Morning Insight - 2 Feb 2016 - Kotak Securitiesmeet stringent capital norms.The 'on-tap' application window is likely to open for a period of one month in July with an empowered committee

FEBRUARY 2, 2016

Economy News The government and the Reserve Bank of India (RBI) are giving final shape

to the licensing guidelines. Those applying to set up private banks may beallowed to have overseas investment to the tune of 74% right at thebeginning rather than five years later, a move that will help aspirantsmeet stringent capital norms.The 'on-tap' application window is likely toopen for a period of one month in July with an empowered committeescreening applications. (ET)

To support domestic manufacturing, the government barred duty-freeimport of capital goods for power generation and transmission projectsunder the Export Promotion Capital Goods Scheme. The EPCG schemeallows zero-duty import of capital goods on the condition that goodsproduced be exported worth six times of the duty saved under thescheme in six years. (BS)

Core sector output returned to positive territory in December 2015 byregistering a 0.9 per cent growth after shrinking (-) 1.3 per cent inNovember last year but was still much lower than 3.2 per cent growthrecorded in December 2014. Fertiliser, coal, cement output and electricityproduction contribute the most. (Hindu)

Advertisers will likely spend a record Rs 12 bn during season nine of theT20 league that will be held in April and May, top media buyers said.That's up a fifth from last year. (ET)

A government-appointed panel suggested sweeping changes to theCompanies Act, 2013, making it easier for companies to raise funds andreward senior management and ensuring that steps to enhanceshareholder democracy don't cripple the functioning of firms and thebusinesses they run. (FE)

Aviation turbine fuel (ATF), or jet fuel, today got cheaper by a steep 12percent and rates of non-subsidised cooking gas LPG were slashed by Rs82.5 per cylinder as global prices continue to tumble. (ET)

Corporate News Abidali Z. Neemuchwala outlined an ambitious target of turning Wipro

into a $15-bn company by 2020, a goal that echoed a similar ambition laidout by cross-town rival Infosys's CEO Vishal Sikka. (ET)

Coal India said it achieved a production of 52.86 mn tonnes coal inJanuary, lower than the target of 56.18 MT for the month. (ET)

Dr Reddy's Laboratories has received the US Food and DrugAdministration's approval for two new drugs in three days, in a sign thattop Indian drug makers might be looking to move beyond generics tocome out with some original drugs of their own. (ET)

Mahindra Holidays & Resorts India Ltd is taking legal action againsta namesake entity for trademark infringement and illegally approachingits members on the pretext of offering new packages. (ET)

State Bank of India (SBI) launched a new home loan scheme which willenable young working professionals to get higher amount than they areeligible for. (ET)

Grasim Industries will spend more than Rs 40 bn in FY17 on capacityexpansion of its various businesses - cement, chemicals and VSF. (ET)

The US Food & Drug Administration (US FDA) has issued a warning letterto Ipca Laboratories for not complying with the drug regulator'squality standard at three of the company's manufacturing plants. (ET)

Sun Pharmaceuticals launched Imatinib Mesylate, the generic copy ofanti-cancer drug Gleevec, in the US market. Being a first-to-file product,the company will enjoy 180 days of marketing exclusivity by the US Foodand Drug Administration (FDA). (ET)

Equity% Chg

1 Feb 16 1 Day 1 Mth 3 Mths

Indian IndicesSENSEX Index 24,825 (0.2) (5.1) (6.5)NIFTY Index 7,556 (0.1) (5.1) (6.1)BANKEX Index 17,357 (1.4) (10.8) (12.2)SPBSITIP Index 11,229 0.6 1.9 (0.5)BSETCG INDEX 12,489 1.0 (12.5) (15.6)BSEOIL INDEX 9,234 (0.3) (3.8) 1.5CNXMcap Index 12,526 0.5 (7.5) (5.2)SPBSSIP Index 10,901 0.3 (8.7) (3.5)

World IndicesDow Jones 16,449 (0.1) (5.6) (7.7)Nasdaq 4,620 0.1 (7.7) (9.9)FTSE 6,060 (0.4) (2.9) (4.7)NIKKEI 17,865 2.0 (6.1) (4.4)HANGSENG 19,596 (0.4) (10.5) (12.3)

Value traded (Rs cr)1 Feb 16 % Chg - Day

Cash BSE 2,437 (4.5)Cash NSE 16,624 (19.4)Derivatives 161,936 (16.6)

Net inflows (Rs cr)29 Jan 16 % Chg MTD YTD

FII 760 (298) (11,471) (11,471)Mutual Fund 586 94 6,703 6,703

FII open interest (Rs cr)29 Jan 16 % Chg

FII Index Futures 12,046 3.5FII Index Options 54,794 8.6FII Stock Futures 48,363 2.6FII Stock Options 1,544 28.0

Advances / Declines (BSE)1 Feb 16 A B T Total % total

Advances 144 613 40 797 53Declines 148 490 29 667 44Unchanged 6 29 4 39 3

Commodity % Chg

1 Feb 16 1 Day 1 Mth 3 Mths

Crude (US$/BBL) 31.2 (1.4) (15.8) (32.4)Gold (US$/OZ) 1,127.0 0.9 6.1 (0.7)Silver (US$/OZ) 14.3 0.1 3.0 (7.0)

Debt / forex market1 Feb 16 1 Day 1 Mth 3 Mths

10 yr G-Sec yield % 7.8 7.8 7.7 7.6Re/US$ 67.8 67.8 66.1 65.6

Sensex

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

23,900

25,500

27,100

28,700

30,300

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

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

MORNING INSIGHT February 2, 2016

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

TEAMLEASE SERVICES LTD

Company background

Teamlease Services Ltd (TSL) is present in the business of human resource ser-vices with major focus on providing temporary staffing solutions across sectorswith diverse functional areas. The majority of its associate employees (employ-ees recruited by clients) are engaged in sales, logistics and customer servicefunctions. Besides this, the company is also present in other human resource ser-vices such as permanent recruitment services, regulatory consultancy for laborlaw compliance, learning and training solutions, etc. Staffing operation contrib-uted 98.2% of its revenue while other human resource services contributed1.8% of its revenue in H1FY16. As on November 2015, it serviced 1252 clients instaffing business through its 9 offices and 1218 full time employees across India.It had 104,946 associate employees as of November 30, 2015 which makes TSLone of the largest organized temporary staffing services companies in India. Itsclients are spread across various industries including the consumer durables,chemicals, manufacturing, media and telecom, retail, Banking Financial Servicesand Insurance (BFSI), e-commerce, pharmaceuticals and healthcare sectors. Thecompany's revenue has grown at a CAGR of 29% in the past three years while ithas witnessed strong growth in PAT in the past two years after turning profit-able in FY14. The company is present in volume business and operates at a thinEBITDA margin of 1.2% (in FY15) which has turned positive in the past two yearsafter achieving economies of scales. However, the business is asset light anddoes not need any major capital which has resulted in net cash of Rs1217mn onits balance sheet at the end of H1FY16.

Details of the offer

Particulars Details

Price band (Rs/share) 785-850

No. of shares (nos. mn) 5.0

Fresh Issue (nos. mn) (At upper level) 1.8

Offer for Sale (nos. mn) 3.2

Issue size (Rsmn) 4237

Fresh Issue (RsMn) 1500

Offer for sale (RsMn) (At upper level) 2737

Date of the issue 02 Feb 2016 to 04 Feb 2016

No. of shares pre-issue (nos. mn) 15.3

No. of shares post-issue (nos. mn) (At upper level) 17.1

Book Building

QIBs 75%

Non-Institutional 15%

Retail 10%

Lead managers IDFC Securities, Credit Suisse, ICICI Securities

Source: Company

Shareholding Pattern

Pre issue Post issue

Promoter holding (%) 51.9 NA

Public shareholding (%) 47.3 NA

Non Promoter Non Public (Employee Trust) 0.8 NA

Total (%) 100.0 100

Source: Company

IPO NOTE

Pankaj [email protected]

+91 22 6621 6321



Objects of the offer

Objects of the offer Utilization of Proceeds (RsMn)

Funding existing and incremental working capital requirements of the Company 800

Acquisitions and other strategic initiatives 250

Upgradation of the existing IT infrastructure 150

General corporate purposes NA

Source: Company

Management Background

Name Age Designation Background& Role

Mr. Manish Mahendra Sabharwal 45 Chairman He is the co-founder of the company and holds a master'sdegree in management from the Wharton School in 1996and is an alumnus of Mayo College, Ajmer. In 1996, heco-founded India Life, a human resource outsourcingcompany that was acquired by Hewitt associates in 2002.He was chief executive officer of Hewitt Outsourcing (Asia)in Singapore. He also serves on various state and centralgovernment committees on education, employment andemployability. He provides leadership at the Board level andsets strategies and directions for the company.

Mr. Ashok Kumar Nedurumalli 45 Managing Director He is the co-founder and Managing Director of thecompany. He holds a bachelors degree in commerce fromthe Shri Ram College of Commerce, University of Delhi anda diploma in management from Indian Institute ofManagement, Bengaluru. He is a first generationentrepreneur with 17 years of experience in the industry ofhuman resource services. Prior to his current position,he was a director of India Life Capital Private Limited, apension and provident fund asset management company.Currently, he oversees the company's operations andrepresents in forums with major clients.

Mr. Gopal Jain 44 Non-Executive He is a non-executive, nominee Director, nominatedNominee Director pursuant to the SSSA. He holds a bachelor's degree in

electrical engineering from the Indian Institute ofTechnology, Delhi. He is one of the co-founders ofGaja Capital.

Source: Company

Key factors for future performance

Leading organized staffing company in IndiaTSL is among the leading staffing services companies in India with 1,252 clientsand 104,946 associate employees as of November 30, 2015. It has a marketshare of 5% in terms associate employees in 2014 (source: Crisil). Thecompany's operation is spread across India with its offices located inAhmedabad, Bengaluru, Chennai, Delhi, Hyderabad, Kolkata, Mumbai and Pune.TSL's large geographical presence enables it to offer services to clients whohave operations at multiple locations across India. It provides temporary staffingservices to large Indian and multi-national companies such as Vodafone, E.I.Dupont India Private Limited, ATC Telecom Tower Corporation Private Limited,etc. The number of associate employees of the company has grown at a CAGRof 16.8% in the past 5 years (FY10-15) resulting in TSL emerging as a majorplayer in the staffing business.



Growth in Associate Employees

Source: Company

Focus on compliance and technology gives edge over peersTSL's focus on regulatory compliance gives it a significant competitive advan-tage particularly in evolving policy environment in India concerning labor laws.Most of the larger clients are shifting to organized service providers to complywith applicable regulations. TSL had a team of 116 persons as of November 30,2015 which focuses on staffing and labor compliance issues as well as on corpo-rate and legal compliance issues. The company has implemented processes andsystems that have resulted in achieving operational excellence by identifying theright human resources to suit its customer requirements. This kind of serviceshelps company in maintaining high levels of repeat customers which stood at93.21% (in FY15) and provides edge over its peers in a highly unorganized indus-try.

