lok sabha 2014 -...

Please refer to Disclosures and Disclaimers at the end of the Research Report.

Lok Sabha 2014 Resuscitating India!

STRATEGY 20 May 2014

PhillipCapital (India) Pvt. Ltd.

The firm people’s mandate of Loksabha 2014 elections has ensured one of the most stable and capable central governments in the Indian history for the next 5 years. The new government’s development agenda’s execution is based on 3 major pillars as have been consistently voiced by Shri Narendra Modi. The three pillars are 1) More collaborative efforts between state and central governments 2) Gujarat model‐ creating an environment for ease of doing business, and 3) Improving the agricultural output. These three pillars of execution have two further offshoots that will have deep impact on the economy a) stabilization of INR and b) cleaning up of balance sheets of banks.

Pillar 1: Improved Centre‐State relations will provide a significant boost to the capex cycle: Stalled projects worth ~Rs 16 trillion (~80% of total stalled projects) are likely to benefit from easing centre‐state relations. Apart from obvious improvements in state‐centre relationship for the states of Gujarat, Madhya Pradesh, Chhattisgarh, Punjab, Goa and Rajasthan (all BJP/NDA ruled states), the NDA’s comprehensive wins in the states of Maharashtra, Jharkhand, Seemandhra and Bihar (non‐NDA ruled states) will mean that the imminent state elections (Seemandhra already done) could be favourable for the NDA translating to furthering of collaborative efforts. Odisha, with the highest share of stalled projects (16% translating to Rs ~3 trillion) will see significant improvement in relations with the new central government translating to a significant boost to the overall capex cycle. We strongly believe that over the next 12 months the prognosis of state‐centre relationship will be the most critical plays to generate alpha. Based on this theme, we pick Sesa Sterlite, L&T, Axis bank, Nalco, PFC & NCC.

Pillar2: Gujarat Model aka ease of doing business or the place to do business: The Gujarat model is renowned for the environment created for ease of doing business and the state of Gujarat is considered the place to do business in India. While the model’s translation to pan‐India execution will be protracted but certain policy actions like simplifying the tax structure are imminent. In this direction is the implementation of Goods and Services Tax (GST) which will simplify the overall tax structure for both corporates and SMEs. Consumer durables, Paints, Retail and FMCG sectors stand to benefit with immediacy on implementation of GST. Consumer plays provide portfolio stability and we recommend Titan, Havells India, Asian Paints, Shopper’s Stop, Kajaria Ceramics and Trent.

Pillar 3: Boosting agriculture output: The NDA government’s focus will be to improve agricultural productivity and attaining nutrient balance in soil. We expect a spate of policy action that will lighten the balance sheets of Fertiliser companies. Our theme picks are Coromandel and Kaveri Seeds.

• Theme A: INR Stability: We have not taken a negative stand on export based plays as we believe that INR stability rather than sharp appreciation will be the dominant theme in the medium term as macroeconomic factors in India coupled with global themes like QE roll back, revival of growth in western economies will continue to put pressure on INR. Thus IT, Pharmaceuticals, Metals, Autos (mostly Tata Motors) may not see sharp earnings contraction but probability of re‐rating appears rather slim.

• Theme B: Clean up of balance sheets of banks: Revival of investment in infrastructure and stalled projects will improve the balance sheets of banks and corporate focused banks will see faster growth and a balance sheet clean up. We prefer PNB, Indian Bank and Andhra Bank in the banking space.

Apart from the above mentioned we continue to like Ultratech Cement, Maruti, Adani Ports, Oberoi Realty, Ashok Leyland & Bharat Forge.

Naveen Kulkarni, CFA, FRM (+ 9122 6667 9947) [email protected] Kinshuk Bharti Tiwari (+9122 6667 9946) [email protected] Gauri Anand (+9122 6667 9943) [email protected] Vivekanand Subbaraman (+9122 6667 9766) [email protected] Phillip Capital India Research

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20 May 2014 / INDIA EQUITY RESEARCH / LOK SABHA 2014 ELECTIONS

Verdict 2014 implications ‐ Improvement in Centre‐State relations the next step! This election marks a deviation from a long‐term trend of fractured mandates, with the BJP alone winning 282 seats; 12 more than the half‐way mark. While the BJP led NDA has won a comfortable majority in the Lok Sabha (winning 335 seats), we highlight that there are several developmental challenges which rely on the centre‐state relations. The current NDA’s strength in the Rajya Sabha is only around a quarter of the house which could be a limiting factor in getting key bills passed. Lower number in Rajya Sabha is no issue. In the Joint Session of Parliament we will have the numbers – Shri. Arun Jaitley, Rajya Sabha Member, BJP Nonetheless, the BJP believes that this isn’t an insurmountable challenge as is evinced by Shri Arun Jaitley’s media interaction. In this research piece, we explore these possibilities and also decode the Lok Sabha results in the context of the same. States comprising ~half of India’s population will see a material improvement in Centre‐State relations. The recently concluded Lok Sabha and Vidhan Sabha elections saw a significant swing in favour of the BJP‐led‐NDA in seven states.

Centre‐state relations to significantly improve LS'14 Outcome State Population

(mn) Winner Seats

(NDA) NDA Vote share (%)

% of seats (NDA)

Current State Govt.

