Centrum Wealth - India Investment Strategy - 24 August 2013

o Editorial
o Equity Strategy & Tactical Asset Allocation

o Rupee Crash A tactical opportunity in 5 MNC
stocks
o Rupee Crash: Net exporters & producers of
import substitutes to benefit
o Sector strategy during turbulent time
o Five high conviction large cap stocks
o New Banking Licenses: Benefit to old private sector banks
o High dividend yield stocks with diversified business models
o Beaten Down Value Stocks
o Silver: Set to shine
o Gold: A defensive bet against falling Rupee
o Fixed Income Outlook and Strategy: Currency defense
pushes up bond yields

August 2013
Emerging $ squeeze & General Election:
Uncertainty in markets to continue

I ndi a I nvest ment St r at egy
2
Table of Contents
1 Editorial 3
2 Equity Strategy & Tactical Asset Allocation 4
3 Rupee Crash A tactical opportunity in 5 MNC stocks 11
4 Rupee Crash: Net exporters & producers of import substitutes to benefit 17
5 Sector strategy during turbulent time 23
6 Five high conviction large cap stocks 30
7 New Banking Licenses: Benefit to old private sector banks 34
8 High dividend yield stocks with diversified business models 39
9 Beaten Down Value Stocks 43
10 Silver: Set to shine 49
11 Gold: A defensive bet against falling Rupee 52
12 Fixed Income outlook & strategy: Currency defense pushes up bond yields 55

3

Dear Clients / Colleagues, 24 August 2013

Emerging $ squeeze & General Election: Uncertainty in markets to continue
The domestic equity market has faced severe stress since the beginning of the current calendar year, going through an
unprecedented turbulent time. The Sensex is down 6.5%, BSE500 down 13.3% and INR has fallen 15.2% YTD in 2013. However,
the trend in both Sensex and BSE500 indices does not truly reflect the pain in the equity markets. In the BSE500 index, while as
many as 81% of the stocks are in negative territory, nearly 1/5th of the stocks have lost anywhere from 50% to as high as 97% of
their market cap and 52% of stocks have lost more than 25% of their market cap on a YTD basis.
What went wrong?
In our view, there are two set of factors which have adversely impacted macroeconomic scenario severe industry slowdown and
loss of confidence in INR - leading to this state of affairs in the domestic markets:
While the global slowdown also contributed to domestic economic slowdown, the high interest rate regime has taken a toll on
industrial growth in India. While most economies in the world were worried about either avoiding or escaping the recession,
perhaps we were alone sitting in an island of inflation. Despite WPI inflation falling from an average of 9.5% in CY2011 to
5.8% in July 2013 and core manufacturing inflation falling below 3%, India did not allow interest rates to fall substantially and in
the process, we saw significant de-growth in the industrial economy. A lot of importance was given to CPI inflation, which is
highly influenced by fuel and crop prices, both of which are exogenously determined to a large extent;
Loss of confidence in INR is partly due to severe slowdown in global trade and hence, in Indias exports. However, the steep
spurt in import of gold has made a severe dent in $ reserves. Despite the country resorting to withdrawal of $12 billion from
forex reserves for balancing BOP in FY2012, it allowed import of gold to the extent of over $110 billion in the last 30 months
alone had even half of this been controlled India would have been in a very comfortable position to tackle the INR exchange
rate crisis it faces today. Export of foreign capital towards importing gold, the most unproductive asset, has also impacted the
investible liquidity available in the domestic economy. The opportunity of holding back at least $50 billion was lost to this. The
RBI, which had bought $78 billion (a record level, at an average price of just about Rs.40/$) from the open market in FY2008)
has already exhausted $60.45 billion (as of June end 2013) since the Lehman crisis. Owing to this swift depletion in $, RBI has
little headroom left to sell $ in the spot market to support the INR.
Catch 22 situation: The Central Bank is in the midst of a perfect storm, with lack of resources to support INR and facing adverse
macroeconomic situation along with the possible risk of a ratings downgrade. Unfortunately RBI having been late in taking steps to
prevent the Rupee depreciation, has recently tried to tighten INR liquidity in the short term to create an artificial liquidi ty squeeze for
INR and pulling down $ value! This has delivered a massive blow to both equity and debt markets, as the action is tantamount to
raising rates in the economy, further increasing losses in both the debt and equity segments.
While broad indices are trading at attractive valuation, they are not representing the grim picture of domestic equity markets. About
80% of individual listed stocks are trading anywhere 10% to 90% below their price levels existed and INR is down about 45% as
compared to levels existed two years ago. In our view, India does not deserve such punishment for its currency and equity markets
though it has been a major failure in containing the damage. Volatility with negative bias is expected to continue till General
Elections are over in next 8 to 9 months. However, the excellent monsoon we are experiencing, coupled with lower inflation and
significant fall in trade deficit will help the markets to recover substantially post elections. Hence, we suggest our clients to expose
note more than 30% for average profile and for highly conservative investors not more than 20%, of total wealth in equity over next
3 to 6 months. We suggest keeping at least 40% in liquid cash or cash equivalent instruments. Within the equity asset class keep
around 15% cash for further bargain buys in next 3 months and also play on defensive equity bets.

