Equitymaster Agora Research Private Limited

Independent Investment Research

This Super Investor Likes Growth with Competitive

Advantage!
Welcome to the Thirteenth issue of Smart Money Secrets!

We are just about to complete our first year.

We are happy that even though we promised you twelve recommendations in a year, we have given thirteen.

The year has been quite interesting in respect to meeting both super investors and super managements of the
companies we recommended.

After a dream run in 2017, the stock market has gone down a rough path. Oil prices, rising US interest rates, and
currency headwinds has resulted in a significant correction.

This, coupled with the recent mutual fund re-classification, has resulted in a lot of pressure on the mid and small-
cap stocks (the space where Smart Money Secrets operates).

We believe this correction is healthy and would help us recommending quality businesses at decent valuations.

For the stocks we have already recommended, there can be some correction in the short-term but we believe, over
next 3-5 years, these will outperform the broader markets.

Coming to this month recommendation...

This company was on our watch list for a long time. However, valuations and some issues with working capital
kept us away from it.

However, the stock has corrected recently and the management has taken corrective measures to improve the
working capital situation which we believe would change the trajectory of the company.

And guess what - Our Super Investor Sumeet Nagar of Malabar India Fund has also increased his stake in the
company in last few quarters.

Speaking of super investors, a concerned subscriber wrote in to us about Ashish Kacholia's exit from SP Apparels.
Should you be worried?

Well, I have good news. I will address this query as well as others in a mailbag going forward from this issue. You
can find it at the end of this report.

India's Population Pyramid Makes This Company Attractive

Did you know, as per worldometers' website, India's population in May 2018 is around 1.35 billion?

That's around 18% of the world's population!

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As per the UN, India's population could surpass that of China's by 2024.

But here's the interesting thing about India's population.

India's population is young.

India's Population Pyramid

This pyramid has a 'bulge' in the middle.

And that represents India's youth.

Today, around 47% of the population is below 25 years of age and the median age is about 27 years.

A young population means a higher number of working people. it also means higher saving and spending due to
the raising disposable income.

Unlike earlier generations, the present generation has a higher appetite for consumption and a lower risk
perception when it comes to indulging in gadgets, luxury items, automobiles, entertainment, foreign vacations and
so on.

Really, it's an eye-opener for companies wanting to leverage the Indian youth's spending power.

Our recommendation today is a company that's leveraging this opportunity brilliantly.

Indian Terrain is a leading premium casual menswear brand.

In FY11, the Indian Terrain brand was de-merged from Celebrity Fashions (the parent company) and Indian Terrain
Fashions Ltd (ITFL) was listed on the stock exchange.

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Over the years, ITFL has established a presence across all the major regions of the country. The company has a
network of more than 1,600 points of sale across more than 250 cities in India.

ITFL is known for its trademark khakis and offers a range of garments including shirts, trousers, T-shirts, shorts,
sweaters, jackets, and denims. The company is focused on simplistic styles and an innovative fit. The brand
targets men between the ages of 25 and 44. No wonder the company has created a niche brand in a premium
segment.

The company forayed into boys' clothing (6-16 years) in 2015. ITFL expects revenue from this segment to touch Rs
1 billion in the next four years.

The apparel business is a capital intensive. The chain starts from sourcing of raw material, manufacturing,
warehousing, distribution to owning and operating exclusive brand outlets (EBOs).

But ITFL follow an asset-light model.

The company outsources its manufacturing to the identified outsourced manufacturing firms. It also employs a
franchise model for its EBOs.

Due to this, ITFL doesn't need to invest large amounts of capital to buy land, machinery, or hire lots of workers.
This helps ITFL to focus on its key strengths - design, product development, branding, and marketing.

We believe, with a strong business model in place, ITFL is well placed to leverage India's young population.

About the Company

The 'Indian Terrain' brand was launched in 2000, as a division of Celebrity Fashions. Over the last 18 years, the
brand has grown to be one of India's leading casual menswear brands in the premium casual menswear segment.

Indian Terrain Fashions Ltd (ITFL) was incorporated in 2009 as a public limited company. This was still part of
Celebrity Fashions Ltd. In FY11, ITFL was demerged from Celebrity Fashions.

Indian Terrain Timeline

FY01 Indian Terrain brand launched by Celebrity Fashions

FY10 Indian Terrain Fashions Ltd incorporated as a standalone company

FY11 Indian Terrain brand demerged from Celebrity Fashions and Indian Terrain Fashions Ltd listed on the BSE
and the NSE

FY12 11th Most Trusted Apparel Brand - "Brand Equity"

FY14 Crossed Rs 2 billion of revenue milestone

FY15 Forayed into boys' clothing

FY17 Crossed Rs 4 billion of revenue milestone (at Gross Level)

Source: Company, Equitymaster

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 The Story of Indian Terrain

Over the years, ITFL has established a presence across all the major regions of the country. The company's
ensemble of menswear including shirts, trousers, jackets, and accessories are focussed on simplistic styling and
innovative fit and is targeted at men between the ages of 25 and 44.

ITFL has two primary segments in apparel line:

a. woven, which includes shirts, trousers, shorts, jeans

b. non-woven, which includes knitwear and jackets

Product Portfolio

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As of 31 December 2017, ITFL has a network of more than 1,600 points of sale across more than 250 cities in
India. This includes which 147 EBOs, more than 300 counters in large format stores (LFS) and more than 1,200
multi branded outlets (MBOs).

Indian Terrain Stores

The Indian Terrain brand has evolved from being a south India centric brand to have a presence in all the major
regions across the country. The company has 14 EBOs in the eastern, 32 in the northern, 67 in the southern and 33
in the western regions of India.

ITFL's Business Model

ITFL follows an asset-light business model. All the manufacturing is outsourced to third-party manufacturers on a
job work basis.

ITFL's manufacturing and supply across the value chain happens as depicted below:

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Key Departments of ITFL
Design and Product Development

ITFL's design studio is in the company's corporate office at Chennai. All the designs, patterns, and fabric
selection for each of its apparel product is conceptualised and designed in-house.

Marketing and Merchandising

The company's marketing team decides the number of sample products, photo shoots, brochures, and
other pre-season advertising material. They organise trade shows prior to the start of a season to
showcase new designs and fabrics.

Apart from tradeshows, the marketing team is also present across various locations in India to generate
interest in the Indian Terrain brand and generate pre-season orders through secondary road shows.

Procurement and Manufacturing

ITFL procures raw materials from a specified set of mills who have a track record of supplying to large
international brands. Most of the company's raw material suppliers have been associated with the Indian
Terrain brand prior to the de-merger and ITFL has developed strong relationships with its raw material
suppliers.

The company does not have long-term contracts with any of its raw material suppliers and procures raw
materials according to the needs of each season.

ITFL follows a dual procurement strategy for raw materials.

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 For most of its woven apparel, the company sources raw materials from its suppliers and passes them
on to the third-party outsourced manufacturing entities on a job work basis.

For the non-woven knit apparel, ITFL provides the design to its third party outsourced manufacturers and
they procure the required raw materials themselves and produce the finished products, which are bought
out as the final products by the company.

