GST | A Reality
GST: A Reality
Refer our latest updates on GST
Beginning of a new era
One tax benefits max
After a long wait, in one of its biggest indirect tax reforms, India finally implemented GST
with effect from July 1, 2017. Like all big transformations, we believe GST will create
disruption in the near term. However, in the long term, it is expected to (a) simplify and
rationalize taxes, (b) shift trade from the unorganized to the organized segment, and (c)
improve efficiency in the system. On the macro front, we believe this will be revenue
accretive for the government, with the tax base expanding though tax rates on various
products remain close to the current effective tax rates. While reported CPI is likely to
remain stable, consumers might feel the pinch due to higher taxation on services. We
believe big disruptions like GST also create opportunities in equity markets.
India’s biggest tax reform a reality now
The indirect tax regime in India is being completely overhauled with the
migration to GST with effect from July 1, 2017. We believe this would simplify
and rationalize taxes, shift trade from the unorganized to the organized
segment, and improve efficiency in the system.
The real value of GST would be in the area of tax governance, where a system
plagued with a plethora of discretionary, ad-hoc taxes would move toward a
ruled-based, transparent and stable tax regime. This would make the tax system
fairer by ensuring ‘neutrality’ across players, products or services, locations or
business cycles.
Near-term pain for long-term gain
Our channel checks suggest that while the larger corporates are well prepared
for the change, SMEs and other trade participants are still grappling to
understand its impacts and procedures. This is likely to create trade disruption
in the economy in the near term.
However, in the long term, this is likely to simplify taxation and provide ease of
doing business in India. We believe that four key themes would emerge, which
might have a significant impact on India Inc: (a) change in effective tax rates for
various products and services, (b) availability of seamless input credit across the
value chain, (c) shift of trade from currently unorganized segments to organized
segments, and (d) rejig in supply chain management.
Revenue accretive for government; reported inflation unlikely to rise
The GST rates for most products have been retained in the bands closest to the
respective current effective rates and the tax on services has been hiked only
slightly. Yet, we believe government revenues would increase over the medium
term, with expansion in the tax base (since the exemption list will be pruned
and threshold for levying tax reduced) and reduction in tax evasion.
Over time, we expect the government to look at rationalizing taxes to further encourage
the shift towards the organized segment.
Investors are advised to refer through important disclosures made at the last page of the Research Report.
Sandeep Ashok Gupta
(S.Gupta@MotilalOswal.com); +91 22 3982 5544
Somil Shah
(Somil.Shah@MotilalOswal.com); +91 22 33124975
3 July 2017
1
Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.

GST | A Reality
As far as the impact of GST on inflation is concerned, the GST rates will help
reduce wholesale price index (WPI), while the impact on consumer price index
(CPI) will be limited. However, since services constitute a larger share of the
consumption basket than in CPI, Indian consumers are likely to feel the pinch of
higher prices of services.
India Inc to be big beneficiary
Our analysis highlights that sectors/companies likely to emerge as gainers are:
(a) Consumer – Pidilite, Asian Paints, Century Plyboards; (b) Autos – Hero
MotoCorp, Amara Raja Batteries, Exide Industries; (c) Multiplexes – PVR, Inox;
(d) Media – Dish TV; (e) Retail – Shoppers Stop; and (f) Logistics – TCI, Gati.
Sectors/companies likely to be adversely impacted: (a) Media: Print companies –
HMVL, DB Corp, Jagran Prakashan, HT Media; (b) Autos – Ashok Leyland.
Four themes under GST
I.
Change of consumer
level effective tax
rates
II.
Shift of trade from
unorganized to
organized
III.
Seamless
availability of input
credits
4 Themes to
impact India
Inc.
IV.
Efficiency in Supply
chain management
Source: MOSL
3 July 2017
2

