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AMBIT INSIGHTS 3 April 2017

DAILY

Updates

Strategy

G&C 11.2 – Keeping faith in quality, raising share of cash

Strategy

Why does the sell side consistently get it wrong?

Automobiles

Mar 2017 volumes - Fiscal ends on a positive note

Weeklies

BFSI

Economy

Utilities

Analyst Notes: Strategy: A framework to identify turnarounds using HAWK Karan Khanna, CFA, +91 22 3043 3251

Over the past six years, our proprietary ‘accounting’ and ‘greatness’ frameworks were crucial in shaping our investment philosophy. A 28% underperformance for the bottom decile on accounting versus the top decile suggests accounting quality is a critical hygiene factor, lack of which severely hurts portfolio returns. Healthy outperformance (both live portfolios and back-tests) for ‘great’ firms in our ‘greatness’ framework suggests structurally strong companies like the ones in our ten-bagger portfolios remain consistent outperformers through booms and busts. Through HAWK, we also gave clients access to both our proprietary frameworks in an easy-to-use and intuitive format. In our note published a couple of weeks back (click here), we discussed a framework on how clients can use HAWK to identify turnarounds. Using HAWK and Piotroski’s F-score, we identified 11 quality stocks that witnessed improvement in fundamentals in recent times but haven’t performed significantly over the last few months. Bosch, Hero (SELL), GSK Pharma, Castrol and Gujarat State Petronet (BUY) are prominent stocks that do well on the three checks. Source: Ambit Capital research

Please refer to our website for complete coverage universe

http://research.ambitcapital.com

AMBIT INSIGHTS

Ambit Capital Pvt Ltd 3 April 2017

Strategy G&C 11.2 – Keeping faith in quality, raising share of cash We revisit our G&C 11.1 portfolio that was launched early December (click here for our 1 Dec 2016 note) in light of the demonetisation-driven disruption. Whilst the G&C 11.1 portfolio has underperformed the broader benchmark BSE500 index by ~427bps since publication in Dec ’16, we stick to ‘quality’ and only make house-keeping changes to arrive at G&C 11.2 portfolio. We continue to find limited investable opportunities in the near term and, hence, remain defensively positioned by further increasing our allocation towards cash (now 15.2% weight in the portfolio). Key sectoral changes: reduce our underweight on Financials by adding plays on savings shift to financials, increase allocation towards Telecom, and reduce allocation towards Utilities, FMCG and IT. Overall, since inception six years ago, our G&C series has outperformed the BSE500 index by 4.4% (annualised).

G&C 11.1- performance attribution

In our 1 Dec 2016 note, “G&C 11.1 - Battling the demonetised disruption”, in light of the near-term disruption in business activities arising from the ban on higher denomination currency notes (Rs500 and Rs1,000 notes) we had reduced our overweight on real estate linked sectors like Home Building and increased our underweight position on Banks and Financial Services. Further, we had also increased the weight of traditional defensives (i.e. IT and Pharma) and increased the allocation towards cash (6.5% weight in the portfolio). Overall, defensives (including cash) had ~46% weight in our G&C 11.1 portfolio.

In spite of this near-term disruption, markets have continued to rally (BSE500 index has rallied ~8.5% since 8 November when PM Modi announced the ban of higher denomination currency notes) largely due to increased flows into the stock market. This increase in flows into the stock market in spite of no major change in the underlying fundamentals has resulted in our G&C 11.1 portfolio underperforming the broader benchmark BSE500 index by ~427bps since publication in early December.

More specifically, our defensive positioning (overweight on IT, Pharma and cash) and underweight stance on Banks and Financial Services have worked against us.

What has changed in the latest G&C?

In this note, we revisit our G&C 11.1 portfolio. Even though the G&C 11.1 portfolio has underperformed the benchmark BSE500 index, we continue to stick to ‘quality’ in this portfolio. We see no reason why we should increase the weight of cyclicals in our portfolio (our Economy team continues to expect the country’s GDP to grow at 3.5% in FY17 and 5.8% in FY18- see our Economy team’s 24 March 2017 note here).

Further, one of the key changes being administered by the Modi government is a shift in savings from physical savings (i.e. gold, real estate) to financial savings. As a result, we increase allocation towards sectors that stand to benefit from this move in savings from physical to financial.

We continue with our defensive positioning (~46% weight in G&C 11.2 portfolio versus ~46% weight in G&C 11.1 portfolio). Further, we continue to find limited investable opportunities in the near term and, hence, further increase allocation towards cash (15.2% weight in G&C 11.2 portfolio versus 6.5% in G&C 11.1 portfolio).

Quick Insight Analysis Meeting Note News Impact

G&C 11.2 portfolio

Company Sector Weight

P I Inds. Agri Inputs 2.2

Tata Motors Auto 4.3

Endurance Tech Auto Anc 2.2

Mahindra CIE Auto Anc 2.2

Atul# Chemicals 2.2

Page Industries Consumer Disc. 2.2

HDFC Bank* Financials 4.3

Axis Bank* Financials 4.3

ICICI Pru Life# Financials 4.3

Motilal Oswal* Financials 2.2

City Union Bank* Financials 2.2

ITC FMCG 4.3

Hind. Unilever FMCG 4.3

Pidilite Inds. Home Building 4.3

Supreme Inds. Home Building 2.2

TCS IT 4.3

Tech M IT 4.3

AIA Engg. Light Engg. 2.2

I O C L Oil & Gas 4.3

Petronet LNG Oil & Gas 4.3

Lupin Pharma 4.3

Cadila Health. Pharma 4.3

Torrent Pharma. Pharma 4.3

Bharti Infra. Telecom 4.3

Cash 15.2

Source: Ambit Capital research. Note: *indicates we have a bottom-up SELL. #indicates Not Rated

Research Analysts

Nitin Bhasin nitin.bhasin@ambit.co Tel: +91 22 3043 3241 Karan Khanna, CFA karan.khanna@ambit.co Tel: +91 22 3043 3251

AMBIT INSIGHTS

Ambit Capital Pvt Ltd 3 April 2017

Updated sector weightages Key weightage increases

Cash – 15.2% versus 6.5% earlier.

Banks and Financial Services - 17.4% versus 13.0% earlier.

Telecom – 4.3% versus 0% earlier.

Key weightage cuts

Utilities – 0% versus 4.3% earlier.

FMCG - 8.7% versus 13.0% earlier.

IT - 8.7% versus 13.0% earlier.

Key sector overweights (vis-à-vis the benchmark Nifty)

Cash – 15.2% weight in the portfolio versus 0% weight in the Nifty index; implying 15.2% overweight in the portfolio.

Pharma – 13.0% weight in the portfolio versus 5.0% weight in the Nifty index; implying 8.0% overweight in the portfolio.

Home Building (including Consumer Durables) – 6.5% weight in the portfolio versus 1.4% weight in the Nifty index; implying 5.1% overweight in the portfolio.

Key sector underweights (vis-à-vis the benchmark Nifty)

Banks and Financial Services – 17.4% weight in the portfolio versus 33.2% weight in the Nifty index; implying 15.8% underweight in the portfolio.

IT – 8.7% weight in the portfolio versus 13.4% weight in the Nifty index; implying 4.7% underweight in the portfolio.

Cement – 0% weight in the portfolio versus 3.1% weight in the Nifty index; implying 3.1% underweight in the portfolio.

Exhibit 1: G&C 11.2 – implied sector weights versus benchmark

Sector G&C 11.2 Nifty BSE200 MSCI India Deviation

vs Nifty vs BSE200 vs MSCI India*

Agri Inputs/Chemicals 4.3 - 1.2 1.0 4.3 3.2 3.3

Auto/Auto Anc 8.7 11.2 12.1 12.8 (2.5) (3.4) (4.1)

Capital Goods/E&C/Infra/Industrials 2.2 5.0 5.2 3.6 (2.9) (3.0) (1.4)

Cement - 3.1 2.6 3.6 (3.1) (2.6) (3.6)

Consumer Discretionary 2.2 - 0.2 - 2.2 1.9 2.2

Financials 17.4 33.2 28.2 22.4 (15.8) (10.8) (5.0)

FMCG 8.7 9.1 11.1 9.3 (0.4) (2.4) (0.6)

Home Building (incl. Consumer Durables) 6.5 1.4 1.9 1.7 5.1 4.6 4.8

IT 8.7 13.4 9.4 16.2 (4.7) (0.7) (7.5)

Media & Entertainment - 0.9 1.0 1.2 (0.9) (1.0) (1.2)

Metals & Mining - 2.9 4.2 4.0 (2.9) (4.2) (4.0)

Oil & Gas 8.7 9.5 9.9 10.7 (0.8) (1.2) (2.0)

Pharma 13.0 5.0 6.0 8.2 8.0 7.0 4.8

Telecom 4.3 2.2 1.8 2.6 2.1 2.6 1.8

Utilities - 3.0 2.7 1.5 (3.0) (2.7) (1.5)

Others - - 2.6 1.3 - (2.6) (1.3)

Cash 15.2 - - 0.1 15.2 15.2 15.1

Source: Bloomberg, Ambit Capital research. Note: * We have used the portfolio composition of iShares MSCI India ETF as on 30th Mar’17 as a proxy for MSCI India Index. Others include Aviation, Conglomerate, Healthcare Services, Miscellaneous, Realty, Retail, Shipping, Textiles and Travel & Leisure.

AMBIT INSIGHTS

Ambit Capital Pvt Ltd 3 April 2017

Stock-specific changes We continue to stick to ‘quality’ and, hence, start with our G&C 11.1 portfolio while making housekeeping changes to arrive at our G&C 11.1 portfolio.

Exclusions: Since we last published our G&C 11.1 portfolio, our analysts have either turned SELLers or initiated with a SELL on 10 out of the 25 stocks forming part of the G&C 11.1 portfolio [Power Grid Corporation, Berger Paints, TVS Motor Company, Marico, HCL Technologies, Mahanagar Gas, Ajanta Pharma, HDFC Bank, Axis Bank and City Union Bank]. We thus exclude all stocks where we have a bottom-up SELL (except for Banks and Financial Services; our Financials team is currently negative on the entire sector from a fundamental perspective; however, weight of Financials is ~33% in the Nifty index and hence we cannot have 0% allocation towards Financials). As a result, HCL Technologies, Power Grid, Marico, Berger Paints, TVS Motor Company, Ajanta Pharma and Mahanagar Gas get left out from our portfolio.