Quality Assurance The company has engaged reputed testing and certification companies like SGS
India and ITS Testing services to conduct multiple quality checks. ITFL conducts fabric package tests to
check fibre content, dimensions, changes during wash and steam, seam strength, tear strength, colour
fastness, and crocking. The company also conducts garment package tests to check for wash
appearance and durability.

Quality Assurance Process

Inventory Management

Maintaining appropriate levels of inventory is critical to ITFL's profitability.

Products in the company's inventory consist of raw materials to be supplied to its outsourced
manufacturers, finished goods from its outsourced manufacturers, and apparel products that are unsold
during the season which are returned in accordance with ITFL's inventory management policy.

The company procures raw material for production on a need basis pursuant to receiving pre-season
orders. ITFL also procures raw materials during the season based on supply orders received from LFOs,
MBOs and for its EBOs. This ensures that the company maintains a lean inventory with quick movement
to reduce any wastage or damage.

Distribution and Sales Network

ITFL deploys the 'hub-spoke model' for expansion where the company focuses on high levels of
penetration in certain geographies prior to entering a new geography. Currently, the company is focused
on the south and western parts of India and the metro cities.

How Did ITFL Distinguish Itself from the Competition?

An Asset-Light Business Model- a Key Differentiator

To give you an overall perspective of the asset-light business model, an example of Nike is apt.

Nike is the largest sneaker and athletic wear company with more than 50,000 employees globally. Yet,
virtually none of its employees are involved in the actual production of sneakers. Instead, for decades,
Nike has focused on design and marketing, while contracting out the rest. Nike was a pioneer in
recognising their "value added"was in design and marketing, not assembly.

A similar pattern is observed with ITFL. The company follows an asset-light model, whereby it

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outsources manufacturing to identified outsourced manufacturers. This is also called upstream model
in which ITFL relies on its manufacturers to provide critical inputs. ITFL chooses its outsourced
manufacturers carefully based on their track record and ability to meet quality requirements.

By employing such an asset-light model of operation, ITFL doesn't need to invest a large amount of
capital to buy land, machinery, or hire lots of workers. The company focuses on quality checks and
procedures to ensure the final products meet the company's requirements.

But it doesn't end there.

The company also employs a franchisee model for its EBOs. In fact, most of its EBOs' are owned and
operated by franchisees. Typically, ITFL's franchisee partners sign the lease deed for retail space and
make the upfront investment at the time of executing the lease deed.

This is also called the downstream model in which ITFL uses an asset-light model to expand the reach of
its products.

Asset-light Distribution Network

The Benefits of Going Asset-light

Better return ratios

Lower profit volatility

Greater flexibility

Higher scale-driven cost savings than more asset-heavy models

Compared to its competitors such as ABFRL and Arvind's branded apparel business, ITFL fares much
better on every parameter.

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 When Asset Light Is Right

Percentage of manufacturing 60% N. A 100%

outsourced

Percentage of stores owned by the 30% N. A 30%

company

EBITDA Margin 7.80% 6.10% 12%

ROCE 9.50% 5.30% 22%

Debt-equity ratio 2.14 0.82 (on consolidated basis) 0.23

Fixed Asset T/O 2.53 2.30 (on consolidated basis) 11.76

Source: Annual reports, Equitymaster, ACE Equity

It is important to note that Arvind and ABFRL have a large branded apparel portfolio. Both companies
are still investing a lot on marketing and distribution initiatives on their newer brands, which is dragging
down the overall margin of the branded business.

The asset-light business model allows ITFL to utilise its cash flows towards the development of the
Indian Terrain brand and invest in the expansion of its points of sale.

As per the management, Rs 60-80 million capex will be enough to take its topline from about Rs 5 billion
in FY18 to Rs 8 billion by FY20. This capex will be invested in technology and stores. With this, the fixed
asset turnover of the company will be in the range of 15-16x.

'Indian Terrain'- a Niche Brand in the Premium Casual Wear Segment

The apparel industry has a short life cycle and trends can change rapidly. It's necessary for every player
to build a strong 'brand image' of its product in the market. Brands create the strongest competitive
advantage for a manufacturer and retailer.

Branding Helps...

Apparel with a higher value may signify higher quality to the consumers.

Brand image signifies the quality of the product, thus giving them the satisfaction of buying
quality items.

Brand indicates a status symbol and satisfies consumer's ego.

Branding helps in developing a customer commitment. Once the customer develops brand
loyalty for the product, he makes buying decisions without much thought as he already has a
positive opinion about the brand.

The management of ITFL knows the importance of branding. For example, in 2005, Bennett Coleman &

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Co picked up a 3.6% stake in Indian Terrain in exchange for ad space and brand building initiatives
across their properties for their next two-three years. This gave the Indian Terrain brand much-needed
visibility and brand recall across the country.

Indian Terrain identified the opportunity in the casual segment and focused on creating good quality
products, which has helped the company stand out among international brands. Indian Terrain was
launched as a premium workwear and smart casual clothing brand for men.

The company is known for its trademark khakis and offers a range of garments including shirts, trousers,
T-shirts, shorts, sweaters, jackets, and denims.

Journey of a Khakhi

Source: Sukil and Khushboo, YouTube Channel

ITFL's Brand Positioning

young men in 25-44 age group

Premium, casual wear brand with price points for core products (shirts & trousers)
primarily ranging between INR 1,599-2,699.

Fashion aware men, who have a "Masculine"sensibility and are looking for brands &
products that reflect their "Real"and "Manly"attitude

Source: Company

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Branding Initiatives Taken by ITFL

1. Actor Kunal Kapoor as Brand Ambassador

Last year, ITFL has signed up actor Kunal Kapoor as its brand ambassador for two years. The
actor is a perfect mix of elegance and intensity, which truly resonates with the brand's
philosophy of 'Real Mature Manly'.

Indian Terrain AW 2017 Collection Photoshoot

Source: Indian Terrain YouTube Channel

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 2. Brand Loyalty Programme

In order to engage and build a base of repeat customers, ITFL has initiated a brand loyalty
programme - 'Man 2 Man'.

Within three years of launching the loyalty program, the company has over 370,000
registered members. More than 60% of the revenue from EBOs' was generated from
customers who were part of the loyalty programme. This demonstrates brand loyalty and
trust towards Indian Terrain brand.

3. Advertisement in Print Media and Social Media

ITFL spends about 4-5% of revenue on advertising and marketing. The company plans to
accelerate the marketing spend to further boost growth and improve brand salience.

The efforts are to embrace and integrate branding in e-commerce marketing strategies and
target increased consumer involvement in the brand through social media.

Apart from all this, Indian Terrain being a company-owned brand, has some advantages
compared to some of its competitors who have licensing agreements with foreign brands.
These include:

Complete freedom in designing, distribution, and marketing

Saving of royalty payments and other licensing expenses

Strengthening and expanding the brand with continuous investments

Diversification of the Product Range - A New Source of Revenue

In a bid to expand its presence across segments, ITFL forayed into boys' clothing in 2015. The
merchandise, targeted at boys from the age of 6-16 years, is currently being sold only in 25 stores. Apart
from having a larger presence across its stores, the company will also sell the boys' line through major
retail chains such as Lifestyle, Shoppers Stop, and Central.

