Ambit Coffee Can Portfolio (Nov16) PDF

STRATEGY
November 2016
Year 1 Year 10
The Coffee Can Portfolio 2016

Research Analysts:
Karan Khanna, CFA Rakshit Ranjan, CFA Sagar Rastogi Anuj Bansal
karan.khanna@ambit.co rakshit.ranjan@ambit.co sagar.rastogi@ambit.co anuj.bansal@ambit.co
Tel: +91 22 3043 3251
Aadesh Mehta, CFA Paresh Dave, CFA Ashvin Shetty, CFA
Nitin Bhasin
aadesh.mehta@ambit.co paresh.dave@ambit.co ashvin.shetty@ambit.co
nitin.bhasin@ambit.co
Prashant Mittal, CFA Ravi Singh Abhishek Ranganathan, CFA Nikhil Pillai
prashant.mittal@ambit.co ravi.singh@ambit.co abhishek.r@ambit.co nikhil.pillai@ambit.co
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CONTENTS
SECTOR
The Coffee Can Portfolio 2016 …………………………………………………….3
Executive Summary ……………………………………………………………………4
The case for a Coffee Can portfolio ……………………………………………….9
A framework for constructing the Indian Coffee Can portfolio ……………….13
Does the approach work? Results from our back-testing ……………………..15
Performance of the Coffee Can portfolios launched in ……………………….18
2014 and 2015
Optimal way to deploy fresh funds each year ………………………………….21
The ideal life of a Coffee Can portfolio ……………………………………….…24
Today’s Coffee Can for 2016-2026 ……………………………………………..26
Appendix 1: How the Coffee Can is different to our …………………………131
other portfolio constructs
Appendix 2: Performance of the 14 back-tested ……………………………..133
Coffee Can portfolios
Appendix 3: John Kay’s IBAS Framework ……………………………………..150
COMPANIES
HDFC Bank (SELL): Flawless execution …………………………………………..27
Axis Bank (BUY): A strong core ……………………………………………………33
HCL Technologies (BUY): Set to surf the IoT wave ……………………………..39
Asian Paints (BUY): A legend built over several decades ……………………..45
Lupin (BUY): Dukes have castellated the fort …………………………………...51
Cadila (BUY): Inches make champions ………………………………………….57
Britannia (SELL): On a steady growth path ……………………………………...63
LIC Housing Finance (SELL): The old lady of housing finance ………………..69
Page Industries (BUY): ‘Inner’ Strength ………………………………………….75
Amara Raja Batteries (SELL): Competitive edge under threat ………………..81
GRUH Finance (NOT RATED): Will it stand the test of time? …………………89
Dr Lal PathLabs (NOT RATED): Long-term growth path ……………………….95
eClerx (SELL): No room for error ………………………………………………..101
Astral Poly (NOT RATED): A ‘fanatic’ challenger ………………………………107
Relaxo Footwears (NOT RATED): The nimble footed giant …………………113
REPCO Home Finance (NOT RATED): Swimming against the tide …………119
Cera Sanitaryware (NOT RATED): A super-efficient Superbrand …………..125
November 17, 2016 Ambit Capital Pvt. Ltd. Page 2

Strategy
THEMATIC November 17, 2016
The Coffee Can Portfolio 2016 The Indian Coffee Can Portfolio 2016
HDFC Bank Our stance: SELL
In this annual update of our coffee can portfolio, we further augment the
case for this unique construct. The previous editions of the coffee can Mcap (US$ bn): 47.6 ADV - 6m (US$ mn): 25.9
portfolio (CCP) have done remarkably well, with 18.4% outperformance Axis Bank Our stance: BUY
and 9.6% outperformance (in CAGR terms) for the two iterations since Mcap (US$ bn): 17.5 ADV - 6m (US$ mn): 85.8
publication in Nov ’14 and Nov ’15 respectively. That said, our analysis HCL Technologies Our stance: BUY
suggests for the true potential of the coffee can construct to play out, the
Mcap (US$ bn): 16.6 ADV - 6m (US$ mn): 27.4
portfolio should be left untouched for a decade. Asian Paints, HDFC
Bank, Page and Astral are some prominent stocks that again appear in Asian Paints Our stance: BUY
this year’s portfolio. Relaxo, Repco and Dr Lal are the new entrants. Mcap (US$ bn): 15.2 ADV - 6m (US$ mn): 17.6
The case for a Coffee Can Portfolio Lupin Our stance: BUY
The coffee can construct hinges on investing in high quality franchises (which Mcap (US$ bn): 10.4 ADV - 6m (US$ mn): 30.1
have a superior track record of financial performance over the preceding decade) Cadila Health. Our stance: BUY
for a very long period of time – a decade to be precise. The virtues of such a
construct include: (a) significantly raising the probability of making returns; (b)
reducing costs by avoiding churn; (c) allowing the power of compounding to work Britannia Inds. Our stance: SELL
its magic; and (d) removing the negatives of “noise”. Mcap (US$ bn): 5.6 ADV - 6m (US$ mn): 10.0
Back-tests prove the potential of the CCP to beat the benchmark LIC Housing Fin. Our stance: SELL
Both on a live basis as well as in back-tests, the previous 16 iterations of the Mcap (US$ bn): 4.0 ADV - 6m (US$ mn): 18.1
Coffee Can Portfolio have handsomely outperformed the Sensex as well as Page Industries Our stance: BUY
broader market indices, such as the BSE200 index. Further, on a total returns
basis (i.e. including dividends), the Coffee Can Portfolio’s returns are +1% to
Amara Raja Batt. Our stance: SELL
+3.7% points higher than the returns under a share price only scenario.
True potential of the CCP is realised over the long term
Whilst the portfolio continues to do well even over a shorter duration (say, five GRUH Finance Our stance: NR
years), terminating it at the end of year 5 (and investing the proceeds in the CCP Mcap (US$ bn): 1.7 ADV - 6m (US$ mn): 1.5
for year 5) results in a loss of potential alpha of ~3.3% points (in CAGR terms). Dr Lal PathLabs Our stance: NR
That said, in case the need for fresh deployment of funds arises, we also Mcap (US$ bn): 1.5 ADV - 6m (US$ mn): 1.8
showcase that doing so in successive coffee can iterations also leads to
eClerx Services Our stance: SELL
benchmark-beating returns (8-9% excess IRRS under various scenarios).
Today’s Coffee Can for 2016-2026
Astral Poly Our stance: NR
Six stocks from the previous CCP do not make it to this year’s portfolio: ITC,
Marico, GSK Consumer, Colgate Palmolive, Berger and V-Guard Inds. Mcap (US$ bn): 0.8 ADV - 6m (US$ mn): 0.4
Fresh additions to this years’ portfolio are Relaxo, Repco and Dr. Lal Relaxo Footwear Our stance: NR
PathLabs. Whilst we do not advocate annual rebalancing of the portfolio, clients Mcap (US$ bn): 0.7 ADV - 6m (US$ mn): 0.2
who are interested in the 2016 CCP should refer to the exhibit on the right.
Repco Home Fin Our stance: NR
Sixteen iterations of the Coffee Can Portfolio have outperformed the Sensex
Kick-off All-cap All-cap CAGR Outperformance
year* CCP (start) CCP (end) return relative to Sensex Cera Sanitary. Our stance: NR
2000 500 3,831 22.6% 6.6% Mcap (US$ bn): 0.5 ADV - 6m (US$ mn): 0.6
2001 600 9,802 32.2% 11.7%
Source: Bloomberg, Ambit Capital research. Note: Mcap as of
2002 800 7,709 25.4% 5.1% 15 November 2016
2003 900 10,175 27.4% 7.2%
2004 1,000 16,849 32.6% 12.7% Research Analysts
2005 900 6,643 22.1% 6.0% Karan Khanna, CFA
2006 1,000 6,376 20.4% 9.0% +91 22 3043 3251
2007 1,500 7,828 19.5% 10.8%
karan.khanna@ambit.co
2008 1,100 5,724 22.1% 11.2%
2009 1,100 4,843 22.7% 11.5% Nitin Bhasin
2010 700 2,042 18.7% 9.5% +91 22 3043 3241
2011 1,400 2,550 12.1% 2.7%
2012 2,200 5,356 23.3% 9.9%
2013 1,800 4,762 34.8% 21.4% Prashant Mittal, CFA
2014 1,600 2,331 22.2% 21.0% +91 22 3043 3218
2015 2,000 2,387 19.3% 13.4% prashant.mittal@ambit.co
Source: Bloomberg, Ambit Capital research. Note: *Returns for 10 year-period from 2000-2006 (starting 30th June); CAGR
returns for portfolios since 2007 until 30th Sep’16 (except for live portfolios for 2014 and 2015 for which CAGR returns and
absolute returns have been calculated since these portfolios were launched in 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
The case for a Coffee Can Portfolio
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 Jan ‘08 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 Lupin’s 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.

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Note that even our work suggests a combination of superior RoCE and revenue
growth has been a winner in the Indian context (see exhibit 1 below):
Exhibit 1: A combination of superior RoCE and revenue growth is a winner in the
Indian context*
Average outperformance, 10-year CAGR

12.0% 11.1%
10.0%
8.0%
6.0% 4.9%
4.0% 2.6%
2.0%
0.0%
Superior on Revenue Superior on RoCE Superior on both
growth
Source: Bloomberg, Ambit Capital research. Note: * The universe is 2006’s BSE200 firms (ex-financials);
performance relative to the BSE200 Index; the chart is based on price data from 31 March 2006 to 31 March
2016. 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.
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 16 years. Results from our back-test suggest that each of the previous 16 coffee
can portfolios has 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,
each of the previous sixteen iterations of the coffee can portfolios still beat the
benchmark BSE200 index quite comprehensively.
Performance of the live Coffee Can Portfolio launched in 2014 and 2015
We launched the first 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 second Coffee Can Portfolio that was launched in our 02
November 2015 thematic: “The Coffee Can Portfolio…the coffee works!”
Since publication in November 2014, the first Coffee Can Portfolio has generated
total CAGR returns of 17.6% vs total CAGR returns of -0.8% for the benchmark
Sensex index. Similarly, the second Coffee Can Portfolio that was launched in 2015
has generated total CAGR returns of 11.7% vs total CAGR returns of 2.1% for the
benchmark Sensex index since initiation.
That said both 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 and 2015 portfolios to include stocks that feature in this year’s 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 ~5.3% points (on a median basis; in CAGR
terms, see exhibit 2 below):

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Exhibit 2: Share price CAGR returns over 10-year period for CCP with and without
rebalancing
2000- 2001- 2002- 2003- 2004- 2005- Median
2010 2011 2012 2013 2014 2015 CAGR
CCP without rebalancing 19.3% 28.5% 22.4% 25.4% 30.8% 20.5% 23.9%
CCP with rebalancing 18.5% 22.6% 22.0% 17.0% 18.7% 13.5% 18.6%
Difference (w/o minus with
0.8% 5.9% 0.4% 8.4% 12.0% 6.9% 5.3%
rebalancing)
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. This exhibit has been reproduced without any changes from our 02 November
2015 thematic: “The Coffee Can Portfolio…the coffee works!”
An optimal way to deploy fresh funds each year

The coffee can construct advocates the “buy and hold” approach. That said one of the
challenges investors face is how to deploy the fresh fund inflows that are received
every year.
Here we evaluate two scenarios: (1) where the fresh fund inflows that are received
every year are assumed to remain constant; and (2) where the fresh fund inflows that
are received every year are assumed to increase by 20% each year. We further
assume that every year as an investor receives fresh fund inflows, these funds are
deployed in the Coffee Can Portfolio for that particular year.
Our analysis suggests that under both the scenarios, the IRR for the Coffee Can
Portfolio is significantly higher than the IRR for Sensex. Further, whilst the number of
stocks in the portfolio are high (~43 stocks on an average for the seven completed
coffee can portfolios), the top ~23% of the stocks comprise 65-75% of the total
portfolio value by the end of year 10 under both the scenarios.
We believe this brings out a very important aspect of the coffee can construct which is
that 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. Thus, even whilst
the number of stocks in the portfolios is fairly high, over time the losing stocks
become insignificant while the portfolio returns are gradually dominated by the
winners.
An ideal life of a Coffee Can Portfolio

Historically, we have advocated a minimum holding period of ten years for the Coffee
Can Portfolio as we believe that the benefits of the coffee can construct can only be
realised by investing in quality franchises with a superior long-term track record of
financial performance, over longer periods of time. That said 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 each of the previous sixteen iterations of the
Coffee Can Portfolio has handsomely outperformed the benchmark Sensex index over
a shorter time horizon (i.e. five years). So, given the outperformance even over a
shorter time period, would the investor be better off if he terminates the Coffee Can
Portfolio at the end of 5 years instead of 10 years?
Our analysis suggests for the coffee can construct to work its magic, the portfolio
should be left untouched for the decade. Whilst the Coffee Can Portfolio over a
shorter time horizon does indeed outperform the benchmark Sensex index,
terminating the portfolio at the end of, say, 5 years (and investing the funds from the
exiting stocks in 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.

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Today’s coffee can for 2016-26

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 year’s edition of our Coffee Can Portfolio has
been summarised in exhibit 3 below. The coffee can continues to feature some of
India’s most successful franchises as well as the most-compelling investment themes.
Using John Kay’s 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 Kay’s IBAS framework
and Ambit’s bestselling book, The Unusual Billionaires, gives you details regarding
just how successful the coffee can companies have been over years.

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Exhibit 3: Summary of the 2016 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) (%) FY16 FY17E FY16 FY17E FY16
Credible execution track record driving consistent high earnings
HDFC Bank HDFCB IN 47,610 35,232 23.2 N/A N/A SELL 25.6 21.5 4.4 3.8 1.9
growth while maintaining asset quality
Despite facing asset quality stress, capability to generate strong
Axis Bank AXSB IN 17,489 11,368 68.3 N/A N/A BUY 13.9 28.2 2.2 2.1 1.7
operating profits provides comfort
Set to capitalise on competitive advantages in IMS and ES to build
HCL Tech. HCLT IN 16,641 6,490 20.6 D2 92% BUY 19.7 13.7 4.1 3.4 34.2
a strong IOT offering
Deserve high valuation due to a) resilient repainting cycle in weak
Asian Paints APNT IN 15,151 7,121 15.0 D1 50% BUY macro, b) greater pricing power and c) ability to successfully drive 58.4 47.3 18.0 15.1 47.2
transition to value added services in home improvement category
Ability to adapt to changing environment and be successful is the
Lupin LPC IN 10,365 5,493 22.7 D6 100% BUY 30.3 23.1 6.3 5.1 24.6
secret sauce to Lupin
Early investments in innovation like biosimilars, NCEs/NDDS are
Cadila Health. CDH IN 5,907 1,477 3.8 D5 46% BUY 25.8 25.0 7.3 6.0 29.0
provide competitive edge in EMs/regulated markets
Will play on the width of the portfolio and leverage its cost
Britannia Inds. BRIT IN 5,633 2,760 8.0 D2 83% SELL 46.5 39.2 21.2 15.9 71.9
efficiencies vs peers
LIC’s support is key strategic asset. But earnings momentum
LIC Housing Fin. LICHF IN 3,987 2,392 15.0 N/A N/A SELL should decline due to declining real estate prices and competitive 15.9 12.4 2.9 2.4 1.4
headwinds.
Will grow due a) aspirational brand b) in-house manufacturing
Page Inds. PAG IN 2,702 1,324 2.0 D3 88% BUY 77.3 61.0 35.6 27.7 54.7
and c) control on distribution channel
Low cost advantage with Johnson Controls' parentage to continue
Amara Raja Batt. AMRJ IN 2,552 1,225 3.9 D3 83% SELL driving market share gains market share gains albeit at lower 34.7 29.8 8.1 6.7 35.8
pace than before
Best play in affordable housing due to innovative credit scoring,
GRUH Finance GRHF IN 1,705 699 0.8 N/A N/A NR 46.6 38.6 13.6 11.3 2.4
strong local knowledge and support of the parent HDFC
Set to enjoy long growth ramp driven by market share gains from
Dr Lal Pathlabs DLPL IN 1,477 177 0.7 N/A N/A NR unorganised, acquisitions and socio economic tailwinds driving 73.8 59.1 19.3 15.2 31.5
penetration
Competitive advantage a thing of past as regulatory driven
eClerx Services ECLX IN 874 437 0.4 D2 42% SELL 15.9 15.2 5.3 4.5 51.5
challenges in BFSI and rise of automation threaten business model
Transitioning from a pipes manufacturer to a larger building
Astral Poly ASTRA IN 758 303 0.2 D1 58% NR materials franchise; capitalising the brand recall and replicating its 49.8 35.6 6.5 5.6 18.2
architecture to become a challenger brand in adhesives
Focus on brand building and premiumisation provide Relaxo the
Relaxo Footwear RLXF IN 727 182 0.1 D1 92% NR pricing power in a value offering without compromising on volume 40.2 36.3 10.1 DNA 29.7
growth
Strong positioning in affordable housing due to local area
Repco Home Fin. REPCO IN 626 388 0.6 N/A N/A NR 27.7 22.0 4.4 3.7 2.2
knowledge and an innovative origination strategy
Second largest in scale but the most profitable sanitaryware
Cera Sanitary. CRS IN 490 221 0.2 D5 67% NR manufacturer. With competition rising, Cera has plugged gaps in 39.1 30.5 7.7 6.4 25.1
its product portfolio, now catering to all market segments
Source: Bloomberg, Capitaline, Ambit Capital Research. Note: *RoA for BFSI stocks. Mcap data as of 15 November 2016.

Strategy
The case for a Coffee Can Portfolio

The coffee can approach to portfolio construction
In our 17 November 2014 thematic: “The Indian Coffee Can Portfolio”, we introduced
the Coffee Can Portfolio for investors who have the ability to hold stocks for very long
periods of time (for ten years or more). For investors who are not familiar with the
coffee can 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 client’s 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 Robert Kirby of Capital Guardian
Portfolio’ - the concept harkens back to the Wild West, when Americans, before the introduced the concept of ‘Coffee
widespread advent of banks, saved their valuables in a coffee can and kept it under a Can Portfolio’ in 1984
mattress.
Why does the approach work?
The simplicity of the coffee can approach to portfolio construction rests in four factors
Four factors work in favour of the
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 Sensex’s 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 4: 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.
Let’s 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 5: A hypothetical portfolio with 50% strike rate and symmetry around positive
and negative returns
600 10 yr CAGR
500
Stock A 26%
400
300 Stock B -26%
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 company’s 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, Lupin’s stock price has
withstood short-term disappointments to eventually compound at an impressive
29% CAGR since Jan’04 (see Exhibit 6 below).
Exhibit 6: Lupin’s stock has compounded at an impressive 29% CAGR since Jan’ 04
3,500
3,000
2,500
2,000
1,500
1,000
500
-
Mar-05
Apr-09
Mar-12
Apr-16
Dec-06
Dec-13
Jan-04
Jul-07
Jan-11
Jul-14
Aug-04
Aug-11
Sep-08
Sep-15
Oct-05
May-06
Feb-08
Jun-10
Nov-09
Oct-12
May-13
Feb-15
Source: Bloomberg, Ambit Capital research
However, the chart shown above also highlights that over the past 13 years, there
have been several extended time periods when Lupin’s share price has not gone
anywhere – such as from Jan’ 04 to Mar ’08, Nov ’10 to Feb ’13 and more
recently since Mar ‘15. In spite of remaining flat over these periods, Lupin has
performed so well in the remaining five years that the 13-year CAGR for the stock
is 29%. 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 market 1.
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 returns 2. 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 2006.
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 8.8%. Left untouched, however, the same portfolio would have Finally, churn has a significant
generated CAGR returns of 9.8%. This implies ~8.6% of the final corpus impact on overall portfolio returns
(~US$22mn in value terms) is lost to churn over the ten-year period. Thus, a
US$100mn portfolio that would have grown to US$252mn over the ten-year
period (30 June 2006 - 30 June 2016) in effect grows to US$230mn 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
A framework for constructing the Indian

Coffee Can Portfolio
There are multiple rule-based approaches that one can use for portfolio construction.
For example, Joel Greenblatt’s ‘Magic Formula’ and Joseph Piotroski’s ‘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.]
Thus, whilst there are multiple rule-based approaches for portfolio construction most
of these rule-based approaches however usually require a periodic rebalance of the
portfolio and will, hence, not be directly useful for the coffee can construct.
We, therefore, start with the basic principles of investing for our stock selection. At the We start with the basic investing
very basic level, a company doing well would mean that it is profitable and is principles for our stock selection
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 RoCE generation.
Exhibit 7: A combination of superior RoCE and revenue growth is a winner in the
Indian context*
Average outperformance - 10-year CAGR

12.0% 11.1%
10.0%
8.0%
6.0% 4.9%
4.0% 2.6%
2.0%
0.0%
Superior on Revenue Superior on RoCE Superior on both
growth
Source: Bloomberg, Ambit Capital research. Note: * The universe is 2006’s BSE200 firms (ex-financials);
performance relative to the BSE200 Index; the chart is based on price data from 31 March 2006 to 31 March
2016. 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.
Specifically, we use the following filters.

 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
firm’s 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
FY06-16 outperformed the BSE200 Index by 2.6% on a CAGR basis. However,
firms with a superior RoCE growth gave a higher outperformance of 4.9%. The
best outperformance during this period was given by firms that were superior on
both revenue growth and RoCE at 11.1%.
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

Strategy
range. The equity risk premium, in turn, is calculated as 4% (the long-term US

equity risk premium) plus 250bps to account for India’s 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: India’s Very few listed companies manage
nominal GDP growth rate has averaged 15% over the past ten years (FY05-14). A to achieve a sales growth that
firm operating in India should, therefore, be able to deliver sales growth of at matches India’s nominal GDP
least 15% per annum. However, very few listed companies (only 8 out of the growth rate of 15%
~1,480 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.
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 bank’s 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 bank’s 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 world’s 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.
Whilst these twin filters of revenue growth and RoCE may appear simplistic in nature,
through our approach we are not looking for optimal 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
Does the approach work? Results from our

back-testing
Having built a case for the coffee can construct and a framework for identifying these We back-test the framework and
coffee can stocks, we now discuss results from our back-testing of the framework. the results are revealing
Using the twin filters of growth and profitability discussed in the previous section, we
ran back-tests of the CCP over the last sixteen years (i.e. portfolios initiated annually
from 2000 to 2015), including seven portfolios that have run their entire course of
ten-years (2000-2010, 2001-2011, 2002-2012, 2003-2013, 2004-2014, 2005-
2015 and 2006-2016) 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 16 portfolios and the Sensex;
 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 7.9%) divided by the absolute maximum drawdown.
Performance of the previous coffee can portfolios vs Sensex using share price
returns
In the exhibit below, we have shown the performance of each of the preceding 16
coffee can portfolios vs Sensex based on share price returns (without including any
dividends):
Exhibit 8: Back-testing results of sixteen iterations of the Coffee Can Portfolio (vs Sensex index) using share price 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 2,923 19.3% 5.3% 400 2,602 20.6% 6.5%
2001 600 7,366 28.5% 10.0% 300 2,685 24.5% 6.0%
2002 800 6,057 22.4% 4.1% 500 3,348 20.9% 2.6%
2003 900 8,668 25.4% 7.1% 600 6,754 27.4% 9.1%
2004 1,000 14,618 30.8% 12.6% 500 3,097 20.0% 1.9%
2005 900 5,795 20.5% 6.0% 500 2,517 17.5% 3.1%
2006 1,000 5,414 18.4% 8.6% 600 2,524 15.4% 5.7%
2007 1,500 6,697 17.5% 10.3% 1,000 3,892 15.8% 8.6%
2008 1,100 5,167 20.6% 11.4% 800 3,136 18.0% 8.8%
2009 1,100 4,431 21.2% 11.7% 900 2,780 16.8% 7.4%
2010 700 1,892 17.2% 9.7% 300 903 19.3% 11.7%
2011 1,400 2,361 10.5% 2.7% 400 860 15.7% 8.0%
2012 2,200 5,118 21.9% 10.3% 500 1,018 18.2% 6.5%
2013 1,800 4,564 33.1% 21.3% 600 1,234 24.8% 13.0%
2014 1,600 2,290 21.0% 21.4% 700 950 17.6% 18.0%
2015 2,000 2,366 18.3% 13.8% 1,200 1,308 9.0% 4.5%
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 2007 have been calculated until 30th Sep’16 (except for the
live portfolios for the years 2014 and 2015 for which CAGR returns and absolute returns have been calculated since these portfolios were launched in Nov ’15 and
Nov ’16 respectively).

Strategy
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 16
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 16 iterations in the table below. For
details on the portfolio constituents, please refer to the Appendix 2.
Exhibit 9: Back-testing results of 16 iterations of the Coffee Can Portfolio (vs Sensex index) using total shareholder returns
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 7,828 19.5% 10.8% 1,000 4,426 17.4% 8.7%
2008 1,100 5,724 22.1% 11.2% 800 3,444 19.3% 8.5%
2009 1,100 4,843 22.7% 11.5% 900 3,054 18.3% 7.2%
2010 700 2,042 18.7% 9.5% 300 959 20.4% 11.2%
2011 1,400 2,550 12.1% 2.7% 400 914 17.0% 7.6%
2012 2,200 5,356 23.3% 9.9% 500 1,066 19.5% 6.1%
2013 1,800 4,762 34.8% 21.4% 600 1,286 26.4% 12.9%
2014 1,600 2,331 22.2% 21.0% 700 969 18.9% 17.8%
2015 2,000 2,387 19.3% 13.4% 1,200 1,323 10.3% 4.3%
The results are revealing and can be summarised as follows:

 Each of the 16 CCPs has comprehensively outperformed the benchmark
Sensex index.
 Even the sub-set of the CCP, i.e. the large-cap version of the CCP has been
16 iterations of the CCP that we
successful in beating the Sensex on all 16 occasions.
initiated from 2000 to 2015 prove
 On a risk-adjusted basis (where we define risk as maximum drawdown), all the the potential of the CCP to beat the
16 iterations of the all-cap portfolio as well as the large-cap portfolio have Sensex and the BSE200
outperformed the Sensex.
 The large-cap versions of the CCP have outperformed the all-cap versions in
2000, 2003, 2010 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.
 Using total shareholder returns, the total portfolio returns improve by +1% to
+3.7% points (average 1.9% points) versus using only the share price returns.

Strategy
Performance of the previous coffee can portfolios vs BSE200 index using total
shareholder returns
From exhibits 8 and 9 above we note that the previous sixteen iterations of the coffee
can portfolios have comprehensively outperformed the benchmark Sensex index in all
the iterations. Further, using total shareholder returns versus only the share price
returns, the total returns for the portfolio improve by +1% to +3.7% points.
In exhibit 10 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 all the sixteen all-cap coffee can portfolios and fifteen of the sixteen large-cap
coffee can portfolios managing to beat the benchmark BSE200 index
comprehensively (see Exhibit 10 below):
Exhibit 10: Back-testing results of sixteen 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 7,828 19.5% 9.9% 1,000 4,426 17.4% 7.8%
2008 1,100 5,724 22.1% 10.1% 800 3,444 19.3% 7.3%
2009 1,100 4,843 22.7% 10.2% 900 3,054 18.3% 5.9%
2010 700 2,042 18.7% 8.6% 300 959 20.4% 10.4%
2011 1,400 2,550 12.1% 0.9% 400 914 17.0% 5.9%
2012 2,200 5,356 23.3% 7.6% 500 1,066 19.5% 3.8%
2013 1,800 4,762 34.8% 17.5% 600 1,286 26.4% 9.1%
2014 1,600 2,331 22.2% 16.5% 700 969 18.9% 13.2%
2015 2,000 2,387 19.3% 8.7% 1,200 1,323 10.3% -0.4%

Strategy
Performance of the coffee can portfolios

launched in 2014 and 2015
In our 17 November 2014 thematic: “The Indian Coffee Can Portfolio”, we had We launched the first two iterations
launched the first Coffee Can Portfolio for investors (to be held from 2014-2024). We of the Coffee Can Portfolio in Nov
followed this up with the second Coffee Can Portfolio that was launched in our 02 ’15 and Nov ‘16
November 2015 thematic: “The Coffee Can Portfolio…the coffee works!”
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 both these portfolios have done extremely well vs. the Sensex.
The Coffee Can Portfolio launched in 2014 has generated total returns of 17.6% (on
a CAGR basis) vs total CAGR returns of -0.8% for the benchmark Sensex index since
initiation.
Similarly, the Coffee Can Portfolio launched in 2015 has generated total CAGR Both these portfolios have done
returns of 11.7% vs total CAGR returns of 2.1% for the benchmark Sensex index since extremely well vs the Sensex index
initiation (see Exhibits 11 and 12 below):
Exhibit 11: 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 11-Nov-16
ITC 100 103 2%
Asian Paints 100 145 21%
Godrej Consumer 100 149 22%
Marico 100 153 24%
Ipca Labs. 100 82 -9%
Berger Paints 100 170 31%
Page Industries 100 149 22%
Balkrishna Inds 100 147 21%
eClerx Services 100 148 22%
Mayur Uniquote 100 100 0%
V-Guard Inds. 100 220 49%
HCL Technologies 100 100 0%
HDFC Bank 100 139 18%
Axis Bank 100 106 3%
City Union Bank 100 168 30%
GRUH Finance 100 131 15%
Portfolio* 1,600 2,212 17.6%
Sensex 100 98 -0.8%
Outperformance 18.4%
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 end is the value of the portfolio at the end of the
period (11 November 2016). Thus, for this period, the value of the portfolio rose from `1,600 at the start to
`2,212 at the end.

Strategy
Exhibit 12: Performance of the 2015 Coffee Can Portfolio since initiation
Company Value at start (`) Value at end (`) Total return
Date from/to 01-Nov-15 11-Nov-16 CAGR
HCL Technologies 100 90 -9%

ITC 100 111 11%
Lupin 100 76 -23%
Cadila Health. 100 92 -8%
Britannia Inds. 100 96 -4%
Marico 100 129 28%
GlaxoSmith C H L 100 90 -10%
Colgate-Palm. 100 101 1%
Amara Raja Batt. 100 107 7%
eClerx Services 100 103 3%
Astral Poly 100 101 1%
V-Guard Inds. 100 222 117%
Cera Sanitary. 100 115 15%
HDFC Bank 100 117 16%
Axis Bank 100 106 6%
LIC Housing Fin. 100 110 9%
GRUH Finance 100 119 18%
Portfolio* 2,000 2,241 11.7%
Sensex 100 102 2.1%
Outperformance 9.6%
period (11 November 2016). Thus, for this period, the value of the portfolio rose from `2,000 at the start to
`2,241 at the end.
Note that amongst the stocks in our Coffee Can Portfolio 2014, five stocks missed out
on making it to the Coffee Can Portfolio for the year 2015. These were Godrej
Consumer, Ipca Labs, Balkrishna Industries, Mayur Uniquoters and City Union Bank.
Similarly, from our Coffee Can Portfolio for the year 2015, 6 stocks miss out on 6 stocks miss out on making it to
making it to this year’s Coffee Can Portfolio. Please see the section on ‘Today’s this year’s Coffee Can Portfolio
Coffee Can for 2016-2016’ on Pg 19 for details on this year’s candidates. The stocks
that do not make it to this year’s portfolio are:
Exhibit 13: Stocks that do not make it to this year’s iteration of the Coffee Can
Portfolio
Company name Reasons for exclusion
ITC delivered sales growth of 2% in FY16; hence does not clear the coffee can filter
ITC
on ten consecutive years of sales growth in excess of 10%
Marico delivered sales growth of 7% in FY16; hence does not clear the coffee can
Marico
filter on ten consecutive years of sales growth in excess of 10%
GSK Consumer's sales have been flat in FY16; hence does not clear the coffee can
GSK Consumer
filter on ten consecutive years of sales growth in excess of 10%
Colgate Palmolive delivered sales growth of ~4.5% in FY16; hence does not clear
Colgate Palmolive
the coffee can filter on ten consecutive years of sales growth in excess of 10%
Berger Paints delivered sales growth of ~7.2% in FY16; hence does not clear the
Berger Paints
coffee can filter on ten consecutive years of sales growth in excess of 10%
V-Guard Industries delivered sales growth of ~6.7% in FY16; hence does not clear
V-Guard Industries
the coffee can filter on ten consecutive years of sales growth in excess of 10%
Source: Company filings, Ambit Capital research

Strategy
Should investors rebalance the coffee can portfolios for the years 2014 and
2015?
With 6 out of last year’s 20 stocks not featuring in this year’s Coffee Can Portfolio,
the obvious question one would ask is whether to rebalance the 2014 and 2015
portfolios to include the stocks figuring in this year’s iteration.
Here we point investors to our 02 November 2015 thematic: “The Coffee Can We advise investors to refrain from
Portfolio…the coffee works!” In our 02 November 2015 note, we compared the rebalancing the coffee can
results of a “buy and hold” strategy vs an annual rebalancing strategy of the Coffee portfolios
Can Portfolio over six ten-year iterations starting year 2000.
The results from our analysis have been reproduced in Exhibit 14 below:
Exhibit 14: Share price CAGR returns over 10-year periods for CCP with and without
rebalancing
2000- 2001- 2002- 2003- 2004- 2005- Median
2010 2011 2012 2013 2014 2015 CAGR
CCP without rebalancing 19.3% 28.5% 22.4% 25.4% 30.8% 20.5% 23.9%
CCP with rebalancing 18.5% 22.6% 22.0% 17.0% 18.7% 13.5% 18.6%
Difference (w/o minus with
0.8% 5.9% 0.4% 8.4% 12.0% 6.9% 5.3%
rebalancing)
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. This exhibit has been reproduced without any changes from our 02 November
2015 thematic: “The Coffee Can Portfolio…the coffee works!”
As can be seen in the results above (Exhibit 14), the Coffee Can approach without
rebalancing has outperformed with rebalancing approach on all six occasions. The
median CAGR for CCP without rebalancing over these six iterations was 23.9% vs
18.6% for CCP with rebalancing. These results reaffirm the advantage of the “buy
and hold” approach over an annual rebalancing approach even with the weights of
repeating stocks unchanged in the portfolio.
How should investors deploy fresh capital received every year?
Whilst the coffee can construct advocates the “buy and hold” approach, we agree
that one of the challenges investors face is using the coffee can construct. How
should investors deploy fresh fund inflows that are received every year? We discuss
this aspect in the next section.

Strategy
Optimal way to deploy fresh funds each

year
From our previous discussions, we note that the coffee can construct advocates the How should investors deploy fresh
“buy and hold” approach, i.e. once invested the portfolio should be kept untouched funds every year under the CCP
for a decade. That said, we agree that as fund managers, one of the challenges construct?
investors face is how the fresh fund inflows that are received every year should be
deployed.
To address this, we discuss two scenarios: We evaluate this under two
In Scenario 1, the fresh inflows every year are assumed to remain constant. scenarios
In Scenario 2, the fresh inflows received every year are assumed to grow at 20% each
year over the 10-year life of a particular Coffee Can Portfolio.
Scenario 1 - Fresh fund inflows every year are assumed to remain constant
In scenario 1, we assume that `100 is invested in the initial Coffee Can Portfolio (say
for example the Coffee Can Portfolio that was launched in Jun ’00). We further
assume that the `100 invested in the initial coffee can is left untouched and is In scenario 1 we assume the fresh
allowed to compound over the subsequent ten years. Each year, as the investor gets fund inflows to be constant each
fresh fund inflows (the fresh fund inflows are assumed to remain constant at `100 year
each year; dividends declared during the year are invested in the portfolio for the
subsequent year), the funds received are deployed in that year’s Coffee Can Portfolio.
So, for example, in Jun ’01, when an investor receives `100 more, 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. Similarly, in Jun ‘02, when the investor receives
another `100, these funds are deployed in the Coffee Can Portfolio for the year 2002
along with any dividend declared by stocks in the coffee can portfolios for the years
2000 and 2001 (and all these funds are allowed to compound over the remaining 8
years of the initial coffee can), and so on.
We repeat this exercise for each of the subsequent coffee can portfolios (i.e. the
coffee can portfolios for the years 2001-11, 2002-12, 2003-13, 2004-14, 2005-15
and finally for the years 2006-16).
The results from the analysis have been summarised in exhibit 15 below:
Exhibit 15: 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%
 Number of stocks: As can be seen in Exhibit 15 above, a typical portfolio,

assuming fresh funds received every year are invested in the Coffee Can Portfolio
for that particular year, has about 43 stocks.

Strategy
 Portfolio returns are significantly higher than Sensex returns for each of
the seven iterations: Not only has each of the seven 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%).
 Portfolio weight: Note that whilst the number of stocks in the portfolio is high,
the top 5 stocks (in terms of value of the stock in the portfolio by the end of year
10) comprise around 54% of the portfolio value by the end of year 10. Further,
the next 5 stocks constitute ~21.5% of the portfolio value by the end of year 10.
The more interesting thing to note, however, is that the remaining 33 stocks
comprise only the remaining 24.6% of the portfolio value at the end of year 10.
This means ~23% of the stocks comprise ~75% of the total portfolio value.
Scenario 2- Fresh fund inflows every year are assumed to grow at 20% each
year over the 10-year life of a particular Coffee Can Portfolio
In scenario 2, we assume that `100 is invested in the initial Coffee Can Portfolio (say
for example the Coffee Can Portfolio that was launched in Jun ’00). Further, just like
the previous scenario, we assume that the `100 invested in the initial coffee can is
left untouched and is allowed to compound over the subsequent ten-year period. In
this scenario, however, we assume that the fresh fund flows received by the investor
grow at 20% each year. So, for example, 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 In scenario 2, we assume the fresh
assume that any dividends that were declared by any of the stocks in the initial fund inflows to increase by 20%
Coffee Can Portfolio are deployed in the Coffee Can Portfolio for the year 2001. each year
Similarly, in Jun ’02, the investor receives `144 more (i.e. a 20% increase over the
`120 received in Jun ’01), which along with any dividend declared by stocks in the
coffee can portfolios for the years 2000 and 2001, is then invested in the Coffee Can
Portfolio for the year 2002 and is allowed to compound over the remaining 8 years of
the initial coffee can; and so on.
We repeat this exercise for each of the subsequent coffee can portfolios (starting with
the coffee can for the years 2001-11 and ending with the coffee can for the years
2006-16).
Exhibit 16 below summarises the results from our analysis.

Exhibit 16: Portfolio returns assuming fund inflows every year grow at 20%
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%
Exhibit 16 above suggests that whilst the total number of stocks in the portfolio would Under both the scenarios, the
remain the same, the top 5 stocks (in terms of value of the stock in the portfolio by portfolio continues to generate
the end of year 10) comprise around 46% of the portfolio value by the end of year healthy IRRs vs the Sensex index
10. Further, the next 5 stocks constitute ~21% of the portfolio value by the end of
year 10. The remaining 33 stocks, however, continue to comprise only ~33% of the
portfolio value by the end of year 10. Here again, the key thing to note is that ~23%
of the stocks comprise ~67% of the total portfolio value by the end of year 10. The
portfolio IRR remains healthy at ~24.2% (vs ~15.3% for the Sensex index).

