Escolar Documentos
Profissional Documentos
Cultura Documentos
November 2016
Year 1 Year 10
Prashant Mittal, CFA Ravi Singh Abhishek Ranganathan, CFA Nikhil Pillai
prashant.mittal@ambit.co ravi.singh@ambit.co abhishek.r@ambit.co nikhil.pillai@ambit.co
Strategy
CONTENTS
SECTOR
The Coffee Can Portfolio 2016 …………………………………………………….3
Executive Summary ……………………………………………………………………4
The case for a Coffee Can portfolio ……………………………………………….9
A framework for constructing the Indian Coffee Can portfolio ……………….13
Does the approach work? Results from our back-testing ……………………..15
Performance of the Coffee Can portfolios launched in ……………………….18
2014 and 2015
Optimal way to deploy fresh funds each year ………………………………….21
The ideal life of a Coffee Can portfolio ……………………………………….…24
Today’s Coffee Can for 2016-2026 ……………………………………………..26
Appendix 1: How the Coffee Can is different to our …………………………131
other portfolio constructs
Appendix 2: Performance of the 14 back-tested ……………………………..133
Coffee Can portfolios
Appendix 3: John Kay’s IBAS Framework ……………………………………..150
COMPANIES
HDFC Bank (SELL): Flawless execution …………………………………………..27
Axis Bank (BUY): A strong core ……………………………………………………33
HCL Technologies (BUY): Set to surf the IoT wave ……………………………..39
Asian Paints (BUY): A legend built over several decades ……………………..45
Lupin (BUY): Dukes have castellated the fort …………………………………...51
Cadila (BUY): Inches make champions ………………………………………….57
Britannia (SELL): On a steady growth path ……………………………………...63
LIC Housing Finance (SELL): The old lady of housing finance ………………..69
Page Industries (BUY): ‘Inner’ Strength ………………………………………….75
Amara Raja Batteries (SELL): Competitive edge under threat ………………..81
GRUH Finance (NOT RATED): Will it stand the test of time? …………………89
Dr Lal PathLabs (NOT RATED): Long-term growth path ……………………….95
eClerx (SELL): No room for error ………………………………………………..101
Astral Poly (NOT RATED): A ‘fanatic’ challenger ………………………………107
Relaxo Footwears (NOT RATED): The nimble footed giant …………………113
REPCO Home Finance (NOT RATED): Swimming against the tide …………119
Cera Sanitaryware (NOT RATED): A super-efficient Superbrand …………..125
The Coffee Can Portfolio 2016 The Indian Coffee Can Portfolio 2016
HDFC Bank Our stance: SELL
In this annual update of our coffee can portfolio, we further augment the
case for this unique construct. The previous editions of the coffee can Mcap (US$ bn): 47.6 ADV - 6m (US$ mn): 25.9
portfolio (CCP) have done remarkably well, with 18.4% outperformance Axis Bank Our stance: BUY
and 9.6% outperformance (in CAGR terms) for the two iterations since Mcap (US$ bn): 17.5 ADV - 6m (US$ mn): 85.8
publication in Nov ’14 and Nov ’15 respectively. That said, our analysis HCL Technologies Our stance: BUY
suggests for the true potential of the coffee can construct to play out, the
Mcap (US$ bn): 16.6 ADV - 6m (US$ mn): 27.4
portfolio should be left untouched for a decade. Asian Paints, HDFC
Bank, Page and Astral are some prominent stocks that again appear in Asian Paints Our stance: BUY
this year’s portfolio. Relaxo, Repco and Dr Lal are the new entrants. Mcap (US$ bn): 15.2 ADV - 6m (US$ mn): 17.6
The case for a Coffee Can Portfolio Lupin Our stance: BUY
The coffee can construct hinges on investing in high quality franchises (which Mcap (US$ bn): 10.4 ADV - 6m (US$ mn): 30.1
have a superior track record of financial performance over the preceding decade) Cadila Health. Our stance: BUY
for a very long period of time – a decade to be precise. The virtues of such a
Mcap (US$ bn): 5.9 ADV - 6m (US$ mn): 5.1
construct include: (a) significantly raising the probability of making returns; (b)
reducing costs by avoiding churn; (c) allowing the power of compounding to work Britannia Inds. Our stance: SELL
its magic; and (d) removing the negatives of “noise”. Mcap (US$ bn): 5.6 ADV - 6m (US$ mn): 10.0
Back-tests prove the potential of the CCP to beat the benchmark LIC Housing Fin. Our stance: SELL
Both on a live basis as well as in back-tests, the previous 16 iterations of the Mcap (US$ bn): 4.0 ADV - 6m (US$ mn): 18.1
Coffee Can Portfolio have handsomely outperformed the Sensex as well as Page Industries Our stance: BUY
broader market indices, such as the BSE200 index. Further, on a total returns
Mcap (US$ bn): 2.7 ADV - 6m (US$ mn): 2.4
basis (i.e. including dividends), the Coffee Can Portfolio’s returns are +1% to
Amara Raja Batt. Our stance: SELL
+3.7% points higher than the returns under a share price only scenario.
Mcap (US$ bn): 2.6 ADV - 6m (US$ mn): 5.0
True potential of the CCP is realised over the long term
Whilst the portfolio continues to do well even over a shorter duration (say, five GRUH Finance Our stance: NR
years), terminating it at the end of year 5 (and investing the proceeds in the CCP Mcap (US$ bn): 1.7 ADV - 6m (US$ mn): 1.5
for year 5) results in a loss of potential alpha of ~3.3% points (in CAGR terms). Dr Lal PathLabs Our stance: NR
That said, in case the need for fresh deployment of funds arises, we also Mcap (US$ bn): 1.5 ADV - 6m (US$ mn): 1.8
showcase that doing so in successive coffee can iterations also leads to
eClerx Services Our stance: SELL
benchmark-beating returns (8-9% excess IRRS under various scenarios).
Mcap (US$ bn): 0.9 ADV - 6m (US$ mn): 1.0
Today’s Coffee Can for 2016-2026
Astral Poly Our stance: NR
Six stocks from the previous CCP do not make it to this year’s portfolio: ITC,
Marico, GSK Consumer, Colgate Palmolive, Berger and V-Guard Inds. Mcap (US$ bn): 0.8 ADV - 6m (US$ mn): 0.4
Fresh additions to this years’ portfolio are Relaxo, Repco and Dr. Lal Relaxo Footwear Our stance: NR
PathLabs. Whilst we do not advocate annual rebalancing of the portfolio, clients Mcap (US$ bn): 0.7 ADV - 6m (US$ mn): 0.2
who are interested in the 2016 CCP should refer to the exhibit on the right.
Repco Home Fin Our stance: NR
Sixteen iterations of the Coffee Can Portfolio have outperformed the Sensex
Mcap (US$ bn): 0.6 ADV - 6m (US$ mn): 1.0
Kick-off All-cap All-cap CAGR Outperformance
year* CCP (start) CCP (end) return relative to Sensex Cera Sanitary. Our stance: NR
2000 500 3,831 22.6% 6.6% Mcap (US$ bn): 0.5 ADV - 6m (US$ mn): 0.6
2001 600 9,802 32.2% 11.7%
Source: Bloomberg, Ambit Capital research. Note: Mcap as of
2002 800 7,709 25.4% 5.1% 15 November 2016
2003 900 10,175 27.4% 7.2%
2004 1,000 16,849 32.6% 12.7% Research Analysts
2005 900 6,643 22.1% 6.0% Karan Khanna, CFA
2006 1,000 6,376 20.4% 9.0% +91 22 3043 3251
2007 1,500 7,828 19.5% 10.8%
karan.khanna@ambit.co
2008 1,100 5,724 22.1% 11.2%
2009 1,100 4,843 22.7% 11.5% Nitin Bhasin
2010 700 2,042 18.7% 9.5% +91 22 3043 3241
2011 1,400 2,550 12.1% 2.7%
nitin.bhasin@ambit.co
2012 2,200 5,356 23.3% 9.9%
2013 1,800 4,762 34.8% 21.4% Prashant Mittal, CFA
2014 1,600 2,331 22.2% 21.0% +91 22 3043 3218
2015 2,000 2,387 19.3% 13.4% prashant.mittal@ambit.co
Source: Bloomberg, Ambit Capital research. Note: *Returns for 10 year-period from 2000-2006 (starting 30th June); CAGR
returns for portfolios since 2007 until 30th Sep’16 (except for live portfolios for 2014 and 2015 for which CAGR returns and
absolute returns have been calculated since these portfolios were launched in Nov ’15 and Nov ’16 respectively).
Ambit Capital and / or its affiliates do and seek to do business including investment banking with companies covered in its research reports. As a result, investors should be aware that Ambit Capital
may have a conflict of interest that could affect the objectivity of this report. Investors should not consider this report as the only factor in making their investment decision.
Strategy
Executive Summary
The case for a Coffee Can Portfolio
We first introduced the Coffee Can Portfolio in our 17 November 2014 thematic: “The
Indian Coffee Can Portfolio” for investors who have the ability to hold stocks for very
long periods of time (i.e. for ten years or more). The coffee can construct essentially
hinges on investing in quality franchises with superior long-term historical track
records of financial performance over longer periods of time.
We believe at the portfolio level, there are four factors that work in favour of the
coffee can construct. These are:
Higher probability of returns over the long term: Over longer periods of
time (for example, the last 30 years), the Sensex has returned ~15% CAGR. That
said there have been intermittent periods of unusually high drawdowns. For
example, an investor entering the market near the peak in early Jan ‘08 would
have lost over 60% of value in just about fourteen months of investing. Thus,
whilst over longer time horizons, the odds of profiting from equity investments are
very high; the same cannot be said of shorter time horizons.
A longer time horizon allows the power of compounding to work its
magic: Holding a portfolio of stocks for periods as long as 10 years or more
allows the power of compounding to play out its magic. Over the longer term, the
portfolio gets dominated by the winning stocks whilst underperforming stocks
keep declining and eventually become inconsequential. Thus, the positive
contribution of the winners disproportionately outweighs the negative
contribution of the losers to eventually help the portfolio compound handsomely.
Neutralising the negatives of “noise”: Empirically, investing and holding for
the long term has been the most effective way of killing ‘noise’ that interferes
with the investment process.
Using Lupin’s illustration in the note we show that one of the reasons the coffee
can construct works well is because the ability to hold on to a great franchise for
a long period of time allows you to let fundamentals drive your investment
decision rather than “noise.”
No churn: Finally, the coffee can construct allows an investor to hold a portfolio
of stocks for over 10 years without any churn. With no churn, the coffee can
approach reduces transaction costs which add to the overall portfolio
performance over the long term.
Note that even our work suggests a combination of superior RoCE and revenue
growth has been a winner in the Indian context (see exhibit 1 below):
Exhibit 1: A combination of superior RoCE and revenue growth is a winner in the
Indian context*
10.0%
8.0%
6.0% 4.9%
4.0% 2.6%
2.0%
0.0%
Superior on Revenue Superior on RoCE Superior on both
growth
Source: Bloomberg, Ambit Capital research. Note: * The universe is 2006’s BSE200 firms (ex-financials);
performance relative to the BSE200 Index; the chart is based on price data from 31 March 2006 to 31 March
2016. The red bars denote the 10-yr share price performance of top quartile stocks on revenue growth, RoCE as
well as a combination of both from the BSE200 universe.
For the Coffee Can Portfolio, we therefore look for firms that have delivered a
minimum pre-tax RoCE of 15% or more and sales growth of at least 10% or more
over ten consecutive years. For financial services stocks, we seek to identify firms that
have delivered a minimum RoE of 16% and loan book growth of at least 10% or more
for ten consecutive years.
Back-test proves the potential of the coffee can construct to beat the
benchmark
Using the filters discussed above, we run back-tests of the framework for each of the
last 16 years. Results from our back-test suggest that each of the previous 16 coffee
can portfolios has comprehensively outperformed the benchmark Sensex index both
on an absolute as well as on a risk-adjusted basis.
Further, even if we were to use broader market indices, such as the BSE200 index,
each of the previous sixteen iterations of the coffee can portfolios still beat the
benchmark BSE200 index quite comprehensively.
Performance of the live Coffee Can Portfolio launched in 2014 and 2015
We launched the first Coffee Can Portfolio for investors in our 17 November 2014
thematic: “The Indian Coffee Can Portfolio” (to be held from 2014-2024). We
followed this up with the second Coffee Can Portfolio that was launched in our 02
November 2015 thematic: “The Coffee Can Portfolio…the coffee works!”
Since publication in November 2014, the first Coffee Can Portfolio has generated
total CAGR returns of 17.6% vs total CAGR returns of -0.8% for the benchmark
Sensex index. Similarly, the second Coffee Can Portfolio that was launched in 2015
has generated total CAGR returns of 11.7% vs total CAGR returns of 2.1% for the
benchmark Sensex index since initiation.
That said both these portfolios have witnessed a churn of 30-35%. With reasonably
high levels of churn, the obvious question one would ask is whether to rebalance the
2014 and 2015 portfolios to include stocks that feature in this year’s iteration?
We advise investors to refrain from rebalancing the coffee can portfolios. A Coffee
Can Portfolio that is rebalanced every year underperforms the Coffee Can Portfolio
that is left untouched for a decade by ~5.3% points (on a median basis; in CAGR
terms, see exhibit 2 below):
Exhibit 2: Share price CAGR returns over 10-year period for CCP with and without
rebalancing
2000- 2001- 2002- 2003- 2004- 2005- Median
2010 2011 2012 2013 2014 2015 CAGR
CCP without rebalancing 19.3% 28.5% 22.4% 25.4% 30.8% 20.5% 23.9%
CCP with rebalancing 18.5% 22.6% 22.0% 17.0% 18.7% 13.5% 18.6%
Difference (w/o minus with
0.8% 5.9% 0.4% 8.4% 12.0% 6.9% 5.3%
rebalancing)
Source: Bloomberg, Ambit Capital Research Note: Dates refer to the first year and last year of the ten-year
holding period. Performance has been measured over a 10-yr period starting from June of the first year and
ending with June of the last year. This exhibit has been reproduced without any changes from our 02 November
2015 thematic: “The Coffee Can Portfolio…the coffee works!”
100%
Probability of gains
90%
80%
70%
60%
50%
1 Hour 1 Day 1 Week 1 Month 1 Year 10 Year 100 Years
Years
Source: Bloomberg, Ambit Capital research. Note: This chart has been inspired by similar work done by Michael
Mauboussin in the Western context.
600 10 yr CAGR
500
Stock A 26%
400
200
Portfolio 17.6%
100
0
0 1 2 3 4 5 6 7 8 9 10
“Is there a solution for noise in the market? Can we distinguish between noise
prices and fundamental prices? The obvious answer is to know the economic Thirdly, by its design, the CCP is
fundamentals of your investment so you can rightly observe when prices have indifferent to short-term trends,
moved above or below your company’s intrinsic value. It is the same lesson sectors, themes, and approaches
preached by Ben Graham and Warren Buffett. But all too often, deep-rooted such as chasing earnings or
psychological issues outweigh this commonsensical advice. It is easy to say we momentum
should ignore noise in the market but quite another thing to master the
psychological effects of that noise. What investors need is a process that allows
them to reduce the noise, which then makes it easier to make rational decisions.”
As an example, we highlight how, over the long term, Lupin’s stock price has
withstood short-term disappointments to eventually compound at an impressive
29% CAGR since Jan’04 (see Exhibit 6 below).
Exhibit 6: Lupin’s stock has compounded at an impressive 29% CAGR since Jan’ 04
3,500
3,000
2,500
2,000
1,500
1,000
500
-
Mar-05
Apr-09
Mar-12
Apr-16
Dec-06
Dec-13
Jan-04
Jul-07
Jan-11
Jul-14
Aug-04
Aug-11
Sep-08
Sep-15
Oct-05
May-06
Feb-08
Jun-10
Nov-09
Oct-12
May-13
Feb-15
Source: Bloomberg, Ambit Capital research
However, the chart shown above also highlights that over the past 13 years, there
have been several extended time periods when Lupin’s share price has not gone
anywhere – such as from Jan’ 04 to Mar ’08, Nov ’10 to Feb ’13 and more
recently since Mar ‘15. In spite of remaining flat over these periods, Lupin has
performed so well in the remaining five years that the 13-year CAGR for the stock
is 29%. At its simplest, this is why the concept of investing for longer time
horizons works – once you have identified a great franchise and you have the
ability to hold on it for a long period time, there is no point trying to be too
precise about timing your entry or your exit. As soon as you try to time that
entry/exit, you run the risk of “noise” rather than fundamentals driving our
investment decisions.
To further demonstrate how ‘churn’ and ‘turn’ destroy ‘return’, we quote again
from ‘Investing: The Last Liberal Art’ by Hagstrom. In this book, the author refers
to an interesting experiment conducted by a behavioural economist at the
University of California. We reproduce the extract below:
“In 1997, Terence Odean, a behavioral economist at the University of California,
published a paper titled, Why do Investors Trade Too Much? To answer his
question, he reviewed the performance of 10,000 anonymous investors.
Over a seven-year period (1987-1993), Odean tracked 97,483 trades among ten
thousand randomly selected accounts of a major discount brokerage. The first thing
he learned was that the investors sold and repurchased almost 80 percent of their
portfolios each year (78 percent turnover ratio). Then he compared the portfolios to
the market average over three different time periods (4 months, 1 year and 2
years). In every case, he found two amazing trends: (1) the stocks that the investors
bought consistently trailed the market, and (2) the stocks that they sold actually
beat the market 1.
Odean wanted to look deeper, so he next examined the trading behavior and
performance results of 6,465 households. In a paper titled, “Trading Is Hazardous
to Your Wealth” (2000), Odean, along with Brad Barber, professor of finance at
University of California, Davis, compared the records of people who traded
frequently versus people who traded less often. They found that, on average, the
most active traders had the poorest results, while those who traded the least earned
the highest returns 2. The implication here is that people who might have suffered
the most from myopic loss aversion and acted upon it by selling stocks did less well
– much less well – than those who were able to resist the natural impulse and
instead hold their ground.“
1
Terence Odean, “Do investors trade too much?”, American Economic Review (December
1999)
2
Terence Odean and Brad Barber, "Trading Is Hazardous to Your Wealth: The Common Stock
Investment Performance of Individual Investors," Journal of Finance 55, no. 2 (April 2000)
No churn: Finally, by holding a portfolio of stocks for over ten years, a fund
manager resists the temptation to buy/sell in the short term. With no churn, this
approach reduces transaction costs which add to the overall portfolio
performance over the long term. We illustrate this with an example below.
Assume that you invest US$100mn in a hypothetical portfolio on 30 June 2006.
Assume further that you churn this portfolio by 50% per annum (implying that a
typical position is held for two years) and this portfolio compounds at the rate of
Sensex Index. Assuming a total price impact cost and brokerage cost of 100bps
for every trade done over a ten-year period, this portfolio would generate CAGR
returns of 8.8%. Left untouched, however, the same portfolio would have Finally, churn has a significant
generated CAGR returns of 9.8%. This implies ~8.6% of the final corpus impact on overall portfolio returns
(~US$22mn in value terms) is lost to churn over the ten-year period. Thus, a
US$100mn portfolio that would have grown to US$252mn over the ten-year
period (30 June 2006 - 30 June 2016) in effect grows to US$230mn due to high
churn.
Having built the case for a coffee can construct, in the next section we discuss the
framework we use to identify stocks for the Coffee Can Portfolio.
10.0%
8.0%
6.0% 4.9%
4.0% 2.6%
2.0%
0.0%
Superior on Revenue Superior on RoCE Superior on both
growth
Source: Bloomberg, Ambit Capital research. Note: * The universe is 2006’s BSE200 firms (ex-financials);
performance relative to the BSE200 Index; the chart is based on price data from 31 March 2006 to 31 March
2016. The red bars denote the 10-yr share price performance of top quartile stocks on revenue growth, RoCE as
well as a combination of both from the BSE200 universe.
For financial services stocks, we modify the filters on RoE and sales growth as
follows:
Return on equity of 16% for each of the last ten years: We prefer return on
We use RoE of 16% and loan
equity over return on assets because it is a fairer measure of the bank’s ability to
growth of 15% as filters to screen
generate higher income efficiently on a given equity capital base over time.
BFSI stocks
We use 16% as a minimum because we believe that is the bare minimum return
required to meet the cost of equity for Indian lenders (for the vast majority of
Indian lenders, cost of equity is at least 15%).
Loan growth of 15% every year for each of the last ten years: We believe
loan growth of 15% is an indication of a bank’s ability to lend over business
cycles. Strong lenders ride the downcycle better as competitive advantages
surrounding their origination, appraisal and collection process ensure that they
continue their growth profitably either through market-share improvements or
upping the ante in sectors which are resilient during a downturn.
Finally, for all the stocks considered for the Coffee Can Portfolio, we put a market- We use a market-cap threshold of
cap threshold of `1bn. India is the least liquid among the world’s 15 largest equity `1bn
markets. Thus, for institutional clients, we believe a market capitalisation of `1bn is
the bare minimum to take a position in the stock. Stocks smaller than this tend to be
illiquid and create high impact costs.
Whilst these twin filters of revenue growth and RoCE may appear simplistic in nature,
through our approach we are not looking for optimal candidates with the highest
growth and highest RoCE, as reversion to mean is an accepted fact in corporate life.
Instead, we base our selection on a system of guard rails which helps us assess which
firms have what it takes to protect themselves and march ahead through good as well
as bad times. This approach is also different to that taken in our other portfolio
constructs that focus on comparatively shorter holding periods, where we are more
focused on directional progress. More details on these can be found in the Appendix
1 - How the Coffee Can is different to our other portfolio constructs.
Performance of the previous coffee can portfolios vs Sensex using share price
returns
In the exhibit below, we have shown the performance of each of the preceding 16
coffee can portfolios vs Sensex based on share price returns (without including any
dividends):
Exhibit 8: Back-testing results of sixteen iterations of the Coffee Can Portfolio (vs Sensex index) using share price returns
Kick-off All-cap All-cap CAGR Outperformance Large-cap Large-cap CAGR Outperformance
year* CCP (start) CCP (end) return relative to Sensex CCP (start) CCP (end) return relative to Sensex
2000 500 2,923 19.3% 5.3% 400 2,602 20.6% 6.5%
2001 600 7,366 28.5% 10.0% 300 2,685 24.5% 6.0%
2002 800 6,057 22.4% 4.1% 500 3,348 20.9% 2.6%
2003 900 8,668 25.4% 7.1% 600 6,754 27.4% 9.1%
2004 1,000 14,618 30.8% 12.6% 500 3,097 20.0% 1.9%
2005 900 5,795 20.5% 6.0% 500 2,517 17.5% 3.1%
2006 1,000 5,414 18.4% 8.6% 600 2,524 15.4% 5.7%
2007 1,500 6,697 17.5% 10.3% 1,000 3,892 15.8% 8.6%
2008 1,100 5,167 20.6% 11.4% 800 3,136 18.0% 8.8%
2009 1,100 4,431 21.2% 11.7% 900 2,780 16.8% 7.4%
2010 700 1,892 17.2% 9.7% 300 903 19.3% 11.7%
2011 1,400 2,361 10.5% 2.7% 400 860 15.7% 8.0%
2012 2,200 5,118 21.9% 10.3% 500 1,018 18.2% 6.5%
2013 1,800 4,564 33.1% 21.3% 600 1,234 24.8% 13.0%
2014 1,600 2,290 21.0% 21.4% 700 950 17.6% 18.0%
2015 2,000 2,366 18.3% 13.8% 1,200 1,308 9.0% 4.5%
Source: Bloomberg, Capitaline, Ambit Capital research. Note: Portfolio at start denotes an equal allocation of `100 for the stocks qualifying to be in the CCP for
that year. *The Portfolio kicks off on 30th June of every year. CAGR returns for all the portfolios since 2007 have been calculated until 30th Sep’16 (except for the
live portfolios for the years 2014 and 2015 for which CAGR returns and absolute returns have been calculated since these portfolios were launched in Nov ’15 and
Nov ’16 respectively).
Performance of the previous coffee can portfolios vs BSE200 index using total
shareholder returns
From exhibits 8 and 9 above we note that the previous sixteen iterations of the coffee
can portfolios have comprehensively outperformed the benchmark Sensex index in all
the iterations. Further, using total shareholder returns versus only the share price
returns, the total returns for the portfolio improve by +1% to +3.7% points.
In exhibit 10 below, we now plot the performance of these portfolios vs broader
market indices, such as the BSE200 index. The results, however, remain the same
with all the sixteen all-cap coffee can portfolios and fifteen of the sixteen large-cap
coffee can portfolios managing to beat the benchmark BSE200 index
comprehensively (see Exhibit 10 below):
Exhibit 10: Back-testing results of sixteen iterations of the Coffee Can Portfolio (vs BSE200 index)
Kick-off All-cap All-cap CAGR Outperformance Large-cap Large-cap CAGR Outperformance
year* CCP (start) CCP (end) return relative to BSE200 CCP (start) CCP (end) return relative to BSE200
2000 500 3,831 22.6% 5.1% 400 3,338 23.6% 6.1%
2001 600 9,802 32.2% 9.8% 300 3,622 28.3% 5.9%
2002 800 7,709 25.4% 4.9% 500 4,182 23.7% 3.2%
2003 900 10,175 27.4% 7.7% 600 7,791 29.2% 9.5%
2004 1,000 16,849 32.6% 13.4% 500 3,679 22.1% 2.8%
2005 900 6,643 22.1% 6.2% 500 2,968 19.5% 3.6%
2006 1,000 6,376 20.4% 8.1% 600 2,918 17.1% 4.9%
2007 1,500 7,828 19.5% 9.9% 1,000 4,426 17.4% 7.8%
2008 1,100 5,724 22.1% 10.1% 800 3,444 19.3% 7.3%
2009 1,100 4,843 22.7% 10.2% 900 3,054 18.3% 5.9%
2010 700 2,042 18.7% 8.6% 300 959 20.4% 10.4%
2011 1,400 2,550 12.1% 0.9% 400 914 17.0% 5.9%
2012 2,200 5,356 23.3% 7.6% 500 1,066 19.5% 3.8%
2013 1,800 4,762 34.8% 17.5% 600 1,286 26.4% 9.1%
2014 1,600 2,331 22.2% 16.5% 700 969 18.9% 13.2%
2015 2,000 2,387 19.3% 8.7% 1,200 1,323 10.3% -0.4%
Source: Bloomberg, Capitaline, Ambit Capital research. Note: Portfolio at start denotes an equal allocation of `100 for the stocks qualifying to be in the CCP for
that year. *The Portfolio kicks off on 30th June of every year. CAGR returns for all the portfolios since 2007 have been calculated until 30th Sep’16 (except for the
live portfolios for the years 2014 and 2015 for which CAGR returns and absolute returns have been calculated since these portfolios were launched in Nov ’15 and
Nov ’16 respectively).
