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Investor’s Eye Stock Update

Sharekhan October 27, 2016 Home Next1

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Index

w Stock Idea >> NBCC (India)

w Stock Update >> Maruti Suzuki India

w Stock Update >> Hero MotoCorp

w Stock Update >> Bajaj Finance

w Stock Update >> Emami

w Stock Update >> PI Industries

w Stock Update >> Supreme Industries

w Stock Update >> Thomas Cook (India)

w Stock Update >> TVS Motor Company

w Stock Update >> Inox Leisure

w Stock Update >> Firstsource Solutions

Investor’s Eye Stock Idea


Key points

w A unique business model with strong moat and a huge opportunity: NBCC (India), a Navratna public sector enterprise, is favourably placed in the construction space due to its asset light business model and quasi monopoly positioning. What’s more, currently it is sitting comfortably on a huge order backlog (12x its FY2016 revenue) and the future outlook is much brighter. NBCC is notified as a Public Works Organization (PWO), which gives it unique eligibility to bag orders on nominated basis from government departments and PSUs, as per the revised General Financial Rules (GFR). This gives NBCC a unique competitive advantage over its peers. The company takes up Project Management Consultancy (PMC) orders (~90% of order book) on a cost-plus basis (low risk) and operates on an extremely asset light model. In the PMC segment, it conceptualises and monitors projects but subcontracts the construction work to other construction companies. Therefore, with minimal capital requirement, NBCC’s business is scalable and has the potential to generate high returns.

w Large order book in sight; redevelopment opportunity adding to its muscle: NBCC has already amassed a huge order book of Rs71,000 crore (12x its FY2016 revenue), which gives it a strong revenue visibility for the next five years. But, the most interesting aspect is that the future prospects look much brighter given the opportunities from multiple areas: redevelopment of old government colonies in Delhi, Rajasthan & Odisha, development of government lands, Smart Cities, ‘Housing for All 2022’, ‘Amrut’ etc. NBCC is also nominated as the land management agency for the disposal of land assets belonging to the sick PSUs. We believe the business opportunity from redevelopment is adding significant muscle to the company’s future inflow pipeline. New Delhi has ~30 government colonies, out of which only seven have been considered for redevelopment till now. Apart from the PMC business, NBCC is also into Real Estate and EPC businesses. It has 180 acres of land bank (50 acres under development) having sales potential of Rs5,000 crore with an estimated development cost of Rs1,800 crore.

w Exceptional financials with highly capital efficient model; Buy: NBCC enjoys a unique competitive advantage (thanks to PWO status) and operates with a low-risk, cost-plus business model for its PMC business. Moreover, its alluring asset light business model enables NBCC to generate high return ratio (RoCE of ~35%, RoE of ~25%). The healthy cash flow generation and net cash positive balance sheet add to its financial strength. Given the strong visibility, we expect NBCC’s earnings to grow at a CAGR of ~30% during FY2016-FY2019E and continue to add value for shareholders with high returns and cash generation on its already net cash positive balance sheet. Therefore, we initiate ‘Buy’ on NBCC with a 12-month price target (PT) of Rs340, based on 30x FY2019E.

w Key risks: Any unfavourable change in policy from nomination to competitive bidding could dent order inflow outlook meaningfully.

Company details

Shareholding pattern

Price chart

Price performance

(%) 1m 3m 6m 12m

Absolute -5.9 -2.5 18.0 25.2

Relative to Sensex -4.4 -2.3 9.1 21.3

Price target: Rs340

Market cap: Rs14,280 cr

52-week high/low: Rs299/162

NSE volume: (No of shares)

10.4 lakh

BSE code: 534309

NSE code: NBCC

Sharekhan code: NBCC

Free float: (No of shares)

6.0 cr

Valuation Rs crParticulars FY2015 FY2016 FY2017E FY2018E FY2019ENet sales 4,399.8 5,838.3 7,146.9 10,446.9 13,466.8Operating profit 292.6 357.6 467.2 736.7 982.1Operating profit (%) 6.65 6.12 6.54 7.05 7.29Net profit (adjusted) 278.3 311.1 363.1 526.9 679.9Adj EPS (Rs) 4.6 5.2 6.1 8.8 11.3EPS Growth (%) 8.1 11.8 16.7 45.1 29.0P/E (x) 51.3 45.9 39.3 27.1 21.0P/BV (x) 10.7 9.5 8.3 6.9 5.6EV/EBITDA (x) 45.2 36.7 27.7 18.0 13.2RoCE (%) 33.5 34.2 37.4 45.7 48.3RoE (%) 22.5 21.9 22.5 27.8 29.5

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Promoters90%

FII1%

DIIs3%

Others6%

NBCC (India) Reco: Buy

Stock Idea

Large opportunity + asset light model = A solid investment CMP: Rs238



Company Background

NBCC (India), formerly known as National Buildings Construction Corporation is a Navratna Enterprise under the Ministry of Urban Development (MoUD). NBCC is certified with ISO 9001:2008 from the Bureau of Indian Standards in respect of Project Management & Consultancy. It operates in three areas, namely Project Management Consultancy (PMC), Real Estate Development and EPC Contracting. The company’s unique business model has made it stand out as a leader in its own right in the construction sector.

Investment Positives

Huge opportunity size & competitive advantage; simply a story of opulence

PMC business; a unique model with competitive advantage: NBCC’s key business (90% contribution to topline) is PMC, where the company acts as a consultant for construction projects for various government entities and PSUs. It charges a certain consultancy fees (7-10%) for planning, conceptualising and ensuring delivery of projects on time and as per customers’ quality requirements. The company takes up projects from government entities and after making a detailed plan, it sub-contracts the work to other construction companies. It’s a unique business model where NBCC doesn’t have to take the execution risk as well as working capital burden, as a large part of it is transferred to the sub contractors. All costs (including construction, approval expenses, litigation and raw material price escalation) are pass-through to NBCC customers. Further, most of the time it gets an advance from the contracting government entities, reducing NBCC’s capital requirement substantially.

Another interesting aspect is that NBCC enjoys a huge competitive advantage, which helps it to keep its competitors at bay. The company has been notified as PWO under revised Rule 126 (2) of GFR. As a result, government departments, PSUs and autonomous bodies can award contracts to NBCC on a nomination basis. Also, NBCC does not have to participate in competitive bids and enjoys relatively stable margins with lower risks. This gives NBCC a huge moat. Further, within the public sector space, NBCC is the only Navratna PSU having expertise in this space and an impeccable execution track record. Therefore, government departments tend to award contracts to NBCC. We see huge opportunity for NBCC going forward, which reflects in its current large order book position.

Massive orders in hand give strong visibility - simply a story of opulence: Due to the above mentioned favourable regulatory advantage, NBCC has bagged various orders from government departments and PSUs in the recent past (refer table - recent order inflow). The company is comfortably positioned with a massive order backlog of Rs71,000 crore, which is almost 12x its FY2016 revenue. A large chunk of the recent order inflows (~45% of total order book) is for redevelopment of government colonies in New Delhi. Year-to-date, NBCC has received orders worth ~Rs37,500 crore, including the redevelopment order from old government colonies. Out of the total existing orders in hand of Rs71,000 crore, ~92% consists of PMC orders (including redevelopment), while Real Estate orders account for ~5% and EPC 3%. The comfortable order book size gives high revenue visibility for the next five years with predictable margins and low risks.

Order book break-up

PMC, 92

EPC, 3 Real Estate, 5

PMC business process

Source: Company, Sharekhan Research Source: Company, Sharekhan Research



Recent order inflows

Date Particulars Rs Cr

4-Oct-16 September, 2016 1,117

20-Sep-16 ESIC 440

7-Sep-16 UGC 270

20-Aug-16 Archaeological Survey of India 120

9-Aug-16 Goa Shipyard Ltd 100

4-Aug-16 ESIC 250

4-Aug-16 July, 2016 345

18-Jul-16 Re-development of old GPRA colonies 32,835

6-Jun-16 May, 2016 1,901

5-May-16 April, 2016 133

8-Apr-16 March, 2016 227

8-Mar-16 February, 2016 131

8-Feb-16 January, 2016 2,526

27-Jan-16 Re-development of Pragati Maidan 2,149

7-Jan-16 IIT, Mandi 295

6-Jan-16 December, 2015 8,523

28-Dec-15 Permanent Township Package for Nabinagar Super Thermal Power Project

328

22-Dec-15 JPN Apex Trauma Centre (Ph-II) 3,000

10-Dec-15 Indian Culinary Institute Society 188

8-Dec-15 November, 2015 193

24-Nov-15 Re-development of AIIMS Western Campus & Ayurvigyan Nagar,

5,828

3-Nov-15 October, 2015 481

16-Oct-15 Acharya N. G. Ranga Agricultural University (ANGRAU)

126

1-Oct-15 September, 2015. 277

18-Sep-15 Ministry of Textiles, Govt. of India 197

3-Sep-15 August, 2015 387

3-Aug-15 July, 2015 541

23-Jul-15 Re-development of IIPA campus 435

2-Jul-15 June, 2015 915

26-Jun-15 Lake View Complex, DDA 1,500

10-Jun-15 MoBE between NBCC and CRECM - Amona

1-Jun-15 May, 2015 2,000

28-May-15 Department of Medical Education, Govt of Rajasthan

378

18-May-15 NAWADCO 398

8-May-15 April, 2015 1,529

Future looks brighter: The massive orders in hand are just one part of the NBCC story; the future looks much brighter with a large window of opportunities. NBCC has entered into several MoUs with various government bodies like Goa Shipyard, Archaeological Survey of India (ASI) and University Grant Commission (UGC) for various PMC projects. Apart from being nominated and

the company of preference for PMC works for several government bodies, we see redevelopment as another big opportunity with immense potential. Till date, the New Delhi government has identified seven government colonies for redevelopment [out of which three are already with NBCC (refer table - redevelopment projects in hand)], and several more are expected in the future. To get a sense of future opportunity in redevelopment, New Delhi has ~30 government colonies, out of which only seven have been considered for redevelopment till now and each project is large in size.

Redevelopment projects details

Particulars Nauroji Nagar Sarojini Nagar

Netaji Nagar

Client Ministry of Urban Development, New Delhi

Type of Complex Commercial Residential/Commercial

Residential/Commercial

Proposed area (Sq Meter)

303,000 1,952,005 897,396

Time for Completion of work (in months)

36 36 36

Project Cost (Rs cr) 2,100 9980 4267

Redevelopment adding significant muscle: Redevelopment of government properties has been identified as one of the key strategies to overcome housing shortage as well as to monetise vacant land lying with government agencies. The strategy involves optimum utilisation of existing land parcels by applying a higher Floor Area Ratio (FAR). Redevelopment of these properties ensure that shortage of housing units can be effectively tackled. This model ensures that no funding support is required from the government for redevelopment of these properties. This is done by utilising the available land as a resource and raising the funds required for meeting the project expenses through leasing of commercial office space constructed on part of the land. The land remains with the original owner ie government agency. The entire project management is taken care of by NBCC. The flats developed can be given on long-term lease (30-99 years) to PSUs/general public. The model ensures availability of a larger housing pool on the same piece of land. It also ensures that the original land owner does not have to spend its own money to develop the land.

Following the Delhi government’s redevelopment model, Orissa, Madhya Pradesh, West Bengal and Rajasthan governments have also started exploring the redevelopment potential in their states. For redevelopment works, NBCC has formed a Joint Venture (JV) with the Rajasthan state government, while it is in



discussion with the Orissa government to redevelop two properties spread over 100 acres each. Further, discussions are on with Madhya Pradesh and West Bengal governments to redevelop properties spread over 20-30 acres each. Therefore, we expect opportunities in the redevelopment space to grow multifold in the future.