Strategy
We believe exhibits 15 and 16 above bring out a very important aspect of the coffee The more important thing to note is
can construct; which is, allowing the power of compounding to work its magic is a that ~23% of the stocks comprise
much more important driver of long-term returns than the most ideal stock selection 65-75% of the end portfolio value
itself. This is also similar to what we had seen in Exhibit 5 on page 10, where even
with a 50% strike rate and perfect symmetry around the returns generated by winning
and losing stocks, the portfolio when left untouched for longer periods of time
compounds well. This is because over time the losing stocks become insignificant
while the portfolio returns are gradually dominated by the winners.
What is the ideal life for a Coffee Can Portfolio?

Having discussed the virtues of the coffee can construct, in the next section we will
discuss how the returns as well as risk profile for the Coffee Can Portfolio are over a
shorter time horizon. Further, using historical analysis, we will discuss whether an
investor should terminate the Coffee Can Portfolio over a shorter time horizon or
would he be better off keeping the portfolio untouched for a decade.

Strategy
The ideal life of a Coffee Can Portfolio

The entire coffee can construct is premised on investing in quality franchises with a
long-term track record of superior financial performance over longer periods of time.
Further, as discussed in the preceding sections of the note, one of the reasons the
coffee can construct works well is because a longer period of time (usually ten years)
allows the power of compounding to play out its magic. Over the longer term, the
coffee can construct allows the portfolio to be dominated by the winning stocks whilst
losing stocks keep declining to eventually become inconsequential.
Performance of the coffee can portfolios over a shorter time horizon
Whilst, historically, we have advocated a 10-year holding period for the Coffee Can
Portfolio, one of the questions that several investors have asked us is how are the
returns as well as the risk profile over a shorter period of time (such as five years).
In that context, in exhibit 17 below, we have shown the returns as well as the risk We analyse the CCP returns over a
profile for each of the preceding 16 iterations of the Coffee Can Portfolio over a shorter time horizon
shorter time horizon (i.e. 5 years).
Exhibit 17: Performance of the previous 16 iterations of the Coffee Can Portfolio over a 5-year period
2000 500 1,150 18.1% 7.3% 400 925 18.2% 7.4%
2001 600 2,409 32.1% 4.3% 300 1,320 34.5% 6.8%
2002 800 4,006 38.0% 0.1% 500 2,667 39.8% 1.8%
2003 900 3,771 33.2% 0.9% 600 3,089 38.8% 6.5%
2004 1,000 3,904 31.3% 4.7% 500 1,769 28.8% 2.2%
2005 900 2,525 22.9% 1.6% 500 1,606 26.3% 4.9%
2006 1,000 2,029 15.2% 1.5% 600 1,458 19.4% 5.7%
2007 1,500 2,685 12.3% 7.4% 1,000 1,968 14.5% 9.5%
2008 1,100 2,670 19.4% 10.2% 800 1,875 18.6% 9.3%
2009 1,100 3,529 26.3% 12.6% 900 2,203 19.6% 6.0%
2010 700 1,764 20.3% 9.2% 300 708 18.7% 7.6%
2011 1,400 2,335 10.8% 1.6% 400 828 15.6% 6.5%
2012 2,200 5,356 23.3% 9.9% 500 1,066 19.5% 6.1%
2013 1,800 4,762 34.8% 21.4% 600 1,286 26.4% 12.9%
2014 1,600 2,331 22.2% 21.0% 700 969 18.9% 17.8%
2015 2,000 2,387 19.3% 13.4% 1,200 1,323 10.3% 4.3%
The results can be summarised as follows:
 Even over shorter time horizons, each of the 16 CCPs has outperformed the
benchmark Sensex index.
 Even the sub-set of the CCP i.e., the large-cap version of the CCP, has been
Even over shorter time horizons,
successful in beating the Sensex on all 16 occasions.
the 16 iterations of the CCP that
 On a risk-adjusted basis (where we define risk as maximum drawdown), 14 out of we initiate from 2000 to 2015
the 16 iterations of the all-cap portfolio as well as the large-cap portfolio have beaten the benchmark
have outperformed the Sensex. Sensex index
What is the optimal holding period for a Coffee Can Portfolio?
Exhibit 17 above suggests that each of the previous sixteen iterations of the Coffee
Can Portfolio has handsomely outperformed the benchmark Sensex index; both on
an absolute basis as well as on a risk-adjusted basis.
Given the outperformance for the coffee can portfolios even over a shorter time Should investors terminate the CCP
period (i.e. 5 years), the obvious question one would ask is whether investors should after 5 years instead of 10 years?
terminate the Coffee Can Portfolio after 5 years instead of 10 years.

Strategy
To answer this, in exhibit 18 below, we have summarised the portfolio returns under
two different scenarios:
Scenario 1- Each of the seven completed coffee can portfolios are left untouched for
a decade.
Scenario 2- Each of these seven 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 and 2006-16.
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 18 below:
Exhibit 18: 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 beg invested at the beg 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 7.3% -44%
2002-12 25.4% 954 23.3% 803 2.1% -16%
2003-13 27.4% 1,119 25.7% 976 1.7% -13%
2004-14 32.6% 1,668 28.6% 1,222 4.1% -27%
2005-15 22.1% 731 21.4% 686 0.8% -6%
2006-16 20.4% 631 13.3% 344 7.1% -45%
Average 26.1% 22.8% 3.3% -21%
Source: Bloomberg, Ambit Capital research. Note: * after considering Re 1 in terms of brokerage and price impact cost.
The results from our analysis (see exhibit 18 above) have been summarised
below:
 Under scenario 1, if an investor invests `100 in each of the seven coffee can
portfolios, the average returns generated by the investor over the seven iterations
of the portfolio is ~26.1%.
 Under scenario 2, if the same investor invests `100 in each of the seven coffee
can portfolios (but decides to replace the exiting stocks in year 5 with stocks that
clear the coffee can filters in year 5), the average returns generated by the
investor over the seven iterations is ~22.8%.
 Points 1 and 2 above suggest that if an investor decides to run the Coffee Can
Portfolio over a shorter time horizon (i.e. 5 years instead of 10 years), the overall
investment returns are lower by ~3.3% points.
 In six out of the seven iterations, the portfolio value at the end of year 10 is
higher if the initial Coffee Can Portfolio is kept untouched for the decade.
 The more astounding thing to note is that in two of the iterations (i.e. 2001-11
and 2006-16), the portfolio value at the end of year 10 is lower by 44% and 45% Our analysis suggests for the
respectively if an investor decides to churn the portfolio in year 5. coffee can construct to play its
The results from our analysis yet again bring out the point that for the coffee can magic, the CCP should be left
construct to deliver its magic, the portfolio should be left untouched for the decade. A untouched for a decade
shorter time horizon does not allow the power of compounding to work its magic.
Which are the stocks that clear our Coffee Can filters for 2016-2026?
Having discussed the virtues of the coffee can construct and establishing the ideal
time horizon over which one should remain invested in a typical Coffee Can Portfolio,
we now introduce the Coffee Can candidates for 2016-2026 in the next section.

Strategy
Today’s Coffee Can for 2016-2026

Introducing the Coffee Can candidates for 2016-2026
We screened India’s 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 19: The short list of firms with superior RoCE (pre-tax) and superior sales Coffee Can 2016-2026 continues
growth over the last ten years (FY06-16) to feature some of India’s most-
Share price performance Mcap FY17 successful franchises as well as the
Superior on both Ticker
(ten-year CAGR rel. to Sensex) (%) (US$bn) P/E
most-compelling investment
HCL Technologies HCLT IN 17% 16.7 13.7
themes
Asian Paints APNT IN 30% 15.2 47.3
Lupin LPC IN 31% 10.4 23.1
Cadila Health. CDH IN 22% 5.9 25.0
Britannia Inds. BRIT IN 22% 5.6 39.2
Page Industries PAG IN 47% 2.7 61.0
Amara Raja Batt. AMRJ IN 50% 2.6 29.8
Dr Lal PathLabs DLPL IN N/A 1.5 59.1
eClerx Services ECLX IN 29% 0.9 15.2
Astral Poly ASTRA IN 49% 0.8 35.6
Relaxo Footwear RLXF IN 59% 0.7 36.5
Cera Sanitary. CRS IN 47% 0.5 30.5
Source: Bloomberg, Capitaline, Ambit Capital research; Note: Share price performance has been measured over
a ten-year period (i.e. 31 March 2006 to 31 March 2016). In case of firms with a shorter listing history, the
performance has been measured over the shorter period (not less than 3 years). * Market-cap as on 10
November 2016. Page Industries, Dr. Lal PathLabs, eClerx Services, Astral Poly and Cera Sanitaryware were not
listed throughout the ten-year period and hence the financial data used is based on Draft Red Herring Prospectus
as provided by Capitaline, for periods prior to their IPOs.
As mentioned in the preceding sections, from our previous Coffee Can Portfolio,
stocks like Marico, GSK Consumer, Colgate Palmolive, Berger Paints, V-Guard
Industries and ITC do not find a place in this year’s coffee can.
The new additions this year include Dr. Lal PathLabs and Relaxo Footwear.
We run a similar filter for India’s listed BFSI stocks with a market-cap of more than
`1bn and: (a) an RoE of 16%; and (b) loan growth of 15% for every consecutive year Only 6 BFSI stocks meet our
for the past ten years. In a universe of 127 firms, a meagre 6 firms managed to pass screening filters
this test (representing a small fraction of ~5%). This handful of firms is shown in the
exhibit below.
Exhibit 20: The very short list of BFSI firms with superior RoE and superior loan book
growth (over FY05-15)
Share price performance Mcap FY17
Superior on both Ticker
(Ten year CAGR rel. to Sensex) (%) US$bn) P/E
HDFC Bank HDFCB IN 21% 47.7 21.5
Axis Bank AXSB IN 20% 17.5 28.2
LIC Housing Fin. LICHF IN 29% 4.0 12.4
GRUH Finance GRHF IN 40% 1.7 38.6
Repco Home Fin REPCO IN 50% 0.6 22.0
Muthoot Cap. Serv MTCS IN 30% 0.1 DNA
Source: Bloomberg, Capitaline, Ambit Capital research; Note: Share price performance has been measured over
the last ten-year period (i.e. 31 March 2006 to 31 March 2016). 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 10
November 2016. 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.
Having identified the coffee can stocks for this year’s 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 year’s
of our Coffee Can Portfolio using John Kay’s IBAS framework. CCP using John Kay’s IBAS
John Kay’s IBAS framework has been discussed in greater details in Appendix 3: John framework
Kay’s IBAS Framework.

HDFC Bank
SELL
STRATEGY NOTE HDFCB IN EQUITY November 17, 2016
Flawless execution BFSI
Since inception, HDFC Bank has focused on building a granular retail Recommendation
franchise on both sides of the balance sheet. It has maintained a
Mcap (bn): `3,230/US$48.5
conservative approach towards lending (gross NPA of 1.02%). With a
3M ADV (mn): `1,798/US$27.0
stable management team at the helm, the bank was able to expand its
CMP: `1,244
retail offering on a pan-India basis and fill the gaps in its corporate
banking offering. However, the valuation premium over peers largely TP (12 mths): `1,225
captures superior earnings growth of the bank in the medium term (20% Downside (%): 2
EPS CAGR over FY17-18E). Further, with 20-odd new banks, we believe
that the competitive intensity will rise for low-cost liabilities and Flags
customer data. We remain SELLers with a TP of `1,225 (15x one-year Accounting: GREEN
forward EPS and 2.9x one-year forward BVPS). Predictability: GREEN
Competitive position: STRONG Changes to this position: STABLE Earnings Momentum: GREEN
Banking on low-cost liabilities

Performance
Established in 1994, HDFC Bank is India’s largest private sector bank in terms of
130
assets. It holds ~4% market share in the total banking industry. The bank’s retail 120
loans form 51% of the loan book, with market-leading presence in most of the 110
retail product categories. Its corporate business has focused on working capital 100
financing. HDFC Bank has differentiated itself from its peers through its strategic 90
80
focus on granular low-cost franchise. Superior margins and controlled asset
70
quality have driven healthy average RoE of ~18% in the last ten years. A stable
Jan-16
Oct-16
Apr-16
Sep-16
Dec-15
May-16
Jun-16
Feb-16
Mar-16
Jul-16
Nov-15
Aug-16
management team and use of technology, since beginning, have further
facilitated the bank’s consistent performance.
HDFC Bank Sensex
Mastering the word “execution”
HDFC Bank focused on two key principles in its business – building a stable and Source: Bloomberg, Ambit Capital research
low-cost liability base and winning clients by offering unique solutions (such as
technology-led capture of capital market floats). The bank has taken a long-term
approach of protecting its margins and asset quality rather than pursuing near-
term aggressive growth (e.g. avoided project finance-led growth in last six
years). Superior profitability has allowed HDFC Bank to sustain its capital
position mainly through internal profit generation without undue dilution of its
shareholders’ fund. The bank has made two acquisitions in the past, but its
recent focus has been on organic growth through accelerated branch network
expansion on a pan-India basis.
Going beyond IBAS framework
Risk-averse culture and ability to use technology (systems and processes) to
create a unique offering have been key differentiators. Despite the relatively low
advertising budget and lack of celebrity endorsements, its high level of brand
recall is a testimony of the bank’s strengths. HDFC Bank is known for its focus on
systems and processes; this has helped the bank in terms of business continuity. Research Analysts
The bank’s key strategic asset has been its low-cost funding franchise (cost of
funds of 5.5% vs peer average of 6.2%), which has helped it effectively compete Pankaj Agarwal, CFA
with other banks without taking higher asset quality risks. Tel: +91 22 3043 3206
pankaj.agarwal@ambit.co
Premium valuation justified by robust growth
Over the years, HDFC Bank has moved in the right direction on most Ravi Singh
parameters. HDFC Bank’s higher NIM (4.1%), improving cost-to-income ratio Tel: +91 22 3043 3181
(48%) and lower credit costs (40bps) are driving the current RoA of 1.8%. ravi.singh@ambit.co
However, with 20-odd new banks, we believe that the competitive intensity will
increase for low-cost liabilities and customer data. We expect earnings CAGR of Rahil Shah
20% over FY17-18E and average RoE of 19.2% over FY17-18E for HDFC Bank. Tel: +91 22 3043 3217
We remain SELLers with a TP of `1,225 (2.9x one-year forward BVPS). 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%
90%
80% 20%
70%
60% 15%
50%
40% 10%
30%
20% 5%
10%
0% 0%
1HFY17
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
Source: Company, Ambit Capital research
Exhibit 2: Key financial parameters over the last decade

FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 1HFY17*
Loan book (` bn) 582 792 989 1,258 1,600 1,954 2,397 3,030 3,655 4,646 4,944
Loan book growth (%) 39.8% 36.1% 24.9% 27.3% 27.1% 22.2% 22.7% 26.4% 20.6% 27.1% 18.1%
Operating profits (` mn) 28,331 41,975 51,790 64,297 77,254 93,906 114,276 143,601 174,045 213,635 118,437
Net profits (` mn) 12,629 17,221 22,449 29,487 39,264 51,671 67,263 84,784 102,159 122,962 66,942
EPS (`) 6.5 8.1 10.6 12.9 16.9 22.0 28.3 35.3 42.1 48.6 26.4
Gross NPAs (%) 1.66% 1.81% 1.95% 1.43% 1.05% 1.01% 0.97% 0.98% 0.93% 0.94% 1.02%
Net NPAs (%) 0.59% 0.66% 0.63% 0.31% 0.19% 0.18% 0.20% 0.27% 0.25% 0.28% 0.30%
Tier 1 (%) 8.8% 10.2% 10.6% 13.3% 12.2% 11.6% 11.1% 11.8% 13.7% 13.2% 13.3%
RoA (%) 1.30% 1.28% 1.31% 1.45% 1.57% 1.68% 1.82% 1.90% 1.89% 1.89% 1.78%
RoE (%) 18.0% 16.7% 16.1% 16.1% 16.7% 18.7% 20.3% 21.3% 19.4% 18.3% 17.5%
Source: Company, Ambit Capital research. Note: *1HFY17 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 HDFC’s 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 book - Loan CAGR Net NPAs
Company CASA (FY16) NIMs (FY16) RoE (FY16) Tier 1(FY16)
` bn (FY16) (FY12-16) (FY16)
State Bank of India 14,637 14.1% 42.6% 2.8% 7.3% 3.81% 9.9%
HDFC Bank 4,646 23.8% 43.2% 4.5% 18.3% 0.28% 13.2%
ICICI Bank 4,353 15.0% 45.8% 3.5% 11.4% 2.98% 13.1%
Axis Bank 3,388 18.9% 47.3% 3.6% 16.8% 0.74% 12.5%
Kotak Mahindra Bank 1,187 32.3% 38.1% 4.0% 9.2% 1.06% 15.3%
IndusInd Bank 884 27.6% 35.2% 3.9% 17.3% 0.36% 14.9%
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 indicate inadequate 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

bank’s 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, receive 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 around Exhibit 7: Due to efficiencies in operations, RoA of the bank
20% with improvement in NIM has improved over the years
45% 4.7% 2.0% 25%

40%
4.6%
35% 20%
1.5%
30% 4.5%
25% 15%
4.4% 1.0%
20%
10%
15% 4.3%
10% 0.5%
4.2% 5%
5%
0% 4.1% 0.0% 0%
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
Loan growth Net interest margins (RHS) RoA RoE (RHS)
Source: Company, Ambit Capital research Source: Company, Ambit Capital research
Exhibit 8: Gross NPAs and provision coverage ratio has Exhibit 9: Tier-1 ratio has been strong over past years
shown healthy trends
2.5% 100% Tier 1
13.7%
13.3%
13.2%
12.2%
11.8%
11.6%
16%
11.1%
2.0% 80%
10.6%
10.2%
14%
8.8%
1.5% 60% 12%
10%
1.0% 40% 8%
0.5% 20% 6%
4%
0.0% 0% 2%
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
0%
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
Gross NPAs Provision coverage ratio (RHS)
Exhibit 10: HDFC Bank is trading at its historical multiple Exhibit 11: Share price performance v/s BSE Bankex
6 700
600
5
500
4 400
3 300
200
2
100
1 0
May-07
May-08
May-09
May-10
May-11
May-12
May-13
May-14
May-15
May-16
Nov-06
Nov-07
Nov-08
Nov-09
Nov-10
Nov-11
Nov-12
Nov-13
Nov-14
Nov-15
Jun-05
Mar-06
Dec-06
Sep-07
Jun-08
Mar-09
Dec-09
Sep-10
Jun-11
Mar-12
Dec-12
Sep-13
Jun-14
Mar-15
Dec-15
Sep-16
HDFCB IN SENSEX
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 10% in FY14, FY15 and FY16.
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 FY17 and FY18 have been reduced by 6% and 7% respectively in past one year. We
Earnings momentum GREEN
expect 20% EPS CAGR over FY17-18E.

HDFC Bank
Balance sheet
Year to March (` mn) FY14 FY15 FY16 FY17E FY18E
Net worth 434,786 620,094 726,778 839,240 973,785
Deposits 3,673,375 4,507,956 5,464,242 6,393,163 7,671,796
Borrowings 394,390 452,136 530,185 621,072 744,570
Other liabilities 413,444 324,844 367,251 459,064 573,830
Total liabilities 4,915,995 5,905,031 7,088,456 8,312,538 9,963,980
Cash & balances with RBI & banks 395,836 363,315 389,188 444,353 517,306
Investments 1,209,511 1,516,418 1,638,858 1,965,391 2,402,834
Advances 3,030,003 3,654,950 4,645,940 5,457,757 6,565,548
Other assets 280,645 370,348 414,470 445,037 478,292
Total assets 4,915,995 5,905,031 7,088,456 8,312,538 9,963,980
Income statement
Interest income 411,355 484,699 602,214 700,351 812,190
Interest expense 226,529 260,742 326,299 368,171 424,461
Net interest income 184,826 223,957 275,915 332,180 387,729
Total non-interest income 79,196 89,964 107,517 125,533 147,419
Total income 264,023 313,920 383,432 457,714 535,148
Total operating expenses 120,422 139,875 169,797 198,323 229,189
Employees expenses 41,790 47,510 57,022 67,504 76,131
Other operating expenses 78,632 92,366 112,775 130,819 153,058
Pre-provisioning profits 143,601 174,045 213,635 259,391 305,959
Provisions 15,873 20,750 27,256 36,870 39,744
PBT 127,728 153,295 186,379 222,521 266,215
Tax 42,944 51,136 63,417 74,544 89,182
PAT 84,784 102,159 122,962 147,976 177,033
Key ratios
Credit-Deposit (%) 82.5% 81.1% 85.0% 85.4% 85.6%
CASA ratio (%) 45.6% 44.6% 43.8% 43.1% 41.8%
Cost/Income ratio (%) 45.6% 44.6% 44.3% 43.3% 42.8%
Gross NPA (` mn) 29,893 34,384 43,928 56,792 64,125
Gross NPA (%) 0.98% 0.93% 0.94% 1.03% 0.97%
Net NPA (` mn) 8,200 8,963 13,204 15,334 17,314
Net NPA (%) 0.27% 0.25% 0.28% 0.28% 0.26%
Provision coverage (%) 72.6% 73.9% 69.9% 73.0% 73.0%
NIMs (%) 4.39% 4.40% 4.52% 4.57% 4.47%
Tier-1 capital ratio (%) 11.8% 13.7% 13.2% 13.1% 12.7%

HDFC Bank
Du-pont analysis
Year to March FY14 FY15 FY16 FY17E FY18E
NII/Assets (%) 4.1% 4.1% 4.2% 4.3% 4.2%
Other income/Assets (%) 1.8% 1.7% 1.7% 1.6% 1.6%
Total Income/Assets (%) 5.9% 5.8% 5.9% 5.9% 5.9%
Cost to assets (%) 2.7% 2.6% 2.6% 2.6% 2.5%
PPP/Assets (%) 3.2% 3.2% 3.3% 3.4% 3.3%
Provisions/Assets (%) 0.4% 0.4% 0.4% 0.5% 0.4%
PBT/Assets (%) 2.9% 2.8% 2.9% 2.9% 2.9%
Tax rate (%) 33.6% 33.4% 34.0% 33.5% 33.5%
RoA (%) 1.90% 1.89% 1.89% 1.92% 1.94%
Leverage 11.2 10.3 9.6 9.8 10.1
RoE (%) 21.3% 19.4% 18.3% 18.9% 19.5%
Valuation
EPS (`) 35.3 42.1 48.6 58.5 70.0
EPS growth (%) 25% 19% 16% 20% 20%
BVPS (`) 181.2 247.4 287.5 332.0 385.2
P/E (x) 36.1 30.3 26.2 21.8 18.2
P/BV (x) 7.04 5.16 4.44 3.84 3.31

Axis Bank
BUY
STRATEGY NOTE AXSB IN EQUITY November 17, 2016
A strong core BFSI
A strong and independent Board, an employee friendly culture, and a

Recommendation
DNA flexible to changes form the foundation of Axis Bank’s long-term
Mcap (bn): `1,190/US$17.9
success. These strengths have helped the bank transform from a quasi-
PSU bank to a new-age universal bank over the past two decades under 3M ADV (mn): `7,049/US$106
three different leaders. The bank’s strength on both sides of the balance CMP: `499
sheet is visible in its strong operating profitability, which enables it to TP (12 mths): `600
absorb higher credit cost of ~200bps in FY17-18E and still deliver Upside (%): 20
average ROE of 13.2% and EPS CAGR of 13% over FY16-18E. Axis Bank is
trading at ~30% discount to peers despite superior steady-state ROE. We Flags
are BUYers with TP of `600 (2.2x FY18 P/B). The key risks to our BUY Accounting: GREEN
stance are a prolonged economic slowdown and continued deadlock in Predictability: AMBER
the power sector. These could lead to higher asset quality risks due to Earnings Momentum: AMBER
Axis Bank’s higher exposure to the power and SME sectors.
Competitive position: MODERATE Changes to this position: STABLE Performance
A long term track-record on RoE and growth 150
In last ten years (FY07-16), Axis Bank’s RoA and RoE have averaged at 1.5% and 130
~19%, respectively, along with loan book CAGR of 31%. However, in 1HFY17, 110
the performance has taken a hit due to asset quality stress with RoA and RoE of 90
0.7% and ~7%, respectively. The underlying drivers of the bank’s long-term 70
performance are: (a) strong liability franchise (focus on branch/ATM network,
Jan-16
Oct-16
Apr-16
Sep-16
Dec-15
May-16
Jun-16
Feb-16
Mar-16
Jul-16
Nov-15
Aug-16
government business, SME banking supporting CASA in early years and focus on
a granular retail term deposits franchise in recent years); (b) superior fee-income
generation (average fee income to assets at 1.8% (FY07-16), and; (c) controlled Axis Bank Sensex
operating efficiency (average cost to fee income of 43% (FY07-16).
From strong retail liability franchise to a universal bank
Axis Bank’s journey in the noughties was mostly about building a low-cost
liability base (cost of funds of 5.7% now) by employing a well thought out branch
and ATM expansion, customer segmentation and sales model. Over the last five
years, the bank leveraged its retail liability base to build its retail asset franchise
(42% of total loans now; vs 20% in FY12). The acquisition of ENAM (equities and
investment banking business), international expansion, and a relationship-based
model strengthened the bank’s corporate banking franchise.
Ticking all boxes of IBAS framework
Multiple innovations were involved when the bank ramped up its low cost
deposit franchise during FY00-09 and when the bank ramped up its retail
franchise during Ms. Sharma’s tenure (FY09-current). Transition of brand from
UTI Bank to Axis Bank was an exemplary success. A strong and independent
Board, an employee friendly culture and a flexible culture open to changes has
defined the success of Axis Bank, which has seamlessly reoriented itself under Research Analysts
three leaders with different management styles. Beyond plain-vanilla banking,
Axis Bank has best-in-class franchise in areas of transaction banking, such as Pankaj Agarwal, CFA
cash management, payments, business banking and government businesses. Tel: +91 22 3043 3206
Significant discount to peers despite strong profitability pankaj.agarwal@ambit.co
Asset quality challenges in the corporate loan book have led to a de-rating of Ravi Singh
the stock. However, strong operating profitability (3.1% of assets) can more than Tel: +91 22 3043 3181
offset the average credit cost of 200bps over FY17-18E and can help generate ravi.singh@ambit.co
average ROE of 13.2% and EPS CAGR of 13% over FY17-18E. Axis Bank is
trading at 1.8x FY18 P/B, ~15% discount to its cross-cycle valuations and ~30% Rahil Shah
discount to its peers despite better steady-state ROE. Our target price of `600 Tel: +91 22 3043 3217
implies FY18E P/B of 2.2x and FY18E P/E of 13.7x (20% upside). rahil.shah@ambit.co
Axis Bank
Exhibit 1: Axis Bank loan book is diversifying towards retail
Retail Corporate SME Agri RoE (RHS)
100% 25%
80% 20%
60% 15%
40% 10%
20% 5%
0% 0%
1HFY17
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16

FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 1HFY17*
Loan book (` bn) 369 597 816 1,043 1,424 1,698 1,970 2,301 2,811 3,388 3,532
Loan book growth (%) 65.3% 61.8% 36.7% 27.9% 36.5% 19.2% 16.0% 16.8% 22.2% 20.5% 18.5%
Operating profits (` mn) 12,639 22,259 37,249 52,405 64,157 74,309 93,031 114,561 133,854 161,036 85,696
Net profits (` mn) 6,590 10,710 18,154 25,145 33,885 42,422 51,794 62,181 73,587 82,237 18,746
EPS (`) 4.7 6.0 10.1 12.4 16.5 20.5 22.1 26.5 31.0 34.5 7.9
Gross NPAs (%) 1.13% 0.83% 1.09% 1.25% 1.11% 1.06% 1.20% 1.36% 1.45% 1.78% 4.53%
Net NPAs (%) 0.72% 0.42% 0.40% 0.40% 0.29% 0.28% 0.36% 0.45% 0.47% 0.74% 2.20%
Tier 1 (%) 6.4% 10.2% 9.3% 11.2% 9.4% 9.5% 12.2% 12.6% 12.1% 12.5% 12.0%
ROA (%) 1.07% 1.17% 1.41% 1.53% 1.60% 1.61% 1.65% 1.72% 1.74% 1.67% 0.70%
ROE (%) 21.0% 17.6% 19.1% 19.2% 19.3% 20.3% 18.5% 17.4% 17.8% 16.8% 6.9%
Source: Company, Ambit Capital research. Note: *1HFY17 operating profits, net profits and EPS numbers not annualized

 Axis Bank framed initial strategy to leverage UTI’s customer base, brand and branch
network.
 Axis Bank’s strategy to lend to mid-corporates backfired in the late 1990s as the economic
1994-1999 The early years – a shaky start
slowdown led to a significant deterioration in asset quality by end FY2000.
 Low investment in branches and ATMs meant that Axis Bank suffered on the liability side as
well with CASA ratio of just 17% by the end of FY2000.
 Dr Nayak was able to win the confidence of senior management of Axis with his clarity of
thought and communication on the bank’s future plans and employee friendly policies.
The P Jayendra Nayak era – An  Another major transformation, apart from starting ESOPs scheme, at the beginning of
unusual and inspirational banker Nayak’s era was IT upgrade at the bank; all branches were brought on an online, real-
2000-2009
who transformed the time, centralised core banking platform.
bank  Axis Bank aggressively expanded its branch and ATM networks between FY2000 and FY09,
the fastest rate amongst peers. Hence, Axis Bank’s CASA, EPS and ROE grew at a rapid
pace during Nayak’s tenure.
 Ms Sharma changed the business model from product-focused to customer-focused. She
hired some of her ex-colleagues to implement her vision.
 Deterioration in corporate asset quality has been a sobering experiencing for the bank with
The Shikha Sharma era –
2009-Present risks in infrastructure loan book emerging from unexpected areas, e.g., environmental and
Seamless reorientation
judicial changes.
 Use of technology has helped the bank in huge productivity gains in terms of reducing
branch sizes and better employee productivity.

Axis Bank
Exhibit 4: Competitive mapping of Axis Bank, with other comparable peers

Loan book - Loan CAGR CASA NIMs RoE Net NPAs Tier 1
Company
` bn (FY16) (FY12-16) (FY16) (FY16) (FY16) (FY16) (FY16)
State Bank of India 14,637 14.1% 42.6% 2.8% 7.3% 3.81% 9.9%
HDFC Bank 4,646 23.8% 43.2% 4.5% 18.3% 0.28% 13.2%
ICICI Bank 4,353 15.0% 45.8% 3.5% 11.4% 2.98% 13.1%
Axis Bank 3,388 18.9% 47.3% 3.6% 16.8% 0.74% 12.5%
Kotak Mahindra Bank 1,187 32.3% 38.1% 4.0% 9.2% 1.06% 15.3%
IndusInd Bank 884 27.6% 35.2% 3.9% 17.3% 0.36% 14.9%
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 indicate inadequate 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

bank’s 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, receive 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).

Axis Bank
Exhibit 6: Loan book growth has been stable at around Exhibit 7: Due to efficiencies in operations, RoA of the bank
20% with improvement in NIMs is improving
70% 4%
2.0% 25%
60%
50% 3% 20%
1.5%
40% 15%
2%
30% 1.0%
10%
20% 1%
0.5% 5%
10%
0% 0%
0.0% 0%
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
Loan growth Net interest margins (RHS)
RoA RoE (RHS)
Exhibit 8: Though the gross NPAs of the bank is increasing, Exhibit 9: Tier 1 ratio has been strong over the past four
the provisioning coverage ratio is strong years
Tier 1
12.6%
2.0% 80%
12.5%
12.2%
12.1%
11.2%
70% 14%
10.2%
1.5% 60%
9.5%
9.4%
9.3%
12%
50%
10%
1.0% 40%
8% 6.4%
30%
0.5% 20% 6%
10% 4%
0.0% 0% 2%
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
0%
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
Gross NPAs Provision coverage ratio (RHS)
Exhibit 10: Forward P/B evolution Exhibit 11: Share price performance v/s BSE Bankex
5 700
600
4
500
3 400
2 300
200
1
100
0 0
Jan-08
Oct-09
Jan-15
Oct-16
Sep-12
Apr-13
Jun-07
May-10
Dec-10
Jun-14
Mar-09
Jul-11
Feb-12
Mar-16
Nov-06
Aug-08
Nov-13
Aug-15
Mar-05
Mar-08
Mar-11
Mar-14
Dec-05
Dec-08
Dec-11
Dec-14
Sep-06
Sep-09
Sep-12
Sep-15
Jun-07
Jun-10
Jun-13
Jun-16
PB Avg. PB AXSB IN SENSEX
Source: Bloomberg, Company, Ambit Capital research Source: Bloomberg, Company, Ambit Capital research

Similar to all other Indian private sector banks, Axis Bank uses intrinsic value of stock option to account ESOP
expense. However, Axis Bank disclosed that if Black Scholes model based fair valuation was used, net profit would
Accounting GREEN
be adjusted lower by 1% in FY14, FY15 and FY16. For fee income on letters of credit (LC), Axis Bank books the
income ’when due’ rather than amortising the income over the period of LC.
Due to uncertainty around the slippages in the corporate loan book it is difficult to predict exact trajectory of the
Predictability AMBER
bank earnings. Over a long term, however, Axis Bank has reported stable operating performance.
FY17/FY18E consensus EPS estimates have been reduced by 52% and 32% respectively in past one year. We expect
Earnings momentum AMBER
13% EPS CAGR in FY16-18E.

Axis Bank
Balance sheet
Net worth 382,205 446,765 531,649 574,973 661,393
Deposits 2,809,446 3,224,419 3,579,676 4,224,017 5,111,061
Borrowings 502,909 797,583 992,264 1,235,895 1,455,223
Other Liabilities 137,889 150,557 151,088 181,305 217,566
Total Liabilities 3,832,449 4,619,324 5,254,676 6,216,190 7,445,243
Cash & Balances with RBI/Banks 282,387 360,990 333,254 387,729 466,920
Investments 1,135,484 1,175,502 1,220,062 1,409,171 1,697,661
Advances 2,300,668 2,810,830 3,387,737 4,068,902 4,920,197
Other Assets 113,910 272,001 313,623 350,388 360,464
Total Assets 3,832,449 4,619,324 5,254,676 6,216,190 7,445,243
Income statement
Interest Income 306,412 354,786 409,880 451,432 522,096
Interest Expense 186,895 212,545 241,551 262,359 299,522
Net Interest Income 119,516 142,241 168,330 189,073 222,574
Total Non-Interest Income 74,052 83,650 93,715 113,523 125,306
Total Income 193,569 225,892 262,044 302,596 347,880
Total Operating Expenses 79,008 92,037 101,008 119,518 139,366
Employees expenses 26,013 31,150 33,760 40,165 46,524
Other Operating Expenses 52,994 60,888 67,248 79,353 92,843
Pre Provisioning Profits 114,561 133,854 161,036 183,078 208,514
Provisions 21,070 23,277 37,099 104,510 51,791
PBT 93,490 110,578 123,937 78,568 156,723
Tax 31,310 36,990 41,700 26,320 52,502
PAT 62,181 73,587 82,237 52,248 104,221
Key ratios
Credit-Deposit (%) 81.9% 87.2% 94.6% 96.3% 96.3%
CASA ratio (%) 47.4% 45.5% 48.0% 47.5% 46.1%
Cost/Income ratio (%) 40.8% 40.7% 38.5% 39.5% 40.1%
Gross NPA (` mn) 31,464 41,102 60,875 170,029 132,092
Gross NPA (%) 1.36% 1.45% 1.78% 4.07% 2.64%
Net NPA (` mn) 10,246 13,167 25,221 59,510 39,628
Net NPA (%) 0.45% 0.47% 0.74% 1.46% 0.81%
Provision coverage (%) 67.4% 68.0% 58.6% 65.0% 70.0%
NIMs (%) 3.40% 3.53% 3.62% 3.50% 3.44%
Tier-1 capital ratio (%) 12.6% 12.1% 12.5% 11.3% 10.8%

Axis Bank
Du-pont analysis
NII / Assets (%) 3.3% 3.4% 3.4% 3.3% 3.3%
Other income / Assets (%) 2.0% 2.0% 1.9% 2.0% 1.8%
Total Income / Assets (%) 5.3% 5.3% 5.3% 5.3% 5.1%
Cost to Assets (%) 2.2% 2.2% 2.0% 2.1% 2.0%
PPP / Assets (%) 3.2% 3.2% 3.3% 3.2% 3.1%
Provisions / Assets (%) 0.6% 0.6% 0.8% 1.8% 0.8%
PBT / Assets (%) 2.6% 2.6% 2.5% 1.4% 2.3%
Tax Rate (%) 33.5% 33.5% 33.6% 33.5% 33.5%
ROA (%) 1.7% 1.7% 1.7% 0.9% 1.5%
Leverage 10.1 10.2 10.1 10.4 11.0
ROE (%) 17.4% 17.8% 16.8% 9.4% 16.9%
Valuation
EPS (`) 26.5 31.0 34.5 21.9 43.7
EPS growth (%) 20% 17% 11% -36% 99%
BVPS (`) 162.7 188.5 223.1 241.3 277.6
P/E (x) 18.8 16.1 14.5 22.7 11.4
P/BV (x) 3.07 2.65 2.24 2.07 1.80

HCL Technologies
BUY
STRATEGY NOTE HCLT IN EQUITY November 17, 2016
Set to surf the IoT wave Technology
HCLT’s prescient bets on infrastructure management services (IMS) and

Recommendation
engineering services (ES) have enabled it to deliver FY06-16 revenue
Mcap (bn): `1087/US$16
CAGR of 21% (USD) vs. 18% for larger peers. Strong capabilities in these
segments also position it well for the upcoming Internet-of-Things era, 3M ADV (mn): `1,515/US$23
as it is able to counter customer-spend deflation (30-40% at each deal CMP: `771
renewal). It has had a stellar capital allocation track record as is visible TP (12 mths): `950
from FY06-16 median RoCE of 21%; its large acquisition of Axon (55% of Upside (%): 23%
overall capital invested, FY09) has been marquee deal in industry.
Current valuation of 12x FY18E EPS, implying 7% revenue CAGR over Flags
FY16-26, vs 21% over FY06-16, offer margin of safety. We are BUYers Accounting: GREEN
with a TP of `950, implying 15x FY18E EPS. Key risk: longevity of the Predictability: GREEN
business, especially IMS which faces 30-40% deflation due to cloud. Earnings Momentum: AMBER
Competitive position: MODERATE Changes to this position: STABLE
Performance
One of the better performing large Indian IT services companies
120
Since FY08, performance of top firms has diverged in terms of revenue/earnings
110
growth due to differences in capital allocation, portfolio mix, operational
100
excellence and management quality. HCLT has been one of the better
90
performers on these metrics. Its bold bets on IMS and Axon have paid off. 80
Capabilities in IMS, Indian IT’s fastest growing segment, continue to strengthen. 70
Finally, an excellent sales effort driven by Vineet Nayar (CEO from 2007-13) has
Jan-16
Oct-16
Apr-16
Sep-16
Dec-15
May-16
Jun-16
Feb-16
Mar-16
Jul-16
Nov-15
Aug-16
allowed it to penetrate and grow marquee clients. Over the past ten years,
HCLT’s revenues and profits have grown at 21% CAGR (USD; vs 18% for larger
peers) and 25% CAGR (Re terms, vs 23% for larger peers). HCL Tech. Sensex
Rode the IMS wave, now well-positioned for IoT

HCLT began as the R&D division of HCL Enterprise, which developed an
indigenous microcomputer in 1978. The inherited culture is a key ingredient of HCLT’s forensic score analysis
its success in outsourced engineering services (#1 in India, top-5 globally). Over
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
thought it was temporary low-end work. However, since then, two large bets
paid off. It pioneered offshore delivery of IMS in 2003-04 (36% of FY16
revenues, no. 2 globally after IBM) and acquired Axon in 2009 (gave it
relationships with CXOs in large organizations). Its next big bet is on IoT, which
would require it to build on its capabilities in IMS and engineering services. Source: Ambit ‘HAWK’, Ambit Capital research
Second only to TCS on our IBAS framework HCLT’s greatness score analysis
HCLT has consistently innovated to lower its cost structure. HCLT posted average
EBIT margin of 19% (FY06-16) despite offering 30-40% cost-savings to clients on
each deal renewal and steady wage inflation; depreciation of INR vs. USD would
have helped though. HCLT scores well on brand as it occupies a high client mind
share (source: third-party industry analyst reports) as well as a good reputation
among employees as is reflected in lower attrition of 17% (vs peer median of
19%). HCLT’s decent positioning on architecture and strategic assets are based
Source: Ambit ‘HAWK’, Ambit Capital research
on strong sales architecture it has built over years and client-connect.
Low valuation (12x FY18 EPS) implies market concerns on longevity Research Analysts
IMS (40% of Sep-16 revenues) is at risk of 30-40% deflation from the cloud. Sagar Rastogi
However, there is significant room to gain share from high-cost vendors. All +91 22 3043 3291
Indian vendors together cater to less than 5% of global IMS spend. HCLT’s sagar.rastogi@ambit.co
investments in moving up the value-chain (higher scale and complexity,
automation) position it well. Further, top-notch capabilities in IMS and Sudheer Guntupalli
engineering will likely lead to leadership in the emerging IoT/automation era. +91 22 3043 3203
We expect 10%/11% revenue/NOPAT CAGR over FY16-26E. sudheer.guntupalli@ambit.co
HCL Technologies
Exhibit 1: Evolution of HCL Technologies
Cloud / IOT
6,500 IMS and ES ramp up 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
Software services Infrastructure services BPO
Source: Ambit Capital research, company

(` mn) FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16
Revenues ($ mn) 1,266 1,763 2,078 2,574 3,320 4,035 4,539 5,180 5,822 6,235
Revenue growth (%) 38% 39% 18% 24% 29% 22% 12% 14% 12% 7%
Net profits 10,049 13,732 9,787 12,156 14,361 21,014 36,313 57,138 73,209 73,365
EPS 14.7 13.4 7.3 8.9 10.3 15.0 25.8 40.4 51.9 51.9
CFO 9,941 15,282 21,272 11,811 14,584 18,493 27,096 63,481 55,422 71,067
CFO pre-tax/ EBITDA 0.8 1.1 1.0 0.5 0.6 0.5 0.5 0.8 0.6 0.8
FCF 6,312 8,786 17,507 6,864 7,353 10,021 22,490 57,527 44,110 61,310
Debt equity (x) 0.00 - 0.70 0.42 0.31 0.20 0.11 0.05 0.02 0.03
RoE (%) 24% 26% 18% 21% 19% 22% 29% 35% 35% 29%
ROCE* (%) 37% 26% 27% 20% 24% 31% 41% 46% 40% 38%
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.

