Q1FY2017 earnings preview

Transcription

1 FY2017 earnings preview Visit us at July 13, 2016 FY2017 earnings preview Barring usual pain points, aggregate earnings growth in FY2017 is expected to be in high single digits Flattish growth; pain points remain the same: FY2017 is expected to be another lackluster quarter for corporate results, with aggregate earnings of Sensex companies expected to decline by 1.5. Interestingly, the weak performance would be limited to certain pockets like global commodities, including Metals (Tata Steel), Oil & Gas (ONGC) and companies with high proportion of overseas business (Tata Motors). Among the domestic sectors, weak results from Capital Goods (largely BHEL) and public sector banks (SBI) would overshadow decent performance of other sectors, besides skewing the aggregate growth figures of Sensex companies. Excluding the five companies mentioned above, the aggregate earnings growth of the remaining 25 Sensex companies works out to be close to 7 for FY2017. Revenue and margins stable: The aggregate revenue growth of Sesnex companies is estimated at 3.8, driven by positive growth across sectors [barring Metals and Energy (Oil & Gas)]. This once again highlights the impact of weak global commodity prices. The margins are largely expected to be stable, while aggregate operating profit growth for Sensex companies is estimated at 6.2. Earnings estimates stable; management commentary critical to sustain consensus confidence on earnings growth: The consensus earnings estimates for FY2017 and FY2018 have been largely stable for the past couple of months, indicating growing confidence in revival of earnings to healthy double-digit growth rates from this fiscal. The optimism stems from the improving outlook for domestic demand on the back of better start to the south-west monsoon season and implementation of the Seventh Pay Commission hikes for government employees. On the other hand, commodity prices have rebounded from extreme low levels and are stabilising at higher levels now. The street would keenly watch for positive signals from corporates in their post result commentary for sustaining expectations of healthy earnings growth over FY2017/FY2018. Valuations seem to factor in strong domestic revival, benign global environment: The recent surge in the Indian equities is driven by positive global sentiments; most global indices have touched new highs on expectations that the Federal Reserve will defer interest rate hikes and world leaders will find a way to avoid or smoothen the impact from Brexit. Progress on reforms (including the possible passage of Goods & Services Tax Bill), and the move to recapitalise PSBs and repair their balance sheets has also lifted investors confidence. Post the recent sharp run-up, Sensex trades at close to 16.5x its one-year forward earnings (based on expectations of aggressive revival in earnings in FY2017/FY2018). We see scope for disappointments in corporate earnings and the possibility of further readjustment in consensus earnings growth estimates over the next few weeks, which could limit upside in the benchmark indices. However, the broader markets could remain buoyant amid expectations of heightened volatility in the earnings season. Sensex one-year forward P/E band Jul-08 Jul-10 Jul-12 Jul sd PER Avg PER -1 sd Jul-16 Source: Bloomberg, Sharekhan Research Sharekhan Special 1 July 13, 2016

2 FY2017 earnings preview Leaders ITC, Marico and GCPL HDFC Bank, Yes Bank, Capital First Shree Cements, JK lakshmi Cement Hero Motocorp, Ashok Leyland Infosys, Zee Entertainment V-guard, Finolex Cables Aurobindo, Glenmark, Lupin, Sun Pharma Bharti Airtel, TTK Prestige Laggards GSK Consumers, Jyothy Laboratories and Emami Bank of India, IDBI Bank, Punjab National Bank India Cement Apollo Tyres, Bajaj Auto Wipro, Tech Mahindra, Firstsource Solution BHEL, Thermax Cipla, Torrent Pharma Orbit Exports, KDDL Sensex earnings (EPS) consensus estimates Estimated revenue growth by sector Jul-15 Oct-15 FY17 EPS estimate Jan-16 Apr-16 FY18 EPS estimate Jul Pharma IT Cap. goods BFSI Power Telecom FMCG Auto (5.4) Metal (8.9) Diversified Sensex Source: Bloomberg Source: Bloomberg, Sharekhan Research Estimated PAT growth by sector Estimated sector-wise contribution to Sensex earnings growth (1.7) (2.4) (6.0) (7.6) (30.2) (1.5) (0.2) (0.2) (0.3) (0.5) (0.7) (0.8) (2.5) (1.5) Power Pharma FMCG IT Auto BFSI Diversified Telecom Cap. goods (69.2) Metal Sensex -4.0 IT Pharma Power FMCG Auto Telecom Cap. goods BFSI Diversified Metal Energy Sensex Source: Bloomberg, Sharekhan Research Source: Bloomberg, Sharekhan Research Sharekhan Special 2 July 13, 2016