Likely state election schedule

% of Rs 21 trillion stalled

projects (by value)

Comment

NDA‐ruled states where centre‐state relations will improve Gujarat 60 BJP 26/26 #1 @ 59% 100 BJP Dec 2017 1 BJP state govt & overwhelming win in LS'14Rajasthan 68 BJP 25/25 #1 @ 55% 100 BJP Oct 2018 3 BJP state govt & overwhelming win in LS'14MP 73 BJP 27/29 #1 @ 54% 93 BJP Oct 2018 5 BJP state govt & overwhelming win in LS'14Chhattisgarh 26 BJP 10/11 #1 @ 49% 91 BJP Oct 2018 11 BJP state govt & overwhelming win in LS'14Punjab 28 NDA 6/13 #1 @ 35% 46 NDA Jan 2017 1 NDA state govt & single largest alliance in

LS'14 States with high likelihood of NDA‐rule in the next 12 months & hence centre‐state relations will improveSeemandhra (LS) 60 TDP/BJP 17/25 #1 68 UPA May 2014 3 VS verdict is an NDA govt.J&K 13 BJP 3/6 #1 @ 32% 50 UPA Aug 2014 ‐ LS result indicates high likelihood of NDA

govt. formation Delhi (NCT) 10 BJP 7/7 #1 @ 46% 100 NA Jun‐Sep 2014 2 Hung verdict in VS'13; expect an NDA govt.Maharashtra 112 BJP/SS 43/48 #1 @ 50% 90 UPA Oct 2014 11 LS result indicates high likelihood of NDA

govt. formation Haryana 25 BJP/HJC 7/10 #1 @ 40% 70 UPA Oct 2014 2 LS result indicates high likelihood of NDA

govt. formation Jharkhand 33 BJP 12/14 #1 @ 40% 86 UPA Oct 2014 9 LS result indicates high likelihood of NDA

govt. formation Bihar 104 BJP 31/40 #1 @ 39% 78 JD(U) Oct 2015 2 LS result could lead to mid‐term polls & NDA

govt. formation sooner Uttarakhand 10 BJP 5/5 #1 @ 55% 100 UPA Jan 2017 1 UPA has wafer‐thin majority; mid‐term polls

could lead to NDA govt.

Source: Election Commission of India, PhillipCapital India Research • Seemandhra (SA) saw Lok Sabha and Vidhan Sabha elections held simultaneously. In

addition to sweeping the Lok Sabha polls where NDA won 68% of the state’s Lok Sabha’s seats; the alliance also won 60% of the state’s assembly. Thus SA will see Shri. Chandrababu Naidu, NDA chief minister taking the reins of the state from 2nd June 2014 itself.

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• Jammu & Kashmir (J&K) – the six‐year term of the J&K assembly is ending in August 2014. The Lok Sabha verdict is overwhelmingly indicative of an anti‐incumbent mood in the state with the two principal opposition parties of the state including the J&K PDP and the BJP winning all the Lok Sabha seats of the state. Additionally the BJP also garnered the highest vote share in the state; clearly indicating that any state government that gets formed in J&K is very likely to include the BJP.

• NCR of Delhi – Delhi, which saw a fractured mandate in the December 2013 assembly elections, saw the BJP comprehensively gaining the popular mandate for Lok Sabha in the recent election. Thus, the city‐state, which is due for a re‐election for the Vidhan Sabha, is likely to see a BJP government.

• Maharashtra saw a massive anti‐incumbent mandate, with the UPA being able to win just over 10% of the state’s seats. The BJP led NDA was also overwhelmingly ahead of the incumbent alliance and secured a 50% vote share in the state. The state will witness Vidhan Sabha elections in October 2014 and here too the Lok Sabha verdict shows a high likelihood of an NDA government taking over very soon.

• Haryana & Jharkhand are seeing trends similar to that witnessed in Maharashtra and here too we are likely to see an NDA government after the state elections.

• Bihar is witnessing a unique situation where the party running the state government, viz. the JD(U), has been relegated to third place in vote share terms. While the current term of the Bihar government expires in October 2015, we believe that there is a distinct opportunity of an early election considering the recent rout faced by the JD(U) coupled with the fact that the government doesn’t enjoy a clear majority in the assembly. Here too, we could be looking at an NDA government by FY15.

• Uttarkhand too is seeing a situation where the party ruling the state was completely routed in the recent polls. Here too the ruling coalition doesn’t enjoy a clear majority and we could see a mid‐term poll with the NDA coming to power by FY15.

States comprising another third of India’s population have non‐Congress non‐NDA governments; where collaboration could increase In addition to the eight states mentioned above, four states including Odisha, Tamil Nadu, West Bengal and Uttar Pradesh also saw a staggering anti‐incumbent (UPA) verdict. Considering that the mandate could be read as a vote against ‘policy paralysis,’ even in states where the NDA wasn’t chosen, the winning regional party could read this as signal from voters to reform.

Centre‐state relations could improve as non‐UPA, non‐NDA govt. in power LS'14 Outcome State Population

(mn) Winner Seats


% of seats (NDA)

Current State Govt.



projects (by value)

Comment

NDA‐ruled states where centre‐state relations will improve Odisha (LS) 42 BJD 1/17 #3 @ 22% 6 BJD May 2014 16 VS verdict in favour of BJD; neutral state

govt. Tamil Nadu 72 ADMK 2/39 #3 @ 18% 5 ADMK Apr 2016 5 VS verdict in favour of ADMK; neutral state

govt. West Bengal 91 TMC 2/42 #3 @ 17% 5 TMC May 2016 5 LS verdict in favour of TMC; anti‐BJP state

govt. Uttar Pradesh 200 BJP/AD 73/80 #1 @ 42% 91 SP Mar 2017 5 LS verdict in favour of BJP; anti‐BJP state

govt.

