Equitymaster Agora Research Private Limited

Independent Investment Research

Welcome to the Fourteenth issue of Smart Money Secrets!

Hope you are doing great. Indian stock markets are going through an interesting phase, to say the least. In 2018,
the broader markets are flat, but there are interesting things happening in mid and small cap space.

Increasing global interest rates, rising oil prices, subdued earnings performance and last but not least - auditor's
resignations, have spoiled the party for small and mid-caps.

We believe, the correction in the small and mid-cap space will continue for some more time. The companies with
questionable corporate governance will see their auditors resigning and rising interest rates will keep a check on
market liquidity.

While, the correction will hit all the companies, the quantum of fall in quality companies with best corporate
governance practices will be lesser and temporary compared to their counterparts.

We are not worried about the correction in the companies we have recommended and believe the correction can
be a buying opportunity.

In fact, a stock bought by our super investor - Aakash Prakash of Amansa Capital has also got fallen.

Aakash has increased his stake in the company in last two quarters and as of March 2018 he holds 1.8% in the
company.

The company is the market leader in the space it operates and has, over the years, grown its profits faster than its
sales.

We have been tracking this company for a while but valuations never gave us comfort. The recent correction has
given us some breathing space.

If Growth in Profits Exceeds Growth in the Topline - That's the Company You Should Buy!
If two companies have both grown their bottomline by 25% CAGR over the past five years, which one do you think
is a better bet? This is of course assuming everything else is pretty much the same.

We would surely see how the bottomline growth has come about. If it has come mostly from the growth in topline
for one of the companies and from margin expansion for the other, our interest would surely start tilting towards
the former.

Well, this may look like oversimplification, but we are trying to drive home a very important point here.

If you are a growth stock hunter, hunt for the ones where growth in bottomline has come about predominantly by a
strong growth in topline. If it is more margin-driven, as a result of cost cutting and efficiency, then it has its limits.

We haven't really come across a company that can sustain its margin improvements year after year. Sooner or
later, the plateau is hit and your dreams of owning a true-blue growth stock could remain just that.

Ok, let's peel back a few more layers.

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Once you've zeroed in on the right growth stock, what kind of a topline growth would you prefer? One where there
is organic growth in volumes or the one where the company is consistently getting into newer geographies and
introducing newer products into the market.

The second one preferably. Not only does it ensure that the company has a good growth runway ahead of it but
also provides great cushion against drop in revenues. A company that's firing on many cylinders at once can still
chug along at a good pace should a couple of them face some temporary snags.

PI Industries, our recommendation for this month ticks these boxes and more in its quest for becoming an ideal
growth stock.

It is India's leading agri chemical and custom synthesis company with over six decades of experience.

The company has had an amazing last few years. Over the last ten years, sales have grown at a compounded
annual rate of 25%, while the profits have grown at a whopping 50%.

The other financial parameters haven't disappointed either. Margins, return ratios, debt levels, and cash flows,
everything looks in top shape.

And come to think of it, the company's journey may have just started.

Not only is it all set to build upon its existing relationships, it is also continuously looking to introduce new
products in the Indian market and expand geographically.

Going by its track record, the company does look well poised to execute its plans to perfection and keep the
growth momentum going.

Well, the broader story does look promising; promising enough to make us take a deeper look.

What's the company's business model? What are some of its key strengths and what are the areas of concern?
Above all, are the valuations conducive to taking a position in the stock right now? Let's get down to answering
these questions in detail now.

About the Company

PI Industries Ltd. (PI) was incorporated in 1947 (as Mewar Oil & General Mills) with its registered office in Udaipur,
Rajasthan. It is engaged in business of agro-chemicals and custom synthesis in domestic and exports markets
respectively.

PI currently operates three formulations and two manufacturing facilities as well as eight multi-product plants
under its three business units across Gujarat. These facilities have integrated process development teams with in-
house engineering capabilities.

The multi-purpose plants provide the flexibility that enables PI to produce new products in a short time and scale
up to meet its customer's needs.

With customer trust, integrity, and Intellectual Property (IP) protection, PI has taken an integrated approach to
differentiate itself with a unique value proposition to its customers by combining research & development,
regulatory know-how, manufacturing, application development, marketing, distribution, and customer connect
initiatives.

Over the years, PI has established a strong farmer connect and distribution network. With 8 zonal offices, 29
depots, 1,500 experienced field force, 10,000 dealer/distributors, and more than 40,000 retailers across the
country; PI can reach over a million farmers directly or indirectly.

PI's Two Segments:

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 1. Domestic Agro-chemicals (37% of the total revenue) - It is one of the market leaders in the branded agro-
chemicals space ranging from insecticides, fungicides, herbicides, and specialty products. These are high-
potential innovator molecules for the Indian market.

This essentially involves an in-licensing agreement wherein the registration of the innovator molecules (global
players) takes place under PI's brand name. This gives PI the rights to exclusively market and distribute these
products domestically.

Several key brands are OSHEEN, NOMINEE GOLD, BIOVITA, CUPRINA, ROKET, FORATOX, KITAZIN, and
KEEFUN.

2. Custom Synthesis Management (CSM) (63% of the revenue) - PI provides contract research and contract
manufacturing services to global innovators for the agro-chemical industry.

It involves engaging with innovators for the global requirement of high potential patented molecules at early
stages of the life cycle for the agro-chemical industry.

These worldwide engagements extend across the commercial lifecycle of the molecule. With this, the
company can reap gains when volumes gain traction over the years.

The company enjoys long-standing relationships with global innovators (from Japan and Europe).

Similarly, PI's expertise in complex chemical equations with wide commercial applicability helped the
company to create a large presence in the field of custom synthesis.

What Differentiates PI?

Differentiated Business Model:

What differentiates PI industries with other companies is its differentiated business model. Apart from
the domestic agro-chemical business it has, over the years, developed a very strong, high margin custom
synthesis business and has limited competition.

It is an integrated player having presence across the entire value chain.

This includes research & development, product registration, manufacturing and formulation, brand
development, farmer connect, and strong distribution.

Presence Cross The Value Chain Creates Entry Barrier

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Exclusive Marketing and Distribution Rights:

PI's business model focuses on high-potential innovator molecules for the Indian markets.

This essentially involves an in-licensing agreement wherein the registration of the innovator molecules
takes place under PI's brand name, thereby giving it rights to exclusively market and distribute these
products domestically.

Depending upon the agreement with the global innovator, the company either imports the technical or
bulk formulations or chooses to manufacture either of the two at its owned factories in India.

These agreements are typically formed with the innovators for early stage patented molecules so that PI
can realise the growth benefit throughout the entire product life cycle.

PI's domestic agro-input operations comprise mainly of:

In-licensing - In-licensing of newly launched or patented molecules from innovators. This includes
registration, formulation, and marketing the formulated products in India.

