Ambit Coffee Can 2017

STRATEGY
November 2017
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Quality Premium
R E W A R D
The Coffee Can Portfolio 2017

Research Analysts
Prashant Mittal, CFA Aadesh Mehta, CFA Sudheer Guntupalli Nikhil Pillai
prashant.mittal@ambit.co aadesh.mehta@ambit.co sudheer.guntupalli@ambit.co nikhil.pillai@ambit.co
Tel: +91 22 3043 3218 Tel: +91 22 3043 3239 Tel: +91 22 3043 3203 Tel: +91 22 3043 3265
Pankaj Agarwal, CFA Abhishek Ranganathan, CFA Ashvin Shetty, CFA

pankaj.agarwal@ambit.co
Saurabh.Mukherjea@ambit.co abhishek.r@ambit.co ashvin.shetty@ambit.co
Tel: +91 22 3043 3206 Tel: +91 22 3043 3085 Tel: +91 22 3043 3285
Strategy
CONTENTS
The Coffee Can Portfolio 2017 3
Executive Summary .4
The case for a Coffee Can Portfolio .10
Framework and results from back-tests ..14
Patience with Quality is the Holy Grail 19
Todays Coffee Can for 2017-2027 .26
Performance of live Coffee Can portfolios 28
Appendix 1: How the Coffee Can is different to our .31

other portfolio constructs
Appendix 2: Performance of last 14 back tested Coffee Can portfolios .33
Appendix 3: John Kays IBAS framework .52
Appendix 4 .57
COMPANIES
HDFC Bank (SELL) 61
HCL Technologies (SELL) .67
Lupin (NOT RATED) ..73
LIC Housing Finance (SELL) 81
Page Industries (BUY) ..87
GRUH Finance (NOT RATED) ..101
Amara Raja (NOT RATED) .107
Abbott India (NOT RATED) ..113
Astral Poly (NOT RATED) ..121
Dr Lal PathLabs (NOT RATED) ..129
Cera Sanitaryware (NOT RATED) 135
REPCO Home Finance (NOT RATED) .141
Saurabh.Mukherjea@ambit.co
November 17, 2017 Ambit Capital Pvt. Ltd. Page 2
Strategy
THEMATIC November 17, 2017
The Coffee Can Portfolio 2017 Coffee Can Portfolio 2017

Company Name Ambit Stance
In this years Coffee Can thematic, we highlight how combining patience
HDFC Bank Our stance: SELL
(of staying invested in Indian stocks) with quality (offered by the Coffee
Can companies) is the holy grail of investing. We show that holding a Mcap (US$ bn): 72.6 ADV - 6m (US$ mn): 40.1
Coffee Can Portfolio (CCP) untouched for 10 years generates the best HCL Technologies Our stance: SELL
returns with minimal risk. The 2017 Coffee Can portfolio contains familiar Mcap (US$ bn): 19 ADV - 6m (US$ mn): 23.1
names like HDFC Bank, HCL Tech., Lupin, Page, Astral, Cera and LIC Lupin Our stance: NR
Housing - with Abbott India being the new entrant this year.
Mcap (US$ bn): 5.9 ADV - 6m (US$ mn): 36.5
The case for a Coffee Can Portfolio
LIC Housing Fin. Our stance: SELL
The Coffee Can construct hinges on investing in high-quality franchises (which
have a superior track record of financial performance over the preceding decade)
for a very long period of time a decade to be precise. The virtues of such a Page Industries Our stance: BUY
construct include: (a) significantly raising the probability of making returns; (b) Mcap (US$ bn): 3.9 ADV - 6m (US$ mn): 4.4
reducing transaction costs by avoiding churn; (c) allowing the power of GRUH Finance Our stance: NR
compounding to work its magic; and (d) removing the negatives of noise.
Mcap (US$ bn): 2.7 ADV - 6m (US$ mn): 2
Back-tests prove the potential of the CCP to beat the benchmark
Amara Raja Batt. Our stance: NR
Both on a live basis as well as in back-tests, 16 out of 17 iterations of the Coffee
Can Portfolio have handsomely outperformed the Sensex as well as broader
market indices, such as the BSE200 index. Further, for investors who seek Abbott India Our stance: NR
deployment of fresh funds received every year, we showcase how the IRR Mcap (US$ bn): 1.5 ADV - 6m (US$ mn): 0.3
achieved from investing fresh inflows in the subsequent years Coffee Can Astral Poly Our stance: NR
portfolio is almost 9% higher vis--vis the Sensex index. Mcap (US$ bn): 1.4 ADV - 6m (US$ mn): 0.9
Patience with Quality is the holy grail of investing Dr Lal Pathlabs Our stance: NR
In last years (hyperlink) Coffee Can report we highlighted that even as Coffee
Can Portfolios (CCP) beat the Sensex over a shorter duration of five years, the
alpha is much higher if you stay put for a longer duration of 10 years. We analyze Cera Sanitaryware Our stance: NR
this point and highlight how combining the patience of staying invested in Indian Mcap (US$ bn): 0.7 ADV - 6m (US$ mn): 0.4
markets (which improves risk-adjusted returns as the holding period increases) Repco Home Fin Our stance: NR
with quality of investments generates the best returns with least risk. Mcap (US$ bn): 0.5 ADV - 6m (US$ mn): 2.4
Todays Coffee Can for 2017-2027
Source: Bloomberg, Ambit Capital Research
Six stocks from the previous CCP do not make it to this years portfolio: Asian
Paints, Britannia, Cadila, eClerx, Axis Bank & Relaxo. The fresh addition to this
years portfolio is Abbott India. Whilst we do not advocate annual rebalancing of
the portfolio, clients interested in 2017 CCP should refer to exhibit on the right.
Coffee Can Portfolios have consistently outperformed the Sensex
All-cap All-cap CAGR Outperformance
Kick-off year
CCP (start) CCP (end) return relative to Sensex
2000 500 3,831 22.6% 6.6%
2001 600 9,802 32.2% 11.7%
2002 800 7,709 25.4% 5.1%
2003 900 10,175 27.4% 7.2%
2004 1,000 16,849 32.6% 12.7%
2005 900 6,643 22.1% 6.0%
2006 1,000 6,376 20.4% 9.0%
2007 1,500 9,027 19.6% 10.3%
2008 1,100 6,759 21.4% 9.6%
2009 1,100 6,510 23.7% 11.5%
2010 700 3,167 22.8% 12.1%
2011 1,400 3,558 15.8% 4.7%
2012 2,200 7,502 25.7% 11.1%
2013 1,800 6,608 34.8% 19.8%
2014 1,600 2,902 22.1% 14.6% Research Analyst
2015 2,000 2,841 19.0% 5.7%
2016 1,700 2,142 26.0% -2.5% Prashant Mittal, CFA
Source: Bloomberg, Ambit Capital research. Note: Full 10 year TSR (Total Shareholder Return) calculation is done for the +91 22 3043 3218
periods from 2000 2007 (starting 30th June). For periods after 2007, TSR calculation is performed till 7th November 2017
( this is excluding live portfolios for 2014, 2015 & 2016 for which CAGR returns and absolute returns have been calculated prashant.mittal@ambit.co
since these portfolios were launched in Nov 14, Nov'15 and Nov 16 respectively).
Ambit Capital and / or its affiliates do and seek to do business including investment banking with companies covered in its research reports. As a result, investors should be aware that Ambit Capital
may have a conflict of interest that could affect the objectivity of this report. Investors should not consider this report as the only factor in making their investment decision.
Strategy
Executive Summary
We first introduced the Coffee Can Portfolio in our 17 November 2014 thematic: The
Indian Coffee Can Portfolio for investors who have the ability to hold stocks for very
long periods of time (i.e. for ten years or more). The Coffee Can construct essentially
hinges on investing in quality franchises with superior long-term historical track
records of financial performance over longer periods of time.
We believe at the portfolio level, there are four factors that work in favour of the
Coffee Can construct. These are:
Higher probability of returns over the long term: Over longer periods of
time (for example, the last 30 years), the Sensex has returned ~15% CAGR. That
said, there have been intermittent periods of unusually high drawdowns. For
example, an investor entering the market near the peak in early January 2008
would have lost over 60% of value in just about fourteen months of investing.
Thus, whilst over longer time horizons, the odds of profiting from equity
investments are very high; the same cannot be said of shorter time horizons.
A longer time horizon allows the power of compounding to work its
magic: Holding a portfolio of stocks for periods as long as 10 years or more
allows the power of compounding to play out its magic. Over the longer term, the
portfolio gets dominated by the winning stocks whilst underperforming stocks
keep declining and eventually become inconsequential. Thus, the positive
contribution of the winners disproportionately outweighs the negative
contribution of the losers to eventually help the portfolio compound handsomely.
Neutralising the negatives of noise: Empirically, investing and holding for
the long term has been the most effective way of killing noise that interferes
with the investment process.
Using Page Industries illustration in the note we show that one of the reasons the
Coffee Can construct works well is because the ability to hold on to a great
franchise for a long period of time allows you to let fundamentals drive your
investment decision rather than noise.
No churn: Finally, the Coffee Can construct allows an investor to hold a portfolio
of stocks for over 10 years without any churn. With no churn, the Coffee Can
approach reduces transaction costs which add to the overall portfolio
performance over the long term.
Laying a framework for constructing the Indian Coffee Can Portfolio

To identify stocks for our Coffee Can Portfolio, we start with the basic principles of
investing. At the very basic level, a company doing well would mean that it is
profitable and is growing. These twin filters of growth and profitability, in our view,
are sufficient to assess the success of a franchise.
We, therefore, select stocks with a long-term track record of delivery on revenue
growth and RoCE. For financial services stocks, we modify these filters slightly and
look for a long-term track record of delivery on loan book growth and RoE.
Note that research suggests a combination of superior RoCE and revenue growth has
been a winner in the Indian context (see exhibit 1 below):

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Exhibit 1: A combination of superior RoCE and revenue growth is a winner in the

Indian context*
12.0% Average outperformance: 10-year CAGR
10.0% 9.6%
8.0%
6.7%
6.0%
4.1%
4.0%
2.0%
0.0%
Superior on sales growth Superior on RoCE Superior on Both
Source: Bloomberg, Ambit Capital research. Note:*The universe is 2007s BSE200 firms (ex-financials);
performance relative to the BSE200 Index; the chart is based on price data from 31 March 2007 to 31 March
2017. The red bars denote the 10-year share price performance of top quartile stocks on revenue growth, RoCE
as well as a combination of both from the BSE200 universe.
For the Coffee Can Portfolio, we therefore look for firms that have delivered a
minimum pre-tax RoCE of 15% or more and sales growth of at least 10% or more
over ten consecutive years. For financial services stocks, we seek to identify firms that
have delivered a minimum RoE of 16% and loan book growth of at least 10% or more
for ten consecutive years.
Back-test proves the potential of the Coffee Can construct to beat the
benchmark
Using the filters discussed above, we run back-tests of the framework for each of the
last 17 years. Results from our back-test suggest that in 16 out of 17 iterations, the
Coffee Can portfolios have comprehensively outperformed the benchmark Sensex
index both on an absolute as well as on a risk-adjusted basis.
Further, even if we were to use broader market indices, such as the BSE200 index, 16
out of 17 iterations of the Coffee Can portfolios still beat the benchmark BSE200
index quite comprehensively.
Performance of the live Coffee Can Portfolio launched in form 2014-16
We launched our maiden Coffee Can Portfolio for investors in our 17 November
2014 thematic: The Indian Coffee Can Portfolio (to be held from 2014-2024). We
followed this up with the two more Coffee Can Portfolios in 02 November 2015
thematic: The Coffee Can Portfoliothe coffee works! and 17 November16
thematic: The Coffee Can Portfolio 2016
Since publication in November 2014, the first Coffee Can Portfolio has generated
total returns of 22% (on a CAGR basis) vs total returns of 8% for the benchmark
Sensex index since initiation. The Coffee Can Portfolio launched in 2015 has
generated total returns (CAGR) of 19% vs total returns of 13% for the benchmark
Sensex index since initiation. The Coffee Can Portfolio launched in 2016 has
generated total returns (CAGR) of 26% vs total returns of 29% for the benchmark
Sensex index since initiation.
That said, from one CCP to the next, these portfolios have witnessed a churn of 30-
35%. With reasonably high levels of churn, the obvious question one would ask is
whether to rebalance the 2014, 2015 and 2016 portfolios to include stocks that
feature in this years iteration?
We advise investors to refrain from rebalancing the Coffee Can portfolios. A Coffee
Can Portfolio that is rebalanced every year underperforms the Coffee Can Portfolio
that is left untouched for a decade by ~3.7% points (on a median basis; in CAGR
terms, see exhibit below):

Strategy
Exhibit 2: Share price CAGR returns over 10-year periods for CCP with and without
rebalancing
2000- 2001- 2002- 2003- 2004- 2005- 2006- 2007- Median
2010 2011 2012 2013 2014 2015 2016 2017 CAGR
CCP without
rebalancing 19.3% 28.5% 22.4% 25.4% 30.8% 20.5% 18.4% 18.9% 21.5%
CCP with rebalancing 18.5% 22.6% 22.0% 17.0% 18.7% 13.5% 11.2% 12.7% 17.8%
Difference (w/o minus
with rebalancing) 0.8% 5.9% 0.4% 8.4% 12.0% 6.9% 7.2% 6.2% 3.7%
Source: Bloomberg, Ambit Capital Research Note: Dates refer to the first year and last year of the ten-year
holding period. Performance has been measured over a 10-year period starting from June of the first year and
ending with June of the last year.
Patience with Quality is the Holy Grail of investing

While we have advocated a minimum holding period of ten years for the Coffee Can
Portfolio to realize its true potential, one of the questions several investors have
asked us is how do the returns as well as risk profile fare over a shorter period of
time (such as five years)?
Results from our analysis reveal that in 15 out of the last 17 iterations, the Coffee
Can Portfolio handsomely outperformed the benchmark Sensex index over a shorter
time horizon (i.e. five years). However, that does not imply that investors should shift
to a duration of five years for their investments. Our analysis suggests for the Coffee
Can construct to work its magic, the portfolio should be left untouched for a decade.
A portfolio at the end of, say, 5 years (and rolling over funds from the exiting stocks
to fresh stocks that make it to the Coffee Can Portfolio in year five) results in ~3.3%
points lower alpha for the portfolio vs keeping the portfolio untouched for a decade.
We analyze this point further by combining analysis, covered in our 22 Dec16 note
The peculiar distribution of equity returns in India and 25 Jan17 note The free lunch
in Indian equities with the results for Coffee Can portfolios. In these notes we
highlighted how the risk-adjusted returns pattern in India is clearly in favour holding
on for periods of more than 5 years. However, once you combine patience with
quality something that we proxy using our Coffee Can portfolios, the risk-adjusted
returns are even better. The exhibits below highlight how the risk-adjusted returns
improve for the market (median returns improves while standard deviation declines)
as one moves towards longer holding horizons. Further, if one was to hold on to
quality companies (as in the CCP) the risk-adjusted profile improves further.
Exhibit 3: Combining Patience with Quality of investing (using Sensex as proxy for market) is the holy grail
50%
= Sensex
1 Yr
40% Coffee Can Portfolios
Staying invested for 1 Yr
longer period
Standard Deviation
improves median
30% returns for Sensex
whilst reducing risk
Combining patience with
20% quality (through CCP) further
3 Yr improves risk-adjusted returns 3 Yr
5 Yr
10%
5 Yr
10 Yr
10 Yr
0%
8% 13% 18% 23% 28%
Returns (median)
-10%
Source: Bloomberg, Ambit Capital Research Note: The returns have been computed since Jan86 for the Sensex and since Jun00 for the CCP on a weekly rolling
basis. For the CCP, every June we shift to the new portfolio being launched that year

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Todays Coffee Can Portfolio for 2017-27

Having discussed the virtues of the Coffee Can construct and establishing the ideal
life for a Coffee Can Portfolio, we screen the entire spectrum of listed companies with
market-cap greater than `1bn using our twin filters of growth and profitability.
The list of firms that makes it to this years edition of our Coffee Can Portfolio has
been summarized in the exhibit on the next page. The Coffee Can continues to
feature some of Indias most successful franchises as well as the most-compelling
investment themes. Using John Kays IBAS (Innovation, Brand, Architecture and
Strategic Assets) framework, we evaluate these companies in the ensuing sections of
the note. Appendix 3 of the note gives you more colour regarding John Kays IBAS
framework.

Strategy
Exhibit 4: Summary of the 2017 Coffee Can Portfolio

Free Float ADV-6m Greatness
Mcap P/E P/B RoCE*
Company Ticker Mcap (Median) Accounting Score Ambit Comments
Decile Stance
($mn) ($mn) ($mn) (%) FY17 FY18E FY17 FY18E FY17
HDFCB Credible execution track record driving consistent high earnings

HDFC Bank 72,487 53,641 31.0 N/A N/A SELL 31.9 26.6 5.2 4.6 1.8
IN growth while maintaining asset quality
We see the competitive advantages built by the company in IMS &

HCL ES at risk because of its recent aggression into end of life IP
HCLT IN 19,272 7,516 18.1 D2 92% SELL 14.6 14.0 3.8 3.3 27.7
Technologies products. In addition, service line oriented organization structure is
a key negative
Lupin has championed the art of business evolution (from plain

oral solids to complex generics) without compromising on
profitability and stakeholder interests. However, now the company
Lupin LPC IN 5,849 3,100 26.0 D9 92% NR is facing threats in US business because of quality issues at 14.8 20.6 2.8 2.5 13.3
facilities delaying launches and channel consolidation in USA
leading to base business erosion. India and Japan offer some
support though
LICs support is key strategic asset. But earnings momentum would

LIC Housing Fin. LICHF IN 4,545 2,727 17.6 N/A N/A SELL decline due to moderating real estate prices, competitive 15.2 14.3 2.6 2.3 1.4
headwinds and asset quality risks
Page can grow at 24% CAGR over the next decade led by
womens innerwear, leisurewear and kidswear. Disciplined
category selection (only knits), tough to displace shelf space and
Page Industries PAG IN 3,532 1,731 3.1 D1 79% BUY 86.2 69.5 34.5 28.4 41.7
brand sweating will only boost dominance. Valuation of 55x
FY19E EPS only partly captures blend of Hanes-like dominance
and high/visible growth ramp
Best play in affordable housing due to innovative credit scoring,

GRUH Finance GRHF IN 2,684 1,101 1.7 N/A N/A NR 58.6 49.0 15.6 13.5 2.4
strong local knowledge and support of the parent HDFC
Emerged as credible competitor to Exide driven by

Amara Raja Batt. AMRJ IN 1,790 859 4.9 D4 67% NR cost/technological advantages. However, market share gains to 24.3 23.0 4.5 3.9 19.7
slow down as Exide wakes up from its complacent past
Abbott trading at a 10-15% discount to peers is justified due to no

novel product launches, over dependence on legacy business and
Abbott India BOOT IN 1,471 368 0.2 D1 83% NR compromised minority interest. Excess cash on the books of the 34.6 26.6 6.9 5.9 21.4
parent and lack of focus in building the business, we believe
multiples signal a likely delisting candidate.
Over last decade Astrals sales and EPS has grown at 35% and
31% CAGR and can grow at similar rate over the next decade as
Astral Poly ASTRA IN 1,400 560 0.5 D1 42% NR 62.9 50.3 10.7 9.0 16.8
the company builds on its brand and architecture to become an
ace building materials brand from a premium pipes brand

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Free Float ADV-6m Greatness

Mcap P/E P/B RoCE*
Company Ticker Mcap (Median) Accounting Score Ambit Comments
Decile Stance
($mn) ($mn) ($mn) (%) FY17 FY18E FY17 FY18E FY17
Sales growth of mid-to-high teens with steady margins and return

ratios will continue led by investment in growth in the form of
reference and satellite labs, expanding the test palette and
Dr Lal Pathlabs DLPL IN 1,026 123 0.9 D2 75% NR reasonable price hikes. Stocks valuation at 35x FY19E consensus 43.0 38.6 10.1 8.3 26.5
P/E is justified given that Dr Lal combines the higher growth
potential of the consumer discretionary sector at the economics of
the consumer staples sector.
Ceras high RoCE (Median FY13-FY17: 29%) despite increasing

competition keeps its valuations elevated. Improving product
Cera
CRS IN 684 308 0.2 D6 54% NR portfolio, increasing presence in premium and mass market and 45.7 37.7 8.6 7.2 18.4
Sanitwaryware
the launch of home upgrade division can strengthen the brand
and growth rates
Strong positioning in affordable housing in South India due to

REPCO local area knowledge and an innovative origination strategy.
Repco Home Fin 550 341 1.8 N/A N/A NR 19.6 17.3 3.1 2.7 2.4
IN However a weak rating profile implies that competitive advantages
are moderate
Source: Bloomberg, Capitaline, Ambit Capital Research. Note: *RoA for BFSI stocks. Market cap data as of 07 Nov17.

Strategy

The Coffee Can approach to portfolio construction
We introduced our maiden Coffee Can portfolio in our 17 November 2014 thematic:
The Indian Coffee Can Portfolio, for investors who have the ability to hold stocks for
very long periods of time (ideally for ten years or more). To recap the origins of this
construct, the term Coffee Can was coined by Robert G Kirby of Capital Guardian,
who in his 1984 note (click here for the note) narrated an incident involving his
clients husband who had purchased stocks recommended by Kirby in US$5000
denomination each but did not ever sell anything from the portfolio. This process led
to enormous wealth creation for the client over a period of about 10 years mainly on
account of one position transforming to a jumbo holding worth over US$800,000
which came from a zillion shares of Xerox. Impressed by this approach of buy and
forget followed by this gentleman, Kirby coined the term Coffee Can Portfolio Robert Kirby of Capital Guardian
likening the approach to the Wild West, when Americans, before the widespread introduced the concept of Coffee
advent of banks, saved their valuables in a Coffee Can and kept it under a mattress. Can Portfolio in 1984
Why does the approach work?

The simplicity of the Coffee Can approach to portfolio construction rests in four
Four factors work in favour of the
factors that work in favour of longer investment horizons at the portfolio level: Coffee Can approach to portfolio
Higher probability of returns over the long term: As is well understood, construction
equities as an asset class are prone to extreme movements in the short term. For
example, whilst the Sensex has returned ~15% CAGR returns over the last 30
years, there have been intermittent periods of unusually high drawdowns. In Jan
08, for instance, an investor entering the market near the peak in January would
have lost over 60% of value in just about fourteen months of investing. Thus,
whilst over longer time horizons, the odds of profiting from equity investments are
very high; the same cannot be said of shorter time frames.
In his book, More than you know, Michael Mauboussin illustrates this concept
using simple math in the context of US equities. We use that illustration and apply
it in the context of Indian equities here.
We note that the Sensexs returns over the past 30 years have been ~14% on a Firstly, the probability of
CAGR basis, whilst the standard deviation of returns has been ~29%. Now using generating positive returns
these values of returns and standard deviation and assuming a normal increases disproportionately with
distribution of returns (a simplifying assumption), the probability of generating increase in holding horizons
positive returns over a one-day time horizon works out to ~51.1%.
Note, however, that as the time horizon increases, the probability of generating
positive returns goes up. The probability of generating positive returns goes up to
~68% if the time horizon increases to one year; the probability tends towards
100% if the time horizon is increased to 10 years (see Exhibit 4 below).
Exhibit 5: Probability of gains from equity investing in India increases
disproportionately with increase in holding horizon
100%
Probability of gains
90%
80%
70%
60%
50%
1 Hour 1 Day 1 Week 1 Month 1 Year 10 Year 100 Years
Years
Source: Bloomberg, Ambit Capital research. Note: This chart has been inspired by similar work done by Michael
Mauboussin in the Western context.

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Power of compounding: Holding a portfolio of stocks for periods as long as 10

years or more allows the power of compounding to play out its magic. Over the
longer term, the portfolio comes to be dominated by the winning stocks whilst
losing stocks keep declining to eventually become inconsequential. Thus, the
positive contribution of the winners disproportionately outweighs the negative
contribution of losers to eventually help the portfolio compound handsomely.
We elaborate the power of this powerful phenomenon in much greater details in
the ensuing sections of the note as well as Appendix 2 (Performance of the 14
back-tested Coffee Can Portfolio) using historical case studies. We will illustrate
the point using simple mathematics here.
Lets consider a hypothetical portfolio that consists only of two stocks. One of
these stocks, stock A, grows at 26% per annum whilst the other, say stock B,
declines at the same rate, i.e. at 26% per annum. Overall, not only do we assume
a 50-50 strike rate, we also assume symmetry around the magnitude of positive
and negative returns generated by the winner and the loser respectively.
In Exhibit 5 below, we track the progress of this portfolio over a 10-year holding
horizon. As time progresses, stock B declines to irrelevance while the portfolio Secondly, compounding results in a
value starts converging to the value of holding in stock A. Even with the assumed natural rebalancing of winners and
50% strike rate with symmetry around the magnitude of winning and losing losers in a portfolio
returns, the portfolio compounds at a healthy 17.6% per annum over this 10-year
period, a pretty healthy rate of return. This example demonstrates how powerful
compounding can be for investor portfolios if only sufficient time is allowed for it
to work its magic.
Exhibit 6: A hypothetical portfolio with 50% strike rate and symmetry around positive
and negative returns
600 10-year
CAGR
500
Stock A 26%
400
Stock B -26%
300
200
Portfolio 17.6%
100
0
0 1 2 3 4 5 6 7 8 9 10
Source: Ambit Capital research

Neutralising the negatives of noise: Empirically, investing and holding for
the long term have been the most effective way of killing noise that interferes
with the investment process. This has also been corroborated by Robert G.
Hagstrom in his recent book, Investing The Last Liberal Art (2nd edition, 2013).
In this book, the author talks about the chaotic environment, with so much
rumour, miscalculation, and bad information swirling. Such an environment was
labelled noise by Fischer Black, the inventor of the Black-Scholes formula.
Hagstrom goes on to say:
Is there a solution for noise in the market? Can we distinguish between noise
prices and fundamental prices? The obvious answer is to know the economic Thirdly, by its design, the CCP is
fundamentals of your investment so you can rightly observe when prices have indifferent to short-term trends,
moved above or below your companys intrinsic value. It is the same lesson sectors, themes, and approaches
preached by Ben Graham and Warren Buffett. But all too often, deep-rooted such as chasing earnings or
psychological issues outweigh this commonsensical advice. It is easy to say we momentum
should ignore noise in the market but quite another thing to master the
psychological effects of that noise. What investors need is a process that allows
them to reduce the noise, which then makes it easier to make rational decisions.

Strategy
As an example, we highlight how, over the long term, Page Industries stock price
has withstood short-term disappointments to eventually compound at an
impressive 30% CAGR since Mar07.
Exhibit 7: Pages stock has compounded at an impressive 30% CAGR since Mar07
25,000
Share price (in Rs)
20,000
CAGR 2.6% CAGR 4.2%
15,000
10,000
5,000 CAGR 0.7%
-
Sep-07
Sep-08
Sep-09
Sep-10
Sep-11
Sep-12
Sep-13
Sep-14
Sep-15
Sep-16
Sep-17
Mar-07
Mar-08
Mar-09
Mar-10
Mar-11
Mar-12
Mar-13
Mar-14
Mar-15
Mar-16
Mar-17
Source: Bloomberg, Ambit Capital research.
However, the chart shown above also highlights that over the past 10 years, there
have been several extended time periods when Pages share price has not gone
anywhere such as from Mar07 to Mar09, Jan15 to Jan16 and May16 to
May17. In spite of remaining flat over these periods, Page has performed so well
in the remaining six years that the 10-year CAGR for the stock is 30%. At its
simplest, this is why the concept of investing for longer time horizons works
once you have identified a great franchise and you have the ability to hold on it
for a long period time, there is no point trying to be too precise about timing your
entry or your exit. As soon as you try to time that entry/exit, you run the risk of
noise rather than fundamentals driving our investment decisions.
To further demonstrate how churn and turn destroy return, we quote again
from Investing: The Last Liberal Art by Hagstrom. In this book, the author refers
to an interesting experiment conducted by a behavioural economist at the
University of California. We reproduce the extract below:
In 1997, Terence Odean, a behavioral economist at the University of California,
published a paper titled Why do Investors Trade Too Much? To answer his question,
he reviewed the performance of 10,000 anonymous investors.
Over a seven-year period (1987-1993), Odean tracked 97,483 trades among ten
thousand randomly selected accounts of a major discount brokerage. The first thing
he learned was that the investors sold and repurchased almost 80 percent of their
portfolios each year (78 percent turnover ratio). Then he compared the portfolios to
the market average over three different time periods (4 months, 1 year and 2
years). In every case, he found two amazing trends: (1) the stocks that the investors
bought consistently trailed the market, and (2) the stocks that they sold actually
beat the market1.
Odean wanted to look deeper, so he next examined the trading behavior and
performance results of 6,465 households. In a paper titled, Trading Is Hazardous
to Your Wealth (2000), Odean, along with Brad Barber, professor of finance at
University of California, Davis, compared the records of people who traded
frequently versus people who traded less often. They found that, on average, the
most active traders had the poorest results, while those who traded the least earned
the highest returns2. The implication here is that people who might have suffered
the most from myopic loss aversion and acted upon it by selling stocks did less well
much less well than those who were able to resist the natural impulse and
instead hold their ground.
1
Terence Odean, Do investors trade too much?, American Economic Review (December
1999)
2
Terence Odean and Brad Barber, "Trading Is Hazardous to Your Wealth: The Common Stock
Investment Performance of Individual Investors," Journal of Finance 55, no. 2 (April 2000)

Strategy
No churn: Finally, by holding a portfolio of stocks for over ten years, a fund
manager resists the temptation to buy/sell in the short term. With no churn, this
approach reduces transaction costs which add to the overall portfolio
performance over the long term. We illustrate this with an example below.
Assume that you invest US$100mn in a hypothetical portfolio on 30 June 2007.
Assume further that you churn this portfolio by 50% per annum (implying that a
typical position is held for two years) and this portfolio compounds at the rate of
Sensex Index. Assuming a total price impact cost and brokerage cost of 100bps
for every trade done over a ten-year period, this portfolio would generate CAGR
returns of 18.6%. Left untouched, however, the same portfolio would have Finally, churn has a significant
generated CAGR returns of 19.7%. This implies ~8.6% of the final corpus impact on overall portfolio
(~US$52mn in value terms) is lost to churn over the ten-year period. Thus, a returns
US$100mn portfolio that would have grown to US$602mn over the ten-year
period (30 June 2007 - 30 June 2017) in effect grows to US$550mn due to high
churn.
Having built the case for a Coffee Can construct, in the next section we discuss the
framework we use to identify stocks for the Coffee Can Portfolio.

Strategy
Framework and results from back-tests

In the world of investing, a number of quantitative (or rules based) approaches have
been devised for portfolio construction. For example, Joel Greenblatts Magic
Formula and Joseph Piotroskis F-score screener are some of the well-known
approaches that can be used for portfolio construction. Even at Ambit, we use our
proprietary greatness framework to identify quality franchises that have consistently
been showing an improvement in their financial performance over a six-year period.
[Note: We have now made both our proprietary greatness and accounting
frameworks available for access to our clients using HAWK. Please contact your sales
representative if you are yet to receive your login credentials for access to the HAWK
platform.]
That said, whilst there are multiple rule-based approaches for portfolio construction,
most of these rule-based approaches usually require a periodic rebalance of the
portfolio. Thus, by virtue of limitations in their very construct they become less useful
for making designing a Coffee Can portfolio.
We, therefore, start with the basic principles of investing for our stock selection in a We start with the basic investing
Coffee Can portfolio. At the very basic level, a company doing well would mean that principles for our stock selection
it is profitable and is growing. The twin filters of growth and profitability, in our view,
are sufficient to assess the success of a franchise. Our tests of stock selection,
therefore, center around a long-term track record of delivery on revenue growth and
strong RoCE.
Exhibit 8: A combination of superior RoCE and revenue growth is a winner in the
Indian context*
12.0% Average outperformance: 10-year CAGR
9.6%
10.0%
8.0%
6.7%
6.0%
4.1%
4.0%
2.0%
0.0%
Superior on sales growth Superior on RoCE Superior on Both
Source: Bloomberg, Ambit Capital research. Note:*The universe is 2007s BSE200 firms (ex-financials);
performance relative to the BSE200 Index; the chart is based on price data from 31 March 2007 to 31 March
2017. The red bars denote the 10-yr share price performance of top quartile stocks on revenue growth, RoCE as
well as a combination of both from the BSE200 universe.
The twin filters of Coffee Can

We use RoCE (pre-tax) and revenue growth as the filters for selecting Coffee Can
stocks. Details are given below:
Pre-tax return on capital employed of 15% for each of the last ten years
Why pre-tax RoCE? Whilst management teams have a natural desire for growth
and scale, growth creates shareholder value only when the returns on capital Stocks with superior RoCE have
exceed the cost of capital. RoCE, therefore, is of utmost importance in assessing a outperformed their peers over the
firms performance. Our empirical work on the share price performance of Indian last ten-year period
companies also supports the primacy of RoCE as a share price driver (see the
exhibit above). As shown in the exhibit above, BSE200 firms (ex-BFSI) with
superior revenue growth (in the top quartile) during the 10-year period over
FY07-17 outperformed the BSE200 Index by 4.1% on a CAGR basis. However,
firms with a superior RoCE growth gave a higher outperformance of 6.7%. The
best outperformance during this period was given by firms that were superior on
both revenue growth and RoCE at 9.6%.

Strategy
Why 15%? The weighted average cost of capital (before taxes) for Indian
15% RoCE is the minimum return
companies is around 13-14% (assuming an equal mix of debt and equity; ~11%
required to beat the cost of capital
cost of debt and ~15% cost of equity). Adding the risk-free rate (7.5-8% in India)
in India
and an equity risk premium of 6-6.5% too gives a cost of capital broadly in that
range. The equity risk premium, in turn, is calculated as 4% (the long-term US
equity risk premium) plus 250bps to account for Indias rating (BBB- as per S&P).
We, thus, use 15% as a minimum because we believe that that is the bare
minimum return required to beat the cost of capital which for the vast majority of
listed companies is at least 14%.
Further, from our earlier discussions, we note that over the past 30 years, the
Sensex has delivered returns of around 15% per annum, validating our point of
view that 15% is a sensible figure to use as a minimum RoCE (pre-tax) criteria.
Revenue growth of 10% every year for each of the last ten years: Indias Very few listed companies manage
nominal GDP growth rate has averaged 14% over the past ten years (FY07-17). A to achieve a sales growth that
firm operating in India should, therefore, be able to deliver sales growth of at matches Indias nominal GDP
least 14% per annum. However, very few listed companies (only 6 out of the growth rate of 15%
~1512 firms run under our screen), have managed to achieve this! Therefore, we
reduce this filter rate modestly to 10%; i.e. we look for companies that have
delivered revenue growth of 10% per annum every year for ten consecutive years.
In summary, our filters focus on a minimum pre-tax RoCE of 15% or more and sales
growth of 10% for more over ten consecutive years.
Note: Given the recent accounting standard change from Indian GAAP to IND-AS, to
calculate the parameters above for FY16-17 we have used corresponding IND-AS
numbers.
For Financial Services stocks, we modify the filters on RoE and sales growth
as follows:
Return on equity of 16% for each of the last ten years: We prefer return on
We use RoE of 16% and loan
equity over return on assets because it is a fairer measure of the banks ability to
growth of 15% as filters to screen
generate higher income efficiently on a given equity capital base over time.
BFSI stocks
We use 16% as a minimum because we believe that is the bare minimum return
required to meet the cost of equity for Indian lenders (for the vast majority of
Indian lenders, cost of equity is at least 15%).
Loan growth of 15% every year for each of the last ten years: We believe
loan growth of 15% is an indication of a banks ability to lend over business
cycles. Strong lenders ride the downcycle better as competitive advantages
surrounding their origination, appraisal and collection process ensure that they
continue their growth profitably either through market-share improvements or
upping the ante in sectors which are resilient during a downturn.
Finally, for all the stocks considered for the Coffee Can Portfolio, we put a market- We use a market-cap threshold of
cap threshold of `1bn. India is the least liquid among the worlds 15 largest equity `1bn
markets. Thus, for institutional clients, we believe a market capitalisation of `1bn is
the bare minimum to take a position in the stock. Stocks smaller than this tend to be
illiquid and create high impact costs.
Note that whilst these twin filters of revenue growth and RoCE may appear simplistic
in nature, our approach consciously does not look for candidates with the highest
growth and highest RoCE, as reversion to mean is an accepted fact in corporate life.
Instead, we base our selection on a system of guard rails which helps us assess which
firms have what it takes to protect themselves and march ahead through good as well
as bad times. This approach is also different to that taken in our other portfolio
constructs that focus on comparatively shorter holding periods, where we are more
focused on directional progress. More details on these can be found in the Appendix
1: How the Coffee Can is different to our other portfolio constructs.

Strategy
Results from back- testing the Coffee Can portfolios

Having built a case for the Coffee Can construct and a framework for identifying We back-test the framework and
these Coffee Can stocks, we now discuss results from our back-testing of the the results are revealing
framework.
Using the twin filters of growth and profitability discussed in the previous section, we
ran back-tests of the CCP over the last seventeen years (i.e. portfolios initiated
annually from 2000 to 2016), including eight portfolios that have run their entire
course of ten-years (2000-2010, 2001-2011, 2002-2012, 2003-2013, 2004-2014,
2005-2015, 2006-2016 and 2007-2017) and nine portfolios (starting 2007) which
have not yet completed their 10 years. We also show the performance of a separate
large-cap CCP consisting solely of stocks that were in the top-100 stocks by market
cap (at the start of the period under consideration).
We have also stress-tested these results for maximum drawdown to test the strength
of the portfolio during periods of market volatility:
First, we calculate CAGR returns for each of the 17 portfolios and the
Sensex/BSE200 index;
Next, we compute the maximum drawdown (defined as the maximum drop in
cumulative returns from the highest peak to the lowest subsequent trough); and
Finally, we calculate the risk-adjusted returns; i.e. returns in excess of the risk-
free rate (assumed at 8%, comparable to the last ten year average 10-yr
Government bond yield of 7.8%) divided by the absolute maximum drawdown.
Performance of the previous Coffee Can portfolios vs Sensex using total
shareholder returns
In the exhibit below, we have shown the performance of each of the preceding 17
Coffee Can portfolios vs Sensex using the total shareholder returns (i.e. assuming
that dividends are reinvested back into the same stock on the ex-dividend date).
We summarise the results of each of these 17 iterations in the table below. For
details on the portfolio constituents, please refer to the Appendix 2.
Exhibit 9: Back-testing results of 17 iterations of the Coffee Can Portfolio (vs Sensex) using total shareholder returns
Kick-off All-cap All-cap CAGR Outperformance Large-cap Large-cap CAGR Outperformance
year* CCP (start) CCP (end) return relative to Sensex CCP (start) CCP (end) return relative to Sensex
2000 500 3,831 22.6% 6.6% 400 3,338 23.6% 7.6%
2001 600 9,802 32.2% 11.7% 300 3,622 28.3% 7.8%
2002 800 7,709 25.4% 5.1% 500 4,182 23.7% 3.3%
2003 900 10,175 27.4% 7.2% 600 7,791 29.2% 9.0%
2004 1,000 16,849 32.6% 12.7% 500 3,679 22.1% 2.1%
2005 900 6,643 22.1% 6.0% 500 2,968 19.5% 3.4%
2006 1,000 6,376 20.4% 9.0% 600 2,918 17.1% 5.7%
2007 1,500 9,027 19.6% 10.3% 1,000 4,690 16.7% 7.4%
2008 1,100 6,759 21.4% 9.6% 800 4,028 18.8% 7.0%
2009 1,100 6,510 23.7% 11.5% 900 3,534 17.8% 5.6%
2010 700 3,167 22.8% 12.1% 300 1,138 19.8% 9.2%
2011 1,400 3,558 15.8% 4.7% 400 1,076 16.8% 5.8%
2012 2,200 7,502 25.7% 11.1% 500 1,214 18.0% 3.4%
2013 1,800 6,608 34.8% 19.8% 600 1,451 22.5% 7.5%
2014 1,600 2,902 22.1% 14.6% 700 1,118 17.0% 9.5%
2015 2,000 2,841 19.0% 5.7% 1,200 1,460 10.2% -3.1%
2016 1,700 2,142 26.0% -2.5% 800 969 21.1% -7.4%

Source: Bloomberg, Capitaline, Ambit Capital research. Note: Portfolio at start denotes an equal allocation of `100 for the stocks qualifying to be in the CCP for
that year. *The Portfolio kicks off on 30th June of every year. CAGR returns for all the portfolios since 2012 have been calculated until 07 Nov17 (except for the live
portfolios for the years 2014, 2015 and 2016 for which CAGR returns and absolute returns have been calculated since these portfolios were launched in November
each year).

