morning insight - 15 feb 2016 · mca has ordered the merger of crisis- hit national spot exchange...

FEBRUARY 15, 2016

Economy News The telecom ministry has proposed a 10-year tax holiday for mega projects

in the sector as part of its recommendations for the upcoming UnionBudget. (ET)

China's heavy equipment major Sany group has committed to invest $ 4billion for setting up manufacturing units and wind farms in India. (ET)

Fixed maturity plans, a popular debt mutual fund (MF) product, seem tobe out of favour with investors following changes to the tax structure andmarkets regulator Sebi expects that lesser number of schemes would befiled in the remaining period of 2015-16. (ET)

Having slipped below Rs 100 per kg, rubber is trading more than 60 percent lower than its record high price levels of Rs 240 per kg. Efforts by themajor rubber producing countries to rescue natural rubber from the bearmarket are unlikely to see any major upside. (FC)

The rate of service tax could go up to a flat 16% from an effective 14.5%now in the coming Budget, but the government would try to soften theresultant blow to businesses and consumers with a broadening of thecredit base and an increase in the turnover threshold for the tax net, fromRs 1.0 mn at present to Rs 2.5 mn. (FE)

Implementation of the 7th Pay Commission recommendations is likely toexert pressure on the government's fiscal finances and inflation trajectorygoing forward. (DNA)

MCA has ordered the merger of crisis- hit National Spot Exchange Ltd(NSEL) with its parent FTIL (Financial Technologies India Ltd) in "publicinterest". (ET)

Corporate News Tata Steel SEZ a 100% subsidiary of Tata Steel that owns 3,000 acres in

Gopalpur, in Odisha is set to invest over Rs 20.0 bn in developinginfrastructure. (ET)

ITC is looking to invest Rs 8.0bn in Odisha over the next few years to setup a hotel property and a food processing park in the state. (ET)

The taxman sent a notice to the UK-based Cairn UK Holdings, renewingthe freeze on the sale of its shares for another three months. The freezerelates to shares of Cairn India that Cairn UK Holdings was planning tosell to the Vedanta group two years ago. (FE)

Essar Group promoter Ravi Ruia, facing trial in a case arising out of the2G scam probe, has been denied permission to travel abroad. (BS)

Axis Bank is planning to raise $500 million (approximately Rs 33.5 bn)through Tier-II capital bonds to shore up its capital base. (BS)

Adani Group's much-awaited USD 16.5 billion Carmichael project willstart operations this year as the firm expects clearances for the mininglease to come by August. (BL)

Swedish defence and security major Saab and Bharat Forge group haverenewed their commitment to manufacture air defence solutions in India,said a media report. (ET)

The Supreme Court has asked India Energy Exchange to pay Rs 310 mndividend to Financial Technologies (India) within two weeks. (ET)

Tyre maker Ceat will invest Rs 3.0 bn to set up a manufacturing facility inMaharashtra to primarily serve export market for off-road radial tyres.(ET)

Equity% Chg

12 Feb 16 1 Day 1 Mth 3 Mths

Indian IndicesSENSEX Index 22,986 0.1 (6.0) (10.2)NIFTY Index 6,981 0.1 (6.1) (10.1)BANKEX Index 15,855 (0.2) (8.0) (18.1)SPBSITIP Index 10,295 0.3 (5.4) (5.8)BSETCG INDEX 11,251 (3.1) (9.3) (20.6)BSEOIL INDEX 8,179 (2.5) (13.0) (6.9)CNXMcap Index 11,486 (0.9) (8.0) (10.9)SPBSSIP Index 9,683 (1.2) (10.2) (13.0)

World IndicesDow Jones 15,974 2.0 (0.1) (7.4)Nasdaq 4,338 1.7 (3.4) (12.0)FTSE 5,708 3.1 (1.7) (6.7)NIKKEI 14,953 (4.8) (8.3) (19.8)HANGSENG 18,320 (1.2) (4.0) (16.3)

Value traded (Rs cr)12 Feb 16 % Chg - Day

Cash BSE 3,541 27.4Cash NSE 22,454 18.5Derivatives 365,912 0.1

Net inflows (Rs cr)11 Feb 16 % Chg MTD YTD

FII (1,210) 139 (3,014) (14,485)Mutual Fund 504 33 781 8,108

FII open interest (Rs cr)11 Feb 16 % Chg

FII Index Futures 12,659 6.5FII Index Options 72,190 2.7FII Stock Futures 48,215 1.2FII Stock Options 3,027 8.2

Advances / Declines (BSE)12 Feb 16 A B T Total % total

Advances 109 346 15 470 31Declines 186 772 48 1,006 67Unchanged 3 22 4 29 2

Commodity % Chg

12 Feb 16 1 Day 1 Mth 3 Mths

Crude (US$/BBL) 29.2 (1.0) (0.9) (28.4)Gold (US$/OZ) 1,236.5 (0.9) 12.2 13.1Silver (US$/OZ) 15.7 (0.4) 10.7 8.1

Debt / forex market12 Feb 16 1 Day 1 Mth 3 Mths

10 yr G-Sec yield % 7.7 7.7 7.8 7.7Re/US$ 68.2 68.3 66.9 66.3

Sensex

Source: ET = Economic Times, BS = Business Standard, FE = Financial Express,BL = Business Line, LM = Live Mint, ToI: Times of India, BSE = Bombay Stock Exchange

22,900

24,900

26,900

28,900

30,900

Feb-15 May-15 Aug-15 Nov-15 Feb-16

Kotak Securities - Private Client Research Please see the disclaimer on the last page For Private Circulation 2

MORNING INSIGHT February 15, 2016

Kotak Securities Limited has two independent equity research groups: Institutional Equities and Private Client Group. This report hasbeen prepared by the Private Client Group. The views and opinions expressed in this document may or may not match or may be contrarywith the views, estimates, rating, target price of the Institutional Equities Research Group of Kotak Securities Limited.

BANK OF BARODA

PRICE: RS.114 RECOMMENDATION: BUYTARGET PRICE: RS.140 FY17E P/E: 11.9X; P/ABV: 1.0X

Q3FY16 Results: Moving ahead after biting the bullet.Earnings pulled down by spike in provisioning on account of RBI's AQR -NII declined 17.7% YoY on back of sharp fall in NIM (48bps YoY) as well asmarginal contraction in loan book (down 2.4% YoY). Spike in the NPAprovisioning (5.6x YoY) pulled down earnings (PBT: loss Rs.44.6 bn). PATalso remained in red (loss Rs.33.4 bn) despite write-back of tax provisions.NPLs spiked on back of RBI's AQR, however, unlike other PSU banks, it hasbitten the bullet by taking all the impact during Q3FY16 itself. We believeBoB is comfortable on capital (Tier-I at 9.6%) and its future capitalrequirement is likely to be met by capital released from the non-coreassets (75% of requirement) as well as improvement in the efficiencies(25% of requirement). We are modeling subdued return profile (RoE: ~6%& RoA: ~30bps in FY17) for BoB, which justifies lower P/ABV multiple forthe stock. Lower risk of dilution at <1x BV (as guided by management) aswell as overhang of AQR behind us, we are retaining higher P/ABVmultiple for BoB in our PSU banking coverage space. We are cutting the TPto Rs.140 (Rs.180 earlier; 1.25x FY17 ABV) but upgrading the stock to BUYfrom ACCUMULATE earlier.

Result Performance

(Rs. Mn) Q3FY16 Q3FY15 YoY (%)

Interest on Advances 71,693 77,153 -7.1

Interest on Investment 26,859 24,636 9.0

Interest on RBI/ banks' balances 3,534 3,667 -3.6

Other Interest 4,056 1,725 135.1

Total Interest Earned 106,140 107,180 -1.0

Interest Expenses 79,087 74,319 6.4

Net Interest Income 27,053 32,861 -17.7

Other income 11,129 10,904 2.1

Net Revenue (NII + Other income) 38,183 43,765 -12.8

Operating Expenses 21,141 20,375 3.8

Payments to / Provisions for employees 11,548 11,198 3.1

Other operating expenses 9,593 9,177 4.5

Operating Profit 17,041 23,390 -27.1

Provisions & contingencies 61,646 12,623 388.4

Provision for taxes (11,184) 7,428 -250.6

Net Profit (33,420) 3,340 NM

EPS (Rs.) (14.46) 1.55 NM

Source: Company

Earnings pulled down by spike in provisioning on account of RBI'sAQRBoB reported weak earnings largely pulled down by spike in NPA provisions (5.6xYoY) on account of RBI's AQR (Asset Quality Review). Core performance was~Rs.6.0 bn below our expectations - NII declined 17.7% YoY (Rs.27.1 bn) on backof sharp fall in NIM (1.72% in Q3FY16; 48bps YoY) as well as marginal contrac-tion in loan book (down 2.4% YoY). This is the fourth consecutive quarter, whenBoB has reported weak loan growth. As per the management's guidance, Rs.74bn slipped into NPLs during Q3FY16 on account of RBI's AQR while another Rs.31bn slipped during earlier quarter.

RESULT UPDATE

Saday [email protected]+91 22 6621 6312



Domestic NIM also witnessed 58bps QoQ compression to 2.11% in Q3FY16, low-est in past several years on back of sharp decline in yield on domestic loans(87bps QoQ) while cost of domestic deposits saw marginal improvement. We aremodeling compression in NIM to 2.0%/2.2% during FY16/17 as compared to2.31% seen during FY15.

Trend in NIM

(%) 1Q 2014 2Q 2014 3Q 2014 4Q 2014 1Q 2015 2Q 2015 3Q 2015 4Q 2015 1Q 2016 2Q 2016 3Q 2016

Yields on Advances 8.46 8.34 8.30 8.16 8.31 8.36 8.09 7.68 7.89 7.61 7.04

Yields on Investments 7.79 7.74 7.78 7.81 7.91 8.00 7.94 7.89 7.83 7.54 7.30

Cost of Deposits 5.6 5.41 5.24 5.27 5.19 5.18 5.18 5.18 5.06 5.05 5.02

NIM (%) - Domestic 2.84 2.85 2.95 2.84 2.94 3.02 2.92 2.76 2.89 2.69 2.11

NIM (%) - Global 2.41 2.32 2.37 2.29 2.35 2.40 2.20 2.17 2.26 2.08 1.72

Source: Company

Non-interest income saw muted growth (2.1% YoY) on back of weak core fee-based income (flat YoY) and 33.5% decline in recovery from written-off ac-counts even though trading gains was up 18.6% YoY. Spike in the NPA provi-sioning (5.6x YoY) on account of recent RBI's AQR pulled down earnings (PBT:loss Rs.44.6 bn). PAT also remained in red (loss Rs.33.4 bn) despite write-back ofRs.11.2 bn worth of tax provisions.

Marginal pressure on liability franchise; loan book contracted lead-ing to some improvement in B/S liquidity

The liability franchise of the bank has been healthy with CASA mix in the rangeof 30-33% during previous 9-10 quarters. During Q3FY16, it saw marginal de-cline on back of weak CA deposits (down 29.6% YoY) while saving depositsgrew 7.1% YoY. The stock numbers are not giving the real picture as averageCASA deposits grew 12% YoY (Q3FY16) while average domestic deposits grew12.2% YoY as against the industry average of 10.9% YoY.

Trend in CASA mix

(Rs. bn) 1Q 2015 2Q 2015 3Q 2015 4Q 2015 1Q 2016 2Q 2016 3Q 2016 YoY (%) QoQ (%)

CASA (Rs. bn) 1144.8 1,210.8 1,240.1 1,367.5 1,292.2 1,354.6 1,238.0 -0.2% -8.6%

CASA (%) 31.3% 31.9% 32.4% 33.0% 31.9% 32.0% 30.0% (2.46) (1.98)

Term Deposits 2509.4 2,585.8 2,584.6 2,775.3 2,759.9 2,884.8 2,892.9 11.9% 0.3%

Total Deposits 5516.5 5,669.3 5,646.0 6,175.6 5,930.9 6,124.6 5,896.9 4.4% -3.7%

Source: Company

Loan book contracted 2.4% YoY during Q3FY16 on back of subdued perfor-mance of SME (down 8.0% YoY) and overseas book (down 5.8% YoY). Retailand agri book grew 6.1% and 11.8%, respectively, during the same period. Thisis the fourth consecutive quarter when deposits have grown faster than the loanbook, resulting into improvement in B/S liquidity (LDR declined 250bps QoQ to65.2% in Q3FY16).

NPLs spiked on back of RBI's AQR; unlike other PSU banks, it has bit-ten the bullet by taking all the impact during Q3FY16 itself.

BoB reported sharp rise in fresh slippage which rose to 14.7% (annualized) dur-ing Q3FY16 on back of recent AQR by RBI vis-a-vis slippage seen at ~3.3% dur-ing previous 4 quarters. Management has indicated that AQR pain is over asbank has recognized all the stressed accounts referred by RBI. Out of Rs.105 bnworth of loan referred under AQR, Rs.74 bn slipped into NPL during Q3FY16while another Rs.31 bn had already been accounted for NPL. They also indicatedthat Rs.150 bn worth of loan is under SMA-II category while bank has refinancedRs.54.3 bn loans under 5/25 scheme and another Rs.20 bn under SDR refinancingschemes.



In absolute terms, GNPA/NNPA grew 64.2%/70.4% (QoQ), respectively, while inpercentage terms, they stand at elevated levels - 9.7%/5.7% in Q3FY16 as com-pared to 5.6%/3.1% in Q2FY16. Provision coverage ratio also saw decline of~550bps QoQ to 52.7% (Q3FY16), in line with trends reported by its peers.

Trends in NPAs

(Rs bn) 1Q 2014 2Q 2014 3Q 2014 4Q 2014 1Q 2015 2Q 2015 3Q 2015 4Q 2015 1Q 2016 2Q 2016 3Q 2016

Gross NPA 97.63 108.88 119.26 118.76 120.87 130.58 154.53 162.61 172.74 237.10 389.34

Gross (%) 2.99 3.15 3.32 2.94 3.11 3.32 3.85 3.72 4.13 5.56 9.68

Net NPA 54.41 63.16 66.24 60.35 60.21 67.05 82.91 80.69 84.70 127.98 218.06

Net (%) 1.69 1.86 1.88 1.52 1.58 1.74 2.11 1.89 2.07 3.08 5.67

Provision Coverage (%) 63.3% 61.7% 62.2% 65.5% 66.7% 65.4% 62.4% 65.0% 64.9% 58.2% 52.7%

Source: Company

Trends in NNPAs

(%) Q3FY15 Q4FY15 Q1FY16 Q2FY16 Q3FY16

Agriculture 3.35% 3.01% 3.18% 3.11% 7.21%

Large & Medium Industries 1.95% 1.56% 1.78% 3.65% 9.04%

Retail 1.35% 1.47% 1.81% 1.94% 2.70%

Housing 0.92% 0.90% 1.02% 1.13% 0.96%

MSME 5.30% 5.62% 6.25% 5.68% 8.18%

Overseas operations 1.09% 0.78% 0.76% 1.72% 2.75%

Source: Company

Trend in fresh impairments

(Rs bn) 1Q 2014 2Q 2014 3Q 2014 4Q 2014 1Q 2015 2Q 2015 3Q 2015 4Q 2015 1Q 2016 2Q 2016 3Q 2016

Restructuring 21.5 16.4 12.1 11.6 9.9 11.8 16.0 40.8 1.5 1.1 2.5

Fresh Slippage 19.6 18.6 15.5 13.0 18.8 17.6 30.4 13.6 16.9 68.2 157.9

Net addition to stressed assets 41.1 35.0 27.7 24.5 28.7 29.3 46.4 54.4 18.3 69.3 160.4

% of advances (annualized) 5.0% 4.3% 3.4% 3.0% 2.9% 3.0% 4.7% 5.5% 1.7% 6.5% 15.0%

Source: Company

Its outstanding restructured portfolio stands at Rs.171.4 bn (4.5% of advances).Almost 37% of slippage (Rs.58 bn in Q3FY16) came from restructured portfolioand as a result outstanding restructured book declined ~25% QoQ. BoB stillfares better than several of its peers in terms of stressed portfolio (Restructuredbook + net NPA) which stands at 10.2%.

