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Sharekhan
Product Review (June)
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01-Jul-17 1
&
Market Outlook (July)
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Fundamental Research Offerings� Top Picks folio
� Stock Ideas/Viewpoints• Third level
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» Fifth level
01-Jul-17 2
� Wealth Creator
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• Third levelSharekhan’s Top Picks folio• Third level
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01-Jul-17 3
An all-weather balanced portfolio
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• A well-balanced portfolio of thoroughly researched
10-12 companies
• Prefers sustainable business model, focuses on near-
term triggers without losing sight of long-term wealth
creation
Sharekhan’s
Top Picks folio
• Careful selection of stocks to deliver superior risk
adjusted returns and outperform benchmark indices
• To maximise shareholders’ returns with minimum risk
and outperform the benchmark indices
Key objectives
• Only thoroughly researched and fundamentally strong
Top Picks folio
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How is our
portfolio different?
We religiously
follow the process
• Only thoroughly researched and fundamentally strong
stocks included, no place for market rumoured, lousy or
grapevine stocks
• Delivered superior returns consistently across equity
cycles since inception
• Actively tracked and reviewed every month without
exception; generally in initial days of the month
• Explains all changes/revisions in the folio for better
understanding of investors
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Superior returns across Market Cycles (on absolute as well as relative basis)
Beating the benchmark indices consistently (absolute returns in %; not annualised)
Sharekhan (Top Picks) Sensex Nifty CNX MIDCAP
YTD CY2017 35.9 16.0 16.3 23.5
CY2016 8.8 1.8 3.2 7.1
CY2015 13.9 -5.1 -4.1 6.5
CY2014 63.6 29.9 30.9 55.1
CY2013 12.4 8.5 6.4 -5.6
CY2012 35.1 26.2 29.0 36.0
CY2011 -20.5 -21.2 -21.7 -25.0
Cumulative returns
(since April 2009)
100
200
300
400
500
600
700
800
900
39911
40004
40097
40190
40283
40376
40469
40562
40655
40748
40841
40934
41027
41120
41213
41306
41399
41492
41585
41678
41771
41864
41957
42050
42143
42236
42329
42422
42515
42608
42701
42794
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CY2010 16.8 11.5 12.9 11.5
CY2009 116.1 76.1 72.0 114.0
Consistent outperformance (absolute returns in %; not annualised) %
1 mth 3 mth 6 mth 1 year 3 year 5 year
Top Picks 3.5 14.6 35.9 37.5 110.1 258.9
Sensex -0.7 4.3 16.0 14.4 20.5 77.0
Nifty -1.0 3.8 16.3 15.0 24.4 81.7
CNX MIDCAP 1.3 3.6 23.5 28.3 58.8 143.5
Note: The returns are based on the assumption that at the beginning of each month an equal amount was invested in each stock of the Top
Picks basket
39911
40004
40097
40190
40283
40376
40469
40562
40655
40748
40841
40934
41027
41120
41213
41306
41399
41492
41585
41678
41771
41864
41957
42050
42143
42236
42329
42422
42515
42608
42701
42794
42887
Sharekhan Top Picks Sensex Nifty
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Well Balanced Portfolio
NameCMP* PER (x) RoE (%) Price Upside
(Rs) FY17 FY18E FY19E FY17 FY18E FY19Etarget (Rs)# (%)
Godrej Industries 637 74.0 - - 14.9 - - 685 8
HDFC Bank 1,654 29.1 24.2 20.2 17.9 18.7 19.9 1,750 6
IndusInd Bank 1,488 30.8 23.6 18.6 16.3 17.2 18.6 1,680 13
ITC 324 38.6 31.5 27.2 23.5 26.6 28.5 350 8
KEC International 236 19.8 14.6 12.2 21.2 23.1 22.7 290 23
L&T Finance Holdings 144 27.6 19.0 14.8 11.9 13.6 15.2 153 8
Maruti Suzuki 7,218 29.7 25.2 21.9 23.0 21.9 21.1 7,900 9
Petronet LNG 432 19.0 15.4 13.5 23.2 24.0 23.4 500 16
Power Grid Corp 211 14.9 12.5 10.6 13.8 14.4 15.1 225 9• Third level
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*CMP as on 30th June, 2017 # Price target for next 6-12 months, ** Under review^ Used SOTP method to derive the target price
Easy to follow with revision done at the beginning of the month (usually changes in 2 stocks on an average); for simplicity, we recommend equal weightage in each stock and assume the same to calculate monthly performance.
Please note the returns shown do not include transaction cost.
Power Grid Corp 211 14.9 12.5 10.6 13.8 14.4 15.1 225 9
Reliance Industries 1,380 13.6 13.6 11.5 11.2 10.1 10.8 1,550 12
Sundram Fasteners 429 27.3 22.9 19.4 29.1 28.4 27.7 442 --
ZEE Entertainment 493 38.8 31.8 26.6 18.3 19.2 19.7 580 18
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Sharekhan Top Picks – Another month of strong outperformance
Markets have taken a breather in June after five consecutive months of a strong rally. The
nervousness stems from the uncertainty created by implementation of Goods & Services Tax
(GST) with effective from July. Like any other major reform implementation of GST could
cause temporary disruption in the system and adversely impact corporate results in Q1 and H1
of FY2018. The global cues also have not been too favourable.
In this backdrop, the Sensex/Nifty declined marginally by 0.7-1% during the last month.
However, the Sharekhan Top Picks folio appreciated by 3.5% in the same period; thereby
highlighting the importance of stock selection in achieving superior returns once again.
Made one change in portfolio
Top Picks performance for June 2017
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01-Jul-17 7
Made one change in portfolio
This month, we are suggesting only one change in the portfolio. We are booking profits in
Supreme Industries (appreciated by 8% last month) and replacing it by KEC International. The
financial performance of Supreme Industries could suffer in the immediate term due to
destocking done by dealers before the implementation of GST. Also the upside to our target
price for Supreme Industries is limited from the current level. On the other hand, KEC
International would not have much of impact from GST and is set to grow at a healthy rate on
the back of strong order inflow in FY2017.
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01-Jul-17 8
Make an informed decision
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• Identify right stocks across sectors
through bottom-up approach
• Focus on generating absolute returns
with a time frame of 6-12 months and a
favorable risk-reward ratio
Key objectives
• Closely tracked stocks with regular
Sharekhan's Stock Ideas
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• Closely tracked stocks with regular
interaction with companies’
management to stay abreast of the
business outlook
• Regular updates and news with view on
stocks through Investor’s Eye and also
Fundamental News & Analysis (FNA)
Focussed approach
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• We put great emphasis on investor’s risk
and reward, so in line with the upside
potential of a stock and the associated
risks, we review our rating regularly
• This also allows investors to churn their
portfolio by switching from one stock to
another to optimise the overall return
Risk and reward
Sharekhan's Stock Ideas
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01-Jul-17 10
• Our last 27 Stock Ideas generated 103%
returns on an aggregate basis.
• Some of the blockbuster Stock Ideas:
Bajaj Finance (up 672%), TVS Motor(up 492%), Gabriel India (up 361%)Finolex Cables (up 287%), & LICHousing Finance (up 220%)
Track record
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Top 10 Stock Ideas delivered strong returns
Company Reco. Initiation DateInitiation Price (Rs)
CMP* (Rs)Returns (%)
Bajaj Finance Buy 21-May-14 178 1374 672
TVS Motor Company Buy 30-Apr-14 92 545 492
Gabriel India Buy 16-Apr-14 33 151 361
Finolex Cables Buy 22-Apr-14 119 461 287
LIC Housing Finance Buy 28-Mar-14 232 742 220
Supreme Industries Buy 09-Jan-14 420 1207 187
Century Plyboards Buy 27-Nov-14 151 302 100
Skipper Buy 19-Jan-15 112 198 77
Triveni Turbine Buy 13-Nov-14 91 140 53
KEC International Buy 14-Mar-17 169 253 49• Third level
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-In last 39 months, we have initiated 27 new stock idea which have given average returns of
103% per new idea.
- Top Ten ideas have generated aggregate return of 250% on absolute basis.