Strategy to grow through focus on high margin new verticals andacquisitions

TSL has traditionally been sector agnostic and focused on providing temporarystaffing solutions for sales, logistics and customer service functions, which arerelatively low margin services. Now the company intends to offer higher marginservices by providing specialized service offerings in service sectors such as IT,hospitality and healthcare. It also intends to strengthen its operations by hiringoperations staff to support the growth in new verticals and service offerings.The company intends to expand its presence in both existing and new segmentsthrough strategic acquisitions. The acquisition would expand its presence innewer sectors such as IT and healthcare and hospitality which requires special-ized human resources.

Focusing on diversifying service offering in in HR services segmentvalue chain

The company is expanding its services from staffing to the entire chain of humanresources. It is targeting to grow its employment services in a) permanent re-cruitment through Recruitment Process Outsourcing b) regulatory consultancy forlabor law compliance. Further, it intends to improve its existing services in em-ployment services business in retail learning solutions by expanding its foot printthrough franchise network and converting their network into employment cen-ters.

0

20,000

40,000

60,000

80,000

100,000

120,000

FY10 FY11 FY12 FY13 FY14 FY15 H1FY16



Huge growth opportunity for the industry

The global staffing industry had grown at 7% over the past few years and hadreached 11.5 million workers by the end of 2012 despite the slump in the after-math of the financial crisis (Source: CIETT Economic Report 2014).The flexi-staff-ing industry in India as of FY14 in value terms was around Rs 180-220 billion. Theaverage wages of flexi-staffing worker is assumed to be around Rs 8,000-10,000per month. In FY14, the employees in the flexi-industry were estimated between1.6-1.8 million with flexi-staffing penetration rate based on the total workforcewas only 0.4% which is expected to reach 1% by FY19 (estimated by Crisil).There are new upcoming sectors such as e-commerce that will create fresh de-mand for flexi-staffing in India. In the past few years, lot of organized flexi-staff-ing companies have emerged in order to meet corporate India's demand forlabour with adequate skill-sets. The flexi-staffing is expected to grow at a CAGRof around 20-25% between 2013-2014 and 2018-2019.

Segmental mix in the flexi-staffing industry (FY12)

Source: Company DRHP, CRISIL Research

Market share of players by number of associates (2014)

Name Market Share %

Teamlease 5-6%

Adecco 4-5%

Randstad 4-5%

Quesscorp 2-3%

Genius 2-3%

Manpower 2-3%

Global Innov 1-2%

Needs Manpower 1-2%

GI Staffing 1-2%

Others 70-80%

Source: Company DRHP, CRISIL Research

Financial analysis

TSL has witnessed strong CAGR of 29% in its consolidated sales in FY12-15 withconsolidated PAT turning positive in FY14 after achieving economies of scale.But, the company operates a low margin business with EBITDA margin at theend of FY15 at 1.2% which has limited scope to improve in the current verticalsin staffing business. The company is focusing on new verticals in staffing busi-ness such as IT and Healthcare where margins are relatively high. Further, thecompany is looking at acquisitions of small size companies preferably in newverticals. The company is present in asset light business and has a net cash bal-ance sheet. Hence, increased focus on higher margin segments and strategy toremain in asset light business would further strengthen its RoCE which is pres-ently at 12.5% (and 38% after adjusting for cash).

30%

13%

25%

11%

10%

7% Manufacturing

BFSI

FMCG/CD and Retail

Media and Entertainment

Logistic and Telecom

Hospitality

IT/ITES

Others



Sales & PAT Trend (Rs Mn)

Source: Company

Breakup of Revenue

Source: Company

D/E (x - RHS), Margins (% - LHS)& RoCE (% -LHS) Trend

Source: Company

Valuation

We believe that TSL is present in high growth business considering low penetra-tion of temporary staffing in the overall employment market. But we believethat there is little pricing power considering low entry barrier in the business andstiff competition from both organized as well as unorganized players. Hence, thegrowth in the business would be volume driven which is forecasted to be high inthe next 2-3 years considering low penetration of staffing services in India.There is no comparable company listed on the Indian bourses. At upper level ofprice band (Rs 850), the issue is priced at FY15 P/E of 48.9x and EV/EBITDA of49.6x, considering post issue equity dilution. We believe that the premium valu-ation may limit any major upside in the stock upon listing.

97.8% 98.3%

2.3% 1.8%0%

30%

60%

90%

120%

FY15 H1FY16

Staffing operations HR services

0.00.00.00.10.10.10.10.10.20.20.2

-30%-20%-10%

0%10%20%30%40%50%

FY12 FY13 FY14 FY15

EBITDA Margins (% - LHS)RoCE (% - LHS)D/E (x - RHS)

-200

-100

0

100

200

300

400

-10,000

-5,000

0

5,000

10,000

15,000

20,000

25,000

FY12 FY13 FY14 FY15

Revenue from operations (Rs mn - LHS)PAT (Rs mn - RHS)



Consolidated financials (Rs Mn)

Profit and Loss Statement

FY12 FY13 FY14 FY15 6MFY15 6MFY16

Net Revenue from operations 9,258 12,507 15,296 20,071 9,436 12,096Employee benefits expense 9,031 12,165 14,839 19,445 9,148 11,792

Other expenses 434 453 337 385 198 192

Total operating expenses 9,465 12,618 15,176 19,830 9,346 11,984

EBITDA -207 -111 120 241 89 113EBITDA Margins (%) -2.2% -0.9% 0.8% 1.2% 0.9% 0.9%

EBIT -245 -147 101 213 72 104

Finance costs 3 5 2 1 1 2

Depreciation and amortization expense 38 36 19 27 17 9

Other income 83 110 79 114 63 61

Profit before exceptional and extraordinary items and tax -165 -43 178 326 135 164

Exceptional/Extraordinary items 0 0 0 0 0 0

PBT -165 -43 178 326 135 164Tax expense: 0 0 0 18 -40 57

PAT -165 -43 178 308 175 107Other adjustment -1 -6 -1 11 3 -3

Reported PAT -165 -37 179 297 172 110PAT margin (%) -1.8% -0.3% 1.2% 1.5% 1.8% 0.9%

Source: Company

Balance Sheet


LIABILITIESShareholders’ funds 1047 1010 1188 1485 1361 1595

Share capital 5 5 5 5 5 153

Reserves and surplus 1042 1005 1183 1480 1355 1442

Non-current liabilities 112 145 188 228 192 303

Long-term borrowings 0.75 0 0 0 0 0

Other long term liabilities 47 54 58 52 56 51

Long-term provisions 64 91 130 176 136 252

Current liabilities 810 1087 1057 1792 1758 2686

Short-term borrowings 80 120 8 0 0 0

Other current liabilities 703 928 990 1702 1681 2583

Short-term provisions 28 39 59 90 77 103

TOTAL LIABILITIES 1969 2242 2433 3505 3311 4584ASSETSNon-current assets 471 511 508 754 699 1015

Fixed assets 195 107 107 95 103 125

Tangible assets 142 66 52 15 40 18

Intangible assets 38 42 39 38 38 36

Intangible asset under development 15 0 16 42 26 71

Non-current investments 0 0 0 0 0 0

Deferred Tax Asset 0 0 0 56 63 70

Long-term loans and advances 210 309 255 436 406 542

Other non-current assets 66 94 146 167 126 278

Current assets 1498 1732 1925 2751 2612 3569

Current Investments 0 0 0 0 40 0

Inventories 9 5 2 2 3 2

Trade receivables 543 618 595 805 816 1185

Cash and bank balances 822 780 847 1147 1195 1217

Short-term loans and advances 76 83 260 78 47 119

Other current assets 48 246 221 719 511 1045

TOTAL ASSETS 1969 2242 2433 3505 3311 4584

Source: Company



Cash Flow Summary


Cash and Cash Equivalents at Beginning of the year 86 418 428 129 129 218

Net Cash from Operating Activities -405 -93 164 343 381 113

Net Cash Used in Investing Activities -306 69 -348 -244 -223 25

Net Cash Used in Financing Activities 1042 35 -115 -10 -9 -2

Net Inc/(Dec) in Cash and Cash Equivalent 331 11 -300 90 149 136

Cash and Cash Equivalents at End of the year 418 428 129 218 278 355

Source: Company




AUTO INDUSTRY UPDATE

Arun [email protected]

+91 22 6621 6143

Summary - January 2016 volumes (Nos)

Jan Dec Jan YoY gth MoM gth FY15 FY16 Growth2015 2015 2016 (%) (%) YTD YTD (%)

Hero MotoCorp

2W 558,982 499,665 563,348 0.8 12.7 5,615,220 5,473,953 (2.5)

TVS Motor

Scooters 54,830 65,090 62,552 14.1 (3.9) 588,304 678,017 15.2

Motorcycles 69,564 71,435 83,374 19.9 16.7 799,799 852,938 6.6

Mopeds 54,642 57,541 55,307 1.2 (3.9) 625,700 599,875 (4.1)

Total 2W sales 179,036 194,066 201,233 12.4 3.7 2,013,803 2,130,830 5.8

2W Exports (incl. above) 19,232 25,906 29,071 51.2 12.2 259,737 304,863 17.4

3W 6,961 8,020 7,252 4.2 (9.6) 88,017 96,628 9.8

Overall sales 185,997 202,086 208,485 12.1 3.2 2,101,820 2,227,458 6.0

Maruti Suzuki

Mini (Alto, WagonR) 35,750 37,234 34,206 (4.3) (8.1) 345,595 360,804 4.4

Compact/Super compact (Swift,

Ritz, Celerio, Dzire, Baleno) 47,259 50,968 48,120 1.8 (5.6) 427,985 483,815 13.0

Mid-Size (CIAZ) 6,005 2,841 5,431 (9.6) 91.2 23,490 43,591 85.6

MUV ( Gypsy, Ertiga, S Cross) 6,432 9,168 8,114 26.2 (11.5) 56,117 72,038 28.4

C (OMNI, Eeco) 10,113 11,122 10,512 3.9 (5.5) 105,904 118,093 11.5

Total Domestic 105,559 111,333 106,383 0.8 (4.4) 959,091 1,078,341 12.4

Export 11,047 7,816 7,223 (34.6) (7.6) 103,218 104,111 0.9

Total Sales 116,606 119,149 113,606 (2.6) (4.7) 1,062,309 1,182,452 11.3

M&M

Passenger Vehicles 19,573 18,197 22,088 12.8 21.4 182,968 185,704 1.5

CV 12,946 12,465 14,385 11.1 15.4 127,777 135,481 6.0

3W 4,526 4,177 4,220 (6.8) 1.0 47,800 46,565 (2.6)

Total Domestic 37,045 34,839 40,693 9.8 16.8 358,545 367,750 2.6

Export 2,885 3,076 3,096 7.3 0.7 23,065 29,628 28.5

Total Sales 39,930 37,915 43,789 9.7 15.5 381,610 397,378 4.1

Tractors 14,913 12,868 15,065 1.0 17.1 210,334 185,335 (11.9)

AUTO INDUSTRY VOLUME UPDATE - JANUARY 2016Overall volume growth for the auto industry remained weak in January2016. In the 2W space, players with high exposure to scooter segment,continued to outperform the two industry growth. In the passenger carsegment, volume growth remained tepid. Commercial vehicle segmentcontinued to grow at a strong pace - led by growth in both the MHCV andLCV segment. Tractor demand did not witness any improvement. Weexpect overall auto industry volume growth to stay subdued in the nearterm. We expect volume growth across segments to pick-up in FY17.Maruti Suzuki (Rating - BUY, TP Rs.4722) and Tata Motors (Rating - BUY, TPRs.490) are our preferred picks in the auto OE space.



