Morning Insight - 00089 11-11-2016 - Kotak Securities · Corporation and Petroleos De Venezuela SA...

NOVEMBER 11, 2016

Economy News India's infrastructure sector will see an investment of Rs25 trn in the next

five years, creating almost five crore jobs. The investment in infrastructuresector including roads and shipping would boost the GDP growth by 3%,road transport and highways, and shipping minister Nitin Gadkari said atthe Economic Editors Conference. (ET)

The government's thrust on road infrastructure has led to a rise indemand for bitumen products, prompting some oil marketing companies(OMCs) to increase its production for better margins. According to datafrom Petroleum Planning Analysis and Cell (PPAC), bitumen's monthlyconsumption growth rate has been constant year-on-year (y-o-y) sinceAugust 2015, except a dip in July 2015, owing to monsoons. (BS)

India will take up the issue of visa for Information Technologyprofessionals as well as other contentious issues with the new DonaldTrump administration in the United States. India will continue tonegotiate with the US government once it takes charge in early January,next year. (BS)

The Reserve Bank of India made a net purchase of US$4.6 bn from thespot market in September to meet the redemption requirement ofFCNR(B) deposits, a data release in the Reserve Bank's monthly Bulletinsaid. The central bank bought $ 9 billion and sold $4.4 billion during themonth. (ET)

The Reserve Bank of India relaxed provisioning norms for loansrestructuring under the so called S4A scheme, a move that could help thescheme take off many months after it was first announced. (ET)

Corporate News PVR, has taken some initiatives, including a complete waiver of

convenience fees for tickets booked online through the PVR Cinemaswebsite, or its mobile app. Currently, the app/website charges between Rs50-60 depending on the size of the transaction. (BS)

ONGC Videsh (OVL) foreign arm of state-owned Oil & Natural GasCorporation and Petroleos De Venezuela SA (PDVSA) have signed twoagreements for facilitating redevelopment of their San Cristobal jointventure project in Venezuela. (BS)

Dabur, is increasingly turning to markets outside India for growth, as thedomestic market continues to be subdued. A little over a third of revenuecomes from abroad and it is investing Rs5 bn to expand operations inWest Asia and Africa. (BS)

The government is looking into the role played by all stakeholders,including oil ministry officials and executives at Oil and Natural GasCorp (ONGC), in the past with respect to the gas dispute between thestate firm and Reliance Industries. (ET)

SBI is in talks with global sovereign wealth funds and strategic investorsto sell up to 5% stake in SBI Life, the life insurance JV with BNP ParibasCardiff, in a pre-IPO fund-raise, pegging its valuation at Rs370-400 bn. (ET)

Rane Holdings Ltd (RHL), has decided to sell its 45.26% stake in itsassociate firm SasMos HET Technologies Ltd (SasMos). (BL)

In a big boost to the Cyrus Mistry camp, the independent directors ofTata Chemicals have come out in full support of its Chairman CyrusMistry in a board meeting. (BS)

Equity% Chg

10 Nov 16 1 Day 1 Mth 3 Mths

Indian IndicesSENSEX Index 27,518 1.0 (2.0) (1.2)NIFTY Index 8,526 1.1 (2.1) (0.8)BANKEX Index 23,186 3.6 4.8 8.7SPBSITIP Index 9,456 (0.7) (7.2) (14.0)BSETCG INDEX 14,422 1.8 (2.6) (3.2)BSEOIL INDEX 12,098 1.6 0.7 13.7CNXMcap Index 15,391 2.0 (3.8) 4.4SPBSSIP Index 12,927 1.8 (2.5) 6.1

World IndicesDow Jones 18,808 1.2 3.7 1.0Nasdaq 5,209 (0.8) (0.7) (0.4)FTSE 6,828 (1.2) (3.4) (1.3)NIKKEI 17,344 6.7 2.2 3.9HANGSENG 22,839 1.9 (4.5) (0.4)

Value traded (Rs cr)10 Nov 16 % Chg - Day

Cash BSE 3,589 (31.5)Cash NSE 27,197 (20.2)Derivatives 756,148 (3.4)

Net inflows (Rs cr)9 Nov 16 % Chg MTD YTD

FII (2,045) (740) (1,678) 43,337Mutual Fund 634 214 3,628 25,684

FII open interest (Rs cr)9 Nov 16 % Chg

FII Index Futures 13,020 0.9FII Index Options 73,243 4.7FII Stock Futures 56,471 2.8FII Stock Options 7,262 8.7

Advances / Declines (BSE)10 Nov 16 A B T Total % total

Advances 234 964 40 1,238 79Declines 65 219 24 308 20Unchanged 1 3 17 21 1

Commodity % Chg

10 Nov 16 1 Day 1 Mth 3 Mths

Crude (US$/BBL) 44.4 (0.6) (12.6) 2.1Gold (US$/OZ) 1,266.8 (0.7) 0.1 (6.5)Silver (US$/OZ) 18.7 1.5 5.5 (7.9)

Debt / forex market10 Nov 16 1 Day 1 Mth 3 Mths

10 yr G-Sec yield % 6.7 6.7 6.7 7.1Re/US$ 66.6 66.4 66.5 66.7

Sensex

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

MORNING INSIGHT November 11, 2016

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

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

GREAVES COTTON LTD

PRICE: RS.129 RECOMMENDATION: BUYTARGET PRICE: RS.160 FY18E P/E: 14.2X

Greaves Cotton's (GCL) quarterly profits exceeded our expectations aidedby higher EBITDA margins. Near term revenue growth outlook is weak butis seen improving in the medium term as economy gains momentum anddue to the implementation of the BS IV emission norms. The company'sforay into spare parts for non Greaves engine fitted vehicles in the 3Wsegment is positive as it opens up a large market for the company.

We like the strong free cash generation of the company. Further, triggercould be potential for addition of OEMs for engine supply likely by FY17.At 14.2x FY18 earnings, GCL is one of the most attractively valued stocksin our sector coverage. Further, dividend yield is also the highest. Wemaintain BUY with an unchanged price target of Rs 160 based on DCF.

Risks and Concerns: Upgrade by customers to 4W LCVs may cannibalise3W LCV volumes which is the stronghold of GCL. We would remainwatchful about this emerging threat.

Quarterly performance

(Rs mn) Q2FY17 Q2FY16 YoY (%) H1FY17 H1FY16 YoY (%)

Gross Revenues 4886 4711 3.7 9322 8931 4.4

Excise duty 501 481 4.2 942 921 2.3

Net Revenues 4384 4229 3.7 8380 8009 4.6

other op income 9 21 -57.0 21 46 -54.2

RM costs 2656 2531 4.9 4975 4822 3.2

Purchase of traded goods 167 227 -26.6 478 396 20.7

Staff costs 411 374 10.0 800 763 4.8

Other costs 462 365 26.4 847 707 19.9

EBITDA 698 753 -7.4 1301 1369 -4.9

Depreciation 115 115 0.0 224 227 -1.4

Other income 130 128 1.9 237 217 9.4

EBIT 712 766 -7.0 1314 1358 -3.2

Interest 2 2 -15.0 2 4 -39.5

PBT 711 764 -7.0 1312 1354 -3.1

Tax -197 -196 0.5 -358 -422 -15.2

Adjusted PAT 513 567 -9.5 954 932 2.4

Extraordinary items 0 -19 -100.0 -55 -19 199.5

Reported PAT 513 549 -6.5 899 913 -1.6

Excise rate (%) 10.0 10.2 10.0 10.3

EBITDA (%) 15.9 17.8 15.5 17.1

RM costs to sales (%) 64.4 65.2 65.1 65.1

Other exp to sales (%) 10.5 8.6 10.1 8.8

Tax rate (%) (27.8) (25.7) (27.3) (31.2)

EPS (Rs) 2.1 2.3 3.9 3.8

Source: Company

Summary table

(Rs mn) FY16 FY17E FY18E

Sales 16162 17575 18954Growth (%) -4.3 8.7 7.9EBITDA 2686 2844 3052EBITDA margin (%) 16.6 16.2 16.1PBT 2915 2802 3086Net profit 1740 2017 2222EPS (Rs) 7.1 8.3 9.1Growth (%) 18.0 16.0 10.1CEPS 9.0 10.2 11.2BV (Rs/share) 33.0 38.4 44.5DPS (Rs) 5.5 2.5 2.5ROE % 20.8 21.9 20.9ROCE % 20.5 19.6 18.8Net cash (debt) 209.2 601.0 278.4NW Capital (Days) 45 36 38EV/Sales (x) 1.9 1.8 1.7EV/EBITDA (x) 11.6 10.9 10.2P/E (x) 18.1 15.6 14.2P/Cash Earnings 14.4 12.6 11.5P/BV (x) 3.9 3.4 2.9

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

RESULT UPDATE

Sanjeev [email protected]+91 22 6218 6424



Estimata - Quarterly performance

(Rs mn) Reported Estimated

Revenue 4384 4898

EBITDA (%) 15.9 14.8

PAT 513 507

Source: Kotak Securities - Private Client Research

Revenue growth continued to remain mutedDuring the quarter, engine segment reported decline of 4% in revenue on a y-o-y basis as demand for 3W and 4W LCVs continued to remain weak in the quar-ter.

