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DIWALI

PICKS OCT 2017


Diwali Picks October 2017

DIWALI PICKS – SAMVAT 2074


Samvat 2073 is ending with gains of about ~13.4% on the benchmarks. This year saw the markets
notching all-time highs, fuelled by sustained buying support from the domestic investors and robust
global market sentiment. The BSE mid-cap and small-cap indices have outperformed during this
period and have returned about 17% and 26%, respectively. Several stocks performed even better
than the mid and small cap indices. We had written in last year's Diwali Note - "All-in-all, we expect
returns in Samvat 2073 to be better than Samvat 2072, notwithstanding the intermittent bouts of
corrections / profit-booking" We are happy that, our optimism came true.
On the global front, the US economy expanded at a solid pace in Q2CY17 after a weak performance
in the prior quarter. Buoyant labour market conditions, upbeat consumer confidence, softer than
expected inflation and a robust housing market supported consumer spending. Industrial
production also showed an upswing. However, recent hurricanes could temporarily weigh on
economic activity. Although, recent tensions between North korea and the US threatened to disrupt
the market momentum, financial markets have remained largely resilient to such geo-political
events and more recently to the US Fed’s decision to reduce the size of its balance sheet. Equity
markets rallied in most advanced equity markets, while some correction has been witnessed in a
few emerging market economies.

Sensex, BSE, Smallcap-Midcap performance


130
BSE Midcap BSE Smallcap Sensex
120

110

100

90

80

Source: Bloomberg

On the domestic front, one concern which came early in Samvat 2073 was the election of Mr Trump
as the President of the US and announcement of Demonetisation, incidentally both these events
happened almost at the same time. Especially, the sudden implementation of demonetization saw
a sharp dip in sales of discretionary items like Auto, Consumer durables, Real Estate and Building
Products, Travel and Jewellery. While there were fears of an extended impact on the economic
growth, such fears were largely belied and even the markets bounced back from their lows. Market
sentiment was further buoyed by the strong election outcome in UP for the ruling NDA government.

Abolishing the earlier system of excise and sales tax, the government implemented the GST tax
from July 1, 2017. However, prior to the scheduled rollout, there was significant uncertainty among
wholesalers/retailers related to the availability of input tax credit (under GST) on existing inventory.
Most traders resorted to curtailing fresh purchases of finished goods. Some of the consumer
durables retailers also offered significant discounts with a view to destock the existing inventory.
The impact of this was reflected in the Q1FY18 earnings numbers. Profits of Nifty companies
declined 8.4% in Q1FY18. Some moderation in GDP growth was also observed in Q1FY18 which
was atleast partly attributed to rollout of GST.

Kotak Securities – Private Client Research Please see the Disclosure/Disclaimer on the last page For Private Circulation 2
Diwali Picks October 2017

Nifty - Top 5 Stocks (20th Oct 16 – 10th Oct 17)


Company Name Price on 10/10/17 Price on 20/10/16 % Chg
Bajaj Finance 1,951 1,121 74.0%
Hindalco Industries 252 155 62.4%
Tata Steel 691 429 61.2%
RIL Industries 843 544 55.1%
Vedanta 321 208 54.6%
Source: Bloomberg

Nifty - Bottom 5 Stocks (20th Oct 16 – 10th Oct 17)


Company Name Price on 10/10/17 Price on 20/10/16 % Chg
Aurobindo Pharma 735 826 -11.0%
Dr Reddy’s Lab 2,411 3,079 -21.7%
Tata Motors 424 547 -22.5%
Sun Pharma 527 746 -29.3%
Lupin 1,062 1,506 -29.5%
Source: Bloomberg

The banking sector continues to face an environment of slow growth. Recent sectoral composition
of credit shows growth at less than 10% yoy with corporate loans flat yoy. Only retail continues to
drive growth. Our study of private capex does not suggest an improvement in corporate loan
growth as fresh capex is still elusive with the focus still on deleveraging the balance sheet at this
point in time. This implies weak revenue growth for the sector, especially public sector banks.

Crude prices have been pretty volatile with the oil producing countries trying to restrict supplies to
match the weakening demand. In the past four quarters, Brent crude has remained largely stable ~
$50-56 / barrel. One needs to watch this closely as it does have an impact on the fiscal position of
the Government and also on inflation.

Brent Crude (US$/bl)


120

95

70

45

20

Source: Bloomberg

Announcements of new industrial & infrastructural projects remained muted in the second quarter
of 2017-18. Only Rs 845 bn projects were proposed during the quarter. This is the lowest level of
“intentions to invest” seen in a quarter during the tenure of the current government. Private sector
investment proposals fell to their lowest level in 15 quarters during the quarter ended September
2017.

FII flows were largely negative FYTD, with August / July seeing outflows of USD 3.4 bn. On the
other hand, domestic institutions and MFs have invested USD.22.1 bn in equity markets on a FYTD
basis. Foreign flows have been a driving force for our markets over the years. But in 2017, domestic
institutions, especially the MFs have emerged as the major force in the equities market. And they
are adding depth to the market. It is clear that, savings are consistently moving to financial assets
v/s physical assets earlier.

Kotak Securities – Private Client Research Please see the Disclosure/Disclaimer on the last page For Private Circulation 3
Diwali Picks October 2017

FII & Mutual Fund investment (Rs cr)


40,000
30,000 FII MF
20,000
10,000
0
-10,000
-20,000
-30,000

Source: Bloomberg

Rainfall was 5% below the long-period average this year. This is likely to impact Kharif output to a
minor extent. With two successive years of average monsoons, several sectors like agrochemicals,
farm equipment, consumer goods, automobiles, etc are poised for improved growth.

Sectoral performance
160 Sensex
FMCG
Capital Goods
Banks
110 Oil & Gas
Auto
Metals
Healthcare
60 IT

Source: Bloomberg

All-in-all, we expect returns in Samvat 2074 to moderate in view of weak near term
earnings growth and higher than average valuations.
Going ahead, in Samvat 2074, we expect the Government to focus on effective measures to
accelerate economic growth. Post the implementation of the GST, there are signs that the business
is coming back on track. Signs of recovery are visible in Auto sales and exports in the economy.
Services sector activity in India expanded for the first time in three months in September, providing
another set of data that showed the economy was recovering from the disruptions due to the goods
and services tax. However, the pace of recovery is gradual. Given this backdrop, we maintain our
positive bias towards domestic infrastructure and cyclical sectors over the medium-to-long term.
We are also positive on the consumption theme. We recommend sticking to quality and advise
selectively investing in stocks having strong balance sheets and ethical managements. Select export-
oriented stocks will do well as US economy continues strengthening. Key risks are geo-political
concerns globally, decline in foreign inflows, sharp currency movements and spike in oil prices.