Leveraging Overseas operationsOverseas operations continued to do well - during Q3FY16, it contributed 31% intotal business. Lower NIM in overseas business (0.87% vs. 2.1% on domesticbook during Q3FY16) is more than compensated by lower opex (overseas C/I ra-tio at 22.4% as compared to domestic operations) as well as lower credit costs(overseas gross NPA: 4.9% vs.9.7% on entire book) during the same period.

Valuation & recommendationWe believe BoB is comfortable on capital (Tier-I at 9.6%) and is likely to be oneof the biggest beneficiaries of improvement in the macro-economic environ-ment. As per the management guidance, bank is not likely to raise capital duringnext 18 months, as capital released from the non-core assets (75% of require-ment) as well as improvement in the efficiencies (25% of requirement) wouldmore than take care of additional capital requirement. We have cut the earningsestimate for FY16/17E on higher credit costs assumption and expect its net in-come to remain subdued during FY16. We are modeling subdued return profile(RoE: ~6% & RoA: ~30bps in FY17) for BoB, which justifies lower P/ABV multiplefor the stock.



Changes in estimates

(Rs bn) Old estimates New estimates % chg % chgFY16E FY17E FY16E FY17E FY16E FY17E

Net interest income 132.96 151.76 126.42 147.44 -4.9% -2.8%

Gross profit 89.50 99.10 85.70 95.23 -4.2% -3.9%

Net profit 20.50 38.60 -20.00 21.23 -197.6% -45.0%

EPS (Rs) 9.2 17.4 -9.0 9.6 -197.6% -45.0%

Adj. BVPS (Rs) 115.1 135.9 77.0 110.8 -33.1% -18.5%

Price target (Rs) 180 140 -22.2%

Recommendation ACCUMULATE BUY

Recommendation base year FY17E FY17E

Source: Kotak Securities - Private Client Research

However, stock is trading at reasonable valuation (1.0x FY17E ABV) post upfrontrecognition of the stress in the portfolio. Unlike its peers it has decided to bitethe bullet and has recognized all the accounts referred during AQR. Lower riskof dilution at <1x BV (as guided by management) as well as overhang of AQRbehind us, we are retaining higher P/ABV multiple for BoB in our PSU bankingcoverage space. We are cutting the TP to Rs.140 (Rs.180 earlier; 1.25x FY17ABV) but upgrading the stock to BUY from ACCUMULATE earlier.

Key data

(Rs bn) 2014 2015 2016E 2017E

Interest income 389.4 429.6 446.0 501.6

Interest expense 269.7 297.8 319.6 354.2

Net interest income 119.7 131.9 126.4 147.4

Growth (%) 5.7 10.2 -4.1 16.6

Other income 44.6 44.2 45.6 47.4

Gross profit 92.9 99.3 85.7 95.2

Net profit 45.4 34.1 -20.0 21.2

Growth (%) 1.3 -24.8 NM NM

Gross NPA (%) 2.9 3.8 7.8 6.4

Net NPA (%) 1.5 1.9 4.1 2.5

NIM (%) 2.4 2.3 2.0 2.2

CAR (%) 12.3 12.6 12.4 11.3

RoE (%) 13.8 9.3 -5.4 5.8

RoA (%) 0.8 0.5 -0.3 0.3

DPS (Rs) 2.1 3.2 3.5 4.0

EPS (Rs) 21.1 15.4 -9.0 9.6

Adjusted BVPS (Rs) 134.2 138.8 77.0 110.8

P/E (x) 5.4 7.4 NM 11.9

P/ABV (x) 0.9 0.8 1.5 1.0

Source: Company, Kotak Securities - Private Client Research

We recommend BUY onBank of Baroda with a price

target of Rs.140




MAHINDRA AND MAHINDRA (M&M)PRICE: RS.1165 RECOMMENDATION: BUYTARGET PRICE: RS.1350 FY17E P/E: 17.6X

M&M+MVML's performance during 3QFY16 was marred by certain one-offs. Adjusting for the same, results at the operational front wereimpressive. M&M+MVML revenues in 3QFY16 grew by 15% YoY toRs105bn. Adjusted for exceptional items, EBITDA margin was strong at14.5%. Further adjusting for inventory reduction impact, margins wouldhave been higher by another 50-100bps. Net profits came in at Rs8.2bn.M&M's sales in the auto segment is expected to grow in FY17 backed bynew product launches done in FY16. In the tractor segment, volumegrowth in FY17 will be contingent upon monsoon and governmentassistance to the agriculture sector. Due to sustained weakness in ruraldemand, we have lowered our FY16/FY17 estimates. However, wemaintain our BUY rating on M&M with revised SOTP based price target ofRs1,350 (earlier 1,484).

Quarterly performance (M&M + MVML)

(Rs mn) 3QFY16 3QFY15 YoY (%) 2QFY16 QoQ (%)

Revenues 104,656 91,047 14.9 87,937 19.0

Total expenditure 90,518 80,251 12.8 76,311 18.6

RM consumed 71,565 63,977 11.9 59,445 20.4

Employee cost 7,006 6,527 7.3 6,417 9.2

Other expenses 11,947 9,747 22.6 10,448 14.3

EBITDA 14,138 10,797 30.9 11,626 21.6

EBITDA margin (%) 13.5 11.9 - 13.2 -

Depreciation 3,328 2,638 26.1 2,830 17.6

Interest cost 554 663 (16.4) 577 (4.0)

Other Income 929 897 3.5 4,885 (81.0)

Exceptional item 2,993

PBT 11,185 11,386 (1.8) 13,104 (14.6)

PBT margins (%) 10.7 12.5 14.9

Tax 2,980 1,719 73.4 3,323 (10.3)

Tax rate (%) 26.6 15.1 - 25.4 -

Reported PAT 8,205 9,668 (15.1) 9,781 (16.1)

PAT margins (%) 7.8 10.6 11.1

Reported EPS (Rs) 13.4 15.7 (15.1) 15.9 (16.1)

Source: Company

Segmental performance (M&M + MVML)


Segmental Revenues

Automotive 69,173 57,027 21.3 59,893 15.5

Farm Equipment 35,823 34,316 4.4 28,442 26.0

EBIT margins

Automotive 10.2 8.5 - 9.8 -

Farm Equipment 15.3 14.4 - 16.4 -

Source: Company

Summary table

(Rs mn) FY15 FY16E FY17E

Sales 389,454 394,126 463,543Growth (%) (3.9) 1.2 17.6EBITDA 41,734 46,162 58,562EBITDA margin (%) 10.7 11.7 12.6PBT 41,689 43,162 53,942Net profit 33,211 32,587 40,727EPS (Rs) 54.1 53.1 66.3Growth (%) (11.6) (1.9) 25.0CEPS (Rs) 70.0 70.6 86.0BV (Rs/share) 313.6 351.0 401.7Dividend / share (Rs) 12.1 14.0 14.0ROE (%) 17.2 15.8 17.6ROCE (%) 19.7 18.4 21.1Net cash (debt) 1,017 (6,936) 6,925NW Capital (Days) (3.5) (1.8) (7.2)P/E (x) 21.5 21.9 17.6P/BV (x) 3.7 3.3 2.9EV/Sales (x) 1.8 1.8 1.5EV/EBITDA (x) 17.1 15.6 12.1

Source: Company, Kotak Securities - PrivateClient Research

RESULT UPDATE

Arun [email protected]

+91 22 6621 6143



M&M + MVML - Result Highlight

M&M+MVML revenues in 3QFY16 grew by 17% YoY to Rs105bn. Automotivesegment revenues grew at a strong pace of 21% YoY to Rs69bn.

Auto segment volumes during the same period grew by 15% amid new prod-uct launches. Further, average selling price in the auto segment increased by5% on account of mix and 1.7% price hike taken in 9MFY16. Tractor rev-enues in 3QFY16 was Rs35.8bn, 4% higher YoY, supported by 5% volumegrowth.

Sequentially revenue growth of 19% came from strong growth in both theautomotive and farm segment. Automotive sales in 3QFY16 was supportedby new launches and festive season. Farm equipment revenues grew due toseasonality factor.

Gross margins during the quarter was impacted on account of reduction intractor inventory in 3QFY16. M&M reduced tractor inventory by 19,000 unitsin 3QFY16. As a result, raw material cost increased by ~50-100 bps. Accord-ingly, gross margin declined sequentially by 78bps to 31.6%. On a YoY basis,gross margin improved by 190bps due to fall in commodity prices.

Employee cost in 3QFY16 increased by 7% YoY and 9% QoQ. Employee costincluded Rs220mn (for 21 months) impact on account of additional bonus pro-vision under the new Bonus Act.

Other expenses were up significantly in 3QFY16 due to certain one-offs tothe tune of Rs880mn. One offs pertains to forex difference loss on loans (im-pact Rs320mn), diminution of certain assets and reversal of incentive.

Reported EBITDA margin of 13.5% was below exceptation due to exceptionalitems and impact of inventory reduction. Adjusted for exceptional items,EBITDA margin was strong at 14.5%. Further adjusting for inventory reduc-tion impact, margins would have been higher by another 50-100bps. Accord-ingly adjusted EBITDA margins were strong in 3QFY16.

Deprecation rose sharply due to amortization/capitalization of new products.Interest cost declined - both YoY and QoQ in 3QFY16. Tax rate was higherYoY.

Impacted by one-offs PAT came in at Rs8,205mn. Adjusting for one-offs, PATwas close to our expectation.

Conference Call Highlights

In the auto segment, M&M introduced nine new products/facelifts/variants.For TUV300, company garnered 19,000 bookings YTD.

KUV100 has received 18,000 bookings with diesel/petrol proportion of 55:45.Company has monthly production capacity of 5,000 units per month (200 carsper day) for KUV 100 and the capacity is expected to increase to 7,500 unitsper month (300 cars per day) from August 2016. Current the order booking is~350 cars per day as against capacity of 200 cars per day.

Tractor industry in 9MFY16 declined by 14.4% YoY. In 3QFY16 M&M outper-formed domestic tractor industry and increased its market share to 42.7%. In9MFY16, M&M has gained 0.5% market share.

M&M expects tractor industry in 4QFY16 to grow on account of weak base.FY17 growth will depend upon monsoon to a large extent.

In FY17, M&M do not have plans for any major product launch in the auto-motive segment.

M&M's gross debt: equity is 0.2x and at the net level M&M is cash positive.



Outlook

We expect M&M's automotive segment volume to grow at a robust pace inFY17, led by new product launches.

In the tractor segment, monsoon and government assistance to the agricul-ture sector will be the key volume growth driver in FY17.

M&M reported strong operating performance in 3QFY16. We expect, im-proved demand scenario in the auto and tractor segment will lead to furtherexpansion in margins.

Given continued weakness in rural areas, we are lower our FY16/FY17standalone net profit estimates lower by 4%/8% respectively.

We maintain our BUY rating on M&M with revised SOTP based price targetof Rs1,350 (earlier 1,484).

We maintain BUY rating onMahindra & Mahindra with a

price target of Rs.1350




ASHOK LEYLAND (ALL)PRICE: RS.83 RECOMMENDATION: BUYTARGET PRICE: RS.99 FY17E EV/EBITDA: 10.9X

Standalone revenues grew by 22% YoY to Rs40.8bn. EBITDA marginexpanded from 7.1% in 3QFY15 to 10.5% in 3QFY16. As a result of 22%jump in volume and significant margin expansion, PAT improved from Rs.321 mn in 3QFY15 to Rs.1986 mn in 3QFY16. We expect healthy 10-15%volume growth to continue for the industry and company in FY17 andmargins to remain healthy. Given strong performance in 9MFY16, we areincreasing our FY16 /FY17 earnings estimates. We revise our target priceon the stock to Rs99 (earlier Rs94), and upgrade the stock to BUY(ACCUMULATE earlier).

Quarterly performance


Total Revenues 40,853 33,610 21.6 49,397 (17.3)

Total expenditure 36,556 31,208 17.1 43,453 (15.9)

RM consumed 28,918 25,032 15.5 34,774 (16.8)

Employee cost 3,492 2,770 26.0 3,784 (7.7)

Other expenses 4,146 3,406 21.7 4,895 (15.3)

EBITDA 4,297 2,402 78.9 5,945 (27.7)

EBITDA margin (%) 10.5 7.1 - 12.0 -

Depreciation 1,087 999 8.8 1,129 (3.8)

Interest cost 666 982 (32.2) 702 (5)

Other Income 259 173 49.9 265 (2.2)

Extraordinary income/ (loss) (65) - (52) -

PBT 2,738 594 361.0 4,326 (36.7)

PBT margins (%) 6.7 1.8 - 8.8 -

Tax 752 273 175.4 1,458 (48.4)

Tax rate (%) 27.5 46.0 - 33.7 -

Reported PAT 1,986 321 518.9 2,868 (30.7)

PAT margins (%) 4.9 1.0 - 5.8 -

Reported EPS (Rs) 0.7 0.1 518.9 1.0 (30.7)


Result Highlights

ALL's revenues grew by 22% YoY to Rs40.8bn. Increase in revenues wascompletely driven by volume growth, as average selling price (ASP) remainedflat YoY.

Revenue mix in 3QFY16 was - 64% domestic truck, 10% domestic bus, 10%exports and balance was LCV/spares/engine/defense.

Despite the company taking price hikes to offset regulatory changes, ASP de-clined QoQ. Accordingly, revenues came in 2% below our expectation. Partreason for the same was QoQ decline in defence revenues. Discounts duringthe quarter stood at ~Rs240,000 per unit as against Rs225,000 in 2QFY16.Company highlighted that even though the discounts were higher, the netselling price (for MHCV) realized was stable QoQ as price hike negated theimpact of increased discounts.