The 3W engine revenue (account for ~ 55-60% of the revenues) has been wit-nessing weak demand since past few years due to muted economic activity aswell as higher financing (interest) rates. The weakness is especially glaring in thecargo segment which is a stronghold of Piaggio (GCL's prime client). Based onSIAM data, the cargo segment in 3W has remained stagnant since FY12 at95000-100000 units. Passenger 3W volumes for the industry has done marginallybetter due to urbanization. Thus, the company's significant reliance on the 3Wengine segment has been a drag on the company's revenues.

While till a few years back, the 4W LCV was being viewed as a growth segment,this product category has also slowed down considerably due to problems ofover capacity plus a stringent financing scenario due to increasing delinquencies.

Although demand from the automotive engines was weak, the company re-ported strong growth in sale of DG sets (800 units vs 500 units) in the quarter.The company mainly operates in the 5-500 KVA DG set range.

Engine Volume

(Nos) Q2FY17 Q2FY16 % chg

3W 80000 80,000 -

4W 8000 10,000 (20.0)

Pumpsets 25000 22,000 13.6

DG sets 800 500 60.0

Tillers 1000 1,000 -

Source: Comapany

Client OEMs of GCL in 3W

Corporate Brand Fuel Engine

Piaggio Ape Xtra and City CNG, Diesel, LPG 4 stroke single cylinder

M&M Alfa and Champion Diesel and CNG 4 stroke single cylinder

TVS King Diesel 4 stroke single cylinder

Atul Auto Shakti, Gem and Gemini Diesel 4 stroke single cylinder

Source: Comapany

Segment Revenues

(Rs mn) Q2FY17 Q2FY16 YoY (%)

Engines 4779 4565 5

Others (includes mainly Tillers) 120 166 -30

Total 4895 4732 3

Source: Comapany



Margins declined due to higher provision for doubtful debts in"Other expenditure"

Company reported gains in gross margins aided by benign material prices andsavings through value engineering.

However, EBITDA margin contracted by 190 bps y-o-y to 15.8% as the companyprovided for doubtful debt of Rs 80 mn in "other expenditure". The provisionrelated to sale of agri-equipment. Note that such provisions are rare for thecompany as ~ 60% of sales is accounted for by Piaggio. Adjusted for this provi-sion, EBITDA margins been higher by 180 bps.

Segment margins

(%) Q2FY17 Q2FY16

Engines 16.5 18.4

Others 5.4 2.6

Total 16.3 17.8

Source: Comapany

Capex likely to remain moderateThe company does not envisage major capex in capacity enhancement in thenear future. Bulk of the capex of the order of Rs 500-1000 mn is earmarked forR&D aimed at making engines emission compliant. Further, this spend would notbe incurred in one go and would be phased out depending on the timeline ofrollout of the emission norms.

Company ready with multicylinder engineGCL is an established name in the LCV diesel engine segment but has now alsoextended its capabilities to make multi-cylinder engines for Small CommercialVehicles of up to 3-3.5 tons, which opens up a significant market for the com-pany. The company is in talks with various OEMs to partner with them for theirexisting as well as future engine requirements in the multi-cylinder engine seg-ment.

Other highlights The company had been selected as the engine sourcing location for the

Eicher's Multix model, though engine supplies are at low levels.

The company continues to be very efficient with cash generation and has ac-cumulated cash of Rs 4.5 bn at the end of Q2FY17.

After sales service for multibrands spares: GCL has recently forayed intomulti brand spares business as an extension to its after-market services. Thecompany derives ~ 20% of its revenues from sale of spares fitted with GCLengine. Now, the company plans to provide a complete range of multi brandspares across categories (like engine, transmission, electrical, rubber parts,lubricants and body parts) and OEMs.

Since, except Bajaj Auto, most other three wheeler manufacturers are sourc-ing engines from GCL, this essentially means competing with Bajaj Auto forafter sales spares.

The company, will initially, offer fast-moving vehicle and engine spare partsthrough its strong retail network. This will be in addition to generic parts. Inthe next phase, even relatively slow-moving parts will also be offered irre-spective of the brand of 3-wheeler passenger and commercial vehicles. Thecompany will be the first to offer spares across all categories in three-wheeler (3W) Segment.



The company does not plan to manufacture these spares but has tied up withmore than 40 vendors for the supply of various spares. That this venturewould not be margin dilutive is being taken care of by the company.

The company's strength is its reach across india, which it aims to expand fur-ther by opening additional 1500 outlets in the coming three to five years.

Currently, the addressable size of the 3W spare part markets in India is Rs 35bn. The company aims to gain a substantial market share in the next threeyears.

Substantial increase in cost of engine for a BS IV compliant engine:

The ministry of Road Transport and Highways has mandated all two-wheelers,three-wheelers and four-wheelers (LCV) will have to comply with Bharat StageIV (BS IV) norms from April 1, 2017. BS IV for these vehicle categories is alreadyin place in metro cities but a nation-wide rollout is scheduled from April 2017.The company sold 3000 units of BS IV compliant LCVs in Q1FY17 out of the totalvolume of 7000 units sold of 4W LCV.

The management has indicated that compliance of BS IV emission norms wouldlead to a material increase in cost of engines (though it did not quantify in valueterms).

We therefore see a reasonable probability of surge in demand in the run-up tothe implementation of the norms in April 2017.

Valuation and Recommendation

GCL is currently trading at 15.6x and 14.2x FY17 and FY18 earnings respectively.The stock trades at a discount to peers, which we believe is mainly on accountof 1) significant dependence on a single client (Piaggio) 2) Weak growth trend inthe 3W segment. While we concede that the growth outlook is not very strongand hence the discount, we highlight that the company's return ratios arehealthy (ROE of 20.7% in FY16) and cash flow is robust. Given this, we see valuein the stock and rate it as BUY with an unchanged price target of Rs 160.

We maintain BUY onGreaves Cotton Ltd with a

price target of Rs.160




BAJAJ ELECTRICALS LTD (BAEL)PRICE: RS.232 RECOMMENDATION: ACCUMULATETARGET PRICE: RS.260 FY18E P/E: 14.2X

BAEL reported Q2FY17 result lower than our estimates due to weakerperformance in the consumer division (including lighting division). Lossminimization continued in the E&P business. We however highlight thatmargin in consumer segment is still substantially lower than keycompetitors like Havells and Crompton Greaves Consumers Electricals.

We note that BAEL stock is trading at a significant discount to the peergroup due to 1) company's presence in EPC business (B2B) which attractlower valuation, 2) sub-par margins vis-à-vis competitors and 3) prolongedhistory of earnings disappointment. While we are positive on the newinitiatives taken by the management to improve distribution network(under RREP program) and achieve better (and monitorable) reach, webelieve that the real benefits would take longer time to surface.

We cut FY17 and FY18 earnings estimate to factor in continuedsluggishness in the B2C business and value the SBU at PER of 16x FY18earnings (earlier 18x). We arrive at a SOTP based target price of Rs 260(earlier Rs 300) and maintain 'ACCUMULATE' (buy on declines) rating oncompany's stock.

