India Strategy
1QFY14 earnings
June-13 Quarter Review
Macro:
Growth worries deepen.
1QFY14 Aggregate:
MOSL Universe
Sales grew 4% YoY, PAT decline by 2%.
Sensex EPS:
FY14 downgraded 3.5%;
EPS growth of 7% now.
Research Team
(Rajat@MotilalOswal.com)
August 2013

Discussion points
Macro Overview
Growth worries deepen; see FY14 GDP growth at 4.6%
Aggregate 1QFY14 Review
Sales grew 4%, PAT de-grew by 2%; Sensex earnings down 4%
Markets & Valuation
FY14 P/E at 14.5x; imperative for growth to rebound
Sector Snapshot
1QFY14 review and outlook
Annexure
MOSL Universe – Annual Performance & Valuations
August 2013
2

INDIA STRATEGY: June-13 Results Review
Growth at a new low: Aggregate Sales grew 4%, PAT de-grew by 2%
Aggregate sales grew by 3.9% (v/s est of 6.2%), EBITDA grew in line with est by 4.5% (est of
6.4%), PAT de-grew by 2.3% v/s est of flat growth.
Large-caps which delivered above estimates
are Maruti, ICICI Bank, Idea Cellular, DLF, Cipla,
Ultratech, Zee, Ambuja Cements, ACC, Tech Mahindra, Kotak Mahindra.
Major disappointments in earnings
were from State Bank, ONGC, Asian Paints, JSPL, Godrej
Consumer, Oil India, Coal India, United Spirits,, Dr Reddy’ s Labs, BHEL, Power Grid.
Sensex EPS for FY14
saw a downgrade of 3.5% and now stand at 1,280 (growth of 7%). FY15
Sensex EPS saw a downgrade of 3%.
Refer our June-13 Quarter Preview
Sensex EPS growth trend
August 2013
3

MACRO: Growth worries deepen; see FY14 at 4.6%
IIP returned to degrowth in 1QFY14
See FY14 GDP growth at lower than 5%
IIP showed a degrowth of -2.2% in
1QFY13. This was even lower than
the decline of -0.2% in 1QFY13.
Latest indications point to
continued weakness in capital
goods and consumer durables
joined by basic goods as well.
Slowdown is evident in services
sector too with banking and
finance likely to grow at a slower
rate than FY13.
Normal monsoon prediction only silverlining
Expect further slowdown in industry and service sector
The only silverlining comes from
monsoon which is 12% above
normal during the season so far.
Monsoons should help the Agri
GDP to grow by 3.9% in FY14, the
key driver of growth for the year.
With both industry as well as
services showing fresh signs of
weakness, we have downgraded
FY14 GDP estimate to 4.6%.
August 2013
4

MACRO: Inflation sees reversal, RBI tightening to impact growth
Inflation has risen , surprisingly, again
RBI policies seen reversal on INR woes
Inflation has dropped sharply
below RBI’s comfort level of 5%
for three consecutive months
but have spiked again to 5.8%
as per latest data.
As part of the measures to curb
volatility in INR, RBI has
resorted to an increase in short
term interest rates inverting
the yield curve.
It has also limited liquidity
support to only 0.5% of
individual bank’s NDTL.
These measures have raised
the interest rates for both
government and private sector.
Along with tight money supply
and NPAs concern this resulted
in further slowdown in bank
deposits and credit growth.
A spike in inflation risks a
formal reversal of RBI policy to
tight money with a rise in repo
rate.
RBI has reduced LAF support raising interest costs
Credit growth constrained by deposits, NPA issues
August 2013
5

MACRO: INR trends remain: policy measures ineffective
External sector: Deterioration in India’s external vulnerability indicators
Date
4-Jun-13
15-Jul-13
22-Jul-13
23-Jul-13
31-Jul-13
8-Aug-13
14-Aug-13
Measures taken
Restriction imposed on import of gold on a consignment basis by banks
Increased MSF/Bank rate by 200bp; restricts LAF support to INR750b
Imposed minimum commitment of exports at 20% of gold imported
Further restricts LAF support to 0.5% of NDTL of individual banks; maintain daily CRR at 99% of
requirement
Status quo on rates in 1st Quarter Policy
Regular CMB of INR220b every Monday
i) Barring oil PSUs, reduced the Overseas Direct Investment (ODI) limit for other cos. under automatic
route to 100% of net worth (from 400%).
ii) RBI reduced outward remittance limit to USD75K from USD200K per year earlier. Within this limit
while setting up Joint Venture/Wholly Owned Subsidiary by residents outside India have now been
permitted, acquisition of immovable property outside have been disallowed.
The sharp depreciation in INR has
invited many measures from RBI
and government.
These measures so far has not been
effective in ensuring lower volatility
in INR which trades closer to its
lowest value ever.
On the other hand these policies
have led to unintended
consequences including a flare up of
short term interest rates and its
volatility while banks have started
raising their base rates.
Of medium term consequence is the
further delay in pick up of industrial
growth.
Moreover, government’s borrowing
cost have increased on top of
already emerging signs of fiscal
stress.
To adhere to the fiscal target, the
government would need to cut on
plan expenditure, a repeat of FY13.
Call rates have shot up with increased volatility
Fiscal stress is brewing up too
August 2013
6

MACRO: FIIs outflows overwhelm correction in trade deficit
Despite INR depreciation exports has not increased…
Even a lower trade gap couldn't arrest INR decline
A sharp depreciation of INR
has not been successful in
lifting India’s exports.
In recent months
however, imports have come
down somewhat on lower gold
import and GDP growth.
Thus trade deficit that has seen
corrections from USD20b in
May-13 to USD12b in Jun-13
and Jul-13.
FIIs debt outflows have continued unabated (USD b)
FIIs equity outflows too have started (USD b)
However, despite reduction in
trade deficit, currency
continued to depreciate as FIIs
flows particularly in debt
remains significantly negative.
During Jun-Jul 2013, while
trade deficit has corrected by
USD4b, it has been
overwhelmed by USD3b equity
outflow and USD7b debt
outflow.
August 2013
7

Jun-13 Quarter Results Review: Sales grew 4%, PAT de-grew by 2%
Aggregate sales grew 4%, PAT de-growth for first time since Sep-09
Aggregate sales grew by 3.9% (v/s est. of 6.2%), EBITDA grew in line with est by 4.5% (est of 6.4%), PAT de-grew by 2.3%
v/s est. of flat growth.
Ex financials, EBITDA growth was flat (est. of 4%) and PAT de-growth was 6.0% (est of 2.6% de-growth).
Aggregate EBITDA margin (ex financials) is down 50bp YoY (est 30 bp); Metals, Energy, Cement and Capital Goods are
the key contributors to the margin decline.
50 companies reported PAT higher than estimates, 49 companies below and 43 in-line. On the EBITDA front, 43
companies exceeded estimates and 46 companies were below estimates.
The current quarter saw more downgrades than upgrades with FY14 EPS revised upwards for 52 companies and
downwards for 81 companies.
Sector performance: Healthcare, Technology and Consumer led the PAT growth
Sales grew by 3.9% led by Healthcare (20%), Technology (13%), Consumer (11%) and Telecom (10%).
PAT de-grew by 2.3% with Capital Goods (-32%), Metals (-19%), Autos (-12%), Oil & Gas ex RMs (-10%), Utilities (-7%)
being the major draggers. Healthcare (+26%), Pvt Banks (+26%), NBFC (+25%), Technology (+14%), Consumer (+12%)
were the key outperformers.
Top outperforming sector over estimates was Telecom (+23% variance).
Oil & Gas ex RMs (-44%) and Metals (-32%) contributed negatively to the EBITDA growth, while Telecom (27%), Utilities
(25%) and Technology (19%) remained the top sectors.
August 2013
8

Jun-13 Quarter Results Review: Sales grew 4%, PAT de-grew by 2%
Sector performance (contd…)
Autos were a drag on the estimates with Tata Motors and Ashok Leyland as laggards. Eicher Motors and Maruti Suzuki
were the stand-outs.
Capital goods EBITDA was significantly below estimates (declined by 29%) led by BHEL (-58% variance with est) and
Siemens (-46% variance over est). Every company reported EBITDA below estimates.
Cement EBITDA margins dipped to 20% (570bp YoY decline). The sector saw EBITDA de-growth YoY in the range of 19-
47% for all companies except Jaiprakash Associates (+2%).
In Consumer space, Britannia and Marico reported PAT above expectations. Britannia (+15%), Marico (+7%) and ITC
(+2%) saw upgrades in estimates; remaining stocks saw no change/down-grade in estimates.
Within Private Banks, 6 out of 8 reported PAT in-line with estimates. Amongst the PSU Banks, SBI and Union Bank were
the major disappointment.
Healthcare sector PAT continued to grow at 26% YoY driven by Lupin (91%), Sun Pharma (+60%) and Cipla (55%). Sun
Pharma saw the maximum upgrade in FY14 earnings by 9% .
Metals has shown a de-growth in sales for 3 consecutive quarters, Except JSW Steel, none of the companies reported
above estimates. Barring JSW Steel and Sesa Goa, remaining companies saw FY15 earning downgrades.
In the Energy space, Oil & Gas ex RMs reported EBITDA below estimates. ONGC and Oil India were the major laggards.
Reliance Industries EBITDA was in-line with estimates.
Technology sector reported PAT in-line with estimates with TCS, Infosys, HCL Tech, Wipro reporting in-line numbers.
Tech Mahindra was the positive surprise with 29% YoY growth (+9% variance over est).
August 2013
9

