Morning Insight - 00005 08-07-2016 - Kotak Securities · Lupin has secured a partial relief as the US Food and Drug Administration has closed the July 2015 inspection of its Goa plant

JULY 8, 2016

Economy News Eight states will issue tenders worth Rs 50 Bn for projects in a renewable

energy transmission network. Six of these states have issued notices fortenders, inviting companies to bid for parts of this green corridor. (BS)

In a relief to export-focused sugar refineries, the government has clarifiedthat export of imported raw sugar, after refining, will not attract anyduty. This paves the way for movement of various shipments that werestuck at ports. (BS)

Riding on the recovery of global iron ore prices and uptrend inconsumption of ore in the domestic market, Odisha is aiming at an outputof 120 million tonnes (mt) in FY17. The projected output, if achieved,would mean a spurt of 50 per cent over 80.86 mt the state produced inFY16. (BS)

India is considering a proposal to increase the limit on foreign directinvestment in local newspapers and magazines. The finance ministryrecommended raising the cap to 49% from 26%, bringing it on par withthat on news television channels. (Mint)

Corporate News Lupin has secured a partial relief as the US Food and Drug Administration

has closed the July 2015 inspection of its Goa plant. The Goa plantaccounts for 50 per cent of Lupin's US sales and adverse observationsfrom FDA resulted in delayed product approvals for the company. (BS)

Reliance Jio Infocomm, a subsidiary of Reliance Industries Limited hasraised Rs 20 Bn through issue of debentures that will be used to part-finance building the infrastructure for its proposed digital telecomservices. (BL)

DLF has shortlisted six potential buyers for 40% stake of the promoters inits rental arm DLF Cyber City Developers Limited that is expected to sellfor about Rs 130 Bn. The shortlisted funds have put in offers of Rs 120-130Bn for the stake. They will now do their final due diligence over the nextone month before concluding negotiations take place. (ET)

Ballarpur Industries plans to sell its Malaysian arm, Sabah ForestIndustries (SFI), to Pandawa Sakti (Sabah) for $500 mn. BILT hadannounced the transaction in September last year to halve its Rs 63 bndebt. As the buyer failed to close the deal, Ballarpur invoked performanceguarantees of $50 million. In 2007, BILT had acquired Malaysia's largestpaper company for $261 million. (BS)

BGR Energy Systems has received a Letter of Intent from the AndhraPradesh Power Generation Corporation (APGENCO) for execution of aproject valued at Rs 23 Bn. The project period is 36 months.(moneycontrol)

Havells India Ltd is targeting to corner 15 percent share of the waterheater segment in India with the launch of advanced range of waterheaters. The domestic market size of the water heater segment isestimated to be Rs 15Bn, which is currently growing at 12-15 percentannually. (ET)

Private equity firms Multiples, ChrisCapital, Creador Capital, Baring Asiaand Partners Group are in race to buy a 10% stake in Hero FinCorp, thevehicle finance arm of Hero Moto-Corp. Hero is expecting to fetcharound $120 million from the stake sale and the deal would value HeroFinCorp (HFCL) at about $1.2 billion. (ET)

Tata Steel is likely to put on hold its plan to sell its steel business in UKafter the exit of Britain from European Union raised concerns of theviability of steel business. (ET)

Equity% Chg

7 Jul 16 1 Day 1 Mth 3 Mths

Indian IndicesSENSEX Index 27,201 0.1 0.7 10.2NIFTY Index 8,338 0.0 0.8 10.4BANKEX Index 20,696 0.2 0.7 17.0SPBSITIP Index 10,994 (1.6) (5.0) (0.6)BSETCG INDEX 15,309 (0.8) 3.0 19.7BSEOIL INDEX 10,055 (0.4) 7.5 10.5CNXMcap Index 14,095 (0.2) 5.0 10.2SPBSSIP Index 11,997 0.0 5.4 12.5

World IndicesDow Jones 17,896 (0.1) (0.6) 1.8Nasdaq 4,877 0.4 (2.0) 0.5FTSE 6,534 1.1 3.7 5.3NIKKEI 15,276 (0.7) (9.6) (3.8)HANGSENG 20,707 1.0 (3.6) 0.8

Value traded (Rs cr)7 Jul 16 % Chg - Day

Cash BSE 2,613 (9.0)Cash NSE 18,572 7.9Derivatives 259,456 34.2

Net inflows (Rs cr)5 Jul 16 % Chg MTD YTD

FII 295 98 181 19,725Mutual Fund (147) (155) 151 9,497

FII open interest (Rs cr)5 Jul 16 % Chg

FII Index Futures 14,864 (0.1)FII Index Options 50,230 1.5FII Stock Futures 49,076 0.5FII Stock Options 3,276 29.6

Advances / Declines (BSE)7 Jul 16 A B T Total % total

Advances 134 670 43 847 54Declines 160 508 23 691 44Unchanged 6 25 10 41 3

Commodity % Chg

7 Jul 16 1 Day 1 Mth 3 Mths

Crude (US$/BBL) 45.6 1.1 (10.9) 14.9Gold (US$/OZ) 1,361.1 (0.3) 7.6 9.3Silver (US$/OZ) 19.7 (1.8) 16.0 28.4

Debt / forex market7 Jul 16 1 Day 1 Mth 3 Mths

10 yr G-Sec yield % 7.4 7.4 7.5 7.4Re/US$ 67.4 67.5 66.8 66.5

Sensex

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

22700

24200

25700

27200

28700

Jul-15 Oct-15 Jan-16 Apr-16 Jul-16

MORNING INSIGHT July 8, 2016

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

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

LUPIN LTD

PRICE: RS.1657 RECOMMENDATION: ACCUMULATETARGET PRICE: RS.1830 FY18E P/E: 19.9X

Lupin received an EIR for Goa plant yesterday, this EIR (EstablishmentInspection Report) was related to Jul-2015 inspection and not the Mar-2016 inspection. Lupin had received 9 observations in each inspection, andnone were repeated observations. Our understanding is, though Lupin hasreceived an EIR for Goa plant, it would not result in approvals from thisplant yet. Goa plant is critical for Lupin as it accounts for ~60% current USrevenues as well as ~20% of pending ANDAs. On the positive side, we donot foresee any risk of the pending Form 483s into a warning letter postthis EIR. We revise our US revenues (by 1-4% higher) as we factor earlierthan expected resolution of Goa plant.

We revise our EPS higher by ~5% at Rs 83.2 (Rs 78.9 earlier). We arevaluing the company at 22x (earlier 20x, on lower risk) and retain ourpositive stance. Maintain Accumulate with a revised target price of Rs1830 (earlier Rs 1580).

Lupin to maintain its trajectoryOver the past five years, Lupin's revenues have grown at 20% CAGR (fromFY11-16) mainly led by strong US revenues and steady domestic formulationssegment growth. Few acquisitions in the emerging markets also aided growth.Going ahead, we expect Lupin to maintain the trajectory (even on a high base)and post 20.6% CAGR in revenues for the next two years.

US revenues would lead the growth, partly led by Gavis acquisition. We expectGavis to account for ~20% Lupin's US revenues by FY17 at ~US$200mn rev-enues. Lupin also plans to launch ~25-30 ANDAs in the US in FY17E of which~50% will be from Gavis portfolio, the benefit of which will be visible in FY18E.In FY16, Lupin received a total 39 USFDA approvals in FY16 of which 14 werefrom Gavis and rest from Lupin filings.

On the domestic formulations segment, we expect the CAGR to slightly taper offas we built in impact of price cuts as well as fixed dose combination bans. Weare also of the view that the drug regulator will remain active for the comingyears and the overall CAGR for the IPM (Indian Pharma market) is likely to belower comparatively.

Summary table

(Rs mn) FY16 FY17E FY18E

Sales 137,016 171,279 199,967Growth (%) 6.3 29.0 16.7EBITDA 37,535 52,234 59,958EBITDA margin (%) 26.4 29.5 29.1PBT 34,331 44,625 51,881Net profit 22,795 32,130 37,613EPS(Rs) 50.4 71.0 83.2Growth (%) (6.7) 41.0 17.1CEPS(Rs) 60.9 90.4 104.9BVPS(Rs) 243.8 305.4 378.5DPS (Rs) 8.0 8.0 8.5ROE (%) 22.9 25.9 24.3ROCE (%) 18.5 24.0 24.2Net debt 63,314 32,599 8,082NW capital (Days) 147.1 102.9 93.0P/E (x) 32.9 23.3 19.9P/BV (x) 6.8 5.4 4.4EV/Sales (x) 5.9 4.5 3.7EV/EBITDA (x) 21.6 14.9 12.5

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

COMPANY UPDATE

Meeta Shetty, [email protected]

+91 22 6218 4425

Revenue breakup

(Rs mn) FY12 FY13 FY14 FY15 FY16 FY17E FY18E CAGR CAGR(FY11-16E) (FY16-18E)

Formulations 60,163 84,447 99,726 114,910 125,375 157,880 185,640 21.5% 21.7%

- Domestic Formulations 19,374 23,840 24,795 29,679 33,916 38,664 44,464 16.6% 14.5%

- US formulations 24,230 36,830 48,871 56,576 59,407 81,027 98,141 24.2% 28.5%

- Japan formulations 8,577 13,068 12,955 13,239 13,646 15,434 17,386 17.0% 12.9%

- Europe formulations 1,975 2,356 2,934 3,279 4,278 5,134 5,647 18.8% 14.9%

- Other EM formulations 6,007 8,353 10,171 12,137 14,128 17,621 20,003 31.8% 19.0%

API 8,885 9,498 11,140 11,941 12,074 13,399 14,327 7.0% 8.9%

Net Revenues 68,797 93,694 110,866 126,851 137,449 171,279 199,967 19.8% 20.6%

Source: Company, Kotak Securities - Private Client Research



Key US launches over the next 2 years

Brand US Sales - US$ mn Tentative launch date

Nuvigil 300 FY17

Prezista 1200 FY18

Seroquel XR 1200 FY17

Truvada 200 FY18

Renvela 400 FY18

Renagel 400 FY18

Trizivir 138 FY18

Viread 400 FY18

Welchol suspension 65 FY18

Welchol Tabs 350 FY18

Gleevec 2000 2018

Prevacid ODT 450 2018

Source: Company

Goa plant resolution - a key trigger

Lupin's Goa plant was inspected in Mar-2016 and the plant had received 9 Form483 observations. Goa is the most important facility at Lupin catering to the USmarket. Some of the key products including gFortamet and gGlumetza aremanufactured at this site. As per our estimates ~60% of US revenues are fromGoa plant. Plus Goa alone has ~30 ANDAs pending for approval of the total 163.

Goa plant - Mar 2016 inspection had nine observations. None of the observationwas related to data integrity and hence the conversion to a warning letter waslow. The inspection was triggered by a pending ANDA approval. The inspectionfollows the inspection carried out by the USFDA in July 2015.

Below is the list of observations

1. Lab controls do not include establishment of scientifically sound and appro-priate test procedures to ensure that the products conform to standards ofidentify, strength, quality and purity.

2. Written procedures are not followed with respect to cleaning and mainte-nance of equipment.

3. Procedures for the cleaning and maintenance of the equipment are deficient.

4. Control procedures are not established which validate the performance ofmanufacturing process that is responsible for causing variability in the char-acteristic of in process material and drug products.

5. Procedures not followed to prevent objectionable microorganisms in drugsproducts not required to be sterile.

6. No written procedures for production and process controls designed to assurethat drug products have identity, strength, quality and purity.

7. Building used in the manufacture, processing, packing or holding of drugproducts are not maintained in clean and sanitary condition.

8. Building used in the holding of a drug product are not maintained in a goodstate of repair.

9. Disposal of trash and refuse from the building is not done in a safe and sani-tary manner.

We maintain ACCUMULATErating on Lupin Ltd with a

revised price target ofRs.1830



USFDA approved plants for Lupin

Location Details Last inspected Pending ContributionForm 483s? to US revenues

Aurangabad, MH Formulations (solid orals) Jan-16 No <5%

Indore APIs, Formulations (solid orals, OC's, Opthal) FY15 No >10%

Mandideep, MP APIs, Formulations (sterile as well as non-sterile) Feb-16 No <20%

Mihan, Nagpur Formulations (solid orals) FY15 No New plant

Verna, Goa Formulations (solid orals and Suspensions) Mar-16 Yes >60%

Tarapur, MH APIs NA NA NA

Source: Kotak Securities - Private Client Research, FDA Zilla, Company



RESULTS PREVIEW

Dipen [email protected]+91 22 6218 5409

1QFY17 RESULTS PREVIEW

Revenues expected to grow by 5.1% YoY during the quarterWe expect stocks under our coverage (ex-banking / NBFCs) to report revenuegrowth of 5.1% on a YoY basis. Among sectors, IT, Capital Goods, Auto, Pharmaand FMCG are expected to predominantly propel this growth. On the otherhand, commodity sectors like Metals and Oil & Gas will likely pull back the over-all revenues growth on the back of a steep fall in commodity prices / slack orderadditions. Cement companies have seen price increases in the latter part of thequarter and should report decent growth of about 10% YoY.

Margins are expected to improve for our coverage universe (ex-banking / NBFCs)EBIDTA margins for the sectors under our coverage are expected to be higher ona YoY basis. We expect lower raw material prices (fall in commodity prices) andbetter pricing power to help margins in various sectors. Companies in Cement,FMCG, Pharma and Power sectors are expected to report improved marginsYoY, whereas margins in Automobiles and IT sectors are expected to deteriorateYoY.