Quarterly performance

(Rs mn) Q2FY17 Q2FY16 YoY (%) Q1FY17 QoQ (%)

Net Sales 9966 11141 (10.6) 9518 4.7

Other Income 77 125 (38.5) 98 (21.6)

Raw material cost 187 -125 (249.8) 510 (63.3)

Purchase of traded goods 6320 7846 (19.5) 5769 9.5

Employee cost 1305 1251 4.3 1346 (3.1)

other expenditure 1701 1652 3.0 1328 28.1

Provision for E&C losses

Total expenditure 9513 10624 (10.5) 8954 6.2

EBITDA 453 517 564 (19.8)

Depreciation 71 63 12.4 67 5.7

PBIT 459 579 (20.8) 595 (22.9)

Interest expense 200 273 (26.6) 228 (12.3)

PBT 259 307 367 (29.5)

Tax Expense 92 121 139 (33.7)

Adj. PAT 167 185.9 229 (26.9)

Other comprehensive Income (7.8) (9.3) (7.7)

Total Comprehensive Income 159 177 220.9

EPS (adj) 1.7 1.9 2.3

EBITDA (%) 4.5 4.6 5.9

Tax (%) 35.5 39.4 37.7

RM/Sales (%) 65.3 69.3 66.0

Source: Company

Summary table


Sales 46120 47896 54980Growth (%) 8.3 3.9 14.8EBITDA 2593 2874 3574EBITDA margin (%) 5.6 6.0 6.5PBT 1535 1744 2443Net profit 955 1151 1612EPS (Rs) 9.7 11.6 16.3Growth (%) nm 20.4 40.1CEPS 12.4 15.0 19.7BV (Rs/share) 76.1 84.5 96.6DPS (Rs) 2.0 2.2 3.2ROE % 13.3 14.5 18.0ROCE % 9.0 10.2 12.8Net cash (debt) (1418) (3374) (2640)NW Capital (Days) 7 25 22EV/Sales (x) 0.5 0.5 0.4EV/EBITDA (x) 9.4 8.5 6.8P/E (x) 24.0 19.9 14.2P/Cash Earnings 17.2 14.3 10.9P/BV (x) 2.8 2.5 2.2

Source: Company, Kotak Securities - PrivateClient Research

RESULT UPDATE

Ruchir [email protected]+91 22 6218 6431



Result HighlightsIn Q2FY17, BAEL revenues stood at Rs 9.9 Bn (-10.6% YoY adjusted for excise) dueto 1) lower primary sales in the consumer business and 2) subdued execution in theEPC business. Company reported operating margin at 4.5% (down 10 bps YoY) dueto poor margins in the consumer business.

E&P segment, revenues stood at Rs 4.3 Bn, down 16% YoY due to prolonged mon-soons that affected the project execution. Operating profit for the segment stood atRs 330 mn vis-à-vis Rs 334 mn in Q2FY16. We believe that most of the loss makinglegacy orders in E&P segment are over and current orders would ascertain sustainedmargins going ahead.

Consumer appliances division disappointed in Q2FY17; revenues stood at Rs 5.6 Bn(-5.5% YoY) due to 1) 33% YoY de-growth in the lighting business (owing to sharpreduction in CFL market and lack of EESL orders for LED) and 2) company's newdistribution initiatives emphasizing on boosting secondary sales. Gross margins im-proved to 34.7% against 30.6% in Q2FY16 driven by lower input costs.

Management highlighted that fans revenue too fell 3.2% YoY in the quarter as mostof the sales is achieved through wholesaler channel which has been negatively im-pacted under RREP format. Consumer appliances (ex-fans/lighting) grew 5.4% YoYin the quarter. Management highlighted that 35% of current distribution systems hasbeen brought under RREP (TOC based selling model) and expects meaningful recov-ery in revenues from Q3FY17 onwards.

EBIT margin for the segment, however contracted sharply to 2% in Q2FY17 vis-à-vis4% in Q2FY16 due to lower volumes. Employee cost at Rs 1.3 Bn (+4.3% YoY)accounted by increased manpower at distribution nodes under new distributionmodel. Management has maintained that the new distribution model shall stabilizeby the end of FY18.

Segment Results Rs (mn)

Consolidated revenues Q2FY17 Q2FY16 YoY (%) Q1FY17 QoQ (%)

Consumer Durables 5661 5991 (5.5) 5478 3.3

Engg Projects 4393 5227 (16.0) 4114 6.8

PBIT

Consumer Durables 115 238 (52) 252 (54.5)

Engg Projects 330 334 309 7.0

PBIT (%)

Consumer Durables 2.0 4.0 4.6

Engg Projects 7.5 6.4 7.5

Source: Company, Q1FY17 and Q4FY16 financials not comparable due to reclassification of consumer num-bers

Interest charges came down to Rs 200 mn in Q2FY17 vis-à-vis Rs 273 mn last yeardue to improved working capital. Tax expense stood at Rs 92 mn resulting in ad-justed net profit of Rs 167 mn vis-à-vis Rs 185 mn in Q2FY16.

Company's RREP program should yield results from Q3FY17 on-wardsBAEL launched RREP (Retail reach expansion program) in FY16 to reach out to deal-ers more efficiently as against traditional wholesaler based model of selling. TheRREP programs (TOC-Theory of constraints based model) is currently under imple-mentation and has had diminishing effect on company's primary sales over the lastfew quarters. Management has earlier highlighted that TOC model would start yield-ing benefits (partially) form Q3FY17 onwards. However, full benefits from TOCbased distribution model are expected to materialize from FY18.



RREP model is likely to realign company's interests/incentives with the channelpartners. We highlight that several other companies have also opted for a simi-lar kind of distribution model in past, in order to obviate the inherent limitationswith the wholesaler based selling such as 1) company's lower degree of involve-ment with distributors (wholesaler centric approach), 2) wholesalers make littleefforts to sell newly launched or premium products and sell lower priced itemsto earn incentives (high volumes realization) and 3) large (influential) wholesalersoften try to generate sales in areas other than their territory by offering largediscounts.

Management believes that TOC based RREP model would provide benefits in termsof 1) improved engagement with dealers, 2) establish efficient feedback mecha-nism, 3) expand product reach for premium/newly launched products and 4) achievelower inventory levels.

Further, management had also highlighted that the company could suffer loss ofprimary sales in the short run, during the course of implementation of RREP model.In the wholesaler based selling model, company typically used to push sales targetsin the end of every month to achieve targets. This was generally achieved by givingextra incentives/discounts to the distributors. Under RREP, company has averted thispractice of giving extra discounts and thus expects streamlining of company's inter-est with dealers. It expects to expand gross margins in the longer term.

Under RREP (where supply chain is highly centralized) company is optimistic of seek-ing benefits from 1) improved purchases in terms of bulk buying, 2) savings fromlower investment in ideal inventory (slow moving products) and 3) reduction in dis-counts offered to large wholesalers.

As a second step under TOC based selling, company would aim at increasing salesand expect recovery from Q3FY17 onwards. We suspect that the company has lostmarket share in the past few quarters (reflected in company's poor sales in last fewquarters' vis-à-vis competitors). As of now, TOC covers nearly 35% of distributorsand should reach 45-50% by the end of current fiscal. Management expects toachieve over 90% TOC rollout by FY18.

We note that in the past, some of the other competitors have also made attempts torealign the distributor discounts. For instance, in FY16 Havells too has averted thepractice of offering additional discounts to the large distributors and had experiencestemporary fall in sales. However, we fail to identify any major players who has com-pletely done away with wholesalers' based selling. Most of the players, we believehave resorted to a combination (40-60 or 50-50) of wholesalers and direct sellingmodel. We therefore believe that the company would have to be swift and efficientin ramping up sales (by means of aggressive advertising campaigns to create de-mand pull) post full commencement of RREP and regain lost market share. We be-lieve that the successful rollout of RREP is critical for the company and remainwatchful of the developments and progress made in this direction.

Earning projection and ValuationWe cut FY17/FY18 estimates and project revenue growth at 9.1% CAGR betweenFY16-18 (earlier 10.8%). In consumer division, we believe BAEL would continue toreport low margin in 9MFY17 until major part of RREP implementation is accom-plished. We project EBITA margin at 6% and 6.5% in FY17 and FY18 respectively.

Change in earnings estimate

(Rs mn) FY17 FY18New Old % Chg New Old % Chg

Sales 47896 49474 (3.2) 54980 56794 (3.2)

EBITDA 2874 2968 (3.2) 3574 3692 (3.2)

PAT 1151 1213 (5.1) 1612 1690 (4.6)

EPS (Rs) 11.6 12.3 (5.3) 16.3 17.1 (4.6)




Valuation and Recommendation

We note that at FY18 PER of 14.2x, BAEL stock is trading at a significant dis-count to the peer group due to 1) company's presence in EPC business (B2B)which attract lower valuation, 2) sub-par margins vis-à-vis competitors and 3)prolonged history of earnings disappointment.

We value consumer business at PER of 16x FY18 earnings (earlier 18x) and arrive ata target price of Rs 260 (earlier Rs 300). We maintain 'ACCUMULATE' (buy on de-clines) rating on company's stock.