*CMP as on June 29, 2017
KEC International Buy 14-Mar-17 169 253 49
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• The idea is to arm investors with
knowledge to help you take informed
decisions in the market
• Focus on generating absolute returns of
20-25% in a short time
Key objectives
Sharekhan's Viewpoints
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01-Jul-17 13
• Stocks with strong business
fundamentals and adequate
understanding through management
interaction/meeting
• Regular updates and news flow on
stocks through updates and also FNA
Focussed approach
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Viewpoints performance snapshot
Date of initiation
Viewpoint Reco Price
Date of closure
Closure price
Total Returns (%)
25-Sep-14 Indo Count Industries172
16-Feb-15 422 145.3
13-Jun-14 Dhanuka Agritech 380 19-May-17 831 118.7
26-Mar-14 FIEM Industries 409 7-Jan-15 886 116.6
25-Jun-14 JK Tyre 64 23-Dec-14138
115.4
16-Oct-14 Dhanuka Agritech 428 19-May-17 831 94.2
1-Sep-14 Salzer Electronics 136 11-Mar-15 257 89.0
14-Aug-14 Force Motors 687 23-Sep-14 1,281 86.5
5-Feb-14Power Finance
146 22-Aug-14 269 84.2
Total number of calls generated 239
Number of closed calls 134
Number of calls in profit 114
Number of calls in loss 18
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5-Feb-14Power Finance
Corporation146 22-Aug-14 269 84.2
19-Mar-14 JK Lakshmi Cement 97 23-May-14 178 83.5
25-Aug-14 Marico Kaya 488 26-Nov-14 876 79.5
29-Jun-16 Chambal Fertilizer 69 19-Jun-17 121 75.4
3-Sep-14 Gulf Oil Lubricants 313 16-Dec-14 541 72.8
14-Mar-14 Arvind 143 30-Jul-14 241 68.5
04-May-16 IFB Industries 353 08-Feb-17 590 67.1
24-Sep-14 TCPL Packaging 255 13-Nov-14 425 66.7
No Profit No Loss 2
Success ratio 91%
Aggregate return 25.4%
Top 15 calls return 91%
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Viewpoint closed in June 2017
Date of release
Date of closure
Viewpoint Reco. Price
Call closure price
Abs Returns (%)
02-Aug-16 01-Jun-17Mahindra Holidays &
Resorts410 509 24
29-Jun-16 19-Jun-17 Chambal fertilizer 69 121 75
30-Jun-16 20-Jun-17 Eveready Industries 266 353 33• Third level
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31-Dec-14 23-Jun-17 Roto Pumps 160 148 -8
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• Gulf Oil Lubricants India Limited (GOLI) has increased its market share from 5% to 7% in retail Indian lubricant market. The company
has shown sound track record of volume CAGR of 10.1% over FY2015-FY2017, which is almost 3-4x of the industry growth. The
management has guided to grow at around 8-10% (which is 2-3x the industry growth rate) over FY2018-FY2019.
• GOLI is currently operating a 90mn liters lubricant plant in Silvassa and in the midst of setting up of an additional 40-50mn liters
lubricant plant at Chennai. Apart from volume growth and market share gain, the company expects saving of Rs3-4/liter in freight
cost as 30% of existing volume (being transported to the southern region from Silvassa plant) would get supplied by Chennai plant
post commissioning in Q3FY2018. We expect GOLI’s EBITDA margins to improve to 16-18% from 15% in Q4FY2017.
• GOLI targets two new OEM tie-ups every year to improve OEM tie-ups and also to strengthen the B2C business segment. The company
also aims to increase share of high growth (growing at 20%) and high margin personal mobility segment, which currently accounts for
around 22-23% of total volumes.
• On back of industry leading double digit volume growth and likely margin expansion, we expect GOLI’s earnings to grow at a CAGR of
23% over FY2017-FY2019E. Moreover, the company’s balance sheet is robust with negative net debt to equity ratio of 0.3x in FY2017.
We are positive on GOLI’s long term earnings growth prospects and expect 18-20% upside from current levels
Reco Price– Rs 787 CMP – Rs810 View: Positive
New Initiation – Gulf Oil Lubricants India Limited
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Particulars (Rs. Cr.) FY16 FY17 FY18E FY19E
Net sales 1,011 1,129 1,290 1,475
EBITDA margin (%) 15.7 15.8 16.5 18.0
PAT 100 121 149 182
EPS 20.2 24.4 30.1 36.7
RoE (%) 46.1 39.9 36.6 34.9
PER (x) 38.9 32.3 26.2 21.4
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• AIA Engineering (AIA) is the second largest manufacturer of high chrome mill internals (grinding media, liners, diaphragms) globally
which are used in crushing and grinding operations in cement, mining and power industries. AIA commands significant market share
(~25% in cement and 5% in mining), in the oligopolistic market and is further gaining market share due to its technological edge and
comparatively low cost of operations as against its key competitor, Magotteaux (Belgium).
• AIA has managed to show a CAGR earnings growth of 20% over the past five years (FY2012-17) largely aided by healthy CAGR volume
growth of 10% along with benefits of rupee depreciation in exports revenues during the period. Given the improving mining demand
globally, AIA is further adding a Greenfield manufacturing capacity at Kerala of 1,00,000MT for Rs500crore in a phased manner over
the next two years. The first phase of expansion will add a capacity of 50,000 TPA in FY2018 while the second phase will add another
50,000 TPA capacity in FY2019; taking the total installed capacity of the company to 4,40,000 TPA at end of FY2019. The expansion
would be largely funded by cash and internal accruals. We expect AIA to report a CAGR volume growth of ~15% over the next two
years. Post expansion, AIA would generate ~Rs500crore of free cash flows over the next two years.
• Given its leadership position, strong earnings growth visibility with robust RoCE of 22-23% on consistent basis, AIA would continue to
trade at premium valuations in the engineering space. The strong internal accruals and tight working capital will help the company
to maintain a healthy balance sheet with a steady return on equity (15-16%). The stock however has recently corrected due to sharp
appreciation of rupee and increase in ferro chrome prices. We see this as a good opportunity for decent returns of 18-20% along with
Reco Price– Rs 1,345 CMP – Rs1,381 View: Positive
New Initiation – AIA Engineering
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01-Jul-17 17
appreciation of rupee and increase in ferro chrome prices. We see this as a good opportunity for decent returns of 18-20% along with
a limited down side risk. We initiate with a positive view on the stock over a period of one year and any further correction, owing to
market volatility, should be used to accumulate the stock for a long term investment view by the investors.
Particulars (Rs. Cr.) FY16 FY17 FY18E FY19E
Net sales 2,098 2,246 2,524 3,014
OPM (%) 29.1 28.3 25.6 26.2
Adj. PAT 424 457 474 586
Adj. EPS 45.0 48.4 50.2 62.1
PER (x) 30.2 28.1 27.1 21.9
RoE (%) 19.4 18.3 16.7 18.6
RoCE (%) 26.3 25.2 23.2 25.6
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• Tube Investments of India Limited (TIL) is engaged in manufacturing of cycles and accessories (bicycles & fitness products),
engineering products (tubes, cold rolled strips, & tubular components), metal formed products (chains for automobile sector &
Industrial applications, doorframe & channels for passenger cars), automotive and industrial gears and dies.
• TIL has earlier in November 2016 approved the scheme of demerger of its manufacturing business into wholly owned subsidiary called
TI Financial Holdings Ltd. We believe the demerger scheme augurs well for the value unlocking for the investors and also post the
separate listing, the value discovery of individual businesses will more transparent and create long term value for the investors.
• Currently, the financials and manufacturing business valuation are getting mixed up and holding discounts restricting the value
discovery in the businesses. Out of two financials companies only Chola investments and Financials company is listed, while
Cholamandalam MS (general insurance, TIL stake at 60%), yet to get listed (as per last deal with Mitsui Sumitomo Insurance, it valued
at Rs6,300 crore). The general insurance business is a wild card in the pack, which will create long term value for the investors given
the super strong growth in the earnings.
