MOS-6 Force Framework

8/10/2019 MOS-6 Force Framework

http://slidepdf.com/reader/full/mos-6-force-framework 1/72

2 September 2014

Shrinath [email protected] | +91 22 3982 5522

Rajat [email protected] | +91 22 3982 5441

the IF series #1



| 6-Force Framework of Levers

6-Force Framework of Levers

Or how to multiply stock value!Page

Preface ......................................................................................................... i-iii

Summary FAQs ............................................................................................... 1

Backdrop & Definitions .................................................................................. 7

Types of Stock Levers ..................................................................................... 8

Case studies & insights ................................................................................. 10

Applying the 6-Force Framework ................................................................. 16

Limitations of the 6-Force Framework ........................................................ 21

What to buy based on the 6-Force Framework ........................................... 22

#1 Sector Lever Jubilant Foodworks ....................... 23

Symphony ..................................... 24

#2 Strategic Lever Alembic Pharma ............................ 25

Gujarat Pipavav Port ..................... 26

J K Cement .................................... 27

Kaveri Seeds .................................. 28

TVS Motor ...................................... 29

Arvind ........................................... 30

#3 Operating Lever Idea Cellular ................................. 31Bharti Infratel ............................... 32

Maruti Suzuki ................................ 33

Ashok Leyland ............................... 34

#4 Financial Lever Jain Irrigation ................................ 35

BHEL .............................................. 36

#5 Regulatory Lever ONGC ............................................ 37

HPCL .............................................. 38

#6 Corporate Action Lever United Spirits ................................ 39

PVR ................................................ 40

Eicher Motors ............................... 41

Crompton Greaves ........................ 42

Annexure 1: Levers for non-Financial companies ....................................... 43

Annexure 2: Levers for Financial companies ............................................... 47

Annexure 3: Non-quantitative Levers .......................................................... 50

Annexure 4: Case Studies of levers

— Company case studies ....................................................... 51

— Sector aggregates: Key takeaways .................................... 63

Notes: Source of all exhibits in this report is MOSL analysis, unless otherwise mentioned.

Current valuations of stocks are based on price dated 26 September 2014.




September 2014 i

Preface

IF we deeply study them …

IF we fully understand them …

IF we smartly apply them …

… Investment Frameworks can offer Insights Forever!

Presenting …

The 4th dimension of equity researchStock ideas, Sector analyses, Theme studies, and … Investment Frameworks

We believe there are 4 dimensions to equity research, in descending order of prevalence and

practice –

1.

Stock ideas — recommendations on which stocks to buy / sell / hold

2. Sector analyses – actionables based on various issues pertaining to sectors

3. Theme studies – impact analysis of a particular phenomenon or development

4.

Investment Frameworks – tools & techniques which are applicable across stocks, sectors,

time horizons and (in most cases) even geographies.

Motilal Oswal and the 4th dimension

Evolved several Investment Frameworks in the past 25 years

At Motilal Oswal, we track over 225 stocks across 20 sectors. We have also written several

theme reports pertaining to Economy, Politics and various sectors.

Motilal Oswal’s Recent Theme Reports (to read full report, please click on the cover icons)

http://institution.motilaloswal.com/emailer/Research/PHARMA-20140620-MOSL-SU-PG078.pdf

http://institution.motilaloswal.com/emailer/Research/OIL-20140728-MOSL-SU-PG054.pdf

http://institution.motilaloswal.com/emailer/Research/THEMATIC-INDIA%20PSUs-20140616-MOSL-SU-PG114.pdf

http://institution.motilaloswal.com/emailer/Research/STRATEGY-Commodity-20140915-MOSL-34PG.pdf



September 2014 ii


Equally important, over the last 25 years, we have evolved several Investment Frameworks,

hitherto published mostly in the form of our Annual Wealth Creation Study.

Motilal Oswal & the 4th dimension of Investment Frameworks (click the icons to read full report)

Investment Framework: MULTI-BAGGERS

Insights Forever: Multi-baggers are of 2 types: (1) Transitory: created

by the combination of cyclical business and questionable management

quality; and (2) Enduring: Great businesses run by good managements

purchased at huge ‘margin of safety’ will create enduring multibaggers.

Investment Framework: INDIA’S NTD OPPORTUNITYInsights Forever: The era of India’s NTD (Next Trillion Dollar of GDP) will

see distinctly buoyant corporate profits, and boom in savings and

investment. This is because amidst linear GDP growth, discretionary

spend grows exponentially, benefiting several businesses.

Investment Framework: GREAT, GOOD, GRUESOME

Insights Forever: Think of companies as 3 types of “savings accounts”:

1.

The Great one pays an extraordinarily high interest rate (i.e. RoE) that

will rise as the years pass.

2. The Good one pays an attractive rate of interest that will be earned

also on deposits that are added.

3.

The Gruesome account both pays an inadequate interest rate and

requires you to keep adding money at those disappointing returns.

Investment Framework: BLUE CHIP INVESTING

Insights Forever: Blue Chips are fountains of dividend. They offer as

much, if not more, investment growth potential than stocks of lesser

quality. There is a systematic framework to identify and invest in

discovered and potential Blue Chip stocks.

Investment Framework: ECONOMIC MOAT

Insights Forever: An Economic Moat protects a company's profits from

being attacked by competitive business forces. Without an Economic

Moat, competition from rivals will ensure that high returns of a companyare lowered to the level of economic cost of capital … or even below.

Companies with “deep, dangerous moats” outperform those without,

both in terms of financial performance and stock returns.

http://institution.motilaloswal.com/emailer/Research/WC08-20040115-MOSL-1998_03-28PG.pdf

http://institution.motilaloswal.com/emailer/Research/WC17-20121212-MOSL-2007-12-PG048.pdf






September 2014 1


6-Force Framework of LeversOr how to multiply stock value!

Summary FAQs

We present the summary of this report in the form of 5 FAQs (read as “Facts”, and short for

Frequently Asked Questions).

FAQ #1: What is the 6-Force Framework of Levers?

A perennial truth of equity investing worldwide is this – for a given common set of macro-

economic parameters, there is wide divergence in stock price performance. We present a

6-Force Framework of Levers (i.e. factors or ratios), which taken together, explain the reasons

behind such divergence.

The 6-Force Framework of Levers

Total Stock Lever

=

Earnings Lever

X

Valuation Lever

1. Country Lever

x

2. Sector Leverx

3. Strategic Lever

x

4. Operating Lever

x

5. Financial Lever

6. Valuation Lever

NOTE: This report also covers 3 non-quantitative levers which in turn may affect one or more of the

above 6 quantitative levers. These are (1) Regulatory Lever, (2) Corporate Action Lever and

(3) Externality Lever.

FAQ #2: How does this 6-Force Framework work?

Total Stock Lever (TSL) is the master lever which connects stock price change to a distant

macroeconomic variable, say, Global GDP. Thus –

Total Stock Lever (TSL) = Stock Price

Global GDP

(Note: ∆ stands for delta i.e. percentage change in a year

If period > 1 year, CAGR is used to compute ∆)



September 2014 2


For non-Financial sector companies –

TSL = Stock Price = EPS x Stock Price

Global GDP Global GDP EPS

= Earnings Lever (EL) x Valuation Lever (VL)

Therefore, Stock Price = Global GDP x EL x VL

EL = EPS

Global GDP

= ∆Country GDP x ∆Sector Sales x ∆Co. Sales x ∆EBIT x ∆EPS

∆Global GDP ∆Country GDP ∆Sector Sales ∆Co. Sales ∆EBIT

= Country x Sector x Strategic x Operating x Financial

Lever(CL) Lever(SL) Lever(StL) Lever(OL) Lever(FL)

Therefore, Stock Price = Global GDP x [CL x SL x StL x OL x FL] x [VL]

For Financial sector companies –

TSL = Stock Price = Book value x Stock Price

Global GDP Global GDP Book value

= Book Value Lever (BL) x Valuation Lever (VL)

Therefore, Stock Price = Global GDP x BL x VL

BL = BV

Global GDP

= ∆Country GDP x ∆Agg. NII x ∆Bank NII x ∆PAT x ∆BV

∆Global GDP ∆Country GDP ∆Agg. NII ∆NII ∆PAT

= Country x Sector x Strategic x Operating x Equity

Lever(CL) Lever(SL) Lever(StL) Lever(OL) Lever(EL)

Therefore, Stock Price = Global GDP x [CL x SL x StL x OL x EL] x [VL]

The 6-Force Framework is unique to each sector and company at different points of time.

Thorough understanding of the same provides valuable insights into past performance and

likely future trends.

Non-quantitative levers: In addition to the 6 quantitative levers discussed above, there are at

least 3 major non-quantitative levers which directly or indirectly impact stock prices –

1.

Regulatory Lever (change in policies affecting economy, sectors or stock market)

2. Corporate Action Lever (change of management, stake hike, delisting offer etc)

3. Externality Lever (uncontrollable external events like drought, earthquake, wars etc).



September 2014 3


FAQ #3: Has the 6-Force worked in the past? What are the key lessons?

For a deeper understanding of various levers, we assessed sector and stock data over the full

economic cycle period of FY03-14, divided into two phases – boom (FY03-08) and lull (FY08-14).

The key takeaways are:

Sector-level takeaways:

• The top performing major sectors over the full economic cycle FY03-14 include: (1) Specific

Consumer segments – Alcoholic beverages, Paints, Tobacco, (2) Gems & Jewelry,

(3) Infrastructure/Construction, (4) Capital Goods, (5) Steel, and (6) Autos – Cars, CVs, and

Auto Ancillaries including Tyres.

• The worst performing major sectors over FY03-14 include: (1) Media, (2) Shipping,

(3) Fertilizers, (4) Power Utilities and (5) Oil & Gas.

• Only few sectors meaningfully outperformed the markets in both the boom phase (FY03-08)

and the lull phase (FY08-14) – (1) Alcoholic beverages, (2) Gems & Jewelry, (3) Autos – Cars,(4) Agro Chemicals and (5) Auto Ancillaries.

• Across business cycles, Revenue and Operating Levers are more important determinants of

outperformance than Financial Lever.

Company-level takeaways:

• Expect levers to work strongly in (1) Emerging, high-growth sectors and (2) Market leaders

within these high-growth sectors.

• Non-quantitative Regulatory Lever and Corporate Action Lever play a critical role in

influencing all the quantitative levers.

•

Expect company-specific levers – Strategic, Operating and Financial – to work strongly incases where the market opportunity is sizable, and the company has just completed major

capacity expansion(s).

• If interest rates are expected to significantly ease, high debt-carrying and high interest-

paying companies are excellent Financial Lever plays.

• Major change in management and/or corporate strategy is a key trigger for stock levers to

play out.

• Quality of management is a key factor for performance breakthrough or breakdown.

FAQ #4: How can the 6-Force Framework be applied?

The 6-Force Framework of Levers is powerful, first, to precisely understand the drivers behind

superior stock performance, and second, to identify potential outperformers going forward.

The simple yet accurate mathematics involved holds potential for wide-ranging applications, an

area of ongoing research.

The 3 applications of the 6-Force Framework discussed in this report are –

(1) Determine sector allocation strategy

(2) Create future market scenarios and(3) Identify potential super-performers.



September 2014 4


APP #1: Determine sector allocation strategy – Key exhibits

[A] Sales Growth Leverage map of sectors

[B] Operating Leverage map of high growth leverage sectors

[C] Sector Allocation Strategy based on [A] and [B] above

Macroeconomic Assessment Overweight Sector

Quadrants

from [A] & [B]

Other Quadrants / Sectors for

selective buysDomestic

(Boom / Lull)

Global

(Tailwind/Headwind)

Boom Tailwind O1, O2 Financials, Technology

Boom No Tailwind O1, O3 Financials, O4

Lull No Headwind G4 (ex Fin. PSUs), O3 G3, O4Lull Headwind G4 (ex Fin. PSUs), G3 O4



September 2014 5


APP #2: Create future market scenarios – Key exhibits

Preliminary calculations

FY03-08

(Boom)

FY08-14

(Lull)

FY03-14

(Full cycle)

Delta (CAGR %) -1 GDP 15 15 15

2 Sales 31 17 23

3 EBIT 38 12 23

4 PAT 39 10 23

5 EPS 25 8 16

6 Opening EPS (INR) 272 833 272

7 Closing EPS (INR) 833 1,339 1,339

8 Sensex 39 6 20

9 Opening Sensex level 3,049 15,644 3,049

10 Closing Sensex level 15,644 22,386 22,386

Sensex P/E (x)

11 Opening 11 19 1112 Closing 19 17 17

Key Levers (Formula in brackets based on row nos.)

13 Revenue Lever (2 ÷ 1) 2.1 1.1 1.6

14 Operating Lever (3 ÷ 2) 1.2 0.7 1.0

15 Financial Lever (5 ÷ 3) 0.7 0.7 0.7

16 Earnings Lever (13 x 14 x 15) 1.7 0.6 1.1

17 Valuation Lever (8 ÷ 5) 1.5 0.7 1.3

18 Total Sensex Lever (16 x 17) 2.7 0.4 1.4

Sensex scenarios using Earnings Lever

FY14-16 [Square brackets give row-based formula] Optimistic Pessimistic Moderate

1 GDP CAGR (%) – estimated 13.2 13.2 13.2

2 Earnings Lever (x) – row 16 of previous table 1.7 0.6 1.1

3 Sensex EPS CAGR (%) [1 x 2] 23 7 14

4 FY14 Sensex EPS 1,339 1,339 1,339

5 FY16 Sensex EPS 2,019 1,544 1,743

6 FY16 Sensex P/E range (x) -

a. Scenario A 17 11 14

b. Scenario B 20 13 16

c. Scenario C 22 15 18

7 FY16 Sensex average [Avg of 7a, 7b, 7c] 39,706 20,078 27,881

a. Scenario A [5 x 6a] 34,322 16,989 24,396

b. Scenario B [5 x 6b] 40,379 20,078 27,881c. Scenario C [5 x 6c] 44,416 23,166 31,366

8 FY14-16 Market average return (%) 33 -5 12

a. Scenario A 24 -13 4

b. Scenario B 34 -5 12


APP #3: Identify potential outperformers

We adapted the approach outlined in App #2 to sift the 30 Sensex constituent stocks into 4

categories – Super-performers, Outperformers, Market performers and Underperformers – asdepicted on next page.



September 2014 6


Sensex stocks - Earnings Lever v/s Valuation Matrix

Note: The bracket next to Bloomberg ticker carries Earnings Lever (x) | EPS CAGR (%), (Disc.)/Prem. to long-period median P/E

E.g. for NTPC, expect FY14-16 Earnings Lever of 1.2x i.e. EPS CAGR of 15%, and it is trading at 34% discount to LPA valuations.

FAQ #5: Which stocks offer a play on the 6-Force Framework?

We believe the following 20 investment ideas offer a play on the 6-Force Framework –

• Sector Lever Jubilant Foodworks, Symphony

• Strategic Lever Alembic Pharma, Gujarat Pipapav Port, J K Cement,

Kaveri Seeds, TVS, Arvind

• Operating Lever Idea Cellular, Bharti Infratel, Maruti Suzuki, Ashok Leyland

• Financial Lever Jain Irrigation, BHEL

• Regulatory Lever ONGC, HPCL

• Corporate Action Lever United Spirits, PVR, Eicher Motors, Crompton Greaves

Besides, we have 5 stocks on the watch-list given major corporate/regulatory action – Infosys

(new CEO), Sun Pharma (Ranbaxy takeover), IDFC (bank license), MCX (stake by Kotak

Mahindra) and Tata Power (potential tariff revision for its UMPP project).

Subsequent pages present a detailed report on the 6-Force Framework of Levers.



September 2014 7


1. BackdropFrom subjective diagnosis to objective prognosis

“Opinions can be debated … not facts.”

– Anonymous

A perennial truth of equity investing worldwide is this – for a given common set of macro-

economic parameters, there is wide divergence in stock price performance. In India, for

instance, during the boom phase of FY03-08, average real GDP growth was 8.9% and nominal

GDP growth 14.5%. However, stock returns of 670 companies were distributed from -20% to as

high as 220%. Likewise, in the lull phase of FY08-14, real GDP growth fell to 6.7% while nominal

GDP growth was almost unchanged. And yet, stock returns of the same 670 companies ranged

from -40% to 70%.

Significant divergence in stock prices for the same macroeconomic conditions

The above divergence in stock performance is primarily explained by diagnosing the interplay of

multivariate factors top-down, popular as EIC i.e. Economy-Industry-Company. However, in

most cases, such diagnosis tends to be subjective and qualitative, and hence less amenable to

objective prognosis. In this report, we use key quantitative metrics (called “Levers”) to

objectively link stock price performance to macroeconomic parameters.

