IDENTIFYING THE EST ‘ALL WEATHER’mailers.sparkcapital.in/uploads/strategy/Spark India Strategy... · Page 1 IDENTIFYING THE EST ‘ALL WEATHER’ MANAGEMENTS December 11, 2017

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IDENTIFYING THE BEST ‘ALL WEATHER’ MANAGEMENTS

December 11, 2017

VIJAYARAGHAVAN SWAMINATHAN [email protected] +91 44 43440022

GAUTAM SINGH [email protected] +91 22 6176 6804

ARJUN N [email protected] +91 44 4344 0081

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SPARK STRATEGY

find SPARK RESEARCH on (SPAK <go>)

BSE Sensex 33,250

NSE Nifty 10,265

Performance (%)

1m 3m 12m

Sensex -0.2% 4.3% 24.3%

BSE200 0.2% 3.5% 27.3%

Identifying The Best ‘All Weather’ Managements

We put our coverage universe of 190 stocks to some of the most stringent qualitative and quantitative criteria to identify the 25 best ‘All Weather’ Managements. In our assessment, most managements tend to be ’Fair Weather’ friends, who do well in upcycles with the help of macro tailwinds. Very few companies have a time tested track record, underlying robust business model and a solid governance structure to deliver consistent performance irrespective of cycles and headwinds. In this note, we separate the two and pick the best managements to have as the core portfolio stocks. We have consciously kept valuations, earnings estimates and TPs from distracting the argument.

15 POINT QUALITATIVE FRAMEWORK

#1. Management Quality

Demonstrated performance track record across cycles and against external headwinds? Is the management ahead of competition both in terms of capturing the future opportunities and cognizant of challenges? Has the management been tested by competition and come out unscathed? Is the management prepared for disruptions in the industry? How well has the management corrected its past mistakes?

#2. Business Model Strength

How long is the runway for the company’s growth? Sustainability of competitive advantages? Ability to protect and gain market/ wallet share? Predictability, consistency, volatility and resilience to vagaries across cycles? Are they vulnerable to concentration and regulatory risks?

#3. Governance Structure

Management continuity? Capital allocation track record? Material related party transactions? Alignment of interests of promoters & management with minority share holders? Frequency of changes to Board of Directors, CFO, auditors and accounting policies?

10 POINT QUANTITATIVE FRAMEWORK

Consistency in revenue growth, Volatility in profit margins, Operating Cash flow generation, Quality of capital expenditure, Free cashflow generation consistency, Cash return on Cash invested (CROCI), Quality of retained earnings, Future growth expectations, Operating cashflows yield v/s earnings yield and Sustainable Growth Rate.

WHO PASSED THE MUSTER?

Large Caps – Maruti Suzuki, Hindustan Unilever, Asian Paints, HDFC Bank, Kotak Mahindra Bank and TCS.

Large Midcaps – Emami, Page industries, Berger Paints, Sundaram Finance, Shree Cement, Ramco Cements, AIA Engineering, Info Edge, Cadilla Healthcare and Torrent Pharmaceuticals.

Midcaps – Sundram Fasteners, Relaxo Footwear, La Opala, City Union Bank, PI Industries, V-Guard, Astral Poly Technik, KNR Construction and Cyient.

The ‘work-in-progress’ companies whose managements are working on strategies which should reduce their past cyclicality and vulnerabilities are Bharat Forge, Ashok Leyland, Voltas, Blue Star, Thermax and Federal Bank.

On the other hand the managements who might fit the criteria currently but are ‘likely to get tested’ going forward are HDFC, Eicher, Whirlpool, Kajaria, Havell’s and IndusInd Bank for a variety of reasons.

STRATEGY 11 December 2017

VIJAYARAGHAVAN SWAMINATHAN

[email protected]

+91 44 4344 0022

GAUTAM SINGH

[email protected]

+91 22 6176 6804

ARJUN N

[email protected]

+91 44 4344 0081

RESEARCH ANALYSTS

-15%

-5%

5%

15%

25%

35%

No

v-1

6

Jan

-17

Mar

-17

May

-17

Jul-

17

Sep

-17

No

v-1

7

Sensex BSE 200

Page 3

Stability of earnings

Ability to find avenues to grow consistently

Working capital trends with consistency

Quantitative Framework

Out of Spark coverage universe of 190 stocks, companies in non-BFSI sector were alone taken and tested for the following 10 parameters

Parameter Why it is relevant? Methodology used

Operating Cash flow generation

Consistency in revenue growth

Earnings Predictability Highest Inline results in the last 30 quarters (+/-5% PAT deviation from the Bloomberg

consensus estimates)

Sales growth more than 10% each year from FY12 - FY17

Highest Pre-tax OCF conversion (Pre tax OCF/ EBITDA) during FY12-FY17

Notes: *OCF – Operating Cash Flow

Companies which are efficient in generating cash with its capital invested

Quality of capex Growth in OCF during FY12-FY17 is higher than growth in invested capital

Consistent track-record of FCF generation; funding future capex with internal accruals

Free cashflow generation consistency

Highest FCF generation. Cumulative FCF from FY12 to FY17 divided by cumulative OCF for the same period

For every 1 rupee retained how much rupee of market value creation

Growth on all parameters Future growth expectations

Quality of retained earnings Market cap difference divided by difference in retained earnings between FY12-17

Sales/EBITDA/PAT CAGR > 15% between FY17-FY20E

Cashflow return on invested capital

How much can the company grow using only internal accruals

Sustainable Growth Rate (SGR)

Cash return on Cash invested (CROCI)

Highest average CROCI during FY12-FY17. CROCI= Post tax post interest OCF/ Invested Capital (Capital employed - CWIP - cash)

Cos. with highest SGR in FY17. (SGR = Incremental OCF/OCF) Note: Incremental OCF= Redeployment of OCF *(OCF/Sales)

Redeployment of OCF = Total asset turn*OCF Total asset turns = Net sales/Total assets (ex-cash)

To assess fluctuations in the EBITDA margin profile; Prefer least volatile companies

Volatility in profit margins Least variance in EBITDA margin range during FY12 - FY17

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Quantitative Framework – Which companies pass the filter?

No. of occurrences Satisfies both qualitative and quantitative criteria

Companies Total no. of

screens qualified

Consistency Earnings

Predictability Margin

Volatility

Cashflows vs. EBITDA

Quality of Capex

FCF generation consistency

CROCI Quality of retained earnings

Future growth rate

SGR

1 2 3 4 5 6 7 8 9 10

Hindustan Unilever Ltd 7

Page Industries Ltd 7

Emami Ltd 6

Infosys Ltd 6

Eicher Motors Ltd 6

ITC Ltd 5

Bajaj Corp Ltd 5

Tata Consultancy Services 5

Britannia Industries Ltd 5

Sun TV 4

Maruti Suzuki India Ltd 4

Whirlpool 4

Bajaj Auto Ltd 4

Eclerx Services Ltd 4

Hero MotoCorp Ltd 4

Just Dial Ltd 4

Info Edge (India) Ltd 4

Titan Company Limited 4

Wonderla Holidays Ltd 4

Shree Cement Ltd 4

Astral Poly Technik Ltd 4

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Qualitative Framework

Key Qualitative criteria

Management continuity

Capital allocation track record

Material related party transactions

Alignment of interests of promoters & management with minority share holders

Frequency of changes to Board of Directors, CFO, auditors and accounting policies

How long is the runway for the company’s growth?

Sustainability of competitive advantages

Ability to protect and gain market/ wallet share?

Predictability, consistency, volatility and resilience to vagaries across cycles.

Are they vulnerable to concentration and regulatory risks?

Demonstrated track record of the management across cycles and against external headwinds.

Is the management ahead of competition both in terms of capturing the future opportunities and cognizant of challenges?

Has the management been tested by competition and come out unscathed?

Is the management prepared for disruptions in the industry?

How well has the management corrected its past mistakes?

#1. Management

Quality

#3. Governance

structure

#2. Business Model

Strength

Out of Spark coverage universe of 190 stocks, companies with three years of listing history coupled with the relevant analyst experience of knowing those companies for over three years were only taken up for the purpose of this analysis.

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The Best Managements on Qualitative Framework

Maruti Suzuki

AUTOMOBILES

Sector Large Caps

Sundram Fasteners

CONSUMER

FINANCIALS

INDUSTRIALS

IT SERVICES

PHARMACEUTICALS

Large Mid Caps Mid Caps

Hindustan Unilever

Asian Paints

Emami

Page Industries

Berger Paints

Relaxo Footwear

La Opala

HDFC Bank

Kotak Mahindra Bank Sundaram Finance City Union Bank

Shree Cement

Ramco Cements

AIA Engineering

PI Industries V-Guard Astral Poly Technik KNR Constructions

Tata Consultancy Services Info Edge Cyient

Cadilla Healthcare

Torrent Pharmaceuticals

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Maruti Suzuki (MSIL)

Timely new product launches in the compact UV and premium hatch segment driving growth. Separate sales/service network for products in the premium segment. Currently investing significantly on sales infrastructure and on lithium ion batteries for EVs.

Introduced new products, targeted marketing such as government employees, expanded reach and network to benefit from non-urban growth.

In a highly competitive market place, the management has kept its market share & leadership status intact. Last 5 year company CAGR of 10%. Vs. industry CAGR of 5%. New technologies (mild hybrids) and move towards premium products have helped.

New product launches, network expansion and lower margin risks have resulted in consistent and predictable earnings. Good capital allocation track record with the parent investing on newer capacities leaves more capital available for sales & marketing.

Why we like the

Management?

Where were they ahead of

competition in managing an

adverse environment?

A negative and further strengthening WC cycle and a EBITDA to OCF conversion improving further from 100% to 125% reflect the balance sheet strength.

FY07-11 and FY11-14 revenue CAGR was volatile at 25% and 6% respectively. However, FY14-FY20 CAGR likely to be more consistent at ~15%.

EBITDA margins averaged 12.8% and 9.5% during FY07-11 and FY11-14 phases respectively, which is also likely to average a more predictable 15% during FY14-FY20 period.

A strong 50% average CROCI over the past 10 years is likely to further improve to 150% over the next 5 years.

Localization of raw material input requirements at ~92% currently vs. lower than 90% in FY12 improves margin/ FX vulnerability.

Growing exports proportion of sales billed in JPY at 5% of sales now vis-à-vis an immaterial proportion earlier provides a natural hedge reducing FX uncertainties.

Its biggest, non-replicable moat is its distribution and service network; Hyundai the second largest OEM in India by volumes, lags MSIL’s reach by a distance.

More rural reach, premiumization and exports offer enough legroom for growth.

Balance sheet strength

Margin stability

Cash generation & CROCI

Reduced vulnerabilities

Predictability & Consistency

Natural FX hedge

Distribution reach strengths

Growth runway

Mr. R C Bhargava, Chairman joined Maruti in 1981. Mr. Kenichi Ayukawa, MD & CEO, joined the parent in 1980 and held multiple global roles. Mr. R.S Kalsi, ED (Marketing and Sales), has more than three decades of experience in the automobile industry.

