sharekhan top picks Visit us at April 29, 2016 Sharekhan Top Picks

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1 Visit us at April 29, 2016 After a sharp recovery in March, the Indian equity markets took a breather to consolidate at higher levels. The benchmark indices, Nifty and Sensex, ended with marginal gains of % each in April. The buoyancy was better in the broader market with gains of 3.5% in the CNX Midcap 100 index. Comparatively, the Sharekhan Top Picks (folio of select picks) comfortably outperformed the indices with gains of 5% in the same period. Along with consistent outperformance by the private sector banks (HDFC Bank and IndusInd Bank), the outperformance of Sharekhan Top Picks was driven by a surge in Relaxo Footwear (its perseverance despite many months of underperformance is paying off now). Within the portfolio, the quarterly results of four companies Sharekhan Top Picks have been announced till now. The financial performance is encouraging for Maruti, Reliance Industries, HDFC Bank and IndusInd Bank whereas Tata Consultancy Services results were a tad below expectations. This month, we are making one change in the portfolio. We are taking profits in Zee Entertainment Enterprises Ltd (ZEEL; gains of over 20% since we added it more than a year ago) to make place for Bharat Electronics Ltd (BEL). We continue to like ZEEL which is our preferred pick in the media space. However, we believe that BEL could provide superior returns in the medium term due to the government s focus on the indigenous defence equipment space (under Make in India initiative) along with comfortable valuations. Consistent outperformance (absolute returns; not annualised) 1 month 3 months 6 months 1 year 3 years 5 years Top Picks Sensex Nifty CNX MIDCAP Absolute returns (Top Picks vs benchmark indices) Sharekhan (Top Picks) Sensex Nifty CNX Midcap 100 CY CY CY CY CY CY CY CY Since inception (Jan 2009) Constantly beating Nifty and Sensex (cumulative returns since April 2009) Apr-09 Aug-09 Dec-09 Apr-10 Aug-10 Dec-10 Apr-11 Aug-11 Dec-11 Apr-12 Aug-12 Dec-12 Apr-13 Aug-13 Dec-13 Apr-14 Aug-14 Dec-14 Apr-15 Aug-15 Dec-15 Apr-16 Sharekhan Sensex Nifty Please 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 * target # Ashok Leyland Bajaj Finance 6, ** - Bharat Electronics 1, , Britannia Industries 2, , Havells HDFC Bank 1, , HUL IndusInd Bank 1, ** - Maruti Suzuki 3, , Relaxo Footwear Reliance Industries , TCS 2, ,750 9 * as on April 29, 2016 # Price target for next 6-12 months ** Under review For Private Circulation only Registered Office: Sharekhan Limited, 10th Floor, Beta Building, Lodha ithink Techno Campus, Off. JVLR, Opp. Kanjurmarg Railway Station, Kanjurmarg (East), Mumbai , Maharashtra. Tel: Sharekhan Ltd.: SEBI Regn. Nos.: BSE: INB/INF / BSE-CD ; NSE: INB/INF/INE ; MSEI: INB/INF / INE ; DP: NSDL-IN-DP-NSDL ; CDSL-IN-DP-CDSL ; PMS-INP ; Mutual Fund-ARN ; Commodity trading through Sharekhan Commodities Pvt. Ltd.: MCX ; (MCX/TCM/CORP/0425) ; NCDEX ; Sharekhan (NCDEX/TCM/CORP/0142) ; NCDEX SPOT-NCDEXSPOT/116/CO/11/ ; For any complaints at igc@sharekhan.com ; Disclaimer: Client April should 2016 read the Risk Disclosure Document issued by SEBI & relevant exchanges and Do s & Don ts by MCX & NCDEX and the T & C on before investing.

