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AMBIT INSIGHTS 7 November 2016

DAILY

Updates

Healthcare

Much ado about nothing

Lupin (BUY)

Goa F483 cleared; bunched up approvals to follow

Century Plyboards (BUY)

Deceleration, disruption and deflation

Weeklies

Economy

Utilities

Results Update

Titan (SELL)

Underwhelming quarter buffered by festive sales

Punjab National Bank (SELL)

NPA slippages stay high

Amara Raja Batteries (SELL)

In-line performance; shady future

Results Expectation

Godrej Consumer: (SELL, 23% downside)

Britannia: (SELL, 15% downside)

GSK Consumer: (SELL)

Analyst Notes: Dish TV: Focus on volumes and cost control Vivekanand Subbaraman, CFA, +91 22 3043 3261

Since reporting sub-par 2QFY17 results (and suspending FY17 ARPU guidance), Dish TV’s stock corrected 8% versus 4% decline in NSE Media Index. Industry-wide ARPU pressure is evident from VDTH and Airtel’s results; ARPU corrected sequentially for both (albeit less than Dish). DTH’s sluggish ARPU is due to the volume-led penetration growth strategy through leaner packages. Lack of judicial push for digitisation (phase-III cases are still stuck in court) and inability of cable MSOs to raise tariffs, continue to impair DTH’s ARPU prospects. In such an environment, Dish TV’s strategy of growing volumes and curbing costs appears credible. We urge investors to focus on Dish TV’s volume (expect 11% FY16-18 CAGR) rather than ARPU trends (1% ARPU CAGR over FY16-18E). Remain BUYers on Dish TV as recent regulations (homogenous content pricing across platforms) are directionally positive and will allow Dish TV to mitigate content inflation to 10-12% (management guidance) in FY17 (trailing revenue growth). Source: Ambit Capital research

Please refer to our website for complete coverage universe

http://research.ambitcapital.com

http://research.ambitcapital.com

AMBIT INSIGHTS

Ambit Capital Pvt Ltd 7 November 2016

Healthcare Much ado about nothing Possible penalty on generic companies for charges of price collusion is unprecedented in our view. We don't believe that there could be adverse implications (in terms of generic pharma companies being proved guilty and levied penalties) given that drug pricing in the USA is not regulated. Specifically for Sun Pharma, we believe the stock price has overreacted to the potential impact; products mentioned in the article had peak annual sales of US$70mn (since FY14) vs market-cap loss of US$1.7bn. Further, unlike innovators, generics are not protected by patents and we believe market forces should determine the price. Any structural changes in the US generics (price controls and curb on settled launch) would be catastrophic as generics may not find all products economically viable. In fact, it could lead to increase in healthcare burden on exchequer as innovators may not see generic competition. Continue to remain positive on US generic market opportunity and believe Lupin and Cadila are best placed to reap benefits of GDUFA.

The Event

As per media article (https://goo.gl/aGntb5), Department of Justice (DOJ) could penalise generic pharma companies for suspected price collusion. Specifically, amongst Indian companies, Sun Pharma received a subpoena asking for reasoning for price hikes taken in the past for Doxycycline (55x price increase) and Digoxin (10x price increase). In total 12 companies have been questioned by the DOJ and as per media article the ruling is expected by December, 2016.

In past, Valeant and Turing Pharma (both innovators) have taken frivolous price increase (20-55x) in some of the products resulting in criticism from all stakeholders (government, insurance companies and patients). The Turing and Valeant episodes resulted in subpoena being issued by DOJ to generic pharma companies in 2015 and early 2016 asking for justification of price increases taken.

Why does the legal system in the USA not support the affected patients?

The US regulatory framework suggests that generic drug prices should represent a cheaper alternative to innovator drugs.

Price of Depakote ER (innovator drug): US$308 for 100 pills = US$3.08/pill (Source: http://www.northdrugstore.com/buy-Depakote-ER.html)

Price of generic Depakote ER before price hikes: US$30 for 100 pills = US$0.3/ pill i.e. a 90% discount to innovator

Price of generic Depakote ER after price hikes: US$179 for 100 pills = US$1.79/pill i.e. still a 40% discount to innovator

Hence, despite the price hikes discussed, the generics are still selling at a significantly cheaper price than the innovator drugs.

Just like innovators, generics also have to recover investment and are free to price their products.

The innovators keep the prices high, arguing that it is important that the R&D machine is well oiled to improve the lives of patients. We fail to understand how this argument does not hold true for generics. They also have to manufacture and spend on R&D to make the generics of these new innovator drugs.

Unlike innovators, generic companies are not protected

In past, penalties have been imposed on companies with patent protection. Case being Mylan for Epipen price increase and Valeant for Glumetza. In both cases, the products were protected from competition via issuance of patent by US PTO (Patent

POSITIVE Quick Insight Analysis Meeting Note News Impact

Research Analysts

Paresh Dave, CFA [email protected] Tel: +91 22 3043 3212

https://goo.gl/aGntb5),

http://www.northdrugstore.com/buy-Depakote-ER.html)

mailto:[email protected]

AMBIT INSIGHTS


and Trademark Office). Mylan has patent for the pen device and Glumetza was under patent protection when Valeant took price hikes. As we see here, law favours the patented products and not the generic products. And the same law also has the right to penalise companies misusing the protection. However, in the case of generic companies, no protection is provided and could see potential competition due to new entrants. Therefore, we question the grounds on which the DOJ could penalise the companies.

Subpoena on generic price hikes not a material risk, in our view

There have been valid reasons for the price hikes on many occasions:

a) Shortage in API supply as the key supplier gets tangled in FDA issues - This raises raw material costs for manufacturers which have to be passed on to consumers.

b) Increase in cost for generic firms with GDUFA fees and higher level of FDA scrutiny on quality and adherence to cGMP.

c) Low volume drugs need to be priced higher in order to recover the fixed cost.

Do we see structural change (price controls and curbs on settled launch) in the US generic pharma? – No!

Recently, in the run up to presidential elections, Senator Bernie Sanders criticised pricing by generic companies (https://goo.gl/RHUcB4) and proposed measures to curb or regulate price increases taken by generics. Also, the Senator argued for ban on ‘pay for delay’ deals between innovator and generic companies which typically result in delay in entry of generics.

In order to control generic price increases, the Senator has argued for inflation-linked price hikes, the same has been corroborated by the Department of Health and Human Services (https://goo.gl/SiSKX9).

We believe, any price controls or prohibition on settled launch could affect the viability of a product market. Generics earn gross margins of ~60% from the US market whereas innovators earn ~95% gross margin from patented products. Further, unlike innovators which are provided with patent protection, generics need to compete for market share which further reduces the profits earned from each product. In specific cases, fluctuating API prices and lower volume drugs also require price increases to maintain profitability. Also, profits from existing generic drugs fuel the R&D initiatives for future generic drugs. Therefore, if profitability is curtailed, it could have impact on the R&D spending and eventually affect the payer as products going off patent will not see generic competition and prices will continue to be inflated.

We believe that regulation of ‘pay for delay’ settlements will be detrimental for Indian pharma companies. With no option to settle litigation amicably midway, Indian generic firms may remain stuck in litigation. With more lawsuits going through the whole litigation chain, the litigation process itself might become longer. Longer litigation timelines would result in deferment of product-specific opportunities till either the patent in litigation expires or the court gives a judgement on the infringement or validity lawsuit.

Overall, we believe such measures will have near-term benefit but longer-term impact on the payers. Further, such issues have been raised earlier as well with little or no impact. Case being Ranbaxy’s settlement with Teva for the launch of the generic version of Lipitor. The Office of the New York Attorney General (NY AG) has disclosed that Teva and Ranbaxy have settled the antitrust claims regarding their 2010 agreement on generic Lipitor for US$0.3mn only (vs brand sales of US$9bn).

A billion dollar loss in market cap for a US$70mn annual sale product

Sun Pharma is one of the dozen companies being suspected of price collusion as per the media article stated above. The price collusion charges are for Doxycycline from which Sun Pharma has generated peak annual sales of US$70mn (launched in FY14).

https://goo.gl/RHUcB4)

https://goo.gl/SiSKX9).

AMBIT INSIGHTS


However, the stock has lost market cap of US$1.7bn since the news. With only US$70mn annual sales, we argue whether US$1.7bn decline in market cap is justified.

Reiterate BUY on Lupin and Cadila

With noise around DOJ investigation and the resultant price decline in pharma companies, we would like to reiterate our BUYs on Lupin and Cadila.

Lupin (TP Rs1,851; 30% upside)

With Goa facility now cleared, we believe that Lupin is best placed to reap benefits of GDUFA given presence in complex generics and large pipeline of ~150 ANDAs pending approval. Also, Lupin has the first-mover advantage in Japan and we expect the company to benefit from increasing generic penetration. Over FY16-19E, we see 250bps margin growth to 28.8% led by gross margin expansion due to higher revenue from limited competition complex generics and operating leverage in RoW; partially offset by increase in R&D spend (12% in FY18E). At CMP, Lupin is trading at 15.7x FY18E EPS. We believe valuations will improve, given: (a) earnings growth momentum – we expect 25% net profit CAGR over FY16-18E due to GDUFA timeline resulting in large product approvals in FY17-18E; (b) investments in longer-term growth drivers – the company is investing in differentiated products like complex injectables, ophthalmics and dermatology, biosimilars in Japan and respiratory in the USA and Japan; and (c) high visibility of earnings through large pipeline in the USA and growth acceleration in India. Our DCF analysis suggests a target price of Rs1,851/share, retain BUY.

Cadila (TP Rs430; 10% upside)

Based on management’s commentary resolution of the warning letter on its Moraiya facility appears to be a near certain event. As we highlighted earlier (click here), the management has corroborated our view of bunched-up product approvals in the US generic market once the facility is cleared. Whilst the management has guided for more than 20 bunched-up product approvals, we believe the company could receive ~30 product approvals in FY18E led by benefits of faster product approval realised through GDUFA, resulting in 34% revenue CAGR over FY16-18E. The current trading multiple of ~16x FY18E EPS factors concerns that do not factor large opportunity in the USA and margin expansion accompanied with it. We expect the multiple to expand (lollapalooza effect to reverse). Our DCF yields a TP of Rs430. We retain BUY.

Exhibit 1: Healthcare RV

CMP Rating Consensus

TP

Upside Mcap EV/EBITDA (x) P/E (x) P/B (x) EV/Sales (x) CAGR (FY16-18)

RoE (%)

(%) US$ mn FY17E FY18E FY17E FY18E FY17E FY18E FY17E FY18E EBITDA EPS FY16 FY17E FY18E

Sun Pharma 652 NR 868 33 23,480 14.4 12.7 22.1 18.5 4.2 3.5 4.8 4.3 21 34 17 20 20

Lupin* 1,421 BUY 1,851 30 9,593 15.2 11.2 21.8 15.7 5.1 4.0 4.1 3.2 29 34 23 24 27

Dr. Reddy's* 3,080 SELL 2,793 (9) 7,641 17.2 12.5 30.5 21.0 3.6 3.1 3.4 2.9 1 12 17 13 16

Cipla* 545 SELL 516 (5) 6,554 16.3 13.9 24.3 20.5 3.6 3.2 3.1 2.7 21 20 13 14 15

GSK Pharma 2,801 NR 2,815 0 3,552 41.6 31.6 55.4 43.4 7.2 6.3 NA NA 21 26 34

Aurobindo Pharma 728 NR 963 32 6,380 12.1 10.4 17.2 14.4 4.6 3.5 2.9 2.6 18 22 32 29 27

Cadila* 390 BUY 430 10 5,979 14.2 11.2 20.2 16.0 5.7 4.5 3.4 2.7 21 28 32 33 32

Divi's Laboratories 1,254 NR 1,282 2 4,985 19.3 15.9 26.2 21.9 6.6 5.5 7.3 6.2 20 17 29 28 28

Torrent Pharma 1,295 NR 1,622 25 3,281 13.9 11.9 20.5 17.1 5.3 4.3 3.6 3.2 (17) (14) 59 28 27

Glenmark 869 NR 1,030 19 3,672 11.8 10.9 18.6 16.6 4.5 3.6 2.9 2.6 31 45 19 28 24

Average 14.9 12.3 22.4 17.9 4.8 3.9 4.0 3.4

Source: Company, Bloomberg, Ambit Capital research. Note: * indicates Ambit Capital estimates

http://reports.ambitcapital.com/reports/Ambit_Healthcare_Thematic_Musicslowingdownpartyaintoveryet_04Jul2016.pdf

AMBIT INSIGHTS


Lupin Goa F483 cleared; bunched up approvals to follow Lupin received Establishment Inspection Report (EIR) for the pending Form 483 issued to its Goa facility in March, 2016. With this EIR, Lupin has all its facilities cleared by the USFDA. As we had highlighted in our initiation report (click here), the issues raised in Form 483 for Goa plant were not serious in nature and we expected the facility to be cleared by December, 2016. Now with all clear status to its facilities, we expect company to receive bunched up products approvals (~40 in FY18E vs 26 in FY16) in the US market resulting in revenue CAGR of 39% over FY16-18E. We believe, Lupin is one of the biggest beneficiaries of GDUFA given presence in complex generics and large pipeline of ~150 ANDAs pending approval. At CMP, Lupin trades at 15.7x FY18E EPS. We expect material re-rating (peers at ~20x) and earnings upgrade by consensus (our estimates are 20% ahead of consensus) as visibility improves. Retain BUY.

March 2016 Form 483 issued to Goa facility now stands cleared

Lupin has cleared the Form 483 issued to its Goa facility and is now cGMP complaint to USFDA. With this EIR, Lupin has all its facilities cleared now.

Goa is an important facility from the perspective of US market as it contributes ~25% of overall revenues and 30% of future ANDAs pending approvals.

Earlier, Lupin had received two form 483s (one in July, 2015 and second in March, 2016) with nine observations each for its Goa facility. The observations were primarily pertaining to SoP-related issues.

In our initiation note (click here), we stated that issues raised were not serious in nature and based on our analysis and discussion with USFDA expert, we had guided for clearance of facility by Dec-16.

The July, 2015 Form 483 was cleared by Lupin in August, 2016 and the second Form 483 issued in March, 2016 has now received an EIR.

