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Ambit Strategy Thematic Sensexentriesandexitsthedecadalstory 19sept2016
Ambit Strategy Thematic Sensexentriesandexitsthedecadalstory 19sept2016
September 2016
US$4K
Per Capita Income
S
RIE
ST
DU
IN
GE
PA
US$2K
Aditi Singh Ritesh Gupta, CFA Bhargav Buddhadev Abhishek Ranganathan, CFA
aditi.singh@ambit.co ritesh.gupta@ambit.co bhargav.buddhadev@ambit.co abhishek.r@ambit.co
CONTENTS
SECTOR
Sensex entries and exits: the decadal story ..3
Section 1: Dissecting Indias GDP growth model 4
Section 2: How have economies with similar growth .8
drivers as India evolved?
Section 3: Market cap changes as per capita income rises to $4000 ..12
Section 4: Predicting the sectoral composition of the Sensex in 2025 .17
Section 5: Entries into the Sensex by FY25..19
Section 6: Predicting exits from the Sensex.32
Appendix 1: Comparison with our Sensex entry and exit 40
predictions from last year
COMPANIES
Kotak Mahindra Bank (SELL)45
IOCL (BUY)..49
HCL Tech (BUY)..55
UltraTech Cement (BUY)..59
BPCL (BUY)..65
IndusInd Bank (BUY).71
Eicher Motors (SELL)..75
Ambuja Cement (BUY).81
Pidilite Industries (BUY).. 87
Torrent Pharma (NOT RATED)... 93
Page Industries (BUY)99
Reliance Inds. (NOT RATED) 105
Coal India (BUY). 109
ONGC (NOT RATED). 115
State Bank of India (SELL). 119
Larsen & Toubro (SELL). 123
Bharti Airtel (NOT RATED) 129
NTPC (SELL). 135
Wipro (SELL).141
Mahindra & Mahindra (SELL).. 145
Hero Motocorp (SELL) 151
Adani Ports (NOT RATED). 157
Dr Reddy's Labs (SELL).. 163
GAIL (India) (SELL)..169
Cipla (NOT RATED) 175
Tata Steel (SELL)..181
Sensex entries and exits - the decadal story Sensex Entry and Exit Candidates
(FY16-25)
Powerful transformations underway in the Indian economy are likely to Entry Exit
manifest in the form of a high churn ratio in the Sensex. By CY25, we Ticker Ticker
Candidates Candidates
expect the Sensex to retain only 15 of the companies that currently Kotak Mahindra
KMB IN
Reliance
RIL IN
Bank Inds.
comprise the 30-stock index. In this note, we identify 15 exit candidates
IOCL IOCL IN Coal India COAL IN
and 15 new entrants with a combination of macroeconomic and financial
HCL Tech HCLT IN ONGC ONCG IN
filters. The macroeconomic filters focus on the evolutionary experience of
UltraTech State Bk of
5 countries that have the same growth model as that of India. After Cement
UTCEM IN
India
SBI IN
identifying the winning and losing sectors, we apply our proprietary BPCL BPCL IN
Larsen &
LT IN
filters to predict 11 entrants and 15 exits from the listed space. To Toubro
BHARTI
identify the remaining 4 entrants from the unlisted space, we pick from Indusind Bank IIB IN Bharti Airtel
IN
the three themes that we believe will dominate the next decade, i.e. e- Eicher Motors EIM IN NTPC NTPC IN
commerce, fin-tech and Insurance. Ambuja Cement ACEM IN Wipro WPRO IN
the last decade, i.e. 9% CAGR. India will hit a per capita income of ~US$4000 in The Sensex in 2025: Current vs.
CY25. Cross-country experience suggests that: (1) The share of spending on Predicted sector weights
consumer discretionary products and Financial Services rises as per capita Current weight Predicted
incomes rise whilst spending on consumer staples declines; (2) The share of Sectors
(based on free weight (based
float market on economic
spending on healthcare services tends to follow a U-shaped pattern, with cap) FY15 insights) FY25
spending falling/stagnating until per capita GDP exceeds ~$10k; and (3) The Consumer
share of investment as a percentage of GDP rises with income. Combining these Discretionary + 41% 49%
Financial services
insights with an analysis of market capitalization data in these 5 countries we Industrials,
conclude that the share of Consumer Discretionary, Industrials + Materials + Materials, and 20% 25%
Energy
Energy and Financial Services in the Sensex will rise by CY25 whilst the share of Information
Consumer Staples, IT and Telecom will decline, and the share of Healthcare Technology and 17% 10%
Telecom
Services will marginally decline/stagnate. As regards Utilities, we do not expect
Consumer Staples 13% 8%
the market-cap share of utilities to change significantly as political imperatives do
not allow ROEs to go north of the cost of capital. Healthcare 6% 5%
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
Labour share
Drivers of GDP growth
Capital share
80%
Total factor productivity
(in%)
60%
40%
20%
0%
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
Source: The Next Generation of the Penn World Table - American Economic Review, Ambit Capital Research. In a
bid to obtain the Cobb-Douglas break-up of Indias GDP growth process, we refer to the "The Next Generation of
the Penn World Table" published in 2015. The dataset for Indias labour share to total output is taken from the
Central Statistical Offices contribution to the United Nations System of National Accounts. Capital share is
approximated by the share of gross capital formation of the GDP. Total factor productivity is calculated as the
residual. All three variables are calculated at current national prices.
Malaysia
Labour share of total output
80% Korea
Thailand
70%
India
60%
(in %)
50%
40%
30%
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
Source: The Next Generation of the Penn World Table - American Economic Review, Ambit Capital
Research.
Factor#2: Capitals share in the growth process
According to the Cobb-Douglas production function, an increase in the stock of
capital would increase both the level of output as well as the level of output per
worker. An economys rate of savings determines the size of its capital stocks and Capital accumulation, in the
hence the level of Q or output. Increase in savings and, as a result, increase in absence of technological progress,
capital causes a period of rapid growth by raising the levels of output and output per cannot drive growth forever
worker.
In Indias case, capitals contribution to the growth process has been rapidly rising
since the mid-nineties. In CY91, when Indias per capita income was around $300,
capital accounted for 22% of GDP whereas in CY14, when Indias per capita income
was around $1600, capital accounted for 34% of GDP.
Note that at very low levels of per capita income (around US$420 in CY97), India Capital accumulation has been a
had close to 60% share of output coming from labour and just about 25% from key driver of Indias growth
capital. As the country became richer, increases in Indias output per worker, i.e. the process.
per capita GDP, has been driven by greater accumulation of capital per worker.
Furthermore, the increase in capital stock in India is expected to continue:
..though investment has slowed recently, the rate of gross fixed capital formation in
India is still high at around 30% of GDP and the growth of capital stock remains one of
the highest among emerging economiesAgain, barring the recent slowdown,
investment in infrastructure capital has been increasing over the years, and additions to
the physical stock of infrastructure, in terms of roads, rail, telecommunication networks,
remain strong
- Ila Patnaik and Madhavi Pundit,
Where is Indias Growth Headed?,
January 2016
In terms of international experience, countries like Korea, Indonesia and Peru have
also been characterised by rising share of capital in output generation since CY70
(see exhibit below).
Exhibit 5: Capitals share of total output has been rising in Korea, Indonesia, Peru
and India
Korea
Indonesia
Capital share of total output
50%
Peru
India
40%
30%
(in %)
20%
10%
0%
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
Source: The Next Generation of the Penn World Table- American Economic Review, Ambit Capital
Research.
Factor#3: The role of technology in the growth process TFP is the efficiency with which
capital and labour are employed to
TFP is the efficiency with which capital and labour are employed. An increase in the
share of TFP comes from innovation in methods of production due to improved produce output
technology or improved organisation. Increasing multifactor productivity due to
innovation is necessary for continued rapid growth. As pointed out earlier, capital
and labour are only finite and what is required ultimately is an increase in the
efficiency with which these two inputs are used to boost GDP growth.
In Indias own experience, TFP has been fluctuating but the trend has been upward.
The 1960s and 1970s were periods
During the 1960s and 1970s, Indias TFP growth was close to zero and the reasons
of low productivity in India due to a
for that are not very hard to find. External shocks like war (India-Pak War 1965, Sino-
closed, public sector e as well as
Indian War 1962, India-Pak War 1971 ), severe drought (1966,1969-70, 1972,
external shocks
1979) and the global oil shock of 1979 coupled with India largely being a closed
public-sector-driven economy meant productivity levels were extremely low.
However, the Indian economy has been experiencing a systematic improvement in
TFP since the introduction of reforms in the eighties and nineties. Hence, Indias
output growth in the past three decades has not only been driven by rapid capital
accumulation but also improvements in productivity.
Post the internal reforms of the
In terms of international experience, countries like Malaysia, Korea and Mexico have 1980s and 1990s, Indias TFP has
also been characterised by rising share of TFP in output generation since CY70 (see systematically improved
exhibit below).
Exhibit 6: Total factor productivitys share of total output has been rising in Korea,
Malaysia, Mexico and India
Malaysia
Korea
share of total output (in %)
50%
Total factor productivity
Mexico
India
40%
30%
20%
10%
0%
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
Source: The Next Generation of the Penn World Table - American Economic Review, Ambit Capital
Research.
It is worth noting that the brand of growth generation as Indias (i.e. a combination of
capital and TFP driven growth with labours contribution diminishing) has been seen
across East Asia, with countries like Malaysia, Thailand and Korea being the best
examples. On the other hand, the factor accumulation model (i.e. a combination of Capital deepening and TFP growth
capital and labour driven growth) has been most commonly seen in Latin America, drove the East Asian tigers
with countries like Chile and most of the Caribbean being the best examples. China,
however, stands out as the most extreme example of factor accumulation driven GDP
growth with limited or no improvements in TFP (see exhibit below).
Exhibit 7: Chinas growth engine has been powered by capital and labour
improvements even as TFP has been a drag
Labour Share
Capital Share
Drivers of GDP growth (in %)
50%
30%
10%
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
-10%
-30%
Source: The Next Generation of the Penn World Table - American Economic Review, Ambit Capital
Research.
The table below summarises details regarding the data used for each of the 4
countries that qualify as members of the refined peer set for India (Mexico is excluded
as data on its consumption breakdown is not available but in included in the market
cap analysis in Section 3)
Exhibit 9: Details regarding the data used for the 4 country comparator set for India
20% 25%
R = 0.8726
Share of transport in
R = 0.5733
consumptione (in %)
Share of transport in
consumptione (in %)
18% 20%
household
16%
household
15%
14% 10%
12% 5%
10% 0%
0 2000 4000 6000 8000 0 500 1000 1500 2000
Per capita income (US$) Per capita income (US$)
Source: CEIC, Bloomberg, Ambit Capital research. Note: Data for Thailand Source: CEIC, Bloomberg, Capitaline, Ambit Capital research. Note: Data for
spans from CY90-15. India spans from CY70-14.
Indias own experience has reflected this cross-country trend. The share of spends on
transport rose from 3% in CY70 to 16% in CY14 as Indias per capita income rose Indias share of spends on
from US$114 to US$1577 (see exhibit above). transport rose from CY70-14 as its
per capita income increased
In fact, the transport equipment argument can also be extended to the consumer
discretionary sector in general. This is because not just transport but the entire non-
food component of spending tends to rise with increasing per capita income. The The entire non-food category tends
non-food component of spending includes key categories like spending on clothing to see an increase in spending as
and footwear, furnishings, hotels, restaurants, recreation and cultural services (see countries get richer
exhibit below).
100% R = 0.6183
Share of non-food items in
household consumption
90%
80%
(in %)
70%
60%
50%
0 5000 10000 15000 20000 25000 30000
Source: CEIC, Bloomberg, Ambit Capital research. Note: Countries covered include Korea (CY70-15), Malaysia
(CY00-15), Thailand (CY9015), and Turkey (CY98-15).
Insight#2: Indias spending on staples is set to decline Conversely, the share of food
The reciprocal of the dynamic highlighted above also holds true, i.e. as countries get spending tends to decrease as
richer their consumption basket moves away from staples, which at low per capita countries get richer
income levels account for the lions share of consumer spends (see exhibit below).
Exhibit 13: Cross-country evidence suggests that the Exhibit 14: Indias spending on food has been falling
spending on food falls as per capita incomes rise rapidly
50% 80%
R = 0.9637
household consumption
consumption(in %)
40%
Share of food in
60% R = 0.946
Share of food in
household
30%
(in %)
40%
20%
20%
10%
0% 0%
0 10000 20000 30000 0 500 1000 1500 2000
Per capita income (US$) Per capita income (US$)
Source: CEIC, Bloomberg, Ambit Capital research. Note: Countries covered Source: CEIC, Bloomberg, Capitaline, Ambit Capital research. Note: The
include Korea (CY70-15), Malaysia (CY00-15), Thailand (CY9015), and period under consideration for India is CY70-14.
Turkey (CY98-15).
Indias own experience has reflected this cross-country trend. The share of spends on Indias share of spends on food fell
food fell from 57% in CY70 to 31% in CY14 as Indias per capita income rose from systematically over CY70-14 as its
US$114 to US$1577 over the same period (see exhibit above). per capita income grew
Exhibit 15: Thailands example suggests that share of Exhibit 16: Koreas spends on services has been rising
Financial Services spends rises as per capita income rises
6% R = 0.5268 70%
Share of spends on financial
Share of spends on
R = 0.954
60%
Services(in %)
5%
50%
services
(in %)
4%
40%
3%
30%
2% 20%
0 2000 4000 6000 8000 0.0 10000.0 20000.0 30000.0
Per capita income (US$) Per capita income (US$)
Source: CEIC, Bloomberg, Ambit Capital research. Note: The period Source: CEIC, Bloomberg, Capitaline, Ambit Capital research. Note:
under consideration for Thailand is CY90-15. The period under consideration for India is CY70-14.
R = 0.9477
16%
Share of spends on services
12%
(in %)
8%
4%
0%
0 500 1000 1500 2000
Per capita income (US$)
Source: CEIC, World Bank, Note: The period under consideration for Korea is from CY70-15.
Exhibit 18: Spends on healthcare tend to marginally Exhibit 19: ..after attaining the US$10k level, the share of
decline/stagnate till US$10k level.. spends on healthcare rises
6% 6%
R = 0.1304 R = 0.8155
household consumption (in %)
Share of healthcare in
5%
4%
3% 4%
2%
3%
1%
0% 2%
0 5000 10000 10000 15000 20000 25000 30000
Per capita income (US$) Per capita income (US$)
Source: CEIC, Bloomberg, Ambit Capital Research. Note: Countries under Source: CEIC, Bloomberg, Ambit Capital Research. Note: Countries under
consideration are Korea (CY70-15), Malaysia (CY00-15), and India (CY70- consideration are Korea (CY70-15), Malaysia (CY00-15), and India (CY70-
14). 14).
Given that Indias per capita income is extremely low at this juncture, we highlight
that healthcare spends are unlikely to rise rapidly in the near term.
Insight#5: Indias investment spending as a share of GDP is likely to rise
Cross-country evidence suggests that investment spending as a share of GDP tends to
rise with per capita income till the US$4k level. The relationship beyond the US$4k
level is ambiguous. Since we are interested in the US$2k to US$4k transition period
for now, we highlight the cross country experience for this particular case below. (see
exhibit below).
Exhibit 20: Cross-country evidence suggests investments as Exhibit 21: Indias investment as a share of GDP has been
a percent of GDP rises as per capita income rises till the rising with rising per capita income
US$4k level
50% R = 0.9536
50% R = 0.3466
Investment's share (% of
Investment's share (% of
40%
40%
30% 30%
GDP)
GDP)
20% 20%
10% 10%
0% 0%
0 1000 2000 3000 4000 0 500 1000 1500 2000
Per capita income (US$) Per capita income (US$)
Source: World Bank. Note : Countries included are Indonesia (CY70-15), Source: World Bank. Note: Data for India spans from CY70-14.
Korea (CY70-15), India (CY70-14), Mexico (CY70-15), and Turkey (CY70-15).
Indias own experience has been similar. The investment (gross capital formation) to Indias share of investments (gross
GDP ratio has increased from 15% in CY70 to 34% in CY14 as Indias per capita capital formation) as a percent of
income went from US$115 to US$1577. GDP is a healthy 34%
Insight#1: The market cap share of consumer staples in India is set to decline
over the next decade
Cross-country evidence suggests that the consumer staples sectors market cap share
tends to decline as per capita incomes rise (see exhibits below).
Exhibit 23: Cross-country evidence suggests consumer Exhibit 24: Indias consumer staples market cap share
staples market cap share dips as per capita income rises has been falling as its per capita income rises
12%
cap share (in %)
30%
cap share (in %)
9%
20%
6%
10%
3%
0% 0%
0 10000 20000 30000 0 500 1000 1500 2000
Per capita income (US$) Per capita income (US$)
Source: CEIC, Bloomberg, Ambit Capital research. Note: Countries under Source: CEIC, Bloomberg, Capitaline, Ambit Capital research. Note: Period
consideration include Turkey (CY00-15), Korea (CY94-15), Thailand (CY94- under consideration is from CY94-15.
15), and Malaysia (CY94-15).
Indias own experience so far too has been in-line with international experience. The The market cap share of consumer
consumer staples sectors market cap share declined from 22% in CY94 to 10% in staples has been falling
CY15 as Indias per capita income rose from around US$350 to US$1600 over the
same period (see exhibit above).
Insight#2: The market cap share of consumer discretionary in India is set to
rise over the next decade
Cross-country evidence also suggests that the consumer discretionary sectors market
cap share tends to rise as per capita incomes rise (see exhibit below).
Exhibit 25: Cross-country data suggests that the market Exhibit 26: Indias consumer discretionary market cap
cap share of consumer discretionary as a sector rises as share has been rising after an initial decline
per capita incomes rise
R = 0.2729 30%
16% R = 0.3729
Consumer discretionary's
market cap share (in %)
Consumer discretionary's
market cap share (in %)
12% 20%
8%
10%
4%
0% 0%
0 10000 20000 30000 0 500 1000 1500 2000
Per capita income (US$) Per capita income (US$)
Source: CEIC, Bloomberg, Ambit Capital research. Note: Countries under Source: CEIC, Bloomberg, Capitaline, Ambit Capital research. Country under
consideration are Mexico (CY00-15), India (CY94-15), Korea (CY94-15), and consideration: India (CY94-15).
Thailand (CY94-15).
Indias own experience so far has also been in-line with international trends. After The market cap share of consumer
initially declining until the US$1k per capita income level was reached, the consumer discretionary sector has been rising
discretionary sectors market cap share rose from 3% in CY01 to 10% in CY15 as
Indias per capita income rose from around US$450 in CY01 to US$1600 in CY15
(see exhibit above).
Insight#3: The market cap share of Financial Services in India is set to rise
over the next decade
Cross-country evidence suggests that the Financial Services sectors market-cap share
rises as per capita incomes rises initially, but tends to decline marginally/stagnate at
higher per capita income levels (see exhibits below).
Exhibit 27: Cross-country evidence suggests that Financial Exhibit 28: however, at higher levels of per capita
Services market cap share initially increases as per capita income, the market cap share of Financial Services tends
income rise to decline/stagnate
60% R = 0.3297 30%
R = 0.4466
Financials' market cap
Financials' market cap
25%
share (in %)
40%
share (in %)
20%
20%
15%
0% 10%
0 1000 2000 3000 4000 4000 9000 14000 19000 24000 29000
Per capita income (US$) Per capita income (US$)
Source: CEIC, Bloomberg, Ambit Capital research. Note: Countries under Source: CEIC, Bloomberg, Ambit Capital research. Note: Countries under
consideration are Thailand (CY94-15), Malaysia (CY94-15), India (CY94-15), consideration are Korea (CY94-15), Thailand (CY94-15), Malaysia (CY94-15).
Turkey (CY00-15).
Indias own experience so far has also been in-line with international trends. The
The market cap share of Financial
Financial Services sectors market cap share rose from nothing in CY94 to 21% in
Services has been rising.
CY14 as Indias per capita income rose from US$353 to US$1577. The share of
savings in GDP in India rose from 24% in CY94 to 33% in CY14 (see exhibits below).
Exhibit 29: The share of savings in Indias GDP increased Exhibit 30: with a corresponding increase in the market
as per capita income rose... cap share of Financial Service
share (in %)
15%
20% 10%
5%
10% 0%
0 500 1000 1500 2000 0 500 1000 1500 2000
Per capita income (US$) Per capita income (US$)
Source: CEIC, Bloomberg, Ambit Capital research. Note: Period under Source: CEIC, Bloomberg, Capitaline, Ambit Capital research. Period under
consideration is from CY70-14. consideration CY94-15.
15% 25%
Industrial's market cap
20%
share (in %)
share (in %)
10%
15%
10%
5%
5%
0%
0%
0 2000 4000 6000
0 5000 10000 15000
Per capita income (US$) Per capita income (US$)
Source: CEIC, Bloomberg, Capitaline, Ambit Capital research. Note: Countries Source: CEIC, Bloomberg, Capitaline, Ambit Capital research. Note: Countries
under consideration Turkey (CY00-15), India (CY94-15), Malaysia (CY94-15), under consideration Mexico (CY00-15), Turkey data (CY00-15), Malaysia
and Thailand (CY06-15). Korea data not available. (CY94-15), and Thailand (CY06-15). Korea data not available.
Indias own experience so far has been reflective of this broader cross-country trend The market cap share of industrials
where the share of the industrials sectors market cap has followed no specific in India has followed no specific
pattern even as the share of investments in GDP rose from 22% in CY94 to 31% in trend
CY14 (see the exhibit below).
Exhibit 33: The share of investments in India rose as its per Exhibit 34: but the trend of market cap share of
capita income rose industrials sector remains ambiguous
40% 15%
R = 0.97
Investments (% of GDP )
share (in %)
10%
20% 5%
10% 0%
0 500 1000 1500 2000 0 500 1000 1500 2000
Per capita income (US$) Per capita income (US$)
Source: CEIC, Bloomberg, Ambit Capital Research. CY94-14. Source: CEIC, Bloomberg, Capitaline, Ambit Capital Research.
100
per capita icnome
Source: World Bank, Ambit Capital Research. Note: Data for Korea pertains to CY82, for Indonesia pertains to
CY08, for Peru pertains to CY97, for China pertains to CY06, for Malaysia pertains to CY83, for Thailand pertains
to CY93, and for India pertains to CY15. Perus data is available from CY97 onwards though per capita income
touched US$2k in CY95. Data for Mexico and Turkey is not available for the desired period.
Indias high market capitalisation to GDP ratio suggests that there is a higher
probability of changes in the underlying economy being translated into changes in
the benchmark equity index.
As these companies grow larger, VC/PE funds will seek exits. Whilst SEBIs current VC/PE investors seeking exits will
listing norms appear restrictive with regards to profits (track record of distributable drive large IPOs
profits for at least three out of the immediately preceding five years) and promoter
holding (locked in for three years), SEBI is reportedly mulling easing the rules for
listing for helping start-ups (Source: https://goo.gl/snjjlO).
Thus, whilst under current norms, a listing appears unlikely in the near term, we
believe that in the next decade these startups will look at IPO to: (a) fund their growth
on a larger scale; (b) provide exits to their PE investors; and (c) compete on a global
platform.
Most likely Sensex entry candidates: As outlined above, we expect the large e-
commerce startups to list in the coming decade. Out of these, we choose Flipkart
and Paytm for their leading positions (both in terms of scale and valuation) among
competition. We have to admit that because these are unlisted firms, our judgments
are based on what we read in the press, which might mean that we do not have a
complete picture of the financial prospects of these firms.
In FY04, the last year of the then BJP-led National Democratic Alliance (NDA), the The BJP-led NDA Government has
Government raised Rs155bn, a record at that time. a track record for big-ticket IPOs of
Exhibit 38: Disinvestment trends from FY92 to FY04
public sector companies
(Rs bn)
Target Receipts Actual Receipts
Over the next decade, we expect the current NDA Government to aggressively divest
its stake in certain Central Public Sector Enterprises (CPSEs). For the current year, the
Government has set a disinvestment target is of Rs56,500crores (Source:
https://goo.gl/JWjU0g).
