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CD Equisearch Pvt Ltd Nov 2, 2016
Equities Derivatives Commodities Distribution of Mutual Funds Distribution of Life Insurance
L.G.Balakrishnan&Bros Ltd
No. of shares (m) 15.7
Mkt cap (Rs crs/$m) 1063/159.4
Current price (Rs/$) 677/10.2
Price target (Rs/$) 847/12.7
52 W H/L (Rs.) 728/392
Book Value (Rs/$) 272/4.1
Beta 0.8
Daily volume (avg. monthly) 46240
P/BV (FY17e/18e) 2.3/2.0
EV/EBITDA (FY17e/18e) 7.1/6.2
P/E (FY17e/18e) 14.4/12.0
EPS growth (FY16/17e/18e) -3.9/16.8/19.7
OPM (FY16/17e/18e) 11.4/12.7/12.7
ROE (FY16/17e/18e) 16.9/17.2/17.8
ROCE(FY16/17e/18e) 14.1/14.2/15.5
D/E ratio (FY16/17e/18e) 0.4/0.3/0.2
BSE Code 500250
NSE Code LGBBROSLTD
Bloomberg LGBB IN
Reuters LBG.BO
Shareholding pattern %
Promoters 47.5
MFs / Banks / FIs 13.7
Foreign 1.4
Govt. Holding 0.0
Non-Promoter Corp. 1.6
Total Public 35.7
Total 100.0
As on Sep 30, 2016
Recommendation
BUY
Analyst
KISHAN GUPTA, CFA, FRM
Phone: + 91 (33) 4488 0043
E- mail: [email protected]
Consolidated (Rs crs)
FY14
FY15
FY16
FY17e FY18e
Income from operations 1108.56 1172.98 1205.30 1343.91 1520.39
Other Income 4.60 8.80 3.92 3.83 4.25
EBITDA (other income included) 130.74 151.08 141.60 174.61 197.73
Profit after MI & associate profit
60.07 65.97 63.37 74.03 88.65
EPS(Rs) 38.26 42.03 40.37 47.16 56.48
EPS growth (%) 94.7 9.9 -3.9 16.8 19.7
Company Brief L G Balakrishnan (LGB) manufactures roller chains and undertakes metal
forming, which includes warm & cold forging, fine blanking and precision-
machined parts. Its step subsidiary, GFM LLC, deals in precision stamped
metal parts which are used in automobiles.
Quarterly Highlights
� If recent trend in sales of LG Balakrishnan is anything to go by, then the
domestic two wheeler industry is showing discernible signs of revival.
Income from operations (standalone) jumped 10.1% to Rs 309.95 crs
($46.5m) in Q2 - the best reading in last nine quarters - not least due to hefty
rise in bellwether transmission business sales (10.2%), catapulting its
revenue share to 79.1%. Slackness in two wheeler industry in last few years
could do little to prevent massive rise in transmission business revenue
(standalone) share - 78.8% in FY16 from 67.3% in FY13.
� Its metal forming business - largely dependent on four wheeler industry -
failed to gain ground in last few quarters partly due to restrictions in sales
of diesel powered vehicles. Sales declined 2% last fiscal, which still evokes
doubts on the strength of the recent recovery – sales are up 11.1% in H1.
EBIT margins have been no stabler - declining by some 300 bps to 7.6% in
Q2 from 11.5% in Q1.
� All thanks to higher dispatches, LGB's transmission business margins
ballooned to 12.1% in Q2- the highest in at least three years, resulting in
47.8% growth in its EBIT to Rs 29.64 crs ($4.4m) from Rs 20.05 crs ($3.0m) in
the same quarter a year ago; margins for H1 also expanded by some 130 bps
to 9.4%. With transmission business turning more vivacious, its EBIT share
has started to creep up - 80.8% in H1FY167from 79.9% a year ago. Adjusted
profit after tax rose by 16.3% to Rs 30.65 crs ($4.6m) in H1FY17 from Rs
26.37 crs($4.0m) in the same period a year ago.
