

exports account for 65% of Indias total exports vs more than 85% of total exports for
leading exporters in the region (see the exhibit below).
Exhibit 3: Manufactured exports share in total exports in Exhibit 4: Indias exports franchise currently is far more
India remains low developed than Koreas was when it had similar per capita
income levels
100% 1600 1507.6

94% 1400
95%
Manufactured exports
1070.4
(as % of total in CY14
1200
90% 88%
86% 1000
85% 800
600
80% 270
400
75% 200 0.5
70% 0
64% India (2010-14) Korea (1966-70)
65%
Avg per capita income (at constant prices, in USD)
60%
China Japan Korea India Avg exports (in USD bn)

Economy & Strategy
Whilst Indias merchandise exports franchise currently appears nascent as compared

to the leading exporters in the Asian region, it is critical to note that the main
exporting nations of today had small export sectors when they were at a
corresponding stage of their growth journey. For instance, Indias average exports
over CY10-14 were substantially more than that of Koreas over 1966-70 i.e. a period
over which Koreas per capita income was comparable to Indias per capita income Indias exports sector is in fact
currently (see the exhibit on the previous page). comparable to that of the Asian
tigers before they embarked on
Thus, whilst Indias exports sector appears small and under-developed, it is in fact their high exports growth phase
comparable to that of the Asian tigers before they embarked on their high exports
growth phase.
Two macroeconomic forces are likely to provide powerful tailwinds to Indias
exports sector
Two serendipitous macroeconomic forces are likely to play a pivotal role in providing
an inorganic push to Indias nascent exports franchise in the future, namely:
Force #1 - The slow but sure decline of Chinas manufactured exports
franchise: Chinas decision to begin revaluing its undervalued currency in CY07
catalysed the beginning of the end of Chinas leadership position in the global
exports market. The space vacated by China is now being captured by a host of
Asian nations, with India being one of the beneficiaries.
Force #2 - The dramatic depreciation of the INR against a host of
competitor currencies: Indias Current Account Deficit (CAD) began exceeding
the 2% threshold post FY09, as slower global growth meant that Indias invisibles
surplus diminished and spurts in the demand for gold expanded Indias already
large import bill. Indias widening CAD meant that the INR has depreciated by
59% as against the USD over FY08-16 YTD as compared to the 18% appreciation
seen in the INR over FY02-08. This depreciation was substantial not just by Indias
own standard but also as compared to a host of Asian peers.
Given that Indias CAD is likely to persist at ~2% of GDP until CY19 (as per IMF Two macroeconomic forces are
estimates) and the US is likely to tighten its monetary policy, Indias currency is likely to buoy a sub-sector of
likely to remain competitive as well. Indias manufactured goods
exports i.e. Indias exports of
Whilst an East-Asia style secular uptick in Indias manufactured exports can
light industrials
materialise only once the Government addresses issues such as Indias infrastructure
deficit, complex labour legislations and high cost of capital, the above-mentioned
forces are likely to buoy a sub-sector of Indias manufactured goods exports i.e.
Indias exports of light industrials.
Force #1: The beginning of the end of Chinas

leadership position in the global exports market
The countries of the world form a wild-geese-flying order from the advanced countries
which have reached the stage of high-degree heavy and chemical industries to the less-
advanced countries which are still in the stage of primary industries. The less-advanced
'wild geese' are chasing those ahead of them, some gradually and others rapidly,
following the course of industrial development in a wild-geese-flying pattern.
- Kaname Akamatsu on A historical pattern of economic growth in
developing economies, Journal of Developing Economies,1962
The Japanese economist, Kaname Akamatsu postulated the flying geese paradigm
The Japanese economist,
(FGP) to explain patterns of exports growth in Asian economies. The paradigm
Kaname Akamatsu postulated the
postulated that Asian nations align themselves like wild geese flying in a V-shaped
flying geese paradigm (FGP) to
pattern, where the production of complex goods as well as the sheer quantum of
explain patterns of exports
goods exported continuously moves from the more advanced countries (that are closer
growth in Asian economies
to the tip of the V-shaped formation) towards the less advanced ones (that form the
rear guard of the formation).

Economy & Strategy
The FGP emerges as the countries that are able to produce high value-add
manufactured products (such as complex machines and engineering goods) at the
most competitive cost are more likely to have a leadership position in the FGP. On the
other hand, countries that are able to produce low value-add manufactured products
(such as say steel parts or textiles) typically form the rear guard of the formation.
This theory is useful in building a framework around the beginning of the end of
Chinas leadership position in the global exports market, a trend that began to
emerge from CY07 onwards.
The regional hierarchy in Asia until the late 1980s is shown in the exhibit below.
Exhibit 5: The Asian wild-geese-flying pattern until the late 1980s, with Japan being the lead goose
Source: CEIC, Ambit Capital research. Note: Figures in parenthesis indicate per capita incomes of nations in CY80.
Whilst the leading exporter (i.e. the lead goose) in this pattern was Japan, the second-
tier of nations consisted of the newly industrialising economies, namely South Korea,
Taiwan, Singapore and Hong Kong. After these two files of flying geese were
countries like Indonesia, Thailand, Malaysia and China which formed the rear guard
in the formation (see the exhibit above).
Japan cemented its position aggressively as the lead goose owing to a range of Japan cemented its position
factors including Government support to exports and a constant exchange rate over aggressively as the lead goose
the 1960s. As a result, Japan accounted for a tenth of US imports in value terms in owing to a range of factors
the early 1980s but had begun accounting for nearly a fifth of US imports by the late including Government support to
1980s (see the exhibit below). Whilst other nations also expanded their share in US exports and a constant exchange
imports over this period (i.e. 1980-89), the extent was far lower, as the higher value- rate over the 1960s
add products were exported out of Japan.
Exhibit 6: Japan nearly doubled its share in US merchandise imports over the 1980s
25%
Share in US imports (in %)
20%
20%
15% 13%
10% 8%
4% 5%
4%
5%
0%
1980 1989
Japan Second file of nations* Third file of nations**
Source: CEIC, Ambit Capital research; Note: *The second file of nations includes Korea, Singapore and Hong
Kong (with average per capita income in 1980 of US$4,041). **The third file of nations includes Indonesia,
Thailand, Malaysia and China (with average per capita income in 1980 of US$825).

Economy & Strategy
Whilst Akamatsus FGP had Japan at the tip of the wild-geese-flying pattern until the
late 1980s, data suggests that China (which was initially part of the third file of
nations began growing its exports franchise rapidly over the 1990s and finally
overtook Japan by CY02 (see the exhibit below). Besides the Chinese Governments
pro-exporter polices, the undervaluation of the RMB over the 1990s aided a rapid
transition into a lower-cost export destination (or a range of products with a rising
value-add component).
Exhibit 7: China overtook Japan as the largest exporter to Exhibit 8: The new FGP of the noughties shows that China
the US by CY02 replaced Japan as the lead exporter to the US
25%
Share in US imports
USA
20%
15%
(in %)
10%
China
5%
0%
1980
1983
1986
1989
1992
1995
1998
2001
2004
2007
2010
2013
Rest of Asia
China Japan
(Includes Japan and India)
Source: CEIC, Ambit Capital research Source: Ambit Capital research
China was able to overtake Japan in the FGP mainly because it could lower its cost of China was able to overtake
production. China in turn was able to lower its cost of production mainly because Japan in the FGP mainly because
despite running a balance of payments surplus, China resisted an appreciation of its it could lower its cost of
currency - the RMB was near-constant from the early 1990s onwards until 2007. production; China in turn was
However, as the Chinese Government began to revalue its undervalued currency from able to lower its cost of
CY07 onwards, the RMB appreciated by 16% against the USD over the years that production mainly because it
followed (i.e. over FY08-16 YTD). This in turn acted as a catalyst for the beginning of resisted an appreciation of its
the end of Chinas position as the leading exporter into the West. currency
Besides the adverse dynamic in the currency markets, Chinas cost advantage has also
been eroded over the last few years by an uptick in domestic wage inflation. The
Chinese Government has been pushing up minimum wages to better protect the
rights of labourers. Consequently, Chinas comparative advantage in terms of
affordable labour is being eroded. According to Shaun Rein (the author of The end of
cheap China), 21 of Chinas 31 provinces raised the minimum wage by an average of
21.7% in CY10, and the Sichuan province alone raised it by 44%.
Exhibit 9: The pace at which Chinas share in US imports grew has been diminishing
since CY07 Chinas share in US imports grew
historically has been diminishing
12% since CY07
8%
over specified period
share in US imports
Change in country's
8% 5%
4% 3%
(in %)
0%
0%
0% -1%
-4%
-3%
-8% -5% -5%
China Asia ex. Japan & China Japan
1990s 2000-08 2008-13
Source: Ambit Capital research. Note: Asia ex-Japan & China includes India, Korea, Hong Kong, Singapore,
Indonesia, Thailand and Malaysia

Economy & Strategy
Whilst China continues to be the largest exporter to the US, accounting for 19% of US
imports (as is evident from the exhibit below), the pace at which Chinas share in US
imports grew historically has been diminishing since CY07 (see the first cluster of bars
in the exhibit on the previous page).
Given the large size of Chinas exports to the US, not only is it all but inevitable that
base effects will kick in, history also suggests that once a countrys cost advantage is
eroded, it seldom can re-capture this very quickly. For instance, Japan accounted for
20% of US imports in the late 1980s but once its cost advantage was eroded, its share
in US imports kept shrinking and now it stands at 6%.
This space vacated by China in turn is being captured by Asian nations such as India,
The space vacated by China is
Indonesia, Thailand and Malaysia. In fact, the decline in the share of these nations
being captured by Asian nations
exports to the US came to a complete halt by CY07. As is evident from the exhibit
such as India, Indonesia,
above, Japan too has been reclaiming lost ground of late, as the pace of decline in its
Thailand and Malaysia
share of US imports diminished dramatically post CY07 (refer to the third cluster of
bars in the exhibit above).
An identical trend is evident even in the share of these Asian countries in the total
imports of the European Union (EU) where: (1) the pace at which Chinas share in EU
imports grew previously has been diminishing since CY07, and (2) the pace of the
decline in the share of Asia ex-Chinas exports to the EU has been diminishing (see
the exhibit below).
Exhibit 10: The pace at which Chinas share in the EUs imports grew has been
diminishing since CY07, with other Asian nations including India capturing this share
12%
8%
imports over specified
Change in share in EU
8%
periods (in %)
4%
0%
0%
-1% -1%
-4%
-3% -4%
-8%
China Asia ex. Japan & China Japan
2000-08 2008-12
Source: Ambit Capital research; Note: Asia ex-Japan & China includes India, Korea, Hong Kong,
Singapore, Indonesia, Thailand and Malaysia.
India, in specific, has been increasing its share in US and EU imports since CY07. India, in specific, has been
However, its share in US imports has been rising at an increasing pace whilst its share increasing its share in US and EU
in EU imports has been rising at a diminishing pace (see the exhibits on the next imports since CY07
page).
Exhibit 11: Indias share in US imports rose by 0.6% over Exhibit 12: Indias share in EU imports rose by 0.2% over
2008-13 2008-13
0.8% 0.6% 0.5%

Change in share in US

Change in share in EU
0.6%
0.6%
period (in %)
period (in %)
0.4%
0.4% 0.4%
0.3% 0.2%
0.2%
0.2%
0.0% 0.0%
India India
1990s 2000-08 2008-13 2000-08 2008-12

Economy & Strategy
As highlighted earlier, the Flying Geese Paradigm (FGP) arises because the countries
that are able to produce high value-add manufactured products at the most
competitive costs are more likely to have a leadership position in the FGP.
With China ceding its ground in the formation, each country is occupying this ceded
With China ceding its ground in
space based on its ability to produce specific types of manufactured goods at the most
the formation, each country is
competitive cost. In the subsequent sections, we will explain how Indias light
occupying this ceded space based
industrial goods exporters are likely to be in the best position to benefit from this
on its ability to produce specific
trend.
types of manufactured goods at
Force #2: INRs rapid depreciation against a host of the most competitive cost
competitor currencies
Indias current account balance had swung from positive to negative territory in FY05,
as oil prices jumped by 42% YoY in FY05. Post FY09, Indias current account deficit
(CAD) as a percentage of GDP began exceeding the 2% threshold, as slower global
growth meant that Indias invisibles surplus diminished. The rising demand for gold
imports further exacerbated Indias CAD woes. Indias widening CAD meant that the
INR depreciated by 59% as against the USD over FY08-16 YTD as compared to the
18% appreciation in the INR over FY02-08.
Not only was the extent of the depreciation high by Indias own historical standards,
the extent was greater than that experienced by its Asian peers as well (see the exhibit
below). For instance, whilst the Korean won and Indonesian rupiah depreciated by
20% YoY and 45% YoY over FY08-16 YTD respectively, the Chinese yuan as well as
the Singapore dollar actually appreciated over this period.
Exhibit 13: The INR has depreciated more against the USD compared to its Asian peers
60% 51% 54%

Change over specified
40%
26%
20%
period
(in %)
9%
0%
-1%
-20% -8%
-18%
-40%
RMB/USD SGD/USD THB/USD HKD/USD IDR/USD KRW/USD INR/USD
Apr 2010 to Aug 2015 Apr 2007 to Aug 2015
Source: CEIC, Ambit Capital research
More importantly, as the Chinese Government began to revalue its undervalued

currency in 2007, the INR depreciated by 69% against the RMB over FY08-15 YTD
(see the exhibit below). Once again, the extent of the INRs depreciation against the
currency of this giant exporter was higher than that experienced by its Asian peers.
Thus, entire swathes of exporting businesses in India have silently received a
competition booster over the past six years.

Economy & Strategy
Exhibit 14: The INR has depreciated by a greater extent against the RMB as compared
to its Asian peers
100%
Change over specified
80% 81%
80%
56%
60%
?(in %)
perios
40%
23% 25%
20% 13%
0%
SGD/RMB THB/RMB HKD/RMB IDR/RMB KRW/RMB INR/RMB
Apr 2010 to Aug 2015 Apr 2007 to Aug 2015
From a practical perspective, the export growth of any country is known to be a A survey of available literature
function of two factors, namely, the strength of foreign demand and the price of the
shows the importance of currency
product in foreign currency terms. However, a survey of available literature shows the
competitiveness in driving export
importance of currency competitiveness in driving export growth in the long run (see growth in the long run
the exhibit below).
Exhibit 15: The importance of currency competitiveness in driving export growth
Title Key relevant findings Authors Year
Exports growth is sensitive to prices with a lag (typically 4-6 months) in two ways: firstly,
What happened to Asian relative to destination countries, and secondly, relative to its competitors. The latter effect Duttagupta and
2000
exports during the crisis? means that the positive effects on export demand of currency depreciation are enhanced if Spilimbergo
the currency of the country under study depreciates by more than its competitors' currency.
Whilst currency competitiveness drives exports growth in the early stages of development of
Export performance and its the export sector, the quality of institutions as well as an increase in capital intensity of
determinants: Supply and manufactured products is critical to propel exports growth in the later stages. The quality of Fugazza 2004
demand constraints internal infrastructure and level of technology involved in production are two other drivers of
exports growth.
Results for all periods indicate that an overvalued real exchange rate is detrimental to export
Determinants of export
performance. Moreover, on average, a 1% real depreciation could increase exports growth UNCTAD 2004
performance
by 6-10% YoY.
Export promotion through
Depreciation encourages exports but more profoundly so when the volatility is low. Fang and Miller 2005
exchange rate policy
India exports: Is the bull run Potential demand, price competitiveness, trade barriers, infrastructure and procedural
Banik 2007
over? bottlenecks affect exports growth.
The exchange rate elasticity of exports is estimated to be greater than 1 in the case of
Are Chinese exports
China. The paper also suggests that if the trade-weighted real renminbi had appreciated at
sensitive to changes in the Ahmed 2009
an annual rate of 10% per quarter since mid-2005, Chinese real exports would have been
exchange rate?
roughly 30% lower today.
Whilst world GDP growth is a more profound determinant of exports' volume growth in the
Indian economy: Selected
short run, real exchange rate movements are the more critical determinants of exports ICRIER 2011
methodological advances
growth in the long run.
Source: Various, Ambit Capital research
In fact some of the leading exporter nations of the world today established their
position in the manufactured goods export market by consciously devaluing their
currencies or by resisting appreciation in the early stages of their export growth story. Throughout the 1960s, the
Japanese yen (JPY) was sustained
Japan was the first large country to apply this formula in the 1960s, and Japan at a constant level of
successfully revved up its exports engine by the 1970s. Throughout the 1960s, the ~361JPY/USD, which in turn led
Japanese yen (JPY) was sustained at a constant level of ~361JPY/USD (see the exhibit to an uptick in exports volume by
below), which in turn led to an uptick in export volume by 4x by the 1970s. 4x by the 1970s

Economy & Strategy
Exhibit 16: Japan held its currency constant over the 1960s and experienced a steep
rise in export growth in the 1970s
400 60
Export Volume Index

350 50
300
250 40
JPY/USD
200 30
150 20
100
50 10
0 0
01-1960
03-1961
05-1962
07-1963
09-1964
11-1965
01-1967
03-1968
05-1969
07-1970
09-1971
11-1972
01-1974
03-1975
05-1976
07-1977
09-1978
11-1979
JPY/USD (Left Scale) Export Volume Index (Right Scale)
South Korea also adopted the same strategy over the 1960s, whereby its currency
value was kept more or less constant, and thus, it experienced high export growth in
the subsequent decade (see the exhibit below).
Exhibit 17: South Korea also resisted a currency appreciation to support its exports South Korea also adopted the
franchise in its early stages same strategy over the 1960s
350 14 whereby its currency value was
Export Volume Index

300 12 kept more or less constant, and
thus, it experienced high export
250 10
growth in the subsequent decade
KRW/USD
200 8
150 6
100 4
50 2
0 0
01-1964
06-1964
11-1964
04-1965
09-1965
02-1966
07-1966
12-1966
05-1967
10-1967
03-1968
08-1968
01-1969
06-1969
11-1969
04-1970
09-1970
KRW/USD (Left Scale) Export Volume Index (Right Scale)

China was the most recent country to replicate this model. China famously resisted an The RMB was near-constant from
appreciation of its currency despite running a balance of payments surplus. The RMB the early 1990s onwards until
was near-constant from the early 1990s onwards until 2007, and China experienced 2007, and China experienced an
an exponential uptick in export growth over the noughties (see the exhibit on the next exponential uptick in export
page). growth over the noughties
Exhibit 18: Chinas exports rose exponentially over the Exhibit 19: Indias manufactured exports have been
noughties following its effort to maintain a near-constant increasing at a faster pace than that of China in most years
currency for more than a decade after CY07
10 800 14
exports divided by India's
8 600 12
China's manufactured
6 10
400
4 8
(in times)
2 200
6
0 0
4
1980
1983
1986
1989
1992
1995
1998
2001
2004
2007
2010
2013
2
0
1984
1987
1990
1993
1996
1999
2002
2005
2008
2011
2014
RMB/USD (Left Scale)

Export Volume Index (Right Scale)

Economy & Strategy
Thus, cross-country experience clearly points to the power of currency

depreciation in driving export growth. In the Indian context, whilst the INR
depreciation over the past five years has not been the result of conscious Government Indias currency is likely to
efforts (as was the case for countries like Japan, Korea and China), this is likely to give remain competitive
a massive boost to Indias exports.
Given that Indias CAD is likely to persist at ~2% of GDP until CY19 (as per IMF
estimates) and given that the US is likely to tighten its monetary policy, Indias
currency is likely to remain competitive.
Which sub-sector in the manufactured goods space is likely to outperform?
Given that Indias internal infrastructure remains poor, Government support to the
manufacturing sector remains limited, and given that India does not have an edge in
high technology exports (see the exhibit below), Indias exports are unlikely to rise on
a secular basis.
Exhibit 20: The growth potential of Indias exports engine
Exposure to Developed Countries Currency Competitiveness

MEDIUM HIGH Technological Edge/Cost of
Production
Given that the developed countries Over the late noughties, the LOW
(DCs) are likely to undergo a INR/USD rate experienced the
prolonged period of moderate GDP highest depreciation as against its High-technology exports accounted for
growth, the fact that the G7s share Asian peers. The INR depreciated 7% of India's total manufactured goods
in Indias exports has been declining 59% against the USD vs a 16% exports (FY15) vs 26% in China (CY14).
(from 33% in FY05 to 25% in FY15) is appreciation in the RMB against the Whilst FDI inflows (which typically are a
a positive. Furthermore, the share of driver of inorganic technological
USD over FY08-16 YTD.
exports to EU27 (i.e. a region that is growth) averaged at 2% of GDP over
Furthermore, given the structural
likely to experience a modest GDP the past five years, India remains a
growth in CY15) has been declining nature of Indias CAD, the INR is
(from 22% in FY05 to 16% in FY15). likely to remain weak. laggard on technology.
Quality of Internal Infrastructure Government Policy Support

LOW HIGH
The Government of India (GoI) passed
Quality of transport infrastructure in the SEZ Act in 2005 which provides for
India is underdeveloped as the creation of tax-free export havens.
compared to Asian peers. Indias cost Recently, Prime Minister Narendra
to export is also higher than most Improving Modi set up a high level team to revive
(US$1,332 per container vs US$823 stalled SEZs and as a part of the plan
per container in China in CY14). Unchanged
announced that States will soon be
Deteriorating allowed to set up their own Export
Promoting Zones (EPZs). Exports are at
the center of focus in Make in India
scheme.
Source: Industry, Ambit Capital research
An East-Asia style secular uptick in Indias manufactured exports is likely to materialise

only if the Government addresses issues like Indias infrastructure deficit or high cost
of capital. However, India appears likely to enlarge its footprint in the light
industrials space.
Whilst Chinas manufactured exports continue to be 10x the size of Indias, China is
An East-Asia style secular uptick
clearly losing its competitiveness, as corroborated by the fact that Indias
in Indias manufactured exports is
manufactured export growth has exceeded that of Chinas for the past five out of six
likely to materialise only if the
years (see the exhibit below). The space vacated by China is likely to be distributed
Government addresses issues like
amongst various nations, depending on each countrys competitive advantage.
Indias infrastructure deficit or
high cost of capital

Economy & Strategy
Exhibit 21: Indias manufactured export growth has exceeded that of Chinas
in five out of the last six years
14
exports divided by India's
China's manufactured
12
10
(in times)
8
6
4
2
0
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
Whilst it is evident that India is capturing a share of Chinas manufactured exports

market too, which sub-sector is India likely to create a substantial mark in?
It is clear that India cannot hope to create a competitive franchise in the heavy
manufacturing space given the prohibitively high cost of debt capital in India (see the
exhibit below). Also, although India is a country that is endowed with plenty of labour
supply, India cannot specialise in labour-intensive products given Indias gaping
infrastructure deficit (see the exhibit below).
Exhibit 22: The cost of capital in India is one of the highest Exhibit 23: Indias infrastructure quality too is one of the
relative to other exporters poorest as compared to its peers
12% 4
Quality of infrastructure
10%
(1=low, 5=high)
Lending rates
8%
(in % p.a.)
6% 3
4%
2%
0% 2
India Mexico Korea China India Mexico Korea China
Source: CEIC, Ambit Capital research; Note: Lending rate (in %, p.a.) is Source: CEIC, Ambit Capital research; Note: Quality of infrastructure captures
calculated by averaging the same for the 5-year period spanning CY10-14. the quality of trade and transport-related infrastructure. Data pertains to
Lending rate is defined as the bank rate that usually meets the short- and CY14.
medium-term financing needs of the private sector.
The infrastructural deficiencies mean that Indian exporters have longer working
capital cycles than their competitors in other Asian countries (it takes longer for raw
materials to reach the factory and longer for finished goods to be shipped out). This
coupled with the high cost of working capital (Indian SMEs typically pay 12-13% for
working capital finance) wipes out the buffer created by labour cost savings in
structurally low-margin businesses.

Economy & Strategy
Exhibit 24: Indias rising specialisation in medium- Exhibit 25: Engineering goods exports have been growing at a
technology merchandise goods rapid pace
Trade balance by FY90-FY00 FY01-FY08 FY09-FY15

technological group divided 1985-86 1995-96 2001-02 Product Category (Median YoY (Median YoY (Median YoY
by total trade (in %) growth, in %) growth, in %) growth, in %)
Petroleum Products 5% 56% 6%
MFG: Engineering
Low Tech 14% 19% 14% 13% 31% 12%
Goods
Manufactured
9% 20% 11%
Goods
MFG: Leather and
2% 12% 9%
Medium-low Tech -10% -4% 0% Manufactures
MFG: Chemicals and
12% 23% 6%
Allied Products
Primary Products 6% 21% 4%
Medium-high Tech -15% -8% -2% MFG: Gems and
12% 15% 7%
Jewellery
MFG: Textile & Textile
9% 11% 9%
Products
MFG: Work of Arts
High Tech -7% -5% -4%
excluding Floor 11% -3% -9%
Covering
Source: World Bank, Ambit Capital research. Source: CEIC, Ambit Capital research. Note: MFG stands for manufacturing
Despite these important shortcomings, India has developed an edge in the medium-
technology space (see the exhibit above), with companies like Bajaj Auto, Cummins
India and TVS Motors leading the charge. India has a natural advantage in the
knowledge-intensive and medium-technology space given its historical expertise at
reverse engineering and given the abundant availability of skilled engineers. Given Indias rising expertise in
Given Indias rising expertise in the medium-technology space and given its the medium-technology space
deficiencies on infrastructure and capital, India appears likely to enlarge its footing and given its deficiencies on
most decisively in the engineering goods space, which fortunately requires moderate infrastructure and capital, India
amounts of capital, labour and technology. In fact, this theme has already been appears likely to enlarge its
playing out, with Indias engineering goods exports being the second fastest-growing footing most decisively in the
exports category after petroleum products (see the exhibit above). engineering goods space
For a more comprehensive analysis of which sectors in India are best placed to
produce large-scale successful exporters, please turn to Section 2.

