sharkhan valueguide 2016

8/16/2019 Sharkhan Valueguide 2016

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January 2016 Sharekhan ValueGuide2


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Sharekhan ValueGuide January 20163

REGULAR FEATURES

Report Card 4Earnings Guide I

If 2015 disappointedin terms of a slower

pace of economicrecovery andcorporate earningsgrowth in India, 2016has begun on adisquieting notelargely due to globalissues. Interestingly, the biggest global concern related tointerest rates hikes in the USA has been quickly absorbed bythe financial markets globally.

TECHNICALS

Nifty 30

Stock Idea 18

Stock Updates 19

Sharekhan Special 27Viewpoints 28

From Sharekhan’s Desk EQUITY

06

Not just local anymore FUNDAMENTALS

DERIVATIVES

View 31

TECHNICALS

Crude Oil 32Gold 33

Silver 33

Copper 33

Lead 33

FUNDAMENTALS

Zinc 33Nickel 34

Castor seed 35

Chana 35

Soya bean 35

Gold 36

Silver 36

Crude Oil 36

Copper 37

Jeera 37

Soya bean 37

TECHNICALS

FUNDAMENTALS

USD-INR 39

EUR-INR 39

GBP-INR 39

JPY-INR 39

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COMMODITY

CURRENCY

PMS DESK ProPrime - Diversified Equity 40

ProTech - IndexFutures Fund 41

ProTech - Trailing Stops 42

MUTUAL FUNDS DESK

Top MF Picks (equity) 45

Top SIP Fund Picks 46

RESEARCH BASED EQUITY PRODUCTS

Market Outlook 07

Top Picks Basket 13

Wealth Creator Portfolio 17

GBP-INR 38

JPY-INR 38

MID Trades 43

USD-INR 38

EUR-INR 38

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CONTENTS

ADVISORY DESK

Derivative Ideas 43


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REPORT CARD EQUITY FUNDAMENTALS

STOCK IDEAS STANDING (AS ON DECEMBER 03, 2015)

COMPANY CURRENT PRICE AS ON PRICE 52 WEEK ABSOLUTE PERFORMANCE RELATIVE TO SENSEXRECO 03-DEC-15 TARGET HIGH LOW 1M 3M 6M 12M 1M 3M 6M 12M

AUTOMOBILES Apollo Tyres Buy 155.8 201.0 249.8 145.1 0.1 -20.6 -8.9 -29.3 1.0 -15.9 0.6 -25.9 Ashok Leyland Buy 92.0 105.0 99.7 56.0 2.7 -1.7 25.8 65.0 3.7 4.0 38.9 72.9

Bajaj Auto Hold 2483.4 2750.0 2656.0 1912.5 0.5 4.6 -2.3 3.8 1.4 10.7 7.9 8.8

Gabriel Industries Buy 95.5 105.0 106.8 72.0 9.3 10.4 27.2 2.6 10.3 16.8 40.5 7.5Hero MotoCorp Buy 2637.8 3250.0 3022.0 2251.3 -1.5 1.8 -1.3 -13.5 -0.6 7.7 8.9 -9.4

M&M Buy 1242.5 1450.0 1442.1 1092.2 -6.8 -3.0 -6.4 2.1 -5.9 2.6 3.4 7.0

Maruti Suzuki Buy 4580.7 5400.0 4790.0 3360.0 -2.6 2.9 13.0 32.8 -1.7 8.9 24.8 39.1

Rico Auto Industries Buy 46.9 58.0 61.2 34.3 3.3 -0.4 12.3 14.9 4.3 5.4 24.0 20.3

TVS Motor Reduce 287.0 250.0 322.3 201.0 0.9 24.4 8.2 7.6 1.8 31.6 19.5 12.8

BSE Auto Index 18295.3 20386.4 16689.5 -2.5 1.3 -4.8 -2.2 -1.6 7.2 5.1 2.4

B ANKS & FINANCE Allahabad Bank Hold 68.2 90.0 132.5 64.1 -6.9 -12.1 -24.2 -44.4 -6.1 -7.0 -16.3 -41.7

Andhra Bank Buy 63.8 84.0 96.5 58.5 -4.5 -8.0 -9.9 -27.2 -3.6 -2.7 -0.4 -23.8

Axis (UTI) Bank Buy 438.4 652.0 655.4 407.0 -6.5 -14.9 -25.7 -13.0 -5.6 -10.0 -17.9 -8.9

Bajaj Finance Buy 6052.5 6500.0 6189.9 3394.6 12.1 18.2 10.2 78.9 13.1 25.1 21.6 87.4

Bajaj Finserv Buy 1959.5 2050.0 2160.0 1208.2 -3.5 8.8 12.9 57.8 -2.7 15.1 24.6 65.3

Bank of Baroda Buy 151.2 195.0 228.9 137.2 -10.9 -19.3 -2.9 -28.2 -10.1 -14.6 7.2 -24.8

Bank of India Hold 114.7 148.0 306.0 108.6 -7.4 -19.5 -36.4 -59.7 -6.5 -14.8 -29.8 -57.8

Capital First Buy 416.4 485.0 464.8 321.0 12.3 11.9 4.0 19.4 13.3 18.4 14.9 25.1

Corp Bank Hold 42.6 48.0 78.9 39.8 1.0 -5.0 -17.5 -33.7 1.9 0.6 -8.9 -30.5Federal Bank Buy 55.8 75.0 79.8 52.2 -3.4 -15.8 -29.6 -23.5 -2.6 -10.9 -22.3 -19.9

HDFC buy 1216.7 1400.0 1402.3 1093.2 3.2 -4.4 -7.3 11.0 4.2 1.1 2.3 16.2HDFC Bank Buy 1070.5 1260.0 1128.0 932.0 0.8 -1.7 -1.5 14.1 1.7 4.0 8.8 19.5

ICICI Bank Buy 255.6 400.0 393.4 243.0 -4.3 -11.5 -20.6 -26.8 -3.5 -6.4 -12.4 -23.3IDBI Bank Reduce 84.9 76.0 95.7 52.3 -9.2 2.5 28.4 16.6 -8.3 8.4 41.9 22.1

LIC Housing Finance Buy 489.7 558.0 526.0 389.3 9.1 4.1 13.5 12.7 10.1 10.2 25.3 18.1

PTC India Financial Services Buy 39.7 62.0 73.2 37.1 1.4 -13.0 -9.0 -38.8 2.3 -8.0 0.5 -35.9Punjab National Bank Hold 112.8 156.0 219.0 104.3 -18.5 -19.9 -23.8 -46.0 -17.8 -15.2 -15.9 -43.4

SBI Buy 220.7 324.0 336.0 209.0 -10.1 -9.7 -19.9 -26.8 -9.2 -4.4 -11.6 -23.3

Union Bank of India Buy 144.7 185.0 253.5 129.8 -13.2 -22.4 -13.0 -33.5 -12.4 -17.9 -3.9 -30.3

Yes Bank Buy 705.8 930.0 910.0 590.0 -4.9 -5.3 -19.1 -7.8 -4.0 0.2 -10.6 -3.5

BSE Bank Index 18943.9 23903.8 18009.1 -3.1 -6.9 -13.2 -10.4 -2.2 -1.4 -4.1 -6.2

CONSUMER GOODSBritannia Buy 2972.6 3650.0 3435.0 1846.3 2.2 -7.8 8.3 60.4 3.2 -2.4 19.6 68.0

GSK Consumers Buy 6496.4 6750.0 6800.0 5467.1 14.0 10.3 7.4 15.9 15.0 16.8 18.6 21.4Godrej Consumer Products Buy 1329.8 1460.0 1459.0 944.1 8.3 -1.1 7.9 37.8 9.3 4.6 19.1 44.4

Hindustan Unilever Hold 859.0 900.0 981.0 769.0 3.4 2.5 -8.4 10.9 4.4 8.5 1.2 16.1

ITC Buy 325.1 370.0 410.0 294.0 -6.2 -8.1 -1.0 -10.7 -5.4 -2.7 9.3 -6.5Jyothy Laboratories Buy 307.4 360.0 342.0 236.0 -1.9 -3.4 2.6 19.4 -1.0 2.2 13.3 25.1

Marico Hold 225.3 240.0 234.3 157.6 7.0 13.4 3.1 39.7 7.9 20.0 13.9 46.3

Zydus Wellness Buy 858.1 990.0 1130.3 770.1 4.4 4.1 -4.1 11.4 5.4 10.2 5.9 16.7

BSE FMCG Index 7829.0 8382.8 7277.5 -1.7 -3.8 -1.9 2.4 -0.9 1.8 8.3 7.2

IT / IT SERVICESFirstsource Solution Buy 42.2 52.0 45.9 24.2 3.2 55.9 40.2 26.8 4.1 64.9 54.8 32.8

HCL Technologies Buy 846.0 980.0 1058.5 746.4 0.6 -0.9 -12.3 11.7 1.6 4.9 -3.1 17.0

Infosys Buy 1078.9 1240.0 1219.8 932.6 1.9 -6.5 9.7 12.1 2.9 -1.1 21.2 17.4

Persistent Systems Buy 647.2 820.0 953.8 573.7 -3.1 -0.6 4.0 -24.4 -2.2 5.1 14.8 -20.8

Tata Consultancy Services Buy 2369.6 2850.0 2812.1 2315.3 2.3 -11.6 -9.2 -1.1 3.2 -6.5 0.3 3.6

Wipro Hold 557.7 660.0 677.6 512.5 -2.5 -7.4 2.2 3.9 -1.6 -2.0 12.8 8.9

BSE IT Index 10872.2 11927.5 10124.5 1.2 -5.9 3.2 6.5 2.2 -0.4 13.9 11.5

C APITAL GOODS / POWERBharat Heavy Electricals Hold 165.2 220.0 300.0 153.0 -1.6 -16.2 -36.1 -36.2 -0.7 -11.4 -29.4 -33.2