All-in-all, we expect returns in Samvat 2074 to moderate in view of weak near term earnings growth
and higher than average valuations. The upmove in Indian equities have been supported by strong
macro-economic factors (GDP growth, reducing Current account deficit and benign inflation etc).
However, there has be some deterioration on these counts in recent times. Inflation concerns have
resurfaced as reflected by the RBI guv’s take on monetary policy stance. Plus, earnings growth in
FY18 is likely to be subdued. In our view, further upsides from the current levels would be
contingent on revival of earnings growth and resolution of stressed banking assets. Having said
that, we believe, there would be continued investor interest in mid and small caps.

Kotak Securities – Private Client Research Please see the Disclosure/Disclaimer on the last page For Private Circulation 4
Diwali Picks October 2017

We have selected some stocks which look attractive to us from an investment perspective.
These stocks have to be ACCUMULATED from the CMP. This is to protect ourselves against
the volatile nature of the markets.
Diwali picks – Samvat 2074
CMP as on Target Expected FY19 PE
11/10/2017 Price Upside (x)
(Rs) (Rs) (%)

Asian Granito 485 603 24% 18.5


Cochin Shipyard 563 740 31% 19.1
Engineers India 151 182 21% 18.7
Genus 60 75 26% 16.8
FIEM Industries 896 1254 40% 12.9
Maruti 7,830 9,061 16% 21.6
MRPL 127 155 22% 7.9
TV 18 broadcast 40 47 17% 18.6
Shree Cement 18,500 22,716 22% 29.9
VIP 264 325 23% 24.7
Source: Kotak Securities – Private Client Research

Performance of our Diwali picks of last year v/s Nifty and CNX 500 Index
Reco given at Price on 11/10/2017 % change

Indices
Nifty Index 8,680 10,012 15.3%
NSE 500 Index 7,528 8,829 17.3%
Stocks – Samvat 2073
Allcargo 181 168 -7.2%
Dish TV 95 73.5 -22.6%
Engineers India 133 150 12.8%
Finolex Industries 458 669 46.1%
L&T 1,003 1,144 14.1%
M&M 1,327 1,305 -1.7%
Mold-Tek 216 305 41.2%
Nagarjuna Construction 82 89 8.5%
Natco Pharma 588 989 68.2%
PNC Infratech 125 149 19.2%
TV 18 Broadcast 44 41 -6.8%
Source: Kotak Securities – Private Client Research

WISH YOU ALL A VERY HAPPY AND PROSPEROUS


DIWALI!
HAPPY INVESTING!

Kotak Securities – Private Client Research Please see the Disclosure/Disclaimer on the last page For Private Circulation 5
Diwali Picks October 2017

Asian Granito India Ltd (AGL) - Buy Analyst: teena.virmani@kotak.com


Last report at Rs.439 on 31 August 2017

Current Market Price (Rs) Target Price (Rs) Potential Upside (%) 52 Week H/L (Rs) Mkt Cap (Rs m n)
485 603 24.4% 518 / 175 14589

Investment Argument 1 Year Perform ance


 Fourth largest player in tile industry and set to benefit from demand
growth: Asian Granito has a capacity of 33 mn sq meter spread across 8 Asian Granito India Ltd (AGL) Nifty
2000
plants in Gujarat.
 Continuous innovations to aid margins: AGL is continuously innovating to
add new products in the market and has the first mover advantage in 1500
introducing large format tiles with much higher margins
 Shift towards B2C going forward: Company would now be focusing more 1000
on increasing B2C mix as compared to higher proportion being sold in B2B
category earlier. AGIL is continuously putting efforts to increase the B2C 500
sales from the current level 35% in FY17 to 50% in next 2-3 years
 Strong distribution network and international presence: AGL has an
0
extensive marketing and distribution network comprising of 180+ exclusive
showrooms, 16 display centres and 5500+ touch points
 Excellent growth in quartz business: Revenues from quartz division are
likely to improve sharply going forward owing to new product addition as Source: Bloomberg
well as higher branding.
 Lower power cost as compared to other players: The company acquired
Artistique Ceramic Pvt. Ltd with a 70% shareholding in Crystal Ceramics Share Holding Pattern (%)
and the acquired company enjoys a gas supply arrangement with ONGC
significantly lower than the prevailing market price. Promoter
32%
Risks & Concerns
 Slower than expected ramp up in dealer network.
 Lower than expected volume uptick
 Sharp rise in gas prices
Others
Company Background 58%
Asian Granito, promoted by Mr Kamlesh Patel and Mr Mukesh Patel in year
2000, is engaged in the manufacture and sale of ceramic wall and floor tiles, FII
vitrified tiles, digital polished glazed vitrified tiles, digital wall tiles, marble and 5%
quartz MFs
5%
Sector Background
Government initiatives such as Swachch Bharat Abhiyan, Affordable housing, Source: Capitaline
Development of smart cities to be positive for organized players

Revenue m ix (Rs m n)
Financials (Rs m n) FY17 FY18E FY19E
16,000
Net sales 10,660 12,159 14,476 Quartz and marble Tiles
Growth (%) 7% 14% 19%
12,000
EBITDA 1,235 1,520 1,954
EBITDA margin (%) 11.6% 12.5% 13.5%
8,000
PBT 532 804 1,225
Net profit 391 534 789
4,000
EPS (Rs) 13.0 17.8 26.2
Growth (%) 21% 37% 48%
0
CEPS (Rs) 24.5 30.1 39.5
FY15 FY16 FY17 FY18E FY19E
BV (Rs/share) 133.3 149.5 174.1
DPS(Rs) 1.3 1.3 1.3 Source: Company; Kotak Securities - Private Client Research
ROE (%) 10.2 12.6 16.2
ROCE (%) 11.9 14.3 18.0 Business m ix (%)
Net cash (debt) 3,150 2,955 3,033
Double charged Ceramics PVT GVT
NWC (Days) 123.6 123.6 123.6
100%