Inclusions: As discussed earlier, we increase the weightages of sectors that stand to benefit from the shift in savings from physical savings (i.e. real estate, gold) into financial savings. As a result, we add Motilal Oswal (SELL) to our portfolio. Further, Bharti Infra, Cadila Healthcare, Petronet LNG and Endurance Technologies are the other stocks we add to our portfolio. We have a bottom-up BUY on these stocks and these stocks also do well on our ‘accounting’ and ‘greatness’ frameworks.

Other changes: We also remove BPCL from the portfolio and replace it with IOCL given our Oil & Gas analyst’s higher conviction in the latter. Further, whilst we do not cover DCB Bank, we remove the bank from our portfolio (on the back of the stock rallying by more than 50% over the last four months) and replace it with ICICI Prudential Life.

IOCL (IOCL IN, US$ 28,979mn, BUY, TP Rs460, 19% upside)

IOCL’s reputation as a laggard to peers should change with Paradip scale-up, improving distillate yields from existing refinery portfolio and rising share of EBITDA from stable businesses, and together these factors will reduce volatility of overall earnings that has impacted multiples. IOCL continues to benefit from: (a) no inventory losses and resultant normalising of refining profits; and (b) rising earnings support from petchem and pipeline business. Over the next 12-18 months, we would expect IOCL’s discount vs OMC peers to narrow as RoE inches up to 20% after Paradip ramp-up. OMCs as a pack should re-rate given growing comfort on fuel deregulation and increased rollout of long-term drivers like micro-market pricing and non-fuel retailing. Announced capex plans shouldn’t be a worry as capex spends have always lagged guidance. TP of Rs460 (11x FY19E EPS) implies 19% upside.

Bharti Infra (BHIN IN, US$ 9,294mn, BUY, TP Rs355, 9% upside)

Consolidation is in the air – telcos are unlikely to be the winners but Infratel/Indus should get stronger. Minuscule contribution of non-incumbent tenants (15%) and Idea-Vodafone’s economic interest in Indus will not lead to an abrupt exit of tenants; data site rollouts will ensure 7% volume growth. Exit of marginal telcos and colocation redundancies would lead to an inevitable towerco consolidation; independent towercos are already stressed and may hold an opportunity for Bharti Infratel to roll up at replacement values. Not only would its bargaining power with telcos to rise, but it will also get an opportunity to finally correct its capital structure. Rather than hoping for elusive benefits for telcos post consolidation, grab the 5% dividend yield (FY19E) easily available.

AMBIT INSIGHTS

Ambit Capital Pvt Ltd 3 April 2017

ICICI Prudential Life (IPRU IN, US$ 8,463mn, Not Rated)

Insurance has historically been the second-biggest part of financial savings (~19% market share). However, in the past 3-4 years, with new financial and alternative savings products having gained market share, growth of the insurance industry was muted (1.6% CAGR over FY12-16). Nevertheless, in FY16 and YTD FY17, the industry reported handsome growth of 23% and 35% respectively. Growth in YTD FY17 also benefited from the demonetisation. Insurance companies have two major competitive advantages, i.e. brand and distribution. Private players like ICICI Pru Life and Max-HDFC Life enjoy a high level of brand and distribution advantage. The market share of private insurance players with strong partnership with banks increased from 63% in FY13 to 73% in YTD FY17. Current valuations of the listed Insurance players are rich and factor in very high sustainable growth. Following the demonetisation, we believe that the rate of shift in financial savings from physical savings will be higher than expected and can be grabbed by insurance players. Hence, tactically, it makes sense to invest in insurance players. Whilst we do not have any official ratings on insurance players, there are very few listed insurance players in India (ICICI Pru Life, Max Life and Bajaj Finserv). ICICI Pru Life is preferable due to its strong partnership with a large private bank.

Cadila Healthcare (CDH IN, US$ 6,977mn, BUY, TP Rs500, 13% upside)

With Moraiya facility now cleared, Cadila is best placed to reap the benefits of GDUFA given its presence in complex generics and large pipeline of ~200 ANDAs pending approval. Whilst the management has guided for more than 20 product approvals in FY18E, we believe the company could receive ~40 product approvals led by benefits of faster product approvals realised through GDUFA, resulting in 23% revenue CAGR over FY16-19E. Cadila has established presence in the USA and India and has been spending on complex and innovative products (innovative R&D at 25% of the total R&D), which could lead to sustainable revenues.

Petronet LNG (PLNG IN, US$ 4,662mn, BUY, TP Rs475, 18% upside)

Petronet (PLNG) is our top pick in the gas space given strong earnings growth visibility and attractive valuations of 15x/13x FY18/FY19E EPS relative to peers. We note PLNG’s earnings growth of ~18% over FY17-20 and RoE of ~23% are well ahead of domestic gas peers. Government push for a broader gas ecosystem and growing gas demand from industrial consumers/CGDs will keep LNG demand growth at high single digits over FY18/FY19. We expect Petronet to clock volumes of ~20mmt by FY20 given: (i) it will garner 90% of incremental demand on the west coast over FY17-19 and (ii) ramp-up in Kochi operations (only LNG terminal in South India) from FY19. Operating leverage due to Dahej ramp-up and reduction in Kochi losses will support earnings. Limited capex needs beyond 2.5mmt expansion at Dahej will provide FCF yield of ~6%. TP of Rs475 (16x FY19E EPS) implies ~18% upside.

Endurance Technologies (ENDU IN, US$ 1,667mn, BUY, TP Rs 765, 0% upside)

Endurance’s share in its addressable market among Indian 2Ws would increase to ~24% by FY19E from 22% now as it deepens presence in Hero/Honda (61% 2W market share but contribute <10% of Endurance standalone revenues). Strong technical capabilities in proprietary products (50% of domestic offerings), low cost structure (lean overheads) and growing customer interdependence (~40% of 2W supply chain) drive our confidence. While we find 2W OEM space expensive to invest in and fear rising competition, Endurance could be a less risky, high-return way to ride the cycle. While most small-to-mid size Indian ancillary players focus on single or a few products/clients, Endurance management stands out; this plus industry leading RoCE (18% in FY19E) back premium valuations. Risk: Bajaj Auto dependence.

AMBIT INSIGHTS

Ambit Capital Pvt Ltd 3 April 2017

Motilal Oswal (MOFS IN, US$ 1,608mn, SELL, TP Rs461, 37% downside)

MOFS is natural beneficiary of the secular shift of savings from physical to financial assets owing to its strong positioning in the broking and asset management business and scaling up of its distribution business. Brokerage business should do well due to: (i) continued investments in distribution and brand even in the downturn; and (ii) consolidation amongst smaller retail brokers. We expect the AMC business would also contribute meaningfully to profitability in the mid-term as it scales up and continues to gain market share. Our concerns are on growth and asset quality of its HFC business which was hit by the demonetisation. Whilst we build in strong earnings momentum of 43% EPS CAGR over FY16-18E, continued subdued trends in the housing finance business could disappoint on further upsides, which are already factored into lofty valuations of 3.6x FY18E P/B and 19.1x FY18E P/E.

Exhibit 2: G&C 11.2 portfolio vs Nifty 50

Portfolio Median mcap Median 6M ADV Median FY18 Median FY18 Median FY16

Beta (US$ mn) (US$ mn) P/E (x) P/B (x) RoE (%)

Nifty 13,816 18.6 18.2 3.1 16.1 1.0

G&C 11.2 6,211 5.1 22.1 4.9 22.9 0.8

G&C 11.1 4,789 4.1 21.2 4.7 23.4 0.8

Source: Bloomberg, Ambit Capital research

AMBIT INSIGHTS

G&C 11.2 – The composition

Company Sector Weight Ticker Mcap ADV-6m

(Median) Accounting Decile

Greatness Score Ambit

Stance Comments P/E P/B RoCE*

($mn) ($mn) (%) FY17E FY18E FY17E FY18E FY16

P I Inds. Agri Inputs 2.2 PI IN 1,778 N/A D4 100% BUY Gradual recovery in CSM business from 2HFY18. Good monsoons in FY18 driving domestic growth rates to ~15% (marginally better than trend market growth). Operating margins sustaining current levels at ~25%

27.2 24.4 8.1 6.8 35.9

Tata Motors Auto 4.3 TTMT IN 22,951 N/A D2 50% BUY 11% volume growth in (FY18) driven by new Discovery, Range Rover/Sport refreshes etc; Margin uptick from 2QFY18 due to diminishing hedge loss

21.9 13.2 1.8 1.6 14.3

Endurance Technologies Auto Anc 2.2 ENDU IN 1,667 N/A D2 63% BUY (i) Execution of new orders (suspension, CVT) from Hero in FY18; and (ii) Recovery of 2W industry in FY18E (14% YoY) to drive standalone revenue growth of 19%

32.0 25.5 6.1 5.0 22.0

Mahindra CIE Auto Anc 2.2 MACA IN 1,239 N/A D1 88% BUY (i) Turnaround of European operations (EBITDA margin up 110 bps in CY17) as operations stabilise; and (ii) higher standalone revenue growth (11% in CY17) due to stabilising content/M&M’s vehicle.

41.9 25.8 3.6 3.1 8.5

Atul# Chemicals 2.2 ATLP IN 1,094 N/A D6 92% NR Recovery in agri growth rates. Improved competitiveness in commodity business due to improved competitiveness

23.8 20.1 4.1 3.5 29.2

Page Industries Consumer Disc. 2.2 PAG IN 2,514 N/A D1 79% BUY 24% Revenue growth in FY18E from new launches in the lingerie segment and kidswear/leisurewear.

60.8 45.8 32.3 26.1 63.1

HDFC Bank* Financials 4.3 HDFCB IN 56,997 N/A N/A N/A SELL The bank ticks all the boxes on asset quality, strong liability franchise, NIM and operating efficiency. The bank's growth and profitability would remain superior to its peers.

25.6 23.7 4.4 3.8 1.9

Axis Bank* Financials 4.3 AXSB IN 18,118 N/A N/A N/A SELL While overhang of corporate NPAs remains, the bank has strong liability franchise, has significantly diversified towards retail assets and has tightly controlled operating efficiency.

32.6 18.5 2.1 1.9 1.7

ICICI Pru Life# Financials 4.3 IPRU IN 8,463 N/A N/A N/A NR It will benefit from the tailwind of shift to financial savings from physical savings with its strong distribution network and superior branding.

31.3 28.6 9.3 8.3 1.6

Motilal Oswal* Financials 2.2 MOFS IN 1,608 N/A N/A N/A SELL It will benefit from the tailwind of shift to financial savings from physical savings and also from its superior capital allocation trends.