Exhibit 12: Performance of the 2015 Coffee Can Portfolio since initiation
Company Value at start (`) Value at end (`) Total return
Date from/to 01-Nov-15 11-Nov-16 CAGR
Note that amongst the stocks in our Coffee Can Portfolio 2014, five stocks missed out
on making it to the Coffee Can Portfolio for the year 2015. These were Godrej
Consumer, Ipca Labs, Balkrishna Industries, Mayur Uniquoters and City Union Bank.
Similarly, from our Coffee Can Portfolio for the year 2015, 6 stocks miss out on 6 stocks miss out on making it to
making it to this year’s Coffee Can Portfolio. Please see the section on ‘Today’s this year’s Coffee Can Portfolio
Coffee Can for 2016-2016’ on Pg 19 for details on this year’s candidates. The stocks
that do not make it to this year’s portfolio are:
Exhibit 13: Stocks that do not make it to this year’s iteration of the Coffee Can
Portfolio
Company name Reasons for exclusion
ITC delivered sales growth of 2% in FY16; hence does not clear the coffee can filter
ITC
on ten consecutive years of sales growth in excess of 10%
Marico delivered sales growth of 7% in FY16; hence does not clear the coffee can
Marico
filter on ten consecutive years of sales growth in excess of 10%
GSK Consumer's sales have been flat in FY16; hence does not clear the coffee can
GSK Consumer
filter on ten consecutive years of sales growth in excess of 10%
Colgate Palmolive delivered sales growth of ~4.5% in FY16; hence does not clear
Colgate Palmolive
the coffee can filter on ten consecutive years of sales growth in excess of 10%
Berger Paints delivered sales growth of ~7.2% in FY16; hence does not clear the
Berger Paints
coffee can filter on ten consecutive years of sales growth in excess of 10%
V-Guard Industries delivered sales growth of ~6.7% in FY16; hence does not clear
V-Guard Industries
the coffee can filter on ten consecutive years of sales growth in excess of 10%
Source: Company filings, Ambit Capital research
Should investors rebalance the coffee can portfolios for the years 2014 and
2015?
With 6 out of last year’s 20 stocks not featuring in this year’s Coffee Can Portfolio,
the obvious question one would ask is whether to rebalance the 2014 and 2015
portfolios to include the stocks figuring in this year’s iteration.
Here we point investors to our 02 November 2015 thematic: “The Coffee Can We advise investors to refrain from
Portfolio…the coffee works!” In our 02 November 2015 note, we compared the rebalancing the coffee can
results of a “buy and hold” strategy vs an annual rebalancing strategy of the Coffee portfolios
Can Portfolio over six ten-year iterations starting year 2000.
The results from our analysis have been reproduced in Exhibit 14 below:
Exhibit 14: Share price CAGR returns over 10-year periods for CCP with and without
rebalancing
2000- 2001- 2002- 2003- 2004- 2005- Median
2010 2011 2012 2013 2014 2015 CAGR
CCP without rebalancing 19.3% 28.5% 22.4% 25.4% 30.8% 20.5% 23.9%
CCP with rebalancing 18.5% 22.6% 22.0% 17.0% 18.7% 13.5% 18.6%
Difference (w/o minus with
0.8% 5.9% 0.4% 8.4% 12.0% 6.9% 5.3%
rebalancing)
Source: Bloomberg, Ambit Capital Research Note: Dates refer to the first year and last year of the ten-year
holding period. Performance has been measured over a 10-yr period starting from June of the first year and
ending with June of the last year. This exhibit has been reproduced without any changes from our 02 November
2015 thematic: “The Coffee Can Portfolio…the coffee works!”
As can be seen in the results above (Exhibit 14), the Coffee Can approach without
rebalancing has outperformed with rebalancing approach on all six occasions. The
median CAGR for CCP without rebalancing over these six iterations was 23.9% vs
18.6% for CCP with rebalancing. These results reaffirm the advantage of the “buy
and hold” approach over an annual rebalancing approach even with the weights of
repeating stocks unchanged in the portfolio.
How should investors deploy fresh capital received every year?
Whilst the coffee can construct advocates the “buy and hold” approach, we agree
that one of the challenges investors face is using the coffee can construct. How
should investors deploy fresh fund inflows that are received every year? We discuss
this aspect in the next section.
In Scenario 2, the fresh inflows received every year are assumed to grow at 20% each
year over the 10-year life of a particular Coffee Can Portfolio.
Scenario 1 - Fresh fund inflows every year are assumed to remain constant
In scenario 1, we assume that `100 is invested in the initial Coffee Can Portfolio (say
for example the Coffee Can Portfolio that was launched in Jun ’00). We further
assume that the `100 invested in the initial coffee can is left untouched and is In scenario 1 we assume the fresh
allowed to compound over the subsequent ten years. Each year, as the investor gets fund inflows to be constant each
fresh fund inflows (the fresh fund inflows are assumed to remain constant at `100 year
each year; dividends declared during the year are invested in the portfolio for the
subsequent year), the funds received are deployed in that year’s Coffee Can Portfolio.
So, for example, in Jun ’01, when an investor receives `100 more, these funds are
deployed in the Coffee Can Portfolio for the year 2001 (and allowed to compound
over the remaining 9 years of the initial coffee can). Any dividends that were declared
by any of the stocks in the initial Coffee Can Portfolio too are deployed in the Coffee
Can Portfolio for the year 2001. Similarly, in Jun ‘02, when the investor receives
another `100, these funds are deployed in the Coffee Can Portfolio for the year 2002
along with any dividend declared by stocks in the coffee can portfolios for the years
2000 and 2001 (and all these funds are allowed to compound over the remaining 8
years of the initial coffee can), and so on.
We repeat this exercise for each of the subsequent coffee can portfolios (i.e. the
coffee can portfolios for the years 2001-11, 2002-12, 2003-13, 2004-14, 2005-15
and finally for the years 2006-16).
The results from the analysis have been summarised in exhibit 15 below:
Exhibit 15: Portfolio returns assuming constant fund inflows every year
Weight in the portfolio (%):
Alpha (Portfolio
Total stocks Remaining Portfolio IRR Sensex IRR
Top 5 stocks Next 5 stocks Overall vs Sensex)
stocks
2000-10 30 62.33 23.70 13.96 100.00 29.7% 21.4% 8.3%
2001-11 31 57.78 24.44 17.79 100.00 29.5% 21.0% 8.5%
2002-12 36 53.14 26.56 20.30 100.00 25.1% 16.9% 8.2%
2003-13 46 54.65 24.29 21.05 100.00 23.3% 15.1% 8.1%
2004-14 48 53.88 17.50 28.63 100.00 25.6% 15.7% 9.9%
2005-15 50 49.15 18.10 32.76 100.00 21.6% 13.5% 8.1%
2006-16 57 46.48 15.66 37.86 100.00 19.9% 10.2% 9.7%
Average 43 53.92 21.46 24.62 100.00 25.0% 16.3% 8.7%
Median 46 53.88 23.70 21.05 100.00 25.1% 15.7% 8.3%
Source: Bloomberg, Ambit Capital research
Portfolio returns are significantly higher than Sensex returns for each of
the seven iterations: Not only has each of the seven portfolios delivered
healthy IRR (average IRR for the seven portfolios is ~25.0%), each of the
portfolios has quite comprehensively beaten the benchmark Sensex index (with
an average outperformance of ~8.7%).
Portfolio weight: Note that whilst the number of stocks in the portfolio is high,
the top 5 stocks (in terms of value of the stock in the portfolio by the end of year
10) comprise around 54% of the portfolio value by the end of year 10. Further,
the next 5 stocks constitute ~21.5% of the portfolio value by the end of year 10.
The more interesting thing to note, however, is that the remaining 33 stocks
comprise only the remaining 24.6% of the portfolio value at the end of year 10.
This means ~23% of the stocks comprise ~75% of the total portfolio value.
Scenario 2- Fresh fund inflows every year are assumed to grow at 20% each
year over the 10-year life of a particular Coffee Can Portfolio
In scenario 2, we assume that `100 is invested in the initial Coffee Can Portfolio (say
for example the Coffee Can Portfolio that was launched in Jun ’00). Further, just like
the previous scenario, we assume that the `100 invested in the initial coffee can is
left untouched and is allowed to compound over the subsequent ten-year period. In
this scenario, however, we assume that the fresh fund flows received by the investor
grow at 20% each year. So, for example, in Jun ’01, the investor receives fresh
inflows of `120 (i.e. a 20% increase over the `100 received in Jun ’00), which is then
invested in the Coffee Can Portfolio for the year 2001 and is then allowed to
compound over the remaining 9 years of the initial coffee can. Here again we In scenario 2, we assume the fresh
assume that any dividends that were declared by any of the stocks in the initial fund inflows to increase by 20%
Coffee Can Portfolio are deployed in the Coffee Can Portfolio for the year 2001. each year
Similarly, in Jun ’02, the investor receives `144 more (i.e. a 20% increase over the
`120 received in Jun ’01), which along with any dividend declared by stocks in the
coffee can portfolios for the years 2000 and 2001, is then invested in the Coffee Can
Portfolio for the year 2002 and is allowed to compound over the remaining 8 years of
the initial coffee can; and so on.
We repeat this exercise for each of the subsequent coffee can portfolios (starting with
the coffee can for the years 2001-11 and ending with the coffee can for the years
2006-16).
Exhibit 16 above suggests that whilst the total number of stocks in the portfolio would Under both the scenarios, the
remain the same, the top 5 stocks (in terms of value of the stock in the portfolio by portfolio continues to generate
the end of year 10) comprise around 46% of the portfolio value by the end of year healthy IRRs vs the Sensex index
10. Further, the next 5 stocks constitute ~21% of the portfolio value by the end of
year 10. The remaining 33 stocks, however, continue to comprise only ~33% of the
portfolio value by the end of year 10. Here again, the key thing to note is that ~23%
of the stocks comprise ~67% of the total portfolio value by the end of year 10. The
portfolio IRR remains healthy at ~24.2% (vs ~15.3% for the Sensex index).
We believe exhibits 15 and 16 above bring out a very important aspect of the coffee The more important thing to note is
can construct; which is, allowing the power of compounding to work its magic is a that ~23% of the stocks comprise
much more important driver of long-term returns than the most ideal stock selection 65-75% of the end portfolio value
itself. This is also similar to what we had seen in Exhibit 5 on page 10, where even
with a 50% strike rate and perfect symmetry around the returns generated by winning
and losing stocks, the portfolio when left untouched for longer periods of time
compounds well. This is because over time the losing stocks become insignificant
while the portfolio returns are gradually dominated by the winners.
To answer this, in exhibit 18 below, we have summarised the portfolio returns under
two different scenarios:
Scenario 1- Each of the seven completed coffee can portfolios are left untouched for
a decade.
Scenario 2- Each of these seven coffee can portfolios is allowed to compound for the
first 5 years of the life of the portfolio. At the end of year 5, the portfolio value of
stocks that does not clear our coffee can filters in year 5 is equally allocated to the
fresh stocks that meet the coffee can criteria in year 5. So, for example, from the
Coffee Can Portfolio for the year 2000, Cipla, Hero MotoCorp and HDFC continued
to meet the coffee can thresholds in 2005. NIIT and Swaraj Engines however failed to
meet the coffee can criteria in 2005. Hence, we allocate the portfolio value of NIIT
and Swaraj Engines at the end of year 5 equally to all the fresh stocks that meet our
coffee can thresholds in 2005 (in this case: Infosys, Container Corporation,
Geometric, Havells India, Ind-Swift and Munjal Showa). We repeat this exercise for
the periods of 2001-11, 2002-12, 2003-13, 2004-14, 2005-15 and 2006-16.
In both the scenarios we assume a total price impact cost plus brokerage cost of
100bps for every trade done over the ten year period. The portfolio attributes under
each of the two scenarios discussed above can be seen in exhibit 18 below:
Exhibit 18: Performance of the coffee can portfolios under the two scenarios
Scenario 1 Scenario 2 Scenario 1 vs Scenario 2
Phase Growth of `99 Growth of `99 Excess CAGR Loss of terminal
CAGR returns for CAGR returns for
invested at the beg invested at the beg returns under portfolio value
the portfolio the portfolio
of the period* of the period* Scenario 1 under Scenario 2
2000-10 22.6% 759 22.7% 769 -0.2% 1%
2001-11 32.2% 1,617 24.9% 913 7.3% -44%
2002-12 25.4% 954 23.3% 803 2.1% -16%
2003-13 27.4% 1,119 25.7% 976 1.7% -13%
2004-14 32.6% 1,668 28.6% 1,222 4.1% -27%
2005-15 22.1% 731 21.4% 686 0.8% -6%
2006-16 20.4% 631 13.3% 344 7.1% -45%
Average 26.1% 22.8% 3.3% -21%
Source: Bloomberg, Ambit Capital research. Note: * after considering Re 1 in terms of brokerage and price impact cost.
The results from our analysis (see exhibit 18 above) have been summarised
below:
Under scenario 1, if an investor invests `100 in each of the seven coffee can
portfolios, the average returns generated by the investor over the seven iterations
of the portfolio is ~26.1%.
Under scenario 2, if the same investor invests `100 in each of the seven coffee
can portfolios (but decides to replace the exiting stocks in year 5 with stocks that
clear the coffee can filters in year 5), the average returns generated by the
investor over the seven iterations is ~22.8%.
Points 1 and 2 above suggest that if an investor decides to run the Coffee Can
Portfolio over a shorter time horizon (i.e. 5 years instead of 10 years), the overall
investment returns are lower by ~3.3% points.
In six out of the seven iterations, the portfolio value at the end of year 10 is
higher if the initial Coffee Can Portfolio is kept untouched for the decade.
The more astounding thing to note is that in two of the iterations (i.e. 2001-11
and 2006-16), the portfolio value at the end of year 10 is lower by 44% and 45% Our analysis suggests for the
respectively if an investor decides to churn the portfolio in year 5. coffee can construct to play its
The results from our analysis yet again bring out the point that for the coffee can magic, the CCP should be left
construct to deliver its magic, the portfolio should be left untouched for the decade. A untouched for a decade
shorter time horizon does not allow the power of compounding to work its magic.
Which are the stocks that clear our Coffee Can filters for 2016-2026?
Having discussed the virtues of the coffee can construct and establishing the ideal
time horizon over which one should remain invested in a typical Coffee Can Portfolio,
we now introduce the Coffee Can candidates for 2016-2026 in the next section.
From the above list, we exclude Muthoot Capital Services due to its size.
Having identified the coffee can stocks for this year’s iteration of the Coffee Can In the ensuing sections we evaluate
Portfolio, in the ensuing sections we will evaluate each of the companies forming part the stocks that feature in this year’s
of our Coffee Can Portfolio using John Kay’s IBAS framework. CCP using John Kay’s IBAS
John Kay’s IBAS framework has been discussed in greater details in Appendix 3: John framework
Kay’s IBAS Framework.
Since inception, HDFC Bank has focused on building a granular retail Recommendation
franchise on both sides of the balance sheet. It has maintained a
Mcap (bn): `3,230/US$48.5
conservative approach towards lending (gross NPA of 1.02%). With a
3M ADV (mn): `1,798/US$27.0
stable management team at the helm, the bank was able to expand its
CMP: `1,244
retail offering on a pan-India basis and fill the gaps in its corporate
banking offering. However, the valuation premium over peers largely TP (12 mths): `1,225
captures superior earnings growth of the bank in the medium term (20% Downside (%): 2
EPS CAGR over FY17-18E). Further, with 20-odd new banks, we believe
that the competitive intensity will rise for low-cost liabilities and Flags
customer data. We remain SELLers with a TP of `1,225 (15x one-year Accounting: GREEN
forward EPS and 2.9x one-year forward BVPS). Predictability: GREEN
Competitive position: STRONG Changes to this position: STABLE Earnings Momentum: GREEN
Jan-16
Oct-16
Apr-16
Sep-16
Dec-15
May-16
Jun-16
Feb-16
Mar-16
Jul-16
Nov-15
Aug-16
management team and use of technology, since beginning, have further
facilitated the bank’s consistent performance.
HDFC Bank Sensex
Mastering the word “execution”
HDFC Bank focused on two key principles in its business – building a stable and Source: Bloomberg, Ambit Capital research
low-cost liability base and winning clients by offering unique solutions (such as
technology-led capture of capital market floats). The bank has taken a long-term
approach of protecting its margins and asset quality rather than pursuing near-
term aggressive growth (e.g. avoided project finance-led growth in last six
years). Superior profitability has allowed HDFC Bank to sustain its capital
position mainly through internal profit generation without undue dilution of its
shareholders’ fund. The bank has made two acquisitions in the past, but its
recent focus has been on organic growth through accelerated branch network
expansion on a pan-India basis.
Going beyond IBAS framework
Risk-averse culture and ability to use technology (systems and processes) to
create a unique offering have been key differentiators. Despite the relatively low
advertising budget and lack of celebrity endorsements, its high level of brand
recall is a testimony of the bank’s strengths. HDFC Bank is known for its focus on
systems and processes; this has helped the bank in terms of business continuity. Research Analysts
The bank’s key strategic asset has been its low-cost funding franchise (cost of
funds of 5.5% vs peer average of 6.2%), which has helped it effectively compete Pankaj Agarwal, CFA
with other banks without taking higher asset quality risks. Tel: +91 22 3043 3206
pankaj.agarwal@ambit.co
Premium valuation justified by robust growth
Over the years, HDFC Bank has moved in the right direction on most Ravi Singh
parameters. HDFC Bank’s higher NIM (4.1%), improving cost-to-income ratio Tel: +91 22 3043 3181
(48%) and lower credit costs (40bps) are driving the current RoA of 1.8%. ravi.singh@ambit.co
However, with 20-odd new banks, we believe that the competitive intensity will
increase for low-cost liabilities and customer data. We expect earnings CAGR of Rahil Shah
20% over FY17-18E and average RoE of 19.2% over FY17-18E for HDFC Bank. Tel: +91 22 3043 3217
We remain SELLers with a TP of `1,225 (2.9x one-year forward BVPS). rahil.shah@ambit.co
Ambit Capital and / or its affiliates do and seek to do business including investment banking with companies covered in its research reports. As a result, investors should be aware that Ambit Capital
may have a conflict of interest that could affect the objectivity of this report. Investors should not consider this report as the only factor in making their investment decision.
HDFC Bank
100% 25%
90%
80% 20%
70%
60% 15%
50%
40% 10%
30%
20% 5%
10%
0% 0%
1HFY17
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
Source: Company, Ambit Capital research
Strategic Overall
Company Innovation Brand Architecture
asset rank
Comments
The bank has mixed scores on IBAS: Innovation (present across all
segments of financial services, pioneer in using technology); brand (wide
geographical and demographical reach, but marred by negative asset
quality cycles); architecture (cyclical ups and downs on growth and asset
ICICI Bank quality indicate inadequate quality of engagement with employees and
customers); and strategic assets (wide branch network, large and sticky
retail deposits franchise, leading franchises in most financial services
businesses)
The bank has mixed scores on IBAS: Innovation (has built presence across
all segments of financial services businesses over the long term, but
constraints linked with being PSU bank limit rapid innovations and
adopting best practices from peers); brand (wide geographical and
State Bank of demographical reach, but underwhelming perception for standards of
India customer service); architecture (poor alignment of employee-reward
programme with commercial success of the bank, HR practices are not
comparable with private sector peers); and strategic assets (wide branch
network, large and sticky retail deposits franchise and leading franchises in
most financial services businesses).
Source: Company, Ambit Capital research; Note: - Strong; - Relatively Strong; - Average; - Relatively weak.
Exhibit 6: Loan book growth has been stable at around Exhibit 7: Due to efficiencies in operations, RoA of the bank
20% with improvement in NIM has improved over the years
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
Loan growth Net interest margins (RHS) RoA RoE (RHS)
Source: Company, Ambit Capital research Source: Company, Ambit Capital research
Exhibit 8: Gross NPAs and provision coverage ratio has Exhibit 9: Tier-1 ratio has been strong over past years
shown healthy trends
13.7%
13.3%
13.2%
12.2%
11.8%
11.6%
16%
11.1%
2.0% 80%
10.6%
10.2%
14%
8.8%
1.5% 60% 12%
10%
1.0% 40% 8%
0.5% 20% 6%
4%
0.0% 0% 2%
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
0%
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
Gross NPAs Provision coverage ratio (RHS)
Source: Company, Ambit Capital research Source: Company, Ambit Capital research
Exhibit 10: HDFC Bank is trading at its historical multiple Exhibit 11: Share price performance v/s BSE Bankex
6 700
600
5
500
4 400
3 300
200
2
100
1 0
May-07
May-08
May-09
May-10
May-11
May-12
May-13
May-14
May-15
May-16
Nov-06
Nov-07
Nov-08
Nov-09
Nov-10
Nov-11
Nov-12
Nov-13
Nov-14
Nov-15
Jun-05
Mar-06
Dec-06
Sep-07
Jun-08
Mar-09
Dec-09
Sep-10
Jun-11
Mar-12
Dec-12
Sep-13
Jun-14
Mar-15
Dec-15
Sep-16
HDFCB IN SENSEX
PB Avg. PB
Source: Bloomberg, Company, Ambit Capital research Source: Bloomberg, Company, Ambit Capital research
Balance sheet
Year to March (` mn) FY14 FY15 FY16 FY17E FY18E
Net worth 434,786 620,094 726,778 839,240 973,785
Deposits 3,673,375 4,507,956 5,464,242 6,393,163 7,671,796
Borrowings 394,390 452,136 530,185 621,072 744,570
Other liabilities 413,444 324,844 367,251 459,064 573,830
Total liabilities 4,915,995 5,905,031 7,088,456 8,312,538 9,963,980
Cash & balances with RBI & banks 395,836 363,315 389,188 444,353 517,306
Investments 1,209,511 1,516,418 1,638,858 1,965,391 2,402,834
Advances 3,030,003 3,654,950 4,645,940 5,457,757 6,565,548
Other assets 280,645 370,348 414,470 445,037 478,292
Total assets 4,915,995 5,905,031 7,088,456 8,312,538 9,963,980
Source: Company, Ambit Capital research
Income statement
Year to March (` mn) FY14 FY15 FY16 FY17E FY18E
Interest income 411,355 484,699 602,214 700,351 812,190
Interest expense 226,529 260,742 326,299 368,171 424,461
Net interest income 184,826 223,957 275,915 332,180 387,729
Total non-interest income 79,196 89,964 107,517 125,533 147,419
Total income 264,023 313,920 383,432 457,714 535,148
Total operating expenses 120,422 139,875 169,797 198,323 229,189
Employees expenses 41,790 47,510 57,022 67,504 76,131
Other operating expenses 78,632 92,366 112,775 130,819 153,058
Pre-provisioning profits 143,601 174,045 213,635 259,391 305,959
Provisions 15,873 20,750 27,256 36,870 39,744
PBT 127,728 153,295 186,379 222,521 266,215
Tax 42,944 51,136 63,417 74,544 89,182
PAT 84,784 102,159 122,962 147,976 177,033
Source: Company, Ambit Capital research
Key ratios
Year to March (` mn) FY14 FY15 FY16 FY17E FY18E
Credit-Deposit (%) 82.5% 81.1% 85.0% 85.4% 85.6%
CASA ratio (%) 45.6% 44.6% 43.8% 43.1% 41.8%
Cost/Income ratio (%) 45.6% 44.6% 44.3% 43.3% 42.8%
Gross NPA (` mn) 29,893 34,384 43,928 56,792 64,125
Gross NPA (%) 0.98% 0.93% 0.94% 1.03% 0.97%
Net NPA (` mn) 8,200 8,963 13,204 15,334 17,314
Net NPA (%) 0.27% 0.25% 0.28% 0.28% 0.26%
Provision coverage (%) 72.6% 73.9% 69.9% 73.0% 73.0%
NIMs (%) 4.39% 4.40% 4.52% 4.57% 4.47%
Tier-1 capital ratio (%) 11.8% 13.7% 13.2% 13.1% 12.7%
Source: Company, Ambit Capital research
Du-pont analysis
Year to March FY14 FY15 FY16 FY17E FY18E
NII/Assets (%) 4.1% 4.1% 4.2% 4.3% 4.2%
Other income/Assets (%) 1.8% 1.7% 1.7% 1.6% 1.6%
Total Income/Assets (%) 5.9% 5.8% 5.9% 5.9% 5.9%
Cost to assets (%) 2.7% 2.6% 2.6% 2.6% 2.5%
PPP/Assets (%) 3.2% 3.2% 3.3% 3.4% 3.3%
Provisions/Assets (%) 0.4% 0.4% 0.4% 0.5% 0.4%
PBT/Assets (%) 2.9% 2.8% 2.9% 2.9% 2.9%
Tax rate (%) 33.6% 33.4% 34.0% 33.5% 33.5%
RoA (%) 1.90% 1.89% 1.89% 1.92% 1.94%
Leverage 11.2 10.3 9.6 9.8 10.1
RoE (%) 21.3% 19.4% 18.3% 18.9% 19.5%
Source: Company, Ambit Capital research
Valuation
Year to March FY14 FY15 FY16 FY17E FY18E
EPS (`) 35.3 42.1 48.6 58.5 70.0
EPS growth (%) 25% 19% 16% 20% 20%
BVPS (`) 181.2 247.4 287.5 332.0 385.2
P/E (x) 36.1 30.3 26.2 21.8 18.2
P/BV (x) 7.04 5.16 4.44 3.84 3.31
Source: Company, Ambit Capital research
Jan-16
Oct-16
Apr-16
Sep-16
Dec-15
May-16
Jun-16
Feb-16
Mar-16
Jul-16
Nov-15
Aug-16
government business, SME banking supporting CASA in early years and focus on
a granular retail term deposits franchise in recent years); (b) superior fee-income
generation (average fee income to assets at 1.8% (FY07-16), and; (c) controlled Axis Bank Sensex
operating efficiency (average cost to fee income of 43% (FY07-16).
Source: Bloomberg, Ambit Capital research
From strong retail liability franchise to a universal bank
Axis Bank’s journey in the noughties was mostly about building a low-cost
liability base (cost of funds of 5.7% now) by employing a well thought out branch
and ATM expansion, customer segmentation and sales model. Over the last five
years, the bank leveraged its retail liability base to build its retail asset franchise
(42% of total loans now; vs 20% in FY12). The acquisition of ENAM (equities and
investment banking business), international expansion, and a relationship-based
model strengthened the bank’s corporate banking franchise.
