3QFY17 | February 2017
VOICES
VOICES
India Inc on Call
VOICES, a quarterly product from Motilal Oswal Research, provides a ready reference for all the post results earnings calls attended by
our research analysts during the quarter. Besides making available to readers our key takeaways from these interactions, it also
provides links to relevant research updates and to the transcripts of the respective conference calls.
This quarterly report contains
Key takeaways from the post results management commentary for 123 companies, with links to the full earnings call
transcripts
Links to our Results Updates on each of the companies included
Research & Quant Team
(Gautam.Duggad@MotilalOswal.com); Tel: +91 22 3982 5404
Investors are advised to refer through important disclosures made at the last page of the Research Report.
24 November 2015
1
Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.

Contents
Summary
........................................................................................................................................................................................
3
Sectors
....................................................................................................................................................................................
7-117
Automobiles
7-15
Amara Raja Batteries ................... 7
Ashok Leyland.............................. 8
Bajaj Auto .................................... 9
Bharat Forge ................................ 9
Eicher Motors ............................ 10
Endurance Tech……………………….11
Hero MotoCorp ......................... 11
Mahindra & Mahindra ............... 12
Maruti Suzuki............................. 13
Tata Motors ............................... 14
TVS Motors ...…………………………. 14
Capital Goods
16-26
ABB………………………………………….16
Crompton Greaves CG ............... 17
Crompton Greaves…………………..18
Cummins .................................... 19
GE T&D India……………………………20
Havells India .............................. 21
KEC International ....................... 22
Larsen & Tourbo ........................ 22
Solar Inds…………………………………24
Thermax..................................... 24
Voltas………………………………………25
Cement
27-30
Dalmia Bharat ............................ 27
Grasim Inds ................................ 28
India Cements ............................ 28
JK Cements………………………………29
JK Lakshmi Cements…………………29
Ultratech ................................... 29
Consumer
31-44
Asian Paints ............................... 32
Britannia Inds ............................ 33
Dabur India ................................ 34
Emami........................................ 35
Godrej Consumer ...................... 36
Hindustan Unilever .................... 37
Jyothy Labs ................................ 39
Marico ....................................... 40
Parag Milk Foods………………………40
Pidilite Inds ……………………………..42
United Breweries……………………..42
United Spirit............................... 43
Financials- Banks
45-60
Axis Bank ................................... 46
Bank of Baroda………… ... ………….47
Canara Bank ............................... 48
DCB Bank ................................... 48
Federal Bank ............................. .50
HDFC Bank ................................ .50
ICICI Bank ................................... 51
IDFC Bank.................................. .52
Indian Bank…………………… ………..53
IndusInd Bank… ......................... 54
J&K Bank…………………………………..55
Kotak Mahindra Bank ................ 55
Punjab National Bank ................ 56
State Bank of India………… .......... 56
South Indian Bank…………………….57
Union Bank……………………………….59
Yes Bank .................................... 59
Financials – NBFC
61-68
Bajaj Finance.............................. 61
Bharat Financial………………………..62
Dewan Housing Finance ............63
Equitas Holdings ........................ 63
IDFC Ltd ..................................... 64
IndiaBulls Housing Finance ........65
M&M Financial .......................... 65
Muthoot Finance………………………66
Repco Home Fin……………………….67
Shriram City Union Fin……………...67
Shriram Transport Finance ........68
Healthcare
69-76
Alembic Pharma ........................ 69
Alkem Labs................................. 70
Aurobindo Pharma .................... 70
Biocon ........................................ 71
Cadila Healthcare....................... 71
Cipla ........................................... 72
Dr Reddy’s Labs ......................... 73
Glenmark Pharma ...................... 73
Granules India…….…………………….74
IPCA Labs……….….……………………..75
Lupin .......................................... 75
Sun Pharmaceuticals ................. 76
Torrent Pharma ......................... 76
Media
77-79
D B Corp….……..…………………………77
Hindustan Media Ventures ........78
Zee Entertainment .................... .78
Metals
80-82
Hindalco Inds………….………………..80
Hindalco Zinc ............................. 81
JSW Steel ................................... 81
Tata Steel ................................... 82
Oil & Gas
83-85
India Oil ..................................... 83
Reliance Inds.............................. 84
Retail
86-89
Jubilant Foodworks.................... 86
Shoppers Stop ........................... 87
Titan........................................... 88
Technology
90-99
Cyient.........................................91
HCL Tech ....................................91
Hexaware Technologies .............92
Infosys........................................92
KPIT Technologies ......................93
L&T InfoTech…………………………….94
Mindtree ....................................94
Mphasis .....................................95
NIIT Technologies ......................95
Persistent Systems .....................96
TCS .............................................96
Tata Elxsi ....................................97
Tech Mahindra...........................98
Wipro .........................................98
Zensar Technologies ..................99
Telecom
100-108
Bharti Airtel .............................100
Bharti Infratel ..........................103
Idea Cellular .............................104
Tata Comm...……..……………………107
Utilities
109
JSW Energy ..............................109
Others
110-117
Allcargo Logistics……………………110
Arvind Ltd ................................110
Container Corp ........................111
Gateway Distriparks.................111
Info Edge (India) ..................... 112
Interglobe Aviation ..................113
Just Dial....................................114
MCX .........................................115
S H Kelkar……………………………….115
SRF…………………………………………116
Index (Alphabetical)
Companies
ABB
Alembic Pharma
Alkem Lab
Allcargo Logistics
Amara Raja Batt.
Arvind
Ashok Leyland
Asian Paints
Aurobindo Pharma
Axis Bank
Bajaj Auto
Bajaj Finance
Bank of Baroda
Bharat Financial
Bharat Forge
Bharti Airtel
Bharti Infratel
Biocon
Britannia
Cadila Health
Canara Bank
CG Consumer Elect.
Cipla
Concor
Crompton Greaves
Cummins India
Cyient
D B Corp
Dabur
Dalmia Bharat
DCB Bank
Pg
16
69
70
110
7
110
8
32
70
46
9
61
47
62
9
100
103
71
33
71
48
17
72
111
18
19
91
77
34
27
48
Companies
Dewan Housing
Dr Reddy’ s Labs
Eicher Motors
Emami
Endurance Tech.
Equitas Holdings
Federal Bank
Gateway Distriparks
GE T&D India
Glenmark Pharma
Godrej Consumer
Granules India
Grasim Industries
Havells India
HCL Technologies
HDFC Bank
Hero Motocorp
Hexaware Tech.
Hind. Unilever
Hindalco
Hindustan Media
Hindustan Zinc
ICICI Bank
Idea Cellular
IDFC Bank
IDFC Ltd
India Cements
Indiabulls Housing
Indian Bank
IndusInd Bank
Info Edge
Pg
63
73
10
35
11
63
50
111
20
73
36
74
28
21
91
50
11
92
37
80
78
81
51
104
52
64
28
65
53
54
112
Companies
Infosys
Interglobe Aviation
Indian Oil Corp
IPCA Labs.
J K Cements
J&K Bank
JK Lakshmi Cem.
JSW Energy
JSW Steel
Jubilant Foodworks
Just Dial
Jyothy Labs
K E C International
Kotak Mahindra Bank
KPIT Tech.
L&T Infotech
Larsen & Toubro
Lupin
M & M Financial
Mahindra & Mahindra
Marico
Maruti Suzuki
MCX
Mindtree
Mphasis
Muthoot Finance
NIIT Tech.
Parag Milk Foods
Persistent Systems
Pidilite Inds.
Punjab National Bank
Pg
92
113
83
75
29
55
29
109
81
86
114
39
22
55
93
94
22
75
65
12
40
13
115
94
95
66
95
40
96
42
56
Companies
Reliance Inds.
Repco Home Fin
S H Kelkar
Shopper's Stop
Shriram City Union
Shriram Transport Fin.
Solar Inds.
South Indian Bank
SRF
St Bank of India
Sun Pharmaceuticals
Tata Comm
Tata Elxsi
Tata Motors
Tata Steel
TCS
Tech Mahindra
Thermax
Titan Company
Torrent Pharma
TVS Motor
Ultratech Cement
Union Bank
United Breweries
United Spirits
Voltas
Wipro
Yes Bank
Zee Entertainment
Zensar Tech
Pg
84
67
115
87
67
68
24
57
116
56
76
107
97
14
82
96
98
24
88
76
14
29
59
42
43
25
98
59
78
99
Note:
All stock prices and indices are as on 20th February 2017, unless otherwise stated

3QFY17 | India Inc on Call
Voices | 3QFY17
Voices
BSE Sensex: 28,662
S&P CNX: 8,879
In
Initial fears relating to demonetization exaggerated
Y
e
Yet, impact evident in most sectors; continuing into 4Q for a few
3QFY17 was a unique quarter, as it was the first earnings print after
demonetization and investors eagerly awaited the results announcements to
gauge the impact on various sectors. Performance as well as management
commentaries suggest that the initial fears relating to demonetization were
exaggerated. Companies met demonetization with several micro-initiatives –
credit extension, distribution expansion, and cost control across the board.
Apart from FMCG and Autos-Two Wheelers, most sectors navigated
demonetization without material impact on P&L. However, for some sectors
like NBFCs and Autos-Four Wheelers one needs to watch even 4QFY17
performance to see if the demonetization blues are truly behind.
The private capex cycle is yet to revive and management commentaries do not
suggest imminent pick-up, though order execution is broadly on track.
In BFSI, CASA deposits received a huge boost. Slippages and credit costs
remained elevated in 3QFY17, cushioned by strong trading gains on account of
falling yields. Retail credit has been robust. However, corporate credit growth
is yet to revive and broader asset quality recovery still seems distant.
Headwinds from input cost inflation were evident, more so as the demand
environment for B2C sectors was constrained due to demonetization. One
needs to closely monitor demand revival and pricing actions by India Inc to
form a view on sustenance of the current elevated operating margins.
Autos
After a prolonged period of muted demand, 2Ws and PVs witnessed strong
recovery, led by normal monsoon and positive sentiment. However, this recovery is
likely to lose momentum (especially in 3QFY17) due to the impact of
demonetization. Export demand for 2Ws, 3Ws and PVs is likely to bottom out, as the
availability of currency improves steadily. With commodity prices hardening, input
costs are likely to inch up over the coming quarters.
Capital Goods
Though execution of orders in hand broadly remains on track, the industry
maintains its cautious outlook. Industrial capex activity could be a few quarters
away, as capacity utilization for most companies – a function of demand
improvement – remains weak. Key infrastructure segments witnessing demand
traction are transmission, renewables, defense, roads and railways.
Cement
The cement sector reported volume decline of 1.5% YoY (growth of 2.1% QoQ) in
3QFY17. Volume growth was strong in the South due to higher government
spending in Andhra Pradesh and Telangana, and lower base due to floods in the
South in 3QFY16. Moreover, volume growth for Northern players was impacted due
to demonetization, with all North-based cement companies showing YoY decline in
3QFY17. Average 3QFY17 realization declined 1% QoQ (but grew 2% YoY); South
based players witnessed higher realizations. The cost curve turned unfavorable, with
higher power and fuel cost, and higher freight costs.
February 2017
3

Voices | 3QFY17
Consumer
Initial fears relating to demonetization were exaggerated. However, the slowdown
created by demonetization washed away the expected benefits of a normal
monsoon from 2HFY17. Management commentaries have called out a gradual
recovery from the demonetization impact. YoY gross margin gains have been
reducing and could be absent in following quarters, given rising material costs.
Cutbacks in A&P and other expenses restricted the impact of slower sales on
EBITDA. Moderate raw material inflation is usually good for FMCG companies in a
healthy demand environment, as volume gains are abetted by realization growth as
well. However, in an environment of gradual demand recovery, passing on raw
material cost increases may not be easy. Also, with A&P already likely to be lower
than usual in FY17, it would not be a margin lever.
Financials
CASA deposits received a huge boost across the banking system, led by
demonetization. Slippages and credit costs remained elevated in 3QFY17, cushioned
by strong trading gains on account of falling yields. Interest income reversals,
negative carry on CRR and change in asset mix (declining C-D ratios) kept margins
under pressure, which led to subdued core income performance. We expect more
progress in resolution mechanisms in FY18, led by stressed asset sales and greater
cooperation between banks and promoter companies. Amid muted corporate
activity and credit growth, banks continued to focus on the retail segment. Given
the competitive landscape and economic scenario, system loan growth is likely to
remain moderate in FY17, with private banks continuing to gain market share.
Healthcare
In pharmaceuticals, overall sector sales and EBITDA margins were marginally above
estimates. Excluding one-off opportunities, growth in US sales remained muted,
primarily owing to increased pricing pressure. India formulations sales were
impacted by demonetization drive in 3QFY17, after being impacted by external
factors like FDC ban and NLEM 2013 since 4QFY16. Emerging markets delivered
robust constant currency growth, but FX volatility continues to impact INR growth.
We expect US sales momentum to pick up, given increasing number of approvals for
Indian companies. Emerging market growth should normalize, with stable currency
movement. Overall, earnings growth should improve over the next few quarters.
Media
Demonetization put brakes on both ad and subscription revenues across platforms.
Print Media was the most impacted, given its higher reliance on local/retail
advertisers that were most impacted by the cash squeeze.
Broadcasters
ZEE delivered a resilient 3% ad growth, though lower than expected (INR9.55b
v/s estimate of INR9.79b). Domestic subscription of INR4.81b (+15% YoY) beat
our estimate of INR4.69b by 2.7%, but this was largely a function of early closure
of content deals with a few distribution platforms. International subscription
grew 8% YoY to INR1.11b. Deferment of A&P spends and other opex levers
ensured a margin beat (31.5% v/s estimate of 26.5%). Non-sports EBITDA margin
was at 33.9% (v/s estimate of 30.7%). For FY18, ZEE expects FMCG ad spends to
recover. Telecom and Auto too are expected to step up ad spends. Post the
sports sale, margins could surge 30%; however, the management intends to re-
invest in fresh content and maintain ~30% margins over the long term.
SUNTV’s ad growth was significantly lower than expectation (INR5.9b v/s
estimate of INR6.25b). Lower movie amortization and higher other income
offset the negative leverage impact. Improvement in viewership in AP market
validates the performance of its recent switch to commissioned content.
February 2017
4

Voices | 3QFY17
However, sustenance of the same and successful replication in other markets is
yet to be established.
Distribution platforms
DITV’s subscription revenue declined 5% QoQ to INR6.92b (6.7% lower than
estimate of INR7.42b), as demonetization adversely impacted both DTH
recharges and subscriber additions. Management estimates subscription to be
8% higher (ex-demonetization impact), with 8-10% impact. DITV added 0.2m
subscribers in 3Q. Margins were largely flat at 33.4% (106bp below estimate).
Print companies
While the demonetization pain was more debilitating for print, within the print
pack, JAGP outperformed peers in terms of ad growth (3% v/s DB Corp’s 2%, HT
Media’s -9%, and HMVL’s -7%). Ex-HMVL, all print companies evoked opex
levers (led by reducing pagination) to save margins.
Ad recovery could be a quarter away, as advertising agencies re-align budgets
for the next fiscal post the knee-jerk event. JAGP/HT Media/HMVL should put up
a better show, courtesy elections in Uttar Pradesh.
Newsprint prices have marginally inched up by 2-3% in 1H. Print companies
expect newsprint prices to stabilize at current levels.
Metals
The metals sector benefited from higher realization and volumes, offset partly by
the impact of demonetization-led weakness. EBITDA for the coverage universe grew
16% QoQ / 172% YoY to INR170b. Nalco, NMDC, Tata Steel and Vedanta were the
outperformers. Amongst the steel companies, Tata Steel outperformed, with
EBITDA growth of 19% QoQ to INR35b, led by higher realization and ferro chrome
prices in India and volume growth. Europe, however, disappointed. JSW Steel’s
EBITDA/ton was higher by 9% QoQ, but volumes declined by 5%. SAIL was back into
negative as EBITDA/ton declined by INR440 QoQ to negative INR130. NMDC posted
72% QoQ jump in adjusted EBITDA on strong volumes on robust domestic steel
production and higher prices. Nalco’s EBITDA was up 66% QoQ on higher LME and
lower aluminum CoP. Vedanta’s EBITDA increased 28% QoQ led by higher zinc,
aluminum and iron ore prices. Hindalco’s EBITDA declined 2% QoQ due to
temporary impact of demonetization.
Oil & Gas
In oil & gas, RIL posted below estimate EBITDA, impacted by GRM at USD10.8/bbl
and higher opex. Jio’s trial user base reached 72.4m in December 2016 and capex
reached INR1.71t. OMCs reported lower GRMs despite inventory gains during the
quarter. Petronet reported better than expected results, led by higher volumes. IGL
posted in-line EBITDA helped by strong volume growth. ONGC’s EBITDA was aided
by lower opex, as service cost for workover wells reduced with oil price decline.
Retail
Demonetization did not have as adverse an impact as initially feared. Sales, EBITDA
and PAT were ahead of our conservative expectations for all companies. However,
weak SSSG momentum continued for JUBI (-3% LTL) and SHOP (6% LTL), while TTAN
(15% jewelry sales growth) showed buoyancy owing to market share gains from
unorganized players. Sustained demand recovery, which will transform the earnings
prospects for retail companies with high fixed cost intensity, is still not visible.
Subsequently, margins may continue to decline or not increase at the desired pace.
GST implementation from July 2017 may be an initial disrupter, but if implemented
well, can be a longer term positive, particularly for TTAN. While SHOP and TTAN are
opening stores in moderation, JUBI’s expansion plans of over 100 stores a year will
put pressure on margins and free cash flows, in our view.
February 2017
5

Voices | 3QFY17
Technology
3Q was impacted on account of seasonal weakness, led by fewer working days and
furloughs. Some macroeconomic factors have been easing out – the shock of Brexit
and US elections are now behind; moreover, interest rate cycles have started
reversing in the US, allowing banks to free up some of their spend crunch. However,
clarity on budgets for the next year is still emerging. Macroeconomic factors look in
better shape compared to the same time last year; however, deal conversions and
revenue growth are yet to reflect any material pick-up. Companies have been
cautiously optimistic about growth in the coming year.
Telecom
Telcos have witnessed sharp decline in both voice and data revenues. The voice
segment has seen traffic growth on the back of unfavorable increase in incoming
traffic. This has led to steep price decline due to the low IUC of INR0.14/min on
incoming minutes. Data business has seen shift of consumption towards secondary
sim cards, leading to sharp decline in data traffic. This should continue in 4QFY17
and may extend beyond 4QFY17 if RJio continues to offer free/subsidized data.
Additionally, the network cost has increased, particularly for Idea due to the data
led network rollout. Subsequently, its EBITDA has been on a downward spiral of 20-
25% QoQ in 3QFY17 and may continue to fall even in 4QFY17.
Utilities
PGCIL’s performance was strong, backed by robust capitalization. Outlook for PGCIL
remains promising on strong capitalization guidance. NTPC reported 8% PAT growth,
in-line with regulated equity growth. JSW Energy suffered on weak merchant power
market, while CESC was steady, with ~5% PAT growth and turnaround at Spencer.
February 2017
6

AUTOMOBILE | Voices
Key takeaways from management commentary
AUTOMOBILES
After a prolonged period of muted demand, 2Ws and PVs have witnessed strong recovery, led by normal
monsoon and positive sentiment. However, this recovery is likely to lose momentum (especially in 3QFY17) due to
the impact of demonetization. Export demand for 2Ws, 3Ws and PVs is likely to bottom out, as the availability of
currency improves steadily. With commodity prices hardening, input costs are likely to inch up over the coming
quarters.
KEY HIGHLIGHTS FROM CONFERENCE CALL
Outlook for FY17-18
Expects motorcycle industry volumes to remain flat
in FY17 (v/s earlier estimate of 5-7% growth).
Expects FY17 volumes at 3.8m units (v/s earlier
estimate of 4.5m units).
Export market headwinds to persist for next 3-6
months, but further deterioration unlikely.
Royal Enfield:
Capacity expansion on track; Vallam
Vadagal plant to be commissioned in 3QFY18. For
rd
FY19, target of 900k, with 3 plant commissioning
operations in FY19.
Impact of Demonetization
Situation post demonetization improving gradually;
expects coming months to be better.
Domestic volumes to normalize from April 2017.
Bajaj Auto
Eicher Motors
Hero MotoCorp
Expects single-digit growth in FY18, with 2H likely to
be stronger than 1H.
Scooters to outpace motorcycle growth rate (though
growth unlikely to be 30% plus).
Royal Enfield:
While bookings/enquires were down
during the first two weeks post demonetization, RE
bookings have normalized.
VECV:
November and December were difficult for
the CV industry. The situation has improved since
then; demand should pick up in the next two months
on pre buying.
Post demonetization, volumes likely to be flat in
February and March 2017. Improvement should
follow from 1QFY18.
Mahindra
& Mahindra
Maruti
Tractor industry growth revised to 8-10% in 4QFY17,
translating into 16-17% (v/s 20% earlier) industry
growth for FY17. Expects PV to witness 11-12%
growth in FY17. 3Ws likely to be in negative territory
in FY17.
Export volumes to be flat in FY17; Baleno exports to
be ~50,000 units in FY17.
Sees recovery in January 2017 after two months. PVs
were the least affected, while 2Ws and tractors were
the worst hit. Expects full recovery by April 2017,
with rural markets recovering; urban markets have
almost recovered.
Bookings had dropped initially post demonetization.
In December, the situation has improved MoM.
However, it is noteworthy that sales in December are
generally higher due to year-end phenomenon.
While recovery is already evident in urban regions
post demonetization, the management expects rural
recovery to follow.
Amara Raja Batteries
Current Price INR 863
Click below for
Results Update
Buy
Target Price INR 1,087 | 26% Upside
Impact of demonetization felt in 2W segment.
Increased market share in both 2W and 4W replacement segment.
Auto OEM growth in low-single-digit, implying strong growth in replacement
segment.
New tubular plant operated at ~30% utilization (offseason).
Lead prices for 3QFY17 at USD1,950-2,000/ton, which could be over
USD2,150/ton for 4QFY17.
Expansion of 4W battery capacity by 2.4m units (to 10.8m) on track for
commissioning in 4QFY17.
7
February 2017

