1

October 10, 2017

Research Team

rsec.research@rcap.co.in

Samvat 2074 – New Highs & Beyond

The last Samvat was one of the most eventful years for the economy as well as the equity

markets because of two major unprecedented events namely Demonetisation and Introduction

of Goods and Services Tax (GST). Nifty initially witnessed some correction from ~8,638 levels on

Muharat Trading day to sub 7,900 levels during month of December 2016 after announcement

of Demonetisation in November 2016. Since then we have witnessed an almost secular positive

movement with NIFTY making a new life high of 10,179 during this period. Samvat to Samvat, Nifty

has given return of 15% in 1 year. Mid-caps and Small Caps have outperformed with gains of 17%

and 22% respectively. Nifty achieved a new peak during the year helped by outperformance of

financial services index (36% weight in NIFTY) which increased 24% from last Samvat. IT Services,

the third largest sector with a weight of 11% continued its underperformance and increased by

6.7% during the same period.

India continues to remain a popular investment destination and is an overweight in most global

portfolios. However, over the past one year, it has underperformed other Asian indices like Hang

Seng (up 24%) and Nikkei (up 19%). Indian Equity markets are waiting for revival of corporate

earnings after a very flattish performance over the last 4-5 years. Sub par performance on

corporate earnings front coupled with rally in equity markets have taken the valuation to almost

all time highs in India. There is a fundamental transition underway in the economy with several

first time steps taken during the last one year.

On the macro front, economic growth momentum has been modest with India hitting relatively

low GDP growth of 5.7% in 1QFY18. India’s reform momentum has been ongoing at a fairly

brisk pace, in absolute and relative terms. Samvat 2073 saw the introduction of GST, one of the

biggest tax reforms in the post-independent India. Introduction of GST has been disruptive for

the corporate earnings in the short term due to de-stocking in the first quarter of current fiscal.

The long term impact is likely to be positive due to efficiency and increase in tax compliance. We

also had two good monsoons in a row which should help in delivering good earnings growth

from the relatively low base in the next financial year after dust settles due to GST. Domestic

interest rates have also moderated due to abundant liquidity, which will aid earnings growth.

Domestic retail liquidity in Indian markets have grown to unprecedented levels during the last 18

months due to lack of positive returns in other popular investment avenues like Gold and Real

Estate. Increase in domestic liquidity augurs well for equity markets as it provides necessary

stability to fund flows.

We are presenting to you a bouquet of 9 stocks across sectors and market capitalization to

invest your hard earned money during start of Samvat 2074. We are confident that these stocks

will have a good double digit return potential over next 12-18 months.

Wish you all a very happy and prosperous Diwali!

Happy Investing!

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October 10, 2017

Stocks Recommendations for Diwali Samvat - 2074

Stock Name M.Cap (Rs cr) Reco. Price* (Rs) Target Price (Rs) % Upside

Large-Caps

Hero MotoCorp 73,736 3,695 4,300 16.4

Indiabulls Housing Finance 54,403 1,282 1,600 24.8

ITC 323,841 266 336 26.2

L&T 160,054 1,143 1,400 22.5

Mid-Caps

Can Fin Homes 6,978 2,624 3,200 21.9

CDSL 4,013 385 450 16.9

Glenmark Pharma 17,225 611 900 47.3

Natco Pharma 17,216 991 1,200 21.1

Somany Ceramics 3,562 840 1,020 21.4

*CMP as on October 10, 2017

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October 10, 2017

Performance of stocks recommended for Diwali Samvat - 2071

Stock Name Reco. Price Target Price Booked Price % Change

TCS* 2,406 3,200-3,400 2506 4

SBI* 249 340-375 243 (2)

Tata Motors 475 650 390 (18)

Lic Housing 333 450 450 35

Bajaj Corp* 278 500 500 80

*Corporate actions are adjusted in recommended price

Booked Price is November 06, 2015 last date or target price achieved whichever is earlier

Performance of stocks recommended last Diwali for Samvat - 2070

Stock Name Reco. Price Target Price Booked Price % Chg

Aurobindo Pharma 230 300-350 325 41

SBI 1879 2,400-2,600 2,500 33

CMC 1351 1800 1,800 33

DCB 51 75-85 75 47

Swaraj Engines 498 750-800 775 56

Booked Price is October 17, 2014 or target price achieved whichever is earlier

Performance of stocks recommended for Diwali Samvat - 2072

Stock Name Reco. Price Target Price Booked Price % Change

Hexaware* 250 325 192 (23)