Q1FY17 estimates - ex-Banking & NBFCs

Sector Revenues (Rs mn) EBIDTA (%) EBIDTA (Rs mns) PAT (Rs mns)

Q1FY17 Q1FY16 YoY (%) Q1FY17 Q1FY16 Q1FY17 Q1FY16 YoY (%) Q1FY17 Q1FY16 YoY (%)

Agriculture (2) 10,314 9,188 12.3 17.3 17.6 1,787 1,618 10.4 1,116 901 23.9

Auto (11) 1,260,299 1,193,069 5.6 13.4 14.4 168,631 172,208 (2.1) 70,140 77,256 (9.2)

Capital Goods (22) 475,003 425,050 11.5 8.2 7.1 39,119 36,533 7.1 19,469 17,848 9.1

Cement (5) 222,577 202,978 9.7 19.6 16.0 43,592 32,446 34.4 18,734 13,510 38.7

Construction (7) 93,440 77,396 20.7 20.4 20.8 19,098 16,078 18.8 3,025 3,123 (3.1)

Education (1) 922 587 57.1 14.0 16.0 129 94 37.5 71 49 44.9

FMCG (7) 278,395 254,907 9.2 26.2 24.8 72,985 63,112 15.6 49,583 40,773 21.6

IT (12) 773,031 680,837 13.5 23.5 24.4 181,823 165,937 9.6 145,120 134,822 7.6

Logistics/Shipping (9) 82,751 78,255 5.7 32.9 34.1 27,205 26,687 1.9 13,527 13,898 (2.7)

Media (6) 42,039 36,896 13.9 27.4 25.2 11,527 9,287 24.1 6,847 5,613 22.0

Metals(5) 188,095 186,460 0.9 24.9 24.8 46,797 46,180 1.3 27,639 29,971 (7.8)

Oil and Gas (9) 287,207 372,758 (23.0) 15.2 15.5 43,597 57,892 (24.7) 20,314 37,218 (45.4)

Paints (3) 64,256 57,451 11.8 16.8 17.1 10,813 9,836 9.9 6,665 6,277 6.2

Pharma (8) 249,291 221,934 12.3 28.6 27.8 71,393 61,659 15.8 48,070 31,824 51.0

Power (2) 282,075 261,233 8.0 24.5 21.5 69,019 56,189 22.8 22,614 23,767 (4.9)

Real Est& associated (5) 32,273 29,718 8.6 21.6 21.9 6,967 6,498 7.2 2,959 2,789 6.1

Total 4,296,968 4,088,717 5.1 19.0 18.6 814,482 762,254 6.9 455,893 439,639 3.7

Source: Companies, Kotak Securities - Private Client Research

Focus areasDomestically, we will focus on the order bookings of capital goods and construc-tion companies. Focus will be higher on companies which stand to benefit fromthe Government spending (eg. Road companies, defence, railways, etc). Govern-ment spending is up significantly on a YoY basis to Rs.900bn in April - May 2016and that should have positive impact on the relevant sectors / companies. Whilewe have started seeing some movement in private sector capex, it is still largelysubdued. This is expected to continue impacting the capital goods companies in1Q and likely in the near future also. Management commentary on momentumof decision-making and order placements will be important for us.

We will also closely track early indications from IT companies, about any impactfrom Brexit of client spending / decision-making.



ConclusionMarkets have reported decent gains post the Brexit event. Foreign flows havealso remained strong in 1Q. With results expected to be largely lack-lustre, glo-bal events, monsoons and the likely passage of GST Bill in the Monsoon sessionwill continue impacting markets. We opine that, if the markets have to moveup, it will need to have more confidence in the medium-to-long term growthrates of Corporate India.

Disappointment in earnings or on future outlook may result in correspondingspecific corrections.




AGRI-PRODUCTS

AGROCHEMICALS

India's crop protection industry has been growing 12% CAGR andexpected to reach USD 7.5 bn by FY19E. In the last two years, monsoonwas weak on account of El Nino which resulted in southwest monsoonbeing at 12% and 14% below normal in 2014 and 2015, respectively. Thishad impacted the performance of the companies in sector. IMD expectsrainfall in June to September 2016 season to be more than normal at 106%of the Long Period Average (LPA) with monsoon gathering pace during thesecond half of the season. We believe that the monsoon picking up pace inJune end and IMD keep its monsoon forecast at 106% of LPA will bepositive for agrochemicals sector.

Insecticides India (Buy, Target Rs 554) - Insecticides India is expected toreport flattish Q1FY17 with rainfall picking up pace in June end. As a result,there was delayed sowing which would result into demand pick up inQ2FY17. We expect revenue and PAT of the company to grow at 4.9% and7.8% respectively. We expect the interest cost to decline by 33.9% on lowerdebt. The company has got registration for Bispyribac Sodium 10% SC andwould compete with PI Industries' flagship product 'Nominee Gold' bylaunching its generic version. It has launched the generic version under brandname Green Label. IIL is marketing the product aggressively and is targetingRs 1 bn revenue with higher margins from the same.

AGRI-PIPES

The government has emphasized on increasing land under irrigation and isfocused on improving rural water and sanitation infrastructure, which ispositive for PVC pipes' demand. The government has given highimportance to micro irrigation, watershed development and 'PradhanMantri Krishi Sinchai Yojana' and allocated Rs 53 bn for these schemes inthe current year 2016. Besides this, monsoon picking up pace towards theend of June and IMD keeping its monsoon forecast at 106% of LPA will bepositive for the rural demand and in turn would be positive for PVC pipesused in agri segment.

Finolex Industries (Buy, Target Rs 504) - We expect Q1FY17 results ofFinolex Industries to be strong on volume and bottomline front consideringdecent demand from agri segment and decline in interest expenses respec-tively. We expect 15.6% yoy growth in revenue led by 18% yoy growth inPVC pipes and fitting volume. Increased contribution from value added prod-ucts would drive margins for the quarter expected at 19.5%. In addition,PVC-EDC spread is expected to remain at USD 600 per tonne which wouldalso positively impact EBITDA in resin business. We expect PAT for the quar-ter to grow at 28.4% yoy on a lower interest cost, resulting in 72% yoy de-cline in interest expenses.

RESULTS PREVIEW

Pankaj [email protected]

+91 22 6218 6434

Quarterly estimates - Agri-Products

Company Revenues (Rs mn) EBIDTA (%) PAT (Rs mn) EPS (Rs)

Q1 Q4 QoQ Q1 YoY Q1 Q4 Q1 Q1 Q4 QoQ Q1 YoY Q1 Q4 QoQ Q1 YoYFY17 FY16 (%) FY16 (%) FY17 FY16 FY16 FY17 FY16 (%) FY16 (%) FY17 FY16 (%) FY16 (%)

Insecticides India 2994 1781 68.1 2854 4.9 12.0 4.6 12.3 214 5 4348.5 198 7.8 10.3 0.2 4348.5 9.6 7.8

Finolex Industries 7320 8055 (9.1) 6334 15.6 19.5 13.8 20.0 902 785 15.0 703 28.4 7.3 6.3 15.0 5.7 28.4





AUTO & AUTO ANCILLARY

Automobile demand in 1QFY17 was better as compared to the samequarter last year. After a long time, all the segments across the autoindustry witnessed YoY increase in volumes. In the two wheeler segment,scooters continued to outperform the motorcycle segment. Passenger cardemand was driven by new launches. In anticipation of good monsoons,tractor demand witnessed pick-up, post a 2-year decline. MHCV segmentvolume growth tapered significantly in 1QFY17; partly on account ofstrong pre-buying in 4QFY16.

From our coverage universe, all the OEM's (except Bajaj Auto) reportedYoY growth in volumes. Eicher Motors reported high volume growth,both in 2W and CV segment. M&M reported double digit volume growthin auto and tractor segment. Backed by volume growth, we expectcompanies under our coverage to report 6% YoY revenue growth in1QFY17. EBITDA margin performance is likely to be mixed. We expectEicher Motors and Motherson Sumi to witness meaningful marginexpansion. We expect marginal growth in adjusted PAT for the companiesunder our coverage (ex-Tata Motors).

Apollo Tyres (APTY) - On the back of improved demand, we expect APTY toreport decent revenue growth. However, due to rebound in raw materialprices and price cuts across various product categories, we expect EBITDAmargin to witness contraction. We expect consolidated adjusted PAT to de-cline YoY.

Ashok Leyland (ALL) - We expect ALL's revenue to grow on the back of11% YoY increase in volumes. However, rise in input cost will likely impactEBITDA margin during the quarter. Accordingly, we expect marginal YoY in-crease in adjusted net profit. Over 4QFY16, earnings are expected to comedown significantly due to seasonal nature of CV demand.

Bajaj Auto (BAL) - Due to weak exports, BAL reported marginal YoY declinein volumes. Aided by increased realization, revenue is likely to witness mod-erate growth. EBITDA margins are expected to expand YoY. However, otherincome is expected to be lower and that is expected to lead into 7% YoYdecline in adjusted net profits for the company.

Eicher Motors (EML) - In 1QFY17, EML reported 38% and 34% YoY volumegrowth in 2W and CV segment respectively. Accordingly, consolidated rev-enues are expected to grow by 31% YoY. High volume growth will translateinto operating leverage benefit and we thereby expect EBITDA margins toincrease over 1QFY16. We expect strong consolidated YoY PAT growth forthe company.

Escorts Limited - Escorts is expected to report better numbers on the backof 10% growth in tractor volumes. We expect tractor margin expansion forthe company during the quarter. Thereby, we expect strong YoY growth innet profit for the company.

Hero MotoCorp (HMC) - HMC's revenues are expected to grow by 10%YoY on account of volume growth, price hike and mix change. EBITDA mar-gin is expected to see marginal improvement. Accordingly, adjusted PATgrowth will likely mirror revenue growth.

Mahindra and Mahindra (M&M) - In 1QFY17, M&M's (incl MVML) YoY rev-enue growth will benefit from double-digit volume growth, in both auto andtractor segment. Given input cost increase and end of excise duty benefit,EBITDA margin is expected to contract YoY. We expect almost flat YoYgrowth in adjusted net profit for M&M+MVML in 1QFY17.

RESULTS PREVIEW

Arun [email protected]

+91 22 6218 6443



Maruti Suzuki India (MSIL) - MSIL's 1QFY16 sales volume growth wastepid, partly hit by production issues. However, blended realization due toproduct mix change will drive YoY revenue growth for the company. On theback of unfavorable forex movement, EBITDA margins are expected to comedown -YoY and QoQ. We expect 5% YoY increase in adjusted net profit forthe company in 1QFY17.

Motherson Sumi (MSSL) - MSSL's revenue growth will be led by both,standalone business and subsidiaries. We expect EBITDA margin to improveYoY and remain flat QoQ. EBITDA margin expansion will likely be driven bySMR. We expect MSSL's consolidated profit to grow by 17% YoY.

Tata Motors (TAMO) - 1QFY17 is expected to be weak for the TAMO. On aQoQ basis, weak MHCV volume and lower JLR volumes will impact revenues,EBITDA margins and net profits during the quarter.

TVS Motors (TVSM) - TVSM reported healthy 12.5% YoY volume growthand the same is expected to translate into 14% YoY jump in revenues.Higher volume should likely lead to into operating leverage benefits. Wethereby expect, EBITDA margin to improve for the company in 1QFY17.Backed by revenue and EBIDTA margin expansion, we expect strong growthin profit.

Volumes

Company Q1FY17 Q4FY16 QoQ (%) Q1FY16 YoY (%)

Ashok Leyland 31,165 43,991 (29.2) 28,186 10.6

Bajaj Auto 994,733 872,458 14.0 1,013,029 (1.8)

Eicher Motors (CV) 15,914 15,276 4.2 11,863 34.1

Eicher Motors (RE) 147,483 148,186 (0.5) 106,613 38.3

Escorts 16,363 11,823 38.4 14,887 9.9

Hero MotoCorp 1,745,389 1,721,240 1.4 1,645,867 6.0

M&M (Auto) 121,528 140,509 (13.5) 109,567 10.9

M&M (Tractor) 74,595 43,321 72.2 62,358 19.6

Maruti Suzuki 348,443 360,402 (3.3) 341,329 2.1

Tata Motors (Standalone) 124,110 146,765 (15.4) 116,571 6.5

TVS Motors 717,694 660,469 8.7 638,033 12.5

Source - Companies

Quarterly estimates - Automobiles

Company Revenues (Rs mn) EBIDTA (%) Adj. PAT (Rs mn) Adj. EPS (Rs)


Apollo Tyres 31,503 29,897 5.4 28,454 10.7 15.9 16.0 17.7 2,603 2,452 6.2 2,906 (10.4) 5.1 4.8 6.2 5.7 (10.4)

Ashok Leyland 41,894 59,553 (29.7) 38,412 9.1 9.5 12.6 10.1 1,618 4,184 (61.3) 1,593 1.6 0.6 1.5 (61.3) 0.6 1.6

Bajaj Auto 58,424 54,114 8.0 56,135 4.1 20.9 21.3 20.3 9,409 7,824 20.3 10,116 (7.0) 32.5 27.0 20.3 35.0 (7.0)

Eicher Motors * 38,294 37,649 1.7 29,167 31.3 16.3 17.0 14.8 3,356 3,345 0.3 2,218 51.3 123.7 123.2 0.3 81.7 51.3

Escorts 10,727 8,047 33.3 9,777 9.7 6.4 4.8 5.9 465 256 81.7 367 26.9 3.8 2.1 81.7 3.0 26.9

Hero MotoCorp 76,377 75,122 1.7 69,553 9.8 15.3 15.7 15.1 8,195 8,142 0.7 7,503 9.2 41.0 40.8 0.7 37.6 9.2

M&M (incl. MVML) 107,644 101,602 5.9 94,371 14.1 13.6 12.5 14.3 8,437 6,622 27.4 8,311 1.5 14.3 11.2 27.4 14.1 1.5

Maruti Suzuki 152,124 153,057 (0.6) 134,249 13.3 15.0 15.4 16.3 12,564 11,336 10.8 11,929 5.3 41.6 37.5 10.8 39.5 5.3

Motherson Sumi 106,050 102,349 3.6 93,848 13.0 10.5 10.4 8.9 3,399 4,140 (17.9) 2,903 17.1 2.6 3.1 (17.9) 2.2 17.1

Tata Motors 607,494 806,844 (24.7) 613,021 (0.9) 12.9 14.1 14.9 18,907 47,540 (60.2) 28,506 (33.7) 5.6 14.0 (60.2) 8.4 (33.7)

TVS Motors 29,769 28,154 5.7 26,082 14.1 7.3 6.3 6.3 1,185 1,178 0.6 903 31.3 2.5 2.5 0.6 1.9 31.3

Total 1,260,299 1,456,387 (13.5) 1,193,069 5.6 13.4 14.1 14.4 70,140 97,017 (27.7) 77,256 (9.2)

Source: Companies, Kotak Securities - Private Client Research; Note: * 15 month period ending March 2016




BUILDING MATERIAL

Building material sector preview - Q1FY17Building materials sector has been impacted by lower demand from pastfew quarters owing to continued slowdown in real estate. Demand hasstarted recovering in few pockets in individual housing segment mainly intier 2 and tier 3 cities but, across the board revival in demand is yet tohappen. Capacity expansion, as well as change in business strategies tocater to mid-tier segment is likely to translate into revenue growth for thecompanies in near to medium term. Along with this, with expectations ofGST bill getting passed in the monsoon session of Parliament, companiesexpect positive impact on revenues to be visible from FY18 onwards. Withadequate capacities and expansion in pipeline, we believe companies areadequately equipped to capture the upswing in demand expected inmedium to long term. We continue to maintain our positive bias forcompanies present in this space and would recommend buying the belowmentioned stocks on declines.

Key highlights about the companies Kajaria Ceramics - Kajaria Ceramics is likely to witness an improvement in

volumes led by higher focus on retail segment, increased brand spend as wellas with expanded capacity. We expect Kajaria Ceramics' sales to grow by10% YoY led by higher volumes on recent capacity expansions. Margins arelikely to remain strong at 19% due to fall in the gas prices as well as highervalue added products in the overall sales. PAT is likely to grow by 37% YoYled by improved volumes and margins.

Century Plyboards - We expect Century Plywood sales to grow by 10% YoYled by shift of demand towards mid segment Sainik brand as well as im-proved revenues in laminates division owing to higher capacity utilizationduring the quarter. Margins are likely to remain strong at 17% due to fall inraw material prices. However, forex volatility is not expected to impact thecompany during the quarter as the company's forex exposure is fully coveredduring Q1FY17. PAT is likely to grow by 3% YoY due to improvement in salesand margins.

