august 2, 2017 - kotak securities · 2018-09-28 · where earnings are likely to get impacted in...

AUGUST 2, 2017

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

Monthly Market Strategy October 2018

TABLE OF CONTENTS

Equity Market Outlook

Theme 1 : Pharmaceuticals

Aurobindo Pharma Ltd

Laurus Labs Ltd

Theme 2 : Information Technology

Tech Mahindra

Cyient Ltd

Persistent Systems Ltd

Theme 3 : Defensives/Consumption driven stocks

Maruti Suzuki India Ltd

ITC Ltd

Arvind Ltd

The Phoenix Mills Ltd

Amber Enterprises India Ltd

1M Portfolio : September 2018

October 2018

One month Model Portfolio Performance



MONTHLY OUTLOOK FOR OCTOBER 2018

Return of volatility

September was a volatile month with domestic markets witnessing sharp correction led by

continued rupee depreciation, higher crude prices, default from large financial institution IL&FS,

higher yields and corresponding stress in NBFCs during the month. High valuation consumption

related sectors also witnessed selling pressure owing to lesser risk reward ratio. Spike in bond

yields, higher crude and depreciated currency has also resulted in valuation de-rating for sectors

where earnings are likely to get impacted in near to medium term.

India is currently facing weaker macros with twin deficits and depreciated currency. Any slip on

fiscal deficit given election year, higher inflation and rising crude can further pressurize INR in

coming months, in our view. Under the given circumstances, we recommend investors to focus

on companies that are capable of delivering strong earnings growth.

Market valuations have corrected in recent months and are trading at 20/17x FY19/20 estimated

earnings but volatility is likely to remain owing to negative global cues as well as domestic factors

such as elections, pressure on CAD and fiscal deficit from higher crude prices. Ideal approach is

to use this volatility to add stocks that are likely to benefit from currency depreciation as well as

healthy growth in respective domains (IT and Pharma), consumption growth as well as various

defensives that have corrected in recent months and available at attractive valuations. Key risks

to our recommendation would come from adverse outcome of further crunch in liquidity, state

elections, further rise in oil prices & yields, shortfall in earnings or decline in liquidity from FIIs

and domestic mutual funds.

Market performance – sector wise (September 2018)

Source: Bloomberg

-6.4% -6.4%

-12.2%

-15.6%

-9.4%-9.0%

-12.0%

-8.8%

-1.8%

-13.3%

1.9%

-3.7% -4.5%

-18.0%

-15.0%

-12.0%

-9.0%

-6.0%

-3.0%

0.0%

3.0%

Teena Virmani

[email protected]

+91 22 6218 6432



GLOBAL MARKETS

Global markets remained weak during the month amid heightened fears surrounding the state

of trade between the U.S. and other major economies. Rising oil prices, higher yields in US, risks

of currency contagion spreading to other emerging markets impacted markets negatively during

the month.

US economy outlook strengthening but interest rate gap has widened with peers

US markets have moved up during the year till date due to front loading of tax reforms,

economic recovery and higher government spending. However, during the month, markets

remained volatile with trade war related concerns. US administration had imposed 10 percent

tariffs on $200 billion worth of Chinese imports, which would rise to 25 percent by year-end.

China also retaliated by announcing levies targeting over 5,000 American products worth $60

billion.

US Fed raised its target overnight rate to a range of 2 percent to 2.25 percent, up from 1.75

percent to 2 percent. This marks the central bank's eighth rate hike since 2015. Fed officials also

upped their outlook for economic growth for this year and next. They now expect US economy

to grow by 3.1 percent in 2018 from 2.8 percent earlier. They also see the economy expanding

2.5 percent in 2019, up from 2.4 percent. Fed rate hike has widened the gap with its peers as

ECB still maintains a policy rate of -0.4 percent till June, 2019 and Bank of Japan is still sticking

with its current rates till 2020. Thus, this hike can force the emerging markets to tighten their

monetary policy to defend their currencies.

US Fed rate (%)

Source: Bloomberg

US unemployment growth (%)

Source: Bloomberg

0.0

0.5

1.0

1.5

2.0

2.5

0.0

3.0

6.0

9.0

12.0



Trade war and impact on currencies

The trade war between US and China is resulting into a currency war among countries with sharp

depreciation being witnessed in emerging market currencies.

US dollar has strengthened compared to other emerging market currencies on the back of

continued strength in the US economy and subsequent rate hikes by the US Fed and trade war

related concerns between US and China. The steps taken by the government on tax cuts and

deregulation are promoting economic growth. However the interest rate differential between

US and other regions is increasing and putting pressure on the exchange rates. Fed has been

indicating faster policy normalization while the rate hikes in EU have been pushed to mid-2019.

This divergence in monetary policy stance is resulting in strengthening of US dollar vis-à-vis

emerging markets.

Apart from US dollar strengthening, adverse risk of trade war, escalating geopolitical tensions,

political and economic uncertainties in Turkey, Argentina and Brazil have sparked the fears of

contagion spreading to other emerging markets particularly the ones with current account

deficit.

Indian rupee has depreciated by 14% since the beginning of 2018. The higher current account

deficit due to higher crude prices, rising US Fed rates and a slowdown in FII inflows into the

Indian capital market is already weakening the Indian currency. The trade war has further

increased the woes of the Indian economy with rupee depreciating by 2% further in September

month itself.

Emerging market currencies – Performance CYTD (%)

Source: Bloomberg

China market impacted by trade war

Chinese economy held up well during August 2018 despite escalating trade tensions with the

United States. Industrial production expanded 6.1% annually while nominal retail sales grew

9.0% on an annual basis, a slight acceleration from the 8.8% expansion registered in July.

However, stocks faced selling pressure owing to trade war related concerns. With the latest

round of tariffs on $200 billion worth of Chinese imports to the U.S. at a 10 percent rate before

rising to 25 percent, the GDP growth of the country is likely to be impacted adversely as the

economy is already reeling under high debt, slowdown in property market and potential

corporate defaults. The BATs – Baidu, Alibaba and Tencent – which had become a proxy for the

Chinese economy have underperformed the FANG stocks – Facebook, Amazon, Netflix and

-107.7

%

-62.6

%

-24.9

%

-15.1

%

-14.4

%

-14.2

%

-10.5

%

-8.9

%

-5.9

%

-4.8

%

-3.0

%

-2.8

%

0.4

%

2.9

%

-120.0%

-90.0%

-60.0%

-30.0%

0.0%

30.0%



Alphabet (parent of Google) owing to concerns of slowdown in economy, high valuations as well

as trade issues between US and China. Chinese authorities had been trying to rein in the

country's rising debt but as the trade war drags on, China appears to be using investments to

boost the economy again.

Oil prices continue to move up

Oil prices rose sharply during the month as reserves’ drawdown in the US and supply disruptions

from Venezuela and Iran pushed prices higher. During the month President Trump urged OPEC

members to lower the prices. OPEC and allies have ruled out any immediate additional increase

in crude supply to offset a shortage of Iran supplies due to US sanctions which are set to take

effect in November. Once these sanctions are in place from November 2018, there is a possibility

of further increase in brent crude prices if OPEC countries fail to increase supplies in the market.