36.8 29.3 6.4 5.5 4.2

City Union Bank* Financials 2.2 CUBK IN 1,405 N/A N/A N/A SELL A strong asset-side franchise with focus on collateralised lending is supporting bank's margins and asset quality.

17.2 16.1 2.6 2.3 1.5

ITC FMCG 4.3 ITC IN 52,499 N/A D2 71% BUY Announcement of GST taxation for cigarettes similar to the existing tax structure (tax neutral) will be the key positive catalyst for ITC.

30.2 26.4 9.4 8.6 45.7

Hind. Unilever FMCG 4.3 HUVR IN 30,426 N/A D2 83% BUY HUL deserves premium valuations versus sector average as it is best positioned to benefit from a rural macro demand recovery and practice of quality talent hiring and retention.

48.7 42.9 59.0 78.4 141.9

Pidilite Inds. Home Building 4.3 PIDI IN 5,527 N/A D5 92% BUY Increased focus and branding of Dr.Fixit, leading retail brand in the highly under-penetrated waterproofing market. Improved supply chain management (focus on reducing inventory day) will keep RoCEs elevated.

44.8 36.8 10.6 9.0 41.1

AMBIT INSIGHTS

Company Sector Weight Ticker Mcap

ADV-6m (Median) Accounting

Decile

Greatness Score Ambit

Stance Comments

P/E P/B RoCE*

($mn) ($mn) (%) FY17E FY18E FY17E FY18E FY16

Supreme Inds.## Home Building 2.2 SI IN 2,140 N/A D1 42% BUY Strong demand for agri pipes in 1QFY18 as the farmers prepare for the Kharif crop and latent demand from FY17 kicks in.

34.5 28.0 8.8 7.3 29.9

TCS IT 4.3 TCS IN 73,881 N/A D2 83% BUY Revenue growth acceleration to 10% YoY (USD) in FY18 vs. 6% in FY17 driven by improved competitive positioning in digital (larger projects) and lower drag from Diligenta, Latin America and Japan segments.

18.1 16.7 5.7 4.8 53.0

Tech M IT 4.3 TECHM IN 6,896 N/A D8 67% BUY Telecom revenue growth acceleration to 4% YoY (USD) in FY18 vs. -1% in FY17 driven by greater penetration in recently added US customers, and because price cuts are now in the base.

13.4 12.1 2.6 2.3 28.5

AIA Engg. Light Engg. 2.2 AIAE IN 2,309 N/A D4 92% BUY The company may surprise on volume growth as it targets newer geographies and its primary grinding offerings continue to grow.

32.6 28.6 2.9 2.6 25.4

I O C L Oil & Gas 4.3 IOCL IN 28,979 N/A D3 25% BUY Paradip operating at 80-90% capacity utilisation alongside GRMs of ~8-8.5 US$/bbl. Continued strength in marketing volumes with industry growth of ~5%. Limited fuel retailing market share loss of 100-150bps

9.7 9.6 2.3 2.0 14.7

Petronet LNG Oil & Gas 4.3 PLNG IN 4,662 N/A D2 29% BUY 8% growth in Dahej LNG volumes. Continued 5% escalation in tariff. Gradual progress on Kochi Mangalore pipeline construction leading to completion by end-FY19.

18.1 16.3 3.9 3.3 16.2

Lupin Pharma 4.3 LPC IN 10,063 N/A D9 92% BUY ~30 product approvals in FY18 led by GDUFA in the complex generics will lead to revenue growth and margin expansion

21.5 18.1 4.8 3.9 25.1

Cadila Health. Pharma 4.3 CDH IN 6,977 N/A D6 67% BUY ~40 product approvals in FY18 led by GDUFA in the complex generics will lead to revenue growth and margin expansion.

37.0 21.1 7.2 5.7 28.9

Torrent Pharma. Pharma 4.3 TRP IN 4,051 N/A D3 67% BUY Product approval in Brazil and sustained revenue growth in India with margin expansion led by operating leverage and improvement in execution 24.1 20.6 6.3 5.2 47.6

Bharti Infra. Telecom 4.3 BHIN IN 9,294 N/A D3 67% BUY Acquisition of towercos by Infratel, resulting in utilisation of surplus cash and balance sheet leverage. 21.8 20.1 3.3 3.2 18.0

Cash

15.2

Source: Bloomberg, Ambit Capital research. Note: *indicates we have a bottom-up SELL. #indicates Not Rated. FY17 and FY18 valuations are based on our bottom-up estimates except for stocks that are Not Rated where we have used Bloomberg consensus estimates. **RoA for BFSI stocks. ##Supreme Industries is not strictly a Home Building play given only 35-40% of its revenues are dependent on housing.

AMBIT INSIGHTS

Ambit Capital Pvt Ltd 3 April 2017

Exhibit 4: Audit of G&C 11.1 portfolio

Ticker Company Sector Mcap ($mn) Weight (%) Price

Performance 30-Nov-16 31-Mar-17

PI IN P I Inds. Agri Inputs 1,778 2.2 870 838 -3.6%

TTMT IN Tata Motors Auto 22,950 4.3 459 466 1.4%

TVSL IN TVS Motor Co. Auto 3,155 4.3 374 431 15.2%

MACA IN Mahindra CIE Auto Anc 1,239 2.2 197 213 8.0%

ATLP IN Atul Chemicals 1,094 2.2 2,235 2,392 7.0%

PAG IN Page Industries Consumer Discretionary 2,514 2.2 13,353 14,621 9.5%

TECHM IN Tech M IT 6,896 4.3 485 459 -5.4%

AXSB IN Axis Bank Financials 18,117 4.3 470 491 4.5%

CUBK IN City Union Bank Financials 1,405 2.2 135 152 12.5%

DCBB IN DCB Bank Financials 749 2.2 112 170 52.3%

HDFCB IN HDFC Bank Financials 56,993 4.3 1,200 1,443 20.3%

ITC IN ITC FMCG 52,496 4.3 233 280 20.6%

HUVR IN Hind. Unilever FMCG 30,424 4.3 844 912 8.0%

MRCO IN Marico FMCG 5,866 4.3 253 295 16.7%

BRGR IN Berger Paints Home Building 3,624 2.2 229 242 5.8%

SI IN Supreme Inds. Home Building 2,140 2.2 899 1,093 21.5%

PIDI IN Pidilite Inds. Home Building 5,526 4.3 640 699 9.2%

LPC IN Lupin Pharma 10,062 4.3 1,505 1,445 -4.0%

AIAE IN AIA Engg. Industrials 2,309 2.2 1,335 1,588 19.0%

TCS IN TCS IT 73,876 4.3 2,276 2,432 6.8%

HCLT IN HCL Technologies IT 19,032 4.3 804 875 8.8%

MAHGL IN Mahanagar Gas Oil & Gas 1,364 4.3 769 895 16.4%

BPCL IN B P C L Oil & Gas 14,489 4.3 644 650 0.9%

TRP IN Torrent Pharma. Pharma 4,051 4.3 1,377 1,553 12.7%

AJP IN Ajanta Pharma Pharma 2,389 4.3 1,898 1,761 -7.2%

PWGR IN Power Grid Corpn Utilities 15,914 4.3 192 197 2.8%

Cash* 6.5 100 102 2.1%

G&C 11.1 performance 8.56%

BSE500 Index 11,195 12,632 12.83%

Alpha (G&C 11.1 vs BSE500) -4.27%

Source: Bloomberg, Ambit Capital research. Note: *For cash we have assumed it was invested in 10yr GoI bonds when the portfolio was launched, i.e. 01 December 2016.

Exhibit 5: Good & Clean portfolios – cumulative performance to date

Source: Bloomberg, Ambit Capital research

(15.0)

(5.0)

5.0

15.0

25.0

35.0

45.0

G&C1

G&C2

G&C3

G&C4

G&C5.0

G&C5.1

G&C6.0

G&C6.1

G&C7.0

G&C7.1

G&C8.0

G&C9.0

G&C9.1

G&C9.2

G&C10.0

G&C11.0

G&C11.1

Alp

ha (%

)

G&C iteration

alpha (vs BSE500) cumulative alpha

AMBIT INSIGHTS

Ambit Capital Pvt Ltd 3 April 2017

Strategy Why does the sell side consistently get it wrong? The Indian sell side consistently tends to overestimate earnings growth projections for the benchmark indices. The consensus estimates for Sensex EPS estimates have been downgraded anywhere between 10% and 33% over the last thre years and FY18 projections look to be following the same trajectory (having been downgraded by 14 % already). In this note we highlight the potential biases that afflict the sell side: overconfidence, herd instinct and representativeness bias.

Consensus estimates face sharp downward revision every year…

In a series of notes over the past 12 months (‘M+R+T resets to the fore’, ‘FY18 earnings – Fantasy vs. Reality’) we had highlighted how consensus earnings estimates for the Sensex are systematically prone to extreme optimism and consequently face sharp downward revisions as the actual earnings pan out. As can be seen in the exhibit below, the Sensex EPS estimate for FY18 has already been cut by almost 14%. The Sensex EPS estimate for FY17 has been cut by a staggering 33%!!

Exhibit 1: Consensus Sensex EPS has been marked down significantly every year since FY12

Source: Bloomberg, Ambit Capital Research. The chart above has been made using Bloomberg consensus estimates for Sensex EPS for a given financial year over the course of past two years. For e.g. FY16 Sensex EPS estimate has been charted over the course of April14 to Mar’16

As we had highlighted in our 07 Feb’17 note, ‘FY18 earnings – Fantasy vs. Reality’. the difference in our estimates vs. consensus arise mainly due to our more pessimistic earnings (relative to consensus) in banking stocks. Our Banking team’s 20 Mar’17 note, ‘Still on the left side of the V’, clearly demonstrated how in light of: a) weak private capex and the associated weakness in corporate credit offtake; b) banks losing market share in corporate loans to corporate bonds; and c) the government’s black money crackdown affecting retail loan demand, the banking system’s loan growth will remain subdued in the foreseeable future.

Further, weak credit trends would lead to pricing competition amongst banks in turn leading to NIM compression for banks going forward, leading to overall weak operating profit trends.

