India Strategy | Get on track please !

January 2017

India Strategy

Happy

2017

Growth

Guru

Budget

New Year,

New Cards

Research Team (Gautam.Duggad@MotilalOswal.com)

Contents

India Strategy -

New Year, New Cards...........................................................................................................................

3-41

3QFY17 Highlights & Ready Reckoner ....................................................................................................................... 42-54

Sectors & Companies ...............................................................................................................................................55-290

Automobiles ......................................... 56-72

Amara Raja Batt .......................................... 60

Ashok Leyland ............................................. 61

Bajaj Auto ................................................. 62

Bharat Forge ............................................... 63

Bosch .......................................................... 64

Eicher Motors.............................................. 65

Escorts ........................................................ 66

Exide Inds.................................................... 67

Hero Motocorp............................................ 68

Mahindra & Mahindra ............................... 69

Maruti Suzuki .............................................. 70

Tata Motors .............................................. 71

TVS Motor ................................................... 72

Capital Goods......................................... 73-87

ABB .......................................................... 76

Bharat Electronics........................................ 77

BHEL ......................................................... 78

CG Consumer Elect. ..................................... 79

Crompton Greaves .................................... 80

Cummins India .......................................... 81

GE T&D India ............................................... 82

Havells India................................................ 83

Larsen & Toubro ....................................... 84

Siemens ...................................................... 85

Thermax ................................................... 86

Voltas.......................................................... 87

Cement .................................................. 88-98

ACC .......................................................... 92

Ambuja Cements ......................................... 93

Grasim Industries ...................................... 94

India Cements ............................................. 95

Ramco Cements .......................................... 96

Shree Cement.............................................. 97

Ultratech Cement ........................................ 98

Consumer ............................................ 99-120

Asian Paints............................................... 102

Britannia ................................................... 103

Colgate...................................................... 104

Dabur ........................................................ 105

Emami....................................................... 106

Godrej Consumer ...................................... 107

GSK Consumer........................................... 108

Hind. Unilever ........................................... 109

ITC ............................................................ 110

Jyothy Labs................................................ 111

Marico ...................................................... 112

Nestle ....................................................... 113

P&G Hygiene ............................................. 114

Page Industries.......................................... 115

Parag Milk Foods ....................................... 116

Pidilite Inds................................................ 117

Radico Khaitan .......................................... 118

United Breweries....................................... 119

United Spirits............................................. 120

Financials ............................................121-145

Axis Bank................................................... 127

Bank of Baroda .......................................... 128

Bank of India ............................................. 129

Canara Bank ............................................ 130

DCB Bank .................................................. 131

Equitas Holdings........................................ 132

Federal Bank ............................................. 133

HDFC Bank .............................................. 134

ICICI Bank ................................................ 135

IDFC Bank ................................................. 136

Indian Bank ............................................... 137

IndusInd Bank ........................................... 138

Kotak Mahindra Bank................................. 139

Oriental Bank of Commerce ...................... 140

Punjab National Bank ................................ 141

RBL Bank ................................................... 142

State Bank ................................................ 143

Union Bank ............................................... 144

Yes Bank .................................................... 145

Financials – NBFC ............................... 146-158

Bajaj Finance ............................................ 148

Bharat Financial ........................................ 149

Dewan Housing ......................................... 150

GRUH Finance............................................ 151

HDFC ...................................................... 152

Indiabulls Housing...................................... 153

LIC Housing Fin ......................................... 154

M & M Financial ........................................ 155

Muthoot Finance ...................................... 156

Repco Home Fin ........................................ 157

Shriram Transport Fin. ............................... 158

Healthcare ......................................... 159-176

Alembic Pharma ........................................ 161

Alkem Lab.................................................. 162

Aurobindo Pharma..................................... 163

Biocon ...................................................... 164

Cadila Healthcare ...................................... 165

Cipla ......................................................... 166

Divis Labs .................................................. 167

Dr Reddy’ s Labs ........................................ 168

Glenmark Pharma ...................................... 169

Granules India ........................................... 170

GSK Pharma............................................... 171

IPCA Labs................................................... 172

Lupin ......................................................... 173

Sanofi India................................................ 174

Sun Pharma ............................................... 175

Torrent Pharma ......................................... 176

Logistics ............................................. 177-181

Allcargo Logistics ....................................... 179

Concor....................................................... 180

Gateway Distriparks................................... 181

Media ................................................ 182-194

D B Corp .................................................... 186

Dish TV ...................................................... 187

Hathway Cable........................................... 188

HT Media................................................... 189

Jagran Prakashan ....................................... 190

PVR ........................................................... 191

Siti Networks ............................................. 192

Sun TV ....................................................... 193

Zee Entertainment..................................... 194

Metals................................................ 195-208

Hindalco ................................................... 201

Hindustan Zinc........................................... 202

JSW Steel................................................... 203

Nalco......................................................... 204

NMDC ....................................................... 205

SAIL ........................................................... 206

Tata Steel ................................................. 207

Vedanta..................................................... 208

Oil & Gas ............................................ 209-224

BPCL .........................................................214

GAIL ..........................................................215

Gujarat State Petronet ..............................216

HPCL .........................................................217

IOC ...........................................................218

Indraprastha Gas .......................................219

MRPL ........................................................220

Oil India ....................................................221

ONGC ........................................................222

Petronet LNG ............................................223

Reliance Inds. ............................................224

Retail.................................................. 225-230

Jubilant Foodworks ...................................228

Shopper's Stop ..........................................229

Titan Company ..........................................230

Technology ......................................... 231-251

Cyient .......................................................238

HCL Technologies ......................................239

Hexaware Tech. ........................................240

Infosys ......................................................241

KPIT Tech. .................................................242

L&T Infotech .............................................243

Mindtree ..................................................244

MphasiS ....................................................245

NIIT Tech. ..................................................246

Persistent Systems ....................................247

TCS ...........................................................248

Tech Mahindra ..........................................249

Wipro ......................................................250

Zensar Tech .............................................. 251

Telecom ............................................. 252-260

Bharti Airtel ...............................................258

Bharti Infratel ............................................259

Idea Cellular...............................................260

Utilities............................................... 261-270

CESC ..........................................................266

Coal India...................................................267

JSW Energy ................................................268

NTPC .........................................................269

Power Grid Corp. .......................................270

Others ................................................ 271-290

Arvind........................................................271

Bata India ..................................................272

Castrol India...............................................273

Coromandel International ..........................274

Dynamatic Tech. ........................................275

Indo Count Inds..........................................276

Info Edge ...................................................277

Inox Leisure ...............................................278

Interglobe Aviation ....................................279

Jain Irrigation.............................................280

Just Dial .....................................................281

Kaveri Seed................................................282

MCX ..........................................................283

Manpasand Beverages ...............................284

Monsanto India..........................................285

P I Industries..............................................286

SRF ............................................................287

S H Kelkar ..................................................288

Tata Elxsi ...................................................289

TTK Prestige ...............................................290

Note: All stock prices and indices for companies as on 4 January 2017, unless otherwise stated

Investors are advised to refer through important disclosures made at the last page of the Research Report.

India Strategy | New Year, New Cards

India Strategy

BSE Sensex: 26,633

S&P CNX: 8,191

New Year, New Cards

Earnings growth returns, but quality of growth weak

Earnings growth optically high; driven by low base of Cyclicals







The earnings performance for 3QFY17 would be significantly impacted by

demonetization. Given the unprecedented nature of the event, prediction of

earnings for 3QFY17 is challenging. That said, we expect 3QFY17 earnings

performance to benefit from the low base of several cyclical sectors like PSU

Banks and Metals. MOSL Universe PAT is likely to grow 30% YoY, the highest

since 1QFY15; also, 3QFY17 would be the second consecutive quarter of double-

digit PAT growth. Excluding PSU Banks and Metals, MOSL Universe PAT growth

is estimated at 8.1%. The entire YoY earnings growth of INR240b for MOSL

Universe in 3QFY17 would be led by PSU Banks, Metals and Oil & Gas.

We expect the contribution of Cyclicals to increase further. Cyclicals would

account for the entire growth in 2HFY17 MOSL Universe earnings; Defensives

would post a 4% YoY decline.

We have cut our Sensex EPS estimates by 1% to INR1,360 for FY17 and by 2% to

INR1,668 for FY18. We now expect 3% EPS growth for Sensex in FY17, followed

by 23% growth in FY18 on a low base of 2HFY17, particularly in demonetization-

hit sectors like Consumer, Autos, Cement and Private Banks.