Sincerely yours,

G Chokkalingam,
Chief Investment Officer, Centrum Wealth
(chokka@centrum.co.in)

4

Equity Strategy & Tactical Asset Allocation

5
Equity Strategy & Tactical Asset Allocation
What you see is NOT what you get
The domestic equity market has faced severe stress since the beginning of the current calendar year, going through an
unprecedented turbulent time. The Sensex is down 5.5%, BSE500 down 12.6% and INR has fallen 15.8% YTD in 2013. However,
the trend in both Sensex and BSE500 indices does not truly reflect the pain in the broader equity markets. In the BSE500 index,
while as many as 81% of the stocks are in negative territory, nearly 1/5
th
of the stocks have lost anywhere from 50% to as high as
97% of their market cap and 52% of stocks have lost more than 25% of their market cap on a YTD basis! The top contributors to
BSE 500 movement were a handful of large stocks largely in the consumer, IT and pharma sectors. The proportion of stocks in
BSE 500 index which are near their 52 week low is close to the ratios that we saw during the Lehman crisis and even post the dot-
com bust. Moreover, today there are close to half of the total listed companies which are below the lows seen post the Lehman
crisis, although the Nifty has moved up by approximately 125% since then! This clearly shows how skewed the performance of the
indices have been, with only a handful of stocks leading to the rise in the Index that we see in headline numbers.
What caused the mayhem in the markets?
We see primarily two set of factors viz., steep fall in GDP growth and crash in the exchange rate of Indian Rupee (INR), being
responsible for causing the pain in the domestic equity markets:
Vicious cycle of growth slowdown and poor corporate performance
RBI raised interest rates by 175bps during FY2012 and maintained a hawkish view on rates despite significant slowdown in the
economy. Even though the headline inflation fell by almost 600bps from the peak to below 6% and core-inflation (non-food
manufactured product inflation) fell below 3%, the central bank reduced benchmark rates only by 125bps from the peak. The focus
on inflation management hit the growth of the economy, leading to a vicious cycle of low GDP growth, severe deceleration in the
industrial economy, severe deterioration in banks asset quality and steep fall in corporate earnings;
Indias GDP growth fell to 4.99% for FY2013, the lowest level in the last decade;
The Index of Industrial Production (IIP) de-grew at 2.2% for the month of June 2013 mainly on account of decline in capital
goods (down 6.6%) and consumer durables (down 10.5%). On a cumulative basis, the IIP declined by 1.1% for the period
Q1FY2013;
Corporate earnings data for Q1FY14 was one of the weakest in the last 15 quarters with the sales being flattish and net profi t
posting low single digit growth for Q1FY14. The auto sales numbers have been weak posting de-growth of 2.09% during the
period April-July 2013 and cement dispatch numbers have also posted de-growth reflecting an overall decline in the investment
and production activity.
Indirect tax collections have been weak for the period April-July 2013 growing by just 2.9% on a YoY basis as against the
Budget target of 19% for FY2014. Among indirect taxes, the excise duty collections during this period de-grew at 11% - it is
really worrisome since excise duty collections reflect the status of aggregate demand in the country and show pain for the
corporate world in terms of poor sales revenues;
In the first quarter of current fiscal itself the fiscal deficit in Q1FY14 has already reached close to 50% of the budgeted
estimates for the whole of FY2014 hence, there is a high possibility that the government may overshoot their fiscal deficit
target considering the higher subsidy burden from recent INR crash.
Exhibit 1: Core-inflation versus Repo rates Exhibit 2: IIP versus GDP (and its components)
-4%
-2%
0%
2%
4%
6%
8%
10%
M
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A
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-
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3
Core Inflation % Repo Rate %

-10.0
-5.0
0.0
5.0
10.0
15.0
20.0
25.0
J
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n
-
0
6
D
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-
1
3
IIP % Manufacturing GDP %
GDP % Services GDP%

