[Kotak] India Daily, July 01, 2016Dec-13 Valeant Solta 263 23.0 - - - Cash Addition to Valeant's aesthetic portfolio Nov-13 Salix Santarus 2,600 32.1 - - - Cash GI therapy expansion

For Private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES’ RATING SYSTEM AND OTHER DISCLOSURES. REFER TO THE END OF THIS MATERIAL.

Contents

Daily Alerts

Company alerts

Torrent Pharmaceuticals: No quick fix in sight

US scale-up has benefitted from Abilify

A quick fix is not easy, as TRP misses out on several M&A deals

Expect pressures on profitability from FY2017 - REDUCE

Sector alerts

Automobiles: Seventh Pay Commission particularly positive for passenger vehicles

Cabinet approves 7CPC recommendations; states will amplify the stimulus

effect over 2-3 years

Expect 5% incremental demand for PVs due to salary increases by central

government

Strong medium-term growth prospects for passenger vehicle industry;

Maruti key beneficiary

Banks/Financial Institutions: Minor changes to trend levels

Marginal increase in gap; could be due to timing issues

Actuarial losses jump sharply; assumptions have changed marginally

Employee mix changing positively leading to a decline in age and maturing

retirement plans

35-45% of employees in defined contribution; average staff costs have

probably peaked

Technology: A steady quarter but challenging outlook

1QFY17 - strong revenue growth for Infosys and TCS, cross-currency

tailwind of 10-40 bps

EBIT margin to decline sequentially due to visa costs, rupee appreciation

and wage revision

Incorporate revised currency and Brexit impact in our forecasts

INDIA DAILY July 1, 2016 India 30-Jun 1-day 1-mo 3-mo

Sensex 27,000 1.0 1.1 6.8

Nifty 8,288 1.0 1.3 7.5

Global/Regional indices

Dow Jones 17,930 1.3 0.8 0.8

Nasdaq Composite 4,843 1.3 (2.2) (1.5)

FTSE 6,504 2.3 5.0 5.8

Nikkei 15,685 0.7 (7.5) (3.0)

Hang Seng 20,794 1.8 0.2 1.4

KOSPI 1,988 0.9 0.3 0.7

Value traded – India

Cash (NSE+BSE) 296 202 202

Derivatives (NSE) 7,641 1,620 5,060

Deri. open interest 3,026 1,977 2,653

Forex/money market

Change, basis points

30-Jun 1-day 1-mo 3-mo

Rs/US$ 67.5 2 9 130

10yr govt bond, % 7.7 (2) (10) (18)

Net investment (US$ mn)

29-Jun MTD CYTD

FIIs 21 - 2,736

MFs 19 - 1,464

Top movers

Change, %

Best performers 30-Jun 1-day 1-mo 3-mo

CRG IN Equity 73.8 2.5 8.1 51.7

ABNL IN Equity 1221.2 3.1 13.0 46.9

VEDL IN Equity 132.0 3.6 25.6 46.5

HNDL IN Equity 122.9 2.4 19.2 41.8

MMFS IN Equity 334.2 4.1 3.0 37.7

Worst performers

ADSEZ IN Equity 206.9 1.9 2.2 (14.8)

BHFC IN Equity 760.3 0.5 (0.2) (11.9)

HCLT IN Equity 730.5 0.3 (0.6) (11.0)

AL IN Equity 98.4 (0.7) (5.8) (10.8)

UBBL IN Equity 750.8 0.3 1.6 (9.0)

For Private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES’ RATING SYSTEM AND OTHER DISCLOSURES, REFER TO THE END OF THIS MATERIAL.

US scale-up has benefitted from Abilify

On our estimates, TRP booked ~US$25 mn in Abilify sales in 4QFY16 and ~US$220 mn in

FY2016. Ex-Abilify, TRP is still struggling to build up scale in the US with its base quarterly run-

rate at ~US$50 mn in 4QFY16 (US$36 mn in 4QFY15). However, competitive dynamics for

Abilify are sharply deteriorating, and we expect FY2017 to be a weak year for launches as well.

TRP filed less than 5 ANDAs in FY2016 and now has only 20 ANDAs pending approval in the

US.

A quick fix is not easy, as TRP misses out on several M&A deals

We believe TRP has historically under-invested in R&D but is now trying to close the gaps in the

portfolio and has guided for doubling R&D costs to 8% of revenues in FY2018 as it intensifies

the efforts to build its US pipeline. Despite the near-term earnings pressure, we believe this is a

step in the right direction. The bigger issue for us, however, is that we do not see any possibility

of a quick fix and expect a lead time of two-to-three years before the FY2017 investments in

R&D start to deliver. In TRP’s pending pipeline, only Renvela / Renagel are likely to contribute

materially, though given FDA guidelines on characterization and lack of vertical integration, we

believe TRP’s launch will be in the second wave in 2HFY18. However, we believe the new wave

of filings will not materialize until FY2019, as we expect filing momentum to improve only from

2HFY17. Even on the M&A front, TRP has been unable to participate, missing out on several

interesting acquisitions. Yesterday’s Glochem acquisition will help improve the profitability of

the US business, though it will add limited product development capabilities, which is the need

of the hour. Post Glochem acquisition (we estimate ~`1-2 bn) and special dividend (~`7 bn

including tax), TRP has deployed over 75% of the cash flow generated from Abilify, thereby

restricting its ability for major acquisitions. We believe the recent Teva divestitures presented a

material opportunity for TRP to strengthen its existing US portfolio and add to the near-term

pipeline. In particular, the portfolio acquired by Sagent and Cadila would have been a good fit

for TRP, but it has lost out on these opportunities.

Expect pressures on profitability from FY2017 - REDUCE

We expect Torrent’s FY2017/18 growth to come under pressure as Abilify prices continue to

drop sharply, with cross currency headwinds (Brazilian Real) also adding to growth concerns.

Torrent’s shares are currently trading at ~23X and ~21X FY2017/18 EPS respectively. We value

TRP at ₹1,260, 19X FY2018 EPS. Re-iterate REDUCE.

Torrent Pharmaceuticals (TRP) Pharmaceuticals

No quick fix in sight. Following a strong year led by Abilify sales, we expect TRP’s US

business and overall profitability to suffer in FY2017/18. This is due to its historic under-

investments in R&D, limiting the ANDA pipeline to 20 with no significant launches to

support growth in FY2017/18. TRP has guided for doubling its R&D portfolio in FY2017,

but we do not expect any quick fixes and see the recent Teva divestitures and Sagent

and Cadila acquisitions as TRP’s missed opportunities. REDUCE.

REDUCE

JULY 01, 2016

UPDATE

Coverage view: Cautious

Price (`): 1,373

Target price (`): 1,260

BSE-30: 27,000

Chirag Talati, CFA

Kumar Gaurav

Torrent Pharmaceuticals

Stock data Forecasts/Valuations 2016 2017E 2018E

52-week range (Rs) (high,low) EPS (Rs) 101.8 57.5 66.0

Market Cap. (Rs bn) EPS growth (%) 129.3 (43.5) 14.8

Shareholding pattern (%) P/E (X) 13.2 23.4 20.4

Promoters 71.2 Sales (Rs bn) 66.8 63.2 71.5

FIIs 10.5 Net profits (Rs bn) 17.2 9.7 11.2

MFs 7.2 EBITDA (Rs bn) 27.2 15.3 17.4

Price performance (%) 1M 3M 12M EV/EBITDA (X) 8.5 15.4 13.3

Absolute 1.2 (3.8) 1.3 ROE (%) 58.6 25.9 24.5

Rel. to BSE-30 (5.4) (9.7) 4.3 Div. Yield (%) 3.0 1.0 1.1

Company data and valuation summary

1,698-1,175

227.7

Torrent Pharmaceuticals Pharmaceuticals

KOTAK INSTITUTIONAL EQUITIES RESEARCH 3

Exhibit 1: Global generics M&A activity continues unabated, though TRP missing out

Source: Companies, Kotak Institutional Equities

Exhibit 2: Abilify erosion set to hurt US business in FY2017/18 March fiscal year-ends, 2011-18E, (US$ mn)

Source: Company, Kotak Institutional Equities estimates

Acquirer Target

Value

(US$ mn)

EV/ EBITDA

(X)

Synergies

(US$ mn)

Synergies to be

achieved in

year

Synergies as a %

of acq. Value

Transaction

structure Comments

Jun-16 Impax Teva ANDA's 586 12.9 - - - Cash Immediate US$150 mn sales addition, and Concerta rights

Jun-16 Sagent Teva ANDA's 40 12.9 - - - Cash 5 ANDAs including propofol, which was marketed by Sagent for Teva.

Jun-16 Zydus Teva ANDA's - - - - - Cash An appproved and a pipeline ANDA (transdermal patch)

Jun-16 Reddy's Teva ANDA's 350 - - - - Cash Portfolio of niche pipeline ANDAs to boslter near-term pipeline

Feb-16 Mylan Meda 7,200 12.9 2,000 4 2.8 Cash and stock Expansion in EU and branded portfolio

Apr-16 Lupin Gavis 880 25.1 - 4 2.8 Cash Scale, access to new technologies (topicals, controlled substances)

Feb-16 Mylan Meda 7,200 12.9 2,000 4 2.8 Cash and stock Expansion in EU and branded portfolio

Feb-16 Cipla Invagen/Exelan 550 8.5 - - 2.8 Cash Generic scale

Feb-16 Hikma Roxane 2,115 25.0 100 4 2.8 Cash and stock Scale, access to new technologies (DPIs, nasal sprays, etc.)

Sep-15 Lannett KudCo 1,230 11.7 100 4 2.8 Cash Scale, tax benefits and synergies

Aug-15 Teva Actavis 40,500 25.8 1,400 3 11.0 Cash and stock Scale, expansion in OTC and synergies

May-15 Endo Par 8,000 14.5 175 1 2.0 Cash and stock Cost and tax synergies; excludes revenue synergies

Feb-15 Pfizer Hospira 17,000 25.8 800 2 5.0 Cash Injectables scale and biosimilars entry

Nov-14 Actavis Allergan 66,000 25.6 400 2 3.0 Stock Cost and tax synergies; excludes revenue synergies

Oct-14 Impax Corepharma 700 8.3 10 1 2.0 Cash Branded portfolio, generic pipeline and manufacturing facilities

Oct-14 Valeant Salix 14,500 24.6 500 1 3.0 Cash Expansion in new therapy areas

Sep-14 Abbott CFR 2,900 24.8 - - - Cash Latin America entry

Aug-14 Mallinckrodt Questcor 5,600 10.8 - - - Cash and stock Product acquisition (HP Acthar gel) and tax inversion

Jul-14 Mylan Abbott EU 5,300 8.8 600 3 11.0 Stock Tax inversion and global expansion

May-14 Akorn Versapharm 440 12.5 - - - Cash Expansion of dermatology portfolio

May-14 Actavis Warner Chilcot 8,500 7.5 400 2 5.0 Stock Cost and tax synergies; excludes revenue synergies

Apr-14 Sun Ranbaxy 4,000 22.5 250 4 6.0 Stock Cumulative $250m synergies at end of Year-3

Feb-14 Forest Aptalis 2,900 10.5 125 2 4.0 Cash and stock Replenish portfolio follow ing patent expiries (Namenda)

Feb-14 Actavis Forest 25,800 59.8 1,000 3 4.0 70/30 equity/debt Expects most of synergies w ithin 12 months

Feb-14 Mallinckrodt Cadence 1,324 - - - - Cash Completes build-out in pain through addition of Ofirmev

Jan-14 Par JHP 490 20+ - - - Cash Cost and tax synergies; excludes revenue synergies

Dec-13 Valeant Solta 263 23.0 - - - Cash Addition to Valeant's aesthetic portfolio

Nov-13 Salix Santarus 2,600 32.1 - - - Cash GI therapy expansion

Nov-13 Endo Paladin 1,600 18.3 - - - Cash Tax inversion and global expansion

Nov-13 Shire V iropharma 4,200 73.4 150 2 4.0 Cash Cost synergies above revenue synergies

Aug-13 Akorn Hi-Tech 640 11.2 20 1 3.0 Cash Generic scale and synergies

Jul-13 Perrigo Elan 6,700 23.0 150 3 2.0 Cash $2bn in tax deductions available to Perrigo

Jul-13 Watson Actavis 6,700 15.0 300 2 4.0 Stock Synergies exclude tax inversion benefits

May-13 Valeant B+L 8,700 12.1 800 2 9.0 Stock Expect 20%+ IRR on EV; at least $800 mn annual run-rate cost synergies

Feb-13 Mylan Agila 1,600 18.7 - - - Cash Entry in injectables market

Dec-12 Sun URL 100 - - - - Cash Product portfolio; US manufacturing facilities

Dec-12 Sun DUSA 230 30.0 - - - Cash Product portfolio; US manufacturing facilities

Sep-12 Valeant Medicis 2,600 13.0 225 1 9.0 Cash Cost synergies at annual run rate of $225 mn w ithin 6 months

Jul-11 Teva Cephalon 6,800 8.2 500 3 7.0 Cash Access to Cephalon's specialty portfolio

2011 2012 2013 2014 2015 2016E 2017E 2018E 2019E

Limited competition/P-IV's/FTF's 0 0 32 47 19 265 78 68 71

TRP base business 29 45 32 74 120 147 185 233 302

Total sales 29 45 64 121 139 412 263 301 373

growth % 19.0 53.7 42.2 89.2 14.5 196.9 (36.1) 14.2 24.2

Limited competition/P-IV's/FTF's as % of Sales 0.0 0.0 50.6 39.1 13.6 64.3 29.5 22.5 19.0

Pharmaceuticals Torrent Pharmaceuticals

4 KOTAK INSTITUTIONAL EQUITIES RESEARCH

Exhibit 3: TRP's US sales trend March fiscal year-ends,1QFY12-4QFY16, (US$ mn)


Exhibit 4: Torrent Pharma - profit and loss, balance sheet, cash model March fiscal year-ends, 2011-19E (Rs mn)


0

20

40

60

80

100

120

140

160

Base business Cymbalta/Abilify

2011 2012 2013 2014 2015 2016E 2017E 2018E 2019E

Profit and loss statement

Net sales 22,330 27,975 31,696 41,847 46,534 66,760 63,188 71,543 83,011

COGS (7,916) (9,829) (10,505) (13,886) (14,148) (15,770) (18,960) (21,432) (25,568)

Staff cost (3,895) (5,337) (6,549) (7,834) (8,418) (8,560) (9,844) (11,075) (12,570)

SG&A (4,974) (5,257) (6,975) (8,071) (11,856) (12,770) (14,047) (15,561) (17,847)

R&D (1,388) (1,320) (1,111) (1,700) (1,910) (2,460) (5,055) (6,081) (7,056)

EBITDA 4,157 6,232 6,556 10,356 10,201 27,200 15,282 17,394 19,971

Pretax profits 3,427 4,602 5,817 8,438 9,398 23,640 12,482 14,325 17,252

Tax (739) (730) (1,476) (1,833) (1,888) (6,420) (2,746) (3,152) (3,795)

Adjusted net profit 2,702 3,879 4,350 6,637 7,510 17,220 9,736 11,174 13,456

Shares outstanding (mn) 169 169 169 169 169 169 169 169 169

Adjusted EPS (Rs) 16.0 22.9 25.7 39.2 44.4 101.8 57.5 66.0 79.5

Balance sheet

Current assets 15,944 19,872 25,598 34,046 40,587 46,610 48,675 50,769 56,644

Net block 8,155 8,918 10,825 13,808 15,999 21,262 25,043 28,583 31,923

Goodwill and intangibles — 239 226 286 17,804 15,968 14,132 12,296 10,460

Fixed assets 9,414 10,607 11,919 15,995 38,524 41,720 43,664 45,369 46,873

Total assets 25,358 30,479 37,517 50,041 79,111 88,330 92,340 96,137 103,517

Current liabilities 7,484 10,359 12,287 16,239 18,277 22,600 23,838 26,717 31,355

Debt 6,588 6,490 9,355 12,951 31,885 27,080 22,080 14,080 6,080

Other long-term liabilities 1,062 1,692 1,656 1,827 4,038 4,760 5,035 5,350 5,729

Total liabilities 15,134 18,541 23,298 31,017 54,201 54,440 50,953 46,147 43,165

Shareholders' equity 10,224 11,938 14,219 19,024 24,910 33,890 41,387 49,991 60,352

Total liabilities and equity 25,358 30,479 37,517 50,041 79,111 88,330 92,340 96,137 103,517

Cash flow

Profit before taxes 3,423 3,586 5,817 8,438 9,398 23,640 12,482 14,325 17,252

Depreciation and amortisation 626 817 827 870 1,907 2,460 3,056 3,296 3,496

Change in working capital 619 1,518 (4,218) (1,197) (4,094) 7,678 (8,541) (3,829) (4,401)

Other adjustements (718) (848) (891) (2,119) 890 (4,526) (2,471) (2,836) (3,416)

Total operational cash flow 3,950 5,073 1,536 5,993 8,102 29,253 4,525 10,955 12,931

Investment cash flow

Investment in fixed assets (2,650) (1,703) (2,929) (4,001) (2,426) (5,919) (5,000) (5,000) (5,000)

Acquisitions 19 11 85 19 (19,539) — — — —

Total investment cash flow (2,326) (1,459) (2,417) (3,653) (21,623) (5,919) (5,000) (5,000) (5,000)

Total financing cash flow (676) (1,920) 197 864 12,123 (15,574) (5,239) (8,570) (9,095)

Net cash flow 943 1,560 (733) 3,197 (1,393) 7,760 (5,714) (2,615) (1,164)

Free cash flow 1,319 3,382 (1,309) 2,011 (13,862) 23,334 (475) 5,955 7,931


Cabinet approves 7CPC recommendations; states will amplify the stimulus effect over 2-3 years

The union cabinet has accepted the 7CPC recommendations to be effective from January 1, 2016

and implemented from July 1, 2016. However, it has not yet accepted the recommendations on

allowances, which will be done on a prospective basis at a later date. The government estimates

a total outgo of ₹849 bn in FY2017 with current outgo of ₹728 bn and arrears of ₹121 bn

(Exhibit 1). We note that states spend around 1.5X of union government’s expenditure on

wages and pensions (₹5.9 tn versus central government expenditure of ₹4.5 tn). The states had

seen similar increases as the central employees and pensioners during the 5CPC and 6CPC

although with a lag of a couple of years. Therefore, a similar pay increase under 7CPC by the

states could significantly boost the fiscal stimulus; albeit this will happen over the next two to

three years.