Management Team & Governance Grid

MSIL by way of regional mix (rural, urban & exports), product mix (economy and premium), largest sales/service network, success rate of products, low total cost of ownership has created a competitive edge over others. Volatility in margins have come down as the company has made efforts to naturally hedge the JPY exposure by way of exports (in

JPY), incremental royalty agreements in INR and by increasing localization.

Business Model Strengths

Related Party Transaction Frequency of changes in

accounting policy & auditors

Immaterial Deloitte w.e.f. FY17; prior to

that, PWC were the auditors for more than 5 years

Management continuity Alignment of interest

Professionally run organisation Well aligned

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Sundram Fasteners (SF)

FY11-FY15 growth in exports (17% CAGR) helped the company manage the domestic downturn (2% CAGR). Successfully increased exposure to PVs – historically had high exposure to CVs. Preparing for opportunity in EVs and the new opportunities / disruptions, already suppliers to Tesla for small components.

Sold German operations as change in government policies impacted business.

Among the most credible and capable management groups in India. The management has significantly diversified away from fasteners into more value added products such as hubs & shafts, pump assembles & engine components, which now contribute 63% of revenues. This has a material positive impact on the riskiness and provides pricing power/ higher margins.

Geographic expansion – China & UK are profitable, significant scale expansion drives more predictability.

Why we like the

Management?




Long-standing relations with major domestic and global OEMs. While ensuring stickiness, the same also inhibits customers from moving to competitors for minor variations in prices.

Reducing the domestic CV bias and increasing the global PV proportion has a material positive impact on the cyclicality of the business.

Higher proportion of the value added products at 63% of sales currently increases the company’s pricing power and margin profile.

Margins have not been volatile, in fact it been consistently moving up (up 500bps in last 4 years).

10 year average CROCI has been muted at 12% though it has improved to 13% for FY17. With the disposal of the German subsidiaries, CROCI to improve to 27% through FY18-FY20E

WC days expected to improve from 101 days (FY13-FY17) to ~70 days through FY18-FY20E (disposal of the German investments) Expect EBITDA to OCF conversion to improve to 95%.

RoCE has improved to 25% in FY17 from 13% in FY14; prefer to outsource a number of activities vs. in-house set up as capital requirement would be significantly higher.

SF’s technical competence, quality and TAT has ensured continued improvement in wallet shares (through existing products and new products/programmes) with major customers

Strong OE relations

Pricing Power & Low Volatility

Margin stability and cash generation

Cash return metrics


Balance sheet strength

Capital Efficiencies

Growth runway

Mr. Suresh Krishna, Founder & CMD, has experience of over five decades in the automotive industry. Ms. Arathi Krishna, JMD, served as ED from 2006 till 2010 when she was elevated to the position of JMD. Ms. Arundathi Krishna, DMD, joined SF in 1997.


Low cost of product development given huge library of in-house tooling, focus on value addition beyond forging, among the lowest TAT, wide basket of products to be a one-stop-shop to most global OEMs. The company has significantly diversified its geographic and end-market mix in order to relatively outperform. Agreements include

pass-through clause for both raw material and FX




Negligible Sundaram & Srinivasan have

been auditors since FY04, atleast


Succession plan in place Well aligned

Page 9

Hindustan Unilever (HUVR)

It has managed to grow even in the highly penetrated categories such as soaps and laundry through sub segmentations such as face washes and fabric conditioners.

To highlight the depth of the management quality, HUVR was one of the few companies in the FMCG space that successfully managed the last ~12 months of high intensity disruptions - Demonetisation (unplanned) and GST (planned).

HUVR’s management is one of those rare global MNC managements in India, which enjoys unquestionable confidence of its parent to decide and execute strategies as per local needs (e.g. Pureit water purifier, Ayurveda portfolio, etc.)

The management has been at the forefront of changes in the FMCG industry, even in cases where they had missed a trend such as in Ayurveda/Natural, they have been quick to reformulate an effective strategy to capture the trend.

Why we like the

Management?




HUVR’s CROCI is ~121% on an average over the past 8 years, which is ~3x the next best FMCG company in our coverage.

Categories contributing ~65% of HUVR’s revenues currently have low penetration at ~40% (avg.) and huge premiumisation opportunities offering long runway for future growth.

Over the last 10 years, the highest fall in gross margins is ~250bps yoy, reflecting strong pricing power.

It has managed to improve operating margins ~450bps in 8 years due to which earnings CAGR has been 7%, though revenue and volume growth CAGR has been muted at 6%.

It has been able to groom competent top management teams consistently by leveraging the human resource pools available across its global network.

HUVR on an average has paid ~88% of its profits as dividends over the past 8 years, highest among our coverage universe.

In their recent acquisition of Indulekha, they had devised a staged payment outgo strategy on the back of the erstwhile team achieving targets set for each year.

Even in highly penetrated categories such as detergents and personal wash, HUVR delivers growth exhibiting its ability to create behavior changes and gain market share.

High cash generation; Low cash utilization

Pricing Power

Low earnings volatility

Managing talent

Runway for growth

High dividend payout

Capital allocation discipline

Ability to create growth opportunities

CEO – Mr. Sanjiv Mehta (57 years), the CEO since October 2013 has been with Unilever for ~25 years. COO – Mr. Pradeep Banerjee (57 years) has been with Unilever for 37 years and has been ED–Supply Chain since March 2010. CFO – Mr. Srinivas Pathak (45 years old) has been with Unilever for ~18 years and has been the CFO since 2017.


Market leadership, pricing power of its strong brands helps HUVR weather exposure to a wide commodity basket, and limit significant gross & operating margin vagaries despite a consistent high A&P outlay.

HUVR’s CROCI returns are ~121% on an average over the past 8 years, which is ~3x the next best FMCG company in our coverage. Sustained high operating cash flow with limited additional CAPEX outlay makes HUVR CROCI as the highest among peers.




Minimal. Royalty at ~3% of sales None


Our key comfort is that the core philosophy and culture of the firm is institutionalized and personality

neutral.

Parent’s entire India biz under HUVR’s umbrella.

Page 10

Asian Paints (APNT)

Set a tone for the industry in venturing ‘ahead of time’ into premium emulsion paint and later into wall papers. It is launching AP homes – a one stop shop for all home needs, again well ahead of the industry.

The company has also been a pioneer in increasing B2C interaction launching experience retail stores, (Colour world), colour consultancy @ home and home painting services significantly trying to enhance its strong brand equity.

Phenomenal demonstrated ability by the management to consistently gain market share for decades even while remaining a dominant market leader in a market having global leaders.

Its capital allocation track record has been at par with the best. While protecting and expanding the current moat, APNT hasn’t hesitated from investing in future growth drivers.

Why we like the

Management?




Operating margins and cash generation (as a % of sales) with a 5 year average of ~17% and ~11% respectively.

The company has demonstrated a consistent growth profile with volume, topline and earnings CAGR at ~8%,~10% & ~14% respectively over the past 5 years.

Gross and operating margins have been stable at ~43%-44% and high teens respectively with low volatility reflecting pricing power.

The company invests significantly in branding as reflected in last five year average A&P outlay of ~4.6% of total revenues.

CROCI has in high teens over the last few years; Capital efficiencies remained healthy as reflected in mid 20s RoEs but has been slightly volatile owing to capex for new facilities.

The company’s dividend policy has been consistent paying out almost 50% of its earnings while also investing back the remaining to keep the growth trajectory.

it has acquired two companies viz. Ess Ess Bathroom fittings & Sleek Kitchenware in the recent past. Capital deployed in these segments are minimal, but symbolises its strategy.

Reach, repeat usage and premiumization remain the company’s time tested growth formula, which is unlikely to change over the ensuing period.


Pricing Power& Low Volatility

Healthy A&P spend

Robust cash return metrics


Dividend payout


Long Runway for Growth

Asian Paints is owned by the Choksi, Vakil & Dani families. Majority of the BoD constitute members from all the three families. Mr. K.B.S Anand has been the MD & CEO of Asian Paints since April 2012. He has over three decades of experience in the company. Mr. Jayesh Merchant is the current CFO.


During FY11-14, when crude oil prices doubled, APNT effected ~15 price hikes cumulating to 40%, thereby protecting margins. Despite effecting this price hike, the company’s volume growth remained in healthy double digits, reflecting its pricing power.

In the oligoplisitc Indian paints market, the company’s total outlay on A&P is healthy in mid-single digits given that even today paints needs B2B marketing with limited consumer decision making which though is increasing.




Nothing Material None


Our key comfort is that the core philosophy and culture of the firm is institutionalized and personality

neutral.

Rightfully aligned

Page 11

Emami (HMN)

HMN’s management was pro-active during the raw material tail wind climate over the past 3 years as they engaged in investing gross margin gains behind extending core brands into complementing categories, launching new brands and pursuing inorganic growth.

HMN despite taking over Zandu in a hostile manner, arguably at steep valuations, has managed to transform the brand to resonate with younger audience and post a significant turnaround of the brand.

Potent mix of entrepreneurial risk taking spirit and professional touch in execution. Driven by the promoter families, HMN has never shied away from taking ‘visibly’ aggressive bets and then turning the same in their favor with the relentless focus on execution.

Through both organic and inorganic measures, they have managed to outpace the industry growth in the past 5 years. New product innovations like ‘HE’ brand, F&H facewash and acquisition like Kesh King have provided additional levers of growth.

Why we like the

Management?




HMN spends ~20% of its revenues on A&P, the highest among our coverage universe companies. Mass audience target with celebrity endorsement.

Categories contributing to ~70% of HMN’s revenues currently have low penetration at <50%, offering a long runway for future growth.

The management has demonstrated its ability to create and protect market leadership in a categories like CHO (~61%) and F&H (~60.3%) reflecting remarkable execution.

HMN has taken conscious initiatives to diversify the seasonality risk. Season neutral products now contribute ~48% of revenues vs 38% 5 years ago.

Despite its policy of investing most of its gross margin benefits into brand investments, has managed to increase its operating margins by ~640bps over 8 years.

HMN’s 13 day working capital cycle coupled with high margins have ensured that Cash returns on Capital Invested is ~40% on an average over the past 8 years

Dividend pay out is about half of its profits, except in years of high M&A activity, the company has maintained consistent dividend payout policy.

Last 5 year volume and revenue growth has been ~8% and 12% (including KK acquisition) respectively. Acquired brands have grown ~13% value CAGR.

Heavy branding efforts

Ability to gain market leadership

Low Volatility

Ability to juggle growth & profitability

Runway for growth

Capital efficiencies

Healthy payout

Scalability

Promoter Director – Mr. Mohan Goenka – With ~20 years experience, he leads the FMCG business. Promoter Director – Mr. Harsha V Agarwal – He heads the M&A, HR, IT & Media functions. CFO – Mr. Naresh Bhansali – With 2 decades of experience, he manages strategy and business development along with budgeting.


Market leadership in its core categories as Cooling Hair Oil, Pain Balm, Men’s fairness creams and Antiseptic creams enables them to command a strong pricing power in these segments, inspite of competitive intensity from MNCs. HMN, on an average, has delivered ~33% RoCE over the past 8 years, stable profit margins in excess of ~20% despite a heightened

CAPEX outlay reflecting its ability to optimally juggle growth, margins and capital efficiencies.