Bajaj Auto - sales volume (Nos)


2W 558,982 499,665 563,348 0.8 12.7 5,615,220 5,473,953 (2.5)

Source: Company

HMC reported a marginal 1% YoY increase in sales in January 2016. Volumes increased from 558,982 units in Janu-ary 2015 to 563,348 units. Over December 2015, volumes were up by 13%. In the scooter segment company re-ported 20% growth in sales volumes on the back of new launch. Motorcycle demand continued to stay tepid due toweakness in rural demand. We expect HMC's volume growth in the near term to stay subdued. In FY17, we expectdemand revival, expected good monsoons and seventh pay commission payout will drive volume growth for HMC.

HERO MOTOCORP (HMC)

HMC - 2W sales volume

Source: Company

Summary - January 2016 volumes (Nos)


Tata Motors

M&HCV 11,273 12,673 14,693 30.3 15.9 99,943 123,551 23.6

LCV 14,301 14,674 15,977 11.7 8.9 159,647 134,834 (15.5)

Utility 1,410 1,169 1,378 (2.3) 17.9 20,585 15,470 (24.8)

Cars 11,637 6,900 9,350 (19.7) 35.5 84,689 91,648 8.2

Total Domestic 38,621 35,416 41,398 7.2 16.9 364,864 365,503 0.2

Export 3,961 4,557 5,636 42.3 23.7 40,587 46,528 14.6

Total Sales 42,582 39,973 47,034 10.5 17.7 405,451 412,031 1.6

Source: Companies

(30.0)

-

30.0

60.0

90.0

120.0

(150,000)

-

150,000

300,000

450,000

600,000Volume (Units - LHS) % YoY growth (RHS)



TVS Motors - sales volume (Nos)


Scooters 54,830 65,090 62,552 14.1 (3.9) 588,304 678,017 15.2

Motorcycles 69,564 71,435 83,374 19.9 16.7 799,799 852,938 6.6

Mopeds 54,642 57,541 55,307 1.2 (3.9) 625,700 599,875 (4.1)

Total 2W sales 179,036 194,066 201,233 12.4 3.7 2,013,803 2,130,830 5.8

2W Exports (incl. above) 19,232 25,906 29,071 51.2 12.2 259,737 304,863 17.4

3W 6,961 8,020 7,252 4.2 (9.6) 88,017 96,628 9.8

Overall sales 185,997 202,086 208,485 12.1 3.2 2,101,820 2,227,458 6.0

Source: Company

Mopeds sales volume trend

Source: Company

Exports sales volume trend

Source: Company

Scooters sales volume trend

Source: Company

Motorcycles sales volume trend

Source: Company

TVS Motors reported 12% volume growth and continued to outperform the industry growth. Overall sales volumesin January 2016 came in at 208,484 units. Scooter segment volumes jumped by 14%, led by strong scooter portfo-lio and healthy demand for scooters. Motorcycle segment volumes were up by 20% YoY. Recently companylaunched a couple of new models in the motorcycle segment and we expect strong growth in motorcycle segmentto continue for the company. Mopeds sales growth remained flat and 3W volumes grew by 4%. Exports was upsharply during the month. We expect TVSM to outperform industry volume growth in the near to medium term, ledby strong scooter portfolio and recent new launches in the motorcycle segment.

TVS MOTORS (TVSM)

-

10

20

30

40

-

20,000

40,000

60,000

80,000

100,000

Volume (Units - LHS)

% YoY growth (RHS)

(15)

-

15

30

-

30,000

60,000

90,000

120,000Volume (Units - LHS)

% YoY growth (RHS)

(20)

-

20

40

60

80

(20,000)

-

20,000

40,000

60,000

80,000

Volume (Units - LHS)% YoY growth (RHS)

(50)

(25)

-

25

50

75

100

(15,000)

(7,500)

-

7,500

15,000

22,500

30,000


% YoY growth (RHS)



MSIL - sales volume (Nos)


Mini (Alto, WagonR) 35,750 37,234 34,206 (4.3) (8.1) 345,595 360,804 4.4

Compact/Super compact (Swift,Ritz, Celerio, Dzire, Baleno) 47,259 50,968 48,120 1.8 (5.6) 427,985 483,815 13.0

Mid-Size (CIAZ) 6,005 2,841 5,431 (9.6) 91.2 23,490 43,591 85.6

MUV ( Gypsy, Ertiga, S Cross) 6,432 9,168 8,114 26.2 (11.5) 56,117 72,038 28.4

C (OMNI, Eeco) 10,113 11,122 10,512 3.9 (5.5) 105,904 118,093 11.5

Total Domestic 105,559 111,333 106,383 0.8 (4.4) 959,091 1,078,341 12.4

Export 11,047 7,816 7,223 (34.6) (7.6) 103,218 104,111 0.9

Total Sales 116,606 119,149 113,606 (2.6) (4.7) 1,062,309 1,182,452 11.3

Source: Company

Export volume trend

Source: Company

Business Mix (Domestic)

Source: Company

Passenger car segment domestic volume trend

Source: Company

Domestic sales volume trend

Source: Company

MSIL's January 2016 wholesale dispatches came in below expectation. Company dispatched 113,606 units in January2016, 2.6% lower over January 2015. During the same period, domestic sales were was up by 1%, lower than ex-pectation partly because of lesser number of working days in January 2016 impacting overall production and dis-patch. Export dispatches remained low for second consecutive month. At 7,223 units exports volume declined by35% over January 2015. We remain optimistic on healthy volume growth for the company in the medium term. Inour view, factors like new launches, demand recovery, Nexa ramp-up, seventh pay commission/OROP payout andexport opportunities are likely volume growth drivers for MSIL.

MARUTI SUZUKI INDIA LIMITED (MSIL)

(5) - 5 10 15 20 25 30

75,000

80,000

85,000

90,000

95,000

100,000


-

5

10

15

20

25

30

- 20,000 40,000 60,000 80,000

100,000 120,000 140,000


% YoY growth (RHS)

(80)

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80

160

240

(6,000)

-

6,000

12,000

18,000


% YoY growth (RHS)

0%

25%

50%

75%

100%

Van

MUV

Passenger Car



M&M - sales volume (Nos)


Passenger Vehicles 19,573 18,197 22,088 12.8 21.4 182,968 185,704 1.5

CV 12,946 12,465 14,385 11.1 15.4 127,777 135,481 6.0

3W 4,526 4,177 4,220 (6.8) 1.0 47,800 46,565 (2.6)

Total Domestic 37,045 34,839 40,693 9.8 16.8 358,545 367,750 2.6

Export 2,885 3,076 3,096 7.3 0.7 23,065 29,628 28.5

Total Sales 39,930 37,915 43,789 9.7 15.5 381,610 397,378 4.1

Tractors 14,913 12,868 15,065 1.0 17.1 210,334 185,335 (11.9)

Source: Company

Domestic volume trend (Automotive)

Source: Company

Export volume trend (Automotive)

Source: Company

4W - domestic volume trend

Source: Company

Tractor - volume trend

Source: Company

M&M's auto segment sales grew by 10% YoY to 43,789 units in January 2016. M&M's growth in the auto segmentwas driven by new launches done by the company in recent months - TUV300 and KUV100. Accordingly passengervehicle segment volumes grew by 13% in January 2016 as compared with January 2015 volumes. Full impact ofKUV100 launch will be visible from February 2016 and we thereby expect growth rate in passenger vehicle segmentto be better going ahead for the company. In the commercial vehicle space, volume grew by 11% YOY, again aidedby new products launched by the company in the past few months. 3W sales declined by 7% and export volumesgrew by 7%. Despite a weak base, a mere 4% domestic tractor volume growth by M&M continues to portray weaktractor demand. Going ahead, we automotive segment volumes to grow at a healthy pace, backed by newlaunches. Tractor demand in the near term will likely stay weak and in the medium term, expected better monsoonswill drive demand recovery.

MAHINDRA AND MAHINDRA (M&M)

(25)

-

25

50

75

100

(12,000)

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24,000

36,000

48,000


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(40)

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40

80

120

160

(10,000)

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10,000

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(25)

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25

50

75

100

(10,000)

5,000

20,000

35,000

50,000


(70)

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70

140

210

280

350

(700)

-

700

1,400

2,100

2,800

3,500




Tata Motors - sales volume (Nos)


M&HCV 11,273 12,673 14,693 30.3 15.9 99,943 123,551 23.6

LCV 14,301 14,674 15,977 11.7 8.9 159,647 134,834 (15.5)

Utility 1,410 1,169 1,378 (2.3) 17.9 20,585 15,470 (24.8)

Cars 11,637 6,900 9,350 (19.7) 35.5 84,689 91,648 8.2

Total Domestic 38,621 35,416 41,398 7.2 16.9 364,864 365,503 0.2

Export 3,961 4,557 5,636 42.3 23.7 40,587 46,528 14.6

Total Sales 42,582 39,973 47,034 10.5 17.7 405,451 412,031 1.6

Source: Company

TATA MOTORS (TAMO)

Cars - domestic volume trend

Source: Company

Business Mix (Domestic)

Source: Company

M&HCV - domestic volume trend

Source: Company

LCV - domestic volume trend

Source: Company

TAMO's sales volume in January 2016 grew 10% YoY to 47,034 units. In terms of absolute numbers - January 2016sales figure was the highest so far in FY16. Passenger vehicle sales declined by 20% to 10,728 units. In comingmonths, TAMO will be launching new product in the passenger car segment and that we believe should arrest de-cline in cars sales to some extent. In the CV segment, TAMO witnessed volume growth - in both the LCV and MHCVsegment. LCV volumes grew YoY for second consecutive month. MHCV volume growth momentum remained ro-bust. Exports too grew strongly for the company in January 2016. Overall decent performance by TAMO in January2016. Going forward, we expect TAMO's performance to gradually improve in the medium term.

(50)

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50

100

150

200

(3,000)

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3,000

6,000

9,000

12,000

15,000


(90)

-

90

180

270

(10,000)

-

10,000

20,000

30,000


% YoY growth (RHS)

(60)

-

60

120

180

240

(4,000)

-

4,000

8,000

12,000

16,000Volume (Units - LHS)

% YoY growth (RHS)

0%

25%

50%

75%

100%Cars

UV

LCV

M&HCV




THERMAX LTD

PRICE: RS.812 RECOMMENDATION: REDUCETARGET PRICE: RS.820 FY17E P/E: 33.3X

Thermax reported weak set of numbers as lower order book has started toweigh on the revenue booking thereby impacting the profitability as well.Outlook remains lackluster as major user industries like Power and Metalsremain in a comatose state.

Going by the trend in order intake, we forecast the company to end thefiscal with a lower order book. Consequently, we expect revenues todecline in FY17 as well. Thus, in view of the subdued near-term earningsand premium valuations, we downgrade the stock to "REDUCE" from"Accumulate" earlier.

