STRATEGY

26 AUG 2015

Indian Equity markets more attractive than Chinese markets ?

Elephants can fly

Recent market volatility have led us to believe that
Indias moment of truth in the global investment
sweepstakes is near. It is time investors recognise
that India, despite its welldocumented undesirable
features and numerous historic stumbles, is
currently a more stable (and hence, more
attractive) growth story than China.
Falling commodity prices are structurally helping
India, for long a net commodity importer (esp oil).
Imported inflation is falling off. Government has
smartly exploited the current account headroom to
fill the fiscal deficit by raising taxes on fuels. This
will enable it to save ammunition to initiate the
next capex cycle early signs of which are already
visible in its plans for roads, urban infrastructure,
railways and defence.
For the first time since Independence, Indias
government has a pronounced rightofcentre
leaning and intent (yes, recent form has been
tepid). The country also has a tightfisted,
responsible and independent central banker
focused on fighting inflation. Indias capital
allocation misadventures are small compared to
the
constructionled,
leveragefuelled
and
ideologically directed binges of Chinas totalitarian
and opaque government.

The challenges for India are many, but the toolkit

and resources could not be better. We believe
global turmoil will nudge the government to move
quicker on nexgen reforms in land, labour, power
distribution and overall ease of doing business. If
this happens, India may indeed become a more
attractive investment destination than China
Here are 18 stocks with low vulnerability to Dragon
sneezes and high alignment with Elephant flights !
FINANCIALS
Axis Bank
Bank of Baroda
IndusInd Bank
State Bank of India
IT SERVICES
HCL Technologies
Infosys
Mindtree
AUTOS
Bharat Forge
Maruti Suzuki
CEMENT
Ultratech Cement

MINING
Coal India
TELECOM & MEDIA
Bharti Infratel
Dish TV
Idea Cellular
Zee Entertainment
FMCG
Asian Paints
Pidilite
INFRASTRUCTURE
KNR Construction

STRATEGY : Indian equity markets more attractive than Chinese markets ?

FINANCIALS
Even the pessimists will admit that there are several
recent pointers to revival in financials. PSU banks have
seen capital infusion and appointment of professional
leadership. We remain cautious on most PSU banks,
given their relatively larger stressed asset position and
exposure to sensitive sectors like textiles, steel and infra.
Our preference in this pack is concentrated on capital
adequate banks with superior lending practices and
deposit franchise SBI and BoB, who will also tend to
benefit the most from a broad revival in macros.
On the other hand, most private banks are well
positioned, given their superior operating metrics,
productivity, retail tilt and better asset quality. Here our
selection is grounded in superior growth, relatively
lower exposure to vulnerable sectors, increasing
granularity and attractive valuations vs peerset.

AXIS BANK

BANK OF BARODA
(CMP Rs 183, MCap Rs 405bn)

(CMP Rs 503, MCap Rs 1.19tn)

Over FY1215 Axis Bank has consistently delivered

positive surprises across parameters (retail book
growth, NIM, asset quality and hence, earnings). We
see this as the direct outcome of a capable
management working overtime in a difficult
environment. Granularity has now spread from BS to
PL. Retail loans are ~40% of book and now contribute
a similar fraction of fee income, while retail deposits
(incl. CASA) are ~79% of deposits.
While the marginal rise in sensitive exposures is a bit
of a negative, we remain confident on the banks
asset quality and believe stress formation has peaked
in FY15 (Rs 57bn). Axis Bank has wisely utilised
windfall gains (treasury/repatriation) towards
proactively building contingent provisions of Rs
12.5bn (0.43bps of loans and Rs 5.3/sh).

At CMP, Axis Bank trades at 2.0x FY17E ABV.

Maintain BUY with TP of Rs 655 (2.6x FY17E ABV).

We think BOB can surprise on growth and asset

quality, given its diversified loan mix and presence in
fast growing states, esp post recent changes in top
management. It has betterthanpeer CRAR position
(Tier I 9.4%), better coverage ratio (65%) and lower
NNPA/NW at 21%.
BOB is probably the biggest beneficiary of recent
government actions in the sector. These include (1)
Appointment of an accomplished private sector
banking professional P S Jayakumar (MD & CEO of
VBHC Value Homes Pvt Ltd, also exCitigroup) as MD
& CEO (2) Appointment of Ravi Venkatesan (currently
Independent Director at Infosys) as chairman and (3)
Capital infusion of Rs 17.9bn (~4.5% of networth).
We believe our loan growth (~12% CAGR over FY15
17E) and flat NIM assumptions are conservative given
BoBs moderate CD ratio of ~68%, wellcapitalised
B/S and its diversified geographical presence. We
expect PAT CAGR of ~26% over FY1517E, factoring
slippages of 1.6% during the period (vs. 2% in FY15)
and credit cost of 0.8% (vs. 0.9% in FY15).
At CMP of Rs 183, BOB trades at 1.1x FY17E ABV
(excluding the recently announced capital infusion).
This is a welldeserved premium.