Multiple initiatives to enrich future potential: Apart from the mainstay PMC projects and redevelopment works, NBCC is looking for several other ways for new opportunities from the public sector entities. Some of the initiatives are premature now but have the potential to open up huge opportunities in the future. The key initiatives worth mentioning are given below.

w MoU with Air India for land monetisation: NBCC had entered into a MoU with Air India in December 2014 to monetise Air India’s land. Under the MoU, the two companies had worked out three land development models. Each land asset had to be individually evaluated for a particular mode of monetisation.

w MoU with Indian Railways for development of stations: Under the Smart City plan, the Ministry of Urban Development and the Ministry of Railways signed a MoU to develop railway stations and adjoining areas for optimal utilisation of land at railway stations. Under this plan, 10 cities could be taken up for the proposed redevelopment with the involvement of NBCC.

w NBCC is the implementing agency for executing projects under Jawaharlal Nehru National Urban

Renewal Mission (JNNURM), Pradhan Mantri Gram Sadak Yojna (PMGSY), Solid Waste Management (SWM) and developmental work in North Eastern Region.

w NBCC has already signed MoU with NAWADCO, the Waqf Board for redevelopment work. It has already bagged development projects from Gulistan Shadi Mahal, MasjideMavalli and Dargah Hazrat Attaullah Shah (all three from Bangalore); and Takiya Chand Shah, Jodhpur (Waqf Board) across four locations worth Rs398 crore.

w Beyond the domestic market, NBCC is consistently scouting for strategic alliances with international players to tap into EPC opportunities in the overseas markets, especially in West Asia, Europe and Commonwealth of Independent States (CIS) countries. It has opened an office in Oman and has also signed a MoU with Al Naba Services LLC in order to jointly explore and secure infrastructure projects in Oman and the neighboring countries. Also, it has entered into MoUs with Construction Industry Development Board Holdings, Malaysia and Form Yapi Malzemeleri Insaat Samayi Ticaret, Turkey.

On going redevelopment works

Source: Company, Sharekhan Research



MoUs signed till date

Date Agencies Rs cr

7-Sep-16 UGC 270

20-Aug-16 Archaeological Survey of India

120

9-Aug-16 Goa Shipyard Ltd 100

22-Dec-15 JPN Apex Trauma Centre (Ph-II)

3,000

23-Jul-15 Re-development of IIPA campus

435

10-Jun-15 MoBE between NBCC and CRECM - Amona

NA

18-May-15 NAWADCO 398

Apart from the above mentioned initiatives, there are visible opportunities from multiple avenues like ‘Smart Cities’, ‘Housing for All 2022’, ‘AMRUT’, several projects under JNNURM, Real Estate projects (both residential and commercial) in tier II & III cities.

Land management agency - a new revenue stream: Recently, the Government of India has issued guidelines for the closure of sick or loss-making CPSEs, including the disposal of their movable and immovable assets. The GoI has appointed NBCC as the land management agency to manage, maintain and protect the land assets of sick CPSEs. It will be paid fees for the same till the land is disposed off. For every disposal, NBCC will be paid 0.5% of the value realised during the discarding of land, subject to maximum of Rs1 crore in each case. GoI’s efforts to utilise the idle land parcels of different sick CPSEs in a time-bound manner provide enormous business opportunities to NBCC.

contributing over 20% and 7%, respectively to PBIT on account of higher Operating Profit Margin (OPM) (especially Real Estate). Real Estate and EPC divisions have 4% and 3% share in the company’s current order book of Rs71,000 crore.

In Real Estate, the company purchases land mostly from government agencies and focuses on residential & commercial projects. NBCC focuses on project management, which involves getting required licenses & approvals, project launch and sales, and sub-contracts execution to third party players. The company has land parcels totaling 180 acres at 30 different locations across India (including Alwar, Jaipur, Kochi, Agartala, Gurgaon, New Delhi, Lucknow, Vadodara, Ahmedabad, Patna, Bhubaneswar, Meerut, Faridabad, Ghaziabad and Coimbatore), and is currently developing 50 acres of land parcels at different places. The estimated cost of land development is pegged at Rs1,800 crore, with a sales potential of Rs5,000 crore.

Internally, the management has decided that NBCC would not be launching any Real Estate project with less than 18% IRR (internal rate of return). NBCC has a constructed inventory of Rs500-600 crore (50% share in Okhla) in the Real Estate space. The structural growth catalyst for the company in Real Estate remains intact with the identification of 100 Smart Cities (first phase), Atal Mission for Rejuvenation of Urban Transformation (AMRUT) and the “Housing for All 2022” government schemes. In the EPC business, the company executes projects such as Chimneys, Cooling Towers and various types of power plants by sub-contracting work packages to small contractors.

Financial Analysis

Standing tall in terms of order book; high visibility going forward: NBCC’s order book grew at 38% CAGR during FY2012-FY2016 with order inflows growing at 45% CAGR during the same period (60% of order intake materialised during FY2015-FY2016). Further, post strong order intake in Q1FY2017, we expect its order book for FY2017 to be upwards of Rs75,000 crore at a book-to-bill ratio of over 10x on FY2017E revenue, which provides a strong revenue visibility over the next five years. NBCC posted a revenue CAGR of 14% during FY2012-FY2016, as major order book accretion happened over the last couple of years. We believe that given NBCC’s strong execution track record and robust order book position, the company is likely to grow its consolidated revenue at 30% CAGR over FY2016-FY2019E.

EPC and Real Estate

Real Estate and EPC – small profitable divisions with huge potential

The Real Estate and EPC divisions comprised 5% each of the company’s overall revenue during FY2016 while



Sustainable margins with low-risk business model

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Low-risk business model enables stable margins; we see 30% earnings CAGR: NBCC has been able to maintain stable margins during FY2013-FY2015, as the company primarily works on cost plus margin basis. A gradual improvement in OPM over FY2012-FY2016 has led to 24% CAGR in operating profit. Going forward, we believe that a significant ramp-up in order book will trigger operating leverage. Also, the company follows an asset-light model, which should help in sustaining and gradually improving OPM going ahead. We expect ramp-up in execution and gradual improvement in OPM to help NBCC post 40% CAGR in operating profit during FY2016-FY2019E.

Extremely capital efficient model; reflects in high return ratios and solid balance sheet: NBCC has been able to be a debt-free company, a rarity in the infrastructure space. Further, the company has been able to generate positive operating cash flows, barring FY2014 and FY2015 when the company acquired land. The company’s focus on planning and management of projects while outsourcing the execution portion to third party players has led to minimum capital requirement, which has helped it to keep its debt NIL and sustain a lower working capital cycle (compared to peers). Although, NBCC pays interest on advances received from customers, which is negligible and is unlikely to hurt the company’s net profit margin. Overall, NBCC has been able to sustain its return ratios at 20%+ on account of its efficient and low capital management. Going ahead, we believe that the ramp-up in execution and increase in asset turnover ratio (low capex requirement) should help NBCC in improving its return ratios further.

Sturdy order book; comfortable visibility

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Key concerns

w Execution challenge with large order book could hurt profitability: NBCC has a huge order book, which provides revenue visibility for five years. But, if the company faces any major execution challenge, the same could hurt future profitability. Nevertheless, given its asset light model where NBCC passes on a large part of execution and construction risk to sub-contractors, the direct impact would not be high on NBCC.

w Unfavorable change in policy could dent outlook: Currently, NBCC bags orders on nomination basis from various governmental agencies and institutions as per the revised GFR. However, if there is any unfavorable development in the policy, like changing its nomination status to competitive bidding, it could dent order inflow outlook meaningfully.



Valuation

Large opportunity + asset light model = A solid Investment; Initiate as Buy with PT of Rs340:

NBCC enjoys a unique competitive advantage (thanks to PWO status) and operates with a low-risk, cost-plus business model for its PMC business. Moreover, its alluring asset light business model enables NBCC to generate high return ratio (RoCE of ~35%, RoE of ~25%). The healthy cash flow generation and net cash positive balance sheet add to its financial strength. Given the strong visibility, we expect NBCC’s earnings to grow at a CAGR of ~30% during FY2016-FY2019E and continue to add value for shareholders with high returns and cash generation on its already net cash positive balance sheet. Therefore, we initiate ‘Buy’ on NBCC with a 12-month price target (PT) of Rs340, based on 30 x FY2019E.

Company Background

NBCC (India), formerly known as National Buildings Construction Corporation is a Navratna Enterprise under the Ministry of Urban Development (MoUD). NBCC is certified with ISO 9001:2008 from the Bureau of Indian Standards in respect of Project Management & Consultancy. It operates in three areas, namely Project Management Consultancy (PMC), Real Estate Development and EPC Contracting. The company’s unique business model has made it stand out as a leader in its own right in the construction sector.

NBCC also ventured into overseas operations in 1977, executing projects of diverse nature in countries like Libya, Iraq, Yemen, Nepal, Maldives, Mauritius, Turkey and Botswana. Presently, the company has its presence in Maldives, Turkey and Botswana to implement various projects and earn consistent revenue. NBCC has opened an office in Oman and has signed a MoU with Al Naba Services LLC in order to jointly explore and secure infrastructure projects in Oman & neighboring countries.

Also, it has entered into MoUs with Construction Industry Development Board Holdings, Malaysia and Form Yapi Malzemeleri Insaat Samayi Ticaret, Turkey.

NBCC subsidiaries

w NBCC Services Ltd: A wholly-owned subsidiary company, NBCC Services Limited, with its Headquarter in New Delhi, has been incorporated on October 16, 2014 with the main objective to act as Execution and Implementation Agency to undertake CSR Projects and related activities on its behalf or for any other Govt. Undertakings/Semi Govt. Undertakings/Body Corporates/ Societies/Trusts/Private Institutions/NGOs or any other concern. It has also been mandated to act as an execution and implementation agency for sustainability projects, heritage building restoration works etc, besides to execute maintenance and internal renovation works of major projects completed by NBCC, thereby extending end-to-end service to its customers.

w Real Estate Development & Construction Corporation of Rajasthan Ltd: This Joint Venture company has been incorporated on September 7, 2015 under the Companies Act, 2013 by the name Real Estate Development & Construction Corporation of Rajasthan Limited in order to look into various re-development projects in the Real Estate sector across Rajasthan.

w NBCC Engineering & Consultancy Ltd (NECL): A wholly-owned subsidiary company named NBCC Engineering & Consultancy Ltd (NECL) has been incorporated on December 15, 2015 by NBCC. The newly formed company shall handle all consultancy jobs for NBCC, besides also rendering consultancy jobs to other Govt and Private Organisations. Thus, it shall be a profit generating self-sustained entity under the NBCC umbrella.

Financial summary Particulars FY14 FY15 FY16 FY17E FY18E FY19ENet Sales (Rs cr) 4,098 4,400 5,838 7,147 10,447 13,467Operating profit (Rs cr) 274 293 358 467 737 982Operating profit % 6.7 6.7 6.1 6.5 7.1 7.3Net Profit (adj) (Rs cr) 280 278 311 363 527 680Adj EPS (Rs) 4.3 4.6 5.2 6.1 8.8 11.3EPS Growth (%) 24.1 8.1 11.8 16.7 45.1 29.0PER (x) 55.5 51.3 45.9 39.3 27.1 21.0P/BV (x) 12.5 10.7 9.5 8.3 6.9 5.6EV/EBITDA (x) 47.7 45.2 36.7 27.7 18.0 13.2RoCE (%) 30.6 33.5 34.2 37.4 45.7 48.3RoE (%) 26.7 22.5 21.9 22.5 27.8 29.5



Income Statement Rs cr

Particulars FY2014 FY2015 FY2016 FY2017E FY2018E FY2019E

Net Sales 4,098 4,400 5,838 7,147 10,447 13,467

YoY Growth (%) 26.8 7.4 32.7 22.4 46.2 28.9

Total Expenditure 3,824 4,107 5,481 6,680 9,710 12,485

Operating Profit 274 293 358 467 737 982

Other Income 106 147 129 134 127 127

EBITDA 380 440 487 601 864 1,109

Depreciation 1 2 2 4 5 6

EBIT 379 437 484 597 859 1,103

Interest - 40 37 56 76 95

Extraordinary Items 8 4 6 6 6 6

PBT 372 393 441 535 777 1,001

Tax 92 115 130 172 250 321

Tax rate (%) 24.7 29.2 29.5 32.2 32.2 32.1

Reported PAT 257 278 311 363 527 680

YoY Growth (%) 31.5 -0.6 11.8 16.7 45.1 29.0

Rep. EPS (Rs) 4.7 4.6 5.2 6.1 8.8 11.3

Adj. EPS (Rs) 4.3 4.6 5.2 6.1 8.8 11.3

YoY Growth (%) 24.1 8.1 11.8 16.7 45.1 29.0

Balance sheet Rs cr


Share Capital 120 120 120 120 120 120

Reserves Total 1,021 1,218 1,385 1,604 1,950 2,413

Net Worth 1,141 1,338 1,505 1,724 2,070 2,533

Total Debt - - - - - -

Capital Employed 1,141 1,338 1,505 1,724 2,070 2,533

Net Fixed assets 23 26 62 93 124 152

Investments 130 146 219 319 469 669

Inventories 990 1,172 1,443 1,886 2,980 3,514

Trade recievables 1,249 1,706 2,006 2,537 4,103 4,604

Cash and Bank 1,201 1,067 1,160 1,316 1,026 1,305

Loan & advances 511 612 616 786 1,149 1,481

Other Current Asset 81 16 8 8 8 8

Total Current Assets 4,033 4,572 5,233 6,533 9,267 10,912

Other Liabilities 2,000 612 738 872 1,254 1,616

Trade payables 924 2,672 3,080 4,095 6,149 7,076

Provision 144 141 221 286 418 539

Total Current Liabilities 3,069 3,426 4,039 5,253 7,821 9,231

Net Current Assets 965 1,147 1,194 1,280 1,446 1,681

Net Deferred Tax 23 20 31 31 31 31

Total Assets 1,141 1,338 1,506 1,724 2,070 2,533



Cash Flow Rs cr


PAT 257 278 311 363 527 680

Depreciation 1 2 2 4 5 6

Change in WC (512) (230) 38 70 (456) 44

Operating cash flow (253) 51 351 437 76 730

Capex 4 (10) (74) (66) (65) (64)