AUTOMOBILE | Voices
Inventory is slightly higher due to lower demand in 2W batteries and pre-season
buildup of inverter batteries.
Capex for FY17 to be INR4.5b-5b for 2W and 4W battery capacity.
Net cash at the end of December 2016 at INR2.5b.
AMRJ is gearing up to be a leader through i) consolidating in existing areas, ii)
entering new business opportunities within battery space, mainly home UPS,
solar and motive power, and iii) aided by capacity and network expansion. The
company aims to increase its share in the OEM and replacement segments to
40% (from current 30%) and 30% (from current 24%) respectively over the
medium term. In the telecom segment, AMRJ expects to maintain its market
share at current levels (60% currently).
A
Ashok Leyland
Current Price INR 94
Click below for
Results Update
Buy
Target Price INR 114 | 21% Upside
Demonetization impact:
MHCV volumes were hit post demonetization as
payments for driver wages, freight and toll are primarily made in cash. Bus
segment for AL showed growth, primarily led by invoicing to STUs. It expects
situation to normalize as availability of cash improves.
Discounting in the industry
has gone up especially post demonetization.
Average discounts in the industry have increased to ~ INR300k/unit from 225-
250k/unit. It expects discounts to slightly moderate in 4QFY17.
Commodity costs
(especially steel) have hardened QoQ as coking coal prices
have shot up. Increase in commodity costs has been largely factored in 3QFY17
raw material costs.
Inventory:
AL has inventory of 11,500 units in anticipation of pre-buying in Feb-
Mar-17.
Price hike:
AL has undertaken price hike of 4% in Jan-17 to offset commodity
cost inflation in order to protect EBITDA margin. No price hike was undertaken
in 3QFY17 in order to safeguard demand immediately post demonetization.
LCV business
enjoys gross margins of 25-26%, which is more than AL margins.
LCV business is EBITDA-positive as on date. AL has taken 100% takeover of LCV
business. It plans to launch new models along with refreshes of Dost going
forward.
Export business:
The company clocked export revenues of ~INR3.8b in 3QFY17.
It plans to expand to Africa, South East Asia and South America in the near
future to further expand its global footprint. The company saw a dip in export
orders from Sri Lanka and the Middle East.
AL plans to
de-leverage
its business model by increasing the share of non-
cyclical business, i.e. exports, spare part revenues and defense. Share of
domestic CVs accounted for 71% in 3QFY17, while defense revenue accounted
for 3-5% of total revenues and exports for 10%.
Capex for FY17 is expected at INR4b.
Management indicated capex of INR5-
7.5b in FY18 (which includes capex on LCV business and capacity additions).
Hinduja Foundries Limited (HFL):
The process of merger with HFL is on track.
HFL reported second straight quarter of EBITDA positive numbers.
Cash generation
during the quarter was ~INR3.5b with net debt to equity of
0.25:1 (0.3:1 in 2QFY17).
February 2017
8

AUTOMOBILE | Voices
Bajaj Auto
Current Price INR 2,793
Click below for
Results Update
Buy
Target Price INR 3,431 | 23% Upside
Management expects
domestic motorcycle industry volumes to remain flat in
FY17 (v/s earlier expectations of 5-7% growth).
It expects Jan-17 volumes to
decline on YoY basis and expects normalization in volumes only by Apr-17.
Similarly, it expects
3Ws sales to remain subdued over next 2-3 months.
On exports, it expects headwinds to persist for another 3-6 months,
but does
not expect the situation to deteriorate any further. While improvement in
commodity prices is positive, heightened uncertainty globally due to geo-
political issues is a key concern.
For Bajaj Auto, it now expects FY17 volumes at 3.8m (v/s 4.5m earlier)
– flat to
marginal decline.
BJAUT has taken
price hikes in motorcycles by INR250-300 from Oct-16 and
INR500-1,000 from Jan-17
to pass on commodity cost inflation and BSIV related
costs.
Partial pass through of BSIV related cost
as competition is yet to launch BSIV-
compliant products. Further, commodity-led cost pressures would be INR1,500-
2,000/3W.
For the industry, it expects commodity-related cost increase of INR350-
400/motorcycle (70-80bp) in 4QFY17 on the back of ~INR200 witnessed in
3QFY17.
For its recent launches, in normalized demand environment, it expects
Dominar
volume at ~8,000 units/month (launched in Jan-17), V (12 & 15) at 35-
40,000/month (V15 9MFY17 average of ~20k/month and V12 launched in Dec-
16), and 3W Cargo at ~6,000/month (v/s ~3,000/month currently).
Dominar is targeting to gain ~10% market share (or ~8,000 units/month) of the
segment priced above ~INR150k/unit,
which is ~80,000 units/month. Dominar
production would see gradual ramp-up from ~2,500 units in Jan-17 to 4,000
units in Feb-17.
Bharat Forge
Current Price INR 1,077
Buy
Target Price INR 1,110 | 3% Upside
Click below for
Results Update
4QFY17 outlook:
It anticipates positive demand condition in India driven by
higher CV volumes as pre-buy ahead of new emission norms. The company
expects continued recovery in export markets driven by industrial and
passenger vehicle sector. The performance of Class 8 volume trucks in North
America is showing some signs of improvement currently in terms of order
intake. Management expects the focus on infrastructure to generate better
opportunities, while the EU automotive market continued to be reasonably
stable.
Outlook for Class 8 trucks:
While it expects Class 8 truck US volumes to decline
in CY17, Bharat Forge is expected to perform better on account of new
customer additions as well as new products. Besides, thrust on infrastructure
spending is likely to push demand for CV in North America.
New product development and business wins:
Its key focus areas are towards
solutions for complete power train and chassis readiness for BSVI change in
2020, portfolio enhancement in passenger, locomotive and aerospace sector.
February 2017
9

AUTOMOBILE | Voices
Oil & gas sector rebounds:
The company registered ~INR 850m revenues from
the oil & gas sector (v/s ~INR1b in 3QFY16). It accounted for about 23% of non-
auto revenues. The peak reached in oil & gas was at about ~ INR 1.3b. It is
seeing revival as visible from increase in the rig count, up 138% from trough in
Apr-16.
Defense sector revenues
have started materializing. The company doubled its
defense revenues to ~INR450m in 3QFY17.
Aerospace is ramping up,
with products in the development phase currently. It
expects to reach validation stage in six months. 9M aerospace revenue was
~INR200-250m.
BS 6 opportunity:
It expects BS 6 norms in 2020 to be a big trigger for the
company. It has invested in R&D and is well prepared for the technology.
Raw material costs:
While commodity costs have increased for domestic
market, BHFL will take a price hike only if its suppliers pass on the cost.
International market is also expected to witness commodity cost pressures.
Capacity expansion:
It expects capex of ~INR3b in FY17 and a similar amount in
FY18 too. The company is setting up a 5,000T and 2000T press to cater to
additional demand for PV products. Besides, it is setting up a machining line for
passenger car components, which will be commercialized in FY18 along with
machining facility for complex and critical aerospace components.
Net debt free target:
The company expects to be debt free by FY18. Current
gross debt stood at ~INR18.4b and net debt was ~INR5.7b as on Dec-16.
Acquisition of Walker Forge Tennessee:
During the quarter, the company
completed the acquisition of Walker Forge Tennessee LLC for a transaction
value of USD14m.
Eicher Motors
Current Price INR 25,024
Royal Enfield
Click below for
Detailed Concall Transcript &
Results Update
Buy
Target Price INR 29,172 | 17% Upside
Demonetization impact:
While bookings/enquires were down during the first
two weeks post demonetization, management indicated RE bookings have
normalized. The company has not altered any terms with its dealers (wrt to
offering credit).
Waiting period
for best-seller Classic model continues to be around three
months.
Commodity costs:
Raw material costs have marginally gone up as commodity
costs have hardened QoQ. It does not see a major impact on 4QFY17 RM costs.
Price hike:
RE has not taken any price increase in 3QFY17 or January 2017. Price
hike of 1% was taken in Aug-16.
BS IV norms:
As per managements understanding on the regulation norms, only
BS IV products could be sold from Apr-17.
Export market:
RE has opened an outlet in Australia with the sale of Himalayan
motorcycle. Besides, it opened a first gear store outside India in Jakarta,
Indonesia. It will complete a year in Mar-17 at its outlet in Jakarta and Bangkok.
Capacity expansion update:
Capacity expansion is on track, with Vallam Vadagal
plant likely to be commissioned in 3QFY18. The new technical center in the UK is
likely to be commissioned over next two months.
RE expects to launch a new product in the next financial year (FY18). The
Company wants to focus on the newly created category Himalayan.
10
F b
February 2017

AUTOMOBILE | Voices
Pan-India dealer count
in Dec-16 stood at 640. It maintains its guidance of 100
dealer additions/year.
Increase in banking channels:
Post demonetization, the use of banking channels
has increased v/s cash payments. Management does not per se see any increase
in financing.
RE continues to maintain its run-rate of 15% same-store-sales growth.
VECV
Demonetization impact:
Nov-Dec-16 months were extremely hard for the CV
industry. However, the situation has improved. Management expects demand
to pick up during over next two months led by pre-buy effect.
Price hike of 1%
has been taken in 3QFY17 for VECV trucks.
Discounts continue to remain high in the HD segment; Management believes
higher discounts are primarily to gain market share rather than to boost
demand.
MDEP engine volumes at ~5,848 units, up 24% YoY.
Endurance Technologies
Current Price INR 671
Click below for
Results Update
Buy
Target Price INR 732 | 9% Upside
Aftermarket is a major focus area, especially for exports, through expansion in
existing markets and entry in new markets.
Bajaj Auto contribution was down to 38% of consol. revenues in 9MFY17 (v/s
42% YoY).
It would start supplying clutch and CVT to HMCL in 2HFY18.
CVT is a huge opportunity and focus area. It might take up to 1.5 years to tap
CVT opportunity with HMSI and Yamaha.
For ABS, it has a MoU with a global player and the tie-up should be done by
Mar-17.
Increase in content per bike to be driven by new products (like CVT, clutch and
brakes) and higher share in existing products with newer customers.
Commissioned machining plant in Germany for Daimler.
FY17 capex guidance of ~INR2.75b for India and EUR15m for EU
Hero MotoCorp
Current Price INR 3,103
Neutral
Target Price INR 3,190 | 3% Upside
Click below for
Results Update
Demonetization impact:
While Nov-Dec 16 witnessed a sharp decline in 2W
volumes, management feels the situation has improved in Jan-17 on a MoM
basis. It expects flat volumes in the coming months of FY17. Recovery is better
in north and parts of south, while west and other parts of south continue to be
sluggish.
Outlook for FY18:
It expects good single-digit growth in FY18, with 2HFY18 to
likely to be stronger than the first half of the year. The company expects
scooters to slightly outpace motorcycle growth in FY18, though scooters are not
expected to grow at previous 30%+ growth rates.
Commodity costs:
HMCL’s arrangement with vendors, on commodity cost pass
through is with a 3-6 month lag (steel price hike comes with a six-month lag).
While RM costs in 3QFY17 reflected the average commodity cost rate of
1HFY17, commodity costs in 3QFY17 have started hardening. Management
February 2017
11

AUTOMOBILE | Voices
indicated that steel prices have gone up by 20-25% QoQ. It expects commodity
cost pressures to reflect over next two quarters.
Price hikes:
The Company has taken a price hike of INR 500-1,500/unit (100-120
bp), partly offsetting commodity cost increase and partly for models rolled out
with BS-IV.
HMCL’s dealer inventory stood at 6-7 weeks.
LEAP Cost Cutting Program
at ~INR1.92b for FY17 YTD (till Jan) v/s ~INR2.8b for
FY16. For FY17E, expects it to be ~INR2.5-2.55b and FY18 at 50-60bp (scope to
increase further by 20-25bp with additional initiatives).
Capex
in FY17 is estimated to be ~INR 12-14b. It expects capital outlay of
INR20b in FY18 (incl. phase 2&3 of the Halol plant) along with ~INR3.5-4b for
Andhra plant. Realistically capex is likely to be ~INR10-11b. Current capacity
stood at 8.9m units.
Emission norms:
It expects INR 400-500/unit of cost increase due to shift to
BSIV norms in Apr-17.
Spare sales
were at ~INR 5b in 3QFY17 (v/s ~INR6b in 2QFY17), decline of 17%
QoQ, on account of demonetization as the cash component is very high.
Replacement market
got affected by demonetization due to larger proportion
of cash component for exchanges along with a higher share of unorganized
market.
Mahindra & Mahindra
Current Price INR 1,315
Click below for
Detailed Concall Transcript &
Results Update
Buy
Target Price INR 1,506 | 15% Upside
Demonetization impact:
The management sees recovery in January 2017 after
two months of demonetization impact. According to the management, PVs were
the least impacted while 2Ws and tractors were the worst hit. While recovery is
already evident in the urban markets, full recovery is likely by April 2017.
Industry guidance:
Post demonetization, the management revised its tractor
industry growth guidance for 4QFY17 to 8-10%, implying 16-17% industry
growth rate for FY17. It expects the PV industry to grow 11-12% in FY17. 3Ws
are likely to be in negative territory in FY17.
Inventory:
MM’s tractor inventory (factory + dealer) stood at 60 days (normal
level), while automobile inventory was at 50 days (lowest in 5-6 quarters).
New launches:
MM plans to launch an MPV code-named ‘U321’, which is being
developed at its technical center in Detroit and is expected to be launched after
12 months. Vehicle on the Tivoli platform (S221) is expected to be launched in
2HFY19. Besides, two new tractor platforms are expected to be launched during
the year under the M&M and Swaraj franchise, along with variants of Nuvo and
Yuvo. XUV 5OO gasoline variant is expected to be launched in 1QFY18, based on
the success of which Scorpio gasoline would be launched.
Capex:
MM has invested ~INR15b for capacity expansion from 160k units to
210k units at its Nashik facility. This, along with ongoing investment at Chakan
(of ~INR45b), is eligible for Ultra Mega Project status and enjoys incentives
under it. These are part of MM’s three-year investment guidance of ~INR100b.
Tax rate:
Effective tax rate is expected to go up by 4% from 27% to 31% due to
lapse of tax benefit available on R&D expenses along with reduction in weighted
average deduction to 150% of R&D from the current 200%.
February 2017
12

AUTOMOBILE | Voices
Spare parts sales during 9MFY17 were 12% higher. No major change in spare
parts sales was seen post demonetization.
Commodity costs:
Raw material costs are expected to go up on account of
hardening of steel, rubber and plastic costs.
Price increase:
MM has taken a price increase of 0.7% from January 2017 on
both Tractors and Autos segments, and 1% and 1.7% price increases YTD
January 2017 in tractors and automotive products, respectively.
BS-IV impact:
MM expects cost increase of ~INR150K/unit (7-8% of selling price)
for CVs while it foresees a 15-20k/unit rise in LCVs on account of cost escalation
due to BS-IV norms from April 2017.
Market share:
MM achieved its highest market share in tractors at 44%, driven
by newly-launched products.
Ssangyong launches:
It plans to launch a new product every year, with Y400
(new large SUV) and Q200 pickup in 2018, and another product in May 2019.
2-wheeler segment:
MM has merged the 2W business from October 2016;
accumulated losses in the 2W business were at ~INR25b.
Maruti Suzuki
Current Price INR 6,092
Click below for
Detailed Concall Transcript &
Results Update
Buy
Target Price INR 6,808 | 12% Upside
Demonetization impact:
Bookings had dropped initially post demonetization;
however, management indicated the situation has improved on MoM basis.
Sales in Dec historically have been generally higher due to year-end
phenomenon and hence difficult to identify a trend. It sees rural recovery
similar to urban recovery post demonetization.
Petrol:
Diesel mix for the industry in 3QFY17 stood at 60:40, up from 56:44 in
2QFY17. MSIL’s share for 3QFY17 was 70% petrol and 30% diesel.
Customer mix:
First-time buyers and government employees (15-16% of
volumes) increased in 3QFY17, while small businessmen were hit on account of
demonetization. Demand from commercial vehicle segment was stable during
the quarter. Salaried employees accounted for 45% of total sales volumes.
Financing mix
for MSIL stood at 80% of domestic sales. Post demonetization,
average LTV has gone up.
Average discounts stood at INR 19,048
(higher by ~INR2950/unit QoQ and
lower by ~INR 2950 YoY). Discounts are generally higher in Dec months on
account of year-end phenomenon.
Gujarat plant update:
Commercial production to start in 4QFY17, with a
capacity of 0.25m units during the first phase. It expects the plant to fully ramp
up in six months.
Commodity costs
(especially steel prices) have started hardening. Commodity
costs were 110 bp higher on a YoY as well as QoQ basis. Bulk of steel price rise
has been reflected in 3QFY17 raw material cost increase.
Price increase:
The company has not taken any price increase during the quarter
and in January.
Waiting periods:
Baleno enjoys a waiting period of 24 weeks, Vitara Brezza
commands a waiting period of 18 weeks, while newly launched Ignis has a
waiting period of 8-10 weeks.
Other income:
Management expects ~INR1.5b on a sustainable basis.
February 2017
13

AUTOMOBILE | Voices
Advertisement expenses
were lower in 3QFY17 by ~INR0.25b QoQ.
Management has guided for higher marketing expenses, going forward.
Royalty
in 3QFY17 was INR9.3b or 5.5% of net revenues (v/s 6.1% in 2QFY17). It
expects royalty rate to be stable in 4QFY17.
Capex:
It expects INR35b of capex in FY17, with ~INR18b to be spent on model-
related expenses. Going forward, it has guided for higher spends on marketing
infrastructure along with maintenance capex at its Manesar and Gurgaon as
they are aging (in operation for ~30 years).
Tata Motors
Current Price INR 456
Click below for
Detailed Concall Transcript &
Results Update
Buy
Target Price INR 653 | 43% Upside
Management indicated JLR would start benefitting from favorable GBP after 4-5
quarters – till then, the adverse impact of realized FX is expected to hurt
operating performance.
JLR’s operating performance was hit during the quarter primarily due to
convergence of multiple factors, such as higher launch and ramp-up costs and
unfavorable product mix, which are likely to reverse in 4QFY17.
The start of Discovery wholesales, peak March UK sales and other seasonal
factors are likely to support 4QFY17 operating performance.
GBP weakened by 5% QoQ.
It expects higher levels of incentive spending to continue.
The company has targeted EBIT margin of 8-10%, similar to its competitors over
the long term, which translates into EBITDA margin of 14%.
Raw material costs have remained the same QoQ, in spite of an increase in ASP
due to hardening of commodity costs and unfavorable product mix.
Tax rate at 34% was higher than the average tax rate due to relatively high profit
in national sales company where tax rates are higher.
China JV Jan-17 wholesale and retail volume differences were primarily due to
timing difference of lunar year.
New product pipeline: XJ EV in early FY18-19, RR & RR Sport refresh in 4QFY18,
Mid-size RR in mid-FY18, E-Pace 4QFY18.
TVS Motors
Current Price INR 426
Click below for
Detailed Concall Transcript &
Results Update
Buy
Target Price INR 462 | 9% Upside
Demonetization impact:
Demand scenario has improved in January, as
compared to the Nov-Dec months, but still not fully recovered. Rural continues
to be sluggish primarily on account of limited banking access compared to urban
areas. Management expects sales volumes to pick up post 15 January as
observed historically.
Short term outlook:
It expects 4QFY17 to be better sequentially with TVS
expected to outperform the industry. Rural markets are expected to improve in
the coming months.
Moped growth
has been primarily due to pent-up demand for past 2-3 years.
Management expects mopeds to grow in line with the industry due to increasing
competition from entry-level motorcycles.
Commodity costs:
Commodity prices were largely stable in 1HFY17; however,
there was a mild increase in steel prices in 3QFY17. It does not expect significant
increase in commodity prices in 4QFY17.
February 2017
14

