Handouts Bank Valuation Basics Mercer Capital 021913

SPARK STRATEGY:
'All Weather Managements' 2.0

December 12, 2018
▪ VIJAYARAGHAVAN SWAMINATHAN  raghavan@sparkcapital.in  +91 44 43440022

▪ GAUTAM SINGH  gautam@sparkcapital.in  +91 22 6176 6804
▪ ARJUN N  arjun@sparkcapital.in  +91 44 4344 0081
Page 1
SPARK STRATEGY
'All Weather Managements' 2.0
‘All Weather Managements’ 2.0, our annual version of identifying the best managements, where we put our coverage universe of 225 stocks to
STRATEGY
some of the most stringent qualitative and quantitative criteria to (i) assess if our investment thesis on the ‘All Weather’ Managements of our
12th December 2018
last edition is intact and (ii) identify new names from our expanded coverage.
In our assessment, most managements tend to be ’Fair Weather’ friends, who do well in upcycles with the help of macro tailwinds. In our
assessment, few companies have a time tested track record, underlying robust business model and a solid governance structure to deliver BSE Sensex 34,959
consistent performance irrespective of cycles and headwinds. In this note, we separate the two and pick the best managements which can
NSE Nifty 10,488
deliver industry leading earnings growth especially during testing macro times which we are currently in without compromising the inherent
business model strength and governance standards. We have consciously kept valuations, earnings estimates and TPs from distracting the
argument with the returns for AWM portfolio (equal-weight) over 1/3/5 year time-frame outperforming the benchmark returns by a distance. Performance (%)
15 POINT QUALITATIVE FRAMEWORK 1Y 3Y 5Y
#1. Management Quality Sensex 5% 40% 65%
Demonstrated performance track record across cycles and against external headwinds? Is the management ahead of competition both in terms of
BSE200 -1% 36% 78%
capturing the future opportunities and cognizant of challenges? Has the management been tested by competition and come out unscathed? Is
the management prepared for disruptions in the industry? How well has the management corrected its past mistakes? AWM
7% 79% 354%
Portfolio
#2. Business Model Strength
How long is the runway for the company’s growth? Sustainability of competitive advantages? Ability to protect and gain market/ wallet share? AWM Stocks Out AWM Stocks In
Predictability, consistency, volatility and resilience to vagaries across cycles? Are they vulnerable to concentration and regulatory risks?
#3. Governance Structure PI Industries Dr. Lal Pathlabs
Management continuity? Capital allocation track record? Material related party transactions? Alignment of interests of promoters & management
with minority share holders? Frequency of changes to Board of Directors, CFO, auditors and accounting policies? Emami Havells
10 POINT QUANTITATIVE FRAMEWORK
Financials: Consistency in loan book growth, Volatility in NIMs, Earnings predictability, Risk pricing, Cost control, Quality of loans underwritten,
Return on retained earnings, Return on risk-weighted assets, Provisioning buffer and Future growth expectations.
Ex-Financials: Consistency in revenue growth, Volatility in operating profit margins, Earnings Predictability, Operating Cash flow generation, RESEARCH ANALYSTS
Quality of capital expenditure, Free cashflow generation consistency, Cash return on Cash invested (CROCI), Quality of retained earnings, Future
VIJAYARAGHAVAN SWAMINATHAN
growth expectations and Sustainable Growth Rate.
raghavan@sparkcapital.in
WHO PASSED THE MUSTER? +91 44 4344 0022
▪ Large Caps – Maruti Suzuki, Hindustan Unilever, Asian Paints, Havells, HDFC Bank, Kotak Mahindra Bank, TCS, Shree Cement and Cadila. GAUTAM SINGH
▪ Large Midcaps – Page industries, Berger Paints, Sundaram Finance, Ramco Cements, AIA Engineering, Info Edge and Torrent Pharmaceuticals. gautam@sparkcapital.in
▪ Midcaps – Sundram Fasteners, Relaxo Footwear, La Opala, City Union Bank, V-Guard, Astral Poly, KNR Construction, Cyient and Dr. Lal. +91 22 6176 6804
Stocks In/out: In-Havells and Dr.Lal PathLabs; Out - Emami (Not able to weather GST/demon factors) PI (Unpredictability of exports business) ARJUN N
arjun@sparkcapital.in
+91 44 4344 0081
find SPARK RESEARCH on Page 2

(SPAK <go>)
Quantitative Framework
Out of Spark coverage universe of 225 stocks, companies in non-BFSI sector were alone taken and tested for the following 10 parameters
Parameter Why it is relevant? Methodology used
Consistency in
Ability to find avenues to grow consistently ▪ Sales growth more than 10% each year from FY13 - FY18
revenue growth
▪ Highest in-line results in the last 32 quarters (+/-5% PAT deviation from the
Earnings Predictability Stability of earnings
Bloomberg consensus estimates)
Volatility in profit To assess fluctuations in the EBITDA margin

▪ Least variance in EBITDA margin range during FY12 - FY18
margins profile; Prefer least volatile companies
Operating Cash
Working capital trends with consistency ▪ Highest Pre-tax OCF conversion (Pre tax OCF/ EBITDA) during FY12-FY18
flow generation
Companies which are efficient in

Quality of capex ▪ Growth in OCF during FY12-FY18 is higher than growth in invested capital
generating cash with its capital invested
Free cashflow Consistent track-record of FCF generation; ▪ Highest FCF generation. Cumulative FCF from FY12 to FY18 divided by cumulative OCF
generation consistency funding future capex with internal accruals for the same period
Cash return on Cash ▪ Highest average CROCI during FY12-FY18. CROCI= Post tax post interest OCF/ Invested
Cashflow return on invested capital
invested (CROCI) Capital (Capital employed - CWIP - cash)
Quality of For every 1 rupee retained how much

▪ Market cap difference divided by difference in retained earnings between FY12-18
retained earnings rupee of market value creation
Future growth
Growth on all parameters ▪ Sales/EBITDA/PAT CAGR > 18% between FY18-FY20E
expectations
Note: Incremental OCF= Redeployment of OCF *(OCF/Sales

Sustainable How much can the company grow using ▪ Cos. with highest SGR in FY18.
Redeployment of OCF = Total asset turn*OCF
Growth Rate (SGR) only internal accruals (SGR = Incremental OCF/OCF) Total asset turns = Net sales/Total assets (ex-cash)
Notes: *OCF – Operating Cash Flow
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Quantitative Framework – Which companies pass the filter?
Total no. of Cashflows vs. FCF Quality of

Earnings Margin Quality of Future
Companies screens Consistency EBITDA generation CROCI retained SGR
Predictability Volatility Capex growth rate
qualified consistency earnings
1 2 3 4 5 6 7 8 9 10
Page Industries 9 ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓
Havells 8 ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓
Eicher 6 ✓ ✓ ✓ ✓ ✓ ✓
Hindustan Unilever 6 ✓ ✓ ✓ ✓ ✓ ✓
Bajaj Auto 6 ✓ ✓ ✓ ✓ ✓ ✓
TVS Motor 6 ✓ ✓ ✓ ✓ ✓ ✓
Bajaj Corp 6 ✓ ✓ ✓ ✓ ✓ ✓
Sun TV 6 ✓ ✓ ✓ ✓ ✓ ✓
Britannia 6 ✓ ✓ ✓ ✓ ✓ ✓
Dr. Lal Pathlabs 5 ✓ ✓ ✓ ✓ ✓
Hero MotoCorp 5 ✓ ✓ ✓ ✓ ✓
TCS 5 ✓ ✓ ✓ ✓ ✓
No. of occurrences more than 5 out of 10 parameters is considered
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Quantitative Framework
Financials – Banks & NBFCs

Parameter Why it is relevant? Methodology used
Consistency in loan growth Ability to grow consistently ▪ Advances growth greater than 10% each year from FY13 to FY18
▪ Highest in-line results in the last 6 years (+/-5% PAT deviation from the bloomberg
Earnings Predictability Stability of earnings
consensus estimates)
To assess fluctuations in the margin profile; ▪ Least difference between maximum and minimum NIMs over the last 6.5 years (less
Volatility in NIMs
prefer least volatile companies than 80bps)
Risk Pricing To evaluate the bank’s ability to price risk ▪ Average of 6 years NIM – Slippage (greater than 2.0%)
Cost Control To evaluate cost effectiveness ▪ Average of 6 years Opex / Assets (less than 1.9%)
Slippages for banks/ ▪ For Banks: Cumulative slippage over FY13-18 as % of FY13 loan book (less than 16.5%)
Quality of the loans underwritten
Credit costs for NBFCs ▪ For NBFCs: Cumulative credit cost over FY13-18 as % of FY13 loan book (less than 5%)
Return on retained earnings For every 1 rupee retained, how much ▪ Change in EPS between FY13 & FY18 as % of change in retained earnings between
(For banks) value is created FY13 & FY18 (greater than 19.4%)
Return on Risk Weighted

To evaluate risk adjusted returns ▪ Average RoRWA between FY13 & FY18 (greater than 2.2%)
Assets
Future growth expectations Growth in ABV over FY18-20E ▪ FY18-20E ABV CAGR (greater than 20%)
To assess the bank’s ability to withstand ▪ Total buffer calculated as sum of excess provisions and floating provisions (greater
Provisioning Buffer
volatility in provisioning requirements than 25%)
Notes: For the Small Finance Banks (EQUITAS, UJJIVAN and AUBANK) credit costs are used in place of slippages where data not available
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Quantitative Framework – Which companies pass the filter?
Banks
Total no of Loan growth

Earnings NIMs Provisioning ABV CAGR
screens >10% every Risk Pricing Cost Control Delinquencies RoRWA RoRE
predictability Volatility Buffer FY18-20E
qualified year
1 2 3 4 5 6 7 8 9 10
HDFC Bank 9 ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓
IndusInd Bnk 9 ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓
AUBANK 7 ✓ ✓ ✓ ✓ ✓ ✓ ✓
YES Bank 4 ✓ ✓ ✓ ✓
NBFCs
Loan growth
Earnings ABV CAGR
Total no. of >10% every NIMs Volatility Risk Pricing Cost Control Delinquencies RoRWA RoRE
predictability FY18-20E
screens year
qualified
1 2 3 4 5 6 7 8 9
Bajaj Finance 5 ✓ ✓ ✓ ✓ ✓
LIC Housing Fin. 5 ✓ ✓ ✓ ✓ ✓
HDFC 4 ✓ ✓ ✓ ✓
REPCO 4 ✓ ✓ ✓ ✓
Notes:ABV=Adjusted Book Value, RoRWA – Return on Risk Weighted Assets, RoRE – Return on Retained Earnings,
No. of occurrences more than 4 is considered
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Qualitative Framework
Out of Spark coverage universe of 225 stocks, companies with the relevant analyst experience of knowing those companies for over three years were only taken up for the
purpose of this analysis.
Key Qualitative criteria
▪ Demonstrated track record of the management across cycles and against external headwinds.
▪ Is the management ahead of competition both in terms of capturing the future opportunities and cognizant of challenges?
#1. Management
▪ Has the management been tested by competition and come out unscathed?
Quality
▪ Is the management prepared for disruptions in the industry?
▪ How well has the management corrected its past mistakes?
▪ How long is the runway for the company’s growth?

▪ Sustainability of competitive advantages
#2. Business Model
Strength ▪ Ability to protect and gain market/ wallet share?
▪ Predictability, consistency, volatility and resilience to vagaries across cycles.
▪ Are they vulnerable to concentration and regulatory risks?
▪ Management continuity
▪ Capital allocation track record
#3. Governance
▪ Material related party transactions
structure
▪ Alignment of interests of promoters & management with minority share holders
▪ Frequency of changes to Board of Directors, CFO, auditors and accounting policies
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The Best Managements on Qualitative Framework
Large Caps (>$5bn) Large Mid Caps($2bn-$5bn) Mid Caps (<$2bn)
AUTOMOBILES ▪ Maruti Suzuki ▪ Sundram Fasteners
▪ Hindustan Unilever ▪ Page Industries ▪ Relaxo Footwear

CONSUMER
▪ Asian Paints ▪ Berger Paints ▪ La Opala
▪ HDFC Bank
FINANCIALS ▪ Sundaram Finance ▪ City Union Bank
▪ Kotak Mahindra Bank
▪ V-Guard
▪ Shree Cement ▪ Ramco Cements
INDUSTRIALS ▪ KNR Constructions
▪ Havells ▪ AIA Engineering ▪ Astral Polytechnik
IT SERVICES ▪ Tata Consultancy Services ▪ Infoedge ▪ Cyient
PHARMACEUTICALS ▪ Cadilla Healthcare ▪ Torrent Pharmaceuticals ▪ Dr Lal PathLabs
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Maruti Suzuki (MSIL)
▪ In a highly competitive market place, the management has kept its market share & leadership status intact. Last 5 year company
Why we like the CAGR of 10%. Vs. industry CAGR of 5%. New technologies (mild hybrids) and move towards premium products have helped.
Management? ▪ New product launches, network expansion (incl. Nexa) and lower margin risk have resulted in consistent and predictable earnings.
Good capital allocation track record with parent investing on new capacities leaves more capital available for sales & marketing.
▪ Timely new product launches in the compact UV and premium hatch segment driving growth. Separate sales/service network for
Where were they ahead of
products in the premium segment. Currently investing significantly on sales infrastructure and on lithium ion batteries for EVs.
competition in managing an
adverse environment? ▪ Introduced new products, targeted marketing such as government employees, expanded reach and network to benefit from non-
urban growth.
▪ MSIL by way of regional mix (rural, urban & exports), product mix (economy and premium), largest sales/service network, success
Business Model Strengths rate of products, low total cost of ownership has created a competitive edge over others.
▪ Volatility in margins have come down as the company has made efforts to naturally hedge the JPY exposure by way of exports (in
JPY), incremental royalty agreements in INR, lower royalty for old models, and by increasing localization.
Growth runway More rural reach, premiumization and exports offer enough legroom for growth.
Management Team & Governance Grid
FY07-11 and FY11-14 revenue CAGR was volatile at 25% and 6% respectively. However,
Predictability & Consistency FY14-FY20 CAGR likely to be more consistent at ~15%. ▪ Mr. R C Bhargava, Chairman joined Maruti in 1981. Mr.
Kenichi Ayukawa, MD & CEO, joined the parent in 1980
Margin stability
EBITDA margins averaged 12.8% and 9.5% during FY07-11 and FY11-14 phases respectively, and held multiple global roles. Mr. R.S Kalsi, ED (Marketing
which is also likely to average a more predictable 15% during FY14-FY20 period. and Sales), has more than three decades of experience in
the automobile industry.
A strong 50% average CROCI over the past 10 years is likely to further improve to 150% over
Cash generation & CROCI
the next 5 years.
A negative and further strengthening WC cycle and a EBITDA to OCF conversion improving Management continuity Alignment of interest
Balance sheet strength
further from 100% to 125% reflect the balance sheet strength.
Localization of raw material input requirements at ~92% currently vs. lower than 90% in Professionally run organisation Well aligned
Reduced vulnerabilities
FY12 improves margin/ FX vulnerability.
Growing exports proportion of sales billed in JPY at 5% of sales now vis-à-vis an immaterial
Natural FX hedge Frequency of changes in
proportion earlier provides a natural hedge reducing FX uncertainties. Related Party Transaction
accounting policy & auditors
Its biggest, non-replicable moat is its distribution and service network; Hyundai the second Deloitte w.e.f. FY17; prior to
Distribution reach strengths Immaterial that, PWC were the auditors for
largest OEM in India by volumes, lags MSIL’s reach by a distance.
more than 5 years
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Maruti Suzuki
Crystal Ball Gazing
Expect MSIL to report revenue and PAT CAGR of 12% and 16% through FY18-FY22E. This would be led by a volume growth of ~8%
enabled by commissioning of brownfield capacities at Gujarat and a strong product portfolio.
Expect improvement in EBITDA margin to ~15.6% by FY22E, leveraging upon its competitive strength and operating leverages
Expect MSIL to trade at elevated multiples given