Greenply Industries - Greenply Industries is likely to benefit from higheroutsourcing as well as improvement in MDF volumes. We expect Greenplyindustries's sales to grow by 10.3% YoY led by higher capacity utilization inMDF division. Margins are likely to remain strong at 14.9% due to highermargins in MDF. However, PAT is likely to grow by 26% YoY led by higherrevenues.

Supreme industries - Supreme's net sales for Q1FY17 is expected to growby 5.4 % led by 1) 14.9% yoy growth in volume in plastic business and 2)8.2% yoy decline in realization on lower raw material price over last year 3)no contribution from real estate construction segment in the quarter. EBITDAmargins are expected to decline by 176 bps yoy on no contribution from highmargin real estate construction segment.

RESULTS PREVIEW

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+91 22 6218 6434

Quarterly estimates - Building Material



Kajaria Ceramics 6,000 6,551 (8.4) 5,460 9.9 19.0% 20.0% 16.5% 585 660 (11.4) 462 26.6 7.4 8.3 (11.4) 5.8 26.6

Supreme industries 13,473 12,005 12.2% 12,780 5.4% 18.4% 17.9% 20.2% 1,335 1,026 30.1% 1,407 -5.1% 10.5 8.1 30.1% 11.1 -5.1%

Century Plyboard 4,100 4,512 (9.1) 3,709 10.5 17.0% 16.4% 18.0% 407 405 0.5 397 2.6 1.8 1.8 0.5 1.8 2.6

Greenply industries* 4,200 4,528 (7.2) 3,809 10.3 14.9% 14.8% 14.7% 336 413 (18.7) 267 25.8 2.8 3.3 (15.8) 2.2 25.8





CAPITAL GOODS, ENGINEERING & POWER

Industry trends and Outlook

The CMIE report on stalled projects paints a subdued picture with thequantum of stalled projects remaining high at Rs.11.2 trillion in Q1FY17(FY16: Rs.11.3 trillion), with 75% in the private sector. Lack of regula-tory clearances and inadequate input availability explained the delaysfor 42% of stalled projects, while weak business sentiment (lack of in-vestor interest, lack of funds, and unfavourable market conditions) ac-counted for 28%. Most of the stalled projects are in the electricity(31%) and steel (25%) sectors.

While the stock of stalled government projects seems to have peaked,the same in the private sector continued to increase.

Newly announced investments totalled Rs.1.3 trillion in first quarter ofFY17, declining about 60% quarter-on-quarter. The drop in investmentcycle has been sharp. To put in perspective, fresh investment an-nouncements averaged Rs 2.0 trn in FY16 as compared to an averagerate of Rs 4.5 trn in FY06-11 period.

Based on the findings of the RBI report as also from views shared byvarious capital goods majors, we understand that the private capexmay take a few quarters to fructify. There are several private develop-ers that are stuck with overleveraged balance sheet and are in the pro-cess of hiving of assets to raise funds.

On the positive side, the pace of project commissioning gained pace inthe fiscal. Pace of road building has increased significantly in recentmonths. Coal supply from Coal India has picked up which has eased thesupply deficit substantially. With more than adequate stocks at itsyards, NTPC is cutting back on its coal import plans. Implementation ofUDAY scheme is resulting in easing of liquidity pressure on SEBs, whichis translating into reduction in receivables outstanding for utilities likeDVC, NHPC etc.

Powergrid has also maintained its investment tempo and for FY16spent Rs 228 bn and is on course to exceed its investment target for12th five year plan of Rs 1.1 trn.

Further we believe that consumer companies (mainly B2C players) likeVoltas, Blue Star, Havells, Bajaj Electricals etc are poised to benefitfrom likely increase in disposable income, driven by 1) favourableprogress in monsoon, 2) meaningful remuneration hike under seventhpay commission and 3) increased allocation for schemes like MNREGA .We believe that going ahead, these developments would stimulate con-sumer demand, both in urban and rural India.

To sum up, macro data continues to be subdued and this is likely to re-flect on the order books of companies like BHEL, Thermax given theirdependence on power sector and corporate investment respectively.The BSE Capital Goods index has gained 18.5% since the beginning ofthis fiscal as against a gain of 7.5% for the Sensex. Given weak nearterm macro data points and significant sector outperformance in re-cent months, we believe the sector may attract some profit booking.

Preview Highlights

We expect moderately strong revenue growth of 9% on y-o-y basis in aggregaterevenue in the Apr-June 2016 quarter. Aggregate EBITDA and PAT is expected topost a modest growth of 7% and 9% respectively

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Ruchir [email protected]+91 22 6218 6431



YoY change in aggregate revenue for our coverage universe


Quarterly EBITDA margins


YoY change in aggregate profits for our coverage universe


Stock View ABB: The company ended the previous quarter with lower order backlog on a

yoy basis and this is likely to weigh on the revenue growth in CY17. WhileRailways and solar power are driving demand for the company’s products,traditional sectors like Power, cement, steel and refineries have not beenable to contribute to order accretion. Having said that, material prices havebeen benign and this coupled with some cost cutting measures should drivemargin expansion in the quarter.

AIA Engineering Ltd (AIA): AIA is expected to report marginal growth inrevenues as well as profits in Q1FY17. This would mainly be attributed tocontinued sluggishness in the mining space.

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Bajaj Electricals Limited (BAEL): We expect BAEL to report continued re-covery in E&P division in Q1FY17. We anticipate muted growth in the con-sumer appliances business due to reduced primary sales. Operating marginwould likely be maintained in Q1FY17 due to continued loss minimization inE&P business.

Bharat Electronics: This is a seasonally weak quarter for the company. Weexpect the company to report moderate growth of 11% in revenue but asharp rise in earnings at 59% y-o-y.

BHEL: The company has managed to arrest the decline in order book. How-ever, quantum of order book is not sufficient enough to provide any mean-ingful traction to revenues. Further, the recent order wins are grappling withdelay in receiving of mandatory clearances. We thus expect another quarterof weak numbers from BHEL.

Blue Star: This is seasonally, the strongest quarter for the company’s roomAC segment. Industry sources have hinted that it was a good quarter for thesector as the weather conditions were favourable. Blue Star is expected tooutperform the industry growth rate in room air conditioners.

Carborundum Universal: We expect company to report marginal YoY rev-enue growth in Q1FY17 due to ongoing restructuring in the South Africanbusiness. However, company is likely to report margin expansion in Q1FY17driven by absence of losses in Thukela business.

Crompton Greaves: CGL is expected to report improved performance in thequarter driven by industrial business. Order book growth is expected to re-main muted in the quarter.

Cummins India: We expect moderate pick up in domestic demand led bypower/industrial divisions. However, international business is expected to re-port decline in revenues. Company is likely to maintain operating margin inQ1FY17.

ELGI Equipment Ltd (EEL): EEL is expected to report muted growth on backof continued slowdown in domestic market. We expect company to reportsignificant increase in net profits on the diminished base of Q3FY15. Interna-tional business is likely to remain under pressure.

EIL: We expect company to report pressure in revenues growth due to con-tinued inactivity in Hydrocarbon Capex. However we expect company to re-port margin expansion in the quarter vis-à-vis diminished base of the previousyear. Order booking is expected to remain weak in the quarter, both in do-mestic and international market.

Greaves Cotton: The company is a play on the LCV industry (3W and 4Wlight commercial vehicles). The growth in LCVs has remained weak and this isweighing on the company’s revenue growth. However, the company’s costcutting initiatives are yielding margin gains. Further, cash flows have alsobeen robust, resulting in the company ending the previous fiscal with a sub-stantial cash surplus.

Havells India Ltd (HIL): HIL is likely to report 8% YoY growth in revenuedue to pickup in demand across key product categories. We expect companyto maintain operating margins in Q1FY17.

Kalpataru Power Transmission: KPTL is likely to observe growth of 10-13%YoY in revenues driven by domestic as well as overseas markets. We expectcompany to maintain operating margin in the quarter

Larsen & Toubro: The company surprised the street with its strong execu-tion and margin gains in the fourth quarter. However, given the subduedmacroeconomic conditions, there could be disappointments in revenue andorder intake on a quarterly basis.



Pidilite: We expect company to report 10.5% YoY growth in revenues drivenby higher volumes. We expect company to report sustained gross marginsdue to benign input prices.

Siemens: We forecast revenue growth of 16% YoY in Q1FY17. Margins arelikely to contract YoY in the quarter. We expect muted PAT growth in thequarter.

Thermax: The company is expected to report a drop in revenue and profit ona y-o-y basis for the quarter as order book has been weak and is not strongenough to provide traction.

Time Technoplast: Capex plans and debt reduction are key monitorables forthe stock performance. Reduction in polymer prices (HDPE) may help postmargin gains in the quarter.

VA Tech Wabag: This is a seasonally weak quarter for the company. Thecompany has begun this fiscal on a strong order book. This has improved themedium term growth outlook for the company.

Voltamp: We expect the company to report higher margins aided by benigncommodity prices.

Voltas: We forecast the company to post strong numbers on the back of fa-vorable demand for air conditioners in the June ending quarter. Rains havestarted late in CY2017 as compared to CY2016, which is also expected to aidAC demand in Q1FY17.

Power

NTPC: The company has reported 9% increase in generation volumes inQ1FY17 which should earn the company higher incentives. Having said that,recent quarterly numbers of the company have been marred by prior periodincome/expenses as well as tax writebacks/provisions.

Tata Power – The company’s power generating unit at Mundra has reported18% y-o-y drop in generation in Q1FY17, which may weigh on the company’squarterly numbers.



Quarterly estimates - Capital Goods, Engineering & Power



Capital Goods

ABB 19,510 19,736 (1.1) 17,850 9.3 8.0 8.0 7.6 753 710 6.1 543 38.7 3.6 3.4 6.0 2.6 38.7

AIA Engg 5,690 5,920 (3.9) 5,271 7.9 26.5 28.9 27.7 1,110 1,344 (17.4) 1,029 7.9 11.8 14.2 (17.4) 10.9 7.9

Bajaj Electricals 11,468 13,572 (15.5) 10,091 13.7 5.7 5.5 6.0 264 347 (23.9) 203 29.9 2.7 3.5 (23.9) 2.1 29.9

BEL 11,867 31,354 (62.2) 10,692 11.0 2.8 (0.5) 31.9 962 8,017 (88.0) 606 58.7 12.0 100.0 (88.0) 7.6 57.9

BHEL 42,479 97,920 (56.6) 42,808 (0.8) (7.1) (4.9) 3.7 (1,467) 3,596 (140.8) 339 (532.7) (0.6) 1.5 (140.0) 0.1 (700.0)

Blue Star 10,372 10,900 (4.8) 9,025 14.9 8.0 7.3 5.2 447 239 87.0 390 14.6 5.0 2.7 85.2 4.3 16.3

Carborundum Univ 5,210 5,351 (2.6) 4,960 5.0 17.5 17.4 16.2 387 397 (2.4) 334 16.0 2.1 2.1 (2.4) 1.8 16.0

CGL 9,557 11,297 (15.4) NA NA 6.3 7.9 NA 430 1,121 (61.6) NA NA 0.7 1.8 (60.7) NA NA

Cummins 13,286 10,654 24.7 13,143 1.1 16.8 16.0 16.6 2,199 1,642 34.0 2,108 4.3 7.9 5.9 34.0 7.6 4.3

Elgi Equipment 3,320 4,101 (19.0) 3,265 1.7 10.5 11.8 9.5 183 305 (40.2) 137 33.2 1.2 1.9 (40.2) 0.9 33.2

EIL 3,320 2,864 15.9 3,905 (15.0) 12.0 13.8 7.3 664 694 (4.4) 569 16.6 2.0 2.1 (4.4) 1.7 16.6

Greaves Cotton 4,050 4,038 0.3 3,785 7.0 15.9 16.4 15.7 436 360 21.1 360 21.1 1.8 1.8 - 1.5 20.0

Havells 13,739 14,754 7.6 12,671 8.4 13.0 14.9 12.5 1,237 1,641 (24.7) 1,074 15.2 2.0 2.6 (24.7) 1.7 15.2

L&T 225,063 328,122 (31.4) 202,522 11.1 10.4 11.3 14.8 7,135 24,536 (70.9) 6,062 17.7 12.2 41.9 (70.9) 10.4 17.9

Pidilite 16,242 12,409 30.9 14,695 10.5 24.0 19.2 23.4 2,729 1,526 78.8 2,255 21.0 5.4 3.0 78.8 4.4 21.0

Praj 2,030 3,298 (38.4) 1,925 5.5 8.0 7.8 13.4 76 340 (77.6) 53 43.4 0.4 1.8 (77.8) 0.3 33.3

Siemens 27,699 27,836 (0.5) 23,760 16.6 10.0 11.0 10.7 1,717 1,775 (3.2) 1,683 2.0 4.9 5.0 (3.2) 4.8 2.0

Thermax 9,900 12,621 (21.6) 9,911 (0.1) 9.3 9.2 9.4 577 1,112 (48.1) 617 (6.5) 4.8 9.3 (48.4) 5.2 (7.7)

VA Tech Wabag 5,000 8,561 (41.6) 44,557 (88.8) 4.7 0.3 13.9 74 691 (89.3) (99) (174.7) 1.3 12.6 (89.7) (1.9) (168.4)

Voltamp 965 2,039 (52.7) 871 10.8 6.8 2.9 9.0 86 192 (55.2) 64 34.4 8.5 19.0 (55.3) 6.4 32.8

Voltas 20,003 18,757 6.6 15,952 25.4 8.6 8.2 9.9 1,339 1,528 (12.4) 1,011 32.4 4.0 4.6 (13.0) 3.1 29.0

Time Technoplast 5,900 6,077 (2.9) 6,603 (10.6) 13.9 12.9 14.6 258 324 (20.4) 285 (9.5) 1.2 1.6 (25.0) 1.4 (14.3)

TOTAL 430,003 612,953 (29.8) 425,050 1.2 9.1 8.6 13.3 19,469 50,036 (61.1) 17,848 9.1 13.7 25.2 10.9

Power

NTPC 190,075 179,901 5.7 170,187 11.7 25.0 20.2 30.3 20,114 27,167 (26.0) 21,354 (5.8) 2.4 3.3 (27.3) 2.6 (7.7)

Tata Power 92,000 92,446 (0.5) 91,046 1.0 23.4 24.0 20.7 2,500 4,527 (44.8) 2,413 3.6 0.9 1.7 (44.0) 0.9 3.4

TOTAL 282,075 272,347 3.6 261,233 8.0 24.5 27.1 21.5 22,614 31,694 (28.6) 23,767 (4.9)





CEMENT

We expect revenues in our coverage universe to grow by 10% YoY andstay flat QoQ mainly led by yoy improvement in demand and pricing inmost of the regions. Operating margins are expected to remain strong onhigher average realizations but may start feeling the pinch of higher petcoke prices from Q2FY17 onwards. Net profits are expected to grow by39% YoY for companies under our coverage due to improvement involumes and prices.