Not material None


Not a concern No visible conflict

Page 12

Page Industries (PAGE)

While brand ‘Jockey’ has found growth challenging across other markets, we believe it is the management’s strategy which aided ‘Jockey’ to grow into a Rs.~15bn brand in India.

In a highly fragmented and unorganised sector, PAGE’s revenues and earnings have grown at a robust CAGR of ~35% and ~47% respectively over the last ten years across cycles significantly outpacing the industry growth rate of ~13%.

PAGE has cracked the complex equation of remaining affordable yet aspirational, unmatched by its competition. The management’s classic strategy of creating heightened brand aspiration and following it up with numerous brand extensions has done wonders.

The management is extending the brand loyalty seamlessly into the adjacencies like leisure wear, which we believe is an excellent strategy.

Why we like the

Management?





The company has demonstrated a consistent growth profile with volume, topline and earnings CAGR at ~15%,~26% and ~24% respectively over the past 5 years.

Gross and operating margins have been stable at 60% and 20% respectively with low volatility reflecting pricing power.

The company invests significantly in branding as reflected in last five year average A&P outlay of ~4% of total revenues.

CROCI has been volatile in the past on account of heightened inventory in select years leading to poor operating cash flows, the same has normalized in the past few years.

the management has been professional enough to share fruits of its success with minority shareholders too, with an average dividend pay-out of ~53% over last ten years)

Robust RoE. Average dividend pay-out of ~53% over last ten years

Reach, repeatable, aspirational and affordable – This cannot go wrong for a long time.



Healthy A&P spend



Dividend Policy



Page Industries is promoted and managed by the Genomal family with Mr. Sunder Genomal at the forefront of operations. Mr. Vedji Ticku, is the current CEO and in the past served

as the Chief Operating Officer of Page Industries Limited.


Its healthy and sustained capital efficiency, owing to an asset light model of distribution with the wholesale channel contributing to more than 85% of total revenues. The company’s capital allocation history has been robust. Unlike its peers in the sector, PAGE does not employ any brand ambassadors. It instead invests significantly on A&P across media

building a ‘moat’ of being an aspirational brand though at affordable price points.




Nothing of a concern None


Though professionally managed, we believe the strategy and

heightened motivation still stems from the promoters

Rightfully aligned

Page 13

Berger Paints (Berger)

In addition to high A&P outlay (company’s total spend on branding as a % of total revenues is the highest in the sector) and multiple initiatives like Express painting etc the company has managed to create a robust brand equity in a segment which by the day is transitioning to a B2C from a B2B model.

Though being the No.2 player in the Indian paints sector, the market leader commands more than thrice the market share of BRGR reflecting the ‘moat’ the market leader has created in the marketplace. Despite this, Berger’s management through aggressive network expansion (grows its dealer network by ~10% annually), highest penetration of tinting machines in dealer network and via differentiated/premium product profile has been garnering market share to grow its revenues in-line/above the market leader.

Why we like the

Management?





The company has demonstrated a consistent growth profile with volume, topline and earnings CAGR at ~9%,~9% & ~20% respectively over the past 5 years.

Gross and operating margins have been largely stable at ~41% to ~43% and ~15% respectively with low volatility on the downside reflecting pricing power.

The company invests significantly in branding as reflected in last five year average A&P outlay of ~5.6% of total revenues.

CROCI has in high teens to low 20’s over the last few years; Capital efficiencies on the uptrend given significant improvement in profitability over the last few years.

The company’s dividend policy has been fairly consistent paying out almost 35% to 40% of its earnings while also investing back the remaining to keep the growth trajectory intact.

Though the company has signed multiple MOU’s/acquired ‘niche’ business in the recent past, it follows a largely robust capital allocation strategy not ‘moving’ away from its core segments where it is among the top.

Reach, repeat usage and premiumization remain the company’s time tested growth formula, which is unlikely to change over the ensuing period.



Healthy A&P spend



Dividend payout



CEO & MD – Mr. Abhijit Roy – has been at the helm of affairs since 2012 (has been with the company for more than two decades). CFO/Director, Finance - Mr. Srijit Dasgupta – has been the CFO since 2011 – total experience of close to three decades


Inherent strengths which the company enjoys being part of the oligopolistic Indian paints sector. As witnessed multiple times, during deflationary cycles the company doesn’t pass on (or limited benefit passed on) decreased raw material prices benefit to consumers while in an inflationary cycle fully passes on any price increases to the consumer. Despite this prevailing scenario, we note that demand remains inelastic reflecting the superior pricing power of the company.




Nothing Material None


Fine mix of promoter and professional personnel lead the

company. Culture has been largely institutionalized.

Rightfully aligned

Page 14

Relaxo Footwear (Relaxo)

Relaxo’s revenues which for at least 10 years grew consistently, witnessed a standstill in FY17. While a general slowdown was a factor, we admire the management for their stance of ‘not chasing growth at the cost of compromising on cash flows’ as competitors extended favorable trade terms to distributors/retailers compromising on the credit quality.

Also, the management took the wise decision of not creating a capital intense retail footprint.

The management identified a vacuum in the market for a branded footwear player in the ‘value for money’ segment, designed new brands and fulfilled the requirement with the help of celebrity endorsements.

The management’s three pronged strategy of branding, premiumization and penetration has been successful with its revenues growing at a robust CAGR of ~22% in the last decade.

Why we like the

Management?





The company has demonstrated a consistent growth profile with topline and earnings growth CAGR at ~15% & ~25% respectively over the past 5 years.

Gross and operating margins have been stable at ~55%-~58% and 14% respectively with low volatility reflecting pricing power.

The company invests significantly in branding as reflected in last five year average A&P outlay of ~4% of total revenues.

CROCI has in high teens over the last few years; Capital efficiencies remained healthy as reflected in mid 20s RoEs but has been slightly volatile owing to capex for new facilities.

The earlier structure of some brands owned by other group entities and related party transactions have been addressed.

The company has no stated dividend policy, however based on the past track record the average dividend payout has been in the range of high single digits to low double digits.

The long growth runway is obvious given the highly fragmented and unorganised nature of the market with limited brands in the ‘value for money’ segment.



Healthy A&P spend



Governance concerns addressed

Dividend Policy


Mr. Ramesh Kumar Dua, the promoter & MD and Mr. Mukand Lal Dua, the promoter & Director, manage the day to day affairs of the company. Both of them have 4+ decades experience in the footwear industry. Mr. Nikhil Dua has an experience of more than 15 years in the footwear sector.


Pricing power in a highly fragmented and competitive space is reflected in the company’s per unit realization growing at a CAGR of ~12% over the last ten years beating the inflation rate significantly led by premiumization and consistent annual price hikes. The company’s strategy to be a wholesale led model realizing the capital intensity of a retail model is possibly its biggest strength.




Earlier concerns addressed completely.

None


Well planned. Earlier concerns on brands

owned by group entities addressed

Page 15

La Opala RG (LOG)

The management was ahead of MNC competition in sensing the opportunity in the space to create a niche.

Though initially aided by Anti-Dumping Duty (FY11-16), LOG did a phenomenal job to graduate from a product to a strong brand. Focusing on the right pillars – Brand, Distribution and Systems, LOG created an enviable position in the Indian opalware market.

Pioneer in the emerging organized opalware space in the country, having single handedly grown the category to ~$100mn. First mover advantage is a strength in taking on competition from MNCs & regional unorganised players to be the market leader.

LOG embarked upon a capex of Rs. ~400mn in FY07-08 when their reported PAT was just Rs.~44mn, this speaks volume about their confidence on the category’s growth potential, brand’s strength and company’s execution capability.

Why we like the

Management?




Operating margins, cash generation (as a % of sales) and CROCI are among the most robust in the consumer space with a 5 year average of ~30%, 23% and ~22% respectively.

The company has demonstrated a consistent growth profile with topline and earnings growth CAGR at ~18% & ~34% respectively over the past 5 years.

Selling price per kg of output is Rs.~139 whereas the raw material per kg of input is Rs.~42 indicative of the huge value creation and pricing power and huge gross margins of 70%.

The company spends low to mid teens % of revenues for both advertising and promotions making it one of the highest such spends in the consumer space.

Reinvestment in the business has reduced dividend payout to~20% of its profits though the company used to distribute more generously years back.

Trailing five years average ROE at ~30% and ROCE at ~26%.

La Opala’s core net working capital days have improved from 124 days in FY12 to 87 days in FY17 primarily led by lower inventory holding.

The space is nascent with little competition in the organised space, rising aspiration/ life style spend, increasing use of microwave ovens and falling stainless steel usage.

Stellar profitability and return metrics

Value creation

Brand awareness

Reinvestment

Earnings Consistency

Healthy Capital efficiency

Consistent improvement in working capital


The company is managed by the father-son duo of Mr. Sushil Jhunjhunwala and Mr. Ajit Jhunjunwala. The former was the founder and has 40 years experience in the space. The latter runs the business operations as the JMD.


The dual strategy of premiumization and low operating costs ensured that the company’s operating margins doubled over the last 7-8 years. We note that the company commands the highest margins in the sector. The company has been consistent in its strategy focusing on its core brands and not investing too much on product/brand extensions.




Nothing material Negligible


Though professionally managed at various levels, expect centralization

of power with founding family. No visible conflict

Page 16

HDFC Bank (HDFCB)

Despite being the market leader across multiple segments, the bank has not faced any major asset quality challenges. This is evident from the FY08 - 09 unsecured retail loans blowout, when the bank came out unscathed; also visible in the current corporate asset quality cycle where the bank has held on to its lofty asset quality standards despite being present in the same operating environment.

They grabbing market share when the incumbents exited the retail lending space was an example of conviction led growth strategy.

The management has found the right mix of aggression, caution and risk pricing within the bank and prizes itself on being proactive, rather than reactive to market conditions. Consistently the de-facto industry benchmark.

Ahead of the curve preparedness for an opportunity or minefields has been exemplary. Willing to let go unviable opportunities and treading a path vacated by competition has been its hallmark.

Why we like the

Management?




Despite having ~1/4th SBI’s branch reach, HDFCB is the market leader in new age channels – Mobile banking, RTGS, NEFT and credit cards.

Steady high margins in a narrow band across interest rate cycles & changing regulatory requirements, led by optimal asset mix, no liability-asset mismatch and low cost deposits.

Over 10 years, the loan book and earnings have grown at a CAGR of 27% and 28% resp. It has been adding 70-80bps every year market share among banks to reach 7.1% now.

Except FY09, NPA additions have been less than 2% of assets. Retail delinquencies remain best in class, while low concentration of wholesale borrowers prevents chunky NPAs.

10 year average CASA is 48% with retail liabilities constituting 75% of total liabilities.

10 year average RoRWA at 2.3% and Risk adjusted margins at 2.9% are the highest among banks

High capital efficiency aided by best in class return metrics and low capital consumption. HDFCB is expected to maintain an RoA of ~1.9% & RoE of ~19% over FY17-21E

The Bank has got the optimal growth-profitability-asset quality-capital efficiency equation for 2 decades, which has created shareholder value of >25% CAGR returns since IPO.

