Earnings Season: Outlook getting better

Key takeaways from 1QFY19 earnings season….



India Inc has ended the last leg of its earnings season for the quarter ended June 2018. Although some interesting trends were

observed during the course of the earning-report season, we note that the underlying narrative stays the same – a healthy

performance from the Consumption- and Commodity-oriented sectors marred by higher provisioning costs at Corporate Banks.

A low base of 1QFY18 indeed provided some succor to several sectors.

Key trends of 1QFY19: [1] Asset quality woes of PSU and

Corporate Banks appear to be stabilizing. Fresh slippages moderated, and Corporate Banks raised the provisioning coverage

ratio further. [2] Consumption – both urban and rural – remains strong, with companies from FMCG, Auto, Durables and

Retail pointing toward a healthy demand outlook. [3] Cyclicals continue leading from the front, with Metals and O&G driving

more than 100% of incremental earnings for the MOSL Universe. [4] IT delivered a healthy quarter, with improved

commentaries on demand in the US BFS market. [5] In Healthcare, pricing pressure in US generics is stabilizing even as

earnings downgrades haven’t abated.

While aggregate sales and EBITDA growth was healthy and in-line, profits missed our estimates. The miss at the PAT level for

both the MOSL and Nifty Universe can be entirely ascribed to Corporate Banks, which were impacted by elevated provisions.

Strong inventory gains in OMCs boosted the aggregate profits.

Among the 19 sectors we track, 2/8/9 posted profits that were above/in-line/below our estimates.

The proportion of companies reporting 30%+ PAT growth (at 41% of MOSL Universe) is the highest since Mar-10, partly aided

by the low base of 1QFY18 in several consumption-oriented sectors.

One of the important takeaways from this earning season is the peaking of asset quality stress for corporate banks. Provisioning

costs could moderate significantly beginning 2HFY19 and provide a lift to broader earnings for 2HFY19 and FY20, in our view. In

BFSI,

while NBFCs maintained their earnings growth trajectory (44% PAT growth, multi-quarter-high), Private Banks missed our

estimates owing to higher provisions at ICICI and Axis. Early signs of margins pressures on Retail lenders were evident.

Improving asset quality of corporate banks and margin pressures on Retail banks could potentially drive a near-term

performance divergence in Financials space.



REVIEW | August 2018

Key takeaways from 1QFY19 earnings season



Recent currency depreciation has added to the prevailing macro concerns. However, from the earnings perspective, we note

that ~50% of Nifty profits are positively co-related with the depreciating INR.

For the quarter, earnings were led by Consumption and Commodity, with Metals and Oil & Gas accounting for more than 100%

of incremental earnings growth for our MOSL Universe. Within the Consumption pack, Auto lagged with a broad-based miss on

profits and consequent earnings downgrades.

Global Cyclicals

single-handedly drove the quarterly performance, led by Metals and OMCs (inventory gains drove profits).

Defensives

posted double-digit earnings growth for the first time since Jun-16, buoyed by Healthcare and Consumer, while

Domestic Cyclicals

posted a 12% YoY PAT decline dragged by corporate banks.

Telecom

posted the fourth consecutive quarter of loss, while

Healthcare

profits rebounded off a low.

Earning moderate led by drag in Corporate Banks:

90 companies saw earnings cut of 3%+ (78 in 4QFY18), while 39 companies

saw earnings upgrades of 3%+ (53 in 4QFY18). Our FY19/20 Nifty EPS estimates have been cut by 5.6%/1% to INR547/688 v/s

INR580/694 earlier. Broader market earnings estimates have held on well. However, higher provisioning by ICICI and SBI and big

margin miss at Tata Motors played culprits. Nearly 80% of the FY19 Nifty earnings cut is driven by ICICI, SBI and Tata Motors. We

are building in 19/26% EPS growth for Nifty for FY19/20. Excluding corporate banks, Nifty earnings growth is expected at

16%/17% for FY19/20 vs. 11%/16%/10% in FY16/17/18.

Nifty Universe (Ex Corp Banks) PAT change YOY (%)

17.5

18.4

15.9

11.1

16.3

15.5

9.6

17.2



MOSL Universe (Ex Corp Banks) PAT change YOY (%)

15.9

10.4

6.6

2.8

3.6

10.6

3.8

1.4

FY13

FY14

FY15

FY16

FY17

FY18

FY19E

FY20E

FY13

FY14

FY15

FY16

FY17

FY18

FY19E

FY20E

REVIEW | August 2018

Ten focus stocks from 1QFY19 earnings season



ICICI Bank:

ICICIBC is in the midst of an improvement in operating environment (stressed asset resolution and growth pick-up) and

overcoming the transitory management/regulator issues. The bank has substantially increased coverage on NCLT exposure (87.9%/60.7%

coverage on NCLT list-1/list-2, thus increasing probability of higher write-backs) and is on track to achieve 70% NPL coverage as guided. Net

stressed assets declined to a multi-year-low of 6.8% of loans v/s 7.8% in 4QFY18. Near-term loan growth would be driven by the retail

business. With a gradual decline in credit cost and a pick-up in revenue growth, we expect ICICIBC to report ~1.2% RoA over FY20. ICICIBC

is our preferred pick to play the recovery in corporate banks.

Hindalco:

Novelis is now reaping the benefit of the USD2b investment in auto lines and recycling facilities across the world a few years ago.

The recently announced acquisition of Aleris strengthens its position further and brings synergies and growth option in aerospace and in

China. Indian smelting business continues benefiting from bauxite and coal mines and plans to grow through value addition. Strict

management focus on high-IRR projects should drive the stock outperformance, in our view.

Petronet:

Dahej continued over utilization despite the fact that LNG prices had almost doubled YoY. We expect the same to continue. Kochi

terminal's utilization would increase as Kochi refinery stabilizes and Kochi-Mangalore pipeline gets completed. Dahej would get further

boost when it's expansion from 15mmtpa to 17.5mmtpa completes early next calendar year. Reiterate Buy with target of INR312.

ACC:

The company posted 34%QoQ improvement in EBITDA/t of INR 922 beating our estimate of INR 698/t, led by higher proportion of (a)

premium sales and (b) sales from its new cost-efficient units of Jamul and Sindri. Additionally, ACC has managed to limit the cost increase,

driven by its higher proportion of linkage coal, lower lead distance and route optimization. The company has also made efforts toward cost

rationalization of fixed costs, resulting in improved profitability. We value ACC at 9x (30% discount to peers vs present discount of 45%) to

arrive at a TP of INR1,633. Upgrade to Buy

Ashok Leyland:

AL is highly focused on making business acyclical by reducing India truck business revenues to 50% in 5 years (from ~62%

currently), by growing share of LCVs, Exports, Spare parts and Defence. This will not only reduce dependence on domestic trucks, but also

drive strong revenue growth. In 1QFY19, overall results were above estimate led by full benefits of cumulative price hike of ~5% from Jan-

Apr, better mix, ~28% growth in aftermarket and ~24% in exports revenues leading to EBITDA margins of 10.4% (est 9.3%). In FY18-20E, we

estimate revenue/EBITDA/PAT CAGR of 14%/22%/27%.



REVIEW | August 2018

Ten focus stocks from 1QFY19 earnings season



Titan:

Jewellery business continued gaining market share in 1QFY19, with reported growth of 6.3%. Jewellery sales miss v/s estimate of 14-

15% means that full-year growth may be ~22-23% now. Jewelry business growth prospects remain robust, with Watches and now Eyewear

starting to contribute to growth. The 18.8% margin achieved in the Watches segment during the quarter may not be sustainable, but the

company is confident of delivering double-digit margins in the segment.

Sun Pharma:

The overall results has been in line. However, US sales (Ex-Taro) surprised positively by growing at 17% YoY/15% QoQ (23% of

sales). With increased traction from the Halol facility and new launches (specialty portfolio and ANDA approvals), we expect US sales run-

rate to gain further momentum. Even emerging market business (18% of sales) had broad-based growth across regions. Operating cost is

expected to increase at a lower rate compared to sales growth and provide enough scope for improving operating leverage, and thus,

profitability.

Buy

with a target price of INR700.

Infosys:

With the quarter largely in-line, INFO remains on track to deliver on its guidance of 6-8% YoY CC growth in FY19. Our EPS estimates

have remained intact. Although lower half of the guided band appears more likely in FY19, we continue believing that the margin band is

conservative, with the share of Digital inching up, recent INR depreciation, and investments already defined internally. Our TP of INR1,550

discounts forward earnings by 17x, based on our thesis of a narrowing gap with tier-I Indian and global peers such as TCS, Cognizant and

Accenture. Maintain

Buy.

BOB:

BOB has reported steady improvement in asset quality as watchlist size has reduced to INR86b (includes SMA in stressed accounts)

while the provisioning coverage has increased to ~69% (one of the highest among peers). This provides comfort on strength of the balance-

sheet as ~85% of slippages for BOB during 1QFY19 occurred from the watchlist. We expect stress addition and credit costs to moderate

from 2HFY19 - SBI results further reinforces our confidence in broader recovery in corporate NPL cycle. This coupled with steady

improvement in margins (robust retail growth and rundown in overseas business) will drive healthy earnings recovery. We maintain Buy

with a target price of INR175 (1.3x FY20E ABV).

L&T Finance:

LTFH has scripted an impressive turnaround and delivered strong growth with a consistent improvement in profitability. The

company has grown well in the high-RoE business and continues allocating more capital to it. The hit on networth due to ECL, which was

expected to be taken over FY19 and FY20, has been taken upfront. Hence, while this would be neutral to FY20 networth, it would be

accretive to FY20 EPS. Despite elevated provisioning, we arrive at 19% RoE for FY19/20. Maintain Buy with a TP of INR240 (3.0x FY20E

BVPS).



REVIEW | August 2018

Top ideas

Preferred Large-cap ideas

Mkt Cap

(USD b)

Company

Infosys

46.8

HDFC

45.2

Maruti Suzuki

39.5

State Bank

38.6

ICICI Bank

31.3

Larsen & Toubro

24.9

IOC

21.6

Titan Company

12.0

Hindalco

7.0

Ashok Leyland

5.4

Preferred Mid-cap ideas

Mkt Cap

Company

(USD b)

Petronet LNG

4.7

Emami

3.7

RBL Bank

3.4

JSPL

2.7

Tata Chemicals

2.6

Mindtree

2.5

Oberoi Realty

2.5

CG Consumer Elect.

2.3

Team Lease Serv.

0.6

MCX

0.6

LP: Loss to profit

CMP

(INR)

1,431

1,884

9,148

302

340

1,240

160

941

220

128

CMP

(INR)

218

574

573

199

708

1,030

474

262

2,617

857

Upside 52 wk Corr. From

(INR)

High 52 wk (%)

1,550

1,437

2,335

2,051

-8

10,805

10,000

-9

360

352

-14

355

366

-7

1,540

1,470

-16

254

231

-31

1,130

1,006

-6

331

284

-23

149

168

-24

(INR)

312

665

650

327

957

1,225

616

305

3,500

1,000

Upside 52 wk Corr. From

High 52 wk (%)

275

-21

714

-20

591

-3

294

-32

787

-10

1,102

-7

609

-22

295

-11

3,339

-22

1,160

-26

EPS (INR)

FY18 FY19E FY20E

64.8 72.7 85.8

42.3 46.5 55.6

266.7 311.2 409.2

-5.3

7.9

30.5

11.1

9.9

20.8

51.7 56.8 72.1

23.9 17.9 18.8

12.6 16.2 20.5

18.9 24.4 27.8

5.4

6.6

8.7

EPS (INR)

FY18 FY19E FY20E

13.9 17.2 19.3

12.1 14.4 17.2

15.1 20.4 28.8

-8.5

1.9

3.8

48.2 49.7 58.8

34.4 46.3 64.4

12.6 24.5 35.8

5.2

6.4

7.8

43.0 60.4 94.8

21.2 23.0 33.7

EPS CAGR (%)

FY18-20

15.1

14.6

23.9

37.0

18.1

-11.3

27.4

21.2

26.9

EPS CAGR (%)

FY18-20

18.0

19.2

38.0

10.5

36.9

68.5

23.0

48.4

26.1

FY18

22.1

44.5

34.3

-56.5

30.7

24.0

6.7

74.5

11.6

23.8

PE (x)

FY19E

19.7

40.5

29.4

38.2

34.5

21.8

8.9

58.0

9.0

19.3

PE (x)

FY19E

12.6

39.8

28.1

104.5

14.3

22.2

19.3

41.1

43.3

37.3

FY20E

16.7

33.9

22.4

9.9

16.4

17.2

8.5

45.9

7.9

14.8

ROE (%)

FY18

24.1

18.6

18.5

-3.5

6.8

13.7

21.0

24.0

12.8

23.7

ROE (%)

FY18

23.3

29.2

11.6

-2.7

24.9

18.8

7.8

48.7

17.6

7.9

FY18

15.7

47.3

37.8

-23.4

14.7

30.0

37.5

50.7

60.8

40.4

FY20E

11.3

33.3

19.9

51.9

12.0

16.0

13.2

33.5

27.6

25.4

REVIEW | August 2018

Key highlights for 1QFY19

–

Profit miss; Consumption and Commodities strong; Corporate Banks drag

Refer our June-18 Quarter Preview



MOSL Universe aggregate PAT in-line (excl. Corporate Banks):

Aggregate sales of MOSL Universe grew 22.9% YoY, at



a 25 quarter high (est. of 22.2%), EBITDA rose 19.3% YoY (est. of +23.5%) and PAT increased 13.8% YoY (est. of

+25.2%). Performance was disproportionately impacted by Corporate Banks. Excluding Corporate Banks, MOSL

Universe sales/EBITDA/PAT grew 23.0%/21.1%/26.7% v/s estimate of 22.6%/24.1%/31.3%. Of the 19 sectors we

track, 2/8/9 posted profits that were above/in-line/below our estimates. Capital goods and Retail universe posted

profits ahead of expectations, while Autos, Banks, Life Insurance, Healthcare and Utilities missed expectations.

Nifty PAT up 10% YoY; Ex-Corporate Banks, Nifty profit up 24.6%:

Nifty sales/EBITDA/PAT grew 23.7%/17.0%/10.0%

v/s our estimate of 22.7%/22.7%/25.9%, dragged by Corporate Banks (SBI, ICICI, Axis). Excluding them, Nifty PAT

growth was 24.6% (est. of 29.3%). Strong inventory gains in OMCs also helped Nifty profitability. EBITDA/profit of

Nifty ex-OMCs and Corporate Banks grew 26.1%/16.3% v/s est. of 26.2%/23.9%.

Major earnings surprises:

Dr. Reddy, BPCL, Hindalco, IOC, NTPC, HPCL and Titan.

Major earnings disappointments:

Coal India, Tata Steel, Maruti Suzuki, SBI, Axis, ICICI Bank, Vedanta and Bajaj Auto.

Rating and estimate downgrades/upgrades:

Our FY19/20 Nifty EPS estimates have been cut by 5.6%/1% to

INR547/688 v/s INR580/694 earlier. Nearly 80% of the earnings cut is driven by ICICI, SBI and Tata Motors. We are

building in 19/26% EPS growth for Nifty for FY19/20. Excluding corporate banks, Nifty earnings growth is expected at

16%/17% for FY19/20.

MOSL Universe PAT growth missed estimates, dragged by PSBs and

Private Corporate Banks

MOSL Universe surprise/miss ratio for 1QFY19 stood at 0.7x

REVIEW | August 2018

Jun-18 Vs Jun-16:

Metals, Capital Goods lead the pack, while Autos and Healthcare disappoint



As Jun-18 profit growth numbers benefit from a low base of Jun-17, the more relevant metric to check is two-year CAGR for each sector.



MOSL Universe PAT CAGR for two years is flattish at 3.4%, whereas MOSL Universe ex Corporate Banks PAT CAGR is 8.3%.



Metals/Capital Goods led the pack with 91%/36% growth in PAT, while Automobile/Healthcare were a drag with 13%/16% PAT de-growth.

Sectoral actual v/s expected - MOSL universe (INR b)

Sector

(no of companies)

High growth sectors

Metals (10)

Oil & Gas (14)

Capital Goods (14)

Retail (2)

NBFC (12)

Healthcare (22)

Media (9)

Utilities (7)

Consumer (17)

Med/Low growth sectors

Technology (15)

Infrastructure (4)

Logistics (2)

PAT de-growth sectors

Automobiles (16)

Banks - Private (10)

Life Insurance (2)

Others (22)

Cement (10)

Telecom (4)

Banks - PSU (4)

MOSL Universe (196)

MOSL Univ Ex Corp Banks (190)

Sensex (30)

Nifty (50)

Nifty Ex Corporate Banks (47)

June

2018

8,660

1,520

4,733

548

148

422

694

469

1,081

1,013

3,339

1,612

311

104

347

302

336

327

13,080

12,641

5,942

9,881

9,551

Sales

Chg. % Chg. % Var. over

QoQ

YoY

Exp. (%)

-3

-25

-1

-3

-2

-4

-3

-7

-18

-4

-7

-13

-2

-41

-2

-12

-1

0.1

22.9

0.5

-0.2

23.0

0.3

-3.2

23.8

2.7

0.8

23.7

0.9

0.6

23.9

0.7

June

2018

1,465

326

504

112

242

115

244

230

875

190

265

205

2,584

2,277

1,573

1,973

1,752

EBITDA

2 Year

Chg. % Chg. % Var. over

CAGR (%)

QoQ

YoY

Exp. (%)

-3

-2

-6

-4

-41

-3

-7

-8

-5

-1

-2

-1

-5

-16

-2

-11

-6

-7

-22

-9

-2

-1

-5

-8

-6

-17

-10

-20

-2

-20

-14

-3.4

19.3

-3.4

10.9

-4.0

21.1

-2.5

12.5

-7.1

23.3

-3.9

10.5

-7.5

17.0

-4.7

10.5

-5.9

18.9

-2.8

12.7

June Chg. %

2018 QoQ

764

-6

124

-15

300

-41

-17

103

-12

-1

185

178

-9

149

-47

-4

-14

-51

Loss

1,099

9.9

1,144 -8.7

587

-9.2

830

-5.4

873

-9.7

PAT

Chg. % Var. over

YoY

Exp. (%)

-7

-6

-8

-3

-45

-44

-13

-35

-13

-20

-8

-14

-8

-23

-1

Loss

13.8

-9.1

26.7

-3.5

-2.2

-19.2

10.0

-12.6

24.6

-3.6

2 Year

CAGR

(%)

-16

-27

-13

-3

3.4

8.3

0.9

1.5

6.9

EBIDTA Margin

June 2018 Chg.