� The stock currently trades at 14.4x FY17e EPS of Rs 47.16 and 12xFY18e EPS
of Rs 56.48. Prodigious recovery of the Indian two wheeler industry has
spurred related auto component makers to ramp up production. Perceptible
signs of recovery are all too evident in LGB’s transmission business – higher
volumes in Q2 with margin augmentation. Yet portending the medium
term trend of the consumer centric auto industry is viciously difficult,
invoking need for frequent estimate changes. Weighing odds, we upgrade
the stock to buy with revised target of Rs 847 (previous target: Rs 549) based
on 15x FY18e earnings (peg ratio: 0.8), over a period of 9-12 months.
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[
Outlook & Recommendation
Two wheeler industry
After growing at just 3% last fiscal, the Indian two-wheeler industry has seen resurrection of sorts for the domestic sales has
grown by a blistering 17.5% in the Apr-Sep 16 period. Motorcycle industry obliterated much of the sclerosis of last few years
(four average growth: 1.6%) to post 17.5% growth in domestic dispatches, while the scooter off take remained buoyant at some
27%. Dispatches of Hero Honda, one of the largest two wheeler makers, rejuvenated as it posted 10.8% growth in overall
volumes in Apr-Sep 16, while Bajaj Auto reported marginal decline is dispatches to 1.77m - primarily due to weak export
market. Its exports plummeted some 22%, whereas the domestic sales rose by 18%.
SIAM attributes much of the recent firmness in Indian automobile industry to good monsoons and wage hikes of government
employees, goading it to revise passenger vehicle industry growth to 11-13% for FY17 from its earlier estimate of 6-8%. In view
of better than expected ramp up in demand momentum, ICRA too revised its domestic passenger vehicle demand outlook for
FY17 to 10-12% from 8.5-9.5% earlier. For two wheeler industry, it expects the September domestic sales growth of 21.6% to
sustain for much of the remaining fiscal.
Industry experts believe that volume growth in domestic two-wheeler industry is set to hit double digit mark after a gap of
four years. Y S Guleria, senior vice-president (sales and marketing), at Honda Motorcycle & Scooter India (HMSI) reckons that
demand from both urban and semi-urban areas have driven the growth of Indian two-wheeler industry since April this year.
He posits 13-14% industry growth for the year galvanized by steady rural demand (where monsoon is near normal), increased
salaries of government employees and expansion of services sector. ICRA, a credit rating agency, postulates 10-12% growth for
the Indian two-wheeler industry on the back of 7th Pay Commission payout and the One Rank One Pension rule for the
defense sector.
Financials & Valuation
Underpinned by strong recovery in two-wheeler industry, LGB's transmission business would muster visibility to post 10.2%
growth in sales - the first double digit after a gap of two quarters, attended by higher margins. With two-wheeler industry
growth estimates for current fiscal levitating in 10-14% range, little scope of misjudgment exists in penciling over10%
transmission business annual revenue growth for next two years. Its margins would expand too by at least 150 bps this fiscal
not least for palpable benefits of economies of scale arising from higher capacity utilization at the Jalna plant. Muddled
outlook of the diesel powered four wheeler industry would restrict rapid expansion of metal forming business, which
somewhat teetered last fiscal (EBIT down by 22%) after a phenomenal expansion in FY15.
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LGB's growth strategy is not bereft of piling up capital assets - its gross block has nearly doubled in last five years. Its Jalna
project - targeted to enhance capabilities of both transmission and metal forming businesses- has already seen investments of
close of Rs 150 crs ($22.5m) in last three years. Of the Rs 80 crs ($12.0m) capex earmarked for current fiscal, Rs 30 crs ($4.5m)
would be channelized in the Jalna project and the balance would be maintenance capex. Undoubtedly, the last few years has
seen the greatest overhaul of operations since 2010-11when LGB added five plants (Manesar, Rudrapur, Kadathur, Annur) in
a year's time to boost its footprint.
Bogged down by a fragile recovery in Indian LCV segment, LGB's dealership business has sorely struggled over the years -
revenues down by two-thirds in last three years. It responded to the crisis by shutting down unviable showrooms, which
would help contain losses in case of a prolonged recovery. Effect of improving asset utilization rates would rub off on
margins and asset turnover ratios (see chart). Large operating cash flows would be deployed in either debt retirement or
maintenance capex.