What next: Expect bunched up product approvals

With Goa facility now cleared, we expect Lupin to receive bunched up product approvals in the US market (~40 no. of approvals expected in FY18E vs 27 received in FY16) implying revenue CAGR of 39% over FY16-18E. In our initiation note, we stated our thesis of ANDA filings being reviewed by the USFDA but not cleared due to quality issues at its plant. Our discussion with channel checks highlighted that company could receive bunched up product approvals once the facility is cleared. Our thesis of bunched up product approvals has also been corroborated by Cadila management in its 2QFY17 conference call where they expect clustered product approvals once they clear their Moraiya facility.

Prior to receiving Form 483s at its Goa facility, Lupin had witnessed a glimpse of benefits of GDUFA (faster product approvals led by decline in time taken by USFDA to approve products from 42 months earlier to 10 months by Sep-17). We expect the approval rate to pick up again.

BUY Quick Insight Analysis Meeting Note News Impact

Stock Information Bloomberg Code: LPC IN

CMP (Rs): 1,427

TP (Rs): 1,851

Mcap (Rs bn/US$ bn): 641/9.6

3M ADV (Rs mn/US$ mn): 1807/27.1

Stock Performance (%)

1M 3M 12M YTD

Absolute (5) (15) (23) (23)

Rel. to Sensex (2) (12) (27) (27)

Source: Bloomberg, Ambit Capital research

Ambit Estimates (Rs mn)

FY16 FY17E FY18E

Revenues 142,085 175,355 220,382

EBITDA 37,535 46,948 62,534

EPS (Rs) 50.4 65.2 90.7


Research Analyst

Paresh Dave, CFA [email protected] Tel: +91 22 3043 3212




AMBIT INSIGHTS


Exhibit 1: Prior to receiving quality issues, Lupin has benefited from faster product approval

Source: Company, USFDA, Ambit Capital research

Exhibit 2: GDUFA are goals are being met by the USFDA resulting in increase in number of products approved on monthly basis

Source: Company, USFDA, Ambit Capital research

Exhibit 3: Expect US business to report 39% CAGR over FY16-19E led by faster product approvals specifically in the complex generics space

Source: Company, Ambit Capital research

0

1

2

3

4

5

6

Apr

-14

Jun-

14

Aug

-14

Oct

-14

Dec

-14

Feb-

15

Apr

-15

Jun-

15

Aug

-15

Oct

-15

Dec

-15

Feb-

16

Apr

-16

Jun-

16

Aug

-16

Oct

-16

No

. of

pro

du

ct a

pp

rova

ls

Benefits of GDUFA before receiving quality issues

16 1524 28

19

4637

57

42

56 54 5055

77

38

5159

5147 49

43 45 43

54

0

10

20

30

40

50

60

70

80

90

Nov

-14

Dec

-14

Jan-

15

Feb-

15

Mar

-15

Apr

-15

May

-15

Jun-

15

Jul-

15

Aug

-15

Sep-

15

Oct

-15

Nov

-15

Dec

-15

Jan-

16

Feb-

16

Mar

-16

Apr

-16

May

-16

Jun-

16

Jul-

16

Aug

-16

Sep-

16

Oct

-16

Approvals by USFDA

23.936.8

47.354.5 58.0

81.7

113.6

156.3

0

20

40

60

80

100

120

140

160

180

FY12 FY13 FY14 FY15 FY16 FY17E FY18E FY19E

Rs

Bn

US business

CAGR 25%

CAGR 39%

AMBIT INSIGHTS


Expect Street to upgrade its estimates and possible re-rating

With Goa facility now cleared and visibility around product approvals; we expect upgrades to consensus estimates. We are ahead of consensus by 19% primarily due to our expectations of faster product approvals.

Exhibit 4: Ahead of Street estimates due to optimism around US business led by GDUFA

Rs Mn Ambit Consensus Deviation

FY17E FY18E FY17E FY18E FY17E FY18E

Sales 175,355 220,382 174,020 200,460 0.8% 9.9%

EBITDA margin 26.8% 28.4% 27.3% 27.4% -54 99

PAT 29,367 40,886 29,531 34,439 -0.6% 18.7%

Source: Company, Bloomberg, Ambit Capital research

Where do we go from here?

With Goa facility now cleared, we believe that Lupin is best placed to reap benefits of GDUFA given presence in complex generics and large pipeline of ~150 ANDAs pending approval. Also, Lupin has the first-mover advantage in Japan and we expect the company to benefit from increasing generic penetration. Over FY16-19E, we see 250bps margin growth to 28.8% led by gross margin expansion due to higher revenue from limited competition complex generics and operating leverage in RoW; partially offset by increase in R&D spend (12% in FY18E). At CMP, Lupin trades at 15.7x FY18E EPS. We believe valuations will improve, given: (a) earnings growth momentum – we expect 25% net profit CAGR over FY16-18E due to GDUFA timelines resulting in large product approvals in FY17-18E; (b) investments in longer-term growth drivers – the company is investing in differentiated products like complex injectables, ophthalmics and dermatology, biosimilars in Japan and respiratory in the USA and Japan; and (c) high visibility of earnings through large pipeline in the USA and growth acceleration in India. Our DCF analysis suggests a target price of Rs1,851/share, retain BUY.

AMBIT INSIGHTS


Revenue mix (` mn)

Year ended 31 Mar FY15 FY16 FY17E FY18E FY19E

Formulations 112,884 124,597 158,932 203,434 261,242

India (gross) 30,614 34,956 40,213 46,244 53,181

US generics 49,596 53,751 70,476 100,757 142,203

US brand 4,873 4,271 11,218 12,827 14,144

Japan 13,239 13,646 15,693 18,047 20,754

Europe 3,279 4,278 3,611 3,860 4,259

RoW 11,283 13,695 17,721 21,700 26,701

API 11,941 12,074 12,678 13,312 13,977

Total 124,825 136,671 171,610 216,746 275,219


Income statement

Year to March (Rs mn) FY15 FY16 FY17E FY18E FY19E

Net revenues 127,700 142,085 175,355 220,382 278,723

Material costs 41,570 43,094 54,162 67,149 93,161

Employee costs 13,949 17,260 19,744 22,063 24,710

Other mfg. costs 35,985 44,196 54,501 68,636 87,553

Core EBITDA 36,196 37,535 46,948 62,534 73,299

Depreciation 4,347 4,635 6,149 7,124 7,936

Interest expense 98 446 1,669 1,419 1,169

Adjusted PBT 34,149 34,331 40,538 56,351 65,794

Tax 9,705 11,536 10,945 15,215 17,764

Net profit 24,032 22,707 29,367 40,886 47,733


Balance sheet

Year to Mar (In Rs. mn) FY15 FY16 FY17E FY18E FY19E

Total assets 96,377 183,984 198,978 223,776 254,402

Fixed assets 32,961 86,379 95,231 103,107 105,171

Current assets (incl cash) 64,507 107,473 120,088 146,302 185,552

Cash 4,814 8,379 30,767 35,542 46,752

Investments 16,584 75 75 75 75

Total liabilities 96,377 183,984 198,978 223,776 254,402

Total networth 88,741 109,844 134,837 169,635 210,261

Total debt 5,371 71,775 61,775 51,775 41,775

Current liabilities 35,001 40,393 46,866 56,159 66,846

Deferred tax liability 2,024 2,045 2,045 2,045 2,045


AMBIT INSIGHTS


Cash flow statement


PBT 34,149 34,331 40,538 56,351 65,794

Depreciation 4,347 4,635 6,149 7,124 7,936

Tax (9,436) (11,662) (10,945) (15,215) (17,764)

Net working capital (1,378) (22,946) 9,856 (12,317) (16,048)

Others (351) (8,047) 7,756 (124) (1,153)

CFO 27,331 (3,689) 53,354 35,819 38,765

Capital expenditure (14,970) (70,028) (15,000) (15,000) (10,000)

Investment and others 4,425 593 - - -

CFI (10,545) (69,435) (15,000) (15,000) (10,000)

Issuance of equity 413 536 - - -

Inc/Dec in borrowings (700) 62,081 (10,000) (10,000) (10,000)

Net dividends (1,573) (4,055) (4,071) (4,374) (6,088)

Interest paid (109) (436) (1,669) (1,419) (1,169)

Others - - (226) (250) (297)

CFF (1,969) 58,126 (15,966) (16,043) (17,554)

Net change in cash 14,817 (14,998) 22,387 4,776 11,210

Closing cash balance 4,814 8,379 30,767 35,542 46,752

FCFF 12,361 (73,717) 38,354 20,819 28,765


Valuation parameters


EPS 53.5 50.4 65.2 90.7 105.9

Book value ( per share) 197.4 243.8 299.3 376.5 466.6

P/E (x) 28.1 29.8 23.0 16.5 14.2

P/BV (x) 7.6 6.2 5.0 4.0 3.2

EV/EBITDA(x) 18.6 19.7 15.1 11.1 9.2

EV/Sales (x) 5.3 5.2 4.0 3.1 2.4

EV/EBIT (x) 21.2 22.4 17.3 12.5 10.3


Ratios


Revenue growth 13.1 11.3 23.4 25.7 26.5

Core EBITDA growth 20.5 3.7 25.1 33.2 17.2

APAT growth 30.9 -5.5 29.3 39.2 16.7

EPS growth 31.1 -5.7 29.3 39.2 16.7

Core EBITDA margin 28.3 26.4 26.8 28.4 26.3

EBIT margin 24.9 23.2 23.3 25.1 23.5

Net profit margin 18.8 16.0 16.7 18.6 17.1

RoCE (%) 26.7 15.8 15.7 19.3 20.1

Reported RoE (%) 30.4 22.9 24.0 26.9 25.1

Debt-equity ratio (X) 0.1 0.7 0.5 0.3 0.2

Current ratio 1.8 2.7 2.6 2.6 2.8

Gross block turnover (x) 2.7 2.1 1.9 2.0 2.3

Working capital turnover (x) 3.7 2.9 2.5 2.7 2.7

CFO/EBITDA (x) 0.8 -0.1 1.1 0.6 0.5


AMBIT INSIGHTS


Century Plyboards Deceleration, disruption and deflation Post recent earnings release, managements of Century and Greenply indicated weak demand environment; our channel checks also suggest that demand is down YoY and customers are switching to either lower-priced products of these companies or cheap imports. Whilst Century is maintaining ply wood realisation and gaining ground in laminates, lower-than-expected ply volumes, declining ‘opportunistic’ face veneer business and delay in particle board ramp-up warrant estimate reductions. Secondly, we note that the shift in the Indian substrate market (notably loss of preference for Garjan finish, acceptance of MDF) is happening at a quick pace due to raw material disruption, availability of alternatives and rising user/intermediary awareness. Product disruption is likely to pick up sharply in the next few years, thereby vindicating Century’s decision to invest in MDF. The stock trades at 20x FY18E EPS, which could witness likely 5-7% reduction; our twelve-month TP implies 18x FY19E EPS.

Plyboard – Persisting slowdown and no face veneer windfall anymore Recent results of plyboard companies and management commentary at the 2QFY17 conference calls of Century and Greenply’s suggests that plyboard demand weakness persists with limited visibility of a near-term improvement.

Greenply’s 8% YoY volume growth was a function of a low base; Century’s volumes declined by 3% due to inventory pileup by distributors in 2QFY16 (before price increases in 3QFY16). We do not expect more than a mid-single digit volume growth in 2HFY17.

Despite the weak demand environment Century has refrained from cutting prices which is evident in its realisation improvement (+9.2% YoY), since the company has maintained the price increases it took in 3Q/4QFY16. The management believes realisation would flatten from 3QFY17 onwards.

Exhibit 1: Greenply posts better volume growth in ply over the last four quarters…

Source: Company, Ambit Capital research; Note: Century’s volumes do not include ‘commercial veneer’

-15%

-10%

-5%

0%

5%

10%

15%

20%

3QFY15 4QFY15 1QFY16 2QFY16 3QFY16 4QFY16 1QFY17 2QFY17

Volume growth YoY

Greenply Century

BUY Quick Insight Analysis Meeting Note News Impact

Stock Information Bloomberg Code: CPBI IN

CMP (Rs): 230

TP (Rs): 288

Mcap (Rs bn/US$ mn): 51/765

3M ADV (Rs mn/US$ mn): 61.7/0.9


1M 3M 12M YTD

Absolute (11) 2 33 36

Rel. to Sensex (8) 5 29 31



FY16 FY17E FY18E

Revenues 16.6 18.8 26.0

EBITDA 2.9 3.2 4.5

EPS (Rs) 7.5 8.0 11.1


Research Analysts

Achint Bhagat, CFA [email protected] Tel: +91 22 3043 3178

Nitin Bhasin [email protected] Tel: +91 22 3043 3241

Girisha Saraf [email protected] Tel: +91 22 3043 3211




AMBIT INSIGHTS


Exhibit 2: …thereby resulting in higher revenue growth as well

Source: Company, Ambit Capital research; Note: Century’s revenues do not include ‘commercial veneer’

Commercial veneer – not as lucrative anymore

Although commercial veneer volumes grew by 8% in 2QFY17, realisations declined by 27%, leading to 21% revenue decline. This makes us believe that company is selling low quality face veneer and hence operating profit contribution coming from veneer will be negligible.

Channel checks – no great news for organised players

Our checks with plyboard dealers across the country suggest that demand for plyboard has fallen sharply because of the weak real estate market. Whilst unorganised players have directly cut prices, organised players have indirectly reduced by introducing various promotional and discounting schemes to push the product.

Further, the channel suggests increased availability of cheaper quality plyboard from China, Malaysia and Africa; it was only when Myanmar put restrictions on exports that the channel (manufacturers and distributors) started looking out for alternative sources of plywood, which is cheaper than the Indian equivalent. In order to be price competitive, organised players are now (a) moving from the high quality Garjan timber to lower quality Poplar and Eucalyptus, and (b) using cheaper glue (urea glue instead of phenolic glue).

Retailers in the southern part of the country suggest increased acceptance of WPC (wood plastic composites) boards as an alternative to plyboard because of (a) cheaper prices; (b) fire resistance; (c) 100% waterproofing; and (d) termite resistance. Since good quality ply (+Rs120/sq feet) is not affordable to all, and the cheaper plyboard has quality issues, WPC board (Rs90/sq feet) is increasingly used. Century is actively foraying into these ‘New Age Products’, including WPC and fibre cement boards; the company has been strongly promoting them at trade fairs.

Disruption and deflation

Rising difficulties in procuring face veneer from South East Asian countries (Garjan timber) has meant that companies have started shifting to lesser quality/cost alternatives in Africa and Malaysia. Hence, the product mix too is structurally shifting towards low-cost plyboards. As the acceptance of the new products increase, the industry size will shrink as consumers start using a low-cost alternative.

