AUGUST 2, 2017 - Online Trading in India | Kotak Securities

AUGUST 2, 2017

Kotak Securities – Private Client Research Please see the Disclosure/Disclaimer on the last page For Private Circulation 2

Monthly Market Strategy September 2018

MONTHLY OUTLOOK FOR SEPTEMBER 2018

Domestic markets were up by around 3% in August on the back of positive global markets,

easing of trade war tensions, strong quarterly results (albeit on a low base of Q1FY18) and

healthy domestic flows. Global markets rallied for the month despite concerns on the financial

crisis in Turkey.

Domestic corporate earnings are on an improving trajectory as reflected by the June quarter

ending earnings season. Excluding banks, corporate earnings grew 26% y-o-y for the quarter, in

part aided by low base of previous fiscal. India is currently facing weaker macros with higher

inflation/interest rates, higher current account deficit (CAD) and weaker INR. Under the given

circumstances, we recommend investors to focus on companies that are capable of delivering

strong earnings growth. Nifty index is currently trading at 22.2x and 17.7x on FY19E and FY20E

forward earnings respectively, which is at a premium to historical five year average. The trade

war seems to be intensifying with US threatening China with 10% import duty on another USD

200 bn worth of goods. On the positive side, since the beginning of trade war commodity prices

have corrected materially. This could provide relief to the manufacturing sector. After the recent

spurt, inflation has also eased, though risks remain on the upside from MSP hikes, INR

depreciation and closing of output gap.

Market breadth has been very shallow as few Nifty stocks have been major contributors to the

last 1000 points rally. Off late we are also witnessing sectoral rotation which makes it difficult for

active investors and fund managers to beat the market. The overall delivery volumes in the

market have come down to new four year low, which is not a good indicator. The consistent

currency depreciation is also a negative for foreign investors as it eats away majority of the

returns made in local currency. Part of on-going economic and earnings recovery is due to low

base of 1H-CY17 (due to Demon and GST). Within 1H-CY17, the Jun’17 quarter was the pre GST

quarter where volumes were subdued because of pre-GST de-stocking by the manufacturing

sector. Hence, comparisons will become progressively tougher after one more quarter as the low

base effect will fade out.

Market performance – sector wise (August 2018)

Source: Bloomberg

3.2% 3.1%

5.4%

3.5%

6.0%

4.2%

1.9%1.6% 1.5%

2.1%

5.9%

10.0%11.1%

0.0%

3.0%

6.0%

9.0%

12.0%

Sanjeev Zarbade

[email protected]

+91 22 6218 6424



Portfolio strategy

We prefer accumulating stocks of companies that are exhibiting improvement in earnings (IT

and banks), export-oriented sectors that are beneficiaries of INR depreciation and infra plays

that are benefiting from government spending in a pre-election year (infrastructure companies).

We also see good traction in consumption related stocks from automobiles and consumer

durables sector. Key risks to our recommendation include 1) further increase in Brent crude 2)

Emerging market risk-off trade 3) weakening GST collections and 4) slowdown in buying from

FIIs and domestic mutual fund.

GLOBAL MARKETS

Global markets have rallied despite trade war concerns

Global markets ended in the green for month of August on the back of better than expected

profits in the earnings season. While there was a bit of concern for global markets on account

of the financial and currency crisis in Turkey, but markets stabilized and even moved up on hopes

that a resolution to a trade dispute with China could be on the horizon.

On the US Fed policy, President Donald Trump questioned the Federal Reserve's decision to raise

interest rates leading to a correction in US debt yields. Later in the month, the Federal Reserve

released the minutes from its meeting earlier this month. The minutes showed central bank

officials are concerned that the ongoing trade war is the biggest threat to an otherwise "strong"

economy.

Trade War and Yuan

The ongoing tussle between the U.S. and China on trade tariffs continued as the US recently

imposed new tariffs on China after their two-day meeting ended with no major breakthrough.

Investors are now keeping their eyes on another round of U.S. tariffs on $200 billion worth of

Chinese goods expected later this year.

Market observers have been of the view that to offset the effect of trade tariffs, the Chinese

could resort to weakening the Yuan. However, the People's Bank of China appeared to contain

that speculation after it announced a change to its yuan policy that looked to keep the currency

steady. The People's Bank of China announced that it was tweaking its methodology for the

fixing of the yuan's daily midpoint in an effort to stabilize the currency market.



DOMESTIC MARKET UPDATE

Corporate earnings is gaining traction

1QFY19 results showed solid improvement in volumes across sectors although the growth

figures are magnified by a low base of corresponding quarter of previous fiscal. Aggregate

profits for major sectors declined by 13.5% on a y-o-y basis in the June ending quarter. The dip

in profits being mainly attributed to the state owned banks. Excluding banks and certain one-

offs by companies (example Bhushan Steel), aggregate profits grew 26.3% YoY, which is very

good even after factoring in the benefit from low base of previous fiscal. The misses were from

autos, airlines and cement while metals, pharma and utilites did better.

Performance of corporate sector in Q1FY19

Sales Profits

Rs bn Q1FY19 Q1FY18 (%) chg Q1FY19 Q1FY18 (%) chg

All companies 18,600 16,300 14.1 874 1,010 (13.5)

Banks 2,470 2,260 9.3 (40) 135

Excluding banks 16,130 14,040 14.9 1127 892 26.3

Source: equitymaster.com

June ending quarter Profits (ex-banks) - Rs bn

Source: equitymaster.com

Monsoons have been weaker than expected but sowing and reservoir levels have

improved

Till August 22, cumulative rainfall was 6.4% below normal. On a regional cumulative basis,

central, south, and west India has seen a favorable rainfall while east and north-east parts of

India remain deficient. Out of the 36 sub-divisions across India, till date, 25 have received normal

rainfall, nine have received deficient rainfall while two have received excess rainfall.

As of August 10, the total Kharif acreage is 1.5% lower than the same period last year. Rice

sowing is 2.9% lower at 30.8 mn hectares. Shortfall in the monsoons can have adverse impact

on the agricultural output and inflation. This can also have a rippling effect on rural demand for

Cement, Auto and FMCG products.

689

361

680

916 9431023

892

1126

0

200

400

600

800

1000

1200

Q1FY12 Q1FY13 Q1FY14 Q1FY15 Q1FY16 Q1FY17 Q1FY18 Q1FY19



Inflation/IIP and Monetary policy

IIP growth for month of June 2018 accelerated to 7% from the May reading of 3.9% led largely

by favorable base effects and some pickup in capital goods, infrastructure/construction, and

consumer durables. CPI inflation moderated to 4.17% in July from a peak of 5% in June led by

broad-based easing in food prices and core inflation. Moderation in inflation reaffirms our view

that the RBI may remain on hold through rest of FY19. However, we remain watchful of the INR

depreciation on the back of ongoing emerging market meltdown in financial assets. Persistence

of global risk-off and a consequent runaway depreciation in INR may warrant unconventional

measures by the RBI, including further rate hikes.

Events/Trends to watch out

Crude prices may harden in the run-up to Iran sanctions

We note that any ‘hard’ sanctions by the US government on oil exports from Iran may result in

a dramatic decline in Iran oil exports, which will upset global oil supply-demand balance. The

next phase of US sanctions effective November 5, 2018 specifically target Iran’s oil industry and

among other things include sanctions against (1) purchase of oil from National Iranian Oil

Company and other Iranian oil & gas companies and (2) transactions by foreign financial

institutions with the Central Bank of Iran and designated Iranian financial institutions.