Quarterly performance

(Rs mn) Q3 FY16 Q3 FY15 YoY (%) 9MFY16 9MFY15 YoY (%)

Net Sales 9,964 11,355 (12) 30,316 31,475 (4)

other income from operations 426 111 285 651 292 123

24% 32% (26) 1 1 (24)

Raw Matl costs 6,298 7,052 (11) 19,041 19,318 (1)

Purchase of trading goods 99 350 (72) 457 991 (54)

Staff costs 1,181 1,078 10 3,315 3,243 2

Other expenditure 1,823 1,672 9 5,259 5,101 3

Total Operating Exp 9,401 10,152 (7) 28,072 28,654 (2)

PBIDT 989 1,314 (25) 2,895 3,114 (7)

Other Income 131 71 84 430 494 (13)

Depreciation 160 156 2 474 488 (3)

EBIT 959 1,228 (22) 2,851 3,119 (9)

Interest 2 19 (90) 5 73 (93)

PBT 957 1,209 (21) 2,845 3,047 (7)

Tax 279 447 (38) 901 1,010 (11)

Deferred Tax

Adj Profit After Tax 679 762 (11) 1,944 2,037 (5)

Extra-ordinary Items +

Rep Profit After Ext-ord item 679 762 (11) 1,944 2,037 (5)

EPS (Rs) 5.7 6.4 (11) 16 17 (5)

PBDIT % excl other op income 5.6 10.6 7.4 9.0

PBIDTM (%) 9.9 11.6 9.5 9.9

Raw Material costs to sales (%) 61.6 64.6 63.0 63.9

Staff costs to sales (%) 11.4 9.4 10.7 10.2

Other costs to sales (%) 17.5 14.6 17.0 16.1

Tax rate (%) 35 42 38 38

Source: Company

Quarterly earnings estimates

(Rs mn) Reported Estimated Remark

Revenue 9964 11101 Revenue miss due to weak domestic market

EBITDA (%) 8.8 9.6 Margin compression due to higher overheads

PAT 679 713 Profits drop due to lower EBITDA

Source: Kotak Securities - Private Client Research

Summary table

(Rs mn) FY15 FY16E FY17E

Sales 53928 56916 55436Growth (%) 6 6 -3EBITDA 4609 4381 4403EBITDA margin (%) 8.5 7.7 7.9PBT 3657 4160 4393Net profit 2565 2746 2899EPS (Rs) 21.6 23.1 24.4Growth (%) -6.7 7.1 5.6CEPS (Rs) 28.7 30.6 32.4BV (Rs/share) 180.4 193.8 207.4Dividend / share (Rs) 7.0 8.0 9.0ROE (%) 5.2 7.2 7.3ROCE (%) 7.9 11.1 11.6Net cash (debt) 6282 5809 10166NW Capital (Days) -7.0 7.6 -8.8EV/Sales (x) 1.8 1.7 1.7EV/EBITDA (x) 21.4 22.6 21.5P/E (x) 37.7 35.2 33.3P/Cash Earnings 28.3 26.5 25.0P/BV (x) 4.5 4.2 3.9

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

RESULT UPDATE

Sanjeev [email protected]+91 22 6621 6305



Revenue growth loses steam due to order book contraction

For the quarter, revenue declined by 12% yoy, as the company's order bookhas remained muted since last few quarters.

Revenue was mainly driven by delivery of short cycle orders as large ordersare not getting finalized.

Segmentwise, energy business which includes boilers, heaters and captivepower projects contracted 9% yoy.

The Environmental engineering division reported significant contraction forthe quarter mainly due to weak investment trends in industrial water treat-ment projects.

Segment revenues

(Rs mn) Q3Y16 Q3FY15 % change

Segment- Energy 8360 9208 -9

Segment - Enviro 2287 2641 -13

Source: Company

EBITDA margin for the quarter has contracted by 170 bps to 9.9% mainlydue to lower revenue booking.

Raw material to sales ratio contracted 300 bps to 61.6% resulting in an ex-pansion in gross margins. However, other expenditure rose 9% yoy, which ina declining revenue scenario led to margin contraction due to lower fixedcost absorption.

Other operating income is up sharply mainly due to change in classification offorex income of Rs 200 mn.

Segment Margins (%)

Q3 FY16 Q3 FY15

Energy 10.3 11.5

Environmental Engineering 7.7 7.3

Source: Company

Subsidiary performance - Except for TBW, most subsidiaries arenow in the black Consolidated PAT stood at Rs 623 mn for the quarter vs Rs 577 mn y-o-y.

Except for TBW (Supercritical boiler manufacturing subsidiary), most othersignificant subsidiaries reported profits in Q3FY16. The management believesthat TBW may end the fiscal with a positive EBITDA.

Update on TBW - While TBW has a boiler manufacturing capacity of 3000MW, it is yet to win any supercritical boiler order (mainly due to the sharpslowdown in BTG ordering in power sector). Consequently, the JV is incurringlosses given fixed expenses of ~ Rs 1.3 bn per annum.

Post the closure of Omnical, Danstoker has reported improved profitabilityduring the quarter.

The company's Chinese subsidiary may have tough times adjusting to slow-down in economic growth in China.

Among other subsidiaries, Performance of the company's international sub-sidiaries ie Danstoker is on an improving trajectory.



Consolidated Numbers

(Rs mn) Q3FY16 Q3FY15 YoY (%)

Revenues 13359 13101 2

PAT 623 577 8

Source: Company

Order intake down 29% yoy to Rs 8.7 bn Order backlog at standalone level stands at Rs 38.3 bn, which is down 25%

on a yoy basis.

Quarterly order intake (Standalone) declined 29% yoy at Rs 8.7 bn vs Rs 12.3bn yoy. The company could not win any project order during the quarterwhich is partly responsible for the steep decline in order intake.

Food, FMCG, Textiles, Light Engineering and Tyres are the major sectors thatare driving demand for the company's products.

The company's supercritical boiler manufacturing entity TBW could not winany major order during the quarter. The company sounded pessimistic andindicated that thermal power generation equipment market is unlikely to im-prove in the next 1.5-2 year timeframe.

Even in TBW, the company indicated that in the current fiscal, there has notbeen a major order win and if orders don't materialize in the next two-threemonths, then the FY17 revenue growth of this JV could be jeopardized.

The company also appeared to discount any hope of orders from the Metalssector given the slowdown in China and prevalent weak price trends.

The company expects some positive traction if the government encouragesbuilding of fertilizer plants in India. Similarly, the air pollution control businesscould benefit on stricter implementation of NoX and desulphurization controlin air polluting industries.

The downstream petroleum sector does offer some hope, the company indi-cated. With the improvement in their cash flows, the government is nudgingthe PSU refiners to undertake capacity addition plans.

Given the sedate outlook for the company's major user industries (Power andMetals), the company is investing in other areas to drive growth. It is settingup a water treatment resins plant in Dahej and an equipment assembly plantin Indonesia wherein the company plans to assemble Chillers and air pollutioncontrol equipment.

The company is of the opinion that, going into the thirteenth plan period(2018-2023), there would be a situation that it would be unviable to manu-facture without the backing of a captive power plant as grid tariffs are ex-pected to increase from the current levels of Rs 8-9 per unit and captivepower project cost would still continue to be in the range of Rs 4-4.5 perunit. Such a scenario would lead to a massive demand for captive powerplants and would be a major boost to Thermax.



Earnings Revision

Taking cognizance of the subdued order intake in Q3FY16, we have finetunedour FY17 earnings as well, which now stand reduced by 14%.

Change in Earnings Estimates

(Rs mn) FY16E FY17EEarlier Revised Earlier Revised

Revenue (Rs mn) 51563 56916 55418 55436

EBITDA (%) 7.7 7.7 8.5 7.9

EPS (Rs) 23.1 23.1 28.3 24.4

% change (0.1) (13.9)


Recommend "Reduce" given minor upside

In the near-term, the headwinds for the stock include, 1) subdued trend in majorproject announcement 2) losses at its subsidiaries (TBW) 3) Premium valuations.

In view of the earnings change, we revise our DCF based target price to Rs 820(Rs 900 earlier). At our TP, the stock would be valued at 34x FY17 earnings.Thus, in view of the minor upside to our target price, we recommend "RE-DUCE".

We recommend REDUCE onThermax Ltd with a price

target of Rs.820



RESULT UPDATE

Sanjeev [email protected]+91 22 6621 6305


PRAJ INDUSTRIES

PRICE: RS.97 RECOMMENDATION: ACCUMULATETARGET PRICE: RS.105 FY17E P/E: 20.2X

Praj reported strong operating performance (Revenue up 32% yoy andEBITDA margins up 500 bps) during the quarter led by 1) efficient projectexecution 2) higher share of export revenues. The company is on path toimprove profitability in the coming quarters, the management believes.

Positive tailwinds include 1) Remunerative ethanol price driving higherblending 2) Greater enforcement of pollution control norms - positive forwaste water treatment 3) Greater business from retrofit and modernizationof existing ethanol plants.

We remain broadly positive on the stock and advise investors to buy thestock on declines.


(Rs mn) Q3FY16 Q3FY15 YoY (%) 9MFY16 9MFY15 YoY (%)

Net Sales 2895 2193 32.0 6843 7057 -3.0

Other op income 9 0 17 0

Raw material cost 1264 1028 22.9 3055 3660 -16.5

Staff costs 395 324 21.9 1144 989 15.7

Other expenditure 825 650 26.8 2031 1974 2.9

Forex (loss)/gain -9 11 -178.9 36 67 -46.2

Total Expenditure 2492 1991 25.2 6193 6555 -5.5

PBIDT 412 202 103.6 666 501 33.0

Interest 4 7 -42.0 12 20 -39.3

Other Income 27 51 -47.3 95 199 -52.3

PBDT 435 247 76.4 750 681 10.1

Depreciation 88 97 -8.8 258 280 -7.7

PBT 347 150 131.4 492 401 22.5

Tax 92 24 280.5 137 94 46.4

PAT 255 126 102.8 354 307 15.3

Exceptional gains/(loss) 0 0 0 108

PAT 255 126 354 415

EPS (Rs) 1.4 0.7 1.9 2.2

PBDIT (%) 14.2 9.2 9.7 7.1

Raw matl cost to sales (%) 43.7 46.9 44.6 51.9

Staff cost to sales (%) 13.6 14.8 16.7 14.0

Other expenditure to sales (%) 28.5 29.7 29.7 28.0

Tax rate (%) 26 16 28 23

Source: Company

Quarterly earnings estimates

(Rs mn) Reported Estimated

Revenue 2895 2753

EBITDA (%) 14.2 7.6

PAT 255 131


Summary table

(Rs mn) FY15E FY16E FY17E

Sales 10118.4 10188.0 11189.9Growth (%) 2.6 0.7 9.8EBITDA 843.2 1049.8 1269.4EBITDA margin (%) 8.3 10.3 11.3PBT 744.7 867.2 1,119.4PAT 663.2 626.6 850.8EPS (Rs) 3.7 3.5 4.8Growth (%) 17.2 -5.5 35.8CEPS 5.9 5.5 6.8BV (Rs/share) 35.9 37.0 38.3Dividend / share (Rs) 1.6 2.0 3.0ROE (%) 10.4 9.5 12.6ROCE (%) 10.3 9.6 12.6Net cash (debt) 2408.2 2521.1 2991.3NW Capital (Days) 45.6 51.7 53.7EV/Sales (x) 1.5 1.4 1.3EV/EBITDA (x) 17.6 14.0 11.2P/E (x) 26.0 27.5 20.2P/Cash Earnings 16.5 17.7 14.2P/BV (x) 2.7 2.6 2.5

Source: Company, Kotak Securities - PrivateClient Research



Earnings driven by strong operating performance

Revenue for Q3FY16 stood at Rs 2.9 bn (32% YoY) led by strong executionmomentum. Exports accounted for 50% of the total revenue in the quarter.