Jun-13 Quarter Results Review: Sensex, Nifty PAT de-grows
Sensex performance: PAT de-grows, in-line with estimates
Sensex aggregate Sales grew 2% (v/s est of 4%), EBIDTA grew 2% (v/s est of 6%) and PAT de-grew by 4% (v/s est
of 1% growth). Ex the 3 PSUs (Coal India, ONGC, SBI), the Sensex PAT grew by 4% (inline with est).
5 companies in Sensex reported PAT above estimates; 11 companies below estimates; 14 reported in-line.
Fastest growing companies are Sun Pharma (+60%), Cipla (+55%), Maruti (+49%), Tata Steel (+41%) and
Reliance Inds (+20%).
Negative growth in earnings came from Tata Power (-65%), BHEL (-50%), ONGC (-34%), Tata Motors (-29%),
GAIL (-29%), JSPL (-28%), Hindalco (-22%) and JSPL (-35%) .
Nifty performance: PAT de-grows, in-line with estimates
Nifty excl BPCL aggregate Sales grew 3% (v/s est of 5%), EBIDTA growth was at 2% (v/s est of 5%) and PAT de-
grew by 4% (vs est de- growth of 2%).
18 companies in Nifty reported PAT above estimates; 18 companies below estimates; 14 reported in-line.
The biggest positive surprises on the PAT front were Bharti Airtel (+114% variance), DLF (+101% variance),
Grasim Inds (+46% variance), Cipla (+39% variance) and Sesa Goa (+36% variance), while negative surprises
were Jaiprakash Associates (-84% variance), Tata Power (-50% variance), JSPL (-28% variance) and Tata Motors
(-24% variance).
August 2013
10

MOSL Universe: June-13 Quarter Performance (INR b)
August 2013
11

Key sectoral trends
Auto:
PAT growth for 2Ws better than other companies in aggregate
Capital Goods:
Revenue de-grows by 4%; first time in nearly a decade
Note: Includes only TTMT S/A (adjusted for JLR dividend income)
Cement:
EBITDA margins decline steeply on flat volume growth
Consumer:
Ad-spends as a % of sales highest, while sales slow
August 2013
12

Key sectoral trends
Media:
Sharp rise in ad-revenue growth (Growth %)
Banks Private:
NII growth remains healthy
Banks PSU:
Sharp deterioration in asset quality
Banks PSU:
Strong treasury gains aids profitability
August 2013
13

Key sectoral trends
Metals:
Aluminium CoP on the decline; lowest in 9 quarters (USD/T)
Telecom:
Sharp jump in RPM was a key positive surprise
Technology:
Despite significant INR depreciation, margins remain flat
Technology:
Revision in FY14E USD revenue for top-tier cos quarter-wise
August 2013
14

MOSL Universe: June-13 Quarter Performance
1QFY14 SECTOR PAT GROWTH (YOY, %): MEDIA, PRIVATE BANKS, HEALTH CARE LEAD THE PACK
PAT growth was led by Media
(+31%, above estimates),
Private Banks (+26%, in line
with estimates), Health Care
(+26%, in line with estimate).
SECTOR PAT VARIANCE FROM ESTIMATES (%): REAL ESTATE, CAPITAL GOODS, AUTO DISAPPOINTS
Real Estate, Capital Goods
were key sectors that
underperformed over our
estimates. Telecom, Cement
reported above estimates.
August 2013
15

Sectoral quarterly PAT trend: Financials rise to 27% of aggregates
MOSL Universe June-13 PAT at INR754bn. Contribution of Financials has risen from 18% to 27% in last 21 qtrs.
Similarly, share of Metals has fallen from 16% to 11% during this period.
Telecom share in earnings have risen after a long time. This will rise further over FY14/FY15.
Technology reported an all time high earnings. Their growth rates will outperform further over 9MFY14.
Note: Comparable Universe, excludes Coal India, NHPC, JSW Energy, Oberoi Realty, Oil India and MCX.
August 2013
16

Sectoral quarterly contribution: High PE stocks share at new high
CONTRIBUTION OF PVT BANKS, CONSUMER & TECHNOLOGY AT ALL TIME HIGH
CONTRIBUTION OF PVT BANKS AND PSU BANKS: CONVERGENCE FOR FIRST TIME EVER
August 2013
17

MOSL Universe PAT at INR754b; Mkt Cap below Dec-10 levels
Note: Comparable Universe, excludes Coal India, NHPC, JSW Energy, Oberoi Realty, Oil India and MCX.
August 2013
18

Sensex Performance: Sales growth at new low (ex crisis of FY10)
TREND IN SENSEX SALES GROWTH (YoY %)
TREND IN SENSEX EBITDA GROWTH (YoY %)
August 2013
19

Sensex Performance: PAT declined by 4%
TREND IN SENSEX PAT GROWTH (YoY %)
1QFY14 PAT GROWTH (YOY, %): SUN PHARMA, CIPLA, MARUTI AMONG KEY LEADERS
August 2013
20

Sensex Performance for 1QFY14
August 2013
21

Changes in ratings
During the earnings season, the number of stocks with downgrade in ratings were significantly higher.
Consumer/Retail saw the most downgrades. The only upgrade was in Sun Pharma and Marico.
August 2013
22

Comparison of Earnings Based on Growth Rates
For 1QFY14, 19% of the companies in MOSL Universe reported earnings growth of over 30%, the lowest in our
aggregates over a decade. In total, 60% of MOSL Universe saw growth of over 15%.
40% of MOSL universe companies reported negative earnings growth.
Distribution of PAT Growth: highest no. of companies with PAT de-growth (ex crisis quarters)
August 2013
23

June-13 Quarter Results: The Best &
The Worst
(>$3B Mkt cap)
August 2013
24

June-13 Quarter Results: The Best &
The Worst
(<$3B Mkt cap)
August 2013
25

Highest Earnings Upgrade /
Downgrade
(>$3B Mkt cap)
August 2013
26

Highest Earnings Upgrade /
Downgrade
(<$3B Mkt cap)
August 2013
27

Sensex Companies’ EPS Upgrade /
Downgrade
August 2013
28

Markets reaction on quarter performance
August 2013
29

FY14/FY15 Sensex EPS downgraded by 3.5%/3.0% post 1QFY14 results
Post the 1QFY14 earnings, FY14 Sensex EPS saw a downgrade of 3.5% and now stands at 1,280 (growth
of 7%). Given the rising headwinds to growth and continued stress led by currency and rates, the
earnings downgrades have been severe over the quarter. The bias would remain negative for growth
rates over the next few quarters.
FY15 Sensex EPS saw a downgrade of 3%. We now expect the FY15 EPS to grow by 16.4% to 1,490. While
our FY14 earnings now project a moderate growth of 7%, the rebound in FY15 is led by few stocks: ONGC
(assuming the gas price benefits), SBI (estimating credit cost to peak in FY14), Tata Motors (lower losses
in standalone business). Unless growth shows signs of pick-up in 2HFY14, these estimates are likely to
see further downgrades.
SBI (-21%), Coal India (-7%) and JSPL (-27%) are the biggest negative contributors to FY14 earnings
revision. Bajaj Auto, Sun Pharma saw an upgrade of 9% in FY14 EPS.
The Sensex EPS growth CAGR since FY08 has remained at 7% and FY14 is also projected at similar rates.
These are well below the long-term growth rates of 15% for Corporate India.
August 2013
30

Earnings growth in FY14 down to 7%
EARNINGS GROWTH IN FY14 DOWN TO 7%
TREND IN FY14E SENSEX EPS REVISION
TREND IN FY15E SENSEX EPS REVISION
August 2013
31

Growth contributors: SBI, BHEL impact growth in FY14
Stock-wise contribution to growth in FY14E Sensex EPS (INR)
Stock-wise contribution to growth in FY15E Sensex EPS (INR)
August 2013
32

MOSL Universe’ EPS Upgrade /
Downgrade
August 2013
33

MOSL Universe’ EPS Upgrade /
Downgrade
August 2013
34

MOSL Universe’ EPS Upgrade /
Downgrade
August 2013
35

Markets and Valuations
August 2013
36

Markets Performance
2013 YTD: Indian markets are underperforming, post a strong 2012 outperformance
World Indices Performance CY13 YTD (%) – Local Currency
World Indices Performance CY13 YTD (%) – USD
August 2013
37

