rural drive non -farm as per the world bank database, over ... · pdf filethe indian...

Non-farm business

8%

Livestock12%

Cultivation48%

Wages/salaries32%

Sources of income of farmers (share %)

Rural India – Driving The Road Ahead

Thematic Note

Rural Drive

A majority of population in India is living in rural areas. As per the World Bank database, over 67% of India’s total population in 2014 was living in rural areas. The population living in rural India predominantly dependent on agriculture with close to 50% of the population earning their livelihood by way of cultivation and close to 30% earning through wages and salaries. The agriculture income is mainly dependent on the monsoon rainfall due to low penetration level of irrigated land and also on the quantum of hike in Minimum Support Price (MSP) for food-grains.

Source: NABARD Annual Report 2015

While historically monsoon and hike in MSP were key drivers for Rural Income…..

Over the years, the vast population living in rural India has been the key demand driver for India’s consumption growth. As per media reports, the monthly per capita spending of rural consumers rose 17% between 2010 and 2012 as compared to12% growth in urban spends during the same period. The major reasons for growth in rural consumption were good monsoon for two consecutive years (2010 and 2011) and steady hikes in MSP for food-grains. In addition to these, the infrastructure boom during 2009 and 2013 also helped as Road and other infrastructure projects required labour which created an additional source of income for the rural population. During this period, there has been a strong demand for tractors, two-wheelers and LED TVs as lot of unmet demand came to forefront. This is visible in the chart mentioned below which reflects the positive trend between the growth in agriculture & allied activities, domestic two wheeler and tractor sales.

Source: RBI, Bloomberg, Company Data, Media reports; Note: Tractors sales is of two listed companies with 50% market share, Agriculture growth is on Constant price Base year 2004-05

During the period of FY09 to FY12, the agriculture and allied activities saw a Compounded Annual Growth Rate (CAGR) of 4.8% YoY (Constant Price with Base year of 2004-05) mainly driven by good monsoon rainfall and steady price hike in MSP. The domestic two-wheeler and tractor sales had grew strongly during this period at a CAGR of 21.8% and 19.3%, respectively. …..two consecutive years of El-Nino and lower MSP hike impacted the rural consumption

For the past few years, Rural India was growing at a healthy pace and had a strong consumption demand for both discretionary and non-discretionary goods. However for the past one and half years, it started reeling under pressure due to erratic monsoons and lower MSP hikes. India has faced El-Nino situation for two consecutive years in FY15 and FY16. The Indian Meteorological Department (IMD) has quoted El-Nino as being a reason for lower than normal monsoon season. As per Economic Survey FY16, year 2015 was the strongest El Nino year since 1997. Further, the hikes in MSPs for food grains were also lower in past two years than the previous years. After the ~14% CAGR in FY08-FY14, MSPs was hiked by ~2% FY15. In addition to these, slowdown in construction projects also impacted the rural wages which in turn led to decline in rural consumption to a multi-year low. This has severely impacted the sectorswhich are more dependent on Rural India like Consumer Goods and Automobile in particularly two wheelers, tractors and commercial vehicle segment to an extent.

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Growth trend in Agriculture and domestic two wheeler and tractors sales

Growth in Two Wheelers Growth in Tractors*

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Trend Agriculture growth, Monsoon Rainfall and Avg hike in MSP

Monsoon Rainfall (% of normal monsoon)Average Hike in MSP For Foodgrains in a crop year (%)Growth in Agriculture