3 FY2017 earnings preview Auto A mixed bag FY2017 result expectations Auto universe (ex-tamo) to post double-digit topline growth: The automobile companies [ex-tata Motors (TAMO)] are expected to report a healthy 12 growth in revenues for FY2017. Maruti Suzuki and Mahindra & Mahindra (M&M) are expected to lead the pack with a growth of 14 and 13, respectively. Eicher Motors and TVS Motors are expected to be other notable performers with impressive double-digit growth. Among the auto ancillary companies, those having higher overseas presence (Bharat Forge, Balkrishna Industries) are likely to report drop in revenue due to subdued demand in their key export markets. Tyre companies are estimated to report a flat topline due to lower realisations (on the back of price cuts to pass on the benefits of lower raw material costs to customers). Rising cost pressures to lead to marginal decline in margins as commodity benefits start waning: The Auto universe s (ex-tamo) operating margins are likely to decline marginally by 50BPS. Increased cost pressures, coupled with higher marketing expenses (on the back of increased competitive intensity) are likely to be a drag on the operating margins of automotive companies. Further, given the recent uptick in commodity prices (steel and aluminum), the benefits from raw material prices are likely to be only marginal (we expect gross margins to improve 30BPS), and would be more than offset by an increase in other costs. Only Hero MotoCorp (HMCL), Exide Industries and Eicher Motors are likely to witness margin improvement on a basis. Given the pressure on margin, our Auto universe (ex-tamo) is likely to report mid single-digit PAT growth of 7 despite a double-digit growth in the topline. Ashok Leyland (ALL), Hero MotoCorp and TVS Motors are expected to outperform with strong double-digit profit growth. Tyre companies (Apollo Tyres, Ceat and JK Tyre) are expected to underperform with double-digit decline in their bottomline. Outlook After a delayed start, the south-west monsoon has progressed well. Currently, the cumulative rainfall has been 1 above normal compared to an 18 deficiency at the beginning of the period. A good monsoon would increase rural incomes, which is beneficial for auto segments that are dependent on buoyant rural demand, viz two-wheelers and tractors. Also, the increase in government employees salaries after the implementation of the Seventh Pay Commission recommendations would further boost demand for two-wheelers and passenger cars. MHCV demand is likely to remain strong (we expect 15 growth in FY2017), underpinned by the expected improvement in rural demand (due to better monsoon) and pre-buying before the introduction of new emission norms. We expect the LCV demand to also gain momentum, driven by the MHCV upcycle over the last 7-8 quarters. Valuation In the automotive universe, we prefer M&M as it is a pure rural play and would be key beneficiary of the impending uptick in rural demand due to good monsoon. We also prefer Maruti Suzuki, as it would outpace the passenger vehicle industry growth on the back of robust demand for its newly launched products. We also like Ashok Leyland, as it is a pure CV play and would benefit from strong demand for commercial vehicles. Preferred picks for the earning season: Ashok Leyland, Hero MotoCorp Sharekhan Special 3 July 13, 2016

4 FY2017 earnings preview FY2017 results estimates Particulars Sales (Rs Cr) EBITDA PAT (Rs Cr) BPS BPS Maruti Suzuki 15, , (0.1) (136.5) (41.3) 1, , Hero Motocorp 7, , Bajaj Auto 6, , (95.1) (192.9) ,014.8 (3.4) 22.1 TVS Motors 3, , M&M # 10, , (48.7) Ashok Leyland 4, , (29.3) (4.1) (256.8) (55.8) Apollo 2, , (2.2) (284.0) (114.4) (25.7) (11.9) Greaves Cotton (4.4) (51.4) (3.8) Gabriel (3.4) Rico Soft coverage Tata 61, , (23.2) (135.9) (61.3) 2, ,846.7 (15.3) (47.3) Eicher 4, , (16.8) Exide Industries 1, , Bharat Forge 1, ,128.5 (2.0) (184.3) (75.9) (6.4) 11.1 Suprajit (7.4) (166.8) (5.0) 1, ,465.3 (2.4) (2.0) (291.1) (104.1) (28.3) (24.6) Balkrishna Industries (1.7) (10.1) (248.8) (686.7) (34.0) (35.3) Jk 1, ,777.2 (3.7) (2.1) (265.0) (133.4) (34.9) (27.4) Jamna Auto (12.9) (344.1) (38.9) Auto Universe 124, , (13.0) (91.6) (32.4) 8, ,237.3 (0.6) (18.0) Auto universe (ex TAMO) 62, , (51.5) (19.2) 5, , # MM+MVML not comparable due to Phoenix Acquisition Valuations CMP (Rs) EPS (Rs) PE (x) FY18E FY18E Old reco New Reco PT (Rs) Maruti Suzuki 4, Buy Buy 4,700 Hero Motocorp 3, Hold Hold UR Bajaj Auto 2, Hold Hold UR TVS Motors Reduce Reduce 250 1, Buy Buy 1,580 Ashok Leyland Buy Buy 120 Apollo Tyres # Buy Buy 180 Greaves Cotton Buy Buy 160 Gabriel India Buy Buy 105 Rico Auto Industries # Buy Buy 47 Soft coverage Tata Motors # Positive Positive Eicher Motors* # 19, Neutral Neutral Exide Industries Neutral Neutral Bharat Forge Neutral Neutral Suprajit Engineering # Neutral Neutral CEAT # Neutral Neutral Balkrishna Industries Neutral Neutral JK Tyre & Industries # Neutral Neutral Jamna Auto Industries # Positive * for 15 MM+MVML; # Consolidated Nos; UR-under review Sharekhan Special 4 July 13, 2016

5 FY2017 earnings preview Banking and NBFC RBI and government working in tandem; patient, long-term investors to gain FY2017 result expectations Asset quality woes may continue; government, RBI measures positive: In FY2017, while the gross non-performing assets (GNPA) levels may increase, the gross stress addition is likely to see improvement on a sequential basis before tapering off in the medium term. The government and the Reserve Bank of India (RBI) have taken several positive measures, in tandem, like Scheme for Sustainable Structuring of Stressed Assets (S4A), Strategic Debt Restructuring (SDR), 5:25 refinance scheme, Bankruptcy Law etc. These steps will help in faster resolution of the banks bad loan problems. Emboldened by these moves, banks too have significantly increased their loan recovery efforts, which should help to gradually reduce and eventually resolve the headline GNPA numbers in the long term. Moderating cost of funds to help sustain NIMs: The RBI has turned the system liquidity to neutral from a liquidity deficit state a quarter ago. An easy liquidity environment will help in the faster transmission of the central bank s policy rate cuts. Already, most banks have reduced their exposure to bulk deposits, besides cutting deposit rates by BPS over the past one year. We believe that the softening of interest rates is likely to continue going forward. This would be the first quarter when the new system of Marginal Cost of Funds based lending rate (MCLR) kicks in. Increasingly, MCLR-based loans would result in better synchronisation of lending and borrowing rates. However, in the near term, we expect the Net Interest Margins (NIMs) to remain stable on a sequential basis. NBFCs are dependent on bank funding to a large extent and would benefit from rationalisation of the lending rates. Outlook BFSI earnings for the previous quarter were hurt largely by the asset quality stress brought about by the RBI-led Asset Quality Review (AQR) as well as the banks willingness to proactively clean up books. However, we don t see a significant on-ground recovery in industrial activity. Hence, we expect provisions and NPAs to likely remain at elevated levels for 1-2 quarters more. Of late, the invigorated stance of banks has led to significant de-leveraging of highly leveraged borrowers through asset divestments, capital infusion etc. This is a positive trend, giving us a reason to expect better asset quality and overall results in the long term. Valuation We expect the NPAs situation to ease from the current elevated levels in the long term, underpinned by government s fiscal discipline, increasing efforts on removal of policy roadblocks and RBI s reforms. Improving auto/cv sales, higher cement dispatches, favourable consumer confidence survey (source: RBI) and re-starting of several stalled projects point to a significant though a gradual economic recovery process going forward. Earnings outperformers in FY2017E: HDFC Bank, Yes Bank, Capital First. Earnings under-performers in FY2017E: Bank of India, IDBI Bank, Punjab National Bank. Sharekhan Special 5 July 13, 2016