Valuation Param eters FY17 FY18E FY19E 75%


P/E (x) 37.3 27.3 18.5
P/BV (x) 3.6 3.2 2.8 50%
EV/Sales (x) 1.7 1.4 1.2
EV/EBITDA (x) 14.4 11.5 9.0 25%

0%
Price Perform ance (%) 1M 3M 6M FY15 FY16 FY17 Q1FY18
8.3 7.0 25.7
Source: Bloomberg, Company, Kotak Securities - Private Client Research Source: Company; Kotak Securities - Private Client Research

Kotak Securities – Private Client Research Please see the Disclosure/Disclaimer on the last page For Private Circulation 6
Diwali Picks October 2017

Cochin Shipyard Ltd (COSH) - Buy Analyst: agarwal.amit@kotak.com


Last report at Rs.570 on 11 October 2017

Current Market Price (Rs) Target Price (Rs) Potential Upside (%) 52 Week H/L (Rs) Mkt Cap (Rs m n)
563 740 31.3% 592 / 435 76593

Investment Argument 1 Year Performance


 COSH has a diversified order book at Rs 83 bn which we expect to grow at
110 Cochin Shipyard Ltd Nifty
20% CAGR with orders coming from Navy, Coast guard and commercial
108
segment.
106
 COSH is one of the yards empanelled with the Indian Navy and the coast 104
guard for orders. 102
 With improvement in commercial shipping segment, we can expect regular 100
flow of orders from the commercial segment. 98
 Company is building a third dry-dock and an international ship-repair center 96
which would cater to the future shipbuilding and ship-repair demand 94
 With healthy operational cash flow generation and negative working capital 92
for the company, we estimate the BS of the company to remain strong in 90
near term. Aug-17 Sep-17 Oct-17

 The stock trades at an attractive valuation of 19x FY19E earnings which is at


Source: Bloomberg
steep discount to bigger international yards having weak earnings profile.
Risks & Concerns Share Holding Pattern (%)
 Delay in execution of large orders
 Slower than expected recovery of the commercial shipping segment Others
13.0%
 Reduced allocation to navy from the defence pie
Company Background DII
10.0%
 Cochin Shipyard (COSH) is a Government promoted Miniratna company,
incorporated on March 29,1972
FII
 The company caters to clients engaged in the defence sector in India and 2.0%
clients engaged in the commercial sector worldwide
Sector Background
 There are three main segments of shipbuilding including defence, commercial Promoter
and ship-repair. 75.0%
 Shipbuilding companies primarily operate from countries like China, Japan
and Korea Source: Capitaline

Estimated order book for COSH (Rs mn)


FINANCIALS (RS MN) FY17 FY18E FY19E
250,000
Sales 20,594 23,200 28,072
Growth (%) 3.5 12.7 21.0 200,000
EBITDA 3,801 4,106 5,226
EBITDA margin (%) 18.5 17.7 18.6 150,000

PBT 4,801 5,148 6,044


100,000
Net profit 3,121 3,418 4,013
EPS (Rs) 27.5 25.1 29.5 50,000
Growth (%) 7.0 9.5 17.4
0
CEPS (Rs) 30.9 28.5 35.3
FY17 FY18E FY19E FY20E FY21E FY22E
Book value (Rs/share) 179.3 238.2 260.6
Dividend per share (Rs) 9.0 6.0 6.0 Source: Company, Kotak Securities - Private Client Research
ROE (%) 15.4 10.6 11.3
ROCE (%) 15.7 10.8 12.0 EBIDTA margin trend for COSH
Net cash (debt) 20,032 27,109 26,342
20
Net Working Capital (Days) (114) (97) (94)

15
VALUATION PARAMETERS FY17 FY18E FY19E
P/E (x) 20.5 22.4 19.1
10
P/BV (x) 3.1 2.4 2.2
EV/Sales (x) 2.7 2.1 1.8
5
EV/EBITDA (x) 14.9 12.1 9.6

0
PRICE PERFORMANCE (%) 1M 3M 6M
FY15 FY16 FY17 FY18E FY19E FY20E
0.2 NA NA
Source: Bloomberg, Company, Kotak Securities - Private Client Research Source: Company

Kotak Securities – Private Client Research Please see the Disclosure/Disclaimer on the last page For Private Circulation 7
Diwali Picks October 2017

Engineers India Ltd (EIL) - Buy Analyst: ruchir.khare@kotak.com


Last report at Rs.149 on 10 October 2017

Current Market Price (Rs) Target Price (Rs) Potential Upside (%) 52 Week H/L (Rs) Mkt Cap (Rs m n)
151 182 20.8% 176 / 118 101538

Investment Argument 1 Year Performance


 Engineers India enjoys healthy market share in the Hydrocarbon
250 Engineers India Ltd Nifty
consultancy segment. It enjoys prolific relationship major oil & gas
companies like HPCL, BPCL, ONGC and IOC.
 Company is well poised to benefit from recovery in the infrastructure 190
spending in the hydrocarbon sector.
 We believe that in future, company shall inevitably benefit from MoPNG
huge target of over Rs 2 trillion envisaged for various projects in next five 130
years.
 Company has been observing pick up in order inflows/revenue booking in
70
consultancy business space which enjoys healthy margins.