The company received over 65% of its order intake of previous fiscal in the sec-ond half and these orders have now started to move beyond design stage and isleading to significant revenue booking.

So far as the Petrobras order (Rs 2.3 bn) is concerned, the management has in-dicated that this project continues to remain on extended hold and the manage-ment would take a call regarding the future course of this order by the end ofthe fiscal.

Gross margins in Q3FY16 stood at 56% vs 53% in Q3 FY15, which the manage-ment attributed to a 1) value engineering 2) nature of projects that executed inthe quarter 3) and overall efficiency of project execution 4) benign materialprices 5) Higher share of export revenues

As a result, EBITDA at Rs 412 mn (104% YoY) was well ahead of our estimateprimarily aided by expansion in gross margins.

The company reported forex loss of Rs 9 mn vs gain of Rs 11 mn in the corre-sponding quarter of the previous fiscal. Aided by quantum rise in EBITDA, thePAT rose to Rs 255 mn (103% YoY).

Performance of various subsidiaries was also superior during the quarter, themanagement indicated.

Other highlightsOrder intake have remained firm

Order intake at Rs 3.0 bn rose 9% y-o-y. During the quarter, among the majorhighlights of the order intake include

1) Order win from Ingenio Tabacal, one of the largest sugar and ethanol producersin Argentina for its modernization & expansion project.

2) Praj HiPurity Systems (PHS) won breakthrough orders from multiple interna-tional markets viz. Algeria, Turkey, Myanmar including for Biowiz Bioreactor.

3) Water & waste water business won 2 international orders. This segment isnow focussing on enhancing ticket size

Order book is moderately higher at Rs 11.1 bn, up 6% yoy and providing revenuevisibility of 17 months based on previous four quarter revenues.

Order book mix is 68% and 32% in favour of core segments (ethanol and breweries)and emerging segment (Waste water treatment, PHS and critical process vessels)respectively.

The company is seeing positive signs for international markets for PHS as it isreceiving leads from customers which should translate into enquiries and then tofirm orders.

The company sounded positive on the business scenario and expected orders tostrengthen in the future quarters. Short of giving any guidance, the managementremained optimistic on business going forward across all its product segments.

Key industry developmentsIndia Ethanol Blending Program- Thrust on blending has continued from the GOI.Ethanol Blending of 4.2% has been achieved against targeted 5%, which in it-self is a major improvement given that in the past blending remained at close to2% level despite the programme being in existence for several years.

Sugar exports, recovery in sugar prices and issuance of soft loans to help improvehealth of sugar mills bode well for the sugar industry and ethanol production.



MOEF has announced stricter pollution control norms for coal-fired thermal powerplants. These norms reduce the water consumption by coal fired thermal unit andalso stipulate zero liquid discharge. This is positive for the company's waste watertreatment business. The size of opportunity arising from these norms is to the tune ofRs 300-500 mn per power project.

OutlookThe company sees strong opportunities in the pharma business for the company'ssubsidiary Praj Hipurity Systems (PHS). Several Indian pharma companies are up-grading their plants to meet the stringent norms of US FDA which opens immenseopportunities for PHS. The company now has a vastly higher number of client leadsin this segment and the business is poised for strong growth in the future years.

The focus on ethanol blending has continued across the globe with blending man-dates increased in Europe and South East Asia. With the government now providingCENVAT benefit to ethanol producers, the company indicated that the average real-ization has increased by Rs 3 per litre to Rs 47 per litre. This, the managementopined is a remunerative price for producers and should see more ethanol plantscoming up in the future. The management also highlighted that Oil marketing com-panies have floated a tender of 2.6 bn litre which corresponds to 10% blending andshould lead to expansions in ethanol capacity. Overall, the management expects anopportunity of Rs 20 bn to fructify from on complete implementation of 10% blend-ing mandate.

The management reiterated its positive outlook on margins and expects its mar-gins to strengthen in the future. The overall plan is to work towards low to mid-teens kind of margins, the management indicated.

Earnings Revision

FY16 FY17(Rs mn) Earlier Revised Earlier Revised

Revenue 10382 10188 12074 11190

EBITDA (%) 9.5 10.3 11.7 11.3

EPS (Rs) 3.3 3.5 5.3 4.8

% change 7.0 -9.6


Valuation Praj is trading reasonable valuations compared to benchmarks as well as sector

peers.

The stock has outperformed sector peers on account of improving order backlog,strong tailwinds in Ethanol blending and expanding EBITDA margins.

In view of the strong outperformance in the stock, we now revise rating to "AC-CUMULATE" from "BUY" earlier.

Our DCF based price target remains unchanged at Rs 105. We advise investors tobuy the stock on declines.

We recommendACCUMULATE on Praj

Industries with a price targetof Rs.105




MARICO LTD

PRICE: RS.226 RECOMMENDATION: ACCUMULATETARGET PRICE: RS.240 FY17E P/E: 33.7X

Marico has posted a strong set of 3QFY16 financials, beating our revenue/EBITDA estimates by 2%/4%. The company's domestic operations havebrought in 10.5% volume growth - the strongest in our coverage universe- helped by strong performance in the edible oils and value added hair oilsbusinesses. International operations, particularly in MENA region, havebegun to rebound, enhancing visibility in revenue/ earnings growth. Rawmaterial prices are likely to remain benign for the near-term, adding toearnings visibility. We raise our FY17 EPS estimates by 7%, and raise ourprice target to Rs 240 (Rs 217 earlier). Maintain ACCUMULATE.

Results Summary

Rs mn, FY Ends Mar 3QFY15 2QFY16 3QFY16 % GRW. Y/Y % Grw. q/q

Net Sales 14,489 14,835 15,546 7% 5%

Growth, % 20.9% 3.8% 7.3%

Cost of Raw Materials 7,923 7,537 7,504 -5% 0%

Gross Profit 6,567 7,298 8,042 22% 10%

Gross Margin 45.3% 49.2% 51.7% 6.4ppt 2.5ppt

Other Expenses

- Adv. &Promotional Spends 1,530 2,176 1,878 23% -14%

as % Sales 10.6% 14.7% 12.1% 1.5ppt -2.6ppt

-Personnel Expenses 783 853 913 17% 7%

- Other Op. Expenses 1,919 1,991 2,331 21% 17%

EBITDA 2,334 2,278 2,920 25% 28%

Margin 16.1% 15.4% 18.8% 2.7ppt 3.4ppt

Deprn. and Amortization 235 239 247 5% 3%

EBIT 2,099 2,040 2,673 27% 31%

Financial Expenses 52 36 56 8% 56%

Other Income 101 142 169 68% 19%

Other Op. Income 35 18 18 -48% -1%

PBT 2,184 2,164 2,805 28% 30%

Exceptional Items

Provision for Tax 562 624 799.53 42% 28%

PAT 1,622 1,541 2,005 24% 30%

Minority Interest 23 33 27 20% -18%

Profit After Tax 1,599 1,507 1,978 24% 31%

Source: Company Reports

Marico registered 7% y/y growth in revenues, 2% ahead of our estimates. Ata group level, Marico brought double-digit volume growth after nine quar-ters. Domestic operations of the company registered 7% y/y growth, aidedby 10.5% y/y growth in volumes.

Within domestic sales, the company posted strong growth in Saffola edibleoils portfolio (17%, y/y), and value added hair oils (21% y/y growth in vol-umes). Parachute sales growth was relatively weak, at 4% y/y volumegrowth. The company gained market share in over 95% of its total productportfolio.

Summary table

(Rs mn) FY15 FY16E FY17E

Sales 57,330 61,238 69,412Growth (%) 22.3 6.7 13.3EBITDA 8,701 10,699 12,355EBITDA margin (%) 15.2 17.5 17.9PBT 8,217 10,454 12,414Net profit 5,735 7,325 8,636EPS (Rs) 4.5 5.7 6.7Growth (%) 18.2 27.7 17.9CEPS (Rs) 5.1 6.3 7.4BV (Rs/share) 14.6 18.7 23.0Dividend / share (Rs) 1.2 2.0 2.7ROE (%) 34.7 34.1 32.1ROCE (%) 27.6 27.1 24.7Net cash (debt) (1,292) 1,910 6,073NW Capital (Days) 37 44 46P/E (x) 50.8 39.8 33.7P/BV (x) 15.4 12.1 9.8EV/Sales (x) 5.1 4.7 4.1EV/EBITDA (x) 33.6 27.0 23.1


RESULT UPDATE

Ritwik [email protected]+91 22 6621 6310



International operations of the company have posted 9% y/y growth, aidedby strong growth in the MENA region (45% y/y). All international geographiesgrew in constant currency terms, during the quarter. Bangladesh (45% of in-ternational revenues), which has been registering de-growth in recent quar-ters on account of deflation in coconut oil, grew 1% on the back of growthin value added hair oils.

Gross margin expanded 6.4 ppt y/y on the back of decline in raw materialprices (copra prices down 28% y/y, liquid paraffin down 35% y/y, while ed-ible oils registered gains). The expansion in gross margins is higher than ourestimates.

The company registered 23% y/y growth in advertising and promotion ex-penses. The company's release notes that a large part of the A&P spendswas spent towards new product launches in value added hair oils, foods, andyouth portfolio in India. Other expenses have come in ahead of estimates,largely on account of realized forex losses in the quarter amounting to c. Rs220mn. Personnel expenses were higher by 17% (y/y) on account of annualincrements and also capacity building in South East Asia and Bangladeshbusiness. Despite the Rs 220mn forex loss, the company's EBITDA has comein 4% ahead of our estimates.

Recent initiatives of the company are delivering results: the company's ruralsales now account for 33% of total, project ONE launched by the companyhas enhanced the distribution in top six cities of India by 60%. The companyhas posted a recovery in Middle East, and changes made to its distributionstructure in Egypt have begun to yield results.

In its outlook the management has indicated that Marico will, over the me-dium term aim at a volume growth of 8-10% and a topline growth of 15%.However, the company has noted that near - term there may be some ad-verse impact on sales on account of deflation. The company has indicatedthat medium-term margins of the company shall be in the range of 16-17%;however, in the short-term margins may be higher on account of raw mate-rial prices.

Outlook and Investment View

In terms of volume growth and market share gains, Marico has posted thestrongest result in our coverage universe in the current results season. Thecompany has made healthy gains in volume growth in edible oils, and has in-dicated that the company will return to double-digit volume growth trajec-tory for the medium-term. The company continues to make gains in thevalue added hair oils category. We believe that stronger growth in Parachuteshall come in post the recent round of price cuts.

Post several weak quarters, the company's international businesses have be-gun to show signs of improvement, particularly in MENA region. From man-agement commentary, we sense that international operations have stabilizedand steady growth can be expected, contributing to revenue growth visibility.We also note that the base turns favorable for Bangladesh business from4QFY16 onwards, and while gains are likely to be modest, the de-growth islikely to be arrested.

Raw material prices are likely to remain benign for the next couple of quar-ters. The company has noted that prices of copra are likely to remain soft inthe near-term. Crude derivatives are also likely to see continued declines. Assuch, gross margins shall continue to rise, although at a moderated pace.