Economy & Strategy
Section 2: Identifying export-oriented

sectors
Using Capitaline data, we identify export-oriented sectors, by calculating net exports
(rather than gross exports) and then cumulating this across stocks in the sector. Net
exports for a sector thus represents revenue earnings in forex minus revenue
expenses in forex aggregated across all stocks in the sector. The primary reason for
focusing on net exports, rather than gross exports, is that it allows us to filter out
sectors which are focused on processing commodities (Oil & Gas, Metals & Mining,
etc).
The top-ten sectors (based on Capitalines sector classification) that emerge as net
exporters based on this calculation using FY15 numbers are shown in the exhibit
below.
Exhibit 26: The top sectors which are net exporters (basis absolute net exports in FY15)*
Net exports as a % of stan.
Net exports
revenues
Rank Capitaline Sector (ranked by FY15 net exports)
FY10 FY15 5yr No. of stocks FY10 FY15 5yr change
(` mn) (` mn) CAGR in the sector (` mn) (` mn) (bps)
1 IT - Software 480,018 1,194,303 20% 25 53.5 53.7 0.1
2 Pharmaceuticals 118,679 304,969 21% 37 25.0 32.9 7.9
3 Automobile 34,753 101,404 24% 12 2.8 4.9 2.1
4 Castings, Forgings & Fasteners 11,670 42,300 29% 5 24.9 37.0 12.1
5 Tobacco Products 18,951 38,658 15% 3 9.6 9.7 0.1
6 Capital Goods-Non Electrical Equipment (3,341) 27,382 N/A 15 (1.8) 10.4 12.2
7 Sugar (26,762) 16,205 N/A 4 (42.8) 10.1 52.8
8 Textiles (5,128) 10,035 N/A 9 (2.6) 2.2 4.8
9 Hotels & Restaurants 1,752 9,641 41% 3 6.5 23.3 16.8
10 Plantation & Plantation Products 7,537 9,305 4% 5 20.5 15.9 (4.6)
11 Agro Chemicals 3,686 8,833 19% 6 5.7 6.3 0.6
12 Telecomm-Service (3,676) 8,043 N/A 6 (0.5) 0.7 1.3
13 Non Ferrous Metals (29,005) 3,273 N/A 4 (8.6) 0.6 9.2
14 Readymade Garments/ Apparels 1,897 3,018 10% 2 37.8 17.8 (20.0)
15 Telecomm Equipment & Infra Services (422) 2,103 N/A 3 (1.3) 2.6 3.9
16 Paper (83) 672 N/A 1 (1.3) 5.9 7.2
Source: Capitaline, Ambit Capital research; Note: Net exports represents revenue earnings in forex minus revenue expenses in forex aggregated across all stocks
in the sector. Net exports as a percentage of revenue indicates an aggregate of net exports across stocks in a sector divided by an aggregate of revenues in that
sector.* The universe is BSE500. ORANGE shading denotes this exhibit has been sorted based on absolute net exports in FY15. We have used FY09/14 data for
companies where the FY10/15 data was not available.
Similarly the list (sorted based on FY15 net exports as a percentage of standalone
revenues) have been reproduced in Exhibit 27 below.

Economy & Strategy
Exhibit 27: The top sectors which are net exporters (basis net exports as a percentage of standalone revenues in FY15)#
Net exports as a % of stan.
Net exports
revenues
Capitaline Sector
Rank FY10 FY15 5yr No. of stocks FY10 FY15 5yr change
(ranked by FY15 net exports)
(` mn) (` mn) CAGR in the sector (` mn) (` mn) (bps)
1 IT - Software 480,018 1,194,303 20% 25 53.5 53.7 0.1
2 Castings, Forgings & Fasteners 11,670 42,300 29% 5 24.9 37.0 12.1
3 Pharmaceuticals 118,679 304,969 21% 37 25.0 32.9 7.9
4 Hotels & Restaurants 1,752 9,641 41% 3 6.5 23.3 16.8
5 Readymade Garments/ Apparels 1,897 3,018 10% 2 37.8 17.8 (20.0)
6 Plantation & Plantation Products 7,537 9,305 4% 5 20.5 15.9 (4.6)
Capital Goods-Non Electrical
7 (3,341) 27,382 N/A 15 (1.8) 10.4 12.2
Equipment
8 Sugar (26,762) 16,205 N/A 4 (42.8) 10.1 52.8
9 Tobacco Products 18,951 38,658 15% 3 9.6 9.7 0.1
10 Agro Chemicals 3,686 8,833 19% 6 5.7 6.3 0.6
11 Paper (83) 672 N/A 1 (1.3) 5.9 7.2
12 Automobile 34,753 101,404 24% 12 2.8 4.9 2.1
13 Telecomm Equipment & Infra Services (422) 2,103 N/A 3 (1.3) 2.6 3.9
14 Textiles (5,128) 10,035 N/A 9 (2.6) 2.2 4.8
15 Telecomm-Service (3,676) 8,043 N/A 6 (0.5) 0.7 1.3
16 Non Ferrous Metals (29,005) 3,273 N/A 4 (8.6) 0.6 9.2
Source: Capitaline, Ambit Capital research; Note: Net exports represents revenue earnings in forex minus revenue expenses in forex aggregated across all stocks
in the sector. Net exports as a percentage of revenue indicates an aggregate of net exports across stocks in a sector divided by an aggregate of revenues in that
sector.* The universe is BSE500. ORANGE shading denotes this exhibit has been sorted based on net exports as a % of standalone revenues in FY15. We have
used FY09/14 data for companies where the FY10/15 data was not available.
In the exhibit above, Net exports as a percentage of revenue is calculated as an

aggregate of net exports across stocks in a sector divided by an aggregate of revenues
in that sector.
The following points emerge from Exhibits 26 and 27 above:
As one would have expected, the top-two sectors on net exports are Technology
and Pharmaceuticals.
The predominance of service-oriented and commodity-linked sectors amongst the
sectors on net exports such as Hotels & Restaurants, Sugar, Plantations &
Plantation Products, Tobacco Products, which have positive net exports, highlights
the infancy of Indias manufacturing export economy.
Only 5 sectors from the exhibits shown on the previous page Automobile,
Castings, Forgings & Fasteners, Capital Goods, Textiles and Agro
Chemicals) - can be described as manufacturing-oriented sectors. We now turn to
detailed sections on each of these sectors.

Economy & Strategy
Section 3: Auto and Auto Ancillaries

Ashvin Shetty, CFA, ashvinshetty@ambitcapital.com, +91 22 3043 3285
How easy is it to build a successful export franchise?
Large Indian auto companies have endured difficult and extended periods of struggle
before tasting success in the export markets. Bajaj Auto, the largest exporter of two-
wheelers (2Ws) from India, had to wait for nearly seven years between FY03 and
FY10 before its export volumes exceeded 1mn units. Also, Balkrishna Industries, the
largest exporter of tyres from India, forayed into off-highway tyre (OHT) exports in
mid-1990s but started getting traction only from 2002. The reasons for this extended
gestation period seems to be the time taken to: (a) conduct market research (product
quality and appropriateness for the different export countries), (b) build an overseas Auto companies have endured
distribution network, and (c) build brand equity and customer trust in the export difficult and extended periods
markets. of struggle before tasting
Some companies such as Hero MotoCorp (HMCL IN, mcap US$6.9bn, SELL) and success in the export markets
Maruti Suzuki (MSIL IN, mcap US$18.7bn, BUY) aspire to increase their exports
substantially. However, for the reasons discussed above, we believe these companies
are unlikely to enjoy overnight success in the export markets.
Hero MotoCorp: Post the split between Hero and Honda in 2010, Hero has struggled
to find its groove in the export market. The companys export volumes still accounted
for only 3% of total volumes in FY15. Heros 2W export volumes grew by a strong 56%
YoY in FY15 after continued YoY declines in FY13 (down 3%) and FY14 (down 19%).
However, FY15 exports volumes were largely driven by one-time scooter export orders
received from the erstwhile Sri Lankan Government (in April-July 2015, Heros export
volume growth moderated to 35% YoY). Whilst the company had earlier targeted to
reach export volumes of 1mn units by FY17 (vs 130k units in FY14), the management
has since pushed the target date to 2020.
Maruti Suzuki: Suzuki Motor Corporation (SMC) has allocated the responsibility of
the export markets of Africa, the Middle East and other neighbouring countries to
Maruti Suzuki. We believe Maruti will face significant challenges in scaling up volumes
in the export markets, as: (a) Globally, the market size for small/compact cars is not
as big as in India; (b) SMC globally does not command the same brand equity as it
does in India; (c) Bigger foreign players (such as Toyota and Honda) have a well-
entrenched distribution network as compared to SMC even in Emerging Markets; (d)
Given Indias low-cost advantage, many global auto players such as Hyundai (31%
share in exports from India) and Nissan (19% share in exports from India) have
already started using India as an export hub. This would restrict Marutis low cost
competitive advantage. Furthermore, we believe that even if Marutis exports were to
expand at 20% CAGR over FY14-20, it would constitute only about 10% of its total
volumes by FY20. In other words, Marutis fortunes would still heavily rely on its
performance in the domestic markets.
Limited opportunity from import substitution by domestic

consumers and threat from recent Chinese devaluation
Most vehicles sold in India are
Indian auto companies generally do not compete with imports, including Chinese locally manufactured and do
imports. Most vehicles sold in India are largely manufactured locally in India except not compete with imports
premium/luxury passenger vehicles which are imported in a completely knocked down including Chinese imports
(CKD) form and sold after assembling the same into a finished product. However,
CKDs are confined to high-end cars and account for a small portion of the overall
passenger vehicle market. Furthermore, the decision to localise production is
dependent on a viable auto market size and hence we do not see significant
opportunity for import substitution here.

Economy & Strategy
This point also holds true generally in the auto components space except in the case
of commercial vehicle tyres where imports (mainly from China) account for nearly 25-
30% of the total truck and bus tyre supplies in the Indian replacement market.
Furthermore, the slowdown in the Chinese automotive market and the recent
devaluation of Yuan pose risks of further rise in Chinese truck tyre imports. However,
in the more brand-conscious passenger vehicle and two-wheeler tyres segment,
Chinese imports have not been able to make any significant headway.
Incumbents to be main beneficiaries

Based on the above considerations, we believe that, in the auto OEM space, the
biggest beneficiary of the INRs depreciation is Bajaj Auto (BJAUT IN, mcap
US$9.5bn, SELL). It already has an established distribution network, brand name and Bajaj and TVS would be the
other systems in place in its export markets. These in turn would give it significant main export beneficiaries given
competitive advantages in the export markets, as it seeks to capitalise on the weak their established distribution
INR. network and brand name in
Bajaj Auto is the largest exporter of 2Ws (volume share of 68%) and 3Ws (volume the export market
share of 70%) in FY15 exports from India. The company's major export markets are
Africa (particularly Nigeria), Asia, the Middle East and Latin America (ex-Brazil). It has
built a strong export franchise (44% of FY15 revenues) over the past decade driven by
first mover advantage and market share gains from Chinese players (particularly in
Africa). Whilst the long-term opportunity remains strong in the export markets (low
penetration of 2Ws and further opportunity for market share gains), strong near-term
headwinds, such as weak crude oil prices, pose major risks to key export economies
such as Nigeria. We have profiled the company in more detail on page 33.
In the Auto Ancillary space, INR depreciation will help companies to some extent
based on their exports exposure. However, at the same time, many of the auto
ancillary companies also have significant import exposure. As a result, we believe that
auto ancillary firms that have significant net exports exposure (exports less imports)
would be the major beneficiaries. In this context, Balkrishna Industries (BIL IN,
mcap US$$0.9bn, SELL), Bharat Forge (BHFC IN, mcap US$3.5bn, Not rated) and
Sundram Fasteners (SF IN, mcap US$0.5 bn) come to mind.
Balkrishna Industries is the largest exporter of off-highway tyres (OHT) from India,
with exports accounting for nearly 90% of its revenues. Balkrishna Industries (BKT) has
built a substantial export business over the years in the niche area of off-highway Balkrishna Industries, Wabco
tyres (OHT) by successfully leveraging Indias low cost of manufacturing. Whilst we India and Bharat Forge would
expect its market share of 4% to grow as the new Bhuj facility provides additional be beneficiaries in the auto
capacities for product portfolio expansion (particularly in the mining segment), we ancillaries space given their
remain concerned about the current weak global demand environment for off- significant net exports exposure
highway tyres and the negative impact of lower Euro realisation on revenues/margin.
We have profiled the company in more detail on page 41.
Increasing focus on the global passenger vehicle forging business and improving
market share in the non-auto space are likely to be the next growth drivers for Bharat
Forges export business. In the automotive CV segment, Bharat Forge has a strong
presence in North America, Europe, Latin America and Asia Pacific, whilst in the
industrial components segment, Bharat Forge supplies forged products to a range of
industries (mainly oil & gas) in Europe and America. Europe and the US together
account for nearly 57% of total standalone revenues in FY15 (vs 45% in FY09). We
have profiled the company in more detail on page 37.
Sundram Fasteners, the largest player in the organised fasteners segment in India
has witnessed healthy growth in exports in the recent years (revenue CAGR of 22%
over FY10-15). Besides growth in the traditional fasteners segment, the introduction of
new components (pump assemblies, engine components) has driven strong exports for
the company in the recent years.

Economy & Strategy
Significant net imports and localised manufacturing to restrict

export opportunities for some auto-ancillary companies
Major auto-ancillary companies where the INRs depreciation is not expected to have
any significant beneficial impact are:
Bosch India (BOS IN, mcap US$10.2bn): The company has significant imports
which accounted for nearly 24% of net sales in CY14 (44% of total raw material and
components consumed). As against this, exports accounted for only 12% of net sales
in CY14. Also, the quantum of exports going forward would be restricted by the fact
that the parent, Bosch Group, has worldwide operations and manufacturing facilities.
Motherson Sumi (MSS IN, mcap US$5.6bn): Exports in FY15 accounted for only 2%
of total consolidated sales. As against this, imports accounted for nearly 5% of total
consolidated sales in FY15 (8% of total raw material and components consumed).
Motherson Sumi plans to increase exports of the wiring harness. However, localised
plants will cater to the global requirements of the larger part of its business viz.
polymer components (Peguform) and mirrors (VisioCorp), together constituting 78% of
FY15 consolidated revenues. Hence, we do not expect exports (out of India) to
constitute a major portion of consolidated sales.

Economy & Strategy
Section 4: Capital goods and light

industrials
Bhargav Buddhadev, bhargavbuddhadev@ambitcapital.com, +91 22 3043 3252
With the exception of Thermax, whose net exports as a percentage of FY15 sales was
Heavy engineering sector in India
at 17% in FY15 (Thermax has a manufacturing JV with Babcock and Wilcox (B&W) in
is not really relevant as an export
India for global ordering of B&W), most heavy capital goods companies in India have
play given the high cost of capital
weak export franchises. Whilst BHEL is a net importer (with 10% net imports to sales in
in India
FY15), Crompton Greaves has negligible net exports to sales despite having
international subsidiaries contributing to 44% of consolidated revenues in FY15. As a
result, the heavy engineering sector in India is not really relevant as an export play;
one reason for the same can be the high cost of capital in India (the highest in the
world excluding sub-Saharan Africa).
Exhibit 28: Whilst the heavy capital goods companies have weak export franchises
`mn BHEL Thermax Crompton Greaves
FY13 FY14 FY15 FY13 FY14 FY15 FY13 FY14 FY15
Consolidated revenues 495,522 401,784 307,886 54,917 50,999 46,974 120,944 134,806 140,130
Exports 5,818 16,086 10,228 9,840 11,010 10,920 8,772 9,908 10,246
Import of RM*, FG**, Components 62,879 62,618 40,723 2,242 2,908 2,883 8,291 8,375 7,909
% of exports to net sales 1% 4% 3% 18% 22% 23% 7% 7% 7%
% of imports to net sales 13% 16% 13% 4% 6% 6% 7% 7% 6%
Net exports/(imports) as a % of net sales -12% -12% -10% 14% 16% 17% 0% 1% 2%
Source: Company, Ambit Capital research. Notes: * RM stands for raw material; ** FG stands for finished goods.
Exhibit 29: low ticket-size capital goods companies have strong export franchises
`mn Cummins India Triveni Turbines Elgi Equipments
FY13 FY14 FY15 FY13 FY14 FY15 FY13 FY14 FY15
Consolidated revenues 45,090 39,767 44,058 6,653 5,154 6,508 11,445 13,504 13,143
Exports 12,193 12,193 17,268 1,746 1,415 2,597 1,396 1,646 1,628
Import of RM*, FG**, Components 5,138 4,779 5,822 298 190 361 685 799 783
% of exports to net sales 27% 31% 39% 26% 27% 40% 12% 12% 12%
% of imports to net sales 11% 12% 13% 4% 4% 6% 6% 6% 6%
Net exports/(imports) as a % of net sales 16% 19% 26% 22% 24% 34% 6% 6% 6%
Source: Bloomberg, Ambit Capital research. Notes: * RM stands for raw materials; ** FG stands for finished goods.
However, the export opportunity is more encouraging for the lighter capital goods
players that sell products with smaller ticket sizes such as Cummins India (KKC IN,
mcap US$4.7bn, SELL), Triveni Turbines (TRIV IN, mcap US$547mn), Elgi The export situation is
Equipments (ELEQ IN, mcap US$315mn), AIA Engineering (AIA IN, mcap encouraging for the lighter
US$1.3bn, BUY), and VA Tech (VATW IN, mcap US$557mn, BUY). All of these firms capital goods players that sell
are well-managed, generate strong operating cash flows, have solid franchises in products with smaller ticket sizes
India and are actively looking to expand their export franchises.
Cummins India (KKC) has, over the past decade, positioned itself smartly as a
manufacturing hub for Cummins Inc with a particular focus on exporting engines to Cummins India has positioned
Africa and Latin America. Over the last five years, KKC invested `3.1bn (21% of FY14 itself as a manufacturing hub for
gross block) in setting up the export SEZ at Phaltan near Pune in Maharashtra. Cummins Inc with a particular
Consequent to this investment, we expect export revenue CAGR of 22% over FY14-16 focus on Africa and Latin America
(vs CAGR of 1% over FY12-14). Hence, we expect the share of exports as a
percentage of revenues to increase from 30% in FY14 to 34% in FY16. We have
profiled the company on page 49.

Economy & Strategy
Section 5: Textiles
Nitin Bhasin, nitinbhasin@ambitcapital.com, +91 22 3043 3241
Indias export opportunity
Indias textile exports have historically been highly susceptible to the
vagaries of cotton prices and currency fluctuations. The availability of cheap
funding (under TUFS) has resulted in overcapacity (yarn/fabric) and high
competitive intensity in this sector. Against this backdrop, we believe that
companies in niche businesses only would be able to maintain their growth
momentum. Kitex Garments, Indo Count and Himatsingka Seide have not
only forayed into niche segments but have also built competitive advantages
by building a strong product-based bargaining/pricing power with their
clients in the developed world; we expect such companies exports to fare
better in light of the INR depreciation but their commodity business such as
yarn and fabric will be adversely affected, as clients can easily switch for
pricing.
Indian textile exports: Raw material advantage
India is the second-largest producer of textiles and garments in the world after China.
India is also the second-largest cotton producer and global leader in jute production.
In terms of exports, it ranks amongst the top-five global players, constantly expanding
its share in world trade. With a traditionally positive trade balance, the textiles sector
accounts for about 10% of India's total exports and contributes around 4% to Indias
GDP and 14% to its industrial production. The strongest competitive feature of the
industry in international markets remains easy access to raw materials at relatively
lower costs. However, the key issue remains overcapacity in yarns, poor fabric
processing capacities and fragmented garment manufacturing capacities.
Export franchise of India: Steady growth but behind potential
Export revenues of India have expanded at ~10% CAGR over 2004-14. Indian textile
exports have flourished in recent years possibly due to lower exports by China on
account of its Textile and Yarn policy and rising labour costs and power shortages in
the India. Historically, India was relegated to the position of a supplier of intermediate
products to other successful garment-exporting countries; now it stands a chance to
recover some market share from China and other nearby nations. However, this will
not be easy, as Bangladesh and Vietnam offer strong cost advantages. Our
discussions with the management teams of various textile exporters reveal the
following:
The unwinding of the Chinese policy (in FY15) has led to lower export throughput
in yarn exports (which is a commodity segment).
Companies in the made-ups and specialised fabric segment are not facing
growth headwinds of such magnitude from the reversal in the Chinese policy as
players in the yarn segment are.
Exhibit 30: Indias textile export revenues (US$ bn)
Raw Cotton/ Yarn Fabric Textiles
50 50
43
39 40
40 39 40
33
28
30 26 30
24 23
21
17
20 20
10 10
- -
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Source: Ambit Capital research, WTO Database, Texmin database

Economy & Strategy
Indian textile exports highly susceptible to global cotton prices and currency
volatility
As seen in Exhibit 31 below, textile exports flourished during 2008-11 when cotton
prices remained benign. Contrary to that, as cotton prices increased during 2011-12,
the growth rates of Indian textile exports declined to as low as 0% YoY in 2012.
As seen in Exhibit 32 below during the phases of depreciating INR (2006-2007 and
2011-12), export revenues have improved, indicating high susceptibility to currency
fluctuations.
Exhibit 31: Textile exports are highly correlated to lagged Exhibit 32: Export revenues have mirrored currency
cotton prices fluctuations
40% Indian Export growth YoY Indian Export growth YoY

1 year lagged cotton price growth 25% INR/ USD growth rates YoY
30%
15%
20%
10% 5%
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
0% -5%
2006
2007
2008
2009
2010
2011
2012
2013
2014
-10% -15%
Source: Ambit Capital research, Bloomberg. Source: Ambit Capital research.
Home textile and apparel export markets in India

Apart from yarns, Indian companies have a made a mark for themselves in the global
home textile market, which is estimated at US$45bn; the US (US$18bn) is the largest
importing country largely due to the dominance of organised retail. Home textile
exports contribute to ~17% of overall Indian textile exports. Due to the existence of a
large unorganised sector including Khadi and other small scale units, the market
share of the largest player (Welspun) is a mere ~10%. Ability to provide market
research along with superior products to overseas clients and timely execution will
ensure market share gain for the organised players in exports markets. This augurs
well for players like Indo Count (ICNT) and Himatsingka Seide (HSS) which have
established their presence in the overseas markets and have implemented several
initiatives to generate enduring moats. However, at the same time, competitive
intensity remains high, with Trident now expanding into this segment.
Infant-wear market: A niche and specialised garment sector
Apparel exporters remain fragmented and the inability of most players in building any
differentiation has meant that no large single player has emerged; at one time,
Gokaldas, OrientCraft, Pearl Fashion and Arvind were considered to become large
garment exporters but they failed to capitalise on the same on account of labour
costs/policies, logistical issues and volatile/inconsistent duty/incentives. However,
Kitex Garments, a Kerala-based company, has emerged as the third-largest
infantwear manufacturer-exporter based on its competitive advantages built around
product quality and effective execution. Most large infant-wear retailers like Carters
and GAP have a dedicated quality assurance team which evaluates vendors as a
standard operating practice. Hence, the need to meet the requirements on product
testing, chemicals used, and overall diligence standards result in lower competitive
intensity. India exports infant garments worth ~US$130mn annually. Kitex has ~70%
market share in this segment. Given high entry barriers and specialised nature of the
infant-wear industry, none of the large Indian textile players have a presence in this
sector.

Economy & Strategy
Exhibit 33: Highly fragmented home textile export market Exhibit 34: Kitex Third-largest infant-wear manufacturer,
in India with 70% market share in Indias infantwear exports
Trident, Welspun, Others,
4% 10% 15%
Indo
Count, 3%
Himatsing Jay Jay
ka, 5% Mills, 15%
Kitex, 70%
others ,
79%
Source: Ambit Capital research Source: Ambit Capital research
Mapping the key Indian exporters

Exhibit 35: Competitive Advantage Framework
Competetive Mapping
Revenue Median Accounting
Size Greatness Bargaining Portfolio Median
Companies growth % RoCE % Score
(` mn) Score (%) Capital Power with Operating expansion Score
(FY10-15) (FY10-15) (Decile) intensity leverage
Buyers opportunities
Arvind Ltd. 79,563 19.3 15.5 D6 79
Himatsingka Seide Ltd. * 19,436 12.6 9.1 D1 83
Indo Count Industries Ltd.* 17,242 32.7 19.8 D6 63
Kitex Garments Ltd.* 5,116 15.6 30.9 D2 71
Vardhman Textiles Ltd. 68,292 15.0 13.7 D4 67
Source: Ambit Capital research; Note: 1 is weak and 4 is the strongest, (*) indicates companies in the sub BSE 500 universe
Note: - Strong; - Relatively Strong; - Average; - Relatively weak.
Himatsingka Seide (HSS): The company scores well both on our competitive
advantage framework as well as on our accounting framework. HSS is penalised on
our competitive advantage framework on parameters of: (a) capital intensity and (b)
operating leverage. The company has continually invested in capacity expansion,
hindering free cash flow generation. Also, the under-absorbed overheads curb
operating leverage benefits. HSS has a strong B2B export franchise, with marquee
clients like Bed Bath & Beyond, Cosco and Macys and it is the sole licensee of
prestigious brands like CK and Barbara Barry, which give it some brand recall with
customers looking to buy fashion bedding. Post the planned capacity addition/up-
gradation, the company will be able to manufacture a greater proportion of high-
margin products and also provide greater protection against raw material volatility.
Indo Count (ICNT): The company scores well on our competitive advantage
framework with sustainable moats around: (a) the ability to provide on-the-ground
market research and (b) strong in-house execution capability. The company scores low
on our accounting framework due to weak cash generation and write-back of
accumulated losses (due to which the company had entered CDR). However, over the
last few years, the company has sweat its assets effectively, benefitted from modular
expansions and invested in building client connect from its market research. Going
forward, the company plans to increase its operations in the non-US geographies,
with a view to reduce concentration risks.
Kitex Garments (KGL): The company scores well both on our competitive advantage
framework as well as on our accounting framework. Its presence in a niche category
(infantwear) with high barriers to entry along with efficient capital utilisation results in
an increased bargaining power with customers and benefits of operating leverage.
KGL is the third-largest infant-wear manufacturer globally and has diversified its client
portfolio from a single client in FY09 to five currently. This leads to lower
concentration risk and improved margins. Going forward, KGL intends to improve its
revenue mix in favour of high-margin clients, buy/license a brand for the US market
and become a wholesaler like Gerber.