Whilst our thesis on the industry has always been that the organised players will gain market share as the unorganised industry fails to cope up, we believe that a risk to that thesis could be quicker-than-expected disruption of the industry. Whilst both Century and Greenply are investing large sums in MDF, the question that arises is will the industry leapfrog to a third product, such as WPC. Moreover, with rising acceptance of low-cost plyboards, are imports a real threat?

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

3QFY15 4QFY15 1QFY16 2QFY16 3QFY16 4QFY16 1QFY17 2QFY17

Plywood revenue growth YoY

Greenply Century

AMBIT INSIGHTS


MDF and particle board – management confident of quick ramp-up MDF acceptance continues to rise in India as the ecosystem is evolving to move forward from plyboards to new alternatives. Whilst the MDF industry was growing in high single digits over FY05-12, the growth rates tapered as commercial real estate slowed and MDF failed to establish itself as a retail product. However, post the ban of timber exports from Mynamar in FY15, the price of the low-quality plyboard rose sharply, leading to rising acceptance of MDF in the retail markets. In the last two years, acceptance of MDF has risen, driving growth rate to ~20%.

Rising acceptance of MDF and inability of Bajaj and Shirdi to service the demand led to a sharp uptick in the utilization of Greenply’s MDF plant – from 73% in FY14 to 99% in FY16.

Confident of commissioning by Mar-17: Century is making its single largest investment ever since its inception (Rs4bn; 75% of FY16 net worth) in setting up its MDF plant. Management is confident that the company will be able to commission the plant in Mar-17 and the employees have been incentivized to complete the project ahead of schedule.

Quick ramp up post commissioning: The management expects to reach breakeven levels (50% capacity utilisation) in Q1FY18; remains confident to ramp-up utilisation to 80% by the end of FY18 and maintain 30% EBITDA margin.

North and Central India target markets: The management indicated plans to sell MDF from the plant in North and Central India; in coastal regions imports are more competitive.

Preliminary preparations: The company has started adding dealers and distributors for MDF and recently hired Mr. Avtar Singh Bhullar (ex-Greenply) for the marketing MDF. Mr. Bhullar has been in the marketing of building materials and related products for over two decades and has worked in organisations, such as Kajaria, HSIL, Jaguar, Nitco tiles and Asahi.

Setting up the base for further expansions: The company has invested in setting up ancillary infrastructure for a quick implementation of phase II of the expansion. Once the MDF plant reaches full capacity utilization (Century has penciled FY19 for the plant to reach full capacity utilization), the company can double the capacity at Rs2bn within a year.

Though the progress of MDF is on track and opportunity is large, we urge investors to watch out for (a) consistent raw material; and (b) power availability. Inadequate availability of raw material could be a hindrance to Century’s MDF plant in Punjab. Efficient running of the MDF plant would require a minimum daily production of 600m3 of MDF (equivalent to 450T/day MDF) that would in turn require 1100T of wood every day.

The math behind this:

Manufacturing 1T MDF = 2T wood + wood for fuel/steam+ block board/peeling unit

Manufacturing 450T MDF = 900T for wood + 200T for fuel/steam & black board/peeling unit

Even though low quality twigs and small diameter logs can be used in the production of MDF, at least 60% of the total wood mix has to be of high quality in order to get the desired MDF properties. Currently, Century plans to source wood (Poplar and Eucalyptus varieties) from Hoshiarpur forest in Punjab (5km away from Century’s plant), with local wood availability of 3000T/day. Though we understand that the current daily requirement of 1100T might be manageable (implies sourcing more than a third of what is locally available), yet the key thing to watch out (and question the management) is whether it will be able to source raw material in case it doubles it capacity to 1200m3 of MDF (2200T of wood every day seems to be a tall ask). Poplar and Eucalyptus varieties have a five-year plantation cycle before further output can be generated.

AMBIT INSIGHTS


MDF plants require 10-10.5 MW of continuous power supply; any disruptions in power supply could impede production. Even though Punjab is a power surplus state, and the company has been laying out power lines, we have noted instance in the past wherein patchy power supply significantly affects the efficiency of the plant (for example: Century’s particle board plant commissioned in June-16 has been unable to operate efficiently because of power supply issues).

Channel checks suggest still low retail acceptance: Our channel checks suggest that MDF is yet to be accepted in the retail market, volumes are currently very low. Since carpenters do not know how to use the product, there have been product rejections, which we believe would hamper players from increasing retail acceptance of the product in future. The retail channel expects MDF to remain a readymade furniture product. Of the current MDF manufacturers, Greenply is perceived to have the best quality.

Particle board still a laggard: During H1FY17 the company only made Rs20mn revenues in particle board. The management suggested that particle board is profitable when there are in-house plywood wastages; only 50% of Century’s raw material consumption for particle board is met in-house. However, the management suggested that the particle board utilisation reached 80% last month, and expects utilisation to ramp up to 90% in 3QFY17 and 100% by 4QFY17.

Laminates – strengthening franchise As is the case with other building material products, real estate slowdown has affected volumes in laminates as well, as suggested by results of players including Greenlam. However, Century posted strong growth during the quarter.

Exhibit 3: Century posted higher laminates revenue growth, albeit on lower base

Source: Company, Ambit Capital research; Note: exact comparison of domestic revenue growth in laminates is not possible, the above analysis includes both domestic and export revenues for both companies

Volume growth to continue: Given the low base, Century posted stellar volume growth on account of increase in market share (currently ~5% market share indicated by the management); EBITDA margins expanded on account of operational leverage. The management indicated that volume growth to remain high for the next two years, until the company gains significant market share.

Operating at 100% capacity utilisation: Laminates business is currently operating at 100% capacity utilisation that can be further ramped up to 120%. The company is on schedule with its plans to increase capacities by 50% by 1HFY18.

Channel checks suggest low market share in laminates: Our channel checks suggest high competition in laminates, with multiple brand players and large scale imports. Century’s laminates, though perceived to be superior quality, do not give the company an edge because the laminates market is very sensitive to design and price. Since Century’s prices are towards the higher end (15-20% higher than average selling price) in the industry because of which the current market share is low. The

0%

2%

4%

6%

8%

10%

12%

14%

16%

3QFY16 4QFY16 1QFY17 2QFY17

Laminates revenue growth YoY

Greenlam Century

AMBIT INSIGHTS


channel suggests that digital catalogues (which the management recently mentioned of in the conference call) are common to all players, and nothing unique to Century.

Where do we go from here? In the backdrop of decelerating volume growth, our estimates appear to be at risk. We might have to cut our revenue estimates by 5-6% and EBITDA margins to 16.5% (in line with 2QFY17 margin) from 17.2% because (a) we had estimated Rs400mn particle board revenues for FY17, however till H1FY17 the company only managed Rs20mn revenues; (b) volatility in face veneer margins, thereby low contribution to operating profit; and (c) weak demand scenario for the industry. However, working capital continues to be comforting; the company’s cash conversion cycle shortened to 98 days in 1HFY17 as against 117 days in1HFY16 and 104 days in FY16. The stock trades at 20x FY18E EPS (likely 5-7% reduction); our twelve-month TP implies 18x FY19E EPS.

AMBIT INSIGHTS


Balance sheet

Rs mn unless mentioned FY15 FY16 FY17E FY18E FY19E

Share capital 223 223 223 223 223

Reserves and surplus 3,671 5,104 6,571 8,603 11,287

Total networth 3,894 5,327 6,794 8,826 11,510

Loans 4,677 4,194 6,494 6,744 6,894

Of which Buyers credit 1,500 1,100 800 800 500

Deferred tax liability (net) (63) (130) (130) (130) (130)

Sources of funds 8,564 9,481 13,256 15,547 18,391

Net block 2,456 2,627 6,707 8,022 8,095

Investments 4 2 31 31 31

Cash and bank balances 374 389 235 1,462 3,183

Sundry debtors 2,683 2,873 2,757 3,155 3,691

Inventories 3,322 2,975 3,008 3,512 4,197

Loans and advances 1,349 1,523 1,504 1,786 2,171

Total current assets 7,819 8,002 7,746 10,157 13,484

Current liabilities and provisions 2,041 2,175 2,254 2,663 3,219

Net current assets 5,777 5,827 5,492 7,494 10,265

Application of funds 8,564 9,481 13,256 15,547 18,391


Income statement


Revenue 15,884 16,637 18,837 25,990 31,612

Plyboards 12,431 12,796 14,048 16,835 20,700

Laminates 3,213 3,669 4,278 5,127 6,249

MDF - - - 3,159 4,044

Total expenses 13,326 13,749 15,130 18,034 21,866

EBITDA 2,559 2,888 3,241 4,519 5,639

Depreciation 485 484 701 787 847

EBIT 2,251 2,462 2,612 3,840 4,998

Other income 177 58 72 108 205

Adj PBT 1,796 1,981 2,231 3,207 4,345

Provision for taxation 338 364 446 738 1,086

Adjusted PAT 1,491 1,672 1,776 2,460 3,249

EPS basic (Rs) 6.7 7.5 8.0 11.1 14.6


AMBIT INSIGHTS


Cash flow statement


PBT 1,796 1,981 2,231 3,207 4,345

Depreciation 485 484 701 787 847

Interest paid 456 481 381 632 652

CFO before change in WC 2,701 3,037 3,241 4,519 5,639

Change in working capital (877) 359 181 (776) (1,049)

Direct taxes paid (337) (468) (446) (738) (1,086)

CFO 1,488 2,928 2,975 3,005 3,504

Net capex 751 1,533 4,781 1,076 920

CFI 128 (1,389) (4,739) (968) (715)

Proceeds from borrowings (649) (461) 2,300 250 450

Change in share capital - 20 - - -

Interest & finance charges paid (335) (272) (381) (632) (652)

Dividends paid (462) (601) (309) (428) (565)

CFF (1,577) (1,525) 1,610 (811) (1,068)

Net increase in cash 39 14 (154) 1,227 1,721

FCF 737 1,395 (1,806) 1,929 2,584


Ratio analysis/Valuation parameters

Particulars FY15 FY16 FY17E FY18E FY19E

Revenue growth 17.9 4.7 13.2 38.0 21.6

EBITDA growth 45 13 12 39 25

PAT growth 137 12 6 38 32

EPS norm (dil) growth 90 12 6 39 32

EBITDA margin 16 17 17 17 18

EBIT margin 14 15 14 15 16

Net margin 9 10 9 9 10

RoCE 22 22 18 20 22

RoIC 24 19 22 25 31

RoE 43 36 29 31 32

Working capital turnover 3.0 2.9 3.2 3.3 3.0

Debt/Equity(x) 1.2 0.8 0.9 0.8 0.6

Net debt/Equity(x) 1.1 0.7 0.9 0.6 0.3

Valuation metrics

P/E (x) 34.3 30.6 28.8 20.8 15.7

P/B(x) 12.9 9.4 7.4 5.7 4.4

EV/Sales(x) 3.5 3.3 3.1 2.6 2.1

EV/EBITDA(x) 21.7 19.0 17.7 12.5 9.7


AMBIT INSIGHTS


Economy Ambit’s qualitative leading indicators’ (QLI) tracker With qualitative data collected through primary data networks often proving to be a stronger leading indicator of changes in the economy, we collate a weekly tracker that captures these critical qualitative inputs. On the positive front: (1) Both the manufacturing and services PMI registered robust growth in October 2016; (2) the GST Council managed to reach a consensus regarding the GST rates; and (3) FDI in India rose by 30% YoY in 1HFY17. On the negative front: (1) The Central Government has ended up spending 84% of the full year fiscal deficit in 1HFY17; (2) The GST Council is yet to reach a consensus regarding administrative control over assesses under the new indirect tax regime; and (3) S&P ruled out an upgrade in India’s sovereign credit rating for the next two years.

Exhibit 1: Ambit’s qualitative indicators tracker for the week commencing 31st October 2016

Head Description Positive/ Negative

Both manufacturing and services PMI accelerates in October

After falling to 52 in September due to drop in new orders, services PMI bounced back in October to 54.5 close to the 43-month high of 54.7 seen in August. The 50-point mark separates expansion from contraction (source:http://www.business-standard.com/article/economy-policy/new-business-pushes-up-services-activity-in-october-116110300237_1.html).

Growth in India’s manufacturing activity touched a 22-month high in October, with a stronger rise in new orders and output, showed the widely tracked Nikkei India Manufacturing Purchasing Managers’ Index (PMI).

The PMI rose to 54.4 in October, after falling to 52.1 in September from 52.6 in August. The 50-point mark separates expansion from contraction (source: http://www.business-standard.com/article/economy-policy/manufacturing-pmi-hits-22-month-high-in-october-116110100877_1.html).

Positive

FDI in India rises 30% to US$21.6bn in 1HFY17

Foreign direct investment (FDI) into the country grew by over 30% to $21.6bn during 1HFY17. The sectors that received maximum inflows include computer hardware and software, trading business,

automobile industry and chemicals (source: http://www.business-standard.com/article/economy-policy/fdi-in-india-rises-30-to-21-6-billion-in-fist-half-of-2016-17-116110600119_1.html).

Positive

GST rate structure finalised, majority of items in 12% and 18% tax slabs

India moved a step closer towards implementing the goods and services tax (GST) after the Centre and the states struck a consensus on the rates and structure of the ambitious tax reform.

As per the rate structure agreed upon by the council, a zero tax rate will apply to 50% of the items present in the consumer price index basket, including food grains, such as rice and wheat.

The next tax slab will be 5%, wherein items of mass consumption like spices, tea and mustard oil will be taxed. There will be two standard rates of 12% and 18% where a majority of the items used by the common man will be taxed. There will be a higher slab of 28% where items currently attracting a tax of 27-31% will be taxed.

However, items used by the middle class, such as toothpastes, soaps and refrigerators, which currently have a high tax incidence of more than 27%, will be brought down into the lower slab of 18% (source: http://www.livemint.com/Politics/OuTNv0usNfIiRBklKa5B1O/GST-rates-to-be-between-5-and-28.html).

Positive

Food law being implemented across India from November, says Ram Vilas Paswan

Implementation of National Food Security law, entailing an annual subsidy of over Rs1.4tn (1% of GDP), has covered the entire nation from this month with two large states Kerala and Tamil Nadu coming on board, the Government said on November 03. As many as 800mn people are covered under this law across 36 states and Union Territories.

Under the law, which was passed by Parliament in 2013, the Government provides 5 kg of highly subsidised food grains per person, per month at Rs1-3 per kg (source: http://indianexpress.com/article/india/india-news-india/food-law-being-implemented-across-india-from-november-says-ram-vilas-paswan-3735392/).