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

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

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

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

Brent Crude (US$/barrel)

Source: Bloomberg

35

45

55

65

75

85



DOMESTIC MARKETS

September was an eventful month with domestic markets witnessing sharp correction led by

continued rupee depreciation, higher crude prices, default from large financial institution IL&FS,

higher yields and corresponding stress in NBFCs during the month. High valuation consumption

related sectors also witnessed selling pressure owing to lesser risk reward ratio. Spike in bond

yields, higher crude and depreciated currency has also resulted in valuation de-rating for sectors

where earnings are likely to get impacted in near to medium term.

Bond market crisis impacted equity markets too

After the defaults by IL&FS in the past month, liquidity crisis fears started gripping the debt

market which had its adverse impact on equity markets too. There are concerns being raised of

a contagion impact of further defaults in case of more cash worries in the market, especially

when the yields on bonds are rising. The distress selling in DHFL bonds at higher yields sparked

concerns of liquidity crisis over likely further defaults in the bond market, especially after IL&FS

had been unable to make repayments on two of its bond maturities.

10-year GSec yield (%)

Source: Bloomberg

10-year GSec Bond yields have moved up to 8.2% - led by liquidity crunch, advance tax outflows

in second half of the month and government’s borrowing plan in H2FY19. Sharp spike in GSec

yields has now moved up the cost of capital thereby impacting valuations. Recent spike in the

bond yields now calls for rate hike in October meeting from RBI despite sub-5% inflation and

expectation of moderation of growth in H2FY19.

Yields are likely to remain high owing to rising crude prices, rate hikes by central banks, trade

war tensions, uptick in core inflation, pass through of MSPs and possibility of fiscal slippage at

the centre or state level.

As per our currency team, the bear handshake between credit and equity markets is an ominous

development for Rupee. Rising oil prices, elevated levels of yields in DM and EM had caused an

outflow from the markets and now the funding squeeze in the under developed debt market in

India can cause further damage to Rupee and we could see Rupee depreciating towards 75.00

levels on spot. Any slip on fiscal deficit given election year, higher inflation and rising crude can

further pressurize INR in coming months, in our view.

6.0

6.5

7.0

7.5

8.0

8.5



Currency depreciation coupled with higher crude prices to impact sectors in Q2FY19

Impact of INR depreciation and its corresponding impact on overall cost is likely to be reflected

on sectors during Q2FY19/H2FY19 with sectors like IT/Pharma/textile/speciality

chemicals/steel/upstream companies getting positively impacted and negative impact is likely

to be seen for aviation, downstream companies, cement, tiles, selective FMCG companies/power

sector.

IT companies would enjoy both translation and margin gains in the near term but we believe it

will be short lived and eventually companies will pass on the currency benefits to clients over

time.

Pharma sector is also likely to benefit positively as nearly 40% of revenues for most of the leading

players come from US and over 70% revenues are generated outside India (dollar bills), hence

rupee depreciation is also expected to benefit and cushion the earnings growth this year.

For Steel sector, rupee depreciation has lifted import parity price, thereby giving room to the

domestic steel manufacturers to hike prices. We expect, domestic steel prices to stay firm in the

near term. Margins of domestic players are expected to remain strong in 2HF19, supported by

weaker Rupee and strong demand. Downstream oil and gas sector which includes refining

companies like IOC, BPCL and HPCL are negatively impacted due to higher crude oil prices and

depreciated INR as their raw material cost, operating cost, working capital and interest cost

increases. On the top of it, market is concerned about pricing freedom of these companies

especially during election heavy year. Upstream companies like ONGC and Oil India are getting

benefited with higher crude oil price and weaker rupee. Additionally, from 1st Oct’18, domestic

gas prices are expected to rise which will be positive for these companies but will be negative

for city gas distribution companies if they fail to pass on.

However, the rise in gas prices along with rupee depreciation is expected to be negative for

building material companies like tiles as companies would find it difficult to pass on the cost

pressures of higher power cost due to lower than expected demand growth. For cement,

aviation, power etc the cost pressures are going to increase with rupee depreciation and higher

imported coal prices or higher ATF prices.

Despite moderation in inflation, RBI likely to hike rates in October

CPI inflation moderated to 3.69% in August compared to 4.17% in July led by softer food and

core inflation. However, the food inflation is likely to inch up higher led by MSP increases for the

Kharif output. Core inflation (including petrol and diesel) moderated to 6% in August from 6.2%

in July. Even as the fading of adverse base effect will continue to moderate core inflation lower,

our economist estimates average core inflation at 5.7% in FY19.

We remain watchful of the INR depreciation and higher crude prices as it increases the risk of

imported inflation in the near to medium term. Though a sub 5% inflation and expectation of

moderation in growth in 2HFY19 would have provided some room for the MPC to remain on

hold, our economist believes that the MPC will deliver a 25 bps of repo rate hike in the October

policy, possibly with a tweak in the policy stance to take into account the forex and crude price

risks.



FII’s remained net sellers for the month

FIIs remained net sellers for the month due to trade war fears, rise in US yields coupled with

rupee depreciation and sold stocks worth Rs79 bn (till 25th Sep). Buying from mutual funds has

come down and stood at Rs.74 bn (till 25th Sep). For CYTD, FII’s remained net sellers to the tune

of Rs.133 bn and MFs remained net buyers to the tune of Rs.843 bn.

FII & Mutual Fund investment (Rs cr)

Source: Bloomberg

Recommendation

Market valuations have corrected in recent months and are trading at 20/17x FY19/20 estimated

earnings but volatility is likely to remain high owing to negative global cues as well as domestic

factors such as elections, pressure on CAD and fiscal deficit from higher crude prices. Ideal

approach is to use this volatility to add stocks that are likely to benefit from currency

depreciation as well as healthy growth in respective domains (IT and Pharma), consumption

growth as well as various defensives that have corrected in recent months and available at

attractive valuations. Key risks to our recommendation would come from adverse outcome of

further crunch in liquidity, state elections, further rise in oil prices & yields, shortfall in earnings

or decline in liquidity from FIIs and domestic mutual funds.

(20,000)

(10,000)

-

10,000

20,000

30,000

40,000

FII MF



Preferred picks

Domestic Cyclicals / Investment oriented sectors

Sector Stocks

Automobiles Maruti Suzuki

Building Material Kajaria Ceramics, Century Plyboards, Shankara Building Products

Capital Goods, Engineering Genus Power Infra, L&T, Voltamp, Bharat Electronics

Construction Dilip Buildcon, Nagarjuna Construction, PNC Infratech

Consumber durables Amber Enterprises

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

Oil & Gas Petronet LNG

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

Resorts India, VIP Industries, Wonderla Holidays and Carborundum

Universal, Maharashtra Seamless Ltd, Essel Propack, Quess Corp

Real Estate Phoenix Mills, Arvind Ltd

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

Source: Kotak Securities - Private Client Research

Export oriented / Defensive sectors

Sector Stocks

FMCG ITC, Marico

IT Cyient Ltd, Persistent Systems

Paints Akzo Nobel India, Kansai Nerolac Paints Ltd




THEME 1: PHARMA SECTOR

The sector is on radar as we expect earnings growth potential to meaningfully revive. We look

at the sector from four aspects 1) compliance status for various large facilities of many large

players receiving clearance and many of the plants are at better quality process handling status

than earlier. 2) This leads to ANDA approval cycle improving meaningfully and take care of base

earnings from US business for many players, along with niche and complex product pipeline

focus 3) Domestic market which contributes nearly 30% of revenues to the sector is set to reflect

a double digit growth over coming two to three years. Large players are expected to grow above

this industry average over this periods 4) nearly 40% of revenues for most of the leading players

come from US and over 70% revenues are generated outside India (dollar bills), hence rupee

depreciation is also expected to benefit and cushion the earnings growth this year.