Investments 32 (16) (73) (100) (150) (200)

Others (49) (81) 33 30 30 29

Investing cash flow (13) (106) (113) (136) (185) (235)

Dividends (71) (79) (144) (144) (181) (217)

Debt - - - - - -

Equity - - - - - -

Financing cash flow (71) (79) (144) (144) (181) (217)

Net change (337) (135) 93 156 (289) 278

Opening cash 1,538 1,201 1,067 1,160 1,316 1,026

Closing cash 1,201 1,067 1,160 1,316 1,026 1,305

Free Cash Flow (249) 41 277 370 11 666

Key ratios


Sales growth (%) 26.8 7.4 32.7 22.4 46.2 28.9

OPM (%) 6.7 6.7 6.1 6.5 7.1 7.3

Adj. PAT Margin(%) 6.8 6.3 5.3 5.1 5.0 5.0

RoE (%) 26.7 22.5 21.9 22.5 27.8 29.5

RoCE (%) 30.6 33.5 34.2 37.4 45.7 48.3

P/E (x) 55.5 51.3 45.9 39.3 27.1 21.0

P/B (x) 12.5 10.7 9.5 8.3 6.9 5.6

Price/CFO (x) (0.9) 4.7 0.7 0.5 3.1 0.3

Price/FCF (x) (1.0) 5.8 0.9 0.6 21.8 0.4

EV/EBITDA (x) 34.0 29.7 26.5 21.0 14.8 11.1

Debt Equity (x) - - - - - -

Current Ratio (x) 1.4 1.3 1.3 1.2 1.2 1.2

Asset Turnover (x) 3.2 3.3 4.0 4.2 5.1 5.4

Inventory Days 72 90 82 85 85 88

Debtor Days 93 123 116 116 116 118

Creditors Days 83 108 110 110 110 110

Net WC Cycle (days) 82 104 87 91 91 96

Net Cash+Inve/share 22 20 23 27 25 33

Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a position in the companies mentioned in the article.



Key points

w Results beat estimates on stellar operating performance, higher other income: Maruti Suzuki India (Maruti) reported a strong operating performance for Q2FY2017, with the results coming in ahead of our as well as street estimates. Revenue grew strongly by 29% YoY, driven by 18% YoY volume growth (on the back of favourable demand environment and market share gains). Realisation per vehicle grew by 9% YoY, led by a better product mix and price hikes. Operating Profit Margin (OPM) expanded by 80BPS YoY to 17% and surpassed our estimate of 14.5%. Operating leverage, lower discounts and cost control measures led to strong OPM improvement. Also, other income was up sharply by 72% YoY to Rs813 crore (owing to higher interest income and ~Rs300 crore gain on revaluation of investments under Ind AS accounting norms). Consequently, PAT grew impressively by 60% YoY to Rs2,398 crore - coming in significantly higher than our estimate of Rs1,535 crore.

w Passenger Vehicle industry to grow in double digits; Maruti to outpace industry: The Passenger Vehicle (PV) industry gained momentum in Q2FY2017, recording an impressive growth of 18% YoY. Uptick in rural demand on the back of a normal monsoon, implementation of the Seventh Central Pay Commission recommendations for government employees and strong demand in the ongoing festival season led to robust demand. The PV industry is likely to clock 10-11% volume growth in FY2017, given the favourable economic environment and improved consumer sentiment. Further, Maruti is likely to outpace the PV industry growth in FY2017, underpinned by strong demand for the recent launches. The new launches - Baleno and Vitara Brezza - have a waiting period of six months and eight months, respectively, pointing to the success of both the models. In order to cut down the waiting period, the company has increased the capacity for both the models at its existing plants. In addition, planned launches in the new segment (Ignis in compact utility vehicle space), upgrades of existing models and the commissioning of the Gujarat plant in Q4FY2017 will aid volume expansion. We expect Maruti’s volume to grow at 14% CAGR over FY2016-FY2018 as against estimated PV industry growth of ~10%.

w Raise estimates; maintain Buy: Maruti is likely to outpace the PV industry growth rate in FY2017-FY2018 on the back of sustained strong demand for recent launches and a robust product pipeline. The commissioning of the first phase of Gujarat plant will further aid volume expansion. Also the operating margins are estimated to improve 80BPS in FY2017 on back of operating leverage and lower discounts due to strong demand. In view of the better- than-expected operating performance and to factor in higher other income, we have raised our earnings estimates by 25% and 15% for FY2017 and FY2018, respectively. We maintain ‘Buy’ rating on the stock with a revised price target (PT) of Rs6,430 (based on 21x average of FY2018 and FY2019 earnings, respectively).

Company details

Price target: Rs6,430


52-week high/low: Rs5,950/3,202


6.7 lakh

BSE code: 532500

NSE code: MARUTI

Sharekhan code: MARUTI


13.2 cr


Price chart

Price performance

(%) 1m 3m 6m 12m

Absolute 5.4 32.2 52.6 34.8

Relative to Sensex 7.0 32.5 41.1 30.5

Results Rs crParticulars Q2FY17 Q2FY16 YoY (%) Q1FY17 QoQ (%)Revenue 17,842.8 13,851.2 28.8 14,920.4 19.6EBIDTA 3,037.4 2,245.4 35.3 2,215.7 37.1EBIDTA margin (%) 17.0 16.2 80 bps 14.9 210 bpsDepreciation 630.0 669.4 -5.9 638.9 -1.4Interest (income) 19.7 17.8 10.7 18.1 8.8Other income 812.6 473.6 71.6 483.3 68.1PBT 3,200.3 2,031.8 57.5 2,042.0 56.7Tax 802.3 534.8 50.0 555.8 44.4Adjusted PAT 2,398.0 1,497.0 60.2 1,486.2 61.4EPS (Rs) 79.4 49.6 49.2

Maruti Suzuki India Reco: Buy

Stock Update

Well poised to outpace industry growth; maintain Buy with revised PT of Rs6,430 CMP: Rs5,860

Promoters56%

Institutions12%

Foreign25%

Public and Others

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Valuation Rs cr

Particulars FY15 FY16 FY17E FY18E FY19E

Net sales 49,971 57,746 69,923 82,464 90,603

Growth (%) 14.3 15.6 21.1 17.9 9.9

EBITDA 6,702.5 8,978.6 11,387.8 13,065.2 14,293.5

EBIDTA (%) 13.4 15.5 16.3 15.8 15.8

PAT 3,711 4,571 7,990 8,853 9,646

Growth (%) 33.4 23.2 74.8 10.8 9.0

FD EPS (INR) 122.9 151.3 264.5 293.1 319.3

P/E (x) 47.7 38.7 22.2 20.0 18.4

P/B (x) 7.5 6.6 5.4 4.6 3.9

RoE (%) 15.7 18.0 24.5 22.8 21.2

RoCE (%) 20.5 24.8 32.5 30.4 28.4

EV/sales(x) 3.5 3.1 2.3 1.8 1.6

EV/EBITDA (x) 26.0 19.7 13.9 11.7 10.2




Key points

w Q2FY2017 results ahead of estimates: Hero MotoCorp (HMCL) posted strong operating numbers for Q2FY2017 that were better than our expectations. Topline grew by 15% YoY to Rs7,796 crore, driven by a healthy 16% YoY growth in volume. Realisation per vehicle declined marginally by 1% YoY. Although the topline was in line with estimate, Operating Profit Margin (OPM) improved by 150BPS YoY to 17.6% - coming ahead of our estimate of 16.2%. Continued benefit of soft commodity prices and cost control initiatives under the “Leap” programme led to margin expansion. Given the robust operating performance and higher other income of Rs152 crore (up 37% YoY), the net profit grew by 28% YoY to Rs1,004 crore, beating our estimate of Rs901 crore.

w Demand outlook strong; Two-wheeler industry to post 15% growth in FY2017: Given the improved rural sentiments on the back of a normal monsoon (after two years of drought), the Two Wheeler (2W) industry gained momentum, posting 17% YoY growth in H1FY2017. Increase in the government employees’ salaries wef from August 2016 and ongoing festival season are likely to maintain demand momentum in H2FY2017. We expect the 2W industry to maintain double-digit growth in H2FY2017, taking the FY2017 growth to 15%. Being the market leader and deriving about half of the volumes from rural areas, HMCL is likely to benefit. We expect the company to report 12% volume growth in FY2017.

w Cost control measures, improving demand scenario to offset margin pressure from rising commodity prices: HMCL is likely to incur savings under the cost control programme “Leap”, wherein the company has identified raw material, vendor sourcing and designing as the key focus areas. HMCL is targeting savings of Rs275 crore from the Leap programme in FY2017. Further, we believe that given the pick-up in 2W demand, the intensity of pricing pressure would reduce, enabling HMCL to improve its margins. We believe that the cost savings, coupled with receding pricing pressures would help the company to offset rising commodity prices. We expect HMCL’s to report 15.9% OPM in FY2018 as against 15.3% reported in FY2016. Our OPM assumption is at the higher end of the man-agement’s guidance of 14-16%.

w Maintain estimates and Buy with unchanged price target of Rs4,100: HMCL is likely to clock 13% topline and 17% earnings CAGR over FY2016-FY2018, led by strong demand momentum and recovery in the rural sentiments. We have broadly maintained our earnings estimates. The company is among the best plays on the rural demand recovery theme. We maintain Buy on the stock with a price target (PT) of Rs4,100.

Company details



52-week high/low: Rs3,740/2,375


3.9 lakh

BSE code: 500182

NSE code: HEROMOTOCO

Sharekhan code: HEROMOTOCO


13.0 cr


Price chart

Price performance

(%) 1m 3m 6m 12m

Absolute -1.4 7.5 17.7 33.5


Hero MotoCorp Reco: Buy

Stock Update

Demand outlook strong; maintain Buy with price target of Rs4,100 CMP: Rs3,315

Results Rs crParticulars Q2FY17 Q2FY16 YoY (%) Q1FY17 QoQ (%)Total income 7,796.3 6,809.3 14.5 7,398.9 5.4EBIDTA 1,368.9 1,095.6 24.9 1,230.1 11.3EBIDTA margin (%) 17.6 16.1 150 bps 16.6 100 bpsDepreciation 119.3 109.1 9.4 115.2 3.5 Interest 1.6 1.2 26.0 1.5 3.3 Other income 152.4 111.5 36.6 120.4 26.6 PBT 1,400.4 1,096.8 27.7 1,233.7 13.5 Tax 396.2 310.7 27.5 350.6 13.0 PAT 1,004.2 786.1 27.7 883.1 13.7 EPS (Rs) 50.3 39.4 44.2