Economy & Strategy
Vardhman Textiles (VTEX): The company scores poorly on both our accounting and
the competitive advantage framework. We do NOT see sustained competitive
advantage for VTEX which operates in a commodity-like segment with an inability to
pass on FULLY the input cost inflation even though it continues to earn a little
premium for its products. Furthermore, VTEX is highly susceptible to the vagaries of
cotton prices, as global cotton prices impact yarn prices, and to its disadvantage,
Indian cotton prices are determined by the Government. The company receives a
weak score on our accounting framework, with low cash conversion of 59%
(CFO:EBITDA) and low free cash flow generation.
Exhibit 36: Financial Snapshot
CAGR
` Mn FY10 FY11 FY12 FY13 FY14 FY15
(10-15)
Revenue
Arvind Ltd. 32,883 41,266 49,959 54,608 70,306 79,563 19%
Himatsingka Seide Ltd. 10,756 12,327 14,287 16,894 20,313 19,436 13%
Indo Count Industries Ltd. 4,186 7,269 8,072 12,105 14,909 17,242 33%
Kitex Garments Ltd. 2,474 2,561 3,120 3,170 4,427 5,116 16%
Vardhman Textiles Ltd. 33,914 44,922 46,831 50,139 62,080 68,292 15%
Total 84,213 108,344 122,269 136,916 172,035 189,648 18%
CAGR
(10-15)
Capital Employeed
Arvind Ltd. 34,072 35,959 38,710 44,370 53,004 58,518 11%
Himatsingka Seide Ltd. 13,358 12,675 12,668 13,386 15,497 15,612 3%
Indo Count Industries Ltd. 3,762 4,080 3,909 4,749 6,075 7,010 13%
Kitex Garments Ltd. 1,249 1,820 1,989 2,235 3,083 4,251 28%
Total 94,913 106,621 106,914 121,541 142,708 145,545 9%
` Mn FY10 FY11 FY12 FY13 FY14 FY15 Median
Free Cash Flow
Arvind Ltd. (155) (1,892) (394) (859) (2,584) (3,609) (1,376)
Himatsingka Seide Ltd. (1,929) (191) 522 551 (754) 1,064 165
Indo Count Industries Ltd. (199) 95 (32) (507) 11 598 (11)
Kitex Garments Ltd. 743 (414) 158 74 265 705 211
Vardhman Textiles Ltd. (3,004) (4,295) (4,256) (3,323) 434 10,920 (3,163)
Total (4,544) (6,697) (4,002) (4,065) (2,629) 9,677 (4,033)
CAGR
(10-15)
EBITDA
Arvind Ltd. 4,773 5,844 7,207 7,680 10,034 11,289 19%
Himatsingka Seide Ltd. 1,085 966 1,490 1,687 2,067 2,234 16%
Indo Count Industries Ltd. 330 723 630 1,201 1,891 3,137 57%
Kitex Garments Ltd. 496 530 657 658 1,102 1,841 30%
Total 14,587 19,338 16,803 21,477 30,686 31,641 17%
% FY10 FY11 FY12 FY13 FY14 FY15 Median
EBITDA margin (%)
Arvind Ltd. 14.5 14.2 14.4 14.1 14.3 14.2 14.2
Himatsingka Seide Ltd. 10.1 7.8 10.4 10.0 10.2 11.5 10.1
Indo Count Industries Ltd. 7.9 9.9 7.8 9.9 12.7 18.2 9.9
Kitex Garments Ltd. 20.0 20.7 21.1 20.8 24.9 36.0 20.9
Vardhman Textiles Ltd. 23.3 25.1 14.6 20.5 25.1 19.2 21.9
Industry Median 14.5 14.2 14.4 14.1 14.3 18.2 14.2
% FY10 FY11 FY12 FY13 FY14 FY15 Median
ROCE (%)
Arvind Ltd. 9.0 11.8 21.6 13.6 15.7 15.5 14.5
Himatsingka Seide Ltd. 4.9 3.1 7.8 9.1 10.3 11.5 8.5
Indo Count Industries Ltd. 0.4 12.3 8.0 19.8 31.3 41.6 16.1
Kitex Garments Ltd. 28.6 30.1 30.9 27.1 37.8 44.4 30.5
Vardhman Textiles Ltd. 13.1 18.3 8.0 13.7 20.1 12.5 13.4
Industry Median 9.0 12.3 8.0 13.7 20.1 15.5 14.5
Source: Ambit Capital research

Economy & Strategy
Exhibit 37: Relative Valuation Table
MCAP P/E EV/EBITDA ROE Dividend 2 Yr CAGR

Company Name
(S mn) FY16E FY17E FY16E FY17E FY16E FY17E Yield Revenue EBITDA EPS
Kitex Garments Ltd. 491 26.4 21.4 15.0 12.7 38.8 36.1 0.2 17% N.A 24%
Gokaldas Exports Ltd. 32 N.A N.A N.A N.A N.A N.A N.A N.A N.A N.A
Indo Count Industries Ltd. 561 16.8 14.5 10.4 8.4 41.0 34.0 N.A 21% 40% 32%
Himatsingka Seide Ltd. 267 11.9 10.0 8.2 7.4 16.6 16.8 1.1 11% 27% 27%
Nahar Spinning Mills Ltd. 60 N.A N.A N.A N.A N.A N.A 0.9 N.A N.A NA
KPR Mill Ltd. 410 15.4 13.9 6.7 5.5 18.2 18.3 1.3 13% 17% 16%
RSWM Ltd. 105 6.5 5.5 4.8 4.1 19.7 19.9 4.2 13% 11% 22%
Trident Ltd. 288 11.2 7.5 N.A N.A 11.1 14.7 0.8 23% N.A 42%
Welspun India Ltd. 1,153 11.7 9.7 6.7 5.9 37.7 35.0 1.4 16% 15% 24%
Vardhman Textiles Ltd. 839 13.1 12.1 5.7 5.2 13.0 12.7 1.1 6% 17% 13%
Arvind Ltd. 1,036 12.2 8.7 8.8 7.4 17.9 21.4 1.0 14% 18% 45%

Economy & Strategy
Section 6: Specialty Chemicals

Ritesh Gupta, CFA, riteshgupta@ambitcapital.com, +91 22 3043 3242
Specialty chemicals are chemical products that are sold on the basis of their
performance or function, rather than for their composition.
Speciality chemicals are a group of high-value, low-volume chemicals formulated for
developing/enhancing properties of specific products. The customised product
requires special technologies, process expertise and understanding of client needs,
and thus the industry typically commands limited competition, yielding higher gross
margins and returns than other chemical sub-segments.
According to industry reports, the Global Specialty Chemicals market is likely to
expand at a CAGR of 5.2% over 2013-2018 to reach US$761bn by 2018 (from
US$619bn in 2014). The Indian market is fairly small (1-2% of the global market) but
it is growng at 25-30%. Exports from India are also growing at a healthy pace of 15%
and have a much larger opportunity.
Facing compliance, cost, and capacity issues, global agrochemical innovators are
looking to outsource their manufacturing processes to India. However, unlike the
pharma sector, high-quality players in emerging markets which can deliver on
innovators quality and safety parameters are limited. This creates a big opportunity
for Indian players over the next 5-10 years.
As it has happened in many

Rising exports will drive strong growth ahead industries like Pharma,
Agrochemicals, MNCs are also
Exports from India are likely to receive a further fillip and Indias export market share looking to outsource their key
is likely to increase (from a miniscule 2% currently) due to: intermediates and raw materials.
Shift in capacities from developed countries to emerging markets That's where India has a good
opportunity.
As Western players face increasing pressure from rival producers and local players
- Mr. Salil Singhal,
try to capture a larger share of the global market, global specialty chemical
Chairman PI Industries
companies are trying to find new ways to compete. Incrementally, manufacturing
is the first thing these global majors look to outsource to remain competitive.
Given rising costs related to labour, initial setup expenses, and stricter
environmental compliance, manufacturing capacities in global countries are being
shut down. Most of these capacities are being transferred to manufacturing
captives or third-party manufacturers in India/China.
Most of the specialty chemical segments except for Pharmaceuticals have been
laggards in outsourcing their manufacturing needs vs base chemical players. This
trend is catching up with the changing mindset of these global innovators.
De-risking of supply chain
Major MNCs are trying to de-risk their supply chain by diversifying their RM
procurement away from China (amongst the developing countries). During the
past decade, China aggressively added chemical capacities and became the
largest exporter (amongst the developing countries) to MNCs. However, as risks
associated with Chinese exports increase (domestic slowdown, IP threat, currency
volatilities, and tightening controls), MNCs increasingly prefer India amongst the
developing countries for their raw material supplies.
Chemical exports are rising from India
Chemical exports from India have expanded at 22% CAGR over 2010-14, significantly
outpacing global demand growth (3-4%) and the trend has continued in 2015 as well.
Our bottom-up analysis for the top-11 specialty chemicals companies shows that
cumulative sales for industry players grew at 22%. The lowest CAGR over FY10-15
was 17%, indicating rapid growth led by sound industry fundamentals. Focus on move
into more value-added chemistries, INR depreciation, and gradual pricing premium
for Indian products have driven EBITDA margin expansion from 11% to 20% and PAT
margin expansion from 6% to 12% over FY10-15.

Economy & Strategy
Exhibit 38: Revenues and margins both have expanded well for both Indian specialty chemical players
CAGR
FY10 FY11 FY12 FY13 FY14 FY15
(FY10-15)
Sales
Aarti Industries Ltd. 13,012 14,530 16,733 20,962 26,325 29,080 17%
Adi Finechem Ltd. 384 574 972 1,231 1,518 1,506 31%
Atul Ltd. 12,137 15,553 17,924 20,429 24,578 26,564 17%
Camlin Fine Sciences Ltd. 1,416 1,717 3,352 3,736 5,087 5,583 32%
Gujarat Fluorochemicals Ltd. (Ex CER) 5,134 8,262 12,419 11,550 11,404 13,209.70 21%
Navin Fluorine (Ex CER) 2,573 3,557 4,728 4,929 4,862 5,915 18%
Omkar Speciality Chemicals Ltd. 681 1,068 1,669 2,117 2,403 2,651 31%
Oriental Carbon & Chemicals Ltd. 1,257 1,590 2,178 2,874 3,308 3,468 23%
SRF Ltd. (Chemicals, Ex CER) 3,982 6,739 7,648 7,721 9,561 12,634 26%
Vinati Organics Ltd. 2,321 3,226 4,475 5,529 6,961 7,717 27%
PI Industries (CSM) 2,065 2,582 3,947 6,352 9,771 11,633 41%
Total 44,962 59,397 76,044 87,430 105,777 119,961 22%
EBITDA
Aarti Industries Ltd. 2,030 1,979 2,493 3,612 4,015 4,657 18%
Adi Finechem Ltd. 25 104 147 174 333 250 59%
Atul Ltd. 1,103 1,708 1,880 2,491 3,637 3,914 29%
Camlin Fine Sciences Ltd. 139 155 290 461 595 842 43%
Gujarat Fluorochemicals Ltd. (Ex CER) -354 1,515 -1,185 2,612 1,892 2,781 nm
Navin Fluorine (Ex CER) -287 375 -14 256 660 722 nm
Omkar Speciality Chemicals Ltd. 128 215 332 402 429 522 32%
Oriental Carbon & Chemicals Ltd. 380 478 557 565 689 682 12%
SRF Ltd. (Chemicals, Ex CER) 600 1,961 2,116 1,527 2,635 4,219 48%
Vinati Organics Ltd. 527 697 950 1,203 1,529 1,918 29%
PI Industries (Overall EBITDA) 871 1,170 1,449 1,826 2,910 3,751 34%
Total 5,163 9,187 7,566 13,303 16,414 24,257 36%
PAT
Aarti Industries Ltd. 685 669 900 1,330 1,521 1,937 23%
Adi Finechem Ltd. -6 51 74 84 187 137 -290%
Atul Ltd. 517 897 950 1,281 2,202 2,262 34%
Camlin Fine Sciences Ltd. 11 74 39 151 287 550 120%
Gujarat Fluorochemicals Ltd. (Ex CER) 91 1,925 -3,497 1,224 3,979 1,870 83%
Navin Fluorine.(Ex CER) -308 188 390 41 547 582 -214%
Omkar Speciality Chemicals Ltd. 52 102 160 206 136 243 36%
Oriental Carbon & Chemicals Ltd. 295 374 315 279 405 453 9%
SRF Ltd. (Chemicals calculated as 70% of EBIDA) 420 1,373 1,481 1,069 1,845 2,953 48%
Vinati Organics Ltd. 400 520 548 687 862 1,158 24%
PI Industries 418 651 814 974 1,912 2,459 43%
Total 2,575 6,823 2,173 7,325 13,882 14,605 42%
Source: Company

Economy & Strategy
How sustainable is the growth?

We believe cost is clearly an advantage for developing countries such as India and
China. Successful Indian players bring in many advantages such as strong process
capabilities, products with much lower impurity profile, adherence to IP, and stable
regulatory regime. The Indian government has been launching various incentives such
as PCPI` (first one in Dahej) with tax sops, single point clearances, integrated pollution
treatment, etc. Many such PCPRs are likely to come across India over the next few
years.
Unlike base chemicals wherein growth is driven by volume and capacities, specialty
chemical products are usually batch processes. Here efficiencies need to be brought in
processes and scale is not important. The purity profile also is crucial and can fetch
significant premium. Many Indian chemists are well regarded for their capabilities.
The sustainability of Indian speciality chemical companies growth will be driven by:
(a) Strong adherence to global manufacturing standards: Most of the global
innovators have strong audit processes for vendor selection. Building global standard
plants is the first step. Some Indian players lost contracts due to inadequate pollution
treatment plants.
(b) Capabilities on process chemistry: Historically, many Indian players had good
capabilities on process engineering before product patents came into picture in 2005.
These old capabilities are being leveraged by some of the Indian agrochemical
players in exports. Some have leveraged their old capabilities to develop downstream
products. A case in point is SRF, which leveraged its fluorine capabilities in refrigerants
to build more complex downstream products.
(c) Strong project management qualities: Given that the contracts are global in
nature, transparency has aided some manufacturers such as PI to build a clear win-
win situation for both the innovator and Indian vendor. PI works on passing RM and
forex volatilities. This has kept its margins intact across cycles. Timely delivery,
transparent communication and high-quality sourcing of raw material are some of the
key differentiators for an Indian vendor.
(d) Adherence to quality/safety/healthy/environmental parameters and
manufacturing efficiencies: Compliance, cost, and capacity are the three important
pillars of manufacturing outsourcing. Cost and capacity discipline is the key to keeping
RoCEs intact in this relatively lower scale advantage versus base chemicals. Any A conflict-free IP model is the key
violation of pollution norms by even the vendor can bring in significant damage to to provide comfort to global
global innovators global repute. Hence, this is another key parameter. A promoter innovators. This is a key
needs to bring in a fine balance to these 3Cs of compliance, cost, and capacity. competitive advantage of Indian
players vs Chinese players
e) Respect for IP: A conflict-free IP model is the key to provide comfort to global
innovators. This is a key competitive advantage of Indian players vs Chinese players.
Some of the Chinese players seem to selling generics competing with global
innovators products at the same eyeing patented molecules CSM from global
innovators.
PI as a case study
We will take PI Industries as a case study. The less-appreciated drivers of PIs success
in CSM are: (a) decade-plus perseverance/investments for building credibility with
global innovators; (b) propositions built around capabilities/integrity and not cost
savings; and (c) agility in long-duration contract pricing. Primary experts across the
value chain, competition and ex/present stakeholders suggest that PIs recent financial
performance should be considered in the light of promoters unmatched foresight
(over last two decades) to build a credible CSM business. The promoters have invested
time and money (sales offices, samples manufacturing) along with curtailing the
domestic generics business to address any potential conflict issues.
Our channel checks clearly suggest that PIs strong growth trajectory in the domestic
and CSM business is to be credited to the right choices made by the management
over the years at various inflection points such as: (1) starting the CSM journey in
1995 and continuing the business for 10 years without material progress, (2) moving
out of reverse engineered products in 2000 to avoid any conflict of interest with

Economy & Strategy
innovators, and (3) moving to an in-licensing strategy, leading to much superior

product launches and capitalising on strong relationship with Japanese innovators.
Other right decisions include: (1) getting the pricing right in the CSM business, which
is critical for key client wins, and (2) investing in strong development and GLP certified
laboratories in a city like Udaipur. As highlighted in our earlier notes
On a solid footing and New Dawn, PI has built a business model which is extremely
robust in its process DNA enabling superior execution vs. its peers. These softer
nuances speak highly of the capabilities of the management team to expand the
franchise at healthy growth rates over the next 8-10 years.
Agrochemical exports - A burgeoning opportunity

Agrochemicals is the biggest part of the Indian specialty chemicals story.
Indian agrochemicals exports have recorded a 17.5% CAGR over the last four
Indias cost advantage has
years to reach ~US$2bn in size. Globally, agrochemical players are becoming more
increased due to rising cost of
focused on their core functions and identifying R&D and marketing as their core
environment law compliance in
operations. As a result, they are looking to use India as a hub for manufacturing.
developed countries and China
Post the tsunami, Japanese players are incrementally looking to diversify their
manufacturing base away from their home country. Similar to pharmaceuticals, India
has an advantage vs other manufacturing destinations such as China due to better IP
protection and engineering talent. Industry participants quantify that the cost in India
of setting up a plant is 50% lower than developed countries, resulting in competitive
pricing. Apart from the cost advantage, environmental stringency in developed
countries has increased significantly (relative to India where the laws are still relaxed).
Exhibit 39: India agro-chemicals export market (US$ bn) Exhibit 40: Value of agro-chemicals going off-patent over
2014-2020 (US$ bn)
2.0 1.6
1.7 1.3
1.2
1.4
1.2 0.9
1.1
0.7
0.4
0.2
FY10 FY11 FY12 FY13 FY14 2014 2015 2016 2017 2018 2019 2020
Source: Industry, Ambit Capital research Source: Industry, Ambit Capital research
Globally, the generic market is on the rise

The generics market in pesticides has been growing as a percentage of overall
market. Industry statistics suggest that the generics market has grown from 33% in
2000 to 52% in 2013. In addition, products worth ~US$6bn are going off-patent in
FY14-20.

Economy & Strategy
Exhibit 41: Global pesticides market Breakup (2000) Exhibit 42: Global pesticides market Breakup (2013)
Off-Patent
Propreitar
Off-Patent y Product,
Generic
Propreitar 26%
Product,
y Product, 33%
37%
Patented
Product, Generic
Patented 22% Product,
Product, 52%
30%
Source: Industry, Ambit Capital research Source: Industry, Ambit Research

Exhibit 43: The number of Active Ingredients in development for agrochemicals has
declined significantly over the last few years
80
70
60
50
40 Rising share of generic pesticide
30 products globally is enhancing
the exports opportunity for
20
domestic agrochemical players
10
0
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Number of Active Ingredients in development
Source: Phillip McDougall
...and India is becoming an attractive destination for exports

As a product turns generic, cost becomes a key competitive advantage. And hence the
shift to a cheaper manufacturing location clearly makes more sense. India is currently
the thirteenth largest exporter of pesticides, most of which are off-patent in nature.
We believe there is a significant room to improve the same.
Exhibit 44: Indias agrochemical export opportunity drivers
Driver Details
Industry participants quantify that Indias cost of setting up a plant is 50% cheaper than developed countries, resulting in
Cost advantage
competitive pricing.
Environment stringency in developed countries including China has increased significantly. Indian laws are still more
Stricter environmental laws
accommodating in terms of environment.
Global agrochemical players are becoming more and more innovative to defend their market share. They are
Business model shift
increasingly focusing on core areas such as R&D and marketing.
Improved IP protection post India being TRIPS-compliant. Also, the proportion of generic molecules is on the rise, leading
IP protection
to lower IP protection concerns.
Post the tsunami, Japanese players are incrementally looking to diversify their manufacturing base away from their home
Concentration risk
country.

Economy & Strategy
Stock-specific sections
The share price performance on the stocks highlighted in our July 2012, July 2013
and September 2014 thematics is highlighted below.
Exhibit 45: Share price performance from our July 2012 thematic
Company Name Ticker Mcap ADV - 6m Price (in `) as of Performance
$ mn $ mn 11-Jul-12 29-Jul-13
Bajaj Auto BJAUT IN 9,597 14.9 1,512 1,996 32%
Balkrishna Inds. BIL IN 954 1.3 274 218 -21%
Dr. Reddy's DRRD IN 10,197 19.5 1,645 2,218 35%
Glenmark Pharma GNP IN 4,268 20.2 395 587 49%
Cummins KKC IN 4,399 3.7 437 411 -6%
Elgi Equipments ELEQ IN 290 0.1 80 79 -1%
AIA Engineering AIAE IN 1,292 1.7 327 295 -10%
TTK Prestige TTKPT IN 680 1.0 3,299 3,634 10%
Absolute performance 11%
BSE500 Index 6,750 7,110 5%
Relative performance 6%
Source: Bloomberg, Ambit Capital research
Exhibit 46: Share price performance from our July 2013 thematic
Company Name Ticker Mcap ADV - 6m Price (in `) as of Performance
$ mn $ mn 29-Jul-13 29-Sep-14
Bajaj Auto BJAUT IN 9,597 14.9 1,996 2,305 15%
Balkrishna Inds. BIL IN 954 1.3 218 759 248%
Dr. Reddy's DRRD IN 10,197 19.5 2,218 3,208 45%
HCL Tech HCLT IN 19,798 32.0 448 853 90%
eClerx ECLX IN 747 0.7 731 1,390 90%
Cummins KKC IN 4,399 3.7 411 672 63%
Elgi Equipments ELEQ IN 290 0.1 79 125 59%
AIA Engineering AIAE IN 1,292 1.7 295 926 214%
TTK Prestige TTKPT IN 680 1.0 3,634 4,080 12%
Absolute performance 93%
BSE500 Index 7,110 10,162 43%
Exhibit 47: Share price performance from our September 2014 thematic
Company Name Ticker Mcap ADV - 6m Price as of Performance
$ mn $ mn 29-Sep-14 08-Sep-15
Bajaj Auto BJAUT IN 9,486 14.9 2,305 2,206 -4%
TVS Motors TVSL IN 1,569 7.7 229 221 -3%
Bharat Forge BHFC IN 3,535 20.2 838 1,022 22%
Balkrishna Industries BIL IN 947 1.3 759 656 -14%
WABCO WIL IN 1,841 1.0 3,786 6,454 70%
Cummins India KKC IN 4,399 3.7 672 1,055 57%
AIA Engineering AIAE IN 1,292 1.7 926 911 -2%
TTK Prestige TTKPT IN 680 1.0 4,080 3,886 -5%
VA Tech VATW IN 545 1.5 851 666 -22%
Triveni Turbines TRIV IN 528 0.2 88 106 21%
Elgi Equipments ELEQ IN 290 0.1 125 122 -3%
PI Industries PI IN 1,354 2.3 456 659 45%
Aarti Industries ARTO IN 541 0.7 276 406 47%
16%
BSE500
BSE500 Index 10,162 10,126 0%
Index

Economy & Strategy
In this note we highlight the following stocks are interesting opportunities to be

explored in the context of light industrial manufacturing exports:
Textiles: Vardhman, Indo Count, Kitex, Himatsingka Seide (none of these four
stocks are rated by Ambit);
Auto & Auto Ancillaries: Bajaj Auto (SELL), Bharat Forge (unrated), Sundaram
Fasteners (unrated), Balkrishna Industries (SELL);
Chemicals: PI Industries (BUY), Aarti Industries (unrated) and Atul Industries
(unrated).
Engineering: Cummins India (SELL), AIA Engineering (SELL).
All of the stocks which are listed above as SELLs are well managed companies with
believable accounts and credible corporate governance. Hence as their share prices
crack in the ongoing dislocation, we believe there will be attractive entry points into
these names.
Exhibit 48: Profile pf the companies listed in this thematic
Exports as
ADV - CFO / pre FY15 Exports
Mcap FY15 a % of FY15 FY15 Price
Company Name Ticker 6m tax Revenue 3 yr CAGR
($ mn) RoCE FY14/15 P/E (x) P/B (x) chg - 6m
($ mn) EBITDA growth (FY12-15)
sales
Bajaj Auto BJAUT IN 9,486 14.9 28% 56% 44% 7% 13% 19.4 5.9 4%
Cummins India KKC IN 4,399 3.7 26% 68% 40% 11% 13% 37.2 10.1 16%
Bharat Forge BHFC IN 3,535 20.2 15% 72% 59% 14% 16% 31.2 6.9 -21%
PI Industries PI IN 1,354 2.3 28% 75% 55% 19% 43% 36.6 10.0 -2%
AIA Engineering AIAE IN 1,292 1.7 22% 98% 69% 17% 24% 19.9 4.1 -24%
Balkrishna Industries BIL IN 947 1.3 11% 135% 82% 13% 7% 13.0 2.8 7%
Vardhman Textiles VTEX IN 832 0.9 9% 57% 39% 24% 18% 13.6 1.6 69%
Atul Industries ATLP IN 575 0.8 18% 76% 46% 8% 14% 15.9 3.7 1%
Aarti Industries ARTO IN 541 0.7 19% 73% 47% 9% 25% 17.5 3.5 37%
Sundaram Fasteners SF IN 516 0.2 12% 28% 38% 15% 12% 26.1 3.9 -11%
Kitex Garments KTG IN 506 3.0 31% 75% 81% 16% 24% 34.2 12.8 39%
Indo Count Industries ICNT IN 487 0.9 26% 106% 82% 15% 39% 21.1 7.7 99%
Himatsingka Seide HSS IN 254 2.2 13% 26% 95% 38% 28% 17.7 2.1 103%
Source: Source: Bloomberg, Ambit Capital research
The methodology used to zero in on these stocks was as follows:

In creating the universe of companies, we excluded companies in the Pharma and
Technology sectors as these are well-established exporting sectors and we dont
expect the companies/sectors competitiveness or near term growth to change
because of the currency movement.
Next, to the extent data was available, we filtered companies for their net exports and
the exports CAGR over FY12-15, with the primary filter being the former (given the
theme if this note we restricted ourselves to companies with net exports being at least
of 25% of overall sales). However, we excluded the companies wherein the large part
of exports revenues accrue from international subsidiaries and where the Indian
manufacturing / cost base is not the key driver. Further into the screening process, we
excluded companies on account of accounting quality only companies in the top half
of our forensic accounting model were considered (click here for our December 2014
accounting thematic) with only one exception, Indo Count Industries. Lastly, we
excluded the companies with very low trading liquidity (<US$0.5mn) and companies
with market capitalisation lesser than US$100mn. A few exceptions were:
Arvind Limited excluded despite having a high net exports as a proportion of
revenues (38%), we excluded the same as we believe the key driver of its
valuations is not the exports but the increasing thrust by the company towards its
domestic branded apparel business.
Wabco - excluded despite having a high net exports as a proportion of revenues
(55%), we excluded the same as we find the valuations expensive at 32X FY16
earnings; moreover, a large part of exports revenues are from related party sales.
Sundaram Fasteners included despite low liquidity, we have included this as
it is one of the fastest growing auto-ancillary export franchises and scores well on
our accounting and greatness frameworks.