Strategy
The results are revealing and can be summarised as follows:

16 out of 17 CCPs comprehensively outperformed the benchmark Sensex
index.
Even the sub-set of the CCP, i.e. the large-cap version of the CCP has been
17 iterations of the CCP that we
successful in beating the Sensex on 15 out of 17 occasions.
initiated from 2000 to 2016 prove
On a risk-adjusted basis (where we define risk as maximum drawdown), 16 out of the potential of the CCP to beat the
17 iterations of the all-cap portfolio and 15 out of 17 iterations of the large- Sensex and the BSE200
cap portfolio have outperformed the Sensex.
The large-cap versions of the CCP have outperformed the all-cap versions in
2000, 2003 and 2011 (both on an absolute basis as well as risk-adjusted basis).
In the other versions, however, the all-cap version of the CCP has delivered
superior returns as compared to the respective large-cap versions on an absolute
basis.
Performance of the previous Coffee Can portfolios vs BSE200 index using
total shareholder returns
In the exhibit below, we now plot the performance of these portfolios vs broader
market indices, such as the BSE200 index. The results, however, remain the same
with 16 out of 17 all-cap Coffee Can portfolios and 15 out of 17 large-cap Coffee
Can portfolios managing to beat the benchmark BSE200 index comprehensively.
Exhibit 10: Back-testing results of 16 iterations of the Coffee Can Portfolio (vs BSE200 index)
year* CCP (start) CCP (end) return relative to BSE200 CCP (start) CCP (end) return relative to BSE200
2000 500 3,831 22.6% 5.1% 400 3,338 23.6% 6.1%
2001 600 9,802 32.2% 9.8% 300 3,622 28.3% 5.9%
2002 800 7,709 25.4% 4.9% 500 4,182 23.7% 3.2%
2003 900 10,175 27.4% 7.7% 600 7,791 29.2% 9.5%
2004 1,000 16,849 32.6% 13.4% 500 3,679 22.1% 2.8%
2005 900 6,643 22.1% 6.2% 500 2,968 19.5% 3.6%
2006 1,000 6,376 20.4% 8.1% 600 2,918 17.1% 4.9%
2007 1,500 9,027 19.6% 9.4% 1,000 4,690 16.7% 6.5%
2008 1,100 6,759 21.4% 8.3% 800 4,028 18.8% 5.7%
2009 1,100 6,510 23.7% 10.1% 900 3,534 17.8% 4.1%
2010 700 3,167 22.8% 11.1% 300 1,138 19.8% 8.2%
2011 1,400 3,558 15.8% 2.9% 400 1,076 16.8% 4.0%
2012 2,200 7,502 25.7% 8.9% 500 1,214 18.0% 1.2%
2013 1,800 6,608 34.8% 16.4% 600 1,451 22.5% 4.1%
2014 1,600 2,902 22.1% 10.8% 700 1,118 17.0% 5.7%
2015 2,000 2,841 19.0% 2.0% 1,200 1,460 10.2% -6.8%
2016 1,700 2,142 26.0% -6.3% 800 969 21.1% -11.1%
each year).
How should investors deploy fresh capital received every year?

Given the long-term buy and hold approach advocated by the Coffee Can it is only
natural that investors wonder about the approach to be followed for fresh fund
deployment that are received every year. We discussed this point in detail in our last
years Coffee Can report The Coffee Can Portfolio 2016 dated 17 Nov16.
Specifically we took into account two scenarios:
a) The fresh inflows every year are assumed to remain constant and are deployed in
next year Coffee Can portfolio. So for instance, after starting a Coffee Can
portfolio in Jun00 with `100, when an investor receives `100 more in Jun 01,
these funds are deployed in the Coffee Can Portfolio for the year 2001 (and
allowed to compound over the remaining 9 years of the initial Coffee Can). Any
dividends that were declared by any of the stocks in the initial Coffee Can
Portfolio too are deployed in the Coffee Can Portfolio for the year 2001.
The results from the analysis have been summarised in exhibit below:

Strategy
Exhibit 11: Portfolio returns assuming constant fund inflows every year
Weight in the portfolio (%):
Alpha (Portfolio
Total stocks Remaining Portfolio IRR Sensex IRR
Top 5 stocks Next 5 stocks Overall vs Sensex)
stocks
2000-10 30 62.33 23.70 13.96 100.00 29.7% 21.4% 8.3%
2001-11 31 57.78 24.44 17.79 100.00 29.5% 21.0% 8.5%
2002-12 36 53.14 26.56 20.30 100.00 25.1% 16.9% 8.2%
2003-13 46 54.65 24.29 21.05 100.00 23.3% 15.1% 8.1%
2004-14 48 53.88 17.50 28.63 100.00 25.6% 15.7% 9.9%
2005-15 50 49.15 18.10 32.76 100.00 21.6% 13.5% 8.1%
2006-16 57 46.48 15.66 37.86 100.00 19.9% 10.2% 9.7%
Average 43 53.92 21.46 24.62 100.00 25.0% 16.3% 8.7%
Median 46 53.88 23.70 21.05 100.00 25.1% 15.7% 8.3%
Source: Bloomberg, Ambit Capital research. Note: In the exhibit above we have assumed that the fresh fund inflows every year remain constant (i.e. Rs100 each
year). Exhibit reproduced without any changes from our 17 Nov16 report The Coffee Can Portfolio 2016.
One can clearly gauge from the table above that not only has each of the portfolios
delivered healthy IRR (average IRR for the seven portfolios is ~25.0%), each of the
portfolios has quite comprehensively beaten the benchmark Sensex index (with an
average outperformance of ~8.7%).
b) The fresh fund inflows every year are assumed to grow at 20% each year over the
10-year life of a particular Coffee Can Portfolio. Here we assume that after
starting Coffee Can portfolio in Jun00 with `100, when an investor receives `100
more in Jun 01, the investor receives fresh inflows of `120 (i.e. a 20% increase
over the `100 received in Jun 00), which is then invested in the Coffee Can
Portfolio for the year 2001 and is then allowed to compound over the remaining
9 years of the initial Coffee Can. Here again we assume that any dividends that
were declared by any of the stocks in the initial Coffee Can Portfolio are deployed
in the Coffee Can Portfolio for the year 2001.
The exhibit below summarises the results from our analysis.

Exhibit 12: Portfolio returns assuming fund inflows grow at 20% every year
Weight in the portfolio (%): Alpha (Portfolio
Total stocks Portfolio IRR Sensex IRR
Top 5 Next 5 Others Overall vs Sensex)
2000-10 30 55.29 23.94 20.77 100.00 29.9% 21.4% 8.4%
2001-11 31 49.65 25.15 25.20 100.00 28.3% 19.7% 8.5%
2002-12 36 45.04 25.26 29.70 100.00 23.4% 14.3% 9.1%
2003-13 46 48.16 21.75 30.09 100.00 20.4% 13.0% 7.4%
2004-14 48 45.94 15.40 38.66 100.00 24.8% 15.3% 9.6%
2005-15 50 41.37 16.58 42.05 100.00 22.4% 13.5% 8.9%
2006-16 57 38.40 16.54 45.06 100.00 20.1% 9.9% 10.2%
Average 43 46.26 20.66 33.07 100.00 24.2% 15.3% 8.9%
Median 46 45.94 21.75 30.09 100.00 23.4% 14.3% 8.9%
Source: Bloomberg, Ambit Capital research Note: In the exhibit above we have assumed that the fresh fund inflows every year increase by 20% (i.e. Rs100 at the
start of year 1, Rs120 at the start of year 2, and so on) Exhibit reproduced without any changes from our 17 Nov16 report The Coffee Can Portfolio 2016.
In this case too, portfolio IRR remains healthy at ~24.2% (vs ~15.3% for the Sensex Under both the scenarios, the
index). portfolio continues to generate
healthy IRRs vs the Sensex index
We believe the exhibits above bring out a very important aspect of the Coffee Can
construct; which is, allowing the power of compounding to work its magic is a much
more important driver of long-term returns than the most ideal stock selection itself.

Strategy
Patience with Quality is the Holy Grail

In last years Coffee Can report, The Coffee Can Portfolio 2016 dated 17 Nov16,
wed also discussed briefly how the returns as well as risk profile for the Coffee Can
Portfolio are over a shorter time horizon. In that context, we determined the
performance of Coffee Can portfolios over shorter time horizon of five years and as
the results in exhibit below showcase, even over shorter time horizons, 15 out of 17
CCPs has outperformed the benchmark Sensex index
Exhibit 13: Performance of the previous 17 iterations of the Coffee Can Portfolio over a 5-year period
year* CCP (start) CCP (end) return relative to Sensex CCP (start) CCP (end) return relative to Sensex
2000 500 1,150 18.1% 4.1% 400 925 18.2% 4.2%
2001 600 2,409 32.1% 0.9% 300 1,320 34.5% 3.3%
2002 800 4,006 38.0% -0.5% 500 2,667 39.8% 1.3%
2003 900 3,771 33.2% 1.3% 600 3,089 38.8% 6.9%
2004 1,000 3,904 31.3% 6.3% 500 1,769 28.8% 3.8%
2005 900 2,525 22.9% 1.8% 500 1,606 26.3% 5.2%
2006 1,000 2,029 15.2% 1.0% 600 1,458 19.4% 5.2%
2007 1,500 2,685 12.3% 7.5% 1,000 1,968 14.5% 9.7%
2008 1,100 2,670 19.4% 10.7% 800 1,875 18.6% 9.8%
2009 1,100 3,529 26.3% 12.5% 900 2,203 19.6% 5.8%
2010 700 1,764 20.3% 9.4% 300 708 18.7% 7.8%
2011 1,400 2,335 10.8% 0.4% 400 828 15.6% 5.2%
2012 2,200 6,651 24.8% 8.9% 500 1,165 18.4% 2.5%
2013 1,800 6,608 34.8% 16.4% 600 1,451 22.5% 4.1%
2014 1,600 2,902 22.1% 10.8% 700 1,118 17.0% 5.7%
2015 2,000 2,841 42.1% 4.8% 1,200 1,460 21.7% -15.5%
2016 1,600 2,069 29.3% -2.9% 800 969 21.1% -11.1%
each year).
While this result might lead investors to wonder why then should they keep their
money locked in for 10 years instead of five, our subsequent analysis in the report
pointed towards how results are materially better in the former case. Specifically, we
compared two scenarios,
Scenario 1- Each of the eight (2000, 2001, 2002, 2003, 2004, 2005, 2006, 2007]
completed Coffee Can portfolios are left untouched for a decade.
Scenario 2- Each of these eight (2000, 2001, 2002, 2003, 2004, 2005, 2006, 2007]
Coffee Can portfolios is allowed to compound for the first 5 years of the life of the
portfolio. At the end of year 5, the portfolio value of stocks that does not clear our
Coffee Can filters in year 5 is equally allocated to the fresh stocks that meet the
Coffee Can criteria in year 5. So, for example, from the Coffee Can Portfolio for the
year 2000, Cipla, Hero MotoCorp and HDFC continued to meet the Coffee Can
thresholds in 2005. NIIT and Swaraj Engines, however, failed to meet the Coffee Can
criteria in 2005. Hence, we allocate the portfolio value of NIIT and Swaraj Engines at
the end of year 5 equally to all the fresh stocks that meet our Coffee Can thresholds
in 2005 (in this case: Infosys, Container Corporation, Geometric, Havells India, Ind-
Swift and Munjal Showa). We repeat this exercise for the periods of 2001-11, 2002-
12, 2003-13, 2004-14, 2005-15, 2006-16 and 2007-17.
In both the scenarios we assume a total price impact cost plus brokerage cost of
100bps for every trade done over the ten-year period. The portfolio attributes under
each of the two scenarios discussed above can be seen in exhibit below:

Strategy
Exhibit 14: Performance of the Coffee Can Portfolios under the two scenarios
Scenario 1 Scenario 2 Scenario 1 vs Scenario 2
Phase Growth of `99 Growth of `99 Excess CAGR Loss of terminal
CAGR returns for CAGR returns for
invested at the start invested at the start returns under portfolio value
the portfolio the portfolio
of the period* of the period* Scenario 1 under Scenario 2
2000-10 22.6% 759 22.7% 769 -0.2% 1%
2001-11 32.2% 1,617 24.9% 913 7.4% -44%
2002-12 25.4% 954 23.3% 803 2.2% -16%
2003-13 27.4% 1,119 25.7% 976 1.8% -13%
2004-14 32.6% 1,668 28.5% 1,222 4.1% -27%
2005-15 22.1% 731 21.3% 686 0.8% -6%
2006-16 20.4% 631 13.3% 344 7.1% -45%
2007-17 19.6% 596 17.5% 496 2.2% -17%
Average 25.3% 22.1% 3.2% -21%
Source: Bloomberg, Ambit Capital research. Note: *After considering Rs1 in terms of brokerage and price impact cost.
The results from our analysis showcase how in seven out of eight iterations, the
portfolio value at the end of year 10 is higher if the initial Coffee Can Portfolio is kept Our analysis suggests for the
untouched for the decade. The more astounding thing to note is that in two of the Coffee Can construct to play its
iterations (i.e. 2001-11 and 2006-16), the portfolio value at the end of year 10 is magic, the CCP should be left
lower by 44% and 45% respectively if an investor decides to churn the portfolio in untouched for a decade
year 5.
This analysis yet again brings out the point that for the Coffee Can construct to
deliver its magic, the portfolio should be left untouched for the decade. A shorter
time horizon does not allow the power of compounding to work its magic.
Combining patience with quality generates best risk-adjusted returns
In this version of our annual Coffee Can thematic, we decided to further explore the
point on why someone should stick to investing for the long term with Coffee Can
companies. Tying up funds for 10 years is by no means an easy task and a large
majority of investors need to showcase good returns over shorter duration too in light
of extreme competition in the fund management industry. To analyze the
performance of a typical Coffee Can portfolio over durations less than 10 years then,
we first direct investors attention towards our 22 Dec16 dated note The peculiar
distribution of equity returns in India and 25 Jan17 dated note To get the free lunch
in Indian equities where we had highlighted how the risk-adjusted returns pattern in
India is clearly in favour holding on for periods of more than 5 years. The exhibits
below clearly showcase how patience with respect to investments serves investors the
best.
Exhibit 15: The BSE100s returns over a 10-year investment horizon are most likely to
beat the risk-free rate
Avg : 13%
10 Yr investment horizon
No. of observations
-1SD
+1SD 1 Yr investment horizon
120
80 -1SD Avg :17% +1SD 10 Yr horizon has a fat

right tail
1 Yr horizon has a
40
fat left tail
0
-50% -30% -10% 10% 30% 50% 70% 90% 110% 130% 150%
BSE100 returns (in %)
Source: Bloomberg, Ambit Capital Research. Note: Period under consideration is from April 1991 December
2016. Avg refers to the average. The red dotted lines represent the average, average +1standard deviation, and
average -1standard deviation for the 1-year investment horizon and the black dotted lines represent the average,
average +1standard deviation, and average -1standard deviation for the 10-year investment horizon.

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Exhibit 16: For the Nifty, the returns distributions Exhibit 17: For the Nifty, the sweet spot of risk-adjusted
normalize as the time horizon increases returns is reached around the fifteen-year mark
Median Standard deviation Sharpe (using median) Standard deviation

14% 40% 2.5 40%
The sweet spot of
35% investment horizon
13% 35%
2.0
30%
Returns (annualised)
30%
Standard Deviation
Standard deviation
12%
25%
Sharpe ratio
1.5 25%
11% 20% 20%

The region which
showcases free
lunch i.e. 15% 1.0
10% 15%
returns and risk
move in 10%
10%
9% favourable 0.5
direction together 5%
5%
8% 0%
- 0%
1 3 5 7 9 11 13 15 17 19
1 3 5 7 9 11 13 15 17 19
Years Years
Source: Bloomberg, Ambit Capital Research Note: The returns have been Source: Bloomberg, Ambit Capital Research Note: The returns have been
computed on a daily rolling basis for the Nifty50 index since July 1990 computed on a daily rolling basis for the Nifty50 index since July 1990
We take this analysis further and showcase that how once you combine patience with
quality something that we proxy using our Coffee Can portfolios, the risk-adjusted
returns are even better. The exhibits below highlight how the risk-adjusted returns
improve for the market (median returns improves while standard deviation declines)
as one moves towards longer holding horizons. Further, if one was to hold on to
quality companies (as in CCP) for the long term, the risk-adjusted profile improves
even further.
Exhibit 18: Combining patience in investing with quality of investing (using Sensex as proxy for market) is the holy grail
50%
= Sensex
1 Yr Coffee Can Portfolios
40% Staying invested for
longer period
1 Yr
improves median
Standard Deviation
returns for Sensex

whilst reducing risk
30%
Combining patience with

quality (through CCP) further
20%
3 Yr improves risk-adjusted returns
3 Yr
5 Yr
10%
5 Yr
10 Yr
10 Yr
0%
8% 13% 18% 23% 28%
Returns (median)
-10%
Source: Bloomberg, Ambit Capital Research Note: The returns have been computed since Jan86 for the Sensex and since Jun00 for the CCP on a weekly rolling
basis. For the CCP, every June we shift to the new portfolio being launched that year

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Exhibit 19: Combining patience in investing with quality of investing (using BSE200 as proxy for market) is the holy grail
50%
BSE200 index
Staying invested for a longer period Coffee Can Portfolios
improves median returns for BSE200 1 Yr
40% whilst reducing risk
Standard Deviation
1 Yr
30%
Combining patience with quality
(through CCP) further improves risk-
3 Yr adjusted returns
20%
3 Yr
10% 5 Yr
5 Yr
10 Yr
10 Yr
0%
8% 13% 18% 23% 28%
-10% Returns (median)
Source: Bloomberg, Ambit Capital Research Note: The returns have been computed since Jun94 and since Jun00 for the CCP on a weekly rolling basis. For the
CCP, every June we shift to the new portfolio being launched that year
These results are clearly spectacular and vindicate the rationale of long-term
investing. However, any smart investor would think that these results are an effect
rather than a cause. In other words, these results are obtained by performing a
critical task i.e. selecting quality companies and holding on to them for long term. So
then how does one identify such quality companies? To capture that point wed like
to direct investors attention to our 02 Nov15 dated note The Coffee Can Portfolio..
the coffee works, where we identified the common traits of those quality franchises
that have made way to Coffee Can portfolios maximum number of times (referred to
as Winners amongst winners in the note). Three traits in particular stood out with
respect to such companies - (a) obsessive focus on the core franchise instead of being
distracted by short-term gambles outside the core segment; (b) relentless deepening
of competitive moats and; (c) sensible capital allocation i.e., refraining from large
bets and returning excess cash to shareholders.
These traits manifest themselves in the form of high and stable earnings growth
trajectory for such companies. In the very same note mentioned in the paragraph
above, we also compared the capital allocation profiles (i.e. sources and uses of cash)
of the Winners amongst winners vs. the market (using Nifty as a proxy in that case).
As can be clearly seen in the charts below, the propensity of using internal cash (i.e.
cash from operations) is much higher for a typical CCP company vs. a typical
company in the market index. This in turn implies lower use of debt and resultantly
lower leverage for such companies.

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Exhibit 20: Nifty companies rely more on debt Exhibit 21: ...as compared to Winners amongst winners
5% 1%
3% CFO CFO
5% 5%
5% 7%
Debt Raised Debt Raised
Equity issued Equity issued

53%
34%
Net cash used Net cash used
82%
Dividend and Dividend and Interest
Interest received received
Source: AceEquity, Ambit Capital Research Note: Exhibit above reproduced Source: AceEquity, Ambit Capital Research Note: Exhibit above reproduced
from our 02 November 2015 thematic: The Coffee Can Portfoliothe coffee from our 02 November 2015 thematic: The Coffee Can Portfoliothe coffee
works! without changes. Data pertains to the FY05-15 period works! without changes. Data pertains to the FY05-15 period
Exhibit 22: Nifty companies pay lower dividends Exhibit 23: ...while Winners amongst winners are more
shareholder friendly on dividends
1% Net capex and 5% Net capex and

9% investments 5% investments
Debt Repayment Debt Repayment
11%
Interest paid 48% Interest paid

7%
54% 37%
Dividend paid Dividend paid
18%
Others Others
2% 3%
Source: AceEquity, Ambit Capital Research Note: Exhibit above reproduced Source: AceEquity, Ambit Capital Research Note: Exhibit above reproduced
from our 02 November 2015 thematic: The Coffee Can Portfoliothe coffee from our 02 November 2015 thematic: The Coffee Can Portfoliothe coffee
works! without changes. Data pertains to the FY05-15 period works! without changes. Data pertains to the FY05-15 period
Now for any Coffee Can company to keep growing at more than 10% year after year,
it will need to find new value accreting opportunities especially as it grows bigger in
size. Given the sharp focus of such companies on maintaining their competitive
moats, these companies do so (i.e. invest in new opportunities) without letting go of
their return on capital. This characteristic allows a typical Coffee Can company to
maintain a steady earnings growth trajectory.
These two facets (lower use of leverage and growing whilst maintaining high RoCE),
are what separates a typical Coffee Can firm from a typical firm in the market. Whilst
the latter might make use of leverage to fund its growth aspirations (even if its value
diluting in nature), a Coffee Can firm maintains a high benchmark for its capital
allocation decisions. It achieves high growth but not at the cost of return on capital.
Lower use of leverage in turn allows for lower earnings (and consequently stock)
volatility during turn in credit cycles.
The effect of such a focused business practice for these companies is visible in
anecdotal evidence of impressive growth in earnings and lower stock price volatility.
The exhibit below clearly showcases how the EPS CAGR of the CCP portfolios has
beaten the EPS CAGR for BSE200 index in 14 out of 17 instances.

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Exhibit 24: The Coffee Can Portfolios have seen higher EPS growth versus the BSE200 index in 14 out of 17 instances
30%
CCP BSE200
25%
20%
EPS growth (CAGR)
15%
10%
5%
0%
FY00-10
FY01-11
FY02-12
FY03-13
FY04-14
FY05-15
FY06-16
FY07-17
FY08-17
FY09-17
FY10-17
FY11-17
FY12-17
FY13-17
FY14-17
FY15-17
FY16-17
-5%
-10%
Source: Bloomberg, Capitaline, Ambit Capital research.
Also, a typical completed CCP (one that has run its entire course of 10 years) has
seen much lower drawdown vs. the BSE 200 index. As an example, we present below
the trajectory of Rs100 invested in BSE200 index and the Coffee Can portfolio
beginning in Jun00. The returns and drawdown profiles for rest of the completed
Coffee Cans portfolios (i.e. the ones starting in 2001 to 2007) are given in Appendix
4.
Exhibit 25: Coffee Can Portfolios suffer much lower drawdowns than the BSE200 index
900 70%
700 CCP - Max
50%
DD (RHS)
500
Maximum drawdown
Portfolio values (Rs)
30%
300 BSE200 -
10% Max DD
100
(RHS)
-100 -10% CCP (LHS)
-300
-30%
-500 BSE200
-50% (LHS)
-700
-900 -70%
Jun-00
Oct-03
Nov-00
Apr-01
Sep-01
Feb-02
Jul-02
Dec-02
May-03
Mar-04
Aug-04
Jan-05
Jun-05
Nov-05
Apr-06
Sep-06
Feb-07
Jul-07
Dec-07
May-08
Oct-08
Mar-09
Aug-09
Jan-10
Jun-10
Source: Bloomberg, Ambit Capital research. Note: The maximum drawdown is calculated as drop in value from the peak to the period concerned. For example, in
Nov08 the maximum drawdown of 59.5% denotes a drop in value of 59.5% in BSE200 index from the peak achieved in Nov07
The importance of this point with respect to the relative performance of CCP vis--vis
the aggregate market index can be gauged through a simple example. Lets say you
invest Rs100 in two stocks each A and B. Investment in Stock A goes to Rs50 in a
year while the one in stock B goes to Rs80 during a downturn. Now for Stock A to
make back the initial investment of Rs100, it will need return of 100% (50* (1+
100%) = 100) while stock B will need a return of 25% (80* (1+25%) = 100). What
this essentially implies is that in any long enough holding horizon with intermittent
periods of sharp correction, stock A will need to provide much better returns than
stock B to be able to beat the latter in end.
This extreme divergence in risk (captured through propensity of drawdown) is what
allows quality companies with low drawdown (like Stock B in above example) to keep
compounding robustly even with modest returns year after year and result in a
substantial corpus at the end of ten years. At the same time, the aggregate market

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index (like Stock A in the above example) on the back of a higher and more
prolonged drawdown is unable to garner equivalent overall returns even with some
intermittent periods of sharply high returns. This lesser risk as captured by lower
price correction and resultantly lesser required return to claw back initial investment
is an important reason why the stocks in a typical CCP tend to outperform aggregate
market indices on a long-term basis.
Combining the lower drawdown aspect with higher EPS growth trajectory for CCP
results in best of both worlds a high stock price appreciation trajectory (on the
back of high earnings growth which as we showed in our 29 Apr15 note, Can value
investors make money in India, is a primary determinant of long term returns) and
lower stock price volatility on the back of lower leverage. These two factors in
combination lead to Coffee Can portfolios outperforming the broader market year
after year.

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Todays Coffee Can for 2017-2027

Introducing the Coffee Can candidates for 2017-2027
We screened Indias listed universe of non-BFSI stocks with a market capitalisation of
more than `1bn that have delivered 10% sales growth and 15% RoCE (pre-tax) every
year for the past year. The list is mentioned in the exhibit below.
Exhibit 26: The shortlisted firms with superior RoCE (pre-tax) and sales growth over Coffee Can 2017-2027 continues
the last ten years (FY07-17) to feature some of Indias most-
Share price performance Mcap FY18 successful franchises as well as the
Superior on both Ticker
(ten-year CAGR rel. to Sensex) (%) (US$bn) P/E
most-compelling investment
HCL Technologies HCLT IN 20% 19.0 13.9
themes
Lupin LPC IN 28% 5.9 21.2
Page Industries PAG IN 48% 3.9 76.5
Amara Raja Batteries AMRJ IN 44% 1.9 25.1
Abbott India BOOT IN 25% 1.5 26.4
Astral Poly ASTRA IN 52% 1.4 50.6
Dr Lal Pathlabs DLPL IN N/A 1.1 39.6
Cera Sanitary. CRS IN 48% 0.7 37.7
Source: Bloomberg, Capitaline, Ambit Capital research; Note: Share price performance has been measured over
a ten-year period (i.e. 31 March 2007 to 31 March 2017). In case of firms with a shorter listing history, the
performance has been measured over the shorter period (not less than 3 years). * Market-cap as on 7th
November 2017. Dr. Lal PathLabs was not listed throughout the ten-year period and hence the financial data
used is based on Draft Red Herring Prospectus as provided by Capitaline, for periods prior to its IPO.
From our previous Coffee Can Portfolio, stocks like Asian Paints, Britannia, Cadila,
eClerx, Axis Bank and Relaxo do not find a place in this years Coffee Can.
The only new addition this year is Abbott India.
We run a similar filter for Indias listed BFSI stocks with a market-cap of more than
`1bn and: (a) an RoE of 16%; and (b) loan growth of 15% for every consecutive year Only 5 BFSI stocks meet our
for the past ten years. The firms clearing this filter are shown in the exhibit below. screening filters
Exhibit 27: The very short list of the BFSI firms with superior RoE and loan book
growth (over FY07-17)
Share price performance
Mcap FY18
Superior on both Ticker (Ten year CAGR rel. to Sensex)
US$bn) P/E
(%)
HDFC Bank HDFCB IN 22% 72.6 26.7
LIC Housing Finance LICHF IN 36% 4.5 14.3
GRUH Finance GRHF IN 40% 2.7 50.1
Repco Home Finance REPCO IN 15% 0.5 17.2
Muthoot Capital Serv MTCS IN 25% 0.1 24.0
Source: Bloomberg, Capitaline, Ambit Capital research; Note: Share price performance has been measured over
a ten-year period (i.e. 31 March 2007 to 31 March 2017). In case of firms with a shorter listing history, the
performance has been measured over the shorter period (not less than 3 years). *Market-cap as on 7th
November 2017. Repco Home Finance was not listed throughout the ten-year period and hence the financial
data used is based on Draft Red Herring Prospectus as provided by Capitaline, for periods prior to its IPO.
From the above list, we exclude Muthoot Capital Services due to its size and liquidity.
It is striking that this year we have a very short list of stocks that pass our filters only
8 non-BFSI stocks and only 5 BFSI stocks. The last time the Coffee Can Portfolio had
so few stocks was in 2011.

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Exhibit 28: Stocks that featured in the CCP last year but did not make it to this years
iteration of the CCP
Company Reasons for exclusion
Asian Paints delivered a sales growth of 7.6% in FY17 (using IND-AS numbers for FY16
Asian Paints and FY17); hence does not clear the Coffee Can filter on ten consecutive years of sales
growth in excess of 10%
Britannia delivered a sales growth of 7.8% in FY17 (using IND-AS numbers for FY16 and
Britannia Inds. FY17); hence does not clear the Coffee Can filter on ten consecutive years of sales
Cadila's sales have been flat in FY17 (using IND-AS numbers for FY16 and FY17); hence
Cadila Health. does not clear the Coffee Can filter on ten consecutive years of sales growth in excess of
10%
Relaxo Footwear delivered a sales growth of ~1.6% in FY17 (using IND-AS numbers for
Relaxo Footwear FY16 and FY17); hence does not clear the Coffee Can filter on ten consecutive years of
sales growth in excess of 10%
eClerx delivered a sales growth of ~1.2% in FY17 (using IND-AS numbers for FY16 and
eClerx Services FY17); hence does not clear the Coffee Can filter on ten consecutive years of sales
Axis Bank delivered a loan book growth of ~10.1% in FY17 (using IND-AS numbers for
FY16 and FY17) and an RoE of ~6.8% (using IND-AS numbers for FY16 and FY17);
Axis Bank
hence does not clear the Coffee Can filter on ten consecutive years of loan book growth
of 15% and RoE in excess of 16% .
Source: Company filings, Ambit Capital research
Having identified the Coffee Can stocks for this years iteration of the Coffee Can In the ensuing sections we evaluate
Portfolio, in the ensuing sections we will evaluate each of the companies forming part the stocks that feature in this years
of our Coffee Can Portfolio using John Kays IBAS framework. CCP using John Kays IBAS
framework
John Kays IBAS framework has been discussed in greater details in Appendix 3: John
Kays IBAS Framework.

Strategy
Performance of live Coffee Can portfolios

We launched our maiden Coffee Can portfolio on 17 November 2014 titled The We have launched three Coffee
Indian Coffee Can Portfolio, We followed this up with two more portfolios revealed in Can portfolios beginning Nov14
2015 and 2016 under notes titled The Coffee Can Portfoliothe coffee works! and
The Coffee Can Portfolio 2016 respectively.
Whilst the whole premise of our Coffee Can Portfolio is based on holding the
portfolio stocks for a period of 10 years without being perturbed by the short-term
fluctuations in the share prices, a look at the performance of these portfolios suggests
that two out of these three portfolios have done extremely well vs. the Sensex. Also,
the pattern of returns in these three portfolios highlight that the benefit from Coffee
Can portfolios is realized when you hold them for longer periods
The Coffee Can Portfolio launched in 2014 has generated total returns of 22% (on a
CAGR basis) vs total CAGR returns of 8% for the benchmark Sensex index since
initiation.
The Coffee Can Portfolio launched in 2015 has generated total CAGR returns of 19% The 2014 and 2015 portfolios have
vs total CAGR returns of 13% for the benchmark Sensex index since initiation. done extremely well vs the Sensex
index
The Coffee Can Portfolio launched in 2016 has generated total CAGR returns of 26%
vs total CAGR returns of 29% for the benchmark Sensex index since initiation.
Exhibit 29: Performance of the 2014 Coffee Can Portfolio since initiation
Value at start Value at end
Company Total return
(`) (`)
CAGR
Date from/to 14-Nov-14 07 Nov 17
ITC 100 114 5%
Asian Paints 100 174 20%
Godrej Consumer 100 204 27%
Marico 100 195 25%
Ipca Labs. 100 81 -7%
Berger Paints 100 198 26%
Page Industries 100 217 30%
Balkrishna Inds 100 275 40%
eClerx Services 100 135 10%
Mayur Uniquote 100 113 4%
V-Guard Inds. 100 344 51%
HCL Technologies 100 117 5%
HDFC Bank 100 200 26%
Axis Bank 100 114 4%
City Union Bank 100 205 27%
GRUH Finance 100 218 30%
Portfolio* 1,600 2,902 22%
Sensex 100 124 8%
Outperformance 14.6%
Source: Bloomberg, Ambit Capital research. Note: * Portfolio price at start of `1,600 denotes an equal allocation
of `100 in each stock at the start of the period. Portfolio price at the end is the value of the portfolio at the end of
the period (07 Nov17). Thus, for this period, the value of the portfolio rose from `1,600 at the start to `2,902 at
the end.

Strategy
Company Value at start (`) Value at end (`) Total return
Date from/to 01-Nov-15 07-Nov-17 CAGR

ITC 100 124 11%
Lupin 100 45 -33%
Cadila Health. 100 121 10%
Britannia Inds. 100 146 20%
Marico 100 166 28%
GlaxoSmith C H L 100 93 -4%
Colgate-Palm. 100 111 5%
Amara Raja Batt. 100 76 -13%
eClerx Services 100 93 -3%
Astral Poly 100 185 36%
V-Guard Inds. 100 347 85%
Cera Sanitary. 100 176 32%
HDFC Bank 100 168 29%
Axis Bank 100 113 6%
LIC Housing Fin. 100 128 13%
Portfolio* 2,000 2,841 19%
Sensex 100 129 13%
Outperformance 5.7%
of `100 in each stock at the start of the period. Portfolio price at the end is the value of the portfolio at the end of
the period (07 Nov17). Thus, for this period, the value of the portfolio rose from `2,000 at the start to `2,841 at
the end.

Strategy
Company Value at start (`) Value at end (`) Total return
Date from/to 16-Nov-16 07-Nov-17 CAGR

Lupin 100 62 -38%
Britannia Inds. 100 156 56%
Cadila Health. 100 134 34%
Amara Raja Batt. 100 73 -27%
eClerx Services 100 92 -8%
Cera Sanitary. 100 168 68%
Relaxo Footwear 100 141 41%
HDFC Bank 100 148 48%
Axis Bank 100 113 13%
LIC Housing Fin. 100 118 18%
Dr Lal Pathlabs 100 73 -27%
Repco Home Fin 100 107 7%
Portfolio 1,700 2,142 26%
Sensex 100 129 29%
Outperformance -2.5%
of `100 in each stock at the start of the period. Portfolio price at end is the value of the portfolio at the end of the
period (07 Nov17). Thus, for this period, the value of the portfolio rose from `1,700 at the start to `2,142 at the
end.
Should investors rebalance the Coffee Can portfolios for the years 2014, 2015
and 2016?
With 6 out of last years 17 stocks not featuring in this years Coffee Can Portfolio,
the obvious question one would ask is whether to rebalance the earlier Coffee Can
Portfolio (initiated in 2016) to include the stocks figuring in this years iteration.
To answer that question, we point investors to our 02 November 2015 thematic: The We advise investors to refrain from
Coffee Can Portfoliothe coffee works! In our 02 November 2015 note, we rebalancing the Coffee Can
compared the results of a buy and hold strategy vs an annual rebalancing strategy portfolios
of the Coffee Can Portfolio over six ten-year iterations starting year 2000.
The updated results from our analysis have been reproduced in exhibit below.
Exhibit 32: Share price CAGR returns over 10-year periods for CCP with and without
rebalancing
2000- 2001- 2002- 2003- 2004- 2005- 2006- 2007- Median
2010 2011 2012 2013 2014 2015 2016 2017 CAGR
CCP without
rebalancing 19.3% 28.5% 22.4% 25.4% 30.8% 20.5% 18.4% 18.9% 21.5%
CCP with rebalancing 18.5% 22.6% 22.0% 17.0% 18.7% 13.5% 11.2% 12.7% 17.8%
Difference (w/o minus
with rebalancing) 0.8% 5.9% 0.4% 8.4% 12.0% 6.9% 7.2% 6.2% 3.7%
Source: Bloomberg, Ambit Capital Research Note: Dates refer to the first year and last year of the ten-year
holding period. Performance has been measured over a 10-yr period starting from June of the first year and
ending with June of the last year.
As can be seen in the exhibit above, the Coffee Can approach without rebalancing
has outperformed with rebalancing approach on all eight occasions. The median
CAGR for CCP without rebalancing over these six iterations was 21.5% vs 17.8% for
CCP with rebalancing. These results reaffirm the advantage of the buy and hold
approach over an annual rebalancing approach.

Strategy
Appendix 1: How the Coffee Can is

different to our other portfolio constructs
"Forever is a good holding period."
Warren Buffett
Over the years, we have developed various portfolio constructions for investors based
on their outlook. We have summarised these below:
Good and Clean (G&C): We began this portfolio in 2011. The G&C portfolios are
Our G&C portfolio is ideal for
constructed each quarter using: (i) a battery of financial tests based on the previous
investors aiming to beat
fiscal years data; and (ii) our forensic accounting model. Each G&C portfolio typically
benchmarks over the short term
runs for a quarter before we revise it. Thus, we believe this portfolio is ideal for
investors aiming to beat benchmarks over the short term. The methodology is:
Within each sector, we first identify firms that do well on our greatness and
accounting frameworks;
We then overlay our macro outlook and valuation filters to identify sectors which
are placed favourably; and
The sector-level champions from step 1 (for the sectors identified in step 2)
constitute our G&C portfolio.
Please click here for the latest G&C portfolio published on September 02, 2015.
Ten-bagger: We first unveiled this portfolio - built using our greatness framework -
in January 2012. (See our 19th January 2012 note - Tomorrows ten baggers - for
the framework behind this construct note; click here for the note.) This framework
studies a firms structural strengths by focusing not on absolutes but rather on
improvements over a period of time and the consistency of those improvements.
A basic sketch of the underlying process behind the making of a great firm has been The ten-bagger framework studies
recaptured in Exhibit below. a firm's structural strength and
Exhibit 33: The greatness framework
focuses on improvements over a
period of time and the consistency
of those improvements
a. Investment (gross b. Conversion of
block) investment to sales (asset
turnover, sales)
c. Pricing discipline (PBIT

margin)
e. Cash generation d. Balance sheet discipline

(CFO) (D/E, cash ratio)
Source: Ambit Capital Research
We rank the BSE500 universe of firms (excluding financial services firms and
excluding firms with insufficient data) on our greatness score, which consists of six
equally weighted headings investments, conversion to sales, pricing discipline,
balance sheet discipline, cash generation and EPS improvement, and return ratio
improvement. Under each of these six headings, we further look at two kinds of
improvements:

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Percentage improvements in performance over FY14-16 vs FY11-13; and

Consistency in performance over FY11-16 i.e. improvements adjusted for
underlying volatility in financial data
A complete list of factors that are considered whilst quantifying greatness has been
mentioned in Exhibit below.
Exhibit 34: Factors used for quantifying greatness
Head Criteria
1 Investments a. Above-median gross block increase (FY14-16 over FY11-13)*
b. Above-median gross block increase to standard deviation
2 Conversion to sales a. Improvement in asset turnover (FY14-16 over FY11-13)*
b. Positive improvement in asset turnover adjusted for standard
deviation
c. Above-median sales increase (FY14-16 over FY11-13)*
d. Above-median sales increase to standard deviation
3 Pricing discipline a. Above-median PBIT margin increase FY14-16 over FY11-13)*
b. Above-median PBIT margin increase to standard deviation
4 Balance sheet discipline a. Below-median debt-equity decline (FY14-16 over FY11-13)*
b. Below-median debt-equity decline to standard deviation
c. Above-median cash ratio increase (FY14-16 over FY11-13)*
d. Above-median cash ratio increase to standard deviation
Cash generation and
5 a. Above-median CFO increase (FY14-16 over FY11-13)*
PAT improvement
b. Above-median CFO increase to standard deviation
c. Above-median adj. PAT increase (FY14-16 over FY11-13)*
d. Above-median adj. PAT increase to standard deviation
6 Return ratio improvement a. Improvement in RoE (FY14-16 over FY11-13)*
b. Positive improvement in RoE adjusted for standard deviation
c. Improvement in RoCE (FY14-16 over FY11-13)*
d. Positive improvement in RoCE adjusted for standard deviation
Source: Ambit Capital research; Note: * Rather than comparing one annual endpoint to another annual endpoint
(say, FY11 to FY16), we prefer to average the data out over FY11-13 and compare that to the averaged data
over FY14-16. This gives a more consistent picture of performance (as opposed to simply comparing FY11 to
FY16).
The ten-bagger portfolio focuses on structural plays that are financially strong firms
(with credible management teams) and remain consistent performers on a cross-
cyclical basis. Companies are identified based on their relentless improvement in
financial performance over long periods of time (usually, six years). This portfolio is
ideal for conventional buy-and-hold investors with a 1-3 year horizon.
Adding the Coffee Can for long-term investors with a ten-year outlook
To this suite of portfolios, we now add the Coffee Can which is ideal for long-term
investors with a ten-year outlook. In the table below, we summarise our portfolio
recommendations for investors.
Exhibit 35: Our suite of Portfolios for investors looking to invest in India The Coffee Can Portfolio is ideal
Recommended Ambit Returns over recommended time for long-term investors with a ten-
Type of Investor
Portfolio period
year outlook
The 19 instalments of our Good &
Short-term investor with quarterly Clean portfolios over the last six years
Good and Clean Portfolio
performance focus have delivered a staggering 3.1% alpha
on a CAGR basis
The six iterations of our ten-baggers
Conventional buy-and-hold
Ten-Bagger Portfolio portfolios have generated over 10.7%
investor with 1-3 year horizon
alpha over the past six years
Long-term investor with ten-year Average alpha of 8.6% over eight- to
Coffee Can Portfolio
outlook ten-year iterations
Source: Ambit Capital Research

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Appendix 2: Performance of last 14 back

tested Coffee Can portfolios
Period 1: 2000-2010 (6.6% alpha relative to the
Sensex; 22.6% per annum absolute returns)
All-cap portfolio stocks: NIIT, Cipla, Hero MotoCorp, Swaraj Engines, HDFC
Large-cap portfolio stocks: NIIT, Cipla, Hero MotoCorp, HDFC
In the first iteration, both versions of the CCP outperformed the benchmark. Whilst
the all-cap CCP delivered a 22.6% return (6.6% alpha to the Sensex), the large-cap
portfolio delivered a 20.6% return (7.6% alpha to the Sensex). The maximum
drawdown for both the portfolios in this period was also less than the maximum
drawdown for the Sensex.
Exhibit 36: First iteration summary
2000-2010* All-cap CCP Large-cap CCP Sensex
CAGR returns 22.6% 23.6% 16.0%
Maximum drawdown** -35% -30% -56%
Excess returns 0.42 0.53 0.14
Source: Bloomberg, Ambit Capital research. Note: * Portfolio kicks off on 30 June 2000. Excess returns have been
calculated as returns in excess of risk-free rate (assumed to be 8%) divided by absolute maximum drawdown.
Maximum drawdown is defined as the maximum drop in cumulative returns from the highest peak to the lowest
subsequent trough. ** Maximum drawdown took place from December 2007 to December 2008 for the all-cap
CCP, large-cap CCP and for the Sensex.
The five stocks that constituted the first iteration of the Coffee Can Portfolio consisted
of one IT company, one pharma company, one BFSI company and two companies
from the automobile/auto-ancillary sector. These were NIIT, Cipla, Hero MotoCorp
HDFC Ltd and Swaraj Engines. The star performers during this period were Hero
MotoCorp and HDFC which proved to be a ten-bagger whilst NIIT collapsed ~74% in
this period.
Exhibit 37: Portfolio performance during the first iteration Hero Motocorp and HDFC were
Value at start Value at end Total return the star performers, whilst NIIT was
Company
(Rs) (Rs) CAGR the laggard in Period 1
Date from/to 30-Jun-00 30-Jun-10
NIIT 100 26 -13%
Cipla 100 531 18%
Hero Motocorp 100 1,499 31%
Swaraj Engines 100 493 17%
HDFC 100 1,283 29%
Portfolio 500 3,831 23%
Sensex 100 441 16%
Outperformance 6.6%
Source: Bloomberg, Ambit Capital research. Note: *Portfolio price at the start of Rs500 denotes an equal
allocation of Rs100 in each stock at the start of the period. Portfolio price at the end is the value of the portfolio
at the end of the period. Thus, for this period, the value of the portfolio rose from Rs500 at the start to Rs3,831 at
the end.