(%)

YoY bp

16.9

21.5

294

10.7

-143

10.0

165

11.8

241

75.7

19.0

187

33.5

330

34.9

224

24.5

170

22.6

22.7

28.3

13.5

-109

26.2

-175

11.8

85.2

6.1

-210

16.3

-295

19.0

-334

28.2

-281

62.6

-950

19.8

-59

18.0

-28

26.5

-10

20.0

-115

18.3

-77

REVIEW | August 2018

Key highlights: Top-line recovery continues; EBITDA margin expands

environment. However, higher provisions in PSU Banks and Private Corporate Banks led to a drag on PAT.



12/19 sectors reported EBITDA in line or better than expectations. Autos and Healthcare missed EBITDA estimates. 10/19 sectors reported

PAT in line or better than expectations. Autos, Private Banks, PSU Banks and Healthcare missed PAT estimates.



EBITDA margin for the MOSL Universe (ex Financials and OMCs) expanded 70bp YoY to 20.1% (est. of 20.4%).



1QFY19 performance was entirely driven by Cyclicals. PAT for Defensives, Domestic Cyclicals and Global Cyclicals expanded 10.9%, (12.1)%

and 46.6%, respectively.

MOSL Universe PAT growth missed estimates; dragged by Corporate Banks

MOSL Universe sales growth at 23% (YoY, %)



The key highlight of the 1QFY19 results season was the continued pick-up in revenue growth and margin expansion in an inflationary

MOSL Universe EBIDTA growth of 19% was in-line

EBITDA margin (ex-Financials & OMCs) expands 70bp to 20.1%

REVIEW | August 2018

Key Highlights: MOSL Universe ex Corporate Banks: Growth at multi-quarter high



Excluding PSU and Private Corporate Banks, MOSL Universe sales, EBITDA and PAT grew 23.0%, 21.1% and 26.7% v/s estimates of 22.6%,

24.1% and 31.3%, respectively.



Sales growth for this universe is at multi-year high aided by commodity inflation and good volume growth in some B2C sectors.



EBITDA and PAT growth for this universe is highest since June’14, partially aided by low base of June’17.



This was the fourth consecutive quarter of double-digit growth in sales, EBITDA and PAT for this universe.

MOSL (Ex PSU and Corporate Banks) sales growth at 23% (YoY)

MOSL (Ex PSU and Corporate Banks) PAT growth (%)

MOSL (Ex PSU and Corporate Banks) EBITDA growth at 21%

REVIEW | August 2018

Key highlights:

Domestic Cyclicals’ contribution to PAT impacted by losses at PSU Banks



Domestic Cyclicals disappointed for the third straight quarter with 12% YoY PAT decline (PSU Banks posted losses of INR 51b), after four

consecutive quarters of double-digit profit growth. EBITDA growth came in at 17.1%, while sales growth was at 20.3% (multi-quarter-high). In

1QFY19, the contribution of Domestic Cyclicals to MOSL Universe earnings stood at 28%.



Profit decline in Domestic Cyclicals is driven by PSU Banks, which posted a loss of INR51b v/s expectations of INR3b loss. In BFSI, though

slippages have moderated, corporate banks shored up the provisions, dragging the aggregates.



Autos, Private Banks and PSU Banks profits missed estimates by 35%, 20% and (loss of INR51b vs expectations of INR3b), respectively. Auto’s

performance was below estimates (with only Ashok Leyland and Escorts beating the estimates), whereas cement numbers were flattish but in-line.

Domestic Cyclicals sales growth stays strong at 20%

Domestic Cyclicals PAT marred by PSBs and Private Corporate Banks

Domestic Cyclicals’ PAT contribution to MOSL Universe at 28%

PSU Banks posted losses of INR51b v/s expectations of INR3b loss

REVIEW | August 2018

Key highlights: NBFCs shine once again, Private Banks miss led by ICICI, Axis



NBFCs

witnessed another steady quarter, with PAT growth at a multi-quarter high of 44% YoY. Performance was broad-based, with 11/12

companies in NBFCs posting either in-line/above-estimated PAT.



Cement

sector posted (1)% YoY PAT growth –in line with estimates. 6/10 companies missed our PAT expectations.



Auto Ex TTMT

posted 31.1% PAT growth, below our estimate of 40.9%. Amongst our coverage universe, only Ashok Leyland and Escorts

beat our estimates.



Private Banks

posted PAT de-growth of 13% YoY, below our estimate of +9.4%, dragged by corporate lenders. Excluding Axis and ICICI,

profits were up 20.4% YoY (in-line).

NBFCs PAT growth YoY (%)

Private Banks PAT growth YoY (%)

Capital Goods PAT growth YoY (%)

Cement PAT growth YoY (%)

Auto Ex TTMT PAT growth YoY (%)

Retail PAT growth YoY (%)

REVIEW | August 2018

Key highlights: Global Cyclicals’ PAT contribution at multi-quarter high

grew by 30% and 47% on a base of 10% and (15)% growth, respectively. PAT growth remains robust, led by OMCs and Metals.



Global Cyclicals’

contribution to MOSL Universe PAT stands at 40%, supported by Metals and Oil & Gas. O&G posted PAT growth of 50% (in-

line), led by a strong performance from OMCs.



Metals

posted another solid quarter, with PAT growth of 81% YoY (exceeding our estimate by 3%), despite a strong base of 1QFY18. Nalco,

JSPL, Hindalco, JSW and SAIL reported a strong beat.

Global cyclicals’ PAT contribution to MOSL

Global cyclicals sales growth remains strong (%)

Global cyclicals profit continue to surprise (%) Universe stands at 40%



Global Cyclicals

posted sales growth of 30% YoY – the seventh consecutive quarter of strong double-digit growth, whereas EBITDA and PAT

Metals – Strong profit growth on high base (%)

Oil & Gas – Profit growth in-line

REVIEW | August 2018

Key highlights:

Defensives post double-digit PAT growth after seven quarters



Defensives posted sales growth of 8.8%, EBITDA growth of 9.5% and PAT growth of 10.9%. Double digit PAT growth for Defensives pack is

first in seven quarters, aided by low b ase.



This is the second consecutive quarter of PAT growth after five consecutive quarters of PAT decline for Defensives, aided by Healthcare,

which posted PAT growth of 33%. Consumer reported 20% profit growth, the highest since Dec-12 quarter. IT posted an in-line quarter with

PAT growth of 14.6%.



Contribution of Defensives to MOSL PAT stands at 32%, in line with the previous quarters.

Defensive sales growth: Strongest since Jun-16

Defensive PAT: Double-digit PAT growth after seven quarters(%)

Defensives’ PAT contribution to MOSL Universe stands at 32%

Defensive EBIDTA growth at eight quarter high

REVIEW | August 2018

Key highlights: Consumer and Technology posted strong set of numbers



Technology

posted a strong quarter with 15% PAT growth, the highest since Jun-14. Mid-caps continue to outdo large-caps on growth front.



Healthcare

posted PAT growth of 33%, the highest since Mar-16, but the performance was below estimates. June’18 profits for our universe is lesser v/s

June’16 profits.



Consumer universe’s

PAT growth came in at 20% YoY, buoyed by a low base, strong rural demand and operating leverage. The performance, however,

was mixed, with eight among our universe of 18 stocks missing estimates.



Telecom

posted fourth consecutive quarter of loss, dragged by continued elevated competitive intensity, resulting in a sequential ARPU drop for another

quarter.

Technology posted 16-quarter-high profit growth(%)

Healthcare PAT grew 33%, highest since Mar-16

Telecom – fourth consecutive quarter of PAT loss

Consumer Universe posted 20% PAT growth, highest since Dec-12

REVIEW | August 2018

Share of Domestic Cyclicals bounces back

Domestic cyclicals’ contribution, which had come off due to PSU Banks’ significant profit miss in 4QFY18, returned to 30% range

Defensives

include Consumer, Healthcare, Technology, Telecom and Utilities

Global Cyclicals

include Metals, Oil & Gas and JLR

Domestic Cyclicals

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

REVIEW | August 2018

June 2018 Results Review:

Outlook getting better; Corporate banks drag the aggregates

Losses in Corporate Banks mar an otherwise decent quarter



Aggregate sales of MOSL Universe grew 22.9% YoY (our estimate: +22.2%), EBITDA was up 19.3% YoY (our estimate: +23.5%) and PAT was up



13.8% YoY (our estimate: +25.2%). Performance was dragged disproportionately by PSU Banks, which posted a loss of INR51b v/s expectations

of a loss of INR3b. Excluding Corporate Banks, MOSL Universe sales, EBITDA and PAT has grown 23.0%, 21.1% and 26.7% v/s expectations of

22.6%, 24.1%, 31.3%, respectively.

Similarly, the aggregate performance was disproportionately aided by a strong performance from OMCs. Excluding OMCs and Corporate

Banks, MOSL Universe posted EBITDA/PAT growth of 26.7%/20.5% v/s expectations of 27.3%/27.3%.

Out of the 19 sectors we track, 2/8/9 posted profits that were above/in-line/below expectations. Capital goods and Retail universe posted

profits ahead of expectations, while Autos, Private Banks, PSU Banks, Life Insurance, Healthcare and Utilities posted profits below

expectations.

EBITDA margin for the MOSL Universe (Ex Financials and OMCs) expanded 70bp YoY to 20.1% (est. of 20.4%). This was led by margin

expansion in NBFCs, Media, Retail and Utilities.

Out of 196 companies, 59 reported PAT beat (69 in 4QFY18), 84 missed estimates (78 in 4QFY18) and 53 reported in-line PAT.

Sector performance: Metals, Oil & Gas, Capital Goods, NBFC stand out; Corporate Banks disappoint



Sales growth was led by Oil & Gas (34%), NBFCs (30%), Metals (28%) and Media (28%), whereas Infra (-7%) and Telecom (-12%) dragged sales.



EBITDA growth was led by Metals (49%), Media (42%), Retail (41%), Capital Goods (38%) and NBFC (30%). Cement, Logistics, Infra and Telecom

reported EBITDA growth of 6%, (2)%, (5)% and (20)%, respectively.



PAT growth was led by Metals (81%), Oil & Gas (50%), Capital Goods (50%), Retail (48%) and NBFC (44%). PSBs and Telecom reported losses,

and Auto reported a 13% YoY PAT decline.

Nifty performance: 10% PAT growth; excluding Corporate Banks, PAT growth at 25% aided by a low base



Nifty aggregate sales grew 23.7% YoY (our estimate: +22.7%), EBITDA grew 17.0% (our estimate: +22.7%) and PAT grew 10.0% (our estimate:



+25.9%). Excluding these, Nifty PAT growth for the rest of the 47 companies came in at 24.6% v/s estimate of 29.3%, highest in 16 quarters.

OMCs’ strong performance boosted Nifty’s profitability. Nifty ex-OMC and Corporate banks posted EBITDA and profit growth of 26.1% and

16.3 % v/s expectations of 26.2% and 23.9%, respectively.

10 Nifty companies reported PAT above estimates, 19 below estimates and 21 in-line.

Highest PAT growth companies:

Dr.Reddy’s, BPCL, IOC, Sun Pharma and HPCL.

Top PAT de-growth companies:.Bharti

Airtel, SBI, ICICI, Tata Motors and Axis Bank.

REVIEW | August 2018

Nifty: 1QFY19 performance highlights



Nifty sales/EBITDA/PAT grew 23.7%/17.0%/10.0% v/s our estimate of 22.7%/22.7%/25.9%, dragged by Corporate Banks.

Excluding Corporate Banks, Nifty PAT growth came in at 24.6% v/s our estimate of +29.3%.

Nifty EBITDA margin (Ex-Financials, OMCs) contracted 80bp YoY to 15.8%.

62% of Nifty Universe posted in-line or higher-than-estimated PAT; 72% posted in-line or higher-than-estimated EBITDA.

Earnings downgrades overweigh upgrades (4:1). Five out of the 50 Nifty companies saw upgrades (> 3%) in FY19E EPS, while 23 companies

saw EPS downgrades.

Fourth consecutive quarter of robust growth in Nifty EBITDA

Nifty sales growth at multi-quarter high

Nifty PAT growth at 10.0%; dragged by Corporate Banks

Nifty EBIDTA margin ex Financials and OMCs shrank 80bps YoY (%)

REVIEW | August 2018

Nifty ex Corporate Banks: In-line performance; profit growth highest in 16 quarters



Excluding Corporate Banks, the 1QFY19 results season was in-line, delivering sales/EBITDA/PAT growth of 23.9%/18.9%/24.6% v/s our

estimate of 23.1%/22.3%/29.3%.



This was the fourth consecutive quarter of double-digit growth in sales, EBITDA and PAT, with sales growth coming in at a multi-quarter-high.



Profit growth for Nifty-ex Corporate banks was highest since June’14, aided by low base.

Nifty Universe Ex Corporate Banks sales growth at 24% (YoY)

Nifty Universe Ex Corporate Banks PAT growth came in robust at 25%

Nifty Universe Ex Corporate Banks EBIDTA growth at 19%

REVIEW | August 2018

Nifty FY19 and FY20 EPS cut on drag from Corporate banks

EPS downgrade de-construct



Our FY19/20 Nifty EPS estimates have been cut by 5.6%/1% to INR547/688 v/s INR580/694 earlier. We expect Nifty EPS to grow 19.3% in

FY19 and 25.7% in FY20. Nearly 90% of the earnings cut is driven by ICICI, SBI and Tata Motors.



Top Upgrades:

HPCL and BPCL have seen healthy upgrades of 18% and 10%, respectively.



Top downgrades:

SBI, ICICI, Tata Motors and Lupin have seen EPS downgrades of 56%, 40%, 25% and 19%, respectively.

Company

Current EPS (INR)

FY18

FY19E FY20E

EPS UPGRADE /

DOWNGRADE

(%)

FY19E FY20E

EPS GR. (%)

FY18

FY19E

FY20E

Company

Current EPS (INR)

FY18

FY19E

FY20E

EPS UPGRADE /

DOWNGRADE (%)

FY19E FY20E

EPS GR. (%)

FY18

FY19E

FY20E

HPCL

BPCL

Reliance Inds.

ONGC

HCL Technologies

NTPC

GAIL

Wipro

Hindalco

TCS

Hind. Unilever

Bajaj Finance

ITC

UPL

IndusInd Bank

Yes Bank

Coal India

Bajaj Finserv

Titan Company

Larsen & Toubro

Power Grid Corp.