Positive

Oil & Gas: CNG a natural choice to control pollution?

Delhi witnessed one of the highest polluting days in 17 years with air quality deteriorating to hazardous levels (https://goo.gl/RkrYPY). This led to a flurry of actions from the government, such as: a) Delhi government announced air purification equipment at every intersection; b) central government summoned governments of Punjab, Delhi, Haryana, Rajasthan and UP to discuss pollution control measures.

We believe this will result in promotion of CNG/PNG within city limits of Delhi and neighbouring states. Given most executives sit in Delhi, incremental action to promote use of CNG/PNG in all cities can’t be ruled out.

Big steps could be taken like banning diesel-based gensets/mini power stations, mandatory conversion to PNG for industrial/commercial establishments and increased thrust on adoption of CNG in private vehicles and LCVs.

Positive

Quick Insight Analysis Meeting Note News Impact

Research Analysts

Ritika Mankar Mukherjee, CFA [email protected] Tel: +91 22 3043 3175

Sumit Shekhar [email protected] Tel: +91 22 3043 3229

http://www.business-standard.com/article/economy-policy/new-business-pushes-up-services-activity-in-october-

http://www.business-standard.com/article/economy-

http://www.business-standard.com/article/economy-policy/fdi-in-

http://www.livemint.com/Politics/OuTNv0usNfIiRBklKa5B1O/GST-rates-to-be-between-5-and-28.html).

http://indianexpress.com/article/india/india-news-

https://goo.gl/RkrYPY).



AMBIT INSIGHTS



Alibaba staff from China working on Paytm ‘integration’

About two dozen Chinese employees of Alibaba are currently camping at Paytm’s office in Noida, working closely with some senior local executives to convert the Indian company’s marketplace into Alibaba’s e-commerce portal, two people familiar with the matter said.

The Chinese executives are overseeing the integration of Alibaba-owned digital payment platform Alipay with Paytm’s e-commerce site, one of the people said.

Alibaba, along with its affiliate Ant Financial, is the single largest shareholder of One97 Communications, the parent of Paytm, with a 40% stake in the company (source: http://economictimes.indiatimes.com/small-biz/startups/alibaba-staff-from-china-working-on-paytm-integration/articleshow/55213729.cms).

As highlighted in our note dated October 4 (click here for the note) the online market place is transforming access to end-markets.

Positive

Investors

welcome India's new rules on rating agencies' disclosures

Investors welcomed policies by Securities and Exchange Board of India (SEBI) to tighten disclosure norms for credit ratings agencies as a much needed step to boost transparency and credibility in the country's young corporate debt markets.

The new rules announced by SEBI on Tuesday will tighten disclosure norms for credit rating agencies, including the one that requires them to provide more details about any rating changes.

While the policies will bring India's policies closer to global standards, market participants also had doubts about some aspects of the rules, including a rule mandating that credit companies must continue providing ratings even after the issuer has stopped co-operating (source: http://in.reuters.com/article/india-ratings-sebi-idINKBN12X1A6).

Neutral

Automobile:

October 2016 volume update - Some hit, some missed

In October 2016, passenger vehicle volumes were lower than our expectation. Maruti’s total volumes (up 2% YoY) were 5% lower vs. estimates mainly due to lower volumes of mini segment (down 10% YoY).

The combined volumes of Maruti, Hyundai and Tata Motors grew just 5% YoY, sharp deceleration from the September (up 21%) and August 2016 (up 11%) growth levels.

Medium and heavy commercial vehicle (MHCV) volumes, on the other hand, were higher than our estimates with top-3 players recording 17% YoY and 5% MoM growth. This strong growth was, in part, driven by low base of October 2015.

For MHCV industry, we expect demand to rebound in 4QFY17 (+25% YoY) catalysed by BSIV-led pre-buying (click here for our note dated November 02 for details).

Neutral

Source: Media reports, Ambit Capital research

Exhibit 2: Ambit’s qualitative indicators tracker for the week commencing 31st October, 2016 (continued)


Fiscal deficit in H1

balloons to two-decade high

The Centre’s fiscal deficit ballooned to 83.9% of the Budget Estimates in the first half of FY17, the highest in the first six months of a financial year since FY99, on account of elevated capital spending and higher salaries outgo.

On the revenue side, lower realisations from disinvestment and other streams hurt the exchequer (source: http://www.business-standard.com/article/economy-policy/fiscal-deficit-in-h1-balloons-to-two-decade-high-116103101233_1.html).

As highlighted in our note dated August 16 (click here for the note), the Government is likely to miss its fiscal deficit target of 3.5% of GDP for FY17.

Negative

Centre, states divided on who will control GST

A day after reaching a consensus on tax rates, the GST Council failed to arrive at an agreement over the crucial issue of administrative control over assesses under the new indirect tax regime.

The finance ministers will have an informal meeting on November 20 to discuss it and have a political solution on the matter. The November 20 meeting will not be of the GST Council and will be held without officials.

Two models were discussed to divide the administrative control between the Union and state governments. One of these was horizontal model, whereby states will have sole control over entities earning up to Rs15mn crore a year and dual control of the Centre and states over this level (source:http://www.business-standard.com/article/economy-policy/centre-states-divided-on-who-will-control-gst-116110401104_1.html).

Negative

S&P rules out India

upgrade for next 2 years, govt hits back

Global ratings agency Standard & Poor’s (S&P) on Wednesday reiterated its sovereign rating and outlook on India but ruled out any upgrade for this year and the next, citing weak public finances.

The US-based ratings agency maintained the lowest investment grade rating of 'BBB-' with a 'stable' outlook for India citing the country's sound external profile and improved monetary credibility. While it advocated more efforts to lower government debt to below 60% of the GDP, it did not expect revenues to rise enough to meaningfully lower the deficit over the medium term (source: http://www.business-standard.com/article/economy-policy/s-p-rules-out-india-upgrade-for-next-2-yrs-govt-hits-back-116110201537_1.html).

Negative

http://economictimes.indiatimes.com/small-

http://in.reuters.com/article/india-ratings-sebi-

http://www.business-standard.com/article/economy-policy/fiscal-deficit-in-h1-balloons-to-two-decade-

http://www.business-standard.com/article/economy-policy/centre-states-divided-on-who-will-control-gst-

http://www.business-

http://reports.ambitcapital.com/reports/Ambit_Economy_Thematic_MRTresets_Arevolutioninaccess_04Oct2016.pdf

http://reports.ambitcapital.com/reports/Ambit_Automobile_October2016volumeupdate_02Nov2016.pdf

http://reports.ambitcapital.com/reports/Ambit_Economy_Insight_FiscalslippageThistimeisitdifferent_16Aug2016.pdf

AMBIT INSIGHTS



BFSI: Bank 2Q results

round-up - muddling through

2QFY17 results of twelve major banks (mostly private sector banks) indicate slippages and credit costs are yet to bottom out; stressed assets increased by 30bps QoQ to 6.5%. Banks have reported treasury gains (25-30bps impact on RoAs) but these remains much below elevated credit costs (55-60bps, as % of assets).

Results also indicate corporate credit growth slowdown is finally affecting banks, such as HDFCB, AXSB and KMB, which were, until 1Q, growing strongly on refinancing.

Most of the banks that are yet to report are corporate lenders, for whom these trends (asset quality stress and unimpressive treasury gains) have negative implications (click here for our note dated November 02 for details)

Negative

Consumer Staples: Will the (expected) growth be sustainable?

The 2Q earnings of most of the consumer staple companies were weak, in terms of volume and value growth.

The absence of margin tailwinds has resulted in weak PAT growth of only 10% for the sector (lowest in the last 3 years).

However, management commentary suggests that there has been moderate consumer demand recovery towards the end of 2Q led by good monsoon.

We remain sceptical about the sustainability of this demand improvement and would like to stress that structural rural demand drivers like DBT only can drive sustainable demand. HUL, we believe will be the biggest beneficiary of the improvement in demand and deliver sales/EPS growth of 13%/18% over FY16-20E with >100% RoCE (click here for our note dated November 03 for details)

Negative


http://reports.ambitcapital.com/reports/Ambit_BFSI_Bank2Qresultsroundupmuddlingthrough_02Nov2016.pdf

http://reports.ambitcapital.com/reports/Ambit_ConsumerStaples_Willtheexpectedgrowthbesustainable_03Nov2016.pdf

AMBIT INSIGHTS


Utilities Weekly tracker In this weekly update, we have compiled the key news flow, regulatory developments and key management/regulator interviews that occurred last week. The key positive news: CERC is expected to decide on Tata Power’s compensatory tariff case in November. The key negative news: (a) India's average PLF declined by 740bps YoY to 60%; and (b) Peak power deficit below 1GW during Diwali week vs 5GW till last year.

Exhibit 1: Key news flows during last week

Sub-Segment / Company Title Implications Description Source

Power generation India's average PLF declined by 740bps YoY to 60%

Negative

Power generation grew by 1% YoY in Oct'16 vs 9%/9%/1% in 4QFY16/1QFY17/2QFY17.

https://goo.gl/94Sq7Z

Weak generation could be attributed to weak power demand which grew by just 1% YoY in 2QFY17.

Whilst average PLF for Tata Power improved by 110bps YoY to 84.4% in Oct'16 (thermal plants) due to ramp-up in Maithon plant, average PLF for NTPC/JSW Energy declined by 250bps/2330bps to 75%/65%.

Our view: If the weak demand persists in November and December then we may have to cut our PLF assumption for NTPC and JSWE for FY17.

Tata Power

CERC is expected to decide on Tata Power’s compensatory tariff case in November

Positive

CERC is expected to deliver its formula for computing compensatory tariff hike for Tata Power's Mundra UMPP in November.

https://goo.gl/1Mvs3z

The Supreme Court has given time till mid-November for the verdict.

The hearing for the case has been completed and we have reserved the judgment and should come out in the next 10 days,” a senior CERC official said.

Our view: We expect Tata Power to be compensated for the entire fuel cost under-recovery. At 100% fuel recovery, Tata Power’s Mundra plant will report PBT of ~Rs4bn vs loss of Rs3bn in FY16.

Our interaction with independent lawyers suggests under Force Majeure the utility would be compensated for the entire losses they have incurred.

Currently, we have not modeled the receipt of compensatory tariff hike.

Power deficit Peak power supply shortage below 1GW for four days

Negative

During the Diwali week (29Oct - 1Nov), India's peak deficit fell below 1GW.

https://goo.gl/b3p7cu

According to a media report, peak deficit has been hovering over less than 2GW this year vs more than 5GW till FY16.

During these four days, ~50% of the power sold at power exchange was for less than Rs2/unit.

Our view: This was expected given the flat power demand growth.

Also, CEA expects peak power surplus of 1.6% in FY17 vs peak deficit of 3.2% in FY16 due to weak underlying demand (https://goo.gl/hjLk4T).

NEUTRAL Quick Insight Analysis News Note Meeting Note

Research Analysts

Bhargav Buddhadev [email protected] Tel: +91 22 3043 3252

Deepesh Agarwal, CFA [email protected] Tel: +91 22 3043 3275

https://goo.gl/94Sq7Z

https://goo.gl/1Mvs3z

https://goo.gl/b3p7cu

https://goo.gl/hjLk4T).



AMBIT INSIGHTS


Sub-Segment / Company Title Implications Description Source

Renewables

Government to complete process for awarding 1GW wind projects by December

Neutral

SECI has already floated Request for Selection (RFS) document for selection of bidders for awarding 1GW of wind power projects.

https://goo.gl/a1xDmO

As per government official, the entire process will be completed by the end of December. The last date for submission of financial bids is December 15, 2016, after which bids will be opened and evaluated.

Our view: Introduction of competitive bidding is an upside risk to our wind capacity addition target of 3.1/2.5GW in FY17E/FY18E. Our interaction with industry participants suggests competitive bidding will attract strong interest from foreign players given upfront PPA, which is unlike the FIT model where PPA is signed at the commissioning stage. However, this will result in pressure on wind tariffs and equipment suppliers will be forced to cut prices.


https://goo.gl/a1xDmO

AMBIT INSIGHTS


Titan Underwhelming quarter buffered by festive sales Revenues contracted by 0.2% YoY to Rs26.7bn (as against our estimate of Rs31.6bn) as jewellery division’s revenue remained flat and the revenue from watch segment declined by 5% YoY to Rs5.2bn. EBITDA margins however, expanded by 280bps YoY to 10.3% (est. 9.7%). The exceptional performance was due to gross margin expansion on account of rising share of studded jewellery (42% of revenues) and cost cutting initiatives. PAT, as a consequence, surged 26% YoY to Rs1.8bn (11% below our estimate). Whilst 2QFY17 saw flat revenues YoY, we keep our estimates unchanged as Tanishq witnessed 39% YoY growth between Dusshera and Diwali thus making up for the loss of revenues in the second quarter; this will also be aided by increased marriage dates in 3QFY17. The stock is trading at 33x FY18E EPS; we remain SELLers given concerns over growth in non-GHS revenues and regulatory driven shrinkage of the $40bn jewellery market.

Jewellery segment – Shift of demand from 2Q to 3Q

Revenues of the jewellery business were flat YoY at Rs19.9bn despite having a low base (due to absence of Golden Harvest Scheme [GHS] revenues in 2QFY16) on account of inflated gold prices and as a consequence, a muted consumer sentiment which resulted in grammage decline of 32% YoY. Revenues, ex-GHS (Rs4,500mn this quarter), declined by 17% YoY. Apart from the above, new launches (Queen of Hearts) and an elongated activation season aided revenues. On the positive side, the studded jewellery activation season (promotions) saw revenues growing by 51% YoY over activation in the previous year. Impressive performance of studded jewellery (42% vs 24% in 2QFY16) resulted in higher gross margins which translated into higher EBIT margins in the segment (11% vs 6% in 2QFY16). Tanishq reported LTL growth of 4% and retail growth of 9% YoY while Goldplus registered sales value and LTL growth of -10% and -7% respectively.

Watch segment – Continues to underperform

Despite the domestic business doing well, the watch segment reported a disappointing quarter. Sales contracted by 5% YoY due to decline in service revenues on account of restructuring (form 10-12% of the watch division) and challenges in the exports business. As a consequence, the watch segment’s EBIT margins declined by 280bps to 12.3% YoY.

Eyewear segment - Let down by sunglass segment

Revenues from the eyewear segment grew by 7% YoY as prescription eyewear segment performed well. However, the high-margin sunglass segment’s growth was a concern and as a result, margins contracted by 270bps YoY to 2.1%.