We break the pharmaceutical generic space into three major segments i.e – 1) US Generics,

Domestic Branded Generics space and ROW markets business 2) CRAMs space 3) API space. In

the extremely generic space we prefer Aurobindo pharma in near term to play the injectable

opportunity and recent acquisition of Sandoz generics business. The API model has seen some

green shoots with China shutting certain chemical base, however situation is still evolving and

not very clear in terms of capacities coming back on stream. We like the unique opportunity

poised by Laurus Labs in this space as it is forward integrating itself in formulation segment

with all major capex in place.

Apart from this, we also find the business model of Sun Pharma is uniquely placed with a very

good basket of patented products focused on US market which could yield better earnings and

longer sustainability of growth over two to three years. Dr Reddys also offers key niche filings

like gSuboxone, gNuvaring and gCopaxone to play with over coming year which would drive

significant improvement in terms of earnings. CRAMS space is a different business model as it is

insulated from the risk of generic price erosion and works closely with the research end of the

sector. We prefer Divis Labs with a balanced focus on both APIs and CRAMs. On other side we

also quite admire the model of Dishman Cabogen Amcis and Suven Life Sciences. Both these

companies have their niches established in their respective segments.

Cyndrella Carvalho

[email protected]

+91 22 6218 6426



Aurobindo Pharma Ltd - Accumulate

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

744 827 / 527 436179

Source: Bloomberg

Source: Bloomberg

Financials (Rs mn) FY18 FY19E FY20E

Sales 164,998 185,448 270,747

Growth (%) 9.3 12.4 46.0

EBITDA 37,885 39,885 60,930

EBITDA margin (%) 23.0 21.5 22.5

PBT 32,579 31,582 44,011

Net profit 24,399 24,637 33,451

EPS (Rs) 41.8 42.2 57.3

Growth (%) 6.1 1.0 35.8

CEPS (Rs) 51.2 52.7 69.3

Book Value per share (Rs.) 199.4 236.2 287.1

Dividend per share (Rs) 3.8 3.0 3.0

ROAE (%) 23.2 19.3 21.8 Source: Company, KIE

ROACE (%) 23.6 20.3 21.9

Net cash (debt) (29,094) (34,689) (100,213)

Valuattion Parameters FY18 FY19E FY20E

P/E (x) 17.8 17.6 13.0

P/BV (x) 3.7 3.2 2.6

EV/Sales (x) 2.8 2.5 2.0

EV/EBITDA (x) 12.3 11.8 8.8

Price Performance (%) 1M 3M 6M

8.5 23.9 33.4

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

Analyst: [email protected]

Target Price (Rs)

830

Revenue / PAT to remain strong

Potential Upside (%)

11.5%

Price Performance

Share Holding Pattern (%)

ROAE and ROACE to remain strong

Promoter

51.88%

FII

17.99%

DII

15.64%

Others

14.49%

60

80

100

120

140

160 Aurobindo Pharma Nifty

0

5

10

15

20

25

0

50,000

100,000

150,000

200,000

FY16 FY17 FY18 FY19E FY20E

0

10

20

30

40


ROAE (%) ROACE (%)

Investment Argument

ARBP has significantly scaled up its injectables filings with cumulative filings at

91 ANDAs, of which 41 ANDAs are pending approval. We expect the

injectables momentum to continue through FY2019, with interesting launches

such as fondaparinux (launched), and ertapenem (approval received 1Q/2Q

FY18). We expect the injectables pipeline to further evolve with the expected

approvals for aztreonam (FY2019) and potentially, iron sucrose (FY2020).

We also expect ARBP to file triamcinolone injection and Copaxone 20/40mg

filings in FY2019, and while Copaxone market will likely turn competitive by the

time ARBP launches, we believe triamcinolone injection will likely be a limited

competition opportunity with potential to add US$20-25 mn sales on a steady-

state basis from FY2021.

Apart from the generic injectables strategy, we expect ARBP to launch two

505(b)(2) RTU (ready-to-use) injectable products in FY2020, namely,

cyclophosphamide RTU and vancomcycin RTU, both of which are likely to be

long-tailed, >US$25 mn opportunities for ARBP.

ARBP announced the acquisition of Sandoz’s US dermatology and oral solids

business for up to US$1 bn in cash, implying ~5X FY2020E EV/EBITDA, and

driving ARBP’s US sales to US$2.1 bn in FY2020.

Risks & Concerns

Exports contribute major part of ARBP’s revenues. Any regulatory or currency risk

can be critical for the company.

Company Background

Aurobindo Pharma Limited, manufactures generic pharmaceuticals and active

pharmaceutical ingredients. The revenues for FY18 were spread as US (45%), EU

(26%), ROW (6%), ARV (5%) and API (18%). The company’s robust product portfolio

is spread over 7 major therapeutic/product areas encompassing Antibiotics, Anti-

Retrovirals, CVS, CNS, Gastroenterologicals, Anti-Allergies and Anti-Diabetics,

supported by an outstanding R&D set-up.



Laurus Lab Ltd - Buy


433 580 / 415 45879

Source: Bloomberg

Source: Bloomberg


Sales 20,690 23,916 28,341

Growth (%) 7.1 15.6 18.5

EBITDA 4,133 4,540 6,493

EBITDA margin (%) 20.0 19.0 22.9

PBT 2,374 2,335 4,172

Net profit 1,676 1,716 3,087

EPS (Rs) 15.9 16.2 29.2

Growth (%) (11.7) 1.9 80.2

CEPS (Rs) 5.0 5.6 8.2

Book Value per share (Rs.) 139.8 157.8 186.2


ROAE (%) 11.3 10.4 15.7 Source: Company, KIE

ROACE (%) 11.7 11.2 16.2

Net cash (debt) (9,768) (10,297) (9,859)

Valuation Parameters FY18 FY19E FY20E

P/E (x) 27.2 26.7 14.8

P/BV (x) 3.1 2.7 2.3

EV/Sales (x) 2.3 2.1 1.8

EV/EBITDA (x) 11.4 10.9 7.8


(2.2) (4.3) (14.0)

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


Target Price (Rs)

500

Revenue / PAT to remain strong


15.6%

Price Performance


ROAE and ROACE to remain strong

Promoter

51.88%

FII

17.99%

DII

15.64%

Others

14.49%

80

100

120

140

160 Laurus Lab Nifty

0

5

10

15

20

25

0

5,000

10,000

15,000

20,000

25,000

30,000


0

5

10

15

20


ROAE (%) ROACE (%)

Investment Argument

Laurus presents a unique business model offering a hybrid of rapidly growing

synthesis business, an emerging formulations business along with a steady

ARV business. While the recent quarters have seen delays to the strategy on

account of Hep-C declines and China cost push, we expect ARV revenues to

continue to grow in high single digit over the next two years with increasing

contribution from EU/US formulations, first supplies to ARV tenders in LMIC

countries, as well as LMV/RTV API supplies from 2QFY19.

This, along with strong scale-up of the synthesis business, particularly for

Aspen and C2 Pharma, will likely drive profitability.