Risks & Concerns


 Slowdown in domestic Hydrocarbon industry.
Source: Bloomberg
Company Background
 A Public sector undertaking. Share Holding Pattern (%)
 Leading player in domestic market Others
13.5%
Sector Background
 Hydrocarbon consulting business is a direct leverage on Hydrocarbon
sector. MPoNG has envisaged investment of over Rs 2 trillion for various DII
projects over next few years. 20.6%

 Indian Hydrocarbon sector has witnessed substantial capacity addition over


Promoter
the last decade. Refining capacity currently stands at 215 MMT against 62
59.3%
MMT in 1998. Demand is expected to surpass current capacity in FY18.
FII
6.6%

Source: Bloomberg

Segment Sales (Rs bn)


Financials (Rs m n) FY17E FY18E FY19E
25
Sales 14,486 19,815 26,378
Growth (%) (4.1) 36.8 33.1 20
EBITDA 3,022 3,567 5,945
15
EBITDA margin (%) 20.9 18.0 22.5
PBT 5,002 5,620 7,990
10
Net profit 3,250 3,822 5,433
EPS (Rs) 4.8 5.7 8.1 5
Growth (%) 10.0 17.6 42.2
0
CEPS (Rs) 5.2 6.0 8.4
FY14 FY15 FY16 FY17E FY18 FY19
BV (Rs/share) 41.1 42.9 46.6
DPS (Rs) 2.8 3.3 3.7 Source: Company, Kotak Securities - Private Client Research
ROE (%) 12.0 13.5 18.0
ROCE (%) 12.0 13.5 18.0 Revenue Mix (%)
Net cash (debt) 26,400 28,580 32,184
Refineries
NW Capital (Days) (111.3) (101.3) (93.4) 14%
Storage
Terminals
29%
Valuation param eters FY17E FY18E FY19E
P/E (x) 31.2 26.6 18.7
P/BV (x) 3.7 3.5 3.2
Petrochemical
EV/Sales (x) 5.2 3.7 2.6 s
EV/EBITDA (x) 24.7 20.3 11.6 32%
Pipelines
19% Fertilizers
Price Perform ance (%) 1M 3M 6M 6%
(5.2) (4.1) (2.4)
Source: Bloomberg, Company, Kotak Securities - Private Client Research Source: Company

Kotak Securities – Private Client Research Please see the Disclosure/Disclaimer on the last page For Private Circulation 8
Diwali Picks October 2017

FIEM Industries Ltd (FIEM) - Buy Analyst: arun.agarwal@kotak.com


Last report at Rs.928 on 6 September 2017

Current Market Price (Rs) Target Price (Rs) Potential Upside (%) 52 Week H/L (Rs) Mkt Cap (Rs mn)
896 1254 39.9% 1510 / 821 11828

Investment Argument 1 Year Performance


 FIEM generates almost 95% of its automobile business revenues from the
600 FIEM Industries Ltd (FIEM) Nifty
2W segment and hence recovery in this segment will be positive for the
company. 500
 Production at FIEM’s top customers is growing at robust pace and FIEM
400
will be a direct beneficiary of the same. Honda Motorcycle and Scooters
India Limited (HMSI) and TVS Motors (TVSM) are the top clients – 300
accounting for ~70% of FIEM’s automotive business revenues.
200
 LED luminaries segment has been under pressure. FIEM is looking at
various options to improve its performance in this segment but the same 100
are expected to yield result over the longer run.
0
 EBITDA margin performance is expected to improve gradually for the
company

Risks & Concerns


Source: Bloomberg
 Lower than expected growth in two wheeler demand
 High dependence on few clients
Share Holding Pattern (%)
 Further significant fall in LED prices

Others
Company Background 12.0%
 FIEM is one of the leading manufacturers of automotive lighting and
DII
signaling equipment for the two wheeler segment in India. Apart from 9.0%
automotive lighting, FIEM’s product portfolio comprises of rear view
mirrors, sheet metal parts and plastic components for two /four wheeler
segment. Recently, FIEM ventured into the LED lighting business.
FII
Sector Background 15.0% Promoter
 Auto ancillary sector will be the key beneficiary of expected revival in the 64.0%
domestic automobile demand.

Source: Bloomberg

Revenues (Rs mn)


Financials (Rs m n) FY17 FY18E FY19E 16,000
Sales 10,174 12,539 14,573
Growth (%) 3.1 23.2 16.2
12,000
EBITDA 1,174 1,468 1,799
EBITDA margin (%) 11.5 11.7 12.3
8,000
PBT 455 938 1,310
Net profit 471 657 917
4,000
Adjusted EPS (Rs) 35.8 49.9 69.7
Growth (%) (25.2) 39.5 39.6
0
CEPS (Rs) 54.8 81.9 103.4 FY12 FY13 FY14 FY15 FY16 FY17E FY18E FY19E
BV (Rs/share) 321.7 361.9 421.9
Dividend / share (Rs) 8.0 8.0 8.0 Source: Company, Kotak Securities - Private Client Research
ROE (%) 13.5 14.6 17.8
ROCE (%) 14.7 16.6 21.1 EBITDA margin (%)
Net cash (debt) (2,021) (436) 68
13.0
NW Capital (Days) 18.8 16.5 13.5

12.5
Valuation Param eters FY17 FY18E FY19E
P/E (x) 25.0 18.0 12.9
12.0
P/BV (x) 2.8 2.5 2.1
EV/Sales (x) 1.3 1.0 0.8
11.5
EV/EBITDA (x) 11.1 8.4 6.5

11.0
Price Perform ance (%) 1M 3M 6M
FY12 FY13 FY14 FY15 FY16 FY17E FY18E FY19E
(5.5) (1.6) (10.3)
Source: Bloomberg, Company, Kotak Securities - Private Client Research Source: Company, Kotak Securities - Private Client Research

Kotak Securities – Private Client Research Please see the Disclosure/Disclaimer on the last page For Private Circulation 9
Diwali Picks October 2017

Genus Power Infrastructures Ltd - Buy Analyst: sanjeev.zarbade@kotak.com


Last report at Rs.53 on 29 August 2017

Current Market Price (Rs) Target Price (Rs) Potential Upside (%) 52 Week H/L (Rs) Mkt Cap (Rs m n)
60 75 25.8% 65 / 33 15331