CESC Hold 522.6 580.0 751.7 452.0 -7.4 -8.0 -8.1 -22.5 -6.5 -2.7 1.5 -18.8

Crompton Greaves Hold 190.0 ** 203.8 145.3 -0.3 10.2 11.1 8.0 0.7 16.6 22.6 13.1

Finolex Cable Buy 250.7 310.0 306.5 213.0 4.8 10.6 -0.6 0.9 5.7 17.0 9.8 5.6

Greaves Cotton Buy 142.2 160.0 162.6 112.6 -4.1 11.2 7.8 -0.2 -3.3 17.6 19.0 4.6

Kalpataru Power Transmission Buy 252.4 325.0 291.8 197.6 -4.7 -2.9 -3.2 14.4 -3.8 2.8 6.9 19.8

PTC India Buy 66.8 90.0 102.0 50.1 7.3 7.6 -1.5 -23.8 8.3 13.8 8.8 -20.2

Skipper Buy 191.8 210.0 219.9 105.2 30.3 25.5 24.2 85.2 31.5 32.8 37.2 94.0

Thermax Hold 883.0 955.0 1318.0 827.0 -1.9 1.3 -16.4 -14.1 -1.0 7.2 -7.7 -10.0

Triveni Turbine Buy 109.0 135.0 151.8 90.0 3.7 -4.1 -7.1 0.9 4.6 1.5 2.6 5.7

Va Tech Wabag Buy 680.3 850.0 972.5 615.0 -2.5 0.4 -15.3 -12.9 -1.6 6.2 -6.5 -8.7

V-Guard Industries Buy 932.8 1155.0 1166.0 800.0 0.8 1.6 5.8 -13.0 1.7 7.5 16.8 -8.9

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REPORT CARDEQUITY FUNDAMENTALS

STOCK IDEAS STANDING (AS ON DECEMBER 03, 2015)

COMPANY CURRENT PRICE AS ON PRICE 52 WEEK ABSOLUTE PERFORMANCE RELATIVE TO SENSEXRECO 03-DEC-15 TARGET HIGH LOW 1M 3M 6M 12M 1M 3M 6M 12M

In Top Picks basket ** Price target under review

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BSE Power Index 1965.0 2332.4 1691.4 5.1 4.6 -4.2 -3.0 6.1 10.7 5.8 1.6

BSE Capital Goods Index 13973.1 18814.2 13343.1 -3.6 -12.1 -22.6 -9.3 -2.7 -7.0 -14.5 -5.0

INFRASTRUCTURE / REAL ESTATE

Gayatri Projects Hold 737.7 752.0 769.2 132.1 -0.8 26.8 129.2 360.9 0.1 34.2 153.1 382.8

ITNL Buy 92.0 175.0 224.0 76.6 8.1 -4.6 -32.0 -46.6 9.1 1.0 -24.9 -44.1IRB Infra Buy 257.9 300.0 275.9 197.1 4.1 0.3 6.3 8.0 5.0 6.1 17.4 13.1

Jaiprakash Associates Hold 12.0 26.0 29.5 7.9 -6.2 2.5 8.0 -53.5 -5.3 8.5 19.3 -51.3

Larsen & Toubro Buy 1256.0 1630.0 1893.8 1200.0 -7.7 -20.5 -31.2 -16.9 -6.8 -15.8 -24.0 -13.0

Punj Lloyd Reduce 30.5 ** 40.8 20.0 9.0 15.9 18.7 -19.3 10.0 22.6 31.1 -15.4

CNX Infra Index 2725.9 3456.8 2587.5 0.1 -8.1 -18.2 -9.5 1.0 -2.7 -9.7 -5.2

BSE Real estate Index 1343.2 1894.0 1142.7 1.1 -3.5 -5.2 -10.3 2.0 2.1 4.6 -6.0

OIL & GAS

Oil India Hold 399.0 400.0 592.0 341.1 1.3 -10.1 -9.1 -22.0 2.3 -4.9 0.3 -18.3

Reliance Ind Buy 995.3 1100.0 1067.9 796.5 6.9 14.9 1.6 24.8 7.9 21.6 12.2 30.8

Selan Exploration Technology Hold 206.0 345.0 343.8 197.2 -14.1 -8.5 -29.1 -37.3 -13.3 -3.2 -21.7 -34.3

BSE Oil and gas Index 9459.3 10408.1 8243.3 4.4 8.0 -2.4 4.6 5.4 14.3 7.8 9.6

PHARMACEUTICALS

Aurobindo Pharma Buy 844.3 973.0 891.5 465.0 7.5 14.9 19.9 60.1 8.5 21.6 32.4 67.7

Cipla Buy 645.7 795.0 752.9 571.3 1.0 -1.8 0.0 6.4 1.9 3.9 10.5 11.5

Cadila Healthcare Buy 320.8 396.0 454.4 285.0 -18.4 -24.6 -11.8 -2.8 -17.7 -20.3 -2.6 1.8Divi's Labs Hold 1149.7 1150.0 1242.4 786.0 0.7 0.0 20.4 37.2 1.6 5.8 33.0 43.7

Glenmark Pharmaceuticals Hold 930.6 1065.0 1262.9 702.6 -5.0 -14.2 -10.8 25.9 -4.1 -9.2 -1.5 31.9

Ipca Laboratories Hold 732.0 779.0 888.0 591.3 -7.4 -1.9 2.8 -1.7 -6.6 3.8 13.5 3.0

Lupin Buy 1795.2 2207.0 2129.0 1364.6 -2.9 -15.4 -8.3 26.1 -2.0 -10.5 1.3 32.1

Sun Pharmaceutical Industries Buy 799.1 885.0 1200.8 704.0 4.8 -12.7 -9.6 -1.7 5.8 -7.6 -0.2 2.9

Torrent Pharma Hold 1448.4 1741.0 1720.0 1030.1 -3.1 -8.1 9.3 28.6 -2.2 -2.7 20.7 34.7

BSE Health Care Index 16640.8 18842.7 15345.7 0.4 -9.4 -1.8 16.3 1.3 -4.1 8.5 21.8

BUILDING MATERIALS

Grasim Buy 3657.3 4475.0 4024.9 3301.0 -1.8 1.4 3.1 8.8 -0.9 7.3 13.9 13.9

The Ramco Cements Buy 389.2 450.0 405.5 270.0 3.7 14.3 15.8 22.0 4.6 21.0 27.9 27.8

Shree Cement Hold 11059.3 11800.0 13360.0 8860.0 2.8 -8.8 3.5 26.3 3.7 -3.4 14.3 32.3

UltraTech Cement Buy 2749.2 3750.0 3399.0 2530.8 -4.6 -1.2 -11.6 2.7 -3.7 4.6 -2.3 7.6

DISCRETIONARY CONSUMPTION

Century Plyboards (India) Buy 172.4 240.0 262.0 137.0 -8.8 1.6 -12.1 10.9 -7.9 7.5 -2.9 16.1

Cox and Kings Buy 238.2 300.0 344.0 200.1 2.8 12.8 -2.2 -16.8 3.7 19.3 8.0 -12.8Inox Leisure Buy 235.9 307.0 276.3 145.0 -5.0 -4.9 32.3 35.8 -4.1 0.6 46.1 42.2

Info Edge (India) Buy 832.9 1000.0 962.7 697.1 -5.6 2.2 -4.6 -2.8 -4.8 8.1 5.4 1.8

KDDL Buy 346.2 400.0 424.5 232.0 9.9 23.7 18.2 34.1 10.9 31.0 30.5 40.4

KKCL Buy 2140.3 2480.0 2342.7 1624.1 9.7 1.0 4.7 15.1 10.7 6.9 15.6 20.6

Orbit Exports Buy 384.0 600.0 495.0 302.2 1.2 -6.8 -15.0 -0.4 2.2 -1.4 -6.2 4.3

Raymond Hold 419.0 450.0 555.5 360.1 2.5 -5.3 -12.5 -16.4 3.4 0.3 -3.4 -12.5

Relaxo Footwear Buy 500.9 635.0 615.0 302.6 2.1 -7.0 -1.3 52.6 3.0 -1.6 8.9 59.8

Speciality Restaurants Hold 142.3 145.0 218.8 114.0 13.8 -11.4 0.3 -24.0 14.9 -6.3 10.8 -20.4

Thomas Cook India Buy 204.4 265.0 256.9 156.1 -1.7 -0.3 -13.7 26.3 -0.8 5.5 -4.7 32.3

Wonderla Holidays Hold 396.4 450.0 430.4 240.2 0.8 34.8 57.0 29.0 1.7 42.6 73.4 35.1

Zee Entertainment Buy 422.0 470.0 440.7 299.5 7.0 6.1 14.0 15.8 7.9 12.2 25.8 21.2

DIVERSIFIED / M ISCELLANEOUS

Aditya Birla Nuvo Buy 2159.9 2500.0 2344.9 1516.0 8.7 1.4 15.4 34.6 9.7 7.3 27.5 41.0

Bajaj Holdings Buy 1660.2 1950.0 1747.8 1242.9 -4.3 4.3 12.2 18.2 -3.4 10.4 23.9 23.8

Bharti Airtel Hold 326.8 380.0 452.5 304.2 0.3 -7.6 -25.2 -8.5 1.2 -2.3 -17.4 -4.2

Bharat Electronics Buy 1370.1 1450.0 1416.9 947.0 10.4 13.9 20.7 44.5 11.4 20.5 33.3 51.4

Gateway Distriparks Buy 313.5 385.0 459.4 302.2 0.2 -5.7 -5.5 -5.9 1.1 -0.3 4.3 -1.5

Max India Buy 517.5 648.0 586.0 381.1 -5.2 -0.7 -0.9 33.2 -4.3 5.0 9.5 39.5

PI Industries Buy 656.1 800.0 787.2 480.0 7.9 5.3 0.6 26.0 8.9 11.5 11.1 32.0

Ratnamani Metals and Tubes Hold 540.5 625.0 806.3 501.4 -4.2 -18.4 -6.7 -18.8 -3.3 -13.7 3.1 -14.9