As most of the large (Maharatna and Navratna) CPSEs are already listed (except
Hindustan Aeronautics Limited and Rashtriya Ispat Nigam Limited), the Government
would look at Follow-up Public Offers (FPOs) for raising funds. For new issues, the
Government could choose from smaller CPSEs (Miniratna Category I with 55
companies and Category II with 17 companies). Airports Authority of India, Housing
& Urban Development Corporation (HUDCO), India Tourism Development
Corporation (ITDC), Indian Railway Catering & Tourism Corporation (IRCTC) are some
of the interesting CPSEs that could open up new investment themes if they were listed
in the next decade. We highlight recent media reports citing Government plans to
corporatise and sell shares of the Airports Authority of India (AAI) (Source:
http://goo.gl/gMgpah) and the possibility of selling shares for the first time in Indian
Renewable Energy Development Agency and Housing and Urban Development
Corporation (Source: https://goo.gl/9cvBVO).
Furthermore, in early September 2016, the Finance Minister raised the possibility of
listing the Life Insurance Corporation of India (LIC). The FM stated how LIC would be
the most valuable company in the markets of the country and one of the most
formidable ones in the world(Source: https://goo.gl/z699KP).
Most likely Sensex entry candidate: We believe that the current NDA Government
Our choice for PSU divestment
would opt for at least one large IPO in the next decade to convey its commitment to
candidate: LIC
divestment. We believe LIC could top the list of profitable PSUs that will list over the
next decade.
Flipkart
The poster boy of Indian ecommerce
Flipkart is not only an ecommerce pioneer but has also revolutionized
customer outreach through initiatives such as cash on delivery and in-house
logistics. Moreover, Flipkart owns two of the largest fashion portals in India
Flipkart is the largest e-retail
controlling over 70% of fashion products sold online. This dominance over
company in India with 20 million
the fastest growing and most profitable category in ecommerce can make
products across more than 70
Flipkart profitable as the market grows and matures, thus, making it a
categories and has 70 million
prospective entrant in the Sensex.
registered users and 23,000
Introduction: Formed in September 2007 by Sachin Bansal and Binny Bansal, employees. Its Gross Merchandise
Bengaluru-based Flipkart is the largest e-retail company in India, with a gross Value run rate is at US$4bn.
merchandise value (GMV) run-rate of US$4bn. With downloads between 50-100
million on the Android store, it is the eighth most-downloaded free app in India. The
company stocks 20 million products across more than 70 categories and has 75
million registered users and 23,000 employees.
Financials: Flipkart is registered in Singapore and its financials are therefore, not in
the public domain. Its current gross merchandise value (GMV) run-rate is US$4bn.
This is higher than peers such as Snapdeal and Amazon India. Flipkarts various
Indian subsidiaries reported revenues of Rs100bn and losses of Rs19.3bn in FY15.
Funding: Flipkarts largest investors are Tiger Global and Intervision Services
Holding (Naspers, South Africa), which between them hold close to 50% in the
Singapore entity, whilst Sachin Bansal and Binny Bansal hold 8.7% each
(http://goo.gl/8txtbB). Flipkart raised US$1.9bn in 2014 (from DST Global, Tiger
Global and Naspers) and raised a further US$700mn in July 2015
(http://goo.gl/OMYUIu, http://goo.gl/OYZuMp, goo.gl/9HfvDC).
Rationale for inclusion as a Sensex entry candidate: Flipkarts current valuation
(US$9.4bn valuation, as per Morgan Stanleys markdown) (goo.gl/qNvrIv) already
places it ahead of many Sensex stocks. E-retail is already a compelling theme among Given its size and growth path,
private investors and, in the next decade, should move to the public investment Flipkart is well placed as a
domain. According to BCG, the Indian e-commerce markets size is likely to increase potential Sensex entrant.
from US$16bn-17bn in 2014 to US$45bn-50bn in 2020, an annual growth rate of
more than 20-25%. Also Flipkart controls over 70% of the fashion business in
ecommerce through Myntra and Jabaong. Apparel is the fastest growing category
(40%) and the second largest category by sales (35%) on ecommerce. It is also the
most profitable category (gross margins 35-40%). As it grows larger in size and
achieves profitability led by fashion, Flipkart has a good chance of finding its way into
the Sensex in the next decade.
Paytm
The digital payments leader
Introduction: Paytm is the flagship brand of One97 Communications, a digital
goods and mobile commerce company founded by Vijay Shekhar Sharma. In FY13, Paytm is making rapid strides in
Paytm received a licence from the RBI for semi-closed digital wallet which it launched the digital payments space
in FY14. It also provides an online B2C marketplace. In 2015, Paytm received a
payments bank license from the RBI. As of September 2016, the company claims that
there are over 130 million wallets registered on its platform. Headquartered in New
Delhi, One97 has employee strength of 3,200.
Financials: Founder, Vijay Shekhar Sharma held a 21.3% stake in the company,
whilst SAIF Partners held 30.8%, as at August 29, 2016. On the e-retail marketplace,
Paytms current GMV run-rate is US$4.5bn in August 2016 and targets to achieve
GMV of US$10bn by end-current financial year (Source: https://goo.gl/TPt9ps).
Funding: Paytm has so far raised more than US$728million in funding. It shot into
the limelight in February 2015 when it raised funding from Alipay Financial (part of
Alibaba, the Chinese e-commerce company) for its mobile commerce and digital
wallet operations. The other key investors include ANT Financial, SAIF Partners, and
Intel Capital. In March 2015, Ratan Tata, Chairman Emeritus, Tata Sons, joined
Paytm as an advisor and made a minor investment in the company. On 31 August
2016, Paytm raised US$60 million reportedly from Taiwan based investment fund
MediaTek taking its valuation to ~US$5billion. (Source: https://goo.gl/L81Oa1)
Paytm can potentially disrupt Indias payments infrastructure over the longer term
Rationale for inclusion as a Sensex entry candidate: One97 also features on the
WSJs Billion Dollar Startup Club, with an estimated valuation of US$4.8bn. Given its
convenience over cash and ease of use via mobile apps, digital wallets are witnessing
rapid growth. Paytm is already a large player (130mn digital wallets) in this space.
Moreover, as a payments bank, it can potentially provide a wider array of financial
services (payments, remittances, small savings, distribution of financial products).
Access to wide transaction data of customers and vendors also places Paytm in a
formidable position in the emerging data-analytics led Financial Services landscape.
When it lists, it will likely be a significant Indian financial services company. The
presence of Alibaba provides a competitive edge.
Exhibit 40: LIC - premium growth Exhibit 41: LIC - AUM growth
1,500 0% 0 0%
FY14 FY15 FY16 FY14 FY15 FY16
Total Premium (Rs bn) Growth (%, RHS) Assets under management (Rs bn)
Source: Company, Ambit Capital research Source: Company, Ambit Capital research
Source: Company, Ambit Capital research Source: Company, Ambit Capital research
10 80% 50 44.7
9 40 35.1
8.2 60% 28.7
7.9
8 7.3 30
40%
7 20
6 20%
10
5 0% 0
FY14 FY15 FY16 FY14 FY15 FY16
Profit After Tax (Rs bn) Growth (%, RHS) Return on Equity (%)
Source: Company, Ambit Capital research Source: Company, Ambit Capital research
Exhibit 48: Nearly half the entrants historically have come from the top-100 stocks as
at the start of the decade
% entrants coming from:
Period 'Beyond top-200' 'Fresh issuances'
'Top-100' bucket '101-200' bucket
bucket bucket
1990-00 33% 11% 6% 50%
1991-01 33% 6% 11% 50%
1992-02 47% 16% 11% 26%
1993-03 45% 20% 15% 20%
1994-04 60% 10% 10% 20%
1995-05 50% 25% 5% 20%
1996-06 50% 7% 7% 36%
1997-07 46% 8% 0% 46%
1998-08 38% 8% 0% 54%
1999-00 43% 0% 7% 50%
2000-10 44% 0% 13% 44%
2001-11* 44% 6% 6% 44%
2002-12* 57% 7% 7% 29%
2003-13* 56% 11% 0% 33%
2004-14* 75% 13% 0% 13%
2005-15* 63% 13% 0% 25%
Average 49% 10% 6% 35%
Source: Bloomberg, Capitaline, Ambit Capital research. Note: * indicates this is on a free float market-cap basis
Exhibit 49: The further an entrant is from the Sensex at the beginning of the decade,
the higher its investment returns over the course of the decade
Average share price returns over the decade for stocks coming from:
Period 'Beyond top-200' 'Fresh issuances'
'Top-100' bucket '101-200' bucket
bucket bucket
1990-00 18% 25% 64% N/A
1991-01 13% 4% 50% N/A
1992-02 10% 34% 35% N/A
1993-03 12% 43% 57% N/A
1994-04 17% 28% 57% N/A
1995-05 24% 42% 67% N/A
1996-06 43% 35% 75% N/A
1997-07 35% 49% N/A N/A
1998-08 22% 39% N/A N/A
1999-00 23% N/A 65% N/A
2000-10 24% N/A 70% N/A
2001-11* 24% 68% 63% N/A
2002-12* 28% 54% 60% N/A
2003-13* 22% 30% N/A N/A
2004-14* 21% 24% N/A N/A
2005-15* 22% 37% N/A N/A
Average 22% 36% 60% N/A
Source: Bloomberg, Capitaline, Ambit Capital research. Note: This is the average share price performance over
the decade for firms entering the Sensex by the end of the decade. * indicates this is share price performance for
firms belonging to the respective buckets constructed on a free float market-cap basis.
Thus, close to half of the 15 Sensex entrants of the next decade are likely to come
from the top-100 stocks ranked by market cap today. Another 10% are likely to come
from the next 100 stocks by market cap (below the top 100). About 6% should come
from the universe beyond the top-200. Finally, a third of the entrants are likely to be
new offerings.
To identify potential Sensex entrants from the current listed universe, we use a five-
step process to identify 10 firms that are most likely to enter the index over the
coming decade.
Step 1: Efficient capital allocation
Over the past four years, we have successfully used our greatness framework to We use a five-step process to
measure the efficiency of a firms capital allocation. The framework looks for firms identify the ten firms from the
that judiciously invest capital and turn those investments into sales, profits, balance current listed universe
sheet strength and, most importantly, free cash flows which then feed back into the
future growth needs of the firm.
Exhibit 50: The greatness framework
This framework has been the basis of stock selection for both our tenbagger and
Good & Clean portfolios. For more details on the framework please refer to our latest
iteration dated January 5, 2016 Ten baggers 5.0.
For a firm to be considered for Sensex inclusion, the greatness score should be 67%
or higher. Thus, at the first step, we weed out all firms that fail to meet this metric.
However, we make exceptions for IOCL, Ambuja, Ultratech, and Pidilite Industries:
Whilst IOCL and Ultratech do not score highly on the greatness model, they
require the least amount of compounding to get into the index given their size.
Ambuja will soon cease to exist in its current form as it will merge with ACC thus
creating the second-largest cement company in India with a combined market
cap in the region of $10.6bn and a highly likely Sensex entrant.
Pidilite is included due to our analysts conviction on the long term story for the
stock.
Exhibit 51: The connected companies index has consistently underperformed the
BSE500 since the release of the CAG report in October 2010
340
Publication of CAG report in
300
Oct' 10 was an inflection point
260
220
180
140
100
60
Sep-09
Sep-10
Sep-11
Sep-12
Sep-13
Sep-14
Sep-15
Jan-09
May-09
Jan-10
May-10
Jan-11
May-11
Jan-12
May-12
Jan-13
May-13
Jan-14
May-14
Jan-15
May-15
Jan-16
May-16
Ambit Connected Cos Index BSE 500 Index
Source: Bloomberg, Ambit Capital research
Thus, any company in our universe that is part of Ambits P-75 companies is
automatically disqualified from becoming a probable Sensex entrant.
Step 4: Market-cap buckets
The fourth filter that we use pertains to the size of the company at the beginning of The fourth filter relates to the size
the period. From our previous discussions, we note that nearly half of the Sensex of the company at the beginning of
entrants historically have been firms belonging to the top-100 stocks on free float the decade
market cap as of the beginning of the period. This would mean that around eight of
the 10 entrants from the current listed universe should belong to the top-100 stocks
on free-float market cap as of today.
Further, the remaining 15% entrants come from the universe outside of the top-100
companies. This would mean that the remaining two companies should belong to the
residual universe (outside of the top-100 companies).
Step 5: Pick and choose depending on sector
In the final step, from the stocks that clear all our filters, we give pre ference to Finally, we give preference to
stocks that belong to the sectors that are expected to gain market share - Consumer stocks which belong to our
Discretionary, Industrials, Energy, Materials, Financial Services. preferred sectors.
Exhibit 52: Stocks from the top-100 universe that are likely to enter*
ADVT-6M Mkt cap FF mkt
Company name Ticker Reasons for entry
(US$mn) (US$bn) cap rank
Among the best-run private sector banks; expected to generate synergies
Kotak Mahindra Bank KMB IN 22.3 11 22
with the ING Vysya integration
Largest Indian fuel retailer and second largest refiner; competitive
IOCL IOCL IN 21.0 19 15 advantage will be driven by Paradip scale up and increased autonomy in
decision making by GoI
Leader in Infra Management Services and Engineering Services; scores
HCL Tech HCLT IN 16.5 25 30 high on our capital allocation, portfolio mix, operational excellence and
management framework
Strong balance sheet/cash generative traits and access to large land
UltraTech Cement UTCEM IN 16.2 27 15 parcels and limestone reserves will drive Ultratechs leadership position
and make it a proxy play on India infra/housing pick up
Leading fuel retailer and refiner in India with superior capital allocation
BPCL BPCL IN 12.9 30 24
and project execution
Leader in Commercial Vehicle financing; expansion in new areas led by
IndusInd Bank IIB IN 10.6 18 22
strong franchise will drive market share gains strong loan book growth
Leader in niche motorcycle segment; well-placed to gain from rise in
Eicher Motors EIM IN 9.2 35 18
consumer discretionary spend
ACC will merge with Ambuja to create the second largest cement entity.
Ambuja Cement ACEM IN 8.1 49 10 The combined entity will maximise plant efficiencies and enjoy synergistic
savings
Sustainable brand leadership, superior fundamentals make Pidilite a
Pidilite Industries PIDI IN 5.4 85 8
high-quality defensive play in consumer sector
Source: Bloomberg, Capitaline, Ambit Capital research. * Note: At present, the smallest Sensex stock by market cap is Tata Steel with a market cap of $5.4bn
Greatness scores for non BFSI names are based on FY10-15 financials and for BFSI names FY09-14 financials. Accounting scores are based on FY09-14 financials.
Our accounting framework does not apply to BFSI names.
Similarly, stocks from the next 100 universe on free-float market-cap that clear all our
filters and which we believe would likely enter the index over the next decade have
been shown in the exhibit below.
Exhibit 53: Stocks from the 101-200 universe that are likely to enter
Mkt cap FF mkt cap ADVT-6M
Company name Ticker Reasons for entry
(US$bn) rank (US$mn)
Increasing presence in generics (US, Europe) and branded markets
Torrent Pharma TRP IN 4.1 108 4
(India and EMs); new management driving high RoCEs
Greater growth longevity than most consumer companies;
Page Industries PAG IN 2.5 105 2
sustained competitive advantages will support premium valuations
Source: Bloomberg, Capitaline, Ambit Capital research. Greatness scores for non BFSI names are based on FY10-15 financials and for BFSI names FY09-14
financials. Accounting scores are based on FY09-14 financials. Our accounting framework does not apply to BFSI names.
Note that in the exhibit above we have only considered firms from the top-200
companies on free-float market cap as of today. Historical trends suggest that ~5% of
the fresh entrants belong to the universe outside of the top-200 companies. Thus, in
todays context, this would mean that 1 of the likely 15 entrants may be from this
universe. However, given that we do not cover most of these names (in the universe
outside top-200), we could not pick a name to be included in the list of entrants.
However, for the universe outside of the top-200 companies, we have listed in the in
the exhibit below all the companies that meet all our criteria.
Exhibit 55: The list of firms outside of the top-200 companies that meet our criteria for inclusion
Mcap FF mkt 6M ADV
Company Name Ticker FY16 P/E FY16 P/B
(US$ mn) cap rank (US$ mn)
Hexaware Tech. HEXW IN 911 313 4.3 15.3 4.2
Relaxo Footwear RLXF IN 828 360 0.4 42.9 10.8
Persistent Sys PSYS IN 749 219 1.3 16.3 2.9
Greenply Inds. MTLM IN 488 340 0.6 25.2 5.3
Vinati Organics VO IN 458 476 0.4 23.6 5.7
Suprajit Engg. SEL IN 381 367 0.2 32.8 5.7
Huhtamaki PPL HPPL IN 307 535 0.2 25.9 3.2
Accelya Kale KALE IN 277 612 0.1 22.1 16
Caplin Point Lab CLPL IN 272 568 0.2 33.5 15.3
Poly Medicure PLM IN 260 462 0.1 36 7.6
Geometric GEO IN 223 455 1.9 14.1 3.2
V-Mart Retail VMART IN 140 648 0.1 34.5 4
KEI Inds. KEII IN 133 629 0.3 14.2 2.4
Kovai Medical KMC IN 131 634 0 21.5 5
Arcotech Ltd ATECH IN 117 897 1.4 20 3.7
Source: Bloomberg, Capitaline, Ambit Capital research. Note: We have also filtered this list for clean accounting quality using our forensic accounting framework.
Greatness scores for non BFSI names are based on FY10-15 financials and for BFSI names FY09-14 financials. Accounting scores are based on FY09-14 financials.
Our accounting framework does not apply to BFSI names.
Note: Assuming that the smallest constituent of the Sensex currently, i.e. Tata Steel,
compounds at 15% over the next 10 years, its free-float market cap would have
grown to Rs1000bn. The largest company on free-float market-cap from the universe
outside the top-200 (listed above) is Crompton Greaves. For it to reach this
milestone, it will have to compound at ~40% over the next 10 years. We cannot see
any of the companies in the exhibit shown above compounding their free float market
cap at 40% CAGR for the next ten years.
70%
60%
over the next 10 yrs
50%
40%
30%
20%
10%
0%
86-96
87-97
88-98
89-99
90-00
91-01
92-02
93-03
94-04
95-05
96-06
97-07
98-08
99-09
00-10
01-11
02-12
03-13
04-14
05-15
Source: Ambit Capital research, Bloomberg. Note: Sensex churn has been calculated as the percentage number
of companies forming a part of the Sensex in year t that get exited from the index by year t+10. For example,
50% in the 1986-96 period suggests 15 of the 30 Sensex constituents in Dec86 were no longer part of the index
10 years later, i.e. Dec 96.
Churn in the Sensex peaked in the four years following the momentous reforms Sensex churn peaked in the four
launched by PV Narsimha Rao (as PM) and Manmohan Singh (as Finance Minister). A years following the 1991 reforms
whole host of businesses which had flourished behind the protectionist barriers
created by the License Raj were ejected from the Sensex. These industries include
(1) Textiles (Aditya Birla Nuvo, Bombay Dyeing, Century Textiles and Future
Polyester), (2) Automobiles (Hindustan Motors and Premier), (3) Steel (Mukand
Limited), (4) Paper (Ballarpur Industries), and (5) Heavy engineering (Bharat Forge,
Cummins India, Siemens and Voltas (although this final group of companies
subsequently adapted well in the post-License Raj).
After 1995, Sensex churn fell remarkably relative to the volatile era of the early
1990s. Sensex incumbents grew rapidly in size, which we attribute to the following
reasons: Post-1995, Sensex churn has fallen
remarkably relative to the volatile
Large business groups ramped up domestic capacities in a license-free era and era of early 1990s
followed them up by large acquisitions in the noughties (Reliance, Tata Steel and
Hindalco).
We believe the next 10 years in India will be akin to the 1990s rather than the The next ten years in India appear
noughties. This is because the period spanning 1992-02 was defined by irrevocable akin to the 1990s in light of Modis
structural changes administered by the political leadership. The structural changes resets
akin to 1992-02 are the three resets by PM Modi to the Indian economy, namely:
Reset 1: Shifting Indias savings landscape away from gold and land towards the
formal financial system;
Reset 2: Disrupting crony capitalism in India by breaking the nexus between
politicians and certain large business houses; and
Reset 3: Re-defining Indias subsidy mechanism so that it becomes centred on Direct
Benefit Transfers (straight into the recipients bank account).
We have focused on this theme in detail in our report Sensex exits: The decadal story
dated 5 May 2015.
Thus, we expect Sensex churn to rise to 50% in the next decade from the historical
lows of 27% during the most-recent decadal bucket (2005 to 2015). This means
that 15 stocks will be replaced in the Sensex in the upcoming decade.
Owning Sensex exit candidates is a losing proposition
Stocks that eventually exit the Sensex do so after a long period of underperformance. A long period of underperformance
We present the price performance of the stocks during 1992-2002 and note their precedes the stocks exit from the
sharp underperformance to the Sensex during that decade. Sensex
In the exhibit below, we show the share price performance for all the exits from the
Sensex in two ways over the next decade and until the time of exit from the Sensex.
Whilst on average these stocks underperformed the Sensex by ~6% on a CAGR basis
over the next decade, what is more interesting is their performance and Sensex exit stocks underperform
underperformance until the time of exit from the Sensex. On average, these stocks the index by ~20% (CAGR terms)
delivered -10% CAGR until exit. Further, relative to the Sensex, the underperformance until the time of exit
(until exit) is as high as -20% CAGR.
Exhibit 59: Sensex exit stocks - massive underperformance until the time of exit from the Sensex
Median Median
Median Median
underperformance underperformance
No. of exits performance performance of
Period rel. to Sensex of rel. to Sensex of
from Sensex of exiting stocks exiting stocks till
exiting stocks exiting stocks
over the decade exit from Sensex
over the decade till exit from Sensex
1991-01 18 -15% -20% -12% -23%
1992-02 19 -8% -11% -9% -17%
1993-03 20 -1% -6% -16% -14%
1994-04 20 -2% -7% -27% -18%
1995-05 20 5% -6% -24% -33%
1996-06 14 8% -7% -21% -25%
1997-07 13 10% -8% -22% -31%
1998-08 13 6% -6% -6% -18%
1999-09 14 9% -5% -9% -11%
2000-10 16 13% -5% -3% -16%
2001-11 16 13% -4% 7% -17%
2002-12 14 21% 2% 14% -19%
2003-13 9 6% -8% 0% -11%
2004-14 8 13% -2% -9% -25%
2005-15 8 9% -2% -4% -15%
Average 15 6% -6% -10% -20%
Source: Bloomberg, Ambit Capital research
Finally, in the exhibit below, we show the performance of companies that were part
of the Sensex in December 05 but exited by December 15. On a median basis,
these stocks delivered CAGR returns of ~9% over the 2005-15 decade (and -2%
CAGR returns relative to Sensex). However, what we also note from the exhibit below
is that these stocks massively underperformed the Sensex until the time of their exit,
having delivered -4% CAGR in absolute terms and -15% CAGR vs the Sensex (see the
penultimate row of the table above).