• The secondary market remains highly positive on the general insurance growth prospects with potential listing of players such as New
India Assurance, General Insurance Co of India, Reliance General Insurance and ICICI Lombard General Insurance Company.
• TIL’s standalone business net income expect to deliver a CAGR of 22.5% over FY17-19E, with overall operational improvement in all
the business segment such as Engineering, Metals forming and Cycles (though there could be near term transition impact owing to
Reco Price– Rs 661 CMP – Rs662 View: Positive
New Initiation – Tube Investments of India Limited
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01-Jul-17 18
the business segment such as Engineering, Metals forming and Cycles (though there could be near term transition impact owing to
GST roll out). Based on our SOTP valuation of TIL, we expect 18-20% return in stock in next 6-8 months.
Particulars (Rs. Cr.) FY16 FY17 FY18E FY19E
Net sales 3,753.5 3,900.5 4,493.3 5,162.8
EBITDA margin (%) 8.3 9.2 10.7 11.1
PAT 123.6 196.1 238.1 294.3
EPS 6.6 10.5 12.7 15.7
RoE (%) 6.1 9.3 10.4 11.8
PER (x) 4.8 6.3 7.8 8.4
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• PGCIL reported topline growth of 17% YoY to Rs6,712 crore in Q4FY2017 led by 18% growth in Transmission segment. Telecom
revenue grew by 27% YoY to Rs133 crore while consultancy income decline by 12% YoY to Rs144 crore in Q4FY2017. OPM however
impacted by 355bps to 83.7% due to higher employee cost and other expenses. Employee cost almost doubled to Rs537 crore due to
hike in salary and gratuity relating to pay commission provision while other expenses jumped 35% YoY to Rs556 crore due to CSR
related expenses in Q4FY2017. Hence, operating profit grew by 12% YoY to Rs5,619 crore. Other income grew significantly by 40%
YoY to Rs342 crore as it includes profit of Rs50 crore on sales of POSCO to Government of India (GOI). Hence, adjusted profit grew by
22% YoY to Rs1,916 crore on higher other income.
• Capitalisation during FY17 came at Rs31,000 crore including Rs20,000 crore capitalization of TBCB projects. As on date, PGCIL has an
ongoing projects totaling Rs1,05,000 crore and projects under development stage of Rs5,000 crore taking the overall projects in hand
at Rs1,10,000 crore. Furthermore, the company has also won few TBCB projects worth Rs20,000 crore. Thus the total project as on
date totals Rs1,30,000 crore of which CWIP totals Rs39,000 crore. These projects are expected to be capitalized over next four years
of period and thus we expect average annual capitalization of ~Rs33,000 crore of assets over next four years. Capex over next four
years are expected to be Rs91,000 crore.
• PGCIL has delivered strong earnings growth of 25% YoY on back of highest capitalisation in FY2017. We expect PGCIL to continue the
capitalisation momentum which will translate into earnings CAGR of 18% over FY2017-19E. Also, we remain bullish on investment in
Reco Price– Rs 206 CMP – Rs207 View: Positive
Re-iterate- Power Grid Corporation Ltd
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capitalisation momentum which will translate into earnings CAGR of 18% over FY2017-19E. Also, we remain bullish on investment in
the transmission sector due to (a) potential for energy demand growth (b) rising share of Rural Electrification and (c)
underinvestment in T&D. PGCIL being defensive bet in the utility space with strong earnings growth visibility and healthy balance
sheet offers a sustainable RoE of 15%. Hence, we reiterate positive stance on the stock with a potential upside of 10-12%.
Particulars (Rs. Cr.) FY15 FY16 FY17 FY18E FY19E
Net sales 17,177 21,007 26,206 28,525 32,018
OPM (%) 86.2 88.6 88.1 88.1 88.4
Adjusted PAT 4,979 5,949 7,520 8,727 10,334
Adj. EPS 9.6 11.4 14.2 16.9 20.0
P/BV (x) 2.8 2.5 2.2 2.0 1.7
RoE (%) 11.8 12.2 13.8 14.4 15.1
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• Crompton Greaves Consumer Electricals’ (CGCE) net sales for Q4FY2017 rose by 7% YoY, led by an 8% YoY growth in ECD segment
(primarily growth in Fans). Revenue from Premium Fans jumped 23% YoY, increasing their share in the total revenue of the Fans
business to 16% at the end of FY2017. Despite the headwinds from commodity inflation, OPM in Q4FY2017 expanded by 20BPS to
12.9%, driven by cost-control measures as well as premiumisation of the product portfolio. Other income jumped more than 3x to Rs7
crore and finance costs dropped 13% YoY to Rs15 crore, leading to a 30% YoY growth in the PAT to Rs86 crore.
• The share of Premium Fans in the total revenue from the Fans segment has increased to 16% from 7% at the end of FY2017. This is
estimated to grow further, with the management’s focus on driving growth through Premium Fans resulting in increased market
share and profitability. With implementation of GST, CGCE’s revenue should go through some temporary disruption during Q1FY2018,
as the distribution channels realign their inventories to adjust for the net impact of GST rates.
• CGCE is expected to generate substantially higher free cash flows and superior return ratios going forward, driven by the
management’s sharp focus on enhancing its core competency through an asset-light business model. The cash generated can be
distributed as dividend or to undertake incremental promotional activities for strengthening the Crompton Greaves brand or for
inorganic growth opportunities in the future. We remain positive on the company’s future growth outlook and the ability of the
experienced management to deliver industry-leading growth. We had initiated a positively biased viewpoint report on CGCE at the
end of January 2017. Since then, the stock has delivered more than 20% returns. We reiterate our ‘positive’ stance on the stock due
Reco Price– Rs 242 CMP – Rs219 View: Positive
Re-iterate- Crompton Greaves Consumer Electricals
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01-Jul-17 20
end of January 2017. Since then, the stock has delivered more than 20% returns. We reiterate our ‘positive’ stance on the stock due
to its competent management, impressive return ratios and high cash flow generating profile, which will help it to drive shareholder
value in the future and expect to generate 5-10% returns from the current level despite a high valuation multiple.
Particulars (Rs. Cr.) FY17 FY18E FY19E
Net sales 3,976 4,525 5,212
OPM (%) 12.3 12.7 12.8
Adjusted PAT 291 353 436
Adj. EPS 4.6 5.6 7.0
PER (x) 52.3 43.1 34.9
RoE (%) 53.9 54.7 48.2
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• Astral Poly Technik Limited (Astral) is a manufacturer and provider of chlorinated polyvinyl, chloride piping, plumbing systems for
hot and cold water, industrial and pressure systems applications and adhesive products. The Company is a leading manufacturer of
chlorinated polyvinyl chloride (CPVC) piping, as well as lead free PVC plumbing system in India. Astral entered into Adhesives and
Construction chemical segment in the year FY15 post acquisition of Resinova and Seal IT.
• Astral has delivered another strong set of numbers in Q4FY2017, despite demonetization challenges. Consolidated revenues grew by
12.6% yoy to Rs656 crore, led by strong growth in both plastics (11%YoY) and adhesive (18.9%YoY) segments.
• Operating profit margins (OPM) improved by 250BPS YoY to 13.6%, led by strong margins improvement in plastics segment (up 270BPS
YoY to 13.8%) as the company commenced the operation of its composite plant. In the adhesive segment, the margin expansion
continued in Q4FY2017, OPM expanded by 200BPS/240BPS YoY/QoQ to stand at 13.7%.
• Management has given a very strong commentary on margin expansion, which would be supported by backward integration across all
its manufacturing plants. Further, the management believes that the improvement in the adhesive business will continue in coming
quarters (the UK plant is expected to grow in double digits at EBITDA level from Q2FY2018 onwards)
• We remain positive on the growth prospects of its piping division driven by Government’s initiative in affordable housing scheme,
spending in agricultural segment and introduction of GST to favor the organized industry, margin expansion on account of backward
integration and ramp up of adhesive business (strong positive trigger for long-term). We believe Astral is a multiyear growth story
Reco Price– Rs 611 CMP – Rs681 View: Positive
Re-iterate- Astral Poly Technik
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integration and ramp up of adhesive business (strong positive trigger for long-term). We believe Astral is a multiyear growth story
and expected to witness significant earnings tractions in the coming years.
