Morning Insight - 00146 02-02-2017 -...

FEBRUARY 2, 2017

Economy News The government has proposed to merge state oil companies to create a

behemoth that could top $100 billion in valuation and match globalcompanies in financial heft. (ET)

In a bid to insulate the country from volatility in global oil market, thegovernment will build two more underground crude oil storages in Odishaand Rajasthan. (ET)

Volkswagen (VW) AG has agreed to pay at least $1.26 billion to fix or buyback nearly 80,000 polluting 3-litre diesel-engined vehicles-and could beforced to pay up to $4.04 billion if regulators don't approve fixes for allvehicles, court documents filed showed. (Mint)

The Union Budget pegged the Indian Railways' capital expenditure for2017-18 at Rs 1.31 trn, the highest ever in the history of the nationaltransporter. It will receive Rs 55,000 crore from the finance ministry asgross budgetary support. (ET)

After a whopping 180 per cent growth in 2015, the Indian e-tailingindustry expanded by merely 12 per cent in 2016 to clock revenues of$14.5 billion, research firm RedSeer said. (ET)

Passenger vehicle sales increased 15% from a year earlier in January, thefastest in four months and after a marginal drop in December that wasblamed on the post-demonetisation currency crunch. (ET)

The Centre will not provide Rs 18.50 per kg subsidy on sugar to states forselling it via ration shops from next fiscal and has allocated only Rs 200crore in the Budget for clearing past claims. (TOI)

Finance Minister has proposed abolition of the Foreign InvestmentPromotion Board (FIPB), a move that sets the stage for more reforms inthe FDI policy. Housed in the finance ministry's Department of EconomicAffairs, the FIPB is an inter-ministerial body responsible for processing ofFDI proposals and making recommendations for government approval.(ET)

Corporate News Sona Autocomp Holding Limited today said it has entered into an

agreement with its long standing technical and financial collaboratorJTEKT Corporation, to sell its entire stake in Sona Koyo SteeringSystems Limited (SKSSL) for Rs 4190mn. (ET)

Trai told the Delhi high court that it has taken a decision on varioustelecom service providers' representations against the free offers ofReliance Jio and it will be communicated to them by today. (Mint)

Escorts sold 3652 tractors in January 2017 as against 3140 tractors inJanuary 2016, registering a growth of 16.3%. (BSE)

Indian Oil Corp hiked the price of aviation turbine fuel (ATF) or jet fuelby 2.9 per cent to Rs 1,539 per kilolitre (kl), the company announced. (BS)

Dishman Pharmaceuticals and Chemicals Ltd has informed that theCompany's Bavla facility was successfully inspected by the US FDA in July,2016, has received the Establishment Inspection Report (EIR) from the USFDA for this facility on February 01, 2017. (BSE)

Atul Auto Ltd's January 2017 total sales of 2349 vehicles were down36.65 percent. (Reuters)

Advanced Enzyme Technologies Ltd has informed that the meeting ofBoard of Directors of Company is scheduled to be held on February 14,2017, to sub-division of equity shares. (BSE)

Equity% Chg

1 Feb 17 1 Day 1 Mth 3 Mths

Indian IndicesSENSEX Index 27,656 (0.7) 3.9 (0.8)NIFTY Index 8,561 (0.8) 4.6 (0.8)BANKEX Index 22,312 (0.4) 7.5 0.3SPBSITIP Index 9,586 (3.0) (5.8) (3.3)BSETCG INDEX 14,783 (0.4) 8.2 (0.3)BSEOIL INDEX 12,838 (1.6) 5.6 4.2CNXMcap Index 15,414 (1.4) 7.4 (3.3)SPBSSIP Index 12,936 (1.0) 7.4 (4.6)

World IndicesDow Jones 19,864 (0.5) 0.5 10.1Nasdaq 5,615 0.0 4.3 8.9FTSE 7,099 (0.3) (0.6) 2.6NIKKEI 19,041 (1.7) (0.4) 9.2HANGSENG 23,361 (0.1) 5.2 0.9

Value traded (Rs cr)1 Feb 17 % Chg - Day

Cash BSE 3,025 22.2Cash NSE 27,937 40.0Derivatives

Net inflows (Rs cr)31 Jan 17 % Chg MTD YTD

FII 735 223 (498) 18,285Mutual Fund 271 (38) 5,468 52,712

FII open interest (Rs cr)31 Jan 17 % Chg

FII Index Futures 15,278 (4.4)FII Index Options 61,709 9.9FII Stock Futures 61,953 (0.2)FII Stock Options 3,576 23.0

Advances / Declines (BSE)1 Feb 17 A B T Total % total

Advances 239 837 40 1,116 71Declines 59 305 59 423 27Unchanged 2 35 3 40 3

Commodity % Chg

1 Feb 17 1 Day 1 Mth 3 Mths

Crude (US$/BBL) 52.7 (0.2) (1.9) 12.9Gold (US$/OZ) 1,210.6 1.1 5.0 (6.1)Silver (US$/OZ) 17.5 2.2 10.2 (4.9)

Debt / forex market1 Feb 17 1 Day 1 Mth 3 Mths

10 yr G-Sec yield % 6.4 6.4 6.5 6.8Re/US$ 67.9 67.9 68.2 66.8

Sensex

Source: ET = Economic Times, BS = Business Standard, FE = Financial Express,BL = Business Line, ToI: Times of India, BSE = Bombay Stock Exchange

22700

24450

26200

27950

29700

Jan-16 Apr-16 Jul-16 Oct-16 Jan-17

MORNING INSIGHT February 2, 2017

Kotak Securities - Private Client Research Please see the Disclosure/Disclaimer on the last page For Private Circulation 2

UNION BUDGET ANALYSIS: FY2017-18A nuanced approachFM has projected a 3.2% fiscal deficit for FY18, which looks'Achievable', with total receipts projected to rise by only 6% YoY. Nettax revenues are projected to rise by 13%. The budget has rightlyfocused on maintaining the fiscal disciple while maintaining thedirection of the economy by allocating higher investments oninfrastructure, rural and agriculture sector, to support equitablegrowth. We expect RBI to cut interest rates by 50 bps over FY18,providing the required support to the private sector investments.Apprehensions on changes in capital gains tax structure have not comeand Foreign Portfolio Investors (FPI) have been exempted from the taxprovisions governing indirect transfer of assets, which is a relief forthe markets. We expect markets to remain buoyant, if executionmatches the intent.

The FM has tried to achieve a balance between growth and fiscal pru-dence. Despite the 7% rise projected in overall expenditure and 11% risein capital expenditure, FD is targeted to come down to 3.2% in FY18from 3.5% in FY17RE. We opine that, the budget has set 'achievable' taxrevenue targets for FY18. A 13% growth in net tax revenues looks withinreach, based on a nominal GDP growth of 11.8%. Divestment revenuetarget of Rs.725bn needs to be closely monitored, though.

With the FD number at 3.2% and the net Government borrowing bud-geted at Rs.3.48tn (v/s Rs.3.47tn in FY17RE), we expect market yields toremain soft. This may provide the required support to the private sector,which has been reeling under low demand and high indebtedness.

While revenue expenditure is projected to rise by 7%, capital expenditure(scheme and other than scheme) is budgeted to see a 14% rise. Whilethe increase in scheme expenditure of 9% is slightly disappointing, therecan be higher allocation towards capex through IBER. Total railway capexis budgeted at Rs.1.31tn of which, the budgetary support is onlyRs.550bn. Rural development and infrastructure sectors, have receivedsignificant attention; which can also create several jobs. These factorsare expected to provide a boost to growth in times when private sectorcapex is yet to pick up.

On reforms, there are various announcements like abolishment of FIPB,creating an integrated public sector 'oil major', listing of railway PSUs,preparation of model law on contract farming, efforts to delist perishableitems from APMC Act. We note that, important legislative agenda includ-ing GST are pending. All these are expected to further facilitate bettercompetitiveness of PSUs, provide better realization to farmers and in-crease ease of doing business, in turn, encouraging private sector capex(interest rate reduction should also help). The cut in corporate tax ratehas come through but only for smaller companies.

UNION BUDGET ANALYSIS

Fundamental Research Team+91 22 6218 5409



Sectoral impact

Budget Impact Sectors

Positive Agro Chemicals, Capital Goods, Cement, Construction, Logistics, Oil & Gas, Paints, Real Estate, ShippingNeutral Automobile, Aviation, FMCG, Information Technology, Media, Metals & Mining, Pharmaceuiticals, Power

Source: Kotak Securities - Private Client Research

GDP growth

Source: CSO

Inflation (%)

Source: Economic Survey 2017-18

9.59.6

9.3

6.7

8.68.9

6.7

5.1

6.67.2

7.67.1

4

5

6

7

8

9

10

-6

-3

0

3

6

9

12

Overall, we believe that, the budget has tried to maintain the fiscal disci-pline, by targeting FD of 3.2%. Growth is expected to come in throughhigher consumption (post demonetization) and from priority areas like ruraland infrastructure sectors. More private sector investments will be encour-aged by reform initiatives taken outside the budget, though.

There has been no change in the corporate tax rates for companies havingturnover of more than Rs.500mn. On the personal income tax front, tax ratein the Rs.0.25mn - Rs.0.50mn income bracket has been halved from 10% to5%, providing relief to the extent of Rs.12,500. However, some deductions /exemptions have been rationalized.

From the stock market perspective, no change in LT Capital Gains tax rules,is a big relief. GAAR will be implemented WEF FY18, which was largely ex-pected. With the major event out of the way, the markets will likely focuson issues like RBI action and global economy. Off-budget action on budgetinitiatives will sustain the confidence of the markets over the medium term.Government's ability to pass significant legislations in ongoing parliamentsession would bode well for sustained market performance. We expect RBIto reduce rates by 50bps in FY18. We believe that, a bottoms-up approachwill be the best approach over this time-frame.



A. FM bats for fiscal rectitude – FD target set at 3.2%FM as budgeted for gross tax revenue to increase by 12% over the 17% in-crease witnessed in FY17. We believe the said estimates for tax revenues arereasonable. Corporate tax is budgeted to increase to Rs.5.4trn from Rs.4.9trn(9% growth, same as observed in FY17RE). We believe there is a possibility ofpositive surprise on this front, if economic growth picks up.

While personal income tax collection is budgeted to increase by 25%, we be-lieve FM has set his hopes on higher compliance, partly due to demonetizationand partly on account of lower entry level income tax rate of 5%, reduced fromearlier 10%. The FM has also likely budgeted for higher receipts due to thecapped exemption limits via Sec 71 (maximum Rs.2,00,000 loss under incomefrom house property) and TCS deduction of 5% on rent payments overRs.50,000 per month and income tax surcharge.

On indirect taxes, FM has budgeted for only 5% increase in excise duty collec-tion, as the collection of Rs.3.9trn, grew by massive 36% in FY17 (could be dueto demonetization effect), against previous estimates of 12% growth.

FM has budgeted for Non-tax revenue to contract by 14% from Rs.3.3trn fromRs.2.9trn in FY18. Lack of spectrum auction has resulted in lower revenue esti-mate from communications to Rs.443bn v/s Rs.787 bn and lower dividend in-come from PSUs at Rs.675bn v/s Rs.770bn.

Government has budgeted for capital receipts to grow by 5% to Rs.6.3trn fromRs.5.9trn in FY17. FM has budgeted for Rs.725bn from divestments (Rs.150 bnfrom strategic divestment and Rs.465bn from divestments and Rs.110bn fromlisting of insurance companies). We believe government will likely raise the saidamount, as government plans to list IRCTC, IRFC and IRCON, HAL etc. Strategicdisinvestment income could come from divestments of SUUTI stake. FM also an-nounced introduction of another ETF, with broader participation of PSU entitiesto be launched. We estimate government would be able to raise budgeted re-sources from this front, if market conditions remain conducive.

FM has lowered revenue estimated from Gold Bonds mobilization to Rs.50 bn v/s target of Rs.100 bn in FY17 as only Rs.38bn could be realized.

Expenditure estimates

Budget estimates for FY18 show a net increase of Rs.1.32trn in expenditure overthe FY17RE, whereas expenditure in FY17 went up by Rs.2.23trn. We believe fis-cal prudence has resulted in lower increase in total expenditure, as governmentis committed to remain fiscally prudent. Fiscal deficit target of 3.2% against thebackdrop of slower economic growth is commendable. The said prudence hasresulted in lower net internal borrowing needs for the government at Rs.3.48trnv/s Rs.3.47trn in FY17.