Laurus has filed a total of 13 ANDAs, and is targeting 10 more ANDA filings in

FY2019, with tenofovir having been launched in 4QFY18 (Rs 51 mn revenues in

1QFY19) and three other ANDAs expected to be launched in FY2019.

Over the past three years, Laurus has made meaningful investments in

capacities with gross block of Rs 8 bn yet to generate revenues (units 2, 4, 5

and 6) with operating costs of Rs1.4bn in FY2018 (Rs 274 mn in 1QFY19),

including its formulations investments, which we expect to break even only in

FY2020 (FY2018 loss of ~Rs1 bn).

Laurus has now received approval for its TLD combination and we expect it to

enter the LMIC tender market from 3QFY19, with ramp-up in FY2020, once TLE,

TLE400 and TEE formulations are approved in key markets.

With target price to Rs 500, ~16X June 2020E EPS.

Risks & Concerns

Any regulatory or currency risk can be critical for the company. ANDA approval

delays and prolonged margin pressure due to China.

Company Background

Laurus Labs is a leading research and development driven pharmaceutical company

in India. The company has grown consistently to become one of the leading

manufacturers of Active Pharmaceutical Ingredients (APIs) for anti-retroviral (ARV)

and Hepatitis C. Laurus Labs also manufactures APIs in oncology and other

therapeutic areas. Its strategic and early investments in R&D and manufacturing

infrastructure have enabled it to become one of the leading suppliers of APIs in the

ARV therapeutic area.



THEME 2: IT SECTOR

The volatility in exchange rates and positive commentary on improving deal activity over last

few months has brought the focus back on Indian IT companies. INR has depreciated by around

6.5% v/s the USD in last three months. Companies would enjoy both translation and margin

gains in the near term but we believe it will be short lived and eventually companies will pass on

the currency benefits to clients over time. Apart from the short term benefits the INR

depreciation would allow companies to reinvest in strengthening its market share penetration

in new markets or new service lines in long term. From mid to long term perspective we believe

demand acceleration with revenue growth is important for IT stocks. Given this, we recommend

Tech Mahindra, Cyient and Persistent where relative valuations are still inexpensive with

sustainable growth.

Companies delivered a strong growth rate in 1Q. Factors helping the growth rate were 1) market

share gains in a robust spending environment by clients 2) Incremental revenue from digital

business with lesser lag from the legacy business 3) strong deal flow which has picked up from

past year. We believe Cyient will post robust growth as it transforms to a full scale solutions

company which would expand its addressable market. Whereas we expect a turnaround of

revenue and margin trajectory making a case for both earning growth and upgrade of valuation

multiples.

The key factors that will determine the sector’s earning sensitivity to currency fluctuation are:

Hedging Policy: Even as INR has depreciated, the impact of the same on immediate

earnings will be a function of hedging policy and instrument used by the company. This

means the quantum of cash flow being hedged and instrument used for hedging. We believe

gains would be limited for companies that are heavily hedged at previous currency rates.

Exposure to different currencies: Companies have different level of exposure across

currencies which can lead to lowering of margin benefits due to cross currency impact. Since

the depreciation in USD INR is accompanied with depreciation of other currencies too the

gains could be limited in terms of margins.

Onsite offshore mix: The onsite offshore mix is an important factor to determine the

sensitivity, as it creates a natural hedge reducing sensitivity for companies having higher

onsite revenues with higher foreign denominated expenses and reducing exposure to other

currencies. Companies having higher offshore revenue would be more sensitive to currency

movements and would have bigger benefits due to the recent INR depreciation. Broadly we

believe the gains depends on nature of contract (time and material or fixed price), duration

of contract and nature of service offerings.

Nature of the contract: Companies with greater percentage of annuity deals in revenue

would have greater benefit. Generally Time and Material (T&M) contracts are Master

Services Agreeement (MSA) based 2-3 year timeframe contracts which do not undergo

frequent changes unless client asks for it, whereas fixed price projects depends on the type

of contract i.e Application management or an IMS contract which are of longer tenure can

undergo re-negotiation in case of significant INR depreciation.

Given the above factors we would recommend stocks where relative valuations are still

inexpensive and could benefit from demand recovery. We recommend Tech Mahindra, Cyient

and Persistent Systems in the IT space.

Nipun Gupta

[email protected]

+91 22 6218 6433




746 780 / 447 730829

Source: Bloomberg

Source: Capitaline


Sales 307,730 348,702 380,933

Growth (%) 5.6 13.3 9.2

EBITDA 47,170 60,420 70,144

EBITDA margin (%) 15.3 17.3 18.4

PBT 48,789 54,296 65,319

PAT (recurring) 38,000 41,180 49,101

Exceptional items - - -

PAT 38,000 41,180 49,101

EPS (Rs) 42.6 46.2 54.6

Growth (%) 32.7 8.5 18.2

Book value per share 211.2 246.8 287.3

ROAE (%) 21.5 20.2 20.5

Debt/Equity 0.1 0.1 0.1 Source: Company


P/E (x) 17.5 16.1 13.7

P/BV (x) 3.5 3.0 2.6

EV/Sales (x) 2.3 2.1 1.9

EV/EBITDA (x) 15.3 11.9 10.2


1.3 12.2 16.7

Source: Bloomberg, Company, KIE Source: Company

Utilization Rate (%)


6.4%

Price Performance


Client Contribution(%)

Target Price (Rs)

793

Tech Mahindra Ltd - Accumulate

Promoter

36.0%

FII

37.6%

DII

7.4%

Others

19.0%

0

10

20

30

40

50

60

70

FY16 FY17 FY18

Top 5 Client Top 10 Client Top 20 Client

60

80

100

120

140

160Tech Mahindra Ltd Nifty

Investment Argument

Tech Mahindra has impressed with progress on margin normalization initiatives,

benefits of which will accrue further in FY19. EBIT margins increase was helped

by rupee depreciation, strength in Comviva business and improved utilization.

Drag from LCC, Comviva had prevailed leading to little revenue growth to

revenue decline in past two years. This growth will accelerate as network

spending increases led by 5G spending.

Enterprise segment grew by 18.5% YoY, on organic basis revenue grew by

~16%. Revenue growth was led by – manufacturing vertical, BFSI vertical and

other segment comprising HCI acquisition and public sector that grew by 4.6%.

Digital remains strong and reported 26-27% of its revenue from digital. Digital

revenue have grown at a healthy rate of 30% YoY.

Outlook remains promising on the back of new deal closures in the telecom

vertical and sustained revenue momentum from the enterprise segment.

We believe company is well on the recovery path with company’s margin

expansion story on track by pricing discipline, operating efficiencies and

improving profitability of subsidiaries.

Risks & Concerns

Significant decline in the business at the existing telecom clients could impact

the revenue growth.

Rupee appreciation beyond the levels assumed and cross currency movements

could impact the amrgins.

Company Background

Tech Mahindra represents the connected world, offering innovative and customer-

centric information technology services and solutions, enabling Enterprises,

Associates and the Society to Rise™. It is a USD3.5b company with ~98,000+

professionals across 51 countries, helping over 674 global customers including

Fortune 500 companies. It is a part of the USD 16.7 billion Mahindra Group that

employs more than 180,000 people in over 100countries.