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Quick Insight Analysis Meeting Note News Impact

Research Analyst

Prashant Mittal, CFA prashant.mittal@ambit.co Tel: +91 22 3043 3218

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AMBIT INSIGHTS

Ambit Capital Pvt Ltd 3 April 2017

Exhibit 2: BFSI sector leads our pessimism vs. the consensus for the FY18 Sensex earnings

Sector Weight in index (%)

Ambit (Rs) Consensus (Rs)

EPS growth (FY16-17)

EPS growth (FY17-18)

FY17E FY18E FY17E FY18E Ambit Consensus Diff Contribution Ambit Consensus Diff Contribution*

Auto 11% 157 196 161 219 -19% -18% -2% -10% 25% 36% -11% 16%

BFSI 32% 455 503 430 546 7% 1% 6% 95% 10% 27% -17% 67%

E&C 5% 56 62 53 64 7% 1% 5% 13% 11% 20% -9% 6%

FMCG 11% 93 106 89 102 -22% -25% 3% 15% 15% 14% 0% -1%

Home Building 2% 10 10 10 12 13% 24% -10% -10% 6% 16% -10% 2%

Infra 1% 18 18 18 18 41% 41% 0% 0% 0% 0% 0% 0%

IT 14% 242 256 243 262 14% 14% 0% -2% 6% 8% -2% 4%

Metals & Mining 3% 41 59 40 66 149% 144% 5% 7% 45% 65% -20% 6%

Oil & Gas 10% 237 250 233 247 10% 8% 2% 8% 5% 6% 0% 1%

Pharma 7% 77 90 75 91 28% 26% 2% 8% 16% 20% -4% 3%

Telecom 2% 14 14 18 17 -25% -3% -22% -20% 3% -8% 11% -2%

Utilities 3% 63 76 65 75 -2% 0% -3% -4% 19% 15% 4% -1%

Total 100% 1,462 1,639 1,436 1,718 2.0% (8.0%) Source: Bloomberg. Ambit Capital Research *the contribution is calculated as the percentage of difference in overall Sensex EPS estimate (Ambit vs. Consensus) coming from a particular sector. So for FY17-18, BFSI contributes 67% of the total difference of -8.0% between Ambit and consensus

… pointing towards potential biases that afflict the sellside

None of what we have said so far in the note is rocket science (eg. it is clear to the average newspaper reader in India that loan demand is going nowhere in the country). So why then does the Indian sellside overestimate EPS growth year after year especially since the buyside presumably pays the sellside to get earnings estimates right once in a while?

Given that both equity markets at large and consensus estimates are a by-product of average human expectations, our inherent biases play a major role in developing a wedge between the reality and its projection. We list below a few biases that we think distort the true picture

Bias #1: Overconfidence: In his 24 Mar’17 note, ‘Does meeting management really help?’ Saurabh Mukherjea highlighted how overreliance on a company management’s earnings’ guidance can be a recipe of disaster for investors. We reproduce a chart from that note that clearly highlights how the Duke Survey of CFOs has shown in the US that 100% of managers are 100% of the time systematically more optimistic about the prospects of their firm than they are about the economy (see Exhibit below and http://www.cfosurvey.org/).

Just as a company’s management is incentivized on the basis of the company’s earnings, the sell side in incentivized basis the ‘flows’ it gets from its clients. Such flows accelerate when there is confidence in the equity markets. By presenting a rosy picture the sell side (individually and collectively) skews the reality in order to drive their own benefits at the cost of the investor.

Interestingly, even though company managements exude systematic overconfidence, some companies have the capability to deliver on it. The sell-side unfortunately has no such power and is merely ‘forecasting’ the deliverability of numbers it cannot control!

AMBIT INSIGHTS

Ambit Capital Pvt Ltd 3 April 2017

Exhibit 3: US CFOs are 100% of time more optimistic about their firm than about the economy

Source: Duke Fuqua School of Business, Ambit Capital Research Note: The numbers above represent the survey’s mean optimism levels on a scale of 0-100 with 0 being least optimistic and 100 being most optimistic

Bias #2: Herd instinct – Similar to how the fear of regret of ending up on the wrong side of peers leads to index hugging in the buy side, the sell side fears being called out for being too different than consensus. The end result is that rather than ‘calling a spade a spade‘, the sell side too indulges in its own form of consensus hugging with everyone sticking to similar sort of projections. As can be seen in chart below, the Coefficient of Variation (CoV) of FY18 EPS estimates for maximum stocks in Sensex is less than 10%. The average CoV of largest 10 stocks (which at 66% weight would affect the final EPS for Sensex the most) is just 10% reflecting lack of dispersion. What this means in effect (statistically) is that for most stocks in Sensex, 95% of the estimates are within +/- 20% of mean value. Given that the Sensex EPS as a whole has seen revision of more than 30% in FY17 itself, this should be a cause for major concern!

Exhibit 4: Coefficient of variation (FY18 EPS estimate) of maximum stocks in Sensex is less than 10%

Source: Bloomberg, Ambit Capital Research

You can see this problem even at the stock specific level. Take, for example, HDFC Bank, the most recommended “BUY” stock idea in the world (source: Bloomberg Quint). 49 out of the 55 analysts covering the stock believe that HDFC is a raging BUY. However, the average consensus TP implies a paltry 2.7% upside! Also, only 5 of the 49 analysts who have a BUY rating on the stock believe that the stock can return more than 10% in one year.

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AMBIT INSIGHTS

Ambit Capital Pvt Ltd 3 April 2017

Exhibit 5: Herd instinct is visible in Indian stock recommendations

Source: Bloomberg

Bias #3: Representativeness bias – The Indian PM is clearly a gifted orator and possesses political acumen not visible in any other senior political leader. Furthermore, he looks the part AND has a reputation as a man who delivered economic growth in Gujarat. As a result, within three months of Narendra Modi being named as the BJP leader, the Sensex rose 4%. In the 8 months following Mr Modi’s victory in May 2014, the Sensex rose another 19%. It is unquestionable that the Prime Minister looks and talks like a leader who can deliver. As a result both the buyside (with money) and the sellside (with exuberant estimates) are betting that he will deliver.

However, the ecosystem in which Mr Modi delivered in Gujarat is significantly different from the National landscape in which he is currently working. One of the reasons he was able to deliver high economic growth in Gujarat was that he was operating on a more even canvass. (Interestingly during the time Mr Modi was Chief Minister of Gujarat (2001-14), the state had a real GDP growth rate (CAGR basis) of 12%. During the same time, Maharashtra had a real GDP growth rate (CAGR basis) of 11%.)

At a pan India level the checks and balances to Mr Modi’s CEO-style of working are considerable and the problems facing him are greater in scale than the problems facing Gujarat. The sell side seems to miss this point. In behavioural economics parlance the Indian sellside is suffering from the “representativeness heuristic” (for e.g. if someone looks like a good player, he must be a good player).

So what should the investors do?

We advise the investors to be mindful of over-optimism currently being displayed regarding the Sensex earnings growth against the backdrop of a rather bleak economic backdrop.

Even in the quarter to December 2016, actual EPS growth for the Sensex fell more than consensus had expected (see exhibit).

AMBIT INSIGHTS

Ambit Capital Pvt Ltd 3 April 2017

Exhibit 6: Sensex EPS for 3QFY17 was much lower than consensus expectations

Source: Bloomberg, Ambit Capital Research

In the quarter to March 2017, we reckon that the EPS hit will be even more pronounced given that the December quarter results were flattered by:

Channel stuffing by manufacturers who found themselves besieged by dealers and distributors who wanted to get rid of their old currency notes.

As highlighted by our Light Electricals team in a note dated January 05, 2017 titled ‘Not all doom and gloom’, “The decline in sales for consumer products (small appliances, water heater fans, stabilisers) has been restricted to 5-10% vs our earlier expectation of 20-30% decline. This was led by channel dumping in November which means that primary sales declined only in December.”

Postponement of bad news by lenders who (sensibly) slowed the pace of lending radically in light of demonetisation but who did not have to recognise the incremental impairment caused by demonetisation in 3QFY17 thanks to the 90-days past due delinquency rule that most lenders follow for provisioning on impaired loans.

The impact of the black money crackdown on demonetisation is likely to show up in the 4QFY17 results season as we see the indigestion in the distribution channel lead to a slowdown in demand (which is already evident in the FMCG and 2W spaces) and as the asset quality impairment related challenges catch up with the lenders.

As the chart below clearly highlights, the valuations for the Indian equity markets have run way ahead of the underlying fundamentals. With such stretched valuations, any negative surprise with respect to the earnings’ expectations is likely to lead to a significant correction for the markets.

Exhibit 6: Indian markets have re-rated significantly despite anaemic earnings growth

Source: BSE, Ambit Capital Research

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AMBIT INSIGHTS

Ambit Capital Pvt Ltd 3 April 2017

Given that there is a more than outside chance of that happening we advise investors to book profits at current levels especially in sectors like banking that are in the center of current crisis facing the economy. Further, as we have been advising investors over the past seven years, investors should o focus on quality franchises from a bottom up perspective that are great capital allocators (as highlighted in our Tenbaggers and Coffee Can Portfolios) and are structurally positioned to benefit from the disruption the Indian economy is currently going through.

Our FY18 Sensex EPS estimate is Rs1626 implying 10% YoY growth (as compared to the consensus EPS estimate of Rs1718). Multiplying our FY18 EPS estimate with a trailing P/E of 19x gives us a FY18-end Sensex target of 31,000 implying 4.6% upside in FY18.

AMBIT INSIGHTS

Ambit Capital Pvt Ltd 3 April 2017

Automobiles Mar 2017 volumes - Fiscal ends on a positive note March wholesale volumes, reported so far, were largely in line with our expectations. The passenger vehicle industry reported 12% YoY growth. Maruti underperformed the industry with 7% growth as volumes disappointed our estimates. MHCV volumes were impacted by the ban on sales of BS-II vehicles (click here for our note dated 30 March 2017). Nevertheless, the MHCV industry (ex Ashok Leyland) reported 2% higher volumes YoY. In FY18, we expect PVs and MHCVs to be impacted more by the demonetisation than 2Ws. Meanwhile, most auto stock prices trade close to or higher than pre-demonetisation levels, leaving little room for upside. We maintain SELL on Maruti (Gujarat plant to drive higher costs and lower EBITDA margin in FY18) and BUY on Ashok Leyland (market share gains and balance sheet improvement).

Passenger vehicles

March 2017 passenger vehicle wholesale volumes for the top-6 players grew by 12% YoY and 11% MoM. Maruti Suzuki underperformed the industry with its volumes falling short of our expectations. Maruti’s domestic volumes at 128k units grew 7% YoY and 6% MoM. The mini segment (Alto and Wagon R) declined by 16% YoY while Ciaz volumes fell by 10% YoY. On the other hand, Maruti’s compact (+24% YoY) and utility vehicle segments (+32% YoY) continued to report strong growth led by the new launches (Baleno, Ignis and Brezza).

