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Infrastructure February03,2014
SobhaDevelopers
Bloomberg:SOBHAINReuters:SOBH.BO BUY
InstitutionalEquities
IndiaResearch
RESULTREVIEW
Recommendation
CMP: Rs277
TargetPrice: Rs460
PreviousTargetPrice: Rs460
Upside(%) 66%
StockInformationMarketCap.(Rsbn/US$mn) 26/416
52weekHigh/Low(Rs) 498/213
3mADV(Rsmn/US$mn) 51/0.8
Beta 0.9
Sensex/Nifty 20,514/6,090
Shareoutstanding(mn) 98
StockPerformance(%)1M 3M 12M YTD
Absolute (14.7) (14.9) (38) (14.7)
Rel.toSensex (12) (12.2) (39.9) (12)
Performance
Source:Bloomberg
AnalystsContactParikshitKandpal
02261844311
VarunChakri Associate
02261844326
200250300350400450500
15,500
17,500
19,500
21,500
23,500
Jan13
Feb
13
Apr13
May13
Jun13
Aug13
Sep13
Oct13
Dec13
Jan14
Sensex (LHS) SOBHA
NomajorsurprisesSobhaDevelopersLtd. (SDL)delivered inline3QFY14performance,with
higherthanexpectedrevenueandinlineEBIDTAandnetprofits.Theonly
disappointment was on presales guidance which was lowered largely
attributed to delay in receiving approvals. Despite this we maintain our
BUY ratingwithNAVbased targetpriceofRs460/shareowing to (i)new
upcoming launches of 11mn sqft (iii) healthy balance sheet & (iv) SDLs
strongcompetitivepositioning.
3QFY14quarterlyperformancelargelyinline
During
3QFY14
Sobha
Developers
(SDL),
Sales,
EBIDTA
and
net
profit
grew
26.6%, 8.4%, 10.5% respectively YoY. Whilst Revenue was higher than our
estimateby5.9%,EBIDTA&NetProfitwasaheadofourexpectationby0.3%
and (1.2%)respectively.Revenue fromcontractualprojectsdeclined to26%
(from 32% during 2QFY14, ~15% EBIDTA margins) inline with last 8Q
average26%revenueshare.Thisresulted inEBIDTAmarginsexpansionof
88bps QoQ. Real estate development contributed 74% to revenue with
~31.8%EBIDTAmarginswhichwas lowervs2QFY14marginsof34%.SDL
reported Net profit of Rs581mn which was inline with our estimate of
Rs588mnandgrowthof10.8%YoY.
Strongbalancesheetrecoveryaugurswellforgrowth
SDLhas
de
leveraged
its
balance
sheet
from
1.95x
net
debt/equity
end
FY08
to0.6xendFY13, thanks toaQIP inJune2009andstrongoperationalcash
flows. Weexpect furtherreduction in thenet debt/equityratio to0.5x over
FY1415E as we forecast stable IT/ITESdriven housing demand. As of
3QFY14 end net debt/equity stands at 0.57x, largely unchanged from the
2QFY14balancesheet.
MaintainBUY:TargetpriceRs460/shareWe maintain our BUY stance with SOTPbased target price of Rs460/share.
WevaluetherealestatebusinessatRs431/shareusingaNAVmodelandthe
contracting and manufacturingbusiness (C&M) at Rs29/share. Webelieve
that theneartermcatalystsare: (i)strong launchpipelineand (ii) focuson
furtherbalance
sheet
de
leveraging
(iii)
healthy
cash
flows.
Key
risks
(i)
An
oversupply may lead to a 810% realty price; (ii) liquidity tightening could
increaseborrowingcostsby150200bpsloweringourNAVby6%.
KeyFinancial Consolidated
Y/EMar(Rsmn) FY11 FY12 FY13 FY14E FY15E
Operatingincome 13,945 14,079 18,645 20,705 25,260
EBITDA 3,600 4,666 5,483 5,879 7,549
EBITDA(%) 25.8 33.1 29.4 28.4 29.9
Netprofit 1,861 2,136 2,214 2,382 3,561
EPS(Rs) 18.8 21.4 22.1 24.3 36.3
RoE(%) 10.4 10.9 10.5 10.7 14.6
P/E(x) 14.7 12.9 12.5 11.4 7.6
P/BV(x) 1.5 1.4 1.3 1.2 1.1
Source:Company,KarvyInstitutionalResearch
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February03,2014
SobhaDeveloper
3QFY14performancelargelyinline
During3QFY14SobhaDevelopers (SDL),Sales,EBIDTAandnetprofitgrew26.6%, 8.4%, 10.5% respectively YoY. Whilst Revenue was higher than our
estimateby5.9%,EBIDTA&NetProfitwasaheadofourexpectationby0.3%
and(1.2%)respectively.