Persistent 659 1000 685 4

HDFC Bank* 1072 1470 1256 17

IPCA Labs 704 1124 614 (13)

Shriram Transport* 926 1220 1220 32

*Corporate actions are adjusted in recommended price

Booked Price is October 20, 2016 or target price achieved whichever is earlier

Performance of stocks recommended for Diwali Samvat - 2073

Stock Name Reco. Price Target Price Booked Price % Upside

Aurobindo Pharma 823 981 735 (11)

HDFC Ltd. 1,337 1,560 1,560 17

JK Lakshmi Cement 499 550 386 (23)

Persistent Systems 677 790 661 (2)

Pidilite Industries 714 832 832 17

Booked Price is October 10, 2017 or target price achieved whichever is earlier

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October 10, 2017

NIFTY (CMP 10,017)Technical View

In our last Diwali Muhurat Picks report (dated: 21st October, 2016 @ NIFTY level of 8,693), we had mentioned that if NIFTY stays firmly above the prior swing high (then at 9,119 level), index will visit the psychological level of 10,000, which is what exactly happened in the market. NIFTY had witnessed some decline due to profit booking till December 2016, wherein index found good support around its 20-month EMA and reversed after forming Double Bottom Pattern around sub-7,900 mark. Later, NIFTY managed to surpass its make-or-break level of 9,119 and recorded a new high of 10,179 level thereafter.

In the last 9 months, NIFTY rose by 2,285 points from its 52-week low of 7,894 level and currently, oscillating around the upper band of the rising channel. Key technical indicators-RSI & MACD are moving higher steadily, signalling strength in NIFTY. Though overall view is positive for NIFTY, sideways movement or some decline due to profit taking cannot be ruled out, where violation of make-or-break level 9,650 will trigger short-term volatility. In case NIFTY manages to stay firm above the make-or-break level for next couple of months, upper band of the rising channel wouldn’t be able to refrain index from moving higher. Thereafter, rising parallel line will work as key reversal point for NIFTY.

As per the prior trading pattern, a chance of a minor decline is relatively higher in NIFTY and we believe that will strengthen the rising trend and will also help the index to achieve another milestone of 11,400 mark by next Diwali. The key technical indicators are positively poised on the monthly chart and in favour of probable up-move in the NIFTY. In case of any negative surprise (like increase in geopolitical tension between US and North Korea, etc.), the index will find strong support at around 9,100, which is coinciding with its 20-month EMA and also with the prior horizontal break-out line (shown in the dotted line above).

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October 10, 2017

Hero MotoCorp rose to its life-time-high of Rs4,091 in September 2017 forming higher top higher bottom pattern on the monthly chart. Later, the stock surrendered partial gains and is currently trading around its 3-month low. Due to the recent decline from its peak level, the key technical indicator-RSI turned downwards and it has given negative cross-over, which suggests that the stock will remain in pressure for the short-term. The stock has strong support near its 13-month SMA, placed at Rs3,460. The stock is a consistent outperformer in the Auto sector and in the past, it has made a new high 10% above the previous peak. We believe the sector is in strong momentum and possible decline from here offers a good risk reward ratio to accumulate the stock, as long-term trend is positive. Hence, fresh long position can be initiated here and on dips with the expected target of making a new high (i.e. Rs4,300).

Hero MotoCorp (CMP Rs3,695)

Fundamental View f Hero MotoCorp Ltd. (HMCL) is world’s largest manufacturer of two-wheelers with an extensive

sales and service network spanning over 6,000 customer touch points. These comprise of a mix of authorised dealerships, service and spare parts outlets and dealer-appointed outlets across the country.

f Though the industry witnessed back-to-back disruptions in last 12 months in the form of demonetisation, new emission norms (BS-IV) and GST roll-out, the demand for 2W in domestic market is expected to remain firm in FY19E . The lower interest rate regime, government’s focus on rural economy and normal monsoon for two successive years are expected to drive 2Ws demand.