6 FY2017 earnings preview FY2017 estimates of Sharekhan s banking and NBFC universe Banks Net interest income Pre-provisioning profit Profit after tax Public SBI 16, , , , , , PNB 3, , , , (147.6) NA Bank of Baroda 2, , , , , NA Bank of India 3, , , , (200.2) NA Union Bank 2, , , , Corporation Bank , (65.0) NA Allahabad Bank 1, , , , NA IDBI Bank 1, , , (314.3) NA PSBs total 31, , , , , , NA Private ICICI Bank 5, , , , , , HDFC Bank 7, , , , , , Axis Bank 4, , , , , , Federal Bank Yes Bank 1, , , Private banks total 19, , , , , , Grand total 50, , , , , , NBFCs HDFC** 2, , , , , , LIC Housing Finance Capital First Bajaj Finance 1, PTC India Fin. Ser NBFC Total 4, , , , , , ** Profitablity boosted by one time Profit on Sale of investment of HDFC Ergo of Rs 920 crores (post tax) Valuation summary Banks Reco Price Target (Rs) CMP (Rs) RoA RoE P/BV (x) FY18E FY18E FY18E Public State Bank of India Buy Punjab National Bank Hold UR Bank of Baroda Buy Bank of India Reduce Union Bank Hold UR Corporation Bank Reduce Allahabad Bank Reduce IDBI Bank Reduce PSBs total / avg Private ICICI Bank Hold UR HDFC Bank Buy 1,300 1, Axis Bank Buy Federal Bank Buy UR Yes Bank Buy 1,200 1, Private banks total / avg Grand total / avg NBFCs HDFC Ltd Buy 1,380 1, LIC Housing Finance Buy Capital First Buy Bajaj Finance Hold UR 8, PTC India Fin. Ser. Buy NBFCs Average UR - Under review Sharekhan Special 6 July 13, 2016

7 FY2017 earnings preview Capital goods and engineering Momentum continues but in select areas only; remain selective FY2017 result expectations Revenue traction healthy on adjusted basis: The revenue performance of our capital goods and engineering universe is likely to be ~6-7 in FY2017. Most of the coverage companies are likely to deliver double-digit topline growth, but Crompton Greaves (CGL) is expected to witness a drop in its topline. However, FY2017 numbers for CGL are not comparable, as the company is in the process of selling its overseas business. Therefore, we have estimated numbers for its retained business only. Thermax is also expected to report a 9 decline in its revenue, while all the other companies are expected to record double-digit topline growth on a basis. Ex-BHEL, healthy earnings show: The overall earnings of our coverage universe are likely to be negative due to significant loss in BHEL. However, (ex-bhel), we expect earnings to show a 28 growth in this quarter. The key drivers for the strong growth are 1) healthy earnings growth in L&T (heavyweight) and 2) expected profit against loss for some companies (Va Tech Wabag and CGL). Among the smaller companies, we expect strong earnings growth in V-Guard Industries (V-Guard) and Finolex Cables. On the other hand, Thermax is expected to report weak earnings in FY2017. Outlook Domestic capex cycle remains static; only select areas seeing positive momentum: The capital expenditure (capex) cycle is yet to kick off in a meaningful way, with status quo maintained in new order inflows (as most of the industrial sectors are either having overcapacity or yet to witness incremental demand). However, the ordering activity in select segments like Power Transmission and Road Construction continues to be robust. Some green shoots are also visible in the Railways and Defence segments, which are potentially large areas. Overseas news flow remains unfavourable and is adding to the ongoing woes of the companies with an international exposure. Hence, domestic-focused companies with an exposure to the above mentioned pockets are likely to see better business traction in the near to medium term. Valuation View-Earnings performance reflected in valuation recovery: Amidst the broad index recovery of around 10 in the last 3-6 months, most of our coverage companies in capital goods and engineering universe have witnessed a sharp appreciation (30-50, especially where earnings growth has been healthy). In our earlier sector preview note (dated April 05, 2016), we had highlighted that post correction, and valuations had come to a reasonable level for most coverage companies. We believe that after the sharp appreciation in most of the stocks in our coverage, only those companies that surprise on earnings could outperform. Nevertheless, favourable trend in public spending, select private capex and gradual rate cuts by the RBI could be the probable catalysts in the near to medium term. Preferred picks this earnings season: We prefer L&T in the heavyweight while among the smaller companies we prefer Kalpataru Power Transmission, V-Guard, Triveni Turbine and Finolex Cables for likely momentum in earnings growth. FY2017 results estimates Rs cr Net sales (Rs cr) OPM PAT (Rs cr) growth BPS () growth BHEL 4, (12.4) (560) -255 PL Crompton Greaves (Restated) 1, LP L&T 23, (21) KPTL (standalone) 1, (26) Thermax (Standalone) (10) Finolex Cables V-Guard Industries Va Tech Wabag LP Skipper (46) Triveni Turbines Sharekhan coverage 33, (17) Ex-BHEL 29, PL - Profit to loss; LP- Loss to profit Sharekhan Special 7 July 13, 2016