Strategy
Exhibit 38: Hero and HDFC rose exponentially whilst NIIT collapsed in 2000-2010
4,500
4,000
Value of stock in portfolio
3,500
Swaraj Engines
3,000
2,500 Hero Motocorp
(in Rs)
2,000 Cipla
1,500 NIIT
1,000 HDFC
500
-
Value at start Vaue at end
Source: Bloomberg, Ambit Capital research. Note: Value at the start denotes an equal allocation of Rs100 in each
stock at the start of the period. Value at the end is the value of each stock at the end of the period. Thus, for this
period, the value of the portfolio rose from Rs500 at the start to Rs3,831 at the end.
Period 2: 2001-2011 (11.7% alpha relative to the

Sensex; 32.2% per annum absolute returns)
All-cap portfolio stocks: Cipla, Hero MotoCorp, Apollo Hospitals, Roofit
Industries, HDFC Ltd and LIC Housing Finance
Large-cap portfolio stocks: Cipla, Hero MotoCorp and HDFC Ltd
Both versions of the CCP performed well during the second iteration as well, beating
the Sensex. The all-cap and large-cap CCP gave an impressive alpha of 11.7% and
7.8% respectively for this iteration. The portfolio was remarkably steady as compared
to the maximum drawdown, delivering an excess return of 0.66-0.72x.
Exhibit 39: Second iteration summary
CAGR returns 32.2% 28.3% 20.5%
subsequent trough. ** Maximum drawdown took place from December 2007 to November 2008 for the all-cap
CCP and the large-cap CCP and December 2007 to February 2009 for the Sensex.
During the second iteration, the Coffee Can Portfolio consisted of six stocks with three
repeats (Cipla, Hero MotoCorp and HDFC from Period 1) and three new entries
(Apollo Hospitals, Roofit Industries and LIC Housing Finance). During this period, note
that one of the stocks in the portfolio, Roofit Industries, was delisted during 2001-
2011. Despite this, the portfolio performed admirably. The star performer was LIC
Housing Finance that delivered 46.7x returns whilst Cipla was a laggard at 3.0x.
Exhibit 40: Portfolio performance during the second iteration
Value at start Value at end LIC Housing Finance was the star
(Rs) (Rs) performer delivering ~47x total
CAGR
Date from/to 30-Jun-01 30-Jun-11 returns in Period 2
Cipla 100 396 15%
Apollo Hospitals 100 1,409 30%
Roofit Inds. 100 4 -27%
HDFC 100 1,242 29%
LIC Housing Fin. 100 4,767 47%
Portfolio 600 9,802 32%
Sensex 100 646 20%
Source: Bloomberg, Ambit Capital research. Note: Value at start denotes an equal allocation of Rs100 in each
stock at the start of the period. Value at end is the value of each stock at the end of the period. Thus, for this

Strategy
Exhibit 41: LIC Housing Finances performance during 2001-2011 was stellar
12,000
10,000
LIC Housing Fin.
8,000 HDFC
(in Rs)
6,000 Roofit Inds.

Apollo Hospitals
4,000
Hero Motocorp
2,000 Cipla
-
Period 3: 2002-2012 (5.1% alpha to the Sensex; 25.4%

per annum absolute returns)
All-cap portfolio stocks: Infosys, Hero MotoCorp, Cipla, Container Corporation
of India, Gujarat Gas, Aurobindo Pharma, HDFC Ltd and LIC Housing Finance
Large-cap portfolio stocks: Infosys, Hero MotoCorp, Cipla, Container
Corporation of India, HDFC Ltd
During the third iteration, the Coffee Can delivered an alpha of 5.1% whilst the
large-cap Coffee Can delivered an alpha of 3.3%. Both versions of the Coffee Can
performed well during maximum drawdown as well, delivering excess returns of
0.43x-0.49x.
Exhibit 42: Third iteration summary
CAGR returns 25.4% 23.7% 20.3%
CCP, December 2007 to December 2008 for the large-cap CCP and December 2007 to February 2009 for the
Sensex.
The number of stocks making it to the 2002 edition of the Coffee Can Portfolio was
much higher than the previous two iterations. A total of eight stocks qualified to be
part of the Coffee Can Portfolio in the third iteration. Cipla, Hero MotoCorp, HDFC
Ltd and LIC Housing were repeated yet again whilst the other four stocks were
Infosys, Container Corporation, Gujarat Gas and Aurobindo Pharma.

Strategy
Exhibit 43: Portfolio performance during the third iteration

(Rs) (Rs)
CAGR
Infosys 100 706 22%
Cipla 100 461 16%
Container Corp. 100 740 22%
Guj Gas Company 100 763 23%
Aurobindo Pharma 100 505 18%
HDFC 100 1,237 29%
Portfolio 800 7,709 25%
Sensex 100 637 20%
Outperformance 5.1%
the end.
Exhibit 44: Portfolios outperformance was led by LIC Housing Finance once again
9,000
8,000 LIC Housing Fin.

7,000 HDFC
6,000 Aurobindo Pharma
(in Rs)
5,000
Guj Gas Company
4,000
Container Corpn.
3,000
Cipla
2,000
Hero Motocorp
1,000
- Infosys

All-cap portfolio stocks: Infosys, Hero MotoCorp, Cipla, Sun Pharma,
Container Corporation of India, Gujarat Gas, Aurobindo Pharma, HDFC Ltd,
LIC Housing Finance
Corporation of India, Sun Pharma and HDFC Ltd
Whilst the all-cap version of the Portfolio delivered a 7.2% alpha, the large-cap
version gave a higher 9% alpha in the fourth iteration. In a maximum drawdown
situation, both versions remained steady and beat the Sensex, thereby delivering
excess returns of 0.62-.0.77x.
Exhibit 45: Fourth iteration summary
Sun Pharma powered through to
be the best-performing stock in
CAGR returns 27.4% 29.2% 20.2%
Period 4
Sensex.

Strategy
Barring one addition (Sun Pharma), the Coffee Can Portfolio in its fourth iteration was
the same as that in the third iteration. Performance was driven by Sun Pharmas
stellar performance. However, the performance of the large-cap version was better
than the all-cap version of the Coffee Can Portfolio.
Exhibit 46: Portfolio performance during the fourth iteration
(Rs) (Rs)
CAGR
Infosys 100 713 22%
Cipla 100 710 22%
Hero Motocorp 100 958 25%
Sun Pharma.Inds. 100 3,381 42%
Container Corpn. 100 736 22%
Aurobindo Pharma 100 528 18%
Guj Gas Company 100 518 18%
HDFC 100 1,292 29%
Portfolio 900 10,175 27%
Sensex 100 631 20%
Outperformance 7.2%
at the end of the period. Thus, for this period, the value of the portfolio rose from Rs900 at the start to Rs10,175
at the end.
Exhibit 47: Sun Pharma delivered a stellar performance in Period 4
12,000
LIC Housing Fin.
10,000 HDFC
Guj Gas Company
8,000
Aurobindo Pharma
(in Rs)
6,000
Container Corpn.
4,000 Sun Pharma.Inds.
Hero Motocorp
2,000
Cipla
-
Infosys
Period 5: 2004-2014 (12.7% alpha to the Sensex;

32.6% per annum absolute returns)
of India, Gujarat Gas, Alok Industries, Munjal Showa and Havells India,
HDFC Ltd and LIC Housing Finance
Corporation of India and HDFC Ltd
The fifth iteration of our Coffee Can Portfolio yielded a whopping 12.7% alpha over
the Sensex. The portfolio was equally divided between large-caps and mid- The CCP delivered a whopping
caps/small-caps. The higher share of the mid-caps/small-caps vs earlier iterations 12.7% to the Sensex, in Period 5
was instrumental in delivering higher alpha during this period.

Strategy
Exhibit 48: Fifth iteration summary

CAGR returns 32.6% 22.1% 19.9%
Sensex.
The performance amongst the mid-cap/small-cap stocks was extreme: Whilst Havells
delivered ~96.7x returns, Alok Industries delivered -60% by the end of the iteration.
Given the phenomenal performance by Havells during the period, the performance of
the large-cap portfolio (22.1% CAGR) lagged that of the all-cap portfolio (32.6%
CAGR).
Exhibit 49: Portfolio performance during the fifth iteration Extreme price performance among
Company
Value at start Value at end mid-cap/small-cap stocks sets
(Rs) (Rs) Total return
CAGR
apart Period 5 from the earlier
Date from/to 30-Jun-04 30-Jun-14 iterations of the CCP
Infosys 100 547 19%
Cipla 100 561 19%
Guj Gas Company 100 1,199 28%
Alok Inds. 100 40 -9%
Munjal Showa 100 627 20%
Havells India 100 9,764 58%
HDFC 100 1,123 27%
Portfolio 1,000 16,849 33%
Sensex 100 616 20%
Source: Bloomberg, Ambit Capital research. Note: * Portfolio price at the start of Rs1,000 denotes an equal
at the end of the period. Thus, for this period, the value of the portfolio rose from Rs1,000 at the start to
Rs16,849 at the end.
Exhibit 50: Havells India was the star performer in Period 5
18,000
LIC Housing Fin.
16,000
HDFC
14,000
Havells India
12,000
Munjal Showa
(in Rs)
10,000
Alok Inds.
8,000
Guj Gas Company
6,000
4,000 Container Corpn.
2,000 Cipla
- Hero Motocorp
Value at start Vaue at end Infosys
period, the value of the portfolio rose from Rs1,000 at the start to Rs16,849 at the end.

Strategy

of India, Geometric, Havells India, Ind-Swift, Munjal Showa and HDFC Ltd
Corporation of India and HDFC Ltd
In the sixth iteration, our Coffee Can Portfolio again outperformed the Sensex with an
alpha of 6.0%. The large-cap version also outperformed the Sensex with an alpha of
3.4%. In this period, while the all-cap version generated a higher alpha than the
large-cap version on an absolute basis on a risk-adjusted basis, large-cap version
beat all-cap version mainly on account of lower maximum drawdown (excess return
of 0.41x for large-cap vs. 0.26x for all-cap). Both versions, however, continued to
perform better than Sensex on risk-adjusted basis as well.
Exhibit 51: Sixth iteration summary
CAGR returns 22.1% 19.5% 16.1%
subsequent trough. ** Maximum drawdown took place from December 2007 to February 2009 for the all-cap
CCP and Sensex; and from December 2007 to December 2008 for the large-cap CCP.
Extreme price performance among

The extreme price performance among mid-cap/small-cap stocks continued during mid-cap/small-cap stocks
this iteration as well: Havells delivered ~30.6x returns whilst Ind-Swift delivered continued in period 6
-92% returns by the end of the iteration.
Exhibit 52: Portfolio performance during the sixth iteration
(Rs) (Rs)
CAGR
Infosys 100 394 15%
Cipla 100 529 18%
Geometric 100 121 2%
Ind-Swift 100 8 -22%
HDFC 100 827 24%
Portfolio 900 6,643 22%
Sensex 100 446 16%
Outperformance 6.0%
Source: Bloomberg, Ambit Capital research. Note: * Portfolio price at the start of Rs900 denotes an equal
the end.

Strategy
Exhibit 53: Havells India continued being the star performer in sixth iteration as well
7,000
HDFC
6,000
Munjal Showa
5,000
Ind-Swift
4,000 Havells India
(in Rs)
Geometric
3,000
Container Corpn.
2,000
Cipla
1,000 Hero Motocorp
- Infosys

All-cap portfolio stocks: Infosys, Cipla, Hero MotoCorp, Container Corporation
of India, Geometric, Havells India, Suprajit Engineering, Munjal Showa, HDFC
Ltd and HDFC Bank
Corporation of India, HDFC Ltd and HDFC Bank
In the seventh iteration, our Coffee Can Portfolio has again outperformed the Sensex
with an alpha of 8.9%. The large-cap version has also outperformed the Sensex with
an alpha of 5.7%. On a risk-adjusted basis, as well, both versions beat the Sensex
with excess return of 0.25-0.28x vs. 0.06x for the Sensex.
Exhibit 54: Seventh iteration summary
CAGR returns 20.3% 17.1% 11.4%
CCP and Sensex; and from December 2007 to November 2008 for the large-cap CCP.
Mid-cap/small-cap stocks again outperformed in this period with Havells and Suprajit
Engineerings stock price rising by 13.4x and 11.9x respectively.

Strategy
Exhibit 55: Portfolio performance during the seventh iteration

(Rs) (Rs)
CAGR
Infosys 100 361 14%
Cipla 100 248 10%
Suprajit Engg. 100 1,291 29%
HDFC 100 622 20%
HDFC Bank 100 794 23%
Portfolio 1,000 6,376 20%
Sensex 100 294 11%
Outperformance 8.9%
at the end of the period. Thus, for this period, the value of the portfolio rose from Rs1,000 at the start to Rs6,376
at the end
Exhibit 56: Mid-caps outperform the large-caps in the seventh iteration

7,000
HDFC Bank
6,000 HDFC
5,000 Suprajit Engg.
Munjal Showa
(in Rs)
4,000
Geometric
3,000
Havells India
1,000 Hero Motocorp
- Cipla
Period 8: 2007-2017 (10.3% alpha to the Sensex;

All-cap portfolio stocks: Infosys, Wipro, Cipla, Tech Mahindra, Hindalco, Hero
MotoCorp, Container Corporation of India, Asian Paints, Havells India,
Geometric, Aftek, Munjal Showa, Suprajit Engineering, HDFC Ltd and HDFC
Bank
Large-cap portfolio stocks: Infosys, Wipro, Cipla, Tech Mahindra, Hindalco,
Hero MotoCorp, Container Corporation of India, Asian Paints, HDFD Ltd and
HDFC Bank
In the eighth iteration, our Coffee Can Portfolio continued its outperformance versus
the Sensex both on an absolute and risk-adjusted basis.

Strategy
Exhibit 57: Eighth iteration summary

CAGR returns 19.6% 16.7% 9.3%
CCP, large-cap CCP and for the Sensex.
In this iteration, amongst large-caps, Asian Paints led the charge with almost 14.2x
returns. Extreme movements were seen in mid-cap stocks again with stocks like
Suprajit Engineering delivering almost 24x returns whereas Aftek delivered -96%
returns.
Exhibit 58: Portfolio performance during the eighth iteration
(Rs) (Rs)
CAGR
Infosys 100 235 9%
Wipro 100 212 8%
Cipla 100 284 11%
Tech Mahindra 100 119 2%
Hindalco Inds. 100 145 4%
Asian Paints 100 1,521 31%
Aftek 100 4 -28%
Suprajit Engg. 100 2,472 38%
HDFC 100 449 16%
HDFC Bank 100 774 23%
Portfolio 1,500 9,027 20%
Sensex 100 244 9%
Source: Bloomberg, Ambit Capital research. Note: * Portfolio price at start of Rs1500 denotes an equal allocation
of Rs100 in each stock at the start of the period. Portfolio price at end is the value of the portfolio at the end of
the period. Thus, for this period, the value of the portfolio rose from Rs1500 at the start to Rs9,027 at the end
Exhibit 59: Asian Paints was the star performer in the eighth iteration
10,000
HDFC Bank
9,000 HDFC
8,000 Suprajit Engg.

Munjal Showa
7,000
Aftek
6,000 Geometric
(in Rs)
5,000 Havells India

Asian Paints
3,000 Hero Motocorp
2,000 Hindalco Inds.
Tech Mahindra
1,000 Cipla
- Wipro

Strategy
Period 9: 2008-Present (9.6% alpha to the Sensex;

All-cap portfolio stocks: Infosys, Wipro, Cipla, Asian Paints, Tech Mahindra,
Havells India, Automotive Axles, Geometric, HDFC Ltd, HDFC Bank and
Punjab National Bank
Large-cap portfolio stocks: Infosys, Wipro, Cipla, Asian Paints, Tech
Mahindra, HDFC Ltd, HDFC Bank and Punjab National Bank
Our ninth iteration that begins in June 2008 is also outperforming the Sensex with an
alpha of 9.6%. The large-cap version also beats the Sensex with an alpha of 7%. The
large-cap version on account of lower drawdown has the higher risk-adjusted return
at 0.29x vs. 0.28x for all-cap version and 0.10x for the Sensex.
Exhibit 60: Ninth iteration summary
CAGR returns 21.4% 18.8% 11.8%
subsequent trough. ** Maximum drawdown took place from July 2008 to February 2009 for the all-cap CCP,
large-cap CCP and for the Sensex.
Both large-caps and mid-caps shared the outperformance during this iteration with
Asian Paints and HDFC Bank delivering ~10x and 8.7x returns respectively whilst
Havells India is continuing its dream run with 15.2x returns.
Exhibit 61: Portfolio performance during the ninth iteration

(Rs) (Rs)
CAGR
Date from/to 30-Jun-08 07-Nov-17
Infosys 100 265 11%
Wipro 100 289 12%
Cipla 100 305 13%
Automotive Axles 100 467 18%
HDFC 100 506 19%
HDFC Bank 100 967 27%
Punjab Natl.Bank 100 306 13%
Portfolio 1,100 6,759 21%
Sensex 100 285 12%
Outperformance 9.6%
until 7thNov17.

Strategy
Exhibit 62: Large-caps and mid-caps shared outperformance in this iteration

8,000
Punjab Natl.Bank
7,000 HDFC Bank

6,000 HDFC
5,000 Geometric
(in Rs)
Automotive Axles
4,000
Havells India
3,000
Tech Mahindra
2,000 Asian Paints
1,000 Cipla
- Wipro
period, the value of the portfolio rose from Rs1,100 at the start to Rs6,759 until 7thNov17.

All-cap portfolio stocks: Infosys, Wipro, Jindal Steel, Cipla, Asian Paints,
Oracle Financial Services, Tech Mahindra, Motherson Sumi, HDFC Ltd, HDFC
Bank and Punjab National Bank
Large-cap portfolio stocks: Infosys, Wipro, Jindal Steel, Cipla, Asian Paints,
Oracle Financial Services, HDFD Ltd, HDFC Bank and Punjab National Bank
In the iteration beginning in 2009, both all-cap and large-cap CCP beat Sensex
comprehensively again with alpha of 11.5% and 5.6% respectively. On a risk-
adjusted basis as well they gave a stable performance with excess returns of 0.53x-
0.74x.
Exhibit 63: Tenth iteration summary
CAGR returns 23.7% 17.8% 12.2%
subsequent trough. ** Maximum drawdown took place from July 2015 to February 2016 for the all-cap CCP; and
December 2010 to December 2011 for the large-cap CCP and Sensex.

Strategy
Motherson Sumi was the star performer in this iteration with the stock price rising
~26x during this period.
Exhibit 64: Portfolio performance during the tenth iteration
(Rs) (Rs)
CAGR
Infosys 100 255 12%
Wipro 100 333 15%
Jindal Steel 100 40 -11%
Cipla 100 252 12%
Oracle Fin.Serv. 100 375 17%
Motherson Sumi 100 2,695 48%
HDFC Bank 100 648 25%
HDFC 100 424 19%
Portfolio 1,100 6,510 24%
Sensex 100 261 12%
until 7thNov17.
Exhibit 65: Motherson Sumi was the star performer in this iteration
7,000 Punjab Natl.Bank

6,000 HDFC
HDFC Bank
5,000
Motherson Sumi
4,000 Tech Mahindra
(in Rs)
Oracle Fin.Serv.
3,000
Asian Paints
2,000 Cipla
1,000 Jindal Steel
Wipro
-
Infosys

Strategy

All-cap portfolio stocks: Asian Paints, Amar Remedies, Motherson Sumi, Tulip
Telecom, HDFC Bank, Punjab National Bank and Dewan Housing Finance
Large-cap portfolio stocks: Asian Paints, HDFC Bank and Punjab National
Bank
In this iteration, our Coffee Can Portfolio outperformed the Sensex with an alpha of
12.1%. The large-cap version also beat the Sensex with an alpha of 9.2%, but on
account of a lower maximum drawdown has the higher risk-adjusted return at 0.59x
vs. 0.57x for all-cap version and 0.11x for the Sensex.
Exhibit 66: Eleventh iteration summary

CAGR returns 22.8% 19.8% 10.6%
subsequent trough. ** Maximum drawdown took place from October 2010 to August 2013 for the all-cap CCP;
June 2011 to December 2011 for the large-cap CCP and December 2010 to December 2011 for the Sensex.
The performance of the portfolio in this iteration was led by Motherson Sumi (~12.7x
returns). In spite of suspension of trading in two of the constituent stocks through the
period (Amar Remedies and Tulip Telecom), the portfolio gave a stellar performance
with ~23% CAGR returns.
Exhibit 67: Portfolio performance during the eleventh iteration
(Rs) (Rs)
CAGR
Amar Remedies 100 8 -29%
Motherson Sumi 100 1,378 43%
Tulip Telecom 100 1 -47%
HDFC Bank 100 501 24%
Dewan Hsg. Fin. 100 643 29%
Portfolio 700 3,167 23%
Sensex 100 211 11%
Source: Bloomberg, Ambit Capital research. Note: * Portfolio price at the start of Rs700 denotes an equal
allocation of Rs100 in each stock at the start of the period. Data for Amar Remedies and Tulip Telecom is not
available because the companies were suspended during this period. Portfolio price at the end is the value of the
portfolio at the end of the period. Thus, for this period, the value of the portfolio rose from Rs700 at the start to
Rs3,167 until 7thNov17.

Strategy
Exhibit 68: Motherson Sumi again was the star performer in this iteration
3,500
3,000 Dewan Hsg. Fin.

2,000 HDFC Bank
(in Rs)
1,500 Tulip Telecom

Motherson Sumi
1,000
Asian Paints
500
Amar Remedies
-
period, the value of the portfolio rose from Rs700 at the start to Rs3,167 until 7thNov17. Data for Amar Remedies
and Tulip Telecom is not available because the companies were delisted during this period.

All-cap portfolio stocks: ITC, Asian Paints, Motherson Sumi, Ipca, Tulip
Telecom, Zylog Systems, Pratibha industries, Unity Infra, Amar Remedies,
Setco Automotive, HDFC Bank, Punjab National Bank, Dewan Housing and
City Union Bank
Large-cap portfolio stocks: ITC, Asian Paints, HDFC Bank and Punjab
National Bank
In the twelfth iteration also the Coffee Can portfolio is outperforming the Sensex with
an alpha of 4.7%. The large-cap version continued its outperformance in this iteration
as well, beating both the all-cap version and the Sensex on both absolute and risk-
adjusted return measures.
Exhibit 69: Twelfth iteration summary
CAGR returns 15.8% 16.8% 11.1%
subsequent trough. ** Maximum drawdown took place from April 2012 to August 2013 for the all-cap CCP, July
2011 to December 2011 for the large-cap CCP and February 2015 to February 2016 for the Sensex.
Extreme price performance among mid-cap/small-cap stocks was seen during this
iteration. Motherson Sumis stock price rose 7.8x during this period whilst Zylog
Systems lost 98% of its value.

Strategy
Exhibit 70: Portfolio performance during the twelfth iteration

(Rs) (Rs)
CAGR
ITC 100 219 13%
Motherson Sumi 100 881 41%
Ipca Labs. 100 165 8%
Tulip Telecom 100 1 -52%
Zylog Systems 100 2 -46%
Pratibha Inds. 100 15 -26%
Unity Infra. 100 10 -30%
Setco Automotive 100 219 13%
HDFC Bank 100 380 23%
Portfolio 1,400 3,558 16%
Sensex 100 195 11%
Outperformance 4.7%
allocation of Rs100 in each stock at the start of the period. Data for Amar Remedies and Tulip Telecom is not
available because the companies were suspended during this period. Portfolio price at the end is the value of the
portfolio at the end of the period. Thus, for this period, the value of the portfolio rose from Rs1,400 at the start to
Rs3,558 until 7thNov17. Data for Amar Remedies and Tulip Telecom is not available because the companies
were suspended during this period.
Exhibit 71: Extreme price performance was seen in mid/small-caps in this iteration
4,000 City Union Bank
Dewan Hsg. Fin.
3,500
Punjab Natl.Bank
3,000 HDFC Bank
Setco Automotive
2,500
(in Rs)
Amar Remedies
2,000 Unity Infra.
1,500 Pratibha Inds.
Zylog Systems
1,000 Tulip Telecom
500 Ipca Labs.
Motherson Sumi
- Asian Paints
Value at start Vaue at end ITC
period, the value of the portfolio rose from Rs1,400 at the start to Rs3,558 until 7thNov17. Data for Amar
Remedies and Tulip Telecom is not available because the companies were suspended during this period

Strategy
Period 13: 2012- Present (11.1% alpha to the Sensex;

All-cap portfolio stocks: ITC, Asian Paints, Marico, Opto Circuits, Ipca Labs,
Berger paints, Page Industries, Balkrishna Industries, Grindwell Norton,
Zylog Systems, Tecpro Systems, Pratibha Industries, Astral Poly Technik,
Amar Remedies, Unity Infra, Setco Automotive, HDFC Bank, Axis Bank,
Punjab National Bank, Allahabad Bank, Dewan Housing and City Union
Bank
Large-cap portfolio stocks: ITC, Asian Paints, HDFC Bank, Axis Bank and
Punjab National Bank
In the iteration beginning June 2012, the all-cap version again came to the fore,
beating both the Sensex and the large-cap CCP on both absolute basis and risk-
adjusted basis.
Exhibit 72: Thirteenth iteration summary
CAGR returns 25.7% 18.0% 14.6%
subsequent trough. ** Maximum drawdown took place from December 2012 to August 2013 for the all-cap CCP,
May 2013 to August 2013 for the large-cap CCP and from February 2015 to February 2016 for the Sensex.
With 22 companies making the cut in this iteration, this was the biggest Coffee Can
portfolio in terms of number of constituent companies. Astral Poly Technik was the
star performer in this iteration with ~16.3x increase in the stock price. Zylog Systems
and Tecpro Systems, on the other hand, lost almost their entire value with a drop of
99% and 97% in their stock price.
Exhibit 73: Portfolio performance during the thirteenth iteration
(Rs) (Rs)
CAGR
ITC 100 169 10%
Marico 100 368 28%
Opto Circuits 100 5 -43%
Ipca Labs. 100 156 9%
Grindwell Norton 100 416 30%
Zylog Systems 100 1 -56%
Tecpro Systems 100 3 -49%
Astral Poly 100 1,729 70%
Setco Automotive 100 160 9%
HDFC Bank 100 336 25%
Axis Bank 100 273 21%
Allahabad Bank 100 58 -10%
Portfolio 2,200 7,502 26%
Sensex 100 208 15%
allocation of Rs100 in each stock at the start of the period. Data for Amar Remedies is not available because the
company was suspended during this period. Portfolio price at the end is the value of the portfolio at the end of
the period. Thus, for this period, the value of the portfolio rose from Rs2,200 at the start to Rs7,502 until
7thNov17.

Strategy
Exhibit 74: Astral Poly Technik outperformed other stocks in this iteration
City Union Bank
Allahabad Bank

Axis Bank
6,000 HDFC Bank
Setco Automotive
Unity Infra.
5,000 Amar Remedies
(in Rs)
Astral Poly
Tecpro Systems
3,000 Zylog Systems
Grindwell Norton
2,000 Balkrishna Inds
Page Industries
Berger Paints
1,000 Ipca Labs.
Opto Circuits
- Marico
Asian Paints
Period 14: 2013- Present (19.8% alpha to the Sensex;

All-cap portfolio stocks: ITC, HCL Technologies, Asian Paints, Marico, Berger
Paints, Ipca, Page Industries, Balkrishna Industries, Solar Industries, Astral
Poly Technik, Pratibha Industries, Unity Infra, Sarla Performance Fibers,
HDFC Bank, Axis Bank, Indian Bank, City Union Bank and Dewan Housing
Large-cap portfolio stocks: ITC, HCL Tech, Asian Paints, Marico, HDFC Bank,
Axis Bank
This iteration beginning in June 2013 has given the best results thus far with a
whopping return of 34.8% on a CAGR basis. Sensex over the same period has
generated a CAGR of 14.9% whereas the large-cap portfolio has generated a CAGR
of 22.5%.
Exhibit 75: Fourteenth iteration summary
CAGR returns 34.8% 22.5% 14.9%
CCP, from July 2015 to February 2016 for the large-cap CCP and from February 2015 to February 2016 for the
Sensex.
Mid-cap stocks led the performance of the profile in this iteration with some of the
stocks prices rising 3-4 times since the beginning of this portfolio in June 2013. These
stocks included names like Balkrishna Industries, Dewan Housing Finance, Astral Poly
Technik, Solar Industries and Page Industries. Unity Infraprojects, Pratibha Industries
and Ipca Labs on the other hand are amongst stocks that lost value in this period.

Strategy
Exhibit 76: Portfolio performance during the fourteenth iteration

(Rs) (Rs)
CAGR
ITC 100 132 7%
Marico 100 324 31%
Ipca Labs. 100 85 -4%
Solar Inds. 100 590 50%
Sarla Performance 100 394 37%
HDFC Bank 100 281 27%
Axis Bank 100 209 18%
Indian Bank 100 346 33%
Portfolio 1,800 6,608 35%
Sensex 100 183 15%
until 7thNov17.
Exhibit 77: Mid-caps led the charge in this iteration generating most of portfolio value
City Union Bank
6,000 Indian Bank

Axis Bank
5,000 HDFC Bank
Sarla Performanc
Unity Infra.
(in Rs)

Astral Poly
3,000 Solar Inds.
Balkrishna Inds
2,000 Page Industries
Ipca Labs.
1,000 Berger Paints
Marico
- Asian Paints
HCL Technologies

Strategy
Appendix 3: John Kays IBAS framework

I dont want an easy business for competitors. I want a business with a moat around it.
I want a very valuable castle in the middle and I want the duke who is in charge of that
castle to be very honest and hardworking and able. Then I want a moat around that
castle. The moat can be various things. The moat around our auto insurance business,
GEICO, is low cost.
Warren Buffett
I always try and spend the last few minutes to touch on a competitor, or a company
they do business with, such as a supplier or a customer. Although not all managements
will talk about other companies, when they do, it can be very revealing. The ultimate
commendation is when a company talks positively about a competitor. I always put a
strong weight on such a view.
Anthony Bolton, the legendary fund manager who ran the Fidelity Special Situations
fund
Sustainable competitive advantages allow firms to add more value than their rivals Sustainable competitive
and to continue doing so over long periods of time. But where do these competitive advantages allow firms to add
advantages come from? And why is it that certain firms seem to have more of these value and continue doing so over
advantages than others? long periods
In his 1993 book, Foundations of Corporate Success, John Kay, the British economist
and Financial Times columnist, wrote more comprehensibly and clearly about this
than any other business guru. John states that sustainable competitive advantage is
what helps a firm ensure that the value that it adds cannot be competed away by its
rivals. He goes on to state that sustainable competitive advantages can come from
two sources: distinctive capabilities or strategic assets. Whilst strategic assets can be
in the form of intellectual property (patents and proprietary know-how), legal rights
(licenses and concessions) or a natural monopoly, the distinctive capabilities are more
intangible in nature.
Distinctive capabilities, says Kay, are those relationships that a firm has with its
customers, suppliers or employees, which cannot be replicated by other competing
firms and which allow the firm to generate more value additions than its competitors.
He further divides distinctive capabilities into three categories:
Brands and reputation John Kays framework focusses on
Innovation, Brands,
Architecture
Architecture and Strategic Assets
Innovation as sources of sustainable
competitive advantage
Let us delve into these in more detail, as understanding them is at the core of
understanding the strength of a companys franchise.
Brands and reputation
"A product can be quickly outdated, but a successful brand is timeless."
Stephen King, American novelist, author & TV Producer
In many markets, product quality, in spite of being an important driver of the
purchase decision, can only be ascertained by a long-term experience of using that A product can be quickly
product. Examples of such products are insurance policies and healthcare. In many outdated, but a successful brand is
other markets, the ticket price of the product is high; hence, consumers are only able timeless
to assess the quality of the product only after they have parted with their cash. A few
examples of such products would be cars and high-end TVs.
In both these markets, customers use the strength of the companys reputation as a
proxy for the quality of the product or the service. For example, we gravitate towards
the best hospital in town for critical surgery and we tend to prefer world-class brands
whilst buying expensive home entertainment equipment. Since the reputation for
such high-end services or expensive electronics takes many years to build, reputation
tends to be difficult and costly to create. This in turn makes it a very powerful source
for a competitive advantage.

Strategy
For products that we use daily, we tend to be generally aware of the strength of a
firms brand. In more niche products or B2B products (e.g. industrial cables, mining
equipment, municipal water purification, and semiconductors), investors often do not
have first-hand knowledge of the key brands in the relevant market. In such
instances, to assess the strength of the brand, they turn to:
Brand recognition surveys conducted by the trade press.
The length of the warranties offered by the firm (the longer the warranties, the
more unequivocal the statement it makes about the firms brand).
The amount of time the firm has been in that market (egg. Established 1905 is
a fairly credible way of telling the world that since you have been in business for
over a century, your product must have something distinctive about it).
How much the firm spends on its marketing and publicity (a large marketing
spend figure, relative to the firms revenues, is usually a reassuring sign).
How much of a price premium the firm is able to charge vis-a-vis its peers.
One way to appreciate the power of brands and reputation to generate sustained
profits and, hence, shareholder returns is to look at how Indias most-trusted brands,
according to an annual Economic Times survey, have fared over the last decade. As
can be seen in the table below, over the past decade, the listed companies with the
most powerful brands have comfortably beaten the most widely acknowledged
frontline stock market index by a comfortable margin on revenues, earnings and
share price movement.
Exhibit 78: Performance of listed companies with the most-trusted brands
Listed companies with the most-
10-year Growth (FY04-14) (% CAGR)**
# Company Trusted Brands* trusted brands have beaten the
Revenues EPS Share price***
benchmark index on revenues,
Colgate-
1
Palmolive
Colgate (1) 14 17 27 earnings and share price
Clinic Plus (4), Lifebuoy performance
Hindustan
2 (10), Rin (12), Surf (13), 10 8 15
Unilever
Lux (14), Ponds, etc
Maggi (9), Nestle Milk
3 Nestle 15 16 23
Chocolate (62), etc
GSK
4 Horlicks (16) 15 21 33
Consumer
5 Bharti Airtel Airtel (18) 33 18 15
Average for the listed companies with
18 16 22
the top 5 brands
For the index, Nifty 12 13 14
Source: Economic Times and Ambit Capital analysis using Bloomberg data. Note: * Figures in brackets indicate
the rank in the 2012 Economic Times brand equity survey to find the 100 most-trusted brands in India. ** The
FY14 data is based on Bloomberg consensus as on 7 April 2014. *** Share price performance has been
measured from Mar-04 to Mar-14
Architecture
A dream you dream alone is only a dream. A dream you dream together is reality.
John Lennon
Architecture refers to the network of contracts, formal and informal, that a firm has Architecture refers to the network
with its employees, suppliers and customers. Thus, architecture would include the of contracts, formal and informal,
formal employment contracts that a firm has with its employees and it would also that a firm has with its employees,
include the more informal obligation it has to provide ongoing training to its suppliers and customers
employees. Similarly, architecture would include the firms legal obligation to pay its
suppliers on time and its more informal obligation to warn its suppliers in advance if
it were planning to cut production in three months.
Such architecture is most often found in firms with a distinctive organisational style or
ethos, because such firms tend to have a well-organised and long-established set of
processes or routines for doing business. So, for example, if you have ever taken a
home loan in India, you will find a marked difference in the speed and
professionalism with which HDFC processes a home loan application as compared to
other lenders. The HDFC branch manager asks the applicant more specific questions
than other lenders do and this home loan providers due diligence on the applicant
and the property appears to be done more swiftly and thoroughly than most other
lenders in India.

Strategy
So, how can an investor assess whether the firm they are scrutinising has architecture
or not? In fact, whilst investors will often not know the exact processes or procedures
of the firm in question, they can assess whether a firm has such processes and
procedures by gauging the:
extent to which the employees of the firm co-operate with each other across
various departments and locations.
rate of staff attrition (sometimes given in the Annual Report).
extent to which the staff in different parts of the firm give the same message
when asked the same question.
extent to which the firm is able to generate innovations in its products or services
or production processes on an ongoing basis.
At the core of successful architecture is co-operation (within teams, across various HDFC and GCMMF are the most
teams in a firm and between a firm and its suppliers) and sharing (of ideas, striking demonstrations of
information, customer insights and, ultimately, rewards). Built properly, architecture architecture in India
allows a firm with ordinary people to produce extraordinary results.
Perhaps the most striking demonstration of architecture in India is the unlisted non-
profit agricultural co-operative, Gujarat Cooperative Milk Marketing Federation Ltd
(GCMMF), better known to millions of Indians as Amul.
With its roots stretching back to Indias freedom movement, GCMMF was founded by
the legendary Verghese Kurien in 1973. This farmers co-operative generated
revenues of `137bn (around US$2.1bn) in FY13, thus making it significantly larger
than its main private sector competitor, Nestle (FY13 revenues of `91bn or around
US$1.5bn). Furthermore, GCMMFs revenues have grown over the past five years by
21% as opposed to Nestles 16% over the same period. In fact, GCMMFs revenue
growth is markedly superior to the vast majority of the top Indian brands shown in
Exhibit 92.
GCMMFs daily milk procurement of 13 million litres from over 16,000 village milk
co-operative societies (which include 3.2 million milk producer members) has become
legendary. The way GCMMF aggregates the milk produced by over 3 million families
into the village co-operative dairy and then further aggregates that into the district
co-operative which in turn feeds into the mother dairy has been studied by numerous
management experts.
Not only does the GCMMF possess impressive logistical skills, its marketing acumen is
comparable to that of the multinational giants cited in the table shown above: In key
FMCG product categories such as butter, cheese and packaged milk, Amul has been
the longstanding market leader in the face of sustained efforts by the multinationals
to break its dominance. GCMMF is also Indias largest exporter of dairy products.
So how does GCMMF do it? How does it give a fair deal to farmers, its management
team (which includes the alumnus from Indias best business schools), its 5,000
dealers, its 1 million retailers and its hundreds of millions of customers? Although
numerous case studies have been written on GCMMF, at the core of this co-
operatives success appears to be: (a) its 50-year old brand with its distinctive
imagery of the little girl in the polka red dotted dress; (b) the idea of a fair deal for
the small farmer and the linked idea of the disintermediation of the unfair middle
man; and (c) the spirit of Indian nationalism in an industry dominated by globe
girdling for-profit corporates.
Innovation
Learning is not compulsory neither is survival.
W Edwards Deming, American statistician, professor, author. The worlds most
famous prize for manufacturing excellence is named after him.
"Innovation distinguishes between a leader and a follower."

Steve Jobs

Strategy
Whilst innovation is often talked about as a source of competitive advantage, Whilst most talked about,
especially in the Technology and Pharmaceutical sectors, it is actually the most Innovation is also the most
tenuous source of sustainable competitive advantage as: tenuous source of sustainable
Innovation is expensive. competitive advantage
Innovation is uncertain - the innovation process tends to be a hit or miss.