Once such past linkages are analyzed, understood and established, the insights can be adapted

and applied to build likely scenarios of future stock performance.

2. Defining Lever, Stock Lever & Stock LeverageIntroducing force-multipliers into stocks

“If you wish to converse with me, first, define your terms.”

– Voltaire, French philosopher and writer

The terms “Lever” and “Leverage” can be defined and described variously, even in the field of

equity investing. For the purposes of this report, the key terms are defined as under –

1. LEVER: Any device or mechanism which multiplies the force applied at one end, leading to a

greater impact at the other i.e. a force-multiplier.

0

30

60

90

120

150

180

< ( 2 0 )

( 2 0 ) - 0

0 - 2 0

2 0 - 4 0

4 0 - 6 0

6 0 - 8 0

8 0 - 1 0 0

1

0 0 - 1 2 0

1

2 0 - 1 4 0

1

4 0 - 1 6 0

1

6 0 - 1 8 0

1

8 0 - 2 0 0

2

0 0 - 2 2 0

> 2 2 0

FY03-08 GDP CAGR:

– Real 8.9%

– Nominal 14.5%

Sensex CAGR 39%

0

30

60

90

120

150

180

< ( 4 0 )

( 3 0 ) - ( 4 0 )

( 3 0 ) - ( 2 0 )

( 2 0 ) - ( 1 0 )

( 1 0 ) - 0

0 - 1 0

1 0 - 2 0

2 0 - 3 0

3 0 - 4 0

4 0 - 5 0

5 0 - 6 0

6 0 - 7 0

> 7 0

FY08-14 GDP CAGR:

– Real 6.7%

– Nominal 14.7%

Sensex CAGR 6%

Main Report



September 2014 8


2. STOCK LEVER: A factor (quantitative or qualitative), a small change in which can potentially

magnify the change in stock price i.e. stock value multipliers.

3. STOCK LEVERAGE: The process of Stock Levers at work, typically at 4 levels – (1) Economy,

(2) Sector, (3) Company, and (4) Stock Market.

3. Types of Stock LeversThe 6-Force Framework

“Give me a place to stand and a lever long enough, and I can move the earth.”

– Archimedes, Greek mathematician and scientist

As stated earlier, Stock Levers provide objective, quantitative and mathematically-operable

linkage between stock prices and distant macro-economic variables. Thus, the “longest” Stock

Lever may well be the one which links stock price performance in any country to global GDPgrowth. We can term this as Total Stock Lever. Thus –

Total Stock Lever (TSL) = Stock Price

Global GDP

(Note: ∆ stands for delta i.e. percentage change in a year

If period > 1 year, CAGR is used to compute ∆)

To make Total Stock Lever more granular, we split it into 6 sub-levers under 2 heads as under –

The 6-Force Framework of LeversTotal Stock Lever

=

Earnings Lever

X

Valuation Lever

1. Country Lever

x

2. Sector Lever

x

3. Strategic Lever

x

4. Operating Lever

x

5. Financial Lever

6. Valuation Lever

NOTE: Besides, there are 3 non-quantitative levers which in turn may affect one or more of these 6

quantitative levers – (1) Regulatory Lever, (2) Corporate Action Lever and (3) Externality Lever.

The above framework is broadly applicable for all sectors. However, the specific levers are

different for the non-Financial and Financial sectors. These levers are fairly self-explanatory,

and have been summarized here.

For detailed explanation, see Annexure 1 (Levers for Non-Financial sectors, page 43), Annexure

2 (Lever for Financial sector, page 47), and Annexure 3 (Non-quantitative levers, page 50).



September 2014 9


3.1 Levers for non-Financial companies

Earnings Lever and Valuation Lever are multiplicative in nature such that –





Next, Earnings Lever is a product of 5 sub-levers as under –

EL = EPS

Global GDP





Therefore, EPS = Global GDP x [CL x SL x StL x OL x FL]

3.2 Levers for Financial companies

For Financial sector companies, Book Value is more relevant and important than EPS. Hence, all

levers are adapted to suit this and other characteristics of the business.

TSL = Stock Price = Book value x Stock Price

Global GDP Global GDP Book value



Here too, Book Value Lever is a product of 5 sub-levers as under –

BL = Book Value

Global GDP




Lever(CL) Lever(SL) Lever(StL) Lever(OL) Lever(EL)

Therefore, Book Value = Global GDP x [CL x SL x StL x OL x EL]



September 2014 10


The 6-Force Framework is unique to each sector and company at different points of time.

Thorough understanding of the same provides valuable insights into past performance and

likely future trends. Given the above mathematically accurate equations, once the various

levers are analyzed, understood and established, it should be possible to estimate change in

local stock price for a given or expected growth in global or local GDP.

Flexibility of Levers

The leverage framework is flexible in terms of the starting point. Thus, Global GDP is the

remotest macroeconomic variable. However, one may start the process with country GDP as

well, in which case –

1.

The Country Lever (CL) becomes redundant, and

2. The change in EPS will be linked to country GDP growth, rather than global GDP growth.

Thus, EPS = GDP x [SL x StL x OL x FL] and Stock Price = EPS x Valuation Lever

Likewise, if we start the process with expected growth in sector (i.e. ∆Sector Sales), the Sector

Lever (SL) becomes redundant.

Thus, EPS = Sector Sales x [StL x OL x FL] and Stock Price = EPS x Valuation Lever

3.3 Non-quantitative levers

In addition to the quantitative levers discussed above, there are at least 3 major non-

quantitative levers which directly or indirectly impact stock prices –

1. Regulatory Lever (change in policies affecting economy, sectors or stock market)

2. Corporate Action Lever (change of management, stake hike, delisting offer, etc)

3. Externality Lever (uncontrollable external events like drought, earthquake, wars, etc).

We now proceed to cover case studies where these levers have played out in the past.

4. Case studies and insightsWhere the 6-Force Framework has worked in the past

“Study the past if you would define the future.”

― Confucius, Chinese thinker and philosopher

For a deeper understanding of various levers, we assessed sector and stock data over the full

economic cycle period of FY03-14, divided into two phases – boom (FY03-08) and lull (FY08-14).

The key takeaways from these case studies are summarized below (for full details, see

Annexure 4, pages 51-63).

4.1 Sector Case Studies – Key takeaways

• The absolute and relative stock market performance of most sectors varies, depending on

the macro-economic conditions.


Consumer segments – Alcoholic beverages, Paints, Tobacco, (2) Gems & Jewelry,

(3) Infrastructure/Construction, (4) Capital Goods, (5) Steel, and (6) Autos – Cars, CVs, and

Auto Ancillaries including Tyres.



September 2014 11


FY03-14 – Top outperforming sectors

• The worst performing major sectors over FY03-14 include: (1) Media, (2) Shipping,

(3) Fertilizers, (4) Power Utilities and (5) Oil & Gas.

FY03-14 – Major underperforming sectors


and the lull phase (FY08-14) – (1) Alcoholic beverages, (2) Gems & Jewelry, (3) Autos – Cars,

(4) Agro Chemicals and (5) Auto Ancillaries.


outperformance than Financial Lever. As tabled below, the differential in levers between

outperforming and underperforming sectors was highest in Operating Lever, followed by

Revenue Lever and Financial Lever.

How levers differ for outperforming sectors vis-à-vis underperforming ones

Lever Formula FY03-14 Median

All

sectors

Out-

performers

Under-

performers

Differential

(x)

Revenue Lever ∆Sales/∆GDP 1.2 1.3 1.0 1.3

Operating Lever ∆EBIT/∆Sales 1.0 1.1 0.7 1.4

Financial Lever ∆EPS/∆EBIT 1.0 1.0 0.8 1.2

Valuation Lever ∆Mkt Cap/∆EPS 1.4 1.4 1.4 1.0

3.93.4 3.2

2.8 2.6 2.5 2.3 2.3 2.2 2.2 2.1

1.4

A l c o h o l i c

B e v e r a g e s

G e m s &

J e w e l l e r y

M i n i n g &

r e l a t e d

A u t o - P V s

R e a l t y

A g r o

C h e m i c a l s

P a i n t s

A u t o - C V s

A u t o A n c .

I n f r a s t r u c t u r e

T o b a c c o

P r o d u c t s

B S E S e n s e x

Total Sector Lever i.e. Mkt Cap/ GDP (FY03-14)

0.2

0.9 1.0 1.0 1.1 1.1 1.2 1.2 1.2 1.2

1.4

I T E d u c a t i o n

M e d i a

S h i p p i n g

F e r t i l i z e r s

U t i l i t i e s

C r u d e O i l , G a s

R e f i n e r i e s

C o n s u m e r -

P e r s o n a l , F o o d

T e c h n o l o g y

P a p e r

B S E S e n s e x




September 2014 12


4.2 Company Case Studies – Key takeaways

Case Study #1: Bharti Airtel

[All levers]

[A] Boom phase FY04-08

• Expect levers to work strongly in (1) Emerging, high-growth sectors and (2) Market leaders

within these high-growth sectors.

• Businesses which entail huge start-up investments are potential candidates for stock super-

performance when they achieve critical levels of scale.

• Rich valuations should not be a deterrent to buy hyper-growth stocks, which will likely super-

perform even if there is any subsequent correction in valuation.

Bharti Airtel – The 6-Force Framework (x)

Formula FY04-08

Global Nominal GDP CAGR (%) ∆Global GDP 10.4

Benchmark Lever ∆BSE Sensex / ∆Global GDP 2.8

TOTAL STOCK LEVER Stock Price / Global GDP 5.0

EARNINGS LEVER EPS / Global GDP 8.6

Country Lever ∆India GDP / ∆Global GDP 1.5

Sector Lever ∆Telecom Revenue / ∆India GDP 1.5

Strategic Lever ∆Bharti Sales / ∆Telecom Revenue 2.4

Operating Lever ∆EBIT / ∆Revenue 1.4

Financial Lever ∆EPS / ∆EBIT 1.2

a. Debt Lever ∆PBT / ∆EBIT 1.2

b. Tax Lever ∆PAT / ∆PBT 1.0

c. Equity Lever ∆EPS / ∆PAT 1.0

VALUATION LEVER Stock Price / EPS 0.6

Bharti’s FY03-08 PAT performance Despite P/E de-rating, Bharti stock

reflects multiple levers at work! super-performs led by FY04-08 EPS CAGR

[B] Lull phase FY08-14

• Non-quantitative Regulatory Lever and Corporate Action Lever play a critical role in


• Change in competitive landscape is a key trigger for stock performance.

• Competitive advantage is always local and does not automatically migrate to other

geographies. Hence, mega global acquisitions must be critically analyzed for potential

negative play of levers, leading to stock under-performance.

-2.0

5.115.0

22.6

42.6

67.0

-8.4%

10.5%

18.7% 19.4%23.0%

24.8%

FY03 FY04 FY05 FY06 FY07 FY08

Adj PAT (INR b)

PAT Margin

0

100

200

300

400

500

600

M a r - 0 4

S e p - 0 4

M a r - 0 5

S e p - 0 5

M a r - 0 6

S e p - 0 6

M a r - 0 7

S e p - 0 7

M a r - 0 8

Bharti

Sensex (Re-based)



September 2014 13


Bharti’s FY08-14 PAT dragged down Bharti stock underperforms in FY08-14

by regulatory & corporate action levers despite valuation re-rating

Case Study #2: Amara Raja Batteries

[Sector, Strategic, Operating & Valuation Levers]

• Expect company-specific levers – Strategic, Operating and Financial – to work strongly in

cases where the market opportunity is sizable, and the company has just completed major


• Duopoly or monopolistic competitive structure in growth sectors is favorable for levers to

play out.

Amara Raja - The 6-Force Framework (x)

Levers (x) FY03-08 FY08-14 FY03-14

Global Nominal GDP CAGR (%) 10.8 4.6 7.4

∆BSE Sensex / ∆Global GDP 3.6 1.3 2.7

TOTAL STOCK LEVER 7.6 7.6 7.4

EARNINGS LEVER 6.2 3.8 5.1

Country Lever 1.3 3.2 2.0

Sector Lever 1.6 1.3 1.4

Strategic Lever 2.0 1.1 1.5

Operating Lever 1.7 1.0 1.4

Financial Lever 0.9 0.8 0.9

a. Debt Lever 0.9 1.1 1.0

b. Tax Lever 1.0 1.0 1.0

c. Equity Lever 1.0 0.7 0.9

VALUATION LEVER 1.2 2.0 1.5

All levers played out well (FY03-14) The stock super-performs the benchmark

67.084.7 89.8

60.542.6

22.8 27.7

24.8%22.9%

21.5%

10.2%

6.0%

3.0% 3.2%

FY08 FY09 FY10 FY11 FY12 FY13 FY14

Adj PAT (INR b)

PAT Margin

100

200

300

400

500

600

M a r - 0 8

S e p - 0 8

M a r - 0 9

S e p - 0 9

M a r - 1 0

S e p - 1 0

M a r - 1 1

S e p - 1 1

M a r - 1 2

S e p - 1 2

M a r - 1 3

S e p - 1 3

M a r - 1 4

Bharti

Sensex (Re-based)

0

3

6

9

12

0

1,000

2,000

3,000

4,000

F Y 0 3

F Y 0 4

F Y 0 5

F Y 0 6

F Y 0 7

F Y 0 8

F Y 0 9

F Y 1 0

F Y 1 3

F Y 1 4

PAT (INR m, LHS)

PAT Margin (%)

0

100

200

300

400

M a r - 0

3

M a r - 0

4

M a r - 0

5

M a r - 0

6

M a r - 0

7

M a r - 0

8

M a r - 0

9

M a r - 1

0

M a r - 1

1

M a r - 1

2

M a r - 1

3

M a r - 1

4

Amara Raja

Sensex (Re-based)



September 2014 14


Case Study #3: CESC

[Financial Lever]

• If interest rates are expected to significantly ease, high debt-carrying and high interest-

paying companies are excellent Financial Lever plays.

•

The impact of Financial Lever tends to be shorter than that of Strategic and OperatingLevers.

• Gains of Financial Lever may be nullified by faulty capital allocation triggering adverse play

of Strategic and/or Operating Leverage.

Huge benefit of Financial Lever during FY03-08 … … nullified during FY08-14, due to Spencer

CESC - The 6-Force Framework (x)

Levers (x) FY03-08 FY08-14

Global Nominal GDP CAGR (%) 10.8 4.6

∆BSE Sensex / ∆Global GDP 3.6 1.3

TOTAL STOCK LEVER 8.8 0.7

EARNINGS LEVER 8.6 2.3

Country Lever 1.3 3.2

Sector Lever 0.9 1.2

Strategic Lever 0.4 0.7

Operating Lever 0.5 1.6

Financial Lever 38.4 0.5

VALUATION LEVER 1.0 0.3

CESC stock super-performs over FY03-08 … … but underperforms over FY08-14

Case Study #4: TCS

[Corporate Action Lever + Strategic & Operating Levers]

• Major change in management and/or corporate strategy is a key trigger for stock levers to

play out.

• Panic-stricken markets offer great opportunity to buy industry leaders with global

competitive advantage cheap (TCS stock at P/E of 10x in FY09). In such cases, Valuation

Lever will amplify earnings growth, driving stock performance.

0

100

200

300

400

500

600

700

M a r - 0 3

S e p - 0 3

M a r - 0 4

S e p - 0 4

M a r - 0 5

S e p - 0 5

M a r - 0 6

S e p - 0 6

M a r - 0 7

S e p - 0 7

M a r - 0 8

CESC

Sensex (Re-based)

100

200

300

400

500

600

M a r - 0 8

S e p - 0 8

M a r - 0 9

S e p - 0 9

M a r - 1 0

S e p - 1 0

M a r - 1 1

S e p - 1 1

M a r - 1 2

S e p - 1 2

M a r - 1 3

S e p - 1 3

M a r - 1 4

CESC

Sensex (Re-based)

0

3

6

9

12

15

18

0

1,000

2,000

3,000

4,000

F Y 0 3

F Y 0 4

F Y 0 5

F Y 0 6

F Y 0 7

F Y 0 8

F Y 0 9

F Y 1 0

F Y 1 1

F Y 1 2

F Y 1 3

F Y 1 4

Interest (net) (INR m)

% of Sales, RHS



September 2014 15


Following appointment of new CEO in mid-FY10, TCS bridged the gap and eventually overtook then

bellwether Infosys on key metrics such as Growth, EBITDA Margin, P/E

FY05-09, TCS underperformed Infosys; Post FY09, TCS has super-performed to emerge as India’s largest

market cap company currently

Case Study #5: Sesa-Sterlite (then Sesa-Goa)

[Regulatory Lever]

• Regulatory Lever can work as a brake or a breakthrough for the fortunes of a company.