Source: RBI, Media Reports

HDFC Bank Investment Advisory Group March 21, 2016

Source: Media Reports

Over 50% of two wheeler market i.e, rural India is under stress

In the Automobile industry, of the total sales of two-wheelers, almost 50% two wheelers are being sold in the rural areas. The impact of slowdown is more visible on Moped and Motorcycles. In FY15, domestic motorcycle sales had risen by 2.4% compared to the average of 12.6% in the preceding five years. In FY16 sales of domestic motorcycle further deteriorated. While scooter sales grew by 11.6% YoY in April-February 2015-16 over April-February 2014-15 which is more dependent on Urban India, sales of motorcycles and mopeds, whose demand is largely rural-led, dropped 1.2% YoY and 3.2% YoY, respectively. Hero MotoCorp gets close to 50% sales from rural markets, and it has witnessed 1.2% YoY decline in April-February 2015-16. This was largely due to subdued market sentiment in some rural areas which got impacted due to various factors, including the curtailment of rural job scheme spends, poor crop realization and moderating wages. Currently, the two wheeler manufacturing companies are waiting for revival in the rural economy and are focusing their efforts towards the rural market and are trying to boost the volume growth with various new launches and schemes to lure customers. Below monsoon rainfall severly impacted tractors sales growth

Tractor sales, an important barometer of economic sentiment in rural markets, have remained largely stagnant for over past four-five years except for FY14. Tractor sales are dependent on the farmers’ sentiments which are driven by the prospects of better monsoon and rise in MSPs. While as per industry experts, the overall tractor sales dipped by ~13% in FY15, industry is likely to see a further decline of about 10% in FY16 due to below average monsoon rainfall for two consecutive years in FY15-FY16. This trend is clearly visible in sales of two of major industry leaders in tractor segment M&M and Escorts. While so far in 11months of FY16 both M&M and Escorts have registered a decline in tractor sales by ~13% YoY and ~16% YoY, respectively, the management of both the companies expects bottoming out of ongoing trend of decline in tractors sales. Going forward, they expect strong demand for tractors on the back of low base, expectation of better monsoon and increased government focus. Government targeting Rural India to bring the incremental growth….

Amidst the concern of global growth not picking up, India has remained amongst the fastest growing economy in the world on the back rapid urbanization and increased government spending. Despite sluggish growth in Rural India, the overall GDP growth at constant market prices is projected to increase to 7.6% in FY16 from 7.2% in FY15. However, the government now wants to

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Motorcycle and Moped remained under pressure ( YoY Volume growth)

Motor Cycle Moped Source: Bloomberg

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Barometer of Rural India (tractor sales) depicting the real stress in Rural India

Escorts M&MSource: Bloomberg

harness the demographic dividend of the country staying in Rural India by investing into social and physical infrastructure, job creation and enhanced social security. Therefore boosting farm incomes and rural demand seems to be the key priority of the government. Hence, the government is working on various projects which are likely to revive the Rural India and in turn drive the demand for discretionary and non-discretionary goods which will help in achieving the incremental growth in the overall economy. …..by focusing is on RURBANIZATION after urbanization…

In June 2015, the government of India launched two urban development programmes namely Smart Cities Mission and Atal Mission for Rejuvenation and Urban Transformation (AMRUT), providing the roadmap for developing 100 smart cities and 500 AMRUT cities over the next five years. After eight months of this announcement, the government announced Rurban (rural-urban) Mission (Shyama Prasad Mukherjee Rurban Mission) in February 2016. The mission aims to develop 300 villages (with a population count of 25,000-60,000) across the country with an investment of over Rs 50 bn in three years to transform rural areas. These 300 villages would be developed as urban clusters with modern facilities and each catering to at least four adjoining villages. Speaking on the occasion, the Prime Minister described the Rurban Mission as one which would enable cluster based development – with a “rural soul and urban amenities.” Source: Press Information Bureau, dated February 21, 2016 This mission is likely to complement the Smart Cities initiative by creating Smart Villages. The focus of the mission would be on improving not only physical infrastructural facilities such as power, housing, roads, drinking water connections and drainage in rural areas, but also social infrastructure by providing better healthcare and education facilities. This would also help the rural youth to get more employment opportunities and would consequently reduce the dependence of Rural India on agriculture for sustenance. …… with Pro-Rural budget announcement to drive the road ahead for Indian economy

