22 March 2017

Market snapshot

Equities - India

Close

Chg .%

Sensex

29,485

-0.1

Nifty-50

9,122

-0.1

Nifty-M 100

16,926

-0.2

Equities-Global

Close

Chg .%

S&P 500

2,344

-1.2

Nasdaq

5,794

-1.8

FTSE 100

7,378

-0.7

DAX

11,962

-0.8

Hang Seng

10,644

0.6

Nikkei 225

19,456

-0.3

Commodities

Close

Chg .%

Brent (US$/Bbl)

50

-1.6

Gold ($/OZ)

1,232

-0.1

Cu (US$/MT)

5,748

-1.8

Almn (US$/MT)

1,914

0.2

Currency

Close

Chg .%

USD/INR

65.2

-0.2

USD/EUR

1.1

0.4

USD/JPY

112.8

-0.5

YIELD (%)

Close

1MChg

10 Yrs G-Sec

6.9

0.0

10 Yrs AAA Corp

8.1

0.0

Flows (USD b)

21-Mar

MTD

FIIs

0.3

3.0

DIIs

-0.1

-1.2

Volumes (INRb) 21-Mar

MTD*

Cash

345

283

F&O

3,902

4,060

Note: YTD is calendar year, *Avg

YTD.%

10.7

11.4

17.9

YTD.%

4.7

7.6

3.3

4.2

13.3

1.8

YTD.%

-9.2

6.3

4.1

12.3

YTD.%

-3.9

2.4

-3.7

YTDchg

0.4

0.5

YTD

4.6

-0.4

YTD*

261

4,322

Today’s top research Idea

Delta Corp: Favorable odds

Dominating in ‘brick world’, entering ‘click world’

v

Delta Corp is the leading player in India's underpenetrated gaming market.

Gaming is an emerging industry in India; given its paltry size of ~USD150m

(Global size of USD183b), the growth potential is huge.

v

Approval of its casino in Daman is a key growth trigger for DELTA, as it would

nearly double its gaming capacity to ~3,000 and further cement its first-mover

advantage.

v

M&A opportunities in the fast-growing online gaming business in India would

allow DELTA to leverage its current strength and open up new avenues for

growth. It recently announced the acquisition of Adda52.com, an online poker

gaming website.

v

We expect 35% revenue CAGR, 45%/62% EBITDA and PAT CAGR over FY17-

19E. EBITDA would be driven by strong operating leverage. We initiate

coverage with a Buy rating. Our PT is INR229 (30x FY19E EPS), upside of ~36%.

Research covered

Cos/Sector

Delta Corp

Dr. Reddy’s

Divi’s Lab

Marico

Oil & Gas

Aviation Monthly

Key Highlights

Favorable odds; Dominating in ‘brick world’, entering ‘click world’

Duvvada 483 observations out; data integrity issues persist

Unit-2 receives import alert; key products exempted

Demand outlook improving; focus on technology paying off

Not much synergy in ONGC-HPCL merger

Feb-16 domestic air passenger growth at ~20% YoY

Piping hot news

Oil advances on talk of extension to Opec output cuts

v

Oil prices on Tuesday fell close to its lowest in a week as the market discounted

Quote of the day

Inflation is taxation without legislation.

the latest talk by OPEC that it would extend output cuts beyond June. That

decline also came ahead of the release of weekly U.S. crude inventory data later

Tuesday and on Wednesday that is expected to show a crude stock build of 2.6

million barrels, according to a Reuters poll.

Chart of the Day:

India’s gaming market has huge potential (current size of USD150m)

Exhibit 1:

Asia Pacific region now dominates global

gaming market size of USD183b

Exhibit 2:

Asia Pacific has been the growth driver for the

industry (10year CAGR)

Research Team (Gautam.Duggad@MotilalOswal.com)

Source: Company, MOSL

Source: Company, MOSL

Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.

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

In the news today

Kindly click on numbers for the detailed news link

1

The Rs 3-lakh limit proposed for

cash payments in the Budget for

2017-18 would be brought down

to Rs 2 lakh as part of an

unprecedented 40 amendments

to the Finance Bill. Finance

Minister Arun Jaitley moved the

amendments in the lower House

on Tuesday…

2

Divi's Labs barred from exports to US after FDA import alert on

Vizag unit

In a big setback to Hyderabad-based active pharmaceutical ingredients

(APIs) maker Divi's Laboratories Limited, the US Food and Drug

Administration (USFDA) has issued an import alert on the company's Unit

2 facility at Visakhapatnam, Andhra Pradesh, though with certain

exemptions. The latest action comes after Divi's management had

submitted a 700-page response in the light of Form 483 observations

issued by the US drug regulator in December 2016. On December 7, 2016,

the USFDA inspection team issued a Form 483 with five observations citing

lack of proper control over computer systems…

Cash transaction limit lowered

to Rs 2 lakh

3

Finance Ministry rejects

Apple's demands for tax sops

to 'Make in India'

The government has rejected

demands for tax exemptions by

Apple for setting up a

manufacturing facility in India,

arguing that such concessions to a

company are not possible. The

finance ministry has refused to

concede the demand for slashing

Customs duties on completely-

knocked-down and…

4

Steel firms mull Rs 1,000 a

tonne hike from April

With iron ore prices on a rise and

domestic demand likely to pick up

by mid-April, steel producers have

already raised product prices by

Rs 1,000 per tonne from 15,

March and are gearing up for

another hike by the same

quantum from April. This time

most of the companies, according

to the source, are raising prices…

5

General insurers achieve 32%

gross premium growth in FY17

General insurance companies

continued their positive

performance and posted about

32% growth in gross direct

premium in the current financial

year till February. In January,

premiums had crossed R1 lakh

crore for the first time, largely

due to the growth in health and

motor insurance along with new

crop insurance scheme.…

6

DGCA tells airlines to

surrender unutilized

international routes

Aviation regulator Directorate

General of Civil Aviation (DGCA)

has asked airlines to surrender

routes that they won’t fly within

six months of being allocated the

rights. The aviation ministry signs

air services agreements with

various countries, allowing their

airlines a fixed number of seats on

various routes to India…

22 March 2017

7

Won’t be much room for

reduction in MCLR rate if CASA

ratio in system comes down:

HDFC Bank honcho Paresh

Sukhtankar

Now the largest private lender,

HDFC Bank, is guided by its goal of

growing faster than the system

even as it keeps an eye on

margins and asset quality. Deputy

Managing Director Paresh

Sukthankar tells Shritama Bose…

2

Initiating Coverage | Sector: Entertainment

Delta Corp

BSE Sensex

29,485

S&P CNX

9,122

CMP: INR169

TP: INR229 (+36%)

Buy

Stock Info

Bloomberg

Equity Shares (m)

52-Week Range (INR)

M.Cap. (INR b)

M.Cap. (USD b)

1, 6, 12 Rel. Per (%)

Avg Val, (INRm)

Free float (%)

DELTA IN

230.7

195/62

39.0

0.6

39/-3/151

556

59.2

Delta Corp (DELTA) is India’s only listed gaming company, with a dominant presence in

Goa’s offshore casino market. It owns three of the six offshore (five operational) gaming

licenses in the state of Goa. It has ~1,700 gaming positions in the state across its three

offshore casinos, one onshore casino and recently commenced casino in Sikkim. DELTA

has an integrated casino resort in Daman, with 1,200 gaming positions which is awaiting

regulatory approval. It has also forayed into online gaming, with the acquisition of

Adda52.com.

Favorable odds

Dominating in ‘brick world’, entering ‘click world’

n

Financial Snapshot (INR b)

Y/E Mar

2017E 2018E 2019E

Sales

4.6

6.7

8.4

EBITDA

1.7

2.7

3.5

NP

0.8

1.6

2.0

EPS (INR)

3.3

6.9

7.6

EPS Gr. (%)

110.7 110.3

11.4

BV/Sh. (INR)

37.5

50.0

46.4

RoE (%)

9.0

15.7

17.0

RoCE (%)

9.4

14.9

16.5

P/E (x)

51.9

24.7

22.1

P/BV (x)

4.5

3.4

3.6

Shareholding pattern (%)

Dec-16 Sep-16 Dec-15

As On

Promoter

DII

FII

40.8

0.3

9.7

40.8

0.7

11.3

40.9

0.4

11.6

n

n

n

Delta Corp (DELTA) is the leading player in India's underpenetrated gaming market.

Gaming is an emerging industry in India; given its paltry size of ~USD150m (Global

size of USD183b), the growth potential is huge.

Approval of its casino in Daman is a key growth trigger for DELTA, as it would nearly

double its gaming capacity (from ~1,700 currently to ~3,000) and further cement its

first-mover advantage.

M&A opportunities in the fast-growing online gaming business in India would allow

DELTA to leverage its current strength and open up new avenues for growth. It

recently announced the acquisition of Adda52.com, an online poker gaming

website.

We expect 35% revenue CAGR, 45% EBITDA CAGR and 62% PAT CAGR over FY17-

19E. EBITDA would be driven by strong operating leverage. We initiate coverage

with a Buy rating. Our target price is INR229 (30x FY19E EPS), indicating an upside

of ~39%.

Emergence of favorable odds

Our Wealth Creation Study 2008-2013 had elaborated the emergence and

endurance of uncommon profit in equity investments. We can relate this study to

DELTA, which is expected to cross the 15% RoE threshold for the first time in FY18

(post business model change to pure-play gaming and hospitality). For details,

please see page 18.