The stock currently trades at 14.4x FY17e EPS of Rs 47.16 and 12xFY18e EPS of Rs 56.48. Stability in earnings underscores
impregnable effects of its large market share of Rolon brand of chains (70% in OEM segment and ~50% in replacement
market) and fine blanking technology. Relentless toil to seek higher turnover from replacement market would indeed
invigorate margins. Yet fragility of business to dramatic shifts in demand of two wheeler industry cannot be undone without
colossal transformation. On balance we upgrade the stock to buy with revised target of Rs 847 (previous target: Rs 549) based
on 15x FY18e earnings (peg ratio: 0.8), over a period of 9-12 months. For more info, refer to our Jan report.
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Risks & Concerns
Firm power cost
LGB reckons that high power cost in India acts a deterrent to low-cost manufacturing. LGB's increasing power cost (from 3% of
sales (standalone) in FY10 to 4.4% in FY16) has somewhat eroded its cost competitiveness over the last few years.
Dreary automobile sector
As the automobile sector forms a bulk of LGB's revenue, slow pick up in two wheeler sales could impact its volumes. Lower than
expected moderation in interest rates would further jeopardize resurrection in auto demand.
Margin pressure
Plethora of factors imperil margins including rising raw material costs, acute power shortages, pricing pressure by clients (read
OEMs) and import of auto components from low cost locations.
Cross Sectional Analysis
Company Equity* CMP Mcap* Sales* PAT* OPM NPM
Int
Cov. ROE
Mcap/
sales P/BV P/E EV/EBITDA
Gabriel India 14 124 1781 1467 77 8.9 5.3 45.5 20.8 1.2 4.5 23.1 13.0
LG Bala 16 677 1063 1136 62 12.3 5.4 6.4 15.4 0.9 2.5 17.2 8.6
Minda Corp 42 113 2373 2613 104 9.2 4.0 4.8 26.0 0.9 5.4 22.9 11.0
Munjal Showa 8 233 931 1516 61 7.3 4.0 360.9 13.1 0.6 1.9 15.3 7.3
*figures in crores; calculations on ttm basis Companies not truly comparable due to product dissimilarity
Note: All dollar value figures expressed in the write up are translated at current exchange rate.
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Financials
Quarterly Results -Standalone Figures in Rs crs
Q2FY17 Q2FY16 % chg. H1FY17 H1FY16 % chg.
Income from operations 309.95 281.54 10.1 574.22 528.39 8.7
Other Income 1.09 1.04 5.4 1.95 1.71 14.0
Total Income 311.04 282.58 10.1 576.17 530.10 8.7
Total Expenditure 264.42 245.63 7.6 500.27 468.17 6.9
PBIDT (other income included) 46.63 36.95 26.2 75.89 61.93 22.6
Interest 3.68 4.54 -19.0 7.61 8.83 -13.8
Depreciation 12.27 10.49 17.0 23.85 19.96 19.5
PBT 30.68 21.92 40.0 44.43 33.14 34.1
Tax 9.53 4.56 109.0 13.78 6.77 103.5
PAT 21.14 17.35 21.8 30.65 26.37 16.3
Extraordinary Item - - - - - -
Adjusted Net Profit 21.14 17.35 21.8 30.65 26.37 16.3
EPS (F.V. 10) 13.47 11.06 21.8 19.53 16.80 16.3
Segment Results Figures in Rs crs
Q2FY17 Q2FY16 % chg. H1FY17 H1FY16 % chg.