As per our analysis, every $10 increase in per barrel price of crude has the potential to increase

our import bill by $11.3 bn per annum and erode 40 bps of GDP. Higher crude prices would also

increase raw material cost, working capital requirements and operating cost for user industries

such as lubricant manufacturer, chemicals industry including consumer staples and paints.

Brent Crude (US$/barrel)

Source: Bloomberg

Emerging market (EM) currency contagion

Emerging markets including India would also have to contend with (1) any contagion effect of

the troubles in the Turkish economy with rapid deterioration in the macroeconomic position of

the country and (2) weakness in global economy on escalation of global trade issues, which

could result in a risk-off sentiment for EMs. As such, EMs have been very poor performers over

the past year or so, lagging the strong performance in Developed Markets (DMs). Further,

strengthening of the US dollar relative to EM currencies on the back of continued strength in

the US economy and subsequent rate hikes by the US Fed could weigh on EMs. Many EMs face

different challenges ranging from (1) threat of further US sanctions (Russia, Turkey) to vigorous

US trade actions (China), (2) high overall and external debt relative to the size of the GDP (many

EMs) and (3) high CAD and GFD (Argentina, Brazil, India, South Africa, Turkey).

20

45

70

95

120



Currency depreciation against USD (CYTD)

Source: Bloomberg

Current Account deficit and INR

Trade deficit in the month of July 2018 widened to USD 18 bn, due to higher gold purchases

and elevated oil import bill. With the current level of crude oil prices, India’s current account

deficit could rise upto 2.6-2.7% of the GDP for FY19E, we believe. This could keep the INR under

pressure.

The INR has depreciated by more than 10% YTD against USD which is much higher than LTA as

USD continues to strengthen against all emerging markets led by steady growth, rise in US

interest rates and deteriorating macros in emerging markets. Any slip on fiscal deficit given

election year, higher inflation and rising crude can further pressurize INR in coming months, in

our view. However, India’s low foreign debt to GDP remains a mitigating factor.

The combined effect of a widening current account deficit (CAD) and subsequent rupee

depreciation is likely to increase the borrowing costs of Indian corporates and also hurt

incremental cost of foreign debt through higher hedging costs.

CAD (%)

Source: Ministry of Finance - * Kotak Securities – Private Client Research

42%

26%

17.00% 18.00%

8.50%11.00%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

Turkey Brazil Russia SA Indonesia India

1.7

1.31.1

0.7

1.9

2.8

0

0.5

1

1.5

2

2.5

3

FY14 FY15 FY16 FY17 FY18 FY19E*



INR (US$)

Source: Ministry of Finance

Fiscal Picture

1) Government disinvestment programme – Could weigh on PSU stocks

With a view to meet its fiscal deficit target, the government is now intensifying efforts to raise

the targeted divestment proceeds of Rs 800 bn in FY19. News reports indicate that it looking to

raise Rs 100-120 bn via share buybacks in 6-8 PSUs in the ongoing financial year. The

government may also mop up over Rs 100 bn through sale of stake in Coal India. Stake sale in

BHEL, NMDC, MMTC and NTPC is also being planned, news reports indicate. In case, there is a

slippage in garnering the targeted divestment proceeds, there would be a risk of fiscal slippage.

The BSE PSU Index has underperformed the Sensex in the past twelve months. With the

government finalising plan to divest holdings in PSUs, this could weigh on PSU stocks, we

believe.

2) GST – monthly collections need to sustain momentum

On the Goods and Services Tax (GST) front, revenues collections for the month of August 2018

needs to be watched when it gets released in September 2018. This is because the government

had slashed rates on nearly 100 items (mainly consumer durable goods) in July 2018. In case,

GST revenue collections are weaker, then it might stoke fears of fiscal slippage especially given

risks from possible government’s pre-election spending, higher crude prices, MSP hikes and

National Health Protection Scheme. This may lead to further pressure on the bond yields. The

government is banking on higher compliance on the direct and indirect tax side to mitigate the

impact.

GST collection (Rs bn)

Source: GSTN

42

47

52

57

62

67

72

951

859837

889 880 892

1034

940956 964

600

700

800

900

1000

1100

Oct-17 Nov-17 Dec-17 Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18 Jul-18



Slowdown in fund flows and premium valuations remain headwinds for the markets

Fund flows – MF purchases have slowed down

In the month of August, FIIs have bought shares worth Rs.0.7 bn only (till 29th Aug). However,

purchases from mutual funds slowed down further to Rs.38.0 bn (till 29th August). For YTD, FII’s

remained net sellers to the tune of Rs.33.3 bn and MFs remained net buyers to the tune of Rs.763

bn.

MFs investment in India Equities (USD mn)

Source: Bloomberg

Valuations are trading at premium, though not in extreme territory as yet.

The valuations of the Indian market continue to be at a premium relative to other emerging

market peers as well as its own historical trend. There has also been significant disconnect

between high equity valuations and weak macroeconomic outlook (higher CAD and Slippage in

Fiscal deficit). India remains one of the most richly valued markets and is trading at 61% premium

to the MSCI Emerging Markets Index, which is much higher than the 10 year average premium

of 38%. India’s market cap-to-GDP ratio is trading above its long-term moving average (78%),

but despite the sharp rally in recent years, it is still lower than the peak seen during the bull run

of calendar year 2007.

P/E Multiple CY19/FY20E

Source: Bloomberg

1160

2501

1427

1718

2013

1359

582 546

0

500

1000

1500

2000

2500

3000

January February March April May June July August

17.4

16.2

16.1

16

15

14.3

14.1

12.5

9.8

9.6

5 7 9 11 13 15 17 19

India

Malaysia

US

Phillipines

Mexico

Thailand

Japan

UK

Brazil

Shanghai



India's market cap to GDP (%)

Source: Bloomberg

On the positive side, earnings outlook is turning better

Consensus estimates now project 18-20% and 22-24% growth in net profits of Nifty-50 Index

for FY19 and FY20. The recovery in net profits is driven by (1) lower loan-loss provisions in banks

in FY19-20, post peaking of NPLs in FY18 and creation of sufficient provisions in FY17-18, (2)

higher global commodity prices from FY18 levels and (3) moderate domestic economic recovery

Nifty Earnings growth (%)

Source:

Portfolio strategy

We prefer accumulating stocks of companies that are exhibiting improvement in earnings (IT

and banks), export-oriented sectors that are beneficiaries of INR depreciation and infra plays

that are benefiting from government spending in a pre-election year (infrastructure companies).

We also see good traction in consumption related stocks from automobiles and consumer

durables sector. Key risks to our recommendation include 1) further increase in Brent crude 2)

Emerging market risk-off trade 3) weakening GST collections and 4) slowdown in buying from

FIIs and domestic mutual fund.