Promoters35%

Institutions14% Foreign

42%

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Valuation Rs cr

Particulars FY14 FY15 FY16 FY17E FY18E

Net sales 25,275.5 27,585.3 28,514.0 31,768.0 36,326.3

Growth (%) 6.3 9.1 3.4 11.4 14.3

EBIDTA 3,540.1 3,542.2 4,361.7 5,244.1 5,773.2

OPM (%) 14.0 12.8 15.3 16.5 15.9

PAT 2,109.1 2,540.7 3,047.0 3,775.6 4,116.1

Growth (%) -0.4 20.5 19.9 23.9 9.0

FD EPS (Rs) 105.6 127.2 152.6 189.1 206.1

P/E (x) 31.4 26.1 21.7 17.5 16.1

P/B (x) 11.8 10.1 8.5 7.1 6.0

EV/EBIDTA (x) 17.5 17.8 14.2 11.6 10.3

RoE (%) 37.7 38.8 39.0 40.3 37.1

RoCE (%) 51.7 53.2 55.2 56.0 51.8




Key points

w Strong operating performance aided by healthy AUM growth: Bajaj Finance (BFL) reported Q2FY2017 results, with 46% YoY growth in net profit on the back of healthy rise in Assets Under Management (AUM) and continued strong customer acquisitions. The numbers are in line with expectations. New Loans booked during Q2FY2017 increased by 56% YoY. Calculated Net Interest Income (NII) grew by 36.4% YoY to Rs1,224 crore while AUM grew by 37.8% YoY to Rs52,332 crore. BFL earns significant amount of fee income from its various business streams and its non interest income (OI) increased by 71.3% YoY to Rs184.8 crore. At Rs1,410 crore, net total income (NII + OI) grew by 40.2% YoY, and helped propel net profit to Rs407.8 crore, up by 45.9% YoY.

w Prudent lending practices help maintain control on NPAs: During the quarter, Gross Non Performing Assets (GNPA) stood at 1.58%, up 11BPS QoQ but down 11BPS YoY. Net Non Performing Assets (NNPA) increased by 2BPS QoQ but declined by 12BPS YoY. BFL has tightened its NPA recognition policy from 150-day overdue to 120-day overdue (as required by RBI guidelines). Therefore, the NPA numbers are not strictly comparable with the year-ago period. However, the provision coverage ratio stood at 73%, which should add to investors’ comfort. Loan loss provisions for Q2FY2017 increased by 23% YoY to Rs169 crore and improved from Rs180 crore in Q1FY2017, thereby adding to the PAT growth.

w AUM growth led by Consumer and SME segments: BFL has a leadership position in Consumer Durable Financing and Auto Financing businesses. Its Consumer Finance business (45.7% of AUM) grew by 52.3% YoY but SME Financing (39% of AUM) grew at a slower pace of 14% YoY. The management flagged off its cautious outlook for the Consumer Durables portfolio (13% of AUM) and Home Loan - self employed (6.3% of AUM), but was confident of achieving 35% CAGR for the overall business with stable margins. The company’s borrowing mix has improved with costlier Bank Funds reducing to 38% of the overall borrowing mix from 45% in Q1FY2017, taking the benefit of liquidity in the money markets. Going forward, while the AUM mix may broadly sustain, we believe that the management’s ability to grow and manage credit and credit costs in newer segments will be the key monitorables.

w Valuation & outlook: In Q2FY2017, BFL benefitted from better funding mix as well as persistently strong loan traction. On the operational front, the cost management was also sustained. The management has demonstrated its ability to grow and manage new product offerings in the past. With strong risk management systems, reduced dependence on acquired business (DSA sourcing) and operating leverage benefits, the business is well placed. We believe that the premium valuation of BFL should continue, owing to high return ratios, superior asset quality and healthy growth outlook. We have revised our price target (PT) to Rs1,200 and downgraded our rating to ‘Hold’.

Company details



52-week high/low: Rs1,180/512


0.3 lakh

BSE code: 500034

NSE code: BAJFINANCE

Sharekhan code: BAJFINANCE


22.9 cr


Price chart

Price performance

(%) 1m 3m 6m 12m

Absolute 2.3 16.6 64.1 117.1


Bajaj Finance Reco: Hold

Stock Update

Business performance buoyant; outlook cautious on consumer segment CMP: Rs1,105

Results Rs crParticulars Q2FY17 Q2FY16 YoY (%) Q1FY17 QoQ (%)Interest income 2,180.2 1,592.1 36.9 2,165.9 0.7Interest expense 956.2 694.7 37.6 883.3 8.2Net interest income 1,224.0 897.4 36.4 1,282.6 -4.6Non-interest income 185.8 108.5 71.3 135.2 37.5Net total income 1,409.8 1,005.9 40.2 1,417.8 -0.6Operating expenses 614.4 441.1 39.3 586.5 4.8Pre-provisioning profit 795.4 564.8 40.8 831.2 -4.3Provisions 169.1 136.8 23.6 179.7 -5.9Profit before tax 626.3 428.0 46.3 651.5 -3.9Tax 218.5 148.6 47.1 227.5 -4.0Profit after tax 407.8 279.4 45.9 424.0 -3.8Asset quality (%)Gross NPA 1.58 1.67 -9 bps 1.47 11 bpsNet NPA 0.43 0.46 -3 bps 0.41 2 bpsKey itemsAdvances 49,981 36,515 36.9 47,923 4.3AUM 52,332.0 37,964.0 37.8 49,608.0 5.5

Promoter57.3%

Public42.3%

Others0.3%

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Advances (Rs cr) AUM break-up

Asset quality (%) Asset under management (Rs cr)

Net interest income (Rs cr) One-year forward P/BV band

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PBV +1.6 mean 5 year PBV mean -1.6 mean

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Q2FY14 Q2FY15 Q2FY16 Q2FY17

Advances (Rs Cr) growth (YoY, %)

0%10%20%30%40%50%60%70%80%90%

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Consumer SME Commercial Rural

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Gross NPA (%) Net NPA (%)

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AUM (Rs cr) growth (YoY, %)

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Net Interest Income (Rs Cr) Growth (%)



Profit and loss statement Rs cr


Interest income 3,789 5,120 6,957 9,194 12,502

Interest expense 1,573 2,248 2,927 3,942 5,338

Net interest income 2,215 2,872 4,030 5,252 7,164

Non interest income 285 294 427 515 631

Net total income 2,500 3,166 4,457 5,767 7,794

Operating expenses 1,151 1,428 1,949 2,422 3,196

Pre-provisioning profit 1,349 1,737 2,508 3,345 4,599

Provisions 258 385 543 698 926

Profit before tax 1,091 1,353 1,965 2,647 3,673

Tax 372 459 686 900 1,249

Profit after tax 719 894 1,279 1,747 2,424

Balance sheet Rs crParticulars FY14 FY15 FY16 FY17E FY18E

LiabilitiesShare capital 50 50 54 54 54Reserves 3,941 4,750 7,373 8,916 11,056Shareholders funds 3,991 4,800 7,427 8,970 11,110

Total borrow-ings 19,750 26,691 37,025 47,743 67,060

Current liabil-ities 878 1,321 2,005 3,810 6,096

Total liabilities 24,618 32,811 46,457 60,523 84,266AssetsFixed assets 220 249 287 301 334Investments 28 332 1,029 1,122 1,256Receivable under finance 22,971 31,199 42,756 57,177 79,833

Cash & deposits 777 220 1,331 1,371 1,426Other current assets 483 598 774 271 1,136

Deferred tax assets 139 212 280 280 280

Total assets 24,618 32,811 46,457 60,523 84,266

Key ratios


Per share data (Rs)

Earnings 14.5 17.9 23.9 32.6 45.3

Dividend 1.6 1.8 2.5 3.3 4.5

Book value 80.2 96.0 138.7 167.5 207.5

Adj. book value 78.9 93.1 136.4 165.5 204.7

Spreads (%)

Yield on assets 19.1 18.9 18.5 18.4 18.3

Cost of funds 9.6 9.7 9.5 9.3 9.3

Net interest margins 11.1 10.5 10.7 10.6 10.8

Operating ratios (%)

Cost to income 46.0 45.1 44.3 42.0 41.0

Provisions to loans 1.1 1.2 1.3 1.2 1.2

Non interest income / Total income 7.0 5.4 5.8 5.3 4.8

Assets/Equity (x) 6.2 6.8 6.3 6.7 7.6

Return ratios (%)

RoAE 19.6 20.3 20.9 21.3 24.1

RoAA 3.4 3.1 3.2 3.3 3.3

Asset quality ratios (%)

Gross NPA 1.2 1.5 1.2 1.2 1.2

Net NPA 0.3 0.5 0.3 0.2 0.2

Growth ratios (%)

Net interest income 31.8 29.6 40.3 30.3 36.4

Pre-provisioning profit 28.1 28.8 44.3 33.4 37.5

Profit after tax 21.6 24.3 43.1 36.7 38.7

Advances 37.2 35.8 37.0 33.7 39.6

Borrowings 50.4 35.1 38.7 28.9 40.5

Valuation ratios (x)

P/E 76.5 61.8 46.3 33.9 24.4

P/BV 13.8 11.5 8.0 6.6 5.3

P/ABV 14.0 11.9 8.1 6.7 5.4




Key points

w Revenue grows in double digits; margin expansion sustains: Unlike other FMCG companies, Emami has registered a double-digit revenue growth of 10.2% YoY at Rs583.6 crore in Q2FY2017, driven by robust volume growth of 10% YoY. The domestic consumer business grew by 14% YoY, driven by volume growth of 11% YoY, while the international business declined by 11% YoY (affected by significant decline in sales in MENAP region). Gross margin improved by 68BPS YoY to 67%. About 2/3rd of the gross margin expansion was due to price hike and 1/3rd because of benign input prices. Operating Profit Margin (OPM) expanded by 145BPS YoY to 30% due to lower other expenses. Operating profit grew by ~15% YoY to Rs175.2 crore (ahead of our expectation of Rs163.8 crore). The adjusted PAT is excluding the amortisation charges toward the Kesh King brand, which stood at Rs120.2 crore (our expectation was Rs105.7 crore) in Q2FY2017 as against Rs109.8 crore in Q2FY2016.

w Balms, Kesh King, BoroPlus continue to grow in double digits; F&H remains muted; international business disappoints: Revenue from Boro Plus antiseptic cream grew by 16% YoY, while the balm range grew by 19% YoY on the back of strong traction. The Kesh King portfolio registered strong growth of 50% YoY in Q2FY2017, with the brand performing well in line with the company’s expectation. Fair & Handsome (F&H) sales remained muted due to low demand, while the Zandu healthcare portfolio sales remained flat (due to high base of Zandu Pancharishta sales, which grew by 109% YoY in Q2FY2016). Sales in the international business declined by 11% YoY due to weak economic conditions and slowdown in the Middle East (MENAP contributes 33% to overall sales).

w Outlook - Revenue of 14-15% in near term; margin uptick to sustain: Emami achieved a volume growth of 11% YoY in Q2FY2017 in the core domestic consumer business owing to solid performance by some of its strong brands. The management is confident of maintaining volume growth in the range of 8-10% in the coming quarters and expects it to increase if demand environment improves significantly in the coming quarters (especially in rural India). Overall, it expects to achieve 14-15% revenue growth in the near to medium term in the domestic business. It will take another quarter or two for the MENAP region to show a recovery. However, the other international geographies (including SAARC and CIS region) are expected to achieve double-digit revenue growth in the coming quarters. Operating Profit Margin (OPM) is expected to improve by 40-50BPS per annum on the back of operating efficiencies.

w Maintain Buy: We have fine-tuned our earnings estimates for FY2017 and FY2018 to factor in lower revenue growth in the international business and Zandu Healthcare portfolio. This will be offset by a strong performance of the Kesh King brand and higher-than-expected OPM achieved during the quarter. The company has maintained its focus on launching new products and enhancing the distribution reach in the coming years. We expect Emami’s earnings to grow at a CAGR of 20%+ over FY2016-FY2018E. Also, the management is confident of becoming a debt-free company by the end of FY2018. The stock is currently trading at 32.6x its FY2018E earnings. We have maintained our Buy recommendation with an unchanged price target (PT) of Rs1,300.