f HMCL enjoys established brand equity and commands >36.9% market share in domestic 2W market. It has a wide range of models from entry level to high-end. It also has strong presence in scooters segment and it is a well-recognised in brand in rural area, which is expected to benefit HMCL, gong ahead. Notably, its volume grew by 11% YoY to 2.0mn units in 2QFY18, which will aid HMCL to report healthy numbers for the quarter.

f Following commissioning of facilities at Vadodara and Bangladesh, its total installed capacity has reached ~9.4mn units. We believe that HMCL is set to meet future demand owing to new capacity.

f Outlook & Recommendation: Looking ahead, we expect HMCL to gain market share and consolidate its position further on the back of capacity addition. Further, with the likely pick-up in rural economy owing to favourable monsoon and government’s push and recent revision of HRAs of government employees, we expect 2-W segment to witness to decent volume growth in ensuing years. We recommend BUY on the stock with a Price Target of Rs4,300 (21x FY19 consensus EPS).

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October 10, 2017

Indiabulls Housing Finance has recorded a new life-time-high of Rs1,336.95 in the last month, where its 20-month EMA helped the stock to resume its northward journey after profit booking. The key technical indicators-RSI and MACD have given positive cross-over above their neutral line in February to March-2017 and later that indicators advanced gradually the way price surged, which is quite positive for the stock. As per the current monthly set-up, we believe the stock will keep moving higher taking support of its 20-month EMA and will easily surpass given Target of Rs1,600 in the long-run. Currently, the stock is trading around its life-time-high, hence fresh long position can be initiated at the current price and on dips.

Indiabulls Housing Finance (CMP Rs1,282)

Fundamental View f Indiabulls Housing Finance Ltd. (IBHFL) is the 2nd largest private housing finance company in

India, which is spread over 220 branches in 110 towns/cities across the country. Further, it has serviced >9.2 lakh customers and has cumulatively disbursed home loans of >Rs1.74 lakh crore till 1QFY18.

f Demonetisation move is expected to boost growth potential of formal and serious players like IBHFL in the medium term. Collection efficiency is expected to improve due to minimising cash transactions between builders and home buyers. Thus, this will not only improve asset quality, but also lower operating expenses.

f As per IBHFL, effective home loan rates in the mid-income affordable housing segment is at near-zero levels at 0.3% for home loans upto Rs2.4mn. With rental yields at 3.2%, home ownership is very affordable and significantly cheaper than renting a house. This is expected to translate into healthy demand in real estate especially in Tier-III and Tier-IV cities.

f Home loans, which form the majority of incremental disbursals, are disbursed at an average ticket size of Rs2.4mn with an average LTV of 73% (at origination). Further, it has been maintaining a better than industry’s asset quality with its GNPA and Net NPA stood at 0.8% and 0.3%, respectively as of 1QFY18.

f Outlook & Recommendation: Given government’s strong focus on housing development in through Housing for All by 2022 along with likely shift of housing financing industry from informal to formal will potentially aid IBHFL to grow its business with better profitability. We expect IBHFL to continue its record of healthy growth in ensuing years on account of improving reach base and sound experience in lending business. We recommend BUY on the stock with a Target Price of Rs1,600 (4.3x FY19E consensus book value and 15x FY19 consensus EPS).

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October 10, 2017

ITC rose to its life-time-high of Rs367 in the month of July 2017, but later the stock witnessed sharp decline on the back of profit booking and has shed its major gains. This gives an opportunity to enter in the stock for consistent returns as strong support of its monthly moving averages (21-month SMA placed at Rs250) and key Fibonacci Retracement level (Rs250-76.4% Retracement level of prior up-move Rs219-368) will save the stock from falling further. The key technical indicator-RSI once again reversed from sub-50 level, signalling near-term turnaround in the stock. We anticipate the stock to initiate a fresh rally in the next couple of months that should see the stock surpassing our target of Rs336, provided it does not break the 34-month SMA, which is placed at Rs240 on the monthly chart.