INDUSIND BANK
(CMP Rs 878, MCap Rs 465bn)
We are confident on management capability, growth
trajectory, asset quality, fee mix and cyclical upswing
in IIBs business. Its loan book tilts towards CV lending
(16% of loans) with very low exposure to sensitive
sectors (like metals and infrastructure) ensuring
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STRATEGY : Indian equity markets more attractive than Chinese markets ?

stable asset quality in an otherwise volatile

commodity and business environment. It is well
poised for a cyclical uptick.
Asset quality has been steady with NNPA at 0.3%
(1QFY16). Despite slowdown in the CV book in the
recent past, stability can be attributed to strong
domain knowledge and financing to the banks
existing customer base.
We like IIBs focus on being the leading market player
in its chosen segments. It is among the top five
players in CV lending and an aggressive No. 2 in 2W
financing. IIB aspires to achieve 40% CASA mix (35+%
now) and 4% NIMs (3.7% at present) over the next
two years as it increases its branch network to 1,200
(from 800+ currently), realigns SA rate and grows the
high yielding retail segment.
The bank is well capitalised (TierI at 16 per cent),
while the regulatory relief on retail loans has further
helped it in controlling RWA growth.
At CMP, IIB trades at 2.6x FY17E ABV. Maintain BUY
with TP of Rs 1,040/sh (3.1x FY17E ABV).

STATE BANK OF INDIA

IT SERVICES
We see the strengthening of the Euro as a positive for
Indias IT services industry. USD strength will also help. A
weak demand environment in Oil & Gas affects Indian
vendors only selectively, if broader macros in North
America and Europe hold up. Digital orientation is
another aspect that we are tracking to spot longer term
winners. IT faces little or no threat from Chinese
competition, let alone a weakening Yuan.

HCL TECHNOLOGIES
(CMP Rs 915, MCap Rs 1.3tn)

(CMP Rs 253, MCap Rs 1.91tn)

SBIN is our top PSB pick, and remains a broad proxy

for a revival in the Indian economy with presence
across segments, sectors and geographies. We
believe it is coming off a sluggish phase (in line with
recent macros) and may hold several positive
surprises if the NPA cycle reverses.
The bank has enough capital (Tier I ~9.6%), lowest net
impaired assets (6.6% of loans and 21% of NW) with
highest PCR of ~69.5% among PSBs.
A superior liability franchise (~40% CASA), well
diversified loan mix and relatively superior return
ratios are additional positives.

Post factoring fairly high slippages of ~2% (vs. 2.3% in

FY15) and LLP of ~1.2% (vs. 1.3% in FY15), we expect
PAT CAGR of ~25% over FY1517E for SBI.
At CMP, SBIN trades at 1.1x FY17E core ABV,
Maintain BUY with an SOTP of Rs 344 (1.7x FY17E
core ABV + Rs 66 subs value).

HCLT is wellpositioned to drive healthy revenue and

earnings growth over FY15FY17E. We currently
forecast USD revenue growth of 13/14.2% in
FY16E/17E, led by improving growth in the key IMS
business and partly owing to favourable cross
currency movements, led by the resurgent Euro.
A positive feature in 4QFY15 (Juneending fiscal year)
was the fastest QoQ growth in 6 quarters in the key
IMS segment, apart from continuing strong deal wins
of US $5bn.

Favourable currency movements are likely to boost

HCLTs operating margins, a welcome relief given that
the IT major will see wage hike impact in the Sep15
quarter; additional margins could also be used to
reinvest into the business.

HCLTs stock currently trades at around 14x FY17E

EPS, which we believe is reasonable given its
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STRATEGY : Indian equity markets more attractive than Chinese markets ?

improving revenue growth and possible earnings
upgrades, led by both favourable crosscurrency
movements and by INR depreciation. We have a
target price of Rs 1,055 on HCLT, implying a PE of 16x
FY17E EPS.