We raise our earnings estimates 7% for FY17, following 3QFY16 results. Wevalue the stock at 36X FY17E PER (from 35X FY17E PER earlier), at a modestpremium to the company's domestic peers. We arrive at a price target of Rs240. Maintain ACCUMULATE.

We maintain ACCUMULATErating on Marico Ltd with a

price target of Rs.240




RESULT UPDATE

Saday [email protected]+91 22 6621 6312

SHRIRAM TRANSPORT FINANCE CO LTD (STFC)PRICE: RS.811 RECOMMENDATION: BUYTARGET PRICE: RS.1060 FY17 P/E: 11.2X; P/ABV: 1.7X

Q3FY16 Results: Earnings largely in-line; asset quality risk con-tinues as it has to move to stringent NPL recognition system.Standalone performance was largely in-line - net operational performance(including securitization) grew 23.5% on back of NIM expansion (44bpsQoQ) and healthy traction in AUM (16.6% YoY). PAT (Rs.3.75 bn; 20.0% YoY)also met our expectations despite being pulled down by higher provisions(30.7% YoY). NIM saw improvement on back of lower funding costs asbanks cut their base rate (~40% borrowing) while improvement in assetyield was aided by better cash management (down 20% QoQ) as well asbetter recovery. Disbursement (16.5% YoY) was similar to the previousquarter and was largely driven by new CV segment which continued togrow at a faster pace (2.1x YoY).

Asset quality risk persists as it has to move to stringent NPL recognitionsystem (150dpd vs. 180dpd earlier). We expect GNPA of equipment financeto fall to ~Rs.9.5 bn (FY16). Assuming STFC writes-off ~Rs.6.0 bn (adjustedfor net worth at Rs.3.5 bn) on merger, STFC's BV would decline by ~4%;limited impact, in our view. At CMP stock trades at 1.7x FY17E ABV, weretain BUY rating on the stock with downward revised TP of Rs.1060(Rs.1090 earlier; 2.2xFY17E ABV). We believe STFC is likely to reap thebenefits from likely bottoming out of CV cycle, even though benefits of CVcycle improvement could be back-ended, given their focus on small CVoperators.


(Rs mn) Q3FY15 Q2FY16 Q3FY16 YoY (%) QoQ (%)

Interest Income 20,538 22,402 23,675 15.3 5.7

Interest expense 11,351 12,059 12,239 7.8 1.5

Net Interest Income 9,187 10,343 11,436 24.5 10.6

Income from Securitization 1,341 1,586 1,567 16.9 -1.2

Net Income (Inc Securitization) 10,528 11,929 13,002 23.5 9.0

Other income 147 211 193 31.3 -8.6

Operating expense 2,702 3,001 3,287 21.7 9.5

Operating profit 7,973 9,139 9,909 24.3 8.4

Provision for bad loans 3,153 3,914 4,123 30.7 5.3

Std asset provisions 116 82 76 -34.1 -7.5

PBT 4,704 5,142 5,710 21.4 11.0

Provision for taxes 1,580 1,761 1,959 24.0 11.2

PAT 3,125 3,381 3,751 20.0 10.9

EPS (Rs) 13.8 14.9 16.5 20.0 10.9

Cost/Income (%) 25.3 24.7 24.9

Effective Tax rate 33.6 34.3 34.3

Disbursements 89,970 95,050 104,790 16.5 10.2

Securitisation - 15,617 19,840 NM 27.0

AUM 570,835 632,530 665,384 16.6 5.2

Gross NPA (%) 3.59 4.18 4.29

Net NPA (%) 0.74 0.93 0.88

Source: Company



Standalone performance was largely in-line; NIM improved~44bps on back of moderation in funding cost.Net operational income (including securitization) of standalone business grew 23.5%(Rs.13.0 bn), largely in-line with our expectations on back of NIM expansion (44bpsQoQ; 83bps YoY) and healthy traction in AUM (16.6% YoY). PAT (Rs.3.75 bn;20.0% YoY) also met our expectations despite being pulled down by higher provi-sions (30.7% YoY). Nonetheless, STFC has increased the provision coverage to80.2% (Q3FY16), an improvement of 170bps QoQ. We believe creating provisioncoverage buffer would cushion the earnings impact due to movement to more strin-gent NPL recognition system (150dpd in Q4FY16 from 180dpd earlier) as well asmerger of equipment financing business.

STFC reported ~44bps sequential improvement in NIM (7.47% in Q3FY16) on backof better asset yield, while cost of funds declined during the same period. Decline inthe borrowing cost has come on the back of base rate cuts by banks (bank borrow-ing is at ~40% of total borrowings) during last two quarters. However, yield on assetwas aided by better cash management (cash & bank balance down 20% QoQ) aswell as better recovery during the quarter which translated into lower interest rever-sal.

We don't expect lending yields to improve further due to - 1) Limited scope to fur-ther reduce cash balance; management has indicated that current level of cashwould be maintained in the future, 2) Change in the asset mix towards new vehicleand towards large operator, 3) Strong securitization expected in coming quarters(9MFY16: Rs.44 bn; Q4FY16E: Rs.20-25 bn vs. Rs.45 bn done in FY15).

During higher securitization, NIM gets suppressed due to higher cash/liquid invest-ment on the B/S. As per the new income tax rule, tax deduction at source onsecuritised income impacts the NIM, while it is largely net income neutral. Nonethe-less, >50% of STFC's borrowings are floating in nature and likely to be re-priced atlower rates, going forward, while its asset book is largely fixed in nature. We aremodelling NIM improvement of ~40bps during FY16.

Healthy traction in disbursement; faster growth in new CV seg-ment aided overall AUM growth.Disbursement (16.5% YoY) was similar to the previous quarter and was largelydriven by new CV segment which continued to grow at a faster pace (2.1x YoY) forthe fifth consecutive quarters. During the same period, disbursement to old vehiclesgrew at moderate pace (9.7% YoY). However, share of new CV segment in totaldisbursement is still small at 12.4% (Q3FY16) as compared to ~18% seen duringFY13.

Trend in Disbursements

(Rs Bn) Q1FY15 Q2FY15 Q3FY15 Q4FY15 Q1FY16 Q2FY16 Q3FY16

Total disbursements 74.8 81.6 90.0 91.3 92.3 95.1 104.8

% chg (YoY) -5.9% 12.6% 39.4% 31.3% 23.5% 16.5% 16.5%

% chg (QoQ) 7.6% 9.1% 10.3% 1.4% 1.2% 2.9% 10.2%

New CVs 4.0 5.4 6.3 8.1 7.8 9.7 13.0

Old CVs 70.7 76.2 83.7 83.2 84.6 85.4 91.8

Share of new CVs (%) 5.4% 6.6% 7.0% 8.8% 8.4% 10.2% 12.4%

Source: Company



Trend in AUM Mix

(%) Q3FY14 Q4FY14 Q1FY15 Q2FY15 Q3FY15 Q4FY15 Q1FY16 Q2FY16 Q3FY16

HCVs 40.0% 39.8% 39.6% 39.9% 40.7% 42.3% 44.3% 48.9% 48.2%

M&LCVs 30.1% 29.6% 29.9% 29.1% 28.7% 27.0% 25.7% 21.8% 21.3%

Passenger Vehicle 22.3% 22.3% 21.6% 22.2% 22.2% 22.4% 22.8% 22.4% 23.4%

Tractors 5.4% 5.4% 5.5% 5.4% 5.4% 5.5% 5.6% 5.2% 5.4%

Others 2.2% 2.9% 3.4% 3.4% 3.0% 2.8% 1.6% 1.7% 1.7%

Source: Company

Trend in AUM

(Rs Bn) Q1FY15 Q2FY15 Q3FY15 Q4FY15 Q1FY16 Q2FY16 Q3FY16

AUM 543.8 555.6 570.8 591.1 605.3 632.5 665.4

% chg 3.6 3.3 6.9 11.3 11.3 13.8 16.6

New CVs 56.3 52.2 47.8 46.8 46.8 49.4 55.4

Share of new CVs (%) 10.4% 9.4% 8.4% 7.9% 7.7% 7.8% 8.3%

Old CVs 480.9 496.6 516.1 537.4 558.1 582.7 609.5

Share of old CVs (%) 88.4% 89.4% 90.4% 90.9% 92.2% 92.1% 91.6%

Others 6.6 6.8 6.8 6.9 0.4 0.4 0.5

Share of Others (%) 1.2% 1.2% 1.2% 1.2% 0.1% 0.1% 0.1%

Source: Company

Trend in asset quality

(Rs. Bn) Q4FY14 Q1FY15 Q2FY15 Q3FY15 Q4FY15 Q1FY16 Q2FY16 Q3FY16

GNPA 14.5 15.5 16.7 17.8 18.9 21.3 23.4 25.4

GNPA (%) 3.86 3.74 3.74 3.74 3.79 4.07 4.18 4.29

NNPA 3.0 3.1 3.5 3.6 3.8 4.6 5.0 5.0

NNPA (%) 0.83 0.78 0.80 0.74 0.78 0.90 0.93 0.88

Coverage ratio (%) 79.1 79.7 79.2 80.0 80.0 78.5 78.5 80.2

Source: Company

We have also seen STFC diversifying into non-CV segments, during previousquarters. Its share of HCV portfolio has increased 750 bps during past one yearwhile M&LCV portfolio declined 740 bps during the same period.

AUM of used CV grew 18.1% to Rs.609.5 bn (Q3FY16), while new CV portfoliocontinue to see relatively moderate performance (15.9% YoY) on higher repay-ment. The share of used CV AUM to total AUM has remained high in the rangeof 91-92% during previous several quarters. We expect STFC to report betterAUM growth as compared to the guidance of 15% AUM growth. Managementhas indicated that heavy CV segment is doing fairly well due to some uptick insegments like coal, steel and cement. Management has also indicated that thereis shift in replacement demand from 25T vehicles to 30T vehicles. We believepick up in CV demand with the improving economic environment is likely to sup-port the STFC's future growth trajectory.

Asset quality risk persists as it has to move to stringent NPL recog-nition system; merger of equipment finance business is likely tohave limited impactAsset quality saw marginal deterioration - GNPA rose 8.4% (QoQ) in absoluteterms and now stands at 4.3% (Q3FY16) as compared to 4.2% in Q2FY16. Pro-visions rose 30.7% (YoY) during Q3FY16 translating into higher provision cover-age ratio (80.2%; an improvement of 170bps QoQ) impacting the net income.Although it is comfortable on provision coverage ratio, migration to 150 dpd bythe end of FY16 could lead to sudden rise in NPLs. While other NBFCs have al-ready shifted to 150 dpd or more stringent NPL recognition system.



Management has guided that GNPA on standalone basis is likely to rise by 100-150bps with move from 180dpd to 150dpd NPL recognition system. Moreover,merger of equipment finance business is likely to further add to the existing assetquality woes. As per the management, equipment finance book has come down to~Rs.22.5 bn in Q3FY16 from ~Rs.29 bn in Q4FY15. Management has also guidedthat this book is likely to shrink to ~Rs.18 bn by the end of FY16 on back of steadyrecovery run-rate of Rs.1.0-1.5 bn/month.

GNPA of equipment finance business is down from ~Rs.11 bn in Q2FY16 to ~Rs.10.5bn in Q3FY16. We expect slightly better recovery during Q4FY16 and expect GNPAto fall to ~Rs.9.5. On assuming write-off equivalent to the net worth of Rs.3.5 bn(equipment finance business), addition to GNPL would be ~Rs.6 bn. Assuming STFCwrites-off this amount on merger, this could shave-off ~4% of its book value.