Particulars (Rs. Cr.) FY16 FY17 FY18E FY19E
Net sales 1,874.5 2,123.5 2,383.8 2,801.2
EBITDA margin (%) 11.1 12.4 13.3 13.7
PAT 101 144.7 192.6 251.8
EPS 8.4 12.1 16.1 21
RoE (%) 12.9 15.7 17.4 18.6
PER (x) 17.7 20.6 22.7 24.1
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Wealth Creator
Generating meaningful wealth in a multi-year rally• Third level
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01-Jul-17 22
Generating meaningful wealth in a multi-year rally
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• A well balanced portfolio of 16-18 quality
companies to create meaningful wealth
in multi-year rally in the Indian stock
market
• Capturing the long-term triggers over a
period of 3-4 years
Sharekhan’s Wealth
Creator portfolio
Sharekhan's Wealth Creator
• Third level
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01-Jul-17 23
• Careful selection of quality stocks
against a backdrop of reviving macro
environment and improving policy
reforms
• It is actively tracked and reviewed
every month; timely changes/revisions
are made to the portfolio and
communicated to the investors
Focussed approach
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Wealth Creator: ahead of broader indices
Returns (%) (as on 29th June 2017)Since inception
(Aug 21, 2014)
Wealth Creator Folio (weighted average returns) 32.8
- Large cap (64%) 29.9
- Mid cap (36%) 38.0
Sensex 17.1
Nifty 20.1
CNX Midcap 57.4• Third level
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01-Jul-17 24
• Sharekhan’s Wealth Creator portfolio continues to outperform the broader indices in the month of May2017 with cumulative weighted average returns of 32.8% as against 17.1% and 20.1% return inSensex/Nifty.
• We are not making any changes in the current portfolio and expect it to maintain the leading performancein 2017.
CNX Midcap 57.4
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Wealth Creator Folio
Sr No Scrip Weights Price as on Target Price Potential Upside
(%) 29-Jun-17 Mar-20 (%)
LargeCaps (64% weightage)
1 Axis Bank 8% 512 1110 116.9
2 Larsen & Toubro 8% 1702 3800 123.2
3 Maruti Suzuki 8% 7223 11050 53.0
4 Britannia 8% 3638 6400 75.9
5 IndusInd Bank 8% 1478 2550 72.6
6 Sun Pharmaceuticals 8% 539 975 81.1
7 Tata Consultancy Services 8% 2335 5100 118.4
8 TVS Motors 8% 545 900 65.3
Midcaps (36% weightage; 4% each)• Third level
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* Pls note we see scope for upward revision in target price (3-year) of some of the stock depending on theextent of economic recovery and will keep updating on the same.
Midcaps (36% weightage; 4% each)
9 Capital First 4% 660 1485 124.9
10 V-Guard Ltd 4% 173 310 79.2
11 Indian Oil Corporation 4% 387 750 94.0
12 IRB Infra 4% 209 545 161.1
13 Network 18 Media 4% 50 105 109.4
14 Gabriel India 4% 151 225 49.3
15 Century Plyboard 4% 302 485 60.4
16 Triveni Turbine 4% 140 265 89.8
17 PI Industries 4% 825 1850 124.3
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– Second level
• Third level
Segment Product Corpus Clients
Cash Top Picks - Investors
Cash Actionable Ideas - Investors
Cash Alpha Delivery Picks 3 lac Short Term traders
Advisory Product Offerings
• Third level
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Cash Alpha Delivery Picks 3 lac Short Term traders
Cash + FNO CTFT 3 lac Traders
Options Derivative Calls 1 Lac Option traders
Options+Fut Derivative Idea 5 lac
Strategy + Future
traders
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1-2 months delivery based Ideas based on Shortterm triggers (Results/ corporate action/Policy)&/or reported flows. Each Idea will have aFundamental Rationale/Key Triggers Points .
New Alpha Delivery Picks
Alpha Delivery Picks & Actionable Ideas
Actionable Ideas focus on generating absolute• Third level
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Actionable
Ideas
Actionable Ideas focus on generating absolutereturns with a time frame of 6-12 months and afavorable risk-reward ratio. Stocks are closelytracked with regular interaction with companies’management to stay abreast of the businessoutlook.
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New Alpha Delivery Picks
Ideas Ideas based on Stock Ideas, Viewpoints,
Stock Update, Market Analysis
Weightage(%) 7
Stop Loss (%)Max -10
Min -5
Profit Potential(%)Max -20
Min -10
Alpha Delivery Picks - Rules
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Min -10
Time Frame Max - 2 Months
Trail Stop loss 5% trailing Stop loss on 5% rise in stock price
Exit Rules
A) Pre defined / Trail Stop loss is hit
B) Unexpected Event/ News/ Outcome
C) Time frame
Performance Reporting Daily
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Alpha Delivery Picks Performance June’17
Sr No Scrip Name Buy Date Close Date Buy Price Sell Price ReturnProfit/
Loss
1 Federal Bank 29-May-17 2-Jun-17 109.85 116.85 6.37% Profit
2 Godrej Properties 2-Jun-17 14-Jun-17 513.28 552.60 7.66% Profit
3 Bank Of Baroda 2-Jun-17 12-Jun-17 179.55 172.00 -4.20% Loss
4 JK Tyres 6-Jun-17 19-Jun-17 180.90 168.00 -7.13% Loss
5 Exide Inds 19-Jun-17 23-Jun-17 225.80 213.70 -5.36% Loss
6 Tata Chemicals 20-Jun-17 27-Jun-17 621.70 590.00 -5.10% Loss
7 Manappuram Finance 8-Jun-17 94.55 Open
8 Petronet LNG 19-Jun-17 436.85 Open• Third level
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Summary June -17
Initated Open Calls Profit Booked Loss Booked
7 2 2 4
New Alpha Delivery Picks Performance
Financial YearNo of Calls Open Calls Profit Booked Loss Booked
FY 2017 – 2018 19 2 7 10
FY 2016 – 2017 100 8 67 25
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Actionable Ideas Performance June’17
Sr No CompanyInitiation
DateExit Date Comments
Close
price
Initiation
PriceTarget
Profit/Loss
(%)
1 Maruti Suzuki 21-Jun-17 7215 7900
2 LIC Hsg Fin 23-Jun-17 770 855
3 LIC Hsg Fin 16-Jan-15 13-Jun-17 Tgt Achieved 780 466 780 67.38%
4 Orbit Exports 20-Jul-15 09-Jun-17 Loss Booked 177 441 177 -59.86%
5 Aurobindo Pharma 01-Jun-16 27-Jun-17 Loss Booked 680 786 680 -13.49%• Third level
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6 Info Edge 01-Nov-16 05-Jun-17 Tgt Achieved 950 899 950 5.67%
7 Maruti Suzuki 28-Apr-17 09-Jun-17 Tgt Achieved 7265 6371 7265 14.03%
8 Supreme Inds 02-May-17 23-Jun-17 Tgt Achieved 1250 1087 1250 15.00%
9 Gabriel India 17-May-17 15-Jun-17 Tgt Achieved 150 129 150 16.28%
10 Hindustan Unilever 18-May-17 02-Jun-17 Tgt Achieved 1100 1006 1100 9.34%
11 Century Plyboards 25-May-17 01-Jun-17 Tgt Achieved 280 241 280 16.18%
12 Cox & Kings 31-May-17 13-Jun-17 Tgt Achieved 255 218 255 16.97%
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Actionable Ideas Performance June’17
June-17
Initiated Calls Profit Booked Loss Booked
2 8 2
Summary • Third level
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Summary
No of CallsOpen Calls Profit BookedLoss
Booked
Avg Profit Booked per Idea
Unrealized Profit / Loss Per Idea
Strike Rate
304 49 218 33 14.40% 1.18% 87%
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Derivative Calls
Derivative Idea
Derivatives Calls & Derivative Idea
• Third level
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Rs. 1,00,000 Margin
Rs. 5,00,000 Margin
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Derivative Calls
• OPTIONS only• OPTIONS onlySEGMENT
• LONG ONLY IDEAS• LONG ONLY IDEASTYPE
• Rs.1,00,000• Rs.1,00,000MARGIN
• 30-40• 30-40AVG. IDEAS PER MONTH
• 3-5• 3-5MAX OPEN POSITIONS• Third level
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• 3-5• 3-5MAX OPEN POSITIONS
• 1-5 Days• 1-5 DaysTIME FRAME(MONTHS)
• 50%• 50%TARGET(%)
• 20-30%• 20-30%STOP LOSS
• 30-35% of Invested Capital• 30-35% of Invested CapitalDRAWDOWN AMOUNT (Rs.)