MINDTREE
(CMP Rs 1280, MCap Rs 107bn)

We like Mindtrees niche focus, with nearly 50% of

revenue coming from BFSI (niche focus on P&C
insurance) and retail & CPG (the leading vertical
investing in digital technologies). Digital spends,
particularly in the retail vertical are robust and this is
likely to remain a major trend over the next several
years, providing Mindtree with a major growth
avenue.

We expect Mindtree to benefit from the recent

depreciation of the INR against the USD, with an
additional kicker from favourable crosscurrency
movements. We currently forecast USD revenue
growth of 12.7% QoQ (18.8% YoY) in 2QFY16, which
could see a boost of over 100 bps if the GBP and EUR
remain at current levels vs the USD.

Deal wins have been robust, with US $207mn worth

of deal wins in 1QFY16, the highest in 5 quarters. This
provides good revenue visibility.

On the digital front, Mindtree appears to have

invested ahead of peers, deriving nearly 35% revenue
from SMAC (13% QoQ USD revenue growth in
1QFY16). Mindtree has assuaged the street with its
ability to manage cost headwinds. We expect 2QFY16
EBITDA margin to expand despite the impact of wage
hikes, aided by growth leverage. With the INR
weakening, this appears an even stronger possibility.

Aided by growth leverage, we forecast a healthy 17%

EPS CAGR for Mindtree over FY15FY17E. If the INR
remains at around 66 levels vs the USD over the next
year or so, our EPS estimates could rise by 78%,
leading to a healthy 20% EPS CAGR.
Mindtrees stock currently trades at around 14x
FY17E EPS. We have a target price of Rs 1,410 on
Mindtree, implying a PE of 16x FY17E EPS.

INFOSYS
(CMP Rs 1087, MCap Rs 2.5tn)

We believe Infosys is wellplaced to achieve a much

anticipated improvement in revenue and earnings
growth over the next few quarters. This is also helped
by the fact that just 18.6% of its revenue is growth
challenged (insurance, telecom and energy).
We currently forecast USD revenue growth of 4.1%
QoQ in 2QFY16, which could see a boost of over 75
80 bps if the GBP and EUR remain at current levels vs
the USD. In INR terms, revenue growth could come in
excess of 8% QoQ and 16% YoY.
Infosys 1QFY16 USD revenue growth was its highest
in 10 quarters, with the most heartening feature
being the broadbased nature of the growth.
Its improved win rates, strategic approach towards
RFPs, traction in the platform business and focus on
top accounts (top10 clients grew 5.7% QoQ in
1QFY16) drive our confidence that it can achieve
nearly doubledigit USD growth in FY16E, followed by
13.3% growth in FY17E.
On the digital front, Infosys is clearly focusing its
energies in building skills as well as in effective
marketing, as seen by Dr Sikkas recent Global
Townhall, which gave a good sense of how Infosys
intends to integrate and crosssell its digital services
to clients.
Infosys stock currently trades at ~16x FY17E EPS. This
is reasonable given its improving revenue growth and
possible earnings upgrades. We have a target price of
Rs 1,275 on Infosys, implying a PE of 19x FY17E EPS.

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STRATEGY : Indian equity markets more attractive than Chinese markets ?

AUTOS
Indian PV (cars) demand is currently in the midst of a
multiyear structural revival, driven by rapid
urbanization and aspirational consumers. Ancillaries
have parallely scaled up to emerge as highquality,
competitive players of global size. Yuan devaluation and
Chinese competition are marginal threats, given the
evolved quality, entrenched brands and distribution
strengths of many Indian auto majors.

BHARAT FORGE
(CMP Rs 1164, MCap Rs 271bn)

Bharat Forge (BFL) is perhaps India's best

manufacturing excellence story. Its multisegment
forgings exports account for ~60% of standalone
revenues. A major chunk of its Auto and Industrial
product exports is to North American and European
markets. BFL's exposure to the Oil & Gas segment
(1012% of standalone revs) is likely to remain a
pressure point. However, we believe that rampup of
new programs in PVs, Aerospace and Defense can
offset the negative impact of Oil & Gas sluggishness
over the medium term.
We see BFL as a key beneficiary of the cyclical upturn
in domestic CVs as it enjoys strong presence across
OEMs. Robust 1015% growth outlook for North
American Class8 trucks and steady recovery in
Europe heavyduty truck demand should aid its auto
exports. BFL is targeting to increase its standalone PV
revenue mix from 8% to 15% over FY1418. The
company has already bagged a few export orders
from global OEMs in this space and rampup should
commence in FY16.
Despite a sharp rampup in industrial exports, BFL still
has a modest <4% global market share. Recent tie
ups with global majors such as Safran and Boeing for
aerospace forgings would open up large new

verticals. Localisation of components in large

segments such as defense, locomotive, power and
metal/mining can significantly expand its domestic
industrial segment opportunity.
BFL currently trades at 21.3x FY17 EPS. We believe
that BFLs strong 27% CAGR in FY1518E EPS, robust
FCF generation and structurally improving return
ratios provide strong case for valuation premium
compared to its past. We have a BUY rating with TP
of Rs 1,310 based on 24X FY17E EPS.