Source: RBI, Centrum Wealth Research Source: Bloomberg, Centrum Wealth Research

6
Structural issues and failure on gold imports lead to rupee crash
Failure to address structural issues impact rupee
We have failed to address structural issues over the years - the import of gold, crude oil, edible oil and fertilizers have gone up from
6 fold to as high as 21 fold in the last 10 years. For instance, coal imports were up by 52% in the month of June 2013. During the
last 10 years, our overall exports have gone up only 6 fold, hence our trade deficit zoomed 22 fold in $ term i n the last 10 years.
Exhibit 3: Increase in Indias imports, exports and trade balance in the last 10 years
Year
India's Import Data ($ Billion)
Exports
($ bn)
Trade Balance
($ bn)
Crude GOLD Coal Edible Oil Fertilizer All Imports
FY2003 17.6 3.8 1.2 1.8 0.4 61.4 52.7 -8.7
FY2013 169.0 53.7 15.4 11.2 7.4 490.3 300.2 -190.1
Increase in 10 years 10x 14x 12x 6x 21x 8x 6x 22x
Source: Bloomberg, Centrum Wealth Research
Booming gold imports leads to limited intervention capability by RBI
Gold import (US$53.7 bn) accounted for almost 58% of the current account deficit in FY2013. The government acted on gold
imports only after it got out of hand and we imported US$ 15bn worth of gold in just the first two months of FY2014. We have made
a major blunder in allowing easy import of around $110 billion in gold in the last 30 months. Had we contained this to even $50
billion, the current situation would not have come about at all. In Rupee terms, the gold imports took up Rs.5 lakh crore. We not
only lost precious forex but also simply exported domestic liquidity when we bought the most unproductive asset viz. gold. In
FY2012, we had to drawdown USD 12bn from the reserves to balance our BOP (Balance of Payments). Still we delayed stringent
measures on gold import till June 2013.
In FY2008 alone, RBI had purchased 78.2bn worth of US Dollars at the rate of below Rs.40 which it has used intermittently to
support the currency, but the RBI has almost depleted its reserves in selling off close to USD 60bn worth of these dollars by June
2013 and hence has limited head room to support the currency any more.
Moreover the services exports which helped meet the trade deficit numbers have also come down by 3.5% in the month of June
2013 at USD 6.22bn. Further, during April-June 2013, NRIs put $5.50 billion into Indian banks' deposits, down by 16.11% YoY. The
total NRI bank deposits as on June 30, 2013 stood at $71.07 billion, marginally lower than $71.69 billion in May 2013. Continued
instability in INR may lead to continued de-growth in NRI deposits; this would impact the financing options for the current account
deficit.
Exhibit 4: Sale (-) and Purchase (+) of USD by RBI
78.2
-34.9
-2.6
1.7
-20.1
-2.6 -1.8
-60.0
-40.0
-20.0
0.0
20.0
40.0
60.0
80.0
100.0
FY2008 FY2009 FY2010 FY2011 FY2012 FY2013 FY2014
(USD bn)

Source: RBI, Centrum Wealth Research
Global meltdown and fear of taper impacts flows
The emerging market currencies have all seen sharp depreciation owing to fears of the US Fed tapering in its quantitative easing
program in September 2013. In the recently released FOMC meeting minutes the members agreed to a reduction in quantitative
easing on the back of economic recovery, although the timing or quantum of the roll back seemed uncertain. The fear of sharp
outflow of funds from both the equity as well as the debt market has led to rise in yields and further depreciation of currency.
Another casualty of slow growth in the developed world has been the slow export growth which has also impacted the current
account deficit.
Owing to the above reasons INR has depreciated by almost 45% in the last two years and has caused instability in the macro
environment as it has impacted imported inflation and fiscal deficit of the country. The instability in INR has raised some uncertainty
among the FIIs as well, though they pulled out less than $3 billion from the equity markets since June 2013. Their pull out from the
equity market so far in the last 3 months is insignificant as compared to their overall cumulative investment of over $216 billion till
date, or over $35 billion in the last 18 months. However, as the appetite to absorb the equity supply is so poor among domestic
investors, even this marginal selling by the FIIs has led to chaos in both currency and equity markets.

7
Exhibit 5: INR movement against USD Exhibit 6: YTD 2013 movement of emerging currencies
52
54
56
58
60
62
64
66
J
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A
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Announcement
of possible taper

-20% -15% -10% -5% 0% 5%
SOUTH AFRICA
BRAZIL
INDIA
INDONESIA
RUSSIA
MALAYSIA
PHILIPPINES
THAILAND
TAIWAN
POLAND
MEXICO
CHINA