8 FY2017 earnings preview Valuations EPS CAGR over PE (x) CMP (Rs) FY2016 FY2017E FY2018E -18E FY2016 FY2017E FY2018E BHEL 137 (3.7) (0.4) 3.9 NA NA NA 35.1 Crompton Greaves (Restated) L&T 1, KPTL # Thermax # Finolex Cables V-Guard Industries 1, Va Tech Wabag Skipper Triveni Turbines # stand-alone Consumer goods and services No major revival in sales volume; margin expansion to taper down FY2017 result expectations Revenue growth to stay in single digits: With no major improvement in the demand environment, the revenue growth of FMCG companies under our coverage [barring Emami and Godrej Consumer Products (GCPL)] is expected to remain in single digits (range of 5-9) in FY2017. The revenue growth will largely be driven by volume growth, which is expected to remain stagnant on a quarter-on-quarter () basis due to slowdown in rural demand and no major improvement in the urban consumer demand environment. Hindustan Unilever (HUL) is expected to see 5-6 volumeled revenue growth, while ITC s core cigarette business is expected to see flat sales volume (leading to 7 revenue growth). Britannia, Dabur and Marico are expected to achieve revenue growth in the range of 6-8. Margin expansion to taper down: During FY2016, FMCG companies gained substantially from lower raw material (RM) prices, resulting in double-digit earnings growth for most during the year. However, with key input prices (including palm oil, sugar and milk) trending upwards, the benefits of lower RM costs will taper down in FY2017. The operating margin expansion is expected to be in the range of 0-100BPS (barring Marico which is likely to see significant improvement due to 40 drop in copra prices). Emami s margins will get support from the contribution of high-margin products such as Kesh King. Therefore, we expect 170BPS improvement in Emami s operating margin on a year-on-year () basis. Outlook Monsoon begins on positive note; benefits of better monsoon and implementation of 7th pay commission hikes would come in H2FY2017: The south-west monsoon began on a positive note, with cumulative rainfall during the period of June 1 July 6 standing at 1 above the long period average (LPA) on the back of strong revival in rainfall in July. If the progress of monsoon continues in the coming months (July-August period crucial period for Kharif crop), it will give a boost to the rural economy. Improved kharif output will lift the rural demand for consumer products in the second half of FY2017. Also, the implementation of the Seventh Pay Commission s recommended pay hikes for Central Government employees will play a key role in driving urban demand over the next few quarters. On the other hand, RM prices have started trending upwards. Hence, margin expansion would be a function of prudent price hikes and operating efficiencies in the coming quarters. The introduction of GST and stable commodity prices will determine the growth prospects of FMCG companies in the near term to medium term. Valuation In the volatile global market environment, consumer goods companies with strong growth prospects, sturdy balance sheet and limited exposure to currency headwinds are getting more preference from investors. In view of this, we like ITC (discounted valuations and reducing concerns on core cigarette business) and HUL (expected improvement in rural sales) in the large-cap space, while in the mid-cap space, we prefer Britannia Industries (on the back of its long-term growth prospects), Emami (well balance product portfolio to tap rural and urban markets) and Kansai Nerolac (due to expected improvement in decorative as well as auto paints businesses). In the consumer services space, we continue to like Wonderla Holidays and Thomas Cook India. Sharekhan Special 8 July 13, 2016

9 FY2017 earnings preview Preferred picks: HUL, ITC, Britannia, Emami and Wonderla Holidays Earnings outperformers in FY2017: ITC, Marico and GCPL Earnings underperformers in FY2017: GSK Consumers, Jyothy Laboratories and Emami FY2017 results estimates Companies Net sales OPM BPS Adjusted PAT FMCG companies under coverage HUL 8, , , , ITC 9, , , , Britannia Industries 2, , GSK Consumer 1, Emami GCPL 2, , Marico 1, , Jyothy Laboratories Zydus Wellness Under soft coverage Bajaj Corp Dabur India 2, , Kansai Nerolac 1, Total 29, , , , Consumer discretionary Cox & Kings * Speciality Restaurants Thomas Cook (India) 1, Wonderla Holiday * Cox & Kings earnings estimates are not comparable on y-o-y basis due to hive off of Superbreak business Valuations Companies under coverage CMP EPS (Rs) PE (x) Reco (Rs) FY18E FY18E HUL 928 Buy ITC 249 Buy Britannia 2,862 Buy GSK Consumer 6,090 Buy Emami 1,107 Buy GCPL 1,659 Hold Marico 269 Hold Zydus Wellness 789 Buy Jyothy Laboratories 295 Buy EV/EBIDTA (X) Cox & Kings 188 Buy Speciality Restaurants 95 Hold Thomas Cook India 220 Buy Wonderla Holidays 401 Buy Sharekhan Special 9 July 13, 2016

10 FY2017 earnings preview Consumer discretionary On ground cheer still awaited FY2017 result expectations Real consumption demand continues to be soft: The last two quarters have been rather muted in terms of consumer demand due to a mediocre festival season and a dull End-of-Season sale. The present quarter also continues to witness subdued consumer demand with only tentative signs of revival. The highlight of the latest quarter was the extended End of-season sale for all the players, along with some rational behavior from the online (e-commerce) players. We expect the consumer discretionary companies within our coverage universe to post low double-digit revenue growth (at 11.6 ) on an aggregate basis. Commodity prices stable, but higher base and lack of leverage to impact margins: Stable commodity prices are likely to keep margins intact despite high gross margins reported by most players last year (due to steep fall in commodity prices). However, a weak revenue profile is likely to restrict the benefits from flowing into the operating performance (higher fixed costs would negate the benefits of lower/stable commodity prices). Therefore, we expect the margins to remain largely stable with only limited contraction. We expect KDDL s consolidated margins to be lower by 775BPS mainly due to low revenues from Ethos (on account of new regulation on PAN disclosure on transactions at or above Rs2 lakh). Outlook Maintain our positive stance: We believe that urban discretionary spending is in the early stages of revival. It will witness further improvement as the economy grows and the confidence among the salaried class improves in terms of income growth prospects. Besides, the implementation of the Seventh Pay Commission s recommendations would boost the passenger vehicle industry, apart from lifting the demand for medium-ticket items like branded apparels, home improvement products, jewellery, consumer durables and kitchen appliances. Thus, we believe that retail players with strong consumer connect & brand equity, wide distribution reach (judicious mix of online and stores) and robust balance sheet are likely to emerge as winners in the medium to long term. Sales volumes would improve and operating leverage will kick in, resulting in a disproportionate growth in their earnings. Valuation Barring premium valuation of Page Industries (trading at over 45x one-year forward earnings), the other consumer discretionary stocks in our universe are trading at an average range of 20-22x FY2018E earnings. We continue to remain positive on the sector. Preferred picks this earning season: Welspun India, TTK Prestige and Raymond. Sharekhan Special 10 July 13, 2016