MARUTI SUZUKI
(CMP Rs 4149, MCap Rs 1.27tn)

Maruti Suzukis (MSIL) business appears to be fairly

insulated to the current global macro turmoil. The
company derives less than 10% of sales from exports,
with even lesser exposure to emerging markets.
MSILs fx exposure is largely through direct + indirect
imports and royalty payments to its parent. Per our
analysis, there is 1.5% earnings impact for every one
1% change in key fx rates (JPY, EUR, USD).

We believe that MSIL is poised to deliver healthy

volume growth on the back of its new launch
pipeline. Importantly, the companys new products
directly feed into the premiumisation trend seen in
domestic PVs. In addition to the recently launched S
Cross, MSIL plans to launch a premium hatchback and
a compact SUV in the coming quarters.

MSIL has been consistently upgrading its product

range with new features and higher fuel efficiency.
Addition of AMT variants and the inpipe smart
hybrids provide enhanced value and excitement for
urban customers. Implementation of the 7th Pay
commission recommendations is likely to be yet
another demand catalyst.

Despite most players still operating at suboptimal

capacity utilisation levels, MSIL has been able to bring
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STRATEGY : Indian equity markets more attractive than Chinese markets ?

down discounts substantially. Sharp decline in fuel
prices and shift in demand towards petrol models is
driving strong market share gains. Decline in
commodity prices and operating leverage benefits
offer further levers for margin improvement.

MSIL currently trades at 17.5x FY17E EPS. We believe

that MSIL deserves to trade at a premium to
historical mean given its strong earnings growth
momentum (~40% CAGR over FY1517E) and
improving return ratios. We have a BUY rating with
TP of Rs 4,802 based on 20x FY17E EPS.

MINING
It is difficult to be positive on mining at a time when the
resource/commodity complex faces a demand (and price
crunch) globally. Yet, the specific set of arguments in
favour of our lone pick here (Coal India) is compelling
enough for us to include it in our India > China picks.

COAL INDIA
(CMP 337, MCap Rs 2.1tn)

CEMENT
Cement is completely driven by local macros and largely
insulated from the global commodity/currency impact.
In fact, cement gains marginally from falling global coal
prices. Medium to longer term demand dynamics can
only improve if housing and infra spend rise. Unutilised
capacities at several capable producers indicate
embedded operating leverage.

ULTRATECH CEMENT
(CMP 2842, MCap Rs 782 bn)

UltraTech is a truly panIndia cement company with a

presence in every region, once its acquisition of JPA's
Satna assets concludes. Given the large extant
capacity (71.65 mTPA by FY17 exit) vs current
volumes (46.5 mT LTM), UTCEM is a clear beneficiary
of the expected demand revival.
Despite its industry leading capacity and aggressive
addition, UT remains underleveraged (we expect
FY18 d/e to fall to under 0.2), which provides further
margin of safety.
At CMP, the stock trades at 13.7x/10.6x Fy16/17
EV/EBITDA and US$200/t

Coal India holds levers that are crucial for the

government of India to demonstrably revive the
economy : higher coal production and the political
dividend arising out of driving a sluggish PSU up the
growth path.
~90% of CILs despatches are sold on fixed prices,
which are still ~6070% lower compared to landed
parity. Our calculation indicates CILs power
consumers get 4,0004,300 kcal/kg (G11 grade) coal
at ~Rs 1,000 (inclusive of levies, net of any
transportation charges) vs Indonesian EcoCoal (4,200
kcal/kg) which is available at ~Rs 3,300 FOB India
port.
Recent weakness in the stock is due to the overhang
of an impending OFS (10% stake sale by GoI) and near
term weakness in realisations, especially in eAuction
coal. Pricing weakness is a function of subdued power
demand, a transient phenomenon in our view.
We remain positive given the vastly improved rake
availability (now ~225/day vs ~180 YoY), which will
continue to drive offtake. Higher offtake benefits
CIL doubly since operating leverage kicks in on
employee costs (~55% of sales and unrelated to
offtake) and sales mix improves (nonpower FSA
consumers pay 35% more).
The stock trades at 6.6/5.7x FY16E/17E on EV/EBITDA
basis and 11.9/10.5x EPS.
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STRATEGY : Indian equity markets more attractive than Chinese markets ?

