STRATEGY

14 AUG 2015

Cautious and choosy...

Quality to the fore !
In our Weekend Ruminations of 21 June we
expressed a selectively positive view on
markets, based on (1) Falling crude and other
commodity prices (India has saved $15bn in
1QFY16 alone on this account) (2) A pick up in
Govt spending, up 24% YoY in 1QFY16 (3)
Revival of monsoon momentum (4) Grexit
fears moderating (5) The US Fed rate hike
being baked in as a known event.
We are somewhat cautious on markets now
(esp. compared to our last note) owing to the
recent run up in stock prices. We see risks to
global macro stability emerging from Chinas
slowdown. Our caution does not preclude us
from being positive on select businesses from a
longer term perspective.

In our view, a China-led meltdown is a far

greater threat to global financial stability than
Greeces worries. China is a bigger economy
(about 41x Greece, and growing unlike the
latter!). China debt to GDP is also very high at
280% of which corporate debt is 160% which
2x of US corporate debt to GDP in percentage
terms while China economy is half of US in
terms of GDP & most importantly China
domestic leverage is towards funding
commodity producers & real estate both of
which are going through structural down cycle
plus their investors have lost huge money in
stock markets so it is extremely difficult to
revive domestic demand & hence they are

Team Research, HDFC securities

hdfcsec-research@hdfcsec.com, +91-22-6171 7330

trying to boost exports by steps like currency

devaluation which has potential to trigger
trade war as other countries will try to protect
their own domestic companies by increasing
duty on imports from China while China is
increasing rebates to its exporters so we really
have no idea when & how this will end?
A China meltdown can lead to FII outflows from
many emerging markets, including India. Note
that cumulative FII inflows into Indian stocks
since April this year are under 20% of the five
year average over FY11-15.
Key positive on macro front is Oil prices at $ 50
will give good fiscal room to Govt (Rs 89000cr
gross saving in oil imports in q1 yoy) to spend &
hence improve demand scenario in the
economy plus even if INR has depreciated to 65
the worry on imported inflation is also muted to
that extent plus CPI AT 3.8% and negative WPI if
sustains will keep hope of rate cut alive
although news on monsoon front are mixed.
Meanwhile, earnings for companies with strong
brands & pricing power can continuously rise
upwards if crude and commodities cool off in
the face of rising supplies and a soft demand
outlook. We think investors should seek
commodity dependent businesses that enjoy
pricing power (brands, unique product or
market niches). However recent Yuan
devaluation which has led to INR depreciation
will have some negative impact as in most of
these companies raw materials are imported
but oil price fall is much severe and due to

pricing power and dominant market share these

companies will retain some margins for sure &
it was clearly reflected in June quarter results
for Example companies like Castrol, Pidilite &
Asian Paints saw good gross margin expansion
plus strong brand like Maruti continues its
dream run on the back of very strong volumes in
an otherwise sluggish demand scenario along
with other margin levers like Yen at 122 & fall in
input prices.
INR depreciation makes IT companies very
attractive as even otherwise they have all great
virtues like high quality business led by rational
& shareholder friendly management with
excellent cash flow generation, very high core
ROCE & top class corporate governance coupled
with reasonable valuation compared to other
high quality business so we remain positive on
Infosys, TCS, HCL TECH, Mindtree & eCLERX.
We also like utility company like Power Grid at
CMP of Rs 136 as it is a recurring annuity cash
flows growing at above 15% with capitalization
numbers increasing which restricts the need to
dilute available at p/e of 14 so earning yield of
7% so it is a 7% bond growing at 15% in our
view.
We like manufacturing excellence of Bharat
Forge where slowdown in oil & gas segment will
be more than offset by higher margin niche
business like Aerospace over medium term but
once Aerospace business gains traction the
margin profile & perception of company will see
huge re rating.

HDFC securities Institutional Research is also available on Bloomberg HSLB <GO> & Thomson Reuters

Cautious and choosy...