70

80

90




745 887 / 493 84139

Source: Bloomberg

Source: Capitaline


Sales 39,177 45,733 51,589

Growth (%) 8.8 16.7 12.8

EBITDA 5,494 6,331 7,498

EBITDA margin (%) 14.0 13.8 14.5

PBT 5,649 6,049 7,303

PAT 4,286 4,833 5,891

Exceptional items - - -

PAT 4,286 4,833 5,891

EPS (Rs) 38.0 42.9 52.3

Growth (%) 15.5 12.9 21.9

Book value per share 208.0 244.7 290.8

RONW (%) 19.2 18.9 19.5

ROCE (%) 24.4 23.1 23.7 Source: Company

Debt/Equity - - -


P/E (x) 19.6 17.4 14.2

P/BV (x) 3.6 3.0 2.6

EV/Sales (x) 1.9 1.6 1.4

EV/EBITDA (x) 13.9 11.3 9.3


3.8 (0.5) 7.2

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

Last report at Rs.717 on 30 August 2018


Target Price (Rs)

810

Cyient Ltd - Buy

Order Intake (in USD) -Service


8.7%

Price Performance


Order Intake (in USD) -DLM

Promoter

22.2%

FII

41.4%

DII

20.3%

Others

16.1%

0

5

10

15

20

25

30

35

1QFY18 2QFY18 3QFY18 4QFY18 1QFY19

70

110

150

190Cyient Ltd Nifty

Investment Argument

Cyient is transitioning towards a solution company with its S3 strategy which

would enable in garning higher wallet share of clients spends. The

addressable market share for its expanded offerings would be much higher

than its present addressable market.

Company is gaining traction in its key transportation and communication

vertical. Within transportation Rail is a key area of strength for Cyient and the

momentuem is expected to sustain thus aiding overall revenue growth for

the company.

DLM after incurring losses turned profitable in 4QFY18 and achieved 2%

margins for FY18. By FY21 company aims to gradually exit B2P business and

not engage any further in low margin contract manufacturing business.

Margins are expected to stabilize at these levels going forward with company

investing about 100bps of operating margins into initiatives like New

Business Accelerator, wherein the company will make investment in

emerging technologies.

Management has guided for a double digit revenue growth in the services

business in FY19, on the back of strong order backlog and a deal pipeline,

which it stated was one of the healthiest. Commentary remains largely

positive across all the verticals.

Risks & Concerns

Significant appreciation of INR against USD, EUR and GBP.

Sustained slowdown in engineering and service spending.

Risk of an expensive acquisition or integration risk.

Company Background

Cyient Ltd provides engineering services, data analytics and data, networks and

operations solutions. The company offers its services to the aerospace and

defense, energy, heavy machinery, consumer, medical utility, communications,

semi-conductor, and transportation industries around the world.

0

50

100

150

200

250

300

1QFY18 2QFY18 3QFY18 4QFY18 1QFY19




788 915 / 629 63072

Source: Bloomberg

Source: Capitaline


Sales 30,337 36,028 40,723

Growth (%) 5.4 18.8 13.0

EBIDTA 4,687 6,037 7,222

EBIDTA margin (%) 15.5 16.8 17.7

PBT 4,292 5,543 6,849

PAT 3,230 4,180 5,205

PAT Margin (%) 10.6 11.6 12.8

EPS (Rs) 40.4 52.2 65.1

Growth (%) 7.2 29.4 24.5

CEPS 52.9 67.2 80.3

Book Value (Rs / Share) 266 302 349

Dividend per Share (Rs) 10.0 13.0 15.1

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

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

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

Net working capital (Days) 38 41 41


P/E (x) 19.5 15.1 12.1

P/BV (x) 3.0 2.6 2.3

EV/Sales (x) 2.0 1.6 1.3

EV/EBITDA (x) 12.9 9.6 7.5


(6.9) 0.7 13.6


Last report at Rs.827 on 31 July 2018


Target Price (Rs)

1025

Persistent Systems Ltd - Buy

Geography: Revenue Mix (%)


30.0%

Price Performance


Revenue Breakup (%)

Promoter

31.5%

FII

27.1%

DII

16.3%

Others

25.1%

70

90

110

130

150

170 Persistent Systems Ltd Nifty

Investment Argument

Persistent specializes in software product development and technology

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

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

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

prospects and better margins).

Persistent expects to outperform industry-growth rates and report overall

double-digit revenue growth for FY19E.

Margin improvement and strong revenue visibility makes us positive on its

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

and healthy return ratios also provide high comfort.

Risks & Concerns

Wide currency fluctuation and INR appreciation will impact earnings.

Volatility in revenues sourced through the partners.

Any major slowdown in economy can impact our growth assumption.

Company Background

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

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

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

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

the customer’s existing software products.

Sector Background

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

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

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

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

service companies, product companies, consumer internet companies and

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

North

America

84%

Europe

7%

India

6%ROW

3%

0%

10%

20%

30%

40%

50%

60%

70%

FY15 FY16 FY17 FY18

ISV Enterprise IP Led



THEME 3: DEFENSIVES/CONSUMPTION DRIVEN STOCKS

Consumption driven defensive stocks at attractive valuations

Considering the developments in the financial markets with rising yields and currency

depreciation, it is imperative to have an allocation towards defensive stocks driven by

consumption and available at attractive valuations. Going by the recent volatility and swings in

global markets the ride ahead may be challenging. Hence there is a need to balance individual

portfolios with some safer names in them.

We have selected a few names across sectors which have corrected in recent times and are

currently available at attractive valuations. With consumer facing business models, these

companies are likely to drive growth from strong consumption growth. Other common thread

between these defensive stocks is strong management, large addressable market size and high

growth visibility on the business side. Most of these stocks are financially very sound having

improving earnings profile, healthy return ratios and generating consistent free cash flows.

Stocks looking attractive in valuations are:

Companies Growth driver

Maruti Volume growth expected to stay healthy; gaining market share

ITC Attractive valuations

Arvind De-merger of branded apparel and engineering business will unlock value

Phoenix Mills Ltd Strong consumption across its retail assets

Amber Enterprises Strong demand for room air conditioner from brands




Maruti Suzuki India Ltd - Accumulate


7348 10000 / 7294 2219669

Source: Bloomberg

Source: Bloomberg

Financials (Rs Mn) FY18 FY19E FY20E

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

Growth (%) 17.2 15.8 16.0

EBITDA 120,615 142,100 176,182

EBITDA margin (%) 15.1 15.4 16.4

PBT 110,034 137,502 177,563

Net profit 77,218 96,939 125,182

EPS (Rs) 255.6 320.9 414.4

Growth (%) 5.1 25.5 29.1

CEPS (Rs) 346.9 417.8 521.5

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


ROE (%) 19.8 21.5 23.5 Source: Company

ROCE (%) 28.4 30.0 32.8

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

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


P/E (x) 28.7 22.9 17.7

P/BV (x) 5.3 4.6 3.8

EV/Sales (x) 2.4 2.0 1.6

EV/EBITDA (x) 15.6 12.8 9.8


(22.1) (16.2) (17.1)




Target Price (Rs)

10360

Market Share (%)


41.0%

Price Performance


Sales Volumes (Units)

Promoter

56.2%FII

25.8%

DII

11.0%

Others

7.0%

0

300,000

600,000

900,000

1,200,000

1,500,000

1,800,000

2,100,000

FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18

46.5

44.7 45.3

38.4

40.1

42.1

45.0

46.8 47.4

50.0

35

40

45

50

55

FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18

50

95

140

185

230 Maruti Suzuki India Ltd Nifty

Investment Argument

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

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

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

upgrades and variants of existing models will also drive sales for the

company.