Exhibit 60: Exits from the Sensex over Dec05-Dec15
CAGR CAGR returns CAGR returns
Year of
returns (Dec'05- (Dec'05-
Company name Sector exit from
(Dec'05 Dec'15, date of exit
Sensex
-Dec'15) rel. to Sensex) from Sensex)
ACC Cement 10% -1% 2010 13%
Ambuja Cem. Cement 10% -1% 2008 1%
Grasim Inds Textiles 14% 3% 2010 14%
Hindalco Inds. Non Ferrous Metals -4% -15% 2015 -5%
Ranbaxy Labs. Pharmaceuticals 9% -2% 2009 -9%
Power Generation &
Reliance Infra. -1% -12% 2011 -4%
Distribution
Satyam Computer IT - Software DNA DNA 2009 -54%
Power Generation &
Tata Power Co. 5% -6% 2006 -5%
Distribution
Source: Bloomberg, Ambit Capital research
Hence, given the stark underperformance of the exit stocks, it becomes critical for
investors to identify potential exiting candidates in advance. We now provide a
framework for identification.
justified theoretically by adding the average decadal risk-free rate (8.5% in India)
and an equity risk premium of 6.5%. This equity risk premium, in turn, is
calculated as 4% (the long-term US equity risk premium) plus 250bps to account
for Indias rating (BBB- rating as per S&P). Note further that over the past 20 ..and those that have failed to
years and 30 years, the Sensex has delivered returns of around 16% per annum, deliver 15% RoCE in any year for
thus validating our point of view that 15% is a sensible figure to use as a the past ten years
minimum RoCE criteria. Therefore, we identify companies that have failed to
deliver 15% RoCE in any year for the past 10 years. Hence, the more years a
company delivers RoCE of less than 15%, the lower will be its score.
For Banks and Financial Services (BFSI) stocks, we modify the filters on RoCE and
sales growth as follows:
RoEs of 15% for NBFCs and RoAs of 1.2% for banks: Whilst we have used For banks, we screen stocks that
RoEs (net profit to average equity) for NBFCs, we have used RoA (net profit to failed to deliver 1.2% RoA/15% RoE
average assets) for banks. Whilst the underlying profitability of operations reflects in any year for the past ten
in both RoE and RoA, RoE is also impacted by the leverage or capital position of years.
the bank. Historically, many banks (especially PSU banks) have delivered high
RoEs due to high leverage despite weak underlying profitability. Therefore, RoA is
a better metric to use for banks. and those that have failed to
For every year that a bank/NBFC fails to deliver 1.2% RoA/15% RoE, we allot a deliver 15% loan growth in any
lower score. Hence, the more years a bank/NBFC delivers RoA of less than 1.2% year for the past ten years
(or RoE of less than 15% in case of banks), the lower will be its score.
Loan growth of 15%: We believe loan growth of 15% is an indication of a
lenders ability to lend over business cycles. Strong lenders ride the downcycle
better as their competitive advantages surrounding their origination, appraisal
and collection process ensure that they continue their growth profitably either
through market share improvements or upping the ante in sectors which are
resilient during a downturn. Therefore, we identify banks/financial institutions
that have failed to deliver 15% loan growth in any year for the past 10 years.
Hence, the more years a bank/financial institution delivers loan growth of less
than 15%, the lower will be its score.
Once we have identified a list of such companies that fail to meet our filters for any
year in the past decade (FY07-16), we allot scores based on the number of years that
the company has failed to meet the filter. Our scoring is based on the parameters
mentioned in the exhibit below.
Exhibit 61: Scoring parameters - number of years (from FY07 to FY16) that a company
fails to meet our filters
From (years) To (years) Score
0 2 20
3 4 15
5 6 10
7 8 5
9 10 0
Source: Ambit Capital research
The thumb rule for the above exhibit is the more years a companys financial
services have been below our filters, the lower the score. For example, a
company that delivers less than 10% sales growth for any eight years (of the past 10
years from FY07 to FY16), gets five points. Similarly, a company that delivers RoCE of
less than 15% for all 10 years (of the past 10 years from FY07 to FY16) gets zero
points. The scoring structure is aimed at raising the penalty on companies that fail to
meet these filters more often in the past 10 years (FY07 to FY16).
Conversely, the more often a company delivers sales growth of more than 10%
and/or RoCE of more than 15%, the higher will be its score. Therefore, a company
that delivers RoCE for all 10 years (FY07 to FY16) will get the highest score of 20.
c. Pricing discipline
(PBIT margin)
This framework has served us remarkably well over the years and has consistently
helped us generate outperformance with our five annual tenbagger portfolios (one
for each of the past five years). Now, to identify exit candidates, we reverse the
framework, i.e. the worse the performance of a company in the greatness framework,
the lower its decile as per the framework and the lower its score.
Exhibit 63: Scores as per our Greatness Framework
Greatness Decile Score
D1-D2 20
D3-D4 15
D5-D6 10
D7-D8 5
D9-D10 0
Source: Ambit Capital research
Whilst we do not have a greatness framework for NBFCs currently, in our 20 February
2013 note titled The Good Indian Banks (click here for more details), we had
unveiled the greatness framework for the banking space. Both these frameworks
study a firms structural strengths by focusing not on absolutes but rather on
improvements over a period of time and the consistency of those improvements.
Step 3: Ambits P-75 companies
In the next step, we check this shortlist of Sensex exit candidates to identify stocks that Companies that are already part of
are part of Ambits P-75 companies, i.e. companies whose core competitive Ambits P-75 companies are
advantage is politically connectivity. immediately deemed to be exit
We believe these companies are on a weaker footing given the impact of the Modi candidates
Resets. In our May 2014 strategy thematic, Can India Turn Back the Clock?
(click here for more details), we said that over the past decade, powerful cliques of
politicians and promoters have suppressed competition in a range of sectors and
drove Indias CPI inflation rate up from 4% to 11%. In that report, we posited that this
vicious spiral could be on the retreat with the changes taking place in New Delhi and
in the RBI. We further said that these changes could result in a redistribution of profits
away from the winning companies of the last decade towards the also-rans of the last
decade.
Over and above the distortionary effects that politically connected companies have
had on competition and inflation, these companies are likely to have received undue
access to capital (from PSU banks), land (from state governments) and public sector
contracts (like building of airports or roads). After peaking in the noughties, the
Thus, any company in our shortlist that is part of Ambits P-75 companies
would qualify automatically to be a Sensex exit candidate.
Step 4: Belongs to a sector likely to lose market cap share in the Sensex
Finally, from our shortlist, we identify those companies that belong to a sector that is
likely to lose market cap share in the index over the next decade.
Exhibit 64: The Sensexs market cap share evolution
Sectors FY95 FY05 FY15 FY25 Reasons
Spending on discretionary items and financial services tends to rise
Consumer Discretionary +
15% 25% 41% 49% with rise in per capita income. That is the result emerging from our
Financial services
cross country analysis and that is what economic theory tells us.
Industrials, Materials, and Energy 58% 35% 20% 25% The share of investments in GDP rises with rising per capita income.
IT Services revenues arise from the Western world and with GDP
growth in the West seemingly stuck at structurally low levels, IT
Information Technology and
0% 21% 17% 10% Services is likely to lose market cap share. In Telecom, continued
Telecommunication Services
regulatory pressure (repeated spectrum auctions) and competitive
pressure will result in market cap share coming under pressure.
Spending on food items tend to fall as income levels rise. That is the
Consumer Staples 23% 12% 13% 8% result emerging from our cross country analysis and that is what
economic theory tells us.
Cross country evidence indicates that spending on healthcare tends
Healthcare 2% 5% 6% 5% to moderately decline/stagnate until US$10k per capita income is
attained, after which it rises
We assume that utilities sector will not show much change in its
Utilities 2% 2% 3% 3% weighting as political imperatives will mean that ROEs will never be
allowed to go north of the cost of capital in this sector
Total 100% 100% 100% 100%
Source: Capitaline, Ambit Capital research. The weights from 2006 onwards are based on free float market cap weights. Note: The weights from 2006 onwards
are based on free float market cap weights. Red indicates a decline in the sectors market cap weight whereas blue indicates an increase.
Sectors which will shed market cap share are: Consumer Staples, Healthcare, and IT
+ Telco. Please refer to Sections 1-4 for more details. Any company in our shortlist
that belongs to a sector that seems likely to shed market share is likely to be a Sensex
exit candidate.
We summarise our four-step process of identifying a Sensex exit candidate in the
checklist below.
Exhibit 65: Checklist for Sensex exit candidates
Step Criteria Parameters
Non BFSI: Highest number of years within FY07-16 where sales
growth was <10%
Non BFSI: Highest number of years within FY07-16 where RoCE was
<15%
Banks and financial services: Highest number of years within FY07-16
1 Coffee Can filters in reverse
where loan growth was <15%
Banks: Highest number of years within FY07-16 where RoA was
<1.2%
NBFCs: Highest number of years within FY07-16 where RoE was
<15%
2 Greatness Framework* Featuring in the lowest decile
3 Politically Connected Part of Ambit's P-75 Index
4 Losing sector Belongs to a sector that is likely to lose market cap share
Source: Ambit Capital research. *Note: As we do not have a greatness framework for NBFCs, we give an average
score to HDFC (the only NBFC in the Sensex) on this parameter. Greatness scores for non BFSI names are based
on FY10-15 financials and for BFSI names FY09-14 financials. Accounting scores are based on FY09-14
financials. Our accounting framework does not apply to BFSI names.
We have chosen 15 exit candidates from this list on the following basis:
The top nine companies with scores of less than 45 qualify automatically for
exiting the Sensex, based on our framework detailed above. These nine
companies are Reliance Industries, Coal India, ONGC, Bharti Airtel, NTPC, M&M,
Hero Motocorp, GAIL (India), and Tata Steel. We do not include Bajaj Auto as an
exit candidate despite low greatness scores as our Auto sector lead, Ashvin
Shetty, is convinced regarding the long term prospects of this company.
The remaining six candidates have been chosen from companies based on our
sector leads views that these companies face an uncertain future. These six
companies are State Bank of India, L&T, Wipro, Cipla, Adani Ports, and Dr
Reddys.
The new exit candidates in comparison with the 2015 list are Coal India, Wipro,
Adani Ports, Dr Reddys Labs, Gail (India), and Cipla.
Bajaj Auto and HDFC are the two candidates which no longer figure in our list.
Our Auto sector lead, Ashvin Shetty, believes that Bajaj Auto seems to be turning the
corner in the domestic motorcycle market thanks to strong responses to its new
launches like Avenger and V15. While export volumes are facing near-term
pressures, the long-term export potential for Indian 2Ws remain huge and Bajaj Auto
will be the prime beneficiary due to its first mover advantage across several export
markets. Hence, we no longer believe that Bajaj Auto is an exit candidate.
HDFC will own 42% of the combined entity HDFC Life and Max Life post-merger. We
do not envisage HDFC exiting the Sensex over the next decade given that HDFC Life
is an entrant candidate from the fresh listings space and is set to become the largest
private insurer.
Exhibit 69: Predicted entry candidates (from the June 2015 note)
Name Ticker Part of current Sensex? Part of this years entry list
HCL Technologies Ltd. HCLT IN No Yes
Kotak Mahindra Bank Ltd. KMB IN No Yes
Asian Paints Ltd. APNT IN Yes No already entered the Sensex
No- marginally fails to clear the greatness cut off and belongs to a
Nestle India Ltd NEST IN No
sector that will lose market share over the next decade
Eicher Motors Ltd. EIM IN No Yes
IndusInd Bank Ltd. IIB IN No Yes
Pidilite Industries Ltd. PIDI IN No Yes
Page Industries Ltd. PAG IN No Yes
Torrent Pharmaceuticals TRP IN No Yes
No our covering analyst does not have conviction that PI Industries
PI Industries PI IN No
will compound its FF market cap @ 34% to enter the Sensex*
Flipkart N/A No Yes
Paytm N/A No Yes
No - the merged entity HDFC Life and Max Life is our top choice as
I Pru Life N/A No
the largest private sector insurer
No- core coffee retailing franchise fundamentally challenged for
Caf Coffee Day N/A No
profitability
Hind. Aeronautics N/A No No- poor earnings quality and sub-par scale
Source: Ambit Capital research. Note: * indicates the minimum amount of FF market cap compounding required
for a stock to enter the Sensex assuming the smallest Sensex stock compounds @15% over the next decade.
Exhibit 70: Entry candidates predicted in this note
Name Ticker
Kotak Mahindra Bank Ltd. KMB IN
IndusInd Bank IIB IN
IOCL IOCL IN
HCL Tech HCLT IN
UltraTech Cement UTCEM IN
BPCL BPCL IN
Eicher Motors EIM IN
Ambuja Cement ACEM IN
Pidilite Industries PIDI IN
Page Industries PAG IN
Torrent Pharma TRP IN
Flipkart N/A
HDFC Life N/A
LIC N/A
Paytm N/A
Source: Ambit Capital research. Bold indicates that the stock is a new entry candidate versus 2015.
The new entry candidates compared with the 2015 are IOCL, Ultratech Cement,
BPCL, LIC, and HDFC Life.
Nestle, Hindustan Aeronautics, IPru Life, and Caf Coffee Day no longer figure in our
list.
Nestle fails to clear the greatness cut-off, albeit marginally. We exclude Nestle as we
already have ITC and HUL in the Sensex representing the consumer staples sector.
Since we expect the consumer staples sector to lose market share over the next
decade, we exclude Nestle.
In the private insurance sector, we believe the recently created merged entity, HDFC
Life, is a better entry candidate than ICICI Prudential Life due to its position as the
largest private sector insurer post-merger. HDFC will hold around 42% in the merged
entity.
A year ago, we had included Caf Coffee Day (CCD) as a Sensex entrant. At that
time, CCD had not yet listed and we were basing our judgment purely on the DRHP.
In retrospect and having seen the now listed company perform for a year we
believe that its core coffee retailing franchise is not strong enough to make this
company a Sensex candidate.
Hindustan Aeronautics was not included due to the poor quality of earnings and sub-
par scale. Further, we believe it doesnt deserve the same premium as BEL due to
Indias poor aerospace capabilities versus other segments like electronics and auto.
Kotak Mahindra Bank (KMB) is a diversified financial services firm with SENSEX ENTRANT
one of the best-run banks in India and leading capital market Mcap (bn): `1,480/US$22.1
subsidiaries. Over the last six years, the bank has demonstrated strong
3M ADV (mn): `1,268/US$18.9
asset quality track record and business focus on margins (~4.4%). CASA
CMP: `807
ratio has increased to ~38% in FY16 (vs industry best of 40-45%). Having
TP (12 mths): `530
completed acquisition of ING Vysya Bank, it is now set to generate
synergies from distribution of products through the acquired network. Downside (%): 34
This will help KMB achieve growth higher than the industry average. We
build in long-term loan CAGR of ~25%. While we believe current Flags
valuations are expensive, in the long term earnings growth would be the Accounting: GREEN
key driver of share price return even as the valuation multiple (3.6x Predictability: GREEN
FY17BV) moderates closer to those of peers. Earnings Momentum: GREEN
Jul-16
Sep-15
Nov-15
Jan-16
Mar-16
May-16
and other retail (12%). KMB also increased its CASA ratio from 19% in FY06 to
~38% in FY16. The bank has generated average RoA of 1.5% and RoE of 13%,
along with strong asset quality (gross NPA of 2.5% and restructured loans of just
0.1%). While the bank accounts for 61% of total profit, other capital market KMB IN BANKEX
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.
Kotak Mahindra Bank
Exhibit 2: Loan book growth moderated due to focus on Exhibit 3: Merger expenses and low growth impacted
merger processes RoA/RoE of the bank
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
Source: Company, Ambit Capital research; Note: Adjusted for ING Vysya Source: Company, Ambit Capital research; Note: Adjusted for ING Vysya
acquisition acquisition
Exhibit 4: KMB is currently trading in line with its historical Exhibit 5: KMBs share price has outperformed BANKEX
P/B index
12 1,200
10 1,000
800
8
600
6
400
4 200
2 0
Sep-06
Sep-07
Sep-08
Sep-09
Sep-10
Sep-11
Sep-12
Sep-13
Sep-14
Sep-15
Mar-07
Dec-07
Sep-08
Mar-10
Dec-10
Sep-11
Mar-13
Dec-13
Sep-14
Mar-16
Jun-09
Jun-12
Jun-15
KMB IN BANKEX
PB Avg. PB
Source: Bloomberg, Ambit Capital research Source: Bloomberg, Ambit Capital research
Balance sheet
Year to March (Rs mn) FY14 FY15 FY16 FY17E FY18E
Net worth 122,751 141,411 239,591 262,415 292,239
Deposits 590,723 748,603 1,386,430 1,705,309 2,097,530
Borrowings 128,956 121,497 209,753 239,552 273,671
Other Liabilities 33,424 48,610 86,824 95,503 105,050
Total Liabilities 875,853 1,060,121 1,922,598 2,302,780 2,768,490
Cash & Balances with RBI/Banks 59,799 62,624 108,797 143,108 149,144
Investments 254,845 286,591 512,602 622,411 756,453
Advances 530,276 661,607 1,186,653 1,443,724 1,758,345
Other Assets 30,933 49,299 114,546 93,537 104,548
Total Assets 875,853 1,060,121 1,922,598 2,302,780 2,768,490
Source: Company, Ambit Capital research
Income statement
Year to March (Rs mn) FY14 FY15 FY16 FY17E FY18E
Interest Income 87,671 97,199 163,842 183,506 215,055
Interest Expense 50,471 54,961 94,838 101,488 117,018
Net Interest Income 37,200 42,237 69,004 82,018 98,037
Total Non-Interest Income 13,997 20,285 26,122 32,589 38,702
Total Income 51,198 62,522 95,126 114,606 136,740
Total Operating Expenses 25,426 32,547 54,715 63,452 73,783
Employees expenses 11,722 14,667 28,170 31,863 35,876
Other Operating Expenses 13,705 17,880 26,546 31,589 37,907
Pre Provisioning Profits 25,772 29,975 40,411 51,154 62,957
Provisions 3,047 1,645 9,174 6,800 8,312
PBT 22,725 28,330 31,237 44,353 54,645
Tax 7,699 9,670 10,339 14,193 17,486
PAT 15,025 18,660 20,898 30,160 37,159
Source: Company, Ambit Capital research
Ratio analysis
Year to March (Rs mn) FY14 FY15 FY16 FY17E FY18E
Credit-Deposit (%) 89.8% 88.4% 85.6% 84.7% 83.8%
CASA ratio (%) 31.9% 36.4% 38.1% 38.3% 38.6%
Cost/Income ratio (%) 49.7% 52.1% 57.5% 55.4% 54.0%
Gross NPA (Rs mn) 10,594 12,372 28,381 28,318 31,640
Gross NPA (%) 1.98% 1.85% 2.36% 1.94% 1.78%
Net NPA (Rs mn) 5,736 6,091 12,620 11,893 13,289
Net NPA (%) 1.08% 0.92% 1.06% 0.82% 0.76%
Provision coverage (%) 45.9% 50.8% 55.5% 58.0% 58.0%
NIMs (%) 4.49% 4.55% 3.95% 4.08% 4.02%
Tier-1 capital ratio (%) 17.9% 16.2% 15.3% 13.4% 12.3%
Source: Company, Ambit Capital research
Du-pont analysis
Year to March (Rs mn) FY14 FY15 FY16 FY17E FY18E
NII / Assets (%) 4.3% 4.4% 3.8% 3.9% 3.9%
Other income / Assets (%) 1.6% 2.1% 1.4% 1.5% 1.5%
Total Income / Assets (%) 6.0% 6.5% 5.2% 5.4% 5.4%
Cost to Assets (%) 3.0% 3.4% 3.0% 3.0% 2.9%
PPP / Assets (%) 3.0% 3.1% 2.2% 2.4% 2.5%
Provisions / Assets (%) 0.4% 0.2% 0.5% 0.3% 0.3%
PBT / Assets (%) 2.7% 2.9% 1.7% 2.1% 2.2%
Tax Rate (%) 33.9% 34.1% 33.1% 32.0% 32.0%
ROA (%) 1.8% 1.9% 1.1% 1.4% 1.5%
Leverage 7.9 7.3 8.1 8.4 9.1
ROE (%) 13.8% 14.1% 9.2% 12.0% 13.4%
Source: Company, Ambit Capital research
Valuation parameters
Year to March FY14 FY15 FY16 FY17E FY18E
Consolidated EPS (Rs) 16.1 19.7 18.8 24.6 29.8
EPS growth (%) 10% 23% -4% 31% 21%
Consolidated ROE (%) 14% 15% 11% 13% 14%
Consolidated BVPS (Rs) 123.8 143.7 181.9 202.5 228.3
P/E (x) 50.2 40.9 42.8 32.7 27.1
P/BV (x) 6.5 5.6 4.4 4.0 3.5
Source: Company, Ambit Capital research
IOCL is the largest fuel retailer and second-largest refiner in India. IOCL SENSEX ENTRANT
should see improvement in ROEs over next 2-3 years as a) Paradip
Mcap (bn): `823/US$12.3
stabilization will drive GRMs and volume growth, and b) upgrades at
3M ADV (mn): `1,903/US$28.5
inland refineries will add to overall GRMs. Investment of improved FCFs
(due to lower subsidy burden) into petrochemicals, pipeline, and refinery CMP: `569
expansion should support healthy earnings growth over the next TP (12 mths): `618
decade. Growing share of businesses with steady profits such as Upside (%): 9
pipelines, marketing and petrochemicals (~70% of FY18E EPS) will
support multiple re-rating. Valuations of 1.4x/8.3x FY18E BV/EPS are Flags
undemanding given ROEs of ~19% by FY18 vs 15% in FY16. We dont Accounting: GREEN
foresee material challenges in compounding at 5% CAGR over next Predictability: AMBER
decade, which should secure it a place in the Sensex. Earnings Momentum: GREEN
Competitive position: STRONG Changes to this position: POSITIVE
Performance
Largest fuel retailer in the country
160
IOCL has ~45% share of retail outlets as well as retail volumes. It has ~35% of
140
Indias total refining capacity and 61% of crude and oil product pipeline
120
capacity. IOCL derives 47% of its profits from refining and marketing; pipeline 100
and petchem businesses contributed 26%/27% in FY16. IOCL has most volatile 80
refining margins amongst OMCs as most of its refineries are inland (holding 60
huge inventories). The Government holds ~59% stake in IOCL. Over the last
Nov-15
May-16
Jan-16
Jun-16
Jul-16
Dec-15
Aug-15
Sep-15
Oct-15
Feb-16
Mar-16
Apr-16
Aug-16
decade, IOCL has grown EBITDA/PAT by 10%/8% while capital employed has
posted a CAGR of 8%, indicating fairly good capital efficiency.
Indian Oil Corp. Sensex
Wide product distribution network provides competitive edge
IOCLs retail network and pan-India refineries give it distinct competitive Source: Bloomberg, Ambit Capital research
benefits. Besides, its wide network of depots and product pipelines (60% market
share) make it tough for private competition to take any major share away from IOCLs forensic score analysis
IOCL. Continued investments in petrochemicals (e.g. Paradip) should also
support earnings as most of it would be import substitution. Increased autonomy
in decision making should improve risk management; crude sourcing and supply
chain management would also improve operating efficiencies of the business.
IOCL just needs 5% compounding to be in Sensex over next decade
OMC earnings were depressed over the last decade due to huge subsidy burden
Source: Ambit HAWK, Ambit Capital research
put on them by the Government. However, recent fuel deregulation has taken
away most of those concerns. IOCLs reputation as a laggard to OMC peers
IOCLs greatness score analysis
should change with Paradip scale-up and rising share of EBITDA from stable
businesses such as marketing, petchem, and pipelines which should drive a
multiples re-rating. We expect ROCEs at 18-20% over next decade while
EPS/FCF growth should sustain ~12%.
Valuations a lot of juice left
IOCLs re-rating has lagged BPCL/HPCL after fuel deregulation as falling crude
prices led to huge inventory losses over the last two years. BPCL/HPCL one-year Source: Ambit HAWK, Ambit Capital research
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.