Key sectoral trends/highlights













Oil & Gas would report another strong quarter, led by OMCs. This quarter, it

accounts for ~27% of MOSL Universe earnings (v/s ~24% in 3QFY16).

Metals and PSU Banks would benefit from favorable base; both sectors reported

losses in 3QFY16. PSU Banks profits are over 40% below their peak profits.

Technology is expected to report another quarter of muted performance, with

0.3% YoY PAT growth. This sector continues to see weaker PAT growth.

3QFY17 would be the first ever quarter of PAT decline for our Consumer

universe. Demonetization-led revenue moderation and consequent operating

deleverage is likely to impact earnings.

Telecom, Media, Retail and Utilities would have a lackluster quarter, with YoY

earnings decline.

In BFSI, Private Banks are expected to post 12% YoY PAT decline, led by Axis

Bank and ICICI Bank. NBFCs are likely to have a healthy quarter, with 16%

earnings growth despite demonetization (RBI dispensation should prevent any

disproportionate impact on P&L).

Three key trends to watch out for

1. Demonetization impacting revenues for key B2C sectors like Autos (-1.6% YoY),

Consumer (flat), NBFCs, and Cement (-1%).

2. Global commodity prices recovering, in turn driving recovery for Cyclicals like Oil

& Gas ex OMCs (revenue growth of 15.3% YoY; one of the highest in five years)

and Metals (+22.3% YoY; highest in four years).

Sources of exhibits in this report include RBI, CMIE, Bloomberg, IMF, Industry, Companies, and MOSL database

January 2017

3

India Strategy | New Year, New Cards

3. No respite for Healthcare (11.7% YoY revenue growth in 3QFY17 v/s 18.4%

CAGR in 10 years) and Technology (8.6% YoY revenue growth in 3QFY17; one of

the weakest in 10 years).

Model portfolio changes

The 2 important events that are driving changes in our Model portfolio are Impact of

Demonetisation (both on earnings and valuations) and recovery in global cyclicals.

Our stance reflects our belief that earnings growth for Defensives will decelerate in

2HFY17. We have reduced our weights for Autos, Consumer, Technology and NBFCs.

We partake in the anticipated cyclical earnings recovery by upgrading our stance on

Private Banks, Capital Goods and Metals. Summary of the changes in our model

portfolio:



We have increased weightage in Private Banks and added Axis Bank to the

model portfolio. Valuations for Axis at P/B of 1.7x FY18 does factor the near

term asset quality concerns; our earnings growth estimate for FY18 is fairly

strong at 78%. Ratnakar Bank is a new addition; we initiated coverage recently

with a Buy. In PSU Banks, we replace Union Bank with PNB as the subsidiary

valuations and CASA growth makes PNB very attractive. We are further

magnifying our Underweight stance on NBFC. In Housing finance, we replace LIC

Housing with Repco as the latter has seen significant correction in valuations

with a strong positioning to benefit from affordable housing boom.



We have reduced our Overweight in Autos, and removed TVS from the model

portfolio. We have increased weightage in Tata Motors and also added Bharat

Forge in the model portfolio.



Consumer will continue to see challenges on volumes and margins, and hence

sees a lower weight. Britannia and Jubilant are the two stocks, where valuations

have become reasonable now.



Within Energy, we remain positive on OMCs. However, we replace HPCL with

IOC, as the former has an aggressive capex plans, which will lead to higher debt

to equity ratio. IOC is exiting its capex plans, which will driver higher cash flows

and can lead to strong dividend payouts.



In Capital Goods, we have increased weights in L&T.



We have also upgraded our stance on Metals from Underweight to Neutral, and

further magnified our Overweight position on Hindalco. We have also

introduced NMDC in our model portfolio.



We continue with our Underweight stance on Technology and replace HCL Tech

with Tech Mahindra.



In midcaps, we have introduced SH Kelkar, Endurance, Alkem Labs, Dewan

Housing, Dish TV and Muthoot Finance in our model portfolio.

January 2017

4

India Strategy | New Year, New Cards

3QFY17 PREVIEW

Earnings growth returns, but quality of growth weak

Cyclicals drive growth; demonetization, cost inflation hurt Defensives

3QFY17 earnings growth to be led by low base of Cyclicals

3QFY17 earnings performance would be supported by the low base of cyclical

sectors like PSU Banks and Metals. We expect MOSL Universe revenue to grow 7.2%

YoY – a 10-quarter high (revenue had declined 7% YoY in the base quarter). EBITDA

growth would be 19.7% YoY, the highest in 10 quarters. PAT is likely to grow 30.2%

YoY, the highest since 1QFY15; also, 3QFY17 would be the second consecutive

quarter of double-digit PAT growth. However, excluding PSU Banks and Metals, we

estimate 5.4% YoY sales growth, 10.8% YoY EBITDA growth, and 8.1% YoY PAT

growth for MOSL Universe. While EBITDA margin is likely to expand 240bp YoY to

22.7%, PAT margin would expand 200bp YoY to 10.9%. This would be driven by

400bp expansion in EBITDA margin and 250bp expansion in PAT margin of Global

Cyclicals. Defensives would report the first margin decline in seven quarters, a

reflection of demonetization and rising commodity costs in Consumer and Autos.

Three key trends coming to the fore







Demonetization impacting revenues of key sectors like Autos (-1.6% YoY),

Consumer (flat), NBFCs, and Cement (-1%)

Global commodity price recovery driving recovery for Cyclicals like Oil & Gas ex

OMCs (revenue growth of 15.3% YoY, one of the highest in five years) and

Metals (+22.3% YoY; highest in four years)

No respite for Healthcare (11.7% YoY revenue growth in 3QFY17 v/s 10-year

CAGR of 18.4%) and Technology (8.6% YoY revenue growth in 3QFY17, one of

the weakest in 10 years)

Earnings growth momentum back, but quality of growth weak

3QFY17 earnings growth would be driven by Cyclicals – Cement, Capital Goods and

Oil & Gas are expected to post 24%, 59% and 42% growth, respectively. PSU Banks

and Metals, which reported losses of INR39b and INR10b in the base quarter, are

expected to post a PAT of INR52b and INR73b, respectively. PAT growth would be

50% YoY (-24% YoY in 3QFY16) for Domestic Cyclicals and 59% YoY (13% YoY in

3QFY16) for Global Cyclicals – multi-quarter high for both. However, Defensives

would report 3% YoY decline in PAT to the lowest in 20 quarters. MOSL Universe (ex

Metals, Oil and PSBs) PAT is likely to decline 1.4% YoY in 3QFY17, the first decline in

eight years.

Expect earnings to decline for consumer-facing sectors







Demonetization would impact the Auto and Consumer sectors, which are likely

to witness sharp moderation in PAT growth. We expect Consumer sector PAT to

decline 1% YoY, the first decline in 11 years. For Autos, we expect just 3% YoY

earnings growth.

PAT growth for the Technology sector would continue to moderate. We expect

YoY flat PAT – no growth for the first time in last 12 years.

Private Banks (-12%), Media (-5%), Retail (-10%) and Utilities (-6%) are the other

sectors that would report YoY PAT decline.

January 2017

5

India Strategy | New Year, New Cards









NBFCs should post a healthy 16% YoY PAT growth – the impact of

demonetization on asset quality could come with a quarter’s lag.

Defensives’ share in MOSL earnings would continue to decline to 35% (recent

high was 47% in 4QFY16); the share of Global Cyclicals would be 31% in 3QFY17,

up from 26% in 3QFY16 and 24% in 2QFY17.

Nifty sales would grow 4% YoY, the highest in nine quarters. PAT is likely to grow

13% YoY, the highest in 10 quarters. EBITDA is likely to post robust 10% YoY

growth. Nifty aggregates would be influenced by Cyclicals – excluding PSU Banks

and Metals, Nifty sales would grow 4% YoY, EBITDA would grow 5% YoY, and

PAT would grow 1% YoY.

Post demonetization, we have cut our 2HFY17E earnings for MOSL Universe by

3%, driven by cuts in Cement (22.5%), Autos (12%), Consumer (11%), NBFCs (6%)

and Capital Goods (~8%). Also, Telecom sectors’ 2HFY17E PAT has seen sharp

cut of ~75%, reflecting tectonic shift in competitive intensity.