Source: Election Commission of India, PhillipCapital India Research • Odisha saw Lok Sabha and Vidhan Sabha elections held simultaneously. In addition

to sweeping the Lok Sabha polls where the BJD won 95% of the state’s Lok Sabha’s seats; the partly also won 80% of the state’s assembly. The BJD has been part of the NDA in the past and it has also indicated a desire to offer ‘conditional support’ to the

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NDA currently. This could be a catalyst for improvement in state relations; a far cry from the political stand‐offs witnessed between the UPA and Odisha state government on matters such as Niyamgiri mining permissions.

• The ADMK got an overwhelming mandate in its favour in Tamil Nadu. In addition to being part of the NDA in the past, the Tamil Nadu chief minister, Ms. J Jayalalitha and Mr. Narendra Modi enjoy a good personal rapport with each other (having attending the respective swearing‐in ceremonies while winning their state elections on being personally invited by each other). This, along with Ms. Jayalalitha’s post‐results statement of best wishes to the new government and a hope that it is ‘friendly’ to the state of Tamil Nadu, clearly indicates that there could be an improvement in the state‐centre relations in Tamil Nadu.

• The TMC secured a solid 80% mandate in its favour in the state of West Bengal. While the party has been at logger‐heads with the BJP, we believe that it would view the current mandate favourably and would likely collaborate better in the interest of firming its position in the May 2016 assembly polls where it faces a resurgent BJP in the state.

• Uttar Pradesh witnessed a landslide victory of the NDA, which won over 90% of the state’s seats. This is very likely to prick the ruling SP, at whose cost the NDA secured this mandate. While the SP could behave in an adversarial manner with the centre, we believe that the current mandate, which appears to be a vote for development could prod the state government into action, so as to be in contention in the state’s politics.

States where there could be a worsening of centre‐state dynamics following the results • We also point out that three states ruled by the INC, including Assam, HP and

Karnataka, saw a massive anti‐incumbent mandate but are likely to see a continuation of the UPA rule owing to the INC’s strength in the state assemblies. These states are likely to see state‐centre relations worsen as the UPA government gets replaced by the NDA.

Centre‐state relations may see a thaw as adversarial environment could continue LS'14 Outcome State Population

(mn) Winner Seats


% of seats (NDA)

Current State Govt.



projects (by value)

Comment

UPA‐ruled states where centre‐state relations will see a thaw Assam 31 BJP 7/14 #1 @ 36% 50 UPA Apr 2016 1 LS result shows substantial BJP leadHimachal Pradesh

7 BJP 4/4 #1 @ 53% 100 UPA Nov 2017 1 LS verdict is for BJP; but state govt. stable; unlikely to see good state‐centre relations

Karnataka 61 BJP 17/28 #1 @ 43% 61 INC May 2018 4 LS verdict is for BJP; but state govt. stable; unlikely to see good state‐centre relations

Source: Election Commission of India, PhillipCapital India Research

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Plays based on improving State‐Centre Relationships and rise in infrastructure spending Sesa Sterlite • The process for government’s stake sale in Hindustan Zinc will gain traction post the

stable governments which will help the company improve its cash fungibility. Access to Hindustan Zinc’s cash will help the company service its existing debt.

• Allocation of bauxite mines post a stable government both in Centre as well as the state will significantly improve the profitability of the Aluminium operations which are a significant drag to the current valuations.

• BJP government both at the Centre and the state of Goa will also help smoothly re‐start the Goa iron ore mining operations in the state. This will improve the profitability and the cash flow in the standalone operations.

• The above scenarios will lead to a significant change in the existing profitability and the balance sheet structure for the company which will lead to a re‐rating for the stock.

Nalco • The process of getting the stage 2 Forest clearance for the Utkal E coal block (in

Odisha) will gain traction with both the Central as well as the State elections getting over. Commissioning of the said block will help the company restart ~ 30% of its Aluminium capacity which is currently shut. The capacity was shut due to lack of stable coal supply at affordable prices.

• Restart of the said capacity will help the company significantly reduce its operating costs (higher fixed cost recovery due to higher production) in addition to reducing its existing coal costs.

• The company is also expected to get Stage 2 Forest clearance for its Panchpatmali bauxite mines post the new government is formed which will help it improve the existing bauxite quality thereby reducing the costs.

• The above clearances will see a significant jump in the existing profitability for the company which will lead to significant returns from the current levels.

L&T Given the new government’s thrust on infrastructure, we expect L&T to be a key beneficiary as it has leadership position across key infra sectors and would be get a disproportionate benefit from any increase in spending in these areas. Over the last few years, L&T had taken a strategic decision to focus on the M. East markets (~25% of revenues and orders are being derived from here) and this helped them counter the slowdown in the domestic market. With the new government’s focus on increasing spending on infrastructure (roads, railways, defense, metros), we see strong growth in L&T’s core infrastructure orders. We currently build in order growth of 6% in FY14 and 5% in FY16 which has upside risk in our view. We also expect a strong pickup in execution starting from FY16. Power Finance Corporation The lack of intent from states like Haryana; Rajasthan; Uttar Pradesh and Tamil Nadu to revise tariff due to political unwillingness may witness a sea change due to improving relations between center and state. The improvement in health of discoms will be beneficial for new power projects as well its financiers like PFC. • The new government is unlikely to reverse the measures taken by the previous

governments (like signing of FSA’s, pass through of imported coal, SEB debt restructuring, tariff hikes etc) in bailing out the troubled power sector. Gujarat is the

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one of the few states which is power surplus and its discoms have the best financials amongst all SEB’s.

• Adopting the similar model would mean regular tariff hikes by major loss making states like TN, UP, Rajasthan etc to turn around the power discoms.