GST | A Reality
GST: Complete overhaul of indirect tax system
Dawn of simpler, unified taxation regime
GST will be a destination-based tax on a comprehensive base of goods and services
across the value chain. It aims to address the complexities in the current multiple
taxation regime.
It will subsume the plethora of indirect taxes levied by various levels of government
and help to (a) lower the tax incidence on organized manufacturing, (b) expand the
narrow tax base, and (c) provide ease of doing business.
Considering the federal structure of government, it will have two components –
CGST and SGST. While CGST will be levied and collected by the central
government, SGST will be levied and collected by the state government in
whose jurisdiction the goods / services are consumed.
GST will facilitate a seamless flow of input credit across the entire supply chain.
Introduction of GST will rationalize the tax content in product price, enhance the
ability of business entities to compete globally, and possibly trickle down to
benefit the ultimate consumer. Better compliance should address instances of
tax evasion by expanding the base.
States
Sales Tax (VAT)
Central Sales Tax (levied by Centre)
Entertainment Tax (unless levied by local bodies)
Purchase Tax
Octroi and Entry Tax in lieu of octroi
Luxury Tax
State Surcharges and cesses that relate to supply of goods
Exhibit 1: Taxes to be subsumed under GST
Taxes to be subsumed
under GST that finds a
mention
in
the
Additional Excise Duties
Constitutional Amendment
Service Tax
Bill
Additional Custom Duty in the nature of
countervailing duty
Special Additional Duty of Customs
Surcharges and cesses that relate to supply
of goods and services
A few other taxes that may
Cesses on rubber, tea, coffee, etc.
be subsumed
Surcharges (National Calamity, Education
Cess, etc.)
Taxes to be subsumed
Petrol and Petroleum Products
under GST in due course
by GST Council
Taxes that would be
Basic Customs Duty, Anti-dumping Duty,
definitely kept out of GST
Export Duty
Taxes that are unlikely to
Excise Duty on tobacco products
be subsumed in GST
Specific Cess
Specific Central Cess like education and oil
cess
Center
Central Excise Duty (CENVAT)
and services
Taxes on lottery, betting and gambling
State Excise Duty (except liquor)
Petrol and Petroleum Products
Alcoholic liquor for human consumption
Property Tax
Tax on consumption of electricity
Stamp Duty
Source: Government, MOSL
Under the new GST structure the center would levy and collect central goods
and services tax (CGST), and the states would levy and collect state goods and
services tax (SGST) on all transactions within the state.
In case of inter-state sale of goods and import of goods in the country, IGST
would be applicable. IGST again would have two components – CGST and SGST.
SGST would go to the state where the ultimate consumption of goods takes
place. The GST framework does not allow for any specific region-wise
exemptions (available for backward areas) or other exemptions; else, these
would result in breaking the value chain.
3 July 2017
3

GST | A Reality
Evolving model and features of GST
Source: Government, MOSL
GST: Addresses shortcomings in the current structure
By subsuming most of the indirect taxes and applying homogenous tax rates on
goods and services, GST will:
Rationalizing the price of goods and services:
GST aims to tax goods and
services at a common rate, thereby rationalizing the effective tax rates for goods
and services. Further, tax cascading and availability of seamless input credits
across the value chain would help lower prices.
Broadening the tax base:
GST aims at broadening the tax base by (a) lowering
the threshold limit for applicability of indirect tax, (b) permitting the center to
levy taxes on sale of goods and the states to levy taxes on rendering of services,
and (c) rationalizing the various exemptions available under the current regime.
a)
Differential thresholds:
With the introduction of GST, the threshold for all
indirect taxes would be INR1m, which is significantly lower than the current
threshold of INR15m for excise and in line with the current threshold of
INR1m for service tax.
b)
Taxing power of the center and the states:
With the introduction of GST,
the center would be able to tax the entire value of goods, not just the value
till the point of manufacture. The states would get a proportional share of
the tax on all services provided in the country.
c)
Various exemptions:
With the introduction of GST, the list of product-wise
exemptions is expected to be trimmed to ~100 goods/services (from the
current ~300 goods by the center and ~100 by the state governments).
Further, it is proposed that various area-based exemptions would be
available.
Ease of doing business:
GST aims to simplify the taxation regime by subsuming
most indirect taxes. Further, the following anomalies in the current tax regime
would get addressed:
a)
Determining the nature of transactions:
With the introduction of GST, there
would be no difference between sale of goods and services for the purpose
of taxation. This would lead to reduction in litigation issues and also
facilitate taxation of bundled services.
b)
Uniformity in provisions and rates:
With the introduction of GST, there
would be a single rate of tax for a particular goods and services as well as
uniform provisions/rules for all states and the center. This would facilitate
free movement of goods and services across the country and also lead to
greater compliance.
3 July 2017
4