Investment Argument 1 Year Perform ance


 The market for electric meters declined from Rs 28-32 bn in FY16 to Rs18-
20 bn in FY17 due to uncertainty related to mode of procurement of Genus Power Infrastructures Ltd (GPIL) Nifty
470
meters. This situation is improving and we understand from the company
that the volume of tendering has increased by 20%. 400
 India has 200 million legacy meters and there are plans to install up to 130
330
million smart meters by 2021. Immediate opportunity for smart meters can
come from the new power distribution franchisee licenses being allotted in 260
various cities (Bharatpur, Kota). GPIL plans to ramp-up its exports of meters
190
from the current level of ~ Rs 120 mn in FY17 to Rs 1250 mn by end of
FY19. 120
 As of FY17, the company’s net debt to equity stands reduced to 0.15x as
50
compared to 0.64x at the end of FY15. The company scores over its peers
like KEC, Kalpataru Transmission and HPL Electric on this count.
Risks & Concerns
 Execution risk in project business. Source: Bloomberg
 Increasing working capital requirement
 Loans and Advances to related parties. Share Holding Pattern (%)
Company Background
 Genus is the flagship company of the USD 400 million Kailash group. The
company primarily manufactures and distributes Electronic Energy Meters
(EEMs) and hybrid microcircuits as well as executes power distribution Others
42% Promoter
management projects in India and across the world.
50%
 Mr Ishwar Chand Agarwal, aged 66 years, is the founder of Kailash Group
and the executive chairperson of the Company.
Sector Background
The market for meters in India was estimated to be Rs 32 bn in fiscal 2016 but
declined appreciably in FY17 due to uncertainty in the mode of procurement of
meters by the utilities. The market is dominated by organised players MFs FII
contributing to over 80% of the total market. There has been a continued and 7% 1%
visible shift from demand for traditional meters to demand for metering
solutions, which helps in energy management as compared to mere Source: Capitaline
monitoring and billing functionalities.
Meter sales (m n)
Financials (Rs m n) FY17 FY18E FY19E 7
Net sales 6,424 8,380 9,680
6
Growth (%) (25.1) 30.5 15.5
5
EBITDA 866 1,136 1,375
EBITDA margin (%) 13.5 13.6 14.2 4

PBT 704 996 1,235 3


Net profit 579 760 914 2
EPS (Rs) 2.3 3.0 3.6
1
Growth (%) (23.8) 31.2 20.3
0
CEPS (Rs) 2.9 3.6 4.3
FY12 FY13 FY14 FY15 FY16 FY17
BV (Rs/share) 26.5 28.9 31.8
DPS(Rs) 0.4 0.5 0.5 Source: Company
ROE (%) 8.5 10.3 11.4
ROCE (%) 11.9 15.2 17.5 Meters m arket (Rs bn)
Net cash (debt) (2,040) (2,064) (1,999)
35
NWC (Days) 197.1 177.4 177.3
30

25
Valuation Param eters FY17 FY18E FY19E
P/E (x) 26.4 20.2 16.8 20

P/BV (x) 2.2 2.1 1.9 15


EV/Sales (x) 2.5 1.9 1.6
10
EV/EBITDA (x) 18.3 14.0 11.5
5

Price Perform ance (%) 1M 3M 6M 0


FY15 FY16 FY17
20.2 18.3 41.7
Source: Bloomberg, Company, Kotak Securities - Private Client Research Source: Company

Kotak Securities – Private Client Research Please see the Disclosure/Disclaimer on the last page For Private Circulation 10
Diwali Picks October 2017

Maruti Suzuki India Ltd - Buy Analyst: arun.agarwal@kotak.com


Last report at Rs.8068 on 25 September 2017

Current Market Price (Rs) Target Price (Rs) Potential Upside (%) 52 Week H/L (Rs) Mkt Cap (Rs mn)
7830 9061 15.7% 8200 / 4765 2365287

Investment Argument 1 Year Performance


 We expect MSIL's volumes to grow at a strong pace aided by expected,
recovery in rural areas, continued robust demand for recently launched 550 Maruti Suzuki India Ltd Nifty
products (Baleno, Brezza, Ignis), expansion of Nexa network and demand
in favor of petrol run vehicle. Furthermore facelifts, upgrades and variants 450
of existing models will also drive sales for the company.
350
 MSIL’s market share in the domestic passenger car market stands increased
from 47.4% in FY17 to 50.4% in FY18 (April-September). 250
 With strong presence in rural areas and dominance in the entry level car
segment, MSIL will be the key beneficiary of rural demand recovery. 150
 In recent years, the company made substantial strides in the premium car
50
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 stay healthy. Source: Bloomberg
Risks & Concerns
 Lower than anticipated growth will jeopardize our revenue and profit Share Holding Pattern (%)
estimates.
 MSIL benefits from yen depreciation. Any unfavorable movement of yen
Others
can have significant impact on the company's profitability. 6.7%
DII
Company Background 15.0%
 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
Promoter
successful player in the Indian car market. 56.2%
FII
Sector Background 22.1%
 India’s passenger vehicle industry sold ~3.8mn vehicles in FY17. While
80% of sales happened in the domestic market, balance 20% were
exported. Top five players account for ~82% of domestic industry sales
Source: Bloomberg
volumes.

Sales Volumes (Units)


Financials (Rs Mn) FY17 FY18E FY19E 1,800,000
Sales 680,348 814,502 950,911 1,600,000
Growth (%) 17.8 19.7 16.7 1,400,000
EBITDA 103,530 117,332 148,704 1,200,000
EBITDA margin (%) 15.2 14.4 15.6 1,000,000
PBT 99,413 117,404 151,019 800,000

Net profit 73,377 85,705 109,489 600,000

EPS (Rs) 242.9 283.7 362.4 400,000


200,000
Growth (%) 60.5 16.8 27.8
0
CEPS (Rs) 329.0 371.4 455.8
FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17
BV (Rs/share) 1,197.4 1,421.2 1,718.0
Dividend / share (Rs) 75.0 75.0 75.0 Source: Company
ROE (%) 23.2 23.3 26.3
ROCE (%) 30.9 31.4 35.9 Market Share (%)
Net cash (debt) 224,432 285,123 375,583 50
NW Capital (Days) (21.3) (22.2) (21.8) 47.4
46.5 46.8
45.9
Valuation Param eters FY17 FY18E FY19E 45 45.3 45.0
44.7
P/E (x) 32.2 27.6 21.6
P/BV (x) 6.5 5.5 4.6 42.1

EV/Sales (x) 36.1 30.2 25.7 40 40.1

EV/EBITDA (x) 237.4 209.4 164.6 38.4

35
Price Perform ance (%) 1M 3M 6M
FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17
(3.8) 5.0 25.3
Source: Bloomberg, Company, Kotak Securities - Private Client Research Source: Company

Kotak Securities – Private Client Research Please see the Disclosure/Disclaimer on the last page For Private Circulation 11
Diwali Picks October 2017

MRPL - Buy Analyst: sumit.pokharna@kotak.com


Last report at Rs.122 on 29 September 2017

Current Market Price (Rs) Target Price (Rs) Potential Upside (%) 52 Week H/L (Rs) Mkt Cap (Rs m n)
127 155 22.2% 144 / 78 222230

Investment Argument 1 Year Performance


 New expansion plans in place: MRPL has set-up the next milestone and is
planning to enhance its refining capacity to 25 mmtpa as against current 350 MRPL Nifty
capacity of 15 mmtpa.
290

Additionally, the company is planning to scale up its petrochemical 230


capacity with an investment of Rs.110 bn, resulting in higher revenue and
margins. 170

We like the sharpened focus of the company on the growth strategy. The 110
expansion is seen as a major margin driver as it will help the company to
50
process cheaper, heavier crudes into high-value products like diesel,
liquefied petroleum gas and propylene.