Bajaj Auto
SELL
COMPANY UPDATE BJAUT IN EQUITY September 09, 2015
Bajaj Auto has built a strong export franchise (44% of FY15 revenues) Auto & Auto Ancillaries
over the past decade, underpinned by its first mover advantage and
market share gains from Chinese players (particularly in Africa). The Recommendation
long-term opportunity in the export markets remains strong (low Mcap (bn): `634/US$9.5
penetration of 2Ws and further opportunity of market share gains). 3M ADV (mn): `991/US$14.9
However, strong near-term headwinds, such as weak crude oil prices,
CMP: `2,191
pose major risks to Bajajs exports into economies like Nigeria.
TP (12 mths): `2,350
Background Upside (%): 7
Bajaj is the second-largest motorcycle (market share of 17.9%) and the largest
3W (market share of 56%) manufacturer in India. It generated revenues of Flags
`218bn (up 7% YoY) and net earnings of `32.6bn (up 1% YoY) in FY15.
Accounting: GREEN
Current export franchise Predictability: AMBER
Bajaj is the largest exporter of 2Ws and 3Ws from India, with 68% and 71% Earnings Momentum: AMBER
volume share respectively (FY15). The company exports to nearly 62 countries,
with its major export regions being as Africa (particularly Nigeria and Egypt), Asia Catalyst
(particularly Sri Lanka and Bangladesh), the Middle East and Latin America. The
company is a market leader in the 2Ws across 26 countries. Bajaj primarily Weak demand to keep FY16
competes against Chinese and Japanese players in Africa as well as in the rest of domestic motorcycle industry
volumes muted (5% YoY growth)
the world. Exports, having compounded at a strong 24% CAGR over FY10-15,
accounted for almost 44% of Bajajs FY15 revenues. Macro headwinds in key export
geographies to keep near term
Export strategy export volumes muted (11% YoY
Bajaj has a well-thought-out export strategy: (i) tie-up with Kawasaki in markets growth in FY16 vs. 15% in FY16)
dominated by Japanese players (such as the ASEAN and Latin American
markets); (ii) solo presence in markets where it competes with Chinese players on Performance
quality (predominantly African markets); and (iii) KTM bikes in developed nations
120
where the market is shifting from >500cc performance motorcycles to sub-
500cc. Bajaj has decades worth of experience in exports (having already built a 110
substantial export business) and a strong balance sheet (net cash of `83bn or 100
0.8x equity).
90
Overall success of the business
80
Bajaj reported healthy growth in revenues (18% CAGR), EBITDA and net earnings
Sep-14
Nov-14
Jan-15
Mar-15
May-15
Jul-15
(30% CAGR each) over FY09-14. However, its performance moderated in FY15
(with revenues, EBITDA and net earnings increasing by only 7%, 1% and 1%,
respectively) due to: (1) significant loss in domestic market share; and (2) muted Bajaj Auto Sensex
export growth particularly in 2HFY15 (due to macro headwinds in key export
markets). Whilst the long-term opportunity in the export markets remains strong Source: Bloomberg, Ambit Capital research
(increasing 2W industry penetration mainly in African markets and market share
gain opportunity from Chinese players), strong near-term headwinds, such as
weak crude oil prices, pose major risks to Bajajs sales in key markets such as
Nigeria.
Valuation
Our DCF-based model leads to a valuation of `2,350, implying 15.0x FY17E EPS.
The stock is currently trading at a premium of 9% to Hero MotoCorp on FY17E
P/E.
premium of 6% to Hero MotoCorp on FY17 P/E.
Key financials - standalone
Year to March (` mn) FY13 FY14 FY15E FY16E FY17E Analyst Details
Revenues 202,283 203,531 218,175 247,928 278,539
Ashvin Shetty, CFA
EBITDA 38,690 43,861 44,292 52,051 58,478
+91 22 3043 3285
EBITDA (%) 19.1% 21.6% 20.3% 21.0% 21.0%
ashvinshetty@ambitcapital.com
EPS (`) 99 112 113 131 148
RoE (%) 41% 37% 32% 33% 32% Ritu Modi
RoCE (%) 172% 165% 154% 166% 183% +91 22 3043 3292
P/E (x) 22.2 19.6 19.4 16.8 14.8 ritumodi@ambitcapital.com
Source: Company, Ambit Capital research
Bajaj Auto
Exhibit 1: Strong revenue growth and EBITDA margin Exhibit 2: RoCE and RoE over the last five years
improvement over the past five years impacted by rising cash on books
220 23% 350% 80%
200 22% 300% 70%

180 250%
21% 60%
160 200%
20% 50%
140 150%
19% 100% 40%

120
50% 30%
100 18%
Revenues (Rs bn) EBITDA margin (RHS) RoCE RoE - RHS
Source: Company, Ambit Capital research Source: Company, Ambit Capital research
Exhibit 3: Bajaj Autos well-diversified exports franchise Exhibit 4: Rising share of exports in overall revenues
100 46%
90 44%
80 42%
LatAm, 19%
40%
70
38%
Africa, 43% 60
ASEAN, 6% 36%
50
34%
40 32%
South Asia & 30 30%
Middle East,
32% 20 28%
Exports (Rs bn) Exports as % of rev (RHS)

Exhibit 5: On P/E, Bajaj is currently trading in line with its Exhibit 6: On EV/EBITDA, Bajaj is currently trading at a
three-year historical average discount of 8% to the three year average
20 14.5
19
13.5
18
17 12.5
16
11.5
15
14 10.5
13
9.5
12
11 8.5
Apr-12
Jul-12
Apr-13
Jul-13
Apr-14
Jul-14
Apr-15
Apr-12
Jul-12
Apr-13
Jul-13
Apr-14
Jul-14
Apr-15
Oct-12
Jan-13
Oct-13
Jan-14
Oct-14
Jan-15
Oct-12
Jan-13
Oct-13
Jan-14
Oct-14
Jan-15
Bajaj Auto 1-yr fwd P/E Avg P/E Bajaj Auto 1-yr fwd EV/EBITDA Avg EV/EBITDA
Source: Bloomberg, Ambit Capital research. Note: P/E bands arrived at using Source: Bloomberg, Ambit Capital research. Note: EV/EBITDA bands arrived
Bloomberg consensus estimates for the respective periods at using Bloomberg consensus estimates for the respective periods
Exhibit 7: Explanation for the flags on the front page

Segment Score Comments
In our forensic accounting model, Bajaj Autos average accounting score ranks amongst the best for Indian auto
Accounting GREEN
stocks.
Given that automobile companies publish their volume numbers on a monthly basis, generally no significant
Predictability AMBER positive/negative surprises are seen in revenues. However, the margins tend to be less predictable and are
generally the source for actual results coming in above/below consensus expectations.
Earnings momentum AMBER No significant consensus upgrades/downgrades in recent weeks.

Bajaj Auto
Balance sheet (standalone)

Year to March (` mn) FY13 FY14 FY15 FY16E FY17E
Shareholders' equity 2,894 2,894 2,894 2,894 2,894
Reserves & surpluses 76,126 93,187 104,028 121,013 137,889
Total networth 79,019 96,080 106,921 123,906 140,783
Debt 884 592 1,124 1,124 1,124
Deferred tax liability 1,151 1,432 1,416 1,416 1,416
Total liabilities 81,055 98,104 109,461 126,446 143,322
Gross block (inc. Goodwill on merger) 38,289 40,770 41,009 44,009 47,009
Net block (inc. Goodwill on merger) 18,044 20,060 19,172 19,399 19,429
CWIP 4,135 2,830 3,483 3,483 3,483
Investments (non-current) 12,841 12,868 12,842 12,842 12,842
Cash & cash equivalents 57,052 77,583 84,552 104,332 125,920
Debtors 7,676 7,962 7,170 8,147 9,153
Inventory 6,363 6,397 8,142 9,252 10,394
Loans & advances 18,675 19,775 20,262 22,553 24,909
Total current assets 89,766 111,717 120,126 144,283 170,376
Current liabilities 26,307 29,635 26,242 29,821 33,503
Provisions 17,425 19,737 19,920 23,740 29,305
Total current liabilities 43,731 49,372 46,162 53,561 62,808
Net current assets 46,034 62,345 73,963 90,722 107,568
Total assets 81,055 98,104 109,461 126,446 143,322
Income statement (standalone)

Revenue (inc. other op income) 202,283 203,531 218,175 247,928 278,539
% growth 2% 1% 7% 14% 12%
Operating expenditure 163,592 159,670 173,882 195,877 220,061
EBITDA 38,691 43,861 44,292 52,051 58,478
% growth -3% 13% 1% 17.5% 12.3%
Depreciation 1,640 1,790 2,668 2,774 2,969
EBIT 37,051 42,072 41,624 49,278 55,509
Interest expenditure 5 5 65 65 65
Non-operating income 3,728 4,231 3,770 4,787 5,835
Adjusted PBT 40,773 46,298 45,329 54,000 61,279
Tax 12,227 13,901 12,711 16,200 18,384
Adjusted PAT/ Net profit 28,546 32,397 32,619 37,800 42,895
% growth -9% 13% 1% 16% 13%

Bajaj Auto
Cash flow statement (standalone)

Net Profit Before Tax 42,662 46,321 40,848 54,000 61,279
Depreciation 1,668 1,790 2,667 2,774 2,969
Others (4,234) (4,587) (3,865) 65 65
Tax (12,394) (13,153) (12,854) (16,200) (18,384)
(Incr) / decr in net working capital (5,011) 4,319 (5,825) (448) (461)
Cash flow from operations 22,691 34,689 20,971 40,190 45,468
Capex (net) (5,285) (2,547) (2,952) (3,000) (3,000)
(Incr) / decrease in investments (15,845) (21,843) (3,546) - -
Other income (expenditure) 8,353 2,975 2,354 - -
Cash flow from investments (12,778) (21,415) (4,144) (3,000) (3,000)
Net borrowings 324 505 532 - -
Interest paid (5) (5) (65) (65) (65)
Dividend paid (15,109) (15,182) (16,909) (17,346) (20,815)
Others (14,791) (14,682) (16,442) (17,411) (20,880)
Cash flow from financing (4,878) (1,408) 386 19,779 21,588
Net change in cash 17,406 32,142 18,019 37,190 42,468
Free cash flow 42,662 46,321 40,848 54,000 61,279
Ratio analysis (standalone)

Year to March (%) FY13 FY14 FY15 FY16E FY17E
EBITDA margin (%) 19.1% 21.6% 20.3% 21.0% 21.0%
EBIT margin (%) 18.3% 20.7% 19.1% 19.9% 19.9%
Net profit margin (%) 14.1% 15.9% 15.0% 15.2% 15.4%
Net debt: equity (x) (0.7) (0.8) (0.8) (0.8) (0.9)
RoCE (post tax) (%) * 121% 116% 111% 116% 128%
RoIC (%) * 121% 116% 111% 116% 128%
RoE (%) 41% 37% 32% 33% 32%
Source: Company, Ambit Capital research *- Excluding cash and cash equivalents
Valuation parameters (standalone)

Year to March FY13 FY14 FY15 FY16E FY17E
EPS (`) 99 112 113 131 148
Diluted EPS (`) 99 112 113 131 148
Book value per share (`) 273 332 370 428 487
Dividend per share (`) 45.0 50.0 50.0 60.0 75.0
P/E (x) 22.2 19.6 19.4 16.8 14.8
P/BV (x) 8.0 6.6 5.9 5.1 4.5
EV/EBITDA (x) 14.2 12.6 12.4 10.6 9.4
EV/EBIT (x) 14.9 13.1 13.2 11.2 9.9

Bharat Forge
NOT RATED
COMPANY UPDATE BHFC IN EQUITY September 09, 2015
The growth drivers for Bharat Forges export business are likely to be a Auto and Auto ancillaries
higher focus on the global passenger vehicle forging business and
market share gains in the non-auto space. At the same time, robust Recommendation
demand in the domestic and US/Europe commercial vehicle business
Mcap (bn): `236/US$3.5
augurs well for its automotive revenue growth.
3M ADV (mn): `1,120/US$16.8
Background
CMP: `1,016
Bharat Forge (BF) is a global leader in the forging business, with a presence in
TP (12 mths): NA
auto and industrial applications. BF has ~80% market share in domestic MHCV
crankshafts/front axle beams. In recent years, BF has forayed into the non-auto Upside (%): NA
segment which now accounts for 38% of revenues. BF generated consolidated
revenues of `76.2bn (up 14% YoY) and net earnings of `7.2bn (up 74% YoY) in Flags
FY15. Accounting: AMBER
Current export franchise Predictability: AMBER
Exports from India accounted for 60% of FY15 standalone revenues (36% of Earnings Momentum: AMBER
consolidated revenues and 31% CAGR over FY10-15). In the CV segment, BF
has a strong presence across North America, Europe, South America and Asia Catalysts
Pacific (clients include Daimler, MAN and Volvo). In industrial components, BF
Continuing momentum in exports
supplies forged products to various industries (mainly oil & gas) in Europe and and recovery in domestic MHCV
America. Europe and the US together accounted for nearly 57% of FY15 segment to drive 15% revenue
standalone revenues (vs 45% in FY09). In order to expand its global presence, growth in FY16 (consensus)
BF acquired overseas companies in the US and Europe for local manufacturing. EBITDA margin improvement of
These acquisitions have given BF access to global customers and technologies. 100bps in FY16 driven by strong
Export strategy revenue growth (consensus)
Whilst the company has achieved a sizeable exports share in the CV space, BF
plans to increase its market share and customer base in the global passenger Performance
car forging business (16% of consolidated revenues). The company plans to 180
increase this share on the back of orders from various global OEMs like Ford 160
and Daimler Chrysler. Furthermore, it has identified the non-auto space 140
(aerospace and locomotive), which accounts for 38% of total exports, as the 120
next focus area for its export business. BF plans to utilise its relationships/JVs 100
with global players (Alstom, Areva, etc) to scale up its non-auto business. 80
60
Sep-14
Nov-14
Jan-15
Mar-15
May-15
Jul-15
BF has reported strong financial performance in recent years (FY10-15), with
healthy growth in revenues (18% CAGR) and EBITDA (34% CAGR). The
company has posted strong operating margin improvement over FY10-15 (up Bharat Forge Sensex
888bps) due to rising contribution from the non-auto business, better product
mix (higher share of machined products) and higher exports from India. The Source: Bloomberg, Ambit Capital research
company generates strong CFO (average 102% of EBITDA over FY10-15) and
its balance sheet deleveraging efforts have led to net debt:equity declining
from 0.98x in FY10 to 0.41x in FY15.
Valuation
The stock is currently trading at 19x FY17E consensus net earnings, which is
marginally higher (~10%) than the multiple commanded by the broad Indian
auto component sector. However, its valuation is at a significant discount to
that of larger auto component makers like Bosch (30% discount).
Key financials - consolidated
Year to March FY11 FY12 FY13 FY14 FY15
Analyst Details
Net Sales (` mn) 50,870 62,791 51,665 67,161 76,247
EBITDA (` mn) 7,852 9,964 7,915 10,271 14,408 Ashvin Shetty, CFA
EBITDA (%) 15.4% 15.9% 15.3% 15.3% 18.9% +91 22 3043 3285
EPS (`) 13.1 18.1 11.3 17.8 31.0 ashvinshetty@ambitcapital.com
BPS (`) 84 94 97 115 148 Ritu Modi
RoE (%) 16% 19% 12% 15% 21% +91 22 3043 3292
Source: Company, Bloomberg, Ambit Capital research
Bharat Forge
Exhibit 1: Strong revenue growth and EBITDA margin over Exhibit 2: RoCE and RoE have been improving driven by
the years improvement in margin
80,000 19.0% 25%
18.0%
70,000 17.0% 20%
16.0% 15%
60,000 15.0%
14.0% 10%
50,000 13.0%
5%
12.0%
40,000 11.0% 0%
10.0%
-5%
30,000 9.0%
Revenues (Rs mn) EBITDA margin (RHS) RoCE RoE
Exhibit 3: Growing export revenues and export contribution Exhibit 4: Well diversified geographical spread
through the years (consolidated) (consolidated) across India, Europe and the US
30,000 40%
Asia Pacific,
25,000 35% 2%
20,000 30% India, 32% Europe,

41%
15,000 25%
10,000 20%
5,000 15%
FY10 FY11 FY12 FY13 FY14 FY15 USA, 25%
Exports (Rs mn) Exports as % of rev (RHS)

Exhibit 5: On P/E, BF is currently trading at a 17% premium Exhibit 6: On EV/EBITDA, BF is currently trading at a 30%
to its five-year historical average premium to its five-year historical average
40 20.0
35 18.0
30 16.0
14.0
25
12.0
20
10.0
15 8.0
10 6.0
5 4.0
- 2.0
Apr-06
Feb-12
Feb-13
Feb-14
Feb-15
Sep-06
Mar-07
Sep-07
Mar-08
Sep-08
Mar-09
Sep-09
Mar-10
Sep-10
Mar-11
Sep-11
Aug-12
Aug-13
Aug-14
Aug-15
Apr-06
Feb-12
Feb-13
Feb-14
Feb-15
Sep-06
Mar-07
Sep-07
Mar-08
Sep-08
Mar-09
Sep-09
Mar-10
Sep-10
Mar-11
Sep-11
Aug-12
Aug-13
Aug-14
Aug-15
BHFC 1-yr fwd P/E Avg P/E BHFC 1-yr fwd EV/EBITDA Avg EV/EBITDA
Exhibit 7: Explanation for the flags on the cover page

As per our forensic accounting model, Bharat Forges average accounting score is in line with other auto
Accounting AMBER
ancillary stocks.
Exposure to the highly cyclical CV segment lends some degree of unpredictability to the companys revenues and
Predictability AMBER
earnings.

Bharat Forge
Balance sheet (consolidated)

Year to March (` mn) FY11 FY12 FY13 FY14 FY15
Shareholders' equity 466 466 466 466 466
Total net worth 19,529 21,839 22,564 26,832 34,442
Minority Interest 1,542 1,957 1,642 170 (20)
Debt 19,014 27,703 27,845 25,613 25,464
Deferred tax liability 1,321 886 1,345 1,645 1,638
Gross block 45,010 50,224 56,472 53,945 56,984
Net block 24,627 26,527 29,099 25,340 26,287
CWIP 2,007 5,168 6,324 5,827 8,586
Investments 187 203 285 291 389
Cash & equivalents 6,390 10,584 9,428 11,949 11,386
Debtors 7,539 8,134 7,967 8,660 8,535
Inventory 8,115 10,961 11,320 10,386 10,339
Loans & advances 7,883 11,765 11,524 12,893 16,817
Provisions 2,222 2,575 2,133 3,006 2,987
Total assets 41,406 52,385 53,397 54,260 61,523
Income statement (consolidated)

Net Sales 50,870 62,791 51,665 67,161 76,247
% growth 53% 23% -18% 30% 14%
EBITDA 7,852 9,964 7,915 10,271 14,408
% growth 135% 27% -21% 30% 40%
Depreciation 2,550 3,022 3,195 3,579 3,624
EBIT 5,302 6,943 4,720 6,693 10,784
Interest expenditure 1,534 1,860 1,672 1,692 1,356
Non-operating income 675 915 1,121 1,249 1,368
Adjusted PBT 4,442 5,998 4,169 6,250 10,795
Tax 1,397 1,796 1,529 2,100 3,587
Adjusted PAT/ Net profit 3,046 4,202 2,640 4,150 7,208
% growth -13807% 38% -37% 57% 74%
Extraordinaries (144) (72) (164) 835 417
Reported PAT / Net profit 2,902 4,130 2,476 4,985 7,625

Bharat Forge
Cash flow statement (consolidated)

PBT 4,368 5,995 4,537 7,287 11,223
Depreciation 2,548 3,022 3,195 3,579 3,624
Others 1,148 1,865 1,016 47 774
Tax (567) (1,710) (1,193) (2,113) (4,088)
(Incr) / decr in net working capital (4,090) (2,307) (207) (1,629) (1,240)
Capex (4,225) (7,982) (5,581) (210) (7,089)
(Incr) / decr in investments 211 (3,024) 2,893 (2,297) 3,245
Other income (expenditure) 10 508 579 625 773
Net borrowings (3,541) 7,730 (454) (3,477) -620.54
Issuance of equity 2,788 - - -
Dividend paid (272) (1,343) (968) (1,221) (1,519)
Others (390) (1,769) (1,874) (1,702) (1,460)
Cash flow from financing (1,416) 4,619 (3,296) (6,400) (3,599)
Net change in cash (2,012) 985 1,941 (1,111) 3,623
Free cash flow (818) (1,118) 1,766 6,961 3,204
Ratio analysis (consolidated)

Year to March (%) FY11 FY12 FY13 FY14 FY15
EBITDA margin (%) 15.4% 15.9% 15.3% 15.3% 18.9%
EBIT margin (%) 10.4% 11.1% 9.1% 10.0% 14.1%
Dividend payout ratio (%) 26.8% 22.2% 30.0% 25.2% 24.2%
Net debt: equity (x) 0.6 0.8 0.8 0.5 0.41
RoCE (%) * 15% 17% 11% 16% 22%
RoIC (%) * 10% 12% 7% 11% 14%
RoE (%) 16% 19% 12% 15% 21%
Valuation parameters (consolidated)

EPS (`) 13.1 18.1 11.3 17.8 31.0
Diluted EPS (`) 13.1 18.1 11.3 17.8 31.0
P/E (x) 77.7 56.3 89.6 57.0 32.8
P/BV (x) 12.1 10.8 10.5 8.8 6.9
EV/EBITDA (x) 31.7 25.5 32.2 24.4 17.4
EV/EBIT (x) 47.0 36.5 54.0 37.4 23.2

Balkrishna Industries
SELL
COMPANY UPDATE BIL IN EQUITY September 09, 2015
Balkrishna Industries (BKT) has built a substantial export business over Auto and Auto ancillaries
the years in the niche area of off-highway tyres (OHT) by successfully
leveraging Indias low cost of manufacturing. Whilst we expect its Recommendation
market share of 4% to grow as the new Bhuj facility provides additional Mcap (bn): `63/US$0.9
capacity for product portfolio expansion, we remain concerned about 3M ADV (mn): `52/US$0.8
the current weak global demand environment for off-highway tyres CMP: `657
and the negative impact of lower Euro realisation on revenues/margin. TP (12 mths): `690
Upside (%): 5
Background
BKT is the leading exporter of off-highway tyres (OHT) like farm,
Flags
industrial/construction and mining tyres from India. It generated revenues of
`40bn (up 13% YoY) and adjusted net earnings of `4.9bn (flat YoY) in FY15. Accounting: AMBER
Predictability: AMBER
Current export franchise Earnings Momentum: AMBER
BKT has built a significant OHT export business, accounting for nearly 90% of
its revenues and recording 21% CAGR over FY10-15. The company primarily Catalysts
caters to Europe (54% of total volumes) and North America (19%). The Weak global demand for OHT to
company has close to 4-5% market share in the global OHT market, with keep volumes muted (Flat YoY in
higher market share in the farm tyre market replacement segment. FY16)
Depreciation in Euro to impact
Export strategy realisation (4% YoY decline) and
After surviving the initial tough years in the 1990s, BKT succeeded in building margin (98bps YoY drop) in FY16
an extensive global OHT business on the back of competitive pricing against
global peers, helped by Indias low cost advantage. With the commissioning of
the new Bhuj plant in October 2015, the companys capacity will increase to Performance
300k tonnes pa vs 180k tonnes now. Having made reasonable progress in
120
farm tyres, BKT plans to increase its focus on the industrial/construction/mining
110
segment (particularly enabled by the new Bhuj facility), OEMs and new 100
geographies (like India and Africa) for future growth opportunities. 90
80
Overall success of the business 70
BKTs standalone volumes, revenues, EBITDA and net earnings have reported a 60
Sep-14
Nov-14
Jan-15
May-15
Jul-15
CAGR of 11%, 22%, 24% and 24% respectively over FY08-15 (implying major Mar-15
market share gains). Whilst we continue to expect market share gains for BKT,
the global off-highway tyre (OHT) has remained weak driven by weak Balkrishna Ind Sensex
crop/commodity prices and consumer sentiment, leading us to build in flat YoY
growth in FY16. Whilst rubber prices remain benign, the depreciation in Euro
relative to INR and exhaustion of favourable hedges could potentially impact
sales realisation and margin in the coming quarters.
Valuation
Our DCF model values the core OHT business at `690/share, implying 12.5x
FY17E net earnings. BKT is currently trading at 12.0x FY17E net earnings, 30%
premium to its historical three-year average, which appears justified due to
better margin and free cash generation prospects.
Key financials standalone (` mn)
Net Sales 31,906 35,767 40,485 35,244 40,690 Analyst Details
EBITDA 6,644 8,938 10,030 9,513 10,283 Ashvin Shetty, CFA
EBITDA (%) 20.8% 25.0% 24.8% 27.0% 25.3% +91 22 3043 3285
EPS (`) 36.8 50.5 50.6 49.1 54.9 ashvinshetty@ambitcapital.com
RoE (%) 28% 30% 23% 19% 18%
Ritu Modi
RoCE (%) 19% 20% 19% 17% 19% +91 22 3043 3292
Exhibit 1: Strong revenue growth and EBITDA margin over Exhibit 2: Return ratios impacted due to significant capex
the years incurred towards the new Bhuj plant
45,000 28.0% 40%
40,000 26.0%
35%
35,000 24.0%
30%
30,000 22.0%
25,000 20.0% 25%
20,000 18.0%
20%
15,000 16.0%
15%
10,000 14.0%
5,000 12.0% 10%
FY10 FY11 FY12 FY13 FY14 FY15 FY10 FY11 FY12 FY13 FY14 FY15
Revenues (Rs mn) EBITDA margin (RHS) RoCE RoE
Exhibit 3: Geographical spread indicates significant Exhibit 4: Export revenues and export contribution through
exposure to Europe the years (check exports should be 90% in FY15 )
32,000 90%
Others, 29,000 88%

15% 26,000 86%
23,000 84%
20,000 82%
India, 12%
Europe, 17,000 80%
54% 14,000 78%
11,000 76%
America,
19% 8,000 74%
Exports (Rs mn) Exports as % of revenues (RHS)
Exhibit 5: On P/E, Balkrishna trades at a premium of 22% Exhibit 6: On EV/EBITDA, Balkrishna trades at a premium
to the historical three-year average of 7% to the historical three-year average
16 10.0
14 9.0
12 8.0
10 7.0
8 6.0
6 5.0
4 4.0
2 3.0
- 2.0
Oct-08
Mar-09
Jul-09
Nov-09
Mar-10
Dec-10
Apr-11
Sep-11
Jan-12
May-12
Sep-12
Feb-13
Jun-13
Oct-13
Feb-14
Jul-14
Nov-14
Mar-15
Aug-10
Aug-15
Oct-08
Mar-09
Jul-09
Nov-09
Mar-10
Dec-10
Apr-11
Sep-11
Jan-12
May-12
Sep-12
Feb-13
Jun-13
Oct-13
Feb-14
Jul-14
Nov-14
Mar-15
Aug-10
Aug-15
Balkrishna 1-yr fwd P/E Avg P/E Balkrishna 1-yr fwd EV/EBITDA Avg EV/EBITDA
Exhibit 7: Explanation for our flags

Significantly higher debtor days and operating working capital cycle compared with its peers (although this is
Accounting AMBER
largely due to the companys make in India and sell in the West business model).
Given the high nature of fixed costs (including depreciation and interest expenses), any marginal
Predictability AMBER outperformance/underperformance at the top-line level tends to have a magnified impact at the net earnings
level. However, this is an industry-wide phenomenon.