Delta Corp

Favorable odds

Dominating India’s underpenetrated gaming industry

DELTA is India’s first listed pure-play gaming company. It enjoys a dominant share

of India’s offshore casino market, with three of the six offshore casino licenses

(five operational) in Goa. Given that the Goa government is unlikely to issue new

licenses and that land-based casinos are allowed only in five-star hotels, DELTA’s

competitive advantage should sustain. Price Waterhouse Coopers (PWC)

estimates the total global gaming casino market in 2015 at USD183b and that it

has grown at a CAGR of 7% over the last 10 years. The Asia Pacific region has led

growth, with a CAGR of 21.5%. In India, gaming is just emerging as an industry;

given its paltry size of ~USD150m, the growth potential is huge.

chintan.modi@motilaloswal.com

Please click here for Video Link

Chintan Modi

+

91 22 3982 5422

22 March 2017

3

Delta Corp: Relative to Index

Approval of Daman casino could be an icing on the cake

DELTA is awaiting regulatory approval for a casino housed in Daman’s only five-star

hotel. Given its locational advantage, Daman (caters to a catchment area of 35m

people over Mumbai and Gujarat) is likely to attract higher footfalls than Goa. We

expect DELTA to replicate its success in Goa’s offshore casino market in the land-

based casino market in Daman. Approval of the Daman casino has the potential to

nearly double its gaming capacity to 3,000. DELTA would be in a better position to

exploit the potential that the nascent industry offers.

Online gaming – next big opportunity

Globally, online gaming is still a nascent industry and is legal in very few countries. It

is increasingly becoming popular, with legal online gaming accounting for 3% of

global gaming revenue. In India too, it is at a nascent stage; some of the popular

names in India are Adda52.com, ace2three.com, pokerbaazi.com, and Spartan

Poker. The size of the global online gaming industry is estimated at USD110m-120m.

To capitalize on the opportunity, DELTA recently acquired Gauss Network, which

holds Adda52.com (online poker), for INR2.1b (part cash and part equity deal

expected to be completed by April 2017). Ace2three.com, the largest rummy site,

generated about INR1,665m in revenue, with PAT of INR617m in FY16. DELTA is

open to further acquisitions in the online gaming space. We believe there would be

significant cross-selling opportunities between DELTA’s casino and online gaming

businesses.

Expect 62% PAT CAGR over FY17-19

We expect DELTA’s revenue to grow at a CAGR of 35% over FY17-19, led by 38%

CAGR in its gaming business and 18% CAGR in its hospitality business. Adda52.com

would further boost revenue in FY18 and a positive trigger from Daman could be an

icing on the cake (we have not factored revenue from Daman casino). DELTA’s focus

on increasing the share of mass crowds would drive revenue growth and margins; as

such crowds give the house a higher chance to win as compared to VIP (large and

experienced) customers. EBITDA would post 45% CAGR, with margin expanding

from 36.3% to 41.5%, largely driven by operating leverage and high-margin online

business. PAT would grow at a CAGR of 62% over FY17-19.

At an inflexion point; Buy

We believe DELTA is at an inflection point. The investment phase is behind and

approval of the Daman casino and M&A opportunities in online gaming could trigger

significant growth and cash generation as well as RoCE / RoE improvement. We

expect RoE to improve from 9% to 17% over FY17-19. The stock trades at

24.7x/22.1x FY18E/19E EPS, 8.4x/6.2x FY18E/19E EV/EBITDA and 3.4/3.6x FY18E/19E

P/BV. DELTA’s premium valuations vis-à-vis its peers in global space is manifestation

of its strong earnings outlook, a near monopoly in casino space in India and

potential approval of Daman Casino. Thus we assign a PE multiple of 30x (~40%

premium) to global peers. We initiate with Buy, with a target price of ~INR229 (30x

FY19E EPS). Under bull case scenario which assumes approval of Daman casino and

FY19 being first full year of operations, leads to an EPS of INR10.9 (vs INR7.6 in base

case) in FY19 and a target price of INR334 (incl. potential cash per share of INR7.5

through sale of non-core assets) .

22 March 2017

4

Dr Reddy’s Labs

BSE SENSEX

29,485

S&P CNX

9,122

21 March 2017

Update | Sector: Healthcare

CMP: INR2,623

n

TP: INR2,875 (+10%)

Neutral

Duvvada 483 observations out; data integrity issues persist

Bloomberg

Equity Shares (m)

M.Cap.(INR b)/(USD b)

52-Week Range (INR)

1, 6, 12 Rel. Per (%)

Avg Val, (INR m)

Free float (%)

DRRD IN

170.4

447.0 / 6.6

3689 / 2602

-14/-20/-34

1187

73.2

n

Financials & Valuations (INR b)

Y/E Mar

2017E 2018E

Sales

143.6

168.6

EBITDA

26.6

37.1

Net Profit

13.3

20.8

EPS (INR)

77.7

121.7

EPS Gr. (%)

-41.3

56.5

BV/Sh. (INR)

809

917

RoE (%)

10.0

14.1

RoCE (%)

7.4

11.1

P/E (x)

33.7

21.6

P/BV (x)

3.2

2.9

2019E

196.3

46.7

25.8

151.4

24.5

1,048

15.4

13.0

17.3

2.5

n

Shareholding pattern (%)

Dec-16 Sep-16 Dec-15

Promoter

26.8

26.7

25.6

DII

8.2

6.5

5.7

FII

36.3

37.2

37.8

Others

28.8

29.7

30.9

Note: FII includes depository receipts

Relative to Index

Dr Reddy's Labs

Sensex - Rebased

3,800

3,450

3,100

2,750

2,400

n

n

n

Dr Reddy’s Labs (DDRD) has been issued 483 observations (4–5 are repeated)

by the US FDA for its Duvvada plant. The FDA investigation has also revealed

data integrity issues (e.g., Observation 3, 4). Given that the FDA has

maintained a zero tolerance policy toward oncology injectable plants, we

believe that the facility may remain under the warning letter status for at least

2-3 quarters.

Key oncology facility; risk of delay in Gleevec launch:

DRRD generates more

than 15% of its US sales from the oncology segment, with the Duvvada facility

contributing ~7-8%. This is because large part of the supply comes from third-

party sources like Cipla and Gland Pharma. Currently, ~15-18 ANDAs (out of

total of ~90) are pending from this facility, of which ~4-5 are expected to be

approved in FY18-19. Gleevec is the key launch due from this facility. With the

partner site (Hetero) also coming under the regulatory scanner, we believe the

Gleevec approval may get pushed by at least 6-9 months if the Duvvada facility

does not come back on track.

Miryalaguda observations not so concerning; Srikakulam inspection is key.

In

November 2015, the US FDA had issued warning letters to Miryalaguda- and

Srikakulam-based API plants and Duvvada-based oncology formulations plant

(US

FDA Link).

These facilities contribute ~10-12% of US sales (~USD250m),

including ~2% from Miryalaguda and ~9-10% from Srikakulam and Duvvada.

The US FDA completed its inspection at Miryalaguda in February 2017 with

three 483 observations (largely procedural in nature). Srikakulam inspection is

due over next few weeks – given that this is the largest facility among the

three, we believe it is imperative that this plant comes back on track soon. The

FDA observed a key issue at the Srikakulam facility: existence of an

uncontrolled ‘Custom QC laboratory’, which was unknown to the FDA.

Need to avoid high third-party consultant costs:

DRRD has so far incurred

~USD40m as third-party consultant costs to take remediation actions at the

three plants. Third-party consultant cost has come down significantly as the

remediation is over now. In our view, DRRD needs to ensure that it does not

incur such high third-party costs again to fix observations.

Will fate of one plant impact others?:

Notably, the three plants have been

issued warning letters simultaneously, and the FDA has suggested a global

corrective action. It is unclear whether all three plants would be back on track

together or each plant would be looked at separately. DDRD needs to take

appropriate remedies to fix observations so that future inspections go well and

the three facilities are back on track.

FDA remediation is key; maintain Neutral:

Although long-term fundamentals

remain intact, the stock is expected to remain in a range over the near term

due to regulatory concerns. We cut our FY18/19E EPS by ~5%, factoring in the

impact of slower resolution of regulatory issues. We maintain

Neutral

with a

target price of INR 2,875 @ 21x 1HFY19E PER.