 HCLT pioneered global offshore delivery of IMS and ES starting in 2003-04. However, strong growth of IMS (36%
CAGR) and ES (21% CAGR) over FY06-16 helped HCLT maintain industry leading overall revenue growth (21%
CAGR vs 15% for Wipro, 16% for Infosys and 19% for TCS) during this period.
 HCLT acquired Capital Stream, US based leader in providing comprehensive Straight through Processing (STP)
solutions to commercial banks and finance companies, for $40mn. In FY13, HCLT sold off a part of capital stream
IMS and ES ramp up to Linedata for $45mn.
FY07-15
/ Inorganic growth
 In FY09, HCLT announced the acquisition of Axon, to add SAP implementation capabilities. At an EV of $765mn,
Axon represented 55% of total capital invested by HCLT in FY09. This was also the largest buyout by an Indian IT
firm.
 During FY11-15, the company slowed down its inorganic growth spending just 6% of its Free Cash Flows during
this period on acquisitions.
 In FY16 HCLT spent 19% of FCF on big ticket acquisitions like Volvo’s external IT business and end to end internal
outsourcing.
 In FY17, the company announced that it will buy majority stake in Geometric in a share swap deal estimated at
FY15- Cloud/IoT
$200mn to bolster its engineering and R&D practise. In addition to Volvo and Geometric, the company
announced seven other deals in the last eighteen months
 To remain insulated from cloud disruption and build on IoT capabilities.

HCL Technologies
Exhibit 4: Competitive mapping of HCLT, TCS, Infosys, Wipro and TechM

FY16 Revenue Industry EBITDA Pre-tax Pre-tax
Sub-Segment Capex/CFO
Company revenue CAGR market margin ROCE CFO/EBITDA
positioning (FY10-16)
($) FY10-16 share (FY16) (FY16) (FY10-16)
TCS 2 16,544 17% 38% 28% 53% 93% 16%
Infosys 4 9,501 12% 22% 27% 35% 97% 31%
Wipro 3 7,346 9% 17% 22% 23% 94% 26%
HCLT 1 6,235 16% 14% 21% 38% 84% 20%
TechM NA 4,038 27% 9% 16% 29% 67% 56%
Exhibit 5: Mapping HCLT and peers on our IBAS framework

Strategic Overall
Company Innovation Reputation Architecture Comments
asset rank
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%, FY16). TCS developed the
reputation of a “value for money” vendor which makes it a preferred
choice of clients especially for annuity kind of Run The Business (RTB)
TCS
projects. It also has the reputation of an employee friendly organization
which is reflected in its low attrition rate (15%, FY16). 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 (25%, FY16). 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 ¼) 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%, FY16). Though the company has been at the forefront of
adopting new technologies, it could not scale them up (and hence given
Wipro away market leadership 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%, FY16) and ROCE (24%,
FY16) by keeping utilization (85%) high, pyramid correction and code
re-use. The company has built a strong reputation of being among top-
HCLT 2 IMS vendors globally (ahead of all Indian peers) 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 (13.3%, FY16), 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 19.4% in FY14). The company has built
TechM
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.
Source: Company, Ambit Capital research, Note: - Strong; - Relatively Strong; - Average; - Relatively weak

HCL Technologies
Exhibit 6: Cash flow from operations was the significant Exhibit 7: The company returned a significant part of its
source of cash for the firm over last decade (FY06-16) cash flows to shareholders as dividends over FY06-16
4%
7%
16%
33%
60%
80%
CFO Asset sale Cash Flow from Financing Dividend Capex Acquisitions
Exhibit 8: Valuations are at a discount to historical average Exhibit 9: HCLT’s share price performance vs Sensex
700
18 1 year forward P/E 600
(consensus) 500
16
400
14 300
200
12
100
10 -
Mar-14
Apr-15
Dec-08
Jan-10
Jul-10
Jan-11
Jul-11
Aug-12
Sep-13
Sep-14
Jun-09
Oct-06
May-07
Nov-07
May-08
Feb-12
Feb-13
Oct-15
May-16
Apr-12
Apr-13
Apr-14
Apr-15
Apr-16
Oct-11
Oct-12
Oct-13
Oct-14
Oct-15
Oct-16
P/E Avg SENSEX HCLT

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%.
Bloomberg shows downgrades to earnings estimates for the sector as a whole and even for HCLT on the back of
uncertainty over US presidential election and subsequent H-1B reforms.
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)*

Balance sheet (` bn) FY14 FY15 FY16 FY17E FY18E FY19E
Net Worth 183.3 229.7 277.5 320.6 368.5 428.2
Other Liabilities 24.7 18.0 22.2 25.2 25.1 25.1
Capital Employed 208.1 247.7 299.6 345.8 393.6 453.3
Net Block 81.4 85.5 106.4 148.5 175.5 204.6
Other Non-current Assets 23.7 29.6 40.0 40.0 40.0 40.0
Current Assets 179.3 215.1 247.4 272.6 305.4 353.1
Debtors 52.9 63.3 76.5 83.2 91.9 104.2
Unbilled revenues 21.4 29.5 29.7 27.2 30.0 34.0
Cash & Bank Balance 83.8 97.1 117.4 133.5 151.8 178.9
Other Current Assets 21.1 25.3 23.9 28.8 31.8 36.0
Current Liab. & Prov 76.3 82.5 94.2 115.3 127.3 144.4
Net Current Assets 103.0 132.6 153.3 157.3 178.1 208.8
Application of Funds 208.1 247.7 299.6 345.8 393.6 453.3

Income statement (consolidated)*

Income statement (`bn) FY14 FY15 FY16 FY17E FY18E
Revenue (US$ mn) 5,180 5,822 6,235 6,934 7,662
Growth 14.1% 12.4% 7.1% 11.2% 10.5%
Revenue 314.7 357.9 409 464 513
Cost of goods sold 201.7 231.4 274.9 317.1 352.5
SG&A expanses 39.9 43.2 52.2 54.3 57.5
EBITDA 80.4 88.4 88 102 116
Depreciation 7.2 5.1 5.7 9.1 13.9
EBIT 73.2 83.4 82.1 92.8 102.5
EBIT Margin 23.3% 23.3% 20.1% 20.0% 20.0%
Other Income (0.9) 8.5 10.1 9.0 9.2
PBT 72.3 91.9 92.2 101.8 111.7
Tax 15.2 18.7 18.8 21.6 24.0
Rate (%) 21.0% 20.3% 20.4% 21.3% 21.5%
Reported PAT 57.1 73.2 73.4 80.2 87.7
Diluted Adj EPS 40.4 51.9 52 57 62

HCL Technologies
Cash flow statement (consolidated)*

Cash flow (` bn) FY14 FY15 FY16 FY17E FY18E
Net Income 57.4 73.2 73.4 80.2 87.7
Depreciation 7.2 5.1 5.7 8.6 12.8
CF from Operations 64.2 73.4 73.5 88.5 101.6
Cash for Working Capital (0.7) (17.9) (2.4) 9.0 (2.5)
Net Operating CF 63.5 55.4 71.1 97.5 99.1
Net Purchase of FA (6.0) (11.3) (9.8) (39.0) (40.6)
Others (37.5) (17.2) (33.1) (4.1) (0.5)
Net Cash from Invest. (43.5) (28.5) (42.8) (43.1) (41.0)
Proceeds from Equity & other 0.3 0.2 0.0 - -
Dividend Payments (11.3) (24.7) (33.7) (40.1) (39.7)
Cash Flow from Fin. (16.9) (28.8) (28.4) (43.7) (39.7)
Free Cash Flow 57.5 44.1 61.3 58.5 58.6
Opening cash balance 46.2 85.9 103.6 119.8 133.4
Net Cash Flow 3.1 (1.9) (0.1) 10.7 18.4
Ratio analysis (consolidated)*

FY14 FY15 FY16 FY17E FY18E
Growth
Revenue growth (US$) 14.1% 12.4% 7.1% 11.2% 10.5%
EBIT growth (`) 54.5% 13.9% -1.5% 13.1% 10.4%
EPS growth (`) 57.0% 28.3% 0.1% 9.3% 9.4%
Valuation (x)
P/E 20.0 15.6 15.6 14.3 13.1
EV/EBITDA 13.0 11.8 11.9 10.3 9.0
EV/Sales 3.3 2.9 2.6 2.3 2.0
EV/NOPAT 14.3 12.6 12.8 11.3 10.2
Price/Book Value 6.2 5.0 4.1 3.6 3.1
Dividend Yield (%) 1.0% 2.1% 2.7% 3.0% 3.0%
Return Ratios (%)
RoE 35% 35% 29% 27% 25%
RoCE 30% 29% 24% 23% 22%
ROIC 46% 48% 39% 37% 35%
Turnover Ratios
Receivable days (Days) 86 95 95 87 87
Fixed Asset Turnover (x) 3.9 4.3 4.3 3.6 3.2

Asian Paints
BUY
STRATEGY NOTE APNT IN EQUITY November 17, 2016
A legend built over several decades Consumer Discretionary
Asian Paints is India’s largest decorative paints player with over 50% Recommendation
organised market share. Its foundation is built around high quality Mcap (bn): `995/US$14.9
professionals, proactive use of technology, effective functioning of its 3M ADV (mn): `1,109/US$16.6
Board and strong dealer relationships. Current high valuations are
CMP: `963
justified by a combination of: a) resilient repainting demand in a weak
TP (12 mths): `1,270
macro: industry likely to deliver volume CAGR of ~12% over the next
Downside (%): 32
decade; b) greater pricing power vs historical levels provides
sustainability to current higher levels of EBITDA margins; and c) ability
to successfully drive the next phase of evolution towards providing value Flags
added services in the broader home improvement category. We expect Accounting: GREEN
18%/23% revenue/EPS CAGR over FY16-FY20 amid 15%/12% decorative Predictability: GREEN
paint industry revenue CAGR over FY15-25/FY25-35. Our DCF-based fair Earnings Momentum: GREEN
value of `1,270 (32% upside) implies FY18E P/E of 43x.
Competitive position: STRONG Changes to this position: STABLE Performance
160
16.4% industry revenue CAGR over FY06-16; Asian Paints gaining share 140
Over FY06-16, India’s organised decorative paints industry has delivered 120
revenue CAGR of 16.4%. This has been driven by: a) shift from unorganised to
100
organised products; b) premiumisation from distempers to emulsions; c)
80
shrinking repainting cycles; and d) urbanisation. Asian Paints has reported 18%
Jan-16
Sep-16
May-16
Mar-16
Jul-16
Nov-15
revenue growth over this period, gaining 10% market share.
Asian Paints has revenue and earnings with remarkable consistency

Asian Paints Sensex
Asian Paints is a rare example of a large Indian company, held by multiple
promoters and yet run by a high-calibre, professional, management team. The Source: Bloomberg, Ambit Capital research
remarkable consistency in revenue growth (18-20% revenue CAGR in each of
the previous 6 decades), earnings growth (consistently rising PBT margin over Asian Paints’ forensic score analysis
the past 40 years), and disciplined capital deployment (~32% average RoCE
over the past two decades) stands testimony to their calibre.
Asian Paints has built moats around supply chain, talent and IT
In a voluminous product category with over 1,800 SKUs, Asian Paints has built
impregnable competitive advantages around supply chain through extensive use Source: Ambit ‘HAWK’, Ambit Capital research
of the technology to forecast demand accurately, shorten product delivery times
and better manage working capital. Asian Paints has consistently led the Asian Paints’ greatness score analysis
evolution of the paints industry by pioneering initiatives like supplying directly to
dealers rather than through distributors and using IT in demand forecasting. The
firm’s architecture is built around: a) nurturing professional talent in a unique
work culture; b) consistent use of technology for operating efficiency
improvements; and c) a truly independent and empowered Board of Directors.
Valuations – what’s the right multiple for an enduring franchise?
Asian Paints’ valuations have undergone a re-rating from 35x to 43x over the
past two years. Resilience of decorative paints category demand and higher
pricing power over the past two years vs a decade ago were the key factors. Research Analysts
However, the current valuations do NOT adequately factor in the likelihood of
Asian Paints transitioning from a decorative paints company to a provider of Rakshit Ranjan, CFA
value-added offerings in the broader home décor sector. Our DCF factors in +91 22 3043 3201
longevity of Asian Paints’ growth profile given market share gains in paints. This rakshit.ranjan@ambit.co
industry growth will be driven by decreasing repainting cycle (from 10.6 years Dhiraj Mistry, CFA
currently to 8.5/7.5 years by FY25/FY35) and a rise in the share of organised +91 22 3043 3264
sector. Our fair value of `1,270 implies 32% upside and 43x FY18E P/E. dhiraj.mistry@ambit.co
Asian Paints
Exhibit 1: Evolution of Asian Paints
175 Renenue (Rs. bn) Pre-tax ROCE (RHS) 80%

150
125 60%
100
40%
75
50 20%
25
- 0%
FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16
Source: Company, Ambit Capital research.

(Fig in ` mn) FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16
Revenues 36,700 44,072 54,632 66,809 77,062 96,322 109,707 127,148 141,828 155,341
Revenue growth (%) 21% 20% 24% 22% 15% 25% 14% 16% 12% 10%
Net profits 2,886 4,365 4,230 8,828 8,814 10,205 11,595 12,727 14,549 18,317
EPS 3.0 4.3 4.2 8.7 8.8 10.3 11.6 12.8 14.8 18.5
CFO 2,697 4,798 3,894 10,632 7,613 8,263 11,868 14,000 11,877 23,333
Pre-tax CFO / EBITDA 90% 101% 87% 112% 88% 83% 94% 94% 81% 112%
FCF 1,760 1,718 794 6,679 6,052 1,532 5,501 11,664 7,501 15,274
Debt equity (x) 0.3 0.2 0.1 0.1 (0.2) (0.1) (0.2) (0.2) 0.0 (0.0)
RoE (%) 40% 47% 37% 57% 43% 40% 36% 33% 32% 34%
Pre-tax ROCE (%) 46% 56% 47% 74% 59% 54% 50% 48% 45% 49%

 Asian Paints chose decorative paints instead of price driven industrial paints business
Founders take it to
1942-1967  Asian Paints built its distribution starting with smaller cities and later expanded to larger cities
the #1
 Asian Paints became India’s largest paints company in 1967
Professional  Started hiring professional from top business schools of India

1967-1997 management helps  Asian Paints strengthened system and processes across functions during 1967-1987
scale up operations  Joint venture company viz. Asian PPG Industries Pvt. Ltd was set up along with PPG Industries
 In 1997 chairman Champaklal Choksey passes away; Atul Choksey resigns; Ashwin Choksi appointed as MD
 Booz Allen Hamilton (consultant) helped improve operational efficiencies during 1998-2001
Business process re-
engineering and  Market share increased from 38% in 1997 to 54% in 2015
1997-2016
acceleration of  Appointed Mr. PM Murty as Managing Director & CEO in 2009
market share gains
 Appointed Mr. KBS Anand as Managing Director & CEO in 2011
 Acquisition of Sleek Group (modular kitchen) in 2013 and ESS ESS bathroom products in 2014
Exhibit 4: Competitive mapping of Asian Paints with other peers

Revenue Decorative EBITDA Pre-tax Pre-tax
Sub-segment Capex/CFO
Company FY16 revenue CAGR FY10- paint market Margin RoCE CFO/EBITDA
Positioning (FY10-16)
16 share (FY16) (FY16) (FY10-16)
Asian Paints #1 155,341 15% 54% 18% 49% 95% 38%
Berger Paints #2 46,341 16% 18% 14% 32% 84% 57%
Kansai Nerolac #3 38,302 14% 16% 15% 27% 83% 31%
Akzo Nobel #4 27,401 17% 10% 11% 30% 97% 49%

Asian Paints
Exhibit 5: Mapping Asian Paints and its peers on IBAS

Asian Berger Kansai Akzo
Comments
Paints Paints Nerolac Nobel
 Asian Paints has regularly innovated around products by staying close to its
customers
 Empowerment of professionals to take control of middle and senior
Innovation
management as early as 1969
 Attempting a transition from a products company to a services company
(home décor company)
 Asian Paints has consistently maintained its focus on advertising from as early
Brand as the 1950s
 Asian Paints advertising expense is 1.3x of summation of other 3 competitors
 Nurtured professional talent in a unique work culture by rapid career
progression for those who perform and allowing creativity
Architecture  Proactive investments in technology
 Independent board of directors are high quality professionals with relevant
experience
 Asian Paints has created a network of factories and depots across the country
Strategic asset with 8 factories, 6 regional distribution centre and 125 depots
 Deep rooted relationships with >35,000 dealers
Overall
Source: Company, Ambit Capital research, Note: - Strong; - Relatively Strong; - Average; - Relatively weak.
Exhibit 6: Sources of funds over the last decade Exhibit 7: Application of funds over the last decade
Dividend Increase in
received, cash and
5% cash
equivalents
5%
Purchase of
Investments Dividend
4% paid
38%
Net Capex
40%
Cash flows
from
operations, Interest paid
96% 3%
Exhibit 8: Asian Paints forward P/E evolution Exhibit 9: Asian Paints’ share price performance v/s Sensex
50 2,000
1,500
40
1,000
30
500
20 -
Jun-12
Jun-13
Jun-14
Jun-15
Jun-16
Oct-11
Feb-12
Oct-12
Feb-13
Oct-13
Feb-14
Oct-14
Feb-15
Oct-15
Feb-16
Oct-16
Oct 06
Oct 07
Oct 08
Oct 09
Oct 10
Oct 11
Oct 12
Oct 13
Oct 14
Oct 15
Oct 16
Asian Paints 1 year fwd P/E Average of 5yr P/E APNT Sensex

Asian Paints

Asian Paints scores well on cash conversion, related party advances and return on surplus cash; its working
Accounting GREEN
capital cycle; RoE and provisions for debtors outstanding for more than six months are better than peers.
Predictability of earnings remains high for Asian Paints given: (a) high correlation of industry volume
Predictability GREEN growth rates with GDP; (b) strong correlation of raw material costs with crude and foreign exchange rates;
and (c) market share changes across various players in the industry.
On the back of higher-than-expected volume growth, Asian paints' consensus EPS estimates have been
Earnings Momentum GREEN
upgraded by 4% for FY17 and FY18 over the past six months.

Asian Paints
Balance sheet
Year to March (` mn) FY15 FY16 FY17E FY18E FY19E
Shareholders' equity 959 959 959 959 959
Reserves & surpluses 46,464 55,093 66,344 81,032 99,467
Total networth 47,424 56,053 67,303 81,991 1,00,426
Minority Interest 2,637 2,942 3,552 4,254 5,061
Preference share capital 0 0 0 0 0
Debt 4,099 3,060 3,060 3,060 3,060
Deferred tax liability 1,799 2,176 2,176 2,176 2,176
Total liabilities 55,959 64,231 76,092 91,481 1,10,723
Gross block 41,123 51,105 57,105 59,105 61,105
Net block 26,600 34,031 36,642 34,994 33,216
CWIP 1,960 1,108 1,000 1,000 1,000
Investments 15,878 20,982 20,982 20,982 20,982
Cash & equivalents 2,044 4,204 7,561 22,622 41,329
Debtors 11,799 12,483 14,538 17,438 20,833
Inventory 22,585 20,640 28,106 33,714 40,277
Loans & advances 5,404 4,683 5,815 6,975 8,333
Other current assets 2,853 3,303 1,938 2,325 2,778
Total current assets 44,685 45,313 57,958 83,075 1,13,550
Current liabilities 25,573 28,326 32,253 38,688 46,219
Provisions 7,591 8,877 8,238 9,882 11,805
Total current liabilities 33,164 37,203 40,491 48,570 58,025
Net current assets 11,520 8,110 17,467 34,505 55,525
Miscellaneous 0 0 0 0 0
Total assets 55,959 64,231 76,092 91,481 1,10,723
Income statement
Operating income 1,41,828 1,55,341 1,76,877 2,12,167 2,53,468
% growth 11.5% 9.5% 13.9% 20.0% 19.5%
Operating expenditure 1,16,993 1,19,749 1,42,970 1,69,413 2,02,545
Operating profit 22,354 28,086 33,906 42,754 50,923
% growth 11.9% 25.6% 20.7% 26.1% 19.1%
Depreciation 2,659 2,880 3,388 3,648 3,778
EBIT 19,695 25,207 30,518 39,106 47,145
Interest expenditure 348 405 346 346 346
Non-operating income 1,697 2,007 2,469 3,061 3,857
Adjusted PBT 21,045 26,809 32,641 41,821 50,656
Tax 6,495 8,491 10,119 12,964 15,703
Adjusted PAT/ Net profit 14,549 18,317 22,522 28,856 34,953
% growth 14% 26% 23% 28% 21%
Prior Period Items 0 0 0 0 0
Reported PAT / Net profit 14,549 18,317 22,522 28,856 34,953
Minority Interest 322 531 610 702 807
Share of associates 0 0 0 0 0
Adjusted Consolidated net profit 14,227 17,787 21,912 28,155 34,146
Reported Consolidated net profit 14,227 17,787 21,912 28,155 34,146

Asian Paints
Cashflow statement
EBIT 21,392 27,214 32,987 42,167 51,002
Depreciation 2,683 2,880 3,388 3,648 3,778
Others (1,367) (1,124) - 0 -
Tax (6,329) (8,154) (10,119) (12,964) (15,703)
(Incr) / decr in net working capital (4,502) 2,517 (6,001) (1,977) (2,313)
Cash flow from operations 11,877 23,333 20,256 30,874 36,764
Capex (4,377) (8,059) (5,892) (2,000) (2,000)
(Incr) / decr in investments 306 (832) - - -
Other income (expenditure) 816 847 - - -
Others (1,523) (648) - - -
Cash flow from investments (4,778) (8,691) (5,892) (2,000) (2,000)
Net borrowings 1,531 (1,139) - - -
Issuance of equity - - - - -
Interest paid (345) (401) (346) (346) (346)
Dividend paid (6,947) (7,642) (10,661) (13,467) (15,711)
Others - - - - -
Cash flow from financing (5,761) (9,182) (11,007) (13,813) (16,057)
Net change in cash 1,339 5,460 3,356 15,061 18,707
Closing cash balance 10,669 16,130 7,561 22,622 41,329
Free cash flow 7,501 15,274 14,364 28,874 34,764
Ratio analysis
Year to March (%) FY15 FY16 FY17E FY18E FY19E
EBITDA margin (%) 15.8% 18.1% 19.2% 20.2% 20.1%
EBIT margin (%) 15.1% 17.5% 18.6% 19.9% 20.1%
Net profit margin (%) 10.3% 11.8% 12.7% 13.6% 13.8%
Dividend payout ratio (%) 50.0% 50.1% 48.7% 47.8% 46.0%
Net debt: equity (x) 0.0 (0.0) (0.1) (0.2) (0.4)
Working capital turnover (x) 15.0 39.8 17.9 17.9 17.9
Gross block turnover (x) 3.8 3.5 3.4 3.8 4.4
Post-tax RoCE (%) 31.4% 32.7% 34.2% 36.5% 36.5%
Pre-tax RoCE (%) 45.4% 49.2% 51.0% 54.3% 54.1%
RoIC (%) 34.7% 34.9% 37.2% 44.3% 53.2%
RoE (%) 32.4% 34.4% 35.5% 37.7% 37.4%
Valuation parameters
EPS (`) 14.8 18.5 22.8 29.4 35.6
Diluted EPS (`) 14.8 18.5 22.8 29.4 35.6
Book value per share (`) 49.4 58.4 70.2 85.5 104.7
Dividend per share (`) 6.1 7.5 9.5 12.0 14.0
P/E (x) 64.9 51.9 42.2 32.8 27.1
P/BV (x) 21.0 17.8 14.8 12.2 9.9
EV/EBITDA (x) 41.6 33.3 27.5 21.8 18.3
EV/EBIT (x) 46.8 36.8 30.3 23.7 19.6

Lupin
BUY
STRATEGY NOTE LPC IN EQUITY November 17, 2016
Dukes have castellated the fort Healthcare
Lupin transitioned from API to plain oral solids to complex generics due
Recommendation
to management’s vision/agility in tapping changing dynamics. Lupin is
Mcap (bn): `658/US$9.9
one of the biggest beneficiaries of GDUFA given presence in complex
generics and pipeline of ~150 ANDAs. Management is preparing for the 3M ADV (mn): `1,824/US$27.4
next leap through innovation. Success should be driven by (a) investment CMP: `1,459
in innovative pursuits in complex therapeutic areas; (b) industry-leading TP (12 mths): `1,851
R&D spends (12% of FY16 sales) and an experienced team; and (c) Upside (%): 27
previous experience in marketing branded products in the USA. Stock
trades at 16x FY18E EPS; material re-rating from present 16x (peers at Flags
~20x) will be driven by earnings surprises (our estimates are 20% ahead Accounting: AMBER
of consensus) as visibility improves. Risks: a) adverse pricing Predictability: AMBER
environment in the USA; and b) failure in executing innovative projects. Earnings Momentum: RED
Competitive position: STRONG Changes to this position: STABLE
Vision to move from oral solids to complex generics materialises Performance
Lupin has championed the art of business evolution (from plain oral solids to 120
complex generics) without compromising on profitability and stakeholder 110
100
interests. Lupin transitioned from anti-TB company (more than 50% of revenues
90
in FY06) to higher growth CVS/Diabetes/CNS resulting in revenue CAGR of 23% 80
over FY06-16E. In the USA, Lupin evolved its revenue profile from plain oral 70
solids to filing for complex generics. Revenue per ANDA improved from
Jan-16
Sep-16
May-16
Mar-16
Jul-16
Nov-15
US$3.7mn in FY08 to US$6.5mn in FY16. Over the past couple of years, Lupin’s
investments in the USA have come to the fore as it has added differentiated
products and expect them to materialise in medium term. Lupin Sensex
From India to USA; journey from weak product portfolio to complex one
Until FY07, Lupin had India-heavy revenue profile with product portfolio in slow-
growing acute therapies. The management realised changing trends in Indian
Lupin’s forensic score analysis
pharma consumption and switched to lifestyle disease chronic products which
grew faster than IPM. Similarly, in the US market, Lupin’s management realised
product-specific opportunities and capitalised during FY13-16 (US revenue
CAGR of 23%). Lupin’s capability to adapt to changing environment has led to
margin/RoCE expansion from 24%/22% in FY07 to 28%/25% in FY16. During
this period, while its peers focused on acquisition to grow, Lupin primarily grew
organically. Early entry into the Japanese market and investments in innovative
pursuits (NCEs/NDDS; R&D at 12% of sales) should provide the next big leap. Source: Ambit ‘HAWK’, Ambit Capital research
Ranks 2nd on sector IBAS framework; brands and strategic asset fortified Lupin’s greatness score analysis
Focus 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. The company has
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 for top
rank. Source: Ambit ‘HAWK’, Ambit Capital research
Visibility on growth drivers lends comfort on valuations

Lupin trades at 16x FY18E EPS (20% discount to its peers and five-year average).
We believe valuations will improve, given: a) well-entrenched promoters; b)
strong balance sheet; and c) excellence in execution. Also, earnings momentum
is likely to sustain led due to a) unfolding of pipeline of ~150 ANDAs in the USA Research Analyst
and 25% net profit CAGR over FY16-18E; b) investments in longer-term growth Paresh Dave, CFA
drivers like complex injectables, ophthalmics, respiratory and dermatology; and +91 22 3043 3212
c) high visibility of earnings through large pipeline in the USA and growth paresh.dave@ambit.co
acceleration in India.
Lupin
Exhibit 1: Evolution of Lupin
Making in-raods in the US Benefits of patent cliff with

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

Source: Company and Ambit Capital research. Note: RoCE is pre-tax RoCE.

Revenues 21,509 28,709 38,296 48,708 58,195 70,829 96,413 112,866 127,700 142,085
Revenue growth (%) 33.5% 33.4% 27.2% 19.5% 21.7% 36.1% 17.1% 13.1% 11.3%
Net profits 3,086 4,083 5,015 6,816 8,625 8,677 13,141 18,364 24,032 22,707
EPS 7.0 9.2 12.0 15.6 19.2 19.4 29.3 40.8 53.5 50.4
CFO 1,779 2,585 4,695 6,764 7,969 5,592 12,510 20,040 27,331 -3,689
CFO (pre-tax)/ EBITDA 58.0% 58.4% 79.2% 85.7% 87.6% 70.2% 83.6% 90.9% 100.4% 44.1%
FCF 8 240 1,308 72 3,693 540 7,098 14,787 18,655 -61,435
Debt equity (x) 1.0 0.9 0.9 0.4 0.4 0.4 0.2 0.1 0.1 0.7
RoE (%) 41.2% 37.9% 37.1% 34.1% 29.5% 23.8% 28.5% 30.3% 30.4% 22.9%
RoCE* (%) 23.9% 26.7% 24.9% 27.1% 25.0% 24.1% 32.2% 39.3% 37.5% 23.9%

 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.
 Lupin’s 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
US business gains presence in RoW markets (specifically South Africa) through acquisition of Pharma dynamics. RoW market
FY13 – Current
momentum reported 22% revenue CAGR over FY12-16.
 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 of `40bn over FY13-15.
RoCE improved from 18% in FY12 to 27% in FY15; dipped in FY16 to 16% due to acquisition of Gavis for
US$880mn.