We have selected various other stocks across

sectors where we feel valuations are reasonable
considering long term outlook on economy like
SBI, City union bank, Federal Bank, Chola
Finance in this note

PREFERRED STOCKS

Preferred stocks : Large caps

ASIAN PAINTS
(CMP Rs 874, MCap Rs 838bn)
Mehernosh Panthaki,
mehernosh.panthaki@hdfcsec.com,
+91 22 6171 7340

Large Caps

Mid Caps

Asian Paints

City Union Bank

Bharat Forge

Castrol

Cholamandalam
Finance

Coal India

Federal Bank

HCL Tech

KNR Constructions

Infosys

L&T Finance

Larsen & Toubro

Mindtree

Maruti Suzuki

Oberoi Realty

Pidilite

Power Grid

State Bank of India

demonstrated capabilities in making complex

forgings, the company is also gaining traction in
lucrative segments such as defense, aerospace
and locomotives across domestic and
international markets.

Asian Paints dominates the paints sector in

India, with a market share of 54%. When GDP
growth surges above 7%, decorative volumes
grow upwards of 2x GDP (normalized run rate
~1.7x). We are confident of vol growth
accelerating to 12.5/16% in FY16/17E on the
back of revival in urban housing and home
improvement. Pick up in industrial growth will
also help.

Soft crude and TiO2 prices (down ~38% and

~15% YoY; 54% of COGS) will boost gross
margins. Crude and TiO2 contribute ~40% to
COGS (highest amongst FMCG companies).

We like Asian Paints market leadership and

superior pricing power and believe its premium
valuations will sustain. We have a BUY on the
stock with TP of Rs 925.

Tata Motors (DVR)

BHARAT FORGE

TCS

(CMP Rs 1,162, MCap Rs 271bn)

Navin Matta, navin.matta@hdfcsec.com,
+91 22 6171 7322

Bharat Forge (BFL) is counted among the largest

independent forging companies globally with
total capacity of 584k MT. Over the next three
years, BFLs automotive revenues will be driven
by cyclical recovery in domestic CVs, as well as
steady demand in the North American truck
market and new order wins in PVs. With

BFL is well poised to benefit from the

governments Make in India campaign.
Localization of components in large segments
such as defense, locomotive, power and
metal/mining would expand its domestic
industrial segment opportunity size significantly.

BFL is on track to achieve its target of more than

doubling its FY14 standalone revenue by FY18
(~Rs 70bn+). Robust growth in standalone
earnings and steady improvement in BFLs
subsidiaries will drive 27% CAGR in consolidated
EPS over FY15-18E.

BFL currently trades at 21.3x on FY17E. We

expect the company to trade at a premium to its
historical valuations given its strong earnings
growth, sharp improvement in its balance sheet
and FCF characteristics.

CASTROL
(CMP Rs 479, MCap Rs 237bn)
Mehernosh Panthaki,
mehernosh.panthaki@hdfcsec.com,
+91 22 6171 7340

Castrol India, an MNC with a strong and decades

old brand and distribution network in India has
a dominant market share of ~22% in the Bazaar
(retail) segment of lubricants. Automotive lubes
account for ~85% of its total revenues.
After five years of stagnant net earnings, the
company has reported impressive numbers for
1HCY15. While its revenues de-grew marginally
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Cautious and choosy...

by 0.9% to Rs. 19.8 bn, the company has
benefitted from falling base oil prices (derived
from crude). Gross margins have improved by
782 bps over 1HCY14 to 57.2%. EBITDA grew
40% to Rs. 4.7 bn, with an expansion of 690 bps
in EBITDA margins at 23.6%. PAT grew by 47.5%
to Rs. 3.3 bn.

2HCY15 is likely to witness a recovery in volume

growth in lubricants owing to an anticipated
revival in autos. Low base oil prices will continue
to aid margin expansion. The stock trades at 32x
CY16E consensus EPS. Market Leadership,
strong brand image, pricing power, high
dividend payouts (70-75%) justify premium
valuations. Re-rating can persist on sustained
earnings growth. We do not have a rating on
Castrol but are more than constructive on its
longer term trajectory.

COAL INDIA
(CMP Rs 377, MCap Rs 2,492bn)
Ankur Kulshrestha, ankur.kulshrestha@hdfcsec.com,
+91 22 6171 7346

CIL is India's monopoly coal producer and

accounted for ~80% of India's coal needs in
FY15. It is a crucial link in the electricity delivery
mechanism as a key supplier of coal to power
plants.
The company has been constrained over the
past
4-5
years
to
increase
its
production/despatches. and has remained on a
flat trajectory (3.3% growth in FY10-15). This
was on account of low availability of railway
rakes, lack of clearances for mining and
regulatory hindrances which affected its ability
to increase production.