Excluding Maruti, the industry grew by 16% YoY and 17% MoM. Hyundai’s wholesale volumes at 45k units grew by 9% YoY. Among other players, Toyota (strong demand for Crysta) and Tata Motors (strong demand for Tiago and Hexa) reported 81% and 83% YoY growth respectively. Honda Cars India reported growth of 9% YoY helped by the launch of the new Honda City.

Exhibit 1: Passenger vehicles (domestic) monthly volume trends

Units in ‘000 Mar-17 Mar-16 YoY Feb-17 Mar-17 MoM Feb-16 YoY Jan-16 Jan-15 YoY

Maruti 127.7 118.9 7% 120.6 6% 108.1 12% 133.9 106.4 26%

Mahindra (UV+PV) 25.4 26.9 -6% 20.6 23% 23.7 -13% 20.1 22.1 -9%

Tata Motors 15.4 8.5 83% 12.3 25% 11.0 12% 12.9 10.7 20%

Hyundai 44.8 41.2 9% 42.3 6% 40.7 4% 42.0 38.0 11%

Toyota 13.8 7.6 81% 11.5 20% 10.3 12% 10.3 8.5 21%

Honda 19.0 17.4 9% 14.2 34% 13.0 9% 15.6 17.1 -9%

Total 246.0 220.5 12% 221.6 11% 206.8 7% 234.9 202.9 16%

Source: Company, Ambit Capital research

Two-wheelers

Among the two-wheeler OEMs, only Royal Enfield (RE) has so far reported March 2017 wholesale volumes. RE’s volumes at 60k units were up 17% YoY and 3% MoM.

Commercial vehicles

The top three MHCV players (excluding Ashok Leyland, which is yet to report volumes) reported a 2% YoY increase in March 2017 wholesale volumes. Tata Motor’s MHCV volumes at 17.6k declined 5% YoY. Tata Motors, in its press release mentioned that the ban on the sale of BS-III vehicle by the Supreme Court on 29 March 2017 led to confusion among the dealers and consequently they focused on increasing retail sales and reducing inventory.

NEGATIVE Quick Insight Analysis Meeting Note News Impact

Research Analysts

Ashvin Shetty, CFA ashvin.shetty@ambit.co Tel: +91 22 30433285

Gaurav Khandelwal, CFA gaurav.khandelwal@ambit.co Tel: +91 22 30433132

AMBIT INSIGHTS

Ambit Capital Pvt Ltd 3 April 2017

Exhibit 2: MHCV (domestic) monthly volume trends

Units in ‘000 Mar-17 Mar-16 YoY Feb-17 Mar-17 MoM Feb-16 YoY Jan-16 Jan-15 YoY

Tata Motors (MHCV) 17.6 18.5 -5% 15.0 17% 14.9 1% 13.8 14.7 -6%

Eicher Motors (ex Volvo)

7.1 6.6 7% 5.4 31% 4.9 9% 4.4 3.7 20%

Mahindra Trucks & Bus 2.6 1.7 51% 1.3 100% 0.9 36% 1.2 1.1 6%

Total 27.3 26.9 2% 21.7 26% 20.8 5% 19.5 19.5 0%

Source: Company, Ambit Capital research

Where do we go from here?

In FY18, we believe 2Ws would be better placed (low ticket, utility purchases) to tackle demand headwinds from demonetisation compared to PVs (discretionary purchases) and MHCVs (subdued end-user segments like real estate and weak resale markets).

Exhibit 3: We expect 2Ws to record faster recovery than PVs and CVs in FY18

mn units FY16 FY17E FY18E CAGR (FY16-18)

PVs 2.79 2.97 3.17 7%

YoY growth 6% 7%

Motorcycles 10.70 11.41 12.95 10%

YoY growth 7% 14%

Scooters 5.03 5.84 6.72 16%

YoY growth 16% 15%

2Ws (ex-mopeds) 15.73 17.25 19.67 12%

YoY growth 10% 14%

MHCV (goods + passenger) 0.30 0.30 0.32 3%

YoY growth 0% 8%

Source: SIAM, Ambit Capital research

Maruti: In FY17, Maruti reported volumes of 1.59 mn units, up 10% YoY. This is 1% higher than our FY17 estimates.

After the demonetisation announcement, we have already brought down our FY18 industry growth estimates from 14% to 7%. Our current estimate for FY18 builds in market share gain for Maruti (~160bps YoY) given strong response to new launches and higher exposure to first-time car buyers and salaried employees. Consequently, Maruti’s FY18 volumes should grow at 11% YoY. On the profitability side, we expect higher commodity prices would continue to impact margins in 4QFY17. In FY18, particularly in 1HFY18, we believe the new Gujarat plant will result in the lower gross margin (higher vendor pricing due to transport costs from Gurgaon/Manesar to Gujarat) and higher overhead costs during the ramp-up phase. As a result, we factor in nearly 80bps decline in FY18 EBITDA margin. We expect FY18 EBITDA growth to remain muted at 7%. Maintain SELL on the stock due to expensive valuations (40% higher than five-year historical average).

Ashok Leyland: Our retail-level channel checks in the MHCV industry suggest that the pre-buying of ahead of the implementation of BS-IV did happen in March 2017. Similar to Tata Motors, Ashok Leyland dealers also focused on reducing inventory from 29 March 2017 because of the ban on the sale of BS-III vehicles by the SC. Our current estimates imply volume of 12.8K, or a 3% decline in March 2017. Given our expectation of pre-buying in March 2017, we expect the actual volumes could be higher for Ashok Leyland.

In FY18, as the demonetisation impact wanes, we build in ~7% YoY growth for Ashok Leyland’s MHCV volumes. New introductions in the ICV, LCV and bus segments would have a positive impact in FY18 volumes. We remain BUYers.

AMBIT INSIGHTS

Ambit Capital Pvt Ltd 3 April 2017

Exhibit 4: Relative valuations

Company Mcap EV/EBITDA (x) P/E (x) CAGR (FY17-19) EBITDA Margin (%) RoE (%)

US$ mn FY17 FY18 FY19 FY17 FY18 FY19 Sales EBITDA EPS FY17 FY18 FY19 FY17 FY18 FY19

Maruti Suzuki 28,461 15.9 14.8 12.9 24.3 23.7 20.8 14 11 8 1 21 70 25 22 21

Tata Motors* 23,270 7.3 5.3 4.4 32.3 15.9 11.9 10 30 64 5 1 30 9 13 14

M&M# 12,354 8.7 7.5 6.6 15.6 13.4 11.6 12 14 15 (1) 10 6 15 15 15

Bajaj Auto 12,942 14.8 13.1 11.9 20.4 18.7 17.0 13 11 9 5 13 27 31 31 32

Hero MotoCorp 10,204 12.7 11.1 10.2 18.4 16.7 15.3 13 12 10 8 9 18 40 38 35

Eicher Motors 10,448 22.2 18.4 15.4 39.3 33.0 28.3 21 20 18 (0) 19 36 47 41 36

Ashok Leyland 3,886 10.9 9.7 8.6 19.5 16.1 14.0 12 12 18 (6) 16 (8) 23 24 23

TVS 3,194 23.0 16.4 13.3 36.4 25.1 20.2 21 32 34 3 19 53 27 32 32

Median 14.2 11.6 10.1 26.0 19.8 16.9 15 19 24 27 28 27

Source: Bloomberg, Company, Ambit Capital research. Note- Multiples and return ratios computed on Ambit estimates. *Tata Motors EBITDA, net earnings adjusted for R&D capitalisation. #M&M multiples excludes value of investments in subsidiaries and associates.

AMBIT INSIGHTS

Ambit Capital Pvt Ltd 3 April 2017

BFSI Weekly tracker In this weekly update, we have compiled all the key news flows, regulatory developments, key management interviews, summary of takeaways from our meetings with management teams/primary data and key notes we published last week. On the positive side, the Government amends its mega power policy to provide potential temporary relief to lenders’ exposed to these projects awaiting PPAs. On the negative front: (1) credit growth trends stay weak with all segments witnessing subdued trends; and (2) MFIs continue to raise alarm bells on poor collections. Exhibit 1: Key news flows during last week

Title Description Implications

MFIs seek more time for loan repayments

News: Microfinance Institution Network (MFIN), the representative body for microfinance institutions (MFIs), is looking to seek six-month extension of repayment tenure for loans stuck on account of demonetisation. Earlier, MFIN had sought a three-month extension from the RBI. The request means that if the loan tenure is 12 months, it could be extended to 15/18 months. Microfinance loans collection has come down to around 85%, against nearly 99% prior to demonetisation. Earlier this month, ratings agency ICRA had cut rating outlook for Janalakshmi Financial Services and Satin Credit Care from stable to negative. (Source: https://goo.gl/XwPzy6)

Views: Recent updates from listed companies and CRISIL indicate MFI collections haven’t materially improved since end-3QFY17; collection ratios are 60-95% for various states, well below pre-demonetisation levels of ~99%. Geographical spread of stress has actually widened recently given fresh speculation on loan waivers and lender-specific issues. While 3QFY17 results for SFBs/MFIs showed a sharp slowdown in disbursement/AUM growth, credit cost/NPA trends remained largely benign as early delinquencies were expected to normalise in the following months. However, trends since then, suggest sticky early delinquencies will now spill over into NPAs and lead to a significant increase in credit costs. For SFBs under coverage (Ujjivan/Equitas), we expect FY18 credit cost of 220-250bps (vs 60-120bps pre-demonetisation). Remain SELLers on Ujjivan and Equitas.

Negative

Government approves extension of mega power policy

News: The Government approved the extension of mega power policy to benefit 24 plants of 30,000MW capacities. The amendments propose to release bank guarantee (around Rs100bn) in proportion to percentage of capacity for which long-term PPA has been signed. This policy was issued with an aim, among others, to avoid formation of potential stressed assets worth Rs1.5 trillion. (Source: https://goo.gl/zIqkCT)

Views: The above policy will give corporate lenders having exposure to these power projects some relief as released bank guarantees can be used to service interest for some time. This will delay the NPA recognition. However, this is a temporary relief; eventual sign-ups of PPAs and increase in operational cash flow are the key factors to keep the exposure regular.