Infosys

Eicher Motors

Adani Ports

47.4 50.6 51.8

49.8 48.6 48.9

60.9 76.6 94.9

20.2 28.3 31.5

62.6 72.0 81.5

13.2 15.3 16.3

20.4 26.6 32.5

17.9 18.8 21.5

18.9 24.4 27.8

66.0 81.9 93.5

24.5 29.2 35.6

43.4 62.7 82.9

8.9

10.0 11.4

44.2 46.7 50.6

60.2 81.8 108.2

18.4 23.8 30.7

19.2 26.2 30.6

172.3 222.4 277.7

12.6 16.2 20.5

51.7 56.8 72.1

16.5 18.6 20.6

64.8 72.7 85.8

799.6 966.3 1238.1

18.3 19.3 22.8

18.2

9.8

4.4

4.2

3.5

2.6

2.4

2.0

1.3

1.2

1.1

0.7

0.3

0.2

0.0

-0.1

-0.7

-1.1

-1.8

-2.0

-2.1

10.4

0.3

16.7

-2.4

4.2

0.0

3.2

2.1

1.9

1.6

1.1

-0.2

0.7

-9.0

0.0

0.2

4.4

0.0

-0.4

-4.0

-1.2

-12.4

3.0

20.7

-9.9

4.5

6.8

20.5

7.7

120.5

-1.0

24.7

35.9

5.5

5.9

25.2

26.3

28.3

21.2

39.9

22.4

16.1

3.1

27.0

-3.3

6.7

-2.3

25.7

40.1

15.2

16.0

30.6

5.2

29.4

24.1

19.5

44.5

13.2

5.7

36.0

29.0

36.6

29.1

28.4

9.9

12.5

12.3

20.9

5.8

2.4

0.5

23.9

11.3

13.1

6.4

21.9

14.2

13.6

14.1

21.8

32.2

13.8

8.3

32.2

29.2

16.7

24.8

26.5

27.0

10.7

18.0

28.1

17.8

Indiabulls Housing

90.2

Zee Entertainment

14.6

Tech Mahindra

42.7

Sun Pharma

13.5

Mah& Mah

41.0

Hero MotoCorp

185.1

HDFC

42.3

Bharti Infratel

13.6

Cipla

20.3

Axis Bank

1.1

Maruti Suzuki

266.7

Vedanta

20.4

Tata Steel

71.9

Dr Reddy’ s Labs

64.7

Asian Paints

21.1

IOC

23.9

Bajaj Auto

151.3

Ultratech Cement

85.7

Kotak Mahindra Bank 32.5

Grasim Industries

57.4

Lupin

46.8

Tata Motors

22.9

ICICI Bank

11.1

State Bank

-5.3

Bharti Airtel

4.1

Nifty (50)

459

106.4

16.1

43.3

18.4

48.3

193.4

46.5

13.5

23.2

20.1

311.2

21.6

85.1

99.3

23.3

17.9

153.9

103.3

37.2

101.4

29.2

30.1

9.9

7.9

-0.8

547

126.6

19.5

52.6

25.6

55.5

219.0

55.6

13.8

30.2

35.9

409.2

27.0

68.7

120.6

28.3

18.8

174.6

141.4

45.7

129.0

45.1

38.2

20.8

30.5

1.2

688

-2.2

-2.6

-3.1

-3.4

-4.2

-4.4

-4.5

-4.6

-6.8

-7.6

-7.8

-8.4

-8.5

-8.6

-9.1

-9.8

-10.0

-13.4

-14.5

-17.2

-19.4

-25.1

-39.9

-56.0

-160.3

-5.6

-3.7

-0.7

-0.8

2.2

0.4

-4.8

-4.1

-5.2

0.5

-2.5

-4.7

-6.1

1.8

-9.2

-6.9

-13.4

-11.8

-15.4

-17.1

-12.0

-6.0

-15.1

-10.4

-0.2

-77.1

-1.0

31.5

-7.0

33.6

-48.5

49.8

9.5

6.2

-8.1

31.2

-92.8

7.3

34.6

76.5

-10.9

1.9

11.0

7.3

-10.9

21.3

-15.4

-17.4

15.7

-34.3

-63.3

8.4

18.0

19.0

10.6

21.3

1.3

21.6

36.7

39.3

17.8

14.8

4.5

13.2

10.1

19.4

-1.2

2.4

14.3

29.8

1704.6 79.2

16.7

31.5

6.2

24.9

18.4

-19.3

53.6

21.4

10.1

21.6

-24.9

4.7

1.7

13.5

20.5

36.9

14.2

22.9

76.8

27.2

-37.6

54.5

31.3

26.9

-10.8 110.5

286.2

-120.1 -247.1

19.3

25.7

REVIEW | August 2018

Sectoral quarterly PAT trend (INR b)

MOSL Universe quarterly PAT trend (INR b)

Sector

Jun

Auto

Capital Goods

Cement

Consumer

Financials

Private Banks

PSU Banks

NBFC

Healthcare

Infrastructure

Logistics

Media

Metals

Oil & Gas

Oil & Gas Ex OMCs

Retail

Technology

Telecom

Utilities

Others

MOSL Universe

184

160

122

132

931

174

131

126

137

871

FY15

Sep

Dec

178

144

797

Mar

200

100

242

129

141

993

Jun

102

191

233

136

141

997

195

119

120

152

879

FY16

Sep

Dec

123

106

-23

-13

185

132

153

819

Mar

123

-72

204

149

158

909

Jun

149

271

140

153

1,003

151

200

148

158

933

FY17

Sep

Dec

169

226

146

164

954

Mar

109

126

102

-27

236

163

157

1,047

Jun

182

102

198

155

153

938

FY18

Sep

110

185

245

167

163

1,061

Dec

148

104

-18

113

303

183

165

-2

1,107

Mar

116

-100

-241

146

283

187

171

-3

118

978

FY19

Jun

110

-51

124

298

189

174

-14

103

1,076

Note:

Comparable Universe, excludes Alkem Labs, Interglobe Aviation, CG Consumer Electricals, Equitas Holding, IDFC Bank, RBL Bank, L&T Infotech, SH Kelkar, Endurance

Tech, Gujarat Gas, Music Broadcast, Avenue Supermarts, Quess Corp, Teamlease Service, HDFC St. Life, Mahanagar Gas, PC Jeweller, Mas Financials and Laurus Labs.

REVIEW | August 2018

Sectoral quarterly PAT trend YoY (%)

Sectoral quarterly PAT growth trend (%)

Sector

Jun

Auto

Capital Goods

Cement

Consumer

Financials

Private Banks

PSU Banks

NBFC

Health Care

Infrastructure

Logistics

Media

Metals

Oil & Gas

Oil & Gas Ex OMCs

Retail

Technology

Telecom

Utilities

Others

MOSL Universe

-6

-3

154

-5

-10

-7

-23

-10

105

-15

FY15

Sep

Dec

-7

-11

-59

-47

-44

-14

-7

Mar

-23

-15

-12

-5

-12

-6

-51

-23

-4

-54

-11

Jun

-28

-21

-7

-8

-45

-13

-10

-19

-38

-9

-5

-37

-5

-6

FY16

Sep

Dec

-70

-31

218

-9

Mar

-72

-16

-14

-28

-16

-13

-2

-5

191

-8

Jun

-20

-22

-78

-17

-29

-2

-22

-3

-84

-8

-24

-32

-6

-17

FY17

Sep

Dec

-36

274

-9

-11

-4

-1

-68

-8

Mar

-12

-5

124

Loss

-13

-28

-24

235

-9

-1

-59

-11

Jun

-14

107

-46

102

-27

-90

-3

-6

-8

211

-21

106

FY18

Sep

Dec

-12

-21

-25

-4

108

Mar

-2

-30

Loss

-9

-22

-7

FY19

Jun

-14

-1

-40

-14

Note:

Comparable Universe, excludes Alkem Lab, Avenue Supermarts, CG Consumer Elect, Endurance Tech, Equitas Holdings, Gujarat Gas, HDFC Stand. Life, ICICI Pru Life,

Interglobe Aviation, Laurus Labs, Mahanagar Gas, Music Broadcast, Quess Corp, RBL Bank, S H Kelkar and Team Lease.

REVIEW | August 2018

1QFY19: Operating margin expands 70bp YoY

Jun-18 EBITDA margin (ex OMCs and Financials) at 20.1% (v/s

estimate of 20.4%)

Jun-18 PAT margin (ex OMCs and Financials) contracted 30bp to 9.2% (v/s

estimate of 9.9%)

REVIEW | August 2018

No. of companies reporting >30% YoY PAT growth highest since Mar-10



41% of the companies reported >30% PAT growth, highest since Mar’10. Low base of 1QFY18 aided the performance to an extent.



19% of the companies reported >15% and <30% growth. 21% of the companies in the MOSL Universe reported a YoY decline in earnings.

Distribution of PAT growth

REVIEW | August 2018

FY18-20 estimates: Expect 28% profit CAGR for MOSL Universe

Sector

(No of Companies)

High PAT CAGR (>20%)

Financials (38)

PSU Banks (7)

Private Banks (12)

Life Insurance (2)

NBFC (17)

Cement (14)

Logistics (2)

Media (10)

Retail (2)

Healthcare (22)

Auto (16)

Capital Goods (17)

Medium PAT CAGR (15-20%)

Others (23)

Consumer (19)

Utilities (7)

Metals (10)

Low PAT CAGR (up to 15%)

Oil & Gas (14)

Excl. OMCs (11)

Technology (15)

Infrastructure (4)

Telecom (4)

MOSL (217)

MOSL Excl. OMCs (214)

Sensex (30)

Nifty (50)

Sales Gr. /

CAGR (%)

(FY18-20)

EBIDTA

Margin

(%)

FY19E

27.6

69.7

74.9

85.0

4.5

82.2

17.9

14.2

32.5

11.8

20.9

14.0

11.5

24.7

18.4

24.6

35.5

21.4

13.8

11.1

14.1

23.4

30.5

29.4

20.4

22.7

25.8

21.5

EBIDTA CAGR

(%)

(FY18-20)

16.1

17.0

16.0

15.8

EBITDA margin

change (bp)

FY18-20

168

-52

-74

105

-37

-230

168

323

117

289

122

107

286

-3

130

621

268

-136

-127

-29

-522

-11

24.5

97.5

132.7

35.2

FY18

-19

-47

-1

-3

-18

-99

-1

PAT Gr. / CAGR (%)

FY19E

174

FY20E

291

Loss

(FY18-20)

111

PAT delta

Share (%)

FY18-20

-1

100

REVIEW | August 2018

Nifty FY18-20 free float PAT CAGR at 23%; sales CAGR at 16%

Sales (INR b)

Company

High PAT Growth (20%+)

State Bank

Axis Bank

Grasim Industries

IndusInd Bank

ICICI Bank

Bajaj Finance

Sun Pharma

Dr Reddy’ s Labs

Ultratech Cement

Yes Bank

Tata Motors

Titan Company

Bajaj Finserv

Coal India

GAIL

ONGC

Reliance Inds.

Eicher Motors

Maruti Suzuki

Cipla

HDFC Bank

Hindalco

Hind. Unilever

FY18

17,719

749

186

562

230

261

142

298

2,946

161

859

537

3,622

3,917

798

152

401

1,152

345

FY19E

22,184

836

208

710

110

256

100

309

157

364

101

3,216

194

942

641

4,733

5,849

106

929

173

478

1,282

393

FY20E

24,804

962

244

871

150

296

133

358

179

468

128

3,600

235

111

1,003

748

5,016

6,382

125

1,090

197

571

1,492

447

Sales

CAGR %

18-20

EBIDTA Margin (%)

FY18

107

100

FY19

102

FY20

103

EBITDA

CAGR %

18-20

FY18

1,512

-46

119

259

361

175

PAT (INR b)

FY19E

2,124

102

163

363

453

210

FY20E

2,875

272

133

130

190

404

562

124

258

FY18

-93

-15

-31

-49

-11

-10

121

PAT YoY (%)

FY19

1,783

-6

FY20

286

111

PAT

CAGR %

18-20

484

Contbn to

Delta %

REVIEW | August 2018

Nifty FY18-20 free float PAT CAGR at 23%; sales CAGR at 16%

Sales (INR b)

Company

Medium PAT Growth (10-20%)

Indiabulls Housing

Kotak Mahindra Bank

Larsen & Toubro

TCS

Mahindra & Mahindra

HDFC

Zee Entertainment

Asian Paints

Vedanta

ITC

HCL Technologies

Adani Ports

Power Grid Corp.

Tech Mahindra

NTPC

Low PAT Growth (<10%)

Hero MotoCorp

UPL

Bajaj Auto

Wipro

Infosys

HPCL

Bharti Infratel

Tata Steel

BPCL

Lupin

IOC

Bharti Airtel

Nifty (PAT free float)

FY18

7,284

1,197

1,231

921

113

168

919

406

506

113

299

308

886

13,221

322

174

252

545

705

2,195

145

1,316

2,358

158

4,215

837

38,224

FY19E

8,104

110

1,346

1,446

1,044

123

184

923

450

588

111

342

350

945

16,059

362

194

281

576

797

2,809

146

1,411

2,989

169

5,524

801

46,348

FY20E

9,016

135

1,462

1,634

1,159

145

221

984

510

661

126

385

399

1,027

17,323

398

359

317

631

898

2,982

152

941

3,184

196

6,401

866

51,142

Sales

CAGR %

18-20

-15

EBIDTA Margin (%)

FY18

113

FY19

FY20

EBITDA

CAGR %

18-20

-3

-1

-6

FY18

1,128

258

108

109

891

161

226

1,795

PAT (INR b)

FY19E

1,284

309

122

126

828

159

102

170

-3

2,151

FY20E

1,487

101

351

101

139

111

108

134

884

180

178

2,704

FY18

-2

-7

-3

-12

-8

108

-17

-63

PAT YoY (%)

FY19

-7

-3

-1

-2

-38

-25

FY20

-19

PAT

CAGR %

18-20

-1

-2

-11

-46

Contbn to

Delta %

-3

-1

100

REVIEW | August 2018

Rating upgrades/downgrades



In our universe, we upgraded our ratings for two stocks and downgraded ratings for six stocks.

Company

UPGRADE IN RATING

ACC

Navneet Education

Company

DOWNGRADE IN RATING

Kotak Mahindra Bank

Bajaj Finance

Dabur

Page Industries

Quess Corp

D B Corp

Mkt Cap

(USDb)

4.2

0.4

Mkt Cap

(USDb)

35.2

23.3

11.4

5.3

2.1

0.6

RECO

Pre-1QFY19

Post-1QFY19

Neutral

Buy

EPS (INR)

FY18

FY19E FY20E

46.9

5.4

72.5

7.9

92.4

8.9

% revision since preview

FY18

FY19E

FY20E

-1.1

0.0

19.4

4.1

15.7

5.2

EPS Growth YoY (%)

FY18

FY19E FY20E

27.7

-26.1

54.7

45.7

27.4

12.8

RECO

Pre-1QFY19

Post-1QFY19

Buy

Neutral

EPS (INR)

FY18

FY19E FY20E

32.5

43.4

7.8

311.1

21.8

17.6

37.2

62.7

8.5

412.2

23.0

18.4

45.7

82.9

10.1

529.4

35.0

23.1

% revision since preview

FY18

FY19E

FY20E

0.0

-6.6

0.0

-14.5

0.7

-5.4

-2.6

-20.3

-10.4

-17.1

-0.2

-2.7

-6.2

-13.1

-7.3

EPS Growth YoY (%)

FY18

FY19E FY20E

21.3

35.9

7.2

30.3

115.7

-13.8

14.2

44.5

9.7

32.5

5.3

4.3

22.9

32.2

18.9

28.5

52.1

25.7

REVIEW | August 2018

Sector Miss/Hits: NBFC Shines/Auto disappoints

REVIEW | August 2018

NBFC: Business momentum intact; Ind-AS transition smooth



Ind-AS implementation has been smooth for NBFC as against market fear of a rise in provisions due to the implementation of

the ECL methodology and the resultant impairment on networth. As expected (Link

to our report),

we have seen stable-to-

higher networth across NBFCs, barring LTFH and BAF, due to lower provisioning requirement and reversal of DTL (for HFCs) .

Lower aggregate provisioning requirement under Ind-AS led to significant networth accretion for SHTF.

Business growth remains strong across the board (except REPCO). DEWH surprised positively with 37% AUM growth.

Gross stage 2&3 reporting did not throw any negative surprises. BAF and SHTF surprised positively on this front. Repco’s ECL of

66bp v/s GNPL ratio of 4% implies that LGDs are small.

Due to the change in methodology of reporting income and expenses, QoQ comparisons are not relevant. In aggregate,

operating profit grew by 30% and PAT by 44% YoY.

Our top picks are

HDFC, LTFH, PIEL and SHTF.



AUM growth for Top 5 players

FY18

34.3

37.1

33.4

32.9

22.5

18.1

17.8

1QFY19

39.6

35.3

PAT growth for Top 5 players

FY18

1QFY19

81.3

22.3

53.7

32.4

12.0

30.3

31.9

34.9

24.7

24.5

35.9

HDFC

IHFL

DHFL

STF

BAF

HDFC

IHFL

DHFL

STF

BAF

Note: HDFC PAT growth strong due to timing difference in dividend received from HDFCB

REVIEW | August 2018

Autos: Op. performance in-line; lower other income and higher tax hurt PAT



Auto sector performance in 1QFY19 was largely impacted by an exceptionally weak performance in JLR for Tata Motors, resulting



in a miss at the EBITDA level (by ~9%) and the PAT level (by ~35%).

Excluding JLR, the operating performance at the aggregate sector level was in-line (beat of 1.1% at EBITDA level). However, lower

other income (due to MTM impact of higher G-Sec yield on treasury) and higher tax (due to lower other income and waning of

tax incentives like R&D benefit and area based tax holidays) resulted in adj. PAT surprising negatively (by ~13.4%).

RM cost inflation was marginally higher than estimated, but it was fully offset by the benefit of operating leverage. As a result, the

EBITDA margin for OEMs was at ~14%, implying an expansion of ~220bp YoY (+80bp QoQ).

Weak operating performance for select companies was largely due to either a weaker mix (AMRJ, BJAUT, TTMT), RM cost inflation

(AMRJ, HMCL, TVSL), or weak market/high competitive intensity (BJAUT, TTMT).

The impact of RM cost inflation and a weaker INR would continue to reflect in 2HCY19. Most of the OEMs have been trying to

pass-through the impact of higher cost inflation by taking price increases, though with a lag.

2W segment disappointed on operating performance, CVs

surprised positively, whereas PV performance was in line

EBITDA Margins (%)

15.7

1QFY19 (Act)

15.2

15.4

9.6

1QFY19 (Est)

Auto sector performance was dragged by JLR, lower other and higher

tax; Auto (ex TTMT) operating performance was in-line

INR m

Auto Aggregate

Revenues

EBITDA

EBITDA Margins (%)

PAT

Auto Aggregate (ex TTMT)

Revenues

EBITDA

EBITDA Margins (%)

PAT

940,942

135,963

14.4

80,927

952,048

139,717

14.7

86,955

-1.2

-2.7

-30bp

-6.9

1,611,755

190,269

11.8

61,903

1,642,913

208,962

12.7

95,482

-1.9

-8.9

-90bp

-35.2

Actual

Estimate

Var (%)

14.5

7.7

Cars

CVs

REVIEW | August 2018

Sector: Key surprises and guidance

REVIEW | August 2018

Sector-wise positive/negative surprises and guidance highlights

AUTO

Positive/negative surprises



Ashok Leyland:

Above-estimate; price hikes and a better mix drive gross margin of 30.45 (v/s est. of 28.2%).



Escorts:

Above-estimate; healthy growth across segments – Tractors grew by 25%, CE by 50% and Railway by 35%.



MSIL:

In-line op. performance; EBITDA margin at 14.9% v/s est. of 15.2%; other income drags PAT growth to 27% YoY (at INR19.7b v/s est. of

INR23b).



MM:

In-line. Auto PBIT margin shrank ~130bp QoQ (+240bp YoY) to 9.4%. Tractor EBIT margin improved ~140bp QoQ (+360bp YoY) to 20.9%.



Eicher Motors:

Op. performance in-line; strong margins in RE at 32.35 (est. of 31.7%) and VECV at 9.2% (est. of 8%).