Cement demand started witnessing improvement since Q4FY16 led by pickup in infrastructure projects along with recovery in individual housingconstruction in tier 2 and tier 3 cities. As per the core industries data,cement production (weight: 2.41%) improved by 3.4% during April-May,2016 over last year. Cement prices also witnessed sharp improvement innorth and central region which was impacted quite badly during H2FY16.

Going forward, with expectations of normal monsoon leading to revival ofrural economy and pick up in infrastructure activity, we expect demandrecovery to be sustained in coming quarters. Individual housing segmentis also likely to sustain improvement in the demand. With slowing pace ofcapacity additions and expected improvement in demand, we expectcement prices to remain firm going forward. We continue to remainpositive on Ultratech Cements, Shree Cements, India Cements and Grasimindustries and any decline in stock prices, led by price weakness inmonsoon season, should be used to buy stocks with medium to long termview.

Cement prices improved sequentially during Q1FY17Cement prices had started recovering from March, 2016 and stood firm in mostof the regions. Northern region prices moved up by Rs 25-30 per bag during thequarter as compared to levels seen in March, 2016. This was led by strong sup-ply discipline coupled with signs of demand improvement. Prices in Delhi andRajasthan stood between Rs 285-300 per bag while Amritsar and Chandigarhprices have moved up to Rs 330-340 per bag. Central region prices are also upsharply by Rs 20-25 per bag to Rs 310-315 per bag due to strong demand fromUP. Prices in South remained volatile during the quarter with sharp declines be-ing witnessed in AP/Telangana in April which were reverted back in the May,2016. Prices in Chennai and Bangalore stood largely flat at Rs 380-390 per bagas demand is yet to start witnessing improvement.

Eastern region prices also stood firm with prices up marginally by Rs 5-10 perbag. Price war, which was being witnessed in north-eastern region duringQ4FY16 and which resulted in sharp price volatility in the region, has now eased.Average prices in eastern region stood between Rs 320-325 per bag. Westernregion prices improved by Rs 5-10 per bag and are expected to move up furtherpost monsoons.

Northern region average prices are up by nearly 11% QoQ while all India aver-age prices are up by 3% QoQ.

Cement prices (Rs per 50 kg bag)

Source: Dealer feedback

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Cement demand scenario showing signs of improvement

As per core industries data, cement production improved by 4.7% YoY duringFY16 while cement production during April to May, 2016 increased by 3.4 %over the corresponding period of previous year. However, going forward we ex-pect the production and sales volumes to grow at healthy rate of 7% for the fullyear led by pick up in construction activity and revival of rural sector demand.Various states such as UP, AP, Telangana are expecting large infrastructureprojects in roads, water and irrigation to be taken off. This is likely to lead toimprovement in cement demand and pricing going forward. With slowing paceof capacity additions, capacity utilizations are expected to improve slightly goingforward.

Margins expected to improve sequentially led by higher averageprices but higher pet coke and diesel prices may play a dampenerfrom Q2FY17 onwards

Increase in average realizations sequentially is likely to aid margins during thequarter as costs have not moved up sharply. Pet coke prices have moved up bynearly 29% from the lows seen in the month of Jan, 2016. Though companyhave sufficient inventories for Q1FY17 but impact of higher pet coke prices isexpected to be reflected by Q2FY17 onwards. We would also expect companiesto shift the usage of coal towards imported coal as compared to pet coke seentill now. Higher diesel prices are likely to result in higher freight cost on year onyear and sequential basis.

Recommendation

Going forward, with expectations of normal monsoon leading to revival of ruraleconomy and pick up in infrastructure activity, we expect demand recovery tobe sustained in the coming quarters. Individual housing segment is also likely tosustain improvement in the demand. With slowing pace of capacity additionsand expected improvement in demand, we expect cement prices to remain firmgoing forward. We continue to remain positive on Ultratech Cements, ShreeCements, India Cements and Grasim industries and any decline in stock pricesled by impact of monsoons should be used to buy stocks with medium to longterm view.

Quarterly estimates - Cement



Grasim 94,700 98,964 (4.3) 85,080 11.3 19.3 19.2 15.6 6,480 6,961 (6.9) 4,847 33.7 70.5 74.6 (5.4) 52.8 33.7

ACC* 30,287 29,274 3.5 29,612 2.3 14.0 12.6 9.4 2,676 2,322 15.3 1,314 103.7 14.2 12.4 15.3 7.0 103.7

India Cement 10,845 11,471 (5.5) 10,710 1.3 17.3 18.4 18.2 316 512 (38.3) 401 (21.1) 1.0 1.7 (38.3) 1.3 (21.1)

Shree Cement 21,745 20,174 7.8 17,194 26.5 27.1 25.0 20.4 2,535 2,233 13.5 1,041 143.5 72.8 64.1 13.5 29.9 143.5

Ultratech Cement 65,000 64,359 1.0 60,382 7.6 20.4 20.0 18.1 6,727 6,814 (1.3) 5,908 13.9 24.5 24.8 (1.3) 21.5 13.9

TOTAL 222,577 224,243 (0.7) 202,978 9.7 18,734 18,842 (0.6) 13,510 38.7

Source: Companies, Kotak Securities - Private Client Research; *ACC is CY ending company; results are for Q2CY16




CONSTRUCTION

Revenues for companies in our coverage universe are expected to grow by21%YoY, while on QoQ basis, revenues are expected to decline by 17%mainly due to high base of Q4FY16. Operating margins are expected toimprove largely for companies. Borrowings are likely to come down forEPC players which have sold stakes in road and power assets. Net profitsare expected to decline by 3%YoY.

During FY17, companies have turned quite optimistic on hybrid annuitymodel for the road sector and are actively looking at participating in thebids. Companies are also extremely confident of bagging upcomingopportunities in irrigation, water supply and infrastructure developmentin AP/Telangana/UP and have upped their order inflow guidance for FY17based on upcoming opportunities.

Order inflow trend, working capital management, debt reduction andasset monetization are likely to be key triggers for the sector goingforward. We continue to maintain positive stance on IRB Infra, NCC, KNRConstruction and PNC Infratech and maintain BUY on these stocks. Wealso like Phoenix mills as we expect company to benefit from increasedconsumption and rentals going forward.

Key highlights about the sector during Q1FY17

Order inflow is expected to ramp up sharply

Ordering activity remained strong for the road sector and has now started pick-ing up in urban infra. NHAI, along with MoRTH, plans to award 25000 km ofprojects in FY17. For that, NHAI is in the process of acquiring land. During FY16,NHAI awarded 72 projects through a mix of EPC/BOT/Hybrid Annuity Model(HAM) with 55 EPC projects covering a length of 2560 km, 7 BOT projects withlength of 873 km and 10 HAM projects with length of 377 km. Going forward,over 80% of the road projects are proposed to be awarded under EPC and Hy-brid Annuity Model routes.

We expect the momentum in the road sector to continue while governmentbuildings, bridges, irrigation, water supply and urban infra are also likely to seeincreased traction going forward. Companies are extremely confident of baggingupcoming opportunities in irrigation, water supply and infrastructure develop-ment in AP/Telangana/UP.

Margins to remain a mixed bag but competitive intensity increas-ing

Operating margins are likely to remain a mixed bag during the quarter depend-ing upon the revenue mix. Companies have built in sufficient cushion while bid-ding for the projects and expect margins to stay strong. However, companieshave mentioned that now competition is increasing in road projects which mayimpact the margins or expected returns from these projects going forward if ex-posure towards road sector increases sharply.

Project specific borrowings to move up as execution paces up

We expect borrowings to remain high for IRB, ILFS Transportation network asexecution work on new road BOT projects, which are funded by mix of debt andequity, has picked up pace. NCC has sold stakes in its road and power projectswhich is likely to result in lower long term borrowings. We expect borrowings forSimplex Infrastructure to remain high as the working capital cycle is stillstretched.

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Quarterly estimates - Construction & Real estate



Construction

IRB Infra 14,500 15,712 (7.7) 11,367 27.6 51.6 49.3 57.7 1,405 1,511 (7.1) 1,659 (15.4) 4.0 4.3 (7.1) 4.7 (15.4)

IL&FS Transportation 22,000 25,480 (13.7) 16,444 33.8 31.0 30.5 32.2 74 804 (90.8) 29 154.3 0.2 2.4 (90.8) 0.1 90.7

NCC 19,088 24,462 (22.0) 16,979 12.4 8.0 8.3 7.9 293 700 (58.2) 412 (28.9) 0.5 1.3 (58.2) 0.7 (28.9)

Simplex Infra 15,462 15,014 3.0 15,055 2.7 11.0 9.2 10.8 163 158 3.3 179 (9.0) 3.3 3.2 3.3 3.6 (9.0)

NBCC 14,852 23,033 (0.4) 11,495 29.2 3.7 7.8 3.4 547 1,387 (60.6) 433 26.4 0.9 2.3 (60.6) 0.7 26.4

KNR Constructions 2,216 2,958 (0.3) 1,712 29.4 14.6 15.3 14.4 194 580 (66.6) 150 28.9 6.9 20.6 (66.6) 5.3 28.9

PNC Infratech 5,321 5,887 (0.1) 4,344 22.5 13.0 13.0 13.8 350 1,537 (77.2) 261 34.2 6.8 30.0 (77.2) 5.1 34.2

TOTAL 93,440 112,546 (17.0) 77,396 20.73 3,025 6,678 (54.7) 3,123 (3.2)

Real Estate & Allied

Phoenix mills Ltd 4,500 4,667 (3.6) 3,960 13.6 45.0 44.3 46.5 296 (14) - 256 15.5 1.9 (0.1) - 1.8 9.5


Companies are also addressing working capital issues and trying to contain theworking capital cycle. With revival in project awards, customer advances arelikely to move up thereby reducing working capital cycle.

Recommendation

We continue to maintain positive stance on IRB Infra, NCC, KNR Constructionand PNC Infratech and maintain BUY on these stocks. We also like Phoenix millsas we expect company to benefit from increased consumption and rentals goingforward.




EDUCATION

The performance of education companies depends upon increasedgovernment focus on education, higher disposable income and increasedurbanization. The government of India has emphasized on education andskill development. The government intends to further scale up PradhanMantri Kaushal Vikas Yojna to skill 10 mn youth over the next three yearswhich would be positive for players in skill development. Further, thecabinet approving 7th pay commission recommendation would result inpay hike for government employees and pensioner. This would be positivefor urban consumption and in turn would positively impact privatecoaching sector.

MT Educare (Buy, Target Rs 230) - We expect Q1FY17 results of MTEducare to be strong at topline level with 23.2% yoy growth driven by robustperformance in Robomate product business and decent performance in Sci-ence and commerce business. The school segment is also expected to im-prove on a low base of last year when it reduced exposure to low marginsemi Marathi state board coaching business. Robomate product business isexpected to remain strong yoy with increased distribution through institution,franchisee and online platform. The company has recently signed AmitabhBacchan as brand ambassador for Robomate plus which would increase itsbrand visibility, but would also increase advertisement expenses. We expectPAT of the company to grow at relatively slower pace of 16.8% yoy onhigher working capital financing cost (up 131.6% yoy) due to tabs providedfree of cost in most of the courses.

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Quarterly estimates - Education



MT Educare 922 748 23.2 587 57.2 14.0 13.6 16.0 71 61 16.8 49 43.0 1.8 1.5 16.7 1.2 43.0





FMCGThe sector is likely to see continued softness in revenue growth, as pricingbenefits fade and volume growth remains moderated. We estimate 9.2%revenue growth in our coverage universe (impact positively by NestleIndia), with median growth of 5.5%. We expect continued gross margingains, leading to a 1.5 ppt expansion in EBITDA margin for our coverageuniverse. Median PAT growth for our coverage universe is modest at 18%;we expect Godrej Consumer and Marico to lead earnings growth.

Colgate-Palmolive (India): We expect 6.5% growth in the company's rev-enues, with volume growth of ~3%. We expect EBITDA margin to expand 2ppt, on gross margin gains as well as other cost savings. We estimate 23.9%y/y growth in reported PAT (weak base on exceptional items, adjusted PATgrowth is c. 16% y/y).

Dabur India: We estimate 11% y/y revenue growth for the company, withhigher growth in international operations. Margins are likely to expand 140bps on higher gross margins as well as other cost benefits. We estimate 16%y/y growth in PAT.

Godrej Consumer: We expect 11% y/y growth in revenues, with highergrowth in international revenues (inorganic growth). We expect 80 bps ex-pansion in EBITDA margin, largely on the back of higher gross margins. Ex-pect the company to report 27% y/y growth in PAT.

Hindustan Unilever: We expect 5.5% y/y growth in net sales, as pricingcontinues to be weak in certain categories, volume growth remains muted.Expect gross margin gains to lead 90 bps expansion in EBITDA margin. Weexpect 10% y/y growth in reported PAT.

ITC: We expect cigarette net sales to grow 11.5%, leading to revenuegrowth of 10.5%. Margins are likely to expand 70 bps, and PAT is likely toregister 11% y/y growth, without taking into account changes likely on IND-AS. We note that reported financials shall diverge to the extent of ESOP ex-penses in the quarter (as well as comparable quarters), on adoption of IND-AS. Reported EBITDA shall be lower by c. 1.3Bn (versus estimates above) forthe quarter (as well as comparable quarters)

Marico: We expect 4% y/y growth in net sales of the company, as volumegrowth is offset to a large degree by price deflation in coconut oil. We modelfor 470 bps expansion in EBITDA margin, largely led by gains in gross mar-gins. We estimate 20% y/y growth in reported PAT.

Nestle India: We expect 22% y/y growth in sales for the company, on re-sumption of Maggi sales. We factor in 370 bps rise in EBITDA margin, on op-erating leverage benefits. Reported PAT is estimated at Rs 3Bn.

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Quarterly estimates - FMCG



Colgate India 10,681 10,911 (2.1) 10,029 6.5 21.2 21.4 19.4 1,415 1,459 (3.0) 1,143 23.9 5.2 5.4 (3.0) 4.2 23.9

Dabur India 22,912 21,573 6.2 20,641 11.0 16.7 19.1 15.3 3,042 3,334 (8.8) 2,621 16.1 1.8 1.9 (8.8) 1.5 16.1

Godrej Consumer 23,307 22,691 2.7 20,977 11.1 15.8 19.5 15.0 2,534 3,100 (18.3) 1,992 27.2 7.4 9.1 (18.3) 5.9 27.2

Hindustan Unilever 85,509 79,456 7.6 81,051 5.5 19.5 18.5 18.6 11,607 10,896 6.5 10,591 9.6 5.4 5.0 6.5 4.9 9.6

ITC 93,983 100,624 (6.6) 85,055 10.5 39.5 35.6 38.8 25,073 24,952 0.5 22,654 10.7 2.1 2.1 0.5 1.9 10.7

Marico 18,474 13,028 41.8 17,815 3.7 22.9 16.3 18.2 2,895 1,405 106.1 2,415 19.9 2.2 1.1 106.1 1.9 19.9

Nestle India 23,530 22,957 2.5 19,338 21.7 21.9 22.0 18.2 3,004 2,590 16.0 (644) NM 31.2 26.9 16.0 -6.7 NM

Total 278,395 271,240 2.6 254,907 9.2 27.3 23.4 25.2 49,571 47,736 3.8 40,773 21.6

Source: Company Reports, Kotak Securities - Private Client Research




INFORMATION TECHNOLOGY

We expect companies under our coverage to report strong revenuegrowth in this seasonally strong quarter. USD revenue growth is expectedto be 2.3% - 3.8% for the Top 4 companies under our coverage. Cross-currency movements will provide a tailwind of between 20bps and 45bpsto the revenue, we estimate. The QoQ rupee appreciation of 1% (v/s USD)will impact INR revenue growth and also margins. For all the companies inour universe, we expect a 2.2% growth in INR revenues. Margins areexpected to fall on the back of rupee appreciation, salary hikes for mostcompanies and higher visa expenses.