Management re-iterated its expectation of 8-9% industry growth in FY19

and MSIL to witness double-digit volume growth. In July 2018, MSIL shared

that they are witnessing 15% higher enquires and 13% increase in bookings.

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

47.4% in FY17 to 50% in FY18 and stood at 52.2% as of end August 2018.

MSIL generates one third sales volume from rural areas. In July 2018,

management highlighted that rural retail demand is growing by 15%. With

strong presence in rural areas and dominance in the entry level car segment,

MSIL will be the key beneficiary of rural demand recovery.

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

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

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

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

increase in a meaningful way

We expect MSIL's EBITDA margin to remain impacted in the near term on

account of commodity price increase and INR depreciation (company is net

importer).

Risks & Concerns

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

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

have significant impact on the company's profitability.

Company Background

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

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

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

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




297 323 / 250 3443797

Source: Bloomberg

Source: Capitaline


Sales 443,874 502,808 551,334

Growth (%) NM 13.3 9.7

EBITDA 158,161 182,504 201,778

EBITDA margin (%) 35.6 36.3 36.6

PBT 167,611 192,880 211,692

Net profit 108,947 125,372 141,833

EPS (Rs) 9.1 10.4 11.8

Growth (%) 4.0 15.1 13.1

CEPS (Rs) 9.8 11.3 12.7

Book value (Rs/share) 39.3 41.3 44.9


ROE (%) 23.1 25.2 26.3 Source: Kotak Securities - Private Client Research

ROCE (%) 22.3 24.8 26.3

Net cash (debt) 121,364 128,528 154,013

Net Working Capital (Days) 45 36 44


P/E (x) 32.7 28.5 25.2

P/BV (x) 7.6 7.2 6.6

EV/Sales (x) 7.5 6.6 6.0

EV/EBITDA (x) 21.0 18.2 16.3


(4.8) 13.9 16.1


Cigarette EBIT Growth (%, y/y)


11.2%

Price Performance


Cigarette Volume Growth (Est., %, y/y)


ITC Ltd - Buy Analyst: [email protected]

Target Price (Rs)

330

70

95

120

145

170 ITC Ltd Nifty

Investment Argument

Cigarette volume increased by 1% in Q1FY19 which saw a significant

improvement from 4% decline in Q4FY18.

ITC’s EBITDA/ PAT growth was reasonably healthy at +19.2%/+18.2%

YoY, well ahead of our and consensus estimates with significant

improvement in performance in cigarettes/ other segments in the

aggregate.

The GST council had not touched the GST rate on cigarettes in its latest

meet which suggest stability in indirect taxation on cigarettes.

The company continues to be largely dependent on cigarettes for its

profits; with sectors like FMCG and Paperboard doing well in Q1FY19

and expected to do well in the rest of FY19.

ITC remains relatively attractively valued, at 25x PER FY20E, versus 35x-

45x FY20E for larger FMCG companies. We expect that the company to

experience a gradual re-rating as growth in cigarette profits rises to

double digits over the next few quarters.

Risks & Concerns

Regulation remains the largest risk for the company. Other risks are

economic/ competitive in nature.

Company Background

ITC is India's largest cigarette company, with c.80% market share. The

company is also involved in several other segments, which include non-

cigarette FMCG goods, paper, paperboards, and packaging, hotel, and agri-

business.

Sector Background

Indian FMCG sector’s size is pegged at Rs 4 Trillion with rural India

contributing to about a third of the revenues.

-20

-15

-10

-5

0

5

10

1Q

FY14

2Q

FY14

3Q

FY14

4Q

FY14

1Q

FY15

2Q

FY15

3Q

FY15

4Q

FY15

1Q

FY16

2Q

FY16

3Q

FY16

4Q

FY16

1Q

FY17

2Q

FY17

3Q

FY17

4Q

FY17

1Q

FY18

2Q

FY18

3Q

FY18

4Q

FY18

1Q

FY19

0.00%

5.00%

10.00%

15.00%

20.00%

FPIs

20%

Financial

Institutions/

Banks

11%Insurance

Companies

21%

Non-

Institutions

10%

Corporate

Bodies

34%

Other

1%




318 479 / 313 82227

Source: Bloomberg

Source: Company

Financials (RS mn) FY18 FY19E FY20E

Sales 108,261 121,495 139,008

Growth (%) 17.2 12.2 14.4

EBITDA 9,650 11,464 14,723

EBITDA margin (%) 8.9 9.4 10.6

PBT 3,904 5,518 8,526

Net profit 3,158 4,211 6,506

EPS (Rs) 12.2 16.3 25.2

Growth (%) (1.3) 33.3 54.5

CEPS (Rs) 26.1 31.7 41.9



ROE (%) 8.1 9.9 13.8 Source: Company

ROCE (%) 8.8 10.2 13.3

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

Net Working Capital (Days) 105 102 103


P/E (x) 26.0 19.5 12.6

P/BV (x) 2.0 1.9 1.6

EV/Sales (x) 1.0 0.9 0.8

EV/EBITDA (x) 11.7 9.8 7.6


(20.2) (17.8) (17.0)

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

Textile and apparel industry in India (US$ billion)


57.3%

Price Performance


Performance of Power Brand


Arvind Ltd - Buy Analyst: [email protected]

Target Price (Rs)

500

Promoter

43%

FII

22%

DII

18%

Others

17%

60

85

110

135

160 Arvind Ltd Nifty

Investment Argument

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

brands targeting different segments and are managed by qualified and

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

resulting in 230 bps improvement in EBITDA margins of the branded apparel

business between FY18-20E.

Arvind has adopted verticalization strategy in its textiles business by focusing

on garmenting business which would positively impact its RoCE.

The process of demerger of branded apparel and engineering business is

proceeding as per plan and is presently at the final stage. We believe that

the demerger would unlock value of each of the businesses post listing.

The company has maintained guidance for 10% growth in textiles

business with flattish margin, 20- 24% yoy growth in brand and retail

business with 100 bps improvement in margins and 10-12% growth in

engineering business with flattish margin.

We expect company’s revenue and PAT to grow at a CAGR of 13.3% and

43.5%, respectively in FY18-20E driven by 27% volume CAGR in garments

business, 20.6% CAGR growth in branded retail business, all brands

turning profitable and improved operating leverage across segments.

We arrive at sum of the parts (SOTP) based target price of Rs 500 by

assigning FY20E EV/EBITDA multiple of 16x to the branded apparel

business, 8x to the textile business and 13x to the engineering business.

Risks & Concerns

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

material or forex volatility.

Company Background

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

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

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

of garments (FY18). The company owns brands such as Flying Machine, Colt,

Ruggers, etc has licensed brands such as US Polo, Arrow, Tommy Hilfiger, Gap,

Calvin Klein, etc.