Exhibit 1: Growth bounces back on low base

Sales

(NO OF COMPANIES)

High growth sectors

PSU Banks (8)

Metals (9)

Capital Goods (12)

Oil & Gas (12)

Others (19)

Cement (7)

NBFC (11)

Med/Low growth sectors

Healthcare (17)

Auto (13)

Technology (15)

PAT de-growth sectors

Consumer (19)

Logistics (3)

Media (9)

Utilities (5)

Retail (3)

Private Banks (11)

Telecom (3)

MOSL (176)

MOSL Ex Metals, Oil & PSU Banks (147)

EBITDA

%

Dec-16

QoQ

8

-2

13

3

9

6

0

4

1

1

1

1

1

-2

1

5

5

26

0

-3

4.8

1.3

3.5

3.3

1,106

254

222

35

450

40

29

76

470

92

174

204

603

89

5

19

154

4

208

125

2,179

1,253

1,243

1,508

%

YoY

46

27

168

42

40

20

3

14

3

10

-2

4

0

-5

1

0

3

-1

1

-3

19.7

3.2

8.2

9.8

%

Dec-16

QoQ

18

-1

26

-12

36

43

-14

3

2

-1

7

-1

3

-5

13

8

23

18

1

-9

9.6

2.5

5.8

5.6

484

52

73

15

265

19

15

46

303

57

89

157

255

63

3

8

73

3

97

8

1,042

653

614

728

PAT

%

YoY

126

LP

LP

59

42

30

24

16

2

8

3

0

-12

-1

-3

-5

-6

-10

-12

-67

30.2

-1.4

5.5

13.3

%

QoQ

19

6

73

-35

25

64

-27

-2

-1

-6

6

-2

1

-3

18

15

39

17

-2

-64

8.3

-0.9

3.0

1.2

PAT

Delta

270

91

82

6

78

4

3

6

7

4

2

1

-36

-1

0

0

-5

0

-13

-17

Sh.

%

52

5

8

2

28

2

2

5

32

6

9

17

27

7

0

1

8

0

10

1

EBITDA* PAT*

Chg bp Chg bp

YoY

YoY

497

1,449

1,038

183

338

138

71

12

-13

-47

0

-96

-123

-107

-31

-106

-24

-73

-783

-115

238

-20

86

123

458

2,973

725

105

209

136

189

97

-15

-45

29

-146

-272

-21

-67

-117

-161

-92

-980

-465

192

-70

9

94

Dec-16

5,430

310

1,163

478

3,034

183

167

96

2,537

381

1,264

891

1,631

405

31

61

476

53

243

361

9,598

5,091

4,686

6,176

%

YoY

10

4

22

6

8

13

-1

14

4

12

-2

9

3

0

4

3

4

8

10

0

7.2

4.0

4.7

4.3

Sensex (30)

Nifty (50)

*Margins

January 2017

6

India Strategy | New Year, New Cards

MOSL Universe headline performance at multi-quarter high

Exhibit 1: Sales growth for MOSL Universe to come in at 10

quarter high…

18.6

15.9

Exhibit 2: …but sales growth of Defensives to moderate

sharply

24.8

22.7

14.4

11.8

9.9

12.3

7.7

11.3

6.6

4.5

0.2

-0.9

-6.7 -7.1

-8.4

-11.3

-2.3

11.4

7.2

2.9

19.1

18.6

17.7

17.7

14.9

13.2

11.9

11.9

12.6

11.2

10.8

9.6

8.5

8.0

9.0 9.1

5.54.8

Source: MOSL

Source: MOSL

Exhibit 3: 3QFY17 EBITDA margin (ex-OMCs, Financials) at

20.6% (+170bp YoY)

MOSL Universe EBITDA

Margin LPA: 20%

Exhibit 4: PAT growth for MOSL Universe will be boosted by

low base in cyclicals…

85.3

71.3

31.4

5.3

-2.3

-33.9

1.0 0.1

-8.2

4.1

5.2

-5.1

-13.3

35.0

30.2

11.7

1.4

-3.0

-0.4

-18.6

FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17

Source: MOSL

Source: MOSL

Exhibit 5: …first PAT decline in multiple quarters for

Defensives…

33.1

27.9

27.5

26.3

24.1 23.3

21.1

18.5

16.1

10.6

5.1

Exhibit 6: 3QFY17 PAT margin (ex-OMCs, Financials) would

expand 80 bps to 10.4% led by Metals, O&G and Cements

MOSL Universe PAT

Margin LPA: 11%

13.1

9.6 10.7 11.2

6.3 10.6

5.7

-2.7-4.6

FY09

Source: MOSL

FY10

FY11

FY12

FY13

FY14

FY15

FY16

FY17

Source: MOSL

January 2017

7

India Strategy | New Year, New Cards

MOSL Universe PAT to be at all-time high in 2HFY17



PAT growth for several sectors in MOSL universe to benefit from low base:

PSU

Banks and Metals to benefit from low base. However, demonetization will drag

earnings for Autos, FMCG and Cement.

FY14

Sep Dec

74 83

21 22

11 11

49 54

163 169

72 80

61 59

31 30

42 49

3

3

5

6

57 57

203 137

174 175

2

2

121 129

12 15

68 84

6

7

FY15

Sep Dec

77 77

19 19

14 9

56 60

190 183

85 95

72 54

33 34

51 33

3

4

5

8

73 61

153 71

149 95

3

2

137 144

26 27

57 73

7

7

FY16

Sep Dec

67 86

15 9

15 12

58 64

190 106

98 106

54 -39

38 39

51 48

3

3

8

9

51 -8

131 187

128 131

2

3

152 153

26 25

68 78

6

7

FY17

Sep

DecE MarE

84 89 106

23 15 55

21 15 24

65 63 66

190 192 216

94 94 99

49 52 62

46 45 54

57 54 56

2

3

3

8

9

9

30 43 43

213 265 206

161 163 137

2

3

2

158 155 161

23 8

0

53 73 82

9

8 10

Exhibit 7: Sectoral quarterly PAT trend (INR b)

Sector

Auto

Capital Goods

Cement

Consumer

Financials

Private Banks

PSU Banks

NBFC

Healthcare

Logistics

Media

Metals

Oil & Gas

Oil & Gas Ex OMCs

Retail

Technology

Telecom

Utilities

Others

Jun

59

26

25

42

170

54

92

24

21

3

4

75

-251

154

2

90

12

81

6

FY13

Sep Dec

52 49

27 28

19 16

43 47

165 177

57 67

83 82

25 28

27 36

3

3

5

5

54 42

342 217

173 166

2

3

93 97

12 8

63 88

6

6

Mar

79

60

20

45

190

71

83

35

29

3

4

76

403

133

2

97

12

99

4

Jun

53

14

19

48

186

70

87

29

32

3

5

60

94

138

2

106

15

76

7

Mar

81

52

18

51

196

85

73

38

43

3

5

71

346

165

3

134

20

99

6

Jun

93

17

17

53

204

82

90

32

45

4

5

67

187

149

2

132

23

77

9

Mar

60

48

15

57

198

100

57

41

37

4

6

33

248

135

3

141

28

89

6

Jun

98

12

13

58

196

91

71

34

53

3

7

36

251

147

2

141

23

77

9

Mar

104

45

19

63

-18

83

-146

45

51

2

12

22

191

137

2

158

28

90

9

Jun

78

15

24

65

169

94

33

41

56

3

7

31

278

148

2

153

26

78

10

MOSL Universe

366 915 821 1123 719 837 829 1126 934 869 780 972 979 843 784 778 996 936 994 1038

MOSL Ex Metals, Oil & PSU Banks 451 435 479 561 478 516 575 636 590 572 593 634 621 607 644 712 653 645 634 726

Exhibit 8: Sectoral quarterly PAT growth trend (%)