Management guides for demand driven by new collections:

a) Purchase of gold on spot apart from high studded jewellery share contributed to high gross margins; (b) GHS contribution to be 15% of FY17 sales; deposits stood at Rs6,200mn post Diwali redemptions; (c) Shubham collection did well; (d) Customer walk-ins only due to new collections and attractive discounts; (e) To open 10 more Tanishq stores in the next 5 months; (f) Advance billing in the jewellery division for franchise sales resulted in increase in debtors by Rs820mn; (g) Targeting 25% growth rate for studded jewellery in 2HFY17.


Enhancing revenue growth rates of 13% for FY17 (lower than company’s guidance of 15% growth) is a tough task considering double-digit decline in non-GHS sales in 3 consecutive quarters. Sustained period of high gold prices (12-18 months) and improving discretionary demand (motivated by income levels) are necessary for pick-up in jewellery demand; whilst this will happen gradually, we fear threat of regulations to overall market size (likely shrinkage by 20%) could be permanent. Valuation of 33x FY18E EPS capture market-share gains and leaves little room for

SELL Result Update Stock Information Bloomberg Code: TTAN IN

CMP (Rs): 368

TP (Rs): 404

Mcap (Rs bn/US$ mn): 328/4,908

3M ADV (Rs mn/US$ mn): 554/8.3


1M 3M 12M YTD

Absolute (9) (11) 6 6

Rel. to Sensex (6) (9) 2 2


Research Analysts

Abhishek Ranganathan, CFA [email protected] Tel: +91 22 3043 3085

Mayank Porwal [email protected] Tel: +91 22 3043 3214



AMBIT INSIGHTS


surprises. Titan remains an outstanding franchise in the jewellery space but given increasing risk to the industry size of US$40bn, we suggest looking for better entry points as near-term growth risks outweigh punchy valuations. We are SELLers of Titan with a TP of Rs404.

Exhibit 1: Quarterly snapshot – not comparable due to IND AS

Rs Mn 2QFY16 1QFY17 2QFY17 YoY QoQ 2QFY17E

Revenues 26,813 28,226 26,758 0% -5% 31,646

Gross profit 7,039 8,482 8,722 24% 3% 8,544

Employee cost 1,804 1,919 1,816 1% -5% 1,899

Advertising 896 1,026 981 9% -4% 1,044

Other expenditure 2,243 2,376 2,928 31% 23% 2,532

EBITDA 2,018 2,923 2,764 37% -5% 3,070

Depreciation 240 261 260 8% 0% 285

Other income 138 134 117 -15% -12% 190

Interest 87 88 117 34% 33% 190

PBT 1,829 1,739 2,474 35% 42% 2,785

Tax 365 471 667 82% 42% 752

PAT 1,464 1,268 1,808 24% 43% 2,033

EPS 1.6 1.4 2.0 2.3

Gross margins 26.3% 30.0% 32.6% 24% 8% 27.0%

EBITDA margins 7.5% 10.4% 10.3% 37% 0% 9.7%

Employee % on sales 6.7% 6.8% 6.8% 1% 0% 6.0%

Advertising % on sales 3.3% 3.6% 3.7% 10% 1% 3.3%

Other expenses % on sales 8.4% 8.4% 10.9% 31% 30% 8.0%

Tax rate 1.4% 1.7% 2.5% 83% 49% 2.4%

PAT margins 5.5% 4.5% 6.8% 24% 50% 6.4%

Segment-wise performance

Jewellery

Revenue (Rs mn) 19,827 21,506 19,875 0% -8%

EBIT (Rs mn) 1,205 2,039 2,182 81% 7%

EBIT margin (%) 6.1% 9.5% 11.0% 81% 16%

Watch

Revenue (Rs mn) 5,524 4,997 5,236 -5% 5%

EBIT (Rs mn) 835 92 643 -23% 601%

EBIT margin (%) 15.1% 1.8% 12.3% -19% 569%

Eyewear

Revenue (Rs mn) 893 1,105 952 7% -14%

EBIT (Rs mn) 43 30 20 -54% -34%

EBIT margin (%) 4.8% 2.7% 2.1% -57% -23%


AMBIT INSIGHTS


Jewellery division’s performance

Exhibit 2: Muted consumer sentiment and inflated prices resulted in a disappointing quarter


Exhibit 3: Flat revenues; margins expand due to decent performance of studded jewellery and cost-cutting initiatives


Exhibit 4: Volumes contract by 32% YoY due to muted consumer sentiment and high prices


Exhibit 5: Gold prices surged 21% YoY


Exhibit 6: Share of studded jewellery improve significantly due to elongated activation


-60%

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Jewellery Revenues (Rs bn) (LHS) EBIT Margin (RHS)

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Gold price (Rs/gm) (LHS) Gold price growth (RHS)

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Studded-mix

AMBIT INSIGHTS


Exhibit 7: 5,000 sqft net space addition in the quarter


Exhibit 8: Tanishq’s 4% LTL growth aided by a low base and activation


Watch division’s performance

Exhibit 9: Revenues contract by 5% YoY; EBIT margins contract by 270bps


Exhibit 10: 9% volume decline as exports business did not perform as per expectation


Eyewear division

Exhibit 11: Eyewear division reports LTL growth of 4% led by good growth in prescription glass business


0.00.10.20.30.40.50.60.70.80.91.0

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Total jewellery area (mn sqft)

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Watches Revenues (Rs bn) (LHS)

EBIT Margin (RHS)

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Volume growth

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AMBIT INSIGHTS


Balance Sheet

Year to March (Rs Mn) FY15 FY16 FY17E FY18E FY19E

Share capital 888 888 888 888 888

Reserves and surplus 29,951 34,012 38,791 44,142 52,096

Total networth 30,839 34,900 39,679 45,030 52,984

Loans 998 1,131 - - -

Sources of funds 31,840 36,035 39,683 45,034 52,988

Net block 6,991 7,889 11,629 12,238 12,718

Cash and bank balances 2,138 1,292 17,762 26,457 34,807

Sundry debtors 1,897 1,963 2,073 2,385 2,742

Inventories 40,493 44,535 41,564 43,413 48,179

Current liabilities and provisions 26,843 27,620 41,013 45,174 51,826




Income statement


Revenue 119,493 113,121 126,123 145,106 166,821

EBITDA 11,485 9,314 11,728 14,214 16,824

Interest and financial charges 807 423 631 726 834

Other income 708 650 939 1,682 2,318

PBT 10,490 8,545 10,775 13,780 16,788

Provision for taxation 2,410 1,857 2,909 3,721 4,533

Adj PAT 8,163 6,896 7,866 10,059 12,255

EPS (Rs) 9.2 7.8 8.9 11.3 13.8


Cash Flow Statement


PBT 10,490 8,545 10,775 13,780 16,788

Change in working capital (4,152) (1,596) 16,151 2,006 1,283

Direct taxes paid (2,449) (2,026) (2,909) (3,721) (4,533)

CFO 5,026 5,803 25,908 14,181 15,893

Net capex (2,070) (2,530) (5,000) (2,000) (2,000)

CFI (1,187) (1,502) (5,000) (2,000) (2,000)

CFF (10,047) (5,048) (4,112) (3,486) (5,542)

Net increase in cash (6,207) (747) 16,797 8,695 8,351

FCF 2,956 3,273 20,908 12,181 13,893



FY15 FY16 FY17E FY18E FY19E

RoCE (%) 32.5 24.5 27.6 30.3 31.2

RoE (%) 36.3 24.6 23.9 27.0 28.9

P/E (x) 40.0 47.4 41.5 32.5 26.7

P/B(x) 10.3 9.1 8.2 7.3 6.2

Debt/Equity(x) 0.3 0.0 0.0 0.0 0.0

Net debt/Equity(x) 0.0 0.0 -0.4 -0.6 0.0

EV/Sales(x) 2.7 2.9 2.4 2.1 1.7

EV/EBITDA(x) 28.3 35.1 26.3 21.1 17.3


AMBIT INSIGHTS


Punjab National Bank NPA slippages stay high In 2QFY17, PNB reported net profit of Rs5.5bn (down 11% YoY), 23% above our estimate, thanks to 6bps QoQ NIM expansion, treasury gains and recovery on written-off loans. Yet core operating profit (down 25% YoY) was in line with our estimate. Slippages to NPA stayed elevated at ~7% of loans (annualised), along with credit cost staying high at 225bps (vs 210bps in 2QFY16). High quantum of stressed assets (18% of loans) with meagre provision coverage (~31%) means credit costs would stay elevated. We expect average credit cost of ~210bps in FY17-18E (vs ~350bps in FY15-16). Weak tier-1 capital ratio (8.8%) would also constrain recovery in balance sheet/operating profit to offset these credit costs. We expect muted RoAs/RoEs of 0.4%/7%. We remain SELLers with target price of Rs84, which values the bank at 0.4x FY17E P/B.

Results overview: In 2QFY17, PNB reported net profit of Rs5.5bn (down 11% YoY), 23% above our estimate. The beat was driven by better-than-expected NII (6bps QoQ expansion in NIM), treasury profits and recovery from written-off assets. Asset quality however remains stressed with fresh additions to NPA staying high at ~7% of loans (annualised). Recovery/upgrades, along with write-offs, led to gross NPA being flat QoQ. Credit cost was high at 225bps (vs 215bps in 2QFY16). Core operating profit also declined 25% YoY and was in line with our estimate.

Asset quality stress persists: Gross addition to NPAs remained high at Rs62bn (~7% of loans, annualised; vs Rs92bn in 1QFY17 and Rs30bn quarterly run-rate in 1HFY16). Recoveries and upgrades, at Rs48bn, moderated from Rs60bn in 1Q. Thus, gross NPA remained flat QoQ. Gross NPA ratio decreased marginally to 13.6% (vs 13.7% at end-1QFY17). Net NPA ratio was 9.07% (vs 9.12% at end-1QFY17). Restructured advances reduced by 4% QoQ to Rs180bn (4.6% of loan book). Credit cost, however, stayed elevated at 225bps (vs 210bps in 2QFY16 and 360bps in 1QFY17). Thus, total net residual stress assets (net NPAs + net restructured) were at ~13.4% of net advances (~125% of net worth).

Subdued core operating profit: Loan book growth was muted at 3.5% YoY. Whilst domestic corporate loans were flat YoY, retail loans (17% of domestic loans) were up 22% YoY. CASA growth at 11% YoY was driven by strong growth in SA (up 14% YoY) taking CASA ratio to 42% (vs 40% in 2QFY16). Thus, global NIMs, after a sharp dip in 4QFY16, improved to 2.51% but were down 45bps YoY. NII, thus, declined by 10% YoY. Core non-interest income was up 3% YoY. Treasury income (Rs6.5bn vs Rs2.1bn in 2QFY16) and recoveries (Rs8bn vs Rs2.4bn in 2QFY16) from written-off loans supported non-interest income (up 76% YoY). Operating expenses were up 8% YoY, implying cost-to-income (ex-treasury income) of 61% (vs 52% in 2QFY16). Hence, core operating profit fell by 25% YoY and was in line with our estimate.


While gross slippages (Rs62bn) moderated from the very high level in 1QFY17 (Rs92bn) and 2HFY16 (Rs181bn quarterly rate, affected by the RBI’s AQR), these stay more than 2x the pre-AQR level of Rs30bn in 1HFY16. Asset quality thus remains under stress. Further, in line with our estimate, core operating profit (down 25% YoY) was subdued. Our FY17 and FY18 earnings estimates remain largely unchanged. High quantum of stressed assets (~18% of loans) with meagre provision coverage (~31%) would lead to high credit costs ~210bps in FY17-18E (vs ~350bps in FY15-FY16). Weak tier-1 capital ratio (8.8%) would also constrain any recovery in balance sheet/operating profit to offset these credit costs. We expect muted RoAs/RoEs of 0.4%/7%. We remain SELLers with target price of Rs84, which values the bank at 0.4x FY18E P/B.

SELL Result Update Stock Information Bloomberg Code: PNB IN

CMP (Rs): 132

TP (Rs): 84


3M ADV (Rs mn/US$ mn): 1,777/26.6


1M 3M 12M YTD

Absolute (9) 7 2 14

Rel. to Sensex (6) 9 (2) 9


Ambit Estimates - Standalone

Rs bn FY16 FY17E FY18E

NII 156.6 159.9 170.2

PAT -39.7 25.1 32.9

EPS (Rs) -20.2 11.8 15.5


Research Analysts

Ravi Singh Tel: +91 22 3043 3181 [email protected]

Pankaj Agarwal, CFA Tel: +91 22 3043 3206 [email protected]

Rahil Shah

Tel: +91 22 3043 3217 [email protected]




AMBIT INSIGHTS


Exhibit 1: Quarterly snapshot

Earnings (Rs Mn) 2QFY16 1QFY17 2QFY17 YoY (%) QoQ (%) 2QFY17E A/E (%)

NII 43,220 36,990 38,799 -10% 5% 37,045 5%

Non-interest income 13,569 23,551 23,879 76% 1% 22,422 6%

Core non-interest income 9,039 10,271 9,339 3% -9% 10,422 -10%

Total income 56,789 60,541 62,678 10% 4% 59,467 5%

Employee cost 18,776 18,998 19,672 5% 4% 19,568 1%

Other operating expenses 8,628 8,797 9,886 15% 12% 9,060 9%

Total operating expenses 27,404 27,794 29,557 8% 6% 28,628 3%

Operating profit 29,385 32,746 33,120 13% 1% 30,839 7%

Total provisions 18,821 27,384 25,338 35% -7% 24,266 4%

PBT 10,564 5,362 7,783 -26% 45% 6,573 18%

Tax 4,354 2,299 2,289 -47% 0% 2,103 9%

Reported profit 6,210 3,064 5,494 -12% 79% 4,469 23%

Balance sheet (Rs bn) Deposits 5,399.2 5,539.5 5,748.8 6% 4% 5,761.1 0%

Net advances 3,809.6 3,915.7 3,937.3 3% 1% 3,994.1 -1%

Total assets 6,336.6 6,490.2 6,701.5 6% 3% 6,671.9 0%

Loan-deposit ratio (%) 70.6% 70.7% 68.5% Key ratios Credit quality Gross NPAs (Rs mn) 249,452 566,541 564,656 126% 0% 581,533 -3%