GST | A Reality
GST benefits visible in many different shades
Four key themes emerging
Four key themes emerge, which will have an impact on India Inc: (a) change in
consumer-level effective tax rates, (b) shift of trade from unorganized to organized
segment, (c) seamless availability of input credits, and (d) improved efficiencies in
supply chain management.
THEME #1
Change of consumer level
effective tax rates
There exists wide variability in the current effective indirect tax levies across
sectors, primarily on account of (a) different classification of goods and
services, (b) exemptions/concessions available to various goods/services
under different statutes, and (c) cascading impact of taxation, which brings
inefficiencies in the system.
GST is expected to simplify the tax structure and change the effective tax
rates on various sectors by:
Factors leading to change in effective tax rates
Treating
goods &
services at par
Exemption
list to be
pruned
Reduction
of Tax
cascading
Uniform
taxes for
goods
across the
country
Source: Government, MOSL
GST is likely to keep effective tax rates intact for most sectors. However, this
would have a material implication only for those companies (a) that have
the pricing power to retain the decrease or do not have the pricing power to
pass on the increase in effective tax rates, or (b) where increase / decrease
in consumer pricing would impact volume growth, and hence, corporate
earnings.
GST
Rate
0
3
5
12
18
28
28 + cess
Goods
/
services
Essential food and services
Gold
Commodities, essentials
General use Goods
Services, certain consumer durables/ staples, metals
Autos, consumer discritionary, personal products
Aerated drinks, tobacco products, pan masala, luxury cars
Source: GST council, MOSL
Exhibit 2: Rate structure under GST
Category
Exempted/zero rated
Special category for Gold
Lower rate
Standard rate 1
Standard rate 2
Higher rate
Sin/demerit goods
3 July 2017
5

GST | A Reality
Exhibit 3: Impact of GST on sectors
Sector
Consumers
Paints
Toothpaste
Adhesive
Soaps
Biscuits
Cigarettes
Auto
2 Wheelers
Motorcycles (engine>350cc)
3 Wheelers
4 Wheelers
Small Cars (length < 4 m ; Petrol<1200
cc )
Small Cars (length < 4 m ; Diesel <
1500 cc)
Mid Segment Cars (engine < 1500 cc)
Large Cars (engine > 1500 cc)
Sports Utility Vehicles (length > 4m ;
engine
1500 cc; ground clearance > 170 mm)
Mid Segment Hybrid Cars (engine <
1500 cc)
Hybrid motor vehicles > 1500 cc
Hydrogen vehicles based on fuel cell
tech > 4m
CV
Auto Anc
Batteries
Tyres
Cement
Metals
Pharma
Capital Goods – Light electrical and
aircon
Capital Goods – Project
Information Technology
Telecom
3 July 2017
30-31%
30-31%
30-31%
31-49%
29%
31%
43%
43%
43%
43%
43%
43%
43%
30-31%
29-30%
24-28%
22-24%
19-21%
4-14%
22-26%
22%
15%
15%
28%
28%
28%
28%
18%
5-12%
28%
18%
18%
18%
Neutral: Companies will have to pass on benefit to consumers
Slightly positive: Companies may retain a portion of reduced
tax rates, which may improve margins
Neutral: Tax incidence is broadly maintained at current level
and hence no major impact
Neutral: Increase in tax rates will be pass-through and is
unlikely to impact volumes
Neutral: Reduction in duty rates will be passed on to
consumers
Neutral: Duty incidence is broadly maintained for
pharmaceutical products
Neutral: Marginal increase in tax rates is likely to be passed to
consumers
Neutral: Decrease in tax rates will be passed on to customers
Neutral: Increase in rate will be offset by availability of input
tax credit
Neutral: Competitive intensity remains high, leaving little
6
28%
31%
28%
Marginally positive: Entry-level two-wheelers can derive some
volume benefit on reduction in tax rate by 2-3%
Neutral
Neutral: Companies will have to pass on benefit to consumers
Neutral: Tax rates are broadly same as current rates. Change
in tax rates whatever applicable will be passed on
25-26%
25-26%
22-23%
25-26%
5-17%
28% + excise
depending on
length
28%
18%
18%
18%
18%
28% + cess
(as per length
+ ad valorem)
Neutral: Companies will be able to pass price increase to
consumers
Positive: Reduction in duty rates may be passed on to
generate volume benefits or may be partially retained to
improve margins
Positive: Reduction in duty rates may be passed on to
generate volume benefits or may be partially retained to
improve margins
Positive: Reduction in duty rates may be passed on to
generate volume benefits or may be partially retained to
improve margins
Neutral: Duty incidence is broadly maintained
Neutral: Tax incidence is broadly maintained at current level
and hence no major impact
Current
Effective tax rate
GST
rate
Remarks