Innovation is hard to manage due to the random nature of the process.
Furthermore, even when the expensive innovation process yields a commercially
useful result, the benefits can be competed away, as other firms replicate the
innovator and/or employees who have driven the innovation process tend to extract
the benefits of innovation through higher compensation.
In fact, innovation is more powerful when it is twinned with the two other distinctive
capabilities we have described above reputation and architecture. Apple is the most
celebrated example of a contemporary firm which has clearly built a reputation for
innovation (think of the slew of products from Apple over the past decade which first
changed how we access music, then changed how we perceive our phones and
finally, how we use our personal computers).
Strategic assets
In contrast to the three distinctive capabilities discussed above, strategic assets are strategic assets on the other
easier to identify as sources of competitive advantages. Such assets can come in hand are easier to identify
different guises:
Intellectual property i.e. patents or proprietary know-how (e.g. the recipe for
Cokes famous syrup which is a closely held secret and kept in the companys
museum in Atlanta, Georgia);
Licences and regulatory permissions to provide a certain service to the public,
e.g., telecom, power, gas or public transport;
Access to natural resources such as coal or iron-ore mines;
Political contacts either at the national, state or city level;
Sunk costs incurred by the first mover which result in other potential competitors
deciding to stay away from that market e.g. given that there already is a
Mumbai-Pune highway operated by IRB, it does not make sense for anyone else
to set up a competing road; and
Natural monopolies i.e. sectors or markets which accommodate only one or two
firms; for example, the market for supplying power in Mumbai is restricted to one
firm, Tata Power.
Whilst strategic assets can come in different forms, all of them result in a lower per Access to captive coal and iron ore
unit cost of production for the firm owning the asset relative to its competitors. For results in more money per tonne of
example, Tata Steels decades-old access to coal and iron-ore from its captive mines steel for Tata Steel vs its
allows it to make more money per tonne of steel produced than any other steel competitors due to lower cost of
manufacturer in India. According to Ambit Capitals analysts, on a tonne of steel production
produced, Tata Steel earns `45,000 vs `39,000 for SAIL and `38,000 for JSW Steel.
Unsurprisingly therefore among the top-50 companies by market cap in India since
the Nifty was launched in 1995, there is only one conglomerate Tata Sons - which
has had three companies which have been in the index more or less throughout this
period i.e., Tata Power, Tata Steel and Tata Motors.
Upon closer examination, the Tatas are an almost text book case of how to build The Tatas have combined
businesses which, without being the most innovative players in town, combine architecture with brand to create
architecture and brands to great effect, thereby creating robust sources of sustainable robust sources of sustainable
competitive advantages. The group seems to have created at least three specific competitive advantages
mechanisms to ensure that these sources of competitive advantage endure:
Firstly, Tata Sons, an unlisted company (owned by several philanthropic trusts
endowed by members of the Tata family), is the promoter of the major operating Tata
companies and holds significant shareholdings in these companies. Tata Sons
patient, long-term orientation in terms of building large and robust businesses
gradually has played a major role in the stability of the listed Tata businesses.

Strategy
Secondly, Tata Quality Management Services (TQMS), a division of Tata Sons, assists
Tata companies in their business excellence initiatives through the Tata Business
Excellence Model, Management of Business Ethics and the Tata Code of
Conduct. TQMS, quite literally, provides the architecture to harmonise practices in
various parts of the Tata empire.
Thirdly, Tata Sons is also the owner of the Tata name and several Tata trademarks,
which are registered in India and around the world. These are used by various Tata
companies under a license from Tata Sons as part of their corporate name and/or in
relation to their products and services. The terms of use of the group mark and logo
by Tata companies are governed by the Brand Equity and Business Promotion
Agreement entered into between Tata Sons and Tata companies.

Strategy
Appendix 4
The exhibits below highlight how the maximum drawdown for the completed Coffee
Can portfolios (beginning every year from 2001 to 2007) has been lower than the
BSE 200 index.
Exhibit 79: Coffee Can Portfolio (2001) suffered much lower drawdowns than the BSE200 index
2,000 70%
1,500 50% CCP- Max
Maximum drawdown
Portfolio value (Rs)
1,000 DD (RHS)
30%
500
10% BSE200 -
0 Max DD
-10% (RHS)
-500
CCP (LHS)
-30%
-1,000
-1,500 -50%
BSE200
-2,000 -70% (LHS)
Jun-01
Nov-01
Apr-02
Sep-02
Feb-03
Jul-03
Dec-03
May-04
Oct-04
Mar-05
Aug-05
Jan-06
Jun-06
Nov-06
Apr-07
Sep-07
Feb-08
Jul-08
Dec-08
May-09
Oct-09
Mar-10
Aug-10
Jan-11
Jun-11
Source: Bloomberg, Ambit Capital Research Note: The maximum drawdown is calculated as drop in value from the peak to the period concerned. For example in
Exhibit 80: Coffee Can Portfolio(2002) suffered much lower drawdowns than the BSE200 index
1,250 70%
50% CCP - Max
Maximum drawdown
750 DD (RHS)
30%
250 10% BSE200 -
Max DD
-250 -10% (RHS)
-30% CCP (LHS)

-750
-50%
-1,250 -70% BSE200

(LHS)
Nov-02
Apr-03
Sep-03
Feb-04
Dec-04
May-05
Mar-06
Nov-07
Apr-08
Sep-08
Feb-09
Dec-09
May-10
Mar-11
Jun-02
Jul-04
Oct-05
Aug-06
Jan-07
Jun-07
Jul-09
Oct-10
Aug-11
Jan-12
Jun-12
Nov08 the maximum drawdown of 59.5% denotes a drop in value of 59.5% in BSE200 index from the peak achieved in Nov07.

Strategy
1,500 70%
50% CCP - Max DD

1,000
(RHS)
Maximum drawdown
30%
500
BSE200 - Max
10% DD (RHS)
0
-10% CCP (LHS)
-500
-30%
-1,000 BSE200 (LHS)
-50%
-1,500 -70%
Nov-03
Sep-04
Dec-05
May-06
Nov-08
Sep-09
Dec-10
May-11
Jun-03
Apr-04
Feb-05
Jul-05
Oct-06
Mar-07
Aug-07
Jan-08
Jun-08
Apr-09
Feb-10
Jul-10
Oct-11
Mar-12
Aug-12
Jan-13
Jun-13
Exhibit 82: Coffee Can Portfolio (2004) suffered equivalent drawdown to BSE200 index
1,700 70%
CCP-
50%
Maximum drawdown
1,200 Max DD
30% (RHS)
700
10% BSE200 -
200
Max DD
-300 -10% (RHS)
-800 -30% CCP

(LHS)
-1,300 -50%
-1,800 -70% BSE200

Sep-05
Sep-10
Jun-04
Nov-04
Apr-05
Feb-06
Jul-06
Dec-06
May-07
Oct-07
Mar-08
Aug-08
Jan-09
Jun-09
Nov-09
Apr-10
Feb-11
Jul-11
Dec-11
May-12
Oct-12
Mar-13
Aug-13
Jan-14
Jun-14
(LHS)

Strategy
Exhibit 83: Coffee Can Portfolio (2005) suffered lower drawdowns than the BSE200 index
900 70%
700
50% CCP - Max
500 DD (RHS)
Maximum drawdown
30%
300 BSE200 -
100 10% Max DD
(RHS)
-100 -10% CCP (LHS)
-300
-30%
-500 BSE200
-50% (LHS)
-700
-900 -70%
Nov-05
Sep-06
Dec-07
May-08
Mar-09
Nov-10
Sep-11
Dec-12
May-13
Mar-14
Jun-05
Apr-06
Feb-07
Jul-07
Oct-08
Aug-09
Jan-10
Jun-10
Apr-11
Feb-12
Jul-12
Oct-13
Aug-14
Jan-15
Jun-15
Exhibit 84: Coffee Can Portfolio (2006) suffered much lower drawdowns than the BSE200 index
900 70%
700 CCP- Max
50% DD (RHS)
Maximum drawdown
500
30%
300 BSE200 -
100 10% Max DD
(RHS)
-100 -10%
CCP (LHS)
-300
-30%
-500
-700 -50% BSE200
(LHS)
-900 -70%
Sep-07
Sep-12
Jun-06
Nov-06
Apr-07
Feb-08
Jul-08
Dec-08
May-09
Oct-09
Mar-10
Aug-10
Jan-11
Jun-11
Nov-11
Apr-12
Feb-13
Jul-13
Dec-13
May-14
Oct-14
Mar-15
Aug-15
Jan-16
Jun-16

Strategy
700 70%
500 50% CCP- Max
Maximum drawdown
DD (RHS)
300 30%
100 10% BSE200 -

Max DD
-100 -10% (RHS)
-300 -30% CCP (LHS)
-500 -50%
-700 -70% BSE200

Nov-07
Sep-08
Feb-09
Dec-09
May-10
Mar-11
Nov-12
Sep-13
Feb-14
Dec-14
May-15
Mar-16
Jun-07
Apr-08
Jul-09
Oct-10
Aug-11
Jan-12
Jun-12
Apr-13
Jul-14
Oct-15
Aug-16
Jan-17
Jun-17
(LHS)

HDFC Bank
SELL
STRATEGY NOTE HDFCB IN EQUITY November 17, 2017
Sustainability is key BFSI
HDFC Bank has since inception focused on building a granular retail Recommendation
franchise on both sides of the balance sheet. It has maintained a
Mcap (bn): `4,708/US$72.9
conservative approach to lending (gross NPA of 1.26%). With a stable
3M ADV (mn): `2,969/US$46.0
management team at the helm, the bank was able to expand its retail
CMP: `1,822
offering on a pan-India basis and fill gaps in its corporate banking
offering. However, despite EPS growth slowing to 19% in the last two TP (12 mths): `1,330
years (vs a decade of >25% EPS growth), valuation multiples expanded. Downside (%): 27
Valuations are at ~50% premium to peers. This leaves little margin of
safety especially as the external environment is still not conducive for Flags
banks. Remain SELLers with TP of Rs1,330 (2.9x FY19E BVPS). Accounting: GREEN
Competitive position: STRONG Changes to this position: STABLE Predictability: GREEN
Earnings Momentum: GREEN
Banking on retail bank and technology
Established in 1994, HDFC Bank is Indias largest private sector bank in terms of Performance
assets with ~6.7% market share (in loans). HDFC Bank has differentiated itself 155
from peers through strategic focus on retail assets and liabilities. Retail loans
130
and retail deposits form ~68% and ~79% of loans and deposits respectively.
This has helped the bank deliver superior NIM (5-year average of ~4.3%) 105
compared to peers. Robust risk management and processes have helped the
80
bank maintain its asset quality (average credit cost of 70bps in the past 5 years),
Nov-16
Mar-17
May-17
Nov-17
Aug-17
Feb-17
Dec-16
Sep-17
Jun-17
helping deliver average RoE of ~19.4% in the last 5 years. A stable
management team and use of technology since inception have facilitated the
consistent performance. HDFC Bank Sensex
Strong execution is in its DNA

Source: Bloomberg, Ambit Capital research
HDFC Bank focused on two key principles in its business building a stable and
low-cost liability base and winning clients by offering unique solutions (e.g.
technology-led capture of capital market floats). The bank has taken a long-term
approach to protect margins and asset quality rather than aggressive, near-term
growth (e.g. avoided project finance-led growth). Superior profitability has
allowed HDFC Bank to sustain its capital position through internal profit
generation without undue dilution of shareholders fund. The bank has made
two acquisitions but its recent focus has been on organic growth through
accelerated branch network expansion on a pan-India basis.
Going beyond IBAS framework
A risk-averse culture and ability to use technology (systems and processes) to
create a unique offering have been key differentiators. Despite a relatively low
advertising budget and lack of celebrity endorsements, a high brand recall is a
testimony of the banks strengths. HDFC Bank is known for its focus on systems
and processes, which has helped it in terms of business continuity. The banks
key strategic asset is its low-cost funding franchise (cost of funds of 5.2% vs peer Research Analysts
average of ~5.7%), which has helped it effectively compete with other banks
without taking higher asset quality risks. Pankaj Agarwal, CFA
Tel: +91 22 3043 3206
Valuations leave little margin of safety pankaj.agarwal@ambit.co
Despite the weak macro environment, the bank has done well in terms of
superior loan growth (currently at 22% vs ~7% for the banking system) and Ravi Singh
maintaining strong NIM (currently 4.3%). However, bank faced some asset Tel: +91 22 3043 3181
quality hiccups in recent times. Thus, with our expectation of a slowdown in loan ravi.singh@ambit.co
growth for private banks due to recapitalisation of PSU banks, pressure on NIM
Rahil Shah
given weak CASA growth, and pick-up in delinquencies in retail/SME loans, we
do not expect a pick-up in EPS growth from current levels. HDFC Bank is trading Tel: +91 22 3043 3217
at 23.6x FY19E P/E and 4.1x FY19E P/B, ~50% premium to peers. rahil.shah@ambit.co
HDFC Bank
Exhibit 1: HDFC Bank loan book is diversifying towards retail
Home Vehicle Other retail Non-retail RoE (RHS)
100% 25%
80% 20%
60% 15%
40% 10%
20% 5%
0% 0%
1HFY18
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
Source: Company, Ambit Capital research
Exhibit 2: Key financial parameters over the last decade

FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 1HFY18*
Loan book (Rs mn) 792 989 1,258 1,600 1,954 2,397 3,030 3,655 4,646 5,546 6,049
Loan book growth (%) 36.1% 24.9% 27.3% 27.1% 22.2% 22.7% 26.4% 20.6% 27.1% 19.4% 22.3%
Operating profits (Rs mn) 41,975 51,790 64,297 77,254 93,906 114,276 143,601 174,045 213,635 257,324 153,379
Net profits (Rs mn) 17,221 22,449 29,487 39,264 51,671 67,263 84,784 102,159 122,962 145,496 80,449
EPS (Rs) 8.1 10.6 12.9 16.9 22.0 28.3 35.3 42.1 48.6 56.8 31.3
Gross NPAs (%) 1.81% 1.95% 1.43% 1.05% 1.01% 0.97% 0.98% 0.93% 0.94% 1.05% 1.26%
Net NPAs (%) 0.66% 0.63% 0.31% 0.19% 0.18% 0.20% 0.27% 0.25% 0.28% 0.33% 0.43%
Tier 1 (%) 10.2% 10.6% 13.3% 12.2% 11.6% 11.1% 11.8% 13.7% 13.2% 12.8% 13.3%
ROA (%) 1.28% 1.31% 1.45% 1.57% 1.68% 1.82% 1.90% 1.89% 1.85% 1.81% 1.79%
ROE (%) 16.7% 16.1% 16.1% 16.7% 18.7% 20.3% 21.3% 19.4% 18.3% 17.9% 17.3%
Source: Company, Ambit Capital research. Note: *1HFY18 operating profits, net profits and EPS numbers not annualized
Exhibit 3: The key things to note from evolution

Time period Phase Key developments
The initial management team was built mostly by hiring young bankers from foreign banks like Citibank,
Bank of America and HSBC.
A corporate bank with

The bank focused on raising low-cost liabilities, finding gaps in the existing offerings of competing banks,
1994-1999 capturing transactional and cash management business from the corporates rather than lending money to
a difference
them.
The bank implemented a fully integrated online banking automation system as compared to other popular
offline systems which were used by other competitors.
In FY04, the bank struck a deal with its parent company (HDFC) to become a distributor of HDFCs home
loans for a fee of 0.7% of the loan and the right to buy back 70% of the loans originated by it.
Building the retail
2000-2008
bank
Extensive focus on retail loans allowed the bank to post a retail loan book CAGR of 67% over FY00-08 and
contributed 57% of the loan book by FY08.
Focused on selling third-party products and acquiring point-of-sale terminals.
HDFC Bank acquired Centurion Bank of Punjab (CBOP) in May 2008. CBOP was one-fifth of HDFC Bank in
terms of balance sheet and half in terms of branches.
Reaching the
2009-Present hinterland and taking
HDFC Bank focused on improving rural foot prints. The bank set up dedicated desks at semi-urban and rural
branches to cater to agriculture loans.
on Silicon Valley
HDFC Bank started a major push towards digital banking. Various initiatives like PayZapp wallet, loans in
ten seconds, etc. were launched.

HDFC Bank
Exhibit 4: Competitive mapping of HDFC Bank with other comparable peers

Loan CAGR
Company (Rs bn, FY17) Loan book CASA NIMs RoE Net NPAs Tier I
(FY13-17)
State Bank of India 15,711 12.6% 44.6% 2.6% 7.0% 3.71% 10.4%
HDFC Bank 5,546 23.2% 48.0% 4.4% 17.9% 0.33% 12.8%
ICICI Bank 4,642 12.8% 50.4% 3.2% 10.3% 5.43% 14.4%
Axis Bank 3,731 17.1% 51.4% 3.5% 6.8% 2.31% 11.9%
Kotak Mahindra Bank 1,361 28.3% 44.0% 4.3% 13.2% 1.26% 15.9%
IndusInd Bank 1,131 26.4% 36.9% 4.0% 15.3% 0.39% 14.7%
Exhibit 5: Mapping HDFC Bank and its peers on IBAS
Strategic Overall
Company Innovation Brand Architecture
asset rank
Comments
The bank scores highly on all parameters: Innovation (origin as an upstart

bank, transaction banking, technology-led solution, capital markets
strategy to capture floats, forays in rural and digital banking); brand (wide
geographical and demographical reach); architecture (little churn in senior
HDFC Bank management, highly focused on systems and processes, meeting unmet
demands of customers); and strategic assets (wide branch network, large
and sticky retail deposits franchise, strong asset quality and a good capital
raising track record)
The bank has mixed scores on IBAS: Innovation (present across all
segments of financial services, pioneer in using technology); brand (wide
geographical and demographical reach, but marred by negative asset
quality cycles); architecture (cyclical ups and downs on growth and asset
ICICI Bank quality has impacted the quality of engagement with employees and
customers); and strategic assets (wide branch network, large and sticky
retail deposits franchise, leading franchises in most financial services
businesses)
The bank scores highly on most parameters: Innovation (evolution of the

banks retail liabilities, retail assets, DCM business, SME banking and
wholesale banking in high quality leading franchises); brand (wide
geographical and demographical reach; successful transition from a quasi-
PSU brand to new-age banking brand); architecture (strong and
Axis Bank independent board, an employee-friendly environment and a flexible
culture open to changes with track record of seamlessly re-orienting under
three leaders with different management styles); and strategic assets (best-
in-class franchise in areas of transaction banking, such as cash
management, payments, business banking and government businesses,
wide branch network, large and sticky retail deposits franchise).
The bank scores highly on most parameters: Innovation (evolution from an

NBFC to a universal financial services conglomerate); brand (strong brand
Kotak but with limited reach, received a fill up from ING Vysya Bank acquisition);
Mahindra architecture (conservative corporate culture with high focus on costs and
Bank risk pricing, even at the cost of growth); and strategic assets (leading
franchises in number of lending and non-lending financial service
businesses).
The bank has mixed scores on IBAS: Innovation (overhauling of entire

corporate banking, and launching and scaling up of retail products under
new management); brand (strong niche brand in vehicle finance and other
niche segments, yet to evolve into a prominent high-street brand);
IndusInd Bank architecture (strong and well-knit senior management team; strong long-
term relationship-based customer connect in vehicle finance); and strategic
assets (unmatched differentiated vehicle finance franchise, structured mid-
market corporate banking franchise, rapidly expanding branch network).
The bank has mixed scores on IBAS: Innovation (has built presence across
all segments of financial services businesses over the long term, but
constraints linked with being PSU bank limit rapid innovations and
adopting best practices from peers); brand (wide geographical and
State Bank of demographical reach, but underwhelming perception for standards of
India customer service); architecture (poor alignment of employee-reward
programme with commercial success of the bank, HR practices are not
comparable with private sector peers); and strategic assets (wide branch
network, large and sticky retail deposits franchise and leading franchises in
most financial services businesses).
Source: Company, Ambit Capital research; Note: - Strong; - Relatively Strong; - Average; - Relatively weak.

HDFC Bank
Exhibit 6: Loan book growth has been stable at ~22% with Exhibit 7: Due to efficiencies in operations, RoA of the bank
improvement in NIM has improved over the years
Loan growth Net interest margins (RHS) RoA RoE (RHS)
45% 4.8% 2.0% 25%

40%
35% 20%
1.5%
30% 4.5%
25% 15%
1.0%
20% 10%
15% 4.3%
10% 0.5%
5%
5%
0% 4.0% 0.0% 0%
1HFY18
1HFY18
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
Source: Company, Ambit Capital research Source: Company, Ambit Capital research; Ratios are annualised for 1HFY18
Exhibit 8: Gross NPAs have increased in recent years Exhibit 9: Tier-1 ratio has been strong over the years
Gross NPAs Tier 1
13.7%
13.3%
13.3%
13.2%
12.8%
12.2%
Provision coverage ratio (RHS)
11.8%
11.6%
16%
11.1%
10.6%
10.2%
2.5% 100% 14%
8.8%
12%
2.0% 80% 10%
1.5% 60% 8%
1.0% 40% 6%
4%
0.5% 20% 2%
0.0% 0% 0%
1HFY18
1HFY18
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
Source: Company, Ambit Capital research Source: Company, Ambit Capital research
Exhibit 10: HDFC Bank is trading at a premium to its Exhibit 11: HDFC Bank has outperformed BSE Bankex by
historical multiples ~5x
6 600
500
5
400
4 300
200
3
100
2 0
Jan-09
Oct-10
Jan-16
Oct-17
Sep-13
Apr-14
Jun-08
May-11
Dec-11
Jun-15
Mar-10
Jul-12
Feb-13
Mar-17
Nov-07
Aug-09
Nov-14
Aug-16
Oct-05
Jul-06
Apr-07
Jan-08
Oct-08
Jul-09
Apr-10
Jan-11
Oct-11
Jul-12
Apr-13
Jan-14
Oct-14
Jul-15
Apr-16
Jan-17
Oct-17
HDFC Bank Sensex Index

PB Avg. PB
Source: Bloomberg, Company, Ambit Capital research Source: Bloomberg, Company, Ambit Capital research
Exhibit 12: Explanation for our flags

Segment Score Comments
Similar to all other Indian private sector banks, HDFC Bank uses intrinsic value of stock option to account ESOP
Accounting GREEN expense. However, the bank disclosed that if Black Scholes model-based fair valuation was used, net profit would
be adjusted lower by average ~8% over FY14-17.
The bank has one of the best track records of long-term profitability. It has delivered on the guidance with very
Predictability GREEN
little room in variation.
Consensus EPS estimates for FY18 and FY19 have been reduced by 3% each in past one year. We expect 19% EPS
Earnings momentum GREEN
CAGR over FY17-20E.

HDFC Bank
Balance sheet
Year to March (Rs mn) FY16 FY17 FY18E FY19E FY20E
Networth 726,778 894,624 1,027,228 1,185,413 1,376,621
Deposits 5,464,242 6,436,397 7,723,676 9,268,411 11,122,093
Borrowings 849,690 740,289 838,150 950,031 1,078,003
Other Liabilities 367,251 567,093 652,157 749,981 862,478
Total Liabilities 7,407,961 8,638,402 10,241,211 12,153,837 14,439,195
Cash & Balances with RBI & Banks 389,188 489,521 583,968 696,921 832,028
Investments 1,958,363 2,144,633 2,564,538 3,067,475 3,669,912
Advances 4,645,940 5,545,682 6,644,634 7,964,685 9,550,659
Other Assets 414,470 458,566 448,071 424,756 386,596
Total Assets 7,407,961 8,638,402 10,241,211 12,153,837 14,439,195
Income statement
Interest Income 602,214 693,060 788,275 935,476 1,114,852
Interest Expense 326,299 361,667 397,194 473,570 564,879
Net Interest Income 275,915 331,392 391,081 461,907 549,974
Total Non-Interest Income 107,517 122,965 142,395 159,519 181,635
Total Income 383,432 454,357 533,476 621,426 731,609
Total Operating Expenses 169,797 197,033 221,542 253,025 288,873
Employees expenses 57,022 64,837 69,515 78,195 87,818
Other Operating Expenses 112,775 132,197 152,026 174,830 201,055
Pre Provisioning Profits 213,635 257,324 311,934 368,401 442,736
Provisions 27,256 35,933 48,804 54,508 63,316
PBT 186,379 221,391 263,131 313,893 379,420
Tax 63,417 75,894 90,203 107,605 130,068
PAT 122,962 145,496 172,928 206,288 249,352
Key ratios
Credit-Deposit (%) 85.0% 86.2% 86.0% 85.9% 85.9%
Cost/Income ratio (%) 44.3% 43.4% 41.5% 40.7% 39.5%
Gross NPA (Rs mn) 43,928 58,857 87,002 97,483 111,688
Gross NPA (%) 0.94% 1.05% 1.30% 1.21% 1.16%
Net NPA (Rs mn) 13,204 18,440 30,451 34,119 39,091
Net NPA (%) 0.28% 0.33% 0.46% 0.43% 0.41%
Provision coverage (%) 69.9% 68.7% 65.0% 65.0% 65.0%
NIMs (%) 4.40% 4.37% 4.35% 4.29% 4.27%
Tier-1 capital ratio (%) 13.2% 12.8% 12.5% 12.3% 12.2%

HDFC Bank
Du-pont analysis
Year to March FY16 FY17 FY18E FY19E FY20E
NII / Assets (%) 4.1% 4.1% 4.1% 4.1% 4.1%
Other income / Assets (%) 1.6% 1.5% 1.5% 1.4% 1.4%
Total Income / Assets (%) 5.8% 5.7% 5.7% 5.5% 5.5%
Cost to Assets (%) 2.6% 2.5% 2.3% 2.3% 2.2%
PPP / Assets (%) 3.2% 3.2% 3.3% 3.3% 3.3%
Provisions / Assets (%) 0.4% 0.4% 0.5% 0.5% 0.5%
PBT / Assets (%) 2.8% 2.8% 2.8% 2.8% 2.9%
Tax Rate (%) 34.0% 34.3% 34.3% 34.3% 34.3%
ROA (%) 1.85% 1.81% 1.83% 1.84% 1.88%
Leverage 9.9 9.9 9.8 10.1 10.4
ROE (%) 18.3% 17.9% 18.0% 18.6% 19.5%
Valuation
Year to March FY16 FY17 FY18E FY19E FY20E
EPS (Rs) 48.6 56.8 67.0 79.3 95.1
EPS growth (%) 16% 17% 18% 18% 20%
BVPS (Rs) 287.5 349.1 397.8 455.5 524.9
P/E (x) 38.4 32.9 27.9 23.6 19.6
P/BV (x) 6.49 5.35 4.69 4.10 3.56

HCL Technologies
SELL
STRATEGY NOTE HCLT IN EQUITY November 17, 2017
On a slippery slope Technology
HCLTs discerning bets on Infrastructure Management Services (IMS) and Recommendation

engineering services (ES) have enabled it to deliver FY07-17 revenue Mcap (bn): Rs1,241/US$19
CAGR of 19% (USD) vs. 17% for larger peers. Strong capabilities in these
3M ADV (mn): Rs1,377/US$21
segments also position it well for the upcoming Internet-of-Things era.
CMP: Rs870
The company has had a stellar capital allocation track record (FY07-17
TP (12 mths): Rs750
average RoE of 26%, its large acquisition of Axon has been successful).
Downside (%): 14%
However, with 13 acquisitions in the past 24 months, we are concerned
about a potential value-destructive deal, especially given the string of IP
deals related to end-of-life products and low double-digit estimated Flags
IRRs. Current valuation of 13x one-year forward P/E does not offer Accounting: GREEN
adequate margin of safety. HCLT remains our top SELL in IT services. Predictability: GREEN
Competitive position: STRONG Changes to this position: STABLE Earnings Momentum: AMBER
One of the better performing large Indian IT services companies
Since the GFC, performance of top firms has diverged with capital allocation, Performance
140
portfolio mix, operational excellence and management quality. HCLT has been 130
one of the better performers on these metrics driven by bold bets on IMS and 120
Axon that have paid off, strong capabilities in IMS and an excellent sales effort 110
100
driven by Vineet Nayar (CEO over 2007-13). Over the past 10 years, HCLTs
90
revenue has posted 19% CAGR (USD, vs 17% for larger peers) and 23% CAGR 80
(INR, vs 21% for larger peers).
Nov-16
Mar-17
May-17
Nov-17
Aug-17
Feb-17
Dec-16
Sep-17
Jun-17
Rode the IMS wave, now well-positioned for IoT
HCL Tech. Sensex
HCLT began as the R&D division of HCL Enterprise, which had developed an
indigenous microcomputer in 1978. The inherited culture is a key ingredient of
its success in outsourced engineering services (#1 in India, top-5 globally). Over Source: Bloomberg, Ambit Capital research
1996-2003, HCL formed a JV with Perot Systems which gave it access to high-
value US clients. It missed out on the Y2K bug boom because management HCLTs forensic score analysis
thought it was temporary low-end work. However, since then, two large bets
paid off. It pioneered offshore delivery of IMS in 2003-04 (38% of FY17
revenues, no.2 globally after IBM) and acquired Axon in 2009 (gave it
relationships with CXOs in large organizations). Its next big bet is IoT, which
would require it to build on capabilities in IMS and engineering services.
Second only to TCS on our IBAS framework
HCLT has consistently innovated (3/4) to lower its cost structure. It has been able Source: Ambit HAWK, Ambit Capital research
to deliver average EBIT margin of 19% (FY07-17) despite offering 30-40% cost
savings to clients on each deal renewal and steady wage inflation though helped HCLTs greatness score analysis
by depreciation of INR vs USD. HCLT scores well (3/4) on brand as it occupies a
high client mind-share (source: third-party industry reports) as well as good
reputation among employees, reflected in lower attrition (16% vs peer median of
18%). HCLTs decent positioning on architecture (3/4) and strategic assets (3/4)
reflects strong sales architecture built over years and client connect.
Competitive positioning is dwindling with the IP acquisition spree
S A bit HAWK A bit C it l h
Over the last two years, HCLT started aggressively investing in IP deals by
partnering with global product majors like IBM. These deals relate to products
approaching end of life, and we reckon their IRRs to be in low double digits.
Besides the risk of continuous reinvestments on upgrade of these products, HCLT
is also exposed to the risk of wasted management bandwidth. A service line Research Analyst
centric organization structure adds to the risks. Valuations at 13x one-year Sudheer Guntupalli
forward P/E are not enticing enough given the above risks.
+91 22 3043 3203
sudheer.guntupalli@ambit.co
HCL Technologies
Exhibit 1: Evolution of HCL Technologies
6,500 IMS & ES ramp up Cloud / IoT 50%

6,000 45%
5,500 40%
5,000
4,500 35%
4,000 30%
3,500 25%
3,000 20%
2,500 15%
2,000
1,500 10%
1,000 5%
500 0%
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
Software services Infrastructure services BPO
Engineering and R&D services ROCE* (RHS)
Source: Ambit Capital research, company

(Rs mn) FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17
Revenues ($ mn) 1,763 2,078 2,574 3,320 4,035 4,539 5,180 5,822 6,235 6,975
Revenue growth (%) 39% 18% 24% 29% 22% 12% 14% 12% 7% 12%
Net profits 13,732 9,787 12,156 14,361 21,014 36,313 57,138 73,209 73,365 84,325
EPS 13.4 7.3 8.9 10.3 15.0 25.8 40.4 51.9 51.9 59.7
CFO 15,282 21,272 11,811 14,584 18,493 27,096 63,481 55,422 71,067 94,010
CFO-EBITDA 1.1 1.0 0.5 0.6 0.5 0.5 0.8 0.6 0.8 0.9
FCF 8,786 17,507 6,864 7,353 10,021 22,490 57,527 44,110 61,310 60,988
Debt equity (x) - 0.70 0.42 0.31 0.20 0.11 0.05 0.02 0.03 0.02
RoE (%) 26% 18% 21% 19% 22% 29% 35% 35% 29% 27%
ROCE* (%) 26% 27% 20% 24% 31% 41% 46% 40% 38% 36%
Source: Company, Ambit Capital research. Note: *This is pre-tax RoCE which includes interest and dividend income along with EBIT in the numerator and total
capital including cash in the denominator.

FY07-15 IMS and ES ramp up HCLT grew its revenues faster than peers because of IMS & ES
FY15- Cloud/IoT To remain insulated from cloud disruption and build on IoT capabilities
Source: Ambit Capital research, company
Exhibit 4: Competitive mapping of HCLT, TCS, Infosys, Wipro & TechM

FY17 Revenue Industry EBITDA Pre-tax Pre-tax
Sub-Segment Capex/CFO
Company revenue CAGR market margin ROCE CFO/EBITDA
positioning (FY10-16)
($) FY10-17 share (FY17) (FY17) (FY10-17)
TCS 2 17,575 12% 38% 27% 53% 93% 16%
Infosys 4 10,208 11% 22% 27% 35% 97% 31%
Wipro 3 7,705 8% 16% 21% 23% 94% 26%
HCLT 1 6,975 15% 15% 22% 38% 84% 20%
TechM NA 4,351 24% 9% 14% 29% 67% 56%

HCL Technologies
Exhibit 5: Mapping HCLT and peers on our IBAS framework

Strategic
Company Innovation Reputation Architecture Overall rank Comments
asset
Overall, TCS ranks on top of our IBAS framework. It has
constantly innovated in areas of offshoring, pyramid
correction, code re-use and moving up the value chain
in terms of IT services (which is also reflected in its
industry leading EBIT margin 26.5%, FY17). TCS
developed the reputation of a value for money vendor
which makes it a preferred choice of clients especially
TCS for annuity kind of Run The Business (RTB) projects. It
also has the reputation of an employee friendly
organization which is reflected in its low attrition rate
(15%, FY17). Focus on delivery, unique organizational
structure driving margin expansion makes TCS score
well on architecture aspect. Client connects ($50mn
clients = 78 which is almost 2x of the nearest
competitor), make it rank well on strategic assets aspect.
Infosys ranks second on our IBAS framework along with

HCLT. The company scores well in areas of offshoring,
pyramid correction, code re-use which is reflected in its
high EBIT margins (24%, FY17). However, it could not
establish a niche for itself in any particular vertical or
Infosys
service line which makes it an average scorer on
reputation aspect. It lags well behind TCS in terms of its
organizational structure (issues regarding placement of
consulting practise in hierarchy) and strategic assets
(client connects).
Wipro lags behind other four big players on (overall

score of ) on our IBAS framework. Wipro is not as
successful as TCS/Infosys in terms of pyramiding, code
re-use which is also reflected in its lower EBIT margin
(19.5%, FY17). Though the company has been at the
forefront of adopting new technologies, it could not
scale them up (and hence given away market leadership
Wipro
to HCLT in IMS). Strategic assets (client connects) are
not strong (as in the case of TCS or Infosys) as it used to
rotate relationship managers every 18 months. Wipro
runs a silo-ed organizational structure which lacks
vertical based selling experience. These factors make
the company score low on architecture and strategic
assets.
HCLT ranks second on our IBAS framework along with

Infosys. The company maintained decent margins (20%,
FY17) and ROCE (22%, FY17) by keeping utilization
(84%) high, pyramid correction and code re-use. The
company has built a strong reputation of being among
top-2 IMS vendors globally (ahead of all Indian peers)
HCLT
and top-5 ES vendors (ahead of all Indian peers)
globally which makes it score well on Reputation. The
company has built the architecture of an aggressive
sales led organization with client relationships in IMS
and ES become strategic assets to cross sell other
services.
Though the current EBIT margins of TechM are

significantly lower than its peers (11%, FY17), this
cannot be interpreted as weakness of the company in
terms of offshoring, pyramid correction and code re-use.
Margins of the company have taken a hit because of
recent acquisitions like LCC (normalized margin is
TechM 19.4% in FY14). The company has built the reputation
of being the strongest player in telecom segment (ahead
of all Indian peers). The company also has the DNA of
successful growth derived in inorganic route and
marquee clients especially in telecom segment. Overall,
the company fits into above average bucket on IBAS
framework.

HCL Technologies
Exhibit 6: Sources of cash over the last 10 years (FY07-17) Exhibit 7: Uses of cash over the last 10 years (FY07-17)
4% 7%
16%
33%
60%
80%
CFO Asset sale Cash Flow from Financing Dividend Capex Acquisitions
Exhibit 8: One year forward P/E evolution Exhibit 9: HCLTs share price performance vs Sensex
18 180
160
16 140
120
14
100
12 80
60
10
Jan-17
Oct-17
Apr-17
Sep-17
Dec-16
May-17
Jun-17
Feb-17
Mar-17
Jul-17
Nov-16
Aug-17
Apr-12
Apr-13
Apr-14
Apr-15
Apr-16
Apr-17
Oct-11
Oct-12
Oct-13
Oct-14
Oct-15
Oct-16
Oct-17
P/E Avg HCLT IN SENSEX

Accounting GREEN Our proprietary forensic accounting tool Hawk places HCL Tech in Zone of safety in terms of Accounting policies.
The management issues annual guidance and earnings surprises over the past eight quarters have averaged less
than 5%.
Earnings momentum AMBER Bloomberg shows multiple downgrades to consensus numbers in last 8 weeks.
Exhibit 11: Forensic score evolution Exhibit 12: Greatness score evolution
Source: Ambit HAWK, Ambit Capital research Source: Ambit HAWK, Ambit Capital research

HCL Technologies
Balance sheet (consolidated)*

Rs bn FY16 FY17 FY18E FY19E FY20E
Net Worth 277 345 350 395 442
Other Liabilities 22 18 18 18 18
Capital Employed 300 363 368 414 460
Net Block 106 166 179 186 193
Other Non-current Assets 40 40 35 35 35
Curr. Assets 247 272 266 315 368
Debtors 76 85 93 101 112
Unbilled revenues 30 26 28 30 33
Cash & Bank Balance 117 131 114 149 184
Other Current Assets 24 31 31 34 38
Current Liab. & Prov 94 115 112 122 135
Net Current Assets 153 158 154 193 232
Application of Funds 300 363 368 414 460
Income statement (consolidated)*

Revenue (US$ mn) 6,235 6,975 7,775 8,492 9,431
Growth 7.1% 11.9% 11.5% 9.2% 11.1%
Revenue 409 466 501 548 608
Cost of goods sold 275 316 343 393 446
SG&A expanses 52 55 58 57 65
EBITDA 88 103 109 106 106
Depreciation 6 8 9 8 9
EBIT 82 94 100 98 97
EBIT Margin 20% 20% 20% 18% 16%
Other Income 10 9 10 10 12
PBT 92 104 110 108 109
Tax 19 19 22 22 22
Reported PAT 73 84 88 86 87
Diluted Adj EPS 52 60 61 60 61

HCL Technologies
Cash flow statement (consolidated)*

Net Income 73.4 84.3 87.5 85.8 86.9
Depreciation 5.7 8.3 9.1 7.8 8.9
CF from Operations 73.5 93.8 96.6 93.6 95.8
Cash for Working Capital (2.4) 0.2 (7.7) (3.7) (4.8)
Net Operating CF 71.1 94.0 88.9 89.9 91.0
Net Purchase of FA (9.8) (33.0) (13.6) (15.0) (16.7)
Acquisitions (179.2) (144.2) 178.1 5.9 7.9
Others (33.1) (10.4) 11.5 0.4 0.5
Net Cash from Invest. (42.8) (43.4) (2.2) (14.6) (16.1)
Proceeds from Equity & other 0.0 - - - -
Dividend Payments (33.7) (40.6) (33.8) (40.3) (40.3)
Cash Flow from Fin. (28.4) (44.4) (67.7) (40.3) (40.3)
Free Cash Flow 61.3 61.0 75.2 74.9 74.3
Opening cash balance 103.6 119.5 126.1 114.4 149.4
Net Cash Flow (0.1) 6.2 19.0 35.0 34.6
Ratio analysis (consolidated)*

FY16 FY17 FY18E FY19E FY20E
Valuation (x)
P/E 17.5 15.2 14.9 15.2 15.0
EV/EBITDA 13.5 11.5 10.8 11.2 11.1
EV/Sales 2.9 2.5 2.4 2.2 1.9
EV/NOPAT 14.4 12.5 11.8 12.1 12.2
Price/Book Value 4.6 3.7 3.7 3.2 2.9
Dividend Yield (%) 2.4% 2.6% 1.8% 2.6% 2.6%
Return Ratios (%)
RoE 29% 27% 25% 23% 21%
RoCE 24% 23% 22% 19% 17%
ROIC 39% 37% 33% 30% 28%
Turnover Ratios
Receivable days (Days) 95 87 87 87 87
Fixed Asset Turnover (x) 4.3 3.4 2.9 3.0 3.2

Lupin
NOT RATED
STRATEGY NOTE LPC IN EQUITY November 17, 2016
Legacy under threat? Healthcare
Lupin transitioned from API to plain oral solids to complex generics due
Recommendation
to managements vision/agility in tapping the changing dynamics. We
Mcap (bn): `374/US$5.7
had considered Lupin as one of the biggest beneficiaries of GDUFA given
presence in complex generics and pipeline of ~150 ANDAs. However, the 3M ADV (mn): `2,259/US$35
US business is coming under pressure because of price pressure in the CMP: `827
base business due to channel consolidation in the US and repetitive TP (12 mths): n.a.
quality issues at its facilities delaying product approvals. However, Upside (%): n.a.
Indias faster than IPM growth driven by higher composition of chronic
therapies and first-mover advantage in Japan will provide support to Flags
earnings albeit with some margin decline. Reduction in R&D, Accounting: RED
underperformance of Gavis acquisition and limited investments in Predictability: AMBER
innovation are emerging structural challenges. Stock trades at 17x FY19 Earnings Momentum: RED
consensus earnings, which is at a marginal discount to peers.
Competitive position: STRONG Changes to this position: STABLE Performance
Vision to move from oral solids to complex generics materialises 150
130
Lupin has championed the art of business evolution (from plain oral solids to 110
complex generics) without compromising on profitability and stakeholder 90
interests. Lupin transitioned from anti-TB company (more than 50% of revenues 70
in FY06) to higher-growth CVS/Diabetes/CNS, resulting in revenue CAGR of 50
23% over FY07-17. In the USA, Lupin evolved its revenue profile from plain oral
Nov-16
Mar-17
May-17
Nov-17
Aug-17
Feb-17
Dec-16
Sep-17
Jun-17
solids to filing for complex generics. Revenue per ANDA improved from
US$3.7mn in FY08 to US$6.5mn in FY16. Over the past couple of years, Lupins
investments in the USA have come to the fore as it has added differentiated Lupin Sensex
products and expect them to materialise in the medium term, but this is now
getting delayed because of the warning letter. Source: Bloomberg, Ambit Capital research
From India to USA; journey from weak product portfolio to complex one
Lupins forensic score analysis
Until FY07, Lupin had an India-heavy revenue profile with product portfolio in
slow-growing acute therapies. Management realised changing trends in Indian
pharma consumption and switched to lifestyle disease chronic products that
grew faster than IPM. Similarly, in the US, management realised product-specific
opportunities and capitalised during FY13-16 (US revenue CAGR of 23%).
Lupins capability to adapt to changing environments has led to margin/RoCE
expansion. While peers focused on acquisitions to grow, Lupin primarily grew
organically. Early entry into the Japanese market is an advantage over peers. Source: Ambit HAWK, Ambit Capital research
Ranks 2nd on sector framework; needs to improve on innovation Lupins greatness score analysis
Focus has been on creating strategic assets through investment in Japan,
presence in complex generics in the USA and de-risking of the US business
through multiple USFDA-approved facilities to strengthen its business mix. Lupin
has a credible branded franchise in India with a broad-based product portfolio
(Top 10 brands contribute only 20% of revenue). Limited key man risk is led by
decentralised decision making. Scope to improve MR productivity in India and
higher investments in biosimilars, NCEs and NDDS (innovation) can improve
Source: Ambit HAWK, Ambit Capital research
comparative standing.
Valuations will take time to rerate
At current valuation of 17x FY19E consensus earnings, there is scope for a
rerating emerging from: a) receding concerns in the USA (2HFY19E), b) well-
entrenched management, c) strong balance sheet, and d) excellence in
execution. However, the recent warning letter, uncertainty around launches and
pricing in the US will delay a rerating. Near-term catalysts to watch for are: (a)
gTobi and gTamiflu launches in 4QFY18; (b) Prevacid ODT, Coreg CR and
gLialda launches in FY19; and (c) further cost efficiencies.
Lupin
Exhibit 1: Evolution of Lupin
Making inroads in the US business Benefits of patent cliff with Lupin