Ticking all boxes of IBAS framework
Multiple innovations were involved when the bank ramped up its low cost
deposit franchise during FY00-09 and when the bank ramped up its retail
franchise during Ms. Sharma’s tenure (FY09-current). Transition of brand from
UTI Bank to Axis Bank was an exemplary success. A strong and independent
Board, an employee friendly culture and a flexible culture open to changes has
defined the success of Axis Bank, which has seamlessly reoriented itself under Research Analysts
three leaders with different management styles. Beyond plain-vanilla banking,
Axis Bank has best-in-class franchise in areas of transaction banking, such as Pankaj Agarwal, CFA
cash management, payments, business banking and government businesses. Tel: +91 22 3043 3206
Significant discount to peers despite strong profitability pankaj.agarwal@ambit.co
Asset quality challenges in the corporate loan book have led to a de-rating of Ravi Singh
the stock. However, strong operating profitability (3.1% of assets) can more than Tel: +91 22 3043 3181
offset the average credit cost of 200bps over FY17-18E and can help generate ravi.singh@ambit.co
average ROE of 13.2% and EPS CAGR of 13% over FY17-18E. Axis Bank is
trading at 1.8x FY18 P/B, ~15% discount to its cross-cycle valuations and ~30% Rahil Shah
discount to its peers despite better steady-state ROE. Our target price of `600 Tel: +91 22 3043 3217
implies FY18E P/B of 2.2x and FY18E P/E of 13.7x (20% upside). rahil.shah@ambit.co
Ambit Capital and / or its affiliates do and seek to do business including investment banking with companies covered in its research reports. As a result, investors should be aware that Ambit Capital
may have a conflict of interest that could affect the objectivity of this report. Investors should not consider this report as the only factor in making their investment decision.
Axis Bank
100% 25%
80% 20%
60% 15%
40% 10%
20% 5%
0% 0%
1HFY17
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
Source: Company, Ambit Capital research
Strategic Overall
Company Innovation Brand Architecture
asset rank
Comments
The bank has mixed scores on IBAS: Innovation (present across all
segments of financial services, pioneer in using technology); brand (wide
geographical and demographical reach, but marred by negative asset
quality cycles); architecture (cyclical ups and downs on growth and asset
ICICI Bank quality indicate inadequate quality of engagement with employees and
customers); and strategic assets (wide branch network, large and sticky
retail deposits franchise, leading franchises in most financial services
businesses)
The bank has mixed scores on IBAS: Innovation (has built presence across
all segments of financial services businesses over the long term, but
constraints linked with being PSU bank limit rapid innovations and
adopting best practices from peers); brand (wide geographical and
State Bank of demographical reach, but underwhelming perception for standards of
India customer service); architecture (poor alignment of employee-reward
programme with commercial success of the bank, HR practices are not
comparable with private sector peers); and strategic assets (wide branch
network, large and sticky retail deposits franchise and leading franchises in
most financial services businesses).
Source: Company, Ambit Capital research; Note: - Strong; - Relatively Strong; - Average; - Relatively weak.
Exhibit 6: Loan book growth has been stable at around Exhibit 7: Due to efficiencies in operations, RoA of the bank
20% with improvement in NIMs is improving
70% 4%
2.0% 25%
60%
50% 3% 20%
1.5%
40% 15%
2%
30% 1.0%
10%
20% 1%
0.5% 5%
10%
0% 0%
0.0% 0%
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
Loan growth Net interest margins (RHS)
RoA RoE (RHS)
Source: Company, Ambit Capital research Source: Company, Ambit Capital research
Exhibit 8: Though the gross NPAs of the bank is increasing, Exhibit 9: Tier 1 ratio has been strong over the past four
the provisioning coverage ratio is strong years
Tier 1
12.6%
2.0% 80%
12.5%
12.2%
12.1%
11.2%
70% 14%
10.2%
1.5% 60%
9.5%
9.4%
9.3%
12%
50%
10%
1.0% 40%
8% 6.4%
30%
0.5% 20% 6%
10% 4%
0.0% 0% 2%
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
0%
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
Gross NPAs Provision coverage ratio (RHS)
Source: Company, Ambit Capital research Source: Company, Ambit Capital research
Exhibit 10: Forward P/B evolution Exhibit 11: Share price performance v/s BSE Bankex
5 700
600
4
500
3 400
2 300
200
1
100
0 0
Jan-08
Oct-09
Jan-15
Oct-16
Sep-12
Apr-13
Jun-07
May-10
Dec-10
Jun-14
Mar-09
Jul-11
Feb-12
Mar-16
Nov-06
Aug-08
Nov-13
Aug-15
Mar-05
Mar-08
Mar-11
Mar-14
Dec-05
Dec-08
Dec-11
Dec-14
Sep-06
Sep-09
Sep-12
Sep-15
Jun-07
Jun-10
Jun-13
Jun-16
Source: Bloomberg, Company, Ambit Capital research Source: Bloomberg, Company, Ambit Capital research
Balance sheet
Year to March (` mn) FY14 FY15 FY16 FY17E FY18E
Net worth 382,205 446,765 531,649 574,973 661,393
Deposits 2,809,446 3,224,419 3,579,676 4,224,017 5,111,061
Borrowings 502,909 797,583 992,264 1,235,895 1,455,223
Other Liabilities 137,889 150,557 151,088 181,305 217,566
Total Liabilities 3,832,449 4,619,324 5,254,676 6,216,190 7,445,243
Cash & Balances with RBI/Banks 282,387 360,990 333,254 387,729 466,920
Investments 1,135,484 1,175,502 1,220,062 1,409,171 1,697,661
Advances 2,300,668 2,810,830 3,387,737 4,068,902 4,920,197
Other Assets 113,910 272,001 313,623 350,388 360,464
Total Assets 3,832,449 4,619,324 5,254,676 6,216,190 7,445,243
Source: Company, Ambit Capital research
Income statement
Year to March (` mn) FY14 FY15 FY16 FY17E FY18E
Interest Income 306,412 354,786 409,880 451,432 522,096
Interest Expense 186,895 212,545 241,551 262,359 299,522
Net Interest Income 119,516 142,241 168,330 189,073 222,574
Total Non-Interest Income 74,052 83,650 93,715 113,523 125,306
Total Income 193,569 225,892 262,044 302,596 347,880
Total Operating Expenses 79,008 92,037 101,008 119,518 139,366
Employees expenses 26,013 31,150 33,760 40,165 46,524
Other Operating Expenses 52,994 60,888 67,248 79,353 92,843
Pre Provisioning Profits 114,561 133,854 161,036 183,078 208,514
Provisions 21,070 23,277 37,099 104,510 51,791
PBT 93,490 110,578 123,937 78,568 156,723
Tax 31,310 36,990 41,700 26,320 52,502
PAT 62,181 73,587 82,237 52,248 104,221
Source: Company, Ambit Capital research
Key ratios
Year to March (` mn) FY14 FY15 FY16 FY17E FY18E
Credit-Deposit (%) 81.9% 87.2% 94.6% 96.3% 96.3%
CASA ratio (%) 47.4% 45.5% 48.0% 47.5% 46.1%
Cost/Income ratio (%) 40.8% 40.7% 38.5% 39.5% 40.1%
Gross NPA (` mn) 31,464 41,102 60,875 170,029 132,092
Gross NPA (%) 1.36% 1.45% 1.78% 4.07% 2.64%
Net NPA (` mn) 10,246 13,167 25,221 59,510 39,628
Net NPA (%) 0.45% 0.47% 0.74% 1.46% 0.81%
Provision coverage (%) 67.4% 68.0% 58.6% 65.0% 70.0%
NIMs (%) 3.40% 3.53% 3.62% 3.50% 3.44%
Tier-1 capital ratio (%) 12.6% 12.1% 12.5% 11.3% 10.8%
Source: Company, Ambit Capital research
Du-pont analysis
Year to March (` mn) FY14 FY15 FY16 FY17E FY18E
NII / Assets (%) 3.3% 3.4% 3.4% 3.3% 3.3%
Other income / Assets (%) 2.0% 2.0% 1.9% 2.0% 1.8%
Total Income / Assets (%) 5.3% 5.3% 5.3% 5.3% 5.1%
Cost to Assets (%) 2.2% 2.2% 2.0% 2.1% 2.0%
PPP / Assets (%) 3.2% 3.2% 3.3% 3.2% 3.1%
Provisions / Assets (%) 0.6% 0.6% 0.8% 1.8% 0.8%
PBT / Assets (%) 2.6% 2.6% 2.5% 1.4% 2.3%
Tax Rate (%) 33.5% 33.5% 33.6% 33.5% 33.5%
ROA (%) 1.7% 1.7% 1.7% 0.9% 1.5%
Leverage 10.1 10.2 10.1 10.4 11.0
ROE (%) 17.4% 17.8% 16.8% 9.4% 16.9%
Source: Company, Ambit Capital research
Valuation
Year to March FY14 FY15 FY16 FY17E FY18E
EPS (`) 26.5 31.0 34.5 21.9 43.7
EPS growth (%) 20% 17% 11% -36% 99%
BVPS (`) 162.7 188.5 223.1 241.3 277.6
P/E (x) 18.8 16.1 14.5 22.7 11.4
P/BV (x) 3.07 2.65 2.24 2.07 1.80
Source: Company, Ambit Capital research
Jan-16
Oct-16
Apr-16
Sep-16
Dec-15
May-16
Jun-16
Feb-16
Mar-16
Jul-16
Nov-15
Aug-16
allowed it to penetrate and grow marquee clients. Over the past ten years,
HCLT’s revenues and profits have grown at 21% CAGR (USD; vs 18% for larger
peers) and 25% CAGR (Re terms, vs 23% for larger peers). HCL Tech. Sensex
Second only to TCS on our IBAS framework HCLT’s greatness score analysis
HCLT has consistently innovated to lower its cost structure. HCLT posted average
EBIT margin of 19% (FY06-16) despite offering 30-40% cost-savings to clients on
each deal renewal and steady wage inflation; depreciation of INR vs. USD would
have helped though. HCLT scores well on brand as it occupies a high client mind
share (source: third-party industry analyst reports) as well as a good reputation
among employees as is reflected in lower attrition of 17% (vs peer median of
19%). HCLT’s decent positioning on architecture and strategic assets are based
Source: Ambit ‘HAWK’, Ambit Capital research
on strong sales architecture it has built over years and client-connect.
Low valuation (12x FY18 EPS) implies market concerns on longevity Research Analysts
IMS (40% of Sep-16 revenues) is at risk of 30-40% deflation from the cloud. Sagar Rastogi
However, there is significant room to gain share from high-cost vendors. All +91 22 3043 3291
Indian vendors together cater to less than 5% of global IMS spend. HCLT’s sagar.rastogi@ambit.co
investments in moving up the value-chain (higher scale and complexity,
automation) position it well. Further, top-notch capabilities in IMS and Sudheer Guntupalli
engineering will likely lead to leadership in the emerging IoT/automation era. +91 22 3043 3203
We expect 10%/11% revenue/NOPAT CAGR over FY16-26E. sudheer.guntupalli@ambit.co
Ambit Capital and / or its affiliates do and seek to do business including investment banking with companies covered in its research reports. As a result, investors should be aware that Ambit Capital
may have a conflict of interest that could affect the objectivity of this report. Investors should not consider this report as the only factor in making their investment decision.
HCL Technologies
Cloud / IOT
6,500 IMS and ES ramp up 50%
6,000 45%
5,500 40%
5,000
4,500 35%
4,000 30%
3,500 25%
3,000 20%
2,500 15%
2,000
1,500 10%
1,000 5%
500 0%
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
Software services Infrastructure services BPO
Source: Ambit Capital research, company
Infosys ranks second on our IBAS framework along with HCLT. The
company scores well in areas of offshoring, pyramid correction, code
re-use which is reflected in its high EBIT margins (25%, FY16). However,
it could not establish a niche for itself in any particular vertical or
Infosys
service line which makes it an average scorer on reputation aspect. It
lags well behind TCS in terms of its organizational structure (issues
regarding placement of consulting practise in hierarchy) and strategic
assets (client connects).
Wipro lags behind other four big players on (overall score of ¼) on our
IBAS framework. Wipro is not as successful as TCS/Infosys in terms of
pyramiding, code re-use which is also reflected in its lower EBIT margin
(19%, FY16). Though the company has been at the forefront of
adopting new technologies, it could not scale them up (and hence given
Wipro away market leadership to HCLT in IMS). Strategic assets (client
connects) are not strong (as in the case of TCS or Infosys) as it used to
rotate relationship managers every 18 months. Wipro runs a silo-ed
organizational structure which lacks vertical based selling experience.
These factors make the company score low on architecture and strategic
assets.
HCLT ranks second on our IBAS framework along with Infosys. The
company maintained decent margins (20%, FY16) and ROCE (24%,
FY16) by keeping utilization (85%) high, pyramid correction and code
re-use. The company has built a strong reputation of being among top-
HCLT 2 IMS vendors globally (ahead of all Indian peers) and top-5 ES vendors
(ahead of all Indian peers) globally which makes it score well on
Reputation. The company has built the architecture of an aggressive
sales led organization with client relationships in IMS and ES become
strategic assets to cross sell other services.
Though the current EBIT margins of TechM are significantly lower than
its peers (13.3%, FY16), this cannot be interpreted as weakness of the
company in terms of offshoring, pyramid correction and code re-use.
Margins of the company have taken a hit because of recent acquisitions
like LCC (normalized margin is 19.4% in FY14). The company has built
TechM
the reputation of being the strongest player in telecom segment (ahead
of all Indian peers). The company also has the DNA of successful
growth derived in inorganic route and marquee clients especially in
telecom segment. Overall, the company fits into above average bucket
on IBAS framework.
Source: Company, Ambit Capital research, Note: - Strong; - Relatively Strong; - Average; - Relatively weak
Exhibit 6: Cash flow from operations was the significant Exhibit 7: The company returned a significant part of its
source of cash for the firm over last decade (FY06-16) cash flows to shareholders as dividends over FY06-16
4%
7%
16%
33%
60%
80%
CFO Asset sale Cash Flow from Financing Dividend Capex Acquisitions
Source: Company, Ambit Capital research Source: Company, Ambit Capital research
Exhibit 8: Valuations are at a discount to historical average Exhibit 9: HCLT’s share price performance vs Sensex
700
18 1 year forward P/E 600
(consensus) 500
16
400
14 300
200
12
100
10 -
Mar-14
Apr-15
Dec-08
Jan-10
Jul-10
Jan-11
Jul-11
Aug-12
Sep-13
Sep-14
Jun-09
Oct-06
May-07
Nov-07
May-08
Feb-12
Feb-13
Oct-15
May-16
Apr-12
Apr-13
Apr-14
Apr-15
Apr-16
Oct-11
Oct-12
Oct-13
Oct-14
Oct-15
Oct-16
Source: Company, Ambit Capital research Source: Company, Ambit Capital research
Accounting GREEN Our proprietary forensic accounting tool Hawk places HCL Tech in ‘Zone of safety’ in terms of accounting policies.
The management issues annual guidance and earnings surprises over the past eight quarters have averaged less
Predictability GREEN
than 5%.
Bloomberg shows downgrades to earnings estimates for the sector as a whole and even for HCLT on the back of
Earnings momentum AMBER
uncertainty over US presidential election and subsequent H-1B reforms.
Source: Ambit Capital research
Exhibit 11: Forensic score evolution Exhibit 12: Greatness score evolution
Source: Ambit ‘HAWK’, Ambit Capital research Source: Ambit ‘HAWK’, Ambit Capital research
Asian Paints is India’s largest decorative paints player with over 50% Recommendation
organised market share. Its foundation is built around high quality Mcap (bn): `995/US$14.9
professionals, proactive use of technology, effective functioning of its 3M ADV (mn): `1,109/US$16.6
Board and strong dealer relationships. Current high valuations are
CMP: `963
justified by a combination of: a) resilient repainting demand in a weak
TP (12 mths): `1,270
macro: industry likely to deliver volume CAGR of ~12% over the next
Downside (%): 32
decade; b) greater pricing power vs historical levels provides
sustainability to current higher levels of EBITDA margins; and c) ability
to successfully drive the next phase of evolution towards providing value Flags
added services in the broader home improvement category. We expect Accounting: GREEN
18%/23% revenue/EPS CAGR over FY16-FY20 amid 15%/12% decorative Predictability: GREEN
paint industry revenue CAGR over FY15-25/FY25-35. Our DCF-based fair Earnings Momentum: GREEN
value of `1,270 (32% upside) implies FY18E P/E of 43x.
Competitive position: STRONG Changes to this position: STABLE Performance
160
16.4% industry revenue CAGR over FY06-16; Asian Paints gaining share 140
Over FY06-16, India’s organised decorative paints industry has delivered 120
revenue CAGR of 16.4%. This has been driven by: a) shift from unorganised to
100
organised products; b) premiumisation from distempers to emulsions; c)
80
shrinking repainting cycles; and d) urbanisation. Asian Paints has reported 18%
Jan-16
Sep-16
May-16
Mar-16
Jul-16
Nov-15
revenue growth over this period, gaining 10% market share.
Asian Paints has built moats around supply chain, talent and IT
In a voluminous product category with over 1,800 SKUs, Asian Paints has built
impregnable competitive advantages around supply chain through extensive use Source: Ambit ‘HAWK’, Ambit Capital research
of the technology to forecast demand accurately, shorten product delivery times
and better manage working capital. Asian Paints has consistently led the Asian Paints’ greatness score analysis
evolution of the paints industry by pioneering initiatives like supplying directly to
dealers rather than through distributors and using IT in demand forecasting. The
firm’s architecture is built around: a) nurturing professional talent in a unique
work culture; b) consistent use of technology for operating efficiency
improvements; and c) a truly independent and empowered Board of Directors.
Source: Ambit ‘HAWK’, Ambit Capital research
Valuations – what’s the right multiple for an enduring franchise?
Asian Paints’ valuations have undergone a re-rating from 35x to 43x over the
past two years. Resilience of decorative paints category demand and higher
pricing power over the past two years vs a decade ago were the key factors. Research Analysts
However, the current valuations do NOT adequately factor in the likelihood of
Asian Paints transitioning from a decorative paints company to a provider of Rakshit Ranjan, CFA
value-added offerings in the broader home décor sector. Our DCF factors in +91 22 3043 3201
longevity of Asian Paints’ growth profile given market share gains in paints. This rakshit.ranjan@ambit.co
industry growth will be driven by decreasing repainting cycle (from 10.6 years Dhiraj Mistry, CFA
currently to 8.5/7.5 years by FY25/FY35) and a rise in the share of organised +91 22 3043 3264
sector. Our fair value of `1,270 implies 32% upside and 43x FY18E P/E. dhiraj.mistry@ambit.co
Ambit Capital and / or its affiliates do and seek to do business including investment banking with companies covered in its research reports. As a result, investors should be aware that Ambit Capital
may have a conflict of interest that could affect the objectivity of this report. Investors should not consider this report as the only factor in making their investment decision.
Asian Paints
100
40%
75
50 20%
25
- 0%
FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16
Source: Company, Ambit Capital research, Note: - Strong; - Relatively Strong; - Average; - Relatively weak.
Exhibit 6: Sources of funds over the last decade Exhibit 7: Application of funds over the last decade
Dividend Increase in
received, cash and
5% cash
equivalents
5%
Purchase of
Investments Dividend
4% paid
38%
Net Capex
40%
Cash flows
from
operations, Interest paid
96% 3%
Source: Company, Ambit Capital research Source: Company, Ambit Capital research
Exhibit 8: Asian Paints forward P/E evolution Exhibit 9: Asian Paints’ share price performance v/s Sensex
50 2,000
1,500
40
1,000
30
500
20 -
Jun-12
Jun-13
Jun-14
Jun-15
Jun-16
Oct-11
Feb-12
Oct-12
Feb-13
Oct-13
Feb-14
Oct-14
Feb-15
Oct-15
Feb-16
Oct-16
Oct 06
Oct 07
Oct 08
Oct 09
Oct 10
Oct 11
Oct 12
Oct 13
Oct 14
Oct 15
Oct 16
Asian Paints 1 year fwd P/E Average of 5yr P/E APNT Sensex
Source: Company, Ambit Capital research Source: Company, Ambit Capital research
Exhibit 11: Forensic score evolution Exhibit 12: Greatness score evolution
Source: Ambit ‘HAWK’, Ambit Capital research Source: Ambit ‘HAWK’, Ambit Capital research
Balance sheet
Year to March (` mn) FY15 FY16 FY17E FY18E FY19E
Shareholders' equity 959 959 959 959 959
Reserves & surpluses 46,464 55,093 66,344 81,032 99,467
Total networth 47,424 56,053 67,303 81,991 1,00,426
Minority Interest 2,637 2,942 3,552 4,254 5,061
Preference share capital 0 0 0 0 0
Debt 4,099 3,060 3,060 3,060 3,060
Deferred tax liability 1,799 2,176 2,176 2,176 2,176
Total liabilities 55,959 64,231 76,092 91,481 1,10,723
Gross block 41,123 51,105 57,105 59,105 61,105
Net block 26,600 34,031 36,642 34,994 33,216
CWIP 1,960 1,108 1,000 1,000 1,000
Investments 15,878 20,982 20,982 20,982 20,982
Cash & equivalents 2,044 4,204 7,561 22,622 41,329
Debtors 11,799 12,483 14,538 17,438 20,833
Inventory 22,585 20,640 28,106 33,714 40,277
Loans & advances 5,404 4,683 5,815 6,975 8,333
Other current assets 2,853 3,303 1,938 2,325 2,778
Total current assets 44,685 45,313 57,958 83,075 1,13,550
Current liabilities 25,573 28,326 32,253 38,688 46,219
Provisions 7,591 8,877 8,238 9,882 11,805
Total current liabilities 33,164 37,203 40,491 48,570 58,025
Net current assets 11,520 8,110 17,467 34,505 55,525
Miscellaneous 0 0 0 0 0
Total assets 55,959 64,231 76,092 91,481 1,10,723
Source: Company, Ambit Capital research
Income statement
Year to March (` mn) FY15 FY16 FY17E FY18E FY19E
Operating income 1,41,828 1,55,341 1,76,877 2,12,167 2,53,468
% growth 11.5% 9.5% 13.9% 20.0% 19.5%
Operating expenditure 1,16,993 1,19,749 1,42,970 1,69,413 2,02,545
Operating profit 22,354 28,086 33,906 42,754 50,923
% growth 11.9% 25.6% 20.7% 26.1% 19.1%
Depreciation 2,659 2,880 3,388 3,648 3,778
EBIT 19,695 25,207 30,518 39,106 47,145
Interest expenditure 348 405 346 346 346
Non-operating income 1,697 2,007 2,469 3,061 3,857
Adjusted PBT 21,045 26,809 32,641 41,821 50,656
Tax 6,495 8,491 10,119 12,964 15,703
Adjusted PAT/ Net profit 14,549 18,317 22,522 28,856 34,953
% growth 14% 26% 23% 28% 21%
Prior Period Items 0 0 0 0 0
Reported PAT / Net profit 14,549 18,317 22,522 28,856 34,953
Minority Interest 322 531 610 702 807
Share of associates 0 0 0 0 0
Adjusted Consolidated net profit 14,227 17,787 21,912 28,155 34,146
Reported Consolidated net profit 14,227 17,787 21,912 28,155 34,146
Source: Company, Ambit Capital research
Cashflow statement
Year to March (` mn) FY15 FY16 FY17E FY18E FY19E
EBIT 21,392 27,214 32,987 42,167 51,002
Depreciation 2,683 2,880 3,388 3,648 3,778
Others (1,367) (1,124) - 0 -
Tax (6,329) (8,154) (10,119) (12,964) (15,703)
(Incr) / decr in net working capital (4,502) 2,517 (6,001) (1,977) (2,313)
Cash flow from operations 11,877 23,333 20,256 30,874 36,764
Capex (4,377) (8,059) (5,892) (2,000) (2,000)
(Incr) / decr in investments 306 (832) - - -
Other income (expenditure) 816 847 - - -
Others (1,523) (648) - - -
Cash flow from investments (4,778) (8,691) (5,892) (2,000) (2,000)
Net borrowings 1,531 (1,139) - - -
Issuance of equity - - - - -
Interest paid (345) (401) (346) (346) (346)
Dividend paid (6,947) (7,642) (10,661) (13,467) (15,711)
Others - - - - -
Cash flow from financing (5,761) (9,182) (11,007) (13,813) (16,057)
Net change in cash 1,339 5,460 3,356 15,061 18,707
Closing cash balance 10,669 16,130 7,561 22,622 41,329
Free cash flow 7,501 15,274 14,364 28,874 34,764
Source: Company, Ambit Capital research
Ratio analysis
Year to March (%) FY15 FY16 FY17E FY18E FY19E
EBITDA margin (%) 15.8% 18.1% 19.2% 20.2% 20.1%
EBIT margin (%) 15.1% 17.5% 18.6% 19.9% 20.1%
Net profit margin (%) 10.3% 11.8% 12.7% 13.6% 13.8%
Dividend payout ratio (%) 50.0% 50.1% 48.7% 47.8% 46.0%
Net debt: equity (x) 0.0 (0.0) (0.1) (0.2) (0.4)
Working capital turnover (x) 15.0 39.8 17.9 17.9 17.9
Gross block turnover (x) 3.8 3.5 3.4 3.8 4.4
Post-tax RoCE (%) 31.4% 32.7% 34.2% 36.5% 36.5%
Pre-tax RoCE (%) 45.4% 49.2% 51.0% 54.3% 54.1%
RoIC (%) 34.7% 34.9% 37.2% 44.3% 53.2%
RoE (%) 32.4% 34.4% 35.5% 37.7% 37.4%
Source: Company, Ambit Capital research
Valuation parameters
Year to March (` mn) FY15 FY16 FY17E FY18E FY19E
EPS (`) 14.8 18.5 22.8 29.4 35.6
Diluted EPS (`) 14.8 18.5 22.8 29.4 35.6
Book value per share (`) 49.4 58.4 70.2 85.5 104.7
Dividend per share (`) 6.1 7.5 9.5 12.0 14.0
P/E (x) 64.9 51.9 42.2 32.8 27.1
P/BV (x) 21.0 17.8 14.8 12.2 9.9
EV/EBITDA (x) 41.6 33.3 27.5 21.8 18.3
EV/EBIT (x) 46.8 36.8 30.3 23.7 19.6
Source: Company, Ambit Capital research
Lupin transitioned from API to plain oral solids to complex generics due
Recommendation
to management’s vision/agility in tapping changing dynamics. Lupin is
Mcap (bn): `658/US$9.9
one of the biggest beneficiaries of GDUFA given presence in complex
generics and pipeline of ~150 ANDAs. Management is preparing for the 3M ADV (mn): `1,824/US$27.4
next leap through innovation. Success should be driven by (a) investment CMP: `1,459
in innovative pursuits in complex therapeutic areas; (b) industry-leading TP (12 mths): `1,851
R&D spends (12% of FY16 sales) and an experienced team; and (c) Upside (%): 27
previous experience in marketing branded products in the USA. Stock
trades at 16x FY18E EPS; material re-rating from present 16x (peers at Flags
~20x) will be driven by earnings surprises (our estimates are 20% ahead Accounting: AMBER
of consensus) as visibility improves. Risks: a) adverse pricing Predictability: AMBER
environment in the USA; and b) failure in executing innovative projects. Earnings Momentum: RED
Competitive position: STRONG Changes to this position: STABLE
Vision to move from oral solids to complex generics materialises Performance
Lupin has championed the art of business evolution (from plain oral solids to 120
complex generics) without compromising on profitability and stakeholder 110
100
interests. Lupin transitioned from anti-TB company (more than 50% of revenues
90
in FY06) to higher growth CVS/Diabetes/CNS resulting in revenue CAGR of 23% 80
over FY06-16E. In the USA, Lupin evolved its revenue profile from plain oral 70
solids to filing for complex generics. Revenue per ANDA improved from
Jan-16
Sep-16
May-16
Mar-16
Jul-16
Nov-15
US$3.7mn in FY08 to US$6.5mn in FY16. Over the past couple of years, Lupin’s
investments in the USA have come to the fore as it has added differentiated
products and expect them to materialise in medium term. Lupin Sensex
From India to USA; journey from weak product portfolio to complex one
Source: Bloomberg, Ambit Capital research
Until FY07, Lupin had India-heavy revenue profile with product portfolio in slow-
growing acute therapies. The management realised changing trends in Indian
Lupin’s forensic score analysis
pharma consumption and switched to lifestyle disease chronic products which
grew faster than IPM. Similarly, in the US market, Lupin’s management realised
product-specific opportunities and capitalised during FY13-16 (US revenue
CAGR of 23%). Lupin’s capability to adapt to changing environment has led to
margin/RoCE expansion from 24%/22% in FY07 to 28%/25% in FY16. During
this period, while its peers focused on acquisition to grow, Lupin primarily grew
organically. Early entry into the Japanese market and investments in innovative
pursuits (NCEs/NDDS; R&D at 12% of sales) should provide the next big leap. Source: Ambit ‘HAWK’, Ambit Capital research
Ranks 2nd on sector IBAS framework; brands and strategic asset fortified Lupin’s greatness score analysis
Focus on creating strategic assets through investment in Japan, presence in
complex generics in the USA and de-risking of the US business through multiple
USFDA-approved facilities to strengthen its business mix. The company has
credible branded franchise in India with a broad-based product portfolio (Top 10
brands contribute only 20% of revenue). Limited key man risk is led by
decentralised decision making. Scope to improve MR productivity in India for top
rank. Source: Ambit ‘HAWK’, Ambit Capital research
Ambit Capital and / or its affiliates do and seek to do business including investment banking with companies covered in its research reports. As a result, investors should be aware that Ambit Capital
may have a conflict of interest that could affect the objectivity of this report. Investors should not consider this report as the only factor in making their investment decision.