We will watch out for management comments on any early indications ofimpact of Brexit on client budgets / spending. We expect the demandcommentary to be generally positive, except for the continuing issues inEnergy and Insurance. Further clarity on the trends in Digital spends byclients and the scale up in these revenues by various Indian vendors willalso be important. We expect Infosys to maintain its FY17 guidance of11.5% - 13.5% in CC terms. NASSCOM has guided for of 10% - 12%growth for the industry. We maintain our constructive view on themedium-to-long term prospects of the sector on expectations ofimproving demand over this period. However, we prefer large caps whichare well-equipped to handle the churn towards Digital. Infosys and TCSare our picks. In mid-caps, we prefer NIIT Limited.

Revenue growth to be strongWe expect revenues in USD terms to grow by 2.3% - 3.8% QoQ, for the top 4companies under our coverage. Of these, Infosys and TCS are expected to report3.6% and 3.7% growth, respectively. On the other hand, HCLT and Wipro rev-enues are expected to be helped by acquisitions of Volvo business (about 3% ofrevenue) and HPS (about 2% of revenue), respectively.

Cross-currency movements will likely provide a tailwind to the extent of 20bps -45bps. Thus, constant currency growth is expected to be slightly lower. How-ever, the 1% appreciation of the rupee v/s USD will impact growth in INR terms.For all companies under coverage, INR revenues are expected to rise by 2.2%QoQ.

We understand that, the demand scenario has remained stable. There areheadwinds in sectors like insurance and energy, which will continue to have animpact on growth rates. Specific cases of ramp-downs by clients, cut-overs(closed project not substituted with new ones) or unexpected loss of clients mayimpact some companies. However, other verticals like BFS (Banking / FinancialServices), Manufacturing / Hi-tech and Retail are witnessing steady growth andshould support overall revenue growth for FY17.

EBIDTA margins to be lowerWe expect margins for companies under our coverage to fall by about 100bpsQoQ. Most companies increase salaries WEF 1Q and that will impact margins.Apart from this, higher visa costs and the 1Q QoQ rupee appreciation v/s USDwill impact the profitability of the companies under our coverage. Indian compa-nies have levers like higher utilization rates, higher Digital (non-liner) revenues,pyramid impact and other cost optimization initiatives to restrict the impact ofmargins.

What to watch out for?We expect Infosys to maintain its 11.5% - 13.5% CC revenue growth guidance.Infosys has been winning larger deals and the Total Contract Value (TCV) of thedeals won has increased over the past few quarters.

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We will watch out any early indications of the Brexit impact on client budgets /spending. Top Indian IT companies have between 17% and 32% of revenuescoming from Europe and about 7% - 15% of revenues are in GBP. Thus, anyslowdown / delays in IT spending from this region will negatively impact thecompanies. Indian vendors are making deeper inroads into the European mar-kets and are getting greater market share, which should help negate some ofthis impact, we believe. The Global Delivery Model is finding increased accep-tance among clients which are looking at reducing costs and improving revenuegrowth rates at the same time.

We will also watch out for comments by company managements on the im-provement seen in spending patterns. Discretionary spends on digital initiativeshave been improving and we will watch out for comments relating to the same.TCS and a few other mid-cap companies have given out revenue numbers fromDigital and we will watch out for better indicators from other companies. Higherrevenues from Digital as well as from products / platforms are essential in thebackdrop of increased competitive pressures in the traditional businesses. Weexpect pressure on pricing for these services to continue. Order bookings in re-bids market by various players will also be a point of interest.

Remain constructive on medium-to-long term prospects; to watchrupee closelyThe US economy has continued to show signs of improvement over the past fewquarters. This should bode well for CY17 revenue growth. We expect deeperpenetration by Indian companies to increase outsourcing business from Europe,though Brexit presents a near-term challenge.We maintain our constructive view on the medium-to-long term prospects of thesector on expectations of improving demand over this period. We have assumedthe rupee to remain ranged in the near term and will closely watch it, goingahead.IT spending trends are changing fast with Digital spends rising and traditionalareas seeing pricing pressures / slower growth. In this scenario, companies whichadopt to new technologies (like Digital) faster will be the winners. We believethat, the larger companies are better equipped to handle this change.The potential risk for the sector is a sharp cut-back in spending by European cli-ents, which will result in cuts in earnings estimates and also lower valuations forthe sector.

Quarterly Estimates (April - June 2016) - Information Technology

Company Revenues (Rs mn) EBIDTA (%) PAT (Rs mns) EPS (Rs)


Infosys ^ 169,914 165,501 2.7 143,540 18.4 23.9 25.5 24.0 34,369 35,970 (4.5) 30,300 13.4 14.7 15.7 (6.3) 13.3 11.2

TCS 292,125 284,486 2.7 256,681 13.8 26.4 27.8 28.1 60,882 63,412 (4.0) 57,089 6.6 30.7 32.0 (4.0) 28.8 6.6

Wipro 137,071 137,415 (0.3) 123,706 10.8 20.7 21.2 22.1 21,925 22,350 (1.9) 21,877 0.2 9.0 9.0 (0.3) 8.9 1.9

HCL Tech * 110,365 106,980 3.2 97,770 12.9 21.5 22.2 21.5 19,326 19,250 0.4 17,820 8.4 13.7 13.7 0.4 12.7 8.4

TOTAL 709,474 694,382 2.2 621,697 14.1 136,502 140,982 (3.2) 127,086 7.4

Geometric 3,200 3,127 2.3 2,976 7.5 15.8 17.1 9.5 245 343 (28.6) 191 28.1 3.8 5.3 (28.6) 2.9 28.1

Mphasis 15,449 15,174 1.8 14,964 3.2 15.8 15.5 14.1 1,986 1,549 28.3 1,563 27.1 9.5 7.4 28.3 7.4 27.1

Cyient 8,255 8,158 1.2 7,263 13.7 12.9 13.0 12.7 809 661 22.4 748 8.1 7.2 5.9 22.4 6.7 8.1

KPIT 8,042 8,407 (4.3) 7,583 6.1 11.3 15.7 9.5 543 885 (38.6) 444 22.4 2.9 4.7 (38.6) 2.4 22.4

NIIT Ltd 2,506 2,389 4.9 2,332 7.5 6.3 5.6 7.0 192 158 21.4 150.0 28.2 1.2 1.0 21.4 0.9 28.2

NIIT Tech 6,825 6,847 (0.3) 6,411 6.5 15.8 18.4 16.3 615 790 (22.1) 586 5.0 10.1 12.9 (22.1) 9.6 5.0

Oracle 11,517 10,168 13.3 10,564 9.0 40.9 35.8 44.8 3,448 2,244 53.7 3,293 4.7 40.6 26.4 53.7 38.8 4.7

Zensar 7,762 7,464 4.0 7,046 10.2 14.3 12.4 15.3 779 703 10.8 761 2.4 17.6 15.9 10.8 17.1 2.8

TOTAL 63,556 61,734 3.0 59,140 7.5 8,618 7,332 17.5 7,612 13.2

TOTAL 773,031 756,116 2.2 680,837 13.5 23.5 24.5 24.4 145,120 148,314 (2.2) 134,822 7.7

Source: Companies, Kotak Securities - Private Client Research^ - Margin numbers and % are EBIT and EBIT %, respectively, for Infosys* - Year-ago numbers are for 4QFY15. FY16 was a 9-month period

Analyst Holding: Infosys - 200 Shares




LOGISTICS

Logistics - Port volume is the key

Performance of Logistics companies involved with container rail business,CFS business and related businesses is strongly linked to performance ofthe port sector in the country. The container port volumes in FY16 at the12 major ports of the country is estimated at 8.2 mn TEUS (+3% YoY),while minor ports like Mundra/Gujarat Pipavav have grown at ~15%. Weexpect the current trend to continue in FY17 as well and estimateLogistics companies in our coverage to report low double digit volumegrowth in FY17E.

Container Corporation of India (SELL: Target Price - Rs 1260)

With weak global trade and slow exports from India, we expect the companyto report weak growth in volumes and revenues. Even margins would remainunder pressure with increasing competition and hike in haulage charges byIndian Railways (IR).

Gateway Distriparks Ltd (BUY: Target Price - Rs 365)

We expect GDL to report healthy growth in revenue and profitability lowbase of FY16 which would be driven by higher lead time in the CFS segment,improvement in rail volumes with improvement in the rail load factor and re-gain of lost market share in the CFS segment. Also the contribution of thecold chain segment is estimated to be healthy in the current quarter.

Allcargo Logistics (BUY: Target price - Rs 200)

We expect revenue for Allcargo to grow by 9% YoY in Q1FY17 and earningsby 10% attributed to new acquisitions, measures taken by the company toimprove volumes and strong relations of ALL across the logistics value chain.

We expect the margins of the company to improve with improving operatingleverage.

Adani Port and Special Economic Zone (ADSEZ) (BUY: Target price -Rs 305)

The consolidated volume is expected to reach 42.5 mn tonnes in the currentquarter (Q4FY16 ~36.3 mn tonnes) driven by volumes at Dhamra, Hazira,Dahej and container volumes at Mundra

We expect the company to report sustained healthy operating margins ofabove ~60%.

Gujarat Pipavav Port (GPPL) (BUY: Target price - Rs 175)

We expect GPPL to report marginal growth in volumes in the container seg-ment. But we are not optimistic about the bulk and liquid cargo (due to plum-meting crude price) in near term.

With improvement in volumes and operating leverage, we estimate YoY im-provement in EBIDTA margins.

Blue Dart Express (BDE) (SELL: Target price - Rs 5655)

With healthy growth of the ecommerce companies, we expect BDE to report7% QoQ growth in the number of shipments and similar growth in the totalweight of cargo in Q1FY17.

Improved volumes and improved realization would lead to revenue of Rs 6.98bn (+13% YoY) with healthy operating margin of 12.75%

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Quarterly estimates - Logistics



Bluedart 6,980 6,297 10.8 6,197 12.6 12.8 11.0 13.0 523 404 29.5 456 14.7 22.0 17.0 29.4 19.2 14.6

Gateway Distriparks 3,041 2,577 18.0 2,642 15.1 26.1 19.4 26.7 375 237 58.2 201 86.6 3.5 2.2 59.1 1.9 84.2

Allcargo Logistics 15,323 14,020 9.3 14,779 3.7 9.4 9.0 9.3 763 691 10.4 749 1.9 3.0 2.7 11.1 3.0 -

Adani Port 20,761 19,472 6.6 17,484 18.7 65.4 64.4 66.6 8,424 9,141 (7.8) 6,326 33.2 4.1 4.4 (6.8) 3.1 32.3

Gujarat Pipavav Port 1,803 1,610 12.0 1,846 (2.3) 56.5 61.6 53.4 592 499 18.6 803 (26.3) 1.2 1.0 20.0 1.7 (29.4)

Concor 15,350 14,152 8.5 14,208 8.0 19.5 14.0 20.5 2,228 1,409 58.1 2,104 5.9 11.4 7.2 58.3 10.8 5.6

Source: Companies; Kotak Securities - Private Client Research




MEDIA

We estimate 14% mean growth in our coverage universe, with mostcompanies reporting 10%-15% growth. Advertising revenue growth in thequarter is likely to have been robust. On operating leverage, reduction inone - time (launch) expenses, and reduction in raw material prices (in caseof newspaper publishers), we expect margin gains (1.6 ppt over theaggregate media coverage universe) shall continue to drive robust EBITDAgrowth. We expect 22% y/y growth in PAT over our coverage universe.

Dish TV: We expect 2.4% q/q growth in revenues, led largely by subscriberadds in the quarter. We expect continued margin gains on higher gross mar-gins (reduced content expenses, 4QFY16 being a high base quarter), and op-erating leverage, driving 21.5% y/y growth in EBITDA.

ENIL: We expect revenue growth of 11% y/y. Marketing and other expensesfor the quarter are likely to be relatively high (on higher brand expenses aswell as new launches), impacting EBITDA margin adversely. We expectflattish EBITDA for the quarter. Reported PAT is likely to come in 37% loweron lower margin, lower other income and higher effective tax rate.

Hindustan Media Ventures (HMVL): We expect the company to report13% growth in advertising revenues. EBITDA margin is likely to expand 150bps on the back of lower newsprint prices. We estimate 14% growth in PAT.

Sun TV Network: We estimate 7% y/y growth for the company; we notethat revenue pie shall change with a higher proportion of revenues comingfrom advertising. We expect 2.2 ppt expansion in EBIT margin, helped bylower content expenses, and higher advertising revenues. We estimate 7.5%y/y growth in PAT.

TV18 Broadcast: We expect 17% y/y growth in revenues, helped by weakbase of 1QFY16, and strong growth in entertainment operations. EBITDAmargin of the company is likely to be significantly impacted by launch ofHindi movie channel in the quarter. We estimate Rs 316mn net profit for thequarter.

Zee Entertainment: Advertising revenue growth of the company is likely tobe robust (est 19% y/y), helped by advertising revenues from sports as alsohigher monetization of "&TV". We factor in 18% y/y growth in subscriptionrevenues, leading to aggregate growth of 18% y/y. We expect content andother expenses to be relatively high in the quarter. Margin expansion shall bechecked by higher sports losses in the quarter, and expenses on new pro-gram launches. We expect 14% y/y growth in PAT for the quarter. We notethat reported PAT shall, in addition to factors discussed, be impacted by ac-counting for RPS of ZEEL, which shall be accounted for as debt this quarteronward.