Source: RBI, Centrum Wealth Research Source: Bloomberg, Centrum Wealth Research
Exhibit 7: FII/DII flows versus Sensex, USD-INR
Month DII (Rs.Cr) FII (Rs.Cr.)
FII Debt Investment
(Rs.Cr.)
Sensex INR / USD
Jan-13 (17,542) 22,230 3,274 19,895 54.3
Feb-13 (8,819) 22,123 4,074 18,862 53.8
Mar-13 (7,872) 10,399 5,031 18,836 54.4
Apr-13 (2,701) 6,407 6,936 19,504 54.4
May-13 (12,052) 20,678 2,575 19,760 55.1
Jun-13 8,427 (10,530) (31,342) 19,396 58.4
Jul-13 (1,541) (5,909) (12,651) 19,346 59.7
Aug-13 2,936 (1,097) (7,176) 18,312 64.7
FIIs have sold in the debt market to the extent of Rs.27,000 crore YTD, post the announcement by Fed on possible tapering of its
stimulus program. This has further added to the rise of debt yields and further fall in the equity markets especially in banking stocks
as the potential losses from investments in government securities increased substantially.
Other factors that aggravated the crisis in domestic equity markets
Repayment of debt: India has over $170 billion in various foreign currency liabilities which need to be repaid before March 31,
2014. This could put pressure on the economics of the capital account owing to the current USD-INR levels and also lead to
pressure on government finances;
Governance issues among many midsized, highly leveraged companies nearly 100 stocks have lost market cap to the extent of
70% to 90% and in many cases, the promoters have offloaded their stake in the companies. Such governance issues have also led
to soaring NPAs, especially for the PSU banks;
Sovereign downgrade could be last nail in the coffin: With deteriorating finances of the government and growth not picking up,
a final blow to the market could come in terms of a rating downgrade by international rating agencies. This could lead to a f light of
capital from the country and further pressure on the INR.
However, some green shoots visible
The FIIs have remained net buyers in the domestic equity markets - on a YTD basis, their net buying stands at Rs.42,144 crore and
the Domestic Institutional Investors (DIIs) who have been largely net sellers since the beginning of 2012 have turned net buyers in
June and August 2013. We believe that any large scale selling of equities by the FIIs is most unlikely the Rupee has already
crashed over 45% in the last 2 years and about 80% of equities are negative on YOY basis. Over 2/3
rd
of cumulative investments of
the FIIs into the country flew in over 2 years ago. Therefore, any large scale selling by the FIIs would involve huge losses for them.
Indias GDP is still growing in nominal terms at about 11%, so we believe that there is no need for any panic for FIIs who hold
Indian equities and assets. Other comforting factors are:
Steep fall in trade deficit: For July 2013 trade deficit declined by 30% YoY to $12.3 billion on the back of steep fall in gold
and silver imports their imports fell sharply by 34% YoY to $2.97 billion during July 2013 following the increase in import duty
and other curbs imposed recently by the government. On a cumulative basis, for April-July 2013 the trade deficit was down
4.6% to $62.4 billion. Exports grew by 11.6% YoY to $25.8 billion during July 2013 the 1st double digit growth in 2 years.
Back of the envelope calculations suggest that the government may even meet its target of US$70 billion current account
deficit (CAD) for FY2014.
Surplus rainfall: For the period from June 1, 2013 to August 18, 2013 India as a whole received 14% surplus rainfall with 86%
(31 subdivisions) out of total 36 subdivisions receiving normal to excess rainfall, which is one of the best in a decade. We can
hope for a record level of food grain production in current year.
With the recent crash in INR, there exist opportunities for foreign investors to opt for bargain buying of Indian equities from the
markets and assets through FDI route. Already the FDI inflows in Q1FY2014 have shown 22% YoY growth.