108

137150

250

0

50

100

150

200

250

300

2015 2016 2017 2019F

10.5%

11.0%

11.5%

12.0%

12.5%

0

10,000

20,000

30,000

FY13 FY14 FY15 FY16 FY17 FY18

Revenue (Rs mn, LHS)

EBITDA (Rs mn, LHS)

EBITDA Margins (%, RHS)




561 732 / 479 85939

Source: Bloomberg

Source: Bloomberg

Consolidated financials (Rs mn) FY18 FY19E FY20E

Sales 16,198 17,755 18,684

Growth (%) -11.0% 9.6% 5.2%

EBITDA 7,774 8,645 9,254

EBITDA margin (%) 48.0% 48.7% 49.5%

PBT 2,871 3,294 3,839

Net profit 2,422 2,746 3,149

EPS (Rs) 15.8 17.9 20.6

Growth (%) 27.0% 13.4% 14.7%

CEPS (Rs) 28.8 32.7 36.0


Dividend per share (Rs) 2.6 2.6 2.6 Source: Company, Kotak Securities - Private Client Research

ROE (%) 9.6 9.3 9.8

ROCE (%) 8.9 8.8 9.5

Net debt (cash) 41,909 38,822 35,950

Net Working Capital (Days) 144.0 144.0 144.0


P/E (x) 35.5 31.3 27.3

P/BV (x) 3.0 2.8 2.6

EV/Sales (x) 7.9 7.0 6.5

EV/EBITDA (x) 16.4 14.4 13.2


(7.7) (13.5) (5.1)



The Phoenix Mills Ltd - Buy Analyst: [email protected]

Target Price (Rs)

707

Phoenix mills rental portfolio (mn sq ft)


26.0%

Price Performance


High Street Phoenix portfolio

Promoter

62.9%

FII

30.4%

DII

2.9%

Others

3.9%

70

100

130

160

190

220

250Phoenix Mills Ltd Nifty

Investment Argument

Rental growth for the company is being driven by the strong operational

performance of Market City malls -PMC Chennai, PMC Pune & PMC

Mumbai as well as High Street Phoenix & Palladium.

Commercial and hospitality segment also registered healthy YoY growth

respectively led by improvement in rentals and ARRs.

Growth going ahead is likely to be led by improvement in rentals as well as

uptick in residential segment revenue booking.

Rental renegotiations and consumption improvement is likely to drive

healthy growth in revenues going forward. Residential segment revenues

are likely to improve with improvement in market activity in its key regions.

Company has closed 4 acquisitions which include land parcels in Bangalore,

Ahmedabad, under construction retail assets in Lucknow and Indore

between April-July 2018 which is in line with its growth strategy of

increasing retail led mixed use development area going forward.

Risks & Concerns

Oversupply in retail and commercial may keep rentals subdued

Delay in launching residential sales may impact revenues and can keep

borrowings higher on consolidated level.

Company Background

Phoenix mills ltd (PML) has emerged as a key beneficiary of growing demand in

the retail sector with its flagship premium mall High Street Phoenix (HSP)

located in central Mumbai.

Sector Background

Residential and commercial segment of real estate is currently impacted by real

estate slowdown. However, retail segment continues to do well in terms of

higher consumption/higher occupancies and improved rentals.

Retail

70%

Residential

7%

Commercial

4%

Hospitality

19%

0.9 0.74

1.19

1.1

1

1

0.330.31

0.0

1.5

3.0

4.5

6.0

FY11 FY18

Palladium(chennai)

Bareilly

Lucknow

Chennai

Bangalore

Mumbai(Kurla)

Pune

HSP




925 1329 / 880 29088

Source: Bloomberg

Source: Bloomberg

Financials (Rs mn) Consolidated FY18 FY19E FY20E

Sales 21,281 26,342 31,577

Growth (%) 29.4 23.8 19.9

EBITDA 1,835 2,110 2,700

EBITDA margin (%) 8.6 8.0 8.6

Net profit 623 1,052 1,459

EPS (Rs) 19.8 33.5 46.5

Growth (%) 123.3 68.8 38.7


Dividend per share (Rs) - - -

ROE (%) 9.9 11.1 13.6

ROCE (%) 16.0 15.1 18.4

Net Working Capital 24.5 24.8 26.0 Source: Company

Net Cash 284 964 1,713

Valuation parameters FY18 FY19E FY20E

P/E (x) 46.6 27.6 19.9

P/BV (x) 3.3 2.9 2.5

EV/Sales (x) 1.4 1.1 0.9

EV/EBITDA (x) 15.7 13.3 10.1


(4.3) 4.0 (13.5)



Amber Enterprises Ltd - Buy Analyst: [email protected]

Target Price (Rs)

1145

Revenue mix (%)


23.8%

Price Performance


Household Penetration across consumer durables category (%)

Promoter

44.0%

FII

10.8%

DII

7.9%

Others

37.3%

4.0

20.0

10.0

60.0

17.0

0

10

20

30

40

50

60

70

Room AC Refrigerator WM FPD TV Air Cooler

RACs

75%

RAC

Components

11%

Non AC

Components

14%

70

80

90

100

110 Amber Enterprises Ltd Nifty

Investment Argument

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

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

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

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

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

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

of multiple brands at various price points.

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

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

FY22E.

The government has recently raised import duty on ACs which will further spur

shift from direct imports to domestic manufacturing, thereby benefiting

contract manufacturers like Amber

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

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

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

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

which adds electronic PCBs into its portfolio.

Risks & Concerns

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

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

affect business of the company.

Company Background

Amber Enterprises Ltd was incorporated as Amber Enterprises India Private Limited

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

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

seven locations in India.

Sector Background

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

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

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

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

SEPTEMBER 3, 2018

1-Month Portfolio

1-MONTH PORTFOLIO (PF) – SEPTEMBER 2018

NIFTY: 11680 This was the portfolio which we had recommended for September 2018. The recommendation in this portfolio now stands closed.

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

(Rs) FY19E FY20E

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

dominated by government spending.

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

Stock is trading at attractive valuations

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

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

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

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


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

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

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

Kansai is one of the most attractively valued paint company

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

momentum in the business.

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

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

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

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

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

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

Source : Kotak Securities - Private Client research

OCTOBER 1, 2018

1-Month Portfolio

1-MONTH PORTFOLIO (PF) – OCTOBER 2018

NIFTY: 10930 We expect the following stocks in 1 month portfolio to outperform the benchmark index Nifty in the month of October 2018. We rate these stocks as “Short Term Buys” with a time frame of 1 month.

Stock M Cap Current (Rs mn) Price PE (x) Comment (Rs) FY19E FY20E

Infosys 3,323,937 732 20.1 17.7 Management is confident of achieving near term financial objectives and is making progress in strengthening lag areas like large deals and digital.

Company has developed significant competencies within Digital which has higher gross margin, revenue per person and growth rates.

Vedanta 862,738 232 7.2 6.0 We expect Vedanta to deliver the highest volume growth over the next two years led by zinc, oil & gas and aluminum operations—these businesses account for 90% of VEDL’s EBITDA.

Hero MotoCorp 582,600 2,913 15.9 14.3 Through new products, HMC is making an attempt to improve its presence in the scooter and premium motorcycle segment.

Pickup in rural demand, (HMC is large player in rural areas) has led to improved demand for motorcycle.

Marico 426,990 331 46.0 37.2 In Q1FY19, Marico delivered strong performance in an extremely challenging input cost environment, with healthy volume growth across key segments

Company continues to maintain/ gain market share in most of its categories

Downward trend in Copra prices is healthy for Marico

Grasim Ind 670,242 1,020 22.1 18.6 Grasim is likely to benefit from improved VSF and chemical volumes along with higher volumes in cement.