Revenuefromcontractualprojectsdeclinedto26%(inlinewithlast8Qaverage26% revenue share, ~15% EBIDTA margins contribution) from 32% during
2QFY14. This resulted in EBIDTA margins expansion of 88bps QoQ. Real
estatedevelopmentcontributed74%torevenuewith~31.8%EBIDTAmargins
which was lower vs 2QFY14 margins of 34%.Sharp increase in construction
expensesandsubcontractorcharges97.3%&82.6%YoYrespectivelyresulted
inlimitedbenefitsonaccountofincreasingrealizations.
SDL reported Net profit of Rs581mn which was inline with our estimate ofRs588mnandgrowthof10.8%YoY.
SDL reported strong collections of Rs6.5bn whilstbeing neutral on net cashflow position at (Rs457mn). We expect pick up in collections with new
launchesof~3mnsqfthittingin4QFY14E(~2mnsqftinBangalore&~1mnsqft
in rest of India) and~11mn sqft over next1215M. SDL incurred Rs280mn of
CAPEXonallcommercialassetsputtogetherduring9MFY14.
Whilsttherevenuewasaheadofestimate,EBIDTAandPATwereinlinewithour
expectations.TherewasanincreaseindebtorsbyRs361mnQoQ.Netdebt/equity
remained at 0.57x and Net debt levels increasedby Rs349mn QoQ. During the
quarterSDLreported 0.74mnsqft of newsales translating intoanorderbook of
Rs5,023mn which was dismal owing to limited new launches on delayed
approvals. SDL has revised its annual guidance of 4.2mn sqft in presales and
Rs26bn in sales value downward whilst highlighting it willbebetter than FY13.WeexpectSDLtonowbookpresaleofRs24.5bnandsalesvolumeof~3.8mnsqft.
Exhibit1:3QFY14resultsperformanceRsmn 3QFY13 2QFY14 3QFY14 YoY% QoQ%
Netsales 4,298 5,408 5,443 26.6 0.6
Expenses 2,924 3,975 3,953 35.2 (0.6)
(Increase)/Decinstockintrade (1,524) (919) (1,844)
LandPurchaseCost 1,316 459 1,043 (20.7) 127.2
ConstructionExps 221 420 436 97.3 3.8
RawMaterialExps 1,261 1,623 1,725 36.8 6.3
Subcontractor&Labourcharges 788 1,336 1,439 82.6 7.7
EmployeeExpenses 397 408 503 26.7 23.3
Otherexpenses 465 648 651 40.0 0.5
EBITDA 1,374 1,433 1,490 8.4 4.0
EBITDAmargin(%) 32.0 26.5 27.4 (459) 88Depreciation 153 172 172 12.4
EBIT 1,221 1,261 1,318 7.9 4.5
Interestexpense 439 434 446 1.6 2.8
Otherincome 15 37 12 (20.0) (67.6)
Profitbeforetax 797 864 884 10.9 2.3
Tax total 271 298 301 11.1 1.0
Netprofit 526 566 583 10.8 3.0Minority
intt/associates
2Netprofitafterpriorperioditems 526 566 581 10.5 2.7
Source:Company,KarvyInstitutionalResearch
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February03,2014
SobhaDeveloper
Salesvolumesdismal Volumesdegrew26.2%QoQand18%YoY
Despiteaseasonallystrongquarter(festive)SDLhasreportedvolumedegrowth
of 26.2% QoQ and 18% YoY. The new launches viz. Elan, Coimbatore (JD with
Lakshmi Machine Works) with saleable area of 0.32mn sqft and Sobha Estate,
Mysore
(plotted
development)
with
saleable
area
of
0.13mn
sqft
didnt
add
up
muchtothepresalesnumbers.Thekeyhighlightsof3QFY14are
Bangalore witnessed a degrowth of 14.8% YoY, absence of new launches
impactedpresales
NCRsawasharpdecelerationofnewsalesdown77.2%YoY.Thisispartially
attributable to unaffordability in NCR market and partially on account of
projectconfiguration.
Almost all regions contributed negatively to sales volume YoY, except for
PuneandMysore.