40

50

60

70

80

90

100

110

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

22

-13

8

26

7

3

15

-5

-1

119

20

24

-15

-10

-5

0

5

10

15

20

25

30

FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20



Preferred picks

Domestic Cyclicals / Investment oriented sectors

Sector Stocks

Automobiles Maruti Suzuki

Building Material Kajaria Ceramics, Century Plyboards, Shankara Building Products

Capital Goods, Engineering Genus Power Infra, L&T, Voltamp, Va Tech Wabag

Construction Dilip Buildcon, Nagarjuna Construction, PNC Infratech

Consumber durables Amber Enterprises

Metals & Mining Jindal Stainless (Hisar), MOIL Ltd, National Aluminium

Oil & Gas Petronet LNG

Others CDSL, Mold-tek Packing Ltd, Insecticides India, Mahindra Holidays &

Resorts India, VIP Industries, Wonderla Holidays and Carborundum

Universal, Maharashtra Seamless Ltd, Essel Propack

Real Estate Phoenix Mills

Transportation Adani Port, Container Corp, VRL Logistics and Cochin Shipyard

Source: Kotak Securities - Private Client Research

Export oriented / Defensive sectors

Sector Stocks

FMCG ITC, Marico

IT Cyient Ltd, Quess Corp Ltd, Persistent Systems

Paints Akzo Nobel India, Kansai Nerolac Paints Ltd

Source: Kotak Securities - Private Client Research

Top Picks



Adani Port & Special Economic Zone - Buy

Current Market Price (Rs) 52 Week H/L (Rs) Mkt Cap (Rs mn)

383 452 / 347 767641

Source: Bloomberg

Source: Bloomberg

Financials (Rs mn) FY18 FY19E FY20E

Sales 113,229 125,684 139,509

Growth (%) 34.2 11.0 11.0

EBITDA 71,454 80,028 89,632

EBITDA margin (%) 63.1 63.7 64.2

EPS (Rs) 17.9 21.5 25.2

Growth (%) (6.4) 20.1 16.8

CEPS (Rs) 23.8 27.6 31.4

Book value (Rs/share) 101.6 121.4 143.8

Dividend/share (Rs) 2.0 2.5 3.5

ROE (%) 17.6 17.7 17.5

ROCE (%) 14.4 14.9 15.4

Net cash (debt) (170,276) (157,818) (137,782) Source: Company

Net Worcking Capital (Days) 18.9 19.9 20.9

Valuation Parameters FY18 FY19E FY20E

P/E (x) 21.4 17.8 15.2

P/BV (x) 3.8 3.2 2.7

EV/Sales (x) 8.3 7.4 6.5

EV/EBITDA (x) 13.1 11.6 10.1

Price Performance (%) 1M 3M 6M

(4.2) (2.3) (6.2)

Source: Bloomberg, Company, Kotak Securities - Private Client Research Source: Company, Kotak Securities - Private Client Research

Last report at Rs.396 on 7 August 2018

Analyst: [email protected]

Target Price (Rs)

485

Volume Projections (mn tonnes)

Potential Upside (%)

26.6%

Price Performance

Share Holding Pattern (%)

Quarterly Breakup of volumes (mn tonnes)

Promoter

56.3%FII

23.9%

DII

14.3%

Others

5.5%

80

110

140

170

200

230 Adani Port & Special Economic Zone Nifty

Investment Argument

FY18 was healthy for APZ in terms of port volumes (+7% YoY), adjusted port

revenues of 113.2bn (+34% YoY) with healthy EBIDTA margin

The management targets 1.5x accelerated total cargo growth and 2x

container volume growth of 2X versus major ports. In order to achieve the

growth objective, the company is expanding operations at several locations

The company intends to focus on container and Liquid cargo which adds

value to APZ as they have higher margins, lower turnaround time and require

lesser investment in terms of infrastructure

APZ now has 10 ports in its fold with the next phase of growth estimated to

come from subsidiary ports of Hazira, Dahej and Dhamra.

The company expects FCF to further improve on a conservative basis in FY19

allowing proportionately higher dividend payout (company targets 15%

payout).

With deleveraging efforts, the company expects net debt/EBITDA and

interest cost to reduce.

We estimate APZ to deliver earnings CAGR of 13% and ROE of ~17.5%,

despite a tough global trade environment.

Risks & Concerns

Competition from ports on the west coast including JNPT, Weak coal imports ,

Slowing economy and trade and Slow capex at SEZs

Company Background

APZ has entered into an agreement with GMB to build, operate and maintain the

port for a period of 30 years till 2031 extendable by another 20 years. The port is

into providing cargo handling services for bulk, crude and container cargo.

Sector Background

Demand for port infrastructure is driven by the 3Cs: coal, containers and crude.

0

50

100

150

200

250

FY15 FY16 FY17 FY18 FY19E FY20E

Mundra Total

0.0

10.0

20.0

30.0

40.0

Q1FY18 Q2FY18 Q3FY18 Q4FY18

Mundra Others




984 1329 / 880 30954

Source: Bloomberg

Source: Bloomberg

Financials (Rs mn) Consolidated FY18 FY19E FY20E

Sales 21,281 26,342 31,577

Growth (%) 29.4 23.8 19.9

EBITDA 1,835 2,110 2,700

EBITDA margin (%) 8.6 8.0 8.6

Net profit 623 1,052 1,459

EPS (Rs) 19.8 33.5 46.5

Growth (%) 123.3 68.8 38.7


Dividend per share (Rs) - - -

ROE (%) 9.9 11.1 13.6

ROCE (%) 16.0 15.1 18.4

Net Working Capital (Days) 24.5 24.8 26.0 Source: Company

Net Cash 284 964 1,713

Valuation parameters FY18 FY19E FY20E

P/E (x) 49.6 29.4 21.2

P/BV (x) 3.5 3.1 2.7

EV/Sales (x) 1.4 1.1 0.9

EV/EBITDA (x) 16.7 14.2 10.8


1.1 (8.9) (9.9)

Source: Bloomberg, Company, Kotak Securities - Private Client Research Source: Company


Amber Enterprises Ltd - Buy Analyst: [email protected]

Target Price (Rs)

1145

Revenue mix (%)


16.3%

Price Performance


Household Penetration across consumer durables category (%)

Promoter

44.0%

FII

10.8%

DII

7.9%

Others

37.3%

4.0

20.0

10.0

60.0

17.0

0

10

20

30

40

50

60

70

Room AC Refrigerator WM FPD TV Air Cooler

RACs

75%

RAC

Components

11%

Non AC

Components

14%

70

80

90

100

110 Amber Enterprises Ltd Nifty

Investment Argument

Amber Enterprises (AEL) is the leading OEM/ODM for several room AC (RAC)

brands in India, with a ~55.4% market share.

The Indian RAC market has been witnessing robust growth trend in the past

five years with a CAGR of 9.4% by volumes. In the next five years, the market is

expected to witness a CAGR of 12.8% reinforced by the surge in rural

consumption, shorter replacement cycles, energy-efficient RACs and availability

of multiple brands at various price points.

The share of manufacturing in RACs by OEMs/ODMs has been consistently

going up from 16% in FY12 to 34% in FY17 and is projected to reach 44% by

FY22E.

With a view to increase wallet share, AEL is 1) filling product gaps 2) entry into

newer brands through components and 3) acquisitions to add competencies. It

added four customers in Q4FY18 and two more additions is in the pipeline. To

bolster its component offering, the company has made two acquisitions in FY18

which adds electronic PCBs into its portfolio.

Risks & Concerns

Majority of AEL’s revenue is derived from top 10 customers (92.5% in FY17). The

loss of, or a significant reduction in purchases by such customers could adversely

affect business of the company.

Company Background

Amber Enterprises Ltd was incorporated as Amber Enterprises India Private Limited

and set up its first factory in Rajpura, Punjab, which commenced operations in 1994.

Since then, the company has today grown to 10 manufacturing facilities across

seven locations in India.

Sector Background

The RAC penetration level in India (4%) lags when compared to the global level

(30%) implying the room for growth. Overall Indian market remains at sub-par level

when compared to the global average. With increase in rural market sales and

product lining strategies, the market penetration is expected to improve in future.