Expect 5% incremental demand for PVs due to salary increases by central government

As per our calculations, 10% of total salary increases during the Sixth Pay Commission was spent

on purchase of automobiles (refer to Exhibit 3), which had positive impact on demand for

passenger vehicles (PV) and two-wheelers. We believe that penetration of two-wheelers in the

government employee segment is high; therefore, the passenger vehicle segment will likely be

the key beneficiary of salary increases due to Seventh Pay Commission recommendations.

Assuming government employees spend 10% of total pay increases under 7CPC on automobiles

(80% on passenger vehicles and 20% on two-wheelers), there could be 5% incremental growth

in the passenger vehicle industry, which will play out over 2HFY17 and FY2018E. We believe

that the impact on the two-wheeler industry will be much more muted (refer to Exhibits 4 and

5). Further, we reckon that the implementation of salary increases by state governments could

lead to additional 7-8% incremental growth in the PV industry over the next two to three years.

Strong medium-term growth prospects for passenger vehicle industry; Maruti key beneficiary

Overall, we believe that passenger vehicle industry volumes are poised to grow at 12-14%

CAGR over FY2017-20E due to tailwinds from improvement in economic growth, fiscal stimulus

from 7CPC and potential implementation of GST by the central government from April 2017.

Maruti will be the biggest beneficiary of this as the company has a strong new model pipeline

and has a 60% market share in the first-time buyer segment. Additionally, the company will

also benefit from potential shift in industry volumes towards the petrol segment. We have an

ADD rating on the stock with a target price of ₹4,300.

Automobiles India

Seventh Pay Commission particularly positive for passenger vehicles. Our analysis

suggests that implementation of 7CPC recommendations by the central government

could lead to 5% incremental demand for passenger vehicles, assuming 10% of total

salary increase is spent on purchase of automobiles. Additionally, there could be further

7-8% incremental growth in the PV industry over the next two to three years due to

similar pay increases by the state governments. Due to already high penetration of two-

wheelers in the government employee segment, impact on the two-wheeler industry

will be muted, in our view. Maruti Suzuki will be the key beneficiary of 7CPC given its

~60% market share in the first-time buyer segment.

ATTRACTIVE

JULY 01, 2016

UPDATE

BSE-30: 27,000

Hitesh Goel

Nishit Jalan

India Automobiles


Exhibit 1: Consumption stimulus of 30 bps of GDP in FY2017 due to 7CPC implementation Details of 7CPC outgo, March fiscal year-end, 2017 (Rs bn)

Source: Ministry of Finance, Kotak Economic Research estimates

Exhibit 2: States spend 1.5X of union government's expenditure on wages and pensions Breakup of total wages and pensions for states, March fiscal year-ends (Rs bn)

Source: RBI, Kotak Economic Research

7PC related payouts

Recurring 728

- Pay 391

- Pension 337

Arrears 121

- Pay 65

- Pension 56

Total pay 456

Total pension 393

Total impact on fiscal 849

Tax revenues 131

Household savings 250

Private consumption 468

Impact (bps of GDP)

Tax revenue 9

Savings 17

Consumption 31

Notes:

(a) Effective tax rate for current employees assumed at 18% and for pensioners at 12.5%.

(b) Marginal propensity to consume for current employees assumed at 70% and for pensioners at 60%.

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

19

91

19

92

19

93

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

RE

20

16

BE

Wages and salaries Pensions Total

Automobiles India


Exhibit 3: Our analysis suggests that consumers spent ~10% of total incremental salaries in purchasing PVs and 2W during 2010 and 2011 Estimated consumer spend on autos (passenger vehicles and 2W) due to salary increases during Sixth Pay Commission, March fiscal year-ends

Source: SIAM data, Kotak Institutional Equities estimates

Exhibit 4: Passenger vehicle industry volumes can increase by 5%

over FY2016 Incremental PV demand assuming 80% of spend (units, %)

Source: Kotak Institutional Equities estimates

Exhibit 5: Two-wheeler industry volumes can increase by 2%

over FY2016 Incremental two-wheeler demand assuming 20% of spend (units, %)


2008 2009 2010 2011

Passenger vehicle industry

Domestic sales volumes (units) 1,546,488 1,551,183 1,949,111 2,519,986

GDP growth rate (%) 6.8 8.0 8.5

Multiple to GDP growth (X) 1.50 1.50 1.50

Normalized growth in domestic PV volumes (%) 10.2 12.0 12.8

PV industry volumes assuming normalized growth rate (units) 1,704,230 1,908,737 2,152,101

Cumulative incremental industry volumes over 2010-11 (units) 408,258

Incremental sales to government employees over 2010-11 (units) 216,667

Average purchase price per vehicle (Rs) 450,000

Amount spent on PVs due to pay commission increments (Rs bn) - (a) 98

Two-wheeler industry

Domestic sales volumes (units) 7,251,259 7,445,869 9,371,259 11,789,875

GDP growth rate (%) 6.8 8.0 8.5

Multiple to GDP growth (X) 1.30 1.30 1.30

Normalized growth in domestic 2W volumes (%) 8.8 10.4 11.1

2W industry volumes assuming normalized growth rate (units) 7,892,270 8,713,066 9,675,860

Cumulative incremental industry volumes over 2010-11 (units) 2,772,207

Assuming 50% sales to government employees (units) 1,386,104

Average purchase price per vehicle (Rs) 45,000

Amount spent on 2W due to pay commission increments (Rs bn) - (b) 62

Total amount spent by consumers on PV and 2W (Rs bn) - (a)+(b) 160

Incremental salaries due to 6th Pay Commission 1699

As % of total incremental salaries due to 6th pay commission 9.4

500,000

80.0

849,000

5 67,920

10 135,840

15 203,760

20 271,680

25 339,600

5 2.4

10 4.9

15 7.3

20 9.7

25 12.2

Incremental amount spend by

consumers on PVs (%)

Incremental passenger vehicle demand (units)

Implied % growth in PVs over FY2016 volumes

Key assumptions

Average Purchase price (Rs)

% amount spent on purchase of PVs

Pay increase due to 7th pay commission (Rs mn)


consumers on PVs (%)

52,000

20

849,000

5 163,269

10 326,538

15 489,808

20 653,077

25 816,346

5 1.0

10 2.0

15 3.0

20 4.0

25 5.0

Pay increase due to 7th pay commission (Rs mn)

Implied % growth in Two-wheelers over FY2016 volumes


consumers on 2W (%)

Incremental 2-wheeler demand (units)

Key assumptions

Average Purchase price (Rs)

% amount spent on purchase of Two-wheelers


consumers on 2W (%)


Marginal increase in gap; could be due to timing issues

In FY2016 there was a marginal increase in the gap between pension assets and liabilities with

a large share of this increase coming from a few banks, particularly Bank of Baroda. However,

we are not reading too much into this as there is a timing difference between contribution and

P&L charge. Exhibit 11 shows that the contribution to the scheme was 70% of the P&L impact

as compared to ~1X earlier. This has kept operating expenses at elevated levels with retirement

costs ~28% of the total staff costs for the bank (see Exhibit 6). Gratuity is of a lesser concern as

overall costs are only 2-5% of reported staff costs (see Exhibit 7). We note that the gap has

reduced in recent years primarily as the full impact of the re-opening of the second pension

scheme has been effected. The gap, which was quite significant in FY2011, has now been

bridged at below 3.5% (see Exhibit 1).

Actuarial losses jump sharply; assumptions have changed marginally

We note two differences between the assumptions that banks (see Exhibit 8) have made

between assets and liabilities. On the liabilities side, banks have marginally reduced their long

term interest rate, which is positive, as it better reflects underlying liabilities. However, the

decline is only marginal at ~10bps to 8.1%, but there was no change on the long term return

on assets yoy at 8.7% which is a bit disappointing as it is a fairly aggressive assumption.

However, we have noticed a lot of banks reporting sharp jumps in actuarial costs and increases

in actuarial losses as compared to their liabilities. This could be partly explained by costs on

account of long term life expectancy.

Employee mix changing positively leading to a decline in age and maturing retirement plans

Given the extent of disclosures and changes to many variables on defined benefit obligation,

we think this is very hard to prove with available data. However, we indirectly look at various

disclosures: (1) growth in benefits paid (~40% yoy) and (2) share of interest costs to current

service costs. At this point, we see strong signs of this showing a possible mature plan. In

FY2016 the share of benefits paid was at 9% of opening balances as compared to 5% in

FY2012 (see Exhibit 11).

35-45% of employees in defined contribution; average staff costs have probably peaked

We maintain our outlook that the ratio of employees who are in defined benefit to total

employees is about 35-45% today as compared to less than 10% in FY2011 (see Exhibit 10) – a

function of the new hiring under defined contribution. On the other hand, we think the ratio of

active employees to those who have retired is likely to reverse in the next few years. Our

discussion with banks indicates that active employees in the defined benefit scheme have

declined to 55% levels from 65-70% levels in FY2011. This would also result in keeping the

average cost/employee closer to current levels. We do expect quite a few public banks to report

single digit growth in staff costs in the short term.

Banks/Financial Institutions India

Minor changes to trend levels. In FY2016, there was a rise in the gap (6% as

compared to 4% yoy) between retirement assets and liabilities of public banks.

Retirement costs contribute ~28% to overall staff costs and these costs were higher

than the contributions made to the scheme, indicating a possible timing mismatch in

some banks. Retirement schemes appear to be maturing based on our analysis, but

aggressive assumption does indicate that actuarial losses would remain high in the short

term.

ATTRACTIVE

JULY 01, 2016

UPDATE

BSE-30: 27,000

QUICK NUMBERS

Gap increased

between pension

assets and liabilities

in FY2016

Benefits paid and

actuarial losses

increased ~40% yoy

The share of

defined

contribution is

rising sharply to 35-

45% of active

employees

M.B. Mahesh, CFA

Nischint Chawathe

Abhijeet Sakhare



Exhibit 1: Overall difference between assets and liabilities rose

in FY2016 after a steady decline since FY2011 Status of retirement benefits, March fiscal year-ends, 2008-16 (` bn)

Notes:

a) Data for FY2008 does not include Dena Bank, Allahabad Bank

and Vijaya Bank.

b) Vijaya Bank, Andhra and Canara Bank reported pending

amortization is already as a part of fair value of planned assets

resulting in lower shortfall than reported in the exhibit.

Source: Company, Kotak Institutional Equities

Exhibit 2: Contribution by employer remained high since

FY2010 primarily to meet the revised benefits offered Status of retirement benefits, March fiscal year-ends, 2008-16 (` bn)

Notes:

a) Data for FY2008 does not include Dena Bank, Allahabad Bank

and Vijaya Bank.

b) Vijaya Bank, Andhra and Canara Bank reported pending

amortization is already as a part of fair value of planned assets

resulting in lower shortfall than reported in the exhibit.


FY2015 was the last year of ammortisation of the reopening of the second

pension option which began in FY2011

Public banks completed a key journey in FY2015 with respect to provisions for the second

pension option after starting this exercise in FY2011. With contribution to the pension fund

(see Exhibit 2) and benefits arising from rising interest rates, there has been a steady decline

in the gap between pension assets and liabilities, though we saw a gap opened in FY2016.

We are not reading too much into this gap currently based on our discussion with a few

banks where the divergence has been quite large.

We do think that the gap has significantly narrowed in recent years but believe there would

be some difference between the assets and liabilities each year. This occurs primarily due to

a mismatch between the ascertainment of liabilities which happens at the end of the

financial year and the contribution to meet that shortfall by the bank at the beginning of the

next financial year. We have probably now reached normalized levels of mismatches.

We have discussed our long term view on the movement of pension liability in subsequent

sections.

-

80

160

240

320

400

2008 2009 2010 2011 2012 2013 2014 2015 2016 -

50

100

150

200

250

2008 2009 2010 2011 2012 2013 2014 2015 2016

India Banks/Financial Institutions


Exhibit 3: Shortfall between pension assets and liabilities at 6% in FY2016 PBO, FPA and shortfall between PBO and FPA, March fiscal year-ends, 2012-16 (%)

Notes:

a) PBO- Projected benefit obligation, Fair value of planned assets

b) Vijaya Bank, Andhra and Canara Bank reported pending amortization is already as a part of FPA. Hence, not been included in amortization

pending

c) BoB has taken the provisions for the changes to the revised tables in FY2016 but transferred the amount only in FY2017 which has resulted in a

steep between assets and liabilities


Employer contribution stable in pension while gratuity saw decline in FY2016

As of FY2016 the total contribution to the fund by banks as compared to the costs reported

for retirement expenses reduced to 0.7X (see Exhibit 4) of the required contribution

expensed to the earnings statement. This is still higher than the contribution given prior to

the second pension option. The difference in contribution and expense charged could partly

be a timing issue for a few banks as the change in assumptions made on mortality tables for

a few banks may be fully visible in FY2017. We understand that certain banks had made

their contributions in 1QFY17 though the P&L reflects the cost of this transition.

Retirement costs to total staff costs has increased to ~28% in FY2016 as compared to 22-

23% levels in the previous few years primarily on account of a few banks like Bank of India

and Bank of Baroda who changed their mortality tables but we note that this is still lower as

compared to the impact that was seen in FY2011 at 33% (see Exhibit 6). This is still higher

than 10-15% levels reported in FY2009-10. We see this declining hereon as FY2015 was the

final year of the ammortisation cost of the second pension option.

On the other hand, the impact of gratuity is lot lower. The cost to earnings has been less

than 5% in the past few years (see Exhibit 5 and 7). On an average the cost related to

gratuity is ~10-15% of the pension related costs. FY2016 saw it lower at 11%.

PBO FPA

Amm.

Pending

Short-

fall (%) PBO FPA

Amm.

Pending

Short-

fall (%) PBO FPA

Amm.

Pending

Short-

fall (%) PBO FPA

Amm.

Pending

Short-

fall (%) PBO FPA

Amm.

Pending

Short-

fall (%)

Allahabad 32 26 4 (5.6) 37 33 3 (3.4) 41 41 1 2.2 46 46 - (0.5) 52 52 - 0.1

Andhra 24 24 0.0 28 28 32 33 37 38 - 41 41 -

BoB 70 57 11 (2.8) 75 67 7 (1.5) 83 76 4 (3.2) 89 87 - (2.7) 119 90 - (24.4)

BoI 71 51 13 (10.4) 74 65 9 (0.2) 80 73 4 (4.2) 94 90 - (4.0) 111 105 - (5.1)

Canara 77 75 (3.4) 86 81 (5.9) 90 89 (1.5) 96 92 (4.5) 100 93 (6.4)

Dena 17 14 2 (2.3) 18 16 1 (0.8) 19 18 1 (4.2) 22 22 - 3.3 25 27 - 6.9

Indian 39 34 5 (0.0) 45 42 3 (0.0) 49 48 2 (0.0) 53 52 - (1.7) 56 55 - (1.8)

IOB 44 39 5 0.0 49 46 3 0.4 54 54 2 2.3 60 60 - 0.4 68 68 - (0.1)

OBC 29 21 5 (8.3) 33 27 3 (8.3) 38 34 2 (7.3) 43 43 - (0.7) 49 49 - (0.3)

PNB 117 102 17 1.9 136 124 11 (0.1) 152 148 7 1.7 182 174 - (4.6) 202 208 - 3.3

SBI (cons) 460 359 12 (19.4) 501 447 8 (9.3) 571 531 4 (6.2) 645 619 - (4.1) 732 668 - (8.7)

Union 53 40 0 (23.6) 60 48 0 (20.3) 67 61 0 (8.7) 82 79 - (4.3) 96 95 - (1.0)

UCO 33 30 3 0.3 39 37 2 0.1 47 45 1 (1.0) 53 52 - (2.5) 63 57 - (9.1)

V ijaya 19 19 - (1.7) 20 20 - (2.3) 21 22 - 5.3 24 23 - (2.5) 26 25 - (2.3)

Total 1,084 891 77 (10.7) 1,200 1,080 51 (5.8) 1,345 1,273 27 (3.4) 1,528 1,477 - (3.4) 1,740 1,635 - (6.0)

20162015201420132012



Exhibit 4: Contribution by employer to the pension fund has been rising to cover the shortfall Charges to P&L and contribution of employer to the fund, March fiscal year-ends, 2008-16 (%)

Notes: a) Data for FY2008 does not include Dena Bank, Allahabad Bank and Vijaya Bank.


Exhibit 5: Contribution by employer to the gratuity fund continued to decline in FY2016 Charges to P&L and contribution of employer to the gratuity fund, March fiscal year-ends, 2010-16 (%)

Notes: a) Data for FY2008 does not include Dena Bank, Allahabad Bank and Vijaya Bank.


-

0.6

1.2

1.8

2.4

3.0

-

50

100

150

200

250

2008 2009 2010 2011 2012 2013 2014 2015 2016

Employer contribution (LHS) Expenses charged to P&L (LHS)

Contribution to P&L charge (RHS)(Rs bn) (X)

-

0.6

1.2

1.8

2.4

3.0

-

9

18

27

36

45

2010 2011 2012 2013 2014 2015 2016

Employer contribution (LHS) Expenses charged to P&L (LHS)

Contribution to P&L charge (RHS)(Rs bn) (X)



Exhibit 6: Pension benefits charged to P&L to total staff costs continues to remain high Pension costs to total staff costs, March fiscal year-ends, 2011-16 (` bn)

Notes:

Reported pension costs that is charged to the P&L is higher in FY2011 primarily due to one-off benefit provided to current and retired employees.

