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1 | P a g e
Larsen & Toubro Infotech PICK OF THE WEEK
Oct 03, 2017
Recommendation
Buy at CMP and add on Dips
Add on dips to
Rs.797-758
Target
Rs. 880-950
Time Horizon
4 Quarters
Industry
IT
CMP
Rs. 797
L&T Infotech (LTI), headquartered in Mumbai, was incorporated in December 1996; the company is a subsidiary
of L&T. It is the 6th largest Indian IT services company in terms of revenues, with 23 delivery centres, > 21,000
employees, with active client base of more than 250. LTI’s industry vertical footprint is spread across BFS (27%
of revenue), Insurance (21% of revenue), Energy and process (12% of revenue), Hi-tech media and entertainment
(11% of revenue). LTI’s geographical revenue mix includes 69% of revenue from North America, 18% from Europe
and 7.5% from India.
Its range of services include application development (38% of revenues), enterprise solutions (23%), AIM, mobility
and platform-based solutions (19% of revenue), Infrastructure management services (11%) and testing (9% of
revenue).
Investment Rationale:
Superior Brand name & strong Financial Profile
Being an L&T group company, it benefits from the strong brand name and domain expertise available within the
group, resulting in better penetration and acceptability in the market.
The company has a strong financial profile marked by robust net worth, healthy cash accruals and Zero debt. LTI
has Industry-leading return ratios (>50% RoIC) and rising payout (>2.5% Avg. dividend yield).
Management bandwidth strengthened
LTI has also scaled its management bandwidth in the past year, with the induction of senior management from
companies such as Infosys, Accenture and Mindtree.
The senior management team includes: (1) Sanjay Jalona, MD & CEO (former EVP & Global Head: Hi-tech, Mfg,
Engg services at Infosys), (2) Aftab Ullah, COO (earlier India Head: Bank of America Captive and Global Head
Financial services: Capgemini), (3) Sudhir Chaturvedi, President Sales (earlier COO at NIIT Tech).
We believe that this would support in the mining of large accounts as well as in new logo wins, as the company
becomes more competitive.
FUNDAMENTAL ANALYST
Nisha Shankhala
nishaben.shankhala@hdfcsec.com
HDFC Scrip Code LTINFO
BSE Code 540005
NSE Code LTI
Bloomberg LTI
CMP as on 29 Sep’17 797
Equity Capital (Rs mn) 171
Face Value (Rs) 1
Equity O/S (mn) 171
Market Cap (Rs mn) 136398
Book Value (Rs) 185
Avg. 52 Week Vol 86284
52 Week High 840
52 Week Low 595
Shareholding Pattern (%)
Promoters 84.3
Institutions 7.6
Non Institutions 8.1
PCG Risk Rating* Yellow
* Refer Rating explanation
2 | P a g e
Larsen & Toubro Infotech PICK OF THE WEEK
Oct 03, 2017
US $1bn threshold as a possible inflection point
LTI is the sixth Indian IT services company to enter the USD 1bn plus revenue slab. Now, we believe that
company will participate in a greater number of large deals.
Large deal TCV of $100mn (net new) booked in 3Q is expected to ramp-up from 2QFY18.
LTI’s revenue growth (10.2% CAGR over FY17-19E) is expected to be in-line with midcap-IT growth (9.5%
CAGR over FY17-19E). However, operating margin (19% for LTI vs. midcap IT at ~15%) and RoE (30%
for LTI vs. midcap median at 20%) will continue to be higher than midcap-IT peers, signifying LTI’s core
strengths.
Higher Offshore share reflected in margin strength
Offshore revenue share is highest of LTI as compared to its peers. LTI’s offshore as % of revenue stands
at 51.3% as compared to peers that range from 33% to 49%. The higher offshore share is supported by
its global delivery model and is reflected in margin strength. Moreover, company will not be having massive
effect because of the change in H-1B visa norms but new US Government’s protectionist policies may give
some heat.
Headwinds receding in the Energy vertical
The oil and gas segment within the energy and process vertical had historically dragged LTI’s performance
down, following plummeting oil prices. Growth impact on LTI owing to the oil & gas vertical decline was
significant, LTI’s revenue (ex-energy vertical) grew 14% CAGR over FY14-17, as compared to growth of
9% including the vertical.