Valuation

(Rs mn) FY18E

B2C

EBIT-Lighting 728

EBIT-Consumer Appliances 1683

EBIT B2C 2410

Interest (300.00)

Tax (696.45)

PAT 1414

Target PER 16

Target Market Capitalization (B2C) (a) 22624

EBIT B2B 1128

Interest (700)

Tax (141)

PAT 287

Target PER 10

Target Market Capitalization (B2B)(b) 2726

Target Market Capitalization (BAEL) (a+b) 25350

Target price per share (BAEL) 260


We maintain ACCUMULATTEon Bajaj Electricals Ltd with

a price target of Rs.260



RESULT UPDATE

Ruchir [email protected]+91 22 6218 6431


PIDILITE INDUSTRIES LTD (PIL)PRICE: RS.665 RECOMMENDATION: SELLTARGET PRICE: RS.670 FY18E P/E: 34.8X

PIL reported Q2FY17 results in line with our estimates; benign VAM priceshelped maintaining margins. International business and other subsidiariesincluding Nina waterproofing and ICA woodworks reported meaningfulrevenue growth.

We believe that at current price, stock is trading expensive implyingminimal margin of safety; fully discounting the benefits of lower inputprices and potential recovery in B2B and B2C businesses. We value PIL stockat 35x FY18 estimated earnings and maintain 'Sell' recommendation oncompany's stock with an unchanged target price of Rs 670.

Consolidated Result

(Rs mn) Q2FY17 Q2FY16 YoY % Q1FY17 QoQ

Income from Operations 14177 13185 7.5 15694 (9.7)

Decrease/ (Increase) in stock 30 (301) 579

Material consumed 6568 6656 (1.3) 6900 (4.8)

Employee expenses 1563 1393 12.1 1625 (3.9)

Other expenses 2791 2429 14.9 2646 5.5

Total Expenses 10952 10177 7.6 11750 (6.8)

EBITDA 3225 3008 7.2 3943 (18.2)

Other income 324 216 50.1 241 34.6

Depreciation 303 248 22.0 258 17.6

EBIT 3246 2976 9.1 3927 (17.3)

Finance cost 26 31 35

Exceptional Items 0 0 0

Foreign exchange dif expense (11) (14) (4)

PBT 3209 2959 8.4 3887 (17.5)

Total tax 912 893 2.0 1174 (22.4)

Other comprehensive income 1.10 0.00 -0.8

PAT 2312 2026 14.2 2722 (15.0)

Adjusted PAT 2312 2026 2722 (15.0)

Adj. EPS (Rs) 4.6 4.0 5.4 (15.0)

RM/Sales 46.5 48.2 47.7

EBITDA (%) 22.8 22.8 25.1

Tax Rate (%) 28.4 30.2 30.2

Source: Company, Kotak Securities - Private Client Research

Result HighlightsPIL consolidated revenue stood at Rs 14.1 Bn grew 7.5% YoY (adjusted for excise) inQ2FY17 driven by 9.4% YoY growth in consumer business (sales reported at Rs 12.9Bn). Standalone business reported 4.8% YoY revenue growth (Volume growth stoodat 12.7% in industrial and 7.8% in consumer and bazar division). Managementstated that the demand outlook remains challenging currently, however is poised torecover on back of strong monsoon boosting consumer spending in tier ii/iii cities.

Industrial product division reported growth of 5.2% YoY in the quarter at consoli-dated level. EBIT margins at 19% expanded 410 bps YoY on back of favourableproduct mix and benign input prices.

Summary table


Sales 53,414 60,735 69,298Growth (%) 10.8 13.6 14.0EBITDA 11,787 14,194 14,778EBITDA margin (%) 22.1 23.4 21.3PBT 10785 13145 13655Net profit 7,612 9,333 9,695EPS (Rs) 14.9 18.4 19.1Growth (%) 47.3 23.4 3.9CEPS (Rs) 17.5 21.2 22.1BV (Rs/share) 54.8 65.6 76.9DPS (Rs) 4.6 6.4 6.7ROE (%) 29.9 30.5 26.8ROCE (%) 26.6 27.5 24.6Net cash (debt) 476 831 1,631NW Capital (Days) 42.6 53.4 58.9EV/Sales (x) 6.6 5.5 4.9EV/EBITDA (x) 28.6 23.7 22.8P/E (x) 44.6 36.2 34.8P/Cash Earnings (x) 38.0 31.4 30.1P/BV (x) 12.1 10.1 8.7




PIL reported consolidated margin expansion to 22.8% in the quarter driven bysoft input prices. We believe that VAM prices have stayed at USD 750-800 levelsper tonne. Management expects benefit from low input prices to keep flowing inthe near term.

Earlier management had stated that raw materials savings could be utilized for ad-vertising and promotion activities over FY17/FY18. We believe the promotion ex-pense could increase to 4-5% of sales in future from current 3.5% level.

Management also stated that its subsidiaries Blue Coat and Nina waterproofing (ac-quired in FY16; revenue over Rs 1.5 Bn in FY16) are observing traction. We note thatNina delivered 13-15% YoY revenue growth with 14-15% operating margin in FY16.

Segment reporting

Q2FY17 Q2FY16 YoY (%) Q1FY17 QoQ (%)

Consolidated Segment Revenue (Rs mn)

Consumer & Bazar Products (CBP) 12929 11820 9.4 14504 (10.9)

Industrial Products (IP) 2388 2270 5.2 2457 (2.8)

Segment EBIT

Consumer & Bazar Products (CBP) 3072 2831 8.5 3926 (21.8)

Industrial Products (IP) 455 339 34.1 449 1.3

Segment Margins %

Consumer & Bazar Products (CBP) 23.8 24.0 27.1

Industrial Products (IP) 19.0 14.9 18.3

Source: Company

International business revenues reported mixed results in Q2FY17 driven by all thegeographies except Middle East and Brazil. Key subsidiaries revenues (implied) re-ported sales at Rs 1.9 Bn in Q2FY17 vis-à-vis Rs 1.5 Bn in Q2FY16. Sales grew 7%YoY in constant currency basis. EBITDA margins at 7.7% in international businesscontracted sharply on YoY basis (implied subsidiaries EBITDA at 14.1% in Q2FY16).Pidilite continues to incurr additional O&M costs in Middle East (budgeted fromQ3FY16 onwards) having diminishing effects on margins currently (should get net offby in 2HFY17).

Among the key geographies, Brazil business continued with report tepid perfor-mance due to sluggish economic growth. PIL has taken various cost restructuringmeasures in the Brazilian subsidiary and have curtailed loss. In Q2FY17, Brazil re-ported EBITDA of Rs 10.8 mn against loss of Rs 9.1 mn in Q2FY16. North Americasales grew by 5.8% YoY in Q2FY17, reported at Rs 635 mn. Operating loss stood atRs 17 mn against a profit of Rs 70 mn in Q2FY16.

Middle East/Africa subsidiary reported revenues at Rs 262 mn in Q2FY17 against Rs239 mn in Q2FY16. However, reported operating loss of Rs 58 mn against loss of Rs31 mn in Q2FY16 due to lower capacity utilization, higher SG&A expenses and delayin ramp up of sales. Other subsidiaries including SAARC and SEA reported sales andoperating profits reported at Rs 360 mn (23% YoY growth, also aided by inor-ganic initiative) and Rs 43 mn in the quarter.

Subsidiaries Result

(Rs mn) Q2FY17 Q2FY16 YoY % Q1FY17 QoQ

Income from Operations 1977 1548 27.7 1992 (0.8)

EBITDA 152 218 (30.5) 76 99.7

PAT 36 123 (71.2) (11) (425.7)

EBITDA% 7.7 14.1 3.81


In Q2FY17, tax expense/provision increased to Rs 912 mn resulting in PAT of Rs 2.3Bn.



Other takeaways

Elastomer business continues to remain on hold. Management expects towork out a definite strategy, involving strategic partner for the business infuture. Company is looking to get a strategic partner at Dahej plant.

Company has been able to maintain market share/pricing in most of the productcategories despite increased competition.

Company would likely maintain advertisement spends at around 3.5-4% of salesin FY17.

In Middle East, company is looking to reduce SG&A expenses and expects im-proved performance from Q3FY17 onwards.

PIL will continue to spend nearly 3% of sales in capex (mainly maintenancecapex). Any inorganic initiatives would be in addition to this.