11 FY2017 earnings preview FY2017 results estimates Rs cr Sales OPM Adjusted PAT FY17 FY17 (BPS) (BPS) FY17 Raymond 1, , Relaxo Footwear Kewal Kiran Clothing Century Plyboards Orbit Exports KDDL Soft coverage Arvind 2, , Titan 2, , Page Industries Jubilant FoodWorks TTK Prestige IFB Industries Welspun India 1, , Valuations CMP (Rs) Price target Rec/view EPS CAGR PER -18E FY18E FY18E Raymond Hold Relaxo Footwear Buy Kewal Kiran Clothing 1,770 2,360 Buy Century Plyboard Buy KDDL Buy Orbit Exports Buy Soft coverage Arvind 311 Positive Titan 364 Neutral Page Industries 14,050 Neutral Jubilant FoodWorks 1,056 Neutral TTK Prestige 4,575 Neutral IFB Industries 336 Positive Welspun India 107 Positive Sharekhan Special 11 July 13, 2016

12 FY2017 earnings preview Cement Cost rationalisation, higher operating leverage to support earnings growth FY2017 result expectations Higher realisation (northern and central players), cost rationalisation to support earnings: We expect the revenues of the cement companies under our coverage (active and soft) to increase by 9.2, largely supported by higher volumes (due to enhanced capacities). On the realisation front, the northern and central regions have maintained pricing discipline with prices up 15.6 and 7.5, respectively (up 14.0 and 10.1 ). Realisations in other regions have remained more or less flat sequentially while showing a downward trend (southern and eastern regions realisations down 7 ). Higher realisations and cost rationalisation measures are likely to benefit cement players like UltraTech, Shree Cement, JK Lakshmi and Mangalam Cement. Southern players operating performance to be affected by lower blended realisations: Southern cement players are expected to show weaker operating performance, as prices for FY2017 are down 7. We expect India Cements and The Ramco Cements to be affected by lower realisations. Despite lower prices, Ramco is still expected to post earnings growth on account of cost efficiencies (leading to better operating performance). Outlook We expect strong pricing discipline in northern and central belts to benefit pan-india and regional cement players. The key moniterable for the southern region will be revival in cement prices. Overall, we expect rural demand for housing to pick up pace in H2FY2017 due to a better monsoon while government spending on infrastructure is also expected to increase. Valuation Most of the cement players continue to trade at higher valuations, buoyed by revival in government spending and operating leverage whereas demand is yet to pick up meaningfully. We remain selective in the cement space and advise to enter on correction. Preferred picks this earnings season: Shree Cement, JK Lakshmi and The Ramco Cements FY2017 results estimates Coverage Sales OPM PAT (Rs cr) (BPS) (BPS) Grasim 9,361 8, UltraTech 6,590 6, Shree Cement 2,040 1, The Ramco Cements Soft coverage India Cements 1,109 1, JK Lakshmi NA NA Mangalam Cement NA NA Total 21,065 19, ,637 1, Rs cr Sharekhan Special 12 July 13, 2016

13 FY2017 earnings preview Valuations Reco Price Target CMP (Rs) EPS (Rs) PE (x) FY18E FY18E Shree Cement* Hold UR 15, Ultratech Hold 3,580 3, Grasim Buy 5,195 4, The Ramco Cement Hold UR India Cements# UR NA JK Lakshmi# UR NA Mangalam Cement# UR NA UR Under Review # soft coverage * Shree cement 9MFY2016, change in accounting year to march IT Good quarter, sentiment weak owing to macro overhang FY2017 result expectations Seasonally strong quarter: Strong seasonality, coupled with the impact of cross-currency tailwinds (10-40BPS) will drive the reported USD revenue performance for the April to June quarter. For the quarter under review, we expect a constantcurrency (CC) growth in the range of negative 0.2 to 5.4. However, the Indian Rupee s appreciation against USD (~1 ) will affect revenue growth in rupee terms. On an organic basis, the growth will be led by Infosys (4.2), followed by Tata Consultancy Services (TCS; 3.2), HCL Technologies [HCL Tech; 5.4 (including inorganic Volvo IT); organic growth at 2.2], Wipro [2.2 (including inorganic HPS); organic growth at 0.2], and Tech Mahindra (a negative growth of 0.2). On a reported basis, growth will be in the range of On the margins front, we expect decline in margins (10-180BPS) on a sequential basis owing to wage hikes, consolidation of acquisitions (Wipro, HCL Tech and Tech Mahindra), visa costs and rupee appreciation. Key issues to watch out for would be: (1) Management commentary on Brexit (business impact), impact on deal closures & renewals besides impact on other geographies (2) Demand visibility in FY2017E and outlook on different verticals (Infosys in recent investors meet has highlighted headwinds in Retail, Healthcare and Insurance verticals) (3) Commentary on digital space, specifically deal wins and outlook (all the companies are positive on the deal flows and outlook) (4) Commentary on the troubled verticals like Energy, Utilities and Telecommunications; (5) Commentary on margins and pricing (more pressure in pricing are evident in deal renewals given that the legacy services are under pricing pressure) and (6) Infosys is likely to keep its guidance unchanged at growth on CC basis for FY2017. Outlook Sentiment weak owing to macro overhang: After an in-line January-March quarter, the April to June quarter is expected to be a good quarter on account of strong seasonality. However, the sector s investment sentiment has weakened in the recent months, owing to the negative impact of Brexit, fragile demand and cautious pricing commentary from top-tier IT companies. Additionally, election rhetoric in the US ahead of the presidential election will restrict the stock s outperformance in the near term. Overall, we expect that the growth should pick up pace in the coming years, with higher incremental spending in the digital space, coupled with stabilisation in growth deceleration in Insurance and Energy. Nevertheless, we maintain our thesis that the industry is in a transition phase (it is building and adding capabilities for newer technologies in the digital space). Also, the industry is revamping the execution process and operations in the traditional services space (which is gradually getting commoditised). This transition phase will take some time (may be 2-3 years) and would result in volatility in earnings in the near-to-medium term. Valuation We remain selective in the IT sector and expect the demand environment to gradually pick up pace in FY2017 and FY2018. However, clarity on business impact from Brexit and commentary on demand improvement will be key to stock performance in the near-to-medium term. We keep our estimates for FY2017/2018E unchanged and will revise the same post the earnings. Preferred picks: Infosys, TCS and HCL Tech (in large-cap space) and Persistent Systems (in mid-cap space). Sharekhan Special 13 July 13, 2016