Sectoral Performance
:
Technology, Telecom
,
Consumer are outperformers
Sectoral Performance for CY13 YTD (%)
Sectoral Performance from Dec-10 till-date (%)
August 2013
38

Sensex Performance: Sun / TCS performs; Cyclical underperform
Sensex Best and Worst Stock Performance CY13 YTD (%)
August 2013
39

Fund Flows: FIIs remain big buyers; DIIs remain big sellers
Fund flows
Compared to CY12 net FII inflow of USD24.5b, the YTD
CY13 FII has net inflow of USD12.6. This is post the
selling flows since June 2013.
Selling intensity of DIIs have been rising with a net
outflow of USD7.8bn, post an outflow of USD10.9b in
2012.
Fund flow into Indian markets
Monthly Net FII Flows(USD b)
Monthly Net DII Flows(USD b)
August 2013
40

Markets valuations below historical averages
Sensex P/E (x)
Sensex P/B (x)
Sensex RoE (%)
Market Cap to GDP (%)
August 2013
41

Sector valuations
Auto Sector EV/EBIDTA (x)
PSU Banks P/B (x)
Capital Goods Sector P/B (x)
Private Banks P/B relative to Sensex P/B (%)
August 2013
42

Sector valuations
Consumer Sector P/E relative to Sensex P/E (%)
Technology Sector P/E (x)
Metals Sector P/B relative to Sensex P/B (%)
Media Sector P/E (x)
August 2013
43

Sector valuations
Oil & Gas Sector P/B relative to Sensex P/B (%)
Health Care Sector P/E(x)
Telecom Sector EV/EBIDTA (x)
Utilities Sector P/B (x)
August 2013
44

Sector Snapshots
August 2013
45

Positive/Negative surprises and Guidance highlights by sector
AUTO
Positive / Negative surprises
Bajaj Auto:
Operating performance significantly above estimates on favourable Fx, which were retained (over 54/USD).
Hero MotoCorp:
Strong operating performance with EBITDA margin of 11.1% (est 10%) on favorable Fx and lower other exp.
TATA Motors:
JLR delivered strong operating performance led by richer mix, Fx benefits. S/A business continues to disappoint.
Maruti Suzuki:
Above estimate operating performance driven by favorable Fx, however higher tax restricted PAT growth.
Eicher Motors:
Royal Enfield (RE) margins touched new highs. VECV also reported healthy operating margin amidst tough environment.
M&M:
Operating performance was below estimate on lower realizations. Auto PBIT margins declined 120bp QoQ to 11.2%
Tata Motors:
JLR demand & margin outlook positive led by product actions. India business outlook remains challenging.
Hero Moto:
Maintained 7-8% FY14 industry growth guidance on good monsoons, over 7-8 product actions planned for FY14
M&M:
Tractor growth guidance raised to 10-12% (from 6-8%), Auto outlook remains weak with no new launches over next 18-24m.
MSIL:
Maintained industry growth guidance of 5-6% but discounts to increase further, JPY/USD exposure for direct imports & royalty
hedged for remainder FY14 at 98-100 (94 in 1Q) but unhedged for vendors imports and entire INR/USD exposure, localization on track.
Bajaj Auto:
Domestic 2W outlook weak but expects demand pick-up during 2H on good monsoons, Fx benefit over INR54/USD to be
retained (70% of balance FY14 exposure hedged at 55-66 band), 2W exports stabilizing with recovery expected, outlook on 3Ws positive.
Eicher Motors:
RE guidance maintained at 175k/250k units for CY13/CY14, Volvo engine project starts, new CV range launch by CY13-end.
Guidance highlights
CAPITAL GOODS
Positive / Negative surprises
BHEL’s
1QFY14 performance was significantly below estimates with revenues at INR63.5b (down 24% YoY) and EBIDTA margins at 6.1%
(down 810bps). Gross order inflow was just INR14.7b (power sector INR8.2b, Industry INR6.3b, international sector INR220m). BHEL has
also cancelled an order worth INR12b from Iraq which had remained stagnant for last 2 years.
For
Crompton Greaves,
the key positive has been the standalone results (with revenue growth of 9.7% and EPS of INR1.9/sh), while the
disappointment continues to be the overseas subsidiaries (just managed EBIDTA breakeven, resulting in PAT loss of INR666m, vs est of loss
of INR248m).
August 2013
46

Positive/Negative surprises and Guidance highlights by sector
CAPITAL GOODS (contd)
Positive / Negative surprises
KKC’s
power generation business in India witnessed revenue decline of 25% YoY in 1QFY14.
HAVL’s
reported revenue growth at just 1.8% YoY; adjusted for the 15% revenue decline in industrial cables business, even the consumer
centric business revenue growth at 7% YoY is significantly lower than estimates.
TMX
reported robust order inflow of INR21.2b, supported by INR13.5b order inflow from Reliance. Excluding this, domestic order inflow at
just INR5.5b, vs run rate of INR9-10b/qtr in first 3 quarters of FY13.
Guidance highlights
LT’s
has maintained its guidance for FY14 (order intake to grow 20%, revenue to grow 15%, and E&C EBITDA margin to be maintained).
KKC
has cut FY14 revenue guidance and now expects flat revenue in FY14 (v/s 10% growth earlier). Domestic business is expected to be flat
to +5%, v/s earlier expectations of 10-15% growth, while exports are expected to decline by ~5% (v/s earlier expectations of 3-5% growth).
Crompton
expects consolidated revenues to increase 8-10% in FY14. Belgium and Hungary are expected to improve profitability; while in
Canada, the losses will continue as existing order book gets executed over the next 10 months and the effort is to improve the operational
efficiency. Margins on incremental orders are better than average order book : in India, higher by 100bps and for overseas business by 10%.
For FY14,
BHEL
expects revenues to be flat YoY (vs our estimate of 19% decline).
In
HAVL,
standalone revenue is expected to grow at 9-10% v/s earlier expectation of 14-15% growth. Consumer business growth is expected
at 12-14% v/s earlier expectations of 17-18%. Switchgear and consumer durables are expected to report 14-15% growth, while lighting
business should report 5% growth (as ~30% of the business is professional luminaries, which was impacted by weak industrial and
commercial demand).
CEMENT
Positive / Negative surprises
Despite pricing pressure in most regions, the QoQ realizations trend for large caps (ACC, ACEM and Ultratech) and northern players surprised
positively , partially attributable to production discipline.
Better realizations led profitability beating our estimates despite moderate negative surprise in cost. EBITDA/ton stood at INR804/ton (v/s
est of INR782/ton).
Strong upswing in AP prices in later part of 1QFY14 has not been reflected in realizations of southern players due to steep weakness in April
and May.
47
August 2013

Positive/Negative surprises and Guidance highlights by sector
CEMENT (contd..)
Guidance highlights
UltraTech
has indicated for ~6% volume growth v/s earlier guidance of 8%. Most management in their commentary have highlighted weak
near-term outlook, and hence downgraded growth expectations. However, it expects margins to remain under pressure due to adverse
demand-supply equilibrium and cost pressures.
CONSUMER
Positive / Negative surprises
HUL
met expectations while
ITC’s
sales were below expectations. Margin expansion in HUL & ITC was ahead of expectations. We
downgraded HUL & ITC to Sell and Neutral, respectively.
APNT
reported a strong double digit volume growth in domestic decorative paints. However EBITDA margins and PAT declined
Britannia’s
margin expansion of 300bps was a positive surprise. Profit doubled, well ahead of expectations..
Marico’s
volume growth and margins were above expectations with highest ever EBITDA margins. Stock upgraded to BUY.
Nestle’s
head-line numbers met expectations
Colgate’s
volume growth was above expectations but profits disappointed due to higher adspends.
GCPL’s
margins disappointed yet again and PAT /EBITDA was ~20% below estimates. However topline was strong.
Pidilite’s
margins were ahead of expectations. However sales were 6% below estimates.
UNSP
disappointed on volumes and margin fronts.
Radico’s
numbers were ahead of expectations after many quarters of below expectations results.
Guidance highlights
HUL indicated continued challenges in discretionary premium personal care and foods consumption. Media inflation is a possibility for all
FMCG companies.
Dabur guided for 8-10% volume growth band with 100bps margin expansion.
Marico guided for revival of volume growth in Saffola and margin expansion in international business.
GCPL guided for continued strong revenue momentum and potential tapering in ad-spends ahead.
August 2013
48