Delivery channels

High growth

Healthy Asset Quality

Stable Liability Franchise

Earnings consistency

Risk pricing


Demonstrated track record

Mr. Aditya Puri has been the MD & CEO since inception. Mr. Paresh Sukthankar, Depy MD, Mr. Kaizad Bharucha, ED – Wholesale banking and Mr. Sashidhar Jagdishan, CFO have been in the bank for 2+ decades.

Multiple exits at the senior management level over the years has not caused disruption.


The Bank’s strength emanates from its CASA franchise, which leads to low cost of funds and as a result, a high quality asset book.

HDFCB’s market leadership in retail credit, counter cyclical approach to large corporate loans, leadership in non-branch transaction channels, deep entrenchment in systemic CA & SA verticals, productivity uptick, granular fee income streams, proactive accounting (in view of IND-AS implementation) place the bank in an exalted orbit.


Related Party Transactions Frequency of changes in


The bank distributes home loans for HDFC Ltd. in return for a fee and

can buy back 70% of such loans.

in line with regulatory requirements.

Management Continuity Alignment of interest

The bank will see a CEO change for the first time in CY20. Succession

planning should see the replacement by Sep/Oct-19.

A well incentivized ESOP scheme ensures alignment of interests of

Promoters, management, employees & shareholders

Page 17

Kotak Mahindra Bank (KMB)

Ability to pull back when risk-reward does not make sense, irrespective of competition. For instance, the bank, sensing issues with the corporate loans back in FY14 ran down the corporate book by 14% in a single quarter, resulting in sub-par loan growth of 9% in that year.

On the other hand, currently, sensing opportunity, we are seeing the bank aggressive in the debt resolution space.

Strong credit culture & management’s single minded focus on asset quality ensures earnings sustainability - while the bank could go through phases of low growth, earnings/ RoA volatility should be limited. A genuine ’sleep well’ bank for investors.

Stability and longevity of the high quality leadership team for 2+ decades - something even HDFC Bank has not had. Ability to integrate ING Vysya Bank - a complex bank with an ‘oil-water mix’ of old generation-MNC bank employee base.

Why we like the

Management?




Carefully scoped and integrated acquisition opportunities acquired at the right price – a rarity in today’s market also sets the management apart.

Over 10 years, demonstrated predictable and consistent growth profile. The loan book and earnings have grown at a CAGR of 27% and 31% resp.

Improving margins across rate cycles, led by shift to higher yielding loan mix, with low volatility, led by high fixed rate vehicle finance book.

Healthy asset quality, 10 year average slippage of 2.1%, negligible assets under various dispensations and high provision coverage.

Average CASA has improved sharply to 48% with retail liabilities constituting 65% of total liabilities.

10 year average RoRWA at 2.2% and Risk adjusted margins at 2.85% are among the best in class – close second only to HDFC Bank.

Though RoAs have been healthy and improving post the ING Vysya Bank merger to close to 1.7%, RoE has been subdued to low leverage, which should get addressed over the years.

Strong track record of healthy return ratios & clean governance history has created substantial shareholder value of >30% CAGR returns since inception.

Integrate acquisitions

Low Volatility




Risk Pricing


Demonstrated track record

Mr. Uday Kotak is the Executive VC & MD. Mr. Dipak Gupta, JMD is in charge of group treasury, wealth management & the ARC businesses, with supervision on the alternative investments business. Executive board comprising different business heads drives

group strategy and the overall operations.


Consistency in strategies – has remained true to its target segments of HNIs, capital markets & vehicle finance since inception without fiddling with the core business model. Has come out relatively successful in the worst of asset quality cycles.

Presence of banking, securities, capital markets, insurance & asset management subsidiaries provide an entire gamut of services to the customer making it a sticky and repeatedly engaging relationship.




Negligible in line with regulatory

requirements.


MD is currently 58 years of age and can possibly continue for a decade

more.

Mr. Uday Kotak owning 30% stake in the bank and a well incentivized ESOP scheme

ensures alignment of interest.

Page 18

Sundaram Finance (SUF)

Demonstrated outperformance across cycles over decades; In our professional engagement, we have seen SUF emerge unscathed from the down cycles seen in late 90s, 2008-09 and 2012-13, when their competition had multiple casualties.

We have seen the management prepare for challenges a year ahead. Willingness to say no during periods of mispricing & over zealousness by competition is a trait few possess.

Overwhelming emphasis on asset quality over growth at all times. Despite conservatism in growing the book, the growth rate for the company has been on par with the industry growth rate.

Knowledge of the market place is unmatched led by the group’s positioning as an automobile manufacturer, OEM supplier across industry segments and as a financier. A seasoned management team which has seen multiple cycles.

Why we like the

Management?




Consistent earnings profile as demonstrated by >2% RoA since FY10, despite being present in a cyclical industry.

Client repeatability at 60% is the best in class vs. peers’ 10%-30% reducing origination costs. New customer acquisition is reference-led by existing customers with implicit guarantees.

A 10 year average of 2.5% operating costs + credit costs as a % of assets is ~100bps lower than the nearest competitor.

Although SUF’s NIMs appear lower than peers, risk adjusted NIM at 6% is best in class.

Transition to 90 days of NPA recognition in FY16, two years ahead of competition, inspite of which GNPA came in at 2% .

At 7.9%, SUF commands one of the lowest cost of funds among peers. 85% rollover rates in retail deposits – one of the highest in the industry.

Prudent capital allocation. Investments have paid back the capital invested in them in the form of healthy dividends; Listing of SFIL is expected to further unlock shareholder value

Scale in passenger vehicle financing, home finance, insurance, asset management and business services serve as counter cyclical shock absorbers for growth and profitability.

Earnings consistency

Low business costs

Superior risk adjusted NIMs

Preparedness for challenges

Enviable repeat customers

AAA rating; Funding cost advantage


Counter-cyclical engines

Uniquely in the financials domain, SUF has a track record of not having raised any capital in the last four decades consistently growing through internal accruals and creating shareholder value through the creation of multiple new businesses. Repeat customers is SUF’s secret sauce leading to low operating and credit costs, which helps SUF source liabilities at AAA pricing and

attract/ retain the best customers, creating a virtuous loop.


Mr. TT Srinivasaraghavan has been the Managing Director of the company since 2004. Mr. Harsha Viji is the Depy MD. Mr. M Ramaswamy, the current CFO of the company has been in this position since FY12. Mr. AN Raju is the Director (Operations). Governance track record is blemishless.




Negligible Brahmayya & Co. have been auditors of SUF for 25+ years


3 out of the 12 directors on the Board and most members of top 2

tiers of the management team have 20+ years experience in SUF

Though reclusive, the promoters’ & managements’ skin in the

business and ownership is clear

Page 19

City Union Bank (CUB)

Unlike peers who ventured into consortium based large corporate lending during FY07-12, CUBK’s management stayed away from that segment sensing the potential risks, at the cost of a lower growth trajectory compared to peers. That strategy ensured that when the asset quality issues came to the fore for the peer banks, CUBK remained unscathed throughout.

Firm No to ‘Pan India aspirations’, micro finance opportunities and unsecured retail loans insulated the bank from others’ mistakes.

Strategies built around core competence and awareness of its limitations irrespective of competitors’ strategies and market’s temporary preferences.

Clarity of thought, consistency of communication and understanding of long term investors’ mind-set brings comfort.

Why we like the

Management?




Well distributed asset book with average SME client exposure (67% of loan book) at ~Rs. 3mn and corporate book (7% of loan book) at Rs. 35mn.

Demonstrated predictable and consistent earnings growth of >20% CAGR over the past ten years, highest among relevant peers.

One of the least volatile RoA profiles in the industry. Last 10 year highest and lowest RoA at 1.7% and 1.45% respectively.

10 year peak slippage at <3% and average slippage at 2.0%, negligible restructured assets of 0.1% currently (lowest in the peer group).

Sticky retail term deposit customer base with 95% renewal, low dependence on wholesale deposits at just ~5% of liabilities and negligible asset-liability mismatch.

Robust and sustainable >3.7% NIMs given adequate pricing power with its loyal SME customer base and stable retail liabilities.

High 18%+ sustainable RoEs. Highest RoRWA of 2.3%, highest in the industry.

CUB’s market share in TN state (63% of loan book) is still 2.3% offering huge growth opportunity in its own backyard, apart from growth opportunities in contiguous states.

Granular Loan Book

Low Volatility




Pricing Power



Dr. N Kamakodi, the current MD & CEO, first joined the bank as DGM in 2003, and rose through the ranks to eventually take charge of the bank in May, 2011. Six years back, the bank had identified third tier

management team who are graduating to second tier adding depth.


Collateralized lending opportunity to small & medium sized businesses is structurally sound, relationships are sticky over a long term and relatively lower competition offers adequate pricing power especially with PSU banks vacating the space. Being sole banker for most customers an added advantage, in terms of determining customer behaviour, early detection of cash flow

constraints and first right on collateral in stress situations.


Related Party Transactions Frequency of changes in


Negligible in line with regulatory

requirements..

Management Continuity Alignment of interest

CEO is 44 years old with a long likely tenor. His father, Mr,

Narayanan was MD of the bank from 1981-2004.

Board managed. No promoters. Management has no other

related or unrelated businesses.

Page 20

Shree Cement (Shree)

Calibrated and prudent expansion plans over the years de-risk from its single region dependency in North in FY13 to East where volumes were at 20% in FY17 which has further potential to increase post the current round of expansion

Unchanging core principles on targeting higher than industry growth; cashflow precedence approach over margin leading to 13% volume CAGR in FY12-17 v/s 6-7% industry growth

Ahead of the curve preparedness has been laudable with long term track record of delivering better than industry growth led by gradual and steady low cost organic expansions. Willing to let go unviable high cost inorganic opportunities.

Consistent focus on cost leadership and pioneering the cost saving initiatives like adoption of pet coke, split grinding units and waste heat recovery plants.

Why we like the

Management?




Open wagon transportation, usage of synthetic gypsum, automated fuel management system, kiln productivity improvement, wet pet-coke usage keep cost under check

Less volatile with average post tax OCF margins at 27%/25% over the last 10/5 year time frame respectively Pre-tax OCF/EBITDA conversion at ~99% between FY08-17 indicates credible working capital management practices

10 year average CROCI at ~65% in FY17 is distantly better than its peer group

Consistent FCF generation each year in the last 10 years irrespective of capex plans

Cost leadership invariably pips out competition; Focus on top 3 positioning in volumes with strong regional barriers offers adequate pricing advantages

Average RoEs of 26% between FY08-17; Average RoCE at 20% both in 5/10 year timeframe despite adverse cyclicality in the last five years

Consistency in clocking double digit volume growth each year in 9 out of the last 10 years

Granular approach = cost efficiency

Cash conversion

CROCI

FCF generation

Cash generation volatility

Pricing Power


Growth Consistency

Currently managed by Promoters Mr. H.M Bangur (Managing director) and his son Mr. Prashant Bangur (Joint Managing director)

Stable middle management professionals who have been with the company since 2000


Shree’s strength manifests from its low cost gross block per tonne which leads to low cost of operations and as a result, a high quality earnings profile

Well-entrenched relationship to optimize trade: non-trade mix in a relentless manner




Negligible transactions with related parties

No change of auditors since 2011


Prashant, JMD is 36 years old with a long likely tenor. Already gathered

12 years of experience in Shree

65% promoter holding. No related /unrelated businesses

ensures alignment of shareholder interest

Page 21

Ramco Cements (Ramco)

With profit-sensitive cement prices being an uncontrollable aspect, Ramco’s de-risk strategies from South centric operations by expanding aggressively in the Eastern markets has paid-off in the last five years.