2 target Ashok Leyland Ashok Leyland Ltd (ALL) is the second largest commercial vehicle (CV) manufacturer in India with a market share of 30% in the heavy truck segment and an even higher share of 43% in the bus segment. The medium and heavy commercial vehicle (MHCV) volumes were under pressure over the past two years but have witnessed a sustained recovery and has been growing in double digits over the past few quarters. We expect the MHCV volumes to remain buoyant over FY driven by a pick-up in the economic cycle, improved operator profitability, new launches and phase-wise implementation of the Bharat Stage IV norms across the country leading to pre-buying. ALL has a strong presence in exports market and continues to expand to newer geographies. The company expects the exports contribution to be around 25% of the revenues over the next three to five years from the current level of 10%. Additionally, ALL s defence business is expected to get a leg-up due to the government s focus on indigenous manufacturing of defence products and foreign direct investment (FDI) in the sector. ALL s operating profit margin has recovered from the lows on the back of a reduction in discounts and price hikes taken by the company. Its margins are expected to expand further, given the operating leverage. With buoyant operating cash flows and no significant capital expenditure planned, we expect the balance sheet to get de-leveraged and the return ratios to improve. Bajaj Finance 6, ** - Bajaj Finance Ltd (BFL) is among the most diversified non-banking financial companies (financing of mortgages, consumer durables, SME, rural etc) having a strong distribution network (512 branches). We believe, a strong growth in customer additions, its unique cross-sell and up-sell capabilities, and robust growth from newer products (rural finance, lifestyle finance etc) should drive a growth of over 25% in the assets under management. Despite a strong growth in loans, the asset quality remains among the best in the system (gross non-performing assets of 1.69% based on 150-day past due [DPD] basis) which along with conservative provisioning adds to the comfort. BFL has already made provisions based on 90-DPD basis, ahead of the Reserve Bank of India (RBI) s timeline. We expect BFL s earnings to grow at a compounded annual growth rate of 26% over FY resulting in a return on asset (RoA) and return on equity (RoE) of 3.2% and 19.2% respectively. While we have been positive on BFL s business model and strong earnings performance, we also have a Buy rating on BFL. Sharekhan 2

3 target Bharat Electronics 1, , Bharat Electronics Ltd (BEL) has got four licences since 2004 in the radar and wafers segments where the company enjoys a monopoly position. Further, the company has a market opportunity size of Rs70,000 crore over the next seven to eight years in its area of expertise. BEL is planning to invest Rs1,500 crore over the next three years under its Make In India expansion and modernisation strategy. The company will also be increasing its R&D spends to 10% of the total turnover (currently at 8%). BEL will be focusing on exports, offsets and buyer nominated equipments. The likely increased private sector participation has led BEL to diversify into areas of homeland security, smart cards, smart city elements and solar power plants which have tremendous growth potential with better operating profit margins. BEL remains our preferred pick in the defence sector on account of its strong manufacturing and R&D base. It has already started to reap the benefits of indigenisation of the defence procurement with 44% Y-o-Y jump in its order book which stood at Rs32,333 crore at the end of Q3FY2016 (order intake of Rs12,000 crore in Q3FY2016). We have maintained our Buy rating on the stock. Britannia Industries 2, , Britannia Industries (Britannia) is the second largest player in the Indian biscuit market with about 30% market share. It has chalked out an aggressive growth strategy to sustain the double-digit volume growth in the biscuit segment by enhancing its product portfolio. It is also striving to expand to the other categories, such as dairy (market size of Rs75,000 crore) and adjacent snacking categories (market size of Rs30,000 crore). It is likely to maintain a 14-15% revenue growth rate with the volume growth standing at 10-11% (largely driven by both enhanced distribution reach and product portfolio). The operating profit margin is expected to remain in the range of 14-15% on the back of benign input cost and operating efficiency. The company has a strong balance sheet with the free cash flow consistently improving over the past few years. Its return ratios have improved over the past few years and remained strong in the upward of 50%. Under a new leadership, Britannia has been able to leverage and monetise its strong brand and position in the biscuit and snack segments. We believe that the company can sustain its higher than industry growth rates with an improving distribution reach, entry into newer categories and focus on cost efficiency. We have a Buy rating on the stock with a price target of Rs3,650. Sharekhan 3