14 FY2017 earnings preview FY2017 results estimates Particulars Sales (Rs cr) OPM Net profit (Rs cr) (BPS) (BPS) Infosys 17,115 14, (182) 3,375 3, (6.2) TCS 29,219 25, (208) (182) 6,051 5, (4.6) Wipro 13,721 12, (94) (21) 2,174 2,188 (0.6) (2.7) HCL Tech 11,226 9, (51) (127) 1,919 1, (0.4) Tech Mahindra 6,841 6, (0.6) (124) (22.0) Persistent Systems (362) (11) (5.3) FSL (4.5) (116) (15.7) Source:, Sharekhan Research Valuations Price EPS (Rs) P/E (x) Reco target CMP (Rs) (Rs) FY18E FY18E Infosys Buy 1,430 1, TCS Buy 2,750 2, Wipro Hold HCL Tech* Buy Tech Mahindra Neutral NA Persistent Systems Buy FSL Hold UR *Changed its financial year ending from June-end to March-end during March 2016-ending quarterly results; hence, FY2016 consists only 9-month period Source:, Sharekhan Research Oil & gas Recovery in crude oil prices not enough to lift profits; benchmark GRM also softer FY2017 result expectations Crude oil prices recover but Natural Gas price to be a drag: Crude oil prices rebounded from ~$35/bbl in Q4FY2016 to cross $45/bbl in FY2017. Therefore, realisations for crude oil would be roughly higher sequentially. This would positively impact revenues of upstream companies. However, the 20 downward revision in natural gas prices in FY2017 will lower gas revenues for these companies. On the macro-economic front, the Indian Rupee- Dollar exchange rate remained fairly stable during the quarter. Consequently, we expect the crude oil revenue of Oil India (OIL) to be higher by 34 while natural gas revenue will decline by 11, resulting in a 20 revenue growth Rs2,076 crore. Weak refining margins to weigh on refiners: With recovery in crude oil prices, the Asian benchmark gross refining margin (GRM; Singapore GRM) is expected to be weak at around $5-5.5/bbl in FY2017. We expect Reliance Industries (RIL) to earn a premium of ~$3.5/bbl over Singapore GRM, taking the company s FY2017 GRM to $9/bbl as against $10.8/bbl in Q4FY2016. On the positive side, RIL s petrochemicals business would continue to perform well. In this backdrop, we expect RIL to report earnings of Rs6,362 crore, down 13. We believe that the public sector oil marketing companies (OMCs) like Indian Oil Corporation (IOC), Hindustan Petroleum Corporation (HPCL) and Bharat Petroleum Corporation (BPCL) would struggle to maintain steady GRM. Sharekhan Special 14 July 13, 2016

15 FY2017 earnings preview Outlook The sector has witnessed significant swings in the last 24 months, with the energy prices (both crude oil and natural gas) correcting sharply and challenging many pre-existing sector dynamics. To some extent, the price recovery has brought about changes in some key statutory levies and regulations. Amidst all, the reform process continues. The gradual deregulation of diesel prices was followed by reforms in LPG through the direct benefit transfer (DBT) mechanism. Now, the government has approved a gradual price hike in kerosene, which will eventually make oil under recoveries negligible. Apart from the obvious benefits to OMCs and upstream companies, the staggered decontrol of kerosene prices will boost investors confidence. We believe that most of the uncertainties related to under-recoveries are over now. Going forward, the energy price movement and efficiency of the companies would drive earnings as well as valuations. Valuation With energy prices still trading low, profitability of OIL and ONGC is likely to be modest. However, the current stock prices factor in the lower energy prices for the long term. Crude oil prices look like bottoming and potentially finding some stability now. Against this backdrop, we retain our Hold rating on OIL. RIL will continue to outperform its peers, backed by strong premium to Singapore GRM and improvement in petrochemicals business. Further, the full-scale commercial launch of Reliance Jio s 4G service is also a potential trigger for RIL. Therefore, we retain our Buy rating on the stock. Preferred pick this earnings season: RIL FY2017 results estimates Sales (Rs cr) OPM PAT (Rs cr) (bps) (bps) Coverage RIL 59, , ,362 6, Oil India 2,413 2, Non coverage GAIL 12,306 12, ONGC 18,686 22, ,796 3,776 5, Valuations Coverage CMP EPS (Rs) CAGR PER (x) over FY18E FY15-17E FY18E New Reco Price Target RIL 1, Buy 1,250 Oil India Hold 400 Non Coverage GAIL NA NA ONGC NA NA Sharekhan Special 15 July 13, 2016