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As a result, the business, which now brings in about Rs 300 million, is expected to rake in Rs 1 billion in
the next four years. We have been conservative in our growth estimates and expect revenues of about
Rs 630 million in FY21E.

Apart from this, over the last 3-4 years, the company has expanded the demography of its customer
base by entering the jeanswear segment, men accessories (belt, wallet, and socks), and footwear
(sandals, loafers, sneakers, boots etc.)

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 Indian Terrain Footwear for Sportswear

Source: Indian Terrain YouTube Channel

Here, ITFL is leveraging the strength of its brand and distribution network. This smart diversification
strategy will bring additional revenues and improves its operating margin.

Established Presence Pan-India and Strong Backend Infrastructure

ITFL has established a pan-India presence. As of 31 December 2017, it has a network of more than 1,600
points of sale across more than 250 cities in India. This includes 147 EBOs, more than 320 counters in
large format stores LFS, and more than 1,200 MBOs.

ITFL's Points of Sale (POS)

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 ITFL's Channel Overview

Channel characteristics Displays an extensive Provides large number of A cost-efficient way to

range of products in an
environment aligned
with the intended brand
image, building brand
equity.
Store formats range in
area from 280 sq. ft. to
3500 sq. ft.
footfalls in cities and towns
where modern retail format
is expanding
Present across Shoppers
Stop, Lifestyle, Central,
Westside and Globus
Counters present in
departmental stores,
together with brand
ambassadors, serve in
building branding at low
capital investment levels
access a large
customer base that is
serviced by traditional
mom & pop, single-
outlet shops
No investment risk as
all required
investments are
undertaken by the
shop-owners
Limited control over
brand positioning,
store ambience, etc.

Inventory Policy Consignment or sale-or- SOR basis No inventory risk

return basis (SOR) associated with this
channel

Sale on outright basis,

based on order
bookings at trade
shows prior to each
season

Growth Focus Focus on driving growth
by following hub and
spoke approach of
geographic penetration
Future growth would be in
line with store openings by
the departmental stores
Expansion drive in
relatively lesser-
penetrated market
would result in growth
in this distribution
channel

Source: Company

The distribution network across MBOs is set to expand in a big way with new customer groups and
deeper penetration of markets. Strong relationships with the existing partners will provide avenues for
future growth.

The Indian Terrain brand has evolved from being a south India centric brand to a pan-India one. The
company has 14 EBOs' in the eastern, 32 in the northern, 67 in the southern, and 33 in the western
regions of India.

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 ITFL's Distribution Statistics

Going forward, ITFL seeks to penetrate further in non-metro cities and smaller urban cities to meet the
rising demand and continually grow its presence there while consolidating and strategically open more
EBOs' and LFO counters in metro cities.

With an increase in purchasing power and economic growth in the smaller cities, the demand for
branded apparel will increase significantly. This will enable the company to increase revenues and
expand its footprint across a larger geographical area.

Enhancing the Distribution Network

ITFL is looking to expand its network of 147 stores to around 250 stores in the next 4-5 years.
It has been adding 20-25 stores every year over the past three-four years and this run-rate will
continue.

Retail expansion through exclusive stores and extensions in departmental stores. The plan is
to increase the retail presence to 625 counters across exclusive outlets and departmental
stores.

To leverage the digital marketplace, the company has revamped its website. The IT
infrastructure is being strengthened and the aim is to merge physical and digital stores.
E-commerce revenue is estimated to contribute about 5% to total revenues.

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 To seek to open more EBOs' across non-metro cities which have a distinct look and layout to
highlight the 'Indian Terrain' brand.

Apart from a pan-India presence, ITFL enjoys strong back-end support of Celebrity Fashions (a parent
company before demerger). Celebrity Fashions has over three decades of experience in designing and
manufacturing apparel. This offers seamless integration of the design and manufacturing processes.
Similarly, the company has a defined pool of raw material suppliers and its association with Celebrity
Fashions enables ITFL to select raw material suppliers who can provide the desired fabric quality.

Long-term relationships with outsourced manufacturers and raw material suppliers helps ITFL to meet
rising demands, expand its presence, and diversify its portfolio.

The Curious Case of ITFL's Long Working Capital (WC) Cycle

Compared to its competitors, the working capital cycle is much longer. This is because of higher
receivable days (117-120 days) and Inventory days (46-50 days).

A comparison of Net Working Capital (WC) with Competitors

Indian Terrain 117

ABFRL -13

Kewal Kiran Clothing 73

Arvind (on consolidated basis) 63

Source: ACE Equity

The management is targeting to reduce the WC cycle by minimum 10-15 days in the coming months.
The company will be doing some minor changes.

This includes...

Reduction in Inventory Days

The company has moved from sourcing for two-season to three-seasons. Going forward,
it will move further to four-seasons. This will help the company reduce working capital
held in inventory. Similarly, the company will be changing its sourcing mix. Currently ITFL
sources 60% on bought-out basis and the remaining on job-work basis. Going forward,
the company will be sourcing 90% on bought-out basis.

In the case of bought-out basis, ITFL doesn't have to invest in the raw material. Here, the
manufacturer will take this responsibility for it. ITFL will just nominate the fabric and
accessory vendor. These small changes will help ITFL to reduce its inventory days.

Reduction in Debtor Days

ITFL is moving from the consignment and quasi-consignment models to the trading
model for its exclusive brand outlets.

In the case of the consignment and quasi-consignment models, ITFL takes calls on

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 buying as well as the management of stocks. On the other hand, in the trading model,
the franchisee has more skin-in-the-game, right from buying and managing sales.

The receivable days for consignment model is about 125 days. For the trading model, it's
about 75 days. Currently, ITFL has around 30 EBOs under the trading model.

Going forward, strategic locations and key markets will be under consignment model
while the expansion in tier-2 and tier-3 cities will be under the trading model.

We expect, with all these small changes, ITFL will be able to bring down its working
capital cycle by around 10 days.

About the Apparel Industry

Indian apparel industry, which is the second largest contributor in the retail industry after food and groceries is in
the middle of a major shift.

Entry of international brands, changes in preferences from non-branded to branded, the fast-growing formal
economy, large and growing numbers of youthful consumers have made India a highly lucrative market.

As per a Technopak Report, the domestic Textile and Apparel market is worth US$ 59 billion and is expected to
grow at 9% annually to reach US$ 142 billion by 2023. This will be driven by an increase in the young consumer
base, rising working age population and spreading urbanisation leading to an increase in private consumption.

Many global brands are penetrating tier I and tier II cities, while domestic brands are also strengthening their
positions. International players such as Mango, GAP, Arrow, Diesel, Massimmo Dutti, and Banana Republic have
entered the Indian market in the last few years.

The median age in India is 28 years. The youth constitute about 60% of the total population, making them a
primary target market for retailers.

Young Generation Dominates India's Population Pyramid

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In the coming years, the amount of disposable income spent on apparel will increase due to more families
entering higher income segments. Increasing income levels will fuel greater consumption. Changing lifestyles of
Indian consumers, awareness created by the media, and a tendency to dress up at par with global trends will fuel
demand for premium apparel.