The energy and process vertical grew 1.1% in FY17 as compared to 20%, and 14% decline in FY15 and
FY16, respectively. And recent deal wins such as OKQ8 Scandinavia (leading energy Distribution Company
in Nordics) and stability in larger accounts are expected to improve the prospects of the oil and gas vertical
going ahead also. LTI gets 11.4% of the revenue from the energy segment so this development provide
bright prospectus for company.
Sharpening focus on emerging technologies
Digitisation would increasingly become systematically critical in the near future, for which the company
plans to enhance digital platforms and it is working really well as digital services have penetrated in all its
top-50 accounts. Its growth in digital at 35% in FY17 was higher than peers, such as Mindtree (18.3%) and
TCS (28.7%).
Figure 1ufuyut
KEY HIGHLIGHTS
L&T Infotech, headquartered
in Mumbai, was incorporated
in December 1996; the
company is a subsidiary of
L&T. It is the 6th largest
Indian IT services company in
terms of revenue generation.
LTI’s revenue growth (10.2%
CAGR over FY17-19E) is
expected to be in-line with
midcap-IT growth. However,
operating margin (19% for
LTI vs midcap IT at ~15%)
and RoE% (30% for LTI vs
midcap median at 20%) will
continue to be higher than
midcap-IT peers, signifying
LTI’s core strengths.
We see the $ 1bn threshold as
a possible inflection point for
LTI, with growth from (1) An
increasing deal pipe, (2)
Deeper penetration in large
accounts, (3) Headwinds
receding in the energy vertical
and (4) Improving quality of
business (digital and
platform-led growth).
We recommend L&T Infotech
Ltd. a BUY at CMP of Rs. 797
and add on the dip of Rs. 758
for the target of Rs. 880 and
950 implying 13x and 13.9x
FY19E EPS.
3 | P a g e
Larsen & Toubro Infotech PICK OF THE WEEK
Oct 03, 2017
About IPO: The Company had come up with the IPO in July 2016. It had issued 1,75,00,000 Equity Shares
- entirely offer for sale by L&T. The IPO price was Rs. 710 and the stock got listed on bourses on Jul 21,
2016.
Risk & Concerns: Change in Global Macro environment.
Strengthening of Rupee against Dollar.
Loss of any major client will have sharp effect on company’s revenue,
Pricing pressure in traditional services/renewals.
View & Valuation:
We see the USD 1bn threshold as possible inflection point for LTI, with growth from (1) An increasing deal pipeline, (2) Deeper penetration in large accounts, (3) Headwinds receding in the energy vertical and (4) Improving quality of business (digital and platform-led growth). These factors are backed by a superior delivery mix (highest off-shoring within the peerset), diversified service portfolio and expanding geographical presence.
L&T Infotech management is aware of rising cash pile leading to reduction in return on capital and may take steps towards improving it by increasing dividend payout. We recommend L&T Infotech Ltd. a BUY at CMP of Rs. 797 and add on the dip of Rs. 758 for the target of Rs. 880 and 950 implying 13x and 13.9x FY19E EPS.
4 | P a g e
Larsen & Toubro Infotech PICK OF THE WEEK
Oct 03, 2017
Quarterly Financials Snapshot (Consolidated)
Particulars (Rs bn) 1QFY18 1QFY17 YoY (%) 4QFY17 QoQ (%)
Revenue USD mn 259.2 231.1 12.2 254.1 2.0
Revenue 16.71 15.55 7.4 16.77 (0.4)
Direct cost 11.06 10.07 9.9 10.77 2.8
SG&A Expenses 2.84 2.44 16.8 2.82 1.0
EBITDA 2.80 3.05 (8.2) 3.19 (12.3)
Depreciation 0.39 0.43 (8.4) 0.42 (5.8)
EBIT 2.41 2.62 (8.2) 2.77 (13.2)
Other Income 0.25 0.03 642.4 0.00 6025.0
Interest Cost - 0.00 (100.0) 0.01 (100.0)
FX Gains / (Loss) 0.84 0.34 147.5 0.50 68.1
PBT 3.49 2.99 16.6 3.28 6.5
Tax 0.82 0.63 28.9 0.73 11.9
RPAT 2.67 2.36 13.3 2.55 5.0
PICK OF THE WEEK
1st July 2017
Highlights of the quarter:
Revenue at USD 259mn, 2% QoQ (1.5% CC QoQ and 11.8% CC YoY) driven by strong growth in digital (4.5% QoQ in analytics and 6.3% QoQ in enterprise integration and mobility) and IMS (12.5% QoQ driven by cloud).