399 479 / 358 103253

Source: Bloomberg

Source: Company

Financials (RS mn) FY18 FY19E FY20E

Sales 108,261 121,495 139,008

Growth (%) 17.2 12.2 14.4

EBITDA 9,650 11,464 14,723

EBITDA margin (%) 8.9 9.4 10.6

PBT 3,904 5,518 8,526

Net profit 3,158 4,211 6,506

EPS (Rs) 12.2 16.3 25.2

Growth (%) (1.3) 33.3 54.5

CEPS (Rs) 26.1 31.7 41.9


Dividend per share (Rs) 2.4 2.4 2.4

ROE (%) 8.1 9.9 13.8 Source: Company

ROCE (%) 8.8 10.2 13.3

Net cash (debt) (31,171) (30,741) (29,730)

Net Working Capital (Days) 105 102 103


P/E (x) 32.7 24.5 15.9

P/BV (x) 2.5 2.3 2.1

EV/Sales (x) 1.2 1.1 1.0

EV/EBITDA (x) 13.9 11.6 9.0


(5.1) 2.9 (4.9)

Source: Bloomberg, Company, Kotak Securities - Private Client Research Source: IBEF

Textile and apparel industry in India (US$ billion)


25.2%

Price Performance


Performance of Power Brand


Arvind Ltd - Buy Analyst: [email protected]

Target Price (Rs)

500

Promoter

43%

FII

22%

DII

18%

Others

17%

80

95

110

125

140

155 Arvind Ltd Nifty

Investment Argument

Arvind has a portfolio of 15 international licensed brands and 12 in-house

brands targeting different segments and are managed by qualified and

experienced professionals. We expect all its brands to be profitable in FY19E,

resulting in 230 bps improvement in EBITDA margins the branded apparel

business between FY18-20E.

Arvind has adopted verticalization strategy in its textiles business by focusing

on garmenting business which would positively impact the RoCE.

Arvind being a major player in branded apparel business and having long

history in textiles business which would be benefited by rising disposable

income, growth in retail sector and increasing preference towards branded

apparels.

We believe that the demerger of branded apparel and engineering business

would unlock value of each of the businesses post listing.

Risks & Concerns

Major revision in license terms of foreign brands, Lower export incentive, Raw

material or forex volatility.

Company Background

Arvind Ltd promoted by Lalbhai family, is a leading textiles company with

presence in textiles, branded apparel and engineering business. The company

manufactures and sells about 300 million meters of fabrics and over 30 mn pieces

of garments (FY18). In branded apparels business, the company’s own brands

such as Flying Machine, Colt, Ruggers and Excalibur, etc. It also has a portfolio of

licensed brands which includes US Polo Association, Arrow, Tommy Hilfiger (TH),

Gap, Calvin Klein (CK), etc.

Sector Background

The textile industry in India has grown at a CAGR of over 10% in 2009-17 (July

2017) and is expected to reach US$ 250 bn by 2019. The current fashion retail

market is ~ US$ 46 bn and is expected to grow at a CAGR of 9.7% to reach US$

115 bn by 2026. The growth is driven by increasing preference towards brands,

favorable demographics, increasing urbanization, etc.

108

137150

250

0

50

100

150

200

250

300

2015 2016 2017 2019F

10.5%

11.0%

11.5%

12.0%

12.5%

0

10,000

20,000

30,000

FY13 FY14 FY15 FY16 FY17 FY18

Revenue (Rs mn, LHS)

EBITDA (Rs mn, LHS)

EBITDA Margins (%, RHS)




996 1190 / 860 132014

Source: Bloomberg

Source: Company

Financials (RS mn) FY18 FY19E FY20E

Sales 161,610 168,588 180,063

Growth (%) 18.0 4.3 6.8

EBITDA 33,810 38,385 39,841

EBITDA margin (%) 20.9 22.8 22.1

PBT 14,130 20,441 22,765

Net profit 11,550 15,214 16,976

EPS (Rs) 87.1 114.8 128.1

Growth (%) 67.0 31.8 11.6

Book value (Rs/share) 844.4 944.1 1,057.3



ROCE (%) 9.3 10.9 11.1

Net cash (debt) (122,200) (80,692) (61,938)

Debt/Equity 0.5 0.4 0.4


P/E (x) 11.4 8.7 7.8

P/BV (x) 1.2 1.1 0.9

EV/Sales (x) 1.6 1.3 1.1

EV/EBITDA (x) 7.5 5.5 4.9


5.4 (2.3) (2.7)

Source: Bloomberg, Company, Kotak Securities - Private Client Research Source: IBEF

Store level sales in Spencer (Rs /Sq ft)


18.5%

Price Performance


Free cash flow (Rs mn)

Last report at Rsxxx on xxxx

CESC Ltd - Buy Analyst: [email protected]

Target Price (Rs)

1180

Promoter

50%

FII

12%

DII

25%

Others

13%

80

105

130

155

180

205CESC Ltd Nifty

Investment Argument

CESC is one of the most efficiently managed integrated private power utility

company in India.

Spencer’s Retail Limited (SRL) is the flagship company of CESC in retail with 124

stores, including 39 hypermarkets, across India under the Spencer’s brand name.

Amazon is in early talks with Spencer's Retail to pick up a minority stake in the

retail chain.

CESC has in May 2017 announced the much expected restructuring of its

business into four distinct parts—distribution (Kolkata and franchisee assets),

generation (Kolkata, Chandrapur and Haldia), retail (Spencers and Music World)

and other ventures (First Source and Quest Mall). The re-structuring will be a

mirror image de-merger and does not entail any change in ownership structure.

Post the above restructuring, a Shareholder holding 10 shares in CESC Ltd will

get 5 shares of CESC Ltd, 5 shares of CESC Genco, 6 shares of Spencer`s Retail

Ltd and 2 shares of CESC Ventures Ltd.

Restructuring of CESC into individual business entities will likely result in re-

rating of valuation multiples, as cash flows from the power business will not be

utilized in non-related business interest of the promoter group. CESC has already

secured shareholder approval for the proposed restructuring in December 2017,

as well as clearance from NCLT. The company is now awaiting regulatory

clearance from WBERC for separating the generation and distribution arms of

the standalone business into separate legal entities.

Risks & Concerns

Delay in turnaround in Spencer’s retail - any downturn in retail sales can once

again lead to deferment in turnaround of the operations

Company Background

CESC, the flagship company of RP-Sanjiv Goenka group, is a vertically integrated

power utility engaged in generation, transmission and distribution of electricity to the

consumers in Kolkata and Howrah. It has a combined generation capacity of 2365

MW of thermal power, wind mills of 156 MW and solar power plant of 18 MW. It is

also into organised retail (Spencer’s), business process management (Firstsource

Solutions – FSL) and real estate (Quest mall)

Sector Background

The power sector is characterized by chronic supply deficit.