Segment Revenue
Transmission 245.09 222.50 10.2 449.15 416.25 7.9
Metal forming 51.71 47.25 9.4 99.09 89.20 11.1
Others 13.15 11.79 11.6 25.97 22.94 13.2
Total 309.95 281.55 10.1 574.22 528.39 8.7
Segment EBIT
Transmission 29.64 20.05 47.8 42.04 33.55 25.3
Metal forming 3.95 4.99 -20.7 9.40 8.10 16.1
Others 1.39 2.25 -38.2 2.24 1.71 30.9
Total 34.98 27.29 28.2 53.68 43.35 23.8
Interest 3.68 4.54 -19.0 7.61 8.83 -13.8
Unallocable exp 0.62 0.83 -24.6 1.64 1.39 18.6
PBT 30.68 21.92 40.0 44.43 33.14 34.1
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Financials
Income Statement - Consolidated Figures in Rs crs
FY14 FY15 FY16 FY17e FY18e
Income from operations 1108.56 1172.98 1205.30 1343.91 1520.39
Growth (%) 15.9 5.8 2.8 11.5 13.1
Other Income 4.60 8.80 3.92 3.83 4.25
Total Income 1113.16 1181.78 1209.22 1347.74 1524.64
Total Expenditure 982.42 1030.70 1067.63 1173.13 1326.91
EBITDA (other income included) 130.74 151.08 141.60 174.61 197.73
Interest 17.90 17.70 17.89 17.25 14.18
EBDT 112.84 133.38 123.71 157.37 183.55
Depreciation 32.79 39.47 45.93 50.68 55.87
Tax 14.90 20.49 12.92 32.00 38.30
Net profit 65.15 73.42 64.86 74.68 89.37
Minority interest 3.24 2.79 2.28 1.56 1.64
Associate profit 0.93 0.58 0.91 0.91 0.91
Net profit after MI&AP 62.84 71.21 63.50 74.03 88.65
Extraordinary item 2.77 5.24 0.13 - -
Adjusted Net Profit 60.07 65.97 63.37 74.03 88.65
EPS (Rs.) 38.26 42.03 40.37 47.16 56.48
Segment Results Figures in Rs crs
FY14 FY15 FY16 FY17e FY18e
Segment Revenue
Transmission 729.50 799.78 859.47 954.01 1087.57
Metal forming 165.95 184.60 180.91 202.62 228.96
Others 213.11 188.61 164.93 187.28 203.86
Net sales 1108.56 1172.98 1205.30 1343.91 1520.39
Segment EBIT
Transmission 73.93 77.85 68.81 90.63 104.41
Metal forming 15.32 23.29 18.14 21.27 24.04
Others 8.70 3.87 8.71 12.02 13.41
Sub Total 97.94 105.00 95.67 123.93 141.86
Unallocable income 0.00 6.61 - - -
Interest 17.90 17.70 17.89 17.25 14.18
PBT 80.04 93.91 77.78 106.68 127.68
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Consolidated Balance Sheet Figures in Rs crs
FY14 FY15 FY16 FY17e FY18e
SOURCES OF FUNDS
Share Capital 7.85 15.70 15.70 15.70 15.70
Reserves 299.89 348.95 400.60 461.41 534.94
Total Shareholders Funds 307.74 364.65 416.30 477.10 550.64
Minority Interest 9.66 12.79 15.32 16.88 18.52
Long term debt 65.99 99.31 94.88 69.77 56.60
Total Liabilities 383.39 476.74 526.49 563.75 625.75
APPLICATION OF FUNDS
Gross Block 486.13 586.02 691.35 761.35 811.35
Less: Accumulated Depreciation 231.41 270.01 310.79 361.48 417.34
Net Block 254.72 316.01 380.56 399.88 394.01
Capital Work in Progress 9.04 36.54 10.22 10.00 5.00
Investments 17.03 17.60 18.52 19.43 20.34
Current Assets, Loans & Advances
Inventory 207.52 230.55 227.88 232.44 248.71
Sundry Debtors 146.10 146.55 152.52 167.78 187.91
Cash and Bank 6.50 7.33 8.04 6.83 9.67
Other Assets 13.80 24.05 35.06 36.83 40.34
Total CA & LA 373.92 408.48 423.51 443.87 486.63
Current liabilities 282.08 305.23 313.19 314.42 284.28
Provisions 6.43 7.18 2.03 3.92 5.81
Total Current Liabilities 288.51 312.41 315.22 318.34 290.09
Net Current Assets 85.41 96.07 108.29 125.53 196.54