4 target Havells Havells is a leading electrical equipment and appliance manufacturer in India. The poor performance of Sylvania (acquired in 2007) dragged the balance sheet of the company for a long time; however now Havells is going to divest Sylvania. We believe the deal will not only strengthen its balance sheet but also add value to the bottom line and lift the return ratios. Therefore, the current overhang will go away and reflect positively on its financials. In terms of quality, the management s focus on domestic business is expected to increase. Apart from consolidating its leadership position in the existing products through product innovation and better features, it is also expanding its product portfolio and making efforts to dwell deeper in the distribution channel by directly connecting with retail and electrician networks (on the lines of Asian Paints and Astral Poly Technik). Further, consistent free cash flow generation, a high cash conversion (reported profit to cash flow) record and a consistent high dividend pay-out speak for the management quality. Superior return ratios and a debt-free balance sheet indicate the quality of business too. Post-divestment of Sylvania, we believe the return ratios are poised to improve further. We believe Havells is a deserving high quality stocks, backed by a strong track record of its management and impressive financials. Going forward, the extraordinary efforts like direct involvement with electricians and retailers will give it competitive advantage and help it to consolidate its leadership position in India. Though currently the domestic business is moving at a modest pace, mirroring consumer demand, we expect urban consumption to rise in future and Havells is well positioned to captalise on it. Moreover, the Sylvania divestment would help it to shake off the past overhang and reflect positively on its return ratios as well as valuations. HDFC Bank 1, , HDFC Bank has a strong presence in the retail segment (~50% of the book) and therefore it has been able to maintain a strong growth in loans even as industry-wise credit growth remains tepid. Going ahead, with a recovery in the economy and improving sentiment in consumer sector, the loan growth will improve further which will drive the profitability. With a current account and savings account (CASA) ratio of over 40% and a high proportion of retail deposits, the cost of funds remains among the lowest in the system and helps to maintain higher net interest margin (NIM). In addition, the bank s loan growth is led by high yielding products, such as personal loans, vehicle loans, credit card, mortgages etc which has a positive impact on the NIM. The bank maintains impeccable asset quality and its NPA ratios are among the lowest in the system. Given the bank s stringent credit appraisal procedures and insignificant exposure to troubled sectors, it is expected to maintain robust asset quality. HDFC Bank is well poised to tap the growth opportunities going ahead due to strong capital ratios, healthy asset quality and steady revival in consumer spending. The bank is likely to maintain a healthy RoE of 19-20% and RoA of 1.8% on a sustainable basis. Therefore, we expect the valuation premium that it enjoys as compared with the other private banks to sustain. Sharekhan 4

5 target HUL Hindustan Unilever Ltd (HUL) is India s largest FMCG company with strong presence in personal care, home care and packaged food segments in India. The company is a market leader in the personal wash, detergent and shampoo segments in India. Despite subdued demand environment, HUL s volume growth stood at 6% in M9FY2016 as against 4.5% volume growth in M9FY2015 on the back of relevant pricing actions and higher promotional spends. With expected improvement in the rural economy and better urban demand (due to the implementation of the Seventh Pay Commission and lower inflation), we expect HUL s volume growth trajectory to improve by 6-8% (from the current level of 4-6%) in the near to medium term. This along with sustained innovation in the portfolio, we expect HUL s earnings to grow at a CAGR of 15% over FY With negative working capital and strong cash generation ability, the company has a strong balance sheet amongst its peers. Also, return ratios continue to remain high (RoE and RoCE remained above 100%). In view of improved earnings visibility, strong cash generation ability and higher return ratios we have a Buy recommendation on the stock with a price target of Rs980. The stock is currently trading at 32x its FY2018E EPS of Rs27.2. IndusInd Bank 1, ** - IndusInd Bank is among the fastest growing banks (a 26% CAGR growth over FY12-16) having a loan book of Rs88,000 crore and 811 branches across the country. About 25% of the bank s book pertains to vehicle finance, which is a high-yielding category and is showing signs of recovery. Given the aggressive measures taken by the management, the deposit profile has improved considerably (a CASA ratio of 35%). Going ahead, the bank would follow a differentiated branch expansion strategy (a 5% branch market share in identified centers) that would help ensure healthy savings accounts and retail deposit growth. Despite a weak economic growth and a higher proportion of vehicle finance book the bank has maintained its asset quality. With total stressed loans (restructured loans + gross NPAs) forming just 1.4% of the book, the bank s asset quality is among the best in the system. A likely revival in the economy will further fuel growth in the consumer finance division and strong capital ratios will support the growth plans. Given the strong loan growth, high RoAs and healthy asset quality, the stock should continue to trade at premium valuation. We have a positive outlook on the stock. Sharekhan 5