Expect strong growth in cash accruals led by MSIL’s With bulk of incremental capacity addition capex
strong earnings growth potential, strong market
strong portfolio and incremental capacities coming being expended by parent, MSIL’s RoIC to improve
standing and robust cash generation to support
on-stream significantly
multiples
FY07-FY11 FY11-FY14 FY14-FY17 FY18-FY22E FY07-FY11 FY11-FY14 FY14-FY17 FY18-FY22E FY22E EBITDA
EV/EBITDA multiple Price target
(bn)
Revenues CAGR 25% 6% 16% 12% RoE (%) 20.1% 14.3% 17.8% 20.3%
11.5 193 9,425
Avg. Gross Margin 24% 24% 31% 31% RoCE (%) 18.6% 13.6% 17.4% 20.2%
EBITDA CAGR 9% 12% 26% 13%
RoIC (%) 58.2% 30.7% 52.6% 160.0%
Avg. EBITDA margin 12.8% 9.5% 13.8% 15.1%
Average 1 yr fwd
EPS CAGR 11% 6% 37% 15%
PE (x) 16.4* 14.3 19.7 –
Avg. Total Asset Turnover
2.2 2.2 1.8 1.7
(x) EV/EBITDA (x) 10.2* 7.5 11.4 –
Avg. Total WC days 0 -3 -18 -38 Peak 1 yr fwd
Avg. Pre-tax OCF/EBITDA
100% 111% 117% 126% PE (x) 21.6* 17.2 24.1 –
(%)
Avg. Post Tax OCF as a % EV/EBITDA (x) 14.4* 9.1 14.9 –
52% 44% 78% 201%
of IC
* (FY10-FY11)
Avg. Net Debt/EBITDA (1.8) (2.0) (2.1) (3.0)
TOTAL
EBITDA CAGR of ~13%, RETURN OF
Entry = Rs. 7,418 @ 11.3x Cumulative Dividends of
exit multiple of 11.5x on
FY20E EV/EBITDA Rs.300/share
FY22E EV/EBITDA 31%
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Sundram Fasteners (SF)
▪ Among the most credible and capable management groups in India. The management has significantly diversified away from
Why we like the fasteners into more value added products such as hubs & shafts, pump assembles & engine components, which now contribute 63%
Management? of revenues. This has a material positive impact on the riskiness and provides pricing power/ higher margins.
▪ Geographic expansion – China & UK are profitable, significant scale expansion drives more predictability.
Where were they ahead of ▪ FY11-FY15 growth in exports (17% CAGR) helped the company manage the domestic downturn (2% CAGR). Successfully increased
exposure to PVs – historically had high exposure to CVs. Preparing for opportunity in EVs and the new opportunities / disruptions,
already suppliers to EV OEMs for small components.
adverse environment?
▪ Sold German operations as change in government policies impacted business.
▪ Low cost of product development given huge library of in-house tooling, focus on value addition beyond forging, among the lowest
Business Model Strengths TAT, wide basket of products to be a one-stop-shop to most global OEMs.
▪ The company has significantly diversified its geographic and end-market mix in order to relatively outperform. Agreements include
pass-through clause for both raw material and FX
SF’s technical competence, quality and TAT has ensured continued improvement in wallet
Growth runway
shares (through existing products and new products/programmes) with major customers Management Team & Governance Grid
Reducing the domestic CV bias and increasing the global PV proportion has a material
Predictability & Consistency
positive impact on the cyclicality of the business. ▪ Mr. Suresh Krishna, Founder & Chairman, has experience
of over five decades in the automotive industry. Ms. Arathi
Pricing Power & Low Higher proportion of the value added products at 63% of sales currently increases the Krishna, CMD, served as JMD from 2010 till 2018 when she
Volatility company’s pricing power and margin profile. was elevated to the position of MD. Ms. Arundathi
Krishna, JMD, joined SF in 1997.
Margin stability and cash Margins have not been volatile, in fact it been consistently moving up (up 500bps in last 4
generation years).
Long-standing relations with major domestic and global OEMs. While ensuring stickiness, Management continuity Alignment of interest
Strong OE relations
the same also inhibits customers from moving to competitors for minor variations in prices.
10 year average CROCI has been muted at 12% though it has improved to 13% for FY17. Succession plan in place Well aligned
Cash return metrics
With the disposal of the German subsidiaries, CROCI to improve to 27% through FY18-FY20E
WC days expected to improve from 101 days (FY13-FY17) to ~70 days through FY18-FY20E
Balance sheet strength Frequency of changes in
(disposal of the German investments) Expect EBITDA to OCF conversion to improve to 95%. Related Party Transaction
RoCE has improved to 25% in FY17 from 13% in FY14; prefer to outsource a number of Sundaram & Srinivasan have
Capital Efficiencies Negligible
activities vs. in-house set up as capital requirement would be significantly higher. been auditors since FY04, atleast
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Sundaram Fasteners
Crystal Ball Gazing

Expect SF to report revenue and PAT growth of 14% and 18% CAGR through FY18-FY22E. This would be led new product
introductions and increasing wallet share in the existing products. Expect sustained improvement in margins led by the
favourable product mix (in favour of higher value added products)
While operations would continue to remain WC intensive, expect FCF yields to continually improve
with sustained improvement in margins.
Expect sustained improvement in revenue and With SF expected to exercise circumspection w.r.t. Expect SF to trade at elevated multiples given strong
margins through FY21 led by the favourable product future inorganic investments, expect RoCEs to earnings growth potential, coupled with
mix (in favour of higher value added products) improve materially improvement in FCF yields
FY05-FY11 FY11-FY14 FY14-FY17 FY18-FY22E FY05-FY11 FY11-FY14 FY14-FY17 FY18-FY22E P/E multiple FY22E EPS (Rs) Price target
Revenues CAGR 11% 4% 13% 13% RoE (%) 18.0% 20.9% 22.4% 20.4% 21 35.4 (consol) 745
Avg. Gross Margin 54% 54% 58% 58% RoCE (%) 10.9% 10.9% 14.8% 20.4%
EBITDA CAGR 7% 4% 29% 16%
RoIC (%) 13.3% 13.6% 17.7% 28.9%
Avg. EBITDA margin 13.0% 12.9% 15.0% 19.0%
Average 1 yr fwd
EPS CAGR 8% 6% 35% 17%
PE (x) 8.8* 7.3 16.8 n/a
Avg. Total Asset Turnover
1.2 1.3 1.4 1.6
(x) EV/EBITDA (x) 7.3** 5.8 10.6 n/a
Avg. Total WC days 118 116 95 81 Peak 1 yr fwd
Avg. Pre-tax OCF/EBITDA
84% 88% 100% 84% PE (x) 13.4* 9.7 20.3 n/a
(%)
Avg. Post Tax OCF as a % EV/EBITDA (x) 7.6** 7.2 13.5 n/a
11% 13% 18% 19%
of IC *(FY08-FY11)
Avg. Net Debt/EBITDA 3.3 2.9 1.8 0.5 ** (FY10-FY11)
TOTAL
PAT CAGR of ~18%, exit RETURN OF
Entry = Rs. 523@ 21x Cumulative Dividends of
multiple of 21x on FY22E
FY20E EPS Rs.27/share
EPS 47%
Page 12
HDFC Bank (HDFCB)
▪ The management has found the right mix of aggression, caution and risk pricing within the bank and prizes itself on being proactive,
Why we like the rather than reactive to market conditions. Consistently the de-facto industry benchmark.
Management? ▪ Ahead of the curve preparedness for an opportunity or minefields has been exemplary. Willing to let go unviable opportunities and
treading a path vacated by competition has been its hallmark.
Where were they ahead of ▪ Despite being the market leader across multiple segments, the bank has not faced any major asset quality challenge. This is evident
from the FY08 - 09 unsecured retail loans blowout, when the bank came out unscathed; also visible in the current corporate asset
quality cycle where the bank has held on to its lofty asset quality standards despite being present in the same operating environment.
▪ They grabbing market share when incumbents exited the retail lending space was an example of conviction led growth strategy.
▪ The Bank’s strength emanates from its CASA franchise backed by a primarily retail deposit base, which leads to low cost of funds and
as a result, a high quality asset book. This is also visible in the bank’s more than ample current liquidity coverage ratio of 118%.
Business Model Strengths ▪ HDFCB’s market leadership in retail credit, counter cyclical approach to large corporate loans, leadership in non-branch transaction
channels, deep entrenchment in systemic CA & SA verticals, productivity uptick, granular fee income streams, proactive accounting
(in view of IND-AS implementation) place the bank in an exalted orbit.
The Bank has got the optimal growth-profitability-asset quality-capital efficiency equation
Demonstrated track record
for 2 decades, which has created shareholder value of >25% CAGR returns since IPO. Management Team & Governance Grid
Steady high margins in a narrow band across interest rate cycles & changing regulatory
Earnings consistency
requirements, led by optimal asset mix, no liability-asset mismatch and low cost deposits. ▪ Mr. Aditya Puri has been the MD & CEO since inception.
Mr. Kaizad Bharucha, ED – Wholesale banking, Mr.
High growth
Over 10 years, the loan book and earnings have grown at a CAGR of 26% and 27% resp. It Sashidhar Jagdishan, CFO and Mr. Jimmy Tata, CRO have
has been adding 70-80bps every year market share among banks to reach 8.4% now. been in the bank for 2+ decades.
Except FY09, NPA additions have been less than 2.5% of assets. Retail delinquencies remain ▪ Multiple exits at the senior management level over the
Healthy Asset Quality years has not caused disruption.
best in class, while low concentration of wholesale borrowers prevents chunky NPAs.
Despite having ~1/4th SBI’s branch reach, HDFCB is the market leader in new age channels Management Continuity Alignment of interest
Delivery channels
– Mobile banking, RTGS and credit cards.
The bank will see a CEO change for A well incentivized ESOP scheme
the first time in CY20. Succession ensures alignment of interests of
Stable Liability Franchise 10 year average CASA is 48% with retail liabilities constituting 70% of total liabilities. planning should see the Promoters, management,
replacement by Sep/Oct-19. employees & shareholders
10 year average RoRWA at 2.3% and Risk adjusted margins at 2.9% are the highest among
Risk pricing Frequency of changes in
banks Related Party Transactions
High capital efficiency aided by best in class return metrics and low capital consumption. The bank distributes home loans
Capital Efficiencies in line with regulatory
HDFCB is expected to maintain an RoA of ~1.8% & RoE of ~18% over FY18-21E for HDFC Ltd. in return for a fee and
requirements.
can buy back 70% of such loans.
Page 13
HDFC Bank
Crystal Ball Gazing
Over FY18-22, HDFCB is expected to clock a 24% business CAGR translating into a loan book size of Rs.15.9tn with deposits of
Rs.18.7tn – a 2.2x increase in business from current levels (loan book of Rs.7.5tn and deposits of Rs.8.3tn). With HDFCB’s stated
expansion strategy of growing faster than the system growth, while slowing down on branches, incremental spend on technology
is expected to keep operating costs at current levels with an average CIR of ~37% in this phase.
Expect NIMs to Increasing leverage to

result in Consistent growth
sustain at ~4.4%
in business to be
levels
rewarded by
RoE expanding to 19%, with no capital requirement
Credit costs averaging at ~100bps to keep RoAs
over the next 3 years; expect 21% CAGR in ABV over Sustaining the multiples
stable at ~1.9%
this phase.
FY05-FY11 FY11-FY14 FY14-FY17 FY18-FY22E FY05-FY11 FY11-FY14 FY14-FY17 FY18-FY22E P/ABV HDFCB Price
FY22E ABV Subsidiaries
multiple Valuation target
NII 35% 21% 21% 23% RoA 1.4% 1.7% 1.9% 1.9%
3.7x 856 3,168 186 3,354
Advances 36% 24% 22% 25% RoE 17.6% 19.3% 19.2% 17.9%
CASA 31% 14% 23% 21% 4.0x 856 3,424 186 3,611
Average 1 yr fwd
Deposits 34% 21% 21% 24% P/ABV (x) 3.4 3.5 3.3 3.7
ABV 25% 18% 24% 21% P/BV (ex. Rev.reserve) (x) 3.3 3.4 3.2 3.6
NII/Assets 4.3% 4.2% 4.1% 4.2%
P/E 21.4 19.4 19.3 24.0
Other Income/Assets 1.8% 1.8% 1.6% 1.5%
Peak 1 yr fwd
Opex/Assets 2.9% 2.9% 2.6% 2.1%
P/ABV (x) 5.3 4.3 3.9 4.0
Credit cost/Assets 1.1% 0.5% 0.4% 0.7%
Gross slippage 2.4% 1.2% 1.3% 2.1% P/BV (ex. Rev.reserve) (x) 5.2 4.2 3.9 3.9
Tier 1 CAR 10.4% 11.7% 12.9% 13.5% P/E 35.7 25.8 23.1 26.3
TOTAL
Entry = Rs.2,012 @ 3.1x Cumulative Dividends of ABV CAGR of 21%, exit RETURN OF
FY20E ABV Rs. 51.0 multiple of 4.0x 81%
Page 14
Kotak Mahindra Bank (KMB)
▪ Strong credit culture & management’s single minded focus on asset quality ensures earnings sustainability - while the bank could go
Why we like the through phases of low growth, earnings/ RoA volatility should be limited. A genuine ’sleep well’ bank for investors.
Management? ▪ Stability and longevity of the high quality leadership team for 2+ decades - something even HDFC Bank has not had. Ability to
integrate ING Vysya Bank - a complex bank with an ‘oil-water mix’ of old generation-MNC bank employee base.
▪ Ability to pull back when risk-reward does not make sense, irrespective of competition. For instance, the bank, sensing issues with
Where were they ahead of the corporate loans back in FY14 ran down the corporate book by 14% in a single quarter, resulting in sub-par loan growth of 9% in
competition in managing an that year.
adverse environment? ▪ On the other hand, currently, sensing opportunity, we are seeing the bank aggressive in the debt resolution space while at the same
time slowing SME loans as KMB believes there is stress building up in the segment.
▪ Consistency in strategies – has remained true to its target segments of HNIs, capital markets & vehicle finance since inception
without fiddling with the core business model. Has come out relatively successful in the worst of asset quality cycles.
Business Model Strengths
▪ Presence of banking, securities, capital markets, insurance & asset management subsidiaries provide an entire gamut of services to
the customer making it a sticky and repeatedly engaging relationship.
Strong track record of healthy return ratios & clean governance history has created
Demonstrated track record
substantial shareholder value of >25% CAGR returns since inception. Management Team & Governance Grid
Over 10 years, demonstrated predictable and consistent growth profile. The loan book and
Earnings Consistency
earnings have grown at a CAGR of 27% and 30% resp. ▪ Mr. Uday Kotak is the Executive VC & MD. Mr. Dipak
Gupta, JMD is in charge of group treasury, wealth
Low Volatility
Stable margins across rate cycles, led by shift to higher yielding loan mix, with low volatility, management & the ARC businesses, with supervision on
led by high fixed rate vehicle finance book. the alternative investments business.
▪ Executive board comprising different business heads drives
Healthy asset quality, 10 year average slippage of 2.1%, negligible assets under various
Healthy Asset Quality group strategy and the overall operations.
dispensations and high provision coverage.
Carefully scoped and integrated acquisition opportunities acquired at the right price – a Management continuity Alignment of interest
Integrate acquisitions
rarity in today’s market also sets the management apart.
Mr. Uday Kotak owning 30%
MD is currently 58 years of age and
Average CASA has improved sharply to 50% with retail liabilities constituting 65% of total stake in the bank and a well
Stable Liability Franchise can possibly continue for a decade
liabilities. incentivized ESOP scheme
more.
ensures alignment of interest.
10 year average RoRWA at 2.2% and Risk adjusted margins at 2.85% are among the best in
Risk Pricing Frequency of changes in
class – close second only to HDFC Bank. Related Party Transaction
Though RoAs have been healthy and improving post the ING Vysya Bank merger to close to In line with regulatory
1.7%, RoE has been subdued to low leverage, which should get addressed over the years. requirements.
Page 15
Kotak Mahindra Bank
Crystal Ball Gazing
Over FY18-22, KMB is expected to clock a 25% business CAGR translating into a loan book size of Rs.4.1tn with deposits of
Rs.4.6tn – a 2.2x increase in business from current levels (loan book of Rs.1.8tn and deposits of Rs.2.1tn). With KMB’s stated
strategy of expanding the branch network at ~100 branches/year and focus more on digital acquisitions, we expect operating
costs to fall from current levels to an average CIR of ~43% in this phase.
Expect NIMs to Increasing leverage to