ITC (CMP Rs266)

Fundamental View f Incorporated in 1910, ITC is the dominant player in Indian cigarette industry with market share

of over 75%. Apart from cigarettes, ITC is also a leading player in hotels, Agri, paperboard and FMCG industry. We expect the cigarette business to continue to be ITC’s key growth driver irrespective of regulatory uncertainties.

f ITC has market share of over 75% in domestic cigarettes industry with marquee brands like Gold Flake, Classic, Navy Cut, Scissors and Players among others. It enjoys market leadership across all sub-categories and is a price maker in the segment.

f Being the market leader, ITC has a strong margin profile and has reported EBITDA margin of 36.4% and net profit margin of 25.4% in FY17. With such margins, the Company has been able to generate operating cash of over Rs120bn annually. While ITC’s overall RoCE stands at 23.5%, the cash cow cigarette business enjoys RoCE of >200% owing to superior pricing power and low capital intensity. High cash generation has enabled ITC to invest aggressively in other fast growing businesses.

f ITC has been in focus over government’s flip flop on GST rates on cigarettes. The final GST (plus cess) on cigarettes is 8-9% higher than the pre-GST indirect tax era. ITC has undertaken a weighted average price increase of 6-7% across most of its key brands, which would boost its cigarette volume to grow by 2-3% in FY18E, while EBIT is expected to grow in double-digit on the back of improved margins.

f Outlook & Recommendation: We believe that increased clarity post revised GST rates and the resultant price hikes will return the focus on earnings for the Company. The stock currently trades at P/E multiples of 27x FY19E earnings. Despite challenging regulatory environment, the stock has traded at an average 1-Yr forward PE multiple of 30x in past five years, which provides cushion in our view. We recommend BUY on the stock with a Target Price of Rs336 (32.2x FY19E EPS).

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October 10, 2017

Larsen & Toubro (CMP Rs1,143)Fundamental View

f Larsen & Toubro (L&T) is a major EPC, technology, manufacturing and financial services conglomerate with global operations. It addresses critical needs – in key sectors i.e. Hydrocarbon, Infrastructure, Power, Process Industries and Defence – for the customers in over 30 countries.

f L&T’s order backlog of Rs2.63trln as of 1QFY18-end (4xFY17 revenue) provides decent revenue visibility. Its order book is highly diversified across segments and geographies. L&T secured orders worth Rs264bn in 1QFY18. Despite decline in international orders, the Management expects order inflow to grow by 12-14% in FY18E.

f Healthy pick up in domestic execution was visible in 1QFY18 as its domestic revenue recorded a growth of 11% YoY, whereas international revenue grew by 8% YoY. The management commentary reiterates the execution rate in domestic segment is looking up for rest of FY18E.

f In 1QFY18, L&T’s net working capital – as percentage of sales – declined by 300bps YoY to 20%, despite 10% rise in consolidated revenue. Further, L&T generated CFO to the tune of Rs3.9bn in Q1FY18 vis-à-vis negative number in Q1FY17. The management expects net working capital to remain in the range of 19-21% on the back of 12-14% growth in revenues in FY18E-19E.

f Outlook & Recommendation: A visible pick-up in execution trends with continued focus on reasonable margin orders, disciplined working capital and monetisation of non-core assets are likely to aid L&T to improve RoEs. We expect L&T’s RoE to improve in ensuing fiscals, which might warrant a re-rating in coming period. We recommend BUY on L&T with a Target Price of Rs1,400 (22x FY19E consensus earnings for parent and 0.5x of its investments).

Larsen & Toubro reversed after taking support of its long-term moving average near 100-month SMA in February 2016 and later the stock rose 89% from that low point of the month (i.e. Rs661) to recover prior damages. During the recovery phase, the stock has taken support of its medium-term moving average 50-month EMA and recorded the new life-time-high of Rs1,250. From last couple of months, the stock has formed a strong base at Rs1,100. Rise in the key technical indicators-RSI and MACD are signalling that the stock will utilize recent consolidation to climb higher levels. However, in case the stock violates that base level (i.e. Rs1,100), we may see short-term volatility, where its medium-term and long-term moving averages will continue to work as key reversal point for the stock (placed at Rs940 and Rs790, respectively). Our view is positive for the stock, buy at current price and on dips for better risk reward. On the higher side, the stock will face major hurdle at Rs1,400, which is coinciding with upper band of the rising channel.