Positive/Negative surprises and Guidance highlights by sector
FINANCIALS
Positive / Negative surprises
SBIN
highest every quarterly addition of INR139b in terms of gross slippages was a negative surprise. NIM was stable QoQ at 3.2% in-line
with expectation, however muted fee income growth and higher opex on account of employee expense (18% above estimate) led to pressure
on core PPP. Net addition to restructured loan of just INR7.4b and strong SA deposit growth of 5% QoQ were positives in otherwise weak
quarter.
AXSB
surprised positively on margins (+16bp QoQ v/s expectation of stable NIMs); strong traction in SA Deposits and average daily CASA ratio
improved to 39% v/s 36% in FY13. Gross stress addition of INR13.7b marginally above guidance.
PNB’s
core operations remained healthy with stable NIMs of 3.5% and healthy fee income growth. As a strategy bank continued to tread on a
consolidation path. While net slippages increased significantly to INR24.2b was in-line with expectation and was driven by one large account
of INR16.6b. Higher trading gains during the quarter led to PAT beat by 15%.
FB
lower than expected NIM and loan growth. While PPP was in-line with estimate sharp rise in provisions on account of incremental stress
addition and provision on one large quasi-government account led to PAT being 50% below estimate
OBC’s
was one of the best performing bank during the quarter with NIM improvement of 10bp QoQ (v/s expectation of flat NIM) and
containment of stressed assets. Strong trading gains was partially utilized to maintain PCR and create buffer by creating higher tax provisions.
BoB
core operation and asset quality performance was in-line with expectation, higher trading gains led to PAT beat.
UNBK
and
CBK
disappointed on both NIMs and asset quality.
REC:
(1) NIMs stood at 4.96% highest ever boosted by increase in yields (2) Asset quality was stable QoQ with GNPAs and NNPAs remaining
flat at 0.37% and 0.29%; However during the quarter konaseema slipped to doubtful category; REC made provisioning of INR232m towards
the same (3) Loan growth remained healthy at +24% to INR1.32t.
SHTF:
(1) AUM grew 25% YoY and 5.7% QoQ at INR525b, whereas disbursements for the quarter stood at INR79b up 48% YoY and 3% QoQ.
(2) Strong disbursement and AUM growth over the last three quarter in an uncertain environment is concerning. (3) NIMs were down 40bp
QoQ (cal) to 7.05led by pressure on lending yields.
August 2013
49

Positive/Negative surprises and Guidance highlights by sector
FINANCIALS
Guidance highlights for FY14
SBIN:
(1) Domestic NIM guidance revised lower to 3.5-3.6% v/s ~3.7% earlier, (2) Loan growth to be driven by higher re-financing
opportunity, working capital demand and retail financing. For FY14, loan growth of 20-22% and deposit growth of 14-15% (3) Restructuring
pipeline is at INR100b and (4) to provide INR6b per quarter for rest of FY14 on account of change in assumption for mortality rate (pension
obligation).
ICICIBC:
(1) 10bp improvement in NIM (FY13 NIM at 3.1%), (2) Fee income growth to be 10%+ v/s 3% in FY13, (3) C/I ratio to be contained
~40%, (4) Credit cost of 75bp, (4) Domestic loan growth to be 2-3% above industry average.
AXSB:
Loan growth to be 1.2-1.25x faster than industry growth rate, (2) cost to income ratio to contained within 45%, and (3) Gross stress
addition of INR50b.
OBC:
(1) NIM of 2.85% (v/s 2.9% in 1QFY14 and 2.8% in FY13), (2) Gross slippages to be contained within the range of INR7.5-8b (3)
Addition of 120-150 branches and (4) Balance sheet growth not to be a focus area – expect loan growth to largely in-line with industry
average.
BOB:
(1) Loan and deposit growth expected to be 2-3% higher than the industry average, (2) domestic NIM of 3% and overseas NIM of 1.5%
(1.32% in 1QFY14) by 4QFY14 and (3) slippages to be contained at the current levels for the next quarter and expected to improve
thereafter.
BOI:
(1) domestic NIM of 3.15% and international NIM of 1.15%, (2) CASA ratio of 34% and (3) GNPAs and NNPAs percentage of 2.95% and
1.9% respectively. For 2QFY14: slippages expected to be INR15b and restructuring pipeline of INR10b.
August 2013
50

Positive/Negative surprises and Guidance highlights by sector
HEALTHCARE
Positive / Negative surprises
Cipla
reported better than expected numbers aided by one-time licensing income from Meda for Dymista.
Despite slower topline growth,
Divi’s
reported better than expected EBITDA margins.
IPCA Lab’s
surprised with better than expected growth in Europe, Africa and APAC; upside from Indore facility ramp-up still pending.
Dr. Reddy’s
lower than expected operational performance impacted by slow growth in Russia/CIS and PSAI segment.
Lupin
witnessed slower than expected sales/EBITDA growth due to slowdown in India, Japan and emerging markets.
Cadila’s
EBITDA too was below estimates as the fixed overheads continue to impact profitability, pending new launches in US & Brazil.
GSK Pharma’s
performance was impacted by supply chain related issues and pricing policy; no respite expected in the near-term.
Guidance highlights - Strong guidance & aspirations
Cipla
guided for double digit sales growth in FY14 and indicated that margins would be under pressure due to high R&D and staff costs.
Divi’s
maintains its topline growth guidance to 15% for FY14 and indicated that power costs may subsidie going forward.
Glenmark
guided for 18-20% growth in US generics and Indian formulations in FY14; EBITDA expected to grow 21% to INR12.25b
Lupin
targets USD5b revenue over next five years with implied CAGR of 25%
Dr. Reddy’s
did not guide for FY14 due to uncertainty in FDA approvals; expects healthy growth in key businesses
Sun Pharma
maintained its sales growth guidance of 18-20% for FY14
EBITDA Margins
–Companies like Lupin, Glenmark, Cadila, IPCA are targeting a gradual improvement in margins over the next 2 years
MEDIA
Positive / Negative surprises
Zee Entertainment and DB Corp surprised positively for third consecutive quarter; Jagran posted strong numbers after several quarters of
muted performance.
TV disappointed for third consecutive quarter
Guidance highlights
Zee expects ad growth to be in line with the industry and subscription revenue growth of 15-16%.
Print companies indicated that strong ad recovery is sustainable and also expect to benefit from higher government spending in the regional
markets due to upcoming elections.
August 2013
51

Positive/Negative surprises and Guidance highlights by sector
METALS
Positive / Negative surprises
NMDC
surprised positively due to higher iron ore realization on account of better than expected product mix (Lumps/Fine).
JSW
surprised positively due to reduction in operating cost despite merger of low margin Dolvi unit and spinning off of VAPs.
Hindalco
surprised positively as standalone operations benefitted from significant decline in Al CoP. Novelis reported weak numbers.
JSPL
surprised negatively due to lower steel and pellet realizations. Contributions from overseas subsidiaries were negative.
Nalco
surprised negatively due to disruption in coal supply and lower Alumina sales volumes.
SAIL
surprised negatively due to higher operating cost. Power & fuel, employee and other expenditures offset lower raw material cost.
Guidance highlights
HZL:
FY14 guidance for mine production is 1m ton while Saleable silver (ex captive use) is 360 tons.
HNDL:
Novelis is planning to spend another USD700-750m in FY14 (USD775m in FY13. First metal has been tapped at Mahan smelter under
trial production. Utkal Alumina too has started production.
TATA:
Tata Steel India continues to maintain volume guidance of 1m tons additional volumes in FY14.
JSW:
Production ramp up in 2HFY14 in order to achieve 11.55mt steel sales in FY14.
OIL & GAS
Positive / Negative surprises
Reliance Industries’ earnings were in-line. GRM’s stood at USD 8.4/bbl and QoQ flat Petchem margins at 8.6%. KG-D6 gas decline continued
and averaged 14.8mmscmd (19mmscmd in 4QFY13).
Except for BPCL, OMC’s in red for 1QFY14 led by (a) weak GRM’s; (b) forex losses and (c) sharing of net under recoveries of ~9% 1QFY14.
ONGC adjusted EBITDA (adj. for employee cost provision) was in-line, while OINL’s profit was impacted by lower oil sales to Numaligarh
refinery due to fire incident.
Decline in the gas availability led by fall in domestic gas production impacted Gail India more in LPG business, as it had to use high cost LNG.
LNG imports impacted due to high cost, but utilization still continued at >100% for PLNG. GSPL earnings were protected due to take-or-pay
contracts.
August 2013
52

Positive/Negative surprises and Guidance highlights by sector
OIL & GAS (contd)
Guidance highlights
Petronet LNG expects Kochi terminal commissioning by Aug-13 (v/s Jul-13 earlier).
ONGC guides from production increase from 2HFY14 with standalone oil production at 25mmt in FY15 v/s 22.6mmt in FY13.
Cairn India maintained guidance for FY14 exit rate at 200-215kbpd v/s ~175kbpd now
Key Actionable
Our positive stance on the Oil PSU’s (ONGC/OINL/BPCL) is driven by ongoing diesel reforms which is likely to reduce the gross under
recoveries by ~40% by FY15. We remain positive on the same and have modeled INR0.45/ltr diesel price hike.
We understand that ONGC/OINL’s FY13 subsidy is computed by multiplying the per barrel subsidy of USD56/bbl with the oil production
volume, while GAIL’s subsidy has been ad-hoc at flat INR7b for all the four quarters. Due to lack of clarity, we maintain upstream sharing at
INR600b for FY14/15 and rest to be share by government, resulting in nil sharing by OMC’s.
Also we model domestic gas price at USD8.2/mmbtu v/s USD4.2/mmbtu now to factor in the recently announced approval of Rangarajan
committee formula for gas pricing applicable from April 01, 2014.
REAL ESTATE
Positive / Negative surprises
Prestige/Sobha, DLF/IBREL:
Continue to post strong sales and cash flow despite concerns over Bangalore market. On track to achieve 15-
20% growth in presales for FY14. Amidst weakness in broader demand, select duper luxury launches performed well (Crest and Camellias for
DLF and Sky Forest for IBREL)
Godrej Properties:
Monetization uptick in BKC commercial.
Negative surprises
Unitech, Oberoi:
Sharp decline in presales velocity impacting cash flows, yet delay in new launches
August 2013
53