result in Consistent growth
rebound to ~4.4%
in business
levels
necessary to
RoE expanding to ~18%, with no capital raise
Fall in Credit costs to ~57bps (83bps in FY19) to result
necessary until FY22; expect 16% CAGR in ABV over Sustaining the multiples
in RoAs expanding to ~2.0%
this phase.
FY05-FY11 FY11-FY14 FY14-FY17 FY18-FY22E FY05-FY11 FY11-FY14 FY14-FY17 FY18-FY22E P/ABV KMB Price
FY22E ABV Subsidiaries
multiple Valuation target
NII 47% 18% 30% 24% RoA 1.4% 1.8% 1.7% 1.8%
3.6x 345 1,242 602 1,844
Advances 39% 22% 37% 25% RoE 12.1% 14.5% 12.9% 14.6%
CASA 59% 29% 54% 26% 3.9x 345 1,346 602 1,947
Average 1 yr fwd
Deposits 38% 26% 39% 24% P/ABV (x) 3.3 2.8 3.3 3.9
NII/Assets 4.8% 4.5% 4.3% 3.9%
P/E 34.2 18.7 25.6 28.8
Peak 1 yr fwd
Opex/Assets 4.0% 3.2% 3.2% 2.5%
P/ABV (x) 8.9 3.3 4.1 4.7
Tier 1 CAR 13.1% 16.5% 16.3% 15.5% P/E 85.1 23.7 37.8 33.6
TOTAL
Entry = Rs.1,167 @ 3.1x Cumulative Dividends of ABV CAGR of 16%, exit RETURN OF
Page 16
Sundaram Finance (SUF)
▪ Overwhelming emphasis on asset quality over growth at all times. Despite conservatism in growing the book, the growth rate for the
Why we like the company has been on par with the industry growth rate.
Management? ▪ Knowledge of the market place is unmatched led by the group’s positioning as an automobile manufacturer, OEM supplier across
industry segments and as a financier. A seasoned management team which has seen multiple cycles.
Where were they ahead of ▪ Demonstrated outperformance across cycles over decades; In our professional engagement, we have seen SUF emerge unscathed
from the down cycles seen in late 90s, 2008-09 and 2012-13, when their competition had multiple casualties.
adverse environment? ▪ We have seen the management prepare for challenges a year ahead. Willingness to say no during periods of mispricing & over
zealousness by competition is a trait few possess.
▪ Uniquely in the financials domain, SUF has a track record of not having raised any capital in the last four decades consistently growing
Business Model Strengths through internal accruals and creating shareholder value through the creation of multiple new businesses.
▪ Repeat customers is SUF’s secret sauce leading to low operating and credit costs, which helps SUF source liabilities at AAA pricing and
attract/ retain the best customers, creating a virtuous loop.
Scale in passenger vehicle financing, home finance, insurance, asset management and
Counter-cyclical engines
business services serve as counter cyclical shock absorbers for growth and profitability. Management Team & Governance Grid
Client repeatability at 60% is the best in class vs. peers’ 10%-30% reducing origination costs.
Enviable repeat customers
New customer acquisition is reference-led by existing customers with implicit guarantees. ▪ Mr. TT Srinivasaraghavan has been the Managing Director
of the company since 2004. Mr. Harsha Viji is the Depy
Low business costs
A 10 year average of 2.5% operating costs + credit costs as a % of assets is ~100bps lower MD. Mr. M Ramaswamy, the current CFO of the company
than the nearest competitor. has been in this position since FY12. Mr. AN Raju is the
Director (Operations).
Superior risk adjusted NIMs Although SUF’s NIMs appear lower than peers, risk adjusted NIM at 6% is best in class. ▪ Governance track record is blemishless.
Consistent earnings profile as demonstrated by >2% RoA since FY10, despite being present Management continuity Alignment of interest
Earnings consistency
in a cyclical industry.
3 out of the 12 directors on the
Though reclusive, the promoters’
Transition to 90 days of NPA recognition in FY16, two years ahead of competition, inspite of Board and most members of top 2
Preparedness for challenges & managements’ skin in the
which GNPA came in at 2% . tiers of the management team have
business and ownership is clear
20+ years experience in SUF
AAA rating; Funding cost At 7.9%, SUF commands one of the lowest cost of funds among peers. 85% rollover rates in
Frequency of changes in
advantage retail deposits – one of the highest in the industry. Related Party Transaction
Sundaram & Srinivasan appointed for
Prudent capital allocation. Investments have paid back the capital invested in them in the a term of 5 years. Prior to this,
form of healthy dividends; Listing of SFIL has also helped unlock shareholder value Brahmayya & Co. were auditors of
SUF since inception.
Page 17
Sundaram Finance
Crystal Ball Gazing
Over FY18-22, SUF is expected to clock a 13% CAGR in loan book translating into a book size of Rs.403bn – a 1.5x increase in loan
book from current levels (loan book of Rs.247bn in FY18). SUF’s conservative approach in terms of prioritizing asset quality over
loan growth will continue to mean best in class asset quality coupled with stable costs, however competitive intensity in core
portfolios is likely to constrain NIM while an unfavorable CV cycle along with macro headwinds could possibly impede growth.
Expect NIMs to continue to
trend down to 5.5% over With control over costs and Stable returns with
the next three years with credit quality, expect possible HoldCo discount
bond yields rising expansion could mean
Credit costs to remain best in class due to relentless RoEs to inch up to ~14% and also be driven by
Valuations hovering at same levels
focus on asset quality; still see an increase in GNPAs value unlocking in investments
FY08-FY11 FY11-FY14 FY14-FY17 FY18-FY22E FY08-FY11 FY11-FY14 FY14-FY17 FY18-FY22E P/ABV Core FY22E Core
SOTP Value Price target
multiple ABV
NII CAGR 18% 17% 3% 12% Average RoA 1.9% 2.3% 2.3% 1.9%
AUM CAGR 11% 8% 10% 13% 2.5 418 627 1,712
Average RoE 15.2% 20.8% 16.5% 14.0%
Average NIM 5.4% 6.5% 6.5% 5.5% Average 1 yr fwd 3.0 418 627 1,921
Average Cost to Income 38.2% 36.9% 38.1% 37.7% P/ABV (x) 1.9 2.2 3.6 4.1
ABV CAGR 14% 16% 15% 10%
P/BV (ex. Rev.reserve) (x) 1.8 2.2 3.5 3.9
NII/Assets 4.5% 5.5% 5.5% 4.8%
P/E 7.1 9.3 23.3 23.2
Peak 1 yr fwd
Opex/Assets 1.9% 2.2% 2.3% 1.9%
P/ABV (x) 3.3 3.4 6.1 5.1
Provision/Assets 0.5% 0.3% 0.4% 0.2%
Average Credit Costs 0.6% 0.4% 0.5% 0.3% P/BV (ex. Rev.reserve) (x) 3.2 3.3 5.8 4.9
Average CAR 15.5% 17.2% 19.0% 18.0% P/E 13.2 14.8 33.5 31.6
TOTAL
Entry = Rs. 1,394 @ 2.8x Cumulative Dividends of ABV CAGR of 10%, exit RETURN OF
Page 18
City Union Bank (CUB)
▪ Strategies built around core competence and awareness of its limitations irrespective of competitors’ strategies and market’s
Why we like the
temporary preferences.
Management?
▪ Clarity of thought, consistency of communication and understanding of long term investors’ mind-set brings comfort.
Where were they ahead of ▪ Unlike peers who ventured into consortium based large corporate lending during FY07-12, CUBK’s management stayed away from
that segment sensing the potential risks, at the cost of a lower growth trajectory compared to peers. That strategy ensured that
when the asset quality issues came to the fore for the peer banks, CUBK remained unscathed throughout.
▪ Firm No to ‘Pan India aspirations’, micro finance opportunities and unsecured retail loans insulated the bank from others’ mistakes.
▪ Collateralized lending opportunity to small & medium sized businesses is structurally sound, relationships are sticky over a long term
Business Model Strengths and relatively lower competition offers adequate pricing power especially with PSU banks vacating the space.
▪ Being sole banker for most customers an added advantage, in terms of determining customer behaviour, early detection of cash flow
constraints and first right on collateral in stress situations.
CUB’s market share in TN state (63% of loan book) is still only 2.3% offering huge growth
Long Runway for Growth
opportunity in its own backyard, apart from growth opportunities in contiguous states. Management Team & Governance Grid
Demonstrated predictable and consistent earnings growth of 19% CAGR over the past ten
years, highest among relevant peers. ▪ Dr. N Kamakodi, the current MD & CEO, first joined the
bank as DGM in 2003, and rose through the ranks to
Low Volatility
One of the least volatile RoA profiles in the industry. Last 10 year highest and lowest RoA at eventually take charge of the bank in May, 2011.
1.7% and 1.45% respectively. ▪ Six years back, the bank had identified third tier
management team who are graduating to second tier
10 year peak slippage at <3% and average slippage at 2.0%, negligible restructured assets of
Healthy Asset Quality adding depth.
0.02% currently (lowest in the peer group).
Well distributed asset book with average SME client exposure (67% of loan book) at ~Rs. Management Continuity Alignment of interest
Granular Loan Book
3mn and corporate book (7% of loan book) at Rs. 35mn.
CEO is 44 years old with a long
Board managed. No promoters.
Sticky retail term deposit customer base with 95% renewal, low dependence on wholesale likely tenor. His father, Mr,
Stable Liability Franchise Management has no other
deposits at just ~5% of liabilities and negligible asset-liability mismatch. Narayanan was MD of the bank
related or unrelated businesses.
from 1981-2004.
Robust and sustainable >3.7% NIMs given adequate pricing power with its loyal SME
Pricing Power Frequency of changes in
customer base and stable retail liabilities. Related Party Transactions
Capital Efficiencies High 16%+ sustainable RoEs. Highest RoRWA of 2.3%, highest in the industry. In line with regulatory
Negligible
requirements..
Page 19
City Union Bank
Crystal Ball Gazing

Over FY18-22, CUBK is expected to clock a 20% business CAGR translating into a loan book size of Rs.568bn with deposits of
Rs.668bn – a 1.9x increase in business from current levels (loan book of Rs.294bn and deposits of Rs.345bn). With 80% of
incremental expansion slated for the 4 southern states and a carefully calibrated expansion strategy of 50-75 branches a year, we
expect costs to remain under control with an average CIR of ~39% in this phase. Also expect the slippages levels to normalize over
the period resulting in fall in credit costs.
Consistent NIMs of Sustaining leverage
to result in Consistent growth
3.9-4.0% with falling
in business to be
slippages resulting in
rewarded by
A fall in credit costs to 80bps against 162bps in FY18 Increasing RoE to 17.0%, with no risk of dilution;
Sustaining the multiples
resulting in RoA expanding to 1.7% expect 18% CAGR in ABV over this phase.
FY05-FY11 FY11-FY14 FY14-FY17 FY18-FY22E FY05-FY11 FY11-FY14 FY14-FY17 FY18-FY22E P/ABV multiple FY22E ABV Price target
NII 25% 22% 16% 16% RoA 1.5% 1.6% 1.5% 1.6% 2.5x 102 255
Advances 29% 20% 14% 19% RoE 21.3% 22.4% 16.6% 16.1%
2.7x 102 275
CASA 25% 16% 22% 19% Average 1 yr fwd
Deposits 27% 19% 11% 19% P/ABV (x) 1.0 1.4 1.8 2.6
NII/Assets 3.2% 3.1% 3.3% 3.7%
P/E 5.0 7.1 11.3 16.9
Peak 1 yr fwd
Opex/Assets 1.8% 1.8% 2.0% 2.0%
P/ABV (x) 2.6 1.8 2.7 3.1
Tier 1 CAR 11.2% 12.8% 15.2% 15.2% P/E 13.1 9.9 17.4 19.6
TOTAL
Entry = Rs.168 @ 2.3x Cumulative Dividends of ABV CAGR of 18%, exit RETURN OF
Page 20
AIA Engineering (AIA)
▪ Persistence and vision to offer total cost of ownership solutions model than selling products in a highly competitive export market is
Why we like the commendable where very few Indian engineering companies have demonstrated consistent success vis-a-vis global competition
Management? ▪ Steady and disciplined strategy of single manufacturing location v/s capacity near to the customer approach of its competition.
Sticking to organic growth approach irrespective of commodity cycle shows prudent capital allocation decision
Where were they ahead of ▪ Even during weaker commodity cycle between FY13-FY15, focus was to increase their market share in the mining segment where the
presence was meager. This helped them buck the trend with average revenue growth of ~15% in an otherwise flat market growth
adverse environment? ▪ Despite presenting a larger opportunity in an oligopolistic market, capacity additions were in a calibrated manner in the past decade
to match with volume visibility
▪ Core competency of knowledge of end application, metallurgy and design are its key strengths. This combination forms the bedrock
which helps customers reduce wear and tear and operational costs. Team of engineers and metallurgists are best-in-craft.
▪ Significant cost advantages over Magotteaux while the product and service quality is at par with Magotteaux, should likely to benefit
both market share gains and an overall increase in opportunity size
Earnings Consistency Demonstrated consistent earnings CAGR 13%/16% over the past ten/five years respectively
Average ten/five year operating margins were stable in the range of 24-25%; Operating
Earnings Volatility
margins have shown signs of volatility in the past. High/low range of 29%/18% ▪ Mr. Bhadresh Shah, Promoter & MD along with his team
possesses more than four decades of experience in the
Pre-tax OCF/EBITDA conversion at ~78% between FY08-18 indicates strong working capital manufacturing and design of various kinds of value added,
Superior cash conversion
management practices impact, abrasion and corrosion resistant high chrome
castings.
Strong pipeline with low Recent order-win from Barrick, world’s largest gold miner indicates that established
capacity utilisation companies are entrusting AIA’s capabilities; Capacity utilisation at ~55% provides visibility
Low cost advantages with strong balance sheet provides strong headroom to growth given Management continuity Alignment of interest
Low cost advantage
that current mining volumes are still at <5% of the overall 3mn MT grinding media market
Mr. Kunal Shah, ED is 40 years old
Consistent FCF generation in the last 7 out of 10 years; 60% conversion from total OCF with a long likely tenor. His uncle, 58.5% promoter holding. No
FCF consistency Mr. Bhadresh Shah is the Managing related/unrelated businesses.
generation between FY13-18
Director
Offering solution than products, manufacturing facility at low cost region (Gujarat) and
sticky relationship with customers helps pricing the products better Related Party Transaction
Statutory Auditors of the
Capital Efficiencies Average RoEs of 20% and pre-tax RoCE of 19% between FY08-18 is superior among its peers Negligible transactions with related
company were changed in 2017
parties
to M/s. BSR & Co. LLP
Page 21
AIA Engineering
Crystal Ball Gazing
Over FY18-22E, AIAE to grow revenue and PAT by CAGR 19% and 18% respectively, on the back of continued market penetration
in the high chrome grinding media market. Expect EBITDA margins to gradually improve through FY22E to ~24% driven by better
pricing power and operating leverage. With low capex requirements, we expect healthy free cash flow generation.
RoE to remain healthy. Expect company to generate Already trading at high multiple
Expect revenue to grow by 19% CAGR
strong cash flows Limited scope for further expansion
FY07-FY11 FY12-FY14 FY15-FY17 FY18-FY22E FY07-FY11 FY12-FY14 FY15-FY17 FY18-FY22E P/E multiple FY22E EPS (mn) Price target
Revenues CAGR 21.6% 21.5% 2.6% 17.2% RoE (%) 22.3% 18.0% 20.4% 16.4% 30.0x 92.6 2779
Gross Margin 55.3% 62.0% 66.0% 59.3% RoCE (%) 21.6% 16.9% 19.3% 15.6% 34.0x 92.6 3149
EBITDA CAGR 17.1% 26.3% 8.1% 15.0% RoIC (%) 32.0% 23.4% 28.5% 20.3%
EBITDA margin 24.6% 20.4% 28.0% 23.9% Average 1 yr fwd
EPS CAGR 18.0% 24.8% 8.7% 13.8% PE (x) 15.4 14.0 21.9 27.4
Total Asset Turnover (x) 1.0 1.1 0.9 0.9 EV/EBITDA (x) 10.3 8.8 13.9 18.1
Total WC days 133 141 140 162 Peak 1 yr fwd
Pre-tax OCF/EBITDA (%) 65.8% 80.8% 91.1% 84.1% PE (x) 27.2 16.5 28.5 33.6
Post Tax OCF as a % of IC 19% 23% 26% 16% EV/EBITDA (x) 17.2 11.1 18.9 22.2
Debt/EBITDA (0.5) (0.3) (0.1) (0.0)
TOTAL
FY20E EPS Rs. 30/share
EPS 66%
Page 22
V-Guard (VGRD)
▪ Leveraging its market leadership in voltage stabilizers, management has metamorphosed the company from a single product/single
Why we like the geography company to a multi product emerging pan-India player in Consumer Electrical segment
Management? ▪ Clarity with measured growth strategies, focus of being relevant in both products/geography (top 3), consistency and transparency in
communication brings comfort
Where were they ahead of ▪ Reduced the business seasonality by continuous launch of new products over the last 7 years which caters to both summer and
winter seasons; VGRD clocked >25% CAGR even during weaker macro periods of FY11-FY14. due to aggressive product launches with
considerable market share gains was visible in stabilizers, water heaters and fans.
▪ Focus on geographical diversification with revenues from South currently at 64% v/s 91% in FY09
▪ Products catering to discretionary consumption, electrification and real estate construction amplifies diversified growth possibilities
Business Model Strengths ▪ More focus on manufacturing v/s outsourcing which can expand gross margins and safeguard against higher commodity prices
▪ Well-entrenched distribution network with products which can funnel through modern retail, electrical and kitchen channel
Growth Consistency Higher double digit growth in 9 out of the last 10 years
Demonstrated consistent earnings CAGR >30%/16% over the past ten/five years
respectively, highest among relevant peers ▪ Mr. Kochouseph Chittilappilly is the Chairman and Mr.
Mithun Chittilappilly is the MD. Mr. Ramachandran,
Earnings Volatility Less volatile. Average ten year operating margins of 9.5%; High/low range at 10.1%/7.6%
Professional Director & COO with loads of experience in
FMCG sector is well supported by a bunch of professionals
with varied background
Last 5 years Average CROCI at ~19% implies superior and stable earnings quality and
CROCI
attractive cash conversion
Management continuity Alignment of interest
Resolve to be number one, two or a strong number three; Vacate segments where they do
Granular approach 64.2% promoter holding. No
not occupy these positions, protecting the capital. Product level RoCE is being measured Mithun, MD is 38 years old with a
subsidiaries or any related
long likely tenor. His father, Mr.
Consistent FCF generation in the last 5 years; 67% conversion from total OCF generation businesses ensures alignment of
FCF generation Kochouseph is the Chairman
between FY13-18 shareholder interest
Focus on top 3 positioning, transparency in pricing and dealer friendly initiatives provides Related Party Transaction
Pricing Power accounting policy & auditors
adequate pricing power
No material transactions with company were changed in 2013
Capital Efficiencies Average RoEs of 22% between FY08-18 which is further on an improving trajectory related parties to M/s. S R Batliboi & Associates
LLP
Page 23
V-Guard
Crystal Ball Gazing
Over FY18-22E, V-Guard to grow revenue and PAT by CAGR 13% and 21% respectively, driven by expanding distribution reach and
continuous traction in key product segments save for cables segments which continues to face weakness in end market demand.
EBITDA margin should be range bound at ~10%.
Expect V-Guard revenue to grow by ~13% CAGR. Already trading at high multiple
Cash flow to remain healthy
EBITDA margin to be ~10% Limited scope for further expansion
EBITDA CAGR 28.9% 18.8% 19.4% 12.1% RoIC (%) 18.4% 18.9% 23.6% 26.0%
EPS CAGR 22.4% 21.6% 13.1% 14.4% PE (x) 10.8 13.2 26.5 41.5
Debt/EBITDA 1.0 1.3 0.2 (0.6)
TOTAL
Entry = Rs. 210 @ 46x Cumulative Dividends of
FY20E EPS Rs. 3.5/share
EPS 35%
Page 24
Havells (HAVL)
▪ Credible transformation from a normal B2B business to a household name led by the founder promoter along with the current
Why we like the second generation is commendable. Focus to remain amongst the top five players in each of the products with no diversification in
Management? to unrelated products; Building capabilities with 100% own manufacturing philosophy v/s outsourcing strategy of its peers.
▪ Consistently finding new avenues to grow when existing businesses/products reach to a considerable size.
▪ Continuous premiumization backed with consistent product innovation during a time (FY10-FY13) when their key competitors were
Where were they ahead of struggling bolstered them in grabbing the market opportunity and gain market share across product category.
competition in managing an ▪ Incentivizing dealers (medical insurance cover) and aggressively/strategically advertising has led to premiumization. Decision to stay
adverse environment? away from the economy space which was targeted by its peers has led to consistent margin expansion even during adverse times.
▪ Corrected their past capital allocation mistake by exiting from its LBO funded acquisition in European lighting company, Sylvania.
▪ Wide range of product portfolio balances the cyclical nature of the real estate market. Acquisition of Lloyd is a step in the right
direction which opens up a large category which caters to the entire household requirement (both electrical & durables)
▪ Significant investments in people, marketing, distribution and technology/R&D platform. Pan-India distribution network with
1,10,000 touchpoints, targeting tier 3/4 cities, uniform strategy for dealers and focus on new geography like East.
Growth Consistency Healthy double digit growth in 6 out of the last 10 years
Have demonstrated double digit earnings growth over the past 7 out of 10 years. Have
displayed PAT CAGR of 14%/17% over the pas 5/10 year period ▪ Mr. Anil Rai Gupta, Chairman & MD, has rich experience
in the field of marketing and is well supported by a group
Earnings Volatility Less volatile. Average ten year operating margins of 12.5%; High/low range at 14.0%/9.2%
of professionals with diversified background.
Pre-tax OCF/EBITDA conversion at ~106% between FY08-18 indicates strong cash