Rs 546. Our target price implies 14.4x FY17
EV/EBITDA, a marginal discount to global peers.

TELECOM & MEDIA

The telecom and media sectors face negligible impact as
their inputs as well as consumption drivers are largely
domestic. Cross country digitisation and addressability
in signal distribution, mass affordability, improving
viewership measurability and rising advertising
propensity provide long term structural tailwinds for the
broadcasting ecosystem. The convergence of next
generation digital telecom and broadcast networks
promises to provide new (and perhaps disruptive)
opportunities.
While telecom has been rendered capital intensive (with
spectrum auctions) and faces competitive challenges
(RJios entry may erode pricing power even as it
redefines the industry), media holds immense promise.
This is reflected in rich valuations. Any marketinduced
fall should be bought into, as our analysis suggests.

DISH TV
(CMP 97, MCap Rs 103bn)

BHARTI INFRATEL
(CMP 376, MCap Rs 714bn)

Bharti Infratel (BHIN) has corrected ~16% since

posting Q1FY16 results, primarily driven by market
turmoil as well as concerns of increased competition
of towers (BSNL has unveiled its plans of opening up
its towers to private cos).

We believe that the tower business isnt a

commoditised offering due to (1) unique location of
each tower and its potential fitment in the data
rollout plans of operators (2) difference in service
quality uptimes, powerbackup, maintenance etc,
that a towerco can offer to tenants. On both counts,
we believe that BHIN is well placed and is unlikely to
witness pressure on tower rental rates.

BHIN trades at 11.2x FY16 and 9.6x FY17 EV/EBITDA

and offers an FCF yield of 5.7% in FY17. We remain
constructive and value the company on a DCFbasis at

BHIN has no linkage to global factors as well as the

INRUSD exchange rate.

Despite the Rs 8.7bn gross debt and transponder

lease cost of ~Rs 1.5bn/annum being USD, we believe
Dish TV is attractive, post the the recent correction.
The ~5% INRUSD correction is likely to result in ~6
7% reduction in operating EBITDA owing to USD
linked costs. However, domestic demand drivers are
unchanged. We see high visibility of growth in the
nearterm as well as mediumterm.
Subscriber addition will continue to remain robust
due to (1) consistent gains in PhaseIII/IV markets,
and (2) mandatory digitization of phases III/IV. We
believe there is increased visibility on ARPU growth as
well, on account of initiatives from MSOs to raise
customer rates by enforcing content packaging and
billing. Dish TV has no significant renegotiations with
broadcasters till Sep16, which lends visibility to
margin expansion as well. Further to these, Dish TV
stands to gain from regulatory initiatives on GST/
reduction in license fees.
We believe that the companys margin accretive
growth is likely to continue and estimate EBITDA
margin improvement of 570bps over FY1517,
implying 28% EBITDA CAGR. Even after factoring in
the recent adverse currency movement, we expect
~24% EBITDA CAGR from FY1517.
At CMP of Rs 97, Dish TV trades at 11.4x FY16E and
9.1x FY17E on EV/EBITDA basis. We value the
company on a DCFbasis with a target of Rs 122.

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STRATEGY : Indian equity markets more attractive than Chinese markets ?

IDEA
(CMP 147, MCap Rs 529bn)

Since its Q1FY16 results, Idea Cellular has corrected

by 21%. The company faces (1) increased capex
needs for supporting robust data growth (3) the
threat of Reliance Jio, which could pressure tariffs,
both on voice and data, resulting in muted revenue
and EBITDA growth.
However, in our view, the recent correction
adequately bakes in the above negatives as the
company now trades at 7x FY16 and 5.8x FY17
EV/EBITDA. Our numbers are much below consensus,
despite which we believe that Idea can deliver a
healthy 16% EBITDA CAGR from FY1517, much lower
than the 30% EBITDA FY1115 EBITDA CAGR. Between
FY1517, Ideas FCF too is expected to rapidly grow,
from Rs 33bn (exspectrum) to Rs 64bn in FY17.
Idea trades at FCF yield (FCF/EV) of 7.6% in FY17E,
which offers adequate riskcover. Considering that
most of Ideas debt is rupee denominated and
demand purely domestic, we see no threat to the
company from the recent global macro adversities.