Company details





16.1 lakh

BSE code: 531162

NSE code: EMAMILTD

Sharekhan code: EMAMILTD


6.19 cr


Price chart

Price performance

(%) 1m 3m 6m 12m

Absolute -0.5 3.5 18.6 9.2


Results (Consolidated) Rs crParticulars Q2FY17 Q2FY16 YoY (%) Q1FY17 QoQ (%)Net sales 583.6 529.5 10.2 643.4 -9.3Other operating income 1.0 1.1 -11.8 1.0 -3.0Total revenue 584.6 530.6 10.2 644.4 -9.3Total expenditure 409.3 378.4 8.2 497.1 -17.7Operating profit 175.2 152.3 15.1 147.3 19.0Other income 8.7 12.2 -29.1 5.1 70.3Interest expenses 16.0 19.2 -16.6 12.5 27.7Depreciation 11.1 9.2 19.9 10.6 4.5Tax 36.6 26.3 39.4 23.9 53.2Adjusted PAT 120.2 109.8 9.5 105.3 14.1Extraordinary gain/loss -54.4 -49.6 - -48.7 Reported PAT 65.9 60.2 9.4 56.6 16.4Adjusted EPS (Rs) 5.3 4.8 10.8 4.6 14.1Gross margin (%) 67.0 66.3 68BPS 64.5 249BPSOPM (%) 30.0 28.5 145BPS 22.9 712BPS

Emami Reco: Buy

Stock Update

Operating performance strong; volume growth stood at 10% YoY CMP: Rs1,164

Promoters73%

Foreign17%

Institutions2%

Others8%

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Key brand performance

• Boroplus antiseptic cream – strong growth sustained: Boroplus antiseptic cream maintained its double-digit growth, with revenue growing by 16% YoY in a seasonally weak quarter. Boroplus moisturising lotion performed well, with revenue almost doubling during the quarter. The brand has maintained its leadership position with a 73.1% market share in Q2FY2017. With Q3 being a seasonally strong quarter for the brand, we expect the revenue growth to be much better.

• Navratna cool oil – revenue declines by 3%; market share up by 210BPS: Navratna cool oil sales contracted by 3% YoY on account of better monsoon and high base of Q2FY2016 (monsoon was below par). The company has maintained its leadership position in the cooling oil segment with a 62.8% market share (up 210BPS YoY). The management is confident of the Cooling Oil segment regaining its momentum once the overall recovery takes shape in the domestic market (especially in the rural area).

• Kesh King range of products – achieves sturdy growth: The Kesh King hair care brand sales grew by over 50% YoY in Q2FY2017 and by 100% in H1FY2017. Kesh King oils (80% of Kesh King sales) registered a growth 73% YoY, while Kesh King shampoo registered a growth of 15% YoY. The company has recently introduced Rs3 sachet of Kesh King Ayurvedic shampoo to increase traction in the domestic market. The management has maintained its focus on improving the penetration of Kesh King oils in the coming years. The gross margin of the brand remained stable on a YoY basis.

• Other recent launches perform well: 7 oils in one premium hair oil brand registered a strong 50%+ YoY revenue growth (largely on account of low base of Q2FY2016). The He range of deodorants registered a sales growth of 20% YoY and is expected to maintain the strong growth momentum in the coming quarters.

• Fair & Handsome – disappointment continues: Fair & Handsome sales grew by just 1% YoY (in-line with flat performance of some of the earlier quarters). However, a new media campaign been launched in September to improve sales of the brand. The brand has maintained its leadership position, with a volume market share of 64.8% in (up by 130BPS YoY). On the other hand, Fair & Handsome’s instant fairness facewash performed well, with a growth of 19% YoY.

• Zandu healthcare portfolio - sales affected by high base of Q2FY2016: Zandu’s healthcare portfolio registered flat sales in Q2FY2017, affected by high base of Q2FY2016. This is mainly on account of high base of Zandu Pancharista brand, which contributes

~50% to the overall Zandu portfolio. Zandu Pancharista grew by 109% YoY in Q2FY2016 and hence there was a decline of 19% YoY in revenue in Q2FY2017. Excluding Zandu Pancharishtha, the Zandu Healthcare portfolio sales grew by 31% YoY during the quarter. The management has maintained its thrust on adding new products in the Zandu portfolio, besides improving its revenue growth in the coming years.

• International business – revenue down by 11% YoY: Emami’s international business posted disappointing performance in Q2FY2017, with revenue declining by 11% YoY mainly on account of a sharp drop in revenue of the MENAP region (contributes ~33% to overall international revenue). Ex-MENAP, the International business delivered strong performance, with revenue growing by 18% YoY on the back of strong double-digit growth of 39% YoY in Bangladesh and 45% YoY growth in the CIS region. The management has indicated that MENAP will take some time to show recovery in performance, while other key geographies are expected to perform well in the coming quarters.

• Distribution expansion continues: Emami’s direct distribution reach currently stands at 6.5 lakh. The management is targeting a distribution reach of 8.0 lakh outlets by FY2018 (added 40,000 to 50,000 outlets in H1FY2017).

Outlook and valuation: We have fine-tuned our earnings estimates for FY2017 and FY2018 to factor in lower revenue growth in the International and Zandu Healthcare businesses, which wil be offset by strong performance of Kesh King brand and higher-than-expected OPM achieved during Q2FY2017. The company has maintained its focus on launching new products and enhancing the distribution strength in the coming years. We expect Emami’s earnings to grow at a CAGR of 20%+ over FY2016-FY2018E. Also, the management is confident of becoming a debt-free company by the end of FY2018. The stock is currently trading at 32.6x its FY2018E earnings. We have maintained our Buy recommendation with an unchanged PT of Rs1,300.

Valuations (Consolidated) Rs cr


Net sales 1,820.8 2,217.2 2,393.7 2,767.7 3,290.8

Operating profit 441.3 540.1 682.7 814.7 993.3

Adjusted PAT 350.4 484.8 528.1 607.9 810.2

EPS (Rs) 15.4 21.4 23.3 26.8 35.7

OPM (%) 24.2 24.4 28.5 29.4 30.2

PE (x) 75.4 54.5 50.0 43.5 32.6

EV/EBIDTA (x) 58.6 47.4 39.5 32.8 26.4

RoE (%) 41.0 44.8 40.1 40.3 44.7

RoCE (%) 44.7 53.7 40.8 38.5 48.2




Key points

w Stellar show in Q2FY2017: PI Industries (PII) recorded an exceptional performance for Q2FY2017, with a topline growth of 22% YoY at Rs544 crore, primarily driven by improved demand from exports business (advancements of global orders). In the domestic market, new product launches in the recent past resulted in better volume. Operating Profit Margin (OPM) expanded impressively by 480BPS YoY to 23.5% - springing a positive surprise. A favorable product mix resulted in higher-than-expected savings in raw material cost (RM / Sales down 500BPS YoY) while better operating leverage led to margin beat. Further, a higher depreciation charge (up 55% YoY), coupled with a lower tax rate (tax rate 16.8% vs 28.1% in Q2FY2016) resulted in the PAT improving strongly by 78% YoY to Rs101 crore, comfortably beating our estimate of Rs76 crore. Commissioning of the Jambusar plant and R&D expenses helped the company to keep tax rate lower during the quarter.

w Domestic growth to remain intact: The global Agrochemicals market is confronting a challenging situation, with the channel inventories at peak levels and commodity prices under pressure. This is likely to have a impact on demand for the exports business (CSM business) in the near term. In contrast, the outlook for the domestic market remains strong, as the upcoming Rabi season is expected to drive demand for agrochemicals. The management has maintained its margin guidance of 150–200BPS YoY improvement in FY2017 on the back of a richer product mix and likely improvement in operational efficiencies. PII is gradually ramping up production at the recently commissioned Jambusar facility. This is likely to result in lower tax rate of 18% for FY2017, while the tax rate for FY2018 is expected to increase to 22% (still lower than prevailing corporate tax rates), as tax rebates will be lower at 50% versus earlier level of 100%.

w Key risks: Increasing competitive pressures in few of its existing products, abnormal monsoon and deferment of export orders will act as a key risks to earnings estimates.

w Valuation; Maintain ‘Buy’ with a revised price target of Rs955: A strong outlook for the domestic market owing to a favorable Rabi season is expected to aid topline growth. Also, the new products launched in the recent past have gained good acceptability in the market and would continue to contribute to the topline growth. The CSM business is expected to gather traction in the medium term, as concerns in near term could slow down the growth. Driven by better operating efficiencies and a richer product mix, OPM is expected to improve 100-150BPS YoY. We have introduced FY2019 earnings estimates in this note. We retain our ‘Buy’ rating on the stock with a revised price target (PT) of Rs955.

Company details

Price target: Rs955




1.0 lakh

BSE code: 523642

NSE code: PIIND

Sharekhan code: PIIND


6.6 cr


Price chart

Price performance

(%) 1m 3m 6m 12m

Absolute 2.7 18.7 34.2 27.6


Results Rs crParticulars Q2FY17E Q2FY16 YoY (%) Q1FY17 QoQ (%)Net sales 544.1 446.1 22.0 638.9 -14.8Total expenditure 416.1 362.6 14.8 473.4 -12.1Operating profit 127.9 83.5 53.2 165.6 -22.7Other income 13.4 8.9 49.8 11.3 18.4EBIDTA 141.3 92.4 52.9 176.9 -20.1Depreciation 18.1 11.7 55.3 17.8 1.9Interest 1.3 1.5 -13.1 1.6 -16.9PBT 121.9 79.2 53.8 155.3 -21.5Tax 20.5 22.3 -8.0 30.6 -33.1Reported PAT 101.4 57.0 78.0 124.7 -18.7Adjusted PAT 101.4 57.0 78.0 126.9 -20.1Margins OPM (%) 23.5 18.7 480 25.9 -240NPM (%) 18.6 12.8 587 19.9 -122

PI Industries Reco: Buy

Stock Update

Impressive performance across parameters; Maintain Buy with revised price target of Rs955 CMP: Rs845

Promoters52%

Institutions13%

Corporate Bodies

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Foreign23%

Public and Others

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Valuation Rs cr

Particulars FY15 FY16 FY17E FY18E FY19E

Net sales 1,939.7 2,096.8 2,495.2 2,984.2 3,521.3

EBIDTA 369.9 432.7 562.1 684.1 809.6

Adj PAT 224.8 300.0 399.9 475.8 557.1

EBIDTA margin (%) 19.1 20.6 22.5 22.9 23.0

PAT margin (%) 11.6 14.3 16.0 15.9 15.8

EPS (Rs) 16.7 22.2 29.6 35.2 41.3

P/E (x) 50.7 38.0 28.5 24.0 20.5

RoCE (%) 34.7 32.6 34.7 34.1 32.5

RoE (%) 28.3 29.2 30.0 27.6 25.4

Key takeaways of concall

• The Agri inputs segment has registered a decline in Q2FY2017, as delayed and uneven distribution of monsoon and lower pest infestation resulted in reduced demand for agrochemicals. PII had introduced a new herbicide called Legacee (Rice herbicide), which has been accepted well in the market. Other products too have gained a good acceptability.

• The CSM segment grew by 50% YoY, largely on account of revival in demand for the new molecules introduced during FY2016. However, going ahead, the growth in the near term could slow down, given the key concerns like lower commodity prices, peak inventory levels and currency headwinds in the global agrochemicals markets. Consequently, the PII management expects a muted performance in H2FY2017 and has cut its topline growth guidance to 15-18% for FY2017.

• The order book during Q2FY2017 contracted to $800 million pointing at deferment in the orders.

• The company will do a capital expenditure (capex) of ~Rs200 crore in FY2017 and ~Rs150 – Rs 200 crore in FY2018, which will be funded by internal accruals.

Revenue mix for the quarter: Revenue for the quarter stood in favor of the CSM segment, which registered an impressive 50% YoY increase as against a decline registered by the Agri Inputs business. Going ahead, the outlook for the domestic market remains strong due to favorable prospects for the upcoming Rabi season.

Revenue break up Rs cr

Particulars Q2 FY17

Q2 FY16

YoY (%)

Q1 FY17

QoQ (%)

Agri 219.0 234.5 -6.6 298.1 -26.5

CSM 316.0 211.0 49.8 340.8 -7.3

Total 535.0 445.5 20.1 638.9 -16.3

Revenue mix (%)

Particulars Q2 FY17

Q2 FY16

YoY (BPS)

Q1 FY17

QoQ (BPS)

Agri 40.9% 52.6% (1170) BPS

46.7% (570) BPS

CSM 59.1% 47.4% 1170 BPS 53.3% 570 BPS

Order book: The order book for the quarter declined to $800 million, as new order inflows slowed due to concern over the global agrochemicals markets. The existing products in the global markets continue to perform better.