Branded Generic Agri-input - This is a traditional business. This includes manufacturing and marketing
of branded generic agri inputs.

Co-marketing - This includes selectively partnering with innovators to co-market their early stage
lifecycle agri input products using the company's countrywide marketing set up in India.

In-licensing and co-marketing contributes about 55%-70% of the product portfolio.

It is important to note that most of the recent major product launches have been for in-licensed co-
marketed products.

Some Key Products

Nominee Gold FY10 Nominee Gold is a Post Emergent, Broad Spectrum systemic herbicide
(Insecticide) for all types of Rice cultivation i.e. direct sown rice, rice nursery and
transplanted rice.

Osheen (Insecticide) FY13 Osheen - solution to effectively manage the Brown Plant Hoppers in
Rice

Keefun (insecticide) FY15 Keefun is a broad spectrum insecticide for the vegetables segment.

Vibrant (Insecticide) FY16 Vibrant is a new granular insecticide having systemic and contact
activity for effective control of stem borer and leaf folder in Rice

Biovita X (Plant FY16 Biovita X - for the good health and quality yield of wheat crop.
Nutrient)

Legacee (herbicide) FY17 Introduced a new herbicide - Legacee during Kharif 2016

Source: Company

In-licensing enables the company to introduce new products. Since in-licensed products are protected
by patents (3-year exclusive data protection for the product in India post registration), this enables
longer product lifecycle and offer higher margins.

As the intellectual property (IP) is respected by the company, this strengthens relations with the global

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innovator.

For example, in May 2016, the company has entered a Joint Venture with Mitsui Chemicals Agro (MCAG;
Japanese company) for providing registration services for the latter's proprietary's products in India and
leverage PI's deep understanding of Indian agriculture, farmer's needs, regulatory system etc.

This is expected to improve revenue diversity and strengthen the product mix in the long term.

While the company continues to maintain the leadership position in rice crop, due to a strong presence
and innovative product portfolio, PI has successfully pursued wheat and horticultural crops.

Growth on the domestic front will be driven by a leading profile of products that have been launched in
the past couple of years and augmented by new introductions.

New Growth Opportunities in Contract Manufacturing:

The company enjoys long-standing relationships with global innovators (from Japan and Europe).

This is possible because the company respects the intellectual property of the global innovators.
Because of this, PI has gained a good reputation internationally over the years.

Given that a lot of commercialisation has taken place in the past few years, PI has an optimal portfolio of
molecules that will continue to generate growth in the coming years.

It is important to note that India enjoys a host of enabling factors that are driving higher exports of
agrochemicals, these include:

1) Institutional mechanism for protecting intellectual property;

2) Augmented manufacturing capabilities;

3) Substituting China in chemical manufacturing.

Going forward, the business from this segment will be mainly be driven by a ramp-up in sales volume of
existing molecules and commercialisation of 2-3 new molecules each year. Commissioning of two new
plants at Jambusar SEZ will support this growth and will also bring operational leverage.

PI has a robust order book of US$ 1.15 billion. The revenue visibility for the coming years will help the
company strengthen its capabilities.

Globally, innovators are prioritising the discovery and development of new molecules. The
requirement of producing molecules with complex chemistries will favor companies such as PI
which has an established footprint in handling new technologies in the agro chemistry.

Since PI has strong capabilities in the CSM segment, this opens up new opportunities in other verticals
of the chemicals sector like pharmaceuticals or fine chemicals used in the electronics.

PI has proposed to acquire a small asset base for contract manufacturing of pharma intermediates. This
is currently under due-diligence. This would provide new growth opportunities. We have not factored in
any revenue from these new verticals. Any revenue and growth opportunities from these verticals will be
icing on the cake.

R&D Focus for an Independent Product Pipeline:

Research & Development (R&D) is one of the key strengths of PI Industries and it is an integral part of
the company's business.

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 The company is engaged with prominent names in the global agrochemicals industry and has nurtured
strategic relationships with several global innovators.

(R&D)capability forms the core of the company's partnership with the global innovators when it comes
to in-licensing arrangements for patented/proprietary products for commercialising in the country.

The company has R&D facility at Udaipur led by a strong team of scientists and chemists who specialise
in complex chemistry. Infrastructure includes advanced research and development labs, kilo plants, and
pilot plants with NABL certification.

At any point in time, the company has 30-35 products in its R&D pipeline. In FY18 this number has
reached 70 which is an indicator of the future growth.

Pricing Power of Brands:

The company works closely with global partners focusing on high-potential molecules for Indian
markets under the in-licensing arrangement.

PI Industries has a leadership position in building strong brands. Several key brands like OSHEEN,
NOMINEE GOLD, BIOVITA, CUPRINA, ROKET, FORATOX,KITAZIN, KEEFUN and others have built a strong
connect with the farmers and have a great recall value.

It is important to note that it takes a considerable amount of time and cost for brand building and
marketing. This creates an entry barrier for new players.

Strong Farmer Connect and Distribution:

The company has an extensive presence spread in the rural hinterlands is actively supported by a strong
and effective customer connect program.

PI conducts strategic business partner meetings wherein the company's channel partners are informed
and trained on the shifting paradigms in agriculture.

Channel partners and company's strong and experienced field force visit the villages and farmers
regularly, conduct one on one as well as group meetings to impart knowledge and training on improved
methods of agriculture to increase yield and productivity.

To further enhance the reach and farmer connect, PI has taken several key initiatives in the digital space
including the use of mobile technology & tablets.

One of the important strengths of PI Industries is its strong distribution system. With 8 zonal offices, 29
depots, 1,500 experienced field force, 10,000 dealer/distributors, and more than 40,000 retailers spread
across the country.

The company's centralised SAP-based ERP system gives efficient last mile connectivity.

About the Industry

A UN study on global population trends predicts that India will surpass China to become the most populous nation
in the world by 2022.

With a present size of 1.3 billion, India currently supports nearly 17.8% of the world population, with 2.4% land
resources and 4% of water resources.

Keeping pace with the growing population and their changing demand for quality food, the country will have to
raise its agricultural production as well as productivity.

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Agriculture sector faces several challenges such as high monsoon dependency, continuously shrinking arable
land, decreasing farm sizes and low productivity. Not to mention, about 15-25% potential crop production is lost
due to insect pests, weeds and diseases.

Difficulties in adopting modern farming technologies and lack of know-how about modern farming processes and
agri-inputs are creating immense pressure on the agriculture sector to undergo a transformation.

It is imperative that to meet the needs and overcome the challenges, the focus needs to be on raising the
agricultural production and enhancing productivity across the value chain simultaneously.

Agrichemicals

Crop protection chemicals, agronomy, fertigation, seed treatment, bio-technology development etc. are some of
the emerging solutions.