FM has tried to find an optimal balance between capital and revenue expensesby increasing the allocation towards capital expenditure within scheme expendi-ture by 14% to Rs.2.71trn from Rs.2.38trn. Total scheme expenditure is bud-geted to grow by 9% to Rs.9.45trn from Rs.8.7trn, an increase of Rs.752bn. Weview the sharp increase in scheme capital allocation positively.

Non scheme expenditure is expected to rise by 5% as the subsidy burden is ex-pected to remain stable at Rs.2.5trn in FY18 (1.5% of GDP). The FM has bud-geted Rs.250bn as the Government’s share of the oil subsidy burden in FY17 v/sRs.275 bn in FY17. We understand that, there is no carry forward of subsidyburden from FY17. Food subsidy bill is estimated at Rs.1.45trn v/s Rs.1.35trn.Overall, the estimates for subsidies are realistic and we do not expect any majorincremental number on the same. Total subsidy burden is Rs.2.55trn in FY18 v/sRs.2.46trn (1.6% of GDP) in FY17, a cut of 10 bps as a percentage of GDP to-wards subsidy bill.



Trend in Subsidies

(Rs bn) FY 15 FY 16 FY 17RE Y 18BE

Food 1176.7 1394.2 1351.7 1453.4

Fertiliser 710.8 724.2 700.0 700.0

Petroleum 602.7 300.0 275.3 250.0

LPG 226.6 186.8 160.8

Kerosene 73.4 88.5 89.2

Interest subsidies 76.3 167.3 194.2 232.0

Other 16.1 55.4 83.6 87.3

Total Subsidies 2582.6 2641.1 2604.8 2722.8

Source: Annual Budget Documents

Gross market borrowings are pegged at Rs.5.8trn and net market loans are es-timated at Rs.4.23trn v/s Rs.4.06trn in FY17 (reduced from budgeted figure ofRs.4.25trn). Lower government borrowing bodes well for the government bondyields. Public debt is expected to increase to Rs.79.6 trn from Rs.74.4trn in FY18(7% increase in indebtedness over FY17RE), which is primarily held internallyand only Rs.2.4trn is external. We expect G-Sec yield to moderate over the fis-cal, along the lines of lower inflation and accommodative monetary policy. Webelieve lower market borrowing shall bode well from lower cost of fund for theeconomy and RBI will have further space to reduce market rates. We expect RBIto cut rates by 50 bps in its forthcoming policy due next week.

Deficits


B. Focus on growth remains

Capital expenditure growth pegged at 11%; revenue expendituregrowth at 6%...

From the current year, the budget has done away with the distinction betweenplan and non-plan expenditure. The total expenditure has been divided betweenScheme and non-Scheme expenditure. This is further divided into revenue andcapital expenditure.

With the private sector laden with high debt and low capacity utilization levels,it was up to the Government to pump up growth. The FM has, indeed, put em-phasis on the same. He has budgeted for a capital expenditure increase of 11%YoY. This compares favourably with a similar growth in FY17RE. We understandthat, the Government will also look at IEBR for further capital spends. The rev-enue expenditure, on the other hand, is expected to go up by about 6% YoYonly.

0.0

2.0

4.0

6.0

8.0

FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17RE

FY18BE

Fiscal Deficit Revenue Deficit Primary Deficit



…driven by infrastructure, even in rural areas

The growth in capital expenditure is led by increase in infrastructure spends.The total capital expenditure towards Roads, Highways and railways is expectedto rise by about 18% on a YoY basis. The FM has indicated that, for transporta-tion sector as a whole, including rail, roads, shipping, a provision of Rs.2.41trnhas been made in 2017-18.

The Railway budget has been subsumed under the Union budget WEF FY18. For2017-18, the total capital and development expenditure of Railways has beenpegged at Rs.1.31trn of which, Rs.550bn will be provided by the Government.Some of the major proposed initiatives in Railways are :

Railway lines of 3,500kms to be commissioned in 2017-18. At least 25 sta-tions are expected to be awarded for station redevelopment.

Feeding about 7,000 stations with solar power in the medium term

For passenger safety, Rashtriya Rail Sanraksha Kosh to be created with acorpus of Rs.1trn over a period of 5 years

A new Metro Rail Act to be enacted by rationalising the existing laws, tofacilitate greater private participation and investment in construction andoperation.

Some of the allocations and initiatives for other infrastructuresectors are :

The budget allocation for highways has been increased from Rs.580bn inFY17BE to Rs.649bn in FY18BE

About 2,000kms of coastal connectivity roads identified for construction anddevelopment

By the end of 2017-18, high speed broadband connectivity on optical fibre tobe available in more than 1,50,000 gram panchayats, under BharatNet.

Second phase of Solar Park development to be taken up for additional20,000 MW capacity.

To set up strategic crude oil reserves at 2 more locations, namely,Chandikhole in Odisha and Bikaner in Rajasthan; to take our strategic re-serve capacity to 15.33 MMT

The FM has also allocated significant sums to other infrastructure areas in agri-culture, rural sectorand social sector, among others. MGNREGA is increasinglybeing used to to increase farm productivity and improve rural infrastructure.

MGNREGA allocation to be the highest ever at Rs.480bn in 2017-18.

Against target of 0.50mn farm ponds under MGNREGA, 1mn ponds to becompleted by March 2017. During 2017-18, another 0.50mn farm ponds tobe taken up

Achieving 100% village electrification by 1st May 2018.

Total allocation for Rural, Agriculture and Allied sectors pegged at Rs.1.87trn

Allocation for Pradhan Mantri Gram Sadak Yojana (PMGSY), including theState's Share pegged at Rs.270bn in FY18

Allocation for Pradhan Mantri Awaas Yojana - Gramin increased fromRs.150bn in FY17BE Rs.230bn in FY18BE, with a target to complete 10mnhouses by 2019 for the homeless.



With a view to ensure equitable growth, the FM has laid increased focus on theagricultural sector as well. Some of the major allocations / initiatives for the ru-ral / agriculture sector are :

Target for agricultural credit in FY18 fixed at a record level of Rs.10trn

Coverage under Fasal Bima Yojana scheme to be increased from 30% ofcropped area in FY17 to 40% in FY18 and 50% in FY19. Budget provision ofRs.90bn has been made

Long Term Irrigation Fund, already set up in NABARD, to be augmented by100% to take the total corpus to Rs.400bn

Dairy Processing and Infrastructure Development Fund to be set up inNABARD with a corpus of Rs.20bn, which is to be increased to Rs.80bn over3 years

Real estate - Affordable housing gets infrastructure status

The FM has announced that, affordable housing will be accorded Infrastruc-ture status. This is positive for the sector as it will lead to lower cost of bor-rowing for these projects and also the tenure of loans under the same canbe longer.

The definition of affordable has been changed to carpet area of 30 sq mtrs(in municipal areas of metros) and 60 sq. mtrs as against the earlier defini-tion, which used built-up area as a measure. This will increase the coverageof the houses which will be benefitted.

The project completion time line for availing these benefits has been in-creased from 3 years to 5 years.

Further, the budget has also provided long term capital gains benefit by pro-viding that, the holding period for claiming LTCG exemption be reducedfrom 3 years to 2 years.

Moreover, the budget has also provided that, capital gain to the extent ofRs.5mn arising from the transfer of a long-term capital asset will be exemptif the assessee invests the whole or any part of capital gains in any bond re-deemable after three years which has been notified by the Central Govern-ment in this behalf. This was restricted earlier to investments in bonds is-sued by the National Highways Authority of India or by the Rural Electrifica-tion Corporation Limited.

We believe that, these initiatives will give a boost to the overall affordablehousing segment, in particular. The real estate sector, as a whole, is also ex-pected to benefit.

C. Reform initiatives continueOne of the features of the budget has been the continued reform initiativestaken by the Government. From political funding to abolishment of FIPB, thesereforms cover several areas.

FIPB to be abolished

With a view to liberalise the foreign investment process, the Government hasdecided to abolish Foreign Investment Promotion Board (FIPB) in FY18. Withmore than 90% of the total FDI inflows through the automatic route and theFIPB having successfully implemented e-filing and online processing of FDI appli-cations, the need for a separate authority has diminished. The Government isalso looking at other measures to further liberalise the FDI policy.



Restructuring and Listing of PSUs

With a view to bring in greater public accountability and unlocking the truevalue of companies, the Government has decided to put in place, a revisedmechanism and procedure to ensure time bound listing of identified CPSEs onstock exchanges. The shares of Railway PSEs like IRCTC, IRFC and IRCON arenow expected to be listed on stock exchanges.

Moreover, the Government is looking to strengthen CPSEs through consolida-tion, mergers and acquisitions. It plans to restructure and merge companies inthe oil and gas sector, to create an integrated public sector 'oil major' whichwill be able to match the performance of international and domestic privatesector oil and gas companies. We believe that, an integrated oil major will havethe capacity to bear higher risks, avail economies of scale, take higher invest-ment decisions and create more value for the stakeholders.

Political funding

With a view to bring in more transparency in political funding, the budget hasproposed the following :

The maximum amount of cash donation to be Rs.2000/- from one person.

Political parties to be entitled to receive donations by cheque or digital modefrom their donors.

Issuance of electoral bonds which a donor can purchase bonds fromauthorised banks against cheque and digital payments only. These shall beredeemable only in the designated account of a registered political party.These bonds will be redeemable within the prescribed time limit from issu-ance of bond.

Every political party required to file its return within the time prescribed inaccordance with the provision of the Income-tax Act.

Model law on contract farming; Delist perishables from APMC

With a view to help farmers, the budget has proposed to integrate farmers whogrow fruits and vegetables with agro processing units for better price realisationand reduction of post-harvest losses. Thus, a model law on contract farming isproposed to be prepared and circulated among the States for adoption.

Also, the Government plans to urge states to denotify perishables from APMC,which will give opportunity to farmers to sell their produce and get betterprices.

D. Push towards Digital economyThe budget has further made provisions to push the economy on the Digitalpath.

Under scheme of presumptive income for small and medium tax payerswhose turnover is upto Rs.20mn, the present 8% of their turnover which iscounted as presumptive income has been reduced to 6% in respect of turn-over which is by non-cash means

The budget has also provided that, no transaction above Rs.0.30mn would bepermitted in cash subject to certain exceptions like payment to banks

With a view to encourage adoption of Digital, miniaturised POS card readerfor m-POS (other than mobile phones or tablet computers), micro ATM stan-dards version 1.5.1, Finger Print Readers / Scanners and Iris Scanners and ontheir parts and components for manufacture of such devices have been ex-empted from BCD, Excise / CV duty and SAD.



E. Tax proposals

Direct taxes

Personal income tax

The FM has proposed some relief to the individual tax payers. Income-tax ratefor Income between Rs.0.25mn and Rs0.50mn has been reduced from 10% ear-lier to 5%. This measure will result in a tax saving of upto Rs.12500 p.a. for theassessee. The total amount of tax foregone on account of this measure isRs.155bn. However, the tax deduction available for income below Rs.0.50 mnhas been reduced from Rs.5000 to Rs.2500.

In order to make good some of this revenue loss on account of this relief, theFM has proposed to levy a surcharge of 10% of tax payable on categories ofindividuals whose annual taxable income is between Rs.5mn and Rs.10mn. Fur-ther, the existing surcharge of 15% of Tax on people earning more thanRs.10mn will continue. This is likely to give additional revenue of Rs.27 bn.

The FM has decided to end the Rajiv Gandhi Equity Savings Scheme (RGESS)under which first-time investors in equities could enjoy tax deduction up to Rs25,000 for three successive years under Section 80CCG. This decision has beentaken as the scheme has failed to gain popularity among investors.

To make filing of tax simpler, the FM has introduced a simple one-page form tobe filed as Income Tax Return for the category of individuals having taxable in-come upto Rs.0.50mn other than business income.

The existing provision of the IT Act provide for concessional rate of tax and alsoindexation benefit for taxation of capital gains arising from transfer of long-term capital asset. To qualify for long-term asset, it is proposed to amend sec-tion 2 (42A) of the Act so as to reduce the period of holding from the existing36 months to 24 months in case of immovable property, being land or buildingor both.

However, on the negative side, in line with the international best practices, theFM has proposed that set-off of loss under the head "Income from house prop-erty" against any other head of income shall be restricted to Rs.0.20mn for anyassessment year. However, the unabsorbed loss shall be allowed to be carriedforward for set-off in subsequent years in accordance with the existing provi-sions of the Act.