GST | A Reality
Sector
Current
Effective tax rate
GST
rate
Remarks
chance to pass on duty hike to consumers
But input tax credit of ~150bp from VAT could reduce the
impact
Limited benefit from availability of input tax credit offset by
increase in duty for F&B
Positive
Slightly Negative: 5% increase in tax rate on 2/3 of revenue,
cushioned by input tax available on ½ of costs
Neutral: Will slightly increase product price differential
between unorganized and organized players, boosting
competitiveness of unorganized players
Neutral: Will slightly increase product price differential
between unorganized and organized players, boosting
competitiveness of unorganized players
Hike likely to be passed on
Neutral as increase will be cushioned by input tax credit
Neutral
Companies will be able to pass on the increase
Increase will be passed on
Source: MOSL
Multiplex
Ticketing
F&B
Pay TV Distributor
Print media
Home Building
Tiles / Sanitary ware
Ply wood
Gems and Jewellery
Ready Made garments- Above 1000
Ready Made garments – Below 1000
Textiles - Natural
Textiles – Man Made
25%-27%
10.50%
21%
0%
28%
20-21%
18%
5%
25-28%
24-25%
2%
6-8%
5-7%
0%
12.50%
28%
28%
3%
12%
5%
5%
18%
Key sectors to benefit:
Autos (Two Wheelers) , Batteries, Consumer, Pay TV
Distributors, Multiplexes
Key sectors to be negatively impacted:
Print Media
THEME #2
Shift of trade from
unorganized to organized
India has significant presence of the unorganized sector. A National Commission
for Enterprises in Unorganized Sector (NCEUS) report estimates that in 2005, out
of the 485m persons employed in India, 86% or 395m worked in the
unorganized sector, generating 50.6% of the country's GDP.
GST implementation is expected to narrow the large indirect tax differential
between the organized and unorganized players.
This would be achieved by ensuring better compliance and enforcement by (a)
reducing the threshold limit for exemption from indirect taxes (to INR2m under
GST from the current INR15m under excise), (b) tracking the flow of GST credit
in the entire value chain using technology platforms, (c) ensuring availability of
seamless input credit, and (d) reducing the overall effective tax rates.
3 July 2017
7

GST | A Reality
Measures that will lead to shift of trade from unorganized to organized
Better
Enforcement
Reduction in threshold limits
Through technology enabled platform
Through availability of Input credit
Reduction in overall effective tax rate
Better
Compliance
Source: MOSL
We believe this will present opportunities to take advantage of the shift in favor
of organized names. However, our discussions with experts and sector
participants highlight that the shift will be prompt for some sectors, gradual for
others and challenging for a few.
To play this theme, one has to carefully consider (a) probability/timing of the
shift and (b) market share expansion potential, with narrowing price differential
between organized and unorganized players.
Potential beneficiaries:
Significant unorganized markets exist in the following
sectors: Logistics, Home building, Capital Goods (Light Electrical), Consumer and
Retail.
Exhibit 4: Significant market share of unorganized players across sectors
Sector
Total
Market
size
INR b
Home building
Paints
Adhesive
Plywood
Tiles
Luxury/ Sin Goods
Jewellery
Alcohol
Cigarettes
Watches
FMCG
Biscuits
Hair Oil
Beverages
Dairy
Detergents
Tea And Coffee
3 July 2017
186
80
524
5,371
200
100
121
40
262
1,077
160
50
65%
50%
50%
20%
80%
50%
65
40
262
4,295
40
50
35%
50%
50%
80%
20%
50%
Britannia, ITC
Marico, Bajaj Corp, Dabur
Dabur, ITC, Manpasand beverages
Parag milk, Prabhat Dairy, Heritage foods
Hindustan Unilever, P&G, Jyoti laboratories
Hindustan Unilever, Tata global beverages, Nestle
8
3,000
410
1,750
89
750
205
1,488
45
25%
50%
85%
50%
2,250
205
263
45
75%
50%
15%
50%
Titan, Tribhovandas bhimji zaveri, PC Jewellers
United spirits, United breweries, Radico Khaitan
ITC, VST industries, Godfrey phillips
Titan
406
60
250
260
264
42
88
129
65%
70%
35%
49%
142
18
163
131
35%
30%
65%
51%
Asian Paints, Berger Paints, Kensai Nerolac
Pidilite, Jyoti resins & adhesives
Century plyboards, Greenply industries
Kajaria ceramics, Somany ceramics
Organized
INR b
%
Unorganized
INR b
%
Top organized listed players