Positive/Negative surprises and Guidance highlights by sector
RETAIL
Positive / Negative surprises
Titan ‘s
jewellery performance was ahead of expectations. Return of gold on lease scheme for RM procurement was key positive.
Jubilant Foodworks
posted 16 quarter low same store growth of 6.3%, a key disappointment. Downgraded the stock to SELL.
Shoppers Stop’s
same store growth maintained the momentum however margins were below expectations.
Outlook
All the retailers guided for caution in ensuing quarters given the subdued macro environment and weak consumer confidence.
TELECOM
Positive / Negative surprises
Wireless RPM surprised positively with QoQ growth of 4-6%.
Bharti Africa EBITDA declined 0.5% QoQ to USD283m and was significantly below estimate.
Guidance highlights
RPM likely to remain stable in 2QFY14 but expected to improve further in 2HFY14.
Bharti’s FY14 capex guidance unchanged at USD2.2-2.3b which includes USD 0.6b in Africa.
Idea’s capex guidance for FY14 unchanged at INR35b.
TECHNOLOGY
Positive / Negative surprises
Infosys’
beat on revenues and yet another quarter of healthy deal signings in outsourcing bode well for performance going forward.
Wipro’s
guidance for 2Q and improvement in deal closures and win rates suggest the growth may finally be reviving.
Cognizant’s
guidance upgrade on the back of discretionary spend revival bodes well for the industry at large.
Tech Mahindra’s broad-based revenue growth, 3 large deals and commentary on margins was positive
Deal signings at HCL Tech was a positive surprise.
August 2013
54

Positive/Negative surprises and Guidance highlights by sector
TECHNOLOGY (contd)
Guidance highlights
Cognizant’s
guidance of “at least” 19% revenue growth in CY13 was a positive, up from “at least” 17% earlier. The upgrade was driven by
better growth than anticipated in discretionary segments
Infosys
retained its full year USD revenue growth guidance band at 6-10% despite healthy revenue beat during the quarter, which we believe
is conservative. The company will have to de-grow to meet the lower end of the guided band going forward.
Wipro
guided for 2QFY14 revenues of USD1,620m-USD1,650m, growth of 2% to +3.9% QoQ, ahead of our expectation of +1-3% QoQ
growth. We were earlier modeling 2.0% QoQ growth in IT Services revenues in 1QFY14, now revised upwards to 3% QoQ.
UTILITIES
Positive / Negative surprises
Powergrid’s
capitalization stood at INR29.5b, lower than estimate and lower YoY (INR41b). PGCIL board has approved FPO for 15% to meet
the equity requirement.
Coal India,
E-auction realization surprised negatively and declined to INR2,140/unit (down INR168/ton QoQ). Washed coal realization too
declined sizably.
Tata Power
coal realisation decline 21% QoQ due to decline in the international coal indexes. Maithon 1
st
time reported considerable profit
PTC India
PTC has converted its tolling arrangement for 350MW in to long term PPA where it will earn 2% margin till INR4.6/kwh and above
it share 30% of the difference. The margin would thus work out to INR0.15/unit, vs earlier margin of INR0.50-0.60/unit
Guidance highlights
NTPC
re-iterated capacity addition target of 1.8GW in FY14. NTPC also said that they are looking for the distressed asset especially based
on the domestic equipments.
Coal India:
said that it would be able to report YoY growth in the profits based on higher volume.
Powergrid
increased its 12
th
plan capex target of INR1.1t+. On capitalisation front, management do not give any guidance.
JSW energy:
JSW has increased its merchant realisation guidance to INR4.25-4.50/kwh (v/s previous guidance of INR4.00-4.25/kwh).
NHPC
will add 937MW of capacity in FY14 and 164GW in FY15. Growth likely to taper off as Kishan Ganga (330MW) project is estimated
only in 4QFY17E. No clarity on Parbat II and Subhanshri lower.
PTC:
Trading volumes of ~ 32b in FY14 and 20% growth thereon in FY15E with increasing quantum of long term volumes/PPAs.
August 2013
55

AUTO:
Favorable Fx drive margins; signs of demand recovery for 2Ws & tractors
Summary
Volume remains weak, tractors though recovering:
Auto volumes
declined 2.8% YoY. CVs and PVs continue to remain most impacted
with 10%/7.5% YoY drop. While 2Ws registered marginal decline of
2.4%, 3Ws grew on low base. Tractor volumes grew by 26% YoY.
EBITDA margins for Auto universe (ex JLR) improve 40bp QoQ led
by favorable Fx:
EBITDA margins improved 40bp QoQ (flat YoY) led
by favorable Fx movement (INR/USD for Bajaj, JPY/USD for
Hero, Maruti). JLR margins improves 200bp YoY (-40bp QoQ) to
16.5% on richer mix and favorable Fx. M&M reported QoQ margin
drop for auto of 120bp but for FES improved by 70bp.
FY14E/15E EPS change: Upgrade for Bajaj, HMCL & Eicher
Motors, downgrade for M&M and ALL:
We upgrade our FY14E/15E
EPS for Bajaj by 9.3%/6.1% on Fx benefits and Hero by 3.4%/1.9%
and Eicher Motors by 10%/4.8% on better margins. Downgrade our
estimates for M&M by 8.3%/6.8% on weak auto outlook.
Volume outlook looking healthy for 2Ws and tractors, while PVs
and CVs no signs of revival yet:
On expectation of good
monsoon, demand outlook for 2Ws and tractors remains positive.
However, in view of slower economic growth and weakness in
business and consumer sentiments, CVs and PVs demand continues
to remain weak with higher discounting pressure.
Top picks:
Prefer
Hero Moto
(expect demand recovery on good
monsoon, ramp-up in exports) and
TTMT
(strong JLR performance
led by product actions, India business could witness cyclical
recovery in 15). Within mid-caps, we prefer
Eicher Motors
(several
projects coming on stream in CY13-14).
HMCL reports 150bp QoQ margin rise on favorable Fx, lower ad spends
JLR margins strong at 16.5% with rich mix and favorable Fx
August 2013
56

CAPITAL GOODS: Order inflows constraint…Growth signals fade
Summary
Operating performance a mixed bag
1QFY14
performance for the capital goods sector was meaningfully below
estimates: Revenues declined 4% YoY, Margins at 7.3% and is down 320bps
YoY and Net profit at INR17.4b (down 31% YoY). Margins have been
particularly impacted by the poor operating leverage and currency
volatility, while the RM costs declined 220bps YoY to 66%. Ordering
environment also remained constrained with coverage companies
(excluding L&T) reporting a 28% decline in intake.
We do believe that the execution risks in domestic business have increased
post the recent RBI actions and our expectations of another year of 5-5.5%
GDP growth, and we would be watchful of the trends.
L&T’s
1QFY14 performance was in-line, with revenues at INR126b (+ 5%
YoY, vs est of +5.6%) and adj EBIDTA margins at 9.4% (down 100bps YoY).
Importantly, margin impact was given losses of ~INR1b in shipbuilding,
while E&C EBIDTA margins were largely resilient at 10.7% (vs 10.9% YoY).
BHEL’s
margins declined steeply given poor fixed cost absorption with staff
costs up 630 bps and SGA up 320 bps, as revenues declined 24% YoY.
Reported profits were supported by INR3.2b of forex gains on receivables.
KKC’s
revenues declined 17%, largely led by muted powergen demand
(down 25% YoY). Margins were stable QoQ at 16.7%.
HAVL’s
domestic operations were impacted by base effect and slowdown in
consumption spend. Sylvania EBIDTA margins declined by 3.9% and
impacted by muted demand in Europe and currency volatility in LatAm.
ABB’s
2QCY13 operational perf was below estimates, largely due to poor
execution (down 8% YoY); while operational EBIDTA margins at 6.3% (up
170bps) are encouraging, particularly given the poor operating leverage.
Order book impacted; BTB down to 2.2x
Revenue growth moderating, decline in margins
August 2013
57