We have includes the cost of retirement provisions for BoB as a part of staff costs though it is part of provisions as per financials


Exhibit 7: Gratuity benefits charged to P&L is lot lower Gratuity costs to total staff costs, March fiscal year-ends, 2011-16 (` bn)


Pension

cost

% of

staff cost

Pension

cost

% of

staff cost

Pension

cost

% of

staff cost

Pension

cost

% of

staff cost

Staff

cost

Pension

cost

% of

staff cost

Staff

cost

Pension

cost

% of

staff cost

Allahabad 19 123.8 6 31.3 5 25.1 3 15.3 23 4 16.8 21 7 31.4

Andhra 7 63.8 2 20.9 4 31.7 3 23.7 17 6 33.5 17 3 15.5

BoB 10 34.5 7 22.5 7 19.8 10 24.5 43 9 21.6 81 30 37.3

BoI 15 41.9 7 24.3 7 21.1 11 26.6 50 16 32.1 54 18 34.2

Canara 9 30.1 7 25.2 3 10.5 (1) (2.0) 43 7 15.5 44 7 16.3

Dena 2 28.7 2 21.4 2 19.0 2 24.8 11 2 20.4 14 4 28.1

Indian 11 78.5 5 30.7 8 38.1 5 25.6 17 5 26.9 20 4 20.4

IOB 1 3.5 5 23.0 4 16.5 4 15.3 26 5 19.6 34 8 24.8

OBC 4 41.0 2 17.6 3 20.0 3 19.1 16 3 16.8 20 3 16.9

PNB 13 29.6 14 30.5 20 35.3 20 30.2 73 33 45.1 64 16 25.3

SBI (cons) 35 18.0 40 19.4 35 14.9 63 22.0 297 47 15.9 310 83 26.7

Union 11 44.0 9 36.2 10 36.8 11 33.9 38 15 39.2 37 11 31.1

UCO 6 42.3 6 43.2 7 45.3 8 53.0 16 7 41.1 18 14 78.8

V ijaya 9 85.1 1 7.4 1 12.2 1 10.8 12 3 22.5 12 3 24.0

Total 152 32.9 114 23.6 116 21.3 144 22.7 683 161 23.6 748 213 28.5

201620152014201320122011

Gratuity

% of

staff cost Gratuity

% of

staff cost Gratuity

% of

staff cost Gratuity

% of

staff cost Gratuity

% of

staff cost Gratuity

% of

staff cost

Allahabad 2 13.7 2 8.8 1 3.1 1 4.4 1 3.3 1 4.9

Andhra 2 15.2 0 3.1 1 4.1 0 2.4 0 1.5 1 6.1

BoB 4 13.9 1 4.9 1 3.9 1 2.4 0 0.9 0 0.3

BoI 3 8.3 2 6.7 2 6.5 1 2.8 1 2.5 2 4.3

Canara 1 4.7 2 7.7 2 6.0 (1) (1.6) 3 6.5 1 2.3

Dena 0 0.5 1 7.7 0 6.1 0 0.6 0 2.3 1 5.1

Indian 1 7.1 1 5.9 1 7.4 2 9.6 0 2.4 1 4.5

IOB 2 9.7 1 3.7 2 8.4 0 1.9 0 0.3 2 4.5

OBC 2 15.7 0 2.5 1 4.8 1 3.0 0 2.3 1 2.7

PNB 5 10.2 3 6.4 2 3.8 2 2.4 1 1.1 4 5.7

SBI (cons) 20 10.3 14 7.0 10 4.4 5 1.7 7 2.5 9 2.8

Union 1 5.6 2 8.2 1 5.3 2 6.2 1 3.1 1 2.0

UCO 2 13.7 2 13.4 2 10.3 1 6.9 0 1.8 1 6.1

V ijaya 1 8.4 0 1.8 0 2.0 0 0.7 0 0.9 0 2.7

Total 45 9.9 32 6.6 27 4.9 15 2.4 16 2.4 24 3.2

20162014201320122011 2015



Assumptions could get better, but banks are taking some hit elsewhere

There has been a lot of discussion on this subject in the recent years. Assumptions continue

to remain a source of concern (see Exhibit 8) but note that there is very little that a bank can

possibly do to make changes on a few of them. Discount rates for capturing long term

liability costs and expected return on planned assets are linked to long-term benchmark

instruments.

An interesting observation is that in FY2016 there was a sharp rise in pension cost reflecting

higher actuarial losses. While one could attribute FY2015 with sharp decline in interest rates

the same cannot be used in FY2016. This has increased the pension obligations but we

believe that this could be due to differences arising out of age assumptions and actual age

of retired employees.

The importance of the interest rate assumptions: a few thoughts

An important point to note is that the impact of these high interest rate assumptions does

not have similar impact on the fair value of assets and defined benefit obligation. The peak

liability creation closes as the active employees (not all employees of the plan) start declining

and this is the scenario that we are seeing today (see Exhibit 10). However, the assets that

are created need to be in existence till the last member is active in the plan post his

retirement. Hence, the duration of the creation of liabilities (which is indirectly checked

through the change in current service cost) because of the change in active employees is lot

lower than the duration of the assets required to service all employees (which is indirectly

checked through the change in current service cost). We think this is important as we should

not look at the two having similar or double impact when interest rates decline.

We acknowledge that we have some shortcomings with respect to data availability with

respect to (1) age of employees in the plan including those who participated recently

(especially those who have retired) (2) total number of members who are currently part of

the plan (3) expected outstanding liability that needs to be created over a period to

understand the full contribution that needs to be provided by banks and importantly (4) the

mortality tables of LIC (1994-96) for valuing the actuarial liability assuming a superannuation

period of 60 years with some level of early retirement/disablement/attrition rate. Hence, we

look at proxies to understand these issues.



Exhibit 8: Change in assumptions was not material in FY2016 March fiscal year-ends, 2011-16 (%)

Notes:

a) Discount refers to discount rate of pension obligation, return refers to return on assets and salary pertains to escalation of staff costs

b) Allahabad Bank gave salary escalation at 7.5% for first 20 years and 5% thereafter for FY2009-10.

c) Indian Bank gave salary escalation at 2% basic and 7.5% DA for FY2010 and 1% basic, 4.7% DA for FY2011 and 1% basic and 3% DA in

FY2012


Greater impact from actuarial assumptions could reflect aggressive assumptions

FY2016 saw a sharp rise in actuarial losses despite the change in interest rates not being too

material. BoB, IOB, Union and UCO Bank have reported a sharp rise in PBO due to these

losses. Given the limited disclosures it is rather difficult to point out factors leading to

actuarial impact, but these losses could reflect the aggressive assumptions made by banks

and hence could potentially report higher actuarial losses for an extended period.

The reasons for this, as highlighted in the earlier section, could be due to various reasons.

However, one possible explanation is the difference between observed and assumed

variances in age of a pensioner post his retirement. This would remain a problem for some

time, but we are not perturbed as most of these plans are at a fair level of maturity given

the levels of retirement that we are seeing in this employee base.

Others reasons could include factoring in new actuarial tables (2006-08) as compared to

1994-96 tables or secondary impact caused due to marginal changes in salary on a yearly

basis such as promotions.

Discount Return Salary Discount Return Salary Discount Return Salary Discount Return Salary Discount Return Salary Discount Return Salary

Allahabad 8.5 8.0 4.0 8.5 8.5 5.0 8.0 8.0 5.5 8.8 8.0 5.5 8.0 8.0 5.5 7.5 7.5 5.5

Andhra 8.4 8.5 3.0 8.4 8.5 3.0 8.1 9.0 4.0 9.1 9.0 5.0 7.8 9.0 5.0 8.1 9.0 5.0

BoB 8.5 8.0 4.0 8.8 8.0 4.0 8.3 8.0 6.0 8.5 8.7 6.0 8.0 8.0 6.0 8.0 8.0 6.0

BoI 8.5 8.0 4.0 9.0 8.0 4.0 8.0 8.0 5.0 9.3 8.4 6.0 8.0 8.6 5.5 8.1 8.9 5.5

Canara 8.5 8.0 4.0 8.7 8.0 4.0 8.3 8.0 4.0 9.3 9.2 5.5 8.0 9.2 5.5 8.0 9.3 5.5

Dena 8.5 8.5 4.0 8.5 8.5 5.0 8.0 8.0 5.5 8.8 9.0 5.0 8.0 9.0 5.0 8.0 9.0 5.0

Indian 8.5 9.0 8.6 9.0 8.4 9.0 9.3 9.0 5.5 8.0 8.0 6.0 8.0 9.0 6.0

IOB 8.5 9.1 3.0 8.5 8.5 3.0 8.5 9.0 4.0 8.8 9.0 5.0 8.8 9.0 5.0 7.8 9.0 5.0

OBC 8.5 8.1 6.0 8.5 8.5 6.0 8.5 9.1 5.5 9.0 9.0 5.3 8.8 9.0 5.3 8.5 8.9 5.0

PNB 8.5 8.6 5.0 8.8 8.6 5.0 8.5 8.6 5.0 9.1 8.6 5.5 8.0 8.6 5.5 8.2 8.6 5.8

SBI (cons) 8.4 7.9 4.4 8.7 8.1 4.4 8.4 8.3 4.6 9.2 9.0 5.0 8.2 8.7 5.0 8.1 8.2 5.0

Union 8.0 8.0 4.0 9.0 8.0 4.0 8.5 8.7 4.0 9.3 8.7 5.0 8.0 8.7 5.0 8.0 8.7 5.0

UCO 8.5 9.0 5.0 8.5 9.1 5.0 8.0 9.2 5.5 8.5 9.4 5.7 8.0 9.4 5.7 8.0 9.0 5.3

V ijaya 8.5 8.3 4.3 9.0 8.3 1.5 8.0 8.7 5.5 8.5 9.5 5.5 8.0 9.0 5.5 8.0 9.0 5.5

J&K Bank 8.0 8.0 3.0 8.5 8.0 3.5 8.0 8.0 3.5 9.0 8.0 5.0 8.0 8.0 5.0

Average 8.4 8.3 4.1 8.7 8.4 4.1 8.2 8.5 4.8 9.0 8.8 5.4 8.1 8.7 5.4 8.0 8.7 5.4

201620152014201320122011



Exhibit 9: Impact due to changes in actuarial assumptions was 10% of opening liabilities in FY2016 as compared to 8% in FY2015 Actuarial losses to opening liabilities, March fiscal-year ends, 2011-16 (` bn)

Notes:

(A) FY2011 saw a higher impact due to recognition implementation of the second pension option from “past service cost” while the largest impact

was taken due to the implementation of the wage settlement of the previous cycle.

(B) BoB and BoI have moved their mortality tables to 2006-08 in FY2016 leading to a rise in actuarial losses while SBI completed this exercise in

FY2014

(C) Some banks have not explicitly mentioned the impact of the second pension option in FY2011 and could have been a part under actuarial

gains/loss in FY2011. Hence, FY2011 may not be a correct year to understand the long term changes.


35-45% of active employees are already under defined contribution

We think that PSU Banks are probably moving far rapidly to defined contribution plans than

our initial expectation. Note that PSU Banks moved to defined contribution (employees

contribute 10% of basic pay and dearness allowance with a matching contribution from

banks) from August 01, 2010.

The exhibit below shows that that the ratio of employees who are currently part of defined

benefit plan and active have fallen to ~55% levels as compared to ~90% in FY2011. On the

other side, the important ratio to track would be the split of employees in the plan between

active/retired and the outstanding liabilities assumed by the bank for these employees.

Discussion with various banks indicate that this ratio which was probably closer to 65-70%

in FY2011 has dropped to ~55% in FY2014 and the probability is high that we would see

this declining to 45-50% or lower by FY2016 for most public banks. This is important to

track as this would help us understand the “current service cost” movement under defined

benefit obligation. As this ratio (share of active to retired employees in the plan) declines the

pace of increase in the current service costs declines as well which then gives us an

indication that the plan is closer to maturity.

PBO Loss

% of

PBO PBO Loss

% of

PBO PBO Loss

% of

PBO PBO Loss

% of

PBO PBO Loss

% of

PBO PBO Loss

% of

PBO

Allahabad 7 15 211.6 26 (0) (0.9) 32 (1) (4.3) 37 (2) (5.8) 41 (2) (4.6) 46 0 0.6

Andhra 9 2 27.6 21 1 4.2 24 1 4.9 28 1 3.4 32 1 4.3 37 2 4.2

BoB 29 (1) (2.5) 67 0 0.1 70 (8) (10.7) 75 (4) (5.8) 83 (4) (5.0) 89 20 22.2

BoI 22 19 87.0 69 (1) (1.6) 71 (8) (10.6) 74 (2) (3.0) 80 6 7.4 94 9 9.9

Canara 34 20 59.0 72 3 4.3 77 6 7.7 86 2 2.6 90 3 3.0 96 (2) (2.6)

Dena 9 7 82.2 17 0 1.3 17 (1) (5.8) 18 (0) (0.3) 19 1 5.2 22 2 10.5

Indian 19 6 31.2 36 (1) (1.5) 39 5 13.8 45 3 5.8 49 3 6.2 53 4 7.2

IOB 20 18 88.4 39 4 10.4 44 4 9.3 49 5 9.6 54 6 10.5 60 9 15.1

OBC 9 15 167.3 25 1 4.5 29 2 6.2 33 2 5.7 38 1 3.8 44 2 5.0

PNB 47 (3) (6.0) 106 (7) (6.8) 117 11 9.4 136 8 5.8 152 21 13.9 182 13 6.9

SBI (cons) 269 19 7.0 419 6 1.5 460 14 3.1 501 47 9.4 569 51 8.9 645 69 10.7

Union 14 4 27.0 48 2 4.4 53 4 6.8 60 4 6.2 67 12 17.6 82 13 15.7

UCO 14 17 123.7 31 1 2.3 33 5 14.8 39 4 10.9 47 3 5.8 53 9 16.2

V ijaya 7 1 18.5 18 0 1.7 19 (2) (10.0) 20 (1) (4.4) 21 1 2.9 24 1 4.7

Total 508 139 27.5 991 9 1.0 1,084 33 3.0 1,200 65 5.5 1,343 102 7.6 1,529 150 9.8

201620152014201320122011



Exhibit 10: ~45% of employees are now outside the defined benefit scheme Number of active members in the defined benefit to overall active employees, March fiscal year-ends, 2010-16

Notes: (A) Data post FY2010 includes active members who opted for the second pension option scheme


The other way to track this ratio would be to look at the movement in various other

reported items. This is not as reliable as what was described previously but we do keep track

of the following: (1) increase in current service cost (2) relative contribution of interest costs

as compared to current service cost and (3) benefits paid. The former two are heavily

influenced by the discount rate and salary escalation assumptions but the third is a bit more

reliable. The exhibit below shows that the trend in benefits paid to opening balances is

steadily rising. The third has a key drawback as it is not necessary that the opening balance

factors in the full cost of the liabilities that needs to be paid. Given the limited data, we do

think that the third option does offer a better alternative. Note that many banks adjust the

difference in expected cost and actual costs under actuarial losses. Hence the one-time cost

taken by SBI in FY2014 could possibly be taken across a period by all public banks.

We believe that banks should be able to manage this liability as they are still in a phase of

strong growth in balance sheet (over 10-12% CAGR in the medium term) giving adequate

cushion for higher-than-expected contribution while the defined benefit plan witnesses a

steady decline of members.

Exhibit 11: Contribution of interest costs are nearly double of current service costs March fiscal year-ends, 2010-16 (₹ bn)


2010 2011 2012 2013 2014 2015 2016

Bank of India

No of members (#) 15,085 36,950 34,498 31,932 29,254 26,268

Outstanding employees (#) 39,676 39,785 41,890 42,146 43,143 45,613 45,713

% of members to employees 38.0 92.9 82.4 75.8 67.8 57.6 -

Union Bank of India

No of members (#) 14,497 27,856 26,345 24,739 23,163 21,337 19,670

Outstanding employees (#) 29,419 29,462 30,838 31,798 33,806 35,514 35,473

% of members to employees 49.3 94.5 85.4 77.8 68.5 60.1 55.5

2010 2011 2012 2013 2014 2015 2016

Opening balance 465 528 1,034 1,132 1,255 1,405 1,604

Current serv ice costs 20 34 47 59 59 71 79

% of opening balance 4.3 6.4 4.5 5.2 4.7 5.0 4.9

Interest costs 37 43 87 96 106 114 120


Discount rate assumption (%) 8.0 8.5 8.6 8.3 9.1 8.0 8.0

Benefits paid 30 42 51 70 86 101 139




Possibility of employee costs peaking for public banks is high, in our view

We think that the average cost/employee is unlikely to see further increase from current

levels. The exhibit below shows that the staff costs per active employee has increased by 7%

yoy for public banks in FY2016 while it has increased by 4% for private banks. The

consistent rise of staff costs has created a sharp divergence where it appears that the

average cost/employee is 33% higher for public banks. This could be partly true as the

average age of employees is far higher at over 40 years as compared to ~30 years for private

banks. However, we think this is an incorrect analysis as ~25-30% of the reported costs

pertain to retirement benefits where we think the contribution is closer to peak levels. This

does not mean that a reversal is immediate but the probability is very high that we could see

this ratio at closer to current levels for public banks and probably start declining in a few

years from now.

Exhibit 12: Employee costs increased 7% yoy in FY2016 and >33% higher than private banks Average cost/employee, March fiscal year-ends, 2010-16 (`)


We base our decline argument on the mix of employees that we are seeing in these banks.

The average age of employees in public banks has started to reverse. For example, the

average age of employees in PNB has declined to 43 years as compared to 50 years in

FY2010. In UCO Bank, 34% of employees are less than 30 years and 54% are less than 45

years while in FY2010 less than 80% of the employees were below 45 years. With more

retirement coming through in the next few years, we see the average cost is likely to decline

and not increase any further.