22 March 2017

5

Operating metrics

Exhibit 1: Key operating metrics

FY14

3Q

Revenue Mix (%)

US

India

Europe

Russia

Others

PSAI

Innovative products

Revenue Gr. (%)

US

India

Europe

Russia

Others

PSAI

Innovative products

Cost on sales (%)

Raw material

SG&A

R&D cost

Tax Rate

Margins (%)

Gross Margins

EBITDA Margins

EBIT Margins

PAT margins

45.9

11.1

5.3

15.0

5.9

14.3

2.5

23.3

75.5

5.2

-3.6

20.9

35.1

-29.0

26.4

71.0

39.5

23.1

8.4

29.0

4Q

43.0

11.8

5.1

13.0

5.6

19.1

2.4

4.2

31.1

17.8

-3.1

0.0

48.3

-34.7

28.5

78.2

42.8

24.0

11.4

20.6

1Q

46.8

11.4

4.1

13.8

6.3

15.7

1.8

23.6

51.5

14.5

-7.2

8.3

50.0

-5.6

-6.6

76.8

40.7

25.0

11.0

21.5

FY15

2Q

39.8

13.4

4.0

13.4

9.9

17.8

1.7

6.9

7.9

14.1

-18.6

-13.0

94.8

-0.2

-1.0

77.3

41.5

24.3

11.5

17.2

3Q

42.8

11.3

4.4

12.4

10.6

15.9

2.6

8.8

1.5

10.6

-8.6

-10.0

94.0

20.7

11.8

76.8

41.8

23.7

11.2

30.7

4Q

44.3

12.3

6.0

8.5

9.0

19.2

0.8

11.2

14.6

15.7

32.0

-27.2

76.8

11.7

-65.2

78.7

45.2

20.3

13.3

12.5

1Q

49.3

12.7

5.1

8.2

7.2

14.9

2.7

6.8

12.4

18.9

31.0

-36.7

21.9

1.4

58.2

73.8

38.9

23.2

11.7

21.6

FY16

2Q

46.5

13.7

5.3

9.8

6.8

14.8

3.0

11.2

29.9

13.9

48.1

-18.4

-23.8

-7.4

94.8

71.4

38.7

21.5

11.2

20.7

3Q

48.9

14.6

4.9

9.2

7.0

12.8

2.6

3.2

18.0

34.1

13.8

-23.8

-32.1

-16.9

5.6

74.7

40.5

23.8

10.3

23.6

4Q

50.4

14.0

4.7

6.1

6.7

15.3

2.7

-3.0

10.5

11.0

-24.9

-30.7

-27.3

-22.3

245.3

78.0

43.4

21.7

13.0

70.0

FY17

1Q

2Q

48.0

16.1

5.0

9.2

4.0

14.5

3.1

-13.9

-16.2

9.8

-15.5

-3.3

-51.9

-16.4

1.2

88.3

43.8

29.7

14.8

26.0

45.0

17.4

5.0

9.9

3.6

16.1

3.0

-10.1

-13.1

14.4

-16.4

-9.8

-51.9

-2.3

-10.5

83.2

44.0

24.7

14.5

23.1

3Q

44.8

16.0

5.8

11.1

5.0

14.6

2.8

-6.6

-14.5

2.4

10.9

-2.0

-23.0

6.3

-1.2

77.0

40.9

22.7

13.4

20.6

60.5

29.0

24.0

16.1

57.2

21.8

16.2

13.9

59.3

23.2

17.9

15.6

58.5

22.7

17.3

16.0

58.2

23.2

17.9

16.3

54.8

21.3

15.5

13.7

61.1

26.2

20.2

16.6

61.3

28.6

22.4

18.1

59.5

25.3

18.8

14.6

56.6

22.0

13.9

10.0

56.2

11.7

3.4

3.9

56.0

16.8

8.7

9.0

59.1

23.0

15.1

12.7

Source: Company; MOSL

22 March 2017

6

Divi's Laboratories

BSE SENSEX

29,485

S&P CNX

9,122

21 March 2017

Update

| Sector:

Healthcare

CMP: INR634

TP: INR600 (-5%)

Neutral

Unit-2 receives import alert; key products exempted

Regulatory uncertainty to keep stock price range-bound in near term

n

Stock Info

Bloomberg

Equity Shares (m)

52-Week Range (INR)

1, 6, 12 Rel. Per (%)

M.Cap. (INR b)

M.Cap. (USD b)

Avg Val, INRm

Free float (%)

DIVI IN

265.5

1,380/628

-19/-56/-52

168.3

2.5

843.0

47.9

n

n

Financials Snapshot (INR b)

Y/E Mar

2017E 2018E

Sales

EBITDA

Net Profit

EPS (INR)

EPS Gr. (%)

BV/Sh. (INR)

RoE (%)

RoCE (%)

P/E (x)

P/BV (x)

42.9

16.1

12.0

45.4

8.3

178.4

26.7

26.5

14.0

3.6

39.0

12.7

9.2

34.6

-23.8

197.4

18.4

18.3

18.3

3.2

US FDA has issued an import alert on DIVI’s Visakhapatnam-based plant, Unit-2.

However, it has exempted nine products including Naproxen and Gabapentin from

the import alert list.

US FDA had inspected Unit-2 for eight days from November 29 to December 06, 2016,

following which it issued Form-483 with five observations to DIVI. The observation

letter highlighted instances of disregard of unknown impurities without specific

justification and sighting of unexplained colored products at various stages of API

manufacturing.

We expect the stock to remain range-bound till further clarity emerges on these 483

observations. We have cut our EPS estimates for FY18/19 by 22-23%. Maintain

Neutral.

2019E

45.6

15.3

10.8

40.6

17.5

219.7

19.5

19.4

15.6

2.9

n

n

Shareholding pattern (%)

Dec-16 Sep-16 Dec-15

As On

Promoter

52.1

52.1

52.1

DII

14.6

13.5

13.8

FII

19.8

20.9

19.9

Others

13.6

13.5

14.3

FII Includes depository receipts

Stock Performance (1-year)

Divi's Lab.

Sensex - Rebased

1,500

1,250

1,000

750

500

n

n

n

Unit-2 a critical plant for DIVI:

Unit-2 accounts for 60-65% of DIVI’s total sales.

US sales stood at ~32% of DIVI’s total sales in FY16. We estimate that US sales

from Unit-2 would account for 15-20% of DIVI’s total sales. Unit-2 was last

inspected in February 2016, with no Form-483 being issued. Unit-1 (located at

Hyderabad) has no pending Form-483 currently (but was last inspected in

2014).

Negative news flow could continue:

There are other regulators that rely on

inspection results from US FDA (like Health Canada). This raises the risk of DIVI

receiving a supply ban from these regulators as well (resulting in incremental

loss of sales). Apart from this, there is risk of loss of market share for existing

products and risk of clients (in EU and other geographies) shifting their

business.

Cutting estimates:

Though ~20% of DIVI’s sales are directly impacted due to

this import alert, exemption to 9 products including Naproxen and Gabapentin

(estimated 7-8% of total sales) would lower the net impact. We also assume 3-

4% loss of sales to other geographies due to risk of (1) supply restrictions from

other regulators, (2) market share loss, and (3) loss of business. Overall, we cut

our FY18/19E revenue by ~15% and our FY18/19E EBITDA margin by ~500bp.

Buyback / special dividend could be a near-term trigger:

DIVI has cash of

~INR12b on its books. There is a possibility of a buyback / special dividend (like

DRRD) in the near term, which could provide near-term support to stock price.

Regulatory concerns a big overhang in the near term; maintain Neutral:

We

expect the stock to remain range-bound till further clarity emerges on these

483 observations. We have cut our EPS estimates for FY18/19 by 22-23%. We

maintain

Neutral

with a target price of INR600 (INR815 earlier). On a going

concern basis also, large capex addition and delay in commencement of facility

would keep growth under check till FY19. However, strong balance sheet (net

cash surplus) and high return ratios (RoE at ~29%) provide valuation cushion.

22 March 2017

7

21 March 2017

Update

| Sector:

Consumer

Marico

Buy

BSE SENSEX

29,485

S&P CNX

9,122

CMP: INR292

TP: INR335 (+15%)

Demand outlook improving; focus on technology paying off

Rural growth and food inflation are the key monitorables

Stock Info

Bloomberg

Equity Shares (m)

52-Week Range (INR)

1, 6, 12 Rel. Per (%)

M.Cap. (INR b)/(USD b)

Avg Val ( INR m)

Free float (%)

MRCO IN

1,289.6

307 / 235

5/-2/2

376.6/5.8

355

40.3

Financials Snapshot (INR b)

Y/E March

2017E 2018E 2019E

Sales

59.5 67.9 78.1

EBITDA

11.0 12.6 14.9

Adj. PAT

7.8

9.1

10.8

Adj. EPS (INR)

6.1

7.1

8.4

EPS Gr. (%)

8.3

16.5 18.8

BV/Sh.(INR)

20.2 23.5 25.3

RoE (%)

33.3 32.4 34.5

RoCE (%)

29.3 28.8 30.6

P/E (x)

48.1 41.3 34.7

P/BV (x)

14.4 12.4 11.5

Shareholding pattern (%)

As On

Promoter

DII

FII

Others

Dec-16 Sep-16 Dec-15

59.7

4.1

28.7

7.5

59.7

3.4

29.3

7.6

59.7

3.6

28.1

8.7

We met management of Marico (MRCO) to understand the company’s distribution and

rural strategy. Key takeaways:

n

We were impressed with the pioneering use of technology, which gives the company a

competitive edge in terms of rural expansion.

n

The focus on technology helps to not only make working capital and cost structure

leaner, but also generate significant data for analysis (e.g. demand forecasting). The

company is looking to tie up with startups offering data mining analytics.

n

The demand outlook has improved sharply for the company, as mentioned by

management during its 3QFY17 results announcement. EPS growth could perk up in

FY18 if monsoon is normal this year, given that government schemes to boost rural

consumption and a weak base of rural growth over past few years have already raised

the earnings prospects.

n

With MRCO’s demonstrated strength in unbranded to branded conversion, ability to

create brands with differentiated positioning (resulting in pricing power) and the

advantages due to the pioneering use of technology, we believe rural sales as a

proportion of total domestic sales (currently at 33%) could increase significantly over

the longer term. This would in turn enable MRCO to sustain its strong earnings

momentum.

n

There is no change to our forecasts. Targeting 40x March 2019 EPS (10% premium to

three-year average), we derive a revised target price of INR335.