The Union Budget for FY17 reflected the government’s firm commitment to substantially boost investment in Agriculture, Social Sector, Infrastructure and Employment generation. Agriculture, Rural growth and Infrastructure were the key themes of this budget with strong dose of social sector spending. The government has stated in the budget that it is looking to double the farmer’s income in the next five years. The evidence of the same was the fact the budgetary allocation to the ministry of Agriculture and Farmers welfare rose by ~94% YoY to ~Rs 445 bn and ~25% YoY increase in total Plan rural spending to Rs 878 bn in FY17. Following are some of the major recommendation of the budget targeting towards improvement in rural demand. Budget Recommendations

Allocation for Agriculture and Farmers’ welfare is Rs 359.84 bn

Allocation for rural sector is Rs 877.65 bn.

As per the recommendations of the 14th Finance Commission, Rs 2.87 trillion will be given

as Grant in Aid to Gram Panchayats and Municipalities

A sum of Rs 385 bn allocated for MGNREGA.

Allocation of Rs 3.68 bn for National Project on Soil Health and Fertility.

To create a dedicated long term Irrigation fund in NABARD with an initial corpus of ~Rs 200 bn.

Allocation under Pradhan Mantri Gram Sadak Yojana increased to Rs 190 bn

A provision of Rs 150 bn towards interest subvention on farmers loan.

Allocation under Prime Minister Fasal Bima Yojana Rs 55 bn.

Rural electrification allocation doubled YoY to Rs 85 bn under Deendayal Upadhayaya Gram Jyoti Yojna and Integrated Power Development Schemes.

Swachh Bharat Mission – Rs 90 bn.

Targeting 100% village electrification by May 1, 2018.

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A new Digital Literacy Mission Scheme for rural India to cover around 60 mn additional household within the next 3 years.

Further, schemes like Health insurance scheme to protect against hospitalization expenditure, Subsidized cooking Gas for the BPL families, Pradhan Mantri Krishi Sinchai Yojana and interest subvention schemes for farmers would ensure that the rural populous are shielded from the vagaries of nature and have a better quality of life. Also, focus on rural employment generation was quite evident with rising allocation to the schemes like Pradhan Mantri Gram Sadak Yojana (PMGSY), MGNREGA. The emphasis of the budget for FY17 was more on reviving Rural India with the focus not only on improving agriculture income but also on providing alternative source of income to rural population. Improved rural economy with higher job opportunities is likely to form the base for increased consumption demand and thus targeting the overall economic growth. and La Nina expected to be a helping hand for the government in driving rural growth

While the El Nino phenomenon in past two years, 2015 El Nino being the strongest since 1997, was the major reason for subdued agriculture production and thereby for subdued rural demand, there are expectations that the current weather phenomenon will swiftly transform into a La Nina, which tends to bring rainfall in Southeast Asia and Australia.As per Global forecasters such as the Japan Agency for Marine-Earth Science and Technology, there was a probability of La Nina developing in 2016. According to National Oceanic and Atmospheric Administration, US, the chance of El Nino gradually decreases into the spring and ENSO-neutral is favored by May-June-July 2016. The chance of La Nina increases to 50% in September-October-November 2016.

Comparison of Agricultural growth in various events of Monsoon

Source: Economic Survey FY16,

As per India’s Economic Survey FY16, some of the strongest El Nino years (1997-98, 1972-73, 2009-10, 1986-87 and 1987-88,ranked in the order of strength and of which the last four produced droughts in India) were followed by La Nina, resulting in bumper harvests. The possibility of this being repeated in 2016 after the second strongest ElNino on record is widely expected. The average growth in agriculture in La Nina years was 8.4%, substantially higher than the period average. The good monsoon rain in India would be a helping hand to the government to boost the overall economy as it is likely to push the sales of discretionary and non-discretionary goods and services in rural areas.