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October 10, 2017

Can Fin Homes (CMP Rs2,624)

Fundamental View f Can Fin Homes Ltd. (CFHL) is one of the fastest growing housing finance companies with robust

loan book growth, strong NIMs and best-in-class asset quality. With its pan-India presence through 130 branches, 12 affordable housing loan centres and 33 satellite offices spread across 19 states/union territories in Q1FY18, the Company stands to benefit from the affordable housing segment in coming quarters.

f CHFL has a robust credit and recovery policy. Strong credit appraisal, credit monitoring and NPAs follow-up ensure good asset quality and regular returns. Further, prudent lending, vigilant credit mechanism and effective collection system aided CFHL to maintain net NPA at 0.17% in 1QFY18, which is well below the industry average.

f Its loan book – which witnessed a strong 32% CAGR over FY14-FY17 to Rs133bn – is expected to reach Rs170bn by FY18E-end and deliver 38% CAGR through FY17-FY20E to Rs350bn.

f Housing loans to individuals with income below Rs18lakh constitute 95% of fresh approvals in 1QFY18. Further, capital adequacy ratio stands at 19.2% as against NHB requirement of 12%, which offers comfort about future prospects.

f Outlook & Recommendation: CFHL currently trades at 3.7x FY19E consensus book value and 19x FY19E earnings, which appears to be rich but deserving considering the long-term growth potential and risk profitability profile of franchise. Though likely fund raising via Rights Issue up to Rs10bn in ensuing months may lift book value, it will depress return ratio too. However, given the likely strong improvement in earnings, we believe its return ratios will get back on track. We recommend BUY on the stock with a Target Price of Rs3,200 (4.6x FY19E Bloomberg consensus book value and 22.5x FY19E consensus earnings.

Can Fin Homes has retraced 38% of prior up-move (from Rs1,256 to Rs3,330) and is currently consolidating around the key Fibonacci Retracement level. Due to recent decline in the stock, RSI has given negative cross-over and currently, that indicator is consolidating at sub-70 mark. In the past, twice RSI has reversed from sub-70 mark and helped the stock to record new high. MACD slipped from the higher levels, but still trading above its average, which is quite positive for the stock. We have also observed fall in the volume w.r.t. decline in the price, which is signalling lack of selling interest in the stock at this juncture. Though, our long-term view is positive for the stock, as per the current monthly set-up, some decline cannot be ruled out before the stock takes a U-turn and resumes its northward journey. Thus, long position can be initiated at current level and on dips for the probable up-move towards Rs3,200. On the lower side, its short-term moving average 20-month EMA (placed at around Rs2,100) will save the stock from falling further.

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October 10, 2017

CDSL (CMP Rs385)

Fundamental View f The business model of Central Depository Services (CDSL) is characterised by a high degree

of predictability and profitability. It earned >35% of revenue from annual issuer charges in FY17, which are likely to remain stable-to-growing irrespective of market conditions. IPO/Corporate Action Charges revenue (45% CAGR) – linked to overall health of the capital market and number of issuers – will drive corporate action volumes, on the other hand, such as bonus share issue and stock-split.

f CDSL has steadily gained market share vis-à-vis its lone competitor, NSDL. It has enjoyed higher incremental market share for 4 successive years vs NSDL on the back of lower cost, net worth criteria and technology investment. Its net worth/deposit criteria are Rs20mn/Rs0.5mn, respectively vs. NSDL’s Rs30mn/Rs1mn, respectively. CDSL had 12.3mn BO accounts as of FY17-end (vs. 15.6mn for NSDL, ~12% CAGR through FY14-FY17).

f CDSL has invested in new business initiatives to drive growth. Through subsidiary CDSL Ventures (CVL), it provides KYC services to capital market intermediaries (>15mn KYC records, ~67% share as of Apr’17). CVL is also one of the two depositories for National Academic Depository (NAD). CDSL’s other subsidiary i.e. CDSL Insurance offers repository services for e-insurance policies issued by insurance companies (>325,000 e-insurance accounts, >66,000 electronic policies as at Apr’17). CDSL also provides services like e-voting to corporates, online drafting solutions for succession wills through Myeasiwill (>1,000 registrations as at end-Apr’17), e-Notices, Corporate Bond Repository, KYC search assistance for Aadhaar holders, GST Suvidha Provider and Warehouse Repository (through its subsidiary, CDSL Commodity Repository, incorporated in Mar’17).

f Outlook & Recommendation: At CMP, the stock trades at a PE of 31.6x FY19E EPS. In ight of a highly predictable revenue model, good health of capital markets, market leadership based on incremental BO accounts, high profitability, steady cash flow and newer business initiatives, we believe that the stock is a very good long-term investment. We expect CDSL’s EPS to witness a healthy 21.8% CAGR through FY17-FY19E, led by strong 22.4%/24.7% CAGRs in revenue/EBITDA, respectively. We recommend BUY on the stock with a Target Price of Rs450 (valuing the stock at 37.5x FY19E EPS).