The new government has focussed on improving

the delivery of coal from the company, which
has resulted in strong despatch growth for the
past few months (FY16 YTD performance: 10.5%
in production and8.1% in output). We expect
volumes to grow at a 6% CAGR over the next 3
years, which will translate into a 625 mT output
in FY18. Government expects CIL to reach ~1 bn
tonnes of coal output by 2020.
Further positives in store include removal of cap
on e-auctions, auction of linkages to the nonregulated sectors and hike in prices for
regulated sectors.

The stock trades at 13.6x FY17 P/E and 8.0x

FY17 EV/EBITDA. Strong earnings trajectory and
government focus on the power generation
sector will help sustain premium valuations.

HCL TECH

(CMP Rs 966, MCap Rs 1,358bn)

Harit Shah, haritj.shah@hdfcsec.com,
+91 22 6171 7325

HCL Technologies (HCLT) is India's fourth-largest

software company, with US$ 5.95bn FY15
revenue (June-ending fiscal year). The IT major
has grown USD revenue at a 13% CAGR over the
period FY12-FY15 (15% over FY11-FY14),
significantly ahead of most of its listed peer set.
The company's major differentiating factor vis-vis competition is its infrastructure
management services (IMS) business, which is
the second-largest in the industry after TCS
(over US$ 2bn in FY15). This segment has
clocked a strong 27% USD revenue CAGR over
FY12-FY15 (30% CAGR over FY11-FY14), well
above company average.

We expect HCLT to clock a 13.6% USD revenue

CAGR over FY15-FY17E, led by the IMS business,
which we expect will clock a 16% USD revenue
CAGR over the period. We like HCLT's strong
positioning in the IMS segment and expect
continued growth to drive further non-linearity
in the business (revenue/employee at US$
60,186 in FY15 vs US$ 51,465 in FY12). We
forecast a healthy 13% EPS CAGR over FY15FY17E and RoE of 29% in FY17E.
HCLT currently trades at 14.7x FY17E EPS (16x
historical average). We believe, given growth
opportunities in the SMAC space, HCLT's strong
positioning in IMS and steadily improving
growth in the software services business (12%
USD revenue CAGR vs 7% over FY12-FY15),
current valuation is reasonable in context of the
solid earnings growth profile and healthy RoE.
We value HCLT at 16x FY17E EPS, implying a
target price of Rs 1,055. We like HCLT given
better-than-peers growth, higher RoE and
more reasonable valuations.

INFOSYS
(CMP Rs 1,157, MCap Rs 2,657bn)
Harit Shah, haritj.shah@hdfcsec.com,
+91 22 6171 7325

Infosys' 1QFY16 revenue was impressive, up

4.5% QoQ in USD terms and up 4.4% QoQ in
constant currency terms. We expect Infosys to
post 9.1% USD revenue growth in FY16, an
acceleration from just 5.6% growth in FY15. This
should further swing up to 13.3% in FY17E led
by initiatives taken by the new CEO, Dr Sikka, on
the digital and automation front while
protecting traditional revenues through the
'New and Renew' strategy.
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Cautious and choosy...

Infosys has won 6 large deals of US$ 50 million

each over the past few weeks. The IT majors
investments into automation, with recent
acquisitions like Panaya should position it well
to leverage the digital/SMAC revolution.
Operating metrics have bottomed out as
indicated by Infosys' margin, which expanded
nearly 200 bps in FY15. We expect margins to
remain within a 50-100 bps band through to
FY17.
Earnings are slated to grow in single digits in
FY16 (7.4%), followed by improved growth of
16% in FY17 (Rs 53.9/Rs 57.9/Rs 67.1 EPS in
FY15/FY16E/FY17E, respectively).
Thus, while we expect FY16E to be a relatively
subdued year for growth albeit improving with
each quarter, we expect the initiatives taken by
Dr Sikka on the digital front, sales effectiveness
and client mining to drive improved growth in
FY17E.
Infosys trades at 17.2x FY17E EPS. Given its
improving growth profile, we value Infosys at
19x FY17E EPS and have a target price of Rs
1,275 on the stock.