Lupin
Exhibit 4: Competitive mapping of Lupin, with other comparable generic pharma peers
EBITDA Pre-tax Median Cumulative
Revenue Revenue
FY16 Margin RoCE Pre-tax CFO/ R&D as % of
Company Positioning CAGR per ANDA
revenue (median (median EBITDA Sales
FY10-16 (US$ mn)
FY10-16) FY10-16) (FY10-16) (FY10-16)
Sun Pharma #1 282,697 38% 5.1 34% 25% 91% 7%
Lupin #2 142,085 20% 7.3 24% 26% 86% 8%
Cadila #5 98,376 18% 6.5 21% 24% 82% 7%
Torrent #4 66,764 23% 2.2 22% 27% 91% 4%
Dr. Reddy’s #3 156,978 14% 7.0 23% 23% 85% 8%
Cipla #6 136,783 17% 1.9 21% 19% 92% 5%
Ipca #8 28,850 10% 1.4 18% 24% 92% 4%
Aurobindo #7 138,961 25% 4.1 22% 21% 65% 4%
Exhibit 5: Mapping Lupin and its peers on IBAS

Strategic
Innovation Brand Architecture Overall Comments
Asset
Visionary management has built its business through acquisitions and fortified its
Sun moats through innovative pursuits like MK3222. The company has strong brand
equity in India with base business reporting stellar growth over FY11-15.
Marginally lower than Sun Pharma but has the ability to scale up in the US market
Lupin through launch of complex generics. The company has focused on creating strategic
assets through investment in Japan and maintaining low-cost structure.
Need to look out for Cadila's innovative pursuits. Whilst the innovative revenues
Cadila would be from India and EMs in the near term, success in these geographies would
be incrementally positive for its regulated market expectations.
Torrent Pharma’s biosimilar outlook coupled with improvement in productive MR in
the Indian business help to strengthen moats. However, the company entered late in
Torrent the US business and will have to use the inorganic route to improve its position. It
continues to be best in class in the EM markets and expect EM revenues to cushion
ventures in regulated markets.
Best in class innovation profile as it leads the pack in biosimilar evolution. However, it
Dr. Reddy’s falters on brands in India and EMs due to predominant presence in acute therapy in
India and volatility in its EM business.
Apart from inhalers, limited investment in innovation. Base business in India lags its
Cipla peers implying lower brand equity for its excising portfolio. Senior management churn
results in weak architecture.
Serious compliance issues at its faculties hamper its prospects in the US market. Yet to
Ipca prove capability in innovative pursuits. Low-cost structure is the only advantage for
the company.
Limited investment in innovation, no branded generic business and average cost
Aurobindo
structure despite presence in complex generics lead to lowest position on IBAS.
Exhibit 6: Increase in debt towards funding of Gavis Exhibit 7: Lupin focused on organic growth through capex
acquisition in 2015 in relevant markets (like Japan)
Proceeds
Purchase of
from Dividend
investment,
shares, paid,
17.4%
1.1% 11.2%
Debt
raised,
39.2%
Interest
CFO, Interest paid, 2.4%
Net Capex,
57.5% received,
67.5%
1.5%
Increase in
cash and
Dividend cash
received, equivalent,
0.8% 1.5%

Lupin
Exhibit 8: Re-rating driven by product approvals in USA Exhibit 9: Lupin’s share price performance v/s Sensex
followed by decline in PE due to quality issues at Goa
45.0 LPC - one-yr forward P/E chart 3500
40.0 3000
35.0
Five-year average PE = 22.1x 2500
30.0
25.0 2000
20.0 1500
15.0 1000
10.0
500
5.0
0
-
Jan-05
Jan-06
Jan-07
Jan-08
Jan-09
Jan-10
Jan-11
Jan-12
Jan-13
Jan-14
Jan-15
Jan-16
Mar-05
Mar-06
Mar-07
Mar-08
Mar-09
Mar-10
Mar-11
Mar-12
Mar-13
Mar-14
Mar-15
Mar-16
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 ratios of: (a) CFO/EBITDA; (b) fixed asset turnover; (c) contingent liabilities; and
Accounting AMBER
(d) audit fees as a percentage of standalone revenues. However, Lupin has weaker scores on: (a) volatility in
selling and distribution costs; and (b) cash yield.
Overall, the 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 FY17E and FY18E EBITDA and EPS estimates have been downgraded by 3-9% over the past three
Earnings momentum RED months led by muted guidance for FY17E, increase in guidance for R&D spends to 12-15% of sales (vs 10% in
FY16) and lack of clarity on remediation at it Goa facility.
Source: Ambit Capital research, Note: - Strong; - Relatively Strong; - Average; - Relatively weak

Lupin
Balance sheet (consolidated)

Year to Mar (` mn) FY15 FY16 FY17E FY18E FY19E
Total assets 96,377 183,984 198,978 223,776 254,402
Fixed assets 32,961 86,379 95,231 103,107 105,171
Current assets (incl cash) 64,507 107,473 120,088 146,302 185,552
Cash 4,814 8,379 30,767 35,542 46,752
Investments 16,584 75 75 75 75
Total liabilities 96,377 183,984 198,978 223,776 254,402
Total networth 88,741 109,844 134,837 169,635 210,261
Total debt 5,371 71,775 61,775 51,775 41,775
Deferred tax liability 2,024 2,045 2,045 2,045 2,045
Source: Company, Ambit Capital research;
Income statement (consolidated)

Net revenues 127,700 142,085 175,355 220,382 278,723
Material costs 41,570 43,094 54,162 67,149 93,161
Employee costs 13,949 17,260 19,744 22,063 24,710
Other mfg. costs 35,985 44,196 54,501 68,636 87,553
Core EBITDA 36,196 37,535 46,948 62,534 73,299
Depreciation 4,347 4,635 6,149 7,124 7,936
Interest expense 98 446 1,669 1,419 1,169
Adjusted PBT 34,149 34,331 40,538 56,351 65,794
Tax 9,705 11,536 10,945 15,215 17,764
Net profit 24,032 22,707 29,367 40,886 47,733
Cash flow statement (consolidated)

PBT 34,149 34,331 40,538 56,351 65,794
Depreciation 4,347 4,635 6,149 7,124 7,936
Tax (9,436) (11,662) (10,945) (15,215) (17,764)
Net working capital (1,378) (22,946) 9,856 (12,317) (16,048)
Others (351) (8,047) 7,756 (124) (1,153)
CFO 27,331 (3,689) 53,354 35,819 38,765
Capital expenditure (14,970) (70,028) (15,000) (15,000) (10,000)
Investment and others 4,425 593 - - -
CFI (10,545) (69,435) (15,000) (15,000) (10,000)
Issuance of equity 413 536 - - -
Inc/Dec in borrowings (700) 62,081 (10,000) (10,000) (10,000)
Net dividends (1,573) (4,055) (4,071) (4,374) (6,088)
Interest paid (109) (436) (1,669) (1,419) (1,169)
Others - - (226) (250) (297)
CFF (1,969) 58,126 (15,966) (16,043) (17,554)
Net change in cash 14,817 (14,998) 22,387 4,776 11,210
FCFF 12,361 (73,717) 38,354 20,819 28,765

Lupin
Ratio analysis (consolidated)

Revenue growth 13.1 11.3 23.4 25.7 26.5
Core EBITDA growth 20.5 3.7 25.1 33.2 17.2
APAT growth 30.9 -5.5 29.3 39.2 16.7
EPS growth 31.1 -5.7 29.3 39.2 16.7
Core EBITDA margin 28.3 26.4 26.8 28.4 26.3
EBIT margin 24.9 23.2 23.3 25.1 23.5
Net profit margin 18.8 16.0 16.7 18.6 17.1
RoCE (%) 26.7 15.8 15.7 19.3 20.1
Reported RoE (%) 30.4 22.9 24.0 26.9 25.1
Debt-equity ratio (X) 0.1 0.7 0.5 0.3 0.2
Current ratio 1.8 2.7 2.6 2.6 2.8
CFO/EBITDA (x) 0.8 -0.1 1.1 0.6 0.5
Valuation parameters (consolidated)

EPS 53.5 50.4 65.2 90.7 105.9
Book value ( per share) 197.4 243.8 299.3 376.5 466.6
P/E (x) 28.1 29.8 23.0 16.5 14.2
P/BV (x) 7.6 6.2 5.0 4.0 3.2
EV/EBITDA(x) 18.6 19.7 15.1 11.1 9.2
EV/Sales (x) 5.3 5.2 4.0 3.1 2.4
EV/EBIT (x) 21.2 22.4 17.3 12.5 10.3

Cadila
BUY
STRATEGY NOTE CDH IN EQUITY November 17, 2016
Inches make champions Healthcare
Cadila, a late bloomer, is finally displaying abilities in the US market

Recommendation
and results from innovative pursuits (19% revenue CAGR over FY03-16).
Mcap (bn): `389/US$5.8
Cadila is building capabilities in complex generics and innovative
pursuits inch by inch and moving up the value chain from plain vanilla 3M ADV (mn): `314/US$4.7
oral solids to complex generics like transdermals and modified release, CMP: `380
resulting in FY11-16 cumulative R&D spends of 7% of sales. Despite TP (12 mths): `430
quality compliance issues, Cadila is best placed to reap the benefits of Upside (%): 13
faster product approvals through GDUFA (~150 ANDAs pending
approval). US business should normalise as issues get resolved, facility is Flags
cleared (Apr-17) and Cadila receives bunched up product approvals (US Accounting: GREEN
revenue CAGR of 26% over FY16-19E). Cadila ranks third on our IBAS Predictability: AMBER
framework led by realisation of novel products and biosimilars in India Earnings Momentum: AMBER
and EMs.
Competitive position: STRONG Changes to this position: STABLE Performance
Catching up with peers 120
110
Cadila has missed opportunities that were leveraged by peers to create value for
100
stakeholders. However, if we discount the initial 43 years of its relatively passive 90
existence, Cadila seems to be a budding newbie. A deep dive into Cadila’s 80
history suggests that the company has been proactive in acquiring capabilities 70
and product-related assets through alliances, JVs and acquisitions. However, its
Jan-16
Sep-16
May-16
Mar-16
Jul-16
Nov-15
financials suggest that the company is yet to extend these acquired assets
beyond the domestic market. We believe the extension of these assets and
capabilities beyond the home market would be a key trigger for value creation Cadila Health. Sensex
and revaluation of Cadila’s long-term growth prospects.
Niche product launches in the USA to drive near-term margins/RoCE
Cadila has been guilty of quality issues in past (FY12 and FY16), but the Cadila’s forensic score analysis
management is closer to clearing its facility as majority remediation have been
done with and Form 483 has been cleared. Cadila should receive bunched up
product approvals and we build >75 product approvals for the USA in FY18/19;
most would be complex generics (modified release, topicals, transdermal
patches) implying lower competition and higher pricing. Over-dependence on
Moraiya facility will end with Baddi and SEZ facilities gaining scale. Normalised
margins (excluding one-off in HCQS revenues) should increase from ~18% in
FY16 to 21.4% in FY19E led by ramp-up in US generics (40% share). Positive
surprises can be from bolt-on acquisitions (in EMs) which are in gestation period
(losses). Cadila’s greatness score analysis
IBAS framework: Leads in innovative capabilities, India brand equity

Cadila is among the more successful innovation plays in Indian pharma. Whilst
innovatives’ revenues would emanate only from India/EMs in the near term,
success will set stage for regulated market forays. Its Indian business has a slow-
growing acute heavy portfolio, yet revenues have grown faster than IPM due
better execution (MR productivity at Rs6.5mn vs peers’ average of Rs4mn). Source: Ambit ‘HAWK’, Ambit Capital research
Valuations to recover as concerns abate

Quality compliance issues at the Moraiya facility have affected valuations in the
past. The company is closer to clearing its facility, as per our analysis. Whilst
well-entrenched promoters, high R&D productivity and excellence in execution
lend comfort on valuations, earnings momentum is also likely to sustain (led by
the unfolding of the ANDA pipeline in the USA). We use a DCF-based Research Analyst
methodology to value Cadila with target price of Rs430/share, implying 19x Paresh Dave, CFA
FY18E P/E vs current P/E of 17.2x, material discount to 20-21x average for last 2 +91 22 3043 3212
years and peers at ~20x. Remediation at Moraiya will drive re-rating.
paresh.dave@ambit.co
Cadila
Exhibit 1: Evolution of Cadila
India business driven Focus on US generics Quality issues at its facility

120 growth with >70% of with launch of limited hamper revenue growth though 35%
revenue from slow-growing competition products limited comeptition opportunity in US
100 improving RoCEs 30%
acute therapy salvages RoCE
25%
80
20%
60
15%
40
10%
20 5%
0 0%
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
Revenue, LHS (Rs. Bn) RoCE
Source: Company and Ambit Capital research. Note: RoCE is pre-tax RoCE

(Rs mn) FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16
Revenues 17,855 22,660 28,624 35,742 44,647 50,900 61,552 70,600 84,971 94,694
Revenue growth (%) 26.9% 26.3% 24.9% 24.9% 14.0% 20.9% 14.7% 20.4% 11.4%
Net profits 2,338 2,576 3,031 5,051 7,110 6,526 6,536 8,036 11,506 15,226
EPS 3.7 4.1 3.0 4.9 6.9 6.4 6.4 7.8 11.2 14.9
CFO 2,885 2,548 4,491 7,084 8,382 6,934 9,105 11,753 14,130 27,188
CFO (pre-tax)/EBITDA 78.9% 49.1% 44.1% 87.7% 73.2% 43.9% 62.1% 88.3% 78.6% 111.4%
FCF 645 -3074 -1,918 3050 1,464 -8881 -2,759 4,294 4,981 10,275
Debt equity (x) 0.5 0.8 1.0 0.7 0.5 0.9 1.0 0.8 0.6 0.5
RoE (%) 29.9% 26.7% 26.4% 35.3% 37.4% 27.5% 23.7% 25.2% 29.9% 31.7%
RoCE* (%) 26.8% 26.3% 22.4% 27.8% 31.9% 22.5% 17.8% 18.5% 25.9% 31.8%

 Cadila derived 60% of its revenues from the Indian business over FY05-07 comprising primarily of acute
therapy (contributing >70% of Indian business).
Indian business
FY05-FY07  The US business is at a nascent stage (8% of revenue), with focus on product development. As of FY07, the
drives growth
company had 23 ANDAs approved (but only 9 launched) and 37 ANDAs filed and pending approval.
 Margins were at 20% (vs FY16 at 25%) due slow moving and lower margin acute therapy portfolio in India.
 Revenue growth accelerated (23% CAGR over FY08-12) led by higher revenue contribution from the US
business (24% of overall revenues) led by launch of limited competition generics. Revenue per ANDA
increased from <US$2mn to US$3.1mn.
 The Indian business reported 12% CAGR over FY08-12 led by a gradual shift from acute therapy to chronic
products (chronic contributing 52% in FY12 vs 30% in FY07). Also, improvement in sales force efficiency led by
Focus shifts to
FY08-12 chronic therapy (MR productivity increases from Rs2mn in FY08 to Rs4.3mn in FY12). From FY09, the
US generics
management expanded its presence in emerging markets (though acquisitions) leading to 16% revenue CAGR
over FY07-12.
 Led US business and chronic revenues in India, gross margins expanded from 64% in FY08 to 67% in FY12,
however EBITDA margins remained flat at 20% due to increase in R&D spends from 6% of sales in FY07 to 8%
in FY12.
 Cadila received warning for its Moraiya facility in FY12 and FY16 leading to slowdown in pace of product
approvals in the US market. However, on the positive side, the launch of limited competition products
(Depakote ER and HCQS) led to flat gross margin (67% in FY12 vs 65% in FY16).
Quality issues at its
 Improvement in revenue growth in emerging markets (26% revenue CAGR over FY12-16) but continue to
FY13 – Current facility stalls revenue
remain loss making for the company due to gestation period in establishing brand equity.
partially
 Increase in R&D spends (20% CAGR over FY12-16), losses in EM business and limited product approvals led to
EBITDA margins at 18% in FY16 vs 21% in FY12. RoCE improved to 23% in FY16 from 19% in FY12. Quality
issues raised at its Moraiya facility are expected to be cleared by the end of FY17.

Cadila
Exhibit 4: Competitive mapping of Lupin, with other comparable generic pharma peers
EBITDA Pre-tax Median Cumulative
Revenue Revenue
FY16 Margin RoCE Pre-tax CFO/ R&D as % of
Company Positioning CAGR per ANDA
revenue (median (median EBITDA Sales
FY10-16 (US$mn)
FY10-16) FY10-16) (FY10-16) (FY10-16)
Sun Pharma #1 282,697 38% 5.1 34% 25% 91% 7%
Lupin #2 142,085 20% 7.3 24% 26% 86% 8%
Cadila #5 98,376 18% 6.5 21% 24% 82% 7%
Torrent #4 66,764 23% 2.2 22% 27% 91% 4%
Dr. Reddy’s #3 156,978 14% 7.0 23% 23% 85% 8%
Cipla #6 136,783 17% 1.9 21% 19% 92% 5%
Ipca #8 28,850 10% 1.4 18% 24% 92% 4%
Aurobindo #7 138,961 25% 4.1 22% 21% 65% 4%
Exhibit 5: Mapping Lupin and its peers on IBAS

Strategic
Innovation Brand Architecture Overall Comments
Asset
Visionary management has built its business through acquisitions and fortified its
Sun moats through innovative pursuits like MK3222. The company has strong brand equity
in India with base business reporting stellar growth over FY11-15.
Marginally lower than Sun Pharma but has the ability to scale up in the US market
Lupin through launch of complex generics. The company has focused on creating strategic
assets through investment in Japan and maintaining low-cost structure.
Need to look out for Cadila's innovative pursuits. Whilst the innovative revenues
Cadila would be from India and EMs in the near term, success in these geographies would be
incrementally positive for its regulated market expectations.
Torrent Pharma’s biosimilar outlook coupled with improvement in productive MR in
the Indian business help strengthen moats. However, the company has entered late in
Torrent the US business and will have to use the inorganic route to improve its position. It
continues to be best in class in the EM markets and expect EM revenues to cushion
ventures in regulated markets.
Best in class innovation profile as it leads the pack in biosimilar evolution. However, it
Dr. Reddy’s falters on brands in India and EMs due to predominant presence in acute therapy in
India and volatility in its EM business.
Apart from inhalers, limited investment in innovation. Base business in India lags its
Cipla peers implying lower brand equity for its excising portfolio. Senior management churn
results in weak architecture.
Serious compliance issues at its faculties hamper its prospects in the US market. Yet to
Ipca prove capability in innovative pursuits. Low-cost structure is the only advantage for the
company.
Limited investment in innovation, no branded generic business and average cost
Aurobindo
structure despite presence in complex generics lead to lowest position on IBAS.
Exhibit 6: CFO and some marginal debt were key sources Exhibit 7: Capex and dividend were main uses of funds over
of funds over last decade (Rs112bn) last decade (Rs76bn)
Debt Purchase of
raised, investment,
15.3% 1.4% Dividend
paid,
20.7%
Interest
received, Interest
CFO, 3.3% Net Capex, paid, 6.7%
81.0% 62.6%
Dividend
Increase in
received,
cash and
0.3%
cash
equivalent,
8.6%

Cadila
Exhibit 8: Re-rating in 2008 driven by entry in USA Exhibit 9: Cadila’s share price performance v/s Sensex
followed by de-rating in FY16 due to quality issues
(P/E) 1400
35 CDH 1yr fwd P/E chart 1200
30 1000
800
25
600
20
400
15
200
10 Five yr PE average = 20.0x 0
Jan-05
Jan-06
Jan-07
Jan-08
Jan-09
Jan-10
Jan-11
Jan-12
Jan-13
Jan-14
Jan-15
Jan-16
5
Mar-05
Mar-06
Mar-07
Mar-08
Mar-09
Mar-10
Mar-11
Mar-12
Mar-13
Mar-14
Mar-15
Mar-16
Cadila Sensex

Field Score Comments
In our forensic analysis of 360 companies, Cadila scores in line with the average of the pharma industry
(comprising 26 companies). Cadila scores high on ratios of: (a) gross block conversion; (b) change in
Accounting GREEN
depreciation rates; (c) audit fees; and (d) non-operating expenses. However, Cadila has weaker scores on: (a)
cash yield; and (b) volatility in sales and distribution costs.
Overall, the management has made timely announcements in its earnings calls, meetings and interviews
Predictability AMBER regarding product filings, acquisitions and business outlook. However, the unpredictability of unknown large
filings in the USA, emerging markets and innovative projects makes us assign an AMBER flag on predictability.
Consensus FY17E and FY18E EBITDA and EPS estimates have been flat over the past three months and have
seen material downgrades in the six-month period led by concerns around remediation at Moraiya facility.

Cadila

Year to Mar (Rs mn) FY15 FY16 FY17E FY18E FY19E
Total assets 71,304 79,904 93,094 110,238 128,277
Fixed assets 41,501 47,896 54,165 59,868 65,004
Current assets (incl cash) 47,426 49,604 63,529 80,705 96,360
Cash 6,699 6,953 15,651 22,892 32,973
Investments 1,544 2,663 2,663 2,663 2,663
Shareholders' equity 1,024 1,024 1,024 1,024 1,024
Reserves & surplus 41,492 52,495 65,685 82,829 100,868
Total networth 42,516 53,519 66,709 83,853 101,892
Total debt 26,513 24,420 24,420 24,420 24,420
Deferred tax liability 586 611 611 611 611
Source: Company, Ambit Capital research;

Year to March (Rs mn) FY15 FY16 FY17E FY18E FY19E
Net revenues 84,971 94,694 111,864 140,601 156,573
Material cost 31,966 32,770 40,790 53,200 59,824
General expenses 31,382 34,240 37,907 44,656 49,601
R&D expenses 5,608 7,537 9,421 12,530 15,663
Core EBITDA 17,557 23,829 25,617 32,555 34,054
Depreciation 2,873 3,022 3,731 4,297 4,864
Interest expense 679 486 661 661 661
Adjusted PBT 14,455 21,237 22,250 28,919 30,428
Tax 2,594 5,711 4,450 5,784 6,086
Reported net profit 11,506 15,226 17,800 23,135 24,342

Cadila

PBT 14,455 21,237 22,250 28,919 30,428
Depreciation 2,873 3,022 3,731 4,297 4,864
Tax 2,594 5,711 4,450 5,784 6,086
Net working capital (3,770) 2,656 (2,833) (5,582) (3,135)
CFO 9,936 19,938 18,698 21,851 26,072
Capital expenditure (4,955) (9,663) (10,000) (10,000) (10,000)
Investment 308 624 - - -
Other investments - - - - -
CFI (4,647) (9,039) (10,000) (10,000) (10,000)
Inc/Dec in borrowings (1,162) (2,558) - - -
Net dividends (2,349) (6,969) - (4,610) (5,991)
Other financing activities - - - - -
CFF (3,511) (9,527) - (4,610) (5,991)
Net change in cash 1,778 1,372 8,698 7,241 10,081
FCFF 4,981 10,275 8,698 11,851 16,072
Ratio analysis (consolidated)

Revenue growth 20.4 11.4 18.1 25.7 11.4
Core EBITDA growth 46.3 35.7 7.5 27.1 4.6
APAT growth 43.2 32.3 16.9 30.0 5.2
EPS growth 41.4 31.4 16.7 30.0 5.2
Core EBITDA margin 20.7 25.2 22.9 23.2 21.7
EBIT margin 17.3 22.0 19.6 20.1 18.6
Net profit margin 13.5 16.1 15.9 16.5 15.5
RoCE (%) 23.4 29.6 27.1 29.7 26.5
Reported RoE (%) 29.9 31.7 29.6 30.7 26.2
Debt equity ratio (X) 0.6 0.5 0.4 0.3 0.2
Net Debt Equity ratio (X) 0.5 0.3 0.1 0.0 (0.1)
CFO/EBITDA (x) 0.6 0.8 0.7 0.7 0.8
Current ratio 2.5 2.4 2.3 2.4 2.7
Valuation parameters (consolidated)

EPS 11.3 14.9 17.4 22.6 23.8
Book Value ( per share) 41.5 52.3 65.2 81.9 99.5
P/E (x) 34.4 26.2 22.4 17.3 16.4
P/BV (x) 9.4 7.5 6.0 4.8 3.9
EV/EBITDA(x) 23.9 17.5 15.9 12.3 11.5
EV/Sales (x) 4.9 4.4 3.6 2.9 2.5
EV/EBIT (x) 28.5 20.0 18.6 14.2 13.4

Britannia
SELL
STRATEGY NOTE BRIT IN EQUITY November 17, 2016
On a steady growth path Consumer Staples
Britannia is the value market leader in India’s biscuit market; delivered

Recommendation
sales/PAT CAGR of 18%/19% over FY07-16. During the first half of the
Mcap (bn): `396/US$5.9
last decade, it faced intense competition from ITC resulting in market-
share loss. Since FY13, under its new CEO Varun Berry, EBITDA margin 3M ADV (mn): `668/US$10.0
expanded from 6.8% to 14.1% in FY16 and it regained market CMP: `3,080
leadership. The company’s increased focus on systems and processes TP (12 mths): `2,700
and a stronger diverse portfolio have made it more capable than a Downside (%): 12
decade ago to weather key threats of input cost inflation and intense
competitive action. With limited scope for margin expansion and Flags
market-share increase we value Britannia at 30x FY18E EPS, at lower Accounting: GREEN
end of FMCG average. Predictability: AMBER
Competitive position: MODERATE Changes to this position: STABLE Earnings Momentum: AMBER
Biscuit market leader with legacy brands

Performance
Britannia derives ~76% of its sales from biscuits with remainder from cakes, rusk
130
and dairy products. In the biscuit segment, Britannia derives majority of its 120
revenues from the mid-to-premium segment with dominant market share in the 110
cookies segment (~26% of the market) through the Good Day brand. It is a 100
distant second in the mass market glucose segment (~19% of the market) and a 90
close #3 in the creams segment (~23% of the market) which is dominated by 80
Jan-16
Sep-16
May-16
Mar-16
Jul-16
Nov-15
ITC (#1) at the premium end and Parle (#2) in the mass end. Britannia has
leveraged the brand equity of legacy brands like Good Day, Cream Treat and
Tiger to maintain its dominance in the biscuit market.
Britannia Inds. Sensex
Renewed dominance since FY13 under the new CEO
During FY07-12, the company barely maintained its biscuit market share due to Source: Bloomberg, Ambit Capital research
severe competition from ITC. The company did not have any successful product
launches and its diversification attempts into the snacks and breakfast category Britannia’s forensic score analysis
failed. Over FY13-16, under Varun Berry the company focused on: a) widening
and deepening its distribution; b) product innovation and renovation; and c)
several cost cutting initiatives (Click here for detailed note_16Dec2014). This
helped the company regain its market leadership from Parle in FY16. Along with
input cost tailwinds, the cost cutting initiatives helped increase EBITDA margin
from 5.7% in FY12 to 14% in FY16 with PAT growing at ~46% CAGR over Source: Ambit ‘HAWK’, Ambit Capital research
FY13-16.
Britannia’s greatness score analysis
Leveraging strong brands and distribution to gain scale advantages
Biscuits sales in India is a low-margin commodity-like business as the category is
mostly dominated by basic variants like glucose and cookies. Unlike its peers
which have only 1-2 strong brands, Britannia has positioned itself in the mid and
premium segment through bouquet of strong brands (Good Day, Tiger, Marie,
Treat, 50-50, Milk Bikis and Nutri Choice) positioned across biscuit sub- Source: Ambit ‘HAWK’, Ambit Capital research
categories. Britannia has the second largest distribution reach in the biscuits
category which has been going deeper and wider in the last 5 years. These Research Analysts
strengths have been leveraged to gain scale and drive investment in technology Rakshit Ranjan, CFA
to further bring down costs and keep growing ahead of its peers. +91 22 3043 3201
Trades at a marginal premium rakshit.ranjan@ambit.co
Our bullishness around gains in market share and EBITDA margin is capped by: Ritesh Vaidya, CFA
(a) aggressive approach to product development by peers like ITC and Parle; +91 22 3043 3246
and (b) increasing input prices, leaving lower potential for EBITDA margin ritesh.vaidya@ambit.co
expansion. We expect Britannia to deliver revenue/earnings CAGR of 14%/17%
over FY16-20E. Our DCF-based fair value of `2,700 (12% downside) implies Dhiraj Mistry, CFA
FY18P/E of 30x. +91 22 3043 3264
dhiraj.mistry@ambit.co
Britannia
Exhibit 1: Tale of two halves over the last decade
Varun Berry era -

Vinita Bali era – several failed product deepeing of distribution,
innovations and diversifications resulting in product renovation
100 market share loss to ITC and Parle driving share gains 80%
80
60%
60
40%
40
20%
20
- 0%
FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16
Biscuits revenue (Rs bn, LHS) Other revenue (Rs bn, LHS) Pre-tax ROCE (RHS)
Source: Ambit capital research

(` mn) FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16
Revenues 27,763 34,212 37,729 46,052 54,854 61,854 69,127 78,584 86,789
Revenue growth (%) 23% 23% 10% 22% 19% 13% 12% 14% 10%
Net profits 1,699 1,335 1,338 1,343 1,996 2,595 3,954 5,426 8,164
EPS 14.2 11.1 11.1 11.2 16.6 21.6 32.9 45.2 68.0
CFO 522 2,926 2,396 2,591 6,802 711 5,979 6,231 6,630
Pre-tax CFO-EBITDA 40% 145% 151% 133% 240% 40% 123% 102% 86%
FCF (4) 145 167 204 3 104 572 631 712
Debt equity (x) 0.4 (0.2) 0.9 0.5 (0.3) 0.2 (0.2) (0.5) (0.4)
RoE (%) 27% 19% 27% 44% 54% 54% 58% 53% 54%
Pre-tax RoCE (%) 27% 21% 17% 25% 40% 53% 62% 70% 75%

 Key brands like Good Day (1986), 50-50 and Little Hearts (1993), Milk Bikis (1996) was launched
 Entered into JV with Fonterra for dairy business
Pre 2003 Sunil Alagh era  In 1993, Danone and Wadia bought controlling stake in Britannia Industries.
 Strengthened ‘Brand Britannia’ through aggressive marketing campaign in late 1990s with ‘Eat Healthy,
Think Better’ and Cricket World Cup 1999 and 2003 campaign of ‘Britannia Khao, World Cup Jao’
 In 2005, Vinita Bali was appointed as new CEO
 Despite shift of focus from brand building to increasing operating efficiency, EBITDA margin decreased from
11.4% in FY04 to 6.8% in FY13
Vinita Bali – Taking  Market-share loss to Parle and ITC
2004-2013
step backward  New product launches intensity decreased
 Wadia bought out Danone’s stake (25.5%) in the company
 Wadia bought out Fonterra’s stake in the Joint Venture entity
 Varun Berry was appointed VP and COO in 2013
 Vinita Bali quits; Varun Berry was appointed as MD
 Distribution efficiency was brought by: a) resolving supply chain inefficiencies to reduce damages; b)
implementing new IT infrastructure for better MIS; and c) restructuring of sales force by giving more decision
making power to junior sales person
 New product launch intensity increased in premium brands and superior/innovative packaging for existing
Varun Berry – Biscuits
Post 2013 premium brands
back in focus
 Increased advertising spends from 7.6% in FY12 to 8.5% in FY16
 EBITDA margin improved from 6.8% in FY13 to 14% in FY16 by a) improving operating efficiency; b) in-
house manufacturing (increasing from 33% in FY13 to 50% in FY16; c) supply chain efficiency; and d)
reducing trade promotions
 Britannia became the market leader in biscuits by end of FY16

Britannia
Exhibit 4: Competitive mapping of Britannia

Revenue Industry EBITDA Pre-tax Pre-tax CFO/
Sub-segment FY16 revenue Capex/CFO
Company CAGR market Margin RoCE EBITDA
Positioning (` bn) (FY10-16)
FY10-16 share (FY16) (FY16) (FY10-16)
Britannia #1 86.8 15% ~29% 14% 40% 125% 35%
ITC – FMCG division #3 97.0 18% ~13% 3% NA NA NA
Parle Biscuits #2 ~83.0 19% ~28% 9% 26% 73% 41%
Source: Company, Ambit Capital research; Note: For ITC we have taken the FMCG segment revenues
Exhibit 5: Mapping Britannia and its peers on IBAS

Britannia Parle ITC Comments
 Introduction of mini pack to increase penetration
 First to focus on nutrition biscuits with the launch of NutriChoice
Innovation
 However, Britannia has poor track record of successful product innovation over the last
decade
 Britannia has built strong brands across categories and price points through popular
marketing campaigns like ‘Eat Healthy, Think Better’ in the last 1990s and the Cricket
Branding
World Cup 1999 campaign with a tagline of ‘Britannia Khao, World Cup Jao’
 ITC and Parle haven’t been able to create strong sub-brands
 Britannia has the second largest distribution outreach in the biscuit category next only to
Parle
 Britannia has increased its network of factories and brought them closer to the end
Architecture market thus reducing the logistics cost. It has focused on bring manufacturing in-house
to improve product quality and produce more value-added products.
 Parle also has an extensive network of factories but these are mostly outsourced
manufacturers.
 In a low profit margin category, Britannia’s scale is a key strategic asset
 Britannia has also successfully created strong sub-brands at different price points which
Strategic assets
it has used to capture the current consumption trend. For e.g. it has used Good Day to
ride the cookies wave and NutriChoice to tap into consumer demand for health biscuits
 Amongst its peers, Britannia is best placed on the IBAS framework. However, the other
Overall
two players are a close second to Britannia
Exhibit 6: Britannia’s sources of fund over the last decade Exhibit 7: Britannia’s application of funds over the last
decade
Decrease Dividend Purchase Debt

in cash received of repayment
Proceeds 5% 6% Investmen 15%
from ts
shares 23%
0%
Dividend
Net Capex paid
29% 28%
CFO Interest
89% paid
5%

Britannia
Exhibit 7: Most of the re-rating happened over last 2 years Exhibit 8: After doing nothing, the stock performed with the
change in the management
50 2,000
40 1,500
30
1,000
20
500
10
Jun-12
Jun-13
Jun-14
Jun-15
Jun-16
Oct-11
Feb-12
Oct-12
Feb-13
Oct-13
Feb-14
Oct-14
Feb-15
Oct-15
Feb-16
Oct-16
-
Oct 06
Oct 07
Oct 08
Oct 09
Oct 10
Oct 11
Oct 12
Oct 13
Oct 14
Oct 15
Oct 16
Britannia 1 year fwd P/E
Average of 5yr P/E BRIT Sensex
Exhibit 9: Explanation for our forensic accounting scores

Britannia has, in the past, reported high cash conversion and efficient management of working capital and it
Accounting GREEN ranks in the top quartile of our forensic accounting checks for FMCG. Consequently, we give a high rating to the
quality of its accounting.
Due to a combination of its presence across products, categories and SKUs, and predominant exposure to
Predictability AMBER consumer-activity-led sector of the economy, revenues show stability. However, the current economic environment
and volatility in raw material prices can lead to some volatility in earnings.
End of tailwinds around raw material cost has led to consensus downgrading its EPS forecast for Britannia by ~5%
Earnings Momentum AMBER
for both FY17 and FY18 over the past six months.

Britannia
Balance sheet
Total networth 12,451 17,693 22,211 27,586 34,143
Debt 1,402 1,270 408 408 408
Deferred tax liability (234) (277) (277) (277) (277)
Gross block 15,989 18,067 21,067 24,067 25,567
Net block 7,334 8,343 9,876 11,183 10,822
CWIP 484 901 901 901 901
Goodwill 1,107 1,159 1,159 1,159 1,159
Investments 771 3,564 3,564 3,564 3,564
Cash & equivalents 6,672 4,841 6,975 11,055 17,989
Debtors 1,358 1,706 1,926 2,198 2,528
Inventory 4,040 4,407 4,974 5,677 6,530
Loans & advances 5,563 8,995 10,154 11,588 13,329
Other current assets 372 378 427 487 560
Total current assets 18,005 20,327 24,456 31,004 40,937
Provisions 4,228 5,092 5,748 6,560 7,546
Total assets 13,644 18,711 22,365 27,736 34,291
Income statement
Operating income 78,584 86,789 97,971 1,11,804 1,28,606
% growth 13.7% 10.4% 12.9% 14.1% 15.0%
Operating expenditure 69,945 74,523 84,186 95,363 1,09,317
EBITDA 8,639 12,265 13,786 16,441 19,289
% growth 37.7% 42.0% 12.4% 19.3% 17.3%
Depreciation 1,445 1,134 1,468 1,693 1,861
EBIT 7,194 11,131 12,318 14,749 17,428
Non-operating income 880 1,000 1,233 1,082 1,574
Adjusted PBT 8,035 12,082 13,500 15,806 18,989
Tax 2,611 3,920 4,380 5,128 6,160
Adjusted PAT/ Net profit 5,424 8,163 9,121 10,678 12,829
% growth 37.2% 50.5% 11.7% 17.1% 20.1%
Extraordinaries 1,461 (103) - - -
Minority Interest (2) (2) (2) (3) (4)
Share of associates - - - - -
Adjusted Consolidated net profit 3,965 8,268 9,123 10,681 12,832
Reported Consolidated net profit 3,965 8,268 9,123 10,681 12,832

Britannia
Cash flow statement

EBIT 8,074 12,131 13,551 15,830 19,002
Depreciation 1,445 1,134 1,468 1,693 1,861
Others (320) (42) (0) 0 (0)
Tax (2,611) (3,920) (4,380) (5,128) (6,160)
(Incr) / decr in net working capital (318) (2,626) 13 16 19
Cash flow from operations 6,231 6,630 10,601 12,386 14,709
Capex (786) (2,561) (3,000) (3,000) (1,500)
(Incr) / decr in investments (457) (2,846) - - -
Others - - - - -
Cash flow from investments -1,243 -5,406 -3,000 -3,000 -1,500
Net borrowings (80) (133) (861) - -
Interest paid (39) (49) (50) (24) (12)
Dividend paid (2,238) (2,888) (4,105) (4,806) (5,775)
Others 1,282 (34) (500) (500) (500)
Cash flow from financing (1,074) (3,103) (5,517) (5,331) (6,287)
Net change in cash 3,914 (1,880) 2,084 4,055 6,922
Free cash flow 5,446 4,069 7,601 9,386 13,209
Ratio analysis
Year to March FY15 FY16 FY17E FY18E FY19E
Gross margin (%) 40.3% 42.4% 42.4% 43.0% 43.3%
EBITDA margin (%) 11.0% 14.1% 14.1% 14.7% 15.0%
EBIT margin(%) 10.3% 14.0% 13.8% 14.2% 14.8%
Net profit margin(%) 6.9% 9.4% 9.3% 9.6% 10.0%
Dividend payout ratio(%) 41.2% 35.4% 45.0% 45.0% 45.0%
Net debt: equity (x) (0.4) (0.2) (0.3) (0.4) (0.5)
Working capital days (13) (0) (0) (0) (0)
RoCE(%) 47.0% 50.7% 44.6% 42.7% 41.4%
RoE(%) 53.1% 54.2% 45.7% 42.9% 41.6%
EPS (`) 45.2 68.0 76.0 89.0 106.9
Diluted EPS (`) 45.2 68.0 76.0 89.0 106.9
P/E (x) 68.1 45.3 40.5 34.6 28.8
P/BV (x) 29.5 20.8 16.6 13.3 10.8
EV/EBITDA (x) 42.2 29.8 26.3 21.8 18.2
Price/Sales (x) 4.7 4.3 3.8 3.3 2.9

LIC Housing Finance
SELL
STRATEGY NOTE LICHF IN EQUITY November 17, 2016
The old lady of housing finance BFSI
LICHF’s prolonged strong performance – 22% EPS CAGR, 24% AUM CAGR,
Recommendation
and median RoE of 19% over FY06-16 – was supported by a decadal rally
in real estate prices and its parent LIC’s support. LIC’s support ensures Mcap (bn): `242/US$3.6
access to cheaper liabilities (no liquidity crunch even during Lehmann 3M ADV (mn): `1367/US$20
crisis) and ease in customer acquisition (access to LIC’s strong brand and CMP: `511
1mn agents). Going forward, declining real estate prices and rising TP (12 mths): `420
competitive intensity should moderate its earnings growth and RoE; we Downside (%): 18
estimate 12% EPS CAGR over FY16-19E (vs 18% CAGR over FY13-16) and
17.5% RoE, which should de-rate the multiples. Our TP of `420, implies Flags
1.9x 1-year fwd P/B. Rapidly moderating cost of funds is a near-term risk. Accounting: GREEN
Competitive position: MODERATE Changes to this position: NEGATIVE Predictability: AMBER
Earnings Momentum: GREEN
Strong focus on the salaried and urban segments
Promoted by state-owned life insurance giant, Life Insurance Corporation of India Performance
(LIC), LICHF is India’s second-biggest HFC with a `1.3tn loan book. LICHF 140
focuses on home loans (88% of loan book) and more specifically on the salaried
segment (84% of home loans) and metros (46% of home loans). 120
100
Growth and RoE slowed despite realignment of assets and liabilities
80
LICHF’s strong growth and profitability during FY06-12 (27% AUM CAGR;
Jan-16
Sep-16
May-16
Mar-16
Jul-16
Nov-15
median RoE of 23%) were driven by benign regulatory and moderate competitive
environment. But from FY12, regulatory and competitive headwinds put intense
pressure on LICHF’s growth and profitability. Growth moderated to 19% CAGR
LIC Housing Fin. Sensex
over FY12-16 and RoE slowed to 18% over FY12-16. This was despite a
meaningful realignment in liability mix (share of cheaper bond borrowings rose
from 58% in FY12 to 77% in FY16) and loan mix (share of higher yielding LAP
rose from 0% in FY12 to 9% in FY16). Growth in line with RoE implied that
dividend payout ratio was a reasonable ~21% over FY12-16.
Parent LIC’s support is the strategic asset

LIC’s 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, LIC’s support has also driven customer
acquisition for LICHF through: i) branding: LICHF’s 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 decadal surge in real estate prices combined with strong support from parent
LIC drove LICHF’s earnings momentum of 22% CAGR over FY06-16. However,
with declining real estate prices and high competitive intensity, LICHF’s already
moderate loan growth and profitability should decelerate further (due to Research Analysts
pressures on margins and asset quality). So, we estimate LICHF’s earnings
Pankaj Agarwal, CFA
growth to continue moderating from 18% CAGR over FY13-16 to 12% CAGR
+91 22 3043 3206
over FY16-19E. Moreover, HFCs are exposed to the looming regulatory risk of
pankaj.agarwal@ambit.co
convergence of loan pricing to a more transparent and objectively calculated
base rate (which is followed by banks). LICHF stock trades at 2.3x 1-year forward Aadesh Mehta, CFA
P/B, which is at a 27% premium to 5-year average. +91 22 3043 3239
aadesh.mehta@ambit.co
LIC Housing Finance
Exhibit 1: LICHF’s growth has moderated due to increasing competition
Strong growth period Moderation in growth and

1,300 AUM CAGR 27% profitability 30%
RoAs 1.9% AUM Growth 19%
1,100 RoAs 1.5%
25%
900
700
20%
500
300
15%
100
(100) FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 10%
AUM (Rs bn) RoEs (RHS, %)
Exhibit 2: LICHF – key financial parameters over the last decade

Interest Income 9.1% 10.2% 11.0% 10.0% 10.2% 10.8% 10.9% 11.0% 10.9% 10.9%
Interest Expense 6.7% 7.4% 8.1% 7.3% 7.1% 8.3% 8.6% 8.7% 8.6% 8.3%
Net Interest Income 2.4% 2.8% 2.9% 2.7% 3.1% 2.5% 2.2% 2.3% 2.3% 2.6%
Non-Interest Income 0.5% 0.7% 0.6% 0.6% 0.5% 0.4% 0.3% 0.3% 0.3% 0.2%
Total Income 2.9% 3.4% 3.6% 3.3% 3.7% 2.9% 2.5% 2.6% 2.6% 2.8%
Operating Expenses 0.6% 0.7% 0.62% 0.58% 0.49% 0.43% 0.41% 0.38% 0.39% 0.42%
Pre Provisioning Profit 2.2% 2.8% 2.9% 2.7% 3.2% 2.5% 2.1% 2.2% 2.2% 2.4%
Loan loss provisions 0.08% 0.12% 0.02% -0.09% 0.09% 0.20% 0.12% 0.03% 0.01% 0.13%
Profit Before tax (PBT) 2.1% 2.7% 2.9% 2.8% 3.1% 2.5% 2.0% 2.2% 2.2% 2.3%
Taxes 0.5% 0.7% 0.8% 0.8% 0.9% 0.7% 0.5% 0.6% 0.6% 0.8%
RoA 1.7% 1.9% 2.1% 2.0% 2.2% 1.6% 1.5% 1.6% 1.4% 1.5%
Leverage 11.3 11.7 12.1 11.5 11.5 11.3 11.3 11.8 12.6 13.2
RoE 19.3% 22.7% 25.8% 23.2% 25.5% 18.5% 16.8% 18.8% 18.1% 19.6%
AUM growth (%, YoY) 19% 21% 22% 34% 38% 28% 25% 18% 19% 15%
EPS growth (%, YoY) 35% 39% 37% 16% 40% -6% 5% 29% 5% 20%
Exhibit 3: LICHF’s growth and profitability has meaningfully moderated since FY12
 LICHF’s 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 LICHF’s growth has moderated to 19% CAGR over FY12-16 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 ~9% in FY16); and ii) shift in liability mix towards cheaper bond borrowings (from
58% in FY12 to 77% in FY16). This somewhat offset the lower profitability from the business and enabled it to still
deliver moderate RoAs of 1.5% during this period.
Source: Ambit Capital research.