Averagerealization/sqft
grew
14.8%
YoY,
which
partially
allayed
shortfall
in
sales
volume.During9MFY14,SDLrecordednewsalesof2.66mnsqftwithsalesvalue
of Rs17.37bn a growth of (0.8%) and 12.8% YoY. Company highlighted that a
lackluster 3QFY14 makes it cautious to achieve full year presales value and
volume guidance of Rs26bn and 4.2mn sqft respectively. SDL has ~11mn sqft of
new launches planned for CY14E (SDLs share ~8.7mn sqft, ~3mn sqft planned
during4QFY14E~2mnsqft inBangalore&1mnsqft inGurgaon,Kozhikode&
Coimbatore), lending visibility to new sales. We believe that main reason for
guidancedowngrade is largelyattributable todelayedapprovalsandhencemay
notbeamajorcauseofconcern.SDLhighlightedthattheystillmaintaintargetof
~1mn+ in presales as quarterly runrate contingent to timely approvals and
indicated
thatJan
14
has
been
the
best
month
with
Gurgaon
sales
picking
up
besidesotherGeographiesalsocontributing.Thisbuildsmomentumfor4QFY14E
beingastrongpresalesquarter forSDLwithsalesexceeding the~1mn+sqft.We
expect SDL to now book FY14E presale of Rs24.5bn and sales volume of
~3.8mnsqft.
Exhibit2:SalesvolumeandrealizationSalesData 3QFY13 2QFY14 3QFY14 YoY% QoQ% 9MFY14 9MFY13 YoY%
Volumes(sqft):
Bengaluru 591,216 674,622 503,708 14.8 25.3 1,781,385 1,701,734 4.7
Thrissur 88,407 103,270 49,064 44.5 52.5 301,528 250,809 20.2
Chennai
67,350 86,869 53,523
20.5
38.4 240,355 181,756 32.2Coimbatore 19,574 15,871 17,124 12.5 7.9 32,995 56,210
Pune 23,124 12,716 24,433 5.7 92.1 60,061 92,384
NCR 103,098 30,892 23,522 77.2 23.9 90,669 376,419
Kozhikode 56,661 42,293 98,954
Mysore 9,881 22,128 26,538 168.6 19.9 57,966 25,065
Total 902,650 1,003,029 740,205 18 26.2 2,663,913 2,684,377 0.8
5,910 6,304 6,786 14.8 7.6 6,522 5,738AveragePrice
realisation(Rs/sf)
SalesValue(Rsmn) 5,335 6,323 5,023 5.8 20.6 17,375 15,403 12.8
Source:Company,KarvyInstitutionalResearch
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February03,2014
SobhaDeveloper
Netdebt/equityremainsunchangedat0.57x
SDLnetD/Ehasremainedunchangedat0.57xandwhilsttheabsolutenumberhas
grown. We expect leverage should remain stable in the 050.6x band. During
9MFY14, SDL generated positive CFO of Rs4,202mn which was offsetby cash
outflowsof
Rs2,022mn
towards
financing
and
Rs3,012mn
towards
investing.
This
resultedinnetcashoutflowofRs832mnandresultantincreaseinthedebtlevels.
Asof9MFY14NetdebtstoodatRs13.03bnwhich isan increase indebt levelsof
Rs820mnasof4QFY13end.
Exhibit3:DebtandnetD/Emovement
Source:Company
CapexmaybeslowduringFY14EandFY15E
During 3QFY14/9MFY14, SDL incurred a commercial asset Capex of
Rs82mn/Rs280mn largely towards the APMC project and Shopping Mall at St
MarksRoad. SDL is yetawaiting DetailedProject Reporton the APMC project
whichmaytake9Mtocomeandpostthat1yrmaygotowardspiling/foundations
work.Theconstructionwillstartfrom1QFY16EhencetheCAPEXintensitywillbe
lowandwillgetdilutedbyhighercashflowsovertheFY1618Eperiod.
0.52
0.54
0.56
0.58
0.6
0.62
0.64
8
9
10
11
12
13
14
1QFY13 2QFY13 3QFY13 4QFY13 1QFY14 2QFY14 3QFY14
Debt NetD/E(x)
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February03,2014
SobhaDeveloper
InvestmentRationale
Bestplacedamongstpeers
Ashighlighted
in
the
thematic
section
of
the
note,
SDL
is
best
placed
amongst
the
Southernpeersonaccountofitssuperiorlandbankqualityandquantity,accessto
finance, healthy balance sheet & successful foray outside home location in
Gurgaon. The macro factors are well supportedby conducive Southern markets
whichremaindemandhealthyandaffordable.Wehighlightourfindinginexhibit
4toarriveatoverallcompetitivepositioning.