Weak financials of state distribution entities have hampered the growth of the

sector

(15,012)

8,080

47,393

21,876

(20,000)

-

20,000

40,000

60,000

FY17 FY18 FY19E FY20E

1,530

1,507

1,607

1,528

1,575

1,450

1,500

1,550

1,600

1,650

Q1FY18 Q2FY18 Q3FY18 Q4FY18 Q1FY19




375 461 / 347 538836

Source: Bloomberg

Source: Bloomberg


Annualized Premium Equivalent 77,900 89,600 108,400

APE growth (%) 17.5% 15.0% 21.0%

Value of New Business 12,900 15,200 19,500

VNB margin 16.5% 17.0% 18.0%

EVOP 37,000 34,000 40,000

PAT 16,198 17,801 19,093

EPS (Rs) 11.3 12.4 13.3

BVPS 45.8 55.7 66.4

RoE (%) 25.0% 24.5% 21.8%

EV 187,900 213,900 245,800

RoEV 16.5% 13.8% 14.9%

Source: Company, KIE


P/E (x) 33.2 30.3 28.2

P/BV (x) 8.2 6.7 5.7

P/EV (x) 2.9 2.6 2.3

P/EVOP (x) 15.0 16.5 13.8


(10.3) (10.9) (8.8)

Source: Bloomberg, Company, KIE Source: Company, KIE


Target Price (Rs)

500

ICICI Prudential Life Insurance - Buy

APE / VNB to grow rapidly


33.2%

Price Performance


RoEV to remain strong / VNB Margin to Improve

Promoter

78.80%

FII

8.48%

DII

4.44%

Others

8.28%

80

100

120

140

160 ICICI Prudential Life Nifty

0

50,000

100,000

150,000

200,000

FY16 FY17 FY18 FY19E FY20E FY21E

0.0

5.0

10.0

15.0

20.0

25.0


Operating RoEV (%) VNB Margin (%)

Investment Argument

An underpenetrated market, an increasing share of financial assets in savings

along with market leader LIC ceding market share lend long term structural

growth to India’s private life insurance sector

Strong bancassurance model – ICICI Prudential Life has substantial backing

from ICICI Bank, with the banking channel contributing more than 50% of

Annualized Premium Equivalent (APE)

Persistency ratio has improved markedly across all buckets driven by

improved selling practices, with 13th month persistency at 87.8% in FY18 (vs

82.4% in FY16) and 61st month persistency improving to 54.8% in FY18 from

46% in FY16

ICICI Prudential Life has historically employed a ULIP heavy strategy, with

ULIPs contributing 84.1% of FY17 APE. However, protection business APE was

8.2% of total APE in 1QFY19 (from 3.9% in FY17); illustrating management’s

focus on sustaining momentum in the higher margin protection business

Risks & Concerns

Capital markets volatility make affect ULIPs. Industry-wide risks include increasing

competition in the protection business, changes in tax rates and regulations.

In addition, expense reduction will be a key concern going forward, however this

may not be easy as management is focusing on adding higher-margin protection

products over expense reduction.

Valuation & Prospects

We expect the company to deliver 20% EVOP CAGR during FY2017-21E and 19%

medium-term operating RoEV. Increase in share of protection business (that will

boost higher margins) and improvement in persistency will provide upside to our

estimates. At our TP, the company will trade at 3X EV and 18X EVOP FY2020E.



Maruti Suzuki India Ltd - Accumulate


9097 10000 / 7532 2748098

Source: Bloomberg

Source: Bloomberg

Financials (Rs Mn) FY18 FY19E FY20E

Sales 797,627 923,995 1,071,676

Growth (%) 17.2 15.8 16.0

EBITDA 120,615 142,100 176,182

EBITDA margin (%) 15.1 15.4 16.4

PBT 110,034 137,502 177,563

Net profit 77,218 96,939 125,182

EPS (Rs) 255.6 320.9 414.4

Growth (%) 5.1 25.5 29.1

CEPS (Rs) 346.9 417.8 521.5

Book value (Rs/share) 1,382.3 1,606.8 1,924.8



ROCE (%) 28.4 30.0 32.8

Net cash (debt) 352,505 408,149 508,313

Net Working Capital (Days) (26.9) (21.6) (21.6)


P/E (x) 35.6 28.3 22.0

P/BV (x) 6.6 5.7 4.7

EV/Sales (x) 3.0 2.5 2.1

EV/EBITDA (x) 20.0 16.5 12.8


(4.4) 6.6 2.8


Last report at Rs.9397 on 27 July 2018


Target Price (Rs)

10360

Market Share (%)


13.9%

Price Performance


Sales Volumes (Units)

Promoter

56.2%FII

25.8%

DII

11.0%

Others

7.0%

0

300,000

600,000

900,000

1,200,000

1,500,000

1,800,000

2,100,000

FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18

46.5

44.7 45.3

38.4

40.1

42.1

45.0

46.8 47.4

50.0

35

40

45

50

55

FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18

50

100

150

200

250

300 Maruti Suzuki India Ltd Nifty

Investment Argument

We expect MSIL's volumes to grow at a strong pace aided by recovery in rural

areas, continued robust demand for new launches, expansion of Nexa network

and demand in favor of petrol run vehicle. Furthermore facelifts, upgrades and

variants of existing models will also drive sales for the company.

MSIL’s market share in the domestic passenger car market stands increased

from 47.4% in FY17 to 50% in FY18.

With strong presence in rural areas and dominance in the entry level car

segment, MSIL will be the key beneficiary of rural demand recovery.

In recent years, the company made substantial strides in the premium car

segment. MSIL has big opportunity to gain market share in the premium

segment. Focus on premium products and scaling-up of distribution network

will translate into share of premium products in MSIL's product mix increase in

a meaningful way

We expect MSIL's EBITDA margin to stay healthy.

Risks & Concerns

Lower than anticipated growth will jeopardize our revenue and profit estimates.

MSIL benefits from yen depreciation. Any unfavorable movement of yen can have

significant impact on the company's profitability.

Company Background

MSIL, India's largest passenger car company, is a subsidiary of Suzuki Motor

Corporation of Japan. Formed as a government owned company (Maruti Udyog

Limited), it entered into a JV with Suzuki Motor Corporation. Over the years the

company has been one the most successful player in the Indian car market.

Sector Background

India’s passenger vehicle industry sold ~4mn vehicles in FY18. While 81% of sales

happened in the domestic market, balance 19% were exported. Top five players

account for ~85% of domestic industry sales volumes.




828 890 / 590 66208

Source: Bloomberg

Source: Capitaline


Sales 30,337 36,028 40,723

Growth (%) 5.4 18.8 13.0

EBIDTA 4,687 6,037 7,222

EBIDTA margin (%) 15.5 16.8 17.7

PBT 4,292 5,543 6,849

PAT 3,230 4,180 5,205

PAT Margin (%) 10.6 11.6 12.8

EPS (Rs) 40.4 52.2 65.1

Growth (%) 7.2 29.4 24.5

CEPS 52.9 67.2 80.3

Book Value (Rs / Share) 266 302 349

Dividend per Share (Rs) 10.0 13.0 15.1

ROE (%) 16.0 18.4 20.0 Source: Company, P&S: People and services, GTS: Global technology solutions

ROCE (%) 18.4 21.9 23.8 IFM: Integrated facility management

Net cash/(debt) 2,397 5,316 9,259

Net working capital (Days) 38 41 41


P/E (x) 20.5 15.8 12.7

P/BV (x) 3.1 2.7 2.4

EV/Sales (x) 2.1 1.7 1.4

EV/EBITDA (x) 13.6 10.1 7.9


(0.9) 5.0 (3.2)




Target Price (Rs)

1025

Persistent Systems Ltd - Buy

Geography: Revenue Mix (%)


23.9%

Price Performance


Revenue Breakup (%)

Promoter

31.5%

FII

27.1%

DII

16.3%

Others

25.1%

70

90

110

130

150 Persistent Systems Ltd Nifty

Investment Argument

Persistent specializes in software product development and technology

services. It helps enterprises to transform their business to software-driven

business in North America, Europe, and Asia. It has moved away from effort-

based business (low growth prospects) to value-based business (high growth

prospects and better margins).

Persistent expects to outperform industry-growth rates and report overall

double-digit revenue growth for FY19E.

Margin improvement and strong revenue visibility makes us positive on its

growth prospects. Additionally, cash rich balance sheet, strong free cash flow

and healthy return ratios also provide high comfort.

Risks & Concerns

Wide currency fluctuation and INR appreciation will impact earnings.

Volatility in revenues sourced through the partners.

Any major slowdown in economy can impact our growth assumption.