Agriculture in the coming years will have to embrace all such possible solutions. The agriculture sector faces
many challenges and the possible solutions can lead to India becoming a global manufacturing hub of quality
crop protection chemicals.

India is the fourth largest global producer of agrochemicals after the US, Japan, and China. This segment
generated a value of US$ 4.4 billion in FY15.

As per FICCI Report, this segment is expected to grow at 7.5% per annum to reach US$ 6.3 billion by FY20.

Approximately 50% of the demand comes from domestic consumers and the rest from exports. During the same
period, the domestic demand is expected to grow at 6.5% per annum and exports at 9% per annum.

At present, per hectare consumption of pesticides in India is amongst the lowest in the world and stands at 0.6
kg/ha against 5-7 kg/ha in the UK and 13 kg/ha in China. With the increase in awareness and market penetration,
consumption is likely to improve soon.

Pests developing resistance to older products and increase in market penetration will be the driving factors for the
Indian crop protection industry.

Custom Synthesis

In the chemical industry, custom synthesis describes the synthesis of non-commercially available molecules
exclusively for a specific company. The amount thus produced tends to be small, ranging from a few milligrams to
about 10kg.

The production of larger amounts is usually called contract manufacturing. While the customer defines the quality
of the required product, the synthetic route is developed by the custom synthesis provider.

In such cases, the key challenge is not carrying out an established production process but rather developing it.

Once such a process has been developed, it is far cheaper (possibly up to 90%) to produce more of the same
material rather than to produce another material.

Key customers for custom synthesis are pharmaceutical, agrochemical, and technology companies.

The global fine chemical industry is US$ 300 billion market. Within this, the custom synthesis manufacturing
segment is estimated to be close to US$ 85 billion.

Out of this, India currently accounts for 5%, but is emerging as a preferred destination for custom synthesis.
Particularly in the patented and early stage molecules and is expected to grow at a CAGR of 12% in the coming
years.

China is the largest exporter of agrochemicals globally and is, thus, a primary competitor to India. However, over

7
the years, China has been gradually losing its dominance in manufacturing on the back of rising labour cost,
stricter environmental, and safety regulations, and weak Intellectual Property Rights (IPR) policy.

It is important to note that for global Innovators, IPR protection is a vital criterion to select partners in the custom
synthesis business. Similarly, introduction of stringent environmental norms and calling off registration of 100+
chemical projects in the coastal chemical industrial parks in China led to the exit of several pesticide companies.

In recent years, India has become a preferred location for many global innovators due to its world-class research
capabilities and manufacturing infrastructure, large and well-qualified talent pool with strong chemistry and
procedural skills, cost-effective R&D cum manufacturing costs, and high capital efficiency.

Economic competencies of India relative to China have also gradually improved over the last few years. These
factors make Indian players an economically viable choice.

PI, which has a strong presence in both agrochemical and custom synthesis, is well poised to ride these tailwinds
going forward.

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 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
company.

In the case of PI, our super investor Aakash Prakash, of Amansa Capital, has entered and increased stake in
last two quarters. As of March 2018, he holds around 1.8% in the company.

In fact, some good funds like DSP Blackrock and ICICI Prudential hold decent stake in the company.

Super Investor: Aakash Prakash Increasing Stake!

AMANSA HOLDINGS PRIVATE LIMITED - - 1.1 1.8

DSP BLACKROCK MIDCAP FUND - - - 2.0

ICICI PRUDENTIAL VALUE DISCOVERY FUND 3.4 4.7 4.7 5.3

Source: NSE, Ace Equity.

The owners of the company also hold a sizable stake in the company. Singhal family holds around 51% in the
company. However, promoters over the years have diluted some stake in the company and we have penalised
it for the same.

Promoters Closely Holding the Stake

Mayank Singhal 23.3 23.3 23.3 23.2 23.2

Madhu Singhal 15.7 15.7 15.7 15.6 15.6

Salil Singhal 6.2 6.2 6.2 6.2 6.2

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 Pooja Singhal 6.3 6.3 6.3 6.3 6.3

Shefali Khushalani 0.1 0.1 0.1 0.1 0.1

Total 51.6 51.6 51.6 51.4 51.4

Source: Stock Exchange, Equitymaster

We believe smart money is adequately invested in the company. However, since, promoters have diluted their
stake we penalise the company by 2 points and hence, we assign a rating of 8 to the company.

2. Business Quality -

PI is one of the market leaders in domestic branded agro-chemical industry and one of the leading contract
manufacturer for global innovators developing specialised agro-chemicals.

PI derives majority of its business from the Custom Synthesis/exports (63% of the total revenues) which has
superior margins and profitability.

Further, in the domestic agro-chemical business it leverages its robust farmer connect and distribution
network to sell branded insecticides, fungicides etc.

The same is reflected in the financials of the company.

Business Quality

ROEs (out of 1.5) 31.53 22% 1.5

ROCEs (out of 1.5) 30.05 26% 1.5

Total 3

Topline Growth (out of 1) 18% 19% 1

Bottomline Growth (out of 1) 50% 26% 1

Operating Profits (out of 1) 29% 26% 1

Total 3

D/E 0.60 0.0 2

OCF/PAT 1.9 0.9 1

If one looks at the last ten years financials, one can understand the kind of pricing power and strength PI
holds. Over the years the company has grown its profitability (50% CAGR) faster than its sales (18% CAGR).

Interestingly, it has done this with a lean balance sheet (debt free as of FY18) and robust return ratios (RoEs -
north of 30%).

We believe, the company has a very strong business model and return profile. We assign a rating of 9 on
business quality.

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3. Competitive advantage -

One of the important factors super investors look for is sustainable competitive advantages aka economic
moats. They love to invest in companies focusing on widening of moats.

As discussed, PI is one of the few companies with an integrated business model both in the domestic agro-
chemical and export custom synthesis business. We believe, the company has following advantages over
others (please read about the company for details):

Integrated Business Model: It is an integrated player having presence across all the value chain.
This includes research & development, Product registration, manufacturing and formulation, brand
development, farmer connect, and strong distribution.

Exclusive Marketing and Distribution Rights: PI has exclusive rights to market products of global
innovator under its brand name. This gives PI an advantage over other competitor both in terms of
exclusivity and better pricing.

Strong Farmer Connect & Distribution Network: PI has over the years established eight zonal
offices, 29 depots, 1,500 experienced field force, 10,000 dealer/distributors, and more than 40,000
retailers spread across the country.

Focus on Research & Development: PI has a very strong focus on research & development which
helps it to stay ahead of the curve specially in the custom synthesis business where it helps
innovators in contract research. On an average, it has 35-40 molecules in R&D pipeline.

Custom Synthesis is a Game Changer: PI has diversified its business from a domestic agro-
chemical player to a custom synthesis (contract manufacturer) for global innovators, which has not
only immunised it from the monsoon dependent domestic business but has also improved its
profitability.