 The possibility of MRPL being merged with HPCL cannot be rulled out. We
believe this will be signifacntly positive for MRPL. Source: Bloomberg

 We expect financial performance to improve further on account of strong


margins in the short term, improvement in operational performance in the Share Holding Pattern (%)
medium term and ongoing improvement in financial metrics.
DII Others
 Going ahead, we expect MRPL’s profitability to improve on account of i). 3.3% 6.4%
FII
Improved product mix, ii). Better refining margins iii). Economies of scale, 1.7%
iv). Forward integration - Polypropylene plant and v). Various tax benefits.

Risks & Concerns


 Wide fluctuations in crude, forex and product prices can impact margins.
 If global supply exceeds demand then margins can be under pressure.

Background
MRPL (Mini-Ratna status) is a pure play crude oil refiner with strong promoter Promoter
backing of ONGC. MRPL has transformed itself into a large and complex 88.6%
refinery with phase-III capacity expansion and has emerged into a much
stronger player in the industry. MRPL's improved flexibility will enable it to Source: Bloomberg
process light to heavy and sweet to sour crude of various API.
Sales volume (mmtpa)
Financials (Rs mn) FY17 FY18E FY19E
Sales 437,548 461,680 491,981 18
16
Growth (%) 10.1 5.5 6.6
14
EBITDA 49,877 43,606 58,606
12
EBITDA margin (%) 11.4 9.4 11.9 10
PBT 50,538 26,618 41,459 8
Net profit 16,959 18,101 28,010 6
EPS (Rs) 9.7 10.3 16.0 4

Growth (%) 139.0 6.7 54.7 2


0
CEPS (Rs) 24.4 15.5 21.3
FY14 FY15 FY16 FY17 FY18E
Book value (Rs/share) 54.2 57.5 66.5
Dividend per share (Rs) 6.0 6.0 6.0 Source: Company, Kotak Securities - Private Client Research
ROE (%) 20.4 17.4 24.4
ROCE (%) 19.7 12.3 17.3 Reported GRMs (US$/bbl)
Net cash (debt) (111,158) (94,201) (79,776)
9
Net working Capital (days) 8.2 7.8 9.2 8
7
6
Valuation parameters FY17 FY18E FY19E 5
P/E (x) 13.1 12.3 7.9 4
P/BV (x) 2.3 2.2 1.9 3
2
EV/Sales (x) 0.8 0.7 0.6
1
EV/EBITDA (x) 6.7 7.3 5.2 0
-1
-2
Price Performance (%) 1M 3M 6M
FY14 FY15 FY16 FY17 FY18E
(6.9) 3.3 12.1
Source: Bloomberg, Company, Kotak Securities - Private Client Research Source: Company

Kotak Securities – Private Client Research Please see the Disclosure/Disclaimer on the last page For Private Circulation 12
Diwali Picks October 2017

Shree Cement Ltd - Buy Analyst: teena.virmani@kotak.com


Last report at Rs.19944 on 17 May 2017

Current Market Price (Rs) Target Price (Rs) Potential Upside (%) 52 Week H/L (Rs) Mkt Cap (Rs m n)
18500 22716 22.8% 20560 / 12477 644540

Investment Argument 1 Year Performance


 Shree Cement has a current capacity of 27.2MT and company is
575 Shree Cement Ltd Nifty
expanding its capacity by nearly 11.6 MT over FY17-19 to 39MT.
 Cement prices and demand are likely to start recovering in northern and
475
central region post festive season in its key markets. This is likely to aid
revenue growth going forward. 375
 Costs are likely to move up going forward but company expects to
improve EBITDA per tonne owing to expected price hikes. 275
 We expect company to benefit from volume expansion as well as pricing
improvement going forward and hence we remain positive on the 175
company.
75

Risks & Concerns


 Decline in cement prices may put downward risk to our estimates
 Decline in merchant power rates may also impact revenues from the
power division. Source: Bloomberg

Company Background Share Holding Pattern (%)


 Shree Cements is one of the most efficient cement producers in India and
is best placed to capitalize on the growing cement demand in northern
India. DII Others
4.6% 5.9%
 Shree Cement's capacity is expected to be enhanced to 39 MT by FY19
post the undergoing expansion.

Sector Background
FII
 Owing to demonetization, demand is likely to remain weak from housing 24.7%
while rural demand has revived with normalization of cash circulation in
the system. Continued focus of government on low cost housing,
infrastructure development and lower interest rates should augur well for Promoter
demand in long term. 64.8%
 Cement prices have also recovered across regions in line with demand
improvement. Costs are likely to move up but with improved demand, it is
likely to be passed on. Source: Bloomberg

Volume growth of Shree Cements (MT)


Financials (Rs m n) FY17 FY18E FY19E 24
Sales 84,292 102,000 121,600 20
Growth (%) 51.4 21.0 19.2
16
EBITDA 23,672 29,900 36,900
12
EBITDA margin (%) 28.1 29.3 30.3
PBT 15,308 20,992 26,287 8

Netprofit 13,391 17,213 21,555 4


EPS (Rs) 384.4 494.1 618.7 0
Growth (%) 194.4 28.5 25.2
CEPS (Rs) 733.0 858.8 1,032.4
BV (Rs/share) 1,917.4 2,387.5 2,982.2
Dividend /share(Rs) 24.0 24.0 24.0 Source: Company, Kotak Securities - Private Client Research
ROE (%) 22.1 23.0 23.0
ROCE (%) 22.9 25.5 26.0 Cement EBITDA per tonne trend(Rs/tonne)
Netcash(debt) 29,605 43,262 60,814 1600
NW Capital(Days) 47.0 47.0 47.0