• Favorable regulatory changes or relaxation of past regulatory curbs hold potential for stock

super-performance.

• Stocks vulnerable to regulation merit low valuation to factor in the risk of unexpected

adverse regulatory changes.

Sesa Goa: Curbs on iron-ore mining in Stock slides post mining curbs; fall cushionedKarnataka & Goa caused plunge in profits due to consolidation of Cairn India PAT

20

25

30

35

40

F Y 0 5

F Y 0 6

F Y 0 7

F Y 0 8

F Y 0 9

F Y 1 0

F Y 1 1

F Y 1 2

F Y 1 3

F Y 1 4

EBITDA Margin Trend (%)

TCS

InfosysNew CEO

at TCS0

10

20

30

40

F Y 0 5

F Y 0 6

F Y 0 7

F Y 0 8

F Y 0 9

F Y 1 0

F Y 1 1

F Y 1 2

F Y 1 3

F Y 1 4

Year-end trailing P/E (x)

TCS

Infosys New CEO

at TCS

0

50

100

150

200

M a r - 0 5

M a r - 0 6

M a r - 0 7

M a r - 0 8

M a r - 0 9

TCS (Re-based)

Infosys (Re-based)

0

150

300

450

600

750

900

M a r - 0 9

M a r - 1 0

M a r - 1 1

M a r - 1 2

M a r - 1 3

M a r - 1 4

TCS (Re-based)Infosys (Re-based)

0

10

20

30

40

50

0

10

20

30

40

F Y 0 3

F Y 0 4

F Y 0 5

F Y 0 6

F Y 0 7

F Y 0 8

F Y 0 9

F Y 1 0

F Y 1 1

F Y 1 2

F Y 1 3

Sesa Goa Standalone PAT (INR b)

PAT margin (%) - RHS

0

100

200

300

400

500

M a r - 0 3

M a r - 0 4

M a r - 0 5

M a r - 0 6

M a r - 0 7

M a r - 0 8

M a r - 0 9

M a r - 1 0

M a r - 1 1

M a r - 1 2

M a r - 1 3

Sesa Goa Stock Price



September 2014 16


Case Study #6: Satyam Computer (now merged in Tech Mahindra)

[Corporate Action Lever]

• Quality of management is a key factor for performance breakthrough or breakdown.

• Fraudulent and minority shareholder unfriendly management will eventually and invariably

“break down” stock performance.• All management-change cases must be monitored as they hold potential for breakthroughs,

resulting in stock super-performance.

Satyam Computer: PAT rebounds post Stock plunges on fraud announcement,

fraud, after Tech Mahindra takeover but recovers on profit turnaround

See Annexure 4 (page 51 onwards) for full details on all case studies.

5. Applying the 6-Force FrameworkSector allocation, Scenario-building, Stock selection

“Testing assumptions allows you the power to create possibilities.”

― Lisa A Mininni, business strategist and author

The 6-Force Framework of Levers is powerful, first, to precisely understand the drivers behind

superior stock performance, and second, to identify potential outperformers going forward.

The simple yet accurate mathematics involved implies huge potential for wide-ranging

applications, an area of ongoing research.

The initial 3 applications of leverages discussed here are –

1.

Determine sector allocation strategy

2. Create market scenarios

3. Identify potential outperformers.

5.1 APP #1: Sector Allocation Strategy

From the perspective of geographic influence, sectors can be classified into:

(1) Domestic and (2) Global. Within this classification, the sectors can be further organized into

(1) High Growth Leverage (to GDP) and (2) Medium/Low Growth Leverage, as mapped in [A].Next, the sectors with high growth leverage can be organized on the basis of (1) High Operating

Leverage (i.e. big change in EBIT for a small change in Sales) and (2) Low Operating Leverage,

also mapped in [B].

0.8

3.5 5.0

7.19.6

14.116.9

-2.8

2.5

-1.6

12.8

F Y 0 2

F Y 0 3

F Y 0 4

F Y 0 5

F Y 0 6

F Y 0 7

F Y 0 8

F Y 0 9

F Y 1 0

F Y 1 1

F Y 1 2

Satyam Computer PAT (INR b)

Accounting fraud &

also class action claims

Tech

Mahindra

takes over

0

100

200

300

400

500

600

M a r - 0 3

M a r - 0 4

M a r - 0 5

M a r - 0 6

M a r - 0 7

M a r - 0 8

M a r - 0 9

M a r - 1 0

M a r - 1 1

M a r - 1 2

M a r - 1 3

Satyam Computer

Sensex (Re-based)



September 2014 17


As Financial Lever is a relatively less important determinant of stock market outperformance,

these two maps can be juxtaposed to outline an effective sector allocation strategy for an

equity portfolio, as tabled in [C].

[A] Growth Leverage map of sectors

[B] Operating Leverage map of high growth leverage sectors

[C] Sector Allocation Strategy based on [A] and [B] above

Macroeconomic Assessment Overweight Sector

Quadrants

from [A] & [B]

Other Quadrants / Sectors for

selective buysDomestic

(Boom / Lull)

Global

(Tailwind/Headwind)

Boom Tailwind O1, O2 Financials, Technology

Boom No Tailwind O1, O3 Financials, O4

Lull No Headwind G4 (ex Fin. PSUs), O3 G3, O4

Lull Headwind G4 (ex Fin. PSUs), G3 O4



September 2014 18


5.2 APP #2: Create future market scenarios

The 6-Force Framework can be used to create market scenarios of the future, by calculating

past levers for the benchmark index as a whole, considering it as one stock. For instance, we

calculated the past levers for BSE Sensex for the periods FY03-08 (boom), FY08-14 (lull) and

FY03-14 (full-cycle) as under –

Preliminary calculations

FY03-08 FY08-14 FY03-14

Delta (CAGR %) -

1 GDP 15 15 15

2 Sales 31 17 23

3 EBIT 38 12 23

4 PAT 39 10 23

5 EPS 25 8 16

6 Opening EPS (INR) 272 833 272

7 Closing EPS (INR) 833 1,339 1,3398 Sensex 39 6 20

9 Opening Sensex level 3,049 15,644 3,049

10 Closing Sensex level 15,644 22,386 22,386

Sensex P/E (x)

11 Opening 11 19 11

12 Closing 19 17 17

Key Levers (Formula in brackets based on row nos.)

13 Revenue Lever (2 ÷ 1) 2.1 1.1 1.6

14 Operating Lever (3 ÷ 2) 1.2 0.7 1.0

15 Financial Lever (5 ÷ 3) 0.7 0.7 0.7

16 Earnings Lever (13 x 14 x 15) 1.7 0.6 1.1

17 Valuation Lever (8 ÷ 5) 1.5 0.7 1.3

18 Total Sensex Lever (16 x 17) 2.7 0.4 1.4

Now, the levers arrived at above can be used to create future market scenarios as tabled below.

Sensex scenarios using Earnings Lever

FY14-16 Optimistic Pessimistic Moderate

1 Nominal GDP CAGR (%) – see next table 13.2 13.2 13.2

2 Earnings Lever (x) – based on row 16 above 1.7 0.6 1.1

3 Sensex EPS CAGR (%) [1 x 2] 23 7 14

4 FY14 Sensex EPS 1,339 1,339 1,339

5 FY16 Sensex EPS 2,019 1,544 1,743

6 FY16 Sensex P/E range (x) -

a. Scenario A 17 11 14

b. Scenario B 20 13 16


7 FY16 Sensex average [Avg of 7a, 7b, 7c] 39,706 20,078 27,881

a. Scenario A [5 x 6a] 34,322 16,989 24,396

b. Scenario B [5 x 6b] 40,379 20,078 27,881

c. Scenario C [5 x 6c] 44,416 23,166 31,366

8 FY14-16 Market return CAGR (%) - Average 33 -5 12

a. Scenario A 24 -13 4

b. Scenario B 34 -5 12c. Scenario C 41 2 18



September 2014 19


FY14-16E India’s Nominal GDP estimate

FY15E FY16E

1 Real GDP growth (%) 5.5 6.5

2 Multiplicative Factor (x) 1.055 1.065

3 Inflation (%) 7.0 6.5

4 Multiplicative Factor (x) 1.070 1.065

5 Nominal GDP growth (%) [based on row (2 x 4) - 1] 12.9 13.4

6 FY14-16 CAGR [based on row 5 above] 13.2

5.3 APP #3: Identify potential outperformers

The approach outlined in App #2 can also be applied to individual stocks, provided -

1.

The past levers are understood, established and suggest a pattern;

2.

The expected future macroeconomic scenario can be mapped to a similar scenario played

out in the past; and

3.

There is no major discontinuity in the company’s operations e.g. a mega acquisition,

business diversification, hive-off of some business division, etc.

5.3.1 Potential outperformers among Sensex constituentsWe undertook the following steps to sift the 30 Sensex constituent stocks into 4 categories -

(1) Super-performers, (2) Outperformers, (3) Market performers and (4) Underperformers -

• Over the full economic cycle FY03-14, we calculated key levers for all the 30 companies on a

2-year rolling CAGR basis i.e. FY03-05, FY04-06, FY05-07, and so on ending with FY12-14 (10

data periods for each lever).

•

We expect the next 2-3 years’ economic and business scenario to be in-between the lullperiod of FY08-14 and boom period of FY03-08.

• Given this, we believe the median values of the rolling CAGR data points should be a

reasonable representation of the likely earnings scenario.

• We calculated the Earnings Lever (i.e. ∆EPS/∆GDP) based on the product of median

Revenue Lever (i.e. ∆Sales/∆GDP) and Operating Lever (i.e. ∆EBIT/∆Sales), with Financial

Lever (∆EPS/∆EBIT) expected to broadly remain around 1x.

• For 9 of the 30 companies, we went with our bottom-up analyst estimates for FY14-16, due

to the reasons tabled below. As can be seen, most of the cases are to do with major change

(i.e. discontinuity) in the companies’ operations, making past established levers non-

applicable going forward.

• We also calculated the stocks’ discount/premium to long-period median P/E, which serves

as a proxy to the Valuation Lever i.e. re-rating/de-rating potential.

• We plotted the Sensex 30 companies on a 4x3 matrix juxtaposing Earnings Lever

(Low/Medium/High/Very High) with Valuation Attractiveness (Low/Medium/High).

• We believe this matrix captures potential Super-performers, Outperformers, Market

Performers and Underperformers among the Sensex constituents.



September 2014 20


Sensex stocks - Earnings Lever v/s Valuation Matrix

Note: The bracket next to Bloomberg ticker carries Earnings Lever (x) | EPS CAGR (%), (Disc.)/Prem. to long-period median P/E

E.g. for NTPC, expect FY14-16 Earnings Lever of 1.2x i.e. EPS CAGR of 15%, and it is trading at 34% discount to LPA valuations.

9 Sensex companies where past levers do not seem relevant

(in these cases, we have relied on our analyst estimates to calculate the Earnings Lever)

Sector Company Reason for past levers not being relevant

Autos Bajaj Auto Significant value migration to scooters

Hero MotoCorp End of association with Honda w.e.f. FY15

M&M Several inorganic growth initiatives

Tata Motors Significant turnaround in overseas subsidiary, JLR

Financials State Bank of India Discontinuous changes in NPA provisioning

Healthcare Sun Pharma Acquisition of Taro

Metals Sesa-Sterlite Mega merger and Cairn India acquisition

Telecom Bharti Airtel Acquisition of Zain

Utilities Tata Power Uncertainty over Mundhra UMPP tariff ruling



September 2014 21


6. Limitations of the 6-Force FrameworkThe meaning is more important than the math

“Real limitations can be reasonably challenged and expanded, but a hobbled mind is not

going anywhere.”– Bryant McGill , US-based author and human rights activist

Powerful though it may be, the 6-Force Framework of Levers has its limitations, which we need

to bear in mind, when applying the same. The two major situations when the 6-Force

Framework becomes mere math rather than meaning are –

1. Discontinuities in a company’s operation; and

2. Profit turnarounds i.e. loss to profit or profit to loss.

6.1 Limitation #1: Discontinuities in a company’s operationIn essence, the 6-Force Framework mathematically links changes in a remote macro-economic

variable to change in a company’s EPS (or book value in the case of financials). For the past such

linkages to make sense and be meaningfully applied in future, there needs to be a semblance of

continuity in the company’s operation. While this is likely to be so in most cases, there are a

fairly large number of events and actions which may cause a company’s future to be

significantly discontinuous from the past, and the framework may cease to apply.

These events and actions are mainly at the company level, but may also occasionally include

structural changes in the sector –

• Major mergers & acquisitions, divestitures or corporate restructuring (e.g. Tata Motors’

acquisition of JLR; Piramal Healthcare’s sale of domestic formulations business; Sesa-

Sterlite merger)

• Far-reaching change in company’s strategy or business-model (e.g. Hero MotoCorp

choosing to terminate its technical-cum-financial tie-up with Honda, Japan)

• Structural shift in the company’s market-place (e.g. “Scooter-ization” of 2-wheelers)

• Any major change in the regulatory framework (e.g. recent ban on iron-ore mining in Goa

and Karnataka, since partially lifted).

6.2 Limitation #2: Profit turnaroundsIn a sense, Profit turnaround (whether from loss to profit or profit to loss) is a special

discontinuity in a company’s operations. In such a case, the 6-Force Framework will most likely

carry meaning only until the Strategic Lever i.e. linking company sales to the economic variable.

But depending on whether the profit turnaround is at the EBIT or the PAT level, the Operating

Lever and the Financial Lever could end up as mere mathematical calculations without

providing any insight.

In fact, in the case profit turnarounds, very little math works e.g. even a simple calculation like

percentage change in PAT can be misleading, as the number will be negative whether from loss

to profit or from profit to loss.



September 2014 22


7. What to buy based on the 6-Force Framework20 stocks which offer play on various levers

“Have the courage of your knowledge and experience. If you have formed a conclusion from

the facts and if you know your judgment is sound, act on it – even though others may hesitateor differ.”

– Benjamin Graham , investing guru and co-author of “Security Analysis” with David Dodd

Sensex constituents apart, we sifted through the MOSL Universe of stocks to identify 20

investment ideas which offer a play on key levers, viz, Sector, Strategic, Operating, Financial,

Regulatory and Corporate Action Levers. The key investment argument for each investment

idea is tabled below.

20 lever plays to bet on

Lever & Stock ideas Key driver of likely stock super-performanceSector Lever i.e. sector performance itself largely drives company performance

Jubilant Foodworks Offers play on high 25%+ growth opportunity in pizza/QSRs

Symphony Air-coolers market growing @ 20%+; penetration rising rapidly

Strategic Lever i.e. competitive positioning/strategic initiative drives company performance

Alembic Pharma Outgrowing the sector via specialty therapies, aggressive US foray

Gujarat Pipapav Port Strategically located for higher share of India’s container traffic

J K Cement Timely commissioning of expansion before expected cement upcycle

Kaveri Seeds Beating sector growth via strong product line, distribution network

TVS Motor Offers play on scooters, which is growing faster than overall 2-wheelers

Arvind Rising share of branded retail sales to drive growth, boost margins

Operating Lever i.e. pricing, costs, product mix and scale drive company performance

Idea Cellular Bottomed-out RPMs, rising data revenue to boost profits

Bharti Infratel High fixed cost business; delta revenue directly flowing to PBT

Maruti Suzuki Improving product mix coupled with scale steadily expands margins

Ashok Leyland Best play on expected CV upcycle

Financial Lever i.e. favorable interest and net debt position impact company performance

Jain Irrigation Multi-pronged deleveraging strategy to drive down interest burden

BHEL Business revival could take net cash to over INR220b, 50% of MCap

Regulatory Lever i.e. favorable regulatory changes drive company performance

ONGC Lower subsidy share, higher gas price may swell profits

HPCL Full diesel deregulation will boost PAT

Corporate Action Lever i.e. specific corporate developments drive performance

United Spirits Majority stake by Diageo to bring plethora of improvements

PVR Cinemax acquisition lends scale, eases competition on the margin

Eicher Motors JV with Volvo opens up huge potential for CV portfolio

Crompton Greaves Proposed demerger of consumer division has value unlocking potential

Besides, we have 5 stocks on the watch-list given major corporate/regulatory action – Infosys

(new CEO), Sun Pharma (Ranbaxy takeover), IDFC (bank license), MCX (stake by Kotak

Mahindra) and Tata Power (potential tariff revision for its UMPP project).