ZEE ENTERTAINMENT
(CMP 359, MCap Rs 345bn)

In the past week, ZEEL has corrected by ~11%, giving

up most of its 1 month outperformance versus NIFTY.
ZEELs exsports ad revenue growth of >25% YoY
reveals that the company is uniquely positioned to
capitalize on higher ad spends on account of
improving GDP growth, incremental spends by FMCG
and the emergence of new categories.
Q1FY16 results also show that FMCG companies have
reaped significant benefits of gross margin expansion
due to falling input costs (linked to commodity prices)
and are aggressively launching new products. These
new product launches entail significant advertising

and promotional spends, which, even for a

conservative media spender like HUL have risen by
22% YoY in Q1FY16.
We continue to maintain our bullish stance on ZEEL
due to (1) strong ad revenue growth led by an
economic recovery (2) repricing of television
currency led by BARCs data which will capture
television reach in the hinterland (3) changes in the
television content distribution ecosystem :
digitization and better content monetization.
ZEEL has just 13% of revenue coming from
international sources, which is a mix of advertising
and subscription, and is unlikely to be negatively
affected by the global turmoil. Further, the company
has net cash of Rs 18bn.
At CMP of Rs 363 and adjusting for pref. share payout
of Rs 21/share, ZEEL trades at 37x FY16 and 28x FY17
EPS. With increasing growth visibility and continued
improvement of &TVs ratings, ZEEL can sustain
premium multiples.

FMCG
FMCG stocks look selectively set for a breakout even
from the currently stiff valuation bands that they trade
in. Market volatility will push investors towards safety.
More importantly, falling commodity prices have
created headroom for FMCG players to invest in more
aggressive brandbuilding even as they partly retain
some of the benefits in the form of fatter margins. We
think the FMCG pack holds selective surprises, with
volume and margin surprises that merit diligent
discovery. Here are two examples.

ASIAN PAINTS
(CMP Rs 852, MCap Rs 817bn)

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STRATEGY : Indian equity markets more attractive than Chinese markets ?

Housing and urbanisation are two strong and

irreversible trends in India. They are as independent
of Chinese macros as any sector in India can be. Asian
Paints dominates the paints sector, with a market
share of 54%. When GDP growth surges above 7%,
decorative paint vols grow > 2x GDP (normalized run
rate ~1.7x). We are confident of vol growth
accelerating to 12.5/16% in FY16/17E on the back of
revival in urban housing and home improvement. Pick
up in industrial growth will also help.

Softer crude and TiO2 prices (down ~38% and ~15%

YoY; 54% of COGS) will boost gross margins. Crude
and TiO2 contribute ~40% to COGS (highest amongst
FMCG companies).

We like Asian Paints market leadership and superior

pricing power and believe its premium valuations will
sustain, given its leadership and long term growth
prospects of housing and home improvement in
India. At CMP, Asian Paints is trading at 34x FY17E
EPS. We have a BUY on the stock with TP of Rs 925.

PIDILITE
(CMP Rs 541, MCap Rs 277bn)

Yet another business virtually insulated from Chinese

tremors is the highly innovative and capable Pidilite
Industries. It is a market leader in adhesives and
sealants (~70% market share), construction
chemicals, hobby colors & polymer emulsions in
India. Its strong brand equity and pricing power are
attributable to its product innovation, consistent
brand building and a strong distribution network. No
wonder revenues have grown at 20% CAGR over the
past decade.

Over the last few quarters, the growth of

discretionary categories (like white glue, construction
chemicals) has slowed down owing to sluggish
macros. This has impacted the performance of
Pidilites key business segment : Consumer & Bazaar

(~85% of revenues). Industrial Segment revenues are

also struggling owing to sluggish industrial activity.

However, 2HFY16 should see a meaningful recovery

(esp vol) owing to the anticipated revival in urban
housing construction, home improvement and rising
IIP (likely to benefit ~60% of Pidilite's portfolio).

The business has benefitted from the sharp decline in

crude oil (down ~40% since Jun14) & VAM prices
(down ~28% from peak levels in 1QFY15) over the last
year. Gross margins have improved significantly at
49.1% in 1QFY16 are the highest since Q4FY10. We
dont see any sharp rise in VAM prices from current
levels and also expect crude to remain subdued.
Despite soft RMs, Pidilite is unlikely to take price cuts.