We believe, individual apparel consumption will grow supported by the following trends

Rising preference to occasion-specific attire, especially casualwear

Growing receptivity of corporatised retail in non-urban centers

Increasing focus on a convenience which is resulting in a shift to ready-to-wear products

Corporatised Brick & Mortar Retail Will Drive Formalisation

Within the retail categories, apparel retail has demonstrated high receptivity towards corporatised retail. High
penetration of corporatised retail has also paved the way to introduce more formal and systematic processes and
procedures in operations, procurement, and distribution.

One of the key reasons for increasing corporatised retail penetration in apparel is the shift in consumer preference
to ready-to-wear products.

Increasing Acceptance of Ready-to-Wear Products

The consumers, especially men, graduating from ready-to-stitch, to ready-to-wear segment, have helped these
retailers in creating a significant differentiation from the local mom & pop textile stores.

Men's Wear Market

With the market size of US$ 19 billion, men's wear is the largest segment in the apparel market. The various
product categories of men's wear segment include shirts, trousers, suits, winter wear, t-shirts, denim, daily wear,
active wear, ethnic, inner wear etc.

Shirts are the single largest category in men's wear, followed by trousers and denim. In recent years, denim,
activewear, and t-shirts have shown promising growth and are expected to grow at a much faster pace due to
changing preference of the consumers. The acceptance of smart causals in corporate sector has also boosted
growth of western wear among working professionals.

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What are the Risks to look out for?

Intense Competition

ITFL has to compete with established brands such as Allen Solly, US Polo, ColorPlus, Provogue, Arrow,
Louis Philippe, and Van Heusen. Additionally, the company also competes with other retailers for scarce
real estate space.

Increasing competition could lead to pricing pressure and additional discounts. This could lead to a
decline in gross margin and profitability.

Long Working Capital Cycle

As explained above, ITFL's business is working capital intensive and its working capital cycle is longer
than its competitors. Working capital as a percentage of total capital employed is around 85%. Although
the company is addressing the working capital issues as discussed above, this remains a key risk.

Poor Financials of Celebrity Fashion Could Impact ITFL's Performance

The Indian Terrain brand was initially set up as a division of Celebrity Fashions in 2000 and later de-
merged into a standalone company in September 2010. ITFL is currently sourcing around 50% of its
woven product requirements from Celebrity Fashions on arms-length basis. The key reason for de-
merger was to pursue growth strategies without being saddled by any future financial troubles of
Celebrity Fashions.

Any adverse impact on Celebrity Fashion's operations, due to its financial difficulties, could in turn affect
ITFL.

Pledging of Shares

As per the latest shareholding pattern, 69% of the promoter stake is pledged. As per the RHP document,
equity shares have been pledged as a security to State Bank of India under the terms of the
supplemental loan agreement.

Any default under this financing document may result in State Bank of India selling the equity shares
pledged to them in the open market, thereby diluting the shareholding of the promoters.

Nevertheless, as per the management, the company will be releasing all of its pledging by end of
1QFY19. We will monitor this.

Does the Company Qualify on Equitymaster's Smart Money ScoreTM?

We believe, any good business needs to pass our checklist i.e. smart money score. You can find a detailed
explanation of what the Smart Money Score in our guide. Smart Money Secrets - A Quick Start Guide.

1. Smart Money Invested - One of the important catalysts we look for in a stock is the smart money. Based on
the holding (higher the better) and our comfort with the super investor, we assign a rating on a scale of 10.

We also like to see either the super investor or the promoters of the company increase their stake.

In the case of Indian Terrain Fashions Limited, Super Investor Sumeet Nagar of Malabar India Fund has
recently increased his stake. Two super investors have a good stake in the company. As of March 2018,
Malabar holds around 6.23% in the company.

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 Super Investor: Sumeet Nagar (Malabar Value/India Fund) Increasing Stake

Malabar India Fund Limited 4.17 4.17 4.36 4.89

Malabar Value Fund - - - 1.34

Total 4.17 4.17 4.36 6.23

Data Source: Ace Equity, BSE

However, promoters have a low holding in the company at 29.2% (as of March 2018).

Low Promoter Holding

Rama Rajagopal 16.35 16.35 16.35 16.35

Venkatesh Rajagopal 12.51 12.51 12.51 12.51

Vidyuth Rajagopal 0.36 0.36 0.36 0.36

Total 29.22 29.22 29.22 29.22

Data Source: Ace Equity, BSE

Keeping in mind there is a super investor catalyst (Sumeet Nagar increasing stake) and the low promoters
holding we assign a rating of 8 to ITFL Ltd.

2. Business Quality - One reason that makes ITFL a compelling story is the brand it has created in the casual
men's segment. It is one of the few Indian companies that has successfully created a brand with some pricing
power.

In fact, it has over the years created a profitable business by outsourcing the apparel manufacturing and
focusing on brand development and strong distribution system (franchises).

Business Quality

ROEs (out of 1.5) 22% 16% 1.5

ROCES (out of 1.5) 22% 23% 1.5

Total     3

Topline & Bottomline CAGR 5 years > 10% Last 5 year CAGR Next 4 Year CAGR Score (out of 3)

Topline Growth (out of 1) 23% 19% 1

Bottomline Growth (out of 1) 73% 23% 1

Operating Profits (out of 1) 31% 21% 1

Total     3

Debt to Equity Last 5 year Average Next 4 Year Average Score (out of 2)

D/E 0.9 0.1 1

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 Operating Cash Flow/ PAT Last 5 year Average Next 4 Year Average Score (out of 2)

OCF/PAT 1.0 0.5 1

Data Source: Ace Equity

The company has been able to grow its profits at a faster pace as compared to sales. In fact, it has been able
to garner robust return ratios. However, given the nature of the business model, it has a very high working
capital requirement which has resulted in lower operating cash flow generation.

Given, high working capital cycle and slightly higher debt in the past we assign a rating of 8 on business
quality.

3. Competitive Advantage - One of the ways a company can maintain industry-leading return ratios and a strong
balance sheet is by having some competitive advantage over its competitors.

As mentioned above, ITFL has, over the years, outperformed its peers on all the fundamental metrics. It is one
of the few Indian company with a brand re-call.

The company has been able to achieve this feat because of the following (detailed explanation in the 'about
the company' section):

Asset-Light Business Model

Indian Terrain - Niche Brand

Strong Distribution network

Thus, after doing a detailed analysis regarding Industry Rivalry, Bargaining Power of Buyers, Bargaining Power
of Suppliers, Threat of New Entrants, and Threat of Substitutes, we assign a rating of 8 to ITFL on competitive
advantage.

4. Soul in the Game - The idiom of soul in the game stands for the owner operated companies i.e. companies
where owners and operators of the business are same. We believe higher stake and active involvement in the
business means the incentives are perfectly aligned.

So, we look out for companies owned and operated by good managers.

The promoters hold 29.2% (post the recent QIP) stake in ITFL.