In subsequent pages, we present a more structured yet concise argument for each of the above

6-Force ideas.

15

16

17

19

11

13

14

18

12

20



September 2014 23


6-Force Idea #1: Jubilant Foodworks (Bloomberg: JUBI IN)

SECTOR LEVER | Offers play on high 25%+ growth opportunity in pizza/QSRs

How the lever works Company brief & Investment case

India’s pizza market/QSR (Quick Service

Restaurants) opportunity is growing at

25%+ CAGR.

Thus, Sector Lever (i.e. Industry

Sales/ GDP) will be close to 2x.

Even if no other levers come into play

(usually, at least Operating Lever does),

EPS CAGR should be ~25% (given

nominal GDP growth of ~13%).

So, even if the stock looks a bit

expensive, valuations catch up in 1-2

years, and the stock outperforms.

• As the master franchisee of Dominos

Pizza Inc in India, Jubilant is the market

leader in the organized pizza market

with 55% overall share and 70% share in

home delivery segment.

• As of FY14, Jubilant has 726 outlets in

152 Indian cities. In FY15, it plans to add

another 150 outlets.

• The company’s other major revenue

stream – Dunkin’ Donuts – is yet to

breakeven, but holds good potential.

• Expect 35% EPS CAGR FY14-16E.

Financial & valuation snapshot Stock price performance (1 year)

(INR b) Price (INR): 1,235 / Mkt Cap (INR b): 81

/E March 2014 2015E 2016E 2017E

Net Sales 17.2 22.4 29.6 38.0

EBITDA 2.5 3.3 4.5 5.8

Margin (%) 14.8 14.5 15.1 15.4

dj PAT 1.3 1.6 2.3 3.1

EPS (INR) 19.2 25.3 35.1 46.8

EPS Gr. (%) -4 31 39 34

BV (INR) 87.0 112.2 147.3 194.1

RoE (%) 22.1 22.5 23.8 24.1

RoCE (%) 30.8 29.2 31.4 32.1

Payout (%) 0.0 0.0 0.0 0.0

aluations

P/E (x) 64 49 35 26

P/BV (x) 14.2 11.0 8.4 6.4

EV/EBITDA (x) 31.2 24.4 17.5 12.8.

850

1,050

1,250

1,450

1,650

S e p - 1 3

D e c - 1 3

M a r - 1 4

J u n - 1 4

S e p - 1 4

Jubilant Foodworks Sensex - Rebased



September 2014 24


6-Force Idea #2: Symphony (Bloomberg: SYML IN)

SECTOR LEVER | Air-coolers market growing @ 20%+; penetration rising rapidly


Air-coolers market is about INR20b, but

with penetration of only 8%, and share

of organized market only 20%.

As a result, the organized air-cooler

market is growing @ 20%+ CAGR

(i.e. Sector Lever of 2.3x).

Besides home air-coolers, Symphony

has also diversified into industrial air-

coolers, yet another high-growth

segment.

Thus, high sector revenue growth itself

is a key driver of earnings.

• SYML is the India’s largest air-cooler

company, with 50% share (40% in

volumes) in the organized market,

followed by Kenstar (35%) and Bajaj

Electricals (15%).

• Its 10-12% pricing premium suggests

strong brand equity.

• Its India network consists of 750+

distributors and 16,400+ dealers. Its

global network spans 60 countries.

• Expect 28% EPS CAGR FY14-16E.


(INR b) Price (INR): 1,329/ Mkt Cap (INR b): 47

/E June 2014 2015E 2016E 2017E

Net Sales 5.3 6.5 8.2 10.3

EBITDA 1.3 1.6 2.1 2.7

Margin (%) 23.6 25.0 25.5 26.0dj PAT 1.1 1.4 1.7 2.2

EPS (INR) 30.4 38.7 49.5 63.2

EPS Gr. (%) 77 28 28 28

BV (INR) 78.8 101.5 130.8 173.9

RoE (%) 42.7 42.9 42.6 41.5

RoCE (%) 54.6 58.0 57.5 56.1

Payout (%) 43 35 35 27

aluations

P/E (x) 44 34 27 21

P/BV (x) 16.9 13.1 10.2 7.6

EV/EBITDA (x) 36.9 28.1 21.5 16.3

Divd Yield (%) 1.0 1.0 1.3 1.3.

250

550

850

1,150

1,450

S e p - 1 3

D e c - 1 3

M a r - 1 4

J u n - 1 4

S e p - 1 4

Symphony Sensex - Rebased



September 2014 25


6-Force Idea #3: Alembic Pharma (Bloomberg: ALPM IN)

STRATEGIC LEVER | Outgrowing sector via specialty therapies, strong US foray


The Indian healthcare sector will

continue its steady growth of ~15%.

But ALPM, under a new management

should grow much faster than industry

(i.e. Strategic Lever > 1):

(1) In India, it is shifting away from the

slowing generics business to fast-

moving specialty therapies; and

(2) US generics is likely to grow 5x over

FY13-16E to USD125m, as 50%+ of its

ANDAs are pending approval.

Expect ALPM’s revenue CAGR at 21%.

• ALPM started in 1907 as a tincture/

alcohol producer, and made its way into

modern medicine in 1940.

• Today, it is India’s 25th largest

formulations player, and also has

presence in over 75 other countries.

• Expect FY15 to be a year of (a) large

capex, (b) building front end in US, (c)

adding field force in India, and

(d) bumping up R&D activities.

• Expect 33% EPS CAGR FY14-16E,

following margin expansion of 280bp.


(INR b) Price (INR): 414 / Mkt Cap (INR b): 78

/E March 2014 2015E 2016E 2017E

Net Sales 18.6 21.8 27.0 32.5

EBITDA 3.6 4.4 5.9 7.3

Margin (%) 19.2 20.2 22.0 22.5

dj PAT 2.4 3.1 4.2 5.2

EPS (INR) 12.5 16.2 22.1 27.5

EPS Gr. (%) 43 30 36 25

BV (INR) 35.8 48.0 65.4 87.1

RoE (%) 40.0 38.7 39.0 36.1

RoCE (%) 43.1 42.0 43.4 41.5

Payout (%) 24 22 18 18

aluations

P/E (x) 33 25 19 15

P/BV (x) 11.6 8.6 6.3 4.8

EV/EBITDA (x) 22.1 18.0 13.2 10.5

Divd Yield (%) 0.7 0.8 1.0 1.2.

130

220

310

400

490

S e p - 1 3

D e c - 1 3

M a r - 1 4

J u n - 1 4

S e p - 1 4

Alembic Pharma Sensex - Rebased



September 2014 26


6-Force Idea #4: Gujarat Pipavav Port (Bloomberg: GPPV IN)

STRATEGIC LEVER | Strategically located for higher share of container traffic


India’s long-period sea cargo volume

growth is about 6%. However, due to

rising container-ization, container traffic

CAGR is 14%.

GPPV is favorably located in Gujarat on

the West coast. Further, GPPV is

expanding its container handling facility

from 0.8m TEUs to 1.35m TEUs, and

also adding 2m tons of liquid handling

capacity.

Expect revenue CAGR of ~20%

i.e. Strategic Lever > 1.

• Port Pipavav, India’s first private sector

port, is an important gateway port on

the West Coast of India for containers,

bulk and liquid cargo.

• GPPV is now owned by APM Terminals,

one of the world’s largest terminal

operators, part of global maritime giant,

AP Moller Maersk Group.

• Expect CY13-15E EPS CAGR of 54%, as

high revenue growth also kicks in

Operating Leverage (EBITDA margin up

12pp to 62% in CY15E).



/E December 2013 2014E 2015E 2016E

Net Sales 5.2 6.9 8.1 9.6

EBITDA 2.6 4.2 5.1 6.1

Margin (%) 49.6 60.3 62.6 63.6dj PAT 1.8 3.3 4.3 4.2

EPS (INR) 3.6 6.9 9.0 8.8

EPS Gr. (%) 137 90 30 -2

BV (INR) 29.0 33.9 39.9 45.6

RoE (%) 13.4 22.0 24.3 20.6

RoCE (%) 13.2 20.4 22.7 24.3

Payout (%) 0 25 27 30

aluations

P/E (x) 45 23 18 18

P/BV (x) 5.6 4.8 4.1 3.6

EV/EBITDA (x) 30.5 18.1 14.6 11.9

Divd Yield (%) 0.0 1.5 1.7 1.9.

20

56

92

128

164

200

S e p - 1 3

D e c - 1 3

M a r - 1 4

J u n - 1 4

S e p - 1 4

Gujarat Pipavav Port Sensex - Rebased



September 2014 27


6-Force Idea #5: J K Cement (Bloomberg: JKCE IN)

STRATEGIC LEVER | Timely commissioning of expansion before cement upcycle


Cement sector may well continue to

grow at its LPA of 15%.

However, J K Cement’s FY14-17 revenue

CAGR is expected to be higher at 24%

(Strategic Lever of 1.6x) as –

1.

It recently expanded its white

cement capacity by 50% to 0.6mt;

2. It is also poised to complete its

brownfield capacity, expanding

capacity 40% to 10.5mt.

3. Its 0.6mtpa white cement plant in

UAE is also commissioning shortly.

• JKCE is one of India's leading cement

producers with capacity of 7.5mt in

Rajasthan (4.5mt) & Karnataka (3mt).

• It is also India’s second largest white

cement producer (0.6mt capacity).

• JKCE has a favorable market mix —

North and West India account for ~70%

of dispatches; no exposure to the weak

Andhra Pradesh market.

• White cement is a cash cow with stable

EBITDA of INR2-2.5b p.a.

• Expect FY14-16E EPS CAGR of 111%.



/E March 2014 2015E 2016E 2017E

Net Sales 27.8 37.5 45.3 53.0

EBITDA 3.4 5.9 9.1 12.2

Margin (%) 12.2 15.8 20.1 23.0

dj PAT 0.7 1.4 3.3 5.6

EPS (INR) 10.7 20.1 47.0 80.1

EPS Gr. (%) -67 88 133 70

BV (INR) 249.7 262.5 300.8 370.9

RoE (%) 4.5 7.8 16.5 23.7

RoCE (%) 7.2 8.9 13.9 18.4

Payout (%) 28 30 15 10

aluations

P/E (x) 48 25 11 6

P/BV (x) 2.0 1.9 1.7 1.4

EV/EBITDA (x) 17.3 10.7 6.5 4.1Divd Yield (%) 0.6 1.2 1.4 1.6

.

150

270

390

510

630

S e p - 1 3

D e c - 1 3

M a r - 1 4

J u n - 1 4

S e p - 1 4

J K Cements Sensex - Rebased



September 2014 28


6-Force Idea #6: Kaveri Seeds (Bloomberg: KSCL IN)

STRATEGIC LEVER | Beating sector growth via strong product line & distribution


Indian hybrid seeds market is growing

at a steady 10%.

However, expect Kaveri Seeds revenue

CAGR at 22% (Strategic Lever 2.2x) as:

(1) It has one of India’s largest

anthology of crop germplasm;

(2) It has a dominant market share in

most crops; and

(3) It has a large sales network of over

15,000 distributors and dealers spread

across the country.

• High revenue growth apart, Kaveri is

also benefiting from –

(1) Season mix: In 2008, 85% of corn

sales were in kharif season while now it

is 65% with rabi contributing 35% of

volumes and 50% of value.

(2) Product mix: Selling price of single

cross hybrid corn is INR200/kg v/s

INR80-110/kg for 2-way and 3-way

cross hybrid corn, enabling 55- 60%

EBITDA margins.




/E March 2014 2015E 2016E 2017E

Net Sales 10.1 12.2 15.2 18.5

EBITDA 2.2 3.0 4.0 5.0

Margin (%) 21.9 25.0 26.2 27.0

dj PAT 2.1 3.0 4.0 5.0

EPS (INR) 30.7 43.6 58.0 73.2

EPS Gr. (%) 66 42 33 26

BV (INR) 75.0 109.3 155.7 213.9

RoE (%) 49.0 47.3 43.8 39.6

RoCE (%) 49.6 48.5 44.6 40.6

Payout (%) 16 18 17 18

aluations

P/E (x) 27 19 14 11

P/BV (x) 11.2 7.7 5.4 3.9

EV/EBITDA (x) 26.0 18.3 13.3 10.0Divd Yield (%) 0.6 1.0 1.2 1.6.

260

460

660

860

1,060

S e p - 1 3

D e c - 1 3

M a r - 1 4

J u n - 1 4

S e p - 1 4

Kaveri Seed Sensex - Rebased



September 2014 29


6-Force Idea #7: TVS Motor Company (Bloomberg: TVSL IN)

STRATEGIC LEVER | Play on scooters, which is growing faster than 2-wheelers


In FY14, India’s 2-wheeler sector grew

only 5.7%. However, within 2-wheelers,

scooters grew a handsome 28%.

This trend continues in FY15 – 1QFY15 2-

wheeler growth is 14% YoY, whereas

scooters growth is a sharp 38%.

TVS offers good play on this trend of

“Scooterization”. In scooters, it is the

second largest (after Honda). It has

recently launched new models like

“Jupiter” and “Zest”. 1QFY15 scooters

growth for TVS is a robust 53% YoY.

Besides, it is also getting aggressive on

the motorcycles front, both in terms of

product launches and promotion.

• TVS Motor Company is 4th largest two-

wheeler company in India.

• It offers the widest range of product in

the Indian 2/3-wheeler sector –

motorcycles, scooters, scooterettes,

mopeds, and 3-wheelers.

• Besides India, TVS has international

presence in more than 50 countries in

Asia, Africa and Latin America.

• Expect EPS CAGR of 58% with RoE

improving from 20% in FY14E to 33% in

FY16E.

• Further, expect TVS to be net-cash by

FY16E.



/E March 2014 2015E 2016E 2017E

Net Sales 79.6 113.6 143.5 164.2

EBITDA 4.8 7.5 11.6 14.0

Margin (%) 6.0 6.6 8.1 8.6

dj PAT 2.6 4.4 7.5 9.3

EPS (INR) 5.5 9.3 15.7 19.5

EPS Gr. (%) 44 70 68 24

BV (INR) 29.8 37.0 50.1 66.7

RoE (%) 19.7 28.0 36.1 33.4

RoCE (%) 20.3 31.4 42.2 41.0

Payout (%) 26 19 14 13

aluationsP/E (x) 40 23 14 11

P/BV (x) 7.4 5.9 4.4 3.3

EV/EBITDA (x) 22.5 14.0 8.7 6.7

Divd Yield (%) 0.7 0.8 1.0 1.1.

20

80

140

200

260

S e p - 1 3

D e c - 1 3

M a r - 1 4

J u n - 1 4

S e p - 1 4

TVS Motor Sensex - Rebased



September 2014 30


6-Force Idea #8: Arvind (Bloomberg: ARVND IN)

STRATEGIC LEVER | Rising share of branded retail sales to boost growth, margins


Arvind is in the midst of a transition

from a textiles manufacturing giant to a

brand powerhouse.

It has one of the best brand portfolios in

India – 28 brands of which 13 are

owned (e.g. Flying Machine, Excalibur,

Ruggers), 15 licensed (e.g. Arrow, US

Polo, Hanes), and Tommy Hilfiger (JV).

Arvind operates India’s largest value

retail chain, Megamart, which offers its

own and other licensed international

brands at low prices and provides retail

experience of a high-end store.

In parallel, Arvind’s other initiatives will

also contribute to profit e.g. garments

business turnaround, focus on high-end

denim for better margins, hive-off of

real estate division to deleverage, etc.

• Arvind Ltd, flagship of the Lalbhai

group, is India’s largest textiles player. It

is also India’s largest cotton textile

manufacturer, with an installed fabric

capacity of over 200m meters p.a. It is

also one of the leading denim fabric

manufacturers in the world.

• It has a strong distribution network

across 150 cities – over 680 retail stores

and ~1.4m sq ft (incl Megamart).

• Expect Arvind to clock revenue CAGR of

22% over FY14-17. Coupled with

interest cost beginning to plateau (at

INR4b levels), expect 27% CAGR in PAT

and EPS. Also expect RoE to improve

from 16% in FY14 to over 21% in FY17.

• Valuations, both P/E and EV/EBITDA,

are reasonable.