Hero MotoCorp:

EBITDA margins below estimate at 15.6% (est. of 16%) led by adverse mix; higher RM cost dent performance.



Bajaj Auto:

EBITDA margin at 17.3% (est. of 19.5%), impacted by adverse product mix, RM inflation, lower spare sales and high employee cost.



Tata Motors:

Below-estimate. JLR records all-time low margins of 6.2% (est. of 10.4%). S/A - solid performance in CV; PV near EBITDA break-even.



TVS Motors:

Margins disappoint once again. RM inflation and Ind-AS accounting change impact realizations and margins.



Exide:

Operating performance better than expected; EBITDA margins in-line at 14.1% and PAT in-line at INR2.1b.



Motherson Sumi:

Below est. Weak SMP margins drag consol. EBITDA margin. Sharp improvement in PKC margins was a positive, though.



Amara Raja:

Below-estimate. Revenues growth healthy. Product mix and RM inflation lead to decade-low EBITDA margin of 12.4% (est. of 14.6%).

Guidance highlights



Ashok Leyland:

M&HCV industry likely to grow 8-10% in FY19. ~50-60% of volumes will not get impacted by an increase in axle norms.



Escorts:

Domestic tractor industry to grow at 12-15% (v/s 9-11% earlier) in FY19, and ESC to outperform led by new product launches.



MSIL:

Expects 8-9% growth for industry in FY19, with MSIL continuing to grow faster. Retails in rural markets grew 15% in 1QFY19.



MM:

Expects tractor industry to grow 12-14% in FY19 (v/s 8-10% growth earlier). Expect new axle load norms to impact near-term CV demand.



Eicher Motors:

Supply is now aligning with demand, with waiting period of <1 month. Higher-priced variants form ~50% of bookings.



Hero MotoCorp:

Indicates double-digit growth for 2W industry in FY19, driven by continued momentum in rural markets. Not perturbed and not



participating in price competition in the economy segment.

Bajaj Auto:

Targets total sales of 4.8m units in FY19 (+20%); targets 45-50% market share (v/s 35% currently) in M1 segment led by CT100.

Tata Motor:

Expects higher sales growth and improved profitability in balance of FY19 due to receding impact of one-offs.

TVS Motors:

Expects industry to grow at 10-12% in FY19, with TVSL expected to grow faster. Not to react to price discount in entry-level 2W.

Motherson Sumi:

No impact of WLTP from Sep-18 – no customer yet has indicated a decline in production volumes.

BOSCH:

BOS is acquiring market share with OEMs in 2Ws. 2Ws will play a prominent role in BOS’ future growth opportunity.

Bharat Forge:

Outlook for both US Class 8 trucks and India CV positive. Expects strong ramp-up in defense and aerospace from 2QFY19.

Endurance:

Witnessing huge growth in rear disc brake, with revenue potential from this segment expected to be larger than ABS.

CEAT:

Expect further RM cost inflation in 2QFY19 by 2-3% QoQ, which would be mitigated by price increase of ~1% in 2Q.

REVIEW | August 2018

Sector-wise positive/negative surprises and guidance highlights

CAPITAL GOODS / INFRASTRUCTURE

Positive/negative surprises



Bharat Electronics:

Beat on all fronts. Revenue above estimate by 13%, EBIDTA above estimate by 88% and PAT above estimate by 79%.

Better-than-estimated execution of better-margin orders led to above-estimated performance for the company.

BHEL:

Revenue in line with estimates, EBIDTA ahead of estimates by 69% and PAT ahead of estimate by 48%. EBIDTA and PAT beat was on

account of execution of supercritical equipment orders, where BHEL has improved indigenization level and has reduced sourcing cost leading

to margin improvement.

Blue Star:

In-line revenue, beat at EBIDTA/PAT level by 49/32% on account of 230bp improvement of margin in EMP segment led by higher

volumes and execution of better-margin orders.

Crompton Consumer:

Beat at EBIDTA and PAT level by 11 and 14%, respectively. Beat mainly supported by a better revenue mix and cost-

rationalization measures taken by the company over the last two years.

GE T&D:

Beat on revenue by 10%, on EBIDTA by 37% and on PAT by 86%. Beat driven by closure of multiple projects and better-margin

projects getting executed during the quarter.

Thermax:

Miss on all fronts. Revenue below estimate by 7%. EBIDTA miss of 33% and PAT miss of 23%. Below-estimated performance was on

account of a weak performance on the overseas subsidiaries front, mainly Danstocker and Thermax Europe Limited.

Infrastructure



KNR:

Strong beat on all parameters. Revenue growth of 16% (v/s estimate of 1.1%), driven by speedy execution of projects in hand. EBIDTA

beat was 49% and PAT beat was 78%. Profitability beat was on account of execution of better-margin irrigation projects and closure of

multiple road projects which led to better-than-expected margins.

Sadbhav Engineering:

Miss on all fronts. Revenue miss of 17% and PAT miss of 15%. Revenue miss on account of weaker-than-estimated

execution of projects in hand. PAT miss was on account of negative operating leverage.

Guidance highlights



L&T maintains guidance on all fronts.

10-12% growth in order inflow and 12-14% revenue growth for FY19. Expects 25bp margin expansion

(excluding Services and IDPL).



KKC maintains its overall guidance for FY19.

8-10% domestic business growth and 0-5% export growth in FY19.



KNR maintains its

revenue guidance of INR20b (4% growth) for FY19, with operating margin of 14-15%.

REVIEW | August 2018

Sector-wise positive/negative surprises and guidance highlights

CEMENT

Positive/Negative surprises



Dalmia Cement:

Below estimate; blended EBITDA/t stood at INR 1162 marginally lower than est of INR 1,184 due to higher than estimated

cost



Ultratech:

Below estimates; while volumes grew 33% YoY with JPA operating at 70% utilization, EBITDA/t remained stable QoQ at INR928

lower than est. of INR950 due to lower-than-estimated realizations



India Cement:

Below estimates; EBITDA/t stood at INR 508 lower than est. of INR 558 due to lower than estimated realizations



Shree Cement:

Below estimate; with volume growth of 19%YoY and realizations in line with est, EBITDA/t stood at INR 763 lower than est of

INR 934 due to a forex loss of INR700m as also cost push



Ramco Cements:

Below estimate; realization miss along with higher than estimated cost on account of higher power and fuel and freight

cost/t resulted in EBITDA/t of INR 899 lower than est of INR 1,045



ACC:

Above estimates; Cement realizations stood at INR4,872/t higher than estimate of INR 4,731/t due to a higher proportion of premium

sales (+44% YoY) resulting in EBITDA/t of INR 922, higher than est of INR 698.



Birla Corporation:

Below estimates; consol EBITDA/t stood at INR 701 lower than estimate of INR 744 due to lower than estimated

realizations as also cost push



Ambuja Cements:

Above estimates; while volumes were in line; realization beat (better pricing in East and higher sales of premium products)

and cost savings led to EBITDA/t of INR971 higher than our estimate of INR776.

Guidance highlights



Demand to be favorable in the coming years due to housing, infra and irrigation projects.



With no capacity additions coming up for the next 18-24 months in the North, utilization should improve, leading to better prices, and thus,



better realizations. With the sand mining ban lifted in many states like UP, Bihar and Tamil Nadu, significant traction is expected from the

central and southern regions.

Recent increase in petcoke prices likely to affect power & fuel cost. Additionally, an increase in diesel prices would further raise freight cost.

With 2QFY19 being a weak quarter due to monsoon, profitability would continue to suffer for the companies due to negative operating

leverage.

REVIEW | August 2018

Sector-wise positive/negative surprises and guidance highlights

CONSUMER

Positive /Negative surprises



HUVR:

Broad based double-digit comparable growth led by volumes; operating margins continue to expand (+180bp YoY in 1QFY19).



ITC:

Cig volumes (~1% growth YoY) marginally exceed estimate, margins surprise positively; FMCG – Others post EBIT of INR501m.



APNT:

Operating performance in-line, with double digit domestic deco. volume growth.



BRIT:

Performance below estimates but delivers double-digit volume growth. Operating margin expands 80bp YoY to 15.3% in 1QFY19.



PAGE:

Overall volumes grew 9% YoY; operating margins expand 360bp YoY but fair valuations limit upside. Downgrade to

Neutral.



EMAMI:

Miss on all accounts. Domestic volumes grew just 18% YoY (on low base of 18% decline). EBITDA margin expanded 490bp YoY.



PIDI:

Underlying volume & mix grew 20%, in-line with estimates. Op. margins (-20bp YoY) dragged by gross margin contraction (-120bp YoY).



UBL:

Volumes grew healthy 23% ahead of the industry. Surprises with all-time high EBITDA margin of 21.5%.



FCL:

Miss on all fronts; loss in PAT level continues.



CLGT:

Volumes disappoint again at 4% growth; toothpaste market share saw continued contraction at 190bp YoY and 100bp QoQ.



DABUR:

Volume growth at an all time high (21%) on a low base; high ad-spends restrict margins; downgrade to

Neutral

on fair valuations.



MRCO:

Performance largely in-line; EBITDA margin contracts 180bp YoY as gross margin shrinks 550bp YoY led by a 40% rise in copra cost.



UNSP:

Disappointing quarter despite soft base. Prestige & Above volumes grew 13.1% YoY. Reported EBITDA margin expanded 180bp YoY.



GCPL:

In-line quarter with decent growth across categories; operating margin up 210bp YoY, led by gross margin expansion (+230bp YoY).



NEST:

Operating performance above estimate led by strong gross margins (+460bp YoY) due to benign commodity costs.



JYL:

Moderate performance given a low base; gross margins contract sharply while operating margin expanded 240bp led by cost savings.



GSKC:

Operating performance above expectations (EBITDA margin expanded 390bp); PAT saw beat on account of a 75% rise in other

income.

REVIEW | August 2018

Sector-wise positive/negative surprises and guidance highlights

CONSUMER

Guidance highlights



HUVR:

Management seeing gradual improvement in demand.



APNT:

Some disruptions are expected in the trade channels due to GST rate reduction.



BRIT:

Demand environment is seeing an uptrend.



PAGE:

Proportion of outsourcing is likely to be at 30-35% by FY19 and 40% by FY20.



EMAMI:

There are no plans to take any further price hikes. Capex is likely to be in the range of INR0.8-1b.



PIDI:

Focus will be on achieving volume growth of 14-15% in the Consumer Bazaar segment for the full year.



Dabur:

Double-digit volume growth is likely in domestic business for full year. Gross margin is unlikely to expand for the rest of the year.



MRCO:

Management is targeting volume growth of 8-10% for the full year.



GCPL:

Management expects rural business to continue growing faster than urban.



JYL:

There has been an improvement in the demand scenario compared to the previous two years, led by rural.



GSKC:

Confident of mid-to-high-single-digit category volume growth over the medium term.

REVIEW | August 2018

Sector-wise positive/negative surprises and guidance highlights

Financials - Banks

Positive/Negative surprises



ICICIBC:

ICICIBC reported a sharp improvement in coverage ratio which led to a miss on net earnings. The bank remains committed to

achieve 70% PCR and bulk of the improvement is likely to be front-ended.



AXSB:

Net earnings stood largely inline aided by controlled slippages and sustained growth in retail fees. However rating downgrades

resulted in an increase in the vulnerable asset pool to 122.4b (+34% QoQ)



KMB:

Net earnings missed estimates on account of elevated provisions as KMB guided for increasing stress in the business banking/SME

segment.



IIB:

Earnings stood inline led by controlled opex despite slight margin pressure. C/I ratio thus moderated 80bp QoQ and is expected to

moderate further.



RBL:

NIM’s expanded 6bp QoQ (one of the very few banks to report NIM expansion) which coupled with strong fee growth enabled inline

earnings. RBL further provided on its MFI portfolio taking the PCR up by 284bp QoQ to 60.4% even as the credit cost in rest of the portfolio

has moderated.



YES:

Reported earnings stood inline led by strong revenue growth even as margins declined 10bp QoQ. However the bank amortized MTM

losses as allowed by the RBI adjusted for which the net earnings stood below our estimates.



SBI:

SBI reported loss of ~INR49b as it recognized the entire MTM losses during the quarter. Fresh slippages though moderated with 91% of

corporate slippages coming from the watchlist and outlook on asset quality is improving. SBI holds 71% provision on NCLT exposure and is

expecting write backs here.



BOB:

Net earnings stood largely inline though NCLT related recoveries aided margin expansion. SMA-2 advances declined 25bp QoQ to 0.94%

of the loans and asset quality outlook is getting better

REVIEW | August 2018

Sector-wise positive/negative surprises and guidance highlights

Financials - Banks

Guidance highlights



ICICIBC :

Aims to reach 70% PCR by FY20 and much of the improvement in the PCR will happen in FY19. Bank guided for 15% ROE by June’20.

AXSB:

Rating downgrade cycle has normalized and credit cost should revert to mean levels from 2HFY19 levels.

KMB:

Management sounded cautious on the SME/business banking segments and cited risks from the inflated collateral value. Corporate

loan growth of 20-25% should be sustainable. Bank is planning to add 100 branches in FY19.

IIB:

NIMs will stabilize going forward as the re-pricing of the loan book happens over the next six months. Opex growth will be controlled

due to various digital initiatives taken in the past.

RBL:

RBL guided for further provisions toward the balance one-third stressed MFI loans over 2Q/3Q; bank guided for 1.5% ROA for FY20E and

40-45bp of tier 1 capital consumption per quarter.

Yes:

Management guided for ~20/25bp improvement in margins till 1HFY20, ~30% - 40% CASA growth; CI ratio to be in the range of 39% to

40%.

SBI:

Management guided for 12% loan CAGR until FY20E, 2% guidance for slippages and credit cost; planning to sell stake in three of the

subsidiaries in the coming quarters; ROA target by FY20: 0.9% to 1%

BoB:

Rundown in the international book is likely to continue; BOB is planning to raise INR60b over and above the government infusion.

REVIEW | August 2018

Sector-wise positive/negative surprises and guidance highlights

Financials - NBFC

Positive/Negative Surprises



BAF:

BAF reported PAT of INR8.36b under Ind-AS accounting (INR10.2b (+69% YoY) under IGAAP v/s our estimate of INR8.7b). The quarter

was marked by continued new client addition (+33% YoY), improving spreads YoY and stable asset quality. Due to migration to Ind-AS

reporting, FY17 networth declined ~6%, mostly due to amortization of up-fronted income (net basis INR7.97b, pre-tax) and hit due to

adoption of ECL (INR2.7b pre-tax).



CIFC:

1QFY19 PAT grew 36% YoY to INR2.9b (under Ind-AS). Disbursements increased 45% YoY to INR70b, driven by 48% YoY growth in

vehicle finance (VF) and 27% YoY growth in home equity (HE). However, margin in VF compressed 130bp YoY to 6.9%, driven by a 90bp

decline in yields.



MMFS:

MMFS reported PAT of INR2.7b (+34% YoY) under Ind-AS. Continuing the trend of the prior quarter, value of assets financed grew

35% YoY to INR103b. For the first time since 2012, disbursement growth has been above 30% for two consecutive quarters. Consequently,

reported AUM grew 7% QoQ/23% YoY to INR587b. Gross stage 3/net stage 3 loans declined YoY from 14.5%/9.3% to 9.4%/6.3%.



LTFH:

1QFY19 PAT grew 71% YoY to INR5.4b (our estimate under IGAAP was INR4.1b), driven by strong AUM growth (+27% YoY) and flat

credit costs during the quarter. The focused loan book grew 27% YoY to INR854b. In the Infra portfolio, LTFH took the entire Expected Credit

Loss on its legacy stressed portfolio (INR18b) and adjusted against FY17 reserves.

Guidance Highlights



SHTF:

AUM growth to be 18%+ YoY, going forward. Margins to be stable. Credit costs to decline 50-70bp in FY19.



MMFS:

Targeting 7% GNPL ratio by end-FY19. AUM growth to remain 17-18% if monsoons are good. Credit costs could decline below 2% in

FY19.



CIFC:

Expects 18-20% YoY growth in overall loan book over the medium term. PAT growth should be in line with AUM growth.



LTFH:

Credit costs in housing finance should decline to 1% in the near term. Growth in rural lending to slow down from 2Q due to higher

base.



BAF:

Expect AUM growth of 25%+ over the medium term. Expects ~40% C/I ratio in FY19.

REVIEW | August 2018

Sector-wise positive/negative surprises and guidance highlights

HEALTHCARE

Positive/negative surprises

AJP:

Performance exceeded expectation due to strong domestic formulation sales and Asia branded generic sales.

BIOS:

Earnings better than estimates. Healthy sales growth and lower R&D spend drive earnings.

CIPLA:

Operationally in line; one-offs in other income boost profitability.

DRRD:

Above expectations. Better product mix and improved leverage led earnings for the quarter.

GLXO:

Better-than-estimates. Low base and improved margins drive earnings growth.

GRAN:

Earnings better than estimates. Revenue growth, and higher income from JVs and other sources drive profitability.

JLS:

Results in-line. Improved operating efficiency in the pharmaceuticals business led to 36% YoY growth in earnings.

SANL:

Results better than estimates. Increase in volumes and new launches led to strong revenue growth. Stable operating cost improved

margins by ~480bp YoY.



SUNP:

Higher-than-expected US revenues led to healthy growth. Margins remained stable sequentially.



SLPA:

Revenues in-line. Operationally better than expected due to significant expansion in gross margin. However, higher depreciation cost on

increased capacity utilization of formulations facility led to slower growth in earnings.



TRP:

Beat on EBITDA margin drove better-than-expected earnings.





ALKEM:

Earnings miss due to deferred domestic formulation sales.

ALPM:

Earnings below estimates. Change in product mix and increased operating expenses led to lower-than-expected profitability.