GST | A Reality
Sector
Total
Market
size
INR b
Organized
INR b
%
Unorganized
INR b
%
Top organized listed players
Consumers - others
Footwear
Garments - Innerwear
Apparel
Plastic
Luggage
Light Electricals
Fans
Pumps
Air Coolers
Domestic Switchgear
Industrial Switchgear
Modular Switches
Domestic Wires And cables
Industrial Cables
Electrical Lighting
Healthcare
Diagnostic
Hospitals
Logistics
Logistics - Road
Auto
Batteries
Tyre
Metals
230
500
4600
150
400
4140
65%
80%
90%
80
100
460
35%
20%
10%
Exide, Amara Raja
MRF, Apollo, CEAT, JK Tyre
Tata Steel, JSW Steel, SAIL
Source: MOSL
6,800
340
5%
6,460
95%
TCI, VRL, GATI
435
4010
65
401
15%
10%
370
3609
85%
90%
Dr. Lal Pathlabs, Thyrocare technologies
Apollo hospitals, Fortis healthcare, Narayana
Hrudayalaya
60
92
27
20
38
20
80
120
122
45
64
5
19
29
12
64
72
73
75%
70%
20%
95%
75%
60%
80%
60%
60%
15
28
22
1
10
8
16
48
49
25%
30%
80%
5%
25%
40%
20%
40%
40%
Crompton greaves consumer, Havells, Bajaj
electricals
Kirloskar brothers, KSB pumps, Crompton greaves
consumer
Symphony, Havells, Voltas
Havells, ABB, Siemens
Havells, Schneider electric, Siemens
Havells
Finolex cables, Havells, KEI industries
KEI industries, Finolex cables
Crompton greaves consumer, Bajaj Electricals,
Havells
336
200
3,550
900
40
134
104
960
540
13
40%
52%
27%
60%
33%
202
96
2,590
360
27
60%
48%
73%
40%
67%
Bata, Relaxo footwear
Page industries, Rupa industries
Arvind, ABFRL
Supreme industries, Sintex industries, Jain irrigation
VIP industries, Safari industries
THEME #3 Seamless availability
of input credits
Under the current regime, the taxes levied by different levels of government /
different states are not allowed to be set off against each other. For example:
a. Excise duty paid to the central government for manufacture of goods is not
allowed to be set off against state VAT payable on sale of goods and vice versa.
b. In the service industry, companies have to incur service tax liability on sales.
However, they also spend sizeable portions on capex on which they are
charged VAT. Current regulations do not allow service tax to be set off against
VAT and vice versa.
9
3 July 2017

GST | A Reality
c. State VAT paid on inputs in one state is not available for set off if the output is
sold in another state. However, on payment of CST on declared goods, a dealer
can claim refund of VAT paid to the originating state in case of inter-state sale.
d. Central sales tax of 2% is a non-VATable tax, and hence, increases the cost of
goods.
e. Companies trading goods (retailers), which pay VAT, are not allowed to claim
credit for the service tax paid on different items since they have no central tax
against which this can be set off.
Unavailability of input credit makes the current system complex and inefficient,
resulting in increased cost for businesses. This is likely to get addressed under
GST when the plethora of multiple taxes is subsumed under a single tax.
Seamless credit of inputs not available currently
Service tax / Excise - credit not
available to retailers
Seem less
credit of
inputs not
available
VAT - credit not available to
service providers
CST - Non VATable
Source: Company, MOSL
This would particularly benefit retailers, multiplexes that operate through leased
stores and pay significant indirect taxes (service tax) on lease rentals. The GST
regime would allow these indirect taxes to be set off.
THEME #4
Efficiency in supply chain
management
Currently, decision making in supply chain management is based not only on
business requirements but also on tax planning. The current legal framework
exempts CST if interstate movement of goods is for stock transfer and not for
sale.
Consequently, in several sectors, companies open various depots and appoint
C&F agents to avail this exemption and incur additional costs.
Under GST, since CST is subsumed, supply chain management would become a
pure play of business requirements. In several sectors, we expect consolidation
of the current supply chain, leading to reduction in operational cost on the one
hand and lower inventory carrying cost on the other.
10
3 July 2017