Aurobindo Pharma 435,398 743 18.6 15.5 We believe ARBP is also well positioned to gain volumes in the US where the management expects US$100 mn worth of NBO’s in FY19 and is well placed to capitalize on any disruptions in US orals (e.g. valsartan).


Cummins India 187,110 675 24.3 20.6 Cummins reported margin improvement in Q1FY19 after six quarters of disappointment. We expect the trend would continue in Q2FY19 as well leading to stock re-rating.

Currently stock is trading at attractive valuations

Jubilant Foodworks 163,820 1,242 49.7 35.5 Company reported stronger than expected results in Q1FY19. New management’s interventions continue to drive strong

momentum in the business.

Amber Enterprises 29,108 927 27.7 19.9 Highest market share in contract manufacturing of room ACs. Hike in import duty on ACs to benefit contract manufacturers

Cyient 84,450 750 17.5 14.3 Continued traction in transportation and communications verticals along with strategic acquisitions would drive revenue growth.

Company has taken several steps to facilitate successful execution of its S3 strategy.

Stock is trading at reasonable valuations.

Source: Kotak Securities - Private Client research



ONE MONTH MODEL PORTFOLIO PERFORMANCE

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

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

outperformance

PF monthly performance vs Nifty monthly performance

Source: Kotak Securities – Private Client Research, NSE

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

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

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

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

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

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

PF performance vs Nifty performance

Source: Kotak Securities – Private Client Research, NSE

5.2

-2.8

-0.1

1.71.0

-0.1

8.7

0.2

6.0

2.9

-0.8

-6.4

7.5

-8.3

-4.1

7.5

0.2

-8.8

1.4

3.4

-1.0

5.8

-1.6 -1.3

5.6

-1.2

3.0

4.7

-0.4

-3.6

6.2

0.0 -0.2

6.0

2.8

-6.4

-10.00

-5.00

0.00

5.00

10.00

-10

-5

0

5

10

Ap

r-17

May-1

7

Jun

-17

Jul-

17

Au

g-1

7

Sep

-17

Oct

-17

No

v-1

7

Dec-

17

Jan

-18

Feb

-18

Mar-

18

Ap

r-18

May-1

8

Jun

-18

Jul-

18

Au

g-1

8

Sep

-18

One Month Portfolio (LHS) Nifty returns (LHS) Outperformance (RHS)

-8.8

-1.1

-5.9

4.6

-6.4

2.5

8.5

16.3

(2.4)

(3.5)

(14.4)

(11.7)

(16.0)

(14.0)

(12.0)

(10.0)

(8.0)

(6.0)

(4.0)

(2.0)

-

-15.0

-10.0

-5.0

0.0

5.0

10.0

15.0

20.0

1 month 3 month 6 month 1 year

PF Nifty Outperformance



RATING SCALE

Definitions of ratings

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

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

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

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

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

information purposes only.

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

is not a Sufficient fundamental basis for determining, or there are legal, regulatory or policy constraints around publishing,

an investment rating or target. The previous investment rating and price target, if any, are no longer in effect for this stock

and should not be relied upon.

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

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

NOTE – Our target prices are with a 12-month perspective. Returns stated in the rating scale are our internal benchmark.

Rating scale for 1 month portfolio

Benchmark – Nifty

Time horizon – 1 month

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

FUNDAMENTAL RESEARCH TEAM

Rusmik Oza Arun Agarwal Amit Agarwal Nipun Gupta Deval Shah

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

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

+91 22 6218 6441 +91 22 6218 6443 +91 22 6218 6439 +91 22 6218 6433 +91 22 6218 6423

Sanjeev Zarbade Ruchir Khare Jatin Damania Cyndrella Carvalho Ledo Padinjarathala

Cap. Goods & Cons. Durables Cap. Goods & Cons. Durables Metals & Mining, Midcap Pharmaceuticals Research Associate


+91 22 6218 6424 +91 22 6218 6431 +91 22 6218 6440 +91 22 6218 6426 +91 22 6218 7021

Teena Virmani Sumit Pokharna Pankaj Kumar Jayesh Kumar Krishna Nain

Construction, Cement, Buildg Mat Oil and Gas, Information Tech Midcap Economist M&A, Corporate actions


+91 22 6218 6432 +91 22 6218 6438 +91 22 6218 6434 +91 22 6218 5373 +91 22 6218 7907

K. Kathirvelu

Support Executive

[email protected]

+91 22 6218 6427

TECHNICAL RESEARCH TEAM

Shrikant Chouhan Amol Athawale

[email protected] [email protected]

+91 22 6218 5408 +91 20 6620 3350

DERIVATIVES RESEARCH TEAM

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

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

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

mailto:[email protected]










Disclosure/Disclaimer

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

Kotak Securities Limited is a corporate trading and clearing member of Bombay Stock Exchange Limited (BSE), National Stock Exchange of India Limited (NSE), Metropolitan Stock Exchange of India Limited (MSE). Our businesses include stock broking, services rendered in connection with distribution of primary market issues and financial products like mutual funds and fixed deposits, depository services and Portfolio Management.

Kotak Securities Limited is also a depository participant with National Securities Depository Limited (NSDL) and Central Depository Services (India) Limited (CDSL). Kotak Securities Limited is also registered with Insurance Regulatory and Development Authority as Corporate Agent for Kotak Mahindra Old Mutual Life Insurance Limited and is also a Mutual Fund Advisor registered with Association of Mutual Funds in India (AMFI). We are registered as a Research Analyst under SEBI (Research Analyst) Regulations, 2014.

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This document is not for public distribution and has been furnished to you solely for your information and must not be reproduced or redistributed to any other person. Persons into whose possession this document may come are required to observe these restrictions.

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We have reviewed the report, and in so far as it includes current or historical information, it is believed to be reliable though its accuracy or completeness cannot be guaranteed. Neither Kotak Securities Limited, nor any person connected with it, accepts any liability arising from the use of this document. The recipients of this material should rely on their own investigations and take their own professional advice. Price and value of the investments referred to in this material may go up or down. Past performance is not a guide for future performance. Certain transactions -including those involving futures, options and other derivatives as well as non-investment grade securities - involve substantial risk and are not suitable for all investors. Reports based on technical analysis centers on studying charts of a stock's price movement and trading volume, as opposed to focusing on a company's fundamentals and as such, may not match with a report on a company's fundamentals.

Opinions expressed are our current opinions as of the date appearing on this material only. While we endeavor to update on a reasonable basis the information discussed in this material, there may be regulatory, compliance or other reasons that prevent us from doing so. Prospective investors and others are cautioned that any forward-looking statements are not predictions and may be subject to change without notice. Our proprietary trading and investment businesses may make investment decisions that are inconsistent with the recommendations expressed herein.

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Research Analyst or his/her relative's financial interest in the subject company(ies): No

Kotak Securities Limited has financial interest in the subject company(ies) at the end of the month immediately preceding the date of publication of Research Report: ITC, Maruti Suzuki, Aurobindo Pharma, Tech Mahindra, Phoenix Mills - Yes

Our associates may have actual/beneficial ownership of 1% or more securities of the subject company(ies) at the end of the month immediately preceding the date of publication of Research Report.

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