Apart from the integrated business model, what also sets Pl apart is the management's immense
understanding of the agro-chemical industry.

While PI has a differentiated business, the domestic business is still dependent on the monsoon and
availability of the MSPs, thus we assign a rating of 7.

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.

PI is owned and managed by the Singhal family. The family holds around 51% in the company. Please note this
is post the dilution.

We love managements that build their business from starch and are actively involved in the business. We see
the same characteristics in these owners who have created PI Industries from scratch. We really like their
capital allocation skills and ability to diversify into more profitable business (CSM).

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's integrity.

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 We believe, management has put its soul in to the business. This is a kind of pattern our Super Investors look
out for. However, given the fact that management diluted some stake we penalise the company by one point
and assign a rating of 8 on this parameter.

5. Capital allocation -

One of the patterns our super investors and we seek for is the efficient capital allocation by the management.
The best way to evaluate this could be 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, sky is the limit
for them.

In case of PI, in the period FY12-17, of the total funds raised by the company, over 72% of the total funds
were generated by the business.

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 PI, around 52% has gone towards capex and 22% has gone towards loan re-payment. In fact,
the company has also been paying dividend and has paid 9% of the total sourced money towards dividend.

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 Application of Funds over FY12-17

We believe, the management has been quite prudent in the capital allocation both in terms of sourcing of
capital and deploying the same. However, we penalise the company for dilution of equity over the years
and assign a rating of 9 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 Statements (which many
people miss).

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 PI and over FY12-17 this number on an average stood at 64% which is above the
sixty percent rule.

We also compare the net cash flow from operations with operating profits because theoretically they should
be close to each other. For PI both accounting and cash operating profits were close.

While the cash conversion cycle for PI is slightly higher at 82 days (5-year average), but we believe that is
largely because of higher share of exports in total revenue.

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 We penalise the company for the higher cash conversion cycle and assign a rating of 8.5 on earnings quality.

7. Scalability of the Business -

Identifying a good business is one thing, identifying a good business with 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.

PI has over the years established a very strong hold both in the domestic agro-chemical business and exports
custom synthesis business. We believe, it has scalability in both businesses.

Domestic Agro-chemical Business:

The agriculture sector faces many challenges and these possible solutions to same can lead to India
becoming a global manufacturing hub of quality crop protection chemicals.

India is the fourth largest global producer of agrochemicals after the US, Japan, and China. This segment
generated a value of US$ 4.4 billion in FY15.

As per FICCI Report, this segment is expected to grow at 7.5% per annum to reach US$ 6.3 billion by FY20.

Approximately 50% of the demand comes from domestic consumers and the rest from exports. During the
same period, the domestic demand is expected to grow at 6.5% per annum and exports at 9% per annum.

At present, per hectare consumption of pesticides in India is amongst the lowest in the world and stands
at 0.6 kg/ha against 5-7 kg/ha in the UK and 13 kg/ha in China. With the increase in awareness and market
penetration, consumption is likely to improve soon.

Pests developing resistance to older products and increase in market penetration will be the driving
factors for the Indian crop protection industry.

Custom Synthesis Business:

The global fine chemical industry is US$ 300 bn market. Within this, the custom synthesis manufacturing
segment is estimated to be close to US$ 85 bn.

Out of this, India currently accounts for 5%, but is emerging as a preferred destination for custom
synthesis. Particularly so in the patented and early stage molecules and expecting to grow at a CAGR of
12% in the coming years.

China is the largest exporter of agrochemicals globally and is, thus, a primary competitor to India.

However, over the years, China has been gradually losing its dominance in manufacturing on the back of
rising labour cost, stricter environmental and safety regulations, and weak Intellectual Property Rights
(IPR) policy.

It is important to note that for global Innovators, IPR protection is a vital criterion to select partners in the
custom synthesis business.

Similarly, introduction of stringent environmental norms and calling off registration of 100+ chemical
projects in the coastal chemical industrial parks in China led to the exit of several pesticide companies.

In recent years, India has become a preferred location for many global innovators due to its world-class
research capabilities and manufacturing infrastructure, large and well-qualified talent pool with strong
chemistry and procedural skills, cost-effective R&D cum manufacturing costs and high capital efficiency.

Economic competencies of India relative to China have also gradually improved over the last few years.
These factors make Indian players an economically viable choice.

13
 PI's sales and profits have grown at a CAGR of 18% and 50% respectively in the last ten years. We expect
the company to deliver revenue and profit CAGR of 19% and 26% respectively over FY18-21.

Thus, given all these factors, we assign a rating 10 based on scalability of business parameter.

8. Market Leadership -

PI is one of the few players with a business that caters to both branded domestic agro-chemical industry and
providing contract research & manufacturing to global innovators.

While it faces different competitors in both the businesses, if we look at growth, margins, profitably and return
ratios, it stands out as a clear winner.

We believe, the disruption in the Chinese industry and PI's increasing share from the CSM business, places it
in a sweet spot.

Even though the company has all the right ingredients to be the market leader, given the fragmented nature of
its industry, we assign a rating of 8 on market leadership.

Considering the above analysis, the total ranking assigned to the company is 67.5 (out of 80). On a weighted
basis, it stands at 8.5. This indicates that fundamentals of the business are strong.

Equitymaster Smart Money ScoreTM

Smart Money Invested 8.0                     15.0% 1.2

Business Quality 9.0                     15.0% 1.4

Competitive Advantage 7.0                     10.0% 0.7

Soul in the Game 8.0                     10.0% 0.8

Capital Allocation 9.0                     10.0% 0.9

Earnings Quality 8.5                     15.0% 1.3

Scalablilty in the Business 10.0                     15.0% 1.5

Market Leadership 8.0                     10.0% 0.8

*Excluding extraordinary gains

Lower the risk on a given parameter higher is the rating

What are the Risks to Be Looked Out For?

Vagaries of Monsoon Poses the Biggest Risk for Agrochemical Segment

An unfavorable monsoon is the biggest risk for the domestic agrochemical segment. Delayed or deficient rainfall
hurts sales and thus, negatively impacts growth. Similarly, unseasonal rainfall can damage standing crops,
resulting in income loss for farmers.

Lower Prices of Agricultural Produce Could Impact Demand for Agrochemicals

Decline in the prices of agricultural commodities or lower MSP (minimum support price) can reduce farm incomes.

This will reduce demand for agri-inputs. Unlike fertilisers, prices of agrochemicals are not subsidised and farmers
may choose to decrease their purchase of agrochemicals to lower their production cost. This could impact the
company's revenue and profitability.

14
Under-Utilization of Jambusar Plant May Drag Margins

PI recently commissioned two new plants at Jambusar facility with a capital outlay of approximately Rs 3 billion.
Under-utilisation of this facility could impact EBITDA margins. However, with strong order book of US$ 1.15 billion,
there is a low probability of under-utilisation.