Ramco bucked the trend with ~20-25% of current volumes contributed by East despite fickle demand scenario in South since FY11 Notably, profitability has not been compromised in the process of expanding reach.

Riding more on micro variables than macro sets the management apart from its peers. Ability to act dynamic across all critical business parameters (product/distribution/geography/costing). Seasoned leadership team has seen multiple business cycles.

Consistent focus on profitable growth is rigorously followed which is a benchmark to its peers. Clinical capacity expansions via organic route with leverage followed by de-leveraging out of cash accruals. Willing to let go unviable high cost M&A opportunities.

Why we like the

Management?




Real time tracking from tracking limestone mining to dispatches, Kiln productivity, ability to switch between captive and renew-power, usage of multi-modal logistics

Track record of 5/10 year average EBITDA/t of over Rs. 1000/t is commendable considering cyclical nature of business Pre-tax OCF/EBITDA conversion at ~100% between FY08-17 indicates strong working capital management practices 10 year average CROCI at ~20% when majority of the time has been impacted by weak market demand

Capacity utilisations at ~55% provides enough head-room to grow with strong operating leverage; Cost optimising split grinding investments enhances market presence

Cost leadership with top 3 positioning in markets it operates with strong regional barriers offers adequate pricing advantages over its peers

Average RoEs of 26% between FY08-17; Average RoCE at 20% both in 5/10 year timeframe despite adverse cyclicality in the last five years

Medium consistency in growth parameters; 7 out of the past 10 years volumes grew with four years of strong double high-digit volume growth

Granular approach to business = cost efficiency

Cashflow conversion

CROCI

Strong headroom to growth

Lesser volatility in earnings

Pricing Power


Growth Consistency

Currently managed by a professional CEO Mr. A.V.Dharmakrishnan who has over three decades of experience with the company

Already identified strong second tier management team with over two decades of experience who are graduating and adding depth to the team


Ramco’s strength stems from its continuous investments in augmenting the plant infrastructure (critical to manage both fuel & freight costs) which in-turn leads to competitive cost advantage and as a result, a superior and consistent earnings profile

Strong relationship to optimize trade: non-trade mix; Vertical approach with strong brand recall & distribution strength by being relevant in a market than a sheer presence



accounting policy & auditors Negligible. Management has

reversed the RP transactions in the past to protect shareholders

interest

Same auditors for many years


Post recent demise of Mr. P. R. Ramasubrahmaneya Rajha in FY17,

Mr. P.R.Venketrama Raja was appointed as the MD. No issue in

management continuity

43% promoter holding; the promoters’ & managements’ skin in the business and ownership is

clear; Group’s largest market capitalisation and asset–base

Page 22

AIA Engineering (AIA)

Even during weaker commodity cycle between FY13-FY15, focus was to increase their market share in the mining segment where the presence was meager. This helped them buck the trend with average revenue growth of ~15% in an otherwise flat market growth

Despite presenting a larger opportunity in an oligopolistic market, capacity additions were in a calibrated manner in the past decade to match with volume visibility

Persistence and vision to offer total cost of ownership solutions model than selling products in a highly competitive export market is commendable where very few Indian engineering companies have demonstrated consistent success vis-a-vis global competition

Steady and disciplined strategy of single manufacturing location v/s capacity near to the customer approach of its competition. Sticking to organic growth approach irrespective of commodity cycle shows prudent capital allocation decision

Why we like the

Management?




Low cost advantages with strong balance sheet provides strong headroom to growth given that current mining volumes are still at <5% of the overall 3mn MT grinding media market

Demonstrated consistent earnings CAGR >14%/20% over the past ten/five years respectively Average ten/five year operating margins were stable in the range of 24-25%; Operating margins have shown signs of volatility in the past. High/low range of 29%/18%

Pre-tax OCF/EBITDA conversion at ~84% between FY08-17 indicates strong working capital management practices

Consistent FCF generation in the last 7 out of 10 years; 65% conversion from total OCF generation between FY13-17

Offering solution than products, manufacturing facility at low cost region (Gujarat) and sticky relationship with customers helps pricing the products better

Average RoEs of 20% and pre-tax RoCE of 26% between FY08-17 is superior among its peers

Recent order-win from Barrick, world’s largest gold miner indicates that established companies are entrusting AIA’s capabilities; Capacity utilisation at 55% provides visibility

Low cost advantage

Earnings Volatility

Superior cash conversion

FCF consistency


Pricing Power


Strong pipeline with low capacity utilisation

Mr. Bhadresh Shah, Promoter & MD along with his team possesses more than four decades of experience in the manufacturing and design of various kinds of value added, impact, abrasion and corrosion resistant high chrome castings.


Core competency of knowledge of end application, metallurgy and design are its key strengths. This combination forms the bedrock which helps customers reduce wear and tear and operational costs. Team of engineers and metallurgists are best-in-craft.

Significant cost advantages over Magotteaux while the product and service quality is at par with Magotteaux, should likely to benefit both market share gains and an overall increase in opportunity size




Negligible transactions with related parties

No auditor change since 2011


Mr. Kunal Shah, ED is 40 years old with a long likely tenor. His uncle,

Mr. Bhadresh Shah is the Managing Director

62% promoter holding. No related/unrelated businesses.

Page 23

PI Industries (PI)

Senior management not resting on laurels from the successful CRAMs business is further scaling up its R&D capabilities -doubled its R&D investments (~13% of workforce; currently 8% of gross block) to tap growing opportunities in both CRAMS and domestic market

In domestic segment, while pricing did materially decline in the past two years due to end of marketing exclusivity in some of its key products – Management’s efforts to aggressively reduce sourcing costs helped it to remain largely margin neutral

Credible track record of building a unique business model with >50% of revenues from niche CRAMS business (very few such entities globally) and has considerably de-risked from relying solely on volatile domestic agrochemical industry

Critically in both these businesses (CRAMS and domestic Agchem) PI’s management has/and is building its forte in patented and high efficacy molecules vs generic oriented approach of its competitors;

Why we like the

Management?




Capex in the past 5 years have largely been on the CRAMS (exports) and R&D (2x size expansion). Most of the CRAMS investments are backed by order book giving predictability.

Gross margins have improved from ~42% during FY12-15 to 47-49% during FY16/17 (+600bps); while EBITDA margins have improved 400bps during the same period to >20% Pre-tax OCF/EBITDA conversion at >90% between FY12-17 indicates strong working capital management practices

10 year average CROCI at ~24% indicates prudent capital allocation

CRAMS revenues could double in 3-4 years and high potential launches in domestic segment could lead to 10-15% CAGR growth over the medium term (though back ended)

CRAMS command superior margin profile (20-25% ROCE); Domestic segment lifecycle product margins are relatively better vs peers due to high efficacy molecules and branding

Average RoEs of 30% between FY12-17; Average RoCE at 26% over the same time frame

High consistency in both revenue & EBITDA growth; Double digit revenue growth consistently in the past 5 years while EBITDA grew >25% in the past 5 years

Measured aggression

Cashflow conversion

CROCI

Strong headroom to growth

Volatility in earnings

Pricing Power


Growth Consistency

Mr. Mayank Singhal, MD & CEO since 2009 has >20 years of experience in the field of chemicals and intermediates and has transformed PI into a science-led company with focus on technical brilliance in all initiatives.

Experienced senior/middle management team in place with decades of relevant sector knowledge


Relatively better predictable business model vs peers due to its integrated business approach of R&D led CRAMS (export) and domestic agrochemical market (majorly in-licensed Patented products). CRAMS business offsets the volatility in domestic agrochemical segment and newer R&D efforts improve potential for new product launches

Best in class R& D skills - a trait visible in new launches as affirmed by competitors.




Negligible Same auditors for more than 7

years


CEO is in mid-forties with a long likely tenor. His father, Mr. Salil Singhal was MD until 2009. No management continuity issues

Promoter group has no related/unrelated businesses.

Full alignment to the interest of shareholders

Page 24

V-Guard (VGRD)

Reduced the business seasonality by continuous launch of new products over the last 7 years which caters to both summer and winter seasons; VGRD clocked >25% CAGR even during weaker macro periods of FY11-FY14. due to aggressive product launches with considerable market share gains was visible in stabilizers, water heaters and fans.

Focus on geographical diversification with revenues from South currently at 65% v/s 91% in FY09

Leveraging its market leadership in voltage stabilizers, management has metamorphosed the company from a single product/single geography company to a multi product emerging pan-India player in Consumer Electrical segment

Clarity with measured growth strategies, focus of being relevant in both products/geography (top 3), consistency and transparency in communication brings comfort

Why we like the

Management?




Resolve to be number one, two or a strong number three; Vacate segments where they do not occupy these positions, protecting the capital. Product level RoCE is being measured

Demonstrated consistent earnings CAGR >30%/25% over the past ten/five years respectively, highest among relevant peers

Less volatile. Average ten year operating margins of 9.5%; High/low range at 10.1%/7.6%

CROCI at ~22% in FY17 in line with its five year average implying superior and stable earnings quality and attractive cash conversion

Consistent FCF generation in the last 5 years; 72% conversion from total OCF (FY12-17)

Focus on top 3 positioning, transparency in pricing and dealer friendly initiatives provides adequate pricing power

Average RoEs of 22% between FY08-17 which is further on an improving trajectory

Higher double digit growth in 9 out of the last 10 years

Granular approach

Earnings Volatility

CROCI

FCF generation


Pricing Power


Growth Consistency

Mr. Kochouseph Chittilappilly is the Chairman and Mr. Mithun Chittilappilly is the MD. Mr. Ramachandran, Professional Director & COO with loads of experience in FMCG sector is well supported by a bunch of professionals with varied background


Products catering to discretionary consumption, electrification and real estate construction amplifies diversified growth possibilities

More focus on manufacturing v/s outsourcing which can expand gross margins and safeguard against higher commodity prices

Well-entrenched distribution network with products which can funnel through modern retail, electrical and kitchen channel




No material transactions with related parties

No change of auditors since 2011


Mithun, MD is 36 years old with a long likely tenor. His father, Mr.

Kochouseph is the Chairman

65% promoter holding. No subsidiaries or any related

businesses ensures alignment of shareholder interest

Page 25

Astral Poly Technik (Astral)

Ability to buck the trend with an aggressive foray into adhesives/construction chemicals segment which offsets the falling growth rates in pipes business during unsupportive macro. Overall revenues at 19% CAGR v/s pipes division at 11% CAGR between FY14-17

Demonstrated strong revenue growth trajectory despite the real estate slowdown with new product launches and consistent brand building; Continuous focus to reduce the proportion of sales from institutional clients from 70% to 50% in the last five years.