Superior Cash Conversion
generation
Management continuity Alignment of interest
Have grown market share across most categories/sub-categories in the core business. Also,
Granular approach 59.6% promoter holding. No
have expanded product portfolio consistently to drive incremental growth
Anil Rai Gupta, Chairman & MD is subsidiaries or any related
Consistent FCF generation in the last 5 years; 75% conversion from total OCF generation 49 years old with a long likely tenor. businesses ensures alignment of
FCF generation shareholder interest
between FY13-18
Focus on top 3 positioning, transparency in pricing and dealer friendly initiatives provides Related Party Transaction
Pricing Power accounting policy & auditors
adequate pricing power
No material transactions with
Capital Efficiencies Average RoEs of ~22% and pre-tax RoCE of 21% between FY08-18 company were changed in 2016
related parties
to M/s. S R Batliboi & Co. LLP
Page 25
Havells
Crystal Ball Gazing
Over FY18-22E, HAVL to grow revenue and PAT by CAGR 14% and 17% respectively. Growth should be broad-based across most
categories with pockets of weakness in switches and switchgear segments due to end market (housing) weakness. Lloyd’s
consumer business revenue should grow by CAGR 19% during the same period
We believe Havells would register a revenue growth Already trading at high multiple
Return metrics should remain healthy
of 14% CAGR Limited scope for further expansion
EBITDA CAGR 23.6% 24.0% 8.2% 17.3% RoIC (%) 36.8% 32.1% 30.6% 33.9%
EPS CAGR 19.5% 25.6% 7.6% 16.8% PE (x) 15.0 17.1 30.0 40.4
Total WC days 10 1 -2 2 Peak 1 yr fwd
Debt/EBITDA (0.0) (0.3) (1.5) (1.3)
TOTAL
FY20E EPS Rs. 16/share
EPS 31%
Page 26
KNR Constructions (KNR)
▪ Strategies built around core competence and awareness of its limitations irrespective of macro economic variable changes
Why we like the
Management? ▪ Geographical focus, consistent bidding strategy (cash contracts over BOT) with pricing discipline and focused execution with direct
intervention from the promoters at every stage
Where were they ahead of ▪ Track record of down-sizing the orderbook during adverse macro (FY12-14) in the past sets KNR apart from its peers. Orderbook
declined by 60% in FY14 v/s FY12; Track record of no fund raise in an otherwise capital guzzling sector
adverse environment? ▪ Consistent infusion of capital to repay the debt at asset owning entities (BOT assets) to avoid default situation. Demonstrated track
record to maintain/improve credit rating at all times
▪ Commitment and consistency in strategy, prefer to remain as a main contractor along with strong balance-sheet are key strengths.
Business Model Strengths ▪ Good relationship and reputation of strong execution have enabled them to be more aware of project risks ahead (evident from
negligible % of slow-moving orders and consistent EBITDA margins and the resultant cashflow conversion)
Growth Consistency Consistent execution track record during strong orderbook phase
Earnings Volatility 16% average operating margins over the last 10 years with 300bps of variance ▪ Clear succession plan in place with Mr. Jalandhar Reddy,
aged 46 years with 19 years of experience is expected to
Strong Cash Conversion Cumulative Pre-tax OCF/EBITDA at 95% between FY08-18
take over from his father as MD in future
▪ Sticky core bidding and project execution team with over
CROCI has improved to 24% over FY15-FY18 vs 13% (highest among the peers) over FY10- decades of experience gathered in KNR
CROCI FY15 implying superior earnings quality, low investments in assets and attractive cash
conversion
South dominant geographical mix, concentrated large sized orders and focus on keeping Management continuity Alignment of interest
Orderbook Quality
the lead distance lower between projects
No conflict; 56% promoter
ED is 46 years old with a long likely
FCF generation in 5 out of 7 years between FY12-18 is commendable in a sector with weak holding. Promoter group has no
FCF generation consistency tenor. His father, Mr. Narasimha
business characteristics other related or unrelated
Reddy is the MD since inception
businesses.
Pricing Power Demonstrated better pricing discipline during bidding process across cycles Frequency of changes in
Related Party Transaction
No material transactions which Auditor has been changed after
Capital Efficiencies Industry leading average RoEs of 17.7% between FY08-18 could have potential conflict with 7 years. Current Auditor is M/s.
the company's interest K.P. Rao & Co.
Page 27
KNR Constructions
Crystal Ball Gazing
We forecast the EPC Revenue to grow at a CAGR of 18% over FY18-22E, driven by a book-to-bill ratio of 2.9x and Company’s
ability to win minimum of Rs. 30bn road projects every year; however, due to discontinuation of 80IA benefits the PAT CAGR is
subdued at 4% over the same period. We expect EBITDA margin to moderate to ~15% over FY18-22E.
Return metrics to decrease due to reduction in

Flat Multiple
Revenue to grow at a CAGR of 18% for FY18-22E margin and higher cash in the books. Cash flow
On account of cost + margin nature of business
generation to be healthy.
Standalone FY12-FY14 FY15-FY17 FY18-FY22E Standalone FY12-FY14 FY15-FY17 FY18-FY22E Construction

Equity Value BOT Asset Target Price
Business
Revenues CAGR 2.6% 35.9% 19.6% RoE (%) 12.8% 19.1% 18.4%
RoCE (%) 11.1% 16.1% 16.0% P/E Multiple Rs./Share FCFE Rs./Share
Gross Margin
RoIC (%) 12.1% 16.9% 19.1% 11.0x 247 53 300
EBITDA CAGR -1.8% 35.1% 19.7%
Average 1 yr fwd
EBITDA margin 16.6% 15.4% 16.9% 13.0x 292 53 345
PE (x) 5.1 14.6 -
EPS CAGR 3.6% 60.6% 15.0%
EV/EBITDA (x) 2.3 8.2 -
Total Asset Turnover (x) 1.0 1.0 1.4
PB (x) 0.6 1.9 -
Total WC days 21 35 17 Peak 1 yr fwd
Pre-tax OCF/EBITDA (%) 122.4% 127.9% 95.5% PE (x) 7.9 20.7 -
Post Tax OCF as a % of IC 22% 26% 25% EV/EBITDA (x) 3.3 11.8 -
Debt/EBITDA 0.5 0.6 (0.1) PB (x) 0.9 2.7 -
TOTAL
Exit Multiple of 11x P/E RETURN OF
Entry = Rs. 190 @ 10.3x Cumulative Dividends of
standalone, Asset Value
FY20E standalone EPS Rs. 1.2/share
of Rs. 53 59%
Page 28
Hindustan Unilever (HUVR)
▪ HUVR’s management is one of those rare global MNC managements in India, which enjoys unquestionable confidence of its parent to
decide and execute strategies as per local needs (e.g. Pureit water purifier, Ayurveda portfolio, GSK CH merger etc.)
Why we like the
Management? ▪ The EPS accretive GSK CH merger underscores HUVR’s confidence of their prevailing business modus operandi to turnaround the
struggling GSK CH operations. Guidance to deliver double digit revenue growth and improve operating margins by 800-1000bps of a
mature business underscores HUVR’s unparalleled business model strength.
Where were they ahead of ▪ It has managed to grow even in the highly penetrated categories such as soaps and laundry through sub segmentations such as face
washes and fabric conditioners.
adverse environment? ▪ To highlight the depth of the management quality, HUVR was one of the few companies in the FMCG space that successfully
managed the last ~12 months of high intensity disruptions - Demonetisation (unplanned) and GST (planned).
▪ Market leadership, pricing power of its strong brands helps HUVR weather exposure to a wide commodity basket, and limit significant
gross & operating margin vagaries despite a consistent high A&P outlay.
▪ HUVR has an unsurmountable distribution reach/ efficiency advantage, which gives them a significant leverage to turnaround new
product innovations quicker and have a cost control throughout the distribution supply chain.
Ability to create growth Even in highly penetrated categories such as detergents and personal wash, HUVR delivers
opportunities growth exhibiting its ability to create behavior changes and gain market share. Management Team & Governance Grid
Categories contributing ~74% of HUVR’s revenues currently have low penetration at ~40%
Runway for growth
(avg.) and huge premiumisation opportunities offering long runway for future growth. ▪ CEO – Mr. Sanjiv Mehta (58 years), the CEO since October
2013 has been with Unilever for ~25 years. COO – Mr.
Pricing Power
Over the last 10 years, the highest fall in gross margins is ~250bps yoy, reflecting strong Pradeep Banerjee (58 years) has been with Unilever for 37
pricing power. years and has been ED–Supply Chain since March 2010.
CFO – Mr. Srinivas Pathak (46 years old) has been with
It has managed to improve operating margins ~660bps in 8 years due to which earnings
Low earnings volatility Unilever for ~18 years and has been the CFO since 2017.
CAGR has been 22%, though revenue and volume growth CAGR has been muted at 9%.
Entrenched Distribution Management continuity Alignment of interest

HUVR enjoys exclusive distributors and reaches out to 8mn+ retail outlets.
network
Our key comfort is that the core
It has been able to groom competent top management teams consistently by leveraging philosophy and culture of the firm Parent’s entire India biz under
Managing talent is institutionalized and personality HUVR’s umbrella.
the human resource pools available across its global network.
neutral.
HUVR on an average has paid ~88% of its profits as dividends over the past 8 years, highest
High dividend payout Frequency of changes in
among our coverage universe. Related Party Transaction
In their acquisition of GSK CH, HUVR devised an all equity deal using their premium valued BSR & Co.LLP have been the
Capital allocation discipline Minimal. Royalty at ~3% of sales
stock price for the merger thereby enabling them to extract maximum value. auditors for the past 5 years.
Page 29
Hindustan Unilever
Crystal Ball Gazing

Hindustan Unilever revenues are likely to grow at a ~16% CAGR over the next three years, supported by volume growth uptick.
Cost efficiency programs in the base business and ~600BPS operating margin expansion in GSK CH operations should lead to
operating margins expanding by ~246bps to 23.6% in FY22. Earnings are anticipated to increase at a ~19% CAGR over the next
three years. Assuming sector leadership valuation multiples to sustain given the comfort over growth visibility and operating
margin expansion initiatives.
Revenue growth of Capital Efficiency to come down Premium
16% to be aided by on account of the GSK CH merger valuations to be
volume growth sustained
Capital Efficiency should be maintained at current Being at the richest end of the already richly valued
Revenue growth to resurface from uptick in rural
levels, Premium valuation multiple in comparison to bucket of consumer stocks, we constrain further
consumption spending.
its FMCG peers to be sustained. multiple expansion.
FY07-FY11 FY11-FY14 FY14-FY18 FY18-FY22E FY07-FY11 FY11-FY14 FY14-FY18 FY18-FY22E P/E multiple FY22E EPS (Rs.) Price target
Revenues CAGR 13% 13% 5% 16% RoE (%) 97% 102% 70% 41% 47x 47.4 Rs.2230
Gross Margin 47.9% 47.9% 51.0% 53.5% RoCE (%) 83% 82% 58% 37% 50x 47.4 Rs.2372
EBITDA CAGR 13% 21% 12% 19% RoIC (%) -85% -295% 412% 508%
EPS CAGR 31% 21% 9% 18% PE (x) 24.1 30.6 41.1
Total Asset Turnover (x) 7.0 6.1 4.1 2.0 EV/EBITDA (x) 20.0 23.5 30.1
Total WC days -17 -22 -25 -31 Peak 1 yr fwd
Pre-tax OCF/EBITDA (%) 121% 109% 104% 105% PE (x) 38.2 41.5 52.0
Post Tax OCF as a % of IC -1242% -253% 908% 593% EV/EBITDA (x) 32.2 31.6 38.0
Debt/EBITDA -1.0 -1.4 -0.9 -0.6
TOTAL
Entry = Rs.1,826 @ 52x Cumulative Dividends of
FY20E EPS Rs.67.5/share
EPS 34%
Page 30
Asian Paints (APNT)
▪ Phenomenal demonstrated ability by the management to consistently gain market share for decades even while remaining a
Why we like the dominant market leader in a market having global leaders.
Management? ▪ Its capital allocation track record has been at par with the best. While protecting and expanding the current moat, APNT hasn’t
hesitated from investing in future growth drivers.
Where were they ahead of ▪ Set a tone for the industry in venturing ‘ahead of time’ into premium emulsion paint and later into wall papers. It is launching AP
homes – a one stop shop for all home needs, again well ahead of the industry.
adverse environment? ▪ The company has also been a pioneer in increasing B2C interaction launching experience retail stores, (Colour world), colour
consultancy @ home and home painting services significantly trying to enhance its strong brand equity.
▪ During FY11-14, when crude oil prices doubled, APNT effected ~15 price hikes cumulating to 40%, thereby protecting margins.
Despite effecting this price hike, the company’s volume growth remained in healthy double digits, reflecting its pricing power.
▪ In the oligoplisitc Indian paints market, the company’s total outlay on A&P is healthy in mid-single digits given that even today paints
needs B2B marketing with limited consumer decision making which though is increasing.
Reach, repeat usage and premiumization remain the company’s time tested growth
formula, which is unlikely to change over the ensuing period. Management Team & Governance Grid
The company has demonstrated a consistent growth profile with volume, topline and
earnings CAGR at ~9%,~9% & ~13% respectively over the past 5 years. ▪ Asian Paints is owned by the Choksi, Vakil & Dani families.
Majority of the BoD constitute members from all the three
Pricing Power& Low Gross and operating margins have been stable at ~43%-44% and high teens respectively families. Mr. K.B.S Anand has been the MD & CEO of Asian
Volatility with low volatility reflecting pricing power. Paints since April 2012. He has over three decades of
experience in the company. Mr. Jayesh Merchant is the
The company invests significantly in branding as reflected in last five year average A&P
Healthy A&P spend current CFO.
outlay of ~4.4% of total revenues.
Margin stability and cash Operating margins and cash generation (as a % of sales) with a 5 year average of ~18% and Management continuity Alignment of interest
generation ~11% respectively.
Our key comfort is that the core
CROCI has in high teens over the last few years; Capital efficiencies remained healthy as philosophy and culture of the firm
Robust cash return metrics Rightfully aligned
reflected in mid 20s RoEs but has been slightly volatile owing to capex for new facilities. is institutionalized and personality
neutral.
The company’s dividend policy has been consistent paying out almost 50% of its earnings
Dividend payout Frequency of changes in
while also investing back the remaining to keep the growth trajectory. Related Party Transaction
it has acquired two companies viz. Ess Ess Bathroom fittings & Sleek Kitchenware in the None; Current auditors are M/s.
Capital allocation discipline Nothing Material
recent past. Capital deployed in these segments are minimal, but symbolises its strategy. Deloitte Haskins & Sells LLP
Page 31
Asian Paints (APNT)
Crystal Ball Gazing
APNT has time and again re-iterated itself to be a significant outperformer among consumer companies in terms of growth and
earnings across cycles given the oligopolistic nature of the decorative paint industry and its indomitable leadership. We believe
that the crux of sectoral competitive advantage emerges from the current distribution structure and unless any disruptive
innovation happens, we strongly believe the incumbents will continue to enjoy the ever expanding pie of the Indian decorative
paints market.
We believe APNT would deliver a revenue and