AUTOMOBILE | Voices
Price hike:
TVS has taken a price increase in Jan-17 (INR 200-600) to offset the
rise in commodity prices.
Export markets
continue to face headwinds on two counts: a) devaluation of
currency in African and Latin American markets affecting purchasing power and
consequently retail demand. b) Availability of foreign currency affecting
dispatches of OEMs. In spite of this, management indicated it maintained
market share in most of its export markets. It is present in 60 countries around
the world.
New launches:
It plans to launch new products in all the categories in FY18.
BS IV norms:
It envisages a price hike between INR 500 and INR1,800 at the
retail level on implementation of BS IV norms.
Investments in 3QFY17:
The company made the following investments: a)
INR0.33b in its Indonesian subsidiary. b) INR0.2b in Sundaram Auto
Components. c) INR0.33b in its Singapore subsidiary and INR 0.4b in its associate
company Emerald Haven Realty (A group company focused on low cost
housing).
Inventory levels
for TVS are 28-32 days currently. Inventory levels in Nov-Dec’16
were higher due to demonetization impact, but have largely normalized in Jan-
17.
Capex:
It has guided for ~INR4b of capex for FY17. Capex YTD was ~INR3.5b.
Indonesian subsidiary:
Management indicated that losses of Indonesian
subsidiary are decreasing and expects it to break even soon. TVS infused
INR300m in 3QFY17 in the subsidiary and plans to invest ~ INR200-250m in
4QFY17.
BMW alliance:
Project is on track, with its first product (G310R) to be launched
in CY17.
Management
maintained EBITDA margin
target of ~10% in FY19.
February 2017
15

CAPITAL GOODS | Voices
CAPITAL GOODS
Though execution of orders in hand broadly remains on track, the industry maintains its cautious outlook.
Industrial capex activity could be a few quarters away, as capacity utilization for most companies – a function of
demand improvement – remains weak. Key infrastructure segments witnessing demand traction are
transmission, renewables, defense, roads and railways.
KEY HIGHLIGHTS FROM CONFERENCE CALL
Outlook for FY17
Domestic revenue to grow 10-12% in FY17.
Expect zero to 5% export revenue growth in
Cummins
FY17.
Operating margin to remain stable in FY17.
Larsen and
Toubro
Operating margins
16.7% in 3QFY17 as compared to 15.2% in
3QFY16.
Order intake guidance: 10%+ growth.
Revenue guidance: 10% growth.
Margin improvement of 50bp to 10% from
9.5%.
EBITDA margin for 3QFY17 at 9.6%, as against
8.2% in 3QFY16.
ABB India
Current Price INR 1,227
Neutral
Target Price INR 1,190 | -3% Downside
Click below for
Detailed Concall Transcript &
Results Update
Industry outlook
Positive on government spending and will continue to serve the utility, transport
& infra and industry sections.
Investment driven by government and retail consumption; commodity prices
have strengthened.
INR11b of CFO generated in CY16.
Orders
Most orders won for high technology in T&D and rail.
Renewables, data center, rail and port modernization also seeing growth. Smart
City initiatives are also coming up for them.
Base orders were flat YoY; Services sales +25% and order +20%.
Key segment
K
Utility - secured UHVDC contract from PGCIL - Raigarh to Pugular, 1800kms
6000MW, two-way link, N E-Agra commissioning is underway.
Launched micro grid solution in 4QFY16; ~2GW solar inverter supplied in CY16;
ABB teams working to increase share by FY22; doubled capacity of inverters in
CY16.
Digitalization – utility; F&B seeing new projects.
UDAY - working with discoms and seeing push on digitalization.
I
Industry
Commissioned 35MW; to reduce electricity of refinery by 30%.
Focus on digitalization; Steel major had 35 control rooms which were unified
into one control room.
IOT being used for monitoring motors.
EV charging for buses - mfrs moving to DC charging and relying on ABB for this.
Rail is modernizing and got a 1600 traction transformer for 800 locos; 60% of
diesel locos run by ABB turbo chargers.
Compact substation already introduced.
February 2017
16

CAPITAL GOODS | Voices
Got contracts in water lift irrigation to bring water to farmers, and ABB
supplying products here as well.
Port automation and modernization; bringing new technology.
Margin
Improving in a sustainable manner.
Will maintain gross margins at 34-35% range, despite higher raw material prices
and increase in mix to large project orders.
NWC
Debtors - 130 days v/s 150 in CY15.
Execution
No headwinds in project execution for them; stick to schedules and adjust to
customer timelines as well; sales not being impacted by anything at this point.
Exports
Order in 2015 converted into sales and now at 15-16% of sales.
Traditional export markets are weak in Africa, M East and SE Asia.
Services - grew at 20% YoY and at 13% of sales.
Rail spending
Spending on electric and diesel locos and bogies.
Turbo chargers, propulsion converter, transformers for locos; line electrification
for tracks via Power Grid.
Renewables
Wind was good in CY16; delivered solar inverters where capacity was doubled
by them.
15-16% of sales are inverter.
Solar inverters; pricing has been under pressure, doubled capacity.
Crompton Greaves Consumer Elec.
Current Price INR 188
Click below for
Detailed Concall Transcript &
Results Update
Buy
Target Price INR 205 | 9% Upside
Cautious on near-term demand and margins – market growth (secondary) has
slowed down post 2QFY17.
Demonetization has led to a negative impact on consumption (Nov saw a
decline); gradually picking up, but not sure of extent and duration of this impact.
The impact will continue going forward as well – near term could continue to be
challenging.
Special incentives for channel partners, selective extension of credit to dealers,
focused pricing action and new product launches were given to counter the
impact of demonetization. Incentives given to the channel in 3QFY17 at <0.5% of
sales.
Taking market share from unorganized and organized players in 3QFY17, which
led to good growth.
B2B sales continue to grow, and no significant impact has been seen by them.
Adv. cost at INR90m v/s INR120m in 2QFY17; scaled back on the back of
demonetization.
Headwinds on commodity costs seen, which had been benign over last 12
months. This will hurt margins. CGCEL has plans to address these challenges via
price increase and cost reduction. Price hikes in fans planned to cover part of
the cost increase.
Margin expansion efforts to continue. Margin expansion projects and continued
focus on premiumization have helped expand margins even during these testing
February 2017
17

CAPITAL GOODS | Voices
times. Improvement in margins driven by a) Programme of cost reduction across
all categories, b) Driving premiumization and better mix, c) Sourcing related
benefits, d) Lower commodity prices over last 12 months helped improve
margin, but now are going up so will need to take price increase, e) Strategic
choices on mix and segments.
Lighting segment
B2B continues to grow and relatively unaffected by demonetization, while B2C
also growing for CGCEL – it is among the few who grew in 3QFY17.
LED sales were up 83% YoY and now at >55% of sales.
50% of lighting is B2B and in all other segment is in single-digits.
EESL sales are at INR75m in 3QFY17 v/s INR190m in lighting, which also helped
improve margins.
Fans
40% growth in premium fans and now at 15% of sales v/s 7% one year back.
Price increase in fans planned to cover part of the cost increase – this may have
led to some preponement of demand from 4Q into Q3FY17.
Disruption from EESL will not be of the same magnitude as was seen in LED.
Working capital
Debtors and payables have largely been at the same levels as in 2QFY17.
Increase in inventory was driven by raw material bought in December to a)
avoid disruption during Chinese New Year, and b) pre-empt rise in commodity
prices. Total of INR400m increase QoQ; 60% was planned and 40% was
demonetization-related.
Valuation and view
We like CGCEL for its strong product portfolio, established brand, market
leadership position, wide distribution network and robust RoCE profile
(34%/36% in FY17/18), and maintain our
Buy
rating on the stock with a target
price of 205. We value CGCEL at 30x its FY19E EPS of INR6.7.
Change in estimates
We raise our earnings estimates by 22/6% for FY18/19E on account of lower-
than-estimated impact of demonetization.
Crompton Greaves
Current Price INR 68
Sell
Target Price INR 45 | -34% Downside
Click below for
Detailed Concall Transcript &
Results Update
Divestment of ZIV has reached the final stage of discussion and the
management expects the sale to close soon.
For overseas business, Crompton has now adopted a geography-based structure
and has divided the business in five major geographies – Hungary, Ireland,
Indonesia, US and Belgium.
Expect overhead reduction, with new structure in place.
In 3QFY17, Crompton incurred a loss of INR20m in the systems business and a
loss of INR280m in the overseas T&D business.
Solutions business in the UK and US has reached final stages of closing down
and Crompton has exited the solutions business.
Proceeds from the ZIV transaction would be utilized for the reduction of
overseas debt. Overseas debt on the books stands at EUR175m, of which
EUR120m would be repaid by ZIV divestment and the balance debt would be
paid in a staggered manner.
February 2017
18

CAPITAL GOODS | Voices
Loss at the subsidiary level has increased on account of Hungary operations.
Domestic industrial segment business is expected to do well, driven by orders
from the Railways.
EBITDA margins in the power systems as well as industrial segments stand at
12%+; however, unallocated cost on account of the overseas and domestic
operations has impacted EBITDA margins at the corporate level.
Expect EBITDA margins at corporate level to improve once the overseas business
is sold.
Interest cost has increased significantly, led by refinancing of overseas debt,
which will reduce with sale of overseas assets.
Cummins India
Current Price INR 885
Click below for
Detailed Concall Transcript &
Results Update
Neutral
Target Price INR 990 | 12% Upside
Exports guidance increased to ‘flat’ v/s 'flat to down" in 2QFY17
Sales Guidance: Domestic:+ 10-12% YoY has been maintained, while Exports
revised up to ‘Flat YoY’ vs. ‘Flat to negative 5% YoY’ as of 2QFY17.
CY17 guidance: Domestic +10% growth and exports are uncertain so likely at 5%.
Higher commodity prices will result in better export demand in the medium
term, while government spending will drive domestic demand.
Exports have bottomed, but recovery uncertain
+23% YoY in Q3FY17 and flat QoQ; not optimistic about sustainability of growth
– do not see any major recovery in any of the key end-markets for them.
Mexico, Turkey seeing some improvement, but largely no material improvement
in any other geography despite commodity prices heading higher. CY17 may not
see an improvement, but CY18 onwards expect to see strong growth revival.
Gross margins (36%) to be sustained at present levels despite higher commodity
G
prices
Product mix remains a headwind for them - offset by productivity and six sigma
efforts by them. Competitive pricing also had a negative impact during the
quarter
Would like to maintain gross margins at this level but it could be in a range of
‘+/- 1-1.5%’ and more on the downside.
Not yet seen any increase in prices from suppliers yet, but within a range so no
reason for price hike yet – will take appropriate price hikes when needed.
Distribution – can sustain mid to high teen growth rates
Change in usage - Mining, trucks, Rail, Construction where use has increased
and therefore sparer parts/service are required. Power Gen is standby and used
less as genset usage has reduced.
Good prospect for this segment - can sustain mid-to-high teen growth rate.
Companies will increasingly outsource non-core operations and this segment
can provide superior service solution in Industrial and Power Gen segment.
Power Gen would be the largest part of distribution (>50%) business for them –
as sales increase, need to maintain these sets would also be there.
February 2017
19

CAPITAL GOODS | Voices
GE T&D India
Current Price INR 300
Neutral
Target Price INR 340 | 13% Upside
Click below for
Detailed Concall Transcript &
Results Update
UDAY has been implemented in majority of the states. However, we are yet to
see pickup in new investment in T&D network in the states.
Solar market is upbeat but prices are challenging as developers continue to bid
low tariff, creating price pressure on EPC and equipment suppliers.
T&D pricing is yet to see any significant improvement; demand continues to be
weak.
GE will continue to be a system provider than just product supplies, which ABB
and CG have moved on to
Execution
Champa Kurukshetra Phase 1 has been booked during this quarter, which led to
strong sales.
Customers are not able to cope with delivery - regulatory and liquidity issues
continue for them. So despite a good backlog, it is not able to scale up execution
meaningfully.
Private sector not investing at all so impacting demand for them.
Issues of collection are from the SEBs and private sector as well; UDAY has
reduced the interest burden, but payments from SEB and delays in execution to
continue.
Phase 2 Champa - Kurukshetra - execution not as per the original schedule on
land acquisition, Pole 3/4 in 2HCY17 and Q1CY18.
No direct impact of demonetization.
Margins
M
Mix was responsible for lower margins. Projects which were delayed have been
commissioned in this quarter. Extra costs are incurred and not all can be claimed
back by them.
Do not expect margins to improve significantly till demand improves
meaningfully.
Other income and Sales
IND AS - retention to be collected over 2-3 years.
Of the other income INR500m in sales, so net impact of INR50m in the results as
retention is discounted back and collection are taken in the sales.
Business Environment
Overcapacity in transformers and GIS is there - PGCIL needs to decide where to
source these products from.
Solar - prices have dipped meaningfully and can turn NPA; with GE are
aggressively targeting the solar market (BOP with inverter) which they won in
Q3FY17 and also targeting the industrial market as it recovers.
GIS Substations
States are driven by land non-availability and are seeing a good pickup in
demand in last 2 years.
PGCIL localization
Forthcoming local manufacturing for GIS and static compensators will help
Alstom win more orders.
February 2017
20

CAPITAL GOODS | Voices
Havells India
Current Price INR 415
Neutral
Target Price INR 425 | 3% Upside
Click below for
Detailed Concall Transcript &
Results Update
Secondary sales in 3QFY17 in line with primary sales; no significant build up in
inventory
Impact of demonetization: Keeping a close watch on inventory. It is near normal
levels and will not impact 4Q sales for Havells. Secondary sales saw growth
similar to primary sales in 3QFY17
Sticking to production schedules for Q4 as well and no cuts at this point in time.
Trade schemes continue to impact margins in 4QFY17
Trade schemes offered in 3QFY17 include - Release funds from QRG deposits to
help dealers during cash crunch; discounts lost by dealers were compensated;
turnover discounts softened so they were able to be reached.
Trade schemes cannot be taken back entirely at once, but will be done during
the quarter. Thus, gross margins may continue to be impacted in 4QFY17 as
well.
Did not reduce prices, but tried to alleviate concerns of dealers.
Market share gains from unorganized and organized players
M
Market share gains from unorganized due to demonetization and GST will
further strengthen this trend.
Havells gained share from both organized and unorganized sector in 3QFY17.
There was a market contraction in the initial period of demonetization. Havells
was growing well, which implies it has gained share.
Consumer Durables
C
Did well in water heaters - could expand production very fast in Neemrana and
fans, appliances also growing steadily.
Air cooler sales should kick in a meaningful manner in FY18 as well with the
upcoming summer season.
Fans grew well in the quarter so double-digits YoY in 3QFY17 – stocking up fans
always happens every year with the upcoming summer and nothing unusual in
this.
Cables and Wires
Copper: +15% price increases announced in November.
Lag of passing on to the market: Price increases were announced in mid-
November and next price increase taken in December. Full impact will come
completely in 1QFY18; ~12% increase is expected.
Lighting
Focusing on fixtures, which is more dependent on new housing sales than
replacement.
Real estate impact has not been as bad as it was initially expected; low-cost
housing getting a boost and interest rates are coming down and so Cable.
Switchgear, lighting fixtures will not be impacted much.
LED now a significant part of the business with conventional CFL now at 15-20%,
LED could still grow in high double digits.
LED prices still dropping, but to stabilize in 1-2 quarters.
February 2017
21

CAPITAL GOODS | Voices
KEC International
Current Price INR 168
Buy
Target Price INR 175 | 4% Upside
Click below for
Detailed Concall Transcript &
Results Update
Guidance
Sales growth of +5% v/s +10% in FY17.
Margin of 9% in FY17.
Order growth of +15-20% YoY v/s last year.
L1 in INR20b of orders.
Sales down on a) demonetization impact on ancillary suppliers, b) L1 orders got
converted only in Q4-end, c) Execution issues in substation as delay in getting
land in J&K.
INR500-600m lost due to demonetization.
FY18 growth earlier of 10% and could grow 15% YoY; margins at 9% in FY18
which will be same as FY17.
Margins to see further improvement from railways.
INR14b of rail orders in 9M17, so FY18 will see good margins.
Orders
More orders on TBCB basis, which would have earlier come from PGCIL.
Earlier from south, but now also from Orissa, Bihar.
Africa starting to see an uptick because of increase of commodity price and also
from M-East.
PGCIL has issued 10 tenders and another 2 for Raigarh-Pugular line.
Margins
Rail turned positive at EBITDA, and cable is also not loss-making any longer.
SAE has turned positive for them - 8-9% EBITDA margin.
Brazil – two years of order book, and Mexico has six months of order book with
them.
18-20% of SAE sales are from Mexico to US/Canada.
Larsen & Toubro
Current Price INR 1,482
Click below for
Results Update
Buy
Target Price INR 1,620 | 9% Upside
Guidance for FY17
Sales guidance of 10% v/s 12-15% earlier; can do better if some clearances come
through (YTD +6%).
Order guidance cut to +10% from 15% earlier (3% in 9MFY17), led by order
finalization getting deferred and not because of orders being lost.
Margin guidance has been maintained at +50bp YoY for FY17.
Execution and business environment
Demonetization: LT was hit by demonetization for a few weeks; since it is B2B,
the direct impact has not been material; realty also has seen slowdown with
lower housing sales.
Real estate: Shifting of factories has helped LT to commercially monetize the
land bank (Chennai, Bangalore and Mumbai). Lower interest rate would lead to
revival in demand of residential realty.
Revival in real estate will benefit from RERA - mortgaging and loan sanctions
faster for organized developers.
Powai phase I has been almost sold before demonetization; for Phase II LT is
waiting for approvals before commencing construction. At the Parel project, 25
February 2017
22

CAPITAL GOODS | Voices
units of inventory are left. Pace of booking is down, but LT intends to hold on to
prices.
Toll roads - shut for 23 days and lost INR1b of sales; will get compensation for
the same in due time; very little operating expenditure.
Demonetization has led to loss of INR80b at the PBT level.
Surrendered two projects. Thus, losses are lower in Chennai Tada and PNG road
projects.
Infra
Faces clearance (ROW, utility shifting) and client-side issues. Thus, domestic
execution is subdued.
The situation in terms of obtaining clearances has been improving, but on-
ground improvement is slow; client is in no hurry to finish projects, especially in
real estate. Cash flow to the developer has slowed and thus LT is not
constructing.
Mumbai Metro phase 3 order is stuck as work cannot be started (due to PIL
against MMRDA); big cities to be underground and smaller cities elevated.
Clients also seeing WC issues and have been delaying payment.
Hindrances to execution are plenty; LT is trying to take care of these, and
planned progress on jobs is short - 10% growth guidance v/s 12-15% earlier.
Residential (Elite) B&F saw a dip on demonetization; INR500-600cr dip in sales
due to demonetization; Affordable homes is project-specific and not in mass
housing.
Margin: 110bp improvement, Heavy civil engineering and T&D segment is seeing
margin improvement and operational efficiencies.
Power
Lower order book led to lower execution as Bangladesh jobs taper off - share of
overseas is declining and mostly completed by 2QFY17.
Margin - affected by higher proportion of cost jobs.
Will be tough to get orders in this segment - 20GW of capacity and 7-8GW of
orders, and pricing will be under pressure for them.
The segment expected to pick-up after two years once manufacturing picks up
and reforms take shape.
H Engineering
Lower order book, so weak sales.
Margin - better margins in both process and defense business.
Electrical and Automation
Muted industrial activity - ESP and CA doing good
Hydrocarbon
Overseas jobs driving growth, as also domestic.
Margins better on close of legacy jobs.
Margins
Projects progressing - get benefit of softer commodity so priced better, optimize
execution.
+50bp margin guidance has been maintained for FY17.
Hyderabad Metro
Seen lot of issues including political, 70% of the project is complete. Jun 17 was
original date for completion and will get extension.
February 2017
23