Lupin
80 15%
60
10%
40
5%
20
0 0%
FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16
Exhibit 4: Competitive mapping of Lupin, with other comparable generic pharma peers
EBITDA Pre-tax Median Cumulative
Revenue Revenue
FY16 Margin RoCE Pre-tax CFO/ R&D as % of
Company Positioning CAGR per ANDA
revenue (median (median EBITDA Sales
FY10-16 (US$ mn)
FY10-16) FY10-16) (FY10-16) (FY10-16)
Sun Pharma #1 282,697 38% 5.1 34% 25% 91% 7%
Lupin #2 142,085 20% 7.3 24% 26% 86% 8%
Cadila #5 98,376 18% 6.5 21% 24% 82% 7%
Torrent #4 66,764 23% 2.2 22% 27% 91% 4%
Dr. Reddy’s #3 156,978 14% 7.0 23% 23% 85% 8%
Cipla #6 136,783 17% 1.9 21% 19% 92% 5%
Ipca #8 28,850 10% 1.4 18% 24% 92% 4%
Aurobindo #7 138,961 25% 4.1 22% 21% 65% 4%
Source: Company, Ambit Capital research
Exhibit 6: Increase in debt towards funding of Gavis Exhibit 7: Lupin focused on organic growth through capex
acquisition in 2015 in relevant markets (like Japan)
Proceeds
Purchase of
from Dividend
investment,
shares, paid,
17.4%
1.1% 11.2%
Debt
raised,
39.2%
Interest
CFO, Interest paid, 2.4%
Net Capex,
57.5% received,
67.5%
1.5%
Increase in
cash and
Dividend cash
received, equivalent,
0.8% 1.5%
Source: Company, Ambit Capital research Source: Company, Ambit Capital research
Exhibit 8: Re-rating driven by product approvals in USA Exhibit 9: Lupin’s share price performance v/s Sensex
followed by decline in PE due to quality issues at Goa
45.0 LPC - one-yr forward P/E chart 3500
40.0 3000
35.0
Five-year average PE = 22.1x 2500
30.0
25.0 2000
20.0 1500
15.0 1000
10.0
500
5.0
0
-
Jan-05
Jan-06
Jan-07
Jan-08
Jan-09
Jan-10
Jan-11
Jan-12
Jan-13
Jan-14
Jan-15
Jan-16
Mar-05
Mar-06
Mar-07
Mar-08
Mar-09
Mar-10
Mar-11
Mar-12
Mar-13
Mar-14
Mar-15
Mar-16
Lupin Sensex
Source: Company, Ambit Capital research Source: Company, Ambit Capital research
Exhibit 11: Forensic score evolution Exhibit 12: Greatness score evolution
Source: Ambit ‘HAWK’, Ambit Capital research Source: Ambit ‘HAWK’, Ambit Capital research
Jan-16
Sep-16
May-16
Mar-16
Jul-16
Nov-15
financials suggest that the company is yet to extend these acquired assets
beyond the domestic market. We believe the extension of these assets and
capabilities beyond the home market would be a key trigger for value creation Cadila Health. Sensex
and revaluation of Cadila’s long-term growth prospects.
Source: Bloomberg, Ambit Capital research
Niche product launches in the USA to drive near-term margins/RoCE
Cadila has been guilty of quality issues in past (FY12 and FY16), but the Cadila’s forensic score analysis
management is closer to clearing its facility as majority remediation have been
done with and Form 483 has been cleared. Cadila should receive bunched up
product approvals and we build >75 product approvals for the USA in FY18/19;
most would be complex generics (modified release, topicals, transdermal
patches) implying lower competition and higher pricing. Over-dependence on
Moraiya facility will end with Baddi and SEZ facilities gaining scale. Normalised
margins (excluding one-off in HCQS revenues) should increase from ~18% in
Source: Ambit ‘HAWK’, Ambit Capital research
FY16 to 21.4% in FY19E led by ramp-up in US generics (40% share). Positive
surprises can be from bolt-on acquisitions (in EMs) which are in gestation period
(losses). Cadila’s greatness score analysis
Ambit Capital and / or its affiliates do and seek to do business including investment banking with companies covered in its research reports. As a result, investors should be aware that Ambit Capital
may have a conflict of interest that could affect the objectivity of this report. Investors should not consider this report as the only factor in making their investment decision.
Cadila
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
Revenue, LHS (Rs. Bn) RoCE
Source: Company and Ambit Capital research. Note: RoCE is pre-tax RoCE
Exhibit 4: Competitive mapping of Lupin, with other comparable generic pharma peers
EBITDA Pre-tax Median Cumulative
Revenue Revenue
FY16 Margin RoCE Pre-tax CFO/ R&D as % of
Company Positioning CAGR per ANDA
revenue (median (median EBITDA Sales
FY10-16 (US$mn)
FY10-16) FY10-16) (FY10-16) (FY10-16)
Sun Pharma #1 282,697 38% 5.1 34% 25% 91% 7%
Lupin #2 142,085 20% 7.3 24% 26% 86% 8%
Cadila #5 98,376 18% 6.5 21% 24% 82% 7%
Torrent #4 66,764 23% 2.2 22% 27% 91% 4%
Dr. Reddy’s #3 156,978 14% 7.0 23% 23% 85% 8%
Cipla #6 136,783 17% 1.9 21% 19% 92% 5%
Ipca #8 28,850 10% 1.4 18% 24% 92% 4%
Aurobindo #7 138,961 25% 4.1 22% 21% 65% 4%
Source: Company, Ambit Capital research
Exhibit 6: CFO and some marginal debt were key sources Exhibit 7: Capex and dividend were main uses of funds over
of funds over last decade (Rs112bn) last decade (Rs76bn)
Debt Purchase of
raised, investment,
15.3% 1.4% Dividend
paid,
20.7%
Interest
received, Interest
CFO, 3.3% Net Capex, paid, 6.7%
81.0% 62.6%
Dividend
Increase in
received,
cash and
0.3%
cash
equivalent,
8.6%
Source: Company, Ambit Capital research Source: Company, Ambit Capital research
Exhibit 8: Re-rating in 2008 driven by entry in USA Exhibit 9: Cadila’s share price performance v/s Sensex
followed by de-rating in FY16 due to quality issues
(P/E) 1400
35 CDH 1yr fwd P/E chart 1200
30 1000
800
25
600
20
400
15
200
10 Five yr PE average = 20.0x 0
Jan-05
Jan-06
Jan-07
Jan-08
Jan-09
Jan-10
Jan-11
Jan-12
Jan-13
Jan-14
Jan-15
Jan-16
5
Mar-05
Mar-06
Mar-07
Mar-08
Mar-09
Mar-10
Mar-11
Mar-12
Mar-13
Mar-14
Mar-15
Mar-16
Cadila Sensex
Source: Company, Ambit Capital research Source: Company, Ambit Capital research
Exhibit 11: Forensic score evolution Exhibit 12: Greatness score evolution
Source: Ambit ‘HAWK’, Ambit Capital research Source: Ambit ‘HAWK’, Ambit Capital research
Jan-16
Sep-16
May-16
Mar-16
Jul-16
Nov-15
ITC (#1) at the premium end and Parle (#2) in the mass end. Britannia has
leveraged the brand equity of legacy brands like Good Day, Cream Treat and
Tiger to maintain its dominance in the biscuit market.
Britannia Inds. Sensex
Renewed dominance since FY13 under the new CEO
During FY07-12, the company barely maintained its biscuit market share due to Source: Bloomberg, Ambit Capital research
severe competition from ITC. The company did not have any successful product
launches and its diversification attempts into the snacks and breakfast category Britannia’s forensic score analysis
failed. Over FY13-16, under Varun Berry the company focused on: a) widening
and deepening its distribution; b) product innovation and renovation; and c)
several cost cutting initiatives (Click here for detailed note_16Dec2014). This
helped the company regain its market leadership from Parle in FY16. Along with
input cost tailwinds, the cost cutting initiatives helped increase EBITDA margin
from 5.7% in FY12 to 14% in FY16 with PAT growing at ~46% CAGR over Source: Ambit ‘HAWK’, Ambit Capital research
FY13-16.
Britannia’s greatness score analysis
Leveraging strong brands and distribution to gain scale advantages
Biscuits sales in India is a low-margin commodity-like business as the category is
mostly dominated by basic variants like glucose and cookies. Unlike its peers
which have only 1-2 strong brands, Britannia has positioned itself in the mid and
premium segment through bouquet of strong brands (Good Day, Tiger, Marie,
Treat, 50-50, Milk Bikis and Nutri Choice) positioned across biscuit sub- Source: Ambit ‘HAWK’, Ambit Capital research
categories. Britannia has the second largest distribution reach in the biscuits
category which has been going deeper and wider in the last 5 years. These Research Analysts
strengths have been leveraged to gain scale and drive investment in technology Rakshit Ranjan, CFA
to further bring down costs and keep growing ahead of its peers. +91 22 3043 3201
Trades at a marginal premium rakshit.ranjan@ambit.co
Our bullishness around gains in market share and EBITDA margin is capped by: Ritesh Vaidya, CFA
(a) aggressive approach to product development by peers like ITC and Parle; +91 22 3043 3246
and (b) increasing input prices, leaving lower potential for EBITDA margin ritesh.vaidya@ambit.co
expansion. We expect Britannia to deliver revenue/earnings CAGR of 14%/17%
over FY16-20E. Our DCF-based fair value of `2,700 (12% downside) implies Dhiraj Mistry, CFA
FY18P/E of 30x. +91 22 3043 3264
dhiraj.mistry@ambit.co
Ambit Capital and / or its affiliates do and seek to do business including investment banking with companies covered in its research reports. As a result, investors should be aware that Ambit Capital
may have a conflict of interest that could affect the objectivity of this report. Investors should not consider this report as the only factor in making their investment decision.
Britannia
80
60%
60
40%
40
20%
20
- 0%
FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16
Biscuits revenue (Rs bn, LHS) Other revenue (Rs bn, LHS) Pre-tax ROCE (RHS)
Exhibit 6: Britannia’s sources of fund over the last decade Exhibit 7: Britannia’s application of funds over the last
decade
Dividend
Net Capex paid
29% 28%
CFO Interest
89% paid
5%
Source: Company, Ambit Capital research Source: Company, Ambit Capital research
Exhibit 7: Most of the re-rating happened over last 2 years Exhibit 8: After doing nothing, the stock performed with the
change in the management
50 2,000
40 1,500
30
1,000
20
500
10
Jun-12
Jun-13
Jun-14
Jun-15
Jun-16
Oct-11
Feb-12
Oct-12
Feb-13
Oct-13
Feb-14
Oct-14
Feb-15
Oct-15
Feb-16
Oct-16
-
Oct 06
Oct 07
Oct 08
Oct 09
Oct 10
Oct 11
Oct 12
Oct 13
Oct 14
Oct 15
Oct 16
Britannia 1 year fwd P/E
Average of 5yr P/E BRIT Sensex
Source: Company, Ambit Capital research Source: Company, Ambit Capital research
Exhibit 10: Forensic score evolution Exhibit 11: Greatness score evolution
Source: Ambit ‘HAWK’, Ambit Capital research Source: Ambit ‘HAWK’, Ambit Capital research
Balance sheet
Year to March (` mn) FY15 FY16 FY17E FY18E FY19E
Shareholders' equity 240 240 240 240 240
Reserves & surpluses 12,211 17,453 21,971 27,346 33,903
Total networth 12,451 17,693 22,211 27,586 34,143
Minority Interest 24 25 22 20 16
Debt 1,402 1,270 408 408 408
Deferred tax liability (234) (277) (277) (277) (277)
Total liabilities 13,644 18,711 22,365 27,736 34,291
Gross block 15,989 18,067 21,067 24,067 25,567
Net block 7,334 8,343 9,876 11,183 10,822
CWIP 484 901 901 901 901
Goodwill 1,107 1,159 1,159 1,159 1,159
Investments 771 3,564 3,564 3,564 3,564
Cash & equivalents 6,672 4,841 6,975 11,055 17,989
Debtors 1,358 1,706 1,926 2,198 2,528
Inventory 4,040 4,407 4,974 5,677 6,530
Loans & advances 5,563 8,995 10,154 11,588 13,329
Other current assets 372 378 427 487 560
Total current assets 18,005 20,327 24,456 31,004 40,937
Current liabilities 9,828 10,491 11,843 13,515 15,546
Provisions 4,228 5,092 5,748 6,560 7,546
Total current liabilities 14,056 15,583 17,591 20,075 23,092
Net current assets 3,949 4,744 6,865 10,929 17,845
Total assets 13,644 18,711 22,365 27,736 34,291
Source: Company, Ambit Capital research
Income statement
Year to March (` mn) FY15 FY16 FY17E FY18E FY19E
Operating income 78,584 86,789 97,971 1,11,804 1,28,606
% growth 13.7% 10.4% 12.9% 14.1% 15.0%
Operating expenditure 69,945 74,523 84,186 95,363 1,09,317
EBITDA 8,639 12,265 13,786 16,441 19,289
% growth 37.7% 42.0% 12.4% 19.3% 17.3%
Depreciation 1,445 1,134 1,468 1,693 1,861
EBIT 7,194 11,131 12,318 14,749 17,428
Interest expenditure 39 49 50 24 12
Non-operating income 880 1,000 1,233 1,082 1,574
Adjusted PBT 8,035 12,082 13,500 15,806 18,989
Tax 2,611 3,920 4,380 5,128 6,160
Adjusted PAT/ Net profit 5,424 8,163 9,121 10,678 12,829
% growth 37.2% 50.5% 11.7% 17.1% 20.1%
Extraordinaries 1,461 (103) - - -
Reported PAT / Net profit 3,964 8,266 9,121 10,678 12,829
Minority Interest (2) (2) (2) (3) (4)
Share of associates - - - - -
Adjusted Consolidated net profit 3,965 8,268 9,123 10,681 12,832
Reported Consolidated net profit 3,965 8,268 9,123 10,681 12,832
Source: Company, Ambit Capital research
Ratio analysis
Year to March FY15 FY16 FY17E FY18E FY19E
Gross margin (%) 40.3% 42.4% 42.4% 43.0% 43.3%
EBITDA margin (%) 11.0% 14.1% 14.1% 14.7% 15.0%
EBIT margin(%) 10.3% 14.0% 13.8% 14.2% 14.8%
Net profit margin(%) 6.9% 9.4% 9.3% 9.6% 10.0%
Dividend payout ratio(%) 41.2% 35.4% 45.0% 45.0% 45.0%
Net debt: equity (x) (0.4) (0.2) (0.3) (0.4) (0.5)
Working capital days (13) (0) (0) (0) (0)
Gross block turnover (x) 4.9 4.8 4.7 4.6 5.0
RoCE(%) 47.0% 50.7% 44.6% 42.7% 41.4%
RoE(%) 53.1% 54.2% 45.7% 42.9% 41.6%
Source: Company, Ambit Capital research
Valuation parameters
Year to March FY15 FY16 FY17E FY18E FY19E
EPS (`) 45.2 68.0 76.0 89.0 106.9
Diluted EPS (`) 45.2 68.0 76.0 89.0 106.9
Book value per share (`) 104.2 148.1 185.9 230.9 285.8
Dividend per share (`) 16.0 20.0 34.2 40.1 48.1
P/E (x) 68.1 45.3 40.5 34.6 28.8
P/BV (x) 29.5 20.8 16.6 13.3 10.8
EV/EBITDA (x) 42.2 29.8 26.3 21.8 18.2
Price/Sales (x) 4.7 4.3 3.8 3.3 2.9
Source: Company, Ambit Capital research
LICHF’s prolonged strong performance – 22% EPS CAGR, 24% AUM CAGR,
Recommendation
and median RoE of 19% over FY06-16 – was supported by a decadal rally
in real estate prices and its parent LIC’s support. LIC’s support ensures Mcap (bn): `242/US$3.6
access to cheaper liabilities (no liquidity crunch even during Lehmann 3M ADV (mn): `1367/US$20
crisis) and ease in customer acquisition (access to LIC’s strong brand and CMP: `511
1mn agents). Going forward, declining real estate prices and rising TP (12 mths): `420
competitive intensity should moderate its earnings growth and RoE; we Downside (%): 18
estimate 12% EPS CAGR over FY16-19E (vs 18% CAGR over FY13-16) and
17.5% RoE, which should de-rate the multiples. Our TP of `420, implies Flags
1.9x 1-year fwd P/B. Rapidly moderating cost of funds is a near-term risk. Accounting: GREEN
Competitive position: MODERATE Changes to this position: NEGATIVE Predictability: AMBER
Earnings Momentum: GREEN
Strong focus on the salaried and urban segments
Promoted by state-owned life insurance giant, Life Insurance Corporation of India Performance
(LIC), LICHF is India’s second-biggest HFC with a `1.3tn loan book. LICHF 140
focuses on home loans (88% of loan book) and more specifically on the salaried
segment (84% of home loans) and metros (46% of home loans). 120
100
Growth and RoE slowed despite realignment of assets and liabilities
80
LICHF’s strong growth and profitability during FY06-12 (27% AUM CAGR;
Jan-16
Sep-16
May-16
Mar-16
Jul-16
Nov-15
median RoE of 23%) were driven by benign regulatory and moderate competitive
environment. But from FY12, regulatory and competitive headwinds put intense
pressure on LICHF’s growth and profitability. Growth moderated to 19% CAGR
LIC Housing Fin. Sensex
over FY12-16 and RoE slowed to 18% over FY12-16. This was despite a
meaningful realignment in liability mix (share of cheaper bond borrowings rose
Source: Bloomberg, Ambit Capital research
from 58% in FY12 to 77% in FY16) and loan mix (share of higher yielding LAP
rose from 0% in FY12 to 9% in FY16). Growth in line with RoE implied that
dividend payout ratio was a reasonable ~21% over FY12-16.
Ambit Capital and / or its affiliates do and seek to do business including investment banking with companies covered in its research reports. As a result, investors should be aware that Ambit Capital
may have a conflict of interest that could affect the objectivity of this report. Investors should not consider this report as the only factor in making their investment decision.
LIC Housing Finance
700
20%
500
300
15%
100
(100) FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 10%
Exhibit 3: LICHF’s growth and profitability has meaningfully moderated since FY12
Time period Phase Key developments
LICHF’s robust growth (27% CAGR) during this period was driven by both increasing customer acquisition (due to
benign competition in the small ticket segment and increasing ticket size per loan (due to rapid increase in real estate
Strong growth prices).
FY06-12
period
Regulatory and competitive environment remained benign. Consequently both growth and profitability remained high
during this period (AUM CAGR of 27% and RoA of 1.9%).
Regulatory headwinds emerged FY11 onwards such as introduction of base rate system (which led to increasing cost
of funds) and removal of prepayment penalties (leading to higher churn in the loan book and reduction in fee-
income).
Moreover, during this period, HFCs have seen hyper-competition from banks in home loans due to: i) lack of any
Moderation in opportunities in corporate loans due to slowdown; and ii) regulators incentivising affordable housing in FY15 by
FY12- reduction of risk weights and exemption on SLR/CRR and PSL requirements. Decline in real estate prices have also let
growth and
Current to moderation in ticket size growth (which used to drive 50-60% of growth of HFCs).
profitability
Consequently LICHF’s growth has moderated to 19% CAGR over FY12-16 versus 27% CAGR in FY06-12. However,
LICHF was able to sustain such pressure on profitability and growth by: i) increasing the share of higher-yielding
albeit risky LAP (from 0% in FY12 to ~9% in FY16); and ii) shift in liability mix towards cheaper bond borrowings (from
58% in FY12 to 77% in FY16). This somewhat offset the lower profitability from the business and enabled it to still
deliver moderate RoAs of 1.5% during this period.
Source: Ambit Capital research.
Exhibit 4: Competitive mapping of HFCs – LICHF’s growth has moderated despite its small-ticket positioning
Key metrics Avg. ticket AUM AUM CAGR Opex/ Gross Branches Employees
NIMs RoA RoE
(FY16) size (` mn) (` bn) (FY13-16) AUM NPA (%) (#) (#)
LICHF 1.2 1,252 17% 2.6% 0.4% 0.45% 1.5% 19.6% 234 1,726
Repco 1.1 77 29% 4.9% 1.0% 1.30% 2.2% 17.0% 150 619
GRUH 0.5 111 27% 4.2% 0.8% 0.32% 2.3% 31.5% 179 618
HDFC 2.5 2,908 16% 3.1% 0.3% 0.70% 2.4% 21.8% 401 2,196
CANFIN 1.7 106 38% 3.1% 0.7% 0.19% 1.6% 19.0% 140 553
DEWAN 1.2 695 24% 3.0% 0.9% 0.93% 0.9% 11.9% 353 2,625
PNBHF 3.7 272 60% 3.8% 1.2% 0.22% 1.4% 17.6% 47 752
Source: Company, Ambit Capital research
Exhibit 5: Mapping GRUH and its peers on IBAS
Particulars GRUH HDFC LICHF REPCO CNFIN DHFL PNBHF Comments
Innovation in terms of ability to appraise a non-salaried borrower is
key to gain penetration in the under-served low-income segment.
GRUH scores best in the metric due to its innovative products and
appraisal techniques. GRUH’s product innovation is exemplified from
the fact that it structures customised EMIs to match the cash flows of
the low-income borrowers and has flexible repayment plan as per
Innovation
daily, monthly or yearly amortising. Moreover, GRUH was the first HFC
to introduce a formal credit score methodology for the low-income
category of borrowers. Repco comes closest to GRUH in replicating
this. Moreover Repco’s origination strategy is also innovative as it
sources only through loan melas and referrals and avoids sourcing
through DSAs unlike other HFCs.
Brand for the home loan borrower will depend on the perceived
customer service and the perceived project financing abilities by the
lender. Whilst HFCs score lower than banks on all these metrics, HDFC
Brand
enjoys the best brand amongst the HFCs due to superior perception on
the above metrics, followed closely by GRUH. LICHF, CNFIN and
PNBHF also score high due to their PSU parentage.
A robust branch network with decentralised decision making is the key
to gain penetration in small ticket housing finance. HDFC with ~400
branches and a decentralised decision making has one of the best
Architecture
architectures amongst peers, closely followed by DHFL and GRUH.
Whilst REPCO has marginally lower branches than GRUH, it also
scores highly due to a decentralised decision making process.
Support of the parent, strong credit rating and a granular retail deposit
franchise are the key strategic assets for HFCs in times of liquidity
Strategic asset
crunch. LICHF is best placed in this metric due to strong support from
its parent on the above mentioned metrics.
GRUH comes out as one the strongest HFCs versus its peers due to its
Overall rank
strengths in innovation, brand, architecture and strategic assets.
Source: Company, Ambit Capital research Note: - Strong; - Relatively Strong; - Average; - Relatively weak.
Exhibit 6: LICHF’s AUM is dominated by home loans Exhibit 7: Salaried segment dominate LICHF’s home loans
LAP
Self-employed
& others
88% Developer 84%
Source: Company, Ambit Capital research Source: Company, Ambit Capital research
Exhibit 8: LICHF’s liability mix is tilted towards bonds Exhibit 9: LICHF’s asset quality has remained in control
3% 3.0%
2%
3% Banks 2.5%
13% 2.0%
NCD
1.5%
NHB 1.0%
0.5%
Deposits
80% 0.0%
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
Others -0.5%
Exhibit 10: LICHF is trading at a 27% premium to its Exhibit 11: LICHF’s share price performance versus Sensex
cross-cycle average P/B
3.5 2,500
3.0
2,000
2.5
2.0 1,500
1.5 1,000
1.0
500
0.5
0.0 -
Mar-05
Mar-06
Mar-07
Mar-08
Mar-09
Mar-10
Mar-11
Mar-12
Mar-13
Mar-14
Mar-15
Mar-16
Apr-07
Apr-08
Apr-09
Apr-10
Apr-11
Apr-12
Apr-13
Apr-14
Apr-15
Apr-16
PB Avg. PB -1 SD +1 SD SENSEX LICHF
Source: Bloomberg, Ambit Capital research Source: Bloomberg, Ambit Capital research
LICHF’s revenue and expense recognition policies are by far the most conservative amongst the peers. We do
Accounting GREEN not come across any instance wherein the reported profitability of the company is materially different from its
true profitability.