8
What is in store for next 6 months?
The passing of the populist food security bill by an ordinance, events in Telengana (awarded status of a separate state) and
increased activity by major parties on various social media platforms allude to undercurrents of preparation for elections. The
election announcement and the run up to the elections would be marked with bouts of volatility as investors, especially the FIIs,
would prefer to wait and watch before they take a fresh call on the markets. There would be greater uncertainty on core
macroeconomic issues as the focus would shift from economic policies to politics.
Rating agencies may announce more adverse downgrades among the PSU banks as there would not be any let up in the NPA
levels for many of them. The list of candidates for possible downgrades would only increase.
Interest rate cycle reversal may be a long protracted journey: The RBI, in the month of July 2013 has taken a series of
steps to create an INR squeeze and raise short term rates to support the INR. The RBI increased the MSF rates from 8.25% to
10.25% and also reduced the LAF borrowing window to Rs.75,000 crore. Moreover, the RBI has also proposed to further suck
out liquidity from the banking system by issuing cash bills to the tune of Rs.22,000 crore each week. This has caused the short
term rates to rise and led to some banks increasing their deposit rates and base rates for lending. Thus, the reversal of interest
rates in the economy has come to a halt for some period. Considering there are no strong triggers for INR to appreciate in the
short term, the interest rate reversal could get delayed in spite of core inflation coming down to 2.4% levels. This would in
effect delay our earlier assumption on reversal of interest rates in CY2013. While the expectations from the new RBI Governor
would be very high, we believe that he has limited ammunition to tide over the current macroeconomic situation. Considering
the current state of INR any sharp reversal of interest rate could lead to further withdrawal of debt by the FIIs.
INR to trend close to Rs.60 level: We believe that the government and RBI have little ammunition left to address short term
movement of Rupee unless some of the long term structural problems are taken care of. The government has been a bit late in
implementing higher import duty on gold and the steps take by RBI to stem short term liquidity has also failed to avert instability
in INR. Moreover, the risk of downgrade from rating agencies has increased as the fiscal deficit pressure and dependence on
external flows to maintain balance of payment has caused a sharp depreciation in INR. This has led to a vicious cycle of higher
imported inflation, higher subsidy payments and rising long term yields putting further pressure on the economy and corporate
sector. The FIIs may remain on the sidelines till the elections, creating a potential funding gap in the balance of payment
account. The government has continued to make desirable moves on the path of reforms creating the right environment for
increased FDI investment into the country. We expect INR to stabilize around Rs.60 against the USD by end of 2013 and
would wait for election results for further recovery.
Corporate earnings to be weak and risk of defaults increase: The corporate earnings for Q1FY14 have been quite weak
with low single digit growth in earnings among the Sensex companies. This would be the lowest growth seen over the last few
quarters. Moreover, the asset quality of banks is deteriorating and possibility of large scale defaults is increasing. As per a
Crisil report, there have been 42,819 cases involving close to Rs.1.43 lakh crore pending with the debt recovery tribunals
across the country. Net non-performing assets for banks went up 51% in FY13 to Rs.92,825 crore. Gross NPAs of banks are
expected to increase to 4% in FY14 from 3.3% in March 2013. The unanticipated rise in interest rates by the central bank coul d
further put pressure on the asset quality of banks. The rise in asset quality pressure could further risk a downgrade for the
country, leading to further INR depreciation and could lead to a vicious cycle of high interest rates and weak INR.
Risk of tapering of the quantitative easing: The global markets are under pressure owing to possible reduction in the
stimulus measures by the Fed in its meeting in September. We expect soft landing of monetary expansion in the US from the
last quarter of 2013 this would cause further temporary uncertainty on foreign investment inflows into the country.
While INR has crashed by 45%, the international crude oil prices almost remain quite firm over the last one year this would
aggravate the governments burden on oil subsidy. High interest regime is also likely to keep Indias GDP growth below 5% during
the first half of FY2014.
Hence, Unlucky (20)13 for most investors
Owing to uncertainties anticipated during the next 6 months, we expect the year 2013 to be a lost year for investors. We expect the
index to remain in the range of 18,000-19,000 (Sensex) for the rest of 2013, with only a handful of stocks participating in any
possible marginal recovery in the broader indices.
Although post election we could see Sensex creating a new high
We maintain our target in the range of 25,000 to 27,000 (Sensex) for the December end 2014 as we expect one of the national
parties to win and get a majority in Parliament. This would enable the formation of a stable government and implementation of
pending reform measures. This is also expected to give a sentimental boost to the markets. Forces of economic equilibrium on
account of the INR crash would also start working we have already seen major fall in gold imports, improvement in profitability of
textile exports and overall exports growth improving in double digits in July 2013 for the first time in the recent past. Hence, the
long term investors who have appetite to take another 5% to 10% risk to their portfolio in next 6 months and whose equity
exposure is less than 30% of total wealth may remain invested in quality stocks.
We believe that there is a convergence of many positives in 2014 which could help in expansion of corporate earnings and lead to
re-rating of the Indian markets.
With good progress of monsoon we expect the food inflation to come down, which should further pull down the WPI inflation.
Current monsoon performance is one of the best in recent times there are reports of kharif crop planting area going up by 9%
leading to cooling off in food inflation and therefore significant fall in overall inflation;
The interest rate reversal may continue in 2014 as we expect the currency to stabilize once the elections are over. With
reversal of interest rates the corporate earnings should expand, owing to margin expansion leading to re-rating of the Indian
equity markets;
We will also see significant fall in imports of goods and also dip in export of $ capital going forward. We can also expect further
aggressive purchase of Indian assets by foreign companies as it is about 45% cheaper as compared to 2 years earlier. FDI
investments in multi brand retail and airline sector would fructify. FDI in insurance and pension sectors is likely to be relaxed.