Supreme Industries Hold 689.0 700.0 746.8 520.0 5.4 9.5 2.8 18.9 6.4 15.8 13.5 24.6

UPL Buy 433.9 550.0 576.4 315.3 5.8 -4.6 -19.9 36.0 6.8 0.9 -11.5 42.5

BSE500 Index 10491.5 11764.8 9931.9 0.3 -2.8 -5.5 0.4 1.2 2.8 4.3 5.2

CNX500 Index 6630.8 7428.1 6286.7 0.4 -3.0 -5.6 0.5 1.3 2.7 4.2 5.3

CNXMCAP Index 13429.4 14237.6 12133.8 2.5 1.5 1.6 11.1 3.4 7.4 12.2 16.4

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Not just local anymore

FROM SHAREKHAN’S DESK

f r o m s h a r e

k h a n

’

s d e s kIf 2015 disappointed in terms of a slower pace of economic recovery and corporate earningsgrowth in India, 2016 has begun on a disquieting note largely due to global issues. Interestingly,

the biggest global concern related to interest rates hikes in the USA has been quickly absorbedby the financial markets globally. However, it is the Chinese wall of worries that is pulling

down the world today.Whether the Chinese economy is moving towards a hard-landing or if the policy makers wouldmanage a more gradual and systematic slowdown of the Chinese economy is a question thathas been debated extensively and is emerging as a major cause for uncertainty today. Andrightly so, after all China is the second largest economy and has contributed substantially tothe global economic growth in the past couple of decades or so. Consequently, a hard landingin China would pull down the global economic recovery and also significantly affect thecommodity and currency markets. So when China sneezes, the equity markets globally catchcold!

The global situation has ramifications for India too. A global slowdown affects Indiaeconomically in terms of the export-import trade. And mind you, over 50% revenues of the

index companies (aggregate of the Sensex companies; like information technology service,pharmaceutical and automobile companies among others) depends upon the overseas marketswhile some of the others, like metals and oil & gas companies, are global commodity-drivenbusinesses.

In addition, the foreign fund inflows are also affected by the rising risk aversion globally. Indiadepends on portfolio inflows in equity and debt markets along with foreign direct investmentsto meet its internal growth resources. So an uncertain global environment and inadequateforeign inflows could further delay the economic recovery and the revival of the investmentcycle in India.

On the brighter side, there are several local factors that inspire confidence in our own economyand that should keep our market afloat. India is not only among the few economies that are

showing a strong growth but is also expected by the World Bank to become the fastest growingeconomy in the next three years. The World Bank projects India would grow at a faster pace of 7.8% in the next financial year itself. So what will drive this growth?

The World Bank believes the situation in India has improved over the past few months with theIndian government taking several reform measures including state electricity board reformsand the move to liberalise foreign direct investment in as many as 15 sectors including agriculture,manufacturing and defence. Even though the Goods and Services Tax Bill hangs fire in theRajya Sabha several other reforms have been announced to boost the economy and more reformsincluding a new bankruptcy law to protect investors and lenders are in the pipeline. The “Madein India” campaign of the government is designed to give a push to the manufacturing sector.

While these schemes of the government will boost investment, the implementation of the Seventh

Pay Commission’s recommendations for government employees and pensioners, and the “Onerank, one pension” scheme for the defence employees and pensioners in this year will boostconsumption.

So the situation is much better locally. The global scenario is uncertain and unpredictable. Butthat’s what has led to a reset of market expectations and a considerable correction in thequality large-cap stocks. Consequently, our research team believes that the market couldpositively surprise this year. Please refer to our Market Outlook report, “Turning around slowlybut surely” on page 7.

We wish you a happy new year ahead!


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Turning around slowly but surely

M ARKET OUTLOOK DECEMBER 23, 2015

2015: Recovery modest and reforms in limbo locally; uncertaintyglobally: Contrary to the Street’s expectations, 2015 has generated

negative returns on the benchmark indices in India. In spite of the

favourable impact of falling prices of commodities, especially crude,

on India’s macros in terms of easing pressure on the trade and current

account deficits, the equity market was bogged down by weak

corporate earnings, parliamentary logjam and uncertainty related to

a shift in the monetary policy stance in the USA. But more

importantly, expectations were running high and the Street was

factoring in a rather fast recovery in the economic and business cycles.

2016: Economic recovery to gain strength...: There are signs of animproving growth trend in manufacturing and industrial activity

(an average growth of 5.1% in the year till date [YTD]) and select

sectors. The green shoots are expected to crystalise into more visible

trends over 2016 (gross domestic product [GDP] growth pegged at

about 8%), given focused government capital spending and

consumption boost after the implementation of the Seventh Pay

Commission’s recommendations (additional annual income of

Rs2.0-2.5 trillion in hands of 25 million state and central government

employees). Additionally, the consumption demand could also be

aided by a revival of rural consumption backed by better farm output

after two consecutive years of sub-normal rainfall.

...to reflect in corporate earnings: For a good part of 2015 the

corporate earnings growth was subdued largely due to a sluggish

performance by the export-led global commodity sectors and a

sub-optimal pick-up in the domestic economy. This resulted in a

10-12% downgrade in Sensex’ consensus earnings estimates for

FY2016 and FY2017. On the brighter side, the Sensex’ earnings

(ex global cyclical companies) have shown a decent improvement

over the past couple of quarters. Moreover, the credit rating

upgrades beating downgrades by 3.2 times for smaller companies

(with revenues of $20-100 million) reflect a broad-basedimprovement in the financial health of corporates. Going ahead,

as the lower interest rates and lower input prices feed into the

financials of firms, the earnings growth will improve for the

domestic demand-driven companies.

Global trends to remain mixed; India relatively better placed but

over-ownership is a potential risk: The global economy is unlikely

to post a major recovery in 2016 and the trends are likely to remain

mixed. Notwithstanding the rate hikes in the USA, the monetary

MARKET OUTLOOKEQUITY FUNDAMENTALS

SENSEX’ ONE-YEAR FORWARD P/E BAND

Source: Bloomberg, Sharekhan Researc

policy stance in most major economies and regions would remainaccomodative. From India’s perspective, it is relatively better

placed within the emerging market (EM) economies. But the

overweight positions of the foreign institutional investors on India

make the market susceptible to a risk aversion-driven bout of

selling.

Valuations comfortable, expect better returns in 2016: The equity

market has gone through a multi-month phase of time and price

correction; and the Street’s expectations have mellowed down

considerably. The biggest global uncertainty related to the

beginning of a rate hike cycle in the USA is also behind us nowThe market’s valuations are comfortable with the S&P BSE Sensex

trading at close to 14.5x price/earnings (P/E; based on FY2017

consensus earnings estimate) factoring in a significant cut in the

earnings estimates and the slew of negative news flow.

3 Cs—Consumption, Capital, Cyclical: Besides bottom-up picks

the three broad investment pockets are: (a) urban discretionary

consumption companies; (b) government capital spending plays

eg road, railways, power T&D and defence; and (c) cyclicals

(private banks, NBFCs, auto makers). We continue to avoid globa

cyclicals (eg oil & gas, metals) and public sector banks at thistage.

Key risk: (a) Global risks: Economic recovery may falter in the USA

China may devalue its currency and geo-political issues; and (b

domestic risks: a higher fiscal deficit and continued parliamentary logjam


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EQUITY FUNDAMENTALSMARKET OUTLOOK

Economy firming up, growth to accelerate in 2016

After a patchy growth over the past couple of years, the Indianeconomy seems to be coming on track with green shoots visibleacross sectors. Apart from a GDP growth of 7.4% (as per the newseries in Q2FY2016), the other economic indicators like the Indexof Industrial Production (IIP) growth are showing an improvingtrend (IIP has averaged at 4.8% in the fiscal so far). A weak demand

environment has been a concern though a healthy growth in therecently concluded festive season suggests an uptick in privateexpenditure which along with government spending will supportgrowth in the coming quarters.

levels by January 2017. The Wholesale Price Index inflation hasremained in negative zone for 13 months in a row, suggesting thedemand is weaker at the wholesale level. A sluggish monsoon hasaffected select food articles in recent months but the core inflationis broadly under control (below 5% ). The RBI has reduced therepo rates by 125 basis points (BPS) in 2015 and the consensusexpectation is of a cut of 50-75 BPS in 2015. This together with an

effective transmission of the rate cuts (marginal cost based pricingof loans) will shape a favourable interest rate scenario and mayrejuvenate investment activity in the country.

…and stimulate consumption whi ch is already showing signs of an upturn

Consumer sentiment especially in the urban areas is showing signsof a steady turnaround as indicated by the recent festive seasonsales that were the best in three to four years. Passenger cars, two-wheelers and other retail products (jewellery, apparels, paints) haveseen a strong offtake in the past couple of months. The othereconomic indicators like a double-digit growth in airline travel andrising hotel occupancy suggest a change in consumer sentiment. A

multi-year high inflation and a slower economic growth had dentedconsumption which is getting a boost from the falling inflation andinterest rates. Going ahead, the implementation of the Seventh PayCommission’s recommendations will be a significant driver of consumption as it will increase the income of millions of state andcentral government employees which, in turn, will stimulategrowth.However, rural consumption remains weak due to twoconsecutive years of sub-optimal rains and may lag the recovery cycle.

GDP, IIP GROWTH IMPROVING

Source: CSO, Bloomberg

Even as some key legislations (the land acquisition bill, the Goodsand Services Tax [GST] Bill) are stuck in the Parliament, thegovernment has taken executive measures like de-clogging of roadprojects, addressing the issues of the power distribution companies,and raising spending on railways, irrigation etc. Over the next two

to three years, multiple factors like lower inflation, a drop in interestrates, a steady pick-up in consumer demand and a likely resumptionof capital expenditure (capex) by the private sector will be the keycontributors to the economy’s growth.