Balance sheet (standalone)

Reserves and surpluses 13,996 18,652 22,723 27,181 32,188
Total net worth 14,190 18,845 22,917 27,374 32,382
Debt 20,744 23,500 23,578 20,078 14,578
Deferred tax liability 999 1,722 1,887 1,887 1,887
Gross block 17,842 30,014 33,213 41,927 42,735
Net block 12,777 23,294 24,148 30,051 27,821
CWIP 11,810 6,172 7,115 500 500
Investments (non-current) 329 615 34 34 34
Debtors 5,045 6,185 6,033 5,252 6,063
Inventory 4,326 5,291 3,920 3,413 3,940
Loans & advances 2,938 3,432 3,171 2,762 3,187
Provisions 215 276 368 368 391
Total assets 35,933 44,067 48,382 49,326 48,834
Income statement (standalone)

Net Sales 31,906 35,767 40,485 35,244 40,690
% growth 13% 12% 13% -13% 15%
EBITDA 6,644 8,938 10,030 9,513 10,283
% growth 31% 35% 12% -5% 8%
Depreciation 1,077 1,650 2,402 2,811 3,038
EBIT 5,567 7,288 7,628 6,703 7,245
Non-operating income 37 138 112 912 1,066
Adjusted PBT 5,347 7,174 7,276 6,981 7,807
Tax 1,794 2,293 2,387 2,234 2,498
Adjusted PAT 3,553 4,880 4,888 4,747 5,309
Extraordinary expense/(income) (5) - - - -
Reported PAT after minority interest 3,558 4,880 4,888 4,747 5,309

Cash flow statement (standalone)

Net profit before tax 5,352 7,177 7,276 6,981 7,807
Depreciation 1,077 1,650 2,402 2,811 3,038
Others 191 387 456 (278) (563)
Tax (1,410) (1,758) (2,103) (2,234) (2,498)
(Incr)/decr in net working capital 291 (1,518) 1,759 1,152 (1,155)
Capex (net) (9,605) (8,581) (3,662) (2,100) (808)
(Incr)/decr in investments (7) (3,936) (769) - -
Other income (expenditure) 19 110 101 912 1,066
Cash flow from investments (9,593) (12,407) (4,330) (1,187) 258
Net borrowings 3,610 4,325 (608) (3,501) (5,500)
Interest paid (261) (251) (465) (634) (503)
Dividend paid (169) (170) (225) (290) (290)
Cash flow from financing 3,181 3,904 (1,298) (4,425) (6,293)
Net change in cash (911) (2,565) 4,162 2,819 594
Closing cash balance 2,662 99 4,261 7,130 7,725
Free cash flow (4,104) (2,643) 6,127 6,331 5,821
Ratio analysis (standalone)

Year to March (%) FY13 FY14 FY15 FY16E FY17E
EBITDA margin (%) 20.8% 25.0% 24.8% 27.0% 25.3%
EBIT margin (%) 17.4% 20.4% 18.8% 19.0% 17.8%
Net prof. margin (%) 11.1% 13.6% 12.1% 13.5% 13.0%
Net debt: equity (x) 1.3 1.0 0.6 0.3 0.1
Working capital turnover (x) 3.6 3.8 4.3 4.4 5.0
Gross block turnover (x) 2.1 1.5 1.3 0.9 1.0
RoCE (pre-tax) (%) * 19.4% 20.0% 19.1% 17.2% 19.3%
RoIC (%) * 12.9% 13.6% 12.9% 11.7% 13.1%
RoE (%) * 28.4% 29.5% 23.4% 18.9% 17.8%
Valuation parameters (standalone)

Diluted EPS (`) 36.8 50.5 50.6 49.1 54.9
P/E (x) 17.9 13.0 13.0 13.4 12.0
P/BV (x) 4.5 3.4 2.8 2.3 2.0
EV/EBITDA (x) 12.5 9.3 8.3 8.7 8.0
EV/EBIT (x) 14.9 11.4 10.9 12.3 11.4

Sundram Fasteners
NOT RATED
COMPANY UPDATE SF IN EQUITY September 09, 2015
Sundram Fasteners, the largest player in the organised fasteners Auto and Auto ancillaries
segment in India has witnessed healthy growth in its exports in recent
years (revenue CAGR of 22% over FY10-15). Besides growth in the Recommendation
traditional fasteners segment, the introduction of new components Mcap (bn): `34/US$0.5
(pump assemblies, engine components) has driven strong exports for 3M ADV (mn): `16/US$0.2
the company in the recent years.
CMP: `164
Background TP (12 mths): NA
Sundram Fasteners is largest organised manufacturers of fasteners in India with Upside (%): NA
market share of close to 40-50% and significant exposure to the domestic CV
segment. The company revenues have witnessed CAGR of 13% over FY10-15 Flags
with average EBITDA margin of close to 10.9% during the last five years (FY11- Accounting: GREEN
FY15). Predictability: AMBER
Current export franchise Earnings Momentum: AMBER
Sundram Fasteners exports has witnessed healthy growth in exports in the
recent years at CAGR of 22% over FY10-15 and helped company tide over the Catalysts
slowdown in the domestic CV segment since FY13. Exports accounted for a Consensus expects healthy 15% YoY
significant 36% of the standalone revenues in FY15 (up from 25% in FY11). The growth in FY16 revenues driven by
companys exports are primarily into USA (accounting for nearly 80% of total recovery in domestic MHCV and
exports) and into the passenger car segment with General Motors, Ford and further growth in exports
Cummins being the key export clients. EBITDA margin improving by 50bps
YoY in FY16 on the back of healthy
Export strategy
revenue growth
The key driver for the companys healthy export growth in the recent years has
been diversification of business beyond the traditional fasteners segment with
the introduction of new products such as pump assemblies and engine Performance
components. Consequently, the share of non-fastener products in the overall 180
standalone revenues has increased from 57% in FY11 to 64% in FY15. The 160
company continues to focus on new product development for the export markets 140
and expects them to drive further growth in the export markets. 120
100
80
Export business growth has helped offset the revenue weakness in the domestic 60
revenues due to the slowdown in the CV segment particularly during FY13 and
Sep-14
Oct-14
Nov-14
Dec-14
Jan-15
Feb-15
Mar-15
Apr-15
May-15
Jun-15
Jul-15
Aug-15
FY14. Consequently, despite decline of 8% CAGR over FY12-14 in domestic
revenues, total revenues declined by only 3% CAGR over FY12-14 thanks to 9%
CAGR in export revenue over the same period. In FY15, helped further by a Sundram Fasteners Sensex
recovery in domestic MHCV segment (domestic revenues up 16%) total
standalone sales witnessed a healthy growth of 15% YoY. Subsidiaries (27% of Source: Bloomberg, Ambit Capital Research
consolidated revenues), however, continue to witness muted performance with
FY15 revenues at `9.0bn, up 10% YoY but PAT margin of only 0.3%.
Valuation
Sundram Fasteners currently trades at 12.0x FY17 net earnings which is at a
discount of 20% to the large auto component makers despite higher net
consensus earnings growth expectations (48% CAGR over FY15-17) and similar
RoEs (FY17 consensus at 25%).
Key financials - consolidated
Net Sales 22,839 27,702 26,510 27,362 31,561 Analyst Details
EBITDA 2,540 3,050 2,661 2,897 3,757 Ashvin Shetty, CFA
EBITDA (%) 11.1% 11.0% 10.0% 10.6% 11.9% +91 22 3043 3285
EPS (`) 5 4.8 3.8 5.8 6.3 ashvinshetty@ambitcapital.com
BPS (`) 26 31 34 38 42
Ritu Modi
RoE (%) 21% 16% 11% 15% 15% +91 22 3043 3292
Sundram Fasteners
Exhibit 1: Healthy revenue growth and EBITDA margin over Exhibit 2: RoCE/RoE improved in FY14 and FY15 driven by
the years healthy exports growth and domestic recovery (FY15)
35,000 13% 24%
12% 22%
30,000 20%
11% 18%
25,000 10% 16%
14%
20,000 9% 12%
8% 10%
15,000 8%
7%
6%
10,000 6% 4%
Revenues (Rs bn) EBITDA margin (RHS) RoCE RoE - RHS
Exhibit 3: Growing export revenues and export contribution Exhibit 4: Subsidiaries rising share in consolidated
through the years revenues
10,000 42% 10,000 31%
9,000 9,000 29%
37%
8,000 8,000 27%
7,000 32% 7,000
25%
6,000 6,000
27% 23%
5,000 5,000
4,000 4,000 21%
22%
3,000 3,000 19%
2,000 17% 2,000 17%
FY11 FY12 FY13 FY14 FY15 FY11 FY12 FY13 FY14 FY15
Exports (Rs bn) Exports as % of rev (RHS) Subsidiary revenues As % of total revenues
Exhibit 5: On P/E, Sundram Fasteners is currently trading Exhibit 6: On EV/EBITDA, Sundram Fasteners is trading at
at a 63% premium to its five-year historical average a 39% premium to its five-year historical average
30 16.0
25 14.0
12.0
20
10.0
15
8.0
10 6.0
5 4.0
- 2.0
Feb-12
Feb-13
Feb-14
Feb-15
Apr-06
Sep-06
Mar-07
Sep-07
Mar-08
Sep-08
Mar-09
Sep-09
Mar-10
Sep-10
Mar-11
Sep-11
Aug-12
Aug-13
Aug-14
Aug-15
Apr-06
Feb-12
Feb-13
Feb-14
Feb-15
Sep-06
Mar-07
Sep-07
Mar-08
Sep-08
Mar-09
Sep-09
Mar-10
Sep-10
Mar-11
Sep-11
Aug-12
Aug-13
Aug-14
Aug-15
SF 1-yr fwd P/E Avg P/E SF 1-yr fwd EV/EBITDA Avg EV/EBITDA
Exhibit 7: Explanation for the flags on the cover page

As per our forensic accounting model, Sundram Fasteners has one of the best accounting scores amongst the
Accounting GREEN
auto-ancillary stocks.
Exposure to the highly cyclical CV segment lends some degree of unpredictability to the companys revenues and
earnings.

Sundram Fasteners

Total net worth 5,522 6,424 7,060 8,014 8,788
Minority Interest 31 40 42 39 105
Debt 7,825 8,926 8,577 7,329 8,739
Deferred tax liability 865 940 962 966 901
Gross block 14,273 16,450 18,010 20,487 21,486
Net block 7,497 8,492 9,076 10,071 10,188
CWIP 551 624 518 502 364
Investments 15 85 89 100 34
Cash & equivalents 120 177 218 256 282
Debtors 4,008 4,887 4,941 4,839 4,919
Inventory 3,905 4,468 4,403 4,410 5,264
Loans & advances 1,465 1,653 1,449 1,458 2,360
Provisions 581 819 770 914 859
Total assets 14,243 16,330 16,640 16,348 18,533

Net Sales 22,839 27,702 26,510 27,362 31,561
% growth 35% 21% -4% 3% 15%
EBITDA 2,540 3,050 2,661 2,897 3,757
% growth 82% 20% -13% 9% 30%
Depreciation 720 837 942 1,021 1,158
EBIT 1,820 2,213 1,719 1,875 2,600
Non-operating income 156 305 411 488 167
Adjusted PBT 1,557 1,537 1,232 1,687 1,822
Tax 417 528 444 478 504
Adjusted PAT/ Net profit 1,140 1,008 789 1,209 1,318
% growth 144% -12% -22% 53% 9%
Extraordinaries (14) (15) (4) (0) (6)
Reported PAT / Net profit 1,126 993 784 1,209 1,313

Sundram Fasteners

PBT 1,558 1,564 1,375 1,686 1,824
Depreciation 720 837 942 1,021 1,158
Others 380 974 543 222 1,042
Tax (302) (464) (411) (471) (632)
(Incr) / decr in net working capital (2,074) (852) 293 1,812 (2,328)
Cash flow from operations 282 2,059 2,742 4,270 1,063
Capex (1,238) (1,760) (1,133) (1,826) (1,335)
(Incr) / decr in investments 3 (74) 21 (3) (36)
Net borrowings 1,653 721 (547) (1,537) 1,151
Issuance of equity - - - -
Dividend paid (256) (320) (371) (370) (456)
Others (438) (597) (710) (531) (493)
Cash flow from financing 959 (197) (1,628) (2,438) 203
Net change in cash 42 43 57 37 (6)
Free cash flow (956) 299 1,609 2,444 (271)

Year to March (%) FY11 FY12 FY13 FY14 FY15
EBITDA margin (%) 11.1% 11.0% 10.0% 10.6% 11.9%
EBIT margin (%) 8.0% 8.0% 6.5% 6.9% 8.2%
Net debt: equity (x) 1.4 1.4 1.2 0.9 0.96
RoCE (%) * 13% 14% 11% 12% 14%
RoIC (%) * 9% 9% 7% 8% 10%
RoE (%) * 21% 16% 11% 15% 15%
Source: Company, Ambit Capital research * Excluding cash and cash equivalents

EPS (`) 5.4 4.8 3.8 5.8 6.3
Diluted EPS (`) 5.4 4.8 3.8 5.8 6.3
P/E (x) 30.1 34.1 43.6 28.4 26.1
P/BV (x) 6.2 5.3 4.9 4.3 3.9
EV/EBITDA (x) 16.6 14.1 16.1 14.3 11.4
EV/EBIT (x) 23.1 19.5 24.9 22.1 16.5

Cummins India
SELL
COMPANY UPDATE KKC IN EQUITY September 09, 2015
Cummins India (KKC) has become a manufacturing hub for Cummins Incs Capital Goods
low KVA engine exports. Over the last six years, KKC invested `3.1bn in
setting up the export SEZ at Phaltan. Consequently, we factor in export Recommendation
revenue CAGR of 16% over FY15-17. However, we remain sceptical about Mcap (bn): `293/US$4.4
the high KVA domestic opportunity given the shift in buyer preferences
3M ADV (mn): `273/US$4.1
towards medium-low KVA due to declining power deficit. Hence, we
CMP: `1,055
factor in an EBITDA margin decline of 50bps over FY15-17E, which feeds
TP (12 mths): `608
into a 360bps fall in RoE. At CMP, KKC is trading at a punchy 32.7x FY17E
Downside (%): 48
P/E. Our TP of `608/share implies FY17E P/E of 20.8x.
Market leader in high KVA engines Flags
KKC is Indias leading manufacturer of gensets, with a strong presence in the
Accounting: GREEN
high KVA engine segment (~45% of its revenue in FY15). KKCs domestic
Predictability: GREEN
franchise is struggling with revenue decline of 11% over FY13-15 due to weak
Earnings Momentum: GREEN
demand and market share loss; however, its export franchise is doing well, with
export revenue CAGR of 16% over FY13-15 due to growth in low KVA exports.
Catalysts
High KVAs share in exports to remain high
Loss of market share in FY16
Until FY14, medium and high KVA exports were the primary export drivers for
50bps contraction in EBITDA margin
KKC (59% share in exports in FY14). However, post the commissioning of Phaltan
over FY15-17
facility in end-FY14, KKCs low KVA exports have increased by 152% YoY in FY15
and the share of medium and high KVA exports has declined to 49% in FY15.
Overall, exports increased by 44% in FY15 vs a 6% decline in domestic revenue. Performance
Low KVA exports to drive the revenue growth over the next two years 180
We believe export growth for low KVA engines will continue to increase over the 160
next two years, as Cummins Inc is shifting its sourcing strategy of buying low KVA 140
gensets from its Cummins UK facility to KKCs Phaltan facility. The rationale for 120
this may be to reduce costs given the sluggish global demand environment (flat
100
global genset sales over CY10-14) alongside rising costs in the UK. Our
80
calculations suggest that the total low KVA export opportunity for KKC is `24bn
Sep-14
Oct-14
Nov-14
Dec-14
Jan-15
Feb-15
Mar-15
Apr-15
May-15
Jun-15
Jul-15
Aug-15
vs its FY15 low KVA export revenue of `8.2bn. Whilst the export visibility is high
for at least the next two years, once KKC achieves this export target of `24bn, the
growth from thereon is a function of global demand for these gensets or if KKC Sensex Cummins
becomes the global hub for medium/high/heavy duty KVA for Cummins Inc.
Cummins problem area - A declining domestic franchise Source: Bloomberg, Ambit Capital research
Whilst we factor in strong export revenue CAGR of 26% over FY15-17, we expect
domestic revenue to grow moderately at 8% due to higher competitive intensity
and a weak demand environment. Moreover, we expect KKCs EBITDA margin to
structurally decline given: (a) shift in genset portfolio towards low-margin
medium and low KVA; and (b) deceleration in distribution and after-sales
segment given the low running hours for engines used for back-up applications.
Punchy multiple to de-rate
As margins decline, KKCs punchy valuation of 32.7x FY17E P/E (55% premium
to its five-year average) should de-rate. We have modelled in average EBITDA
margin of 16.2% over FY16-18E vs 16.8% over FY13-15, resulting in average
RoE declining to 25% over FY16-18E vs 31% over FY10-14.
Key financials
YE March (` mn) FY14 FY15 FY16E FY17E FY18E
Operating income 39,767 44,058 51,778 62,897 76,996
Analyst Details
EBITDA (%) 17.5 16.7 16.3 16.2 16.0
Bhargav Buddhadev
Net profit 6,000 7,859 7,571 8,964 10,116
EPS (`) 24.2 28.8 24.5 25.2 24.4 +91 22 3043 3252
RoE (%) 21.0 20.6 20.2 22.6 23.0 bhargavbuddhadev@ambitcapital.com
RoCE (%) 48.8 41.6 38.7 32.7 28.9 Deepesh Agarwal
P/E (x) 11.4 10.1 8.9 7.6 6.5 +91 22 3043 3275
P/BV (x) 39,767 44,058 51,778 62,897 76,996 deepeshagarwal@ambitcapital.com
Cummins India
Exhibit 1: Cummins reported strong revenue growth of 44% in Exhibit 2: vs a 6% decline in domestic revenue in FY15
exports
20.0 60.0 40 20.0
15.0 40.0 30 10.0
10.0 20.0 20 -
5.0 - 10 (10.0)
0.0 (20.0) - (20.0)

FY12
FY13
FY14
FY15
FY12
FY13
FY14
FY15
Export revenue (Rsbn) Domestic revenue (Rsbn)
Revenue growth YoY (%) on RHS Revenue growth YoY (%) on RHS
Source: Company, Ambit Capital research Source: Company, Ambit Capital research.
Exhibit 3: Low KVA exports from Phaltan stood at `8.2bn Exhibit 4: Description of the Phaltan plant
`mn FY14 FY15 Plants Capability
Low KVA exports For Export market
- From Phaltan 1,550 8,150 Low KVA genset plant Low and medium KVA engines
Domestic
- From Other Facilities 1,950 670
HHP Rebuild Centre Rebuild High KVA engines
Other exports 8,460 8,400
Reconditioning facility Distribution parts
Total Exports 11,960 17,220
Tata Cummins B series engines
Source: Company, Ambit Capital research Parts Distribution Centre Aftermarket parts
Midrange Uplift Centre B, L and C series engines
Phaltan High Horsepower B and L series engines
Exhibit 5: Low KVA export opportunity for KKC is at `24bn Exhibit 6: On forward P/E, Cummins is trading at a 55%
premium to its five-year average P/E
CY14 Export Share of
Figures in US$mn unless Opportuni 1,200
genset market for low
specified ty for KKC 42x
sales KKC KVA (%) 1,100
US/Canada 1,100 No NA NA 1,000
35x
Europe + Middle East 637 Yes 30% 191 900
China 319 No NA NA 800 28x
LaTAM + Mexico 261 Yes 50% 130 700
Asia Pacific 232 Yes 40% 93 600
21x
India 232 No NA NA 500
Africa 116 Yes 70% 81 400
14x
Total Low KVA export 300
495
potential (US$mn) 200
Less: Freight and other
Apr-10
Oct-10
Apr-11
Oct-11
Apr-12
Oct-12
Apr-13
Oct-13
Apr-14
Oct-14
Apr-15
25%
selling overheads
Total low KVA export
396
potential for KKC
Low KVA export potential
24 Source: Company, Bloomberg, Ambit Capital research
for KKC (in `bn)
Source: Industy, Cummins Inc; Ambit Capital research, Note - # as our channel
interaction US/Canada and China already has sufficient low KVA manufacturing
capacity for domestic market and as per Cummins Inc.s procurement practice,
KKC cannot export low KVA engine to these geographies; * we assume the
share of low KVA market based on ancedote data
Exhibit 7: Explanations for the flag on the cover page

In our forensic accounting model, Cummins ranks in the top quartile and above the average score
Accounting GREEN
of the capital goods companies and the BSE 500 universe.
Predictability GREEN Cummins has fairly been a predictable company, with no major surprises in the past.
The management has raised its FY15 revenue guidance from 8-12% earlier to 10-15% in the 1QFY16 earnings
Earnings momentum GREEN
call.

Cummins India
Balance sheet
Year to March (` mn) FY14 FY15 FY16E FY17E FY18E
Cash 865 799 843 5,071 7,263
Debtors 7,820 9,355 10,923 12,924 16,876
Inventory 5,513 6,823 7,518 8,616 10,336
Loans & advances 8,426 7,545 8,795 8,099 9,704
Investments 4,954 4,650 2,693 2,693 2,693
Fixed assets 10,149 14,046 18,047 19,586 19,878
Miscellaneous - - - - -
Total assets 37,727 43,217 48,820 56,989 66,750
Current liabilities & provisions 11,611 13,721 15,320 18,094 21,306
Debt - - - - -
Other liabilities 465 631 631 631 631
Total networth 25,652 28,865 32,868 38,265 44,814
Net working capital 10,149 10,001 11,916 11,545 15,610
Net debt (cash) (865) (799) (843) (5,071) (7,263)
Income statement
Operating income 39,767 44,058 51,778 62,897 76,996
% growth (11.8) 10.8 17.5 21.5 22.4
EBITDA 6,967 7,351 8,414 10,189 12,319
% growth (7.7) 5.5 14.5 21.1 20.9
Depreciation 528 797 998 1,211 1,309
EBIT 6,440 6,553 7,416 8,978 11,011
Non-operational income / Exceptional items 1,777 2,866 1,847 1,984 2,690
PBT 8,175 9,374 9,233 10,932 13,670
Tax 2,175 1,515 1,662 1,968 3,554
Minority Interest / others - - - - -
Reported PAT 6,000 7,859 7,571 8,964 10,116
Adjustments - 816 - - -
Adjusted PAT 6,000 7,043 7,571 8,964 10,116
% growth -14.6% 17.4% 7.5% 18.4% 12.8%

Cummins India
Cash flow statement

PBT 8,175 9,374 9,233 10,932 13,670
Depreciation 528 797 998 1,211 1,309
Interest (419) (217) 30 30 30
Tax (2,308) (1,853) (1,662) (1,968) (3,554)
(Incr) / decr in net working capital (1,607) (1,142) (1,915) 370 (4,065)
Others (745) (1,948) - - -
Cash flow from operating activities 3,624 5,012 6,684 10,576 7,390
(Incr) / decr in capital expenditure (4,678) (3,304) (5,000) (2,750) (1,600)
(Incr) / decr in investments 1,516 1,296 1,957 - -
Others 3,701 1,445 - - -
Cash flow from investing activities 539 (563) (3,043) (2,750) (1,600)
Issuance of equity - - - - -
Incr / (decr) in borrowings - - - - -
Others (4,258) (4,261) (3,598) (3,598) (3,598)
Cash flow from financing activities (4,258) (4,261) (3,598) (3,598) (3,598)
Net change in cash (95) 188 44 4,228 2,193
FCF (1,055) 1,708 1,684 7,826 5,790
Ratio Analysis
Year to March FY14 FY15 FY16E FY17E FY18E
EBITDA margin (%) 17.5 16.7 16.3 16.2 16.0
EBIT margin (%) 16.2 14.9 14.3 14.3 14.3
Net profit margin (%) 15.1 17.8 14.6 14.3 13.1
Return on capital employed (x) 21.0 20.6 20.2 22.6 23.0
Return on equity (%) 24.2 28.8 24.5 25.2 24.4
Return on invested capital (%) 29.1 26.1 23.3 24.1 24.5
Current ratio (x) 1.9 1.8 1.8 1.9 2.1
Valuation parameters
EPS (`) 21.6 25.4 27.3 32.3 36.5
Book value per share (`) 92.5 104.1 118.6 138.0 161.7
P/E (x) 48.8 41.6 38.7 32.7 28.9
P/BV (x) 11.4 10.1 8.9 7.6 6.5
EV/EBITDA (x) 41.9 39.7 34.7 28.7 23.7
EV/Sales (x) 7.3 6.6 5.6 4.6 3.8
CFO/EBITDA 0.85 0.93 0.99 1.23 0.89