CAPITAL GOODS | Voices
Saw time and cost overruns on account of the issues faced on governmental
actions, Project has witnessed involvement by state and central government.
Will complete by Sep-Oct 18 if full commissioning in one go for 72 kms – being
done in sections.
Can start in phased manner, but no decision made given the overruns.
It is monetisable once the uncertainty around the metro has been removed.
Pipeline of projects -70000-80000cr of orders to be finalized
Middle East
Middle East will form 25% of orders for them in next few years.
In some years, will participate in big infra orders. Hydrocarbons - closed legacy
jobs during falling oil prices and now focused on profitable jobs
Will focus on execution in both big infra and hydrocarbon. Earlier, bid for too
many jobs and spread too thin, but now focused on execution.
Base order of INR1.25-1.5lakh crore; need large orders like for new airport,
which will take the company from base to big growth in orders.
Solar Inds
Current Price INR 737
Click below for
Results Update
p
Neutral
Target Price INR 800 | 9% Upside
Exports revenue declined led by weak economic scenario. To compensate for
that, Solar plans to enter new geographies. Management has guided for flat
export sales in FY17 (INR1.1b).
Defense revenue for FY16 stood at INR77m, and management has provided
revised guidance for revenue of INR200m for FY17, as against earlier guidance of
INR500m.
Interest cost during the quarter increased by 43% YoY, mainly as capex for the
project is completed and now interest is getting charged in P&L. Current debt on
the book stands at INR3.3b.
South Africa facility is expected to be completed by 4QFY17 with capex of
USD11m. Solar expects INR100m revenue in FY17 from the same.
Capex plan for FY18 stands at INR2b.
SOIL has order backlog in defense segment of INR1.0b, which it expects to
execute in FY18.
Thermax
Current Price INR 850
Sell
Target Price INR 781 | -8% Upside
Click below for
Detailed Concall Transcript &
Results Update
Thermax Wilcox and Babcock
No new orders for B&W - 2 orders are available to B&W and may come to the
JV, but not yet received funding support for this as coal fired plants are not
coming up. After June 17, no more orders are left with them.
No tenders in offering for BTG; government has said that there is no need for
new coal fired plants till FY22.
International market may see some but globally there is a lull - post COP 21,
banking system not willing to fund new plant; B&W has two orders in Africa and
LATAM, but not started as FC is pending.
New factories coming in Dahej, Indonesia and AP
Indonesia: Factory is almost complete; could start in April with all machinery in
place; start with heating business of Thermax, 60 people on ground.
February 2017
24

CAPITAL GOODS | Voices
Market is little depressed but getting better now - FY18 to see better traction.
SE Asia to contribute USD100m in orders in FY18 - both made in India and from
Indonesia.
Medium-sized project in ASEA, M East and Africa - no major improvement, but
some improvement in enquiry.
Specialty resins to be made by them, where margins are better - Du Pont is
competitor.
Chillers: Long time to get to construction, all approvals done and to be complete
by 15 months from foundation stone-laying in April-17.
Gross margins
Two factors driving gross margin: a) Design and cost reduction done by them in
engineering, b) Product mix change with lower mix of large projects v/s earlier
(EPC have lower margin).
Product and services sales are doing better; standard product sales are better
during the quarter.
SA - Projects (Larger boiler, EPC, Air pollution EPC) down by INR2.8b YoY.
Water segment has turned profitable and this has been the swing factor for
them and will break even for this year.
Commodity prices - 85% of orders are covered, but 15% are for spot purchase.
This may have a 10bp impact on EBITDA at most.
Voltas
Current Price INR 349
Click below for
Results Update
Neutral
Target Price INR 365 | 5% Upside
Room aircon market share maintained; 11% decline in industry volumes in 3QFY17
Sales of ACs at multi-brand outlets declined 11% in volume terms (Source: GFK
Neilsen). Voltas maintained market share at 21.7%. Peers’ high growth may
have been driven by higher discounts. Voltas does not intend to sacrifice
profitability to gain market share.
3QFY17 began on a strong note, given the festive season. However, subsequent
sales across the consumer durables basket were affected in varying degrees
owing to demonetization.
Inverter market share is 10% of total market and competition is investing heavily
in this. For the new season, Voltas has a strong portfolio of inverters and should
retain its share in this segment.
As the pricing difference between inverters and fixed speed compressors
narrows, customers would shift to inverters. However, inverters cannot be
relied on in areas where power from the grid is unreliable. Inverters may not be
well suited for smaller towns/cities.
Project segment margins to improve sequentially
Margin expansion in 3QFY17 reflects the positive closure of certain old projects
as well as higher margins in newer ones; margins should improve further in the
coming quarters.
Domestic projects are seeing a slow uptick in order booking; private capex still
weak, but Voltas focusing on public capex, especially across smart cities, urban
infrastructure, educational institutions, rural electrification and water.
Middle East: Remains in a state of slow recovery, given the volatility in oil prices,
combined with fiscal deficit.
February 2017
25

CAPITAL GOODS | Voices
Margins to be maintained in UCP segment
In the UCP segment margins declined 110bp YoY to 10.6% on weaker volumes
and negative operating leverage (advertising, overhead costs).
If competition becomes irrational in pricing, Voltas may have to cut prices too.
Until then, it intends to focus on margins.
Voltas has built its stock of compressors for the upcoming season and will not be
affected by higher commodity prices in CY17. If commodity prices remain high
when new stock arrives in 2QFY18, it might have to take price hikes.
February 2017
26

CEMENT | Voices
CEMENT
The cement sector reported volume decline of 1.5% YoY (growth of 2.1% QoQ) in 3QFY17. Volume growth was
strong in the South due to higher government spending in Andhra Pradesh and Telangana, and lower base due to
floods in the South in 3QFY16. Moreover, volume growth for Northern players was impacted due to
demonetization, with all North-based cement companies showing YoY decline in 3QFY17. Average 3QFY17
realization declined 1% QoQ (but grew 2% YoY); South based players witnessed higher realizations. The cost
curve turned unfavorable, with higher power and fuel cost, and higher freight costs.
KEY HIGHLIGHTS FROM CONFERENCE CALL
Outlook for FY18
Volume demand is currently volatile; expect stability in 1QFY18. Volume
demand to be driven by government spending in AP and Telangana,
followed by Karnataka. In FY18, regional growth in AP and Telangana to be
15-20%. Export growth target at 20-30% in FY18 due to customs duty
problem in Sri Lanka.
Capital expenditure set at INR2b in FY18 for maintenance purposes. INR10b
debt refinanced in 3QFY17 with the right to pre-payment. Interest reduction
benefit to be seen in FY18.
Mining costs lower in Andhra Pradesh than in Tamil Nadu. Higher volume
demand from Andhra Pradesh to lower raw material expenses in FY18.
Petcoke mix currently at 72%, with target of 80% by FY18.
Government spending in AP and Telangana, Mumbai Metro, and National
Roadways to drive demand in FY18. Northern markets to face headwinds
due to elections in FY18.
Jaypee assets transaction to be completed by early FY18. Overall capacity
post Jaypee expansion to be 91mt. Current utilization for Jaypee assets at
30%; utilization set to increase post transaction completion in FY18.
Pricing stability likely in 1QFY18; to continue throughout FY18.
One to two quarters of administrative challenges on GST implementation
in FY18.
Market conditions to be continually poor in FY18 in overseas business due
to slower construction activity in Saudi Arabia.
Petcoke prices to be stable in initial two quarters of FY18 because prices
have peaked as of 3QFY17.
Decrease in raw material prices to continue over FY18 due to lower
chemical sourcing costs.
FY17 tax rates to continue over FY18, but FY19 tax rates could change. VAT
subsidy of INR60m-70m per quarter to be recognized over 4QFY17 and
1QFY18.
India Cement
Impact of
Demonetization
Prices have reduced by
INR15-20/bag in Gujarat
and Rajasthan in 3QFY17.
Prices in South flat QoQ in
3QFY17 despite
demonetization.
Ultratech
South and East faced low
demand following
demonetization in 3QFY17
due to higher percentage of
organized and government
spending in South.
JK Cement
Dalmia Bharat
Current Price INR 1,905
Click below for
Up
date
p
Results Update
Buy
Target Price INR 2,246 | 18% Upside
All India cement volume demand declined 1% YoY and DBEL Markets (South,
East and North East) grew at 4% YoY in 3QFY17. DBEL grew at 20% YoY in
3QFY17. Future demand in South to be driven by affordable housing and
infrastructure spending.
DBEL market share at 11% in DBEL markets, led by North East at 21% market
share, followed by East at 15% and South at 8%.
DBEL using alternative fuels such as e-fuels to offset higher coal and petcoke
prices. Current petcoke prices at USD78–80, but averaged USD90–95 in 3QFY17.
DBEL paid down INR6b in debt in 9MFY17, with net debt outstanding at INR57b.
The company continues to focus on de-leveraging over next few years. 4QFY17
maintenance capex at INR450-500m and FY18 capex at INR1b.
February 2017
27

CEMENT | Voices
Market share improvement can be attributed to increase in customer focus,
provide best-branded products to the customer (Dalmia DSP), timeliness with
contractual agreements, and superior quality.
Grasim Industries
Current Price INR 1,053
Click below for
Results Update
Neutral
Target Price INR 1,067 | 1% Upside
VSF:
VSF prices after seeing some decline in October-November-2016 have
recovered in December. However, pricing in the short term could face some
pressure as supply in China which had gone out of production is likely to come
back into the system. In the medium to long term, prices are expected to be
stable with positive bias as new capacity addition is slowing down.
Caustic Soda:
Caustic soda volumes were affected by lower chlorine demand.
However, caustic realizations were higher YoY (+5pp), led by better ECU
realizations on account of lower supply.
Capacity expansion:
The caustic soda capacity to increase by 208K tonnes by
FY18 through 144K tonnes brownfield expansion at Vilayat and 64K tonnes
capacity debottlenecking.
Operating expenses:
Sequentially lower EBITDA margins in caustic soda in
3QFY17 can be attributed to increase in coal prices and rail freight rates.
Margins in VSF would be under pressure in 4QFY17 due to increase in pulp
prices with lag effect.
India Cements
Current Price INR 163
Click below for
Results Update
Neutral
Target Price INR 138 | -15% Downside
Demand:
All-India cement demand has increased at 4% YoY and South cement
industry has grown 8% for the period Apr-Dec-16. South cement demand
increased due to infrastructure spending and low-cost housing led by Andhra
Pradesh and Telangana. Management expects south demand in FY18 to increase
at 8% YoY.
Volume growth trajectory to be strong:
Management expects volume growth in
AP/Telangana to increase in excess of 20% YoY led by low-cost housing projects
(incremental demand of 2 lakh ton of monthly volume) and irrigation projects.
Demand from TN and Kerala continue to be subdued.
Prices:
Prices have been steady in month of January-17 sequentially. Net plant
realizations increased 2% QoQ to INR 3636 in 3QFY17 led by full impact of price
hikes in AP/Telangana towards the end of 2QFY17.
Gross debt and capex:
Gross debt at end of 3QFY17 at INR28.3b/INR29.9b on
standalone/consolidated basis. ICEM intends to repay debt by INR2.3b in FY17
(INR 1.8b repaid YTD). ICEM intends to incur INR4b toward maintenance capex
in FY17 and FY18, out of which INR2b will be spent in FY17. Major capex would
be toward replacing of grinding mill at one of its plant.
Costs:
Freight costs increased due to increase in fuel prices. Energy costs
increased by 21% QoQ (-2% YoY) due to rising petcoke costs and unfavorable
fuel mix at 72% petcoke (vs. 80% petcoke in 2QFY17). Raw material costs
decreased 11% QoQ (-14% YoY) due to increase in production from newer plants
in Andhra Pradesh compared to older plants in Tamil Nadu which incur higher
mining costs.
February 2017
28

CEMENT | Voices
J K Cements
Current Price INR 899
Click below for
Results Update
Buy
Target Price INR 938 | 4% Upside
Normalization in south operations to 55-60% utilization.
Jan-17 volume to fall YoY due to higher base.
Petcoke prices at USD85-90/t; Fuel mix at 75% petcoke.
Gross debt at INR24.5b; UAE operations debt at INR6b; 9MFY17 debt repayment
at INR1.4b.
Ongoing capex at INR2b (incl. maintenance capex/putty expansion).
White cement a cash cow: It is the second largest player in the duopolistic white
cement industry in India, with 40% market share. Moderation in white cement
growth (owing to lower exports to the Middle East) would be offset by healthy
growth in putty and 0.2mt expansion in Katni (Madhya Pradesh) by FY16-end.
With INR3b-3.5b of steady EBITDA cushion, white cement business remains a
cash cow.
Preferred leverage play on earnings growth in north-west markets: With lower
immediate capex and FCFE of INR3-4b in FY17-18, there remains visibility of
deleveraging from FY16 peak of INR27b (1.6x).
J K Lakshmi Cement
Current Price INR 387
Click below for
Results Update
Buy
Target Price INR 455 | 18% Upside
Capacity expansion:
The company is enhancing its Durg capacity from 1.8mt to
2.7mt that will be completed in March-17. Moreover, the UCW subsidiary with
0.9mt will be operational in 1QFY18. Both these capacity expansion projects will
bring JKLC capacity to 12.5mt. Additionally, the company is looking to increase
its captive power capacity by 7MW WHRS (INR 0.9b) and 20MW thermal power
capacity (INR 1.2b) at Durg. FY18 estimated capex at INR2b.
Volume mix:
3QFY17 volume mix stood at 46% PPC compared to 54% OPC. The
company’s 9MFY17 volume mix stood at 50% PPC to 50% OPC.
Realizations:
North prices declined 7% YoY and east prices fell 1% YoY in
3QFY17, primarily driven by lower proportion of retail demand in north that was
affected by demonetization. Gujarat prices stand at INR 210 to 220/bag,
compared to INR 260 to 270/bag in Jan-16.
Energy costs:
Petcoke prices increased INR500/tonne in 3QFY17 QoQ. Petcoke
prices to increase by additional 10-11% in 4QFY17. Current prices at
INR6,000/tonne
Ultratech Cement
Current Price INR 3,740
Click below for
Detailed Concall Transcript &
Results Update
Buy
Target Price INR 4,058 | 9% Upside
South and East markets continue to shine
Demand in south markets has been strong led by minimal impact of
demonetization as also higher infrastructure spends by A.P/Telangana. Ultratech
volumes in south market have increased in double-digit for 3QFY17.
East market is also continuing to grow at a healthy rate. Ultratech’s east
volumes have increased at 5% YoY for 3QFY17. North market after initial impact
of demonetization is beginning to see some signs of growth led by DFCC.
Ultratech North volumes declined for 3QFY17. West market continues to be
weakest among all regions.
February 2017
29

CEMENT | Voices
Volumes for north market could be impacted in 4QFY17 due to state elections in
Uttar Pradesh.
Ultratech continues to gain market share led by higher rural push and additions
to dealer network.
Demand from IHB segment is most impacted, particularly in tier II cities.
Demand from infrastructure and institutional segment is not impacted due to
demonetization.
Pricing in month of December was 4% lower than average prices for 3QFY17,
indicating weak pricing sequentially for 4QFY17.
C
Cost-efficiency initiatives to further bring down unitary cost
Petcoke mix increased to 78% for its kiln operations and 73% for overall.
The impact of higher fuel prices would be seen in 4QFY17. The average prices of
petcoke for 3QFY17 stood at USD80/t, while likely average prices for 4QFY17
would be USD85/t.
Transportation mix at 72 (road) to 24 (Rail) and lead distance reduced to
435kms (-2%YoY). Lead distance expected to further reduce due to ramp-up of
split grinding units.
Capacity expansion to help remain market leader
Announced capacity expansion of 3.5mt at South West MP in Dhar to be
completed by Q4FY19 and to cater to Eastern Gujarat and North Eastern
Maharashtra markets. The total capex would be INR26b (USD110/t).
Acquisition of Jaypee assets to be completed by the end of FY17/1QFY18.
3QFY17 capacity utilization at 67%, while utilization at Jaypee assets at 30%.
February 2017
30

CONSUMER | Voices
CONSUMER
Initial fears relating to demonetization were exaggerated. However, the slowdown created by demonetization
washed away the expected benefits of a normal monsoon from 2HFY17. Management commentaries have called
out a gradual recovery from the demonetization impact. YoY gross margin gains have been reducing and could be
absent in following quarters, given rising material costs. Cutbacks in A&P and other expenses restricted the
impact of slower sales on EBITDA. Moderate raw material inflation is usually good for FMCG companies in a
healthy demand environment, as volume gains are abetted by realization growth as well. However, in an
environment of gradual demand recovery, passing on raw material cost increases may not be easy. Also, with A&P
already likely to be lower than usual in FY17, it would not be a margin lever.
KEY HIGHLIGHTS FROM CONFERENCE CALL
Outlook for FY18
Management expects 6-7% price
increase and mid-single-digit
volume growth in FY18.
Volumes
Volumes in 4QFY17
likely to be similar
to 3QFY17.
Mid-single-digit
volume growth in
FY18.
Impact of
Demonetization
Demonetization
impact has not
completely gone away.
May take 3-6 months
for complete recovery.
Wholesale channel
dependence for BRIT
much lower than
FMCG peers.
Sales were impacted in
rural and in North &
Southern region due to
demonetization.
Expect wholesale sales
to be back to normal in
2 months.
Within rural India,
central India was the
most affected.
Smaller rural
wholesalers and large
urban wholesalers’
sales are coming back.
It is the large rural
wholesalers who are
struggling as of now.
Management expects
normalcy in 4QFY17,
unique among peers
on that call; in fact,
called out 6-8% volume
growth in the March
quarter.
December sales were
actually worse than
November, as
November saw
acceptance of old
notes.
Industry has not yet
fully recovered.
Margins
Increasing commodity
costs will continue to
put pressure on
margins.
Company witnessed
10% commodity cost
inflation in 3QFY17.
Britannia
NA
Emami
Management
expects double-
digit volume
growth for FY18.
Do not expect higher
EBITDA margins from
current levels going
forward.
NA
HUL
NA
Maintained
commitment on
modest margin
improvement every
year.
Marico
Company expects inflation-led
value growth from 1QFY18, as
input costs are going up.
NA
NA
NA
United
Breweries
NA
NA
February 2017
31

CONSUMER | Voices
Asian Paints
Current Price INR 975
Click below for
Detailed Concall Transcript &
Results Update
Neutral
Target Price INR 1,035 | 6% Upside
Impact on sales for the quarter
Decorative paint sales started on a good note in the festival season before the
impact of demonetization. In North and Central India, demonetization impact
was higher. Cyclone Vardah affected sales in Tamil Nadu in 3QFY17. Otherwise,
sales in South and West have recovered much faster post demonetization.
December too witnessed subdued sales in many states. It is only in January that
there was some element of stability in the operating environment.
Retailer inventory is at normal levels (15-30 days) in the South and West.
Inventory is lower than usual at the retailer level in North and Central India.
Sleek (kitchen equipment) and Ess Ess (bathroom fittings) also witnessed
delayed sales a result of demonetization.
Management did not call out any significant efforts on its part during the
quarter to check potential worsening of the impact of demonetization.
I
International and industrial business sales
Revenue growth in the international business has recovered after some time.
Industrial business sales in India (other than two wheelers) did surprisingly well
in 3QFY17. Sales to two wheeler OEMs were affected by demonetization.
R
Raw materials, pricing and margins
The management is closely monitoring RM prices and intends to take suitable
action as and when required.
There was a 1.3% sequential increase in blended RM cost in 3QFY17. 4QFY17 so
far has witnessed further sequential increase.
Margin performance has also been good in the international business. Industrial
margins have also seen good gain YoY.
Potential disruption
Apart from use of glass and aluminum in commercial construction, nothing has
fundamentally changed in the industry in decades.
GST
Unorganized segment in paints is 30-35%.
Effective indirect tax rates currently are 11-12% of excise plus sales tax
averaging 14%.
GST implementation could lead to disruption for a couple of months, similar to
the time VAT was implemented.
Capex, currency and tax rates
FY17 capex would be around INR6b. New Mysore and Vizag plant expansion
would be in phases, looking at the demand environment.
Capacity utilization is currently 75-80% on an average. 25-30% of manufacturing
is outsourced.
Income tax would be at marginal rates, as there are no tax exemptions.
Egyptian pound depreciation led to impact of INR164m on other income.
AP Homes
To add 2-3 more outlets in the next two quarters.
February 2017
32