Further rate cuts to br ing down cost of capital…

Compared with 2014 the Consumer Price Index inflation hasdeclined significantly in 2015 (average at 4.7% in FY2016 so far)and the Reserve Bank of India (RBI) plans to bring it down to 4.8%

INTEREST RATES DOWN TRENDING

Source: RBI, Bloomberg

TRENDS IN MARUTI SALES (NOS), POST-SIXTH PAY COMMISSION HIKE

Source: SIAM

*Apart from pay hikes, low base supported volume growth FY2010-11

Government’s infra spending to aid long-term growth

Given the fiscal comfort due to falling crude oil prices, thegovernment has stepped up spending particularly in theinfrastructure segment (roads, railways) the after-effects of whichare likely to be spread over 2016. It is worthwhile to note that thegross value-added growth over the past couple of quarters hasaveraged at 7.3% and been contributed by a pick-up in governmentspending. To point a few, the road project awards by the NationalHighways Authority of India (NHAI), and higher investment outlaysin the Indian Railways and defence sectors indicate significantinvestments in the economy. The state governments will account fora major portion of the infrastructure spending, as they get a higher


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allocation based on the Finance Commission’s recommendation, andthis will build the foundation of a sustainable growth.

the underground water levels have fallen following two years ofdrought. Presently, it looks like a revival in the rural economy andconsumption may be slow in 2016 (but would be better than in2015) and may lag urban consumption.NHAI ROAD PROJECT AWARDS GAINING PACE

Source: NHAI, Ministry of Road and Transport

Addressal of infra issues holds the key, pr ivate capex to pick up

with lagAddressal of the bottlenecks in the infrastructure sector has beenthe key challenge in recent years. The government has taken severalinitiatives in the energy sector especially in coal and oil & gas sectors.In the road sector too policies have been formulated to expedite theongoing projects as well as increase construction and projects awardsall of which will have a positive impact from FY2017 onwards. Inorder to address the issue of stalled projects the prime minister,senior ministers and bureaucrats are working to put these projectson track and positive outcomes are emerging. In the power sector,the government has announced the “Uday” scheme to revive statedistribution companies and tackle the perennial power sector issues.Notwithstanding the government measures, private investment willfollow with some lag, given the present macro situation and highdebt levels of corporates.

GROWTH IN GOVERNMENT CONSUMPTION

Source: Planning commission

WEAK MONSOON AFFECTS AGRICULTURE INCOME

Source: data.gov.in

Pace of reforms a concern, Union Budget will be keenly watched

Key economic reforms like the GST bill have been stuck in theParliament as the ruling National Democratic Alliance lacks therequired numbers in the upper house of the Parliament (Rajya Sabhato get the reforms passed. While the government is lying low after

Rural economy in distress

Two consecutive years of weak rainfall, and unseasonal rains andfloods in select regions have affected the agriculture output of thecountry. Further, the marginal hike in minimum support prices andfalling rural wages have affected the income levels in rural areas.As we move to 2016, the monsoon remains a key factor, given that

LOK SABHA COMPOSITION

Source: loksabha.nic.in

RAJYA SABHA COMPOSITION

Source: rajyasabha.nic.in



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its Bihar debacle, consolidation of the opposition parties and thedisruption of the winter session of the Parliament over petty issueshave affected the other bills also (real estate bill, bankruptcy billetc). However, the government has taken several measures at theexecutive level (reforms for the power distribution companies,increase in foreign direct investment [FDI] in 15 sectors, energyreforms etc) which will continue in future also. Going ahead, the

Union Budget will be a significant event which is expected tocontinue the policies that seek to boost manufacturing, skilldevelopment, infrastructure etc.

Corporate earnings to report a notable improvement in 2016compared wit h 2015

The earnings expectations were belied in 2015 due to global issues(a slump in commodity prices, currency volatility), and a sub-optimalGDP growth and weak monsoon rains on the domestic front. As aresult, the consensus earnings estimate for the Sensex had beendowngraded by 10-12%. Going ahead, as the RBI’s rate cuts andlower input prices feed into the financials of the corporates, theearnings growth will improve. Given a weak global economy and

volatility in the currency markets, export-led sectors may continueto be a drag, though the domestic demand-driven sectors are alreadyshowing signs of an improvement. The Sensex’ earnings (ex globalcyclical companies) have shown a decent improvement over thepast couple of quarters.

and PSBs due to a global slowdown. However, the intensity of theearnings downgrade may slow down, given a likely upturn in theeconomy as is already visible in certain pockets. Therefore, theconsensus earnings growth estimate for the Sensex companies hasbeen toned down to 6-8% for FY2016. But the same is expected toimprove to 17-18% in FY2017. The analysis of the results of theBSE-100 companies suggests that financial service, automobile and

consumer goods companies will drive the bulk of the improvementin the earnings.

SENSEX’ EARNINGS GROWTH EX GLOBAL CYCLICALS

Source: Bloomberg

SENSEX’ CONSENSUS EARNINGS (EPS) ESTIMATE

Source: Bloomberg

Rising upgrades/downgrades ratio (mid-sized firms) is a positivesign

The banking sector (especially the public sector banks [PSBs]) sawa sharp rise in non-performing assets during the 2014-15 periodwhich led to a reduction in their earnings estimates. Lately,

incremental stressed loan formation has shown some moderationthough some large corporate groups remain under watch. A leadingcredit rating agency (CRISIL) suggests that the ratio of upgrades todowngrades is ~3.2x for the medium-sized firms (with revenues inthe range of $20-100 million) for 2015 which is a meaningfulimprovement. While this might just be one of the trends but animproving economy and declining interest rates would improve thedebt servicing ability of firms and contribute to their earnings.

Earnings downgrade cycle easing

Two thousand and fifteen saw a significant downgrade in theearnings estimates of sectors like metals, industrials, technology

Fed raises rates but it’s not the end of the road

Sticking to its script the US Federal Reserve (Fed) raised the interestrates by 25BPS suggesting confidence in the recovery of the USeconomy. However, the World Bank, the International MonetaryFund and other multi-lateral institutions have downgraded thegrowth estimate of the global economy to 3.0-3.3%, largely due toa subdued growth in the developed economies and head winds in

the EM economies (Russia, Brazil, China etc). A gradual tighteningby the Fed will result in outflows from the EMs but the net additionto the global liquidity from the monetary easing by the other majorcentral banks (People’s Bank of China, Bank of Japan, EuropeanCentral Bank etc) would prevent any disruption.

Date S&P 500 Advance Time to market Fed Funds ratefrom first hike (%) Top (months) range (tightning)

14-08-77 41.1 41 6.00% - 20.00%

16-12-86 34.7 8 6.00% - 7.25%

29-03-88 41.9 28 6.50% - 9.75%

30-06-99 11.3 9 4.75% - 6.50%

30-06-04 37.2 40 1.00% - 5.25

16-12-15 ? ? 0.25% - ??

Average 33.25 25

Source: media reports

India remains attractive to foreign investors despite rate hike inthe USA

India is the fastest growing economy among the larger economies.The other macro variables are also stable. On the external front,the current account deficit may remain under control (at about1.5% of the GDP) led by substantial savings on crude oil (globalcrude prices are down) leading to a contraction in the overall



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merchandise trade deficit. The government has vowed to achieveits fiscal deficit target despite a higher outlay for infrastructurespending. On the other hand, efforts to improve the business climate,increased FDI limit across sectors and healthy capital markets wouldattract long-term foreign flows.

From REER perspective, the INR is overvalued by more than 10%against a basket of 36 currencies. Also, further devaluation of thChinese currency can have repercussions for the financial marketsincluding India. However, barring near-term issues the strong macrofundamentals of the its economy will help India to stand out amongthe other EMs.

Equities: Better placed to outperform other asset classesThe stock market is likely to end 2015 with negative returns(compared with a 30% return in 2015) largely due to sluggishnesin corporate earnings and volatility in global commodity andcurrency markets. However, the visibility of a recovery in thedomestic economy and a revival in corporate earnings in 2016 aresignificantly better compared with the scene in early 2015. In viewof three fundamental factors, namely the reform push, declininginterest rates and channelisation of savings from physical to financiaassets, equities as an asset class is likely to outperform the otherasset classes in 2015.

Physical assets: Real estate and gold face several head winds

Policy push: Policy initiatives taken to curtail black money (likeBenami Property Act etc) would restrict the demand for realestate and gold.

Positive real interest rate: As compared with a negative realinterest rate (inflation higher than deposit rate), the real interestrate is positive now. Traditionally, it results in money movingto financial assets from physical assets.

Strong dollar: Globally, bullions and commodities are weakdue to the strengthening of the dollar with an improving growthoutlook for the US economy and a rising probability of interestrate hikes in the USA.

Fixed/Term deposits: Repo rates already lowered by 125-150BPS; further pressure expected as the RBI’s monetary stanceremains accommodative.

On the other hand, equities tend to perform well in an economicrecovery cycle and the initial phase of such a cycle seems tohave started.

FOREIGN FUND INFLOWS (RS CR)

Source: Bloomberg

Rupee outlook to be shaped by global events

The Indian Rupee (INR) remained firm amid sharp volatility inglobal currencies though it may depreciate in the short term owingto a rise in demand for the dollar after the rate hike in the USA.

FDI FLOWS

Source: Bloomberg

RUPEE’S PERFORMANCE AGAINST EM CURRENCIES

Source: Bloomberg

MUTUAL FUND AUM (RS '00CR)

Source: AMF



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Valuations in comfort zone after correction

The correction in the benchmark indices (down about 7% in YTD)following a decline in earnings growth over the past over fourquarters has built in most of the known risks and therefore appearsreasonable. On the other hand, the broader market has deliveredpositive returns (the BSE Mid-cap Index is up 4.6% in 2015) anddomestic flows into equities (as evident from the assets under

management [AUM] of mutual funds) have increased. Given theincreasing visibility of corporate earnings and economic recovery,investors can use the current weakness in the market to build aportfolio for the long term.