Indian Oil Corporation
Exhibit 2: Most of the cash flow generation has been from Exhibit 3: Cash has been used to build fixed assets
core operations
Debt Issue, Increase in Purchase
15% Cash, 1% of Fixed
Assets, 15%
Cash From
Operating
Equity
Activities,
Capital Dividend
40%
Sale of expenditure, Paid, 11%
Subsidy 50%
Bonds, 35% Interest
Dividend Paid, 23%
Income, 4%
Interest
received,
6%
Source: Company, Ambit Capital research Source: Company, Ambit Capital research
Exhibit 4: IOCL Forward P/B Evolution Exhibit 5: IOCL share price performance vs. BSE Energy
1.6x 3.0
500
1.4x 2.5
400 1.2x 2.0
1.0
200 0.7x
0.5
Sep-06
Sep-07
Sep-08
Sep-09
Sep-10
Sep-11
Sep-12
Sep-13
Sep-14
Sep-15
Sep-16
100
May-06
May-07
May-08
May-09
May-10
May-11
May-12
May-13
May-14
May-15
May-16
Source: Ambit HAWK, Ambit Capital research, Note: Using our accounting Source: Ambit HAWK, Ambit Capital research, Note: On our greatness
framework, we categorize the market into deciles on the basis of their framework, on a scale of 0 to 100, a small minority of outstanding companies
accounting quality with D1 indicating the best decile and D10 indicating tend to score above 67 whilst most companies tend to have scores below 50
the worst decile. Our analysis points towards a strong link between
accounting quality and share price performance.
Jun-16
Nov-15
bets paid off. It pioneered offshore delivery of infrastructure management
Sep-15
Feb-16
Jul-16
Sep-16
Dec-15
Mar-16
May-16
services in 2003-04 (now 35% of revenues, no. 2 globally after IBM) and
acquired Axon in 2009 (gave it relationships with CXOs in large organisations).
SENSEX HCLT
Over the past 10 years, revenues and profits have grown at 21% CAGR (USD)
and 25% CAGR (INR terms) respectively, and pre-tax RoCE has averaged 33%.
Source: Bloomberg, Ambit Capital research
Strong portfolio, execution are its key strengths
HCLTs willingness to commit upfront to large savings for customers and then HCL Techs forensic score analysis
executing well in large deals (smooth transition from incumbent or in-house
vendor to offshore, automation) differentiate it from peers, especially in IMS and
engineering services (54% of FY16 revenue). These competitive strengths should
sustain as the company continues to invest in building its capabilities.
Sustained earnings growth should drive entry into the Sensex Source: Ambit HAWK, Ambit Capital research
Global IT services spend grew 3% CAGR over the past 10 years despite
HCL Techs greatness score analysis
deflationary trends such as outsourcing, offshoring and packaged software. In
the next 10 years, technology is gaining strategic importance across industries,
its heterogeneity (types of hardware, software, platforms) is growing, and pace
of change in both business and technology is increasing. So global spend could
grow at a similar pace over the next 10 years despite deflationary trends such as
Source: Ambit HAWK, Ambit Capital research
automation and the cloud. HCLTs strengths in infrastructure management
services and engineering services as well as its intellectual property investments
should ensure leading position in Internet-of-Things/automation era. So we
expect revenue/earnings CAGR of 10%+ over the next 10 years with ROCE
above 20%, enabling an entry into the Sensex. Research Analysts
Valuations are reasonable Sagar Rastogi
+91 22 3043 3291
Stock currently trades at 13.5x one-year forward earnings vs 5-year average of
Sagar.rastogi@ambit.co
14x one-year forward earnings. We have been worried about questionable
acquisitions in the recent past (e.g. Geometric, a large software product from a Sudheer Guntupalli
customer) but we keep the faith given its long-term excellent capital allocation +91 22 3043 3203
track record. Senior management attrition (has seen about a dozen exits in past
Sudheer.guntupalli@ambit.co
two years and more appear likely) poses a key risk.
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.
HCL Technologies
7%
16%
33%
60%
80%
CFO Asset sale Cash Flow from Financing Dividend Capex Acquisitions
Source: Company, Ambit Capital research Source: Company, Ambit Capital research
14 12
12 10
10 8
01-Sep-11
01-Mar-12
01-Sep-12
01-Mar-13
01-Sep-13
01-Mar-14
01-Sep-14
01-Mar-15
01-Sep-15
01-Mar-16
01-Sep-16
6
Mar-12
Mar-13
Mar-14
Mar-15
Mar-16
Sep-11
Sep-12
Sep-13
Sep-14
Sep-15
Sep-16
Source: Company, Ambit Capital research Source: Company, Ambit Capital research
Exhibit 7: HCL Tech fares well on forensic score Exhibit 8: as well as greatness score in Hawk
Source: Ambit Hawk, Ambit Capital research, Note: Using our accounting Source: Ambit Hawk, Ambit Capital research, Note: On our greatness
framework, we categorize the market into deciles on the basis of their framework, on a scale of 0 to 100, a small minority of outstanding companies
accounting quality with D1 indicating the best decile and D10 indicating the tend to score above 67 whilst most companies tend to have scores below 50
worst decile. Our analysis points towards a strong link between accounting
quality and share price performance.
Balance sheet
Balance sheet (Rs bn) FY15 FY16 FY17E FY18E FY19E
Net Worth 229.7 277.5 318.2 363.3 421.9
Other Liabilities 18.0 22.2 25.8 25.8 25.8
Capital Employed 247.7 299.6 344.1 389.1 447.7
Net Block 85.5 106.4 132.6 137.7 144.2
Other Non current Assets 29.6 40.0 40.0 40.0 40.0
Curr. Assets 215.1 247.4 278.5 329.6 397.6
Debtors 63.3 76.5 86.7 95.7 108.5
Unbilled revenues 29.5 29.7 34.4 38.0 43.1
Cash & Bank Balance 97.1 117.4 130.6 166.4 212.5
Other Current Assets 25.3 23.9 26.8 29.5 33.5
Current Liab. & Prov 82.5 94.2 107.1 118.2 134.1
Net Current Assets 132.6 153.3 171.4 211.4 263.5
Application of Funds 247.7 299.6 344.1 389.1 447.7
Source: Company, Ambit Capital research
Income statement
Income statement (Rs bn) FY15 FY16 FY17E FY18E FY19E
Revenue (US$ mn) 5,822 6,235 6,941 7,665 8,694
Growth 12.4% 7.1% 11.3% 10.4% 13.4%
Revenue 357.9 409 465 514 582
Cost of goods sold 231.4 274.9 317.2 353.0 398.8
SG&A expanses 43.2 52.2 56.7 63.0 70.2
EBITDA 88.4 88 100 108 124
Depreciation 5.1 5.7 8.9 10.4 10.9
EBIT 83.4 82.1 91.4 97.6 113.5
EBIT Margin 23.3% 20.1% 19.6% 19.0% 19.5%
Other Income 8.5 10.1 10.4 10.5 11.7
PBT 91.9 92.2 101.8 108.1 125.2
Tax 18.7 18.8 21.7 23.2 26.9
Rate (%) 20.3% 20.4% 21.4% 21.5% 21.5%
Reported PAT 73.2 73.4 80.0 84.8 98.3
Diluted Adj EPS 51.9 52 57 60 70
Source: Company, Ambit Capital research
Ratio analysis
FY15 FY16 FY17E FY18E FY19E
Growth
Revenue growth (US$) 12.4% 7.1% 11.3% 10.4% 13.4%
EBIT growth (Rs) 13.9% -1.5% 11.3% 6.8% 16.3%
EPS growth (Rs) 28.3% 0.1% 9.1% 6.0% 15.9%
Valuation (x)
P/E 15.0 14.9 13.7 12.9 11.2
EV/EBITDA 11.3 11.4 10.0 9.3 8.0
EV/Sales 2.8 2.4 2.1 1.9 1.7
EV/NOPAT 12.0 12.2 11.0 10.3 8.8
Price/Book Value 4.8 3.9 3.4 3.0 2.6
Dividend Yield (%) 2.2% 2.8% 3.1% 3.1% 3.1%
Return Ratios (%)
RoE 35% 29% 27% 25% 25%
RoCE 29% 24% 22% 21% 20%
ROIC 48% 39% 36% 35% 38%
Turnover Ratios
Receivable days (Days) 95 95 95 95 95
Fixed Asset Turnover (x) 4.3 4.3 3.9 3.8 4.1
Source: Company, Ambit Capital research
Nov-15
Sep-15
Dec-15
Jan-16
Jul-16
Sep-16
Mar-16
May-16
Jun-16
FY05-16 and has steadily established scale and brand leadership across Indian
regions. Its RoCE declined to 11% in FY16 as against peak RoCE of 18-24%
over FY07-10 since the demand downcycle impacted recent performance. A SENSEX UTCEM
demand/pricing recovery over the next few years will drive EBITDA/tonne to
Rs1,718 (vs Rs956 in FY16) and RoCE to 15% by FY20. Source: Bloomberg, Ambit Capital research
The prime contender to represent Materials in the Sensex UltraTechs greatness score analysis
We expect UltraTech to generate 16% CFO/FCF CAGR over the next decade as
it continues to outpace industry growth through consolidating capacities, which
should easily help it surpass the 9% annual compounding required to make it
to the Sensex. Whilst our assumptions imply it will re-invest in India for growth,
any major capital allocation outside India remains a key risk to the franchise.
Valuations the proxy premium
Source: Ambit HAWK, Ambit Capital research
UltraTechs multiple has consistently re-rated in the last five years (14x FY18E
EV/EBITDA; 20% premium to five-year average) as it established its leadership
and now trades at 10-30% premium to ACEM and ACC. Whilst headline Research Analysts
valuation multiples appear rich, the demand and supercycle pricing will not
Nitin Bhasin
commence in FY18 and hence FY18 is not the correct representative of
earnings-based multiples. We expect double-digit industry volume growth over +91 22 3043 3201
FY19 and FY20, and UltraTech will be able to benefit from improving industry nitin.bhasin@ambit.co
volumes due to its scale and, thereby, post strong EBITDA growth. Over the
Achint Bhagat, CFA
next decade, UltraTech will maintain its valuation premium over peers as its
+91 22 3043 3178
utilisation ramps up and it sustains cost efficiency and capital discipline.
achint.bhagat@ambit.co
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.
UltraTech
Exhibit 2: CFO accounted for majority of the cash inflows in Exhibit 3: Two-thirds of the overall cash inflows were spent
the last decade on capex
Investments
Int+div, , 0% Debt
2% repaid, 0% Others, 8%
Dividend,
6%
Interest,
11%
Inc in cash,
8%
CFO, 98% Capex, 67%
Source: Company, Ambit Capital research Source: Company, Ambit Capital research
Exhibit 4: Post a recent re-rating UltraTech is trading at a Exhibit 5: UltraTech has materially outperformed the
significant premium to its five-year average EV/EBITDA Sensex
20
120
15
10 100
5
- 80
Sep-15
Oct-15
Apr-16
Nov-15
Feb-16
Mar-16
May-16
Jun-16
Aug-16
Sep-16
Dec-15
Jan-16
Jul-16
Jan-10
Jul-10
Jan-11
Jul-11
Jan-12
Jul-12
Jan-13
Jul-13
Jan-14
Jul-14
Jan-15
Jul-15
Jan-16
Jul-16
Source: Company, Ambit Capital research Source: Company, Ambit Capital research
Predictability of UltraTech is better than Ambuja/ACC and has improved since management became more
Predictability AMBER
transparent in recent years and improved the quality of non-financial disclosures.
Earnings momentum AMBER Consensus EBITDA estimates for FY18 have been increased by 10% as pricing improved.
Source: Ambit Capital research
Exhibit 7: Forensic score has improved over the years Exhibit 8: Greatness score has been impacted negatively
due to the demand downcycle and high capex investments
Source: Ambit HAWK, Ambit Capital research, Note: Using our accounting Source: Ambit HAWK, Ambit Capital research, Note: On our greatness
framework, we categorize the market into deciles on the basis of their framework, on a scale of 0 to 100, a small minority of outstanding companies
accounting quality with D1 indicating the best decile and D10 indicating tend to score above 67 whilst most companies tend to have scores below 50
the worst decile. Our analysis points towards a strong link between
accounting quality and share price performance.
BPCL is the leading fuel retailer and refiner in India. Its core strength lies SENSEX ENTRANT
in superior capital allocation (upstream, investments in gas) and project
Mcap (bn): `823/US$12.3
execution. Whilst industry-best GRMs and throughput per outlet among
OMCs testify efficient operations, its de-centralised decision making 3M ADV (mn): `1,903/US$28.5
(legacy of erstwhile MNC parentage) is behind its superior execution CMP: `569
capabilities. We believe BPCL is on track to marry these capabilities with TP (12 mths): `675
geology knowledge to build a credible upstream business over the next Upside (%): 9
decade. This, together with building on its marketing franchise, would
drive required the compounding to get the stock into the Sensex. BPCL Flags
has re-rated to one-year fwd P/B of 2.2x from 1.6x in FY14 after fuel Accounting: GREEN
deregulation, which should sustain given RoEs of 20%+. Predictability: AMBER
Competitive position: STRONG Changes to this position: POSITIVE Earnings Momentum: GREEN
The most efficient fuel retailer
Performance
BPCL is the leading integrated fuel retailer in India with over 28% volume market
share. Unlike other PSUs, BPCL originated from nationalization of Shell Refinery 150
in India. It now has second-largest fuel retailing network in India (13,500 outlets)
100
and 12%/13% share in refining capacity/output. BPCL has also built a credible
position in upstream (stakes in Brazil and Mozambique) and gas (stake in PLNG, 50
IGL, CUGL, MNGL and Sabarmati Gas) businesses. Over last 10 years,
EBITDA/PAT grew by 34%/50% with capital employed CAGR of 9%. 0
Dec-15
Aug-15
Nov-15
Feb-16
Mar-16
Apr-16
Jun-16
Sep-15
Oct-15
Jan-16
May-16
Jul-16
Aug-16
De-centralised decision making drives capital efficiencies
BPCL has evolved a culture that promotes quick decision making and focuses on Bharat Petroleum Corp Sensex
nurturing talent. This has helped it build an efficient refining business (highest
GRMs alongside less volatility amongst three OMCs) and a marketing business Source: Bloomberg, Ambit Capital research
too (best throughput per outlet amongst OMCs). Foray into upstream and gas
businesses has also been successful. BPCL occupies prime retailing space across BPCLs forensic score analysis
India along with depots and pipelines, a retail network that is difficult to
replicate. Resultantly, efficient operation and prudent capital allocation make it
the leader in the energy/PSU space with ROEs of ~24%+.
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.
Bharat Petroleum
Exhibit 2: Sources of cash over last ten years Exhibit 3: Uses of cash over last ten years
Cash From
Interest Operating
received and Activities, Purchase of
Equity
Other 78% Fixed Assets,
Dividend Paid,
Investments, 66%
9%
5%
Source: Company, Ambit Capital research Source: Company, Ambit Capital research
Exhibit 4: BPCL multiples have seen a sharp re-rating Exhibit 5: BPCL has significantly outperformed BSE Index
1,200 6.5
2.4x 5.5
1,000
2.2x
4.5
800 1.8x
1.6x 3.5
600
2.5
400 1.0x 1.5
200 0.5
Sep-06
Nov-07
Jun-08
Jan-09
Aug-09
Sep-13
Oct-10
Nov-14
Jun-15
Jan-16
Aug-16
Jul-12
Feb-13
Apr-07
Mar-10
May-11
Dec-11
Apr-14
0
Aug-06
Aug-07
Aug-08
Aug-09
Aug-10
Aug-11
Aug-12
Aug-13
Aug-14
Aug-15
Aug-16
Source: Company, Ambit Capital research Source: Company, Ambit Capital research
Accounting GREEN In our forensic accounting, BPCL has an accounting score above the sector average.
OMCs earnings are difficult to predict due to: (a) volatility in refining GRMs due to crude sourcing, fuel losses,
Predictability AMBER
distillate mix (b) volatility in marketing margins due to frequent pricing changes
Earnings Momentum GREEN Bloomberg earnings momentum suggests gradual upgrades in FY17/FY18 earnings during last 6-9 months
Source: Ambit HAWK, Ambit Capital research, Note: Using our accounting Source: Ambit HAWK, Ambit Capital research, Note: On our greatness
framework, we categorize the market into deciles on the basis of their framework, on a scale of 0 to 100, a small minority of outstanding companies
accounting quality with D1 indicating the best decile and D10 indicating tend to score above 67 whilst most companies tend to have scores below 50
the worst decile. Our analysis points towards a strong link between
accounting quality and share price performance.
Ratio Analysis
FY14 FY15 FY16 FY17E FY18E
EBITDA margin (%) 3.1 3.5 5.8 6.2 6.4
EBIT margin (%) 2.3 2.4 4.9 5.1 5.2
Net profit margin (%) 1.6 2.1 3.9 3.7 3.7
Net Debt/Equity (%) 102 46 8 31 28
RoCE (%) 14.7 15.7 24.4 24.9 24.6
RoE (%) 22.5 24.3 29.8 26.6 24.4
Net Debt/Equity 102 46 8 31 28
Net debt/ EBITDA (x) 2.4 1.3 0.2 0.8 0.7
Gross block turnover (x) 6.5 6.5 5.0 4.9 4.7
Source: Company, Ambit Capital research
Valuation
FY14 FY15 FY16E FY17E FY18E
Diluted Shares (mn) 723 723 723 723 723
EPS (Rs) 56.2 70.3 102.8 110.4 119.5
Cash EPS (Rs) 87.2 105.1 128.4 144.6 159.2
BV (Rs) 269 311 378 451 530
Dividend yield (%) 4.7 5.9 8.6 9.3 10.0
P/E (x) 18.0 14.4 9.8 9.2 8.5
EV/EBITDA (x) 10.8 9.2 6.5 6.0 5.4
P/B (x) 3.8 3.3 2.7 2.2 1.9
DPS (Rs/ share) 16.8 21.1 30.8 33.1 35.9
Dividend payout (%) 30.0 30.0 30.0 30.0 30.0
Source: Company, Ambit Capital research
IndusInd Bank (IIB) is the best-in-class vehicle financier with unmatched SENSEX ENTRANT
reach and a proven record of superior yields with asset quality control.
Mcap (bn): `697/US$10.4
Further, since the new management took charge in FY08, the bank has
3M ADV (mn): `1,440/US$21.5
been filling gaps in its liability franchise and product suites in other
CMP: `1,170
retail segments. Asset quality has been strong with low exposure to
stressed assets. While valuation, at 3.7x FY17BV, has limited room to TP (12 mths): `1,265
expand, strong earnings CAGR of 25% (over FY16-18E) will drive share Upside (%): 8
price return. Over the longer term, strong capital, healthy profitability, a
stable, well-knit top management team, and lack of any asset quality Flags
overhang will sustain earnings growth levels superior to the industry. Accounting: GREEN
Predictability: GREEN
Competitive position: MODERATE Changes to this position: UNCHANGED Earnings Momentum: GREEN
Premium CV financier; scaling-up other businesses as well
Performance
IIB is the best-in-class vehicle financier with unmatched reach (1,000 branches
145
and separate vehicle finance outlets) and a unique business model (long-term 135
relationships in SRTO segment). Further, it has been filling gaps in its liability 125
115
franchise and product suites in other segments (like loan against property, 105
tractor loans and credit cards). Stabilizing vehicle financing after a period of slow 95
85
growth, along with rising CASA ratio and fee income, should help IIB deliver 75
Sep-15
Nov-15
Jan-16
Mar-16
Jul-16
May-16
industry-leading earnings growth.
10-year loan book CAGR at 25%; RoAs have improved
In addition to IIBs competitive edge in CV finance business (with long-term IIB IN BANKEX
relationships/risk-history/sector expertise), a well-knit strong management team
with steady track-record of launching and scaling up new products is a key Source: Bloomberg, Ambit Capital research
strength of the bank. Since end-FY10, when IIB accelerated its network
expansion, the number of branches has more than tripled and CASA as a
percentage of total borrowed funds has risen from 20% (in FY10) to ~35%
currently. Since FY08, loan book has expanded at a CAGR of 27%, with RoA
expanding from 0.3% in FY08 to 1.8% in FY16.
Known for CV lending, now strengthening other businesses
IIB has been diversifying its presence in other retail products and wholesale
banking. The bank has scaled-up its LAP, credit card and home loan distribution
in recent years. The recent acquisition of RBS's diamond & Jewellery financing
business is an example of a targeted scale-up in wholesale banking. We expect
the bank to continue delivering a loan book growth 5-10 percentage points
higher than banking system growth over the next 5-10 years, with stable
RoA/RoE of 1.9%/17-18%. The bank would continue to seek selective market
Research Analysts
share gain (it still accounts for <1% credit market share).
Ravi Singh
Superior earnings growth justify the valuations Tel: +91 22 3043 3181
Our target price of Rs1,265 values the bank at 20x P/E and 3.25x P/B (1-year ravi.singh@ambit.co
forward). At 18.6x FY17E EPS, the current valuation reflects the earnings growth
Pankaj Agarwal, CFA
potential. We expect earnings CAGR of 29% along with stable valuation multiple
to drive share price return over next 5-10 years. While the stock trades at 10- Tel: +91 22 3043 3206
15% discount to peers (HDFC Bank and Kotak Bank), it is likely to deliver better pankaj.agarwal@ambit.co
earnings growth (29% EPS CAGR in FY16-18E) than peers. Succession planning
Rahil Shah
(after current CEO) and pricing pressure in high yielding retail segments are key
Tel: +91 22 3043 3217
risks.
rahil.shah@ambit.co
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.