Company Background

Incorporated in 1990, Persistent is founded by Anand Deshpande. It provides

product engineering services, platform based solutions and IP-based software

products to its global customers. It designs, develops and maintains software

systems and solutions, creates new applications and enhances the functionality of

the customer’s existing software products.

Sector Background

Nasscom expects that the future of the industry will lie in 'Digital at Scale' as global

digital spending is growing at 20% annually. India's digital revenues grew at 30% in

FY18. Nasscom has a vision to build a US$1 tn digital economy by 2022 supported

by growth across all segments — established and new-age companies, technology

service companies, product companies, consumer internet companies and

increased adoption of digital across enterprises, government and MSME in India.

North

America

84%

Europe

7%

India

6%ROW

3%

0%

10%

20%

30%

40%

50%

60%

70%

FY15 FY16 FY17 FY18

ISV Enterprise IP Led




248 276 / 202 372075

Source: Bloomberg

Source: Bloomberg


Sales 309,160 378,137 423,651

Growth (%) 23.8 22.3 12.0

EBITDA 36,296 41,496 46,485

EBITDA margin (%) 11.7 11.0 11.0

PBT 30,876 36,243 41,728

Net profit 21,103 24,210 27,833

EPS (Rs) 14.1 16.1 18.6

Growth (%) 23.7 14.7 15.0

CEPS (Rs) 16.8 19.0 21.5

Book value (Rs/share) 65 75 85


ROE (%) 22.1 22.0 22.0 Source: Company, Kotak Securities - Private Client Research

ROCE (%) 18.5 20.7 22.2

Net cash (debt) 30,585 52,348 72,890

Net Working Capital (Days) 6.7 8.0 5.2


P/E (x) 17.6 15.4 13.4

P/BV (x) 3.8 3.3 2.9

EV/Sales (x) 1.1 0.8 0.7

EV/EBITDA (x) 9.4 7.7 6.4


8.2 12.9 0.3


Dividend Yield (%)


7.6%

Price Performance


Sales Volume (TBTU's)


Petronet LNG Ltd - Buy Analyst: [email protected]

Target Price (Rs)

267

Promoter

50.0%

FII

21.7%

DII

16.3%

Others

12.0%

0

200

400

600

800

1,000

FY14 FY15 FY16 FY17 FY18

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

FY18 FY19E FY20E

60

120

180

240Petronet LNG Ltd Nifty

Investment argument

We believe PLNG’s earnings to rise over the next 2-3 years, driven by higher

RLNG volumes from both Dahej and Kochi terminals. Construction of the

pipeline to evacuate gas from Kochi is progressing well.

The company has highlighted that Dahej terminal expansion from 15 MMTPA

to 17.5 MMTPA is expected to complete by June’19.

Take or pay agreement with GAIL, GSPC, IOC, BPCL and Torrent power gives

decent revenue visibility.

We expect its earnings to grow over the next 3 years driven by (1) completion

of Kochi- Mangalore pipeline, (2) Dahej expansion, and (3) tariff escalation as

per contract.

In order to boost domestic LNG consumption, PLNG along with others are

setting up an eco-structure with an investment of Rs.150 bn. It is also

launching around 20 LNG fuel stations to boost LNG consumption.

PLNG will invest US$300 mn to set up a 2-2.5 MMTPA floating LNG terminal. It

will take 47.5% stake in Sri Lanka LNG terminal.

The prospects for LNG have improved over the last many years, as KG D6

production has decreased considerably and is expected to remain subdued

over the medium term. Consequently, the lower domestic supply prompted

consumers to increase consumption of R-LNG, which is costlier than domestic

gas but still economical in comparison to liquid fuels (at prevailing high crude

oil prices).

Risks & concerns

Availability of LNG at reasonable prices has remained a key worry.

Any capping of margins by PNGRB will negatively impact its earnings.

Project execution risk.

Company background

Petronet LNG is India's largest importer of LNG at its Dahej plant.



Talbros Automotive Components Ltd - Buy


294 354 / 184 3628

Source: Bloomberg

Source: Bloomberg

Financials (Rs mn) FY18E FY19E FY20E

Sales 3,930 4,566 5,150

Growth (%) 21.0 16.2 12.8

EBITDA 408 494 591

EBITDA margin (%) 10.4 10.8 11.5

PBT 211 253 342

Net profit 207 266 349

Adjusted EPS (Rs) 16.8 21.5 28.3

Growth (%) 69.7 28.1 31.5

CEPS (Rs) 28.3 34.3 42.1

BV (Rs/share) 145.3 162.0 188.5

Dividend / share (Rs) 1.5 1.5 1.5

ROE (%) 12.4 14.0 16.1 Source: Company, Kotak Securities - Private Client Research;

ROCE (%) 11.5 12.5 14.1 * as per Indian GAAP till FY17, Ind As from FY18 onwards

Net cash (debt) (1,095) (1,236) (1,036)

NW Capital (Days) 89.4 89.8 89.6

Valuation Parameters FY18E FY19E FY20E

P/E (x) 17.5 13.7 10.4

P/BV (x) 2.0 1.8 1.6

EV/Sales (x) 1.2 1.1 0.9

EV/EBITDA (x) 11.6 9.9 7.9


4.0 (4.4) 2.0




Target Price (Rs)

396

Revenue Mix (%)


34.8%

Stock Performance


Revenues (Rs mn)

Promoter

56.7%

DII

2.0%

Others

41.3%

34473660

3896 39194281

3833

4525

5093

0

1,000

2,000

3,000

4,000

5,000

6,000

FY13 FY14 FY15 FY16 FY17 FY18E* FY19E* FY20E*

Gasket

55%

Forging

22%

Nippon

Leakless

Talbros JV

9%

Magneti

Marelli

Talbros JV

10%

Talbros

Marugo

Rubber JV

4%

70

120

170

220

270

320

370 Talbros Automotive Components Ltd Nifty

Investment Argument

Company enjoys market leadership position in the two-wheeler and the

commercial vehicle gasket segment. In the passenger vehicle segment.

Company believes that post coated gasket and heat shields can help them

make inroad in the passenger vehicle segment.

Forging business, that accounts for 22% of consolidated revenues is

witnessing high growth. TBA has been getting various new orders in this

segment. Company is adding higher tonnage presses and the same is

expected to be operational by end FY19.

TBA has three joint ventures (accounting for ~23% of consolidated

revenues). Strong volume growth from Honda two-wheeler, Hero

MotoCorp and Maruti Suzuki and new order wins is expected to drive

revenue.

Operating leverage from expected robust growth in revenues, substitution

of imported raw material, foray into high margin products and internal

efficiencies is expected to help the company expand margins in the coming

years.

Risks & Concerns

Slowdown in domestic automobile demand

Introduction of electric vehicle

Company Background

Talbros Automotive Components Ltd (TBA) was established in the year 1956

and is into manufacturing of gaskets & heat shields, forgings, suspension

systems, anti-vibration components and hoses. TBA is a market leader in the

gasket business.

Sector Background

Auto ancillary sector will be the key beneficiary of expected revival in the

domestic automobile demand.