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Derivative calls Performance June’17
Summary June-17
Initated
Profit
Booked
Loss
Booked Profit/Loss
23 14 9 23006*
Derivative Calls Performance • Third level
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Derivative Calls Performance
Financial YearNo of Calls
Profit
Booked
Loss
BookedProfit/Loss
FY 2017 – 2018 90 53 37 58136*
* Excluding Brokerage
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Derivative Idea
• FUTURE & OPTION TRADING STRATEGY• FUTURE & OPTION TRADING STRATEGYSEGMENT
• LONG & SHORT IDEAS• LONG & SHORT IDEASTYPE
• Rs.5,00,000• Rs.5,00,000MARGIN
• 15-20• 15-20AVG. IDEAS PER MONTH
• 3• 3MAX OPEN POSITIONS• Third level
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• 3• 3MAX OPEN POSITIONS
• 1 DAY – 1 MONTH• 1 DAY – 1 MONTHTIME FRAME(MONTHS)
• 4-5%• 4-5%TARGET FOR FUTURE (%)
• 1-2%• 1-2%STOP LOSS FOR FUTURE
• 30-35% of Invested Capital• 30-35% of Invested CapitalDRAWDOWN AMOUNT (Rs.)
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Derivative Idea – Banknifty CE spread
Position Option Type Strike Qty CMP Value
Buy BankNifty CE 23200 40 115 4600
Sell BankNifty CE 23400 -40 50 -2000• Third level
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Click for Report
Loss Potential : Rs. 2600
(If Nifty expires below 23200)
Max profit potential : Rs 5400
(if nifty expire @ 23400 & above 23400)
NET OUTFLOW 2600
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CTFT
� Carry Today for Tomorrow.
� Popularly known as BTST / STBT.
CTFT
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� CTFT is a Trade, Intraday Tradershave to carry forward for next dayeither in Cash segment and/or F&Osegment.
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CTFT
Ideas Ideas / Calls are based on EOD Momentum Triggers
Risk: Reward Ratio 1:2
Time Of InitiationAfter 2:30 PM
Day of Initiation
Time Of Square Off Any Time after initiation or
Next Trading Day
CTFT Calls - RULES
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Time Of Square Off Next Trading Day
Time Frame 1 Day
Exposure per Call Rs 1 Lakh in Cash Segment & 1 Lot in F&O Segment
Exit RulesA) Pre defined Target / Stop Loss is hit
B) Time Frame
Performance Reporting Daily
Target Clients Aggressive & High Risk Traders
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CTFT Calls - Offering
Cash Ticket Size Rs. 125000
FNO Ticket Size Rs. 500000
Calls per Day
� Max 1 Call in Cash (Long Only).
� Max 1-3 Calls in FNO (Long / Short).• Third level
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Coverage Universe *CNX 500 & FNO Stocks*
Trigger Points End Of Day Momentum Stocks.
BTST Calls Segment Cash & FNO Segment.
Draw Down 25% of the Corpus.
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CTFT Performance June’17
Sr No Scrip NameBuy/Sell
Date
Close
Date
Buy/S
ell
Reco
PriceClose Price
Stop
LossTargets
Returns
(%)
Profit /
LossGross P/L
1 Century Plyboards Ltd 31-May-17 1-Jun-17 Buy 266.04 265.75 258.40 270-275 -0.11% Loss (109.04)
2 Sun Tv 2-Jun-17 5-Jun-17 Buy 832 842.74 817.00 850-866 1.29% Profit 1,288.80
3 Power Finance Corp. Ltd 6-Jun-17 7-Jun-17 Buy 127.25 126.50 125.00 131-134 -0.59% Loss (590.25)
4 India Cements 9-Jun-1712-Jun-
17Buy 214.41 210.35 210.00 219.50-223 -1.89% Loss (1,887.90)
5 Kajaria Ceramics 12-Jun-1713-Jun-
17Buy 695.75 701.35 680.00 708-722 0.80% Profit 812.00
6 Equitas 16-Jun-1719-Jun-
17Buy 155.58 155.85 153.00 160-163 0.17% Profit 173.07
7 Dabur 23-Jun-1727-Jun-
Buy 290.25 284.71 285.00 295-302 -1.91% Loss (1,911.30)• Third level
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01-Jul-17 40
7 Dabur 23-Jun-1727-Jun-
17Buy 290.25 284.71 285.00 295-302 -1.91% Loss (1,911.30)
8 IRB Infra June Fut 8-Jun-17 9-Jun-17 Sell 229 230.25 232.50 224-220 -0.55% Loss (3,125.00)
9 Ajanta pharma June Fut 14-Jun-1715-Jun-
17Buy 1581.75 1608.00 1555.00 1608-1636 1.66% Profit 10,500.00
10 GAIL June Fut 19-Jun-1720-Jun-
17Buy 382 378.05 378.00 387-392 -1.03% Loss (7,900.00)
11 TECHM June Fut 20-Jun-1721-Jun-
17Buy 395.4 393.55 388.00 402-410 -0.47% Loss (2,035.00)
12 Amara Raja Batteries June Fut 21-Jun-1722-Jun-
17Buy 845.8 854.15 831.00 868-880 0.99% Profit 5,010.00
13 Dr.Reddy July Fut 28-Jun-1729-Jun-
17Buy 2657 2639.60 2622.00 2690-2740 -0.65% Loss (3,480.00)
14 Titan July Fut 30-Jun-17 - Buy 521.65 - 511.00 529-540 - Open
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CTFT Performance June’17
Summary June-17
Initated Open Calls
Profit
Booked
Loss
Booked
14 1 5 8
CTFT Performance • Third level
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01-Jul-17 41
FY 2016-2017: Profit of Rs 81438
CTFT Performance
Financial Year
No of
Calls
Open
Calls
Profit
Booked
Loss
Booked
Profit / Loss
Amount
FY 2017 – 2018 44 1 20 23 33508
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Call/Alerts Window in TT
Step 3
• Third level
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01-Jul-17 42
Mode of Communication of Calls:
- Trade Tiger Call Alert Window (Pop Up)
- Email from Advisory Team to Branches
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Market OutlookJuly 2017
• Third level
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01-Jul-17 43
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Valuations turn reasonableOverview
GST Impact analysis; Sectoral view
Market Valuation : At premium, but sustainable
Cues for the market & Earnings outlook• Third level
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01-Jul-17 44
Key Investment themes
Key Concerns & Conclusion
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GST: Impact analysis of the game changer tax reform
• Third level
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01-Jul-17 45
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Valuations turn reasonableGST implementation from July 1: The Goods and Service Tax (GST), the reform aimed at
overhauling the entire indirect tax regime will be implemented from July 1, 2017. GST will subsume
all the indirect taxes governed by state (VAT, Octroi, entry tax) as well as the centre (service
tax, excise duty) in a single tax levy that is uniform for each product/services category across the
country. There are four tax slabs 5%, 12%, 18% and 28% depending upon product/services.
Near term pain; long term gain: For business, the access to national market, cost optimization
through uniform tax regime and better distribution system would improve cost efficiencies and
productivity. On the other hand, the end consumer would benefit from lower product prices and
availability of more options in the similar price range. Thus, the implementation of GST is expected
to be win-win situation for the government, companies and end consumers in the long run. However
any new reform will cause short term disruption in the system and the performance of the
companies.
GST – Positive reform for long term growth
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01-Jul-17 46
companies.