AIA Engineering
SELL
COMPANY UPDATE AIAE IN EQUITY September 09, 2015
Whilst AIAs strong competitive positioning in the high-chrome grinding Industrials

media segment remains intact and the company should potentially
benefit from INR depreciation, the weakness in the global mining
Recommendation
industry should impact volume growth in FY16. In its recent earnings call,
the company said it will pursue aggressive pricing as it looks to enter Mcap (bn): `86/US$1.3
new markets. Hence, our FY16 volume growth (10%) and realisation 3M ADV (mn): `97/US$1.5
estimates (up 3% YoY) will be downgraded. Valuation of 20x FY16E P/E is CMP: `911
punchy given the moderation in EPS growth (12% FY15-18E CAGR) and TP (12 mths): `1,038
RoCEs (20% in FY18 vs 22% in FY15). However, cost leadership and a fast- Upside (%): 14
paced scale-up in an oligopolistic industry with high penetration
potential will limit valuation downgrades. Flags
Leading player in the high-chrome grinding media segment Accounting: GREEN
AIA is a leading manufacturer of high-chrome grinding media in an oligopolistic Predictability: AMBER
industry dominated by Magotteaux and AIA. It has reported 18% revenue CAGR Earnings Momentum: AMBER
in FY10-15 led by higher penetration in mining; mining volumes increased from
14,300tonnes in FY10 to 106,300tonnes in FY15. Catalysts
A growing export franchise Single digit volume growth in FY16
AIAs export revenue CAGR of 24% over FY10-15 vs domestic revenue CAGR of
Lower realisations on account of
6% was led by its increasing share of high-chrome grinding media vs forged steel dropping input prices/weak demand
in mining operations. AIA has aggressively added capacity (88,000 tonnes in the
last five years) whilst Magotteaux, its only significant competitor, has not added
capacity. Increasing adoption of high-chrome grinding media in mining Performance
operations remains a sizable opportunity (grinding media replacement 160
opportunity at 1.5-2mn tonnes) but the pace of conversion is likely to be slow. 140
but exposed to the weakness in global mining 120
Global copper and iron ore mining production growth has decelerated over the
past two years driven by lower demand/declining prices. Whilst weakness in 100
commodity prices has not led to any customer mine closures yet, this is resulting 80
Apr-15
Jul-15
Sep-14
Oct-14
Dec-14
Jan-15
Mar-15
Aug-15
Jun-15
in reduced capex spends by miners thus impacting offtake of high-chrome media
and the conversion process. During the previous meltdown in global commodity
prices, AIA found it difficult to break into mining clients. In its 1QFY16 earnings
SENSEX AIA
call, the management highlighted that it will now be more aggressive in terms of
pricing.
INR depreciation should help
We have currently built in 10%/3% volume/realisation growth for FY16E,
resulting in revenue growth of 13%. These estimates are likely to be downgraded
due to weak outlook on volume and realisations. The recent INR depreciation
and hence stable margins at 24-26% could lead to upgrades. AIA enjoys a
significant cost advantage over Magotteaux, which gives it enough headroom to
price its products aggressively, thereby reducing the pricing differential between
forged and high-chrome media.
Limited upside but cost advantage/industry structure support valuation
AIA is currently trading at 20x/17x FY16/FY17 P/E, higher than its five-year
average of 16x. However, the benefits of INR depreciation may be offset by
downgrades to our volume & realisation estimates; hence we see limited upside
from CMP (14%). We expect cuts to our FY16 estimates but limited cuts to our
valuation. A share price correction would force us revisit our stance.
Key financials - standalone
Year to March (` bn) FY14 FY15 FY16E FY17E FY18E
Revenues 20.8 21.8 24.7 30.2 35.8
EBITDA 5.0 5.8 6.2 7.6 9.0
EBITDA (%) 24.1% 26.8% 25.3% 25.3% 25.3% Analyst Details
EPS (`) 37.2 46.3 45.4 55.1 65.7
Nitin Bhasin
RoE (%) 20.5 22.5 19.0 19.7 20.1
RoCE (%) 20.6 21.7 18.5 19.4 19.9 +91 22 3043 3241
P/E (x) 24.4 19.7 20.1 16.5 13.9 nitinbhasin@ambitcapital.com
AIA Engineering
Exhibit 1: Strong revenue growth in the last five years Exhibit 2: RoCE and RoE have improved since FY13
coupled with margin expansion in the last two years
25 Revenue and margins 30% 24% Profitability ratios 24%
22% 22%
20
20% 20%
25%
15 18% 18%
10 16% 16%
20%
14% 14%
5
12% 12%
- 15% 10% 10%
Revenue (Rsbn; LHS) EBITDA margin (RHS) RoE (LHS) RoCE (RHS)
Exhibit 3: Revenue growth from outside India decelerated Exhibit 4: Production growth of mined commodities
in FY15 to 3% after 30% CAGR over FY10-14 globally has decelerated in 2014
20 20% 20% Global Production growth
Revenue from outside India
(mn mt, YoY)
15%
15 15%
10%
10 5% 10%
0%
5 5%
-5%
- -10% 0%
FY10 FY11 FY12 FY13 FY14 FY15 2009 2010 2011 2012 2013 2014
Gross revenue outside of India (Rsbn; LHS) Global Mined Copper production
Growth (YoY; RHS) Global Iron Ore production
INR depreciation vs USD (YoY; RHS) Gold mine production
Exhibit 5: On P/E, AIA is currently trading at an 15% Exhibit 6: On P/B, AIA is currently trading at a 20%
premium to its five-year historical average premium to its five-year historical average
30 1 year forward P/E 6 1 year forward P/B
26 (consensus) (consensus)
5
22
4
18
3
14
2
10
Jul-10
Jan-11
Jul-11
Jan-12
Jul-12
Jan-13
Jul-13
Jan-14
Jul-14
Jan-15
Jul-15
1
Jul-10
Jan-11
Jul-11
Jan-12
Jul-12
Jan-13
Jul-13
Jan-14
Jul-14
Jan-15
Jul-15
P/E Avg P/B Avg

Source: Bloomberg, Ambit Capital research. Note: P/E bands arrived at using Source: Bloomberg, Ambit Capital research. Note: P/B bands arrived at using
Bloomberg consensus estimates for the respective periods Bloomberg consensus estimates for the respective periods

In our forensic accounting screen, AIA Engineering scores above the industry average. The company scores high on
Accounting GREEN asset turnover, related party transactions, and miscellaneous expenses as a percentage of revenues. However, the
company scores poorly on CFO/EBITDA and doubtful debts as a percentage of total debtors.
The management has made timely announcements in earnings calls and meetings regarding business outlook.
However, quarterly results tend to surprise consensus estimates.
Earnings momentum AMBER FY16/ FY17 consensus EPS estimates have seen downgrades by 3-5% in the last six months.

AIA Engineering
Balance sheet
` mn FY14 FY15 FY16E FY17E FY18E
Total Net-worth 17,466 20,914 24,341 28,498 33,457
Loans 900 641 641 141 141
Sources of funds 18,566 21,802 25,229 28,886 33,844
Net block 3,887 4,881 6,773 8,519 8,472
Investments 5,291 6,370 5,370 5,370 5,370
Cash and bank balances 2,198 1,868 5,073 5,476 9,083
Sundry debtors 4,315 3,938 5,144 6,192 7,219
Inventories 3,508 4,596 3,945 4,705 5,425
Loans and advances 2,121 2,690 2,791 3,321 3,825
Total Current Assets 12,154 13,139 16,969 19,713 25,575
Current Liabilites 2,490 2,209 2,908 3,559 4,215
Other current liabilities 1,161 1,018 1,356 1,660 1,965
Provisions 1,273 1,477 1,472 1,655 1,855
Current liabilities and provisions 4,924 4,705 5,737 6,874 8,036
Application of funds 18,566 21,801 25,228 28,885 33,844
Income statement
Operating Income 20,801 21,836 24,670 30,194 35,756
% growth 18.8% 5.0% 13.0% 22.4% 18.4%
EBITDA 5,021 5,848 6,242 7,639 9,046
% growth 61.9% 16.5% 6.7% 22.4% 18.4%
EBITDA margin (%) 24.1% 26.8% 25.3% 25.3% 25.3%
Net depreciation / amortisation 381 697 609 753 847
Other income 334 832 520 557 663
Adjusted PBT 4,599 5,943 6,120 7,423 8,854
Provision for taxation 1,342 1,634 1,836 2,227 2,656
Reported Consolidated PAT 3,517 4,364 4,284 5,196 6,198
EPS (Adjusted) (Rs) 37.3 46.3 45.4 55.1 65.7
Cash flow statement

PBT 4,599 5,943 6,120 7,423 8,854
CFO 4,657 3,139 4,502 3,745 4,813
Purchase of fixed assets (1,340) (1,692) (2,500) (2,500) (800)
CFI (4,340) (2,509) (402) (1,965) (160)
Dividends paid (445) (662) (862) (857) (1,039)
Interest paid (64) (39) (33) (20) (7)
CFF (911) (959) (895) (1,377) (1,046)
Net Cash (594) (330) 3,205 403 3,607

AIA Engineering
Ratios
FY14 FY15E FY16E FY17E FY18E
Dividend payout ratio (%) 17.4 17.2 17.2 17.2 17.2
Net debt/Equity (0.4) (0.4) (0.4) (0.4) (0.4)
Working capital turnover (x) 2.3 2.5 3.4 4.0 4.5
Gross block turnover (x) 3.5 3.1 2.7 2.6 2.7
Debt/Equity 0.1 0.0 0.0 0.0 0.0
Net debt/Equity (0.4) (0.4) (0.4) (0.4) (0.4)
ROCE 20.7 22.0 18.5 19.4 19.9
ROE 20.6 22.5 19.0 19.7 20.1
Valuation metrics
P/E (x) 24.4 19.7 20.1 16.5 13.9
P/B (x) 4.9 4.1 3.5 3.0 2.6
EV/EBITDA (x) 15.8 13.4 12.2 9.8 7.9

PI Industries
BUY
COMPANY UPDATE PI IN EQUITY September 09, 2015
PI has perfected the early stage custom synthesis and manufacturing
Agri Inputs
model (60% of FY15 revenues) by building strong relationships with
global innovators through: (1) flawless execution of 18 commercialised
molecules, (2) clean record on IP protection, and (3) manufacturing Recommendation
facilities of global standards. PI is expanding its ambit from Mcap (bn): `90/US$1.3
agrochemicals to other speciality chemicals (30% of the current pipeline, 3M ADV (mn): `195/US$2.9
but none in the existing order book) and is expanding its addressable CMP: `659
market. Its sizable order book of US$600mn (3.2x the current CSM TP (12 mths): `825
revenues) provides significant revenue visibility. PI has been consistently Upside (%): 25
expanding its RoCE led by better asset turns, improved product mix, and
better capital efficiencies. Flags
Background Accounting: GREEN
PI is a leading agrochemicals player in India. It has two business activities: (1) Predictability: GREEN
Agri Inputs, offering crop protection products; and (2) Custom Synthesis & Earnings Momentum: GREEN
Manufacturing (CSM) of agrochemicals, intermediates and other niche fine
chemicals for global innovators. In the domestic segment, PI focuses on in-
Catalysts
licensed molecules from global innovators vs other domestic players that also
focus on reverse engineering patented products. Commissioning of Jambusar Phase
2 in 2HFY16
Current export franchise
Revenue jump in FY16 from the
PI has ramped up its exports revenue at a CAGR of 42% over the last five years to newly launched products in
`11.5 bn (~60% of net revenues). The company has high visibility on export domestic business
revenues due to its existing order book of US$600mn (nearly 3.2x of FY15 export
Success in commercialisation of
revenues) which is to be executed over the next 3-4 years. Nearly 30-40% of PIs non-agrochemical molecules in
export revenues arises from annual contracts and will further augment this order CSM business over next 12 months
book. The firm has expanded its exports revenue share from 37% in FY10 to 59%
in FY15. Since the company imports nearly half of its raw material, net exports Performance
were at 27% in FY15 vs only 16% in FY10.
180
Export strategy 160
PI follows a differentiated business strategy of focusing on custom synthesis and
140
manufacturing for patented molecules that are in the early stage of
120
commercialisation. It derives 90% of its CSM sales from patented molecules or
molecules at the early stage of commercialisation. Once PI partners with a 100
global innovator for a new molecule, it has multi-year visibility on a particular 80
Oct-14
Nov-14
Jan-15
Feb-15
Apr-15
May-15
Jul-15
Sep-14
Dec-14
Mar-15
Aug-15
Jun-15
product through the 3-5 years required to bring a molecule to commercialisation
and then through the patent protection period of ~20 years. The CSM business
EBITDA margin at ~22% is healthy and has been expanding steadily. Sensex PI
Over the last five years, PI has recorded an impressive CAGR of 27%/34%/45% Source: Bloomberg, Ambit Capital research
on overall sales/EBITDA/PAT, outperforming most of its peers. Its RoCEs have
improved from 14% to 28% over FY09-15. Cash flow conversion remains healthy
with average pre-tax CFO:EBITDA of ~90%.
Valuation
PI is currently trading at 21x one-year forward earnings vs its last five-year
average of 10x one-year forward. Our target price of `825 implies 25x FY17E
P/E (delivering EPS CAGR of 32% over FY15-18E).
Key financials Consolidated
Y/E March FY13 FY14 FY15E FY16E FY17E
Operating Income (` mn) 11,514 15,955 19,403 23,506 29,384
EBITDA (` mn) 1,826 2,910 3,727 4,691 6,399
EBITDA margin (%) 15.9 18.2 19.2 20.0 21.8
EPS (`) 7.6 14.0 18.1 22.7 32.5 Analyst Details
RoCE (%) 16.2 23.9 26.3 27.7 31.9 Ritesh Gupta, CFA
RoE (%) 22.7 31.2 31.0 30.2 32.9 +91 22 3043 32842
P/E 86.7 46.9 36.5 29.0 20.3 riteshgupta@ambitcapital.com
PI Industries
Exhibit 1: Revenue growth has been strong alongside Exhibit 2: RoCE has seen healthy improvement whilst RoEs
improvement in margins have remained stable due to falling leverage
Revenue EBITDA margin (%) (RHS) RoCE (%) RoE (%)
35000 22% 25% 35 31 31 32 33

30
30000 19% 20% 30 28
20% 26
23 24
25000 25
18%
20000 16% 15% 20 16
15000 10% 15
10000 10
5%
5000 5
0 0% 0
FY13 FY14 FY15 FY16E FY17E FY13 FY14 FY15 FY16E FY17E
Source: Ambit Capital research Source: Ambit Capital research.
Exhibit 3: Exports growth momentum remains sustainable Exhibit 4: Exports now contribute to more than half of
revenues
Exports YoY Growth (RHS) Export/Sales % (Export-Import)/Sales %

14,000 70%
70%
12,000 60% 60% 61% 59%
58% 55%
55% 60%
10,000 50%
50% 45%
8,000 40%
40% 34%
6,000 30% 25% 28% 27%
30% 23%
4,000 23%
24% 20%
20%
11%
2,000 10% 10%
- 0% 0%
Exhibit 5: P/E multiple has seen significant re-rating Exhibit 6: and the same applies to the P/B ratio
35 10.0
30 8.0
25
20 6.0
15 4.0
10
5 2.0
- -
Nov-09
Mar-10
Jul-10
Nov-10
Mar-11
Jul-11
Nov-11
Mar-12
Jul-12
Nov-12
Mar-13
Jul-13
Nov-13
Mar-14
Jul-14
Nov-14
Mar-15
Jul-15
Nov-09
Mar-10
Jul-10
Nov-10
Mar-11
Jul-11
Nov-11
Mar-12
Jul-12
Nov-12
Mar-13
Jul-13
Nov-13
Mar-14
Jul-14
Nov-14
Mar-15
Jul-15
One-yr fwd P/E 5-yr avg P/E One-yr fwd P/B 5-yr avg P/B
Exhibit 7: Explanation for the flags

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 better than expectations.
Earnings momentum GREEN Consensus EPS estimates have been revised upwards by 15% in the last six months.

PI Industries
Balance sheet (Consolidated)

Total net worth 5,317 6,945 8,931 11,553 15,354
Debt 2,172 1,223 1,223 223 (0)
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
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
Miscellaneous expenditure - - - - -
Total assets 7,972 8,605 10,591 12,213 15,791
Income statement (Consolidated)

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
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

PI Industries
Cash flow statement (Consolidated)

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 - - - - -
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 (Consolidated)

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
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
Source: Company, Ambit Capital research, Note: * excluding revaluation reserve
Valuation parameters (Consolidated)

EPS (`) 7.7 14.0 18.1 22.7 32.5
Diluted EPS (`) 7.6 14.0 18.1 22.7 32.5
Book value per share (`) * 39.3 51.0 65.6 84.9 112.8
P/E (x) 86.7 46.9 36.5 29.0 20.3
P/BV (x) 16.8 12.9 10.0 7.8 5.8
EV/EBITDA (x) 50.2 31.1 24.2 19.3 14.1
EV/EBIT (x) 57.1 34.9 28.0 21.8 15.7
EV/Sales (x) 8.0 5.7 4.7 3.8 3.1

Atul Ltd
NOT RATED
COMPANY UPDATE ATUL IN EQUITY September 09, 2015
Atul Ltd is in a sweet spot to capitalise on the fast-growing specialty Chemicals

chemicals exports opportunity, due to its wide range of process
capabilities (phosgenation, aromatics, sulphones, etc) and low cost
Recommendation NOT RATED
manufacturing setup. Atuls focus on capitalising these capabilities has
led to 19% export CAGR over FY10-15. Strong focus on mix improvement, Mcap (bn): ` 40/US$0.6
efficiency enhancements and better asset utilisation have led to 3M ADV (mn): ` 59/US$0.9
improvement in RoCEs from 7% in FY05 to 26% in FY15. The stock is CMP: `1290
trading at attractive valuations of 11x FY17 consensus EPS alongside
~85% dividend payout (in FY15) and good corporate governance. Flags
Background Accounting: GREEN
Atul is one of the leading suppliers of dyes, pigments, agrochemicals, Predictability: AMBER
pharmaceuticals, fragrances & cosmetics intermediates, polymers and rubber Earnings Momentum: AMBER
intermediate chemicals to global manufacturers. Its bouquet of 920 products
caters to 5,700 customers in 68 countries. Atul was founded in 1947 by Catalysts
Kasturbhai Lalbhai. The companys key manufacturing operations are based out
Revival in internation demand for 2,4
of Ankleshwar and Valsad (Gujarat) and Tarapur (Maharashtra). Atul is now run D (herbicide product accounting for
by Sunil Lalbhai along with professional management. nearly 20-25% of sales)
Current export franchise Announcement of new capex plans
Atuls export CAGR was at 19% over the last five years. Net exports CAGR was at
23% during the same period. As a result, exports share of total revenues has
improved from 40% in FY10 to 44% in FY15. The company manufactures Performance
chemicals, having end use in agriculture, pharmaceuticals, textiles and 120
construction. The company generates nearly 18% of sales from Asia (ex-India), 110
14% from Europe, and 13% from North America.
100
Export strategy
90
Atul is looking to leverage its existing chemistry capabilities to launch more
value-added downstream projects. Atul further plans to improve its presence 80 Sep-14
Oct-14
Nov-14
Dec-14
Aug-15
Jan-15
Feb-15
Mar-15
Apr-15
May-15
Jun-15
Jul-15
across key countries and also cross sell more products to its existing clients to
leverage on its product and client strengths. Key growth areas for the company
are: (a) Pharma intermediates (capabilities on a wide range of chemistries Sensex Atul
alongside USFDA plants), (b) aromatic products (flavours, fragrances, and
sunscreens), (c) new generics and CRAMS under agrochemicals, and (d) new
products under colorants, pigments, polymers, etc.
Over the last decade, Atul has significantly turned around the efficiency of its
businesses. Atul significantly reduced its exposure to the lower-margin business
of colorants to higher-margin products under life sciences; thus, PBT CAGR was
at 32% vs 14% sales CAGR over FY05-15. Cumulative CFO/EBITDA at 83% was
led by improvement in inventory days (from 66 days to 51 days) and receivable
days (from 79 days to 59 days) over FY10-15. Fixed asset turns too have
improved from 1x in FY10 to 2x in FY15.
Valuation
Atul is now trading at 13x FY17 consensus EPS vs the historical average of 7
times. Sector peers such as Aarti and Vinati trade at 12x/17x FY17 consensus
estimates. The multiples are in line with its peer average. The stock might trade
at a premium to its peer median given its strong chemistry capabilities, high
dividend payout and clean corporate governance.
Key financials - Consolidated
Net Sales 15,553 17,924 20,429 24,578 26,564
EBITDA 1,708 1,880 2,491 3,637 3,914
EBITDA (%) 27.4 29.8 39.1 73.9 81.1 Analyst Details
EPS (`) 11.5 12.7 13.2 19.4 17.8 Ritesh Gupta, CFA
RoCE (%) 15.8 14.9 16.5 25.7 24.2 +91 22 3043 32842
RoE (%) 47.8 41.7 31.4 21.5 19.7
riteshgupta@ambitcapital.com
P/E (x) 47.5 43.6 33.2 17.6 16.0
Atul Ltd
Exhibit 1: EBITDA margins have scaled up driven by focus Exhibit 2: RoCE and RoE have increased in tandem
on improving product mix
Revenue Growth EBITDA margin (RHS) RoCE RoE
30% 16% 30
14%
25% 25
12%
20% 20
10%
15% 8% 15
6%
10% 10
4%
5% 5
2%
0% 0% 0
Exhibit 3: Atuls growth rate have seen an impact of a Exhibit 4: Net exports have scaled up over the last 4 years
temporary blip in 2,4 D (~20-25% of export sales) led by higher domestic sourcing
Exports (Rs mn) YoY Growth (RHS) Export/Sales % (Export-Import)/Sales %
14,000 35% 50% 43% 45% 44%

41% 43%
12,000 30% 30%
40%
10,000 25% 29%
22% 29%
8,000 20% 30% 25% 25%
19%
6,000 15% 18%
20%
13% 11%10%
4,000
10%
2,000 5%
- 0% 0%
Exhibit 5: P/E multiples have sharply re-rated over the last Exhibit 6: Atul is trading on 3.2x one-year book value per
18 months share
20 4
15 3
10
2
5
1
-
May-11
Dec-11
Mar-12
May-13
Dec-13
Mar-14
May-15
Month
Oct-10
Jan-11
Aug-11
Jul-12
Oct-12
Jan-13
Aug-13
Jul-14
Oct-14
Feb-15
-
Jul-10 Jul-11 Jul-12 Jul-13 Jul-14 Jul-15

On our forensic accounting screener of 30 chemical stocks, Atul ranks in the top quartile due to high CFO/EBITDA (80%
Accounting GREEN
conversion ratio), healthy cash yields, lower audit fees and no material unclassified loans or contingent liabilities.
Predictability for earnings momentum is relatively difficult due to the companys presence across multiple business segments
Predictability AMBER with entirely different dynamics. The management gives adequate disclosures in annual reports and annual analyst meets;
however, lack of quarterly conference calls is a challenge.
Earnings Atul is not a well-covered stock. However, recent earnings have seen some downward pressure due to weaker performance of
AMBER
momentum the agrochemicals business.

Atul Ltd

Total net worth 5,706 6,541 7,542 9,486 10,390
Minority Interest 40 44 58 59 57
Debt 3,272 3,924 3,662 3,671 2,988
Gross block 9,731 10,754 11,903 12,952 12,958
Net block 3,905 4,436 5,061 5,703 5,137
CWIP 359 662 659 591 1,121
Long term loans and advances - - - - -
Cash & cash equivalents 220 186 149 211 367
Debtors 2,900 3,589 3,517 4,371 4,424
Inventory 2,820 3,332 3,665 4,342 4,153
Loans & advances 1,594 1,633 1,921 2,333 2,369
Investments (current) - - - - -
Provisions 547 553 414 490 596
Miscellaneous expenditure
Total assets 9,248 10,737 11,535 13,587 13,896

Net Sales 15,553 17,924 20,429 24,578 26,564
% growth 28.2% 15.2% 14.0% 20.3% 8.1%
EBITDA 1,708 1,880 2,491 3,637 3,914
% growth 54.8% 10.1% 32.5% 46.0% 7.6%
Depreciation 386 440 514 583 603
EBIT 1,322 1,440 1,977 3,055 3,311
Adjusted PBT 1,389 1,301 1,864 3,083 3,256
Tax 492 350 583 881 994
Adjusted PAT 837 911 1,161 2,192 2,407
% growth 62.3% 8.8% 27.4% 88.8% 9.8%
Extraordinary income/ (expense) 101 - 54 - -
Minority Interest 0 3 (1) 3 2
Share of profit of associates 5 (42) (82) (13) 143
Reported PAT after minority interest 943 867 1,133 2,177 2,548

Atul Ltd

Depreciation 386 440 514 583 603
Others 98 198 380 144 70
Tax (459) (420) (546) (742) (765)
(Incr)/decr in net working capital (828) (633) (340) (1,550) (100)
Cash flow from operations 586 886 1,871 1,517 3,063
Capex (net) (479) (1,271) (1,039) (1,138) (1,761)
(Incr)/decr in investments 66 28 37 245 26
Other income (expenditure) 74 239 (118) 313 114
Cash flow from investments (617) (1,040) (1,157) (831) (1,652)
Net borrowings 341 633 (287) (69) (734)
Issuance/buyback of equity - - - - -
Interest paid (254) (373) (337) (333) (260)
Dividend paid (138) (164) (155) (207) (260)
Cash flow from financing (51) 162 (778) (605) (1,253)
Net change in cash (82) 8 (64) 82 158
Free cash flow (before investments) 107 (385) 832 379 1,302

PBT marigin (%) 8.3% 7.3% 8.9% 12.5% 12.3%
Net debt: equity (x) * 0.5 0.6 0.5 0.4 0.3
Net profit margin 5.4 5.1 5.7 8.9 9.1
EV/Sales(x) 2.68 2.36 2.06 1.71 1.55
RoCE (%) 11.5% 12.7% 13.2% 19.4% 17.8%
RoE(%) 15.8% 14.9% 16.5% 25.7% 24.2%
Working Capital Turnover 4.2 4.8 5.3 6.2 5.5
Gross Block Turnover 1.6 1.8 1.8 2.0 2.1

EPS (`) 28.2 30.7 39.1 73.9 81.1
Diluted EPS (`) 27.4 29.8 39.1 73.9 81.1
P/E (x) 47.5 43.6 33.2 17.6 16.0
P/BV (x) 6.8 5.9 5.1 4.1 3.7
EV/EBITDA (x) 24.4 22.5 16.9 11.6 10.5
EV/Sales (x) 2.7 2.4 2.1 1.7 1.6