Net NPAs (Rs mn) 151,870 357,285 357,223 135% 0% 366,366 -2%

Gross NPA (%) 6.38% 13.73% 13.62% 13.82% Net NPA (%) 3.99% 9.12% 9.07% 9.17% Loan loss provisions (%) 2.09% 2.78% 2.20% 2.49% Coverage ratio (%) 39.1% 36.9% 36.7% 37.0% Capital adequacy Tier I (%) 9.36% 8.62% 8.78% CAR (%) 12.20% 11.58% 11.65% Du-pont analysis NII/Assets (%) 2.76% 2.25% 2.35% 2.25% Non-interest inc/assets (%) 0.87% 1.43% 1.45% 1.36% Operating cost/assets (%) 1.75% 1.69% 1.79% 1.74% Operating profits/assets (%) 1.88% 1.99% 2.01% 1.87% Provisions/assets (%) 1.20% 1.66% 1.54% 1.47% RoA (%) 0.40% 0.19% 0.33% 0.27% Source: Company, Ambit Capital research

AMBIT INSIGHTS


Balance sheet (standalone)

Year to March (Rs mn) FY14 FY15 FY16 FY17E FY18E

Networth 344,871 376,920 354,654 402,232 435,135

Deposits 4,513,967 5,013,786 5,530,511 5,917,647 6,391,059

Borrowings 480,344 456,705 597,552 575,990 555,506

Other Liabilities 150,934 172,049 162,739 165,994 169,314

Total Liabilities 5,490,117 6,019,460 6,645,457 7,061,863 7,551,013

Cash & Balances with RBI & Banks 452,184 559,342 736,231 760,262 798,074

Investments 1,437,855 1,498,770 1,578,459 1,810,417 1,927,099

Advances 3,492,691 3,805,344 4,123,258 4,265,109 4,543,077

Other Assets 107,387 156,005 207,509 226,075 282,762

Total Assets 5,490,117 6,019,460 6,645,457 7,061,863 7,551,013


Income statement (standalone)


Interest Income 434,291 466,494 477,752 481,868 490,446

Interest Expense 270,773 297,598 321,126 321,928 320,229

Net Interest Income 163,518 168,896 156,626 159,941 170,217

Total Non-Interest Income 43,709 55,567 65,262 83,178 88,663

Total Income 207,227 224,463 221,888 243,118 258,880

Total Operating Expenses 93,382 104,915 99,725 110,089 122,224

Employees expenses 65,104 73,369 64,259 70,723 78,528

Other Operating Expenses 28,278 31,546 35,465 39,366 43,697

Pre Provisioning Profits 113,845 119,548 122,163 133,029 136,656

Provisions 66,939 79,975 179,542 96,053 88,270

PBT 46,905 39,573 -57,379 36,975 48,386

Tax 13,479 8,957 -17,635 11,832 15,484

PAT 33,426 30,616 -39,744 25,143 32,903


Ratio analysis (standalone)


Credit-Deposit (%) 77.4% 75.9% 74.6% 72.1% 71.1%

CASA ratio (%) 41.3% 40.6% 41.6% 43.6% 45.3%

Cost/Income ratio (%) 45.1% 46.7% 44.9% 45.3% 47.2%

Gross NPA (Rs mn) 188,801 256,949 558,183 544,306 444,576

Gross NPA (%) 5.27% 6.57% 12.90% 12.16% 9.40%

Net NPA (Rs mn) 99,170 153,965 354,226 332,026 257,854

Net NPA (%) 2.84% 4.05% 8.59% 7.78% 5.68%

Provision coverage (%) 47.5% 40.1% 36.5% 39.0% 42.0%

NIMs (%) 3.26% 3.00% 2.55% 2.41% 2.41%

Tier-1 capital ratio (%) 8.9% 9.3% 8.4% 9.3% 9.5%


AMBIT INSIGHTS


Du-Pont analysis (standalone)

Year to March FY14 FY15 FY16 FY17E FY18E

NII / Assets (%) 3.2% 2.9% 2.5% 2.3% 2.3%

Other income / Assets (%) 0.9% 1.0% 1.0% 1.2% 1.2%

Total Income / Assets (%) 4.0% 3.9% 3.5% 3.5% 3.5%

Cost to Assets (%) 1.8% 1.8% 1.6% 1.6% 1.7%

PPP / Assets (%) 2.2% 2.1% 1.9% 1.9% 1.9%

Provisions / Assets (%) 1.3% 1.4% 2.8% 1.4% 1.2%

PBT / Assets (%) 0.9% 0.7% -0.9% 0.5% 0.7%

Tax Rate (%) 28.7% 22.6% 30.7% 32.0% 32.0%

ROA (%) 0.65% 0.53% -0.63% 0.37% 0.45%

Leverage 15.6 15.9 17.3 18.1 17.5

ROE (%) 10.2% 8.5% -10.9% 6.6% 7.9%


Valuation parameters (standalone)

Year to March FY14 FY15 FY16 FY17E FY18E

EPS (Rs) 18.5 16.5 -20.2 11.8 15.5

EPS growth (%) -31% -11% -223% -158% 31%

BVPS (Rs) 190.5 203.2 180.6 189.0 204.5

P/E (x) 7.1 8.0 -6.5 11.2 8.5

P/BV (x) 0.69 0.65 0.73 0.70 0.65


AMBIT INSIGHTS


Amara Raja Batteries In-line performance; shady future AMRJ’s Q2FY17 operating performance was in line with our estimate, with lower raw material cost getting offset by higher other expenses. PAT was however boosted by higher ‘other income’ and lower tax expenses. Going forward, we expect higher lead prices (up 26% from the lows of Q3FY16) to affect margin. Further, AMRJ’s revenue from replacement battery segment is expected to get affected by slowdown in the OEM sales from FY12-16 and rising competitive intensity by Exide. Also, in the telecom segment, we expect lower co-location growth from FY12-16 to affect battery replacement volumes. Pricing in segment is also expected to get affected by Exide’s re-entry into the segment. Consequently, we expect AMRJ’s revenue and EBITDA to register 12% CAGR growth over FY16-19E as compared to 19% and 25% respectively over FY12-16. The stock currently trades at 28.7x FY18E net earnings. We retain SELL rating on the stock with a TP of Rs763, implying 20x one-year forward net earnings estimates.

Results overview:

AMRJ’s Q2FY17 results were in line with our expectations. Revenues at Rs13.5bn (+16% YoY) were 1% higher than our expectations. Raw material cost as a percentage of sales at 64.3% was ~170bps lower than our expectations. However, this was offset by higher ‘other expenses’ which as a percentage of sales were ~170bps higher than our expectations. Hence, EBITDA margin at 17.1% was in line with our expectations and absolute EBITDA at Rs2.3bn was 1% higher than our expectations.

PAT was further boosted by higher ‘other income’ (Rs120mn, 20% higher than our expectations) and lower tax expense (29.9%, ~210bps lower than our expectations). Overall PAT at Rs1.4bn was 5% ahead of our expectations.


AMRJ’s Q2FY16 performance was in line with our estimates. Going forward, we believe there can be pressure on margins due to higher lead prices. International lead prices are already up 26% from the lows of Q3FY16. Hence, we believe there can be risk to our EBITDA margin estimate for 2HFY17 at 17.7% as compared with Q2FY17 EBITDA margin of 17.1%.

In the longer term, we are concerned about slowdown in the lucrative replacement battery industry (30% of AMRJ’s revenue) driven by muted OEM volumes across vehicles categories from FY12-16 (PVs, 2Ws, MHCVs and tractors sales volumes grew by a muted 1%, 5%, 3% and 2% CAGR respectively). Further, we are also concerned about AMRJ ability to continue to gain market share at the pace it has done in the past (1,600bps over FY09-16), as Exide focuses on cost control/technology upgrade and thereby increases the competitive pressure.

Lower tower addition and co-location (space/facility in telecom tower rented out by telecom companies for placing servers) growth from FY12-16 at 2% and 6% respectively, will keep the growth in the telecom replacement battery segment (24% of AMRJ revenue) low over FY16-19. Further, higher spectrum spends by the telcos and comeback of Exide into the segment is also expected to have a negative effect on the pricing in the segment. As per our discussion, with experts, AMRJ has already taken a price cut in telecom battery segment in H1FY17.

Consequently, we have built in a slower revenue and EBITDA growth of 12% CAGR over FY16-19 as compared to 19% and 25% respectively over FY12-16.

Similarly, we expect capex intensity to increase over the long term due to rising spends for technology upgrade and innovation to meet changing industry requirements (more advanced lead-acid batteries and/or a potential lithium-ion foray).

SELL Result Update Stock Information Bloomberg Code: AMRJ IN

CMP (Rs): 1,007

TP (Rs): 763


3M ADV (Rs mn/US$ mn): 408.7/6.1


1M 3M 12M YTD

Absolute (5) 12 14 17

Rel. to Sensex (2) 15 10 12



FY16 FY17 FY18

Revenues 46,907 52,787 59,077

EBITDA 8,169 9,193 10,288

EPS (Rs) 27.9 30.7 35.1


Research Analysts

Ashvin Shetty, CFA [email protected] Tel: +91 22 3043 3285

Gaurav Khandelwal, CFA [email protected] Tel: +91 22 3043 3132

Ritu Modi [email protected] Tel: +91 22 3043 3292




AMBIT INSIGHTS


Valuation: Our DCF-based model arrives at a 1 November 2017 valuation of Rs763/share, implying 20x one-year forward earnings.

The stock currently trades at 28.7x FY18E net earnings. We retain SELL.

Exhibit 1: AMRJ - 2QFY17 results snapshot

Rs mn 2QFY17A 2QFY17E Divergence 2QFY16A YoY 1QFY17A QoQ

Net sales 13,455 13,320 1% 11,583 16% 13,208 2%

Total material costs 8,647 8,791 -2% 7,419 17% 8,748 -1%

As % of sales 64.3% 66.0% (174) 64.0% 22 66.2% (196)

Gross profit 4,808 4,529 6% 4,164 15% 4,461 8%

Gross margin 35.7% 34.0% 174 36.0% (22) 33.8% 196

Employee expenses 693 693 0% 580 20% 656 6%

As % of sales 5.2% 5.2% (5) 5.0% 15 5.0% 19

Other expenses 1,818 1,572 16% 1,597 14% 1,532 19%

As % of sales 13.5% 11.8% 171 13.8% (28) 11.6% 191

EBITDA 2,297 2,264 1% 1,988 16% 2,273 1%

EBITDA margin 17.1% 17.0% 7 17.2% (9) 17.2% (14)

Depreciation 457 450 2% 343 33% 441 4%

EBIT 1,840 1,814 1% 1,645 12% 1,832 0%

EBIT margin 13.7% 13.6% 5 14.2% (52) 13.9% (19)

Interest 15 1 1390% 0 3625% 14 6%

Other income 120 100 20% 116 3% 90 34%

PBT 1,945 1,913 2% 1,761 10% 1,908 2%

PBT margin 14.5% 14.4% 9 15.2% (75) 14.4% 1

Tax 582 612 -5% 534 9% 601 -3%

Effective tax rate 29.9% 32.0% (208) 30.3% (42) 31.5% (159)

Adjusted PAT 1,363 1,301 5% 1,227 11% 1,307 4%

Adjusted PAT margin 10.1% 9.8% 36 10.6% (46) 9.9% 24


AMBIT INSIGHTS


Balance sheet - standalone

Year to March (Rs mn) FY15 FY16 FY17E FY18E

Networth 16,996 20,145 24,453 29,380

Loans 759 741 678 615

Deferred tax liability (net) 368 588 588 588

Sources of funds 18,124 21,475 25,720 30,583

Net block 9,443 13,163 15,017 15,517

Capital work-in-progress 1,342 1,322 1,322 1,322

Investments 161 161 161 161

Net current assets 7,178 6,829 9,220 13,584

Application of funds 18,123 21,475 25,720 30,584


Income statement – standalone


Revenue 42,113 46,907 52,787 59,077

EBITDA 7,108 8,169 9,193 10,288

Depreciation 1,260 1,399 1,746 2,000

Interest expense 7 5 5 5

Other income 273 330 358 531

PBT 6,115 7,095 7,799 8,814

Provision for taxation 1,990 2,327 2,558 2,821

Adj. PAT 4,125 4,768 5,241 5,994

EPS diluted (Rs) 24.1 27.9 30.7 35.1


Cash flow statement – standalone


PBT 6,099 7,222 7,799 8,814

WC changes (1,450) (677) (778) (832)

CFO 3,950 5,547 5,857 6,636

Net capex (4,062) (4,904) (3,600) (2,500)

Net investments (34) (89) - -

CFI (2,891) (3,938) (3,242) (1,969)

Proceeds from borrowings (97) (18) (63) (63)

CFF (745) (1,637) (939) (1,001)

FCF -112 643 2,257 4,136


Ratio analysis/Valuation parameters - standalone


Revenue growth 23% 11% 13% 12%

EBITDA margin 14% 14% 14% 14%

Net margin 10% 10% 10% 10%

RoCE (Pre-tax) 41% 36% 34% 35%

RoIC (Post-tax) 24% 23% 22% 21%

RoE 24% 24% 21% 20%

P/E (x) 41.7 36.1 32.8 28.7

EV/EBITDA(x) 24.1 21.0 18.6 16.6


AMBIT INSIGHTS


Greaves Cotton Higher other expenses lead to EBITDA miss Greaves Cotton’s 2QFY17 revenue at Rs4.4bn (up 3% YoY) was 5% below our estimate led by 4% lower-than-expected engine revenue, possibly led by weak revenue growth in agri equipment/gensets. Its gross profit at Rs1.6bn was in line with our estimate. However, EBITDA at Rs0.7bn (down 7% YoY) was 9% below our estimate led by higher employee cost and other expenses. EBITDA margin at 15.9% (down 180bps YoY) was 60bps below our estimate. Cash and investments increased by 22% YoY to Rs4.6bn (14% of Mcap). Reiterate BUY as we expect Greaves to benefit from: (a) rollout of BSIV emission norms in FY18, which would boost realisation (by ~12%; EBITDA margin to be maintained); (b) emergence of hub & spoke distribution model post GST; and (c) new sign-ups in the 4W segment. Greaves’ auto business trades at 15x FY18E P/E, at a 40% discount to peers; the low multiple ignores engine business margins of ~20% and ~40% RoE.

Results overview: Revenues at Rs4.4bn (net of excise) increased by just 3% YoY (5% lower than estimate) led by 30% YoY decline in non-engine revenue (primarily infrastructure equipment). Engine revenue grew by 5% YoY. We believe agri-equipment/genset revenue growth would have been in the low single digit to flat given domestic 3W volumes (accounts for ~50% of engine revenue) have grown by 7% in 2QFY17 (as per SIAM data).