ARBP:

Lower gross margin leads to earnings miss.

CDH:

Lower-than-expected US sales impacted revenues; margins too came in below expectation due to higher raw material prices (negative).

DIVI:

In-line operational performance. Higher depreciation and lower other income led to lower-than-expected earnings.

GNP:

In-line operating margin; PAT decline capped by higher other income.

IPCA:

In-line operational performance. Higher other income and lower tax rate led to better-than-expected earnings.

LAURUS:

Earnings below estimates. Though sales were in line, increased raw material process impacts profitability.

LPC:

Miss in revenues, supply constrains increase raw material prices impacting margins.

STR:

Revenue in line. Australia and US drove growth, offset by Africa and Institutional business. Better operating efficiency was offset by high

depreciation, lower other income and loss in JV/associates.

REVIEW | August 2018

Sector-wise positive/negative surprises and guidance highlights

HEALTHCARE

Guidance highlights



SUNP maintains

guidance of low double-digit growth in FY19 revenue. There could be increased operating expenses associated with the

launch of specialty products and higher R&D spends.

LPC

has guided for single-digit growth in revenue; it lowered EBITDA margin guidance by 1% to 18-20% for FY19. Company is on track

regarding its warning letter resolution. It has sent last update to the US FDA in July, post which it will have a discussion with the US FDA and

invite for inspection.

CIPLA

guided for 15 product launches in the US in FY19. It expects R&D expense to increase with the start of Advair clinical trials, but it should

not exceed ~8% of sales. Gross margin to improve with new launches in the US and reduced share of B2B products.

BIOS:

On Biologics sales of ~36m in 1QFY19, BIOS maintained its guidance of USD200m in FY19. Trastuzumab and Pegfilgrastim filings for the

EU market are on track and would be presented to Committee for Medicinal Products for Human Use (CHMP) in CY18.

STR

on track to bring 50% of the partnered business in the US to own front-end by FY19. Due diligence in progress for the merger of Arrow

and Australia

business of Apotex. The transaction is under review by Australia Competition and Consumer Commission (ACCC).

GNP

guided for ~15 ANDA filings over the next two years from Monroe facility. Breakeven of investment in Monroe facility would be by FY21.

GNP guided for ~15% CAGR in Latin America over 2-3 years.

CDH:

Though US sales were lower for the quarter, CDH is confident of exceeding FY18 US sales of USD~900m in the current year, led by

product launches and increased traction in existing products.

DRRD:

DRRD is expected to submit a response on g-Copaxone in a few weeks, and expects to launch in 2HCY19. DRRD has requested USFDA

for inspection at Duvvada. Data investigation and analysis at Srikakulam site are expected to be completed by Sep’18.

ARBP:

Although 1QFY19 US injectable sales were subdued, ARBP remains confident to grow by 30% YoY on USD163m sales in FY18. ARBP

remains confident to grow its US business in FY19.

TRP

is on track to reduce the attrition rate of field force acquired from Unichem and improve brand sales and productivity. After two

launches in the US in 1QFY19, TRP is confident of launching 15 ANDAs in FY19.



REVIEW | August 2018

Sector-wise positive/negative surprises and guidance highlights

HEALTHCARE

Guidance highlights



ALKEM:

Domestic business to grow at mid-teens in medium term. ALKEM guided for 8-9 launches in the US market.

ALPM:

ALPM has guided for 15 product launches in FY19 in the US market (launched one in 1QFY19). Oncology facility is complete and onco

injectable and general injectable facility will be complete by 2HFY19.

DIVI:

Lower remediation related cost to continue to drive profitability. Revenues from Unit 1 to improve in coming quarters.

JLS:

JLS guided for better traction in specialty pharma on higher radio pharma business. New launches, favorable pricing and expanded

capacity to drive Life Science Ingredient segment performance.

SLPA:

ANDA approvals to drive strong growth in earnings.

AJP:

maintained the guidance of subdued FY19 performance compared to that in FY18.

GRAN:

GRAN expects share of income from JV to be ~INR400m in FY19; Guided for revenue of INR1b in FY19 and INR2.5b in FY20 from the

US market

SANL:

Expects healthy growth in existing brands. New launches to drive growth in CY19.

GLXO:

Product diversification and increased in-house manufacturing to drive revenue as well as profitability.

IPCA:

Low base to benefit domestic formulation business. With lower remediation cost, EBITDA margin should expand 200bp in FY19.

LAURUS:

Backward integration initiatives to aid better margins from 3QFY19.

REVIEW | August 2018

Sector-wise positive/negative surprises and guidance highlights

MEDIA

Positive/negative surprises



Zee Entertainment:

In-line. Strong 22% growth in domestic ad revenue growth drove 50bp uptick in EBITDA margin to 31.9% (est. 31.8%).



SUN TV:

Above-expectations. Robust IPL revenue growth of 1.7x led to overall revenue/EBITDA beat. Ad revenue grew at a healthy 20% (in-

line), but subscription revenue growth of 15% marginally missed estimates.



Jagran Prakashan:

In-line. Ad/circulation revenue was flat; drop in circulation copies and use of old (low-priced) inventory restricted EBITDA

margin contraction to 15bp at 27.1%.



D B Corp:

Below expectations. Despite healthy ad/circulation growth, a steep (28%) rise in newsprint cost pulled down EBITDA margin to

26.6% (estimate: 29.8%).



Music Broadcast:

In-line. Higher contribution from new (phase-III) stations led to 290bp expansion in EBITDA margin to 34.4%.



ENIL:

Above expectations. Low base and higher contribution from new (phase-III) stations led to 16% EBITDA beat.

Guidance highlights



Zee Entertainment:

FY19 ad growth to be higher than industry growth (12%); subscription growth likely to be in low teens. Maintains 30%+

margin guidance. Malayalam channel to be launched by Sept-18.



SUN TV:

Expects to launch 2

GEC channels in TN/AP market; new channel in Bengal market before end-FY19. TN market still has ~8m analog

subscribers who are yet to be digitized.



Jagran Prakashan:

Expects 8% print ad revenue growth for FY19; 4-5% circulation revenue growth; 12-13% rise in newsprint cost.

D B Corp:

Circulation revenue for FY19 to grow in double-digit. FY19 newsprint cost to be ~20% higher.

Music Broadcast:

Management expects 12-15% revenue growth in FY19.

ENIL:

Expects to grow ahead of radio industry (10-12%). Remaining 16 of 21 batch-2 - phase III stations to be launched by mid-3QFY19.

REVIEW | August 2018

Sector-wise positive/negative surprises and guidance highlights

METALS

Positive/negative surprises



Tata Steel:

Margins in Europe expanded sharply. Losses at raw material and other subsidiaries on forex movement.



JSW Steel:

Strong performance on healthy increase in steel product spreads and minimum impact of iron ore imports.



Hindalco:

Expansion in EBITDA per ton QoQ was 64% more than increase in LME. Novelis benefited from tailwind of recycling spreads.



Vedanta:

Aluminum continues to suffer from cost inflation, stoppage of copper smelter and iron ore mines in Goa. CoP at Zinc-int remains

very high.



Nalco:

Historically best operating performance was driven by high alumina prices.



NMDC:

Dispatches suffered as its largest customer i.e. JSW Steel resorted to imports unhappy over domestic pricing in Karnataka.



Hind Zinc:

Cost of production remains elevated.

Guidance highlights



Tata Steel:

Expect margin compression in 2Q on some correction in steel prices and stable cost of production.



JSW Steel:

Volume growth would be muted in FY19. All five captive iron ore mines are likely to be commissioned in FY19. Steel realization

would be lower in 2Q on seasonal factors.



Hindalco:

India aluminum cost of production will increase by 3-4% in 2Q on input cost inflation. Copper production will remain low again in

2Q due to spillover of maintenance shutdown. Novelis to deliver 2% volume growth and incur USD450m capex in FY19.



SAIL:

Volume guidance of ~17mt for FY19, skewed in second half. Expect INR40b capex.



Vedanta:

Zinc India – mine production to be slightly higher in FY19, with the targeted 1.2mt rate likely in FY20. Silver production to be 650-

700t and CoP to be USD950-975/t in FY19 (v/s USD976 in FY18). Zinc International – Gamsberg producton start delayed to Oct 2018.

Production volume guidance of ~100kt in FY19 and 250kt in FY20.



Nalco:

Outlook strong on higher alumina prices. Captive coal mine to start sometime in FY19/20.



JSPL:

Steel production of 6mt in FY19.

REVIEW | August 2018

Sector-wise positive/negative surprises and guidance highlights

OIL & GAS

Positive/negative surprises



Marketing segment shines for OMCs:

Shoving aside the worries of the investors in a high crude oil environment, all the OMCs reported an

improvement in their marketing margins inclusive of inventory gains. Core refining margins were, however a disappointment for all refining

companies. However, strong inventory gains resulted in profit ahead of estimates. Companies have guided that marketing margins are likely

to stay strong going forward.

Petrochem shines for all:

Led primarily by highest product deltas for PET in the last decade, RIL reported petrochemical EBITDA much ahead

of estimates. Petrochemical EBITDA/mt has improved sequentially for IOCL as well. GAIL also showed improvement in its petrochemical

segment.

Gas stocks, all the way up:

All gas stocks reported good operating performance as well as good EBITDA/PAT. IGL topped its peers with

impressive 13% volume growth and stable EBITDA/scm, while GUJGA reported a sharp increase in its EBITDA/scm. GAIL improved its trading

volume sharply due to commencement of new overseas long-term contracts from the US and Gazprom. Gujarat State Petronet also reported

increase in transmission volumes in the quarter. As the focus on pollution increases and government comes up with more initiatives for

usage of gas, we expect to see the gas stocks doing well.

Muted upstream performance:

ONGC witnessed a 3.5% YoY decline in its oil production and a 3% YoY increase in gas production. It expects

~10% increase in gas production going forward, while oil production is expected to remain flat. Oil India reported flat YoY oil production and

a decline of 4% YoY in its gas production.



Key actionable



Expect high utilization for Petronet to continue. Low LNG prices would also help. Near-term triggers on completion of Kochi-Mangalore

pipeline, Dahej expansion would help the stock further.

IGL would clock 12% CAGR in volume for FY18-20 and EBITDA/scm at INR5.9 for FY19/20. Volume growth is expected to continue. Remains

one of our top picks.

Post the Karnataka elections, OMCs have been gradually increasing retail prices. We believe that attractive valuations offer opportunity to

add OMCs. Positive on all OMCs, with preference for Indian Oil.

REVIEW | August 2018

Sector-wise positive/negative surprises and guidance highlights

RETAIL

Positive/negative surprises



Titan:

Jewellery business saw further market share gains (segment sales grew 6.3% YoY); Watches EBIT margin expanded sharply (+900bp).



Jubilant Foodworks:

Strong SSSG delivered at 25.9%; gross margin contracted 180bp YoY, while EBITDA margin expanded 490bp YoY.

Guidance highlights



Titan:

1QFY19 sales miss versus expectations of 14-15% means that full-year growth may be ~22-23% for the jewellery business, as the



company maintained its earlier target for the remaining nine months.

JUBI:

Store addition likely to accelerate from 2QFY19. JUBI aims to add 75 stores in FY19.

TELECOM

Positive/negative surprises



Bharti Airtel:

In-line. India wireless business impact subsides as ARPU decline gets offset by Telenor biz. contribution. ARPU fell 9% to INR105 (est. of

INR112).



Bharti Infratel:

In-line. Rental EBITDA margin expanded 115bp QoQ. However, 730bp contraction in energy EBITDA margin (due to seasonality) dragged

consol. margins to 41.1% (-210bp).



Tata Communications:

In-line. Data EBITDA margin at 16.8% (v/s est. of 17.2%), impacted by subdued transformation and payment business.



Idea Cellular:

Below expectations. Adjusted for one-offs in 4QFY18, EBITDA fell 35%, impacted by double whammy of ARPU decline and higher opex.

Guidance highlights



Bharti Airtel:

FY19 capex guidance maintained at INR270b. Targets to have ~2m incremental FTTH home-passes in FY19.



Idea Cellular:

Vodafone-Idea merged operations to be effective from Aug-18. ~INR3.5-4b annualised EBITDA from tower business will not form part of

FY19 consol. EBITDA.



Bharti Infratel:

Expects Bharti Infratel-Indus merger to get concluded by Mar-19.



Tata Communications:

Expect ~35% YoY increase in Growth segment revenue for FY19. Capex guidance for FY19 maintained at USD250-275m. Expect

land de-merger to get completed in CY18.

REVIEW | August 2018

Sector-wise positive/negative surprises and guidance highlights

TECHNOLOGY

Positive/Negative Surprises



INFO:

After having cut its margin guidance by 100bp to 22-24% last quarter, there was no upward revision despite favourable currency

movement QoQ (~4.5% depreciation). Flattish FS (QoQ CC) was a disappointment.



WPRO:

WPRO’s performance remained lop-sided, continues to be led by BFSI (+14% YoY CC), while four out of the remaining six verticals

declined YoY.



TCS:

TCS’ 3.7% QoQ CC growth in BFSI was a positive, demonstrating long-awaited revival within the segment. It announced deals worth

TCV of USD4.9b, of which USD1.6b came from BFSI.



MTCL:

MTCL’s revenue growth of 8.2% QoQ was positive surprise to our already high estimate of 5.1% : Dollar revenue growth in 2Q is

expected to marginally lag growth of 1Q (+6.8% QoQ) – even 5% QoQ growth in 2Q would translate into 23% YoY growth.

Guidance highlights



TCS

cited that it remains on track for double-digit growth. This was substantiated by its strong deal wins, recovery in BFSI and inching up of

YoY growth every quarter..



CTSH

guided for 8.4-10% growth in CY18. It retained its guidance this quarter, even though growth was at the lower end of the guided band.



INFO

FY19 guidance of 6-8% was unchanged, and also the margin guidance for the full year (EBIT margin of 22-24%).



For

WPRO,

although the guidance of 0-2% QoQ CC for 2QFY19 failed to enthuse, it implies a stemming of the downward trend on a YoY

basis (2.6-4.7% YoY CC for 2Q v/s 2.6% YoY CC achieved in 1Q).



For FY19,

HCLT

guided for CC revenue growth of 9.5-11.5%. At the midpoint of 10.5%, 5.25% would be the contribution of inorganic growth.

This remained unchanged despite the best ever quarter of deal wins and two out of last three quarters have been significant on that front.

REVIEW | August 2018

Sector-wise positive/negative surprises and guidance highlights

UTILITIES

Positive/negative surprises



Power Grid:

It was a dull quarter from the perspective of capitalization, while capex remains strong.



NTPC:

Underlying performance was impacted by fixed charge under-recovery, which has started shrinking.



NHPC:

Lower availability of water impacted generation. Wage bill benefitted from 656 retirements.



TATA Power:

Spike in interest cost despite peaking of debt; Indonesia’s regulation to cap coal prices at 25% of production will impact hedge

equation for Mundra under recoveries. Regulated equity declined 10% in Mumbai as unit-6 was taken out of service on expiry of PPA.



CESC:

Standalone performance impacted by absence of tariff hike; Spencer returns to growth.



JSW Energy:

Lower hydro generation drives operating weakness; But saving in interest cost drives PAT growth.

Guidance highlights



Power Grid:

Maintains full-year capitalization guidance of INR280b-300b for FY19 (including TBCB).



NTPC:

Targets commercialization of ~5GW in FY19 and expect fixed cost under-recoveries to disappear by year-end.



NHPC:

Recently commissioned 330MW Kishanganga hydro project will add INR17b to regulated equity, but it will have PAT breakeven

initially pending approval of revised project.



Tata Power:

Focusing on renewable and distribution space for growth.



CESC:

Expect approval from regulator for demerger of Kolkata distribution and generation business by September 2018.



JSW Energy:

Expect lower water flow due to hydrology; plans to commission 200MW solar plants ; capex in EV will be lower than past

guidance of INR10b.

REVIEW | August 2018

Sector highlights

REVIEW | August 2018

AUTO: RM inflation dents margins, healthy growth outlook across OEMs in FY19

Summary



Trend in key operating indicators

Volumes ('000 units)

1QFY19 YoY (%)

BJAUT

HMCL

TVS Motor

MSIL

TTMT (S/A)

TTMT (JLR) *

TTMT (Cons)

Ashok Leyland

Eicher (RE)

Eicher (VECV)

Eicher (Consol.)

Agg. (ex JLR)

1227

2105

928

490

241

176

132

225

5451

38.1

13.3

15.7

24.3

19.2

60.8

-5.0

47.9

22.5

40.9

21.7

EBITDA margins (%)

YoY

(bp)

-60

120

160

260

920

-170

-40

320

220

Adj PAT (INR M)

QoQ

(%)

3.3

-6.0

-11.5

-4.2

10.5

-115.4

-165

-43.0

42.6

-33.8

-11.2

22.6

QoQ

1QFY19

(%)

17.3

5.4

15.6

4.4

7.4

6.2

14.9

1.9

15.8

-13.7

9.3

-28.0

6.2

8.1

-28.3

10.4

-0.7

32.3

-29.3

9.2

32.3

6.0

14.0

QoQ

1QFY19 YoY (%)

(bp)

-210 11,152 17.8

-40

9,092

-0.5

1,466 13.2

19,753 26.9

12,406 65.0

250 11,877

-730

-264

-380 -25,842 NM

-140 3,805 217.2

5,912 19.6

-30

1,180 76.1

5,761 22.4

72,641 61.2



Strong growth in rural markets, low base drive volumes:

In 1QFY19, the

auto industry witnessed robust demand across segments, led by (a)

strong growth in rural markets driving PV and 2W demand, (b) healthy

infrastructure activity supporting CV demand and (c) a relatively low base

(GST impact). In FY19, demand momentum is expected to remain intact,

as most OEMs are indicating 8-10% demand growth across segments,

while tractor industry is expected to grow at 12-14%.