Capital efficiency to remain at healthy rates in the Healthy growth prospects and resilient business
earnings CAGR of ~16% & ~18% respectively over the
medium term model ‘justify’ the expensive valuations.
next four years
Revenues CAGR 21% 18% 6% 16% RoE (%) 41.8% 36.5% 28.8% 27.7% 40x Rs.40.8 Rs.1,632
Gross Margin 41.1% 41.2% 44.1% 41.9% RoCE (%) 32.7% 31.8% 25.0% 25.0% 41x Rs.40.8 Rs.1,673
EBITDA CAGR 28% 15% 15% 17% RoIC (%) 33.3% 32.9% 25.7%
EPS CAGR 31% 13% 17% 18% PE (x) 22.4 29.3 39.8
Pre-tax OCF/EBITDA (%) 93.4% 87.6% 90.9% 84.9% PE (x) 28.1 36.8 50.0
Post Tax OCF as a % of IC 32.4% 29.3% 23.8% EV/EBITDA (x) 17.6 23.2 31.6
Debt/EBITDA 0.43 0.17 0.16 0.11
TOTAL
Entry = Rs.1,138 @ 40x Cumulative Dividends of
EPS 52%
Page 32
Page Industries (PAGE)
▪ PAGE has cracked the complex equation of remaining affordable yet aspirational, unmatched by its competition. The management’s
Why we like the classic strategy of creating heightened brand aspiration and following it up with numerous brand extensions has done wonders.
Management? ▪ The management is extending the brand loyalty seamlessly into the adjacencies like leisure wear, which we believe is an excellent
strategy.
Where were they ahead of ▪ While brand ‘Jockey’ has found growth challenging across other markets, we believe it is the management’s strategy which aided
‘Jockey’ to grow into a Rs.~15bn brand in India.
adverse environment? ▪ In a highly fragmented and unorganised sector, PAGE’s revenues and earnings have grown at a robust CAGR of ~29% and ~31%
respectively over the last ten years across cycles significantly outpacing the industry growth rate of low to mid teens.
▪ Its healthy and sustained capital efficiency, owing to an asset light model of distribution with the wholesale channel contributing to
Business Model Strengths more than 85% of total revenues. The company’s capital allocation history has been robust.
▪ Unlike its peers in the sector, PAGE does not employ any brand ambassadors. It instead invests significantly on A&P across media
building a ‘moat’ of being an aspirational brand though at affordable price points.
Long Runway for Growth Reach, repeatable, aspirational and affordable – This cannot go wrong for a long time.
earnings CAGR at ~13%,~24% and ~25% respectively over the past 5 years. ▪ Page Industries is promoted and managed by the Genomal
family with Mr. Sunder Genomal at the forefront of
Pricing Power& Low Gross and operating margins have been fairly stable at 58% and 20% respectively with low operations.
Volatility volatility reflecting pricing power. ▪ Mr. Vedji Ticku, is the current CEO and in the past served
as the Chief Operating Officer of Page Industries Limited.
Healthy A&P spend
outlay of ~4% of total revenues.
Though professionally managed,
CROCI has been volatile in the past on account of heightened inventory in select years we believe the strategy and
leading to poor operating cash flows, the same has normalized in the past few years. heightened motivation still stems
from the promoters
the management has been professional enough to share fruits of its success with minority
Dividend Policy Frequency of changes in
shareholders too, with an average dividend pay-out of ~54% over last ten years) Related Party Transaction
Capital Efficiencies Robust RoE. Average dividend pay-out of ~54% over last ten years None; Current auditors are S R
Nothing of a concern
Batliboi & Associates LLP
Page 33
Page Industries
Crystal Ball Gazing
Page Industries revenues and PAT is expected to grow at a CAGR of ~22% and ~27% respectively over the next four years on the
back of long term penetration, brand extension and per capita consumption prospects remain favourable .
Page Industries revenues and PAT is expected to grow

at a CAGR of ~22% and ~27% respectively over the
next four years on the back of long term penetration, Capital efficiency to remain robust given the We believe an achievable ~20% earnings growth
brand extension and per capita consumption prospects increasing scale of operations alongside an asset CAGR over the next 3-4 years makes PAG a
remain favourable . light business model. lucrative compounding engine.
FY05-FY11 FY11-FY14 FY14-FY17 FY18-FY21E FY05-FY11 FY11-FY14 FY14-FY17 FY18-FY21E Implied P/E multiple FY22E EPS (Rs.) Price target
Revenues CAGR 37% 34% 22% 22% RoE (%) 56% 61% 51% 44% 45x Rs.757 Rs. 34,065
Gross Margin 50.4% 54.4% 58.0% 57.8% RoCE (%) 31% 38% 39% 43% 46X Rs.757 Rs.34,822
EBITDA CAGR 51% 39% 20% 24%
EPS CAGR 55% 38% 20% 27% PE (x) 16.3 28.0 47.8 52.5
Pre-tax OCF/EBITDA (%) 65% 90% 92% 74% PE (x) 26.9 37.7 67.7 66.2
EV/EBITDA (x) 16.1 24.3 44.2 42.4
TOTAL
Entry = Rs.26,616@ 58x Cumulative Dividends of
FY20E EPS Rs.940/share 29%
EPS
Page 34
Berger Paints (Berger)
▪ Though being the No.2 player in the Indian paints sector, the market leader commands more than thrice the market share of BRGR
Why we like the reflecting the ‘moat’ the market leader has created in the marketplace. Despite this, Berger’s management through aggressive
Management? network expansion (grows its dealer network by ~10% annually), highest penetration of tinting machines in dealer network and via
differentiated/premium product profile has been garnering market share to grow its revenues in-line/above the market leader.
Where were they ahead of ▪ In addition to high A&P outlay (company’s total spend on branding as a % of total revenues is the highest in the sector) and multiple
competition in managing an initiatives like Express painting etc the company has managed to create a robust brand equity in a segment which by the day is
adverse environment? transitioning to a B2C from a B2B model.
▪ Inherent strengths which the company enjoys being part of the oligopolistic Indian paints sector. As witnessed multiple times, during
Business Model Strengths deflationary cycles the company doesn’t pass on (or limited benefit passed on) decreased raw material prices benefit to consumers
while in an inflationary cycle fully passes on any price increases to the consumer. Despite this prevailing scenario, we note that
demand remains inelastic reflecting the superior pricing power of the company.
Reach, repeat usage and premiumization remain the company’s time tested growth
formula, which is unlikely to change over the ensuing period. Management Team & Governance Grid
earnings CAGR at ~9%,~9% & ~9% respectively over the past 5 years. ▪ CEO & MD – Mr. Abhijit Roy – has been at the helm of
affairs since 2012 (has been with the company for more than
Pricing Power& Low Gross and operating margins have been largely stable at ~41% to ~43% and ~15% two decades). CFO/Director, Finance - Mr. Srijit Dasgupta –
Volatility respectively with low volatility on the downside reflecting pricing power. has been the CFO since 2011 – total experience of close to
three decades
Healthy A&P spend
outlay of ~5.6% of total revenues.
Fine mix of promoter and
CROCI has in high teens to low 20’s over the last few years; Capital efficiencies on the professional personnel lead the
uptrend given significant improvement in profitability over the last few years. company. Culture has been largely
institutionalized.
The company’s dividend policy has been fairly consistent paying out almost 35% to 40% of
its earnings while also investing back the remaining to keep the growth trajectory intact. Related Party Transaction
Though the company has signed multiple MOU’s/acquired ‘niche’ business in the recent
Capital allocation discipline past, it follows a largely robust capital allocation strategy not ‘moving’ away from its core None; Current auditors are S R
Nothing Material
segments where it is among the top. Batliboi & Co LLP
Page 35
Berger Paints (Berger)
Crystal Ball Gazing
We believe BRGR should continue to outperform industry growth led by incessant product and marketing initiatives. Gross
margins to contract as raw material prices stabilise however operating margins expansion to accrue on the back of rise in
operating leverage. Multiples to hover around current levels
Revenues and Earnings to grow at a CAGR of Gross margins to come down as raw material Multiples to hover around 40x provided rerating
~16% & ~20% respectively over next four years. headwinds emerge doesn’t arise which don’t currently foresee
Revenues CAGR 18% 18% 6% 16% RoE (%) 26.2% 24.5% 24.5% 25.6% 38x Rs.9.9 Rs.376
Gross Margin 35.4% 38.1% 42.0% 40.9% RoCE (%) 19.7% 17.8% 18.8% 22.7% 39x Rs.9.9 Rs.386
EBITDA CAGR 19% 20% 19% 18% RoIC (%) 22.2% 21.9% 20.5% 24.4%
EPS CAGR 15% 18% 21% 19% PE (x) 18.0 22.5 40.3 49.6
Pre-tax OCF/EBITDA (%) 0.84 0.78 1.03 0.86 PE (x) 27.7 32.9 53.0 57.3
Post Tax OCF as a % of IC 0.19 0.18 0.26 0.22 EV/EBITDA (x) 18.6 20.0 32.0 34.5
Debt/EBITDA 1.29 1.32 0.73 0.29
TOTAL
Entry = Rs.314 @ 42x Cumulative Dividends of
EPS 32%
Page 36
Relaxo Footwear (Relaxo)
▪ The management identified a vacuum in the market for a branded footwear player in the ‘value for money’ segment, designed new
Why we like the brands and fulfilled the requirement with the help of celebrity endorsements.
Management? ▪ The management’s three pronged strategy of branding, premiumization and penetration has been successful with its revenues
growing at a robust CAGR of ~20% in the last decade.
Where were they ahead of ▪ Relaxo’s revenues which for at least 10 years grew consistently, witnessed a standstill in FY17 however normalized in FY18. While a
general slowdown was a factor, we admire the management for their stance of ‘not chasing growth at the cost of compromising on
cash flows’ as competitors extended favorable trade terms to distributors/retailers compromising on the credit quality.
▪ Also, the management took the wise decision of not creating a capital intense retail footprint.
▪ Pricing power in a highly fragmented and competitive space is reflected in the company’s per unit realization growing at a CAGR of
Business Model Strengths ~10% over the last ten years beating the inflation rate significantly led by premiumization and consistent annual price hikes.
▪ The company’s strategy to be a wholesale led model realizing the capital intensity of a retail model is possibly its biggest strength.
The long growth runway is obvious given the highly fragmented and unorganised nature of
the market with limited brands in the ‘value for money’ segment. Management Team & Governance Grid
The company has demonstrated a consistent growth profile with topline and earnings
growth CAGR at ~14% & ~29% respectively over the past 5 years. ▪ Mr. Ramesh Kumar Dua, the promoter & MD and Mr.
Mukand Lal Dua, the promoter & Director, manage the
Pricing Power& Low Gross and operating margins have been stable at ~55%-~58% and 14% respectively with day to day affairs of the company. Both of them have 4+
Volatility low volatility reflecting pricing power. decades experience in the footwear industry. Mr. Nikhil
Dua has an experience of more than 15 years in the
Healthy A&P spend footwear sector.
outlay of ~4% of total revenues.
Earlier concerns on brands
CROCI has in high teens over the last few years; Capital efficiencies remained healthy as Well planned. owned by group entities
Robust cash return metrics
reflected in mid 20s RoEs but has been slightly volatile owing to capex for new facilities. addressed
Governance concerns The earlier structure of some brands owned by other group entities and related party
addressed transactions have been addressed. Related Party Transaction
The company has no stated dividend policy, however based on the past track record the Earlier concerns addressed None; Current auditors are B R
Dividend Policy
average dividend payout has been in the range of high single digits to low double digits. completely. Maheswari & Co.
Page 37
Relaxo Footwear (Relaxo)
Crystal Ball Gazing
We believe RLXF stands at a favourable position to benefit from this drive given the mass appeal of their brands (through
celebrity endorsements) and attractive pricing points. Evolving premium product portfolio and expansion into south and west
Indian markets are expected to add to revenue growth momentum.
Higher revenue scale achieved through sustained A&P