Current scenario

n

FII Includes depository receipts

Stock Performance (1-year)

Marico

Sensex - Rebased

310

290

270

250

230

n

The company distributes its products via ~4.6m outlets, of which ~900,000 are

reached directly and the rest via distributors. Thus, MRCO is far better placed

than many consumer peers in the FMCG universe that itself has a reach to over

9m outlets. However, we believe that there is still significant room for MRCO to

expand both its direct and indirect reach, given its wide mix of product

categories and brands that range from premium to lower end.

The pace of direct reach expansion may be relatively slower than peers, but this

is a conservative strategy adopted based on extensive analysis. Consequently,

the company has had over 95% success rate in its direct reach rollout (close to

100% in recent years). Frequency and range are the important factors

determining classification of an outlet for direct reach.

MRCO has been one of the pioneers in the Indian FMCG space in terms of

generating value for retailers, rather than just having a business relationship.

Deliberate but comprehensive expansion in direct reach

n

Technology – critical part of expansion

n

MRCO was the first among peers to undertake sales automation. It was also first

off the block to develop distributor and salesmen software (the company

actually has a patent for the latter). Auto order management right up to the

lowest levels allows sales personnel to focus more on marketing.

22 March 2017

8

n

Even the distributor employees covering the van routes in remote areas are

provided with handheld devices, which help them in data analysis. The data

analytics prowess is superior to peers, enabling the company to effectively

manage inventory, forecast demand and ensure a leaner working capital and

cost structure.

Data mining for demand forecasting and achieving efficiencies – a high

potential area

n

The company is in the process of establishing a cell for analyzing data. Currently,

Indian retail throws up a tremendous amount of data, which is cumbersome and

not used to its full potential. The company thus is partnering with start-ups,

which could potentially help it analyze data even more effectively. The company

has recognized that consumer behavior analysis is far more useful than

conducting surveys. According to management, loyalty programs will be offered

on a much larger scale going forward.

Indirect reach will also expand rapidly

n

n

n

n

MRCO considers 20 variables (e.g. population, size of the region, infrastructure

in the region, potential size of store sales) to determine its store expansion

strategy (whether directly or through wholesalers). The company has 4,800

stockist towns currently, up from 3,000 a few years ago.

Through 3.6m outlets (indirect reach), wholesalers account for 35% of MRCO’s

general trade sales.

When the aim is to convert users in adjacencies from unorganized to organized,

the scope for expansion in indirect retail is also high (particularly conversion in

case of hair oil from loose to packaged). Indirect reach is expanding rapidly in

Rajasthan, Bihar and UP. Viability remains a key factor for outlet expansion.

Around 33% of MRCO’s sales are derived from rural areas. Of the 643,000

villages in India, the company reaches nearly all 100,000 villages with population

of over 5,000. In villages with population greater than 5,000, the company

already has close to 100% reach. Management reckons that its rural reach is

best-in-class in south and west India, and extremely good in the east. North is

the area where it is expanding substantially and where rural population is

higher.

Rural margins, working capital and return ratios

n

The rural market share is higher in all categories compared to the urban share.

Margins and RoCE in rural are higher than those in urban, despite 2% higher

costs incurred on reaching urban outlets. Urban margins get diluted by foods

items that do not feature in rural sales. Debtor days in rural are higher in the

initial years before eventually coming down as scale picks up. In metros and key

urban centers, the company operates on a just-in-time basis, resulting in near

zero inventory. In rural centers, some inventory is desirable, but inventory days

are now coming down due to the use of technology.

Demand environment and outlook

n

In November and December – the first two months of demonetization –

demand had collapsed in the wholesale and rural channels as well as in the

northern and eastern states. Modern trade revenues, however, jumped. It is

interesting that, despite cash coming back into the system in the ongoing

22 March 2017

9

n

n

n

n

quarter, sales from the modern retail channel (9% of Marico India’s revenues)

remain strong. The wholesale channel sales recovered to earlier levels toward

end-December, and rural as well as northern and eastern geographies also

showed some revival from January 2017.

Post 3QFY17 results, MRCO was the only one among peers to guide for a sharp

recovery from 4QFY17 with 6-8% volume growth, a big jump from the 4%

volume decline in 3QFY17. This is especially notable given 8.4% volumes growth

in the base quarter (4QFY16). It is pick-up in demand, as mentioned above,

which gives management confidence on a sharp volume recovery for the

quarter.

Management is particularly enthused by the government’s initiatives to boost

rural demand, low base of rural growth in recent years, and edge over peers in

terms of technology and analytics. If monsoon is close to normal this year (first

IMD forecast will be out only in April), the company will be well placed for

strong growth in FY18 as well.

With MRCO’s demonstrated strength in conversion from unbranded to branded,

ability to create brands with differentiated positioning (resulting in pricing

power) and edge over peers in terms of working capital and efficiency, we

believe rural sales as a proportion of domestic sales could increase significantly

over the longer term, enabling the company to sustain strong earnings

momentum.

Management was confident of strong earnings growth in FY18 if monsoon is

normal this year. However, it did point out that if food inflation goes up sharply,

purchasing power of the rural consumer for non-food items may not recover as

sharply as desired and thus restrict earnings growth.

22 March 2017

10

Sector Update | 16 March 2017

Oil & Gas

Refer to our report

on Oil & Gas, February 2017

Not much synergy in ONGC-HPCL merger

Elephant and the blind men

n

n

Since the Indian government, in its Union Budget, proposed to create an integrated oil

& gas company to take on global majors and large domestic private players, investors

have been losing sleep over what shape and form the new firm would take. In light of

the same, we had come out with two reports discussing the various possibilities.

It appears from the reported articles that the journey through the maze is finally

coming to an end with the possible ONGC-HPCL merger/acquisition.

Business synergies? Dhoondte rah jaoge!^

(once a famous tag line of a leading

washing powder)

n

n

n

While some may argue that oil volatility would be minimized as ONGC is a

producer of oil and HPCL is a consumer, we note that the margin driver for HPCL

is refining (~25% of EBITDA) and marketing and pipeline (~75% of EBITDA).

Refining margins are not strictly linked to oil prices, while marketing margins are

deregulated. Marketing volume is a function of consumption and economic

growth. Pipeline volumes depend again on marketing, while the margin is linked

to railway freight.

ONGC’s margin, on the other hand, is completely linked to oil prices. We do not

see much synergy here.

^ The tagline suggested that if you use the specified product, you would not be able to find any

dirt on the washed clothes

Cultural synergies? Miles apart!

n

n

n

HPCL traces its origin to Esso/Caltex, and has seen rather lower government

holding of 51% since its public offer in 1995.

ONGC traces its origin to the government’s quest to develop domestic oil & gas

resources. Post listing in 2004, ONGC saw government holding of 74%. The

government brought down its direct holding to 69% only in 2012.

ONGC has been often associated with poor investment decisions, especially

overseas, while HPCL has been quite cautious.

Since there are no synergies, we do not see much benefit from the integration

of ONGC with HPCL – more so as HPCL is embarking upon huge capex, including

INR210b of Vizag expansion.

We believe any such integration with BPCL would have made more sense as 1)

BPCL also has expertise in E&P and b) strong free cash flow from BPCL would

have helped the consolidated balance sheet.

Our estimates show that the combined entity would have an RoE of 15.5%,

while HPCL alone would make an RoE of 23% if not merged with ONGC. This

would be a concern for existing investors of HPCL.

Additionally, investment in HPCL is more to do with call on refining and

marketing (larger contributor), which are much lesser volatile than oil prices.

Existing investors would not want to expose themselves to oil volatility if HPCL

were to merge with ONGC.

We do not see much benefit in the two coming together

n

n

n

n

22 March 2017

11

the lines of MRPL, then we do not see any concern for holders of HPCL.

However, HPCL’s merger with ONGC would result in downgrade of the former.

Exhibit 1: Evolution of HPCL

1952 -

Standard

Vacuum

Refining

Company

1962 - Name

changed to

Esso

Standard

Refining

Company

1974 - HPCL

formed after

takeover &

merger of

Esso

Standard &

Lube India

1978 - Caltex

Oil Refining

(India)

merged with

HPCL

1979 - Kosan

Gas Company

also merged

with HPCL

1992-94 -

through

divestments,

govt brings

down its

stake from

100% to 60%

1995 - govt

further

dilutes its

holding to

51% through

public

offering

2017 - HPCL,

with market

share of 25%

in domestic

petroleum

products, has

a market cap

of USD7.7b

Source: Company, MOSL

22 March 2017

12

Exhibit 2: Evolution of ONGC

1955 -

Government

sets up Oil and

Natural Gas

Directorate

under then

Ministry of

Natural

Resources and

Sciences;

objective being

development of

oil and gas

resources in the

country

1956 -

Government

adopted

Industrial

Policy

Resolution;

which put the

sole and

exclusive

responsibility

of mineral oil

development

on the state;

Directorate

raised to the

status of a

Commission

with enhanced

powers

1959 -

Commission

converted into

a statutory

body by act of

Parliament;

objective being

"to plan,

promote,

organize &

implement

programmes

for

development

of Petroleum

Resources &

production and

sale of

petroleum

and petroleum

products

produced by

it,..."