Venkatesh Rajagopal is the Chairman and Managing Director of ITFL. He has a bachelor's degree in
economics from Sri Ram college of commerce and post graduate in economics from University of Bangalore.

He was an officer in the Indian Police Service and left the service in 1988 to pursue his entrepreneurial goals.
He is a first-generation entrepreneur and has been involved in the apparel industry for more than three
decades. He is also the promoter of Celebrity Fashions. He currently holds around 12.5% in the company.

Rama Rajagopal is an executive director of ITFL. She holds a post graduate degree in economics from
University of Bangalore. She currently holds around 16.4% in the company.

22
 In 2015, the company raised Rs 750 million through a QIP (qualified institutional placement) and has diluted
about 9% stake. ITFL utilised this fund to expand its retail horizon and launched new product lines, besides
beefing up its supply chain infrastructure, marketing activities, and IT infrastructure.

Further, the promoters have pledged their holding to an extent of 68% (even though the management has
indicated that it will get it freed by 1QFY19).

Even though we don't like promoters diluting their stake and pledging their holding, in case of Indian Terrain
there has been some legacy issues which has resulted in such structure.

However, we penalise the company for low promoter holding.

Further, in FY12-17, the total salary drawn stood at 10% of the total profits earned during the same period. In
FY17, salaries accounted for 6% of net profits which is quite reasonable. In fact, management in FY16 took a
sharp cut in their salaries.

Also, we have gone through the auditor's report and Related Party Transactions; even though the company
has entered in some related party transactions, we do not find any material transactions which may raise
questions on the management integrity.

We did not like low promoter holding and pledging and assign a rating of 4.5 on this parameter.

5. Capital allocation - One of the patterns our super investors and we seek is efficient capital allocation by the
management. The best way to evaluate this is to look at both the sources and the application of the funds by
the management over a period.

Sources of Funds

By sources of funds we mean the money raised by the company to grow its business. Typically, there are three
big sources i.e. Equity Dilution, Raising Debt and Internal Accruals (cash generated by the business).

We love the companies with capabilities of funding their growth using cash generated by the business itself.
Further, if these companies are present in the industries with big market opportunity...the sky is the limit for
them.

In case of ITFL Ltd, in the period FY12-17, of the total funds raised by the company, over 29% of the total funds
were generated by the business, 31% were raised by equity dilution.

The company has not been able to generate ample cash historically due to high working capital requirements
(high debtor and inventory days).

23
 Sources of Funds Over FY12-17

Application of Funds

After sourcing the capital, the next and most important aspect is the allocation of the raised money. We
believe generating cash from the business is not enough, it is very important for the company to deploy the
same in profitable ventures.

In the case of ITFL, the management has used most of the cash towards working capital. The contribution
towards capital expenditure has been just 15% over FY12-17. Given the asset-light nature of the business, the
capital expenditure requirement for the company is generally low, but working capital requirement is quite
high.

Thus, the asset-light nature of the business has helped the management to offset the heavy working capital
requirement.

24
 Application of Funds Over FY12-17

We believe ITFL Ltd has been allocating capital decently.

We believe the management understands capital allocation well, but we do not like management using equity
as their source of funds. Hence, we assign a rating of 7 for capital allocation.

6. Earnings Quality - One of the key challenges while evaluating small and mid-cap companies is the quality of
their earnings.

The growth in the sales and profits should translate into cash flows for the company. There should be a good
comparison between the accounting and cash profits to understand the quality of the earnings.

One crucial tool to check the earnings quality is the proper analysis of the Cash Flow Statement (which many
people incorrectly ignore).

Over the years, we have found a similar pattern in companies that were fraudulent or bankrupt or both in India
and abroad. The usual culprit in both the cases involved money stuck in their working capital which meant
accounting profits weren't converted into cash profits.

We have devised a simple way to inspect earnings quality of any company. We begin with cash flow from
operations. Divide it in two parts i.e. Gross Cash Flow from Operations (GCFO) and Net Cash Flow from
Operations (NCFO). The difference being the 'changes in working capital'.

As a thumb rule, for a manufacturing company NCFO as a percentage of GCFO should not be significantly
below sixty percent. This simply means ideally not more than forty percent of the money should be stuck in
working capital.

We applied the same rule on ITFL and over FY12-17 this number on an average stood at 28% which well below
our sixty percent rule. In other words, 72% of the company's operating cash flow is stuck in working capital.
This is largely due to high debtor and inventory days.

25
 Further, the company also has a stretched cash conversion cycle of 154 days.

We believe, high working capital days is one of the biggest risk as far as ITFL is concerned. Even though the
management has started taking corrective steps to reduce the overall working capital cycle, we penalise the
company on this and assign a rating of 3.5 for earnings quality.

7. Scalability of the Business - Identifying a good business is one thing. Identifying a good business with the
potential to grow at decent rates for years to come is another. One crucial factor for a business is the size of
the market it caters to.

ITFL is present in India's premium casual wear largely catering to men's wear. In fact, recently it has also
entered the children wear market. One should note, while women wear market is very dynamic and fashion
changes rapidly, men's wear is a relatively standard market.

As per Technopak Report, Indian men's wear market is around USD 19 billion, men's wear is the largest
segment in apparel market.

The various products categories of men's wear segment include shirts, trousers, suits, winter wear, t-shirts,
denim, daily wear, active wear, ethnic, inner wear etc.

Shirts are the single largest category in men's wear, followed by trousers and denim.

In recent years, denim, activewear, and t-shirts have shown promising growth and are expected to grow at
much faster pace due to changing preference of the consumers.

The acceptance of smart causals in corporate has also boosted growth of western wear among working
professionals.

Indian Terrain is a well-known brand with a strong distribution network both in metros and TIER-1 & TIER-2
towns. In fact, given its asset light business model, it has all the capability to grow both faster and profitable
then its competitors.

Management plans to double revenues by FY20, which implies a growth in north of 25%. However, we expect
the company to grow at 19% CAGR over FY17-21E.

Given the huge opportunity in the business, we assign a rating of 10 on scalability.

8. Market Leadership - Readymade apparel business is generally a fragmented one with multiple competing
brands.

As every brand competes with both national and international brands, it is very difficult to identify the market
leadership. However, we believe, market leadership can be reflected both in the repeat customers of the brand
and profitability.

Just to understand the brand recall consider this:

In order to engage and build a base of repeat customers, ITFL has initiated a brand loyalty programme - 'Man 2
Man'.

Within three years of launching the loyalty program, the company has over 370,000 registered members.

26
 More than 60% of the revenue from EBOs' was generated from customers who were part of loyalty
programme. This demonstrates brand loyalty and trusttowards the Indian Terrain brand.

Further, as shown above, the company has been able to outperform its peers in all profitability metrics.

Keeping these aspects in mind, we have assigned a rating of 7 to the company on this parameter.

Considering the above analysis, the total ranking assigned to the company is 55 (out of 80). On a weighted basis,
it stands at 7 out of 10.