Corporate earnings – weak Q1 and H1 results in this fiscal: Corporate earnings performance
would be affected due to de-stocking of goods by various trade channels (including dealers and
distributors) and re-aligning of supply chain under the new regime (will take two to three months to
stabilise). However the sales are expected to recover from Q3FY2018 and will gradually improve in
the subsequent quarters.
Sectors positively impacted by GST: Auto, FMCG, Building Materials and Logistic
Sectors negatively impacted by GST: Hotels, Restaurants and Branded Apparels
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Valuations turn reasonableGST – Positive impact on sectors
Sectors Tax Implications under GST Companies to benefit
Auto -Commercial Vehicle (CV)/Two wheelers (2W)
Tax rate under GST would come down marginally by 1% as compared to the existing tax structure.
Sentimentally Positive
Eicher Motors, Ashok Leyland, Tata Motors, Hero Motocorp, Bajaj Auto, TVS Motors, Eicher Motors
Auto - Small cars
Tax rate under GST for small cars (under 4 meter length and < 1500 cc engine) would come down by 2-2.5% as compared to the existing tax
structure. Sentimentally Positive Maruti Suzuki
Auto - Mid sized cars and SUV
Tax rate for Mid sized cars (above 1500 cc and above 4 meters in length) and SUV would come down by 8% and 12% respectively as compared to existing tax structure. Sentimentally Positive
Maruti Suzuki, M&M and Tata Motors
Effective tax rate in essential goods such as • Third level
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01-Jul-17 47
Consumer goods - essential items
Effective tax rate in essential goods such as soaps, toothpaste, edible oil and hair oils under
vairous tax slabs - PositiveHUL, Marico, Godrej Consumer
Products and ITC etc
Consumer goods - Cigarettes
Effective tax under GST would be 28% along with additional cess and other taxes. The government is planning to keep GST rate on cigarettes in-line with existing rate would gradually increase over
the period next 5 to 6 years - Positive ITC and Godfrey Phillips
Consumer goods - Footwear
Effective tax rate on Footwears costing less than Rs500 has been reduced to 5% from 9.5% earlier and above Rs500 has been reduced to 18% from
24-30% earlier - PositiveRelaxo Footwear and Bata India
etc
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Valuations turn reasonableGST – Positive impact on sectors
Sectors Tax Implications under GST Companies to benefit
Building Materials
Higher tax rate in building material segment
is expected to benefit organised players over
a long term with market share gain as pricing
spread between organised and unorganised
players gets reduced. However, higher tax
rate may lead to tax evasion through
loopholes which is a concern among
organised players
Kajaria Ceramics, Cera
Sanitaryware, HSIL, Century
Plyboards, Greenply Industries
among others
Implementation of GST is likely to allow
consolidation of warehouses across the
country with free movement of goods leading • Third level
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01-Jul-17 48
Logistics
country with free movement of goods leading
to higher volumes for logistic companies.
However execution of the same is likely to
take time as unorganised players will have to
adapt to new systems under GST.
Container Corporation, Gateway
Distriparks, Allcargo Logistics
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Valuations turn reasonableGST – Negative impact on sectors
Sectors Tax Implications under GSTCompanies with negative
impact
Hotel more than Rs7500 room
rental
The tax rate on fine dinning restaurants has
increased to 28% from 15% earlier - Negative
This will result in hike in the
room rentals, which will have
negative impact on the
occupancies. Hotels, Hotel
Leela Ventures, ITC's hotel
business and Royal Orchid
The increase in tax rate will
further the affect the fine
dining restaurant industry,
which has seen significant
pressure on the footfalls/sales • Third level
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01-Jul-17 49
Restaurants & fine dinning
The tax rate on fine dinning restaurants has
increased to 18% from 15% earlier - Negative
pressure on the footfalls/sales
due to slowdown in macro
environment. Speciality
Restaurants and Sayaji Hotels
Branded Apparels
The tax on the garments above Rs1000 will
be taxed at 12% which is higher than 7%
earlier
This is negative for branded
apparel companies such as
Arvind, Kewal Kiran Clothing
and Aditya Birla Fashion as the
price hikes in key brands would
result in late recovery in sales.
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Valuation:At premium but sustainable• Third level
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01-Jul-17 50
At premium but sustainable
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Market Valuation at a premium but justified…
50%
60%
19
21 MCap to GDP
Sensex currently trades at ~18.1x one year forward PE which is slightly higher than its
historical average however on a MCAP to GDP basis it does not seem to be to expensive
with an improving earning scenario.
With persisting low interest rate scenario, normal monsoon and structural reforms like
GST coming into picture the outlook for economy is positive which could have been
factored in by the markets
• Third level
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01-Jul-17 51
0%
10%
20%
30%
40%
50%
Jun-07
Jun-08
Jun-09
Jun-10
Jun-11
Jun-12
Jun-13
Jun-14
Jun-15
Jun-16
Jun-17
Sensex Premium to MSCI EM
10 Year Average Premium
11
13
15
17
19
Jun-09
Jun-10
Jun-11
Jun-12
Jun-13
Jun-14
Jun-15
Jun-16
Jun-17
Sensex PE Sensex Average PE
0.8X
1.0X
0.6X
1.0X
0.9X
0.7X0.6X
0.7X
0.8X
0.7X
0.9X
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Valuations turn reasonable
�However, if we look at the emerging market valuation to
developed market, MSCI emerging market is trading at around
12.5x earnings, while the MSCI United States (18.2×), MSCI
Europe (15.1×), MSCI Japan (14.1×), MSCI United Kingdom
(14.6×), and MSCI World (16.9×) indices are trading at levels
that are 10% to 50% richer by comparison..
Valuations: It’s a global rally
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01-Jul-17 52
�Thus, Indian market being on a economic and earning up
cycle does not look stretched looking at the global re-rating
of equity as an asset class..
*data based on March 2017
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Strong Indian Rally, led by midcaps
In the first six months of 2017, the Nifty/Sensex has appreciated by 17%
whereas midcap and smallcap index are up by 22% and 24% respectively.
17% 17%
22%
24%
20%
25%
30%
• Third level
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01-Jul-17 53
0%
5%
10%
15%
Sensex NIFTY NIFTY MID CAP NIFTY SMALL CAP
Last 6 Months Returns (%)
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Favorable macros precursor to eco and earning growth
Low interest rates and easing inflationary pressures to spur faster economic growth and a
precursor to uptick in consumer demand and earnings growth – which leads to re-rating and
higher valuations at the beginning of eco cycle, as we are in a up cycle will see double digits
earnings growth over next few years with superior RoE, as compared to other EM.
Further, with lower inflation, improving CAD situation , Oil prices staying on the lower side
the rupee is showing strength, as FII investors pour in to count on economic growth.
60
61
627.2
7.4
7.6
6
7
4
6
8
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63
64
65
66
67
68
69
70
Jun-15
Sep-15
Dec-15
Mar-16
Jun-16
Sep-16
Dec-16
Mar-17
Jun-17
USD INR
6.0
6.2
6.4
6.6
6.8
7.0
7.2
Jun-16
Jul-16
Aug-16
Sep-16
Oct-16
Nov-16
Dec-16
Jan-17
Feb-17
Mar-17
Apr-17
May-17
Jun-17
10 Year Gsec Yield %
0
1
2
3
4
5
-8
-6
-4
-2
0
2
4
Jul-15
Sep-15
Nov-15
Jan-16
Mar-16
May-16
Jul-16
Sep-16
Nov-16
Jan-17
Mar-17
May-17
WPI Inflation % CPI Inflation % (RHS)
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Manufacturing : India readies to surge ahead
- Auto sales data indicates another positive data-point- Most passenger vehicle manufacturers reported healthy growth in sales inApril, swiftly overcoming the Demonetization related impact.
10.0%
20.0%
30.0%
40.0%
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01-Jul-17 55
Demonetization
effect
-30.0%
-20.0%
-10.0%
0.0%
May-15
Aug-15
Nov-15
Feb-16
May-16
Aug-16
Nov-16
Feb-17
May-17
YoY Domestic Auto Sales Growth (%)
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Policy Measures: Addressing Issues in Key Sectors
Banking Sector: NPA Ordinance aimed at NPA resolutionBanks are back bone of economy but so far large corporate facing banks and
public sector banks have been hobbled by the huge NPA burden. RBI is taking
steps to encourage/guide banks to take stricter measures to resolve stressed
assets and effectively deal with defaulters.