16 FY2017 earnings preview Power A steady quarter FY2017 result expectations Power generation in India is expected to grow by 9 and 7 to 256 billion units (BU) in FY2017. During the quarter, we expect energy deficit to slip below 1, as supply is likely to be 11 against the required growth of 9. Consequently, merchant power prices are under pressure. One positive development for the power sector has been the improvement in domestic coal supply situation. We expect CESC to report a decent earnings growth of 7, although the sequential numbers would be lower (not comparable as Q4FY2016 results included prior period tariff adjustments). We expect the company s power generation to be lower (strategically sourcing more power from new plant at Haldia) over the last year. But, the total energy outgo will be higher by 3, resulting into 8 higher volumes sourced from outside (majorly from Haldia). Factoring in the revised tariff, we expect CESC s earnings to grow by 7 to Rs163 crore in FY2017. PTC India is expected to witness a healthy ~20 volume growth, but due to lower realisations (weak merchant power prices), its revenue is estimated to grow by 6 to Rs3,500 crore. We build in operating margin of ~6 paise per unit and estimate PAT of Rs55 crore for PTC India. Among the non-rated companies, we expect both Power Grid Corporation of India and NPTC to report healthy earnings growth in this quarter. Outlook After several years, Coal India (CIL) has managed to record a meaningful growth recently while the power deficit in the country is now below 1. The aggregate capacity utilisation of coal-fired power plants continues to be lower (around 60 currently). On the other hand, the government s UDAY scheme has been well accepted by several states. Still, some states needed more time to comply with the financial restructuring of their own accounts. Hence, the Union Cabinet has approved an extension in the deadline for implementing UDAY to March 31, This would offer a window to few more states to join UDAY. Among our coverage companies, we have revised down our rating on PTC India from Buy to Hold, considering the limited upside potential in the stock post a sharp run-up. We keep CESC s rating as under review. Preferred stocks: PTC India, Power Grid FY2017 results estimates Sales (Rs cr) OPM PAT Sales (Rs cr) (BPS) (BPS) Coverage CESC 1,744 1, PTC India 3,500 3, Non coverage NTPC 18,640 17, ,685 2, Power Grid 5,815 4, ,614 1, Valuations CMP (Rs) Book value per share CAGR over PB (x) FY15-18E FY18E FY18E Price Target Coverage CESC PTC India Non coverage NTPC NA Power Grid NA Sharekhan Special 16 July 13, 2016

17 FY2017 earnings preview Pharma Steady performance; Remain selective with positive long-term outlook FY2017 result expectations Steady quarter due to favorable currency movements: During FY2017, INR depreciated by 7 () against USD. A weaker INR will thus support revenue growth in US generics (and to some extent will help to mitigate pricing pressure). As far as Emerging Market (EM) currencies are concerned, movements were unfavorable, but there has been some improvement on a sequential basis. This will lead to some recovery in EM as well as the rest of the world (RoW) markets (Brazil, Russia etc will see stable growth; Brazilian Real lost 10 while Russian Rouble is down by 13). Better approval rate, ongoing exclusivities to support growth: Continuing business from exclusive opportunities (ggleevec, gglumetza), coupled with the improved product approval rate will help to counter the recent pricing concerns in the US. The performance in the US market will vary significantly during the quarter, since it will be based on product launches. We expect Lupin, Sun Pharma and Glenmark to record robust growth in the US, while Torrent Pharma and Cadila are likely be the laggards. We expect our pharma coverage universe to report sales and profit growth of 14 and 22, respectively. We expect Aurobindo Pharma, Glenmark, Lupin and Sun Pharma to report strong quarterly performance while Cipla and Torrent Pharma to be the laggards (due to high base in FY2016 on the back of one off sales opportunities). Outlook & Valuation Long-term outlook remains healthy; remain selective: We expect steady earnings growth in FY2017 and FY2018, as favorable sequential currency movements will result in stronger US generic sales and recovery in EM and RoW businesses. Continued impact of exclusive opportunities (ggleevec; gglumetza; gzetia etc) and improved product approval rate will maintain steady growth in US generics despite the recent pricing concerns. Also, growth in the next two years is likely to be driven by the domestic market (which is witnessing a robust volume growth) and introduction of new drugs. Therefore, we remain positive on the long-term prospects of the pharma sector and advise to stay selective). We also see some of the headwinds on account of the USFDA warning letters getting resolved. Preferred picks this earnings season: Aurobindo, Glenmark and Sun Pharma. Earnings outperformers in FY2017: Aurobindo, Glenmark, Lupin and Sun Pharma. Earnings laggards in FY2017: Cipla and Torrent Pharma. Sharekhan Special 17 July 13, 2016

18 FY2017 earnings preview FY2017 results estimates Rs cr Companies Net sales OPM BPS Adjusted PAT Pharma companies under coverage Aurobindo 3, , Cadila 2, , Cipla 3, , , Divis Glenmark 2, , Lupin 4, , Sun Pharma 7, , , , Torrent Pharma 1, , , Total - A 26, , , , Under soft coverage Granules India Dr Reddy's Lab 3, , Natco Pharma Jubilant Lifesciences 1, , Biocon Total - B 6, , Grand Total (A+B) 33, , , , Valuations CMP (Rs) Reco EPS (Rs) PE (x) RoCE FY18E FY18E FY18E Aurobindo 775 Buy Cadila 370 Hold Cipla 516 Hold Divis 1,160 Hold Glenmark 835 Buy Lupin 1,672 Hold Sun Pharma 785 Buy Torrent Pharma 1,435 Hold Sharekhan Special 18 July 13, 2016