EBITDA% at 16.8% -227bps QoQ was impacted by INR appreciation (-90bps), lower utilization
and higher lateral intake (-110bps impact), S&M and visa expense (-50bps impact). APAT came at Rs 2.67bn, 5% QoQ on higher forex gain of Rs 0.84bn (Rs 0.5bn in 4Q).
Top account grew above company average while growth was largely driven by non-top accounts
(7.4% QoQ) in 1Q. Net additions were strong during the quarter (1,298 net adds in 1Q as compared to 951 adds in FY17) which also resulted in lower utilizations (-100bps QoQ to 78.2%).
5 | P a g e
Larsen & Toubro Infotech PICK OF THE WEEK
Oct 03, 2017
Headcount, Utilization Data
(Nos.) 3QFY16 4QFY16 1QFY17 2QFY17 3QFY17 4QFY17 1QFY18
Total headcount 21,073 20,072 19,292 19,751 20,605 21,023 22,321
Development 19,669 18,705 17,959 18,428 19,234 19,627 20,899
Sales & support 1,404 1,367 1,333 1,323 1,371 1,396 1,422
Net additions (98) (1,001) (780) 459 854 418 1,298
Attrition rate (%) 18.5 18.4 19.5 18.5 18.1 16.9 14.7
Utilisation - incl trainees (%) 74.0 75.9 77.4 78.7 78.1 78.3 77.7
Utilisation - excl trainees (%) 76.5 77.1 78.0 80.6 80.5 79.3 78.2
Key Assumptions Particulars FY16 FY17 FY18E FY19E
Onsite Revenue growth (%) 9.9 9.3 7.5 14.4
Offshore Revenue growth (%) 9.2 9.4 14.1 10.9
Total USD revenue growth (%) 9.5 9.3 10.9 12.5
USD/INR rate 65.9 67.0 65.4 66.0
EBITDA margin (%) 17.5 18.9 17.0 18.3
Source: Company, HDFC sec Research
6 | P a g e
Larsen & Toubro Infotech PICK OF THE WEEK
Oct 03, 2017
Revenue Mix By Verticals (%)
Source: Company, HDFC sec Research
BFS
27.0
Auto Aero and Others
21.7 Insurance20.7
Energy & Process
11.6
Hi-tech, Media &
Ent.10.9
CPG, Retail
& Pharma8.1
Revenue Mix By Service Line (%)
Source: Company, HDFC sec Research
ADM
38.4
Enterprise
solutions
22.6
AIM, Enterprise
integration, mobility
14.5
IMS
11.4
Testing
9.1
Platform based
solutions4.0
Revenue Mix By Geography (%)
Source: Company, HDFC sec Research
North
America
68.6
Europe18.1
India
7.5
RoW3.7
Asia Pacific
2.1
Revenue Mix By Top Accounts
Source: Company, HDFC sec Research
Top Account
15.5
Top 2-5
accounts
23.0
Top 6-10 accounts
14.6
Top 11-20
accounts
14.9
Non top-20 accounts
32.0
7 | P a g e
Larsen & Toubro Infotech PICK OF THE WEEK
Oct 03, 2017
LTI’s Revenue Trend
Source: Company, HDFC sec Research
810 887
970 1,076
1,211
0%
5%
10%
15%
20%
25%
0
200
400
600
800
1,000
1,200
1,400
FY15 FY16 FY17 FY18E FY19E
Revenue EBITDA%
(USD
EBITDA and APAT Trend
Source: Company, HDFC sec Research
10
,04
5
10
,24
8
12
,30
2
11
,94
0
14
,60
0
7,5
95
8,3
65
9,7
09
10
,21
0
11
,65
0
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
FY15 FY16 FY17 FY18E FY19E
EBITDA APAT
(Rs mn)
PAT Margin Near Large Cap Peers
Source: Company, HDFC sec Research
6.3
% 7.4
% 10.0
%
11
.9%
12
.9%
15
.2%
16
.2% 19
.3%
21
.0%
22
.3%
0%
5%
10%
15%
20%
25%
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High Revenue Productivity (Revenue/empl.)