SENSEX’ P/E BAND

Source: Bloomberg, Sharekhan Research

Relative valuation too appears reasonable

Despite the global volatility India has stayed resilient, thanks to thestrength of its economy. However, the premium it has enjoyedtraditionally over the other EMs has narrowed significantly and is

close to 22%. This suggests that the valuations of the benchmarkindices are reasonable even on a relative basis.

SENSEX’ PREMIUM CLOSE TO ITS LONG-TERM MEAN

Source: Bloomberg

Investment theme is 3 Cs: Urban ‘C’onsumption, government‘C’apital spending and domestic ‘C’yclicals

As explained above, urban consumption clearly seems to be turningthe corner and may lead the recovery cycle in India. The government

is on a spending spree and is expanding the “Make in India”programme. The results of the will be more visbible from 2016onwards. These factors may benefit select industrials, energy anddefence players. The domestic economy is on the cusp of a recovery,and private banks and select auto players could benefit from arevival. We also recommend bottom-up picks and selective exposureto information technology service and pharmaceutical companies.We continue to avoid global cyclical companies (eg commodity andmetal companies) and PSBs at this stage.

Urban consumption Leisure, media & entertainment, consumer brand plays

Government spending Roads, railways, power T&D along with defence

Economic recovery Cyclicals like financials (private banks, NBFCs), autos andselect industrials

KEY THEMES


Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a postition in the companies mentioned in the article.


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Sharekhan Top Picks

SHAREKHAN TOP PICKS

Two thousand and fifteen seems to have been a difficult year forequity investors going by the negative returns posted by the

benchmark indices, the Nifty and the Sensex, and the mid single-digit returns shown by the CNX Mid-cap Index. However, thereare numerous stocks in the broader market that have givensuperlative returns in the past one year. The divergent trendhighlights the importance of careful stock selection as a tried andtested formula to generate superior returns in equities.

Even our Top Picks basket has comfortably outperformed the indicesby delivering gains of close to 14% in the past 12 months in spiteof the two mishaps in the pharmaceutical sector (Dr Reddy’sLaboratories and Cadila Healthcare [Cadilla]) recently. We had tobook losses in these stocks due to an unfortunate and unexpectedregulatory risk arising from a spike in US Food and DrugAdministration (USFDA) activism.

In the last month, the basket’s outperformance was wiped off with

*CMP as on December 31, 2015 # Price target for next 6-12 months ** Under review

NAME CMP* PER ROE (%) PRICE UPSIDE(RS) FY15 FY16E FY17E FY15 FY16E FY17E TARGET (RS)# (%)

Ash ok Leyland 88 106.7 25.1 16.0 4.9 18.3 24.8 105 20

Bajaj Finance 6,044 33.8 27.4 21.4 20.3 19.5 19.2 6,500 8Britannia Industries 2,968 65.7 41.7 34.4 53.3 55.9 47.5 3,650 23

GCPL 1,324 48.9 39.5 32.1 24.6 25.7 25.8 1,460 10

Havells 305 40.6 38.1 32.4 20.6 20.0 21.0 370 21

IndusInd Bank 966 28.6 23.0 18.2 19.2 20.5 21.5 1,108 15

Maruti Suzuki 4,623 37.6 25.3 19.7 16.6 21.3 22.8 5,400 17

Relaxo Footwear 508 59.1 45.8 33.9 23.4 22.1 22.3 635 25

Reliance Industries 1,010 12.6 12.9 10.8 10.8 9.7 10.5 1,100 9

SBI 225 12.8 9.4 7.1 10.6 13.2 15.7 ** -

TCS 2,436 24.3 19.9 17.8 33.7 32.7 29.7 3,000 23

Zee Entertainment 437 50.9 44.2 35.2 19.0 18.8 20.6 470 8

ABSOLUTE RETURNS (TOP PICKS VS BENCHMARK INDICES) % CONSTANTLY BEATING NIFTY AND SENSEX (CUMULATIVE RETURNS) SINCE APRIL 2009Sharekhan Sensex Nifty CNX

(Top Picks) MIDCAP

CY2015 13.9 -5.1 -4.1 6.5

CY2014 63.6 29.9 30.9 55.1

CY2013 12.4 8.5 6.4 -5.6

CY2012 35.1 26.2 29.0 36.0

CY2011 -20.5 -21.2 -21.7 -25.0

CY2010 16.8 11.5 12.9 11.5

CY2009 116.1 76.1 72.0 114.0

Since inception 423.2 160.2 160.6 269.8(Jan 2009)

CONSISTENT OUTPERFORMANCE (ABSOLUTE RETURNS; NOT ANNUALISED) (%1 month 3 months 6 months 1 year 3 years 5 years

Top Picks 0.1 -1.4 1.6 13.9 109.4 124.9

Sensex -0.1 -0.1 -6.8 -5.1 33.7 33.0

Nifty 0.1 0.0 -6.1 -4.1 33.6 35.1

CNX Mid-cap 1.1 3.2 1.2 6.5 55.9 59.1

Please note the returns are based on the assumption that at the beginning of each month an equal amount was invested in each stock of the Top Picks basket

EQUITY FUNDAMENTALS SHAREKHAN TOP PICKS

the last-day sell-off in Cadila (down by 15%) after the issue of awarning letter by the USFDA for two of its manufacturing facilities

Consequently, the Top Picks basket is marginally positive (0.1%since our last revision and its performance is in line with that of theSensex (up 0.1%) and the Nifty (down 0.1%). Among theconstituents of the basket, Bajaj Finance, Zee EntertainmentEnterprises and Godrej Consumer Products posted healthy returnin the last month.

This month, we are making only one change in the Top Picksportfolio. We are replacing Cadila with Havell’s India. We continueto be positive on the long-term prospects of Cadila but the stockcould languish in the near term. On the other hand, Havell’s Indiais set to chalk out an aggressive domestic growth story (partiallyaided by its inorganic initiatives) on the back of cash inflows fromthe sale of its loss-making Sylvania to leverage on the expectedsustained improvement in the urban discretionary consumption.


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NAME CMP PER ROE (%) PRICE UPSIDE(RS) FY15 FY16E FY17E FY15 FY16E FY17E TARGET (RS) (%)

ASHOK LEYLAND 88 106.7 25.1 16.0 4.9 18.3 24.8 105 20

Remarks: Ashok Leyland Ltd (ALL) is the second largest commercial vehicle (CV) manufacturer in India with a market share of 27% in the heavytruck segment and an even higher share of about 40% in the bus segment.

The medium and heavy commercial vehicle (MHCV) volumes were under pressure over the past two years but have witnessed a

sustained recovery and been growing in double digits over the past few quarters. We expect the MHCV volumes to remain buoyant

over FY2016-17 driven by a pick-up in the economic cycle, improved operator profitability and phase-wise implementation of the

Bharat Stage IV norms across the country leading to pre-buying.

The management is also concentrating on verticals other than CVs to de-risk the business model. It has a strong presence in exports

and continues to expand to newer geographies. Additionally, ALL’s defence business is expected to get a leg-up due to the government’s

focus on indigenous manufacture of defence products and FDI in the sector.

ALL’s operating profit margin has recovered from the lows on the back of a reduction in discounts and price hikes taken by the

company. Its margins are expected to expand further, given the operating leverage. With buoyant operating cash flows and no significantcapital expenditure planned, we expect the balance sheet to get de-leveraged and the return ratios to improve.

BAJA J FINANCE 6,044 33.8 27.4 21.4 20.3 19.5 19.2 6,500 8

Remarks: Bajaj Finance Ltd (BFL) is among the most diversified NBFCs (financing of mortgages, consumer durables, SME, rural etc) having a

strong distribution network ( 512 branches). We believe a strong growth in customer additions, its unique cross-sell and up-sellcapabilities, and robust growth from newer products (rural finance, lifestyle finance etc) should drive a growth of over 25% in the AUMs.

Despite a strong growth in loans, the asset quality remains among the best in the system (gross NPAs of 1.69% based on 150-day past

due [DPD] basis) which along with conservative provisioning adds to the comfort. BFL has already made provisions based on 90-DPDbasis, ahead of the Reserve Bank of India (RBI)’s timeline.

We expect BFL’s earnings to grow at a compounded annual growth rate of 28% over FY15-17 resulting in a return on asset (RoA) and

return on equity (RoE) of 3.2% and 19.2% respectively. While we have been positive on BFL’s business model and strong earningsperformance; We have a Buy rating on BFL with a price target of Rs6,500.

BRITANNIA INDUSTRIES 2,968 65.7 41.7 34.4 53.3 55.9 47.5 3,650 23

Remarks: Britannia Industries (Britannia) is the second largest player in the Indian biscuit market with about 30% market share. It has chalkedout an aggressive growth strategy to sustain the double-digit volume growth in the biscuit segment by enhancing its product portfolio.

It is also striving to expand to the other categories such as dairy (market size Rs75,000) and adjacent snacking categories (market sizeRs30,000 crore).

It is likely to maintain a 14-15% revenue growth rate with the volume growth standing at 10-11% (largely driven by enhanced both

distribution reach and product portfolio). The operating profit margin is expected to remain in the range of 14-15% on the back of

benign input cost and operating efficiency.

The company has a strong balance sheet with the free cash flow consistently improving over the past few years. Its return ratios have

improved over the past few years and remained strong in the upward of 50%.

Under a new leadership, Britannia has been able to leverage and monetise its strong brand and position in the biscuit and snack

segments. We believe that the company can sustain its higher than industry growth rates with an improving distribution reach, entry

into newer categories and focus on cost efficiency. We recommend a Buy on the stock with a price target of Rs3,650.