9
Risk to our Views
Remaining period of 2013:
In case the US postpones proposal to cut down monetary expansion to 2014 this would provide sentimental boost to
both currency and equity markets;
In case a predominant portion of the foreign investors believe that 45% crash in INR is a rare opportunity which may not
be available post elections and therefore decide to rush in, instead of sitting on sidelines, to buy out Indian equities and
assets this development can lead to robust recovery in the Indian equities.
For CY2014:
In case the developed world especially the US and Euro zone fall back to low growth or recession, then the Indian
economy would suffer from decelerating exports and poor inflow of foreign capital, leading to GDP growth remaining
below 5% for one more year.
General Election results: We bank on our hypothesis that one of the two dominant national parties would succeed in forging
successful alliances with regional parties and improve their own tally, on standalone basis, close to 250 seats. This would
strengthen the hold of the major ruling party over its alliance partners. However, in case both major national political parties secure
only around 150 seats on a standalone basis (while simple majority requires 273 seats), there would be major setback to both the
markets (currency & equity) and economy.
We would remain alerted on these risk factors over the next 9 months.
Conclusion: Equity Strategy & TAA
Equity strategy Portfolio allocation
Considering substantial volatility over the next 6 months period, we prefer a defensive strategy. Hence, suggest we 15% cash
within equity asset class for another 3 months or till individual stocks are further beaten down badly.
Investment strategy
Suggest large cap and fairly large mid cap for investments;
Avoid companies with high promoters share pledging;
Avoid highly leveraged companies, as high interest rates are impacting bottom line growth;
Sectoral Bias
Export oriented sectors: Prefer sectors which have a major portion of their earnings which are dollar denominated and hence
prefer stocks in the IT Sector;
Domestic demand themes: Sectors which do not depend on government intervention or regulatory overhang or major capital
expenditure in the country. Hence, prefer FMCG and Pharma;
High Dividend Yield: Companies which have a strong track record of dividend payments and also have some visibility on the
earning potential. They would provide a good downside protection in the current volatile environment;
Import substitutes: companies which compete with importers of goods would stand to benefit from the current Rupee crash
as the competitiveness of their products would increase;
Deep value: Stocks which offer deep value and still hold the potential to become multi-baggers in the long term;
Market cap bias
In terms of market cap segments, we suggest restructuring the portfolios and recommend investing only 20% of the equity
allocation into small caps (below Rs.1000 crore market cap) and rest in large and large midcap stocks. The recovery as and when
it happens, may start with large and large midcap stocks. On the other hand, if risk emanates from the election results, exit from
larger stocks would be much easier.
Exhibit 8: Equity Allocation
Allocation by Market Cap Allocation (%)
Large Cap

30
Large Mid Cap

35
Small Cap

20
Cash

15
Total 100
Source: Centrum Wealth Research

10
Tactical Asset Allocation (TAA)
Considering our expectation of huge volatility in the equity markets till elections are over and possible major risks
associated with the election results for CY2014, we have cautiously developed following conservative TAA strategy.
For an average investor, we would suggest not having more than 30% of wealth in the equity market due to high volatility in the
next 3-6months. For a very conservative investor, not more than 20% of wealth till elections are over or till further possible
beating down of individual stocks;
Suggest additionally 5% allocation to silver while maintaining 5% in gold;
Exhibit 9: Tactical Asset Allocation
Asset Class Current TAA (%) Previous TAA (%)
Equity 30% 50%
Other than Equity 70% 50%
Fixed income/ Structured products 55% 40%
Gold/ Silver 10% 5%
Real Estate Investment 5% 5%
Total 100% 100%

G Chokkalingam, CIO
(chokka@centrum.co.in)
Ankit Agarwal, Fund Manager
(ankit.agarwal@centrum.co.in)

11

Rupee Crash A great attraction for foreigners to buy Indian
Assets; a tactical opportunity in 5 MNC stocks

12
Rupee Crash A great attraction for foreigners to buy Indian
Assets; a tactical opportunity in 5 MNC stocks
INR has depreciated by 45% in the past 2 years, from Rs.43.86 in July 2011 to Rs.63.4 at present. In the last 2 years, though
Sensex rose 13%, over 80% of individual stocks, including MNC stocks, fell anywhere from 10% to as high as 90%. This
provides a historically rare opportunity for MNCs to either increase their stake in Indian subsidiaries up to 75% or 100% (and
then delist them) at the cheapest possible valuations. Other factors which could make Indian assets attractive to the foreign
investors are:
o In nominal terms, India is still growing over 11% and in the past Indias GDP growth has rarely stayed at very low levels for
more than 2 years in a row. India has probably crossed Japan to occupy 3rd largest position in terms of GDP size (Source:
OECD);
o INR is unlikely to fall further significantly as it has already crashed close to 50%. Considering the steep fall in gold imports
and other remedial measures taken by government, we can expect the INR to stabilize soon and in fact, it can appreciate
10% to 20% in the next one to 2 years;
In the last 2 years most of the MNC stocks, barring those in the FMCG space have fallen substantially. We have shortlisted 6
MNC stocks based on their fundamentals, strength of parents balance sheets and correction in their stock prices. These 6
stocks except GSK Pharma have fallen in the range of 3% to 48%. However, the price fall has been in the range of 23% to
63% in USD term. Hence, we believe that the current market conditions in India provide a historically rare opportunity for
MNCs to consider open offers to increase their stakes. Even if they offer 40-50% premium to the current valuations, the benefit
for the MNCs would be far greater in the long run.
Exhibit 10: % Fall in stock prices of Indian subsidiaries in last two years
-48%
-33%
-24%
-8%
9%
-63%
-52%
-46%
-34%
-23%
-75.0%
-60.0%
-45.0%
-30.0%
-15.0%
0.0%
15.0%
S
i
e
m
e
n
s