6 target Maruti Suzuki 3, , Maruti Suzuki India (Maruti) is India s largest passenger vehicle manufacturer with a strong 45% market share. The company has been able to gain market share over the last two years on the back of its diverse product portfolio, a large distribution network with an increased focus on the rural markets and a shift in consumer preference to petrol models from diesel models. The recently launched premium hatchback, ie Baleno, has received a positive response which will help the company expand its market share in the segment. Also, the company recently entered the compact utility vehicle space with the launch of Vitara Brezza and has received encouraging response. Further, the company also plans to enter into the light commercial vehicle segment which would further boost topline. The company is poised to reap the benefits of an increase in discretionary spending from the Seventh Pay Commission pay-out. The commencement of first phase of Gujarat plant with a 2.5 lakh capacity is scheduled in early Q4FY2017. The management plans to double its existing sales and premium distribution network ( NEXA ) in order to achieve its target of doubling domestic volumes over the next five years. Relaxo Footwear Relaxo Footwear is present in the fast-growing footwear category, wherein it caters to customers with its four top-of-the-mind-recall brands, viz, Hawaii, Sparx, Flite and Schoolmate. In the last quarter it also added another brand, Bahamas, to its product portfolio. Relaxo has a proactive approach towards both brand building and creating capacities. To build its brand and create pull, like FMCG players it continues to rope Bollywood celebrities and this creates an aspirational quotient for its brands. On the one hand, the company is creating strong consumer centric aspiration for the consumers; on the other hand, it is keeping its eye on quality and thus does not believe in outsourcing. It is in the process of building capacity for future. Despite the current capacity (180 million pieces per annuam) that would take care of growth in the next three years, the company has bought a 15-acre land at Bhiwadi to built additional capacity to serve the future requirements. Relaxo s strong presence in the lucrative mid priced footwear segment (through its top-of-the-mind-recall brands like Hawaii, Flite and Sparx) along with its integrated manufacturing set-up, lean working capital requirement and vigilant management puts it in a sweet spot to cash in on the strong growth opportunity unfolding in the footwear category due to a shift from unbranded to branded products. We thus maintain our Buy rating on the stock. Sharekhan 6

7 target Reliance Industries , Reliance Industries Ltd (RIL) has a strong presence in the refining, petrochemical and upstream exploration businesses. The refining division of the company is the highest contributor to its earnings and is operating efficiently with a better gross refining margin (GRM) compared with its peers in the domestic market due to the ability of its plant to refine more of heavier crude. Currently, with soft crude oil prices RIL is likely to enjoy high GRM in the near to medium term. The exploration business remains weak due to low production in the Krishna-Godavari-D6 (KG-D6) field and weak pricing of global fuel prices. However, capital employed and profit contribution from the exploration business is low. Moreover, the upcoming incremental capacities in the petrochemical and refinery businesses are going to drive the future earnings growth substantially as the downstream businesses are on the driving seat and contributing the lion s share of the profitability and cash flow. After a strong GRM in FY2016, we expect the margin to remain healthy for FY2017 and drive a strong bottomline performance. The stock is available at an attractive valuation considering the size, strong balance sheet and cash flow generating ability of the company. TCS 2, ,750 9 Tata Consultancy Services (TCS) pioneered the IT services outsourcing business from India and is the largest IT services firm in the country. It is a leader in most service offerings and has further consolidated its position as a full-service provider by delivering a robust financial and operational performance consistently over the years. The consistency and predictability of its earnings performance has put the company at the top of its league. TCS s management expects the digital revenues to grow much faster in the coming years; for the third quarter of FY2016 the digital revenues grew by 4% QoQ and formed 13.7% of the total revenues (13.3% in Q2FY2016). Further, the management expects Q4FY2016 to be better than Q3FY2016. Diligenta is expected to bottom out in Q4FY2016 while Japan s softness (integration issues related to the Mitsubishi acquisition) is expected to continue for a few more quarters. We remain positive on TCS, given its strong positioning, scale advantage and head-start in the digital technologies space (the highest among the top Indian IT companies), which justify the valuation premium for TCS over the others. Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a position in the companies mentioned in the article. 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