CONSUMER | Voices
Britannia Inds
Current Price INR 3,264
Click below for
Detailed Concall Transcript &
Results Update
Buy
Target Price INR 3,775 | 16% Upside
Demonetization impact
Wholesale channel dependence much lower than FMCG peers.
Direct reach of nearly 1.45m outlets doubled from March 2015 levels.
Volume growth was 2% in domestic base business.
Demonetization impact has not completely gone away. May take 3-6 months for
complete recovery.
Volume in 4QFY17 likely to be similar to 3QFY17.
Premium part of the business continues to grow faster.
Market share and costs
Witnessed continued market share gain.
Have accelerated cost-efficiency program.
Cost savings will be around INR 1.5b this year. Next year cost savings are likely
to be 40% higher than FY17.
RM costs – wheat flour costs were up by 10%, sugar by 40%, refined palm oil by
20% and milk by 19%.
Company was not able to take price increases in the demonetized environment.
Have taken 5.5% price increase when inflation has been ~10%. Next 2-3 months
will take prices up in the right SKUs.
Sugar has 40% import duty. If government reduces duty, then there will be some
stability. Meanwhile, management thinks that sugar prices will continue to be
firm. Sugar has an 18-month crop cycle, so next crop will take time.
A&P down 10%. Will increase as they see recovery.
Other expenses including A&P likely to be at ~19% of sales.
FY18 likely to witness 6-7% price increase – management is targeting mid-single
digits.
Distribution
Direct distribution expansion by 200,000 outlets a year.
Already has reach to 10,000 rural distributors across the country. It was 7,500 at
end-March 2016.
Hindi belt performance was good, but some states were affected (e.g. UP).
However, Rajasthan and Gujarat did well.
New category
New category close to being finalized.
Also evaluating a partnership for the new category with an international
company. Management may be in a position to disclose the partner in little over
a month’s time. Britannia has evaluated the company’s international facilities,
and mentioned that they have differentiated products with high gross margin.
Technology, recipe and years of experience will be what the JV partner will bring
in. Britannia will bring in distribution strength and understanding of the Indian
consumer.
Management has not made a final decision on dairy. They have hiked prices in
ghee as it was not making money.
Capex
A new manufacturing facility will come up in Maharashtra in biscuits as it was a
state where Britannia did not have its own facility. Also setting up a facility in
Nepal.
Capex of INR3.5-4b over next 18 months.
Tax rate
Tax rate going forward will be around 31%.
February 2017
33

CONSUMER | Voices
Dabur
Current Price INR 265
Neutral
Target Price INR 300 | 13% Upside
Click below for
Detailed Concall Transcript &
Results Update
Demonetization impact and outlook
Dabur had witnessed double-digit sales growth in October. November was poor,
and while there was recovery in December, sales are still down YoY.
The company allowed channel destocking of around INR1b (10-12 days sales).
Now inventory is 22-25 days at the distributor level; of this, 15 days inventory is
paid for and the remaining is credit extended by Dabur. Usually, the distributor
pipeline for Dabur is 30-35 days. While its lost sales proportion is among the
lowest in the industry, its distributor pipeline is higher than peers. Part of the
reason cited is large distance from its manufacturing facilities to the distributor.
Some winter-centric brands were affected.
Wholesale usually accounts for ~35% of sales. The management seeks to bring
this level down by 5% or 10% once the company increases its own direct reach.
The management expects a relatively muted 4QFY17. Moreover, while the
demonetization effect may not be there in 1QFY18, the pipeline for that quarter
might be affected by possible GST rollout in July.
12-15% topline growth would take time. It needs good monsoons and
government stimulus. Base case expectations are mid-single-digit sales growth
for the next two quarters.
Modern trade accounts for 15% of domestic sales now.
A
Additional product/segment highlights
Chyawanprash witnessed 300 bp market share decline YoY, but sales growth
was in double digits YoY.
In Honey, commodity costs were soft; competition could intensify, going
forward.
Babool had weaker performance, as the brand is rural. Toothpowder sales were
also muted. Meswak and Dabur Red are doing well.
Herbal category constitutes 20% of Oral Care sales.
Management believes Patanjali sales could be close to plateauing in categories
like Oral Care and Honey.
Ethicals business is the fastest growing in Dabur’s portfolio.
Amla Oil reaches around 2m outlets.
In Juices, Dabur’s market share is now 57%. It had dipped last year to around
50% when the company had supply chain issues.
The management believes that sales of the Amla Oils portfolio should soon be
close to INR10b. The Chyawanprash range could get to these levels in 2-3 years,
but this category needs innovation and brand extensions. The management
believes that Honey too is a potential INR10b product for Dabur. Currently, the
category sales are ~INR7b, with Dabur having 51% market share (was 56%
before Patanjali entered). Patanjali now has 25-30% share in Honey. Dabur’s
price cuts and promotions in Honey are aimed at regaining market share.
Financials
Adverse category mix, high consumer promotions and input cost increases
affected gross margins. Input cost uptick is overall benign. Beverage business,
which grew rapidly off a low base, has lower gross margins. Excluding mix effect,
gross margins would have declined ~100bp YoY instead of 310bp decline YoY.
The company is in the process of reducing promotion efforts in most categories
except in categories like Honey. It expects advertising to increase sharply on a
QoQ basis in 4QFY17, as it put the earlier promotion spends into advertising.
February 2017
34

CONSUMER | Voices
Management expects domestic margins to be stable, going forward. However,
currency depreciation could affect international business margins.
International business could recover from 3QFY18 onwards.
There may be some flattening of currency pressure in the international business,
going forward. Local currency sales in these regions are healthy.
Management is satisfied with 18-20% EBITDA margins domestically.
Receivables and inventory actually saw a decline during the quarter.
New launches
The company has launched the gel version of Red toothpaste.
There has been a delay in rollout of science-based Ayurveda products, but
management hopes to roll the first ones out soon.
Healthcare would be largely Ayurveda-based, going forward as well. Personal
Care portfolio would be a mix of herbal and non-herbal products.
Emami
Current Price INR 1,112
Click below for
Detailed Concall Transcript &
Results Update
Buy
Target Price INR 1,260 | 13% Upside
Reduction in discretionary spends was reflected in decline in Fair and Handsome
and Navratna Cool Oil sales. Kesh King grew just 2% and Balms sales were weak.
Sales were impacted in rural and in North and South India due to
demonetization. Wholesale revenue should normalize in two months.
The management expects Kesh King sales to bounce back and expects 14-15%
yearly sales growth beyond FY17. It is trying coconut-based Kesh King in South
India. Wholesale accounts for 65% of Kesh King sales.
Honey sales declined 3%. Emami’s product is more expensive and it will remain
a niche player, banking on quality.
While the winter season has been extended, primary sales have largely
happened; hence, it may not get higher sales in 4QFY17.
Wholesalers have lower than usual inventory. The management expects higher
levels, as liquidity improves.
CSD sales were affected in 3QFY17 due to a one-off issue; should do better in
4QFY17.
C
Consolidated and international volumes
Consolidated volumes declined 2.6%, as international business volumes declined
6.7%. Domestic volumes were flat.
MENAP sales declined 50%. Emami has changed the distributor in Saudi Arabia
and Oman.
Management stated that international business will report positive growth in
4QFY17.
S
Strategy
Emami targets a direct reach of 0.8m outlets by the end of FY18, up from
estimated 0.7m outlets as at March 2017.
Currently the share of wholesale sales is 50-55%, which the management
intends to take to 40%.
Emami took an effective price increase of 2% in Navratna towards the end of
3QFY17.
Expect double-digit volume growth for FY18.
Do not expect expansion in EBITDA margin from current levels. Expect some
new launches next year, as sentiment recovers.
Amortized INR100m in addition to the usual Kesh King write-off on account of
She deodorant, which has been completely written off during the quarter.
February 2017
35

CONSUMER | Voices
Management initially said it was looking for a buyer for this brand and then said
it is in two minds.
Big drivers of growth over next 3-4 years: Kesh King, Boro Plus, Fair &
Handsome, Navratna Oil and Balms targeted to grow at double digits.
Margins
Good Boro Plus sales aided gross margin expansion and earlier price hikes of 2-
3% also played a part.
Crude and mentha prices are going up.
The company keeps around 60 days inventory; 4QFY17 gross margin should be
stable. The management has stated that gross margin may be maintained at
these levels for a couple of quarters.
Godrej Consumer
Current Price INR 1,638
Click below for
Detailed Concall Transcript &
Results Update
Neutral
Target Price INR 1,655 | 1% Upside
Domestic business
Demonetization impact and outlook
The management revealed that domestic sales growth was positive YoY in
December. January has witnessed demand revival.
At 2% YoY, growth in secondary sales was higher than flat primary sales in the
domestic market in 3QFY17.
Modern trade sales were up by 33%.
Sales of discretionary products were affected more due to demonetization.
However, products like powdered hair color, which is less discretionary, were
also affected due to higher rural and wholesale proportion.
The company extended 6-7 days credit to trade partners. The management
normalization by the end of February.
The company actually increased ad spend in double digits in 3QFY17, aiming to
gain market share from the unorganized segment in the current environment.
Segmental performance and outlook
S
In Household Insecticides (HI) in India, secondary sales were flat, while primary
sales declined 2%.
Personal repellent launch has received good response and the company is
increasing capacity. In Indonesia, personal HI products account for 15% of
volumes. In India, it is a new category, with low single-digit share.
In Soaps, the company saw positive price effect in 3QFY17 after a few quarters.
The management does not expect sales decline to continue, going forward (in
3Q, sales had declined 6% YoY). Soaps volume had declined 8% YoY in 3QFY17.
In Soaps, the management is happy with Cinthol. Godrej No 1 has lost share and
more work needs to be done. Overall market share has been flattish, as Cinthol
share gain was offset by Godrej No 1 market share loss.
International business highlights
Indonesia volumes grew 3.5%. Africa volumes grew in early double digits.
Europe grew volumes in early double digits, while LATAM witnessed slight
volume decline in 3QFY17.
Household Insecticides (HI) sales were weak in Indonesia due to weak season.
Other segments did well. Market volumes in Indonesia declined 4% while GCPL
volumes increased 3.5% YoY.
HI market share in Indonesia across products has been maintained or increased.
Weak season was an issue for all; there is no specific issue with GCPL’s own
product portfolio.
February 2017
36

CONSUMER | Voices
The management did call out that there was heightened level of sales
promotions in Indonesia in the December 2016 quarter, which affected margins.
Weak sales growth affected operating leverage.
Sales of SoN were lower than the management would have liked, as it
deliberately slowed sales to Nigerian distributors due to dollar availability issues.
Wet hair color localization is progressing in Africa. Sometime during CY17, the
management expects phased localization of SoN products.
SoN wet hair localization would give more agility in product availability as well
as pricing. It would also enable the company to save on import duty. Capex for
the localization would be small.
For the African business, 3Q is a higher margin quarter. For the US (SoN
currently) the high margin quarter is 2Q; so, SoN did not contribute as much to
incremental margins in 3Q as in 2Q. In addition, depreciation of the Nigerian
Naira impacted YoY margins.
Strategy, margins and margin improvement
Mr Pirojsha Godrej has been added on the board of directors.
Gross margin expanded due to price increases in HI, lower consumer offers in
Soaps and Project Pi (INR1.1b savings expected in the current year).
Management maintained that in the longer term, the company would continue
to expand EBITDA ahead of sales.
Levers expected to drive domestic EBITDA margin:
Favorable mix – higher HI and Hair Color sales
New launches at the premium level
Rigorous cost savings program
Management putting analytics in place on price management, making price
changes more nimble
Management also putting analytics to optimize A&P effectiveness
Better management of fixed overheads
Operating leverage growth on muted sales in 3QFY17
On overseas margins, the management is satisfied with Indonesia margins. It
believes that it can improve Chile margins as it did in Argentina. Africa margins
should increase over the long term, but there may be near-term currency issues,
affecting margins.
In 3QFY17 and 9MFY17, innovation rate was around 16%. In FY16, it was around
17%. The management expects much higher innovation rate, going forward,
both in terms of new products and adjacencies.
Among products launched in the last three years, Fast Card, Cinthol Deo Stick,
and the two Aer products did very well. Nupur Hair Color did not do as well as
expected.
Hindustan Unilever
Current Price INR 853
Neutral
Target Price INR 865 | 1% Downside
Click below for
Detailed Concall Transcript &
Results Update
Performance and outlook
Performance across categories was affected by adverse market conditions.
3QFY17 volume growth was -4% and 9MFY17 volume growth was-1%.
Premiumization process continues.
Market conditions should improve gradually.
Rising trend in input costs would continue.
The management maintained its commitment on modest margin improvement
every year. Cost savings, pricing, mix, zero-based media budgeting would enable
modest improvement in operating margins, every year.
February 2017
37

CONSUMER | Voices
Demonetization
Rural wholesale segment remains under pressure.
Within the rural segment, central India was the most affected. Smaller rural
wholesalers’ and large urban wholesalers’ sales are bouncing back. It is the large
rural wholesalers that are struggling now.
Wholesale pipeline is lower than usual. Though better at the end of December
than at the end of November, it is still lower than normal. The company
extended credit from November 9, and then pulled it back on better stability. It
has made its supply chain more agile to cater to changes.
Over November 8-30, sales declined sharply. In December too, sales declined
YoY, but at a slower pace. The company has not shared its January performance
data so far.
On whether or not it has gained share from the unorganized segment in
detergents and tea, the management said it is too early to comment. It would
have more clarity in two months.
Segmental information; new launches
The management is excited about the new Lever Ayush range; it is happy with
the response so far. Arya Veda Pharmacy developed products based on the
ancient Vedas. Toothpaste, soaps, hand washes, shampoos, conditioners and
face wash are the key products.
The Lever Ayush range could lead to some cannibalization; in nascent categories
like hand washes, face wash and conditioners, cannibalization would be lower.
The management did not share plans for national rollout of Ayush. It intends to
first observe performance in the four southern states initially.
Personal Wash: Further price increase in 3Q also impacted volumes and was a
key factor behind the overall 4% volume decline.
Every sub-segment in Personal Care affected.
Oral Care performance was subdued.
Ayush should contribute positively.
Tea: Double-digit sales growth was led by differentiated WIMI strategy.
Winter period sales performance was mixed. October was great, but
demonetization affected performance in other months.
Financials
Assam unit expansion is on target. Effective tax rate would be 50bp lower in
FY18 despite other exemptions coming off.
Cash yields are declining. The management is keen on transferring excess cash
from general reserve and pay it out. It is awaiting approval from the authorities.
Quarterly volatility in other income and other expenses can be partly explained
by the gap between charges on account of Unilever and the receipt of income
due from Unilever.
Home Care margins declined due to operating deleverage and commodity cost
increases.
Inventory reduced YoY, as planning was much better. Debtor days had
increased, but by early December, were back to normal levels.
February 2017
38

CONSUMER | Voices
Jyothy Labs
Current Price INR 355
Click below for
Results Update
Neutral
Target Price INR 365 | 3% Upside
Demonetization impact
Business in the North and the East remains challenging. The wholesale channel
accounts for ~40% of Jyothy’s sales and in these regions, the share of wholesale
is larger. In November, Jyothy’s wholesale channel sales shrank to nearly zero
following demonetization.
Consumers went into cash conservation mode following demonetization and
postponed discretionary purchases.
In December, the wholesale channel achieved 75% normalcy in the South and
the West. In the North and the East, only 50% normalcy has been achieved.
Though the situation is particularly challenging in the East, the management
expects overall demand to revive gradually.
Jyothy’s response to demonetization
Set up a daily monitoring cell.
Focused on superior servicing, especially in towns with population of over 500k.
Altered production plans to maximize production of small SKUs.
Did not extend any channel credit.
The company’s increased focus on modern trade also paid off.
In November, it stemmed the negative impact of demonetization to 9% overall
and 17% in general trade. General trade was actually positive in December and
overall growth during the month was 13%. It expects double-digit sales growth
to continue in January. Part of the sales might be channel filling. The
management believes that the unorganized segment will continue to suffer.
Cut A&P in 3QFY17 to arrest margin impact, but did not hold back on
innovation.
Rising input costs impacted gross margins in 3QFY17. Jyothy held prices due to
the prevailing scenario in 3Q, but has since begun price increases and grammage
reduction. It is confident that gross margins will not dip YoY in 4QFY17. Expect 5-
7% price increase/grammage reduction.
Appointing more distributors in smaller towns in the North and the East to
check impact on the wholesale channel.
Key segment highlights
Fabric Care sales grew 10% YoY, helped by Henko, which has a much larger
modern trade component and is mainly an urban product.
Household Insecticides has a large component in the wholesale channel,
particularly in the North and the East, and hence, the 15% decline YoY.
Maxo is struggling. Dip in EBIT margins was because both coils and liquids
suffered in 3QFY17 and there was no mix improvement. There will be innovation
in liquid vaporizer and continued A&P support behind this segment.
Ujala Crisp and Shine are growing at 20%. FY18 sales target is INR1b. Sales were
INR409m in YTD FY17.
Brands that need overhaul: Margo will be restaged significantly. Ujala detergent
will be rolled out to TN as well, just like Crisp and Shine were.
Henko Matic has 16% market share in Kerala.
Other key points
For 4QFY17, the tax rate is likely to be 21%. For FY18 as well, the management
has guided a tax rate of 21%.
North East capex would be as expected. 21% tax guidance is including tax
benefits from these units. Large part of manufacturing of key products would be
shifted to these units.
February 2017
39

CONSUMER | Voices
Amalgamation of subsidiary: Some final approvals awaited; expect these before
March 31, 2017. Will have further tax benefits if the approvals come through.
A&P will be back on track in 4Q to around 7-8% of sales (IND-AS).
Direct reach is just below 1m outlets.
Henkel deal
March 31, 2017 is the deadline; can be extended by a couple of weeks if
required.
Marico
Current Price INR 267
Click below for
Detailed Concall Transcript &
Results Update
Buy
Target Price INR 300 | 12% Upside
Demonetization and outlook
Management expects normalcy in 4QFY17 – unique among peers on that call. In
fact, it called out 6-8% volume growth in the March quarter in its press release.
The company expects inflation-led value growth from 1QFY18, as input costs are
going up.
It has postponed a few launches to 4QFY17 and 1QFY18.
In VAHO, North and East, which are more wholesale dependent, account for
60%. Hence, there was a greater effect on demand. The management expects
flattish to marginal growth in VAHO in 4QFY17.
New and recent launches
Innovation would be high in foods, edible oils and premium products.
Coconut oil as an edible oil brand option would be examined in the future if the
company believes it has a right to win.
Parachute Advanced Ayurvedic Oil has been successful in South India. However,
performance of Parachute Advanced Ayurvedic Gold, launched for non-
Southern markets, has been below expectations. The management remains
confident on long-term growth in the latter SKU, as well.
The low unit pack initiatives in key products wouldn’t be available in major cities
and would serve as recruiter packs.
Growth has slowed down for Masala Oats; however, it has not lost market
share. To revive growth, the company could launch more food products in the
next 12 months.
International business
The management is confident of good performance in Bangladesh; in FY18, it
expects at least high single-digit volume growth.
In MENA, the management expects recovery in 2HFY18; base correction and
constant currency growth would drive growth.
Parag Milk Foods
Current Price INR 223
Neutral
Target Price INR 215
Click below for
Results Update
Reasons why gross margins decreased steeply; Steps taken by the company
Raw milk prices have gone up 20% YoY and 14% QoQ in 3QFY17. Prices usually
go down after Diwali but went up taking them by surprise.
SMP prices moved in line or ahead of RM costs in the quarter.
Management did not take a price increase in 3QFY17.
8% price increases in the Consumer business in mid-January so far is not
enough. May take price increase in 3 phases. Also working on cost savings
wherever possible.
Further price increase may also be dependent on ability of market to absorb the
increase and on the strategy followed by competitors.
Cooperatives have no t passed on price increase in pouched milk so far.
February 2017
40

CONSUMER | Voices
The company has taken price increases in institutional business as well but there
could be some reaction from customers which could affect volumes for a few
days to weeks. Institutional investment is ~10% of sales.
In Ghee no one else has taken a price increase and management expects
competitors to increase prices soon.
In Cheese both institutional and well as retail, they have taken the lead on price
increase. In Institutional part of cheese business others are likely to follow suit
while in retail business competitors have already taken price increase albeit not
to the same extent as Parag.
Inventory is higher because value is higher due to higher procurement costs.
Gross margin in SMP is 1% to 5%. Consumer business gross margins are from
26%-40%. Therefore the mix change from 4% of sales coming from SMP in
3QFY16 to 12% of sales coming from SMP in 3QFY17 affected overall gross
margin adversely.
Annual Ad spend to sales at level will be in line with earlier guidance at 2%
(excluding promotions) for the full year. This was over 3% of sales in 3QFY17 due
to festive season spend.
Other expenses increase was witnessed in 3 components. These were in A&P,
Selling and distribution (scale up without consequent increase in sales as of now
as they expand, usually around 4-5% of sales) and factory overheads (spare
capacity used for job work stopped).
Demonetization impact going forward
December was in line with normal sales so not much sales impact of
demonetization is likely to be witnessed in 4QFY17
Whey protein launch and other new products
Whey protein brand ‘Avataar’ was launched in 4QFY17- .9kg INR3200, 2.2kg INR
7000. Price comparable to peers. However cost per gram of protein is 20%
cheaper than international brands. Quality of protein is also better. Competitors
have 4% sugar while Avatar is Sugar free.
‘Avataar’ is being rolled out initially in top 7 cities in India (35-40% of demand in
the country). Also launched in Ecommerce which is 35-40% of sales for this
product.
Gym trainers, nutritional shops and online are the channels of distributors
Will spend on A&P on this product only after distribution roll out. Majority of
the spends in this category will be below the line anyway.
Pride of Cows brand is expanding into yogurt as well.
Capex
Spent INR 250m on capex so far. 3 year target at the time of IPO was INR 1.5b.
The targeted spread across 3 years was INR850m, INR500m and INR 150m in
FY17, FY18 and FY19 respectively. So capex has been lower than expected in
Year 1.
VAT issue
In 18 states own depots rest is through super stockiest
In the remaining states the chain is company-super stockiest-distributor retailer.
Some super stockiest did not pay sales tax due in their respective state. Ultimate
responsibility is with company. When they recover from super stockiest
(difficult) these provisions will be written back.
Management does not believe there will be more write offs. These issues were
with preceding years. They believe that now their processes and systems are
stronger.
February 2017
41