At CMP, Pidilite is trading at under 30x FY17E EPS.

Pidilites robust consumer franchise justifies premium
valuations. We have a BUY rating on the stock with TP
of Rs 654 (36x FY17E EPS).

INFRASTRUCTURE
The infrastructure sector is driven by Government
investments in building Roads, Ports, Irrigation, Water,
Power projects, etc. We believe government will utilize
fiscal headroom (from falling oil subsidy) to aggressively
drive spends (tenders) in pure EPC contracts. This is
already visible in the much improved flow of road and
select infra projects, leading to a better tendering
environment for vendors. Chinese tremors have little or
no impact here, except for bidding by Chinese vendors.
We think the government is cognizant of this threat and
will use it positively to enable JV opportunities for Indian
contractors.

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STRATEGY : Indian equity markets more attractive than Chinese markets ?

KNR CONSTRUCTIONS
(CMP Rs 504, MCap Rs 14bn)

KNR is a domestic infra play with FY1518E order

book expected to grow ~6x, largely driven by NHAI &
State EPC road projects. During 1QFY16E, KNRC has
announced three orders totaling Rs 23.3bn (resulting
in order book multiplying 2.8x FY15 to Rs 36.4bn). We
expect new orders of Rs17bn for rest of 9MFY16E
With the recent ramp up of order book, revenue
growth will be back on track with FY1518E revenue

CAGR of 32.5%. Further, the limited incremental

capex on BOTs (Kerala BOT is ~95% complete and
partial COD has been achieved) shall help keep
balance sheet healthy.
We expect strong order intake to deliver
32.5%/29.2% FY1518E sales/net profit CAGR. With
no exposure to foreign debt, KNR remains resilient to
currency headwinds. We maintain BUY with SOTP
based TP target price of Rs 665/share (standalone
business at 15x FY17E EPS, Kerala BOT at 1x P/BV). At
CMP, KNRC trades at 13.1x FY17E EPS.

Page | 10

600

250

500

Aug15

350

700

Jul15

800

Jun15

450

May15

900

Jul15
Aug15

Aug15

Mar15

Feb15

Jan15

Dec14

Nov14

Oct14

Jul15

200

Jun15

250

Jun15

300

May15

800

May15

SBI

Apr15

SBI

Apr15

Mar15

Feb15

Jan15

Dec14

350

Apr15

1,000

Sep14

Axis Bank

Mar15

HCL Tech

Feb15

HCL Tech

Jan15

400
Nov14

600

Dec14

1,000

Oct14

IndusInd

Nov14

IndusInd Bank

Sep14

300

Oct14

400

Aug14

500

Aug14

600

Sep14

Aug15

Jul15

Jun15

May15

Apr15

Mar15

Feb15

Axis Bank

Aug14

Aug15

Jul15

Jun15

May15

Apr15

1,100

Mar15

1,200

Feb15

Jan15

Dec14

Nov14

Oct14

Sep14

Aug14

700

Jan15

Dec14

Nov14

Oct14

Sep14

Aug14

Apr14
May14
Jun14
Jul14
Aug14
Sep14
Oct14
Nov14
Dec14
Jan15
Feb15
Mar15
Apr15
May15
Jun15
Jul15
Aug15

STRATEGY : Indian equity markets more attractive than Chinese markets ?

1-YR PRICE CHARTS

Bank of Baroda
BOB

230

210

190

170

150

130

KNR Construction

650
KNR

550

150

Page | 11

Aug15

Jul15

2,000

Jun15

2,500

May15

3,000

Apr15

500

Aug15

Jul15

Jun15

May15

Apr15

Mar15

Feb15

Jan15

Bharat Forge

Mar15

Ultratech

Aug15

Jul15

Jun15

May15

Apr15

Mar15

Feb15

Jan15

Dec14

Nov14

Oct14

Sep14

Aug14

1,800

Feb15

Ultratech Cement
Dec14

600

Jan15

800

Nov14

1,000

Dec14

4,500

Oct14

1,200

Nov14

5,000

Sep14

1,400

Oct14

Bharat Forge

Aug14

Aug15

Jul15

Jun15

May15

Apr15

Mar15

Infosys

Sep14

Aug15

Jul15

Jun15

May15

Apr15

Mar15

Feb15

Jan15

Dec14

Nov14

Oct14

Sep14

Aug14

Infosys

Aug14

Aug15

Jul15

Jun15

May15

Apr15

Mar15

Feb15

Jan15

Dec14

Nov14

Oct14

Sep14

Aug14

1,400
1,300
1,200
1,100
1,000
900
800
700

Feb15

3,500

Jan15

Dec14

Nov14

Oct14

Sep14

Aug14

STRATEGY : Indian equity markets more attractive than Chinese markets ?