CEMENT: Flattish realizations, in-line volume, and moderate cost push
Summary
Volumes grew 0.7% YoY, in-line:
MOSL Cement Universe volumes
grew 0.7% YoY (-6%QoQ v/s est 1.1%YoY) in 1QFY14. Demand
recovery is not yet visible, with both organized housing and
infrastructure showing limited signs of recovery.
Realizations flattish QoQ:
Cement realizations saw flattish trend
QoQ (-INR163/ton YoY) v/s our est of INR62/ton decline. Large caps
and north players posted strong resilience with INR0-90/ton QoQ
uptick, while strong upswing in AP prices in later part of 1QFY14 has
not been reflected in realizations of southern players , which have
declined INR30-160/ton QoQ (ICEM, MCEM and Dalmia).
Moderate cost uptick hurts EBITDA:
Cost remains flattish to
moderately higher in 1QFY14 with marginal push in energy cost
and RM cost coupled with negative operating leverage. EBITDA/ton
stood at INR804/ton (v/s est of INR782/ton) – down by INR31/ton
QoQ (-INR354/ton YoY). Profitability beat estimate on better
realizations. Prism (-INR356 QoQ, INR496/ton YoY), Dalmia (-
INR148 QoQ, INR552/ton YoY) and Madras (-INR520/ton YoY, -
INR25/ton QoQ) witnessed sharpest fall, while Birla Corp (-
INR71/ton QoQ) was most resilient.
Monsoon weakness underway, recovery hope a key in 2HFY14:
Cement prices are seeing softening in onset of monsoon. Recovery
in demand would be most critical for sustenance of pricings and
profitability. We estimate realization improvement of INR(0)/14 per
bag in FY14/15 and EBITDA improvement of INR(5)/10 per bag.
Top picks:
Prefer Ultratech/Grasim and Shree Cement, whereas in
mid-caps we prefer Birla Corp, Madras Cement and Dalmia Bharat.
Volume growth of ~4% for MOSL Cement Universe
Profitability marginally down QoQ on moderate cost push
August 2013

CONSUMER: Volume deceleration manifests itself
Summary
1QFY14 Performance Snapshot
Marginally below estimates:
Consumer coverage universe reported 10.8%
revenue growth (est 13.1%), 12.8% EBITDA growth (est 16.5%) and 12%
Adjusted PAT growth (est 11.6%).
Volume growth deceleration:
While volume growth has not collapsed,
there is clear deceleration across the board, reflecting the lagged impact of
macro slowdown in staples. Dabur, Marico & APNT stood out.
Gross margin expansion;
10 out of 13 companies in our universe reported
gross margin expansion. However, we see challenges ahead given the
recent currency depreciation as well as uptick in selective RM costs. Some
companies have started price cuts to revive volumes.
Ad-spends remain elevated:
Brand investments continued to remain
elevated given the threat to volume growth. Thus benefits from gross
margin expansion. Were partially ploughed back in ad spends.
EBITDA margins mix:
Half of our coverage universe reported operating
margins expansion. However, rise in other expenses due to inflation in
power, freight and diesel costs impacted the universe. Britannia, ITC,
Marico & Pidilite reported margin expansion while APNT, UNSP, GCPL &
GSK reported margin contraction.
Top picks: ITC, Marico and Britannia
in the sector. We downgraded ITC
from Buy to Neutral, HUL from Neutral to Sell and upgraded Marico from
Neutral to Buy . In the large-caps, our preference stays with ITC given the
earnings visibility and lack of headwinds faced by other consumer
companies (slowdown in volume growth, RM volatility, rising competitive
intensity). We believe Marico’s underperformance is behind and recovery in
international margins coupled with steady volume growth underscores our
BUY thesis. We continue to like Britannia as we see our thesis of efficiency
led margin expansion coupled with portfolio premiumisation playing out.
Volume growth deceleration in 1QFY14
August 2013
59

FINANCIALS: PSBs: Qtr of earnings downgrade; Private: Strong Performance
PSBs: Net slippages up 3x QoQ; private banks manage well:
Net slippage
ratio for PSBs rose significantly to 3.2% v/s 1.1% in 4QFY13 and average of
2.1% for FY12/13. SBIN (INR109b) reported highest ever quarterly addition.
PNB (INR24.2b v/s INR3.9b in 2HFY13) and CBK (INR13.3b v/s INR16.6b in
2HFY13) were impacted due to slippage in one large corporate account.
For, BoB net slippages were largely in-line with exp., and OBC’s performance
was better than expected. Pvt. Banks performance remained strong (GNPA
up 5% QoQ), though pressure increased in some sub-segments viz. CV etc.
Pace of fresh restructuring declines:
In 1QFY14, fresh restructuring done by
PSBs declined to 0.5% of loans (INR146b) v/s 1% (INR273b) in 4QFY13.
However, net addition was at INR71b v/s INR82b (4QFY13 banks benefitted
as loans moved out of restructured pool in-line with RBI notification).
PAT in-line; weak core income and outlook drive earnings downgrade for
PSBs:
While aggregate PAT of PSBs was in-line with exp. it was helped by
strong net investment gains (formed 22% of PBT v/s 5% in 4QFY13) which
partially compensated for weak core PPP (stable NIMs, muted loan and fee
income growth) and higher credit cost. Recent liquidity tightening and macro-
economic uncertainty have raised concerns of extended asset quality
pressure and MTM losses. Hence, on back of weak core perf. and near term
challenges we downgrade our earnings for PSBs by 18/13% for FY14/15.
Earning growth intact for private banks:
Stable/improving NIMs, higher
trading gains and healthy asset quality performance helped private banks to
report PAT growth of 25%+. FB reported PAT was significantly below
est., driven by weak NIMs and higher provisions. We expect healthy earnings
trajectory to continue though NIMs may come under pressure in 2CY13.
Valuation & view:
Near term growth and profitability outlook remains
subdued for PSBs however, valuations factor negatives and most banks are
trading at its lower end of LPA valuations. We prefer banks with strong
liability franchise and capitalization as they would be able to manage near
term risk better. Healthy core operations and returns ratio, top mgmt
continuity etc will keep premium valuation of private banks in-tact.
Top picks:
PSBs-
SBIN, PNB and OBC
Private Banks
- ICICIBC.
NBFC:
HDFC
August 2013
60

FINANCIALS: PSBs: Qtr of earnings downgrade; Private: Strong Performance
Loan growth moderates , private banks growth remains healthy (YoY, %)
NIMs: PSBs Under pressure; Private : Stable / Improving (%)
Sharp rise in net slippages – SBIN net slippages ratio highest ever
Gross addition to restructured pool decline QoQ but still elevated (INR b)
August 2013
61

HEALTHCARE: DPCO impacts India sales; US growth momentum remains strong
Summary
Mixed bag:
Our coverage universe reported an EBITDA miss of
7% for 1QFY14. US & Europe were key growth drivers during the
quarter, partly led by favorable currency. As expected, growth in
the India formulations biz had slowed down for most
companies, impacted by the implementation of the new pricing
policy. Performance for Cadila, Healthcare, Dr. Reddy’s
, Glenmark, Lupin and Torrent was also impacted by slow growth
in emerging markets particularly Brazil and Russia
EBITDA outperformers:
Cipla, IPCA Labs
In-line
EBITDA:
Biocon,
Labs, Glenmark, Ranbaxy, Sanofi, Sun Pharma, Torrent
Divi’s
EBITDA disappointment:
Cadila Healthcare, Dishman, Dr.
Reddy’s, GSK Pharma, Jubilant, Lupin
Strong guidance & aspirations:
Cipla
guided for double digit
sales growth in FY14, margins likely to be under pressure due to
high R&D and staff costs.
Divi’s
maintained its topline growth
guidance of 15% for FY14 and building on the FY13 operating
margins.
Glenmark
guided for 18-20% growth in US generics and
Indian formulations in FY14 and 21% growth in EBITDA.
Lupin
targets USD5b topline over next five years; implied CAGR of 25%.
Sun Pharma
maintained its sales growth guidance of 18-20% for
FY14.
Dr. Reddy’s
did not guide for FY14 due to uncertainty in
FDA approvals; expects healthy growth in key businesses. Some
companies like Lupin, Glenmark, Cadila, IPCA are targeting a
gradual improvement in
EBITDA margins
over the next 2 years
Top picks:
Dr Reddy’s, Sun Pharma, Lupin, Divi’s Labs, IPCA Labs
August 2013
62