Gross margin improved by 60bps YoY to 35.7% (170bps ahead of our estimate). However, EBITDA margin declined 180bps YoY to 15.9% (60bps lower than our estimate) led by 10%/26% YoY increase in other expenses/employee expenses vs revenue growth of 3%. Higher employee cost could be possibly led by expenses relating to recruitment of new MD. We will get more clarity from the management in the conference call on 10 November on the employee cost. Engine business EBIT margin declined 210bps YoY to 18.5% possibly led by passing on the benefits of lower commodity prices to the customers; prices got re-negotiated with major customers in 4QFY16.

Consequently, EBITDA/PBT declined by 7%/7% YoY to Rs698mn/Rs711mn (9% below our estimate). APAT at Rs513mn declined 10% YoY on account of increase in tax rate by 210bps YoY to 27.8%.

Cash conversion improves by 3 days YoY led by 13 days’ increase in payables. However, inventories/receivables also increased by 4 days/6 days. Cash and investment increased by 22% YoY to Rs4.6bn which is equivalent to 14% of Mcap.

Exhibit 1: Cash conversion improves by 3 days YoY

In days 2QFY17 2QFY16 YoY

Inventories 9 5 4

Receivables 31 24 6

Payables 52 39 13

Cash conversion cycle (12) (9) (3)


BUY Result Update Stock Information Bloomberg Code: GRV IN

CMP (Rs): 135

TP (Rs): 195

Mcap (Rs bn/US$ mn): 34/500

3M ADV (Rs mn/US$ mn): 39/0.9


1M 3M 12M YTD

Absolute 5 (3) (2) (6)

Rel. to Sensex 8 (0) (6) (10)



FY16 FY17E FY18E

Revenues 16.2 17.8 19.9

EBITDA 2.7 2.9 3.2

EPS (Rs) 7.2 8.2 9.1


Research Analysts

Bhargav Buddhadev [email protected] Tel: +91 22 3043 3252

Deepesh Agarwal, CFA [email protected] Tel: +91 22 3043 3275



AMBIT INSIGHTS


Key questions to be asked in today’s conference call

What is the reason for such a significant increase in employee cost and other expenses? Whether there are one-off items in employee cost such as joining bonus to new MD?

What is the share of spares business in 2QFY17 and how is the response to the new spares business, started recently in 2QFY17?

Is the current trend in EBIT margin for engines business sustainable given that Greaves may have already cut prices to pass on the benefit of lower raw material prices?

What are the timelines for BSIV implementation for 3W across India? Do you anticipate 3W volumes to pick up in 2HFY17 on the back of pre-buying?

What is the likely increase in realisation under BSIV for 3W? Is it fair to say EBITDA margin would be maintained under BSIV, if not improve?

Engine revenues have grown by just 5% despite 7% YoY growth in 3W domestic volumes as per the SIAM data. Why is this the case; is it that gensets and farm equipment have seen a decline or have grown in low single digit?

With the cut in the interest rates, are you seeing a pick-up in the replacement demand? What is the share of replacement demand in the market?

How is the response to the 250KVA genset launched in 4QFY16 given this is a fast-moving genset? Have you taken any price cuts in any of the gensets given that your competitors like Cummins and Kirloskar may have announced price cuts in 2QFY17?

Do you expect the farm equipment business to do well in 2HFY17 assuming the monsoon is good?

What is the volume guidance for Multix in 2HFY17 and over the next three years? What is the nature of the contract i.e. for how many years is the exclusive contract for and what is the expected realisation and margin on engines supplied for this vehicle? What is the capex plan, given that Eicher Polaris may have asked Greaves to have a separate engine platform for Multix?

Are there any other OEM sign-ups in the pipeline? What has been the response to Greaves’ engines from prospective customers in the Shanghai exhibition?

Where do we go from here? We keep our estimates unchanged on Greaves given that we expect 3W volumes to pick up in 2HFY17 on the back of pre-buying in the run-up to the implementation of the BSIV emission norms. We model revenue/EBITDA growth of 16%/21% YoY in 2HFY17. We model EBITDA margin to improve by 60bps YoY to 16.6% in 2HFY17 led by favourable operating leverage. We reiterate BUY given the following positives:

New sign-ups in the pipeline: Greaves can add at least one large client in the 4W 1.5-3.5 tonnage SCV segment given encouraging response to its engine in the recently held Delhi Auto Expo and Shanghai Auto exhibition. Such a sign-up would be key to Greaves’ diversification from just a 3W engine company (~50% of overall revenue comes from 3Ws). The volume market size for the 4W 1-3.5 tonnage (285,000 p.a.) is similar to Greaves’ 3W engine sales volume of 301,000 in FY16. If Greaves manages to empanel one client, we believe others would follow. For e.g., in 3Ws, Atul Auto, TVS Motors and Scooter India followed soon after Piaggio was signed up by Greaves.

Moreover, with the renewed focus in the power genset business, the company is expected to double its genset revenues over FY15-17. Greaves has started strengthening its marketing team by hiring senior people from its competitors like Cummins, KOEL and Mahindra Powerol and genset OEM partners like Powerica and Jakson. Greaves’ weakness is its marketing and hence by hiring senior marketing people from its competitors and from the genset OEM partners it is trying to strengthen its marketing credentials. Some of the key recent marketing

AMBIT INSIGHTS


recruits engaged by Greaves are leveraging their relationships to win business for Greaves.

BSIV emission norms to be profit-accretive for Greaves: The rollout of BSIV across India in FY18 will translate into additional EBITDA of ~12% (assuming margins are maintained); interaction with industry participants suggests that the cost of a 3W engine will increase by 12% given BSIV requires a significant 22% reduction in carbon emission. During the transition from BSII to BSIII in 2010, engine cost increased by 12% as carbon emission reduced by ~18% and EBITDA margin did not decline. This may have been on account of: (a) Greaves’ strong market share of 83% (excluding Bajaj) amongst 3W OEMs; and (b) its ability to ensure smooth transition to BSIV; Greaves’ OEMs do not have BSIV-compliant engines of their own. Moreover, in the run-up to BSIV implementation, Greaves would report strong volume growth in 2HFY17 on the back of pre-buying as seen during the implementation of CPCB-II emission norms recently.

Beneficiary of GST: We believe Greaves will significantly benefit from the emergence of the hub & spoke model in distribution after the implementation of GST. Our interaction with industry participants suggests that a lot of inter-state trade that now happens due to the differential tax structure between states will significantly decline and shift to the hub & spoke model (i.e. local business) after GST implementation. As the importance of localisation increases, the hub & spoke model will become very popular and should benefit small commercial vehicles. This is because with travel distance reducing materially, it makes economic sense to use small commercial vehicles over medium and heavy commercial vehicles. Moreover, manoeuvrability of small commercial vehicles is also far better than that of medium and heavy commercial vehicles given the congested roads in cities and tier 1-3 towns.

Strong volume growth over FY16-18 led by pick-up in replacement demand: Greaves’ auto business can see strong volume growth in FY17; we model 3W revenue growth of 9% over FY16-18E vs flat growth over FY14-FY16, led by pick-up in the replacement demand on the back of softening interest rates.

Valuation: Auto business trading at attractive valuations

Greaves’ auto business is currently trading at 15x FY18E P/E, which is at a significant discount of 40% to auto ancillary peers like Wabco (manufactures braking systems), Suprajit Engineering (manufactures auto cables), and Mahindra CIE (makes forgings). The company has no direct comparable peer; it enjoys ~82% market share in 3W diesel auto engines and the trend of outsourcing in 4W and 2W auto engines is yet to increase in India.

We believe the valuation discount to auto ancillary peers is unjustified given: (1) Greaves’ auto business registered an impressive RoE of 33% and EBITDA margin of 23% in FY16 vs 21% and 16% for auto ancillary peers; and (2) the opportunity to scale up from a 3W auto engine company to a larger engine franchise through a sign-up in the 4W 1-3.5 tonnage segment.

We calculate the current traded multiple for the auto business by assuming that the agriculture business and the genset business trade at our fair value of Rs7/share (implied FY17/18E P/E of 19x/18x) and Rs12/share (implied FY17/18E P/E of 20x/18x) respectively. We value cash and investments at Rs14/share (FY16 book value).

Exhibit 2: Greaves auto business is trading at a 40% discount to auto ancillary peers on FY18 P/E

Company CMP Mcap

(US$mn)

P/E (x) EBITDA margin (%) RoE (%) CAGR (FY16-18) (%)

FY16 FY17 FY18 FY16 FY17 FY18 FY16 FY17 FY18 Revenue EPS

Greaves Cotton 135 492 18.8 17.1 15.1 23.2 22.6 22.4 32.9 44.7 48.8 4.9 3.3

Wabco 6,250 1,784 57.9 40.1 33.2 16.0 18.1 18.5 21.3 24.1 22.9 22.1 32.2

Suprajit Engineering 217 430 52.8 32.9 26.4 17.0 17.3 17.6 15.5 16.5 17.8 17.1 41.5

Mahindra CIE Automotive 190 927 27.8 21.9 15.9 8.7 11.5 12.6 4.0 11.6 14.0 12.9 32.4

Average (excl. Greaves) 46.2 31.6 25.1 13.9 15.6 16.2 13.6 17.4 18.3 17.3 35.4

Divergence -59% -46% -40% 930bps 690bps 620bps 1,930bps 2,730bps 3,060bps -1240bps -3200bps

Source: Bloomberg, Ambit Capital research; Note: Prices as on 5 November 2016 *Note the ratio represents Greaves auto engine business revenues only

AMBIT INSIGHTS


Exhibit 3: Quarterly snapshot

Rs mn unless specified 2QFY17 2QFY16 1QFY17 YoY QoQ 2QFY17E Divergence (%)

Net income 4,393 4,251 4,007 3% 10% 4,630 -5%

Raw materials 2,823 2,758 2,630 2% 7% 3,056 -8%

Gross profit 1,571 1,492 1,378 5% 14% 1,574 0%

Employee cost 411 374 388 10% 6% 388 6%

Other expenses 462 365 386 26% 20% 424 9%

Total expenditure 3,696 3,497 3,404 6% 9% 3,868 -4%

EBITDA 698 753 604 -7% 16% 763 -9%

Depreciation 115 115 109 0% 5% 99 16%

Other income 130 128 107 2% 21% 105 24%

Interest 2 2 1 -15% 183% 1 NA

PBT 711 764 601 -7% 18% 768 -7%

Exceptional income (1) (19) (55) -

PBT after exceptional 710 745 546 -5% 30% 768 -8%

Tax 197 196 161 1% NA 207 -5%

PAT 513 549 385 -7% NA 561 -9%

APAT 513 567 441 -10% 16% 561 -8%

Gross margin (% of sales) 35.7% 35.1% 34.4% 60bps 130bps 34.0% 170bps

Employee cost (% of sales) 9.4% 8.8% 9.7% 60bps -30bps 8.4% 100bps

Other expenses (% of sales) 10.5% 8.6% 9.6% 190bps 90bps 9.1% 140bps

EBITDA (% of sales) 15.9% 17.7% 15.1% -180bps 80bps 16.5% -60bps

PBT (% of sales) 16.2% 18.0% 15.0% -180bps 120bps 16.6% -40bps

Tax rate 27.8% 25.7% 26.7% 210bps 110bps 27.0% 80bps

APAT (% of sales) 11.7% 13.4% 11.0% -170bps 70bps 12.1% -40bps


Exhibit 5: Segmental performance

Rs mn unless specified 2QFY17 2QFY16 1QFY17 YoY QoQ 2QFY17E Divergence

Gross revenues Engine business 4,779 4,567 4,267 5% 12% NA NA

Others 116 166 181 -30% -36% NA NA

Total 4,895 4,732 4,448 3% 10% NA NA

Net revenues Engine business 4,278 4,085 3,826 5% 12% 4,449 -4%

Others 116 166 181 -30% -36% 181 -36%

Total 4,393 4,251 4,007 3% 10% 4,630 -5%

EBIT Engine business 790 842 662 -6% 19% 712 11%

Others 6 2 12 NA -49% 13 -50%

Total segmental 796 844 674 -6% 18% 725 10%

Unallocable expenses 213 205 180 4% 19% 61 252%

Reported EBIT 583 638 495 -9% 18% 664 -12%

EBIT (%) Engine business 18.5% 20.6% 17.3% -210bps 120bps 16.0% 250bps

Others 5.4% 1.3% 6.8% 410bps -140bps 7.0% -160bps

Total 18.1% 19.8% 16.8% -170bps 130bps 15.6% 250bps

Capital employed Engine business 4,231 4,298 3,977 -2% 6% Others 204 360 185 -43% 10% Segmental capital employed 4,434 4,657 4,162 -5% 7% Unallocable 5,041 4,523 5,088 11% -1% Total capital employed 9,475 9,180 9,251 3% 2% Source: Company, Ambit Capital research

AMBIT INSIGHTS


Balance sheet


Networth 8,198 8,553 9,399 10,436 11,823

Loans - - - - -

Deferred tax liability (net) 126 187 187 187 187

Sources of funds 8,324 8,740 9,586 10,622 12,009

Net block 3,252 2,754 3,621 2,947 3,964

Capital work-in-progress 84 366 366 366 366

Investments 3,094 3,094 3,094 3,094 3,094




Income statement


Revenue 16,887 16,189 17,835 19,907 22,800

EBITDA 1,998 2,691 2,877 3,201 3,715

Adjusted EBITDA 2,352 2,691 2,877 3,201 3,715

Depreciation 471 457 395 412 444

Interest expense 24 10 - - -

Other income 243 455 418 428 496

PBT (before exceptionals) 1,747 2,679 2,900 3,217 3,767

Provision for taxation 272 927 899 997 1,168

Adj PAT 1,475 1,752 2,001 2,220 2,599

Reported PAT 815 2,004 2,001 2,220 2,599

Adjusted EPS (Rs) 6.0 7.2 8.2 9.1 10.6

Source: Company, Ambit Capital research; Note: * Adjusted EBITDA = Reported EBITDA – losses of the infrastructure equipment business; Adjusted PAT = (reported PBT before exceptional items – losses of the infrastructure equipment business) x (1 – 31% (which is the normalised tax rate))

Cash flow statement


PBT 1,087 2,932 2,900 3,217 3,767

WC changes 1,029 360 267 (20) (301)

CFO 2,234 2,302 2,663 2,611 2,742

Net capex (447) 36 (1,263) 263 (1,461)

Net Investments (1,190) (400) - - -

CFI (1,635) (701) (1,263) 263 (1,461)

Borrowings (1) - - - -

Issue of equity - - - - -

CFF (1,635) (701) (1,263) 263 (1,461)

FCF 599 1,601 1,400 2,875 1,280


AMBIT INSIGHTS



Year to March FY15 FY16 FY17E FY18E FY19E

Revenue growth (%) (2.7) (4.1) 10.2 11.6 14.5

EBITDA margin (%) 14.3 16.6 16.1 16.1 16.3

Adjusted net margin (%) 5.0 12.4 11.2 11.2 11.4

Adjusted RoCE (%) 19.4 18.4 19.1 19.4 20.3

Adjusted RoE (%) 10.0 20.9 22.3 22.4 23.4

Net debt/Equity (x) (0.0) (0.0) (0.0) (0.2) (0.2)

Adjusted P/E (x) 40.4 18.8 16.5 14.9 12.7

P/B (x) 4.0 3.9 3.5 3.2 2.8

Adjusted EV/EBITDA (x) 13.9 12.1 11.3 10.2 8.8


AMBIT INSIGHTS


Godrej Consumer: 2QFY17 results expectation (GCPL IN, mcap US$7.8bn, SELL, TP Rs1,180, 23% downside) Analyst: Rakshit Ranjan, CFA, [email protected], +91 22 3043 3201

Godrej Consumer (GCPL) will report its 2QFY17 results today. We expect revenue growth of 9% YoY supported by domestic volume growth of ~5% YoY and 4% price/ mix lead growth. We assume no gross margin expansion and EBITDA margin expansion of ~50bps YoY due to lower employee cost and other expenditure. PAT growth at 11% YoY is likely to be ahead of sales growth due to EBITDA margin expansion.