Equitymaster Smart Money ScoreTM

Smart Money Invested 8.0                     15.0% 1.2

Business Quality 8.0                     15.0% 1.2

Competitive Advantage 7.0                     10.0% 0.7

Soul in the Game 4.5                     10.0% 0.5

Capital Allocation 7.0                     10.0% 0.7

Earnings Quality 3.5                     15.0% 0.5

Scalablilty in the Business 10.0                     15.0% 1.5

Market Leadership 7.0                     10.0% 0.7

*Excluding extraordinary gains

Lower the risk on a given parameter higher is the rating

Updates On INDIAN TERRAIN: Valuations

Add: Alert | Portfolio
We have valued Indian Terrain Fashions Ltd
Market Data based on price to earnings basis. In fact, given One could
the company is growing rapidly and can consider
Price On Reco. Date (Rs) 175 (BSE)
surprise our conservative assumptions on the buying the
CMP - BSE / NSE (Rs) 176 / 172 positive side, we have conducted a scenario stock of Indian
Change Since Reco. 0.3% analysis. Terrain
52-week High/Low (Rs) 169 / 252
Fashions Ltd
What we have essentially done is kept both at Current
NSE Symbol INDTERRAIN
the earnings growth and the PE multiple in a Market Price
BSE Code 533329
range that we are comfortable with and have or lower.
No. Of Shares 37.9 m
tried to deduce target price based on different
Face value 2
combinations of the same.
FY17 dividend/share (Rs) 0

Dividend yield (%) 0.0% This gives a fair idea about the potential upside for the stock. However, in
Stock Classification Small cap addition to this we have derived a target price based on our numbers.
Free Float 70.78%
Expected Target Price (FY21) Under Different Assumptions of Earnings
Market Cap (Rs m) 6,633
Growth and P/E Multiples

27
Premium Search
12% 15% 20% 22% 25%

16 183 203 241 258 284

Rs 100 Invested Is Now Worth Forward PE Multiple 18 206 229 271 290 319

20 229 254 302 322 355

22 252 280 332 354 390

ITFL has established a presence across all the major regions of the
country. 'Indian Terrain' as a brand has established its niche presence in
the premium casual wear segment.

View Updated Chart

ITFL follows an asset-light model, whereby ITFL outsources its
manufacturing to the identified outsourced manufacturers. The company
also employs a franchise model for its exclusive brand outlets (EBOs).
Most of its EBOs' are owned and operated by its franchisees.

Asset light business model allows ITFL to utilise the cash flows towards
the development of the Indian Terrain brand and invest in the expansion of
its points of sale as well as towards brand development.

Going forward, ITFL seeks to penetrate non-metro cities and smaller urban
cities to meet the rising demand and continually grow its presence there
while consolidating and strategically open more EBOs' and LFO counters
in metro cities.

Apart from a pan-India presence, ITFL enjoys strong back-end support of

Celebrity Fashions.

With its asset-light business model, ITFL managed to keep its debt-equity
ratio in check with its debt-equity ratio hovering below 0.3 in FY17. With
this, ITFL has a stable financial profile. However, considering the
competitive intensity and long working capital cycle, we assign a multiple
of 18 times from FY21 perspective.

As such, we have arrived at a target price of Rs 295 for the company (from
FY21 perspective). This implies a CAGR of about 19% and a point to point
upside of 69%.

The maximum buy price for the stock is Rs 194.

According to us, in a scenario of ideal allocation of funds, predominantly

mid and small-cap stocks could be considered to comprise of not more
than 30-40% of your total equity portfolio. Further, we believe a single
small cap stock should not form more than 2-3% of the total portfolio.
Please note that this allocation will vary from person to person. For
something that works best for you, we recommend you talk to your
investment advisor.

More On INDIAN TERRAIN

28
 All Recommendation Reports | Latest Update | Latest Stock Quote

Financials At A Glance

Sales 3,250 3,998 4,797 5,661 6,680 7,882

Sales growth (%) 11.9% 23.0% 20.0% 18.0% 18.0% 18.0%

Operating Profit 411 471 542 696 855 1,025

Operating profit margin (%) 12.6% 11.8% 11.3% 12.3% 12.8% 13.0%

Net profit 330 276 316 410 512 621

Net profit margin (%) 10.2% 6.9% 6.6% 7.2% 7.7% 7.9%

Balance Sheet

Current assets 2,314 2,656 2,917 3,396 3,979 4,692

Fixed assets 266 365 482 562 652 747

Long Term Loans & Advances 117 113 144 170 200 236

Other non current assets 3 2 2 2 2 2

Total Assets 2,699 3,137 3,544 4,129 4,833 5,677

Current liabilities 577 726 814 960 1,133 1,337

Net worth 1,610 1,910 2,226 2,636 3,149 3,770

Loan funds 424 352 355 383 402 421

Other liabilities 89 149 149 149 149 149

Total liabilities 2,699 3,137 3,544 4,129 4,833 5,677

Valuations

Revenue (Rs m) 3,250 3,998 4,797 5,661 6,680 7,882

PAT (Rs m) 330 276 316 410 512 621

EPS (Rs) 9 7 8 11 13 16

Price to earnings (x) 19.5 24.1 21.1 16.2 13.0 10.7

Price to sales (x) 2.0 1.7 1.4 1.2 1.0 0.8

Price to book value (x) 4.1 3.5 3.0 2.5 2.1 1.8

Key Financial Ratios

Operational & Financial Ratios

EPS (Rs.) 9 7 8 11 13 16

Book Value per share (Rs.) 42.4 50.3 58.7 69.5 83.0 99.3

Dividend Payout Ratio (%) 0% 0% 0% 0% 0% 0%

Margin ratios (%)

EBITDA Margins 13% 12% 11% 12% 13% 13%

EBIT Margins 14% 16% 15% 15% 15% 15%

PBT Margins 14% 12% 11% 12% 12% 13%

29
 PAT Margins 10% 7% 7% 7% 8% 8%

Performance Ratios (%)            

ROE 21% 14% 14% 16% 16% 16%

ROCE 22% 22% 21% 23% 23% 24%

ROIC 19% 14% 12% 13% 14% 15%

Turnover Ratios Days            

Debtors 132 128 130 125 120 118

Inventory 50 53 55 52 50 48

Creditors 44 43 40 38 35 35

Cash Conversion Cycle (days) 138 138 145 139 135 131

Fixed Assets turnover (x) 12.2 11.6 10.4 10.5 10.6 10.9

Financial Stability Ratios (x)            

Debt-equity 0.3 0.2 0.2 0.1 0.1 0.1

Current ratio 4.0 3.7 3.6 3.5 3.5 3.5

Growth Ratios            

Net Sales growth (%) 12% 23% 20% 18% 18% 18%

PAT growth (%) 84% -16% 15% 30% 25% 21%

Valuation Ratios            

Price to earnings (x) 19.5 24.1 21.1 16.2 13.0 10.7

Price to book value (x) 2.0 1.7 1.4 1.2 1.0 0.8

Price to sales (x) 4.1 3.5 3.0 2.5 2.1 1.8

Performance Review
This is as per the closing prices for the stocks as on 23rd May 2018.

The stock of SP Apparels is trading below the price at which we had originally recommended the stock. Our
maximum Buy price for the stock is Rs 460. Thus, we maintain BUY view on the stock of SP Apparels.