Power Sector: A new dawn (UDAY)Huge investments stuck getting resolved by through gas/coal pooling and
reduce stress on State Electricity board – UDAY Scheme showing results• Third level
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Roads/Railways: New projects under hybrid modelAnother big roadblock in economic growth was the huge number of road
projects struck due to non availability of land/environment clearance in time
and aggressive bidding by construction companies; resolution of old sticky
projects and new projects under hybrid model with lower implementation
risk has kick start the flow and execution of projects
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Ample liquidity in the system –conducive for investment pickup
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No dearth of liquidity…and likely to continue
�Indian equity indices have seen ample liquidity flows from from DII’s and
FII’s, and incidentally DIIs flows have been much higher than FIIs flows in the
last 24 months, led by strong surge in SIPs flows and higher allocation to
equity , as other assets class return looks relatively soft..
�EPFO also plans to invest ~Rs20000 crore in equity markets this year which
is around 15% of the corpus from 5% earlier should also add to liquidity
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�PFRDA also mulls over to pursue government to allow subscribers under the
NPS to invest in equities up to 50% from the current limit of 15%
Expected Flow in Markets this year (Sticky Money) In Crs
SIP 48000 4000 Cr Monthly
EPFO 20000 Expected Flow this year
PFRDA 25000 Expected Flow this year
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With limited opportunity to get decent returns in other asset class, the
inflows in equity likely to remain strong going ahead.
FII flows, though unpredictable, tend to favor growth economy like India,
owing to domestic advantage and government pro-reforms agenda..
Ample Liquidity.. with Equity being the favored asset class..
20,000
30,000
40,000
10,000
20,000
30,000
40,000
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-20,000
-10,000
0
10,000
Jul/16
Aug/16
Sep/16
Oct/16
Nov/16
Dec/16
Jan/17
Feb/17
Mar/17
Apr/17
May/17
Jun/17
DII Net inflow YTD Net inflow
-30,000
-20,000
-10,000
0
10,000
Jul/16
Aug/16
Sep/16
Oct/16
Nov/16
Dec/16
Jan/17
Feb/17
Mar/17
Apr/17
May/17
Jun/17
FII Net inflow YTD Net inflow
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Positive cues for markets & Earnings Outlook
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Normal Monsoon Forecast: Positive cue for overall economyNormal Monsoon Forecast: Positive cue for overall economy
�For FY17, IMD forecasts NORMAL monsoon; upgraded forecast to 98% (from 96%) of LPA.
�Coming after 2 yrs of deficit rainfall (2014 & 2015) India saw good monsoon for FY16 which
greatly helps to revive demand in country
�Since ~60% of rural households depend on Agriculture & allied activities for their primary
source of income hence better monsoon is crucial for income levels, rural demand
�The government too has increased budget allocation for rural, agriculture and allied activities
by 24% from FY17 to Rs1872 billion. This along with better monsoon could provide shot in the
arm for rural economy.
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0
20
40
60
80
100
120
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Monsoon forecast % LPA Actual Rainfall % LPA
Average
1510
1872
0
400
800
1200
1600
2000
FY17 FY18
Budget allocation for Rural, Agri and allied sectors Rs Bn
24%
increase
in
budgetary
allocation
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- For fundamental perspective, it is earnings growth which matters.
- Importantly, the downgrade in earnings factor in lot of negatives, and still the
growth in FY2017-18 is expected to be healthy double-digit.
Consensus earnings estimates (Bloomberg)
Earning Estimates Stable Now
Year EPS Growth2100
2300
2500
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2017 1358 -
2018E 1635 20%
2019E 2012 23%*Bloomberg Estimates
1500
1700
1900
Jun-16
Jul-16
Aug-16
Sep-16
Oct-16
Nov-16
Dec-16
Jan-17
Feb-17
Mar-17
Apr-17
May-17
Jun-17
Sensex EPS consensus Estimates FY18
Sensex EPS consensus Estimates FY19
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- Net profits of companies under Sharekhan coverage universe showed strong
growth of 32.6% over Q4 last year
- Growth was primarily driven by normalisation of earnings of Banks and Oil&Gas
sectors. Excluding banks and Oil&Gas, the PAT declined by 0.6% in Q4FY2017.
- Thus the performance is quite skewed with domestic demand still weak while
exporters like IT and pharma facing sector specific issues.
Q4 Earnings – Strong growth figures
92021
7670580000
100000
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76705
45471
69382 69344
45687
0
20000
40000
60000
80000
SKn Coverage Adj.PAT SKn Coverage Adj.PAT (Ex Bank)
SKn Coverage Adj PAT (ex-Bank, Ex Energy)
Q4FY17 Q4FY16
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Q4 Earnings – Similar trend in Sensex
- For Sensex companies, the aggregate net profit increased by 6.0% which is slightly
ahead of estimates.
- But the earnings growth was fueled by normalization in earnings of Banks earnings
along with robust results of few companies like HUL, L&T and Tata Motors
- Consensus estimates of close to 20% growth though the margin pressure and short
term disruption from GST could hurt financial results in first half of financial year.
6.00%7.00%
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5.20%
6.00%
0.00%
1.00%
2.00%
3.00%
4.00%
5.00%
6.00%
Estimated (sharekhan) Actual
Sensex Adj.PAT Growth
21.90%20.20%
0.00%
5.00%
10.00%
15.00%
20.00%
Q4FY16 Q4FY17
EBIDTA Margin (Ex-BFSI) Sensex Companies
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- Normalisation Banks/Metals earnings to drive growth in FY2018 earnings
- Low base of FY2017 would also make FY2018 growth look healthy optically
Strong revival in Earnings to support valuations
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Developed markets reviving steadily
500
�US economy has been on an improving trend with various macro indicators
gaining trend, also Q1CY2017 earnings performance of S&P 500 was
decent, (75% of Cos reported > Consensus Nos)
�S&P 500 companies have beaten the mean EPS estimate and 64% of S&P 500
companies have beaten the mean sales estimate.
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0
100
200
300
400
500
Jun-12
Jun-13
Jun-14
Jun-15
Jun-16
Jun-17
US Jobless Claim data
0
20
40
60
80
100
120
140
Jun-11
Jun-12
Jun-13
Jun-14
Jun-15
Jun-16
Jun-17
US consumer confidence index
50
51
52
53
54
55
56
57
58
Jun-15
Aug-15
Oct-15
Dec-15
Feb-16
Apr-16
Jun-16
Aug-16
Oct-16
Dec-16
Feb-17
Apr-17
Jun-17
EUROZONE PMI
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� Banking NPA Resolution: Spurred by RBI initiatives, Banks have
started bankruptcy proceedings against 4 A/c and also fast tracked
proceedings against remaining 8 A/cs. Meaningful steps on NPA
resolution would result in re-rating of corporate lending focused
banks; Prefer ICICI Bank and Axis Bank. In case of public sector
banks, SBI and BOB are prefered picks
� Push to affordable housing: Sectors/segments to benefit -
Cement, Housing Finance Cos, Paints and construction companies
Key Investment Themes
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Cement, Housing Finance Cos, Paints and construction companies
� Return of infra/construction companies due to low interest
rates, rationale biding and success of projects under hybrid annuity
model
Cautious on Pharma (especially formulations); Neutral on It Services
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KEY INVESTMENT THEMES
Banks: NPA resolution Ahead(Re-rating of corporate lenders; narrowing of valuation gap with retail focused banks)• Third level
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valuation gap with retail focused banks)
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Banks: NPA resolution chances brightens
� Banks with relatively high exposure to corporate loans has been sharply de-rated on
the back of close to Rs7-7.5 trillion worth of sticky loans (bad or restructured)
� RBI has identified 12 accounts with 25% of bank bad loans and pushing case for fast-
track resolution / bankruptcy proceedings agasint them.