(INR b) Price (INR): 297/ Mkt Cap (INR b): 77

/E March 2014 2015E 2016E 2017E

Net Sales 68.6 83.8 103.6 125.9

EBITDA 9.3 11.3 14.1 17.6

Margin (%) 13.6 13.5 13.6 13.9

dj PAT 3.9 4.3 5.6 7.9

EPS (INR) 15.0 16.7 21.8 30.6

EPS Gr. (%) 56 11 31 41

BV (INR) 100.0 113.2 130.3 156.2

RoE (%) 16.0 15.6 17.9 21.4

RoCE (%) 15.1 16.0 18.2 21.0

Payout (%) 16 18 18 13

aluations

P/E (x) 20 18 14 10

P/BV (x) 3.0 2.6 2.3 1.9

EV/EBITDA (x) 11.2 9.5 7.7 6.2

Divd Yield (%) 0.8 1.0 1.3 1.3.

70

140

210

280

350

S e p - 1 3

D e c - 1 3

M a r - 1 4

J u n - 1 4

S e p - 1 4

Arvind Mills Sensex - Rebased



September 2014 31


6-Force Idea #9: Idea Cellular (Bloomberg: IDEA IN)

OPERATING LEVER | Bottomed-out RPMs, rising data revenue to boost profits


For wireless telecom, voice traffic

growth is likely to be a modest 10%.

However, RPMs have bottomed out

given easing competitive landscape.

As a result, revenue CAGR @ 13% is

higher than volume CAGR.

Further, share of data in revenue is

rising, even as most associated costs

remain fixed. Within data, share of

higher margin 3G revenue is rising.

As a result, FY14-16E EBIT CAGR at 27%

is much higher than Sales CAGR of 13%

(i.e. Operating Lever of 2x).

• Idea Cellular is India’s third largest

wireless operator with revenue market

share of ~17%.

• It operates in all 22 telecom circles with

strong incumbency advantage in 8

established circles, and 900MHz

spectrum allocation in 9 circles.

• It has 3G spectrum in 13 circles. Expect

3G revenue to contribute 9% of wireless

revenues by FY16E.

• FY14-16E PAT CAGR works out to 18%

even after factoring in INR165b outlay

for spectrum in FY16.



/E March 2014 2015E 2016E 2017E

Net Sales 265.2 305.7 339.6 378.0

EBITDA 83.3 102.2 116.5 130.2

Margin (%) 31.4 33.4 34.3 34.4

dj PAT 19.7 32.0 29.4 29.5

EPS (INR) 5.9 8.9 8.2 8.2

EPS Gr. (%) 94 50 -8 1

BV (INR) 49.8 64.3 71.8 79.4

RoE (%) 12.7 16.1 12.0 10.9

RoCE (%) 7.2 8.7 8.4 8.4

Payout (%) 8 8 8 8

aluations

P/E (x) 28 19 20 20

P/BV (x) 3.3 2.6 2.3 2.1

EV/EBITDA (x) 9.5 7.0 7.2 6.0

Divd Yield (%) 0.2 0.4 0.4 0.4.

100

140

180

220

260

S e p - 1 3

D e c - 1 3

M a r - 1 4

J u n - 1 4

S e p - 1 4

Idea Cellular Sensex - Rebased



September 2014 32


6-Force Idea #10: Bharti Infratel (Bloomberg: BHIL IN)

OPERATING LEVER | High fixed cost business; delta revenue flowing to PBT


Bharti Infratel offers an excellent

“passive” play on the dynamics of

wireless telecom i.e. growing traffic and

rising share of data.

As most of its costs are fixed/sunk,

much of revenue flows into PBT.

Thus, for FY14-16E, we expect revenue

CAGR of 10%. EBITDA CAGR is higher at

13%. With no major capex, EBIT CAGR is

even higher at 20% i.e. (Operating Lever

of 2x).

There is also Financial Lever of 1.1x i.e.

PAT CAGR 2.3x Sales CAGR.

• BHIL, a subsidiary of Bharti Airtel, is in

the business of passive telecom

infrastructure (mainly towers).

• Besides 35,000 own towers, it also has

42% stake in Indus Towers (i.e. 47,000

of 112,000 towers), a JV of Bharti,

Vodafone, Idea. In toto, BHIL has 21%

share of India’s towers.

• Apart from catering to top 3 GSM

service providers, BHIL has recently

signed a master service agreement for

providing sites to Reliance JIO.




/E March 2014 2015E 2016E 2017E

Net Sales 108.3 117.7 131.3 145.8

EBITDA 44.0 49.2 56.4 64.2

Margin (%) 40.6 41.8 43.0 44.1

dj PAT 15.2 19.2 23.0 29.1

EPS (INR) 8.0 10.2 12.2 15.4

EPS Gr. (%) 44 26 20 27

BV (INR) 95.5 98.4 101.8 106.1

RoE (%) 8.6 10.5 12.2 14.8

RoCE (%) 7.4 8.5 9.7 11.7

Payout (%) 64 72 72 72

aluations

P/E (x) 36 29 24 19

P/BV (x) 3.0 3.0 2.9 2.7

EV/EBITDA (x) 13.1 11.6 9.9 8.6

Divd Yield (%) 1.5 2.5 3.0 3.8.

140

190

240

290

340

S e p - 1 3

D e c - 1 3

M a r - 1 4

J u n - 1 4

S e p - 1 4

Bharti Infratel Sensex - Rebased



September 2014 33


6-Force Idea #11: Maruti Suzuki (Bloomberg: MSIL IN)

OPERATING LEVER | Improving product mix with scale steadily expands margins


Indian car market is seeing steady

premium-ization e.g. Maruti 800

replaced by Alto, which too has given

way to higher end models like Swift.

Improving product mix apart, Maruti

has scale (1.2m cars for ~45% share).

This is an excellent combination for

Operating Lever to play out. Over FY03-

14, Maruti’s EBIT CAGR at 28% was 1.6x

Sales CAGR of 18%.

FY14-16E should see Operating Lever of

2x (38% EBIT CAGR on 19% Sales CAGR).

• Maruti Suzuki is India’s largest passenger

vehicle manufacturer (1.2m cars in FY14

for ~44% market share).

• Besides, it is also emerging as the global

export hub of small cars for Suzuki Japan

(world model A-Star exclusively

produced in India).

• Volume growth will be led by tier-II cities

and rural market coupled with

aggressive new launches (e.g. Celerio

with automatic manual transmission).




Y/E March 2014 2015E 2016E 2017E

Net Sales 444.5 532.7 649.9 777.0

EBITDA 52.0 69.6 93.4 119.3

Margin (%) 11.7 13.1 14.4 15.4Adj PAT 28.5 39.4 56.5 74.6

EPS (INR) 94.4 130.3 186.9 247.1

EPS Gr. (%) 16 38 43 32

BV (INR) 694.5 804.6 965.7 1181.0

RoE (%) 12.7 15.9 19.1 20.7

RoCE (%) 15.4 18.6 23.0 25.3

Payout (%) 13 12 11 10

Valuations

P/E (x) 32 23 16 12

P/BV (x) 4.4 3.8 3.1 2.6

EV/EBITDA (x) 16.2 11.7 8.3 6.0

Divd Yield (%) 0.4 0.5 0.7 0.8.

1,300

1,800

2,300

2,800

3,300

S e p - 1 3

D e c - 1 3

M a r - 1 4

J u n - 1 4

S e p - 1 4

Maruti Suzuki Sensex - Rebased



September 2014 34


6-Force Idea #12: Ashok Leyland (Bloomberg: AL IN)

OPERATING LEVER | Offers best play on expected CV upcycle


Ashok Leyland offers the best play on

the expected upcycle in CVs, a business

with high level of fixed costs, and hence

high operating leverage.

During the last two major cycles, MHCV

demand CAGR was 23%. If FY14-17 CV

volumes clock CAGR of 17%, Ashok

Leyland’s EBIT can potentially move

from negative INR2.1b in FY14 to a high

positive INR18b in FY17.

Ramp-up at Pantnagar plant (which

enjoys tax benefits) and softening of

commodity prices could further

accentuate the operating lever.

• Ashok Leyland, the flagship of Hinduja

Group, is India’s 2nd largest M&HCV

player with ~26% market share.

• To expand its product offerings, AL has

entered into 50:50 JV with Nissan for

LCVs (branded “Dost”) and John Deere

for construction equipment.

• Key levers for stock performance are:

(1) Series of new launches, both under

the company itself and via JVs, (2) Sharp

volume-led EBITDA growth, (2) High FCF

generation via measured capex, (3)

Balance sheet de-leveraging, and (4)

Monetization of non-core assets.



/E March 2014 2015E 2016E 2017E

Net Sales 99.4 122.2 161.1 203.4

EBITDA 1.7 9.4 16.3 22.8

Margin (%) 1.7 7.7 10.1 11.2

dj PAT -4.8 1.2 7.6 13.3

EPS (INR) -1.8 0.4 2.7 4.7

EPS Gr. (%) -385 -123 553 75

BV (INR) 16.7 18.1 20.2 24.3

RoE (%) -10.7 2.4 13.9 21.0

RoCE (%) -1.6 6.2 14.9 21.6

Payout (%) 0 49 19 11

aluations

P/E (x) N.A. 97 15 9P/BV (x) 2.4 2.2 2.0 1.6

EV/EBITDA (x) 74.4 12.8 6.8 4.3

Divd Yield (%) 0.0 0.5 1.3 1.3.

10

20

30

40

50

S e p - 1 3

D e c - 1 3

M a r - 1 4

J u n - 1 4

S e p - 1 4

Ashok Leyland Sensex - Rebased



September 2014 35


6-Force Idea #13: Jain Irrigation (Bloomberg: JI IN)

FINANCIAL LEVER | Multi-pronged deleveraging strategy to drive down interest


In India, Micro Irrigation Systems (MIS)

are subsidized by State governments.

Chasing growth, JI’s receivables from

States shot up to over 100 days,

bloating interest (81% of EBIT in FY14)

and debt (FY14 debt-equity of 1.9x).

The company has now embarked on a

multi-pronged deleveraging strategy:

(1) Focus on stronger states;

(2) Adopt the NBFC model; and

(3) Stake sale in food processing.

Expect Financial Leverage to kick in

(Interest/Sales to fall from 8% in FY14

to <5% in FY16, and <4% in FY17).

• Set up in 1986, JI is a transnational

company with its headquarters in

Maharashtra, India.

• Its products include drip and sprinkler

irrigation systems, PVC & PE piping

systems, plastic sheets, green houses,

bio-fertilizers, and solar water-

heaters/pumps. It also processes fruits

and vegetables.

• JI’s financial initiatives should

substantially improve cash flow.

• Expect EPS to jump from INR1.4 in FY14

to INR8.9 in FY16.



/E March 2014 2015E 2016E 2017E

Net Sales 58.3 66.8 79.2 93.6

EBITDA 7.7 8.9 11.1 13.1

Margin (%) 13.2 13.4 14.0 14.0

dj PAT 0.7 1.7 4.0 5.8

EPS (INR) 1.4 3.6 8.6 12.6

EPS Gr. (%) 33 151 137 46

BV (INR) 47.0 50.0 57.6 69.0

RoE (%) 3.1 7.5 16.0 19.8

RoCE (%) 10.0 10.8 14.7 17.5

Payout (%) 40 19 11 9

aluations

P/E (x) 58 23 10 7P/BV (x) 1.8 1.7 1.4 1.2

EV/EBITDA (x) 10.0 8.2 6.4 5.1

Divd Yield (%) 0.6 0.8 1.1 1.4.

50

75

100

125

150

S e p - 1 3

D e c - 1 3

M a r - 1 4

J u n - 1 4

S e p - 1 4

Jain Irrigation Sensex - Rebased



September 2014 36


6-Force Idea #14: BHEL (Bloomberg: BHEL IN)

FINANCIAL LEVER | Revival may take net cash to over INR220b, 50% of MCap


Financial Lever need not work on the

P&L side alone. For BHEL, it may well

play out on the Balance Sheet.

BHEL is a net-cash company. So, there is

no major delta in PAT/EPS for a given

delta in EBIT.

However, economic recovery changes

the shape of BHEL’s balance sheet by

retention money recovery.

Thus, over FY15-16, even on flat sales, if

debtors improve from current 386 days

to ~300, cash rises to INR220b, 50% of

market cap.

• BHEL is India’s dominant producer of

power and industrial machinery, and a

leading EPC company.

• BHEL offers a strong play on India’s

economic recovery, as few companies

in India can match its fabrication

capacity and capability.

• The company is favorably positioned in

3 GW of orders, which are expected to

be awarded in FY15.

• Expect Operating Cash flow to improve

from average of ~INR20b in FY10-13 to

~INR92b in FY15/16E.



Y/E March 2014 2015E 2016E 2017E

Net Sales 391.1 333.7 368.4 412.3

EBITDA 45.2 34.0 46.2 61.3

Margin (%) 11.6 10.2 12.5 14.9

Adj PAT 35.9 24.9 35.7 47.6

EPS (INR) 14.7 10.2 14.6 19.5

EPS Gr. (%) -45 -31 43 34

BV (INR) 135.0 142.8 153.8 168.6

RoE (%) 11.3 7.3 9.8 12.1

RoCE (%) 16.1 10.6 13.9 17.0

Payout (%) 19 20 20 20

Valuations

P/E (x) 14 20 14 11

P/BV (x) 1.5 1.4 1.3 1.2

EV/EBITDA (x) 9.0 10.1 6.3 4.0

Divd Yield (%) 1.4 1.0 1.4 1.9.

120

160

200

240

280

S e p - 1 3

D e c - 1 3

M a r - 1 4

J u n - 1 4

S e p - 1 4

BHEL Sensex - Rebased



September 2014 37


6-Force Idea #15: ONGC (Bloomberg: ONGC IN)

REGULATORY LEVER | Lower subsidy share, higher gas price may swell profits


ONGC is a play on 2 near-inevitable

regulations -

(1) Ongoing hike in diesel prices,

lowering upstream subsidy sharing (i.e.

hike in effective oil realization from

USD45/bbl to USD65); and

(2) Potential doubling of gas price to

USD8.4/mmbtu.

If both these go through, ONGC’s PAT

will be almost double the current level of

INR260b.

Precise timing of these regulatory

changes is the only issue.

• ONGC, a Fortune 500 company, is

India’s leading E&P company.

• With over 300 discoveries, it has

established in-place reserves of

6.9btoe (billion tons oil equivalent),

with ultimate reserves of 2.4btoe.

• Its 100% subsidiary ONGC Videsh has

E&P stakes in 16 countries.

Downstream presence is through

MRPL (71.6% subsidiary).

• Reasonable valuations imply stock

should outperform even if regulatory

changes are partly implemented.


(INR b) Price (INR): 412 / Mkt Cap (INR b): 3,527

/E March 2014 2015E 2016E 2017E

Net Sales 1,745 1,914 2,046 2,113

EBITDA 590 674 789 822

Margin (%) 33.8 35.2 38.6 38.9

dj PAT 262 304 372 388

EPS (INR) 30.6 35.6 43.4 45.4

EPS Gr. (%) 8 16 22 4

BV (INR) 201.2 223.9 252.2 281.2

RoE (%) 16.3 16.7 18.2 17.0

RoCE (%) 13.9 13.7 15.1 14.3

Payout (%) 31 31 30 31

aluations

P/E (x) 13 12 9 9

P/BV (x) 2.0 1.8 1.6 1.5

EV/EBITDA (x) 6.3 5.3 4.5 4.3

Divd Yield (%) 2.3 2.7 3.2 3.4.

200

270

340

410

480

S e p - 1 3

D e c - 1 3

M a r - 1 4

J u n - 1 4

S e p - 1 4

ONGC Sensex - Rebased



September 2014 38


6-Force Idea #16: Hindustan Petroleum (Bloomberg: HPCL IN)

REGULATORY LEVER | Full diesel deregulation will boost PAT


Steady price hikes in diesel point to end

of under-recoveries here.

This means no delay in receiving subsidy

payments, and hence no working

capital borrowings. For HPCL, this

translates into lower debt of ~INR30b,

interest savings of ~INR3b pre-tax, and

INR2b post-tax, which is 22% of FY14

PAT.

Further, in a deregulated scenario,

additional marketing margin of INR0.50

on diesel implies PAT delta of INR5b,

which is 50% of FY14 PAT.

• HPCL is one of India’s leading oil

refining and marketing company, and is

among the Fortune 500 list.

• Its refining capacity is 14.8m tons, and it

markets ~30m tons of petroleum

products.

• It plans to setup a 9m ton refinery-cum-

petchem complex at Barmer, Rajasthan

in JV with state government at a capex

of ~INR370b.