S
t
y
r
o
l
u
t
i
o
n

A
B
S
C
l
a
r
i
a
n
t
B
A
S
F

I
n
d
i
a
G
S
K

P
h
a
r
m
a
Price chg in INR terms Price chg in USD terms

Exhibit 11: Most of the companies are trading near 52 week low
Open offer candidates
Parent Company Indian Subsidiaries
(%) of total
subsidiaries
wholly owned
Revenue (In
EUR bn)
Net
Cash
(In EUR
bn)
CMP
(Rs.)
Chg from 52 Week
1 year
forward P/E High Low
BASF India 87 72.1 1.6 521 -32.3% 6.3% 14.5*
Clariant Chemicals (India) 91 5.0 1.4 481 -28.6% 29.6% 18.9
Glaxosmithkline Pharma 89 32.6 5.3 2,282 -21.3% 18.2% 25.1
Siemens 73 78.3 11.4 451 -39.9% 7.6% 28.1**
Styrolution ABS (India) 94 6.0 0.2 350 -56.3% 3.2% 8.7
Note: * March ending; ** September ending; Rest December ending

13
Exhibit 12: A tactical opportunity for 5 MNC stocks
Open offer
Candidates
Rational for possible open offers / Stock Attraction
BASF India
In 2011, its parent merged 4 of its local unlisted subsidiaries with BASF India, which was followed by
merger of the Indian operations of Cognis, which was globally acquired by BASF SE in December 2010;
Parent company made public its intention of converting BASF India the Single Legal Entity for all its India
based operations;
The parent has already increased its holding in the company from 52.7% in FY2008 to the present 73.3%
through an open offer in FY2009 and the merger of unlisted entities (2.1%);
Clariant
Chemicals
(India)
Clariant International, the parent company has been restructuring its businesses across geographies it
is exiting non-core segments in order to concentrate on value added segments like specialty chemicals.
In the past the company has sold its land and other assets & distributed one third of the sale proceeds as
dividend. Expect another special dividend payout as last year it sold low focus businesses for Rs.209
crore;
Glaxosmithkline Pharmaceuticals

Recently, the GSK Pte announced increasing its stake in its GlaxoSmithKline Consumer subsidiary from
43.2% to 75%, in a deal worth 591m at a 28% premium to the units closing share price of the previous
week;
The logical possibility of increasing the stake is higher for its pharma venture, as the extent of involvement
of parents technology is more for this business;
Siemens
Siemens AG had earlier increased its stake in Siemens by 19.8% from 55.2% to 75% through an open
offer in 2011;
Siemens AG has charted a new strategy to design and develop about 60 products especially for India,
targeting $1.3 billion in annual revenues from them alone by 2020;
Reversal of interest rate cycle along with revival of economy would lead to the company outperforming its
peers;
Styrolution ABS (India)
The parent had tried to acquire 100% stake in its Indian subsidiary in the past but had not been
successful;
Styrolution ABS has been on a steady growth path. Over CY2008-2012, its revenue and net profit has
been consistently growing at 13.1% CAGR and 36.7% CAGR respectively;
Due to OFS to meet the SEBI norms, the stock has witnessed correction and the current market price
offers a good opportunity for MNC to consider delisting of the Indian subsidiary;
Source: Company, Centrum Wealth Research

Abhishek Anand, VP - Research
(a.anand@centrum.co.in; +91 22 4215 9853)
Dhaval Sangoi - Research Analyst
(dhaval.sangoi@centrum.co.in; +91 22 4215 9980)