CDSL had a stellar listing (listed 75% higher from the issue price) and later, the stock has almost doubled from its life- time-low of Rs243 and made a high of Rs486 in July-2017. Later, the stock retraced 80% of prior up-move amidst sharp profit booking and bounced to Rs400 thereafter. We believe the stock has completed its price-wise and time-wise correction in the last couple of days. Currently, the stock is trading above its short-term and medium-term averages and rise in the key technical indicator-RSI on the daily chart is signalling strength in the stock. We believe the stock will continue its gradual rise and will manage to surpass the given target of Rs450.

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October 10, 2017

Glenmark Pharma (CMP Rs611)

Fundamental View f Glenmark Pharmaceuticals (GNP) is a research driven global company. The US and India are

its largest markets, which contributed ~71% to its revenues in Q1FY18. In the US, GNP has decent product portfolio in niche therapeutic segments i.e. derma, hormones, controlled substances and modified release. Notably, GNP stands apart from its peers owing to its success in NCE (New Chemical Entity) research.

f Its US business (45% of sales) is expected to show healthy growth, going ahead on account of ramp-up in new products approval and few key high-value launches. GNP expects 10-15 new products approval in FY18E. Despite higher base in FY17 due to gZetia and price erosion, we expect GNP’s US base business to report a healthy 15% CAGR over FY17-19E.

f Despite regulatory challenges and loss of sales due to GST roll-out, we expect GNP’s domestic revenue (26% of sales) to deliver 14% CAGR over FY17-19E driven by improvement in sales force productivity and new product launches.

f GNP plans to develop differentiated dosage forms i.e. inhalers (DPI/MDI), films, depot injectables and trans-dermal patches/topical products by ramping up in its R&D spend. Notably, GNP has a pipeline of 7 molecules i.e. 2 (NCEs) and 5 New Biological Entities (NBEs), which are now under clinical trials. Notably, GNP has already announced positive Phase-2a data of GBR 830 molecule.

f Outlook & Recommendation: The Management expects at least 1 out-licensing deal (GBR 830) out of 4 in FY18E, which we believe would act as a big catalyst. Further, the Company also looks forward to decent ANDA approvals from the US FDA. We continue to remain positive on its growth prospects in medium to long term driven by niche product pipeline. We expect GNP’s sales and net profit to witness 9% and 11% CAGR, respectively over FY17-19E led by new launches in the US, steady growth in India and strong R&D pipeline in the US. We recommend BUY on the stock with a Target price of Rs900 (17x FY19E EPS).

Glenmark Pharma has seen a sharp correction from its life-time-high of Rs1,253 in August 2015 and later the stock slipped to Rs566 completing retracement of 60% of prior multi-fold up-move from March-2009 to August-2015 (Rs112-1253). The key technical indicator-RSI consolidating around its oversold zone, indicating high probability of the stock creating base at the current level and in case of further decline, its 61.8% Fibonacci Retracement level of prior multi-fold up-move will provide protection. The sector has seen some positive traction in the past few weeks, which will not only help the stock to come out of its corrective phase, but also support to recover prior damages. Though cluster of short-term and medium-term moving average will initially restrict the stock, probable positivity will help it to surpass that hurdles and achieve the given target of Rs900.