• Post-deregulation, earnings growth

coupled with valuation re-rating will

drive stock super-performance.



/E March 2014 2015E 2016E 2017E

Net Sales 2,232 2,093 2,149 2,159

EBITDA 52 43 49 52Margin (%) 2.3 2.0 2.3 2.4

dj PAT 17.3 14.8 15.8 17.7

EPS (INR) 51.1 43.7 46.6 52.3

EPS Gr. (%) 92 -14 6 12

BV (INR) 442.8 471.2 501.4 535.4

RoE (%) 12.1 9.6 9.6 10.1

RoCE (%) 8.2 5.8 6.5 7.5

Payout (%) 30 30 30 30

aluations

P/E (x) 9 11 10 9

P/BV (x) 1.1 1.0 0.9 0.9


.

170

270

370

470

570

S e p - 1 3

D e c - 1 3

M a r - 1 4

J u n - 1 4

S e p - 1 4

HPCL Sensex - Rebased



September 2014 39


6-Force Idea #17: United Spirits (Bloomberg: UNSP IN)

CORPORATE ACTION LEVER | Majority stake by Diageo to usher in improvements


In November 2012, Diageo Plc

announced its plans to acquire United

Spirits from the Mallya Group.

The acquisition adds several premium

brands to UNSP’s offerings, including

Johnny Walker whisky, Smirnoff vodka

and Dom Perignon champagne.

UNSP’s own premium brands like Black

Dog whisky are expected to get required

marketing push.

UNSP’s valuations have also changed

orbit, given governance issues of UB

Group (e.g. Kingfisher Airlines).

• UNSP is India’s leading player in IMFL

(Indian-made Foreign Liquor), with

volume sales of over 120m cases, (41%

market share) and 22 millionaire

brands.

• It has manufacturing and bottling

presence in all states, with 40 owned

plants and 42 contract tie-ups.

• Post its acquisition by Diageo, expect

improvement in product mix to drive up

realizations and profits.

• Restructuring has commenced with sale

of Whyte & McKay and also a huge

INR53b write-off of intercorporate loans

and debtors.



/E March 2014 2015

2016E 2017

Net Sales 105.0 98.2 110.8 126.6

EBITDA 8.7 10.0 13.3 16.2

Margin (%) 8.3 10.2 12.0 12.8

dj PAT -1.3 4.5 7.6 10.2

EPS (INR) -9.0 31.1 52.5 70.4

EPS Gr. (%) 21 -447 69 34

BV (INR) 208.7 241.1 293.6 361.6

RoE (%) -4.3 12.9 17.9 19.5

RoCE (%) 12.8 14.9 18.8 21.5

Payout (%) -28 0 0 3

aluations

P/E (x) N.A. 77 45 34

P/BV (x) 11.4 9.9 8.1 6.6

EV/EBITDA (x) 48.7 38.5 28.5 23.1.

2,000

2,400

2,800

3,200

3,600

S e p - 1 3

D e c - 1 3

M a r - 1 4

J u n - 1 4

S e p - 1 4

United Spirits Sensex - Rebased



September 2014 41


6-Force Idea #19: Eicher Motors (Bloomberg: EIM IN)

CORPORATE ACTION LEVER | Volvo JV opens up huge potential for CV portfolio


To become a full-fledged CV player, in

July 2008, EIM formed Volvo Eicher

Commercial Vehicles (VECV), a 50-50 JV

with AB Volvo, Sweden.

This JV opens up at least 3

opportunities for EIM -

(1) Stronger medium & heavy CV

portfolio for the Indian market

(2) Eicher to be Volvo’s global brand for

mass market trucks

(3) VECV to be global production hub

for medium-duty engines.

Most quantitative levers will kick in.

• Eicher Motors is a diversified auto

company: (1) High-end motorcycles

(350cc+) under the brand “Royal

Enfield”, and (2) Commercial vehicles,

automotive components and engine

solutions under its subsidiary, VECV.

• Benefits of recent expansion projects

should start to flow in –

(1) More than doubling of motorcycle

capacity to 150,000, (2) Medium-duty

engines plant, (3) Bus body-building

facility, (4) New HCV range, etc.

• Expect 58% EPS CAGR CY13-15E.


(INR b) Price (INR): 11,356/ Mkt Cap (INR b): 307

/E December 2013 2014E 2015E 2016E

Net Sales 66.9 85.6 117.3 157.6

EBITDA 7.1 10.7 17.2 25.6

Margin (%) 10.7 12.5 14.6 16.2

dj PAT 3.9 6.2 9.6 14.4

EPS (INR) 145.9 228.2 356.5 532.0

EPS Gr. (%) 21 56 56 49

BV (INR) 760.1 892.9 1192.

1661.

RoE (%) 20.7 27.6 34.2 37.3

RoCE (%) 21.8 27.4 37.0 43.0

Payout (%) 21 15 11 9

aluations

P/E (x) 78 50 32 21

P/BV (x) 14.9 12.7 9.5 6.8


.

1,000

4,000

7,000

10,000

13,000

S e p - 1 3

D e c - 1 3

M a r - 1 4

J u n - 1 4

S e p - 1 4

Eicher Motors Sensex - Rebased



September 2014 42


6-Force Idea #20: Crompton Greaves (Bloomberg: CRG IN)

CORPORATE ACTION LEVER | Demerger of consumer business to unlock value


Two of Crompton Greaves’ three SBUs

are industry-facing, and cater to the

usual ups and downs of business cycles.

The consumer-facing SBU (mainly fans,

lights and household appliances) is both

less-cyclical and also asset-light.

The division is estimated to be currently

contributing 50% to consolidated EBIT,

up from 20-25% 3-4 years ago.

In July 2014, the management proposed

demerger of the Consumer division into

a separate company. A Committee has

been set up to work out modalities.

Considering valuations of peer

companies like Havells, the demerged

Consumer division can account for over

75% of Crompton’s total Enterprise

Value, leaving residual industry-facing

businesses also reasonably valued.

• Crompton Greaves is the flagship of the

Avantha Group led by Gautam Thapar.

• It has organized its business in 3 SBUs:

(1) Power systems (mainly products and

solutions for power transmission &

distribution), (2) Industrial Systems

(mainly motors & drives) and (3)

Consumer Products (fans, lights and

appliances under “Crompton” brand).

• CRG is currently focused on a 3-D

approach to growth: (1) geographic

expansion, (2) moving up the value

chain, and (3) widening the production

footprint through lean manufacturing in

low cost countries.

• Even as the B2B businesses await full

economic recovery, the demerger of

the Consumer SBU could unlock value.



/E March 2014 2015E 2016E 2017E

Net Sales 134.8 145.8 165.4 190.7

EBITDA 6.8 9.0 12.7 16.4

Margin (%) 5.1 6.1 7.7 8.6

dj PAT 2.4 4.0 7.4 10.6

EPS (INR) 3.9 6.3 11.9 16.9

EPS Gr. (%) 27 62 88 42BV (INR) 58.2 63.0 72.7 86.6

RoE (%) 7.2 10.3 17.3 21.0

RoCE (%) 6.0 7.6 12.7 16.2

Payout (%) 21 24 16 15

aluations

P/E (x) 51 32 17 12

P/BV (x) 3.4 3.2 2.8 2.3

EV/EBITDA (x) 2.4 15.7 11.0 8.3

Divd Yield (%) 0.6 0.7 0.9 1.2.

80

110

140

170

200

230

S e p - 1 3

D e c - 1 3

M a r - 1 4

J u n - 1 4

S e p - 1 4

Crompton Greaves Sensex - Rebased



September 2014 43


Annexure 1: Levers for non-Financial companies

Total Stock Lever (TSL) for a stock can be first broken down into Earnings Lever and Valuation

Lever, which are multiplicative in nature such that –





Next, Earnings Lever is a product of 5 sub-levers as under –

EL = EPS

Global GDP





Therefore, Stock Price = Global GDP x [CL x SL x StL x OL x FL] x [VL]

We discuss each of the above sub-levers below.

A1.1 Country Lever (CL)

Country Lever (CL) = ∆Country GDP

∆Global GDP

• Country Lever links local GDP growth to global GDP growth. (For the purposes of this

report, we have used GDP growth in nominal terms.)

•

Typically, developing economies like India grow faster than global GDP. Thus, companies in

these economies enjoy Country Lever greater than 1.

A1.2 Sector Lever (SL)

Sector Lever (SL) = ∆Sector Sales

∆Country GDP

• Sector Lever links sector sales performance to GDP growth.

•

The higher the ratio, the faster is the sector growth relative to GDP growth and vice versa.• For many sectors, the Sector Lever tends to get established over time.



September 2014 44


A1.3 Strategic Lever (StL)

Strategic Lever (StL) = ∆Co. Sales

∆Sector Sales

•

Strategic Lever captures whether the company has grown faster, slower or in line with the

industry i.e. whether it has gained, lost or maintained market share in value terms.

• Higher the Strategic Lever, stronger is the company’s unique value proposition to its

customers (or Economic Moat).

• This lever is called Strategic Lever as whether a company gains or loses market share

depends on what strategy it is pursuing to strengthen or at least maintain its competitive

positioning.

• In this sense, Strategic Lever is a key reflector of a company’s management competence.

A1.4 Operating Lever (OL)

Operating Lever (OL) = ∆EBIT

∆Sales

= ∆EBITDA x ∆EBIT

∆Sales ∆EBITDA

= Margin Lever (ML) x Utilization Lever (UL)

• Operating Lever captures the impact of two aspects of a company’s operations –1. Cost structure (i.e. mix proportion of variable and fixed), and

2. Scale of operations i.e. asset utilization.

• Higher the fixed cost component, greater the operating leverage and vice versa.

• Likewise, higher the scale or asset utilization levels, greater the operating leverage and vice

versa.

• Operating Lever can be made more granular by dissecting it as Margin Lever (ML) and

Utilization Lever (UL) as discussed below.

A1.4.1 Margin Lever (ML) [ EBITDA ÷ Sales]

•

Margin Lever captures the full interplay of C-P-V-M in a company’s operations i.e. Cost,Price, Volume, Mix.

• Margin Lever greater than 1 suggests one or more of the following:

1. Cost savings not passed on to customers

2. Product price hike more than offsetting cost increase

3. Major increase in volume, lowering per unit fixed costs

4. Change of sales mix in favor of higher margin products/services.

• Margin Lever lower than 1 suggests the opposite of one or more of the above phenomena.

A1.4.2 Utilization Lever (ML) [ EBIT ÷ EBITDA]

•

Utilization Lever highlights the impact of better asset utilization, especially in capital-

intensive sectors like Utilities and Telecom.



September 2014 45


• Depreciation is a fixed charge based on the acquisition cost of fixed assets, and irrespective

of their utilization levels.

• When asset utilization improves meaningfully, EBITDA increases in sync but depreciation

remains broadly unchanged. Thus, incremental EBITDA fully flows down to EBIT, causing

Utilization Lever to be greater than 1 (and vice-versa).

A1.5 Financial Lever (FL)

Financial Lever (FL) = ∆EPS

∆EBIT

= ∆PBT x ∆PAT x ∆EPS

∆EBIT ∆PBT ∆PAT

= Debt Lever (DL) x Tax Lever (TL) x Equity Lever (EqL)

• Financial Lever reflects three aspects of a company -

1. Share of debt in current capital structure

2. Tax-cover status and

3. Equity capital expansion or contraction.

• To explicitly capture each of these 3 aspects, it can be trisected into Debt Lever (DL), Tax

Lever (TL) and Equity Lever (EL) as discussed below.

A1.5.1 Debt Lever (DL) [ PBT ÷ EBIT]

• Debt Lever reflects the share of debt in current capital structure, which in turn determineshow Net Interest (Interest Expense less Financial Income) is behaving in the P&L.

• Above PBT breakeven levels, Debt Lever will be greater than 1 if EBIT is rising whereas debt

levels are stable or declining.

A1.5.2 Tax Lever (TL) [ PAT ÷ PBT]

• Tax Lever captures change in a company’s tax-cover status.

• If the company is already a full-tax paying company and likely to remain so, Tax Lever will

always be 1.

• If the company is moving out from a tax holiday or tax concession situation into a full-tax

situation, Tax Lever will be less than 1.

• Tax Lever will be greater than 1 in specific situations e.g. if the company is commencing

units in a tax concession zone, or acquires some business with accumulated losses which

provide tax cover.

A1.5.3 Equity Lever (EqL) [ EPS ÷ PAT]

• Equity Lever indicates whether a company is expanding or contracting its equity.

• If a company has raised funds by issuing equity shares, Equity Lever will be less than 1.

• On the other hand, if the company has resorted to share buybacks, Equity Lever will be

greater than 1.• If equity capital remains unchanged, Equity Lever will be 1.



September 2014 46


A1.6 Valuation Lever

The Earnings Lever and sub-levers when established and applied will suggest how a company’s

EPS will change for a given change in a macroeconomic variable i.e.

Earnings Lever = EPS

Global GDP

Therefore, EPS = Global GDP x Earnings Lever

The final step in completing the Total Leverage exercise is to cross the change in EPS with the

Valuation Lever to arrive at the expected Stock Price change i.e.

Valuation Lever = Stock Price

EPS

Therefore, Stock Price = EPS x Valuation Lever

Essentially, Valuation Lever is a measure as to how much a stock has been (or will be) re-rated

for a given change in earnings. Thus, directionally, three scenarios are possible –

1.

If no change in rating, Valuation Lever = 1, and Stock Price change = EPS change.

2. If there’s a re-rating, Valuation Lever > 1, and Stock Price change > EPS change.

3. If there’s a de-rating, Valuation Lever < 1, and Stock Price change < EPS change.

Further, Valuation Lever itself is influenced by the Earnings Lever – a higher than expected EPS

change is more likely to trigger higher valuation re-rating and vice versa.



September 2014 47


Annexure 2: Levers for Financial companies

For Financial sector companies, Book Value is more relevant and important than EPS. Hence, all

levers are adapted to suit this and other characteristics of the business.

TSL = Stock Price = Book Value x Stock Price

Global GDP Global GDP BV



Here too, Book Value Lever is a product of 5 sub-levers as under –

BL = BV

Global GDP




Lever(CL) Lever(SL) Lever(StL) Lever(OL) Lever(EqL)

Therefore, Stock Price = Global GDP x [CL x SL x StL x OL x EqL] x [VL]

We discuss each of the above sub-levers below.

A2.1 Country Lever (CL)

Country Lever (CL) = ∆Country GDP

∆Global GDP

This lever remains the same, both for non-financial and financial companies (see page 43).

A2.2 Sector Lever (SL)

Sector Lever (SL) = ∆Agg. NII

∆Country GDP

= ∆Total Funds x ∆Agg. NII

∆Country GDP ∆Total Funds

= Monetary Lever (ML) x Interest Rate Lever (IL)

• Sector Lever links Aggregate NII growth to country GDP growth.

• The lever will be greater than 1 if Aggregate NII grows faster than GDP and vice versa.

• For further granularity, the Sector Lever can be dissected into (1) Monetary Lever and

(2) Interest Rate Lever, which are briefly discussed below.



September 2014 48


A2.2.1 Monetary Lever (ML) [ Total Funds ÷ Country GDP]

• Monetary Lever links growth in banking sector’s total funds to GDP growth.

• This reflects the money supply in the economy.

• In India, money supply has grown broadly in line with GDP.

• FY03-14, ML for Indian financial sector has hovered around 1.2-1.3 across economic cycles.

A2.2.2 Interest Rate Lever (IL) [ Aggregate NII ÷ Total Funds]

• Interest Rate Lever captures how interest rates and rate spreads in the economy have

moved over a given period of time.

• In India, IL was 0.9x during the boom phase of FY03-08 (i.e. spread compression in lieu of

growth) and 1.1x during the lull phase of FY08-14.

A2.3 Strategic Lever (StL)

Strategic Lever (StL) = ∆Bank NII

∆Agg. NII

• Strategic Lever is calculated for individual banks/NBFCs, and suggests whether NII has

grown faster or slower than the sector i.e. whether they have gained or lost NII market

share.

• Over FY03-14, SL for most private sector banks is greater than 1x, whereas in contrast, for

most public sector banks it is less than 1x.

A2.4 Operating Lever (OL)

Operating Lever (OL) = ∆PAT

∆NII

= ∆NI x ∆PPP x ∆PBT x ∆PAT

∆NII ∆NI ∆PPP ∆PBT

= Fee x Efficiency x Asset Quality x Tax

Lever(FL) Lever(EfL) Lever(AQL) Lever(TL)

• Operating Lever reflects the operational effectiveness of a bank/NBFC i.e. whether it has

been able to grow PAT faster than its NII or not.