• Also, with the government’s focus on infra, the demand for power from SEB’S will increase and at the same time, improving liquidity situation of SEB’s augurs well for power generation companies to which PFC has a significant exposure.

• With asset quality risks abating and credit demand improving, we see a possibility of re‐rating for PFC. At the CMP, PFC trades at 1x FY16E Adj BV. We, therefore believe PFC to be a strong play on election results.

Nagarjuna Construction (NCC) • NCC should benefit from the overall economic revival and increase in orders from the

government, esp. orders in roads segment (Center level) and from the state of AP (both Seemandhra+Telangana: state level). While it might take two‐three quarters for the company to come back to its old levels of profitability, we see the company much better placed than peers, to capture the overall economic revival over the medium‐long term.

• NCC remains the only major EPC company NOT to be under CDR and has managed to maintain stable operating margins over the last eight quarters. The company has demonstrated high degree of financial discipline by reducing debt (Rs3bn over FY14) and controlling working capital (reduced debtor days from 95 to 80 in FY14). Sale of stake in Nelcast Power to Sembcorp also reduces the overhang of the equity requirement for the project.

Favored banks based on above theme The pro‐growth strategy of NDA will provide fillip to the infrastructure segment as well as its financiers. We expect faster execution of stalled projects to avoid them to turn non performing in the lender’s book. The tide has turned in favor of corporate focused bank where we see a case for multiple re‐rating compared to retail focused banks due to factors like inexpensive valuation and better growth prospects. Axis Bank • The bank maintains its stressed asset guidance at Rs 65bn. We do not expect major

impairment in the loan book as some of the stalled projects are on the verge of kick‐start after CCI’s intervention.

• Advances growth to continue to moderate till economic activity remains lackluster. However, the balance sheet has shown increasing signs of de‐risking. The share of mortgage business increased from 20% to 24% YTD, whereas exposure to riskier sectors declined by 74bps during the same period to 21.4%.

• The bank has started reaping benefits of developing a sound low‐cost liability franchise, which reflects in its stable funding cost. NIM has held up well at ~3.8% for FY14, and we expect the NIMs remains stable at +3.8% level.

• The focus on operational efficiencies is enabling the bank to sail through the current downturn.

• The bank’s ability to meet its guidance makes us believe that the FY15 credit costs will be contained below 100bps. Stable return ratios and favorable valuations provide comfort. At the CMP of Rs 1756, the bank trades at 1.7x FY16 ABVPS of Rs1043 vs. 10‐year median valuation of 2x.

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Punjab National Bank Though the stress still prevails in the system, the bank may not witness its peak slippages number compared to FY14 given moderate balance sheet growth in last one year translating into a decline in exposure towards stressed segment (203bps YTD) to 33%. • It has focused on strengthening balance sheet by improving the provision coverage

and reducing reliance on bulk deposit to provide better earnings visibility vs. peers. • Renewed focus on improving topline and containing stressed loans will translate into

better earnings growth. • We expect 31% earnings growth and 300bps improvement in RoE from 11% to 14%

over FY14‐16. At the CMP of Rs917, the bank trades at 1.17x. Indian Bank • The management has guided for improvement in asset quality driven by

containment of slippage and sell down of NPAs • NIMs are expected to improve driven by improvement in the domestic CD ratio,

which has declined from 70% to 66.7% in the current fiscal • The cost‐to‐income ratio, which increased to 54% during the quarter, is expected to

decline with improvement in NII. • The stability in NPA will contain credit costs, leading to a 20% & 24% earnings

growth in FY15 & FY16 respectively. Adequate capital provides comfort in terms of balance sheet growth and abates the risk of erosion in book value due to dilution.

• At the CMP of Rs145, the bank trades at inexpensive valuation of 0.6x FY16 ABVPS of Rs236.

Andhra Bank • Andhra Bank’s prospects of business growth have been a derivative of the economic

conditions prevailing in the state of Andhra Pradesh (erstwhile), given the looming economic conditions not only due to the existing slowdown in the GDP growth, but also due to the political uncertainty the state has witnessed over the past period due to the division of the state between Seemandhra and Tenengana.

• The bank has a significant business exposure in AP. In FY13, the AP’s gross state domestic products (GSDP) declined to 14.5% (share of 8.1% of country’s GDP) at nominal prices from an average of 18.5% over last 5 years. Given the peaceful division of the state, we expect industrial and manufacturing activities in the state to increase, not only due to pick up in the state’s business activity, but also over the expectation of the country’s GDP bottoming out.

• Andhra Banks has large exposure of 11.2% (of gross advances) to power segment which has been a drag in its portfolio given the concerns surrounding power segment. With likely resolution to the power sector (like reduction in cash loss of discoms; faster execution of projects; removal of supply side bottleneck etc), we expect the risk in Andhra bank’s balance sheet risk to subside.

Hence reduction in balance sheet risk due to resolution to power sector problem; Settlement of political uncertainty to allay concern surrounding the stock.