228 356 / 201 846361

Source: Bloomberg

Source: Bloomberg


Sales 918,660 928,280 1,029,130

Growth (%) 27.2 1.0 10.9

EBITDA 251,640 313,355 355,702

EBITDA margin (%) 27.4 33.8 34.6

PBT 166,720 214,572 254,172

Adj. Net profit 80,250 119,691 143,253

EPS (Rs) 21.6 32.2 38.5

Growth (%) 9.6 49.1 19.6

CEPS (Rs) 38.5 51.1 59.5

BV (Rs/share) 179.0 187.0 210.3


ROE (%) 12.9 18.0 19.4 Source: Company, Kotak Securities - Private Client Research

ROCE (%) 8.7 11.8 12.5

Net cash (debt) (304,273) (337,411) (234,482)


P/E (x) 10.5 7.1 5.9

P/BV (x) 1.3 1.2 1.1

EV/Sales (x) 1.3 1.3 1.1

EV/EBITDA (x) 4.6 3.8 3.0


2.5 (8.3) (30.9)


FCF to remain strong (Rs Mn)


62.5%

Price Performance


Higher zinc and aluminium volume to drive earnings

Vedanta Ltd - Buy Analyst: [email protected]

Target Price (Rs)

370

Promoter

50.10%

FII

24.80%

DII

5.90%

Others

19.20%

50

150

250

350

450 Vedanta Ltd Nifty

Investment Argument Post-merger with Cairn India, Vedanta will have one of the strongest balance sheets in

the Indian corporate sector with flexibility to balance capital allocation to the highest return projects while providing a strong and stable dividend.

Vedanta’s consolidated operating cash flows increased to Rs162 bn (before workingcapital changes) in FY2017 (Rs127 bn in FY2016) led by improvement in earningsacross businesses, especially of zinc and aluminum.

The company expects FY2018E aluminum production at 1.5 -1.6mn tons (1.2 mn tons in FY17) further increasing to 1.9-2 mn tons in FY19E from the ramp-up of Jharsuguda and Korba smelters. On Zinc front, mined metal production at Zinc India is expected to reach 1.2 mtpa by FY20. In the power division, TSPL’s availability of 75% is targeted for FY18.

Near completion of shafts at HZ’s Rampura Agucha and Sidesward Khurdmines

prepares ground for ramp-up to 1.2 mtpa in the next one year; production costs likely

to decline as hauling costs decrease. Going ahead growth towards 1.5MT is on

drawing board

The company will generate strong free cash flows on the back of higher metal

volumes and prices and deleveraging is expected to play out despite healthy dividend

and capex. The stabilization of copper, power plants and ramp-up of aluminum

smelters by 3QFY18 will aid sequential improvement in earnings.

Vedanta’s key business segments of zinc and aluminum will see strong growth in earnings led by higher volumes and strong pricing outlook.

Risks & Concerns

Any volatility in metal and oil and gas prices can affect the company’s earnings going

ahead. Delay in capacity ramp up can be a concern for the company. Company Background

Vedanta Ltd. is the Indian subsidiary of Vedanta Resources Plc., a London-listed company. Vedanta is a diversified natural resources company, whose business primarily involves producing oil and gas, zinc-lead-silver, copper, iron ore, aluminum and commercial power. The company has a presence across India, South Africa, Namibia, Australia and Ireland. The merger of Cairn India and Vedanta has recently become effective. This merger consolidates Vedanta’s position as one of the world’s largest diversified natural resources companies, with world-class, low cost assets in metals and mining and oil and gas

25,000

102,232

75,361

126,391 124,826

173,244

0

50,000

100,000

150,000

200,000


0

500,000

1,000,000

1,500,000

2,000,000

2,500,000


Zinc (tonnes) Aluminium (tonnes)

Investment Argument

Vedanta’s consolidated operating cash flows expected to increase to Rs226 bn

(before working capital changes) in FY19 (Rs184 bn in FY18) led by improvement

in earnings across businesses, especially of zinc and aluminum.

The zinc, aluminum and oil & gas operations account for close to 85% of VEDL’s

EBITDA. We expect strong volume growth in all three businesses: (1) the zinc-lead

volumes will increase by 40% over next two years led by mine expansion in Zinc

India and Gamsberg project in RSA, (2) aluminum volumes will increase to 2MT in

FY2019E from 1.6MT led by ramp-up of Jharsuguda-II smelters, and (3) in oil &

gas, management guidance is of sharp increase in gross production volumes to

220-250 kb/d in FY2019.

Zinc-lead volumes to increase by 40% over the next 2 years led by (1) completion

of 1.2 mtpa expansion at Zinc India (from 947 kt in FY2018) and (2)

commissioning of Gamsberg project in RSA from mid CY2018. Beyond this, Zinc

India will see its output rise by another 25% (to 1.5 mtpa) from its next phase of

expansion.

The company will generate strong free cash flows on the back of higher metal

volumes and prices and deleveraging is expected to play out despite healthy

dividend and capex.

Risks & Concerns

Any volatility in metal and oil and gas prices can affect the company’s earnings going

ahead. Delay in capacity ramp up can be a concern for the company.

Company Background

Vedanta Ltd. is the Indian subsidiary of Vedanta Resources Plc., a London-listed

company. Vedanta is a diversified natural resources company, whose business

primarily involves producing oil and gas, zinc-lead-silver, copper, iron ore, aluminum

and commercial power. The company has a presence across India, South Africa,

Namibia, Australia and Ireland. The merger of Cairn India and Vedanta has recently

become effective. This merger consolidates Vedanta’s position as one of the world’s

largest diversified natural resources companies, with world-class, low cost assets in

metals and mining and oil and gas.

AUGUST 1, 2018

1-Month Portfolio

1-MONTH PORTFOLIO (PF) – AUGUST 2018

NIFTY: 11356 This was the portfolio which we had recommended for August 2018. The recommendation in this portfolio now stands closed.

Stock M Cap Current (Rs mn) Price PE (x) Comment

(Rs) FY19E FY20E

NALCO 118,976 62 8.3 7.9 Given the uptick in the alumina and aluminium prices, we believe the company’s operating margin is likely to remain strong.

Given the strong surge in aluminium prices, the managementbelieves that aluminium segment will be EBITDA positive given the sustainability of the current prices.

Cipla 516,005 641 30.5 20.7 Cipla has the least exposure to the US accounting for ~18% of company’s revenue in FY18E.

Expect minor re-rating of Cipla from FY19 onwards as RoE islikely to improve from 12% in FY17 to 17% in FY19/20E.

Larsen & Toubro 1,825,404 1,302 21.3 18.6 Company reported stronger than expected results in Q1FY19 The company has strong ordering and order pipeline.

dominated by government spending.

BEL 283,377 116 19.7 18.5 The company has a strong order book of Rs 400 bn, providing revenue visibility of 46 months.

Government's "Strategic Partnership" policy to be a positivefor defence vendors like BEL.

VRL Logistics 31,941 351 23.7 19.9 We expect company to report strong numbers for Q1FY19 with strong performance of bus division.

VRL is one of the biggest beneficiary of GST Act and recentlypassed Motor Vehicle Act.

Stock is available at attractive valuation.

Maharashtra Seamless 32,227 481 11.1 8.7 We believe that MSL valuations can get rerated on back of 1) recovery in demand for seamless pipes in the domestic/international market 2) limited competition from domestic players who are struggling with their highly leveraged balance sheets.

Engineers India Ltd 91,647 136 18.9 16.2 EIL is expected to benefit from recovery in spending by major hydrocarbon players like HPCL, BPCL and IOC. Margins likely to expand in FY19/FY20.

PNC Infratech 40,586 158 17.6 13.4 Robust order book of over Rs 150 bn gives very strong revenue growth visibility for the next three years.

The company is expecting sharp uptick in revenue in FY19Ebased on execution stage of new projects.

Persistent Systems 66,800 835 16.0 12.8 Persistent Systems expects its robust pipeline to drive growth, going forward. The Company alluded that it is aggressively investing in sales and marketing which will boost its topline.

Persistent is optimistic in beating Nasscom's growth forecastbacked by growth in new businesses.