Fourth consecutive quarter of EBITDA margin expansion (ex JLR):

1QFY19, the EBITDA margin expanded 220bp YoY to 14% for our Auto

Universe (ex JLR), as the impact of higher RM costs was offset by price

hikes and operating leverage. Margins in 1QFY18 were impacted by GST-

related compensation to dealers. All auto OEMs (ex JLR, HMCL and

BJAUT) witnessed margin expansion, particularly TTMT S/A (+9.2pp), AL

(+3.2pp) and MM (+2.6pp). JLR margin shrank 1.7pp YoY (-7.3% QoQ). On

a QoQ basis, EBITDA margin expanded 80bp (ex JLR), primarily led by

operating leverage.

RM cost inflation partially mitigated by price hikes:

RM cost (as % of

sales) rose 50bp YoY (+70bp QoQ) to 69.5% for our Auto Universe.

However, the impact was partially mitigated by price hikes. Sales mix

impact remained mixed for companies under our coverage. While most

OEMs indicated partial pass-through of higher RM costs, further price

hikes are likely to follow in 2QFY19 to cover incremental costs.

EPS downgrade for BJAUT, MSS, TTMT and TVSL:

We lower FY19/20

earnings estimates for BJAUT (10%/11%), MSS (13% each), TTMT

(25%/15%) and TVSL (12% each). We cut FY19/20E earnings for MSIL by

8%/5% and for CEAT by 6%/5%.

Top picks:

We prefer PVs over 2Ws and CVs due to stronger volume

growth and a stable competitive environment. Our top picks are MSIL,

EIM and MSS among large caps. Among midcaps, we prefer AL, ENDU

and EXID.

EBITDA margin (ex JLR) expands YoY for the fourth consecutive quarter

Aggregate (excld JLR)

Aggregate (incl JLR)

REVIEW | August 2018

CAPITAL GOODS: Performance beat on all fronts

Summary



1QFY19 performance snapshot

Sales

INR Million

ABB

Bharat Electronics

BHEL

Blue Star

CG Consumer Elect.

CG Power & Indl.

Cummins India

Engineers India

GE T&D India

Havells India

Larsen & Toubro

Siemens

Thermax

Voltas

Capital Goods

June-18

27,127

21,021

59,355

15,078

12,039

11,798

13,280

5,733

11,624

25,963

282,835

30,730

10,353

21,481

548,417

YoY

Chg (%)

21.5

22.1

6.3

-0.2

14.1

-6.4

-1.0

52.7

-3.9

39.5

18.8

15.9

18.7

10.5

15.6

EBIDTA

June-18

1,959

3,105

2,872

1,367

1,673

909

2,147

864

1,442

3,208

29,133

3,023

693

2,432

54,825

YoY

Chg (%)

32.6

87.5

41.6

23.6

29.3

39.2

9.9

5.5

36.7

84.0

40.4

33.4

-3.9

16.7

38.4

June-18

1,022

1,797

1,556

764

1,043

354

1,830

866

820

2,189

15,828

2,044

490

1,839

32,441

PAT

YoY

Chg (%)

35.2

43.4

92.5

0.3

30.0

91.0

10.2

6.3

33.0

78.4

77.3

25.5

20.6

0.2

49.6



Healthy revenue growth for industry:

Revenue growth stood at 16% YoY for

the industry, exceeding our estimate by 5%. Most players performed well

on the execution front – projects were getting timely executed. Barring the

weak performance from players in the room AC segment (given unseasonal

rains), other sectoral players did not face any delays on the execution front.

Operating leverage drives profitability:

Operating profit growth for the

quarter stood at 38%, supported by better operating leverage, cost-

rationalization measures, and a better revenue mix. This is commendable at

a time when the industry is witnessing intense competition, raw material

prices are increasing significantly and price hikes are difficult to come by.

Net profit growth for the quarter stood at 50% YoY. Operating profit and net

profit growth for the industry was influenced by LT’s results, where adjusted

profitability was ahead of our estimate on account of multiple one-offs.

Order inflow improves; cautiously optimistic commentary given green

shoots in a few industrial segments:

Order inflows improved with strong

ordering by LT and BHEL. Order inflow for LT was up 37% YoY to INR367.

Order inflow for BHEL stood at INR44b (+143% YoY). Management

commentary in terms of ordering outlook has been cautiously optimistic,

given the green shoots in terms of capex revival being witnessed in industrial

segments like steel, cement and oil & gas.

Infrastructure:

Excluding KNR, the performance for the sector at the

operating level was below our expectation. Sectoral revenue (Ex KNR)

declined 10.0% YoY, impacted by weak execution of projects in hand and as

multiple project awarding has happened on a HAM basis which is yet to

enter the execution cycle. Profitability has remained stable for EPC players,

with the moderation in competitive intensity helping players to bag projects

at better margins. Operating profit for the sector declined 5.2% YoY, as

against revenue decline of 6.6%. Net profit grew 8% YoY.

Top Picks:

We maintain our positive stance on LT in the capital goods sector,

given (i) an improvement in domestic execution, (ii) ordering from ME is likely

to revive with crude prices firming up, (iii) working capital cycle improvement

and (iv) a leaner balance sheet due to non-core asset divestment.

In the infrastructure space, we like KNR given the improvement in revenue

visibility, the healthy balance sheet and the robust execution track record.

Book-to-bill ratio stands at 2.3x

Order book (INR b)

BTB (x)

REVIEW | August 2018

CEMENT: Better realizations drive profitability

Summary



Profitability improvement led by better realizations:

MOSL Cement

Universe reported volume growth of 13.2% YoY (incl. Ultratech's JPA

assets). EBITDA increased 20% YoY (+25% QoQ), led by better

realizations. PAT increased 5% YoY.

Healthy volume growth:

MOSL Cement Universe reported healthy

volume growth of 13% YoY. Growth was led by a 31% YoY increase in

volumes by Ultratech due to JPA capacity expansion. Players like Dalmia

and Ramco registered growth of 14% YoY and 20% YoY, respectively, led

by growth in east and south.

EBITDA/t up 5% YoY:

Cement companies reported aggregate sales of

INR286b (+20% YoY; +16% QoQ), led by higher volumes and 7% YoY/2%

QoQ increase in realizations. The increase in realization was due to firm

prices in central and east, offset by weaker prices in north and south.

Cost/t increased 7% YoY to INR3,781, driven by higher power & fuel and

freight cost/t. However cost/t remained flat QoQ, as an increase in fuel

prices was mitigated by better operating leverage. Hence, EBITDA/tonne

stood at INR840 (+5% YoY, +9% QoQ).

Top picks:

Shree Cement:

Best placed for a recovery in cement prices in

north India, as utilization improvement will be the highest in north.

Dalmia Cement:

Strong EBITDA growth led by margin improvement and

volume growth in east operations.

Birla Corporation:

Strong performance by acquired subsidiary likely to

drive earnings outperformance.

Ultratech Cement:

UTCEM is likely to witness strong growth in EBITDA,

led by ramp-up of acquired capacities. With a 20% market share, UTCEM

will be the key beneficiary of the likely upturn in the Indian cement cycle

over FY18-20.

Volume growth of 13% YoY for MOSL Cement Universe

Aggregate Vol (m ton)

10.7

1.8

1.5

(1.3)

(5.5)(3.0)(5.0)

Volume growth (%)

19.4

5.8 5.8

(5.5)

8.1

3.9 6.4

9.6

3.1 5.3

8.8 7.4

12.3

20.4

13.2

38 42 37 34 36 42 41 36 38 40 42 39 41 48 46 40 43 52 50 45 52 59

Profitability increased led by healthy realizations

Aggregate EBITDA (Rs/ton)

REVIEW | August 2018

CONSUMER: Visible resurgence in consumer demand

Summary



Sales below expectations for coverage universe (excl. PGHH):

Our

Consumer universe (excl. PGHH) reported 12.3% YoY revenue growth

(v/s est. of +17.1% YoY), 20.7% YoY EBITDA growth (v/s est. of +22.1%

YoY) and 20.1% YoY adjusted PAT growth (v/s est. of +23.5%). Only Dabur

and ITC surprised positively on the volume growth front. 12 out of 17

companies in our Universe posted EBITDA in-line/above our estimates.

Coverage companies’ aggregate EBITDA margin expanded 170bp YoY (v/s

est. of +100bp YoY).



Revival in demand scenario:

Most of our coverage companies called out

a revival in consumer demand as well as normalization of the trade

channels, resulting in a much more positive outlook going forward.



Downgraded Page and Dabur:

We downgrade Page and Dabur to

Neutral from Buy as valuations are now fair.



Top picks: BRIT, HUL, Emami and UBL



BRIT

- Given (a) continuing investment in R&D and own

manufacturing facilities and (b) leveraging of its enviable and

consistently improving distribution, BRIT remains one of our top

picks in the sector.



HUL

- HUL will be a key beneficiary of the confluence of positive factors

likely to drive rural volumes and the strong premiumization trend.



Emami

- We believe that HMN remains a credible long-term play due

to (a) likely healthy growth in existing product categories, where it

has a dominant market share, (b) best-of-breed R&D and A&P spend

resulting innovative products as well as ability to back up innovation

with strong marketing, and (c) much-needed efforts on improving its

direct distribution reach.



UBL -

Long-term volume and earnings growth opportunity (FY18 PAT

at USD58m) is immense for India’s largest beer player with strong

barriers to entry in the form of distribution, brewery reach, scale and

brands. Operating environment appears to be improving at a healthy

pace, market share gains continue, and profitability is on an uptrend,

indicating continuing strong pace of earnings growth, going forward.

1QFY19 performance snapshot

INR Million

Asian Paints

Britannia

Colgate

Dabur

Emami

Future Consumer

Godrej Consumer

GSK Consumer

Hind. Unilever

ITC

Jyothy Labs

Marico

Nestle

Page Industries

Pidilite Inds.

United Breweries

United Spirits

Consumer

Sales

June-18 YoY Chg (%)

43,903

15.1

25,438

12.4

10,413

6.5

20,807

16.2

6,144

16.2

8,406

26.9

24,760

13.7

11,071

12.3

94,870

11.2

107,070

7.6

4,053

17.8

20,268

20.5

26,984

12.3

8,153

17.1

18,341

20.0

18,659

11.2

20,119

12.9

469,458

12.3

EBIDTA

PAT

June-18 YoY Chg (%) June-18 YoY Chg (%)

8,744

31.4

5,713

30.4

3,894

18.5

2,581

19.5

2,815

26.7

1,669

22.4

3,861

25.0

3,292

18.1

1,235

54.1

879

45.3

201

133.4

-61

Loss

4,491

28.4

3,177

36.5

2,303

38.0

1,772

34.0

22,510

20.6

15,670

21.3

42,021

12.2

28,187

10.1

610

39.8

324

57.1

3,549

9.2

2,601

10.2

6,648

44.9

4,147

59.3

1,893

38.6

1,244

45.9

3,817

18.9

2,404

6.4

4,004

25.8

2,219

37.1

2,283

34.0

1,054

45.6

114,878

20.7

76,873

20.1

2Q18

9.0

5.0

(0.9)

7.2

10.0

15.0

2.5

4.0

(6.0)

8.0

12.0

3.0

12.0

15.0

3Q18

6.0

11.0

12.0

13.0

6.0

15.0

11.0

(2.0)

9.4

15.0

8.0

0.0

23.0

4Q18

10.0

11.0

4.0

7.7

8.0

15.0

8.0

11.0

(2.0)

1.0

(5.0)

11.0

(1.0)

13.0

1Q19

10.0

11.0

4.0

21.0

18.0

10.0

12.0

1.0

12.4

9.0

15.0

10.0

20.2

Quarterly volume growth trend

Quarterly volume growth (%)

1Q17 2Q17 3Q17 4Q17 1Q18

Asian Paints (Domestic decorative)* 11.0 12.0

2.0 10.0

4.0

Britannia (Base business)

8.0 10.0

2.0

Colgate (Toothpaste)

5.0

4.0

(12.0) (3.0) (5.0)

Dabur (Domestic FMCG)

4.1

4.5

(5.0)

2.4

(4.4)

Emami (Domestic)

18.0 11.0

0.2

(1.5) (18.0)

Godrej Consumer (Soaps)*

LDD (MSD)

(8.0)

5.0

(9.0)

GSK Consumer (MFD)

(6.0) (3.0) (17.0) (1.0)

0.0

Hindustan Unilever (Domestic)

4.0

(1.0) (4.0)

4.0

0.0

ITC (cigarette)*

3.0

4.0

(1.0)

0.0

1.0

Marico

Domestic

8.0

3.0

(4.0)

10.0

(9.0)

Parachute

7.0

(6.0) (1.0)

15.0

(9.0)

VAHO

9.0 11.0

(12.0)

10.0

(8.0)

Saffola

11.0

8.0

6.0

(9.0)

Pidilite (Consumer bazaar)

9.0

7.8

(1.5)

7.0

0.0

*Our estimate

REVIEW | August 2018

FINANCIALS-Banks:

NPL cycle nearing completion; earnings to gain pace from FY20

Summary

Systemic loan growth of 12% was one of the highest in three years, mainly

driven by retail loans, as capex recovery appears to be a few quarters away.

Net slippages moderated in 1QFY19, mainly driven by recoveries from the

resolution of NCLT-related accounts, while the operating performance was

mainly hit by tepid treasury income, and gratuity provisions. Margins were

largely stable for private banks and expanded marginally for PSU banks, as

recoveries were accounted through the interest income. CASA ratios have

moderated for several private banks owing to sequentially weak SA deposit

growth, while the credit-deposit ratio remains elevated.



1QFY19

PSBs

SBIN

PNB

CBK

BOB

BOI

UNBK

INBK

PBs

AXSB

HDFCB

ICICIBC

IIB

KMB

YES

NII Growth (%)

YoY

QoQ

PPP Growth (%)

YoY

QoQ

(21)

(25)

(2)

(23)

PAT Growth (%)

YoY

QoQ

160

(44)

(46)

(106)

(117)

(102)

(105)

(132)

(4)

(112)

(9)



Private Banks – mixed asset quality:

Asset quality trends were mixed,

with AXSB and ICICIBC disclosing marginally higher quantum of stressed

assets (fund + non-fund), while KMB, HDFCB , YES and IIB maintaining

largely stable asset quality – mixed trends in Agri/SME.

Public Sector Banks – stress addition to moderate in 2HFY19:

Overall

NSL remains at elevated levels. We expect majority of the slippages to

come from the disclosed watch list/vulnerable pool. We expect PSU

Banks’ credit costs to remain elevated in FY19, while private corporate

banks are likely to report normalization from 2HFY19. Recoveries from

the NCLT-related cases and resolution of stressed power assets will be a

big positive for PSU banks.

View:

In the near term, retail lenders with granular loan book are better

placed than corporate lenders due to the moderate economic growth

environment. However, the outlook for corporate banks is improving,

given moderation in slippages from standard corporate portfolio and a

sharp decline in SMA-2 assets for the system. Within corporate lenders,

we prefer

ICICIBC

and

SBIN

as we expect strong buoyancy in earnings

from FY20.

Top picks: PBs – YES, RBK and ICICIBC. PSBs – SBIN.

1QFY19

SBIN

PNB

CBK

BOB

BOI

UNBK

INBK

AXSB

HDFCB

ICICIBC

IIB

KMB

YES

NIM (%)

1QFY19

2.8

2.9

2.5

2.7

2.5

2.3

3.1

3.5

3.1

4.2

3.2

3.9

4.3

3.3

4QFY18

2.5

1.7

2.4

2.5

1.7

1.9

2.8

3.3

3.1

4.3

3.2

4.0

4.4

3.4

Loan Growth (%)

YoY

4.0

3.9

10.9

9.8

-9.9

5.3

22.5

14.4

23.6

22.0

11.3

29.4

24.3

53.4

QoQ

-3.1

-4.2

1.2

-3.0

-4.0

1.5

1.2

0.3

2.5

7.6

0.8

3.9

4.2

5.5

Net Stress Loans (%)*

1QFY19

6.6

10.6

9.4

7.9

11.2

8.7

5.1

6.7

3.1

0.5

6.8

0.7

0.9

1.5

4QFY18

7.2

11.2

9.4

8.5

12.8

8.7

5.1

6.4

3.5

0.5

7.8

1.0

1.7

*Net Stress loans = NPA + watchlist + Stressed assets under various dispensations less overlap

REVIEW | August 2018

FINANCIALS – Banks:

Clean-up act continues for PSBs and private corporate lenders

PSBs consolidate, while PBs continue gaining market

share (loan growth – YoY %)

53.4

Margins improved marginally for PSBs due to resolution of NCLT-related cases,

while several private banks reported margin compression

4QFY18

1QFY19

29.4

22.0

14.4

23.6

11.3

4.0

5.3

3.9

22.5

10.9

-9.9

9.8

Net slippage ratio – Several PSU banks reported a decline in their GNPL portfolio

FY16

SBIN

PNB

CBK

BOB

BOI

UNBK

INBK

1.5

1.2

1.8

1.1

5.1

2.1

1.1

2Q 3Q 4Q

1.4 6.4 8.8

1.7 12.3 24.1

2.1 6.6 16.8

6.8 15.7 2.6

3.8 7.4 13.4

2.7 5.2 8.8

1.1 5.2 6.0

2.5

3.4

2.5

3.5

3.1

4.9

1.6

FY17

3.1

1.5

2.3

0.2

1.3

4.3

2.3

2.4

1.7

2.3

1.5

0.8

4.5

2.5

2.2

2.3

2.9

1.7

4.5

2.9

1.9

1.1

4.0

5.7

4.0

1.3

5.8

1.1

FY18

0.4

2.2

3.2

3.5

1.1

3.0

0.4

1.2

2.8

2.5

4.0

4.7

5.3

0.6

1.3

6.7

2.2

1.9

(0.6)

2.9

1.5

FY19

(0.1)

(0.0)

1.7

0.6

4.4

(0.5)

Net stressed loans have moderated for several PSBs

GNPA

NNPA

% of loans

4QFY18 1QFY19 4QFY18 1QFY19

SBIN

10.9

10.7

5.7

5.3

PNB

18.4

18.3

11.2

10.6

CBK

11.8

11.1

7.5

6.9

BOB

12.3

12.5

5.5

5.4

BOI

16.6

16.7

8.3

8.5

UNBK

15.7

16.0

8.4

8.7

INBK

7.4

7.2

3.8

NSL

4QFY18

7.2

11.2

9.4

8.5

12.8

8.7

5.1

1QFY19

6.6

10.6

9.4

7.9

11.2

8.7

5.1

REVIEW | August 2018

FINANCIALS – NBFCs: Mixed quarter on transition to Ind-AS

Summary

1QFY19 was a mixed quarter for our coverage universe. On the

business front, growth was strong and asset quality was largely stable.