LIC Housing Finance
Exhibit 4: Competitive mapping of HFCs – LICHF’s growth has moderated despite its small-ticket positioning
Key metrics Avg. ticket AUM AUM CAGR Opex/ Gross Branches Employees
NIMs RoA RoE
(FY16) size (` mn) (` bn) (FY13-16) AUM NPA (%) (#) (#)
LICHF 1.2 1,252 17% 2.6% 0.4% 0.45% 1.5% 19.6% 234 1,726
Repco 1.1 77 29% 4.9% 1.0% 1.30% 2.2% 17.0% 150 619
GRUH 0.5 111 27% 4.2% 0.8% 0.32% 2.3% 31.5% 179 618
HDFC 2.5 2,908 16% 3.1% 0.3% 0.70% 2.4% 21.8% 401 2,196
CANFIN 1.7 106 38% 3.1% 0.7% 0.19% 1.6% 19.0% 140 553
DEWAN 1.2 695 24% 3.0% 0.9% 0.93% 0.9% 11.9% 353 2,625
PNBHF 3.7 272 60% 3.8% 1.2% 0.22% 1.4% 17.6% 47 752
Exhibit 5: Mapping GRUH 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. GRUH’s 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 Repco’s 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 ~400
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.
GRUH 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: LICHF’s AUM is dominated by home loans Exhibit 7: Salaried segment dominate LICHF’s home loans
LICHF's customer profile

3%
Salaried
9% Home loans
16%
LAP
Self-employed
& others
88% Developer 84%

LIC Housing Finance
Exhibit 8: LICHF’s liability mix is tilted towards bonds Exhibit 9: LICHF’s asset quality has remained in control
3% 3.0%
2%
3% Banks 2.5%
13% 2.0%
NCD
1.5%
NHB 1.0%
0.5%
Deposits
80% 0.0%
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
Others -0.5%
Gross NPA Credit costs

Exhibit 10: LICHF is trading at a 27% premium to its Exhibit 11: LICHF’s share price performance versus Sensex
cross-cycle average P/B
3.5 2,500
3.0
2,000
2.5
2.0 1,500
1.5 1,000
1.0
500
0.5
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
Apr-07
Apr-08
Apr-09
Apr-10
Apr-11
Apr-12
Apr-13
Apr-14
Apr-15
Apr-16
PB Avg. PB -1 SD +1 SD SENSEX LICHF
Source: Bloomberg, Ambit Capital research Source: Bloomberg, Ambit Capital research

LICHF’s 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 GREEN Consensus has marginally upgraded in FY17/18 estimates by 1% over the past 3-4 months

LIC Housing Finance
Income statement
FY15 FY16 FY17E FY18E FY19E
Net Interest Income 22,364 29,441 33,730 35,663 40,692
Interest Income 105,467 122,508 139,409 155,950 177,080
Interest Expense 83,102 93,068 105,679 120,287 136,388
Non Interest Income 2,520 2,346 2,575 2,825 3,102
Total Income 24,884 31,787 36,305 38,487 43,794
Operating expenses 3,792 4,687 5,849 6,835 7,664
Pre Provisioning Profit 21,092 27,100 30,456 31,652 36,130
Provisions 73 1,465 2,087 1,405 1,556
PBT 21,020 25,635 28,369 30,247 34,574
Less:Tax 7,158 9,028 9,362 9,982 11,409
Net Profit 13,862 16,608 19,007 20,265 23,164
Balance sheet
Networth 78,184 91,460 106,666 122,878 141,410
Borrowings 965,470 1,109,360 1,265,452 1,437,619 1,627,282
Total Sources of funds 1,043,654 1,200,820 1,372,118 1,560,497 1,768,692
Loan Book 1,083,610 1,251,730 1,430,290 1,626,657 1,843,678
- Individual 1,056,300 1,217,310 1,390,186 1,579,252 1,787,224
- Developer 27,310 34,420 40,104 47,405 56,454
Other Assets (39,956) (50,910) (58,173) (66,159) (74,986)
Total Application of funds 1,043,654 1,200,820 1,372,118 1,560,497 1,768,692

LIC Housing Finance
Key ratios
AUM growth (%) 18.6 15.5 14.3 13.7 13.3
Dil Consol EPS growth (%) 5.2 19.8 14.4 6.6 14.3
Net interest margin (NIM) (%) 2.3 2.6 2.5 2.3 2.3
Cost to income (%) 15.2 14.7 16.1 17.8 17.5
Opex (% of AAUM) 0.39 0.41 0.44 0.45 0.44
Gross NPAs (%) 0.5 0.5 0.6 0.6 0.6
Credit costs (% of AAUM) 0.01 0.13 0.16 0.09 0.09
Provisioning Coverage 52.2 51.1 55.0 55.0 55.0
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 12.8 12.6
BVPS (`) 155 181 211 243 280
Diluted EPS (`) 27.5 32.9 37.7 40.2 45.9
ROA (%) 1.6 1.5 1.5 1.4 1.4
ROE (%) 18.1 19.6 19.2 17.7 17.5
P/E 18.6 15.5 13.6 12.7 11.1
P/BV 3.3 2.8 2.4 2.1 1.8
Dividend yield (%) 1.0 1.1 1.3 1.3 1.5

Page Industries
BUY
STRATEGY NOTE PAG IN EQUITY November 17, 2016
‘Inner’ Strength Consumer Discretionary
With laser-like focus on innerwear and associated categories, the Recommendation

Genomals have leveraged their experience in the Philippines to fortify
Mcap (bn): `176/US$2.6
Page’s moats around: a) product differentiation given in-house
6M ADV (mn): `151/US$2.3
manufacturing; b) aspirational brand recall; and c) tight control on the
distribution channel. Hence, new entrants offering either international CMP: `14,177
brand recall, or affordable price, struggle to break Jockey’s customer TP (12 mths): `16,400
loyalty which is built on a combination of quality, affordability and Upside (%): 16
brand. Weakness in revenue growth momentum in FY16 is temporary
and macro-driven. We expect 28%/34% CAGR in revenue/earnings over Flags
FY16-21 with average RoE of 58% and a high dividend payout of >55%. Accounting: GREEN
Our DCF-based fair value of `16,400 implies 44x FY18E EPS. Predictability: GREEN
Greatness: GREEN
Competitive position: STRONG Changes to this position: STABLE
Page possesses strong and sustainable growth drivers
Performance (%)
Page controls the master franchise of Jockey (innerwear) and Speedo
150
(swimwear) in India. Over the past 10 years, Page has delivered 33%/34%
130
revenue/earnings growth with 35% average RoCE. Longevity of Page’s growth
110
is led by: (a) only ~50% penetration of mid-premium innerwear in SEC A/B
households even in 2020; (b) sustainability of competitive advantages driving 90
market-share gains in mid-to-premium innerwear to 38% overall (including 70
Jan-16
Sep-16
May-16
Mar-16
Jul-16
Nov-15
65% in men’s segment) by FY30; and (c) unexplored sub-segments in
categories like kidswear and loungewear.
Page has focused intently on Jockey/Speedo, and capital discipline Page Inds. Sensex
Page’s foundation is built on: a) 60-year association with Jockey and Speedo;
b) strong focus on capital allocation and RoCE; and c) incentivisation and Source: Bloomberg, Ambit Capital Research
empowerment of professionals to achieve scale with operating efficiencies.
Some of the key strategic decisions Page has implemented over the past Page’s forensic score analysis
decade include: a) extending Jockey’s product portfolio to leisurewear
segments like thermals, loungewear, t-shirts, shapewear etc; b) maintaining
capital allocation discipline with 0.5-0.7x debt/equity ratio, leveraging on
benefits under Technology Upgradation Funds Scheme for textile sector, and
ensuring payout of surplus capital each year as dividends to shareholders.
Page has built a fortress with its competitive moats
Page’s competitive advantages are centered on: a) in-house manufacturing to Source: Ambit ‘HAWK’, Ambit Capital research
deliver product differentiation in a labour-intensive industry; b) maintaining
aspirational connect with consumers; and c) an entrenched distribution channel Page’s greatness score analysis
spanning hosiery stores to exclusive brand outlets through distributors. Threats
to Page’s leadership are low given: a) incumbents like Rupa/Maxwell sell
through the wholesale channels with outsourced manufacturing and hence lack
control of both manufacturing and distribution; b) given lack of in-house
manufacturing, new entrants like FCUK, USPA, CK or regional players can’t
offer affordability with good product quality.
Page deserves one of the highest P/E multiples in the consumer space Source: Ambit ‘HAWK’, Ambit Capital research
Besides overall macro improvement, Page’s growth revival will be driven by

benefits from recent initiatives like: a) new products (kids innerwear, Research Analysts
hoodies/lounge pants and towels); b) new IT platform aimed at improving Rakshit Ranjan, CFA
working capital management, closer monitoring of the sales team and +91 22 3043 3201
distributors’ performance; and c) expanding Speedo’s footprint in India. rakshit.ranjan@ambit.co
Exemplary financials (33% EPS CAGR over FY16-21E and ~57% RoCE) support
Dhiraj Mistry, CFA
the valuation premium to most consumer names. Key risk: Inability to manage
growth given labour-intensive manufacturing and wide range of SKUs. +91 22 3043 3264
dhiraj.mistry@ambit.co
Page Industries
Exhibit 1: Evolution of Page Industries
in ` bn
20 Phase IV - Beating the 90%
Phase III - competition
Gearing up for 80%
15 competition
70%
10 60%
50%
5
40%
- 30%
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
Others Liesurewear Women Men *Innerwear (Men + Women) Pre-tax ROCE (RHS)
Source: Ambit Capital research, * Split of men and women innerwear is available since FY10.
Exhibit 2: Page’s key financial parameters over the last decade

Revenues 1,375 1,945 2,584 3,441 4,977 6,966 8,758 11,876 15,430 17,834
Revenue growth 35% 42% 33% 33% 45% 40% 26% 36% 30% 16%
Net profits 170 238 316 396 585 900 1,125 1,537 1,960 2,327
EPS (`) 15 21 28 36 52 81 101 138 176 209
CFO 91 112 315 298 (2) 1,226 871 740 1,670 2,165
CFO (pre-tax)/EBITDA 63% 58% 84% 70% 31% 113% 79% 59% 83% 85%
FCF (45) (90) 43 62 (275) 959 430 280 1,139 1,902
Debt equity (x) 0.4 0.5 0.5 0.6 0.9 0.5 0.5 0.6 0.3 0.1
RoE 42% 33% 39% 43% 53% 62% 59% 61% 58% 52%
Pre-tax RoCE 47% 36% 42% 44% 48% 60% 64% 65% 64% 65%
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 licence to manufacture Jockey in the Philippines in
1959
Establishing Jockey’s  Genomals got the master franchise of brand Speedo in Philippines in 1988
1959-1992 leadership
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 Bengaluru
 Men’s innerwear products launched in November 1995
Jockey re-enters India
1993-1997  First exclusive brand outlet launched in Bengaluru’s Commercial Street in 1995
through 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
Gearing up for
1997-2003  TTK Tantex and Associated Apparel (Liberty/Libertina) fell prey to labour strikes
competition
 In FY03, Page crossed `500mn 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 men’s in 2004, brassieres in 2005, ‘No panty
line promise’ in 2006, sub-brand ‘USA Originals’ in 2014, Kids innerwear in 2015, Towels in 2016
2004-2015 Beating the competition  In 2007, Page raised `1bn from an IPO
 Brand campaign launch - ‘Just Jockeying’ (2010) and ‘Jockey or Nothing’ (2015)
 Speedo’s 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 FY16 Revenue EBITDA CFO / CFO/ Segment presence
ROCE channel type
(` mn) CAGR margin EBITDA Capex
Men and women innerwear;
Page 17,834 27% 21% 76% 5.0 43% Distributor-based only
leisurewear, sportswear, swim wear
Men innerwear, men leisurewear,
Rupa 10,148 9% 15% 38% 1.3 26% Wholesale largely
thermal wear
VIP 1,946 3% 10% 82% 0.9 11% Wholesale largely Men and women innerwear
Wholesale +
Lovable 1,725 7% 19% 22% 5.4 15% Women innerwear, women sportswear
Distributors
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 doesn’t 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’ of experience in expanding Jockey in the Philippines
Strategic Asset
 Access to Jockey's international experience and technology is a key strategic asset
Overall
Source: Ambit Capital research; Note: - Strong; - Relatively Strong; - Average; - Relatively weak.
Exhibit 6: Sources of funds over FY07-16 Exhibit 7: Application of funds over FY07-16
Increase in Debt
Interest
cash and repayment,
received,
cash 5%
1%
equivalents,
Debt raised, 14%
24%
Dividend
Proceeds Net Capex,
paid, 45%
from shares, Cash flow 30%
4% from
operations,
71%
Interest
paid, 7%

Page Industries
Exhibit 8: Band chart of Page one-year forward P/E Exhibit 9: Page’s share price performance vs Sensex
80 7,000
70 6,000
60 5,000
4,000
50
3,000
40
2,000
30
1,000
20 -
Jun-12
Jun-13
Jun-14
Jun-15
Jun-16
Oct-11
Feb-12
Oct-12
Feb-13
Oct-13
Feb-14
Oct-14
Feb-15
Oct-15
Feb-16
Oct-16
Sep 07
Sep 08
Sep 09
Sep 10
Sep 11
Sep 12
Sep 13
Sep 14
Sep 15
Sep 16
Mar 07
Mar 08
Mar 09
Mar 10
Mar 11
Mar 12
Mar 13
Mar 14
Mar 15
Mar 16
Page 1 year fwd P/E Average of 5yr P/E Page 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-
Accounting GREEN tax)/EBITDA of above 70% in FY07-16. 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 FY09 to 71 days in FY16.
Since FY16, Page Industries has twice beaten or missed consensus revenue estimates by more than 4%. The
company has twice missed consensus net profit estimates by more than 4% and beaten once by more than 4%.
Earnings momentum GREEN In the last six months, consensus earnings forecasts for Page have been upgraded by ~3.5% for FY17 and FY18
Exhibit 11: Page’s forensic score has remained in zone of Exhibit 12: Page’s greatness score has improved from 40 in
safety over 2011-15 2011 to 95 in 2015

Page Industries
Abridged financial summary

Balance sheet
Reserves & surplus 3,756 4,941 6,203 7,850 10,050
Total net worth 3,868 5,052 6,315 7,961 10,162
Loan funds 1,344 734 734 484 234
Gross block 3,059 3,251 3,941 4,672 5,446
Net block 2,173 2,132 2,555 2,968 3,368
CWIP 1 4 4 4 4
Investments 0 0 0 0 0
Inventories 4,435 5,393 4,939 6,182 8,063
Debtors 884 1,034 1,190 1,545 2,016
Cash and cash equivalents 44 86 1,145 1,358 1,649
Loans & Advances 509 705 595 773 1,008
Creditors 821 941 1,071 1,391 1,814
Deposits from Dealers 556 735 869 1,128 1,472
Other current liabilities 1,028 1,234 1,369 1,777 2,318
Provisions 504 640 357 464 605
Total assets 5,326 5,897 7,159 8,556 10,506
Income statement
Net Sales 15,430 17,834 21,718 28,204 36,788
% growth 29.9% 15.6% 21.8% 29.9% 30.4%
Raw materials Cost 7,121 8,133 10,230 13,397 17,474
Employees cost 2,585 3,130 3,670 4,231 5,564
Royalty expenses 846 994 1,210 1,571 2,050
Advertisement expenses 714 670 903 1,044 1,324
Other Admin, S&D expenses 974 1,137 1,387 1,713 2,108
Total operating expenses 12,240 14,063 17,400 21,956 28,520
EBITDA 3,190 3,771 4,318 6,248 8,267
% growth 27.0% 18.2% 14.5% 44.7% 32.3%
Depreciation 176 238 266 318 374
EBIT 3,014 3,533 4,052 5,930 7,893
Non-operating Income 86 62 130 169 221
PBT 2,933 3,443 4,125 6,055 8,089
Tax expenses 973 1,116 1,320 1,938 2,588
Adjusted PAT 1,960 2,327 2,805 4,117 5,500
% growth 27.5% 18.7% 20.6% 46.8% 33.6%
Extraordinary items - - - - -

Page Industries
Cash flow statement

PBT 2,933 3,443 4,125 6,055 8,089
Depreciation 176 238 266 318 374
Others 96 102 (73) (125) (196)
Tax (966) (1,046) (1,320) (1,938) (2,588)
(Increase)/Decrease in working capital (569) (572) 220 (772) (1,258)
Cash flow from operating activities 1,670 2,165 3,218 3,538 4,421
Capex (534) (263) (689) (731) (775)
(Increase)/Decrease in investments - 1 - - -
Interest income 3 4 - - -
Others 3 - 130 169 221
Cash flow from investing activities (531) (258) (559) (562) (554)
Net borrowings (59) (624) - (250) (250)
Interest paid (171) (152) (57) (44) (25)
Dividend paid (899) (1,087) (1,543) (2,470) (3,300)
Cash flow from financing activities (1,129) (1,864) (1,600) (2,765) (3,575)
Net change in cash 10 43 1,059 212 291
Closing cash balance 43 86 1,145 1,358 1,649
Free cash flow 1,139 1,902 2,659 2,977 3,867
Ratio analysis
Gross margin (%) 53.8 54.4 52.9 52.5 52.5
EBITDA margin (%) 20.7 21.1 19.9 22.2 22.5
EBIT margin (%) 19.5 19.8 18.7 21.0 21.5
Net profit margin (%) 12.7 13.0 12.9 14.6 15.0
Dividend payout ratio (%) 49 49 55 60 60
Net debt/equity (x) 0.3 0.1 (0.1) (0.1) (0.1)
Asset turnover excluding cash (x) 3.2 3.2 3.4 3.7 3.9
Post-tax RoCE (%) 42.6 44.2 44.3 53.5 58.6
Pre-tax RoCE (%) 63.7 65.4 65.2 78.7 86.1
ROE (%) 58.0 52.2 49.4 57.7 60.7
EPS (`) 175.7 208.6 251.5 369.1 493.1
Book value per share (`) 347 453 566 714 911
P/E (x) 79.8 67.2 55.8 38.0 28.4
P/BV (x) 40.4 31.0 24.8 19.6 15.4
EV/EBITDA (x) 49.4 41.6 36.1 24.9 18.7
Price/Sales (x) 10.1 8.8 7.2 5.5 4.3
Dividend yield (%) 0.5 0.6 0.8 1.4 1.8

Amara Raja Batteries
SELL
STRATEGY NOTE AMRJ IN EQUITY November 17, 2016
Competitive edge under threat Auto & Auto ancillaries
Amara Raja has made rapid market gains in automotive battery Recommendation
segments (4W and 2Ws) led by Johnson Controls (JCI) parentage (low-
Mcap (bn): `165/US$2.4
cost manufacturing knowledge; hence, competitive pricing vs Exide) and
3M ADV (mn): `406/US$6.1
innovation surrounding products/advertising. We expect market share
CMP: `960
gains for AMRJ to slow as Exide attempts comeback through aggressive
pricing/cost cutting. The current expensive valuation multiples (25x TP (12 mths): `763
FY19E net earnings) do not appear sustainable as long-term RoCE will Downside (%): 20
moderate due to rising capital intensity for investments in new
technologies and changes to business model from Lithium-ion adoption. Flags
Accounting: GREEN
Competitive position: STRONG Changes to this position: POSITIVE
Predictability: AMBER
Second-largest battery player in India Earnings Momentum: AMBER
AMRJ is a JV between the Galla family and JCI (world’s largest lead acid battery
player). AMRJ’s automotive segment (~56% of FY16 revenues) is a play on Performance
automotive volume recovery (at 18/1,000 people, India has among the lowest 130
PV penetrations). The key growth drivers are market share gain from 120
unorganised segment and market leader Exide. The Industrial segment is, 110
however, very dependent on telecom segment (slowly shifting to lithium-ion) and 100
recovery in industrial activity. 90
80
JCI provides strategic edge
Jan-16
Oct-16
Apr-16
Sep-16
Dec-15
May-16
Jun-16
Feb-16
Mar-16
Jul-16
Nov-15
Aug-16
AMRJ started as an Industrial battery player (in 1975), ventured into the
Automotive battery segment, with a JV with JCI in 2000. Driven by competitive
Amara Raja Batt. Sensex
pricing, aggressive warranty terms and distribution expansion, it gained
significant market share across both 4W OEM (30% market share) and
replacement (41% market share). Despite late entry, it now commands 15% and Source: Bloomberg, Ambit Capital research
28% market share in 2W OEM and replacement. Over the last 10 years, AMRJ
has grown its revenue and EBITDA by 26% and 29% CAGR respectively. Amara Raja’s forensic score analysis
Market share gains to slow down

AMRJ’s tie-up with JCI imparts superior technology, lower production cost and
competitive pricing over Exide. Further, it also scores over Exide on innovative
advertisement/communication. As battery technologies such as lithium-ion
evolve, strategic global partnerships and low-cost architecture will play a key
role. However, AMRJ’s cost advantage is under threat from Exide’s growing focus
Amara Raja’s greatness score
on cost control. This should slow AMRJ’s market-share gains, particularly in the
lucrative auto replacement segment (1,600bps over FY09-16). analysis
Current valuation akin to a consumer company is unjustified

We are concerned about slowdown in: (1) the lucrative automotive replacement
battery industry (30% of AMRJ’s revenue) given muted OEM volume across
vehicle categories over FY12-16 and Exide’s increased focus on cost
control/technology upgrade; and (2) telecom battery segment (24% of AMRJ’s
revenue) due to lower tower addition over FY12-16. So, we expect revenue and
Research Analyst Details
EBITDA to grow at a slower pace of 12% and 11% CAGR respectively over the
next 10 years. JCI’s parentage does provide better long-term visibility but Ashvin Shetty, CFA
technology changes (lithium-ion, advances in lead-acid) over the next decade +91 22 3042 3285
could erode some key competitive advantages. Current multiples seem rich and ashvin.shetty@ambit.co
akin to consumer stocks though battery business drivers are not as sustainable. Gaurav Khandelwal, CFA
We are SELLers of the stock with a target price of `763, implying 20x one-year +91 22 3042 3132
forward net earnings. The stock currently trades at 27.4x FY18E net earnings. gaurav.khandelwal@ambit.co
Ritu Modi
+91 22 3042 3292
ritu.modi@ambit.co
Exhibit 1: Amara Raja has emerged as a formidable player in the automotive battery segment…
52 Phase I- Emergence as a Phase II- Foray into automotive Phase III- Finding success across various 120%
strong industrial battery segment through JV with Johnson automotive battery segments.
player Controls 100%
42
`. billion
80%
32
Launched CV and 60%

22 Tractor battery Launched
Launched 2W battery
40%
4W battery
Won OE orders from
12
Maruti and Hyundai 20%
2
0%
FY96 FY97 FY98 FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16
(8) -20%
Revenue CAGR: 32% Revenue CAGR: 32% Revenue CAGR: 20%
Median RoCE: 84.4% Median RoCE: 13.2% Median RoCE: 42.1%
AMRJ's Revenues (LHS) AMRJ's ROCE % (Pre-tax) (LHS)
Exhibit 2: … through better quality products at a lower price…

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
 Amara Raja’s better technology, lower price, expanding distribution contributed to share gains
Phase-III FY09-16
 Exide’s complacency (lack of capacities/shortage in replacement market)/capital allocation issues (foray into
insurance business) helped Amara Raja
Source: Company, Ambit capital research
Exhibit 3: … allowing it to earn superior returns

Revenues 5,958 10,833 13,132 14,645 17,611 23,645 29,614 34,367 42,113 46,907
Revenue growth (%) 64% 82% 21% 12% 20% 34% 25% 16% 23% 11%
Net profits 479 909 1,115 1,550 1,479 2,024 2,898 3,621 4,125 4,768
EPS 4.2 8.0 6.5 9.1 8.7 11.8 17.0 21.2 24.1 27.9
CFO (pre-tax) (146) 328 2,776 2,927 1,638 4,011 4,721 4,394 5,872 7,729
CFO (pre-tax)/EBITDA -18% 18% 138% 101% 63% 118% 104% 78% 83% 95%
FCF (1,056) (1,333) 1,335 1,627 195 2,176 1,892 (943) (112) 643
Net-debt equity (x) 0.5 0.8 0.5 0.1 0.1 (0.2) (0.3) (0.2) (0.1) (0.0)
RoE (%) 19.6% 27.3% 27.5% 28.5% 22.9% 24.6% 27.3% 26.6% 24.3% 23.7%
ROCE* (%) 23.2% 31.9% 27.7% 40.7% 32.3% 40.4% 51.5% 49.3% 40.6% 36.4%

Exhibit 4: Amara Raja has been able to gain the scale required to generate healthy returns
Amara Exide
Particulars Comments
Raja Industries
Amara Raja has established a network size of more than 30,000 in 15 years as
Aftermarket network >30,000 38,500
compared Exide’s 38,500 developed over decades.
 Amara Raja's plants are relatively new and more efficient compared to Exide’s
old plants which are operating with old equipment.
Number of plants 2 7  Amara Raja’s both plants are located in close vicinity of each other, as
compared to Exide plants which are spread across India. This has helped Amara
Raja operate its plant at lower overheads vs Exide.
Market share in four-wheeler OEM 31% 59% Amara Raja has gained significant market share across both 4W OEM and
Market share in four-wheeler replacement driven by competitive pricing, aggressive warranty terms and
41% 56% distribution expansion.
replacement
Revenues (FY16 ` mn) 46,907 68,246  From FY11-16, Amara Raja has gained significant market share in both OE and
aftermarket segments from Exide due to its better quality product and lower
price (enabled by lower cost of manufacturing).
 Shortage of capacity at Exide Industries also benefited Amara Raja. During
2009-10, automobile volumes picked up sharply and Exide took a strategic
Revenue CAGR FY11-16 34% 16% decision to cater to the full requirement of the OE customers thereby
underplaying the more profitable aftermarket. This enabled Amara Raja to
become a major player in the aftermarket through its ‘Amaron’ brand. Amara
Raja’s market share in the 4W aftermarket segment improved to 41% in FY16,
an increase of 1600 bps over FY09-16.
EBITDA margin (FY16) 17.4% 15.0% Amara Raja benefited from improving product mix with rising contribution from the
higher-margin replacement segment, increasing utilisation levels and more cost
Change in EBITDA Margin (FY11- efficient operations (deployed best manufacturing practices of Johnson Controls). As
(+)290 bps (-)430bps against this, Exide suffered market share loss in profitable 4W replacement market
FY16)
and rising overheads.
Pre-tax CFO/ EBITDA (Average
90% 96% Lower working capital levels have helped cash conversion for both the companies.
FY11-16)
Capex to CFO (Average FY11-16) 79% 47%  Amara Raja has been continuously investing over the years to expand its 4W
and 2W capacities. It also invested in UPS capacities which were earlier sourced
from outside.
Capex and Investments to CFO  Exide on the other part made significant investment in FY15/16 (`8bn) to
79% 63% upgrade their technology and plants & machinery. Apart from this, Exide also
(Average FY11-16)
made significant investments in the insurance business which now represents
53% of its FY16-end capital employed.
Higher margins and lower capex enabled Amara Raja to generate higher returns vs
Post-tax RoCE (Average FY11-16) 28% 23%
Exide.
Source: Company, Ambit Capital

Exhibit 5: Strong Innovation capabilities and Brand places Amara Raja on top in our IBAS framework
Parameters Amara Raja Exide Remarks
Innovation
A) Does the company have an Technological  AMRJ brought zero maintenance batteries (Amaron Hi-Life)
JV with Johnson
agreement with a foreign partner for agreement into the Indian market, which was a key differentiator from
Controls Inc.
technology? Hitachi, Japan the batteries which required regular maintenance and top-
ups. Similarly, it pioneered the introduction of VRLA batteries
Rank
for the 2W segment (Amaron Pro-bike rider) in May 2008,
B) Was the company first to innovate which was suited for rising power needs of 2Ws due to
Yes Yes
and have competitors copy it? adoption of self-start bikes.
 AMRJ offered aggressive warranty terms; for instance, it
Rank
introduced Amaron Pro-range of automotive batteries in
Overall position in Innovation FY2005 with a first of its kind 48 month warranty.
Brands/Reputation
Market Market Leader in
A) What is the ranking of the company
Challenger in a a Duopoly
in the industry?
Duopoly industry industry
 AMRJ has emerged as a strong challenger to Exide over the
Rank
years and closed the difference in brand perception to a
B) Does the company spend more than significant extent. However, build upon its decades of
industry level on advertising, sales 1.2% of sales 0.8% of sales presence in India and a large number of installations in the
promotion, publicity? existing car park, Exide still commands a greater brand recall.
Rank
Overall position in Brands
Architecture
Does the company employ superior  AMRJ employs superior manufacturing practices through its
manufacturing practices? business alliance with JCI. AMRJ commands low
rejections/higher yield which is one of the reasons for its
Rank
higher gross margin despite pricing its products cheaper than
Exide.
 AMRJ has had consistently low employee and overhead costs
Overall position in Architecture
compared to that of Exide mainly because of its concentrated
manufacturing plants.
Strategic Asset
A) Has the company demonstrated cost  JCI commands a much dominant position in the global lead-
Yes No
competitive edge over competition? acid battery industry with significantly higher R&D spends.
JCI’s parentage provides an edge to AMRJ. It also helps that
Rank
JCI owns 26% equity stake in AMRJ. On the other hand, while
B) Does the company have more Exide has technical tie-ups with East Penn, Shin-Kobe
manufacturing facilities in India than 2 mfg. facilities 7 mfg. facilities (Hitachi) and Furukawa, there is no equity participation.
its competition?  Captive smelters have historically lent significant cost
advantage to Exide. However, recycling of lead has increased
Rank
in India over the years and the price of the used batteries
(that dealers pay to customers) has witnessed a spike,
Overall position in Strategic Asset
somewhat negating Exide’s cost advantage on this front.
 Strong Innovation capabilities, Improving brand perception
Overall Score in IBAS and better cost control places Amara Raja ahead of Exide
Industries in our IBAS framework.
Source: Company, Ambit Capital. Rank 1; Rank 2

Exhibit 6: Cash generated over the years... Exhibit 7: ... has largely been used to fund expansion
Interest &
dividend Finance
received charges
4% 1%
Change in
net debt Dividends
4% 17%
Capex
CFO 78%
96%
Exhibit 8: Stock trades at 27.4x one-year forward net Exhibit 9: AMRJ has multiplied ~37x in the last 10 years as
earnings, 50% premium to five-year average multiples compared to ~2x by Sensex
35 4,000
3,500
Return percentage
30
3,000
25
2,500
20
2,000
15 1,500
10 1,000
5 500
0
0
Mar-14
Mar-16
Mar-08
Mar-10
Mar-12
Jul-15
Jul-11
Jul-13
Jul-07
Jul-09
Nov-14
Nov-10
Nov-12
Nov-06
Nov-08
Jan-15
Jan-16
Jan-12
Jan-13
Jan-14
Sep-14
Sep-15
Sep-11
Sep-12
Sep-13
May-15
May-16
May-12
May-13
May-14
Amara Raja Sensex index

1 yr forward P/E (x) 5 yr Average P/E

AMRJ’s scores relatively well in our accounting and forensic framework. AMRJ’s key accounting ratios such as cash
Accounting GREEN yield, CFO-EBITDA conversion, miscellaneous expenditure (as a % of sales) was much higher than other listed peers.
On Ambit’s forensic accounting, AMRJ is categorised in the 3rd 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 required replacement in 2-3 years. Industrial volumes (44% of the revenue) are
also volatile and linked to telecom sector 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 momentum AMBER Bloomberg shows no significant upgrades/downgrades to consensus numbers in recent weeks.

Exhibit 11: AMRJ scores high in our forensic framework... Exhibit 12: …and greatness framework

Balance sheet (standalone)

Share capital 171 171 171 171 171
Reserves and surplus 16,825 19,974 24,283 29,209 34,857
Total Networth 16,996 20,145 24,453 29,380 35,027
Loans 759 741 678 615 552
Sources of funds 18,123 21,475 25,720 30,584 36,168
Net block (inc CWIP) 10,785 14,485 16,339 16,839 17,438
Investments 161 161 161 161 161
Cash and bank balances 2,221 1,498 3,173 6,839 11,021
Sundry debtors 5,541 5,921 6,664 7,458 8,373
Inventories 4,181 6,016 6,771 7,577 8,507
Loans and advances 992 1,002 1,127 1,262 1,416
Current assets 12,935 14,437 17,735 23,136 29,318
Current liabilities and provisions 5,757 7,608 8,514 9,552 10,749
Application of funds 18,123 21,475 25,720 30,584 36,168
Income statement (standalone)

Revenue 42,113 46,907 52,787 59,077 66,327
% growth 22.5% 11.4% 12.5% 11.9% 12.3%
Total expenses 35,005 38,738 43,594 48,789 54,776
% growth 21.8% 10.7% 12.5% 11.9% 12.3%
EBITDA 7,108 8,169 9,193 10,288 11,550
Net depreciation 1,260 1,399 1,746 2,000 2,222
EBIT 5,849 6,770 7,447 8,288 9,329
Interest 7 5 5 5 5
Other Income 273 330 358 531 779
PBT after EO 6,115 7,095 7,799 8,814 10,103
Provision for taxation 1,990 2,327 2,558 2,821 3,233
Adjusted PAT 4,125 4,768 5,241 5,994 6,870
% growth 13.9% 15.6% 9.9% 14.4% 14.6%
Reported PAT 4,104 4,894 5,241 5,994 6,870
Adjusted EPS diluted (`) 24.1 27.9 30.7 35.1 40.2

Cash flow statement (standalone)

EBIT 6,099 7,222 7,799 8,814 10,103
Depreciation 648 1,340 1,399 1,746 2,000
Others (305) (116) (215) (353) (526)
Direct taxes paid (1,606) (1,922) (2,181) (2,558) (2,821)
Change in working capital (1,315) (1,450) (677) (778) (832)
CFO 3,519 5,074 6,125 6,871 7,924
Capex (3,731) (4,062) (4,904) (3,600) (2,500)
Other expenses 282 182 190 358 531
CFI (3,448) (3,880) (4,714) (3,242) (1,969)
Proceeds from borrowings (27) (97) (18) (63) (63)
Interest paid (0) (2) (5) (5) (5)
Dividends paid (504) (645) (1,614) (871) (933)
CFF (531) (745) (1,637) (939) (1,001)
Change in cash (460) 448 (226) 2,690 4,955
Closing cash 746 1,498 3,173 6,839 11,021
Free cash flow (112) 643 2,257 4,136 4,538
Ratio analysis (standalone)

EBITDA margin 16.9% 17.4% 17.4% 17.4% 17.4%
EBIT margin 13.9% 14.4% 14.1% 14.0% 14.1%
Net profit margin 9.8% 10.2% 9.9% 10.1% 10.4%
Net debt: equity (x) (0.1) (0.0) (0.1) (0.2) (0.3)
RoCE (pre-tax) 40.6% 36.4% 33.8% 34.6% 36.7%
RoCE (post-tax) 27.4% 24.5% 22.7% 23.5% 24.9%
RoE 24.3% 23.7% 21.4% 20.4% 19.6%
Valuation parameters (standalone)

EPS (`.) 24.1 27.9 30.7 35.1 40.2
Diluted EPS (`.) 24.1 27.9 30.7 35.1 40.2
Book value per share (`.) 100 118 143 172 205
Dividend per share (`.) 3.6 4.3 4.6 5.2 6.0
P/E (x) 39.8 34.4 31.3 27.4 23.9
P/BV (x) 9.6 8.1 6.7 5.6 4.7
EV/EBITDA (x) 23.0 20.0 17.8 15.9 14.1
EV/EBIT (x) 27.9 24.1 21.9 19.7 17.5

GRUH Finance
NOT RATED
STRATEGY NOTE GRHF IN EQUITY November 17, 2016
Will it stand the test of time? 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): `103/US$1.5
borrowers), strong local knowledge (well penetrated and decentralized
3M ADV (mn): `143/US$2.1
branches) and backing of the behemoth HDFC. Combined with a decadal
CMP: `282
surge in real-estate prices, such strengths have driven GRUH’s superior
profitability and growth over FY06-16 (avg. RoE of 30% and AUM CAGR TP (12 mths): NA
of 26%). However, declining real estate prices and increasing Downside (%): NA
competition in affordable housing finance have led to moderation in
earnings growth (EPS growth of 20% in FY16 versus 28% CAGR over Flags
FY10-15). GRUH’s lofty valuations (10x 1-year fwd P/B, 100% premium to Accounting: GREEN
its peers) will be tested by such 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 160
loans in rural and semi-urban areas, operating primarily in the Gujarat and
140
Maharashtra, which account for ~70% of its loan book. With a modest loan
120
book of ~`120bn, GRUH accounts for less than 1% market share in mortgages
100
and has averaged loan growth of ~27% over FY06-16, making it a promising
play on the rural mortgage opportunity in India. 80
Jan-16
Sep-16
May-16
Mar-16
Jul-16
Nov-15
Strong focus in informal segment has driven robust growth and RoE
Since the stressful period of 1996-98, GRUH has moved away from the
developer loan segment to individual home loans where asset quality and GRUH Finance Sensex
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% Source: Bloomberg, Ambit Capital research
in FY98 to 22% in FY04. Since then RoE has never dipped below 24% as it has
single-mindedly focused on small-ticket home loans to informal segments. High
RoE over the past ten years (average RoE of ~30%) implied that it didn’t need to
raise capital despite growing at 27% 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 of ~20bps over past ten years); iii) HDFC’s 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 risk to its earnings growth.
Valuations could be tested by declining earnings momentum
Mortgage financers have re-rated over the past two years at the cost of
corporate lenders due to the latter’s shaky earnings trajectory due to asset
quality concerns. A combination of such fundamental and sentimental factors Research Analysts
underpins GRUH’s premium valuations. However, such peak valuations could be
Aadesh Mehta, CFA
tested by a declining earnings momentum (EPS growth of 20% in FY16 versus
+91 22 3043 3239
28% CAGR over FY10-15) due to slower growth (24% in FY16 versus 30% CAGR
over FY10-15) caused by declining real estate prices and increasing competitive
intensity in the small-ticket housing finance. Moreover, HFCs 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 4.2%
120 RoAs 2.5% RoAs 2.3% 40%
100
35%
80
60 30%
40
25%
20
- 20%
Exhibit 2: GRUH – key financial parameters over the last decade

Interest Income 10.0% 10.8% 12.3% 11.1% 11.0% 12.3% 12.3% 12.2% 12.0% 11.4%
Total Income 4.2% 4.5% 4.0% 4.8% 5.0% 5.1% 4.7% 4.5% 4.5% 4.4%
Employee Expenses 0.4% 0.4% 0.5% 0.5% 0.5% 0.5% 0.5% 0.5% 0.4% 0.4%
Admin Expenses 0.6% 0.5% 0.4% 0.5% 0.5% 0.5% 0.4% 0.4% 0.4% 0.4%
Loan loss provisions 0.5% 0.2% 0.1% 0.3% 0.1% 0.1% 0.1% 0.04% 0.2% 0.2%
Taxes 0.5% 1.0% 0.8% 1.0% 1.1% 1.1% 1.0% 1.0% 1.1% 1.1%
RoA 2.2% 2.3% 2.1% 2.6% 2.9% 3.0% 2.9% 2.7% 2.4% 2.3%
Leverage 11.0 10.2 11.4 11.0 10.8 11.5 11.8 12.1 12.9 13.9
RoE 23.9% 23.7% 24.3% 28.4% 31.4% 34.2% 34.2% 32.2% 30.9% 31.5%
AUM growth (%, YoY) 29% 29% 18% 18% 29% 28% 33% 29% 28% 24%
EPS growth (%, YoY) 16% 30% 19% 37% 31% 31% 20% 20% 14% 19%
Exhibit 3: Emerging regulatory & competitive headwinds led to slower growth and lower profitability recently
 GRUH’s 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 RoAs 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 have also let to
Headwinds FY14- moderation in ticket size growth (which used to drive 50-60% of growth of HFCs).
emerge Current
 Such headwinds mentioned above led to slowdown in growth as well as pressure in profitability for HFCs including
GRUH. GRUH’s growth has slowed down to 24% YoY in FY16 (versus 28% CAGR in FY05-14) and RoAs moderating to
2.3% from an average of 2.5% in FY05-14.