Summary table


Sales 135,622 181,508 204,633Growth (%) 36.4 33.8 12.7EBITDA 10,266 20,565 22,788EBITDA margin (%) 7.6 11.3 11.1PBT 4,422 14,385 17,291Net profit 3,348 9,782 11,758EPS (Rs) 1.2 3.4 4.1Growth (%) 965.3 192.2 20.2CEPS (Rs) 2.6 5.0 5.7BV (Rs/share) 18.0 20.9 24.5Dividend / share (Rs) 0.4 0.5 0.5ROE (%) 5.6 17.8 18.2ROCE (%) 8.0 19.0 21.4Net cash (debt) (25,984) (24,096)(13,173)NWCapital (Days) (5) 5 4P/E (x) 70.6 24.1 20.1P/BV (x) 4.6 4.0 3.4EV/Sales (x) 1.9 1.4 1.2EV/EBITDA (x) 25.5 12.7 10.9

Source: Company, Kotak Securities - Pri-vate Client Research

RESULT UPDATE

Arun [email protected]

+91 22 6621 6143



Despite fall in commodity prices, the company has not reported any improve-ment in gross margins. On the contrary, gross margins has sequentially beencoming down in the past two quarters. Company said that product-mix is im-pacting gross margins. We believe lower defense off-take also impactedgross margins. In 3QFY16, gross margins was higher YoY but lower QoQ.

Employee cost during the quarter was up by 26% YoY to Rs3,492mn. Rise inemployee cost is due to impact of annual increments, wage revision and bo-nus/variable increments. Further, as per new Bonus Act the company pro-vided for additional bonus provision (for past 21 months). On a QoQ basis,employee cost declined due to lower scale of operations.

Other expenses during the quarter was up by 22%, similar to 22% increasein revenues. Despite strong volume growth, the company has not been ableto achieve operating leverage benefit. Other expenses has been higher dueto certain expenses related to exports. Sequential fall in other expenses isdue to 17% lower sales volumes.

EBITDA margin during the quarter expanded from 7.1% to 10.5% on accountof YoY gross margin expansion. However despite 22% volume growth, therewas no YoY operating leverage benefit in 3QFY16. As compared with2QFY16, EBITDA margin declined due to negative operating leverage from17% volume fall.

As a result of debt reduction, interest cost declined for ninth consecutivequarter. In 3QFY16, interest cost was down by 32% YoY and 5% QoQ. Ex-ceptional loss during the quarter pertains to loss on sales of immovable prop-erties (Rs15mn loss) and diminution in the value of JV/subsidiaries (Rs50mnimpact).

Despite Rs65mn exceptional loss, profit increased from Rs321mn in 3QFY15to Rs1,986mn in 3QFY16.

Conference Call Highlights

Domestic MHCV demand continue to stay robust on account of pent-up de-mand, lower fuel prices (improving operators profitability) and some pre-buy-ing on revival of some infra/road projects. Company expects that industryvolume growth in 4QFY16 will remain robust.

In exports, the company maintained that they target to derive 25-30% ofrevenues from exports in the next 3-5 years. Company is focusing on Africanow and will subsequently target the South East Asian and South Americanmarkets.

ALL has gained market share across all regions in FY16. Strong growth inALL's key segment and markets aided market share gain for the company.

Despite mere 5% spares revenues growth in 9MFY16, company expects FY16spares revenues to grow by 15% in FY16. Company expects defense rev-enues to grow by 12-15% in FY16.

ALL's net debt stands at Rs35bn and debt: equity is 0.7:1. Working capital in3QFY16 increased QoQ by Rs10bn. Working capital days increased fromnegative 5 days as of end 1HFY16 to positive 18 days as of end 3QFY16.

In 9MFY16 capex and investments by ALL stood at Rs750mn as againstcompany's FY16 guidance of Rs5bn.

In 3QFY16, Pantnagar production came in at 10,000 units as against 4,000units in 3QFY15. During 9MFY16, company produced 34,000 units at itsPantnagar plant. Excise duty benefit for the Pantnagar plant is available upto March 2020.



Outlook

During 9MFY16, ALL's volumes have grown by 36% YoY. In the MHCV seg-ment, volume growth stands at 54% in 9MFY16, as against industry growthof 30%. Accordingly, ALL’s market share in the domestic MHCV segment in-creased from 27% in 9MFY15 to 32% in 9MFY16.

We expect healthy 10-15% volume growth to continue for the industry andcompany in 4QFY16 and FY17. In our estimates, we have factored in 13%volume growth for ALL in FY17.

Buoyed by robust volume growth, EBITDA margin has improved sharply inFY16. We expect EBITDA margin to stay stable in FY17.

Strong EBITDA growth will lead to improvement in cash flows and aid in fur-ther lowering debt and interest outflow. Robust revenue growth, healthyEBITDA margin and reduction in interest outgo will lead to strong earningsgrowth for the company in FY17.

Given strong performance in 9MFY16, we increase our FY16 volume andmargin assumptions and that translates into 25% increase in net profit esti-mates. For FY17, we increase our net profit estimates by 5%.

We revise our target price on the stock to Rs99 (earlier Rs94), and upgradethe stock to BUY (ACCUMULATE earlier).

We recommend BUY onAshok Leyland with a price

target of Rs.99




NATIONAL BUILDING CONSTRUCTION COMPANY

PRICE: RS.836 RECOMMENDATION: BUYTARGET PRICE: RS.1079 FY17E P/E: 24.2X

NBCC reported below expected Q3FY16 results in terms of bottomline onaccount of disappointment on margins front. Net revenue for the quarterwas inline and grew at 29% yoy to Rs 14.3 bn. Growth in net revenue wasdriven by strong growth across all segments. EBITDA for the quarter grewby 49% yoy to Rs 615 mn and was below our estimates led by belowexpected EBITDA margins at 4.3% Vs estimates of 6%. This was onaccount of below expected margins in PMC business led by higher workconsultancy expenses and employee benefit expenses resulting in 120 bpsyoy fall in segmental margin. NBCC has a strong order book of Rs 350 bn(excluding redevelopment orders of ~Rs 150 bn) at the end of Q3FY16which was driven by Rs 85.2 bn of new orders in the quarter. Inflow oflarge size redevelopment orders would strengthen company's order bookand would be positive for future growth in financials. The company isaiming to achieve more than 25% yoy growth with 6-6.5% PAT margins ina longer run. We have cut our earnings estimates for FY16E & FY17E by5.9% and 13.8% respectively considering delay in ramp up of some of theredevelopment projects. The stock is presently trading at 24x on FY17Erevised EPS of Rs 34 (earlier Rs 39). We maintain Buy on the stock withrevised target price of Rs 1079 (Vs Rs 1122 earlier).

Standalone Result Table

Year to March (INR mn) Q3FY16 Q3FY15 % Chg Q2FY16 % Chg

Net Revenues 14,260 11,064 29 11,254 27

Materials/Work cons Cost 12,943 9,971 30 10,004 29

Gross Profit 1,317 1,094 20 1,250 5

Employee Expenses 531 496 7 503 6

Other Expenses 171 186 (8) 83 106

Operating Expenses 13,646 10,653 28 10,590 29

EBITDA 615 412 49 664 (7)

EBITDA margin (%) 4.3 3.7 5.9

Depreciation 5 5 4 5 17

Other income 342 373 (8) 318 8

Net finance expense 99 82 53

Profit before tax 852 697 22 924 (8)

Provision for taxes 256 189 35 251 2

Reported net profit 596 508 17 673

As % of net revenues

COGS 90.8 90.1 88.9

Employee cost 3.7 4.5 4.5

Other Expenses 1.2 1.7 1

Operating expenses 95.7 96.3 94.1

EBITDA 4.3 3.7 5.9

Reported net profit 4.2 4.6 6.0

Tax rate (% of PBT) 30.1 27.1 27.2

Source: Company

Summary table


Revenue 46621 57477 75148Growth (%) 15 23 31EBITDA 2870 3719 4866EBITDA margin (%) 6.2 6.5 6.5PBT 3910 4677 5914PAT 2773 3274 4140EPS 23 27 34EPS Growth(%) 12.2 18.1 26.5CEPS (Rs) 23 28 35BV (Rs/share) 110 130 154Dividend / share (Rs) 7 8 10ROE (%) 22.6 22.7 24.3ROCE (%) 23.7 25.7 28.4Net cash (debt) 12890 14921 17268NW Capital (Days) -56 -51 -46P/E (x) 36.2 30.6 24.2P/BV (x) 7.6 6.5 5.4EV/EBITDA (x) 30.5 23.0 17.1EV/Sales (x) 1.9 1.5 1.1


RESULT UPDATE

Pankaj [email protected]

+91 22 6621 6321



Q3FY16 revenue in line with our estimates

Net revenue for the quarter grew by 29% yoy to Rs 14.3 bn and was inlinewith our estimates of Rs 14.3 bn. This was led by 62% yoy growth in realestate (Vs estimated 47% growth estimates), 19% yoy growth in EPC seg-ment (Vs 8% yoy decline estimates) and 27% yoy growth in PMC (Vs 30%growth estimates).

In the quarter, the company witnessed strong revenue growth across all seg-ments. Revenue growth is expected to remain firm across all segments in thecoming quarters considering strong order book. Kidwainagar project contrib-uted Rs 6 bn to the 9MFY16 revenue and is expected to ramp up further.

The company has guided to achieve 20-25% growth in the current financialyear and more than 25% growth in FY17. Further, the management expectsFY18 to be much stronger than FY17 as its redevelopment project would seestrong rampup in the year.

EBITDA margins disappointed

EBITDA for the quarter grew by 49% yoy to Rs 615 mn (Vs Rs 671 mn esti-mates) on strong sales growth, but the growth in EBITDA was lower than ourestimates on lower margins which was at 4.3% Vs our estimates of 6%.

Margin disappointment was on account of below expected margins in PMCbusiness led by higher work consultancy expenses and employee benefit ex-penses resulting in 120 bps yoy fall in segmental margin and also led bylower margins in EPC business.

PAT for the quarter grew at relatively slower pace of 17.3% yoy to Rs 596mn and was below our estimates of Rs 776 mn on account of lower marginsand higher finance cost.

The management expects the margins to normalize in future to the range of6-6.5%.

Segmental Performance

(Rs mn) Q3FY16 Q3FY15 % Chg Q2FY16 % Chg

Segmental Sales

Real Estate 1100 679 62 1630 -32

EPC 712 596 19 559 27

PMC 12399 9744 27 8977 38

Total Revenue 14211 11018 29 11166 27

Segmental EBIT

Real Estate 258 114 127 464 -44

EPC 85 114 -26 97 -13

PMC 902 824 10 675 34

Unallocated -29 -27 -26

Total EBIT 1216 1024 19 1209

Segmental Margins (%)

Real Estate 23.5 16.8 28.5

EPC 11.9 19.1 17.3

PMC 7.3 8.5 7.5

Source: Company



Strong current order book of Rs 350 bn with robust order pipeline

NBCC has strong present order book of Rs 350 bn which is contributed by 1)80% from PMC work 2) 15-16% from real estate and 4) 4-5% from EPC.The present order book gives very strong revenue growth visibility for thenext 3-4 years. The company management has guided for 20-25% of rev-enue growth in FY16 with 6-6.5% PAT margins. The company expects final-ization of DDA project in the current quarter.

Order book does not include total Rs 150 bn of other redevelopment workwhich includes redevelopment projects from DDA of total Rs 80 bn of ordersize and Rs 70 bn of redevelopment work from different states and othergovernment entities.

NBCC added large size orders in the quarter which includes large size rede-velopment order from AIIMS of Rs 58.3 bn cost and Rs 21.5 bn PMC order forre-development of Pragati Maidan

Further, the company management expects Rs 200 bn of redevelopment or-ders from redevelopment of four colonies in Delhi. As per management, theproject has got further delay in terms of approval from central government.Government has included more colonies in the proposed redevelopment plan.As a result, NBCC would now be developing 4 colonies instead of 3 as perprevious plan. As a result the size of the project is increased to Rs 200 bn Vsprevious less than Rs 150 bn The company expects government approval byend of H2FY17 considering change in overall plan.

NBCC has signed an MoU with AIIMS to develop a trauma centre on 15-acreland at a cost of Rs 30 bn. The company would get 15% advance in theproject where the interest component would be a pass through.

NBCC has entered in to Ganga cleaning project and has got a project inBihar. It has received project to carry out work on condition assessment andfeasibility study and also entry level activities under National Mission forClean Ganga NBCC management has not given any details about the size ofproject, however they are hopeful of winning more projects under this pro-gram.

Real estate business sales remained strong in the quarter

The company has reported strong performance in the real estate sales in thelast quarter with the segment growing by 62% yoy as it sold inventoriesacross different location.

NBCC has has total inventory of Rs 13 bn spread across different region.NBCC is going slow in terms of launching new projects considering weak realestate market.

Outlook and valuation

Based on strong current order book of Rs 350 bn and robust pipeline for futureprojects, we expect high growth in NBCC's revenue in next 4-5 years. We expectrevenue CAGR of 27% in FY15-17E led by 31% CAGR in PMC segment, 6%CAGR in real estate business and 16% CAGR in EPC business. We have cut ourearnings estimates for FY16E and FY17E by 5.9% and 13.8% respectively by re-ducing our growth estimates in PMC business considering delay in ramp up insome of the redevelopment projects. However, we do not see any major impactof the same in our target price as we have factored in recent redevelopmentorder from AIIMS in our DCF valuation. The stock is presently trading at 24x onFY17E EPS of Rs 35 (Vs earlier estimates of Rs 39). We maintain BUY on thestock with target price of Rs 1079 (Vs Rs 1122 earlier).

We maintain BUY onNational Building

Constuction Company with aprice target of Rs.1079



Change in estimates

Particulars Previous Revised % Chg in estimatesFY16E FY17E FY16E FY17E FY16E FY17E

Revenue 59,809 80,624 57,477 75,148 -3.9% -6.8%

EBITDA 3,852 5,353 3,719 4,866 -3.5% -9.1%

EBITDA margin (%) 6.4 6.6 6.5 6.5 7 bps -12 bps

PAT 3,539 4,775 3,274 4,140 -7.5% -13.3%

EPS 29.0 40.0 27.3 34.5 -5.9% -13.8%


Valuation summary

SOTP Basis Absolute Per share

PMC Other DCF 6,159 513

PMC Redevelopment DCF 5,605 467

Real estate 1x Capital 1049 87

EPC 5x EBIT 139 12

Total Value 12,952 1,079





NESTLE INDIA

PRICE: RS.5056 RECOMMENDATION: SELLTARGET PRICE: RS.4850 CY16E P/E: 39.6X

Nestle India's 4QCY15 revenues have come in 6% below our estimates,leading to a 21% EBITDA disappointment. The results indicate that either: a/Maggi sales have come in well below expectations, or b/ other segments arewitnessing a significant degrowth, or c/ a moderate version of (a) and (b)above. It may be early to make a judgment on whether Maggi will be ableto meet our CY16 expectations (since sales of the Masala variant havestarted only in November); however, it is unlikely that the company shallprovide a significant positive signal in 1QCY16, therefore valuations areunlikely to steepen. Meanwhile, competitive forces may have strengthened(ITC's Yippee noodles set to hit Rs 10 Bn mark, launch of Patanjali noodles),further reducing visibility. While maintaining our CY16 estimates, we cutvaluation to 38X CY16 earnings, and arrive at a price target of Rs 4850(Rs5230 earlier). Maintain SELL.