Volatile bond yields and frequent base rate cuts by banks have made it difficult to predict the earnings of
Predictability AMBER LICHF. Moreover, the management guidance has been off-mark both in times of earnings decline and
recovery.
Earnings momentum GREEN Consensus has marginally upgraded in FY17/18 estimates by 1% over the past 3-4 months
Source: Ambit Capital research
Income statement
FY15 FY16 FY17E FY18E FY19E
Net Interest Income 22,364 29,441 33,730 35,663 40,692
Interest Income 105,467 122,508 139,409 155,950 177,080
Interest Expense 83,102 93,068 105,679 120,287 136,388
Non Interest Income 2,520 2,346 2,575 2,825 3,102
Total Income 24,884 31,787 36,305 38,487 43,794
Operating expenses 3,792 4,687 5,849 6,835 7,664
Pre Provisioning Profit 21,092 27,100 30,456 31,652 36,130
Provisions 73 1,465 2,087 1,405 1,556
PBT 21,020 25,635 28,369 30,247 34,574
Less:Tax 7,158 9,028 9,362 9,982 11,409
Net Profit 13,862 16,608 19,007 20,265 23,164
Source: Company, Ambit Capital research
Balance sheet
FY15 FY16 FY17E FY18E FY19E
Networth 78,184 91,460 106,666 122,878 141,410
Borrowings 965,470 1,109,360 1,265,452 1,437,619 1,627,282
Total Sources of funds 1,043,654 1,200,820 1,372,118 1,560,497 1,768,692
Loan Book 1,083,610 1,251,730 1,430,290 1,626,657 1,843,678
- Individual 1,056,300 1,217,310 1,390,186 1,579,252 1,787,224
- Developer 27,310 34,420 40,104 47,405 56,454
Other Assets (39,956) (50,910) (58,173) (66,159) (74,986)
Total Application of funds 1,043,654 1,200,820 1,372,118 1,560,497 1,768,692
Source: Company, Ambit Capital research
Key ratios
FY15 FY16 FY17E FY18E FY19E
AUM growth (%) 18.6 15.5 14.3 13.7 13.3
Dil Consol EPS growth (%) 5.2 19.8 14.4 6.6 14.3
Net interest margin (NIM) (%) 2.3 2.6 2.5 2.3 2.3
Cost to income (%) 15.2 14.7 16.1 17.8 17.5
Opex (% of AAUM) 0.39 0.41 0.44 0.45 0.44
Gross NPAs (%) 0.5 0.5 0.6 0.6 0.6
Credit costs (% of AAUM) 0.01 0.13 0.16 0.09 0.09
Provisioning Coverage 52.2 51.1 55.0 55.0 55.0
Capital adequacy (%) 16.5 17.0 17.0 17.0 17.0
Tier-1 (%) 12.5 13.9 13.9 13.9 13.9
Leverage (x) 12.6 13.2 13.0 12.8 12.6
Source: Company, Ambit Capital research
Valuation parameters
FY15 FY16 FY17E FY18E FY19E
BVPS (`) 155 181 211 243 280
Diluted EPS (`) 27.5 32.9 37.7 40.2 45.9
ROA (%) 1.6 1.5 1.5 1.4 1.4
ROE (%) 18.1 19.6 19.2 17.7 17.5
P/E 18.6 15.5 13.6 12.7 11.1
P/BV 3.3 2.8 2.4 2.1 1.8
Dividend yield (%) 1.0 1.1 1.3 1.3 1.5
Source: Company, Ambit Capital research
Jan-16
Sep-16
May-16
Mar-16
Jul-16
Nov-15
65% in men’s segment) by FY30; and (c) unexplored sub-segments in
categories like kidswear and loungewear.
Page has focused intently on Jockey/Speedo, and capital discipline Page Inds. Sensex
Page’s foundation is built on: a) 60-year association with Jockey and Speedo;
b) strong focus on capital allocation and RoCE; and c) incentivisation and Source: Bloomberg, Ambit Capital Research
empowerment of professionals to achieve scale with operating efficiencies.
Some of the key strategic decisions Page has implemented over the past Page’s forensic score analysis
decade include: a) extending Jockey’s product portfolio to leisurewear
segments like thermals, loungewear, t-shirts, shapewear etc; b) maintaining
capital allocation discipline with 0.5-0.7x debt/equity ratio, leveraging on
benefits under Technology Upgradation Funds Scheme for textile sector, and
ensuring payout of surplus capital each year as dividends to shareholders.
Page has built a fortress with its competitive moats
Page’s competitive advantages are centered on: a) in-house manufacturing to Source: Ambit ‘HAWK’, Ambit Capital research
deliver product differentiation in a labour-intensive industry; b) maintaining
aspirational connect with consumers; and c) an entrenched distribution channel Page’s greatness score analysis
spanning hosiery stores to exclusive brand outlets through distributors. Threats
to Page’s leadership are low given: a) incumbents like Rupa/Maxwell sell
through the wholesale channels with outsourced manufacturing and hence lack
control of both manufacturing and distribution; b) given lack of in-house
manufacturing, new entrants like FCUK, USPA, CK or regional players can’t
offer affordability with good product quality.
Page deserves one of the highest P/E multiples in the consumer space Source: Ambit ‘HAWK’, Ambit Capital research
Ambit Capital and / or its affiliates do and seek to do business including investment banking with companies covered in its research reports. As a result, investors should be aware that Ambit Capital
may have a conflict of interest that could affect the objectivity of this report. Investors should not consider this report as the only factor in making their investment decision.
Page Industries
in ` bn
20 Phase IV - Beating the 90%
Phase III - competition
Gearing up for 80%
15 competition
70%
10 60%
50%
5
40%
- 30%
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
Others Liesurewear Women Men *Innerwear (Men + Women) Pre-tax ROCE (RHS)
Source: Ambit Capital research, * Split of men and women innerwear is available since FY10.
Source: Ambit Capital research; Note: - Strong; - Relatively Strong; - Average; - Relatively weak.
Exhibit 6: Sources of funds over FY07-16 Exhibit 7: Application of funds over FY07-16
Increase in Debt
Interest
cash and repayment,
received,
cash 5%
1%
equivalents,
Debt raised, 14%
24%
Dividend
Proceeds Net Capex,
paid, 45%
from shares, Cash flow 30%
4% from
operations,
71%
Interest
paid, 7%
Source: Company, Ambit Capital research Source: Company, Ambit Capital research
Exhibit 8: Band chart of Page one-year forward P/E Exhibit 9: Page’s share price performance vs Sensex
80 7,000
70 6,000
60 5,000
4,000
50
3,000
40
2,000
30
1,000
20 -
Jun-12
Jun-13
Jun-14
Jun-15
Jun-16
Oct-11
Feb-12
Oct-12
Feb-13
Oct-13
Feb-14
Oct-14
Feb-15
Oct-15
Feb-16
Oct-16
Sep 07
Sep 08
Sep 09
Sep 10
Sep 11
Sep 12
Sep 13
Sep 14
Sep 15
Sep 16
Mar 07
Mar 08
Mar 09
Mar 10
Mar 11
Mar 12
Mar 13
Mar 14
Mar 15
Mar 16
Page 1 year fwd P/E Average of 5yr P/E Page Sensex
Source: Company, Ambit Capital research Source: Company, Ambit Capital research; Note: price are rebased to 100
Page Industries' cash conversion has remained healthy and this has resulted in cumulative CFO (pre-
Accounting GREEN tax)/EBITDA of above 70% in FY07-16. Page has maintained effective control on the working capital cycle, and
hence despite high sales growth, WC days have increased marginally from 63 days in FY09 to 71 days in FY16.
Since FY16, Page Industries has twice beaten or missed consensus revenue estimates by more than 4%. The
Predictability AMBER
company has twice missed consensus net profit estimates by more than 4% and beaten once by more than 4%.
Earnings momentum GREEN In the last six months, consensus earnings forecasts for Page have been upgraded by ~3.5% for FY17 and FY18
Source: Ambit Capital research
Exhibit 11: Page’s forensic score has remained in zone of Exhibit 12: Page’s greatness score has improved from 40 in
safety over 2011-15 2011 to 95 in 2015
Source: Ambit ‘HAWK’, Ambit Capital research Source: Ambit ‘HAWK’, Ambit Capital research
Income statement
Year to March (` mn) FY15 FY16 FY17E FY18E FY19E
Net Sales 15,430 17,834 21,718 28,204 36,788
% growth 29.9% 15.6% 21.8% 29.9% 30.4%
Raw materials Cost 7,121 8,133 10,230 13,397 17,474
Employees cost 2,585 3,130 3,670 4,231 5,564
Royalty expenses 846 994 1,210 1,571 2,050
Advertisement expenses 714 670 903 1,044 1,324
Other Admin, S&D expenses 974 1,137 1,387 1,713 2,108
Total operating expenses 12,240 14,063 17,400 21,956 28,520
EBITDA 3,190 3,771 4,318 6,248 8,267
% growth 27.0% 18.2% 14.5% 44.7% 32.3%
Depreciation 176 238 266 318 374
EBIT 3,014 3,533 4,052 5,930 7,893
Non-operating Income 86 62 130 169 221
Interest expenditure 167 153 57 44 25
PBT 2,933 3,443 4,125 6,055 8,089
Tax expenses 973 1,116 1,320 1,938 2,588
Adjusted PAT 1,960 2,327 2,805 4,117 5,500
% growth 27.5% 18.7% 20.6% 46.8% 33.6%
Extraordinary items - - - - -
Reported PAT / Net profit 1,960 2,327 2,805 4,117 5,500
Source: Ambit Capital research
Ratio analysis
Year to March FY15 FY16 FY17E FY18E FY19E
Gross margin (%) 53.8 54.4 52.9 52.5 52.5
EBITDA margin (%) 20.7 21.1 19.9 22.2 22.5
EBIT margin (%) 19.5 19.8 18.7 21.0 21.5
Net profit margin (%) 12.7 13.0 12.9 14.6 15.0
Dividend payout ratio (%) 49 49 55 60 60
Net debt/equity (x) 0.3 0.1 (0.1) (0.1) (0.1)
Asset turnover excluding cash (x) 3.2 3.2 3.4 3.7 3.9
Working capital turnover (x) 5.1 5.2 5.2 5.6 5.8
Gross block turnover (x) 5.6 5.7 6.0 6.5 7.3
Post-tax RoCE (%) 42.6 44.2 44.3 53.5 58.6
Pre-tax RoCE (%) 63.7 65.4 65.2 78.7 86.1
ROE (%) 58.0 52.2 49.4 57.7 60.7
Source: Ambit Capital research
Valuation parameters
Year to March FY15 FY16 FY17E FY18E FY19E
EPS (`) 175.7 208.6 251.5 369.1 493.1
Book value per share (`) 347 453 566 714 911
Dividend per share (`) 72.0 85.0 118.2 189.3 252.9
P/E (x) 79.8 67.2 55.8 38.0 28.4
P/BV (x) 40.4 31.0 24.8 19.6 15.4
EV/EBITDA (x) 49.4 41.6 36.1 24.9 18.7
Price/Sales (x) 10.1 8.8 7.2 5.5 4.3
Dividend yield (%) 0.5 0.6 0.8 1.4 1.8
Source: Ambit Capital research
Amara Raja has made rapid market gains in automotive battery Recommendation
segments (4W and 2Ws) led by Johnson Controls (JCI) parentage (low-
Mcap (bn): `165/US$2.4
cost manufacturing knowledge; hence, competitive pricing vs Exide) and
3M ADV (mn): `406/US$6.1
innovation surrounding products/advertising. We expect market share
CMP: `960
gains for AMRJ to slow as Exide attempts comeback through aggressive
pricing/cost cutting. The current expensive valuation multiples (25x TP (12 mths): `763
FY19E net earnings) do not appear sustainable as long-term RoCE will Downside (%): 20
moderate due to rising capital intensity for investments in new
technologies and changes to business model from Lithium-ion adoption. Flags
Accounting: GREEN
Competitive position: STRONG Changes to this position: POSITIVE
Predictability: AMBER
Second-largest battery player in India Earnings Momentum: AMBER
AMRJ is a JV between the Galla family and JCI (world’s largest lead acid battery
player). AMRJ’s automotive segment (~56% of FY16 revenues) is a play on Performance
automotive volume recovery (at 18/1,000 people, India has among the lowest 130
PV penetrations). The key growth drivers are market share gain from 120
unorganised segment and market leader Exide. The Industrial segment is, 110
however, very dependent on telecom segment (slowly shifting to lithium-ion) and 100
recovery in industrial activity. 90
80
JCI provides strategic edge
Jan-16
Oct-16
Apr-16
Sep-16
Dec-15
May-16
Jun-16
Feb-16
Mar-16
Jul-16
Nov-15
Aug-16
AMRJ started as an Industrial battery player (in 1975), ventured into the
Automotive battery segment, with a JV with JCI in 2000. Driven by competitive
Amara Raja Batt. Sensex
pricing, aggressive warranty terms and distribution expansion, it gained
significant market share across both 4W OEM (30% market share) and
replacement (41% market share). Despite late entry, it now commands 15% and Source: Bloomberg, Ambit Capital research
28% market share in 2W OEM and replacement. Over the last 10 years, AMRJ
has grown its revenue and EBITDA by 26% and 29% CAGR respectively. Amara Raja’s forensic score analysis
Ambit Capital and / or its affiliates do and seek to do business including investment banking with companies covered in its research reports. As a result, investors should be aware that Ambit Capital
may have a conflict of interest that could affect the objectivity of this report. Investors should not consider this report as the only factor in making their investment decision.
Amara Raja Batteries
Exhibit 1: Amara Raja has emerged as a formidable player in the automotive battery segment…
52 Phase I- Emergence as a Phase II- Foray into automotive Phase III- Finding success across various 120%
strong industrial battery segment through JV with Johnson automotive battery segments.
player Controls 100%
42
`. billion
80%
32
2
0%
FY96 FY97 FY98 FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16
(8) -20%
Revenue CAGR: 32% Revenue CAGR: 32% Revenue CAGR: 20%
Median RoCE: 84.4% Median RoCE: 13.2% Median RoCE: 42.1%
AMRJ's Revenues (LHS) AMRJ's ROCE % (Pre-tax) (LHS)
Exhibit 4: Amara Raja has been able to gain the scale required to generate healthy returns
Amara Exide
Particulars Comments
Raja Industries
Amara Raja has established a network size of more than 30,000 in 15 years as
Aftermarket network >30,000 38,500
compared Exide’s 38,500 developed over decades.
Amara Raja's plants are relatively new and more efficient compared to Exide’s
old plants which are operating with old equipment.
Number of plants 2 7 Amara Raja’s both plants are located in close vicinity of each other, as
compared to Exide plants which are spread across India. This has helped Amara
Raja operate its plant at lower overheads vs Exide.
Market share in four-wheeler OEM 31% 59% Amara Raja has gained significant market share across both 4W OEM and
Market share in four-wheeler replacement driven by competitive pricing, aggressive warranty terms and
41% 56% distribution expansion.
replacement
Revenues (FY16 ` mn) 46,907 68,246 From FY11-16, Amara Raja has gained significant market share in both OE and
aftermarket segments from Exide due to its better quality product and lower
price (enabled by lower cost of manufacturing).
Shortage of capacity at Exide Industries also benefited Amara Raja. During
2009-10, automobile volumes picked up sharply and Exide took a strategic
Revenue CAGR FY11-16 34% 16% decision to cater to the full requirement of the OE customers thereby
underplaying the more profitable aftermarket. This enabled Amara Raja to
become a major player in the aftermarket through its ‘Amaron’ brand. Amara
Raja’s market share in the 4W aftermarket segment improved to 41% in FY16,
an increase of 1600 bps over FY09-16.
EBITDA margin (FY16) 17.4% 15.0% Amara Raja benefited from improving product mix with rising contribution from the
higher-margin replacement segment, increasing utilisation levels and more cost
Change in EBITDA Margin (FY11- efficient operations (deployed best manufacturing practices of Johnson Controls). As
(+)290 bps (-)430bps against this, Exide suffered market share loss in profitable 4W replacement market
FY16)
and rising overheads.
Pre-tax CFO/ EBITDA (Average
90% 96% Lower working capital levels have helped cash conversion for both the companies.
FY11-16)
Capex to CFO (Average FY11-16) 79% 47% Amara Raja has been continuously investing over the years to expand its 4W
and 2W capacities. It also invested in UPS capacities which were earlier sourced
from outside.
Capex and Investments to CFO Exide on the other part made significant investment in FY15/16 (`8bn) to
79% 63% upgrade their technology and plants & machinery. Apart from this, Exide also
(Average FY11-16)
made significant investments in the insurance business which now represents
53% of its FY16-end capital employed.
Higher margins and lower capex enabled Amara Raja to generate higher returns vs
Post-tax RoCE (Average FY11-16) 28% 23%
Exide.
Source: Company, Ambit Capital
Exhibit 5: Strong Innovation capabilities and Brand places Amara Raja on top in our IBAS framework
Parameters Amara Raja Exide Remarks
Innovation
A) Does the company have an Technological AMRJ brought zero maintenance batteries (Amaron Hi-Life)
JV with Johnson
agreement with a foreign partner for agreement into the Indian market, which was a key differentiator from
Controls Inc.
technology? Hitachi, Japan the batteries which required regular maintenance and top-
ups. Similarly, it pioneered the introduction of VRLA batteries
Rank
for the 2W segment (Amaron Pro-bike rider) in May 2008,
B) Was the company first to innovate which was suited for rising power needs of 2Ws due to
Yes Yes
and have competitors copy it? adoption of self-start bikes.
AMRJ offered aggressive warranty terms; for instance, it
Rank
introduced Amaron Pro-range of automotive batteries in
Overall position in Innovation FY2005 with a first of its kind 48 month warranty.
Brands/Reputation
Market Market Leader in
A) What is the ranking of the company
Challenger in a a Duopoly
in the industry?
Duopoly industry industry
AMRJ has emerged as a strong challenger to Exide over the
Rank
years and closed the difference in brand perception to a
B) Does the company spend more than significant extent. However, build upon its decades of
industry level on advertising, sales 1.2% of sales 0.8% of sales presence in India and a large number of installations in the
promotion, publicity? existing car park, Exide still commands a greater brand recall.
Rank
Overall position in Brands
Architecture
Does the company employ superior AMRJ employs superior manufacturing practices through its
manufacturing practices? business alliance with JCI. AMRJ commands low
rejections/higher yield which is one of the reasons for its
Rank
higher gross margin despite pricing its products cheaper than
Exide.
AMRJ has had consistently low employee and overhead costs
Overall position in Architecture
compared to that of Exide mainly because of its concentrated
manufacturing plants.
Strategic Asset
A) Has the company demonstrated cost JCI commands a much dominant position in the global lead-
Yes No
competitive edge over competition? acid battery industry with significantly higher R&D spends.
JCI’s parentage provides an edge to AMRJ. It also helps that
Rank
JCI owns 26% equity stake in AMRJ. On the other hand, while
B) Does the company have more Exide has technical tie-ups with East Penn, Shin-Kobe
manufacturing facilities in India than 2 mfg. facilities 7 mfg. facilities (Hitachi) and Furukawa, there is no equity participation.
its competition? Captive smelters have historically lent significant cost
advantage to Exide. However, recycling of lead has increased
Rank
in India over the years and the price of the used batteries
(that dealers pay to customers) has witnessed a spike,
Overall position in Strategic Asset
somewhat negating Exide’s cost advantage on this front.
Strong Innovation capabilities, Improving brand perception
Overall Score in IBAS and better cost control places Amara Raja ahead of Exide
Industries in our IBAS framework.
Exhibit 6: Cash generated over the years... Exhibit 7: ... has largely been used to fund expansion
Interest &
dividend Finance
received charges
4% 1%
Change in
net debt Dividends
4% 17%
Capex
CFO 78%
96%
Source: Company, Ambit Capital research Source: Company, Ambit Capital research
Exhibit 8: Stock trades at 27.4x one-year forward net Exhibit 9: AMRJ has multiplied ~37x in the last 10 years as
earnings, 50% premium to five-year average multiples compared to ~2x by Sensex
35 4,000
3,500
Return percentage
30
3,000
25
2,500
20
2,000
15 1,500
10 1,000
5 500
0
0
Mar-14
Mar-16
Mar-08
Mar-10
Mar-12
Jul-15
Jul-11
Jul-13
Jul-07
Jul-09
Nov-14
Nov-10
Nov-12
Nov-06
Nov-08
Jan-15
Jan-16
Jan-12
Jan-13
Jan-14
Sep-14
Sep-15
Sep-11
Sep-12
Sep-13
May-15
May-16
May-12
May-13
May-14
Exhibit 11: AMRJ scores high in our forensic framework... Exhibit 12: …and greatness framework
Source: Ambit ‘HAWK’, Ambit Capital research Source: Ambit ‘HAWK’, Ambit Capital research
GRUH has the strongest positioning in the affordable housing finance Recommendation
due to its innovative credit scoring (first to credit score low-income
Mcap (bn): `103/US$1.5
borrowers), strong local knowledge (well penetrated and decentralized
3M ADV (mn): `143/US$2.1
branches) and backing of the behemoth HDFC. Combined with a decadal
CMP: `282
surge in real-estate prices, such strengths have driven GRUH’s superior
profitability and growth over FY06-16 (avg. RoE of 30% and AUM CAGR TP (12 mths): NA
of 26%). However, declining real estate prices and increasing Downside (%): NA
competition in affordable housing finance have led to moderation in
earnings growth (EPS growth of 20% in FY16 versus 28% CAGR over Flags
FY10-15). GRUH’s lofty valuations (10x 1-year fwd P/B, 100% premium to Accounting: GREEN
its peers) will be tested by such declining earnings momentum. Predictability: GREEN
Competitive position: STRONG Changes to this position: NEGATIVE Earnings Momentum: AMBER
Jan-16
Sep-16
May-16
Mar-16
Jul-16
Nov-15
Strong focus in informal segment has driven robust growth and RoE
Since the stressful period of 1996-98, GRUH has moved away from the
developer loan segment to individual home loans where asset quality and GRUH Finance Sensex
profitability were higher. Hence, share of individual home loans increased from
61% of loan book in FY97 to 97% by FY02, resulting in RoE improving from 3% Source: Bloomberg, Ambit Capital research
in FY98 to 22% in FY04. Since then RoE has never dipped below 24% as it has
single-mindedly focused on small-ticket home loans to informal segments. High
RoE over the past ten years (average RoE of ~30%) implied that it didn’t need to
raise capital despite growing at 27% CAGR and simultaneously sustaining a
generous dividend payout of ~43% during the same period.
Innovation and architecture drive competitive advantages
GRUH is one of the strongest HFCs on the IBAS framework due to: (i) its
innovative products and appraisal techniques (first HFC to introduce credit
scoring for low-income borrowers); ii) a well penetrated and decentralized
branch architecture underpinning its strong local area knowledge and superior
sourcing of low-ticket customers (despite low ticket sizes, credit costs have been
minimal at average of ~20bps over past ten years); iii) HDFC’s parentage,
which enables it to get a better cost of funding, credit appraisal process and
management quality; and (iv) strong local reputation owing to its superior and
transparent customer service relative to peers. However, regulatory and
competitive headwinds pose risk to its earnings growth.
Valuations could be tested by declining earnings momentum
Mortgage financers have re-rated over the past two years at the cost of
corporate lenders due to the latter’s shaky earnings trajectory due to asset
quality concerns. A combination of such fundamental and sentimental factors Research Analysts
underpins GRUH’s premium valuations. However, such peak valuations could be
Aadesh Mehta, CFA
tested by a declining earnings momentum (EPS growth of 20% in FY16 versus
+91 22 3043 3239
28% CAGR over FY10-15) due to slower growth (24% in FY16 versus 30% CAGR
aadesh.mehta@ambit.co
over FY10-15) caused by declining real estate prices and increasing competitive
intensity in the small-ticket housing finance. Moreover, HFCs are exposed to the Pankaj Agarwal, CFA
looming regulatory risk of convergence of loan pricing to a more transparent +91 22 3043 3206
and objectively calculated base rate (which is followed by banks). pankaj.agarwal@ambit.co
Ambit Capital and / or its affiliates do and seek to do business including investment banking with companies covered in its research reports. As a result, investors should be aware that Ambit Capital
may have a conflict of interest that could affect the objectivity of this report. Investors should not consider this report as the only factor in making their investment decision.
GRUH Finance
Exhibit 1: Evolution of GRUH – good times have ended due to competitive and regulatory headwinds
Exhibit 3: Emerging regulatory & competitive headwinds led to slower growth and lower profitability recently
Time period Phase Key developments
GRUH’s robust growth (28% CAGR) during this period was driven by both increasing customer acquisition (due to
benign competition) and increasing ticket size per loan (due to real estate prices).
The good times FY05-14 Regulatory headwinds emerged FY11 onwards such as introduction of base rate system (which led to increasing cost
of funds) and removal of prepayment penalties (leading to higher churn in the loan book and reduction in fee-
income). However, GRUH was able to price in such increased costs to its customers due to benign competition and
relatively small market share in key geographies. Its RoAs sustained at 2.5% during this period.
During this period, HFCs have seen hyper-competition from banks in home loans due to: i) lack of any opportunities
in corporate loans due to slowdown; and ii) regulators incentivising affordable housing in FY15 by reduction of risk
weights and exemption on SLR/CRR and PSL requirements. Moreover decline in real estate prices have also let to
Headwinds FY14- moderation in ticket size growth (which used to drive 50-60% of growth of HFCs).
emerge Current
Such headwinds mentioned above led to slowdown in growth as well as pressure in profitability for HFCs including
GRUH. GRUH’s growth has slowed down to 24% YoY in FY16 (versus 28% CAGR in FY05-14) and RoAs moderating to
2.3% from an average of 2.5% in FY05-14.
Source: Ambit Capital research.
Exhibit 4: Competitive mapping of HFCs – GRUH’s small-ticket positioning makes drives its superior profitability
Key metrics Avg. ticket AUM CAGR Gross Branches Employees
AUM (` bn) NIMs Opex/AUM RoA RoE
(FY16) size (` mn) (FY13-16) NPA (%) (#) (#)
GRUH 0.5 111 27% 4.2% 0.8% 0.32% 2.3% 31.5% 179 618
HDFC 2.5 2,908 16% 3.1% 0.3% 0.70% 2.4% 21.8% 401 2,196
LICHF 1.2 1,252 17% 2.6% 0.4% 0.45% 1.5% 19.6% 234 1,726
REPCO 1.1 77 29% 4.9% 1.0% 1.30% 2.2% 17.0% 150 619
CANFIN 1.7 106 38% 3.1% 0.7% 0.19% 1.6% 19.0% 140 553
DEWAN 1.2 695 24% 3.0% 0.9% 0.93% 0.9% 11.9% 353 2,625
PNBHF 3.7 272 60% 3.8% 1.2% 0.22% 1.4% 17.6% 47 752
Source: Company, Ambit Capital research
Source: Company, Ambit Capital research; Note: - Strong; - Relatively Strong; - Average; - Relatively weak.