GRUH Finance
Exhibit 4: Competitive mapping of HFCs – GRUH’s small-ticket positioning makes drives its superior profitability
Key metrics Avg. ticket AUM CAGR Gross Branches Employees
AUM (` bn) NIMs Opex/AUM RoA RoE
(FY16) size (` mn) (FY13-16) NPA (%) (#) (#)
GRUH 0.5 111 27% 4.2% 0.8% 0.32% 2.3% 31.5% 179 618
HDFC 2.5 2,908 16% 3.1% 0.3% 0.70% 2.4% 21.8% 401 2,196
LICHF 1.2 1,252 17% 2.6% 0.4% 0.45% 1.5% 19.6% 234 1,726
REPCO 1.1 77 29% 4.9% 1.0% 1.30% 2.2% 17.0% 150 619
CANFIN 1.7 106 38% 3.1% 0.7% 0.19% 1.6% 19.0% 140 553
DEWAN 1.2 695 24% 3.0% 0.9% 0.93% 0.9% 11.9% 353 2,625
PNBHF 3.7 272 60% 3.8% 1.2% 0.22% 1.4% 17.6% 47 752

Innovation
Brand
Architecture
Strategic asset
Overall rank
Exhibit 6: AUM mix Exhibit 7: Liability mix
Home loan - Salaried

3% 4%
NHB
Home loan - Self 9%
11% employed
14% 39% Bank loans
LAP - Residential
52%
29% Public deposits
LAP - Non Residential 38%
Others
Construction Loans

GRUH Finance
Exhibit 8: NIMs are declining due to competitive pressures Exhibit 9: Asset quality is worsening
5.4% NIM 2.0% Gross NPA
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
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
Exhibit 10: GRUH is trading at 60% premium to its Exhibit 11: GRUH – share price performance versus sensex
cross-cycle average P/B
12.0 3,000
10.0 2,500
8.0 2,000
6.0 1,500
4.0 1,000
2.0 500
0.0 -
Apr-07
Apr-08
Apr-09
Apr-10
Apr-11
Apr-12
Apr-13
Apr-14
Apr-15
Apr-16
Apr-10
Mar-13
Apr-15
Dec-11
Jul-11
Jan-14
Jul-16
Aug-13
Sep-10
Sep-15
Feb-11
May-12
Oct-12
Jun-14
Nov-14
Feb-16
PB Avg. PB -1 SD +1 SD SENSEX GRUH


GRUH’s 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.
GRUH’s earnings trajectory has been fairly predictable. It has delivered a clockwork 20% earnings growth for at
least past 18 quarters.
Pressure on AUM growth and profitability has led to GRUH’s earnings growth moderating from 30% PAT CAGR
over FY07-14 to 20% PAT CAGR over FY14-16.

GRUH Finance
Income statement
Year to March (` mn) FY12 FY13 FY14 FY15 FY16
NII (inclu. Securitisation) 1,871 2,311 2,707 3,437 4,212
Other income 170 149 319 389 468
Total income 2,041 2,460 3,025 3,826 4,680
Operating expenditure 392 463 556 661 844
Pre-provisioning profit 1,649 1,997 2,469 3,165 3,836
Provisions 22 29 24 157 219
Profit before tax 1,627 1,968 2,445 3,008 3,617
Tax 424 509 675 970 1,181
Consol. PAT 1,202 1,500 1,770 2,038 2,436
Balance sheet
Net-worth 3,856 4,910 6,072 7,115 8,353
Borrowings - on balance sheet 38,330 49,145 64,475 67,453 102,444
Borrowings - off balance sheet 0 0 0 0 0
AUM 40,774 54,378 70,090 89,544 111,146
Cash and equivalents 1 652 530 798 1,429
Net Current Assets 1,410 (974) (73) (15,775) (350)
Total assets 28,134 36,990 46,431 59,165 74,927
Key ratios
NIM % (on AUM) 5.2% 4.9% 4.3% 4.3% 4.2%
AUM Growth 28% 33% 29% 28% 24%
Opex as % of AAUM 1.08% 0.97% 0.89% 0.83% 0.84%
Credit costs as a % of AUM 0.06% 0.06% 0.04% 0.20% 0.22%
CAR (%) 14.0% 14.6% 16.4% 15.4% 17.8%
Dil EPS – Consol (`) 3.4 8.2 4.9 5.6 6.7
BVPS (`.) 11 14 17 20 23
ROA (%) 3.0% 2.9% 2.7% 2.4% 2.3%
ROE (%) 34.2% 34.2% 32.2% 30.9% 31.5%
P/B (x) 25.8 20.6 16.7 14.4 12.3
P/E (x) 82.6 34.4 57.4 50.3 42.1

GRUH Finance
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Dr Lal PathLabs
NOT RATED
STRATEGY NOTE DLPL IN EQUITY November 17, 2016
Long-term growth path Healthcare
Dr Lal PathLabs is the largest diagnostics chain in India by revenues; it Recommendation

recorded 35% sales CAGR and 78% PAT CAGR over FY07-16 driven by: 1)
Mcap (bn): `93/US$1.4
aggressive geographical expansion; 2) acquisition of smaller labs; 3)
3M ADV (mn): `188/US$2.8
market-share gain from low-quality unorganised players (48% share
CMP: `1,135
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: 1) low penetration Downside (%): NA
rate of healthcare; 2) socio-economic tailwinds; and 3) continued
market-share gains from unorganised players. Valuation at 61x FY18E Flags
P/E is at a 100% premium to FMCG sector justified by potentially higher Accounting: GREEN
growth rates while delivering FMCG-like EBITDA margins and RoIC. Key Predictability: AMBER
risks: Price disruption and increased competition from other labs. Earnings Momentum: GREEN
Competitive position: MODERATE Changes to this position: STABLE
Performance
Sustained quality leadership in Indian diagnostics space
280
Dr Lal started operations in 1949 and is one of the pioneers in the diagnostics
230
industry in India. It is highly focused on technology to provide high quality
customer experience, faster turnaround time and wider array of tests with higher 180
accuracy vs unorganised peers. More than 20 labs of Dr Lal are certified by 130
National Accreditation Board. With `7.9bn in revenues (FY16), 175 labs, 1,500 80
patient service centres and annual throughput of 26mn+ samples, Dr Lal is the
Jan-16
Oct-16
Apr-16
Sep-16
Dec-15
May-16
Jun-16
Feb-16
Mar-16
Jul-16
Aug-16
largest diagnostics chain in India. Dr Lal’s 35% sales CAGR (last 10 years) is
unlikely to sustain given high base but a higher-than-industry growth rate of
mid-to-high teens is possible. Dr Lal Pathlabs Sensex
Focus on quality is helping to grow market share

Diagnostics in India is highly fragmented (unorganised hold 48% market share).
Organised chains hold only 15% of revenues. Dr Lal, the largest player, has only
2% market share. Though globally, the industry is fragmented, market leaders
tend to 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 market-leading due to:
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
We believe, given the high base and rising competition from national and
regional chains, Dr Lal will have to continue investing in growth. Steps being
taken to maintain market leadership in terms of growth and quality are: 1)
setting up of two reference labs for capex of `1bn; 2) continuous expansion of
an array of tests, including for latest epidemics like the Zika virus; 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 high RoIC (50%+), we are not overly worried about this.
Valuation is rich as investors are focusing on long-term growth
Trading at 61x FY18 consensus P/E, Dr Lal appears rich. However, we believe Dr
Lal combines the higher growth potential of the consumer discretionary sector Research Analyst
but at the economics of the consumer staples sector. This combination of higher Anuj Bansal
growth and healthy profitability, return ratios and cash generation is unique and
+91 22 3043 3122
justifies the 100% premium over consumer staples and 33% premium over the
anuj.bansal@ambit.co
consumer discretionary basket.
Dr Lal PathLabs
Exhibit 1: Tale of two halves over the last decade
130% 45%
Phase 1: With penetration rates
low, rapid geographic expansion,
share gains and acquisition of
smaller labs for lower price helped
strong revenue growth while Phase 2: As base
90% expanded, smaller players 35%
driving up RoCE
became organised,
valuations for M&A moved
up – scope for revenue
growth moderated and
50% incremental RoIC for this 25%
growth became lower
10% 15%
FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16
Pre-tax ROCE (%) Revenue growth (RHS, %)
Source: Ambit capital research

(` mn) FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16
Revenues 945 1,230 1,670 2,373 3,422 4,517 5,579 6,596 7,913
Revenue growth (%) 24% 30% 36% 42% 44% 32% 24% 18% 20%
Net profits 86 128 252 295 452 557 803 964 1,059
EPS 1.6 2.4 4.5 3.6 5.6 6.8 9.7 11.6 16.1
CFO 522 2,926 2,396 2,591 6,802 711 5,979 6,231 6,630
Pre-tax CFO-EBITDA 144% 105% 151% 135% 136% 95% 177% 111% 125%
FCF 63 103 234 438 559 380 974 700 904
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% 25%
Pre-tax RoCE (%) 31% 46% 83% 49% 73% 90% 127% 110% 92%

 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 first Indian Diagnostic chain to get into a Public Private Partnership with
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
 Profitability 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 going forward
Growth is strong but at a
Post 2014  With two new reference labs coming up, quality of service should improve further
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 Britannia

Revenue Industry EBITDA Pre-tax Pre-tax CFO/
Sub-segment FY16 revenue Capex/CFO
Company CAGR market Margin RoCE EBITDA
Positioning (` bn) (FY11-16)
FY11-16 share (FY16) (FY16) (FY11-16)
Dr Lal #1 79.1 27% ~2% 23% 92% 130% 15%
SRL #2 77.4 14% ~2% 24% NA NA NA
Thyrocare #4 23.5 25% ~1% 40% 74% 108% 30%
Source: Company, Ambit Capital research; Note: For ITC we have taken the FMCG segment revenues
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 4 3 1 3  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 3 4 2 3
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 2 3 2 3
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 4 4 3 3
 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 3 4 2 3 Hospitals has an edge.
 Thyrocare clearly needs to enhance focus on moving up the quality chain
Exhibit 6: CFO was the main source of funds Exhibit 7: Post capex, large sums of money available for
liquid investments
Debt Others
4% 9%
Dividend
Share 14%
Capital
17% Capex
57%
CFO Investments
79% 20%

Dr Lal PathLabs
Exhibit 8: Sharp re-rating since listing in Dec’15 Exhibit 9: Strong outperformance vs Sensex
80 160
150
70 140
130
60 120
110
50 100
90
40 80
Apr-16
Mar-16
Jul-16
Jan-16
Aug-16
Sep-16
Jun-16
Oct-16
Nov-16
Feb-16
May-16
Jun 16
Feb 16
May 16
Oct 16
Apr 16
Mar 16
Dec 15
Jul 16
Jan 16
Aug 16
Sep 16
Dr Lal 1- yr average Dr Lal Sensex
Exhibit 10: Explanation for our forensic accounting scores

There are no significant issues with Dr Lal’s 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 medium term
is fairly predictable, near-term volatility can be high. Actual performance has often beaten management guidance.
Earnings Momentum GREEN Earnings momentum has been positive for Dr Lal with consistent earnings beat vs expectations since listing.

Dr Lal PathLabs
Balance sheet
Shareholders' equity 163 164 803 1,108 1,243
Reserves & surpluses 996 1,457 1,512 2,303 3,831
Total networth 1,160 1,621 2,315 3,411 5,074
Debt 0 4 9 0 0
Deferred tax liability (27) (127) (196) (254) (121)
Gross block 1,245 1,466 1,676 1,995 2,340
Net block 1,145 1,271 1,400 1,510 1,697
Investments 48 548 86 379 643
Cash & equivalents 134 215 1,057 1,482 2,296
Debtors 143 198 252 310 363
Inventory 62 86 117 143 145
Loans & advances 180 203 347 597 882
Total current assets 415 528 776 1,128 1,495
Current liabilities 394 898 1,038 1,127 838
Provisions 204 150 135 192 312
Total current liabilities 598 1,048 1,173 1,319 1,150
Net current assets (183) (520) (397) (192) 345
Total assets 1,171 1,640 2,342 3,434 5,102
Income statement
Revenues 3,422 4,517 5,579 6,596 7,913
% growth 32% 24% 18% 20%
Operating expenditure 2,557 3,540 4,194 5,036 6,090
EBITDA 865 977 1,386 1,560 1,824
% growth 13% 42% 13% 17%
Depreciation 198 204 272 282 283
EBIT 667 773 1,113 1,278 1,541
Interest expenditure 11 (1) (56) (90) (142)
Non-operating income 8 28 22 29 50
Adjusted PBT 664 802 1,192 1,397 1,734
Tax 213 245 389 433 675
Adjusted PAT/ Net profit 452 557 803 964 1,059
% growth 23% 44% 20% 10%
Extraordinaries - - - - (274)
Reported PAT / Net profit 447 552 796 957 1,322

Dr Lal PathLabs
Cash flow statement

PAT 452 557 803 964 1,059
Depreciation 198 204 272 282 283
Others ESOPs 6 250 155 242 239
Tax 213 245 389 433 675
(Incr) / decr in net working capital 78 (337) 123 205 537
Cash flow from operations 947 919 1,743 2,126 2,792
Capex 194 368 400 372 400
Cash flow from investments 194 368 400 372 400
Net borrowings (183) 4 5 (9) -
Issuance of equity (66) 0 640 305 135
Dividend paid 150 91 100 150 196
Cash flow from financing (399) (87) 545 146 (61)
Closing cash balance 134 215 1,057 1,482 2,296
Free cash flow 380 974 700 904 907
Ratio analysis
Year to March FY12 FY13 FY14 FY15 FY16
Gross margin (%) 77.7% 78.5% 78.9% 78.9% 78.1%
EBITDA margin (%) 25.3% 21.6% 24.8% 23.6% 23.0%
EBIT margin (%) 19.5% 17.1% 20.0% 19.4% 19.5%
Net profit margin (%) 13.2% 12.3% 14.4% 14.6% 13.4%
Dividend payout ratio (%) 33.5% 16.4% 12.6% 15.7% 18.5%
Net debt: equity (x) -0.2 -0.5 -0.5 -0.5 -0.6
Working capital days -20 -42 -26 -11 16
Post-tax RoCE(%) 49.3% 62.6% 85.5% 75.9% 56.0%
RoE(%) 43.3% 40.1% 40.8% 33.7% 25.0%
EPS (`) 5.6 6.8 9.7 11.6 12.9
Diluted EPS (`) 5.6 6.8 9.7 11.6 12.9
P/E (x) 198.6 162.3 113.3 94.7 68.6
P/BV (x) 76.6 55.3 38.9 26.6 14.3
EV/EBITDA (x) 102.5 90.9 64.2 56.9 48.1
Price/Sales (x) 26.0 19.8 16.2 13.7 9.2

eClerx
SELL
STRATEGY NOTE ECLX IN EQUITY November 17, 2016
No room for error Technology

eClerx has built formidable moats around its niche of low-volume, high-
Recommendation
complexity BPO, reflected in high pre-tax median RoCE of 57% (FY06-16).
Its internal processes, deep domain expertise and superior sales engine Mcap (bn): `57/US$0.8
have helped it offset competition (from larger peers, offshore captives) 3M ADV (mn): `77.8/US$1.2
to deliver 40%/30% revenue/operating cash flow CAGR (FY06-16). The CMP: `1,399
promoters have also demonstrated an impeccable capital allocation TP (12 mths): `1,425
track record over the past 10 years – 41% of profits have been returned Upside (%): 1.8%
to shareholders over the past 10 years and each of the three acquisitions
has been successful. However, regulatory-driven challenges in BFSI (40% Flags
of revenue) and the rise of robotic process automation tools threaten its Accounting: GREEN
business model. Current valuation of 15x FY18E EPS (vs. 15x for Infosys) Predictability: AMBER
leave no room for error. We are SELLers with a TP of `1,425, implying Earnings Momentum: AMBER
14x FY18E EPS.
Competitive position: STRONG Changes to this position: NEGATIVE Performance
Specialises in low-volume, highly complex, offshore BPO 130
120
eClerx business has three segments: financial services (~40% of FY16 revenues),
110
digital marketing (~40%) and cable & telecom (~20%). Examples of processes in 100
each: handling documentation related to OTC derivatives for a global 90
investment bank, optimising an e-commerce website catalog to boost sales and 80
using analytics to improve customer-service for a large US-based cable
Jan-16
Apr-16
Sep-16
Dec-15
May-16
Jun-16
Feb-16
Mar-16
Jul-16
Nov-15
Aug-16
company. Revenue and operating cash flow posted 40% and 30% CAGR over
FY06-16.
eClerx Services Sensex
Impeccable capital allocation, exemplary growth
The founders have made no mistake in either strategy or execution since Source: Bloomberg, Ambit Capital research
founding in 2000. eClerx has focused on large corporate customers, small &
complex processes and annuity-like revenue. Its key competitive advantages eClerx’s forensic score analysis
have been its internal processes (knowledge management, training), deep
domain expertise and superior sales engine (higher-quality talent). The capital
allocation track record is also impeccable. 41% of profits were returned to
shareholders over FY06-16. After examining hundreds of potential targets,
eClerx has made just three niche acquisitions (in FY08, FY13 and FY15), each of
which has been successful (EPS-accretive from day-1, continued to grow post
deal).
Architecture built around domain expertise, talent and clients
eClerx scores most highly on the architecture aspect of the IBAS framework. The eClerx’s greatness score analysis
founders’ network (both were Wharton MBA graduates) and sales ability enabled
marquee wins (e.g. Dell, Lehman Brothers). This, in turn, not only allowed eClerx
attract and retain high-calibre employees (a generous ESOP and listing in 2007
also helped) but also resulted in significant growth headroom. Focus on low-
volume and complex processes have resulted in better pricing (low competition)
and also high utilisation (just-in-time hiring). All of these combine to deliver high
customer satisfaction despite relying on low-cost, junior, offshore labour, which
A b AW A b l h
in turn generates high profitability (average EBIT margin of 35% over FY06-16).
Trading at par with Infosys; threats from regulation and automation
The regulatory-driven shift of trading OTC derivatives to the exchanges and the Research Analysts
higher proportion of newer, smaller-duration projects are hurting eClerx’s Sagar Rastogi
competitive advantages in the financial services segment (~40% of revenues in +91 22 3043 3291
FY14). Robotic process automation is another threat. Although the management sagar.rastogi@ambit.co
has a good track record of overcoming challenges and it could potentially add
new revenue streams, current valuations leave no room for error. eClerx trades Sudheer Guntupalli
at 15x FY18E EPS, on par with Infosys (15x) which is a better franchise (much +91 22 3043 3203
larger scale, full-service offering). sudheer.guntupalli@ambit.co
eClerx
Exhibit 1: eClerx has executed the same play book (mine customers, make sensible acquisitions…)
250 200%
180%
Revenue (US$mn)
200 Executing the same play book over last decade 160%
Pre-Tax RoCE
140%
150
120%
100%
100
80%
50 60%
40%
- 20%
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
Revenue (US$mn) Pre-tax RoCE

Revenues ($ mn) 20 31 42 55 76 98 122 138 154 199
Revenue growth (%) 91% 56% 39% 30% 37% 29% 25% 14% 11% 29%
Net profits 397 446 618 735 1,328 1,599 1,716 2,555 2,297 3,630
EPS 13.9 15.6 21.7 18.8 30.8 39.8 42.7 62.8 55.7 87.7
CFO 358 330 412 606 1,020 1,721 1,533 1,950 2,432 4,254
CFO-EBITDA 82% 67% 51% 60% 76% 91% 60% 55% 77% 87%
FCF 330 177 284 517 780 1,470 451 1,503 1,822 2,583
Debt equity (x) - - - - - - - - - 0.0
RoE (%) 135% 34% 37% 37% 56% 55% 44% 50% 35% 40%
RoCE* (%) 193% 61% 46% 45% 68% 69% 54% 65% 46% 53%
Exhibit 3: …since it was founded in 2000

Phase Time Period Key developments
 Founded by P D Mundhra and Anjan Malik, batch-mates at the Wharton MBA programme. After graduation, PD
worked at Citibank and Anjan worked at Lehman Brothers. They founded the company in 2000.
 Initially most of the revenues from the investment banking segment with also some revenues from retail and
manufacturing segments.
 It listed on the stock exchanges in 2007 through an IPO.
Phase- I 2000-now  In 2007, it acquired Igentica which added clients in the digital marketing segment.
 In 2008, Lehman Brothers, which was one of its top clients, went bankrupt but eventually revenues resumed from the
successor entity.
 In 2012, it acquired Agilyst, which added the cable and telecom segment.
 In 2015, it acquired CLX, which added capabilities in content marketing.

eClerx
Exhibit 4: Competitive mapping of eClerx, HGS and WNS Global

Hinduja Global
Metric eClerx WNS Global
Solutions (HGS)
FY16 Revenues (US$mn) 199 507 562
Revenue growth (US$ terms, last 5 years) 21.0% 15.8% (2)%
FY16 EBIT Margin (%) 33.2% 9.0% 11.0%
Last 5 FY EBIT Margin (%) 34.0% 11.3% 9.9%
CFO/EBITDA 56.0% 50.7% 118%
CFO/CAPEX 1.23 0.63 3.8
RoE 36.0% 9.0% 15.0%
RoCE 53.0% 10.0% 15.0%
Client Metrics
US$5m+ clients 7 NA 16
US$1m+ clients 17 NA 57
Top 10 clients' revenue (%) 76.0% 60.6% 45.5%
Revenue per employee ('000 $) 22 12.7 17.3
EBIT per employee ('000 $) 7 1.1 2.0
Exhibit 5: Mapping eClerx and peers on our IBAS framework

Component eClerx HGS WNS Global Comment
The ability of the management to identify sweet spots (high value work that can be done by
relatively low-cost employees) is a key innovation. Though peers like HGS and WNS Global
were quick to capitalise on the BPO opportunity which evolved as a logical extension to ITO,
eClerx went a step ahead and started offering solutions which are more critical than a typical
Innovation
BPO. It kept moving up the value chain over a period of time, becoming a key strategic partner
to its clients. The company’s average EBIT margin (35%) is significantly higher than that of
peers (HGS - 9%, WNS Global – 19%) indicating the complexity of processes (pricing power)
that eClerx executes.
eClerx occupies high mindshare of clients in its niche despite many competitors/captives now
Brand (Reputation) providing, such services. This reflects in the fact that it has not lost a single client so far despite
intense competition from larger peers.
eClerx focuses on low-volume, highly complex processes. This insulates the company from
competition from its larger peers like TCS, Infosys etc. since BPO divisions of these companies
Architecture prefer high volume and simple processes. Captives are not able to match its cost structure or
its knowledge management and training processes. In fact, most of its clients use eClerx’s
training material to train their own employees!
eClerx’s deep understanding of the client’s processes, and relationship with marquee
Strategic Assets
customers are the key strategic assets.
The brand image, architecture and strategic assets that eClerx has built in its business makes it
less vulnerable to upcoming technologies like robotic process automation when compared to
Overall peers like HGS and WNS Global which are into low-end BPO services. Clients can easily
automate low-value offerings like claims and payroll processing, which is not the case with
complex offerings (such as trade confirmations and settlements) that eClerx provides.
Source: Company, Ambit Capital research, Note: - Strong; - Relatively Strong; - Average; - Relatively weak
Exhibit 6: Cash generated over the years… Exhibit 7: …largely used to fund dividends
Equity Total Outflow: Capital

Issuance Expenditure
`18bn Acquistions
7% 15%
14%
Total Outflow:
`17bn
CFO (ex- Dividends

WC) 37%
WC
93%
investments
34%

eClerx
Exhibit 8: Valuations at premium to historic average Exhibit 9: eClerx share price performance v/s Sensex
20 3,500
1 year forward P/E
18 (consensus) 3,000
2,500
16
2,000
14
1,500
12
1,000
10
500
8
-
Apr-11
Apr-12
Apr-13
Apr-14
Apr-15
Apr-16
Oct-11
Oct-12
Oct-13
Oct-14
Oct-15
Oct-16
Nov-08
Oct-09
Oct-10
Aug-14
Aug-15
Aug-16
May-09
Apr-10
Apr-11
Feb-14
Feb-15
Feb-16
Mar-12
Mar-13
Sep-11
Sep-12
Sep-13
P/E Avg SENSEX Eclerx

Our proprietary forensic accounting tool Hawk places eClerx in ‘Zone of safety’ (D2 in FY15) in terms of
Accounting GREEN
Accounting policies.
The management issues annual guidance and earnings surprises over past eight quarters have averaged more
than 5%.
Earnings momentum AMBER Bloomberg shows downgrade to consensus numbers in last 8 weeks.

eClerx

(` mn) FY15 FY16 FY17E FY18E FY19E
Net worth 7,150 10,863 14,653 18,839 23,319
Other liabilities 122 300 182 182 182
Capital employed 7,272 11,163 14,835 19,021 23,501
Net block 1,693 968 4,277 5,208 6,226
Goodwill 857.5 2,429.4 2,429.4 2,429.4 2,429.4
Other non-current assets 720 579 614 694 805
Curr. assets 7,190 8,677 9,177 12,568 16,204
Debtors 1,261 1,861 1,953 2,205 2,513
Cash & bank balance 4,419 5,459 5,786 8,736 11,803
Other current assets 505 1,357 1,439 1,626 1,888
Current liab. & prov 2,319 1,456 1,662 1,878 2,164
Application of funds 7,272 11,163 14,835 19,021 23,501

Revenue (US$ mn) 154 199 207 234 266
Revenue 9,421 13,143 14,163 15,988 17,842
Cost of goods sold 3,964 5,514 6,040 7,017 8,129
SG&A expanses 2,801 3,268 3,469 3,712 4,104
EBITDA 3,156 4,868 5,177 5,909 6,393
Depreciation 500 507 524 649 783
EBIT 2,656 4,361 4,653 5,260 5,610
EBIT margin 28.2% 33.2% 32.9% 32.9% 31.4%
Other income 324 404 316 310 348
PBT 2,979 4,765 4,969 5,570 5,957
Tax 683 1,132 1,139 1,337 1,430
Rate (%) 0.2 0.2 0.2 0.2 0.2
Reported PAT 2,297 3,630 3,831 4,233 4,528
Diluted EPS 55.7 87.7 92.8 102.6 109.7

eClerx

PBT 2,979 4,765 4,969 5,570 5,957
Depreciation 500 507 524 649 783
CF from operations 3,272 5,179 5,216 5,909 6,393
Cash for working capital 121 (1,310) 32 (224) (283)
Taxes (683) (1,132) (1,139) (1,337) (1,430)
Net operating CF 2,710 2,738 4,110 4,349 4,679
Net purchase of FA (623) (2,223) (1,403) (1,581) (1,801)
Net cash from invest. (1,776) (3,562) (1,161) (1,350) (1,565)
Proceeds from equity & other 2 104 0 - -
Equity distributions (1,692) (49) (48) (48) (48)
Others 103 207 (147) - -
Cash flow from fin. (1,587) 263 (194) (48) (48)
Free cash flow 2,088 515 2,706 2,768 2,878
Net cash flow (652) (562) 2,754 2,951 3,067

Growth
Revenue (US$) 11% 29% 4% 13% 14%
EPS -11% 57% 6% 11% 7%
Valuation
P/E 29.5 18.7 17.7 16.0 15.0
EV/EBITDA 20.4 13.2 12.4 10.9 10.0
Price/Book value 9.5 6.2 4.6 3.6 2.9
Return ratios (%)
RoE 35% 40% 30% 25% 19%
RoCE 31% 36% 28% 24% 20%
Turnover ratios
Receivable days (Days) 48 51 51 51 51
Fixed asset turnover (x) 5.8 9.9 5.4 3.4 3.1

Astral Poly
NOT RATED
STRATEGY NOTE ASTRA IN EQUITY November 17, 2016
A ‘fanatic’ challenger Building Materials
Astral evolved from a niche pipe maker (CPVC) to a pan-India plastic Recommendation
pipe brand in less than a decade. Sales and EPS CAGR was 40% and Mcap (bn): `50/US$0.8
median ROCE was 22% over FY06-16. Focus on innovation (products and 3M ADV (mn): `28.2/US$0.4
processes) and strong relationships across ecosystem (suppliers, global
CMP: `418
innovators and intermediaries) will support growth of the plastic pipe
TP (12 mths): n.a.
business and building adhesives/construction chemicals business. Astral
Downside (%): n.a.
can transition into an ace building material franchise (akin to legends
like Pidilite, Asian Paints) since: (a) both segments have significant room
for innovation/re-investments; and (b) management is fanatic, frugal Flags
and focused. Valuations appear misleadingly expensive (25x FY18 EPS) Accounting: GREEN
and should be seen in light of high growth rates beyond the next Predictability: GREEN
decade. Consensus expects 39% EPS CAGR over FY16-18, higher than Earnings Momentum: AMBER
most other “new-age” building material names.
Pipes – a category with ample room for sustaining innovation 130
120
Despite a 16% 10-year revenue CAGR for top-5 companies, plastic pipes in 110
India have a long path to chart through: (a) replacement of GI pipes, (b) 100
increasing applications, and (c) innovation in plastic compounds and water 90
management systems. Current deflation in input prices (CPVC/PVC resin) 80
alongside scale and distribution ramp-up will support market share gains for
Jan-16
Apr-16
Sep-16
Dec-15
May-16
Jun-16
Feb-16
Mar-16
Jul-16
Nov-15
Aug-16
organized players (40% industry is unorganized). Astral is the 3rd largest and one
of the strongest plastic pipes brands and, hence, poised to gain share as the
market expands. Increasing competition has led to management’s decision for Astral Poly Sensex
reinvesting capital and leveraging its brand/reach architecture.
From category creation to brand building to category extension
Astral created the CPVC pipes market in India through: (a) continuous launch of Astral’s forensic score analysis
differentiated products, (b) innovative communication to the influencers
(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 (0.2x D/E in FY16 vs 1.5x in FY05).
Establishment of Astral’s brand and prudent capital allocation manifested in 40%
sales/EPS CAGR and average pre-tax RoCE of 22% over FY06-16.
Innovation flows into products, branding and processes
Innovative, category-expanding product launches and processes set Astral apart Astral’s greatness score analysis
from peers. Strong relationships with Lubrizol and global pipe majors (Wavin,
Spears and IPSC) facilitated launch of differentiated products. Astral’s unique
strategic assets are: (a) unparalleled CPVC/pipes brand (even without Lubrizol
support now), (b) relationships with plumbers, and (c) management’s strong
reputation amongst channel. Acquisitions of well-established adhesive brands in
India/UK will add another leg to growth. Astral is slowly replicating its winning
formula of quality products, impactful communication, intermediary connect and Source: Ambit ‘HAWK’, Ambit Capital research
learning from leaders to build India’s 2nd largest adhesives franchise.
Headline valuations can often be misleading
At 25x FY18 consensus EPS, Astral is one of the most expensive building material Research Analysts
franchises in India. However, Astral’s valuation should be considered in light of: Nitin Bhasin
(a) focused capital allocation history, and (b) ability and intent to reinvest cash in +91 22 3043 3241
RoCE-accretive products/segments to sustain the longevity of cash flow growth. nitin.bhasin@ambit.co
The growth phase in such businesses is longer than a 10-year DCF model gives Girisha Saraf
them credit for and, hence, a low terminal growth rate assumption leads to +91 22 3043 3211
misleading exit multiples (akin to Asian, Berger and Pidilite). girisha.saraf@ambit.co
Astral Poly Technik
Exhibit 1: Evolution of Astral Poly
(` mn) Product Establishment (%)

Scale ramp-up Brand Building; start of
Sales CAGR: 65% Sales CAGR: 43% Adhesives
16,000 Pre-tax RoCE: 29% Pre-tax RoCE: 24% Sales CAGR: 31% 45
Pre-tax RoCE: 26% 40
12,000 35
30
8,000
25
4,000 20
15
- 10
FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16
Revenue Pre-tax RoCE (RHS)
Source: Company Ambit Capital research
Exhibit 2: Key financial parameters over the last decade (consolidated)

Revenues 969 1,358 1,924 2,888 4,113 5,827 8,252 10,796 14,299 17,190
Revenue growth (%) 80% 40% 42% 50% 42% 42% 42% 31% 32% 20%
Net profits 91 171 140 277 328 395 610 793 782 1,024
EPS 1 2 1 2 3 4 5 7 6 8
CFO 29 101 167 245 501 851 648 672 1,170 2,303
CFO (pre-tax)/EBITDA 31% 60% 84% 71% 106% 114% 64% 58% 85% 127%
FCF (72) (35) (316) 68 230 158 (42) (286) 315 944
Gross debt equity (x) 0.4 0.4 0.4 0.4 0.3 0.5 0.4 0.5 0.3 0.3
RoE (%) 13% 23% 16% 26% 25% 24% 29% 28% 17% 15%
ROCE* (%) 14% 21% 17% 26% 26% 31% 32% 33% 20% 18%
capital including cash in the denominator;

 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  Expanded product portfolio through launch of lead-free PVC pipes
FY03-07
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
Brand building and  Acquisitions – acquired Resinova in India and Seal-It in UK to establish its adhesive franchise. It raised `3bn
FY13-17 addition of new through a QIP to fund this acquisition.
segments
 Ended ties with Lubrizol for CPVC compound and technology in October 2016; setting up own compounding
facility and partnered with Japan’s 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

Astral Poly Technik
Exhibit 4: Competitive mapping of Astral with its plastic piping peers

Pre-tax
Capacity FY16 Revenue EBITDA Pre-tax
CFO/ Capex/CFO
Company FY16 revenue CAGR Segments Plants Margin RoCE
EBITDA (FY10-16)
(tonnes) (in `mn) FY10-16 (FY16) (FY16)
(FY10-16)
Maharashtra (3), UP (1), WB
Supreme 4,00,000 23,069 18% Plumbing and Agri 14.50% 29% 94% 58%
(1), MP (2),
Plumbing, Agri and
Astral 1,27,762 12,855 28% Gujarat (2), HP (1), TN (1) 11.90% 22% 93% 75%
Industrials
Plumbing, Agri and
Ashirvad* 1,08,000 14,002 33% Karnataka (2) 12.90% 30% NA NA
Industrials
Largely Agri, now
Finolex 2,80,000 17,822 14% getting into Maharashtra (2), Gujarat (1) 15.20% 29% 83% 28%
plumbing
Largely Agri, now Dadra (2), Uttarakhand (1),
Prince* 90,000 9,572 21% getting into Maharashtra (1), Tamil 5.70% 11.10% NA NA
plumbing Nadu (1)
Source: Company, Ambit Capital research;*Ashirwad & Prince numbers as of FY15
Exhibit 5: Mapping Astral and its 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
Industries
farmers 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, Astral’s 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
Finolex
differentiated products. A strong agri brand but still not
Industries
very strong in urban markets
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. 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

Astral Poly Technik
Exhibit 6: CFO and equity were the primary sources of Exhibit 7: Continuous capacity expansion and recent
funds acquisitions to build upon brand were the main uses
Interest Net change Dividend
Net recd, 1% in cash, 5% paid, 3%
borrowings
, 11%
Interest
paid, 12%
Capex,
51%
Equity CFO, 59%
raises, Investments
29% in sub/JV,
29%
Exhibit 8: After a strong re-rating valuations have Exhibit 9: Astral’s share price performance vs Sensex
corrected as the company absorbs the new acquisitions
70 6,000
60 5,000
50
4,000
40
3,000
30
20 2,000
10 1,000
0 0
Nov-10
May-11
Nov-11
May-12
Nov-12
May-13
Nov-13
May-14
Nov-14
May-15
Nov-15
May-16
Nov-16
Mar-07
Mar-10
Mar-13
Mar-16
Dec-07
Dec-10
Dec-13
Sep-08
Sep-11
Sep-14
Jun-09
Jun-12
Jun-15
1-year forward P/E (x) 6 yr avg P/E Astral Sensex index

Astral falls in the top most decile (D1) in Ambit’s accounting framework; the company’s (a) high cash yield (9%),
Accounting GREEN (b) low contingent liabilities as a % of net worth (1%), (c) negligible misc. expenses as a % of total revenues, and
(d) low volatility in non-operating income stand out.
Largely a predictable business. Management has been providing good indication of the progress of the business.
Excepting the sales of newly acquired Seal IT and Kenyan operations operating metrics are fairly predictable
Earnings momentum AMBER Consensus EPS downgraded by 4.7% and revenue by 2.5% over the past three months
Exhibit 11: Astral’s forensic score evolution Exhibit 12: Astral’s greatness score evolution