Updates On PI INDUSTRIES: Valuations

Add: Alert | Portfolio
Market Data
Price On Reco. Date (Rs)
We have valued PI based on price to earnings basis. In fact, given the
company is growing rapidly and can surprise our conservative
assumptions on the positive side, we have conducted a scenario analysis.
767 (BSE)

CMP - BSE / NSE (Rs) 767 / 769 What we have essentially done is kept both the earnings growth and the
Change Since Reco.  0.0% PE multiple in a range that we are comfortable with and have tried to
52-week High/Low (Rs) 1,035 / 674 deduce target price based on different combinations of the same.
NSE Symbol PIIND
We believe, this gives a fair idea about the potential upside for the stock.
BSE Code 523642
However, in addition to this we have derived a target price on basis of our
No. Of Shares 137.91 m
numbers.
Face value 1

FY18 dividend/share (Rs) 4 Expected Target Price (FY21) Under Different Assumptions of
Dividend yield (%) 0.5% Earnings Growth and P/E Multiples
Stock Classification Small cap

Free Float 48.5%

Market Cap (Rs m) 105,777 15% 18% 20% 26% 30%

12 557 618 661 803 910

Premium Search 16 743 824 881 1,071 1,214

18 836 927 991 1,205 1,366

20 929 1,030 1,102 1,339 1,517

Rs 100 Invested Is Now Worth
Source: ACE Equity, Equitymaster

PI is one of the few players with a differentiated business model both in

terms of business diversification (domestic and CSM) and vertical
integration. It has not only helped PI to sail through tough times, but has
also helped it grow its revenue by 18% annually in last ten years.

It has maintained a very strong balance sheet with close to zero debt. As
View Updated Chart
of March 2018, PI had a cash of Rs 2,200 million on the balance sheet. It
has always commanded industry best return ratios and cash flows.

Strong focus on research and development and robust last mile

distribution network sets PI apart from its competitors.

This along with a very strong owner operated management has helped the
company to trade at premium valuations for a decade. PI has traded at an
average price to earnings multiple of 23 times in the last ten years.

However, in last two years, the company has been facing some headwinds
with both domestic and exports business not delivering the kind of growth
they delivered in last ten years. This along with the recent sell off in the
mid-small cap space has led to an attractive correction in the stock.

While we are still not comfortable with the current market valuations of PI,
we have arrived at a target price of Rs 1,054 from FY21 perspective. This
implies a point to point return of 38% and a CAGR of 12%.

15
 We believe subscribers who are willing to hold the stock for the long-term
could consider taking a partial exposure of 50%. Please note that the
maximum buy price for 50% exposure is Rs 780.

Subscribers could consider putting in not more than 50% of the sum
intended to invest into the stock of PI Industries Ltd at current
valuations. We will let subscribers know through a special update
when the stock approaches best buy price. Until such an update, we
recommend subscribers to consider not acting on short term price
movements.

For the stock to become a strong buy, it will have to fall by around 10%
from its current price.

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 PI INDUSTRIES
All Recommendation Reports | Latest Update | Latest Stock Quote

Consolidated Financials

Sales 20,968 22,768 22,118 26,630 31,423 37,079

Sales growth (%) 8.1% 8.6% -2.9% 20.4% 18.0% 18.0%

Operating Profit 4,367 5,548 4,923 6,650 7,847 9,937

Operating profit margin (%) 20.8% 24.4% 22.3% 25.0% 25.0% 26.8%

Net profit 3,153 4,595 3,663 4,646 5,588 7,268

Net profit margin (%) 15.0% 20.2% 16.6% 17.4% 17.8% 19.6%

Current assets 13,583 17,149 14,061 17,840 23,002 30,359

Fixed assets 9,463 10,223 11,421 12,556 13,559 14,391

Investments 5 9 12 12 12 12

Other non-current assets 542 405 492 533 628 742

Total Assets 23,594 27,786 25,986 30,941 37,202 45,502

             

Current liabilities 9,792 10,483 6,136 6,573 7,756 9,153

Net worth 11,718 16,272 19,248 23,574 28,778 35,546

Loan funds 1,230 830 463 471 288 355

Other liabilities 853 201 139 322 380 448

Total liabilities 23,594 27,786 25,986 30,941 37,202 45,502

Key Financial Ratios

16
 Operational & Financial Ratios

EPS (Rs.) 23 33 27 34 41 53

Book Value per share (Rs.) 85.0 118.0 139.6 170.9 208.7 257.7

Dividend Payout Ratio (%) 8% 7% 7% 10% 12% 12%

Margin ratios (%)

EBITDA Margins 21% 24% 22% 25% 25% 27%

PBT Margins 19% 22% 21% 22% 23% 25%

PAT Margins 15% 20% 17% 17% 18% 20%

Performance Ratios (%)

ROE 30% 33% 21% 22% 21% 23%

ROCE 35% 32% 22% 26% 26% 27%

ROIC 36% 34% 24% 29% 30% 34%

Turnover Ratios Days

Debtors 69 68 87 72 72 72

Inventory 69 69 75 72 72 72

Creditors 64 46 61 50 50 50

Cash Conversion Cycle (days) 74 91 101 94 94 94

Fixed Assets turnover (x) 2.2 2.2 1.9 2.1 2.3 2.6

Financial Stability Ratios (x)

Debt-equity 0.1 0.1 0.0 0.0 0.0 0.0

Current ratio 1.3 1.5 2.1 2.3 2.3 2.3

Growth Ratios

Net Sales growth (%) 8% 9% -3% 20% 18% 18%

PAT growth (%) -6% 50% -16% 19% 20% 25%

Valuation Ratios

Price to earnings (x) 33.1 22.9 28.7 22.6 18.8 14.5

Price to book value (x) 5.0 4.6 4.8 3.9 3.3 2.8

Price to sales (x) 9.0 6.5 5.5 4.5 3.7 3.0

Quarterly Result Updates

Ador Fontech Ltd: Strong Recovery. Ends Year on a Solid Note.
Ador Fontech (Ador) reported very strong results for 4QFY18. Sales for the quarter grew by 15% YoY profits grew
way faster than sales at 185% YoY.

As indicated in the last result, the company has started getting benefits of expansion in the gross margins and
operating leverage. The same trend continued for 4QFY18 and gross margins expanded by 700 bps to 47% against
40% in 4QFY17.

The increase in gross margins and improvement in efficiencies were reflected in the operating profits and margins
which were up by 117% and 500 bps YoY respectively.

Ador Fontech: Financials at Glance

Net Sales & Other Operating Income 398 458 15% 1466 1520 4%

17
 Gross Profits  158  218 38%  611  653 7%

Margins 40% 47% 42% 43%

EBIDTA 23 50 117% 114 114 -1%

Margins 6% 11% 8% 7%

PAT  13  39 185%  72  69 -3%

Margins 3% 9% 5% 5%

One should note, the company reported a loss in the first quarter of FY18 due to de-stocking by the its customers
at the time of implementation of GST.