Others
Construction Loans
Source: Company, Ambit Capital research Source: Company, Ambit Capital research
Exhibit 8: NIMs are declining due to competitive pressures Exhibit 9: Asset quality is worsening
5.4% NIM 2.0% Gross NPA
5.2%
1.5%
5.0%
4.8%
1.0%
4.6%
4.4% 0.5%
4.2%
4.0% 0.0%
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
Source: Company, Ambit Capital research Source: Company, Ambit Capital research
Exhibit 10: GRUH is trading at 60% premium to its Exhibit 11: GRUH – share price performance versus sensex
cross-cycle average P/B
12.0 3,000
10.0 2,500
8.0 2,000
6.0 1,500
4.0 1,000
2.0 500
0.0 -
Apr-07
Apr-08
Apr-09
Apr-10
Apr-11
Apr-12
Apr-13
Apr-14
Apr-15
Apr-16
Apr-10
Mar-13
Apr-15
Dec-11
Jul-11
Jan-14
Jul-16
Aug-13
Sep-10
Sep-15
Feb-11
May-12
Oct-12
Jun-14
Nov-14
Feb-16
Income statement
Year to March (` mn) FY12 FY13 FY14 FY15 FY16
NII (inclu. Securitisation) 1,871 2,311 2,707 3,437 4,212
Other income 170 149 319 389 468
Total income 2,041 2,460 3,025 3,826 4,680
Operating expenditure 392 463 556 661 844
Pre-provisioning profit 1,649 1,997 2,469 3,165 3,836
Provisions 22 29 24 157 219
Profit before tax 1,627 1,968 2,445 3,008 3,617
Tax 424 509 675 970 1,181
Consol. PAT 1,202 1,500 1,770 2,038 2,436
Source: Company, Ambit Capital research
Balance sheet
Year to March (` mn) FY12 FY13 FY14 FY15 FY16
Net-worth 3,856 4,910 6,072 7,115 8,353
Borrowings - on balance sheet 38,330 49,145 64,475 67,453 102,444
Borrowings - off balance sheet 0 0 0 0 0
Total liabilities 42,186 54,055 70,547 74,568 110,797
AUM 40,774 54,378 70,090 89,544 111,146
Cash and equivalents 1 652 530 798 1,429
Net Current Assets 1,410 (974) (73) (15,775) (350)
Total assets 28,134 36,990 46,431 59,165 74,927
Source: Company, Ambit Capital research
Key ratios
Year to March (` mn) FY12 FY13 FY14 FY15 FY16
NIM % (on AUM) 5.2% 4.9% 4.3% 4.3% 4.2%
AUM Growth 28% 33% 29% 28% 24%
Opex as % of AAUM 1.08% 0.97% 0.89% 0.83% 0.84%
Credit costs as a % of AUM 0.06% 0.06% 0.04% 0.20% 0.22%
CAR (%) 14.0% 14.6% 16.4% 15.4% 17.8%
Source: Company, Ambit Capital research
Valuation parameters
Year to March (` mn) FY12 FY13 FY14 FY15 FY16
Dil EPS – Consol (`) 3.4 8.2 4.9 5.6 6.7
BVPS (`.) 11 14 17 20 23
ROA (%) 3.0% 2.9% 2.7% 2.4% 2.3%
ROE (%) 34.2% 34.2% 32.2% 30.9% 31.5%
P/B (x) 25.8 20.6 16.7 14.4 12.3
P/E (x) 82.6 34.4 57.4 50.3 42.1
Source: Company, Ambit Capital research
Jan-16
Oct-16
Apr-16
Sep-16
Dec-15
May-16
Jun-16
Feb-16
Mar-16
Jul-16
Aug-16
largest diagnostics chain in India. Dr Lal’s 35% sales CAGR (last 10 years) is
unlikely to sustain given high base but a higher-than-industry growth rate of
mid-to-high teens is possible. Dr Lal Pathlabs Sensex
Ambit Capital and / or its affiliates do and seek to do business including investment banking with companies covered in its research reports. As a result, investors should be aware that Ambit Capital
may have a conflict of interest that could affect the objectivity of this report. Investors should not consider this report as the only factor in making their investment decision.
Dr Lal PathLabs
130% 45%
Phase 1: With penetration rates
low, rapid geographic expansion,
share gains and acquisition of
smaller labs for lower price helped
strong revenue growth while Phase 2: As base
90% expanded, smaller players 35%
driving up RoCE
became organised,
valuations for M&A moved
up – scope for revenue
growth moderated and
50% incremental RoIC for this 25%
growth became lower
10% 15%
FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16
Exhibit 6: CFO was the main source of funds Exhibit 7: Post capex, large sums of money available for
liquid investments
Debt Others
4% 9%
Dividend
Share 14%
Capital
17% Capex
57%
CFO Investments
79% 20%
Source: Company, Ambit Capital research Source: Company, Ambit Capital research
Exhibit 8: Sharp re-rating since listing in Dec’15 Exhibit 9: Strong outperformance vs Sensex
80 160
150
70 140
130
60 120
110
50 100
90
40 80
Apr-16
Mar-16
Jul-16
Jan-16
Aug-16
Sep-16
Jun-16
Oct-16
Nov-16
Feb-16
May-16
Jun 16
Feb 16
May 16
Oct 16
Apr 16
Mar 16
Dec 15
Jul 16
Jan 16
Aug 16
Sep 16
Dr Lal 1- yr average Dr Lal Sensex
Source: Company, Ambit Capital research Source: Company, Ambit Capital research
There are no significant issues with Dr Lal’s accounting policy. High CFO/EBITDA and steady working capital are
Accounting GREEN
positives. Historically ESOPs have been at an elevated level but have been accounted for fairly.
Earnings swing due to extent of onset of seasonal diseases is fairly high. While structural growth over medium term
Predictability AMBER
is fairly predictable, near-term volatility can be high. Actual performance has often beaten management guidance.
Earnings Momentum GREEN Earnings momentum has been positive for Dr Lal with consistent earnings beat vs expectations since listing.
Source: Ambit Capital research
Balance sheet
Year to March (` mn) FY12 FY13 FY14 FY15 FY16
Shareholders' equity 163 164 803 1,108 1,243
Reserves & surpluses 996 1,457 1,512 2,303 3,831
Total networth 1,160 1,621 2,315 3,411 5,074
Minority Interest 11 16 18 23 29
Debt 0 4 9 0 0
Deferred tax liability (27) (127) (196) (254) (121)
Total liabilities 1,171 1,640 2,342 3,434 5,102
Gross block 1,245 1,466 1,676 1,995 2,340
Net block 1,145 1,271 1,400 1,510 1,697
Investments 48 548 86 379 643
Cash & equivalents 134 215 1,057 1,482 2,296
Debtors 143 198 252 310 363
Inventory 62 86 117 143 145
Loans & advances 180 203 347 597 882
Other current assets 29 41 62 79 105
Total current assets 415 528 776 1,128 1,495
Current liabilities 394 898 1,038 1,127 838
Provisions 204 150 135 192 312
Total current liabilities 598 1,048 1,173 1,319 1,150
Net current assets (183) (520) (397) (192) 345
Total assets 1,171 1,640 2,342 3,434 5,102
Source: Company, Ambit Capital research
Income statement
Year to March (` mn) FY12 FY13 FY14 FY15 FY16
Revenues 3,422 4,517 5,579 6,596 7,913
% growth 32% 24% 18% 20%
Operating expenditure 2,557 3,540 4,194 5,036 6,090
EBITDA 865 977 1,386 1,560 1,824
% growth 13% 42% 13% 17%
Depreciation 198 204 272 282 283
EBIT 667 773 1,113 1,278 1,541
Interest expenditure 11 (1) (56) (90) (142)
Non-operating income 8 28 22 29 50
Adjusted PBT 664 802 1,192 1,397 1,734
Tax 213 245 389 433 675
Adjusted PAT/ Net profit 452 557 803 964 1,059
% growth 23% 44% 20% 10%
Extraordinaries - - - - (274)
Minority Interest 5 5 7 8 10
Reported PAT / Net profit 447 552 796 957 1,322
Source: Company, Ambit Capital research
Ratio analysis
Year to March FY12 FY13 FY14 FY15 FY16
Gross margin (%) 77.7% 78.5% 78.9% 78.9% 78.1%
EBITDA margin (%) 25.3% 21.6% 24.8% 23.6% 23.0%
EBIT margin (%) 19.5% 17.1% 20.0% 19.4% 19.5%
Net profit margin (%) 13.2% 12.3% 14.4% 14.6% 13.4%
Dividend payout ratio (%) 33.5% 16.4% 12.6% 15.7% 18.5%
Net debt: equity (x) -0.2 -0.5 -0.5 -0.5 -0.6
Working capital days -20 -42 -26 -11 16
Gross block turnover (x) 2.75 3.08 3.33 3.31 3.38
Post-tax RoCE(%) 49.3% 62.6% 85.5% 75.9% 56.0%
RoE(%) 43.3% 40.1% 40.8% 33.7% 25.0%
Source: Company, Ambit Capital research
Valuation parameters
Year to March FY12 FY13 FY14 FY15 FY16
EPS (`) 5.6 6.8 9.7 11.6 12.9
Diluted EPS (`) 5.6 6.8 9.7 11.6 12.9
Book value per share (`) 14.4 20.0 28.3 41.5 61.7
Dividend per share (`) 1.9 1.1 1.2 1.8 2.4
P/E (x) 198.6 162.3 113.3 94.7 68.6
P/BV (x) 76.6 55.3 38.9 26.6 14.3
EV/EBITDA (x) 102.5 90.9 64.2 56.9 48.1
Price/Sales (x) 26.0 19.8 16.2 13.7 9.2
Source: Company, Ambit Capital research
Jan-16
Apr-16
Sep-16
Dec-15
May-16
Jun-16
Feb-16
Mar-16
Jul-16
Nov-15
Aug-16
company. Revenue and operating cash flow posted 40% and 30% CAGR over
FY06-16.
eClerx Services Sensex
Impeccable capital allocation, exemplary growth
The founders have made no mistake in either strategy or execution since Source: Bloomberg, Ambit Capital research
founding in 2000. eClerx has focused on large corporate customers, small &
complex processes and annuity-like revenue. Its key competitive advantages eClerx’s forensic score analysis
have been its internal processes (knowledge management, training), deep
domain expertise and superior sales engine (higher-quality talent). The capital
allocation track record is also impeccable. 41% of profits were returned to
shareholders over FY06-16. After examining hundreds of potential targets,
eClerx has made just three niche acquisitions (in FY08, FY13 and FY15), each of
which has been successful (EPS-accretive from day-1, continued to grow post
deal).
Source: Ambit ‘HAWK’, Ambit Capital research
Architecture built around domain expertise, talent and clients
eClerx scores most highly on the architecture aspect of the IBAS framework. The eClerx’s greatness score analysis
founders’ network (both were Wharton MBA graduates) and sales ability enabled
marquee wins (e.g. Dell, Lehman Brothers). This, in turn, not only allowed eClerx
attract and retain high-calibre employees (a generous ESOP and listing in 2007
also helped) but also resulted in significant growth headroom. Focus on low-
volume and complex processes have resulted in better pricing (low competition)
and also high utilisation (just-in-time hiring). All of these combine to deliver high
customer satisfaction despite relying on low-cost, junior, offshore labour, which
A b AW A b l h
in turn generates high profitability (average EBIT margin of 35% over FY06-16).
Trading at par with Infosys; threats from regulation and automation
The regulatory-driven shift of trading OTC derivatives to the exchanges and the Research Analysts
higher proportion of newer, smaller-duration projects are hurting eClerx’s Sagar Rastogi
competitive advantages in the financial services segment (~40% of revenues in +91 22 3043 3291
FY14). Robotic process automation is another threat. Although the management sagar.rastogi@ambit.co
has a good track record of overcoming challenges and it could potentially add
new revenue streams, current valuations leave no room for error. eClerx trades Sudheer Guntupalli
at 15x FY18E EPS, on par with Infosys (15x) which is a better franchise (much +91 22 3043 3203
larger scale, full-service offering). sudheer.guntupalli@ambit.co
Ambit Capital and / or its affiliates do and seek to do business including investment banking with companies covered in its research reports. As a result, investors should be aware that Ambit Capital
may have a conflict of interest that could affect the objectivity of this report. Investors should not consider this report as the only factor in making their investment decision.
eClerx
Exhibit 1: eClerx has executed the same play book (mine customers, make sensible acquisitions…)
250 200%
180%
Revenue (US$mn)
200 Executing the same play book over last decade 160%
Pre-Tax RoCE
140%
150
120%
100%
100
80%
50 60%
40%
- 20%
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
Revenue (US$mn) Pre-tax RoCE
Source: Company, Ambit Capital research. Note: *This is pre-tax RoCE which includes interest and dividend income along with EBIT in the numerator and total
capital including cash in the denominator.
Exhibit 6: Cash generated over the years… Exhibit 7: …largely used to fund dividends
Source: Company, Ambit Capital research Source: Company, Ambit Capital research
Exhibit 8: Valuations at premium to historic average Exhibit 9: eClerx share price performance v/s Sensex
20 3,500
1 year forward P/E
18 (consensus) 3,000
2,500
16
2,000
14
1,500
12
1,000
10
500
8
-
Apr-11
Apr-12
Apr-13
Apr-14
Apr-15
Apr-16
Oct-11
Oct-12
Oct-13
Oct-14
Oct-15
Oct-16
Nov-08
Oct-09
Oct-10
Aug-14
Aug-15
Aug-16
May-09
Apr-10
Apr-11
Feb-14
Feb-15
Feb-16
Mar-12
Mar-13
Sep-11
Sep-12
Sep-13
P/E Avg SENSEX Eclerx
Source: Company, Ambit Capital research Source: Company, Ambit Capital research
Exhibit 11: Forensic score evolution Exhibit 12: Greatness score evolution
Source: Ambit ‘HAWK’, Ambit Capital research Source: Ambit ‘HAWK’, Ambit Capital research
Astral evolved from a niche pipe maker (CPVC) to a pan-India plastic Recommendation
pipe brand in less than a decade. Sales and EPS CAGR was 40% and Mcap (bn): `50/US$0.8
median ROCE was 22% over FY06-16. Focus on innovation (products and 3M ADV (mn): `28.2/US$0.4
processes) and strong relationships across ecosystem (suppliers, global
CMP: `418
innovators and intermediaries) will support growth of the plastic pipe
TP (12 mths): n.a.
business and building adhesives/construction chemicals business. Astral
Downside (%): n.a.
can transition into an ace building material franchise (akin to legends
like Pidilite, Asian Paints) since: (a) both segments have significant room
for innovation/re-investments; and (b) management is fanatic, frugal Flags
and focused. Valuations appear misleadingly expensive (25x FY18 EPS) Accounting: GREEN
and should be seen in light of high growth rates beyond the next Predictability: GREEN
decade. Consensus expects 39% EPS CAGR over FY16-18, higher than Earnings Momentum: AMBER
most other “new-age” building material names.
Competitive position: MODERATE Changes to this position: STABLE Performance
Pipes – a category with ample room for sustaining innovation 130
120
Despite a 16% 10-year revenue CAGR for top-5 companies, plastic pipes in 110
India have a long path to chart through: (a) replacement of GI pipes, (b) 100
increasing applications, and (c) innovation in plastic compounds and water 90
management systems. Current deflation in input prices (CPVC/PVC resin) 80
alongside scale and distribution ramp-up will support market share gains for
Jan-16
Apr-16
Sep-16
Dec-15
May-16
Jun-16
Feb-16
Mar-16
Jul-16
Nov-15
Aug-16
organized players (40% industry is unorganized). Astral is the 3rd largest and one
of the strongest plastic pipes brands and, hence, poised to gain share as the
market expands. Increasing competition has led to management’s decision for Astral Poly Sensex
reinvesting capital and leveraging its brand/reach architecture.
Source: Bloomberg, Ambit Capital research
From category creation to brand building to category extension
Astral created the CPVC pipes market in India through: (a) continuous launch of Astral’s forensic score analysis
differentiated products, (b) innovative communication to the influencers
(plumber trainings), and (c) branding (mass-media advertising in a seemingly
commoditized product). Throughout the last decade, the company maintained
focused capital allocation, with cash flows initially ploughed back to increase
capacities and then to de-leverage (0.2x D/E in FY16 vs 1.5x in FY05).
Establishment of Astral’s brand and prudent capital allocation manifested in 40%
sales/EPS CAGR and average pre-tax RoCE of 22% over FY06-16.
Source: Ambit ‘HAWK’, Ambit Capital research
Innovation flows into products, branding and processes
Innovative, category-expanding product launches and processes set Astral apart Astral’s greatness score analysis
from peers. Strong relationships with Lubrizol and global pipe majors (Wavin,
Spears and IPSC) facilitated launch of differentiated products. Astral’s unique
strategic assets are: (a) unparalleled CPVC/pipes brand (even without Lubrizol
support now), (b) relationships with plumbers, and (c) management’s strong
reputation amongst channel. Acquisitions of well-established adhesive brands in
India/UK will add another leg to growth. Astral is slowly replicating its winning
formula of quality products, impactful communication, intermediary connect and Source: Ambit ‘HAWK’, Ambit Capital research
learning from leaders to build India’s 2nd largest adhesives franchise.
Headline valuations can often be misleading
At 25x FY18 consensus EPS, Astral is one of the most expensive building material Research Analysts
franchises in India. However, Astral’s valuation should be considered in light of: Nitin Bhasin
(a) focused capital allocation history, and (b) ability and intent to reinvest cash in +91 22 3043 3241
RoCE-accretive products/segments to sustain the longevity of cash flow growth. nitin.bhasin@ambit.co
The growth phase in such businesses is longer than a 10-year DCF model gives Girisha Saraf
them credit for and, hence, a low terminal growth rate assumption leads to +91 22 3043 3211
misleading exit multiples (akin to Asian, Berger and Pidilite). girisha.saraf@ambit.co
Ambit Capital and / or its affiliates do and seek to do business including investment banking with companies covered in its research reports. As a result, investors should be aware that Ambit Capital
may have a conflict of interest that could affect the objectivity of this report. Investors should not consider this report as the only factor in making their investment decision.
Astral Poly Technik
4,000 20
15
- 10
FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16
Exhibit 6: CFO and equity were the primary sources of Exhibit 7: Continuous capacity expansion and recent
funds acquisitions to build upon brand were the main uses
Interest Net change Dividend
Net recd, 1% in cash, 5% paid, 3%
borrowings
, 11%
Interest
paid, 12%
Capex,
51%
Equity CFO, 59%
raises, Investments
29% in sub/JV,
29%
Source: Company, Ambit Capital research Source: Company, Ambit Capital research
Exhibit 8: After a strong re-rating valuations have Exhibit 9: Astral’s share price performance vs Sensex
corrected as the company absorbs the new acquisitions
70 6,000
60 5,000
50
4,000
40
3,000
30
20 2,000
10 1,000
0 0
Nov-10
May-11
Nov-11
May-12
Nov-12
May-13
Nov-13
May-14
Nov-14
May-15
Nov-15
May-16
Nov-16
Mar-07
Mar-10
Mar-13
Mar-16
Dec-07
Dec-10
Dec-13
Sep-08
Sep-11
Sep-14
Jun-09
Jun-12
Jun-15
1-year forward P/E (x) 6 yr avg P/E Astral Sensex index
Source: Company, Ambit Capital research Source: Company, Ambit Capital research
Astral falls in the top most decile (D1) in Ambit’s accounting framework; the company’s (a) high cash yield (9%),
Accounting GREEN (b) low contingent liabilities as a % of net worth (1%), (c) negligible misc. expenses as a % of total revenues, and
(d) low volatility in non-operating income stand out.
Largely a predictable business. Management has been providing good indication of the progress of the business.
Predictability GREEN
Excepting the sales of newly acquired Seal IT and Kenyan operations operating metrics are fairly predictable
Earnings momentum AMBER Consensus EPS downgraded by 4.7% and revenue by 2.5% over the past three months
Source: Ambit Capital research
Exhibit 11: Astral’s forensic score evolution Exhibit 12: Astral’s greatness score evolution
Source: Ambit ‘HAWK’, Ambit Capital research Source: Ambit ‘HAWK’, Ambit Capital research
Relaxo has grown at anything but a relaxing pace with FY05-16 revenue Recommendation
and PAT CAGR of 21% and 37%, respectively. It is a testament to brand
Mcap (bn): `48/US$0.7
creation; brandex equalled capex since FY11 with ad spends averaging
8% of sales over the decade. The consistency and focus have provided 3M ADV (mn): `7.2/US$0.1
Relaxo pricing power (13% CAGR; FY05-16) in a value offering without CMP: `401
compromising volume growth (8% CAGR). Segmented brands (Sparx, TP (12 mths): NA
Flite, Bahamas, Schoolmate, Boston, etc.) and brand investments as Downside (%): NA
against distribution (only 250 stores) have driven asset turns (from 2.2x
in FY06 to 2.7x in FY16), driving RoE from 7% in FY06 to 28% in FY16. Flags
Relaxo with an average selling price of `170/pair (just 4% market share Accounting: GREEN
in volumes) could very well be the horse for the long haul. Relaxo trades Predictability: AMBER
at 23x FY18E EPS (consensus), which is at a discount to Bata despite Earnings Momentum: AMBER
superior RoCE/ improving brand equity.
Competitive position: MODERATE Changes to this position: STABLE Performance
Unique combination of value proposition, quality and branding 120
110
Relaxo is one of the largest footwear companies in India selling over 129mn 100
pairs across its brands. It can sustain high growth as it is a leader in the largely 90
unorganised footwear market (at lower price points) with unique proposition of 80
value, durability and branding. Moreover, as the company expands its 70
distribution outside its dominant geographies (North and East), it will gain
Jan-16
Apr-16
Sep-16
Dec-15
May-16
Jun-16
Feb-16
Mar-16
Jul-16
Nov-15
Aug-16
market share. The company has room to premiumise its portfolio (realisation per
pair has moved from `36 in FY05 to `132 in FY16) as it adds more offerings
such as Sparx (35% of FY15 revenues) to the portfolio. Relaxo Footwear Sensex
From the humble Hawaii slippers to spring in the step Source: Bloomberg, Ambit Capital research
Relaxo has come a long way from a Hawaii slipper company to creating and
selling brands like Flite, Sparx, Boston and Bahamas. It began brand additions in Relaxo’s forensic score analysis
FY04 to give discerning customers premiumisation choices. In FY08, it identified
exports as an important market and grew it from `15mn to `300mn in FY15
(stagnant since FY12). In FY12, Relaxo introduced four major brand
ambassadors for four of its brands, which catapulted the brand perception of the
seeming value offering of rubber and rubber lookalike slippers. A point to note
is that unlike other parameters inventory days deteriorated from 67 days in FY10
to 138 days in FY16 – partly due to premiumisation (lower turns).
Source: Ambit ‘HAWK’, Ambit Capital research
Ambit Capital and / or its affiliates do and seek to do business including investment banking with companies covered in its research reports. As a result, investors should be aware that Ambit Capital
may have a conflict of interest that could affect the objectivity of this report. Investors should not consider this report as the only factor in making their investment decision.
Relaxo Footwears
Exhibit 1: Evolution of Relaxo Footwears – The “Flite” from Hawaii slippers to Sparx and Bahamas
- 0%
FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16
Revenues (Rs bn) (LHS) RoCE (RHS)
Source: Company, Ambit Capital research Note: RoCE is pre-tax.
While Bata is the oldest brand (in India for 85 years), Relaxo has a legacy of 40
years – it started out as a slipper brand. However, as the customer has moved up,
Relaxo’s product launches and designs have kept pace along with consistent
branding.
Relaxo is one of the few major footwear brands to have created sub-brands at price
points (as low as `150), significantly lower than peers. So much so that original
Brands and
brands of Relaxo and Hawaii are no longer the core brands and its additions such as
reputation
Flite, Sparx etc. have become part of the core brands.
It has backed these brands by consistent advertisement and brand ambassadors.
The aggregate ad spend of `5bn over last decade with consistent messaging of style,
quality and value is Relaxo's valued and strategic asset. Peers such as Bata have
missed this strategy and in contrast have sacrificed volumes in the endeavour to
premiumise.
Relaxo enjoys strong terms of trade with distributors (a sign of popular brand) as is
evident in 21 debtor days. Similarly, it enjoys creditor days of 52.
Relaxo controls manufacturing (has 8 plants) whereas most peers outsource a
Architecture significant portion of their products.
Relaxo is available across 50,000 touch points (higher than Bata’s 30,000). While
Metro has lower reach its store productivity is lot superior to that of Bata’s and
hence in our framework scores as well as Bata and Relaxo.
Apart from Bata India, which has access to the know-how and designs of its parent,
Strategic Assets
there are no major strategic assets for the players.
Relaxo and Metro score highly given brand reputation and strong architecture driven
Overall
by distribution reach (Relaxo) and high throughput stores (`20,000 sales per sq ft).
Source: Company, Ambit Capital research
Exhibit 6: Cash generated over the last 10 years… Exhibit 7: …have been deployed to fund capex and service
interest
Interest paid
Loans taken Dividend 19%
Sale of 21% paid
investments 3%
1%
Purchase of
CFO assets
78% 78%
Source: Company, Ambit Capital research Source: Company, Ambit Capital research
Exhibit 8: Relaxo is trading at a 40% premium to its 5-yr Exhibit 9: Relaxo’s share price performance v/s Sensex
average P/E
70 20,000
60
15,000
50
40
10,000
30
20 5,000
10
0 0
Oct-06
Oct-07
Oct-08
Oct-09
Oct-10
Oct-11
Oct-12
Oct-13
Oct-14
Oct-15
Jun-12
Jun-13
Jun-14
Jun-15
Jun-16
Oct-11
Feb-12
Oct-12
Feb-13
Oct-13
Feb-14
Oct-14
Feb-15
Oct-15
Feb-16
Oct-16
Relaxo's trailing P/E 5-yr avg. P/E RLXF SENSEX
Source: Company, Ambit Capital research Source: Company, Ambit Capital research
Exhibit 11: Forensic score evolution Exhibit 12: Greatness score evolution
Source: Ambit ‘HAWK’, Ambit Capital research Source: Ambit ‘HAWK’, Ambit Capital research
Income statement
Year to March (` mn) FY12 FY13 FY14 FY15 FY16
Net Sales 8,647 10,098 12,123 14,808 17,130
% growth 25% 17% 20% 22% 16%
Operating expenditure 3,112 4,306 5,141 6,344 7,640
EBITDA 943 1,098 1,470 2,009 2,411
% growth 31% 16% 34% 37% 20%
Depreciation 231 255 312 399 471
EBIT 712 843 1,159 1,610 1,940
Interest expenditure 187 177 227 185 229
Non-operating income 11 11 23 4 23
Adjusted PBT 535 677 955 1,426 1,776
Tax 136 229 299 396 573
Adjusted PAT before minority
399 448 656 1,031 1,203
interest
% growth 49% 12% 46% 57% 17%
Minority Interest - - - - -
Adjusted PAT after minority
399 448 656 1,031 1,203
interest
Reported PAT after minority interest 399 448 656 1,031 1,203
Source: Company, Ambit Capital research.