Most companies have also managed spreads despite the impact of

rising GSec yields. However, the transition to Ind-AS has been mixed –

it has resulted in lower profitability for some companies, but boosted

networth for others.

Impact on 1QFY18 PAT due to Ind-AS transition (%)

MMFS

LTFH

SHTF

SCUF

IHFL

CIFC

BAF

HDFC

PNBHF

425

-6

-8



HFCs witnessing stable growth and margins:

Growth has remained

in line with trend. Some companies, like IHFL, had a networth

benefit from Ind-AS transition (revaluation of investments).



Vehicle financiers riding on secular CV upcycle:

Vehicle financiers

continue to reap the benefits of a CV upcycle, with growth

remaining strong and asset quality improving YoY. Branch expansion

by most vehicle financiers is likely to augur well in FY19.

have been on a strong growth path, given the emerging

opportunities in corporate lending due to asset quality issues at

corporate banks. Further, most entities are adequately capitalized

in this space.

AUM growth robust across NBFCs

AUM growth (1QFY19, %)



Diversified/corporate financiers:

Diversified/corporate financiers



Our view:

We remain bullish on vehicle financiers, which are

enjoying strong tailwinds from the CV upcycle. We, however,

remain concerned about fuel price increase and recent axle load

norms. Our top pick in this segment is SHTF. We maintain our

positive long-term view on housing finance sector, but see near-

term headwinds to margins. Our top pick in this space is HDFC. In

corporate lending, we like PIEL and LTFH – both these companies

offer attractive entry point at current valuations, in our view.

REVIEW | August 2018

HEALTHCARE: Earnings reverse the downtrend

Summary

1QFY19 performance snapshot

INR Million

Ajanta Pharma

Alembic Pharma

Alkem Lab

Aurobindo Pharma

Biocon

Cadila Health

Cipla

Divis Labs

Dr Reddy’ s Labs

Fortis Health

Glenmark Pharma

Granules India

GSK Pharma

IPCA Labs.

Jubilant Life

Laurus Labs

Lupin

Sanofi India

Shilpa Medicare

Strides Shasun

Sun Pharma

Torrent Pharma

Healthcare

June-18

5,110

8,625

16,695

42,503

11,240

28,937

39,390

9,953

37,207

10,420

21,294

4,532

7,357

8,539

20,787

5,390

38,559

6,836

1,982

6,635

71,388

18,720

422,098

Sales

YoY Chg (%)

8.0

33.1

28.9

15.5

20.4

31.7

11.7

21.2

12.2

-9.9

-8.6

17.4

21.2

19.8

30.2

9.7

-0.4

13.8

17.6

0.8

15.8

36.2

14.1

June-18

1,575

1,510

2,142

7,792

2,380

6,450

7,264

3,519

7,575

3,106

726

1,404

1,370

4,376

806

5,270

1,645

547

808

15,214

4,770

80,328

EBIDTA

YoY Chg (%)

20.5

48.8

127.0

-7.4

23.9

132.6

12.4

43.7

147.7

-90.6

-42.9

-13.8

613.3

697.0

29.6

-16.5

-31.4

42.5

58.2

28.4

44.4

60.6

26.5

June-18

1,058

905

1,362

5,203

1,097

4,605

3,363

2,456

4,561

-715

1,442

372

969

885

2,004

165

2,028

996

336

-41

9,825

1,630

44,506

PAT

YoY Chg (%)

7.9

35.7

90.3

-0.4

34.6

232.7

-17.7

39.1

671.7

-56.7

10.0

603.0

36.2

-57.5

-43.4

35.1

40.1

86.9

-13.3

33.0



After declining for five quarters, PAT increased 33% YoY in

1QFY19, partly on a low base of past year. Companies having

exposure to the domestic formulation business exhibited strong

YoY growth in earnings off a low base (1QFY18 was adversely

impacted by GST-led disruption).

revenue from the domestic formulation segment on an

aggregate basis. The increase in revenue at stable operating cost

led to profitability improvement.



Companies under our coverage delivered 28% YoY growth in



Companies under our coverage delivered moderate ~2% YoY

revenue growth in the US generics segment in 1QFY19, reversing

the downtrend on an aggregate basis. CDH, TRP, SUNP and ARBP

delivered much higher YoY growth, driving overall growth in US

generics. However, the ongoing YoY decline in US sales of LPC

and GNP dragged overall growth.



Pricing pressure remained stable at mid-to-high single-digits.



The low base of FY18 and better prospects in both regulated and

emerging markets would lead to a better performance in FY19

compared to FY18.

Low base supports India growth

US Growth YoY (%)

India Growth YoY (%)

Emerging Market Growth YoY (%)



Top picks:

Sun Pharma, Aurobindo Pharma.

8.3

22.2

6.4

-7.0

29.6

15.6

27.9

8.8

27.4

40.0

6.3

7.6 8.4

-26.0

*Sun Pharma numbers include Ranbaxy, hence not comparable

-32.7

REVIEW | August 2018

MEDIA: Broadcasters continue driving overall growth

Summary



1QFY19: Actual v/s estimates

INR Million

D B Corp

Dish TV

Ent.Network

HT Media

Jagran Prakashan

Music Broadcast

PVR

Sun TV

Zee Entertainment

Media

Sales

June-18 YoY Chg (%)

6,324

6.7

16,556

124.1

1,216

16.4

5,424

-7.1

6,026

1.9

757

7.6

6,963

9.4

11,204

42.5

17,720

15.0

72,189

27.9

EBIDTA

PAT

June-18 YoY Chg (%) June-18 YoY Chg (%)

1,680

-9.9

976

-11.4

5,568

176.7

279

284

65.0

331.4

360

-48.7

-96.8

1,636

1.4

854

-1.4

261

17.5

135

24.5

1,372

22.5

521

17.3

7,347

63.9

4,091

62.6

5,657

16.8

3,477

15.3

24,163

41.9

10,417

24.9

Media sector revenue up 13% YoY:

Our Media Universe (ex Dish

TV – as it reported merged co. figures) reported aggregate YoY

revenue/EBITDA growth of 13%/21%. Aggregate PAT grew at a

strong 26% YoY.

Broadcasters continue driving overall sector margin:

EBITDA

margin for our Media universe (ex-Dish TV) expanded 230bp YoY,

mainly led by an uptick in broadcasters’ EBITDA (~50% of our

media universe EBITDA). SUNTV reported robust 860bp margin

expansion to 66% on the back of positive surprise from IPL, while

ZEE saw a 50bp uptick in margins to 32%. Amongst the print pack,

higher newsprint cost and circulation copies took a toll on DB

Corp’s EBITDA margin (-490bp YoY); drop in circulation copies

however, provided support to Jagran’s margins (-15bp). Within

radio category, ENIL/MBL reported 690bp/290bp margin

expansion, led by higher contribution from new stations.

Low base provides support to ad growth:

Entire Media universe

(except HT media) witnessed an uptick in ad revenue, partly

attributed to the low base. Although broadcasters have recouped,

the print and radio categories are still unclear on momentum.

EPS downgrade for DB Corp:

Jagran is reducing copies to lower the

impact of the rise in newsprint prices; however, DB Corp remains

firm on increasing circulation. This would magnify the impact on

DB’s EBITDA margins. Thus, we have lowered our FY19/20 EPS

estimate by 7-10%, and consequently, downgraded to

Neutral.

Top picks:

We prefer Zee Entertainment and SUNTV.



Media universe (ex-Dish TV) revenue growth and EBITDA margin trend (%)

20.0

10.0

0.0

-10.0

-20.0

Revenue growth YoY (LHS, %)

EBITDA margin (RHS, %)

34.0

32.0

30.0

28.0

26.0



Broadcaster’s consol. revenue growth trend (%)

65.0

45.0

25.0

5.0

-15.0

SUN TV

ZEE Ent



REVIEW | August 2018

METALS: Steel margins at historical highs

Summary



1QFY19 performance snapshot

INR Million

Hindalco

Hindustan Zinc

JSPL

JSW Steel

Nalco

NMDC

Rain Industries

SAIL

Tata Steel

Vedanta

Metals

Sales

June-18 YoY Chg (%)

312,812

18.9

53,100

16.0

97,282

63.9

205,190

38.4

29,733

64.9

24,220

-14.8

38,033

44.2

159,072

37.4

378,328

28.0

222,060

21.4

1,519,829

28.4

EBIDTA

PAT

June-18 YoY Chg (%) June-18 YoY Chg (%)

40,022

23.5

15,058

51.4

27,130

13.8

19,180

2.2

22,766

68.3

1,808

51,050

85.9

23,660

257.2

10,111

344.4

6,270

386.0

14,788

-8.7

9,691

-9.6

6,924

48.0

2,948

94.6

25,764

9,806.8

7,215

64,677

30.0

22,976

49.7

62,840

28.9

15,330

0.5

326,072

48.8

124,136

80.6

The Metals pack continues exhibiting a strong performance. EBITDA

grew 49% YoY, while PAT increased 81% YoY (despite a high base) led

by robust demand and higher prices. The performance was led by

steel companies, where EBITDA grew 81% YoY, driven by historically

high spreads. Underlying indicators remain positive on supply-side

measures in China and an unexpected surge in demand.

Metal and alumina prices drove gains:

Steel companies’ aggregate

realization increased 21% YoY (5% QoQ) due to strong domestic

demand. Global steel prices were also supportive for majority period

during the quarter. Aluminum and alumina prices were also higher,

benefiting HNDL and Nalco. Realization for steel companies is

expected to be lower in 2Q due to seasonal weakness in demand

during monsoon.

Volume growth strong:

Volumes for steel companies increased 11%

YoY (-7% QoQ) to 11.3mt. Growth was led by strong 47% volumes

growth by JSP. Tata, SAIL and JSW Steel too reported 8-9% growth.

The outlook is strong, driven by a pick-up in infrastructure spending

by the government and growth in the auto segment. Aluminum

volumes increased ~24% YoY, led by ramp-up at Vedanta and Nalco.



Steel EBITDA (INR/ton) continues to increase

22,500

Average

Tata Steel - India

SAIL

JSW Steel

JSP

15,000

Top Pick



Hindalco:

Novelis reported a strong performance, benefiting from

tailwinds in autos and healthy recycling spreads. India smelting

operations remain strong with captive mines of bauxite/coal and

higher share of value-added products. Focus remains on higher-IRR

projects and grade mines. Aleris acquisition will strengthen business.

JSW Steel:

It is most efficient in opex and capex, which enables it to

grow fastest in industry.

7,500



-7,500

REVIEW | August 2018

METALS: Volumes and realization

Steel sales (mt)

Tata Steel

10.8

8.8

9.0

3.1

2.7

2.3

8.5

3.3

3.1

2.7

2.1

2.6

2.9

2.3

3.8

2.7

3.3

2.8

2.2

3.6

2.6

3.3

3.0

3.4

3.2

9.1

3.8

3.6

4.0

SAIL

10.9

JSW Steel

11.5

10.1

JSP

11.4

12.0

12.2

11.3

Steel realization (INR/T)

3.8

3.3

3.0

Average

Tata Steel

SAIL

JSW Steel

JSP

10.8

3.5

3.0

2.8

3.9

3.5

3.1

4.0

4.2

3.8

3.3

3.7

3.0

Aluminum sales (kt)

1,000

750

500

VEDL

Balco

Hindalco

Nalco

Copper sales (kt) – Vedanta’s smelter is mothballed

250

200

150

100

VEDL

Hindalco

250

REVIEW | August 2018

OIL & GAS: Improved earnings for OMCs; volume growth continues for gas companies

Summary

Improved earnings for OMCs:

Core GRMs were lower than expected

for all, but inventory gains on both refining and marketing segments

resulted in better-than-expected PAT.



Petrochem drives earnings for RIL:

RIL reported GRM of

USD10.5/bbl in the quarter. Petrochem profitability was driven by

strong volume growth and favorable deltas. Profitability in telecom

and retail also boosted consolidated earnings.



Dahej utilization at 113%:

Petronet registered 113% utilization at

Dahej. Kochi utilization stood at 9%. Expect Kochi utilization to

improve with completion of Kochi-Mangalore pipeline.



Strong CGD volume growth at NCR:

Despite a high base, IGL

showed strong 12% YoY growth in CNG and 18% growth in PNG-

domestic. EBITDA/scm increased to INR5.8 from INR5.7 in the

previous quarter.

Valuation view



Expect high utilization for Petronet to continue. Low LNG prices

would also help. Near-term triggers on completion of Kochi-

Mangalore pipeline and Dahej expansion would help the stock

further.



1QFY19: Earnings snapshot and Actual v/s Estimate

EBIDTA

QoQ YoY Chg Var

INR Million

Jun-18

Chg (%)

(%)

Strong performance of RIL

Reliance Inds. (conso) 206,610 11.9

64.6 13.5

ONGC

147,321 29.4

49.1

0.5

Oil India

14,084 75.9

61.1 -12.7

OMCs: Inventory gain impacts OMCs profit

IOC

47,098 -37.9

-49.0 -41.4

BPCL

19,013 -41.9

-27.8 -29.6

HPCL

18,234 -34.1

-43.1 -28.3

Gas: Strong volume growth benefited gas companies

GAIL

22,436 32.3

18.1

8.9

Petronet LNG

9,344

13.7

25.6

9.4

Gujarat State Petronet 3,438

18.9

24.6 14.9

Indraprastha Gas

2,951

7.1

6.4

1.0

Pure Refiners: GRM led by inventory gains

MRPL

8,131 -22.1

39.5 -23.0

PAT

QoQ Chg YoY Chg

Jun-18

(%)

94,850

61,439

7,032

68,311

22,933

17,192

12,593

5,870

1,444

1,759

3,788

0.3

3.9

-18.8

30.9

-14.2

-1.6

25.2

12.3

-8.2

7.0

-30.1

4.5

58.2

56.2

155.2

208.0

85.9

22.8

34.1

-5.3

9.1

61.9

Var

(%)

0.5

-2.0

-33.7

18.4

22.6

13.2

-0.3

5.0

-12.9

-3.1

-29.9

1QFY19: Singapore GRM at USD6.1/bbl (USD/bbl)

IOCL reported GRM

BPCL reported GRM

RIL

SG complex GRM

HPCL

IGL would clock 12% CAGR in volume for FY18-20 and EBITDA/scm

at INR5.9 for FY19/20. Volume growth is expected to continue. IGL

remains one of our top picks.

Post the Karnataka elections, OMCs have been gradually increasing

retail prices. We believe that the sharp correction in the stock prices

offers an attractive opportunity to add OMCs. Positive on all OMCs,

with preference for Indian Oil.

RIL’s near-term future will be contingent on telecom/retail business

ramp-up.

8.0

6.3

7.8

5.0

5.1

6.7

8.3

6.4

7.3

7.0

6.1



REVIEW | August 2018

RETAIL: Jewelry growth prospects remain strong

Summary



1QFY19 performance snapshot

INR Million

Jubilant Foodworks

Titan Company

Retail

Sales

YoY Chg

June-18

(%)

8,551

26.0

44,510

9.4

53,061

11.8

EBIDTA

YoY Chg

June-18

(%)

1,421

78.5

4,829

32.3

6,249

40.6

PAT

June-18

747

3,286

4,033

YoY Chg

(%)

213.2

31.9

47.8

Overall performance above expectations:

Our Retail Universe

sales grew 11.8% YoY (v/s our est. of +7.2%), EBITDA increased

40.6% YoY (v/s our est. of +26.6%) and adj. PAT grew 47.8% YoY

(v/s our est. of +29.3%).

Coverage retail companies did well on SSS :

JUBI’s SSS grew 25.9%

(our estimate: 18%), while Tanishq’s SSS increased by 2% off a high

base of 51%.

Continued operating margin expansion in 1QFY19; pace of store

addition increased:

Operating margin expanded sharply by 490bp

YoY for JUBI and Titan saw operating margin expansion of 190bp

YoY. TTAN added 10 World of Titan stores in 1QFY19. Tanishq

stores, excluding three Zoya stores, stood at 262 in 1QFY19. JUBI

added 10 Domino’s stores this quarter, with store addition target

maintained at 75 for FY19.

We remain positive on Titan and maintain neutral on JUBI

Titan -

Titan is among the biggest beneficiary of growth offered

by the shift toward the organized jewellery market in India with

its leadership in the branded jewellery space, national

presence, strong franchise and quality management.



JUBI –

SSSG continues to beat expectations. However, we

maintain Neutral as it remains to be seen if JUBI will be able to

improve its EBITDA margin and SSSG to the FY11/FY12 levels of

~30% once the effect of everyday value schemes, product

revamp, favourable base and low-hanging fruit (as a result of

Dunkin Donuts store closures) runs its course over the next 2-3

quarters.