2010 2011 2012 2013 2014 2015 2016

Public banks

Allahabad 488,400 737,890 841,640 884,780 952,780 945,570 1,026,340

Andhra 577,350 777,890 787,710 813,980 784,640 911,650 1,011,790

BoB 620,300 738,370 726,230 808,990 929,140 893,560 1,290,290

BoI 575,230 874,750 747,700 745,040 935,910 1,123,490 1,173,210

Canara 501,590 675,490 694,090 765,860 805,410 834,160 823,400

Dena 501,360 672,140 709,180 743,680 834,860 839,140 1,060,900

Indian 613,020 688,350 782,230 1,052,660 1,008,210 877,370 983,710

IOB 662,070 661,070 783,810 808,090 814,750 859,360 902,660

OBC 647,230 655,770 780,110 850,400 872,150 823,880 988,650

PNB 542,180 783,010 792,880 904,920 1,010,680 1,106,770 952,830

Union 463,610 883,030 822,310 879,690 1,008,400 1,092,190 990,730

SBI 628,010 718,830 774,340 828,380 999,460 1,081,490 1,193,130

UCO 450,240 639,780 599,080 589,670 635,980 659,400 688,930

V ijaya 599,500 879,410 636,410 694,460 818,000 835,330 963,290

Total 580,610 738,760 760,330 822,190 935,280 990,230 1,063,170

Growth (%) 17.1 27.2 2.9 8.1 13.8 5.9 7.4

Private banks

Axis Bank 594,270 671,410 715,170 682,660 647,740 735,960 731,010

HDFC Bank 437,810 527,830 558,970 586,850 609,050 650,080 688,860

ICICI Bank 509,040 574,670 610,050 647,040 628,500 678,150 704,790

IndusInd Bank 603,190 617,630 592,830 633,830 597,440 564,940 586,090

Yes Bank 900,570 1,040,740 992,890 1,035,120 991,530 999,250 1,004,880

Total 506,070 587,110 620,280 644,210 638,070 685,580 710,180

Growth (%) (2.8) 16.0 5.6 3.9 (1.0) 7.4 3.6

(% difference - public

and private) 12.8 20.5 18.4 21.6 31.8 30.8 33.2



Exhibit 13: Average age of employees has declined to 43 years in FY2015 Average age across different levels for PNB, March fiscal year-ends, 2010-15 (%)


Exhibit 14: UCO Bank has seen a fairly sharp decline in average age in the past two years Share of employees across various age buckets for UCO Bank, March fiscal year-ends, 2010-15 (%)


Exhibit 15: The average age has been broadly stable for the past few years at 29-30 Break-up of employees by age for Axis Bank, March fiscal year-ends, 2010-15 (%)


2010 2011 2012 2013 2014 2015

Officer 50.2 50.4 50.1 49.5 49.1 48.2

Clerical 49.8 49.6 44.9 44.7 43.0 41.1

Sub-staff 46.9 45.9 44.5 42.4 40.5 38.8

Total 49.3 49.0 46.8 46.0 44.7 43.1

2010 2011 2012 2013 2014 2015

Less than 30 years 7.7 7.3 11.2 23.4 28.5 33.5

30 years -45 years 8.9 11.0 11.5 13.7 16.7 20.3

45 years -55 years 61.1 47.8 40.9 29.7 23.1 16.9

>55 years 22.3 34.0 36.5 33.2 31.7 29.3

2010 2011 2012 2013 2014 2015

Below 30 66.0 70.9 69.0 67.9 64.2 51.6

30-40 years 29.0 24.9 27.0 28.1 31.7 42.2

40 - 50 years 4.0 3.5 3.0 3.3 3.5 5.2

50 - 60 years 1.0 0.7 1.0 0.7 0.7 1.0

Average age (years) 29 29 29 29 30


1QFY17—strong revenue growth for Infosys and TCS, cross-currency tailwind of 10-40 bps

The June quarter is seasonally strong for revenue growth but weak for margins due to wage

revision and additional visa costs. We expect 4.2% and 3.7% sequential c/c revenue growth for

Infosys and TCS respectively. Wipro will report flat revenues in c/c terms. We expect 2% organic

c/c revenue growth for HCLT and model 3.1% growth (or US$50 mn) from acquisition of Volvo

IT services business. We have not built in any revenues from Volvo internal IT contract. Tech

Mahindra will report 1% organic c/c revenue decline due to seasonal decline in Comviva

revenues. Appreciation of EUR, AUD, INR and JPY will provide10-40 bps cross-currency tailwind

to revenues net of headwinds from GBP depreciation.

EBIT margin to decline sequentially due to visa costs, rupee appreciation and wage revision

We expect 100-200 bps EBIT margin decline due to (1) additional visa costs, (2) marginal

appreciation in rupee (1%) against USD and (3) wage revision at Infosys, TCS and with effect

from June at Wipro. Combined, these factors will put pressure on margins. Infosys and TCS will

report 200 bps and 150 bps sequential decline to 23.5% and 24.6% EBIT margin respectively.

Incorporate revised currency and Brexit impact in our forecasts

We make the following changes to our estimates and target prices

KIE economist has revised FY2017 INR/USD rate to 68.5 from 67.5, GBP/USD rate to 1.37 from

1.44 and EUR/USD to 1.09 from 1.11 earlier for FY2017. Net impact—(1) cross-currency

headwind of 40-70 bps to our revenue growth estimates; HCLT (70 bps), Wipro (70 bps) and

Tech Mahindra (70 bps) will face the maximum impact, and (2) rupee tailwind will offset the

impact of cross-currency moves on margins.

Cut in c/c revenue growth estimate by 40-90 bps. Our industry growth forecast implies high

single-digit revenue growth from the UK. Clearly these estimates are a tall order given a high

likelihood of the UK moving into recession in 2017. We believe that a realistic growth

forecast in the near term will be low single digit. When rolled up to the organization level,

this will impact c/c revenue growth by 40-90 bps across IT companies, with the highest

impact on TCS, HCLT and Tech Mahindra and the least on Infosys.

Cut in P/E multiple; increase risk premium to price in uncertainty risk. In an interconnected

world, it is unrealistic to expect the Brexit impact to be localized. However, the data points

are limited to quantify such an impact. We believe that such uncertainty is priced through a

higher risk premium (50 bps) resulting in 5-6% cut in implied P/E multiples.

Exhibit 4 provides details on changes to our estimates and target prices; we have cut target

prices by 4-7%. Infosys (leadership in revenue growth) and Tech Mahindra (inexpensive

valuations and improvement in business outlook) are our top picks.

Technology India

A steady quarter but challenging outlook. 1QFY17 revenue growth will be strong

for Infosys and TCS but margins will decline led by seasonal factors. We revise estimates

as we (1) build in revised currency forecast of KIE economist, (2) cut revenue growth

rate by 0.6-1.2% to build in the Brexit impact and (3) raise risk premium to account for

uncertainty in demand outlook in the aftermath of Brexit. Combined, these factors

result in 1-4% cut in EPS estimates and 4-7% cut in target prices. Infosys and Tech

Mahindra remain our top picks.

ATTRACTIVE

JULY 01, 2016

UPDATE

BSE-30: 27,000

Kawaljeet Saluja

Jaykumar Doshi

India Technology


Brexit—growth from UK and select Europe banks to slow

Brexit will slow down growth plans and accelerate cost take-out focus of banks. Brexit will

also hurt Swiss banks, which tend to do banking business by passporting from the UK. This

in turn will impact UK growth rates. Exhibit 1 details currency exposure for Indian IT. Our

industry growth forecast implies high single-digit revenue growth from the UK. Clearly these

estimates are a tall order given a high likelihood of the UK moving into recession in 2017.

We believe that a realistic growth forecast in the near term will be low single digit. When

rolled up to the organization level, this will impact c/c revenue growth by 40-90 bps and

US$ revenue growth by 60-120 bps across IT companies, with the highest impact on TCS,

HCLT and Tech Mahindra and the least on Infosys.

Impact on rest of the geos is difficult to gauge; multiples could take a hit

In an interconnected world, it is unrealistic to expect the Brexit impact to be localized.

However, the data points are limited to quantify such an impact. We believe that such

uncertainty is priced through a higher risk premium. For example, a 3% cut in EPS estimates

for FY2017 carried to perpetuity will barely impact DCF-based valuation. However, we

would not be surprised if the markets price this risk in through a higher discount rate (or risk

premium) or effectively lower P/E multiple. While this could pose immediate downside and

likely underperformance, this can also present buying opportunities.

We have valued Indian IT in the range of 12.5-17X, which we believe is fair after considering

market share gain opportunity and growth potential. Assuming a higher risk premium, and

after baking in revised estimates downside to earnings estimate, fair value reduces by 6-

10% (Exhibit 4).

A bit on our valuation approach for Tier-1 IT

Our longstanding approach to valuing TCS and Infosys has been through decomposition of

the multiples into three parts using discounted cash-flow analysis—

Ex-growth multiple, which assuming 12% CoE, stands at 8.5X,

No market share gain growth, i.e. growth for these companies converges with long-term

global IT spending growth of 4%. This leg of growth provides additional 4.5X multiple.

This effectively stands for trough or the worst case multiple, i.e. 13X. Infosys corrected to

these multiple at the time of global financial crisis.

Additional multiples for high growth phase, i.e. market share gain. We believe that Indian

IT still has enough headroom for market share gain and report 10-12% growth for a few

years. Our valuations implied 12-13% growth for 6-7 years for this high-growth phase.

This provided additional 4-6X. Adding the three components up led to fair valuation

range of 17-19X on next-year earnings.

During period of uncertainty, markets readjust the third component of the multiple. For

example, markets may choose to adjust the third component to 10-11% growth over 6-7

years that can effectively bring down fair multiple for Infosys and TCS by about 5-6% to 16-

17.5X. Such a scenario can present buying opportunity.

Changes to estimates

Our estimate change for FY2017-19E (Exhibit 4 and Exhibit 5) also factors in 1QFY17

preview expectations besides the Brexit impact. Consequently, revenue and earnings cut is

not consistent across companies. In case of Tech Mahindra, our revised estimates

incorporate The Bio Agency acquisition from 2QFY17 and Target group acquisition from

3QFY17. For Mindtree, earnings cut is driven by amortization charge on intangibles

associated with shift to Ind-AS.

Technology India


Key focus points for the quarter—Infosys’ guidance, Brexit impact and pricing

pressure

We expect investor focus on the following points

Infosys’ FY2017 guidance. We expect the company to retain 11.5-13.5% c/c revenue

growth guidance. The Street is at the upper end of the guidance band, which may be a

relatively taller ask due to Brexit.

Brexit impact. Commentary on demand in light of Brexit will be keenly tracked.

Pricing pressure. Large deals are extremely competitive and suffer from high pricing

pressure. Progress on automation is important as it determines the ability to offset the

pressure on pricing in traditional businesses.

Digital. We expect companies to detail capabilities spanning sub-segments of digital

(skills, ecosystem partnerships, solutions and IPs created, etc.), deal wins and projects

executed.

Exhibit 1: Currency movement in June 2016 quarter

Source: Bloomberg, Kotak Institutional Equities

Exhibit 2: Cross-currency tailwinds in 1QFY17E

Notes: (a) As per disclosures for Infosys, TCS, Wipro and Tech M; assumed to be in line with geographic mix for other companies.


Depreciation of currencies against the US Dollar

INR/USD USD/GBP USD/EUR USD/AUD JPY/USD

Mar 2016 quarter average 67.7 1.43 1.10 0.73 115.2

June 2016 quarter average 67.0 1.42 1.12 0.74 106.9

Appr/ (Depr) (%) 1.0 (0.7) 2.0 1.7 7.8

Appreciation of the Rupee against other currencies

INR/USD INR/GBP INR/EUR INR/AUD JPY/INR

Mar 2016 quarter average 67.7 96.8 74.5 49.4 1.7

June 2016 quarter average 67.0 95.2 75.2 49.8 1.6

Appr/ (Depr) (%) 1.0 1.8 (0.9) (0.7) (6.6)

Impact in bps on

US US$ revenue

USD GBP EUR AUD Others growth

TCS 57 13 8 40

Infosys 69 7 10 7 8 20

Wipro 60 11 9 4 16 15

HCL Tech 59 20

Tech M 49 11 11 5 24 20

Mindtree 66 15

Hexaware 81 10

22

32 10

25 10

Europe Rest of the world

13 6

Currency-wise revenue mix (a)

India Technology


Exhibit 3: Results preview for the quarter ending June 2016 (Rs mn)


Financials Jun-15 Mar-16 Jun-16E qoq (%) yoy (%) Comments/what to look for

TCS (July 14, 2016)

Revenues (US$ mn) 4,036 4,207 4,381 4.1 8.6 We expect constant-currency (c/c) revenue growth of 3.7%; and cross-currency tailwind

of 40 bps (largely due to 8% appreciation of JPY vs USD). Revenue growth will be led

by core developed markets. Diligenta & Japan will stabilize

Revenues 256,681 284,486 293,536 3.2 14.4 We expect EBIT margin to decline 145 bps qoq largely due to wage hike (8-12%

offshore and 2-6% onsite)

EBITDA 72,019 79,068 77,450 (2.0) 7.5 We do not assume any forex gain in our model. Note that, FX gain in the Mar 2016

quarter was Rs1.9 bn

Adjusted net profit 57,089 63,412 60,039 (5.3) 5.2 We expect investor focus on (1) FY2017 growth outlook in view of Brexit, (2) TCS'

positioning in the evolving digital landscape and growth outlook for digital practice,

and (3) demand environment in BFSI

EBITDA margin (%) 28.1 27.8 26.4 (141) bps (167) bps

EBIT margin (%) 26.3 26.1 24.6 (145) bps (168) bps

Wipro (Jul 19, 2016)

Total revenues 123,706 137,417 137,084 (0.2) 10.8 We expect US$ revenue growth of 2.2% (organic growth of 0.2%) and cross-currency

tailwind of 15 bps. C/C growth of 2% will be around mid-point of guidance of 1-3%

c/c growth (including contribution of 2% or US$37 from full quarter consolidation of

HPS acquisition). IMS will be the driver of growth. We have not built revenue from

Viteos acquisition pending closure.

Global IT revenues

(US$ mn)

1,794 1,882 1,924 2.2 7.2 We expect IT services EBIT margin to decline 135 bps due to (1) full quarter

consolidation of HPS (45 bps impact), (2) one-month impact of wage hike and (3)

Wipro will start reporting amortization charge of intangibles pertaining to acquisitions

under IT services segment (reported under reconciling items earlier). This change could

impact IT services EBIT margin by 30 bps (no impact on consolidated EBITDA or

earnings)

Global IT revenues 115,773 127,967 128,901 0.7 11.3 We expect c/c revenue growth guidance of 1.5-3.5% (about 1-3% organic) for Sep

2016 quarter

EBIT 24,023 24,837 23,452 (5.6) (2.4) We expect investor focus on (1) growth outlook following Brexit , (2) progress on the

initiatives taken by the new CEO, (3) efficacy of measures taken to improve sales

effectiveness, account mining and to defend shares in core areas of competence, (4)

go-to-market strategy of digital business and HOLMES platform, (5) integration of

recent acquisitions of cellent AG and HPS

Adj. net profit 21,878 22,351 21,083 (5.7) (3.6)

Total EBITDA margin

(%)

19.4 18.1 17.1

Global IT - EBITDA

margin (%)

23.9 23.4 21.5 (196) bps (242) bps

Global IT - EBIT margin

(%)

21.0 20.1 18.4 (162) bps (253) bps

Infosys (July 15, 2016)

Revenues (US$ mn) 2,256 2,446 2,554 4.4 13.2 We expect c/c revenue growth of 4.2% and cross-currency tailwind of 20 bps. We

expect strong growth in BFSI and IMS

Revenues 143,540 165,500 171,144 3.4 19.2 EBIT margin will decline 200 bps largely due to wage hike, higher visa costs and 1%

appreciation of rupee

EBITDA 37,600 46,390 44,351 (4.4) 18.0 We expect other income to decline sequentially and yoy as we have not built fx gains

(Rs740 mn in Mar-16 quarter)

Adjusted net profit 30,300 35,980 33,591 (6.6) 10.9 We expect Infosys to maintain 11.5-13.5% constant-currency revenue growth and 24-

26% EBIT margin band for FY2017E. US$ growth guidance will be cut by about 70 bps

to 11.1-13.1% led by cross-currency moves

EBITDA margin (%) 26.2 28.0 25.9 (212) bps (28) bps We expect investor focus on (1) demand environment in Europe and BFSI aftermath of

Brexit, (2) pricing outlook, growth versus margin trade-offs and progress on

automation, (3) Infosys' positioning in the digital landscape, and (4) TCVs


HCL Technologies

Revenues (US$ mn) 1,538 1,587 1,670 5.2 8.6 We expect 2% organic growth in constant currency and 20 bps impact of cross

currency. Acquisition of IT business of Volvo would contribute US$48 mn (3% to qoq

growth). We are not building any revenues from internal IT portion of Volvo contract

Revenues 97,770 106,980 111,895 4.6 14.4 We expect EBIT margin to decline 100 bps due to (1) 50 bps impact from Volvo

external IT acquisition and (2) Mar 2016 quarter included provision reversal in BPO

business aiding consolidated EBIT margin by 60 bps

EBITDA 20,897 23,767 23,720 (0.2) 13.5 Our estimates are based on US GAAP

Adjusted net profit 17,745 19,218 19,161 (0.3) 8.0 Expect investors focus on (1) FY2017 demand outlook in view of Brexit, (2) growth

prospects and investments in service lines other than IMS and ERD, (3) focus areas in

digital and how the company intends to catch up with competition, (4) profitability

trends after disappointment in FY2016, and (5) competitive intensity in IMS and HCLT's

win rates



Technology India


Exhibit 3 (continued): Results preview for the quarter ending June 2016 (Rs mn)


Financials Jun-15 Mar-16 Jun-16E qoq (%) yoy (%) Comments/what to look for

Tech Mahindra (August 1, 2016)

Revenues (US$ mn) 989 1,023 1,021 (0.2) 3.2 We expect c/c and US$ revenue decline of 0.4% and 0.2% (including US$6 mn from

Pininfarina acquisition for one month). Enterprise business will register good growth.