Aarti Industries
NOT RATED
COMPANY UPDATE ARTO IN EQUITY September 09, 2015
Aarti Industries is a leading player in Benzene-based derivatives, Chemicals
enjoying global market share of about 25-40% amongst various
products. The management has planned product portfolio/capacity
expansion activities, which will require a capex of `4.5bn over FY15-17 Recommendation NOT RATED
(~30% of current gross block), driving 20-25% PAT CAGR over the next Mcap (bn): `36/US$0.5
3-4 years (vs 21% over FY11-15). A good client base, widening product 3M ADV (mn): `48/US$0.7
portfolio, and a capable management with proven execution will keep CMP: `406
the current multiples intact.
Background Flags
Aarti Industries is one of the leading suppliers of dyes, pigments, Accounting: GREEN
agrochemicals, pharmaceuticals and personal care intermediate chemicals to Predictability: AMBER
global manufacturers. Over FY10-15, the company has delivered revenue Earnings Momentum: GREEN
CAGR of 17% and PAT CAGR of 20%. Gradually, its RoCEs improved from 13%
in FY10 to 19% in FY15. Net debt:equity ratio was at 1.0x in FY15 on the back Catalysts
of a significant capex programme in FY11-15 (cumulative capex of `10.1bn).
Completion of various capacity
FY10-15 CFO/EBITDA stands at 75%, indicating above average cash
expansion projects over the next 18
conversion. months
New client signups for toluene based
Aarti Industries export CAGR was at 22% over FY10-15. As a result, exports
chemistries
share of total revenues has improved from 38% in FY10 to 46% in FY15. Over
the years, Aarti has moved significantly up the value chain from basic
chemicals to more complex chemicals and it continues to enter into more Performance
product segments. Aarti imports certain feedstock and other raw materials, 180
resulting in net exports of ~31% of net sales. Its backward-integrated 160
manufacturing provides significant cost advantages in key products. 140
Export strategy 120
Aarti is focused on leveraging its longstanding relationships with existing 100
customers and expanding across the value chain with backward and forward 80
Feb-15
Sep-14
Oct-14
Nov-14
Dec-14
Jan-15
Mar-15
Apr-15
May-15
Aug-15
Jun-15
Jul-15
integration. The company has nearly doubled its gross block over the last three
years and is planning a capex of `4.5bn (30% of FY15 gross block) over the
next 18-24 months to expand into new chemistries (toluene and ethylene
Sensex Aarti
based) alongside capacity addition for chlorination and PDA. This should result
in faster revenue growth driven by 3-4x asset turnover (FY15 asset turn of 3x).
Aarti is promoted by first-generation technocrats who are chemical engineers
from the reputed University Department of Chemical Technology (UDCT),
Mumbai. Established in FY75, the company has evolved from a manufacturer
of basic chemicals to more complex chemicals. The company today maintains
an impressive list of clients and has expanded its manufacturing footprint to
more than 16 manufacturing units spread across Gujarat and Maharashtra.
Valuation
Aarti is now trading at 15x one-year forward multiple vs the historical average
of 5x. Its peers, Atul Ltd and Vinati Organics, trade at one-year forward P/Es of
15x and 19x respectively. We believe multiple expansion would be limited from
hereon though the company is likely deliver 20% earnings CAGR over FY15-17
based on consensus estimates.
Key financials - Consolidated
Net Sales 14,530 16,733 20,962 26,325 29,080
EBITDA 1,979 2,493 3,612 4,015 4,657
EBITDA (%) 13.6% 14.9% 17.2% 15.3% 16.0%
Analyst Details
EPS (`) 10.6 13.1 17.0 18.3 23.2
Ritesh Gupta, CFA
RoCE (%) 11.7% 13.3% 15.5% 15.5% 19.3%
RoE (%) 16.9% 18.8% 20.0% 20.0% 21.5% +91 22 3043 32842
P/E (x) 38.1 31.0 23.8 22.1 17.7 riteshgupta@ambitcapital.com
Aarti Industries
Exhibit 1: Revenue growth was impacted by weaker input Exhibit 2: RoCE and RoE increased in tandem despite
prices though margins improved, taking care of profit addition of new manufacturing facilities
growth
Revenue % growth RoCE (%) RoE (%)

EBITDA margin % (RHS) 25%
21%
28% 20% 20% 20% 19%
20% 19%
17%
18% 16% 15%
23% 15% 13%
12%
16%
18% 10%
14%
13% 12% 5%
8% 10% 0%
Exhibit 3: Aarti continues to show superior growth rates in Exhibit 4: Net exports have scaled up over the last 4 years
export earnings
Exports (Rs mn) YoY Growth (RHS) Export/Sales % (Export-Import)/Sales %

16,000 50% 47%
50% 46% 46%
14,000 45%
41%
40% 36%
12,000 40%
29% 32% 30% 31%
10,000 30% 30% 30% 23%
8,000
22%
6,000 20% 20%
4,000
10%10% 10%
2,000 8%
- 0% 0%
Exhibit 5: P/E multiples have sharply re-rated in recent Exhibit 6: Aarti is trading on 3x one-year book value per
months share
3.50
12.00 3.00
2.50
8.00 2.00
1.50
4.00 1.00
0.50
0.00 0.00
Aug-10
Dec-10
Apr-11
Aug-11
Dec-11
Apr-12
Aug-12
Dec-12
Apr-13
Aug-13
Dec-13
Apr-14
Aug-14
Dec-14
Apr-15
Aug-15
Aug-10
Dec-10
Apr-11
Aug-11
Dec-11
Apr-12
Aug-12
Dec-12
Apr-13
Aug-13
Dec-13
Apr-14
Aug-14
Dec-14
Apr-15
Aug-15

On our forensic accounting screener of 30 chemical stocks, Aarti ranks in the top quartile due to high CFO/EBITDA (80%
Accounting GREEN
conversion ratio), healthy cash yields, lower audit fees and no material unclassified loans or contingent liabilities.
Predictability for earnings momentum is relatively difficult due to volatility in raw material prices and due to revenue growth
being driven by the global demand-supply situation
Earnings
GREEN Consensus EPS estimates are limited though they have been increasing over the last six months.
momentum

Aarti Industries

Total net worth 5,182 5,934 7,605 8,750 10,223
Debt 4,944 5,881 8,045 9,421 12,023
Deferred tax liability 501 556 709 847 1,027
Gross block 7,803 8,549 12,368 14,770 16,851
Net block 4,121 4,434 6,737 8,262 9,669
CWIP 184 544 687 1,174 1,930
Investments (non-current) 764 936 954 1,172 1,392
Debtors 3,325 4,070 4,290 4,432 4,390
Inventory 2,941 3,259 4,622 6,061 5,517
Loans & advances 2,255 3,049 4,092 5,155 5,820
Provisions 1,587 1,967 2,482 2,905 3,399
Total assets 10,627 12,370 16,359 19,018 23,272

Net Sales 14,530 16,733 20,962 26,325 29,080
% growth 11.7% 15.2% 25.3% 25.6% 10.5%
EBITDA 1,979 2,493 3,612 4,015 4,657
% growth -2.5% 26.0% 44.9% 11.1% 16.0%
Depreciation 498 549 828 885 820
EBIT 1,481 1,944 2,784 3,130 3,837
Interest expenditure 562 718 954 1,178 1,380
Adjusted PBT 960 1,262 1,868 2,061 2,548
Tax 291 362 538 540 610
Adjusted PAT 669 900 1,330 1,521 1,938

Aarti Industries

Net profit before tax 960 1,262 1,868 2,061 2,513
Depreciation 498 549 828 885 820
Others 597 692 938 1,070 1,333
Tax (302) (438) (600) (526) (583)
(Incr)/decr in net working capital (1,144) (856) (737) (340) (688)
Capex (net) (635) (1,323) (2,314) (2,879) (2,947)
(Incr)/decr in investments (196) 3 10 (38) 2
Other income (expenditure) 10 7 10 9 (32)
Cash flow from investments (821) (1,313) (2,294) (2,908) (2,977)
Net borrowings 138 (270) (48) 1,380 2,018
Issuance/buyback of equity 35 104 - - -
Interest paid (562) (718) (954) (1,178) (1,380)
Dividend paid (150) (252) (342) (415) (483)
Cash flow from financing 224 111 9 (217) (230)
Net change in cash 13 6 12 24 189
Free cash flow (before investments) 1,245 2,531 4,612 6,029 6,342

EBITDA margin (%) 13.6 14.9 17.2 15.3 16.0
EBIT margin (%) 10.2 11.6 13.3 11.9 13.2
Net prof. (bef min int) margin (%) 4.6 5.4 6.3 5.8 6.7
Net debt: equity (x) * 0.80 0.82 0.92 0.93 1.01
RoCE (pre-tax) (%) 11.7% 13.3% 15.5% 15.5% 19.3%
RoIC (%) 12.0% 14.5% 16.5% 15.7% 22.5%
RoE (%) 16.9% 18.8% 20.0% 20.0% 21.5%

EPS (`) 10.6 13.1 17.0 18.3 23
P/E (x) 38.1 31.0 23.8 22.1 17.7
P/BV (x) 7.0 6.1 4.7 4.1 3.5
EV/EBITDA (x) 18.1 14.4 9.9 8.9 7.7
EV/EBIT (x) 24.2 18.5 12.9 11.5 9.4

Indo Count Industries
NOT RATED
COMPANY UPDATE ICNT IN EQUITY September 09, 2015
Indo Count Industries (ICNT) is Indias third-largest bed-sheet exporter; Textiles
ICNT operates an asset-light model (owns the key fabric processing
capacities). The company has built its competitive advantages and Recommendation
bargaining power with US-based retailers through product design and
Mcap (bn): `39/US$0.6
market research; the US accounts for 70% of its exports. After having hit
3M ADV (mn): `76/US$1.1
a rough patch and turning sick post a large expansion in 2007, ICNT has
CMP: `820
changed its business model from a low-cost exporter to a solutions
provider thus improving utilisation and financial performance to one of TP (12 mths): NOT RATED
the best in the industry; resultantly, ICNT is exiting the CDR process Upside (%): NA
ahead of schedule. Recent capacity expansion (33%) and product
portfolio expansion into utility/institutional/fashion segments will be the Flags
key drivers of growth. Accounting: RED
Background - An asset-light model focused on processing Predictability: AMBER
ICNT is one of Indias leading integrated home textile companies, with quality Earnings Momentum: GREEN
products and prestigious international customers such as Walmart, Target, Bed,
Bath & Beyond, Macys, JC Penney, John Lewis and Debenhams. Whilst it has Catalysts
spinning facilities, its capacities are largely for processing fabric and
Demand recovery in US and revenue
cutting/sewing bed sheets. ICNT is now among the top-3 suppliers of bed linen generation from new geographies
from India and the fourth-largest supplier of bed sheets to the US. Home textile
Exit from CDR ahead of the schedule
(70%) and spinning (20%) are the major revenue contributors for ICNT.
leading to lower debt burden.
Export revenues currently contribute to ~85% of total revenues and have been
expanding at ~35% CAGR (FY10-15) as against domestic revenue growth of Performance
22%. Whilst the company exports to 49 counties, 70% of its exports are to the 800
700
US. India contributes to ~46% of US imports in the bed linen segment and Indo 600
Count is amongst the top-3 players, with 20% share. According to the 500
management, The demand revival in US retail market has led to improvement in 400
300
our realisation and bettering of product mix. We are witnessing early signs of 200
recovery in Europe. 100
Export strategy - Expand capacities, products and markets -
Oct-14
Dec-14
Jan-15
Feb-15
Apr-15
May-15
Jul-15
Aug-14
Aug-15
ICNTs exports are predominately to the US market and it is trying to de-risk by
expanding to UK, Japan, and Australia. In addition, once the eagerly-awaited
FTA is signed between India and EU, it would open a huge market for the Indian Sensex Indo Count
textile companies. The design/marketing team of 100 people (US and India) set
up by the company conducts market research and sell to major clients; given the Source: Bloomberg, Ambit Capital research
knowledge of the customer, the clients appreciate ICNTs products. This is now
helping the company to expand into utility/institutional and fashion bedding,
which will triple its opportunity. The management indicated that the company will
expand capacities (through greenfield expansion) if these ventures succeed.
Overall success of the business product/service based
Derivative losses and slowdown in demand for home textiles in the US drove
ICNT into CDR in August 2008. The liquidity position has been on the mend over
the past six years primarily driven by change in business approach and traction in
the home textiles business and the companys lean working capital business
model (~30 days working capital cycle). The company in 2HFY15 expanded
capacity from 45mn meters to 68mn mtrs pa, incurring a capex of ~0.7bn
largely funded by the TUFS scheme. The incremental capacity will enable it to tap
demand for higher-value bed linen products (utility bedding and top-of the-bed).
Key Financials
Year to March (` mn) Mar-11 Mar-12 Mar-13 Mar-14 Mar-15
Net Sales 7,082 7,797 11,868 14,676 17,169
EBITDA 473 356 897 1,588 2,488 Analyst Details
EBITDA (%) 6.7% 4.6% 7.6% 10.8% 14.5%
EPS (`) 3.0 (0.6) 8.2 31.0 36.9 Aditya Bagul
RoCE (%) 3.5% 3.6% 11.7% 20.5% 23.4% +91 22 3043 3264
RoE (%) 8.0% 5.4% 24.1% 45.3% 48.0%
adityabagul@ambitcapital.com
P/E (x) 334.9 NA 121.1 32.2 27.1
Indo Count
Exhibit 1: Rising franchise with customers has reduced Exhibit 2: RoCE and RoE improved due to improved
margin cyclicality and led to secular improvement revenue growth and operating leverage
Revenues (Rs bn) EBITDA margin % (RHS) RoCE RoE (RHS)
30% 50%
20 20% 25% 40%
15 15% 20% 30%

15% 20%
10 10%
10% 10%
5 5%
5% 0%
- 0% 0% -10%
Exhibit 3: ICNTs geographical spread of exports Exhibit 4: Accelerating growth in export revenues
dominated by home textiles with some from yarn
Export Revenues( Rs bn) Exports as % of revenues

Rest of the
world,
20 100%
30%
80%
15
60%
10
40%
5
20%
US, 70%
- 0%
Exhibit 5: ICNT is currently trading at an 30% premium to Exhibit 6: In line with the historical average, upside
its 5-year historical average on improving fundamentals potential is due to further deleveraging
60 60
50 50
40 40
30 30
20 20
10 10
- -
Sep-11
Mar-12
Sep-12
Mar-13
Sep-13
Mar-14
Sep-14
Mar-15
Sep-15
Mar-10
Sep-10
Mar-11
Sep-11
Mar-12
Sep-12
Mar-13
Sep-13
Mar-14
Sep-14
Mar-15
Sep-15
P/E (1 Yr forward) Average EV/EBITDA (1 Yr forward) Average


In our forensic accounting model, ICNT scores low due to weak cash conversion and higher accumulated losses
Accounting RED
from derivate transactions
Given the high volatile in input costs, diminished capabilities to pass on the cost inflation, unwinding of derivate
losses and high concentration risks in the export business the financial performance has been choppy.
Earnings momentum GREEN Consensus estimates have been upgraded by ~15% in the last 4 weeks.

Indo Count
Balance Sheet (Consolidated)

Total net worth 1,935 1,789 1,956 2,917 4,239
Debt 3,412 3,191 3,658 4,012 3,487
Deferred tax liability (254) (264) (213) (131) 370
Gross block 5,988 6,057 6,301 6,422 7,065
Net block 3,884 3,651 3,596 3,464 3,884
CWIP 21 49 18 3 146
Debtors 565 586 879 1,087 1,270
Inventory 1,328 1,480 2,458 3,457 3,830
Loans & advances 670 706 1,115 1,597 2,664
Provisions 25 0 57 284 708
Total assets 3,375 3,936 5,814 6,767 8,055
Income Statement (Consolidated)

Net Sales 7,082 7,797 11,868 14,676 17,169
% growth 71.3% 10.1% 52.2% 23.7% 17.0%
EBITDA 473 356 897 1,588 2,488
% growth 101.9% -24.7% 152.1% 77.0% 56.6%
Depreciation 196 186 185 196 160
EBIT 277 170 712 1,393 2,328
Adjusted PBT 221 92 518 1,196 2,327
Tax 68 (8) 66 93 611
Adjusted PAT 153 100 452 1,104 1,716
% growth -164.5% -121.7% -1375.9% 274.0% 32.1%
Reported PAT after minority interest 106 -22 293 1,100 1,457

Indo Count
Cashflow Statement (Consolidated)

Net profit before tax 175 -37 338 1,174 2,025
Depreciation 196 186 185 196 160
Others 297 729 870 731 982
Tax - (11) 0 (231) (487)
(Incr)/decr in net working capital (166) 99 (772) (1,096) (158)
Cash flow from operations 501 451 187 342 2,362
Capex (net) -38 -96 -215 -180 -853
(Incr)/decr in investments - (0) 1 (22) (0)
Cash flow from investments -82 40 -151 18 -1,028
Net borrowings -101 -219 465 314 -528
Issuance/buyback of equity 25 - 11 - 50
Interest paid -259 -352 -498 -499 -650
Dividend paid 0 0 0 0 0
Cash flow from financing (334) (572) (22) (133) (1,139)
Net change in cash 85 (82) 15 227 195
Free cash flow (before
463 354 -28 162 1,510
investments)
Ratio Analysis
Year to March Mar-11 Mar-12 Mar-13 Mar-14 Mar-15
EBITDA margin (%) 7% 5% 8% 11% 14%
EBIT margin (%) 4% 2% 6% 9% 14%
Net prof. (bef min int) margin (%) 2% 1% 4% 8% 10%
Dividend payout ratio (%) 0% 0% 0% 0% 0%
Net debt: equity (x) * 1.7 1.7 1.8 1.3 0.7
RoCE (pre-tax) (%) 3% 4% 12% 20% 23%
RoIC (pre-tax) (%) 0% -4% 4% 14% 18%
RoE (%) 8% 5% 24% 45% 48%
Valuation Parameters
EPS (`) 3.0 (0.6) 8.2 31.0 36.9
Diluted EPS (`) 3.0 (0.6) 8.2 31.0 36.9
Dividend per share (`) - - - - -
P/E (x) 334.9 NA 121.1 32.2 27.1
P/BV (x) 98.4 107.3 58.7 21.0 12.5
EV/EBITDA (x) 90.6 119.7 48.0 27.3 17.2
EV/EBIT (x) 154.7 250.6 60.5 31.2 18.4

Kitex Garments
NOT RATED
COMPANY UPDATE KGL IN EQUITY September 09, 2015
Kitex Garments (KTG) is the third-largest infant-wear manufacturer Textiles

globally. KTG has diversified its client mix from a single client in FY09 to
five currently, leading to lower client concentration risk and improving
Recommendation
margins. KTG intends to improve its revenue mix in favour of high-
margin clients like Toys R Us, Jockey and Mothercare, which procure Mcap (bn): `33/US$0.5
high value-added products, thus driving further margin improvement. 6M ADV (mn): `0.2/US$0.3
KTG also plans to buy/license a brand for the US market and aims to be CMP: `710
a wholesaler like Gerber. It has plans to launch its products through the TP (12 mths): NOT RATED
e-commerce channel for the US market. Downside (%): NA
Background A large supplier to trusted brands
Flags
Kitex Garments Ltd (KTG), incorporated in 1992, manufactures infant-wear
and majorly exports to the US and UK. The company derives 85% of its revenue Accounting: GREEN
from the sale of infant garments and the balance 15% from the sale of fabric to Predictability: AMBER
Kitex Childrenwear. KTG ventured into the US market by supplying mass market Earnings Momentum: GREEN
offerings to Gerber, and only in the last few years, it has entered into sourcing
agreements with Carters (premium segment player). The product quality is a Catalyst
key purchase consideration in infant-wear; thus, only trusted brands like Carter, Expanding client base to aid revenue
Babies-R-Us, Gerber, The Children's Place, Mothercare and a few others have growth trajectory
endured over several decades. Effective utilisation of upgraded
Current export franchise - Five clients, rising margin and utilisations capacity to aid margins
KTG derives 100% of its garment revenue from exports, out of which 80% are to
the US and 20% to Europe. The company has five large clients Gerber, Toys R Performance (%)
Us, Jockey, Mothercare and Carters and it has added two large clients, 350
Childrens Place and Kohls in 1HFY15. KTG has diversified its client mix from a 300
single client in FY09 (Gerber) to five in FY14. The managements focus on 250
improving the share of retail brands and diversifying the clientele over the last 200
five years ensured substantial margin accretion. Ability to optimise working 150
100
capital, manage concentration risks from having only 5-6 clients and maintain 50
high capacity utilisation have aided the companys margins and profitability. -
Sep-14
Oct-14
Dec-14
Dec-14
Jan-15
Feb-15
Mar-15
Apr-15
May-15
Jun-15
Jul-15
Aug-14
Aug-15
Export strategy - Increased focus on premium clients
KTG intends to improve its revenue mix in favour of high-margin clients like
Toys R Us, Jockey and Mothercare which procure high-value-added products, Sensex Kitex
which will drive continued margin improvement. The company also plans to
enter the retailing space by buying/licensing a brand for the US hypermarket
Source: Bloomberg, Ambit Capital Research
market. Also, it plans to be a wholesaler like Gerber. Apart from this, KTG plans
to launch its products through the e-commerce channel for the US market,
which can capture margins across the entire value chain.
Apart from improvement in the client mix, the company is implementing various
technological upgrades including upgrading the sewing machines, installation
of automatic dying facility, etc. This along with improvement in capacity
utilisation should improve the profitability of the company. High cash holdings
(0.8x equity) alongside leverage (0.5x equity) remain key concerns.
Key financials
Net Sales 2,561 3,120 3,170 4,422 5,111
EBITDA 478 594 618 968 1,707
EBITDA (%) 18.7% 19.0% 19.5% 21.9% 33.4%
RoCE (%) 18.9% 20.4% 17.7% 22.3% 29.8% Aditya Bagul
RoE (%) 32.0% 31.7% 26.7% 38.7% 45.0% +91 22 3043 3264
P/E (x) 158.8 120.7 111.5 57.0 33.2 adityabagul@ambitcapital.com
Kitex Garments
Exhibit 1: Margins recovered over last two years with Exhibit 2: RoCE and RoE over the last five years have
increase in revenues tracked EBITDA margins
Revenues (Rs bn) RoCE RoE (RHS)

EBITDA margin % (RHS)
35% 50%
6 40%
30%
5 35% 40%
30% 25%
4 25% 30%
20%
3 20%
15% 20%
2 15%
10% 10%
1 10%
5% 5%
- 0%
0% 0%
Exhibit 3: KTGs geographical spread of exports Exhibit 4: Marginal increase in share of exports as number
of clients increased
Export Revenues( Rs bn)

UK, 20%
Exports as % of revenues
5 100%
4 80%
3 60%
2 40%
1 20%
US, 80% - 0%
Exhibit 5: On P/E, Kitex is currently trading at a 15-20% Exhibit 6: On EV/EBITDA, Kitex is currently trading at a 15-
premium to its five-year historical average 20% premium to its five-year historical average
70 40
60 35
50 30
40 25
20
30
15
20 10
10 5
- -
Sep-10
Sep-11
Sep-12
Sep-13
Sep-14
Sep-15
Sep-10
Sep-11
Sep-12
Sep-13
Sep-14
Sep-15
Mar-10
Mar-11
Mar-12
Mar-13
Mar-14
Mar-15
Mar-10
Mar-11
Mar-12
Mar-13
Mar-14
Mar-15

In our forensic accounting model, Kitex Garments fares well on our accounting framework, with healthy cash
Accounting GREEN
conversion of ~90% and reducing working capital cycles.
Given the high volatility in input costs, diminished capabilities to pass on the cost inflation, and high concentration
risks in the export business, the financial performance has been choppy.
Earnings momentum GREEN Consensus estimates have been upgraded by ~20% in the last 4 weeks

Kitex Garments

Reserves and surpluses 689 927 1,176 1,694 2,591
Total net worth 736 974 1,224 1,742 2,639
Debt 880 884 918 1,194 1,408
Deferred tax liability - - - - -
Gross block 1,540 1,613 1,638 2,374 2,625
Net block 1,223 1,228 1,172 1,812 1,882
CWIP 9 4 23 7 3
Debtors 393 318 506 531 627
Inventory 566 520 459 108 112
Loans & advances 113 144 161 263 363
Current liabilities 598 479 426 549 548
Provisions 116 158 195 313 500
Total current liabilities 714 637 621 862 1,048
Net current assets 422 710 916 1,075 2,086
Total assets 1,786 2,037 2,328 3,175 4,305

Net Sales 2,561 3,120 3,170 4,422 5,111
% growth 3.5% 21.8% 1.6% 39.5% 15.6%
EBITDA 478 594 618 968 1,707
% growth 102.8% 24.3% 4.0% 56.8% 76.3%
Depreciation 69 69 86 97 213
EBIT 409 525 532 872 1,494
Adjusted PBT 312 401 440 882 1,417
Tax 106 130 147 308 432
Adjusted PAT 206 271 294 574 985
% growth 11.5% 31.4% 8.3% 95.3% 71.7%
Reported PAT after minority interest 206 271 294 574 985

Kitex Garments

Net profit before tax 312 401 440 882 1,417
Others 45 42 112 102 194
Tax - - (139) (242) (364)
(Incr)/decr in net working capital (582) 114 (256) 315 (176)
Cash flow from operations -156 626 244 1,154 1,284
Capex (net) -107 -68 -48 -720 -302
Cash flow from investments -107 -68 -48 -716 -298
Net borrowings 390 -69 -5 334 271
Interest paid -130 -176 -115 -106 -192
Dividend paid -16 -22 -33 -44 -56
Cash flow from financing 244 (267) (153) 183 24
-263 558 196 433 981
investments)
Ratio Analysis
EBITDA margin (%) 19% 19% 19% 22% 33%
EBIT margin (%) 16% 17% 17% 20% 29%
Net debt: equity (x) * 1.1 0.5 0.4 0.1 NA
RoCE (pre-tax) (%) 19% 20% 18% 22% 30%
RoIC (pre-tax) (%) 12% 14% 16% 28% 47%
RoE (%) 32% 32% 27% 39% 45%
EPS (`) 4.3 5.7 6.2 12.1 20.7
Diluted EPS (`) 4.3 5.7 6.2 12.1 20.7
P/E (x) 158.8 120.7 111.5 57.0 33.2
P/BV (x) 44.5 33.6 26.7 18.8 12.4
EV/EBITDA (x) 70.4 56.7 54.5 35.1 20.0
EV/EBIT (x) 82.3 64.1 63.4 39.0 22.9