19 FY2017 earnings preview Telecom Good EBITDA traction, net earnings impacted by fixed cost FY2017 result expectations Decent topline aided by combination of voice and data growth: Telecom service providers [Bharti Airtel (Bharti) and Idea Cellular (Idea)] wireless business performance is expected to be decent on revenue and EBITDA front. We expect Bharti (domestic mobile business) and Idea s consolidated revenue to post 3.2 and 3 growth (), respectively. Bharti s DTH and Enterprise businesses are expected to post robust results, while its African and South Asian results are expected to remain subdued (largely led by weakness in Narobi). We expect both, Bharti and Idea to post a traffic growth of 3.5 and 3.2, respectively while the pricing is expected to remain stable. Data volume is expected to continue its double-digit sequential growth momentum (averaging ) for both Bharti as well as Idea, but pricing pressures will persist. Despite network expansion, EBITDA margins to remain intact: Telecom players across the board have upped their ante in terms of network expansion and rolling out of data services (3G + 4G) across geographies. This would entail an increase in the network operating cost, compressing margins on a basis. On a basis, we expect Bharti and Idea to witness margin expansion. We expect Bharti to post the highest margin at ~40 for the Indian mobile business, driven by improving traffic growth momentum and data growth traction (3G + 4G). Net earnings to be hit by higher fixed cost: The investments made in spectrum acquisition would continue to reflect in the financials of the telecom service providers in the form of higher depreciation and interest costs, which in turn will impact the earnings. Bharti Infratel impacted on tenancy and lower energy spread: Bharti Infratel s consolidated topline is expected to grow by 1.9, largely led by an improvement in the average sharing factor. A sizeable effect of the same through the utilisation of Reliance Jio towers would be visible in the company s financials from Q4FY2017 onwards. Lower energy spread, coupled with flat rentals are likely to have a marginal impact on the company s margins. Outlook Despite a strong market for data growth, the impending launch of Reliance Jio s 4G services (commercial launch now expected in September after several delays), and the strategy adopted by a financially-strong competitor remains the key overhang for the sector. Further, regulations continue to be stringent, with the latest call drop penalty issue (pending in court) being the case in point. This continues to weigh heavily on the sentiment as well as the financials. Valuation Over the last four years, the telecom stocks have been shunned by investors owing to various regulatory issues and a fierce competitive environment. Thus, the telecom stocks were commanding lower valuations on account of the lingering uncertainty over the sector. The shares of telecom operators are currently trading at 6-7x one-year forward EV/EBITDA. We believe that with its healthy spectrum inventory and first-mover advantage in rolling out 4G services, Bharti is the best placed to withstand future competition from Reliance Jio. We currently have a Hold rating on Bharti with a price target of Rs425. Preferred picks this earnings season: Bharti Airtel FY2017 results estimates Sales (Rs cr) OPM PAT (Rs cr) Sharekhan Special 19 July 13, 2016 BPS BPS Bharti Airtel 25,723 23, (89) 1, ,554.3 (8) 11.3 Idea Cellular 9,763 8, (63) (37) 1.9 Bharti Infratel 3,221 3, (10) (1.0)

20 FY2017 earnings preview Valuations Particulars CMP Price Reco/view EPS EPS EV/EBITDA (Rs) target FY18E CAGR FY18E Bharti Airtel Hold Idea Cellular NR Neutral (19.3) Bharti Infratel 352 NR Positive Miscellaneous FY2017 results snapshot Net Sales (Rs cr) OPM Adjusted PAT (Rs cr) (BPS) (BPS) Ratnamani Metal BEL UPL PI Industries Gateway Distriparks IRB Gayatri Projects ITNL ZEE Ent Inox Leisure Info Edge Supreme Ind Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a position in the companies mentioned in the article. 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 ; (NCDEX/TCM/CORP/0142) ; NCDEX SPOT-NCDEXSPOT/116/CO/11/20626 ; For any complaints at [email protected] ; Disclaimer: Client should 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. 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 contain confidential and/or privileged material and is not for any type of circulation and any review, retransmission, or any other use is strictly prohibited. This document is subject to changes without prior notice. This document does not constitute an offer to sell or solicitation for the purchase or sale of any financial instrument or as an official confirmation of any transaction. Though disseminated to all customers who are due to receive the same, not all customers may receive this report at the same time. SHAREKHAN will not treat recipients as customers by virtue of their receiving this report. The information contained herein is obtained from publicly available data or other sources believed to be reliable and SHAREKHAN has not independently verified the accuracy and completeness of the said data and hence it should not be relied upon as such. While we would endeavour to update the information herein on a reasonable basis, SHAREKHAN, its subsidiaries and associated companies, their directors and employees ( SHAREKHAN and affiliates ) are under no obligation to update or keep the information current. Also, there may be regulatory, compliance, or other reasons that may prevent SHAREKHAN and affiliates from doing so. This document is prepared for assistance only and is not intended to be and must not alone be taken as the basis for an investment decision. Recipients of this report should also be aware that past performance is not necessarily a guide to future performance and value of investments can go down as well. The user assumes the entire risk of any use made of this information. Each recipient of this document should make such investigations as he deems necessary to arrive at an independent evaluation of an investment in the securities of companies referred to in this document (including the merits and risks involved), and should consult his own advisors to determine the merits and risks of such an investment. The investment discussed or views expressed may not be suitable for all investors. We do not undertake to advise you as to any change of our views. Affiliates of SHAREKHAN may have issued other reports that are inconsistent with and reach different conclusion from the information presented in this report. This report is not directed or intended for distribution to, or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction, where such distribution, publication, availability or use would be contrary to law, regulation or which would subject SHAREKHAN and affiliates to any 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 of investors. Persons in whose possession this document may come are required to inform themselves of and to observe such restriction. Either SHAREKHAN or its affiliates or its directors or employees/representatives/clients or their relatives may have position(s), make market, act as principal or engage in transactions of purchase or sell of securities, from time to time or may be materially interested in any of the securities or related securities referred to in this report and they may have used the information set forth herein before publication. SHAREKHAN may from time to time solicit from, or perform investment banking, or other services for, any company mentioned herein. Without limiting any of the foregoing, in no event shall SHAREKHAN, any of its affiliates or any third party involved in, or related to, computing or compiling the information have any liability for any damages of any kind. The analyst certifies that all of the views expressed in this document accurately reflect his or her personal views about the subject company or companies and its or their securities and do not necessarily reflect those of SHAREKHAN. Further, no part of the analyst s compensation was, is or will be, directly or indirectly related to specific recommendations or views expressed in this document. Please refer the Risk Disclosure Document issued by SEBI and go through the Rights and Obligations and Do s and Dont s issued by Stock Exchanges and Depositories before trading on the Stock Exchanges. Please refer disclaimer for Terms of Use. Compliance Officer: Ms. Namita Amod Godbole; Tel: ; [email protected] Contact: [email protected] Sharekhan Special 20 July 13, 2016