Telecom revenues will decline led by seasonal drop in Comviva and continued

weakness in LCC

Revenues 62,938 68,837 68,396 (0.6) 8.7 Expect EBIT margin to decline 110 bps due to lower revenue from Comviva (seasonal;

120 bps impact) and higher visa costs (seasonal; 120 bps impact) and 10 bps impact

from Pininfarina, partly offset by operational efficiency

EBITDA 9,355 11,613 10,717 (7.7) 14.6 Impact from move to Ind-AS: (1) ESOP costs to increase by US$2 mn/quarter as ESOP

accounting will be based on fair value versus intrinsic value earlier, (2) treasury shares

will not show up on P&L and BS. Investment in treasury shares will be adjusted against

reserves on BS, (3) amortization of intagibles associated with recent acquisitions

(Pininfarina, Target group and The BIO agency) will impact financials in FY2017;

negligible impact in 1Q

Adjusted net profit 6,761 8,971 7,078 (21.1) 4.7 We expect investors to focus on (1) potential headwinds from Brexit, (2) pipeline in

telecom and deal wins in Enterprise segment, (3) turaround strategy for LCC, (4)

roadmap for further improvement in margins, productivity and automation, and (5)

growth outlook for top telecom accounts

EBITDA margin (%) 14.9 16.9 15.7 (120) bps 80 bps We do not build forex impact. Forex gain of Rs643 mn and tax write-back (ETR was

14.6%) aided profit in Mar-16; partly explains sharp qoq drop in earnings

EBIT margin (%) 12.1 13.7 12.6 (111) bps 49 bps

Mindtree (July 18, 2016)

Revenues (US$ mn) 154.9 195.6 201.3 2.9 30.0 We expect organic c/c revenue growth of 2.8% and cross currency tailwind of 15 bps

Revenues 9,816 13,242 13,490 1.9 37.4 Revenue growth will be driven by digital business that accounts for 39% of revenues

EBITDA 1,729 2,259 2,255 (0.2) 30.4 We expect EBIT margin to decline 35 bps led by visa costs (seasonal) partly offset by

operating efficiencies. EBIT margin decline will be higher due to additional amortization

charge pertaining to intangibles of about 100 bps of revenues under Ind-AS (as against

Indian GAAP)

Adjusted net profit 1,379 1,560 1,429 (8.4) 3.6 We expect investor focus on (1) the deal pipeline and deal wins and potential impact of

Brexit, (2) investment plan for digital business and levers to defend operating margins,

(3) pricing pressure in offshore business and (4) attrition in digital business



Hexaware Technologies (Last week of July 2016)

Revenues (US$ mn) 121.3 121.7 129.1 6.1 6.4 We expect strong bounce-back in growth after two quarters of decline. We expect c/c

revenue growth rate of 6% and cross-currency tailwind of 10 bps

Revenues 7,722 8,202 8,649 5.5 12.0 EBIT margin will recover by 255 bps after a sharp cumulative decline of 350 bps over

the past two quarters. Margin expansion would be driven by about 350 bps increase in

utilization and operating efficiencies

EBITDA 1,323 1,194 1,480 23.9 11.8 We expect investor focus on (1) demand outlook in BFS in view of high exposure to

capital markets segment, (2) deal pipeline and deal wins, (3) progress in the IMS

vertical, and (4) constraints for Hexaware following bond issue by Baring

Adjusted net profit 989 842 1,058 25.6 7.0

EBITDA margin (%) 17.1 14.6 17.1 255 bps (3) bps

EBIT margin (%) 15.6 12.9 15.4 254 bps (23) bps

Mphasis

Revenues (US$ mn) 234 225 226 0.4 (3.6) We expect robust growth in Direct International (excluding Digital Risk) while Digital

Risk and HP channel revenues would decline. We expect 0.3% revenue growth in c/c

and 10 bps cross-currency tailwind

Revenues 14,964 15,173 15,147 (0.2) 1.2 We expect 100 bps improvement in margins largely on account of front-ended

provisioning of expected losses in ATM business in the previous quarter

EBITDA 2,115 2,344 2,484 6.0 17.4 Investor focus will remain on (1) deal wins in direct channel and confidence on

sustenance of growth, (2) fate of ATM business and digital risk, (3) dividend policy and

cash utilization strategy, and (4) margin outlook

Adjusted net profit 1,742 1,864 1,928 3.4 10.6

EBITDA margin (%) 14.1 15.4 16.4 95 bps 227 bps

EBIT margin (%) 12.7 14.3 15.2 97 bps 254 bps

India Technology


Exhibit 4: Changes to estimates and target prices for Tier-1 IT companies under coverage


Exhibit 5: Changes to estimates and target prices for IT companies under coverage


TP (b) Target P/E (b)

FY2017 FY2018 FY2019 FY2017 FY2018 FY2019 FY2017 FY2018 FY2019 FY2017 FY2018 FY2019 (Rs/share) (X)

TCS

New 18,130 20,173 22,245 9.6 11.3 10.3 25.8 25.9 25.8 135.2 150.6 166.9 2,550 16.5

Old 18,315 20,419 22,517 10.7 11.5 10.3 26.0 26.1 26.0 135.4 152.2 168.6 2,650 17.0

Change (a) (1.0) (1.2) (1.2) (112) (22) 0 (20) (19) (19) (0.2) (1.1) (1.1) (3.8)

Infosys

New 10,712 12,113 13,615 12.7 13.1 12.4 24.9 25.0 25.0 66.0 75.2 84.1 1,340 17.4

Old 10,804 12,220 13,738 13.7 13.1 12.4 25.0 25.2 25.1 66.0 75.9 84.7 1,425 18.4

Change (a) (0.8) (0.9) (0.9) (97) (3) (3) (3) (19) (14) (0.0) (0.9) (0.7) (6.0)

Wipro

New 7,948 8,675 9,510 8.2 9.1 9.6 18.9 19.1 19.8 37.5 41.5 46.5 525 12.6

Old 8,005 8,783 9,628 9.0 9.7 9.6 19.8 20.0 20.4 38.5 43.1 47.7 560 13.0

Change (a) (0.7) (1.2) (1.2) (77) (57) (0) (94) (94) (66) (2.5) (3.8) (2.6) (6.3)

HCL Tech

New 6,942 7,576 8,259 11.3 9.1 9.0 19.1 18.4 18.0 56.3 58.4 62.5 755 12.5

Old 6,981 7,662 8,353 11.9 9.8 9.0 19.5 18.5 18.5 56.7 59.3 64.7 800 13.1

Change (a) (0.6) (1.1) (1.1) (62) (63) (0) (32) (9) (43) (0.6) (1.5) (3.4) (5.6)

Notes:

(a) Changes to revenues, EPS estimates and target price are in %, while changes to revenue growth and EBITDA margin estimates are in bps.

(b) Target price includes div idends. Target multiples are based on FY2018 earnings.

EBIT margin (%) EPS (Rs/share)Revenues (US$ mn) Revenue growth (%)

TP (b) Target P/E (b)

FY2017 FY2018 FY2019 FY2017 FY2018 FY2019 FY2017 FY2018 FY2019 FY2017 FY2018 FY2019 (Rs/share) (X)

Tech M

New 4,359 4,925 5,511 8.0 13.0 11.9 14.2 14.5 14.8 39.3 45.0 50.6 570 12.5

Old 4,345 4,899 5,485 7.6 12.7 12.0 14.3 14.6 14.8 38.6 45.1 50.0 600 13.2

Change (a) 0.3 0.5 0.5 33 25 (6) (11) (5) (4) 1.7 (0.2) 1.2 (5.0)

Mindtree

New 842 970 1,110 17.7 15.2 14.5 13.4 13.6 13.4 37.2 43.9 49.9 665 15.0

Old 842 968 1,108 17.8 14.9 14.5 14.7 14.8 14.7 40.3 47.5 54.5 713 14.8

Change (a) (0.1) 0.2 0.2 (10) 33 (1) (133) (120) (130) (7.7) (7.7) (8.4) (6.7)

Hexaware (c)

New 525 608 696 8.2 15.7 14.6 15.0 15.4 15.3 13.9 16.4 18.6 240 14.0

Old 526 608 696 8.3 15.7 14.5 15.0 15.4 15.3 14.0 16.4 18.6 240 14.0

Change (a) (0.0) (0.1) (0.0) (4) (2) 1 (5) (0) (3) (0.4) (0.3) (0.5) -

Notes:

(a) Changes to revenues, EPS estimates and target price are in %, while changes to revenue growth and EBITDA margin estimates are in bps.

(b) Target price includes div idends. Target multiples are based on FY2018 earnings.

(c) Hexaware estimates are for CY2016-18E.

Revenues (US$ mn) Revenue growth (%) EBIT margin (%) EPS (Rs/share)

Technology India


Exhibit 6: Kotak Institutional Equities: valuation summary of key Indian technology companies

Source: Companies, Kotak Institutional Equities estimates.

30-Jun-16 EPS (Rs) P/E (X) EV/EBITDA (X) RoE (%)

Company Price (Rs) Rating (Rs m) (US$ m) 2016 2017E 2018E 2016 2017E 2018E 2016 2017E 2018E 2016 2017E 2018E

HCL Technologies 730 REDUCE 1,030,487 15,259 52.0 56.3 58.4 14.0 13.0 12.5 10.4 9.0 8.4 27.7 26.4 24.1

Hexaware Technologies 229 ADD 69,114 1,023 12.9 13.9 16.4 17.7 16.4 14.0 12.1 11.0 9.1 28.9 28.5 30.5

Infosys 1,171 ADD 2,689,263 39,821 59.0 66.0 75.2 19.8 17.7 15.6 13.8 11.5 10.0 24.9 24.5 24.6

Mindtree 665 REDUCE 111,582 1,652 35.9 37.2 43.9 18.5 17.9 15.2 13.0 11.0 9.0 27.4 24.0 24.1

Mphasis 573 REDUCE 120,537 1,785 34.5 37.9 40.0 16.6 15.1 14.4 10.5 9.3 8.5 12.3 12.3 12.4

TCS 2,553 ADD 5,030,700 74,492 122.9 135.2 150.6 20.8 18.9 17.0 15.3 13.5 11.8 37.1 33.2 31.3

Tech Mahindra 506 BUY 490,986 7,270 35.8 39.3 45.0 14.1 12.9 11.2 10.4 8.9 7.4 23.4 22.2 21.6

Wipro 558 REDUCE 1,378,534 20,413 36.0 37.5 41.5 15.5 14.9 13.4 10.6 9.6 8.4 20.3 18.6 17.8

Technology Attractive 10,921,202 161,717 19.2 17.0 15.4 13.7 11.6 10.1 24.8 24.3 23.3

KIE universe 75,767,371 1,121,931 21.4 17.6 14.4 11.4 9.9 8.4 11.9 13.2 14.6

Target O/S shares EPS CAGR (%) EPS growth (%) Net Profit (Rs mn) EBITDA (Rs mn) Sales (Rs mn)

Company Price (Rs) (mn) 2016-18E 2016E 2017E 2018E 2016 2017E 2018E 2016 2017E 2018E 2016 2017E 2018E

HCL Technologies 755 1,413 6.0 0.7 8.4 3.7 73,437 79,725 82,771 87,844 98,310 102,861 409,130 475,724 518,922

Hexaware Technologies 240 304 12.5 7.7 17.5 17.5 3,932 4,241 4,983 5,355 5,947 7,129 31,235 35,693 41,620

Infosys 1,340 2,286 12.9 11.8 13.9 13.9 134,900 150,855 171,845 170,780 200,609 226,236 624,410 734,072 829,741

Mindtree 665 168 10.6 3.8 17.9 17.9 6,032 6,261 7,379 8,299 9,687 11,409 46,896 57,646 66,422

Mphasis 460 210 7.7 10.1 5.3 5.3 7,242 7,974 8,398 8,970 10,025 10,717 60,879 62,581 67,742

TCS 2,550 1,970 10.7 10.0 11.4 11.4 242,148 266,309 296,700 306,780 342,126 380,738 1,086,462 1,242,354 1,381,819

Tech Mahindra 570 872 12.2 9.9 14.6 14.6 31,181 34,262 39,254 43,337 51,531 59,125 264,942 298,778 337,364

Wipro 525 2,467 7.3 4.1 10.7 10.7 88,924 91,041 99,109 112,955 120,314 132,124 516,307 574,339 624,574

Technology 12.4 10.9 10.9 569,800 640,669 710,440 723,376 838,551 930,339 2,942,491 3,481,186 3,868,202

KIE universe (6.1) 21.3 22.9

Notes:

(a) HCL Technologies adjusted for shift to March fiscal year-end. FY2016 financials and ratios are based on TTM March 2016.

(b) Hexaware Technologies is December year-ending.

Mkt cap.

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June 2016: Results calendar

Source: NSE, Kotak Institutional Equities

Mon Tue Wed Thu Fri Sat Sun

4-Jul 5-Jul 6-Jul 7-Jul 8-Jul 9-Jul 10-Jul

South Indian Bank


IndusInd Bank


Exide Industries HDFC Bank Axis Bank Mphasis

GRUH Finance Kotak Mahindra Bank Mahindra & Mahindra Financial


Info Edge Bajaj Finance Bajaj Auto Mahindra Lifespace Developers Dr Lal Pathlabs

Bajaj Finserv Bajaj Holding & Investment Nestle India

Mahindra CIE Automotive Dabur India

PI Industries

1-Aug 2-Aug 3-Aug 4-Aug 5-Aug 6-Aug 7-Aug

Berger Paints

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Kotak Institutional Equities: Valuation summary of KIE Universe stocks

Source: Company, Bloomberg, Kotak Institutional Equities estimates

Target O/S

Price (Rs) price Upside Mkt cap. shares EPS (Rs) EPS growth (%) PER (X) EV/EBITDA (X) ADVT-3mo

Company Rating 30-Jun-16 (Rs) (%) (Rs mn) (US$ mn) (mn) 2016 2017E 2018E 2016 2017E 2018E 2016 2017E 2018E 2016 2017E 2018E 2016 2017E 2018E 2016 2017E 2018E 2016 2017E 2018E (US$ mn)

Automobiles

Amara Raja Batteries SELL 869 735 (15.4) 148,359 2,197 171 28.7 34.2 38.5 18.8 19.5 12.4 30.3 25.4 22.6 18.1 14.8 13.0 7.1 5.8 4.9 0.5 0.8 0.9 25.8 25.2 23.5 3.8

Apollo Tyres BUY 152 230 51.8 77,117 1,142 509 19.9 21.4 23.2 (7.6) 7.2 8.3 7.6 7.1 6.5 4.2 4.8 4.5 1.3 1.1 1.0 1.3 1.3 1.4 18.4 16.8 15.7 4.6

Ashok Leyland ADD 98 110 11.8 279,892 4,145 2,846 3.5 5.5 6.5 284.6 57.6 17.6 28.2 17.9 15.2 13.4 10.1 9.1 5.1 4.3 3.6 1.0 1.7 2.0 18.7 26.0 25.9 18.1

Bajaj Auto ADD 2,690 2,750 2.2 778,383 11,527 289 126.2 142.6 161.8 15.8 13.0 13.4 21.3 18.9 16.6 14.4 12.5 10.8 6.3 5.4 4.6 2.0 2.1 2.4 31.8 30.8 29.8 10.0

Balkrishna Industries BUY 663 820 23.7 64,099 949 97 59.3 52.1 65.1 21.3 (12.2) 24.9 11.2 12.7 10.2 6.7 7.1 5.6 2.3 2.0 1.7 0.8 0.9 1.0 22.7 16.8 18.0 0.2

Bharat Forge BUY 760 870 14.4 176,982 2,621 237 27.4 30.6 41.0 (14.8) 11.9 34.0 27.8 24.8 18.5 13.4 13.2 10.3 5.0 4.4 3.8 1.5 1.0 1.3 18.5 18.9 21.9 9.4

Eicher Motors SELL 19,222 13,500 (29.8) 522,103 7,732 27 470.5 621.9 709.4 107.2 32.2 14.1 40.9 30.9 27.1 20.5 17.0 14.2 15.1 10.3 7.6 0.5 0.2 0.2 42.7 39.6 32.3 19.4

Exide Industries REDUCE 169 130 (23.2) 143,905 2,131 850 7.3 7.5 8.1 14.1 2.8 8.0 23.1 22.5 20.8 14.3 13.4 12.3 3.2 3.0 2.8 1.4 1.5 1.8 14.7 13.8 13.8 3.5

Hero Motocorp REDUCE 3,178 2,875 (9.5) 634,657 9,399 200 156.6 178.5 191.6 23.1 14.0 7.3 20.3 17.8 16.6 13.3 12.1 11.2 8.0 6.8 5.8 2.3 2.8 3.0 43.0 41.0 37.6 20.5

Mahindra CIE Automotive SELL 178 175 (1.6) 57,563 852 323 4.4 7.4 9.6 (41.1) 69.2 29.6 40.5 24.0 18.5 17.8 11.3 9.2 2.9 2.6 2.2 — — — 7.3 11.3 12.9 0.7

Mahindra & Mahindra ADD 1,430 1,380 (3.5) 888,131 13,153 569 58.0 64.8 74.7 6.8 11.8 15.3 24.7 22.1 19.1 16.6 14.8 12.8 3.6 3.3 2.9 0.8 1.1 1.3 15.6 15.6 16.1 22.9

Maruti Suzuki ADD 4,187 4,300 2.7 1,264,870 18,732 302 151.3 192.0 238.4 23.2 26.9 24.2 27.7 21.8 17.6 12.1 11.0 8.7 4.7 4.0 3.4 0.8 0.9 1.1 18.0 19.9 21.1 53.6

Minda Corp. REDUCE 118 110 (6.5) 24,626 365 209 4.6 5.9 7.4 10.6 26.6 26.5 25.4 20.1 15.9 13.1 10.0 8.3 4.3 3.6 3.0 0.4 0.5 0.5 18.8 19.7 20.8 0.1

Motherson Sumi Systems SELL 290 250 (13.8) 383,728 5,683 1,323 9.7 12.0 14.5 29.6 23.7 21.0 30.0 24.3 20.1 11.5 8.7 7.1 9.0 7.3 5.9 1.0 1.2 1.5 33.8 33.2 32.5 13.3

Suprajit Engineering BUY 200 180 (10.1) 26,301 389 131 5.5 7.7 9.1 30.7 39.9 19.0 36.6 26.1 22.0 18.6 15.0 12.9 5.9 5.0 4.2 0.5 0.7 0.8 20.9 20.7 20.9 0.3

Tata Motors BUY 459 550 19.8 1,474,296 21,833 3,395 32.5 47.6 56.7 (22.2) 46.5 19.2 14.1 9.7 8.1 4.5 3.8 3.4 1.9 1.6 1.3 — — — 16.1 18.2 18.1 74.2