IndusInd Bank
Exhibit 2: Loan book CAGR of 25% (FY06-16) Exhibit 3: RoAs have expanded over the years
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
Source: Company, Ambit Capital research Source: Company, Ambit Capital research
Exhibit 4: IIB is trading at premium to its average P/B Exhibit 5: IIB outperformed benchmark index by 24% in last
ten years
4 3,000
2,500
3
2,000
2 1,500
1,000
1
500
0 0
Mar-05
Sep-06
Mar-08
Jun-07
Sep-09
Mar-11
Jun-10
Sep-12
Mar-14
Jun-13
Sep-15
Jun-16
Dec-05
Dec-08
Dec-11
Dec-14
Sep-06
Sep-07
Sep-08
Sep-09
Sep-10
Sep-11
Sep-12
Sep-13
Sep-14
Sep-15
Balance sheet
Year to March (Rs mn) FY14 FY15 FY16 FY17E FY18E
Net worth 86,347 102,395 173,014 198,283 230,544
Deposits 605,023 741,344 930,003 1,181,104 1,488,192
Borrowings 147,620 206,181 221,559 270,253 338,172
Other Liabilities 27,297 64,045 72,186 90,198 112,713
Total Liabilities 866,287 1,113,964 1,396,762 1,739,838 2,169,620
Cash & Balances with RBI/Banks 67,694 107,791 101,119 123,144 150,175
Investments 215,630 228,783 312,143 384,481 476,686
Advances 551,018 687,882 884,193 1,112,303 1,397,219
Other Assets 31,944 89,507 99,307 119,910 145,540
Total Assets 866,287 1,113,964 1,396,762 1,739,838 2,169,620
Source: Company, Ambit Capital research
Income statement
Year to March (Rs mn) FY14 FY15 FY16 FY17E FY18E
Interest Income 82,535 96,920 115,807 141,804 171,967
Interest Expense 53,628 62,717 70,641 82,944 99,057
Net Interest Income 28,907 34,203 45,166 58,860 72,911
Total Non-Interest Income 18,905 25,480 32,969 39,656 48,843
Total Income 47,812 59,683 78,135 98,516 121,754
Total Operating Expenses 21,853 28,701 36,721 46,119 56,171
Employees expenses 8,093 9,805 12,361 15,425 18,724
Other Operating Expenses 13,760 18,896 24,360 30,694 37,446
Pre Provisioning Profits 25,960 30,982 41,414 52,397 65,583
Provisions 4,676 3,891 6,722 7,169 7,838
PBT 21,283 27,092 34,693 45,229 57,745
Tax 7,203 9,155 11,828 15,420 19,688
PAT 14,080 17,937 22,864 29,808 38,058
Source: Company, Ambit Capital research
Ratio analysis
Year to March (Rs mn) FY14 FY15 FY16 FY17E FY18E
Credit-Deposit (%) 91.1% 92.8% 95.1% 94.2% 93.9%
CASA ratio (%) 32.5% 34.1% 35.2% 35.8% 36.8%
Cost/Income ratio (%) 45.7% 48.1% 47.0% 46.8% 46.1%
Gross NPA (Rs mn) 6,208 5,629 7,768 11,453 14,976
Gross NPA (%) 1.12% 0.81% 0.87% 1.02% 1.06%
Net NPA (Rs mn) 1,841 2,105 3,218 4,352 5,092
Net NPA (%) 0.33% 0.31% 0.36% 0.39% 0.36%
Provision coverage (%) 70.4% 62.6% 58.6% 62.0% 66.0%
NIMs (%) 3.75% 3.68% 3.89% 4.04% 4.00%
Tier-1 capital ratio (%) 12.7% 11.2% 14.9% 13.6% 12.6%
Source: Company, Ambit Capital research
Du-pont analysis
Year to March (Rs mn) FY14 FY15 FY16 FY17E FY18E
NII / Assets (%) 3.6% 3.5% 3.6% 3.8% 3.7%
Other income / Assets (%) 2.4% 2.6% 2.6% 2.5% 2.5%
Total Income / Assets (%) 6.0% 6.0% 6.2% 6.3% 6.2%
Cost to Assets (%) 2.7% 2.9% 2.9% 2.9% 2.9%
PPP / Assets (%) 3.3% 3.1% 3.3% 3.3% 3.4%
Provisions / Assets (%) 0.6% 0.4% 0.5% 0.5% 0.4%
PBT / Assets (%) 2.7% 2.7% 2.8% 2.9% 3.0%
Tax Rate (%) 33.8% 33.8% 34.1% 34.1% 34.1%
ROA (%) 1.8% 1.8% 1.8% 1.9% 1.9%
Leverage 10.0 10.5 9.5 8.4 9.1
ROE (%) 17.6% 19.0% 17.3% 16.1% 17.7%
Source: Company, Ambit Capital research
Valuation parameters
Year to March FY14 FY15 FY16 FY17E FY18E
EPS (Rs) 26.8 33.9 38.4 50.1 64.0
EPS growth (%) 32% 26% 13% 30% 28%
BVPS (Rs) 164.3 193.4 290.8 333.3 387.5
P/E (x) 43.7 34.5 30.4 23.3 18.3
P/BV (x) 7.12 6.05 4.02 3.51 3.02
Source: Company, Ambit Capital research
Feb-16
Mar-16
Jun-16
Oct-15
Nov-15
Sep-15
Dec-15
Jan-16
May-16
Jul-16
Aug-16
Apr-16
following, significant product improvement, successful response to new models
(Classic 350), expanding user base (customers aged 18-35 years now at 79% vs Eicher Motors Sensex index
68% in 2011) and increased category awareness from entry of expensive global
brands like Harley Davidson and Triumph. With no credible competition in sight Source: Bloomberg, Ambit Capital research
and product/distribution expansion, we expect REs annual domestic sales to
continue and witness 22% volume CAGR over FY16-20 vs 10% for domestic 2W Eichers forensic score analysis
industry.
Expensive valuation drives our SELL stance Source: Ambit HAWK, Ambit Capital research
Eicher scores relatively well on both our accounting (D3) and greatness (75%
score) frameworks. The earnings multiple of the company has witnessed
significant re-rating over the last five years driven by much improved
performance of RE. However, we believe the current valuation (30x FY18) more
Research Analysts
than captures REs unique positioning (affordable premium) amongst
leisure/utility users, much strong volume/earnings and limited competitive risks, Ashvin Shetty, CFA
unlike for Hero/Bajaj. We value RE at 26x (12% discount to current levels but ashvin.shetty@ambit.co
Tel: +91 22 3043 3285
75% premium to our implied valuation for Hero/Bajaj/TVS). Any success in
export markets present key risks to our estimates/SELL stance. Gaurav Khandelwal, CFA
gaurav.khandelwal@ambit.co
Tel: +91 22 3043 3132
Ritu Modi
ritu.modi@ambit.co
Tel: +91 22 3043 3292
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.
Eicher Motors
Exhibit 2: Funds generated over the last 10 years Exhibit 3: have largely been utilized for capex and
(Rs74bn) paying dividend
Finance Investments
charges made
Int. & 1% 15%
Issue of Dividend Dividends
shares rcd. 16%
14% 8%
Change in
net debt
10%
CFO
78%
Capex
58%
Source: Company, Ambit Capital research Source: Company, Ambit Capital research
Exhibit 4: Eicher has re-rated in the last 6 years on back of Exhibit 5: Eicher has marginally underperformed BSE Auto
strong volumes index in last one -year
140
40.0
130
35.0
30.0 120
25.0 110
20.0
100
15.0
90
10.0
5.0 80
Jan-16
Oct-15
Nov-15
Aug-16
Sep-15
Dec-15
Feb-16
Mar-16
Jun-16
Jul-16
Apr-16
May-16
Exhibit 7: Eicher scores high in our forensic framework Exhibit 8: and greatness framework
Source: Ambit HAWK, Ambit Capital research, Note: Using our accounting Source: Ambit HAWK, Ambit Capital research, Note: On our greatness
framework, we categorize the market into deciles on the basis of their framework, on a scale of 0 to 100, a small minority of outstanding companies
accounting quality with D1 indicating the best decile and D10 indicating tend to score above 67 whilst most companies tend to have scores below 50
the worst decile. Our analysis points towards a strong link between
accounting quality and share price performance.
Jun-16
Nov-15
Sep-15
Feb-16
Jul-16
Dec-15
Mar-16
Sep-16
May-16
smaller players that aggressively added capacities. A cyclical demand downturn
and volatile pricing meant that their RoCE dropped to 9% in CY15 as against
peak-RoCE of 23-25% over CY07-09 SENSEX HOLCIM
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.
Holcim India
Exhibit 2: CFO accounted for most of the cash inflows Exhibit 3: Capex and dividend accounted for ~75% of
overall cash outflows
Receipts Net
from payment
Sale of
subsidiaries towards
Investments , 2% Debt, 5% Interest, 3%
, 1%
Others, 5% Increase in
Cash, 17%
Int+Divd, Dividend,
7% 29%
Capex, 47%
CY06-15
CFO, 85% CY06-15
Source: Company, Ambit Capital research Source: Company, Ambit Capital research
Exhibit 4: Ambuja-ACC (Holcim) is trading at a 15% Exhibit 5: Holcim outperformed Sensex as pricing improved
premium to its five-year average in core markets
- 80
Sep-15
Nov-15
Mar-16
May-16
Jun-16
Sep-16
Dec-15
Feb-16
Jul-16
Jan-10
Jul-10
Jan-11
Jul-11
Jan-12
Jul-12
Jan-13
Jul-13
Jan-14
Jul-14
Jan-15
Jul-15
Jan-16
Jul-16
Source: Company, Ambit Capital research Source: Company, Ambit Capital research
Earnings momentum GREEN Consensus EBITDA estimates have been increased by 8-10% in the last 3 months.
Source: Ambit Capital research
Source: Ambit HAWK, Ambit Capital research, Note: Using our accounting Source: Ambit HAWK, Ambit Capital research, Note: On our greatness
framework, we categorize the market into deciles on the basis of their framework, on a scale of 0 to 100, a small minority of outstanding companies
accounting quality with D1 indicating the best decile and D10 indicating tend to score above 67 whilst most companies tend to have scores below 50
the worst decile. Our analysis points towards a strong link between
accounting quality and share price performance.
Source: Ambit HAWK, Ambit Capital research, Note: Using our accounting Source: Ambit HAWK, Ambit Capital research, Note: On our greatness
framework, we categorize the market into deciles on the basis of their framework, on a scale of 0 to 100, a small minority of outstanding companies
accounting quality with D1 indicating the best decile and D10 indicating tend to score above 67 whilst most companies tend to have scores below 50
the worst decile. Our analysis points towards a strong link between
accounting quality and share price performance.
Jun-16
Nov-15
Sep-15
Jan-16
Jul-16
Dec-15
Mar-16
Sep-16
May-16
ambassadors; and (d) chasing shelf space at every shop in India. In three high-
growth and high-potential segments, Pidilites brands enjoy near-monopoly
recall. The strength of this champion franchise is clearly visible in its stellar SENSEX PIDI
financial performance over the last two decades 24% CFO CAGR and 20%+
RoE each year alongside maintaining a strong balance sheet. Source: Bloomberg, Ambit Capital research
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.
Pidilite Industries
Exhibit 2: CFO accounted for most of the cash inflows Exhibit 3: Capex and dividend accounted for ~75% of
overall cash outflows
Debt
Int+Dividend Repayment(
, 2% Investments net), 1%
Proceeds Others, 0%
, 14%
from Share
Capital, 1%
Capex, 48%
Dividend,
29%
Exhibit 4: Pidilite is trading at a 35% premium to its 5-year Exhibit 5: Pidilite outperformed Sensex as it posted strong
average P/E earnings growth led by margin expansion
50 130
40 120
30 110
20 100
10 90
0 80
May-12
Oct-12
Mar-13
Aug-13
Jun-14
Nov-14
Apr-10
Dec-11
Sep-10
Feb-11
Apr-15
Jul-11
Jan-14
Sep-15
Feb-16
Jul-16
Oct-15
Nov-15
Mar-16
May-16
Jun-16
Aug-16
Dec-15
Sep-15
Jan-16
Feb-16
Apr-16
Jul-16
Sep-16
Whilst the business has several moving parts, the management has been fair in giving guidance and does not
Predictability GREEN
have a reputation of being over-optimistic.
Earnings momentum GREEN Consensus EPS estimates have been increased by 5% in the last 3 months
Source: Ambit Capital research
Exhibit 7: Top-notch forensic score Exhibit 8: Been in the zone of greatness consistently; FY15
is a temporary blip
Source: Ambit HAWK, Ambit Capital research, Note: Using our accounting Source: Ambit HAWK, Ambit Capital research, Note: On our greatness
framework, we categorize the market into deciles on the basis of their framework, on a scale of 0 to 100, a small minority of outstanding companies
accounting quality with D1 indicating the best decile and D10 indicating tend to score above 67 whilst most companies tend to have scores below 50
the worst decile. Our analysis points towards a strong link between
accounting quality and share price performance.
Aug-15
Nov-15
Mar-16
Jun-16
Sep-15
Dec-15
Jan-16
Jul-16
May-16
incentive program for Medical Representatives (MRs) led to RoCEs improving
from 20% in FY11 to ~25% in FY16 (ex one-off revenue from Abilify). Sensex Torrent Pharma
Outperformance to peers led by creation of moats around its business Torrent greatness score analysis
Revival of growth in the Brazil business led by new approvals (branded +
unbranded) is a key catalyst. The company has created moats around its
business in branded generic markets in India and EMs to support >15% revenue
growth over next 10 years. Furthermore, with its entry in the US markets with
key products like Cymbalta and Abilify, the company has further de-risked its
Source: Ambit HAWK, Ambit Capital research
revenue portfolio. Adding to its longer-term visibility through investment in
innovation, Torrent is working on New Chemical Entities and on biosimilars with
its partner Reliance Life Sciences. Therefore, we believe market-cap
compounding of 29% over next 10 years to enter the Sensex will not be a
challenge. We expect its excellent capital allocation track record (refer exhibit 8)
to be replicated in other EMs and innovative pursuits.
Deserves a re-rating led by improvement in return profile and growth
The stock is trading at a 10% discount to the large-cap average FY18E P/E
despite above average competitive positioning and higher RoCE. Whilst strong Research Analyst
earnings growth would sustain current valuations, key triggers for a re-rating are
Paresh Dave, CFA
realisation of improvement in execution in domestic business, scale-up of the
value chain in the US and sales ramp-up in RoW/Brazil. Key risks: Delay in +91 22 3043 3212
approval in Brazil and USFDA cGMP issues. Paresh.dave@ambit.co
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.
Torrent Pharma
Exhibit 2: Sources of cash over last ten years Exhibit 3: Uses of cash over last ten years
Increase in
cash and
Interest cash
Debt received, equivalent,
raised, 2.2% 22.0%
25.6% Net Capex,
40.4%
Interest
CFO, Dividend paid,
70.6% received, 10.5% Dividend
0.1% paid,
27.1%
Source: Company, Ambit Capital research Source: Company, Ambit Capital research
Exhibit 4: Forward P/E evolution Exhibit 5: Torrents share price performance vs CNX
Pharma
25 1 year forward P/E 1800
1600
22 1400
1200
19
1000
16 800
600
13 400
200
10 0
Mar-11
Sep-11
Mar-12
Sep-12
Mar-13
Sep-13
Mar-14
Sep-14
Mar-15
Sep-15
Mar-16
Jan-06
Jan-07
Jan-08
Jan-09
Jan-10
Jan-11
Jan-12
Jan-13
Jan-14
Jan-15
Jan-16
Source: Company, Ambit Capital research Source: Company, Ambit Capital research
Source: Ambit HAWK, Ambit Capital research, Note: Using our accounting Source: Ambit HAWK, Ambit Capital research
framework, we categorize the market into deciles on the basis of their
accounting quality with D1 indicating the best decile and D10 indicating
the worst decile. Our analysis points towards a strong link between
accounting quality and share price performance.
Mar 16
Jul 16
Sep 15
Nov 15
Jan 16
Sep 16
May 16
funding) for the textile sector, Page has maintained a debt/equity of 0.5x-1.0x.
Pages competitive moats will help gain further market share Page Sensex
Pages competitive advantages are centred on: a) in-house manufacturing to
deliver product differentiation in a labour-intensive industry; b) maintaining Source: Bloomberg, Ambit Capital research
aspirational brand recall; and c) an entrenched distribution channel through
distributors. Over the next decade, threats to Pages leadership are low given: a) Pages forensic score analysis
incumbents like Rupa/Maxwell sell through the wholesale channel with
outsourced manufacturing and hence lack control on both product development
and hosiery stores distribution; b) given lack of scale and in-house
manufacturing, new entrants like FCUK, USPA, CK or regional players cant offer
affordability with good product quality.
Source: Ambit HAWK, Ambit Capital research
Why we expect it to enter Sensex
Pages unique genesis should help sustain 27% earnings growth over FY16-26 Pages greatness score analysis
and hence qualify for entry into Sensex. This includes: a) 60-year association
with two strong international brands (Jockey and Speedo) which allows know-
how on branding, product development and technological R&D; b) focus on
capital allocation and maintaining ROCE above 20%, with Page not willing to
shift focus to other brands or product categories in the foreseeable future; c)
Source: Ambit HAWK, Ambit Capital research
incentivisation/empowerment of professionals to achieve scale with operating
efficiencies. We expect category CAGR of 14%, 19% and >20% for mens
innerwear (mid-premium), womens innerwear (mid-premium) and leisurewear
respectively over the next decade given low penetration of organized segment.
Page deserves one of the highest P/E multiples in the consumer space
Longevity of Pages growth is led by: (a) only ~50% penetration of mid-premium
innerwear in SEC A/B households even in 2020; (b) sustainability of competitive Research Analysts
advantages driving market share gains in mid-to-premium innerwear to 44% Rakshit Ranjan, CFA
overall by FY30 vs ~20% in FY16 ; (c) unexplored sub-segments in kidswear and rakshit.ranjan@ambit.co
loungewear. Resultant exemplary financials (33% EPS CAGR over FY16-21E and Tel: +91 22 3043 3201
~57% RoCE) support valuation premium to most consumer names. Key risk: Dhiraj Mistry, CFA
Inability to manage growth given labour intensive manufacturing and wide dhiraj.mistry @ambit.co
range of SKUs in its distribution network. Tel: +91 22 3043 3264
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.
Page Industries
Exhibit 2: Sources of funds over FY07-16 Exhibit 3: Application of funds over FY07-16
Interest Increase in Debt
received, cash and repayment,
1% cash 5%
equivalents,
Debt raised,
14%
24%
Proceeds Dividend
from shares, Cash flow Net Capex, paid, 45%
4% from 30%
operations,
71%
Interest
paid, 7%
Source: Company, Ambit Capital research Source: Company, Ambit Capital research
Exhibit 4: Band chart of Pages one-year forward P/E Exhibit 5: Pages share price performance vs Sensex
80 4,000
70 3,500
3,000
60
2,500
50 2,000
40 1,500
1,000
30
500
20 -
Sep-11
May-12
Sep-12
May-13
Sep-13
May-14
Sep-14
May-15
Sep-15
May-16
Sep-16
Jan-12
Jan-13
Jan-14
Jan-15
Jan-16
Mar 11
Oct 11
May 12
Dec 12
Sep 07
Apr 08
Nov 08
Jun 09
Jan 10
Aug 10
Jul 13
Feb 14
Sep 14
Apr 15
Nov 15
Jun 16
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
Predictability AMBER
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
Source: Ambit Capital research
Exhibit 7: Pages forensic score has remained in zone of Exhibit 8: Pages greatness score has improved from 40 in
safety over 2011-15 2011 to 95 in 2015
Source: Ambit HAWK, Ambit Capital research, Note: Using our accounting Source: Ambit HAWK, Ambit Capital research, Note: On our greatness
framework, we categorize the market into deciles on the basis of their framework, on a scale of 0 to 100, a small minority of outstanding companies
accounting quality with D1 indicating the best decile and D10 indicating tend to score above 67 whilst most companies tend to have scores below 50
the worst decile. Our analysis points towards a strong link between
accounting quality and share price performance.
Balance sheet
Year to March FY14 FY15 FY16 FY17E FY18E
Shareholders' equity 112 112 112 112 112
Reserves & surplus 2,778 3,756 4,941 6,315 7,976
Total net worth 2,890 3,868 5,052 6,426 8,088
Loan funds 1,632 1,344 734 734 484
Deferred tax liability 95 114 110 110 110
Total liabilities 4,617 5,326 5,897 7,271 8,683
Gross block 2,404 3,059 3,251 3,941 4,672
Net block 1,728 2,173 2,132 2,555 2,968
CWIP 36 1 4 4 4
Investments 0 0 0 0 0
Inventories 3,626 4,435 5,393 5,026 6,290
Debtors 727 884 1,034 1,211 1,572
Cash and cash equivalents 35 44 86 1,198 1,412
Loans & Advances 328 509 705 606 786
Other current assets 217 189 93 402 494
Total current assets 4,932 6,061 7,312 8,442 10,554
Creditors 608 821 941 1,090 1,415
Deposits from Dealers 466 556 735 884 1,148
Other current liabilities 764 1,028 1,234 1,393 1,808
Provisions 241 504 640 363 472
Total current liabilities 2,079 2,909 3,550 3,730 4,843
Net current assets 2,853 3,152 3,762 4,712 5,711
Total assets 4,617 5,326 5,897 7,271 8,683
Source: Ambit Capital research
Income statement
Year to March FY14 FY15 FY16 FY17E FY18E
Net Sales 11,876 15,430 17,834 22,101 28,696
% growth 35.6% 29.9% 15.6% 23.9% 29.8%
Raw materials Cost 5,659 7,121 8,133 10,387 13,631
Employees cost 1,881 2,585 3,130 3,377 4,312
Royalty expenses 584 846 994 1,231 1,599
Advertisement expenses 335 714 670 918 1,004
Other Admin, S&D expenses 906 974 1,137 1,450 1,779
Total operating expenses 9,365 12,240 14,063 17,365 22,325
EBITDA 2,511 3,190 3,771 4,736 6,371
% growth 42.3% 27.0% 18.2% 25.6% 34.5%
Depreciation 139 176 238 266 318
EBIT 2,372 3,014 3,533 4,470 6,052
Non operating Income 66 86 62 77 100
Interest expenditure 104 167 153 57 44
PBT 2,334 2,933 3,443 4,490 6,108
Tax expenses 797 973 1,116 1,437 1,955
Adjusted PAT 1,537 1,960 2,327 3,053 4,154
% growth 36.6% 27.5% 18.7% 31.2% 36.0%
Extraordinary items - - - - -
Reported PAT / Net profit 1,537 1,960 2,327 3,053 4,154
Source: Ambit Capital research
Ratio analysis
Year to March FY14 FY15 FY16 FY17E FY18E
Gross margin (%) 52.3 53.8 54.4 53.0 52.5
EBITDA margin (%) 21.1 20.7 21.1 21.4 22.2
EBIT margin (%) 20.0 19.5 19.8 20.2 21.1
Net profit margin (%) 12.9 12.7 13.0 13.8 14.5
Dividend payout ratio (%) 51 49 49 55 60
Net debt/equity (x) 0.6 0.3 0.1 (0.1) (0.1)
Asset turnover excluding cash (x) 3.1 3.2 3.2 3.4 3.7
Working capital turnover (x) 5.2 5.1 5.2 5.3 5.6
Gross block turnover (x) 5.6 5.6 5.7 6.1 6.7
Post-tax RoCE (%) 41.9 42.6 44.2 47.8 53.2
ROE (%) 61.2 58.0 52.2 53.2 57.2
Source: Ambit Capital research
Valuation parameters
Year to March FY14 FY15 FY16 FY17E FY18E
EPS (Rs) 137.8 175.7 208.6 273.8 372.4
Book value per share (Rs) 259 347 453 576 725
Dividend per share (Rs) 60.0 72.0 85.0 128.7 191.0
P/E (x) 105.6 82.8 69.8 53.1 39.1
P/BV (x) 56.2 42.0 32.1 25.3 20.1
EV/EBITDA (x) 65.3 51.3 43.2 34.2 25.3
Price/Sales (x) 13.7 10.5 9.1 7.3 5.7
Dividend yield (%) 0.4 0.5 0.6 0.9 1.3
Source: Ambit Capital research
Aug-15
Sep-15
Oct-15
Nov-15
Nov-15
Dec-15
Feb-16
Mar-16
Mar-16
Apr-16
Jan-16
Jan-16
sharp increase in net debt. Most of the capex for telecom, E&P and retail have
been unproductive, leading to ROE moderation to 12% in FY16 vs 33% in FY06. Reliance Ind Sensex
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.
Reliance Industries
Exhibit 2: Sources of funds over the last ten years (FY06-16) Exhibit 3: Utilisation of funds over last ten years (FY06-16)
Proceeds Other
from Issue of Investment
Equity Share Activities, 2% Increase in
Capital, 3% Cash, 2%
Debt Issue, Purchase
27% of Investme
nt, 8%
Interest
Cash From Paid, 10%
Other
Operating
Financial Purchase
Activities, Equity
Activities, of Fixed
62% Dividend
1% Assets, 73%
Paid, 6%
Interest
received, 6%
Source: Company, Ambit Capital research Source: Company, Ambit Capital research
Exhibit 4: one-year forward P/E band Exhibit 5: Share price performance vs BSE Energy index
18x 3.3
1,600 15x
1,400 2.8
12x
1,200 2.3
1,000 10x
800 1.8
600 6x
1.3
400
200 0.8
Aug-09
Aug-16
Sep-06
Nov-07
Jun-08
Jan-09
Apr-07
Mar-10
Oct-10
May-11
Dec-11
Jul-12
Feb-13
Sep-13
Jun-15
Jan-16
Apr-14
Nov-14
0
Aug-06
Aug-07
Aug-08
Aug-09
Aug-10
Aug-11
Aug-12
Aug-13
Aug-14
Aug-15
Aug-16
Source: Company, Bloomberg, Ambit Capital research Source: Company, Bloomberg, Ambit Capital research
Source: Ambit HAWK, Ambit Capital research, Note: Using our accounting Source: Ambit HAWK, Ambit Capital research, Note: On our greatness
framework, we categorize the market into deciles on the basis of their framework, on a scale of 0 to 100, a small minority of outstanding companies
accounting quality with D1 indicating the best decile and D10 indicating tend to score above 67 whilst most companies tend to have scores below 50
the worst decile. Our analysis points towards a strong link between
accounting quality and share price performance.