1200
Valuation param eters FY17 FY18E FY19E
P/E (x) 48.1 37.4 29.9 800
P/BV (x) 9.6 7.7 6.2
EV/Sales (x) 7.3 5.9 4.8 400
EV/EBITDA (x) 26.0 20.1 15.8

0
Price Perform ance (%) 1M 3M 6M FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17
(15M)
(1.6) 0.5 4.7
Source: Bloomberg, Company, Kotak Securities - Private Client Research Source: Company

Kotak Securities – Private Client Research Please see the Disclosure/Disclaimer on the last page For Private Circulation 13
Diwali Picks October 2017

TV18 Broadcast Ltd - Buy Analyst: ritwik.rai@kotak.com


Last report at Rs.39 on 20 July 2017

Current Market Price (Rs) Target Price (Rs) Potential Upside (%) 52 Week H/L (Rs) Mkt Cap (Rs m n)
40 47 16.5% 50 / 33 68999

Investment Argument 1 Year Performance


 TV18 owns one of the most attractive bouquets in the Indian TV
Broadcasting industry (news operations, 50% ownership in entertainment/ 270 TV18 Broadcast Ltd Nifty
250
infotainment operations via JVs), and valuation (mkt. cap ~Rs 70Bn) versus 230
peers (Zee Entertainment ~Rs 520 Bn, Sun TV ~Rs 300 Bn) indicates 210
significant scope for appreciation. 190
 Strong performance in entertainment channels’ ratings points to strong 170
150
earnings ahead: Colors, the flagship channel of Viacom18, has emerged as 130
the #1 Hindi GEC in several weeks of 2016/17; regional channels too 110
bringing in strong performance. IPO pipeline being strong is a positive signal 90
for business news performance. Additionally, near-term earnings of news 70
channels shall benefit from election advertising. We expect strong earnings
growth ahead, with EBITDA rising 7X through FY17-FY19E.
 Valuations are attractive, at 19X FY19E PER (>30% discount to Zee
Entertainment). Our price target implies PER of 21.5X FY18E. Source: Bloomberg

Risks & Concerns Share Holding Pattern (%)


 Ratings performance of key channels is the key risk.
Others
Company Background 23.5%
 TV18 Broadcast is amongst the largest TV broadcasting companies in India,
with presence in news as well as entertainment.
 The company has a 50:50 JV with Viacom ("Viacom18) which operates,
among others, Hindi GEC Colors. TV18 has bought a 50% stake in ETV DII
7.3%
entertainment channels (other than Telugu) and 100% stake in ETV News
Promoter
channels.
60.3%
FII
Sector Background 8.9%
 Indian TV Broadcasting is a Rs 540 Bn industry, with Rs 175 Bn in advertising
revenues. The sector is positively exposed to digital addressability, which
should bring benefits to broadcasters/ platform providers.
Source: Bloomberg

Top 10 Hindi GEC (Urban) Week 5, 2017(Imp., mn)


Financials (Rs mn) FY17 FY18E FY19E 400
Sales 9,794 10,923 12,601
Growth (%) 5.9 11.5 15.4 300

EBITDA 313 1,307 2,221


200
EBITDA margin (%) 3.2 12.0 17.6
PBT 315 2,267 3,877 100
Net profit 191 2,265 3,721
EPS (Rs) 0.1 1.3 2.2 -

Growth (%) (90) 1,088 64


CEPS (Rs) 0.4 1.7 2.5
Book value (Rs/share) 19 21 23
Dividend per share (Rs) - - - Source: BARC, Note: Imp. Stands for impressions in the headline above
ROE (%) 0.5 6.6 9.9
ROCE (%) 0.6 6.6 10.0 CNBC TV-18 Budget Week Viewership
Net cash (debt) (2,612) (1,024) 2,178
1400
Net Working Capital (Days) 60 133 140
1200
CY2016 CY2017
1000
Valuation Parameters FY17 FY18E FY19E
800
P/E (x) 362.2 30.5 18.6
600
P/BV (x) 2.1 1.9 1.8
400
EV/Sales (x) NM NM NM
200
EV/EBITDA (x) NM NM NM
0
CNBC TV18 ET Now NDTV Profit Bloomberg TV
Price Performance (%) 1M 3M 6M
(3.0) 8.0 (9.1)
Source: Bloomberg, Company, Kotak Securities - Private Client Research Source: Kotak Securities - Private Client Researh

Kotak Securities – Private Client Research Please see the Disclosure/Disclaimer on the last page For Private Circulation 14
Diwali Picks October 2017

VIP Industries Ltd - Buy Analyst: agarwal.amit@kotak.com


Last report at Rs.248 on 21 September 2017

Current Market Price (Rs) Target Price (Rs) Potential Upside (%) 52 Week H/L (Rs) Mkt Cap (Rs m n)
264 325 23.3% 276 / 112 37251

Investment Argument 1 Year Perform ance


 We estimate the penetration of luggage to increase within the country with
490
growing income levels and growing leisure and business travel. VIP Industries Ltd Nifty
420
 Diversified product portfolio enables VIP to cater to consumer of every age
and every income group 350

 VIP has been constantly working on improving its brand visibility and product 280
reach for the entire range of products across various VIP brands and across 210
price points. 140
 We estimate volumes for VIP to grow at 12% CAGR over FY17 to FY20E.
70
 We expect the sourcing of soft luggage from China to fall to 50% with share
0
of Bangladesh increasing to 40%, which would aid margins going forward.