Q2 FY17

Q2 FY16

YoY (%)

Q1 FY17

QoQ (%)

Order Book ($ million)

800 610 31.1 850 -5.9




Key points

w Impressive topline performance: With the impact of fiscal year-end transition over in Q1FY2017, Supreme Industries (SIL) reported strong revenue growth of 14.2% YoY to Rs882.9 crore in Q2FY2017, which was ahead of our expectations. SIL shifted its fiscal year to March-ending from June earlier, which impacted the company’s performance in Q1FY2017. The strong growth in revenue was led by 17% YoY overall volume growth to 66,808 MT (realisation down 2% YoY). All the product segments delivered impressive growth. The share of value-added products in H1FY2017 stood at 34.7% as against 33.8% in H1FY2016.

w Healthy expansion in margins: Operating Profit Margin (OPM) improved by 340BPS YoY to 15.1%, driven by higher realisation in value-added products, savings in power cost and stable raw material prices. OPM across segments improved significantly; Plastics division margins expanded by 300BPS to 16.5%, while Consumer, Packaging and Industrial segments’ margins improved by 530BPS, 90BPS and 323BPS, respectively. Interest expenses fell by 13% YoY, while the core net income (ex-share of profit from associates) grew by 80% YoY to Rs57.6 crore. The management has raised its margin guidance for FY2017 to at least 15% from 14-14.5% earlier, owing to better margin performance in Q2FY2017 and expectations of incremental contribution from high value-added products in H2FY2017.

w Volume guidance maintained, margin outlook brighter: SIL’s Plastic Piping segment (contributes> 50% to total revenue) saw a 20% YoY volume growth in Q2FY2017, while the Packaging segment volume grew by 4% YoY. Consumer segment volume grew by 22% YoY and Industrial Products volume rose by 7% YoY. Sipaulin volume was up by a modest 2.2% YoY to 2,772MT after falling by 10.7% YoY in Q1FY2017. CPVC Pipes segment volume declined by 16.6% YoY in H1FY2017 (by 12.5% YoY in value term), as the CPVC market witnessed 3% YoY drop. The management has maintained volume growth guidance of 12-15% for FY2017 despite a slower H1FY2017 growth of 8% YoY. It sounded confident of delivering volume growth target, led by strong growth in H2FY2017.

w Outlook improves; upgrade to Buy with revised PT of Rs1,067: We are broadly maintaining our earnings estimates and are expecting adjusted CAGR of 36.6% in earnings over FY2016-FY2018E. The expected investment uptick in infrastructure development, particularly in housing construction, sanitation and irrigation is likely to keep the demand environment buoyant for the company’s products. Further, the success of newly launched high-value products and stable raw material prices will facilitate margin improvement. Therefore, we are upgrading our target multiple for FY2018E to 25x from 24x, valuing its core business at Rs1,030 per share. We are now also valuing its 30% stake in Supreme Petrochem (at Rs37 per share) for SOTP-based price target (PT), as it has started showing consistency in earnings (EBITDA of Rs120 crore in H1FY2017). We are thus revising our PT upwards to Rs1,067 and upgrade the stock to ‘Buy’ from ‘Hold’ earlier.

Company details



52-week high/low: Rs1,023/589


86,114

BSE code: 509930

NSE code: SUPREMEIND

Sharekhan code: SUPREMEIND


6.4 cr


Price chart

Price performance

(%) 1m 3m 6m 12m

Absolute 5.8 -2.5 17.1 47.9

Relative to Sensex 7.4 -2.2 8.2 43.2

Supreme Industries Reco: Buy

Stock Update

Outlook improves; upgrade to Buy with revised price target of Rs1,067 CMP: Rs903

Results Rs crParticulars Q2FY17 Q2FY16 YoY (%) Q1FY17 QoQ (%)Total revenue 882.9 772.8 14 1,189.3 -26Total expenditure 749.5 682.0 10 988.2 -24EBITDA 133.3 90.8 47 201.1 -34Depreciation 37.4 33.5 12 37.0 1EBIT 96.0 57.3 67 164.1 -42Other income 1.6 1.5 3 0.6 160Interest expenses 8.6 9.9 -13 9.7 -11PBT 88.9 48.9 82 154.9 -43Tax expenses 31.3 16.9 85 53.4 -41Adjusted net profit* 57.6 32.0 80.3 101.5 -43Adjusted EPS (Rs) 4.5 2.5 80 8.0 -43 BPS BPSEBITDA margin (%)* 15.1 11.7 336 16.9 -181PAT margin (%) 6.5 4.1 239 8.5 -201Effective tax rate (%) 35.2 34.6 57 34.5 70* Excluding real estate business and share of profits from Supreme Petrochem

Promoters50%

Foreign19%

DIIs13%

Others18%

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Valuation Rs cr

Particulars FY14 FY15 M9FY16 FY17E FY18E

Revenue 3,962.2 4,255.2 2,974.8 4,812.0 5,843.1

EBITDA margin (%) 14.9 15.7 15.5 16.8 16.9

Adjusted PAT* 274.4 311.7 212.0 420.5 522.9

Adjusted EPS (Rs) 21.6 24.5 16.7 33.1 41.2

RoCE (%) 30.0 27.9 21.4 30.4 33.7

RoE (%) 26.4 25.7 16.1 26.0 26.4

P/E (x) 41.8 36.8 54.1 27.3 21.9

P/BV (x) 11.0 9.5 8.7 7.1 5.8

* excluding exceptional items, #June ending till FY2015

Valuation of stake in Supreme Petrochemicals

Market cap (Rs cr) 2,254

Stake of SIL (%) 29.9%

SIL stake (Rs cr) 673.5

Holding company discount 30%

Value per share (Rs) 37

Key management commentary:

• Management has maintained volume growth guidance of 12-15% for FY2017 despite a slower H1FY2017 growth of 8% YoY; management sounded confident of delivering volume growth target led by strong H2FY2017 growth.

• A good monsoon, increasing state & central government spends and 7th Central Pay Commission pay hikes are helping to improve demand.

• In the irrigation projects, SIL is mainly participating in four states of UP, Gujarat, West Bengal and Maharashtra. The company is not participating in Telengana.

• Expects Sipaulin demand to improve going forward, as the government is encouraging farmers for opt for rain water harvesting with lower loan rates.

• In the consumer products space, the management plans to launch 15-16 new premium furniture products. Introduction of GST will be much beneficial to the consumer products division.

• SIL is planning new products launches in CPVC pipes, industrial application, premium furniture, bathroom fittings, packaging division and material handing division.

• In the industrial application, industrial components’ growth is still soft, while material handling business is witnessing decent growth (up by 12% YoY in Q2FY2017).

• Average monthly borrowing stood at Rs455.9 crore compared to Rs356 crore in Q1FY2017.

• Average cost of borrowing stood at 7.28% in Q2FY2017 vs 8.78% in March 2016 and 8.9% in Q1FY2017.

• Capex estimates for FY2017 stood at Rs250 crore.

• Expect to reduce monthly borrowing by Rs100 crore in FY2017.




Thomas Cook (India) (TCIL) Q2FY2017 results are not comparable on YoY basis due to consolidation of acquisitions (including acquisition of Kuoni’s India and Hong Kong businesses) done in the past few quarters. Also, the company has changed the accounting standards, resulting in change in the financial presentation.Key points

w Strong performance continues: TCIL’s consolidated revenue grew by 56.5% YoY to Rs2,051.6 crore in Q2FY2017, driven by a 2x revenue growth in the core Travel business (including the consolidation of Kuoni’s Travel businesses) and 25%+ growth each in Human Resource (HR) services and Vacation Ownership (VO) business. Operating Profit Margin (OPM) expanded by 130BPS YoY to 3.3%, largely on the back of better profitability in all the business verticals (strong profitability improvement in Financial Services). Operating profit grew by 160.1% YoY to Rs68.4 crore. Interest cost almost doubled to Rs29 crore due to increase in the debt undertaken for inorganic initiatives. PAT stood at Rs20 crore in Q2FY2017 as against Rs6.8 crore in Q2FY2016.

w HR, Travel and VO register strong organic growth; Financial Services see solid improvement in margins: The core Travel business revenue grew by 125% YoY to Rs958.6 crore and PBIT margins stood at 6.8%. On a ‘like-to-like’ basis (ex-consolidation of Kuoni business), the sales growth stood at about 15-20%. HR Services business continued to perform well, with revenue growing by 27% YoY and PBIT margins improving by 96BPS to 5.5%. Financial Services business revenue stood flat at Rs65 crore, but PBIT margins expanded to 55% from 30% in Q2FY2016. The VO business (Sterling Holidays) continued to register sturdy performance, with 23.8% YoY growth in revenue at Rs54.9 crore and PBIT at Rs0.9 crore (as against loss of Rs18.2 crore in Q2FY2016).

w H2FY2017 to be better than H1FY2017; long-term growth prospects intact: TCIL’s management is confident of achieving better growth in H2FY2017 with the Travel business expected to post particularly exceptional performance (on account of seasonally strong quarter for domestic outbound business and inbound business of Kuoni). Post the integration of Kuoni businesses, the margin of the Travel business is expected to improve by about 100BPS by FY2018. The current membership base in the VO business is ~80,000 members, which is expected to grow by 15-20% in the coming years. Further, the VO business is expected to be EBIDTA positive by the end of FY2017 and is expected to generate good earnings in the coming years.

w Long-term growth prospects intact; Retain Buy: TCIL’s H2FY2017 performance is expected to be better than H1FY2017, as the second half is the strongest for the Travel & Related Services business. Also, the organic and inorganic initiatives would help the HR Services business to deliver a strong performance in the near to medium term (along with gradual improvement in OPM). Overall, we expect TCIL’s revenue to grow at a CAGR of 25% over FY2016-FY2018, leading to strong growth in the bottomline on the back of steady improvement in OPM. Also, the management is confident of improving the cash generation ability in the coming quarters, which will help in strengthening the balance sheet and enhance investments in key businesses. We maintain our ‘Buy’ recommendation with an unchanged price target (PT) of Rs255.

Company details

Price target: Rs255




3.0 lakh

BSE code: 500413

NSE code: THOMASCOOK

Sharekhan code: THOMASCOOK


11.8 cr


Price chart

Price performance

(%) 1m 3m 6m 12m

Absolute 7.1 10.8 13.9 2.6

Relative to Sensex 8.8 11.0 5.3 -0.6

Thomas Cook (India) Reco: Buy

Stock Update

Growth momentum sustains CMP: Rs217

Results (consolidated) Rs crParticulars Q2FY17 Q2FY16 YoY (%) Q1FY17 QoQ (%)Net sales 2,051.6 1,311.1 56.5 2,431.7 -15.6Other operating income 40.6 22.5 80.7 44.4 -Total revenue 2,092.2 1,333.6 56.9 2,476.1 -15.5Total expenditure 2,023.8 1,307.3 54.8 2,334.1 -13.3Operating profit 68.4 26.3 160.1 142.0 -51.9Other income 27.0 15.4 75.8 16.4 64.3Depreciation 21.8 13.3 63.9 20.3 7.5Interest cost 29.0 18.5 56.6 30.5 -5.0PBT 44.5 9.8 354.9 107.6 -58.6Tax 24.5 16.6 47.3 45.6 -Reported PAT 20.0 -6.8 -393.3 62.0 -67.7EPS (Rs) 0.5 -0.2 -393.3 1.7 -67.7OPM (%) 3.3 2.0 130 5.7 -247* Financials are restated due to adoption of Ind AS

Promoters68%

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FIIs7%

Others13%

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Key segmental performance

• HR business - continues to grow in double digits; OPM improves YoY: TCIL’s HR Services business registered a strong performance, with revenue growing by 27% YoY to Rs1,013.8 crore and PBIT margins expanding by 96BPS YoY to 5.5%. People & Services, Global Technology Services and Industrial Asset Management segments registered stellar growth of ~29% YoY, 27% YoY and 33% YoY, respectively during the quarter. PBIT margins of the Industrial Asset Management segment improved significantly to 9.8% from 4.9% in Q2FY2016, while that of Global Technology Services business improved by expanded by 100BPS to 7.1%. The revenue mix shifting towards the high-margin Industrial Asset Management segment would result in better profitability in the near future. In line with its strategy of entering Security Solutions, Quess Corp (subsidiary of TCIL) has acquired a 49% stake in Terrier Security Services (TSS), which has footprint in 14 states in India, covering 60 cities (TSS has 400+ marquee clients). Further, it has acquired a 64% stake in Comtel Solutions (IT staffing solution company in Singapore) and a 45% stake in Simpliance (compliance services) to enhance its growth prospects. The recent acquisitions are expected to generate revenue of Rs750 crore and EBIDTA of Rs52 crore in FY2017.