Net Deferred Tax (net of liability) -16.99 -16.51 -18.49 -20.08 -20.98
Other Assets (Net of liabilities) 34.17 27.03 27.39 28.99 30.85
Total Assets 383.39 476.74 526.49 563.75 625.75
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Cash Flow Statement Figures in Rs crs
FY15 FY16 FY17e FY18e
Net Income (a) 73.42 64.86 74.68 89.37
Non cash exp. & others (b) 33.19 48.25 51.67 56.08
Depreciation 39.47 45.93 50.68 55.87
Profit / loss on sale of assets -6.70 -0.15 0.00 0.00
Others 0.43 2.47 0.99 0.21
(Increase) / decrease in NWC (c) -23.84 -13.67 -14.45 -29.97
Inventory -23.03 2.67 -4.56 -16.27
Debtors -1.32 -5.73 -15.25 -20.13
Long term loans & advances 3.06 -3.82 0.60 -1.76
Trade payables & others -2.54 -6.79 4.76 8.19
Operating cash flow (a+b+c) 82.78 99.44 111.90 115.49
Proceeds on sale of assets 7.78 0.49 - -
Purchase of fixed assets -104.77 -84.06 -79.31 -45.00
Investments - - - -
Others 0.61 1.25 0.60 0.69
Investing cash flow (d) -96.38 -82.32 -78.71 -44.31
Net borrowings 26.95 0.67 -23.08 -55.11
Dividends paid -12.45 -16.62 -11.34 -13.22
Issue of shares - - - -
Financing cash flow (e) 14.50 -15.95 -34.41 -68.33
Net change (a+b+c+d+e) 0.90 1.17 -1.22 2.84
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Key Financial Ratios
FY14 FY15 FY16 FY17e FY18e
Growth Ratios
Revenue (%) 15.9 5.8 2.8 11.5 13.1
EBIDTA (%) 40.2 13.4 -2.0 23.5 13.2
Net Profit (%) 94.7 9.8 -3.9 16.8 19.7
EPS (%) 94.7 9.9 -3.9 16.8 19.7
Margins
Operating Profit Margin (%) 11.4 12.1 11.4 12.7 12.7
Gross Profit Margin (%) 9.9 10.8 10.3 11.7 12.1
Net Profit Margin (%) 5.6 5.8 5.4 5.6 5.9
Return
ROCE (%) 17.7 16.6 14.1 14.2 15.5
RONW (%) 22.4 20.6 16.9 17.2 17.8
Valuations
Market Cap / Sales 0.3 0.7 0.6 0.8 0.7
EV/EBIDTA 3.6 7.2 6.0 7.1 6.2
P/E 5.3 13.1 10.8 14.4 12.0
P/BV 1.1 2.5 2.7 2.3 2.0
Other Ratios
Interest Coverage 5.3 5.9 5.3 7.2 10.0
Debt-Equity Ratio 0.5 0.5 0.4 0.3 0.2
Current Ratio 1.3 1.3 1.3 1.4 1.7
Turnover Ratios
Fixed Asset Turnover 4.8 4.3 3.6 3.6 4.0
Total Asset Turnover 3.1 2.8 2.5 2.5 2.6
Debtors Turnover 8.2 8.0 8.1 8.4 8.5
Inventory Turnover 4.9 4.7 4.7 5.1 5.5
Creditors Turnover 7.4 6.3 5.7 6.1 6.7
WC Ratios
Debtor Days 44.5 45.5 45.3 43.5 42.7
Inventory Days 75.0 77.6 78.4 71.6 66.2
Creditor Days 49.3 58.4 63.8 59.7 54.6
Cash Conversion Cycle 70.1 64.7 59.9 55.4 54.3
Cash Flows (Rs crs)
Operating Cash Flow 82.8 99.4 111.9 115.5
FCFF 0.2 32.0 45.3 81.1
FCFE 13.3 17.8 10.1 16.1
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Cumulative Financial Data Figures in Rs crs FY13-14 FY15-16 FY17-18e
Income from operations 2065 2378 2864
Transmission revenues 1360 1659 2042
Metal forming revenues 323 366 432
Transmission to total (%) 66 70 71
Transmission EBIT 131 147 195
Transmission EBIT margin (%) 9.6 8.8 9.6
Operating profit 215 280 364
EBIT 156 200 266
PBT 115 165 234
PAT 91 129 163
Dividends 18 25 28 OPM (%) 10.4 11.8 12.7
NPM (%) 4.5 5.6 5.7
Interest coverage 3.8 5.6 8.5
ROE (%) 17.4 18.7 17.4
ROCE (%) 15.4 15.5 14.9
Debt-equity ratio* 0.5 0.4 0.2
Fixed asset turnover 4.7 3.9 3.8
Total asset turnover 3.1 2.7 2.5
Debtors turnover 8.1 8.0 8.4