Proactive strategies and incessant focus of the management on the look out for new products especially in PVC pipes and fittings through technology absorptions/tie-ups with reputed international players

Credible and experienced senior management team with strong domain knowledge; Promoter is often attributed for introducing and spread-heading usage of CPVC pipes in India by collaborating with Lubrizol

Why we like the

Management?




Capacity expansions both in pipes and adhesive business. Further sales mix change towards retail, market share gain possible due to captive compounding and foray into agri pipes

Track record of 5/10 year average EBITDA margins of 13.5% is commendable. 300bps is the range between best/worst margins Pre-tax OCF/EBITDA conversion at ~83% between FY08-17 indicates strong working capital management practices

10 year average CROCI at ~22% indicates efficient capital allocation

14% sustainable growth indicates strong self funding of future capex without leverage

Leadership in CPVC market backed by regular product launches + consistent branding + cross selling opportunities should lead to pricing power

Average RoCEs of ~20% between FY08-17

Consistent double digit revenue growth every year in the last 10 years. 30% revenue CAGR between FY08-17

Multiple growth levers

Cashflow conversion

Strong CROCI

Sustainable growth


Pricing Power

Stable capital efficiencies

Growth Consistency

Currently managed by Mr. Sandeep Engineer, MD first generation promoter with strong domain knowledge

Second generation have joined the business with clear cut responsibilities. Kairav looks after pipes and Saumya has recently started to look after adhesives segment


First mover advantage in fast-growing CPVC pipes with increased manufacturing and distribution reach. Captive CPVC compounding facilities offers both margin expansion and working capital cushion

Launching new products at regular intervals, increasing share of fittings, and efficient logistics are inherent strength. Strong brand recall (ad-spends at 3% of sales) trickling pull demand coupled with brand leveraging to strengthen its adhesives business.




No material RP transactions Same auditors for many years


Management continuity in place with responsibilities identified for

the second generation

58% promoter holding; the promoter family is fully involved

with no related/unrelated businesses

Page 26

KNR Constructions (KNR)

Track record of down-sizing the orderbook during adverse macro (FY12-14) in the past sets KNR apart from its peers. Orderbook declined by 60% in FY14 v/s FY12; Track record of no fund raise in an otherwise capital guzzling sector

Consistent infusion of capital to repay the debt at asset owning entities (BOT assets) to avoid default situation. Demonstrated track record to maintain/improve credit rating at all times

Strategies built around core competence and awareness of its limitations irrespective of macro economic variable changes

Geographical focus, consistent bidding strategy (cash contracts over BOT) with pricing discipline and focused execution with direct intervention from the promoters at every stage

Why we like the

Management?




South dominant geographical mix, concentrated large sized orders and focus on keeping the lead distance lower between projects

16% average operating margins over the last 10 years with 300bps of variance

Cumulative Pre-tax OCF/EBITDA at 100% between FY08-17

CROCI has improved to 32% in FY17 vs 13% (highest among the peers) over FY10-FY15 implying superior earnings quality, low investments in assets and attractive cash conversion

FCF generation in 6 out of 9 years between FY09-17 is commendable in a sector with weak business characteristics

Demonstrated better pricing discipline during bidding process across cycles

Industry leading average RoEs of 16.5% between FY08-17

Consistent execution track record during strong orderbook phase

Orderbook Quality

Strong Cash Conversion

CROCI

FCF generation consistency

Earnings Volatility

Pricing Power


Growth Consistency

Clear succession plan in place with Mr. Jalandhar Reddy, aged 45 years with 18 years of experience is expected to take over from his father as MD in future

Sticky core bidding and project execution team with over decades of experience gathered in KNR


Commitment and consistency in strategy, prefer to remain as a main contractor along with strong balance-sheet are key strengths.

Good relationship and reputation of strong execution have enabled them to be more aware of project risks ahead (evident from negligible % of slow-moving orders and consistent EBITDA margins and the resultant cashflow conversion)




No material transactions which could have potential conflict with

the company's interest

No change in auditors for more than 7 years.


ED is 45 years old with a long likely tenor. His father, Mr. Narasimha Reddy is the MD since inception

No conflict; 56% promoter holding. Promoter group has no

other related or unrelated businesses.

Page 27

Tata Consultancy Services (TCS)

Despite its growing size, TCS used the high growth phase of FY10-14 to make the organisation more nimble and this helped it open newer markets like Japan and Scandinavian countries to outpace peers.

During the period of weak macro, TCS readjusts its pricing policies to gain market share and grow faster than the industry. The strong focus on sales and lower cost of delivery helps TCS grow faster than Indian peers.

Senior management continuity and longevity is the key reason TCS has managed the transitions of the past two decades better than most others in the industry. The company has had only 3 CEOs over the past 25 years.

TCS has largely been consistent in delivering its strategy of growing faster than the industry due to its scale and pushing high value services wherever possible.

Why we like the

Management?




TCS bridged the 5% differential in EBITDA margins to Infosys in FY10 with higher revenue growth and then utilized its size and scale to reduce the total cost of ownership for clients

Barring FY15 and FY16, when the industry realigned itself to the lower growth and it Insurance (Deligenta) and retail offering, TCS performance has largely been predictable

TCS’ EBITDA margins of 27% has remained stable over the last 10 years despite employee growth being faster than revenue growth due to lower costs and low attrition.

The largest spender on IT is the BFSI sector and the fastest growing amongst services is IMS. TCS has the largest practice in BFSI and now has overtaken HCLT in IMS segment as well

The average cash return on the capital invested during the last 10 years is a robust 37%. TCS continues to convert almost 100% of its EBITDA into pre tax operating cash flow.

TCS has increased its dividend payout from 26% in FY07 to 35% in FY17. A buyback in FY18 and if followed on a consistent basis can improve ROCE over the next five years

TCS generates 75% of the profitability of Tata Group which is then used by the group to fund its investments in other sectors, providing alignment of interest.

The addressable IT offshore services opportunity for TCS is ~US$1 trillion, and the market share of TCS (India IT export revenues) 15.2% in FY17, indicative of further room for growth.

Beneficiary of scale


Clear focus on high growth vertical and horizontal

Cash return metrics


Dividend payout


Growth runway

Mr. N. Chandrasekaran, Chairman of the Board of Tata Sons was the CEO of TCS from FY07-17. Mr. Rajesh Gopinathan, is the CEO. He has been with TCS for close to two decades now. Mr. Ganapathy Subramaniam is the COO and Mr. V Ramakrishnan is the CFO. All 3 took their respective roles from February 2017.


TCS has the largest digital practice amongst the Indian vendors and its decision to reskill 25-30% of its workforce should enable it to compete with larger MNC vendors going forward. Although there is no pricing power in the business due to commoditized service offerings, the adoption of outsourcing increases in a

downturn and TCS given its scale and accommodative pricing policies grows faster than the industry.




Negligible Consistent


Clear now Well aligned

Page 28

Info Edge

Demonstrated track record to drive earnings during weak macro between FY08-10 & FY12-14 by realignment of A&P spend

Vigorous investments in search algorithms to weather the competition

Maintaining leadership positioning in 99acres despite momentarily stiff competition from Housing.com and Commonfloor in 2014/15

`

Deep domain knowledge of the management team with consistent innovation in the product profile within its core business, Recruitment Services has bolstered to garner ~75% traffic market share

Proactive and measured capital allocation decisions in now profitable Zomato and Policy Bazaar

Why we like the

Management?




Info Edge commands 75% traffic market share in recruitment portal and 55% in real estate portal and has leadership position in food ordering and in growing insurance aggregation

Consistent improvement in operating margins of core business in last 10 years from 36% to 55%. YoY contraction in margins has been contained at under 2% over last 10 years Pre-tax OCF/EBITDA conversion at ~106% between FY08-17 indicates strong working capital management practices


The offline to online shift is a structural change in customer behaviour.

Over the last 10 years the pricing growth has contributed to 40% of the overall revenue growth. Its revenues has grown by 19% CAGR over last 10 years but the price per unique customer has increased at 85% CAGR.

Average RoEs of 17% between FY08-17 despite investments in Zomato, 99acres, Policy Bazaar and Jeevansathi

High consistency in growth parameters; 7 out of the past 10 years reported strong growth

Unique positioning

Cashflow conversion

CROCI

Growth drivers


Pricing Power


Growth Consistency

Mr. Sanjeev Bikhchandani, Founder Promoter & Executive Vice Chairman is currently leading the company.

Core management team has been with the company for more than 15 years.

Strong middle management team in place with extensive experience.


Revenue growth from its core recruitment business is the factor of GDP growth thus bringing in predictability in revenues and cash flows. Strong operating leverage in the business with any incremental growth over 15% in recruitment services is a complete flow through to the operating margins.

99acres, Zomato and Policy Bazaar are leaders in their respective segment with challengers lagging far behind





years


Founder promoter is 54 years old with a long likely tenor. No challenges in management

continuity

Founding management team owns 42%; No related/unrelated

businesses

Page 29

Cyient

The core change in Cyient came in after Krishna Bodanapu was elevated to the position of CEO and MD in April 2014 and with that came in management’s focus on receivables management, FCF generation and profitability improvement as a part of the senior leadership’s KRAs. This resulted in consistency and predictability in performance vis-à-vis peers.

Another area where Cyient clearly scores over its peers is the longevity of its middle management.

Cyient has managed to outpace the Engineering services industry over the past 3-4 years due to measures taken by the management in focusing on top 50 accounts, putting in place a list of 600 “must have” accounts that spend heavily on R&D and incentivizing sales force by offering 3x commission in converting such names.

Clear focus on the niche engineering services opportunity; exited a small IT services company in 2016.

Why we like the

Management?




Transportation practice of $250m; telecom and hitech practice of $150m and industrial product practice of $150m drive client referencibility

Growth in its top 10 and top 20 accounts since FY14 has been 16% and 15% respectively, and the company has converted ~4-5% of the 600 high focus target accounts.

Over the last 10 years, Cyient’s revenues has grown by 16% CAGR while the headcount has grown by 10% CAGR indicating strong improvement in employee productivity.

In last 5 years, EBITDA margins have declined by 2.5% vs. ~7% decline for peers, DSOs decreased by 12 days and pre-tax OCF/EBITDA improved from 72% in FY13 to 107% in FY17.

The average cash return on the capital invested during the last 5 years stood at 39%, and has moved from 34% in FY13 to 41% in FY17

Cyient’s stated dividend policy is to pay upto 40% of consolidated profits as dividend and it currently pays 30% of its profits as dividend which has risen from 5% 10 years back.

Its ROE has doubled from 9.5% in FY07 to 18.5% in FY17 due to improvement in asset turnover.

The addressable E,R&D offshore services opportunity for Cyient is US$ 22bn, out of which Cyient’s market share is 2.4%, reflecting its long runway available for growth.