We pencil in a revenue and PAT CAGR of ~16% and ~20% expected to lead to better pricing power and enhanced The company has already witnessed significant re-rating
respectively for RLXF over the FY18 to FY22E period. terms of trade expected to lead to better operating over past few years limiting any upside in re-rating.
leverage.
FY06-FY11 FY11-FY14 FY14-FY17 FY18-FY22E FY06-FY11 FY11-FY14 FY14-FY17 FY18-FY22E Implied P/E multiple FY22E EPS (mn) Price target
Revenues CAGR 28% 21% 13% 16% RoE (%) 18.4% 22.6% 24.3% 22.6% 35x Rs. 28.0 Rs. 980
Gross Margin 33.8% 51.6% 57.8% 54.7% RoCE (%) 13.0% 15.1% 18.1% 20.6% 37x Rs. 28.0 Rs. 1,036
EBITDA CAGR 32% 27% 18% 17%
EPS CAGR 52% 35% 23% 20% PE (x) - 12.6 30.8 41.7
Total Asset Turnover (x) 2.1 2.4 2.3 2.2 EV/EBITDA (x) - 7.3 18.4 21.6
Pre-tax OCF/EBITDA (%) 98% 86% 87% 86% PE (x) - 26.9 50.0 49.2
EV/EBITDA (x) - 12.5 27.6 25.1
TOTAL
FY20E EPS Rs.10.5 /share 32%
EPS
Page 38
La Opala RG (LOG)
▪ Pioneer in the emerging organized opalware space in the country, having single handedly grown the category to ~$100mn. First
Why we like the mover advantage is a strength in taking on competition from MNCs & regional unorganised players to be the market leader.
Management? ▪ LOG embarked upon a capex of Rs. ~400mn in FY07-08 when their reported PAT was just Rs.~44mn, this speaks volume about their
confidence on the category’s growth potential, brand’s strength and company’s execution capability.
Where were they ahead of ▪ The management was ahead of MNC competition in sensing the opportunity in the space to create a niche.
competition in managing an ▪ Though initially aided by Anti-Dumping Duty (FY11-16), LOG did a phenomenal job to graduate from a product to a strong brand.
adverse environment? Focusing on the right pillars – Brand, Distribution and Systems, LOG created an enviable position in the Indian opalware market.
▪ The dual strategy of premiumization and low operating costs ensured that the company’s operating margins doubled over the last 7-
Business Model Strengths 8 years. We note that the company commands the highest margins in the sector.
▪ The company has been consistent in its strategy focusing on its core brands and not investing too much on product/brand extensions.
The space is nascent with little competition in the organised space, rising aspiration/ life
style spend, increasing use of microwave ovens and falling stainless steel usage. Management Team & Governance Grid
The company has demonstrated a consistent growth profile with topline and earnings
growth CAGR at ~11% [Actual growth higher] & ~26% respectively over the past 5 years. ▪ The company is managed by the father-son duo of Mr.
Sushil Jhunjhunwala and Mr. Ajit Jhunjunwala. The
Value creation
Selling price per kg of output is Rs.~139 whereas the raw material per kg of input is Rs.~42 former was the founder and has 40 years experience in the
indicative of the huge value creation and pricing power and huge gross margins of 70%. space. The latter runs the business operations as the JMD.
The company spends low to mid teens % of revenues for both advertising and promotions
Brand awareness
making it one of the highest such spends in the consumer space.
Stellar profitability and Operating margins, cash generation (as a % of sales) and CROCI are among the most robust Management continuity Alignment of interest
return metrics in the consumer space with a 5 year average of ~34%, 26% and ~20% respectively.
Though professionally managed at
Reinvestment in the business has reduced dividend payout to~21% of its profits though the various levels, expect centralization No visible conflict
Reinvestment
company used to distribute more generously years back. of power with founding family.
Trailing five years average ROE at ~23% and ROCE at ~20% [Optically lower owing to IND
Healthy Capital efficiency Frequency of changes in
AS]. Related Party Transaction
Consistent improvement in La Opala’s core net working capital days have improved from 108 days in FY13 to 88 days in Negligible; Current auditors are
working capital FY18 primarily led by lower inventory holding. Nothing material
Singhi & Co.
Page 39
La Opala RG (LOG)
Crystal Ball Gazing
Driven by rise in per-capita income and increasing need for sophistication, aesthetically appealing categories as opalware should
continue gaining healthy traction in India. With wide under penetration, huge room for increase in per-capita consumption is
expected to lead to robust long term growth. LOG having cemented itself as a significant player used its core strength of being the
only player to produce & market its offerings in India.
We believe LOG would deliver a revenue and Given that growth momentum can only taper
Capital efficiency to remain at similar healthy
earnings CAGR of ~14% & ~13% respectively from here given the high base, multiples are
levels over the medium to long term.
over the next four years only expected to go down.
Revenues CAGR 18% 17% 10% 14% RoE (%) - 31.8% 26.4% 16% 30X Rs.10.8 Rs. 324
Gross Margin 49.6% 62.4% 71.2% 72.0% RoCE (%) - 24.9% 24.3% 15% 31x Rs. 10.8 Rs. 335
EBITDA CAGR 26% 24% 15% 15%
EPS CAGR 20% 34% 16% 13% PE (x) - 11.8 38.8 36.9
Total Asset Turnover (x) 0.87 1.54 1.15 0.82 EV/EBITDA (x) - 6.9 24.8 23.2
Pre-tax OCF/EBITDA (%) 64% 90% 95% 93% PE (x) - 22.8 53.0 43.3
Debt/EBITDA 3.3 0.5 0.1 0.0 EV/EBITDA (x) - 13.4 32.9 27.5
TOTAL
multiple of 34X on FY22E
FY20E EPS Rs.8/share 48%
EPS
Page 40
Shree Cement (Shree)
▪ Ahead of the curve preparedness has been laudable with long term track record of delivering better than industry growth led by
Why we like the gradual and steady low cost, organic expansions. Willing to let go of unviable high cost inorganic opportunities.
Management? ▪ Consistent focus on cost leadership and pioneering the cost saving initiatives like adoption of pet coke, split grinding units and waste
heat recovery plants.
▪ Calibrated and prudent expansion plans over the years de-risk from its single region dependency in North in FY13 to East where
Where were they ahead of volumes were at 25% in FY18 which has further potential to increase post the current round of expansion. Commissioning of
competition in managing an Gulbarga unit will mark the entry in South in FY19.
adverse environment? ▪ Unchanging core principles on targeting higher than industry growth; cashflow precedence approach over margin leading to 12%
volume CAGR in FY13-18 v/s 6-7% industry growth
▪ Shree’s strength manifests from its low cost gross block per tonne which leads to low cost of operations and as a result, a high quality
Business Model Strengths earnings profile
▪ Well-entrenched relationship to optimize trade: non-trade mix in a relentless manner
Growth Consistency Consistency in clocking double digit volume growth each year in 9 out of the last 10 years
Less volatile with average post tax OCF margins at 27%/25% over the last 10/5 year time
Cash generation volatility
frame respectively ▪ Currently managed by Promoters Mr. H.M Bangur
(Managing Director) and his son Mr. Prashant Bangur
Cash conversion
Pre-tax OCF/EBITDA conversion at ~99% between FY09-18 indicates credible working (Joint Managing director)
capital management practices
▪ Stable middle management professionals who have been
with the company since 2000
CROCI 10 year average CROCI at ~65% in FY17 is distantly better than its peer group
Granular approach = cost Open wagon transportation, usage of synthetic gypsum, automated fuel management Management continuity Alignment of interest
efficiency system, kiln productivity improvement, wet pet-coke usage keep cost under check
65% promoter holding. No
Prashant, JMD is 36 years old with a
related /unrelated businesses
FCF generation Consistent FCF generation each year in the last 10 years irrespective of capex plans long likely tenor. Already gathered
ensures alignment of
12 years of experience in Shree
shareholder interest
Cost leadership invariably pips out competition; Focus on top 3 positioning in volumes with
strong regional barriers offers adequate pricing advantages Related Party Transaction
Average RoEs of 25% between FY09-18; Average RoCE at 20% both in 5/10 year timeframe Negligible transactions with related No change of auditors since 2011
Capital Efficiencies
despite adverse cyclicality in the last five years parties (Gupta & Dua)
Page 41
Shree Cement
Crystal Ball Gazing
Play on demand recovery in Pan-India. Organic expansions (capacity expansion by 50% from 29mt to 45mt by FY21E) will aid
superior volume growth and market share gains in FY18-21E; and (2) Robust cash generation and balance sheet will support
further capacity expansions
Volume growth CAGR for FY18-21E at 14%. Expect Robust generation of cash flow from operations
EBITDA to grow by 16% CAGR led by capacity despite capacity expansion, net debt to equity Multiples to sustain
expansion and operating leverage remain negative
FY05-FY11 FY11-FY14 FY14-FY17 FY18-FY22E FY05-FY11 FY11-FY14 FY14-FY17 FY18-FY22E EV/EBITDA multiple FY22E EBITDA Price target
Revenues CAGR 34% 19% 13% 15% RoE (%) 32% 24% 15% 15% 13x 43,277 19,000
EBITDA CAGR 32% 16% 14% 15% RoCE (%) 18% 21% 15% 14% 15x 43,277 21,400
EBITDA margin 36% 27% 25% 24% RoIC (%) 48% 58% 19% 33%
EPS CAGR 33% 64% 24% 16% Average 1 yr fwd
Total Asset Turnover (x) 1.03 1.19 0.99 1.13 PE (x) 9.2 15.9 21.7
Total WC days 22.0 (2.7) 38.8 25.5 EV/EBITDA (x) 4.8 9.6 13.9
Pre-tax OCF/EBITDA (%) 96% 97% 102% 96% Peak 1 yr fwd
Post Tax OCF as a % of IC 82% 85% 42% 40% PE (x) 11.6 22.7 33.1
Debt/EBITDA 1.23 (0.31) (1.19) (0.77) EV/EBITDA (x) 7.0 7.2 19.3
TOTAL
Entry = Rs. 16,130@ 20x Cumulative Dividends of
exit multiple of 15x on
FY22E EBITDA 36%
Page 42
Ramco Cements (Ramco)
▪ Riding more on micro variables than macro sets the management apart from its peers. Ability to act dynamic across all critical
Why we like the business parameters (product/distribution/geography/costing). Seasoned leadership team has seen multiple business cycles.
Management? ▪ Consistent focus on profitable growth is rigorously followed which is a benchmark to its peers. Clinical capacity expansions via organic
route with leverage followed by de-leveraging out of cash accruals. Willing to let go unviable high cost M&A opportunities.
Where were they ahead of ▪ With profit-sensitive cement prices being an uncontrollable aspect, Ramco’s de-risk strategies from South centric operations by
expanding aggressively in the Eastern markets has paid-off in the last five years.
adverse environment? ▪ Ramco bucked the trend with ~20-25% of current volumes contributed by East despite fickle demand scenario in South since FY11
Notably, profitability has not been compromised in the process of expanding reach.
▪ Ramco’s strength stems from its continuous investments in augmenting the plant infrastructure (critical to manage both fuel &
freight costs) which in-turn leads to competitive cost advantage and as a result, a superior and consistent earnings profile
▪ Strong relationship to optimize trade: non-trade mix; Vertical approach with strong brand recall & distribution strength by being
relevant in a market than a sheer presence
Medium consistency in growth parameters; 7 out of the past 10 years volumes grew with
Growth Consistency
five years of strong double high-digit volume growth Management Team & Governance Grid
Track record of 5/10 year average EBITDA/t of over Rs. 1000/t is commendable considering
Lesser volatility in earnings
cyclical nature of business ▪ Currently managed by a professional CEO Mr.
A.V.Dharmakrishnan who has over three decades of
Cashflow conversion
Pre-tax OCF/EBITDA conversion at ~100% between FY09-18 indicates strong working capital experience with the company
management practices
▪ Already identified strong second tier management team
10 year average CROCI at ~20% when majority of the time has been impacted by weak with over two decades of experience who are graduating
CROCI and adding depth to the team
market demand
Granular approach to Real time tracking from tracking limestone mining to dispatches, Kiln productivity, ability to Management continuity Alignment of interest
business = cost efficiency switch between captive and renew-power, usage of multi-modal logistics Post recent demise of Mr. P. R. 43% promoter holding; the
Ramasubrahmaneya Rajha in FY17, promoters’ & managements’ skin
Capacity utilisations at ~60% provides enough head-room to grow with strong operating Mr. P.R.Venketrama Raja was in the business and ownership is
Strong headroom to growth
leverage; Cost optimising split grinding investments enhances market presence appointed as the MD. No issue in clear; Group’s largest market
management continuity capitalisation and asset–base
Cost leadership with top 3 positioning in markets it operates with strong regional barriers
offers adequate pricing advantages over its peers Related Party Transaction
Negligible. Management has
Average RoEs of 18% between FY09-18; Average RoCE at 12% both in 5/10 year timeframe
Capital Efficiencies reversed the RP transactions in the Same auditors for many years
despite adverse cyclicality in the last five years (M/s.Ramakrishna Raja And Co)
past to protect shareholders
interest
Page 43
Ramco Cement
Crystal Ball Gazing
TRCL with a capacity of 16.5mt will be key beneficiary of improving demand growth in South and East region. We expect TRCL to
continue to post industry leading margins due to its cost efficient facilities. Increasing utilizations and steady margins will aid in
increasing return metrics in coming years
Volume growth of 10% CAGR over next four years led Strong cash flow generation despite 3mt capacity
Multiples to sustain
by market share gains in East and South addition over next three year
FY05-FY11 FY11-FY14 FY14-FY17 FY18-FY22E FY05-FY11 FY11-FY14 FY14-FY17 FY18-FY22E EV/EBITDA multiple FY23E EBITDA Price target
Revenues CAGR 23% 12% 3% 13% RoE (%) 34% 15% 16% 13% 10x 15,586 790
Gross Margin 86% 84% 83% 82% RoCE (%) 16% 9% 11% 12% 11x 15,586 864
EBITDA CAGR 26% -6% 23% 9% RoIC (%) 30% 12% 14% 17%
EBITDA margin 30% 23% 26% 22% Average 1 yr fwd
EPS CAGR 24% -13% 68% 11% PE (x) 8.4 10.4 20.1
Total WC days 53.8 66.8 45.4 19.2 Peak 1 yr fwd
Pre-tax OCF/EBITDA (%) 104% 101% 126% 100% PE (x) 19.3 17.5 26.8
Post Tax OCF as a % of IC 25% 16% 21% 19% EV/EBITDA (x) 14.1 9.5 14.8
Debt/EBITDA 2.73 3.75 2.25 0.61
TOTAL
exit multiple of 11x on
FY23E EBITDA 45%
Page 44
Astral Poly Technik (Astral)
▪ Proactive strategies and incessant focus of the management on the look out for new products especially in PVC pipes and fittings
Why we like the through technology absorptions/tie-ups with reputed international players
Management? ▪ Credible and experienced senior management team with strong domain knowledge; Promoter is often attributed for introducing and
spread-heading usage of CPVC pipes in India by collaborating with Lubrizol
▪ Ability to buck the trend with an aggressive foray into adhesives/construction chemicals segment which offsets the falling growth
Where were they ahead of
rates in pipes business during unsupportive macro. Overall revenues at 19% CAGR v/s pipes division at 11% CAGR between FY14-17
▪ Demonstrated strong revenue growth trajectory despite the real estate slowdown with new product launches and consistent brand
building; Continuous focus to reduce the proportion of sales from institutional clients from 70% to 50% in the last five years.
▪ First mover advantage in fast-growing CPVC pipes with increased manufacturing and distribution reach. Captive CPVC compounding
facilities offers both margin expansion and working capital cushion
▪ Launching new products at regular intervals, increasing share of fittings, and efficient logistics are inherent strength. Strong brand
recall (ad-spends at 3% of sales) trickling pull demand coupled with brand leveraging to strengthen its adhesives business.
Consistent double digit revenue growth every year in the last 10 years. 33% revenue CAGR
Growth Consistency
between FY08-18 Management Team & Governance Grid
Track record of 5/10 year average EBITDA margins of 13.5% is commendable. 300bps is the
range between best/worst margins ▪ Currently managed by Mr. Sandeep Engineer, MD first
generation promoter with strong domain knowledge
Pre-tax OCF/EBITDA conversion at ~90% between FY09-18 indicates strong working capital ▪ Second generation have joined the business with clear cut
Cashflow conversion
responsibilities. Kairav looks after pipes and Saumya has
recently started to look after adhesives segment
Strong CROCI 10 year average CROCI at ~24% indicates efficient capital allocation
Multiple growth levers Capacity expansions both in pipes and adhesive business. Further sales mix change towards Management continuity Alignment of interest
retail, market share gain possible due to captive compounding and foray into agri pipes
59% promoter holding; the
Management continuity in place
promoter family is fully involved
Sustainable growth 14% sustainable growth indicates strong self funding of future capex without leverage with responsibilities identified for
with no related/unrelated
the second generation
businesses
Leadership in CPVC market backed by regular product launches + consistent branding +
cross selling opportunities should lead to pricing power Related Party Transaction
Stable capital efficiencies Average RoCEs of ~20% between FY09-18 No material RP transactions Same auditors for many years
Page 45
Astral Poly Technik
Crystal Ball Gazing
Astral to witness strong earnings growth led by (a) Capacity expansion in Hosur and Rajasthan (b) Ramp up in adhesives (c)
increasing brand awareness/perception; (d) Acquisition of REX to aid in diversify in Double wall corrugated pipes
Consistent volume growth led by new capacity

Strong ROE ‘s of more than 20% and debt free
expansion in Hosur and Rajasthan and new product Multiples to sustain
balance sheet despite capacity expansion
launches in Adhesives/Pipes
FY07-FY11 FY11-FY14 FY14-FY17 FY18-FY22E FY07-11 FY11-FY14 FY14-FY17 FY18-FY22E PE multiple FY22E EPS Price target
Revenues CAGR 44% 38% 21% 22% RoE (%) 21% 27% 17% 21% 35x 34 1,190
EBITDA CAGR 42% 41% 14% 26% RoCE (%) 19% 25% 15% 20% 40x 34 1,360
EBITDA margin 14% 14% 13% 16% RoIC (%) 28% 40% 25% 35%
EPS CAGR 38% 34% 21% 27% Average 1 yr fwd
Total Asset Turnover (x) 1.37 2.36 1.86 1.94 PE (x) 9.0 12.0 32.7
Total WC days 74.2 48.6 59.7 53.8 EV/EBITDA (x) 5.6 7.0 20.8
Pre-tax OCF/EBITDA (%) 65% 83% 92% 78% Peak 1 yr fwd
Post Tax OCF as a % of IC 16% 28% 20% 21% PE (x) 13.3 25.3 42.2
Debt/EBITDA 0.5 0.8 0.9 0.1 EV/EBITDA (x) 7.0 15.4 26.9
TOTAL
EPS CAGR of ~24%, exit RETURN OF
Entry = Rs. 1,020@62x Cumulative Dividends of
EPS 20%
Page 46
Tata Consultancy Services (TCS)
▪ Senior management continuity and longevity is the key reason TCS has managed the transitions of the past two decades better than
Why we like the most others in the industry. The company has had only 3 CEOs over the past 25 years.
Management? ▪ TCS has largely been consistent in delivering its strategy of growing faster than the industry due to its scale and pushing high value
services wherever possible.
Where were they ahead of ▪ Despite its growing size, TCS used the high growth phase of FY10-14 to make the organisation more nimble and this helped it open
newer markets like Japan and Scandinavian countries to outpace peers.
adverse environment? ▪ During the period of weak macro, TCS readjusts its pricing policies to gain market share and grow faster than the industry. The
strong focus on sales and lower cost of delivery helps TCS grow faster than Indian peers.
▪ TCS has the largest digital practice amongst the Indian vendors and its decision to reskill 25-30% of its workforce should enable it to
Business Model Strengths compete with larger MNC vendors going forward.
▪ Although there is no pricing power in the business due to commoditized service offerings, the adoption of outsourcing increases in a
downturn and TCS given its scale and accommodative pricing policies grows faster than the industry.
The addressable IT offshore services opportunity for TCS is ~US$1 trillion, and the market
Growth runway
share of TCS (India IT export revenues) 15.5% in FY18, indicative of further room for growth. Management Team & Governance Grid
Barring FY15 and FY16, when the industry realigned itself to the lower growth and it
Insurance (Deligenta) and retail offering, TCS performance has largely been predictable ▪ Mr. N. Chandrasekaran, Chairman of the Board of Tata
Sons was the CEO of TCS from FY07-17. Mr. Rajesh
Margin stability and cash TCS’ EBITDA margins of ~28.5% has remained stable over the last 10 years despite Gopinathan, is the CEO. He has been with TCS for close to
generation employee growth being faster than revenue growth due to lower costs and low attrition. two decades now. Mr. Ganapathy Subramaniam is the
COO and Mr. V Ramakrishnan is the CFO. All 3 took their
Clear focus on high growth The largest spender on IT is the BFSI sector and the fastest growing amongst services is IMS.
respective roles from February 2017.
vertical and horizontal TCS has the largest practice in BFSI and now has overtaken HCLT in IMS segment as well
TCS bridged the 5% differential in EBITDA margins to Infosys in FY10 with higher revenue Management continuity Alignment of interest
Beneficiary of scale
growth and then utilized its size and scale to reduce the total cost of ownership for clients
The average cash return on the capital invested during the last 10 years is a robust 34%. TCS The current CEO can continue for Management and shareholders
Cash return metrics next 7 to 10 years interest are aligned
continues to convert ~83% of its EBITDA into pre tax operating cash flow.
TCS has increased its dividend payout from 27% in FY08 to 107% in FY18. A buyback in FY18
and if followed on a consistent basis can improve ROCE over the next five years Related Party Transaction
TCS generates 80% of the profitability of Tata Group which is then used by the group to
Capital Efficiencies Negligible Consistent
fund its investments in other sectors, providing alignment of interest.
(BSR & Co., is the auditor of TCS)
Page 47
TCS
Crystal Ball Gazing
TCS is likely to grow its revenues at a CAGR of 8.7% during FY18-21E, while operating (EBIT) margins are likely to expand in FY19E
led by strong revenue growth and tailwinds from currency, and contract by 130bps over FY19E-21E led by pricing pressure and
sharing of currency related gains with clients. The RoEs are likely to increase to ~37% in FY21E from ~29% in FY18 largely led by
higher dividend payout ratio (~90% of FCF) Better cash flows,
coupled with
Margin dip results in higher dividend
Revenue growth of 8.7% payout would
result in
Margins likely to dip from FY20E led by lower