Results Summary

(Rs mn) 4QCY15 4QCY14 % chg y/y 3QCY15 % chg q/q

Net Sales 19,464 25,161 -22.6 17,362 12.1

- Domestic Sales 17,913 23,576 -24.0 15,878 12.8

- Exports 1,551 1,585 -2.2 1,484 4.5

Cost of Materials 8,691 11,248 -22.7 6,605 31.6

Purchase of Stocks in Trade 230 212 8.7 207 11.4

Changes in Inventories -839 -238 253.0 617 -236.1

Raw Material Expenses 8,082 11,222 -28.0 7,429 8.8

Gross Profit 11,383 13,939 -18.3 9,934 14.6

Gross Margin (%) 58.5 55.4 57.2

Employee Expenses 2,556 2,201 16.1 2,298 11.2

Other Expenses 5,171 6,201 -16.6 4,762 8.6

Provisions for contingencies (ops) 92 91 0.5 77 18.5

CSR Expenses 165 85 NA 16 916.0

EBITDA 3,400 5,362 -36.6 2,781 22.2

Depreciation and Amortization 897 848 906

Impairment losses 0 12 NA 168 -100.0

EBIT 2,503 4,502 -44.4 1,707 46.6

Other Operating Income 130 148 62 NM

Net Provsns for contingencies (other) 0 0 - 0 NM

Other Income 273 177 53.8 272 0.1

Financial Expenses -2 0 - 0 NM

PBT before exceptional items 2,908 4,827 2,041

Exceptional Items 247 70 NA 245 NM

PBT 2,661 4,897 -45.7 1,796 48.2

Tax Expenses 829 1,634 -49.3 553 49.8

PAT 1,832 3,264 -43.9 1,242 47.5

Source: Company

Nestle India's 4QCY15 results came in below estimates, as topline came in wellbelow expectations. The company's revenues de-grew 23% y/y as domestic saleswere lower 24% y/y. Sales indicate that Maggi sales have not risen to the levelsexpected; we also believe that non-Maggi sales have been fairly week.

Summary table

(Rs mn) CY14 CY15E CY16E

Sales 98,063 81,233 103,820Growth (%) 8.2 -17.2 27.8EBITDA 20,163 15,613 22,338EBITDA margin (%) 20.6 19.2 21.5PBT 17,673 8,136 18,749Net profit 11,777 5,633 12,318EPS (Rs) 122.1 58.4 127.8Growth (%) 6.7 (52.2) 118.7CEPS (Rs) 158.0 190.9 168.0BV (Rs/share) 294.3 292.3 338.1Dividend / share (Rs) 63.0 48.5 86.0ROE (%) 41.5 34.2 37.8ROCE (%) 37.0 19.9 36.1Net cash (debt) 4,301.2 4,817.7 9,851.0NW Capital (Days) (60.3) (87.4) (70.7)P/E (x) 41.4 50.6 39.6P/BV (x) 17.2 17.3 15.0EV/Sales (x) 4.9 5.9 4.6EV/EBITDA (x) 24.0 30.9 21.4


RESULT UPDATE

Ritwik [email protected]+91 22 6621 6310



We note that the company had resumed the sales of MAGGI from November 9,2015, initially with MAGGI Masala noodles only. The chicken flavour of MAGGI hasbeen launched in February, 2016.

Even as we understand that the sales of MAGGI should likely have risen to about60% of pre-crisis levels, we think that the quarter's results indicate that the declinein sales of non-Maggi products is about 5-10%.

Gross margins expanded 3.1 ppt y/y as a result of lower raw material prices. On a q/q basis, gross margins have expanded we believe as a combined result of addition ofMAGGI to the product portfolio. Employee expenses have risen 11%, on expectedlines, as Maggi production has resumed.

Surprisingly, other expenses have risen somewhat modestly, 9% y/y, despite the re-turn of MAGGI. We had expected that the company shall be more aggressive inadvertising and promotion spends in the quarter, and had therefore expected higherother expenses.

Reported EBITDA, Rs 3400mn, came in 21% below estimates, primarily resultingfrom the topline miss.

Other line items are in line with expectations. Reported PAT, Rs 1832 mn, missedour estimates by 22%.

Final dividend for the year is Rs 18.5/ share, the total dividednd for the year is Rs48.5/ share.

Outlook and Investment ViewWhile the company has underperformed our estimates in the quarter, it may beearly to make a negative judgment about the sales of the company from thisquarter's result. We leave our CY16 estimates unchanged, i.e. we continue tofactor in recovery of lost market share to a large extent, in Maggi noddles. AsMAGGI sales pick up and the distribution of the copmany ramps up, we wouldalso expect a positive rub-off on other products of the company.

We have noted in our earlier reports that the maintenance of dominance in the in-stant noodles is a must to justify investment in Nestle, since prepared dishes seg-ment is the highest growth segment of the company, and since the company hasbeen (even before the crisis) losing market share in the category.

Even so, we note that we are disappointed by the lack of agression by the companyin advertising and promotion of MAGGI, especially given the rising competitive in-tensity in the space. We note that recently, ITC has said that its YIPPEE brand isclose to achieving a Rs 10 Bn turnover (i.e. almost 30% of sales of MAGGI in thepre-crisis days). Recent months have also seen launch of Patanjali noodles. There areother, less likely rivals, such as MSG brand of noodles, which have come into themarket. We would have liked to see intent to aggresively retain market share,which is not yet visible. This shall have an impact on the valuation of Nestle India.

The stock has declined significantly since our last update. Even so, valuations arenear the peak of the large-cap FMCG pack. Longer-term, we see little sense in in-vesting in the stock even from these levels. We cut our valuation multiple to 38XCY16 earnings (on lower visibility of MAGGI regaining market share in the coming2-3 quarters), and reduce our price target to Rs 4850 (Rs 5230 earlier). MaintainSELL.

We maintain SELL onNestle India with a price

target of Rs.4850




SUN TV NETWORK

PRICE: RS.330 RECOMMENDATION: ACCUMULATETARGET PRICE: RS.362 FY17E P/E: 14.6X

Sun TV Network's profits have come in 5% below estimates, asadvertising revenues underperformed (higher impact of Chennai floodsthan expected), and higher other expenses. Without adverse impact ofChennai floods, we believe the miss shall have been marginal. Wemaintain our FY17 estimates for the copmany, and remain significantlybelow consensus. The stock should be considered only by investors withrequisite risk proclivity as concerns relating to the promoters shallcontinue to weigh. Even while having a below consensus view onearnings, and while recognizing risks, we believe the current price doesprovide a positive trading opportunity - more so given the relativelyhigher exposure of the company to internet exploitation of its movielibrary. We upgrade the stock to ACCUMULATE (REDUCE earlier), with aprice target of Rs 362 (Rs 384 earlier).

Result Summary

SA, Rs mn, FY Ends Mar 3QFY16 3QFY15 % chg y/y 2QFY16 % chg q/q

Revenues 5741 5524 3.9 5681 1.1

- Advertising 2984 2920 2.2 3010 -0.9

- Slot Sales 270 290 -6.9 214 26.2

- Analogue Subscription 580 580 0.0 576 0.7

- DTH 1509 1330 13.5 1499 0.7

- International Revenues 350 360 -2.8 354 -1.1

- Other 54 44 21.6 29 88.2

Cost of Revenues 398 420 -5.3 449 -11.4

Employee Expenses 587 557 5.4 596 -1.5

Other Expenses 352 267 32.0 313 12.4

Depreciation and Amortization 1348 1254 7.4 1176 14.6

EBIT 3057 3027 1.0 3147 -2.9

EBIT Margin (%) 53.2 54.8 -1.5ppt 55.4 -2.1ppt

Interest Expenses 5 12 -61.0 1 585.7

Other Income 246 226 8.9 204 20.9

PBT 3298 3240 1.8 3349 -1.5

Provision for Tax 1142 1099 3.9 1166 -2.0

PAT 2156 2141 0.7 2184 -1.3

Source: Company Reports

Sun TV's 3Q revenues came in marginally below estimates, as lower than expectedgrowth in advertising revenues was offset by higher than expected revenues fromcable subscribers (a certain degree of lumpiness in cable revenues during the quar-ter).

Advertising revenues grew 2.2%, way below industry growth (likely about 15%)during the quarter. We note that advertising revenues of the company have beensignificantly impacted by floods in Chennai and certain other cities in Tamil Naduduring the quarter (TN contributes 65% to the total advertising revenues of the com-pany). The company said that for the first two months of the quarter, revenuegrowth was along near-term trends (double -digit growth), and the weakness is fullyattributable to the floods.

Most other revenue items grew in line with estimates, with the exception ofcable revenues (we had expected some weakness in cable revenues on accountof floods and possible non-payment).

Summary table


Sales 23,954 26,531 28,280Growth (%) 7.7 10.8 6.6EBITDA 16,772 18,649 19,902EBITDA margin (%) 70.0 70.3 70.4PBT 11,727 12,902 13,440Net profit 7,827 8,552 8,907EPS (Rs) 19.9 21.7 22.6Growth (%) 4.6 9.3 4.1CEPS (Rs) 35.5 39.4 43.3BV (Rs/share) 88.7 99.4 110.9Dividend/share (Rs) 11.3 11.3 11.3ROE (%) 23.5 23.1 21.5ROCE (%) 23.6 22.8 21.3Net cash (debt) 12,980 17,982 24,368NW Capital (Days) 187 185 181P/E (x) 16.6 15.2 14.6P/BV (x) 3.7 3.3 3.0EV/Sales (x) 4.9 4.2 3.8EV/EBITDA (x) 7.0 6.0 5.3


RESULT UPDATE

Ritwik [email protected]+91 22 6621 6310



Other expenses for the quarter include Rs 80mn contributed by the company toflood relief effors; adjusted for the same, other expenses grew on expectedlines. Depreciation and amortization expenses were high in the quarter, as thecompany has aired high-cost movies during the festive season. Cost of revenuesand employee expenses are broadly in line.

Reported EBIT, Rs 3057mn, is 7% below estimates. Adjusted for one-off expenses,the miss is 5%. PAT has also missed our estimates by 5%.

On the conference call, the management said that the board has decided not to goin for a buyback (earlier under consideration).

On the matter of weakness in the non-Tamil GECs of the company, the manage-ment said that the copmany was taken a bit by surprise by the addition of ruralhouseholds data in several states, and is taking steps in programming to ensuregreater rural viewership.

The management indicated that the company has signed some deals relatingwith Phase -3 (DAS) markets and the same shall begin to have a positive impacton the company's fincancials from 4QFY17 onward. For FY17, the managementhas guided for a 15% growth in cable revenues, even as Tamil Nadu, thecompany's most important market remains out of the DAS regime.

The company has recently signed deals with two OTT platforms for providing itscontent online. On the matter of its content library, the company said that it hasdigital rights over all the content library it owns. The company is currently enter-ing into two - year content deals, of which the first six months are minimum-guarantee deals and the later months are on a cost per subscriber basis.

The management provided some information about the ongoing cases against thepromoter. The case initiated by CBI has its next date set in April, and the companyhopes it will be resolved soon. Emanating from this case, there is a case (per-taining to the money trail, as per media sources) which has been initiated by theED. The charges have not yet been framed in both these cases, in our under-standing.

There has been some speculation in the media over the grant (non-grant) of licenseto Sun TV Network. Although the company has not received any informationfrom the government regarding its TV channels, there were objections of theMinistry of Information and Broadcasting, over participation in the radio FM auc-tions and migration. Thus far, the company has been allowed to proceed (viastay orders from the court).

Outlook and Investment ViewWe make changes to our FY16 estimates on account of weaker 3Q. Our resultingestimates are lower 3% (versus prior est). FY17 estimates are broadly main-tained at prior levels.

While the miss in the quarter is, we think, related with the Chennai floods, we con-tinue to believe that over the longer term Sun TV will underperform industry (ashas been the case over the past few quarters) in so far as advertising revenuegrowth is concerned - Sun TV channels in non-Tamil languages have lostsignfiicant market share, consistently, over the past few years. While the man-agement has been consistently conveying the message that the copmany willmake changes to its programming and be able to improve ratings, nothing muchhas changed. As a result, our FY17 estimates are significantly lower than con-sensus.

The issues relating with the promoter are unlikely to be resolved in the medium-term. Rollout of DAS in Tamil Nadu continues to be an event of significant impor-tance for the company; however, the rollout can't be predicted. A great deal de-pends on the Tamil Nadu elections which are scheduled this year (if the rulingAIADMK were to lose elections, it may have a huge positive impact on Sun TVNetwork).



Digital exploitation of the company's library holds signficant potential and SunTV stock is likely to respond positively to events such as the rolout of RelianceJio.

On account of weaker outlook on advertising revenues (relative to peers) andTamil Nadu DAS being a non-starter, we believe that a 20%-30% discount rela-tive to peers is warranted. Further, there is merit in incorporating a 20%- 30%discount to value of operations on account of the issues relating with the pro-moter. Even so, we think that a 16X FY17E multiple (versus 35XFY17E for ZeeEntertainment) should be a fair indicator of value for the company. We valueSun TV stock at Rs 362 (Rs 384 earlier). The stock has declined significantlysince our last update, prompting an upgrade to ACCUMULATE (REDUCE earlier).

We recommendACCUMULATE on Sun TV

Network with a pricetarget of Rs.362




ADANI PORT AND SPECIAL ECONOMIC ZONE (APSEZ)PRICE: RS.178 RECOMMENDATION: BUYTARGET PRICE: RS.320 FY17E P/E: 10.7X

Adani Port has reported healthy numbers for Q3FY16 in a weak businessenvironment with the company focusing on (1) increasing the share ofcontainers and liquid cargo volumes in the overall mix, (2) replicating thesuccess of Mundra across its other ports, (3) reducing the debt cost further,and (4) monetizing the SEZ. We believe the company has started to reap thebenefit of these efforts with strong performance in Q3FY16 with overallvolume of 38 mn tonnes (+5.5% QoQ), sales at Rs 17.2 bn (-7% QoQ and+11% YoY), EBIDTA at Rs 10.8 bn (margin of 62.8%) and PAT at Rs 6.48 bnmarginally below our expectation of Rs 6.79 bn. We read the numbers asstrong in a weak business environment especially in comparison toperformance of other companies in port and allied sectors. We estimate thebenefits of the efforts to extend and fully reflect in the medium term forAPSEZ. The present high mix of bulk cargo and EXIM slowdown will impactin the near term. Maintain BUY with an unchanged TP of Rs 320.