1993 - under

the

liberalization

drive, ONGC

reorganized as

a limited

company

under

Companies

Act, 1956; govt

disinvested 2%

through

competitive

bidding & 2%

fresh equity

was issued to

employees

1999 - govt

sells 10% of

its holding in

ONGC to

IOCL and

2.5% to

GAIL;

bringing

down its

holding to

84.1%

2004 -

Govt sold

10%

stake in

IPO,

bringing

down its

holding

to 74.1%

2012 -

Govt

divested

4.9%

stake

through

OFS,

bringing

down its

stake to

69%

2017

- ONGC

with

production

of

~51mmtoe

from

domestic

sources

and

~12mmtoe

from

overseas,

has a

market cap

of USD37b

Source: Company, MOSL

Exhibit 3: Evaluation of possible merger

FY18

Remarks

FY18

FY18

HPCL conso

ONGC conso ONGC+HPCL

117

Using USD60/bbl of realization for ONGC

757

874

36

328

364

81

429

510

16

43

59

11

45

56

76

431

507

50

Assuming 33% tax rate

284

334

86

612

698

Capex for HPCL is high due to upcoming Vizag expansion (INR210b) by

100

4-5 years, fuel upgradation (INR40-50b) by Sep 2019 and marketing

430

530

and pipeline regular capex (INR40-50b) each year

(14)

182

168

(0.2)

2.5

2.3

251

1,900

2,151

556

2,900

3,456

22.9

Significant margin dilution for HPCL holders

15.0

15.5

9.9

9.8

9.7

Source: MOSL

EBITDA (INRb)

Depr (INRb)

EBIT (INRb)

Int cost (INRb)

Int income (INRb)

PBT (INRb)

PAT (INRb)

Operating cash flow (INRb)

Capex (INRb)

Free cash flow (INRb)

Free cash flow (USDb)

Equity (INRb)

Capital employed (INRb)

ROE (%)

ROCE (%)

22 March 2017

13

Sector Update | 21 March 2017

Aviation

Domestic passenger growth

(YoY %)

Feb-16 domestic air passenger growth at ~20% YoY

Domestic load factor at 87.2%; IndiGo’s domestic ASK/RPK share highest

n

25.3

23.3 22.6 23.4

19.9

n

n

Domestic air passengers in India grew ~20% YoY (adj.) in Feb-17 (v/s +25.3% in Jan-17;

+23.1% in 3QFY17). However, we believe this strong growth would be at the cost of

yields, as seen in headline fares.

While Feb-17 ASK growth stood at 17.8% YoY (adj.) (v/s +21.1% in 3QFY17 and +19% in

2QFY17), RPKs increased 21% YoY (adj.) (v/s +22.8% in 3QFY17 and +24.5% in 2QFY17).

Load factor stood at 87.2% in Feb-17 (v/s 84.8% in 3QFY17 and 83% in 2QFY17).

*adj.:

With 2016 being a leap year, we adjust pax/ASK/RPK numbers to calculate YoY change for Feb-17.

Domestic air passenger growth at ~20% YoY in Feb-17

n

n

n

88.7

87.2

82.5

82.2

81.1

84.5

Industry load factor (%)

88.3

n

n

India’s domestic air passengers grew ~20% YoY (adj.) in Feb-17. Domestic

passenger growth remained ~20% and above for the 16

th

straight month.

IndiGo’s passenger growth stood at +28.6% YoY (adj.) in Feb-17 (v/s +43% in

3QFY17 and +39% in 2QFY17).

SpiceJet’s domestic passenger volumes grew +20% YoY (adj.) in Feb-17 (v/s

+22% in 3QFY17).

Go Air’s domestic passenger volumes grew +30.4% YoY (adj.) in Feb-17 (v/s

+19% in 3QFY17).

Passenger volume growth (adj.) YoY for other airlines was as follows: Jet Airway:

+3.6% YoY (v/s +1.3% in 3QFY17); Air India: +4.9% (v/s +2% in 3QFY17).

IndiGo’s passenger market share stood at ~40% in Feb-17 (v/s +41.8% in 3QFY17

and +40% in 2QFY17).

Jet Airways’ market share remained below 20% for the eleventh consecutive

month at 18.3%. It had market share of above 20% since Jul-14.

Air India’s market share stood at 13.3% (v/s 13.1% in 3QFY17).

SpiceJet’s market share stood at 13.3% (v/s 12.8% in 3QFY17).

GoAir’s market share stood at 8.7% in Feb-17; it seems to have stabilized in the

8-9% range.

IndiGo’s domestic ASKs increased +23.5% YoY (adj.) (v/s +34% in 3QFY17); its

domestic ASK share stood at the highest at 41.5%.

SpiceJet’s domestic ASKs grew +23.4% YoY (adj.) (v/s +19.8% in 3QFY17).

Domestic ASKs of GoAir grew +20.3% YoY (adj.) (v/s +13.5% in 3QFY17) and

those of Jet grew +3% YoY (adj.) (v/s +3% in 3QFY17).

IndiGo’s RPKs grew +25.9% YoY (adj.) (v/s +38.9% in 3QFY17), with the highest

market share of 41.7% in Feb-17.

SpiceJet’s domestic RPKs grew +25.2% (adj.) YoY (v/s +21.2% in 3QFY17), with a

market share of 12.6% in Feb-17.

GoAir’s domestic RPKs grew +26.7% YoY (adj.) (v/s +18.7% in 3QFY17), with a

market share of 8.3% in Feb-17.

Jet’s RPK growth stood at +8% YoY (adj.), followed by Air India at +5.9% YoY

(adj.).

14

IndiGo’s passenger market share remains highest at ~40% in Feb-17

n

n

Industry load factor (%)

n

n

Passenger market share (%)

Jan-17

IndiGo

Jet

AI

SpiceJet

GoAir

Others

18.0

18.3

13.9

13.3

12.9

13.1

8.3

8.7

7.1

7.0

Feb-17

39.9

39.7

n

Domestic ASKs increase +17.8% YoY (adj.) in Feb-17 (v/s +21.1% in 3QFY17)

n

n

n

Domestic RPKs rise +21% YoY (adj.) in Feb-17 (v/s +22.8% in 3QFY17)

n

n

n

n

22 March 2017

Industry load factors

stood at 87.2% (v/s 84.8% in 3QFY17)

n

n

n

n

n

SpiceJet’s load factor stood at 93.6% in Feb-17 (v/s 92.7% in 3QFY17); had 90%+

load factor for last 22 months.

IndiGo’s load factor stood at 87.7% (v/s 88.1% in 3QFY17).

GoAir’s load factor stood at 90.9% (v/s 87.5% in 3QFY17).

Jet reported load factor at 86.6% (v/s 80.2% in 3QFY17).

Air India reported load factor at 79.6% (v/s 75.9% in 3QFY17).

Exhibit 4: Domestic passengers grew ~20% YoY adj. in Feb-17

Total Domestic Passengers (millions)

Feb-17 was 16 consecutive

month of above ~20%

growth

th

Source: DGCA, MOSL

Exhibit 5: Double-digit passenger growth since Aug-14

Domestic passenger growth (YoY %)

Domestic passenger volumes

grew ~20% YoY in Feb-17

Source: DGCA, MOSL

Exhibit 6: Airline-wise passenger growth (YoY %)

Passenger growth YoY (%)

80

Total

Air India

IndiGo

SpiceJet

Jet Airways

GoAir

Passenger volumes up

+28.6% YoY for IndiGo in

Feb-17.

40

0

-40

Source: DGCA, MOSL

22 March 2017

15

In conversation

1. Gruh Finance: Expect proper functioning of rera in 6-9

months; Sudhin Choksey, MD

n

n

n

n

n

n

The time taken for implementation of RERA Act by various states will be

different. So it could well be 6-9 months before it starts functioning properly.

The inventory build-up in both Gujarat and Maharashtra are quite high over the

last 3-4 years and so demand has been weak compared to other states.

In Madhya Pradesh the inventory being less, the demand situation may be

better.

As per the newly launched CLSS, MIG-I(annual income of Rs.6,00,001 to

Rs.12,00,000), an interest subsidy of 4% has been provided for loan amounts up

to Rs.9 lakh while in MIG-II(annual income of Rs.12,00,001 to Rs.18,00,000), an

interest subsidy of 3% has been provided for loan amount of Rs.12 lakh.

The interest subsidy will be calculated at 9% NPV over a maximum loan tenure

of 20 years or the actual tenure, whichever is lesser. Housing loans above Rs. 9

lakh and Rs. 12 lakh will be at non-subsidized rates.

Hopeful that the scheme will get an extension beyond one year.

2. Godfrey Philips: Expect an atmosphere of stability once gst is

implemented; KK Modi, President & MD

n

n

n

n

GST is being implemented at a great speed, there is an atmosphere of

consensus.. This is good for industry, it will bring prosperity throughout India.

Cigarettes are sold at different prices for different class of consumer. The

cheapest cigarette is at Rs 3 per cigarette or Rs 3,000 per thousand sticks and

the cap is Rs 4,000 per thousand sticks.