CONSUMER | Voices
Pidilite Industries
Current Price INR 699
Click below for
Detailed Concall Transcript &
Results Update
Neutral
Target Price INR 720 | 3% Upside
Demonetization and impact
Post demonetization, receivables have risen from 40 days to 47 days due to
efforts taken to support the channel; in the process of being normalized now.
Consumer products sales were more affected by demonetization than Bazaar
products. The former has a larger proportion of rural and smaller town sales.
Waterproofing subsidiaries had a reasonable quarter in terms of growth.
Consumer Bazaar witnessed 1.5% volume decline. Industrial segment volumes
grew 4% YoY.
Material cost and price increase
There has been no significant increase in VAM prices (remains at ~USD800) but
costs of other RM have gone up. The company has taken marginal (close to 1%)
price increase in 4QFY17.
Overseas business update
Africa strategy has been through sales from own plant in Egypt or exports from
India, but management is open to an acquisition if it makes sense.
Brazil business is doing better. Management is still looking for a.
USA: Profitability has been affected by product recall.
Bangladesh and Sri Lanka are doing well.
Thailand business has witnessed disruption due to local factors. Management
mentioned that it remains a fairly profitable business otherwise.
Update on distribution tie-ups and JVs
WD-40 distribution tie-up: Since September 2016, the company has expanded
distribution to a large extent (which was a key reason for the tie-up) and is now
rolling out marketing activities to grow sales. Over 3-5 years, the management
expects this tie-up to have a material impact on sales. The product is synergistic
to Pidilite’s repair and maintenance products. In terms of end user, there are
synergies with Pidilite’s products sold to mechanics.
ICA-Pidilite JV is doing well. Numbers will be shared at the end of the year.
Guidance
Income tax rate would be around 30% for FY17.
United Breweries
Current Price INR 793
Buy
Target Price INR 1,044 | 32% Upside
Click below for
Results Update
Regional volume trend
In 3QFY17, while industry volumes declined 3% in the North, UB’s volumes grew
1% in this region.
Western region volumes declined 12% for UB, in line with industry decline.
In the East, the smallest part of regional sales, industry volumes declined 30%;
UB’s volumes were down 24%. The steep volume decline was due to the impact
of prohibition in Bihar as well as the adverse impact of demonetization. Exports
are also prohibited from Bihar now.
In the South, while industry volumes declined 3%, UB’s volumes declined 7%.
This is partly because of lack of sales in Tamil Nadu since August, as the state-
owned TASMAC has not given incremental orders due to political upheavals.
Sequentially, market share was higher in Karnataka and Telangana.
Demonetization impact
December sales were worse than November sales; in November, retail sales
were made against demonetized currency.
The industry has not yet fully recovered.
February 2017
42

CONSUMER | Voices
Premium products update
Heineken is close to launch in Telangana.
Ban on stores within 500 meters from highways April 1, 2017
Quick relocation of such stores within the same locality but beyond a range of
500 meters from the highway might be a problem in cities.
In some states, state highways may be de-notified as highways, possibly
circumventing the ban.
For beer, there is only 7-10 days’ inventory at the retail level. Beer is much
faster moving than spirits at retail outlets.
Financials
Other expenses declined YoY. A contract brewer until last year, a brewer in
North India is now a direct seller. So, UB did not have to reimburse service
charges, power and fuel costs, which were part of other expenses last year.
Gross margins have been hit by higher excise.
There were no price increases for the quarter.
Other developments
After SEBI order, the board has asked Vijay Mallya to step down as Non-
Executive Chairman.
United Spirits
Current Price INR 2,340
Click below for
Detailed Concall Transcript &
Results Update
Buy
Target Price INR 2,885 | 23% Upside
Brand performance
Prestige and above: Core McDowell No 1 grew 19% YoY; Signature grew 51%
YoY in 3QFY17.
New launches
New launches during the quarter: (a) McDowell’s No 1 Silk introduced in honey
favor, (b) expresso-based Royal Challenge, and (c) gift packs of Royal Challenge,
VAT 69, and Black Dog launched to a good response.
UNSP confident that it grew ahead of industry during the quarter.
RM inflation subdued during the quarter at 2-3%; however, towards the end of
the quarter, there was some firming up of ENA costs.
2-3% YoY increase in ENA in 1QFY17, up 6-7% YoY in 2QFY17, 3% YoY increase in
3QFY17, and 3% YoY increase likely in 4QFY17.
Likely impact of demonetization during 4Q as well, but at a reduced rate. The
key headwind could be the Supreme Court ban on stores less than 500 meters
from highways.
Margins and price increases
In Maharashtra, the price increase due to LBT is reflected in sales and the LBT is
in other overheads. Around 100bp gain in gross margin has been through this
factor. Rest is due to mix improvement and stable RM cost.
In Telangana, there are no price increases yet, despite conversion of VAT to
excise. This has working capital implications and no margin impact.
In Karnataka, Maharashtra and West Bengal, price increases have been taken
this year (WB price increase was in 3QFY17). Smaller market, Delhi saw price
increases as well.
Karnataka and Maharashtra account for ~40% of volumes, but West Bengal is
small, with 4-5% volume share.
In Maharashtra, price increases are ahead of LBT impact. West Bengal is a free
pricing market and there was also a price increase ahead of excise increase.
For 9MFY17, LBT impact was INR610m and service tax increase impact was
around INR400m.
February 2017
43

CONSUMER | Voices
From a pricing point, there is more rationality compared to a year ago. LBT and
excise increases have been completely passed on by all.
Highway ban
No clarity yet on impact.
If liquor stores need to be moved, they will be moved, as this is in the interest of
the states and the retailers. The key is managing the transition.
There is no clarity on whether 500 meters are as on road route or as the crow
flies.
New franchise agreements
UNSP is considering expanding through the franchisee route in some states.
Franchisees may have cost advantage through cost savings mainly on staff costs
that are much higher for UNSP. They also gain from concentrated focus on a
state. UNSP will observe quality compliance.
Based on its TN experience, UNSP could get 20% fixed fees.
Such an arrangement frees up resources for the ‘Prestige and above’ segment
both on expenses as well as working capital.
May shut a few factories or sell to franchisees if required.
The reason for franchising in Kerala is because most brands do not make money,
as there has been no increase in prices in 7-8 states.
Agreements will be largely EBITDA neutral. Margins will, however, look better.
Asset sales
INR20b monetization of asset gains likely this year on track.
Reduced manufacturing locations from 93-94 two-and-a-half years ago to 75-76.
GST
No further clarifications on which slabs their input materials will be. Unlikely to
be worst case as was feared a couple of quarters ago.
States also understand some of the industry concerns.
Will get full clarity in 2-3 months.
February 2017
44

FINANCIALS/BANKS | Voices
FINANCIALS/BANKS
CASA deposits received a huge boost across the banking system, led by demonetization. Slippages and credit costs
remained elevated in 3QFY17, cushioned by strong trading gains on account of falling yields. Interest income
reversals, negative carry on CRR and change in asset mix (declining C-D ratios) kept margins under pressure, which
led to subdued core income performance. We expect more progress in resolution mechanisms in FY18, led by
stressed asset sales and greater cooperation between banks and promoter companies. Amid muted corporate
activity and credit growth, banks continued to focus on the retail segment. Given the competitive landscape and
economic scenario, system loan growth is likely to remain moderate in FY17, with private banks continuing to gain
market share.
KEY HIGHLIGHTS FROM CONFERENCE CALL
Growth & Asset Quality
Outlook
Management maintained
guidance at ~300bp credit
cost for FY17; slippages to
moderate.
Corporate fees to be muted
in near term.
Target C/I at 40%.
Asset quality
Slippages in iron & steel
accounted for 30% of non-
watch list slippages. The
management believes
these accounts will be
subject to restructuring
and the bank may not
have to take much of a
haircut.
There have been minimal
upgrades from the watch
list, with the management
conservatively observing
little scope for
improvement in these
accounts.
Corporate slippages are
80% of overall slippages.
SMA2 stood at INR79b (all
standard). The
management expects bulk
of the slippages to come
from OSRL+SMA2
accounts.
INR27b slipped from the
watchlist during the
quarter.
Slippages increased QoQ
to INR41.4b (annualized
slippage ratio of 4.3%) v/s
INR28.6b in 2Q.
Asset quality remains
impeccable, with NSL of
less than 50bp of loans.
The bank used RBI’s 90dpd
dispensation on small
value accounts for
classifying NPAs;
otherwise GNPAs would
have been marginally
higher by a few basis
points at ~1.1%.
75% of the corporate and
SME slippages from drill-
down list; restructured
loan and devolvement of
non-fund based exposure
Exposure to drill-down
Net interest margins
Management expects
NIM to remain 3.6%+
in FY17.
Impact of
Demonetization
Stickiness of SA deposits
seen to be reasonably
strong. On a daily
average basis, CASA
deposits grew 30%+.
Loans aggregating
INR400m have been used
for RBI dispensation.
10bp of NIM
compression can be
attributed to change in
asset mix and higher CRR
requirements.
Axis Bank
Bank of Baroda
Guidance unchanged, with
slippages of INR150b and
recoveries of INR100b
during FY17.
The bank will explore
options to increase capital,
may be in FY18: (a)
monetization of stake in
some assets (UTI MF, NSE,
etc), and (b) raising capital
(bank may consider QIP in
coming years).
The bank maintained that it
would open 150 branches by
the end of FY17, with branch
expansion plans that had
been put on hold in 3Q
(owing to demonetization
related distraction) to be
completed in 4Q.
NIM contracted by
23bp QoQ to 2%, led
by interest income
reversal of INR2.6b;
adjusted for this, NIM
would have been lower
by 6bp QoQ.
Domestic CASA ratio
improved 345bp QoQ to
37.1% with domestic SA
deposit growth at 31%.
HDFC Bank
Reported NIM declined
10bp QoQ to 4.2% led by
sharp fall in C-D ratio (-
560bp to 78%) and
negative carry due to
demonetization.
ICICI Bank
Expect NPL provision to be
elevated next quarter, as
well.
Sustainable NIM in overseas
book to be 1.4-1.5%; mean
reversal might take some
Reported NIM stable
QoQ at 3.1%. Domestic
margins ticked higher
by 10bp QoQ to 3.5%
while overseas NIMs
declined 82bp QoQ to
Demonetization
impacted several fee
lines such as ATM fees
and merchant acquiring
fees.
The bank incurred
negative carry for ~14
days on account of RBI’s
temporary incremental
100% CRR requirement.
CA/SA deposit growth
robust at 37%/38%.
Strong CASA growth of
+26% YoY (13% QoQ)
was driven by robust SA
deposit inflows (+30%
YoY,+13% QoQ). CA
deposits grew 16% YoY
45
February 2017

FINANCIALS/BANKS | Voices
Growth & Asset Quality
Outlook
quarters.
Retail fees formed 71% of
fees in 3QFY17. Aspiration is
to grow fee income in
double digits.
Asset quality
sectors (stressed sectors)
declined from 16.2% in
March 2012 to 12.4% in
December 2016. Rating
upgrade led to reduction
in drill-down list by
INR20b.
Bank utilized RBI
dispensation for NPL
recognition amounting to
INR1b.
Of the overall slippages,
INR12b was on account of
restructured pool. 4Q
amount coming out of
moratorium is INR3b-4b;
hence, slippages from this
pool likely to be lower.
Resolution process is
expected to improve but
disagreement on hair cut
on loans is taking a toll.
Bank selective in invoking
SDR, chances of slippage
into NPLs are high.
SMA2 accounts increased
to INR190b v/s INR120b in
last quarter.
Current resolution
mechanisms may not have
the best structural fit with
the bank’s assets. The
bank prefers deep
restructuring rather than
S4A/SDR.
5:25: 16 accounts
~INR171b; SDR: 15
accounts ~INR94.4b; S4A:
10 accounts ~INR86.45b.
Significant overlap
between the watch list
and 5:25/SDR/S4A;
moreover, lot of accounts
have already slipped to
NPA, so the o/s standard
(non-restructured) loans
would be less.
Slippage from
restructured book at
INR20b.
Net interest margins
0.8% on account of
interest income
reversals for large
mining exposure
slipping into NPA
category.
Impact of
Demonetization
(+14% QoQ).Overall
CASA ratio improved
420bp QoQ to 50% v/s
46% in 2QFY17
.
Average
daily CASA ratio
increased to 45%
(+330bp QoQ) to reach
life time high levels.
Punjab
National Bank
4Q slippages to decline;
recoveries and upgrades to
be strong, implying
sequential fall in NPLs.
NIM should be at similar
levels as in 3QFY17, as
lending yields are under
pressure.
Loan growth to improve, led
by government-backed
projects, especially roads,
ports and small-value
accounts.
Global and domestic
margins declined 18bp
and 24QoQ, respectively
owing to lower C-D ratio
of 63% v/s 68% in
2QFY17 and high
competitive intensity
leading to lower yields.
CASA deposits grew 33%
YoY (22% QoQ) led by
strong growth in SA
deposits (+37% YoY).
Domestic CASA ratio
stood at 47% v/s 42.1%
in 2QFY17.
State Bank of
India
Watch list may be revised,
but there could be
movements both in and out.
Size may not actually
increase significantly.
Overall growth guidance of
11%, with retail growth at
17-18%.
Large scale redemption of
CASA deposits could lead to
deposit rate cuts to maintain
CoF.
Target C/I below 50%.
NIMs (derived) were
largely stable QoQ at
2.74% despite a change
in asset mix (sharp fall in
C-D ratio to 71% v/s 77%
in 2Q).
CASA deposits grew 35%
YoY, led by robust SA
deposit growth of 36%
YoY. CA deposits grew
28% YoY. CASA ratio
increased 380bp QoQ to
46.5%. Average daily
CASA ratio stood at
42.7%.
Axis Bank
Current Price INR 481
Click below for
Detailed Concall Transcript &
Results Update
Neutral
Target Price INR 535 | 11% Upside
Asset quality related
Loans aggregating INR400m have been used for RBI dispensation.
Management maintained guidance at ~300bp credit cost for FY17. While credit
costs for 2HFY17 will be similar to 1HFY17, slippages are expected to reduce and
therefore PCR should increase.
SDR on two accounts amounted to INR5.01b.
February 2017
46

FINANCIALS/BANKS | Voices
Slippages in iron and steel accounted for 30% of non-watch list slippages.
Management believes these accounts will be subject to restructuring, and the
bank may not have to take much of a haircut.
INR2.5b provision provided on conversion of non-fund based exposure. Not
included for PCR calculation.
There have been minimal upgrades from the watch list, with management
conservatively observing little scope for improvement in these accounts;
believes upgrading these accounts will depend on the resolution environment
and may start once restructuring starts happening.
Corporate slippages are 80% of overall slippages.
Slippage from restructured book stood at INR8.13b.
B
Balance sheet related
Deposits have been impacted by FCNR redemption.
Stickiness of SA deposits seen to be reasonably strong. On a daily average basis,
CASA deposits increased by 30%+.
P/L related
NIM compression can be attributed to two factors: a) ~10bp due to balance
sheet structural changes (change in C-D ratios, higher investments, higher cash
and reserve requirements) and b) ~23bp can be attributed to RBI regulations in
relation to one-time interest reversals on SDR/S4A loans. This is non-recurring in
nature.
Management reiterated NIM guidance at 3.6% For FY17.
Trading gains primarily related to gains from G-secs.
The bank has a meaningful part of MCLR linked loans in 6-month bucket.
The bank expects corporate fees to be muted in the near term.
Target C/I of 40% for FY17. Size of the branches (incremental) has come down to
100-1200 sq. feet v/s 1800 sq. feet earlier. 91% of the branches have broken
even in three years.
Bank of Baroda
Current Price INR 169
Click below for
Results Update
Buy
Target Price INR 221 | 31% Upside
Asset quality
Outstanding stock of stress loans – S4A: INR19.48b (standard), SDR: INR69.44b
(of which INR49.13b standard), and 5:25: INR74.08b (standard).
Under 5:25, the amount restructured during the quarter was INR5.37b, of which
was one large account (Shirpur Power) constituted INR5.33b. No SDR was done
during the quarter.
SMA2 stood at INR79b (all standard). The management expects bulk of the
slippages to come from OSRL+SMA2 accounts.
INR27b slipped from the watch list during the quarter.
Guidance unchanged, with slippages of INR150b and recoveries of INR100b
during FY17.
Other highlights
CET1 has declined ~80bp owing to reclassification of certain items that were
earlier considered in the calculation of CET1 ratio (change in interpretation of
RBI guidelines by the statutory auditors).
The bank will explore options to increase capital maybe in FY18: (a)
monetization of stake in some of the assets (UTI MF, NSE, etc), and (b) raise
capital (the bank might consider QIP in the coming years).
Coupon on AT1 bonds raised was 8.5%.
Home loan pricing is risk-based (CIBIL score), with interest rate at 8.35- 9.35%.
Incremental exposures in power are only in the renewable energy space.
February 2017
47

FINANCIALS/BANKS | Voices
Canara Bank
Current Price INR 290
Click below for
Detailed Concall Transcript &
Results Update
Neutral
Target Price INR 300 | 3% Upside
Balance sheet related
Focus on growth is returning back; Targeting 7-8% loan growth for FY17 v/s YTD
and YoY being flat
Targeting a 64-65% retail, SME and agriculture portfolio mix in overall loan book
(as this offers better yields as well as lower delinquencies).
Not accepting DRI corporate deposits. Focus remains on retail term deposits.
Share of retail TD in overall TD has increased to 62% from 51% a year ago
In the corporate lending segment, the bank feels it has become much more
competitive with MCLR, allowing it to get access to higher quality corporates.
P/L Related
The bank has booked only 40% of the available trading gains in the quarter and
expects to book to rest in 4Q.
The bank has board approval to dilute 13% stake in CANFIN homes. This is
expected to provide INR5-6b capital gains, in our view.
The bank also has board approval to sell of CANARA FACTORS business.
CBK is targeting 2.5% exit margins for FY18.
Asset quality
Total outstanding S4A stands at INR25b, no new addition in the quarter and has
pipeline of INR25b.
5:25 total pool stands at INR63b, which is largely standard (some are included
standard restructured loans).
INR75b is the pool of SDR accounts, and INR8b of which are recognized as stress
loans. Of the rest, some are in standard restructured loans.
Targeting to improve PCR to 55% by end of FY17.
Expects 1-2 large corporate accounts resolution to take place by end of FY17,
leading to upgrade of INR10-15b.
Expects slippages of less than INR15b in 4QFY17.
SMA2 accounts remain in the range of INR170-180b.
The bank has taken benefit of RBI dispensation of 90dpd for small-value
accounts of less than INR10m – amounting to INR5.6b.
DCB Bank
Current Price INR 153
Click below for
Detailed Concall Transcript &
Results Update
Neutral
Target Price INR 134
Asset quality related
Sale to ARC: (1) INR870m from NPA accounts: of which INR520m (20% cash,
balance in SR) adjusted against recoveries and INR350m against write-offs from
GNPA, and (2) INR210m from previously written-off accounts.
SR o/s as of 3QFY17 stood at INR700m v/s INR290m in 2QFY17.
The bank has been conservative and has not made use of the RBI’s 90dpd
deferment dispensation. Customers with portfolio amounting to INR300m had
asked the bank for the regulatory dispensation, while the bank did not hamper
their individual records; at the corporate level they have classified these
accounts as NPAs.
Balance sheet related
CASA stickiness: The bank is more hopeful of retaining small-ticket accounts that
are generally sticky compared to large-ticket accounts where there are alternate
avenues to potentially generate higher returns. However, it is too early to take a
call on the sustainability of CASA deposits.
February 2017
48