Quarterly snapshot (Consolidated)

(Rs mn) Q3FY15 Q4FY15 Q1FY16 Q2FY16 Q3FY16

Net Sales 15,484 16,812 17,484 18,423 17,179

OPEX 4288 4,355 4441 4,174 4754

Employee cost 714 600 639 764 712

Admn cost 886 765 757 909 919

EBIDTA 9,596 11,092 11,647 12,576 10,794

EBIDTA (%) 62.0 66.0 66.6 68.3 62.8

Other Income 1,553 1,506 1,488 1,436 1,779

Depreciation 2,557 2,477 2,601 2,756 2,877

Gross int 3,444 3,234 3,180 3,644 2,637

PBT 5,148 6,887 7,354 7,612 7,059

Taxes 11 401 683 578 650

Effective tax rate (%) 0.2 5.8 9.3 7.6 9.2

Share of Associates/MI 69.0

PAT 5,137 6,486 6,671 7,034 6,478

Extraordinary -17 97 -345 -524 -27

Reported PAT 5,120 6,583 6,326 6,510 6,451

Source; Company

Getting equipped for long term growthAPSEZ has made major announcements in H1FY16 with respect to new port projectsincluding development of a new port at Vizhinjam, acquisition of Kattupalli port inTamil Nadu from L&T Shipbuilding Limited and a transshipment hub at Mundra. It isalso raising Rs 45 bn via NCDs to repay high cost short term debt and facilitate thedevelopment of the new port projects PAN India. This expansion strategy will makeAPSEZ the largest port in the country with PAN India presence. We estimate theexpansion to be EPS accretive for Adani Port with improvement in cash flows. Theexpansion also (1) De-risks Adani port from any concentration risk and any specificcommodity risk and (2) lends greater credibility to our estimates.

Summary table


Sales 61,643 72,602 87,042Growth (%) 38.5 17.8 19.9EBITDA 39,742 46,901 56,400EBITDA margin (%) 64.5 64.6 64.8PBT 25,031 28,701 36,400Net profit 23,264 26,401 33,900EPS (Rs) 11.5 13.1 16.8Growth (%) 17.7 13.5 28.4CEPS (Rs) 16.0 18.6 22.8Book value (Rs/share) 51.1 62.1 76.9Dividend/share (Rs) 1.0 2.0 2.0ROE (%) 22.6 21.1 21.8ROCE (%) 12.8 11.7 12.1Net cash (debt) (119,955)(159,343)(184,105)Net WC (Days) 15.4 16.9 17.9EV/EBITDA (x) 12.2 11.1 9.7P/E (x) 15.6 13.8 10.7P/Cash Earnings 11.2 9.7 7.9P/BV (x) 3.5 2.9 2.3


RESULT UPDATE

Amit [email protected]

+91 22 6621 6222



Transshipment hub with expansion of container terminal 3

Adani Ports has decided to expand the container terminal 3 at Mundra (50:50 JVwith Mediterranean Shipping Company (MSC)) to 3.1 mn TEUs from 1.5 mn TEUsat present. The expansion aims to create a transshipment hub for the Middle East,South Asia and India. As per the company (1) construction has already commencedand the terminal will be commissioned in 15 months, (2) it will have a quay lengthof 1,460 meters with 15 super post Panamax quay cranes. It will be capable of han-dling 18,000 TEU container vessels, and (3) the revenue share model of MSC will besimilar to the one presently followed at CT-3.

Mundra Port is currently handling around 300,000 TEUs of transshipment volumeand is looking to attract/shift volumes from the transshipment ports of Middle East.The JV is significant for the company as (1) it provides good volume visibility.Mundra port will charge 20% royalty from the terminal and will also get all marinecharges, and (2) the company has a 50% stake in the profit of the JV company andalso earns a profit on the construction of the terminal (once terminal is transferred tothe JV company's book).

Details of the transshipment hub

Particulars Details

Expansion CT3 from 1.5 to 3.1 mn TEUs

Estimated cost Rs 15 bn

Focus Transshipment volume of Gulf/India/Pakistan

Work Started

Completion Q1FY18

Targeted volume 1.2 mn TEUs


New port projects to drive next leg of growthAdani Ports now has 10 ports in its fold, including Kattupalli (acquisition pendingapprovals). The key Mundra Port has already created significant value for the com-pany. We estimate the next phase of growth for the company to come from subsid-iary ports of Hazira, Dahej and Dhamra ports. The growth would be primarily led byboth market growth and market share gains (lower government revenue share tohelp). Large value creation from some ports is less likely given higher revenue shareto government (Vizag and Ennore) or likely lower rate of growth in cargo volumesgiven the emerging domestic supply economics (Kandla). The other big value creatorcould be SEZ land sale/lease where transactions have picked up in FY16 and is likelyto sustain at high levels over the next 2-3 years (LNG terminal, CT4 and possiblyCT5, potential IOCL refinery transaction, etc.)

Details of subsidiary port projects of Adani port

Port Dahej Mormugao Dhamra Hazira Kandla Vizag Ennore Vizhinjam

Stake of Adani (%) 74 74 100 100 74 100 100 100

Capacity (mt) 20 8 20 35 14 5 0 0

Under construction (mt) 0 0 15 0 0 0 20 20

Expansion room (Upto mt) 25 8 100 85 20 8 20 50




Focus more on container and liquid cargo

The management outlined its focus on the growing share of container cargo overtime. Recent additions of Vizhinjam and Kattupalli ports and a transshipment hubcorroborate this strategy. The company has similar plans to grow liquid volumes andsees strong uptick in demand at key ports (Mundra, Hazira). Such a strategy willreduce exposure to bulk cargo where visibility of business growth over the medium-term is low.

Container and Liquid cargo also adds value to APSEZ as they have higher margins,lower turnaround time and require lesser investment in terms of infrastructure re-quired for evacuation compared to bulk cargo.

Share of liquid/container cargo to increase

Source: Company; Kotak Securities - Private Client Research

Current mix of business and sectoral developments to impactbulk volumes in the near termBulk forms almost ~55% of total volumes of APSEZ with significant contributionfrom TATA power and Adani Power UMPP. A significant share of its bulk cargo iscoal imports. With increasing production of Coal India, improving PLF at powerplants and few plant shutdowns, the imports of coal has gone down impacting thebulk volumes at most Indian Ports including Mundra. We factor in the emergingdynamics and lower coal volumes versus our earlier estimates for Mundra, Dhamraand other ports.

Capex of Rs 25 bn over FY15 to FY17EAdani Ports has outlined its near-term capex plans: (1) capacity expansion atMundra CT-4 (Rs 5 bn for 1.3 mn TEU capacity), (2) capacity expansion at Dahej (Rs5 bn for taking capacity to 24 mn tonnes), (3) capacity expansion at Dhamra (Rs 10bn for adding two berths), (4) capex at Ennore (Rs 3 bn) and (5) maintenance capex(Rs 2-3 bn per annum). Most of these capex would get incurred over the next 2-3years.

Q3FY16 volumes were strong in the current business environ-mentAdani reported healthy volumes for Q3FY16 despite weak coal imports, consolida-tion in the container market and weaker crude. Also we believe that the expansionstrategy, measures to reduce cost of capital and initiatives taken by the governmentlike Dedicated Freight Corridor (DFC) should yield results for the company in me-dium to longer term and help ADSEZ report healthy numbers.

45.6 51.0 47.7 49.2 48.0 47.0

23.4 18.6 19.8 17.8 18.4 18.9

31.1 30.4 32.4 33.1 33.6 34.1

0%

25%

50%

75%

100%

FY13 FY14 FY15 FY16 FY17 FY18

BULK LIQUID CONTAINERs

90.7 114.0 148.6 158.0 173.0 185.0



Quarterly volumes for Adani Port

Mn tonnes Q3FY15 Q4FY15 Q1FY16 Q2FY16 Q3FY16

Total 39.0 36.4 39.6 36.0 37.97

QoQ 10.7 -6.6 8.9 -9.1 5.5

YoY 33.4 26.3 5.5 2.4 -2.5

Source; Company, Kotak Securities - Private Client Research

Overall volume growth for Adani Port

(million tonnes) FY13 FY14 FY15 FY16E FY17E

Bulk (including coal) 37.4 52.0 53.0 58.0 60.0

Crude 19.2 19.0 22.0 21.0 23.0

Container terminal 25.5 31.0 36.0 39.0 42.0

Total handled at Mundra 82.2 102.0 111.0 118.0 125.0

Hazira 1.0 3.0 7.2 9.0 10.0

Dahej 7.6 9.0 12.4 11.0 12.0

Dhamra 15.5 15.0 17.0

Others 0.0 0.0 2.5 5.0 9.0

Total for Adani 90.7 114.0 148.6 158.0 173.0


Focusing to bring down the cost of capitalAdani Ports had raised USD 650 mn through dollar bonds at a yield of 3.59% andutilized the proceeds partly to repay rupee debt of Rs 150 bn (total debt of Rs 170bn) on the Balance sheet. And now it is planning to raise Rs 45 bn through long termdebentures (NCDs) to repay high cost short term debt. The intent of the man-agement is to bring down the cost of capital while it pursues its capexprogramme.

Recent debt raising by the company

Type of debt Amount Yield Date

Dollar bonds Rs 44 bn (USD 650 mn) 3.59% Q1FY16

NCDs Rs 45 bn not known To be announced


High levels of debt - an overhang on the stockAPSEZ would be taking a lot of debt in the next 3 to 4 years to pursue its expansionstrategy. We estimate the debt to peak at Rs 260 bn in FY19 with net debt to equityof 1.2x. We estimate the incremental debt to potentially generate increased earn-ings and outweigh the debt costs generating return for equity shareholders. Butthe returns generated by the new assets would be lower than those generatedby the current assets (old assets) of the port diluting the historical high earningsand returns of APSEZ in near term. But we expect the new assets to match withthe old assets in the medium term with respect to returns and provide APSEZwith healthy growth in the medium term.

We do not see the costs of financing through debt overpowering the returns gener-ated by the company even in near term.



Valuation and recommendation

Stock underperformance over the last four months adequately captures the de-celeration in bulk cargo volume growth led by a fall in coal imports and weakcontainer market. In 9MFY16, volumes for Adani Port grew 3% at 114 mntonnes led by weak coal volumes and lower than expected growth in the con-tainer segment. But estimate volume momentum to remain strong and the ben-efits of the efforts taken by APSEZ to fully reflect in the medium term forAPSEZ.

We arrive at a SOTP-based unchanged TP to Rs320 with our assumptions for traffictill the end of the concession period. Mundra Port contributes 46% at Rs147/share,implied valuation 12x FY17E EV/EBITDA and 16x P/E. Other port concessions contrib-ute Rs114/share to the SOTP i.e., 36% of total value, of these the recently acquiredDhamra (Rs52/share) and Hazira (Rs35/share) are the larger contributors. SEZ ac-counts for remaining 16% of our SOTP and Adani Logistics 2%.

We maintain BUY on AdaniPort & Special Economic

Zone with a price target ofRs.320




SUN PHARMA LTD (SUN)PRICE: RS.848 RECOMMENDATION: ACCUMULATETARGET PRICE: RS.923 FY17E P/E: 22.9X

Though Sun Pharma’s revenues were in line with expectations, USrevenues adjusted for Taro were lower than expected. Domesticformulations segment growth was in line with expectations. PAT onreported basis was ahead of expectations, but adjusted for Taro's profits,Sun's profits were lower than expected.

Going ahead, key catalyst for Sun will be market share gains in gGleevec,resolution of Halol plant, positive data from MK3222 and benefits fromRanbaxy integration. We revise our FY17E EPS as we increase our marketshare/margin assumptions for gGleevec. Our revised EPS for FY17E stands atRs 37.1 (earlier Rs 33.9). We continue to value Sun at 23x FY17E EPS and addRs 70 (NPV for MK3222, a novel molecule). Maintain Accumulate with arevised target price of Rs 923 (earlier Rs 850).

RESULT UPDATE

Meeta [email protected]

+91 22 6621 6309

Quarterly Financials - Snapshot

(Rsmn) 3QFY15 4QFY15 1QFY16 2QFY16 3QFY16 YoY (%) QoQ (%)

Net Sales 68,826 61,449 65,222 68,033 70,466 2.4 3.6

Material Expenses 17,127 15,974 17,174 15,583 17,554 2.5 12.7

Employee Expenses 10,909 11,286 12,270 12,088 11,483 5.3 (5.0)

Other Operating Expenses 15,962 20,910 14,635 16,600 14,334 (10.2) (13.6)

Research and Development expenses 3,651 5,477 4,999 4,769 5,760 57.7 20.8

Operating Profits 21,176 7,802 16,143 18,994 21,335 0.8 12.3

Other Operating Income 469 122 2,354 343 355 (24.2) 3.6

EBITDA 21,645 7,923 18,497 19,337 21,690 0.2 12.2

Interest Cost 1,529 1,248 1,230 1,484 1,170 (23.5) (21.1)

Depreciation 2,284 4,618 2,401 2,711 2,508 9.8 (7.5)

Other Income (733) 3,825 1,054 1,913 2,192 (399.1) 14.6

PBT 17,099 5,882 15,920 17,055 20,205 18.2 18.5

Tax 10,290 (5,999) 2,268 3,355 2,020 (80.4) (39.8)

Minority interest (2,856) (3,012) (2,011) (2,633) (3,948) 38.2 49.9

Exceptional items - - (6,852) - -

RPAT 3,953 8,869 4,790 11,067 14,236 260.1 28.6

E/o (adj for tax) - - 5,824 - -

APAT 3,953 8,869 10,614 11,067 14,236 260.1 28.6

Margin Analysis (%) 3QFY15 4QFY15 1QFY16 2QFY16 3QFY16 YoY (bps) QoQ (bps)

Raw mat cost 24.9 26.0 26.3 22.9 24.9 2.7 200.7

Employee cost 15.9 18.4 18.8 17.8 16.3 44.5 (147.3)

Other expenses 28.5 42.9 30.1 31.4 28.5 1.8 (289.3)

R&D Expenses 5.3 8.9 7.7 7.0 8.2 286.9 116.4

Operating Margin 30.8 12.7 24.8 27.9 30.3 (49.1) 235.9

EBITDA Margin 31.2 12.9 27.4 28.3 30.6 (60.9) 234.7

APAT Margin 5.7 14.4 15.7 16.2 20.1 1439.7 391.7

Tax Rate 60.2 (102.0) 14.2 19.7 10.0 (5017.7) (967.2)

Source: Company



Quarterly - Segmental Mix

(Rsmn) 3QFY15 4QFY15 1QFY16 2QFY16 3QFY16 YoY (%) QoQ (%)

Domestic formulations 17,454 15,690 17,840 18,187 18,903 8.3 3.9

Export formulations 49,496 43,425 44,941 47,215 47,513 (4.0) 0.6

- US formulations 33,858 30,477 30,744 33,158 32,003 (5.5) (3.5)

- RoW formulations 15,638 12,948 14,197 14,057 15,510 (0.8) 10.3

Bulks 2,477 2,860 2,714 3,150 4,405 77.9 39.8

Others 122 122 214 142 207 69.5 46.4

Revenues 69,549 62,097 65,709 68,693 71,028 2.1 3.4

Source: Company

Key results/con-call highlights

Domestic formulations segment posted 9% YoY growth at Rs 18.9bn; Sun ini-tiated withdrawal of bonus scheme in the acute segment (Ranbaxy portfolio)which continues to impact the segment revenues.