Overall View: Today, India is amongst the fastest growing economies in the world which is driving the global growth despite the Rural India reeling under the pressure due to two consecutive years of below average monsoon rains. In past two years industries dependent on rural areas like consumer goods, two wheeler, tractors and to an extent commercial vehicle industry has faced the maximum brunt of rural slowdown. With over 65% of the total population living in rural area and of which 50% dependent on Agricultural income, it becomes the utmost priority of the government to take adequate measures to revive the Rural India. The government seems to have understood the need of the hour and directed its efforts towards reviving Rural India with various announcements in Union Budget like increasing allocation for rural development, allocation towards irrigation and road development and also a concentrated scheme like Rurban Mission which is focusing on developing villages with urban facilities. Further, the efforts to increase rural income by targeting to double the farmer’s income in five years, increasing allocation for MGNREGA and undertaking skill development programmes to reduce the dependence on agriculture is also a positive move. We believe that the increased focus of the government to revive Rural India and a widely expected La Nina event is likely to be beneficial for the companies in consumer goods, two wheeler, tractors and commercial vehicle industry. In our model portfolio, we have Jyothy Labs, Zydus Wellness and ITC in consumer goods space and M&M, Escorts, Bajaj Auto and Tata Motors in Automobile space which are likely to be the beneficiaries of revival in Rural India. We remain positive on these stocks from 12-18 months perspective and recommend a Buy on these stocks except for Jyothy Labs which is on Hold rating.

Mahindra & Mahindra Ltd CMP*: Rs.1222 Background

Mahindra and Mahindra Ltd (M&M) is having operations in multiple industries that include aerospace, aftermarket, agribusiness, automotive, components, construction equipment, consulting services, defense, energy, farm equipment, finance and insurance, industrial equipment, information technology, leisure and hospitality, logistics. The Company’s business segments include Automotive Segment that comprises of sale of automobiles, spare parts and related services and Farm Equipment Segment, which includes sale of tractors, spare parts and related services. Its subsidiaries include Tech Mahindra Ltd., Mahindra & Mahindra Financial Services Ltd., Mahindra Investments (India) Private Ltd. and Mahindra Investments (International) Private Ltd. etc.

Shareholding Pattern (%) on 31 December 2015

Promoter 27.11

Institutions 59.08

Public 13.81

Total 100.00

Valuations and Chart

Source: Bloomberg

View: M&M continues to be a leader in the domestic Tractor and UV industry with 42.7% and 38.6% market share, respectively. While the domestic tractor industry saw a minor growth in Q3FY16, the management believes full recovery is likely in FY17 based on lower base effect and expectations of good monsoon. With series of launches during the year, M&M has filled the gap in its product portfolio in UV segment and is now focusing on boosting the volumes to drive the growth. We believe M&M has geared up itself to take on the competition and to grab the opportunity arising from expected recovery in auto industry with series of new launches done in FY16. We remain positive on the stock on the back of new product launches which is likely to drive revenue growth for the company and based on good return ratios of over 20%. We continue to recommend a Buy on the stock with the target price of Rs.1535 at 16x (maintaining earlier multiple) FY17E EPS of Rs.74.4 adding Rs.344 as value of subsidiaries at 30% holding company discount. Any earning/target price revision would depend on the performance of new launches, improvement in market share, rollover to next financial year and changes in general business momentum. *CMP as on 18 March 2016

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Key Details

52 week H/L(Rs) 1441/1092

Book Value (Rs) YTD 352

FV (Rs) 5.0

PE (X) (TTM) 24.6

Dividend Yield (%) 1.0

PE (X)

FY15 FY16E FY17E

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Escorts Ltd. CMP*: Rs.131 Background

Escorts Ltd. (Escorts) is operating in the sectors of agri-machinery, construction & material handling equipment, railway equipment and auto components. The Company offers a range of tractors, more than approximately 45 variants starting from 25 to 80 HP. Its brands of tractors include Escort, Farmtrac and Powertrac. It also manufactures diverse range of equipment like cranes, loaders, vibratory rollers and forklifts. The Company’s Jai Kisan Series comes in five new categories – ValueMaxx, LoadMaxx, AgMaxx, InfraMaxx and SuperMaxx. Product categories include Agri Machinery; Construction Equipment; Auto Products such as shock absorbers, struts and telescopic front; and Railway Products.