Sector

Auto

Capital Goods

Cement

Consumer

Financials

Private Banks

PSU Banks

NBFC

Health Care

Logistics

Media

Metals

Oil & Gas

Oil & Gas Ex OMCs

Retail

Technology

Telecom

Utilities

Others

MOSL Universe

MOSL Ex Metals, Oil & PSU Banks

Jun

11

12

28

24

38

30

48

27

5

-1

-2

-15

PL

3

6

36

-13

17

-16

-37

19

FY13

Sep Dec

-4 -26

-5 -18

63 -2

15 22

19 14

27 28

11 -2

30 43

26 66

22 -7

8 22

-19 -23

812 -24

-3 19

14 22

35 19

7 -46

39 32

-15 -2

70 -3

21 13

Mar

-5

-7

-14

17

3

25

-18

38

26

-15

25

6

10

-4

24

15

-24

1

-34

5

6

Jun

-10

-47

-26

14

9

29

-5

19

51

-6

26

-20

LP

-10

15

17

27

-6

13

96

6

FY14

Sep Dec

41 68

-25 -20

-44 -33

16 13

-1 -4

26 20

-27 -28

24 9

53 38

-1 9

12 18

5 36

-41 -37

1

6

5 -12

31 33

2 94

7 -5

7 31

-8 1

19 20

Mar

3

-13

-11

13

3

20

-12

6

45

22

13

-6

-14

24

12

38

71

0

43

0

13

Jun

75

26

-10

12

10

18

3

10

42

13

-5

11

99

8

-6

25

50

0

26

30

23

FY15

Sep Dec

5

-7

-7 -13

26 -12

14 11

16 8

19 19

18 -7

7 10

21 -32

-2 32

3 33

27 7

-25 -48

-14 -46

24 5

13 11

111 82

-17 -13

12 1

4

-6

11 3

Mar

-26

-9

-16

13

1

17

-23

10

-13

20

17

-53

-28

-18

-2

6

36

-10

6

-14

0

Jun

6

-31

-20

9

-4

10

-21

7

17

-9

33

-47

34

-1

-12

7

-1

1

1

5

5

FY16

Sep Dec

-13 12

-20 -54

12 32

5

7

0 -42

14 12

-25 PL

17 16

1 44

4 -31

48 16

-30 PL

-14 162

-14 37

-37 16

11 7

-2 -7

19 6

-9 -4

-3

0

6

9

Mar

73

-4

26

10

PL

-16

PL

10

38

-41

113

-35

-23

2

-11

12

1

0

40

-20

12

Jun

-21

29

82

13

-14

3

-53

21

5

-17

4

-12

11

1

26

9

16

1

13

2

5

FY17

Sep

DecE MarE

24 3

2

50 63 21

37 24 26

11 -1 5

0 81 LP

-3 -12 19

-9 LP LP

21 16 19

12 12 10

-25 -3 29

-3 -4 -26

-42 LP 99

62 42 8

26 25 -1

20 -10 -23

4

1

2

-9 -67 -100

-22 -6 -9

44 20 14

11 27 33

6

-1 2

Note:

Comparable Universe excludes Vedanta due to merger, Just Dial, Alembic Pharma, Hathway, Repco Home Finance, MCX, Alkem Labs,

Interglobe Aviation, CG Consumer Electricals, Parag Milk Foods, Equitas Holding, IDFC Bank, RBL Bank, L&T Infotech, Manpasand, and SH

Kelkar.

January 2017

8

India Strategy | New Year, New Cards

Exhibit 9: Key Assumptions – Commodities bottoming out in 2QFY17

Macro

GDP Growth (%)

IIP Growth (%)

Inflation CPI-RU (%)

Currency: USD/INR

Oil: Brent (US$/bbl)

Repo Rate (%)

Interest Rate (%): 1Year CP Rate (Avg)

10Year G Sec (Avg)

Sectoral

Banking: Loan Growth (%)

Auto: CV Volume growth (%)

Car Volume growth (%)

Cement: Volume growth (%)

Capital Goods: L&T order Intake (INRb)

Capital Goods: L&T order Intake (% YoY)

Metal: Steel (USD/Tonne)

Aluminium (USD/Tonne)

Zinc (USD/Tonne)

Oil & Gas: Under Recoveries (INRb)

Singapore GRM (USD/bbl)

Technology: $Revenue growth (%)

FY16

7.6

2.4

4.9

65.5

47.5

6.9

8.6

7.7

FY16

10.7

11.1

10.6

4.0

1,369

-11.9

494

1,592

1,846

124.3

7.5

6.9

1QFY17

7.1

0.7

5.7

66.9

46.0

6.52

8.30

7.46

1QFY17E

8.1

9.2

2.1

5.6

297

12.5

492

1,570

1918

24.0

5.0

3.6

2QFY17

7.3

-0.9

5.2

67.0

45.8

6.50

7.85

7.12

2QFY17E

6.6

10.3

18.4

3.3

311

8.7

465

1,619

2,252

27.8

4.5

1.1

3QFY17E

6.1

1.8

3.8

67.4

50.2

6.25

7.27

6.54

3QFY17E

7.5

-4.0

2.6

-3.0

416

8.1

515

1,720

2,500

8.8

6.4

1.1

4QFY17E

6.2

2.9

4.5

68.2

55.0

6.00

7.25

6.50

4QFY17E

8.2

12.0

17.7

-10.0

481

11.0

515

1,712

2,600

13.9

6.4

2.4

FY17E

6.7

1.2

4.8

67.4

49.3

6.32

7.67

6.90

FY17E

8.2

5.0

10.0

-1.3

1,505

10.0

497

1,655

2,318

50.5

5.5

7.9

* CV volume for Tata Motors and Ashok Leyland; PV Volume for Maruti Suzuki

Interesting sectoral trends

Key PAT growth sectors

















At 2.6% YoY, 3QFY17 PAT growth for

Autos

would be one of the weakest in

recent quarters.

Eicher, Maruti and Ashok Leyland stand out with 56%, 39% and 38% growth,

respectively.

Excluding Tata Motors (which is expected to post 16% YoY PAT decline), Autos

should post 15% YoY growth.

Capital Goods

sector is expected to post 20-quarter high PAT growth of 59%

YoY, driven by favorable base. BHEL posted a loss in the base quarter; excluding

BHEL, growth would be 7% YoY.

PSU Banks

would report a PAT of INR52b v/s a loss of INR39b in the base

quarter. SBIN (up 2.4x), PNB (up 8.7x) and UBI (up 2.9x) are expected to post

strong performance.

NBFCs

are likely to post another quarter of healthy performance, with 16% YoY

PAT growth. MMFS (125%), LIC Housing Finance (27%), Muthoot Finance (40%),

Bharat Financial (31%) and Gruh Finance (19%) are expected to deliver strong

performance.

Metals

would also have a strong quarter and report a PAT of INR73b v/s a loss

of INR10b in the base quarter. Hindalco (up 2.3x), Vedanta (loss to profit) and

Tata Steel (loss to profit) are expected to post strong results.

Cement

is expected to continue its strong momentum, led by Shree Cement.

Consumer

companies would report the first YoY PAT decline in 11 years.

Key PAT de-growth sectors







Asian Paints would post 4% YoY PAT decline.

Britannia would see ~20% YoY decline in PAT.

January 2017

9

India Strategy | New Year, New Cards





HUVR and ITC are likely to report flattish YoY PAT performance.





For

Private Banks,

aggregate PAT is likely to decline 12% YoY, driven by Axis

Bank (-69%) and ICICI Bank (-26%). Yes Bank (+25%), Kotak Mahindra Bank

(27%), and IndusInd Bank (+23%) would report strong growth.

Utilities

would post 6% YoY PAT decline, largely led by Coal India (-22%).

Telecom

would report PAT decline (-67% YoY), despite the low base (PAT was

down 7% in 3QFY16).

22

15

12

9

8

Exhibit 10: 3QFY17 sectoral sales growth (%)

8

8

6

4

4

3

0

0

-1

-2

Exhibit 11: 3QFY17 sectoral PAT growth (%)

LP

77

59

26

25

24

8

3

0

-1

-3

-5

-6

-10

-67

Exhibit 12: ~40% of the universe to report >15% PAT growth

Earnings Gr.

>30%

>15-30%

>0-15%

<0%

Ex RMs (%)

15 24 26 20 -8 -15 -15-11 23 42 26 22 24 9 13 11 4 18 11 9 6 0

-3 8 12 9 17 7

-7

-8 -3 -3 -10 -10 -2 6 26 35

27

21 24 23 26

30 27 25

42 41 32 35 31

14

19 24

9 9 10 20 18

26

14 14

13

21 11

17

18

22

18

22

18

22 10

21

18

10 14

51

44 45

41 43

38 32 39

35 30

26 27 32

24 31

34

18

24 19

42 40

30

35

38 39 42 41 37 38

45

26

35 37 47 36 39 36 33 33 37 34

27

17 18 21 22 21

18

22

13 27 17 16

20 24

25 25

16

22

17 21

23

16

19

19 21 18 12 18

18 13

24 25 18 22 18 17 19 16

27 14

19 22 21 23 16 13

18

35

29 27

21 21 24 25 25 28 26 24 19 26 25 20 20 26 18 22 21 20 24 29 28 28

PAT Growth Ex RMs (%)

40% of the companies would grow at >15% YoY, and almost 30% of the Universe would report >30% PAT growth. More than 1/3rd of the

Universe would report PAT de-growth.