Century Plyboards 55625 250 25 21.0 Volume gains are going to be significant in each of its division. Increased compliance towards e-way bill implementation to

benefit the company

Source : Kotak Securities - Private Client research

SEPTEMBER 3, 2018

1-Month Portfolio

1-MONTH PORTFOLIO (PF) – SEPTEMBER 2018

NIFTY: 11680 We expect the following stocks in 1 month portfolio to outperform the benchmark index Nifty in the month of September 2018. We rate these stocks as “Short Term Buys” with a time frame of 1 month.

Stock M Cap Current (Rs mn) Price PE (x) Comment

(Rs) FY19E FY20E

L&T 1,920,740 1,370 22.5 19.6 Company reported stronger than expected results in Q1FY19. The company has strong ordering and order pipeline

dominated by government spending.

Grasim 703,754 1,071 23.2 19.5 Grasim is likely to benefit from improved VSF and chemical volumes along with higher volumes in cement.

Stock is trading at attractive valuations

Tech Mahindra 750,680 766 16.7 13.9 Tech Mahindra reported better than expected results in 1QFY19.

Overall outlook remains promising on the back of new dealsclosures in the telecom vertical and sustained revenuemomentum from the enterprise segment

Ramp ups from high quality accounts signed in the past 18months will too power medium term growth.

Aurobindo Pharma 417,818 713 17.8 14.9 We believe ARBP is also well positioned to gain volumes in the US where the management expects US$100 mn worth of NBO’s in FY2019 and is well placed to capitalize on any disruptions in US orals (e.g. valsartan)

Stock is trading at attractive valuations

Petronet LNG 372,000 248.0 15.4 13.3 We believe PLNG’s earnings to rise over the next 2-3 years, driven by higher RLNG volumes from both Dahej and Kochi terminals. Construction of the pipeline to evacuate gas from Kochi is progressing well.

Kansai Nerolac 278,124 516 43.4 38.2 Volume trends remain strong for the company and we expect the trend to continue in medium term.

Reduction in GST (from 28% to 18%) bodes well for paintcompanies including Kansai Nerolac.

Kansai is one of the most attractively valued paint company

Jubilant Foodworks 205,368 1,557 62.3 44.5 Company reported stronger than expected results in Q1FY19 New management’s interventions continue to drive strong

momentum in the business.

Maharashtra Seamless 32,763 489 7.9 6.8 We believe that MSL valuations can get rerated on back of 1) recovery in demand for seamless pipes in the domestic/international market 2) limited competition from domestic players who are struggling with their highly leveraged balance sheets.

PNC Infratech 42,587 166 18.4 14.1 Robust order book of over Rs 150 bn gives very strong revenue growth visibility for the next three years.

PNC is targeting over 40% revneue growth in FY18-20E basedon its current orderbook and stage of execution.

Talbros Auto 3,616 294 13.7 10.4 VTBA’s gasket business that accounts for majority revenues for the company is witnessing robust growth.

Given current order book status, revenue growth in thisbusiness is expected to continue strong growth in FY19/FY20.In 1QFY19, revenues in the forging business stood at Rs417mn, 115% growth YoY.

It is estimated to report 25% earnings CAGR over FY18-FY20E,stock is available at attractive valuation.

Source : Kotak Securities - Private Client research



ONE MONTH MODEL PORTFOLIO PERFORMANCE

Portfolio (PF) returns vs Nifty Returns and outperformance of portfolio vis-à-vis Nifty

Graph 1 depicts the monthly returns of the portfolio vs monthly returns of Nifty and its

outperformance

PF monthly performance vs Nifty monthly performance

Source: Kotak Securities – Private Client Research, NSE

Graph 2 depicts the performance of monthly, 3 monthly, 6 monthly and yearly basis and

corresponding outperformance. 3 monthly PF returns are calculated by adding the returns of

last three months, 6 monthly PF returns are calculated by adding the returns of last six months,

1 yearly PF returns are calculated by adding the returns of last 12 months. Nifty returns for the

same periods have been calculated by using the actual opening and closing value for the said

period such as monthly, 3 monthly, 6 monthly and yearly.

PF performance vs Nifty performance

Source: Kotak Securities – Private Client Research, NSE

5.2

-2.8

-0.1

1.661

-0.1

8.7

0.16

5.95

2.93

-0.8

-6.4

7.5

-8.3

-4.1

7.5

0.2

1.4

3.4

(1.0)

5.8

(1.6) (1.3)

5.6

(1.2)

3.0

4.7

(0.4)

-3.61

6.18

-0.03 -0.20

6.00

2.84

-10.00

-5.00

0.00

5.00

10.00

-10

-5

0

5

10

One Month Portfolio Nifty returns Outperformance

0.2

3.7

-3.5

13.3

2.9

8.7

10.8

21.7

-2.7

-5.0

-14.3

-8.4

-16.0

-14.0

-12.0

-10.0

-8.0

-6.0

-4.0

-2.0

0.0

-5.0

0.0

5.0

10.0

15.0

20.0

25.0

1 month 3 month 6 month 1 year

PF Nifty Outperformance



RATING SCALE

Definitions of ratings

BUY – We expect the stock to deliver more than 12% returns over the next 12 months

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

REDUCE – We expect the stock to deliver 0% - 5% returns over the next 12 months

SELL – We expect the stock to deliver negative returns over the next 12 months

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

information purposes only.

RS – Rating Suspended. Kotak Securities has suspended the investment rating and price target for this stock, either because there

is not a Sufficient 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 12-month perspective. Returns stated in the rating scale are our internal benchmark.

Rating scale for 1 month portfolio

Benchmark – Nifty

Time horizon – 1 month

Short term buys – Stocks expected to outperform the benchmark Nifty in the said time horizon

FUNDAMENTAL RESEARCH TEAM

Rusmik Oza Arun Agarwal Amit Agarwal Nipun Gupta Krishna Nain

Head of Research Auto & Auto Ancillary Transportation, Paints, FMCG Information Tech, Midcap Special Situations

[email protected] [email protected] [email protected] [email protected] [email protected]

+91 22 6218 6441 +91 22 6218 6443 +91 22 6218 6439 +91 22 6218 6433 +91 22 6218 7907

Sanjeev Zarbade Ruchir Khare Jatin Damania Cyndrella Carvalho K. Kathirvelu

Cap. Goods & Cons. Durables Cap. Goods & Cons. Durables Metals & Mining, Midcap Pharmaceuticals Support Service

[email protected] [email protected] [email protected] [email protected] [email protected]

+91 22 6218 6424 +91 22 6218 6431 +91 22 6218 6440 +91 22 6218 6426 +91 22 6218 6427

Teena Virmani Sumit Pokharna Pankaj Kumar Jayesh Kumar

Construction, Cement, Building Mat Oil and Gas, Information Tech Midcap Economist

[email protected] [email protected] [email protected] [email protected]

+91 22 6218 6432 +91 22 6218 6438 +91 22 6218 6434 +91 22 6218 5373

TECHNICAL RESEARCH TEAM

Shrikant Chouhan Amol Athawale

[email protected] [email protected]

+91 22 6218 5408 +91 20 6620 3350

DERIVATIVES RESEARCH TEAM

Sahaj Agrawal Malay Gandhi Prashanth Lalu Prasenjit Biswas, CMT, CFTe

[email protected] [email protected] [email protected] [email protected]

+91 79 6607 2231 +91 22 6218 6420 +91 22 6218 5497 +91 33 6625 9810

mailto:[email protected]








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Kotak Securities Limited established in 1994, is a subsidiary of Kotak Mahindra Bank Limited. Kotak Securities is one of India's largest brokerage and distribution house.

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