Sep-15
Oct-15
Nov-15
Jan-16
Feb-16
Apr-16
May-16
Jul-16
Dec-15
Mar-16
Jun-16
But pricing and penchant for fossil fuel have to sustain
Under the Coal Nationalisation Drive in 1970s, the Government took over the
ownership of all coal assets in India and CIL was made a deemed lessee of the COAL IN SENSEX
mines that it explores and operates. We see limited risks to CILs dominant
position and expect share of coal-based power to remain ~73%; but we see
Source: Bloomberg, Ambit Capital research
risks to CILs ability to maintain margins as its pricing power is a function of
whether it can take regular price hikes to offset cost escalation. Given CIL is at
the mercy of the Government for price hikes, pricing power could be Coal Indias forensic score analysis
compromised to meet the Governments broader agenda to reduce cost of
power (CILs margins declined from 28% in FY13 to 23% in FY16).
Sensex exit if pricing power is compromised or cash is mis-utilised
Although we expect CIL to achieve volume CAGR of 9-10% over FY16-20, we
Source: Ambit HAWK, Ambit Capital research
expect the following factors to pressure margins: (a) risks to pricing power for
FSA segment (over 80% of total volumes); and (b) muted e-auction prices given
Coal Indias greatness score analysis
global oversupply and subdued prices. Hence, market-cap compounding beyond
9-10% could be at risk if CILs pricing power is compromised and/or e-auction
prices do not recover (for CILs to stay in the Sensex, its market-cap needs to
compound at 9% at least assuming smallest stock compounds at 15%).
Moreover, risks of capital misallocation (given CILs high cash balance of
Rs400bn) loom large CIL plans to invest in railway lines, wagons, power Source: Ambit HAWK, Ambit Capital research
plants etc. with limited visibility on expected RoI.
Valuations inexpensive but upside nominal
Our BUY stance on CIL is based on our expectation of improving volume
trajectory of 9% CAGR over FY16-20E (vs 3% over FY10-15) due to sustained
share of coal-based power, import replacement and gradual adoption of
inflation-linked escalation pricing for new contracts. We expect CIL to achieve
10%/12% revenue/EPS CAGR over FY16-20E and find valuations (11.3x FY18
P/E vs historical average of 12.7x) inexpensive. However, we do not expect Research Analyst
multiples to re-rate and, hence, our TP of Rs375 offers only 16% upside.
Parita Ashar, CFA
However, multiples could de-rate if CILs pricing power is compromised or if
cash is mis-utilised. CILs score on our forensic accounting framework as well as +91 22 3043 3223
our greatness framework has been mediocre (refer exhibits 7 and 8). parita.ashar@ambit.co
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.
Coal India
Exhibit 2: CFO and income on investments are key sources Exhibit 3: most of which has been returned as dividend
of cash over last ten years given low capex needs
Others
1% Capex
Incr. in
21%
cash
Interest / balance
Dividend 17% Others
income 2%
22%
CFO Interest /
77% dividend
paid
60%
Source: Company, Ambit Capital research Source: Company, Ambit Capital research
Exhibit 4: CIL trades in line with historical one-year Exhibit 5: CIL has outperformed BSE Metal index since
forward P/E listing due to its utility characteristics
18 140
120
16
100
14 80
12 60
40
10 20
8 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
Dec-10
Apr-11
Aug-11
Dec-11
Apr-12
Aug-12
Dec-12
Apr-13
Aug-13
Dec-13
Apr-14
Aug-14
Dec-14
Apr-15
Aug-15
Dec-15
Apr-16
Aug-16
Source: Company, Ambit Capital research Source: Company, Ambit Capital research
Source: Ambit HAWK, Ambit Capital research, Note: Using our accounting Source: Ambit HAWK, Ambit Capital research, Note: On our greatness
framework, we categorize the market into deciles on the basis of their framework, on a scale of 0 to 100, a small minority of outstanding companies
accounting quality with D1 indicating the best decile and D10 indicating tend to score above 67 whilst most companies tend to have scores below 50
the worst decile. Our analysis points towards a strong link between
accounting quality and share price performance.
Aug-15
Sep-15
Oct-15
Nov-15
Dec-15
Jan-16
Feb-16
Mar-16
Apr-16
Jul-16
May-16
Jun-16
Aug-16
FY09 despite a capex of over US$50bn during this period. OVL produced
5.82MMT/3.3BCM crude/gas in FY16 post cumulative investment of US$25bn so
far. Consequently, ROCEs have declined from 36% in FY07 to 10% in FY16 due
Source: Bloomberg, Ambit Capital research
to increased subsidy burden on Indian operations, significant jump in
capex/opex requirements for oil & gas fields, and expensive acquisitions.
ONGCs forensic score analysis
ONGC limited competitive advantages
ONGC historically benefited from being a quasi-government arm to explore and
develop Indias E&P assets on a nomination basis. However, ONGC failed to
ramp-up domestic crude and gas production given lack of any major success in
E&P despite consistent investments. ONGC hasnt been able to build credible Source: Ambit HAWK, Ambit Capital research
competitive advantages around technical capabilities for assessing and choosing
right exploration and production block. It has also not emerged as a preferred ONGCs greatness score analysis
partner for financial investments in overseas blocks unlike its younger peer BPRL.
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.
ONGC
Exhibit 2: Sources of funds over the last ten years Exhibit 3: Utilisation of funds over last ten years (FY07-16)
(FY07-16)
Loan Funds, Increase In
10% Cash, 6%
Interest Purchase
received, of Fixed
6% Assets, 30%
Other
Dividend Investment
Income, 1% Activities,
43%
Cash From Income
Operating tax and
Activities, Loans & Equity
83% advances Dividend
given to Paid, 19%
subsidiaries
partnership Interest
firms etc., Paid, 1%
1%
Source: Company, Ambit Capital research Source: Company, Ambit Capital research
Exhibit 4: 1-yr forward P/E band rerating on the back of Exhibit 5: ONGC has significantly underperformed BSE
a decline in under-recoveries offset by fall in crude prices Energy Index
2.6
14x 2.4
500
12x 2.2
450 10x 2.0
400 1.8
9x
350 1.6
7x
1.4
300
1.2
250
1.0
200 0.8
Sep-06
Nov-07
Jan-09
Aug-09
Sep-13
Oct-10
Nov-14
Jan-16
Aug-16
Jun-08
Apr-07
Mar-10
Jul-12
Feb-13
Jun-15
May-11
Dec-11
Apr-14
150
100
Aug-06
Aug-07
Aug-08
Aug-09
Aug-10
Aug-11
Aug-12
Aug-13
Aug-14
Aug-15
Aug-16
Source: Company, Ambit Capital research Source: Company, Ambit Capital research
Accounting RED ONGC is in ninth decile in our forensic framework indicating fairly low accounting quality
Predictability RED Lack of visibility over net crude realisations and subsidy sharing mechanism make earnings volatile.
Earnings Momentum GREEN Consensus earnings have seen some upgrades over last 6 months
Source: Ambit Capital research
Source: Ambit HAWK, Ambit Capital research, Note: Using our accounting Source: Ambit HAWK, Ambit Capital research, Note: On our greatness
framework, we categorize the market into deciles on the basis of their framework, on a scale of 0 to 100, a small minority of outstanding companies
accounting quality with D1 indicating the best decile and D10 indicating tend to score above 67 whilst most companies tend to have scores below 50
the worst decile. Our analysis points towards a strong link between accounting
quality and share price performance.
The largest bank in India has been underperforming the new SENSEX EXIT
generation private sector banks. Despite its large network and strong
Mcap (bn): `1,974/US$29.5
liability, the bank is struggling with asset quality issues due to the large
3M ADV (mn): `5,411/US$803.7
exposure to stressed segments. With weak profitability, rising capital
requirements, competition from stronger private sector peers and entry CMP: `254
of new players, SBI seems highly likely to continue underperforming its TP (12 mths): `180
private sector peers on earnings growth. Low provision (34%) on Downside (%): 29
stressed assets of 9.4% would keep credit costs high and RoAs low. With
steady-state RoA at less than 1% and capped leverage of 12-13x, the Flags
bank will struggle to deliver steady state RoEs above 10-12% any time Accounting: GREEN
soon. We are SELLers with TP of Rs180. Predictability: AMBER
Earnings Momentum: AMBER
Competitive position: MODERATE Changes to this position: NEGATIVE
The largest Bank in India Performance
State Bank of India (SBI) is Indias largest bank and, along with its associate 130
120
banks, has a loan market share of ~24%. The bank has a strong liability 110
franchise (CASA at 43%), but exposure to stressed segments and poor 100
90
productivity have led to RoA languishing at 0.5%. Gross NPAs stand at 7% with 80
provision coverage of 44%. Even as it is regarded the best-run state-owned 70
60
bank, state ownership remains a key millstone around SBIs neck, preventing it
Nov-15
Jan-16
Sep-15
Mar-16
Jul-16
May-16
from being able to better compete with nimble-footed private banks.
SBI has struggled to generate RoAs of more than 1%
SBIN IN BANKEX
Since FY99, SBI has generated RoA of over 1% in only two years. Despite
enjoying arguably the best liability franchise (CASA at 43%) and branch network Source: Bloomberg, Ambit Capital research
in India, profitability suffered due to weak income productivity (sub-par cross-
sell) and volatile asset quality trends. SBI and other PSU banks have structurally
weakened over the years due to the role of Government as promoter. High
exposure to risky sectors (e.g. metals and infra) at inadequate risk pricing and
low employee and branch productivities are reflections of these weaknesses.
SBI has underperformed the new-gen private sector banks
Whilst SBI has retained its market share vs other PSU banks that have lost
market share, it has underperformed its private sector peers in profitability (RoA
less than third of private peers). Moreover, the Governments efforts to improve
corporate governance at PSU banks, including SBI, have been underwhelming.
With a large size, weak profitability, rising capital requirements, competition
from stronger private sector peers, and introduction of new players, SBI seems
highly likely to underperform its private sector peers on earnings growth. We
expect loan CAGR of 12-14% in the next three years vs 18-20% for private sector Research Analysts
peers. RoE will not cross 10-12% anytime soon due to high credit costs. Ravi Singh
Overvalued given the weak profitability Tel: +91 22 3043 3181
With steady-state RoA of ~1% and capped leverage of 12-13x, SBI will struggle ravi.singh@ambit.co
to deliver steady state RoEs above 12-13%. We value the standalone bank at Pankaj Agarwal, CFA
Rs140, implying 0.75x June17 BV. The sum-of-the-parts method for the banks
Tel: +91 22 3043 3206
banking and non-banking subsidiaries leads to a target price of Rs180
pankaj.agarwal@ambit.co
(June17). Current valuation of ~1.15x 1-year fwd P/B is at a significant
premium to peers BOB (0.97x) and PNB (0.72x). The only way it can remain in Rahil Shah
the Sensex is if it were given greater autonomy by the Government in HR policies Tel: +91 22 3043 3217
and external vigilance. rahil.shah@ambit.co
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.
State Bank of India
Exhibit 2: NIMs are declining so is loan book growth Exhibit 3: RoAs and RoEs has been subdued
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
Source: Company, Ambit Capital research Source: Company, Ambit Capital research
Exhibit 4: SBI is trading at a discount to its historical P/B Exhibit 5: SBIN has underperformed BANKEX by 400bps in
but at a premium to other PSU banks the past decade
4 500
3 400
300
2
200
1
100
0 0
Mar-05
Mar-08
Mar-11
Mar-14
Jun-07
Jun-10
Jun-13
Jun-16
Sep-06
Nov-07
Jun-08
Jan-09
Aug-09
Mar-10
Feb-13
Sep-13
Jun-15
Jan-16
Oct-10
Dec-11
Jul-12
Nov-14
Aug-16
Dec-05
Dec-08
Dec-11
Dec-14
Sep-06
Sep-09
Sep-12
Sep-15
Apr-07
May-11
Apr-14
Source: Bloomberg, Ambit Capital research Source: Bloomberg, Ambit Capital research
We do not find anything unusual in SBIs financial statements and we believe that the reported numbers are a
Accounting GREEN
true reflection of the profitability of the bank.
Predictability AMBER The volatility in asset quality trends lead to weak predictability of financial performance.
Earnings were down 27% YoY in FY16. Weak balance sheet CAGR of 13% (FY16-18E) would dampen earnings
Earnings Momentum AMBER
growth even as RoA begins to improve gradually.
Source: Ambit Capital research
Balance sheet
Year to March (Rs mn) FY14 FY15 FY16 FY17E FY18E
Networth 1,182,822 1,284,382 1,442,744 1,533,893 1,651,574
Deposits 13,944,085 15,767,932 17,307,224 19,557,164 22,295,166
Borrowings 1,831,309 2,051,503 2,241,906 2,555,171 2,907,927
Other Liabilities 969,267 1,376,980 1,598,756 1,822,582 2,077,743
Total Liabilities 17,927,483 20,480,798 22,590,630 25,468,809 28,932,410
Cash & Balances with RBI/Banks 1,325,496 1,547,558 1,674,677 1,868,719 2,103,055
Investments 3,987,996 4,817,587 4,770,973 5,239,650 5,691,392
Advances 12,098,287 13,000,264 14,637,004 16,470,241 18,772,656
Other Assets 515,704 1,115,389 1,507,977 1,890,198 2,365,307
Total Assets 17,927,483 20,480,798 22,590,630 25,468,809 28,932,410
Source: Company, Ambit Capital research
Income statement
Year to March (Rs mn) FY14 FY15 FY16 FY17E FY18E
Interest Income 1,363,508 1,523,971 1,636,853 1,724,533 1,861,799
Interest Expense 870,686 973,818 1,068,035 1,113,941 1,186,172
Net Interest Income 492,822 550,153 568,818 610,592 675,627
Total Non-Interest Income 185,529 225,759 281,584 291,320 314,461
Total Income 678,351 775,911 850,402 901,912 990,088
Total Operating Expenses 357,259 380,539 417,824 454,529 503,782
Employees expenses 225,043 235,371 251,138 266,174 287,174
Other Operating Expenses 132,216 145,168 166,685 188,355 216,608
Pre Provisioning Profits 321,092 395,373 432,578 447,383 486,306
Provisions 159,354 202,233 294,838 275,767 264,734
PBT 161,739 193,140 137,741 171,616 221,572
Tax 52,827 62,124 38,234 54,917 70,903
PAT 108,912 131,016 99,506 116,699 150,669
Source: Company, Ambit Capital research
Ratio analysis
Year to March (Rs mn) FY14 FY15 FY16 FY17E FY18E
Credit-Deposit (%) 86.8% 82.4% 84.6% 84.2% 84.2%
CASA ratio (%) 45.8% 43.8% 45.1% 44.8% 44.2%
Cost/Income ratio (%) 52.7% 49.0% 49.1% 50.4% 50.9%
Gross NPA (Rs mn) 616,054 567,253 981,728 960,443 896,055
Gross NPA (%) 4.97% 4.27% 6.52% 5.69% 4.67%
Net NPA (Rs mn) 310,961 275,906 558,070 537,848 492,830
Net NPA (%) 2.57% 2.12% 3.81% 3.27% 2.63%
Provision coverage (%) 49.5% 51.4% 43.2% 44.0% 45.0%
NIMs (%) 3.03% 2.99% 2.81% 2.73% 2.69%
Tier-1 capital ratio (%) 9.7% 9.6% 9.9% 10.1% 9.6%
Source: Company, Ambit Capital research
Du-pont analysis
Year to March (Rs mn) FY14 FY15 FY16 FY17E FY18E
NII / Assets (%) 2.9% 2.9% 2.6% 2.5% 2.5%
Other income / Assets (%) 1.1% 1.2% 1.3% 1.2% 1.2%
Total Income / Assets (%) 4.0% 4.0% 3.9% 3.8% 3.6%
Cost to Assets (%) 2.1% 2.0% 1.9% 1.9% 1.9%
PPP / Assets (%) 1.9% 2.1% 2.0% 1.9% 1.8%
Provisions / Assets (%) 0.9% 1.1% 1.4% 1.1% 1.0%
PBT / Assets (%) 1.0% 1.0% 0.6% 0.7% 0.8%
Tax Rate (%) 32.7% 32.2% 27.8% 32.0% 32.0%
ROA (%) 0.6% 0.7% 0.5% 0.5% 0.6%
Leverage 15.5 15.6 15.8 16.1 17.1
ROE (%) 10.0% 10.6% 7.3% 7.8% 9.5%
Source: Company, Ambit Capital research
Valuation parameters
Year to March FY14 FY15 FY16 FY17E FY18E
EPS (Rs) 13.4 16.0 12.2 14.0 19.4
EPS growth (%) -22% 20% -24% 14% 39%
BVPS (Rs) 141.6 152.9 171.2 180.3 193.3
P/E (x) 12.7 10.7 14.0 12.2 8.8
P/BV (x) 1.20 1.12 1.00 0.95 0.88
Source: Company, Ambit Capital research
One eyed king in the land of the blind Engineering & Construction
L&Ts industry leadership (in contracting) is meaningless in the context of
potential Sensex survivors given the industry itself has never sustainably SENSEX EXIT
created shareholder value. As transient competitive advantages of scale Mcap (bn): `1,364/US$20.5
and balance sheet strength fade (new segment-specific peers and 3M ADV (mn): `2,692/US$40.4
potential entry of globals), the construction business (now dominant) will CMP: `1,467
face challenges to grow profitably. There are also risks of the TP (12 mths): `1,250
conglomerate splitting into multiple smaller entities and becoming akin Downside (%): 15
to a holdco. In this scenario, only the construction business may stand a
chance of remaining a Sensex company due to its scale; recent capital Flags
allocation decisions have yielded barely par-for-the-course franchises,
Accounting: AMBER
unlikely to fetch premium valuations.
Predictability: AMBER
Competitive position: STRONG Changes to this position: STABLE Earnings Momentum: AMBER
Largest contractor in the country; now a conglomerate
L&T is the largest EPC company in the country (and sizably so! 6x revenues than Performance
its closest listed competitor). Over the last five years, the company has invested 120
its surplus funds into IT, financial services and infrastructure businesses and now
resembles a conglomerate with more than 50% capital employed in new forays. 100
An impressive 15% consolidated revenue CAGR over FY11-16 was accompanied
80
by a paltry profit growth of 3% CAGR. RoEs declined from 17% in FY11 to 11% in
FY16 due to investments in infra assets and declining standalone profitability. 60
Jun-16
Sep-15
Jan-16
Jul-16
Mar-16
Sep-16
Nov-15
Dec-15
May-16
Competitive advantages will erode further
Contracting business has few competitive edges and perceived advantages of
scale and technical know-how are fleeting or misleading (or both!). L&Ts SENSEX L&T
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.
Larsen & Toubro
Exhibit 2: Despite cyclical downturn, the company did not Exhibit 3: High investments highlights the capital allocation
need to rely too much on debt funding issues of the last five years
Inflow of funds Net Outflow of funds
(FY07-16: Rs500bn) Other, 3% Investment, (FY07-16: Rs500bn)
0% Capex, 25%
Investment
Debt, 19% in
subsidiaries,
40%
Inc in cash,
Equity, 10% CFO, 51%
4%
Source: Company, Ambit Capital research Source: Company, Ambit Capital research
Exhibit 4: Forward P/E evolution Exhibit 5: L&Ts share price performance vs BSE Sensex
(x)
L&T P/E 120
35
30
100
25
20 80
15
10 60
Jan-10
Jul-10
Jan-11
Jul-11
Jan-12
Jul-12
Jan-13
Jul-13
Jan-14
Jul-14
Jan-15
Jul-15
Jan-16
Jul-16
Dec-15
Sep-15
Nov-15
Mar-16
May-16
Jun-16
Sep-16
Jan-16
Jul-16
Source: Company, Ambit Capital research Source: Company, Ambit Capital research
Source: Ambit HAWK, Ambit Capital research, Note: Using our accounting Source: Ambit HAWK, Ambit Capital research, Note: On our greatness
framework, we categorize the market into deciles on the basis of their framework, on a scale of 0 to 100, a small minority of outstanding companies
accounting quality with D1 indicating the best decile and D10 indicating tend to score above 67 whilst most companies tend to have scores below 50
the worst decile. Our analysis points towards a strong link between
accounting quality and share price performance.
Airtel is Indias largest telco, with 33% revenue market share (1QFY17). The 110
company also has telecom presence in Africa (present in 16 countries and is the 100
number 2 operator), Bangladesh and Sri Lanka. In India, Bharti also provides
90
fixed line telecom and Digital TV and IPTV services to homes and enterprises.
80
The company also owns tower infrastructure pertaining to telecom operations Sep-15 Dec-15 Mar-16 Jun-16
through its subsidiary (Bharti Infratel) and joint venture (Indus Towers). The
Sensex Bharti Airtel
company has dominated the Indian telecom market by investing aggressively to
maintain its first mover advantage.
Source: Bloomberg, Ambit Capital research
Competitive advantage blunted by industry structure
Despite being indispensable to entertainment, financial services and Bhartis forensic score analysis
communication, telecom operators return ratios remain utility-like. Sectors
seductive operating cash flows (a third of revenue) due to strong operating
margins with scale persistently attract competition and regulators ire, which
looks to capture value through usurious spectrum auctions. Further, despite
being B2C providers, telcos are unable to capture the cream of consumer
spends, which accrue to dominant OTT media companies (Facebook, Google),
smartphone vendors (Apple) and content providers (Disney, Netflix). Source: Ambit HAWK, Ambit Capital research
Not a steep ask but stock price CAGR will weigh under RoCE decline
Bhartis greatness score analysis
Bhartis capital allocation strategy of redeploying gargantuan India cash flows
into international markets with uncertain growth trajectory has destroyed
shareholder wealth leading to negative share price CAGR over 1/3/5 years.
Now, as the company looks to make amends for its disastrous international
expansion (by opportunistically exiting African markets), competition has spiraled
in the Indian market. RJios entry results in pricing pressure, challenging revenue
growth and spiraling capex needs. This will keep return ratios depressed and
Source: Ambit HAWK, Ambit Capital research
substantially below cost of capital (FY16 RoCE was 3%), implying that decadal
share price CAGR of 9% remains a tall task.
Valuations to moderate
Bharti Airtel has consistently de-rated from 8x 1-year forward EV/EBITDA to 5.3x
now. Valuations remain aggressive as analyst forecasts are yet to incorporate
competition-led pricing pressures and persistently high capex. Whilst the
company ranks highly in our Greatness framework owing to high pre-tax CFO to
Research Analyst
EBITDA (common across telcos owing to prepaid business nature), the same isnt
an important enough factor to sustain current multiples. Key risk to our stance is Vivekanand Subbaraman, CFA
success in monetisation of international assets and focus on India business +91 22 3043 3261
backed by strong content investments, potentially resulting in improved RoCE. Vivekanand.s@ambit.co
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.
Bharti Airtel
Dividend,
Debt (net), 2% Others, 2%
17% Interest, 9%
Equity raise,
Acquisitions
6%
, 20%
Tangible
assets
capex, 52%
CFO, 77%
Intangible
assets
capex, 16%
Source: Company, Ambit Capital research Source: Company, Ambit Capital research
Exhibit 4: Bharti Airtel EV/EBITDA band chart Exhibit 5: Share price performance vs BSE SENSEX
300
20
260
16
220
12
180
8 140
4 100
Aug-07
May-08
Nov-09
Aug-10
May-11
Nov-12
Oct-15
Mar-06
Dec-06
Feb-09
Feb-12
Apr-14
Jul-13
Jan-15
Jul-16
60
Sep-06
Sep-07
Sep-08
Sep-09
Sep-10
Sep-11
Sep-12
Sep-13
Sep-14
Sep-15
Source: Ambit HAWK, Ambit Capital research, Note: Using our accounting Source: Ambit HAWK, Ambit Capital research, Note: On our greatness
framework, we categorize the market into deciles on the basis of their framework, on a scale of 0 to 100, a small minority of outstanding companies
accounting quality with D1 indicating the best decile and D10 indicating tend to score above 67 whilst most companies tend to have scores below 50
the worst decile. Our analysis points towards a strong link between
accounting quality and share price performance.