US formulations segment revenues were at US$ 486mn, 11%/5% de-growthYoY/QoQ. Higher base in 3QFY15 due to one off opportunity of gDiovan led tolower growth. Supply constraints at Halol impacted QoQ growth.

Sun expects the supply constraints to subside in next few months and resumefull supplies by 1QFY17. However, the loss in market share in few productsmay not recover/ take time to recover. Sun expects to invite USFDA to re-in-spect the Halol plant in 1QFY17.

Sun has launched gGleevec in the US market in early Feb-16. Sun targets 30%market share in the products and expects the product to contribute substantiallyin the exclusivity period (till Aug-2016). Post the exclusivity, Sun expectscompetition to impact revenues/profits. gGleevec is a US$1.8bn opportunity.Being a specialty product, Sun expects ramp up in the market share to begradual. Sun has launched the product as a 30% discount as per our channelchecks.

As far as ANDAs are concerned - Sun awaits approval for 156 of the total 435filed. In 3QFY16, Sun filed 11 and received approvals for 9.

In the emerging markets/RoW, Sun reported Rs 15.5bn revenues, down by 1%YoY. The decline is the result of volatile currency movements in certain emergingmarkets and a strategic decision of not participating in low margin businesses.

Though emerging market revenues have been impacted significantly for peersdue to currency turmoil's, Sun has indicated that they too have been impactedbut presence in countries like Romania and few others where currencies areholding strong have minimized the impact of overall emerging market revenues.

Management has indicated that Ranbaxy integration is ahead of track and man-agement remains confident that the target of US$ 300mn synergies by FY18E isvery much achievable. The margin expansion in 3QFY16 is partly driven by syn-ergy benefits from the integration. Sun has changed Ranbaxy's procurementsources wherever possible and will continue with the changes as the old longterm procurement agreements end.

Sun has consolidated the opiod business (acquired from GSK) from this quarter.

Sun's in licensed novel molecule MK3222 - the phase 3 data should be out byApr-May 2016 (earlier it was expected by Dec-2015). It believes it has a de-cent efficacy compared to already approved Cosentyx, Novartis approved mol-ecule for Psoriasis (which is comparable to Sun's novel molecule). As far as sideeffects are concerned, Sun believes its molecule is better than Consentyx. Thesecomparables should lead to company gaining a sensible market share, if themolecule is launched. Sun expects to file MK3222 in CY2017.

Summary table


Sales 274,334 283,917 354,705Growth (%) 70.6 3.5 24.9EBITDA 80,636 81,510 125,421EBITDA margin (%) 29.6 29.0 35.7PBT 64,041 68,168 118,329Net profit 47,909 55,178 89,250.4EPS(Rs) 18.9 22.9 37.1Growth (%) (26.0) 21.5 61.8CEPS(Rs) 24.3 23.4 40.6BVPS(Rs) 110.2 132.1 171.3DPS (Rs) 0.0 2.0 2.2ROE (%) 20.2 16.6 24.4ROCE (%) 33.3 24.8 29.9Net debt (18,817) (65,970)(135,696)NW capital (Days) 110.4 117.6 122.3P/E (x) 44.9 37.0 22.9P/BV (x) 7.7 6.4 4.9EV/Sales (x) 6.2 10.5 8.4EV/EBITDA (x) 25.1 24.2 15.2




Company is not looking at any acquisitions in the near term and will be fo-cusing on consolidating/integrating its already acquired businesses.

It expects the tax rate to increase gradually going ahead. Sun's tax rate hasbeen lower (5-15%) in the past few years led by better tax management.

Halol plant issues The Halol plant had received 23 observations from the USFDA during an inspec-

tion in July-August 2014. Of the 23 observations, 14 were for the injectable unitand 9 were for the oral solids unit. Sun was required to make changes in SOPs(standard operating procedure) as well as processes to meet USFDA compliance.

Though company does not share plant wise details, but as per our assumptions,Halol plant manufactures injectables, nasals and oral solids. Few of the key prod-ucts manufactured there include Liposomal Doxorubicin (gDoxil) (US$200mn or~9% US revenues), Sumatriptan Auto Injector (US$ 130mn or ~6% of US rev-enues). Overall contribution from this plant stands at ~25% of Sun's consolidatedrevenues.

Halol plant received warning letter in the month of Dec-15 and requires the com-pany to make some further changes. These remediation measures have led tocertain supply constraints (especially Sumatriptan injectable). Management ex-pects to invite the USFDA in 1QFY17 for a re-inspection.

Assuming Sun invites the USFDA in Apr-May 2016 and the re-inspection is con-cluded by Jun-Jul 2016. We expect the plant to be back in full compliance bySep-2016. Any delay in these timelines remains a risk to our view.

On the positive note, Sun has been receiving CRL/TAD (complete response letter/Target action dates) from USFDA for products filed from Halol plant. Theoreti-cally warning letter lead to stoppage of approvals from the impacted plant and ithas been the case for Halol too, but receiving of CRL/TAD's gives comfort.

Sun Pharma announced that it has decided to terminate the JV with Merck todevelop, manufacture and commercialise branded generics for emergingmarkets. The joint venture was established in 2011 to develop andcommercialise novel formulations and combinations of medicines for emerg-ing markets. Company did not disclose the investment it has made in theventure. However, management has indicated that it would not have anymaterial impact on financials.

Outlook and Valuation

Sun has been our top pick in the large cap pharma space due to robust outlookon revenues as well as margin improvement, attractive valuations as well as ben-efits from the Ranbaxy merger. However, the compliance issues at the Halolplant, is very critical.

As far as our revenue estimates are concerned, we revise our revenues slightlyhigher to factor better gGleevec revenues (US$378mn). We assume gGleevecwill be a 48% NPM product and Sun will be able to garner ~30% market sharein the US$ 1.8bn market, assuming 30% price erosion. Our revised CAGR forrevenue stands at 13.7% (earlier 13.0%) from FY15-17E. Our EPS for FY16E andFY17E now stands at Rs 22.9/37.1 (earlier Rs 21.3/33.9).

To factor the risk of Halol plant, we continue with our lower PEx ratio of 23x(from our pre-Halol PEx of 25x)

We maintain ACCUMULATE on Sun with a revise target price of Rs 923 (earlierRs 850), 23x FY17E EPS and an NPV of Rs 70 for its novel molecule - MK3222.

The stock is expected to remain weak led by lower US revenues but we ex-pect the stock to trade higher as market share gains in gGleevec starts re-flecting in monthly data. Key catalyst for Sun over the long run will be reso-lution of Halol plant, positive data from MK3222 and benefits from Ranbaxyintegration.

We maintain ACCUMULATErating on Sun Pharma with a

price target of Rs.923




Summary table


Sales 73,828 71,628 75,108Growth (%) 11.0 (3.0) 4.9EBITDA 17,060 9,122 9,825EBITDA margin (%) 23.1 12.7 13.1PBT 21,134 11,294 11,941Net profit 11,734 7,064 7,469Adj EPS (Rs) 4.8 2.7 2.9Growth (%) 69.6 (39.8) 5.7CEPS (Rs) 6.7 4.3 4.5BV (Rs/share) 49.7 50.1 51.0Dividend / share (Rs) 1.8 1.8 1.8ROE (%) 9.6 5.5 5.7ROCE (%) 14.5 8.0 8.4Net cash (debt) 55,790 67,086 62,562EV/Sales (x) 0.2 0.2 0.3EV/EBITDA (x) 1.6 1.8 2.1P/E (x) 6.7 11.7 11.0P/CEPS (x) 4.8 7.4 7.1P/BV (x) 0.6 0.6 0.6

Source: Company, Kotak Securities - Pri-vate Client Research

NALCO

PRICE: RS.32 RECOMMENDATION: BUYTARGET PRICE: RS.44 FY17E P/E: 11.0X

NALCO's 3QFY16 performance, was below expectations driven by a fall inrealisation, lower alumina sales volume and increase in costs. Net salesduring the quarter declined 14.2%/9.9% YoY/QoQ to Rs16.35bn onaccount of lower alumina sales volumes and decline in realisation. EBITDAdeclined 74.1%/59.8% YoY/QoQ to Rs1.36bn, with an EBITDA margin of8.3%. PAT declined 62.3%/41% YoY/QoQ to Rs1.34bn including Rs534mnof extraordinary income (income out of litigation settlement). Adjustingfor a one-time gain, adjusted net profit for the quarter stood at Rs800mn.We believe going ahead, aluminium business will continue to remain adrag on earnings. Given the sharp fall in the stock price since our lastupdate, we upgrade the stock to BUY (earlier Reduce), with an unchangedtarget price of Rs44, as stock is attractively valued at 2.1x FY17E EV/EBITDA.

Quarterly Financials

Y/E March (Rsmn) Q3FY16 Q3FY15 YoY (%) Q2FY16 QoQ (%)

Net sales 16,353 19,060 (14.2) 18,151 (9.9)

Materials 2,567 2,285 2,459

% of sales 15.7 12.0 13.5

Power & Fuel 5,084 4,472 4,929

% of sales 31.1 23.5 27.2

Total Expenditure 14,989 13,788 14,758

Operating profit 1,363 5,272 (74.1) 3,393 (59.8)

OPM (%) 8.3 27.7 18.7

Depreciation 1,046 1,165 1,073

Interest 0 0 -

EBT 317 4,107 2,321

Other income 1,240 1,516 1,260

PBT 1,558 5,623 (72.3) 3,581 (56.5)

Exceptional Item 535 - -

Provision for tax 757 2,079 1,319

-effective tax rate 48.6 37.0 36.8

PAT (reported) 1,335 3,545 (62.3) 2,261 (41.0)

Minority/ Share of Profit 0 0 -

PAT (Adjusted) 1,335 3,545 (62.3) 2,261 (41.0)

NPM (%) 8.2 18.6 12.5

Source: Company

Deferred alumina shipment and decline in realisation impacted revenueRevenue during the quarter declined by 14.2%/9.9% YoY/QoQ to Rs16.35bn, onthe back of lower alumina volume and weak realisation. Alumina production vol-ume during the quarter stood at 517,000 tonnes, down 3% QoQ, while salesvolume during the quarter declined by 9.5% sequentially to 285,000 tonnes. Thedecline in alumina sales volume is attributed to 30,000 tonnes of the delayedalumina shipment to Q4FY16. We expect, alumina volumes to remain strong inthe coming quarter. Aluminium production and sales volume stood at 958,896tonnes and 97,000 tonnes respectively in 3QFY16. In addition to the delayedshipment, fall in alumina and aluminium realisation to Rs17,089/tonne (down18% QoQ) and Rs115,007/tonne (down 25% QoQ) respectively in 3QFY16 alsoimpacted the revenue.

RESULT UPDATE

Jatin [email protected]

+91 22 6621 6137



EBITDA margin declined sharply

EBITDA during the quarter declined 74.1%/59.8% YoY/QoQ to Rs1.36bn, with anEBITDA margin of 8.3%, down from 27.7% and 18.7% in 3QFY15 and 2QFY16respectively. The decline in EBITDA margin is attributed to fall in realisation andincrease in cost. The alumina segment EBIT stood at Rs2.57bn (down 20% QoQ)due to delayed shipment and weak realisation. While, aluminium segment EBITloss widen to Rs1.32 bn (Rs1.11bn in 2QFY16), which was fully on account of de-cline in realisation and an increase in power and fuel costs. The increase inpower and fuel costs is attributed to higher electricity duty, amounting to Rs182mn, levied from 1st October, 2015.

Valuation and Outlook

We expect, going ahead, Alumina to remain a key earnings driver for the com-pany, however the margin in alumina segment is likely to remain muted due todecline in alumina prices. At current all-in prices aluminum business will continueto incur loss and company's efficiency to control costs will be a key for alu-minium business. In our view, downside from current levels is limited, as we ex-pect increased sales of alumina to drive the company's profitability, though theweak outlook on aluminium would keep alumina prices under pressure. Thestock has corrected sharply since our last update in the month of December2015. However, at the CMP, the stock is attractively valued at 2.1x FY17E EV/EBITDA, and offers significant upside. Hence, we upgrade the stock to BUY (ear-lier Reduce), with an unchanged target price of Rs44.

Exhibit: Segment performance

Y/E Mar (Rs mn) 3QFY16 3QFY15 YoY (%) 2QFY16 QoQ (%)

Segment Revenue

Chemicals 9,337 9,858 (5.3) 10,313 (9.5)

Aluminium 11,224 12,727 (11.8) 11,506 (2.5)

Segment EBIT

Chemicals 2,565 3,361 (23.7) 3,223 (20.4)

Aluminium (1,324) 1,491 (188.8) (1,111) --

Source: Company

Exhibit: Aluminium performance

Source: Company

We recommend BUY onNalco with a price target

of Rs.44

(2 ,00 0)

0

2 ,0 0 0

4 ,0 0 0

6 ,0 0 0(R s M n ) P ow er & Fu e l Costs A lum in ium EB IT




OIL INDIA LTD (OINL)PRICE: RS.316 RECOMMENDATION: BUYTARGET PRICE: RS.425 FY17E P/E: 7.8X

Oil India's PAT for Q3FY16 is marginally lower than our estimates andmarket consensus. In Q3FY16, OINL has reported 18% yoy and 39% qoqdecrease in net profit to Rs.4.1 bn largely reflecting lower net realiza-tion (both oil and gas), higher depletion & write-offs, and lower otherincome. OIL's Q3FY16 net realized crude price decreased sharply toUS$42/bbls versus US$ 46.4/bbls in Q2FY16 mainly due to sharp fall ininternational crude oil price (-14% qoq).

In the short to medium-term, the key triggers for the stock are the ex-pected downward revision in cess rate and upward revision in domes-tic gas prices for deep-water blocks. We have lowered our estimates toreflect lower crude oil/expected cut in domestic gas prices (due as on1st April 2016) and higher well write-offs. We expect OINL to reportan EPS of Rs. 38 FY16E and Rs. 41 in FY17E. On the basis of our esti-mates, the stock at current market price of Rs. 316 is attractively val-ued at 7.8x P/E and 6.0x P/cash earnings on the basis of FY17E. Wemaintain BUY on OINL with a revised price target of Rs. 425. CMP of-fers attractive dividend yield of 4.7%)

Key developments: OINL's subsidy payout: In Q3FY16, NIL subsidy payout to OMCs v/s Rs.149

Mn in Q2FY16 due to fall in crude prices.

Cess rate may be reduced: As per our channel checks, the oil and gas in-dustry has demanded government reviewing fixed quantum of cess (~US$9/bbls) on crude oil (Brent at $30/bbls, cess translates into 30% of upstream oilrevenue). In March'12, the government had increased cess on crude toRs.4,500/ton from Rs.2,500/ton fixed since Feb'06 due to material increase inoil prices to $113-114/bbls in FY12 from $58/bbls in FY06. Now, with thecrude oil prices reversing, industry is asking government to consider reducingcess or link it with crude price itself to prevent such irregularities in future.