• For Financial Sector, Operating Lever can be further analyzed into (1) Fee Lever, (2)

Efficiency Lever, (3) Asset Quality Lever and (4) Tax Lever which are briefly discussed below.

A2.4.1 Fee Lever (FL) [ NI ÷ NII]

• For financial companies, NI (Net Income) = NII + Non fund-based (i.e. Fee) income

• Thus, Fee Lever > 1 suggests that the bank’s non fund-based income has grown faster than

its fund-based income and vice-versa.

A2.4.2 Efficiency Lever (EfL) [

PPP ÷ NI]• PPP (Pre-Provisioning Profit) = NI – Operating expenses

• Thus, Efficiency Lever suggests how efficiently the bank/NBFC has managed its operating

expenses. EfL > 1 implies operating expenses have grown slower than NI, and vice versa.



September 2014 49


A2.4.3 Asset Quality Lever (AQL) [ PBT ÷ PPP]

• PBT = PPP – Provisions for non-performing assets (NPAs)

• As the name itself suggests, Asset Quality Lever reflects the Asset Quality of the bank/NBFC.

• AQL > 1 implies NPA provisions have grown slower than operating profit and vice versa.

A2.4.4 Tax Lever (TL) [ PAT ÷ PBT]

• As in the case of non-financial companies, the Tax Lever indicates whether the bank/NBFC

enjoys any tax shield (e.g. tax rebate on income from infrastructure/housing loans).

A2.5 Equity Lever (EqL)

Equity Lever (EqL) = ∆BV

∆PAT

= ∆Net Worth x ∆BV

∆PAT ∆Net Worth

= Capital Lever (CpL) x Pricing Lever (PL)

• Equity Lever suggests whether the bank’s Book Value has grown faster or slower than PAT.

• This is a function of two factors: (1) The amount of fresh equity capital raised, and (2) The

price at which the same was issued.

• These two factors get captured and Capital Lever and Pricing Lever, respectively.

A2.5.1 Capital Lever (CpL) [ Net Worth ÷ PAT]

•

Capital Lever (CpL) indicates the level of equity-funding resorted to by the bank/NBFC to

capitalize itself.

• The Financials sector median CpL was 1.4x during the FY03-08 boom and 0.9x during the

FY08-14 lull. This indicates higher equity-raising during boom times for higher capitalization.

A2.5.2 Pricing Lever (PL) [ Book Value ÷ Net Worth]

• Pricing Lever reflects the pricing at which fresh equity was issued, if any.

• The lower the ratio, the lower the equity pricing, relative to the book value prevailing at the

time of raising the funds.

•

Pricing Lever will be 1 if no equity has been raised during a given period.

A2.6 Valuation Lever (VL)

Valuation Lever (VL) = ∆Stock Price

∆Book Value

• Valuation Lever indicates as to whether – and by how much – a stock was (or will be)

re-rated for a given change in book value.

• VL > 1 suggests re-rating and VL < 1 suggests de-rating.



September 2014 50


Annexure 3: Non-quantitative Levers

Apart from the 4 quantitative and multiplicative levers discussed above, there are 3 non-

quantitative levers as well. These are – (1) Regulatory Lever, (2) Corporate Action Lever and (3)

Externality Lever. True to the definition of levers, a small change in any of these levers couldpotentially cause a significant change in stock prices. Hence they merit a separate albeit brief

discussion here.

A3.1 Regulatory Lever

Regulatory Lever mainly includes policy action across the economy, sectors or stock market as

listed below. Change in one or more of these could have a major impact on stock prices.

Regulatory Lever may be triggered across economy, sectors or stock market itself

Area Typical regulatory actions which affect stock prices

Economy•

Income tax rates, Indirect tax rates (customs, excise), Interest rates, etcSectors • Deregulation of hitherto regulated sectors (or vice versa), Environmental norms, etc

Stock Market • Foreign investment norms (including shareholding ceiling), trading limits, turnover tax, etc

A3.2 Corporate Action Lever

Some specific non-operational, non-financial corporate actions could have a significant bearing

on stock prices. These include –

• Change of ownership and/or management

• Stake hike by existing owners

• Hostile takeover bid

•

Offer to delist the shares by 100% buyback of non-owner holding• Major corporate restructuring or M&A announcements, not yet reflected in financials

• Large-scale corruption, fraud or violation of legal norms.

A3.3 Externality Lever

Uncontrollable external events like drought, earthquake, wars, etc also impact stock prices,

even if there is no immediate change in any operating or financial metrics of a company.



September 2014 51


Annexure 4: Case studies of levers

We calculated the various levers for all companies listed in India through the full economic cycle

of FY03 to FY14. We also classified these companies into sectors, and calculated the various

relevant levers for sector aggregates. We present our findings under two sections –1. Case studies of companies where specific levers have played out; and

2.

Key takeaways from sector-level levers.

A4.1 Company case studies

We present case studies of 6 companies which, taken together, illustrate how most of the

major levers covered in this report play out. The companies and the respective levers which

they illustrate are tabled below.

Company case studiesCompany Major levers tested

#1 Bharti Airtel All levers

#2 Amara Raja Batteries Strategic, Operating & Valuation Levers

#3 CESC Financial Lever

#4 TCS Corporate Action Lever + Strategic & Operating Levers

#5 Sesa Goa (now Sesa-Sterlite) Regulatory Lever

#6 Satyam Computer Corporate Action Lever

All the case studies are structured under 5 common heads –

1.

Company in brief

2.

Backdrop to the levers3. How the levers worked

4.

After the levers

5. Key takeaways.

Case Study #1: Bharti Airtel

Major levers tested: All

Company in brief

• Bharti Airtel is an integrated telecom service provider with presence in wireless, fixed-line

and broadband, long distance, enterprise, and passive infrastructure services across India,Sri Lanka, Bangladesh and Africa.

• It is India’s largest wireless operator (revenue market share of 31%), also the third largest

globally in terms of subscribers.

• Bharti’s case offers two distinct set of lessons in the working of levers –

(1) Positive, in the boom phase (FY04-08); and

(2) Adverse, in the lull phase (FY08-14).

[A] BOOM PHASE FY04-08

Backdrop to the levers

•

Bharti Airtel (then Bharti Tele-Ventures) launched its mobile services in FY96. Over the next6-7 years, it steadily expanded its national footprint, both organically and inorganically.

• In FY03, revenue doubled to INR30.5b and EBITDA quadrupled to INR5.4b.

• However, high depreciation and interest burden kept the company in net loss of INR2b.



September 2014 54


After the levers

• Total Stock Lever (-0.9x): Over FY08-14, Bharti’s stock (-4% CAGR) underperformed the

Sensex (+6% CAGR). However, given the strong performance in FY04-08, over the full cycle

FY04-14, Bharti’s stock performance was 2.2x (15% CAGR) that of global GDP (7% CAGR), in

line with that of Sensex.

Bharti’s FY08-14 PAT dragged down Bharti stock underperforms in FY08-14

by regulatory & corporate action levers despite valuation re-rating

Key takeaways

• The non-quantitative Regulatory Lever and Corporate Action Lever play a critical role in


• Change in competitive landscape is a key trigger for change in stock levers, and hence in

stock super-performance.

• Competitive advantage is always local and does not automatically migrate to other

geographies. Hence, mega global acquisitions must be critically analyzed for potential

negative play of operating/financial levers, leading to stock under-performance.

Case Study #2: Amara Raja Batteries

Major levers tested: Sector, Strategic, Operating & Valuation Levers

Company in brief

•

Amara Raja Batteries is the largest manufacturer of standby VRLA (Valve-Regulated Lead

Acid) batteries in the Indian Ocean Rim (i.e. from Africa and the Middle East to South EastAsia).

• It started operations in 1992 with industrial batteries. In 1997, it entered into a

collaboration with Johnson Controls, US (26% stake), and launched automotive batteries in

January 2000 (“Amaron” brand). It is now the second largest automotive batteries company

in India after Exide Industries.


• Amara Raja’s foray into automotive batteries came amidst a sharp slowdown in the autos

sector. As a result, overheads and depreciation were eating into profits – PAT declined

steadily from INR440m to INR74m in FY03.• Meanwhile, Amara Raja’s Gross Block expanded to INR1.5b, almost 2.5x the figure 5 years

ago.

67.084.7 89.8

60.542.6

22.8 27.7

24.8%22.9%

21.5%

10.2%

6.0%

3.0% 3.2%

FY08 FY09 FY10 FY11 FY12 FY13 FY14

Adj PAT (INR b)

PAT Margin

100

200

300

400

500

600

M a r - 0 8

S e p - 0 8

M a r - 0 9

S e p - 0 9

M a r - 1 0

S e p - 1 0

M a r - 1 1

S e p - 1 1

M a r - 1 2

S e p - 1 2

M a r - 1 3

S e p - 1 3

M a r - 1 4

Bharti

Sensex (Re-based)



September 2014 55


How the levers worked

• Demand revival: The situation worsened further in FY04; due to high lead prices, EBITDA

Margin dipped to as low as 5.4% (v/s 36.1% in FY99). The company reported an EBIT loss,

other income helped it report PAT of barely INR14m. The take-off commenced in FY05, with

strong revival in battery demand from both Telecom and Auto sectors.

Amara Raja - The 6-Force Framework (x)

Levers (x) FY03-08 FY08-14 FY03-14

Global Nominal GDP CAGR (%) 10.8 4.6 7.4

∆BSE Sensex / ∆Global GDP 3.6 1.3 2.7

TOTAL STOCK LEVER 7.6 7.6 7.4

EARNINGS LEVER 6.2 3.8 5.1

Country Lever 1.3 3.2 2.0

Sector Lever 1.6 1.3 1.4

Strategic Lever 2.0 1.1 1.5

Operating Lever 1.7 1.0 1.4

Financial Lever 0.9 0.8 0.9a. Debt Lever 0.9 1.1 1.0

b. Tax Lever 1.0 1.0 1.0

c. Equity Lever 1.0 0.7 0.9

VALUATION LEVER 1.2 2.0 1.5

• Country Lever (1.3x), Sector Lever (1.6x): During FY03-08, India’s nominal GDP CAGR of

~15% was 1.3x that of global GDP CAGR of ~11%. At the same time, the Auto Ancillary

sector grew 1.6x India’s GDP (i.e. 23% CAGR).

• Strategic Lever (2.0x): Most significantly, Amara Raja Batteries grew at 2x the industry, as it

was ready with its capacity expansion when demand arose. Also, the company went on an

aggressive branding and franchisee strategy for the automotive after-market.

• Operating Lever (1.7x): EBIT growth was 1.7x Sales growth. Asset utilization lever (1.4x) was

a major contributor as depreciation did not grow with sales.

• Financial Lever (0.9x): Amara Raja was a net cash company, and hence PAT and EPS growth

was marginally lower than EBIT growth.

• Earnings Lever (6.2x): As a product of all of the above, Amara Raja’s EPS grew 6.2x faster

than global GDP (EPS CAGR of 66% vis-à-vis global GDP CAGR of 11%).

• Valuation Lever (1.2x): Amara Raja Stock also enjoyed a re-rating from P/E of 5x in FY03 to

8x in FY08, driving stock price CAGR 16pp over EPS CAGR.

After the levers

•

Total Stock Lever (FY03-08 7.6x): In effect, over FY03-08, Amara Raja stock price CAGR

(82%) was 7.6x of global GDP v/s 3.6x for Sensex (29% CAGR).

• Total Stock Lever (FY03-14 7.4x): Amara Raja continued its robust performance even

through the lull phase of FY08-14 through new product launches (two-wheeler batteries,

home UPS, exports, etc) and steady capacity expansion. In the next phase FY08-14, the

stock saw a huge P/E rating from 8x to 18x, despite modest EPS CAGR of 17% (i.e. Valuation

Lever of 2x).Thus, over the full cycle FY03-14, Amara Raja stock price CAGR was 55% i.e.

7.4x that of global GDP.



September 2014 56


Amara Raja: All levers played out well The stock super-performs the benchmark

through the full cycle FY03-14 throughout FY03-14

Key takeaways

• Expect company-specific levers – Strategic, Operating and Financial – to work strongly in

cases where the market-opportunity is big, and the company has just completed major


• Duopoly or monopolistic competitive structure in growth sectors is favorable for levers to

play out.

• If a cyclical business manages even modest profit growth during lull phase, expect valuation

re-rating to sustain stock super-performance.

Case Study #3: CESC

Major levers tested: Financial Lever

Company in brief

• Flagship company of RP Sanjiv Goenka Group, CESC is one of the oldest integrated power

utilities in India.

• Its generation capacity stands at 1.2GW, and its distribution network supplies power to

2.3m consumers in Kolkata and Howrah region.

• Another 1.2GW of generation projects are under construction and additional 6GW of

projects are in pipeline.

Backdrop to the levers• Non-remunerative tariffs, high T&D losses and rising burden of high-interest debt led CESC

to barely break-even in FY03 following 3 years of losses.

• FY03 interest cost was INR4.1b whereas the market cap was less than INR1b.

How the levers worked

• Debt restructuring: In FY03, CESC completed a debt-restructuring program with 24 of its

lenders, including a cut in lending rates. In FY04, CESC negotiated a further rate cut, and

also swapped high-cost long-term debt with lower cost short-term debt.

• Lower T&D losses, higher collections: CESC worked aggressively to cut T&D losses and

improve cash collections. As a result, its debtor days went down from 155 days in FY03 to47 days in FY08. Cash flow from operations also increased from INR5.5b in FY03 to INR9.6b

in FY08.

0

3

6

9

12

0

1,000

2,000

3,000

4,000

F Y 0 3

F Y 0 4

F Y 0 5

F Y 0 6

F Y 0 7

F Y 0 8

F Y 0 9

F Y 1 0

F Y 1 3

F Y 1 4

PAT (INR m, LHS)

PAT Margin (%)

0

100

200

300

400

M a r - 0 3

M a r - 0 4

M a r - 0 5

M a r - 0 6

M a r - 0 7

M a r - 0 8

M a r - 0 9

M a r - 1 0

M a r - 1 1

M a r - 1 2

M a r - 1 3

M a r - 1 4

Amara Raja

Sensex (Re-based)



September 2014 57


• Financial Lever (38.4x): During FY03-08, CESC’s EBIT CAGR was only 2%, even lower than its

revenue CAGR of 5%. However, with net interest cost slashed from INR3.5b in FY03 to near-

zero in FY08, PBT and PAT CAGR was 120%. Despite a small equity dilution, EPS CAGR was

still a high 93%, translating into a Financial Lever of 38x.

• Earnings Lever (8.6x): In effect, CESC’s FY03-08 EPS CAGR at 93% was 8.6x that of global

GDP CAGR of 11%).

CESC: Huge benefit of Financial Lever … nullified during FY08-14, mainly due to

during FY03-08 … acquisition of Spencer Retail

CESC – The 6-Force Framework (x)

Levers (x) FY03-08 FY08-14

Global GDP CAGR (%) 10.8 4.6

∆BSE Sensex/∆Global GDP 3.6 1.3

TOTAL STOCK LEVER 8.8 0.7

EARNINGS LEVER 8.6 2.3

Country Lever 1.3 3.2

Sector Lever 0.9 1.2

Strategic Lever 0.4 0.7

Operating Lever 0.5 1.6

Financial Lever 38.4 0.5

a. Debt Lever 50.0 0.7

b. Tax Lever 1.0 0.8

c. Equity Lever 0.8 1.0

VALUATION LEVER 1.0 0.3

After the levers• Total Stock Lever (FY03-08 8.8x): With valuation moving in line with earnings, CESC’s stock

price CAGR over FY03-08 at 95% was 8.8x global GDP CAGR, super-performing even the

high-performing Sensex which was 3.6x (39% CAGR).

• Financing impact wears off, strategy takes over: Post FY08, CESC’s Financial Lever slipped

to 0.5x as the company borrowed for expansions and also diversified into retail (Spencer’s),

which is still loss-making. CESC’s FY08-14 price CAGR is only 3%, under-performing the

Sensex’s 6% CAGR.