MEDIA: Strong quarter for broadcasters as well as print
Summary
Media sector earnings up 31% YoY:
Aggregate PAT for our
media universe increased 31% YoY driven by 19%/16% YoY
2QFY11
2QFY10
1QFY11
revenue/EBITDA
3QFY10
growth.
4QFY10
All coverage companies except
Dish/Sun surprised positively with 10-40% earnings beat.
Advertising growth normalizing:
Ad growth was 19/12% for
Zee/Sun TV. Regional print companies posted strong ad growth
of 12-20% YoY confirming strong revival ahead of our earlier
expectations. HT English ad growth of 8% was broadly in-line
(on a low base).
Healthy subscription/circulation growth:
Zee/Sun TV reported
Jagran Prakashan
Deccan Chronicle
HT Media
16%/22% growth in subscription revenue while print universe
witnessed 15-17% YoY increase in circulation revenue. Dish TV’s
subscription revenue growth of 15% YoY was led by subscriber
growth of 11% and ARPU improvement of 4%.
Divergent trends in margins:
DB Corp reported significant
margin expansion of ~900 bps, while Zee/Jagran reported
margin improvement of 150-230 bps YoY. While Sun TV and HT
Media reported flat margins. Dish TV margin performance was
disappointing with a decline of ~900 bps.
Ad growth bottomed-out; focus on digitization:
Ad recovery
theme is playing out well for print companies. Digitization
remains a strong theme in broadcasting over medium-to-long
term even though short-term challenges continue as
‘addressability’ is yet to be fully achieved even in the phase I
markets.
Top-picks: Sun TV, DB Corp
1QFY14: Actual v/s estimates
YoY revenue growth (%)
* Like-to-like growth
Divergence in YoY EBITDA margin trend (%)
August 2013
63

METALS: Steel margins remain subdued. Aluminum CoP declining
Summary
TATA’s consolidated adjusted PAT increased 27% QoQ
to INR11.2b
due to significant tax credits in Europe relating to deferred taxes.
EBITDA declined 16% QoQ to INR36.9b on expected lines.
JSTL’s consolidated adjusted PAT at INR1.1b
was higher than our
estimate. Reported loss after tax of INR4b included INR8.6b on
account of a forex loss. Standalone EBITDA per ton remained
resilient at USD122/ton due to reduction in operating costs
despite merger of low margin Dolvi unit and spinning off of VAPs.
JSPL’s adj. consolidated PAT declined 27% YoY to INR6.9b
due to
(1) lower prices of steel and pellets, and (2) lower captive power
generation. Overseas subsidiaries made a negative contribution of
INR662m against a positive contribution of INR585m in 1QFY13,
resulting in sharper fall in consolidated PAT
NMDC’s adjusted PAT declined 9% QoQ to INR15.7b,
4% above
our estimate, due to better iron ore realization. Average iron ore
realization was marginally higher QoQ mainly due to improved
product mix despite prices cuts taken at the quarter’s start.
Sterlite adjusted PAT declined 41% QoQ to INR11.6b,
in-line with
our estimates. Reported PAT (after MI and asso) of INR9.37b
included forex loss of INR2.3b. Losses at VAL were higher at
INR2.6b due to impact of phase-2 interest cost, which is no longer
capitalized. This was largely offset by higher other income.
Hindalco adjusted PAT at INR4.7b (down 2% QoQ),
was higher
than our estimate driven by superior operating performance of the
Aluminum segment and higher other income. Novelis’ adjusted
EBITDA declined 16% YoY to USD218m due to lower volumes and
pricing pressure in the can business in North America.
JSW and NMDC surprised positively
Steel margins declined QoQ (INR/T)
Aluminium CoP declined (USD/T)
August 2013
64

OIL & GAS:
OMC’s share ~9% subsidy; RIL/Cairn in line performance; diesel reforms critical
Summary
BPCL reports profit v/s loss by HP/IOC led by superior GRM:
Of the
gross INR256b under recovery, upstream provided INR153b,
government INR80 and OMC’s had to share INR23b. While, forex and
product inventory losses dented profit, BPCL reported profit v/s loss by
HPCL and IOCL due to higher GRM.
Upstream - KG-D6 below 15mmscmd, Aishwariya ramp-up increases
Cairn’s Rajasthan production:
KG-D6 volume averaged 14.8mmscmd
(19 in 4QFY13), concerns remain on timelines of ramp up. Cairn’s
Rajasthan production averaged 173kbpd (169kbpd in 4QFY13).
Gas: Headwinds for incremental volume continue:
Declining KG-D6
volumes impacted Gail’s transmission and LPG business. PLNG offtake
impacted due to high LNG prices exacerbated by INR depreciation.
Despite volume decline, GSPL benefits from ship-or-pay contracts,
concerns on likely revision of contracts.
Refining – Crude inventory gain helps PSU’s:
Except HPCL, OMC’s GRM
benefited by inventory gains. RIL’s GRM of USD8.4/bbl were at
USD1.8/bbl premium to Singapore GRM.
Headline Petchem margins stabilize:
Polymer and polyester margins
seem to be stabilized. Expect margin increase for domestic producers
led by increase in customs duty from 5% to 7.5% from May 2013.
Valuation and view:
OMC’s and ONGC/OINL underperformed recently
led by newly emerged concerns like INR depreciation and uncertainty
on export/trade parity. However, we believe that correction is
overdone (stocks trading at 10 year low valuation) inspite of continued
reforms. Maintain Neutral on GAIL/GSPL due to headwinds on
incremental gas, situation augurs well for PLNG. RIL (Neutral) and Cairn
(Buy) are direct beneficiaries of INR/USD depreciation. To watch out for
news flow in BPCL’s E&P business and update on Cairn’s ongoing
exploration program.
1QFY14: Actual v/s Estimate
Singapore GRM at USD6.6/bbl; down 1% YoY and 24% QoQ
August 2013
65

OIL & GAS:
High price impact LNG imports; under recoveries up due to INR depreciation
RIL: KG-D6 volume decline, lower import demand
impact volumes (mmscmd)
RIL KG-D6
117
119
119
PLNG
116
110
GSPL
GAIL India
1 4 0
ONGC: YoY increase in D,D&A led by higher dry
well write offs (INRb)
Depletion
75
60
1 0 0
RIL: GRM at USD8.4/bbl; USD1.8/bbl premium to
Singapore (USD/bbl)
Premium/ (discount)
Singapore GRM
RIL
Depreciation
Dry Wells
Survey
Others
20
14
8
2
106
105
1 2 0
100
38
22
19
99
40
22
4 0
8 0
49
42
37
45
45
42
36
31
40
33
31
42
44
45
30
42
41
35
33
6 0
27
29
29
24
-4
15
15
2 0
0
0
1QFY12
3QFY12
1QFY13
3QFY13
1QFY14
1QFY12
1QFY13
1QFY14
FY08
FY09
FY10
FY11
FY12
FY13 FY14
Govt. subsidy helps OMC’s to limit losses in
1QFY14 (INRb)
HPCL
450
300
150
0
(150)
(300)
(450)
OMC’s debt reduce QoQ as government releases
prior-period subsidy dues (INRb)
HPCL
BPCL (SA)
IOC (SA.)
Model upstream share at INR600b in FY14/FY15
and nil for OMC’s
(INR b)
FY11
FY12
FY13 FY14E
Fx Rate (INR/USD)
45.6
47.9
54.5
57.5
Brent (USD/bbl)
86.3 114.5 110.6 105.0
Gross Under recoveries (INR b)
Auto Fuels
375
812
915
535
Domestic Fuels
405
573
696
687
Total
780 1,385 1,610 1,223
Sharing (INR b)
Oil Bonds/Cash
410
829 1,000
623
Upstream
303
552
600
600
OMC's sharing
67
-
10
-
Total
780 1,385 1,610 1,223
Sharing (%)
Government
53
60
62
51
Upstream
39
40
37
49
OMC's sharing
9
-
1
-
Total
100
100
100
100
FY15E
57.0
105.0
233
719
953
348
600
-
953
37
63
BPCL
IOC
Net sharing
800
473
301
93
67
295
114
105
388
161
168
242
228
267
213
252
250
495
578
302
298
809
717
202
300
238
325
FY09
FY10
FY11
FY12
FY13
FY14
-
100
August 2013
66

REAL ESTATE: Core operations (presales, collections) mixed bag and led by launches
Bangalore-duo, DLF and IBREL outperformed on presales:
Steady growth in 1QFY14 presales for Prestige and Sobha (led
by recent launches) partially allayed slowdown concern in
Bangalore market. Both players seem to be on track to achieve
strong FY14 guidance. Success in select super premium
projects resulted into robust operations for DLF (Crest,
Camellias) and IBREL (Sky Forest). For rest, presales were
driven by new launches only. Hence it weakened for Oberoi,
Unitech and JPIN (due to no major new launch), while
remained steady for GPL, MLIFE (few fresh offerings).
Leasing up QoQ:
Commercial leasing posted QoQ uptick as
evident in case of DLF (0.4msf v/s 0.2msf QoQ), Prestige
(0.16msf v/s 0.08msf), and IBREL (0.5msf v/s 0.1msf).
Presales trend percolate into collections and OCF:
Operating
cash flows (OCF) were mixed bag, as players with strong
operations posted steady growth (Prestige, Sobha, IBREL). It
weakened meaningfully for Unitech and JPIN. Benefits of
strong presales for DLF is likely to flow in 2Q onwards.
Ex-DLF leverage up:
Barring QIP led net debt reduction of
INR15b for DLF, most other developers witnessed moderate
uptick in leverage due to (a) weak OCF, or (b) OCF strong, but
higher construction or land commitments.
Management commentaries:
Amidst uncertain macro, focus is
restricted to streamlining cash flows with (1) higher launches
with strategic monetization mix, (2) select execution focus and
fast completion of CWIP and (3) de-leveraging.
Preferred picks:
Prestige, Oberoi, IBREL and Sobha (not rated).
DLF remains a bet hinges on improvement in operating
leverage and rate sensitive rally.
Quarterly presales trend: Bangalore-duo, DLF and IBREL are 1QFY14 outperformers
Collections run-rate (INR b)
DLF net debt trend
August 2013
67