FINANCIALS/BANKS | Voices
Restricted impact of CASA on margins: Owing to MCLR windfall benefits in terms
of lower COF due to CASA are limited. The bank believes margins will be a play
on yields, and will seek to balance out risk reward to generate better risk
adjusted margins.
Bank has seen good traction on customer inflows at new branches set up in the
last 18 months. Also, these branches got a three-month head start in CASA
(targets).
Witnessed contraction in SME book until third week of November owing to
higher repayment rates. Hence, flat sequential loan growth may not reflect the
true picture.
Average ticket size of SME book stood at INR4-5m (all are working capital loans;
disbursements on the basis of business analysis – sales projections , CFs), in case
of LAP/mortgage average ticket sizes at INR3-3.5m (disbursements done on the
basis of repayment capacity, capacity to service EMIs). The bank has kept an
internal policy of not exceeding loan size of INR30m.
Microfinance comprises only 5% of the book primarily to meet PSL targets. Very
conservative and watchful on the portfolio. No plans to exceed the proportion
of the loan book.
P/L related
Muted fee growth: Processing fees weak because of slowdown in loan
disbursals, no ATM fees since ATMS were shut till December. Opportunity in PSL
certificates, where risk can be passed on and decent fees can be earned. They
have classified fees from PSL outside core fees, as they want to be confident on
the sustainability of these fees in the next two years.
The bank prefers self-employed customers to salaried customers in the
mortgage segment owing to better yields (as long as they are small-ticket-size
loans, where it is perceived to be less risky).
Demonetization commentary
Slowdown in throughput across SMEs anywhere between 20-30% post
demonetization. However, there was some normalcy returning from mid-
December.
Demonetization-related higher opex in terms of security, transportation of cash,
increased personnel, additional insurance costs, bank charges as currency was
offloaded to currency chests, ATM recalibration charges and so on.
Other highlights
No change in branch opening strategy: Aiming to have 310 branches by Oct 17,
max by Dec 17. From then onwards, once the initial branch footprint is set up,
pace will be slowed down; funding should happen from the profit generated
through existing branches. Branches generally take 22-24 branches on an
average to break even.
FY17 Guidance: C/I lower than 63%, ROEs ~10%.
The bank has plans to raise equity in August-September 2017.
February 2017
49

FINANCIALS/BANKS | Voices
Federal Bank
Current Price INR 86
Click below for
Detailed Concall Transcript &
Results Update
Buy
Target Price INR 105 | 22% Upside
Asset quality related
90dpd RBI dispensation used on an amount ~INR350-400m (250m retail, SME
INR50-60m). Management expects 50% of this to be resolved in January itself.
Recoveries during the quarter amounted to INR1.11b and write offs stood at
INR460m; INR160m added to GNPA on account of conversion of non-funded
exposure.
Break-up of provisions: Loan loss provisions - INR1.04b, standard asset provision
- INR280m, investment - INR80m, tax - INR1.1b, others - 190m.
Profit and loss related
Pension obligations increased owing to fall in yields, with impact of ~INR170m in
opex.
Demonetization-related expenses amounted to another INR550m (includes
opex of INR130m and management estimates of CRR impact+ opportunity
costs).
One-off (due to excess liquidity) income of INR190m included in NII.
Balance Sheet related
Looking at both organic growth as well as portfolio acquisition.
FB has improved and scaled up client origination processes, and has good
relations with mid corporates and local corporates. With the beefing up of
senior mgt. team, the opportunity pool is that much bigger and growth
turnaround is much more possible.
Targeted buckets of 1/3rd share in all three (retail, wholesale and SME).
The bank identifies INR250m+ exposure as “corporate exposure”.
Organic retail growth during the quarter was at 16% YoY (excluding acquired
portfolios). Retail continues to be branch-led and should scale-up. The bank has
made progress on several retail initiatives, such as increasing the range of
offerings, scale up on SBI credit cards etc.
Incremental yields in corporates at ~10.5%, housing yields of 9.5%, SME yield of
10.6-10.8%.
10% of the book is credit substitutes.
Average ticket size of INR2m in housing.
Deposit mix between Kerala and Non Kerala at 66:33, whereas in case of loans it
is 33:66 between Kerala and non-Kerala (almost the reverse).
~25% of sourcing outside Kerala is done through Fedbank Financial Services
Limited.
HDFC Bank
Current Price INR 1,407
Click below for
Detailed Concall Transcript &
Results Update
Buy
Target Price INR 1,510 | 7% Upside
Asset Quality related
The bank used RBI’s 90dpd dispensation on small value accounts for classifying
NPAs; Otherwise GNPAs would have been marginally higher by a few basis
points at ~1.1%.
Total RWAs at the end of the quarter stood at INR5.81t.
Balance sheet related
Domestic loans constituted ~96% of total loans.
Business banking segment was affected owing to b) reduced drawdown in CC
and overdraft facilities, b) higher repayments.
Retail disbursement growth stood at 11% YoY for this quarter.
February 2017
50

FINANCIALS/BANKS | Voices
P/L related
Demonetization impacted several fee lines such as ATM fees and merchant
acquiring fees (where charges were waived off). Third-party distribution fees
were muted as the bank consciously did not encourage the sale of insurance
products against the cash deposited in the accounts.
The bank incurred negative carry for ~14 days on account of the RBI’s temporary
incremental 100% CRR requirement, which impacted NIMs to some extent.
Expects NIMs to trend higher than the 4.1% reported in 3Q.
Cash handling, logistics, ATM recalibration added to operating costs during the
quarter, partly offset by the fact that disbursements in some retail segments like
auto and two wheelers were lower, and hence expenditure like commission
expenses, dealer charges (included in other operating expenses) came in lower
during the quarter.
The bank had started the downsizing exercise even prior to demonetization in a
bid to improve productivity.
80-85% of the fee income is retail fees – broad-based across different sources
like credit card fees, interchange fees, third party distribution, and transaction
fees (contributing in the range of 13-16% each).
Other highlights
Tier 1 capital at 13.8%
The bank maintained that it would open 150 branches by the end of FY17, with
branch expansion plans that had been put on hold in 3Q (owing to
demonetization related distraction) to be completed in 4Q.
ICICI Bank
Current Price INR 282
Click below for
Detailed Concall Transcript &
Results Update
Buy
Target Price INR 345 | 22% Upside
Asset Quality: 75% of the corporate and SME slippages from drill-down list;
restructured loan and devolvement of non-fund based exposure
Recalibrating balance sheet with a focus on retail loans. Exposure to drill-down
sectors (stressed sectors) declined from 16.2% in Mar-12 to 12.4% in Dec-16.
Rating upgrade and resolution led to reduction in drill-down list by INR20b.
Based on the transaction in public domain, the bank expects significant
reduction in drill-down list (below investment grade). This excludes exposure of
INR5.3b to central public undertaking (gas based).
Slippages from restructured loan INR2.4b, drill down list INR29.4b and
devolvement of non-fund based exposure ~INR18b. Retail portfolio net
slippages were negligible.
Outside of the drill-down list, stress is company-specific and not specific sector
apart from construction (high percentage in this segment already NPL or
restructured).
Bank sold NPLs of INR870m during the quarter.
Of INR34b of overall SDR, INR28b already restructured or loan to below
investment grade accounts.
5:25 refinancing INR33b (INR27b in 2QFY17), of which INR24b loan to below
investment grade.
No S4A as of Dec-16
Bank did not make any floating and contingency provisions during the quarter.
Expect NPL provision to be elevated in next quarter as well.
Gross and net NPL for the retail segment stood at 1.8% and 0.6% as compared
to 1.9% and 0.65%.
Management mentioned corporate portfolio above investment grade grew at
15% YoY, but for reduction in stressed sector, overall corporate loans grew by
February 2017
51

FINANCIALS/BANKS | Voices
4% YoY. 75% of the incremental disbursement to corporate is to top-rated
corporates.
Non-fund based exposure to restructured loan would be ~INR20b (not included
in drilled down list).
Bank has utilized RBI dispensation for NPL recognition amounting to INR1b.
Few small cases were restructured during the quarter. One mid-sized real estate
exposure slipped into NPL, resulting into an increase in home finance subsidiary.
Balance-sheet: Retail business remains healthy
Reduction in international loan (in rupee terms) by 16% led to modest overall
loan growth of 5% YoY.
Domestic loans grew 12% YoY, with retail loan growth at 18% YoY. Within retail,
mortgage and auto loans grew 17% YoY and 13% YoY. Unsecured personal loans
and credit cards grew 40% YoY. Unsecured loan growth was driven by cross-sell
to existing customers.
Of the mortgage portfolio, LAP is 17%.
FCNR (B) deposits of USD1.75b matured during the quarter. Daily average basis
CASA grew 29% YoY.
SME and business banking book growth was muted because of higher
repayment and cautious approach by the bank. As a strategy, the bank is making
more disbursement in this portfolio (risk adjusted basis returns are higher).
P&L: Healthy operating performance
International NIM contracted on account of higher interest income reversal.
Sustainable NIM in overseas book to be 1.4-1.5%, but may take some quarters
to mean revert.
Yield on loans would be under pressure due to reduction in MCLR, non-accrual
of interest income and resolution of loans leading to reduction in interest rate.
Lower funding cost will provide buffer to NIMs.
Retail fees formed 71% of fees in Q3FY17. Aspiration is to grow fee income in
double-digits.
INR4.5b was dividend from the subsidiaries.
76% of domestic loan book is floating rate, of which MCLR linked is 20%.
IDFC Bank
Current Price INR 63
Click below for
Detailed Concall Transcript &
Results Update
Neutral
Target Price INR 68 | 7% Upside
The bank acquired 0.1m customers inorganically and 0.025m customers
organically. The bank’s current run-rate of customer acquisition is 40,000-
45,000 per month.
In a digitalized phase, the bank intends to increase point of contact via ATMs
and micro ATMs. While number of branches are 75; points of presence is 4684
(including BC network).
The retail and SME portfolio of the bank is 13% of gross credit (including buyout
of 8%). Indirect lending was 5%.
Provisions were high on account: (1) MTM on investment, (2) one-off
deterioration in non-legacy asset, and (3) ageing of the NPL portfolio. NPL
provisions formed 85% of overall provisions. Slippages were high at INR3.5b.
One large account slipped into NPL on account of borderline fraud.
30 days past due was not impacted and collection efficiency was 99%+ in small
value accounts.
The key driver for fee income is expected to be non-funded business. The bank
is set to leverage on its customer relationship to improve fee income
contribution.
February
20
17
201
2017
52

FINANCIALS/BANKS | Voices
During the quarter, the bank disbursed INR50b, but high repayment by a
telecom company led to muted loan growth.
Grama Vidayal assets have been taken over by the bank.
The bank intends to increase its asset yield by changing composition of asset
toward retail loans.
The bank has ~1% of stake in NSE.
Indian Bank
Current Price INR 290
Click below for
Results Update
Buy
Target Price INR 330 | 14% Upside
Balance Sheet related
Management has cut down guidance for retail loan growth to 16-18% in FY17
v/s guidance of 20-22% earlier. Overall credit growth to be 2-3% for FY17.
Bank expects to maintain CASA at 36-36.5%. The bank shed ~53.15b of high-cost
deposits during the quarter and has strived to increase proportion of retail
deposits.
P/L related
With regards to pension obligations, management claims that the returns on
planned assets are higher than the outflows, which is reflected in employee
expenses being flat, despite a fall in systemic yields. The bank is incurring
~INR1.2b in pension obligations (included in employee expenses) each quarter.
Average yield on investment book is 8.3%.
Asset quality related
Recoveries during the quarter amounted to INR1.3b, and upgrades amounted to
INR0.36b; there was no sale to ARC during the quarter. The bank is engaging
actively in relation to resolution of big-ticket accounts in iron and steel and
other lumpy accounts. Management expects recoveries and upgrades to pick up
in 4Q.
Exposure to TN SEB at INR11b.
Slippages: During the quarter, INR1.6b slippages arose from accounts of value
less than INR10m, slippages in existing NPA is INR1.08b, and from restructured
book is 2.93b. Going forward, the quarterly run rate of slippages is likely to be in
the range of INR9-10b.
The bank utilized the RBI’s 90dpd asset classification dispensation for loans
amounting to ~INR2-2.25b of loans.
NIMs have come down by 8-10bp owing interest reversals on S4A and SDR
accounts of ~INR820m.
O/s SDR – 12 accounts amounting to INR12.3b with 1 account amounting to
INR1.77b being added during the quarter. INR5.3b of outstanding restructured
included in SDR.
O/S S4A - INR4.1b.
O/s 5/25 – 10 accounts amounting to INR27.41b, of which three accounts
amounting to INR18.65b have already been classified as NPA.
SMA-2 o/s ~INR37b.
February 2017
53

FINANCIALS/BANKS | Voices
IndusInd Bank
Current Price INR 1,338
Click below for
Detailed Concall Transcript &
Results Update
Buy
Target Price INR 1,535 | 15% Upside
Balance Sheet related
Improvement in RWA profile – constituting just 78-79% of assets down from
82% earlier. Quality of book has improved as reflected in an improved rating
profile.
Registered strong CASA growth of 46%YoY, despite large IPO proceeds inflow of
INR80b last quarter going out during this quarter. This, in our view, could
explain the sharp 230bp fall in CA deposits.
Gained market share in VF across segments during the quarter other than 2-
wheelers (stable to marginal loss in market share).
Sold portfolio amounting to INR8.5b, loan growth was completely organic.
The bank added 280,000 new accounts during the quarter; average ticket size of
INR40,000-45,000. INR14b mobilized from new accounts. Management iterated
its desire to retain deposits by enabling cross sell.
Management estimated retention rates on SA at 60% to be higher than CA
(30%).
IIB disbursed INR42b in October and November. It managed to disburse INR18b
in December (December typically is a slow month, but management feels
growth of 21% YoY was better than projected at the time of demonetization).
MF loan book was flat in 3Q with origination entirely through BCs – deals only
with top-rated BCs.
P/L related
P/
Third party distribution fees could see an uptick owing to increased cash flow
into mutual funds and expanding insurance industry. There is a linear
relationship between branch network and third-party distribution. Investment
banking fees (no equity only debt) have stabilized, not likely to see large surges;
it may decline as a proportion of overall fee income.
Re-pricing of retail TD and CASA influx contributed to lower cost of funds (-25bp
QoQ); money market borrowings have come down significantly, as evidenced by
the trend in C-D rates. Very low differential between retail TD and bulk deposit
rates.
Management commented that loan processing fee is not only a function of
incremental loans, but also loan renewals. Most loans come up for renewal once
a year, and the bank charges processing fees during renewal.
Asset quality related
ARC book has shrunk with recoveries more than sales – net recovery of
INR140m.
Credit costs well within guidance of 60bp for FY17; management commented
that it could come in lower.
Two relatively small accounts slipped from restructured book to NPA.
Outstanding SR stood at INR2.23b.
INR520m loan book on which RBI dispensation was applied (INR470m pertained
to vehicle finance). These are not NPA accounts.
Cumulative collection efficiency in MF stood at ~99%.
Demonetization commentary
Management feels the biggest challenge was balance sheet management due to
continuous changes in liquidity stance.
Favorable construct of loan book: Large percentage of book is fixed rate,
therefore as rates fall the bank should benefit.
February 2017
54

FINANCIALS/BANKS | Voices
Other highlights
MCLR cuts would translate into refinancing opportunities for the bank.
CRAR was flat QoQ, with Tier 1 actually improving despite 25% loan growth. This
was the result of reduced market risk and improved quality of loan book.
Debit card swipes increased 2.5x, with spending up nearly 4x. Credit card swipes
went up by 3.5x; however, overall spend was flat due to lower ticket size.
Jammu & Kashmir Bank
Current Price INR 71
Neutral
Target Price INR 75 | 5% Upside
Click below for
Detailed Concall Transcript &
Results Update
Asset quality
3QFY17 concern of the bank was on account of asset quality, particularly in rest
of the India portfolio and civil unrest in state of J&K state. However, slippages
were contained under INR2b v/s addition of INR10b+ in 2QFY17.
Restructuring of the portfolio in state of J&K was earlier estimated at INR40b,
but it could be lowered to INR20-25b. Bank had already provided INR20b for the
restructured portfolio/rehabilitation in the state of J&K Bank.
Bank availed the benefit of RBI dispensation of recognizing NPL, but the amount
is not meaningful.
75% of the current restructured portfolio is from the non J&K state.
GNPL in non J&K state would constitute 85% of the overall GNPLs.
Supreme Court’s ruling allowed SARFAESI Act to state of J&K, which would help
in recovery. Bank is planning to set up ARC (51% state government and 49% by
J&K Bank) in the state for better recovery prospect. Organization changes made
by creating separate verticals of stressed assets in every SBUs.
Restructured portfolio on account of floods (INR11.25b) has not seen spike in
slippages.
Other highlights
FY17 is the year of cleaning and consolidating balance sheet. Growth should
resume from FY18. Expect loan growth rate of 15-20% and deposit growth of
15% in FY18. J&K state growth to be 20-25% and rest in India 12-15%. Outside
J&K, the bank is looking to lend to top-rated corporates.
84% of the bond portfolio (INR20b) is to top-rated corporates.
State budget announced infusion of INR5.3b (to come in two tranches) in the
bank, which should help it to raise further capital and provide opportunity for
growth. Revaluation of assets could release capital of INR2.7b; if government
transfers the lease property to the bank revaluation could be INR5b.
Maintain NIMs in the range of 3.25-3.5%. NIMs in the current quarter dropped
on account of slippages from the restructured portfolio.
Cost to income target is 45%. In the state of J&K, cost to income ratio is ~25%
whereas would be 50%+ in rest of India.
Kotak Mahindra Bank
Current Price INR 797
Click below for
Detailed Concall Transcript &
Results Update
Buy
Target Price INR 940 | 18% Upside
The bank is beginning to see normalization in most of the segments in 4QFY17.
Some challenges seen in SME and agriculture segment in 3QFY17, particularly in
terms of loan growth. Loan growth should normalize in next couple of quarters.
Integration was complete before de-monetization of the currency.
Bank is seeing benefits of the merger (though initial days).
Recovery is tougher than earlier envisaged.
Over last 12 months, the bank has gained market share in CV/CE as the product
offering has been increased to more distribution network. The bank believes the
February 2017
55

FINANCIALS/BANKS | Voices
problem is higher in SRTO, where bank has low presence. Currently, the bank
does not see any challenges in terms of collection efficiency.
The bank is in communication with the RBI about the promoter shareholding
pattern (30% by Dec-16 and 20% by Mar-18).
Individual product was all-time high in October; credit cards and personal loans
were unaffected. Home loans/LAP slowed down in November, but has improved
sharply in December 16. Additionally, car loans also improved in December 16 in
terms of volumes.
Cost-to-income ratio to be below 50% in FY17 and is likely to trend lower in
coming years.
Fee income: (1) customer forex income, (2) syndication (gift city) and (3) PSLC
trading (INR200m) helped in improvement in fee income. Syndication fees come
from (1) debt market syndication, (2) loan syndication, (3) gift city (foreign
exchange loans)
PSLC cost of buying for the company was INR310mn. Thus, on net basis, the
bank had to pay INR110m.
Punjab National Bank
Current Price INR 143
Click below for
Results Update
Buy
Target Price INR 185 | 30% Upside
Of the overall slippages INR12b was on account of restructured pool. 4Q amount
coming out of moratorium is INR3-4b; hence, slippages from this pool are likely
to be lower. Largest account slipped during the quarter was rice account of
INR6.5b.
Overall for 4Q slippages are expected to inch lower, and recoveries & upgrades
are expected to be strong, implying sequential fall in NPLs. Bank would continue
to write-off INR20b every quarter. Resolution process is expected to improve
but disagreement on hair cut on loans is taking a toll. Bank is very selective in
invoking SDR as chances of it slipping into NPLs are high.
SMA2 accounts increased to INR190b vs. INR120b in last quarter.
Bank has already recovered INR13b QTD. Most of the recoveries are from low-
value accounts.
NIM should be at similar levels as in 3QFY17 as lending yields are under
pressure. Reversal of interest on SDR and S4A were negligible.
SDR: INR35b of which INR14.5b is restructured.
5:25: INR53b.
S4A: INR17b, of which INR12.5b is restructured.
Bank has adequately made provisions for AS-15 and do not expect negative
surprise.
Loan growth is expected to improve led by (1) government-backed projects,
especially road and ports and small-value accounts.
State Bank of India
Current Price INR 269
Click below for
Results Update
Buy
Target Price INR 350 | 30% Upside
Asset quality related
5:25: 16 accounts, ~INR171b; SDR: 15 accounts, ~INR94.4b; S4A: 10 accounts,
~INR86.45b. Significant overlap between watch list and 5:25/SDR/S4A.
Moreover, several accounts have already slipped to NPA; the outstanding
standard (non-restructured) loans would be less.
Current resolution mechanisms may not have the best structural fit with the
bank’s assets. The bank prefers deep restructuring rather than S4A/SDR.
Watch list may be revised, but there could be movements both in and out of the
watch list. Hence, size may not actually increase to a significant extent.
February 2017
56