Cannot comment on the exact impact of GST because of various taxes like VAT,

excise duty, additional excise duty, entrance taxes are present, but roughly 60%

of cigarette price accounts for taxes and the next is for products and

manufacturing cost.

The industry is expecting that the government will take a very rational decision

and cap is just for the upper limit, and not the average of the industry.

3. GSK Consumer: Demand muted because of economic factors;

Manoj Kumar, MD

n

n

n

n

On GSK consumer volumes falling. the category is facing a volume growth

problem it isn’t as if Horlicks' shares are falling. Besides, rural economy has not

been good the last two years which has added to the woes.

There is a premium segment willing to pay for functional products. And there is

a mass segment looking for value. We are playing both the mass and high

science segment with clinical claims.

We've got our tiering strategy clear – on one end we will go after penetration

because we are the leaders. For affluent consumers, we are giving life stage

products depending on what their needs are.

We expect revival of the rural economy and reversed pricing of sachets (to Rs 5

from Rs 6) of our low unit packs (LUPs) to drive penetration. We have taken a

20% drop in prices, since consumers enter the category and then upgrade.

22 March 2017

16

From the think tank

1. Gender diversity builds businesses. by Monica Vincent

n

Businesses are missing a trick if they fail to respect and accommodate the family

responsibilities of their employed women. Employer hostility towards working

women during their pregnancy and motherhood phase is a disgrace to say the

least. An increasing number of research studies show that tapping into the full

potential of women and benefiting from the innovation and creativity of gender

diversity is an investment with returns that build strong and viable economies

and enhance business outcomes.

2. Infrastructure in India: land not a problem, government owns

enough of it for most projects. by The Financial Express

n

While large industrial and infrastructure projects continue to fight an uphill task

when it comes to buying land—a Business Standard news story points out as

many as 280 cases challenging pending land acquisitions are already in the

Supreme Court—there may not be any problem when it comes to projects

within the boundaries of most cities. Business Standard cites a study by India

Development Foundation (IDF) which tries to quantify just how much land is

held by central ministries, state governments and local bodies—it does not talk

of PSUs.

3. Vodafone, Idea cellular join hands to beat Reliance Jio, but deal

of limited use unless Narendra Modi government fixes policy. by

The Financial Express

n

That an industrialist of the calibre of Kumar Mangalam Birla has been compelled

to collaborate with a rival—Vodafone Plc—in the telecom business is a

reflection not merely of the increasing competitive intensity in the space, but

also the government’s total disregard for the health of the sector. With a 42%

market share, the combined Vodafone-Idea will be better placed to fight the

RJio onslaught because of synergies—estimated at $2.1bn in the fourth year—

and a better balance sheet will help raise much-needed funds. But if

government policy continues to bleed the sector—telcos need to keep buying

spectrum to meet subscriber needs—even the merged Vodafone-Idea will find

the going difficult.

4. Does good economics make for good politics in india? by

Pramit Bhattacharya & Tadit Kundu

n

The choice of the controversial rabble-rouser and Hindutva mascot, Yogi

Adityanath, as the chief minister of Uttar Pradesh has once again rekindled an

old debate on the relative importance of economic performance and extra-

economic considerations in Indian politics. While conventional wisdom suggests

that identity always triumphs economics in Indian elections, there is some

evidence to suggest that economic growth may have become more important

than before in recent years. A Mint analysis of 18 major Indian states shows that

governments which deliver better growth may have a greater chance of being

re-elected.

22 March 2017

17

5. What is the fix for India? by v. Anantha nageswaran

n

One of the good things about the recently concluded elections to five state

assemblies is not the decisive victory of the Bharatiya Janata Party (BJP) in Uttar

Pradesh. In general, leaders do not take risks to do the right things from a

position of strength and the BJP is strong now. They do so from a position of

weakness, when their backs are to the wall. But what is decisively good, as

several have noted already, is that the people of Punjab looked into the abyss

and turned back. They did not choose to empower a political party that sought

to play the game of radicalism and schisms in a sensitive border state.

6. Red carpet, not red tape. by Aurodeep Nandi

n

Before RsMake in India' comes RsPermission to Make in India'. And that is why ease

of doing business is so important.But bureaucrats are generally better at making

laws and procedures than changing them. Regulation, however, is costly -not

just for businesses to comply to, but also for governments to check that

compliance. The absence of anyone calculating the cost of regulation in India

meant that very few in the system ever bothered to check if that additional

piece of paper, or that umpteenth no-objection certificate, was indeed leading

to anything productive or not. But the same department once in charge of

implementing the licence raj -the department of industrial policy and promotion

(Dipp) -is now trying to spark a red-tape revolution.

International

7. China and the US: An odd couple doomed to co-operation. by

Martin Wolf

n

The future of our world heavily depends on relations between the US, a young

country and the incumbent superpower, and China, an ancient empire and a

rising superpower. Making these relations particularly challenging have been the

election in the US of Donald Trump, a populist xenophobe, and the ascendancy

of Xi Jinping, a centralising autocrat, in China. No less contrasting, however, are

the perspectives of these two on the world economy. Forty years ago, Mao

Zedong ruled China: his aim was autarky. Ever since 1978, however, the

watchword of China’s economic policy has been the “reform and opening up”

proposed by his successor, Deng Xiaoping.

22 March 2017

18

Click excel icon

for detailed

valuation guide

CMP

(INR)

TP

% Upside

EPS (INR)

(INR) Downside FY17E FY18E FY19E

26

28

18

9

-4

9

10

4

13

6

-5

15

12

38

5

29.2

4.8

136.2

25.7

489.0

89.9

623.7

24.2

21.8

8.2

175.2

60.7

6.2

252.7

12.8

11.9

37.7

45.4

6.4

8.2

160.6 182.3

37.5

46.7

639.6 735.0

107.6 140.6

868.2 1,072.1

30.2

36.6

32.8

42.6

9.7

11.8

190.7 199.4

75.0

89.4

9.7

11.9

313.1 379.5

35.5

70.1

15.4

21.9

Valuation snapshot

P/E (x)

P/B (x)

ROE (%)

FY17E FY18E FY17E FY18E FY17E FY18E FY19E

29.6

18.5

21.3

39.6

46.9

14.3

39.9

29.0

24.2

26.6

19.1

21.3

33.7

24.1

37.1

37.0

27.5

34.7

23.3

26.6

19.3

25.3

15.8

20.1

28.8

NM

32.7

40.3

7.3

18.7

25.0

21.7

NM

12.1

50.5

8.7

20.4

21.2

31.6

18.0

26.8

34.5

18.5

11.8

48.3

31.1

13.4

15.6

23.9

37.6

11.8

22.9

13.9

18.1

27.1

35.8

12.0

28.7

23.3

16.0

22.6

17.5

17.3

21.5

19.4

13.3

28.6

18.9

19.5

19.2

23.2

16.2

21.1

15.2

15.5

23.7

5.8

26.6

28.6

6.6

15.3

19.7

8.9

7.5

7.9

12.0

8.2

6.9

11.2

12.6

5.0

10.6

26.3

20.9

10.1

38.6

28.2

10.8

13.1

21.3

28.6

10.1

5.9

4.0

6.0

6.0

9.2

2.2

14.2

5.6

2.7

3.8

7.0

3.2

2.3

5.6

1.9

8.9

4.1

2.1

2.4

2.4

1.8

4.4

1.9

1.4

4.2

0.7

4.2

4.4

0.7

3.8

3.0

1.1

0.5

0.6

0.7

0.9

0.3

0.8

1.2

0.5

0.9

7.1

4.1

1.8

13.7

5.8

3.3

2.8

2.7

2.8

2.2

4.8

3.4

5.3

5.2

7.7

1.9

10.2

4.7

2.4

3.4

6.0

2.9

2.1

4.6

1.7

7.2

3.6

1.9

2.1

2.2

1.6

3.8

1.7

1.3

3.6

0.6

3.6

3.9

0.6

3.2

2.7

1.0

0.5

0.6

0.7

0.8

0.3

0.7

1.1

0.5

0.8

5.8

3.4

1.6

11.3

5.3

3.0

2.4

2.5

2.7

1.9

21.6

23.1

30.0

15.9

18.8

16.4

41.1

21.2

11.4

14.2

40.1

14.3

7.7

22.8

5.2

26.4

15.0

6.3

10.9

11.3

9.4

18.6

10.4

7.4

15.5

-21.1

13.5

12.6

9.7

22.1

12.0

5.0

-2.4

4.9

1.4

10.4

1.7

3.9

3.9

2.8

3.3

22.5

29.6

16.6

31.0

19.6

26.0

19.1

11.4

7.7

19.8

23.1

26.3

31.0

20.6

23.4

16.9

41.2

21.8

15.6

14.9

36.8

13.6

10.3

23.2

13.3

27.9

18.9

10.3

11.8

9.9

10.4

19.3

9.9

8.9

16.4

11.6

14.5

14.4

10.0

22.6

13.6

11.5

7.0

7.2

5.8

10.2

4.8

6.8

9.2

9.7

7.9

24.1

18.0

16.6

32.1

19.6

28.9

19.5

12.2

9.7

20.3

22.9

28.2

30.9

22.0

22.6

18.9

37.1

22.1

17.7

15.9

33.0

14.5

11.3

23.2

22.2

31.4

22.0

17.3

13.1

11.1

12.1

19.8

11.3

10.2

17.2

12.5

16.0

17.7

11.3

23.0

15.5

14.4

8.9

10.3

7.3

11.1

5.6

8.6

11.5

13.0

10.1

25.9

19.4

17.2

31.6

19.0

32.3

19.6

14.0

11.4

20.8

Company

Automobiles

Amara Raja

Ashok Ley.