Source: Company, HDFC sec Research
3
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26
41,2
28
42
,37
8
42,6
41
45
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3
45
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9
47
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8
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20,000
30,000
40,000
50,000
60,000
70,000
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(USD)
8 | P a g e
Larsen & Toubro Infotech PICK OF THE WEEK
Oct 03, 2017
Income Statement (Consolidated) YE March (Rs bn) FY15 FY16 FY17 FY18E FY19E
Net Revenues (US$ mn) 810 887 970 1,076 1,211
Growth (%) 8.4% 9.5% 9.3% 10.9% 12.5%
Net Revenues 49.78 58.46 65.01 70.35 79.92
Growth (%) 1.2% 17.4% 11.2% 8.2% 13.6%
Employee Expenses 29.24 35.27 37.76 41.29 46.24
Other operating expenses 10.49 12.95 14.95 17.12 19.08
EBITDA 10.04 10.25 12.30 11.94 14.60
EBITDA Margin (%) 20.2% 17.5% 18.9% 17.0% 18.3%
EBITDA Growth (%) -12.4% 2.0% 20.0% -2.9% 22.2%
Depreciation 1.58 1.74 1.78 1.76 2.00
EBIT 8.47 8.51 10.52 10.18 12.60
Other Income (Including EO Items) 0.92 1.90 1.87 3.08 2.53
Interest 0.10 0.06 0.03 - -
PBT 9.28 10.35 12.36 13.26 15.13
Tax (Incl Deferred) 1.68 1.98 2.65 3.05 3.48
RPAT 7.59 8.37 9.71 10.21 11.65
APAT 7.59 8.37 9.71 10.21 11.65
APAT Growth (%) 15.1% 10.1% 16.1% 5.2% 14.1%
Adjusted EPS (Rs) 47.1 49.3 56.9 59.9 68.3
EPS Growth (%) 15.1% 4.6% 15.6% 5.2% 14.1%
Source: Company, HDFC sec Research
Balance Sheet (Consolidated) YE March (Rs bn) FY15 FY16 FY17 FY18E FY19E
SOURCES OF FUNDS
Share Capital - Equity 0.16 0.17 0.17 0.17 0.17
Reserves 19.58 21.08 31.27 37.20 43.25
Total Shareholders’ Funds 19.74 21.25 31.44 37.37 43.42
Total Debt 2.18 0.55 - - -
Net Deferred Taxes (0.83) (1.97) (1.26) (1.26) (1.26)
Long Term Provisions & Others 0.22 0.24 0.29 0.31 0.35
TOTAL SOURCES OF FUNDS 21.31 20.07 30.47 36.42 42.52
APPLICATION OF FUNDS
Net Block 2.75 2.79 2.58 3.31 3.53
Goodwill & intangibles 4.28 3.77 2.85 4.28 4.61
Investments 1.81 1.75 3.47 3.47 3.47
LT Loans & Advances 0.98 0.89 0.72 0.78 0.89
Total Non-current Assets 9.87 9.21 9.62 11.85 12.50
Debtors 10.83 11.66 11.70 12.91 14.67
Other Current Assets 2.79 4.67 5.71 6.18 7.02
Cash & Equivalents 5.02 3.87 15.88 18.93 23.61
Total Current Assets 18.63 20.20 33.29 38.03 45.30
Creditors 2.69 3.41 3.37 3.64 4.14
Other Current Liabilities & Prov. 4.51 5.94 9.07 9.82 11.15
Total Current Liabilities 7.19 9.34 12.44 13.46 15.29
Net Current Assets 11.44 10.86 20.85 24.57 30.01
TOTAL APPLICATION OF FUNDS 21.31 20.07 30.47 36.42 42.52
Source: Company, HDFC sec Research
9 | P a g e
Larsen & Toubro Infotech PICK OF THE WEEK
Oct 03, 2017
Cash Flow Statement (Consolidated) YE March (Rs bn) FY15 FY16 FY17 FY18E FY19E
Reported PBT 9.28 10.35 12.36 13.26 15.13
Interest expenses 0.10 0.06 0.03 - -
Depreciation 1.58 1.74 1.78 1.76 2.00
Working Capital Change (0.92) (0.94) 2.02 (0.66) (0.77)
Tax Paid (1.68) (1.98) (2.65) (3.05) (3.48)
OPERATING CASH FLOW ( a ) 6.42 8.63 14.46 11.27 12.82