FINANCIALS/BANKS | Voices
35% of the provisions are for new slippages and 65% for NPL ageing; INR60b of
standard asset provisioning is not taken in PCR calculation.
Most of the power exposure is to PSUs like NPCL; exposure to DISCOMs is fairly
less. Hence, power constitutes a low figure in watch list.
NPAs at INR285.2b in iron & steel, INR41.15b in power (low exposure to gas-
based power plants, and hence, lower slippage), and INR83.38b in textiles.
Banks are able to resolve bad accounts faster and at a lesser haircut than ARCs.
Hence, the ARC model needs to be reworked to a fair extent.
GNPA consolidated: INR551.6b; NNPA consolidated: INR348.68b; OSRL
consolidated: INR127.93b.
Slippage from restructured book at INR20b.
B
Balance sheet related
Overall growth guidance of 11%, with retail growth at 17-18%; rest of the
growth to come from corporate segment. Next year, the management expects
higher working capital requirements.
Large scale redemption of CASA deposits could lead to deposit rate cuts in order
to maintain COF.
40% of loans are linked to MCLR, with 60% still linked to base rate.
RWA at the end of the quarter stood INR14.46t.
AFS book stood at INR3.87t with average duration of 1.55 years; HTM book at
INR4.07t, with duration of 5.19 years. On an aggregate basis, the overall
duration was 3.52 years.
P/L related
The bank incurred additional expenses of INR25b in respect of pension
obligations this quarter (on account of falling yields).
Margins could come off by 5-6bp, impacted by redemption of CASA deposits as
well as fall in interest rate yields.
Target C/I below 50%.
Total interest income reversal during the quarter was INR7.24b. There was no
interest income reversal on SDR/S4A as per RBI’s guidelines.
Other highlights
Including 9MFY17 retained earnings (~40bp) and capital raising (~39bp), CAR
would be higher by 79bp at 14.5% as against the reported 13.7%
Average balance in SA deposits stood at INR31,000.
Preliminary preparations for IND-AS have been done; awaiting RBI’s clarification
on this.
South Indian Bank
Current Price INR 21
Click below for
Detailed Concall Transcript &
Results Update
Neutral
Target Price INR 21
Asset Quality
Fresh NPA added INR1.96b, Recoveries INR 260m, Sale to ARC INR490m (sale
was INR900m and write-off was INR410m, 15% in cash with the remaining being
SR), write-off INR410m and upgradation INR390m. Therefore, total recoveries
were INR1.55b and closing balance at INR17.87b.
Recoveries were impacted slightly owing to demonetization with manpower
focused elsewhere - customer servicing and regulation compliance. There was
no significant improvement in recovery trends owing to deposit of old currency
notes.
39% - total corporate book, which includes all exposures over INR250m.
However, management highlighted that it is mainly facing stress in large
accounts amounting to INR60b (ticket size above 100m-150m) where the bank
has entered into consortium.
February 2017
57

FINANCIALS/BANKS | Voices
Resolution of these large stress accounts will define the asset quality trends.
Management highlighted that they stayed away from such large consortium
accounts and sectors in last 2.5 years. The TN government has joined the Uday
scheme; the bank has INR1.13b exposure there in OSRL, and therefore could
benefit from this.
Watch-list (including all stress accounts ex NPA) of INR11.7b – Steel INR3b, EPC
– INR4b, Auto ancillary INR3-4b
Restructured book amounts to INR12.95b, of which NPA: INR6.53b and
Restructured standard is INR6.42b. 5:25 – just 1 account of INR910m (already
included in SDR figure).
SDR: INR11.7b; SR: INR2.65b; no S4A accounts.
Credit costs will remain elevated and follow the current trend (INR1.5b each
quarter for next six quarters). INR700-800m where the bank has taken the RBI
relaxation (90 days recognition norm).
B
Balance Sheet related
Housing portfolio – average ticket size of INR2.7m with yields ~10%.
Expect loan growth of 15-18% in FY18.
P/L related
Demonetization has impacted fee income – especially card charges. In the
coming quarters should see an uptick as digital transactions have more than
doubled.
NIM guidance: 2.75-2.8% maintained. Interest reversal on account of change in
RBI guideline in relation to SDR which has impacted NIMs. Impact adjudged to
be 8bp.
Non-core income boosted owing to one-offs: HTM sale of INR500m, Bank could
sell PSL certificates of INR190m, IT refund amounting to INR120m.
Will be taking a call on reducing MCLR based on their assessment of the
stickiness of CASA deposits; NIM impact will obviously be negated to some
extent by reduced cost of funds.
Similar run-rate in employee expenditure to be maintained.
Other highlights
Fraud Account – Exposure (INR1.93b) secured by way of adequate collateral
(land, buildings). Management commented that the bank, nevertheless,
conservatively classified the incident as fraud. Management expects significant
recovery (reasonable estimate of 25% haircut on this exposure). The account
has led to elevated provisions (INR420m included in ‘others’ under provisions).
Branch expansion plans subject to rationalization – Management is looking to
build a cluster approach around existing high-potential branches. Also looking to
open and test extension counters before converting them to full-fledged
branches.
Post demonetization, average daily transactions up nearly 2x of pre-
demonetization levels – this will drive long-term benefits for the bank.
February 2017
58

FINANCIALS/BANKS | Voices
Union Bank of India
Current Price INR 142
Click below for
Results Update
Neutral
Target Price INR 172| 22% Upside
Asset Quality related
Other stress loans (1) SDR o/s– 21 accounts amounting to INR50.28b,three
accounts amounting to INR2.1b turned NPA during the quarter; (2) S4A o/s
INR6.77b; Overlap with restructured books at INR20b.
O/S SR ~INR7.36b.
Recoveries to be much better in 4Q. Management has guided for recoveries at
least 15% more than 3Q. The bank believes GNPA% has peaked and should
come down in the next quarter.
The bank is targeting a PCR target of 50%+ in 4QFY17.
The bank utilized RBI’s 90dpd NPA classification dispensation on portfolio
~INR2b.
SMA2 (internally classified by the bank as its watch list) o/s as of March’ 2016
stood at INR168.9b, Sept’2016 at INR180b, and as of Dec’ 2016 stood at
INR153.06b.
Within slippages, six accounts were over INR1b, with 1 account at ~INR14b.
Slippages were spread across steel (o/s NPA of INR75.68b, provision 35-40% of
this amount), food, construction, textile and auto.
O/s exposure of power sector stood at INR223.7b (NPA INR76.58b).
B
Balance-sheet related
Corporate loans de-grew as a result of ~INR80b of standard loans being repaid
by borrowers across the country (owing to demonetization).
70% of loans linked to MCLR, whereas 25-30% of loans are linked to base rate.
23% of term deposits will get re-priced in Q4.
P/L related
Bank is targeting exit NIMs at ~2.25% for FY17.
NIMs impacted by (1) interest income reversals of INR1.77b (~17bp) and (2)
change in asset mix (higher investments + repayment of loans worth INR80b
during the quarter owing to demonetization)
CET1 stood at 7.68, excluding 9MFY17 profits (impact ~15bp) and equity
infusion (~15bp). Adjusted for these, CET1 would be 30bp higher at ~8%.
Yes Bank
Current Price INR 1,429
Click below for
Detailed Concall Transcript &
Results Update
Buy
Target Price INR 1,575 | 10% Upside
Asset Quality
Collections remained in mid-to-high 90s in the MFI book throughout the
quarter. However, the book has seen some de-growth in this quarter in the
aftermath of demonetization.
No sale to ARC during the quarter. There was no additional restructuring during
the quarter with OSRL standing at ~42bp.
Under SDR, there was one new account worth INR 1.6b (construction exposure)
restructured during the quarter. SDR advances o/s increased to ~16bp of gross
advances from ~1bp of gross advances.
P/L related
This quarter saw INR270m amount of expensing on account of PSL certificate.
The bank considers PSL certificates to be far more efficient than portfolio
acquisitions.
Trading profits are INR3-3.5b YTD.
February 2017
59

FINANCIALS/BANKS | Voices
Trade financing business has been sluggish since commodity prices fell in the
last two years. Will look to add more fee products and make the stream more
granular.
Expects fee growth to be in line with balance sheet growth. Forex fee income is
more related to fixed income division (therefore will not grow in line with
balance sheet).
Balance sheet related
Effective February, the bank will be setting SA deposit rates at 6% and 6.5% for
two products.
In retail assets, disbursements reduced by INR1b in November as compared to
October, but increased to INR10b (highest ever) in December.
Negating the impact of demonetization, the bank believes that under normal
circumstances, the bank would be reporting CASA of 31.3%.
Credit substitute book stable QoQ at INR96b.
AT1 issued ~INR30b during the quarter, i.e. 190bp of RWA. CET stood at 9.9% at
quarter-end v/s 9.7% in 2QFY17.
Demonetization
The bank commented that they have witnessed some slowdown in SMEs post
demonetization as they are largely cash dependent. There were some signs of
normalcy returning in December; however things will take another 2-3 months
to settle down. The non-fund business in SME segment did take a hit. However,
the bank sees no structural issues in this segment. In the longer run, more
formalization expected in this segment.
The bank had already cut MCLR by 40-50bp over April-Dec 2016.
February 2017
60

FINANCIALS/NBFC | Voices
FINANCIALS/NBFC
KEY HIGHLIGHTS FROM CONFERENCE CALL
Outlook for FY18
Expect +25% AUM growth for FY18. In
LAP, targeting only existing customers.
Will resume growth in CD financing
from FY18.
AUM to remain largely stable QoQ in
4QFY17, but to grow 50% in FY18.
Asset quality
Overall asset quality trends remain
healthy.
Impact of Demonetization
Main impact felt in
2W/3W segment. Other
segments have witnessed
run-rate collection
efficiency.
Impact on disbursements
and collections to last in
4Q, but things will
normalize in FY18.
No impact of
demonetization for its
customer segment.
Bajaj Finance
Bharat
Financial
Inclusion
Witnessing signs of stress in UP and
Maharashtra.
LIC Housing
Share of non-retail loans to be capped
at 15%.
Incremental spreads to witness margin
compression.
No targets on growth.
Asset quality trends to remain
healthy.
97% of loan book is retail; mitigates
any asset quality shock.
Improvement in asset quality is
dependent on farmers receiving cash
for their rabi crop output.
Asset quality in the CV segment will
remain under pressure due to the
subdued macro environment.
Temporary increase in GNPL due to
lower levels of gold auctions.
Management does not foresee any
asset quality risk.
Mahindra
Finance
Muthoot
Finance
FY17 AUM growth target reduced to
14-15% from 18-20% earlier.
Expect 15% AUM growth in FY18 too.
Collection efficiency in the
tractors segment has
been subdued.
Management is cautious
on the CV segment, but is
confident on the Cars
segment.
Disbursements have
improved in January
compared to prior months
and are at 60-70% of run-
rate.
Bajaj Finance
Current Price INR 1,100
Buy
Target Price INR 1,276 | 16% Upside
Click below for
Results Update
Business updates
Business volumes have returned to normal. However, in terms of value, the
usual run-rate is yet to be achieved.
Consumer durables financing: Will continue to scale-back in this business over
the next three months. Post March 2017, should report strong growth.
Loans against property: Paused disbursements of LAP with ticket size of INR25m
or more post November 8, 2016. Such loans comprise 30% of the LAP book.
Consumer finance: The share of consumer finance might increase in the next 1-2
quarters, but should decline structurally. The management targets 35-37% share
of consumer finance over the medium-to-long term.
Demonetization impact
Repayments in LAP accounts were stronger than usual, as borrowers deposited
cash into their accounts and paid off their loans.
In 2W loans, volume demand, which had dropped significantly in November and
December, has returned to normalcy in January. However, financing penetration
increased in November and December, compensating for the drop in volume
demand.
The company continues to monitor the self-employed portfolios closely for
collection efficiency.
Asset quality
The company did not use the RBI relaxation on NPA recognition.
61
February 2017

FINANCIALS/NBFC | Voices
Sold INR920m worth of NPLs (pertaining to mortgages and business loans) on
cash basis, resulting in an improvement in asset quality. No impact on P&L.
Others
Targeting C/I ratio of 40-41%.
Capital adequacy improved due to warrant money raised from the parent
company.
Launched co-branded credit card with RBL Bank. Will be given to existing well-
performing EMI customers.
Over INR5b (out of INR12b) worth of LAP was disbursed in October. INR14b-15b
disbursement run-rate expected, going forward.
Mix of fixed/floating rate assets: 50/50.
Housing Finance subsidiary should go live in February.
65-68% of consumer finance borrowers are salaried while ~40% of overall
borrowers are salaried.
Bharat Financial
Current Price INR 872
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Results Update
Buy
Target Price INR 883 | 1% Upside
Demonetization impact
The management commented that the on-the-ground situation with regards to
collections is improving in Bihar and Jharkhand. UP and Maharashtra still lag
other states in terms of collection efficiency, but the management expects the
situation to normalize post elections.
Excluding UP and Maharashtra, collection efficiency for dues payable in
November as of date (i.e. 25th January, 2017) stands at 99%.
For off-balance sheet assets, the company has to recognize interest income only
when received and cannot accrue interest income at all.
Guidance
The management has guided disbursements of INR33b-35b in 4QFY17.
Expects 35-50bp reduction in cost of funds over the next 1-2 quarters, following
MCLR cuts by banks. The company does not intend to pass on these gains to the
customers, as it already offers the lowest interest rate in the industry and is also
making spreads reasonably below the 10% threshold as mandated by the RBI.
Expect C/I ratio to decline to 40% over the medium term.
Others
The company explained (with the help of a video) its investments in technology
that would help reduce TAT for a loan to a mere few minutes. This could be a
game changer and help it to move towards cashless business.
The company also aims at building a platform where cash could be withdrawn
by customers in remote areas from accessible places such as the neighborhood
grocery store, etc.
February 2017
62

FINANCIALS/NBFC | Voices
Dewan Housing
Current Price INR 323
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Detailed Concall Transcript &
Results Update
Buy
Target Price INR 405 | 25% Upside
Growth
Disbursements were down 12% MoM in November, but recovered to pre-
demonetization levels in December.
For the quarter, disbursements were up 10% YoY, primarily driven by home
loans and LAP (up 15% YoY). Disbursements in project financing were flat-to-
marginally-negative on a YoY basis.
There has been a slowdown in the high-ticket segment. The affordable housing
segment has not been impacted. Also, some pockets in NCR, Gujarat,
Maharashtra and MP also witnessed a slowdown.
Margins
The management continues to target NIM of 2.95-3.05%. It has cut yields by
~15bp.
Share of project financing is expected to increase to 14-15% over the next few
quarters due to the strong pipeline.
Yield in LAP is 13.55-13.75%, while that in builder loans is 15.45-16.2%.
The company earns a yield of 9.35% on its treasury book.
Others
The company did not avail of the 90-day NPA recognition benefit provided by
the RBI.
The company targets to achieve C/I ratio of 21-21.5% over the medium term.
Advertising costs are down 30% for 9MFY17, while legal and professional costs
have been stable.
Average ticket size in LAP is INR4m, while that in project financing is INR400m.
Equitas Holdings
Current Price INR 180
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Detailed Concall Transcript &
Results Update
Buy
Target Price INR 240 | 33% Upside
Assets: MFI business witnessing muted trend
The operating environment was not conducive, and collection and growth in the
MFI business was challenging. MFI disbursement is expected to be subdued in
4QFY17 as well. Collection efficiency for the quarter was 98.4%, with December
collection efficiency at 96.2%. Total PAR>1 (30 dpd+) was 1.02%.
The state of Karnataka, where the collection efficiency was low at 91% in
December 2016, is witnessing revival.
In December, Maharashtra had the lowest collection efficiency at 83.4%. There
has been a lot of disturbance in Vidharbha and the Nasik district on account of
political interference (local body election). This might continue till the end of
February 2017. However, the Government of Maharashtra is supportive of MFI
business.
As its cost of borrowing declines and benefits of operating efficiencies accrue,
Equitas would cut its lending rates for MFI borrowers.
In the MSME (backed by security) segment, Equitas has not seen stress in the
same geographies where MFI is witnessing stress. Overall collection efficiency
remains healthy.
New products such as two-wheeler loans, gold loans, business loans and
agriculture loans have been launched and Equitas expects acceleration in these
segments in the coming quarters. Two-wheelers loans are to be offered only to
February 2017
63

FINANCIALS/NBFC | Voices
micro-finance clients (not a focus area). There is significant opportunity in loans
against gold; especially agriculture gold loans (will be through liability branches).
Liability profile to improve
The bank’s deposit customer base is 6,500. CASA deposits constitute 2.3% of
deposits.
Currently, the bank has 112 liability branches (most were opened in December
2016) and it targets to reach 412 by 1QFY18. In addition, it has 605 asset
branches.
Retail term deposits (less than INR10m) constitute 12% of overall deposits.
Demonetization would help in mobilizing deposits and could lead to better than
expected performance.
Current deposits could be generated through customers other than micro-
finance customers.
Deployment of PoS machines could also lead to higher deposit generation.
The bank is offering interest rates ranging from 5.5% (shorter duration) to 8.85%
(for longer tenor).
Other highlights
Opex increased on account of increase in liability staff and addition of branches
during the quarter.
Consolidated yield for the quarter was 19.7%.
On an average, overlap of MFI customers with other products is 60%.
IDFC
Current Price INR 54
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Detailed Concall Transcript &
Results Update
Buy
Business updates
While credit disbursements slowed down owing to demonetization, collection
efficiency in the MF entity was high at 98%+.
IDFC is impacted by MCLR rate cuts by the larger banks. While lending rates
have declined, IDFC’s cost of funds has not fallen commensurately. The
management expects margin compression in the next few quarters.
Corporate growth will be muted in the next few quarters, with the management
aiming to grow retail book to 25% of overall book over the next 2-3 years.
C/I ratio will continue to increase, owing to large scale investment by the banks
on network and customer franchise building. The bank is aiming to end FY17 at
40% C/I.
Asset quality
Energy sector constitutes 80% of stressed exposure.
Of the total provisioning of INR2.9b, INR2.78b is in relation to IDFC Bank.
‘Dividend elimination’ figure of INR1.84b is in relation to road assets.
Others
The management highlighted that the merger of IDFC and IDFCB is not feasible
on regulatory grounds.
February 2017
64

FINANCIALS/NBFC | Voices
IndiaBulls Housing Finance
Current Price INR 848
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Detailed Concall Transcript &
Results Update
Buy
Target Price INR 1,015 | 20% Upside
Business growth
The loan book grew 31% YoY in the quarter. Growth in home loans was 43%
YoY, but in LAP and corporate loans, it was sub-20% YoY.
Fee income was flat YoY at INR1.3b.
The management has guided 23-28% AUM growth for FY17.
Three years ago, the management turned cautious on the luxury real estate
segment and took a conscious decision to restrict growth in construction
finance. As a result, the CF book has been largely stable at INR70b.
Margins
Incremental cost of funds for the company, post MCLR cuts by banks, stands at
7.7%. Around 60% of funding for the company is at variable rate.
Management believes this should help cushion the yield pressure due to cut in
home loan rates. It has guided incremental spreads of 275-300bp (307bp in
3QFY17) and book spreads of 300-325bp, going forward.
Incremental yields in each segment are as follows – HL: 9.05%, LAP: 10.5-11%,
LRD: 10-10.5% and Construction Finance: 15%.
Management expects the retail home loan book to re-price to the current rate
(i.e. 9%) over the next 1-1.5 years.
2020 outlook
The management reiterated that retail home loans will comprise 66% of total
loan book by FY20.
Asset quality
The company has tied up with CRISIL to publish monthly reports on the asset
quality of their sell-down book.
Provisions made during the quarter amounted to INR1.78b compared to
INR1.12b in 3QFY16. This includes a one-off of INR500m of treasury gains added
to the provision buffer.
Others
The cost-to-income ratio declined 60bp YoY to 13.8% in the quarter. The
management reiterated its guidance of 70-100bp annual reduction in C/I ratio.
The break-up of the corporate book is as follows: LRD – INR100b, CF – INR70b.
Management expects cash and cash equivalents (i.e. current investments) to
remain largely stable at ~INR200b.