TVS Motor SELL 310 235 (24.1) 147,039 2,178 475 7.7 12.7 15.3 27.3 65.7 20.1 40.3 24.3 20.3 20.5 14.4 12.2 9.3 7.4 5.9 0.8 1.1 1.3 25.1 33.7 32.3 9.2

WABCO India BUY 5,822 6,500 11.6 110,425 1,635 19 107.9 145.7 170.1 69.6 35.1 16.7 54.0 40.0 34.2 36.2 25.7 21.5 10.5 8.5 6.9 0.1 0.2 0.2 21.3 23.4 22.3 0.5

Automobiles Attractive 7,202,476 106,664 2.6 28.7 17.7 21.5 16.7 14.2 9.3 7.9 6.8 3.8 3.2 2.7 0.9 1.0 1.2 17.8 19.4 19.3 264.2

Banks/Financial Institutions

Axis Bank ADD 534 530 (0.7) 1,273,335 18,857 2,383 34.5 34.6 40.7 11.2 0.3 17.6 15.5 15.4 13.1 — — — 2.4 2.1 1.9 0.9 1.0 1.2 16.8 14.6 15.2 68.4

Bajaj Finserv ADD 2,322 2,070 (10.8) 369,440 5,471 159 117.1 138.0 159.1 10.1 17.8 15.3 19.8 16.8 14.6 — — — 2.8 2.6 2.2 0.6 0.6 0.6 15.3 15.8 16.4 4.0

Bank of Baroda REDUCE 154 140 (9.1) 354,725 5,253 2,310 (23.4) 7.2 18.1 (252.4) 131.0 149.2 (6.6) 21.3 8.5 — — — 0.9 0.9 0.8 — 0.9 2.3 (14.4) 4.6 10.7 21.8

Bank of India ADD 101 85 (16.0) 94,571 1,401 817 (74.5) (2.2) 34.3 (390.2) 97.0 1,646.0 (1.4) (45.7) 3.0 — — — 0.3 0.3 0.2 — (0.4) 6.8 (22.6) (0.7) 10.4 6.6

Bharat Financial Inclusion ADD - 650 - 0 0 127 23.8 33.7 42.9 59.3 41.7 27.4 - - - — — — - - - - - - 24.9 26.8 26.2 15.6

Canara Bank REDUCE 218 190 (13.0) 118,616 1,757 543 (51.8) 18.8 55.0 (191.1) 136.3 192.4 (4.2) 11.6 4.0 — — — 0.4 0.4 0.4 — — — (8.9) 3.2 9.2 12.7

Cholamandalam REDUCE 949 950 0.2 148,132 2,194 156 36.2 44.1 53.5 20.0 21.8 21.3 26.2 21.5 17.7 — — — 4.1 3.5 3.0 0.5 0.6 0.7 17.9 17.4 18.1 2.4

City Union Bank BUY 116 120 3.1 69,629 1,031 598 7.4 8.4 9.9 12.3 13.0 17.5 15.7 13.9 11.8 — — — 2.3 2.0 1.8 1.0 1.2 1.4 15.5 15.4 16.0 0.7

DCB Bank ADD 97 100 2.9 27,667 410 284 6.8 6.2 7.7 0.9 (8.8) 24.1 14.2 15.6 12.6 — — — 1.5 1.4 1.3 — — — 11.9 9.7 10.8 2.0

Dewan Housing Finance BUY 204 245 20.3 59,439 880 291 27.6 33.5 36.7 (42.0) 21.4 9.5 7.4 6.1 5.6 — — — 1.2 1.0 0.9 3.9 1.8 1.9 16.3 17.6 17.3 5.5

Federal Bank BUY 58 70 21.5 98,968 1,466 1,720 2.8 5.2 6.7 (52.9) 87.8 29.6 20.8 11.1 8.6 — — — 1.2 1.1 1.0 1.2 2.3 3.0 6.0 10.6 12.7 7.2

HDFC BUY 1,254 1,335 6.5 1,981,898 29,351 1,580 47.3 53.2 59.4 17.2 12.4 11.7 26.5 23.6 21.1 — — — 5.8 5.2 4.6 1.4 1.5 1.7 22.3 22.2 21.6 56.0

HDFC Bank BUY 1,176 1,250 6.3 2,978,467 44,109 2,528 48.6 58.4 70.4 19.3 20.1 20.6 24.2 20.1 16.7 — — — 4.1 3.5 3.0 0.8 1.0 1.2 18.3 18.8 19.6 24.7

ICICI Bank BUY 241 340 41.3 1,399,261 20,722 5,849 16.6 17.3 24.5 (14.6) 4.2 41.5 14.5 13.9 9.8 — — — 1.6 1.5 1.3 2.1 2.2 3.1 11.4 10.9 14.2 72.2

IDFC BUY 48 60 26.3 75,807 1,123 1,594 (5.9) 4.5 6.2 (154.7) 176.1 39.2 (8.1) 10.6 7.6 — — — 0.7 0.7 0.6 (4.6) 0.5 0.7 (1.3) 10.1 13.6 4.1

IDFC Bank BUY 45 65 43.8 153,447 2,272 — 1.2 2.6 4.0 - 113.4 54.9 37.6 17.6 11.4 — — — 0.5 1.1 1.8 5.4 6.2 9.1 3.2

IIFL Holdings BUY 223 245 9.9 70,609 1,046 317 16.1 19.0 21.1 11.8 17.9 10.8 13.8 11.7 10.6 — — — 2.4 2.1 1.8 1.9 1.1 1.2 20.2 20.6 21.0 0.5

IndusInd Bank ADD 1,112 1,200 8.0 662,321 9,809 595 38.4 46.3 55.4 13.4 20.4 19.8 28.9 24.0 20.1 — — — 3.7 3.3 2.9 0.4 0.5 0.6 17.1 15.1 15.7 20.6

J&K Bank BUY 69 80 16.1 33,401 495 485 8.6 5.8 15.0 (18.2) (32.4) 159.0 8.0 11.9 4.6 — — — 0.5 0.5 0.5 2.5 1.7 4.4 6.6 4.3 10.5 2.1

Karur Vysya Bank BUY 496 560 12.8 59,996 889 122 46.6 52.8 57.1 24.4 13.3 8.1 10.7 9.4 8.7 — — — 1.3 1.2 1.1 2.8 2.7 2.9 12.9 13.4 13.2 1.0

L&T Finance Holdings ADD 79 85 7.7 138,431 2,050 1,754 4.9 5.2 6.4 (1.7) 6.0 24.6 16.2 15.3 12.3 — — — 1.9 1.7 1.5 1.7 0.6 0.9 12.6 11.9 13.0 5.3

LIC Housing Finance ADD 495 550 11.1 249,808 3,699 505 36.3 42.3 47.2 20.8 16.5 11.6 13.6 11.7 10.5 — — — 2.7 2.3 2.0 1.1 1.3 1.4 19.6 19.4 20.4 14.8

Magma Fincorp ADD 109 105 (3.6) 25,804 382 235 9.0 11.1 13.2 2.5 23.7 18.5 12.1 9.8 8.3 — — — 1.2 1.1 1.0 0.7 1.5 1.8 10.6 11.8 12.3 0.5

Mahindra & Mahindra Financial ADD 334 305 (8.7) 190,053 2,815 565 11.9 14.4 18.1 (19.2) 20.5 26.1 28.0 23.3 18.5 — — — 3.1 2.8 2.6 0.9 1.1 1.4 11.4 12.7 14.6 9.5

Max Financial Services ADD 533 400 (24.9) 142,256 2,107 267 4.3 7.0 7.1 (70.6) 62.8 1.5 123.5 75.9 74.7 — — — 8.5 8.0 7.6 0.3 0.5 0.5 4.5 10.9 10.5 5.4

Muthoot Finance BUY 293 275 (6.2) 116,928 1,732 399 20.3 24.8 28.3 20.2 22.3 14.3 14.4 11.8 10.3 — — — 2.1 1.9 1.7 2.1 2.5 2.9 15.1 16.7 17.1 2.3

Oriental Bank of Commerce ADD 108 100 (7.5) 37,404 554 321 4.9 17.5 27.6 (70.7) 259.7 58.0 22.2 6.2 3.9 — — — 0.2 0.2 0.2 0.6 3.2 5.1 1.1 3.7 5.6 5.5

PFC REDUCE 169 180 6.3 223,615 3,312 1,320 46.3 31.6 39.5 2.5 (31.8) 25.0 3.7 5.4 4.3 — — — 0.6 0.6 0.5 8.2 3.8 4.7 18.0 11.2 12.7 5.2

Punjab National Bank REDUCE 106 80 (24.5) 207,945 3,080 1,964 (20.2) (0.9) 20.1 (222.6) 95.7 2,426.6 (5.2) (122.8) 5.3 — — — 0.5 0.5 0.5 - (0.2) 3.8 (10.9) (0.5) 10.6 15.5

Rural Electrification Corp. BUY 173 205 18.2 171,275 2,536 987 57.0 44.4 34.8 7.0 (22.2) (21.7) 3.0 3.9 5.0 — — — 0.6 0.5 0.5 9.9 5.5 4.3 21.0 14.5 10.3 10.4

Shriram City Union Finance ADD 1,650 1,650 (0.0) 108,796 1,611 66 80.1 97.5 124.0 (5.4) 21.7 27.2 20.6 16.9 13.3 — — — 2.4 2.1 1.9 0.5 0.7 0.8 12.1 13.2 14.9 0.4

Shriram Transport BUY 1,204 1,350 12.1 273,144 4,045 223 52.8 75.7 92.0 (4.8) 43.4 21.4 22.8 15.9 13.1 — — — 2.6 2.3 2.0 0.6 0.9 1.1 12.2 15.6 16.5 12.3

State Bank of India BUY 219 250 14.3 1,698,496 25,154 7,763 12.8 13.9 27.9 (27.0) 8.3 101.3 17.1 15.8 7.8 — — — 1.2 1.1 1.0 1.2 1.3 1.4 7.3 7.3 13.4 83.4

Union Bank ADD 128 130 1.3 88,199 1,306 687 19.7 29.4 38.4 (29.8) 49.6 30.6 6.5 4.4 3.3 — — — 0.4 0.4 0.3 1.5 2.3 3.0 6.8 9.0 10.7 9.8

YES Bank ADD 1,107 970 (12.4) 466,087 6,902 421 60.4 64.8 76.7 25.8 7.3 18.4 18.3 17.1 14.4 — — — 3.4 2.9 2.5 0.9 1.0 1.1 19.9 18.3 18.7 55.7

Banks/Financial Institutions Attractive 14,167,971 209,818 (33.4) 46.6 43.4 23.4 16.0 11.1 1.8 1.7 1.5 1.2 1.3 1.6 7.6 10.4 13.4 567.3

Dividend yield (%) RoE (%)Price/BV (X)

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Target O/S



Cement

ACC SELL 1,616 1,380 (14.6) 303,474 4,494 188 39.6 51.1 71.7 (13.3) 29.1 40.3 40.8 31.6 22.5 25.2 16.1 12.1 3.6 3.4 3.0 1.0 1.1 1.1 8.9 11.0 14.2 7.2

Ambuja Cements SELL 255 205 (19.5) 395,423 5,856 1,550 5.6 8.1 10.4 (34.6) 44.8 28.5 45.7 31.6 24.6 24.0 17.0 13.4 3.6 3.5 3.2 1.7 1.7 2.0 8.0 11.3 13.7 9.6

Dalmia Bharat BUY 1,197 1,015 (15.2) 106,271 1,574 89 21.5 71.0 100.5 1,802.5 230.6 41.5 55.7 16.8 11.9 11.1 8.1 6.4 2.8 2.4 2.0 0.1 0.2 0.2 5.5 15.2 18.2 0.5

Grasim Industries ADD 4,666 4,700 0.7 435,527 6,450 93 255.7 350.3 421.5 34.0 37.0 20.3 18.2 13.3 11.1 8.1 5.9 4.5 1.7 1.5 1.3 0.5 0.5 0.5 9.7 12.0 12.8 4.9

India Cements REDUCE 113 85 (24.8) 34,727 514 307 4.5 6.8 9.2 4,256.5 50.9 35.5 NM 16.7 12.4 7.4 7.3 6.4 1.0 0.9 0.9 0.9 1.9 1.9 4.0 5.8 7.2 7.3

J K Cement BUY 666 770 15.6 46,589 690 70 9.1 35.6 68.9 (49.9) 293.0 93.3 73.5 18.7 9.7 14.2 9.2 6.4 2.9 2.5 2.0 0.6 0.6 0.6 3.9 14.4 23.3 0.4

JK Lakshmi Cement BUY 386 410 6.3 45,403 672 118 2.0 20.1 35.3 (86.6) 917.4 75.9 195.4 19.2 10.9 24.1 10.3 6.5 3.4 2.9 2.3 0.5 0.5 0.5 1.7 16.3 23.8 0.7

Orient Cement BUY 183 170 (7.3) 37,573 556 205 3.0 8.3 16.2 (68.0) 172.9 95.6 60.3 22.1 11.3 28.5 11.3 7.4 3.7 3.3 2.6 0.5 1.0 1.0 6.2 15.7 25.8 0.3

Shree Cement SELL 14,546 10,600 (27.1) 506,758 7,505 35 115.4 341.8 484.8 (13.0) 196.3 41.8 126.1 42.6 30.0 36.9 17.9 13.0 8.2 7.0 5.7 0.2 0.2 0.2 7.0 17.7 20.9 2.4

UltraTech Cement SELL 3,411 2,825 (17.2) 936,108 13,863 274 79.2 129.9 164.5 7.9 64.0 26.6 43.0 26.3 20.7 21.8 15.0 12.0 4.5 3.9 3.3 0.3 0.3 0.3 11.0 15.9 17.3 13.1

Cement Cautious 2,847,852 42,175 2.0 66.4 32.1 40.4 24.3 18.4 16.8 11.5 8.9 3.4 3.1 2.7 0.6 0.6 0.6 8.5 12.6 14.5 46.4

Consumer products

Asian Paints REDUCE 1,003 865 (13.8) 962,363 14,252 959 18.5 21.5 25.4 25.0 16.1 18.1 54.1 46.6 39.5 33.7 29.1 24.7 17.2 14.5 12.3 0.7 0.9 1.1 34.4 33.7 33.8 15.1

Bajaj Corp. BUY 388 465 19.9 57,215 847 148 16.5 18.2 20.2 10.8 10.3 11.1 23.5 21.3 19.2 19.9 17.1 14.6 11.9 11.2 10.6 3.0 3.2 3.9 50.2 54.2 56.7 0.5

Britannia Industries BUY 2,759 3,100 12.4 331,007 4,902 120 68.0 79.6 97.6 50.4 17.0 22.7 40.6 34.7 28.3 26.7 22.8 18.5 18.7 14.0 10.7 0.7 0.9 1.1 54.1 46.2 42.8 10.2

Coffee Day Enterprises ADD 256 290 13.5 52,633 779 206 (0.4) 3.6 7.2 92.8 1,090.5 98.8 (699.1) 70.6 35.5 15.7 13.4 11.6 2.4 2.4 2.2 — — — (0.6) 3.4 6.4 0.6

Colgate-Palmolive (India) ADD 919 910 (0.9) 249,819 3,700 272 21.2 23.6 27.1 3.2 11.1 15.0 43.3 39.0 33.9 26.6 23.3 20.4 24.5 19.4 15.5 1.1 1.3 1.4 64.5 55.6 50.8 3.5

Dabur India ADD 309 300 (2.8) 542,959 8,041 1,759 7.1 8.2 9.4 19.1 15.4 14.3 43.3 37.5 32.8 35.7 30.5 26.2 13.1 10.9 9.1 0.7 0.9 1.0 33.3 31.6 30.1 6.3

GlaxoSmithKline Consumer ADD 5,916 6,400 8.2 248,794 3,684 42 154.6 173.8 198.6 11.4 12.4 14.3 38.3 34.0 29.8 26.7 23.5 20.0 10.2 9.0 8.0 1.2 1.4 1.6 28.5 28.0 28.3 1.6

Godrej Consumer Products REDUCE 1,607 1,340 (16.6) 547,323 8,105 341 33.5 39.7 45.9 27.3 18.7 15.6 48.0 40.5 35.0 34.8 29.4 24.8 10.7 8.8 7.3 0.4 0.4 0.4 24.2 24.0 22.9 6.2

Hindustan Unilever REDUCE 899 865 (3.7) 1,944,683 28,799 2,164 18.7 21.4 24.0 7.6 14.1 12.3 48.0 42.1 37.4 33.1 28.9 25.4 52.7 53.2 52.9 1.8 2.0 2.2 109.3 126.0 141.8 19.9

ITC ADD 368 385 4.5 2,964,591 43,904 8,069 11.9 13.7 15.8 (0.0) 15.1 15.3 30.9 26.8 23.3 19.9 17.7 15.2 9.0 8.2 7.4 2.3 2.2 2.6 27.8 27.8 30.6 40.8

Jubilant Foodworks REDUCE 1,136 1,000 (12.0) 74,786 1,108 66 15.9 23.2 31.4 (6.0) 46.2 35.4 71.6 49.0 36.2 26.5 19.7 15.3 10.3 8.9 7.5 0.2 0.4 0.6 15.2 19.5 22.6 12.9

Jyothy Laboratories NR 303 — — 54,825 812 181 7.3 9.9 11.1 26.2 35.9 12.0 41.7 30.7 27.4 24.8 21.7 18.5 6.5 6.9 6.3 1.7 1.7 2.0 21.6 27.1 24.0 0.9

Manpasand Beverages ADD 553 530 (4.2) 27,697 410 50 10.1 15.3 20.4 26.7 51.8 33.2 54.8 36.1 27.1 24.2 16.9 13.1 4.6 4.1 3.6 0.2 0.3 0.4 12.8 12.1 14.3 0.5

Marico REDUCE 264 240 (9.0) 340,089 5,036 1,290 5.5 6.7 7.8 23.4 21.6 16.0 47.9 39.4 34.0 31.6 26.3 22.6 16.2 13.6 11.5 1.3 1.1 1.3 36.2 37.6 36.7 4.0