Risks & Concerns


 Continued competition from unorganized sector. Source: Bloomberg
 Depreciation of rupee
 Increase in prices of raw material like polypropylene and polycarbonate Share Holding Pattern (%)

Others
Company Background
26.0%
 VIP Industries is a leading luggage maker in India offering a wide range of
products in hard luggage and soft luggage
 The company has manufacturing facilities located at Haridwar in Uttarakhand,
Jalgaon, Nagpur and Nashik in Maharashtra
Promoter
 The company has set up a subsidiary in Bangladesh to manufacture and 52.0%
market luggage and bags DII
17.0%
Sector Background
 The Indian luggage industry is currently valued at Rs 80 bn and is partially FII
5.0%
dominated by the unorganized sector
Source: Bloomberg

Financials (Rs mn) FY17 FY18E FY19E EBIDTA Margin profile of VIP (%)
Sales 12,752 15,581 17,734
14.0
Growth (%) 4.8 22.2 13.8
12.0
EBITDA 1,319 1,957 2,264
EBITDA margin (%) 10.3 12.6 12.8 10.0
PBT 1,244 1,874 2,177 8.0
Net profit 849 1,302 1,512
6.0
EPS (Rs) 6.0 9.2 10.7
4.0
Growth (%) 25.2 53.3 16.2
2.0
CEPS 6.9 10.2 11.7
Book Value (Rs / Share) 28.6 34.2 40.6 0.0
FY15 FY16 FY17 FY18E FY19E FY20E
Dividend per Share (Rs) 2.2 3.0 3.5
ROE (%) 21.0 26.9 26.3 Source: Company, Kotak Securities - Private Client Research
ROCE (%) 29.3 37.5 36.8
Net cash (debt) 60 128 582 Ad spends by VIP (Rs m n)
Net working capital (Days) 77.2 71.2 74.4 1,200

1,000
Valuat io n Paramet ers FY17 FY18E FY19E
P/E (x) 43.9 28.7 24.7 800
P/BV (x) 9.2 7.7 6.5
600
EV/Sales (x) 2.9 2.4 2.1
EV/EBITDA (x) 28.2 19.0 16.2 400

200
Price Perfo rmance (%) 1M 3M 6M
15.5 41.7 33.0 0
FY15 FY16 FY17 FY18E FY19E FY20E

Source: Bloomberg, Company, Equinomics Research & Advisory Private Ltd Source: Company, Kotak Securities - Private Client Research

Kotak Securities – Private Client Research Please see the Disclosure/Disclaimer on the last page For Private Circulation 15
Diwali Picks October 2017

RATING SCALE
Definitions of ratings
BUY – We expect the stock to deliver more than 12% returns over the next 9 months
ACCUMULATE – We expect the stock to deliver 5% - 12% returns over the next 9 months
REDUCE – We expect the stock to deliver 0% - 5% returns over the next 9 months
SELL – We expect the stock to deliver negative returns over the next 9 months
NR – Not Rated. Kotak Securities is not assigning any rating or price target to the stock. The report has been prepared for
information 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 9-month perspective. Returns stated in the rating scale are our internal benchmark.

FUNDAMENTAL RESEARCH TEAM


Sanjeev Zarbade Ruchir Khare Amit Agarwal Nipun Gupta
Capital Goods, Engineering Capital Goods, Engineering Logistics, Paints, Transportation Information Technology
sanjeev.zarbade@kotak.com ruchir.khare@kotak.com agarwal.amit@kotak.com nipun.gupta@kotak.com
+91 22 6218 6424 +91 22 6218 6431 +91 22 6218 6439 +91 22 6218 6433

Teena Virmani Ritwik Rai Jatin Damania Ashini Shah


Construction, Cement FMCG, Media Metals & Mining Midcap
teena.virmani@kotak.com ritwik.rai@kotak.com jatin.damania@kotak.com ashini.shah@kotak.com
+91 22 6218 6432 +91 22 6218 6426 +91 22 6218 6440 +91 22 6218 5438

Arun Agarwal Sumit Pokharna Pankaj Kumar K. Kathirvelu


Auto & Auto Ancillary Oil and Gas Midcap Production
arun.agarwal@kotak.com sumit.pokharna@kotak.com pankajr.kumar@kotak.com k.kathirvelu@kotak.com
+91 22 6218 6443 +91 22 6218 6438 +91 22 6218 6434 +91 22 6218 6427

TECHNICAL RESEARCH TEAM


Shrikant Chouhan Amol Athawale
shrikant.chouhan@kotak.com amol.athawale@kotak.com
91 22 6218 5408 +91 20 6620 3350

DERIVATIVES RESEARCH TEAM


Sahaj Agrawal Malay Gandhi Prashanth Lalu Prasenjit Biswas
sahaj.agrawal@kotak.com malay.gandhi@kotak.com prashanth.lalu@kotak.com prasenjit.biswas@kotak.com
+91 79 6607 2231 +91 22 6218 6420 +91 22 6218 5497 +91 33 6625 9810

Kotak Securities – Private Client Research Please see the Disclosure/Disclaimer on the last page For Private Circulation 16
Diwali Picks
Disclosure/Disclaimer October 2017
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as an advertisement or advice, professional or otherwise. The investor is requested to take into consideration all the risk factors including their financial condition, suitability to
risk return profile and the like and take professional advice before investing. Investments in securities market are subject to market risks, read all the related documents carefully
before investing. Derivatives are a sophisticated investment device. The investor is requested to take into consideration all the risk factors before actually trading in derivative
contracts. Compliance Officer Details: Mr. Manoj Agarwal. Call: 022 - 4285 8484, or Email: ks.compliance@kotak.com.
 Level 1: For Trading related queries, contact our customer service at 'service.securities@kotak.com' and for demat account related queries contact us at ks.demat@kotak.com
or call us on: Online Customers - 30305757 (by using your city STD code as a prefix) or Toll free numbers 18002099191 / 1800222299, Offline Customers - 18002099292
 Level 2: If you do not receive a satisfactory response at Level 1 within 3 working days, you may write to us at ks.escalation@kotak.com or call us on 022-42858445 and if you
feel you are still unheard, write to our customer service HOD at ks.servicehead@kotak.com or call us on 022-42858208.
 Level 3: If you still have not received a satisfactory response at Level 2 within 3 working days, you may contact our Compliance Officer (Mr. Manoj Agarwal ) at
ks.compliance@kotak.com or call on 91- (022) 4285 8484.
 Level 4: If you have not received a satisfactory response at Level 3 within 7 working days, you may also approach CEO (Mr. Kamlesh Rao) at ceo.ks@kotak.com or call on 91-
(022) 4285 8301.

Kotak Securities – Private Client Research Please see the Disclosure/Disclaimer on the last page For Private Circulation 17