Capex (1.96) (1.14) (0.75) (1.06) (1.20)
Free cash flow (FCF) 4.46 7.49 13.70 10.22 11.62
Investments (1.84) 0.57 (0.58) (2.17) (0.55)
INVESTING CASH FLOW ( b ) (3.80) (0.57) (1.34) (3.22) (1.75)
Debt Issuance/(Repaid) 1.07 (1.64) (0.40) - -
Interest Expenses (0.10) (0.06) (0.03) - -
FCFE 5.43 5.79 13.27 10.22 11.62
Share Capital Issuance (0.00) 0.01 0.00 - -
Dividend (4.81) (5.47) (3.38) (4.29) (5.59)
FINANCING CASH FLOW ( c ) (3.84) (7.16) (3.81) (4.29) (5.59)
NET CASH FLOW (a+b+c) (1.22) 0.91 9.31 3.76 5.48
Closing Cash & Equivalents 5.02 3.87 15.88 18.93 23.61
Source: Company, HDFC sec Research
Key Ratios YE March FY15 FY16 FY17 FY18E FY19E
PROFITABILITY (%)
GPM 41.3 39.7 41.9 41.3 42.1
EBITDA Margin 20.2 17.5 18.9 17.0 18.3
APAT Margin 15.3 14.3 14.9 14.5 14.6
RoE 42.4 40.8 36.9 29.7 28.8
RoIC (or Core RoCE) 44.0 42.3 53.7 48.9 53.3
RoCE 38.6 40.7 38.5 30.5 29.5
EFFICIENCY
Tax Rate (%) 18.1 19.2 21.4 23.0 23.0
Fixed Asset Turnover (x) 3.7 4.1 4.3 4.1 4.3
Debtors (days) 79 73 66 67 67
Payables (days) 20 21 19 19 19
Cash Conversion Cycle (days) 47 44 28 29 29
Debt/EBITDA (x) 0.2 0.1 - - -
Net D/E (x) (0.1) (0.2) (0.5) (0.5) (0.5)
Interest Coverage (x) 81 147 329 NA NA
PER SHARE DATA (Rs)
EPS 47.1 49.3 56.9 59.9 68.3
CEPS 56.9 59.5 67.6 70.5 80.3
Dividend 30 33 17 21 27
Book Value 122 125 185 220 256
VALUATION
P/E (x) 16.9 16.2 14.0 13.3 11.7
P/BV (x) 6.5 6.4 4.3 3.6 3.1
EV/EBITDA (x) 12.7 12.4 9.3 9.3 7.3
OCF/EV (%) 5.0 6.8 12.6 10.1 12.0
FCF/EV (%) 3.5 5.9 12.0 9.2 10.9
FCFE/Mkt Cap (%) 4.2 4.4 10.2 7.8 8.9
Dividend Yield (%) 3.9 4.3 2.2 2.8 3.6
Source: Company, HDFC sec Research
10 | P a g e
Larsen & Toubro Infotech PICK OF THE WEEK
Oct 03, 2017
Rating Chart
R E T U R N
HIGH
MEDIUM
LOW
LOW MEDIUM HIGH
RISK
Ratings Explanation:
RATING Risk - Return BEAR CASE BASE CASE BULL CASE
BLUE LOW RISK - LOW RETURN STOCKS
IF RISKS MANIFEST PRICE CAN FALL 20% OR MORE
IF RISKS MANIFEST PRICE CAN FALL 15%
& IF INVESTMENT RATIONALE
FRUCTFIES PRICE CAN RISE BY 15%
IF INVESTMENT RATIONALE
FRUCTFIES PRICE CAN RISE BY 20% OR
MORE
YELLOW MEDIUM RISK - HIGH RETURN STOCKS
IF RISKS MANIFEST PRICE CAN FALL 35% OR MORE
IF RISKS MANIFEST PRICE CAN FALL 20%
& IF INVESTMENT RATIONALE
FRUCTFIES PRICE CAN RISE BY 30%
IF INVESTMENT RATIONALE
FRUCTFIES PRICE CAN RISE BY 35% OR
MORE
RED HIGH RISK - HIGH RETURN STOCKS
IF RISKS MANIFEST PRICE CAN FALL 50% OR MORE
IF RISKS MANIFEST PRICE CAN FALL 30%
& IF INVESTMENT RATIONALE
FRUCTFIES PRICE CAN RISE BY 30%
IF INVESTMENT RATIONALE
FRUCTFIES PRICE CAN RISE BY 50%
OR MORE
11 | P a g e
Larsen & Toubro Infotech PICK OF THE WEEK
Oct 03, 2017
550
600
650
700
750
800
850
29-S
ep-1
6
13-O
ct-
16
27-O
ct-
16
10-N
ov-1
6
24-N
ov-1
6
08-D
ec-1
6
22-D
ec-1
6
05-J
an-1
7
19-J
an-1
7
02-F
eb-1
7
16-F
eb-1
7
02-M
ar-
17
16-M
ar-
17
30-M
ar-
17
13-A
pr-
17
27-A
pr-
17
11-M
ay-1
7
25-M
ay-1
7
08-J
un-1
7
22-J
un-1
7
06-J
ul-
17
20-J
ul-
17
03-A
ug-1
7
17-A
ug-1
7
31-A
ug-1
7
14-S
ep-1
7
28-S
ep-1
7
Close Price