Exhibit4:OverallcompetitivepositioningofrealestatedevelopersMacro
Competitive
30%weight
Business
Competitive
25%weight
Landbank
&Pricing
20%weight
Balance
Sheet
positioning
25%
weight
Overall Comments
Sobha
Sobha is the best positioned on strong balance sheet
positioning,highbrand recalland superior landbank.We
rateitatopquartile
Prestige
PrestigeEstatesscoreswellonexecutionandbrandrecall.It
scoreswellontheJDAstrategyoflandacquisition.AMid
quartileinmostoftheparameters
Puravankara
Amidquartileonallparameters.Expecteddeleveragingof
balance sheet through OFS route shall further strengthen
competitivepositioning
Mantri Amidquartilewithstrongbrandrecallinsouthernmarkets
Brigade Brigadeseemsmiddling
Source:KarvyInstitutionalResearch;Note: Strong; RelativelyStrong; Average; RelativelyWeak WeakOn overall competitive positioning, we find that the top real estate playersincludeSobha,Prestige&PuravankarainSouthernmarkets.SDLwiththerightmix of branding, execution capability, balance sheet strength and underlyingbusinessfundamentals remainsbestpoisedamongst thepeers.Notwithstandingtheir
scores
differ
on
these
factors
we
see
limited
differentiation
on
an
overall
basis.
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February03,2014
SobhaDeveloper
ValuationNAVtargetofRs460/share
SOTPValuation
We
maintain
our
BUY
rating
on
SDL
with
a
SOTPbased
target
price
of
Rs460/share.WevaluetherealestatebusinessatRs431/shareandthecontracting
andmanufacturingbusiness(C&M)atRs29/share.Weusethenetprofitforecasts
ofthecontractingandmanufacturingsegmentandvaluethesebusinessesat6x&
8xFY15EEPSrespectively,inlinewiththeconstructionsectorvaluationmultiples.
Exhibit7:SumofthepartsRsmn Rs/share Comments
ResidentialNAV 42,293 431Valuationat0.7xFY14ENAV
(seeexhibit8)
Cashcontractingbusiness 1,834 19 At6xFY15EP/E
Manufacturingbusiness 986 10 At8xFY15EP/E
Total 45,113 460
Source:KarvyInstitutionalResearchRealestatedevelopmentNAVcalculationmethodology
WehavedividedSDLsentirelandbankintoresidentialprojects(basedontheinformationgivenbythecompany)
Wehavearrivedatthesaleprice/sq ft.and theanticipatedsalesvolumesforeachprojectbasedonourdiscussionswithindustryexperts
We have deducted the cost of construction based on our assumed costestimateswhichhavebeenarrivedatafterdiscussionswithindustryexperts
We have further deducted marketing and other costs which have beenassumedat5%ofthesalesrevenue
Wehavethendeductedincometaxbasedonthetaxapplicablefortheproject Theresultantcashinflowsattheprojectlevelhavebeendiscountedbasedon
WACCof17%(costofequity21.3%basedonbetaof1.9,costofdebt15%&
debt/equityratioof0.6x).AlltheprojectlevelNAVshavethenbeensummed
uptoarriveattheNAVofthecompany
From the NAV, we have deducted the net debt as of FY14E to arrive at thefinalvaluationofthecompany.
NAVcalculationBasedon the methodology above wearrive at SDLs grossNAVof Rs73,029mn.
Wefurther
make
adjustments
for
the
value
of
net
debt
as
at
end
March
2014
and
incorporateNAVdiscountof30%toarriveatSDLsNAV/shareofRs431.
Exhibit8:NAVcalculationRsmn Comments
GrossNAV 73,029NAVbasedonthemethodologyabove
(seetableontheleftfordetails)
Lessnetdebt 12,610 NetdebtasonMarch2014E
NAV 60,419
Sharesoutstanding(mn) 98 AsofDec2013
RNAV/share(Rs) 616
DiscounttoNAV(%) 30
NAV/share(Rs) 431
Source:KarvyInstitutionalResearch
NAVbylocation
LocationGrossNAV
(Rs mn) %
Bangalore 41,130 56.3
Chennai
10,846
14.9
Kochi 6,293 8.6
Hosur 4,779 6.5
Pune 2,933 4.0
Coimbatore 1,434 2.0
Mysore 386 0.5
Thrissur 1,620 2.2
Gurgaon 3,112 4.3
Calicut 498 0.7
Total 73,029 100
Source:KarvyInstitutionalResearch
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February03,2014
SobhaDeveloper
Keyvaluationassumptions
Inexhibit9wehighlightoursalesandcostinflationforecasts.Weexpectproperty
price
appreciation
in
line
with
WPI
inflation
i.e.