RETAIL: SSS slows further; Jewellery benefits from price correction
Summary
1QFY14 performance snapshot
Sales in line; EBITDA & PAT below estimates –
Our coverage
universe sales were in-line with estimates with revenue growth of
36.2% (est 31.6%), EBITDA growth of 18.3% (est 30%) and Adjusted
PAT growth of 15.3% (est 27.3%). Higher than expected Jewellery
revenue growth in Titan resulted in sales beating our estimates.
SSS slowing:
While Jubilant posted 17 quarter low same store
growth of 6.3%,
Shoppers Stop maintained its momentum aided by
low base. Consumer sentiment has deteriorated and is increasingly
reflected in the rise in discounts/promotions/sale undertaken by
retailers across the board. We see clear headwinds to SSS growth
ahead.
Margins disappoint:
Operating margins bore the burnt of lower
revenue growth and inflation in overheads like rentals, power costs.
Titan jewellery margins was down 70bp YoY due to mix
deterioration in favor of plain gold after price correction in April.
Expansion plans on track:
Expansion plans remained on track– Titan
added 37k sqft of space during 1Q while JUBI opened 26 stores
Neutral on the sector; Titan is our top pick:
Titan remains our top
pick; as we believe return of Gold-on-Lease is a long term positive
for Titan’s balance sheet and expansion plans. We upgraded our
estimates by 7%. Jubilant’s weak same store growth is bringing the
cyclicality of the business model to the fore. Given this, we believe
current premium valuations are stretched and downgraded the
stock to SELL. We see further weakening in JUBI’s same store growth
performance as entrenched economic slowdown continues to
impact discretionary demand.
Operating margins decline for the universe
SSS improves for Titan but deteriorates further for JUBI
Expansion plans largely on track
Company
Q1FY12 Q2FY12 Q3FY12 Q4FY12 Q1FY13 Q2FY13 Q3FY13 Q4FY13 Q1FY14
Jubilant Foodworks
392 411 439 465 489 515 552 576
602
Shoppers Stop (dept)
41
43
49
51
52
55
55
55
60
Titan Industries
World of Titan
311 317 326 332 337 348 354 364
368
Tanishq
121 125 129 129 132 134 145 148
153
August 2013
68

TECHNOLOGY: Position of strength
Summary
1QFY14 Performance Snapshot
USD revenue - m
Act.
Est. % beat
3,165 3,150 0.50%
1,991 1,961 1.53%
1,588 1,590 -0.12%
1,228 1,223 0.41%
EBIT margin
Act.
Est. bp beat
27.0% 26.8%
+30
23.6% 23.5%
+10
18.2% 18.1%
+10
20.8% 20.6%
+20
PAT - INR b
Act.
Est. % beat
37.96
37.6 +0.97%
23.74
23.7 +0.18%
16.23 15.73 3.20%
11.97 11.49 4.20%
Positive surprises across the board:
Top-tier USD revenue growth
in 1QFY14 was either in line or above our estimates. Revenue
growth beat estimates the most at CTSH, followed by INFO, while
deal signings at HCLT were a positive surprise. TCS delivered
impressive volume growth, sustaining solidarity in performances.
Strong guidance across the board:
Wipro’s guidance of 2-4% QoQ
growth in 2Q was strong, as was CTSH’s upgrade in revenue
growth to ‘at least’ 19% , from at least 17% earlier. INFO retained
its guidance despite a healthy beat, which is believed to be on the
conservative side (the company will need to de-grow in 2H to
meet the lower end of its guidance).
Clearer signs of demand uptick and discretionary spending:
INFO’s 2 outperformances in the last 3 quarters were both
driven by discretionary segments, so was CTSH’s beat in 2Q
and upgrade in guidance. TCS and Wipro too alluded to
definite pick up in discretionary demand environment.
Midcaps – TECHM outshone peers:
TECHM’s organic revenue
growth and broad-based strength in demand (ex-BT) was a
key positive among midcaps.
Prefer HCLT and TECHM:
We see uptick in discretionary spends
benefit Infosys and Wipro, and deal signings-led visibility is the
maximum at HCL Tech. While our Neutral rating on TCS comes on
the back of steep valuations, we will be buyers in any opportunity
lent by correction. Among tier-II, we continue to prefer
TECHM, followed by PSYS and MTCL
TCS
Infosys
Wipro
HCL Tech
The usual suspects led growth once again (CTSH, TCS, HCLT)
9
6
3
0
-3
TCS
Infosys
Wipro
HCL Tech
Cognizant
Maximum earnings upgrades at INFO and HCLT
Change in
Estimates
TCS
Infosys
Wipro
HCL Tech
USD revenue (%)
FY14
FY15
0.7
1.6
2.7
3.8
0.9
0.9
1.5
2.2
EBIT margin (bp)
FY14
FY15
-5
-42
10
37
31
8
-4
26
EPS (%)
FY14
FY15
-0.1
0.3
2.3
4.9
1.3
0.1
3.1
6.6
August 2013

TELECOM: Strong RPM improvement as consolidation theme plays out
Double-digit QoQ EBITDA growth in domestic wireless driven by RPM
improvement and consequent operating leverage:
Strong RPM
expansion for GSM incumbents along with healthy traffic growth kicked
in operating leverage. Proforma EBITDA grew ~12% QoQ for Bharti
(India mobile) and ~20% for Idea (consolidated).
RPM up 4-6%; Traffic up 2-3% for GSM incumbents:
Pricing power
returned with RPM growing 4-6% QoQ for leading operators. Wireless
traffic grew 2-3% for Bharti/Idea/Vodafone, while it remained flat for
RCom. RPM is likely to remain stable in 2QFY14 post significant hike in
1QFY14 and weak seasonality which will drag volumes. We expect RPM
improvement to continue in 2HFY14.
Bharti-Africa business disappoints again:
Africa EBIDTA was 8% below
our estimate and declined 0.5% QoQ to USD283m (vs est of USD 308m)
on 5% QoQ revenue decline (11% QoQ traffic increase; 15% RPM
decline). EBITDA margin improved 100bp QoQ to 26.7%.
Idea’s RoE improves; aggressive bidding for spectrum/M&A key risk:
Adjusting for change in depreciation policy effective 1QFY14, Idea’s
annualized RoE improved from 7.4% in FY13 to ~16% in 1QFY14. Given
board approval for QIP, any aggressive bidding scenario for
spectrum/M&A would constitute a key risk to our positive stance.
Regulatory challenges to recede; likely to drive next leg of optimism:
We expect regulatory pressures to recede driven by a more
accommodating spectrum pricing stance from regulator and likely
policy clarity on M&A/spectrum sharing/spectrum trading. Recent TRAI
Chairman statements and consultation paper on spectrum valuation
and reserve price indicate a more rational approach which can reduce
the regulatory overhang.
Top-picks: Idea Cellular, Bharti Airtel
QoQ wireless traffic and blended RPM growth (%)
August 2013
70

UTILITIES: Below estimate
Summary
Actual v/s Estimate (INR m)
1QFY14 performance
was below estimate across several companies.
However JSW Energy surprised with better realizations and lower fuel cost
owing to low cost inventory. CIL was impacted by lower market linked
realizations.
NTPC
NTPC’s operating performance looked better despite lower operating
parameters but profit was below estimate due to lower other
income, lower offtake by DISCOMs.
PGCIL
1QFY14 capitalization was muted at INR29.5b and profits were below
estimates due to lower transmission EBIT.
Tata Power
Standalone adjusted PAT was above estimates owing to
dividend income from the coal business. Consolidated PAT dipped due to
lower contribution from coal SPV (lower realization) and higher losses for
Mundra UMPP. Maithon project reported PAT, but was marginally lower
than estimates.
CESC’s
PAT was below estimate due to higher fixed cost and lower than
estimated operating/other income. The performance of Spencer continues
to improve led by consolidation.
JSW Energy
Consolidated PAT was above estimate led by better realizations
and muted fuel cost.
Coal India
CIL number were below estimate due to decline in E-auction
realizations. Washed coal realizations and volumes also declined coupled
with lower than estimated ACQ realizations also impacted the PAT growth.
PTC India
has converted its tolling business in to long term trading PPA with
2%margin/profit sharing arrangements. Higher than expected performance
was driven by better than estimated volumes.
Key Operational Metrics
Performance below
estimate largely
across the companies
August 2013
71

MOSL Universe: Annual Performance (INR b)
August 2013
72

MOSL Universe: Valuations
August 2013
73

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August 2013

Motilal Oswal India Strategy Gallery
August 2013