Nestle India REDUCE 6,492 5,400 (16.8) 625,965 9,270 96 92.7 127.9 153.0 (24.1) 38.0 19.6 70.0 50.7 42.4 38.3 28.2 24.4 22.2 19.0 16.5 0.7 1.0 1.3 31.6 40.3 41.6 4.1

Page Industries SELL 14,017 10,500 (25.1) 156,344 2,315 11 208.6 253.7 307.4 18.7 21.6 21.2 67.2 55.3 45.6 41.7 34.9 28.9 30.9 23.5 17.9 0.6 0.7 0.7 52.2 48.4 44.6 1.8

PC Jeweller BUY 386 430 11.5 69,043 1,022 179 21.5 25.4 30.3 1.5 18.5 19.3 18.0 15.2 12.7 10.3 8.4 6.6 3.0 2.6 1.9 0.9 1.0 1.2 17.8 18.1 18.3 1.7

Pidilite Industries REDUCE 720 640 (11.1) 369,075 5,466 513 14.7 17.5 20.0 46.0 18.9 14.4 48.9 41.1 35.9 30.9 26.0 22.6 13.3 10.9 9.1 0.6 0.7 0.8 29.9 29.1 27.6 9.8

S H Kelkar and Company REDUCE 213 230 8.0 30,811 456 145 5.8 7.9 9.1 8.8 35.6 15.9 36.8 27.1 23.4 19.7 16.1 14.1 4.0 3.7 3.3 0.7 1.1 1.3 12.6 14.2 15.0 0.4

Speciality Restaurants REDUCE 99 75 (24.0) 4,632 69 47 0.1 0.4 1.1 (97.2) 684.8 143.8 1,781.2 227.0 93.1 22.5 15.9 12.9 1.5 1.5 1.5 — — 1.0 0.1 0.7 1.6 0.0

Tata Global Beverages ADD 131 130 (0.9) 82,804 1,226 631 5.0 5.7 6.6 (8.5) 14.0 16.4 26.4 23.1 19.9 13.2 11.6 10.2 1.4 1.4 1.3 1.7 1.7 1.9 5.6 6.2 6.9 2.9

Titan Company REDUCE 406 320 (21.2) 360,663 5,341 888 8.0 10.1 11.4 (14.2) 26.5 13.3 51.0 40.3 35.6 37.8 27.3 23.7 10.3 8.9 7.7 0.5 0.8 0.9 21.5 23.8 23.3 10.0

United Breweries SELL 751 710 (5.4) 198,502 2,940 264 11.2 13.9 17.8 13.5 24.6 28.0 67.2 53.9 42.1 28.4 24.5 20.5 9.4 8.2 7.1 0.2 0.3 0.4 14.9 16.3 18.1 6.0

United Spirits ADD 2,500 2,800 12.0 363,341 5,381 145 12.3 34.4 53.8 210.0 180.9 56.4 NM 72.6 46.4 41.6 31.8 23.9 20.3 12.0 7.9 — — — 14.5 20.7 20.6 13.4

Consumer products Cautious 10,659,967 157,867 8.6 18.6 16.6 42.6 35.9 30.8 27.1 23.2 19.8 12.4 10.8 9.4 1.3 1.4 1.7 29.0 30.2 30.6 173.4

Energy

BPCL ADD 1,072 1,100 2.6 775,255 11,481 723 102.8 100.1 104.6 46.2 (2.6) 4.5 10.4 10.7 10.3 7.1 6.6 5.7 2.9 2.4 2.1 2.8 2.8 2.9 30.0 24.6 22.1 18.2

Cairn India RS 141 — — 263,512 3,902 1,875 11.4 7.0 11.8 (67.2) (39.2) 70.0 12.3 20.2 11.9 6.6 7.6 5.6 0.5 0.5 0.5 2.1 1.8 3.2 4.0 2.7 4.4 6.3

Castrol India ADD 379 420 10.8 187,439 2,776 495 12.0 14.0 14.9 25.4 16.0 6.7 31.5 27.2 25.5 20.2 17.9 16.7 32.6 30.6 29.4 2.4 2.9 3.2 111.0 116.1 117.8 11.1

GAIL (India) ADD 385 420 9.0 488,554 7,235 1,268 17.9 25.1 33.0 (31.5) 40.2 31.4 21.5 15.3 11.7 13.3 10.0 7.9 1.6 1.5 1.4 1.4 1.9 2.6 7.6 10.1 12.3 8.9

GSPL ADD 143 150 4.7 80,732 1,196 563 7.9 9.5 10.8 22.2 20.5 13.6 18.2 15.1 13.3 9.0 7.5 6.6 2.0 1.9 1.7 1.0 1.7 2.3 11.7 12.9 13.4 0.8

HPCL ADD 996 1,040 4.4 337,357 4,996 339 113.9 119.6 120.5 41.3 5.0 0.7 8.7 8.3 8.3 7.0 6.2 6.0 1.8 1.6 1.4 3.5 3.6 3.7 22.5 20.6 18.4 14.0

Indraprastha Gas ADD 628 600 (4.4) 87,857 1,301 140 33.2 37.1 40.4 6.0 11.8 8.9 18.9 16.9 15.5 10.8 9.7 8.7 3.6 3.2 2.8 1.0 1.2 1.4 20.6 20.1 19.3 5.5

IOCL BUY 441 530 20.2 1,070,727 15,857 2,428 39.1 56.9 60.8 127.4 45.3 6.9 11.3 7.8 7.3 6.7 4.6 4.1 1.4 1.3 1.2 3.2 3.9 4.2 13.4 17.6 16.9 8.8

ONGC SELL 216 185 (14.5) 1,850,552 27,405 8,556 20.3 15.8 18.2 (8.5) (21.8) 14.9 10.7 13.7 11.9 4.1 5.0 4.6 1.0 1.0 0.9 3.9 3.2 3.2 9.4 7.1 7.9 13.8

Oil India SELL 352 320 (9.1) 211,720 3,135 601 38.8 31.1 31.2 (7.2) (19.9) 0.4 9.1 11.3 11.3 5.2 6.4 6.4 0.9 0.9 0.9 4.5 3.5 3.5 10.6 8.2 7.9 2.1

Petronet LNG ADD 294 300 2.0 220,650 3,268 750 11.2 15.6 23.0 13.2 39.7 47.7 26.4 18.9 12.8 14.7 11.7 7.9 3.5 3.1 2.7 0.8 1.4 2.2 15.2 17.2 22.3 5.8

Reliance Industries ADD 969 1,130 16.6 2,853,612 42,260 3,240 84.6 88.4 99.4 20.5 4.4 12.5 11.5 11.0 9.8 9.2 8.6 7.0 1.3 1.2 1.1 1.1 1.2 1.4 12.0 11.4 11.6 53.7

Energy Attractive 8,440,344 124,996 8.8 2.5 12.5 11.3 11.0 9.8 7.0 6.6 5.8 1.3 1.2 1.1 2.4 2.4 2.7 11.2 10.7 11.1 154.9


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Industrials

ABB SELL 1,224 900 (26.5) 259,365 3,841 212 14.2 18.4 27.6 31.2 29.7 50.3 86.5 66.7 44.4 36.4 32.1 24.4 8.6 7.9 7.0 0.3 0.4 0.6 10.3 12.4 16.8 1.5

BHEL SELL 128 100 (21.7) 312,559 4,629 2,448 (3.7) 1.7 6.6 (164.4) 145.1 294.9 (34.2) 75.9 19.2 (10.9) 59.6 7.5 0.9 0.9 0.9 0.8 0.8 1.1 (2.7) 1.2 4.8 14.8

Carborundum Universal ADD 239 215 (10.1) 45,042 667 188 7.6 10.1 13.6 47.0 32.4 34.6 31.4 23.7 17.6 14.2 10.8 8.8 3.8 3.4 2.9 0.6 0.7 1.0 11.7 15.0 17.7 0.2

Crompton Greaves NR 74 — — 46,223 685 627 (3.2) (0.4) 3.1 (208.6) 87.3 854.1 (23.1) (181.4) 24.1 16.2 11.5 12.6 1.2 1.0 1.0 1.8 0.5 0.5 (5.2) (0.6) 4.0 6.6

Cummins India REDUCE 849 825 (2.8) 235,315 3,485 277 26.3 29.0 33.1 (2.7) 10.2 14.0 32.2 29.3 25.7 30.4 27.7 23.8 7.4 6.7 6.1 1.6 1.7 2.0 24.1 24.1 24.8 4.8

Havells India REDUCE 360 320 (11.1) 224,885 3,330 624 7.8 9.7 11.3 25.8 25.5 15.8 46.4 36.9 31.9 26.1 24.3 20.4 8.8 7.8 6.9 1.7 1.1 1.2 22.2 22.4 23.0 11.1

Kalpataru Power Transmission BUY 256 280 9.5 39,240 581 153 7.7 12.5 14.6 (2.3) 63.3 16.8 33.4 20.4 17.5 8.5 7.4 6.8 1.7 1.6 1.5 0.6 0.6 0.6 5.2 8.0 8.7 0.4

KEC International ADD 144 150 4.1 37,046 549 257 7.4 10.6 14.3 19.0 41.9 35.0 19.3 13.6 10.1 9.0 7.4 6.2 2.5 2.1 1.8 0.7 1.0 1.3 13.5 16.7 19.4 0.9

L&T ADD 1,497 1,400 (6.4) 1,394,750 20,655 930 48.7 50.6 62.8 38.9 3.8 24.1 30.7 29.6 23.8 19.0 18.3 15.4 3.7 3.4 3.1 1.2 0.9 0.9 12.4 12.1 13.7 43.4

Siemens SELL 1,310 830 (36.6) 466,411 6,907 356 19.6 25.7 32.3 74.2 31.0 25.7 66.8 51.0 40.6 39.2 32.4 25.7 7.0 6.6 6.2 3.0 1.0 1.2 11.8 13.3 15.8 5.4

Thermax REDUCE 826 720 (12.8) 98,405 1,457 119 23.1 23.3 27.2 6.2 0.7 16.6 35.7 35.5 30.4 22.6 22.0 19.3 4.2 3.9 3.5 0.7 0.7 0.8 12.2 11.3 12.1 0.7

Voltas ADD 322 330 2.4 106,628 1,579 331 10.4 11.6 15.2 2.0 11.5 30.6 30.9 27.7 21.2 24.5 22.7 16.5 4.4 4.0 3.5 0.8 0.9 1.2 15.3 15.2 17.6 8.9

Industrials Cautious 3,265,868 48,365 (12.0) 36.3 39.1 48.8 35.8 25.8 24.6 20.0 15.6 3.3 3.1 2.8 1.4 0.9 1.0 6.7 8.6 11.1 98.7

Infrastructure

Adani Port and SEZ ADD 207 255 23.3 428,376 6,344 2,085 13.8 14.6 13.0 23.8 6.5 (11.3) 15.0 14.1 15.9 13.6 11.5 10.4 3.3 2.7 2.4 0.7 0.7 1.0 23.9 20.9 15.9 19.3

Ashoka Buildcon BUY 159 220 38.6 29,710 440 188 3.1 7.4 7.1 (39.4) 138.0 (4.3) 51.0 21.4 22.4 9.0 8.8 7.6 1.6 1.5 1.5 1.0 1.0 1.4 3.6 7.2 6.6 1.6

Container Corporation ADD 1,431 1,430 (0.0) 278,920 4,131 195 40.4 48.3 56.6 (24.8) 19.6 17.3 35.4 29.6 25.3 23.7 19.2 15.8 3.4 3.2 3.0 0.9 1.1 1.3 10.0 11.2 12.3 4.0

Gujarat Pipavav Port ADD 163 180 10.4 78,801 1,167 483 3.6 5.3 7.1 (59.2) 46.2 32.4 44.7 30.6 23.1 20.2 16.0 12.6 4.1 3.8 3.5 1.2 1.5 1.9 9.5 12.9 15.7 1.5

IRB Infrastructure BUY 213 285 33.6 74,999 1,111 351 18.1 14.7 14.4 17.2 (18.6) (2.2) 11.8 14.5 14.8 7.8 7.3 7.3 1.6 1.3 1.2 1.8 1.8 1.8 13.9 9.7 8.3 3.8

Sadbhav Engineering ADD 293 310 6.0 50,182 743 172 8.0 8.7 13.8 13.4 8.2 58.3 36.4 33.6 21.3 19.1 17.3 12.9 3.4 3.1 2.8 — — — 9.8 9.7 13.8 0.8

Infrastructure Attractive 940,989 13,935 3.0 8.5 (0.6) 20.2 18.6 18.7 13.2 11.4 10.2 3.0 2.6 2.4 0.9 0.9 1.2 14.8 14.0 12.6 31.0

Internet

Info Edge BUY 826 960 16.2 99,913 1,480 121 11.7 17.2 22.4 (27.4) 47.2 30.2 70.6 47.9 36.8 56.0 34.5 24.9 5.7 5.2 4.8 0.4 0.5 0.7 8.3 11.3 13.5 0.8

Just Dial REDUCE 610 700 14.7 42,411 628 69 20.6 19.7 28.0 4.6 (4.6) 42.2 29.6 31.0 21.8 20.4 19.6 12.8 6.3 5.4 4.4 — 0.3 0.5 21.3 18.7 22.1 22.1

Internet Attractive 142,324 2,108 (14.4) 21.2 35.0 50.0 41.3 30.6 37.4 28.4 19.8 5.8 5.3 4.6 0.3 0.5 0.6 11.7 12.8 15.2 22.9

Media

DB Corp. ADD 375 345 (8.0) 68,910 1,021 184 16.1 20.4 24.5 (6.3) 26.4 20.1 23.2 18.4 15.3 12.8 10.2 8.5 5.1 4.6 4.2 2.9 2.9 3.7 22.5 26.5 28.8 0.2

DishTV BUY 98 115 17.7 104,132 1,542 1,066 6.5 3.1 3.7 21,951.6 (52.8) 19.9 NM 31.9 26.6 10.8 9.2 7.8 6.2 6.2 6.2 — — — 41.5 19.6 23.5 6.6

Jagran Prakashan ADD 181 200 10.3 59,285 878 327 10.4 12.6 14.3 30.0 21.4 13.0 17.4 14.4 12.7 10.3 8.5 7.1 3.7 3.4 3.0 — 3.3 3.9 25.0 24.7 25.2 0.4

PVR BUY 1,011 1,075 6.4 47,221 699 47 26.9 26.3 35.0 647.0 (2.2) 33.4 37.6 38.5 28.9 15.3 13.7 11.3 5.4 4.8 4.2 0.3 0.3 0.3 19.6 13.3 15.6 1.6

Sun TV Network ADD 364 415 14.0 143,427 2,124 394 23.4 26.8 29.5 18.0 14.6 9.9 15.5 13.6 12.3 9.7 8.2 7.2 4.1 3.7 3.4 4.3 4.1 4.7 26.8 28.6 28.7 6.6

Zee Entertainment Enterprises BUY 457 475 4.1 438,445 6,493 960 9.4 12.0 15.5 8.4 27.7 29.1 48.6 38.0 29.5 27.7 22.4 17.8 7.0 6.2 5.6 0.5 0.5 0.8 15.3 17.3 20.0 12.8

Media Attractive 861,420 12,757 48.9 5.1 19.6 26.3 25.0 20.9 15.7 13.1 11.0 5.7 5.1 4.7 1.2 1.4 1.8 21.5 20.4 22.4 28.2

Metals & Mining

Coal India ADD 313 300 (4.2) 1,977,022 29,278 6,316 22.7 24.5 27.8 4.3 8.0 13.4 13.8 12.8 11.3 8.8 8.5 7.7 5.8 5.4 5.0 8.8 5.5 6.2 37.1 43.8 45.8 20.0

Hindalco Industries REDUCE 123 85 (30.8) 253,683 3,757 2,065 2.4 6.1 9.0 (76.1) 156.2 46.6 51.5 20.1 13.7 9.2 7.8 7.1 0.7 0.6 0.6 0.8 0.8 0.8 1.3 3.2 4.6 23.0

Hindustan Zinc BUY 181 190 5.2 762,881 11,298 4,225 19.4 18.0 19.2 0.2 (7.4) 6.9 9.3 10.0 9.4 6.2 6.4 5.2 2.0 1.8 1.6 15.4 2.4 2.4 20.3 19.0 17.8 5.3

Jindal Steel and Power RS 68 — — 62,076 919 915 (18.2) (14.5) 1.4 (363.0) 20.1 109.4 (3.7) (4.7) 49.5 15.5 9.9 7.6 0.3 0.4 0.4 — — — (8.4) (7.4) 0.7 11.4

JSW Steel REDUCE 1,464 1,045 (28.6) 353,966 5,242 242 (10.5) 131.8 154.3 (113.9) 1,352.0 17.1 (139.1) 11.1 9.5 12.2 6.2 5.7 1.6 1.4 1.3 0.6 0.6 0.6 (1.1) 13.8 14.2 13.9

National Aluminium Co. SELL 43 36 (16.3) 110,821 1,641 2,577 2.7 2.2 2.9 (43.2) (20.1) 33.6 15.9 19.9 14.9 6.7 6.5 4.5 0.9 0.8 0.8 4.7 2.3 2.3 5.4 4.3 5.6 0.8

NMDC SELL 94 75 (20.1) 372,089 5,510 3,965 8.0 7.2 7.6 (51.8) (9.5) 5.5 11.8 13.0 12.4 7.5 8.3 7.6 1.2 1.2 1.2 11.7 6.4 6.4 10.1 9.5 10.0 3.1

Tata Steel REDUCE 322 270 (16.1) 312,683 4,631 971 (23.4) 20.3 35.6 (72,377.0) 186.6 75.3 (13.7) 16 9.0 14.3 7.4 6.3 1.1 1.1 1.0 2.5 2.5 2.5 (7.6) 6.8 11.2 39.6

Vedanta BUY 132 140 6.1 391,191 5,793 2,965 9.8 12.4 19.0 (42.5) 26.3 53.5 13.4 10.6 6.9 7.7 6.7 5.3 0.9 0.6 0.6 2.7 2.1 2.1 5.9 8.6 10.9 29.0