Rating Definition:
Buy: Stock is expected to gain by 10% or more in the next 1 Year. Sell: Stock is expected to decline by 10% or more in the next 1 Year.
12 | P a g e
Larsen & Toubro Infotech PICK OF THE WEEK
Oct 03, 2017
Disclosure: I, Nisha Sankhala, MBA, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our views about the subject issuer(s) or securities. HSL has no material adverse disciplinary history as on the date of publication of this report. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. Research Analyst or her relative or HDFC Securities Ltd. does not have any financial interest in the subject company. Also Research Analyst or her relative or HDFC Securities Ltd. or its Associate may have beneficial ownership of 1% or more in the subject company at the end of the month immediately preceding the date of publication of the Research Report. Further Research Analyst or his relative or HDFC Securities Ltd. or its associate does not have any material conflict of interest. Any holding in stock –No HDFC Securities Limited (HSL) is a SEBI Registered Research Analyst having registration no. INH000002475. Disclaimer: This report has been prepared by HDFC Securities Ltd and is meant for sole use by the recipient and not for circulation. The information and opinions contained herein have been compiled or arrived at, based upon information obtained in good faith from sources believed to be reliable. Such information has not been independently verified and no guaranty, representation of warranty, express or implied, is made as to its accuracy, completeness or correctness. All such information and opinions are subject to change without notice. This document is for information purposes only. Descriptions of any company or companies or their securities mentioned herein are not intended to be complete and this document is not, and should not be construed as an offer or solicitation of an offer, to buy or sell any securities or other financial instruments. This report is not directed to, or intended for display, downloading, printing, reproducing or for distribution to or use by, any person or entity who is a citizen or resident or located in any locality, state, country or other jurisdiction where such distribution, publication, reproduction, availability or use would be contrary to law or regulation or what would subject HSL or its affiliates to any registration or licensing requirement within such jurisdiction. If this report is inadvertently send or has reached any individual in such country, especially, USA, the same may be ignored and brought to the attention of the sender. This document may not be reproduced, distributed or published for any purposes without prior written approval of HSL. Foreign currencies denominated securities, wherever mentioned, are subject to exchange rate fluctuations, which could have an adverse effect on their value or price, or the income derived from them. 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