In 4QFY18 the company covered for the loss and ended the year with net profits down by just 3%. We believe, the
company is set to deliver superior results in FY19. (Refer to last quarter results for detailed triggers)

The stock is trading just above our maximum buy price of Rs 100, hence our view on the stock is Hold.

Please Note - During the quarter Anil Kumar Goel exited Ador Fontech and the promoters increased their stake in
the company.

Mayur Uniquoters: Continues to Deliver Strong Results

Mayur Uniquoters (Mayur) continued reporting strong results for 4QFY18. Sales for the quarter grew by 15% YoY
with net profits growing at 33% YoY on the back of improvement in gross margins and operating leverage benefits.

As indicated in the last result, the footwear market and the domestic auto replacement market led the growth. The
management indicated, the company is witnessing good recovery across the industries it operates.

The improvement in gross margins by 100 bps came in as a surprise, because the basic raw material for company
is the PVC which is a crude derivative. Now, with crude oil prices increasing it was expected the company would
see some pressure on the gross margins.

However, management indicated that the company could improve its gross margins to 44% (against 43%) largely
on the back of better product mix and improvement in raw material usage. It has also increased realisations by 5%
in the footwear segment.

The improvement in the gross margins and operating leverage benefit helped company to improve its operating
profits by 25% YoY and net profits by 33% YoY.

For FY18, sales grew by 20% YoY and the net profits grew by 19% YoY.

Mayur Uniquoters: Financials

Net Sales (after Excise) 1,222 1,405 15% 4,735 5,700 20%

Raw Material Cost 692 786 14% 2,608 3,244 24%

Gross Profits 530 619 17% 2,127 2,456 15%

Gross Margins 43% 44% 45% 43%

Employee cost 62 72 16% 264 279 5%

Other Cost 156 156 0% 600 678 13%

EBIDTA 312 391 25% 1262 1499 19%

Margins 26% 28% 27% 26%

Depreciation 41 44 6% 167 171 3%

Interest 4 3 -38% 14 14 -2%

PBT 267 345 29% 1196 1449 21%

Tax 78 103 33% 381 480

18
 PAT 182 241 33% 815 969 19%

Margins 15% 17% 17% 17%

Source: Ace Equity, Company

Update on PU Plant - The construction of the PU plant is on the roll and is expected to get commercialised by April
2019. Management has ordered machinery from China and the construction of the plant is on in full swing.

PVC Plant - The PVC plant has been delayed by one quarter and management expects to get land approval by next
quarter. However, they indicated there is no impact on the business due to this delay, as it is operating at a
capacity of 80% and can scale up to 95% in the existing plant.

European Market - As indicated in our last reports, Mayur is in talks with Mercedes and BMW in the European
market. The company has already cleared most of its audits with Mercedes and it will have one final audit in the
next two quarters and will start supplying in FY20. We believe, this can be a huge opportunity for Mayur
Uniquoters.

Apart from the above, management indicated, it is also in talks with OEMs in the US markets for supplying
products to the newer products that are to be launched.

We believe, Mayur is well placed to benefit from the revival in the domestic footwear industry (post GST) and
opening of European auto market. At CMP, the stock is above our maximum buy price of Rs 400. Hence, our view
on the stock remains Hold.

Indian Terrain: Strong Performance at Operating Levels; Higher Tax Rate Impacts
Bottomline
Indian Terrain announced its 4QFY18 results. The company's revenue grew by 21.4% YoY. Uptick in
business across channels led to 21% YoY growth. Retail growth was flat in January with advancement of
end of season sale (EOSS) to December and higher discounts. However, the early start of new season
helped in gaining business momentum with February and March recording growth upwards of 20% YoY.
Same-store growth (SSG) for the Quarter remained at 6%. Indian Terrain witnessed robust traction in the
Boys wear segment, which grew more than 30% YoY.

At the operating level, operating margins improved by 1.14% YoY to 13% during 4QFY18. This is one the
back of improvement to gross contribution margins with dominance of wholesale trade business and
GST benefits flowing in.

Profit before tax grew by 20% YoY. Due to an increase in tax outgo, PAT stood flat at Rs 73 million.

Financial Snapshot

Sales 889 1,079 21% 3,259 4,015 23%

Operating Profits 106 140 32% 400 496 24%

Margins % 11.9% 13.0%   12.3% 12.4%  

Net Profits 73 73 0% 229 254 11%

Margins % 8.21% 6.77%   7.03% 6.33%  

During the quarter, the company added 3 exclusive brand outlets (EBOs), increased its presence to more
than 1,400 multi-brand outlets (MBOs) and 367 departmental stores.

19
What to expect?

At the current price of Rs 168, the stock is trading at 25 times trailing twelve months earnings.

Going forward, organized retail set to benefit from favorable demographics supported by rising per capita income,
increasing share of the working population and an increase in market share of organised retail. Similarly, the
domestic readymade garment industry is expected to double in size over the next 6-7 years.

With the impact of demonetisation and GST finally getting over, the business outlook remains buoyant with
consumption picking up. The management expects to add 20 new EBOs in FY19. Also, e-commerce will see a
much bigger thrust with expanded presence across platforms, enhanced product assortments and exclusive
products.

The company has given the capex guidance of Rs 80 million in FY19. This will be invested in retail analytics and
technology, new stores, and renovations.

We maintain a Buy view on the stock.

Bodal Chemicals: Difficult Times Behind; FY19 Looks Promising

Bodal Chemicals announced its 4QFY18 results. The company's revenue declined marginally by 3% YoY.
The revenue contribution from the dyestuff segment (high margin value-added segment) increased to
36% compared to 24% in 4QFY17. The revenue contribution from dye intermediate declined to 46% of the
revenue compared to 60% in 4QFY17.

In FY18, the company experienced several business challenges such as the lag effect of demonetisation,
implementation of the GST, revamp of effluent discharge canals, teething issues in acquisitions, and
spurt in raw material prices. Bodal chemicals also witnessed a significant increase in overheads due to
the implementation of major growth projects.

During the quarter, gross margins were impacted on the back on an increase in raw material prices. With
this, operating profits declined by 11% YoY. Operating margins stood at 17.6% during the quarter.

There was the positive impact of Rs 149 million when comparing standalone depreciation of FY 2018
with FY 2017. It was due to change in depreciation method.

On the back of the positive impact of depreciation, PAT grew by 31% YoY.

Financial Snapshot

Sales 2,901 2,824 -3% 11,401 11,422 0%

Operating Profits 559 498 -11% 2,366 2,039 -14%

Margins % 19.3% 17.6%   20.8% 17.9%  

Net Profits 303 397 31% 1,329 1,219 -8%

Margins % 10.44% 14.06%   11.66% 10.67%  

During the year, subsidiaries/associates did not add to the topline and bottomline to their full potential.
Teething issues have now been resolved and we expect a positive impact in FY 2019 in these
businesses.