SSSG for coverage companies

LTL Growth (%)

Jubilant Foodworks

Tanishq

1Q17

(3.2)

3.0

2Q17

4.2

4.0

3Q17

(3.3)

15.0

4Q17

(7.5)

52.0

1Q18

6.5

51.0

2Q18

5.5

18.0

3Q18

17.8

12.0

4Q18

26.5

17.0

1Q19

25.9

2.0

Margins contracted for our Retail universe

Company

Jubilant Foodworks

Titan Industries

Expansion/Contraction in (bp)

Gross Margin

EBITDA Margin

(180)

490

290

190



Store network for Retail universe

Company

Jubilant Foodworks

Titan Industries

World of Titan

Tanishq

1Q17 2Q17 3Q17 4Q17 1Q18 2Q18 3Q18 4Q18 1Q19

1,049 1,081 1,107 1,117 1,125 1,125 1,127 1,134 1,144

458

197

467

198

470

202

474

208

482

219

485

229

481

240

486

253

496

262

REVIEW | August 2018

TECHNOLOGY: Growth – better; outlook – even better

Summary



1QFY19 performance snapshot

USD revenue - m

Act.

TCS

Infosys

Wipro

HCL Tech

TECHM

5,051

2,831

2,026

2,055

1,224

Est.

5,059

2,837

2,011

2,075

1,213

% beat

-0.2

0.8

-1.0

0.9

EBIT margin (%)

Act.

25.0

23.7

14.3

19.7

13.0

Est.

24.7

23.8

15.5

19.9

12.5

bp beat

-10

-120

-20

Act.

73.4

38.8

21.2

24.0

9.0

PAT - INR b

Est.

69.2

37.8

20.4

23.5

9.3

% beat

6.0

2.6

3.9

2.3

-3.6

Gradual improvement…:

Revenue growth continued its upward

trajectory for the third consecutive quarter, after being in a downward

spiral for the last two years. Aggregate CC organic revenue for the Tier-I

companies grew by 7.3% YoY versus 6.3% in the previous quarter.

…problem areas still there:

With the exception of TCS, which saw

strength in BFS, problem areas across vendors remained intact. Growth

for INFO in BFS, for HCLT in IMS and for TECHM in Communications

remained weak, restricting a steeper improvement.

Outlook positive…:

The outlook was uniformly positive across all the

vendors. Some even substantiated this with colour on TCV of deal wins.

For TCS, USD4.9b of deal wins was promising; INFO’s USD1.1b in wins

was coupled with a strong pipeline. For HCLT, although the quantum of

wins wasn’t specified, TCV was the highest-ever, and substantially higher

than its previous peak.

…especially in crucial pieces:

The more encouraging part was that INFO

stated 40% of its wins this quarter were in BFS. Similarly, HCLT sees a pick-

up in organic growth (inc. IMS) next quarter onwards. For TECHM, deal

wins in Communications were particularly strong, and so was the pipeline.

Efficiency gains continue:

1Q saw some benefits of INR depreciation,

which partly offset pressure from wage hikes. Despite a steep comeback

in headcount growth, continued efficiency improvement kept supporting

margins.

Acceleration seen in Tier II:

Several Tier-II vendors (KPIT, MTCL, MPHL,

CYL, NITEC, ZENT and LTI) have seen acceleration in growth throughout

FY18. The trend continued for many of them, taking growth to the high

teens, and even the 20s for MTCL and LTI.

Prefer INFO, TECHM in Tier-I:

We remain selective in terms of our picks,

balancing between valuation comfort and performance visibility. Both

INFO and TECHM are at the lower end of the valuation bracket. Among

the mid-caps, we prefer MTCL, PSYS and ZENT.



Growth ex-acquisitions picking up (CC revenue gr. YoY, %)

Aggregate CC organic revenue growth (YoY, %)



YoY revenue growth accelerated across most tier-II players

1QFY18

2QFY18

MPHL

CYL

NITEC

3QFY18

4QFY18

PSYS

HEXW

KPIT

MTCL

ZENT

LTI

1QFY19



REVIEW | August 2018

TELECOM: No respite for margins

Summary



1QFY19: Actual v/s estimates

INR Million

Bharti Airtel

Bharti Infratel

Idea Cellular

Tata Comm

Telecom

Sales

June-18 YoY Chg (%)

200,800

-8.6

36,735

4.2

58,892

-27.9

39,123

-9.2

335,550

-11.6

EBIDTA

PAT

June-18 YoY Chg (%) June-18 YoY Chg (%)

67,258

-13.3

-1,711

15,196

-3.5

6,380

-3.9

6,594

-64.8

-17,837

Loss

5,554

-0.6

-585

94,602

-19.6

-13,753



Bharti’s India wireless business improves, but Idea continues to

bleed:

Contribution from the Telenor biz. offset the impact of a 9%

QoQ decline in ARPU (INR105), leading to marginal 1% growth in

Bharti’s India wireless revenue. India wireless EBITDA margin,

however, contracted 200bp, dragging the consol. margin by 180bp to

33.5%. Idea’s EBITDA margin stood at 11.2% (-11.7pp QoQ), impacted

by a 5% QoQ decline in APRU to INR100, coupled with a 3% drop in the

subscribers base. However, RJio reported 100bp QoQ margin

expansion to 38.8%. This was on the back of a strong 15% increase in

the subscriber base, partly offset by a 2% QoQ decline in ARPU to

INR135.

Energy weakness impacts BHIN’s consol. EBITDA margin:

Despite

4,818 tenancy exits, the rental EBITDA margin for BHIN expanded

110bp QoQ on the back of revenue from 6,672 discontinued tenants.

Yet, seasonality hit Energy EBITDA margin (-730bp), pulling down the

consol. EBITDA margin by 210bp QoQ.

TCOM data margin continues disappointing:

Data EBITDA margin

expanded by a meager 10bp QoQ to 16.8%, as the improvement in the

Traditional/Growth segment EBITDA margin was largely offset by a

contraction in the Transformation/Payments margins.

RJio’s renewed aggression:

RJio’s renewed focus on the feature phone

market – with a revised scheme of INR501 for buying JioPhone and the

launch of JioPhone 2 – is expected to keep competitive intensity high

over the near term.

Top picks:

We believe that the merger synergies should aid

incumbents in sustaining competition and provide some solace to

earnings. Post FY19, as the flux gets settled and all the three big

players have similar financial and operational wherewithal to compete

with each other, we believe ARPU accretion should kick in, driving FCF.

Bharti and Idea are our top picks.

Operator-wise active subscriber market share (%)

35.0%

25.0%

15.0%

5.0%

RJio

Bharti

Idea

Other players

Vodafone

Operator-wise ARPU (INR)

Bharti (India)

200

160

120

FY17

Idea

Vodafone - India

RJio

FY18

FY19

REVIEW | August 2018

UTILITIES: Coal grows faster as it offsets hydro power decline

Summary

Electricity generation (excluding RE) growth was just 2.9% YoY during

the quarter. Hydro generation declined 13.5% YoY due to lower

availability of water, which impacted both JSW Energy and NHPC

adversely and benefitted Coal India and NTPC. Coal-based power

generation increased by 5.2%. Coal India’s dispatches increased 12%

YoY, aided by restocking demand and declining imports. Aggregate PAT

grew 22% YoY.

Major highlights



1QFY19 performance snapshot

INR Million

CESC

Coal India

JSW Energy

NHPC

NTPC

Power Grid Corp.

Tata Power

Utilities

Sales

EBIDTA

PAT

June-18 YoY Chg (%) June-18 YoY Chg (%) June-18 YoY Chg (%)

21,590

-1.1

4,950

-18.5

1,820

2.2

242,609

26.6

66,160

93.7

37,843

60.9

23,606

5.8

7,762

-10.7

2,292

5.5

21,290

-8.5

12,904

-6.9

7,376

-14.5

228,637

13.7

61,149

16.1

29,472

16.1

83,365

15.0

71,365

13.8

22,076

3.2

73,134

4.9

17,708

-3.3

2,213

35.1

694,230

15.3

241,998

23.2

103,092

22.0

NTPC:

Power generation increased 7.5% YoY to 69b kwh, while

coal plants’ PLF declined 110bp YoY to 78%, yet best in country.

Under recoveries of fixed charge due to low availability at some

plants impacted PAT growth.

Power Grid:

Underlying growth in the transmission business was

strong, but volatility in consultancy revenue and some under

recoveries of fixed cost impacted PAT.

NHPC:

Lower water availability impacted power generation and

PAT growth. 330MW Kishanganga project started commercial

generation.

Coal India:

Coal India reported a very strong set of numbers as

EBITDA doubled YoY on price hike, 12% volume growth and strong

E-auction prices.

JSW Energy:

EBITDA was down on lower hydro generation, yet PAT

increased 5% YoY due to lower interest cost and tax rate, partly

offset by lower other income and higher depreciation. Net debt

(ex-acceptances) was unchanged QoQ.



REVIEW | August 2018

MOSL Universe: Annual performance (INR b)

SECTOR

Auto (16)

Capital Goods (17)

Cement (14)

Consumer (19)

Financials (38)

Private Banks (12)

PSU Banks (7)

Life Insurance (2)

NBFC (17)

Healthcare (22)

Infrastructure (4)

Logistics (2)

Media (10)

Metals (10)

Oil & Gas (14)

Excl. OMCs (11)

Retail (2)

Technology (15)

Telecom (4)

Utilities (7)

Others (23)

MOSL (217)

MOSL Excl. OMCs (214)

Sensex (30)

Nifty (50)

Sales (INR B)

FY18 FY19E FY20E

6,836 7,662 8,725

2,384 2,694 2,971

1,603 1,928 2,319

1,784 2,009 2,321

3,705 4,330 5,147

1,167 1,388 1,680

1,435 1,618 1,859

502

597

720

601

727

888

1,626 1,832 2,105

147

170

224

119

135

153

251

297

331

5,488 6,130 6,014

17,932 23,896 26,194

11,474 15,503 16,731

191

229

275

3,708 4,257 4,804

1,431 1,345 1,459

2,657 2,887 3,117

1,345 1,612 2,032

51,209 61,413 68,190

44,752 53,020 58,727

12,368 14,634 15,841

17,899 21,436 23,627

Change YoY (%)

EBIDTA (INR B)

FY18 FY19E FY20E FY18 FY19E FY20E

14.2 12.1

13.9

922

1,074 1,283

8.7

13.0

10.3

257

309

352

29.0 20.3

20.2

287

344

431

6.6

12.6

15.5

423

494

580

12.0 16.9

18.9

2,647 3,017 3,650

15.1 19.0

21.0

1,010 1,180 1,471

2.9

12.7

14.9

1,110 1,212 1,425

21.1 18.9

20.6

23.6 21.0

22.1

502

598

721

0.8

12.7

14.9

319

383

474

7.7

15.1

31.9

8.8

13.3

9.8

18.1

11.4

111

22.1 11.7

-1.9

1,049 1,310 1,311

18.3 33.3

9.6

2,193 2,660 2,872

18.3 35.1

7.9

1,667 2,179 2,382

20.8 19.5

20.4

4.3

14.8

12.9

849

997

1,146

-11.7 -6.0

8.5

448

395

455

8.8

8.7

8.0

826

1,026 1,163

14.4 19.9

26.0

255

296

385

13.5 19.9

11.0 10,635 12,499 14,329

12.9 18.5

10.8 10,110 12,018 13,839

12.2 18.3

8.2

3,221 3,776 4,335

13.6 19.8

10.2

3,956 4,603 5,305

Change YoY (%)

FY18 FY19E FY20E

10.6 16.5

19.5

21.5 20.1

14.1

17.9 19.9

25.1

10.1 16.8

17.5

5.7

14.0

21.0

8.4

16.9

24.7

-3.5

9.1

17.5

46.1

9.4

21.3

24.1 19.1

20.7

-11.2 20.0

23.7

0.8

11.9

13.1

8.5

18.5

21.8

10.2 25.9

15.6

29.8 24.9

0.1

19.9 21.3

8.0

21.0 30.7

9.4

49.3 29.3

23.3

3.3

17.4

15.0

-16.9 -11.8 15.2

12.7 24.2

13.3

14.6 16.0

30.1

10.4 17.5

14.6

10.1 18.9

15.2

10.0 17.3

14.8

10.8 16.4

15.3

PAT (INR B)

Change YoY (%)

FY18 FY19E FY20E FY18 FY19E FY20E

394

467

584

15.2 18.6

24.9

148

171

213

15.1 16.1

24.0

103

147

198

-0.1

42.2

34.5

289

336

397

10.5 16.3

18.4

368 1,006 1,631 -47.0 173.6 62.1

410

536

766

-1.3

30.7

42.9

-335

109

426 -849.4 -132 291.2

6.0

10.8

14.8

266

331

405

27.8 24.7

22.3

189

219

284

-18.2 15.9

29.6

43.5

9.2

8.7

4.7

45.1

20.4

-3.0

25.5

33.2

398

522

534

73.3 31.2

2.2

1,155 1,329 1,514

5.5

15.1

13.9

855 1,080 1,254

5.9

26.3

16.1

51.2 31.3

26.2

678

749

860

5.3

10.4

14.8

-44

-24

Loss

369

449

506

12.9 21.8

12.6

130

137

182

17.8

5.8

32.1

4,294 5,581 6,994

-0.2

30.0

25.3

3,993 5,331 6,734

-0.5

33.5

26.3

1,395 1,711 2,193

7.0

22.6

28.2

1,795 2,151 2,704

7.8

19.9

25.7

Note: For Banks : Sales = Net Interest Income, EBIDTA = Operating Profits; Note: Sensex & Nifty Numbers are Free Float.

REVIEW | August 2018

MOSL Universe: Valuations

Sector

Auto (16)

Capital Goods (17)

Cement (14)

Consumer (19)

Financials (38)

Private Banks (12)

PSU Banks (7)

Life Insurance (2)

NBFC (17)

Healthcare (22)

Infrastructure (4)

Logistics (2)

Media (10)

Metals (10)

Oil & Gas (14)

Excl. OMCs (11)

Retail (2)

Technology (15)

Telecom (4)

Utilities (7)

Others (23)

MOSL (217)

MOSL Excl. OMCs (214)

Sensex (30)

Nifty (50)

FY18

25.0

30.4

37.2

55.4

76.4

35.2

-11.5

55.4

31.2

30.9

15.2

33.8

30.7

12.7

12.3

14.2

77.4

23.2

2839

12.7

30.1

27.2

28.7

27.3

24.9

PE (x)

FY19E

21.1

26.2

26.1

47.6

27.9

26.9

35.5

50.0

25.0

26.7

13.9

23.3

24.5

9.7

10.6

11.2

59.0

21.1

-53

10.5

28.4

20.9

21.5

21.9

20.9

FY20E

16.9

21.1

19.4

40.2

17.2

18.8

9.1

43.6

20.4

20.6

12.8

19.3

18.4

9.5

9.3

9.7

46.7

18.3

-99.2

9.3

21.5

16.7

17.0

17.1

16.6

EV / EBIDTA (x)

FY18 FY19E

FY20E

9.9

8.6

6.9

20.4

16.4

13.9

13.8

11.4

9.0

29.9

31.7

26.8

N.M

17.2

15.5

12.3

8.0

6.6

6.3

19.1

16.1

13.0

16.1

11.1

9.2

7.3

6.0

5.8

7.1

6.1

5.4

7.8

6.4

5.5

47.0

37.2

30.1

13.0

14.6

12.5

9.2

9.8

8.4

9.6

7.7

6.8

15.3

13.0

10.2

N.M

P/BV (x)

FY18 FY19E FY20E

3.9

3.4

3.0

3.3

3.1

2.7

3.1

2.8

2.5

14.7

13.2

12.2

2.8

2.5

2.2

3.7

3.1

2.7

0.9

0.8

13.0

11.0

9.4

4.4

3.8

3.3

3.9

3.5

3.1

1.9

1.7

1.5

3.0

2.8

2.6

3.9

3.6

3.2

1.5

1.3

1.2

1.8

1.6

1.5

1.9

1.7

1.5

16.8

16.2

13.8

5.6

5.3

4.8

2.1

2.2

2.3

1.9

1.8

1.6

4.0

3.6

3.2

2.9

2.6

3.2

2.9

2.6

3.4

3.0

2.6

3.2

2.9

2.6

FY18

15.5

11.0

8.4

26.6

3.6

10.4

-8.0

23.5

14.3

12.6

12.8

8.9

12.7

11.5

14.9

13.4

21.8

24.2

0.1

14.9

13.2

11.6

11.2

12.3

13.0

ROE (%)

FY19E

FY20E

16.3

17.8

11.9

12.6

10.8

12.8

27.7

30.3

9.0

13.0

11.6

14.6

2.5

9.1

22.0

21.6

15.3

16.4

13.2

15.1

12.5

12.1

13.3

12.0

14.7

17.2

13.5

12.7

15.3

15.6

15.0

15.5

27.4

29.5

25.1

26.1

-4.1

-2.3

16.8

17.4

12.5

14.8

13.7

15.4

13.6

15.4

13.5

15.4

14.0

15.7

Div Yield (%)

FY17

1.0

1.2

0.5

1.5

1.0

0.9

0.0

1.3

0.5

1.0

1.4

0.7

4.0

2.9

2.2

0.7

2.0

1.4

4.1

1.4

1.7

1.6

1.5

EARN. CAGR

(FY18-FY20)

21.8

19.9

38.3

17.3

110.6

36.7

12.8

23.5

22.6

9.0

32.2

29.3

15.8

14.5

21.1

28.7

12.6

17.1

18.2

27.6

29.9

18.9

17.6

N.M. - Not Meaningful

REVIEW | August 2018

NOTES

REVIEW | August 2018

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REVIEW | August 2018