RUBIK EQUITY PORTFOLIO – INVESTMENT THESIS

1) HDFC Bank Ltd

 HDFC Bank Ltd is India’s largest private sector bank with a loan book of INR 6 lakh crores.
 The quality and lineage of the bank is reflected in its consistent performance of loan CAGR of 20%+
while maintaining the best in class profitability ratios and asset quality over a long period of time.
 At a time when the other major banks in India are facing asset quality and profitability issues, only 1%
of HDFC Bank’s loan book is non-performing (GNPA).
 HDFC Bank is a leader in retail lending with 55% of its loan book coming from consumption related
lending, thus it remains well placed to participate in the growth opportunities across product and
consumer segments.
 We expect the bank to continue growing in higher teens and at better profitability as it continues
investing in technology and analytics. The stock currently trades at 3.3x FY20 Price to Book.
 This makes it an attractive investment bet considering its size, scale, quality and growth potential.
HDFC, the parent entity has recently infused INR 8,500 cr in HDFC Bank.

2) Yes Bank Ltd

 YES Bank Ltd is the 4th largest and one of the fastest growing private banks in India.
 The bank has grown its loan book at 38% CAGR over FY14 to FY18 to INR 2 lac crores in FY18. The next
leg of growth will be led by the banks’ retail franchisee and sweating of the corporate relations which
the bank has built over the last 15 years.
 The bank has lot of ground to cover vs. its peers when it comes to the retail asset and liability book.
Retail constitutes only 32% of Yes Bank’s loan books vs. 55% for HDFC Bank. Wholesale financing
(projects etc) is a cyclical business.
 As the retail business grows, the bank will see benefits at the NIM level, higher fee income and the
profile of the loan book will improve qualitatively.
 Yes Bank has best in class ROE of 20% and Non-performing loans are at 1.3% (GNPA). Yes Bank has
been able to grow at a fast rate with high profitability and low NPAs.
 The valuation of Yes Bank at 2.3x FY20 book gives us enough comfort and headroom for making
attractive returns. Re-rating of the multiple provides us with further upside.

3) RBL Bank Ltd

 RBL Bank has been in existence for the past 73 years as Ratnakar Bank Limited. It has been rebranded
as RBL Bank and is undergoing a transformation led by extremely capable and experienced bankers
who are ex-Citi and ex-Merill Lynch.
 RBL bank is India’s fastest growing private sector bank with Loan CAGR of 55% over FY11-18 and its
current outstanding loan book stands at INR 42,000 crs.
 The new management has plans to increase profitability of the loan book by 25% (Return on Asset
from 1.2% to1.5%).
 What gives us the comfort to invest in RBL Bank is their risk management function. For example, RBL
Bank always stays away from Greenfield capex and project financing. Their focus is more on working
capital loans.
  Another key focus area for RBL bank is credit card fee income.
 Once it reaches a certain scale it can achieve 30% return on equity (ROE).
 The clarity and execution of the management gives us confidence that the bank can grow its profits by
30% CAGR over FY18-20E with no major accidents (NPAs). The stock is available at 2.8x FY20E Price to
book.

4) TAKE Solutions Ltd

 TAKE Solutions is a unique IT company that reduces costs and speeds up results for pharmaceutical
companies.
 The skills required for such work are scarce, and time required to win confidence of pharmaceutical
majors is long.
 These two factors act as entry barriers, which allow TAKE to grow rapidly while maintaining strong
margins.
 Across the world, pharmaceutical companies face two challenges – Rising regulatory compliance
requirements and increasing cost of non-compliance. Besides this, cost of drug research is rising
rapidly, and there is a need to complete the research projects quickly and within the budget.
 TAKE has IT based solutions for automated regulatory compliance, which are quite popular. TAKE is
also using its IT expertise to significantly reduce the time required to complete a drug or clinical trial.
 These innovative solutions are helping TAKE grow its revenue at above 20% per annum, while
maintaining strong profit margins.
 The Company operates in a very large market exceeding $30 Billion. With its innovative solutions,
TAKE can potentially grow much larger without compromising on margins.
 There is potential for a valuation re-rating since companies similar to TAKE enjoy much higher
valuations in the US stock markets.
 TAKE solutions currently trades at 13 times its estimated FY20 earnings. Given its differentiated
positioning and strong growth prospects, TAKE should do well in the coming years.

5) Parag Milk Foods Ltd

 Parag Milk Foods Ltd (Parag) is a fully integrated player in the value-added milk segment with milk
processing capacity of 2 million liters per day.
 Over the years, the company has successfully created a strong brand portfolio and is consistently
innovating and introducing new products in the market. It has recently become the only Indian player
to enter the lucrative whey protein segment.
 India’s dairy industry is large, and is 80% dominated by the unorganized sector. However, the share of
organized sector has been rising consistently over the past decade or so.
 Within the product basket, about 90% of consumption is in the traditional form of liquid milk, ghee,
paneer and curd. But new value-added categories like cheese, butter milk, butter, flavored milk and
whey protein are growing 2-3 times the overall industry and increasing their share of total
consumption.
 Since Parag derives more than 65% of its revenue from value added products, it is benefitting both
from the shift towards organized sector and also from rapid growth of value added products. As such,
it is poised to grow much faster than the industry.
  The Company has invested in building capacities over the last 3 years, and incremental capex
requirement is negligible. The focus is now shifting to reduction of working capital.
 As such, Parag will benefit from both rapid sales growth as well as rising profitability.
 We expect EPS growth of 30% CAGR over FY18-20E. Parag is currently trading at roughly 30 times
trailing twelve month earnings.
 With strong growth in profits in FY19 and FY20, the forward valuation of Parag is 17 times FY20E EPS.
 We are encouraged to see that promoters have also been increasing their stake in recent times.
 Given its strong growth and FMCG-like characteristics, Parag Milk should command premium
valuations in coming years