Metals & Mining Cautious 4,596,413 68,070 (34.9) 41.5 26.2 18.0 12.7 10.1 9.5 7.5 6.4 1.7 1.6 1.4 7.9 3.8 4.1 9.6 12.2 14.3 146.0

Pharmaceutical

Biocon SELL 741 460 (37.9) 148,240 2,195 200 21.8 24.1 26.2 11.4 10.5 8.8 34.0 30.7 28.3 18.7 15.6 12.6 3.4 3.1 2.9 1.0 1.1 1.2 11.2 10.6 10.6 10.2

Cipla BUY 501 590 17.8 402,588 5,962 805 18.7 21.6 28.9 27.5 15.6 34.0 26.8 23.2 17.3 17.6 15.1 11.4 3.3 3.0 2.6 0.8 0.9 1.2 13.0 13.6 16.2 15.4

Dr Lal Pathlabs ADD 847 890 5.0 70,108 1,038 84 15.9 18.3 21.0 19.9 15.5 14.6 53.4 46.2 40.3 32.0 27.4 23.8 14.0 11.2 9.1 0.3 0.3 0.4 31.3 26.9 24.9 1.0

Dr Reddy's Laboratories NR 3,382 — — 576,716 8,541 171 139.3 119.5 144.2 2.7 (14.2) 20.7 24.3 28.3 23.4 14.3 15.1 12.4 4.5 4.4 3.8 0.6 0.5 0.6 19.9 15.8 17.5 18.2

Lupin REDUCE 1,540 1,600 3.9 694,157 10,280 450 50.5 60.0 73.3 (5.5) 19.0 22.1 30.5 25.6 21.0 19.7 15.0 12.5 6.3 5.2 4.3 0.5 0.6 0.7 22.8 22.2 22.4 34.8

Sun Pharmaceuticals SELL 763 715 (6.3) 1,836,548 27,198 2,406 22.1 29.0 34.0 11.1 31.2 17.3 34.5 26.3 22.4 22.0 16.7 13.1 5.8 4.8 4.0 0.5 0.8 0.9 18.4 20.1 19.6 44.2

Torrent Pharmaceuticals REDUCE 1,373 1,260 (8.2) 232,307 3,440 169 101.8 57.5 66.0 129.3 (43.5) 14.8 13.5 23.9 20.8 8.7 15.7 13.6 6.9 5.6 4.6 2.9 1.0 1.1 58.6 25.9 24.5 2.7

Pharmaceuticals Cautious 3,960,665 58,655 15.4 9.5 20.1 28.8 26.3 21.9 18.1 16.0 12.8 5.2 4.5 3.8 0.7 0.7 0.9 18.2 17.2 17.6 126.6


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Real Estate

DLF BUY 150 180 20.0 267,474 3,961 1,801 3.1 2.5 2.8 1.4 (18.1) 10.2 49.1 59.9 54.4 12.4 15.6 14.7 0.9 0.9 0.9 1.3 1.3 1.3 1.9 1.6 1.7 20.9

Godrej Properties REDUCE 364 280 (23.0) 78,643 1,165 216 10.7 11.6 12.8 11.6 8.7 9.9 34.0 31.3 28.5 29.9 21.7 18.0 3.6 3.3 3.0 — 0.4 0.7 11.5 11.0 11.1 1.1

Oberoi Realty BUY 271 345 27.2 92,053 1,363 339 12.6 9.2 43.0 42.1 (26.4) 366.0 21.6 29.4 6.3 14.1 16.5 3.5 1.7 1.7 1.3 0.7 0.7 0.7 8.6 5.8 23.5 1.0

Prestige Estates Projects BUY 185 250 34.8 69,525 1,030 375 9.4 9.2 13.3 5.7 (2.2) 45.2 19.8 20.2 13.9 12.3 9.7 8.4 1.7 1.6 1.4 0.8 0.8 0.8 8.8 8.0 10.8 0.6

Sobha BUY 327 480 46.9 32,037 474 98 16.1 22.6 24.1 (33.8) 40.5 6.9 20.3 14.5 13.5 11.8 10.0 8.7 1.3 1.2 1.1 2.1 2.1 2.1 6.4 8.6 8.7 0.5

Sunteck Realty BUY 246 360 46.2 15,505 230 60 27.1 82.0 53.3 138.8 201.9 (34.9) 9.1 3.0 4.6 10.7 2.2 0.2 0.9 0.7 0.6 0.8 0.8 0.8 10.5 26.2 14.1 0.2

Real Estate Attractive 555,238 8,223 13.4 10.3 58.7 29.6 26.8 16.9 13.4 13.0 9.8 1.2 1.2 1.1 1.0 1.1 1.1 4.2 4.5 6.8 24.4

Technology

HCL Technologies REDUCE 730 755 3.4 1,030,487 15,261 1,413 39.2 56.3 58.4 (23.5) 43.6 3.7 18.6 13.0 12.5 13.8 9.0 8.4 3.7 3.2 2.9 2.3 3.4 3.9 21.3 26.4 24.1 34.3

Hexaware Technologies ADD 229 240 4.8 69,114 1,024 304 12.9 13.9 16.4 19.4 7.7 17.5 17.7 16.4 14.0 12.1 11.0 9.1 4.9 4.5 4.0 3.8 3.8 3.8 28.9 28.5 30.5 5.2

Infosys ADD 1,171 1,340 14.5 2,689,263 39,826 2,286 59.0 66.0 75.2 9.4 11.8 13.9 19.8 17.7 15.6 13.8 11.5 10.0 4.6 4.1 3.6 1.9 2.3 2.6 24.9 24.5 24.6 60.3

Mindtree REDUCE 665 665 0.0 111,582 1,652 168 35.9 37.2 43.9 12.5 3.8 17.9 18.5 17.9 15.2 13.0 11.0 9.0 4.7 4.0 3.4 1.6 1.5 1.8 27.4 24.0 24.1 4.1

Mphasis REDUCE 573 460 (19.8) 120,537 1,785 210 34.5 37.9 40.0 6.8 10.1 5.3 16.6 15.1 14.4 10.5 9.3 8.5 1.9 1.8 1.7 3.1 3.3 3.5 12.3 12.3 12.4 2.0

TCS ADD 2,553 2,550 (0.1) 5,030,700 74,501 1,970 122.9 135.2 150.6 22.5 10.0 11.4 20.8 18.9 17.0 15.3 13.5 11.8 6.9 5.8 4.9 1.7 2.1 2.4 37.1 33.2 31.3 41.4

Tech Mahindra BUY 506 570 12.7 490,986 7,271 872 35.8 39.3 45.0 19.0 9.9 14.6 14.1 12.9 11.2 10.4 8.9 7.4 3.1 2.7 2.2 1.2 2.4 1.2 23.4 22.2 21.6 14.2

Wipro REDUCE 558 525 (5.9) 1,378,534 20,415 2,467 36.0 37.5 41.5 2.8 4.1 10.7 15.5 14.9 13.4 10.6 9.6 8.4 3.0 2.7 2.3 1.1 0.9 0.9 20.3 18.6 17.8 13.5

Technology Attractive 10,921,202 161,736 9.5 12.4 10.9 19.2 17.0 15.4 13.7 11.6 10.1 4.7 4.1 3.6 1.7 2.1 2.3 24.8 24.3 23.3 175.0

Telecom

Bharti Airtel BUY 367 415 13.1 1,466,246 21,714 3,997 11.9 14.9 18.0 (20.9) 24.9 21.0 30.7 24.6 20.3 6.8 6.2 5.3 2.2 2.1 2.0 0.4 1.0 1.5 7.5 8.9 10.3 18.9

Bharti Infratel ADD 345 375 8.7 654,445 9,692 1,897 12.6 15.4 17.0 19.4 22.3 11.0 27.5 22.5 20.2 11.5 10.2 9.2 3.6 3.5 3.4 0.9 3.2 3.6 13.5 15.7 17.1 13.9

IDEA BUY 107 170 59.5 383,846 5,684 3,601 8.6 4.2 5.4 (2.8) (51.2) 28.8 12.5 25.6 19.8 6.0 5.6 5.1 1.5 1.4 1.4 0.6 1.4 1.9 12.6 5.7 7.1 17.5

Reliance Communications SELL 51 40 (21.5) 126,814 1,878 2,488 2.7 2.2 3.2 (4.4) (20.0) 47.6 18.6 23.3 15.8 7.7 7.5 7.0 0.4 0.4 0.4 — — — 2.1 1.7 2.5 15.9

Tata Communications ADD 480 525 9.3 136,928 2,028 285 1.6 5.6 14.9 (56.1) 242.7 164.8 292.8 85.4 32.3 8.2 7.1 6.2 (33.3) (54.9) 77.7 1.1 1.4 1.4 (111.4) (48.5) (1,157) 3.4

Telecom Cautious 2,768,279 40,996 (8.8) 1.2 22.9 25.2 24.9 20.3 7.2 6.6 5.8 2.0 1.9 1.8 0.5 1.5 1.9 7.8 7.6 9.0 69.6

Utilities

Adani Power SELL 31 26 (14.8) 101,685 1,506 3,334 1.5 3.1 4.4 132.8 109.7 44.4 20.8 9.9 6.9 7.3 6.2 5.6 1.4 1.2 1.0 — — — 7.5 13.0 16.2 4.6

CESC BUY 597 610 2.2 79,117 1,172 133 27.8 56.8 71.7 86.4 104.6 26.2 21.5 10.5 8.3 8.4 7.0 6.7 0.9 0.8 0.8 1.5 1.5 1.6 4.3 8.2 9.8 3.5

JSW Energy ADD 84 80 (4.6) 137,601 2,038 1,640 7.6 7.4 8.7 (10.0) (2.4) 17.5 11.0 11.3 9.6 7.1 6.2 5.5 1.6 1.5 1.3 2.4 2.4 2.4 15.5 13.6 14.4 4.0

NHPC REDUCE 25 23 (8.7) 278,981 4,132 11,071 2.7 2.8 3.4 17.2 4.1 22.1 9.5 9.1 7.5 7.2 7.5 6.0 0.9 0.9 0.8 6.0 6.2 7.7 9.5 9.6 11.3 3.6

NTPC BUY 156 170 8.8 1,288,766 19,086 8,245 11.5 11.5 14.3 (2.6) (0.1) 24.8 13.6 13.6 10.9 12.9 11.0 8.9 1.5 1.4 1.3 2.3 2.2 2.8 11.1 10.3 12.0 10.6

Power Grid BUY 163 180 10.4 853,272 12,636 5,232 11.4 14.2 15.7 18.6 24.4 10.8 14.3 11.5 10.4 10.4 8.8 7.4 2.0 1.8 1.6 1.4 1.7 1.9 14.7 16.3 15.9 8.4

Reliance Power SELL 51 36 (29.9) 144,043 2,133 2,805 4.9 4.5 4.5 32.4 (6.8) 0.4 10.6 11.4 11.3 9.2 8.9 8.6 0.7 0.6 0.6 (1.9) — — 6.6 5.9 5.6 3.3

Tata Power ADD 73 76 3.6 198,385 2,938 2,800 5.5 5.6 6.2 965.8 2.2 10.6 13.3 13.1 11.8 8.3 6.6 6.2 1.4 1.3 1.2 1.8 1.6 1.6 10.5 10.1 10.3 6.3

Utilities Attractive 3,081,849 45,640 24.8 10.3 18.9 13.2 11.9 10.1 9.8 8.5 7.4 1.4 1.3 1.2 2.1 2.2 2.6 10.5 10.7 11.7 44.3

Others

Astral Poly Technik REDUCE 470 425 (9.6) 56,289 834 120 8.4 11.1 14.8 31.0 31.7 34.2 56.0 42.5 31.7 27.8 21.3 16.8 7.2 6.2 5.2 0.1 0.1 0.1 14.4 15.7 17.9 0.3

Cera Sanitaryware ADD 2,377 2,050 (13.8) 30,914 458 13 64.2 72.6 93.3 23.3 13.2 28.5 37.0 32.7 25.5 21.5 19.4 15.4 7.3 6.2 5.1 0.4 0.4 0.4 21.6 20.5 21.9 0.5

Dhanuka Agritech BUY 658 780 18.6 32,910 487 50 21.3 26.2 32.5 0.6 22.6 24.3 30.8 25.1 20.2 22.9 18.2 14.6 6.9 5.8 4.8 1.0 1.0 1.2 23.9 24.9 25.9 0.3

Godrej Industries ADD 397 380 (4.3) 133,389 1,975 336 14.4 16.8 19.9 20.3 16.8 17.9 27.5 23.6 20.0 30.3 17.4 15.5 3.8 3.4 2.9 0.4 0.4 0.4 14.4 15.2 15.6 1.8

HSIL ADD 275 320 16.4 19,878 294 72 12.3 14.4 18.9 4.2 16.7 31.9 22.3 19.1 14.5 7.8 8.2 6.7 1.4 1.4 1.3 1.5 1.5 1.5 6.6 7.3 9.1 0.4

InterGlobe Aviation BUY 1,015 1,200 18.2 365,888 5,419 351 56.7 71.3 88.0 50.5 25.7 23.3 17.9 14.2 11.5 11.8 9.2 7.5 21.0 13.0 8.8 4.7 3.5 4.3 188.2 116.0 93.7 10.3

Kaveri Seed BUY 444 520 17.0 30,681 454 69 25.1 37.5 45.3 (42.7) 49.2 20.8 17.7 11.9 9.8 13.5 9.2 7.3 3.3 2.8 2.4 0.0 2.5 3.1 20.5 25.5 26.1 4.8

PI Industries ADD 723 750 3.8 99,102 1,468 136 21.9 26.7 31.1 30.9 22.1 16.8 33.1 27.1 23.2 23.0 18.4 15.6 8.5 6.8 5.5 0.4 0.6 0.6 29.0 27.9 26.1 1.6

Rallis India ADD 221 225 1.7 43,036 637 194 7.3 9.5 12.3 (10.2) 30.7 29.2 30.5 23.3 18.1 19.0 14.8 11.6 4.9 4.3 3.7 1.4 1.4 1.5 16.6 19.6 22.2 1.0

Tata Chemicals ADD 430 500 16.2 109,647 1,624 255 30.6 39.0 44.2 6.1 27.1 13.4 14.0 11.0 9.7 8.4 7.0 6.1 1.8 1.6 1.5 2.3 2.3 2.3 13.5 15.6 15.8 3.0

UPL ADD 550 600 9.1 235,775 3,492 429 30.3 33.5 39.6 12.8 10.5 18.3 18.2 16.4 13.9 9.8 8.0 6.9 3.4 2.4 2.0 0.9 0.8 0.9 20.4 20.5 18.8 16.8

Whirlpool ADD 830 820 (1.3) 105,354 1,560 127 19.6 23.6 28.0 17.8 20.7 18.8 42.5 35.2 29.6 25.4 21.3 18.0 9.1 7.6 6.3 — 0.6 0.7 23.9 23.4 23.3 0.5

Others 1,212,071 17,950 20.5 28.2 20.1 21.6 16.8 14.0 13.4 10.4 8.8 5.2 4.1 3.4 1.9 1.8 2.1 23.9 24.4 24.3 40.4

KIE universe 75,675,720 1,120,707 (6.1) 21.3 22.9 21.4 17.6 14.3 11.4 9.9 8.4 2.5 2.3 2.1 1.8 1.7 1.9 11.9 13.2 14.6

KIE universe (ex-energy) 67,235,376 995,711 (9.5) 26.3 25.1 24.1 19.1 15.2 12.8 10.7 9.2 2.9 2.6 2.4 1.7 1.6 1.8 12.1 13.9 15.6

Notes:

(a) We have used adjusted book values for banking companies.

(b) 2016 means calendar year 2015, similarly for 2017 and 2018 for these particular companies.

(c) Exchange rate (Rs/US$)= 67.53

Dividend yield (%)Price/BV (X) RoE (%)

Disclo

sure

s


Disclosures

Ratings and other definitions/identifiers

Definitions of ratings

BUY. We expect this stock to deliver more than 15% returns over the next 12 months.

ADD. We expect this stock to deliver 5-15% returns over the next 12 months.

REDUCE. We expect this stock to deliver -5-+5% returns over the next 12 months.

SELL. We expect this stock to deliver <-5% returns over the next 12 months.

Our target prices are also on a 12-month horizon basis.

Other definitions

Coverage view. The coverage view represents each analyst’s overall fundamental outlook on the Sector. The coverage view will consist of one of the following

designations: Attractive, Neutral, Cautious.

Other ratings/identifiers

NR = Not Rated. The investment rating and target price, if any, have been suspended temporarily. Such suspension is in compliance with applicable regulation(s)

and/or Kotak Securities policies in circumstances when Kotak Securities or its affiliates is acting in an advisory capacity in a merger or strategic transaction

involving this company and in certain other circumstances.

CS = Coverage Suspended. Kotak Securities has suspended coverage of this company.

NC = Not Covered. Kotak Securities does not cover this company.

RS = Rating Suspended. Kotak Securities Research has suspended the investment rating and price target, if any, for this stock, because there is not a sufficient

fundamental basis for determining an investment rating or target. The previous investment rating and price target, if any, are no longer in effect for this stock

and should not be relied upon.

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

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

Kotak Institutional Equities Research coverage universe

Distribution of ratings/investment banking relationships

Source: Kotak Institutional Equities As of March 31, 2016

Percentage of companies covered by Kotak Institutional

Equities, within the specified category.

* The above categories are defined as follows: Buy = We

expect this stock to deliver more than 15% returns over

the next 12 months; Add = We expect this stock to

deliver 5-15% returns over the next 12 months; Reduce

= We expect this stock to deliver -5-+5% returns over

the next 12 months; Sell = We expect this stock to deliver

less than -5% returns over the next 12 months. Our

target prices are also on a 12-month horizon basis.

These ratings are used illustratively to comply with

applicable regulations. As of 31/03/2016 Kotak

Institutional Equities Investment Research had

investment ratings on 180 equity securities.

Percentage of companies within each category for

which Kotak Institutional Equities and or its affiliates has

provided investment banking services within the

previous 12 months.

34.4%

30.6%

19.4%

15.6%

3.3%5.0%

1.1% 0.6%

0%

10%

20%

30%

40%

50%

60%

70%

BUY ADD REDUCE SELL

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