GODREJ CONSUMERS 1,324 48.9 39.5 32.1 24.6 25.7 25.8 1,460 10

Remarks: Godrej Consumer Products Ltd (GCPL) is one of the largest FMCG companies in India with a strong portfolio of brands catering to thematured and fast growing categories in the domestic market. With a slew of acquisitions in markets such as Africa, Latin America andIndonesia, it has expanded its base globally (about 40% of its revenues come from the international market.

GCPL's domestic business is performing well in a weak demand environment (grew by 9% in Q2FY2016). The key reason for a better

performance is a presence in the under-penetrated categories such as hair color and mosquito repellent, sustained innovation in theportfolio and expansion in distribution reach. On the other hand, the business in Africa is in a consolidation phase while the Indonesian

business is standing tall in a favourable demand environment.

Benign input prices would continue to boost its profitability and help GCPL to take adequate promotional actions and do higher brand

investment in a weak demand environment.

GCPL's long-term growth prospects remain intact and we expect its earnings to grow at a CAGR of above 20% over the next two to

three years. Thus, better growth prospects and strong earning visibility make it one of the better picks in the mid-cap FMCG space. We

maintain our Buy recommendation on the stock.

EQUITY FUNDAMENTALSSHAREKHAN TOP PICKS


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HAVELLS 305 40.6 38.1 32.4 20.6 20.0 21.0 370 21

Remarks: Havells is a leading electrical equipment and appliance manufacturer in India. The poor performance of Sylvania (acquired in 2007) draggedthe balance sheet of the company for a long time; however now Havells is going to divest Sylvania. Therefore, the current overhang will go

away and reflect positively on the consolidated results. We believe the deal will not only strengthen its balance sheet but also add value to the

bottom line and lift the return ratios. In terms of quality, the management’s focus on domestic business is expected to increase.

Apart from consolidating its leadership position in the existing products through product innovation and better features, it is also

expanding its product portfolio and making efforts to dwell deeper in the distribution channel by directly connecting with retail and

electrician networks (on the lines of Asian Paints and Astral Poly Technik). Further, consistent free cash flow generation, a high cash

conversion (reported profit to cash flow) record and a consistent high dividend pay-out speak for the management quality. Superior return ratios and a debt-free balance sheet indicate the quality of business too. Post-divestment of Sylvania, we believe the return

ratios are poised to improve further.

We believe Havells is a deserving high quality stocks, backed by a strong track record of its management and impressive financials.

Going forward, the extraordinary efforts like direct involvement with electricians and retailers will give it competitive advantage and

help it to consolidate its leadership position in India. Though currently the domestic business is moving at a modest pace, mirroringconsumer demand, we expect urban consumption to rise in future and Havells is well positioned to captalise on it. Moreover, the

Sylvania divestment would help it to shake off the past overhang and reflect positively on its return ratios as well as valuations.

INDUSIND BA NK 966 28.6 23.0 18.2 19.2 20.5 21.5 1,108 15

Remarks: IndusInd Bank is among the fastest growing banks (a 27% CAGR growth over FY10-15) having a loan book of Rs68,700 crore and 811branches across the country. About 25% of the bank’s book pertains to vehicle finance, which is a high-yielding category and is

showing signs of recovery.

Given the aggressive measures taken by the management, the deposit profile has improved considerably (a CASA ratio of 34%).

Going ahead, the bank would follow a differentiated branch expansion strategy (a 5% branch market share in identified centers) that

would help ensure healthy savings accounts and retail deposit growth.

Despite a weak economic growth and a higher proportion of vehicle finance book the bank has maintained its asset quality. With total

stressed loans (restructured loans + gross NPAs) forming just 1.4% of the book, the bank’s asset quality is among the best in the system.

A likely revival in the economy will further fuel growth in the consumer finance division and strong capital ratios will support the growth

plans. The stock is trading at 3.3x its FY17E book value (not factoring in the QIP issue). Given the strong loan growth, high RoAs and

healthy asset quality, the stock should continue to trade at premium valuation. We have a positive outlook on the stock.

MARUTI SUZUKI 4,623 37.6 25.3 19.7 16.6 21.3 22.8 5,400 17

Remarks: Maruti Suzuki India Ltd (Maruti) is India’s largest passenger vehicle manufacturer with a strong 45% market share.The company hasbeen able to gain market share over the last two years on the back of its diverse product portfolio, a large distribution network with an

increased focus on the rural markets and a shift in consumer preference to petrol models from diesel models.

The recently launched premium hatchback, ie Baleno, has received a positive response which will help the company expand its market

share in the segment. Further, the company has a pipeline of new launches over the next few years, the most important being the entry

into the compact utility vehicle and light commercial vehicle segments.

The company is poised to reap the benefits of an increase in discretionary spending from the Seventh Pay Commission pay-out.

The management plans to double its existing sales and distribution network in order to achieve its target of doubling domestic volumesover the next five years.

The profitability continues to remain high on the back of soft commodity prices, depreciation of the Japanese Yen and high operating

leverage.

RELAXO FOOTWEAR 508 59.1 45.8 33.9 23.4 22.1 22.3 635 25

Remarks:

Relaxo Footwear is present in the fast-growing footwear category, wherein it caters to customers with its four top-of-the-mind-recallbrands, viz, Hawaii, Sparx, Flite and Schoolmate. In the last quarter it also added another brand, Bahamas, to its product portfolio.

Relaxo has a proactive approach towards both brand building and creating capacities. To build its brand and create pull, like FMCG

players it continues to rope Bollywood celebrities and this creates an aspirational quotient for its brands. On the one hand, thecompany is creating strong consumer centric aspiration for the consumers; on the other hand, it is keeping its eye on quality and thus

does not believe in outsourcing. It is in the process of building capacity for future. Despite the current capacity (180 million pieces per

annuam) that would take care of growth in the next three years, the company has bought a 15-acre land at Bhiwadi to built additionalcapacity to serve the future requirements.

Relaxo’s strong presence in the lucrative mid priced footwear segment (through its top-of-the-mind-recall brands like Hawaii, Flite and

Sparx) along with its integrated manufacturing set-up, lean working capital requirement and vigilant management puts it in a sweet

spot to cash in on the strong growth opportunity unfolding in the footwear category due to a shift from unbranded to branded products.We thus maintain our Buy rating on the stock. We also roll over our multiple from FY2017 estimate to FY2018 estimate (valuing the

stock at 33x FY2018E) with a price target of Rs635.

EQUITY FUNDAMENTALS SHAREKHAN TOP PICKS


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RELIANCE INDUSTRIES 1,010 12.6 12.9 10.8 10.8 9.7 10.5 1,100 9

Remarks: Reliance Industries Ltd (RIL) has a strong presence in the refining, petrochemical and upstream exploration businesses. The refiningdivision of the company is the highest contributor to its earnings and is operating efficiently with a better gross refining margin (GRM)compared with its peers in the domestic market due to the ability of its plant to refine more of heavier crude. The exploration business

remains weak due to low production in the Krishna-Godavari-D6 (KG-D6) field and weak pricing of global fuel prices. However, capitalemployed and profit contribution from the exploration business is low.

Moreover, the upcoming incremental capacities in the petrochemical and refinery businesses are going to drive the future earnings

growth substantially as the downstream businesses are on the driving seat and contributing the lion’s share of the profitability and cashflow.

After a strong GRM in H1FY2016, we expect the margin to remain healthy for the whole year and drive a strong bottom line performance.

The stock is available at an attractive valuation considering the size, strong balance sheet and cash flow generating ability of thecompany.

SBI 225 12.8 9.4 7.1 10.6 13.2 15.7 ** -

Remarks: SBI is India's largest bank in terms of most comparable parameters such as assets size, branch network (18,000 branches) andcustomer base. The bank has a market share of ~18% and along with its associate banks it commands a market share of over 25% in

the banking system. Therefore, with a revival in the investment cycle and pick-up in consumption the bank is likely to benefit significantly

in terms of loan growth and profitability.

SBI’s asset quality is relatively better compared with the other public sector banks (PSBs; its stressed loans stand at ~8.5% vs ~13.5%

of the other PSBs) and has been showing improving trends in the past few quarters. While the pressure on the asset quality may

continue in the near term, a higher tier-1 CAR (9.6%) and an improving operating performance remain comforting factors.

Going ahead, SBI will look to merge its associate banks which will give an unmatched hold in the domestic banking sector and boost

economies of scale. In addition, the likely monetisation of the insurance and other subsidiaries will strengthen the capital position of the bank. The bank may also benefit from the government’s plans to infuse capital into the PSBs. SBI is a better pick among the

government-owned banks and is reasonably valued at the current levels.

TCS 2,436 24.3 19.9 17.8 33.7 32.7 29.7 3,000 23

Remarks: TCS pioneered the IT services outsourcing business from India and is the largest IT service firm in the country. It is a leader in mostservice offerings and has further consolidated its position as a full-service provider by delivering a robust financial and operational

performance consistently over the years.

The consistency and predictability of its earnings performance has put the company at the top of its league. TCS’s management

remains positive on the digital technologies space, which grew by 10.7% QoQ, forms 13.3% of the revenues as compared with 12.5%in Q1FY2016. The management remains confident about the growth trajectory of the digital space for the coming years. Given the

usual seasonal weakness in H2, it expects a soft revenue growth in the next two quarters. Further, it expects weakness in Diligenta

(insurance) and Japan (integration issues related to the Mitsubishi acquisition) to continue for few more quarters.

We remain positive on TCS, given its strong positioning, scale advantage and head start in the digital technologies space (the highest

among the top Indian IT companies), which justify the valuation premium for TCS over the others.

ZEE ENTERTAINMENT 437 50.9 44.2 35.2 19.0 18.8 20.6 470 8

Remarks: Among the key stakeholders of the domestic TV industry, we expect the broadcasters to be the prime beneficiary of the mandatorydigitisation process initiated by the government. The broadcasters would benefit from higher subscription revenues at the least incremental

capex as the subscriber declaration improves in the cable industry.