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October 10, 2017

Natco Pharma (CMP Rs991)

Fundamental View f Natco Pharma (NATP) is vertically integrated pharmaceutical company with focus on niche

therapeutic segments, complex generics and Active Pharmaceutical Ingredients (APIs). It has built a strong pipeline for the US market with 43 ANDA filings (complex generics including 20 Para-IVs/FTF). In FY17, it generated ~42% revenue from domestic formulation market, ~40% from international formulation market and the rest came from API and others.

f Approval for gCopaxone (20 & 40mg/ml) granted to Natco’s partner Mylan was an unexpected positive development. It validates Natco’s capability in complex generics space (high-margin/limited competition) besides boosting earnings visibility for FY18-20E. We believe this approval will provide a strong traction for Natco’s US business. Mylan has launched both 20mg/ml (market size: US$700mn) and 40mg/ml (market size: US$3.64bn; at risk launch) strengths in the US. We expect NPV (Net present Value per share) of Rs15 and Rs117 for 20 mg/ml and 40 mg/ml, respectively. Natco would supply gCopaxone to Mylan under cost plus profit sharing agreement in the US.

f NATP has been successful in establishing its dominant position in domestic oncology market and enjoys ~25% market share in operational product portfolio. The Company has widened oncology product portfolio to 28 (Haematology: 11; Solid Tumours: 17) in FY17 from 6 in FY04, catering to various oncology diseases including breast, brain, bone, lungs and ovarian cancers. We envisage NATP’s domestic oncology revenue to deliver 20% CAGR over FY17-19E driven by volume growth (owing to affordable prices) in existing and new products.

f Outlook & Recommendation: Driven by monetisation of its niche US pipeline and strong traction in domestic business, we expect NATP’s revenue and net profit to witness 19% and 34% CAGR, respectively over FY17-19E. At CMP, the stock trades at 34.1x & 25.0x of FY18E & FY19E EPS, respectively. We recommend BUY on the stock with a Target Price of Rs1,200.

Natco Pharma has retraced 70% of prior up-move (from Rs495 to Rs1,088) and later reversed quite swiftly after taking support of its short-term moving average 20-month EMA. In the past, such kind of reversal from its short-term moving average has turned out quite well for the stock, as it has recorded new high thereafter. We believe, history repeats itself and the stock will record new high and will manage to achieve the given target of Rs1,200. Rise in the key technical indicators-RSI and MACD (on the monthly chart) are coinciding with our view and in favour of probable up-move. In case of any negative surprise, its short-term moving average will continue to work as key reversal point for the stock.

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October 10, 2017

Somany Ceramics (CMP Rs840)

Fundamental View f Founded in 1969, Somany Ceramics (SCL) is a complete décor solutions provider. It specialises

in ceramic and allied products with presence in India, Africa, Middle East, the UK and Russia. With two in-house manufacturing plants (Haryana & Gujarat) and other JV units, SCL’s total annual production capacity stands at 60mn square meters.

f SCL has consistently been focussing on improving the product-mix in favour of high-margin Polished Vitrified Tiles (PVT) and Glazed Vitrified Tiles (GVT) segment. The share of low-margin ceramic tile segment has fallen from 69% in FY12 to 42% in FY17, while share of PVT has increased from 24% to 36% and GVT from 8% to 22% in the same period. SCL has also taken decent strides into sanitary-ware and bath fittings segment. Its revenues and EBITDA witnessed 16% and 19% CAGR, respectively in the same period, even surpassing the industry leader in the process.

f Currently, 60% of ceramic tile market by volume is controlled by the unorganised players, who have so far been able to compete with the organised players by undercutting prices through tax evasion and under-reporting of invoices. However, implementation of GST and introduction of E-Way bill would result in effective audit trail and make tax evasion difficult. Under GST regime, the unorganised players would find it extremely difficult to compete with their organised counterparts, who have made significant investments behind their brand and distribution network, which in our view will result in structural shift in the industry towards large organised players like SCL.

f Outlook & Recommendation: Increasing premiumisation, higher share of organised industry post-GST roll-out, operating leverage and asset light expansion model will be the key growth drivers for Somany Ceramics (SCL), going forward. Expecting SCL to report revenue and earnings CAGR of 13.8% and 24.6%, respectively through FY17-19E coupled with attractive valuations (24.6x FY19E earnings), we recommend BUY on the stock with a Target Price of Rs1,020, based on 27x Sept’19 earnings, which is at a 20% discount to industry leader Kajaria’s target multiple.