• Travel business – registers spectacular performance: The Travel business (comprising newly acquired travel companies of SOTC, Sita and Kuoni Hong Kong) has delivered strong performance, with revenue and PBIT growing 2x and 3x, respectively during the quarter. The Travel business margins improved by 124BPS YoY to 6.8%. The organic business registered a growth of ~15-20% and the management expects the same to improve in the coming quarters. The domestic outbound travel business is expected to achieve strong growth in H2FY2017, while Kuoni’s inbound travel business is also expected to maintain strong growth momentum. To improve the long-term growth prospects, the company is building a proprietary e-commerce platform (for both Thomas Cook and SOTC brands), besides enhancing the conventional reach and focusing on customised packages to improve growth prospects. Post the integration of Kuoni’s acquisitions, the Travel business’ margins are expected to expand by ~100BPS by FY2018.

• VO business – sustains strong performance: TCIL’s VO business revenue grew by 23.8% YoY to Rs54.9 crore in Q2FY2017. The growth in topline was largely driven by 50% YoY growth in room night sales and improvement in the occupancy ratio to 56% (from 44% in Q2FY2016). The company added 2,905 new members in H1FY2017, taking the current membership base to ~80,000 members (expected to grow by 15-20% in coming years). The PBIT of the

VO business stood at Rs0.9 crore as against a loss of Rs0.5 crore in Q1FY2016. The management is confident of the business reaching EBIDTA positive by the end of FY2017.

• Financial Services – flat revenue; margins improve substantially – The Financial Services business revenue stood flat at Rs65 crore in Q2FY2017. However, the profits grew by 86% YoY to Rs35.7 crore in Q2FY2017 due to a better revenue mix. The management expects the Financial Services revenue growth to improve in the coming quarters.

Segmental revenue (consolidated) Rs crParticular Q2

FY17Q2

FY16YoY

%Q1

FY17QoQ %

Financial services 65.0 64.3 1.1 62.2 4.5Travel & related services

958.6 426.0 125.0 1,354.6 -29.2

Human resource services

1,013.8 799.0 26.9 987.2 2.7

Vacation ownership 54.9 44.3 23.8 72.2 -23.9 Segmental PBIT (consolidated) Rs crParticular Q2

FY17Q2

FY16YoY

%Q1

FY17QoQ

%Financial services 35.7 19.3 85.6 31.1 14.9Travel & related services

65.2 23.7 175.0 78.9 -17.4


55.8 36.2 53.8 45.1 23.5

Vacation ownership 0.5 -8.1 - 0.4 11.6 Segmental PBIT margins (%)Particular Q2

FY17Q2

FY16BPS Q1

FY17BPS

Financial services 55.0 30.0 - 50.0 500Travel & related services

6.8 5.6 124 5.8 -


5.5 4.5 96 4.6 90

Vacation ownership 0.9 -18.2 0.6

• Outlook and view: TCIL’s H2FY2017 performance is expected to be better than H1FY2017, as the second half is the strongest for the Travel & Related Services business. Also, the organic and inorganic initiatives would help the HR Services business to deliver a strong performance in the near to medium term (along with gradual improvement in OPM). Overall, we expect TCIL’s revenue to grow at a CAGR of 25% over FY2016-FY2018, leading to strong growth in the bottomline on the back of steady improvement in OPM. Also, the management is confident of improving the cash generation ability in the coming quarters, which will help in strengthening the balance sheet and enhance investments in key businesses. We maintain our ‘Buy’ recommendation with an unchanged PT of Rs255.



Valuations (Consolidated) Rs cr

Particulars CY2013 FY2015 # FY2016 FY2017E FY2018E

Net sales 1,295.6 3,244.3 4,236.7 5,464.6 6,724.1

Operating profit 152.2 241.6 242.1 364.8 558.1

OPM (%) 11.7 7.4 5.7 6.7 8.3

Adjusted PAT 68.7 112.3 50.2 140.3 281.1

EPS (Rs) 2.5 2.8 0.8 2.9 5.8

PE (x) 88.0 60.7 273.4 75.0 37.4

EV/EBIDTA (x) 34.8 34.2 32.8 22.3 14.1

RoE (%) 12.2 8.9 4.0 11.4 20.4

RoCE (%) 18.7 13.7 10.3 14.1 22.8

# FY2015 financials are for 15 months due to change in accounting year from December 2014 to March 2015




Key points

w Results ahead of estimates; impressive performance on all parameters: TVS Motor Company (TVSM) reported a strong set of numbers for Q2FY2017, beating our as well as street expectations. The topline grew by 21% YoY, as strong demand and market share gains (owing to new launches) led to 20% volume growth. Realisation per vehicle declined marginally by 1% YoY. TVSM managed to improve the Operating Profit Margin (OPM) on YoY basis despite increased commodity costs. The margins expanded by 10BPS YoY to 8.1% coming better than our estimates of 7.7%. Operating leverage and a better product mix more than offset increase in the commodity costs. Also, higher other income at Rs39 crore (up 101% YoY) further boosted profitability. Net profit at Rs177 crore grew strongly 33% YoY coming above our estimate of Rs142 crore.

w Well poised to outpace 2W industry growth: TVSM’s management expects to outpace the Two Wheeler (2W) industry growth over the next two years. Good demand for recent upgrades - Victor, Apache and Jupiter (Million R) and Star City helped TVSM to post higher volume and gain market share. Further, the company is expanding its distribution reach, which would enable it to outgrow 2W industry going forward. TVSM has posted a 23% YoY volume growth in H1FY2017 as against the 2W industry growth of 17% YoY and expects to continue outpacing the industry in H2FY2017. We expect TVSM to register 18% volume CAGR over the next two years in domestic 2W segment as against the expected industry growth rate of ~13%.

w Margins to improve on operating leverage and a better product mix; company aims at double-digit margins over the next two years: TVSM registered good OPM performance for the quarter. Going ahead, the company is expected to derive benefit of operating leverage amid a strong volume growth. Also, the collaboration with BMW would enable TVSM to gain foothold in the high-margin premium motorcycle segment, where it currently has only one model “Apache”. TVSM would also incorporate better manufacturing processes and designing cues gained from the BMW alliance across its existing product range. We believe this will enhance the brand image of TVS products and help the company to command higher margins going forward. We expect the OPM to expand by ~170BPS over the next two years.

w Outlook & valuation: Retain Buy with a revised PT of Rs455: TVSM is poised to outpace the 2W industry growth given the new launches and sustained demand for its products. We expect the company to report overall 18% CAGR in topline over FY2016-FY2018. Benefits of operating leverage, better product mix and alliance with BMW are expected to aid in margin expansion over the next 1-2 years. We expect TVSM to report 36% CAGR growth in net profit over the next two years. Given the better-than-expected margin performance and strong volume outlook, we have raised our earnings estimates by 15% and 9% for FY2017 / FY2018, respectively. We retain our ‘Buy’ rating with a revised price target (PT) of Rs455 (based on 22x average FY2018 and FY2019 earnings).

Company details

Price target: Rs455




19.6 lakh

BSE code: 532343

NSE code: TVSMOTOR

Sharekhan code: TVSMOTOR


20.2 cr


Price chart

Price performance

(%) 1m 3m 6m 12m

Absolute 14.8 37.3 21.1 64.9


TVS Motor Company Reco: Buy

Stock Update

Margin surprises positively; Maintain Buy with revised price target of Rs455 CMP: Rs411

Results Rs crParticulars Q2FY17 Q2FY16 YoY (%) Q1FY17 QoQ (%)Total income 3,426.5 2,837.4 20.8 2,880.9 18.9EBIDTA 276.7 227.0 21.9 200.4 38.1EBIDTA margins (%) 8.1 8.0 10 BPS 7.0 110BPSDepreciation 72.4 56.5 28.1 66.0 9.8Interest 9.4 11.5 -18.0 9.8 -3.8Other income 39.2 19.5 101.4 36.2 8.4PBT 234.0 178.5 31.1 160.8 45.5Tax 56.7 45.5 24.5 39.6 43.2PAT 177.4 133.0 33.4 121.3 46.3EPS (Rs) 3.7 2.8 33.4 2.6 46.3

Promoters57%

Institutions14%

Corporate Bodies

1%

Foreign17%

Public and Others

11%

250270290310330350370390410430

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Valuation Rs crParticulars FY15 FY16 FY17E FY18E FY19E Revenues 10,068.9 11,243.9 13,074.7 15,588.3 17,558.4

Growth (%) 26.4 11.7 16.3 19.2 12.6

EBIDTA 618.6 756.4 1,028.4 1,363.1 1,680.3

OPM (%) 6.1 6.7 7.9 8.7 9.6

PAT 356.5 437.8 618.0 855.0 1,111.7

Growth (%) 35.3 22.8 41.2 38.3 30.0

FD EPS (Rs) 7.5 9.2 13.0 18.0 23.4

P/E (x) 54.8 44.6 31.6 22.8 17.6

P/B (x) 11.9 10.1 8.3 6.6 5.3

EV/EBIDTA (x) 33.7 27.0 19.6 14.6 11.5

RoE (%) 21.7 22.6 26.2 29.1 30.3

RoCE (%) 17.6 20.1 24.3 29.3 32.5




Key points

w Disappointing quarter: Inox Leisure (ILL) reported weaker-than-expected results on all fronts in Q2FY2017. Revenue declined by 3.4% YoY to Rs297.4 crore, owing to 6.0% YoY decline in box office revenue (contributes 60.3% to total revenue), while advertising revenue grew by 11.2% YoY. The drop in net box office revenue is due to a 12.4% YoY decline in footfalls (owing to lack of content during the quarter), partially offset by 9% YoY increase in Average Ticket Price (ATP). Food & Beverages revenue was marginally up by 1.4% YoY at Rs70.2 crore. Operating Profit Margin (OPM) contracted by 920BPS YoY to 9.1%, missing estimate on account of higher distributor share (as most of the movies were screened for a shorter duration) and higher other expenses. As a result, net profit was down by 92% YoY at Rs1.6 crore.

w GST rollout to improve OPM by 300-500BPS: (1) ILL added just three new property during the quarter. The management plans to add eight new properties (with 40 screens) during the remaining part of FY2017. It has signed a binding agreement to add 56 properties beyond FY2017 (2) On the GST rollout, the management expects 300-500BPS positive impact on OPM if the GST rate is fixed at 18% (3) Though the management acknowledged that its conscious efforts to drop the low-paying advertisers, along with rate hike have impacted growth in advertising revenue, it has already started witnessing some acceptance of its higher ad rates in the market and expects this initiative to pay off in the long term. Further, it noted that there is room for improvement in per screen ad minutes (4) The F&B segment is expected to grow further, led by an improvement in customer touchpoints and an increase in number of menus (5) The ATP is expected to increase by 6-8% YoY in FY2017 (6) The management expects to do a capex of Rs120 crore in the remaining period of FY2017; Rs70 crore will be financed by debt and the remaining Rs50 crore will come from internal accruals.

w Maintain Hold with an unchanged PT of Rs285: We have revised our estimates for FY2017/FY2018E, owing lower-than-expected performance in H1FY2017 and slow screen count addition on the back of regulatory hurdles. We continue to remain positive on ILL from a long-term perspective, given its pan-India growth plans, healthy balance sheet (lower financial leverage) and potential benefits from GST rollout. We expect a gradual improvement in the operating parameters over FY2017 and FY2018. Owing to the absence of re-rating triggers in the near to medium term (due to weak earnings performance), we maintain our Hold rating on ILL with an unchanged price target (PT) of Rs285.