Premium gas pricing for deep-water blocks: In order to monetize difficultdeep-water projects, the upstream companies are demanding for premiumgas pricing. Any positive development on the same will have a material posi-tive impact on the reserve potential of the Company.

Quarterly Table

(Rs mn) Q3FY16 Q3FY15 YoY (%) QoQ (%)

Net Sales/Income from ops 22,187 20,615 8 (7)

Incr/(Decr) in stock (48) (67) (28) (7)

Total Expenditure 15,846 14,028 13 (2)

EBIDTA 6,293 6,519 (3) (18)

Depreciation + Depletion & Write-offs 2483 3106 (20) 12

EBIT 3,809 3,414 12 (30)

Other income 3,650 4,284 (15) (35)

Interest-net 874 799 9 0

PBT 6,586 6,898 (5) (35)

Tax 2,479 1,916 29 (28)

PAT 4,107 4,983 (18) (39)

Equity Capital 6,011 6,011

Basic EPS 6.8 8.3 (18) (39)

Source: Company

Summary table


Net Sales 94,673 95,612 95,026Growth (%) 3.7 1.0 -0.6EBIDTA 36,775 32,951 36,930EBIDTA margin (%) 38.8 34.5 38.9PBT 36,771 33,806 36,548Net profit 24,849 22,650 24,487EPS (Rs) 43.4 37.7 40.7Growth (%) -11.3 -13.2 8.1CEPS (Rs) 57.8 47.2 52.7BV (Rs/share) 357.7 377.7 400.4DPS (Rs) 20.0 15.0 15.0ROE (%) 11.08 9.77 10.01ROCE (%) 8.82 9.9 11.7Net Cash (Debt) (481) (280) (17,283)NW Capital (Days) 109.3 57.1 58.9EV/Sales (x) 2.01 1.99 2.18EV/EBIDTA (x) 5.2 5.8 5.6P/E (x) 7.6 8.4 7.8P/BV (x) 0.9 0.8 0.8P/CEPS (X) 5.5 6.7 6.0


RESULT UPDATE

Sumit [email protected]+91 22 6621 6313



Performance Analysis

Net Revenue: OIL India's net revenue for Q3FY16 was at Rs.22 bn, up 8% yoybut down 7% qoq. On a sequential basis, the top line has decreased mainly dueto lower net realization (both oil and gas) and lower revenue from natural gassegment.

OIL's Q3FY16 net realized crude price decreased sharply to US$42/bbls versusUS$ 46.4/bbls in Q2FY16 mainly due to sharp fall in international crude oilprice (-14% qoq). Average rupee depreciated 1.5% qoq and 6.5% yoy toRs.64.97/$ in Q3FY16 from Rs.64.97/$ in Q3FY16, weak currency is positivefor Oil India.

Margins Performance (%)

Q3FY16 Q3FY15 YoY (%) QoQ (%)

EBITDA Margin 28 32 (3) (4)

EBIT Margin 17 17 1 (6)

Adj PAT Margin 19 24 (6) (10)

Other Income/PBT 55 62 (7) 1

Tax/PBT 38 28 10 4

Source: Company

Expenses (Rs. Mn)

Q3FY16 Q3FY15 YoY (%) QoQ (%)

Staff costs 3,255 3,486 (7) (23)

Statutory Levies 6,614 6,694 (1) (4)

Other Expenditure 5,977 3,849 55 18

Total 15,846 14,028 13 (2)

Expenses Ratio (%)

Employee to Sales 15 17 (2) (3)

Statutory Levies to VoP 30 33 (3) 1

Other Exp. to Sales 27 19 8 6

Source: Company

Employee cost: OINL's staff cost for Q3FY16 stands at Rs.3.3 bn, decreased23% qoq and 7% yoy.

Other expenditure: In Q3FY16, other expenses increased 18% qoq and 55%yoy to Rs.5.98 bn mainly due to rise in cost of support services.

Statutory levies: In Q3FY16, statutory levies decreased 4% yoy and 1%qoq. Broadly, statutory levies are linked with the production volumes.

Operating profit: In Q3FY16, operational profit decreased 3% yoy and 18%qoq (despite lower base) to Rs.6.3 bn.

Operating margin: The Company witnessed decrease in operating margin.In Q3FY16, the operating margin stood at 28% as against 32% in Q2FY16and 32% Q3FY15 on account of lower realization and higher operating ex-penses.

DD&A expenses: OINL's DD&A expenses increased 12% qoq but down 20%yoy to Rs.2.5 bn. Higher DD&A costs in Q3FY16 reflects higher write-off fromdry wells.

Higher other income: OIL's other income decreased meaningfully by 35%qoq and 15% yoy to Rs.3.7 bn in Q3FY16 mainly due to lower dividend/inter-est income. Other income comprises mainly interest and dividend income.

Finance expenses: In Q3FY16, OINL's interest cost increased 9% yoy to Rs.872 mn (flat qoq) partly due to higher borrowings and also interest paid onborrowings related to acquisition of 4% participating interest in Rovuma 1offshore block in Mozambique. Gross debt as on 30th Sep'15 stands higherat Rs. 91.3 bn as against Rs.83.4 bn as on 31st Mar'15.



Profit Before Tax (PBT): OINL reported PBT of Rs.6.6 bn down 35% qoq and5% yoy due to factors mentioned above.

In Q3FY16, OINL paid tax at a higher rate of 38% as against 34% in Q2FY16and 28% in Q3FY15.

PAT for Q3FY16 is at Rs.4.1 bn down 18% yoy and 39% qoq thereby translatinginto quarterly EPS of Rs.6.8. Lower PAT is on account of lower realization, higherdepreciation cost due to higher write-offs and higher other expenditure.

Multiple contingent liabilities not provided by OINL: Value added tax demand: OINL received notice of tax demand for Rs.13.5 Bn

(tax on price discount on crude oil given to OMCs) from Assam value added taxauthority. The Company is contesting the demand with higher authority and hasnot provided for the same in books. Additionally, the Company said if the de-mand is ultimately payable then it will be recovered from the customers.

Royalty claim: OINL has also received royalty claim of Rs. 72 Bn from director ofGeology and mining, Assam for FY09-FY14. OINL's contention is that it is payingroyalty on net of sharing of under-recoveries based on the instructions issued byMOP&NG in line with oil field (Regulation & Development) Act, 1948 and ac-cordingly such claim is not acknowledged as debt and considered as contingentliability.

Valuation & Recommendation- SOTPIn the short to medium-term, the key triggers for the stock are the expected down-ward revision in cess rate and upward revision in domestic gas prices for deep-waterblocks. We have lowered our estimates to reflect lower crude oil/domestic gas pricesand higher well write-offs. We expect OINL to report an EPS of Rs. 38 FY16E and Rs.41 in FY17E. On the basis of our estimates, the stock at current market price of Rs.316 is attractively valued at 7.8x P/E and 6.0x P/cash earnings on the basis ofFY17E. We maintain BUY on OINL with a revised price target of Rs. 425.

Our BUY rating and target price of Rs 425, comprises:

Core business valued at P/E of 7.5x FY17E core EPS. We believe PE captures theuncertainty relating to the under-recovery, so we value OINL on a PE basis (valueper share of Rs.177).

OINL's investment in Venezuela (value per share of Rs.51)

Investment in refinery is considered at book value (value per share of Rs. 20)

Investment in IOC is considered at 30% discount (value per share of Rs. 59)

And balance Cash and cash equivalent

Key risk and concerns Nationalization of foreign assets (like in Venezuela) by the respective govern-

ment can significantly impact the valuations of the Company.

Disappointment on production and sales volumes.

Significant drop in crude prices and sharp rupee appreciation remains the keydownside risks to earnings.

OINL has been producing oil from its Assam discoveries from last few decadeswith recovery factor more than 50%. We believe incremental crude oil produc-tion will be more expensive.

OINL is initiating significant exploration activity in the NELP blocks, which in-creases the risks of failures and hence material dry wells write-offs. This canimpact earnings and cash flows in the short-run.

We recommend BUY onOil India Ltd with a price

target of Rs.425




MANGALORE REFINERY & PETROCHEMICALS LTD. (MRPL)PRICE: RS.56 RECOMMENDATION: BUYTARGET PRICE: RS.63 FY17E P/E: 6.3X

MRPL's result is in-line with our expectations. MRPL has reported a PAT ofRs.2.98 bn (v/s our expectation of Rs.3 bn) in Q3FY16 as against a net loss ofRs.9 bn in Q2FY16 and a net loss of Rs.18.9 bn in Q3FY15. Despitereporting core GRMs higher than benchmark Singapore GRMs (MRPL's$8.4/bbls v/s $8/bbls) in Q3FY16, the overall implied GRMs stand lower at~$4.83/bbls due to inventory/product losses on account of fall in crude oilprices.

We expect going ahead, the profitability to improve on account of i).Improved product mix, ii). Better refining margins iii). Economies of scale,iv). Forward integration - Polypropylene plant and v). Various tax benefits.At current price of Rs.56, the stock is trading at 6.3x P/E and 1.4x P/Bmultiples on FY17E earnings. Recent correction in the stock price offersattractive entry point and hence we upgrade the stock to BUY (earlierAccumulate). Based on EV/EBIDTA multiple of 8x FY17E EBIDTA, the fairvalue of MRPL is Rs.63 (unchanged).

Results table

MRPL (Rs mn) Q3FY16 Q3FY15 YoY (%) QoQ (%)

Net Sales/Income from ops 88,166 1,47,119 (40) (14)

Incr/(Decr) in stock 4,158 (11,993)

Total Expenditure 87,880 1,53,196 (43) (8)

EBIDTA 4,444 (18,071) NM NM

Depreciation 1,596 1,429 12 0

EBIT 2,849 (19,500) NM NM

Other income 1,657 1,835 (10) (32)

Interest-net 1,515 1,279 18 (5)

PBT 2,991 (18,944) NM NM

Extra ordinary Exp/(Inc) 6.3 - - (97)

Tax 0 0

PAT 2,984 (18,944) NM NM

Equity Capital 17,526 17,526 0.0 0

EPS (Rs) 1.70 (11) NM NM

Source: Company

MRPL Q3FY16 results analysis

Crude throughput lower (YoY) due to planned shutdown:In Q3FY16, MRPL reported throughput of 3.82 mmt, down 1% yoy (on account ofplanned shutdown) but up 10% qoq (base effect), resulting in sequentially highercapacity utilization (102% in Q3FY16 as against 92% in Q2FY16).

Summary table


Sales 5,70,967 3,74,958 3,46,093Growth (%) (20) (34) (8)EBITDA (21647) 6,850 27,849EBITDA margin (%) (4) 1.8 8.0PBT (22950) 1,402 23,151Net profit (18529) 1,149 15,511EPS (Rs) (11) 0.66 8.85Growth (%) NM NM 1250CEPS(Rs) NM 4.2 12.5Book value(Rs/share) 29.8 30.4 39.3DPS (Rs) - - -ROE (%) NM 2.2 25.4ROCE (%) NM 3.9 11.2Net debt/(cash) 29,901 84,390 1,12,173NW Capital (days) (79) (77) (51)P/E (x) NM 85.4 6.3P/BV (x) 1.9 1.8 1.4EV/Sales (x) 0.22 0.49 0.61EV/EBITDA (x) NM 26.6 7.6


RESULT UPDATE

Sumit [email protected]+91 22 6621 6313



Lower crude throughput resulted in lower capacity utilization

Source: Company

Core GRMs improved:Despite reporting core GRMs higher than benchmark Singapore GRMs (MRPL's $8.4/bbls v/s $8/bbls) in Q3FY16, the overall implied GRMs stand lower at ~$4.83/bblsdue to inventory/product losses on account of fall in crude oil prices. The improve-ment in GRMs is on account of products like Pet Coke and Polypropylene generatedout of the new phase III secondary units.

Net revenue growthDespite improvement in GRMs, higher crude throughput (QoQ) and weak cur-rency, MRPL's top-line has fallen due to steep reduction in crude and productprices. In Q3FY16, MRPL has reported net revenue of Rs.88 bn, lower 14% qoqand 40% yoy. In Q3FY16, average implied realization per unit (calculated oncrude through put) stood at USD$ 50/bbls, down 5% qoq and 34% yoy.

Raw material cost:In Q3FY16, raw material consumption decreased 7% qoq and 45% yoy to Rs. 81 bn.In per unit terms, MRPL's crude oil price stands at US$43/bbls. However, the fallin product prices is lower than raw material cost resulting in higher impliedspread.

Chart showing product and raw material price decline

Source: Company



Margin Ratio

(%) Q3FY16 Q3FY15 YoY (%) QoQ (%)

EBITDA Margin 5.0 (12.3) NM NM

EBIT Margin 3.2 (13.3) NM NM

Adj PAT Margin 3.4 (12.9) NM NM

Other Income/PBT 55.4 (9.7) NM NM

Tax/PBT 0.0 0.0 0 (10)

excise/net sales 1.1 7.6 (6) (17)

Expenses (Rs Mn)

Raw Material consumption 80,705 1,46,247 (45) (7)

Staff costs 688 585 18 5

Forex Loss/(Gain) 1631 3434 (53) (77)

Other Exp. 4855 2930 66 290

Total 87,880 1,53,196 (43) (8)

Expenses Ratio

Employee to Sales 0.7 0.4 0 (0)

RM to VOP 87.4 108.2 (21) (13)

Forex Loss to VOP 1.8 2.5 (1) (6)

Mfg exp. To Sales 5.3 2.2 3 4

Source: company

Staff Cost: In Q3FY16, employee cost increased 5% qoq to Rs.688 Mn(+18% yoy). Broadly, MRPL's staff cost is within control.

Forex Loss: In Q3FY16, MRPL has incurred forex loss of Rs.1.6 bn as againstRs.7 bn in Q2FY16 mainly due to deprecation of rupee against US$ by 2% qoq.

Other expenditure: In Q3FY16, MRPL's adjusted other expenditure increasedmeaningfully 66% yoy and 290% qoq (base effect) to Rs.4.9 bn. We believe thiswill come down going forward as production normalizes. In per unit terms,MRPL's operating cost stands at $2.97/bbls, up 159% qoq and 52% yoy.

Operating profit - In Q3FY16, MRPL reported operating profit of Rs.4.4 bnas against loss of Rs.9 bn in Q2FY16 and a loss of Rs.18 bn in Q3FY15 on ac-count of the reasons mentioned above.

Depreciation cost: In Q3FY16, MRPL reported higher depreciation charge(Rs. 1.6 bn, 12% yoy but flat QoQ). The Company has adopted depreciationrate in line with the new schedule II to the Companies Act, 2013.

Finance cost: MRPL's interest cost has increased to Rs. 1.5 bn, down 5%qoq but up 18% yoy. Debt as on 30th Sep'15 stands at Rs.74 bn as againstRs.79 bn as on 31st Mar'15. Lower crude oil price will improve working capi-tal situation and lower borrowings.