LARSEN & TOUBRO

(CMP 1,761, MCap Rs 1,638bn)
Parikshit Kandpal, parikshit.kandpal@hdfcsec.com,
+91 22 6171 7317
Prabhat Anantharaman,
prabhat.anantharaman@hdfcsec.com,
+91 22 6171 7319

L&T is the largest construction company India

with a significant presence in manufacturing.
The company is an established leader with
excellent execution track record over many
business cycles.

Over FY13-15, the company has (in line with

Indian economy) faced a slow down. Revenue
growth (5% over FY13-15 vs. 18% over FY11-13)
has come under pressure due to slowdown in
execution across the private and public sector.
The company has tried to mitigate the impact
by going overseas and reduction in capital
allocation to capital intensive infrastructure
development business.
However, order inflows have perked up in FY15
(Rs 1.4tn, up 19% YoY) and consolidated order
backlog is up 28% YoY to Rs 2.3tn. With an
expected pickup in domestic projects execution
management has guided for 15% growth in
consolidated order inflow/revenue for FY16.
Order inflow prospects from India remain strong
and L&T remains the best proxy to investment
revival in India. Hydrocarbon business should
also come out of red in FY16 as the company
has finished/recognised losses on low margin
legacy orders.
Valuation at 18x FY17E standalone EPS
(adjusted for subsidiary valuation of Rs 355/sh)
is in line with the capital goods sector. We
have a BUY rating on the stock with a SOP
based TP of Rs 1,810/sh, based on 20x FY17E
EPS and Rs 353/sh for subsidiaries.

The cos product pipeline also looks better than

in recent times, especially with the success of
the Ciaz midsize sedan and the AMT Celerio
rollout. An upcoming LCV launch holds promise,
too, backed by a new, small diesel engine.

MSIL's recent earnings performance highlighted

that its erstwhile high level of discounts are not
structural in nature. The company lowered
discount/vehicle by ~5500 from its peak, that
too at a time when several peers in the industry
are yet operating at low utilisation levels.

We believe that MSIL should trade at higher

than historical valuations supported by strong
earnings momentum (40% CAGR over FY1517E), improving return ratios and higher
dividend payouts. Our target price of Rs 4,802 is
based on P/E of 18.7x on FY17E EPS.

PIDILITE
(CMP Rs 572, MCap Rs 293bn)
Mehernosh Panthaki,
mehernosh.panthaki@hdfcsec.com,
+91 22 6171 7340

Pidilite Industries is a market leader in adhesives

and sealants (~70% market share), construction
chemicals, hobby colors & polymer emulsions in
India. Its strong brand equity and pricing power
are attributable to its product innovation,
consistent brand building and a strong
distribution network. No wonder revenues have
grown at 20% CAGR over the past decade.

Over the last few quarters, the growth of

discretionary categories (like white glue,
construction chemicals) has slowed down owing
to sluggish macros. This has impacted the
performance of Pidilites key business segment

MARUTI SUZUKI
(CMP 4,493, MCap Rs 13,572bn)
Navin Matta, navin.matta@hdfcsec.com,
+91 22 6171 7322

Maruti has an exciting new model pipeline over

the next 1-2 years. Launch of the SX4 cross and
compact UV would beef up its presence in the
under-represented UV segment (~21% of
domestic PVs).

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Cautious and choosy...

Consumer & Bazaar (~85% of the total
revenues). Industrial Segment revenues are also
struggling due to slowdown in industrial activity.

However, 2HFY16 should see a meaningful

recovery (esp vol) owing to the anticipated
revival in urban housing construction, home
improvement and rising IIP (likely to benefit
~60% of Pidilite's portfolio).
The company has benefitted from the sharp
decline in crude oil (down ~40% since Jun-14) &
VAM prices (down ~28% from peak levels in
1QFY15) over the last year. Gross margins have
improved significantly at 49.1% in 1QFY16 are
the highest since Q4FY10. We dont see any
sharp rise in VAM prices from current levels and
also expect crude to remain subdued. Despite
soft RMs, the company is unlikely to take price
cuts.

At CMP, Pidilite is trading at 31.5x FY17E EPS.