What to expect?

Dye manufacturers in India will benefit from the recent surge in dye intermediate prices due to supply constraints

20
in China. Environmental compliance and the resultant plant shutdowns in China appears to be more structural as
Chinese manufacturers are looking for business collaboration in India to source dyestuff and dye intermediates.

In FY19, the management expects, good revenue and profitability growth. This is due to:

Trion and SPS will start generating cash and add to profits during the year.

The capacity expansion of dyestuff by 12,000 MTPA.

The revenue contribution from Thionyl chloride (TC) project.

Existing businesses will yield higher margins due to better pricing in domestic and exports. Also, in the
last two months of April and May 2018, the raw material prices have started stabilising to some extent.
The dollar is becoming stronger again, which may lead to better profitability.

At the current price of Rs 132, the stock is trading at 13 times trailing twelve months earnings.

In our view, a vertically-integrated manufacturer like Bodal Chemicals is better placed to ride this positive demand
and pricing outlook. We maintain a Buy view on the stock.

Jagran Prakashan: Increase in Newsprint Cost Impacts Margins and Profitability

Jagran Prakashan (JPL) announced its 4QFY18 results. Consolidated revenue declined by 2.5% YoY on
the back 6.2%YoY decline in print ad revenues while circulation revenue was down 2.6% YoY basis. Radio
City reported 14.1% YoY revenue growth aided primarily by volumes from new stations. BFSI,
government, and real estate were the key sectors, which did not perform in FY18.

At the operating levels, overall operating profit declined 16.4%YoY with EBIDTA margins declining by
3.6% to 22%.

Consolidated PAT was down 23% to Rs 628 million on the back of a decline in EBITDA and other income.

Financial Snapshot

Sales 5,620 5,480 -2% 22,830 23,040 1%

Operating Profits 1,441 1,204 -16% 6,396 5,832 -9%

Margins % 25.6% 22.0%   28.0% 25.3%  

Net Profits 811 628 -23% 3,493.21 3,109 -11%

Margins % 14.43% 11.46%   15.30% 13.49%  

What to expect?

During the quarter, JPL 's subsidiary, Music Broadcast (MBL) has acquired 91.9-Friends FM from Ananda Offset
Private Limited in Kolkata. With this acquisition, MBL will reach 72% of the population where FM is present from
the earlier 62%.

JPL's Hindi publications have 77 million readers. Similarly, digital performed incredibly in FY18 (except in 4QFY18).
Jagran.com is the No 2 Hindi website in news/information category, based on unique users.

Going ahead, we believe the political ads will show strong growth spurred by the upcoming state elections in the
company's core markets as well as the general elections. Further, the circulation revenue is expected to grow on
the back of an increase in circulation in Nai Dunia and steep increase in cover prices due to increase in newsprint
prices.
21
We continue to like Jagran Prakashan due to its dominance in core markets and high dividend yield/buyback offer.

At the current price of Rs 141, the stock is trading at 15 times trailing twelve months earnings.

We maintain a Buy view on the stock.

TVS Srichakra: Increase in Raw Material Prices Dent Profitability

TVS Srichakra announced its 4QFY18 results. The company's revenue grew by 16.1% YoY. This is on the
back of good industry growth in 2-wheeler market, which has grown by 15% in FY17.

The operating profit declined by 9.4% YoY. This is on the back of an increase in raw material prices
(carbon black and rubber chemical prices). As a result, gross margins declined by 4.9% on YoY basis.
Similarly, a rise in employee cost and other expenses also resulted in a decline in EBITDA margins.
EBITDA margin stood at 10.8% during the quarter compared to 13.9% in 4QFY17.

Subsequently, net profit declined by 10.7% YoY despite an increase in other income.

Financial snapshot

Sales 4,760 5,529 16% 19,605 21,524 10%

Operating Profits 662 600 -9% 2,826 2,519 -11%

Margins % 13.9% 10.8%   14.4% 11.7%  

Net Profits 321 287 -11% 1,496.9 1,173.4 -22%

Margins % 6.75% 5.19%   7.64% 5.45%  

For the year FY18, the company declared a dividend of Rs 40 per share.

What to expect?

In FY19, TVS Srichakra is planning a capex of Rs 1.3 billion for capacity expansion. The company is increasingly
focusing on brand building and sales promotion. This has enabled the company to increase the proportion of
revenue from the less volatile and higher-margin aftermarket segment.

Though rubber prices have softened recently, the positive impact would be offset by an increase in crude-based
input costs for the sector due to an uptick in crude oil prices. It is important to note that the company has a
formula-based pass-through of raw material price changes in the contract with OEM players, thereby passing the
increased raw material cost to OEMs with a lag.

However, in the aftermarket segment, its ability to pass-through is limited due to competitive pressures. A
sustained increase in input costs could impact its EBITDA margins.

Going forward, two-wheeler sales are expected to continue its robust growth on the back of increased government
spending, especially in rural areas due to increased rural allocation in the budget. Similarly, a normal monsoon, the
positive impact of seventh pay commission, and overall economic recovery will further aid to drive growth.

At the current price of Rs 3,148, the stock is trading at 21 times trailing twelve months earnings.

We maintain a Buy view on the stock.

Karur Vysya Bank: On the Turnaround Path. Performing as We Anticipated.

For Q4FY18, Karur Vysya Bank (Karur) reported interesting set of numbers which were in line with our
expectations. While the net interest income grew by 11% YoY, the net profits were down by 77% YoY.

22
Advances for the year grew by 11% YoY, led by growth in the retail (up 20% YoY), agriculture (up 13% YoY) and
commercial (up 11% YoY).

As indicated in our initiation report, the growth in the beleaguer corporate loan book was slow at 5% YoY. The slow
growth in the corporate loan book helped reducing banks' exposure to 31% of the total loan book against 33% in
FY17.

Restructuring the Loan Book

Advances

Commercial 145,040 160,950 11%

% of Total 35% 35%

Corporate 136,120 143,970 6%

% of Total 33% 31%

Agriculture 69,790 78,610 13%

% of Total 17% 17%

Retail 63,400 76,200 20%

% of Total 15% 17%

Total 414,350 459,730 11.0%

Source: Ace Equity, Equitymaster

While, company reported strong net interest margins and improved efficiency ratios, the write offs from the
corporate book continued.

As expected, the bank continued writing off provisions which impacted the profits for the quarter and the year.
However, we believe, the write offs will continue for next two quarters and will normalise.