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The Gujarat Model: Ease of Doing business Implementation of GST will reduce the product cost payable by the end‐user, widening the market for discretionary products in India. Typically products such as Consumer durables, home décor materials and apparels have slower inventory turns. The cost and time involved in the movement of goods would reduce and also result in reduction of multiple warehouses (thus result in more optimum inventory levels). Since GST unifies the states into a single landmass, inter‐state movement will be seamless, reducing the logistics cost for companies with high value inventory like consumer durables, paints, tile manufacturers and apparel retailers. Therefore lower logistic costs and lower working capital requirement would aid margins and capital efficiency. Relaxation of gold import restrictions – The Government could relax the gold import relaxations (80/20 rule) as well reduce the high custom duty (currently at 10% duty). Both moves would reduce the spot premium of physical gold retailed in India , thus restoring the competitiveness of organized players. Titan The company will benefit from expansion undertaken since FY12 and with over 47% of area < 3 years old the potential for high double digit growth remains strong. We estimate robust earnings growth of 26% in FY15‐16 on the back of operating leverage from new store maturity, marginal pickup in consumer sentiments, and steady improvement in share of studded jewelry. Asian Paints We pick Asian Paints from the consumer sector as it is a beneficiary of multiple themes from the election results. The following are the key reasons: • Paints sector is a leverage play on GDP growth rate and Asian paints will benefit the

most from improvement in GDP growth rate. • Asian Paints has a dealer model and simplification of tax structure will reduce the

operating costs for dealers and improve the business profitability. • Improvement in channel profitability will translate to faster expansion of channel

and increased throughput. • Moreover Asian Paints will also benefit from INR stabilisation as now the peak of

rupee depreciation is already factored into the stock price. Shoppers Stop Operating leverage for Shoppers stop would kick in from FY16 largely led by better absorption of opex from the 31 stores opened from FY12‐14. With new store openings to taper from FY16 we expect LTL EBITDA margin expansion to be reflected truly from FY16 onwards and consequently we expect the EBITDA in FY16E nearly double. Kajaria Cermaics Kajaria is well placed to continue the healthy revenue growth momentum (20% + for FY15 and FY16) led by capacity expansions/new ventures (increased market penetration). The recent change in operating cost (from coal based to gas based power) of unorganized players would benefit branded players such as Kajaria. We expect earnings growth of 22% and 39% in FY15E and FY16E respectively/ Havells Ltd Proposed implementation of GST should lead to reduction of hassles and operation cost for the Havells’ dealers and distributors. The same should also lead to better movement of goods across states. Overall, the company should benefit from the distribution network benefitting from the improved business environment, and hence, might lead to higher topline growth and improvement in margins.

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Overall the company, having created a strong brand image and superior distribution network, should benefit from the overall economic revival. Its continuous improvisation and entry into new product segments should lead to robust topline and earnings growth over the next three years.

Improving agriculture productivity will be a key focus area The agri sector has been marred by archaic policy regime and policy inaction for long now; however with BJP led NDA’s thrust on increasing agricultural productivity and attaining nutrient balance in soil, we see a turn of things from hereon. Foremost we expect a spate of policy action that would lighten balance sheet and attract investments. A lot can change for the Agri‐input sector….. Fertilisers: Expect a spate of policy action: The pro‐reform central government cannot afford to overlook the fertilizer sector as fertilizer subsidy accounts ~13% of India’s fiscal deficit. The Cabinet and EC commission have already approved raising adhoc subsidy on Urea by Rs 350/mt and subsidy rates for P&K fertilizers for FY15E. A re‐telling by the new government would be assuring. The highly subsidized Urea has led to its higher application; that has affected P&K fertilizer demand. With excessive imports and expensive feed (decline in KG D6 Gas led to usage of expensive imports) Urea subsidies have risen to Rs 400 bn, making reforms in urea a compulsion than a choice. As per our workings, with the approved gas price formula, the cost of urea production per/mt would rise by US$100/mt and cost additional subsidy of Rs 100 bn, with an already alarming fiscal deficit, it’s reasonable to expect that urea retail prices would be linked to cost of production. Our channel checks indicate that although NBS in urea is distant possibility but retail prices could double, should domestic gas prices rise. About 63% of India’s land holdings by small and marginal farmers deters any ruling party from rolling out NBS in Urea. As a corollary of reforms in Urea, we expect the P&K sector to benefit the most. De‐canalisation of urea imports, timely subsidy disbursal, a revisit to policy for quantities beyond cut‐off limits and new investment policy are other expectations from the new government. Hybrid Seeds To continue witnessing high growth: The macro opportunity for the seeds industry in India is huge, given factors such as a/ rising population and shrinking per capita land availability b/ low crop yields (among the lowest in the world), and c/low usage and penetration of hybrid seeds across key crops. Approval of BT‐cotton was a huge trigger for the Indian Seed industry. However, now industry awaits approval for the next generation variant which is, RR Flex. RR Flex is a new technology that will have resistance to herbicides (targeted to kill everything that is green, except the cotton crop). Farmers will be able to save on cost of maintenance (especially labour). Any early approval for RR‐flex and revision of hybrid cotton seed prices (due for revision in FY16E) would steadfast growth for the hybrid seed sector.