January 2017

10

India Strategy | New Year, New Cards

Three key trends for 3QFY17

1] Demonetization impacting revenues for key sectors like Autos,

Consumer, and Cement







We expect Autos (ex JLR) to report flat revenue YoY, impacted by sharp

moderation in volumes across segments, especially 2Ws and PVs. Higher

discounts and negative operating leverage would lead to sharp moderation in

PAT growth for Autos (ex JLR).

Cement revenue is likely to decline ~1% YoY, reflecting ~1% YoY volume decline.

With cost inflation offsetting higher realization, EBITDA growth would be

restricted to ~3% YoY. PAT growth would moderate considerably to ~24% YoY

(v/s ~58% YoY in 1HFY17).

For our Consumer universe, we expect revenue to be flat YoY, translating into a

PAT decline for the first time in 12 years.

Exhibit 13:

Demonetization

to impact PAT growth for sectors like Auto, Cement, Consumers etc (% YoY)

30

18

22

15 15 14

16

Consumer

19

17

21

24

15

22

17

14 16 13 13 12 14 11 13

9

24

21 19 19

9 8

5

26

17

20

5

7

11 13 12

-1

Exhibit 14: PAT growth moderates sharply for Autos & Cement sector (%)

Autos Excl JLR

157

126

63

98

17 18 9

28

Cement

26

32 26

82

37

12

24

26

-3

17

-16 -20

-30

-1

-15

4

-8

-26

2

19

-2

-14

-26

-11 -10

-44

-33

-12 -16 -20

2] Global commodity price recovery driving recovery for Global Cyclicals







Recovery in base commodity prices has led to sharp recovery in revenues and

PAT for Global Cyclicals like Oil and Metals.

We estimate revenue growth for Oil & Gas at 8% YoY, one of the highest in five

years, influenced by ~14% YoY increase in crude oil prices. This would reflect in

PAT growth of ~42% YoY (~25% QoQ).

For Metals, we expect 22.3% YoY revenue growth, the highest in four years,

driven by recovery in prices – Steel (up 70% from recent lows), Copper (up 35%),

January 2017

11

India Strategy | New Year, New Cards

and Aluminum (up 15%). More importantly, PAT is likely to grow ~72% QoQ

(from loss to profit on YoY basis).

Exhibit 15: Global cyclicals showing smart recovery in PAT on the back of rising commodity prices (INR b)

342

403

Oil & Gas PAT (INR b)

346

248

278 265

251

203

187153

187191 213

137

131

94

71

100

Metals PAT (INR b)

89

84 87 90 77

75

67

66 71

59

59

50

41

217

73

33 37 42

-251

-10

3] No respite for Healthcare (expect 11.7% YoY revenue growth in 3QFY17

v/s 18.4% CAGR in 10 years) and Technology (expect 8.6% YoY revenue

growth in 3QFY17, one of the weakest in 10 years)





We estimate revenue growth for our Technology universe at 8.6% YoY, one of

the lowest in 10 years. For the first time in 12 years, PAT would remain flat YoY.

For our Healthcare universe, we expect moderation in revenue growth (11.7%

YoY in 3QFY17 v/s 10-year CAGR of 18.4%), reflecting in 8.4% YoY PAT growth.

64

26

27

Healthcare

38

45 42

21

21

10

47

38

6 8 8

Exhibit 16: PAT growth for defensives like Technology and Healthcare continues to be weak (%YoY)

36 35

19

15 17

38

25

13 11

6 8

13

9

14

9

4 0

-28

-10

Technology

51 53

31

33

5

Cyclicals to drive entire 2HFY17 earnings growth







After witnessing severe stress in 1HFY17, Cyclicals like PSU Banks and Metals are

making strong recovery, driven by favorable base, interest rate moderation,

recovery in commodity prices, etc. PAT for Cyclicals is likely to grow 54% YoY in

3QFY17 (v/s just 5% growth in 1HFY17).

While we estimate MOSL Universe PAT growth at 33% YoY for 2HFY17 (v/s 6%

YoY in 1HFY17), 95% of this growth would be driven by Cyclicals. Defensives

would drag overall performance.

For Domestic Cyclicals, PAT is likely to grow 101% YoY in 2HFY17 (v/s 6% YoY in

1HFY17), driven by PSU Banks, Cement and Capital Goods. For Global Cyclicals,

we expect PAT to grow 34% YoY in 2HFY17 (v/s 4% YoY in 1HFY17), driven by

Metals and Oil & Gas.

January 2017

12

India Strategy | New Year, New Cards

Exhibit 17: Cyclicals are expected to drive the entire earnings growth in 2H

94

Contribution to 1HFY17 PAT growth (%)

57

Contribution to 2HFY17 PAT growth (%)

16 15 13 12 11

7 6 4 1 1

0 -1 -4

-12

-25

24

18

3 3 2 2 1 1 1 1 0 0

-37

0 -1 -2

-9

Source: MOSL

Source: MOSL

Exhibit 18: Cyclicals are expected to grow significantly ahead of MOSL Universe average in 2HFY17

1HFY17 PAT growth (%)

58

46

28 23

21 17

12 7

6

LP

539

2HFY17 PAT growth (%)

6

3 3

-1 -2

-10

33 26

25

25 18 14 11 9 2 2 2 1

-21

-27 -34

-7 -16 -17

-84

Source: MOSL

Source: MOSL

Defensives to drag 2HFY17 earnings









Defensives solely drove MOSL Universe PAT growth over FY14-16; Cyclicals

(both domestic and global) were under pressure, resulting in the share of

Defensives in aggregate PAT rising to 36%.

However, we expect Cyclicals to be the key driver of PAT growth over FY17-18,

with over 78% of the increase in MOSL Universe PAT being driven by Cyclicals.

As a result, we expect the share of Cyclicals to increase to 70% by FY18 from

63% in FY16. Key drivers of growth within Cyclicals would be PSU Banks, Autos,

Metals, and Cement.

For 3QFY17, Defensives would report a 2.7% YoY decline in PAT to the lowest in

20 quarters. This is expected to continue even in 4QFY17, with a decline of 5%

YoY. Large part of the 2HFY17 weakness would be due to demonetization-led

growth moderation in the Consumer sector.

January 2017

13

India Strategy | New Year, New Cards

Exhibit 19: Cyclicals to drive entire PAT growth in 3QFY17

78

6

6

4

4

3

2

1

-0

-0

-0

-1

-5

-13

-17

91

82

801

1,042

Source: MOSL

Share of defensives comes off further

Exhibit 20: PAT share of global cyclicals to see sharp sequential pick up

100%

75%

50%

25%

0%

33

26 23

27

Defensives

36

39

40 39 35 33

31 29

25

33

40

45

41

Global cyclicals

37

36

27

26

26 24

42

38

Domestic cyclicals

35

31

34

34

32

34 37 34 38

37

35

Defensives

includes Consumer, Healthcare, Technology, Telecom and Utilities

Global cyclicals

includes Metals, Oil & Gas and JLR

Domestic cyclicals

includes Automobiles, Banks, Capital Goods, Cement, Media, NBFCs, Real Estate and Retail

Nifty sales and PAT growth to be 4% and 13%, respectively









Nifty PAT is likely to grow 13% YoY in 3QFY17, the highest in 10 quarters. Sales

are expected to grow 4% YoY.

Performance of Nifty would be driven by Cyclicals like PSU Banks and Metals

that are benefiting from the depressed base of 2HFY16. Excluding PSU Banks

and Metals, Nifty PAT would be flat YoY.

17 Nifty companies are expected to post YoY PAT decline – two each from

Consumer, Cement, Telecom and Technology, and three from Autos.

Another notable feature of 3QFY17, as discussed in earlier sections, would be

the YoY PAT decline for large-cap Consumer companies (ITC, Asian Paints), an

impact of demonetization.