Promoter 43.01

Institutions 12.22

Public 44.77

Total 100.00


Source: Bloomberg

View: Escorts’ Agri machinery segment continued to witness subdued growth during 9MFY16 and is likely to improve in Q4FY16. The management is positive on the long-term growth of the company due to increased focus of the government on agriculture and infrastructure sector. Going forward, the company plans to drive tractor volume growth by increasing market share through new product launches and improving dealer footprint in weaker markets. The Company has been focusing on improving margins with the help of product portfolio rationalization, enhancing presence in higher HP segment (above 45-50HP) and other cost cutting initiatives. We are positive on the company from long-term perspective due to improvement in tractor penetration on the back of labour shortage, expected improvement in monsoon in 2016 post two consecutive years of El-Nino and expected revival in infrastructure activity with improved government focus. Hence, we recommend a Buy on the stock and continue with the target price of Rs.150 at 10x (maintaining earlier multiple) at FY17E EPS of Rs.15.0. Any earning/target price revision would depend on the performance of new launches, improvement in market share, rollover of earnings to next year and changes in general business momentum. *CMP as on 18 March 2016

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Key Details

52 week H/L(Rs) 189/102


FV (Rs) 10.0

PE (X) (TTM) 18.2


PE (X)

FY15 FY16E FY17E

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Bajaj Auto Ltd. CMP*: Rs.2302 Background

Bajaj Auto Ltd. is an India-based manufacturer of motorcycles, three-wheelers and parts. The Company's business segments include Automotive, Investments and Others. The Company's two wheelers include Pulsar, Avenger, Discover, Platina and Ninja. The Company's services include troubleshooting, maintenance chart and service centers. The Company has manufacturing plants at Waluj, Chakan and Pantnagar. The Company's subsidiaries include PT. Bajaj Auto Indonesia and Bajaj Auto International Holdings BV.


Promoter 49.30

Institutions 26.04

Public 24.66

Total 100.00


Source: Bloomberg

View: Bajaj Auto Ltd.’s domestic Motorcycle business has continued to reap benefits from change in its strategy to expand “Price” segment and strengthening its presence in “Premium” and “Luxury” segments. Bajaj’s market share is expected to improve further on the back of recent new launches. We maintain our positive stance on Bajaj Auto considering its focus on exports, expected increase in market share in the Premium segment, strong R&D capabilities, huge cash and cash equivalent of Rs 94.3 bn (9MFY16) and strong return ratios with ROE over 30%. We recommend a Buy on the stock and maintained the target price of Rs 2745 at 18x (maintaining earlier multiple) FY17E EPS of Rs 150 adding Rs 45 per share for 48% stake in KTM AG of Austria (at 30% holding company discount). Any earning/target price revision would depend on the performance of new launches, improvement in domestic market shares in Motorcycle segment, rollover to next financials and changes in general business momentum. *CMP as on 18 March 2016

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Key Details

52 week H/L(Rs) 2655/1914


FV (Rs) 10.0

PE (X) (TTM) 22.9


PE (X)

FY15 FY16E FY17E

23.7 18.5 15.3

Tata Motors Ltd. CMP*: Rs.366 Background

Tata Motors Ltd. (TTMT) is India's largest automobile company, with consolidated revenues of Rs 2.63 trillion (US$ 42.04 b) in FY15. TTMT has operations in the United Kingdom (UK), South Korea, Thailand, South Africa and Indonesia through subsidiaries and associate companies. The Company’s Jaguar Land Rover (JLR) business has significant presence in the UK, North America, continental Europe and China as well as sales operations in many major countries across the globe. It also has an industrial joint venture with Fiat in India. Tata Motors is the country's market leader in commercial vehicles and among the top in passenger vehicles with over 8mn Tata vehicles plying in India.