Referencibility and Productivity

Improving employee productivity


Cash return metrics


Growing dividends


Growth runway

Mr. Krishna Bodanapu was elevated to the position of CEO and MD in April 2014. Mr. Ajay Aggarwal joined Cyient as the CFO in March 2011. Before joining Cyient, he was Chief Corporate Controller with Tata Chemicals. Mr. Anand Parameshwaran heads the Aerospace and Defense business unit, Cyient’s largest vertical.


In order to tap a higher proportion of clients R&D spending, Cyient has successfully broaden its offerings from services to solutions to manufacturing. With engineering services, Cyient was tapping only 10-15% of the client spending which was in upfront design. But with Solutions and Design Led Manufacturing, it is now able to tap incremental 40-50% of the client spending. Engineering services have higher entry and exit barriers given the longer sales cycles and the complex nature of services.




Negligible Consistent


Visibility for next 10 years Well aligned

Page 30

Cadila Healthcare (Cadilla)

Direct intervention by the promoters helping relatively (vs. peers) better navigation of an extremely challenging phase in the US. While peers go through a phase of erosion in their US sales and profitability, Cadila bucking the trend on the back of compliant facilities and strong approvals

After a weak approval phase, management prioritized addressing deficiencies in ANDA filings, which has led to the current phase of complex generic approvals. These approvals include highly complex products such as gLialda, gAsacol HD and gTamiflu suspension

Investments in areas such as transdermals, vaccines, biosimilars, NCEs, animal health and Wellness several years back were clearly out-of-the-box capital allocation decisions. While the upsides from some of these investments are yet to play out, these investments should add significant diversity and resilience to revenues in the next 5 years

Following multiple compliance issues in FY12-FY15, management focused on improving the quality culture at the company, leading to the current clean compliance status at all facilities

Why we like the

Management?




In a unique position to reap benefits from high R&D investments in complex generic segments such as injectables, derma, modified-release orals and transdermals

Improvement in margins – currently at 20-22% vs. ~17% in FY13/FY14. Margin volatility in the past due to inherent lumpy nature of high-value product opportunities in the US Pre-tax OCF/EBITDA conversion at ~80% between FY09-17 indicates strong working capital management practices


Strong growth from its investments such as transdermals, vaccines, biosimilars and NCEs should add significant diversity and resilience to Cadila’s business in the next 5 years

Optimal mix between branded (B2C) and unbranded (B2B) generics. While pricing power is limited in unbranded generics, reasonable pricing power in branded generic markets such as India (including Zydus Wellness business) and other emerging markets

Average RoEs of 31% between FY08-17; Average RoCE at ~18%/~21% in 5/10 year timeframe

Volatility in growth in the past partly due to compliance issues and weak pipeline execution. Both issues now behind and more consistency in growth expected going forward

Unique positioning

Cashflow conversion

CROCI

Growth levers


Pricing Power


Growth Consistency

Mr. Pankaj Patel is the Chairman. Mr. Sharvil Patel, the MD, joined the company a decade back. He had spearheaded several key projects before his recent elevation

The promoter leadership is supported by an experienced senior and middle management team


Optimal mix between branded and unbranded generic markets. In unbranded generics (mainly US), Cadila has attempted to reduce volatility in performance through investments in complex generic segments such as injectables, derma, modified-release orals and transdermals. The gross margin profile (~65%) over the years validates the margin stability provided by optimal geographic and business mix

Invested heavily in capacities in recent years (annual capex of ~Rs. 10bn including acquisitions) to augment its positioning. Cadila’s strong FCF profile has helped maintain a strong balance sheet (FY18E net debt/equity of 0.4), despite the heavy investment phase





years


Sharvil Patel, MD who is aged 38 years is in for long likely tenor. His

father Pankaj Patel mentors the company in his role as chairman

Promoter ownership at 74%; No related businesses.

Page 31

Torrent Pharmaceuticals (Torrent)

Transformational M&A and capex decisions. Acquisitions of Heumann in 2005, Elder in 2014, Unichem in 2017 and the huge capacity addition at Dahej are examples. Strong execution on integration and deleveraging of balance sheet have always followed large transformational acquisitions.

Rs. 36bn acquisition of Unichem’s domestic business - given Torrent’s limitations in R&D and challenges in the US generic market, we believe Torrent’s decision to allocate more resources to its domestic business is a prudent one.

Over the years, Torrent management has offset the company’s limitations in R&D through 1) strong execution on product opportunities 2) transformational M&As 3) disciplined selection of therapies and markets

Willingness to say NO to high cost M&As. Torrent was actively pursuing M&A opportunities in the US in FY14-FY17, to compensate for its weak pipeline. However, unlike its peers, Torrent walked away from many transactions citing unreasonable valuations, now totally vindicated.

Why we like the

Management?




Higher exposure to branded generic markets such as India and Brazil makes it more diversified and less volatile vs. other Indian pharma peers

Consistent improvement in EBITDA margin – ~500bps in the past 5 years (excluding FY16 at ~40% EBITDA margin, which benefited from limited competition opportunity, gAbilify, in the US) Pre-tax OCF/EBITDA conversion at ~91% between FY09-17 indicates strong working capital management practices


M&A led growth in domestic market and scaling up of US business (is currently sub-scale compared to peers) by stepping up R&D spending

Optimal mix between branded (B2C) and unbranded (B2B) generics. While pricing power is limited in unbranded generics (US and Germany), reasonable pricing power in branded generic markets such as India and Brazil

Average RoEs of ~40% between FY08-17; Average RoCE at ~27%/~27% both in 5/10 year timeframe

High consistency in revenue and earnings growth rates; reported strong revenue growth (>15%) in 8 out of the past 10 years

Unique positioning

Cashflow conversion

CROCI

Growth levers


Pricing Power


Growth Consistency

Promoters - Mr. Sudhir Mehta and Mr. Samir Mehta provide strategic directions, day-to-day operations are managed by its senior leadership team comprising of Mr. Ashok Modi (ED & CFO), Mr. Sanjay Gupta (ED – International Business) and Mr. Dhruv Gulati (ED – India & RoW)

Experienced middle management team is in place


Higher exposure to branded generic markets such as India and Brazil makes it more diversified and less volatile vs. other Indian pharma peers. Traditionally, the company has stayed away from low-margin, high working capital segments and markets

Strong franchises and market positions in key chronic therapy segments such as cardiac and CNS in India





years


Sudhir Mehta aged 63 & Samir Mehta aged 56 are currently

holding chairmanship position. Induction of key senior leadership

positions in recent years

High promoter holding at ~71% Enough skin for the promoter group. No related businesses while the power business is

managed separately

Page 32

Appendix – List of companies which satisfy the parameters

Consistency in revenue growth Earnings predictability Volatility in profit margins Operating Cash flow generation Quality of capex

HealthCare Global Enterprises Ltd Tata Consultancy Services Ltd Astral Poly Technik Ltd Fortis Healthcare Ltd Eicher Motors Ltd

TeamLease Services Ltd Wipro Ltd Asian Paints Ltd Just Dial Ltd Just Dial Ltd

Info Edge (India) Ltd Reliance Industries Ltd V Guard Coal India Ltd Britannia Industries Ltd

Alkem Laboratories Ltd Infosys Ltd ITC Ltd Mahindra & Mahindra Ltd Sadbhav Engineering Ltd

Cyient Limited ITC Ltd Wipro Ltd Ashok Leyland Ltd Eclerx Services Ltd

UPLL IN equity Britannia Industries Ltd Havells India Ltd Maruti Suzuki India Ltd Astral Poly Technik Ltd

Persistent Systems Ltd Marico Ltd Tata Consultancy Services Ltd Gujarat Pipavav Port Ltd Info Edge (India) Ltd

Page Industries Ltd Bajaj Auto Ltd Hindustan Unilever Ltd DFM Foods Ltd Emami Ltd

Minda Industries Page Industries Ltd Page Industries Ltd ACC Wonderla Holidays Ltd

Sun TV Sun TV Network Ltd Exide Industries Ltd JK Lakshmi Cement Ltd Shree Cement Ltd

Page 33

Appendix – List of companies which satisfy the parameters

Free cashflow generation consistency Cash return on Cash invested (CROCI) Quality of retained earnings Future growth expectations Sustainable Growth Rate (SGR)

Bajaj Corp Ltd Eicher Motors Ltd Hindustan Unilever Ltd Wonderla Holidays Ltd Hindustan Unilever Ltd

Bajaj Auto Ltd Hindustan Unilever Ltd Bajaj Corp Ltd Ashok Leyland Ltd Dish TV

Zydus Wellness Ltd Bajaj Auto Ltd Page Industries Ltd Granules Titan Company Limited

Tata Consultancy Services Ltd Emami Ltd DFM Foods Ltd Astral Poly Technik Ltd Hero Motocorp Ltd

Info Edge (India) Ltd Zydus Wellness Ltd TVS Motor Company Ltd Maruti Suzuki India Ltd Bajaj Corp Ltd

Eclerx Services Ltd Whirlpool V.I.P.Industries Ltd Page Industries Ltd Page Industries Ltd

Hindustan Unilever Ltd Dish TV Infosys Ltd Cadila Healthcare Shree Cement Ltd

HCL Technologies Ltd Maruti Suzuki India Ltd Eicher Motors Ltd Cera Sanitaryware Ltd Emami Ltd

V.I.P.Industries Ltd Eclerx Services Ltd Britannia Industries Ltd Eicher Motors Ltd Tata Consultancy Services Ltd

Wipro Ltd Shree Cement Ltd V Guard Titan Company Limited Eclerx Services Ltd

Page 34

Valuation Summary

Company Name CMP (Rs.) Mkt Cap (Rs. bn)

Net Sales (Rs. bn) EBITDA (Rs. bn) Net Profit (Rs. bn)

FY17 FY18E FY19E FY20E FY17 FY18E FY19E FY20E FY17 FY18E FY19E FY20E

Agro Chemicals

PI Industries Ltd 959 132 22.8 25.0 28.8 33.5 5.5 5.9 6.8 8.1 4.6 4.5 5.1 6.1

Auto

Maruti Suzuki India Ltd 9,118 2,754 680.3 793.2 945.2 1,040.9 102.5 123.7 154.4 174.8 72.3 85.9 108.6 124.4

Sundram Fasteners Ltd 508 107 29.3 32.5 37.2 42.6 5.5 6.1 7.2 8.3 3.2 3.8 4.5 5.3

Capital Goods & Engineering

AIA Engineering Ltd 1,502 142 22.5 24.5 28.0 31.5 6.3 5.7 7.3 8.9 4.6 4.1 5.1 6.1

V-Guard Industries Ltd 236 100 21.5 24.0 27.1 30.9 2.2 2.4 2.8 3.2 1.5 1.8 2.1 2.5

Cement / Materials

Shree Cement Ltd 17,179 598 84.3 96.3 119.5 144.5 23.7 23.7 32.2 41.2 13.4 10.9 16.4 22.7

The Ramco Cements Ltd 699 166 39.4 42.0 46.8 54.1 11.6 11.3 12.9 15.1 6.5 6.2 7.3 9.4