Valuation and recommendationThe CV down-cycle has impacted STFC's return ratios (RoE is likely to be at 15-16%during FY16/17E) in recent years, which definitely justifies a case for lower tradingmultiple than its historical mean. Given its presence amongst small CV operator,STFC's future earnings are levered to improvement in the CV cycle.

We have tweaked the earnings estimates for FY16/17E which incorporates shift toconservative NPL recognition system as well as impact of merger of equipment fi-nance business. We now expect net income to grow 14.1% CAGR during FY15-17E.Currently, stock trades at reasonable valuation (1.7x FY17E ABV) and hence we re-tain BUY rating on the stock with downward revised TP of Rs.1060 (Rs.1090 ear-lier; 2.2xFY17E ABV). We are positive on the turnaround of CV cycle and seesome green shoots in the small CV segments. We believe STFC is likely to reapthe benefits from likely bottoming out of CV cycle, even though benefits of CVcycle improvement could be back-ended, given their focus on small CV opera-tors. However, potential spike in NPLs due to migration to 150 dpd remains anoverhang on the stock.

Summary Table

(Rs bn) FY14 FY15 FY16E FY17E

Interest Income 62.9 77.8 92.5 107.9

Interest expenses 39.0 44.0 49.5 59.1

NII 23.9 33.8 42.9 48.8

Growth (%) 44.9 41.3 27.2 13.5

NII (Incl Securitization) 36.7 41.1 49.3 56.3

Other Income 1.5 0.7 0.7 0.8

Total Income 25.3 34.5 43.6 49.5

Operating Profit 28.6 31.1 37.3 42.4

PAT 12.6 12.4 13.5 16.1

Growth (%) -7.1 -2.1 8.9 19.6

Gross NPA (%) 3.9 3.8 6.2 6.0

Net NPA (%) 0.8 0.8 1.3 1.5

NIM (%) 6.7 6.6 7.1 7.2

RoA (%) 2.5 2.0 1.9 1.9

RoE (%) 17.3 15.1 15.1 15.9

DPS (Rs.) 7.0 10.0 11.0 12.0

EPS (Rs) 55.7 54.6 61.1 72.6

BV (Rs) 365.1 408.5 457.5 517.0

Adj. BV (Rs) 351.7 391.8 432.3 482.7

P/E (x) 14.6 14.9 13.3 11.2

P/ABV (x) 2.3 2.1 1.9 1.7

Source: Company, Kotak Securities Ltd - Private Client Group

We recommend BUY onShriram Transport Finance

Co with a price target ofRs.1060



COMPANY UPDATE



IDFC BANK

PRICE: RS.57 RECOMMENDATION: BUYTARGET PRICE: RS.83 FY17E P/E: 17.7X; P/ABV: 1.4X

We expect IDFC bank to deliver moderate return ratios (RoA: 1.0-1.2%;RoE: 7-10%) during first two years of operations (FY17/18E). Bank hasconsciously built-up strong FX book (Rs.338.2 bn) as against the regulatoryrequirement of maintaining SLR at Rs.107 bn (Q3FY16). NIM is expected tobe ~2% in FY16/17E which is likely to improve to 2.6% in FY18E. Webelieve NIM would be impacted due to strategy of aggressively building-up of investment book where income flows through non-interest line itemwhile borrowing cost flows through NII.

We are valuing banking business at Rs.83 (2.0x FY17E ABV; Rs.89 earlier)which has started banking operation on strong footing (provision bufferof ~10%). Its premium valuation given the modest return ratios (7-10% inFY17/18E) is justified by the strong capital position (19.6% Tier-I capital),strong growth trajectory and FII ownership headroom.

Banking operation started on strong footingIDFC Bank is cruising ahead along with its execution plan. It has three distinctbusinesses - commercial & wholesale bank, rural bank and consumer bank andefforts continues to build a universal bank in next 5-7 years. As of today, bankhas 24 branches - 16 are rural branches in Hoshangabad, Khandwa and Hardadistricts of MP while rest are in bigger cities. Management has been guiding thattheir strategy would continue to be light on branches (vis-à-vis well establishedbanks of today) and rely more on digital infrastructure. They would continue fo-cusing on investment in technology and re-engineering processes for better cus-tomer experience.

IDFC bank reported RoA at 1.2% during Q3FY16 as against the guidance of 1.0-1.1% during initial phase. Management has guided that C/I ratio would be in-verted U-shaped and will rise further from here onwards (35.6% in Q3FY16).RoA trough is likely to be seen during FY17 at 1.0-1.1% before it would witnessimprovement.

Bank has built-up strong investment book to maintain balance sheet liquidity aswell as to benefit from the yield curve movement. Its investment book grew32.5% QoQ and stands at Rs.338.2 bn (Q3FY16) while SLR requirement is onlyRs.107 bn. It has also reported outstanding credit (including credit substitutes) ofRs.462.7 bn comprising of Rs.430 bn of net advances, Rs.9.3 bn of NCDs andRs.23.4 bn of LC/BGs. Bharat bank book is very small at Rs.543 mn (~1% of loanbook).

Reported PAT (Rs.2.42 bn) for IDFC bank was largely aided by strong treasurygains (Rs.1.72 bn) while NII came at Rs.4.04 bn. Its NIM came at 2% while NIMfor loan portfolio was at 3.2%. Overall NIM is lower because of build-up of in-vestment book where income flows through non-interest income line item whilefunding cost flows through interest expense line.

Retail banking strategyManagement has been targeting to grow its loan book 3x to ~Rs.1.5 tn in next 5years, covering 50 districts in 5 states (MP, Karnataka, Maharashtra, Rajasthanand Gujarat). Bank's strategy would be to pick up a district and saturate it usingMFI delivery model. Its rural branch strategy would deliver through micro ATMs,which will do everything except credit products. Micro ATMs would be hookedto Aadhar data base and can be authenticated using biometric information. They

Summary table


Interest Income 37471 96611 130425Interest expenses 30160 75750 98476NII 7311 20860 31949Growth (%) 53.2%Non-Int Income 4234 9886 11143Total Income 11545 30746 43092Operating Profit 6561 16965 24488PAT 4215 10901 15820Growth (%) 45.1Gross NPA (%) 3.3 4.0 3.9Net NPA (%) 1.4 1.4 1.3NIMs (%) 2.0 2.1 2.6RoA (%) - 1.0 1.2RoE (%) - 7.6 10.1DPS (Rs) - - -EPS (Rs) 1.24 3.22 4.67BV (Rs) 40.6 43.8 48.4Adj. BV (Rs) 38.8 41.4 45.5P/E (x) NM 17.7 12.2P/ABV (x) 1.5 1.4 1.3

Source: Kotak Securities - Private ClientResearch



will also form partnerships with MFIs/BCs. Management has also indicated that>70% branches will be operating in rural segment. Although it would be a smallpart of overall book, it would be profitable on the standalone basis.

Urban retail banking strategy would be branch light focusing more on digitalspace. IDFC bank has opened 5 retail branches till date and would focus on af-fluent class using segmentation strategy e.g. younger and self-employed.

Liability strategy - not offering pricing advantage:

IDFC's liability strategy has been to focus on CA rather than SA to build stickydeposit franchise at a reasonable cost. Management has indicated that they arenot offering any price advantage for attracting SA deposits but would offer cashdiscount/cashback if one transact using IDFC bank account. As per themanagement's earlier guidance, CASA is likely to touch ~10% in next 5-6 years.

At the end of Q3FY16, bank has mobilized CASA of Rs.3.2 bn (CA: Rs.2.93 bn,SA: Rs.0.3 bn) and TDs of Rs.13.2 bn. It is small as compared to the size of B/S -0.7% of core funds. We expect gradual build-up to liability franchise and byFY18 it is likely to be 7.5% of core funds. We believe building strong liabilityfranchise would be most daunting task for the management. Intense competi-tion in the saving deposit segments as well as limited branch presence of IDFCwould limit the quick ramp-up the saving account franchise. However, it can le-verage its strong relationship with the wholesale customers to mobilize currentaccount floats as well as fee-income through cross-selling.

Asset quality - strong counter-cyclical provisioning provides morecomfort

Management had indicated earlier that loan worth Rs.88 bn (Rs.50 bn as perregulatory definition) out of Rs.430 bn of loan book is facing stress. Out of thisRs.30 bn comes from gas based exposure. However, IDFC bank has already pro-vided Rs.50 bn and recognizing income on cash basis only from the stressedportfolio. They have also appointed dedicated team for recovery from this seg-ment. We believe ~10% of contingency provision buffer provides sufficient cush-ion to its future earnings against any negative surprise on its asset quality. Anyresolution on gas price pooling would significantly reduce the stress on its gasexposure.

Valuation and Recommendation

IDFC has aggressively built-up buffer provisions over past several quarters whichis touching ~10%. So, even in the worst case scenario, if 13-14% of its stressedassets turn into NPLs, provision coverage ratio would remain healthy at 50-55%.IDFC's BV/Share is Rs.40 and bank is well capitalized (CAR: 20.3%; Tier I: 19.4%)amongst the private sector banks. It's asset quality remained stable - GNPA andNNPA at 3.1% and 1.0%, respectively (Q3FY16). As they have already createdprovision buffer of Rs.50 bn, Q3FY16 saw only marginal fresh provisioning(Rs.123 mn).

Management has guided for trough RoA of 1% for IDFC bank, which we expectin FY17. We are modeling RoA to come at 1% in FY17E which is likely to im-prove to 1.2% in FY18E. We expect IDFC bank to deliver moderate return ratios(RoA: 1.0-1.2%; RoE: 7-10%) during first two years of operations (FY17/18E).

We are valuing banking business at Rs.83 (2.0x FY17E ABV; Rs.89 earlier) whichhas started banking operation on strong footing (provision buffer of ~10%). Itspremium valuation given the modest return ratios (7-10% in FY17/18E) is justi-fied by the strong capital position (19.6% Tier-I capital), strong growth trajectoryand FII ownership headroom.

We recommend BUY onIDFC Bank with a price

target of Rs.83




IDFC LTD

PRICE: RS.40 RECOMMENDATION: BUYTARGET PRICE: RS.80 FY17E P/ABV: 0.6X

IDFC Ltd (consolidated) has net worth of Rs.100 bn which implies BV/shareat Rs.63. On consolidated basis, they reported Rs.1.76 bn of PAT duringQ3FY16 on back of strong operating income (Rs.7.7 bn) with non-interestincome at Rs.3.2 bn. We are valuing IDFC Ltd on SOTP after giving 40%holding company discount as there are two step-up subsidiaries forbanking operation. We are valuing banking business at Rs.83 (2.0x FY17EABV; Rs.89 earlier) which has started banking operation on strong footing(provision buffer of ~10%). Its premium valuation given the modest returnratios (7-10% in FY17/18E) is justified by the strong capital position(19.6% Tier-I capital), strong growth trajectory and FII ownershipheadroom. Post 40% holdco discount, fair value for IDFC ltd/share comesat Rs.80 (Rs.84 earlier) and hence we retain BUY rating on the stock.