Bajaj Auto

Bharat Forge

Bosch

CEAT

Eicher Mot.

Endurance Tech.

Escorts

Exide Ind

Hero Moto

M&M

Mahindra CIE

Maruti Suzuki

Tata Motors

TVS Motor

Aggregate

Banks - Private

Axis Bank

DCB Bank

Equitas Hold.

Federal Bank

HDFC Bank

ICICI Bank

IDFC Bank

IndusInd

J&K Bank

Kotak Mah. Bk

RBL Bank

South Indian

Yes Bank

Aggregate

Banks - PSU

BOB

BOI

Canara

IDBI Bk

Indian Bk

OBC

PNB

SBI

Union Bk

Aggregate

NBFCs

Bajaj Fin.

Bharat Fin.

Dewan Hsg.

GRUH Fin.

HDFC

Indiabulls Hsg

LIC Hsg Fin

Manappuram

M&M Fin.

Muthoot Fin

Reco

Buy

Buy

Buy

Buy

Neutral

Buy

Buy

Buy

Buy

Buy

Neutral

Buy

Not Rated

Buy

Buy

Buy

864

1,087

89

114

2,909 3,432

1,018 1,110

22,911 22,049

1,288 1,406

24,902 27,458

703

732

526

596

219

233

3,343 3,190

1,294 1,486

209

-

6,077 6,808

473

653

440

462

Neutral

Neutral

Buy

Buy

Buy

Buy

Neutral

Buy

Neutral

Buy

Buy

Neutral

Buy

488

165

161

89

1,442

272

61

1,391

75

860

501

20

1,487

535

134

240

105

1,510

345

68

1,535

75

940

450

21

1,575

10

-19

49

18

5

27

11

10

0

9

-10

3

6

14.1

7.1

6.1

4.6

56.9

17.2

3.1

48.4

-25.2

26.3

12.4

2.8

79.3

25.0

8.6

6.9

5.5

68.3

17.9

3.9

58.7

13.0

32.3

17.5

3.1

97.0

46.8

10.9

8.7

6.9

81.5

21.8

4.9

71.2

15.4

41.3

24.6

3.8

118.4

Buy

Neutral

Neutral

Neutral

Buy

Neutral

Buy

Buy

Neutral

163

129

289

77

265

135

143

272

153

221

123

300

49

330

114

185

350

172

36

-4

4

-36

25

-15

30

29

13

7.5

-5.6

23.9

1.5

30.4

6.6

6.7

8.6

8.5

18.3

17.1

36.7

6.4

32.2

19.6

12.7

21.6

30.5

25.3

23.2

56.0

8.6

38.1

24.1

17.2

29.5

45.3

Buy

Neutral

Buy

Neutral

Buy

Buy

Buy

Not Rated

Buy

Buy

1,175

826

361

380

1,458

934

588

91

317

350

1,276

848

405

348

1,580

1,015

693

-

323

409

9

3

12

-8

8

9

18

2

17

34.1

44.6

30.7

7.9

46.8

69.5

37.6

3.8

8.4

29.7

44.6

39.5

35.6

9.8

51.7

86.2

44.7

4.3

11.1

34.7

59.3

51.5

42.0

11.7

57.3

109.6

52.6

5.2

13.9

40.5

22 March 2017

19

Click excel icon

for detailed

valuation guide

CMP

(INR)

144

674

168

2,030

1,047

TP

% Upside

EPS (INR)

(INR) Downside FY17E FY18E FY19E

117

-18

24.0

25.5

40.5

752

12

29.0

34.2

40.5

134

-20

29.4

35.3

39.9

2,500

1,225

23

17

91.2

58.1

130.5

77.9

164.2

96.7

Valuation snapshot

P/E (x)

P/B (x)

ROE (%)

FY17E FY18E FY17E FY18E FY17E FY18E

6.0

5.6

1.0

0.9

16.8

16.2

23.2

19.7

3.8

3.2

17.5

17.5

5.7

4.7

1.0

0.9

18.8

19.5

22.3

18.0

17.2

64.8

25.7

30.5

43.3

20.0

33.8

52.5

50.4

9.1

16.8

28.9

11.7

73.3

38.6

85.3

37.3

22.4

29.5

33.2

48.5

41.8

32.5

58.8

15.5

22.3

27.1

76.0

22.5

NM

NM

42.1

42.9

33.7

52.7

45.7

45.2

38.6

42.7

46.1

34.3

46.9

34.3

47.0

48.1

53.4

15.6

13.5

14.8

45.8

21.7

29.6

36.2

18.8

29.5

28.6

37.4

10.7

14.4

23.8

9.9

48.5

32.9

33.1

32.7

17.2

24.4

27.5

32.3

30.3

17.0

37.4

12.6

15.3

23.8

36.8

20.5

42.2

38.5

28.0

30.9

24.3

46.5

39.6

38.0

33.9

35.0

39.7

30.2

42.0

30.3

39.6

41.2

44.0

2.7

2.1

3.0

7.7

4.7

1.2

32.8

1.1

7.2

6.3

10.2

1.8

2.6

3.0

1.7

6.7

6.6

-2.1

4.3

3.1

4.7

3.6

2.4

3.1

1.9

4.1

1.8

1.3

3.4

3.9

4.2

2.9

5.3

7.7

4.8

3.3

16.1

17.5

23.6

10.1

12.6

9.6

8.0

32.3

9.1

7.1

14.4

20.1

2.3

1.9

2.6

6.6

4.1

1.2

22.3

1.0

6.6

5.6

9.2

1.5

2.3

2.8

1.4

5.8

5.7

-2.2

4.0

2.7

4.2

3.3

2.3

3.2

1.8

3.7

1.6

1.2

3.1

3.8

3.6

2.7

4.8

6.1

4.2

3.0

14.1

13.9

22.1

8.6

10.7

8.2

7.0

33.6

8.0

6.5

12.4

17.3

12.7

12.3

17.2

11.9

19.7

4.0

94.3

5.4

22.6

11.7

20.3

21.2

16.6

10.9

14.5

9.2

18.4

NM

12.1

8.9

17.1

10.8

5.0

7.5

6.0

7.2

12.0

5.8

13.3

5.2

20.3

-3.7

-3.1

19.9

11.7

9.9

32.5

42.9

54.9

28.3

33.8

22.4

25.1

67.6

28.4

15.7

33.3

35.9

16.1

14.7

17.7

14.4

19.0

4.0

73.3

5.5

23.2

20.7

24.6

15.3

16.8

12.2

14.6

11.9

18.6

-6.7

12.6

16.7

18.2

11.9

7.4

10.4

10.9

10.4

13.1

7.6

13.6

10.5

18.9

6.6

13.1

24.4

14.5

12.5

32.3

39.1

60.1

27.3

33.0

22.2

24.7

78.4

28.1

17.2

32.4

39.2

FY19E

22.3

17.7

18.9

17.6

16.1

18.9

15.9

19.3

4.0

66.1

6.0

25.3

19.2

25.1

14.3

16.2

13.6

16.6

14.2

19.0

-8.4

13.1

17.3

18.8

12.9

7.7

13.2

13.3

13.4

14.7

7.8

16.0

14.7

20.0

11.3

20.8

24.3

15.8

14.0

32.5

37.9

68.5

27.2

33.2

21.9

23.1

92.5

28.2

18.3

34.5

42.3

Company

Reco

PFC

Neutral

Repco Home

Buy

REC

Neutral

Shriram City

Buy

Union

STF

Buy

Aggregate

Capital Goods

ABB

Neutral

Bharat Elec.

Buy

BHEL

Sell

CG Cons. Elec.

Buy

CG Power & Indu. Sell

Cummins

Neutral

GE T&D

Neutral

Havells

Neutral

Inox Wind

Neutral

K E C Intl

Buy

L&T

Buy

Pennar Eng.

Not Rated

Siemens

Neutral

Solar Ind

Neutral

Suzlon Energy

Not Rated

Thermax

Sell

Va Tech Wab.

Buy

Voltas

Neutral

Aggregate

Cement

Ambuja Cem.

Buy

ACC

Neutral

Birla Corp.

Buy

Dalmia Bharat

Buy

Grasim Inds.

Neutral

India Cem

Neutral

J K Cements

Buy

JK Lakshmi Ce

Buy

Ramco Cem

Buy

Orient Cem

Buy

Prism Cem

Buy

Shree Cem

Buy

Ultratech

Buy

Aggregate

Consumer

Asian Paints

Neutral

Britannia

Buy

Colgate

Buy

Dabur

Neutral

Emami

Buy

Godrej Cons.

Neutral

GSK Cons.