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Plays based on agriculture sector Coromandel International (CRIN) An unequalled business model: CRIN’s market share has risen from 11 to 16% (FY09‐14); further its firm tie‐ups for key inputs and an already expanded capacity (4 mmt, although environment clearance is for 3.6 mmt) we estimate volumes to ramp up from 2.2 to 2.7 mmt in FY14‐16E. The reduction in channel inventories (almost near normalcy); appreciating INR; almost unchanged fixed subsidies and huge capacity additions globally that lowers feed price outlook and on expectation of reforms in urea, we see positive turn of things for the P&K sector. As we value these players on a mid‐cycle margins of US$ 40~ 50/mt, we continue to believe in its structural growth story. With feed cost for its peers rising (espc gas) and higher diesel prices we expect CRIN to improve its market share/margins further. The earnings on a depressed base is expected to double over FY14/16E; a CAGR of 40%; warranting an attention. We reiterate a Buy with a PT of Rs 278. Tata Chemicals Deleveraging to drive equity value: Tata Chemical is committed to restructuring its loss‐making/non‐core operations and continue disproportionate attention to consumer and farm businesses. The company is unlikely to invest in Urea capacity expansion, and would only focus more on capital light consumer businesses. With limited capex (only GCIP capacity augmentation over time likely), improved cash flows and consequent fall in debt, we see net debt to equity halving to 0.4x in FY16E from 0.8x FY14E. Earnings mix is set to improve (stable businesses to form ~ 35% of FY17E PAT); offers deep value (Invt in Tata Sons equals gross debt) and 3% yield and trades attractive (1x book and 10x PER) we remain positive on its long term prospects. Maintain Neutral with a PT of Rs 300. Kaveri Seeds To benefit from rising opportunity: Kaveri’s earnings CAGR of 46% between FY09 ‐14E has been spectacular following launch of blockbuster products like Jadoo and Jackpot. To gain market shares in large markets of Maharashtra/Karnataka and other areas Kaveri has launched ATM and Chameli. The cotton sowings are expected to improve following better cotton yarn realizations and failure of alternate crops like Soya in FY15E. Also with an increasing thrust on high density cropping the demand for hybrid cotton seed is expected to rise. Cotton seed prices were last revised in FY11 the price increase is due in FY16E all this should translate into an earnings CAGR of > 20% during FY14‐16E. Kaveri's business is asset and working capital light (operating cycle is 28 days) and almost debt free businesses. Return Ratios> 30% and asset turn comparable to FMCG businesses at 4x. Trades at 15x PER and offers yield of 1.5%. We see little threat to its superior competitive positioning in the industry and thus reiterate a Buy.

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Other key ideas UltraTech Cement: • A proxy play on the GDP growth of the country. The largest pan‐India cement

manufacturer with a never dying huger for increasing market share. • Recent management communications suggests us that outperformance over peers is

definite in terms of operating parameters. • Even on our upgraded price target of Rs2,798/‐ the valuation is mere 33% premium

to current replacement cost. We have seen historical valuations as high as 3x replacement cost in cases of efficient players such as Ambuja. We have no reason to believe that UltraTech cannot reach that milestone. This potential means UltraTech can be a potential 2x in the longer term, even from current levels.

Adani Ports (ADSEZ) • ADSEZ stands to benefit the most from any sort of broad economic revival, that might

lead to growth in cargo volumes at the Indian shores. The company currently has a portfolio of 8 port projects, and handled cargo volumes of ~125mn tonnes in FY14 (including Dharma). Mundra port alone, handled 101mn tonnes, making it the biggest commercial port in India.

• ADSZ has a robust cash flow generating and superior ROE (+23% over FY14‐16) business at the helm. Its strong balance sheet and domain expertise should help the company garner large share of the port project to be awarded over the next two years.

GMR Infrastructure • GMR, with Rs430bn of debt, stands to gain the most from • Reduction in interest rates • Increase in profitability due to traffic growth at airport and roads, led by the overall

economic revival • The company has been actively looking to deleverage its balance sheet, having

divested assets leading to gross debt reduction of Rs60bn and cash accrual of Rs52bn, over the last twelve months. We expect further divestments on the anvil, to lead to gross debt reduction of Rs27bn and cash accrual of Rs40bn over the next twelve months. The company is also currently in a sweet spot, with multiple levers (new assets commencing operations, old assets becoming profitable and non‐core assets being divested) all working towards healthier cash flow generation and deleveraging of balance sheet.

Oberoi Oberoi Realty is a good play on the sector given: (a) Visible and relatively short land bank largely in Mumbai, (b) comfortable debt/equity Ratio, (c) better governance, and (d) proven execution.We expect a marked improvement in volumes over FY15‐16E (recovery in sentiment with stable government) with the launch of 4‐5 residential projects. These include the Mulund and Worli launches in 2HFY15E and Borivali and Goregaon Phase III launches in FY16E that provides visibility on cash flows over the medium term. The ticket size for Borivali shall be Rs20mn/unit whilst for Mulund Rs30mn/unit translating into revenue potential of Rs50bn each from each project. Also the company has steady cash flow from its annuity assets which works as hedge incase there is delay in recovery in Mumbai market.

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Ashok Leyland An improvement in the investment cycle will have a direct impact on the M&HCV cycle. Ashok Leyland will be a direct beneficiary of this improvement. Further, the company is highly leveraged with high operating leverage and hence an improvement in volumes will disproportionately benefit the company’s bottomline. Bharat Forge The key end user industries that Bharat Forge supplies to – M&HCV and sectors such as construction and mining would be disproportionate beneficiaries of a revival in the investment cycle. In addition, Bharat Forge would benefit from an improvement in the global economy. This improvement in volumes would lead to a sharp jump in the bottomline of the company. Maruti Suzuki With stability, the street will favourably look at well run businesses with long term growth potential despite near term issues. Car penetration in India remains extremely low in India and is likely to show a sharp jump in the next few years as India ascents on the “J” curve. MSIL’s robust distribution network, strong brand equity and growing product range would help it take advantage of the potential growth. While there could be near term growth issues, the volume growth in the medium term is likely to be robust.