Positive

Update on credit growth

News: Last week, the RBI released an update on sectoral credit for the month ending February 2017. The growth in non-food credit continued to remain muted at 3.3% YoY. Within that, the credit growth in industries continued to decline (down 5.2% YoY). Growth in services and personal loans also continued to remain muted at 7.7% and 12% respectively. Within personal loans, growth in housing loans declined to 11.4% in Feb’17 from 13.5% in Jan’17 and 14.8% in Dec’16. In another update from the RBI, credit growth for the fortnight ending 17 March, 2017 was at 4.4% YoY. (Source: https://goo.gl/9LOFk7; https://goo.gl/CHTbTC)

Views: Indian banks’ credit growth has been continuously plunging since FY11. It has gathered pace post demonetisation with 4.4% YoY growth as of 17 March, 2017. Even adjusting for non-bank borrowings, credit growth trends are decreasing. Retail loans also seem to be decelerating post demonetisation. With real estate and the informal economy likely to stay under pressure for some time, feeble chances of revival in capex cycle and banks’ losing market share to corporate bonds mean banks would witness weak credit growth (10-12% CAGR over FY18-19E vs 13% CAGR in the last five years). Weak credit growth should result in pricing competition leading to NIM pressure as well. Thus, in absence of strong operating profit, PSU banks and private sector corporate lenders will struggle to emerge from asset-quality woes (7-10% RoE in FY18E). Retail banks are unlikely to deliver on sustained strong earnings growth expectations built into lofty valuation of 3.3x FY18E BV (vs ~1.0 FY18E BV for corporate lenders) due to growth/NIM pressure. We remain SELLers on the sector.

Negative

Source: Media reports, Ambit Capital research

Quick Insight Analysis Meeting Note News Impact

Research Analysts

Pankaj Agarwal, CFA Tel: +91 22 3043 3206 pankaj.agarwal@ambit.co

BFSI Team bfsi@ambit.co

AMBIT INSIGHTS

Ambit Capital Pvt Ltd 3 April 2017

Exhibit 2: Key Interviews given by management during last week

Interview with Summary

Kaizad Bharucha, Executive Director, HDFC Bank

Focus is on expanding corporate loan book, refinancing and term loans: HDFC Bank is now looking at increasing focus on corporate term loans — something it has shied away from for a long

time. The bank used technology to offer working capital loans to corporates and helped with vendor financing and dealer

financing. This helped to improve efficiency for the entire supply chain and not merely for the corporate client. Having understood the cash flows of clients, the bank is now aggressively helping companies deal with balance sheet

stress. HDFC Bank is among the few banks willing to even fund infrastructure projects now, especially in the roads segment. (Source: https://goo.gl/bczILq).

Uday Kotak, Vice Chairman, Kotak Mahindra Bank

Only five large banks can survive in the long term; the bank seeks to double its customer base in 18 months: Globally, in most countries, there are only three to five large banks which dominate. This is how the future will be in our

country as well. Kotak Mahindra Bank has learnt a lot from the ING Vysya merger and that does not mean that the bank is rushing into a

merger but the bank is always open for consolidation. Macroeconomic stability, now combined with political stability, is a very big plus for the country to embark faster on the

growth side. This is the opportunity the bank is looking forward to. Separately, the bank launched its app-based banking driven strategy called “811” to double its customer base in 18

months (Source: https://goo.gl/cvxOR0, https://goo.gl/mKKACr). Source: Media reports, Ambit Capital research

Exhibit 3: Recent notes published by Ambit team relevant to the BFSI sector

Title Description Implications

NPA clean-up: Who foots the bill?

The clamour over a final takedown in the banks’ bad loan clean-up saga has resurfaced in recent weeks. Media reports suggested an imminent announcement by the Finance Ministry. Having rejected the “bad bank” option, the Government is likely to form more oversight panels to help banks take hard decisions on deep restructuring of stressed assets. However, with provisioning cover of ~33% on stressed loans, even ~50% haircut could lead to ~US$20bn bill, which banks can’t afford. The Government doesn’t want to be seen providing funds for corporate write-offs but has also been slow on governance reforms at PSU banks, keeping away private capital. Only a dilution in restructuring norms on write-off amortisation and asset classification can save the day, but that will make banks’ balance sheets opaque. Any plan short of ring-fencing stressed assets and provision of capital for them is unlikely to support a rally in the PSU banks for long. We remain negative on the sector.

Negative

Source: Ambit Capital research

AMBIT INSIGHTS

Ambit Capital Pvt Ltd 3 April 2017

Economy Ambit’s qualitative leading indicators’ (QLI) tracker With qualitative data collected through primary data networks often proving to be a stronger leading indicator of changes in the economy, we collate a weekly tracker that captures these critical qualitative inputs. On the positive front: (1) Car makers end FY17 on a high note as sales zoom in March; (2) The Lok Sabha gave its nod to all four GST bills; and (3) Mergers and Acquisition activities double in FY17 compared to FY16. On the negative front: (1) NHAI to miss roads awards target by a huge margin in FY17; (2) MFIs seek more time for loan repayments; (3) Cement volumes declined YoY for the third successive month in February; and (4) As cab drivers’ earnings slow down, Uber and Ola drivers in India are staring at defaults on car loans.

Exhibit 1: Ambit’s qualitative indicators’ tracker for the week commencing 27 March, 2017

Head Description Positive/ Negative

Car majors hit top gear in last lap of FY17

Carmakers achieved their best domestic sales figures in March, the last month of FY17, since demonetisation, with more than 10% growth YoY.

The sector sold over 3 million units in FY17, a milestone. In FY16, 2.78 million units were sold. India, the fifth-largest passenger vehicle market globally (cars, vans and utility vehicles), has registered a volume growth of about 9% in FY17.

The country’s largest carmaker Maruti Suzuki reported a domestic sale of 127,695 vehicles, growing at 7.4% over March 2016. The growth was led by the compact and utility vehicle segment. In FY17, domestic volume of the company stood at 1.44 million, up 10.6% from the previous year (source: http://www.business-standard.com/article/companies/car-majors-hit-top-gear-in-last-lap-of-fy17-117040100940_1.html).

Positive

All GST bills passed in Lok Sabha for uniform taxation across India

India is on the verge of creating history. With the Lok Sabha signing off on the last batch of bills on the Goods and Services Tax (GST), India is just a step away from rolling out an indirect tax regime that will for the first time economically unify the country.

Clearing the last legislative hurdle, the Lok Sabha gave its nod to the last batch of bills crucial for the implementation of this seminal tax reform. The lower house passed the four bills; the central GST bill, the integrated GST bill, the union territory GST bill and the GST (compensation to states) bill.

Since these bills were tabled as money bills, the Rajya Sabha can only make recommendations on the proposed laws and that too within 14 days of the bills being sent to the upper house (source: http://www.livemint.com/Politics/szIPFP9kOYy2VVxMzUya1M/All-GST-bills-passed-in-Lok-Sabha-for-uniform-taxation-acros.html).

Positive

FY17 in review: A record year for M&A deals

FY17 has set a record for mergers and acquisitions (M&As) in India, with deals worth $61.26 billion—more than double the value of transactions last year.

In 2015-16, M&A deals were worth $27.62 billion. The sharp increase was a result of both strong foreign buying interest and consolidation underway across sectors including telecom, cement and energy.

From Rosneft PJSC’s acquisition of Essar Oil to the merger agreement between Vodafone India and Idea Cellular, FY17 has largely been a year of big ticket M&A deals. Inbound deals worth $21.2 billion and domestic deals worth $35.6 billion were reported in the financial year (source: http://www.livemint.com/Companies/yFW5eECFGq2F0hdbO3FdLP/201617-in-review-A-record-year-for-MA-deals.html).

Positive

E&C/Infrastructure: Tendering activity – a few burn brighter

Tendering of infra projects has been strong in FY17 (+19% YoY). However, the growth rate has decelerated off a high base (64% YoY in FY16) and a similar trend could sustain as Government allocation to infra is now tapering.

Tendering growth was led by roads (up 29%) and power distribution (up 120%); the latter aided by the Central Government’s IPDS/DDUGJY schemes.

Government-led housing scheme was another bright spot (up 71%) though tender sizes remain sub-Rs5bn. Water and railway tenders disappointed, with no growth in tendering and small tender sizes. With no sign of

improvement in private sector capex, Government-led investments remain the only beacon of hope and roads and power T&D the main bright spots (click here for our note dated 28 March, 2017 for details).

Neutral

Quick Insight Analysis Meeting Note News Impact

Research Analysts

Ritika Mankar Mukherjee, CFA ritika.mankar@ambit.co Tel: +91 22 3043 3175 Sumit Shekhar sumit.shekhar@ambit.co Tel: +91 22 3043 3229

AMBIT INSIGHTS

Ambit Capital Pvt Ltd 3 April 2017

Head Description Positive/ Negative

Light Electricals: Lacklustre demand for seasonal products this summer

Channel participants told us that growth in sales of fans and stabilisers has been weak, at a low single digit, due to delay in the onset of the summer season and unseasonal rains in South and North India (media articles: https://goo.gl/GRYhNS and https://goo.gl/w7ndEm).

Crompton’s CEO highlighted weak demand in 4QFY17 and 1QFY18 (https://goo.gl/ZSakoZ). Margins are also likely to be weak given none of the fan and stabiliser companies were able to hike prices in Jan-Feb despite an increase in copper prices (up 17% over the last 5 months).

Whilst fan prices were increased in March, there is a fear of rollback if sales remain weak in the last week of the month. Competitive intensity, especially in premium fans, has increased; Havells has launched dust-resistant fans, Orient has launched the Aeroquiet range across India and Bajaj Electricals has launched 10 new models.

Neutral

Source: Media reports, Ambit Capital research

Exhibit 2: Ambit’s qualitative indicators’ tracker for the week commencing 27 March, 2017 (continued)

Head Description Positive/ Negative

NHAI to miss 2016-17 road projects target on land acquisition woes

The National Highways Authority of India (NHAI) will miss its target of awarding 15,000km of road projects in the year ending 31 March, 2017 by a huge margin. A year ago, the Government set a target of awarding 25,000km of road projects in FY17. Of this, 15,000km was to be awarded by NHAI and the remaining 10,000km by the Ministry of Road Transport and Highways (MoRTH).

It was seen as an ambitious goal from the very start, given that the Union Government is already building roads at the fastest pace ever.

However, between April 2016 and January 2017, NHAI awarded 50 projects spanning about 2,914km under the build, operate, transfer (BOT), hybrid annuity model (HAM) and engineering, procurement, construction (EPC) models, according to data on NHAI’s website. Data for February and March has not yet been made available.