Mindtree
Mindtree

1,600

1,400

1,200

1,000
800

Maruti Suzuki
Maruti

4,000

3,500

3,000

2,500

Coal India
Coal India

450

400

350

300

Page | 12

Aug14

900

600

800

500

700

400

600

300

500

200

Asian Paints

Asian Paints

700

May15
Jun15
Jul15
Aug15

Jun15
Jul15
Aug15

Mar15

Feb15

Jan15

May15

Pidilite

Apr15

Pidilite

Apr15

Mar15

200

Dec14

450

Feb15

40

Aug15

Jul15

Jun15

May15

Apr15

Mar15

Feb15

Jan15

Dec14

Nov14

Oct14

Sep14

220

Jan15

250

Dec14

60

Nov14

80

Nov14

100

Oct14

120

Oct14

140

Sep14

Dish TV

Sep14

Dish TV

Aug14

Aug15

Jul15

Jun15

May15

Apr15

Mar15

Feb15

Bharti Infratel

Aug14

Aug15

Jul15

Jun15

May15

Apr15

Mar15

Feb15

Jan15

Dec14

Nov14

Oct14

Sep14

Bharti Infratel

Aug14

Aug15

Jul15

Jun15

May15

Apr15

Mar15

Feb15

1,000

Jan15

Dec14

Nov14

Oct14

Sep14

Aug14

500
450
400
350
300
250
200

Jan15

Dec14

Nov14

Oct14

Sep14

Aug14

STRATEGY : Indian equity markets more attractive than Chinese markets ?

IDEA Cellular
IDEA Cellular

200

180

160

140

120

ZEE Entertainment
Zee

400

350

300

Source : Bloomberg

Page | 13

STRATEGY : Indian equity markets more attractive than Chinese markets ?

Disclosure:
Analyst
Darpin Shah, Siji Philip
Darpin Shah, Siji Philip
Darpin Shah, Siji Philip
Darpin Shah, Siji Philip
Darpin Shah, Siji Philip
Darpin Shah, Siji Philip
Harit Shah
Harit Shah
Harit Shah
Harit Shah
Navin Matta
Navin Matta
Ankur Kulshrestha
Ankur Kulshrestha
Ankur Kulshrestha
Ankur Kulshrestha
Vivekanand Subbaraman
Vivekanand Subbaraman
Vivekanand Subbaraman
Vivekanand Subbaraman
Mehernosh Panthaki
Mehernosh Panthaki
Parikshit Kandpal, Prabhat Anantharaman
Parikshit Kandpal, Prabhat Anantharaman
Parikshit Kandpal, Prabhat Anantharaman
Parikshit Kandpal, Prabhat Anantharaman

Stock
Axis Bank
Bank of Baroda
DCB Bank
Federal Bank
IndusInd Bank
State Bank of India
Eclerx
HCL Technoloigies
Infosys
Mindtree
Bharat Forge
Maruti Suzuki
Orient Cement
Sanghi Industries
Ultratech Cement
Coal India
Bharti Infratel
Dish TV
Idea Cellular
Zee Entertainment
Asian Paints
Pidilite
KNR Construction
PNC Infratech
Oberoi Realty
Prestige Estates

Holding
No
No
No
No
No
No
No
No
No
No
No
No
No
No
No
No
No
No
No
No
No
No
No
No
No
No

We, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our views about the subject issuer(s) or securities.
We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report.
Research Analyst or his/her relative or HDFC Securities Ltd. does not have any financial interest in the subject company. Also Research Analyst or his relative or HDFC Securities Ltd. or its
Associate may have beneficial ownership of 1% or more in the subject company at the end of the month immediately preceding the date of publication of the Research Report. Further
Research Analyst or his relative or HDFC Securities Ltd. or its associate does not have any material conflict of interest.

Rating Definitions
BUY
: Where the stock is expected to deliver more than 10% returns over the next 12 month period
NEUTRAL : Where the stock is expected to deliver ()10% to 10% returns over the next 12 month period
SELL
: Where the stock is expected to deliver less than ()10% returns over the next 12 month period

Page | 14

STRATEGY : Indian equity markets more attractive than Chinese markets ?

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