The stock of TCPL Packaging Ltd has increased marginally since we recommended the stock. Our maximum Buy
price for the stock is Rs 600. Thus, we maintain BUY view on the stock of TCPL Packaging Ltd.

The stock of Ador Fontech Ltd has gained since our recommendation. The maximum Buy price for the company is
Rs 100. Given that the current price is above the maximum Buy price, our view on the stock of Ador Fontech
remains HOLD.

Mayur Uniquoters has also gained considerably since we recommended the stock. The maximum Buy price for
this stock is Rs 400. Since the current price is above our maximum Buy price, our view on the stock of Mayur
Uniquoters remains a HOLD.

TVS Srichakra Ltd has increased marginally since we recommended the stock. The maximum Buy price for this
stock is Rs 3,250. Since the current price is below our maximum Buy price, we change our view on the stock from
Hold to Buy.

Honda Siel Power Products Ltd has increased marginally since we recommended it. The maximum Buy price for
this stock is Rs 1,400. Since the current price is below our maximum Buy price, we change our view on the stock
from Hold to Buy.

30
Jagran Prakashan Ltd has fallen since we recommended the stock. Thus, the current price is still below our
maximum Buy Price of Rs 185. Hence, we maintain our BUY view on the stock of Jagran Prakashan Ltd.

Ashiana Housing Ltd has fallen since we recommended it. The maximum Buy price for this stock is Rs 200. Hence,
we maintain our BUY view on the stock of Ashiana Housing Ltd.

Newgen Software Technologies Ltd has increased marginally since we recommended it. The maximum Buy price
for this stock is Rs 260. Hence, we maintain our BUY view on the stock of Newgen Software Technologies Ltd.

Bodal Chemicals Ltd has increased marginally since we recommended the stock. The maximum Buy price for this
stock is Rs 140. Hence, we maintain our BUY view on the stock of Bodal Chemicals Ltd.

Karur Vysya Bank Ltd has fallen since we recommended the stock last month. The maximum Buy price for this
stock is Rs 115. Hence, we maintain our BUY view on the stock of Karur Vysya Bank Ltd.

The performance review of our open positions table is mentioned below:

Summary of Open Positions for Smart Money Secrets as on 23rd May 2018

SP Apparels Ltd 03-Jun-17 Buy 424 766 333 -21% Buy 130%

TCPL Packaging 23-Jun-17 Buy 515 1,100 532 3% Buy 107%

Ltd

Ador Fontech Ltd 27-Jul-17 Buy 95 169 101 6% Hold 67%

Mayur Uniquoters 21-Aug-17 Buy 345 673 468 36% Hold 44%
Ltd

TVS Srichakra Ltd 25-Sep-17 Buy 3,127 4,934 3,100 -1% Buy 59%

Honda Siel Power 26-Oct-17 Buy 1,314 2,387 1,395 6% Buy 71%
Products Ltd

Jagran Prakashan 22-Dec-17 Buy 171 312 164 -4% Buy 91%
Ltd

Ashiana Housing 27-Jan-18 Buy 187 328 151 -19% Buy 118%
Ltd

Newgen Software 26-Feb-18 Buy 239 416 253 6% Buy 64%

Technologies Ltd

Bodal Chemicals 19-Mar-18 Buy 125 190 126 1% Buy 51%

Ltd

Karur Vysya Bank 26-Apr-18 Buy 105 159 98 -7% Buy 51%

Indian Terrain# 24-May-18 Buy 176 295 176 0% Buy 66%

#Price as on 24th May 2018

Here is our list of Top Stocks To Consider Buying

Ashiana Housing

Honda Siel

31
 TVS Srichakra

Newgen Software Technologies

The Mailbag

A concerned subscriber wrote to us about Ashish Kacholia's exit from SP Apparels...

SP apparel is your one recommendations where investor Ashish Kacholia had bought a stake.

Your service offers recos where u suggest one reco from top 40 investors which are on your radar but recently Ashish
Kacholia had exited in this company and there is no update regarding that from your side, it's becomes very tough for
your members whether to go with this company or not as no updates were provided by u.

This is a very important point raised by our subscriber and I would like to address it here.

We completely understand subscriber's concern about the recent exit by our super Investor from SP Apparels. We
also agree that one of the catalysts for recommending a stock in Smart Money Secrets is the presence of a super
investor.

However, please do keep in mind, the stock that is recommended is also backed by our detailed research. A super
investor exiting a stock will not always mean we would turn negative on it.

While the company is facing some short-term issues with the implementation of GST and a reduction of the duty
drawback, our long-term view on the stock remains intact.

A super investor exiting a stock cannot be a reason for us to automatically recommend an exit as well. Having
said that, if there is some structural change in the business which warrants our change in the view, we will
certainly communicate that to all of you immediately.

This is the reason why we are maintaining our view on the SP Apparels.

Keep your queries coming. I'll be glad to address them here.

Regards,

Kunal Thanvi (Research Analyst)

Editor, Smart Money Secrets

Kunal Thanvi (Research Analyst), Managing Editor,Smart Money Secrets, a member

of the Institute of Chartered Accountants and the Companies Secretaries of India. He
started his career with a PMS as a buy-side analyst. He is a balance sheet driven
analyst who loves niche businesses with competitive advantages.

He practices value investing based on Ben Graham's principles of 'Margin of Safety'

and 'Mr Market'. He is an avid reader who believes it's better to learn vicariously than
the hard way.

Where Smart Money Secrets Fits In...

32
Our team will focus primarily in the mid and small cap domain. Having said that, we will remain market-cap agnostic towards
mispriced opportunities that the markets may present to us.

Market participants must note that stock markets tend to be very volatile. Mid and Small cap stocks are inherently riskier
compared to large blue-chip stocks. On the brighter side, they present a huge growth potential. It is not unusual for a good small
and mid-cap stock to turn a multibagger in a short period of time. But on the flipside, there is a considerable risk attached. And
putting too much money in a single stock or sector can be very risky.

According to us, in a scenario of ideal allocation of funds, predominantly mid and small-cap stocks could be considered to
comprise of not more than 30-40% of your total equity portfolio. Further, we believe a single small cap stock should not form more
than 2-3% of the total portfolio. Please note that this allocation will vary from person to person. For something that works best for
you, we recommend you talk to your investment advisor.

Frequently Asked Questions

These are some of the Most Frequently Asked Questions on Smart Money Secrets. Please view the others here.

If the stock price runs up post the recommendation and trades at levels higher than the
buy price, should one still buy the stock?
Please note that small and midcap stocks, in general, have low market capitalisation and liquidity. There is always
the possibility that these stocks may shoot up in price in no time, even at the time of our recommendation.

Therefore, we would like to recommend to our subscribers not to chase prices and not to consider buying a stock
once it goes beyond our recommended maximum buy price. There will be enough recommendations in a year so
that the pain of missing out on a few recommendations is eased considerably.

Do note that we give maximum buy price range for every stock we recommend in Smart Money Secrets.

Can there be an overlap or contrary views on the stocks recommended under this service
and that of the other Equitymaster services?
We believe that earning good returns from stocks is all about following a well-defined process.