Cashflow statement
Year to March (` mn) FY12 FY13 FY14 FY15 FY16
Net Profit Before Tax 535 677 955 1,426 1,776
Depreciation 231 255 312 399 471
Others 192 176 227 191 192
Tax 89 209 276 376 543
(Incr) / decr in net working capital (142) (359) 31 (566) (302)
Cash flow from operations 727 540 1,249 1,075 1,594
Capex (net) (471) (827) (706) (1,302) (1,344)
(Incr) / decr in investments - - 0 2 39
Other income (expenditure) 1 1 6 2 3
Cash flow from investments -470 -825 -697 -1,298 -1,303
Net borrowings (67) 502 (270) 410 (30)
Issuance/buyback of equity - - - - 6
Interest paid (187) (177) (227) (164) (216)
Dividend paid (14) (18) (24) (30) (60)
Cash flow from financing (268) 294 (513) 211 (313)
Net change in cash -11 10 39 -12 -21
Closing cash balance 11 17 56 44 22
Free cash flow 257 -287 543 -227 250
Source: Company, Ambit Capital research.
Ratio analysis
Year to March (%) FY12 FY13 FY14 FY15 FY16
EBITDA margin (%) 11 11 12 14 14
EBIT margin (%) 8 8 10 11 11
Net profit (bef min. int.) margin (%) 5 4 5 7 7
Dividend payout ratio (%) 5 5 5 6 6
Net debt: equity (x) 1 1 1 1 0
Working capital turnover (x) 23 16 15 15 13
Gross block turnover (x) 2 2 2 2 2
RoCE (pre-tax) (%) 21 22 26 30 29
RoCE (post-tax) 16 15 18 22 20
RoIC (%) (post-tax) 18 15 19 23 21
RoE (%) 26 23 27 32 28
Source: Company, Ambit Capital research.
Valuation parameters
Year to March FY12 FY13 FY14 FY15 FY16
EPS after minority interest (`) 3 4 5 9 10
Diluted EPS (`) 3 4 5 9 10
Book value per share (`) 144 179 46 61 40
Dividend per share (`) 2 2 1 1 1
P/E (x) 122 109 74 47 41
P/BV (x) 3 2 9 7 10
EV/EBITDA (x) 53 46 34 25 21
EV/EBIT (x) 71 60 44 32 26
Source: Company, Ambit Capital research.
Jan-16
Apr-16
Sep-16
Dec-15
May-16
Jun-16
Feb-16
Mar-16
Jul-16
Nov-15
Aug-16
Post capital infusion by Carlyle in FY08, Repco’s growth was led by strong
growth in home loans (45% CAGR over FY08-12) driven by aggressive branch
expansion (from 25 in FY08 to 73 in FY13). But FY12 onwards, growth in home Repco Home Fin. Sensex
loans moderated (26% CAGR over FY12-16) due to regulatory and competitive
headwinds. However, shifting gears to LAP ensured Repco’s loan growth and Source: Bloomberg, Ambit Capital research
profitability remained respectable despite moderation. This led to Repco posting
at least 29% AUM CAGR and average RoA of 2.4% over FY12-16 (vs 45% AUM
CAGR and average RoA of 3% over FY06-12) as LAP’s share in AUM increased
from 14% to 20% during the period. Growth being higher than RoE implied that
dividend payout ratio remained frugal at ~9% over FY12-16.
Local knowhow and decentralized architecture are key strengths
A well-penetrated and decentralized branch architecture underpins strong local
area knowledge and superior sourcing of low-ticket customers (despite low ticket
sizes, credit costs have been reasonable at ~34bps over the past ten years).
Moreover, Repco’s strong positioning in the informal housing finance is also led
by its innovative origination strategy (unlike other HFCs, it avoids sourcing
through DSAs and instead sources only through loan melas and referrals). That
said, a weak credit rating profile relative to its peers implies a weaker liability
franchise, making it susceptible to margin pressure during a liquidity crunch.
Further rerating doubtful due to macro headwinds
A decadal surge in real-estate prices combined with strong local knowhow and
decentralized decision making drove Repco’s earnings momentum of 23% CAGR
over FY06-16. Simultaneously, mortgage financers have re-rated over the past 2
years at the cost of corporate lenders due to the latter’s shaky earnings
trajectory due to asset quality concerns. The combination of such fundamental Research Analysts
and sentimental factors underpins Repco’s premium valuations (3.7x 1-year fwd Aadesh Mehta, CFA
P/B, in line with peer average). Further re-rating hereon is doubtful as Repco +91 22 3043 3239
could find it difficult to sustain its current earnings momentum in light of
aadesh.mehta@ambit.co
declining real estate prices and pressures on the informal economy due to
clampdown on the black economy. Moreover, HFCs are exposed to the looming Pankaj Agarwal, CFA
regulatory risk of convergence of loan pricing to a more transparent and +91 22 3043 3206
objectively calculated base rate (which is followed by banks). pankaj.agarwal@ambit.co
Ambit Capital and / or its affiliates do and seek to do business including investment banking with companies covered in its research reports. As a result, investors should be aware that Ambit Capital
may have a conflict of interest that could affect the objectivity of this report. Investors should not consider this report as the only factor in making their investment decision.
REPCO Home Finance
Exhibit 1: Evolution of Repco – Repco’s growth has moderated as the base effect is now over
Exhibit 3: From a high growth phase of FY06-14, Repco is now going through a steady-state growth phase
Time period Phase Key developments
Repco’s robust growth (45% CAGR) during this period was driven by both increasing customer acquisition (due to benign
competition in the small ticket segment and rapid branch expansion from 25 in FY08 to 73 in FY13) and increasing ticket
size per loan (due to rapid increase in real estate prices).
The Such growth was supported by ~`1.1bn investment by Carlyle for a 49% stake in 2007. Such capital infusion helped
honeymoon FY06-12 Repco to further scale up their growth quickly.
period Regulatory and competitive environment remained benign in the relevant sub-segment Repco was operating.
Consequently both growth and profitability remained high during this period (AUM CAGR of 45% and RoA of 3%). Home-
loans was the key growth and profitability driver, growing at 46% CAGR during this time period and accounting for 86% of
the AUM mix in FY12.
Regulatory headwinds emerged FY11 onwards such as introduction of base rate system (which led to increasing cost of
funds) and removal of prepayment penalties (leading to higher churn in the loan book and reduction in fee-income).
Moreover, during this period, HFCs have seen hyper-competition from banks in home loans due to: i) lack of any
opportunities in corporate loans due to slowdown; and ii) regulators incentivising affordable housing in FY15 by reduction
Growth FY12- of risk weights and exemption on SLR/CRR and PSL requirements. Decline in real estate prices have also let to moderation
moderation Current in ticket size growth (which used to drive 50-60% of growth of HFCs).
Consequently Repco’s growth in the key segment of home loans moderated to 26% CAGR over FY12-16 versus 46%
CAGR in FY06-12. However, Repco was able to sustain such pressure on profitability and growth by increasing the share
of higher-yielding albeit risky LAP (from 14% in FY12 to 20% in FY16). This somewhat offset the lower profitability from the
business and enabled it to still deliver a respectable RoA of 2.5% during this period.
Source: Ambit Capital research.
Exhibit 4: Competitive mapping of HFCs – Repco’s small-ticket positioning drives its sustainable growth
Avg. ticket AUM AUM CAGR Opex/ Gross Branches Employees
Key metrics (FY16) NIMs RoA RoE
size (` mn) (` bn) (FY13-16) AUM NPA (%) (#) (#)
Repco 1.1 77 29% 4.9% 1.0% 1.30% 2.2% 17.0% 150 619
GRUH 0.5 111 27% 4.2% 0.8% 0.32% 2.3% 31.5% 179 618
HDFC 2.5 2,908 16% 3.1% 0.3% 0.70% 2.4% 21.8% 401 2,196
LICHF 1.2 1,252 17% 2.6% 0.4% 0.45% 1.5% 19.6% 234 1,726
CANFIN 1.7 106 38% 3.1% 0.7% 0.19% 1.6% 19.0% 140 553
DEWAN 1.2 695 24% 3.0% 0.9% 0.93% 0.9% 11.9% 353 2,625
PNBHF 3.7 272 60% 3.8% 1.2% 0.22% 1.4% 17.6% 47 752
Source: Company, Ambit Capital research
Exhibit 5: Mapping GRUH and its peers on IBAS
Particulars GRUH HDFC LICHF REPCO CNFIN DHFL PNBHF Comments
Innovation in terms of ability to appraise a non-salaried borrower is
key to gain penetration in the under-served low-income segment.
GRUH scores best in the metric due to its innovative products and
appraisal techniques. GRUH’s product innovation is exemplified from
the fact that it structures customised EMIs to match the cash flows of
the low-income borrowers and has flexible repayment plan as per
Innovation
daily, monthly or yearly amortising. Moreover, GRUH was the first HFC
to introduce a formal credit score methodology for the low-income
category of borrowers. Repco comes closest to GRUH in replicating
this. Moreover Repco’s origination strategy is also innovative as it
sources only through loan melas and referrals and avoids sourcing
through DSAs unlike other HFCs.
Brand for the home loan borrower will depend on the perceived
customer service and the perceived project financing abilities by the
lender. Whilst HFCs score lower than banks on all these metrics, HDFC
Brand
enjoys the best brand amongst the HFCs due to superior perception on
the above metrics, followed closely by GRUH. LICHF, CNFIN and
PNBHF also score high due to their PSU parentage.
A robust branch network with decentralised decision making is the key
to gain penetration in small ticket housing finance. HDFC with ~400
branches and a decentralised decision making has one of the best
Architecture
architectures amongst peers, closely followed by DHFL and GRUH.
Whilst REPCO has marginally lower branches than GRUH, it also
scores highly due to a decentralised decision making process.
Support of the parent, strong credit rating and a granular retail deposit
franchise are the key strategic assets for HFCs in times of liquidity
Strategic asset
crunch. LICHF is best placed in this metric due to strong support from
its parent on the above mentioned metrics.
GRUH comes out as one the strongest HFCs versus its peers due to its
Overall rank
strengths in innovation, brand, architecture and strategic assets.
Source: Company, Ambit Capital research Note: - Strong; - Relatively Strong; - Average; - Relatively weak.
Exhibit 6: Repco has delivered a robust loan book growth Exhibit 7: Increasing share of LAP has sustained growth
AUM mix (%)
70%
57% 100%
60% 16% 15% 14% 15% 19% 19% 20%
47% 47% 80%
50%
35% 29%
40%
32% 31% 60%
26% 27% 28%
30%
20% 40% 84% 85% 86% 85% 81% 81% 80%
14% 12%
10%
20%
0%
FY11 FY12 FY13 FY14 FY15 FY16 0%
FY10 FY11 FY12 FY13 FY14 FY15 FY16
Disbursements growth AUM growth
Mortgages LAP
Source: Company, Ambit Capital research Source: Company, Ambit Capital research
Exhibit 8: Repco’s liability mix is tilted towards banks Exhibit 9: Repco’s asset quality has remained in control
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
72%
NCDs
Exhibit 10: Repco is trading in line with its cross-cycle Exhibit 11: Repco – share price performance versus sensex
average P/B
5.0 600
4.5
4.0 500
3.5 400
3.0
2.5 300
2.0
1.5 200
1.0 100
0.5
0.0 -
Apr-13
Apr-14
Apr-15
Apr-16
Jul-13
Jan-14
Jul-14
Jan-15
Jul-15
Jan-16
Jul-16
Jun-13
Sep-13
Dec-13
Mar-14
Jun-14
Sep-14
Dec-14
Mar-15
Jun-15
Sep-15
Dec-15
Mar-16
Jun-16
Sep-16
Oct-13
Oct-14
Oct-15
Oct-16
Income statement
Year to March (` mn) FY12 FY13 FY14 FY15 FY16
NII (inclu. Securitisation) 1,033 1,255 1,909 2,604 3,327
Other income 128 147 198 8 12
Total income 1,161 1,402 2,106 2,612 3,339
Operating expenditure 191 242 388 547 642
Pre-provisioning profit 970 1,160 1,718 2,065 2,698
Provisions 94 92 227 204 393
Profit before tax 875 1,068 1,491 1,861 2,304
Tax 201 268 390 632 800
Consol. PAT 674 801 1,101 1,229 1,505
Source: Company, Ambit Capital research
Balance sheet
Year to March (` mn) FY12 FY13 FY14 FY15 FY16
Net-worth 3,032 6,345 7,411 8,121 9,548
Borrowings - on balance
25,102 30,645 39,020 51,044 65,379
sheet
Borrowings - off balance
- - - - -
sheet
Total liabilities 28,134 36,990 46,431 59,165 74,927
AUM 28,022 35,447 46,619 60,129 76,912
Cash and equivalents 175 2,101 219 175 200
Net Current Assets (143) (639) (531) (1,263) (2,309)
Total assets 28,134 36,990 46,431 59,165 74,927
Source: Company, Ambit Capital research
Key ratios
Year to March (` mn) FY12 FY13 FY14 FY15 FY16
NIM % (on AUM) 4.2% 4.0% 4.7% 4.9% 4.9%
AUM Growth 35% 26% 32% 29% 28%
Opex as % of AAUM 0.78% 0.74% 0.93% 1.04% 0.96%
Credit costs as a % of AUM 0.39% 0.29% 0.55% 0.38% 0.57%
CAR (%) 16.5% 25.5% 25.5% 25.5% 20.7%
Source: Company, Ambit Capital research
Valuation parameters
Year to March (` mn) FY12 FY13 FY14 FY15 FY16
Dil EPS – Consol (`) 13.2 17.1 17.6 19.7 24.1
BVPS (`.) 66 102 119 130 153
ROA (%) 2.7% 2.4% 2.6% 2.3% 2.2%
ROE (%) 24.7% 17.1% 16.0% 15.8% 17.0%
P/B (x) 8.1 5.2 4.5 4.1 3.5
P/E (x) 40.3 31.2 30.2 27.0 22.1
Source: Company, Ambit Capital research
Jan-16
Apr-16
Sep-16
Dec-15
May-16
Jun-16
Feb-16
Mar-16
Jul-16
Nov-15
Aug-16
market share (~60%); (c) new entrants (tile players, global majors); hence,
limited market share gains for Cera in future. Though tiles may get Cera
incremental sales, it is hard for Cera to build significant market share in this Cera Sanitary. Sensex
segment; globally, we have not seen any sanitaryware brand succeed in tiles.
Source: Bloomberg, Ambit Capital research
A disciplined approach to usurp competition
A decade back, Cera was 1/3rd the size of main peer HSIL; by FY16, it was Cera’s forensic score analysis
~90% of HSIL’s revenues and a lot more profitable (21.6% RoE vs 8.6% for
latter). Cera’s secret sauce: (a) focus on gradually growing scale and segments
(lifestyle products, faucets, tiles) alongside maintaining strong balance sheet
(D/E within 1x in the last decade though capacity tripled); (b) significant
spending on brand (one of highest in building material space); (c) controlled
overheads; (d) expanding distribution. Faucets are 1.3x sanitaryware market size
at `52bn-55bn with 40% organised vs 60% in the case of sanitary ware.
Source: Ambit ‘HAWK’, Ambit Capital research
Strong brand and low-cost manufacturing are key advantages
Cera has launched several differentiated products like twin-flush and 4-litre WC Cera’s greatness score analysis
ahead of competition. Higher brandex than most peers has helped CERA
increase premium sales mix to ~40% of sales. It has the second-largest
sanitaryware manufacturing capacity (3mn units), strongest distribution network,
and a team of 200 in-house technicians for after-service. It is the only frontline
ceramic manufacturer with access to administered gas (30% cheaper than spot
gas) for ~30% of its production, which is a unique strategic asset.
Source: Ambit ‘HAWK’, Ambit Capital research
Sustenance of rich valuations require a lot playing out in Cera’s favor
Cera trades at 22x FY18 EPS, a marginal discount to Kajaria and at a premium
to Somany. Whilst Cera deserves credit for disciplined growth and good capital Research Analysts
allocation over the last decade, future free cash flows will depend on: (a) ability
Nitin Bhasin
to garner further market share, (b) reduce working capital intensity (78 days
+91 22 3043 3241
now); and (c) discipline in deployment of capital in the tiles segment. Both of the
nitin.bhasin@ambit.co
above could be difficult given aggressive expansions by competitors which make
us less comfortable on Cera given it rich valuations. Girisha Saraf
+91 22 3043 3211
girisha.saraf@ambit.co
Ambit Capital and / or its affiliates do and seek to do business including investment banking with companies covered in its research reports. As a result, investors should be aware that Ambit Capital
may have a conflict of interest that could affect the objectivity of this report. Investors should not consider this report as the only factor in making their investment decision.
Cera Sanitaryware
Source: Company, Ambit Capital research (RoCE for the above purpose implies Median RoCE for that period)
Source: Company, Ambit Capital research, Note: - Strong; - Relatively Strong; - Average; - Relatively weak.
Exhibit 6: Mostly CFO and a small equity issuance were the Exhibit 7: Funds were mostly expended on capex (`3.5bn)
key sources (`4.7bn)
Net Interest Dividend
borrowings recd, 3% Interest paid, 7%
, 8% paid, 8%
Investments
, 9%
Equity
Capex,
issuance, Net
CFO, 70% 65%
19% increase in
cash, 11%
Source: Company, Ambit Capital research Source: Company, Ambit Capital research
Exhibit 8: Strengthening of franchise and high earnings Exhibit 9: Cera’s share price performance vs Sensex
growth led to sharp re-rating
50 4,000
3,500
40
3,000
30 2,500
2,000
20
1,500
10 1,000
0 500
0
Nov-10
May-11
Nov-11
May-12
Nov-12
May-13
Nov-13
May-14
Nov-14
May-15
Nov-15
May-16
Nov-16
Nov-07
May-08
Nov-08
May-09
Nov-09
May-10
Nov-10
May-11
Nov-11
May-12
Nov-12
May-13
Nov-13
May-14
Nov-14
May-15
Nov-15
May-16
Nov-16
1-year forward P/E (x) 6 yr avg P/E Cera Sensex index
Source: Company, Ambit Capital research Source: Company, Ambit Capital research
Exhibit 11: Forensic score evolution Exhibit 12: Greatness score evolution
Source: Ambit ‘HAWK’, Ambit Capital research Source: Ambit ‘HAWK’, Ambit Capital research
We rank the BSE500 universe of firms (excluding financial services firms and
excluding firms with insufficient data) on our ’greatness‘ score, which consists of six
equally weighted headings – investments, conversion to sales, pricing discipline,
balance sheet discipline, cash generation and EPS improvement, and return ratio
improvement. Under each of these six headings, we further look at two kinds of
improvements:
Percentage improvements in performance over FY13-15 vs FY10-12; and
Consistency in performance over FY10-15 i.e. improvements adjusted for
underlying volatility in financial data
A complete list of factors that are considered whilst quantifying greatness has been
mentioned in Exhibit below.
Exhibit 14: Factors used for quantifying greatness
Head Criteria
1 Investments a. Above median gross block increase (FY13-15 over FY10-12)*
b. Above median gross block increase to standard deviation
2 Conversion to sales a. Improvement in asset turnover (FY13-15 over FY10-12)*
b. Positive improvement in asset turnover adjusted for standard
deviation
c. Above median sales increase (FY13-15 over FY10-12)*
d. Above median sales increase to standard deviation
3 Pricing discipline a. Above median PBIT margin increase (FY13-15 over FY10-12)*
b. Above median PBIT margin increase to standard deviation
4 Balance sheet discipline a. Below median debt-equity decline (FY13-15 over FY10-12)*
b. Below median debt-equity decline to standard deviation
c. Above median cash ratio increase (FY13-15 over FY10-12)*
d. Above median cash ratio increase to standard deviation
Cash generation and
5 a. Above median CFO increase (FY13-15 over FY10-12)*
PAT improvement
b. Above median CFO increase to standard deviation
c. Above median adj. PAT increase (FY13-15 over FY10-12)*
d. Above median adj. PAT increase to standard deviation
6 Return ratio improvement a. Improvement in RoE (FY13-15 over FY10-12)*
b. Positive improvement in RoE adjusted for standard deviation
c. Improvement in RoCE (FY13-15 over FY10-12)*
d. Positive improvement in RoCE adjusted for standard deviation
Source: Ambit Capital research; Note: * Rather than comparing one annual endpoint to another annual endpoint
(say, FY10 to FY15), we prefer to average the data out over FY10-12 and compare that to the averaged data
from FY13-15. This gives a more consistent picture of performance (as opposed to simply comparing FY10 to
FY15).
The ten-bagger portfolio focuses on structural plays that are financially strong firms
(with credible management teams) and remain consistent performers on a cross-
cyclical basis. Companies are identified based on their relentless improvement in
financial performance over long periods of time (usually, six years). This portfolio is
ideal for conventional buy-and-hold investors with a 1-3 year horizon.
Adding the Coffee Can for long-term investors with a ten-year outlook
To this suite of portfolios, we add the Coffee Can which is ideal for long-term
investors with a ten-year outlook. In the table below, we summarise our portfolio
recommendations for investors.
Exhibit 15: Our suite of Portfolios for investors looking to invest in India
Type of Investor
Recommended Ambit Returns over recommended time The Coffee Can Portfolio is ideal
Portfolio period for long-term investors with a ten-
The 16 instalments of our ‘Good &
year outlook
Short-term investor with quarterly Clean’ portfolios over the last five years
Good and Clean Portfolio
performance focus have delivered a staggering 4.1% alpha
on a CAGR basis
The five iterations of our ten-bagger
Conventional buy-and-hold portfolios have generated over 10.2%
Ten-bagger portfolio
investor with 1-3 year horizon alpha on a CAGR basis over the past
five years
Long-term investor with ten-year Average alpha of 8.3% over seven ten-
Coffee Can Portfolio
outlook year iterations using total returns
Source: Ambit Capital Research
The five stocks that constituted the first iteration of the Coffee Can Portfolio consisted
of one IT company, one pharma company, one BFSI company and two companies
from the automobile/auto-ancillary sector. These were NIIT, Cipla, Hero MotoCorp
HDFC Ltd and Swaraj Engines. The star performers during this period were Hero
MotoCorp and HDFC which proved to be a ten-bagger whilst NIIT collapsed ~74% in
this period.
Exhibit 17: Portfolio performance during the first iteration
Value at start Value at end
Company Total return
(`) (` bn)
CAGR
Date from/to 30-Jun-00 30-Jun-10
NIIT 100 26 -13%
Cipla 100 531 18%
Hero MotoCorp 100 1,499 31%
Swaraj Engines 100 493 17%
HDFC 100 1,283 29%
Portfolio 500 3,831 23%
Sensex 100 441 16%
Outperformance 6.6%
Source: Bloomberg, Ambit Capital research. Note: *Portfolio price at start of `500 denotes an equal allocation of Hero MotoCorp and HDFC were
`100 in each stock at the start of the period. Portfolio price at end is the value of the portfolio at the end of the
period. Thus, for this period, the value of the portfolio rose from `500 at the start to `3,831 at the end. the star performers, whilst NIIT was
the laggard in Period 1
Exhibit 18: Hero and HDFC rose exponentially whilst NIIT collapsed in 2000-2010
5,000
4,000 Swaraj Engines
2,000 Cipla
1,000 NIIT
- HDFC
Value at start Vaue at end
Source: Bloomberg, Ambit Capital research. Note: Value at start denotes an equal allocation of `100 in each
stock at the start of the period. Value at end is the value of each stock at the end of the period. Thus, for this
period, the value of the portfolio rose from `500 at the start to `3,831 at the end.
During the second iteration, the Coffee Can Portfolio consisted of six stocks with three
repeats (Cipla, Hero MotoCorp and HDFC from Period 1) and three new entries
(Apollo Hospitals, Roofit Industries and LIC Housing Finance). During this period, note
that one of the stocks in the portfolio, Roofit Industries, was delisted during 2001-
2011. Despite this, the portfolio performed admirably. The star performer was LIC
Housing Finance that delivered 46.7x returns whilst Cipla was a laggard at 3.0x.
Exhibit 20: Portfolio performance during the second iteration
Value at start Value at end LIC Housing Finance was the star
Company Total return
(`) (` bn) performer delivering ~47x total
CAGR
Date from/to 30-Jun-01 30-Jun-11 returns in Period 2
Cipla 100 396 15%
Hero MotoCorp 100 1,985 35%
Apollo Hospitals 100 1,409 30%
Roofit Inds. 100 4 -27%
HDFC 100 1,242 29%
LIC Housing Fin. 100 4,767 47%
Portfolio 600 9,802 32%
Sensex 100 646 20%
Outperformance 11.7%
Source: Bloomberg, Ambit Capital research. Note: *Portfolio price at start of `600 denotes an equal allocation of
`100 in each stock at the start of the period. Portfolio price at end is the value of the portfolio at the end of the
period. Thus, for this period, the value of the portfolio rose from `600 at the start to `9,802 at the end.
Exhibit 21: LIC Housing Finance was the stellar performer during 2001-2011
12,000
10,000 LIC Housing Fin.
8,000 HDFC
Source: Bloomberg, Ambit Capital research. Note: Value at start denotes an equal allocation of `100 in each
stock at the start of the period. Value at end is the value of each stock at the end of the period. Thus, for this
period, the value of the portfolio rose from `600 at the start to `9,802 at the end.
Exhibit 24: Portfolio’s outperformance was led by LIC Housing Finance once again
10,000 LIC Housing Fin.
HDFC
8,000
Aurobindo Pharma
6,000
Guj Gas Company
4,000 Container Corpn.
2,000 Cipla
Hero Motocorp
-
Value at start Vaue at end Infosys
Source: Bloomberg, Ambit Capital research. Note: Value at start denotes an equal allocation of `100 in each
stock at the start of the period. Value at end is the value of each stock at the end of the period. Thus, for this
period, the value of the portfolio rose from `800 at the start to `7,709 at the end.
Source: Bloomberg, Ambit Capital research. Note: Value at start denotes an equal allocation of `100 in each
stock at the start of the period. Value at end is the value of each stock at the end of the period. Thus, for this
period, the value of the portfolio rose from `900 at the start to `6,643 at the end.