January 2017

14

India Strategy | New Year, New Cards

Exhibit 21: Nifty - Sectoral contribution to growth 3QFY17 vs Index Weight

3.1

66.9

Contr to growth for 3QFY17 (%)

29.2

26.0

5.8

5.3

1.7

1.6

1.4

0.9

0.3

-0.2

-0.8

-3.6

-14.8

Weight in Index (%)

1.5

9.4

4.0

6.3

11.3

6.6

14.4

3.0

0.8

0.8

10.1

4.4

21.5

2.3

-19.7

Exhibit 22: Nifty sales to grow 4% in 3QFY17, fourth consecutive quarter of positive sales growth

30 32

19 20

23

16

37

26

16

8

25

30

23

35 33

15

28

26

22 18

22

26

21

26

21

LPA: 14%

16

14

8

4 4

14 14 14 15

4

-1

-6

1Q

-6 -4

3Q

FY16

3

0

3

4

8

-4

-12

1Q

3Q

FY06

1Q

3Q

FY07

1Q

3Q

FY08

1Q

3Q

FY09

1Q

-8

3Q

FY10

1Q

3Q

FY11

1Q

3Q

FY12

1Q

3Q

FY13

1Q

3Q

FY14

1Q

3Q

FY15

-9

1Q 3QE

FY17

Exhibit 23: 3QFY17 Nifty PAT to grow 13% YoY, highest in ten quarters

65

38

20 16

22

7

16

36

19 13 12 21

11

19

27

16

LPA: 11%

24

5

5

-1

11

2

9 9

20

4

-7

-12

0 0 -5

1 0 4

13

34

24

4

10

12

0

29

6

-7

-8 -5 -15

-20

FY06

FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15

FY16

FY17

January 2017

15

India Strategy | New Year, New Cards

Exhibit 24: Nifty companies 3QFY17 performance (INR b)

Company

High PAT Growth (16)

Bank of Baroda

Tata Steel

State Bank

Hindalco

Bharti Infratel

Eicher Motors

BPCL

GAIL

Grasim Industries

Maruti Suzuki

Bosch

Kotak Mahindra Bank

Yes Bank

Sun Pharma

Power Grid Corp.

IndusInd Bank

Med/Low PAT Growth (17)

Cipla

Lupin

Aurobindo Pharma

HDFC Bank

Ambuja Cements

Reliance Inds.

Zee Entertainment

ONGC

HDFC

Mahindra & Mahindra

Larsen & Toubro

NTPC

Tata Power

HCL Technologies

TCS

Hind. Unilever

Infosys

Negative PAT Growth (17)

Ultratech Cement

Wipro

Adani Ports

ITC

Asian Paints

Bajaj Auto

Tech Mahindra

Hero MotoCorp

Bharti Airtel

Tata Motors

Coal India

Dr Reddy’ s Labs

ICICI Bank

ACC

Axis Bank

Idea Cellular

BHEL

Nifty (50)

Sales

Dec-16

1,790

33

283

143

254

34

18

459

151

25

166

28

20

15

80

66

15

2,406

39

42

39

80

22

641

16

193

24

103

273

177

95

117

295

79

171

1,981

53

139

18

88

40

50

74

64

241

708

197

37

52

27

45

87

61

6,176

Var %

YoY

5

21

1

5

9

8

-44

-2

13

7

10

3

14

26

13

23

29

8

26

19

10

13

-7

13

3

5

10

-1

6

2

3

13

8

1

7

0

-7

8

8

-4

5

-9

10

-12

0

-2

4

-6

-5

-7

8

-4

14

4

EBITDA

Dec-16

443

27

34

119

32

15

6

34

17

5

25

4

14

14

27

59

13

615

7

10

9

63

3

120

4

97

22

15

28

50

23

25

80

14

45

449

10

27

12

34

8

10

12

10

87

89

33

8

51

2

43

23

-8

1,508

Var %

YoY

34

56

335

24

39

8

12

44

55

22

16

4

14

22

24

25

23

9

30

20

15

9

-12

17

2

12

9

6

5

11

-5

11

3

-4

5

-6

-8

2

9

-6

-3

-16

1

-16

3

-5

-22

-22

-22

-13

7

-27

Loss

10

PAT

Dec-16

181

8

5

27

10

8

4

23

10

4

19

3

8

8

18

20

7

374

4

6

6

39

2

80

3

44

17

9

11

22

4

20

63

10

35

173

5

22

6

26

5

8

7

7

11

29

29

4

22

1

7

-10

-7

728

Var %

YoY

179

LP

LP

138

130

58

56

52

45

42

39

39

27

25

24

23

23

8

18

18

16

16

11

11

10

9

9

9

6

5

5

3

2

2

1

-25

0

-2

-2

-3

-4

-6

-7

-13

-14

-16

-22

-22

-26

-43

-69

PL

Loss

13

PAT Contbn

(%) Grw. (%)

26

1

1

4

1

1

1

3

1

1

3

0

1

1

2

3

1

53

1

1

1

6

0

11

0

6

2

1

2

3

1

3

9

1

5

24

1

3

1

4

1

1

1

1

2

4

4

1

3

0

1

-1

-1

103

150

54

25

20

7

4

2

10

4

1

7

1

2

2

4

5

2

34

1

1

1

7

0

10

0

5

2

1

1

1

0

1

2

0

0

-74

0

-1

0

-1

0

-1

-1

-1

-2

-7

-10

-2

-10

-1

-19

-23

5

110

EBITDA margin

Dec-16

25

81

12

83

13

44

32

7

11

21

15

13

68

96

33

90

86

26

18

25

25

78

12

19

27

50

93

15

10

28

24

21

27

17

27

23

18

20

62

38

19

19

16

16

36

13

17

21

99

7

95

26

-12

24

Var (bp)

546

1809

918

1232

274

-2

1591

234

305

257

81

13

-39

-379

276

99

-412

24

64

6

96

-300

-69

52

-45

326

-70

99

-11

231

-194

-36

-112

-100

-67

-142

-13

-110

100

-100

-150

-165

-133

-88

120

-38

-552

-429

-2083

-52

-101

-836

1837

123

January 2017

16

India Strategy | New Year, New Cards

Exhibit 25: Nifty Sectoral 3QFY17 PAT chg YoY (%)

LP

LP

PSU Banks, Cap Goods,

Metals to report profits

in 3QFY17 against

losses in 3QFY16

LP

13

12

12

10

9

8

2

1

-2

-2

-4

-12

-67

Key trends to watch out for in 4QFY17 and thereafter

Trend # 1: Re-monetization















Re-monetization has been faster than expected. Value-wise, almost 50% of the

withdrawn currency has been replaced as at the end of December 2016.

We expect it to pick up pace over the next quarter. Overall, by the end of March

2017, we expect things to normalize in the economy.

The government’s digitization push coupled with lazy money coming back into

the banking system should lead to currency in circulation being less than earlier.

With the banking system flushed with funds and lower inflation, we expect

lower interest rates than in the pre-demonetization era.

We expect a shift from unorganized credit sources to organized credit. Banks

with strong liability franchise are likely to be key beneficiaries of this shift. Even

mid-size private sector banks with strong management and under-utilized

capacity are likely to benefit.

Apart from banks, other financial intermediaries like insurance and asset

management companies also stand to benefit.

Normalization of liquidity by March 2017 would also help in restoring normalcy

for consumer-focused businesses, especially in rural markets.

Trend # 2: Government actions to improve economic activity

Exhibit 26: While some measures have been announced post demonetization, we expect more relief measures over next few

months

Measures announced

1. 4% subsidy in interest rate for housing loan upto INR0.9m, and

3% subsidy for housing loan upto ~INR1.2m.

2. Loan @3% on housing in rural area for construction/renovation of

home.

3. Small traders credit guarantee to increase from loan of INR10m

to INR20m.

4. 60 days interest on agriculture loan from cooperative bank will be

paid by the government.

5. INR6k will be paid to pregnant ladies in rural area to reduce death

rate of ladies.

6. Senior citizen to get 8% interest on 10 years fixed deposit of upto

~INR0.75m.

7. 30m Kisan Credit Cards holders to be given RuPay Debit Cards.

New measures expected

1. A 1-2pp cut in corporate tax rate, providing a relief of INR 150-300b

to corporates.

2. Increasing income tax slab and 80C exemptions by INR50k each.

This will cost government ~INR300b.

3. Some compensation to states could help fasten GST passage. It

could cost ~INR100-200b.

4. Since states would be restricted in terms of their ability to invest,

higher capex (by 15-20%) is expected from the Central Govt.

5. An increase in MGNREGA by INR50b to INR430b.

Source: GoI, MOSL

January 2017

17

India Strategy | New Year, New Cards

Trend # 3: Cost pressures from commodity inflation







After bottoming out in the last 2-3 quarters, global commodities have witnessed

sharp recovery – Crude (up over 90% from the bottom), Steel (up over 70%),

Aluminum (up over 15%), Copper (up over 35%), Lead (up over 55%), Rubber (up

over 100%), etc.

MOSL Universe (ex Metals and OMCs) EBITDA margin has expanded ~310bp

over the last two years, partly driven by favorable commodity prices and

operating leverage.