This amendment will take effect from 1st April, 2018 and will, accordingly applyin relation to assessment year 2018-19 and subsequent years. This is a negativefor salaried individuals claiming this benefit. While there is a limit of Rs.0.20mnfor claiming tax deduction from "Interest on home loan", there was no upperlimit on "loss on house property". Hence, it made sense for salaried individualsto opt for claiming tax deduction from "loss on house property". This arbitragehas now been done away with.

In order to widen the scope of tax deduction at source, the FM has proposedthat Individuals or a HUF, responsible for paying to a resident any income byway of rent exceeding Rs.50,000 a month or part of month during the previousyear, shall deduct an amount equal to 5% of such income as income-taxthereon.



0%

10%

20%

30%

40%

0

2000

4000

6000

8000

10000

FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17BE

Direct Tax (Rs bn - LHS) Growth (% - RHS)

-20%-10%0%10%20%

30%40%50%

0

2000

4000

6000

8000

10000

FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17BE

Indirect Tax (Rs bn - LHS) Growth (% - RHS)

Direct tax


Corporate tax

For corporates, there has been no reduction in the tax rate for companies whichhave revenues in excess of Rs.500mn in FY17 (and not FY18). Companies havingturnover of less than Rs.500mn will enjoy a tax rate of 25%, but will not be ableto avail any exemptions. According to the FM, about 96% of the registeredcompanies will be benefitted by this provision.

According to the FM, these direct tax proposals will result in a loss of Rs.200 bnto the exchequer.

Indirect taxes

On indirect tax, contrary to our expectations, the service tax rates have beenleft unchanged. The peak excise and customs duty have also been maintained,barring a few changes have been made for select items. According to the FM,his proposals on indirect taxes are revenue neutral.

Indirect tax


Some of the notable changes in indirect tax rates are as under :

Excise duty hike of 6% across cigarette lengthsThe 6% hike in excise duty on cigarettes affected by the budget is the lowest inthe past six years, and, given expectations of 8-10% hike (10% excise duty hikefactored into our prior estimates), is a positive for cigarette companies.

Custom duty reduced on LNG from 5% to 2.5%The drop in the customs duty (from 5% BCD to 2.5% BCD) on LNG will benefitPetronet LNG, gas transportation companies like GAIL and GSPL and city gasdistribution companies such as Indraprashtra Gas and Mahanagar Gas. The con-sumption of the imported LNG is growing rapidly and currently constitutesnearly half of the total gas consumed in India.



Table

Commodity BCDFrom To

Liquefied Natural Gas BCD – 5% BCD – 2.5%

o-Xylene BCD – 2.5% BCD – Nil

Medium Quality Terephthalic Acid (MTA) & QualifiedTerephthalic Acid (QTA) BCD – 7.5% BCD – 5%

2-Ethyl Anthraquinone [29146990] for use in manufacture

of hydrogen peroxide, subject to actual user condition BCD – 7.5% BCD – 2.5%

Vinyl Polyethylene Glycol (VPEG) for use in manufactureof Poly Carboxylate Ether, subject to actual user condition BCD – 10% BCD – 7.5%

Basic Customs Duty (BCD) means the customs duty levied under the Customs Act, 1962.

F. Capital marketsContrary to expectations, the budget has neither proposed any change in corpo-rate tax rates (except for companies with turnover of less than Rs.500mn), norhas it made any changes to the capital gains tax structure.

However, the budget has exempted Foreign Portfolio Investors (FPI) from thetax provisions governing indirect transfer of assets, setting aside a Decembercircular that had sought to bring such transactions by overseas funds within theambit of Indian taxes. Overseas fund managers had sought clarity on the Cen-tral Board of Direct Taxes (CBDT) notice that said FPIs would be subject to taxon indirect transfer of shares, a move which would have left room for pro-tracted future litigation and international arbitration

Exemption of long term capital gains taxOne notable change relates to Exemption of long term capital gains tax u/s10(38). With a view to prevent abuse, the budget has proposed that, exemptionunder this section for income arising on transfer of equity share acquired or onafter 1st day of October, 2004 shall be available only if the acquisition of shareis chargeable to Securities Transactions Tax under Chapter VII of the Finance(No 2) Act, 2004. STT was made applicable WEF October 2004 and hence, noshares bought through the stock exchange will be impacted by this provision.

The provision provides exemption to genuine cases where the Securities Trans-actions Tax could not have been paid like acquisition of share in IPO, FPO, bo-nus or right issue by a listed company acquisition by non-resident in accordancewith FDI policy of the Government etc. However, other genuine cases whereshares were acquired without paying STT - ESOPs, Private placements, acquisi-tion of shares by strategic / financial investors, VC funding, etc, are not coveredby this exemption.

Thus, there is uncertainty over taxability of these shares, when they are sold.The budget has proposed to notify transfers for which the condition ofchargeability to Securities Transactions Tax on acquisition shall not be appli-cable. While we believe that, all genuine transactions will be exempted, weawait the final notification from the Government.

With the major event out of the way, the markets will likely focus on issues likeRBI action and global economy. Off-budget action on budget initiatives will sus-tain the confidence of the markets over the medium term. We expect RBI toreduce rates by 50bps in FY18. We believe that, a bottoms-up approach will bethe best approach over this time-frame.



BUDGET HIGHLIGHTS FY2017-18

Customs duty

Pre-budget Post-budget

Mineral fuels and Mineral oils

Liquefied Natural Gas 5.0% 2.5%

Chemicals & Petrochemicals

Medium Quality Terephthalic Acid (MTA) & Qualified Terephthalic Acid (QTA) 7.5% 5.0%

Metals

Nickel 2.5% NIL

Finished Leather

Vegetable tanning extracts, namely, Wattle extract and Myrobalan fruit extract 7.5% 2.5%

Capital Goods

Ball screws, linear motion guides and CNC systems for use in "Ball screws and liner 2.5%

the manufacture of CNC machine tools, subject to actual user condition motion guides“

BCD – 7.5%

“CNC systems

“BCD – 10%"

Renewable Energy

All items of machinery required for fuel cell based power generating "BCD – 10% /7.5% "BCD – 5%“

systems to be set up in the country or for demonstration purposes “CVD – 12.5%" CVD – 6%"

All items of machinery required for balance of systems operating on BCD – 10% /7.5% BCD – 5%

biogas/ bio-methane/ by-product hydrogen, subject to certain specified CVD – 12.5% CVD – 6%

conditions

Solar tempered glass for use in the manufacture of solar cells/panels/modules 5.00% Nil

Parts/raw materials for use in the manufacture of solar tempered glass for use in solar

photovoltaic cells/modules CVD – 12.5% CVD – 6%

Textiles

Nylon mono filament yarn for use in monofilament long line system for Tuna fishing 7.5% 5.0%

Metals

Co-polymer coated MS tapes / stainless steel tapes for manufacture of specified

telecommunication grade optical fibres or optical fibre cables Nil 10.0%

Hot Rolled Coils for use in the manufacture of welded tubes and pipes 12.5% 10.0%

Electronics / Hardware

Populated Printed Circuit Boards (PCBs) for use in the manufacture of mobile phones SAD-Nil SAD-2%

Miscellaneous

All parts for use in the manufacture of LED lights or fixtures, including LED lamps, Applicable BCD, CVD "BCD – 5%“

subject to actual user condition CVD – 6%"




Excise duty

Item Pre Budget Post Budget

Pan Masala 6% 9%

Unmanufactured tobacco 4.2% 8.3%

Cigarettes (Rs/ 1000 sticks)

Non filter:

<65 mm Rs215 Rs311

65 mm-70 mn Rs370 Rs541

Filter:

<65 mm Rs215 Rs311

65 mm-70 mn Rs260 Rs386

70 mm-75 mn Rs370 Rs541

Other Rs60 Rs811

Chewing tobacco (including filter khaini) 6% 12%

Jarda scented tobacco 6% 12%

Pan Masal containing tobacco (Gutkha) 6% 12%

Paper rolled biris (per '000) Rs21 Rs28

LED Components 12.5% 6%

Source: Union Budget Document



BUDGET AT A GLANCE

Central Government Finances

(Rs bn) 2015-2016 2016-2017 2016-2017 2017-2018Actual BE RE BE

1 Revenue Receipts 11,950 13,770 14,236 15,158

2 Tax Revenue (net to centre) 9,438 10,541 10,888 12,270

Gross Tax Revenue 14,596 16,309 17,032 19,116

Corporation Tax 4,530 4,939 4,939 5,387

Income Tax 2,991 3,532 3,532 4,413

Customs 2,095 2,300 2,170 2,450

Union Exicse 2,841 3,187 3,874 4,069

Service Tax 2,100 2,310 2,475 2,750

Other Taxes 39 41 43 47

Assignment to States 5,062 5,703 6,080 6,746

3 Non-Tax Revenue 2,513 3,229 3,348 2,888

4 Capital Receipts (5+6+7) 5,958 6,010 5,908 6,310

5 Recoveries of Loans 208 106 111 119

6 Other Receipts 421 565 455 725

7 Borrowings and other liabilities 5,328 5,339 5,343 5,465

8 Total Receipts (1+4) 17,908 19,781 20,144 21,467

9 Expenditure on other than Scheme 10,657 11,761 11,446 12,017

10 On Revenue Account 9,921 11,291 11,030 11,629

of which, 0 0 0 0

11 Interest Payments 4,417 4,927 4,831 5,231

12 Subsidies 2,641 2,631 2,605 2,723

II Food 1,394 1,348 1,352 1,453

II Fertilizer 724 700 700 700

III Petroleum 300 290 275 250

IV Others 223 293 278 319

13 On Capital Account 735 470 415 388

14 Scheme Expenditure 7,251 8,020 8,698 9,451

15 On Revenue Account 5,456 6,019 6,315 6,741

16 On Capital Account 1,795 2,001 2,383 2,710

17 Total Expenditure (9+14) 17,908 19,781 20,144 21,467

18 Revenue Expenditure (10+15) 15,378 17,310 17,346 18,369

19 Of Which, Grants for creation of Capital Assets 1,318 1,668 1,715 1,954

20 Capital Expenditure (13+16) 2,530 2,470 2,798 3,098

21 Revenue Deficit (18-1) 3,427 3,540 3,110 3,212

2.5 2.3 2.1 1.9

22 Effective Revenue Deficit (21-19) 2,110 1,872 1,395 1,258

1.6 1.2 0.9 0.7

23 Fiscal Deficit {17-(1+5+6)} 5,328 5,339 5,343 5,465

3.9 3.5 3.5 3.2

24 Primary Deficit (23-11) 911 412 512 235

0.7 0.3 0.3 0.1

Nominal GDP 135,672 150,650 150,754 168,475

Source: Annual Budget 2017-18



SECTOR SUMMARY

Sector Summary

Sector BudgetImpact Preferred Picks

Agro Chemicals Positive Insecticides India

Automobiles Neutral Maruti Suzuki, Escorts, Bajaj Auto, Gabriel India

Aviation Neutral -

Capital Goods and Engg. Positive Carborundum Universal, Cummins IndiaEngineers India, Greaves Cotton,Larsen & Toubro, Va Tech Wabag,Voltamp

Cement Positive India Cement, Grasim, Ultratech Cements,Shree Cements

Construction Positive IRB Infra, NCC, PNC Infra

FMCG Neutral Dabur India, ITC

Information Technology Neutral Infosys, NIIT Ltd

Logistics & Shipping Positive Adani Ports, GPPL, Allcargo Logistics,VRL Logistics, Gateway Distriparks

Media Neutral Dish TV, HMVL, TV18 Broadcast, Sun TV Network

Metals & Mining Neutral -

Oil & Gas Positive Castrol India, Petronet LNG

Paints Positive Asian Paints, Kansai Nerolac

Pharmaceuticals Neutral Alembic Pharma, Natco Pharma

Power Neutral NTPC

Real Estate Positive Phoenix mills




Summary - January 2017 volumes (Nos)

Jan Dec Jan YoY gth MoM gth FY16 FY17 Growth2016 2016 2017 (%) (%) YTD YTD (%)

Hero MotoCorp

2W 563,348 330,202 487,088 (13.5) 47.5 5,473,953 5,529,186 1.0

Maruti Suzuki

Mini (Alto, WagonR) 34,206 31,527 37,928 10.9 20.3 360,804 349,929 (3.0)

Compact/Super compact (Swift,

Ignis, Celerio, Dzire, Baleno) 48,120 45,854 58,818 22.2 28.3 483,815 506,021 4.6