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Quarterly estimates - Media



Dish TV 8,188 7,994 2.4 7,367 11.1 35.1 32.6 32.1 1,008 4,828 (79.1) 542 NM 0.9 4.5 (79.1) 0.5 85.9

ENIL* 1,124 1,472 (23.6) 1,016 10.7 30.2 26.2 34.8 163 202 (19.3) 259 (37.2) 3.4 4.2 (19.3) 5.4 (37.2)

HMVL 2,439 2,275 7.2 2,237 9.0 25.9 22.5 24.4 474 470 1.0 417 13.7 6.5 6.4 1.0 5.7 13.7

Sun TV Network* 7,427 5,707 30.1 6,911 7.5 42.6 57.1 40.4 2,121 2,360 (10.1) 1,973 7.5 5.4 6.0 (10.1) 5.0 7.5

TV18 Broadcast 7,003 6,713 4.3 5,967 17.4 8.3 14.8 2.0 317 825 (61.6) (0) NM 0.2 0.5 (61.6) 0.0 NM

Zee Entertainment 15,859 15,316 3.5 13,399 18.4 24.8 27.0 23.2 2,765 2,606 6.1 2,423 14.1 2.9 2.7 6.1 2.5 14.1

Total 42,039 39,477 6.5 36,896 13.9 27.8 30.0 26.2 6,847 11,290 (39.4) 5,613 22.0

Source: Company Reports, Kotak Securities - Private Client Research; Note: * Standalone operation, in the case of Sun TV to be read as EBIT margin (asagainst EBITDA margin)




METALS & MINING

We expect strong earnings for the metal companies, backed byimprovement in realisation. Steel companies are expected to reportsequential improvement in margin due to higher realisation. Non-ferrousproducers would also likely report expansion in margin sequentially. Pricesacross the metals (ferrous and non-ferrous) were up on QoQ basis, exceptfor lead, which declined marginally. In the mining space as well, playerswould report sequential improvement in margins. Though metals andmining sector would see an improvement in the EBITDA margin, but thesustainability of the same in the long run would be an issue. Hence, wecontinue to maintain our cautious stance on the space.

Steel companies are expected to report QoQ expansion in EBITDA margins,backed by higher realisation, as full impact of Minimum Import Prices flows inand also due to an increase in global steel prices. We expect saleable steel vol-umes to have increased in 1QFY17 by 10-15% YoY for domestic steel makers,due to reduced import pressure. Chinese export prices of Hot Rolled Coil in-creased sharply QoQ in 1QFY17 to ~US$390/tonne. The domestic steel consump-tion has grown 4.5% YoY during Apr-May 2016. Steel imports and exports dur-ing the same period declined by 29.3% YoY to 1.2MT and 11.7% to 0.69MT re-spectively, leaving India a net importer of 0.51 MT. A sharp decline in imports islargely attributed to the Minimum Import Price on 173 products, which was im-posed in the month of February 2016.

For non-ferrous players, we expect better realisation to support earnings growth.Prices of base metals were up during the quarter, with zinc and aluminiumprices increasing by over 14% and 4.5% respectively, followed by marginal risein copper prices QoQ. However, lead prices declined marginally.

Commodities price movement (US$/t)

Commodity 1QFY17 1QFY16 YoY (%) 4QFY16 QoQ (%)

Aluminum 1,583 1,789 (11.5) 1,515 4.5

Zinc 1,925 2,191 (12.1) 1,686 14.2

Lead 1,725 1,950 (11.5) 1,745 (1.1)

Copper 4,732 6,053 (21.8) 4,681 1.1

Source: LME

JSW Steel: We expect saleable steel sales volume to increase 16%/10%YoY/QoQ to 3.6MT backed by capacity ramp-up at Vijaynagar and Dolvi. Weexpect steel realisation to increase by Rs2,750/tonne supported by an imposi-tion of MIP. Consolidated revenue is expected to grow 9.1%/18% YoY/QoQto Rs126.3bn. We estimate consolidated EBITDA to increase by 43% QoQ toRs26.15bn. Aided by higher steel prices, we expect standalone EBITDA/T toincrease to Rs7,525/tonne. We expect company to report PAT of Rs6.69bn in1QFY17.

National Aluminium Company: We model alumina sales volume of 340ktand aluminum sales of 98kt. For 1QFY17, we expect net sales to increase20.1 YoY to Rs17.9bn (down 4.4% QoQ), EBITDA to increase 28.1%/20%YoY/QoQ to Rs2.87bn with EBITDA margin of 16%. QoQ improvement in op-erating profit is attributed to 14% rise in alumina prices. We expect companyto report PAT of Rs2.1bn.

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Hindustan Zinc: Due to the ongoing mine development, volumes are ex-pected to decline in 1HFY17, which would offset the rise in zinc prices. Wemodel lower zinc sales of 110,000 tonnes and lead sales volume of 28,000tonnes. For 1QFY17, we expect net sales to decline 25.8%/14% YoY/QoQ toRs26.94bn, EBITDA to decline 32.7%/14.5% YoY/QoQ to Rs11.18bn withEBITDA margin of 41.5%. We expect company to report PAT of Rs11.92bn.

Tata Sponge: We expect EBITDA margin to improve QoQ on the back ofstable realisation and decline in iron ore costs. The QoQ expansion in marginwould also be supported by higher power sales. We model sales volume of100,000 tonnes and expect net sales to decline by 13.3% QoQ to Rs1.22bn.EBITDA is expected to decline 7% QoQ to Rs147mn, while EBITDA margin islikely to expand to 11.2%. We expect company to report PAT of Rs141mn.

NMDC: Revenue is expected to decline 12.7% YoY to Rs15.77bn due tolower sales volume and decline in iron ore realisation. We model sales vol-ume of 7.6MT. The company took a price hike in April, which was partiallyrolled back in the month of May and June. We expect EBITDA to decline 41%YoY to Rs6.46bn, with an EBITDA margin of 41%. We expect company toreport PAT of Rs6.78bn.

Quarterly estimates - Metals & Mining



JSW Steel 126,250 106,975 18.0 115,762 9.1 20.7 17.1 14.1 6,690 1,712 290.7 (1,068) --- 27.7 7.1 290.7 (4.4) ---

NALCO 17,911 18,744 (4.4) 14,913 20.1 16.0 12.7 15.0 2,103 2,079 1.1 1,659 26.8 0.8 0.8 1.1 0.6 26.8

Hindustan Zinc 26,942 31,324 (14.0) 36,302 (25.8) 41.5 41.8 45.7 11,920 21,491 (44.5) 19,208 (37.9) 2.8 5.1 (44.5) 4.5 (37.9)

Tata Sponge 1,218 1,404 (13.3) 1,419 (14.2) 11.2 10.5 2.8 141 128 10.4 71 99.4 9.2 8.3 10.4 4.6 99.4

NMDC 15,774 15,299 3.1 18,064 (12.7) 41.0 35.3 61.0 6,785 5,529 22.7 10,101 (32.8) 1.7 1.4 22.7 2.5 (32.8)

Source: Company Reports, Kotak Securities - Private Client Research




OIL & GAS

Sharp spike in crude oil prices, significant fall in GRMs, meaningfulinventory gains, and stable currency are key highlights for the sector

Crude oil: In Q1FY17, Brent crude oil price increased 33% to US$47/bbls (av-erage) supported by wildfires in the oil-sands region in Canada, output cuts inNigeria/Venezuela due to political unrest and expectation that US crude oilproduction will decline significantly.

We expect upstream companies (such as OIL INDIA, ONGC, Selan explora-tion) to show earnings growth due to higher realization and hence stocks inthis space to remain in focus. However, the benefit of higher crude oil priceswill get partly offset by ~20% cut in domestic gas price w.e.f. April 2016.

Refining margins: In Q1FY17, refining margins have come under pressuredue to fall in product prices but partly mitigated by inventory gains.Singapore GRMs have corrected to US$ 5.0/bbls In Q1FY17 as againstUS$6.5/bbls in Q4FY16 led by fall in Petrol (-28%), Jet (-15%), Diesel (-5%)and naphtha (-19%) spreads. We believe this will impact the earnings of allthe refining companies (MRPL, CPCL, OMCs, RIL).

Mid-stream companies - Natural gas utilities companies are expected to re-port positive earnings growth sequentially, supported by volume pick up andfavourable feedstock costs.

Forex (INR/US$): Average local currency has marginally appreciated to US$66.9/bbls (average) in Q1FY17 from $67.5/bbls (average) in Q1FY17. This willmarginally negatively impact both the upstream and downstream companies.

We expect revenues in our coverage universe to de-grow by about 45% YoYbasis mainly on account of lower realizations.

Average product spread with Dubai crude ($/bbls)

Particulars Q4 Q1 Q2 Q3 Q4 Q1 QoQ QoQFY15 FY16 FY16 FY16 FY16 FY17 Chg Chg

* (%)

INR/USD 62.3 63.5 64.9 65.9 67.5 66.9 (1) (1)

Diesel 18.9 16.2 13.9 14.4 10.5 10.0 (1) (5)

Jet/SKO 15.7 13.0 11.1 14.7 12.6 10.7 (2) (15)

Petrol 10.4 15.2 15.0 14.4 13.2 9.6 (4) (28)

Naphtha 15.1 15.5 12.9 19.6 16.5 13.3 (3) (19)

FO (9.2) (13.4) (13.4) (11.7) (9.3) (14.3) (5) NM

Dubai Crude price 52.1 61.4 50.1 41.1 30.7 42.9 12 40

Brent crude oil 55.1 63.5 51.3 44.7 35.2 47.0 12 33

Singapore GRM 8.0 6.2 8.0 6.5 5.0 (2) (24)

Arab light-heavy 3.4 2.7 3.2 2.7 2.8 0 2

Source: Bloomberg; * Absolute change

US Dollar Index vs crude oil prices

Source: Bloomberg. Note: The appreciating US dollar puts pressure on the dollar-denominated commodities.

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65

75

85

95

105

27

47

67

87

107

127

147

167 Brent crude Dollar index



Key highlights

Due to fall in refining margins, revenue and margins of all the refining compa-nies are expected to be under pressure. However, this will be partly mitigated bystrong inventory gains. However, upstream companies will be the key beneficia-ries of higher crude oil prices.

Companies

Aban offshore Ltd: In Q1FY17, we expect Aban to report yoy decrease inrevenues and EBITDA on account of lower utilization of jack-ups, and baseeffect. Aban Offshore's step down subsidiary has received a firm letter ofaward from ONGC for the deployment of the Drillship Aban Abraham for afirm period of two years. The expected revenues from this deployment is es-timated at USD 87 mn (equivalent to Rs. 5.92 bn). The deployment is ex-pected to commence during Q4CY16.

Cairn India Ltd.: We expect CIL to report strong growth in topline line,which reflects better crude oil price realization, and marginal improvement inproduction. In Q1FY17, Brent crude oil price increased 33% to US$47/bbls(average).

Castrol India Ltd.: The lubricant business is a seasonal business and volumegets affected due to various seasonal factors. Hence, quarter-on-quarter re-sult comparison will not give the correct picture. We have observed that forCastrol Quarter 2 (April- June) and Quarter 4 (Oct-Dec) of the calendar yearare generally the best quarters. Castrol's profit is expected to increase dueto better EBITDA margins on account of decline in base oil price and marginalvolume growth. We have assumed lubricants sales volumes of 54.35 mn litersin Q2CY16 versus 53.66 mn liters in Q2CY15 and 50.1 liters in Q1CY16.

Chennai Petroleum Corporation Limited (CPCL): In Q1FY17, crudethroughput was lower due to refinery shut down on account of plant mainte-nance. In Q1FY17, refining margins have come under pressure due to fall inproduct prices but partly mitigated by inventory gains. Singapore GRMs havecorrected to US$ 5.0/bbls In Q1FY17 as against US$6.5/bbls in Q1FY17 led byfall in Petrol (-28%), Jet (-15%), Diesel (-5%) and naphtha (-19%) spreads.

Gujarat State Petronet Ltd (GSPL). We expect GSPL to report growth inrevenue on account of higher gas transmission volume and higher realizedtariffs (7.6% qoq). We have assumed gas transmission volumes of 25.6mmscmd higher by 3.7% qoq.

Indraprastha Gas Ltd. (IGL): We expect IGL's earnings to improve 8.4%QoQ and 14.5% YoY, driven by higher CNG/PNG volumes as competitivenessversus alternates improves and higher EBITDA margin due to domestic gasprice cut.

Mangalore Refinery and Petrochemicals Limited (MRPL): We have as-sumed lower refinery throughput of 3 mmt for Q1FY17 (plant shut down dueto maintenance) as against 4.52 mmt for Q4FY16 and 3.39 mmt for Q1FY16.In Q1FY17, refining margins have come under pressure due to fall in productprices but partly mitigated by inventory gains. Singapore GRMs have cor-rected to US$ 5.0/bbls In Q1FY17 as against US$6.5/bbls in Q1FY17 led by fallin Petrol (-28%), Jet (-15%), Diesel (-5%) and naphtha (-19%) spreads.

OIL India Ltd. (OINL): We expect earnings improvement for OIL India inQ1FY17 mainly on account of higher realization. We have assumed realiza-tion of $45/bbls in Q1FY17 as against $32.6/bbls in Q4FY16 and $57.4/bbls inQ1FY16. However, part of the benefit will be offset by sharp cut in domesticgas price.



Quarterly estimates - Oil & Gas



ABAN 7,300 6,293 16.0 9,815 (25.6) 59.2 53.9 59.7 284 (1,198) NM 1354 (79.0) 4.9 (20.5) (123.7) 23.2 (79.0)

Cairn India 20,500 17,168 19.4 26,271 (22.0) 42.0 29.0 49.1 4,292 (109,482) NM 8350 (48.6) 2.3 (58.4) NM 4.5 (48.6)

Castrol 9,511 8,521 11.6 9,202 3.4 30.5 29.5 29.6 1,953 1,724 13.3 1845 5.9 3.9 3.5 13.3 3.7 5.9

CPCL 64,600 58,635 10.2 90,514 (28.6) 6.4 6.7 11.7 2,009 2,656 (24.4) 9235 (78.2) 13.5 17.8 (24.4) 62.0 (78.2)

GSPL 2,584 2,313 11.7 2,557 1.0 88.5 88.3 87.5 1,163 997 16.7 1128 3.2 2.1 1.8 16.7 2.0 3.2

IGL 8,800 8,816 (0.2) 8,994 (2.2) 22.5 21.9 21.5 1,166 1,076 8.4 1018 14.5 8.3 7.7 8.4 7.3 14.5

MRPL 85,500 92,848 (7.9) 113,131 (24.4) 7.1 16.5 6.3 2,083 13,534 (84.6) 4059 (48.7) 1.2 7.7 (84.6) 3.2 (62.8)

Oil India 23,000 18,990 21.1 27,501 (16.4) 37.2 33.2 39.4 4,653 4,693 (0.8) 7754 (40.0) 7.7 7.8 (0.8) 12.9 (40.0)

PLNG 65,412 59,501 9.9 83,772 (21.9) 7.2 5.6 4.3 2,710 2,393 13.3 2475 9.5 3.6 3.2 13.3 3.3 9.5

TOTAL 287,207 273,084 5.2 371,758 (22.7) 15.2 16.0 15.6 20,314 (83,608) NM 37,218 (45)

Source: Companies; Kotak Securities - Private Client Research; * Follows calendar year

3M Stocks Performance in Oil and Gas Sector

Source: Bloomberg

Rig rentals ($/day)

Source: Riglogix

-1 0 .0 %-5 .0 %0 .0 %5 .0 %

1 0 .0 %1 5 .0 %2 0 .0 %2 5 .0 %3 0 .0 %

60,000

80,000

100,000

120,000

140,000

160,000

Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16

3-months average Jackup IC 350' + WD Monthly leading rate

Petronet LNG (PLNG): In Q1FY17, PLNG's sequential bottom line is expectedto increase meaningfully on account of higher volume and tariffs. PLNG's op-erating profit is expected to increase which reflects (1) higher LNG off-takeand (2) increase in blended tariffs due to modest spot margins. We have as-sumed sequential increase in LNG re-gasification volumes to 158 tn BTUs ver-sus 153.6 tn BTUs in Q4FY16 and 127.9 tn BTUs in Q1FY16. Dahej full expan-sion work is expected to be completed by FY17 end.