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Annexure BJP Manifesto snapshots

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Management

(91 22) 2300 2999(91 22) 6667 9735

Research Pharma

Deepak Jain (9122) 6667 9758 Anjali Verma (9122) 6667 9969 Surya Patra (9122) 6667 9768Priya Ranjan (9122) 6667 9965

Engineering, Capital Goods Retail, Real EstateAnkur Sharma (9122) 6667 9759 Abhishek Ranganathan, CFA (9122) 6667 9952

Manish Agarwalla (9122) 6667 9962 Aditya Bahety (9122) 6667 9986 Neha Garg (9122) 6667 9996Sachit Motwani, CFA, FRM (9122) 6667 9953Paresh Jain (9122) 6667 9948 Infrastructure & IT Services Technicals

Vibhor Singhal (9122) 6667 9949 Subodh Gupta, CMT (9122) 6667 9762Varun Vijayan (9122) 6667 9992

Naveen Kulkarni, CFA, FRM (9122) 6667 9947 Production ManagerVivekanand Subbaraman (9122) 6667 9766 Metals Ganesh Deorukhkar (9122) 6667 9966Manish Pushkar, CFA (9122) 6667 9764 Dhawal Doshi (9122) 6667 9769

Dharmesh Shah (9122) 6667 9974 Database ManagerCement Vishal Randive (9122) 6667 9944Vaibhav Agarwal (9122) 6667 9967 Oil&Gas, Agri Inputs

Gauri Anand (9122) 6667 9943 Sr. Manager – Equities SupportDeepak Pareek (9122) 6667 9950 Rosie Ferns (9122) 6667 9971

Sales & Distribution Kinshuk Tiwari (9122) 6667 9946 Sales Trader ExecutionAshvin Pati l (9122) 6667 9991 Dilesh Doshi (9122) 6667 9747 Mayur Shah (9122) 6667 9945Shubhangi Agrawal (9122) 6667 9964 Suniil Pandit (9122) 6667 9745Kishor Binwal (9122) 6667 9989Sidharth Agrawal (9122) 6667 9934Dipesh Sohani (9122) 6667 9756

Economics

Consumer, Media, Telecom

Vineet Bhatnagar (Managing Director)Jignesh Shah (Head – Equity Derivatives)

Automobiles

Banking, NBFCs

Contact Information (Regional Member Companies)

SINGAPORE

Phillip Securities Pte Ltd 250 North Bridge Road, #06‐00 Raffles City Tower,

Singapore 179101 Tel : (65) 6533 6001 Fax: (65) 6535 3834

www.phillip.com.sg

MALAYSIA Phillip Capital Management Sdn Bhd B‐3‐6 Block B Level 3, Megan Avenue II,

No. 12, Jalan Yap Kwan Seng, 50450 Kuala Lumpur Tel (60) 3 2162 8841 Fax (60) 3 2166 5099

www.poems.com.my

HONG KONG Phillip Securities (HK) Ltd

11/F United Centre 95 Queensway Hong Kong Tel (852) 2277 6600 Fax: (852) 2868 5307

www.phillip.com.hk

JAPAN Phillip Securities Japan, Ltd

4‐2 Nihonbashi Kabutocho, Chuo‐ku Tokyo 103‐0026

Tel: (81) 3 3666 2101 Fax: (81) 3 3664 0141 www.phillip.co.jp

INDONESIA PT Phillip Securities Indonesia

ANZ Tower Level 23B, Jl Jend Sudirman Kav 33A, Jakarta 10220, Indonesia

Tel (62) 21 5790 0800 Fax: (62) 21 5790 0809 www.phillip.co.id

CHINA Phillip Financial Advisory (Shanghai) Co. Ltd.

No 550 Yan An East Road, Ocean Tower Unit 2318 Shanghai 200 001

Tel (86) 21 5169 9200 Fax: (86) 21 6351 2940 www.phillip.com.cn

THAILAND Phillip Securities (Thailand) Public Co. Ltd.

15th Floor, Vorawat Building, 849 Silom Road, Silom, Bangrak, Bangkok 10500 Thailand

Tel (66) 2 2268 0999 Fax: (66) 2 2268 0921 www.phillip.co.th

FRANCE King & Shaxson Capital Ltd.

3rd Floor, 35 Rue de la Bienfaisance 75008 Paris France

Tel (33) 1 4563 3100 Fax : (33) 1 4563 6017 www.kingandshaxson.com

UNITED KINGDOM King & Shaxson Ltd.

6th Floor, Candlewick House, 120 Cannon Street London, EC4N 6AS

Tel (44) 20 7929 5300 Fax: (44) 20 7283 6835 www.kingandshaxson.com

UNITED STATES Phillip Futures Inc.

141 W Jackson Blvd Ste 3050 The Chicago Board of Trade Building

Chicago, IL 60604 USA Tel (1) 312 356 9000 Fax: (1) 312 356 9005

AUSTRALIA PhillipCapital Australia

Level 37, 530 Collins Street Melbourne, Victoria 3000, Australia

Tel: (61) 3 9629 8380 Fax: (61) 3 9614 8309 www.phillipcapital.com.au

SRI LANKA Asha Phillip Securities Limited

Level 4, Millennium House, 46/58 Navam Mawatha, Colombo 2, Sri Lanka

Tel: (94) 11 2429 100 Fax: (94) 11 2429 199 www.ashaphillip.net/home.htm

INDIA PhillipCapital (India) Private Limited

No. 1, C‐Block, 2nd Floor, Modern Center , Jacob Circle, K. K. Marg, Mahalaxmi Mumbai 400011 Tel: (9122) 2300 2999 Fax: (9122) 6667 9955 www.phillipcapital.in