Mid-Size (CIAZ) 5,431 3,711 6,530 20.2 76.0 43,591 53,644 23.1

UV ( Gypsy, Ertiga, S Cross, Brezza) 8,114 16,072 16,313 101.0 1.5 72,038 159,567 121.5

C (OMNI, Eeco) 10,512 9,224 14,179 34.9 53.7 118,093 126,186 6.9

Total Domestic 106,383 106,414 133,934 25.9 25.9 1,078,341 1,195,807 10.9

Export 7,223 11,494 10,462 44.8 (9.0) 104,111 102,753 (1.3)

Total Sales 113,606 117,908 144,396 27.1 22.5 1,182,452 1,298,560 9.8

M&M

Passenger Vehicles 22,088 16,698 20,096 (9.0) 20.3 185,704 190,173 2.4

CV 14,385 14,154 13,890 (3.4) (1.9) 135,481 141,657 4.6

3W 4,220 3,458 3,056 (27.6) (11.6) 46,565 43,818 (5.9)

Total Domestic 40,693 34,310 37,042 (9.0) 8.0 367,750 375,648 2.1

Export 3,096 2,053 2,261 (27.0) 10.1 29,628 32,232 8.8

Total Sales 43,789 36,363 39,303 (10.2) 8.1 397,378 407,880 2.6

Tractors 15,065 14,047 15,909 5.6 13.3 185,335 228,648 23.4

Tata Motors

Commercial Vehicles 30,670 24,998 28,521 (7.0) 14.1 258,432 258,620 0.1

Passenger Vehicles 10,728 10,827 12,907 20.3 19.2 107,071 125,897 17.6

Total Domestic 41,398 35,825 41,428 0.1 15.6 365,503 384,517 5.2

Export 5,636 5,119 4,921 (12.7) (3.9) 46,528 53,468 14.9

Total Sales 47,034 40,944 46,349 (1.5) 13.2 412,031 437,985 6.3

Source: Companies

AUTO INDUSTRY VOLUME UPDATE - JANUARY 2017Automobile companies' sales performance in January 2017 were mixed.Passenger car segment made a sharp comeback with most playersreporting growth and we believe the passenger vehicle industry to havegrown in double-digits during the month. Post demonetization, tractordemand has seen recovery as both M&M and Escorts reported YoY volumegrowth for second consecutive month. Commercial vehicle performancewas mixed with Ashok Leyland and Eicher Motors reporting growth andTata Motors witnessing volume decline. Three wheeler segment continueto witness sharp YoY fall in volumes. In the two wheeler space, RoyalEnfield continued to report strong growth. Hero MotoCorp reportedvolume decline. We expect the two wheeler companies to witness YoYvolume decline in January 2017. We expect two wheeler and three wheelersegment to remain under pressure in 4QFY17. Commercial vehicle,passenger car and tractor segment are expected to report growth in4QFY17. Currently we like Maruti Suzuki (ACCUMULATE, TargetPrice.6464) and Bajaj Auto (BUY, Target Price Rs.3208) in the auto OEspace.

AUTO INDUSTRY UPDATE

Arun [email protected]

+91 22 6218 6443



Hero MotoCorp - sales volume (Nos)


2W 563,348 330,202 487,088 (13.5) 47.5 5,473,953 5,529,186 1.0

Source: Company

Hero MotoCorp's January 2017 wholesale dispatches declined by 14% YoY from 563,348 units in January 2016 to487,088 units in January 2017. Demonetization impact has been severe in rural areas and given HMC's high expo-sure there, the company reported sharp YoY volume decline for third consecutive month. Post demonetization,HMC's volumes in the past three months are down by 20%. We expect the company's volumes to stay under pres-sure in 4QFY17 and expect recovery to happen in FY18.

HERO MOTOCORP (HMC)

HHML - 2W sales volume

Source: Company

(40.0)

-

40.0

80.0

120.0

160.0

(150,000)

-

150,000

300,000

450,000

600,000Volume (Units - LHS) % YoY growth (RHS)



MSIL - sales volume (Nos)


Mini (Alto, WagonR) 34,206 31,527 37,928 10.9 20.3 360,804 349,929 (3.0)

Compact/Super compact (Swift,

Ignis, Celerio, Dzire, Baleno) 48,120 45,854 58,818 22.2 28.3 483,815 506,021 4.6

Mid-Size (CIAZ) 5,431 3,711 6,530 20.2 76.0 43,591 53,644 23.1

UV ( Gypsy, Ertiga, S Cross, Brezza) 8,114 16,072 16,313 101.0 1.5 72,038 159,567 121.5

C (OMNI, Eeco) 10,512 9,224 14,179 34.9 53.7 118,093 126,186 6.9

LCV (Super Carry) - 26 166 - - - 460 -

Total Domestic 106,383 106,414 133,934 25.9 25.9 1,078,341 1,195,807 10.9

Export 7,223 11,494 10,462 44.8 (9.0) 104,111 102,753 (1.3)

Total Sales 113,606 117,908 144,396 27.1 22.5 1,182,452 1,298,560 9.8

Source: Company

MSIL reported strong wholesale dispatch growth in January 2017. Wholesale volumes grew by 27% YoY to 144,396units. Domestic volumes grew by 26% YoY led by strong retails in December 2016. In December 2016, MSIL is be-lieved to have retailed ~182,000 units, far ahead than its wholesale dispatches of 106,414 units, and that translatedinto depletion in dealer inventory. Volume growth in January is also supported by strong demand for products likeBaleno, Brezza and start-up of Ignis sales. Exports grew by 45% YoY on a lower last year base. With new Gujaratplant expected to start during 4QFY17, volume growth will receive further boost in FY18. MSIL is expected to con-tinue reporting healthy volume growth in the coming months and as well in FY18.

Export volume trend

Source: Company

Business Mix (Domestic)

Source: Company

Passenger car segment domestic volume trend

Source: Company

Domestic sales volume trend

Source: Company

MARUTI SUZUKI INDIA LIMITED (MSIL)

(20)

(10)

-

10

20

(40,000)

-

40,000

80,000

120,000

Volume (Units - LHS)

% YoY growth (RHS)

(10)

-

10

20

30

40

50

(30,000)

-

30,000

60,000

90,000

120,000

150,000

Volume (Units - LHS)% YoY growth (RHS)

(50)

-

50

100

150

(6,000)

-

6,000

12,000

18,000Volume (Units - LHS)

% YoY growth (RHS)

0%

25%

50%

75%

100%

Van

MUV

Passenger Car



M&M - sales volume (Nos)


Passenger Vehicles 22,088 16,698 20,096 (9.0) 20.3 185,704 190,173 2.4

CV 14,385 14,154 13,890 (3.4) (1.9) 135,481 141,657 4.6

3W 4,220 3,458 3,056 (27.6) (11.6) 46,565 43,818 (5.9)

Total Domestic 40,693 34,310 37,042 (9.0) 8.0 367,750 375,648 2.1

Export 3,096 2,053 2,261 (27.0) 10.1 29,628 32,232 8.8

Total Sales 43,789 36,363 39,303 (10.2) 8.1 397,378 407,880 2.6

Tractors 15,065 14,047 15,909 5.6 13.3 185,335 228,648 23.4

Source: Company

M&M's auto division performance continues to stay impacted as impact on demonetization has been high in ruralareas and commercial vehicle segment. In January 2017, M&M's auto segment wholesale volumes declined by 10%and stood at 39,303 units. In the auto segment, M&M reported volume decline across all broad segments. Givengood monsoons, impact of demonetization has been relatively lower. Accordingly M&M reported 6% YoY growth intractor. M&M FY17YTD growth in auto and tractor segment stands at 3% and 23% respectively. Going ahead, inthe near term, we expect M&M's auto sales to stay weak and tractor volumes to continue reporting growth.

Domestic volume trend (Automotive)

Source: Company

Export volume trend (Automotive)

Source: Company

4W - domestic volume trend

Source: Company

Tractor - volume trend

Source: Company

MAHINDRA AND MAHINDRA (M&M)

(30)

-

30

60

90

120

(12,000)

-

12,000

24,000

36,000

48,000


% YoY growth (RHS)

(25)

-

25

50

75

100

125

(10,000)

-

10,000

20,000

30,000

40,000

50,000


% YoY growth (RHS)

(25)

(15)

(5)

5

15

25

(15,000)

-

15,000

30,000

45,000

60,000


(40)

(20)

-

20

40

60

(1,500)

-

1,500

3,000

4,500

6,000




Tata Motors - sales volume (Nos)


Commercial Vehicles 30,670 24,998 28,521 (7.0) 14.1 258,432 258,620 0.1

Passenger Vehicles 10,728 10,827 12,907 20.3 19.2 107,071 125,897 17.6

Total Domestic 41,398 35,825 41,428 0.1 15.6 365,503 384,517 5.2

Export 5,636 5,119 4,921 (12.7) (3.9) 46,528 53,468 14.9

Total Sales 47,034 40,944 46,349 (1.5) 13.2 412,031 437,985 6.3

Source: Company

TAMO's January 2017 wholesale dispatches stood at 46,349 units, 2% lower as compared with 47,034 units. Ascompared with December 2016, volumes increased by 13%. In the passenger vehicle space, the company continuedto ride on the Tiago and report volume growth. However, commercial vehicle sales for the company remained weakfor the company. TAMO reported YoY decline in CV sales as against growth reported by competitors like AshokLeyland and Eicher Motors. We expect TAMO's CV sales to improve in February and March 2017 on account ofexpected pre-buying ahead of BSIV emission norms getting implemented. Passenger car sales will continue to growin the near to medium, primarily driven by new products.

TATA MOTORS (TAMO)

PV - domestic volume trend

Source: Company

Business Mix ( Domestic)

Source: Company

CV - domestic volume trend

Source: Company

Exports volume trend

Source: Company

(25)

-

25

50

75

100

(10,000)

-

10,000

20,000

30,000

40,000


(20)

-

20

40

60

80

(5,000)

-

5,000

10,000

15,000

20,000


% YoY growth (RHS)

(50)

-

50

100

150

200

(5,000)

-

5,000

10,000

15,000

20,000Volume (Units - LHS)

% YoY growth (RHS)

0%

25%

50%

75%

100%PV

CV



Kotak Securities Limited has two independent equity research groups: Institutional Equities and Private Client Group. This report hasbeen prepared by the Private Client Group. The views and opinions expressed in this document may or may not match or may be contrarywith the views, estimates, rating, target price of the Institutional Equities Research Group of Kotak Securities Limited.

MPHASIS LTD

PRICE: RS.564 RECOMMENDATION: SELLTARGET PRICE: RS.524 FY18E P/E: 13.7X

Mphasis once again disappointed with weak revenue performance andmissed our estimates by about 2% in dollar terms. Revenues wereimpacted by lower Direct International which was down by 0.2% QoQ.Within Direct International, Digital Risk which contributes about 20% ofDI revenue witnessed sharp decline of 6% on QoQ Basis. The balance 80%of DI revenue witnessed growth of 1.2% QoQ impacted by annual clientshutdown. HP business continues to grow and reported growth of about1% sequentially. EBIT margins were inline with our expectations at 14.7%and reported a decline of about 60bps on QoQ Basis, due to salary hike(about 160bps impact). There is little scope for improvement in marginsfrom here and we believe it would remain in this range due to pricingpressure and underinvestment in digital business. Deal win remain robustat about USD 96mn in Digital International Business. However, there areheadwinds for the DI business in the short term and HP business isexpected to grow at a muted pace. Board approved buyback of 1.7 croreequity shares (8.26% of paid up capital) at Rs.635 per share amounting toRs.11030mn. We cut our FY17 and FY18 earnings to Rs.39 (Rs.39.1 earlier)and Rs.40.8 (Rs.41.4, earlier) per share, respectively. Our TP stands revisedto Rs.524 (Rs.494 earlier). At that level, our FY18E earnings will bediscounted by about 11.5x, which, we feel is adequate, considering theexpected low growth in revenues. We maintain SELL.

Consolidated Quarterly performance

(Rs.mn) 2QFY17 3QFY17 QoQ (%) 3QFY16 YoY (%)

Turnover 15176 15361 1.2 15167 1.3

Expenditure 12713 12973 13001

EBIDTA 2463 2388 -3.0 2166 10.3

Depreciation 140 131 167

EBIT 2323 2257 -2.8 1999 12.9

ESOP/EO expns 59 0 0

Other Income 665 594 403

PBT 2929 2851 -2.7 2402 18.7

Tax 822 815 666

PAT 2107 2036 -3.4 1736 17.3

Shares (mns) 210 210 210

EPS (Rs) 10.0 9.7 8.3

Margin (%)

EBDITA 16.2 15.5 14.3

EBIT 15.3 14.7 13.2

PAT 13.9 13.3 11.4

Source : Company;

HP grows, Digital Risk remains a concern

Mphasis reported sequential de growth of 0.3% to USD 223.5mn (excl hedg-ing gain). HP growth slowed down to about 0.6% from about 1.8% in previ-ous quarter. Digital Risk continues to de-grow.