Valuation and RecommendationWe believe that at current price, stock is trading expensive at 34.8x FY!8 earningsimplying minimal margin of safety; fully discounting the benefits of lower inputprices and potential recovery in B2B and B2C businesses. We value PIL stock at 35xFY18 estimated earnings and maintain 'SELL' recommendation on company's stockwith an unchanged target price of Rs 670.

We maintain SELL on PidiliteIndustries Ltd with a price

target of Rs.670




APOLLO TYRES LTD (APTY)PRICE: RS.196 RECOMMENDATION: ACCUMULATETARGET PRICE: RS.211 FY18E P/E: 7.4X

APTY's 2QFY17 results came below expectations. Consolidated revenuesfor the quarter increased by 2% YoY to Rs31bn, EBITDA margin contractedYoY by 193bps YoY and PAT declined by 7% YoY to Rs2.6bn. Companyperformance during the quarter was impacted by volume decline indomestic commercial vehicle business, increase in raw material cost, pricecuts and lower margin from Reifencom (acquired in 2HFY16). We remainpositive about healthy revenue growth for the company over the medium tolong term. Expected improvement in commercial vehicle demand, continuedgrowth in passenger car demand, ramp-up in two wheeler segment,OEM's sales startup in Europe and new capacities coming on stream arefactors that will drive revenue growth for APTY. We expect EBITDAmargins to remain healthy and stable. We have increased our FY17/FY18net profit estimates by 4%/7%. We revise our target price on the stock toRs211 (earlier Rs185) and maintain ACCUMULATE rating on the stock. Anysignificant rise in natural rubber remains a key risk to our estimates andrating.

Standalone result highlights

Quarterly performance (Standalone)

(Rs mn) 2QFY17 2QFY16 YoY (%) 1QFY17 QoQ (%)

Revenues 20,755 22,646 (8.4) 22,734 (8.7)

Total expenditure 17,446 18,652 (6.5) 18,761 (7.0)

RM consumed 11,784 13,376 (11.9) 12,476 (5.5)

Employee cost 1,487 1,393 6.7 1,563 (4.9)

Other expenses 4,175 3,882 7.5 4,722 (11.6)

EBITDA 3,309 3,995 (17.2) 3,974 (16.7)

EBITDA margin (%) 15.9 17.6 - 17.5 -

Depreciation 644 683 (5.7) 631 2.0

Interest cost 235 224 5.0 242 (2.8)

Other Income 428 93 358.3 253 69.2

Exceptional item - -

PBT 2,858 3,180 (10.1) 3,353 (14.8)

PBT margins (%) 13.8 14.0 14.7

Tax 812 1,029 (21.1) 991 (18.1)

Tax rate (%) 28.4 32.3 - 29.5 -

Reported PAT 2,046 2,152 (4.9) 2,362 (13.4)

PAT margins (%) 9.9 9.5 - 10.4 -

Other Comprehensive Income (53) 1 3.9

Total Comprehensive Income 1,993 2,153 (7.4) 2,366 (15.8)

Reported EPS (Rs) 4.0 4.2 (4.9) 4.6 (13.4)

Source: Company

APTY's standalone revenues during the quarter declined by 8% YoY toRs20.8bn. Revenue decline was due to 2% volume degrowth and 6% negativeimpact of price and mix (due to price cuts taken in past one year and declinein commercial tyres volumes).

During the quarter, company witnessed 10%/15% volume growth in passengercar radial (PCR)/farm tyres and 10% volume decline in truck tyres.

Summary table


Sales 117,930 131,945 155,645Growth (%) (7.8) 11.9 18.0EBITDA 19,682 20,236 24,255EBITDA margin (%) 16.7 15.3 15.6PBT 15,706 15,635 18,445Adj. Net profit 10,613 11,483 13,404Adjusted EPS (Rs) 20.8 22.6 26.3Growth (%) 2.8 8.2 16.7CEPS (Rs) 29.8 31.4 37.2BV (Rs/share) 121.5 141.6 165.5Dividend / share (Rs) 2.0 2.0 2.0ROE (%) 18.9 17.2 17.1ROCE (%) 23.7 19.5 19.1Net cash (debt) (3,610) (14,988) (24,647)NW Capital (Days) 58 53 49P/E (x) 9.1 8.7 7.4P/BV (x) 1.6 1.4 1.2EV/Sales (x) 0.9 0.9 0.8EV/EBITDA (x) 5.3 5.7 5.1


RESULT UPDATE

Arun [email protected]

+91 22 6218 6443



During the quarter, raw material cost inched up QoQ and that resulted intogross margin sliding by 190bps to 45.1%. On a YoY basis, raw material werelower and thereby gross margin were up by 229bps.

Other expenses increased YoY due to conversion cost for 2W tyres and in-crease in freight and R&D expenses.

EBITDA for the quarter declined by 17% YoY as margins contracted by 169bpsYoY and 153bps QoQ to 15.9%. On a YoY basis, EBITDA margin reducetionwas due to volume decline, translating in to negative operating leverage. Se-quentially margin decline was due to increased raw material cost.

Other income saw sharp surge in 2QFY17 due to forex gain and interest income(both accounting ~50% each). Tax rate was also lower during the quarter whichwe believe was due to higher other income.

Standalone PAT for the quarter declined by 5% YoY to Rs2.05bn.

Consolidated result highlights

Quarterly performance (Consolidated)


Revenues 30,849 30,136 2.4 33,116 (6.8)

Total expenditure 26,466 25,272 4.7 27,728 (4.6)

RM consumed 15,915 15,878 0.2 16,186 (1.7)

Employee cost 4,338 3,972 9.2 4,468 (2.9)

Other expenses 6,212 5,422 14.6 7,075 (12.2)

EBITDA 4,383 4,864 (9.9) 5,388 (18.6)

EBITDA margin (%) 14.2 16.1 - 16.3 -

Depreciation 1,058 1,075 (1.6) 1,060 (0.2)

Interest cost 263 256 2.8 269 (2.4)

Other Income 430 165 160.7 269 59.5

Exceptional item 478 - -

PBT 3,493 4,175 (16.3) 4,328 (19.3)

PBT margins (%) 11.3 13.9 13.1

Tax 891 1,366 (34.8) 1,181 (24.6)

Tax rate (%) 25.5 32.7 - 27.3 -

PAT (bef minority int/asso pft) 2,602 2,810 (7.4) 3,147 (17.3)

Share of associates/Minority Int 1 9 - 0 -

Reported PAT 2,600 2,801 (7.2) 3,147 (17.4)

PAT margins (%) 8.4 9.3 9.5

Other Comprehensive Income 19 1,001 (272)

Total Comprehensive Income 2,619 3,802 (31.1) 2,875 (8.9)

Reported EPS (Rs) 5.1 5.5 (7.2) 6.2 (17.4)

Source: Company

Segmental performance


Segmental Revenues

APMEA 23,664 25,680 (7.9) 25,611 (7.6)

EA 9,942 7,630 30.3 10,577 (6.0)

Others 3,678 2,327 58.0 2,962 24.2

EBIT margins

APMEA 13.2 13.2 - 14.1 -

EA 4.6 5.6 - 8.6 -

Others 3.2 3.1 - 2.2 -

Source: Company



Consolidated revenues for the quarter grew by 2% YoY to Rs30.8bn. WhileIndia operations witnessed decline, growth in Europe plant and acquisition ofReifencom (acquired in 2HFY16) helped the company post marginal consolidatedrevenue growth. Company takes maintenance shutdown at Europe plant in July/August every year.

European business revenues grew by 30% YoY to Rs9.9bn. Volume growth inEurope business was 7%. Vredestein (manufacturing activity in Netherland) rev-enues grew by 6% YoY from Euro106mn to Euro112mn. Reifencom revenues forthe quarter was Euro28mn as against Euro29mn in 2QFY16 (this business wasacquired during 2HFY16).

Given lower input cost gross margins for the quarter improved by 110bps YoY to48.4%. However, QoQ EBITDA margin declined by 272bps due to 5% increasein raw material cost basket and weak performance by Reifencom (due to leanseason).

Rise in other expenses pertains to conversion cost for 2W tyres and increase infreight and R&D expenses at the standalone business and lower margins atReifencom business.

Consolidated EBITDA for the quarter declined 10% YoY and 19% QoQ. Lowerstandalone business EBITDA margin and negative 5% EBITDA margin fromReifencom impacted EBITDA during the quarter. Vredestein's EBITDA margin in-creased marginally to 11.4% (from ~11% in 2QFY16).