With commodity prices recovering from recent lows and impact of

demonetization on demand, Corporate India would have to focus on cost

management.

Exhibit 27: Base commodities have started recovering, after sharp fall over last 2 years

Bloomberg Base Metals Spot Price

Commodity Index (Ex Steel)

700

600

500

400

300

200

Steel (USD/Ton)

125

100

75

50

25

Brent Crude (USD/Barrel)

260

220

180

140

100

Source: Bloomberg, MOSL

Exhibit 28: EBITDA margin improvement over last 2 years partly driven by lower

commodity prices

MOSL Excl Metals & OMCs (EBITDA Margin, %)

Source: MOSL

Cutting 2HFY17E PAT for consumer-focused businesses following

demonetization







Post demonetization, we have cut our 2HFY17E earnings for MOSL Universe by

3%, driven by cuts in Cement (~22.5%), Autos (12%), Consumer (11%), NBFCs

(~6%) and Capital Goods (~8%).

2HFY17E PAT for Telecom has seen sharp cut of ~75%, reflecting tectonic shift in

competitive intensity.

However, the impact of cuts in above sectors has been offset by upgrades in

Metals (+8%) and Oil & Gas (+11%).

January 2017

18

India Strategy | New Year, New Cards

Exhibit 29: Earnings cut in Cement, Autos, Consumer, Financials diluted by upgrades in

Metals and Oil & Gas

8.4

11.0

-11.4

-22.5

Cement

-20.4

Retail

-17.4

Auto Ex JLR Consumer

-7.9

-4.5

Capital

Goods

Financials Metals

Oil & Gas

Source: MOSL

Exhibit 30: Auto Ex JLR

PAT growth Pre-Demon YoY (%)

Current est. PAT growth YoY (%)

20.4

16.5

13.3

Exhibit 31: Consumer

PAT growth Pre-Demon YoY (%)

Current est. PAT growth YoY (%)

14.5

14.5

14.5

4.3

2.6

3QFY17

2.0

4QFY17

2.3

-1.3

2HFY17

Source: MOSL

3QFY17

4QFY17

1.5

2HFY17

Source: MOSL

Exhibit 32: Cement

73.5

PAT growth Pre-Demon YoY (%)

Current est. PAT growth YoY (%)

54.0

26.0

61.8

Exhibit 33: NBFCs

27.7

PAT growth Pre-Demon YoY (%)

Current est. PAT growth YoY (%)

24.0

16.0

19.3

25.7

17.8

24.3

25.3

3QFY17

4QFY17

2HFY17

Source: MOSL

3QFY17

4QFY17

2HFY17

Source: MOSL

Exhibit 34: Metals

PAT growth Pre-Demon YoY (%)

Current est. PAT growth YoY (%)

489.7

539.0

Exhibit 35: Oil & Gas

PAT growth Pre-Demon YoY (%)

Current est. PAT growth YoY (%)

41.9

24.8

99.9

133.5

16.0

9.1

8.0

12.5

LP

LP

4QFY17

2HFY17

Source: MOSL

3QFY17

4QFY17

2HFY17

Source: MOSL

3QFY17

January 2017

19

India Strategy | New Year, New Cards

Exhibit 36: Intra-sector 3QFY17 earnings

divergence

(%)

Sector

growth

High growth sectors

Sectors

Banks

PSU

-

LP

+30%

growth

15-30%

growth

0-15%

growth

-Ve earnings

growth

Earnings

momentum

Metals

Capital

Goods

LP

INBK: 778%,PNB:

768%,CBK: 386%,UNBK:

194%,SBIN: 138%,BOB,

BOI & OBC: LP

HNDL: 130%,NACL:

93%,HZ: 62%,NMDC:

61%,JSTL,

TATA & VEDL: LP

CRG: 133%,

ATD: LP

CAIR: 6817%,MRPL:

277%,IOCL: 109%,PLNG:

87%,BPCL: 52%,HPCL:

50%,GAIL: 45%,

OINL & IGL: 37%

ICEM: 781%,SRCM:

152%,GRASIM: 42%

MMFS: 125%,MUTH:

40%,BHAFIN: 31%

SIEM: 18%

JSP: Loss,

SAIL: Loss

VOLT: -3%,TMX: -

BHE: 9%,LT: 6%,ABB:

9%,CROMPTON: -23%,HAVL: -

5%,KKC: 3%

41%,BHEL: Loss

RIL: 11%,

ONGC: 9%

ACEM: 11%,

UTCEM: 0%

DEWH: 14%,HDFC:

9%,BAF: 8%,REPCO:

7%,SHTF: 1%

59

Oil & Gas

25

(Ex OMCs)

GUJS: -6%

Cement

NBFC

24

16

TRCL: 20%

LICHF: 27%,IHFL:

21%,GRHF: 19%

SUNP: 24%,CIPLA:

18%,LPC: 18%,

ARBP: 16%

TVSL: 21%

TELX: 24%,

HEXW: 20%,

CYL: 19%

ACC: -43%

Medium/Low growth sectors

IPCA: 136%,GNP:

Health

83%,GRAN: 43%,

8

Care

GLXO: 40%,BIOS: 34%

ESC: 137%,EIM:

Autos

3

56%,MSIL & BOS:

39%,AL: 38%

Technology

0

SANL: 15%,

CDH: -6%,DRRD: -22%,TRP: -

DIVI: 12%,ALKEM: 11% 35%,ALPM: -58%,FORH: Loss

MM: 9%

ZENT: 15%,MPHL:

12%,HCLT: 3%,

TCS: 2%,INFO: 1%

EXID: -4%,BJAUT: -6%,

AMRJ: -12%,HMCL: -13%,

TTMT: -16%,BHFC: -19%

WPRO: -2%,

NITEC: -4%,TECHM: -7%,

PSYS: -12%,KPIT: -16%,

LTI: -26%,MTCL: -30%

GCPL: -1%,ITC: -3%,

PIDI: -3%,APNT: -4%,

DABUR & NEST: -5%,

HMN: -7%,MRCO: -8%,PG: -

14%,BRIT: -20%,RDCK: -28%

CCRI: -7%,

GDPL: -10%

DBCL: -3%,PVRL & JAGP: -

16%,HTML: -31%,

DITV: -36%,SITINET: -57%,

HATH: Loss

COAL: -22%,

JSW: -54%

TTAN: 1%

SHOP: -52%,

JUBI: -56%

IDFCBK: -21%,

ICICIBC: -26%,AXSB: -69%

BHARTI: -14%,

IDEA: PL%

PAT de-growth sectors

UNSP: 2146%,

JYL: 42%

PAG: 13%,UBBL:

5%,CLGT: 4%,

HUVR & SKB: 2%,

PARAG: 0%

AGLL: 10%

Consumer

-1

Logistics

-3

Media

-5

PWGR: 23%,

NTPC: 5%

SUNTV: 13%,Z: 10%

Utilities

Retail

Banks

Private

Telecom

-6

-10

-5

-67

CESC: 29%

KMB: 27%,YES: 25%,

IIB: 23%,DCBB: 21%,

HDFCB: 16%

BHIN: 58%

FB: 15%,

EQUITAS: 0%

January 2017

20

India Strategy | New Year, New Cards

Key Sectoral Highlights - 3QFY17

SECTOR

Auto

Key highlights



Automobile volumes were subdued in the





Capital

Goods







quarter due to the impact of

demonetization. In our view, 2Ws and 3Ws

are likely to be the worst hit as the cash

component in transactions is higher in this

space along with higher rural exposure. PVs

are expected to be relatively well placed,

primarily due to waiting periods in many

models of OEMs and lower cash component.

In CVs, LCV volumes are expected to decline

due to higher cash component, while MHCV

growth is likely to moderate.

EBITDA margins for our Auto OEM (ex-JLR)

coverage universe are likely to contract

140bp QoQ (stable YoY), given pressure

from negative operating leverage due to

decline in volumes.

Auto aggregate PAT is expected to grow 2%

(incl. JLR). Ex JLR, auto sector PAT is

estimated to grow ~9% YoY, led by MSIL and

AL. Bajaj Auto and HMCL, however, are

expected to drag overall PAT.

We expect order intake by most companies 6.1

to be flattish in 3QFY17, based on

announced orders during the quarter.

Industrial capex continues to remain

sluggish, while roads, rail and power T&D

remain the only bright spots on the infra

side.

Execution to remain subdued on account of

weak opening backlog and continued

challenges in execution on account of

demonetization scheme, delay in procuring

clearances, funding and land acquisition

issues.