Company details

Price target: Rs285




2.0 lakh

BSE code: 532706

NSE code: INOXLEISUR

Sharekhan code: INOXLEISUR


4.9 cr


Price chart

Price performance

(%) 1m 3m 6m 12m

Absolute -0.4 9.0 25.1 10.3


Inox Leisure Reco: Hold

Stock Update

Weak results, maintain Hold with price target of Rs285 CMP: Rs263

Results (consolidated) Rs crParticulars Q2FY17 Q2FY16 Q1FY17 YoY (%) QoQ (%)Net sales 297.4 307.7 336.9 -3.4 -11.7Exhibition costs 86.7 86.6 95.4 0.1 -9.1Cost of F&B 18.3 17.6 18.4 4.0 -0.4Employee expenses 21.8 18.4 21.6 18.5 0.8Property rent 57.4 51.5 59.6 11.4 -3.8Other expenses 86.0 77.2 79.8 11.4 7.8EBITDA 27.2 56.4 62.1 -51.8 -56.2Depreciation 20.8 19.7 20.3 5.3 2.5Finance cost 5.8 6.2 5.8 -5.7 0.7Other income 2.1 1.4 2.5 51.1 -14.1PBT 2.7 31.9 38.5 -91.5 -92.9Tax provision 1.1 11.5 13.6 -90.1 -91.7Net profit 1.6 20.4 25.0 -92.2 -93.6EPS (Rs) 0.2 2.1 2.6 -92.2 -93.6Margin (%)EBITDA margin 9.1 18.3 18.4NPM 0.5 6.6 7.4

Promoters49%

Institutions14% Corporate

Bodies3%

Foreign17%

Public and Others

17%

170

190

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250

270

290

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ValuationParticulars FY15# FY16# FY17E FY18ENet revenue 1,016.8 1,332.7 1,308.2 1,571.8

EBITDA margin (%) 12.1 14.3 15.2 16.9

Net profit 20.0 77.5 63.0 108.7

EPS (Rs) 2.2 8.4 6.9 11.8

PER (x) 117.9 30.5 38.3 22.2

EV/EBITDA (x) 22.0 13.9 13.8 10.2

RoE (%) 3.0 13.0 9.6 14.3

RoCE (%) 6.8 12.2 13.1 17.8

*FY17/FY18 based on IND AS, # FY15/FY16 are not restated to IND AS

Key metrics Rs crParticulars Q2FY17 Q2FY16 Q1FY17 YoY (%) QoQ (%)Total properties (nos) 111 101 108 9.9 2.8

Numbers of seats (nos) 112,033 102,785 109,406 9.0 2.4

Number of screens (nos) 436 393 425 10.9 2.6

Footfalls (in mn) 12.7 14.5 15.5 -12.4 -18.3

Occupancy (%) 26.0 32.0 31.0

ATP (Rs) 183.0 169.0 174.0 8.3 5.2

SPH (Rs) 65.0 56.0 61.0 16.1 6.6

Revenue mix (Rs cr)

GBOC 179.4 190.9 213.5 (6.0) -16.0

Food & beverages 70.2 69.2 80.7 1.4 -13.0

Advertisements 23.8 21.4 21.3 11.2 11.7

Source: Sharekhan Research and Company

Gross box office revenue trend Footfall trend

Source: Sharekhan Research and Company Source: Sharekhan Research and Company

142124

157180

202

135

239 244 231

191214

179

0

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Occupancy trend Screen addition trend

Average ticket price F&B spending per head

Revenue mix trend Operating margin trend




27

2326 26

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33 32

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26

-

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30.0

35.0 Q

3FY

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(in

%)

296 310 320361 365 372 377 393 413 420 425 436

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(AT

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51 49

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in R

s cr

Ticket sales Food and Beverages Advertisements

12.6

8.6

12.613.8

15.4

4.8

21.3

15.9 15.5

5.2

18.4

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0

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(in

%)




Key points

w Good performance: Firstsource Solutions (FSL) reported a revenue growth of 1.2% QoQ on a constant currency (CC) basis. However, on a reported basis, the total revenue declined by 1.0% QoQ to Rs884.4 crore, owing to currency depreciation, especially in GBP. Operating Profit Margin (OPM) contracted by 60BPS QoQ to 12.7%, owing to currency headwinds, expenses incurred for enrolment activities in North America and transitioning cost linked to Sky deal. Net profit declined by 2.9% QoQ to Rs71.3 crore. On the operating metric front, the BFSI vertical grew by 8.4% QoQ on the back of better-than-anticipated performance of ISGN BPO business. In terms of geography, North America grew by 0.9% QoQ, while the UK business declined by 1.5% QoQ. Net employee addition stood at 762 during the quarter, taking the total headcount to 24,910, while the seat filling factor remained flat QoQ at 72%.

w Maintains growth and margin guidance with upward bias: (1) The management continues to maintain revenue growth (10-12% YoY on CC terms) and margin expansion (70-90BPS YoY) guidance for FY2017 with an upward bias. The guidance will be backed by incremental revenue (~$10 million) from the full consolidation of Sky deal in Q3FY2017 (already booked one month’s revenue in Q2FY2017) and seasonally strong Q4FY2017; (2) The management expects ISGN’s FY2017 revenue to be 30-35% higher than its earlier reported revenue ($24-25 million in FY2016) and its EBITDA margin to be better than the company’s average. In Q2FY2017, ISGN’s revenue was ~20% QoQ higher than Q1FY2017 (~$9 million); (3) The management expects BFSI to sustain growth momentum, led by the ISGN acquisition and tailwinds in the UK banking segment; (4) Though Brexit has had an adverse impact on currency movements, the management stated that there will be a negligible impact on its business, as its offshore receivables have been hedged for a longer tenure. Further, it foresees growth momentum in the form of outsourcing out of the UK in the wake of Brexit and (5) Going forward, the management expects to acquire entities for growing its Healthcare business.

w Maintain Hold owing to macro overhang, PT revised to Rs47: We have marginally tweaked our revenue estimates for FY2017/FY2018E, due to better-than-expected Q2FY2017 numbers and good results reported by ISGN. We believe that the ongoing macro overhang will restrict the stock outperformance in the near-to-medium term, as FSL has 38.1% exposure to the UK and also overall IT sector overhang could restrict any material re-rating for the stock. At the CMP of Rs40, the stock trades at 8.4x/7.1x FY2017/FY2018E earnings estimates. Given our cautious stance on the IT sector, we are now assigning a lower P/E multiple to FSL and have consequently revised our price target (PT) to Rs47. We maintain our ‘Hold’ rating on the stock.

Company details

Price target: Rs47




29 lakh

BSE code: 532809

NSE code: FSL

Sharekhan code: FSL


30 cr


Price chart

Price performance

(%) 1m 3m 6m 12m

Absolute -4.5 -18.0 4.0 23.7

Relative to Sensex -3.0 -17.8 -3.9 19.8

Firstsource Solutions Reco: Hold

Stock Update

Steady performance, macro overhang to restrict outperformance; maintain Hold with revised PT of Rs47 CMP: Rs40

Results Rs crParticulars Q2FY17 Q2FY16 Q1FY17 YoY (%) QoQ (%) Revenue from operations 884.4 787.8 893.5 12.3 -1.0Employee expenses 595.0 534.4 581.7 11.3 2.3Gross profit 289.4 253.4 311.8 14.2 -7.2Operating expenses 176.8 159.9 192.6 10.6 -8.2EBITDA 112.6 93.5 119.2 20.4 -5.6Depreciation and amortisation 16.0 18.3 16.3 -12.3 -1.5EBIT 96.5 75.2 102.9 28.3 -6.2Other income (net) -0.2 0.9 1.9 - -Interest expenses 10.3 13.1 13.2 -21.2 -21.7EBT 86.1 63.1 91.6 36.4 -6.1Taxes 14.9 4.3 18.3 246.4 -18.7PAT 71.3 58.7 73.4 21.5 -2.9EPS 1.1 0.9 1.1 21.5 -2.9Margin (%) EBITDA 12.7 11.9 13.3 EBIT 10.9 9.5 11.5 NPM 8.1 7.4 8.2

Promoters55%

Institutions6%

Foreign10%

Public and Others

29%

28

33

38

43

48

53

58

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Valuation Rs crParticulars FY15 FY16 FY17E FY18ETotal revenue 3,034.6 3,217.3 3,803.4 4,273.9

EBITDA margin (%) 12.5 12.1 13.2 13.1

Net profit 234.3 255.2 318.0 375.8

EPS (Rs) 3.5 3.8 4.7 5.6

P/E (x) 11.5 10.5 8.4 7.1

EV/EBITDA (x) 8.9 9.2 5.9 4.6

EV/sales (x) 1.1 1.1 0.8 0.6

RoE (%) 11.2 13.2 16.3 16.4

RoCE (%) 10.4 11.2 13.9 14.0

Other result highlights:

• FSL’s net long-term debt stood at $84 million as against $97 million in the previous quarter.

• The cash & cash equivalent stood at Rs122.0 crore compared to Rs114.7 crore in Q1FY2017. Capital expenditure (capex) was Rs20.8 crore during the quarter. FSL has outstanding hedges of $50 million (59% covered at Rs70.6 per USD) and GBP 62 million (82% covered at Rs109.7 per GBP). It has decreased the coverage for GBP to 65% (vs 80% in Q1FY2017) at Rs107.9/INR for the next 12-24 months. The company has also taken GBP coverage for the next 24-36 months,

given the impact on currencies (especially GBP) from Brexit. Notably, the company generates 38.1% of its total revenues from the UK.

• The company had 48 delivery centers in Q2FY2017 compared to 47 delivery centers in the previous quarter.

• For Q2FY2017, the attrition rate for offshore business (India and the Philippines) further improved to 43.7% from 50.1% in Q1FY2017. But, the attrition rate increased for onshore business (USA and Europe) to 49.9% vs 49.3% in Q1FY2017. The attrition rate for the domestic market (India and Sri Lanka) dropped to 71.7% from 76.8% in Q1FY2017.

• The management expects the effective tax rate to be ~18% for FY2017.

• In Sky deal, the first phase of transition of 257 employees was successfully completed in September 2016 in Warrington, while the second phase of transition is expected to be completed in March 2017. The deal is expected to be signed on November 15, 2016.

• Debt will be considerably reduced over the next couple of quarters. It will be in the range of $60-70 million.

Operating metricsParticulars Q2FY17 Q2FY16 Q1FY17 YoY (%) QoQ (%) CommentsGeographic mix (%)North America 55.1 54.4 54.4 13.7 0.2 North Americas grew marginally against 3.0%

QoQ growth in Q1FY2017 in (Rs cr) 487.3 428.6 486.1UK 38.1 37.4 38.3 14.4 -1.5in (Rs cr) 336.9 294.6 342.2India 5.9 6.4 5.7 3.5 2.4in (Rs cr) 52.2 50.4 50.9Rest of the World 0.9 1.9 1.5 -46.8 -40.6in (Rs cr) 8.0 15.0 13.4Industry verticals (%)BFSI 35.5 21.5 32.4 85.4 8.4 BFSI contribution continues to improve,

reached 35.5% in against 32.4% in Q1FY2017. BFSI grew by 8.4% QoQ vs compared to growth of 31.6% QoQ in Q1FY2017

in (Rs cr) 313.9 169.4 289.5Telecom and Media 29.8 38.8 32.5 -13.8 -9.3in (Rs cr) 263.5 305.7 290.4Healthcare 34.5 39.5 34.8 -2.0 -1.9in (Rs cr) 305.1 311.2 311.0Others 0.2 0.2 0.3 12.3 -34.0in (Rs cr) 1.8 1.6 2.7Segment breakdown (%)Customer management 51.3 46.7 51.4 23.3 -1.2 Customer management declined 1.2% QoQin (Rs cr) 453.7 367.9 459.3Healthcare 34.5 39.5 34.8 -2.0 -1.9in (Rs cr) 305.1 311.2 311.0Collections 10.9 10.1 10.6 21.1 1.8in (Rs cr) 96.4 79.6 94.7Domestic 5.9 6.4 5.7 3.5 2.4in (Rs cr) 52.2 50.4 50.9

contd...



Particulars Q2FY17 Q2FY16 Q1FY17 YoY (%) QoQ (%) Comments

Delivery mix

Offshore 20.6 22.4 21.4 3.2 -4.7 Offshore delivery revenue declined by 4.7% QoQ vs growth of 12.2% QoQ in Q1FY2017in (Rs cr) 182.2 176.5 191.2

Domestic 5.9 6.4 5.7 3.5 2.4

in (Rs cr) 52.2 50.4 50.9

Onshore 73.5 71.2 72.8 15.9 -0.1

in (Rs cr) 650.0 560.9 650.5

Client concentration (%)

Top customer 19.8 22.9 20.7 -2.9 -5.3 Business from top client was down by 5.3% QoQ; volumes have been stable with upward bias, but there has been a rate impact

in (Rs cr) 175.1 180.4 185.0

Top 5 customers 44.1 43.8 41.6 13.0 4.9

in (Rs cr) 390.0 345.1 371.7

Other than top 5 clients 55.9 56.2 58.4 11.7 -5.3

in (Rs cr) 494.4 442.7 521.8

Other Important Metrics

Total Employees 24,910 23,658 24,148 5.3 3.2 Net addition of 762 employees to headcount in Q2FY2017Net Addition 762 (281) 262

Number of Seats 22,797 23,159 23,920 -1.6 -4.7

Seat Fill Factor (%) 67.0 72.0 72.0 - -


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