Revenue growth likely to moderate in FY20E High multiple
revenue growth and increasing costs
Revenues CAGR 23.3% 29.9% 10.8% 11.5% RoE (%) 48.0% 38.2% 33.5% 37.5% 19 103.4 1,965
Gross Margin 45.2% 47.6% 44.7% 42.2% RoCE (%) 46.2% 38.4% 32.8% 37.0% 20 103.4 2,069
EBITDA CAGR 28.7% 32.1% 6.7% 10.6% RoIC (%) 52.0% 46.6% 38.2% 44.5%
EPS CAGR 12.0% 31.6% 8.3% 11.4% PE (x) 18.8 18.9 19.1 23.4
Post Tax OCF as a % of IC 38.6% 34.8% 39.0% 49.2% EV/EBITDA (x) 21.5 17.3 17.4 19.9
Net Debt/EBITDA -0.2 -0.5 -1.1 -1.2
TOTAL
Entry = Rs. 2,000@ 22.4x Cumulative Dividends of Exit multiple of 20x RETURN OF
FY20E EPS Rs.197 FY22EPS 13%
Page 48
Info Edge
▪ Deep domain knowledge of the management team with consistent innovation in the product profile within its core business,
Why we like the
Recruitment Services has bolstered to garner ~75% traffic market share
Management?
▪ Proactive and measured capital allocation decisions in now profitable Zomato and Policy Bazaar
Where were they ahead of ▪ Demonstrated track record to drive earnings during weak macro between FY08-10 & FY12-14 by realignment of A&P spend
competition in managing an ▪ Vigorous investments in search algorithms to weather the competition
adverse environment? ▪ Maintaining leadership positioning in 99acres despite momentarily stiff competition from Housing.com and Commonfloor in 2014/15
▪` Revenue growth from its core recruitment business is the factor of GDP growth thus bringing in predictability in revenues and cash
flows. Strong operating leverage in the business with any incremental growth over 15% in recruitment services is a complete flow
through to the operating margins.
▪ 99acres, Zomato and Policy Bazaar are leaders in their respective segment with challengers lagging far behind
Growth Consistency High consistency in growth parameters; 7 out of the past 10 years reported strong growth
Consistent improvement in operating margins of core business in last 10 years from 42% to
55%. YoY contraction in margins has been contained at under 2% over last 10 years ▪ Mr. Sanjeev Bikhchandani, Founder Promoter & Executive
Vice Chairman is currently leading the company.
Pre-tax OCF/EBITDA conversion at ~108% between FY08-18 indicates strong working capital ▪ Core management team has been with the company for
Cashflow conversion
more than 15 years.
▪ Strong middle management team in place with extensive
CROCI 10 year average CROCI at ~26% indicates prudent capital allocation
experience.
Info Edge commands 75% traffic market share in recruitment portal and 55% in real estate Management continuity Alignment of interest
Unique positioning
portal and has leadership position in food ordering and in growing insurance aggregation
Founder promoter is 55 years old
Founding management team
with a long likely tenor. No
Growth drivers The offline to online shift is a structural change in customer behaviour. owns 42%; No related/unrelated
challenges in management
businesses
continuity
Over the last 10 years the pricing growth has contributed to 40% of the overall revenue
Pricing Power growth. Its revenues has grown by 13% CAGR over last 10 years and the pricing has grown Frequency of changes in
by a CAGR of 5%. accounting policy & auditors
Average RoEs of 16% between FY08-18 despite investments in Zomato, 99acres, Policy Auditor changed in FY18 after 7
Bazaar and Jeevansathi years from PWC to E&Y
Page 49
Info Edge
Crystal Ball Gazing
Info Edge’s revenues and PAT to grow at a CAGR of 16.4% and 23.6% respectively during FY18-21E driven by growth in Naukri
business, while EBITDA margins are likely to expand to 39.9% in FY21 vs. 32.5% in FY18.
Strong growth
Revenue and higher
Higher EBITDA margins
growth of margins will
will result in
c.16% drive
Strong revenue growth primarily driven by Improved ROEs and higher

Higher multiple
recruitment business cash flow from operations
FY07-FY11 FY11-FY14 FY14-FY18 FY18-FY22E FY07-FY11 FY11-FY14 FY14-FY18 FY18-FY22E EV/Sales FY22E sales (mn) Price target
Revenues CAGR 20.5% 19.8% 16.0% 16.2% RoE (%) 18.0% 21.1% 11.7% 17.8% 12 16,708 2296
Gross Margin 59.5% 59.2% 53.7% 55.6% RoCE (%) 18.3% 21.3% 11.8% 17.8% 14 16,708 2,645
EBITDA CAGR 27.9% 18.8% 15.5% 22.8% RoIC (%) 38.6% 24.8% 12.0% 28.8%
EPS CAGR 0.3% 33.7% 17.1% 22.1% PE (x) 34.1 39.1 80.5 47
Total WC days -73 -65 -34 -39 Peak 1 yr fwd
Net Debt/EBITDA -2.9 -2.4 -6.0 -4.4
TOTAL
Entry = Rs. 1,500@ 13.8x Cumulative Dividends of Exit multiple of 14x FY22 RETURN OF
FY20E EV/Sales Rs. 39 EV/Sales 79%
Page 50
Cyient
▪ Cyient has managed to outpace the Engineering services industry over the past 3-4 years due to measures taken by the management
Why we like the in focusing on top 50 accounts, putting in place a list of 600 “must have” accounts that spend heavily on R&D and incentivizing sales
Management? force by offering 3x commission in converting such names.
▪ Clear focus on the niche engineering services opportunity; exited a small IT services company in 2016.
Where were they ahead of ▪ The core change in Cyient came in after Krishna Bodanapu was elevated to the position of CEO and MD in April 2014 and with that
came in management’s focus on receivables management, FCF generation and profitability improvement as a part of the senior
leadership’s KRAs. This resulted in consistency and predictability in performance vis-à-vis peers.
▪ Another area where Cyient clearly scores over its peers is the longevity of its middle management.
▪ In order to tap a higher proportion of clients R&D spending, Cyient has successfully broaden its offerings from services to solutions to
Business Model Strengths manufacturing. With engineering services, Cyient was tapping only 10-15% of the client spending which was in upfront design. But
with Solutions and Design Led Manufacturing, it is now able to tap incremental 40-50% of the client spending.
▪ Engineering services have higher entry and exit barriers given the longer sales cycles and the complex nature of services.
The addressable E,R&D offshore services opportunity for Cyient is US$ 22bn, out of which
Growth runway
Cyient’s market share is 2.4%, reflecting its long runway available for growth. Management Team & Governance Grid
Growth in its top 5 and top 10 accounts since FY14 has been 14% and 13% respectively, and
Predictability & Consistency Mr. Krishna Bodanapu was elevated to the position of CEO
the company has converted ~5% of the 600 high focus target accounts.
and MD in April 2014. Mr. Ajay Aggarwal joined Cyient as the
Improving employee Over the last 10 years, Cyient’s revenues has grown by 12.5% CAGR while the headcount CFO in March 2011. Before joining Cyient, he was Chief
productivity has grown by 7.5% CAGR indicating strong improvement in employee productivity. Corporate Controller with Tata Chemicals. Mr. Anand
Parameshwaran heads the Aerospace and Defense business
Margin stability and cash In last 5 years, EBITDA margins have declined by 4.2% vs. ~7% decline for peers, DSOs
unit, Cyient’s largest vertical.
generation decreased by 14 days and pre-tax OCF/EBITDA improved from 80% in FY14 to 84% in FY18.
Referencibility and Aerospace and Defence practice of > $200m, Communication practice of c.$150m and Management continuity Alignment of interest
Productivity Utilities and GIS practice of c.$100m drive client referencibility
The promoters doesn’t have any

Cash return metrics The average cash return on the capital invested during the last 5 years stood at 26% Visibility for next 10 years
other business
Cyient’s stated dividend policy is to pay upto 40% of consolidated profits as dividend and it
Growing dividends Frequency of changes in
currently pays 36% of its profits as dividend which has risen from 25% 5 years back. Related Party Transaction
Its ROE has increased from 13% in FY09 to 18% in FY18 due to improvement in asset
Capital Efficiencies Negligible Consistent (Deloitte)
turnover.
Page 51
Cyient
Crystal Ball Gazing
Cyient is likely to grow its revenues at a CAGR of ~15.7% during FY18-21E driven by growth in both services and DLM segments.
The EBITDA margins are likely to improve to 14.5% in FY21 with increased contribution from the DLM business and operational
efficiencies in the services segment
Strong revenue
Revenue growth of Increase in margins will
growth and increase in
~15.7% result in
margins will result in
Revenue growth driven by both services and DLM

Improved cash flow from operations and higher RoEs Higher multiple
segments
Revenues CAGR 29.1% 22.9% 15.4% 14.1% RoE (%) 18.4% 16.4% 18.7% 21.0% 15 65.4 981
Gross Margin 38.7% 36.6% 38.0% 36.6% RoCE (%) 18.3% 15.6% 18.4% 20.3% 16 65.4 1,047
EBITDA CAGR 24.2% 31.5% 7.6% 15.4% RoIC (%) 24.0% 23.8% 23.1% 31.8%
EPS CAGR 25.8% 24.0% 11.0% 16.1% PE (x) 11.2 8.8 13.2 16.9
Debt/EBITDA -1.0 -1.9 -1.8 -1.7
TOTAL
Entry = Rs. 610@ 14.6x Cumulative Dividends of Exit multiple of 16x FY22E RETURN OF
FY20E EPS Rs. 100 EPS 88%
Page 52
Dr Lal PathLabs
▪ In a highly fragmented industry, management has spearheaded DLPL to be the largest diagnostic chain (~3% market share of the ex-hospitals
Why we like the diagnostics market) and one of the few diagnostic chains to offer wider test menu with advanced tests at par with global peers
▪ DLPL is led by a team of founder family members and experienced professionals. (Hony.) Brig. Dr. Arvind Lal and Dr. Vandana Lal are licensed
Management?
pathologists with over 30+ years of experience and the senior management comprises of professionals with rich experience in diverse industries.
The combination has helped the company in transitioning from a regional player to a pan-India diagnostics chain
▪ DLPL has established a strong brand over the years by focusing on patients and doctors (key decision makers). Significant contribution from ‘sticky’
Where were they ahead of B2C business (~60% of revenue) and relatively less competitive high-end tests (outsourced by hospitals) has helped the company recover swiftly
competition in managing an from the phase of low growth (in 2HFY18)
adverse environment? ▪ While other diagnostic chains are facing challenges to break into new geographies, DLPL’s strategy to commission a 2nd reference laboratory in
Kolkata has provided the company a platform for further expansion in the East region. Contribution from the region should increase going forward
▪ DLPL’s scalable hub-and-spoke business model with ~60% of revenue from B2C segment is a key strength, in our view. The B2C business is more
moated given the strong brand recognition and long-standing doctor relationships
Business Model Strengths ▪ DLPL’s current logistics & lab infrastructure (2 reference labs & ~200 satellite labs) can handle ~2x its current sample volumes. DLPL is currently
expanding its franchisee collection centre network (low opex/low capex) in tier-2 and tier-3 cities, to accelerate volume growth
▪ Strong balance sheet (net cash of Rs. 6.3bn) provides opportunities for inorganic initiatives in regions with limited presence (South and West)
Strong revenue growth has been consistent except for the slowdown in growth in
Growth Consistency
FY17/1HFY18 Management Team & Governance Grid
EBITDA margins have remained consistent in the 25-26% range. Margin should gradually
improve as the company enters a phase of franchisee collection centre led growth ▪ Brig. Dr. Arvind Lal (69 years old), Chairman and MD, is a
pioneer in the industry. Dr. Om Manchanda (50 years old),
Cashflow conversion
Pre-tax OCF/EBITDA conversion at ~100% between FY12-18 indicates strong working capital CEO, joined the company in 2005. He has over 24 years
management practices across sales, marketing and general management functions
in business sectors such as FMCG, agri-biotech products,
CROCI 7 year average CROCI at ~80% indicates prudent capital allocation consumer healthcare and medical diagnostics
DLPL has established a strong brand over the years by focusing on patients and doctors and Management continuity Alignment of interest
Unique positioning
has ~60% of revenue from B2C segment
DLPL is a professionally run
DLPL is currently expanding its franchisee collection centre network in tier-2 and tier-3 company with Dr. Om Manchanda Promoter ownership at 57%; No
Growth levers heading the operations of the significant related businesses.
cities to accelerate volume growth
company
Pricing power is limited given the industry is high fragmented. However, pricing in B2C
segment is less vulnerable to competition compared to B2B segment Related Party Transaction
Deloitte Haskins & Sells LLP was
Capital Efficiencies Average RoEs of 38% between FY12-18; Average RoCE at ~32%/~34% in 5/7 year timeframe Negligible appointed as the auditor for next
5 years in May 2018
Page 53
Dr Lal PathLabs
Crystal Ball Gazing
We believe DLPL has entered a phase of ‘low opex/low capex’ growth driven by scale up of its franchisee collection centre network in
North, East and Central India. Opportunity for expansions in hitherto lower-contributing regions (South & West) along with the potential
to lead consolidation in a highly fragmented industry (top-3 players account for <10% of the ex-hospitals diagnostics market) provide
comfort on growth beyond the next 2-3 years. Given the lower capital intensity and superior return profile (vs. hospitals), we believe
~14% revenue
diagnostics is a superior play on improving healthcare access/penetration in India.
CAGR in FY18-
23E driven by
EBITDA margin to remain stable as operational

Multiples to sustain on the back of EPS CAGR of
17% patient volume CAGR during FY18-23E efficiencies offset incremental costs from
17% in FY18-23E
Kolkata Reference Lab
FY11-FY14 FY14-FY18 FY18-FY23E FY11-FY14 FY14-FY18 FY18-FY23E P/E multiple FY23E EPS (mn) Price target
Revenues CAGR 33% 17% 14% RoE (%) 47% 34% 23% 32.0x 45.1 1,443
EBITDA CAGR 35% 17% 16% RoCE (%) 41% 32% 23%
EBITDA margin 24% 25% 26% RoIC (%) 34% 28% 22%
EPS CAGR NA NA 17% Average 1 yr fwd
Total Asset Turnover (x) 2.2 1.7 1.3 PE (x) NA 49.3 35.8
Total WC days (5) 1 1 EV/EBITDA (x) NA 30.5 19.1
Pre-tax OCF/EBITDA (%) 111% 104% 104% Peak 1 yr fwd
Post Tax OCF as a % of IC 85% 69% 69% PE (x) NA 61.9 40.7
Debt/EBITDA (0.6) (1.3) (2.1) EV/EBITDA (x) NA 37.9 25.7
TOTAL
Earnings CAGR of 17% in RETURN OF
FY18-23E, exit multiple of
FY21E EPS Rs. 24
32x 55%
Page 54
Cadila Healthcare (Cadila)
▪ Investments in areas such as transdermals, vaccines, biosimilars, NCEs, animal health and Wellness several years back were clearly out-of-the-box
capital allocation decisions. While the upsides from some of these investments are yet to play out, these investments should add significant
Why we like the
diversity and resilience to revenues in the next 5 years
Management?
▪ Following multiple compliance issues in FY12-FY15, management focused on improving the quality culture at the company, leading to the current
clean compliance status at all facilities
Where were they ahead of ▪ Direct intervention by the promoters helping relatively (vs. peers) better navigation of an extremely challenging phase in the US. While peers go
through a phase of erosion in their US sales and profitability, Cadila bucking the trend on the back of compliant facilities and strong approvals
▪ After a weak approval phase, management prioritized addressing deficiencies in ANDA filings, which has led to the current phase of complex generic
approvals. These approvals include highly complex products such as gLialda, gAsacol HD, gTamiflu susp, gPrevacid Solutab and gToprol XL
▪ Optimal mix between branded and unbranded generic markets. In unbranded generics (mainly US), Cadila has attempted to reduce volatility in
performance through investments in complex generic segments such as injectables, derma, modified-release orals and transdermals. The gross
Business Model Strengths margin profile (~65%) over the years validates the margin stability provided by optimal geographic and business mix
▪ Invested heavily in capacities in recent years (annual capex of Rs. 10-11bn excluding acquisitions) to augment its positioning. Cadila’s strong FCF
profile has helped maintain a strong balance sheet (FY20E net debt/equity of 0.4), despite the heavy investment phase
Volatility in growth in the past partly due to compliance issues and weak pipeline
Growth Consistency
execution. Both issues now behind and more consistency in growth expected going forward Management Team & Governance Grid
Improvement in margins – currently at 22-23% vs. ~17% in FY13/FY14. Margin volatility in
the past due to inherent lumpy nature of high-value product opportunities in the US ▪ Mr. Pankaj Patel is the Chairman. Mr. Sharvil Patel, the
MD, joined the company a decade back. He had
Cashflow conversion
Pre-tax OCF/EBITDA conversion at ~80% between FY09-18 indicates strong working capital spearheaded several key projects before taking over as MD
▪ The promoter leadership is supported by an experienced
senior and middle management team
CROCI 10 year average CROCI at ~23% indicates prudent capital allocation
In a unique position to reap benefits from high R&D investments in complex generic Management continuity Alignment of interest
Unique positioning
segments such as injectables, derma, modified-release orals and transdermals
Sharvil Patel, MD who is aged 39
Strong growth from its investments such as transdermals, vaccines, biosimilars and NCEs years is in for long likely tenor. His Promoter ownership at 75%; No
Growth levers father Pankaj Patel mentors the related businesses.
should add significant diversity and resilience to Cadila’s business in the next 5 years
company in his role as chairman
Optimal mix between branded (B2C) and unbranded (B2B) generics. While pricing power is
Pricing Power limited in unbranded generics, reasonable pricing power in branded generic markets such Frequency of changes in
as India (including Zydus Wellness business) and other emerging markets accounting policy & auditors
Average RoEs of 29% between FY08-18; Average RoCE at ~18%/~19% in 5/10 year Deloitte Haskins & Sells LLP was
Capital Efficiencies Negligible appointed as the auditor for next
timeframe
5 years in 2018
Page 55
Cadila Healthcare (Cadila)
Crystal Ball Gazing
With significant presence in segments such as animal health, wellness and APIs, CDH is among the most diversified Indian
pharmaceuticals companies. CDH has made significant investments and progress in biosimilars, inhalers, transdermals, topicals,
vaccines and NCEs (Lipaglyn to commence phase II trials in the US). Till recently, CDH lagged peers in timely approvals and
~14% revenue launches in the US, impacting monetization of its attractive pipeline. However, with the recent resolution of Moraiya WL and
CAGR in FY18- pick up in approvals including several complex products, concerns on execution are largely removed
22E driven by
10% CAGR in the US business, 12% CAGR in