Extra ordinary Exp/(Inc): In Q3FY16, MRPL has reported an exceptionalitem of Rs. 6.3 mn (differential whariage) as against Rs.205 mn in Q2FY16(contribution to Super Annuation benefit fund for 2007 to 2015 for non-man-agement staff).

Other income: In Q3FY16, MRPL's other income stands at Rs.1.7 bn de-creased by 32% qoq (due to base effect) and by 10% yoy.

Profit before tax (PBT): In Q3FY16, MRPL has reported PBT of Rs2.99 bn asagainst a loss of Rs.9.9 mn in Q2FY16 mainly due to higher crude throughput,better GRMs and lower forex losses.

Income Tax: In Q3FY16, due to previous losses the Company has not paid anyincome tax.

Bottom line: The Company has reported a net profit of Rs.2.99 bn in Q3FY16 asagainst a net loss of Rs. 9 bn in Q2FY16 and net loss of Rs.18.9 bn in Q3FY15.



Key Developments MRPL is venturing into RLNG business: Recently, MRPL has signed a

memorandum of understanding (MOU) with new Mangalore Port Trust tostudy the feasibility of setting up an LNG re-gasification terminal atMangalore. We believe this is at a preliminary stage and will have a longgestation period. However, if materializes then it will help MRPL to lower itsrefinery operating cost by replacing costlier liquid fuel with cheaper LNG.

New expansion plans in place - Growth is a process: The Company plansto expand crude processing capacity by 40% to 420,000 bopd by end-March2018. We have not considered the same as it is too pre-mature to model thesame.

Re-commencing retail outlets - MRPL has drawn up plans for opening over100 retail outlets which will improve its overall margins due to addition ofmarketing margins.

Marketing initiatives: Post fuel price de-regulation, MRPL has increased its domestic sales. In Q3FY16,

due to marketing initiatives the domestic sales volume mix increased to 70% asagainst 53% in Q3FY15.

The Company has successfully penetrated and made an impact in the highlycompetitive polypropylene market. Similarly, for the other solid products such asSulphur and Pet Coke, the market response continuous to be encouraging. InQ1FY16, the Polypropylene Unit (PPU) having a capacity of 0.44 MTPA has com-missioned commercial production.

OVERALL INVESTMENT SUMMARY

Valuations & Recommendations:We expect going ahead, the profitability to improve on account of i). Improved prod-uct mix, ii). Better refining margins iii). Economies of scale, iv). Forward integration -Polypropylene plant and v). Various tax benefits.

At current price of Rs.56, the stock is trading at 6.3x P/E and 1.4x P/B multiples onFY17E earnings. Recent correction in the stock price offers attractive entry pointand hence we upgrade the stock to BUY (earlier Accumulate). Based on EV/EBIDTA multiple of 8x FY17E EBIDTA, the fair value of MRPL is Rs.63 (un-changed).

Key Risk and Concerns:1). Wide fluctuations in crude, forex and product prices can impact the margins.

2). If global supply exceeds demand then margins can be under pressure.

3). Any delay in executing the project can significantly impact the valuations.

Company back ground:Mangalore Refinery and Petrochemicals Ltd. (Mini-Ratna status) is a pure play crudeoil refiner with strong promoter backing of ONGC (India's biggest governmentowned exploration Company). MRPL has transformed itself into a large and complexrefinery with phase-III capacity expansion and has emerged into a much strongerplayer in the industry.

We recommend BUY onMRPL with a price target

of Rs.63




IIPIIP de-grew by -1.3% in December; CPI at 5.7% in January 2016 ishighest in 17 months IIP jump of October (9.9%) reversed to de-growth of -3.4% in Novem-

ber and -1.3% in December. Lower December IIP growth could partiallybe explained by Chennai floods. Due to delays in the reporting systemand seasonal volatility we beleive 3-MMA is better representative ofindustrial activities, currently 1.7%, against 12-MMA IIP growth of3.3%. Most of the decline in IIP can be explained by contraction in capi-tal goods. Ex. Capital goods IIP would have been positive 1.2%.

CPI for January came in at 5.69% vs 5.61% in December, primarily onaccount higher Rural CPI at 6.48% vs 6.32% in December. Also food in-flation came in at 6.85% vs 6.4% in December Core CPI remained at4.75% vs 4.5% 12-MMA.

We are not expecting any rate action by RBI before Union Budget. Rateaction in April policy is dependent on the budget outcome. RBI wouldassess treatment of the pay commission recommendations, whichwould need to be balanced by budgetary tightening for fiscal consoli-dation. We believe RBI is likely to use its entire space available for thefiscal year in the April policy only. We would await for the Union Bud-get announcement for the magnitude of the cut, if any.

Industrial production reported growth (2.1%) on m-o-m basis. Economy is yet torecover fuly from the earlier lows, we are expecting recovery in economic activi-ties from current levels. 3-month moving average in IIP growth rate stands at1.7%. Past revisions in the IIP growth, Nov revised down by 23 bps suggestingvolatility is still persistent in the series, and one shall look at longer term trendrather than individual data points. Current negative gowth rate should be lookedin the light pf Chennai floods.

Table 1:Performance of Industrial Production (YoY %)

Mining Manufacturing Electricity GeneralFY15 FY16 FY15 FY16 FY15 FY16 FY15 FY16

April 1.7% -0.6% 3.0% 3.9% 11.9% -0.5% 3.7% 3.0%

May 2.5% 2.1% 5.9% 2.1% 6.7% 6.0% 5.6% 2.5%

June 4.8% -0.4% 2.9% 5.2% 15.7% 1.2% 4.3% 4.2%

July 0.1% 0.9% -0.3% 4.6% 11.7% 3.5% 0.9% 4.1%

August 1.2% 4.2% -1.1% 6.6% 12.9% 5.6% 0.5% 6.3%

September 0.1% 3.5% 2.7% 2.7% 3.9% 11.4% 2.6% 3.7%

October 4.5% 5.2% -5.6% 10.6% 13.7% 9.0% -2.7% 9.9%

November 4.0% 1.9% 4.7% -4.7% 10.0% 0.7% 5.2% -3.4%

December -1.7% 2.9% 4.1% -2.4% 4.8% 3.2% 3.6% -1.3%

January -1.8% 3.4% 3.3% 2.8%

February 1.9% 5.2% 5.9% 4.9%

March 1.1% 2.8% 2.0% 2.5%

Source: MOSPI and Kotak Securities - Private Client Research

Mining, Manufacturing, and Electricity segments recorded y-o-y growth rates of2.9%, (-2.4%) and 3.2%. The cumulative growth in the three sectors duringApril-December 2015-16 over the corresponding period of 2014-15 has been2.3%, 3.1% and 4.5% respectively.

As per Use-based classification, the growth rates are 0.5% in Basic goods, (-19.7%) in Capital goods and 0.9% in Intermediate goods in Dec. The Consumerdurables and Consumer nondurables have recorded growth of 16.5% and (-3.2%) respectively, with the overall growth in Consumer goods being 2.8% inDec.

ECONOMY UPDATE

Jayesh [email protected]+91 22 6652 9172



Components of Industrial ProductionIn terms of industries ten out of the twenty two industry groups in the manufac-turing sector have shown negative growth. The industry group 'Electrical ma-chinery' has shown the highest negative growth of (-44.9%), followed by (-10.7%) in 'Publishing media' and (-8.2%) in 'Tobacco Products'.

On the other hand, the industry group 'Communication equipment' has shownthe highest positive growth of 82%, followed by 17.5% in 'computing machin-ery' and 16.6% in 'Furniture'.

Table 2: Performance of Use Based Industries (YoY %)

Basic goods Capital goods Intermediate goods Consumer goodsFY15 FY16 FY15 FY16 FY15 FY16 FY15 FY16

April 8.6% 2.6% 13.4% 5.5% 3.0% 2.3% -4.8% 2.8%

May 7.5% 6.2% 4.2% 3.0% 3.5% 1.2% 4.6% -2.2%

June 10.2% 5.1% 23.3% -2.0% 2.6% 1.3% -8.8% 7.2%

July 7.0% 5.0% -3.0% 10.6% 2.9% 1.7% -5.9% 0.9%

August 9.0% 3.5% -10.0% 21.4% -0.1% 3.1% -6.2% 6.0%

September 5.0% 4.2% 12.3% 10.1% 2.0% 1.8% -4.0% 1.2%

October 9.7% 4.2% -3.2% 16.3% -3.4% 6.4% -18.2% 18.4%

November 9.5% -0.7% 7.0% -24.5% 4.7% -1.3% -1.6% 1.0%

December 5.9% 0.5% 6.1% -19.7% 1.1% 0.9% 0.6% 2.8%

January 4.8% 12.4% 0.1% -1.9%

February 5.3% 8.5% 1.1% 3.9%

March 2.7% 8.8% 2.5% -0.4%


Some important items showing high negative growth during the current monthover the same month in previous year include 'Cable, Rubber Insulated' (-85.2%), 'Heat Exchangers' (-68.8%), 'Cement Machinery' (-60.2%), 'Soyabeanoil' (-59.0%), 'Polythene Bags including HDPE & LDPE Bags' (-53.9%), 'GrindingWheels' (-37.4%), 'Ayurvedic Medicaments' (-24.4%), 'Boilers' (-22.7%) and'Sponge Iron' (-22.5%).

Some other important items that have registered high positive growth include'Woollen Carpets' (184.1%), 'Mobile Phone' (141.1%), 'DAP' (46.8%), 'Trans-formers' (38.8%), 'Furniture' (36.9%), 'Paraxylene' (32.3%), 'Commercial Ve-hicles' (28.7%), 'Gems and Jewellery' (27.1%), 'PVC Pipes' (24.6%) and'Polypropylene' (22.2%).

Table 3: Major Contributions in IIP

Item Group Weights (%) Contribution

High Positive Contributors

Mobile Phone 0.22 0.72

Commercial Vehicles 1.93 0.52

Gems And Jewellery 1.77 0.38

Electricity 10.32 0.31

Mineral index 14.16 0.30

High Negative Contributors

Cable, Rubber Insulated 0.12 -2.57

sponge iron 0.99 -0.29

Stainless/ alloy steel 0.64 -0.22

Conductor, Aluminium 0.20 -0.17

Heat Exchangers 0.10 -0.17




Exhibit 1: Monthly Ä in IIP and Base Effect

Source: Mospi

Exhibit 2: Magnitude of IIP Revisions (in bps)

Source: Mospi

Exhibit 3: Monthly Ä in CPI and Base Effect

Source: Mospi

Exhibit 4: Monthly Ä in WPI and Base Effect

Source: Mospi



Exhibit 5: Contribution to IIP

Source: Mospi

Exhibit 6: Sectoral Compenents of IIP

Source: Mospi

Exhibit 7: Use Based IIP Compenents - Cap. Gds. & Inter. Gds.

Source: Mospi

Exhibit 8: Use Based Compenents of IIP - Consumer Goods

Source: Mospi



Exhibit 9: Core Sector and IIP Growth Rates

Source: Mospi

Exhibit 10: IIP & Core Secotr Growth Trend

Source: Mospi

Exhibit 11: CPI, Food and ex-Food CPI

Source: Mospi

Exhibit 12: Inflation vs. Growth

Source: Mospi



Gainers & Losers Nifty Gainers & LosersPrice (Rs) chg (%) Index points Volume (mn)

Gainers

Idea Cellular 110 8.4 NA 6.9

Tata Motors 298 8.0 NA 21.5

Bharti Airtel 325 5.1 NA 3.7

Losers

BHEL 104 (13.1) NA 20.4

BPCL 773 (5.5) NA 2.3

ONGC 193 (4.9) NA 6.7

Source: Bloomberg

Trade details of bulk deals

Date Scrip name Name of client Buy/ Quantity Avg.Sell of shares price

(Rs)

12-Feb ATHENAGLO Srinivasa Rao Aluri B 51,976 16.6

12-Feb DANLAW Shirish Waman Joshi B 25,000 69.8

12-Feb ESSARSHPNG Clairvoyance Energy Pvt Ltd S 1,552,500 23.3

12-Feb JAIHINDS Sudha Commercial Co Ltd S 24,485 5.8

12-Feb JAUSPOL Harish Kumar Gupta B 30,000 36.0

12-Feb JAUSPOL Milind Kishore Madhani HUF S 30,000 35.1

12-Feb KAKATCEM Ricky Ishwardas Kirpalani S 57,316 117.5

12-Feb NEHAINT Avatar India Opportunities Fund B 286,539 5.4

12-Feb RISHITECH Arvind Baburao Joshi B 50,000 15.1

12-Feb TEAMLEASE The Mastertrust bank of Japan LtdA/C Nomura india invst fund MF B 116,937 932.2

12-Feb VINRKLB Prasun F Singh B 30,500 4.9

12-Feb VINRKLB Nitha Lodha R S 46,150 4.9

Source: BSE

Bulk deals



Fundamental Research Team

Dipen [email protected]+91 22 6621 6301

Sanjeev ZarbadeCapital Goods, [email protected]+91 22 6621 6305

Teena VirmaniConstruction, [email protected]+91 22 6621 6302

Saday SinhaBanking, NBFC, [email protected]+91 22 6621 6312

Arun AgarwalAuto & Auto [email protected]+91 22 6621 6143

Ruchir KhareCapital Goods, [email protected]+91 22 6621 6448

Ritwik RaiFMCG, [email protected]+91 22 6621 6310

Sumit PokharnaOil and [email protected]+91 22 6621 6313

Amit AgarwalLogistics, Transportation, [email protected]+91 22 6621 6222

Meeta Shetty, [email protected]+91 22 6621 6309

Jatin DamaniaMetals & [email protected]+91 22 6621 6137

Pankaj [email protected]+91 22 6621 6321

Jayesh [email protected]+91 22 6652 9172

K. [email protected]+91 22 6621 6311

Technical Research Team

Shrikant [email protected]+91 22 6621 6360

Amol [email protected]+91 20 6620 3350

Derivatives Research TeamSahaj [email protected]+91 79 6607 2231

Rahul [email protected]+91 22 6621 6198

Malay [email protected]+91 22 6621 6350

Prashanth [email protected]+91 22 6621 6110

RATING SCALE

Definitions of ratingsBUY – We expect the stock to deliver more than 12% returns over the next 9 months

ACCUMULATE – We expect the stock to deliver 5% - 12% returns over the next 9 months

REDUCE – We expect the stock to deliver 0% - 5% returns over the next 9 months

SELL – We expect the stock to deliver negative returns over the next 9 months

NR – Not Rated. Kotak Securities is not assigning any rating or price target to the stock. The report has been prepared for information purposesonly.

RS – Rating Suspended. Kotak Securities has suspended the investment rating and price target for this stock, either because there is not a suffi-cient fundamental basis for determining, or there are legal, regulatory or policy constraints around publishing, an investment rating or target.The previous investment rating and price target, if any, are no longer in effect for this stock and should not be relied upon.

NA – Not Available or Not Applicable. The information is not available for display or is not applicable

NM – Not Meaningful. The information is not meaningful and is therefore excluded.

NOTE – Our target prices are with a 9-month perspective. Returns stated in the rating scale are our internal benchmark.



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