Ratios
Year end March FY12 FY13 FY14 FY15 FY16
EBITDA margin (%) 33.2 30.2 32.4 34.1 35.3
EBIT margin (%) 14.5 11.0 14.1 17.2 17.2
Adj. net profit margin (%) 6.0 3.0 3.2 6.1 4.9
Tax rate (%) 34.6 56.8 66.5 49.8 61.5
Net debt/equity (x) 1.3 1.2 1.0 1.1 1.2
Net debt/EBITDA (x) 2.7 2.5 2.2 2.1 2.2
Pre-tax RoCE (%) 5.3 3.5 5.3 7.2 5.9
RoCE (%) 3.5 1.8 2.0 3.7 2.9
RoE (%) 8.6 4.5 5.0 9.2 7.4
Source: Company, Ambit Capital research
Valuation parameters
Year end March FY12 FY13 FY14 FY15 FY16
EPS (Rs/share) 11.2 6.0 7.0 13.0 13.6
Adj. EPS (Rs/share) 11.2 6.0 6.9 14.0 11.9
Book value per share (Rs) 133 133 149 155 165
Dividend per share (Rs) 1.0 1.0 1.8 3.9 1.4
Adj. P/E (x) 28 53 45 25 23
P/BV (x) 2.2 2.2 1.9 1.9 1.8
EV/EBITDA (x) 8.1 8.0 6.8 6.2 6.0
EV/EBIT (x) 18.6 22.0 15.5 12.2 12.2
Source: Company, Ambit Capital research
NTPC with 16% share in generation capacity is Indias largest utility. SENSEX EXIT
Over the past decade, NTPC served as governments vehicle to expand Mcap (bn): `1,275/US$19.0
power capacities and hence enjoyed nominated assured-RoE PPAs,
3M ADV (mn): `678/US$10.2
driving EPS CAGR of 6.3%/RoIC of 11.1%. However, NPTC could exit
CMP: `156
from the Sensex in the next decade given: (a) limited growth
TP (12 mths): `126
opportunities (surplus power situation); (b) likely cut in assured RoE
from April19; (c) weakening competitive positioning with expensive Downside (%): 19
power from new plants and challenges in signing new PPAs; and (d)
RoE-dilutive diversification into renewables. Stock trades at 1.3x FY18E Flags
P/B despite RoE of 11% being lower than CoE of 14%. With EPS growth Accounting: AMBER
of merely 4.6% and RoIC <10% over FY16-26, re-rating is unlikely and Predictability: GREEN
share price growth would at best replicate net worth CAGR of 6.2%. Earnings Momentum: AMBER
Competitive position: STRONG Changes to this position: NEGATIVE
Indias largest utility and one of the most efficient Performance
270
NTPC is Indias largest utility with ~16% share in installed capacity. With plant 240
availability factor (PAF) of >90% over the past decade, it is among the most- 210
efficient utilities. Over the past decade, NTPCs installed capacity/PAT/CFO 180
150
grew by 6%/11%/10% led by 6% growth in Indias power demand; however 120
NTPCs share price has compounded by just 2.2% vs 9.5% for the Sensex due 90
to decline in NTPCs RoIC from 15.2% in FY07 to 9.7% in FY16.
Aug-14
Oct-14
Nov-14
Jan-15
Jun-14
Jul-14
Sep-14
Dec-14
Feb-15
Mar-15
Apr-15
May-15
Weakening competitive advantage
NTPCs competitive advantage came from: (a) nominated PPAs with assured Sensex Eicher Motors
RoE; (b) lower generation cost given proximity to mines; (c) cheap financing
due to strong credit rating. Two of these factors are weakening as: (a) power
Source: Bloomberg, Ambit Capital research
surplus in 18 states casts shadow on converting MoUs (for capex up to FY30)
into PPAs; (b) power from new plants is expensive (Rs4-4.5/unit vs Rs2.5-3/unit
NTPCs forensic score analysis
for older plants) as they are far from mines. Hence, NTPC may face offtake
challenges (lower incentive income) and see under-recoveries at new plants.
NTPC to exit Sensex as generation sector loses its flavor
NTPC may exit from Sensex as power capacity addition would significantly
decelerate with India not needing fresh capacities; coal-based capacity was Source: Ambit HAWK, Ambit Capital research
185GW (plus 118GW gas/hydro/renewables) vs peak demand of 153GW in
FY16. Under-construction coal-based capacity of 87GW is more than sufficient NTPCs greatness score analysis
to meet single-digit demand CAGR over FY16-22E. So, NTPCs new capacity
addition is likely to slow down. There is also the risk of assured RoE of 15.5%
being cut in 2019 tariff regulation given: (a) G-Sec yields have declined from
9.1% in March14 to 6.8% in Sept16; (b) Governments focus on reduction in
power tariff; (c) disincentive for further capacity expansion. Lastly, NTPCs
incremental capital allocation strategy will be RoE-dilutive. NTPCs capex plans Source: Ambit HAWK, Ambit Capital research
are shifting toward renewables, which will earn non-assured ROE of 12-14%
vs assured RoE of 15.5% (plus 50-100bps incentives) in thermal.
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.
NTPC
Exhibit 2: CFO/debt accounted for 57%/31% of cash Exhibit 3: and capex accounted for 61% of cash used over
generation over FY07-16 FY07-16
Others, Interest,
Rs0.1tn, 4% Rs0.4tn,
17%
Investments
, Rs0.2tn,
8%
CFO,
Rs1.2tn, Dividends,
57% Rs0.5tn, Capex,
22% Rs1.3tn,
Debt,
Rs0.7tn, 61%
31%
Source: Company, Ambit Capital research Source: Company, Ambit Capital research
Exhibit 4: One-year forward P/B evolution Exhibit 5: NTPC has outperformed BSE Power by 10ppt
(cumulative) over the past decade
300
250 250
2.0x
200 200
1.7x
150
150 1.4x
1.1x 100
100 50
0.8x
Sep-06
Sep-07
Sep-08
Sep-09
Sep-10
Sep-11
Sep-12
Sep-13
Sep-14
Sep-15
Sep-16
50
Sep-06
Sep-07
Sep-08
Sep-09
Sep-10
Sep-11
Sep-12
Sep-13
Sep-14
Sep-15
Sep-16
Source: Bloomberg, Ambit Capital research Source: Bloomberg, Ambit Capital research
Exhibit 6: NTPC explanation for forensic accounting scores on the cover page
Field Score Comments
NTPC's overall scores D4 in utilities space in our accounting framework. Whilst the company enjoys strong
Accounting AMBER
CFO/EBITDA and cash yields, it scores poorly on CWIP/gross block and volatility in non-operating income.
The company has always given a detailed description and has made timely disclosures regarding its future
Predictability GREEN strategy, expansion plans, expected business momentum and expected earnings performance, in its annual
reports and conference calls. Further, regulated equity model renders high predictability to earnings.
Over past three months, there has been no change in the consensus FY18 earnings estimate for NTPC.
Earnings momentum AMBER
Consensus has marginally cut FY18 EPS estimate by 2%/4% over past 6/12 months
Source: Company, Ambit Capital research
Source: Ambit HAWK, Ambit Capital research, Note: Using our accounting Source: Ambit HAWK, Ambit Capital research, Note: On our greatness
framework, we categorize the market into deciles on the basis of their framework, on a scale of 0 to 100, a small minority of outstanding companies
accounting quality with D1 indicating the best decile and D10 indicating tend to score above 67 whilst most companies tend to have scores below 50
the worst decile. Our analysis points towards a strong link between
accounting quality and share price performance.
Nov-15
Jan-16
Sep-15
Dec-15
Mar-16
Jun-16
Jul-16
May-16
Sep-16
only 10% CAGR (INR terms) vs 25% for HCL Tech.
Weak portfolio and poor culture leading nowhere
SENSEX Wipro
Wipro has higher exposure to project-based work (revenue bucket needs to
constantly re-filled), troubled industry segments such as energy and telecom,
Source: Bloomberg, Ambit Capital research
and low-margin markets like India and the Middle East. Wipro has seen
significant churn in sales staff (both internal and external) hurting customer
trust. Its top-10 clients contribute revenue of US$136mn on average vs Wipros forensic score analysis
US$220mn for Infosys. A silo-led organisation culture (until recently sales and
delivery organisations were barely integrated) means that it lacks the DNA of
selling based on vertical-specific domain expertise.
Continued underperformance vs peers could lead to Sensex exit
Source: Ambit HAWK, Ambit Capital research
Wipro has often been early to enter segments with the most opportunity but for
the reasons described above failed to execute effectively (e.g. it was early to Wipros greatness score analysis
enter IMS, but TCS and even HCLT have now overtaken it in terms of absolute
revenue). The new CEO (Abidali Neemuchwala, a veteran of TCS) recently
changed the organisation structure and given incentives to change the culture,
but this will likely take a long time to take effect.
Valuations are expensive given the weak franchise Source: Ambit HAWK, Ambit Capital research
Stock is currently trading at 16.1x one-year forward EPS estimates ahead of its
5-year average of 14.2x. Wipro has had four leadership changes in the last 10
years so the CEO needs to prove himself quickly. This desperation for near-term
revenue growth could lead to more value-destructive acquisitions (Wipro has
had a poor track record so far), expansion into low-margin businesses and/or
pricing cuts. We build in 8% revenue CAGR and 500bps margin decline over the Research Analysts
next 10 years, yielding earnings CAGR of just 4%. RoCE will likely drop from
23% to 18% over this period. Sagar Rastogi
+91 22 3043 3291
Sagar.rastogi@ambit.co
Sudheer Guntupalli
+91 22 3043 3203
Sudheer.guntupalli@ambit.co
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.
Wipro
27% 26%
40%
73%
34%
Source: Company, Ambit Capital research Source: Company, Ambit Capital research
14 140
120
12
100
10
80
Sep-11
Mar-12
Sep-12
Mar-13
Sep-13
Mar-14
Sep-14
Mar-15
Sep-15
Mar-16
Sep-16
Nov-15
Mar-16
May-16
Jun-16
Dec-15
Sep-15
Jan-16
Jul-16
Sep-16
Exhibit 7: Wipro scores well on our forensic accounting Exhibit 8: Wipro scores highly on our greatness framework
framework
Source: Ambit HAWK, Ambit Capital research, Note: Using our accounting
framework, we categorize the market into deciles on the basis of their Source: Ambit HAWK, Ambit Capital research, Note: On our greatness
accounting quality with D1 indicating the best decile and D10 indicating the framework, on a scale of 0 to 100, a small minority of outstanding companies
worst decile. Our analysis points towards a strong link between accounting tend to score above 67 whilst most companies tend to have scores below 50
quality and share price performance.
Income statement
Income statement (Rs bn) FY16 FY17E FY18E FY19E
Rev-IT Serv (US$mn) 7,346 7,752 8,057 8,745
Revenue 516.3 543.9 562.0 608.1
Cost of goods sold 357.0 383.3 396.8 426.2
SG&A expanses 62.6 71.5 71.8 77.4
EBITDA 112.1 107.4 112.4 125.2
Depreciation 15.0 18.5 19.1 20.7
EBIT 97.1 88.9 93.3 104.5
EBIT margin 18.8% 16.3% 16.6% 17.2%
Other Income 17.7 19.0 20.9 23.0
PBT 114.8 107.9 114.2 127.5
Tax 25.3 24.8 26.3 29.3
Rate (%) 22.0 23.0 23.0 23.0
Reported PAT 89.0 82.8 87.6 97.9
PAT margin 17.2% 15.2% 15.6% 16.1%
Diluted Adj EPS 36.2 33.6 35.6 39.7
DPS 6.0 14.0 15.0 15.0
Source: Ambit Capital research, company
Balance sheet
Balance sheet (Rs bn) FY16 FY17E FY18E FY19E
Net Worth 466.1 511.3 555.8 610.6
Other Liabilities 148.1 149.4 149.7 150.0
Capital Employed 614.2 660.7 705.5 760.5
Net Block 65.0 64.5 62.2 59.7
Cash & Bank Balance 232.0 346.7 390.3 439.8
Other Current Assets 122.9 54.4 56.4 61.0
Current Liab. & Prov 110.7 117.5 121.7 131.6
Net Current Assets 394.9 440.0 487.1 544.5
Application of Funds 614.2 660.7 705.5 760.5
Source: Company, Ambit Capital research;
Ratio analysis
FY16 FY17E FY18E FY19E
Rev growth (US$ IT Serv) 3.7% 5.5% 3.9% 8.5%
EBIT growth 1.8% -8.4% 5.0% 12.0%
EPS growth 3.1% -7.0% 5.8% 11.7%
P/E 15.2 16.3 15.4 13.8
EV/EBITDA 10.5 10.9 10.4 9.4
RoE 20% 17% 16% 17%
RoCE 16% 13% 13% 13%
Turnover Ratios
Receivable days (Days) 107 105 105 105
Fixed Asset Turnover (x) 8.7 8.4 8.9 10.0
Source: Company, Ambit Capital research;
While M&Ms dominance in domestic tractors looks intact, its leadership SENSEX EXIT
in domestic UVs is seriously undermined by rising competition from Mcap (bn): `915/US$13.8
global players with better styled products. Driven by market share losses 3M ADV (mn): `1,597/US$24.0
in domestic UVs (from 38% in FY16 to 32% in FY20), we expect M&Ms CMP: `1,472
core businesses to deliver a muted 7% net earnings CAGR and 600bps
TP (12 mths): `1,300
fall in RoCE (to 14%) over FY16-26, making a case for its exit from
Downside (%): 12
Sensex. This, together with capital allocation concerns (core business
cash flows used consistently to fund other automotive/non-automotive
forays, some of which are heavily loss-making) would continue to weigh Flags
on the valuation multiples (35% discount to Maruti). Divestment of loss- Accounting: AMBER
making entities is a key risk to our SELL stance. Predictability: AMBER
Earnings Momentum: RED
Competitive position: STRONG Changes to this position: NEGATIVE
M&M - a federation of diverse businesses Performance
M&M is the leader in the domestic UV and tractor segments. The company has 130
over the years entered into different businesses and now has presence in more 120
than 20 business segments (at FY16-end, nearly 57% of groups capital 110
employed is deployed in businesses outside of the core tractor/UV business) 100
including 2Ws, aerospace, information technology and realty. Over FY11-16, 90
the companys core business has delivered revenue, EBITDA and net earnings 80
Feb-16
Mar-16
Jun-16
Sep-15
Oct-15
Nov-15
Dec-15
Jan-16
May-16
Jul-16
Aug-16
Apr-16
CAGR of 11%, 7% and 5% respectively.
Rising competition in domestic UVs
M&M Sensex index
M&Ms leadership in tractors (41% market share in FY16) will likely sustain on
the back of strong competitive advantages surrounding brand (reliability, high Source: Bloomberg, Ambit Capital research
resale value) and distribution. On the other hand, its domestic UV leadership
built around first mover advantage, lack of competition and rural reach is now M&Ms forensic score analysis
witnessing significant competitive headwinds. MNCs (with strong product
development) and large car makers (Maruti, Hyundai with distribution
advantages) are targeting the UV segment aggressively and successfully.
Consequently, we expect M&Ms market share losses in the recent years (from
53.1% in FY12 to 37.9%) to continue and further decline to 32% by FY20.
Source: Ambit HAWK, Ambit Capital research
Weak outlook for core business, capital allocation a further concern
Driven by market share losses in domestic UVs, we expect M&Ms core M&Ms greatness score analysis
businesses to deliver a muted 7% net earnings CAGR over FY16-18; RoCE
should decline from 20% in FY16 to 14% in FY26. Furthermore, M&Ms policy of
allocating core businesses cash flows to fund the group businesses across
several spheres of mobility and unrelated non-mobility businesses is a concern
particularly given that more recent investments like two wheelers and heavy
commercial vehicles are incurring huge losses. We believe the muted earnings Source: Ambit HAWK, Ambit Capital research
Weak earnings and poor capital allocation force lower multiples Research Analysts
While the company gets relatively average score on our accounting framework,
Ashvin Shetty, CFA
it scores poorly on the greatness framework across most parameters. At 8.1x ashvin.shetty@ambit.co
FY18 EBITDA, the stock justifiably trades at 35% discount to Marutis FY18 Tel: +91 22 3043 3285
EV/EBITDA given market share concerns in UVs, lower return ratios and weak
Gaurav Khandelwal, CFA
capital allocation. We do not expect the valuation multiples to re-rate with key
gaurav.khandelwal@ambit.co
risk to our call being the divestment of loss-making entities. Tel: +91 22 3043 3132
Ritu Modi
ritu.modi@ambit.co
Tel: +91 22 3043 3292
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.
Mahindra & Mahindra
Exhibit 2: Core business generated funds (Rs350bn) largely Exhibit 3: of which a significant amount (Rs95bn) has
through internal accruals over FY07-16 been invested in subsidiaries and associates
Change in Investments Repayent of
net debt made capital
7% 27% 0%
Dividends
18%
CFO
81% Capex
49%
Source: Company, Ambit Capital research Source: Company, Ambit Capital research
Exhibit 4: Trading 15% above its historical five-year Exhibit 5: M&Ms has marginally underperformed in last
average 1-year forward EV/EBITDA one year
13 140
12 130
11
120
10
9 110
8 100
7
90
6
80
5
Sep-15
Oct-15
Nov-15
Dec-15
Jan-16
Feb-16
Mar-16
Jun-16
Jul-16
Aug-16
Apr-16
May-16
Sep-11
Mar-12
Sep-12
Mar-13
Sep-13
Mar-14
Sep-14
Mar-15
Sep-15
Mar-16
Exhibit 7: M&M scores average in our forensic Exhibit 8: ..but has consistently witnessed poor scores in our
framework greatness framework
Source: Ambit HAWK, Ambit Capital research, Note: Using our accounting Source: Ambit HAWK, Ambit Capital research, Note: On our greatness
framework, we categorize the market into deciles on the basis of their framework, on a scale of 0 to 100, a small minority of outstanding companies
accounting quality with D1 indicating the best decile and D10 indicating tend to score above 67 whilst most companies tend to have scores below 50
the worst decile. Our analysis points towards a strong link between
accounting quality and share price performance.
We see Heros market share dominance in Indian 2Ws facing serious SENSEX EXIT
challenges from rising competition from its erstwhile partner Honda Mcap (bn): `723/US$10.9
(aggressive distribution/product rollout) but more importantly from 3M ADV (mn): `1,298/US$19.5
shifting customer preference towards its weak areas of premium bikes CMP: `3,621
and scooters. We expect the company to record a market share loss of
TP (12 mths): `2,880
~500bps over FY16-20; deliver a muted net earnings CAGR of 7% over
Downside (%): 20
FY16-26 and see a decline in its RoCE to 22% by FY2026 (from 33% in
FY16). The current premium valuation (18.8x FY18, 20% premium to
historical average) should de-rate as recent weak commodity-driven Flags
benefits dissipate and net earnings growth moderate. Accounting: GREEN
Predictability: AMBER
Competitive position: STRONG Changes to this position: NEGATIVE Earnings Momentum: GREEN
A Market-leading franchise in domestic motorcycles
Performance
Hero MotoCorp, the largest 2W player in India by volumes, started as a JV
160
between the Hero Group and Honda Motors (Japan) (which exited in 2011).
Over the past five years, the company has witnessed a net earnings CAGR of 140
10% (10 years: 12%) led by revenue CAGR of 8% and EBITDA margin expansion 120
of ~200bps. Post traditional focus on motorcycles and bicycles, Hero group is 100
now geeing into new business areas like defense, energy etc.
80
Dec-15
Nov-15
Feb-16
Mar-16
Apr-16
Sep-15
Oct-15
Jan-16
May-16
Jun-16
Jul-16
Aug-16
Facing structural risks around competition and changing customer
Heros dominance in the Indian 2W market over the last twenty years evolved
Hero MotoCorp Sensex index
through Hondas technological strength, rapid network expansion in rural India
and shifting customer preference towards commuter bikes (Heros core
portfolio). However, we see risks emerging to Heros market Source: Bloomberg, Ambit Capital research
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.
Hero MotoCorp
Exhibit 2: Cash generated over the years Exhibit 3: largely used for paying dividends and Capex
CFO Capex
95% 37%
Change in
net debt
8%
Source: Company, Ambit Capital research Source: Company, Ambit Capital research
Exhibit 4: Trading 20% above its historical five-year Exhibit 5: Hero MotoCorp has outperformed BSE Auto index
average 1-year forward P/E in last one year
20 160
19 150
18 140
17 130
16 120
15 110
14 100
13 90
12 80
Sep-11
Jun-12
Mar-13
Dec-13
Aug-14
Feb-16
May-15
Sep-15
Jun-16
Oct-15
Nov-15
Dec-15
Jan-16
Feb-16
Mar-16
Aug-16
Jul-16
Apr-16
May-16
HMCL 1-yr fwd P/E Avg P/E Hero MotoCorp BSE Auto index
Source: Company, Ambit Capital research Source: Company, Ambit Capital research
Exhibit 7: Hero has consistently scored well in our forensic Exhibit 8: but has seen sharp deterioration in our
framework greatness framework
Source: Ambit HAWK, Ambit Capital research, Note: Using our accounting Source: Ambit HAWK, Ambit Capital research, Note: On our greatness
framework, we categorize the market into deciles on the basis of their framework, on a scale of 0 to 100, a small minority of outstanding companies
accounting quality with D1 indicating the best decile and D10 indicating tend to score above 67 whilst most companies tend to have scores below 50
the worst decile. Our analysis points towards a strong link between
accounting quality and share price performance.
Jun-16
Nov-15
Sep-15
Jan-16
Jul-16
Dec-15
Mar-16
Sep-16
May-16
this growth was from the exemplary Mundra Ports with locational benefits
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.
Adani Ports
Exhibit 2: Debt has been the primary source of funds which Exhibit 3: Most cash has been deployed in capex and also
is expected in infra businesses in an expansion phase investments
Investment
Outflow of funds in
Inflow of funds (FY07-16: Rs462bn)subsidiaries, Others, 2%
(FY07-16: Rs462bn) 1%
Source: Company, Ambit Capital research Source: Company, Ambit Capital research
Exhibit 4: Forward P/E evolution Exhibit 5: Adani Portss share price performance vs BSE
Sensex
Sep-11
May-13
Oct-13
Mar-14
Aug-14
Jun-15
Nov-15
Sep-16
Apr-11
Jan-10
Feb-12
Dec-12
Apr-16
Jul-12
Jan-15
Sep-15
Oct-15
Nov-15
Mar-16
May-16
Jun-16
Aug-16
Sep-16
Dec-15
Apr-16
Jan-16
Feb-16
Jul-16
Source: Company, Ambit Capital research Source: Company, Ambit Capital research
Accounting RED On Ambits forensic accounting, Adani Ports is categorised in the 9 th decile.
Predictability AMBER In the last 4 quarters, Adani Ports has exceeded consensus estimates of EPS by an average of 26%.
Earnings momentum AMBER Bloomberg shows no significant upgrades/downgrades to consensus numbers in last 6 months for Adani Ports.
Source: Ambit Capital research
Source: Ambit HAWK, Ambit Capital research, Note: Using our accounting Source: Ambit HAWK, Ambit Capital research, Note: On our greatness
framework, we categorize the market into deciles on the basis of their framework, on a scale of 0 to 100, a small minority of outstanding companies
accounting quality with D1 indicating the best decile and D10 indicating tend to score above 67 whilst most companies tend to have scores below 50
the worst decile. Our analysis points towards a strong link between
accounting quality and share price performance.