CESC stock super-performs over FY03-08 … … but underperforms over FY08-14

0

100

200

300

400

500

600

700

M a r - 0 3

S e p - 0 3

M a r - 0 4

S e p - 0 4

M a r - 0 5

S e p - 0 5

M a r - 0 6

S e p - 0 6

M a r - 0 7

S e p - 0 7

M a r - 0 8

CESC

Sensex (Re-based)

100

200

300

400

500

600

M a r - 0 8

S e p - 0 8

M a r - 0 9

S e p - 0 9

M a r - 1 0

S e p - 1 0

M a r - 1 1

S e p - 1 1

M a r - 1 2

S e p - 1 2

M a r - 1 3

S e p - 1 3

M a r - 1 4

CESCSensex (Re-based)

0

3

6

9

12

15

18

0

1,000

2,000

3,000

4,000

F Y 0 3

F Y 0 4

F Y 0 5

F Y 0 6

F Y 0 7

F Y 0 8

F Y 0 9

F Y 1 0

F Y 1 1

F Y 1 2

F Y 1 3

F Y 1 4

Interest (net) (INR m)

% of Sales, RHS



September 2014 60


Case Study #5: Sesa-Goa (now Sesa-Sterlite)

Major levers tested: Regulatory Lever & Corporate Action Lever

Company in brief

• In 2013, Sesa Goa merged with Sterlite Industries (both Vedanta Group companies) to formthe merged entity, Sesa-Sterlite, which also has stake in Cairn India and Hindustan Zinc.

• Prior to the merger, standalone Sesa Goa was India’s largest exporter of iron ore in the

private sector.


• For 10 consecutive years ending FY11, Sesa Goa’s PAT rose exponentially – from INR89m in

FY02 to INR41.7b in FY11.

• EBITDA Margin was 56% and both RoE and RoCE were well in excess of 40%.

How the levers worked• Regulatory Lever: Sesa Goa’s performance was hit by a series of adverse regulatory

measures –

1.

In July 2010, Karnataka state government stopped all iron ore exports from the state as

a curb on illegal mining.

2.

In August 2011, the Supreme Court ordered a ban on all iron ore mining activity in

Karnataka on environmental concerns and a PIL (public interest litigation) alleging

widespread illegality of mines.

3.

A commission of the Ministry of Mines submitted its report in September 2012. Based

on the same, Goa state government suspended all mining operations. This was followed

by a Supreme Court order in October 2012 suspending all mining operations in Goapending enquiry by a Centrally Empowered Committee.

• Corporate Action: Meanwhile Sesa Goa entered into an agreement to acquire 20% stake in

Cairn India from Vedanta Group for a consideration of INR130b (against net cash of

~INR87b).

After the levers

• PAT almost halves in 2 years …: Owing to the ban on iron ore mining, in two years (FY13

over FY11), Sesa Goa’s revenue fell 72% and EBIT fell 94%. The Cairn India acquisition

caused Interest (net of financial income) to turn from positive inflow of INR4.5b to negative

outflow of INR4.6b. PAT before share of associates went from positive INR42b in FY11 to aloss of INR1.3b in FY13. Including profit share of Cairn India, PAT was still down 46% (-27%

CAGR).

• … followed by stock price: The stock also clocked a negative return in line with PAT decline,

-27% CAGR, underperforming the benchmark by a high 25%.

• Rebound following regulatory relief: Things have since then recovered for the merged

entity Sesa-Sterlite, with the mining ban both in Karnataka and Goa significantly relaxed.

The stock too has regained most of its lost ground.



September 2014 62


After the levers

• Complete turnaround in FY12 …: The new management led by Mr Vineet Nayyar went

about systematically turning around the beleaguered company, renamed as Mahindra-

Satyam. In FY10 and FY11, all the financial discrepancies and the subsequent class action

claims by customers and partners were accounted. Finally, in FY12, Mahindra Satyam was

back in the profit mode.

• … followed by merger with Tech Mahindra: In March 2012, the boards of Tech Mahindra

and Mahindra Satyam approved a merger with a swap ratio of 2 shares of Tech Mahindra

(then at ~INR650) for every 17 shares of Mahindra Satyam (then at INR75). Shareholders

who opted for the swap have gained handsomely as Tech Mahindra shares have since more

than trebled to INR2,100 levels.

Satyam Computer: PAT rebounds post Stock plunges on fraud announcement,

fraud, after Tech Mahindra takeover but recovers on profit turnaround

Key takeaways

• Quality of management is a key factor causing performance breakthrough or breakdown.

• Fraudulent and minority shareholder unfriendly management will eventually and invariably

“break down” stock performance.

• All management-change cases must be monitored as they hold potential for breakthroughs,

resulting in stock super-performance.

0.83.5

5.0 7.1

9.6

14.116.9

-2.8

2.5

-1.6

12.8

F Y 0 2

F Y 0 3

F Y 0 4

F Y 0 5

F Y 0 6

F Y 0 7

F Y 0 8

F Y 0 9

F Y 1 0

F Y 1 1

F Y 1 2

Satyam Computer PAT (INR b)

Accounting fraud &

also class action claims

Tech

Mahindra

takes over

0

100

200

300

400

500

600

M a r - 0 3

M a r - 0 4

M a r - 0 5

M a r - 0 6

M a r - 0 7

M a r - 0 8

M a r - 0 9

M a r - 1 0

M a r - 1 1

M a r - 1 2

M a r - 1 3

Satyam Computer

Sensex (Re-based)



September 2014 63


A4.2 Sector aggregates – Key takeaways

• The absolute and relative stock market performance of most sectors varies, depending on

the macroeconomic conditions.


Consumer segments – Alcoholic beverages, Paints, Tobacco, (2) Gems & Jewelry, (3)

Infrastructure/Construction, (4) Capital Goods, (5) Steel, and (6) Autos – Cars, CVs, and Auto

Ancillaries including Tyres.




3.93.4 3.2

2.8 2.6 2.5 2.3 2.3 2.2 2.2 2.1

1.4

A l c o h o l i c

B e v e r a g e s

G e m s &

J e w e l l e r y

M i n i n g &

r e l a t e d

A u t o - P V s

R e a l t y

A g r o

C h e m i c a l s

P a i n t s

A u t o - C V s

A u t o A n c .


T o b a c c o

P r o d u c t s

B S E S e n s e x


12.5

10.28.7

6.7 6.3 6.0 5.8 5.5 5.4 5.2

2.7

R e a l t y

M i n i n g &

r e l a t e d

C o n s t r u c t i o n

A l c o h o l i c

B e v e r a g e s

P l a s t i c

p r o d u c t s

C a p i t a l G o o d s

G e m s &

J e w e l l e r y

R e t a i l

S t e e l


B S E S e n s e x


2.1 2.11.8 1.8 1.7 1.6 1.6 1.5

1.41.1

0.4

A l c o h o l i c

B e v e r a g e s

A u t o - C V

s

P a i n

t s

G e m s &

J e w e l l e

r y

T y r e s

T o b a c c

o

P r o d u c t s

A u t o - P V

s

A u t o - 2 W

H e a l t h c a r e

A g r o

C h e m i c a

l s

B S E S e n s e x




September 2014 64


• The worst performing major sectors over FY03-14 include: (1) Media, (2) Shipping, (3)

Fertilizers, (4) Power Utilities and (5) Oil & Gas.




0.2

0.9 1.0 1.0 1.1 1.1 1.2 1.2 1.2 1.2

1.4

I T E d u c a t i o n

M e d i a

S h i p p i n g


U t i l i t i e s

C r u

d e O i l , G a s

R e f i n e r i e s

C o n s u m e r -

P e r

s o n a l , F o o d

T e c h n o l o g y

P a p e r

B S E S e n s e x


0.9

1.5 1.6 1.8 1.8

2.0 2.1 2.12.4 2.4

2.7

C o n s u m e r -

P e r s o n a l , F o o d

M e d i a

T e c h n o l o g y

A u t o - 2 W

P a p e r

E n t e r t a i n m e n t

H e a l t h c a r e


C r u d e O i l , G a s

C h e m i c a l s

B S E S e n s e x


-1.6 -1.5 -1.4

-0.7 -0.6 -0.6 -0.5 -0.5 -0.4 -0.4

0.4

R e a l t y

I T

E d u c a t i o n

C o

n s t r u c t i o n

S h i p p i n g

U t i l i t i e s

C a p i t a l

G o o d s

P l a s t i c

p r o d u c t s

S u g a r

S t e e l

M i n i n g

& r e l a t e d

B

S E S e n s e x




September 2014 65



and the lull phase (FY08-14) – (1) Alcoholic beverages, (2) Gems & Jewelry, (3) Autos – Cars,

(4) Agro Chemicals and (5) Auto Ancillaries.


outperformance than Financial Lever. As tabled below, the differential in levers between

outperforming and underperforming sectors was highest in Operating Lever, followed by

Revenue Lever and Financial Lever.

How levers differ for outperformers vis-à-vis underperformers

Lever Formula FY03-14 Median

All

sectors

Out-

performers

Under-

performers

Differential

(x)

Revenue Lever ∆Sales/∆GDP 1.2 1.3 1.0 1.3

Operating Lever ∆EBIT/∆Sales 1.0 1.1 0.7 1.4

Financial Lever ∆EPS/∆EBIT 1.0 1.0 0.8 1.2

Valuation Lever ∆Mkt Cap/∆EPS 1.4 1.4 1.4 1.0



September 2014 66


N O T E S



Disclosures

This research report has been prepared by MOSt to provide information about the company(ies) and sector(s), if any, covered in the report and may be distributed by it and/or its affiliated company(ies). This

report is for personal information of the select recipient and does not construe to be any investment, legal or taxation advice to you. This research report does not constitute an offer, invitation or inducement to

invest in securities or other investments and Motilal Oswal Securities Limited (hereinafter referred as MOSt) is not soliciting any action based upon it. This report is not for public distribution and has been

furnished to you solely for your general information and should not be reproduced or redistributed to any other person in any form. This report does not constitute a personal recommendation or take into

account the particular investment objectives, financial situations, or needs of individual clients. Before acting on any advice or recommendation in this material, investors should consider whether it is suitable

for their particular circumstances and, if necessary, seek professional advice. The price and value of the investments referred to in this material and the income from them may go down as well as up, and

investors may realize losses on any investments. Past performance is not a guide for future performance, future returns are not guaranteed and a loss of original capital may occur.

MOSt and its affiliates are a full-service, integrated investment banking, investment management, brokerage and financing group. We and our affiliates have investment banking and other business

relationships with a significant percentage of the companies covered by our Research Department Our research professionals provide important input into our investment banking and other business selection

processes. Investors should assume that MOSt and/or its affiliates are seeking or will seek investment banking or other business from the company or companies that are the subject of this material and that

the research professionals who were involved in preparing this material may participate in the solicitation of such business. The research professionals responsible for the preparation of this document may

interact with trading desk personnel, sales personnel and other parties for the purpose of gathering, applying and interpreting market information. Our research professionals are paid in part based on theprofitability of MOSt which include earnings from investment banking and other business. MOSt generally prohibits its analysts, persons reporting to analysts, and members of their households from

maintaining a financial interest in the securities or derivatives of any companies that the analysts cover. Additionally, MOSt generally prohibits its analysts and persons reporting to analysts from serving as an

officer, director, or advisory board member of any companies that the analysts cover. Our salespeople, traders, and other professionals or affiliates may provide oral or written market commentary or trading

strategies to our clients that reflect opinions that are contrary to the opinions expressed herein, and our proprietary trading and investing businesses may make investment decisions that are inconsistent with

the recommendations expressed herein. In reviewing these materials, you should be aware that any or all o the foregoing, among other things, may give rise to real or potential conflicts of interest . MOSt and

its affiliated company(ies), their directors and employees may; (a) from time to time, have a long or short position in, and buy or sell the securities of the company(ies) mentioned herein or (b) be engaged in

any other transaction involving such securities and earn brokerage or other compensation or act as a market maker in the financial instruments of the company(ies) discussed herein or act as an advisor or

lender/borrower to such company(ies) or may have any other potential conflict of interests with respect to any recommendation and other related information and opinions.

Unauthorized disclosure, use, dissemination or copying (either whole or partial) of this information, is prohibited. The person accessing this information specifically agrees to exempt MOSt or any of its

affiliates or employees from, any and all responsibility/liability arising from such misuse and agrees not to hold MOSt or any of its affiliates or employees responsible for any such misuse and further agrees to

hold MOSt or any of its affiliates or employees free and harmless from all losses, costs, damages, expenses that may be suffered by the person accessing this information due to any errors and delays. The

information contained herein is based on publicly available data or other sources believed to be reliable. Any statements contained in this report attributed to a third party represent MOSt’s interpretation of the

data, information and/or opinions provided by that third party either publicly or through a subscription service, and such use and interpretation have not been reviewed by the third party. This Report is not

intended to be a complete statement or summary of the securities, markets or developments referred to in the document. While we would endeavor to update the information herein on reasonable basis, MOSt

and/or its affiliates are under no obligation to update the information. Also there may be regulatory, compliance, or other reasons that may prevent MOSt and/or its affiliates from doing so. MOSt or any of its

affiliates or employees shall not be in any way responsible and liable for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report. MOSt or any ofits affiliates or employees do not provide, at any time, any express or implied warranty of any kind, regarding any matter pertaining to this report, including without limitation the implied warranties of

merchantability, fitness for a particular purpose, and non-infringement. The recipients of this report should rely on their own i nvestigations.

Recipients who are not institutional investors should seek advice of their independent financial advisor prior to taking any investment decision based on this report or for any necessary explanation of its

contents.

MOSt and/or its affiliates and/or employees may have interests/positions, financial or otherwise in the securities mentioned in this report. To enhance transparency, MOSt has incorporated a Disclosure of

Interest Statement in this document. This should, however, not be treated as endorsement of the views expressed in the report.

Disclosure of Interest Statement Companies where there is interest

Analyst ownership of the stock None

Analyst Certification

The views expressed in this research report accurately reflect the personal views of the analyst(s) about the subject securities or issues, and no part of the compensation of the research analyst(s) was, is, or

will be directly or indirectly related to the specific recommendations and views expressed by research analyst(s) in this report. The research analysts, strategists, or research associates principally responsible

for preparation of MOSt research receive compensation based upon various factors, including quality o f research, investor client feedback, stock picking, competitive f actors and firm revenues.

Regional Disclosures (outside India)

This report is not directed or intended for distribution to or use by any person or entity resident in a state, country or any jurisdiction, where such distribution, publication, availability or use would be contrary tolaw, regulation or which would subject MOSt & its group companies to registration or licensing requirements within such jurisdictions.

For U.K.This report is intended for distribution only to persons having professional experience in matters relating to investments as described in Article 19 of the Financial Services and Markets Act 2000 (Financial

Promotion) Order 2005 (referred to as "investment professionals"). This document must not be acted on or relied on by persons who are not investment professionals. Any investment or investment activity to

which this document relates is only available to investment professionals and will be engaged in only with such persons.

For U.S. Motilal Oswal Securities Limited (MOSL) is not a registered broker - dealer under the U.S. Securities Exchange Act of 1934, as amended (the"1934 act") and under applicable state laws in the United States.

In addition MOSL is not a registered investment adviser under the U.S. Investment Advisers Act of 1940, as amended (the "Advisers Act" and together with the 1934 Act, the "Acts), and under applicable state

laws in the United States. Accordingly, in the absence of specific exemption under the Acts, any brokerage and investment services provided by MOSL, including the products and services described herein

are not available to or intended for U.S. persons.

This report is intended for distribution only to "Major Institutional Investors" as defined by Rule 15a-6(b)(4) of the Exchange Act and interpretations thereof by SEC (henceforth referred to as "major institutional

investors"). This document must not be acted on or relied on by persons who are not major institutional investors. Any investment or investment activity to which this document relates is only available to major

institutional investors and will be engaged in only with major institutional investors. In reliance on the exemption from registration provided by Rule 15a-6 of the U.S. Securities Exchange Act of 1934, as

amended (the "Exchange Act") and interpretations thereof by the U.S. Securities and Exchange Commission ("SEC") in order to conduct business with Institutional Investors based in the U.S., MOSL has

entered into a chaperoning agreement with a U.S. registered broker-dealer, Motilal Oswal Securities International Private Limited. ("MOSIPL"). Any business interaction pursuant to this report will have to be

executed within the provisions of this chaperoning agreement.

The Research Analysts contributing to the report may not be registered /qualified as research analyst with FINRA. Such research analyst may not be associated persons of the U.S. registered broker-dealer,

MOSIPL, and therefore, may not be subject to NASD rule 2711 and NYSE Rule 472 restrictions on communication with a subject company, public appearances and trading securities held by a research

analyst account.

For Singapore

MOS-6 Force Framework

Documents

Transcript of MOS-6 Force Framework