6) Bhansali Engineering Polymers Ltd

 Bhansali Engineering Polymers Ltd. (BEPL) operates in a duopoly market and is the largest
manufacturer of Acrylonitrile Butadiene Styrene (ABS) resins in India.
 India’s usage of ABS is increasing due to changing preferences, and demand is rising strongly. Also, due
to inadequate domestic capacity, India imports roughly 50% of its requirement.
 This is working to the advantage of BEPL, who is rapidly increasing sales by replacing imports. BEPL has
also upgraded its product profile and it now operates in the premium segment of ABS, where margins
are much higher and price volatility is much lesser.
 We believe BEPL’s profit margins will rise further, as it continues to increase the share of premium ABS
in its total sales.
 We expect BEPL’s revenue to increase at 22% per year between FY18 and FY20. With rising
profitability, BEPL’s net profit would increase at more than 33% per year during the same period.
 As such it is trading at roughly 11 times its expected earnings in FY20.
 We consider this to be very cheap, since this business has strong entry barriers, high ROCE and rapid
growth prospects. Promoters have been increasing their stake over the past few quarters, and this
adds to our conviction.

7) Dalmia Bharat Ltd (DBL)

 Dalmia Bharat Ltd (DBL) is a fast growing and highly profitable cement player, currently ranked fourth
largest in India.
 While it is strong in South and East, recent acquisitions would help it penetrate the Western region,
making it a truly pan India player.
 It is amongst the few players delivering EBITDA/t of more than INR 1,000/tonne. We think Dalmia
Cement is undervalued relative to some of the industry leaders despite its higher growth and
profitability, and expect to make money as the valuation gap reduces.

8) Piramal Enterprises Ltd (PEL)

 Piramal Enterprises Ltd is a conglomerate with presence in financial services, Pharma and Healthcare
Information segments.
 Using the proceeds from its profitable asset sale in 2010, the company has built a successful financial
services business (largely real estate financing) and has built out a high margin pharma business.
  Assets under management of the lending business have grown at 100%+ CAGR for the last 3 years and
stand at INR 38,000 Crs for 9MFY18. The business is highly profitable, with 4.1% ROA and 21% ROE.
 Despite servicing the troubled real estate sector, PEL has reported gross NPA of only 0.4%. This speaks
of the strong underwriting skills of the management.
 Lending business should continue to show robust growth as they introduce new products and
penetrate deeper in the older lines of business.
 In Pharma business, when most companies are facing challenges, PEL pharma continues to grow its
sales while delivering more than 21% operating margin.
 Promoter’s past track record also inspires confidence. A sum-of-parts valuation indicates that PEL is
undervalued, and we hope to make good returns on this position.

9) Vaibhav Global Ltd (VGL)

 Vaibhav Global Ltd manufactures fashion (non-precious) jewellery in China and India, and sells them to
retail consumers in USA and UK.
 It has an integrated value chain right from procurement/ manufacturing to owning the sales channels
of television and internet properties.
 Combination of manufacturing at Chinese and Indian costs and selling at American rates through its
own selling channels has led to attractive gross margins.
 VGL’s costs are relatively fixed and gross margins are high. As revenue increases, most of the gross
profits will fall to the bottom line. As such, bottom-line growth is expected to be much faster than
revenue growth.
 VGL is expected to report 35% CAGR in profits over FY18-20e. With very high RoCE, and the
positioning of a retail / consumer company, VGL should command healthy valuations.

10) KEC International Ltd (KEC)

 KEC is a flagship Company of RPG group is a global EPC player with 51% of revenues coming from
outside India.
 It has presence in the verticals of Power Transmission and Distribution (T&D), Cables, Railways, and
Civil.
 The growth drivers in the domestic space are the civil and railways opportunities.
 With estimated capex in Indian Railways to touch INR 1, 35,000 Crs by FY20, KEC is one of the front
runners to get maximum benefit from this spending. In the international operations, the company has
strong order and revenue visibility as it is expected to benefit from the infra spending by the
governments in Brazil, Africa and Middle East.
 As such with an order book of INR 17,148 crs combined with winds of solid infrastructure spending will
lead to earnings CAGR of 36% for next 2 years.

11) Manappuram Finance Ltd (Manappuram)

 Manappuram is a leading gold loan providing NBFC based out of Kerala, with assets under
management of INR 14600 Crs.
 While Gold loans are highly profitable and low risk, the growth rate of loans is relatively slow.
 As such the company has over last few years diversified into other product lines, which currently
account for roughly 22% of total loan book.
 Manappuram now has a combination of growth, profitability and diversification that should provide
good returns to shareholders.
 We expect better performance in FY19 based on falling costs and scaling up of nascent businesses.
With a relatively cheap valuation of roughly 2 times FY19E book value, high return ratios and stronger
loan book growth, Manappuram should do well.

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