Pidilites robust consumer franchise justifies
premium valuations. We have a BUY rating on
the stock with TP of Rs 654 (36x FY17E EPS).

capitalisation of this capex has also been in line

at Rs 550bn. APAT during FY13-15 has grown by
14% CAGR but EPS has grown by 7% as the
company diluted equity in FY14 to fund its
capex plans.
Over FY15-17 PGCIL will continue to incur capex
of Rs 225bn/year. It also intends to increase the
pace of capitalisation which would ultimately
lead to profit growth. We expect spends to
continue in the transmission sector as it is a vital
cog in the power chain (NDA govt. recognises
this) which has been neglected historically. Risk
of private sector entry has also reduced as
private sector balance sheets are not in a
position to undertake large projects and
execute them on time.
Valuations at 1.7x FY16E BVPS and 11x FY16E
EPS are attractive. Any share offering by Govt.
of India (58% shareholder) can act as near term
dampener on the stock price. We will strongly
recommend investors to invest in any such
offering as it typically happens at a discount to
market price.

POWERGRID CORP

STATE BANK OF INDIA

(CMP 138, MCap Rs 725bn)

Powergrid is India's central transmission utility
(CTU), responsible for inter state and inter
regional power transmission infrastructure. The
company works under a regulated return
regime, wherein it is guaranteed 15.5% post tax
return on equity on the equity investments
made in transmission assets and all other
expenses are passed on in the tariff.
It is among handful of power companies which
have consistently delivered on execution. The
company incurred a capex of Rs 650bn over
FY13-15 (in line with guidance). Further,

(CMP Rs 259, MCap Rs 1,962bn)

Darpin Shah, darpin.shah@hdfcsec.com,
+91 22 6171 7328
Siji Philip, siji.philip@hdfcsec.com,
+91-22-6171 7324

Over the last few years, SBI has borne the brunt
of the structural slowdown in Indias macros. As
a result, its profits have taken a hit despite a
growing loan book owing to higher provisioning
on stressed assets and a reset in wages.
With its broad presence across sectors, plus its
colossal size and reach, SBI remains the best

cyclical play on the anticipated macro recovery

in India. We expect employee costs to rise at a
slower pace. And, more importantly, GNPLs to
fall by over 80 bps from 4.5% in Mar-15.

SBIs superior capital adequacy (low dilution

risk), lowest impaired assets (in peerset)
coupled with a well-cushioned B/S (higher
coverage ratio) and superior CASA franchise
combine to provide a solid set of reasons that
make SBI our preferred bet amongst PSBs.

SBIN trades at 1.18x FY17E core ABV. Maintain

BUY with a sum of parts TP of Rs 344.

TATA MOTORS (DVR)

(CMP 235, MCap Rs 119bn)
Navin Matta, navin.matta@hdfcsec.com,
+91 22 6171 7322

Over the past 6 months, Tata Motors DVR share

price has declined by almost 30% over China
slowdown concerns. JLRs China volumes have
declined by 34% YoY on YTD basis as a result of
(1) wrong pricing strategy of its locally built
Evoque, (2) absence of Freelander volumes on
account of the model being phased out and 3)
demand moderation in China.

While most premium car makers have to

contend with lower volume growth and
normalization in margins, we think that JLRs
strong new product cycle would help in partially
mitigating the current gloom.

We note that demand in other key markets

including US, UK and Europe are growing at a
healthy double digit pace. In India business is
gradually recovering on the back of strong
recovery in MHCV demand and steady volume
uptick in the PV business.
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Cautious and choosy...

At current level, Tata Motors trades at 3.2x

EV/EBITDA on FY17E. We prefer betting on
Tata Motors through its DVR share, considering
it is trading at a 33% discount to the ordinary
share.

TCS
(CMP Rs 2,637, MCap Rs 5,166bn)
Harit Shah, haritj.shah@hdfcsec.com,
+91 22 6171 7325

We like TCS' leadership positioning, better-thanpeers growth despite being the largest IT firm,
and its leading position in the digital/SMAC
space vs peers.
TCS' 1QFY16 revenue grew 3.5% QoQ in USD
terms. We expect TCS to post slower revenue
growth in FY16 vs FY15 (10.3% vs 15%);
however, we expect FY17 USD revenue to
improve to 13.9% YoY (US$ 19,416mn).
TCS' EBIT margins adjusted for one-offs declined
112 bps QoQ in 1QFY16. We expect EBIT margin
to range between 27%-28% (26.9% in FY15). We
expect adjusted earnings to achieve a healthy
14% CAGR over FY15-FY17E (Rs 110.8/Rs 125.3
/Rs 143.9 adjusted EPS in FY15/FY16E/FY17E,
respectively), led by operating leverage and
improving profitability.
TCS stock is currently trading at 18.3x FY17E
EPS (historical average forward PE of 19x).