Astral Poly Technik
Balance sheet (consolidated)*

(` mn) FY12 FY13 FY14 FY15 FY16
Total networth 1,841 2,414 3,153 6,188 7,816
Debt 938 923 1,420 2,026 2,026
Gross block 2,119 2,808 3,766 4,826 6,159
Net block 1,640 2,150 2,888 3,424 4,364
CWIP 130 120 82 268 165
Cash & Cash equivalents 355 115 10 115 542
Debtors 1,032 1,063 1,451 2,327 2,308
Inventory 1,271 1,505 1,950 2,656 2,804
Loans & advances 368 486 554 702 759
Provisions 48 76 67 93 29
Net current assets 668 1,037 1,714 2,604 2,241
Total assets 2,793 3,422 4,698 8,556 10,185
Source: Company, Ambit Capital research; EPS adjusted for stock splits
Income statement (consolidated)*

(` mn) FY12 FY13 FY14 FY15 FY16
Net Sales 5,827 8,252 10,796 14,299 17,190
% growth 42% 42% 31% 32% 20%
EBITDA 827 1,153 1,551 1,683 2,051
% growth 50% 39% 35% 8% 22%
Depreciation 138 181 219 364 423
EBIT 689 971 1,332 1,319 1,628
Adjusted PBT 500 798 1,045 1,095 1,344
Tax 105 189 252 313 319
Adjusted PAT before minority
395 610 793 782 1,024
interest
% growth 20% 55% 30% -1% 31%
Minority Interest 0 (4) (4) (23) (10)
Adjusted PAT after minority
395 606 789 759 1,014
interest
Reported PAT after minority interest 7% 7% 7% 5% 6%

Astral Poly Technik
Cashflow statement (consolidated)*

(` mn) FY12 FY13 FY14 FY15 FY16
Net Profit Before Tax 500 798 1,045 1,095 1,335
Depreciation 138 181 219 364 423
Others 228 199 301 281 328
Tax (91) (91) (229) (264) (292)
(Incr) / decr in net working capital 77 (440) (665) (306) 508
Cash flow from operations 851 648 672 1,170 2,303
Capex (net) (696) (681) (920) (854) (1,359)
(Incr) / decr in investments (2) - (7) (2,591) (696)
Other income (expenditure) 18 16 18 11 12
Cash flow from investments (680) (665) (909) (3,435) (2,043)
Net borrowings 278 (48) 476 313 (27)
Issuance/buyback of equity - - - 2,359 590
Interest paid (167) (145) (309) (255) (307)
Dividend paid (29) (29) (36) (47) (90)
Cash flow from financing 82 (223) 131 2,371 166
Net change in cash 253 (240) (106) 106 426
Closing cash balance 355 115 10 115 542
Free cash flow 155 (33) (248) 315 944

(` mn) FY12 FY13 FY14 FY15 FY16
EBITDA margin (%) 14% 14% 14% 12% 12%
EBIT margin (%) 12% 12% 12% 9% 9%
Net profit (bef min. int.) margin (%) 7% 7% 7% 5% 6%
Dividend payout ratio (%) 6% 5% 5% 6% 5%
Net debt: equity (x) 0.3 0.3 0.4 0.3 0.2
RoCE (pre-tax) (%) 31% 32% 33% 20% 18%
RoIC (pre-tax) (%) 32% 34% 33% 20% 18%
RoE (%) 24% 29% 28% 17% 15%
Valuation parameters (consolidated)*

(` mn) FY12 FY13 FY14 FY15 FY16
EPS after minority interest (`) 3.5 5.4 7.0 6.4 8.4
Diluted EPS (`) 3.5 5.4 7.1 6.6 8.5
P/E (x) 121.6 78.7 60.5 64.7 50.3
P/BV (x) 26.1 19.9 15.2 8.2 6.5
EV/EBITDA (x) 63.6 45.7 33.9 31.3 25.6
EV/EBIT (x) 76.3 54.2 39.5 39.9 32.3
Source: Company, Ambit Capital research; EPS adjusted for stock splits

Relaxo Footwears
NOT RATED
STRATEGY NOTE RLXF IN EQUITY November 17, 2016
The nimble footed giant Retail
Relaxo has grown at anything but a relaxing pace with FY05-16 revenue Recommendation
and PAT CAGR of 21% and 37%, respectively. It is a testament to brand
Mcap (bn): `48/US$0.7
creation; brandex equalled capex since FY11 with ad spends averaging
8% of sales over the decade. The consistency and focus have provided 3M ADV (mn): `7.2/US$0.1
Relaxo pricing power (13% CAGR; FY05-16) in a value offering without CMP: `401
compromising volume growth (8% CAGR). Segmented brands (Sparx, TP (12 mths): NA
Flite, Bahamas, Schoolmate, Boston, etc.) and brand investments as Downside (%): NA
against distribution (only 250 stores) have driven asset turns (from 2.2x
in FY06 to 2.7x in FY16), driving RoE from 7% in FY06 to 28% in FY16. Flags
Relaxo with an average selling price of `170/pair (just 4% market share Accounting: GREEN
in volumes) could very well be the horse for the long haul. Relaxo trades Predictability: AMBER
at 23x FY18E EPS (consensus), which is at a discount to Bata despite Earnings Momentum: AMBER
superior RoCE/ improving brand equity.
Unique combination of value proposition, quality and branding 120
110
Relaxo is one of the largest footwear companies in India selling over 129mn 100
pairs across its brands. It can sustain high growth as it is a leader in the largely 90
unorganised footwear market (at lower price points) with unique proposition of 80
value, durability and branding. Moreover, as the company expands its 70
distribution outside its dominant geographies (North and East), it will gain
Jan-16
Apr-16
Sep-16
Dec-15
May-16
Jun-16
Feb-16
Mar-16
Jul-16
Nov-15
Aug-16
market share. The company has room to premiumise its portfolio (realisation per
pair has moved from `36 in FY05 to `132 in FY16) as it adds more offerings
such as Sparx (35% of FY15 revenues) to the portfolio. Relaxo Footwear Sensex
From the humble Hawaii slippers to spring in the step Source: Bloomberg, Ambit Capital research
Relaxo has come a long way from a Hawaii slipper company to creating and
selling brands like Flite, Sparx, Boston and Bahamas. It began brand additions in Relaxo’s forensic score analysis
FY04 to give discerning customers premiumisation choices. In FY08, it identified
exports as an important market and grew it from `15mn to `300mn in FY15
(stagnant since FY12). In FY12, Relaxo introduced four major brand
ambassadors for four of its brands, which catapulted the brand perception of the
seeming value offering of rubber and rubber lookalike slippers. A point to note
is that unlike other parameters inventory days deteriorated from 67 days in FY10
to 138 days in FY16 – partly due to premiumisation (lower turns).
Brand equity extends from customers to distributors

Relaxo’s greatness score analysis
The strategy of premiumisation, consistent branding (8% of sales since FY04)
and brands across different price points (from `140 to `3,000) sets Relaxo apart.
Moreover, the company has demonstrated strong control over manufacturing
costs at its 8 plants by delivering 800bps improvement in EBITDA margins over
FY05-16. The fact that debtor days stand only at 3 weeks (as against 12-week
industry norm) indicate the strength of the brand and willingness of the
distributors to pay in time.
Valuations - Package of brand, value and RoE, yet at a discount!

The stock trades at 23x consensus FY18E EPS, a discount to Bata India (Ambit - Research Analysts
29x FY18E EPS) despite superior RoE profile and brand-driven growth strategy as Abhishek Ranganathan, CFA
against Bata’s distribution-driven strategy (see our report dated 09th Dec 2015). +91 22 3043 3085
The large opportunity at the bottom of the pyramid and a decade of brand
abhishek.r@ambit.co
investment make Relaxo one of the best positioned companies in the branded
footwear category. FCF generation and maintaining value proposition of brands Mayank Porwal
such as Sparx are the risks which investors should watch out for. +91 22 3043 3214
mayank.porwal@ambit.co
Relaxo Footwears
Exhibit 1: Evolution of Relaxo Footwears – The “Flite” from Hawaii slippers to Sparx and Bahamas
Undertook supply chain

Catapulting new brands
18 initiatives 35%
Revenue CAGR 29%
Revenue CAGR 19%
16 The quiet period Sold 83mn pairs p.a. (avg.)
Sold 115mn pairs p.a. (avg.) 30%
14 Revenue CAGR 12%
Sold 56mn pairs p.a. (avg.) 25%
12
10 20%
8 15%
6
10%
4
2 5%
- 0%
Revenues (Rs bn) (LHS) RoCE (RHS)
Source: Company, Ambit Capital research Note: RoCE is pre-tax.

Revenues 2,359 3,057 4,075 5,537 6,916 8,647 10,098 12,123 14,808 17,130
Revenue growth 17% 30% 33% 36% 25% 25% 17% 20% 22% 16%
Net profits 61 105 142 377 268 399 448 656 1,031 1,203
EPS (`) 1 1 1 3 2 3 4 5 9 10
CFO (post-tax) 205 306 411 719 437 727 540 1,249 1,075 1,594
CFO (pre-tax)-EBITDA 97% 121% 116% 104% 72% 87% 68% 104% 72% 89%
FCF (67) 38 (183) (206) (190) 239 (298) 538 (238) 246
Debt equity (x)* 1.1 1.1 1.4 1.3 1.3 1.0 0.9 0.7 0.6 0.5
RoE 13% 19% 21% 41% 22% 26% 23% 27% 32% 28%
RoCE* 16% 20% 22% 30% 18% 22% 22% 26% 30% 30%
capital including cash in the denominator. Debt:equity used is Net debt:equity
Exhibit 3: Relaxo’s evolution – calibrated and thoughtfully executed strategy

 Production capacity during the period of 0.25 mn pairs from across 6 plants.
 Revenues increased at a CAGR of 12% during this period and gross margins increased by 960bps; as a consequence EBIT
margins improved by 360bps.
The quite period;
 Sold 56mn pairs per annum on an average during the period wherein realisation per pair increased from `36.2 to 47.6
FY05-08 new brand
(CAGR of 10%).
launches
 CFO (pre-tax) to EBITDA averaged 105%; net debt equity averaged 0.6.
 Launched brand ‘Sparx’ in 2005 and opened its first retail outlet by the name of ‘Relaxo Retail Shoppe’.
 Brandex on an average formed 8% of sales and averaged 87% of capex during the period.
 Production capacity during the period increased from 0.29mn pairs to 0.38mn pairs across 7 plants.
 Own store network - 149
 Revenues increased at a CAGR of 29% during this period and gross margins increased by 40bps. EBIT margins improved from
7.8% in FY09 to 11.1% in FY10 and dropped to 8.2% in FY12 due to pressure on raw material prices (natural rubber and
Catapulting new EVA).
FY09-12 brands with strong
 Identified exports as an important market and grew it from `15mn to `300mn in FY12
segmentation
 Sold 83 mn pairs per annum on an average during the period wherein realisation per pair increased from `58.9 to 92.5
(CAGR of 16%).
 Production capacity was increased to close to 0.6mn pairs per day during the period across 8 plants.
 Own store network - 250
 Opened regional warehouses across India to strengthen supply chain management.
 Revenues increased at a CAGR of 19% during this period and gross margins increased by 520bps. Raw material prices eased
during the period and as a consequence of the aforementioned and cost rationalisation, EBIT margins improved by 300bps.
Supply Chain
 Revenues from exports remained stagnant at `300mn per annum during this period as focus shifted to domestic market.
FY13-16 initiatives and debt
reduction
 Signed heavyweight brand ambassadors for Hawaii, Flite and Sparx brands spending ` 800 mn in FY13
 Sold close to 115mn pairs per annum on an average during the period wherein realisation per pair increased from `100.4 to
`132.4 (CAGR of 10%).
 Launched brand ‘Bahamas’ in FY15.

Relaxo Footwears
Exhibit 4: Competitive mapping of Relaxo with other comparables

Revenue EBITDA Pre-tax Pre-tax CFO/
Sub-segment FY16 Capex/CFO
Company CAGR Margin RoCE EBITDA
Positioning revenue (FY10-16)
FY10-16 (FY16) (FY16) (FY10-16)
Bata Mid premium (ASP ` 500) 24,254 14% 11% 18% 91% 92%
Relaxo Value (ASP ` 170) 17,130 21% 14% 29% 85% 66%
Liberty Value (ASP ` 450) 4,542 9% 8% 10% 75% 85%
Metro Premium (ASP ` 1,500) 7,020 24% 18% 46% 79% 59%
Source: Company, Ambit Capital research. Note: Metro Shoes data is available only till FY15.
Exhibit 5: Mapping Relaxo and its peers on IBAS

Relaxo Metro Bata Liberty
Comments
Footwears shoes India shoes
 Innovation is not the key source of competitive advantage in footwear sub-segment.
Innovation Innovation at best can be attributed to maintaining product quality and low cost –
both of which can be replicated by peers.
 While Bata is the oldest brand (in India for 85 years), Relaxo has a legacy of 40
years – it started out as a slipper brand. However, as the customer has moved up,
Relaxo’s product launches and designs have kept pace along with consistent
branding.
 Relaxo is one of the few major footwear brands to have created sub-brands at price
points (as low as `150), significantly lower than peers. So much so that original
Brands and
brands of Relaxo and Hawaii are no longer the core brands and its additions such as
reputation
Flite, Sparx etc. have become part of the core brands.
 It has backed these brands by consistent advertisement and brand ambassadors.
The aggregate ad spend of `5bn over last decade with consistent messaging of style,
quality and value is Relaxo's valued and strategic asset. Peers such as Bata have
missed this strategy and in contrast have sacrificed volumes in the endeavour to
premiumise.
 Relaxo enjoys strong terms of trade with distributors (a sign of popular brand) as is
evident in 21 debtor days. Similarly, it enjoys creditor days of 52.
 Relaxo controls manufacturing (has 8 plants) whereas most peers outsource a
Architecture significant portion of their products.
 Relaxo is available across 50,000 touch points (higher than Bata’s 30,000). While
Metro has lower reach its store productivity is lot superior to that of Bata’s and
hence in our framework scores as well as Bata and Relaxo.
 Apart from Bata India, which has access to the know-how and designs of its parent,
Strategic Assets
there are no major strategic assets for the players.
 Relaxo and Metro score highly given brand reputation and strong architecture driven
Overall
by distribution reach (Relaxo) and high throughput stores (`20,000 sales per sq ft).
Exhibit 6: Cash generated over the last 10 years… Exhibit 7: …have been deployed to fund capex and service
interest
Interest paid
Loans taken Dividend 19%
Sale of 21% paid
investments 3%
1%
Purchase of
CFO assets
78% 78%

Relaxo Footwears
Exhibit 8: Relaxo is trading at a 40% premium to its 5-yr Exhibit 9: Relaxo’s share price performance v/s Sensex
average P/E
70 20,000
60
15,000
50
40
10,000
30
20 5,000
10
0 0
Oct-06
Oct-07
Oct-08
Oct-09
Oct-10
Oct-11
Oct-12
Oct-13
Oct-14
Oct-15
Jun-12
Jun-13
Jun-14
Jun-15
Jun-16
Oct-11
Feb-12
Oct-12
Feb-13
Oct-13
Feb-14
Oct-14
Feb-15
Oct-15
Feb-16
Oct-16
Relaxo's trailing P/E 5-yr avg. P/E RLXF SENSEX

Relaxo scores well on key accounting parameters like a low contingent liability proportion as a % of networth and
Accounting GREEN steady auditor remuneration. On Ambit’s forensic accounting, Relaxo is categorised in the 1st decile of the consumer
discretionary universe (comprising eleven companies).
Predictability AMBER The company does not provide any guidance on future estimates.

Relaxo Footwears

Total networth 1,724 2,144 2,766 3,678 4,800
Minority Interest - - - - -
Debt 1,455 2,049 1,627 2,110 2,026
Gross block 3,785 4,572 5,256 6,678 7,712
Net block 2,713 3,267 3,658 4,717 5,305
CWIP 202 237 242 21 282
Debtors 230 360 682 821 1,080
Inventory 1,285 1,594 1,640 2,487 2,858
Loans & advances 134 55 86 141 192
Provisions 142 50 168 221 312
Net current assets 417 865 708 1,271 1,468
Total assets 3,471 4,525 4,741 6,131 7,251
Income statement
Net Sales 8,647 10,098 12,123 14,808 17,130
% growth 25% 17% 20% 22% 16%
EBITDA 943 1,098 1,470 2,009 2,411
% growth 31% 16% 34% 37% 20%
Depreciation 231 255 312 399 471
EBIT 712 843 1,159 1,610 1,940
Adjusted PBT 535 677 955 1,426 1,776
Tax 136 229 299 396 573
399 448 656 1,031 1,203
interest
% growth 49% 12% 46% 57% 17%
399 448 656 1,031 1,203
interest
Reported PAT after minority interest 399 448 656 1,031 1,203

Relaxo Footwears
Cashflow statement
Net Profit Before Tax 535 677 955 1,426 1,776
Depreciation 231 255 312 399 471
Others 192 176 227 191 192
Tax 89 209 276 376 543
(Incr) / decr in net working capital (142) (359) 31 (566) (302)
Cash flow from operations 727 540 1,249 1,075 1,594
Capex (net) (471) (827) (706) (1,302) (1,344)
(Incr) / decr in investments - - 0 2 39
Cash flow from investments -470 -825 -697 -1,298 -1,303
Net borrowings (67) 502 (270) 410 (30)
Issuance/buyback of equity - - - - 6
Interest paid (187) (177) (227) (164) (216)
Dividend paid (14) (18) (24) (30) (60)
Cash flow from financing (268) 294 (513) 211 (313)
Net change in cash -11 10 39 -12 -21
Free cash flow 257 -287 543 -227 250
Ratio analysis
Year to March (%) FY12 FY13 FY14 FY15 FY16
EBITDA margin (%) 11 11 12 14 14
EBIT margin (%) 8 8 10 11 11
Net profit (bef min. int.) margin (%) 5 4 5 7 7
Dividend payout ratio (%) 5 5 5 6 6
Net debt: equity (x) 1 1 1 1 0
Working capital turnover (x) 23 16 15 15 13
Gross block turnover (x) 2 2 2 2 2
RoCE (pre-tax) (%) 21 22 26 30 29
RoCE (post-tax) 16 15 18 22 20
RoIC (%) (post-tax) 18 15 19 23 21
RoE (%) 26 23 27 32 28
EPS after minority interest (`) 3 4 5 9 10
Diluted EPS (`) 3 4 5 9 10
Dividend per share (`) 2 2 1 1 1
P/E (x) 122 109 74 47 41
P/BV (x) 3 2 9 7 10
EV/EBITDA (x) 53 46 34 25 21
EV/EBIT (x) 71 60 44 32 26

REPCO Home Finance
NOT RATED
STRATEGY NOTE REPCO IN EQUITY November 17, 2016
Swimming against the tide BFSI

Repco’s decade-long earnings momentum (23% EPS CAGR, 26% AUM
CAGR, and average RoE of 22% over FY06-16) are underpinned by a Recommendation
decadal rally in real estate prices and its strong positioning in the Mcap (bn): `33/US$0.5
informal segment. Its strengths are derived from strong local area 3M ADV (mn): `98.9/US$1.5
knowledge (validated by low credit costs) and an innovative origination CMP: `532
strategy (avoids sourcing through DSAs unlike other HFCs). Further TP (12 mths): NA
rerating of Repco’s premium valuations (at 3.7x 1 year fwd P/B) depends Downside (%): NA
on its ability to further extend its current earnings momentum, which
seems doubtful in the light of declining real estate prices and pressures Flags
on the informal economy. Accounting: GREEN
Competitive position: MODERATE Changes to this position: NEGATIVE Predictability: GREEN
Earnings Momentum: GREEN
Play on the under-penetrated informal segment
Set up in 2000, Repco provides housing and LAP loans to the vastly Performance
underpenetrated informal segment (non-salaried; 59% of loan book), with focus
140
on the four South Indian states (~90% of loan book). With a modest loan book
of ~`80bn, the bulk of it home loans, Repco has delivered ~27% loan book 120
CAGR of over FY06-16 with average RoE of 21%, making it a promising play on
100
housing finance to the informal segment in India.
80
Increasing LAP offset declining growth and profitability in home loans
Jan-16
Apr-16
Sep-16
Dec-15
May-16
Jun-16
Feb-16
Mar-16
Jul-16
Nov-15
Aug-16
Post capital infusion by Carlyle in FY08, Repco’s 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 (26% CAGR over FY12-16) due to regulatory and competitive
headwinds. However, shifting gears to LAP ensured Repco’s loan growth and Source: Bloomberg, Ambit Capital research
profitability remained respectable despite moderation. This led to Repco posting
at least 29% AUM CAGR and average RoA of 2.4% over FY12-16 (vs 45% AUM
CAGR and average RoA of 3% over FY06-12) as LAP’s 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 FY12-16.
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 ~34bps over the past ten years).
Moreover, Repco’s 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.
Further rerating doubtful due to macro headwinds
A decadal surge in real-estate prices combined with strong local knowhow and
decentralized decision making drove Repco’s earnings momentum of 23% CAGR
over FY06-16. Simultaneously, mortgage financers have re-rated over the past 2
years at the cost of corporate lenders due to the latter’s shaky earnings
trajectory due to asset quality concerns. The combination of such fundamental Research Analysts
and sentimental factors underpins Repco’s premium valuations (3.7x 1-year fwd Aadesh Mehta, CFA
P/B, in line with peer average). Further re-rating hereon is doubtful as Repco +91 22 3043 3239
could find it difficult to sustain its current earnings momentum in light of
declining real estate prices and pressures on the informal economy due to
clampdown on the black economy. Moreover, HFCs are exposed to the looming Pankaj Agarwal, CFA
regulatory risk of convergence of loan pricing to a more transparent and +91 22 3043 3206
objectively calculated base rate (which is followed by banks). pankaj.agarwal@ambit.co
REPCO Home Finance
Exhibit 1: Evolution of Repco – Repco’s growth has moderated as the base effect is now over
The honeymooon period Growth moderation

100 30%
AUM CAGR 45% AUM Growth 29%
90 Avg. RoA 3.0% Avg. RoA 2.4%
80
25%
70
60
50 20%
40
30
15%
20
10
- 10%
FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16
Exhibit 2: Repco – key financial parameters over the last decade

Interest Income 10.8% 10.9% 12.4% 12.3% 11.9% 12.4% 11.8% 12.1% 12.8% 12.7%
Total Income 5.0% 4.9% 5.1% 5.8% 5.5% 4.7% 4.2% 5.0% 4.8% 4.8%
Employee Expenses 0.4% 0.4% 0.4% 0.4% 0.4% 0.4% 0.4% 0.5% 0.6% 0.6%
Admin Expenses 0.5% 0.8% 0.4% 0.4% 0.4% 0.3% 0.3% 0.4% 0.4% 0.4%
Loan loss provisions 0.3% 0.1% 0.3% 0.3% 0.3% 0.4% 0.3% 0.5% 0.4% 0.6%
Taxes 0.8% 1.0% 1.1% 1.3% 1.2% 0.8% 0.8% 0.9% 1.2% 1.2%
RoA 3.1% 2.6% 2.8% 3.5% 3.2% 2.7% 2.4% 2.6% 2.3% 2.2%
Leverage 9.8 6.6 6.2 7.4 8.3 9.1 7.1 6.2 6.9 7.8
RoE 30.1% 17.4% 17.7% 25.7% 26.2% 24.7% 17.1% 16.0% 15.8% 17.0%
AUM growth (%, YoY) 47% 50% 52% 41% 47% 35% 26% 32% 29% 28%
EPS growth (%, YoY) 83% 35% 61% 75% 29% 19% 19% 38% 12% 22%

REPCO Home Finance
Exhibit 3: From a high growth phase of FY06-14, Repco is now going through a steady-state growth phase
 Repco’s 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.
Consequently both growth and profitability remained high during this period (AUM CAGR of 45% and RoA of 3%). Home-
loans was the key growth and profitability driver, growing at 46% CAGR during this time period 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 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
Growth FY12- of risk weights and exemption on SLR/CRR and PSL requirements. Decline in real estate prices have also let to moderation
moderation Current in ticket size growth (which used to drive 50-60% of growth of HFCs).
 Consequently Repco’s growth in the key segment of home loans moderated to 26% CAGR over FY12-16 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 FY16). This somewhat offset the lower profitability from the
business and enabled it to still deliver a respectable RoA of 2.5% during this period.
Exhibit 4: Competitive mapping of HFCs – Repco’s small-ticket positioning drives its sustainable growth
Avg. ticket AUM AUM CAGR Opex/ Gross Branches Employees
Key metrics (FY16) NIMs RoA RoE
size (` mn) (` bn) (FY13-16) AUM NPA (%) (#) (#)
Repco 1.1 77 29% 4.9% 1.0% 1.30% 2.2% 17.0% 150 619
GRUH 0.5 111 27% 4.2% 0.8% 0.32% 2.3% 31.5% 179 618
HDFC 2.5 2,908 16% 3.1% 0.3% 0.70% 2.4% 21.8% 401 2,196
LICHF 1.2 1,252 17% 2.6% 0.4% 0.45% 1.5% 19.6% 234 1,726
CANFIN 1.7 106 38% 3.1% 0.7% 0.19% 1.6% 19.0% 140 553
DEWAN 1.2 695 24% 3.0% 0.9% 0.93% 0.9% 11.9% 353 2,625
PNBHF 3.7 272 60% 3.8% 1.2% 0.22% 1.4% 17.6% 47 752
Innovation
Brand
Architecture
Strategic asset
Overall rank
Source: Company, Ambit Capital research Note: - Strong; - Relatively Strong; - Average; - Relatively weak.

REPCO Home Finance
Exhibit 6: Repco has delivered a 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%
47% 47% 80%
50%
35% 29%
40%
32% 31% 60%
26% 27% 28%
30%
20% 40% 84% 85% 86% 85% 81% 81% 80%
14% 12%
10%
20%
0%
FY11 FY12 FY13 FY14 FY15 FY16 0%
FY10 FY11 FY12 FY13 FY14 FY15 FY16
Disbursements growth AUM growth
Mortgages LAP
Exhibit 8: Repco’s liability mix is tilted towards banks Exhibit 9: Repco’s asset quality has remained in control
1.6% 1.5% 1.5%

1.4% 1.3% 1.3%
NHB 1.4% 1.3% 1.2% 1.2%
6% Refinancing
14% 1.2%
8% 1.0%
1.0%
Banks 0.8%
0.6% 0.6%
0.6% 0.4% 0.4%
0.3% 0.3% 0.3% 0.3%
0.4%
Repco Bank 0.2% 0.1%
0.0%
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
72%
NCDs
Gross NPA (%) Credit Costs as a % of AUM

Exhibit 10: Repco is trading in line with its cross-cycle Exhibit 11: Repco – share price performance versus sensex
average P/B
5.0 600
4.5
4.0 500
3.5 400
3.0
2.5 300
2.0
1.5 200
1.0 100
0.5
0.0 -
Apr-13
Apr-14
Apr-15
Apr-16
Jul-13
Jan-14
Jul-14
Jan-15
Jul-15
Jan-16
Jul-16
Jun-13
Sep-13
Dec-13
Mar-14
Jun-14
Sep-14
Dec-14
Mar-15
Jun-15
Sep-15
Dec-15
Mar-16
Jun-16
Sep-16
Oct-13
Oct-14
Oct-15
Oct-16
PB Avg. PB -1 SD +1 SD SENSEX REPCO


Repco’s 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.
Repco’s earnings trajectory has been fairly predictable. It has delivered earnings growth of 16%+ for at least past
13 quarters.
Earnings momentum GREEN Repco’s recent earnings growth (20%+) has sustained at FY12-16 run-rate of 22% CAGR over FY12-16.

REPCO Home Finance
Income statement
NII (inclu. Securitisation) 1,033 1,255 1,909 2,604 3,327
Other income 128 147 198 8 12
Total income 1,161 1,402 2,106 2,612 3,339
Operating expenditure 191 242 388 547 642
Pre-provisioning profit 970 1,160 1,718 2,065 2,698
Provisions 94 92 227 204 393
Profit before tax 875 1,068 1,491 1,861 2,304
Tax 201 268 390 632 800
Consol. PAT 674 801 1,101 1,229 1,505
Balance sheet
Net-worth 3,032 6,345 7,411 8,121 9,548
Borrowings - on balance
25,102 30,645 39,020 51,044 65,379
sheet
Borrowings - off balance
- - - - -
sheet
AUM 28,022 35,447 46,619 60,129 76,912
Cash and equivalents 175 2,101 219 175 200
Net Current Assets (143) (639) (531) (1,263) (2,309)
Total assets 28,134 36,990 46,431 59,165 74,927
Key ratios
NIM % (on AUM) 4.2% 4.0% 4.7% 4.9% 4.9%
AUM Growth 35% 26% 32% 29% 28%
Opex as % of AAUM 0.78% 0.74% 0.93% 1.04% 0.96%
Credit costs as a % of AUM 0.39% 0.29% 0.55% 0.38% 0.57%
CAR (%) 16.5% 25.5% 25.5% 25.5% 20.7%
Dil EPS – Consol (`) 13.2 17.1 17.6 19.7 24.1
BVPS (`.) 66 102 119 130 153
ROA (%) 2.7% 2.4% 2.6% 2.3% 2.2%
ROE (%) 24.7% 17.1% 16.0% 15.8% 17.0%
P/B (x) 8.1 5.2 4.5 4.1 3.5
P/E (x) 40.3 31.2 30.2 27.0 22.1

REPCO Home Finance
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Cera Sanitaryware
NOT RATED
STRATEGY NOTE CRS IN EQUITY November 17, 2016
A super-efficient Superbrand Building Materials

Cera ranks second in scale but is the best-run Indian sanitaryware
Recommendation
company; it posted 27%/25% revenue/EBITDA CAGR and 24% median
RoE over FY07-16, significantly beating closest peer HSIL and tiles Mcap (bn): `29/US$0.4
players. Continuous capacity additions (first in sanitaryware, then faucets 3M ADV (mn): `54.7/US$0.8
and now tiles) and industry leading brandex (~4% of sales; FY05-16) led CMP: `2,193
to high growth and made it a Superbrand. Despite stellar history, our TP (12 mths): n.a.
concern emanates from rising competition in sanitaryware/faucets from Downside (%): n.a.
domestic tile manufacturers in low-mid range and global majors in
premium category. Stock isn’t cheap at 22x FY18 EPS and value creation Flags
depends on ability to: (a) improve working capital intensity (78 days, Accounting: GREEN
highest among building materials) and gross block intensity (plateaued Predictability: GREEN
at 3.1X); (b) gain market share (seems difficult, hence entry into new
Earnings Momentum: AMBER
segments); and (c) bring in further operating efficiencies.
160
Can rising competition clog Cera’s wheels?
140
In the last decade Indian sanitaryware industry expanded at ~12% CAGR and 120
Cera posted 27% CAGR. Whilst poor sanitation quality/penetration in India 100
leaves ample scope for top brands to grow, our key concerns are: (a) market is 80
relatively small (`40bn vs `240bn for tiles), (b) organized players have sizable
Jan-16
Apr-16
Sep-16
Dec-15
May-16
Jun-16
Feb-16
Mar-16
Jul-16
Nov-15
Aug-16
market share (~60%); (c) new entrants (tile players, global majors); hence,
limited market share gains for Cera in future. Though tiles may get Cera
incremental sales, it is hard for Cera to build significant market share in this Cera Sanitary. Sensex
segment; globally, we have not seen any sanitaryware brand succeed in tiles.
A disciplined approach to usurp competition
A decade back, Cera was 1/3rd the size of main peer HSIL; by FY16, it was Cera’s forensic score analysis
~90% of HSIL’s revenues and a lot more profitable (21.6% RoE vs 8.6% for
latter). Cera’s secret sauce: (a) focus on gradually growing scale and segments
(lifestyle products, faucets, tiles) 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 building material space); (c) controlled
overheads; (d) expanding distribution. Faucets are 1.3x sanitaryware market size
at `52bn-55bn with 40% organised vs 60% in the case of sanitary ware.
Strong brand and low-cost manufacturing are key advantages
Cera has launched several differentiated products like twin-flush and 4-litre WC Cera’s greatness score analysis
ahead of competition. Higher brandex than most peers has helped CERA
increase premium sales mix to ~40% of sales. It has the second-largest
sanitaryware manufacturing capacity (3mn units), strongest 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.
Sustenance of rich valuations require a lot playing out in Cera’s favor
Cera trades at 22x FY18 EPS, a marginal discount to Kajaria and at a premium
to Somany. Whilst Cera deserves credit for disciplined growth and good capital Research Analysts
allocation over the last decade, future free cash flows will depend on: (a) ability
Nitin Bhasin
to garner further market share, (b) reduce working capital intensity (78 days
+91 22 3043 3241
now); and (c) discipline in deployment of capital in the tiles segment. Both of the
above could be difficult given aggressive expansions by competitors which make
us less comfortable on Cera given it rich valuations. Girisha Saraf
+91 22 3043 3211
girisha.saraf@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: 31%
1,000 35%
900
30%
800
700 25%
600 20%
500
400 15%
300 10%
200
5%
100
- 0%
FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16
Revenues Rsbn (LHS) RoCE pre-tax (%)
Source: Company, Ambit Capital research (RoCE for the above purpose implies Median RoCE for that period)

Revenues 1,067 1,281 1,595 1,914 2,430 3,194 4,879 6,637 8,217 9,337
Revenue growth (%) 33% 20% 25% 20% 27% 31% 53% 36% 24% 14%
Net profits 91 101 147 196 265 320 462 519 677 835
EPS 7 8 10 15 21 25 37 41 52 64
CFO 124 134 215 255 295 78 424 634 406 1,138
CFO (pre-tax)/ EBITDA 85% 79% 87% 97% 93% 44% 83% 91% 60% 102%
FCF (98) (86) 171 228 79 (166) 44 235 (426) 248
Gross debt/equity (x) 0.6 0.7 0.5 0.3 0.3 0.3 0.3 0.2 0.2 0.2
RoE (%) 19% 19% 23% 25% 27% 26% 29% 26% 24% 22%
ROCE* (%) 19% 19% 22% 26% 30% 29% 33% 32% 29% 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 FY08as against 16,000MT in FY05) and started expanding its distribution
Setting the
FY05-08  Initial stages of building brand through adding Cera Bath studios (display centres)
base
 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
FY08-12 product 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 stared 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 tiles segment accounts for 13% of Cera revenue currently. The company also plans to enter
Building into a JV in Rajasthan
FY13-17 premium  The company trebled its faucetware capacity to 2.34mn pieces in FY15. This segment now accounts for 20% of
brand the company’s overall revenue
 D/E reduced to 0.16x in FY16 as against 0.34x in FY13. The company also raised `700mn from Lighthouse
capital 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

Cera Sanitaryware
Exhibit 4: Competitive mapping

EBITDA Pre-tax Pre-tax CFO/
Sub-segment FY16 CAGR Industry Capex/CFO
Company Margin RoCE EBITDA
Positioning revenue FY10-16 market share (FY10-16)
(FY16) (FY16) (FY10-16)
Kajaria #1 23,073 18% ~10% 19% 37% 89% 81%
Somany #2 14,975 31% ~7% 7% 20% 87% 94%
Berger #2 14,010 33% ~20% 14% 33% 102% 50%
Astral #2 16,938 15% ~7% 12% 16% 97% 71%
Cera #1 12,000 14% ~23% 15% 29% 83% 74%
Century Ply #1 11,628 2% ~9% 17% 26% 71% 69%
Exhibit 5: Mapping Cera Sanitaryware and its peers on IBAS

Brand Architecture
Strategic Overall
Company Innovation Mfg Dstrbn Comments
Rural Urban asset rank
reach reach
Ahead of competition in launching and building premium
tile brand (Glazed and Double charged polished vitrified
Kajaria tiles). It is the only tile Super-brand in India and has the
highest scale, strong distribution and is now building a
professional management team
Somany’s 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
Somany improved its vitrified brand in the last few years. The
company is the third largest manufacturer and has been
investing in improving distribution. It is still way behind
Kajaria in professionalizing management
Promoter’s 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
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
Astral
in India but weak in rural India. Relationships with Lubrizol
for raw materials and real-estate developers and plumbers
for retail pipes are it's unique architecture
Innovation in limited to a few products. It has a mid-
segment brand recall and manufacturing is centred on a
Cera
single location. Its unique advantage is the access to
administered gas, which is 30% cheaper than spot gas.
We do not note any major innovation by HSIL which set it
apart from competition. The company has a strong brand
HSIL
and manufacturing capability. We don’t notice any unique
strategic assets which competitors do not enjoy.
Century has not displayed any major product innovation. It
is the most premium ply brand in India and has a wide
spread manufacturing reach (seven plants in India) and is
Century Ply
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: Mostly CFO and a small equity issuance were the Exhibit 7: Funds were mostly expended on capex (`3.5bn)
key sources (`4.7bn)
Net Interest Dividend
borrowings recd, 3% Interest paid, 7%
, 8% paid, 8%
Investments
, 9%
Equity
Capex,
issuance, Net
CFO, 70% 65%
19% increase in
cash, 11%
Exhibit 8: Strengthening of franchise and high earnings Exhibit 9: Cera’s share price performance vs Sensex
growth led to sharp re-rating
50 4,000
3,500
40
3,000
30 2,500
2,000
20
1,500
10 1,000
0 500
0
Nov-10
May-11
Nov-11
May-12
Nov-12
May-13
Nov-13
May-14
Nov-14
May-15
Nov-15
May-16
Nov-16
Nov-07
May-08
Nov-08
May-09
Nov-09
May-10
Nov-10
May-11
Nov-11
May-12
Nov-12
May-13
Nov-13
May-14
Nov-14
May-15
Nov-15
May-16
Nov-16
1-year forward P/E (x) 6 yr avg P/E Cera Sensex index

Cera falls into the 5th decile on the HAWK framework; in FY14 the forensic score evolved to ‘zone of safety’ from
‘zone of pain’. Whilst the company does well in terms of (a) low contingent liability as % of net worth (at 3%), (b)
Accounting GREEN low volatility in 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
Predictability GREEN issues or overall discretionary consumption spending. Management has not surprised on guidance and discussed
business progress in detail at regular intervals

Cera Sanitaryware
Balance sheet (consolidated* in FY16)

(` mn) FY12 FY13 FY14 FY15 FY16
Total networth 1,392 1,795 2,240 3,517 4,210
Minority Interest - - - - 164
Debt 476 610 483 682 667
Gross block 1,324 1,753 2,117 2,879 3,145
Net block 903 1,251 1,517 2,147 2,298
CWIP 109 43 52 77 651
Debtors 455 831 1,066 1,612 1,884
Inventory 918 940 1,046 1,259 1,357
Loans & advances 231 307 418 572 754
Current liabilities 671 897 1,158 1,489 1,962
Provisions 271 332 450 477 689
Total current liabilities 942 1,229 1,608 1,965 2,651
Net current assets 981 1,260 1,234 1,776 1,961
Total assets 2,004 2,568 2,924 4,477 5,384
Income statement (consolidated* in FY16)