Promoter 33.01

Institutions 40.97

Public 26.02

Total 100.00


Source: Bloomberg

View: We are positive on the stock on the back of well diversified global presence, expected new launches in both domestic and JLR business, recovery in domestic CV industry, long term structural drivers and on good return ratios of over 20%. We recommend a Buy on the stock with target price of Rs 569 based on the SOTP valuation (JLR (Rs 512/share) + Standalone business (Rs 47/Share) + other subsidiaries (Rs 30/Share) - net automotive debt (Rs 20/Share)). *CMP as on 18 March 2016

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Key Details

52 week H/L(Rs) 594/266


FV (Rs) 2.0

PE (X) (TTM) 16.2


PE (X)

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Jyothy Laboratories Ltd. CMP*: Rs.282 Background

Jyothy Laboratories Ltd. (Jyothy), a fast moving consumer goods (FMCG) company, was founded by Mr. M P Ramachandran in 1983. Over years, Jyothy has evolved from a single product company into a multi-product company. Jyothy is principally engaged in manufacturing and marketing of fabric whiteners, soaps, detergents, mosquito repellents, scrubber, bodycare and incense sticks. Jyothy has 10 brands under its product portfolio offering including Ujala, Maxo, Exo, Henko, Prill, Margo, Neem, Fa, Mr. White and Check. Jyothy also runs laundry chain through its subsidiary Jyothy fabricare services Ltd.


Promoter 66.74

Institutions 24.04

Public 9.22

Total 100.00


Source: Bloomberg

View: Jyothy Lab has been able to drive the volume growth in Q3FY16. However, due to intense competition the company couldn’t take the price hike. On the EBITDA margin, benign commodity prices and fall in employee cost during the quarter helped the company to meet its margin target. The management continued its efforts to reduce its dependence on southern region and making its brand national from local. It has also started re-launching of its some of the power brands with increased distribution reach and will be launching some more brands in high margin segments in coming quarters. We believe this may put near term pressure on the EBITDA margin due to increase in Advertisement & Promotion expenses and improvement will be at a slower pace. Post the recent correction in the stock prices, it is trading at multiple of 23.3x FY17E earnings. Hence, we recommend a Hold on the stock and maintain the target price of Rs.304 at 25x (discount to 5year average multiple) on FY17E EPS of Rs.12.1. Any revision in target price and earnings would depend on the performance of its power brands, improvement in EBITDA margin, Henkel’s Buyback option which will be active from May 2016, rollover to next financial year and changes in general business momentum. *CMP as on 18 March 2016

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Key Details

52 week H/L(Rs) 342/237


FV (Rs) 1.0

PE (X) (TTM) 33.6


PE (X)

FY15 FY16E FY17E

41.5 26.1 23.3

ITC Ltd. CMP*: Rs.325 Background

ITC Ltd. (ITC) is engaged in fast moving consumer goods (FMCG), hotels, paperboards and specialty papers, packaging, agri-business, and information technology. It operating segments include FMCG, hotels, agri business and paperboards, paper and packaging. FMCG businesses consist of cigarettes, cigars, smoking mixtures, and branded packaged foods, personal care products, education and stationery products, lifestyle retailing, incense sticks (agarbattis) and safety matches. The Hotels involve in hoteliering. The paperboards, paper and packaging segment includes paperboards, paper including specialty paper and packaging including flexibles. The Agri business segment includes agri commodities such as soya, spices, coffee and leaf tobacco. Others includes information technology services and filter rods, among others.