Karur Vysya Bank: Financials

Interest Earned 14,332 14,909 4% 56,224 56,997 1%

Interest Expended 8,533 8,480 -1% 35,487 34,015 -4%

Net Interest Income (NII) 5,800 6,429 11% 20,737 22,981 11%

NII (%) 40% 43% 37% 40%

Other Income 2,320 2,087 -10% 7,822 8,999 15%

Total Operating Income 8,120 8,515 5% 28,559 31,980 12%

Operating Expenses 3,049 3,718 22% 12,850 14,207 11%

Cost to Income Ratio 38% 44% 45% 44%

Operating Profit before Prov.& Cont. 5,071 4,797 -5% 15,710 17,773 13%

Operating Margins 35% 32% 28% 31%

Provisions and Contingencies 2,175 3,942 81% 6,875 12,737 85%

PBT 2,896 855 -70% 8,835 5,037 -43%

Tax 720 350 -51% 2,775 1,580 -43%

Profit After Tax 2,176 506 -77% 6,060 3,457 -43%

PAT Margins 15% 3% 11% 6%

Source: Ace Equity, Equitymaster

While the NPAs continued to haunt the company, but headline metrics like net interest margins, cost to income
ratio, CASA continued to improve.

Improvement in Financials Continues

23
 Net Interest Margins (%) 4.0% 4.1% 3.7% 3.9%

Cost to Income Ratio (%) 38% 44% 45% 44%

CASA Mix 28% 29% 28% 29%

Gross NPA (% of Advances) 3.6% 6.6% 3.6% 6.6%

Net NPA (% of Advances) 2.5% 4.2% 2.5% 4.2%

Source: Ace Equity, Equitymaster

We believe, the profit and loss account in FY19 will look way different than what it looks in FY18. This would be on
the back of normalisation of NPAs and write backs from bad accounts referred to Insolvency and Bankruptcy Code
(IBC).

Karur's exposure to Bhushan Steel and Power is around Rs 4,000-5,000 million. With Bhushan Steel already
resolved and there's a new bidder for Bhushan Power, the recoveries from IBC can surprise our conservative
numbers (which do not account for any recoveries).

In fact, as per management, by the end of FY19, all the accounts under IBC will get recovered and maximum
haircut can be 60%. If that turns out to be true, there can be a significant reduction in the gross NPAs.

During the quarter, management automated two of its products i.e. home loans and working capital renewals. A
working capital renewal typically takes 3-6 working days. Now with the automated version, it will take just 30
minutes.

Further, board has issued ESOP to the managing director Mr. PR Seshadari, we believe this is a great move as now
the incentives of the management are aligned with the bank. MD will invest around Rs 90 million, which we believe
is a huge amount and aligns incentives.

The stock of Karur has corrected since our recommendation and our view on the stock remains BUY.

Performance Review
Summary of Open Positions for Smart Money Secrets as on 22nd Jun 2018

SP Apparels Ltd 3-Jun-17 Buy 424 766 322 -24% Buy 138%

TCPL Packaging Ltd 23-Jun-17 Buy 515 1,100 485 -6% Buy 127%

Ador Fontech Ltd 27-Jul-17 Buy 95 169 101 6% Hold 68%

Mayur Uniquoters Ltd 21-Aug-17 Buy 345 673 424 23% Hold 59%

TVS Srichakra Ltd 25-Sep-17 Buy 3,127 4,934 3,148 1% Buy 57%

Honda Siel Power 26-Oct-17 Buy 1,314 2,387 1,303 -1% Buy 83%
Products Ltd

Jagran Prakashan Ltd 22-Dec-17 Buy 171 312 141 -18% Buy 122%

Ashiana Housing Ltd 27-Jan-18 Buy 187 328 139 -26% Buy 136%

Newgen Software 26-Feb-18 Buy 239 416 251 5% Buy 66%

Technologies Ltd

Bodal Chemicals Ltd 19-Mar-18 Buy 125 190 132 6% Buy 44%

Karur Vysya Bank Ltd 26-Apr-18 Buy 105 159 106 1% Buy 50%

Indian Terrain Ltd 24-May-18 Buy 177 295 168 -5% Buy 76%

PI Industries Ltd# 25-Jun-18 Buy 767 1,054 767 0% 50% of the 37%
sum
intended

24
 to be put
into the
stock.

# Price as on 25th Jun 2018

Here is our list of Top Stocks To Consider Buying

Ashiana Housing

Honda Siel

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

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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...

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
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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
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
of Frequently Asked Questions.

DISCLOSURES UNDER SEBI (RESEARCH ANALYSTS) REGULATIONS, 2014

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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 Ador Fontech 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 Ador Fontech, 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.
j. Equitymaster's technical team/other research services have given a 'Buy at Lower' view on PI Industries and a 'Buy' view on 'Mayur Uniquoters Ltd'

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:

If you have any feedback or query or wish to report a matter, please do not hesitate to write to us.

MORE ON PI INDUSTRIES MORE SMART MONEY SECRETS

PI Industries: Weakness in the Domestic TCPL Packaging: Caught on the Wrong Side of
Market Impacts Performance Things. What's Ahead?
(Quarterly Results Update - Detailed) (Quarterly Results Update - Detailed)
Feb 8, 2018 May 31, 2018

PI Industries has reported a subdued performance. The normalisation of paper prices and increase in
Weakness in the domestic market impacted the capacity utilisation will put the company back on
topline whereas higher effective tax rate takes a toll track.
on profitability.

28
PI Industries: Muted CSM Business Impacts Indian Terrain Fashions Ltd
Performance (Smart Money Secrets)
(Quarterly Results Update - Detailed) May 24, 2018

Oct 30, 2017

Smart Money Secrets recommendation report for
PI Industries has reported a subdued performance. the month of May 2018.
Weakness in the global agrochem market impacted
CSM business.
Karur Vysya Bank Ltd.
(Smart Money Secrets)
Apr 26, 2018
PI Industries: GST Transition and Slow Exports
Impact Topline Smart Money Secrets recommendation report for
(Quarterly Results Update - Detailed)
the month of April 2018.
Aug 17, 2017

PI Industries has reported a subdued performance

on the back of weak demand ahead of GST Bodal Chemicals Ltd.
(Smart Money Secrets)
implementation and lower exports. Mar 19, 2018

Smart Money Secrets recommendation report for

PI Industries Ltd. the month of March 2018.
(ValuePro)
Jun 5, 2017

This agro chemicals solutions company has Newgen Software Technologies Ltd.
(Smart Money Secrets)
created huge value for its shareholders by pursuing Feb 26, 2018
a robust growth and generating high returns on
Smart Money Secrets recommendation report for
their capital.
the month of February 2018.

PI Industries: Better Product Mix and More Views on News     Recommended Reading
Operating Leverage Boost Bottomline
(Quarterly Results Update - Detailed)
May 18, 2017

Better product mix helped PI industries register a

healthy growth in the bottomline in FY17.

More Views on News     Recommended Reading

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