Preferred stocks : Mid caps

CITY UNION BANK

CHOLAMANDALAM FINANCE
(CMP Rs 628, MCap Rs 98bn)

(CMP Rs 100, MCap Rs 60bn)

Darpin Shah, darpin.shah@hdfcsec.com,

+91 22 6171 7328

Darpin Shah, darpin.shah@hdfcsec.com,

+91 22 6171 7328

Siji Philip, siji.philip@hdfcsec.com,

+91 22 6171 7324

Siji Philip, siji.philip@hdfcsec.com,

+91-22-6171 7324

City Union Bank (CUB) is one of the best

managed regional banks with strong small
business lending franchise in its focus regions
(South India, primarily Tamil Nadu). CUBs
lending discipline, well capitalised balance
sheet, focus on MSME segment and stickiness
with clients has resulted in consistently high
ROAs, superior NIMs and lower delinquencies
prior to FY14.
CUB's recent performance (FY14-15) was pulled
down by low credit growth (sub 10%), slightly
higher NPLs (1.9%) and increase in cost-income
ratio (42.8%). It has also expanded branch
network aggressively over the last few years.
Unfortunately, this has coincided with the
macro slowdown in India. Lower branch
additions hereon and operating leverage from
existing branches will help contain its costincome ratio over FY16-17.

Buoyed by improving trends in MSME, naturally

higher yielding working capital loans, in-place
margin levers (lower provisioning charges,
improved CI ratio and strong deposit franchise)
we maintain a
positive stance on the stock.
We don't have a formal rating on the stock. CUB
trades at 1.8x FY17E ABV for RoA/RoE of
~1.5/16% respectively.

Cholamandalam
Investment
&
Finance
Company (CIFC), a part of the southbased
Murugappa Group, operates as a pure asset
finance player (AFC) offering vehicle finance,
home equity loans and business finance. It
offers a niche play on the cyclical CV (68% of
AUM) and steady home equity financing. Within
the CV business, CIFC further offers a diversified
play with presence across segments and
geographies.
Notwithstanding its AUM slump over FY14-FY15,
CIFC has still maintained NIMs with sustained
yields and improving cost efficiencies. It has
managed a slow recovery in recent quarters
with gradual uptick in Vehicle Financing,
consistent momentum in Home Equity,
relatively stable asset quality and operating
leverage.
CIFC has already shifted to 150 DPD in 4QFY15
and hence the incremental impact of tighter
NPA recognition and provisions norm is already
absorbed. Further, with superior underwriting
and recoveries process and higher capitalisation
CIFC is better placed vs peers.
A return to 20%+ growth (driven by revival in
the CV cycle) over the next 2-3 years, structural
improvement in C/I ratios driven by productivity
improvement and the expected normalization
of credit costs from current cyclical peaks keeps
us positive on CIFC. While the move towards
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Cautious and choosy...

90DPD NPA recognition will keep headline NPAs
higher than aspired, the gradual healing in
macros and increasing proportion of Home
Equity business will keep overall asset quality
under check. We do not have a formal rating on
the stock. CIFC trades at 2.7x FY17E ABV.

FEDERAL BANK
(CMP Rs 65, MCap Rs 111bn)
Darpin Shah, darpin.shah@hdfcsec.com,
+91 22 6171 7328
Siji Philip, siji.philip@hdfcsec.com,
+91-22-6171 7324
Over the last three years, Federal Bank (FB) has
consciously tempered its 'large corporate'
exposure while growing its retail, SME and agri
loan books. This strategic change apart, it has
also streamlined credit appraisal operations. It
has achieved higher granularity on both assets
(loans) and liabilities (deposits). To our mind,
these are virtues that enhance business quality.
With adequate capital, FB finds itself in an
advantageous position in its home base of
Southern India where a number of entrenched
(but stressed) PSU banks are unable to capitalise
on an impending economic revival. We think
the next few years might see the bank deliver
operating leverage as well as improving asset
quality.
1Q was not an an inspiring quarter for the bank,
with a large corporate account slipping. Higher
provisions on NPAs as well as investments hit
reported
profitability.
The
granularity
improvement, continued. We think the
watchlist of ~Rs 2bn in FB's Steel & Shipping
exposures may act as an overhang. Still, we
believe FBs focus towards quality growth,

increased granularity and higher PCR will drive

valuations in the long run. FB trades at 1.2x
FY17E ABV. Maintain BUY with a revised TP of
Rs 84/sh.