Promoter 0.00

Institutions 56.07

Public 43.93

Total 100.00


Source: Bloomberg

View: The Q3FY16 continued to see decline in cigarette volumes though at a slower pace which led to subdued growth in overall revenues. We believe, in the wake of hike in excise duty and new regulation on sale of loose cigarettes, cigarette volumes would remain subdued in near term. However, over the longer term, Cigarette segment should continue to perform well on the back of healthy margins due to pricing power, focus on selling 64mm cigarette (contribution increased during the quarter) and expected launch of smaller pack size to combat the decline in volumes in the wake of ban on loose cigarette. Going forward, announcement on excise duty on cigarettes in upcoming Union Budget is likely to be the key point to watch out. In a move to reduce its dependence on cigarette segment, the company has been focusing on new launches in non-Cigarette business and on entering into new markets. At CMP the stock is trading at 22.3x FY17E EPS of Rs 14.6 which is at ~35% discount to HUL’s valuations. We are positive on the stock due to its deep discount compared to peers, cash and cash equivalent of ~Rs 113 bn (September 2015) and strong ROE of over 30%. We continue to recommend a Buy on the stock with the target price of Rs 393 at 27x (maintaining earlier multiple) FY17E EPS of Rs 14.6). Any earning/target price revision would depend on the performance of FMCG business, any changes in excise duty in Upcoming Union Budget, any regulatory changes in Cigarette business and in general business momentum and rollover of earnings in the next year. *CMP as on 18 March 2016

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450

Mar

-13

May

-13

Jul-

13

Sep

-13

No

v-1

3

Jan

-14

Mar

-14

May

-14

Jul-

14

Sep

-14

No

v-1

4

Jan

-15

Mar

-15

May

-15

Jul-

15

Sep

-15

No

v-1

5

Jan

-16

Mar

-16

Daily closing price for last 3 years of ITC

Key Details

52 week H/L(Rs) 359/268


FV (Rs) 1.0

PE (X) (TTM) 26.7


PE (X)

FY15 FY16E FY17E

27.1 25.0 22.3

Zydus Wellness Ltd. CMP*: Rs.706 Background

Zydus Wellness Ltd. (Zydus Wellness) is engaged in manufacturing of consumer products. The Company’s products include Everyuth, Sugar Free, Nutralite and Actilife. The Company has a range of skincare products under the brand name of Everyuth Naturals. Everyuth Naturals includes skincare solutions for sun protection, pigmentation and acne. Its product, Sugar Free is a nutritious, safe and ideal low calorie sugar substitute available in two options: Sugar Free Gold, which is a sugar alternative made from Aspartame, and Sugar Free Natura, which contains Sucralose, a zero calorie sweetener.


Promoter 72.54

Institutions 12.92

Public 14.54

Total 100.00


Source: Bloomberg

View: Zydus Wellness has reported a subdued revenue growth during the quarter post adjustment of one-off items. However, it has maintained its leadership position across the categories with market share gain in some of the categories and is also working on improving its distribution reach to drive the revenue growth. The penetration level across the categories in which the company operates is very low and with completion of restructuring of distribution channels the company is ready to grab the opportunity arising from improvement in consumer sentiments. Going forward, we believe, improvement in penetration level would augur well for the company as it holds strong market share in most of the categories. We are positive on the structural drivers of the health & wellness industry, debt free balance sheet of the company, its strong market share and healthy return ratios. Hence, we maintain a Buy on the stock with the target price of Rs.971 at a target PE multiple of 25x (maintaining earlier multiple) on FY17E EPS of Rs.38.9. Any earning/target price revision would depend on the improvement in performance of key brands, increase in distribution reach, launch of new products, rollover to next financial year and changes in general business momentum. *CMP as on 18 March 2016

0

200

400

600

800

1000

1200

Mar

-13

May

-13

Jul-

13

Sep

-13

No

v-1

3

Jan

-14

Mar

-14

May

-14

Jul-

14

Sep

-14

No

v-1

4

Jan

-15

Mar

-15

May

-15

Jul-

15

Sep

-15

No

v-1

5

Jan

-16

Mar

-16

Daily closing price for last 3 years of Zydus Wellness

Key Details

52 week H/L(Rs) 1118/632


FV (Rs) 10.0

PE (X) (TTM) 28.6


PE (X)

FY15 FY16E FY17E

25.3 22.4 18.1

Source: Bloomberg

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Rating Expected to

Buy Appreciate more than 10% over a 12 to 15 month period

Hold Appreciate below 10% over a 12 to 15 month period

Under Review Rating under review

Exit Exited out of the Model Portfolio

Rating Interpretation

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