The growth in DI business was mainly due to growth of Direct Core (about75% of DI Business) business. The sharp de growth of 6% sequentially ofDigital Risk impacted the growth rate of DI overall.

Summary table

(Rs mn) FY16 FY17E FY18E

Sales 60,880 61,118 63,880Growth (%) 5.1 0.4 4.5EBITDA 8,971 9,732 10,190EBITDA margin (%) 14.7 15.9 16.0PBT 9,391 11,383 11,739Net profit 6,695 8,212 8,569EPS (Rs) 31.9 39.1 41.1Growth (%) 2.9 22.6 5.2CEPS (Rs) 35.4 41.7 43.7BV(Rs/share) 282.2 300.6 323.5Dividend / share (Rs) 18.0 20.0 20.0ROE (%) 11.7 13.4 13.1ROCE (%) 16.0 17.5 16.9Net cash (debt) 26,553 27,197 30,020NW Capital (Days) 73.9 71.9 72.9P/E (x) 17.7 14.4 13.7P/BV (x) 2.0 1.9 1.7EV/Sales (x) 1.5 1.5 1.4EV/EBITDA (x) 10.1 9.3 8.6

Source: Company, Kotak Securities - Pri-vate Client Research

RESULT UPDATE

Dipen [email protected]+91 22 6218 5409



Growth challenges in HP and DI, Direct Core to sustain momentum

Direct international has about 75% contribution from Direct Core and about21% from Digital Risk.

During 3Q, DI business saw marginal USD revenue growth of about 0.3% se-quentially as against de-growth of about 1% in previous quarter. Mphasishas been focusing on the non-HP business over the past few quarters and hasbeen indicating additional spends to garner more business from non-HP chan-nels.

However, Digital Risk business continues to be impacted to due to rise in in-terest rates in its market. The downward trend is expected to continue forfew more quarters before it stabilizes.

Management expects the revenue trajectory from HP Business to continue inthe coming quarters too as there was no one time gain in the current quar-ter. However, growth is expected to remain muted in the short to mediumterm.

As per management there is no further investment required to be made tomaintain the current revenue rate from HP Business.

We have assumed revenues in FY17 and FY18 to be at around $214mn and$221mn respectively.

On the other hand, Mphasis now also has an opportunity to penetrate intothe Blackstone portfolio of customers. However, we believe that, full benefitsof the association will accrue to Mphasis only from H2 of FY18.

Mphasis won new contracts of $96mn v/s $83mn Total Contract Value (TCV)in 2QFY17.Majority of the wins were predominately in Direct Core.

EBIT margins inline; management maintains EBIT margin guidanceat 14-16%

EBIT margins at 14.7% were in line with our expectations. There was a160bps impact on margins due to wage hikes during the quarter which wereoffset by better operating efficiencies.

Margins were also impacted by higher SG&A expenses which stood at about6.9% of revenue v/s 6.5% in previous quarter. It is expected to remain atthese levels with increased investment required to gain market share.

The margins are expected to remain in the band of 14-16% for the full yearand in FY18.

Key takeaways from Earning Call

Deal wins continue to remain robust at USD96mn for Q3FY17. 51% of thedeals are in focus areas of Digital, NextGen and GRC Services. About USD10mn worth of deals came from Digital Risk and Product business.

Focus would be on increasing wallet share by looking at Blackstone Portfolio,this would be through extending the client base and expanding the pipeline.

Program for mining Blackstone portfolio is on track. A separate sales teamhas been put in place to mine the Blackstone Portfolio.

Due to rise in interest rate there is a downward pressure on mortgage busi-ness which is impacting the Digital Risk Business. In short term the downwardpressure is expected to continue and would improve only post 2-3 quarters.

Company maintained 14-16% operating band margin.

DSO improved by 7 days and stood at 60 days in Q3FY17.



Future Prospects

We have tweaked our FY17 and FY18 estimates. We have assumed the ru-pee to be at 67.4 / USD in FY17 and 67.5 / USD in FY18.

HP revenues are broadly expected to be around $214 mn in FY17 and$221mn in FY18 versus $240mn in FY16. On the other hand, Digital risk busi-ness is expected have a sharp de-growth for year.

On an overall basis, we expect USD revenue to de-grow by 3% in FY17 andgrow by about 5% in FY18.

Consequently, PAT is expected to be at Rs.8.2bn in FY17 and Rs.8.6bn inFY18. EPS works out to Rs.39.1in FY17 and Rs.40.8 in FY18.

Valuations

Mphasis has been scaling up its core Direct International business over thepast several quarters. This has led to higher-than-industry growth in this busi-ness.

However, DR revenues are expected to be lower YoY in FY17 as volatilitycontinues. The HP business is also expected degrow YoY and stabilizing atthese levels going forward.

Demand generating efforts may bring in more business, going ahead. We willwatch out for further progress on these over the next few quarters.

At the CMP, our FY18 estimates are discounted by about 13.7 x, which, wefeel, are adequate, looking at the muted revenue growth.

We maintain SELL with a PT of Rs.524.

Risk and Concerns

A delayed recovery in the developed economies may impact our projections.

A sharp acceleration in rupee from the current levels may impact our earningsestimates for the company.

We maintain SELL on Mphasis Ltdwith a price target of Rs.524




MIRZA INTERNATIONAL LTD

PRICE: RS.91 RECOMMENDATION: BUYTARGET PRICE: RS.119 FY18E P/E: 10.7X

Mirza International Ltd Q3FY17 results were better than our estimates.Net revenue for the quarter grew by 5.5% yoy to Rs 2.28 bn as against ourestimates of Rs 2.13 bn. The 35% yoy growth in domestic Redtape brandbusiness and 4% yoy growth in footwear exports business which nullifiedthe negative impact of 38% yoy decline in overall tannery business due toslower demand. The company's business also had limited impact ofdemonetization due to large presence in exports, higher share of cardbased transaction and relatively non-discretionary nature of demand infootwear. In footwear exports business, UK witnessed 1% growth, USremained flattish and other markets witnessed a growth after long time.EBITDA for the quarter grew by 16.1% yoy to Rs 397 mn with EBITDAmargins at 17.4%, which improved by 159 bps yoy. EBITDA marginsimproved on yoy on a low base of last year when Genesis Footwear'saccount was not consolidated. However, the margins could have beenbetter, if there was no negative impact of Brexit on realization. Besidesthis, decline in tannery business also impacted margins. We believe thatthe margins would revive in next year. The company has launched newbrand 'Bondstreet' in order to cater the mid or affordable segment. Thecompany has launched the same across geography and is positive on thesegment. The company is focused on growing domestic branded andexports business in a longer run. We maintain our estimates and buyrecommendation on the stock with target price of Rs 119.

Result Table

Year to March (Rs mn) Q3FY17 Q3FY16 % Chg Q2FY17 % Chg

Net Revenues 2,280 2,162 5.5 2,503 (8.9)

Raw Materials Cost 1,214 1,185 2.4 1,459 (16.8)

Gross Profit 1,067 977 9.2 1,044 2.2

Employee Expenses 181 160 13.2 161 12.4

Other Expenses 489 475 2.9 505 (3.2)

Operating Expenses 1,883 1,820 3.5 2,125 (11.4)

EBITDA 397 342 16.1 378 5.0

EBITDA margin 17.4% 15.8% 15.1%

Depreciation 75 62 20.5 71 5.3

Other income - - -

Net finance expense 64 49 30.7 65 (1.3)

Profit before tax 258 231 11.8 242 6.6

Provision for taxes 86 80 - 79 10.0

Reported net profit 172 151 13.8 164 5.0

As % of net revenues

COGS 53.2 54.8 58.3

Employee cost 7.9 7.4 6.4

Other Expenses 21.4 22.0 20.2

Operating expenses 82.6 84.2 84.9

EBITDA 17.4 15.8 15.1

Reported net profit 7.5 7.0 6.5

Tax rate (% of PBT) 33.5 34.7 32.4

Source: Company

Summary table - Standalone


Revenue 9258 9439 11012Growth (%) 0.8 2.0 16.7EBITDA 1706 1658 2068EBITDA margin (%) 18.4 17.6 18.8PBT 1158 1115 1520PAT 781 752 1025EPS 6.5 6.3 8.5EPS Growth(%) 53 (4) 36CEPS (Rs) 9 9 11Book value (Rs/share) 37 43 50Dividend/share (Rs) 0.5 0.7 0.9ROE (%) 20.6 15.7 18.3Core ROCE (%) 24.0 19.9 23.2Net cash (debt) (1936) (1209) (929)NW Capital (Days) 112 120 121P/E (x) 14.0 14.6 10.7P/BV (x) 2.5 2.1 1.8EV/EBITDA (x) 7.6 7.3 5.7EV/Sales (x) 1.4 1.3 1.1


RESULT UPDATE

Pankaj [email protected]

+91 22 6218 6434



Q3FY17 revenue better than estimates

Net revenue for the quarter grew by 5.5% yoy to Rs 2.28 bn led by 35% yoygrowth in domestic Redtape brand business and 4% yoy growth in footwearexports business which nullified the negative impact of 38% yoy decline inoverall tannery business due to slower demand.

The company's business had limited impact of demonetization due to largepresence in exports, higher share of card based transaction and relativelynon-discretionary demand of shoes.

In terms of geography, total exports business declined by 0.5% yoy whiledomestic business grew by 18.7% yoy. Exports business contributed 65% torevenue Vs 69% yoy, while domestic business witnessed gain in revenueshare at 35% Vs 31% yoy.

In exports, footwear business grew by 4% yoy, while tannery business wit-nessed 46.5% decline. UK market witnessed 1% growth on account of slow-down due to Brexit while US remained flattish. Other markets witnessedgrowth after long time, as demand revived from Germany, France, South Af-rica, etc in the quarter.

Domestic branded business remained robust

Domestic market sales grew by 18.7% yoy primarily on account of 35% yoygrowth in domestic Redtape brand business, while domestic tannery declinedby 33% yoy on low demand due to demonetization.

Redtape brand business grew 35% yoy on strong festive and marriage seasonand had minimal impact of demonetization. The company witnessed strongrevenue contribution of 22% (of brand sales) from online business. Inbranded business, garment and accessory business grew by 79% yoy.

MIL is focused on growing branded business in a longer run through in-creased focus on online, increasing penetration to smaller cities throughEBOs, adding new products, etc.

EBITDA grew by 16.1% on improvement in margins on yoy

EBITDA for the quarter was ahead of our estimates and grew by 16.1% yoyto Rs 397 mn Vs estimates of Rs 337 mn.

EBITDA margin for the quarter was at 17.4% (vs estimates of 15.5%) andwitnessed an increase of 159 bps on yoy. EBITDA margins improved on yoyon a low base of last year when Genesis Footwear's accounts were not con-solidated. However, the margins could have been better at ~18.5%, if therewas no negative impact of Brexit on realization.

In the quarter, the company booked higher employee expenses up 13.2%yoy. This was due to certain contract labours shifted to payroll post demon-etization, as they were not paid by the contractors due to cash crunch. As aresult, other expenses grew at a slower pace by 2.9% yoy due to lower pro-cessing charges.

PAT for the quarter grew by 13.8% on improved margins

PAT for the quarter grew by 13.8% yoy to Rs 172 mn (Vs estimates of Rs 134mn) on account of better EBITDA margins.

The finance expenses for the quarter grew by 30.7% yoy on a low base oflast year (when company provided lower finance expenses), however it wasflattish on qoq. The gross debt of the company remained flattish on qoq to Rs1.5 bn. The company targets to reduce to Rs 1.5 bn by FY17 end.



Launching new products/segment to tap domestic opportunity

MIL has launched new brand Bondstreet which is priced in the range of Rs1500-2000 per pair. With this, MIL entered into the mid/affordable segmentconsidering huge opportunity in the same. The company has launched theproduct on pan India basis and is presently distributing through the samechannel. MIL targets to grow this business to the size of Redtape in the next3-4 years.

The company also targets to launch sports shoes under Redtape brand whichwould diversify its products. It is expected to launch the same by May 2017.