KNR CONSTRUCTIONS
(CMP Rs 523, MCap Rs 15bn)
Parikshit Kandpal, parikshit.kandpal@hdfcsec.com,
+91 22 6171 7317
Prabhat Anantharaman,
prabhat.anantharaman@hdfcsec.com,
+91 22 6171 7319

KNR has over two decades of experience as a

pure play road EPC contractor with 95% of the
order book in roads segment (Rs 35bn). Strong
execution skills, cautious bidding approach and
low net d/e (0.1x) makes is a compelling growth
story. More so with NHAI bid pipeline of Rs 4tn
over next 5yrs, KNRC is well poised to be a
major beneficiary.

FY15-18E order book to grow ~6x: We expect

KNRCs FY15-end order book of Rs 13bn to grow
~6x to Rs 78bn (end FY18E). This will be driven
by NHAI & State EPC road projects. Strong and
profitable order booking will continue to drive
further stock re-rating

Revenue growth to pick up over FY16-18E:

Despite weak ordering & muted revenue
growth, KNRC has maintained profitability
during FY11-15. With the recent ramp up of
order book, revenue growth will be back on
track with FY15-18E revenue CAGR of 32.5%.

Cautious on BOTs: KNRCs Kerala BOT is ~90%

complete and partial COD has been achieved.
During FY16E, we expect KNRC to win road BOTs
worth ~Rs 10bn, equity for which can be
supported by its own cash flows.

Maintain BUY, SOTP of Rs 665/sh: We expect

strong order intake to deliver 32.5%/29.2%
FY15-18E sales/net profit CAGR. We maintain
BUY with SOTP based TP target price of Rs
665/share (standalone business at 15x FY17E
EPS, Kerala BOT at 1x P/BV, see inside). At CMP,
KNRC trades at 14x FY17E EPS

L&T FINANCE
(CMP Rs 68, MCap Rs 118bn)
Darpin Shah, darpin.shah@hdfcsec.com,
+91 22 6171 7328
Siji Philip, siji.philip@hdfcsec.com,
+91 22 6171 7324

L&T Finance Holdings (LTFH), promoted by L&T

(owns 73%), is a well-diversified NBFC having
wide presence in both retail and infrastructure
segments. It has strong parentage and highly
qualified management team which has
significant experience in evaluating longgestation infrastructure projects. However,
owing to difficult macro-environment and the
challenges
facing
large
numbers
of
infrastructure projects and CV/CE segment, the
company has been on a course correction path
over the past two years.

Since then, LTFH has consciously de-risked its

balance sheet in both Retail & Infrastructure
portfolio and has identified select segments to
pursue profitable growth. In the retail segment
it has shifted focus to tractors, two-wheelers
and microfinance B2C segments, and reduced
exposure to the ailing CV/CE segment. B2C
segments now constitute more than half the
retail loan portfolio.

In the wholesale segment, company has

increased exposure to operational projects
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Cautious and choosy...

substantially as they carry lesser risk. Roads and
renewable projects which are mostly
operational constitute 48 per cent of corporate
loans.

LTFH is probably Indias cheapest NBFC of its

size, spread and pedigree. It has all the
ingredients to ride the long term India financials
growth story with exposure to retail, corporate
and infrastructure lending business, footprint in
investment
management
and
strong
candidature to be a bank. Rise in NPLs (given
infrastructure exposure), stress in corporate
loans and higher opex (because of retail focus)
are an overhang even as diversification reduces
the impact. We do not have a formal rating on
the stock. LTFH trades at 2x FY15 ABV.