Top picks: Petronet LNG, Castrol and Oil India.




PAINTS

We expect paint companies to moderate set of numbers in Q1FY17 with 1)Q1 is usually moderate for paint companies with respect to demand 2)Raw material prices remain benign for paint companies

Kansai Nerolac Paints Limited (REDUCE: Target Price - Rs 295)

Auto sales (main business for KNPL) has been mixed in the quarter and hence weestimate KNPL to report flattish revenues and margins in the quarter

Asian Paints Limited (ACCUMULATE: Target Price - Rs 1065)

For Asian Paints which get 90% of its business from decorative segment and10% from automotive segment, we estimate the company to report moderategrowth in revenues with flattish margins.

Berger Paints (ACCUMULATE: Target price - Rs 300)

Berger has been continually making efforts to add high value decorative prod-ucts and focus on western and southern markets (weak markets for Berger). Theabove efforts from the company coupled with a moderate business environmentis expected to translate into moderate growth in revenues (+10% YoY) with im-provement in operating margins and profitability.

Quarterly estimates - Paints



Kansai Nerolac Paints 9,987 8,911 12.1 9,997 (0.1) 14.7 14.9 14.9 947 804 17.8 941 0.6 1.8 1.5 20.0 1.7 5.9

Asian Paints 41,914 39,712 5.5 36,235 15.7 18.0 17.7 18.9 4,660 4,088 14.0 4,555 2.3 4.9 4.3 14.0 4.7 4.3

Berger Paints 12,355 11,297 9.4 11,219 10.1 14.5 14.1 13.4 1,058 929 13.9 781 35.5 1.5 1.3 14.2 1.1 35.4


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PHARMACEUTICALS

Pharma sector has been under the cloud of regulatory issues with most ofour coverage universe companies having pending 483s or warning letter.These regulatory issues are likely to have a double whammy effect on thecompanies wherein the cost related to remediation measures wouldimpact margins and delay in ANDA approvals would impact revenues. Thisincreased frequency of inspections from USFDA is here to stay and hencewe would keep seeing bouts of these compliance issues. Over the next 2-3years we see Companies to (1) eventually enhance their systems more andmore towards automation (most of the 483 observations are due tohuman intervention) which would lower the frequency of 483observations and (2) imply de-risk strategies like multiple plants for keyproducts which would eventually make these 483s less relevant.

As far as 1QFY17 is concerned, limited competition opportunities will bethe sole driver (for Sun, Lupin) during the quarter for few of our coveragecompanies. Other than that, we do not expect any significant growth ascompanies recoup with base business price erosions as well as delays inANDA approvals. Natco pharma although is expected to post robustrevenue growth driven by strong sales from Hep-C portfolio (in domesticmarket). Acquisition benefits will cushion Cipla, DRL in an otherwise weakquarter. Cadila and Torrent will too face the heat due to increasedcompetition on products in US. Alembic is expected to post a tepid quarterwith no big ticket launches in US.

Sector pick for results - Alembic Pharma, Sun Pharma.

Alembic Pharma will see its second normalized quarter post few quarters ofrobust revenues (led by one off opportunity). With lack of any big ticketlaunches, we expect this fiscal to be subdued albeit on a high base.

As far as segmental growth is concerned, we expect the domestic formula-tions segment to post 11% growth. On exports front, we expect export for-mulations to post 44.6% growth.

We expect EBIDTA margins of ~22% in 1QFY17 against ~17.5% in Q1FY16and margins of 22.9% posted in 4QFY16. PAT at 0.96bn will be up ~38%YoY but marginally up QoQ.

Key thing to watch out - Injectable plant progress, US launches goingahead

Cadila Hc will start seeing the impact of price erosion in HCQS brand (~US$140-160mn revenues) for US markets, hence we expect a dip in US revenuesboth QoQ as well as YoY, impacting the overall revenues. On EBIDTA marginfront we expect them to dip by ~150-200bps both QoQ as well as YoY. OnPAT front we expect 11% dip QoQ and 2.6% YoY. Cadila has been indicatingof resolution of Moraiya plant in FY17E, which will be a key trigger for thecompany.

On segmental front, Domestic segment is expected to post 8% growth. US isexpected to dip 18-20% YoY as well as QoQ.

Key thing to watch out - Update on meeting with USFDA, Plant re-inspec-tion timelines.

Cipla Ltd will see the benefit of consolidation of Invagen/Exelan for full quar-ter. We have assumed revenue of ~US$ 60mn (For full year the revenues forthe acquired business would add US$ 230mn) from this acquisition. Overallexport revenues are expected to remain flat YoY (base quarter had gNexiumbenefit) and up 20% QoQ (led by consolidation of Invagen/Exelan). For do-mestic formulations segment, we expect growth to remain tepid at mere8%. On EBIDTA margins, we expect uptick QoQ, but YoY margins will belower sharply due to high base.

Key thing to watch out - Clarity on pending compliance issues at Indoreplant, launch timelines for combination inhaler in the UK market.

RESULTS PREVIEW

Meeta Shetty, [email protected]

+91 22 6218 4425



For Dr Reddy's, market share gains in gNexium's entry will be offset by in-creased competition in gValcyte. We expect US revenues of $270mn, down~8% YoY as well as QoQ. For domestic market, we expect 15% growthpartly driven by UCB acquisition. Overall revenues are expected to dip ~3%as we also built in nil sales from Venezuela (US$ 18mn quarterly run-rate).On OPM we expect an increase of ~200bps (base quarter has one off ex-penses) QoQ but dip of 250bps YoY (due to lower injectable revenues fromUS). PAT is expected to be 27% lower YoY. 4QFY16 reported loss due towrite offs related to Venezuela market.

Key thing to watch out - Timelines resolution of plants under complianceissues, US launches for FY17E.

Lupin is expected to report a robust quarter led by the exclusivity launch ofgGlumetza (full quarter benefit) as well as price increases taken in gFortametin the US markets. Consolidation of Gavis acquisition would also aid growth.For the domestic formulation segment we expect 10% growth whereas USformulations revenues are expected to post 83% growth YoY (on low base).Overall revenues are expected to see 41% growth YoY and 6.6% growthQoQ. EBIDTA margins will sharply rise to ~32.4%, up 750bps YoY and mar-ginally lower QoQ (as we assume higher R&D). PAT will be up 62% YoY and6% QoQ.

Key thing to watch out - Clarity on timelines for resolution of Goa USFDAcompliance issues.

For Natco Pharma we expect marginal growth in revenues QoQ and 85%growth YoY primarily led by domestic formulation segment. Hep C segmentrevenues have been significant growth driver for Natco over the last fewquarters. On EBIDTA margins front we expect 240bps decrease YoY but flatQoQ. PAT will be up 120% YoY but flat QoQ.

Key thing to watch out - Launch timelines for gCopaxone, gTamiflu.

Sun Pharma launched gGleevec in Feb-16 and will see the first full quarterbenefit flowing this quarter. The US revenues are expected to be at~US$400mn (ex-Taro) and US$650mn with Taro. Domestic formulationsgrowth is pegged at 14%, albeit on a low base.

On overall revenues, we expect ~25% YoY growth and 10% QoQ growth.Margins will expand significantly at 37.9%, up 1000bps YoY mainly driven bygGleevec. On QoQ basis, we expect ~500bps expansion. PAT will up 4x YoY(base quarter was impacted by an exceptional item), adj for the exceptionalitem, PAT should grow at 119%.

For Taro we expect to post 15% increase in revenues YoY. On margins, weexpect OPM of 65.6% (up 320bps YoY). PAT is expected to dip 28% YoY.

Key thing to watch out - Clarity on timelines for Halol resolution.

Torrent Pharma will post QoQ growth in spite of lower one off revenuesfrom US (YoY, revenues will be lower). The gains will be driven by better cur-rency realization of Brazil as well as better domestic revenues. On marginswe expect Torrent to post decline both YoY as well as QoQ due to lower USrevenues.

Segmental revenues - For US revenues we expect 43% drop in revenues YoYand flat QoQ revenues. For domestic formulations we expect 12% growthYoY.

Key thing to watch out - Clarity on US launches.



Quarterly estimates - Pharmaceuticals



Alembic Pharma 6,734 6,256 7.6 5824 15.6 22.0 22.9 17.5 963 912 5.6 698 37.9 5.1 4.8 5.6 3.7 37.9

Cadila Hc 23,219 23,755 (2.3) 23,783 (2.4) 21.9 23.7 24.1 3,459 3,881 (10.9) 3,551 (2.6) 3.4 3.8 (10.9) 3.5 (2.6)

Cipla 38,088 32,067 18.8 37,768 0.8 15.5 (6.7) 27.0 3,570 809 341.5 6,506 (45.1) 4.4 1.0 341.5 8.1 (45.1)

Dr Reddy's 36,488 37,562 (2.9) 37,578 (2.9) 23.0 20.8 26.2 4,576 (3,563) (228.4) 6,257 (26.9) 26.9 (21.0) (228.4) 36.8 (26.9)

Natco Pharma 4,000 3,868 3.4 2,157 85.5 24.3 23.9 26.6 620 601 3.2 282 119.5 3.6 3.4 3.4 1.7 119.5

Lupin 43,607 40,913 6.6 30,743 41.8 32.4 32.7 24.9 8,522 8,071 5.6 5,250 62.3 19.0 18.0 5.6 11.7 62.3

Sun Pharma 81,347 74,139 9.7 65,222 24.7 37.9 33.0 27.4 23,258 17,137 35.7 4,790 385.6 9.7 7.1 35.7 2.0 385.6

Torrent Pharma 15,809 14,730 7.3 18,860 (16.2) 29.1 32.3 46.7 3,101 3,570 (13.1) 4,490 (30.9) 18.2 21.0 (13.1) 26.4 (30.9)





SHIPPING

Current shape of shipping markets

BULK: The Baltic Dry Index (BDI) continued to trade at lower levelsprimarily due to slowdown in the Chinese economy, slowing globaldemand for raw materials including iron ore, coal, cement, steel andmismatch of demand and supply of vessels with supply far exceeding thedemand. Infact, freight rates in the bulk sector are currently so low that itfails to cover even the operating cost of running a vessel. (Without takinginto account possible financing). This is the only reason why many bulkcompanies were thrown out of business globally, while Indian companieslike Mercator Limited (dedicated to bulk segment) continuing to reporthuge losses

TANKER: On the other, with lower crude oil prices, net importingcountries like China and India are importing more oil keeping the tankersegment more active compared to bulk segment.

To conclude, bulk segment is weak and tanker/product segment continuesto hold.

RESULTS PREVIEW


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Fresh ordering has been slow

Shipping companies are placing new orders under 2 circumstances; 1) If they geta committed long term business for the asset or 2) they believe that the asset ishighly undervalued. The above two circumstances are translating into slow paceof fresh ordering and some business for shipbuilding companies. The slow busi-ness for new ships is also forcing yards to compete even harder and reduce newbuilding prices even lower.

While Latest data from Bloomberg (the above table) indicate that that fresh or-dering continues to be slow (except crude) leading to improvement in order bookto current fleet ratio. But despite slow fresh ordering (fewer new supplies) is notgetting translated into any significant improvement in freight rates primarily be-cause of 2 reasons: 1) Weak global demand esp. from China and 2) Excess sup-ply of ships over demand in the current market.

Baltic Dry Index

Source: Bloomberg

Baltic dirty tanker index

Source: Bloomberg

0

200

400

600

800

1,000

1,200

1,400

Jun-15 Aug-15 Oct-15 Jan-16 Mar-16 May-16550

700

850

1,000

1,150

Jun-15 Aug-15 Oct-15 Dec-15 Feb-16 Apr-16 Jun-16



Assets prices continue to move down - impacting the NAV

We had a close look at the recent deals in sales/purchase of assets in the ship-ping sector. We observed that the prices of all assets in the last 3 months aredown by 10 to 15 %. Management of SCI indicated that, with low asset pricesand weak earnings, scrapping has increased in January/February 2016 which ispositive for shipping companies. The downward movement in asset prices hasalso impacted the NAV of shipping companies.

Low demand for ships, has impacted the freight market as well as the prices ofships in the secondary markets. We had a close look at the recent deals insales/purchase of assets in the shipping sector. We observed that the prices ofall assets in the last 36 months are on a down trend though in a declining rate.

Asset prices across categories (for 5 year old assets in USD mn)

Segment Jun-16 Jun-15 Jun-14 Jun-13 Jun-12

Aframax 40.0 46.5 54.0 52.0 54.0

Suezmax 53.0 60.0 67.0 60.0 65.0

VLCC 73.0 82.0 97.0 97.0 101.0

Handy Size 19.0 22.0 26.0 23.0 24.5

Supramax 22.0 24.0 27.5 28.0 31.0

Panamax 25.0 27.5 35.0 30.0 34.0

Capesize 45.0 50.0 59.0 50.0 57.0

Source: Bloomberg

Low crude prices is positive for shipping industry and for SCI

With fall in crude prices, the bunker prices have come down significantly. Thefall was more significant in the last 18 months which is helping the margins ofshipping companies including SCI

We estimate, bunker to remain at lower levels in FY17/FY18 with crude averag-ing $55/barrel. The lower crude level would translate into lower bunker priceswhich would impact the operational margins positively of shipping companies.

Bunker cost 380 centistoke in Singapore

Rs mn FY12 FY13 FY14 FY15 FY16 Current

Avg bunker ($/tonne) 710 608 580 308 162 226

Source: Bloomberg

Great Eastern Shipping Company (SELL: Target Price - Rs 300) GESCO has been continuously selling assets in the market and currently have

a depleted fleet. Also shipping market have been week. So far GESCO, weexpect de-growth in revenues with declining margins.

We also estimate gross NAV of the company (including shipping and offshore)to have decreased in the current quarter on account of weakness in both -shipping and offshore market.

Shipping Corporation of India (SELL: Target Price - Rs 66) SCI has not been able to renew fixed contracts for many of its ships and

hence even for SCI, we expect the revenues, operating margins and earningsto drop in the current quarter, as freight rates have dropped.

We also estimate the gross NAV of the company to get negatively impactedin the current quarter.



Reliance Defense and Engineering (ACCUMULATE: Target Price - Rs70)

We expect even Pipavav to report weak revenues and profitability forQ1FY17 due to poor shipbuilding market.