FY17 to be muted year

The management has maintained its guidance for a muted FY17 consideringslower exports revenue. The management expects strong growth in brandbusiness to continue in Q4FY17 and in coming years.

The company expects margins to improve in a longer run when currency im-pact neutralizes post Brexit and on improvement in utilization of tannerybusiness.

Outlook and valuation

We maintain our estimates of sales and PAT CAGR of 9% and 15% respectivelyin FY16-18E. We had assumed revenue growth of 2% in FY17E by factoring inslowdown in exports business and short term impact of demonetarization andexpect it to revive in FY18E with 17% growth. Based on FY17E and FY18E EPS ofRs 6.3 and Rs 8.5, the stock is trading at PE of 14.6x and 10.7x respectively andis available at a significant discount to its peers in the sector. We maintain BUYrating and target price of Rs 119, by assigning PE of 14x.

We maintain BUY rating onMirza International Ltd

with a price target ofRs.119




EICHER MOTORS LIMITED (EML)PRICE: RS.24,030 RECOMMENDATION: REDUCETARGET PRICE: RS.24,164 FY18E P/E: 28.7X

EML's 3QFY17 came broadly as per expectations. The Royal Enfield (RE)business reported 43% YoY growth in revenues, 352bps YoY expansion inEBITDA margin and PAT growth of 65%. VECV JV business performancewas subdued as demonetization took its toll on commercial vehicle (CV)demand. EML's 2W wheeler business performance remained unscathedfrom demonetization impact. Given capacity constraints, RE's sequentialvolume growth is expected to be capped for the next 2-3 quarters. VECV'sperformance have been weak in recent quarters, but we expect somerecovery in 4QFY17 from expected pre-buying ahead of BS IV emissionnorm implementation. We marginally revise our RE business estimatesupwards. We maintain REDUCE on the stock with price target of Rs24,164(earlier Rs23,230).

Quarterly performance (Standalone)

(Rs mn) 3QFY17 3QFY16 YoY (%) 2QFY17 QoQ (%)

Revenues 18,336 12,843 42.8 17,625 4.0

Total expenditure 12,508 9,213 35.8 12,101 3.4

RM consumed 9,690 6,925 39.9 9,161 5.8

Employee cost 1,015 785 29.4 956 6.2

Other expenses 1,802 1,503 19.9 1,984 (9.2)

EBITDA 5,828 3,630 60.6 5,524 5.5

EBITDA margin (%) 31.8 28.3 - 31.3 -

Depreciation 355 321 10.6 358 (0.8)

Interest cost 7 4 86.8 8 (5.3)

Other Income 590 345 70.8 665 (11)

Exceptional item

PBT 6,056 3,651 65.9 5,823 4.0

PBT margins (%) 33.0 28.4 33.0

Tax 1,904 1,127 69.0 1,862 2.3

Tax rate (%) 31.4 30.9 - 32.0 -

Reported PAT 4,152 2,524 64.5 3,962 4.8

PAT margins (%) 22.6 19.7 - 22.5 -

Other Comprehensive Income (3) (6) 4

Total Comprehensive Income 4,149 2,518 64.8 3,965 4.6

Reported EPS (Rs) 153.0 93.0 64.5 146.0 4.8

Volumes (Units) 173,838 125,690 38.3 166,941 4.1

Net Realization (Rs) 105,105 101,856 3.2 105,192 (0.1)

RM cost per vehicle (Rs) 55,742 55,098 1.2 54,874 1.6

Source: Company

Standalone Result Highlight RE business continue to report robust YoY growth for the company. In

3QFY17, RE revenues grew by 43% YOY to Rs18.3bn and the same were asper expectations. Volume growth during the quarter stood at 38% YoY andaverage selling price moved up by 3% YoY. EML's 2W business remainedlargely unaffected from demonetization.

Gross margin for the quarter expanded by 107bps YoY to 47.2% on accountof raw material cost rationalization initiative. However, from the highs of2QFY17, gross margin contracted by 87bps.

Summary table (Standalone)

(Rs mn) CY15E* FY17E FY18E

Sales 61,880 70,486 95,368Growth (%) 104.1 13.9 35.3EBITDA 17,305 22,212 30,982EBITDA margin (%) 28.0 31.5 32.5PBT 17,696 23,064 32,910Rep Net profit 12,299 15,914 22,708EPS (Rs) 452.8 585.9 836.0Growth (%) 119.6 29.4 42.7Con Net profit 12,779 16,858 24,701Con EPS (Rs) 470 621 909Cons EPS Growth (%) 107 32 47CEPS (Rs) 504 642 908BV (Rs/share) 792 1,263 1,984Dividend / share (Rs) 100 100 100ROE (%) 58 57 52ROCE (%) 83 82 75Net cash (debt) 16,602 32,599 53,547NW Capital (Days) (29) (42) (42)P/E (x) 53.1 41.0 28.7P/BV (x) 30.3 19.0 12.1EV/Sales (x) 10.3 8.8 6.3EV/EBITDA (x) 36.8 27.9 19.3

Source: Company, Kotak Securities - Pri-vate Client Research; * CY15 is a 15 monthperiod

RESULT UPDATE

Arun [email protected]

+91 22 6218 6443



Employee cost increased by 29% YoY due to annual increments, increase inmanpower and high growth in production. Other expenses increased by 19%on 38% increase in sales volume, thereby reaping benefits of operating le-verage.

On the back of higher gross margins and operating leverage benefits, EML'sstandalone business EBITDA margin moved up by 352bps YoY to 31.8%.

Other income grew by 71% YoY and we believe that could partly be due torevaluation on investments as per IND AS.

Standalone business PAT grew by 64% YoY to Rs4.2bn.

VECV Result Highlights

Quarterly performance (VECV) - Derived


Volumes 11,462 12,334 (7.1) 13,149 (12.8)

Revenues 18,850 19,910 (5.3) 19,716 (4.4)

EBITDA 1,300 1,700 (23.5) 1,428 (9.0)

EBITDA margin (%) 6.9 8.5 - 7.2

PAT 570 860 (33.7) 657 (13.2)

Source: Company

VECV's performance during the quarter was weak as commercial vehicle de-mand was significantly impacted by demonetization. Further, increase in dis-counting levels and rise in raw material cost inflicted further damage to prof-itability.

Revenues for the quarter declined by 5% YoY led by 7% fall in sales volume.Sequentially volumes were down by 13%.

EBITDA margin came down from 8.5% in 3QFY16 and 7.2% in 2QFY17 to6.9% in 3QFY17.

On the back of revenue decline and contraction in EBITDA margin, VECV'sPAT fell by 34% YoY and 13% QoQ to Rs570mn.

Consolidated Result Highlights

Quarterly performance (Consolidated)


Revenues 18,348 12,843 42.9 17,549 4.6Total expenditure 12,577 9,266 35.7 12,127 3.7RM consumed 9,691 6,925 39.9 9,116 6.3Employee cost 1,058 817 29.5 1,000 5.8Other expenses 1,829 1,524 20.0 2,011 (9.1)EBITDA 5,770 3,577 61.3 5,422 6.4EBITDA margin (%) 31.4 27.9 - 30.9 -Depreciation 356 321 10.9 359 (0.7)Interest cost 10 4 152.6 8 17.1Other Income 590 345 70.8 665 (11)Exceptional item - -PBT 5,995 3,598 66.6 5,720 4.8PBT margins (%) 32.7 28.0 32.6Tax 2,000 1,127 77.5 1,840 8.7Tax rate (%) - -PAT (bef minority int/associates pft) 3,995 2,471 61.7 3,879 3.0Profit from JV 187 316 (40.8) 252 (26)Reported PAT 4,182 2,787 50.0 4,132 1.2PAT margins (%) 22.8 21.7 23.5Other Comprehensive Income (11) (4) (3)Total Comprehensive Income 4,171 2,783 49.9 4,129 1.0Reported EPS (Rs) 154.1 102.7 50.0 152.2 1.2

Source: Company



Consolidated revenues grew by 43% YoY, on the back of robust 43% YoYjump in RE volumes. EBITDA margin expanded 360bps YoY, led by highergross margin and operating leverage benefits. For EML, share of profit fromVECV declined by 41% YoY to Rs187mn. Consolidated PAT grew by 50% YoYto Rs4.2bn, in line with our expectation.

Post adoption of IND AS, VECV JV is consolidated under equity method. Un-like line to line consolidation earlier, VECV JV profit share is directly added toconsolidated profits. Change in JV consolidation accounting will not impactconsolidated net profits.

Conference Call Highlights

Initial impact of demonetization on RE business was felt for two weeks, postwhich bookings and demand came back to normal. Company's order bookcontinues to grow ahead of sales. Waiting period on Classic 350 at ~3months, remains unchanged QoQ. Volumes in top 20 cities is growing at15%.

RE business has 640 dealerships as of end 2016 and all stores have new retailidentity. Company plans to add ~8-10 dealerships per month in the foresee-able future (next 12 months).

In exports, the company launched Himalayan in Australia and Columbia inNovember 2016. Backed by various initiatives taken by the company in previ-ous years, company indicated of some traction in export volumes.

Company's Oragadam plant is running at full capacity and additional capacityfrom the new plant will come in 3QFY18. New technical center will start op-erations by end 4QFY17.

In the CV business, industry and company witnessed sharp decline in demanddue to demonetization. Company expects volumes to pick-up in 4QFY17 onaccount of pre-buying ahead of BSIV emission norms implementation. MDEPsales for the quarter was at 5,848 units.

In the RE business, company witnessed marginal increase in raw materialcost in 3QFY17. Last price hike taken by the company in the 2W businesswas in August 2017 (0.9% increase).

In the CV business, the company indicated that apart for raw material costincrease, product mix is very critical for gross margins. In October 2016,VECV took a price hike of less than 1% on its CV portfolio.

Outlook

In 3QFY17, RE's 38% YoY volume growth was robust, but on a sequentialbasis, volumes grew by mere 4% as the company is facing capacity con-straint. Additional capacity from new plant is expected to come in 3QFY18and thereby RE's sequential volume growth in the next few quarters will re-main capped.

VECV's performance in the past two quarters has been weak, but we expectthe same to improve in 4QFY17 supported by expected pre-buying.

EBITDA margin for the company is expected to stay strong in FY18.

We have revised our FY18 EBITDA margin and other income estimates up-wards. Accordingly our consolidated net profits estimates for FY18 stands re-vised by 6%.

We maintain REDUCE on the stock with price target of Rs24,164 (earlierRs23,230). We value the RE business at a PE of 27x (unchanged) on FY18 ad-justed EPS to arrive at value of Rs21,525. VECV business is valued at 13x (un-changed) FY18 EV/EBITDA to arrive at value of Rs2,639.

We maintain REDUCE onEicher Motors Ltd with a

price target of Rs.24164




GUJARAT PIPAVAV PORT LTD


Improving product mix (liquid and Ro-Ro account for 10% of volumes andare expected to grow at a fast pace), recent commissioning of Khatuwasterminal (aids pickup in double-stacked rail volumes and addressesimbalance), operating leverage benefits and ongoing cost-reductionprogram at the port has helped the company report sales of Rs 1.7 bn(+2.3% YoY) and EBIDTA of Rs 1.04 bn. This has translated into healthyOPM of 61.7 % (+110 bps YoY and highest ever for the company) and PATwas reported at Rs 645 mn (+20.8% YoY) and above our expectation of Rs610 mn. However, inability to add any major client in the containersegment, a weak global container market and intense competition isimpacting the performance of the company in the key containersegment.From here, we expect the growth to come from segments otherthan container. Broadly we expect the financial performance of thecompany to be not so encouraging in near to medium term, but areoptimistic about the long term prospects of the company, with thecompany expected to benefit from the upcoming Dedicated Freightcorridor (DFC) with Pipavav Rail Corporation preparing to connect the portwith the DFC. We lower our long term container volume assumption forGPPL. We Recommend BUY with a reduced TP of Rs 175 (from Rs 190).