GST | A Reality
Logistics would emerge as a big sector, with consolidation in the industry.
Implementation of GST may also be slightly negative for CV manufacturers, as
this would help ease bottlenecks in logistics, especially time spent at check posts
for local taxes. This would increase the on-road time for the fleet and enhance
fleet productivity, diluting the need for fleet expansion and reducing CV growth
over the medium term.
Exhibit 5: Supply chain consolidation to yield material benefits
Benefits for Industry
Pruning of distribution network
Reduction in inventory carrying
cost
Play on Logistics
Consolidation in Industry
Slight negative impact on CV
manufacturers
Source: Company, MOSL
Key sectors to benefit:
Logistics, FMCG, Metals and Light Electricals
Key sectors to be negatively impacted:
Automobiles – CV Manufacturers
3 July 2017
11

GST | A Reality
Economic impact of GST
Revenue accretive over the medium term
With the increase in the tax base, GST is likely to be revenue accretive for the government
over the medium term. It is unlikely to impact reported inflation adversely, but consumers
are likely to feel the pinch since 47% of the consumption basket comprises of services, on
which the effective tax rate would be 3% higher in the GST regime.
How will GST impact government receipts?
While fixing the GST rates, the government had attempted to contain inflation
by keeping the rates on various products close to the prevailing rates. However,
for services, the GST rate is slightly higher.
GST intends to increase the tax base by (a) lowering the threshold limit for
applicability of indirect tax, (b) permitting the center to levy taxes on sale of
goods and the states to levy taxes on rendering of services, and (c) rationalizing
the various exemptions available.
With widening of the tax base, we believe government revenues would increase
over the medium term. Over time, we expect the government to rationalize tax
rates to further encourage the shift towards the formal economy.
CPI expected to remain largely unchanged
As far as the impact on consumer price index (CPI) is concerned, it is unlikely to
be affected much, since food constitutes almost half the basket and other items
such as fuel also hold high weightage. A large part of CPI will either be exempted
or continue to attract similar tax rates.
Exhibit 6: Food, fuel & rent have high weight in CPI
Others, 11.76
Transport, comm
etc, 8.59
Health, 5.89
Education, 4.46
Housing, 10.07
Fuel & light, 6.84
Clothing &
footwear, 6.53
Source: Government, MOSL
Food & beverages,
45.86
3 July 2017
12

GST | A Reality
However, consumers are likely to feel the pinch
Importantly though, while services comprise a very small share in CPI, they
account for almost 50% of the total consumption basket in the economy. Thus,
while the impact of GST may not be visible in the official inflation measures, it
will certainly pinch Indian consumers, as the share of services has been rising.
Exhibit 7: Services account for ~47% of Indian consumption basket
Durable goods
Semi-durable goods
Non-durable goods
Services
46.6
46.2
45.9
47.0
42.4
7.9
3.1
2011-12
43.1
7.6
3.1
2012-13
43.0
8.3
2.8
2013-14
41.6
8.7
2.7
2014-15
Source: Government, MOSL
3 July 2017
13

Disclosures
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GST | A Reality
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In respect of any matter arising from or in connection with the research you could contact the following representatives of Motilal Oswal Capital Markets Singapore Pte Limited:
Varun
Kumar
Varun.kumar@motilaloswal.com
Contact : (+65) 68189232
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Motilal Oswal Securities Ltd
3 July 2017
Motilal Oswal Tower, Level 9, Sayani Road, Prabhadevi, Mumbai 400 025
Phone: +91 22 3982 5500 E-mail: reports@motilaloswal.com
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