Key things to watch out for: (a) Market share changes in the domestic soaps and HI business; (b) Commentary on urban demand recovery; and (c) Constant currency organic growth of the Indonesian and African businesses.

The stock is currently trading at 34x FY18E earnings. We remain SELLers on the stock.

Exhibit 1: Results expectations (Rs mn, unless specified)

Particulars Sep'16E Sep'15 Jun'16 YoY QoQ Comments

Sales 23,070 21,165 21,228 9% 9% Assuming 9% YoY revenue growth driven by ~5% volume growth and 4% price and mix led growth

EBITDA 4,636 4,064 3,800 14% 22% Expect no gross margin expansion; lower employee cost and other expenditure leads to EBITDA margin expansion of 90bps YoY. EBITDA margin (%) 20.1% 19.2% 17.9% 89 219

PBT 4,136 3,722 3,288 11% 26% PAT growth to be ahead of sales growth due to EBITDA margin expansion PAT 3,290 2,961 2,535 11% 30%


mailto:[email protected],

AMBIT INSIGHTS


Britannia: 2QFY17 results expectation (BRIT IN, mcap US$5.9bn, SELL, TP Rs2,800, 15% downside)

Analyst: Rakshit Ranjan, CFA, [email protected], +91 22 3043 3201 Britannia will report its 2QFY17 results today. We expect revenue growth of 12% YoY to Rs24.7bn, mainly driven by higher volumes. We expect gross margin to contract by ~50bps YoY due to rising input costs. EBITDA margin is likely to increase by ~50bps YoY to 15.2% due to operating efficiencies. We expect PAT growth of 13% YoY to Rs2.5bn, ahead of topline growth due to EBITDA margin expansion.

Key things to watch for: (a) biscuit volume growth, (b) performance of its new launches, (c) product innovation pipeline, and (d) EBITDA margin change.

The stock is currently trading at 35x FY18E earnings. We remain SELLers on the stock with a TP of Rs2,800 (15% downside, implying FY18E P/E of 30x).



Sales 24,738 22,087 NA 12% NA Assuming 10% volume and 2% price & mix led growth YoY

EBITDA 3,764 3,250 NA 16% NA Expect gross margin to contract by 50bps YoY due to rising input costs; EBITDA margin expansion of ~50bps YoY due to operating efficiencies EBITDA margin (%) 15.2% 14.7% NA 50 NA

PBT 3,705 3,265 NA 13% NA PAT is expected to grow by 13% ahead of topline due to EBITDA margin expansion PAT 2,481 2,186 NA 13% NA



AMBIT INSIGHTS


GSK Consumer: 2QFY17 results expectation (SKB IN, mcap US$3.7bn, SELL, TP Rs5,450)

Analyst: Rakshit Ranjan, CFA, [email protected], +91 22 3043 3201 GSK Consumer will report its 2QFY17 results today. We expect revenue growth of 8% YoY to Rs12.1bn, with 1% volume growth and price/mix-led growth of 7% YoY. We expect gross margin/ EBITDA margin contraction of 25bps/ 50bps YoY due to higher input prices. We expect PAT to grow 7% YoY to Rs1.9bn led auxiliary income growth of ~15% YoY.

Key things to watch out for: (a) Volume growth; and (b) Market share change.

The stock is currently trading at valuations of 31x of FY18E EPS. We remain SELLers on the stock with a TP of Rs5,450 (8% downside, implying FY18E P/E of 28x).



Sales 12,111 11,257 NA 8% NA Assuming 1% volume and 7% price/mix led growth

EBITDA 2,497 2,377 NA 5% NA Expect gross margin contraction of ~25bps YoY due to higher input prices EBITDA margin (%) 20.6% 21.1% NA (50) NA

PBT 3,005 2,812 NA 7% NA Auxillary income expected to grow 15% YoY helping PAT grow at 7% YoY, ahead of EBITDA growth PAT 1,952 1,827 NA 7% NA



AMBIT INSIGHTS


Institutional Equities Team Saurabh Mukherjea, CFA CEO, Institutional Equities (022) 30433174 [email protected]

Research Analysts

Name Industry Sectors Desk-Phone E-mail

Nitin Bhasin - Head of Research E&C / Infra / Cement / Industrials (022) 30433241 [email protected] Aadesh Mehta, CFA Banking / Financial Services (022) 30433239 [email protected] Abhishek Ranganathan, CFA Retail (022) 30433085 [email protected] Achint Bhagat, CFA Cement / Home Building (022) 30433178 [email protected] Anuj Bansal Mid-caps (022) 30433122 [email protected] Aditi Singh Economy / Strategy (022) 30433284 [email protected] Ashvin Shetty, CFA Automobile (022) 30433285 [email protected] Bhargav Buddhadev Power Utilities / Capital Goods (022) 30433252 [email protected] Deepesh Agarwal, CFA Power Utilities / Capital Goods (022) 30433275 [email protected] Dhiraj Mistry, CFA Consumer (022) 30433264 [email protected] Gaurav Khandelwal, CFA Automobile (022) 30433132 [email protected] Girisha Saraf Mid-caps / Small-caps (022) 30433211 [email protected] Karan Khanna, CFA Strategy (022) 30433251 [email protected] Mayank Porwal Retail (022) 30433214 [email protected] Pankaj Agarwal, CFA Banking / Financial Services (022) 30433206 [email protected] Paresh Dave, CFA Healthcare (022) 30433212 [email protected] Parita Ashar, CFA Metals & Mining / Aviation (022) 30433223 [email protected] Prashant Mittal, CFA Strategy / Derivatives (022) 30433218 [email protected] Rahil Shah Banking / Financial Services (022) 30433217 [email protected] Rakshit Ranjan, CFA Consumer (022) 30433201 [email protected] Ravi Singh Banking / Financial Services (022) 30433181 [email protected] Ritesh Gupta, CFA Oil & Gas / Chemicals / Agri Inputs (022) 30433242 [email protected] Ritesh Vaidya, CFA Consumer (022) 30433246 [email protected] Ritika Mankar Mukherjee, CFA Economy / Strategy (022) 30433175 [email protected] Ritu Modi Automobile (022) 30433292 [email protected] Sagar Rastogi Technology (022) 30433291 [email protected] Sudheer Guntupalli Technology (022) 30433203 [email protected] Sumit Shekhar Economy / Strategy (022) 30433229 [email protected] Utsav Mehta, CFA E&C / Industrials (022) 30433209 [email protected] Vivekanand Subbaraman, CFA Media (022) 30433261 [email protected]

Sales

Name Regions Desk-Phone E-mail

Sarojini Ramachandran - Head of Sales UK +44 (0) 20 7886 2740 [email protected] Dharmen Shah India / Asia (022) 30433289 [email protected] Dipti Mehta India / USA (022) 30433053 [email protected] Hitakshi Mehra India (022) 30433204 [email protected] Krishnan V India / Asia (022) 30433295 [email protected] Nityam Shah, CFA USA / Europe (022) 30433259 [email protected] Parees Purohit, CFA UK / USA (022) 30433169 [email protected] Praveena Pattabiraman India / Asia (022) 30433268 [email protected] Punitraj Mehra, CFA India / Asia (022) 30433198 [email protected] Shaleen Silori India (022) 30433256 [email protected]

Singapore

Pramod Gubbi, CFA – Director Singapore +65 8606 6476 [email protected] Shashank Abhisheik Singapore +65 6536 1935 [email protected]

USA / Canada

Ravilochan Pola - CEO Americas +1(646) 361 3107 [email protected]

Production

Sajid Merchant Production (022) 30433247 [email protected] Sharoz G Hussain Production (022) 30433183 [email protected] Jestin George Editor (022) 30433272 [email protected] Richard Mugutmal Editor (022) 30433273 [email protected] Nikhil Pillai Database (022) 30433265 [email protected]


















































AMBIT INSIGHTS


Lupin Ltd (LPC IN, BUY)


Cadila Healthcare Ltd (CDH IN, BUY)


Century Plyboards India Ltd (CPBI IN, BUY)


Titan Co Ltd (TTAN IN, SELL)


0

5001,0001,5002,0002,500

Oct

-13

Dec

-13

Feb-

14

Apr

-14

Jun-

14

Aug

-14

Oct

-14

Dec

-14

Feb-

15

Apr

-15

Jun-

15

Aug

-15

Oct

-15

Dec

-15

Feb-

16

Apr

-16

Jun-

16

Aug

-16

Lupin Ltd

0

100

200

300

400

500

Oct

-13

Dec

-13

Feb-

14

Apr

-14

Jun-

14

Aug

-14

Oct

-14

Dec

-14

Feb-

15

Apr

-15

Jun-

15

Aug

-15

Oct

-15

Dec

-15

Feb-

16

Apr

-16

Jun-

16

Aug

-16

Cadila Healthcare Ltd

050

100150200250300

Oct

-13

Dec

-13

Feb-

14

Apr

-14

Jun-

14

Aug

-14

Oct

-14

Dec

-14

Feb-

15

Apr

-15

Jun-

15

Aug

-15

Oct

-15

Dec

-15

Feb-

16

Apr

-16

Jun-

16

Aug

-16

Century Plyboards India Ltd

0100200300400500

Sep-

13

Nov

-13

Jan-

14

Mar

-14

May

-14

Jul-

14

Sep-

14

Nov

-14

Jan-

15

Mar

-15

May

-15

Jul-

15

Sep-

15

Nov

-15

Jan-

16

Mar

-16

May

-16

Jul-

16

Sep-

16

Titan Co Ltd

AMBIT INSIGHTS


Punjab National Bank (PNB IN, SELL)


Amara Raja Batteries Ltd (AMRJ IN, SELL)


Greaves Cotton Ltd (GRV IN, BUY)


Godrej Consumer Products Ltd (GCPL IN, SELL)


050

100150200250

Oct

-13

Dec

-13

Feb-

14

Apr

-14

Jun-

14

Aug

-14

Oct

-14

Dec

-14

Feb-

15

Apr

-15

Jun-

15

Aug

-15

Oct

-15

Dec

-15

Feb-

16

Apr

-16

Jun-

16

Aug

-16

Punjab National Bank

0200400600800

1,0001,200

Nov

-13

Jan-

14

Mar

-14

May

-14

Jul-

14

Sep-

14

Nov

-14

Jan-

15

Mar

-15

May

-15

Jul-

15

Sep-

15

Nov

-15

Jan-

16

Mar

-16

May

-16

Jul-

16

Sep-

16

Amara Raja Batteries Ltd

0

50

100

150

200

Oct

-13

Dec

-13

Feb-

14

Apr

-14

Jun-

14

Aug

-14

Oct

-14

Dec

-14

Feb-

15

Apr

-15

Jun-

15

Aug

-15

Oct

-15

Dec

-15

Feb-

16

Apr

-16

Jun-

16

Aug

-16

Greaves Cotton Ltd

0

500

1,000

1,500

2,000

Oct

-13

Dec

-13

Feb-

14

Apr

-14

Jun-

14

Aug

-14

Oct

-14

Dec

-14

Feb-

15

Apr

-15

Jun-

15

Aug

-15

Oct

-15

Dec

-15

Feb-

16

Apr

-16

Jun-

16

Aug

-16

Godrej Consumer Products Ltd

AMBIT INSIGHTS


Glaxosmithkline Consumer (SKB IN, SELL)


Britannia Industries Ltd (BRIT IN, SELL)


0

2,000

4,000

6,000

8,000

Oct

-13

Dec

-13

Feb-

14

Apr

-14

Jun-

14

Aug

-14

Oct

-14

Dec

-14

Feb-

15

Apr

-15

Jun-

15

Aug

-15

Oct

-15

Dec

-15

Feb-

16

Apr

-16

Jun-

16

Aug

-16

GlaxoSmithKline Consumer Healthcare Ltd

0

1,000

2,000

3,000

4,000

Oct

-13

Dec

-13

Feb-

14

Apr

-14

Jun-

14

Aug

-14

Oct

-14

Dec

-14

Feb-

15

Apr

-15

Jun-

15

Aug

-15

Oct

-15

Dec

-15

Feb-

16

Apr

-16

Jun-

16

Aug

-16

Britannia Industries Ltd

AMBIT INSIGHTS


Explanation of Investment Rating

Investment Rating Expected return (over 12-month)

BUY >10%

SELL <10%

NO STANCE We have forward looking estimates for the stock but we refrain from assigning valuation and recommendation

UNDER REVIEW We will revisit our recommendation, valuation and estimates on the stock following recent events

NOT RATED We do not have any forward looking estimates, valuation or recommendation for the stock POSITIVE We have a positive view on the sector and most of stocks under our coverage in the sector are BUYs

NEGATIVE We have a negative view on the sector and most of stocks under our coverage in the sector are SELLs

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Additional information on recommended securities is available on request.

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AMBIT INSIGHTS


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