IDFC Ltd owns 53% in IDFC bank through NOHFC (non-operating financial hold-ing company) structure while FIIs stake is around ~23%. Even though FIIs canincrease the stake in banking business till 49% during first 5 years of operation,for all practical purposes it can only rise to 39%, as GOI holds ~8% in IDFC bankand is less likely to sell in near future.

Post Q3FY16, net worth of IDFC Ltd is Rs.100 bn and its portfolio of businessesinclude 53% stake in IDFC Bank, 75% stake in IDFC AMC, 100% stake in IDFCSecurities, 100% stake in IDFC Alternatives and 100% in IDFC InfrastructureDebt Fund.

Banking operation: Progressing well

IDFC Bank has started its operation on strong footing. As per the managementguidance, they would go light on branches as compared to well establishedbanks of today and rely more on digital infrastructure. Their focus would con-tinue to invest in technology and re-engineering processes for better customerexperience.

IDFC's liability strategy has been to focus on CA rather than SA to build stickydeposit franchise at a reasonable cost. Management has indicated that they arenot offering any price advantage for attracting SA deposits but would offer cashdiscount/cashback if one transact using IDFC bank account. As per themanagement's earlier guidance, CASA is likely to touch ~10% in next 5-6 years.

At the end of Q3FY16, bank has mobilized CASA of Rs.3.2 bn (CA: Rs.2.93 bn,SA: Rs.0.3 bn) and TDs of Rs.13.2 bn. It is small as compared to the size of B/S -0.7% of core funds. We expect gradual build-up to liability franchise and byFY18 it is likely to be 7.5% of core funds. We believe building strong liabilityfranchise would be most daunting task for the management. Intense competi-tion in the saving deposit segments as well as limited branch presence of IDFCwould limit the quick ramp-up the saving account franchise. However, it can le-verage its strong relationship with the wholesale customers to mobilize currentaccount floats as well as fee-income through cross-selling.

Reported PAT (Rs.2.42 bn) for IDFC bank was largely aided by strong treasurygains (Rs.1.72 bn) while NII came at Rs.4.04 bn. Its NIM came at 2% while NIMfor loan portfolio was at 3.2%. Overall NIM is lower because of build-up of in-vestment book where income flows through non-interest income line item whilefunding cost flows through interest expense line.

RESULT UPDATE


Summary Table (IDFC Bank)


Interest Income 37471 96611 130425Interest expenses 30160 75750 98476NII 7311 20860 31949Growth (%) 53.2%Non-Int Income 4234 9886 11143Total Income 11545 30746 43092Operating Profit 6561 16965 24488PAT 4215 10901 15820Growth (%) 45.1Gross NPA (%) 3.3% 4.0 3.9Net NPA (%) 1.4% 1.4 1.3NIMs (%) 2.0 2.1 2.6RoA (%) - 1.0 1.2RoE (%) - 7.6 10.1DPS (Rs) - - -EPS (Rs) 1.24 3.22 4.67BV (Rs) 40.6 43.8 48.4Adj. BV (Rs) 38.8 41.4 45.5P/E (x) NM 17.7 12.2P/ABV (x) 1.5 1.4 1.3





Bank has built-up strong investment book (RS.338 bn; 32.5% YoY) while its out-standing credit (including credit substitutes) was Rs.462.7 bn comprising ofRS.430 bn of net advances, Rs.9.3 bn of NCDs and Rs.23.4 bn of LC/BGs. Bharatbank book is very small at Rs.543 mn (~1% of loan book).

Management had indicated earlier that loan worth Rs.88 bn (Rs.50 bn as perregulatory definition) out of Rs.430 bn of loan book is facing stress. Out of thisRs.30 bn comes from gas based exposure. However, IDFC bank has already pro-vided Rs.50 bn and recognizing income on cash basis only from the stressedportfolio. They have also appointed dedicated team for recovery from this seg-ment. We believe ~10% of contingency provision buffer provides sufficient cush-ion to its future earnings against any negative surprise on its asset quality. Anyresolution on gas price pooling would significantly reduce the stress on its gasexposure.

Infrastructure Debt Fund (IDF):IDFC ltd presently holds 100% stake in IDF while it has to reduce its stake below49% (in 2 years) as per the regulatory requirements. It is an interesting businesswith no CRR, SLR and PSL obligation. Moreover, it is a tax free vehicle. It hasalready crossed ~Rs.10.0 bn of exposure which is likely to grow to Rs.200 bn innext 4-5 years. Management has indicated that future contract would comefrom IDFC ltd.

Its net worth is Rs.4.7 bn and reported PBT of Rs.110 mn during Q3FY16. Man-agement has guided that this business can generate 15-17% of RoE as it is taxexempt business. Moreover, it can achieve the leverage of 7-8x being AAA ratedentity.

AMC business:This business has done well post acquisition from standard chartered AMC.While overall MF industry AUM grew from Rs.8 tn to Rs.13 tn, IDFC AMC AUMhas grown from Rs.130 bn to Rs.544 bn (market share: 4.1%). Its ranking in theleague table has also moved up from 13th during the time of acquisition to 8thas per last reported data. With 74:26 debt: equity, this business has the pros-pects of growing at 10-15% in the future (management's guidance). DuringQ3FY16, PBT was Rs.480 mn.

IDFC Alternatives:This business does not require much capital. It has 7 funds and manages Rs.164bn worth of assets in private equity, infrastructure equity and real estate. DuringQ3FY16, it reported Rs.170 mn.

IDFC Securities:This business is doing well and reported PBT of Rs.50 mn during Q3FY16.

Valuation and RecommendationIDFC bank (IDFC Ltd owns 53%) has aggressively built-up buffer provisions overpast several quarters which is touching ~10%. So, even in the worst case sce-nario, if 13-14% of its stressed assets turn into NPLs, provision coverage ratiowould remain healthy at 50-55%. IDFC's BV/Share is Rs.40 and bank is well capi-talized (CAR: 20.3%; Tier I: 19.4%) amongst the private sector banks. It's assetquality remained stable - GNPA and NNPA at 3.1% and 1.0%, respectively. Asthey have already created provision buffer of Rs.50 bn, Q3FY16 saw only mar-ginal fresh provisioning (Rs.123 mn).




We are valuing banking business at Rs.83 (2.0x FY17E ABV; Rs.89 earlier) whichhas started banking operation on strong footing (provision buffer of ~10%). Itspremium valuation given the modest return ratios (7-10% in FY17/18E) is justi-fied by the strong capital position (19.6% Tier-I capital), strong growth trajectoryand FII ownership headroom.

SOTP Valuation

Value of IDFC Ltd (FY17E)

(Rs bn) Stake (%) Value Bear Case Base Case Bull Case

FY17E Adj Net worth of IDFC Bank 140.3

P/ABV multiple 1.5x 2.0x 2.5x

Value of IDFC Bank 210.5 280.7 350.8

Value per share of IDFC Bank 62.1 82.8 103.5

Value of IDFC Ltd (FY17E)

AMC business 75.0 5% of AUM 26.3

IDFC Alternatives 75.0 10% AUM 10.5

IDFC Securities 6.0

NSE Stake 8.0

IDFC Bank 53.0 148.8

IDF 100.0 1x net worth 2.0

others 10.0

Total Value of IDFC Ltd (Rs. Bn) 211.5

40% Holding company discount 126.9

Value of IDFC Ltd/share 79.7


We are valuing IDFC Ltd on SOTP after giving 40% holding company discount asthere are two step-up subsidiary for banking operation. We are valuing bankingbusiness at Rs.83 (2.0x FY17E ABV; Rs.89 earlier) which has started banking op-eration on strong footing (provision buffer of ~10%). Its premium valuation giventhe modest return ratios (7-10% in FY17/18E) is justified by the strong capitalposition (19.6% Tier-I capital), strong growth trajectory and FII ownership head-room. Post 40% holdco discount, fair value for IDFC ltd/share comes at Rs.80(Rs.84 earlier) and hence we retain BUY rating on the stock.

We recommend BUY onIDFC Ltd with a price target

of Rs.80



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

Gainers

Adani Ports 221 4.2 NA 4.0

Yes Bank Ltd 772 3.4 NA 11.1

Coal India 329 2.7 NA 3.2

Losers

ICICI Bank 217 (5.6) NA 36.7

SBI 173 (4.0) NA 22.9

Maruti Suzuki 3,948 (3.6) NA 1.9

Source: Bloomberg

Bulk deals

Forthcoming events Company/MarketDate Event

2-Feb Crompton Greaves, Cummins India, Shree Cements earnings expected

3-Feb Dish TV earnings expected

4-Feb ABB, Bajaj Auto, Berger Paints, Mphasis, Tata Steel, Torrent Pharma, GE Shippingearnings expected

5-Feb Cadila Healthcare, Carborundum Universal, Eicher Motors, Lupin, Tata Power, Voltas,earnings expected

Source: BSE India

Trade details of bulk deals

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

01-Feb AARYAGLOBL Jamisetti Posi Babu S 122,000 1.7

01-Feb CITIZYN Mansukhlal K Shah S 31,563 14.5

01-Feb INDOVATION N Janaki Devi S 18,510 48.6

01-Feb INTELLCAP Sunil Optics Pvt Ltd S 192,905 49.9

01-Feb OONE Patel Aalap Bipinbhai S 161,000 4.2

01-Feb OONE Mahesh Somabhai Desai B 161,963 4.2

01-Feb POTENTIAL Shalabh Agarwal S 300,000 13.5

01-Feb POTENTIAL Rahul Gupta B 625,362 13.4

01-Feb SAL Money Care Fin & Leasing Pvt Ltd B 100,000 10.9

01-Feb SAL Gazi Estates Pvt Ltd S 100,000 10.9

01-Feb SCTL Shreeji Broking Pvt Ltd S 40,000 55.0

01-Feb SCTL Ramachandran Ranganathan B 44,000 55.0

01-Feb SHUBHRA Saurav B 20,000 12.0

01-Feb SHUBHRA Varishtha S 20,000 12.0

01-Feb SIICL Ravi Ramgopal Rathi B 20,120 11.8

01-Feb SIICL Hemlataben Kesarimal Shah S 20,000 11.8

01-Feb SPECIALITY Kedia Securities Pvt Ltd B 350,000 107.0

01-Feb TCPLPACK Spice Commerce And Trade Pvt Ltd S 50,924 520.1

01-Feb TIRIN Anitha R B 40,000 39.2

01-Feb TIRIN Ketan Fatehchand S 50,000 39.2

01-Feb TRIVENIGQ Stressed Assets Stabilization Fund S 200,000 17.5

01-Feb VGCL Savita Ramkishore Hansaria S 198,000 19.0

Source: BSE



Fundamental Research Team

Dipen [email protected]+91 22 6621 6301

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

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

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

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

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

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

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

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

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

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

Pankaj [email protected]+91 22 6621 6321

Jayesh [email protected]+91 22 6652 9172

K. [email protected]+91 22 6621 6311

Technical Research Team

Shrikant [email protected]+91 22 6621 6360

Amol [email protected]+91 20 6620 3350

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

Rahul [email protected]+91 22 6621 6198

Malay [email protected]+91 22 6621 6350

Prashanth [email protected]+91 22 6621 6110

RATING SCALE

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

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

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

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

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

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

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

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

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



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Morning Insight - 2 Feb 2016 - Kotak Securitiesmeet stringent capital norms.The 'on-tap' application window is likely to open for a period of one month in July with an empowered committee