NHAI will likely achieve about 4,500-5,000km of road awards in the year ending 31 March, 2017 against its earlier plan of 15,000km (source: http://www.livemint.com/Politics/gH1DRE9FPWQlZFhwaeArML/NHAI-to-miss-201617-road-projects-target-on-land-acquisitio.html).

Negative

Monsoon likely to remain below normal for India in 2017: Skymet

According to Skymet Weather, monsoon in 2017 is likely to remain below normal at 95% (with an error margin of +/-5%) of the long period average (LPA) of 887 mm for the four-month period from June to September.

This may cause trouble for farmers and decide the fate of Kharif crop that depends heavily on the performance of the southwest monsoon.

The India Meteorological Department (IMD) had earlier reported that the country is likely to emerge unscathed from the El Nino weather phenomenon, as it is expected to set in only during the latter part of the four-month monsoon season.

Monsoon rain will arrive on the southern tip of Kerala by around 1 June, 2017 and retreat from the western state of Rajasthan by September (source: http://www.business-standard.com/article/economy-policy/monsoon-2017-to-remain-below-normal-for-india-skymet-117032700359_1.html).

Negative

Core sector growth slips to over 1-year low of 1% in Feb

The growth of eight core sectors slipped to over one-year low of 1% in February mainly due to decline in output of crude oil, natural gas, refinery products, fertilisers and cement.

The growth rate of eight infrastructure sectors of coal, crude oil, natural gas, refinery products, fertilisers, steel, cement and electricity was 9.4% in February 2016. The previous low of 0.9% was recorded in December 2015. In January 2017, these sectors grew by 3.4%.

The core sectors, which contribute 38% to the total industrial production, expanded by 4.4% in April-February this fiscal compared to 3.5% growth in the same period previous financial year, according to the data released by the commerce and industry ministry today (source: http://www.business-standard.com/article/economy-policy/core-sector-output-growth-slows-to-1-in-february-117033100787_1.html).

Negative

Note ban: MFIs seek more time for loan repayments

With disruptive influence at local level continuing to impact repayments, the Microfinance Institution Network (MFIN), the representative body for microfinance institutions (MFIs), is looking to seek a six-month extension of repayment tenure for loans stuck on account of demonetisation. Earlier, MFIN had sought three months’ extension from the Reserve Bank of India (RBI).

In December 2016, the RBI had granted additional 60 days for repayment of certain loans, including microfinance loans, which were due between November 1 and December 31.

Later, it extended the repayment tenure by another 30 days, giving farmers a window of about 90 days extra to repay loans due within the stipulated period.

Now, with the 90-day extension period expiring in the last one and two months, a large chunk of borrowers are feared to be tagged as non-creditworthy by credit bureaus. Further, MFIs would have to factor in large chunks of NPA in their books (source: http://www.business-standard.com/article/economy-policy/note-ban-mfis-seek-more-time-for-loan-repayments-117040100859_1.html).

Negative

AMBIT INSIGHTS

Ambit Capital Pvt Ltd 3 April 2017

Head Description Positive/ Negative

11MFY17 cement production down 1% YoY

In Feb-17, cement production declined 16% YoY. On a like-to-like basis (adjusting for the leap year last year), production declined 13% YoY, similar to Jan-17.

Production decline has been due to: (a) high base as volumes were up ~13% in Feb last year; and (b) the impact due to demonetisation.

Cement production in the country has declined for the third consecutive month, resulting in 11MFY17 cement production being down 1% YoY.

Volume growth in FY17E has been led by South (6-8% YoY, mainly AP/Telangana) as growth in other regions has been between -3% and +3%.

Negative

Uber drivers in India likely to default on their loans

Two years ago, Gopal Singh Mehra, a New Delhi-based surveyor, started seeing advertisements on buildings and bus stands that offered the chance to earn more than Rs100,000 ($1,500) per month — and obtain a car — by becoming a driver for Uber.

Mr. Mehra, then earning Rs25,000 per month, decided to investigate. He travelled to the outskirts of Delhi to Uber’s cramped two-room office, where its employees explained he would have to take a loan to buy the car, but assured him the monthly repayments would pose no difficulty.

But those expectations have not been fulfilled. Initially, Mr. Mehra had fares of Rs70,000 to 85,000 per month, which meant that, after expenses, he was taking home the same as he had as a surveyor. More recently, his fares have fallen by half, despite driving 12 to 13 hours a day, six days a week, he says. After deducting the money for his car loan and fuel, he adds he is barely able to meet his family’s basic needs (source: https://www.ft.com/content/12bf0cce-0d99-11e7-a88c-50ba212dce4d).

Negative

BFSI: NPA clean-up: Who foots the bill?

The clamour over a final takedown in the banks’ bad loan clean-up saga has resurfaced in recent weeks. Media reports suggested an imminent announcement by the Finance Ministry.

Having rejected the “bad bank” option, the Government is likely to form more oversight panels to help banks take hard decisions on deep restructuring of stressed assets. However, with provisioning cover of ~33% on stressed loans, even ~50% haircut could lead to ~US$20bn bill, which banks can’t afford.

The Government doesn’t want to be seen providing funds for corporate write-offs but has also been slow on governance reforms at PSU banks, keeping away private capital. Only a dilution in restructuring norms on write-off amortisation and asset classification can save the day, but that will make banks’ balance sheets opaque (click here for our note dated March 29, 2017 for details).

Negative

Automobiles: BSIII curbs – bad news for OEMs

SC ban on registration of BS-III vehicles from 1 April, 2017 is the worst scenario for auto OEMs among several ranging from allowing registration after 31 March, 2017 to additional tax. Ashok Leyland, with an unsold BS-III vehicle inventory of 18-20k units, and Hero MotoCorp, with 250-300k units, would be the most impacted companies.

Some mitigating factors include sale of BS-III vehicle in some export markets, sales in the last two days of FY17 and sale of some BS-III engines in the aftermarket.

While it is currently challenging to quantify the impact on stock prices, our interactions with industry participants suggest a hit of Rs0.2-1.0 per share (0.2-1.25% of CMP) on Ashok Leyland’s target price and Rs2-9 per share (0.1-0.3% of CMP) on Hero’s target price (click here for our note dated March 30, 2017 for details).

Negative

Source: Media reports, Ambit Capital research

AMBIT INSIGHTS

Ambit Capital Pvt Ltd 3 April 2017

Utilities Weekly tracker In this weekly update, we have compiled the key news flows, regulatory developments and management/regulator interviews that occurred last week. The key positive news: (a) Government approves an extension of mega power policy; (b) BHEL planning to diversify into multiple businesses; and (c) CIL in talk with coastal power companies to substitute imports. The key negative news: NTPC may drop further expansion plans of Kudgi thermal project in Karnataka.

Exhibit 1: Key news flows during last week

Sub-Sector / Company Title Implications Description Source

Power policy

Government approves extension of mega power policy

Positive

The Government gave a five-year extension to 25 large power projects to sign long-term power purchase agreement (PPA) and avail the promised customs and excise duty benefits on equipment procured under the Mega Power Policy of 2009.

https://goo.gl/55qlDA

Earlier these 25 projects were given five years to sign PPA and avail customs and excise duty benefits on equipment procured.

The move will provide ~Rs100bn of benefits to the 25 projects with about 32GW in capacity and help ease the stress that some of them pose to the banking sector. The total cost of these projects is estimated to be about Rs1.5trn.

GMR Chhattisgarh Energy, Monnet Power, Lanco Power, Essar Power (Jharkhand), JSPL, Hinduja National Power Corp., IL&FS Tamil Nadu Power, and Torrent Power are among companies that are eligible for the benefits.

Our view: Whilst this is positive, it doesn’t guarentee signing PPAs.

Unless discoms come with new PPAs, these projects are likely to remain stranded.

According to an industry estimate, tenders for just 11GW versus commissioned projects of ~75GW have been floated by the states since 2011 for new PPAs.

Further, the states are unlikely to come with meaningful PPA tenders in near term given 19 states are having surplus power (as per consultants).

NEUTRAL Quick Insight Analysis News Note Meeting Note

Research Analysts

Bhargav Buddhadev bhargav.buddhadev@ambit.co Tel: +91 22 3043 3252

Deepesh Agarwal, CFA deepesh.agarwal@ambit.co Tel: +91 22 3043 3275

AMBIT INSIGHTS

Ambit Capital Pvt Ltd 3 April 2017

Sub-Sector / Company Title Implications Description Source

BHEL

BHEL planning to diversify into multiple businesses

Positive

BHEL is planning to enter the aerospace sector.

https://goo.gl/jMneYi

BHEL has signed an MoU with ISRO for manufacturing space grade solar cells. It is also looking to partner with ISRO for satellite launches.

BHEL is also in discussion with the Defence Ministry for the maintenance of the aircraft engines. BHEL has already manufactured compact heat exchangers for 'Tejas' aircraft which is indigenously developed aircraft inducted by the Air Force last year.

To tap the opportunity in the defence and aerospace, BHEL has formed Defence and Aerospace Business Group.

BHEL wants to become a turn-key metro rail end-to-end solutions provider and also manufacture electric vehicles, such as buses, cars, two-wheelers and boats.

BHEL is also exploring the feasibility of manufacturing cells and batteries for application in electric vehicles.

Our view: BHEL’s desperation to diversify confirms the challenges the power sector is facing.

We don’t believe diversifying into solar panels makes sense given Indians cannot compete with Chinese OEMs which can manufacture equipment at least 15% cheaper; Chinese panel manufacturers are operating at ~55% utilisation levels.

In transportation, BHEL does not have any competitive edge due to lack of cutting edge technology over MNC peers like Alstom and GE; BHEL has failed to benefit from the metro opportunity. In aerospace, we are not sure whether BHEL has the relevant technology for launching satellites.

Coal

CIL in talk with coastal power companies to substitute imports

Positive

Coal India Ltd (CIL) is in talks with the power companies along the western and eastern coasts to discontinue the use of imported coal.

https://goo.gl/QoljdD

As per CIL's marketing director, imported coal power plants are keen to shift to domestic coal to lower the cost of generation.

Our view: Earlier in Aug'16, CIL highlighted its plan to sell blended coal to domestic plants. By blending different grades of domestic coal, CIL was planning to supply coal with attributes similar to imported coal (http://goo.gl/OFDuuB).

If CIL manages to supply coal equivalent to imported coal at a cheaper rate (including freight) it will be positive for imported coal-based players like JSW Energy, Adani Power, Tata Power (Mundra, if discoms allow to change source of fuel).