Neutral

HUL

Neutral

ITC

Buy

Jyothy Lab

Neutral

Marico

Buy

Nestle

Neutral

1,194

159

169

197

73

900

316

451

177

177

1,550

123

1,247

735

19

912

594

388

1,190

180

115

205

45

990

340

425

175

175

1,660

-

1,340

800

-

781

760

365

0

13

-32

4

-38

10

8

-6

-1

-1

7

7

9

-14

28

-6

18.4

6.2

5.5

4.6

3.6

26.6

6.0

8.9

19.4

10.5

53.6

10.5

17.0

19.0

0.2

24.4

26.5

13.1

26.1

7.3

5.7

5.5

3.9

30.5

11.0

12.1

16.5

12.3

65.0

12.4

25.7

22.3

0.6

27.9

34.5

15.9

32.6

8.5

5.8

6.7

4.5

36.5

11.4

14.1

17.6

13.5

79.7

16.8

33.5

26.5

0.7

31.3

40.3

18.8

237

277

1,412 1,339

700

869

1,898 2,246

1,091 1,067

163

138

885

1,024

450

455

654

815

134

167

101

112

16,296 19,006

4,005 4,058

17

-5

24

18

-2

-16

16

1

25

25

11

17

1

4.9

33.7

21.5

32.3

70.2

7.3

32.6

5.9

29.0

-1.8

-0.6

387.1

93.5

7.3

46.7

41.2

50.7

86.5

10.7

37.2

12.2

31.9

3.2

2.6

582.8

129.6

7.9

58.6

54.1

73.8

110.7

12.4

49.3

17.8

40.1

5.8

4.8

729.9

161.2

1,067

3,289

980

281

1,044

1,698

5,407

904

288

356

292

6,333

1,035

3,775

1,170

300

1,260

1,655

5,300

865

295

365

330

6,840

-3

15

19

7

21

-3

-2

-4

3

3

13

8

20.2

71.9

21.7

7.3

24.5

36.8

157.7

19.3

8.4

7.6

6.1

118.7

22.9

83.0

25.8

8.3

29.8

42.8

178.8

21.5

9.5

9.0

7.1

144.0

26.8

101.3

31.6

9.7

36.0

49.6

190.8

24.8

10.8

10.5

8.4

171.0

22 March 2017

20

Click excel icon

for detailed

valuation guide

CMP

TP

% Upside

(INR) (INR) Downside

14,605 16,910

16

220

215

-2

699

720

3

6,829 8,250

21

774

1,044

35

2,160 2,885

34

EPS (INR)

FY18E FY19E

305.1 388.4

9.7

12.1

18.3

20.5

167.7 198.8

15.4

19.8

47.0

64.0

Valuation snapshot

P/E (x)

P/B (x)

ROE (%)

FY17E FY18E FY17E FY18E FY17E FY18E

62.0

47.9

25.6

20.2

41.3

42.2

31.3

22.7

2.5

2.3

10.8

10.5

42.0

38.2

10.8

8.8

28.0

25.4

46.9

40.7

12.7

10.9

29.0

28.8

72.6

50.4

8.7

7.5

12.6

16.0

75.4

46.0

14.2

11.0

20.8

24.0

42.3

36.6

12.5

10.9

29.5

29.8

25.6

26.8

32.9

17.1

34.5

36.8

32.6

14.0

33.7

60.8

21.4

19.2

79.7

34.9

23.5

35.5

25.5

41.0

25.4

27.1

18.0

49.6

34.4

29.5

17.0

13.1

31.2

63.6

18.3

NM

NM

11.0

10.3

16.0

67.9

NM

30.1

42.8

35.4

11.5

15.5

NM

14.1

21.3

24.8

28.9

14.7

32.2

25.0

24.6

12.4

20.3

56.4

18.1

16.7

49.6

19.7

18.4

28.3

19.9

33.1

18.9

21.2

15.4

39.2

27.1

16.5

8.9

10.6

23.6

34.0

16.2

43.7

NM

9.9

10.1

14.1

39.5

14.1

25.5

29.7

25.5

8.7

10.9

NM

10.1

5.8

6.0

10.3

4.4

5.1

7.4

3.7

3.6

3.2

2.0

4.4

3.3

17.8

2.8

4.9

5.8

4.9

8.3

6.1

4.8

2.4

22.0

2.9

2.2

2.3

2.0

3.4

20.4

4.7

0.9

2.9

1.9

0.8

3.1

6.9

4.0

7.6

10.1

6.1

1.8

3.0

0.3

2.2

4.8

5.0

7.9

3.4

4.6

6.0

3.2

3.1

2.8

1.7

3.4

2.3

21.3

2.5

4.0

5.3

4.1

6.8

5.1

4.1

2.2

16.8

2.7

2.1

2.1

1.7

3.1

12.7

4.1

0.9

3.1

1.6

0.7

2.7

6.0

2.7

6.9

8.2

5.3

1.5

2.5

0.3

1.8

24.8

24.4

35.9

29.0

14.7

21.4

11.2

26.7

10.0

3.4

20.5

19.9

22.4

8.4

22.9

16.4

20.0

22.2

26.0

17.9

12.0

50.5

8.6

7.6

12.4

16.7

11.0

38.2

27.0

-4.1

-16.6

19.3

7.7

20.7

10.6

-10.2

25.1

31.3

17.3

16.1

20.9

-8.0

16.4

24.7

22.0

30.9

26.0

14.1

26.5

13.2

26.5

14.9

3.3

18.9

16.6

43.0

13.5

23.9

18.7

22.3

22.5

29.2

19.2

14.9

48.6

10.3

12.9

19.4

17.8

13.3

46.1

27.1

2.1

-6.1

17.8

7.1

20.6

16.3

23.5

27.3

30.3

20.6

18.8

25.2

-4.5

19.6

FY19E

43.2

12.9

23.4

29.5

17.8

24.9

30.3

25.3

21.7

29.9

23.8

15.7

27.9

14.7

25.7

16.1

6.0

19.1

18.4

56.9

15.9

22.1

19.8

22.4

20.7

29.6

19.5

15.0

46.8

10.6

15.3

25.4

18.6

14.3

44.7

27.5

8.1

3.3

16.9

7.0

20.4

22.0

11.2

29.0

29.3

21.7

17.7

22.0

-0.6

17.1

Company

Page Inds

Parag Milk

Pidilite Ind.

P&G Hygiene

United Brew

United Spirits

Aggregate

Healthcare

Alembic Phar

Alkem Lab

Ajanta Pharma

Aurobindo

Biocon

Cadila

Cipla

Divis Lab

Dr Reddy’s

Fortis Health

Glenmark

Granules

GSK Pharma

IPCA Labs

Lupin

Sanofi India

Sun Pharma

Syngene Intl

Torrent Pharma

Aggregate

Logistics

Allcargo Logistics

Blue Dart

Concor

Gateway

Distriparks

Gati

Transport Corp.

Aggregate

Media

Dish TV

D B Corp

Den Net.

Hathway Cab.

Hind. Media

HT Media

Jagran Prak.

PVR

Siti Net.

Sun TV

Zee Ent.

Aggregate

Metals

Hindalco

Hind. Zinc

JSPL

JSW Steel

Reco

Buy

Neutral

Neutral

Buy

Buy

Buy

FY17E

235.6

7.0

16.6

145.7

10.7

28.6

Neutral

Neutral

Buy

Buy

Sell

Buy

Neutral

Neutral

Neutral

Buy

Neutral

Buy

Neutral

Neutral

Buy

Buy

Buy

Not Rated

Buy

596

2,128

1,845

691

1,145

442

591

634

2,623

180

890

134

2,753

552

1,455

4,574

699

533

1,441

630

1,850

2,028

915

750

510

550

815

3,050

240

990

160

2,700

540

1,850

5,000

850

-

1,700

6

-13

10

32

-35

15

-7

28

16

34

11

19

-2

-2

27

9

22

18

23.2

79.3

56.0

40.5

33.2

12.0

18.1

45.4

77.7

3.0

41.6

7.0

34.5

15.8

61.8

129.0

27.4

13.0

56.8

27.9

85.7

63.8

47.0

35.6

17.7

24.1

51.0

129.4

3.2

49.2

8.0

55.5

27.9

79.0

161.6

35.1

16.1

76.3

35.1

100.0

79.6

54.6

44.5

23.0

31.1

57.0

160.2

6.5

60.5

11.7

64.4

37.3

89.3

193.8

42.2

18.0

93.4

Buy

Not Rated

Neutral

Buy

Not Rated

Not Rated

170

5,088

1,239

258

142

222

191

-

1,309

314

-

-

12

6

21

9.5

102.5

36.0

8.8

8.4

16.9

11.1

129.9

45.8

15.7

15.9

21.0

12.5

163.2

50.0

20.1

23.9

25.9

Buy

Buy

Neutral

Buy

Buy

Neutral

Buy

Buy

Neutral

Neutral

Buy

107

387

81

38

290

83

172

1,411

38

757

523

115

450

75

47

355

85

215

1,533

40

735

600

8

16

-7

24

22

3

25

9

5

-3

15

1.7

21.1

-3.6

-2.4

26.5

8.0

10.8

20.8

-0.9

25.1

12.2

3.2

23.9

1.9

-0.8

29.4

8.2

12.2

35.7

2.7

29.7

17.6

4.8

27.4

7.7

0.4

33.2

8.7

13.9

56.8

1.2

34.5

20.9

Buy

Neutral

Buy

Buy

198

307

128

192

240

307

180

226

21

0

41

18

17.2

19.8

-23.9

13.6

22.9

28.2

-17.5

19.0

25.6

29.5

-2.2

19.4

22 March 2017

21