On the back of decrease in EBITDA, PAT declined by 7% YoY to Rs2.6bn.

Conference Call Highlights Company highlighted that volume decline in truck tyres was for both OEM and

replacement segment (though decline in OEM volume decline was higher). Man-agement indicated towards improved truck tyre demand, so far in 3QFY17. How-ever, company pointed out that demonetization could impact demand in thenear term.

In the 2W tyre segment, the company continues to make progress. Current vol-umes stands at 100,000 tyres per month for APTY.

In the consolidated revenues - 75% contribution was from replacement and 25%came from OEM. Truck tyres share declined to 41% from ~45-50% earlierand share of PCR and farm tyres increased YoY. In standalone revenues,share of truck tyres fell from ~65% to ~55%.

APTY signed a MoU with the Andhra Pradesh government for setting up anew greenfield plant with total investment of around Rs5bn.

Company will soon start supplying to OEM's in Europe business.

Company expects Europe business margin could remain under pressure in thenear term due to increased fixed cost (R&D / test centre cost) and will im-prove post Hungary plant coming on stream.

On raw material, company expects prices to be range bound and could witnessslight increase in 3QFY17. Average raw material price in 2QFY17 - NaturalRubber - Rs137/kg, Synthetic Rubber - Rs110/kg, Steel Cord - Rs110/kg andCarbon Black - Rs55/kg.

During 1HFY17, APTY incurred capex of Rs6bn for Chennai plant andEuro100mn on Hungary plant. In FY18, company will invest Euro125mn on Hun-gary plant and Rs8bn on Chennai plant expansion.

Capex of Hungary and Chennai plant will end in 4QFY18. Post that capex isexpected to come down. Hungary plant's full capacity will be achieved byFY21. Post Hungary plant, APTY's Europe PCR capacity will increase from6.5mn TPD to 12mn TPD.



Hungary plant will start commercial production in 4QFY17. Hungary plant willhave phase 1 capacity of 5.5mn PCR and 0.7mn truck tyres.

In India current PCR capacity is 32,000 tyres per day (TPD) and the same willremain unchanged. However, APTY exports 1mn tyres annually to Europe andthat will stop with Hungary plant coming onstream - thereby creating additionalvolumes for domestic PCR segment. Company will add small capacities on theSUV tyre segment. Truck Bus Radial (TBR) capacity will increase from current6,000 TPD to 12,000 TPD post full ramp-up by June 2018.

APTY took a price cut of 2% in July 2016 in TBR segment and 2.5% price cut inTBB segment in October 2016.

Consolidated gross/net debt as of end 2QFY17 was at Rs30bn/16.5bn.Standalone gross/net debt as of end 2QFY17 was at Rs14bn/5bn.

Outlook We expect APTY's volumes to improve in 2HFY17 and grow at a healthy pace

in FY18. Expected improvement in commercial vehicle demand, continuedgrowth in passenger car demand, ramp-up in two wheeler segment, OEM'ssales startup in Europe and new capacities coming on stream are factors thatwill drive revenue growth for APTY.

We expect EBITDA margins to remain healthy and stable

Government have initiated probe against TBR dumping from China. Any positivedevelopment on this event can potentially give strong boost to TBR/TBB vol-umes. APTY derives significant proportion of sales from truck tyres and itcould be a key beneficiary if Chinese TBR imports are curbed.

For FY17, we have lowered revenues to factor in weak 2QFY17 performance.We have also adjusted below EBITDA line items in line with 1HFY17 perfor-mance. Accordingly our FY17 PAT stands increased by 4%. For FY18, we havemarginally increased our revenues and EBITDA margin and that translates into6.5% increase in PAT.

We revise our target price on the stock to Rs211 (earlier Rs185) and maintainACCUMULATE rating on the stock. We have valued the stock on a PE of 8x(earlier 7.5x) FY18E EPS.

Change in estimates

Consolidated FY17 FY18(Rs mn) Old New % chg Old New % chg

Revenues 134,301 131,945 -1.8 154,025 155,645 1.1

EBITDA Margin (%) 15.4 15.3 15.5 15.6

PAT 11,070 11,483 3.7 12,584 13,404 6.5


Key RiskLower than expected volume growth and significant increase in raw material costare key risks to our earnings estimates.

We maintain ACCUMULATE onApollo Tyres Ltd with a price

target of Rs.211




MOTHERSON SUMI SYSTEMS LTD (MSSL)PRICE: RS.326 RECOMMENDATION: SELLTARGET PRICE: RS.298 FY18E P/E: 22.4X

MSSL's consolidated 2QFY17 revenues and EBITDA came in marginallybelow our estimates. Consolidated revenues during the quarter grew by14% YoY to Rs101bn (2% below estimates). EBITDA for the quarter camein at Rs9.97bn, 11% higher YoY but 4% below our estimates. ConsolidatedPAT during the quarter stood at 3.6bn, 25% growth YoY and 5% aboveestimates. While standalone business performance was on expected lines,SMRPBV's results were a tad below expectations. Backed by expectation ofrobust passenger vehicle demand and rising content per car, MSSL'sstandalone business revenues are expected to grow at a healthy pace. AtSMRPBV, execution of various new orders started in 1HFY17 and that willramp-up in the coming quarters, translating into robust revenue growth.With increased revenues and operational efficiencies, we expect EBITDAmargins to witness improvement. We maintain our price target of Rs298on the stock and maintain SELL as valuations capture most of thepositives.

Standalone Result Highlights

Quarterly performance (Standalone)


Revenues 15,860 13,548 17.1 14,215 11.6

Total expenditure 12,682 10,794 17.5 11,598 9.3

RM consumed 8,560 7,369 16.1 7,548 13.4

Employee cost 1,999 1,647 21.4 2,003 (0.2)

Other expenses 2,123 1,778 19.4 2,047 3.7

EBITDA 3,179 2,754 15.4 2,617 21.5

EBITDA margin (%) 20.0 20.3 - 18.4 -

Depreciation 492 503 (2.3) 479 2.7

Interest cost 13 183 (93.1) 135 (90.6)

Other Income 105 702 (85.1) 105 (0)

Exchange Differences (net loss) (87) (4) 15

PBT 2,866 2,773 3.3 2,094 36.9

PBT margins (%) 18.1 20.5 14.7

Tax 886 784 13.0 657 34.9

Tax rate (%) 30.9 28.3 - 31.4 -

Reported PAT 1,980 1,989 (0.5) 1,437 37.8

PAT margins (%) 12.5 14.7 - 10.1 -

Other Comprehensive Income (40.9) (15.4) (31.6)

Total Comprehensive Income 1,939 1,974 (1.8) 1,405 38.0

Reported EPS (Rs) 1.4 1.5 (6.2) 1.1 29.9

Source: Company

Standalone revenues grew by 17% YoY to Rs15.9bn. Revenue grew on the backof strong passenger car volume growth and rising content per car. Copper pricesin 2QFY17 were lower 22% YoY.

Gross margins during the quarter stood at 46%, 43bps higher YoY but 87bpslower QoQ.

Summary table


Sales 386,769 450,269 516,510Growth (%) 10 16 15EBITDA 38,333 46,799 56,679EBITDA margin (%) 9.9 10.4 11.0PBT 23,399 30,777 39,816Net profit 12,737 15,228 19,280EPS (Rs) 9.6 11.5 14.6Growth (%) 47.7 19.5 26.6CEPS (Rs) 18.2 21.1 25.2BV (Rs/share) 32 40 52Dividend/share (Rs) 2.5 2.5 2.5ROE (%) 34.0 31.8 31.6ROCE (%) 24.0 28.0 33.9Net cash (debt) (40,553) (27,288) (8,775)NW Capital (Days) 20 22 22P/E (x) 33.9 28.3 22.4P/BV (x) 10.2 8.1 6.3EV/Sales (x) 1.2 1.0 0.9EV/EBITDA (x) 12.3 9.8 7.8

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

RESULT UPDATE

Arun [email protected]

+91 22 6218 6443



Employee cost increased by 21% YoY, led by annual increments and increasein manpower. Other expenses increased by 19% YoY due to growth in busi-ness.

EBITDA margin for the quarter was at 20%, 30bps lower YoY. SequentiallyEBITDA margin moved up on account of operational leverage.

Other income declined YoY on a high base. 2QFY16 other income includesRs680mn as dividend income. Interest cost was lower YoY and QoQ. Standalonegross debt declined from Rs4.6bn as of on end 1QFY17 to Rs3.1bn as of end2QFY17.