(` mn) FY12 FY13 FY14 FY15 FY16
Net Sales 3,194 4,879 6,637 8,217 9,337
% growth 31% 53% 36% 24% 14%
EBITDA 534 753 949 1,175 1,413
% growth 27% 16% 41% 26% 24%
Depreciation 77 94 122 155 163
EBIT 525 749 888 1,087 1,349
Adjusted PBT 485 678 824 1,009 1,295
Tax 165 216 305 333 460
320 462 519 677 835
interest
% growth 21% 44% 12% 30% 23%
320 462 519 677 835
interest
Reported PAT after minority interest 320 462 519 677 835

Cera Sanitaryware
Cashflow statement (consolidated* in FY16)

(` mn) FY12 FY13 FY14 FY15 FY16
Net Profit Before Tax 485 678 824 1,009 1,295
Depreciation 77 94 122 155 163
Others 11 45 38 72 (2)
Tax (155) (200) (233) (296) (300)
(Incr) / decr in net working capital (340) (194) (118) (535) (18)
Cash flow from operations 78 424 634 406 1,138
Capex (net) (244) (380) (399) (832) (890)
(Incr) / decr in investments 69 (2) (108) (356) 17
Cash flow from investments (150) (356) (481) (1,173) (832)
Net borrowings 98 134 (128) 199 (15)
Issuance/buyback of equity - - - 706 164
Interest paid (39) (68) (63) (76) (51)
Dividend paid (37) (44) (59) (74) (98)
Cash flow from financing 23 22 (250) 755 (1)
Net change in cash (49) 91 (96) (12) 305
Free cash flow (166) 44 235 (426) 248
Ratio analysis (consolidated* in FY16)

(` mn) FY12 FY13 FY14 FY15 FY16
EBITDA margin (%) 16.7% 15.4% 14.3% 14.3% 15.1%
EBIT margin (%) 16.4% 15.4% 13.4% 13.2% 14.5%
Net profit (bef min. int.) margin (%) 10.0% 9.5% 7.8% 8.2% 8.9%
Dividend payout ratio (%) 12% 11% 12% 12% 14%
Net debt: equity (x) 0.1 0.1 0.1 0.1 0.0
RoCE (pre-tax) (%) 29% 33% 32% 29% 27%
RoIC (pre-tax) (%) 31% 34% 35% 30% 28%
RoE (%) 26% 29% 26% 24% 22%
Valuation parameters (consolidated* in FY16)

(` mn) FY12 FY13 FY14 FY15 FY16
EPS after minority interest (`) 25.3 36.5 41.0 52.0 64.2
Diluted EPS (`) 25.3 36.5 41.0 52.0 64.2
P/E (x) 106.4 73.7 65.7 51.8 42.0
P/BV (x) 24.5 19.0 15.2 10.0 8.3
EV/EBITDA (x) 65.7 46.5 36.9 29.8 24.8
EV/EBIT (x) 66.8 46.8 39.5 32.3 26.0

Cera Sanitaryware
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 year’s 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 August 29, 2016.
Ten-bagger: We first unveiled this portfolio - built using our ‘greatness’ framework -
in January 2012. (See our 19th January 2012 note - ‘Tomorrow’s ten baggers’ - for
the framework behind this construct note; click here for the note.) This framework
studies a firm’s 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
focuses on improvements over a
Exhibit 13: The ‘greatness’ framework
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:
 Percentage improvements in performance over FY13-15 vs FY10-12; and
 Consistency in performance over FY10-15 i.e. improvements adjusted for
underlying volatility in financial data

Cera Sanitaryware
A complete list of factors that are considered whilst quantifying greatness has been
mentioned in Exhibit below.
Exhibit 14: Factors used for quantifying greatness
Head Criteria
1 Investments a. Above median gross block increase (FY13-15 over FY10-12)*
b. Above median gross block increase to standard deviation
2 Conversion to sales a. Improvement in asset turnover (FY13-15 over FY10-12)*
b. Positive improvement in asset turnover adjusted for standard
deviation
c. Above median sales increase (FY13-15 over FY10-12)*
d. Above median sales increase to standard deviation
3 Pricing discipline a. Above median PBIT margin increase (FY13-15 over FY10-12)*
b. Above median PBIT margin increase to standard deviation
4 Balance sheet discipline a. Below median debt-equity decline (FY13-15 over FY10-12)*
b. Below median debt-equity decline to standard deviation
c. Above median cash ratio increase (FY13-15 over FY10-12)*
d. Above median cash ratio increase to standard deviation
Cash generation and
5 a. Above median CFO increase (FY13-15 over FY10-12)*
PAT improvement
b. Above median CFO increase to standard deviation
c. Above median adj. PAT increase (FY13-15 over FY10-12)*
d. Above median adj. PAT increase to standard deviation
6 Return ratio improvement a. Improvement in RoE (FY13-15 over FY10-12)*
b. Positive improvement in RoE adjusted for standard deviation
c. Improvement in RoCE (FY13-15 over FY10-12)*
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, FY10 to FY15), we prefer to average the data out over FY10-12 and compare that to the averaged data
from FY13-15. This gives a more consistent picture of performance (as opposed to simply comparing FY10 to
FY15).
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 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 15: Our suite of Portfolios for investors looking to invest in India
Type of Investor
Recommended Ambit Returns over recommended time The Coffee Can Portfolio is ideal
Portfolio period for long-term investors with a ten-
The 16 instalments of our ‘Good &
year outlook
Short-term investor with quarterly Clean’ portfolios over the last five years
Good and Clean Portfolio
performance focus have delivered a staggering 4.1% alpha
on a CAGR basis
The five iterations of our ten-bagger
Conventional buy-and-hold portfolios have generated over 10.2%
Ten-bagger portfolio
investor with 1-3 year horizon alpha on a CAGR basis over the past
five years
Long-term investor with ten-year Average alpha of 8.3% over seven ten-
Coffee Can Portfolio
outlook year iterations using total returns
Source: Ambit Capital Research

Cera Sanitaryware
Appendix 2: Performance of the 14

back-tested Coffee Can Portfolio
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 23.6% 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 16: 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 February 2009 for the all-cap
CCP and Sensex and December 2007 to December 2008 for the large-cap CCP.
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 17: Portfolio performance during the first iteration
(`) (` bn)
CAGR
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 start of `500 denotes an equal allocation of Hero MotoCorp and HDFC were
`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. Thus, for this period, the value of the portfolio rose from `500 at the start to `3,831 at the end. the star performers, whilst NIIT was
the laggard in Period 1
Exhibit 18: Hero and HDFC rose exponentially whilst NIIT collapsed in 2000-2010
5,000
4,000 Swaraj Engines
3,000 Hero Motocorp
2,000 Cipla
1,000 NIIT
- HDFC
Value at start Vaue at end
Source: Bloomberg, Ambit Capital research. Note: Value at start denotes an equal allocation of `100 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
period, the value of the portfolio rose from `500 at the start to `3,831 at the end.

Cera Sanitaryware
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 Inds,
HDFC Ltd and LIC Housing Finance
Large-cap portfolio stocks: Cipla, Hero MotoCorp and HDFC
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 19: 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 20: Portfolio performance during the second iteration
Value at start Value at end LIC Housing Finance was the star
(`) (` bn) 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: *Portfolio price at start of `600 denotes an equal allocation of
period. Thus, for this period, the value of the portfolio rose from `600 at the start to `9,802 at the end.
Exhibit 21: LIC Housing Finance was the stellar performer during 2001-2011
12,000
10,000 LIC Housing Fin.
8,000 HDFC
6,000 Roofit Inds.

4,000 Apollo Hospitals
2,000 Hero Motocorp
- Cipla

Cera Sanitaryware
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 and LIC Housing Finance
Large-cap portfolio stocks: Infosys, Hero MotoCorp, Cipla, Container
Corporation of India, HDFC
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 22: 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 LIC Housing Finance continued to
much higher than the previous two iterations. A total of eight stocks qualified to be dominate portfolio returns in
part of the Coffee Can Portfolio in the third iteration. Cipla, Hero MotoCorp, HDFC period 3
Ltd and LIC Housing were repeated yet again whilst the other four stocks were
Infosys, Container Corporation, Gujarat Gas and Aurobindo Pharma.
Exhibit 23: Portfolio performance during the third iteration
(`) (` bn)
CAGR
Infosys 100 706 22%
Cipla 100 461 16%
Container Corpn. 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%
Exhibit 24: Portfolio’s outperformance was led by LIC Housing Finance once again
HDFC
8,000
Aurobindo Pharma
6,000
Guj Gas Company
4,000 Container Corpn.
2,000 Cipla
Hero Motocorp
-
Value at start Vaue at end Infosys

Cera Sanitaryware

All-cap portfolio stocks: Infosys, Hero MotoCorp, Cipla, Sun Pharma,
Container Corporation of India, Gujarat Gas, Aurobindo Pharma, HDFC, LIC
Housing Finance
Corporation of India, Sun Pharma and HDFC
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, delivering excess
returns of 0.62-0.77x.
Exhibit 25: 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.
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 Pharma’s
stellar performance. However, the performance of the large-cap version was better
than the all-cap version of the Coffee Can Portfolio.
Exhibit 26: Portfolio performance during the fourth iteration
(`) (` bn)
CAGR
Infosys 100 713 22%
Cipla 100 710 22%
Hero MotoCorp 100 958 25%
Sun Pharma 100 3,381 42%
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%
Exhibit 27: Sun Pharma delivered a stellar performance in Period 4

HDFC
10,000
Guj Gas Company
8,000 Aurobindo Pharma
Sun Pharma.Inds.
4,000
Hero Motocorp
2,000
Cipla
- Infosys

Cera Sanitaryware
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 and LIC Housing Finance
Corporation of India and HDFC
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-
caps/small-caps. The higher share of the mid-caps/small-caps vs earlier iterations
was instrumental in delivering higher alpha during this period.
Exhibit 28: Fifth iteration summary The CCP delivered a whopping
2004-2014* All-cap CCP Large-cap CCP Sensex 12.7% to the Sensex, in Period 5
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 on the other hand 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 29: Portfolio performance during the fifth iteration Extreme price performance among
Company
Value at start Value at end mid-cap/small-cap stocks sets
(`) (` bn) 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 start of `1000 denotes an equal allocation
Exhibit 30: Havells India was the star performer in Period 5

HDFC
15,000 Havells India
Munjal Showa
10,000 Alok Inds.
Guj Gas Company
Cipla
- Hero Motocorp

Cera Sanitaryware

of India, Geometric, Havells India, Ind-Swift, Munjal Showa and HDFC
Corporation of India and HDFC
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 31: Sixth iteration summary
CAGR returns 22.1% 19.5% 16.1%
CCP and Sensex; and from December 2007 to December 2008 for the large-cap CCP.
The extreme price performance among mid-cap/small-cap stocks continued during Extreme price performance among
this iteration as well: Havells’ delivered ~30.6x returns whilst Ind-Swift delivered mid-cap/small-cap stocks
-92% returns by the end of the iteration. continued in period 6
Exhibit 32: Portfolio performance during the sixth iteration
(`) (` bn)
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 start of `900 denotes an equal allocation of
Exhibit 33: Havells India continued being star performer in sixth iteration as well
7,000
HDFC
6,000
Munjal Showa
5,000
Ind-Swift
4,000
Havells India
3,000
Geometric
2,000
Container Corpn.
1,000
Cipla
-
Value at start Vaue at end Hero Motocorp

Cera Sanitaryware

All-cap portfolio stocks: Infosys, Cipla, Hero MotoCorp, Container Corporation
of India, Geometric, Havells India, Suprajit Engineering, Munjal Showa, HDFC
and HDFC Bank
Corporation of India, HDFC 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 34: 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 Mid-caps continued their
Engineering delivering 13.4x and 11.9x returns respectively. outperformance in the seventh
Exhibit 35: Portfolio performance during the seventh iteration iteration
(`) (` bn)
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%
period. Thus, for this period, the value of the portfolio rose from `1,000 at the start to `6,376 at the end.
Exhibit 36: Mid-caps continued their outperformance in seventh iteration

7,000
HDFC Bank
6,000 HDFC
5,000 Suprajit Engg.
4,000 Munjal Showa

Geometric
3,000
Havells India
2,000
Container Corpn.
1,000 Hero Motocorp
- Cipla

Cera Sanitaryware
Period 8: 2007-Present (10.8% 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 and HDFC Bank
Large-cap portfolio stocks: Infosys, Wipro, Cipla, Tech Mahindra, Hindalco,
Hero MotoCorp, Container Corporation of India, Asian Paints, HDFD 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. The large-cap CCP beat the
all-cap CCP on a risk adjusted basis (0.24x for large cap CCP vs. 0.22x for all-cap
CCP).
Exhibit 37: Eighth iteration summary
CAGR returns 19.5% 17.4% 8.8%
CCP, large-cap CCP and for the Sensex.
In this iteration, amongst large caps, Asian Paints lead the charge with almost 14.9x Suprajit Engineering and Asian
returns. Extreme movements were seen in mid-cap stocks again with stocks like Paints have proven to be the star
Suprajit Engineering delivering almost 15.4x returns whereas Aftek delivered -96% performers in the eighth iteration
returns. so far
Exhibit 38: Portfolio performance during the eighth iteration
(`) (` bn)
CAGR
Date from/to 30-Jun-07 30-Sep-16
Infosys 100 253 11%
Wipro 100 196 8%
Cipla 100 297 12%
Tech Mahindra 100 131 3%
Hindalco Inds. 100 116 2%
Asian Paints 100 1,587 35%
Havells India 100 952 28%
Aftek 100 4 -30%
Suprajit Engg. 100 1,635 35%
HDFC 100 386 16%
HDFC Bank 100 592 21%
Portfolio 1,500 7,828 20%
Sensex 100 218 9%
period. Thus, for this period, the value of the portfolio rose from `1500 at the start to `7,828 until Sep ‘16.

Cera Sanitaryware
Exhibit 39: Suprajit Engineering and Asian Paints have been the star performers in
the eighth iteration
9,000 HDFC Bank
8,000 HDFC
Suprajit Engg.
7,000
Munjal Showa
6,000 Aftek
Geometric
5,000
Havells India
4,000 Asian Paints
Hero Motocorp
2,000 Hindalco Inds.
1,000 Tech Mahindra
Cipla
- Wipro
period, the value of the portfolio rose from `1500 at the start to `7,828 until Sep ‘16.

All-cap portfolio stocks: Infosys, Wipro, Cipla, Asian Paints, Tech Mahindra,
Havells India, Automotive Axles, Geometric, HDFC, HDFC Bank and Punjab
National Bank
Large-cap portfolio stocks: Infosys, Wipro, Cipla, Asian Paints, Tech
Mahindra, HDFC, HDFC Bank and Punjab National Bank
Our ninth iteration that began in June 2008 is also outperforming the Sensex with an
alpha of 11.2%. The large-cap version too continues to beat the Sensex with an alpha
of 8.5%. The large-cap version on account of lower drawdown has the highest risk
adjusted return at 0.30x vs. 0.29x for all-cap version and 0.07x for the Sensex.
Exhibit 40: Ninth iteration summary
CAGR returns 22.1% 19.3% 10.9%
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 Both large-caps as well as mid-
Asian Paints and HDFC Bank delivering 10x and 5.7x returns respectively whilst caps have shared the
Havells India is continuing its dream run with 12.4x returns. outperformance during the ninth
iteration

Cera Sanitaryware
Exhibit 41: Portfolio performance during the ninth iteration

(`) (` bn)
CAGR
Infosys 100 277 13%
Wipro 100 228 10%
Cipla 100 290 14%
Automotive Axles 100 355 17%
HDFC 100 395 18%
HDFC Bank 100 671 26%
Punjab Natl. Bank 100 226 10%
Portfolio 1,100 5,724 22%
Sensex 100 235 11%
period. Thus, for this period, the value of the portfolio rose from `1,100 at the start to `5,724 until Sep ‘16.
Exhibit 42: Large-caps and mid-caps shared outperformance in this iteration
7,000
Punjab Natl.Bank
6,000 HDFC Bank
HDFC
5,000
Geometric
4,000 Automotive Axles
3,000 Havells India
Tech Mahindra
2,000
Asian Paints
1,000 Cipla
- Wipro
period, the value of the portfolio rose from `1,100 at the start to `5,724 until Sep ‘16.

Cera Sanitaryware
Period 10: 2009-present (11.5% alpha to the Sensex;

All-cap portfolio stocks: Infosys, Wipro, Jindal Steel, Cipla, Asian Paints,
Oracle Financial Services, Tech Mahindra, Motherson Sumi, HDFC, HDFC
Bank and Punjab National Bank
Large-cap portfolio stocks: Infosys, Wipro, Jindal Steel, Cipla, Asian Paints,
Oracle Financial Services, HDFC, HDFC Bank and Punjab National Bank
In the iteration beginning in 2009, both all-cap and large-cap CCP beat the Sensex
comprehensively again with alpha of 11.5% and 7.2% respectively. On a risk adjusted
basis, they gave a stable performance as well with excess returns of 0.56-0.69x.
Exhibit 43: Tenth iteration summary
CAGR returns 22.7% 18.3% 11.1%
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.
Motherson Sumi has been the star performer in this iteration having delivered The returns for the tenth iteration
~14.4x returns during this period. have largely been dominated by
Exhibit 44: Portfolio performance during the tenth iteration Motherson Sumi and Asian Paints
(`) (` bn)
CAGR
Infosys 100 266 14%
Wipro 100 262 14%
Jindal Steel 100 19 -21%
Cipla 100 239 13%
Oracle Fin. Serv. 100 317 17%
Motherson Sumi 100 1,544 46%
HDFC Bank 100 450 23%
HDFC 100 331 18%
Punjab Natl. Bank 100 121 3%
Portfolio 1,100 4,843 23%
Sensex 100 215 11%
period. Thus, for this period, the value of the portfolio rose from `1,100 at the start to `4,843 until Sep ‘16.
Exhibit 45: Motherson Sumi has been the star performer in this iteration
6,000 Punjab Natl.Bank
HDFC
5,000
HDFC Bank
4,000 Motherson Sumi
Tech Mahindra
3,000 Oracle Fin.Serv.
2,000 Asian Paints
Cipla
1,000 Jindal Steel
Wipro
-
Infosys

Cera Sanitaryware

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
This iteration of the Coffee Can Portfolio too continues to outperform the Sensex (with
an alpha of 9.5%). The large-cap version beat both the Sensex and the all-cap
version in this iteration with an outperformance of 11.2% and 1.8% respectively.
Exhibit 46: Eleventh iteration summary
CAGR returns 18.7% 20.4% 9.2%
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 continues to be led by Motherson Even in the eleventh iteration
Sumi and Asian Paints. In spite of suspension of trading in two of the constituent Motherson Sumi and Asian Paints
stocks through the period (Amar Remedies and Tulip Telecom), the portfolio continues have dominated the portfolio
to deliver a stellar performance with an 18.7% CAGR. returns
Exhibit 47: Portfolio performance during the eleventh iteration
(`) (` bn)
CAGR
Amar Remedies 100 8 -33%
Motherson Sumi 100 789 39%
Tulip Telecom 100 1 -53%
HDFC Bank 100 348 22%
Punjab Natl. Bank 100 77 -4%
Dewan Hsg. Fin. 100 284 18%
Portfolio 700 2,042 19%
Sensex 100 173 9%
Outperformance 9.5%
Source: Bloomberg, Ambit Capital research. Note: * Portfolio price at start of `700 denotes an equal allocation of
period. Thus, for this period, the value of the portfolio rose from `700 at the start to `2,042 until Sep ‘16.
Exhibit 48: Motherson Sumi and Asian Paints continue to be the star performers in this
iteration
2,500
Dewan Hsg. Fin.
2,000
Punjab Natl.Bank
1,500 HDFC Bank
Tulip Telecom
1,000
Motherson Sumi
500 Asian Paints
Amar Remedies
-
period, the value of the portfolio rose from `700 at the start to `2,042 until Sep ‘16.

Cera Sanitaryware

All-cap portfolio stocks: ITC, Asian Paints, Motherson Sumi, Ipca Labs, 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
This iteration gave the weakest result in terms of both the absolute performance of
our Coffee Can Portfolio and the alpha generated versus the Sensex. 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 49: Twelfth iteration summary
CAGR returns 12.1% 17.0% 9.4%
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 Extreme price performance
iteration. Motherson Sumi delivered 4.0x returns during this period whilst Zylog amongst small/mid-caps can be
Systems lost 99% of its value. seen in the twelfth iteration
Exhibit 50: Portfolio performance during the twelfth iteration
Value at start Value at end Total return
Company
(`) (` bn) CAGR
Date from/to 30-Jun-11 30-Sep-16 5.26
ITC 100 196 14%
Motherson Sumi 100 505 36%
Ipca Labs. 100 179 12%
Tulip Telecom 100 1 -59%
Zylog Systems 100 1 -55%
Pratibha Inds. 100 34 -19%
Unity Infra. 100 18 -28%
Setco Automotive 100 222 16%
HDFC Bank 100 263 20%
Portfolio 1,400 2,550 12%
Sensex 100 161 9%
Outperformance 2.7%
period. Thus, for this period, the value of the portfolio rose from `1,400 at the start to `2,550 until Sep ’16.

Cera Sanitaryware
Exhibit 51: Extreme price performance was seen in mid/small-caps in this iteration
3,000 City Union Bank
Dewan Hsg. Fin.
2,500 Punjab Natl.Bank
HDFC Bank
2,000 Setco Automotive
Amar Remedies
1,500 Unity Infra.
Pratibha Inds.
1,000 Zylog Systems
Tulip Telecom
500 Ipca Labs.
Motherson Sumi
- Asian Paints
ITC
period, the value of the portfolio rose from `1,400 at the start to `2,550 until Sep ’16.
Period 13: 2012- Present (9.9% 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 52: Thirteenth iteration summary
CAGR returns 23.3% 19.5% 13.4%
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 The thirteenth iteration has been
Portfolio in terms of number of constituent companies. Astral Poly Technik was the the biggest CCP in terms of number
star performer in this iteration with almost 9x returns. Zylog Systems and Tecpro of stocks in the portfolio
Systems, on the other hand, lost almost their entire value with a drop of 99% and
97% respectively.

Cera Sanitaryware
Exhibit 53: Portfolio performance during the thirteenth iteration

(`) (` bn)
CAGR
ITC 100 151 10%
Marico 100 321 32%
Opto Circuits 100 8 -45%
Ipca Labs. 100 170 13%
Grindwell Norton 100 292 29%
Zylog Systems 100 1 -67%
Tecpro Systems 100 3 -57%
Setco Automotive 100 162 12%
HDFC Bank 100 233 22%
Axis Bank 100 278 27%
Allahabad Bank 100 56 -13%
Portfolio 2,200 5,356 23%
Sensex 100 171 13%
Outperformance 9.9%
of `100 in each stock at the start of the period. Thus, for this period, the value of the portfolio rose from `2,200
at the start to `5,356 until Sep ‘16.
Exhibit 54: Astral Poly Technik outperformed other stocks in this iteration
City Union Bank
6,000 Dewan Hsg. Fin.
Allahabad Bank
Punjab Natl.Bank
5,000 Axis Bank
HDFC Bank
Setco Automotive
4,000 Unity Infra.
Amar Remedies
Astral Poly
3,000 Pratibha Inds.
Tecpro Systems
Zylog Systems
Grindwell Norton
2,000 Balkrishna Inds
Page Industries
Berger Paints
1,000 Ipca Labs.
Opto Circuits
Marico
- Asian Paints
ITC

Cera Sanitaryware

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 Technologies, Asian Paints, Marico, HDFC
Bank, Axis Bank
The 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 generated a CAGR return of 13.5%,
whereas the large-cap portfolio generated a CAGR return of 26.4%.
Exhibit 55: Fourteenth iteration summary
CAGR returns 34.8% 26.4% 13.5%
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 Mid-caps drove the
stocks’ prices rising 3-4 times since the beginning of this portfolio in June 2013. outperformance for the fourteenth
These stocks included names like Astral Poly Technik, Balkrishna Industries, Page iteration
Industries, Sarla Performance Fibers and Solar Industries. Unity Infraprojects and
Pratibha Industries on the other hand are amongst stocks that lost value in this
period.
Exhibit 56: Portfolio performance during the fourteenth iteration
(`) (` bn)
CAGR
ITC 100 119 5%
HCL Technologies 100 220 27%
Marico 100 283 38%
Ipca Labs. 100 93 -2%
Solar Inds. 100 360 48%
Sarla Performance 100 467 61%
HDFC Bank 100 195 23%
Axis Bank 100 213 26%
Indian Bank 100 198 23%
Portfolio 1,800 4,762 35%
Sensex 100 151 13%
period. Thus, for this period, the value of the portfolio rose from `1,800 at the start to `4,762 until Sep ’16.

Cera Sanitaryware
Exhibit 57: Mid-caps led the charge in this iteration driving most of the portfolio
returns
6,000 Dewan Hsg. Fin.
City Union Bank
Indian Bank
5,000 Axis Bank
HDFC Bank
4,000 Sarla Performanc
Unity Infra.
Pratibha Inds.
3,000 Astral Poly
Solar Inds.
2,000 Balkrishna Inds
Page Industries
Ipca Labs.
1,000 Berger Paints
Marico
- Asian Paints
HCL Technologies
ITC

Cera Sanitaryware
Appendix 3: John Kay’s IBAS Framework

“I don’t 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 Kay’s 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 company’s 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 company’s 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.

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For products that we use daily, we tend to be generally aware of the strength of a
firm’s 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 firm’s brand).
 The amount of time the firm has been in that market (e.g. “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 firm’s 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 India’s 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 58: 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 firm’s 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 provider’s due diligence on the applicant
and the property appears to be done more swiftly and thoroughly than most other
lenders in India.

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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 India’s freedom movement, GCMMF was founded by
the legendary Verghese Kurien in 1973. This farmer’s 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, GCMMF’s revenues have grown over the past five years by
21% as opposed to Nestle’s 16% over the same period. In fact, GCMMF’s revenue
growth is markedly superior to the vast majority of the top Indian brands shown in
exhibit 58.
GCMMF’s 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 India’s 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 India’s 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-
operative’s 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 world’s most
famous prize for manufacturing excellence is named after him.
"Innovation distinguishes between a leader and a follower."

– Steve Jobs

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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
Coke’s famous syrup which is a closely held secret and kept in the company’s
museum in Atlanta, Georgia);
 Licenses 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 Steel’s 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 Capital’s 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.

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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.

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Institutional Equities Team

Saurabh Mukherjea, CFA CEO, Institutional Equities (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 / Industrials (022) 30433241 nitin.bhasin@ambit.co
Aadesh Mehta, CFA Banking / Financial Services (022) 30433239 aadesh.mehta@ambit.co
Abhishek Ranganathan, CFA Retail (022) 30433085 abhishek.r@ambit.co
Anuj Bansal Mid-caps (022) 30433122 anuj.bansal@ambit.co
Aditi Singh Economy / Strategy (022) 30433284 aditi.singh@ambit.co
Ashvin Shetty, CFA Automobile (022) 30433285 ashvin.shetty@ambit.co
Bhargav Buddhadev Power Utilities / Capital Goods (022) 30433252 bhargav.buddhadev@ambit.co
Deepesh Agarwal, CFA Power Utilities / Capital Goods (022) 30433275 deepesh.agarwal@ambit.co
Dhiraj Mistry, CFA Consumer (022) 30433264 dhiraj.mistry@ambit.co
Gaurav Khandelwal, CFA Automobile (022) 30433132 gaurav.khandelwal@ambit.co
Girisha Saraf Mid-caps / Small-caps (022) 30433211 girisha.saraf@ambit.co
Karan Khanna, CFA Strategy (022) 30433251 karan.khanna@ambit.co
Mayank Porwal Retail (022) 30433214 mayank.porwal@ambit.co
Pankaj Agarwal, CFA Banking / Financial Services (022) 30433206 pankaj.agarwal@ambit.co
Paresh Dave, CFA Healthcare (022) 30433212 paresh.dave@ambit.co
Parita Ashar, CFA Metals & Mining / Aviation (022) 30433223 parita.ashar@ambit.co
Prashant Mittal, CFA Strategy / Derivatives (022) 30433218 prashant.mittal@ambit.co
Rahil Shah Banking / Financial Services (022) 30433217 rahil.shah@ambit.co
Rakshit Ranjan, CFA Consumer (022) 30433201 rakshit.ranjan@ambit.co
Ravi Singh Banking / Financial Services (022) 30433181 ravi.singh@ambit.co
Ritesh Gupta, CFA Oil & Gas / Chemicals / Agri Inputs (022) 30433242 ritesh.gupta@ambit.co
Ritesh Vaidya, CFA Consumer (022) 30433246 ritesh.vaidya@ambit.co
Ritika Mankar Mukherjee, CFA Economy / Strategy (022) 30433175 ritika.mankar@ambit.co
Ritu Modi Automobile (022) 30433292 ritu.modi@ambit.co
Sagar Rastogi Technology (022) 30433291 sagar.rastogi@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 / Industrials (022) 30433209 utsav.mehta@ambit.co
Vivekanand Subbaraman, CFA Media (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
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
Parees Purohit, CFA UK (022) 30433169 parees.purohit@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
Ravilochan Pola – CEO Americas +1(646) 793 6001 ravi.pola@ambitamerica.co
Hitakshi Mehra Americas +1(646) 793 6002 hitakshi.mehra@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

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Cadila Healthcare Ltd (CDH IN, BUY) Lupin Ltd (LPC IN, BUY)
500 2,500
400 2,000
300 1,500
200 1,000
100 500
0 0
Apr-14
Apr-15
Apr-16
Jan-14
Jul-14
Jan-15
Jul-15
Jan-16
Jul-16
Oct-13
Oct-14
Oct-15
Apr-14
Apr-15
Apr-16
Jan-14
Jul-14
Jan-15
Jul-15
Jan-16
Jul-16
Oct-13
Oct-14
Oct-15
Cadila Healthcare Ltd Lupin Ltd
LIC Housing Finance Ltd (LICHF IN, SELL) HDFC Bank Ltd (HDFCB IN, SELL)
700 1,400
600 1,200
500 1,000
400 800
300 600
200 400
100 200
0 0
Apr-14
Apr-15
Apr-16
Jan-14
Jul-14
Jan-15
Jul-15
Jan-16
Jul-16
Oct-13
Oct-14
Oct-15
Apr-14
Apr-15
Apr-16
Jan-14
Jul-14
Jan-15
Jul-15
Jan-16
Jul-16
Oct-13
Oct-14
Oct-15
LIC Housing Finance Ltd HDFC Bank Ltd
HCL Technologies Ltd (HCLT IN, BUY) Exhibit 59: eClerx Services Ltd (ECLX IN, SELL)
1,200 1,800
1,600
1,000
1,400
800 1,200
1,000
600
800
400 600
400
200
200
0 0
Apr-14
Apr-15
Apr-16
Apr-14
Apr-15
Apr-16
Jan-14
Jul-14
Jan-15
Jul-15
Jan-16
Jul-16
Jan-14
Jul-14
Jan-15
Jul-15
Jan-16
Jul-16
Oct-13
Oct-14
Oct-15
Oct-13
Oct-14
Oct-15
HCL Technologies Ltd eClerx Services Ltd

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Asian Paints Ltd (APNT IN, BUY) Exhibit 60: Britannia Industries Ltd (BRIT IN, SELL)
1,400 4,000
1,200 3,500
1,000 3,000
2,500
800
2,000
600
1,500
400 1,000
200 500
0 0
Apr-14
Apr-15
Apr-16
Apr-14
Apr-15
Apr-16
Jan-14
Jul-14
Jan-15
Jul-15
Jan-16
Jul-16
Jan-14
Jul-14
Jan-15
Jul-15
Jan-16
Jul-16
Oct-13
Oct-14
Oct-15
Oct-13
Oct-14
Oct-15
Asian Paints Ltd Britannia Industries Ltd
Axis Bank Ltd (AXSB IN, BUY) Exhibit 61: Page Industries Ltd (PAG IN, BUY)
700 18,000
600 16,000
14,000
500
12,000
400 10,000
300 8,000
6,000
200
4,000
100 2,000
0 0
Apr-14
Apr-15
Apr-16
Jan-14
Jul-14
Jan-15
Jul-15
Jan-16
Jul-16
Oct-13
Oct-14
Oct-15
Apr-14
Apr-15
Apr-16
Jan-14
Jul-14
Jan-15
Jul-15
Jan-16
Jul-16
Oct-13
Oct-14
Oct-15
Axis Bank Ltd Page Industries Ltd
Exhibit 62: Astral Poly Technik Ltd (ASTRA IN, NOT RATED) Amara Raja Batteries Ltd (AMRJ IN, SELL)
600 1,200
500 1,000
400 800
300 600
200
400
100
200
0
0
Apr-14
Apr-15
Apr-16
Jan-14
Jul-14
Jan-15
Jul-15
Jan-16
Jul-16
Oct-13
Oct-14
Oct-15
Aug-14
Aug-15
Aug-16
Nov-13
Feb-14
May-14
Nov-14
Feb-15
May-15
Nov-15
Feb-16
May-16
Astral Polytechnik Ltd

Amara Raja Batteries Ltd

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GRUH Finance Ltd (GRHF IN, NOT RATED) Dr Lal PathLabs Ltd (DLPL IN, NOT RATED)
400 1,300
350 1,200
300 1,100
250 1,000
900
200
800
150 700
100 600
50 500
0 400
Apr-16
Mar-16
Dec-15
Jul-16
Jan-16
Aug-16
Aug-14
Aug-15
Aug-16
Sep-16
Jun-16
Oct-16
Nov-13
Feb-14
May-14
Nov-14
Feb-15
May-15
Nov-15
Feb-16
May-16
Feb-16
May-16
GRUH Finance Ltd Dr Lal PathLabs Ltd
Relaxo Footwears Ltd (RLXF IN, NOT RATED) Repco Home Finance Ltd (REPCO IN, NOT RATED)
700 1,000
600
800
500
400 600
300 400
200
200
100
0 0
Aug-14
Aug-15
Aug-16
Aug-14
Aug-15
Aug-16
Nov-13
Feb-14
May-14
Nov-14
Feb-15
May-15
Nov-15
Feb-16
May-16
Nov-13
Feb-14
May-14
Nov-14
Feb-15
May-15
Nov-15
Feb-16
May-16
Relaxo Footwears Ltd Repco Home Finance Ltd
Cera Sanitaryware Ltd (CRS IN, NOT RATED)
3,000
2,500
2,000
1,500
1,000
500
0
Aug-14
Aug-15
Aug-16
Nov-13
Feb-14
May-14
Nov-14
Feb-15
May-15
Nov-15
Feb-16
May-16
Cera Sanitaryware Ltd

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Explanation of Investment Rating

Investment Rating Expected return (over 12-month)
BUY >10%
SELL <10%
NO STANCE We have forward looking estimates for the stock but we refrain from assigning valuation and recommendation
UNDER REVIEW We will revisit our recommendation, valuation and estimates on the stock following recent events
NOT RATED We do not have any forward looking estimates, valuation or recommendation for the stock
POSITIVE We have a positive view on the sector and most of stocks under our coverage in the sector are BUYs
NEGATIVE We have a negative view on the sector and most of stocks under our coverage in the sector are SELLs
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STRATEGY

The Coffee Can Portfolio 2016

November 17, 2016 Ambit Capital Pvt. Ltd. Page 2

Laying a framework for constructing the Indian Coffee Can Portfolio

November 17, 2016 Ambit Capital Pvt. Ltd. Page 4

Average outperformance, 10-year CAGR

November 17, 2016 Ambit Capital Pvt. Ltd. Page 5

An optimal way to deploy fresh funds each year

An ideal life of a Coffee Can Portfolio

November 17, 2016 Ambit Capital Pvt. Ltd. Page 6

Today’s coffee can for 2016-26

November 17, 2016 Ambit Capital Pvt. Ltd. Page 7

Exhibit 3: Summary of the 2016 Coffee Can Portfolio

November 17, 2016 Ambit Capital Pvt. Ltd. Page 8

The case for a Coffee Can Portfolio

November 17, 2016 Ambit Capital Pvt. Ltd. Page 9

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

300 Stock B -26%

Source: Ambit Capital research

November 17, 2016 Ambit Capital Pvt. Ltd. Page 10

November 17, 2016 Ambit Capital Pvt. Ltd. Page 11

November 17, 2016 Ambit Capital Pvt. Ltd. Page 12

A framework for constructing the Indian

Average outperformance - 10-year CAGR

Specifically, we use the following filters.

November 17, 2016 Ambit Capital Pvt. Ltd. Page 13

range. The equity risk premium, in turn, is calculated as 4% (the long-term US

November 17, 2016 Ambit Capital Pvt. Ltd. Page 14

Does the approach work? Results from our

November 17, 2016 Ambit Capital Pvt. Ltd. Page 15

Performance of the previous coffee can portfolios vs Sensex using total

The results are revealing and can be summarised as follows:

November 17, 2016 Ambit Capital Pvt. Ltd. Page 16

November 17, 2016 Ambit Capital Pvt. Ltd. Page 17

Performance of the coffee can portfolios

November 17, 2016 Ambit Capital Pvt. Ltd. Page 18

HCL Technologies 100 90 -9%

November 17, 2016 Ambit Capital Pvt. Ltd. Page 19

November 17, 2016 Ambit Capital Pvt. Ltd. Page 20

Optimal way to deploy fresh funds each

 Number of stocks: As can be seen in Exhibit 15 above, a typical portfolio,

November 17, 2016 Ambit Capital Pvt. Ltd. Page 21

Exhibit 16 below summarises the results from our analysis.

2000-10 30 55.29 23.94 20.77 100.00 29.9% 21.4% 8.4%

November 17, 2016 Ambit Capital Pvt. Ltd. Page 22

What is the ideal life for a Coffee Can Portfolio?

November 17, 2016 Ambit Capital Pvt. Ltd. Page 23

The ideal life of a Coffee Can Portfolio

November 17, 2016 Ambit Capital Pvt. Ltd. Page 24

November 17, 2016 Ambit Capital Pvt. Ltd. Page 25

Today’s Coffee Can for 2016-2026

November 17, 2016 Ambit Capital Pvt. Ltd. Page 26

Flawless execution BFSI

Banking on low-cost liabilities

Exhibit 1: HDFC Bank loan book is diversifying towards retail

Home Vehicle Other retail Non-retail RoE (RHS)

Exhibit 2: Key financial parameters over the last decade

Exhibit 3: The key things to note from evolution

A corporate bank with

November 17, 2016 Ambit Capital Pvt. Ltd. Page 28

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

Exhibit 5: Mapping HDFC Bank and its peers on IBAS

The bank scores highly on all parameters: Innovation (origin as an upstart