5%.
We
forecast
other
costs
includingmarketing,SGAandemployeescostsat5%ofsales.
Exhibit9:BasecaseassumptionsDiscountrate 17%
Annualrateofinflationsalesprice 5%
Annualrateofinflationcostofconstruction 5%
Othercostsmarketing,SGA,employeecost(as%ofsales) 5%
Taxrate(%) 33%
Source:KarvyInstitutionalResearch
In
the
exhibit
10
we
highlight
our
sale
price
and
construction
cost
forecasts.
Our
pricing assumptions are moderate and at a 1020% discount to the current
prevailingprices.
Exhibit10:BasepropertypriceandconstructioncostassumptionsLocation Saleablearea Prices Cost
mnsqft Rs/sqft Rs/sqft
Bangalore 85.3 4,450 2,400
Mysore 2.6 2,150 1,500
Pune 5.3 4,500 2,200
Chennai 38.1 4,250 2,200
Kochi
48.4 3,450 1,900Hosur 34.8 2,200 1,300
Thrissur 5.6 3,500 2,200
Coimbatore 6.0 3,500 2,200
Gurgaon 4.3 7,450 3,425
Calicut 1.0 3,450 1,800
Total 231
Source:KarvyInstitutionalResearch
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February03,2014
SobhaDeveloper
Keycatalysts
Successofnewlaunches
SDLhas
unsold
inventory
of
7.3mn
sqft
as
of
3QFY14
and
has
planned
11mn
sq
ft
ofnew launchesovernext1215Mwith45%of the launchesat locationsoutside
Bangalore (viz. Chennai, Cochin and Calicut). In addition to the launches above
SDLplanstodevelop270acresofexistinglandbankadmeasuring21mnsqftover
thenext1to3years.WhilstweforecasttheFY14Esalesrunratefromtheexisting
projectstobemaintainedat~1.8mnsqft,webuild in~2.0mnsqftadditionfrom
proposedlaunchesinnewlocations.
Changeinlaunchmixmayresultinmarginexpansion
SDLs project launch prices in new markets (viz. Chennai, Cochin, NCR and
Calicut) will result in better realization as property prices have seen sharp
recoveryin
these
markets
over
FY12
13.
Besides
Bengaluru
continues
to
do
well
withpricessurpassingtheirFY08peak.
KeyriskstoourBUYstance
OversupplyintheSouthernmarketmayresultinpropertyprice
correction
High unsold real estate inventory and aggressive launch plans (4x of what they
havelaunchedoverpast23years)oftheSouthernrealestatedevelopersmaylead
toanoversupplysituationintheSouthernrealestatemarket.Whilstaffordability
in
South
is
still
reasonable
an
oversupply
situation
can
lead
to
a
0
5%
price
correction. This drop in realization couldbe margin dilutive, more so with high
input costs. Hence this may result in sharp financial and stock price
underperformance. For every 1% correction inbase residential prices our NAV
estimateforSDLwillbenegativelyimpactedby3%.
Liquiditytighteningmayresultincashflowpressures
The tightened liquidity scenario has led to developers evaluating current
repayment needs versus new launches. Hence cash flows from existing projects
maybeutilizedforretiringdebtratherthanreinvestmentinnewprojectlaunches.
The sustained liquidity tightening may impact new launches and thereby the
momentum
in
cash
flows.
Whilst
this
is
a
generic
risk
for
the
sector,
SDL
is
relativelyneutrallyimpactedasbalancesheetremainsstrong.
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InstitutionalEquitiesTeam
Rangachari
Muralikrishnan
HeadInstitutionalEquities /
Research
/Strategy
+91
22
61844301
K.AnantRao Head SalesTrading&Derivatives +912261844303 [email protected]
INSTITUTIONALRESEARCH
Analysts Industry/Sector DeskPhone EmailID
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Kadam
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Forfurtherenquiriespleasecontact:[email protected]
Tel:+912261844300
DisclosuresAppendix
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The following analyst(s),who is (are)primarily responsible for this report, certify (ies) that the views expressedherein
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compensationwas,isorwillbedirectlyor indirectlyrelatedtothespecificrecommendation(s)orviewscontained inthis
researchreport.
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