NTPC

NTPC may drop further expansion plans of Kudgi thermal project in Karnataka

Negative

NTPC may call off its plan to increase the capacity of Kudgi power plant from 2.4GW currently to 4GW.

https://goo.gl/HQoKfH

Our view: We believe, the challenges in signing PPA could be the possible reason for NTPC not expanding Kudgi plant.

There isn't enough power demand in Karnataka for NTPC to expand its Kudgi power plant given state's peak demand/peak deficit of just 9.5GW/0.7GW in FY16.

Moreover, the thermal plant is facing competition from the renewables given the recent solar tariff at Rs3.33/unit (levelised) and wind tariff at Rs3.46/unit.

Clearly negative news for BHEL.

AMBIT INSIGHTS

Ambit Capital Pvt Ltd 3 April 2017

Sub-Sector / Company Title Implications Description Source

UDAY

UDAY pulls down book losses in FY17 by half to Rs375bn

Neutral

ICRA estimates that financial restructuring under the Ujwal Discom Assurance Yojana (UDAY; debt refinancing and transfer of 75% debt to state governments) will lower book losses of discom from Rs670bn in FY15 to Rs375bn in FY17.

https://goo.gl/XwjRGq

However, the states are still reluctant to take tariff hikes with only 16 out of the 29 states having filed so far.

Discoms were required to file FY18 tariff petitions by Nov'16 to receive tariff hike orders from State Electricity Regulatory Commissions (SERCs) by Mar'17.

Only Manipur, Mizoram, Odisha and Bihar have issued tariff orders.

Lastly, Kerala, Tripura, Arunachal Pradesh recently joined UDAY scheme taking the count of states to 26.

Our view: We remain negative on the UDAY scheme. Recently, lenders said that they are planning to cut working capital finance to Rajasthan’s SEB which have failed to meet the financial targets set under the UDAY scheme; UDAY was first implemented in Rajasthan. UDAY is not the first bailout plan for power distribution firms. This is the third such bailout for the Indian distribution sector in around 13 years; the first two failed to incentivise the states to act. Unless there is a political willingness to increase tariffs (only 16 states have filed tariff petition for FY18) and reduce AT&C losses (Rajasthan has not seen any reduction in AT&C loss and Tamil Nadu has only recently joined UDAY scheme; Rajasthan and Tamil Nadu accounted for 39% of total discom debt as of FY15), it is difficult to envisage a scenario where SEBs turnaround and remain profitable on a sustainable basis.

Renewables

25 states/UTs failed to meet RPO compliance in FY17

Neutral

As per Mercom India Solar Project Tracker, 25 states and union territories have failed on their specified solar renewable purchase obligation (RPO) targets for FY17.

https://goo.gl/7Djf8V

Whilst the solar RPO deficit stands at 2GW, non-solar RPO deficit stands at 4.9GW.

The current solar RPO is 2.75% vs 8% target for FY22.

Our view: With the recent fall in renewable tariff at <Rs3.5/unit which is in line with the cost of conventional power, we expect RPO compliance to improve.

Source: Media reports, Ambit Capital research

AMBIT INSIGHTS

Ambit Capital Pvt Ltd 3 April 2017

Indian Oil Corp Ltd (IOCL IN, BUY)

Source: Bloomberg, Ambit Capital research

Bharti Infratel Ltd (BHIN IN, SELL)

Source: Bloomberg, Ambit Capital research

ICICI Pru Life (IPRU IN, NOT RATED)

Source: Bloomberg, Ambit Capital research

Cadila Healthcare Ltd (CDH IN, BUY)

Source: Bloomberg, Ambit Capital research

0100200300400500

Mar

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14

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Indian Oil Corp Ltd

0100200300400500600

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Bharti Infratel Ltd

250270290310330350370390

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ICICI Pru Life

0100200300400500

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Cadila Healthcare Ltd

AMBIT INSIGHTS

Ambit Capital Pvt Ltd 3 April 2017

Petronet LNG Ltd (PLNG IN, BUY)

Source: Bloomberg, Ambit Capital research

Motilal Oswal Financial Serv (MOFS IN, SELL)

Source: Bloomberg, Ambit Capital research

Endurance Technologies Ltd (ENDU IN, BUY)

Source: Bloomberg, Ambit Capital research

Maruti Suzuki India Ltd (MSIL IN, SELL)

Source: Bloomberg, Ambit Capital research

0100200300400500

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Petronet LNG Ltd

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Motilal Oswal Financial Services Ltd

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Endurance Technologies Ltd

02,0004,0006,0008,000

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14

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15

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Maruti Suzuki India Ltd

AMBIT INSIGHTS

Ambit Capital Pvt Ltd 3 April 2017

Ashok Leyland Ltd (AL IN, BUY)

Source: Bloomberg, Ambit Capital research

020406080

100120

Mar

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Ashok Leyland Ltd

AMBIT INSIGHTS

Ambit Capital Pvt Ltd 3 April 2017

Institutional Equities Team Saurabh Mukherjea, CFA CEO, Ambit Capital Private Limited (022) 30433174 saurabh.mukherjea@ambit.co Pramod Gubbi, CFA Head of Equities (022) 30433124 pramod.gubbi@ambit.co

Research Analysts

Name Industry Sectors Desk-Phone E-mail

Nitin Bhasin - Head of Research E&C / Infra / Cement / Home Building (022) 30433241 nitin.bhasin@ambit.co Aadesh Mehta, CFA Banking / Financial Services (022) 30433239 aadesh.mehta@ambit.co Abhishek Ranganathan, CFA Retail / Consumer Discretionary (022) 30433085 abhishek.r@ambit.co Anuj Bansal Consumer (022) 30433122 anuj.bansal@ambit.co Aditi Singh Economy / Strategy (022) 30433284 aditi.singh@ambit.co Ashvin Shetty, CFA Automobiles / Auto Ancillaries (022) 30433285 ashvin.shetty@ambit.co Bhargav Buddhadev Power Utilities / Capital Goods (022) 30433252 bhargav.buddhadev@ambit.co Deepesh Agarwal, CFA Power Utilities / Capital Goods (022) 30433275 deepesh.agarwal@ambit.co Dhiraj Mistry, CFA Consumer (022) 30433264 dhiraj.mistry@ambit.co Gaurav Khandelwal, CFA Automobiles / Auto Ancillaries (022) 30433132 gaurav.khandelwal@ambit.co Girisha Saraf Home Building (022) 30433211 girisha.saraf@ambit.co Karan Khanna, CFA Strategy (022) 30433251 karan.khanna@ambit.co Mayank Porwal Retail / Consumer Discretionary (022) 30433214 mayank.porwal@ambit.co Pankaj Agarwal, CFA Banking / Financial Services (022) 30433206 pankaj.agarwal@ambit.co Paresh Dave, CFA Healthcare (022) 30433212 paresh.dave@ambit.co Parita Ashar, CFA Cement / Metals / Aviation (022) 30433223 parita.ashar@ambit.co Prashant Mittal, CFA Strategy / Derivatives (022) 30433218 prashant.mittal@ambit.co Rahil Shah Banking / Financial Services (022) 30433217 rahil.shah@ambit.co Ravi Singh Banking / Financial Services (022) 30433181 ravi.singh@ambit.co Ritesh Gupta, CFA Oil & Gas / Chemicals / Agri Inputs (022) 30433242 ritesh.gupta@ambit.co Ritesh Vaidya, CFA Consumer (022) 30433246 ritesh.vaidya@ambit.co Ritika Mankar Mukherjee, CFA Economy / Strategy (022) 30433175 ritika.mankar@ambit.co Sagar Rastogi Technology (022) 30433291 sagar.rastogi@ambit.co Sudheer Guntupalli Technology (022) 30433203 sudheer.guntupalli@ambit.co Sumit Shekhar Economy / Strategy (022) 30433229 sumit.shekhar@ambit.co Utsav Mehta, CFA E&C / Infrastructure (022) 30433209 utsav.mehta@ambit.co Vivekanand Subbaraman, CFA Media / Telecom (022) 30433261 vivekanand.s@ambit.co

Sales

Name Regions Desk-Phone E-mail

Sarojini Ramachandran - Head of Sales UK +44 (0) 20 7886 2740 sarojini.r@ambit.co Dharmen Shah India / Asia (022) 30433289 dharmen.shah@ambit.co Dipti Mehta India (022) 30433053 dipti.mehta@ambit.co Krishnan V India / Asia (022) 30433295 krishnanv@ambit.co Nityam Shah, CFA Europe (022) 30433259 nityam.shah@ambit.co Punitraj Mehra, CFA India / Asia (022) 30433198 punitraj.mehra@ambit.co Shaleen Silori India (022) 30433256 shaleen.silori@ambit.co

Singapore

Praveena Pattabiraman Singapore +65 6536 0481 praveena.pattabiraman@ambit.co Shashank Abhisheik Singapore +65 6536 1935 shashankabhisheik@ambitpte.com

USA / Canada

Ravilochan Pola – CEO Americas +1(646) 793 6001 ravi.pola@ambitamerica.co Hitakshi Mehra Americas +1(646) 793 6002 hitakshi.mehra@ambitamerica.co Achint Bhagat, CFA Americas +1(646) 793 6752 achint.bhagat@ambitamerica.co

Production

Sajid Merchant Production (022) 30433247 sajid.merchant@ambit.co Sharoz G Hussain Production (022) 30433183 sharoz.hussain@ambit.co Jestin George Editor (022) 30433272 jestin.george@ambit.co Richard Mugutmal Editor (022) 30433273 richard.mugutmal@ambit.co Nikhil Pillai Database (022) 30433265 nikhil.pillai@ambit.co

AMBIT INSIGHTS

Ambit Capital Pvt Ltd 3 April 2017

Explanation of Investment Rating

Investment Rating Expected return (over 12-month)

BUY >10%

SELL <10%

NO STANCE We have forward looking estimates for the stock but we refrain from assigning valuation and recommendation

UNDER REVIEW We will revisit our recommendation, valuation and estimates on the stock following recent events

NOT RATED We do not have any forward looking estimates, valuation or recommendation for the stock POSITIVE We have a positive view on the sector and most of stocks under our coverage in the sector are BUYs

NEGATIVE We have a negative view on the sector and most of stocks under our coverage in the sector are SELLs

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Additional information on recommended securities is available on request.

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AMBIT INSIGHTS

Ambit Capital Pvt Ltd 3 April 2017

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