Aug-15
Sep-15
Nov-15
Jan-16
Feb-16
Jun-16
Aug-16
Apr-16
Average ranking on IBAS framework
As highlighted in our initiation note (click here 4th July), Dr. Reddy scores
Sensex Dr. Reddy's
average on IBAS framework due to weak brand equity in India and EMs. The
company has presence in acute therapy in India and, hence, we expect lower
than market growth. In the EM business, Dr. Reddy has presence in volatile Source: Bloomberg, Ambit Capital research
economies like Russia where demand and currency volatility have hampered
growth profile. Whilst the company has best-in-class innovation profile as it Dr. Reddys forensic score analysis
leads the pack in biosimilars evolution, no material success has been derived
yet. Quality observations raised by US FDA at three of its facilities are serious in
nature and strongly worded. Issues around systemic corporate quality and
recurrent and longstanding failures could lead to long period of remediation and
hurt incremental US revenues.
Source: Ambit HAWK, Ambit Capital research
Weak franchise would lead to lower than peer-average growth
We complement management on its ability to realize the potential of innovative Dr. Reddys greatness score analysis
pursuits and start investing in R&D early (since 2003). Early entry could provide a
tactical first mover advantage. However, success from innovative pursuits has
remained elusive with instances of R&D investment write-offs due to project
failures (Balaglitazone). Though no material success has been achieved, Dr.
Reddy could be a beneficiary of early entry into biosimilars in the regulated Source: Ambit HAWK, Ambit Capital research
market but lacks visibility. Weak India business, demand concerns in EMs,
systemic quality issues at its manufacturing facility and failures in innovation
R&D could lead to lower than peer-average growth; hence, market cap
compounding at 10% for it to remain in the Sensex is a challenge.
Muted expectations until longer-term growth verticals are realized
Our medium-term (FY19-28E) FCFF CAGR is 13.5%. RoCEs will remain
depressed, at ~14%, over the medium term until innovation investments are
monetized. Margins would remain under pressure (decline ~450bps to 21.2% by
FY19E) due to high R&D cost (22% CAGR over FY16-19E) and US base business Research Analyst
erosion. On our greatness and accounting frameworks the company scores 92% Paresh Dave, CFA
and D4 (decile four) respectively, implying excellent capital allocation skills and +91 22 3043 3212
better than average accounting. Upside risk: Early resolution of warning letter
Paresh.dave@ambit.co
and early tailwind from innovation pipe.
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.
Dr. Reddys Labs
Exhibit 2: Sources of cash over last ten years Exhibit 3: Uses of cash over last ten years
Proceeds Interest
from paid, 5.0%
shares, Dividend
5.0% Interest paid,
Debt 13.3%
received,
raised,
3.4%
10.5% Net Capex,
CFO, 43.2%
Purchase
81.0% Decrease
of
in cash
investment
and cash
, 38.6%
equivalent,
0.2%
Source: Company, Ambit Capital research Source: Company, Ambit Capital research
Exhibit 4: Forward P/E evolution Exhibit 5: Dr. Reddys share price performance vs CNX
Pharma
30 1000
1 year forward P/E
27 800
24 600
21 400
18 200
15 0
Mar-11
Sep-11
Mar-12
Sep-12
Mar-13
Sep-13
Mar-14
Sep-14
Mar-15
Sep-15
Mar-16
Jan-06
Jan-07
Jan-08
Jan-09
Jan-10
Jan-11
Jan-12
Jan-13
Jan-14
Jan-15
Jan-16
Source: Company, Ambit Capital research Source: Company, Ambit Capital research
Source: Ambit HAWK, Ambit Capital research, Note: Using our accounting Source: Ambit HAWK, Ambit Capital research, Note: On our greatness
framework, we categorize the market into deciles on the basis of their framework, on a scale of 0 to 100, a small minority of outstanding companies
accounting quality with D1 indicating the best decile and D10 indicating tend to score above 67 whilst most companies tend to have scores below 50
the worst decile. Our analysis points towards a strong link between
accounting quality and share price performance.
GAIL is the leading gas pipeline operator and marketer in India. It has SENSEX EXIT
over the years diversified into petrochemicals, LPG production, E&P and
Mcap (bn): `493/US$7.4
LNG terminals. Over the last decade, GAILs RoCEs sharply declined to
6M ADV (mn): `663.2/US$9.9
6% (vs regulated 12% IRR) as incremental investments in pipelines did
CMP: `388
not yield fruit. GAIL remains a GoI vehicle to build pipeline
infrastructure; hence, IRRs will remain muted given artificially TP (12 mths): `365
suppressed tariffs by the regulator and under-utilisation. Rising Downside (%): 6
competition from GSPL (cross-country pipeline) and emerging new
sources of gas supplies (LNG terminals) imply operating leverage Flags
benefits will be limited. We estimate that RoCE/ RoE will remain muted at Accounting: RED
10-12% and CFO generation register an 8-9% CAGR over the next Predictability: RED
decade and hence expect GAIL to be replaced by efficient OMCs. Earnings Momentum: RED
Competitive position: WEAK Changes to this position: NEGATIVE
Performance (%)
GAIL the largest gas pipeline operator
150
GAIL transmits 75% and trades 50% of natural gas in India. Its integrated
120
business model spans natural gas processing, transmission and distribution.
90
Apart from natural gas, GAIL has business interests in manufacturing of petchem
60
products, operating LNG terminals, and production and transmission of LPG.
Over last decade, GAILs PAT has been flat while capital employed has grown at 30
~12% CAGR, leading to dip in ROCE to ~5% vs 19% in FY06. This has primarily 0
Aug-15
Feb-16
Jun-16
Sep-15
Oct-15
Nov-15
Dec-15
Jan-16
Jul-16
Aug-16
Mar-16
Apr-16
May-16
been due to consistent investments to build pipelines and petchem capacities
despite weaker profit generation, resulting in declining ROEs.
GAIL (India) Sensex
Government sponsored competitive advantages unlikely to sustain
GAIL has enjoyed monopoly in gas distribution since inception. Its trading
Source: Bloomberg, Ambit Capital research
business also benefited from the distribution monopoly. As the share of LNG
increases and new terminals like Ennore, Dhamra and Mundra come on-stream, GAILs forensic score analysis
the supply centre for gas will shift and strengthen non-GAIL pipeline volumes.
Historically, GAILs LPG and petchem businesses benefited from allocation of
cheap domestic gas until a gradual decline in domestic gas production and
increase in domestic gas prices impacted profitability. GAILs marketing arm
benefited due to long-term LNG from RasGas which was cheaper than existing
spot LNG. Some of these advantages are unlikely to play out in the next decade. Source: Ambit HAWK, Ambit Capital research
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.
GAIL
Exhibit 2: Sources of cash over last 10 years Exhibit 3: Uses of cash over last 10 years
Decrease in
Cash, 5% Interest
Debt issue, Paid, 7%
11% Equity
Dividend
Interest Paid, 22%
received,
5% Loans &
advances
Dividend given to Purchase
Income, 5% subsidiaries / of Fixed
partnership Assets, 66%
firms etc., 1%
Cash From Purchase
Operating of Investmen
Activities, t, 5%
74%
Source: Company, Ambit Capital research Source: Company, Ambit Capital research
Exhibit 4: Forward P/B trends Exhibit 5: Share price performance vs BSE Energy index
800 3.0x
2.5x 3.5
700
3.0
600 2.0x 2.5
2.0
500
1.5
1.5x
400 1.0
0.5
300
Sep-06
May-07
Sep-08
May-09
Sep-10
May-11
Sep-12
May-13
Sep-14
May-15
Sep-16
Jan-08
Jan-10
Jan-12
Jan-14
Jan-16
200
Source: Ambit HAWK, Ambit Capital research, Note: Using our accounting Source: Ambit HAWK, Ambit Capital research, Note: On our greatness
framework, we categorize the market into deciles on the basis of their framework, on a scale of 0 to 100, a small minority of outstanding companies
accounting quality with D1 indicating the best decile and D10 indicating tend to score above 67 whilst most companies tend to have scores below 50
the worst decile. Our analysis points towards a strong link between
accounting quality and share price performance.
Sep-15
Aug-15
Nov-15
Feb-16
Apr-16
Jun-16
Jan-16
Aug-16
(5.5% of sales). Cipla had RoCE of 13% in FY16 (vs 16% in FY11) burdened by
distributor acquisitions made in the RoW markets at expensive valuations. Sensex Cipla
Average ranking on IBAS framework
As highlighted in our note (click here 4th July), Cipla scores average on our IBAS Source: Bloomberg, Ambit Capital research
framework due to weak brand equity and lack of investment in innovation. Since
the company has presence in acute therapy in India, we expect lower than Ciplas forensic score analysis
market growth (<15%). The company continues to lose market share in the
inhaler franchise in India which raises concerns on ability to retain consumers. In
the export market, apart from inhalers, the company has made no material
investment in innovative projects. Whilst new management has renewed its focus
on innovation, we believe it is too late to obtain benefits of limited competition
Source: Ambit HAWK, Ambit Capital research
as innovative pursuits typically take 5-7 years to commercialize. In the export
generics market, concentrated bets in inhalers havent materialized yet and the
company runs a risk of no moated revenues. Ciplas greatness score analysis
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.
Cipla
Exhibit 2: Sources of cash over last ten years Exhibit 3: Uses of cash over last ten years
Proceeds Purchase
of Dividend
from
investment, paid,
shares,
20.1% 11.4%
8.6% Debt
raised, Interest Interest
24.7% received, paid, 3.6%
0.8%
Source: Company, Ambit Capital research Source: Company, Ambit Capital research
Exhibit 4: Forward P/E evolution Exhibit 5: Ciplas share price performance vs CNX Pharma
45 1 year forward P/E 700
40 600
35 500
30 400
25 300
20 200
15 100
10 0
Mar-11
Sep-11
Mar-12
Sep-12
Mar-13
Sep-13
Mar-14
Sep-14
Mar-15
Sep-15
Mar-16
Jan-06
Jan-07
Jan-08
Jan-09
Jan-10
Jan-11
Jan-12
Jan-13
Jan-14
Jan-15
Jan-16
Source: Company, Ambit Capital research Source: Company, Ambit Capital research
Source: Ambit HAWK, Ambit Capital research, Note: Using our accounting Source: Ambit HAWK, Ambit Capital research, Note: On our greatness
framework, we categorize the market into deciles on the basis of their framework, on a scale of 0 to 100, a small minority of outstanding companies
accounting quality with D1 indicating the best decile and D10 indicating tend to score above 67 whilst most companies tend to have scores below 50
the worst decile. Our analysis points towards a strong link between
accounting quality and share price performance.
Sep-15
Jan-16
Feb-16
Oct-15
Nov-15
Dec-15
Mar-16
Jun-16
Jul-16
Apr-16
May-16
restructurings and reduction in European capacity to ~11mt from 21mt. India
margins have also declined sharply over the last 3-4 years as integrated players
(like Tata Steel) were disproportionately affected in the falling raw material price
TATA IN SENSEX
scenario. Over FY06-16, despite a 19% revenue CAGR and 8x increase in
capital employed, EBITDA CAGR was merely 2%.
Source: Bloomberg, Ambit Capital research
Raw material cost advantage receding
Tata Steels key competitive advantage as one of the lowest cost producers (raw Tata Steels forensic score analysis
material integration) is gradually receding as (a) European operations are not
integrated; (b) the value of raw materials (iron ore, coking coal) has declined
given global oversupply. We see long-term risks to raw material integration of
the India operations post the MMDR Act, 2015 (requires all new mines to be
auctioned and existing mines would remain only until 2030). Hence, bids for
Source: Ambit HAWK, Ambit Capital research
new mines could increase raw material costs and deteriorate margins.
Global overcapacity + falling raw material integration = Risk to margins Tata Steels greatness score analysis
Our outlook for global steel prices is bleak given the global oversupply of iron
ore/coking coal and low capacity utilisation of steel mills (~70%); hence, we do
not expect RoCE (sub-10% since FY13) to improve significantly hereon for even
the next decade or so albeit possibilities of a brief period of high profitability.
Further, long-term risks to raw material integration of the India operations Source: Ambit HAWK, Ambit Capital research
would also structurally deteriorate margin profile.
Premium valuations unjustified
Our TP of Rs250 implies an FY18E EV/EBITDA of 6.2x, a premium to historical
average of 5.3x, unjustified given risks to margins. Tata Steel is trading at an
FY18 EV/EBITDA of 6.8x, in line with JSW Steel (7.0x) and higher than global
sector average of 6.3x. We recommend investors to SELL the stock as the CMP
optimistically factors in a further 5% increase in domestic steel prices, which is
difficult given our muted outlook on global steel demand and raw material
Research Analyst
oversupply. Tata Steels score on our forensic accounting framework has been
deteriorating whereas its score on our greatness framework has always been Parita Ashar, CFA
sub-par (refer exhibits 7 and 8). Key risk to our thesis is a further increase in +91 22 3043 3223
Government protection to the domestic steel industry for a long time. parita.ashar@ambit.co
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.
Tata Steel
Exhibit 2: CFO and debt have been the key sources of cash Exhibit 3: ~73% of cash has been spent on
over the last ten years capex/acquisitions over the last ten years
Eq/Pref/Hyb
rid cap. Others Incr. in cash
Interest /
raised 2% balance
dividend
10% 1%
paid
26%
Source: Company, Ambit Capital research Source: Company, Ambit Capital research
Exhibit 4: Tata Steel trading at ~30% premium to historical Exhibit 5: Tata Steel has underperformed the BSE Metal
one-year fwd EV/EBITDA index by ~28% over last 10 years
9.0 300
8.0 250
7.0 200
6.0
150
5.0
100
4.0
3.0 50
2.0 -
Sep-06
Sep-07
Sep-08
Sep-09
Sep-10
Sep-11
Sep-12
Sep-13
Sep-14
Sep-15
Sep-16
Sep-06
Sep-07
Sep-08
Sep-09
Sep-10
Sep-11
Sep-12
Sep-13
Sep-14
Sep-15
Sep-16
Source: Company, Ambit Capital research Source: Company, Ambit Capital research
Exhibit 7: Forensic accounting score deteriorating sharply Exhibit 8: Capital allocation score has always been weak
given European adventure
Source: Ambit HAWK, Ambit Capital research, Note: Using our accounting Source: Ambit HAWK, Ambit Capital research, Note: On our greatness
framework, we categorize the market into deciles on the basis of their framework, on a scale of 0 to 100, a small minority of outstanding companies
accounting quality with D1 indicating the best decile and D10 indicating tend to score above 67 whilst most companies tend to have scores below 50
the worst decile. Our analysis points towards a strong link between
accounting quality and share price performance.
Balance sheet
Year to March (Rs mn) FY14 FY15 FY16E FY17E FY18E
Net worth 445,647 353,483 324,281 334,236 350,913
Borrowings 814,855 823,039 858,040 858,040 888,040
Other liabilities & provisions 79,945 92,114 90,064 90,064 90,064
Capital employed 1,366,404 1,297,481 1,301,215 1,311,170 1,357,847
Net Fixed Assets 859,806 833,709 824,174 852,762 902,762
Investments 50,935 34,551 67,965 67,965 67,965
Net current assets 297,768 295,146 271,841 253,207 249,885
Total assets 1,366,404 1,297,481 1,301,215 1,311,170 1,357,847
Source: Company, Ambit Capital research
Income statement
Year to March (Rs mn) FY14 FY15 FY16E FY17E FY18E
Net revenue 1,486,136 1,395,037 1,171,516 1,108,069 1,218,302
Total operating costs 1,322,587 1,272,680 1,095,659 968,496 1,055,989
EBITDA 163,549 122,358 75,856 139,573 162,313
EBITDA margin % 11.0% 8.8% 6.5% 12.6% 13.3%
Depreciation 58,412 59,436 50,818 61,412 74,474
Other income 5,729 7,962 11,174 6,321 6,321
EBIT 110,866 70,883 36,212 84,483 94,159
Interest expense 43,368 48,478 41,286 43,058 41,906
Adjusted PBT 67,498 22,406 (5,075) 41,425 52,253
Total taxes 30,582 25,674 15,050 24,466 24,504
Adjusted Net profit 36,225 (2,969) (18,827) 16,959 27,750
Source: Company, Ambit Capital research
Indian Oil Corp Ltd (IOCL IN, BUY) Kotak Mahindra Bank Ltd (KMB IN, SELL)
700 900
600 800
700
500 600
400 500
300 400
300
200
200
100 100
0 0
Aug-13
Nov-13
May-14
Aug-14
Nov-14
May-15
Aug-15
Nov-15
May-16
Aug-13
Nov-13
May-14
Aug-14
Nov-14
May-15
Aug-15
Nov-15
May-16
Feb-14
Feb-15
Feb-16
Feb-14
Feb-15
Feb-16
Indian Oil Corp Ltd Kotak Mahindra Bank Ltd
Source: Bloomberg, Ambit Capital research Source: Bloomberg, Ambit Capital research
Bharat Petroleum Corp Ltd (BPCL IN, BUY) HCL Technologies Ltd (HCLT IN, BUY)
700 1,200
600 1,000
500
800
400
600
300
200 400
100 200
0 0
Aug-13
Nov-13
Feb-14
May-14
Aug-14
Nov-14
Feb-15
May-15
Aug-15
Nov-15
Feb-16
May-16
Aug-13
Nov-13
Feb-14
May-14
Aug-14
Nov-14
Feb-15
May-15
Aug-15
Nov-15
Feb-16
May-16
Bharat Petroleum Corp Ltd HCL Technologies Ltd
Source: Bloomberg, Ambit Capital research Source: Bloomberg, Ambit Capital research
Ultratech Cement Ltd (UTCEM IN, BUY) Eicher Motors Ltd (EIM IN, SELL)
4,000 25,000
3,500
20,000
3,000
2,500 15,000
2,000
1,500 10,000
1,000
5,000
500
0 0
Aug-13
Aug-14
Aug-15
Aug-13
Aug-14
Aug-15
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
Source: Bloomberg, Ambit Capital research Source: Bloomberg, Ambit Capital research
Ambuja Cements Ltd (ACEM IN, UNDER REVIEW) Pidilite Industries Ltd (PIDI IN, BUY)
300 800
250 700
600
200 500
150 400
300
100 200
50 100
0
0
May-14
May-15
May-16
Nov-13
Nov-14
Nov-15
Aug-13
Feb-14
Aug-14
Feb-15
Aug-15
Feb-16
Aug-13
Nov-13
May-14
Aug-14
Nov-14
May-15
Aug-15
Nov-15
May-16
Feb-14
Feb-15
Source: Bloomberg, Ambit Capital research Source: Bloomberg, Ambit Capital research
Torrent Pharmaceuticals Ltd (TRP IN, NOT RATED) Page Industries Ltd (PAG IN, BUY)
1,800 18,000
1,600 16,000
1,400 14,000
1,200 12,000
1,000 10,000
800 8,000
600 6,000
400 4,000
200 2,000
0 0
Aug-13
Nov-13
Feb-14
May-14
Aug-14
Nov-14
Feb-15
May-15
Aug-15
Nov-15
Feb-16
May-16
Aug-13
Nov-13
Feb-14
May-14
Aug-14
Nov-14
Feb-15
May-15
Aug-15
Nov-15
Feb-16
May-16
Torrent Pharmaceuticals Ltd Page Industries Ltd
Source: Bloomberg, Ambit Capital research Source: Bloomberg, Ambit Capital research
Coal India Ltd (COAL IN, BUY) State Bank Of India (SBIN IN, SELL)
500 350
400 300
250
300
200
200
150
100 100
0 50
Aug-13
Aug-14
Aug-15
Nov-13
Feb-14
May-14
Nov-14
Feb-15
May-15
Nov-15
Feb-16
May-16
Aug-13
Nov-13
May-14
Aug-14
Nov-14
May-15
Aug-15
Nov-15
May-16
Feb-14
Feb-15
Feb-16
Source: Bloomberg, Ambit Capital research Source: Bloomberg, Ambit Capital research
Larsen & Toubro Ltd (LT IN, SELL) Bharti Airtel Ltd (BHARTI IN, NOT RATED)
2,000 500
400
1,500
300
1,000
200
500
100
0 0
Aug-13
Nov-13
May-14
Aug-14
Nov-14
May-15
Aug-15
Nov-15
May-16
Aug-13
Nov-13
May-14
Aug-14
Nov-14
May-15
Aug-15
Nov-15
May-16
Feb-14
Feb-15
Feb-16
Feb-14
Feb-15
Feb-16
LARSEN & TOUBRO LTD Bharti Airtel Ltd
Source: Bloomberg, Ambit Capital research Source: Bloomberg, Ambit Capital research
NTPC Ltd (NTPC IN, SELL) Wipro Ltd (WPRO IN, SELL)
180 800
160 700
140 600
120 500
100
400
80
60 300
40 200
20 100
0 0
Aug-13
Nov-13
Feb-14
May-14
Aug-14
Nov-14
Feb-15
May-15
Aug-15
Nov-15
Feb-16
May-16
Aug-13
Nov-13
Feb-14
May-14
Aug-14
Nov-14
Feb-15
May-15
Aug-15
Nov-15
Feb-16
May-16
NTPC LTD Wipro Ltd
Source: Bloomberg, Ambit Capital research Source: Bloomberg, Ambit Capital research
Mahindra & Mahindra Ltd (MM IN, SELL) Hero Motocorp (HMCL IN, SELL)
1,600 4,000
1,400 3,500
1,200 3,000
1,000 2,500
800 2,000
600 1,500
400 1,000
200 500
0 0
Aug-13
Aug-14
Aug-15
Nov-13
Feb-14
May-14
Nov-14
Feb-15
May-15
Nov-15
Feb-16
May-16
Aug-13
Nov-13
May-14
Aug-14
Nov-14
May-15
Aug-15
Nov-15
May-16
Feb-14
Feb-15
Feb-16
Source: Bloomberg, Ambit Capital research Source: Bloomberg, Ambit Capital research
Dr. Reddy's laboratories (DRRD IN, SELL) GAIL India Ltd (GAIL IN, SELL)
5,000 600
4,000 500
400
3,000
300
2,000
200
1,000 100
0 0
Aug-13
Nov-13
May-14
Aug-14
Nov-14
May-15
Aug-15
Nov-15
May-16
Feb-14
Feb-15
Feb-16
Aug-13
Nov-13
May-14
Aug-14
Nov-14
May-15
Aug-15
Nov-15
May-16
Feb-14
Feb-15
Feb-16
Dr Reddy's Laboratories Ltd GAIL India Ltd
Source: Bloomberg, Ambit Capital research Source: Bloomberg, Ambit Capital research
Cipla Ltd (CIPLA IN, NOT RATED) Tata Steel Ltd (TATA IN, SELL)
800 700
700 600
600 500
500
400
400
300
300
200 200
100 100
0 0
Aug-13
Nov-13
Feb-14
May-14
Aug-14
Nov-14
Feb-15
May-15
Aug-15
Nov-15
Feb-16
May-16
Aug-13
Nov-13
Feb-14
May-14
Aug-14
Nov-14
Feb-15
May-15
Aug-15
Nov-15
Feb-16
May-16
Cipla Ltd/India Tata Steel Ltd
Source: Bloomberg, Ambit Capital research Source: Bloomberg, Ambit Capital research
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Disclosures
37. The analyst (s) has/have not served as an officer, director or employee of the subject company.
38. There is no material disciplinary action that has been taken by any regulatory authority impacting equity research analysis activities.
39. All market data included in this report are dated as at the previous stock market closing day from the date of this report.
40. Ambit and/or its associates have financial interest/equity shareholding in Kotak Mahindra Bank, HCL Tech, Reliance Industries, Coal India, SBI, L&T, M&M, Hero Motocorp, GAIL, Cipla, Tata Steel,
Century Textiles, Indian Hotels, Tata Power & HDFC.
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