However, we expect the company to focus more on defence sector whichimproves the prospects of the company going forward.

Quarterly estimates - Shipping



GE shipping 8,643 8,767 (1.4) 9,465 (8.7) 47.7 48.4 53.5 810 575 40.9 3,257 (75.1) 5.4 3.8 42.1 21.6 (75.0)

SCI 9,669 9,838 (1.7) 10,564 (8.5) 26.3 27.5 31.2 940 (72) (1,405.6) 1,675 (43.9) 2.0 (0.2) (1,440.0) 3.6 (44.2)

Reliance Defence 1,181 947 24.7 1,070 10.4 (14.7) (13.3) (9.6) (1,128) 1,017 (210.9) (1,673) (32.6) (1.6) 1.5 (210.3) (2.4) (33.3)




Bulk deals Trade details of bulk deals

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

(Rs)

07-Jul AFEL Kiran Mittal S 30,000 7.9

07-Jul ALUFLUOR Varsha Sharad Shah B 73,000 26.1

07-Jul ANSHUS Pradeep Narendra Bhatt S 235,292 4.3

07-Jul CELEBRITY Chetan Rasiklal Shah B 225,000 10.6

07-Jul CITIZYN Varadharaja Perumal Jeya Baskar S 38,245 2.8

07-Jul DUNE Ravi Jagdishraj Bhandari S 211,937 23.2

07-Jul DUNE Maheshbhai N Purabia S 100,000 23.1

07-Jul DUNE Kunal J Parmar S 190,000 23.3

07-Jul DUNE Pradeep Narendra Bhatt B 163,351 23.2

07-Jul DUNE Firoz Hanifbhai Memon B 156,225 23.2

07-Jul DUNE Dhiren Dharamdas Agrawal (Huf) S 97,970 23.2

07-Jul GEETANJ Rathod Manoj Chhaganlal Huf S 50,000 22.0

07-Jul GTLINFRA Goldman Sachs Investments Mauritius I S 55,380,252 2.7

07-Jul GTLINFRA Linden Capital L P B 55,380,252 2.7

07-Jul ISHANCH Swetsam Stock Holding Private Limited B 239,944 40.0

07-Jul ISHANCH Harshadbhai Patel S 214,900 40.0

07-Jul ISHANCH Rajeshkumar Patel S 285,100 40.0

07-Jul KUBERJI Santosh Pandurang Kate S 30,000 33.1

07-Jul LINEARIND Ram Gopal Ramgharia S 5,922 14.7

07-Jul LINEARIND Ram Gopal Ramgarhia Huf S 8,928 14.7

07-Jul LINEARIND Vsl Securities Pvt Ltd B 16,536 14.7

07-Jul NAVIGANT Naysaa Seurities Limited S 40,000 7.1

07-Jul NAVIGANT Vsl Securities Pvt Ltd B 40,000 8.5

07-Jul PRISMMEDI Anmol Kothari B 15,000 20.8

07-Jul PRISMMEDI Ratan Prakash Dinesh Kumar Huf B 10,000 20.8

07-Jul SAHYOG Yakshaben Ashokbhai Shah B 24,900 22.3

07-Jul SAHYOG Sunita Marwah S 24,082 22.7

07-Jul SHUBHRA Ramvilas Gupta S 20,803 18.5

07-Jul SIICL Khursheed A Merchant B 19,996 13.1

07-Jul VIKASECO Visaria Mavji (Huf) B 1,451,061 14.2

07-Jul VIKASECO Athena Multitrade Private Limited S 1,500,000 14.2

07-Jul VIPPYSP Akshay Galada S 30,000 35.1

Source: BSE

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

Gainers

Lupin Ltd 1,656 5.9 NA 1.9

Hindalco Ind 128 3.3 NA 15.7

Hindustan Unilever 918 3.2 NA 1.69

Losers

Tata Steel 318 (4.8) NA 10.1

Zee Entertainment 448 (3.1) NA 3.4

HCL Tech 717 (2.9) NA 3.4

Source: Bloomberg



RATING SCALE

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

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

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

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

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

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

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

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

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

Fundamental Research Team

Dipen ShahIT, Banking, NBFC, [email protected]+91 22 6218 5409

Sanjeev ZarbadeCapital Goods, [email protected]+91 22 6218 6424

Teena VirmaniConstruction, [email protected]+91 22 6218 6432

Arun AgarwalAuto & Auto [email protected]+91 22 6218 6443

Ruchir KhareCapital Goods, [email protected]+91 22 6218 6431

Ritwik RaiFMCG, [email protected]+91 22 6218 6426

Sumit PokharnaOil and [email protected]+91 22 6218 6438

Amit AgarwalLogistics, Paints, [email protected]+91 22 6218 6439

Meeta Shetty, [email protected]+91 22 6218 6425

Jatin DamaniaMetals & [email protected]+91 22 6218 6440

Pankaj [email protected]+91 22 6218 6434

Nipun GuptaInformation [email protected]+91 22 6218 6433

Jayesh [email protected]+91 22 6218 5373

K. [email protected]+91 22 6218 6427

Technical Research Team

Shrikant [email protected] 22 6218 5408

Amol [email protected]+91 20 6620 3350

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

Rahul [email protected]+91 22 6218 5498

Malay [email protected]+91 22 6218 6420

Prashanth [email protected]+91 22 6218 5497



Disclosure/DisclaimerKotak Securities Limited established in 1994, is a subsidiary of Kotak Mahindra Bank Limited. Kotak Securities is one of India's largest brokerage anddistribution house.Kotak Securities Limited is a corporate trading and clearing member of Bombay Stock Exchange Limited (BSE), National Stock Exchange of India Limited (NSE),Metropolitan Stock Exchange of India Limited (MSEI). Our businesses include stock broking, services rendered in connection with distribution of primarymarket issues and financial products like mutual funds and fixed deposits, depository services and Portfolio Management.Kotak Securities Limited is also a depository participant with National Securities Depository Limited (NSDL) and Central Depository Services (India) Limited(CDSL). Kotak Securities Limited is also registered with Insurance Regulatory and Development Authority as Corporate Agent for Kotak Mahindra Old MutualLife Insurance Limited and is also a Mutual Fund Advisor registered with Association of Mutual Funds in India (AMFI). We are registered as a Research Analystunder SEBI (Research Analyst) Regulations, 2014.We hereby declare that our activities were neither suspended nor we have defaulted with any stock exchange authority with whom we are registered in lastfive years. However SEBI, Exchanges and Depositories have conducted the routine inspection and based on their observations have issued advise letters orlevied minor penalty on KSL for certain operational deviations. We have not been debarred from doing business by any Stock Exchange / SEBI or any otherauthorities; nor has our certificate of registration been cancelled by SEBI at any point of time.We offer our research services to clients as well as our prospects.This document is not for public distribution and has been furnished to you solely for your information and must not be reproduced or redistributed to any otherperson. Persons into whose possession this document may come are required to observe these restrictions.This material is for the personal information of the authorized recipient, and we are not soliciting any action based upon it. This report is not to be construedas an offer to sell or the solicitation of an offer to buy any security in any jurisdiction where such an offer or solicitation would be illegal. It is for the generalinformation of clients of Kotak Securities Ltd. It does not constitute a personal recommendation or take into account the particular investment objectives,financial situations, or needs of individual clients.We have reviewed the report, and in so far as it includes current or historical information, it is believed to be reliable though its accuracy or completenesscannot be guaranteed. Neither Kotak Securities Limited, nor any person connected with it, accepts any liability arising from the use of this document. Therecipients of this material should rely on their own investigations and take their own professional advice. Price and value of the investments referred to in thismaterial may go up or down. Past performance is not a guide for future performance. Certain transactions -including those involving futures, options andother derivatives as well as non-investment grade securities - involve substantial risk and are not suitable for all investors. Reports based on technical analysiscenters on studying charts of a stock's price movement and trading volume, as opposed to focusing on a company's fundamentals and as such, may not matchwith a report on a company's fundamentals.Opinions expressed are our current opinions as of the date appearing on this material only. While we endeavor to update on a reasonable basis theinformation discussed in this material, there may be regulatory, compliance or other reasons that prevent us from doing so. Prospective investors and othersare cautioned that any forward-looking statements are not predictions and may be subject to change without notice. Our proprietary trading and investmentbusinesses may make investment decisions that are inconsistent with the recommendations expressed herein.Kotak Securities Limited has two independent equity research groups: Institutional Equities and Private Client Group. This report has been prepared by thePrivate Client Group. The views and opinions expressed in this document may or may not match or may be contrary with the views, estimates, rating, targetprice of the Institutional Equities Research Group of Kotak Securities Limited.We and our affiliates/associates, officers, directors, and employees, Research Analyst(including relatives) worldwide may: (a) from time to time, have long orshort positions in, and buy or sell the securities thereof, of company (ies) mentioned herein or (b) be engaged in any other transaction involving such securitiesand earn brokerage or other compensation or act as a market maker in the financial instruments of the subject company/company (ies) discussed herein oract as advisor or lender / borrower to such company (ies) or have other potential/material conflict of interest with respect to any recommendation and relatedinformation and opinions at the time of publication of Research Report or at the time of public appearance. Kotak Securities Limited (KSL) may haveproprietary long/short position in the above mentioned scrip(s) and therefore may be considered as interested. The views provided herein are general innature and does not consider risk appetite or investment objective of particular investor; readers are requested to take independent professional advicebefore investing. This should not be construed as invitation or solicitation to do business with KSL. Kotak Securities Limited is also a Portfolio Manager.Portfolio Management Team (PMS) takes its investment decisions independent of the PCG research and accordingly PMS may have positions contrary to thePCG research recommendation. Kotak Securities Limited does not provide any promise or assurance of favourable view for a particular industry or sector orbusiness group in any manner. The investor is requested to take into consideration all the risk factors including their financial condition, suitability to riskreturn profile and take professional advice before investing.The analyst for this report certifies that all of the views expressed in this report accurately reflect his or her personal views about the subject company orcompanies and its or their securities, and no part of his or her compensation was, is or will be, directly or indirectly related to specific recommendations orviews expressed in this report.No part of this material may be duplicated in any form and/or redistributed without Kotak Securities' prior written consent.Details of Associates are available on our website ie www.kotak.comResearch Analyst has served as an officer, director or employee of subject company(ies): NoWe or our associates may have received compensation from the subject company(ies) in the past 12 months. We or our associates may have managed or co-managed public offering of securities for the subject company(ies) in the past 12 months. We or our associates may have received compensation forinvestment banking or merchant banking or brokerage services from the subject company(ies) in the past 12 months. We or our associates may have receivedany compensation for products or services other than investment banking or merchant banking or brokerage services from the subject company(ies) in thepast 12 months. We or our associates have not received any compensation or other benefits from the subject company(ies) or third party in connection withthe research report. Our associates may have financial interest in the subject company(ies).Research Analyst or his/her relative's financial interest in the subject company(ies): Infosys Technologies, Time Technoplast - YesKotak Securities Limited has financial interest in the subject company(ies): Ashok Leyland, Bajaj Auto, Eicher Motors, Escorts, Hero MotoCorp, M&M, Maruti,Tata Motors, TVS Motors, ABB, Bajaj Electricals, BHEL, Carborundam Universal, Engineers India, Greaves Cotton, L&T, Siemens, Voltas, ACC, Grasim, UltratechCement, IRB Infra, KNR Construction, Nagarjuna Construction, PNC Infratech, Colgate, Dabur India, GCPL, HUL, ITC, Marico, Nestle, Pidilite Ind, Geometric, HCLTech, Infosys, TCS, Wipro, Zensar, Adani Port, Blue Dart, Concor, Dish TV, HMVL, TV18 Broadcast, Zee Ent. JSW Steel, Castrol India, Asian Paints, Cadila, Cipla,DRL, Lupin, Natco, Sun Pharma, NTPC - YesOur associates may have actual/beneficial ownership of 1% or more securities of the subject company(ies) at the end of the month immediately precedingthe date of publication of Research Report.Research Analyst or his/her relatives has actual/beneficial ownership of 1% or more securities of the subject company(ies) at the end of the monthimmediately preceding the date of publication of Research Report: NoKotak Securities Limited has actual/beneficial ownership of 1% or more securities of the subject company(ies) at the end of the month immediately precedingthe date of publication of Research Report: No

Subject company(ies) may have been client during twelve months preceding the date of distribution of the research report.

"A graph of daily closing prices of securities is available at www.nseindia.com and http://economictimes.indiatimes.com/markets/stocks/stock-quotes. (Choosea company from the list on the browser and select the "three years" icon in the price chart)."Kotak Securities Limited. Registered Office: 27 BKC, C 27, G Block, Bandra Kurla Complex, Bandra (E), Mumbai 400051. CIN: U99999MH1994PLC134051,Telephone No.: +22 43360000, Fax No.: +22 67132430. Website: www.kotak.com/www.kotaksecurities.com. Correspondence Address: Infinity IT Park, Bldg.No 21, Opp. Film City Road, A K Vaidya Marg, Malad (East), Mumbai 400097. Telephone No: 42856825. SEBI Registration No: NSE INB/INF/INE 230808130, BSEINB 010808153/INF 011133230, MSEI INE 260808130/INB 260808135/INF 260808135, AMFI ARN 0164, PMS INP000000258 and Research AnalystINH000000586. NSDL/CDSL: IN-DP-NSDL-23-97. Our research should not be considered as an advertisement or advice, professional or otherwise. The investoris requested to take into consideration all the risk factors including their financial condition, suitability to risk return profile and the like and take professionaladvice before investing. Investments in securities are subject to market risk; please read the SEBI prescribed Combined Risk Disclosure Document prior toinvesting. Derivatives are a sophisticated investment device. The investor is requested to take into consideration all the risk factors before actually tradingin derivative contracts. Compliance Officer Details: Mr. Manoj Agarwal. Call: 022 - 4285 6825, or Email: [email protected] case you require any clarification or have any concern, kindly write to us at below email ids: Level 1: For Trading related queries, contact our customer service at '[email protected]' and for demat account related queries contact us at

[email protected] or call us on: Online Customers - 30305757 (by using your city STD code as a prefix) or Toll free numbers 18002099191 / 1800222299,Offline Customers - 18002099292

Level 2: If you do not receive a satisfactory response at Level 1 within 3 working days, you may write to us at [email protected] or call us on 022-42858445 and if you feel you are still unheard, write to our customer service HOD at [email protected] or call us on 022-42858208.

Level 3: If you still have not received a satisfactory response at Level 2 within 3 working days, you may contact our Compliance Officer (Name: ManojAgarwal ) at [email protected] or call on 91- (022) 4285 6825.

Level 4: If you have not received a satisfactory response at Level 3 within 7 working days, you may also approach CEO (Mr. Kamlesh Rao) [email protected] or call on 91- (022) 6652 9160.

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Morning Insight - 00005 08-07-2016 - Kotak Securities · Lupin has secured a partial relief as the US Food and Drug Administration has closed the July 2015 inspection of its Goa plant