In this iteration, amongst large caps, Asian Paints lead the charge with almost 14.9x Suprajit Engineering and Asian
returns. Extreme movements were seen in mid-cap stocks again with stocks like Paints have proven to be the star
Suprajit Engineering delivering almost 15.4x returns whereas Aftek delivered -96% performers in the eighth iteration
returns. so far
Exhibit 38: Portfolio performance during the eighth iteration
Value at start Value at end
Company Total return
(`) (` bn)
CAGR
Date from/to 30-Jun-07 30-Sep-16
Infosys 100 253 11%
Wipro 100 196 8%
Cipla 100 297 12%
Tech Mahindra 100 131 3%
Hindalco Inds. 100 116 2%
Hero MotoCorp 100 665 23%
Container Corpn. 100 202 8%
Asian Paints 100 1,587 35%
Havells India 100 952 28%
Geometric 100 221 9%
Aftek 100 4 -30%
Munjal Showa 100 591 21%
Suprajit Engg. 100 1,635 35%
HDFC 100 386 16%
HDFC Bank 100 592 21%
Portfolio 1,500 7,828 20%
Sensex 100 218 9%
Outperformance 10.8%
Source: Bloomberg, Ambit Capital research. Note: * Portfolio price at start of `1,500 denotes an equal allocation
of `100 in each stock at the start of the period. Portfolio price at end is the value of the portfolio at the end of the
period. Thus, for this period, the value of the portfolio rose from `1500 at the start to `7,828 until Sep ‘16.
Exhibit 39: Suprajit Engineering and Asian Paints have been the star performers in
the eighth iteration
9,000 HDFC Bank
8,000 HDFC
Suprajit Engg.
7,000
Munjal Showa
6,000 Aftek
Geometric
5,000
Havells India
4,000 Asian Paints
3,000 Container Corpn.
Hero Motocorp
2,000 Hindalco Inds.
1,000 Tech Mahindra
Cipla
- Wipro
Value at start Vaue at end Infosys
Source: Bloomberg, Ambit Capital research. Note: Value at start denotes an equal allocation of `100 in each
stock at the start of the period. Value at end is the value of each stock at the end of the period. Thus, for this
period, the value of the portfolio rose from `1500 at the start to `7,828 until Sep ‘16.
Both large-caps and mid-caps shared the outperformance during this iteration with Both large-caps as well as mid-
Asian Paints and HDFC Bank delivering 10x and 5.7x returns respectively whilst caps have shared the
Havells India is continuing its dream run with 12.4x returns. outperformance during the ninth
iteration
7,000
Punjab Natl.Bank
6,000 HDFC Bank
HDFC
5,000
Geometric
4,000 Automotive Axles
3,000 Havells India
Tech Mahindra
2,000
Asian Paints
1,000 Cipla
- Wipro
Value at start Vaue at end Infosys
Source: Bloomberg, Ambit Capital research. Note: Value at start denotes an equal allocation of `100 in each
stock at the start of the period. Value at end is the value of each stock at the end of the period. Thus, for this
period, the value of the portfolio rose from `1,100 at the start to `5,724 until Sep ‘16.
Motherson Sumi has been the star performer in this iteration having delivered The returns for the tenth iteration
~14.4x returns during this period. have largely been dominated by
Exhibit 44: Portfolio performance during the tenth iteration Motherson Sumi and Asian Paints
Value at start Value at end
Company Total return
(`) (` bn)
CAGR
Date from/to 30-Jun-09 30-Sep-16
Infosys 100 266 14%
Wipro 100 262 14%
Jindal Steel 100 19 -21%
Cipla 100 239 13%
Asian Paints 100 1,049 38%
Oracle Fin. Serv. 100 317 17%
Tech Mahindra 100 245 13%
Motherson Sumi 100 1,544 46%
HDFC Bank 100 450 23%
HDFC 100 331 18%
Punjab Natl. Bank 100 121 3%
Portfolio 1,100 4,843 23%
Sensex 100 215 11%
Outperformance 11.5%
Source: Bloomberg, Ambit Capital research. Note: * Portfolio price at start of `1,100 denotes an equal allocation
of `100 in each stock at the start of the period. Portfolio price at end is the value of the portfolio at the end of the
period. Thus, for this period, the value of the portfolio rose from `1,100 at the start to `4,843 until Sep ‘16.
Exhibit 45: Motherson Sumi has been the star performer in this iteration
6,000 Punjab Natl.Bank
HDFC
5,000
HDFC Bank
4,000 Motherson Sumi
Tech Mahindra
3,000 Oracle Fin.Serv.
2,000 Asian Paints
Cipla
1,000 Jindal Steel
Wipro
-
Infosys
Value at start Vaue at end
Source: Bloomberg, Ambit Capital research. Note: Value at start denotes an equal allocation of `100 in each
stock at the start of the period. Value at end is the value of each stock at the end of the period. Thus, for this
period, the value of the portfolio rose from `1,100 at the start to `4,843 until Sep ‘16.
The performance of the portfolio in this iteration continues to be led by Motherson Even in the eleventh iteration
Sumi and Asian Paints. In spite of suspension of trading in two of the constituent Motherson Sumi and Asian Paints
stocks through the period (Amar Remedies and Tulip Telecom), the portfolio continues have dominated the portfolio
to deliver a stellar performance with an 18.7% CAGR. returns
Exhibit 47: Portfolio performance during the eleventh iteration
Value at start Value at end
Company Total return
(`) (` bn)
CAGR
Date from/to 30-Jun-10 30-Sep-16
Amar Remedies 100 8 -33%
Asian Paints 100 534 31%
Motherson Sumi 100 789 39%
Tulip Telecom 100 1 -53%
HDFC Bank 100 348 22%
Punjab Natl. Bank 100 77 -4%
Dewan Hsg. Fin. 100 284 18%
Portfolio 700 2,042 19%
Sensex 100 173 9%
Outperformance 9.5%
Source: Bloomberg, Ambit Capital research. Note: * Portfolio price at start of `700 denotes an equal allocation of
`100 in each stock at the start of the period. Portfolio price at end is the value of the portfolio at the end of the
period. Thus, for this period, the value of the portfolio rose from `700 at the start to `2,042 until Sep ‘16.
Exhibit 48: Motherson Sumi and Asian Paints continue to be the star performers in this
iteration
2,500
Dewan Hsg. Fin.
2,000
Punjab Natl.Bank
1,500 HDFC Bank
Tulip Telecom
1,000
Motherson Sumi
500 Asian Paints
Amar Remedies
-
Value at start Vaue at end
Source: Bloomberg, Ambit Capital research. Note: Value at start denotes an equal allocation of `100 in each
stock at the start of the period. Value at end is the value of each stock at the end of the period. Thus, for this
period, the value of the portfolio rose from `700 at the start to `2,042 until Sep ‘16.
Source: Bloomberg, Ambit Capital research. Note: * Portfolio kicks off on 30 June 2011. Excess returns have been
calculated as returns in excess of risk-free rate (assumed to be 8%) divided by absolute maximum drawdown.
Maximum drawdown is defined as the maximum drop in cumulative returns from the highest peak to the lowest
subsequent trough. ** Maximum drawdown took place from April 2012 to August 2013 for the all-cap CCP, July
2011 to December 2011 for the large-cap CCP and February 2015 to February 2016 for the Sensex.
Extreme price performance among mid-cap/small-cap stocks was seen during this Extreme price performance
iteration. Motherson Sumi delivered 4.0x returns during this period whilst Zylog amongst small/mid-caps can be
Systems lost 99% of its value. seen in the twelfth iteration
Exhibit 50: Portfolio performance during the twelfth iteration
Value at start Value at end Total return
Company
(`) (` bn) CAGR
Date from/to 30-Jun-11 30-Sep-16 5.26
ITC 100 196 14%
Asian Paints 100 382 29%
Motherson Sumi 100 505 36%
Ipca Labs. 100 179 12%
Tulip Telecom 100 1 -59%
Zylog Systems 100 1 -55%
Pratibha Inds. 100 34 -19%
Unity Infra. 100 18 -28%
Amar Remedies 100 6 -41%
Setco Automotive 100 222 16%
HDFC Bank 100 263 20%
Punjab Natl. Bank 100 72 -6%
Dewan Hsg. Fin. 100 296 23%
City Union Bank 100 375 29%
Portfolio 1,400 2,550 12%
Sensex 100 161 9%
Outperformance 2.7%
Source: Bloomberg, Ambit Capital research. Note: * Portfolio price at start of `1,400 denotes an equal allocation
of `100 in each stock at the start of the period. Portfolio price at end is the value of the portfolio at the end of the
period. Thus, for this period, the value of the portfolio rose from `1,400 at the start to `2,550 until Sep ’16.
Exhibit 51: Extreme price performance was seen in mid/small-caps in this iteration
3,000 City Union Bank
Dewan Hsg. Fin.
2,500 Punjab Natl.Bank
HDFC Bank
2,000 Setco Automotive
Amar Remedies
1,500 Unity Infra.
Pratibha Inds.
1,000 Zylog Systems
Tulip Telecom
500 Ipca Labs.
Motherson Sumi
- Asian Paints
Value at start Vaue at end
ITC
Source: Bloomberg, Ambit Capital research. Note: Value at start denotes an equal allocation of `100 in each
stock at the start of the period. Value at end is the value of each stock at the end of the period. Thus, for this
period, the value of the portfolio rose from `1,400 at the start to `2,550 until Sep ’16.
With 22 companies making the cut in this iteration, this was the biggest Coffee Can The thirteenth iteration has been
Portfolio in terms of number of constituent companies. Astral Poly Technik was the the biggest CCP in terms of number
star performer in this iteration with almost 9x returns. Zylog Systems and Tecpro of stocks in the portfolio
Systems, on the other hand, lost almost their entire value with a drop of 99% and
97% respectively.
Exhibit 54: Astral Poly Technik outperformed other stocks in this iteration
City Union Bank
6,000 Dewan Hsg. Fin.
Allahabad Bank
Punjab Natl.Bank
5,000 Axis Bank
HDFC Bank
Setco Automotive
4,000 Unity Infra.
Amar Remedies
Astral Poly
3,000 Pratibha Inds.
Tecpro Systems
Zylog Systems
Grindwell Norton
2,000 Balkrishna Inds
Page Industries
Berger Paints
1,000 Ipca Labs.
Opto Circuits
Marico
- Asian Paints
ITC
Value at start Vaue at end
Source: Bloomberg, Ambit Capital research. Note: Value at start denotes an equal allocation of `100 in each
stock at the start of the period. Value at end is the value of each stock at the end of the period. Thus, for this
period, the value of the portfolio rose from `2,200 at the start to `5,356 until Sep ‘16.
Mid-cap stocks led the performance of the profile in this iteration with some of the Mid-caps drove the
stocks’ prices rising 3-4 times since the beginning of this portfolio in June 2013. outperformance for the fourteenth
These stocks included names like Astral Poly Technik, Balkrishna Industries, Page iteration
Industries, Sarla Performance Fibers and Solar Industries. Unity Infraprojects and
Pratibha Industries on the other hand are amongst stocks that lost value in this
period.
Exhibit 56: Portfolio performance during the fourteenth iteration
Value at start Value at end
Company Total return
(`) (` bn)
CAGR
Date from/to 30-Jun-13 30-Sep-16
ITC 100 119 5%
HCL Technologies 100 220 27%
Asian Paints 100 257 34%
Marico 100 283 38%
Berger Paints 100 327 44%
Ipca Labs. 100 93 -2%
Page Industries 100 379 51%
Balkrishna Inds 100 506 65%
Solar Inds. 100 360 48%
Astral Poly 100 397 53%
Pratibha Inds. 100 65 -12%
Unity Infra. 100 42 -23%
Sarla Performance 100 467 61%
HDFC Bank 100 195 23%
Axis Bank 100 213 26%
Indian Bank 100 198 23%
City Union Bank 100 248 32%
Dewan Hsg. Fin. 100 393 52%
Portfolio 1,800 4,762 35%
Sensex 100 151 13%
Outperformance 21.4%
Source: Bloomberg, Ambit Capital research. Note: * Portfolio price at start of `1,800 denotes an equal allocation
of `100 in each stock at the start of the period. Portfolio price at end is the value of the portfolio at the end of the
period. Thus, for this period, the value of the portfolio rose from `1,800 at the start to `4,762 until Sep ’16.
Exhibit 57: Mid-caps led the charge in this iteration driving most of the portfolio
returns
6,000 Dewan Hsg. Fin.
City Union Bank
Indian Bank
5,000 Axis Bank
HDFC Bank
4,000 Sarla Performanc
Unity Infra.
Pratibha Inds.
3,000 Astral Poly
Solar Inds.
2,000 Balkrishna Inds
Page Industries
Ipca Labs.
1,000 Berger Paints
Marico
- Asian Paints
HCL Technologies
Value at start Vaue at end
ITC
Source: Bloomberg, Ambit Capital research. Note: Value at start denotes an equal allocation of `100 in each
stock at the start of the period. Value at end is the value of each stock at the end of the period. Thus, for this
period, the value of the portfolio rose from `1,800 at the start to `4,762 until Sep ‘16.
For products that we use daily, we tend to be generally aware of the strength of a
firm’s brand. In more niche products or B2B products (e.g. industrial cables, mining
equipment, municipal water purification, and semiconductors), investors often do not
have first-hand knowledge of the key brands in the relevant market. In such
instances, to assess the strength of the brand, they turn to:
Brand recognition surveys conducted by the trade press.
The length of the warranties offered by the firm (the longer the warranties, the
more unequivocal the statement it makes about the firm’s brand).
The amount of time the firm has been in that market (e.g. “Established 1905” is a
fairly credible way of telling the world that since you have been in business for
over a century, your product must have something distinctive about it).
How much the firm spends on its marketing and publicity (a large marketing
spend figure, relative to the firm’s revenues, is usually a reassuring sign).
How much of a price premium the firm is able to charge vis-a-vis its peers.
One way to appreciate the power of brands and reputation to generate sustained
profits and, hence, shareholder returns, is to look at how India’s most-trusted brands,
according to an annual Economic Times survey, have fared over the last decade. As
can be seen in the table below, over the past decade, the listed companies with the
most powerful brands have comfortably beaten the most widely acknowledged
frontline stock market index by a comfortable margin on revenues, earnings and
share price movement.
Exhibit 58: Performance of listed companies with the most-trusted brands
Listed companies with the most-
10-year Growth (FY04-14) (% CAGR)**
# Company Trusted Brands* trusted brands have beaten the
Revenues EPS Share price***
benchmark index on revenues,
Colgate-
1
Palmolive
Colgate (1) 14 17 27 earnings and share price
Clinic Plus (4), Lifebuoy performance
Hindustan
2 (10), Rin (12), Surf (13), 10 8 15
Unilever
Lux (14), Ponds, etc
Maggi (9), Nestle Milk
3 Nestle 15 16 23
Chocolate (62), etc
GSK
4 Horlicks (16) 15 21 33
Consumer
5 Bharti Airtel Airtel (18) 33 18 15
Average for the listed companies with
18 16 22
the top 5 brands
For the index, Nifty 12 13 14
Source: Economic Times and Ambit Capital analysis using Bloomberg data. Note: * Figures in brackets indicate
the rank in the 2012 Economic Times ‘brand equity’ survey to find the 100 most-trusted brands in India. ** The
FY14 data is based on Bloomberg consensus as on 7 April 2014. *** Share price performance has been
measured from Mar-04 to Mar-14
Architecture
“A dream you dream alone is only a dream. A dream you dream together is reality.”
– John Lennon
‘Architecture’ refers to the network of contracts, formal and informal, that a firm has ‘Architecture’ refers to the network
with its employees, suppliers and customers. Thus, architecture would include the of contracts, formal and informal,
formal employment contracts that a firm has with its employees and it would also that a firm has with its employees,
include the more informal obligation it has to provide ongoing training to its suppliers and customers
employees. Similarly, architecture would include the firm’s legal obligation to pay its
suppliers on time and its more informal obligation to warn its suppliers in advance if
it were planning to cut production in three months.
Such architecture is most often found in firms with a distinctive organisational style or
ethos, because such firms tend to have a well-organised and long-established set of
processes or routines for doing business. So, for example, if you have ever taken a
home loan in India, you will find a marked difference in the speed and
professionalism with which HDFC processes a home loan application as compared to
other lenders. The HDFC branch manager asks the applicant more specific questions
than other lenders do and this home loan provider’s due diligence on the applicant
and the property appears to be done more swiftly and thoroughly than most other
lenders in India.
So, how can an investor assess whether the firm they are scrutinising has architecture
or not? In fact, whilst investors will often not know the exact processes or procedures
of the firm in question, they can assess whether a firm has such processes and
procedures by gauging the:
extent to which the employees of the firm co-operate with each other across
various departments and locations.
rate of staff attrition (sometimes given in the Annual Report).
extent to which the staff in different parts of the firm give the same message
when asked the same question.
extent to which the firm is able to generate innovations in its products or services
or production processes on an ongoing basis.
At the core of successful architecture is co-operation (within teams, across various HDFC and GCMMF are the most
teams in a firm and between a firm and its suppliers) and sharing (of ideas, striking demonstrations of
information, customer insights and, ultimately, rewards). Built properly, architecture architecture in India
allows a firm with ordinary people to produce extraordinary results.
Perhaps the most striking demonstration of architecture in India is the unlisted non-
profit agricultural co-operative, Gujarat Cooperative Milk Marketing Federation Ltd
(GCMMF), better known to millions of Indians as ‘Amul’.
With its roots stretching back to India’s freedom movement, GCMMF was founded by
the legendary Verghese Kurien in 1973. This farmer’s co-operative generated
revenues of `137bn (around US$2.1bn) in FY13, thus making it significantly larger
than its main private sector competitor, Nestle (FY13 revenues of `91bn or around
US$1.5bn). Furthermore, GCMMF’s revenues have grown over the past five years by
21% as opposed to Nestle’s 16% over the same period. In fact, GCMMF’s revenue
growth is markedly superior to the vast majority of the top Indian brands shown in
exhibit 58.
GCMMF’s daily milk procurement of 13 million litres from over 16,000 village milk
co-operative societies (which include 3.2 million milk producer members) has become
legendary. The way GCMMF aggregates the milk produced by over 3 million families
into the village co-operative dairy and then further aggregates that into the district
co-operative which in turn feeds into the mother dairy has been studied by numerous
management experts.
Not only does the GCMMF possess impressive logistical skills, its marketing acumen is
comparable to that of the multinational giants cited in the table shown above: In key
FMCG product categories such as butter, cheese and packaged milk, Amul has been
the longstanding market leader in the face of sustained efforts by the multinationals
to break its dominance. GCMMF is also India’s largest exporter of dairy products.
So how does GCMMF do it? How does it give a fair deal to farmers, its management
team (which includes the alumnus from India’s best business schools), its 5,000
dealers, its 1 million retailers and its hundreds of millions of customers? Although
numerous case studies have been written on GCMMF, at the core of this co-
operative’s success appears to be: (a) its 50-year old brand with its distinctive
imagery of the little girl in the polka red dotted dress; (b) the idea of a fair deal for
the small farmer and the linked idea of the disintermediation of the unfair middle
man; and (c) the spirit of Indian nationalism in an industry dominated by globe
girdling for-profit corporates.
Innovation
“Learning is not compulsory … neither is survival.”
– W Edwards Deming, American statistician, professor, author. The world’s most
famous prize for manufacturing excellence is named after him.
Whilst innovation is often talked about as a source of competitive advantage, Whilst most talked about,
especially in the Technology and Pharmaceutical sectors, it is actually the most ‘Innovation’ is also the most
tenuous source of sustainable competitive advantage as: tenuous source of sustainable
Innovation is expensive. competitive advantage…
Secondly, Tata Quality Management Services (TQMS), a division of Tata Sons, assists
Tata companies in their business excellence initiatives through the Tata Business
Excellence Model, Management of Business Ethics and the Tata Code of
Conduct. TQMS, quite literally, provides the architecture to harmonise practices in
various parts of the Tata empire.
Thirdly, Tata Sons is also the owner of the Tata name and several Tata trademarks,
which are registered in India and around the world. These are used by various Tata
companies under a license from Tata Sons as part of their corporate name and/or in
relation to their products and services. The terms of use of the group mark and logo
by Tata companies are governed by the Brand Equity and Business Promotion
Agreement entered into between Tata Sons and Tata companies.
Cadila Healthcare Ltd (CDH IN, BUY) Lupin Ltd (LPC IN, BUY)
500 2,500
400 2,000
300 1,500
200 1,000
100 500
0 0
Apr-14
Apr-15
Apr-16
Jan-14
Jul-14
Jan-15
Jul-15
Jan-16
Jul-16
Oct-13
Oct-14
Oct-15
Apr-14
Apr-15
Apr-16
Jan-14
Jul-14
Jan-15
Jul-15
Jan-16
Jul-16
Oct-13
Oct-14
Oct-15
Source: Bloomberg, Ambit Capital research Source: Bloomberg, Ambit Capital research
LIC Housing Finance Ltd (LICHF IN, SELL) HDFC Bank Ltd (HDFCB IN, SELL)
700 1,400
600 1,200
500 1,000
400 800
300 600
200 400
100 200
0 0
Apr-14
Apr-15
Apr-16
Jan-14
Jul-14
Jan-15
Jul-15
Jan-16
Jul-16
Oct-13
Oct-14
Oct-15
Apr-14
Apr-15
Apr-16
Jan-14
Jul-14
Jan-15
Jul-15
Jan-16
Jul-16
Oct-13
Oct-14
Oct-15
Source: Bloomberg, Ambit Capital research Source: Bloomberg, Ambit Capital research
HCL Technologies Ltd (HCLT IN, BUY) Exhibit 59: eClerx Services Ltd (ECLX IN, SELL)
1,200 1,800
1,600
1,000
1,400
800 1,200
1,000
600
800
400 600
400
200
200
0 0
Apr-14
Apr-15
Apr-16
Apr-14
Apr-15
Apr-16
Jan-14
Jul-14
Jan-15
Jul-15
Jan-16
Jul-16
Jan-14
Jul-14
Jan-15
Jul-15
Jan-16
Jul-16
Oct-13
Oct-14
Oct-15
Oct-13
Oct-14
Oct-15
Source: Bloomberg, Ambit Capital research Source: Bloomberg, Ambit Capital research
Asian Paints Ltd (APNT IN, BUY) Exhibit 60: Britannia Industries Ltd (BRIT IN, SELL)
1,400 4,000
1,200 3,500
1,000 3,000
2,500
800
2,000
600
1,500
400 1,000
200 500
0 0
Apr-14
Apr-15
Apr-16
Apr-14
Apr-15
Apr-16
Jan-14
Jul-14
Jan-15
Jul-15
Jan-16
Jul-16
Jan-14
Jul-14
Jan-15
Jul-15
Jan-16
Jul-16
Oct-13
Oct-14
Oct-15
Oct-13
Oct-14
Oct-15
Asian Paints Ltd Britannia Industries Ltd
Source: Bloomberg, Ambit Capital research Source: Bloomberg, Ambit Capital research
Axis Bank Ltd (AXSB IN, BUY) Exhibit 61: Page Industries Ltd (PAG IN, BUY)
700 18,000
600 16,000
14,000
500
12,000
400 10,000
300 8,000
6,000
200
4,000
100 2,000
0 0
Apr-14
Apr-15
Apr-16
Jan-14
Jul-14
Jan-15
Jul-15
Jan-16
Jul-16
Oct-13
Oct-14
Oct-15
Apr-14
Apr-15
Apr-16
Jan-14
Jul-14
Jan-15
Jul-15
Jan-16
Jul-16
Oct-13
Oct-14
Oct-15
Source: Bloomberg, Ambit Capital research Source: Bloomberg, Ambit Capital research
Exhibit 62: Astral Poly Technik Ltd (ASTRA IN, NOT RATED) Amara Raja Batteries Ltd (AMRJ IN, SELL)
600 1,200
500 1,000
400 800
300 600
200
400
100
200
0
0
Apr-14
Apr-15
Apr-16
Jan-14
Jul-14
Jan-15
Jul-15
Jan-16
Jul-16
Oct-13
Oct-14
Oct-15
Aug-14
Aug-15
Aug-16
Nov-13
Feb-14
May-14
Nov-14
Feb-15
May-15
Nov-15
Feb-16
May-16
Source: Bloomberg, Ambit Capital research Source: Bloomberg, Ambit Capital research
GRUH Finance Ltd (GRHF IN, NOT RATED) Dr Lal PathLabs Ltd (DLPL IN, NOT RATED)
400 1,300
350 1,200
300 1,100
250 1,000
900
200
800
150 700
100 600
50 500
0 400
Apr-16
Mar-16
Dec-15
Jul-16
Jan-16
Aug-16
Aug-14
Aug-15
Aug-16
Sep-16
Jun-16
Oct-16
Nov-13
Feb-14
May-14
Nov-14
Feb-15
May-15
Nov-15
Feb-16
May-16
Feb-16
May-16
GRUH Finance Ltd Dr Lal PathLabs Ltd
Source: Bloomberg, Ambit Capital research Source: Bloomberg, Ambit Capital research
Relaxo Footwears Ltd (RLXF IN, NOT RATED) Repco Home Finance Ltd (REPCO IN, NOT RATED)
700 1,000
600
800
500
400 600
300 400
200
200
100
0 0
Aug-14
Aug-15
Aug-16
Aug-14
Aug-15
Aug-16
Nov-13
Feb-14
May-14
Nov-14
Feb-15
May-15
Nov-15
Feb-16
May-16
Nov-13
Feb-14
May-14
Nov-14
Feb-15
May-15
Nov-15
Feb-16
May-16
Relaxo Footwears Ltd Repco Home Finance Ltd
Source: Bloomberg, Ambit Capital research Source: Bloomberg, Ambit Capital research
3,000
2,500
2,000
1,500
1,000
500
0
Aug-14
Aug-15
Aug-16
Nov-13
Feb-14
May-14
Nov-14
Feb-15
May-15
Nov-15
Feb-16
May-16
Disclaimer
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Disclosures
37. The analyst (s) has/have not served as an officer, director or employee of the subject company.
38. There is no material disciplinary action that has been taken by any regulatory authority impacting equity research analysis activities.
39. All market data included in this report are dated as at the previous stock market closing day from the date of this report.
40. Ambit and/or its associates have received compensation for investment banking/merchant banking/brokering services from Astral Poly Technik in the past 12 months.
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Each of the analysts identified in this report certifies, with respect to the companies or securities that the individual analyses, that (1) the views expressed in this report reflect his or her personal views
about all of the subject companies and securities and (2) no part of his or her compensation was, is or will be directly or indirectly dependent on the specific recommendations or views expressed in this
report.
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