In line with this, each of our product teams, be it the Smart Money Secrets team or Hidden Treasure or The India
Letter, has its own unique screen and checklist for selecting and recommending stocks. In rare cases, where there
is a compelling proposition to recommend a stock in more than one service simultaneously, could there be an
overlap in stocks.

For example, the Smart Money team has unique smart money screener for any stock to pass i.e. 1) Greater than 1%
shareholding of Super Investors; 2) Bulk & Block Deals; and 3) Increasing Promoter Shareholding. On the other
hand, same stock could be recommended under another service irrespective of the smart money screener. In fact,
any service may have recommend a stock and now smart money has entered the stock, it becomes a candidate
for Smart Money Team.

Thus, there could be recommendations that overlap with those in our other services. This aspect also leaves the
stage open for sometimes contradictory recommendations.

What does 'Closed Position' mean?

StockSelect recommendations are meant to meet the target prices within a time frame of three years. So when the
stock meets target price or completes the time frame we 'close the recommendation'. However, since we keep
reviewing our assumptions and estimates for the stock even in the interim, the view or target price on the stock
may warrant a change. This could be a revision upwards or downwards. In such cases, if the previous

33
recommendation on the stock is no longer valid we close that recommendation. So we essentially close
recommendations either by giving a Sell view or putting out a changed view.

How to read the returns calculations?

For positions that are not closed returns are calculated from date of recommendation till date.

For closed positions, there can be two types of calculations.

Assuming we initially gave a Buy on a stock with no subsequent recommendations on the same stock.
In that case the calculation is fairly simple. The returns shown in this case is simply the change in stock
price from the date of recommendation till the date on which the position was closed.

Now let us take a case where we initiated with a Buy (1st position) and subsequently came with another
recommendation (2nd position) on the same stock. Let us assume that the subsequent
recommendation was also a buy. In such cases, the return calculation depends on whether the 1st
position is closed or not. If the first position is closed before we reiterate buy then the return on the first
position will be calculated as shown previously. However, if 1st position was not closed before we
reiterated buy, then the return calculation is from the earlier buy recommendation till the date on which
the position was closed. Basically where we have reiterated view on a stock we try to show cumulative
returns. The same logic applies with Hold recommendations as well.

Now let us look at Sell recommendations. There can be two situations here.

If there is no recommendation subsequent to the Sell recommendation we show maximum drop in stock
price from date of sell recommendation till date.

If the Sell recommendation is followed up by another recommendation, we show maximum drop in stock
price between the two recommendation dates.

Basically we have tried to cover all hypothetical instances in this note that may help you better understand the
return calculations and closed positions of our recommendations. If you have any query pertaining to it please do
write in to us for further clarifications.

Definitions of Terms Used

Buy recommendation: This means that the subscribers could consider buying the concerned stock at
current market price keeping in mind the tenure and objective of the recommendation service.

Hold recommendation: This means that the subscribers could consider holding on to the shares of the
company until further update and not buy more of the stock at current market price.

Buy at lower price: This means that the subscribers should wait for some correction in the market price
so that the stock can be bought at more attractive valuations keeping in mind the tenure and the
objective of the service.

Sell recommendation: This means that the subscribers could consider selling the stock at current
market price keeping in mind the objective of the recommendation service.

To enhance your experience of using Smart Money Secrets and to ensure that this journey is smooth for you we have compiled a list

34
of Frequently Asked Questions.

DISCLOSURES UNDER SEBI (RESEARCH ANALYSTS) REGULATIONS, 2014

INTRODUCTION:
Equitymaster Agora Research Private Limited (hereinafter referred to as "Equitymaster"/"Company") was incorporated on October 25, 2007. Equitymaster is a joint
venture between Quantum Information Services Private Limited (QIS) and Agora group. Equitymaster is a SEBI registered Research Analyst under the SEBI (Research
Analysts) Regulations, 2014 with registration number INH000000537.

BUSINESS ACTIVITY:
An independent research initiative, Equitymaster is committed to providing honest and unbiased views, opinions and recommendations on various investment
opportunities across asset classes.

DISCIPLINARY HISTORY:
There are no outstanding litigations against the Company, it subsidiaries and its Directors.

GENERAL TERMS AND CONDITIONS FOR RESEARCH REPORT:

For the terms and conditions for research reports click here.

DETAILS OF ASSOCIATES:
Details of Associates are available here.

DISCLOSURE WITH REGARDS TO OWNERSHIP AND MATERIAL CONFLICTS OF INTEREST:

a. 'subject company' is a company on which a buy/sell/hold view or target price is given/changed in this Research Report.
b. Equitymaster holds 1 share each of Honda Siel Power Products Ltd and Indian Terrain Fashions Ltd as per the guidelines prescribed by the Board of Directors of
the Company. The investment is made for research purposes only.
c. Equitymaster has financial interest in TVS Srichakra Ltd.
d. Equitymaster's investment in TVS Srichakra Ltd is as per the guidelines prescribed by the Board of Directors of the Company. The investment is however made
solely for building track record of its services.
e. Equitymaster has no other financial interest in Honda Siel Power Products Ltd, Indian Terrain Fashions Ltd and TVS Srichakra Ltd.
f. Equitymaster has no financial interest in any other Subject Company forming a part of this report.
g. Equitymaster's Associates and Research Analyst or his/her relative doesn't have any financial interest in the subject company.
h. Neither Equitymaster, it's Associates, Research Analyst or his/her relative have actual/beneficial ownership of one percent or more securities of the subject
company at the end of the month immediately preceding the date of publication of the research report.
i. Neither Equitymaster, it's Associates, Research Analyst or his/her relative have any other material conflict of interest at the time of publication of the research
report.

DISCLOSURE WITH REGARDS TO RECEIPT OF COMPENSATION:

a. Neither Equitymaster nor it's Associates have received any compensation from the subject company in the past twelve months.
b. Neither Equitymaster nor it's Associates have managed or co-managed public offering of securities for the subject company in the past twelve months.
c. Neither Equitymaster nor it's Associates have received any compensation for investment banking or merchant banking or brokerage services from the subject
company in the past twelve months.
d. Neither Equitymaster nor it's Associates have received any compensation for products or services other than investment banking or merchant banking or
brokerage services from the subject company in the past twelve months.
e. Neither Equitymaster nor it's Associates have received any compensation or other benefits from the subject company or third party in connection with the
research report.

GENERAL DISCLOSURES:

a. The Research Analyst has not served as an officer, director or employee of the subject company.
b. Equitymaster or the Research Analyst has not been engaged in market making activity for the subject company.

Definitions of Terms Used:

a. Buy recommendation: This means that the subscriber could consider buying the concerned stock at current market price keeping in mind the tenure and objective
of the recommendation service.
b. Hold recommendation: This means that the subscriber could consider holding on to the shares of the company until further update and not buy more of the stock
at current market price.
c. Buy at lower price: This means that the subscriber should wait for some correction in the market price so that the stock can be bought at more attractive
valuations keeping in mind the tenure and the objective of the service.
d. Sell recommendation: This means that the subscriber could consider selling the stock at current market price keeping in mind the objective of the
recommendation service.

Feedback:

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