Vardhman Textiles
NOT RATED
COMPANY UPDATE VTEX IN EQUITY September 09, 2015
Vardhmans export revenue CAGR of ~29% over the last five years Textiles
outstripped the firms domestic revenue CAGR of ~10% due to a
combination of external factors (like diminishing competitiveness of the Recommendation
Chinese textile industry) and internal factors (like improved product mix
Mcap (bn): `56/US$0.8
and capacity expansion alongside INR depreciation). We do not see
3M ADV (mn): `69/US$1
strong competitive advantages in this business model, as VTEX operates
in a commodity-like segment with an inability to fully pass on the input CMP: `866
cost inflation, making it susceptible to the vagaries of cotton prices. High
capital intensity, high levels of cotton inventory in China and resultantly Flags
uncertain yarn pricing remain key challenges. Accounting: AMBER
Predictability: AMBER
Background - A large and reputed spinner and fabric manufacturer
Incorporated in 1965, VTEX (the erstwhile Mahavir Spinning Mills Ltd) is one of
Indias leading textile companies, with diverse operations across manufacturing
of yarn (60% of revenues), fabric (25%), sewing (10%), threads, fibre and Catalysts
garmenting. The company has a strong yarn exports presence in the US, Japan, Stable input costs to reduce margin
Hong Kong, Korea, the UK and the EU, in addition to the domestic market. The volatility
company has a manufacturing setup of 22 units across 6 states in India, with a Leveraging on R&D capabilities of JV
manufacturing capacity of ~0.2mn tonnes yarn and 170mn meters of fabric. partners to aid realisations
Export franchise Chinas slide floats the VTEX boat
Exports revenues (~40% of overall revenues) have been expanding at ~29% Performance
CAGR over the last five years vs domestic revenue CAGR of ~10%. Export
250
revenues in grew by more than 26% YoY CAGR over the last 2 years due to: (a)
200
the erosion in competitiveness of Chinese players; and (b) long-term
150
relationships with global players through product development and
customisation. Europe and US contribute to ~70% of exports, with the balance 100
coming from Asian countries like Vietnam, China, and Japan. Over the years, the 50
company has expanded its fabric production base more than yarn exports but it -
Sep-14
Oct-14
Jan-15
Feb-15
Apr-15
May-15
Jun-15
Jul-15
Aug-14
Dec-14
Dec-14
Mar-15
Aug-15
continues to sell yarn to intermediate exporters.
Export strategy - No change and waiting for global/local cues
Improving yarn realisation (due to changes in Chinese cotton and yarn policy) Sensex Vardhman
and INR depreciation strengthened the companys exports profitability. The
management acknowledges that the reversal of the Chinese (Cotton and Yarn) Source: Bloomberg, Ambit Capital research
policy would impact the global textile market. The management believes that the
impact on the company would be moderate due to the higher proportion of
specialised value-added yarns and improved product mix in favour of fabrics.
However, the company operates in a commodity-like segment with high
competition from domestic and international players, leading to an inability to
fully pass on input cost inflation. Capital allocation to business segments will be
driven by market share considerations and global demand-supply.
After stellar performance in FY14, revenue growth and margins dropped in FY15
due to lower yarn realisation in the export market and cotton inventory loss. The
management expects the operating margin to be at 19-23% over the next two
years on the back of: (a) stable cotton prices (leading to lower inventory write-
offs); and (b) increasing contribution of the high-margin fabric business.
Key Financials
Net Sales 44,185 46,488 49,736 61,664 67,860
EBITDA 10,934 6,239 9,762 14,603 11,130
EBITDA (%) 24.7% 13.4% 19.6% 23.7% 16.4%
RoCE (%) 18.4% 7.1% 13.4% 19.7% 10.3% Aditya Bagul
RoE (%) 29.3% 7.5% 16.3% 27.2% 13.7% +91 22 3043 3264
P/E (x) 10.8 40.2 15.9 7.9 14.2 adityabagul@ambitcapital.com
Source: Ambit capital research
Vardhman Textiles
Exhibit 1: Raw material (RM) cost volatility leads to margin Exhibit 2: RoCE and RoE over the last five years have
cyclicality; exports drive revenue growth momentum tracked EBITDA margins
Revenues (Rs bn) RoCE RoE (RHS)

EBITDA margin % (RHS) 16% 35%
80 30% 14% 30%
70 25% 12% 25%
60 10%
50 20% 20%
8%
40 15% 15%
6%
30 10% 10%
20 4%
10 5% 2% 5%
- 0% 0% 0%
Exhibit 3: VTEXs geographical spread of exports Exhibit 4: Accelerating growth in export revenues
Export Revenues( Rs bn)

Rest of
the world, Exports as % of revenues
30%
30 50%
US, 40%
25 40%
20
30%
15
20%
10
Europe , 5 10%
30%
- 0%
Exhibit 5: VTEX has rerated by ~40% over the last year; re- Exhibit 6: VTEX has rerated by ~40% over the last year due
rating could be a function of declining earnings estimates to deleveraging (lower net debt/equity)
12 7
10 6
8 5
4
6
3
4 2
2 1
- -
Mar-10
Sep-10
Mar-11
Sep-11
Mar-12
Sep-12
Mar-13
Sep-13
Mar-14
Sep-14
Mar-15
Sep-15
Mar-10
Sep-10
Mar-11
Sep-11
Mar-12
Sep-12
Mar-13
Sep-13
Mar-14
Sep-14
Mar-15
Sep-15

VTEX stacks up at the middle of our accounting score framework with a weak cash conversion of ~61% and an
Accounting AMBER
improving (yet heavy) working capital cycle.
Given the high volatility in input costs and the diminished capabilities to pass on the cost inflation, the financial
performance has been choppy. Stability in input costs and premiumisation would lead to stable earnings.
Earnings momentum GREEN Consensus estimates have been upgraded by 15% in the past 4 weeks

Vardhman Textiles

Total net worth 22,642 22,067 25,065 31,320 33,753
Debt 27,883 25,516 28,881 29,084 19,066
Deferred tax liability 2,311 2,322 2,552 2,924 2,232
Gross block 44,185 46,614 50,454 57,950 60,963
Net block 25,370 25,779 27,040 31,538 28,753
CWIP 1,251 1,852 2,135 944 832
Investments (non-current) 824 10,094 80,493 12,572 15,772
Debtors 6,672 6,304 7,465 8,678 8,095
Inventory 19,329 15,348 17,840 21,924 19,158
Loans & advances 4,922 3,444 4,694 5,490 3,890
Provisions 508 478 643 967 1,130
Total assets 47,399 54,848 130,322 66,951 65,251

Net Sales 44,185 46,488 49,736 61,664 67,860
% growth 31.9% 5.2% 7.0% 24.0% 10.0%
EBITDA 10,934 6,239 9,762 14,603 11,130
% growth 24.7% 13.4% 19.6% 23.7% 16.4%
Depreciation 2,647 2,735 2,953 3,355 5,322
EBIT 8,287 3,504 6,809 11,248 5,808
Interest expenditure 1,077 1,736 1,771 1,762 1,597
Non-operating income 341 579 490 990 2,011
Adjusted PBT 7,551 2,347 5,528 10,476 6,222
Tax 1,876 663 1,682 2,821 1,765
Adjusted PAT 5,675 1,683 3,846 7,655 4,457
% growth 87.7% -70.3% 128.4% 99.1% -41.8%
Reported PAT after minority interest 5,253 1,414 3,564 7,183 4,002

Vardhman Textiles

Depreciation 2,647 2,735 2,953 3,355 5,322
Others 955 1,251 1,440 852 557
Tax (1,824) (573) (1,495) (2,349) (2,247)
(Incr)/decr in net working capital (9,021) 4,441 (5,097) (3,995) 4,269
Capex (net) -3,555 -4,124 -4,907 -6,503 -3,051
(Incr)/decr in investments (1,329) (2,744) (588) (1,740) (553)
Cash flow from investments -4,564 -6,468 -5,170 -7,795 -3,152
Net borrowings 5,663 -1,261 4,166 1,991 -7,326
Issuance/buyback of equity 1,967 - (158) (170) (20)
Interest paid -1,296 -1,883 -1,952 -1,666 -1,479
Dividend paid -268 -410 -407 -540 -926
Cash flow from financing 2,339 (3,551) 1,652 (386) (9,751)
Net change in cash (1,918) 133 (189) 158 1,220
Free cash flow (before investments) -3,248 6,077 -1,578 1,836 11,072
Ratio Analysis
EBITDA margin (%) 25% 13% 20% 24% 16%
EBIT margin (%) 19% 8% 14% 18% 9%
Net debt: equity (x) * 1.1 1.0 0.9 0.8 0.4
RoCE (pre-tax) (%) 14% 5% 9% 14% 7%
RoIC (pre-tax) (%) 11% 3% 7% 13% 6%
RoE (%) 29% 8% 16% 27% 14%
EPS (`) 84.0 22.6 57.0 114.9 64.0
Diluted EPS (`) 84.0 22.6 57.0 114.9 64.0
P/E (x) 10.8 40.2 15.9 7.9 14.2
P/BV (x) 2.5 2.6 2.3 1.8 1.7
EV/EBITDA (x) 7.7 13.2 8.8 5.9 6.8
EV/EBIT (x) 10.2 23.5 12.6 7.6 13.1

Himatsingka Seide Ltd
NOT RATED
COMPANY UPDATE HSS IN EQUITY September 09, 2015
Himatsingka Seide (HSS) has a strong B2B bed-sheets export franchise Textiles
with marquee clients in the US like Bed Bath & Beyond, Cosco and
Macys. The company is the sole licensee of prestigious brands like CK Recommendation
and Barbara Barry. Post the planned capacity addition/up-gradation, Mcap (bn): `16/US$0.2
the company will be able to manufacture greater proportion of high- 3M ADV (mn): `244/US$3.7
margin products and also provide greater protection against raw CMP: `170
material volatility. Key risks include high geographic concentration and
uncertainty around execution capabilities at the upgraded facility. Blue
Flags
sky scenarios include turnaround of its retailing arm Atmosphere and
addition of new brands. More than the INR depreciation, the demand Accounting: GREEN
environment/ initiatives in the US are the key things to watch out for. Predictability: AMBER
From a silks manufacturer/exporter to a home textiles retailer/exporter
HSS is a vertically integrated home textile major, focusing on the manufacture,
Catalysts
retailing and distribution of bed sheets; North America remains its key export
destination (88% of revenues). After solely focusing on silks, HSS forayed into Growth uptick post the restructuring
bed linen manufacturing (set up capacities in India) and retailing in 2007/08 by of the US business
acquiring brands and distribution in the US and Europe. This expansion and Margin uptick with high-margin
acquisition amid limited understanding of the business led to poor financial products manufactured in-house
performance up to FY11, which has since then turned around.
Current export franchise - Integrated and brand-dependent Performance
HHS generates 88%/8% of its exports revenues from US/Europe through its 250
subsidiaries (acquired in 2007): DWI Holdings (DWI) and Divatex Home Fashions 200
(Divatex) in US and Giuseppe Bellora in Europe. The company operates a B2B 150
model and has marquee clients like Bed, Bath and Beyond, Cosco and Macys. It 100
also has exclusive licensee agreements with brands like CK and Barbara Barry. 50
The company sells both branded and private label products with revenues from -
branded products contributing to ~75% of revenues. The subsidiaries procure the
Sep-14
Oct-14
Nov-14
Dec-14
Jan-15
Feb-15
Mar-15
Apr-15
May-15
Jun-15
Jul-15
Aug-14
Aug-15
finished product either from captive facilities in India or from Asian countries.
Export strategy - Expansion, backward integration and more brands Sensex Himatsingka
Over the last two years, the company restructured its front-end operations in the
US resulting in subdued growth (8%, after 20% over FY10-13). However, post the Source: Bloomberg, Ambit Capital research
restructuring, the management expects revenue growth to improve. The
company has planned capacity up-gradation and expansion in FY16 (60mn
mtrs). This will enable the company to divert higher-margin business to in-house
capacity and outsource only the low-margin products. HSS, through this process,
also plans to backward integrate into spinning, enabling reduction in raw
material cost volatility; this would increase capital intensity. The company is also
looking at adding few other brands to its ambit which suit the DNA of the
business.
Stable revenue growth (13% CAGR over FY10-15) along with improving EBITDA
margins (5% in FY09) to more than 10% in FY15 & healthy cash conversion of
90% have led to RoCEs improving to 10-12% (vs 2-3% in FY10-11). Multiple
margin levers include: (a) reduced impact of raw material cost volatility post
current capacity up-gradation/expansion; (b) higher proportion of value-added
products being manufactured in-house; and (c) operating efficiencies and
benefits of operating leverage flowing into the manufacturing operations.
Key Financials - consolidated
Net Sales 12,327 14,287 16,894 20,282 19,406
EBITDA 886 1,461 1,598 2,019 2,025
EBITDA (%) 7.2% 10.2% 9.5% 10.0% 10.4% Analyst Details
EPS (`) (1.7) 3.4 5.8 6.4 9.7 Aditya Bagul
RoCE (%) 2.6% 7.7% 8.8% 11.0% 10.9%
+91 22 3043 3264
RoE (%) -3.0% 5.2% 8.4% 8.5% 12.2%
adityabagul@ambitcapital.com
P/E (x) (101.8) 50.9 29.4 26.6 17.6
Himatsingka Seide
Exhibit 1: RM cost volatility led to margin cyclicality; Exhibit 2: RoCE and RoE over the last five years have tracked
exports drive revenue growth momentum EBITDA margins
Standalone Revenues (Rs bn)
Consol Revenue (Rs bn) RoCE RoE (RHS)
Standalone Margins (RHS)
Consol margins (RHS) 14% 15%
30 30%
12%
10% 10%
20 20%
8%
5%
10 10% 6%
4% 0%
- 0% 2%
Mar-09
Mar-10
Mar-11
Mar-12
Mar-13
Mar-14
Mar-15
0% -5%
Exhibit 3: HSSs geographical spread of exports Exhibit 4: Increasing contribution of exports
India, Others, Export Revenues( Rs bn) Retail revenue (Rs bn)

1% 2% 25 0.7
Europe,
8%
20
0.6
15
0.5
10
0.4
5
North
- 0.3
America,
88%
Exhibit 5: HSS has re-rated by more than 50% over the Exhibit 6: On EV/EBITDA, HSS is currently trading at an 28%
last 18 months on the back of improving fundamentals premium to its five-year historical average
50 14
40 12
30 10
20 8
10 6
-
4
Mar-11
Sep-11
Mar-12
Sep-12
Mar-13
Sep-13
Mar-14
Sep-14
Mar-15
Sep-15
(10)
(20) 2
(30) -
Sep-10
Sep-11
Sep-12
Sep-13
Sep-14
Sep-15
Mar-10
Mar-11
Mar-12
Mar-13
Mar-14
Mar-15
Source: Bloomberg, Ambit Capital research. Note: P/E bands arrived at Source: Bloomberg, Ambit Capital research. Note: EV/EBITDA bands arrived at
using Bloomberg consensus estimates for the respective periods using Bloomberg consensus estimates for the respective periods

In our forensic accounting model, Himatsingka scores well within the small-cap universe with strong cash
Accounting GREEN
conversion on the back of stable working capital cycle and improving fundamentals.
Given the high volatility in input costs, diminished capabilities to pass on cost inflation and high concentration risks
in the export business, the financial performance has been choppy.
Earnings momentum GREEN Consensus estimates have been upgraded by ~10% over the last 4 weeks

Himatsingka Seide

Reserves and surpluses 689 927 1,176 1,694 2,591
Total net worth 736 974 1,224 1,742 2,639
Debt 880 884 918 1,194 1,408
Deferred tax liability - - - - -
Gross block 1,540 1,613 1,638 2,374 2,625
Net block 1,223 1,228 1,172 1,812 1,882
CWIP 9 4 23 7 3
Debtors 393 318 506 531 627
Inventory 566 520 459 108 112
Loans & advances 113 144 161 263 363
Current liabilities 598 479 426 549 548
Provisions 116 158 195 313 500
Total current liabilities 714 637 621 862 1,048
Net current assets 422 710 916 1,075 2,086
Total assets 1,786 2,037 2,328 3,175 4,305

Net Sales 2,561 3,120 3,170 4,422 5,111
% growth 3.5% 21.8% 1.6% 39.5% 15.6%
EBITDA 478 594 618 968 1,707
% growth 102.8% 24.3% 4.0% 56.8% 76.3%
EBIT 409 525 532 872 1,494
Adjusted PBT 312 401 440 882 1,417
Tax 106 130 147 308 432
Adjusted PAT 206 271 294 574 985
% growth 11.5% 31.4% 8.3% 95.3% 71.7%
Reported PAT after minority interest 206 271 294 574 985

Himatsingka Seide

Net profit before tax 312 401 440 882 1,417
Others 45 42 112 102 194
Tax - - (139) (242) (364)
(Incr)/decr in net working capital (582) 114 (256) 315 (176)
Cash flow from operations -156 626 244 1,154 1,284
Capex (net) -107 -68 -48 -720 -302
Cash flow from investments -107 -68 -48 -716 -298
Net borrowings 390 -69 -5 334 271
Interest paid -130 -176 -115 -106 -192
Dividend paid -16 -22 -33 -44 -56
Cash flow from financing 244 (267) (153) 183 24
-263 558 196 433 981
investments)
Ratio Analysis
EBITDA margin (%) 7% 10% 9% 10% 10%
EBIT margin (%) 3% 6% 6% 7% 8%
Net prof. (bef min int) margin (%) -1% 2% 3% 3% 5%
Dividend payout ratio (%) -46% 7% 10% 17% 16%
Net debt: equity (x) * 1.2 1.1 0.9 0.9 0.8
RoCE (pre-tax) (%) 2% 10% 9% 12% 11%
RoIC (pre-tax)(%) -2% 4% 3% 6% 5%
RoE (%) -3% 5% 8% 8% 12%
EPS (`) (1.7) 3.4 5.8 6.4 9.7
Diluted EPS (`) (1.7) 3.4 5.8 6.4 9.7
P/E (x) (109.5) 54.8 31.6 28.6 19.0
P/BV (x) 3.5 3.2 2.9 2.4 2.3
EV/EBITDA (x) 27.6 16.6 15.2 12.4 12.3
EV/EBIT (x) 76.2 26.8 22.6 16.9 15.7

Himatsingka Seide
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
Abhishek Ranganathan, CFA Midcaps (022) 30433085 abhishekr@ambitcapital.com
Achint Bhagat, CFA 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, CFA 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, CFA 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
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
Singapore
Pramod Gubbi, CFA Director Singapore +65 8606 6476 pramodgubbi@ambitpte.com
Shashank Abhisheik Singapore +65 6536 1935 shashankabhisheik@ambitpte.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

Himatsingka Seide
Bajaj Auto (BJAUT IN, SELL)
3,000
2,500
2,000
1,500
1,000
500
0
Sep-12
Nov-12
Mar-13
May-13
Sep-13
Nov-13
Mar-14
May-14
Sep-14
Nov-14
Mar-15
May-15
Sep-15
Jan-13
Jul-13
Jan-14
Jul-14
Jan-15
Jul-15
BAJAJ AUTO LTD

Bharat Forge (BHFC IN, NOT RATED)
1,500
1,000
500
0
Sep-12
Sep-13
Sep-14
Sep-15
Nov-12
Jan-13
Mar-13
May-13
Jul-13
Nov-13
Jan-14
Mar-14
May-14
Jul-14
Nov-14
Jan-15
Mar-15
May-15
BHARAT FORGE LTD Jul-15
Balkrishna Industries (BIL IN, SELL)
1,000
800
600
400
200
0
Sep-12
Sep-13
Sep-14
Sep-15
Nov-12
Jan-13
Mar-13
May-13
Jul-13
Nov-13
Jan-14
Mar-14
May-14
Jul-14
Nov-14
Jan-15
Mar-15
May-15
Jul-15
BALKRISHNA INDUSTRIES LTD

Sundram Fasteners (SF IN, NOT RATED)
250
200
150
100
50
0
Sep-12
Nov-12
Mar-13
May-13
Sep-13
Nov-13
Mar-14
May-14
Sep-14
Nov-14
Mar-15
May-15
Sep-15
Jan-13
Jul-13
Jan-14
Jul-14
Jan-15
Jul-15
SUNDRAM FASTENERS LTD

Himatsingka Seide
Cummins India (KKC IN, SELL)
1,500
1,000
500
0
Sep-12
Nov-12
Mar-13
May-13
Sep-13
Nov-13
Mar-14
May-14
Sep-14
Nov-14
Mar-15
May-15
Sep-15
Jan-13
Jul-13
Jan-14
Jul-14
Jan-15
Jul-15
CUMMINS INDIA LTD
AIA Engineering (AIAE IN, SELL)
1,400
1,200
1,000
800
600
400
200
0
Sep-12
Sep-13
Sep-14
Nov-12
Jan-13
Mar-13
May-13
Jul-13
Nov-13
Jan-14
Mar-14
May-14
Jul-14
Nov-14
Jan-15
Mar-15
May-15
AIA ENGINEERING LTD Jul-15
PI Industries (PI IN, BUY)
800
600
400
200
0
Sep-12
Nov-12
Mar-13
May-13
Sep-13
Nov-13
Mar-14
May-14
Sep-14
Nov-14
Mar-15
May-15
Sep-15
Jan-13
Jul-13
Jan-14
Jul-14
Jan-15
Jul-15
PI INDUSTRIES LTD
Atul Ltd (ATLP IN, NOT RATED)
2,000
1,500
1,000
500
0
Sep-12
Nov-12
Jan-13
Mar-13
May-13
Jul-13
Sep-13
Nov-13
Jan-14
Mar-14
May-14
Jul-14
Sep-14
Nov-14
Jan-15
Mar-15
May-15
Jul-15
Sep-15
ATUL LTD

Himatsingka Seide
Aarti Industries (ARTO IN, NOT RATED)
500
400
300
200
100
0
Sep-12
Sep-13
Sep-14
Sep-15
Nov-12
Jan-13
Mar-13
May-13
Jul-13
Nov-13
Jan-14
Mar-14
May-14
Jul-14
Nov-14
Jan-15
Mar-15
May-15
Jul-15
AARTI INDUSTRIES LIMITED

Indo Count Industries(ICNT IN, NOT RATED)
1,200
1,000
800
600
400
200
0
Sep-12
Sep-13
Sep-14
Sep-15
Nov-12
Jan-13
Mar-13
May-13
Jul-13
Nov-13
Jan-14
Mar-14
May-14
Jul-14
Nov-14
Jan-15
Mar-15
May-15
INDO COUNT INDUSTRIES LTD Jul-15
Kitex Garments (KTG IN, NOT RATED)
1,200
1,000
800
600
400
200
0
Sep-12
Nov-12
Jan-13
Mar-13
May-13
Jul-13
Sep-13
Nov-13
Jan-14
Mar-14
May-14
Jul-14
Sep-14
Nov-14
Jan-15
Mar-15
May-15
Jul-15
Sep-15
KITEX GARMENTS LTD
Vardhman Textiles (VTEX IN, NOT RATED)
1,200
1,000
800
600
400
200
0
Sep-12
Sep-13
Sep-14
Sep-15
Nov-12
Jan-13
Mar-13
May-13
Jul-13
Nov-13
Jan-14
Mar-14
May-14
Jul-14
Nov-14
Jan-15
Mar-15
May-15
Jul-15
VARDHMAN TEXTILES LTD

Himatsingka Seide
Himatsingka Seide (HSS IN, NOT RATED)
250
200
150
100
50
0
Sep-12
Nov-12
Mar-13
May-13
Sep-13
Nov-13
Mar-14
May-14
Sep-14
Nov-14
Mar-15
May-15
Sep-15
Jan-13
Jul-13
Jan-14
Jul-14
Jan-15
Jul-15
HIMATSINGKA SEIDE LTD

Himatsingka Seide
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
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Ambit Economy&Strategy ExportThematic 09sept2015

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ECONOMY &

Sundaram Fasteners Kitex Garments

Balkrishna Industries Vardhman Textiles

Indias top light industrial export plays

Gaurav Mehta, CFA Bhargav Buddhadev Aditya Bagul

Section 1: The macroeconomic backdrop4

Section 2: Identifying export-oriented sectors..15

Section 3: Auto and Auto Ancillaries .17

Section 4: Capital goods and light industrials .20

Section 5: Textiles ..21

Section 6: Specialty Chemicals 26

Bharat Forge (NOT RATED)..37

Balkrishna Industries (SELL)..41

Sundram Fasteners (NOT RATED) ..45

Cummin India (SELL) .49

AIA Engineering (SELL) ..53

PI Industries (BUY) .57

Atul Industries (NOT RATED) 61

Aarti Industries (NOT RATED) ..65

Indo Count Industries (NOT RATED) ..69

Kitex Garments (NOT RATED)..73

Vardhman Textiles (NOT RATED) 77

Himatsingka Seide (NOT RATED)81

September 09, 2015 Ambit Capital Pvt. Ltd. Page 2

Section 1: The macroeconomic backdrop

2,500 2,343 100%

Furthermore, in terms of the composition of Indias exports, manufactured goods

100% 1600 1507.6

September 09, 2015 Ambit Capital Pvt. Ltd. Page 4

Whilst Indias merchandise exports franchise currently appears nascent as compared

Force #1: The beginning of the end of Chinas

September 09, 2015 Ambit Capital Pvt. Ltd. Page 5

Japan Second file of nations* Third file of nations**

September 09, 2015 Ambit Capital Pvt. Ltd. Page 6

Source: CEIC, Ambit Capital research Source: Ambit Capital research

September 09, 2015 Ambit Capital Pvt. Ltd. Page 7

0.8% 0.6% 0.5%

imports over specified

1990s 2000-08 2008-13 2000-08 2008-12

September 09, 2015 Ambit Capital Pvt. Ltd. Page 8

60% 51% 54%

Apr 2010 to Aug 2015 Apr 2007 to Aug 2015

Source: CEIC, Ambit Capital research

More importantly, as the Chinese Government began to revalue its undervalued

September 09, 2015 Ambit Capital Pvt. Ltd. Page 9

Apr 2010 to Aug 2015 Apr 2007 to Aug 2015

Source: CEIC, Ambit Capital research

September 09, 2015 Ambit Capital Pvt. Ltd. Page 10

Export Volume Index

Export Volume Index

KRW/USD (Left Scale) Export Volume Index (Right Scale)

RMB/USD (Left Scale)

September 09, 2015 Ambit Capital Pvt. Ltd. Page 11

Thus, cross-country experience clearly points to the power of currency

Exposure to Developed Countries Currency Competitiveness

Quality of Internal Infrastructure Government Policy Support

Source: Industry, Ambit Capital research

An East-Asia style secular uptick in Indias manufactured exports is likely to materialise

September 09, 2015 Ambit Capital Pvt. Ltd. Page 12

Whilst it is evident that India is capturing a share of Chinas manufactured exports

September 09, 2015 Ambit Capital Pvt. Ltd. Page 13

Trade balance by FY90-FY00 FY01-FY08 FY09-FY15

September 09, 2015 Ambit Capital Pvt. Ltd. Page 14