Indian business led by launch of plain oral solids; launching limited competiion
200 driven growth with enetering chronic space in India. products in the US market 45%
180 India contributing 60% 40%
160 of overall revenues 35%
140 30%
120
25%
` Bn
100
20%
80
60 15%
40 10%
20 5%
- 0%
FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17
India US generics Others (RoW , API) RoCE (RHS)

Source: Company and Ambit Capital research. Note: RoCE is pre-tax RoCE.
Exhibit 2: Strong growth and RoCE over the past decade but a sharp decline in RoCE in FY17
Revenues 28,917 38,666 48,708 58,190 70,829 96,413 112,866 127,700 142,555 174,943
Revenue growth (%) 44% 34% 26% 19% 22% 36% 17% 13% 12% 23%
Net profits 4,083 5,015 6,816 8,626 8,677 13,142 18,364 24,032 22,607 25,575
EPS 9.9 12.1 15.3 19.3 19.4 29.4 41.0 53.5 50.2 56.6
CFO 2,585 4,695 6,764 7,980 5,600 12,510 20,039 27,331 (3,824) 41,148
Pre tax CFO/EBITDA 59% 78% 86% 88% 60% 79% 92% 102% 21% 117%
FCF 241 1,308 72 7,990 549 7,097 14,787 18,655 (61,639) 15,141
Gross debt equity (x) 0.94 0.86 0.44 0.35 0.41 0.22 0.09 0.06 0.64 0.59
RoE (%) 38% 37% 34% 29% 24% 29% 30% 30% 23% 21%
ROCE* (%) 25% 24% 26% 24% 23% 31% 38% 37% 23% 18%

Lupin derived 60% of its revenues from its Indian business comprising primarily of anti-TB portfolio
(contributing 50% of the Indian business).
Within its Indian business, the company relied on acute portfolio which is a low-margin business (consolidated
Indian business drives
FY05-FY07 EBITDA margins <20%). Its US business was negligible contributing ~15% of the overall revenues with
growth
products in plain vanilla oral solids and entering as follow-on generic player, garnering revenue per ANDA of
<US$3mn.
RoCE at <20% with investment in R&D at ~4% of sales. High debt to equity at 1x led to RoE at ~40%.
Revenue growth accelerated (25% CAGR over FY08-12) led by higher revenue contribution from the US
business (34% of overall revenues) led by the launch of limited competition generics. Revenue per ANDA
increased from US$4mn to US$5mn.
Indian business reported 22% CAGR over FY08-12 led by launch of chronic products. Improvement in sales
Making in-roads in force efficiency led by chronic therapy (MR productivity increased from `2mn in FY08 to `4.3mn in FY12).
FY08-12
US market Chronic therapies contribute ~45% of the Indian business.
Led by US business and chronic revenues in India, gross margins expanded from 58% in FY08 to 62% in
FY12, however EBITDA margins remained flat at 21% due to increase in R&D spends from 5% of sales in FY08
to 7.5% in FY12. The company reduced its debt-to-equity ratio to 0.4x. Entered Japanese market though
acquisition of Irom Pharma which also led to slip in RoCE from 22% in FY11 to 18% in FY12.
Led by launch of limited competition products in the US market, overall revenues reported 19% CAGR over
FY12-16. Its Indian business (now majority portfolio being of chronic therapy) grows at 16% CAGR.
Lupins presence in the Japanese market improved led by Irom acquisition and revenues grew by 12% CAGR
over FY12-16. As of FY16, Japan contributes 10% of the overall revenues. The company is also fortifying its
presence in RoW markets (specifically South Africa) through acquisition of Pharma dynamics. RoW market
US business gains
FY13 Current reported 22% revenue CAGR over FY12-16.
momentum
Led by the US business, EBITDA margins improved from 21% in FY12 to 27.7% in FY16 despite increase in
R&D spends from 8% in FY12 to 12% in FY16. Acquisitions fuelled by FCF generation; acquisition of Gavis for
US$880mn.
Rising stress from channel consolidation, competition have impacted last three 3-4 quarters; but the real
shocker has been the warning letter from USFDA for Goa and Indore plants, which will impact launches

Lupin
Exhibit 4: Competitive mapping of Lupin with comparable generic pharma peers

EBITDA Pre-tax Median Cumulative
FY17 Revenue
Margin RoCE Pre-tax CFO/ R&D as % of
Company Positioning Revenue CAGR FY11-
(median (median EBITDA Sales
(Rs bn) 17
FY11-17) FY11-17) (FY11-17) (FY11-17)
Sun Pharma #1 313 33% 34% 25% 94% 3%
Lupin #2 175 20% 26% 24% 88% 11%
Cadila #5 94 13% 20% 22% 83% 7%
Torrent #4 59 18% 22% 24% 101% 5%
Dr. Reddys #3 142 11% 23% 21% 85% 8%
Cipla #6 144 15% 21% 16% 91% 5%
Ipca #8 32 9% 18% 19% 92% 4%
Aurobindo #7 149 23% 22% 24% 65% 3%
Exhibit 5: Sun, Dr. Reddys and Cadila are building innovation pipelines while others have lagged on most parameters
Bargaining
Complex De-risking US
US business Innovation power with Compliance Overall Comments
generics revenues
customers
Sun has best in class investment in innovation with
higher percentage of ANDAs in complex generics.
Sun
Whilst biosimilar portfolio is limited, it is developing
NCEs and NDDS through partners and SPARC.
Dr. Reddys is best placed to reap benefits of
biosimilar opportunity globally. Whilst in India and
Dr. Reddy EMs, the company is launching independently, in
regulated market the company is rightly following a
partner model.
Cadila has second best complex generics portfolio
with revenue per ANDA at Rs7mn. Though NCEs and
Cadila
NDDS opportunities are limited, we expect company
to excel in biosimilars in the emerging markets.
Lupin with its complex generics portfolio will be able
to garner high quality revenue. However, limited
Lupin
investment in biosimilars and NCEs and NDDS would
hurt longer opportunity in the innovation space.
Torrent has limited ANDA filings in the complex
generics in the US market. But the company, with its
Torrent partner, is developing all available biosimilars. We
believe management will have to make a bolt-on
acquisition for enhancing its innovative capability.
Baring inhaler, Cipla has limited investment in the
innovation space. With inhaler launch delayed due to
Cipla additional data requirements, we believe the
company will have to re-invent its R&D set-up to
catch up with its peers.
Though Ipca has previously displayed green shoots of
innovation, it largely remains restricted to India and
EMs. Also, these novel products do not exactly fit in
Ipca
the bracket of innovation as products launched are
with improved efficacy with no material
differentiation.
We credit Aurobindo for pipeline in complex
injectables, peptides and microspheres. However,
Aurobindo baring these, there are limited investment in
innovation for branded products like NCEs and
NDDS.
Ajanta has primarily focused on Para III opportunities
in the US. Though in India they have launched first-
Ajanta
to-market products, they are not in the category of
NCEs/NDDS
Source: Company, Ambit Capital research Note: - Strong; - Relatively Strong; - Average; - Relatively weak

Lupin
Exhibit 6: Sun and Lupin consistently outperform on most parameters

Base
MR Lower Brand Overall
India business business Comments
productivity concentration score
growth
Sun has large portfolio of top ranked products. Best in class
execution with MR productivity at ~Rs8mn per MR per month.
Sun
Strategically propelled its branded business through acquisition
of Ranbaxy.
Lupin falls marginally short of the podium ranking due to low MR
productivity. We believe the company has credible branded
Lupin
franchise with broad based product portfolio (Top 10 brands
contribute only 20% of revenue).
Dr. Reddys is an average joe in the branded generics space with
base business report growth of 7.5% over FY11-15 implying sub-
Dr. Reddy par brand equity. Launch of biosimilars could provide impetus to
the MR productivity but the company needs structural change in
portfolio which is currently in slow growing acute therapy area.
Though Cadila has launched innovative products in India and is
Cadila one of the few companies to be in the market since inception, it
continues to struggle in having large no. of credible brands.
Management is overhauling its filed force with objective of
improving its MR productivity. Whilst not impossible, we believe
Torrent the improvement in MR productivity will have to be aided by
credible launches in novel space and optimising the Elder
portfolio.
Cipla has built strong inhaler franchise and has launched first to
market products in India. However base business lags its peers
Cipla implying lower brand equity for its excising portfolio. Also, the
company continues to lose market share in the inhaler franchise
with raises concern on ability to retain consumers.
Promising base business growth at 16.1% over FY11-17, but
lacks in areas of MR productivity and concentrated portfolio. As
Ipca
company launches better efficacy products, we expect company
to improve on these parameters.
Aurobindo has limited revenue from branded business and
Aurobindo
hence fares lower than its peers.
Excellent product portfolio but focused only in four therapies
Ajanta where growth opportunity is limited. Need to expand to newer
therapies.
Source: Company, Ambit Capital research Note: - Strong; - Relatively Strong; - Average; - Relatively weak
Exhibit 7: Increase in debt towards funding of Gavis Exhibit 8: Lupin focused on organic growth through capex
acquisition in 2015 in relevant markets (like Japan)
Interest Others Dividend
and 4% paid incl.
dividend tax
received 10%
Net 1%
Cash
borrowings Interest 14%
33% paid
2%
CFO Capex
Investments 61%
61% and loans
to subs/JV
Equity 13%
issues
1%

Lupin
Exhibit 9: Recent dip is due to invalidation of Ravicti patent Exhibit 10: Lupins share price performance vs Sensex; has
and US FDA warning for Goa and Indore plant given up all outperformance
35 460
30 410
25 360
20
310
15
10 260
5 210
0 160
12-Apr-13
12-Apr-14
12-Apr-15
12-Apr-16
12-Apr-17
12-Oct-12
12-Oct-13
12-Oct-14
12-Oct-15
12-Oct-16
12-Oct-17
110
60
Nov-10
Aug-11
Oct-13
Nov-14
Aug-15
Oct-17
Apr-12
Jan-13
May-13
Apr-16
Jan-17
May-17
Feb-14
Jun-14
Mar-11
Mar-15
Dec-11
Sep-12
Dec-15
Sep-16
1- year forward P/E (x)
5 year avg P/E (x) Lupin SENSEX

Field Score Comments
In our forensic analysis of 360 companies, Lupin scores above the pharma industry average (comprising 26
companies). Lupin scores high on (a) volatility in other income; and (b) contingent liabilities as percentage of
Accounting RED
networth. However, Lupin has weaker scores on: (a) CFO-EBITDA; (b) cash yield; (c) change in depreciation rate;
and (d) cumulative FCF to median revenues.
Overall, management made timely announcements in its earnings calls, meetings and interviews regarding
Predictability AMBER product filings, acquisitions and business outlook. However, the unpredictability of unknown large filings in the
USA, emerging markets and innovative projects makes us assign an AMBER flag on predictability.
Consensus FY18E and FY19E EBITDA and EPS estimates have been downgraded by 4% and 11% respectively in
Earnings momentum RED
the last six months.
Source: Ambit Capital research.

Lupin
Balance sheet (consolidated)

(Rs mn) FY13 FY14 FY15 FY16 FY17
Shareholders' equity 895 897 899 901 903
Reserves & surpluses 51,078 68,157 87,282 109,589 132,335
Total networth 51,973 69,053 88,181 110,490 133,238
Minority Interest 595 669 241 321 345
Debt 11,645 6,537 5,371 71,775 79,661
Deferred tax liability 1,632 1,779 1,182 (92) (1,128)
Sources of funds 65,845 78,039 94,975 182,494 212,116
Net block 30,002 33,556 43,682 87,170 110,329
CWIP 2,497 2,660 4,956 9,812 7,150
Investments 21 1,785 16,584 164 21,361
Cash & Cash equivalents 4,349 7,975 4,814 8,218 6,994
Total current assets 55,305 62,970 64,510 108,533 107,975
Net current assets 32,784 39,919 29,509 69,281 60,833
Applications of funds 65,845 78,039 94,975 182,494 212,116
Source: Company, Ambit Capital research;
Income statement (consolidated)

Net Sales 96,413 112,866 127,700 142,555 174,943
% growth 36% 17% 13% 12% 23%
Operating expenditure 73,714 82,838 91,504 105,702 130,012
EBITDA 22,699 30,028 36,196 36,854 44,931
% growth 57% 32% 21% 2% 22%
Depreciation 3,322 2,610 4,347 4,871 9,122
EBIT 19,377 27,418 31,849 31,982 35,809
Interest expenditure 410 267 98 595 1,525
Non-operating income 279 1,165 2,398 1,852 1,065
Adjusted PBT 19,246 28,317 34,148 33,239 35,349
Tax 5,842 9,622 9,704 10,593 9,785
Adjusted PAT before MI 13,404 18,695 24,444 22,646 25,564
% growth 51% 39% 31% -7% 13%
Minority Interest (263) (331) (412) (88) (72)
Adjusted PAT after MI 13,142 18,364 24,032 22,558 25,492
PAT margin 14% 16% 19% 16% 15%
Cash flow statement (consolidated)

Net Profit Before Tax 19,246 28,317 34,148 33,288 35,431
Depreciation 3,322 2,610 4,347 4,871 9,122
Others 874 1,495 (780) 982 3,025
(Incr) / decr in net working capital (5,494) (4,663) (949) (31,264) 5,059
Tax (5,439) (7,719) (9,436) (11,701) (11,490)
Cash flow from operations 12,510 20,039 27,331 (3,824) 41,148
Capex (net) (5,412) (5,252) (8,676) (57,815) (26,007)
Cash flow from investments (5,219) (8,585) (10,545) (69,617) (25,287)
Cash flow from financing (6,628) (8,571) (1,969) 58,364 4,332
Net change in cash 663 2,883 14,817 (15,077) 20,193
Closing cash balance 3,109 6,066 21,084 7,802 27,995
Free cash flow 7,097 14,787 18,655 (61,639) 15,141

Lupin
Ratio analysis (consolidated)

EBITDA margin (%) 24% 27% 28% 26% 26%
EBIT margin (%) 20% 24% 25% 22% 20%
Net profit (bef. MI) margin (%) 14% 17% 19% 16% 15%
Net debt: equity (x) 0.14 (0.05) (0.18) 0.57 0.38
Working capital turnover (x) 4.08 4.04 4.12 3.15 3.13
Gross block turnover (x) 2.17 2.26 2.14 1.80 1.62
RoCE (pre-tax) (%) 31% 38% 37% 23% 18%
RoIC (pre-tax) (%) 33% 42% 45% 26% 20%
RoE (%) 29% 30% 30% 23% 21%
Valuation parameters (consolidated)

Diluted EPS (Rs) 29 41 53 50 57
Book value per share (Rs) 116 154 196 245 295
P/E (x) 28 20 15 16 15
P/BV (x) 7.1 5.4 4.2 3.4 2.8
EV/EBITDA (x) 17 12 10 12 9

Lupin
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LIC Housing Finance
SELL
STRATEGY NOTE LICHF IN EQUITY November 17, 2017
The old lady of housing finance BFSI
LICHFs prolonged strong performance 21% EPS CAGR, 23% AUM CAGR,
Recommendation
and median RoE of 20% over FY06-17 was supported by a decade-long
rally in real estate prices, less hostile competition and parent LICs Mcap (bn): `292/US$4.5
support. The latter ensured access to cheaper liabilities (no liquidity 3M ADV (mn): `1263/US$19
crunch even during Lehmann crisis) and ease in customer acquisition CMP: `578
(access to LICs strong brand and 1mn agents). Moderating real estate TP (12 mths): `499
prices, hostile competition and worsening asset quality could moderate Downside (%): 14
earnings growth and RoE. We estimate 8% EPS CAGR over FY17-19E vs
18% over FY13-16 and 17.7% RoE, which should de-rate multiples. Our TP Flags
of `499 implies 1.9x 1-year forward P/B. Increasing wholesale cost of Accounting: GREEN
funds is a near-term catalyst for our SELL stance. Predictability: AMBER
Competitive position: MODERATE Changes to this position: NEGATIVE Earnings Momentum: AMBER
Strong focus on the salaried and urban segments

Performance
Promoted by state-owned life insurance giant, Life Insurance Corporation of India
160
(LIC), LICHF is Indias second-biggest HFC with a `1.3tn loan book. LICHF
140
focuses on home loans (85% of loan book) and more specifically on the salaried
segment (83% of home loans) and metros (45% of home loans). 120
100
Growth and RoE slowed despite realignment of assets and liabilities
80
LICHFs strong growth and profitability during FY06-12 (27% AUM CAGR;
Nov-16
Mar-17
May-17
Nov-17
Aug-17
Feb-17
Dec-16
Sep-17
Jun-17
median RoE of 23%) were driven by benign regulatory and moderate competitive
environment. But from FY12, regulatory and competitive headwinds put intense
pressure on LICHFs growth and profitability. Over FY12-17, AUM growth LIC Housing Fin. Sensex
moderated to 18% CAGR and RoE declined to 19%. This was despite a
meaningful realignment in liability mix (share of cheaper bond borrowings rose Source: Bloomberg, Ambit Capital research
from 58% in FY12 to 79% in FY17) and loan mix (share of higher yielding LAP
rose from 0% in FY12 to 12% in FY17). Growth in line with RoE implied that
dividend payout ratio was a reasonable ~21% over FY12-17.
Parent LICs support is the strategic asset

LICs support has helped LICHF get cheap and convenient access to wholesale
markets. This was tested during the Lehman crisis when LIC was able to access
funds rather effortlessly and sustained growth even as other lenders struggled for
funding. Moreover, beyond liabilities, LICs support has also driven customer
acquisition for LICHF through: i) branding: LICHFs approval on a home loan of a
under-construction project is perceived by customers as having minimal legal and
execution risks; and ii) origination: LICHF has access to ~1mn LIC agents, who
currently contribute ~60% of its origination.
A turn in the decade-long dream run

A decade-long surge in real estate prices combined with strong support from
parent LIC drove LICHFs earnings momentum of 21% CAGR over FY06-17.
However, with declining real estate prices and high competitive intensity, LICHFs
already moderate loan growth and profitability should decelerate further as Research Analysts
margin and asset quality pressures now start biting. So, we estimate LICHFs Pankaj Agarwal, CFA
earnings growth to continue moderating from 18% CAGR over FY13-17 to 8% +91 22 3043 3206
CAGR over FY17-19E. Moreover, like other HFCs, LICHF is also exposed to the pankaj.agarwal@ambit.co
looming regulatory risk of convergence of loan pricing to a more transparent and Aadesh Mehta, CFA
objectively calculated base rate (which is followed by banks). LICHFs stock trades +91 22 3043 3239
at 2.2x 1-year forward P/B, which is at a 22% premium to 5-year average. aadesh.mehta@ambit.co
LIC Housing Finance
Exhibit 1: LICHFs growth has moderated due to increasing competition
Strong growth period Moderation in growth and profitability

1,300 AUM CAGR 27% AUM CAGR 18% 30%
1,100 RoAs 1.9% RoAs 1.5%
900 25%
700
20%
500
300 15%
100
(100) FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 10%
AUM (Rs bn) RoEs (RHS, %)
Exhibit 2: LICHF key financial parameters over the last decade

(` mn) FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17
Interest Income 10.2% 11.0% 10.0% 10.2% 10.8% 10.9% 11.0% 10.9% 10.9% 10.7%
Interest Expense 7.4% 8.1% 7.3% 7.1% 8.3% 8.6% 8.7% 8.6% 8.3% 7.9%
Net Interest Income 2.8% 2.9% 2.7% 3.1% 2.5% 2.2% 2.3% 2.3% 2.6% 2.8%
Non-Interest Income 0.7% 0.6% 0.6% 0.5% 0.4% 0.3% 0.3% 0.3% 0.2% 0.2%
Total Income 3.4% 3.6% 3.3% 3.7% 2.9% 2.5% 2.6% 2.6% 2.8% 3.0%
Operating Expenses 0.7% 0.62% 0.58% 0.49% 0.43% 0.41% 0.38% 0.39% 0.42% 0.47%
Pre Provisioning Profit 2.8% 2.9% 2.7% 3.2% 2.5% 2.1% 2.2% 2.2% 2.4% 2.5%
Loan loss provisions 0.12% 0.02% -0.09% 0.09% 0.20% 0.12% 0.03% 0.01% 0.13% 0.22%
Profit Before tax (PBT) 2.7% 2.9% 2.8% 3.1% 2.5% 2.0% 2.2% 2.2% 2.3% 2.3%
Taxes 0.7% 0.8% 0.8% 0.9% 0.7% 0.5% 0.6% 0.6% 0.8% 0.8%
RoA 1.9% 2.1% 2.0% 2.2% 1.6% 1.5% 1.6% 1.4% 1.5% 1.5%
Leverage 11.7 12.1 11.5 11.5 11.3 11.3 11.8 12.6 13.2 13.0
RoE 22.7% 25.8% 23.2% 25.5% 18.5% 16.8% 18.8% 18.1% 19.6% 19.5%
AUM growth (%, YoY) 21% 22% 34% 38% 28% 25% 18% 19% 15% 15%
EPS growth (%, YoY) 39% 37% 16% 40% -6% 5% 29% 5% 20% 16%
Source: Company, Ambit Capital research.
Exhibit 3: LICHFs growth and profitability has meaningfully moderated since FY12
LICHFs robust growth (27% CAGR) during this period was driven by both increasing customer acquisition (due to
benign competition in the small ticket segment and increasing ticket size per loan (due to rapid increase in real estate
Strong growth prices).
FY06-12
period
Regulatory and competitive environment remained benign. Consequently both growth and profitability remained high
during this period (AUM CAGR of 27% and RoA of 1.9%).
Regulatory headwinds emerged FY11 onwards such as introduction of base rate system (which led to increasing cost
of funds) and removal of prepayment penalties (leading to higher churn in the loan book and reduction in fee-
income).
Moreover, during this period, HFCs have seen hyper-competition from banks in home loans due to: i) lack of any
Moderation in opportunities in corporate loans due to slowdown; and ii) regulators incentivising affordable housing in FY15 by
FY12- reduction of risk weights and exemption on SLR/CRR and PSL requirements. Decline in real estate prices have also let
growth and
Current to moderation in ticket size growth (which used to drive 50-60% of growth of HFCs).
profitability
Consequently LICHFs growth has moderated to 18% CAGR over FY12-17 versus 27% CAGR in FY06-12. However,
LICHF was able to sustain such pressure on profitability and growth by: i) increasing the share of higher-yielding
albeit risky LAP (from 0% in FY12 to ~12% in FY17); and ii) shift in liability mix towards cheaper bond borrowings
(from 58% in FY12 to 79% in FY17). This somewhat offset the lower profitability from the business and enabled it to
still deliver moderate RoA of 1.5% during this period.

LIC Housing Finance
Exhibit 4: Competitive mapping of HFCs LICHFs growth has moderated despite its small-ticket positioning
Key metrics Avg. ticket AUM AUM CAGR Opex/ Gross Branches Employees
NIMs RoA RoE
(FY17) size (Rs mn) (Rs bn) (FY13-17) AUM NPA (%) (#) (#)
LICHF 1.3 1,445 17% 2.7% 0.5% 0.43% 1.5% 19.5% 245 1,833
GRUH 0.6 132 25% 4.3% 0.8% 0.31% 2.5% 30.5% 185 661
HDFC 2.6 3,378 16% 3.0% 0.2% 0.79% 1.5% 19.1% 427 2,196
REPCO 1.4 89 26% 4.8% 0.8% 2.60% 2.2% 17.4% 157 625
CANFIN 1.8 133 35% 3.5% 0.7% 0.21% 1.9% 24.1% 170 578
DEWAN 1.4 836 23% 2.7% 0.8% 0.94% 3.6% 18.0% 352 2,881
PNBHF 3.7 415 58% 3.7% 1.0% 0.22% 1.4% 13.6% 63 999
Exhibit 5: Mapping LICHF and its peers on IBAS
Particulars GRUH HDFC LICHF REPCO CNFIN DHFL PNBHF Comments
Innovation in terms of ability to appraise a non-salaried borrower is
key to gain penetration in the under-served low-income segment.
GRUH scores best in the metric due to its innovative products and
appraisal techniques. GRUHs product innovation is exemplified from
the fact that it structures customised EMIs to match the cash flows of
the low-income borrowers and has flexible repayment plan as per
Innovation
daily, monthly or yearly amortising. Moreover, GRUH was the first HFC
to introduce a formal credit score methodology for the low-income
category of borrowers. Repco comes closest to GRUH in replicating
this. Moreover Repcos origination strategy is also innovative as it
sources only through loan melas and referrals and avoids sourcing
through DSAs unlike other HFCs.
Brand for the home loan borrower will depend on the perceived
customer service and the perceived project financing abilities by the
lender. Whilst HFCs score lower than banks on all these metrics, HDFC
Brand
enjoys the best brand amongst the HFCs due to superior perception on
the above metrics, followed closely by GRUH. LICHF, CNFIN and
PNBHF also score high due to their PSU parentage.
A robust branch network with decentralised decision making is the key
to gain penetration in small ticket housing finance. HDFC with ~427
branches and a decentralised decision making has one of the best
Architecture
architectures amongst peers, closely followed by DHFL and GRUH.
Whilst REPCO has marginally lower branches than GRUH, it also
scores highly due to a decentralised decision making process.
Support of the parent, strong credit rating and a granular retail deposit
franchise are the key strategic assets for HFCs in times of liquidity
Strategic asset
crunch. LICHF is best placed in this metric due to strong support from
its parent on the above mentioned metrics.
LICHF comes out as one the strongest HFCs versus its peers due to its
Overall rank
strengths in innovation, brand, architecture and strategic assets.
Source: Company, Ambit Capital research Note: - Strong; - Relatively Strong; - Average; - Relatively weak.
Exhibit 6: LICHFs AUM is dominated by home loans Exhibit 7: Salaried segment dominate LICHFs home loans
4% LICHF's customer profile
Salaried
13% 17%
Self-employed &
others
Home loans
LAP
Developer
84% 83%

LIC Housing Finance
Exhibit 8: LICHFs liability mix is tilted towards bonds Exhibit 9: LICHFs asset quality is worsening slightly
2% Gross NPA Credit costs

3% 3.0%
5% 9%
2.5%
Banks
2.0%
NCD
1.5%
NHB
Deposits 1.0%
Others 0.5%
81%
0.0%
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
-0.5%
Exhibit 10: LICHF is trading at a 21% premium to its Exhibit 11: LICHFs share price performance versus Sensex
cross-cycle average P/B
3.5
1,000
3.0
2.5 750
2.0 500
1.5
250
1.0
0.5 0
Mar-15
Mar-17
Jul-16
Mar-09
Mar-11
Mar-13
Jul-12
Jul-14
Jul-08
Jul-10
Nov-15
Nov-17
Nov-07
Nov-09
Nov-11
Nov-13
0.0
Mar-05
Mar-06
Mar-07
Mar-08
Mar-09
Mar-10
Mar-11
Mar-12
Mar-13
Mar-14
Mar-15
Mar-16
Mar-17
LIC Housing Sensex Index

PB Avg. PB -1 SD +1 SD
Source: Bloomberg, Ambit Capital research Source: Bloomberg, Ambit Capital research

LICHFs revenue and expense recognition policies are by far the most conservative amongst the peers. We do
Accounting GREEN not come across any instance wherein the reported profitability of the company is materially different from its
true profitability.
Volatile bond yields and frequent base rate cuts by banks have made it difficult to predict the earnings of
Predictability AMBER LICHF. Moreover, the management guidance has been off-mark both in times of earnings decline and
recovery.
Earnings momentum AMBER Consensus has downgraded in FY18/19 EPS estimates by 3-4% over the past 3-4 months

LIC Housing Finance
Income statement
FY15 FY16 FY17 FY18E FY19E
Net Interest Income 22,364 29,441 36,452 39,138 42,399
Interest Income 105,467 122,508 138,767 149,543 166,498
Interest Expense 83,102 93,068 102,315 110,405 124,100
Non Interest Income 2,520 2,346 2,036 2,159 2,340
Total Income 24,884 31,787 38,489 41,297 44,738
Operating expenses 3,792 4,687 6,118 7,198 8,483
Pre Provisioning Profit 21,092 27,100 32,371 34,099 36,255
Provisions 73 1,465 2,813 2,180 2,831
PBT 21,020 25,635 29,558 31,919 33,424
Less:Tax 7,158 9,028 10,246 10,533 11,030
Net Profit 13,862 16,608 19,312 21,386 22,394
Balance sheet
Networth 78,184 91,460 106,909 124,018 141,933
Borrowings 965,470 1,109,360 1,263,350 1,462,703 1,655,375
Total Sources of funds 1,043,654 1,200,820 1,370,259 1,586,721 1,797,308
Loan Book 1,083,610 1,251,730 1,445,340 1,653,992 1,873,507
- Individual 1,056,300 1,217,310 1,390,240 1,568,177 1,757,727
- Developer 27,310 34,420 55,100 85,815 115,780
Other Assets (39,956) (50,910) (58,785) (67,271) (76,199)
Total Application of funds 1,043,654 1,200,820 1,386,555 1,586,721 1,797,308

LIC Housing Finance
Key ratios
AUM growth (%) 18.6 15.5 15.5 14.4 13.3
Dil Consol EPS growth (%) 5.2 19.8 16.3 10.7 4.7
Net interest margin (NIM) (%) 2.3 2.6 2.7 2.5 2.4
Cost to income (%) 15.2 14.7 15.9 17.4 19.0
Opex (% of AAUM) 0.39 0.41 0.45 0.46 0.48
Gross NPAs (%) 0.5 0.5 0.4 0.5 0.6
Credit costs (% of AAUM) 0.01 0.13 0.21 0.14 0.16
Provisioning Coverage 52.2 51.1 67.4 66.0 65.0
Capital adequacy (%) 16.5 17.0 17.0 17.0 17.0
Tier-1 (%) 12.5 13.9 13.9 13.9 13.9
Leverage (x) 12.6 13.2 13.0 12.9 12.7
Valuation parameters
BVPS (Rs) 155 181 212 246 281
Diluted EPS (Rs) 27.5 32.9 38.3 42.4 44.4
ROA (%) 1.6 1.5 1.5 1.4 1.3
ROE (%) 18.1 19.6 19.5 18.5 16.8
P/E 21.2 17.7 15.2 13.8 13.1
P/BV 3.8 3.2 2.8 2.4 2.1
Dividend yield (%) 0.9 0.9 1.1 1.2 1.3

Page Industries
BUY
STRATEGY NOTE PAG IN EQUITY November 17, 2017
One Page many stories Consumer Discretionary
With unparalleled focus on innerwear and associated categories, the Recommendation

Genomals have leveraged their experience in the Philippines to fortify
Mcap (bn): `206/US$3.6
Pages moats around: a) product differentiation given in-house
6M ADV (mn): `270/US$4.2
manufacturing; b) aspirational brand recall; and c) tight control on the
distribution channel. New entrants struggle to break Jockeys customer CMP: `20,400
loyalty which is built on a combination of quality and affordability. TP (12 mths): `16,728
Lingerie will be a key growth driver as Page fills product gaps in Upside (%): 0
fashion segment. Transition from mens wear brand to family brand
via US$2.4bn leisurewear market and US$8bn kidswear market Flags
supports growth visibility. Valuation of 50x FY19E EPS is punchy but Accounting: GREEN
attractive given expectations of strong momentum in the topline (26% Predictability: AMBER
CAGR over FY17-21E) led by streamlined focus on each category, high Greatness: GREEN
growth opportunities in womens wear and leisurewear.
Competitive position: STRONG Changes to this position: STABLE Performance (%)
200
Page possesses strong and sustainable growth drivers 180
Page controls the master franchise of Jockey (innerwear) and Speedo 160
140
(swimwear) in India. Over the past 10 years, Page has delivered 31%
120
revenue/earnings growth with 36% average RoCE. Longevity of Pages growth 100
is led by: (a) volumes of panties, which are just a fourth of mens innerwear 80
while the socioeconomic class that Page caters to in mens and womens wear
Nov-16
Mar-17
May-17
Nov-17
Aug-17
Feb-17
Dec-16
Sep-17
Jun-17
is the same; (b) sustainability of competitive advantages driving market share
gains in mid-to-premium innerwear; and (c) new launches in largely
Page Inds. Sensex
unorganized and unrivaled leisurewear and kidswear (US$ 8bn).
Page has focused on Jockey/Speedo and capital discipline Source: Bloomberg, Ambit Capital Research
Pages foundation is built on: a) 60-year association with Jockey and Speedo;
and b) strong focus on capital allocation and RoCE. Some of the key strategic Pages forensic score analysis
decisions Page has implemented over the past decade are: a) extending
Jockeys product portfolio to leisurewear and womens innerwear; b)
maintaining capital allocation discipline with 0.3-0.5x debt/equity, leveraging
benefits of Technology Upgradation Funds Scheme for the textile sector, and c)
ensuring payout of surplus capital each year as dividends to shareholders.
Page has built a fortress with its competitive moats
Pages competitive advantages are centered on: a) in-house manufacturing to
deliver product differentiation in a labour-intensive industry; b) maintaining Pages greatness score analysis
aspirational connect with consumers; and c) an entrenched distribution
channel spanning hosiery stores to exclusive brand outlets through distributors.
Threats to Pages leadership are low given: a) incumbents like Rupa/Maxwell
sell through the wholesale channel with outsourced manufacturing and, hence,
lack control on both manufacturing and distribution; b) new entrants like
FCUK, USPA, CK and Van Heusen or regional players cant offer affordable
products given lack of in-house manufacturing.
Page deserves one of the highest P/E multiples in the consumer space
Page can record 24% CAGR over the next decade led by womens innerwear,
leisurewear and kidswear. Disciplined category selection (only knits), tough-to-
displace shelf space and brand sweating will only boost dominance. Valuation Research Analysts
of 50x FY19E EPS only partly captures blend of Hanes-like dominance and Abhishek Ranganathan, CFA
high/visible growth ramp. Key risks: Inadequate launches in womens wear, +91 22 3043 3085
allowing peers to grow bigger; impact of macro slowdown on leisurewear abhishek.r@ambit.co
demand; and inability to manage growth given labour-intensive
Mayank Porwal
manufacturing.
+91 22 3043 3214
mayank.porwal@ambit.co
Page Industries
Exhibit 1: Evolution of Page Industries

25 0.6
Phase IV-Beating the
Phase III- 0.5
20 competition
Gearing up for
the competition 0.4
15
Rs bn
0.3
10
0.2
5 0.1
0 0
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
Mens innerwear revenues (LHS) Leisurewear revenues (LHS) Others (LHS)
Womens innerwear revenues (LHS) Innerwear (Men + Women) revenues (LHS) RoCE (post-tax) (RHS)
Source: Ambit Capital research, * Split of men and women innerwear is available since FY10.
Exhibit 2: Pages key financial parameters over the last decade

Revenues 1,945 2,584 3,441 4,977 6,966 8,758 11,876 15,430 17,955 21,301
Revenue growth (%) 42% 33% 33% 45% 40% 26% 36% 30% 14% 18%
Net profits 238 316 396 585 900 1,125 1,537 1,960 2,315 2,663
EPS 21 28 36 52 81 101 138 176 208 239
CFO 112 315 298 (2) 1,226 871 740 1,670 2,192 2,736
CFO (pre-tax)/EBITDA (%) 58% 84% 70% 31% 113% 79% 59% 83% 86% 100%
FCF (90) 43 62 (275) 959 430 280 1,139 1,929 2,122
Debt equity (x) 0.5 0.5 0.6 0.9 0.5 0.5 0.6 0.3 0.1 0.1
RoE (%) 33% 39% 43% 53% 62% 59% 61% 58% 51% 45%
Pre-tax ROCE (%) 36% 42% 44% 48% 60% 64% 65% 62% 59% 60%
Exhibit 3: The key things to note from the evolution of Page

Time period Phase Key developments/ initiatives
Genomal Vehromal (father of Sunder Genomal) got the license to manufacture Jockey in the
Philippines in 1959
Establishing Jockeys leadership Genomals got the master franchise of brand Speedo in Philippines in 1988
1959-1992
in the Philippines Jockey entered India in 1962 with Associated Apparels, and exited in 1973
Several innerwear brands expanded during 1980s and 1990s in India Rupa, Amul, Lux Cozi,
Neva, Bodycare, Softy, Lady Care, Little Lacy, Red Rose etc.
Page Apparel Manufacturing was incorporated in Nov 1994 in Bangalore
Mens innerwear products launched in November 1995
Jockey re-enters India through
1993-1997 First exclusive brand outlet launched in Bangalores Commercial Street in 1995
Page
Between 1995 and 1997, core team was hired (incl. Vedji Tiku and Pius Thomas)
Competition for Jockey included strong brands like Liberty, Libertina and Tantex
Competition intensified Rupa and VIP were 7-8x larger than Jockey in sales
1997-2003 Gearing up for competition TTK Tantex and Associated Apparel (Liberty/Libertina) fell prey to labour strikes
In FY03, Page crossed Rs500mn in sales with a retail network of 10,000 outlets
Page delivered 35% sales CAGR with at least one new product launch every year
Some key new product launches sub-brand Jockey Zone for mens in 2004, brassieres in 2005,
No panty line promise in 2006, sub-brand USA Originals in 2014, Kids innerwear in 2015,
Towels in 2016
2004-2017 Beating the competition In 2007, Page raised Rs1bn from an IPO
Brand campaign launch - Just Jockeying (2010), Jockey or Nothing (2015) and There is Only
One (2017)
Speedos licence for India signed up in 2011
UAE was added as a new territory in 2011
Source: Ambit Capital Research, Company
Page Industries
Exhibit 4: Competitive mapping of the company with its key peers

Revenues 3 yr Avg 3 yr Avg 3 yr Avg 3 yr
Avg 3yr Distribution
of FY17 Revenue EBITDA CFO / CFO/ Segment presence
ROCE channel type
(Rs mn) CAGR margin EBITDA Capex
Men and women innerwear; leisurewear,
Page 21,301 22% 20% 90% 4.6 41% Distributor based only
sportswear, swim wear
Rupa 10,927 7% 14% 100% 5.8 25% Wholesale largely Men innerwear, men leisurewear, thermal wear
VIP 2,321 -3% 6% NA 0.9 11% Wholesale largely Men and women innerwear
Lovable 1,974 7% 13% 41% 0.5 13% Wholesale + Distributors Women innerwear, women sportswear
Exhibit 5: Mapping Page and its peers on IBAS