Inventory turnover 4.6 4.8 5.2
Creditors turnover 7.2 6.2 6.4
Debtors days 45.1 45.8 43.4
Inventory days 79.1 75.7 69.6
Creditor days 51.0 58.5 57.4
Cash conversion cycle 73.1 63.1 55.6
Dividend payout ratio (%) 18.7 18.2 17.4
FY13-14 implies two years ending fiscal 14; *as on terminal year;
Recovery in two-wheeler demand has reinvigorated most auto component makers who have been affected by a dramatic
slowdown in domestic two- wheeler industry. LG Balakrishnan was no exception for it reported an average annual sales
growth of 8.3% in its transmission business (replacement sales included) in last four years when domestic two wheeler industry
grew by a mere 5.3%; yet bettering its four wheeler industry reliant metal forming business whose revenues rose by 3.5%. But
recent buoyancy in domestic motorcycle dispatches (12.7% in Apr-Sep 16 period) has doubtless buttressed estimates -
cumulative sales in FY17-18e period projected to jump by 20.4% to Rs 2864 crs (see table) from the preceding two years.
Thanks to higher volumes, margins would plump too - 12.7% in FY17-18e period from 11.8%, thus perceptibly boosting
earnings. Most pertinently, transmission business cumulative EBIT would increase by a third to Rs 195 crs in FY17-18 period,
galvanizing EBIT margins (which had come off a lot from the peak in last few years) by some 80 bps to 9.6%. Yet lower asset
turnover ratios would hinder rise in return on capital ratios - ROE estimated to decline by nearly 130 bps to 17.4%. Noticeable
debt retirement in the next two years would manifest itself in sharp rise in interest coverage ratio.
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Financial Summary – US dollar denominated
million $ FY14 FY15 FY16 FY17e FY18e
Equity capital 1.3 2.5 2.4 2.4 2.4
Shareholders’ funds 48.6 55.8 60.3 69.1 80.1
Total debt 25.0 28.3 26.8 23.2 15.0
Net fixed assets (incl CWIP) 41.7 54.2 56.8 59.4 57.7
Investments 2.8 2.8 2.8 2.9 3.0
Net current assets 14.2 15.3 16.3 18.8 29.5
Total assets 61.6 74.1 77.3 82.4 91.7
Revenues 183.2 191.8 184.1 201.4 227.9
EBITDA 21.0 23.6 21.6 26.2 29.6
EBDT 18.1 20.7 18.9 23.6 27.5
PBT 12.7 14.3 11.9 16.0 19.1
Profit after MI & asso. profit 9.9 10.8 9.7 11.1 13.3
EPS($) 0.63 0.69 0.62 0.71 0.85
Book value ($) 3.1 3.6 3.8 4.4 5.1
Operating cash flow 13.2 15.0 16.8 17.3
Investing cash flow -15.4 -12.4 -11.8 -6.6
Financing cash flow 2.3 -2.4 -5.2 -10.2
income statement figures translated at average rates; balance sheet and cash flow at year end rates; projections at current rates All dollar denominated figures are adjusted for extraordinary items.
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CD Equisearch Private Limited (CIN: U67120WB1995PTC071521)
Registered Office: 37, Shakespeare Sarani, 1st Floor, Kolkata – 700 017; Phone: +91(33) 4488 0000; Fax: +91(33) 2289 2557 Corporate Office: 10,
Vasawani Mansion, 2nd Floor, Dinshaw Wachha Road, Churchgate, Mumbai – 400 020. Phone: +91(22) 2283 0652/0653; Fax: +91(22) 2283, 2276
Website: www.cdequi.com; Email: [email protected]
buy: >20% accumulate: >10% to ≤20% hold: ≥-10% to ≤10% reduce: ≥-20% to <-10% sell: <-20%