Despite EBITDA growth of 15% YoY, standalone PAT remained flat YoY atRs1.98bn due to lower income.

Subsidiary Result Highlights

Quarterly performance (Subs) - Derived


Revenues 85,509 75,174 13.7 90,289 (5.3)


RM consumed 52,752 45,607 15.7 56,179 (6.1)

Employee cost 17,105 15,235 12.3 18,091 (5.5)

Other expenses 8,859 8,076 9.7 9,232 (4.0)

EBITDA 6,792 6,255 8.6 6,787 0.1

EBITDA margin (%) 7.9 8.3 - 7.5 -

Source: Company

SMRPBV (includes SMR and SMP) revenues grew by 13% YoY to Euro1,055mn,driven by double-digit growth at both SMP and SMR. SMR revenues grew by16% YoY to Euro375mn. Revenue growth for SMP during the quarter was 11%with revenues of Euro981mn.

EBITDA margin for SMRPBV witnessed marginal 40bps improvement YoY andthe same stood at 7.9%. EBITDA margin improvement was on the back of30bps margin improvement at both key businesses - SMR and SMP.

SMR's EBITDA margin increased from 9.3% to 9.6% YoY. SMR's EBITDA marginduring the quarter is still quite lower than record 12.5% margins achieved during4QFY16.

SMP's EBITDA margin moved up from 6.2% to 6.5%. However, margins weredown 40bps QoQ. SMP's EBITDA margin in the past few quarters have broadlybeen between 6-7%.

SMRPBV's PAT increased from Euro10mn to Euro14mn YoY.



Consolidated Result Highlights

Quarterly performance (Consolidated)


Revenues 101,369 88,721 14.3 104,504 (3.0)


RM consumed 61,312 52,977 15.7 63,727 (3.8)

Employee cost 19,104 16,882 13.2 20,094 (4.9)

Other expenses 10,983 9,854 11.5 11,279 (2.6)

EBITDA 9,971 9,009 10.7 9,404 6.0

EBITDA margin (%) 9.8 10.2 - 9.0 -

Depreciation 2,643 2,573 2.7 2,508 5.4

Interest cost 980 1,047 (6.4) 847 15.7

Other Income 45 53 (15.4) 37 20.4

Exchange Differences (net loss) (97) 224 123

PBT 6,489 5,218 24.4 5,964 8.8

PBT margins (%) 6.4 5.9 5.7

Tax 2,105 1,692 24.5 1,955 7.7

Tax rate (%) 32.4 32.4 - 32.8 -

PAT (bef minority int/asso pft) 4,384 3,526 24.3 4,009 9.3

Share of associates/Minority Int 774 643 20.4 983 (21.2)

Reported PAT 3,610 2,883 25.2 3,026 19.3

PAT margins (%) 3.6 3.3 2.9

Other Comprehensive Income (538) (535) 141

Total Comprehensive Income 3,072 2,348 30.8 3,168 (3.0)

Reported EPS (Rs) 2.6 2.2 18.0 2.3 12.4

Source: Company

Backed by growth at India operations and SMRPBV, MSSL's consolidated rev-enues grew by 14% YoY to Rs101bn, marginally lower than our expectation ofRs103bn.

EBITDA margin for the quarter was 9.8%, lower than 10.2% reported during2QFY16. EBITDA for the quarter was 9.97bn as against expectation ofRs10.4bn.

Reported PAT for the quarter was grew by 25% YoY to Rs3.6bn as against ex-pectation of Rs3.4bn.

Outlook and Valuation Domestic passenger vehicle demand is likely to stay robust over FY16-FY18E and

the same will be positive for company's India revenues.

At SMRPV, company started execution of orders worth Euro3.1bn (Rs.230 bn)in 1HFY17 and ramp-up of these orders will happen in subsequent quarters.In 1HFY17, added new orders worth Euro1.6bn (Rs120bn) and the total orderbook now stands at Euro11.9bn (Rs890bn). Company's order book as of endFY16 stood at Rs1,000bn.

On the back of commencement of new plants, we expect revenue growth tobe healthy for the company. With increased revenues and operational effi-ciencies, we expect EBITDA margins to witness improvement.

We maintain our price target of Rs298 on the stock and maintain SELL asvaluations capture most of the positives.

We recommend SELL onMotherson Sumi Systems Ltdwith a price target of Rs.298




SUN PHARMACEUTICALS INDUSTRIES LTD

PRICE: RS.667 RECOMMENDATION: BUYTARGET PRICE: RS.915 FY18E P/E: 18.2X

Sun's results were ahead of expectations mainly led by better margins. USrevenues at US$ 555mn (our exp US$ 560mn) were though in line. Sun hasindicated US$ 25mn of one time sales (which may not be repeated onquarterly basis). Adj for that, overall sales were lower than expected.However, on margins front, we saw the operating leverage benefit as wellas synergy benefit playing out. Though the quantum of benefits mayfluctuate depending on currencies as well as R&D outgo. Sun expects tolaunch Bromsite in near term, MK3222 BLA will be filed as per guidance inthis year. We retain our estimates for FY17E as well as FY18E and continueto value Sun at 23x FY18E and add an NPV (of Rs 28) for MK3222. MaintainBuy with a target price of Rs 915 (unchanged). The key catalyst for Sunremains Halol plant clearance.

RESULT UPDATE

Meeta Shetty, [email protected]

+91 22 6218 4425

Quarterly Financials -Snapshot

(Rs mn) 2QFY16 3QFY16 4QFY16 1QFY17 2QFY17 YoY (%) QoQ (%)

Net Sales 68,033 70,466 74,139 80,067 77,640 14 (3)

Material Expenses 15,583 17,554 14,520 18,470 18,399 18 (0)

Employee Expenses 12,088 11,483 11,812 12,393 11,991 (1) (3)

Other Oper Expenses 16,600 14,334 18,091 17,181 15,055 (9) (12)

R&D expenses 4,769 5,760 6,715 5,176 5,530

Operating Profits 18,994 21,335 23,000 26,847 26,666 40 (1)

Other Oper Income 343 355 2,203 2,363 5,011 1,361 112

EBITDA 19,337 21,690 25,203 29,210 31,677 64 8

Interest Cost 1,484 1,170 886 1,346 537 (64) (60)

Depreciation 2,711 2,508 2,643 3,160 3,038 12 (4)

Other Income 1,913 2,192 (350) 1,571 1,194 (38) (24)

PBT 17,055 20,205 21,325 26,275 29,295 72 11

Tax 3,355 2,020 1,706 3,527 4,417 32 25

Minority interest (2,633) (3,948) (2,482) (2,340) (2,360) (10) 1

Exceptional items - - - - -

PAT 11,067 14,236 17,137 20,408 22,519 103 10

Share of associates - - - (71) (168) 137

RPAT 11,067 14,236 17,137 20,337 22,351 102 10

Margin Analysis (%) 2QFY16 3QFY16 4QFY16 1QFY17 2QFY17 YoY (bps) QoQ (bps)

Raw mat cost 22.9 24.9 19.6 23.1 23.7 79.2 62.9

Employee cost 17.8 16.3 15.9 15.5 15.4 (232.3) (3.3)

Other expenses 31.4 28.5 33.5 27.9 26.5 (489.7) (141.1)

R&D Expenses 7.0 8.2 9.1 6.5 7.1 11.3 65.7

Operating Margin 27.9 30.3 31.0 33.5 34.3 642.7 81.5

EBITDA Margin 28.3 30.6 33.0 35.4 38.3 1004.6 289.0

APAT Margin 16.2 20.1 22.4 24.7 27.0 1085.8 237.1

Tax Rate 19.7 10.0 8.0 13.4 15.1 (459.5) 165.2

Source: Company



Results highlights

Domestic formulations

Posted ~10% growth in the quarter.

Company believes - Competition, government mandated price controls andchanging regulations - are key long term trend deciders for IPM.

Sun launched 8 products in the Indian market during the quarter.

Sun expects to continue to outperform the IPM.

Impact from NLEM would be ~Rs 1.5bn for FY17E.

US

US formulations revenues were at US$ 555 million up by 9% over Q2 last year.

Sun indicated two key things for US - (1) the US sales includes a non-recurringsale of US$ 25mn (non-recurring on QoQ basis) and (2) The gGleevec revenueswere booked for a month during the quarter.

Adj for these two, US sales have increased QoQ which was attributable to pickup in supplies from Halol and pick up in market share of few products, this webelieve is positive as base sales trajectory was subdued over the past few quar-ters.