MINDTREE
(CMP Rs 1,378, MCap Rs 115bn)
Harit Shah, haritj.shah@hdfcsec.com,
+91 22 6171 7325

Mindtree's 1QFY16 revenue grew by a robust

4.8% QoQ in USD terms, led by its digital
initiatives (up 12.9% QoQ). The company is likely
to post even stronger organic USD revenue
growth in excess of 5% QoQ in 2QFY16. We
expect Mindtree to post a solid revenue growth
of 19% in FY16E and 17% in FY17E (16% in
FY15)led by strong digital traction and focus in

key verticals like retail, travel and P&C

insurance.
We expect Mindtree's earnings to achieve a
healthy 17% CAGR over FY15-FY17E (Rs 63.8/Rs
70.4 /Rs 88 EPS in FY15/FY16E/FY17E,
respectively), led by strong growth leverage. We
like Mindtree's industry-leading revenue
growth, leading investments made on the digital
side, which are translating into deal wins and
increasing deal sizes, healthy earnings and RoE
of 29%.
Mindtree's stock is currently trading at 15.7x
FY17E EPS. Considering the mid-sized IT major's
impressive and consistent revenue growth
leadership, leading position in digital, healthy
earnings growth, debt-free balance sheet and
strong return ratios, we are positive on its
growth prospects. We have a BUY rating on
Mindtree with a target price of Rs 1,410 (16x
FY17E EPS).

low net d/e (0.1x) & city limit developments has

been the key competitive advantage. Over the
YTD, ORL share has underperformed Nifty by
12%. This has happened despite pick up in
Goregaon sales, strong response to the Mulund
launch (presold 20% of the project) and likely
Sep-15E Borivali project launch. We believe that
investors concerns on real estate slowdown are
already in the price.

ORL is facing inventory liquidation headwinds

as it currently has ~Rs 40mn+ ticket size, new
launches (Borivali) shall fill in the ticket size gap
in Rs 20-40mn range. Mulund project (~3.2mn
sqft) witnessed strong market absorption with
20% of units getting booked within a months
time and we expect similar success for the
Borivali launch (~3.2mn sqft) during Sep15E.

Annuity assets provide comfort on volatile

devco value: ORL operates a well balanced
business model with residential (devco.) &
commercial (annuity) segment contributing 56%
and 42% to our NAV respectively. Unlike peers,
in an event of slowing residential sale the cash
flows from commercial projects lend visibility to
earnings.

Maintain BUY with SOTP-based target price of

Rs 339/share. Key catalysts : (1) success of
Mulund & Borivali launch; (2) foray outside
Mumbai & (3) new land acquisitions.

OBEROI REALTY
(CMP Rs 242, MCap Rs 82bn)
Parikshit Kandpal, parikshit.kandpal@hdfcsec.com,
+91 22 6171 7317
Oberoi Realty (ORL) is one of the largest
Mumbai centric developers with ~15mn sqft of
residential portfolio & ~2mn sqft commercial
assets. Timely execution, superior build quality,

Page | 8

Cautious and choosy...

Disclosure:
Analyst

Stock

Holding

Ankur Kulshrestha

Coal India

No

Darpin Shah & Siji Philip

State Bank of India

No

Darpin Shah & Siji Philip

City Union Bank

No

Darpin Shah & Siji Philip

Cholamandalam Finance

No

Darpin Shah & Siji Philip

Federal Bank

No

Darpin Shah & Siji Philip

L&T Finance

No

Harit Shah

HCL Tech

No

Harit Shah

Infosys

No

Harit Shah

Mindtree

No

Harit Shah

TCS

No

Mehernosh Panthaki

Asian Paints

No

Mehernosh Panthaki

Castrol

No

Mehernosh Panthaki

Pidilite

No

Navin Matta

Bharat Forge

No

Navin Matta

Tata Motors (DVR)

Yes

Navin Matta

Maruti Suzuki

No

Parikshit D Kandpal & Prabhat Anantharaman

Larsen & Toubro

No

Parikshit D Kandpal & Prabhat Anantharaman

KNR Constructions

No

Parikshit D Kandpal & Prabhat Anantharaman

Oberoi Realty

No

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We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report.
Research Analyst or his/her relative or HDFC Securities Ltd. does not have any financial interest in the subject company. Also Research Analyst or his relative or HDFC Securities Ltd. or its
Associate may have beneficial ownership of 1% or more in the subject company at the end of the month immediately preceding the date of publication of the Research Report. Further Research
Analyst or his relative or HDFC Securities Ltd. or its associate does not have any material conflict of interest.

Rating Definitions
BUY
: Where the stock is expected to deliver more than 10% returns over the next 12 month period
NEUTRAL : Where the stock is expected to deliver (-)10% to 10% returns over the next 12 month period
SELL
: Where the stock is expected to deliver less than (-)10% returns over the next 12 month period

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Cautious and choosy...

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