Margins to improve YoY on account of

improvement in operational performance

and reduction in loss from BHEL.

3QFY17E YoY (%)

Sales EBIDTA PAT

Margin

Key stock to watch

Chg YoY (pp)

-1.6

-1.6

2.6

0.0



TVS Motor (+ve, despite demonetization

impact, PAT is expected to grow 21%

YoY).



HMCL ( -ve, demonetization impact to

41.9

59.3

1.8

hit HMCL’s volumes and financial

performance; EBTDA margins expected

to contract 100bp, while PAT is likely to

decline 13% YoY).



MSIL (+ve, PAT is expected to rise 39%

YoY, while EBITDA margins are expected

to rise 80bp YoY due to benefits of

operating leverage and favorable

currency movement).



Execution from LT is likely to remain

subdued in 3QFY17; profit is likely to

grow 6.3% YoY. Operating margins are

expected to remain stable.



Bharat Electronics is likely to report

strong revenue growth of 22% YoY, led

by pick-up in revenue booking of orders

in hand.



Havells to report marginal revenue

Cement



Cement demand witnessed healthy recovery -1.0

in October-16, with all-India production

increasing ~7% YoY on a relatively high base.

However, demand in November was

severely impacted due to demonetization.

The impact was particularly pronounced in

the initial 15 days of implementation of

demonetization due to acute shortage of

cash. November all-India production

declined 15% MoM, but increased ~1% YoY

due to low base on account of festival

season in November-15. We expect volumes

in December to decline in double-digit YoY,

partly led by high base and due to the

impact of demonetization.

3.3

24.3

0.7

decline of 1% YoY on account of

demonetization. We expect net profit to

decline 41% YoY on account of increase

in other expenses led by vendor support

provided by the company.



Shree Cement would report volume

growth, as against ex-south players that

are likely to report volume decline due

to ramp-up of capacity in eastern

operations.

January 2017

21

India Strategy | New Year, New Cards

SECTOR

3QFY17E YoY (%)

Sales EBIDTA PAT

Margin

Key highlights

Key stock to watch

Chg YoY (pp)



Prices under pressure: Prices increased in



Ramco Cement would continue

October on expectation of better 2HFY17

reporting strong profitability due to

volume demand, but declined in December

strong volume growth and sustenance of

due to demonetization. In our view, ASPs

prices in south markets.

should be impacted for north and east

markets.



We expect our consumer universe’s revenue 0.1

Consumer

and PAT to decline 0.5% and 2.8%,

respectively, in 3QFY17. Demonetization is

likely to affect all companies, particularly

those selling products with discretionary

demand and which have higher proportion

of wholesale trade vis-à-vis direct

distribution. The anticipated rural demand

recovery after a good monsoon was dented

by the effect of demonetization-led liquidity

crunch. MOSL Consumer universe EBITDA is

likely to decline 6.1%, with 130bp margin

decline. PFAD and Palm Oil prices saw steep

YoY inflation of 70% and 37%, respectively.

Ti02 and Mentha prices have not increased

sharply, up just 4% YoY and 3% YoY on

average for 3QFY17. Mentha prices over

past 20 days are up 10% YoY, though. LLP

and HDPE prices still remain benign, with

low-single-digit growth YoY.

-4.5

-1.2

-1.1



We expect ITC’s sales to decline 7% YoY

(led by 10% fall in cigarette volumes)

and PAT to decline 6.5%. HUVR’s sales

growth is estimated at 1.5% (volume

decline of 1%), with 100bp EBITDA

margin contraction. Barring PAGE, for

which we expect 13% PAT growth YoY,

none of the other companies is expected

to report any material growth in PAT. 11

out of 18 companies under coverage

actually are expected to report YoY

decline in PAT.

Financials

7.7

13.6

76.8

4.3

Private

Banks



Mixed picture expected with sustained

PSU Banks

NBFC

earnings pressure at corporate lenders like

ICICIBC and AXSB (led by asset quality strain)

and sustained growth trajectory at lenders

like YES and IIB. We expect most private

banks to report a drop in loan growth post

demonetization, but deposit intake will be

strong. CASA ratio will receive a boost

during the quarter, leading to lower cost of

funds. Lower C-D ratio and blended yields

may have marginal impact on NIMs.



Loan growth trajectory will continue

4.2

remaining muted, while deposit influx will

be strong, leading to downward pressure on

NIMs. Provisions are expected to remain at

elevated levels during the quarter, and

operating expenses will increase steeply.

Although core revenue will remain under

pressure, strong trading gains owing to

falling bond yields will provide cushion to

earnings.



Housing finance companies with low share

13.7

of LAP and corporate loans are expected to

perform relatively well than others. Those

with high share of LAP/corporate loans will

see significant slowdown in disbursements

as well as problems in collections.

Companies dealing in vehicle finance are

also likely to witness significant slowdown

and poor collection levels due to high share

10.1

0.9

-11.7

-7.8



Prefer ICICIBC and YES among corporate

lenders; HDFCB and IIB top pick among

retail lenders.

26.6

LP

14.5



Prefer SBIN, PNB and BOB among PSU

banks.

13.9

16.0

0.1



We expect LICHF to post strong results

among HFCs. Other key stocks to watch

out for are BHAFIN, MUTH and BAF.

January 2017

22

India Strategy | New Year, New Cards

SECTOR

Key highlights

Healthcare







Logistics



of cash dealings. Gold financiers and MFIs

are likely to be the worst hit, and AUM is

unlikely to register sequential growth.

With respect to the US market, Glenmark is 11.7

expected to exhibit strong growth in the US,

led by Zetia FTF and series of other generic

launches.

Sun and Lupin should continue to see

sequential decline in the US business on the

back of competition in key products.

Aurobindo should report stable US sales on

the back of key launches, including Crestor.

After strong 1H numbers, the domestic

business is expected to get impacted in 3Q

on the back of seasonality and

demonetization.

EXIM trade continues to be sluggish for

3.6

3QFY17. We expect overall container rail

volumes for 3QFY17 to decline by 2% YoY.

Margins to remain flat QoQ, with no major

improvement in trade.

3.2

3QFY17E YoY (%)

Sales EBIDTA PAT

Margin

Key stock to watch

Chg YoY (pp)

9.6

8.4

-0.5



GNP (+ve; gFTF launch should help drive

growth and margins).



ARBP (+ve; should report double-digit

growth in the US, despite key launches

getting deferred and pricing pressure).



Sun & LPC (-ve; should report sequential

decline in US sales on the back of

competition in key products).

1.5

-3.4

-0.3



Concor and GDL would report moderate

volume growth on YoY basis due to

higher transhipment volumes.

Media



We expect our universe ad revenue growth

to grow at a meager ~1% YoY, lower than 7-

13% in the preceding four quarters. Both

Broadcasters and Print companies are

expected to face the demonetization brunt.

The ad pain is expected to be more

debilitating for Print media, given their

higher reliance on local/retail advertisers –

most impacted group by the cash squeeze.

Zee’s ad growth is expected to moderate to

~4% YoY post six quarters of strong ad

revenues. Apart from FMCG, Auto, Telecom,

other sectors such as Auto, Consumer

Durables, Traditional retail too have cut

back on ad spends. Regional/niche channels

and publishers are expected to take a bigger

hit. Our industry interactions suggest that a

full recovery could be expected by 1QFY18.



DTH companies are expected take a hit in

recharges and fresh seeding as

demonetization impacts both. One can

expect cable companies to step up their

seeding rates from 1H levels as Delhi HC has

quashed all stay orders pertaining to DAS III

implementation. Phase III monetization

remains a key concern for all stakeholders.

Monetization expected to improve in

4QFY17.

-0.2

-5.1

-1.1



Zee Ent: 4%/12% ad/domestic

subscription CAGR.



20% EPS CAGR (adj. for pref dividend)

over FY16-19.

Metals



Across-the-board increase in commodity

prices. Zinc/lead average LME up 11/15%.



EBITDA for our coverage universe is

expected to increase 18% QoQ (2.7x YoY) on

higher realization and volume increase.



NMDC, Nalco and Vedanta to report strong

performance.

22.3

167.6

LP

10.4



NMDC EBITDA to increase 79% QoQ on

higher volumes and realization.



NALCO EBITDA to almost double QoQ to

INR3.5b on higher aluminum and

alumina prices.



Vedanta to report 44% QoQ EBITDA

increase, led by strong volume and price

growth in zinc and aluminum.

January 2017

23