Page Rupa VIP Lovable Comments
Jockey (Parent) provides technology related innovation
Page has 20 member R&D team to understand local consumer preferences
Innovation
Whilst Page launches one new product every year, product portfolio of peers largely
remains unchanged for 3-5 years in a row
Jockey has maintained an aspirational recall as an international brand
Brand Page doesnt allow price discounts on its products, unlike others
Page maintains premium look and feel of its stores, display racks and packaging
Page uses in-house manufacturing with strong labour relationships vs outsourced
manufacturing for peers
Page sells through distributor channel vs wholesale for Rupa/VIP
Architecture
Page follows a process oriented approach towards operations management
Page's HR philosophy includes empowerment of professionals and attractive incentive
structures for senior managers
Page has over 60 years experience of expanding Jockey in the Philippines
Strategic Asset
Access to Jockey's international experience and technology is a key strategic asset
Overall
Exhibit 6: Uncanny similarities between Hanes and Page in terms of organisation and brand positioning
Attributes Hanes Page
65% overall cost of goods sold is manufactured in-house; this Page controls over 85% of COGS, as currently they
Control over Manufacturing
includes activewear, T-shirts which are usually outsourced deal only in innerwear and leisurewear
Diversified yet utility driven product Hanes has utility-driven yet diversified product mix ranging Page's product portfolio is diversified catering to
mix from innerwear (46%) to activewear (27%) innerwear (68%) and leisurewear (40%)
Employs various types of inventory management techniques
that include collaborative forecasting Sales and marketing team forecasts demand a year in
Demand forecasting and working
and planning, supplier-managed inventory, key event advance based on a MIS for each and every product.
Capital management
management and various forms of replenishment This helps create order pipeline for production team
management processes
Positioning is that of a product offering comfort yet timeless Positioning as mid-to-premium aspirational
Clear and consistent positioning
and everyday utility international brand
Ensuring availability of innerwear styles through the years Ensuring style availability and refreshing the same
Processes aligned to positioning
(after launch) as customers seldom change styles with new colours
Maintained its position in various categories over years despite Page has leveraged on its success in men's wear by
High Displacement quotient competition from existing players as well as new players and re-investing in women's wear and thus, utilising same
private labels of department stores distribution channel
Exhibit 7: Market share analysis for the mid-premium innerwear segment of Page
By value By no. of customers Value growth
2014 2020 2030 2014 2020 2030 FY16-20 FY20-30
For mid-premium segment
Mid-premium segment as a % of Total Innerwear Market 41% 50% 62% 11% 15% 18% 17% 12%
Men's mid-premium segment as a % of Total Men's Innerwear market 42% 52% 61% 13% 16% 20% 16% 11%
Women's mid-premium segment as a % of Total Women's Innerwear market 40% 50% 62% 10% 14% 17% 18% 13%
For Page Industries
Page Total Innerwear as a % of mid-premium market 17% 26% 38% 25% 30% 56% 28% 19%
Page Mens as a % of mid-premium Men's market 30% 46% 65% 34% 40% 64% 24% 17%
Page Women's as a % of mid-premium Women's market 8% 13% 25% 12% 16% 46% 37% 23%
Page Industries
Exhibit 8: Bras will drive women lingerie growth; leisurewear share is set to increase
led by distribution
500
450 Others
400
350 Leisurewear
300 revenues
Rs bn
250
Mens innerwear
200
revenues
150
100 Panty revenues
50
0 Bra revenues
FY10
FY12
FY14
FY16
FY18E
FY20E
FY22E
FY24E
FY26E
FY28E
FY30E
FY32E
FY34E
Exhibit 9: Page will maintain its RoCE trajectory even as Exhibit 10: Hanes RoCE has increased despite higher
outsourcing increases outsourcing
% of cost of goods outsourced by Hanes (LHS)

% of cost of goods outsourced by Page (LHS) RoCE of Hanes (post-tax) (RHS)
40% 25%
RoCE of Page (post-tax) (RHS)
25% 60% 35%
20%
50% 30%
20%
40% 25% 15%
15%
20%
30%
10% 15% 10%
20%
10%
5% 10% 5%
5%
0% 0% 0% 0%
FY14
FY15
FY16
FY17
FY18E
FY19E
FY20E
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
Exhibit 11: Sources of funds over FY07-16 Exhibit 12: Application of funds over FY07-16
Debt Interest Increase in Debt
raised, 10% received, cash and repayment,
0% cash 10%
Proceeds equivalents,
from 5%
shares, 0%
Net Capex,
28%
Dividend
Cash flow paid, 46%
from
operations,
89% Interest
paid, 7%
Page Industries
Exhibit 13: One-year forward P/E Exhibit 14: Share price performance vs Sensex
80 6,000
70 5,000
60
4,000
50
40 3,000
30 2,000
20 1,000
10
0
Jan-12
Jan-13
Jan-14
Jan-15
Jan-16
Jan-17
Sep-12
Sep-13
Sep-14
Sep-15
Sep-16
Sep-17
May-12
May-13
May-14
May-15
May-16
May-17
Oct-08
Oct-09
Oct-10
Oct-11
Oct-12
Oct-13
Oct-14
Oct-15
Oct-16
Oct-17
Apr-08
Apr-09
Apr-10
Apr-11
Apr-12
Apr-13
Apr-14
Apr-15
Apr-16
Apr-17
1 year fwd P/E 5 yrs average PE
PAG IN SENSEX
Source: Company, Ambit Capital research Source: Company, Ambit Capital research; Note: price are rebased to 100

Page Industries' cash conversion has remained healthy and this has resulted in cumulative CFO (pre-tax)/EBITDA of
Accounting GREEN above 76% in FY08-17. Page has maintained effective control on the working capital cycle, and hence despite high
sales growth, WC days have increased marginally from 63 days in FY08 to 72 days in FY17.
Since FY16, Page Industries has thrice beaten consensus revenue estimates by more than 6% and missed twice by
Predictability AMBER
less than 5%. It has thrice missed consensus EPS estimates by more than 3% and beaten twice by more than 4%.
In the last six months, consensus earnings forecasts for Page have been downgraded by ~0.5% for FY18 and
Earnings momentum GREEN
upgraded by ~0.5% for FY19
Exhibit 16: Pages forensic score has remained in the zone Exhibit 17: Pages greatness score has improved from 50
of safety over 2011-16 in 2011 to 80 in 2016
Page Industries
Abridged Financial summary

Balance Sheet
Year to March FY15 FY16 FY17 FY18E FY19E
Reserves & surplus 3,756 5,187 6,546 7,754 9,595
Total net worth 3,868 5,299 6,658 7,866 9,707
Loan funds 1,573 949 877 699 449
Total liabilities 5,555 6,327 7,646 8,675 10,266
Gross block 3,059 2,408 2,764 4,672 5,446
Net block 2,173 2,167 2,361 3,007 3,432
Inventories 4,435 5,408 6,229 6,505 8,260
Debtors 878 1,024 1,099 1,457 1,830
Cash and cash equivalents 44 86 206 1,055 994
Loans & Advances 609 506 517 728 915
Other current assets 95 70 164 465 560
Creditors 821 941 1,113 1,370 1,739
Deposits from Dealers 556 735 1,031 1,064 1,336
Other current liabilities 799 1,120 1,380 1,675 2,105
Provisions 504 143 169 437 549
Total assets 5,555 6,327 7,646 8,675 10,266
Income statement
Net Sales 15,430 17,955 21,301 26,589 33,405
% growth 29.9% 14.2% 18.6% 24.7% 25.6%
Raw materials Cost 7,121 8,084 9,814 12,497 15,867
Employees cost 2,585 3,127 3,756 4,440 5,470
Royalty expenses 846 994 1,183 1,481 1,861
Advertisement expenses 714 670 875 1,010 1,203
Other Admin, S&D expenses 974 1,329 1,540 1,684 2,047
Total operating expenses 12,240 14,204 17,169 21,113 26,448
EBITDA 3,190 3,751 4,133 5,476 6,957
% growth 27.0% 17.6% 10.2% 32.5% 27.0%
Depreciation 176 241 247 297 349
EBIT 3,014 3,510 3,886 5,179 6,608
Non operating Income 86 98 243 160 200
Interest expenditure 167 178 180 60 40
PBT 2,933 3,430 3,949 5,279 6,768
Tax expenses 973 1,116 1,285 1,689 2,166
Adjusted PAT 1,960 2,315 2,663 3,590 4,603
Page Industries
Cash flow statement

PBT 2,933 3,431 3,948 5,279 6,768
Depreciation 176 241 247 297 349
Tax (966) (1,046) (1,397) (1,689) (2,166)
(Increase)/Decrease in working capital (569) (583) (65) (565) (1,227)
Cash flow from operating activities 1,670 2,192 2,736 3,222 3,565
Capex (534) (263) (613) (731) (775)
Cash flow from investing activities (531) (262) (1,074) (571) (574)
Net borrowings (59) (624) (72) (250) (250)
Interest paid (171) (178) (180) (60) (40)
Dividend paid (899) (1,087) (1,289) (1,974) (2,762)
Cash flow from financing activities (1,129) (1,889) (1,541) (2,284) (3,052)
Free cash flow 1,139 1,929 2,122 2,651 2,991
Ratio analysis
Gross margin (%) 53.8 55.0 53.9 53.0 52.5
EBITDA margin (%) 20.7 20.9 19.4 20.6 20.8
EBIT margin (%) 19.5 19.5 18.2 19.5 19.8
Net profit margin (%) 12.7 12.9 12.5 13.5 13.8
Dividend payout ratio (%) 49 49 36 55 60
Net debt/equity (x) 0.4 0.2 0.1 (0.0) (0.1)
RoCE (%) 41.6 41.7 40.4 46.1 49.5
ROE (%) 58.0 50.5 44.6 50.9 52.4
EPS (Rs) 175.7 207.5 238.8 321.8 412.6
Dividend per share (Rs) 72.0 85.0 72.0 151.3 211.6
P/E (x) 116.6 98.8 85.8 63.4 49.4
P/BV (x) 59.1 43.1 34.3 28.9 23.4
EV/EBITDA (x) 72.1 61.2 55.4 41.5 32.6
Price/Sales (x) 14.8 12.7 10.7 8.6 6.8
Dividend yield (%) 0.4 0.4 0.4 0.7 1.0
Page Industries
GRUH Finance
NOT RATED
STRATEGY NOTE GRHF IN EQUITY November 17, 2017
Will it become more expensive? BFSI
GRUH has the strongest positioning in the affordable housing finance Recommendation
due to its innovative credit scoring (first to credit score low-income
Mcap (bn): `181/US$2.8
borrowers), strong local knowledge (well-penetrated and decentralized
3M ADV (mn): `149/US$2.3
branches) and backing of the behemoth HDFC. Combined with a decade-
CMP: `496
long surge in real estate prices, these strengths have driven GRUHs
superior profitability and growth over FY06-17 (avg. RoE of 30% and TP (12 mths): NA
AUM CAGR of 26%). However, moderating real estate prices, hostile Downside (%): NA
competition and moderately worsening asset quality have slowed
earnings momentum (EPS growth of 21% in FY16-17 vs 28% over FY10- Flags
15). GRUHs lofty valuations (13x 1-year fwd P/B, ~130% premium to Accounting: GREEN
peers) will be tested by the declining earnings momentum. Predictability: GREEN
Competitive position: STRONG Changes to this position: NEGATIVE Earnings Momentum: AMBER
Play on the rural mortgage opportunity Performance

Set up in 1986, GRUH is a subsidiary of HDFC (owns 59%). It provides housing 200
loans in rural and semi-urban areas, operating primarily in Gujarat and 180
160
Maharashtra, which account for ~70% of its loan book. With a modest loan 140
book of ~`137bn, GRUH accounts for less than 1% market share in mortgages 120
and averaged loan growth of ~26% over FY06-17, making it a promising play 100
on the rural mortgage opportunity in India. 80
Nov-16
Mar-17
May-17
Nov-17
Aug-17
Feb-17
Dec-16
Sep-17
Jun-17
Strong focus on the informal segment drives robust growth and RoE
Since the stressful period of 1996-98, GRUH moved away from the developer GRUH Finance Sensex
loan segment to individual home loans where asset quality and profitability were
higher. Hence, share of individual home loans increased from 61% of loan book
in FY97 to 97% by FY02, resulting in RoE improving from 3% in FY98 to 22% in Source: Bloomberg, Ambit Capital research
FY04. Since then, RoE has never dipped below 24% as GRUH single-mindedly
focused on small-ticket home loans to informal segments. High RoE over the
past ten years (average ~30%) implied that it didnt need to raise capital despite
growing at 26% CAGR and simultaneously sustaining a generous dividend
payout of ~43% during the same period.
Innovation and architecture drive competitive advantages
GRUH is one of the strongest HFCs on the IBAS framework due to: (i) its
innovative products and appraisal techniques (first HFC to introduce credit
scoring for low-income borrowers); ii) a well-penetrated and decentralized
branch architecture, underpinning its strong local area knowledge and superior
sourcing of low-ticket customers (despite low ticket sizes, credit costs have been
minimal at average ~20bps over the past ten years); iii) HDFCs parentage,
which enables it to get a better cost of funding, credit appraisal process and
management quality; and (iv) strong local reputation owing to its superior and
transparent customer service relative to peers. However, regulatory and
competitive headwinds pose risks to earnings growth.
Valuations could be tested by declining earnings momentum
Mortgage financers are trading at premium valuations due to expectations of
strong and sustained earnings growth led by the Governments thrust on
affordable housing. Whilst such yet to reflect on-ground measures could Research Analysts
benefit smaller HFCs like GRUH in the long term, peak valuations could be Aadesh Mehta, CFA
tested in the interim as moderating real estate prices, hostile competition and +91 22 3043 3239
asset quality risks moderate earnings momentum (EPS CAGR of 21% in FY16-17 aadesh.mehta@ambit.co
vs 28% over FY10-15). Moreover, all HFCs, including GRUH, are exposed to the
Pankaj Agarwal, CFA
looming regulatory risk of convergence of loan pricing to a more transparent
+91 22 3043 3206
and objectively calculated base rate (which is followed by banks).
pankaj.agarwal@ambit.co
GRUH Finance
Exhibit 1: Evolution of GRUH good times have ended due to competitive and regulatory headwinds
The good times Headwinds emerge

160 AUM CAGR 28% AUM Growth 24% 45%
140 NIMs 4.5% NIMs 4.3%
RoAs 2.5% RoAs 2.3% 40%
120
100
35%
80
60 30%
40
25%
20
- 20%
FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17
Exhibit 2: GRUH key financial parameters over the last decade

(Fig in ` mn) FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17
Interest Income 10.8% 12.3% 11.1% 11.0% 12.3% 12.3% 12.2% 12.0% 11.4% 11.3%
Interest Expense 6.7% 8.6% 6.7% 6.4% 7.7% 7.8% 8.2% 7.9% 7.5% 7.2%
Net Interest Income 4.1% 3.7% 4.3% 4.6% 4.6% 4.5% 4.1% 4.0% 3.9% 4.1%
Non-Interest Income 0.4% 0.3% 0.5% 0.4% 0.4% 0.3% 0.5% 0.5% 0.4% 0.3%
Total Income 4.5% 4.0% 4.8% 5.0% 5.1% 4.7% 4.5% 4.5% 4.4% 4.5%
Operating Expenses 1.0% 0.9% 0.9% 1.0% 1.0% 0.9% 0.8% 0.8% 0.8% 0.7%
Employee Expenses 0.4% 0.5% 0.5% 0.5% 0.5% 0.5% 0.5% 0.4% 0.4% 0.4%
Admin Expenses 0.5% 0.4% 0.5% 0.5% 0.5% 0.4% 0.4% 0.4% 0.4% 0.4%
Pre Provisioning Profit 3.5% 3.1% 3.8% 4.1% 4.1% 3.9% 3.7% 3.7% 3.6% 3.7%
Loan loss provisions 0.2% 0.1% 0.3% 0.1% 0.1% 0.1% 0.04% 0.2% 0.2% 0.3%
Profit Before tax (PBT) 3.3% 3.0% 3.5% 4.0% 4.0% 3.8% 3.7% 3.5% 3.4% 3.5%
Taxes 1.0% 0.8% 1.0% 1.1% 1.1% 1.0% 1.0% 1.1% 1.1% 1.1%
RoA 2.3% 2.1% 2.6% 2.9% 3.0% 2.9% 2.7% 2.4% 2.3% 2.3%
Leverage 10.2 11.4 11.0 10.8 11.5 11.8 12.1 12.9 13.9 13.1
RoE 23.7% 24.3% 28.4% 31.4% 34.2% 34.2% 32.2% 30.9% 31.5% 30.5%
AUM growth (%, YoY) 29% 18% 18% 29% 28% 33% 29% 28% 24% 19%
EPS growth (%, YoY) 30% 19% 37% 31% 31% 20% 20% 14% 19% 22%
Exhibit 3: Emerging regulatory & competitive headwinds led to slower growth and lower profitability recently
GRUHs robust growth (28% CAGR) during this period was driven by both increasing customer acquisition (due to
benign competition) and increasing ticket size per loan (due to real estate prices).
The good times FY05-14 Regulatory headwinds emerged FY11 onwards such as introduction of base rate system (which led to increasing cost
of funds) and removal of prepayment penalties (leading to higher churn in the loan book and reduction in fee-
income). However, GRUH was able to price in such increased costs to its customers due to benign competition and
relatively small market share in key geographies. Its RoA sustained at 2.5% during this period.
During this period, HFCs have seen hyper-competition from banks in home loans due to: i) lack of any opportunities
in corporate loans due to slowdown; and ii) regulators incentivising affordable housing in FY15 by reduction of risk
weights and exemption on SLR/CRR and PSL requirements. Moreover, decline in real estate prices also led to
Headwinds FY14- moderation in ticket size growth (which used to drive 50-60% of growth of HFCs). Demonetisation and advent of
emerge Current RERA have led to a further slowdown in growth.
Headwinds mentioned above led to a slowdown in growth as well as pressure in profitability for HFCs, including
GRUH. GRUHs growth has slowed to 22% AUM CAGR in FY16-17 (versus 28% CAGR in FY05-14) and RoA
moderated to 2.3% from an average of 2.5% in FY05-14.

GRUH Finance
Exhibit 4: Competitive mapping of HFCs GRUHs small-ticket positioning drives its superior profitability
Key metrics Avg. ticket AUM AUM CAGR Opex/ Gross Branches Employees
NIMs RoA RoE
(FY17) size (Rs mn) (Rs bn) (FY13-17) AUM NPA (%) (#) (#)
GRUH 0.6 132 25% 4.3% 0.8% 0.31% 2.5% 30.5% 185 661
HDFC 2.6 3,378 16% 3.0% 0.2% 0.79% 1.5% 19.1% 427 2,196
LICHF 1.3 1,445 17% 2.7% 0.5% 0.43% 1.5% 19.5% 245 1,833
REPCO 1.4 89 26% 4.8% 0.8% 2.60% 2.2% 17.4% 157 625
CANFIN 1.8 133 35% 3.5% 0.7% 0.21% 1.9% 24.1% 170 578
DEWAN 1.4 836 23% 2.7% 0.8% 0.94% 3.6% 18.0% 352 2,881
PNBHF 3.7 415 58% 3.7% 1.0% 0.22% 1.4% 13.6% 63 999
Exhibit 5: Mapping GRUH and its peers on IBAS

Innovation
this. Moreover, Repcos origination strategy is also innovative as it
Brand for the home loan borrower depends on the perceived customer
service and the perceived project financing abilities of the lender.
Whilst HFCs score lower than banks on all these metrics, HDFC enjoys
Brand
the best brand amongst the HFCs due to superior perception on the
above metrics, followed closely by GRUH. LICHF, CNFIN and PNBHF
also score high due to their PSU parentage.
to gain penetration in small-ticket housing finance. HDFC with ~427
branches and decentralised decision making has one of the best
Architecture
Strategic asset
GRUH is one the strongest HFCs versus its peers due to its strengths in
Overall rank
innovation, brand, architecture and strategic assets.
Source: Company, Ambit Capital research; Note: - Strong; - Relatively Strong; - Average; - Relatively weak.
Exhibit 6: AUM mix Exhibit 7: Liability mix
3% Home loan - Salaried

4% 20%
NHB
Home loan - Self 31%
11%
employed
Bank loans
LAP - Residential
13%
52%
Public deposits
29% LAP - Non Residential
36% Others
Construction Loans

GRUH Finance
Exhibit 8: NIMs are declining due to competitive pressures Exhibit 9: Asset quality is worsening
2.0% Gross NPAs (%)

5.4% NIMs (%)
5.2%
1.5%
5.0%
4.8% 1.0%
4.6%
4.4% 0.5%
4.2%
4.0% 0.0%
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
Source: Company, Ambit Capital research FY17 Source: Company, Ambit Capital research
Exhibit 10: GRUH is trading at a 60% premium to its Exhibit 11: GRUH share price performance versus Sensex
cross-cycle average P/B
16.0 3,500
14.0 3,000
12.0 2,500
10.0 2,000
8.0 1,500
6.0 1,000
4.0
500
2.0
0
0.0
Jan-09
Oct-10
Jan-16
Oct-17
Sep-13
Apr-14
Jun-08
May-11
Dec-11
Jun-15
Mar-10
Jul-12
Feb-13
Mar-17
Nov-07
Aug-09
Nov-14
Aug-16
Apr-10
Oct-10
Apr-11
Oct-11
Apr-12
Oct-12
Apr-13
Oct-13
Apr-14
Oct-14
Apr-15
Oct-15
Apr-16
Oct-16
Apr-17
Oct-17
Gruh Sensex Index


GRUHs revenue and expense recognition policies are by far the most conservative amongst the peers. We do not
Accounting GREEN come across any instance wherein the reported profitability of the company is materially different from its true
profitability.
GRUHs earnings trajectory has been fairly predictable. It has delivered a clockwork 20% earnings growth for at
least 18 quarters.
Pressure on AUM growth and profitability has led to GRUHs earnings growth moderating from 30% PAT CAGR
Earnings momentum AMBER
over FY07-14 to 19% PAT CAGR over FY14-17.

GRUH Finance
Income statement
Year to March (Rs mn) FY13 FY14 FY15 FY16 FY17
NII (inclu. Securitisation) 2,311 2,707 3,437 4,212 5,260
Other income 149 319 389 468 416
Total income 2,460 3,025 3,826 4,680 5,676
Operating expenditure 463 556 661 844 935
Pre-provisioning profit 1,997 2,469 3,165 3,836 4,741
Provisions 29 24 157 219 320
Profit before tax 1,968 2,445 3,008 3,617 4,421
Tax 509 675 970 1,181 1,454
Consol. PAT 1,500 1,770 2,038 2,436 2,967
Balance sheet
Net-worth 4,910 6,072 7,115 8,353 11,132
Borrowings - on balance sheet 49,145 64,475 67,453 102,444 120,182
Borrowings - off balance sheet 0 0 0 0 0
AUM 54,378 70,090 89,544 111,146 132,443
Cash and equivalents 652 530 798 1,429 1,561
Net Current Assets (974) (73) (15,775) (1,778) (2,691)
Total assets 36,990 46,431 59,165 17 18
Key ratios
NIM % (on AUM) 4.9% 4.3% 4.3% 4.2% 4.3%
AUM Growth 33% 29% 28% 24% 19%
Opex as % of AAUM 0.97% 0.89% 0.83% 0.84% 0.77%
Credit costs as a % of AUM 0.06% 0.04% 0.20% 0.22% 0.26%
CAR (%) 14.6% 16.4% 15.4% 17.8% 18.3%
Dil EPS Consol (Rs) 8.2 4.9 5.6 6.7 8.1
BVPS (Rs.) 14 17 20 23 31
ROA (%) 2.9% 2.7% 2.4% 2.3% 2.3%
ROE (%) 34.2% 32.2% 30.9% 31.5% 30.5%
P/B (x) 36.7 29.8 25.7 21.9 16.4
P/E (x) 61.3 102.3 89.7 75.1 61.7

GRUH Finance

Amara Raja
NOT RATED
STRATEGY NOTE AMRJ IN EQUITY November 17, 2017
Challenging the leader Auto & Auto Ancillaries
Amara Raja, the second-largest automotive/industrial battery player,

Recommendation
has successfully challenged Exide and gained material market share
Mcap (bn): `135/US$2.1
(especially in 4W replacement) given: (i) cost and pricing advantages
provided by JCI parentage; and (ii) innovation (products, advertising). 3M ADV (mn): `558/US$8.5
Market share gain from Exide would continue albeit slowly as pricing CMP: `788
gap has narrowed and Exide is awakening from recent complacence. TP (12 month): NA
This and potential risks from lithium-ion adoption mean Downside (%): NA
revenue/EBITDA growth over the next 10 years could be significantly
lower than historical levels (revenue/EBITDA CAGR of 24%/26%; FY08- Flags
17). But recent correction in earnings multiple (25% over the past year; Accounting: GREEN
now trading close to last 5-year average) provides some comfort. Predictability: AMBER
Competitive position: STRONG Changes to this position: POSITIVE Earnings Momentum: AMBER
Second-largest battery player powered by Johnson Controls Performance

Owned 26% each by Johnson Controls and the Galla family, AMRJ is a leading 150
domestic automotive/industrial battery player. It has developed strongholds in 130
industrial segments like telecom (>50% market share) and UPS (after Exide with 110
~33% market share). It is also the second-largest player in auto (OEM and 90
replacement; 30-35% and 40-45% market share respectively). Auto OE segment 70
growth (12% of total revenue) is dependent on new vehicle sales. The bigger 50
Nov-16
Mar-17
May-17
Nov-17
Aug-17
Feb-17
Dec-16
Sep-17
Jun-17
auto replacement (30%) caters to existing vehicle base (replacement every 2-3
years) and benefits from shift from unorganised segment. Growth of telecom
(25% of revenues) depends on tower additions/usage. Amara Raja Sensex
Emerged as a strong automotive player over the last ten years
AMRJ posted strong market share expansion in automotive over the last 10 Source: Bloomberg, Ambit Capital research
years (at Exides expense) led by competitive pricing, aggressive warranty terms
and distribution expansion. In telecom, it benefited from strong subscriber AMRJs forensic score analysis
growth. Revenues/EBITDA saw 24%/26% CAGR over FY08-17 (much higher
than Exides 15%/13% growth). This was supplemented by pre-tax RoCE
expanding from 23.2% in FY07 to 29.3% in FY17. CFO (before tax) averaged
89% of EBITDA over FY08-17 (aggregate Rs42bn). CFO has been mainly
invested in capex (81%) and payment of equity dividend (14%).
Johnson Controls provide strategic edge, but cost advantage waning
AMRJ scores over Exide on innovation (products, advertising) and parentage that
enables superior manufacturing (low cost) and products. As battery technologies
AMRJs greatness score analysis
like lithium-ion evolve, strategic global ties and low-cost architecture will play
important roles. While JCIs parentage will continue to provide an edge in
strategic partnerships, AMRJs cost advantage is under threat from Exides
growing focus on cost control and technology upgrade. This alongside industry
growth challenges (auto replacement, telecom) would slow revenue/EBITDA
CAGR to 13%/14% (consensus estimates) over FY17-20.
Potential headwinds, but current valuation provide comfort
JCI parentage does provide better long-term visibility but disruptions over the
next decade could erode some key competitive advantages. Revenue/EBITDA
growth over the next 10 years could be significantly lower than historical levels.
However, AMRJs PE multiple has de-rated significantly (by 25%) in the past year
and premium over Exide narrowed from 40% to ~18% now. The stock now Research Analyst
trades at 20x FY19 net earnings, close to last five-year historical average. In the Ashvin Shetty, CFA
context of duopoly nature of the industry (involving strong entry barriers
+91 22 3043 3285
surrounding brand and distribution) and pre-tax RoCE of ~30%, the current
earnings multiple provide some comfort. ashvin.shetty@ambit.co
Amara Raja
Exhibit 1: AMRJ has emerged as a formidable auto/industrial battery player over the last 10 years
Phase IV-
120%
62 Phase I- Emergence as a Phase II- Foray into automotive Phase III- Finding success Slowing
strong industrial battery segment through JV with Johnson across various automotive industry growth
player Controls battery segments and market 100%
52
share gains
80%
Rs. billion
42
32 60%
Launched CV and
Tractor battery Launched
Launched 2W battery 40%
22
4W battery
Won OE orders from
Maruti and Hyundai 20%
12
2 0%
FY96 FY97 FY98 FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17
(8) -20%
Revenue CAGR: 32% Revenue CAGR: 32% Revenue CAGR: 21%
Avg RoCE: 72.9% Avg RoCE: 13.5% Avg RoCE: 40.4%
AMRJ's Revenues (LHS) AMRJ's ROCE % (Pre-tax) (LHS)
Exhibit 2: Key financial parameters over the last 10 years

Revenue 10,833 13,132 14,645 17,611 23,645 29,614 34,367 42,113 46,907 53,172
Revenue growth (%) 82% 21% 12% 20% 34% 25% 16% 23% 11% 13%
Net profit 909 1,115 1,550 1,479 2,024 2,898 3,621 4,125 4,768 4,794
EPS(Rs) 8.0 6.5 9.1 8.7 11.8 17.0 21.2 24.1 27.9 28.1
CFO post tax (167) 2,364 2,143 861 2,985 3,355 2,788 3,950 5,547 5,529
CFO-EBITDA * 18% 138% 101% 63% 118% 104% 78% 83% 95% 89%
FCF (1,333) 1,335 1,627 195 2,176 1,892 (943) (112) 643 1,224
Net Debt equity (x) 0.80 0.53 0.05 0.08 (0.17) (0.30) (0.15) (0.09) (0.04) (0.09)
RoE (%) 27.3% 27.5% 28.5% 22.9% 24.6% 27.3% 26.6% 24.3% 23.7% 18.5%
RoCE (pre-tax) (%) 31.9% 27.7% 40.7% 32.3% 40.4% 51.5% 49.3% 40.6% 36.4% 29.3%
Source: Company, Ambit Capital research Note: * CFO before tax considered in this ratio
Exhibit 3: AMRJ witnessed strong market share expansion in the auto segment between FY09 and FY15
Phase Time period Key developments
Emerged as a major player in the industrial battery segment
Phase I FY1996-2000 Won several prestigious contracts from industrial customers like DoT (for rural telecommunication
programme) and ONGC (power supplies on offshore platforms)
Entry into automotive segment in 2000 through JV with Johnson Controls
Phase II FY01-08 Started with the more lucrative 4W aftermarket segment
Later won OEM contracts with key players like Maruti and Hyundai
Gained significant share in automotive segment from Exide
Phase III FY09-15

Amara Rajas better technology, lower price, expanding distribution contributed to share gains
Exides complacency (lack of capacities/shortage in replacement market)/capital allocation issues (foray into
insurance business) helped Amara Raja
Industry growth slows down across automotive segments (OE, replacement) and key industrial segments like
telecom
Phase IV FY16-17
Exide attempts comeback through cost cutting and competitive pricing which slows AMRJ's market share
gains

Amara Raja
Exhibit 4: AMRJs growth has been higher than Exide but the latter scores better on RoCE
Revenue Pre-tax Pre-tax CFO/
Sub-segment FY17 Industry EBITDA Capex/CFO
Company CAGR RoCE EBITDA
Positioning revenue market share Margin (FY17) (FY10-17)
FY10-17 (FY17) (FY10-17)
4W replacement -
Exide #1 76,284 10% 55%; 4w OEM- 14.2% 38.4% 92% 43%
60-65%
4W replacement -
Amara Raja #2 53,172 20% 40-45%; 4w 16.0% 29.3% 90% 77%
OEM-30-35%
Source: Company, Ambit Capital research Note: Replacement market share in organised segment
Exhibit 5: IBAS analysis

Parameter AMRJ Exide Comments
AMRJ has an edge because of its innovation surrounding products, advertising. Some of the instances of product
differentiation are:
Zero maintenance batteries (Amaron Hi-Life), a key differentiator from the batteries which required regular
maintenance and top-ups;
Innovation Introduction of VRLA batteries for the 2W segment (Amaron Pro-bike rider) in May 2008;
Aggressive warranty terms with introduction of innovative 48 months warranty in 2005;
Differentiated product design like black body with fluorescent green logo; and
'Clutter-busting' advertising campaigns using claymation (clay models + animation) which helped create
strong recall for the brand
AMRJ has emerged as a strong challenger to Exide over the years and closed the
Brands/
difference in brand perception to a significant extent. However, build upon its several decades of presence in India
Reputation
and a large number of installations in the existing car population, Exide still has greater brand recall.
AMRJ employs superior manufacturing practices through its business alliance with Johnson Controls Inc., USA,
reinforcing compliance with global best-practices and benchmark. AMRJ commands low rejections/higher
Architecture yield one of the reasons for its higher gross margin despite pricing its products cheaper than Exide.
AMRJ has had consistently low employee and overhead costs compared to that of Exide helped by its
concentrated manufacturing plants.
Amara Raja's JV relationship with Johnson Controls (involving equity participation) enables better access to the
Strategic best technology/best manufacturing practices which is otherwise not possible in a pure-play technology
Assets sharing tie-ups like that of Exide with Shin-Kobe (Hitachi), East Penn and Furukawa.
Johnson Controls' R&D spends and size dwarf that of Exide's technological partners
Overall While Exide still has the highest brand recall, AMRJ has emerged as a strong challenger
Exhibit 6: Healthy operational cash generation over the Exhibit 7: Mainly utilised for capacity expansion and
last 10 years dividend payment
Dividend Interest
Int/div recd paid paid
9% 14% 2%
Debt
repaid
3%
Capex
(net)
81%
CFO
91%

Amara Raja
Exhibit 8: AMRJs one-year forward P/E has witnessed Exhibit 9: ..resulting in the stock price trailing BSE Auto
significant correction in the last one year Index recently after several years of outperformance
35 2500%
30 2000%
25 1500%
20 1000%
15 500%
10 0%
25-Oct-07
25-Oct-08
25-Oct-09
25-Oct-10
25-Oct-11
25-Oct-12
25-Oct-13
25-Oct-14
25-Oct-15
25-Oct-16
25-Oct-17
5
0
Nov-12 Nov-13 Nov-14 Nov-15
1 yr forward P/E (x) 5 yr Average P/E BSE Auto Index AMRJ

AMRJ scores relatively well in our accounting and forensic framework. AMRJs key accounting ratios, such as cash yield,
Accounting GREEN CFO-EBITDA conversion and miscellaneous expenditure (as a % of sales) were much higher than other listed peers. On
Ambits forensic accounting, AMRJ is categorised in the 4th decile of the auto ancillary universe.
The OEM business (15% of the revenue) tends to be volatile. However, the replacement demand (35% of the revenue) is
more stable as battery requires replacement in 2-3 years. Industrial volumes (44% of the revenue) are also volatile and
linked to telecom sectors performance and industrial activity.
Moreover, lead (and lead alloys) which is a volatile commodity is the key raw material in battery manufacturing and
constitutes 60-65% of the material cost (35%-40% of the sales revenue). However, lead price is a pass-through for ~65% of
the sales (auto OEM and Industrial)
Earnings
AMBER Bloomberg shows no significant upgrades/downgrades to consensus numbers in recent weeks.
momentum
Exhibit 11: AMRJ has witnessed some deterioration in Exhibit 12: AMRJ scores good in Ambits greatness
forensic score but is still above average framework

Amara Raja
Balance sheet (standalone)

Year to March (` mn) FY13 FY14 FY15 FY16 FY17
Total networth 10,598 13,627 16,996 20,145 25,931
Debt 881 857 759 741 725
Deferred tax liability 195 301 368 588 815
Gross block 6,803 9,955 14,414 19,147 18,156
Net block 3,589 6,232 9,443 13,163 14,922
CWIP 1,185 1,835 1,342 1,322 2,403
Investments (non-current) 157 161 161 161 189
Debtors 3,807 4,528 5,541 5,921 5,705
Inventory 2,929 3,350 4,181 6,016 8,170
Loans & advances 1,927 783 992 1,002 1,472
Current liabilities 3,161 3,421 4,118 5,755 7,434
Provisions 2,870 1,629 1,639 1,854 941
Total current liabilities 6,030 5,050 5,757 7,608 8,375
Total assets 11,674 14,785 18,124 21,475 27,471
Income statement (standalone)

Net Sales 29,614 34,367 42,113 46,907 53,172
% growth 25% 16% 23% 11% 13%
EBITDA 4,559 5,628 7,108 8,169 8,495
% growth 34% 23% 26% 15% 4%
Depreciation 661 646 1,260 1,399 1,912
EBIT 3,898 4,982 5,849 6,770 6,583
Non-operating income 360 333 273 330 506
Adjusted PBT 4,249 5,313 6,115 7,095 7,031
Tax 1,351 1,692 1,990 2,327 2,237
Adjusted PAT 2,898 3,621 4,125 4,768 4,794
% growth 43% 25% 14% 16% 1%

Amara Raja
Cashflow statement (standalone)

Depreciation 577 648 1,340 1,399 1,912
Interest paid 2 7 2 5 58
(Incr)/decr in net working capital (94) (1,315) (1,450) (677) (1,137)
Direct taxes paid (1,366) (1,606) (1,922) (2,181) (2,024)
Others 17 (312) (118) (219) (302)
Cash flow from operations 3,355 2,788 3,950 5,547 5,529
Capex (net) (1,463) (3,731) (4,062) (4,904) (4,305)
(Incr) / decr in investments - - 34 89 (1,110)
Other income (expenditure) 258 282 148 101 56
Cash flow from investments (1,205) (3,448) (3,880) (4,714) (5,359)
Net borrowings 26 (27) (97) (18) (17)
Issuance/buyback of equity - - - - -
Interest paid (0) (0) (2) (5) (3)
Dividend paid (375) (504) (645) (1,614) -
Others - - 990 776 9
Cash flow from financing (350) (531) 244 (861) (10)
Net change in cash 1,800 (1,192) 314 (28) 160
Closing cash balance 4,095 2,929 746 1,498 1,008
Free cash flow 1,892 (943) (112) 643 1,224
Ratio analysis (standalone)

Year to March (%) FY13 FY14 FY15 FY16 FY17
Revenue growth 25% 16% 23% 11% 13%
EPS norm (dil) growth 43% 25% 14% 16% 1%
EBITDA margin (%) 15.4% 16.4% 16.9% 17.4% 16.0%
Net profit margin (%) 9.8% 10.5% 9.8% 10.2% 9.0%
Dividend payout ratio (%) 18% 18% 18% 18% 0%
Net debt: equity (x) (0.3) (0.2) (0.1) (0.0) (0.1)
RoCE (Pre-tax) (%) 51% 49% 41% 36% 29%
RoIC (%) 27% 27% 24% 23% 20%
RoE (%) 27% 27% 24% 24% 18%
Valuation parameters (standalone)

Year to March FY13 FY14 FY15 FY16 FY17
EPS (`) 17.0 21.2 24.1 27.9 28.1
Diluted EPS (`) 17.0 21.2 24.1 27.9 28.1
Book value per share (`) 62 80 100 118 152
Dividend per share (`) 2.5 3.2 3.6 4.3 -
P/E (x) 46.6 37.3 32.8 28.3 28.2
P/BV (x) 12.8 9.9 8.0 6.7 5.2
EV/EBITDA (x) 29.1 23.6 18.7 16.3 15.6
EV/EBIT (x) 34.1 26.7 22.7 19.6 20.2

Abbott India
NOT RATED
STRATEGY NOTE BOOT IN EQUITY November 17, 2017
How much more left to extract? Pharmaceuticals
Abbott Indias business quality has declined due to (a) price controls by Recommendation
DPCO/NLEM and resultant stagnant EBITDA margin of 14%; and (b)
Mcap (bn): `107/US$1.6
lack of product launches and over-dependence on legacy business (top
6M ADV (mn): `16.3/US$0.2
50 products contribute 65% of revenue). Further, minority interest is
compromised as global parent is launching most of its new products CMP: `5,048
(75-80%) from an unlisted subsidiary; Abbot India primarily launches TP (12 mths): NA
line extensions of existing products. With most production outsourced, Downside (%): NA
the company has generated RoCE of 30-35%. No material capex and
limited investment in working capital led to annual FCF generation of Flags
`2-3bn in the last three years. The stock trades at 29x FY18E, at a Accounting: GREEN
discount to MNC peers and premium to domestics despite weak Predictability: GREEN
innovation and no improvement to business, implying an embedded Greatness: AMBER
delisting premium supported by excess cash in the group.
Competitive position: MODERATE Changes to this position: STABLE Performance (%)
135
No material product launches; minority interest compromised
115
New launches declined to below 10 p.a. over FY14-16 from ~20 earlier; there
was some recovery to 10 in FY17! Most launches have been line extensions of 95
existing products. We believe minority interest is compromised as the parent 75
entity has used a privately held company (Abbott Healthcare Pvt. Ltd.) to launch
Nov-16
Mar-17
May-17
Nov-17
Aug-17
Feb-17
Dec-16
Sep-17
Jun-17
new products; over FY11-15, 75-80% of new products introduced in India by
parent were from the privately held company. Given lack of product launches,
Abbott India Sensex
we expect Abbott India to at best mirror market growth of ~12%. Key risk
would be ban on Fixed Dosage Combination (FDC) drugs, which could lead to
2-3% impact on sales for Abbott India. Source: Bloomberg, Ambit Capital Research
From cash cow to average Joe; regulatory hurdles tame the tiger Abbotts forensic score analysis
Over FY06-10, Abbot reported 14% revenue CAGR with ~20% EBITDA margin
led by product launch and presence in high-growth chronic space. RoCE was
~40% given: a) low asset base (most production was outsourced); and b)
regular buyback to deploy surplus capital. But over FY11-13, regulatory hurdles
in the form of price control led to decline in margins from 20% to 12%. After
price control, focus shifted to lowering cost through introduction of technology
for the supply chain and improving sales-force effectiveness. Hence, margin
expanded from 12% in FY13 to 14% over FY15-17. Source: Ambit HAWK, Ambit Capital research
Average ranking on IBAS: No innovation; strong brand equity Abbotts greatness score analysis
Low score on innovation is because incremental products are being launched
by parent entity through private firm. Abbott India has primarily launched line
extensions of existing products. Stronger brand equity than peers is visible as
base business reported healthy CAGR of 10.7% over FY12-16 vs 7% for peers.
Above-average MR productivity (`8mn sales per MR vs peer average of `6mn)
bodes well for architecture but over-dependence on legacy is a worry (top 50
products contribute ~65% of revenue). The company lacks strategic assets, with
no presence in top 100 pharma brands vs 7-10 products for peers.
Justified discount to peers; delisting and consumer nature factored in
The stock trades at 29x FY18 consensus EPS vs 32-35x for peers; we believe the
discount is justified given: a) no novel product launches, b) high revenue
concentration, and c) compromised minority interest. Current valuations can
sustain due to: (a) consistent revenue growth of 12-15%; (b) asset-light balance
sheet, leading to high RoCE (~30-35%); and (c) stable annual FCF generation
of `3bn. Due to excess cash on the books of the parent and no focus in
building the business, we believe multiples signal a likely delisting candidate.
Abbott India
Exhibit 1: Evolution of Abbott India
Cash cow phase with low double digit product Regulatory headwinds The new normal with
laucnhes and increasing penetration of products Slovay pharma acquisition led to dip high single digit product
35 and limited control on pricing in ROCE. One time integration and launch (majority being line 40%
sales force transformation expense extensions) and high focus
30 led to decline in margins. on cost controls
35%
25 Introduction of NPPP in 2012 led to
price controls
` Bn
20 30%
15 25%
10
20%
5
- 15%
CY05 CY06 CY07 CY08 CY09 CY10 CY11 CY12 FY14 FY15 FY16 FY17
Revenue RoCE (RHS)
Source: Company, Ambit Capital research. Note: (a) RoCE is pre-tax; (b) CY10 was a 13month period; CY11 is after merger with Solvay Pharma and (c) FY14 is a
15 month period; for FY15 we find the revenue growth by considering 12month sales of FY15

(Fig in Rs mn) CY07 CY08 CY09 CY10 CY11 CY12 FY14** FY15 FY16 FY17
Revenues 6,224 6,953 7,946 10,369 14,902 16,527 22,759 22,893 26,145 29,026
Revenue growth (%) 17% 12% 14% 30% 44% 11% 38% 1% 14% 11%
Net profits 684 619 775 609 1,204 1,447 1,985 2,290 2,553 2,766
EPS 47.3 45.2 56.7 44.6 56.7 68.1 93.4 107.7 120.1 130.2
CFO 305 872 372 461 241 1,013 1,553 2,148 2,487 3,072
Pre-tax CFO/EBITDA 78% 163% 77% 137% 48% 82% 99% 106% 109% 118%
FCF 219 659 293 340 88 843 1,512 1,993 2,260 2,859
Gross debt equity (x) 0.00 0.00 - - - - - - - -
RoE (%) 30% 28% 29% 20% 22% 22% 25% 24% 21% 20%
ROCE* (%) 31% 30% 35% 20% 38% 31% 34% 35% 33% 30%
capital including cash in the denominator. CY10 was a 13month period; CY11 is after merger with Solvay Pharma and **FY14 is a 15 month period; for FY15 we
find the revenue growth by considering 12month sales of FY15

High margins (~20%) provided by launch of products (~20 products) in the chronic space. Enjoyed benefits of
changing demand environment due to higher instance of lifestyle diseases.
FY06-FY10 Cash cow

Majority of manufacturing outsourced to third parties, leading to low asset base and RoCE of 40-50%. Regular
buyback to deploy surplus capital led to increase in RoCE from 37% in FY07 to 48% in FY10.
CFO to EBITDA at ~90% led to high FCF generation and therefore reduction in debt from `22mn (0.01x debt
to equity) in FY05 to NIL in FY10.
Purchase of Solvay Pharma by parent entity led to India business of Solvay Pharma being acquired by Abbott
India in an all-equity deal with swap ratio of 2:3.
Government introduces National Pharmaceutical Pricing Policy (NPPP), 2012, to reduce prices of essential
Regulatory hurdles drugs 348 drugs came under price control. Biggest impact on MNC pharma companies (including Abbott)
FY11-13 led to change in which price their products 1.5-2x higher than domestic players.
strategy Issuance of compulsory licensing policy by the Government weakened IP protection policy of India. This led to
change in parent strategy for launch of new products. Product launches declined from ~20 products annually
to high single digits. Majority of these new launches were line extensions with no material innovative product
introduced in India. Parent entity shifted focus of new product introduction through its privately held company.
No material product launch in the innovative space and most new launches were line extensions. Focus was
on strengthening presence in existing therapy areas with no new therapy products introduced.
Focus on lowering the cost structure through introduction of integrated technology platform for supply chain
and sales representatives. Lowered ad spends from 6-6.5% of sales prior to FY13 to 4% of sales in FY15. This
FY14 Current The New Normal
led to margin expansion from 12% in FY13 to 14% in FY16.
Launched 10 products in FY17, mostly line extensions with innovative campaigns supporting launches; most
of the last 12-24 months sales growth was driven by Womens Health, Gastro Intestine, Gastroenterology and
GI Prospera.