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Disclosures and Disclaimers PhillipCapital (India) Pvt. Ltd. has three independent equity research groups: Institutional Equities, Institutional Equity Derivatives and Private Client Group. This report has been prepared by Institutional Equities Group. The views and opinions expressed in this document may or may not match or may be contrary at times with the views, estimates, rating, target price of the other equity research groups of PhillipCapital (India) Pvt. Ltd. This report is issued by PhillipCapital (India) Pvt. Ltd. which is regulated by SEBI. PhillipCapital (India) Pvt. Ltd. is a subsidiary of Phillip (Mauritius) Pvt. Ltd. References to "PCIPL" in this report shall mean PhillipCapital (India) Pvt. Ltd unless otherwise stated. This report is prepared and distributed by PCIPL for information purposes only and neither the information contained herein nor any opinion expressed should be construed or deemed to be construed as solicitation or as offering advice for the purposes of the purchase or sale of any security, investment or derivatives. The information and opinions contained in the Report were considered by PCIPL to be valid when published. The report also contains information provided to PCIPL by third parties. The source of such information will usually be disclosed in the report. Whilst PCIPL has taken all reasonable steps to ensure that this information is correct, PCIPL does not offer any warranty as to the accuracy or completeness of such information. Any person placing reliance on the report to undertake trading does so entirely at his or her own risk and PCIPL does not accept any liability as a result. Securities and Derivatives markets may be subject to rapid and unexpected price movements and past performance is not necessarily an indication to future performance. This report does not have regard to the specific investment objectives, financial situation and the particular needs of any specific person who may receive this report. Investors must undertake independent analysis with their own legal, tax and financial advisors and reach their own regarding the appropriateness of investing in any securities or investment strategies discussed or recommended in this report and should understand that statements regarding future prospects may not be realized. In no circumstances it be used or considered as an offer to sell or a solicitation of any offer to buy or sell the Securities mentioned in it. The information contained in the research reports may have been taken from trade and statistical services and other sources, which we believe are reliable. PhillipCapital (India) Pvt. Ltd. or any of its group/associate/affiliate companies do not guarantee that such information is accurate or complete and it should not be relied upon as such. Any opinions expressed reflect judgments at this date and are subject to change without notice Important: These disclosures and disclaimers must be read in conjunction with the research report of which it forms part. Receipt and use of the research report is subject to all aspects of these disclosures and disclaimers. Additional information about the issuers and securities discussed in this research report is available on request. Certifications: The research analyst(s) who prepared this research report hereby certifies that the views expressed in this research report accurately reflect the research analyst’s personal views about all of the subject issuers and/or securities, that the analyst have no known conflict of interest and no part of the research analyst’s compensation was, is or will be, directly or indirectly, related to the specific views or recommendations contained in this research report. The Research Analyst certifies that he /she or his / her family members does not own the stock(s) covered in this research report. Independence/Conflict: PhillipCapital (India) Pvt. Ltd. has not had an investment banking relationship with, and has not received any compensation for investment banking services from, the subject issuers in the past twelve (12) months, and PhillipCapital (India) Pvt. Ltd does not anticipate receiving or intend to seek compensation for investment banking services from the subject issuers in the next three (3) months. PhillipCapital (India) Pvt. Ltd is not a market maker in the securities mentioned in this research report, although it or its employees, directors, or affiliates may hold either long or short positions in such securities. PhillipCapital (India) Pvt. Ltd may not hold more than 1% of the shares of the company(ies) covered in this report. Suitability and Risks: This research report is for informational purposes only and is not tailored to the specific investment objectives, financial situation or particular requirements of any individual recipient hereof. Certain securities may give rise to substantial risks and may not be suitable for certain investors. Each investor must make its own determination as to the appropriateness of any securities referred to in this research report based upon the legal, tax and accounting considerations applicable to such investor and its own investment objectives or strategy, its financial situation and its investing experience. The value of any security may be positively or adversely affected by changes in foreign exchange or interest rates, as well as by other financial, economic or political factors. Past performance is not necessarily indicative of future performance or results. Sources, Completeness and Accuracy: The material herein is based upon information obtained from sources that PCIPL and the research analyst believe to be reliable, but neither PCIPL nor the research analyst represents or guarantees that the information contained herein is accurate or complete and it should not be relied upon as such. Opinions expressed herein are current opinions as of the date appearing on this material and are subject to change without notice. Furthermore, PCIPL is under no obligation to update or keep the information current. Copyright: The copyright in this research report belongs exclusively to PCIPL. All rights are reserved. Any unauthorized use or disclosure is prohibited. No reprinting or reproduction, in whole or in part, is permitted without the PCIPL’s prior consent, except that a recipient may reprint it for internal circulation only and only if it is reprinted in its entirety. Caution: Risk of loss in trading in can be substantial. You should carefully consider whether trading is appropriate for you in light of your experience, objectives, financial resources and other relevant circumstances. For U.S. persons only: This research report is a product of PhillipCapital (India) Pvt Ltd. which is the employer of the research analyst(s) who has prepared the research report. The research analyst(s) preparing the research report is/are resident outside the United States (U.S.) and are not associated persons of any U.S. regulated broker‐dealer and therefore the analyst(s) is/are not subject to supervision by a U.S. broker‐dealer, and is/are not required to satisfy the regulatory licensing requirements of FINRA or required to otherwise comply with U.S. rules or regulations regarding, among other things, communications with a subject company, public appearances and trading securities held by a research analyst account. This report is intended for distribution by PhillipCapital (India) Pvt Ltd. only to "Major Institutional Investors" as defined by Rule 15a‐6(b)(4) of the U.S. Securities andExchange Act, 1934 (the Exchange Act) and interpretations thereof by U.S. Securities and Exchange Commission (SEC) in reliance on Rule 15a 6(a)(2). 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