IT Services

Cyient Ltd 591 67 36.0 38.8 43.5 47.8 4.8 5.4 6.4 7.3 3.7 4.1 4.8 5.5

Info Edge (India) Ltd 1,225 149 8.0 9.3 10.8 12.5 2.3 2.8 3.3 3.8 2.1 2.6 3.0 3.5

Tata Consultancy Services Ltd 2,616 5,008 1,179.7 1,219.8 1,309.4 1,402.1 323.1 320.0 338.3 361.8 262.9 252.7 264.8 284.9

Building Material

Astral Polytechnik Ltd 826 99 18.9 21.3 26.5 32.1 2.6 3.0 3.9 4.9 1.5 1.7 2.4 3.2

Consumptions

Asian Paint Ltd 1,133 1,086 152.9 172.2 198.7 228.9 30.2 32.0 37.0 43.0 19.4 20.6 23.5 27.1

Berger Paint India Ltd 253 246 45.5 52.1 60.4 69.0 7.2 8.0 9.6 11.0 4.4 4.7 5.6 6.4

Emami Ltd 1,266 287 25.3 26.7 31.2 36.5 7.6 8.0 9.5 11.5 5.5 5.8 7.3 8.3

Hindustan Unilever Ltd 1,320 2,858 331.6 356.2 395.4 438.2 63.4 74.9 84.8 95.1 43.1 51.7 58.5 65.9

La Opala RG Ltd 663 37 2.6 2.8 3.3 3.9 0.9 1.1 1.3 1.5 0.5 0.7 0.9 1.1

Page Industries Ltd 22,555 252 21.3 25.6 31.1 38.1 4.1 5.1 6.5 8.2 2.7 3.3 4.3 5.4

Relaxo Footwears Ltd 644 78 17.4 20.3 23.5 26.9 2.4 3.0 3.7 4.3 1.2 1.6 2.0 2.4

Pharma

Cadila Healthcare 422 432 94.3 121.0 137.1 153.3 19.0 27.3 33.2 38.1 14.7 17.3 22.3 25.8

Torrent Pharmaceuticals 1,336 226 58.6 61.0 78.5 88.9 13.8 13.9 18.8 22.5 9.3 7.7 8.8 11.6

Infra & Power

KNR Constructions Ltd 281 40 16.8 21.1 23.8 27.5 2.6 4.3 4.3 5.0 1.0 1.8 1.5 1.7

Page 35

Valuation Summary

Company Name P/E EV/EBITDA (x) ROE (%) Target

Price Rating


Agro Chemicals

PI Industries Ltd 28.9 29.7 25.9 21.6 24.1 22.6 19.3 16.3 33.1 24.8 23.3 23.2 925 Buy

Auto

Maruti Suzuki India Ltd 38.1 32.1 25.4 22.1 24.2 19.8 15.5 13.4 21.9 22.0 23.9 23.5 9,350 Buy

Sundram Fasteners Ltd 39.1 33.0 28.1 23.5 20.1 17.8 15.2 13.1 27.5 27.1 27.9 27.4 585 Buy

Capital Goods & Engineering

AIA Engineering Ltd 31.0 34.5 27.5 23.3 21.0 23.2 18.0 14.7 18.1 14.4 16.4 17.3 1,666 Buy

V-Guard Industries Ltd 66.0 60.4 47.9 40.8 45.4 39.9 34.4 29.5 27.4 24.8 24.9 24.2 164 Sell

Cement / Materials

Shree Cement Ltd 44.7 54.7 36.5 26.4 23.5 23.2 17.3 13.2 18.4 13.6 18.2 21.7 19,500 Buy

The Ramco Cements Ltd 25.6 26.4 22.4 17.6 15.5 15.7 13.6 11.2 19.0 15.9 16.6 18.2 780 Buy

IT Services

Cyient Ltd 18.0 16.1 13.8 12.0 10.2 8.9 7.2 6.1 18.4 19.0 20.5 21.5 650 Buy

Info Edge (India) Ltd 71.0 56.8 49.2 41.8 55.8 44.6 37.0 30.9 11.1 12.5 13.0 13.9 1,300 Buy

Tata Consultancy Services Ltd 19.6 19.9 18.9 17.6 13.7 14.1 13.0 11.8 32.6 30.0 30.7 29.0 2,300 Reduce

Building Material

Astral Polytechnik Ltd 66.7 58.2 40.4 31.2 37.0 31.8 24.3 19.4 19.1 18.3 21.8 22.9 820 Add

Consumptions

Asian Paint Ltd 56.0 52.6 46.3 40.1 38.1 36.2 31.3 26.7 27.5 25.6 25.8 26.5 1,111 Reduce

Berger Paint India Ltd 51.9 52.3 44.2 38.3 34.4 30.6 25.5 22.1 25.6 23.2 24.4 24.7 232 Reduce

Emami Ltd 52.2 49.4 39.5 34.5 36.5 34.4 28.4 23.2 32.7 31.7 35.5 35.8 1,261 Add

Hindustan Unilever Ltd 63.8 55.3 48.8 43.4 40.9 38.9 35.1 30.3 64.7 74.7 78.3 77.7 1,339 Add

La Opala RG Ltd 67.0 51 42.2 35 28.9 24.8 20.8 17.4 21.7 23.9 24.0 23.9 563 Add

Page Industries Ltd 94.5 75.4 58.6 46.4 61.7 49.9 39.1 31.1 44.5 44.6 45.8 46.1 16,040 Reduce

Relaxo Footwears Ltd 62.9 48 37.8 32.3 40.6 32.8 26.4 22.6 22.7 23.7 24.1 22.7 528 Reduce

Pharma

Cadila Healthcare 29.4 24.9 19.4 16.7 25.2 17.2 13.9 11.8 23.2 22.5 23.8 22.9 505 Buy

Torrent Pharmaceuticals 24.2 29.3 25.6 19.4 18.0 19.7 14.3 11.6 23.8 16.8 17.2 19.9 1,374 Add

Infra & Power

KNR Constructions Ltd 40.0 22.1 26.8 23.7 17.4 10.8 10.7 9.2 12.1 18.2 13.1 13.0 235 Reduce

Page 36

Valuation Summary - Financials

Company Name CMP Mkt Cap (Rs. bn)

Net Interest Income (Rs. Bn) Operating Profits (Rs. Bn) PAT (Rs. Bn)


Financials

City Union Bank 182 120 12.0 14.3 16.2 18.7 9.9 12.3 13.6 15.6 5.0 6.1 7.1 9.1

HDFC Bank 1,845 4,775 331.4 407.7 508.2 613.8 257.3 325.2 410.2 499.6 145.5 176.7 232.2 286.3

Kotak Mahindra Bank 1,006 1,916 81.3 94.5 112.9 135.9 59.8 71.2 87.5 107.3 34.1 41.0 51.2 63.2

Sundaram Finance 1,888 210 11.9 13.7 15.7 17.8 7.8 9.3 10.5 11.9 5.0 5.5 6.3 7.2

Company Name ABV/share Rs. P/ABV RoE (%)

Target Price

Rating FY17 FY18E FY19E FY20E FY18E FY19E FY20E FY17 FY18E FY19E FY20E

Financials

City Union Bank 49.9 57.8 67.8 80.1 2.9 2.4 2.1 15.2 15.9 15.8 17.4 201 Buy

HDFC Bank 344.3 386.8 460.2 551.3 4.8 4.0 3.4 17.9 18.5 20.9 21.6 2,115 Buy

Kotak Mahindra Bank 143.8 188.7 213.8 245.1 4.0 3.4 2.9 13.2 12.6 12.9 14.0 1,233 Buy

Sundaram Finance 332.0 349.9 390.6 438.6 5.3 4.3 4.3 14.0 14.3 15.0 15.3 1,841 Buy

Page 37

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Page 38

Spark Capital and/or its affiliates and/or employees may have interests/positions, financial or otherwise in the securities mentioned in this report. To enhance transparency, Spark Capital has incorporated a disclosure of interest statement in this document. This should however not be treated as endorsement of views expressed in this report:

Analyst Certification of Independence

The views expressed in this research report accurately reflect the analyst’s personal views about any and all of the subject securities or issuers; and no part of the research analyst’s compensations was, is or will be, directly or indirectly, related to the specific recommendation or views expressed in the report.

Additional Disclaimer for US Institutional Investors

This investment research distributed in the United States by Spark Capital Advisors (India) Private Limited and in certain instances by Enclave Capital LLC ('Enclave'), a U.S registered broker dealer, only to major U.S. institutional investors, as defined under Rule 15a-6 promulgated under the US Securities Exchange Act of 1934, as amended, and as interpreted by the staff of the US Securities and Exchange Commission. This investment research is not intended for use by any person or entity that is not a major U.S institutional investor. If you have received a copy of this research and are not a major U.S institutional investor, you are instructed not to read, rely on or reproduce the contents hereof, and to destroy this research or return it to Spark Capital Advisors (India) Private Limited or to Enclave. Analyst(s) preparing this report are employees of Spark Capital Advisors (India) Private Limited who are resident outside the United States and are not associated persons or employees of any US registered broker-dealer. Therefore the analyst(s) are not be subject to Rule 2711 of the Financial Industry Regulatory Authority (FINRA) or to Regulation AC adopted by the U.S Securities and Exchange Commission (SEC) which among other things, restrict communications with a subject company, public appearances and personal trading in securities by a research analyst. Any major U.S Institutional investor wishing to effect transactions in any securities referred to herein or options thereon should do so by contacting a representative of Enclave Capital LLC. Enclave is a broker-dealer registered with the SEC and a member of FINRA and the Securities Investor Protection Corporation. Its address is 19 West 44th Street, Suite 1700, New York, NY 10036 and its telephone number is 646-454-8600. Spark Capital Advisors (India) Private Limited is not affiliated with Enclave Capital LLC or any other U.S registered broker-dealer.

Disclosure of interest statement CIFC; CUBK; HDFC; INFO; BHEL; OPI;

BPCL; HPCL; PLNG; ICEM; SUNP; Z; DITV; ITC

ICICIBC; SUF; WPRO; TPW; IGM

HDFCB; TCS; YES

GUJGA INDA; SII Others

Analyst financial interest in the company No Yes Yes No No No

Group/directors ownership of the subject company covered Yes No Yes No No No

Investment banking relationship with the company covered No No No No Yes No

Spark Capital’s ownership/any other financial interest in the company covered No No No Yes No No

Associates of Spark Capital’s ownership more than 1% in the company covered No No No No No No

Any other material conflict of interest at the time of publishing the research report No No No No No

Receipt of compensation by Spark Capital or its Associate Companies from the subject company covered for in the last twelve months: Managing/co-managing public offering of securities Investment banking/merchant banking/brokerage services products or services other than those above in connection with research report

No No No No No

Whether Research Analyst has served as an officer, director or employee of the subject company covered No No No No No

Whether the Research Analyst or Research Entity has been engaged in market making activity of the Subject Company;

No No No No No

Spark Disclaimer (2/2)

SPARK CAPITAL ADVISORS | Board: +91.44. 4344 0000 | www.sparkcapital.in Spark Capital Advisors (India) Pvt. Ltd. is a SEBI registered Research Analyst bearing SEBI Registration No. INH200001459

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