Quarterly consolidated numbers

(Rs mn) Q3FY16 Q4FY16 Q1FY17 Q2FY17 Q3FY17

Sales 1,654 1,610 1,679 1,722 1,692

YoY % -10.4 -14.4 -9.0 15.4 2.3

QoQ % 10.9 -2.7 4.3 2.6 -1.7

Operating expense 294 295 287 367 312

Employee cost 128 75 129 125 112

Administration 230 248 255 244 224

Operating Expenditure 652 618 671 736 648

EBIDTA 1,002 992 1,008 986 1,044

EBIDTA (%) 60.6 61.6 60.0 57.3 61.7

Depreciation 249 247 251 280 275

Interest payment 1 1 1 1 1

Other income 64 65 66 119 108

Tax 282 310 220 228 231

PAT 534 499 602 594 645

Equity 4,835 4,835 4,835 4,835 4,835

EPS (Rs) 1.1 1.0 1.2 1.2 1.2

Source: Company

Financial highlights for the quarter Stable volumes in the container segment, improved car volumes and liquid

volumes have helped GPPL report decent set of numbers for Q3FY17

Container volume was reported at 167,000 TEUs (flat QoQ). Container mar-kets remain weak globally with GPPL losing key clients on regular basis

Bulk volume increased YoY to 520,000 tonnes (-27% QoQ).

Liquid volume was strong in the quarter at 2.3 mn tonnes (+195% QoQ)

Ro-Ro volumes of 27,000 cars (+25% QoQ) based on 18 calls by ships.

Summary table


Sales 6,602 6,808 7,391Growth (%) (23.9) 3.1 8.6EBITDA 3,744 4,076 4421EBITDA margin (%) 56.7 59.9 59.8PBT 3,037 3,422 3,761Net profit 1,764 2,430 2,670EPS (Rs) 3.6 5.0 5.5Growth (%) (54.3) 37.7 9.9CEPS (Rs) 5.6 7.1 7.7BV (Rs/share) 41.4 44.7 47.8Dividend/share (Rs) 1.9 1.5 2.0ROE (%) 8.8 11.3 11.5ROCE (%) 15.1 15.8 16.2Net cash (debt) 2,763 3,233 3,711NW Capital (Days) (20.2) (19.5) (18.5)EV/EBITDA (x) 17.5 15.9 14.6P/E (x) 38.6 28.1 25.5P/Cash Earnings 25.0 19.7 18.4P/BV (x) 3.4 3.2 2.9


RESULT UPDATE

Amit [email protected]

+91 22 6218 6439



Sales was reported at Rs 1.7 bn (+2.3% YoY)

EBIDTA was reported at Rs 1.04 bn translating into healthy OPM of 61.7 %(+110 bps YoY) and highest ever for the company

Other income includes Rs 38 mn received as dividend from Pipavav Rail cor-poration (PRCL)

Consequently PAT was reported at Rs 645 mn (+20.8% YoY) which wasabove our expectation of Rs 610 mn

Quarterly volumes for GPPL

Segment Q3FY16 Q4FY16 Q1FY17 Q2FY17 Q3FY17

Container ( No of TEUs) 178,000 177,000 172,000 166,000 167,000

Bulk (mn tonnes) 0.44 0.38 0.60 0.71 0.52

Liquid (mn tonnes) 0.19 0.25 0.13 0.78 2.30

Rail volumes (mn tonnes) 1.82 1.77 1.69 1.82 1.76

ICD volumes (TEUs) 124,000 119,000 119,000 127,000 113,000

No of rakes 664 702 640 665 583

Cars handled 4,500 8,700 11,000 21,570 27,000

No of calls for cars 7 10 9 21 18

Source; Company

Facilities expanded and made more efficient

GPPL has invested Rs 4.5bn to increase its container handling capacity to 1.4mnTEU p.a (from 0.85 mn TEUs), expand its container storage yard, add modernequipment and strengthen handling capacity of the berths. The company has re-placed its old cranes with more efficient cranes, lowering the turnaround time ofships which can lead to the shifting of some shipping vessels from other ports inGujarat and Maharashtra to GPPL.

No investment would be made in expanding capacities of handling other com-modities. GPPL would take a call on further capacity addition once capacity uti-lization reaches the 80% mark. Till then, we do not expect any major capex forGPPL, except for maintenance capex of Rs 500 mn per annum over FY16 toFY18E.

Current capacities at GPPL

Segment Capacity

Container 1.4 mn TEUs

Bulk 5 mn MT

Liquid 50 lakh MT

RoRo 2.5 lakh cars

Source: Company

Current environment in container shipping market and ports

The market environment in which container ports like GPPL and shipping linesare operating has changed substantially. Shipping lines have started demandingbetter rates, better services, quicker turnaround time, berthing for larger ves-sels, zero congestion and superior hinterland connectivity as shipping lines con-solidate business and look to save cost. Here, GPPL is doing two things: (1) en-suring that existing services are satisfied of its offering and (2) convincing oldand new shipping lines to add new services at its port, now that they have slotsto offer on berths 3 and 4. Despite the above, it is increasingly becoming diffi-cult for GPPL to attract volumes in the container segment due to weak globalcontainer shipping market and competition from the Western Ports of Mundra,JNPT and Hazira for the same cargo.



Superior network of GPPL

Parameter Remark

Superior Rail connectivity 269km broad gauge rail built by PRCL to connect toSurendranagar which connects to the national grid

Road connectivity 11km four-lane expressway connects to theNational Highway 8E.

Double stacking Saves cost for shipping lines/train operators

Four container berths With modern cranes

Draft of 14.5 mts Can handle ships upto 12,000 TEUS

Other facilities Liquid/ Bulk/RoRo

Parentage of Maersk Strong relations with all shipping lines

Source: Company

Volume assumption over FY16 to FY18E Parentage of Maersk, improved services, relations with shipping lines, strate-

gic location on the west coast and ability to provide seamless railway con-nectivity to hinterland would continue to help GPPL attract container vol-umes. We expect container volumes to decline marginally in FY17 and growby 6% in FY18.

With Gujarat developing as an Auto hub, we expect the share of high marginRoRo to increase in future, which should aid margins for GPPL.

With increasing demand for chemicals, petroleum products, lubricants andpetrochemicals serving industries like oil and gas, chemicals, pharma, tex-tiles, and paints and so on, we expect the clients of GPPL to increasethroughput at the port on a continuous basis. We estimate the company tohandle 6 mn tonnes in FY17E and 7 mn tonnes of liquid cargo in FY18E.

Overall, bulk volumes continue to be a very small portion of the overall cargoand we are not very optimistic (even management of GPPL) on bulk cargo innear term for GPPL.

Volume Estimates for GPPL

Segment CY12 CY13 15mFY15 FY16 FY17E FY18E

Containers (mn TEUs) 0.57 0.64 0.98 0.69 0.68 0.72

Bulk (mn tonnes) 3.9 4.0 4.7 2.5 2.6 2.8

Liquid (mn tonnes) 0.0 0.0 0.3 0.7 6.0 7.0

Source; Company, Kotak Securities - Private Client Research

Rail associate PRCL continues to contribute to profitability

Pipavav Rail Corporation Ltd (PRCL - 38.8% subsidiary) has been reporting profitsfor the last 5 years. Financials of PRCL of FY16 and 9MFY17 are not yet avail-able. PRCL has paid a total dividend Rs 38 mn in the current quarter. PRCL iscurrently evaluating the investments required for efficient connectivity to theWestern Dedicated Freight Corridor (DFC).

Financial performance of PRCL for the last seven years

(Rs mn) FY09 FY10 FY11 FY12 FY13 FY14 FY15

Sales 684 766 896 1,530 1,790 2,240 2,317

Profit -238 -180 35 553 464 807 437

Source; Pipavav Rail Corporation



Concerns:

Focused only on container business

Weak global container trade

Competition from other ports in Maharashtra and Gujarat

Lower aggression compared to Mundra and JNPT

Valuation and Recommendation

We have not made changes to our earnings estimates for FY17/FY18, but expectthe container segment to report slow growth in volumes in the long run due toweak global container market, increasing competition and lower appression ofthe company. Liquid and RoRo would remain strong for GPPL with improvementin share in the overall cargo portfolio.

We have lowered our volume assumption in the container segment and expectcontainer volumes to grow at 6.8% p.a (from 7.5%) till end of FY28 (end of con-cession period). We have also lowered the multiple accorded to the book valueof PRCL from 2x to 1.5 x. We are assuming GPPL to reinvest all its cash flows toincrease container handling capacity through subsequent expansions (it hasaround 600 acres of unutilized land at the port and can expand 5x from here).

Valuation Table

Particulars Value of equity Share of GPPL FCFE base caseRs mn Rs mn (%)

Port 77,956 100.0 77,956

Gujarat Pipavav Rail Corporation(at 1.5 x Book value) 17,000 38.8 6,596

Total Value 84,552

No of shares (mn) 483.4

Value per share 175


Our FCFE for the port comes at ~ Rs161 and Pipavav Rail Corporation contributes~ Rs 14 per share to the value of GPPL, valuing the company at Rs 175 per share(earlier Rs190) and recommend BUY.

We recommend BUY on GujaratPipavav Port Ltd with a revised

price target of Rs.175




ITC LTD


We see the 6% hike in excise duties on cigarettes (versus 10% factoredinto prior estimates) as a positive for the stock, from the point of view ofearnings (upgraded 3% for FY18), as well as valuations - since themagnitude of recent hikes should alleviate fears of aggressive tax actionagainst cigarette companies. ITC currently trades at 27X FY18E PER, about30% discount to HUL. We believe there is a case for greater convergenceof ITC's valuations with large-cap FMCG companies as growthexpectations become similar, and ITC's earnings provide greater visibility.Upgrade to BUY with a price target of Rs 309 (Rs 273 earlier).

Event UpdateIn the Union Budget, the government has raised the excise duty on cigarettes byc. 6% across various cigarette lengths. This in towards the lower end of our ex-pectation of 5-10% and it is lower than the consensus figures of 8-10%, as re-ported by media (and 10% hike factored into our estimates).

COMPANY UPDATE

Ritwik [email protected]+91 22 6218 6426

Excise Duties : Cigarettes (Rs/ '000 sticks)

Rs/ 1000 sticks FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18

Filter:

75mm-85mm 1,759 1,759 1,759 1,959 1,959 2,309 2,725 3,290 3,790 4,170 4,421

70mm-75mm 1,323 1,323 1,323 1,473 1,473 1,718 2,027 2,250 2,590 2,850 3,021

<70mm 819 819 819 969 969 1,194 1,409 1,650 1,900 2,090 2,216

<65mm (Int. FY13) (Int. FY13) (Int. FY13) (Int. FY13) (Int. FY13) 669 669 1,150 1,440 1,585 1,681

Source: Budget Documents, Kotak Securities - Private Client Research

Growth, Excise Duties

FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18

75mm-85mm 5.0% 0.0% 0.0% 11.4% 0.0% 17.9% 18.0% 20.7% 15.2% 10.0% 6.0%

70mm-75mm 5.0% 0.0% 0.0% 11.3% 0.0% 16.6% 18.0% 11.0% 15.1% 10.0% 6.0%

<70mm 5.0% 0.0% 0.0% 18.3% 0.0% 23.2% 18.0% 17.1% 15.2% 10.0% 6.0%

<65mm NA NA NA NA NA NA NA 71.9% 25.2% 10.1% 6.1%

Source: Budget Documents, Kotak Securities - Private Client Research

This marks the first time in the past six years that the excise duty hike on ciga-rettes is in single digits.

As we see it, there are two functions that the excise duty hikes on cigarettesperform - a/ raise the excise revenues for the government, and b/ provide disin-centives for smokers, which is a moral function for the government.

We believe that in the past two Union Budgets, the government's actions indi-cate that the primary thrust of government policy remains gaining excise rev-enues, and perhaps a recognition of the damage that successive hikes throughFY13-FY16 have done on the legal cigarettes industry in India.

Keeping other factors constant, a rise of 6% in the excise duties (versus 10%factored into our estimates), leads to a 3% rise in our EPS estimates for FY18.

Reasonable hikes in budgets FY17/FY18 indicate that the government's aggres-sion on the cigarette industry has reduced. Further, given prior comments by thegovernment indicate that the GST on cigarettes is likely to be revenue-neutral.



Given the above, as also the fact that ITC's stock trades at a significant discountto peers, we believe that there is a case for re-rating of the stock (ITC currentlytrades at 27X FY18E PER, versus HUL's 38X FY18E PER).. As growth expectationsare now similar, we believe there is a case for re-rating of ITC stock relative tolarge-cap FMCG companies. We now value the stock at 31X FY18E PER, or Rs309. We upgrade ITC to BUY (ACCUMULATE earlier).