Total - 144 ANDAs pending, 423 approved. 3 filed and 6 approvals in 2QFY17.

Sun is seeing delays in launching gGlumetza due to technical difficulties.

Others

Emerging Markets sales at US$ 170 million, up 22% YoY the growth wasacross markets.

Rest of World sales at US$ 79 million, down 3.0% YoY.

API segment - posted 16% growth YoY.

R&D expenses - 7.3% for 2QFY17 and guidance of ~9.0% to sales. The R&Dexpense is expected to pick up in the coming quarters.

On other expenses, company did not clarify on exact cause of reduction;however, some part is driven by synergy benefits apart from forex, R&D aswell as lumpiness in other line items.

Bromsite - Launch by ~Dec - 2016. Company expects to launch one morespecialty ophthal product in FY17 (taking the total to 2) and have a dedicatedfield force of ~100 to market them.

Gleevec competition - Sun has already seen competition in gGleevec with 2competitors (Teva and Apotex) launching in early Aug-16. Sun expects morecompetition in coming months which will impact market share as well asprices.

On MK3222, company maintained its earlier guidance of filing in CY17. Sunhas signed a licensing agreement with Almirall (Spain), a leading Europeandermatology company, for the development and commercialization ofTildrakizumab for psoriasis in Europe.

On Halol, company maintained that they have invited the USFDA for re-in-spection and expect the plant to be inspected in near term. Once inspected,(as per usual timelines) company expects the USFDA to clear the facilitywithin 3-5 months.

Sun maintained its guidance (8-10% revenue growth) in spite of ~18%growth registered in 1HFY17. Sun has in the past outperformed its guidance,we expect this year too to be similar.

Other operating income was higher for the quarter at Rs 5.01bn (vs avg of Rs2.5bn) as it includes US$ 45 million of milestone payment from Almirall aspart of the licensing agreement for the development and commercializationof Tildrakizumab for psoriasis in Europe.

Summary table


Sales 282,697 324,063 388,344Growth (%) 3.0 14.6 19.8EBITDA 84,816 104,819 129,360EBITDA margin (%) 30.6 33.1 34.0PBT 67,653 95,471 121,908APAT 54,030 69,867 88,330AEPS(Rs) 22.5 29.0 36.7Growth (%) 19.0 29.3 26.4CEPS(Rs) 23.8 33.9 41.9BVPS(Rs) 130.5 162.1 201.8DPS (Rs) 2.0 2.2 2.2ROE (%) 16.3 19.8 20.2ROCE (%) 26.0 27.4 27.7Net debt (51,511)(124,865)(211,602)NW Capital (Days) 113.6 104.5 98.8P/E (x) 29.7 23.0 18.2P/BV (x) 5.1 4.1 3.3EV/Sales (x) 5.5 4.6 3.6EV/EBITDA (x) 18.3 14.1 10.8




MK3222 - Tildrakizumab

For Tildra, Sun believes they have a better safety profile as well as the dosingbenefit (once a quarter) are the key positives compared to peer set products.

On PASI 90, though tildra seems lower, compared to other IL- categorydrugs, but as per indications from clinicians, Sun's product is very competi-tive.

Sun also believes pricing will play a key role, once the drug is launched.

Revenue breakup

(Rs mn) 2QFY16 3QFY16 4QFY16 1QFY17 2QFY17 YoY (%) QoQ (%)

Domestic formulations 18,187 18,903 18,066 18,543 20,091 10 8

Export formulations 47,215 47,513 52,800 56,643 53,836 14 (5)

- US formulations 33,158 32,003 39,103 40,706 37,144 12 (9)

- Emerging/RoW formulations 14,057 15,510 13,697 15,936 16,692 19 5

Bulks 3,150 4,405 3,760 4,698 3,669 16 (22)

Others 142 207 165 183 45 (68) (76)

Revenues 68,693 71,028 74,791 80,067 77,640 13 (3)

Source: Company

Outlook and Valuation

Sun's results were ahead of expectations mainly led by better margins. US revenuesat US$ 555mn (our exp US$ 560mn) were though in line. Sun has indicated US$25mn of one time sales (which may not be repeated on quarterly basis). Adj forthat, overall sales were lower than expected. However, on margins front, wesaw the operating leverage benefit as well as synergy benefit playing out.Though the quantum of benefits may fluctuate depending on currencies as wellas R&D outgo.

At the start of the year, management had guided for a mere 8-9% growth in rev-enues and also indicated margin pressures due to higher expenses towards buildinga specialty portfolio as well as higher R&D expenses. The sales guidance included 4months of gGleevec exclusivity revenues as well as consolidation of Japanese acqui-sition (~US$60mn revenue). The Japanese acquisition will add revenues only for 5-6months in FY17. Sun has posted ~18% growth in 1HFY17, but has maintained itsguidance. Sun has been conservative in its guidance in the past, hence we had built14.6% growth in revenues for FY17E and we maintain the same.

We expect the next key catalyst for Sun would be Halol inspection, post which weexpect ANDA approvals to pick up. We retain our estimates for FY17E as well asFY18E and continue to value Sun at 23x FY18E and add an NPV (of Rs 28) forMK3222. Maintain BUY with a target price of Rs 915.

We maintain BUY on SunPharmaceuticals Industries Ltd

with a price target of Rs.915



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

Gainers

Tata Steel 437 9.4 NA 10.9

Bank of Baroda 165 9.1 NA 19.9

Hindalco Ind 176 8.4 NA 16.3

Losers

Asian Paints 1,011 (3.8) NA 1.7

Hero MotoCorp 3,145 (2.8) NA 0.5

Lupin Ltd 1,494 (2.3) NA 2.6

Source: Bloomberg

Bulk deals Trade details of bulk deals

Date Scrip name Name of client Buy/ Quantity Avg.Sell of shares price

(Rs)

10-Nov APARINDS Fid Funds Mauritius Ltd S 2,42,484 574.0

10-Nov DIKSAT Sajankumar Rameshwarlal Bajaj B 2,22,000 44.0

10-Nov DIKSAT Overskud Multi Asset Management S 93,000 42.8

10-Nov DIKSAT Aryaman Broking Ltd S 2,43,000 43.9

10-Nov ENIL Amansa Holdings Pvt Ltd B 2,58,465 730.0

10-Nov INTENTECH Uno Metals LTD S 1,58,588 91.2

10-Nov JUNCTION Shefali Trehan S 16,000 24.6

10-Nov JUNCTION Darshan Trading Company B 16,000 24.6

10-Nov MAHLIFE Nwbp As Dp Offirststate Glbemrgmkts

Sust Fdasubfdoffsinvtsicvc S 2,17,998 422.0

10-Nov MHEL Bimal Abhechand Mehta S 24,000 16.9

10-Nov OMNIAX Roopa Shrenik Shah B 2,85,000 1.0

10-Nov OMNIAX Aryaman Broking Ltd S 4,95,500 1.0

10-Nov RCSL Sonal Bhattbhatt . S 24,551 21.6

10-Nov SAL Thar Commercial Finance Pvt Ltd B 1,00,000 22.0

10-Nov SUNILHITEC Vigrah Trading Pvt Ltd B 90,000 327.0

10-Nov SUPRDOM Rameshbhai Vallabhbhai Patel B 24,500 4.2

10-Nov SUYOG Lts Investment Fund Ltd B 63,200 451.0

10-Nov SUYOG Ivory Consultants Pvt Ltd S 63,200 451.0

10-Nov TRANSPEK* Pankaj Dhanji Chheda S 84,552 471.7

10-Nov TRANSPEK* Transpek Industry Limited B 92,064 471.6

10-Nov TTIL Samseerhusain Kasimhusain Khan S 30,000 14.0

Source: BSE

Forthcoming events Company/MarketDate Event

11 Nov Alembic, Gabriel India, GE Shipping, M&M, MT Educare earnings expected

Source: bseindia.com



RATING SCALE

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

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

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

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

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

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

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

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

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

Fundamental Research Team

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

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

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

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

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

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

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

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

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

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

Pankaj [email protected]+91 22 6218 6434

Nipun GuptaInformation [email protected]+91 22 6218 6433

Jayesh [email protected]+91 22 6218 5373

K. [email protected]+91 22 6218 6427

Technical Research Team

Shrikant [email protected] 22 6218 5408

Amol [email protected]+91 20 6620 3350

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

Malay [email protected]+91 22 6218 6420

Prashanth [email protected]+91 22 6218 5497



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