Somany Ceramics reversed after taking support of prior swing high in August-2017 and later the stock recorded new life-time-high of Rs886. In case of profit booking, its 20-month EMA has saved the stock from falling and every time supported it to record the new high. The key technical indicators-RSI and MACD are trading above their neutral line from last couple of months, which is quite positive for the stock. Currently, both the indicators are in buy mode and signalling strength in the stock. We believe the stock will continue its northward journey and will manage to achieve the given Target of Rs1,020. Though our view is positive for the stock, fresh long position can be initiated at current market price and later on dips for the better risk reward.

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October 10, 2017

“For detailed report of each of the above fundamental recommendation, kindly visit to research section under our website www.rsec.co.in”

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General Disclaimers: This Research Report (hereinafter called ‘Report’) is prepared and distributed by RSL for information purposes only. The recommendations, if any, made herein are expression of views and/or opinions and should not be deemed or construed to be neither advice for the purpose of purchase or sale of any security, derivatives or any other security through RSL nor any solicitation or offering of any investment /trading opportunity on behalf of the issuer(s) of the respective security(ies) referred to herein. These information / opinions / views are not meant to serve as a professional investment guide for the readers. No action is solicited based upon the information provided herein. Recipients of this Report should rely on information/data arising out of their own investigations. Readers are advised to seek independent professional advice and arrive at an informed trading/investment decision before executing any trades or making any investments. This Report has been prepared on the basis of publicly available information, internally developed data and other sources believed by RSL to be reliable. RSL or its directors, employees, affiliates or representatives do not assume any responsibility for, or warrant the accuracy, completeness, adequacy and reliability of such information / opinions / views. While due care has been taken to ensure that the disclosures and opinions given are fair and reasonable, none of the directors, employees, affiliates or representatives of RSL shall be liable for any direct, indirect, special, incidental, consequential, punitive or exemplary damages, including lost profits arising in any way whatsoever from the information / opinions / views contained in this Report.

Risks: Trading and investment in securities are subject to market risks. There are no assurances or guarantees that the objectives of any of trading / investment in securities will be achieved. The trades/ investments referred to herein may not be suitable to all categories of traders/investors. The names of securities mentioned herein do not in any manner indicate their prospects or returns. The value of securities referred to herein may be adversely affected by the performance or otherwise of the respective issuer companies, changes in the market conditions, micro and macro factors and forces affecting capital markets like interest rate risk, credit risk, liquidity risk and reinvestment risk. Derivative products may also be affected by various risks including but not limited to counter party risk, market risk, valuation risk, liquidity risk and other risks. Besides the price of the underlying asset, volatility, tenor and interest rates may affect the pricing of derivatives.

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Disclosure of Interest: The research analysts who have prepared this Report hereby certify that the views /opinions expressed in this Report are their personal independent views/opinions in respect of the securities and their respective issuers. None of RSL, research analysts, or their relatives had any known direct /indirect material conflict of interest including any long/short position(s) in any specific security on which views/opinions have been made in this Report, during its preparation. RSL’s Associates may have other potential/material conflict of interest with respect to any recommendation and related information and opinions at the time of publication of research report. RSL, its Associates, the research analysts, or their relatives might have financial interest in the issuer company(ies) of the said securities. RSL or its Associates may have received a compensation from the said issuer company(ies) in last 12 months for the brokerage or non brokerage services.RSL, its Associates, the research analysts or their relatives have not received any compensation or other benefits directly or indirectly from the said issuer company(ies) or any third party in last 12 months in any respect whatsoever for preparation of this report.

The research analysts has served as an officer, director or employee of the said issuer company(ies)?: No

RSL, its Associates, the research analysts or their relatives holds ownership of 1% or more, in respect of the said issuer company(ies).?: No

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RSL’s activities were neither suspended nor have defaulted with any stock exchange with whom RSL is registered. Further, there does not exist any material adverse order/judgments/strictures assessed by any regulatory, government or public authority or agency or any law enforcing agency in last three years. Further, there does not exist any material enquiry of whatsoever nature instituted or pending against RSL as on the date of this Report.

Important These disclaimers, risks and other disclosures must be read in conjunction with the information / opinions / views of which they form part of.

RSL CIN: U65990MH2005PLC154052. SEBI registration no. ( Stock Brokers: NSE - INB / INF / INE 231234833; BSE - INB / INF / INE 011234839, Depository Participants: CDSL IN-DP-257-2016 IN-DP-NSDL-363-2013, Research Analyst: INH000002384); AMFI ARN No.29889.