The management maintains that the advertisement spending will continue to grow in double digits going ahead and ZEEL will be able

to outperform the same. The growth in the advertisement spending will be driven by an improvement in the macro-economic factors

and the fact the ZEEL is well placed to capture the emerging opportunities being a leader in terms of market share.

ZEEL continues to outperform the broadcasting advertising market. We expect the momentum to continue with an improvement in the

macro economy. The management indicated the strong momentum in the advertisement revenue growth would continue led by market

share gains and improvement in spending from segments like FMCG, e-commerce, consumer durables and telecom companies.

Subscription revenues are also expected to benefit from the run-up phases III and IV of the digitisation process (to be more visible in

FY2017 and FY2018). We continue to see ZEEL as the prime beneficiary of the macro revival and digitisation.

EQUITY FUNDAMENTALSSHAREKHAN TOP PICKS


17/68


WEALTH CREATOR PORTFOLIOEQUITY FUNDAMENTALS

Wealth Creator portfolio

WEALTH CREATOR PORTFOLIO XXX XX, 2015

COMPARATIVE RETURNS

Particulars Returns (as on on December 31, 2015)

Since inception (August 21, 2014)

Wealth Creator fo lio (weighted average returns) 9.5

- Large-cap (64%) 9.0

- Mid-cap (36%) 10.3

Sensex -0.9

Nifty 0.7

CNX Mid-cap 19.8

UPDATE ON WEALTH CREATOR PORTFOLIO

Sr No Scrip Weights Reco price (Rs) Price target (Rs) Potential upside 31-Dec-2015 March-18

Large-caps (64% weightage; 8% each))

1 Axis Bank 8% 450 1210 169.2%

2 Larsen & Toubro 8% 1276 3800 197.9%

3 Maruti Suzuki 8% 4615 8750 89.6%

4 Cummins 8% 1028 1708 66.2%

5 State Bank of India 8% 224 580 158.5%

6 Sun Pharmaceuticals 8% 820 1650 101.2%

7 Tata Consultancy Services 8% 2439 5100 109.1%

8 Tata Motors DVR 8% 290 675 132.9%

Mid-caps (36% weightage; 4% each)

9 PTC India Financials 4% 40 112 177.6%

10 V-Guard 4% 946 2100 122.0%

11 Gateway Distripark 4% 324 810 150.3%

12 IRB Infra 4% 243 650 167.1%

13 Network 18 Media 4% 59 135 130.2%

14 Gabriel India 4% 99 200 102.0%

15 Century Plyboards 4% 170 440 159.0%

16 Triveni Turbines 4% 113 265 134.7%

17 Dhanuka Agritech 4% 512 1150 124.6%

Objective: To build a balanced and actively managed portfolio of

quality companies that will help create meaningful wealth forinvestors in the multi-year rally expected in the Indian equity market.

In addition to some bottom-up picks, the portfolio contains stocksidentified based on three key themes:

Policy push: Stocks from sectors benefiting from improvementin the policy environment

Early gainers: Beneficiaries of an economic recovery (stocks fromauto, banking & financial services, logistic sectors)

Evergreen: Steady performers that provide stable and consistentreturns including urban consumption plays

Portfolio performance review

Wealth Creator folio has appreciated by 9.5% (weighted averagereturns) since its inception comprehensively beating the returnsfrom the benchmark indices.

No changes/revisions suggested in the folio in the month ofDecember 2015. Prices as on December 31, 2015.

* Please note we see scope for upward revision in target price (3-year) of some of the stocks depending on the extent of economic recovery and will keep updating on the same


18/68


Customised Success Model

COMPANY DETAILS

Price target: Rs800

Market cap: Rs8,331 cr

52-week high/low: Rs786/440

NSE volume: (No of shares) 0.1 lakh

BSE code: 523642

NSE code: PIIND

Sharekhan code: PIIND

Free float: (No of shares) 5.7 cr

PRICE CHART

SHAREHOLDING PATTERN

(%) 1m 3m 6m 12m

Absolute -3.9 -2.3 -3.9 30.6

Relative -2.9 -0.7 -0.1 35.2

to Sensex

PRICE PERFORMANCE

BUY CMP: RS610 DECEMBER 17, 2015

KEY POINTS

Unique business model, prime source of competitive advantage: PI Industries (PI), a leadingagro-chemical company, has a differentiated business model with focus on the fast-growingcustom synthesis and manufacturing (CSM) business, which contributes 60% of its revenues.Its strong research base and manufacturing practices make it a preferred outsourcing partnerfor the global chemical players for their innovative and patented products. Given its trackrecord and established relations with global players, the company is able to introduceinnovative agro-chemicals (which contribute 40% of the revenues) in the domestic marketthrough the in-licencing of molecules. It has in its kitty blockbuster products like “NomineeGold” and “Osheen” in association with MNCs.

Capacity addition to help sustain growth momentum in the CSM business: The CSMbusiness remains the differentiating force that will help it achieve a higher growth with acontinuous improvement in the margins in the coming years. To sustain the growth

momentum, the company has expanded its manufacturing capacity in Jambusar at a costof Rs300 crore and the new capacity would be commissioned in H2FY2016. After theexpansion PI would be able to improve its revenue mix in favour of the relatively high-margin CSM business. The capacity expansion would also have a favourable impact on itsreturn ratios. On the agro-chemical front, the company is concentrating on a few nicheproducts which have the ability to become blockbusters in future. It has only 25-30 productsin the market (vs the other agro-chemical companies, which have 80-100 products) andplans to launch two new products every year which will help it to increase its market share.

Earnings to grow at 24% CAGR over FY2015-18, balance sheet to be deleveraged by FY2017:The commissioning of the Jambusar facility and the launch of new products in the agro-chemical segment will help the company to achieve a revenue CAGR of around 17% andearnings CAGR of around 24% over FY2015-18. On the other hand, the margins are expectedto improve by 225BPS over the next three years. On the balance sheet front, the company isexpected to become debt-free by FY2017 on account of strong cash flow from operations.The return ratios, among the best in the industry, will remain strong at RoCE of around 36%and RoE of around 28%. With a major capex behind it, the company will generate strongfree cash flows, so there’s room to increase the dividend pay-out from 15% currently.

A differentiated business model and compounding growth story: PI has a unique businessmodel, strong relationship with global innovators, good revenue visibility in the CSMbusiness and a well-spread distribution network, making it a compelling investment case.PI is one of the few agro-chemical companies that have a unique business model and are anexample to the other chemical companies. On the valuation front, PI continues to attract apremium valuation over the other agro-chemical companies on account of its unique businessmodel, strong visibility of earnings, robust balance sheet (to be debt-free by FY2017),impressive return ratios with strong free cash flows and excellent management. Currently,PI trades at PE of 23.2x FY2017E and 19.2x FY2018E earnings. We have valued thecompany at 25x FY2018E earnings. We initiate coverage on PI with a Buy recommendationand price target of Rs800.

PI INDUSTRIES

Sharekhan Limited, its analyst or dependant(s) of the analyst might be

holding or having a postition in the companies mentioned in the article.

VALUATIONS

Particulars FY2014 FY2015 FY2016E FY2017E FY2018E

Net sales (Rs cr) 1,595.0 1,939.7 2,225.0 2,613.4 3,090.1

EBIDTA (Rs cr) 285.6 369.9 449.8 541.3 658.9

Adj. PAT (Rs cr) 183.7 224.8 286.9 354.9 428.9

EBIDTA margin (%) 17.9 19.1 20.2 20.7 21.3

PAT margin (%) 11.5 11.6 12.9 13.6 13.9

EPS (Rs) 13.6 16.7 21.3 26.3 31.8

P/E (x) 44.8 36.6 28.7 23.2 19.2

RoCE (%) 33.1 34.7 33.9 35.2 36.1

RoE (%) 30.1 28.3 28.2 27.5 26.2

Debt/Equity 0.2 0.2 0.1 0.0 0.0

For detailed report, please visit the Research section of our website, sharekhan.com.

EQUITY FUNDAMENTALSSTOCK IDEA

*FY2015 includes consolidation of Satyam Cineplexes, which will affect the overall profitability Source: Company and Sharekhan Research


19/68


STOCK UPDATEEQUITY FUNDAMENTALS

Sun Life ups its stake in Bir la Sun Life Insurance;

maintain Buy

COMPANY DETAILS

Price target: Rs2,500


52 week high/low: Rs1,519/2,340

NSE volume (no. of shares): 1.4 lakh

BSE code: 500303

NSE code: ABIRLANUVO

Sharekhan code: ABIRLANUVO

Free float (no. of shares): 5.6 cr

(%) 1m 3m 6m 12m

Absolute 2.3 6.5 19.7 19.4

Relative to Sensex 4.2 4.3 26.0 28.4

PRICE PERFORMANCE

BUY CMP: RS2,073 DECEMBER 4, 2015 ADITYA BIRLA NUVO

KEY POINTS

Event update: Sun Life Financial (Sun Life), which partners and holds 26% stake in AdityaBirla Nuvo Ltd (ABNL)’s insurance arm, Birla Sun Life Insurance, has agreed to increase itsstake in the insurance company from 26% to 49% (acquiring additional 23% stake) at aninvestment of Rs1,664 crore. ABNL will continue to hold a controlling stake at 51%.

Broad contours of the deal: (a) The deal value of Rs1,664 crore for a 23% stake leadsto valuing the insurance arm at Rs7,235 crore, resulting in 2.2x its FY2015 embeddedvalue. The deal value is higher than our valuation of the insurance business wherein wehad attached Rs5,500 crore for the insurance business. The increase in stake by SunLife testifies the franchisee strength of the business coupled with general attractivenessof the Indian insurance business. The money raised would be utilised to pay off thedebt and deliver the balance sheet of ABNL.