RoCEs to return to ~12% levels after Heinz India Expecting exit multiple of 20x given the lower
domestic formulations 7% CAGR in EU and 9%
acquisition in FY20 visibility on long-term growth drivers
CAGR growth in EMs
FY11-FY14 FY14-FY18 FY18-FY22E FY11-FY14 FY14-FY18 FY18-FY22E

P/E multiple FY22E EPS (mn) Price target
Revenues CAGR 16% 13% 14% RoE (%) 29% 28% 19%
20.0x 25.3 505
EBITDA CAGR 5% 24% 11% RoCE (%) 20% 18% 13%
EPS CAGR 3% 22% 10% Average 1 yr fwd
Total Asset Turnover (x) 1.1 1.0 0.8 PE (x) 18.7 22.3 19.1
Total WC days 90 94 110 EV/EBITDA (x) 13.3 16.1 12.0
Post Tax OCF as a % of IC 18% 17% 14% PE (x) 22.4 27.3 21.8
Debt/EBITDA 1.5 1.2 1.2 EV/EBITDA (x) 16.2 20.1 15.2
TOTAL
Earnings CAGR of 9% in RETURN OF
FY18-22E, exit multiple of
FY20E EPS Rs. 14
20x 47%
Page 56
Torrent Pharmaceuticals (Torrent)
▪ Over the years, Torrent management has offset the company’s limitations in R&D through 1) strong execution on product opportunities 2)
Why we like the transformational M&As 3) disciplined selection of therapies and markets
Management? ▪ Willingness to say NO to high cost M&As. Torrent was actively pursuing M&A opportunities in the US in FY14-FY17, to compensate for its weak
pipeline. However, unlike its peers, Torrent walked away from many transactions citing unreasonable valuations, now totally vindicated.
▪ Transformational M&A and capex decisions. Acquisitions of Heumann in 2005, Elder in 2014, Unichem in 2017 and the huge capacity addition at
Where were they ahead of Dahej are examples. Strong execution on integration and deleveraging of balance sheet have always followed large transformational acquisitions.
competition in managing an ▪ Rs. 36bn acquisition of Unichem’s domestic business - given Torrent’s limitations in R&D and challenges in the US generic market, we believe
adverse environment? Torrent’s decision to allocate more resources to its domestic business is a prudent one. The acquisition derives benefits from procurement
synergies, MR rationalisation and reduction of overlapping promotional spends
▪ Higher exposure to branded generic markets such as India and Brazil makes it more diversified and less volatile vs. other Indian pharma peers.
Traditionally, the company has stayed away from low-margin, high working capital segments and markets
Business Model Strengths ▪ Strong franchises and market positions in key chronic therapy segments such as cardiac and CNS in India
▪ To address its weak US pipeline, TRP has added 550 scientists (to its existing R&D workforce of 600) and has stepped up ANDA filings targeting ~20
filings per year, with focus on oncology, dermatology and ophthalmology. Recent Bio-Pharm acquisition (~$70mn) is a step in the right direction
High consistency in revenue and earnings growth rates. However, FY18 was impacted by
Growth Consistency
lack of significant product launches in US and weakness in EMs Management Team & Governance Grid
Consistent improvement in EBITDA margin – ~400bps in the past 6 years (excluding FY16 at
Lesser volatility in earnings ~40% EBITDA margin, which benefited from limited competition opportunity, gAbilify, in ▪ Promoters - Mr. Sudhir Mehta and Mr. Samir Mehta
the US). 1HFY19 margins improved further with benefits from Unichem acquisition provide strategic directions, day-to-day operations are
Cashflow conversion
Pre-tax OCF/EBITDA conversion at ~93% between FY09-18 indicates strong working capital managed by its senior leadership team comprising of Mr.
management practices Ashok Modi (ED & CFO), Mr. Sanjay Gupta (ED –
International Business) and Mr. Dhruv Gulati (ED – India &
CROCI 10 year average CROCI at ~44% indicates prudent capital allocation RoW)
Higher exposure (~51% post Unichem acquisition) to branded generic markets such as India Management continuity Alignment of interest
Unique positioning
and Brazil makes it more diversified and less volatile vs. other Indian pharma peers Sudhir Mehta aged 64 & Samir High promoter holding at ~71%
Mehta aged 57 are currently Enough skin for the promoter
M&A led growth in domestic market and scaling up of US business (is currently sub-scale holding chairmanship position. group. No related businesses
Growth levers
compared to peers) by stepping up R&D spending Induction of key senior leadership while the power business is
Optimal mix between branded (B2C) and unbranded (B2B) generics. While pricing power is positions in recent years managed separately
Pricing Power limited in unbranded generics (US and Germany), reasonable pricing power in branded Frequency of changes in
generic markets such as India and Brazil accounting policy & auditors
Average RoEs of ~36% between FY08-18; Average RoCE at ~24%/~24% both in 5/10 year B S R & Co LLP was appointed as
Capital Efficiencies Negligible the auditor for next 5 years in
timeframe
July 2017
Page 57
Torrent Pharmaceuticals (Torrent)
Crystal Ball Gazing

We remain positive on TRP from a 3 year perspective. With strong presence in key branded (India, Brazil) and unbranded (US,
Germany) generic markets, TRP has one of the most diversified business models among leading pharma players. On the
domestic front, TRP’s strong franchises in chronic therapeutic segments (cardiology and neurology) is a key differentiator and
the acquisition of Unichem bolsters TRP’s presence in key therapy areas. To address its weak US pipeline, TRP has added 550
scientists (to its existing R&D workforce of 600) and has stepped up ANDA filings targeting ~20 filings per year, with focus on
oncology, dermatology and ophthalmology. While recent the BioPharm acquisition is a step in the right direction, further M&A
initiatives will be key to scale up TRP’s US business to larger peer levels
630bps expansion in EBITDA margin in FY18-

PE multiples to sustain at 24x on the back of
18% revenue CAGR in FY18-22E 22E; ROCE to expand ~850bps in FY18-22E on
strong EPS growth
the back of margin improvement
FY11-FY14 FY14-FY18 FY18-FY22E FY11-FY14 FY14-FY18 FY18-FY22E P/E multiple FY22E EPS (mn) Price target
Revenues CAGR 24% 9% 18% RoE (%) 34% 35% 21% 24.0x 111.5 2,160
EBITDA CAGR 35% 9% 25% RoCE (%) 25% 22% 15%
EPS CAGR 35% 7% 22% Average 1 yr fwd
Total Asset Turnover (x) 1.3 0.9 0.8 PE (x) 12.8 18.5 23.3
Total WC days 48 50 69 EV/EBITDA (x) 9.2 13.2 13.3
Post Tax OCF as a % of IC 39% 34% 19% PE (x) 16.3 24.7 32.8
Debt/EBITDA (0.1) 1.6 1.7 EV/EBITDA (x) 11.3 16.5 16.7
TOTAL
Entry = Rs. 1,741 @ 25x Cumulative Dividends of EPS CAGR of 22% in FY18- RETURN OF
FY20E EPS Rs. 54 22E, exit multiple of 24x 27%
Page 58
Appendix – List of top 5 coverage companies which satisfy the parameters
Consistency in revenue growth Earnings predictability Volatility in profit margins Operating Cash flow generation Quality of capex
✓ Info Edge (India) ✓ Tata Consultancy Services ✓ UPL ✓ Eicher Motors ✓ Thermax
✓ TeamLease Services ✓ Wipro ✓ Astral Poly Technik ✓ Maruti Suzuki India ✓ Hindustan Unilever
✓ Alkem Laboratories ✓ Reliance Industries ✓ ITC ✓ Info Edge (India) ✓ Bajaj Auto
✓ Apollo Hospitals Enterprise ✓ Infosys ✓ Bajaj Auto ✓ Britannia Industries ✓ Voltas
✓ Thyrocare ✓ ITC ✓ Rane ✓ Whirlpool of India ✓ NIIT
Free cashflow generation Cash return on Cash invested

Quality of retained earnings Future growth expectations Sustainable Growth Rate (SGR)
consistency (CROCI)
✓ Bajaj Corp ✓ Eicher Motors ✓ Bajaj Corp ✓ L&T Infotech ✓ Bharat Forge
✓ Bajaj Auto ✓ Hindustan Unilever ✓ Marico ✓ Cyient ✓ Hindustan Unilever
✓ Ceat ✓ Bajaj Auto ✓ Hindustan Unilever ✓ Mindtree ✓ Bajaj Corp
✓ Hindustan Unilever ✓ Bajaj Corp ✓ Page Industries ✓ NIIT Technologies ✓ Page Industries
✓ Tata Consultancy Services ✓ Zydus Wellness ✓ Trent ✓ Quess Corp ✓ Eicher Motors
Page 59
Spark Model Portfolio
Spark Quality/ All Weather Value/ Defensives/ Emerging AWM/ Spark Model Portfolio Performance
BSE-200 36% 46% 18%
Weights Managements Out of Favour Turnaround/ Cyclicals Spark 216%
BSE 200
Financials 34% 26% UW 12% 7% 7%
Sensex
HDFC Bank 6% State Bank of India 4% Federal Bank 4% 113%
88%
Kotak Mahindra Bank 3% Karur Vysya Bank 3% ICICI Lombard Gen Ins 3% 62%
46%41%
City Union Bank 3% 3% 3% 2% 8% 5% 7%
Consumer & Media 15% 20% OW 11% 6% 3% 6M 1 yr 3yr Since Oct'13

Hindustan Unilever 5% Sun TV 3% ABFRL 3%
Model Portfolio Changes
Britannia Industries 3% Emami 3%
Sector Weights Prev ▲ Now
Asian Paints 3%
Financials 23% +3% 26%
Autos & Logistics 9% 14% EW 12% 2% IT & Biz Services 17% -2% 15%
M&M 3% VRL Logistics 2% Autos & Logistics 18% -4% 14%
Industrials & Infra 6% +3% 9%
Hero Motocorp 3%
Exide 3% Stock Weights Prev ▲ Now
Container Corp 3% HDFC Bank 5% +1% 6%
IT & Biz Services 12% 15% EW 6% 9% SBI 3% +1% 4%
Federal Bank 3% +1% 4%
Infoedge 3% Infosys 4%
Infosys 5% -1% 4%
Cyient 3% Tech Mahindra 3% M&M 4% -1% 3%
Eclerx 2% Eclerx 3% -1% 2%
Industrials & Infra 14% 9% UW 3% 6%
Model PF Stocks Out Weight
Powergrid 3% ACC 3%
M&M Financial Services 3%
Cummins India 3%
Apollo Hospitals 3%
Pharma & Healthcare 5% 12% OW 7% 5%
Bharat Forge 3%
Cadila 4% Dr. Reddy's Laboratories 5%
Model PF Stocks In Weight
Dr Lal Pathlabs 3%
Oil & Gas & Agri 12.0% 4.0% UW 4% ICICI Lombard 3%
Petronet LNG 4% Dr. Lal Pathlabs 3%
Total Weights 100% 100% ACC 3%
Page 60
Strategy Note
Spark Disclaimer
BUY Stock expected to provide positive returns of >15% over a 1-year horizon REDUCE Stock expected to provide returns of <5% – -10% over a 1-year horizon
Absolute Rating
Interpretation
ADD Stock expected to provide positive returns of >5% – <15% over a 1-year horizon SELL Stock expected to fall >10% over a 1-year horizon
Spark Disclaimer
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Page 61
Strategy Note
Spark Disclaimer
Spark Capital and/or its affiliates and/or employees may have interests/positions, financial or otherwise in the securities mentioned in this report. To enhance transparency, Spark Capital has
incorporated a disclosure of interest statement in this document. This should however not be treated as endorsement of views expressed in this report:
Disclosure of interest statement Yes/No
Details of Financial Interest of Research Entity [Spark Capital Advisors (India) Private Limited] and its Associates No
Details of Financial Interest of covering analyst/ and his relatives No
Investment banking relationship with the company covered No
Any other material conflict of interest at the time of publishing the research report by Spark and its associates No
Receipt of compensation by Spark Capital or its Associate Companies from the subject company covered for in the last twelve months:
▪ Managing/co-managing public offering of securities
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▪ Products or services other than those above in connection with research report
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Whether the research entity or its associates, has actual/beneficial ownership of one per cent. or more securities of the subject company, at the end of the month immediately preceding the
No
date of publication of the research report
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or will be, directly or indirectly, related to the specific recommendation or views expressed in the report.
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SPARK STRATEGY:

'All Weather Managements' 2.0

▪ VIJAYARAGHAVAN SWAMINATHAN  raghavan@sparkcapital.in  +91 44 43440022

find SPARK RESEARCH on Page 2

Volatility in profit To assess fluctuations in the EBITDA margin

Companies which are efficient in

Quality of For every 1 rupee retained how much

Note: Incremental OCF= Redeployment of OCF *(OCF/Sales

Notes: *OCF – Operating Cash Flow

Total no. of Cashflows vs. FCF Quality of

Dr. Lal Pathlabs 5 ✓ ✓ ✓ ✓ ✓

No. of occurrences more than 5 out of 10 parameters is considered

Financials – Banks & NBFCs

Return on Risk Weighted

Total no of Loan growth

No. of occurrences more than 4 is considered

Key Qualitative criteria

▪ How long is the runway for the company’s growth?

Large Caps (>$5bn) Large Mid Caps($2bn-$5bn) Mid Caps (<$2bn)

AUTOMOBILES ▪ Maruti Suzuki ▪ Sundram Fasteners

▪ Hindustan Unilever ▪ Page Industries ▪ Relaxo Footwear

IT SERVICES ▪ Tata Consultancy Services ▪ Infoedge ▪ Cyient

PHARMACEUTICALS ▪ Cadilla Healthcare ▪ Torrent Pharmaceuticals ▪ Dr Lal PathLabs

Crystal Ball Gazing

Expect MSIL to trade at elevated multiples given

Crystal Ball Gazing

Crystal Ball Gazing

Expect NIMs to Increasing leverage to

Crystal Ball Gazing

Expect NIMs to Increasing leverage to

Crystal Ball Gazing

Crystal Ball Gazing

Crystal Ball Gazing

Crystal Ball Gazing

Pre-tax OCF/EBITDA conversion at ~106% between FY08-18 indicates strong cash

Crystal Ball Gazing

Crystal Ball Gazing

Return metrics to decrease due to reduction in

Standalone FY12-FY14 FY15-FY17 FY18-FY22E Standalone FY12-FY14 FY15-FY17 FY18-FY22E Construction

Entrenched Distribution Management continuity Alignment of interest

Crystal Ball Gazing

Crystal Ball Gazing

We believe APNT would deliver a revenue and

Crystal Ball Gazing

Page Industries revenues and PAT is expected to grow

Crystal Ball Gazing

Crystal Ball Gazing

Higher revenue scale achieved through sustained A&P

Total WC days 27 51 59 63 Peak 1 yr fwd

Crystal Ball Gazing

Crystal Ball Gazing

Crystal Ball Gazing

Crystal Ball Gazing

Consistent volume growth led by new capacity

Crystal Ball Gazing

Margins likely to dip from FY20E led by lower

Crystal Ball Gazing

Strong revenue growth primarily driven by Improved ROEs and higher

The promoters doesn’t have any

Crystal Ball Gazing

Revenue growth driven by both services and DLM

Crystal Ball Gazing

EBITDA margin to remain stable as operational

Crystal Ball Gazing