Abbott India
Exhibit 4: Competitive mapping of the company with its key peers

Median Median Cumulative Asset
FY17 Revenue
Company EBITDA margins RoCE CFO to EBITDA turnover
Revenue CAGR FY11-17
(FY11-17) (FY11-17) (FY11-17) FY17 (x)
GSK 39,865 10% 18% 36% 119% 1.40
Abbott 29,026 19% 12% 33% 101% 2.27
Sanofi 23,686 14% 15% 14% 129% 1.32
Pfizer 19,663 8% 20% 18% 103% 0.85
Merck 9,963 12% 11% 14% 103% 1.66
Source: Company, AIOCD and Ambit Capital research.
Exhibit 5: Mapping Abbott India and its peers on IBAS

Abbott Pfizer Sanofi Merck GSK Comments
Pfizer is leveraging on parent entity by consistently
launching of 10-15 products annually.
Innovation Abbott and Sanofis lack of focus on expanding product
basket from parents portfolio (~5 products launched
annually and majority line extensions).
Merck and Abbott have strong brand equity with base
business growth of 10-12% over FY12-16.
Brand
Sanofi and GSK have weak brand equity with base business
growth of less than 5% over FY12-16.
Abbott has best in class MR productivity at `9mn per MR

while others are at `6mn per MR.
Architecture
Higher revenue per MR is due to strong brand equity further
accentuated by effectiveness of sale force.
Whilst GSK has average brand equity, with 11 products in

top 100 drugs in India, we expect new product launches to
Strategic assets cover up on base business deficit.
Merck has no products in top 100 drugs with no new

product launches implying fading business.
GSK and Pfizer score high due to focus on launching new

products and leveraging on brand equity and MR strength.
Overall score Abbott, Merck and Sanofi do not have India as key focus
market; no incremental product launch. Further, high
dependence (70-80%) on base business with limited
number of products in Top 100 increases risk to revenues
Note: - Strong; - Relatively Strong; - Average; - Relatively weak.

Abbott India
Exhibit 6: Margins have stabilized at 14% for the past Exhibit 7: Five-year average cash conversion ratio at
three years 103%; working capital turnover at ~12x in FY17
175% 14
35,000 15%
30,000 150% 12
12%
25,000 125% 10
20,000 9%
` Bn
100% 8
15,000 6% 75% 6
10,000
3% 50% 4
5,000
25% 2
- 0%
0% 0
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
Revenue EBITDA Margin (RHS) Pre tax CFO to EBITDA (x)
Working Capital T/O (RHS)
Exhibit 8: CFO has been the major source of capital in the Exhibit 9: Limited capex and high dividend paid out
last decade
Interest Others Capex

and -21% 17% Net
dividend Investmen
received ts
7% 5%
Dividend
CFO
Equity paid incl. Cash
65%
issues tax 24%
-5% 54%
Exhibit 10: Median pre- tax RoCE in the last 8 years was Exhibit 11: Current P/E is at 11% to historical 3-year
34% average
40% 50%
45
35% 40%
40
30% 30%
35
25% 20%
30
20% 10% 25
15% 0% 20
10% -10% 15
Aug-15
Aug-16
Aug-17
Nov-14
Feb-15
May-15
Nov-15
Feb-16
May-16
Nov-16
Feb-17
May-17
Nov-17
5% -20%
0% -30%
FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17
RoCE EPS growth (RHS) 1 - year forward P/E (x) 3 year Avg. P/E (x)
Source: Company, Ambit Capital research. Note: RoCE refers to Pre-tax RoCE Source: Company, Ambit Capital research
i.e. EBIT divided by average capital employed

Abbott India

Field Score Comments
In our forensic analysis of 360 companies, Abbott scores above the pharma industry average (comprising 26
companies). Abbott scores high on (a) CWIP to gross block; and (b) contingent liabilities as percentage of
Accounting GREEN
networth; and (c) provision for debtors. However, Abbott has weaker scores on: (a) miscellaneous expenses as a %
of revenues; and (b) change in depreciation rate.
Overall, the management made timely announcements in its earnings calls, meetings and interviews regarding
product filings, acquisitions and business outlook.
Earnings momentum AMBER Consensus FY18E EPS estimates have been downgraded by 4% in the last three months.

Abbott India
Abridged financial summary

Income statement
(Rs mn) CY12 FY14** FY15 FY16 FY17
Net Sales 16,527 22,759 22,893 26,145 29,026
% growth 11% 38% 1% 14% 11%
EBITDA 2,014 2,673 3,113 3,637 3,948
% growth 15% 33% 16% 17% 9%
Depreciation 195 219 149 144 164
EBIT 1,819 2,453 2,964 3,493 3,784
Adjusted PBT 2,046 2,946 3,444 3,980 4,365
Tax 703 961 1,154 1,428 1,598
Adjusted PAT 1,343 1,985 2,290 2,553 2,766
% growth 12% 48% 15% 11% 8%
PAT margin 8% 9% 10% 10% 10%
Source: Company, Ambit Capital research. **FY14 is a 15 month period; for FY15 we find the revenue growth by
considering 12month sales of FY15.
Balance Sheet
Total networth 6,469 7,879 9,375 11,956 13,869
Debt - - - - -
Deferred tax liability 13 (13) (65) (94) (124)
Sources of funds 6,481 7,866 9,310 11,862 13,746
Net block 1,087 983 960 1,085 1,096
CWIP 5 5 30 19 51
Investments - - - - -
Applications of funds 6,481 7,866 9,310 11,862 13,746
Source: Company, Ambit Capital research. Note: **FY14 is a 15 month period; for FY15 we find the revenue
growth by considering 12month sales of FY15.
Cash flow statement

Depreciation 195 219 149 144 164
Others (287) (230) (521) (384) (527)
(Incr) / decr in net working capital (398) (285) 235 218 658
Tax (646) (1,097) (1,159) (1,472) (1,588)
Cash flow from operations 1,013 1,553 2,148 2,487 3,072
Capex (net) (170) (41) (155) (227) (214)
Cash flow from investments (585) (1,439) (1,867) (772) (1,554)
Cash flow from financing (420) (423) (576) (803) (898)
Net change in cash 8 (309) (295) 912 620
Closing cash balance 1,095 785 490 1,402 2,022
Free cash flow 843 1,512 1,993 2,260 2,859

Abbott India
Ratios
EBITDA margin (%) 12% 12% 14% 14% 14%
EBIT margin (%) 11% 11% 13% 13% 13%
Net profit (bef MI) margin (%) 9% 9% 10% 10% 10%
Net debt: equity (x) (0.50) (0.59) (0.69) (0.70) (0.79)
RoCE (pre-tax) (%) 31% 34% 35% 33% 30%
RoIC (pre-tax) (%) 60% 76% 97% 110% 120%
RoE (%) 22% 25% 24% 21% 20%
Diluted EPS (Rs) 68 93 108 120 130
P/E (x) 74 54 47 42 39
P/BV (x) 16.6 13.6 11.4 9.0 7.7
EV/EBITDA (x) 52 38 32 27 24

Abbott India

Astral Poly
NOT RATED
STRATEGY NOTE ASTRA IN EQUITY November 17, 2017
Challenger to champion Building Materials
Astral is evolving from an innovative pipe manufacturing company to a Recommendation

respected pan-India building materials brand (for pipes, adhesives and Mcap (bn): `92/US$1.4
building maintenance products). Sales/EPS CAGR was 35%/31% and 3M ADV (mn): `52.5/US$0.8
median RoCE was 22% over FY07-17. Astral can grow at similar or
CMP: `768
marginally lower rates over the next decade as it builds on its brand
TP (12 mths): n.a.
and architecture (suppliers, channel, employees, plants) to become an
Downside (%): n.a.
ace building materials franchise (akin to legends like Pidilite, Asian
Paints). Evolving house construction practices will lead to higher
reinvestment opportunities for new-age building products (and brands), Flags
keeping growth of the industry and champion franchises high. Accounting: GREEN
Managements challenger mindset (through organic or inorganic Predictability: GREEN
approach) keeps sources of growth unknown and hence risk of Earnings Momentum: AMBER
underestimating long-term growth high. Near-term valuations are futile
for such emerging leaders as displayed by similar stories in the past. Performance
Competitive position: STRONG Changes to this position: STABLE 230
Pipes a category with ample room for sustaining innovation 180
Despite a ~15% 10-year revenue CAGR for top-5 companies, organised plastic 130
pipes players in India have a long path to chart through: (a) replacement of GI
pipes, (b) increasing applications, (c) innovation in plastic compounds and water 80
Nov-16
Mar-17
May-17
Nov-17
Aug-17
Feb-17
Dec-16
Sep-17
Jun-17
management systems, and (d) GST adoption. Astral is the 3rd largest and one of
the strongest plastic pipes brands and, hence, poised to gain share. Increasing
competition drives managements decision to reinvest capital in business Astral Poly. Sensex
outside pipes and leveraging its brand/reach architecture.
From category creation to brand building to category extension Source: Bloomberg, Ambit Capital research
Astral created the CPVC pipes market in India through: (a) continuous launch of
differentiated products, (b) innovative communication to the influencers Astrals forensic score analysis
(plumber trainings), and (c) branding (mass-media advertising in a seemingly
commoditized product). Throughout the last decade, the company maintained
focused capital allocation, with cash flows initially ploughed back to increase
capacities and then to de-leverage (0.3x D/E in FY17 vs 1.5x in FY05).
Establishment of Astrals brand and prudent capital allocation manifested in
35%/31% sales/EPS CAGR and average pre-tax RoCE of 24% over FY07-17.
Leading pipe manufacturer to a strong building materials brand Source: Ambit HAWK, Ambit Capital research
With strong branding and promotions over the years, Astral has created a
strong brand that does not need the backing of Lubrizols name to sell CPVC Astrals greatness score analysis
pipes. With CPVC becoming competitive, Astral took advantage of its brand and
changed its raw material supplier from Lubrizol to Sekisui, thereby reducing
costs and gaining pricing flexibility over competitors. Astrals successful foray
into adhesives (25% of FY17 revenue) and increase in EBITDA margin is a
classic example of capitalizing on its brand. Increasing adhesives capacity,
strong promotion of its adhesive brand and strengthened distribution network
will provide the next leg of growth for Astral.
Near-term valuations futile; challenge to estimate a challengers path
At 40x FY19 consensus EPS, Astral is one of the most expensive building
materials franchises in India. However, Astrals valuation should be considered Research Analysts
in light of: (a) prudent capital allocation history (both organic and inorganic),
Nitin Bhasin
and (b) ability and intent to reinvest cash in RoCE-accretive products/segments
+91 22 3043 3241
to sustain the longevity of cash flow growth. The growth phase in such
businesses is longer (albeit non-linear) than a 10-year DCF model gives them nitin.bhasin@ambit.co
credit for and, hence, a low terminal growth rate assumption leads to Prateek Maheshwari
misleading exit multiples (akin to Asian, Berger, Pidilite). +91 22 3043 3234
prateek.maheshwari@ambit.co
Astral Poly Technik
Exhibit 1: Evolution of Astral Poly
20 35%
Scale ramp-up Acquisitionof adhesives and
Product and brand
Sales CAGR: 43% becoming a multiple product brand
establishment
Median Pre-tax RoCE: 26% Sales CAGR: 31% 30%
15 Sales CAGR: 65%
Median Pre-tax RoCE: 22%
Median Pre-tax RoCE: 22%
25%
10
20%
5
15%
0 10%
FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17
Plastics Revenue (Rs bn) Domestic adhesives revenue (Rs bn)
International adhesives revenues (Rs bn) RoCE (pre tax) (RHS)
Source: Company Ambit Capital research. Note: RoCE for the above purpose implies median RoCE for that period
Exhibit 2: Key financial parameters over the last decade (consolidated)

(` mn) FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17
Revenues 969 1,358 1,924 2,888 4,113 5,827 8,252 10,796 14,299 16,778 18,888
Revenue growth (%) 80% 40% 42% 50% 42% 42% 42% 31% 32% 17% 13%
Net profits 91 171 140 277 328 395 610 793 782 1,075 1,472
EPS (`) 1 2 1 2 3 4 5 7 6 8 12
CFO 29 101 167 245 501 851 648 672 1,170 2,258 1,142
CFO/EBITDA 31% 60% 84% 71% 106% 114% 64% 58% 85% 123% 60%
FCF (72) (35) (316) 68 230 158 (42) (286) 315 914 (455)
Gross debt equity (x) 0.4 0.4 0.4 0.4 0.3 0.5 0.4 0.5 0.3 0.3 0.3
RoE (%) 21% 23% 16% 26% 25% 24% 29% 28% 17% 17% 19%
ROCE* (%) 19% 21% 17% 26% 26% 31% 32% 33% 20% 19% 22%
capital including cash in the denominator

Astral Poly Technik

Established relationships with real-estate developers such as Rohan Lifescapes and Hiranandani and hotels in
Mumbai and Bangalore, which was the first proof of acceptance of CPVC pipes
Product and brand Expanded product portfolio through launch of lead-free PVC pipes
FY04-07
Establishment Began plumber training and certifications aggressively to build brand recall with the intermediaries
Set up a fitting manufacturing capacity in Baddi, HP, which was a significant step towards increasing revenue
scale and improving financial performance
Raised `340mn through an IPO and re-invested spare cash flows to increased its capacities 7x in this phase
Enhanced product portfolio through launch of large diameter pipes and sound-proof pipes
Scale
FY08-12
ramp-up
Ventured into Kenya through acquisition of a 26% stake in a JV
Incurred significant forex losses due to unhedged forex exposure in FY09, which wiped out 40% of its FY09 PBT
Improved working capital cycle to 48 days in FY12 as against 84 days in FY07
Aggressively started brand building initiatives and hired Salman Khan as the brand ambassador. Brandex
increased at a 50% CAGR in this phase
Expanded in South India and set up a plant in Hosur in Feb-14. It also shut down its operations in Baddi
Expanded capacities in Gujarat. Installed capacities increased to ~120k tonnes as against 65k tonnes in FY12
Acquisition of
Adhesives and
Acquisitions acquired Resinova in India and Seal-It in UK to establish its adhesive franchise. It raised `3bn
through a QIP to fund this acquisition.
FY13-17 building a larger
home building Ended ties with Lubrizol for CPVC compound and technology in October 2016; setting up own compounding
material brand facility and partnered with Japans Sekisui Chemical for CPVC resin.
Currently, bringing changes to Resinova: (a) product packaging appearance and longevity, (b) go-to-market
strategy channel engagement and product reach, and (c) pricing strategy increasing prices and reducing cash
discounts to distributors; expected to increase branding for the adhesives business
Launch of other home improvement products from Clean-X partnership

Astral Poly Technik
Exhibit 4: Mapping Astral and its piping peers on IBAS

Brand Architecture
Strategic Overall
Company Innovation Mfg Dstrbn Comments
Rural Urban asset rank
reach reach
Continued innovation in plastic processing with unique
products launches such as Silpaulin. The company has a
Supreme
strong brand with the plumbers for PVC pipes and farmers
Industries
for agri pipes. Unmatched manufacturing and distribution
architecture, with plants at 18 locations.
Innovation in plastic pipes, first through creation of the
CPVC market and then through launches of differentiated
products of global majors in India. Strongest CPVC brand
in India but weak in rural India. Relationship with real-
Astral
estate developers and plumbers for retail pipes form its
PolyTechnik
unique architecture. Now with Lubrizol relationship
broken, Astrals own brand is the strategic asset which is
helping it maintain recall and also display strong
bargaining power with new CPVC resin supplier
Has not displayed innovation and does not have
differentiated products. A strong agri brand but still not
Finolex
very strong in urban markets; recently tied up with
Industries
Lubrizol for CPVC pipes and launching its plumbing
portfolio aggressively
Launched innovative products such as column pipes and is
now a part of one of the most innovative plastic pipes
Ashirvad company globally - Alliaxis. A strong brand, especially in
Pipes urban markets but a leader in rural market for column
pipes. Ashirvad also has relationships with Lubrizol for
raw material supply
No innovation of note in product launches or marketing.
Prince Brand is reasonably strong but largely an institutional
seller
One of the slowest growing pipes companies. Largely an
Jain
agri pipe manufacturer but has been losing market share
Irrigation
to more aggressive peers
Exhibit 5: Competitive mapping of Astral with its plastic piping peers

Piping FY17 Pipe Pipes and Overall Pre-tax
EBITDA Pre-tax Cap-
Capacity and Fittings Fittings revenues CFO/EBITD
Company Segments Plants Margin RoCE ex/CFO
FY17 Revenue Revenue CAGR (FY17) A
(FY17) (FY17) FY10-17
(tons) (` mn) FY10-17 (` mn) FY10-17
Madhya Pradesh,
Plumbing and
Supreme 400,000 24,679 16% Rajasthan, West Bengal, 44,623 17.1% 30% 91% 54%
Agri
Assam, Gujarat, and TN
Plumbing, Agri
Astral 137,708 14,103 25% Gujarat and TN 18,888 14.0% 22% 85% 88%
and Industrials
Plumbing, Agri
Ashirvad* 108,000 16,141 34% Karnataka 16,141 15.0% 22% 81% 63%
and Industrials
Largely Agri
Finolex 290,000 22,169 15% and recently Maharashtra and Gujarat 29,876 18.8% 25% 90% 28%
started plumbing
Maharashtra, TN,
Plumbing and
Prince 210,646 12,626 19% Uttarakhand, 12,626 12.8% 24% 71% 79%
Agri
Dadra and Nagar Haveli
Source: Company, Ambit Capital research;*Ashirvad financials as of FY16 but channel checks suggest that Ashirvad revenues for FY17 were `24bn

Astral Poly Technik
Exhibit 6: Mapping Astral and its building material peers on IBAS

Brand Architecture
Strategic Overall
reach reach
Ahead of competition in launching and building premium
tile brand (glazed and double charged polished vitrified
tiles). It is the only tile Super-brand in India and has the
Kajaria
highest scale, strong distribution and is now building a
professional management team. Plans to enter into new
categories such as ply may not be prudent capital allocation
Somany has innovated in products and launched
differentiated by launching tiles such as abrasion resistant
VC tiles. It has a strong ceramic brand and has significantly
improved its vitrified brand in the last few years. The
Somany company is the third largest manufacturer and has been
investing in improving distribution. It is still way behind
Kajaria in professionalizing management though the brand
and new products (especially sanitaryware) are resonating
with customers
Promoters hands-off approach and flying under the radar
differentiates Berger from most other paint manufacturers.
Aggressive sub-brand creation such as Silk and Illusions.
Berger
Unique employee work culture which empowers and helps
improve execution. Widest network of manufacturing
locations 9 across the country
products of global majors in India. Strongest CPVC brand in
India but weak in rural India, though now strengthening.
Astral
Relationships with Sekisui for raw materials and real-estate
developers and plumbers for retail pipes are it's unique
architecture; entry into adhesives can create a unique
distribution architecture
Product innovation is limited to a few products. It has a
mid-segment brand recall and manufacturing is centred on
a single location. Its unique advantage is the access to
Cera administered gas, which is 30% cheaper than spot gas.
Secondly, capital allocation by the promoters, gradual entry
into new products and adjacent price points is helping it
become stronger than most home building brands
We do not note any major innovation by HSIL which set it
apart from competition. The company has a strong brand
and manufacturing capability. We dont notice any unique
HSIL
strategic assets which competitors do not enjoy. Its unique
advantage of premium positioning is facing competition
from global and some local brands (Jaquar and Cera)
Century has not displayed any major product innovation
though the recent launches of WPC, Fibre board and MDF
indicate improvement on this front; this product innovation
is more like imitation. It is the most premium ply brand in
Century Ply
India and has a wide spread manufacturing reach (seven
plants in India) and is strengthening distribution to reach
micro-markets. Access to face veneer from Myanmar and
Laos through its own capacities, is its unique strategic asset.

Astral Poly Technik
Exhibit 7: CFO and equity were the primary sources of Exhibit 8: Continuous capacity expansion and recent
funds acquisitions to build on brand were the main uses
Interest Net change Dividend
Net recd, 1% in cash, -2% paid, 3%
borrowings,
12%
Interest
paid, 13%
Investments
Capex, 59%
Equity in sub/JV,
CFO, 63%
raises, 24% 27%
Exhibit 9: After stagnating, multiples expanded as Exhibit 10: Astrals share price performance vs Sensex;
acquisition performance improved outperformance compounding with patience
45 2,560
40
35 2,060
30
25 1,560
20
15
10 1,060
5
0 560
11-Oct-12
11-Oct-13
11-Oct-14
11-Oct-15
11-Oct-16
11-Oct-17
11-Apr-13
11-Apr-14
11-Apr-15
11-Apr-16
11-Apr-17
60
Jan-13
Oct-13
Jan-17
Oct-17
Apr-12
Sep-12
Apr-16
Sep-16
Dec-11
May-13
Jun-14
Dec-15
May-17
Mar-11
Feb-14
Mar-15
Nov-10
Aug-11
Nov-14
Aug-15
1- year forward P/E (x) 5 year avg P/E (x) Astral SENSEX

Astral falls in the top most decile (D1) in Ambits accounting framework; the companys (a) high cash yield (8%), (b) low
Accounting GREEN contingent liabilities as a % of net worth (1%), (c) negligible miscellaneous expenses as a % of total revenues, and (d) low
volatility in non-operating income (24bps) stand out.
Largely a predictable business. Management has been providing good indication of the progress of the business. Except
the sales of newly acquired Seal IT and Kenyan operations, operating metrics are fairly predictable.
Earnings
AMBER Consensus EPS downgraded by 6.4% and revenue by 2.0% over the past three months.
momentum
Exhibit 12: Astral s forensic score evolution Exhibit 13: Astrals greatness score evolution; decline on
account of acquisition and slowdown in pipes

Astral Poly Technik
Balance sheet (consolidated)*

(` mn) FY12 FY13 FY14 FY15 FY16 FY17
Shareholders' equity 112 112 112 118 120 120
Total networth 1,841 2,414 3,153 6,188 7,084 8,468
Debt 938 923 1,420 2,026 1,966 2,274
Total liabilities 2,793 3,422 4,698 8,556 9,388 11,128
Gross block 2,119 2,808 3,766 4,826 4,732 5,978
Net block 1,640 2,150 2,888 3,424 4,314 5,091
CWIP 130 120 82 268 149 250
Cash & Cash equivalents 355 115 10 115 499 166
Net current assets 668 1,037 1,714 2,604 2,289 3,300
Total assets 2,793 3,422 4,698 8,556 9,388 11,128
Source: Company, Ambit Capital research; EPS adjusted for stock splits
Income statement (consolidated)*

(` mn) FY12 FY13 FY14 FY15 FY16 FY17
Net Sales 5,827 8,252 10,796 14,299 16,778 18,888
EBITDA 827 1,153 1,551 1,683 2,076 2,638
Depreciation 138 181 219 364 418 502
EBIT 689 971 1,332 1,319 1,658 2,136
Adjusted PBT 500 798 1,045 1,095 1,379 2,043
Tax 105 189 252 313 296 562
Adjusted PAT before MI 395 610 793 782 1,083 1,482
Adjusted PAT after MI 395 606 789 759 1,093 1,481
PAT margin 7% 7% 7% 5% 6% 8%
Cash flow statement (consolidated)*

(` mn) FY12 FY13 FY14 FY15 FY16 FY17
Net Profit Before Tax 500 798 1,045 1,095 1,315 2,007
(Incr) / decr in net working capital 77 (440) (665) (306) 428 (1,064)
Cash flow from operations 851 648 672 1,170 2,258 1,142
Capex (net) (696) (681) (920) (854) (1,344) (1,597)
Cash flow from investments (680) (665) (909) (3,435) (2,029) (1,580)
Net borrowings 278 (48) 476 313 (39) 320
Issuance/buyback of equity - - - 2,359 590 1
Cash flow from financing 82 (223) 131 2,371 156 104
Free cash flow 155 (33) (248) 315 914 (455)
Ratio analysis and Valuation parameters (consolidated)*

(` mn) FY12 FY13 FY14 FY15 FY16 FY17
EBITDA margin (%) 14% 14% 14% 12% 12% 14%
EBIT margin (%) 12% 12% 12% 9% 10% 11%
Net profit (bef MI) margin (%) 7% 7% 7% 5% 6% 8%
Net debt: equity (x) 0.3 0.3 0.4 0.3 0.2 0.2
Gross block turnover (x) 3.3 3.4 3.3 3.3 3.5 3.7
RoCE (post-tax) (%) 24% 24% 25% 15% 15% 16%
RoE (%) 24% 29% 28% 17% 17% 19%
Diluted EPS (`) 3.5 5.4 7.1 6.6 8.7 12.1
Book value per share (`) 16 21 28 52 60 71
P/E (x) 117.9 76.3 58.7 62.7 47.8 34.3
P/BV (x) 25.3 19.3 14.8 7.9 7.0 5.9
EV/EBITDA (x) 61.8 44.3 32.9 30.4 24.6 19.4

Astral Poly Technik

Dr Lal PathLabs
NOT RATED
STRATEGY NOTE DLPL IN EQUITY November 17, 2017
Ready steady grow Healthcare
Dr Lal PathLabs is the largest diagnostics chain in India by revenues. It Recommendation

recorded 29% sales CAGR and 77% PAT CAGR over FY07-17 led by: 1)
Mcap (bn): `73/US$1.1
aggressive geographical expansion; 2) acquisition of smaller labs; 3)
3M ADV (mn): `109/US$1.7
market-share gain from low-quality unorganised players (48% share
CMP: `872
now); and 4) acquiring customers through branding, not commission-
based referrals by doctors. Sales growth of mid-to-high teens with TP (12 mths): NA
steady margins and return ratios will continue given low penetration Downside (%): NA
rate of healthcare, socio-economic tailwinds and continued market-
share gains from unorganised players. Valuation of 35x FY19 consensus Flags
P/E is justified by potentially higher growth rates than FMCG companies Accounting: GREEN
while delivering FMCG-like EBITDA margins and RoIC. Key risks: Price Predictability: AMBER
disruption and increased competition from other labs. Earnings Momentum: AMBER
Competitive position: MODERATE Changes to this position: STABLE
Performance
Sustained quality leadership in Indian diagnostics space
150
Dr Lal started operations in 1949 and is one of the pioneers in the diagnostics 130
industry in India. It is highly focused on technology to provide high quality 110
customer experience, faster turnaround time and wider array of tests with higher 90
accuracy than unorganised peers. More than 20 labs of Dr Lal are certified by 70
National Accreditation Board. With Rs9.1bn in revenues for FY17, 189 labs, 50
1,759 patient service centers and annual throughput of 29mn+ samples, Dr Lal
Nov-16
Mar-17
May-17
Nov-17
Aug-17
Feb-17
Dec-16
Sep-17
Jun-17
is the largest diagnostics chain in India. Dr Lals 29% sales CAGR over the past
10 years is unlikely to sustain given the high base but a mid-to-high teen growth
rate, in line with industry growth, is possible. Dr Lal PathLabs Sensex
Focus on quality is helping grow market share

Diagnostics in India is highly fragmented (unorganised hold 48% market share).
Organised chains account for only 15% of revenues. Dr Lal, the largest player,
Dr Lals forensic score analysis
has only 2% market share. Though even globally, the industry is fragmented,
leaders have 10-20% market share (e.g. Quest in USA has 10% share, Miraca in
Japan has 21% share, DAAS in Brazil has 18% share, and Sonic in Australia has
43% market share). Dr Lal can continue to consolidate its leadership led by: 1)
shifting of sales from unorganised to organised; 2) geographical expansion
beyond North and East; and 3) acquiring smaller/regional labs.
Investing for growth to ensure competitive advantage sustains Source: Ambit HAWK, Ambit Capital research
We believe that given the high base and rising competition from national and
regional chains, Dr Lal will have to continue investing in growth. Steps being Dr Lals greatness score analysis
taken to maintain market leadership in terms of growth and quality are: 1)
setting up of two more reference labs for capex of Rs1bn (apart from Delhi and
Kolkata); 2) continuous expansion of the array of tests; 3) pricing discipline with
annual hikes averaging 2-3%, which is much lower than inflation; 4) addition of
satellite labs in new cities to enhance reach; and 5) acquisition of
smaller/regional labs. While these steps will drive growth, RoIC will be hit.
However, given already high RoIC of over 50%, we are not overly concerned.
Valuation is attractive as investors focus on long-term growth
After the 3QFY17 results, Dr Lal lowered revenue growth guidance to match Research Analysts
industry growth of 17-18%, growth potential is still higher than that offered by
Abhishek Ranganathan, CFA
the consumer discretionary space. The stock de-rated from 43x FY19 consensus
abhishek.r@ambit.co
P/E to 35x; this valuation is justified as Dr Lal combines higher growth potential
Tel: +91 22 3043 3085
of consumer discretionary with the economics of consumer staples.
Mayank Porwal
mayank.porwal@ambit.co
Tel: +91 22 3043 3214
Dr Lal PathLabs
Exhibit 1: Tale of two halves over the past decade

Phase 1: With penetration rates Phase 2: As the base expanded,
80% low, rapid geographic expansion, smaller players became organised, 50%
share gains and acquisition of valuations for M&A moved up, 45%
70% smaller labs for lower price scope for revenue growth
helped strong revenue growth moderated and incremental RoCE 40%
60% while driving up RoCE for this growth declined
35%
50% 30%
40% 25%
30% 20%
15%
20%
10%
10% 5%
0% 0%
FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17
Pre-tax ROCE (LHS) Revenue growth (RHS)
Source: Ambit capital research

(` mn) FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17
Revenues 945 1,230 1,670 2,373 3,422 4,517 5,579 6,596 7,913 9,124
Revenue growth (%) 24% 30% 36% 42% 44% 32% 24% 18% 20% 27%
Net profits 86 128 252 295 452 557 803 964 1,332 1,552
EPS 1.6 2.4 4.5 3.6 5.6 6.8 9.7 11.6 16.0 18.6
CFO 97 219 317 418 681 881 980 1,218 1,585 1,716
Pre-tax CFO-EBITDA 108% 82% 98% 103% 102% 124% 107% 113% 109% 103%
FCF 11 80 30 72 346 681 652 865 1,144 1,200

Debt equity (x) 0.0 0.0 0.0 0.2 0.0 0.0 0.0 - - -
RoE (%) 13% 16% 26% 32% 43% 40% 41% 34% 31% 27%
Pre-tax RoCE (%) 15% 22% 42% 42% 60% 73% 61% 51% 47% 37%
Exhibit 3: The key things to note from the evolution

Business started in 1949 by Dr Major S.K. Lal
Dr Arvind Lal (son of Dr S.K. Lal) took over as the Chairman of Dr Lal PathLabs in 1977
Dr S.K Lal and Dr Arvind
Under his leadership, the company modernised and adopted Information and Communication Technology
Pre 2005 Lal run the company as a
(ICT). The company also expanded beyond Delhi NCR.
family business
In 2004, Dr Lal PathLabs became the first Indian Diagnostic chain to get into a Public Private Partnership
with the Government of Tripura.
Helped convert a family run business into a professional entity.
Dr Om Manchanda joins
Revenues grew 11x in 10 years at a 30% CAGR mainly driven by rapid geographic expansion and
2005-2014 as COO and promoted
acquisition of smaller labs.
to CEO in 2008
Profits improved significantly, going up from `10mn to `1.8bn over FY06 to FY16.
Level of investments set to rise to ensure growth levels are maintained. This should cap profitability and
return ratios.
Growth is strong but at a
Post 2014 With two new reference labs coming up, quality of service should improve.
higher cost
Focus will be firmly on growing in North and East with West and South to be tapped either inorganically or
through selected clusters.

Dr Lal PathLabs
Exhibit 4: Competitive mapping of Dr Lal

Revenue Industry EBITDA Pre-tax Pre-tax CFO/
Sub-segment FY17 revenue Capex/CFO
Company CAGR market Margin RoIC EBITDA
Positioning (` bn) (FY11-17)
FY11-17 share (FY17) (FY17) (FY11-17)
Dr Lal #1 9.1 25% ~2% 27% 78% 109% 39%
SRL #2 6.4 24% ~2% 18% 9% 98% 108%
Thyrocare #4 3.1 25% ~1% 38% 35% 108% 30%
Source: Company, Ambit Capital research. Note: SRL nos. are standalone nos.
Exhibit 5: Mapping Dr Lal and its peers on IBAS

Dr Lal SRL Thyrocare Metropolis Comments
In terms of back-end systems or sample collection and logistics, all four are fairly
well placed.
Innovation Key difference is range of tests provided where Dr Lal leads (4,600) followed by SRL
(3,500) and Metropolis (4,500).
Thyrocare has a limited test portfolio (200 tests) and focuses just on basics.
SRL has a well-established brand with presence across pan-India (revenue split is
even).
Dr Lal (North and East) and Metropolis (West) are also strong brands but with
Branding
limited geographic reach.
Thyrocare is better known for Thyroid tests and its Aarogyam brand for preventive
health check-ups is still work in progress
SRL through higher presence in hospitals, more accredited labs (37) and more
doctors (700) has a better ecosystem.
Dr Lal is largely dependent on franchisees which have high churn rate of 15-20%
Architecture
and fewer certified labs (20) and doctors (175).
Thyrocare also has a weaker ecosystem which is completely dependent on
franchisees which compromises customer experience and quality
High class reference lab for Dr Lal in Delhi.
Synergies with Fortis Hospitals for SRL provide better branding and customer reach
Strategic Assets
Thyrocare's reference lab is relatively limited in its ability due to limited number of
tests supported by it.
Dr Lal is a strongly competing player though SRL due to its parentage with Fortis
Overall Hospitals has an edge.
Thyrocare clearly needs to enhance focus on moving up the quality chain
Source: Company, Ambit Capital research Note: - Highest; - Relatively high; - Average; - Less
Exhibit 6: CFO was the main source of funds Exhibit 7: Post capex, large sums of money are available
for liquid investments
Application of funds (FY08-17)

Dividend/ Debt
Sources of funds (FY08-17)
Interest repayment
income 1%
Equity 8%
Capital
5% Others
21% Capex
Interest paid 33%
1%
Dividend
12%
CFO Investments
87% 32%

Dr Lal PathLabs
Exhibit 8: Sharp de-rating since November 2016 Exhibit 9: Dr. Lal has recently underperformed the Sensex
Dr Lal's 1 yr fwd P/E Dr Lal's avg. P/E 240

220
70 200
60 180
50 160
140
40
120
30
100
20 80
10 60
Oct-16
Oct-17
Apr-16
Apr-17
Dec-15
Jun-16
Dec-16
Jun-17
Feb-16
Feb-17
Aug-16
Aug-17
0
Jan-17
Sep-16
Sep-17
May-16
May-17
Mar-16
Mar-17
Jul-16
Jul-17
Nov-16
Nov-17
Dr Lal SENSEX
Exhibit 10: due to decline in revenue growth trajectory; but RoIC remains high
RoIC (LHS) Revenue growth (RHS)
120% 50%
100% 40%
80%
30%
60%
20%
40%
20% 10%
0% 0%
FY11 FY12 FY13 FY14 FY15 FY16 FY17
Exhibit 11: Explanation for our forensic accounting scores

There are no significant issues with Dr Lals accounting policy. High CFO/EBITDA and steady working capital are
Accounting GREEN
positives. Historically ESOPs have been at an elevated level but have been accounted for fairly.
Earnings swing due to extent of onset of seasonal diseases is fairly high. While structural growth over the medium
term is fairly predictable, near-term volatility can be high.
Earnings Momentum AMBER After beating consensus estimates since listing, Dr Lal has missed consensus estimates constantly since 3QFY17.