Maintain Buy with an unchanged price target of Rs2,500: Despite incorporating thedeal (insurance being valued at Rs7,235 crore, higher than our valuation of Rs5,500crore), we have maintained our price target on the stock of the company as wedowngraded the telecom business (now valued at 7x its FY2017E EV/EBITDA as agains7.5x earlier) due to increasing competitive intensity in the telecom space in the wake ofthe impending launch of Reliance Jio and Idea Cellular’s aggression towards higherspending to build its data capability that would have a negative effect on its balancesheet. Thus, cumulatively our price target remains unchanged at Rs2,500. We havealso maintained our Buy rating on the stock.



holding or having a postition in the companies mentioned in the article.For detailed report, please visit the Research section of our website, sharekhan.com.

Strong growth outlook backed by slew of productapprovals; upgrade to Buy

COMPANY DETAILS

Rs973


52 week high/low: Rs861/491


BSE code: 524804

NSE code: AUROPHARMA

Sharekhan code: AUROPHARMA


(%) 1m 3m 6m 12m

Absolute -1.5 13.7 22.5 43.0


PRICE PERFORMANCE

BUY CMP: RS804 DECEMBER 10, 2015 AUROBINDO PHARMA

KEY POINTS

Event--received approval for key products: Aurobindo Pharma Ltd (APL) received USFDA’nod for two products: (a) Eptifibatide injection (gIntegrillin); antiplatelet drug (US marketsize $137 million; only Teva and Schering have approvals for this product and now APL wilbe the third player) which can help APL generate around Rs90-100-crore sales (assuming10% market share); and (b) Levonorgestrel tablet; OTC-contraceptive in the USA.

Key product approvals and launches to drive earnings: APL received 25 abbreviated newdrug application (ANDA) approvals in the year till date (the highest compared with its peersand important launches are scheduled in H2 (Aripiprazole, Memantine, Raloxifene, Integrilin)Additionally, the management expects a few more big-ticket injectable approvals in H2

thereby indicating a strong H2FY2016 performance. EBITDA margins to expand over next 3 years: We expect its operating profit margin to

increase to 25.5% in FY2018 from 21.2% in FY2015, as APL continues to launch nicheproducts in the USA and as the profitability of the EU and anti-retroviral (ARV) businessesimproves.

Upgraded rating from Hold to Buy with price target of Rs973: At the current market price oRs804, APL trades at 23.6x its FY2016E earnings of Rs34, 18.8x its FY2017E earnings ofRs42.8 and 14.9x its FY2018E earnings of Rs54.1. Going ahead, re-rating is expected tohappen on the back of increasing profitability, improving balance sheet and strong free cashflow generation. Hence, we have upgraded the rating to Buy with a price target of Rs973valuing the stock at 18x its FY2018E earnings of Rs54.6.

Risks: (1) Delay in ANDA approvals and adverse outcome of USFDA inspection of plants; (2worsening of pricing environment in EU; and (3) currency fluctuations in both dollar and euro



holding or having a postition in the companies mentioned in the article.

For detailed report, please visit the Research section of our website, sharekhan.com.


20/68


STOCK UPDATE EQUITY FUNDAMENTALS

Strong growth to sustain; PT revised to Rs6,500COMPANY DETAILSPrice target: Rs6,500




BSE code: 500034

NSE code: BAJFINANCE

Sharekhan code: BAJFINANCE


(%) 1m 3m 6m 12m

Absolute 10.2 17.1 19.0 75.5


PRICE PERFORMANCE

BUY CMP: RS5,915 DECEMBER 24, 2015B AJAJ FINANCE

KEY POINTS Consumption trends improving: The improving consumption trend remains a key bright

spot in the economy and will drive a recovery going ahead. The retail sales in the festiveseason gone by were better than expected suggesting a positive trend. Bajaj Finance isamong the key players to benefit from a strong consumption trend. The company’soverall book grew by 36% in Q2FY2016 with a strong growth coming from segmentslike consumer goods, which forms 41% of the AUM. The new products like lifestylefinancing and rural financing are showing strong traction.

Falling interest rates to cushion margins, asset quality stays robust: Around 50% of thecompany’s borrowings are on a floating rates. Therefore, declining interest rates will easethe borrowing costs. Going ahead, as the RBI is pushing banks for faster transmission of rates coupled with higher borrowings from bonds will aid the margins. Despite the stronggrowth, BFL’s asset quality has remained amongst the best in the system. In terms of provisioning, the company is ahead of the curve as it has already made provisioning

based on 90-day past due (DPD) basis vs 150 days mandated by the regulator. Valuations rolled over to FY2018 estimates, maintain Buy: We expect BFL to continue

its strong growth trajectory (27% CAGR in loans over FY2015-18) led by steadyconsumer demand, unique cross-selling capabilities and newer product launches. Wehave shifted valuations to FY2018E book value (BV; earlier valued at the average of FY2017E and FY2018E BV) resulting in a revised price target of Rs6,500 (3.4x itsFY2018 BV). We have maintained our Buy rating on the stock.

Key risk: So far the company has demonstrated an exceptional performance on mostcounts and therefore any negative surprise on asset quality could affect the valuations.




Recent correction provides good entry point;long-term growth prospects intact

COMPANY DETAILS

Price target: Rs3,650




BSE code: 500825

NSE code: BRITANNIA

Sharekhan code: BRITANNIA


(%) 1m 3m 6m 12m

Absolute -9.6 -0.2 15.5 78.3

Relative to Sensex -7.8 0.0 21.6 92.9

PRICE PERFORMANCE

BUY CMP: RS2,969 DECEMBER 1, 2015BRITANNIA INDUSTRIES

KEY POINTS

Britannia posted a strong operating performance in H1FY2016 with a double-digit volumegrowth and OPM expansion of 400BPS to 14.5%. The management is confident of maintaining the strong performance in H2FY2016 as well, with volume growth expected tosustain in the range of 8-10%. The margins are likely to remain strong at around 14% on theback of benign raw material prices and benefits derived from various cost-saving initiatives.

Britannia is set to relaunch its Tiger brand in the value segment which will not only garnermarket share from organised players but also position it to benefit from the eventualimplementation of the GST bill that would potentially lead to a shift in the market share

from the unorganised to organised segment. Also, the company aims to aggressively strengthenits position in dairy products and snack segment (rusk and cakes). Lastly, the company iscurrently servicing 75 countries globally, but the revenues of the international business arejust 6% of the overall revenues. Its aim is to expand the international business’ revenuecontribution to one-fifth of the overall revenues over the next three to four years, which willbe done through new product launches and distribution expansion in the key internationalmarkets.

The strategies are in place which will help Britannia to maintain the double-digit revenuegrowth along with a steady improvement in the OPM. The stock has corrected by 11% inthe last one month which provides a good entry point for investors. Thus, in view of thestrong growth prospects and better upside from the current level, we have maintained ourBuy recommendation on the stock with an unchanged price target of Rs3,650.





21/68


STOCK UPDATEEQUITY FUNDAMENTALS

Unrelated diversification to hurt valuationmultiples; downgrade to Hold

COMPANY DETAILS

Price target: Rs580




BSE code: 500084

NSE code: CESC

Sharekhan code: CESC


(%) 1m 3m 6m 12m

Absolute 3.2 14.5 8.8 -19.4

Relative to Sensex 6.2 11.4 13.2 -11.4

PRICE PERFORMANCE

HOLD CMP: RS516 DECEMBER 9, 2015CESC

KEY POINTS

Another investment in unrelated area; to buy IPL team: CESC through one of its stepdown subsidiary, New Rising Promoters Pvt, has won the rights and obligations to operatthe Pune franchisee of the IPL for two years. New Rising Promoters Pvt is a 100%subsidiary of Crescent Power, in which CESC holds a 51% stake and the remaining iheld by the promoters. The company had invested earlier in unrelated areas like retaiand business process outsourcing (BPO) which was not appreciated by the minorityshareholders even then.

Management indicates zero cash outflow for IPL venture: As per media interactions, themanagement has clearly stated that there would be zero financial effect or cash outflow fromCESC for the IPL venture. Also, the reason to acquire IPL rights through CESC step-downsubsidiary could be to use the strength of CESC’s balance sheet to meet the bank guaranterequirements (non-fund-based support) for the transaction. However, we view the unrelated

investments negatively. Therefore, we expect a de-rating of valuation multiples of the stock PT revised down and stock put on Hold: Given the bitter experience of most of the IPL

owners in the past, we believe the Street will not appreciate the move. The stock has sufferedon the valuation front in the past on account of venturing into unrelated areas; now owningIPL team raises further risk. Though the management intends to transfer the IPL venturefrom the CESC umbrella by revising the structure over time, we don’t think it was prudentin the first place to bid for an IPL team through a step-down subsidiary of the listed entityCESC. Therefore, we have revised down our target multiples and price target to Rs580consequently, we have downgraded the recommendation to Hold from Buy.




Valuations turn reasonable post-correction;upgraded to Buy

COMPANY DETAILS

Price target: Rs75




BSE code: 500469

NSE code: FEDERALBNK

Sharekhan code: FEDERALBNK


(%) 1m 3m 6m 12m

Absolute -0.7 -12.6 -19.0 -23.8

Relative to Sensex 1.2 -10.3 -15.6 -18.3

PRICE PERFORMANCE

BUY CMP: RS54 DECEMBER 16, 2015FEDERAL B ANK

KEY POINTS Inexpensive valuations: The stock of Federal Bank has corrected by around 18% since our last

report (dated October 20, 2015) following a weak set of numbers in Q2FY2016. Presently, thestock trades at 1.0x FY2017E BV, which is around 17% discount to the five-year mean valuation(ie 1.2x). While we expect the earnings to witness a significant improvement from FY2017 onwardsthe current valuation increases the comfort and mostly factors in the concerns.

Structural initiat

sharkhan valueguide 2016

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