Summary table

FY16 FY17E FY18E

Sales 515,825 547,008 622,993

Growth (%) NM 6.0 13.9

EBITDA 133,558 142,686 166,627

EBITDA margin (%) 25.9 26.1 26.7

PBT 143,396 154,627 181,620

Net profit 92,447 102,054 119,869

EPS (Rs) 7.7 8.5 10.0

Growth (%) NM 10.4 17.5

CEPS (Rs) 8.5 9.4 10.9

Book value (Rs/share) 27.4 26.5 31.3

Dividend per share (Rs) 5.7 4.4 4.4

ROE (%) 29.0 31.5 34.5

ROCE (%) 23.7 25.7 29.3

Net cash (debt) 65,640 100,498 140,951

Net Working Capital (Days) 213 178 204

P/E (x) 35.1 31.8 27.1

P/BV (x) 9.8 10.2 8.6

EV/Sales (x) 8.8 8.3 7.2

EV/EBITDA (x) 23.8 22.0 18.6

Source: Company, Kotak Securities - Private Client Research

We recommend BUY onITC with a price target of

Rs.309



Gainers & Losers Nifty Gainers & LosersPrice (Rs) chg (%) Index points Volume (mn)

Gainers

BOSCHLTD 23,500 6.2 NA 0.0

MARUTI 6,195 5.1 NA 1.2

BANKBARODA 173 4.9 NA 17.0

Losers

TCS 2,165 (2.9) NA 2.4

AUROPHARMA 666 (2.3) NA 2.4

IDEA 108 (2.3) NA 66.8

Source: Bloomberg



RATING SCALE

Definitions of ratingsBUY – We expect the stock to deliver more than 12% returns over the next 9 months

ACCUMULATE – We expect the stock to deliver 5% - 12% returns over the next 9 months

REDUCE – We expect the stock to deliver 0% - 5% returns over the next 9 months

SELL – We expect the stock to deliver negative returns over the next 9 months

NR – Not Rated. Kotak Securities is not assigning any rating or price target to the stock. The report has been prepared for information purposesonly.

RS – Rating Suspended. Kotak Securities has suspended the investment rating and price target for this stock, either because there is not a suffi-cient fundamental basis for determining, or there are legal, regulatory or policy constraints around publishing, an investment rating or target.The previous investment rating and price target, if any, are no longer in effect for this stock and should not be relied upon.

NA – Not Available or Not Applicable. The information is not available for display or is not applicable

NM – Not Meaningful. The information is not meaningful and is therefore excluded.

NOTE – Our target prices are with a 9-month perspective. Returns stated in the rating scale are our internal benchmark.

Fundamental Research Team

Dipen ShahIT, [email protected]+91 22 6218 5409

Sanjeev ZarbadeCapital Goods, [email protected]+91 22 6218 6424

Teena VirmaniConstruction, [email protected]+91 22 6218 6432

Arun AgarwalAuto & Auto [email protected]+91 22 6218 6443

Ruchir KhareCapital Goods, [email protected]+91 22 6218 6431

Ritwik RaiFMCG, [email protected]+91 22 6218 6426

Sumit PokharnaOil and [email protected]+91 22 6218 6438

Amit AgarwalLogistics, Paints, [email protected]+91 22 6218 6439

Meeta Shetty, [email protected]+91 22 6218 6425

Jatin DamaniaMetals & [email protected]+91 22 6218 6440

Pankaj [email protected]+91 22 6218 6434

Nipun GuptaInformation [email protected]+91 22 6218 6433

Jayesh [email protected]+91 22 6218 5373

K. [email protected]+91 22 6218 6427

Technical Research Team

Shrikant [email protected] 22 6218 5408

Amol [email protected]+91 20 6620 3350

Derivatives Research TeamSahaj [email protected]+91 79 6607 2231

Malay [email protected]+91 22 6218 6420

Prashanth [email protected]+91 22 6218 5497

Prasenjit [email protected]+91 33 6625 9810



Disclosure/DisclaimerKotak Securities Limited established in 1994, is a subsidiary of Kotak Mahindra Bank Limited. Kotak Securities is one of India's largest brokerage anddistribution house.Kotak Securities Limited is a corporate trading and clearing member of Bombay Stock Exchange Limited (BSE), National Stock Exchange of India Limited (NSE),Metropolitan Stock Exchange of India Limited (MSEI). Our businesses include stock broking, services rendered in connection with distribution of primarymarket issues and financial products like mutual funds and fixed deposits, depository services and Portfolio Management.Kotak Securities Limited is also a depository participant with National Securities Depository Limited (NSDL) and Central Depository Services (India) Limited(CDSL). Kotak Securities Limited is also registered with Insurance Regulatory and Development Authority as Corporate Agent for Kotak Mahindra Old MutualLife Insurance Limited and is also a Mutual Fund Advisor registered with Association of Mutual Funds in India (AMFI). We are registered as a Research Analystunder SEBI (Research Analyst) Regulations, 2014.We hereby declare that our activities were neither suspended nor we have defaulted with any stock exchange authority with whom we are registered in lastfive years. However SEBI, Exchanges and Depositories have conducted the routine inspection and based on their observations have issued advise/warning/deficiency letters/ or levied minor penalty on KSL for certain operational deviations. We have not been debarred from doing business by any Stock Exchange/ SEBI or any other authorities; nor has our certificate of registration been cancelled by SEBI at any point of time.We offer our research services to clients as well as our prospects.This document is not for public distribution and has been furnished to you solely for your information and must not be reproduced or redistributed to any otherperson. Persons into whose possession this document may come are required to observe these restrictions.This material is for the personal information of the authorized recipient, and we are not soliciting any action based upon it. This report is not to be construedas an offer to sell or the solicitation of an offer to buy any security in any jurisdiction where such an offer or solicitation would be illegal. It is for the generalinformation of clients of Kotak Securities Ltd. It does not constitute a personal recommendation or take into account the particular investment objectives,financial situations, or needs of individual clients.We have reviewed the report, and in so far as it includes current or historical information, it is believed to be reliable though its accuracy or completenesscannot be guaranteed. Neither Kotak Securities Limited, nor any person connected with it, accepts any liability arising from the use of this document. Therecipients of this material should rely on their own investigations and take their own professional advice. Price and value of the investments referred to in thismaterial may go up or down. Past performance is not a guide for future performance. Certain transactions -including those involving futures, options andother derivatives as well as non-investment grade securities - involve substantial risk and are not suitable for all investors. Reports based on technical analysiscenters on studying charts of a stock's price movement and trading volume, as opposed to focusing on a company's fundamentals and as such, may not matchwith a report on a company's fundamentals.Opinions expressed are our current opinions as of the date appearing on this material only. While we endeavor to update on a reasonable basis theinformation discussed in this material, there may be regulatory, compliance or other reasons that prevent us from doing so. Prospective investors and othersare cautioned that any forward-looking statements are not predictions and may be subject to change without notice. Our proprietary trading and investmentbusinesses may make investment decisions that are inconsistent with the recommendations expressed herein.Kotak Securities Limited has two independent equity research groups: Institutional Equities and Private Client Group. This report has been prepared by thePrivate Client Group. The views and opinions expressed in this document may or may not match or may be contrary with the views, estimates, rating, targetprice of the Institutional Equities Research Group of Kotak Securities Limited.We and our affiliates/associates, officers, directors, and employees, Research Analyst(including relatives) worldwide may: (a) from time to time, have long orshort positions in, and buy or sell the securities thereof, of company (ies) mentioned herein or (b) be engaged in any other transaction involving such securitiesand earn brokerage or other compensation or act as a market maker in the financial instruments of the subject company/company (ies) discussed herein oract as advisor or lender / borrower to such company (ies) or have other potential/material conflict of interest with respect to any recommendation and relatedinformation and opinions at the time of publication of Research Report or at the time of public appearance. Kotak Securities Limited (KSL) may haveproprietary long/short position in the above mentioned scrip(s) and therefore may be considered as interested. The views provided herein are general innature and does not consider risk appetite or investment objective of particular investor; readers are requested to take independent professional advicebefore investing. This should not be construed as invitation or solicitation to do business with KSL. Kotak Securities Limited is also a Portfolio Manager.Portfolio Management Team (PMS) takes its investment decisions independent of the PCG research and accordingly PMS may have positions contrary to thePCG research recommendation. Kotak Securities Limited does not provide any promise or assurance of favourable view for a particular industry or sector orbusiness group in any manner. The investor is requested to take into consideration all the risk factors including their financial condition, suitability to riskreturn profile and take professional advice before investing.The analyst for this report certifies that all of the views expressed in this report accurately reflect his or her personal views about the subject company orcompanies and its or their securities, and no part of his or her compensation was, is or will be, directly or indirectly related to specific recommendations orviews expressed in this report.No part of this material may be duplicated in any form and/or redistributed without Kotak Securities' prior written consent.Details of Associates are available on our website ie www.kotak.comResearch Analyst has served as an officer, director or employee of subject company(ies): NoWe or our associates may have received compensation from the subject company(ies) in the past 12 months.We or our associates have managed or co-managed public offering of securities for the subject company(ies) in the past 12 months: NoWe or our associates may have received compensation for investment banking or merchant banking or brokerage services from the subject company(ies) inthe past 12 months. We or our associates may have received any compensation for products or services other than investment banking or merchant bankingor brokerage services from the subject company(ies) in the past 12 months. We or our associates may have received compensation or other benefits from thesubject company(ies) or third party in connection with the research report. Our associates may have financial interest in the subject company(ies).Research Analyst or his/her relative's financial interest in the subject company(ies): NoKotak Securities Limited has financial interest in the subject company(ies) at the end of the month immediately preceding the date of publication of ResearchReport: NoOur associates may have actual/beneficial ownership of 1% or more securities of the subject company(ies) at the end of the month immediately precedingthe date of publication of Research Report.Research Analyst or his/her relatives has actual/beneficial ownership of 1% or more securities of the subject company(ies) at the end of the monthimmediately preceding the date of publication of Research Report: NoKotak Securities Limited has actual/beneficial ownership of 1% or more securities of the subject company(ies) at the end of the month immediately precedingthe date of publication of Research Report: NoSubject company(ies) may have been client during twelve months preceding the date of distribution of the research report."A graph of daily closing prices of securities is available at www.nseindia.com and http://economictimes.indiatimes.com/markets/stocks/stock-quotes. (Choosea company from the list on the browser and select the "three years" icon in the price chart)."Kotak Securities Limited. Registered Office: 27 BKC, C 27, G Block, Bandra Kurla Complex, Bandra (E), Mumbai 400051. CIN: U99999MH1994PLC134051,Telephone No.: +22 43360000, Fax No.: +22 67132430. Website: www.kotak.com/www.kotaksecurities.com. Correspondence Address: Infinity IT Park, Bldg.No 21, Opp. Film City Road, A K Vaidya Marg, Malad (East), Mumbai 400097. Telephone No: 42856825. SEBI Registration No: NSE INB/INF/INE 230808130, BSEINB 010808153/INF 011133230, MSEI INE 260808130/INB 260808135/INF 260808135, AMFI ARN 0164, PMS INP000000258 and Research AnalystINH000000586. NSDL/CDSL: IN-DP-NSDL-23-97. Our research should not be considered as an advertisement or advice, professional or otherwise. The investoris requested to take into consideration all the risk factors including their financial condition, suitability to risk return profile and the like and take professionaladvice before investing. Investments in securities market are subject to market risks, read all the relateddocuments carefully before investing. Derivatives are a sophisticated investment device. The investor is requested to take intoconsideration all the risk factors before actually trading in derivative contracts. Compliance Officer Details: Mr. Manoj Agarwal. Call: 022 - 4285 8484, or Email:[email protected] case you require any clarification or have any concern, kindly write to us at below email ids: Level 1: For Trading related queries, contact our customer service at '[email protected]' and for demat account related queries contact us at

[email protected] or call us on: Online Customers - 30305757 (by using your city STD code as a prefix) or Toll free numbers 18002099191 / 1800222299,Offline Customers - 18002099292

Level 2: If you do not receive a satisfactory response at Level 1 within 3 working days, you may write to us at [email protected] or call us on 022-42858445 and if you feel you are still unheard, write to our customer service HOD at [email protected] or call us on 022-42858208.

Level 3: If you still have not received a satisfactory response at Level 2 within 3 working days, you may contact our Compliance Officer (Mr. ManojAgarwal) at [email protected] or call on 91- (022) 4285 8484.

Level 4: If you have not received a satisfactory response at Level 3 within 7 working days, you may also approach CEO (Mr. Kamlesh Rao) [email protected] or call on 91- (022) 4285 8301.

Morning Insight - 00146 02-02-2017 -...

Documents

Transcript of Morning Insight - 00146 02-02-2017 -...