Dr Lal PathLabs
Balance sheet
Shareholders' equity 164 803 1,108 1,243 1,243
Total networth 1,621 2,315 3,411 5,074 6,595
Minority Interest 16 18 23 29 24
Debt 4 9 0 0 0
Deferred tax liability (127) (196) (254) (121) (160)
Net block 1,271 1,400 1,510 1,697 2,078
Cash & equivalents 215 1,057 1,482 2,099 2,383
Debtors 198 252 310 363 418
Inventory 86 117 143 145 179
Loans & advances 203 347 597 1,079 1,192
Provisions 150 135 192 312 69
Net current assets (520) (397) (192) 542 954
Total assets 1,640 2,342 3,434 5,102 6,619
Income statement
Revenues 4,517 5,579 6,596 7,913 9,124
% growth 32% 24% 18% 20% 15%
EBITDA 977 1,386 1,560 2,098 2,366
% growth 13% 42% 13% 35% 13%
Depreciation 204 272 282 283 282
EBIT 773 1,113 1,278 1,815 2,085
Interest expenditure (1) (56) (90) (142) (187)
Adjusted PBT 802 1,192 1,397 2,008 2,334
Tax 245 389 433 675 781
Adjusted PAT/ Net
557 803 964 1,333 1,553
profit
% growth 23% 44% 20% 38% 16%

Dr Lal PathLabs
Cash flow statement

PBT 802 1,192 1,397 2,007 2,333
Depreciation 204 272 282 283 282
Others ESOPs 250 155 242 (35) 73
Tax (334) 389 433 675 781
(Incr) / decr in net working capital (28) (94) (82) 185 (81)
Cash flow from operations 881 980 1,218 1,585 1,716
Capex (196) (328) (353) (441) (516)
Cash flow from investments (650) (897) (1,135) (1,635) (1,407)
Net borrowings 4 - (9) - -
Issuance of equity 0 - 105 161 36
Dividend paid (150) (97) (104) (156) (378)
Cash flow from financing (148) (102) (8) 4 (344)
Closing cash balance 173 158 233 187 152
Free cash flow 685 652 865 1,144 1,200
Ratio analysis
Gross margin (%) 78.5% 78.9% 78.9% 78.1% 78.6%
EBITDA margin (%) 21.6% 24.8% 23.6% 26.5% 25.9%
EBIT margin(%) 17.1% 20.0% 19.4% 22.9% 22.8%
Net profit margin(%) 12.3% 14.4% 14.6% 16.8% 17.0%
Net debt: equity (x) -0.5 -0.5 -0.5 -0.5 -0.5
Post-tax RoCE(%) 38.4% 37.8% 30.7% 28.3% 22.6%
RoE(%) 40.1% 40.8% 33.7% 31.4% 26.6%
EPS (Rs) 6.8 9.7 11.6 16.2 18.9
Book value per share (Rs) 20.0 28.3 41.5 61.7 80.2
Dividend per share (Rs) 1.1 1.2 1.8 1.9 4.6
P/E (x) 132.4 92.4 77.3 55.9 48.0
P/BV (x) 45.1 31.8 21.7 14.7 11.3
EV/EBITDA (x) 74.0 52.3 46.2 34.0 29.8
Price/Sales (x) 16.2 13.2 11.2 9.4 8.2

Cera Sanitaryware
NOT RATED
STRATEGY NOTE CRS IN EQUITY November 17, 2017
Imitating one of the best Building Materials
Cera ranks second in scale but is the best-run Indian sanitaryware

Recommendation
company. It posted 25% revenue and EBITDA CAGR and 24% median RoE
Mcap (bn): `43/US$0.7
over FY07-17, significantly beating closest peer HSIL and tiles players.
Continuous capacity additions (first in sanitaryware then faucets and now 3M ADV (mn): `37/US$0.6
tiles) and industry leading brandex (~5% of sales; FY07-17) led to high CMP: `3,322
growth, making it a Superbrand. Our concerns over rising competition in TP (12 mths): n.a.
sanitaryware/faucets from domestic tile manufacturers in low-mid range Downside (%): n.a.
and global majors in premium have partly eased. Growth tapered in
FY17. But industry leading RoCE remained intact and should improve in Flags
FY18 with launch of premium/luxury products and unique home-upgrade Accounting: GREEN
platform (imitating Asian Paints). Value creation depends on ability to: Predictability: GREEN
(a) increase market share, (b) improve working capital intensity (80 days, Earnings Momentum: AMBER
highest in building materials); and (c) improve operating efficiencies.
Competitive position: MODERATE Changes to this position: STRONG Performance
160
Rising competition did not dent CERAs high RoCE
140
Indian sanitaryware industry posted ~12% CAGR in the past 10 years while Cera
clocked 25%. Ceras continued high RoCE (27% in FY17) partly eased our 120
concern that new entrants (tiles players, global majors) will hit market share and 100
profitability, imparting confidence that rich valuations will sustain. Key concerns: 80
(a) market is relatively small (Rs40bn vs Rs240bn for tiles), (b) organized players
Nov-15
Jul-16
Sep-16
May-16
Jan-16
Mar-16
have sizable market share (~60%). Though tiles may get Cera more sales, Cera
will find it tough to gain significant market share in this segment; globally, few Cera SENSEX index
sanitaryware brands have succeeded in tiles and vice versa.
A disciplined approach to usurp competition Source: Bloomberg, Ambit Capital research
rd
A decade back, Cera was 1/3 the size of main peer HSIL. By FY17, Cera
increased this to ~91% of HSILs building material revenues with much higher Ceras forensic score analysis
profitability (20.7% RoE vs 6.9% for HSIL). Ceras secret sauce: (a) focus on
gradually expanding scale and segments (lifestyle products, faucets, tiles and
now home upgrades) alongside maintaining strong balance sheet (D/E within 1x
in the last decade though capacity tripled); (b) significant spending on brand (one
of highest in the building materials space); (c) controlled overheads; and (d)
expanding distribution. Faucets are a 1.7x bigger market than sanitaryware, at
Rs40bn-42bn. Faucets market is 40% organised vs 60% for sanitary ware.
Strong brand and low-cost manufacturing are key advantages
Cera has launched several differentiated products like twin-flush and 4-litre WC Ceras greatness score analysis
ahead of competition. Higher brandex than most peers helped Cera increase
premium sales mix to ~40%. It has the second-largest sanitaryware
manufacturing capacity (3mn units), strong distribution network, and a team of
200 in-house technicians for after-service. It is the only frontline ceramic
manufacturer with access to administered gas (30% cheaper than spot gas) for
~30% of its production, which is a unique strategic asset.
Rich valuations to sustain due to high RoCE and improved portfolio Source: Ambit HAWK, Ambit Capital research
Cera trades at 37x FY18 EPS, a marginal discount to Kajaria (39x) and premium
to Somany (36x). Rich valuations can sustain; we have seen in the past that Research Analysts
strong and stable RoCE keep valuations elevated even if growth decelerates. Nitin Bhasin
Despite increasing competition, Cera has been able to maintain RoCE at ~27%. +91 22 3043 3241
Improvement in product portfolio, entry into premium and mass brand JEET, nitin.bhasin@ambit.co
and successful entry into home upgrade can strengthen the brand and growth. Prateek Maheshwari
+91 22 3043 3234
prateek.maheshwari@ambit.co
Cera Sanitaryware
Exhibit 1: Evolution of Cera Sanitaryware
Setting the base: Product extensions: Building premium brand:

Sales CAGR: 26% Sales CAGR: 26% Sales CAGR: 26%
RoCE: 19% RoCE: 27% RoCE: 29%
12,000 35%
10,000 30%
8,000 25%
20%
6,000
15%
4,000 10%
2,000 5%
- 0%
FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17
Revenues Rsmn (LHS) RoCE pre-tax (%)
Source: Company, Ambit Capital research (RoCE for the above purpose implies Median RoCE for that period)
Exhibit 2: Key financial parameters over the last decade a steady 25%+ RoCE for last 8 years!
(Fig in Rs mn) FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17
Revenues 1,067 1,281 1,595 1,914 2,430 3,194 4,879 6,637 8,217 9,172 10,066
Revenue growth (%) 33% 20% 25% 20% 27% 31% 53% 36% 24% 14% 10%
Net profits 91 101 147 196 265 320 462 519 677 835 973
EPS (Rs) 7 8 10 15 21 25 37 41 52 64 76
CFO 124 134 215 255 295 78 424 634 406 1,138 993
CFO-EBITDA 85% 79% 87% 97% 93% 44% 83% 91% 60% 102% 88%
FCF (98) (86) 171 228 79 (166) 44 235 (426) 248 274
Debt equity (x) 0.6 0.66 0.50 0.31 0.34 0.34 0.34 0.22 0.19 0.16 0.16
RoE (%) 19% 19% 23% 25% 27% 26% 29% 26% 24% 22% 21%
RoCE* (%) 19% 19% 22% 26% 30% 29% 33% 32% 29% 27% 27%

In this phase, the company was much smaller than the leader HSIL. To plug the gap, the company added
capacities (to 24,000 MT in FY08 as against 16,000MT in FY05) and started expanding its distribution
Setting the
FY05-08
base
Initial stages of building brand through adding Cera Bath studios (display centres)
Improved plant level efficiencies (leading to 20% increase in production) and also increased capacity of its power
capacities by installing a 1.25MW wind turbine generator in Gujarat
Increased manufacturing capacity by 33% to 2.7mn pieces in FY11. Also, tied up with Italian wellness major
Novellini, SPA for launching premium wellness products in India
Established a faucetware unit in FY11 to extend its products beyond sanitaryware. It further expanded its product
Product
FY08-12 portfolio by adding kitchen sinks, mirrors and sensor products to its range under Bathware
extensions
Began plumber and architect influencing programmes, through adding sales manpower to build its intermediary
connect
Debt/Equity receded to 0.34x in FY12 as against 0.68x in FY08
Aggressively started investing in the brand hired Bollywood celebrities (Sonam Kapoor and Dia Mirza) as brand
ambassadors.
Entered into the tiles business, first through outsourcing and has recently entered into a JV with Anjani Tiles in
Hyderabad. The company also plans to enter into a JV in Rajasthan
Building The company trebled its faucetware capacity to 2.34mn pieces in FY15.
FY13-17 premium D/E reduced to 0.16x in FY17 as against 0.34x in FY13. The company also raised Rs700mn from Lighthouse capital
brand for capacity expansions
Entered the luxury sanitary ware segment through exclusive tie up with Italian luxury designer sanitary ware brand,
ISVEA, to market their luxury range of sanitary ware in India
In FY18 Cera has launched JEET brand of sanitaryware for the mass market
Started new division Home Upgrade in metros offering hassle-free renovation of bathroom within 5-6 days.

Cera Sanitaryware
Exhibit 4: Competitive mapping

EBITDA Pre-tax
Sub-segment FY17 CAGR Industry Pre-tax Cap-ex/CFO
Company Margin CFO/EBITDA
Positioning Revenue FY10-17 Market Share RoCE (FY17) (FY10-17)
(FY17) (FY10-17)
Kajaria #1 25,496 19% ~7-8% 19% 29% 84% 87%
Somany #2 18,110 19% ~5% 11% 20% 77% 100%
Berger #2 45,523 13% ~18% 16% 39% 84% 152%
Astral #2 18,888 31% ~ 6% 14% 21% 78% 88%
Cera #1 10,066 27% ~ 9% 21% 27% 82% 68%
Century Ply #1 18,187 7% ~7-8% 17% 24% 78% 153%
Exhibit 5: Mapping Cera Sanitaryware and its peers on IBAS

Brand Architecture
Strategic Overall
reach reach
Ahead of competition in launching and building premium
tile brand (Glazed and Double charged polished vitrified
tiles). It is the only tile Super-brand in India and has the
Kajaria
highest scale, strong distribution and is now building a
professional management team. Plans to enter into new
categories such as ply may not be prudent capital allocation
Somany has innovated in products and launched
differentiated by launching tiles such as abrasion resistant
VC tiles. It has a strong ceramic brand and has significantly
improved its vitrified brand in the last few years. The
Somany company is the third largest manufacturer and has been
investing in improving distribution. It is still way behind
Kajaria in professionalizing management though the brand
and new products (especially Sanitaryware) are resonating
with customers
Promoters hands-off approach and flying under the radar
differentiates Berger from most other paint manufacturers.
Aggressive sub-brand creation such as Silk and Illusions.
Berger
Unique employee work culture which empowers and helps
improve execution. Widest network of manufacturing
locations 9 across the country
products of global majors in India. Strongest CPVC brand in
India but weak in rural India, though now strengthening.
Astral
Relationships with Sekisui for raw materials and real-estate
developers and plumbers for retail pipes are it's unique
architecture; entry into adhesives can create a unique
distribution architecture
Products innovation is limited to a few products. It has a
mid-segment brand recall and manufacturing is centred on
a single location. Its unique advantage is the access to
Cera administered gas, which is 30% cheaper than spot gas.
Secondly, capital allocation by the promoters, gradual entry
into new products and adjacent price points is helping it
become stronger than most home building brands
We do not note any major innovation by HSIL which set it
apart from competition. The company has a strong brand
and manufacturing capability. We dont notice any unique
HSIL
strategic assets which competitors do not enjoy. Its unique
advantage of premium positioning is facing competition
from global and some local brands (Jaquar and Cera)
Century has not displayed any major product innovation
though the recent launches of WPC, Fibre board and MDF
indicate improvement on this front; this product innovation
is more like imitation. It is the most premium ply brand in
Century Ply
India and has a wide spread manufacturing reach (seven
plants in India) and is strengthening distribution to reach
micro-markets. Access to face veneer from Myanmar and
Laos through its own capacities, is its unique strategic asset.

Cera Sanitaryware
Exhibit 6: Over FY07-17, mostly CFO and a small equity Exhibit 7: Over FY07-17, funds were mostly expended on
issuance were the key sources of funds (Rs3.4bn) capex (Rs2.6bn)
Net Interest recd, Dividend
borrowings, 3% Interest paid, 7%
11% paid, 10%
Investments,
Equity 12%
issuance,
21%
Net increase
CFO, 64% Capex, 65%
in cash, 7%
Exhibit 8: Maintained RoCE despite competition from tiles Exhibit 9: Ceras share price performance vs Sensex
and international players hence, multiple maintained
60 2,060
50 1,860
40 1,660
1,460
30 1,260
20 1,060
10 860
660
0 460
May-13
May-14
May-15
May-16
May-17
Nov-12
Nov-13
Nov-14
Nov-15
Nov-16
Nov-17
260
60
Jan-13
Jan-17
Oct-17
Apr-12
Sep-13
Apr-16
Jun-14
May-13
Mar-11
Dec-11
Dec-15
May-17
Feb-14
Mar-15
Jul-11
Jul-15
Nov-10
Aug-12
Nov-14
Aug-16
1- year forward P/E (x) 5 year avg P/E (x) Cera SENSEX

Cera falls into the 6th decile on the HAWK framework; in FY14 the forensic score plunged to zone of pain from zone of
safety. Whilst the company does well in terms of (a) low contingent liability as % of net worth (at 4%), (b) low volatility in
Accounting GREEN depreciation rate, (c) reasonable auditors remuneration and (d) low volatility in non-operating income; we would like to flag
that the company (a) does not provide for doubtful debts, and (b) has high miscellaneous expenses as % of total revenue (at
3.6%).
Largely the business is fairly predictable excepting the demand related issues emanating from category specific issues or
Predictability GREEN overall discretionary consumption spending. Management has not surprised on guidance and discussed business progress in
detail at regular intervals
Earnings momentum AMBER Bloomberg shows no significant upgrades/downgrades to consensus numbers in recent weeks.

Cera Sanitaryware
Balance sheet
Total networth 1,795 2,240 3,517 4,210 5,224
Debt 610 483 682 351 342
Deferred tax liability 162 202 278 344 357
Gross block 1,753 2,117 2,879 3,105 3,682
Net block 1,251 1,517 2,147 2,258 2,664
CWIP 43 52 77 42 2
Investments 14 121 478 671 1,151
Cash & Cash equivalents 404 307 295 594 554
Debtors 831 1,066 1,612 1,884 2,207
Inventory 940 1,046 1,259 1,322 1,292
Loans & advances 307 418 572 678 1,087
Other current assets 7 5 3 16 17
Current liabilities 897 1,158 1,489 1,872 2,345
Provisions 332 450 477 689 706
Total assets 2,568 2,924 4,477 4,905 5,923
Source: Company, Ambit Capital research. Note: Financials are on Standalone basis
Income statement
Net Sales 4,879 6,637 8,217 9,172 10,092
% growth 53% 36% 24% 12% 10%
EBITDA 753 949 1,175 1,413 1,670
% growth 41% 26% 24% 20% 18%
Depreciation 94 122 155 163 181
EBIT 659 827 1,021 1,250 1,488
Adjusted PBT 678 824 1,009 1,295 1,558
Tax 216 305 333 460 545
Adjusted PAT 462 519 677 835 1,013

Cera Sanitaryware
Cash flow statement

Net Profit Before Tax 678 824 1,009 1,295 1,558
Depreciation 94 122 155 163 181
Others 45 38 72 (2) (34)
Tax (200) (233) (296) (300) (524)
(Incr) / decr in net working capital (194) (118) (535) 3 (79)
Cash flow from operations 424 634 406 1,159 1,103
Capex (net) (380) (399) (832) (241) (543)
(Incr) / decr in investments (2) (108) (356) (180) (465)
Other income (expenditure) 26 26 15 41 48
Cash flow from investments (356) (481) (1,173) (380) (960)
Net borrowings 134 (128) 199 (331) (9)
Issuance/buyback of equity - - 706 - -
Interest paid (68) (63) (76) (51) (33)
Dividend paid (44) (59) (74) (98) (141)
Cash flow from financing 22 (250) 755 (480) (183)
Net change in cash 91 (96) (12) 299 (40)
Closing cash balance 404 307 295 594 554
Free cash flow 44 235 (426) 917 560
Ratio analysis
FY13 FY14 FY15 FY16 FY17
EBITDA margin (%) 15% 14% 14% 15% 17%
EBIT margin (%) 14% 12% 12% 14% 15%
Net profit margin (%) 9% 8% 8% 9% 10%
Dividend payout ratio (%) 11% 12% 12% 14% 0%
Net debt: equity (x) 0.1 0.0 (0.0) (0.2) (0.3)
RoCE (pre-tax) (%) 33% 32% 29% 29% 29%
RoIC (pre-tax) (%) 41% 39% 36% 36% 38%
RoE (%) 29% 26% 24% 22% 21%
EPS (Rs) 36.5 41.0 52.0 64.2 77.9
Dividend per share (Rs) 4.0 5.0 6.3 9.0 -
P/E (x) 95.32 84.86 66.91 54.24 44.68
P/BV (x) 24.54 19.67 12.87 10.75 8.67
EV/EBITDA (x) 60.4 47.7 38.4 31.5 26.5
EV/EBIT (x) 69.0 54.8 44.3 35.7 29.7

REPCO Home Finance
NOT RATED
STRATEGY NOTE REPCO IN EQUITY November 17, 2017
Swimming against the tide BFSI

Repcos decade-long earnings momentum (24% EPS CAGR, 26% AUM
CAGR, and average RoE of 22% over FY06-16) was underpinned by a Recommendation
decadal rally in real estate prices and its strong positioning in the Mcap (bn): `38/US$0.6
informal segment. Its strengths are derived from strong local area 3M ADV (mn): `187/US$2.9
knowledge (validated by low credit cost) and an innovative origination CMP: `614
strategy (avoids sourcing through DSAs unlike other HFCs). We believe TP (12 mths): NA
that valuations will re-rate (2.7x 1-year forward P/B) only on improving Downside (%): NA
growth visibility which is now lacking due to weak growth trends
(disbursement decline of 14% YoY in 2QFY18). Flags
Competitive position: MODERATE Changes to this position: NEGATIVE Accounting: GREEN
Predictability: AMBER
Play on the under-penetrated informal segment Earnings Momentum: AMBER
Set up in 2000, Repco provides housing and LAP loans to the vastly
underpenetrated informal segment (non-salaried; 60% of loan book), with focus Performance
on the four South Indian states (~90% of loan book). With a modest loan book 180
of ~`93bn, the bulk of it home loans, Repco delivered ~37% loan book CAGR 160
of over FY06-17 with average RoE of 21%, making it a promising play on 140
housing finance to the informal segment in India. 120

100
Increasing LAP offset declining growth and profitability in home loans 80
Nov-16
Mar-17
May-17
Nov-17
Aug-17
Feb-17
Dec-16
Sep-17
Jun-17
Post capital infusion by Carlyle in FY08, Repcos growth was led by strong
growth in home loans (45% CAGR over FY08-12) driven by aggressive branch
expansion (from 25 in FY08 to 73 in FY13). But FY12 onwards, growth in home Repco Home Fin. Sensex
loans moderated (24% CAGR over FY12-17, 16% in FY17) due to regulatory and
competitive headwinds. However, shifting gears to LAP ensured Repcos loan
growth and profitability remained respectable. This led to Repco posting at least
26% AUM CAGR and average RoA of 2.4% over FY12-17 (vs 45% AUM CAGR
and average RoA of 3% over FY06-12) as LAPs share in AUM increased from
14% to 20% during the period. Growth being higher than RoE implied that
dividend payout ratio remained frugal at ~9% over FY12-17.
Local knowhow and decentralized architecture are key strengths
A well-penetrated and decentralized branch architecture underpins strong local
area knowledge and superior sourcing of low-ticket customers (despite low ticket
sizes, credit costs have been reasonable at ~38bps over the past ten years).
Moreover, Repcos strong positioning in the informal housing finance is also led
by its innovative origination strategy (unlike other HFCs, it avoids sourcing
through DSAs and instead sources only through loan melas and referrals). That
said, a weak credit rating profile relative to its peers implies a weaker liability
franchise, making it susceptible to margin pressure during a liquidity crunch.
Can the stock rerate?
Multiple pain-points of demonetization, RERA and non-registration of
unapproved plots in Tamil Nadu (~62% of AUM) have driven sharp deterioration
in Repcos growth and asset quality over the past 5 quarters. Consequently,
Repcos EPS CAGR moderated to 18% in 1HFY18 versus 21% over FY16-17 and Research Analysts
28% over FY10-15. Consequently, valuations too de-rated sharply from 4.5x Aadesh Mehta, CFA
one-year forward P/B to 2.7x one-year forward P/B in past year. We believe that +91 22 3043 3239
valuations will re-rate only on improving growth visibility which is now lacking
aadesh.mehta@ambit.co
due to weak growth trends (disbursement decline of 14% YoY in 2QFY18).
Moreover, the looming regulatory risk of convergence of loan pricing to a more Pankaj Agarwal, CFA
transparent and objectively calculated base rate (which is followed by banks) can +91 22 3043 3206
structurally impair the premium valuations of HFCs. pankaj.agarwal@ambit.co
REPCO Home Finance
Exhibit 1: Evolution of Repco Repcos growth has moderated as the base effect is now over
100 Strong growth from a very low base Growth moderation 30%
AUM CAGR 45% AUM Growth 26%
80 RoAs 3.0% RoAs 2.3%
25%
60
20%
40
15%
20
- 10%
FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17
Exhibit 2: Repco key financial parameters over the last decade

(Fig in ` mn) FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17
Total NII 4.0% 4.3% 5.2% 4.9% 4.2% 3.9% 4.6% 4.5% 4.5% 4.9%
Other Income 1.0% 0.9% 0.8% 0.7% 0.5% 0.5% 0.5% 0.4% 0.4% 0.0%
Total Income 5.0% 5.2% 6.0% 5.6% 4.8% 4.3% 5.0% 4.9% 5.0% 4.9%
Opex 1.2% 0.8% 0.8% 0.8% 0.8% 0.7% 0.9% 1.0% 1.0% 0.8%
Operating Profit 3.8% 4.4% 5.2% 4.7% 4.0% 3.6% 4.1% 3.9% 4.0% 4.1%
Provisions and write-offs 0.1% 0.3% 0.3% 0.3% 0.4% 0.3% 0.5% 0.4% 0.6% 0.6%
PBT 3.7% 4.1% 5.0% 4.4% 3.6% 3.3% 3.6% 3.5% 3.4% 3.5%
Taxes 1.0% 1.2% 1.4% 1.2% 0.8% 0.8% 0.9% 1.2% 1.2% 1.2%
ROA 2.7% 2.9% 3.6% 3.2% 2.8% 2.5% 2.6% 2.3% 2.2% 2.2%
Leverage 6.4 6.1 7.2 8.2 9.0 6.9 6.1 6.8 7.6 7.7
ROE 17.4% 17.7% 26.0% 26.2% 24.9% 17.1% 16.0% 15.8% 17.0% 17.4%
AUM growth (%, YoY) 50% 52% 41% 47% 35% 26% 32% 29% 28% 16%
EPS growth (%, YoY) 5% 61% 48% 27% 8% 29% 3% 12% 22% 21%
Exhibit 3: From a high growth phase of FY06-12, Repco is now going through a steady-state growth phase
Repcos robust growth (45% CAGR) during this period was driven by both increasing customer acquisition (due to benign
competition in the small ticket segment and rapid branch expansion from 25 in FY08 to 73 in FY13) and increasing ticket
size per loan (due to rapid increase in real estate prices).
The
Such growth was supported by ~`1.1bn investment by Carlyle for a 49% stake in 2007. Such capital infusion helped
honeymoon FY06-12
Repco to further scale up their growth quickly.
period
Regulatory and competitive environment remained benign in the relevant sub-segment Repco was operating in.
Consequently, both growth and profitability remained high during this period (AUM CAGR of 45% and RoA of 3%). Home-
loans were the key growth and profitability driver, growing at 46% CAGR and accounting for 86% of the AUM mix in FY12.
Regulatory headwinds emerged FY11 onwards such as introduction of base rate system (which led to increasing cost of
funds) and removal of prepayment penalties (leading to higher churn in the loan book and reduction in fee-income).
Moreover, during this period, HFCs faced hyper-competition from banks in home loans due to: i) lack of any opportunities
in corporate loans due to slowdown; and ii) regulators incentivising affordable housing in FY15 by reduction of risk
Growth FY12- weights and exemption on SLR/CRR and PSL requirements. Decline in real estate prices also led to moderation in ticket
moderation Current size growth (which used to drive 50-60% of growth of HFCs).
Consequently, Repcos growth in the key segment of home loans moderated to 24% CAGR over FY12-17 versus 46%
CAGR in FY06-12. However, Repco was able to sustain such pressure on profitability and growth by increasing the share
of higher-yielding albeit risky LAP (from 14% in FY12 to 20% in FY17). This somewhat offset the lower profitability from the
business and enabled it to still deliver a respectable RoA of 2.5% during this period.

REPCO Home Finance
Exhibit 4: Competitive mapping of HFCs Repcos small-ticket positioning drives its sustainable growth
Avg. ticket AUM AUM CAGR Opex/ Gross Branches Employees
Key metrics (FY17) NIMs RoA RoE
size (Rs mn) (Rs bn) (FY13-17) AUM NPA (%) (#) (#)
REPCO 1.4 89 26% 4.8% 0.8% 2.60% 2.2% 17.4% 157 625
GRUH 0.6 132 25% 4.3% 0.8% 0.31% 2.5% 30.5% 185 661
HDFC 2.6 3,378 16% 3.0% 0.2% 0.79% 1.5% 19.1% 427 2,196
LICHF 1.3 1,445 17% 2.7% 0.5% 0.43% 1.5% 19.5% 245 1,833
CANFIN 1.8 133 35% 3.5% 0.7% 0.21% 1.9% 24.1% 170 578
DEWAN 1.4 836 23% 2.7% 0.8% 0.94% 3.6% 18.0% 352 2,881
PNBHF 3.7 415 58% 3.7% 1.0% 0.22% 1.4% 13.6% 63 999
Exhibit 5: Mapping Repco and its peers on IBAS

Innovation
this. Moreover Repcos origination strategy is also innovative as it
Brand for the home loan borrower will depend on the perceived
customer service and the perceived project financing abilities by the
lender. Whilst HFCs score lower than banks on all these metrics, HDFC
Brand
enjoys the best brand amongst the HFCs due to superior perception on
the above metrics, followed closely by GRUH. LICHF, CNFIN and
PNBHF also score high due to their PSU parentage.
to gain penetration in small ticket housing finance. HDFC with ~427
branches and a decentralised decision making has one of the best
Architecture
Strategic asset
REPCO comes out as a middle rung HFC owing to lack of a strong
Overall rank
credit rating.
Source: Company, Ambit Capital research Note: - Strong; - Relatively Strong; - Average; - Relatively weak.

REPCO Home Finance
Exhibit 6: Repco has delivered robust loan book growth Exhibit 7: Increasing share of LAP has sustained growth
AUM mix (%)
70%
57% 100%
60% 16% 15% 14% 15% 19% 19% 20% 20%
47% 47%
50% 80%
29%
40% 35%
32% 31%
26% 27% 28% 60%
30% 16%
20% 14% 12% 40% 84% 85% 86% 85% 81% 81% 80% 80%
10%
0% 20%
-10%
-7% 0%
FY11 FY12 FY13 FY14 FY15 FY16 FY17
FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17
Disbursements growth AUM growth
Mortgages LAP
Exhibit 8: Repcos liability mix is tilted towards banks Exhibit 9: Repcos asset quality has worsened of late
3.0% 2.6%
NHB
2.5%
15% 15% Refinancing
Banks 2.0%
1.5% 1.5%
7% 1.4% 1.3% 1.3%
1.5% 1.3% 1.2% 1.2%
Repco Bank 1.0%
1.0%
0.6% 0.6% 0.6%
0.3% 0.3% 0.3% 0.4% 0.3% 0.4%
NCDs 0.5%
0.1%
0.0%
63%
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
Gross NPA (%) Credit Costs as a % of AUM
Exhibit 10: Repco is trading at 25% discount to its cross- Exhibit 11: Repco share price performance versus Sensex
cycle average P/B
5.0 600
4.5 500
4.0 400
3.5 300
3.0 200
2.5 100
2.0 0
Mar-13
Jul-13
Mar-14
Jul-14
Mar-15
Jul-15
Mar-16
Nov-13
Jul-16
Mar-17
Nov-14
Jul-17
Nov-15
Nov-16
1.5
Jun-13
Oct-13
Feb-14
Jun-14
Oct-14
Feb-15
Jun-15
Oct-15
Feb-16
Jun-16
Oct-16
Feb-17
Jun-17
Oct-17
Repco Sensex Index


Repcos revenue and expense recognition policies are by far the most conservative amongst the peers. We do not
Accounting GREEN come across any instance wherein the reported profitability of the company is materially different from its true
profitability.
Predictability AMBER Repcos earnings trajectory has been difficult to predict of late as it asset quality trends have been highly volatile.
Earnings momentum AMBER Repcos recent earnings growth in 1HFY18 (~18%) has moderated from FY12-17 run-rate of 22% CAGR.

REPCO Home Finance
Income statement
NII (inclu. Securitisation) 1,255 1,908 2,376 3,039 3,978
Other income 147 198 236 297 16
Total income 1,402 2,106 2,612 3,336 3,994
Operating expenditure 242 388 547 642 675
Pre-provisioning profit 1,160 1,718 2,066 2,694 3,319
Provisions 92 227 204 393 519
Profit before tax 1,068 1,491 1,862 2,301 2,800
Tax 268 390 632 800 981
Consol. PAT 800 1,101 1,230 1,501 1,819
Balance sheet
Net-worth 6,345 7,411 8,121 9,548 11,372
Borrowings - on balance sheet 30,645 39,020 51,044 65,379 75,604
Borrowings - off balance sheet - - - - -
AUM 35,447 46,619 60,129 76,912 89,399
Cash and equivalents 2,182 343 299 324 381
Net Current Assets (639) (531) (1,263) (2,309) (2,804)
Total assets 36,990 46,431 59,165 74,927 86,976
Key ratios
NIM % (on AUM) 4.0% 4.7% 4.5% 4.4% 4.8%
AUM Growth 26% 32% 29% 28% 16%
Opex as % of AAUM 0.76% 0.95% 1.02% 0.94% 0.81%
Credit costs as a % of AUM 0.29% 0.55% 0.38% 0.57% 0.62%
CAR (%) 25.5% 24.5% 20.3% 20.8% 20.8%
Dil EPS Consol (Rs) 17.1 17.6 19.7 24.1 29.1
BVPS (Rs.) 135 119 130 153 182
ROA (%) 2.5% 2.6% 2.3% 2.2% 2.2%
ROE (%) 17.1% 16.0% 15.8% 17.0% 17.4%
P/B (x) 4.6 5.2 4.8 4.1 3.4
P/E (x) 36.5 35.3 31.6 25.9 21.4

REPCO Home Finance
Institutional Equities Team

Saurabh Mukherjea, CFA CEO, Ambit Capital Private Limited (022) 30433174 saurabh.mukherjea@ambit.co
Pramod Gubbi, CFA Head of Equities (022) 30433124 pramod.gubbi@ambit.co
Research Analysts
Name Industry Sectors Desk-Phone E-mail
Nitin Bhasin - Head of Research E&C / Infra / Cement / Home Building (022) 30433241 nitin.bhasin@ambit.co
Aadesh Mehta, CFA Banking / Financial Services (022) 30433239 aadesh.mehta@ambit.co
Abhishek Ranganathan, CFA Retail / Consumer Discretionary (022) 30433085 abhishek.r@ambit.co
Aditi Singh Economy / Strategy (022) 30433284 aditi.singh@ambit.co
Anuj Bansal Consumer (022) 30433122 anuj.bansal@ambit.co
Ariha Doshi Consumer (022) 30433228 ariha.doshi@ambit.co
Ashvin Shetty, CFA Automobiles / Auto Ancillaries (022) 30433285 ashvin.shetty@ambit.co
Bhargav Buddhadev Power Utilities / Capital Goods / Small Caps (022) 30433252 bhargav.buddhadev@ambit.co
Dhiraj Mistry, CFA Consumer (022) 30433264 dhiraj.mistry@ambit.co
Gaurav Khandelwal, CFA Oil & Gas (022) 30433132 gaurav.khandelwal@ambit.co
Gaurav Kochar Banking / Financial Services (022) 30433246 gaurav.kochar@ambit.co
Girisha Saraf Home Building (022) 30433211 girisha.saraf@ambit.co
Karan Khanna, CFA Strategy / Small Caps (022) 30433251 karan.khanna@ambit.co
Kushagra Bhattar Agri Inputs / Chemicals (022) 30433062 kushagra.bhattar@ambit.co
Nikhil Mathur Small Caps (022) 30433220 nikhil.mathur@ambit.co
Mayank Porwal Retail / Consumer Discretionary (022) 30433214 mayank.porwal@ambit.co
Pankaj Agarwal, CFA Banking / Financial Services (022) 30433206 pankaj.agarwal@ambit.co
Prateek Maheshwari Cement / E&C / Infrastructure (022) 30433234 prateek.maheshwari@ambit.co
Prashant Mittal, CFA Strategy / Derivatives (022) 30433218 prashant.mittal@ambit.co
Rahil Shah Banking / Financial Services (022) 30433217 rahil.shah@ambit.co
Ravi Singh Banking / Financial Services (022) 30433181 ravi.singh@ambit.co
Ritesh Gupta, CFA Oil & Gas / Agri Inputs / Chemicals (022) 30433242 ritesh.gupta@ambit.co
Ritika Mankar Mukherjee, CFA Economy / Strategy (022) 30433175 ritika.mankar@ambit.co
Sudheer Guntupalli Technology (022) 30433203 sudheer.guntupalli@ambit.co
Sumit Shekhar Economy / Strategy (022) 30433229 sumit.shekhar@ambit.co
Utsav Mehta, CFA E&C / Infrastructure (022) 30433209 utsav.mehta@ambit.co
Vivekanand Subbaraman, CFA Media / Telecom (022) 30433261 vivekanand.s@ambit.co
Sales
Name Regions Desk-Phone E-mail
Sarojini Ramachandran - Head of Sales UK +44 (0) 20 7886 2740 sarojini.r@ambit.co
Anmol Arya India (022) 30433079 anmol.arya@ambit.co
Dharmen Shah India / Asia (022) 30433289 dharmen.shah@ambit.co
Dipti Mehta India (022) 30433053 dipti.mehta@ambit.co
Krishnan V India / Asia (022) 30433295 krishnanv@ambit.co
Nityam Shah, CFA Europe (022) 30433259 nityam.shah@ambit.co
Punitraj Mehra, CFA India / Asia (022) 30433198 punitraj.mehra@ambit.co
Shaleen Silori India (022) 30433256 shaleen.silori@ambit.co
Singapore
Praveena Pattabiraman Singapore +65 6536 0481 praveena.pattabiraman@ambit.co
Shashank Abhisheik Singapore +65 6536 1935 shashankabhisheik@ambitpte.com
USA / Canada
Hitakshi Mehra Americas +1(646) 793 6751 hitakshi.mehra@ambitamerica.co
Achint Bhagat, CFA Americas +1(646) 793 6752 achint.bhagat@ambitamerica.co
Production
Sajid Merchant Production (022) 30433247 sajid.merchant@ambit.co
Sharoz G Hussain Production (022) 30433183 sharoz.hussain@ambit.co
Jestin George Editor (022) 30433272 jestin.george@ambit.co
Richard Mugutmal Editor (022) 30433273 richard.mugutmal@ambit.co
Nikhil Pillai Database (022) 30433265 nikhil.pillai@ambit.co

REPCO Home Finance
HCL Technologies Ltd (HCLT IN, SELL) HDFC Bank Ltd (HDFCB IN, SELL)
1,500 2,000
1,000 1,500
1,000
500
500
0 0
Aug-15
Aug-16
Aug-17
Nov-14
Feb-15
May-15
Nov-15
Feb-16
May-16
Nov-16
Feb-17
May-17
Aug-15
Aug-16
Aug-17
Nov-14
Feb-15
May-15
Nov-15
Feb-16
May-16
Nov-16
Feb-17
May-17
HCL Technologies Ltd HDFC Bank Ltd
Lupin Ltd (LPC IN,NOT RATED) LIC Housing Finance Ltd (LICHF IN, SELL)
3,000 1,000
2,000 500
1,000
0 0
Aug-15
Aug-16
Aug-17
Nov-14
Feb-15
May-15
Nov-15
Feb-16
May-16
Nov-16
Feb-17
May-17
Apr-15
Apr-16
Apr-17
Jan-15
Jul-15
Jan-16
Jul-16
Jan-17
Jul-17
Oct-14
Oct-15
Oct-16
Lupin Ltd LIC Housing Finance Ltd
Page Industries Ltd (PAG IN, BUY) GRUH Finance (GRHF IN, NOT RATED)
560
30,000
20,000 540
10,000 520
0
500
Aug-15
Aug-16
Aug-17
Nov-14
Feb-15
May-15
Nov-15
Feb-16
May-16
Nov-16
Feb-17
May-17
Jan-17
Oct-17
Apr-17
Sep-17
Dec-16
May-17
Jun-17
Feb-17
Mar-17
Jul-17
Nov-16
Aug-17
Page Industries Ltd
GRUH Finance
Amara Raja (AMRJ IN, NOT RATED) Abbott India (BOOT IN, NOT RATED)
1,100 6,500
900 4,500
700 2,500
500
500
Jan-17
Oct-17
Apr-17
Sep-17
Dec-16
May-17
Jun-17
Feb-17
Mar-17
Jul-17
Nov-16
Aug-17
Jan-17
Oct-17
Apr-17
Sep-17
Dec-16
May-17
Jun-17
Feb-17
Mar-17
Jul-17
Nov-16
Aug-17
Amara Raja Abbott India

Astral Poly (ASTRA IN, NOT RATED) Dr Lal PathLabs (DLPL IN, NOT RATED)
900 1,500
700 1,000
500
500
Jan-17
Oct-17
Apr-17
Sep-17
Dec-16
May-17
Jun-17
Feb-17
Mar-17
Jul-17
Nov-16
Aug-17
Jan-17
Oct-17
Apr-17
Sep-17
Dec-16
May-17
Jun-17
Feb-17
Mar-17
Jul-17
Nov-16
Aug-17
Astral Poly. Dr Lal PathLabs


REPCO Home Finance
Repco Home Fin. (REPCO IN, NOT RATED) Muthoot Cap. Serv. (MTCS IN, NOT RATED)
1,000 750
900 700
800 650
700 600
600 550
500 500
Jan-17
Oct-17
Apr-17
Sep-17
Dec-16
May-17
Jun-17
Feb-17
Mar-17
Jul-17
Nov-16
Aug-17
Jan-17
Oct-17
Apr-17
Sep-17
Dec-16
May-17
Jun-17
Feb-17
Mar-17
Jul-17
Nov-16
Aug-17
Repco Home Fin. Muthoot Cap. Serv.
Cera Sanitary. (CRS IN, NOT RATED)

4,500
2,500
500
Jan-17
Oct-17
Apr-17
Sep-17
Dec-16
May-17
Jun-17
Feb-17
Mar-17
Jul-17
Nov-16
Aug-17
Cera Sanitary.

REPCO Home Finance
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SELL <10%
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REPCO Home Finance
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STRATEGY

The Coffee Can Portfolio 2017

Pankaj Agarwal, CFA Abhishek Ranganathan, CFA Ashvin Shetty, CFA

The case for a Coffee Can Portfolio .10

Framework and results from back-tests ..14

Patience with Quality is the Holy Grail 19

Todays Coffee Can for 2017-2027 .26

Performance of live Coffee Can portfolios 28

Appendix 1: How the Coffee Can is different to our .31

Appendix 2: Performance of last 14 back tested Coffee Can portfolios .33

Appendix 3: John Kays IBAS framework .52

HCL Technologies (SELL) .67

Lupin (NOT RATED) ..73

LIC Housing Finance (SELL) 81

Page Industries (BUY) ..87

GRUH Finance (NOT RATED) ..101

Amara Raja (NOT RATED) .107

Abbott India (NOT RATED) ..113

Astral Poly (NOT RATED) ..121

Dr Lal PathLabs (NOT RATED) ..129

Cera Sanitaryware (NOT RATED) 135

REPCO Home Finance (NOT RATED) .141

THEMATIC November 17, 2017

The Coffee Can Portfolio 2017 Coffee Can Portfolio 2017

Laying a framework for constructing the Indian Coffee Can Portfolio

November 17, 2017 Ambit Capital Pvt. Ltd. Page 4

Exhibit 1: A combination of superior RoCE and revenue growth is a winner in the

November 17, 2017 Ambit Capital Pvt. Ltd. Page 5

Patience with Quality is the Holy Grail of investing

November 17, 2017 Ambit Capital Pvt. Ltd. Page 6

Todays Coffee Can Portfolio for 2017-27

November 17, 2017 Ambit Capital Pvt. Ltd. Page 7

Exhibit 4: Summary of the 2017 Coffee Can Portfolio

HDFCB Credible execution track record driving consistent high earnings

We see the competitive advantages built by the company in IMS &

Lupin has championed the art of business evolution (from plain

LICs support is key strategic asset. But earnings momentum would

Best play in affordable housing due to innovative credit scoring,

Emerged as credible competitor to Exide driven by

Abbott trading at a 10-15% discount to peers is justified due to no

November 17, 2017 Ambit Capital Pvt. Ltd. Page 8

Free Float ADV-6m Greatness

Sales growth of mid-to-high teens with steady margins and return

Ceras high RoCE (Median FY13-FY17: 29%) despite increasing

Strong positioning in affordable housing in South India due to

November 17, 2017 Ambit Capital Pvt. Ltd. Page 9

The case for a Coffee Can Portfolio

Why does the approach work?

November 17, 2017 Ambit Capital Pvt. Ltd. Page 10

Power of compounding: Holding a portfolio of stocks for periods as long as 10

Source: Ambit Capital research

November 17, 2017 Ambit Capital Pvt. Ltd. Page 11

5,000 CAGR 0.7%

November 17, 2017 Ambit Capital Pvt. Ltd. Page 12

November 17, 2017 Ambit Capital Pvt. Ltd. Page 13

Framework and results from back-tests

The twin filters of Coffee Can

November 17, 2017 Ambit Capital Pvt. Ltd. Page 14

November 17, 2017 Ambit Capital Pvt. Ltd. Page 15

Results from back- testing the Coffee Can portfolios

2001 600 9,802 32.2% 11.7% 300 3,622 28.3% 7.8%

2002 800 7,709 25.4% 5.1% 500 4,182 23.7% 3.3%

2003 900 10,175 27.4% 7.2% 600 7,791 29.2% 9.0%

2004 1,000 16,849 32.6% 12.7% 500 3,679 22.1% 2.1%