� NPA resolution could result in re-rating of coprporate lending banks and reduce
their valuation gap with retail focused peers.
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82.49 80.2970.37
59.11
0
20
40
60
80
100
Q1FY17 Q2FY17 Q3FY17 Q4FY17*
ICICI bank Slippages (Rs Bn)
5.4%
3.5%
2.8%2.2%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
Q1FY17 Q2FY17 Q3FY17 Q4FY17
Axis Bank O/s Watch List as % of loans
67% 66%
62%59%
55%
51%
40.0%
45.0%
50.0%
55.0%
60.0%
65.0%
70.0%
BoB SBI BoI PNB Corp Bank
Union Bank
PCR (%)
*Excluding one large account which accounted for ~48% of slippage
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KEY INVESTMENT THEMES
Affordable Housing -- Big opportunity• Third level
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Opportunity - low mortgage penetration in India
Low mortgage penetration in India implies room for growth
Mortgage as % of nominal GDP
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Affordable housing: Key investment theme
A major investment theme in the works:
�India’s economy is set for a $1.3 trillion bonanza from 60 million new homesbetween 2018 and 2024 from the push to affordable housing sector by the NDA
government
�Positive rub off effect on Cement, Steel, Paints, Housing finance, Tiles, Sanitary ware
among other industries. Overall help in creating over 2 million jobs annually and add
up to 75 basis points to India’s GDP
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Positive levers in place�India has given infrastructure status to the affordable housing sector providing low
cost funding opportunity for development.
�Central and state assistance in funding, subsidized interest rates from banks, usage
of provident fund for buying and sevicing EMIs among others are key steps towards
pushing affordable housing
�Increasing transparency and focus on improving execution through Real Estate Act
(RERA).
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KEY INVESTMENT THEMES
Infra: Huge investment in rail & roads• Third level
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Infrastructure: Key investment theme
A major investment theme in the works:� India’s infrastructure investment is estimated to the tune of Rs43 lakh crore($646 billion) over the next 5 years -- 70% in rail, roads and urban infrastructure
� Road construction and award target of 15000km (up 82% YoY) for FY2018.
� Investments planned in urban development (AMRUT scheme), 12 airportscapacity expansion, 100 smart cities, Irrigation etc over the next five years
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� Addressing funding issues: Offshore fund raising, infrastructure investment
trusts , restructuring & refinancing loans from banks; and above all benefits from
low interest rates.
� Fast tracking of projects through faster environmental clearances, replacement
of concessionaires, re-bidding of projects, prior land acquisition, periodic
monitoring etc.
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Infrastructure: Key investment theme
0
50
100
150
200
250
300
FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17
Infrastructure spending (USD Bn)
5.0
5.5
6.0
6.5
7.0
7.5
8.0
8.5
9.0
9.5
FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17
Infra spending as a % of GDP
Infrastructure spending on the rise… As a % of GDP…
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Increasing outlay towards Roads segment.. Road project award/construction trend..
0
10,000
20,000
30,000
40,000
50,000
60,000
70,000
Central plan outlay to MoRTH (Rs cr)
0.0
10.0
20.0
30.0
40.0
50.0
0
5000
10000
15000
20000
25000
30000
Total project award (nhai+Morth) Total project construction (nhai+Morth)
Construction per day (km)
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KEY INVESTMENT THEMES
View on beleaguered sectors:IT & Pharma• Third level
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IT & Pharma
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• Soft quarter along expected lines:
o In Q4FY17, the top five Indian IT companies delivered a muted performance, but the revenue growth
remained broadly in line with the estimates (ex Infosys).
o The operating profit margin (OPM) during the quarter was affected on account of the rupee’s
appreciation, acceleration in local hiring, investments in setting up delivery centres in the USA and
pricing pressure in the legacy businesses, despite automation and internal operational efficiencies.
• Outlook: Maintain Neutral stance, pains yet to get over: we do not expect any material growth
revival in the revenues for the IT sector in FY18 as issues around immigration, reskilling
programme, acceleration in localisation programmes, increase in offshorisation and intense
competition continue to act as an overhang.
• Comfort on valuations, worries on upside; stay selective: The current valuations are reasonable
IT Sector – Soft quarter; reasonable valuationView: Neutral
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• Comfort on valuations, worries on upside; stay selective: The current valuations are reasonable
for investment with a time horizon of 12-15 months, but the material outperformance will be
limited in the near term owing to the sector overhang. Further, the increase in the pay-out ratio
(one-time share buyback/dividend) provides downside protection to IT stocks amid an ongoing
challenging environment. We remain selective in our preference for stocks.
Leaders in Q4FY2017: HCL Tech
Laggards in Q4FY2017: Tech Mahindra
Preferred picks: HCL Tech (in large-cap space) and Persistent Systems (in mid-cap).
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• View : Cautious
• Weak performance:
o In Q4FY2017, the pharmaceutical companies in our coverage universe reported weak
performance. On an aggregate basis, our coverage universe reported marginal de-growth of 0.5%
in revenue and 8% fall in adjusted profit. OPM declined by 480 bps to 21% vs. 25.8% in Q4FY2106.
o Weak performance during the quarter was due to US business of majority pharmaceutical players
witnessed high single to double digit pricing pressure due to increased competition, consolidation
of channels and delay in key product approvals due to ongoing USFDA issues (also Q4FY2016 had
high one of sales due to exclusivity for few companies). Also domestic business witnessed slow
down due to GST which shall roll-out in the near term.
• Outlook: Cautious outlook; stay selective: Indian pharma companies have seen significant correction
/ multiple de-rating due to uncertain regulatory environment coupled with pricing pressure on account
Pharma Sector – Weak quarter; caution warranted
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/ multiple de-rating due to uncertain regulatory environment coupled with pricing pressure on account
of increased competition. On the domestic front, GST roll-out is likely to result in difficulties (channel
disruption) in H1FY2018. Appreciating rupee is likely to add further pressure on businesses in the near
term. Hence we expect earnings growth in FY18 & FY19 to remain under pressure. We warrant a
cautious outlook for pharma sector for next 12-18 months and hence advice to stay selective. Also
progress of pharma companies in complex generics and specialty will be key monitorables to watch for
as quality of pipeline will be crucial for re-rating of multiple for the sector.
• Laggards in Q4FY2017: Divis, Sun Pharma & Torrent Pharma.
• Preferred pick: Aurobindo Pharma.
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Key Concerns:More Global than Local
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�Geopolitical issues continue to be a mixed bag for markets:
•The PM’s successful US visit augurs well for the long term capital
inflow, investments for India
•US and North Korean brinkmanship may precipitate a localized military
conflict
•Fractured Mandate in UK elections makes Brexit negotiations tricky, may
impede the Euro region’s economic growth & demand
•Few countries like Saudi Arabia have recently cut diplomatic ties with Qatar
which may escalate tensions in the middle east region, implications for Oil
prices
Geopolitical Issues
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prices
So are investors underestimating the risk potential of one or more of aboveconflicts spiralling into a more serious crisis?
�Our view: It is likely, investors are counting on that policymakers’ monetary and
fiscal policy may be able to turn post-shock market corrections into buying
opportunities, as seen as several other events in the last two decades.
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Conclusion
�Recent rally makes valuation of Indian equities at premium
to long term average multiples and to its peers (other
emerging markets);
Valuation at premium but justified and sustainable as:
�Favourable macros: Low interest rates and inflation precursor to eco growth
�Policy measures: Addressing structural issues in key areas like banks, power, roads• Third level
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�Policy measures: Addressing structural issues in key areas like banks, power, roads
�Ample liquidity: retail inflows driven by lack of decent returns in other asset class
�Corporate earnings: estimates stable; revival in FY2018; Q4 results reaffirm our
expectations to quite an extent.
Stick to our investment themes and use the market volatility to pick the
quality stocks
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Disclaimer
This document has been prepared by Sharekhan Ltd. (SHAREKHAN) and is intended for use only by the person or entity to which it is addressed to. This Document may
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registration or licencing requirement within such jurisdiction. The securities described herein may or may not be eligible for sale in all jurisdictions or to certain category
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