14

BASF India Ltd.
BASF India, a subsidiary of 72 billion chemical engineering
major BASF, Germany (73.3% equity stake) is engaged across
virtually the entire chemicals sector including agri chemicals,
performance products, plastics, functional solutions, etc.
In FY2012, BASF consolidated its businesses by merging
four of its unlisted entities belonging to the parent company
(BASF Polyurethanes, BASF Coatings, BASF Construction
Chemicals and Cognis Specialty Chemicals) with itself.
Subsequently, the management announced that BASF India
would be the Single Legal Entity for all its India operations.
This provides us some conviction of its eventual delisting,
as the MNC already holds more than 73% stake in this
company;
Post consolidation, BASF has proposed aggressive
capacity expansions. It is setting up a new chemical plant in
Gujarat at a cost of over Rs.1,000 crore and the plant is
expected to be operational in 2014. BASF is looking to fund
this expansion through a mix of internal accruals and ECB
from group companies which would be on beneficial terms.
The plant is likely to add at least Rs.700 crore of revenue in
its 1st year of operations. Further, the company is looking to
set up a Global Research Centre for crop protection
solutions in India as it shifts its R&D work to Asia,
supporting its major expansion into the region;
BASF is expected to add a production line for precious
metal-based fine chemical catalysts at its Mangalore plant.
These catalysts find applications in the manufacturing of
active pharmaceutical ingredients (API). This is the first
chemical catalyst facility in the Asia-Pacific region and will
not only cater to the increasing pharma market in India but
also the growing market across the Asia-Pacific region;
BASF for Q1FY2014 reported 21% YoY growth in net profit
to Rs.87 crore led by improvement in margin from agri-
solution business. Revenue for the quarter grew by 5.2%
YoY to Rs.1,360 crore. The companys operating profit grew
by 22% YoY to Rs.151 crore with margin improving by 151
bps to 11.1%. On segmental basis, Agri-solution business
outperformed with its EBIT growing by 61% YoY to
Rs.111.4 crore and revenue increasing 16% YoY to Rs.586
crore. EBIT margin of the segment improved 527 bps to
19%. BASF reported an EPS of Rs.20 for Q1FY2014;
The company is setting up precious metal catalyst plant at
its existing manufacturing site at Mangalore at an
approximate cost of Rs.10 crore (Euro 1.5 million) and the
same will be financed through internal accruals. Production
is likely to commence in Q3FY2013. Further, it is targeting
annual sales of Rs.820 crore from innovative lifestyle
solutions for affordable mass housing, food fortification,
solar and wind energy and water purification. Also, the
parent company is targeting sales revenue of 25 billion
(~Rs.2.12 lakh crore) by 2020 in the Asia-Pacific region in
which India is likely to play a major role. We believe this
would be positive for BASF;
INR has depreciated by almost 44% since July 2011 from
Rs.43.9 to Rs.63.4 at present. We believe this offers a good
opportunity for the parent to delist BASF which if implemented
would make the stock a multi bagger. Even if delisting does not
materialize, the stock can provide significant returns post the
business restructuring and aggressive expansion plans which
would boost both its top line and bottom line in the next 2 years.
Hence we recommend Buy with a fair value of Rs.773.
Financial Summary (Rs. Cr.)
CMP: Rs. 521 52 week H/L Rs. 770/490
Y/E Mar Revenue Adj. PAT Growth % EPS P/E
2012A 3,516 101 -14.4 23.3 22.3
2013A 3,941 121 19.5 27.8 18.7
2014E 4,532 155 28.6 35.8 14.5
2015E 5,235 159 2.8 36.8 14.1
Source: Company; Centrum Wealth Research Estimates

Clariant Chemicals (India) Ltd (CCIL)
Clariant Chemicals (India) Ltd. (CCIL), a 63.4% subsidiary of
Clariant AG Switzerland, is a leading manufacturer of specialty
chemicals in India catering to various sectors including
automobiles, paints, personal care, food & beverage and among
others. It has four manufacturing plants across the country. We
expect significant export opportunity for CCIL from its parent as
some plants in EU and South Korea are not likely to be operative.
CCIL is a debt-free cash rich company, with cash on books
at Rs.181 crore as on June 2013 (~14% of its current market
cap). The company had restructured its business in 2011
and sold land & infrastructure worth Rs.240 crore of which it
distributed a third as special dividend to shareholders. It had
paid a total dividend of Rs.60 per share for CY2011
(including a special dividend of Rs.30). For CY2012, CCIL
paid a total dividend of Rs.27.5/share translating to a yield of
5.7% at the current market price;
CCILs board in March 2013 approved the sale of 3 out of
the total 9 business units - Textile Chemicals, Paper
Specialties and Emulsions to SK Capital (US based PE
Investor) for a consideration of Rs.209 crore. The divestment
of the company's business includes a textile chemical plant
situated at Roha. The total cash after considering the
divestment (post tax) would increase to about Rs.389 crore
(Rs.145 per share) or 30% of its current market cap;
Further, the company has recently decided to sell its land at
Kolshet, Thane and move its plant to a new location. Based
on media reports, the company has around 88 acre of land in
Thane and is looking to raise about Rs.1,500-Rs.1,600 core.
Even if we consider realisation of Rs.1,200 core for the land,
post tax the cash would increase by about Rs.840 crore
(Rs.311 per share).
Considering its history with regards to being investors
friendly, we believe there is likely case for a special dividend
by the company in future as the total cash post the sale of 3
business units and land at Thane would increase to Rs.1,229
crore (Rs.456 per share);
For Q2CY2013 on CCILs net profit declined by 21.6% YoY
to Rs. 24 crore. While Revenue grew by 14% YoY to Rs. 327
crore, EBITDA declined by 17% YoY to Rs. 38 crore with
margin contracting by 420 bps to 11.5%. This was mainly
due to raw material and employee cost, which as a
percentage of sales increased by 194bps YoY and 305 bps
YoY to 63.3% and 10% respectively. For H1CY2013, while
the revenue grew by 15% YoY to Rs.612 crore, the
companys net profit declined by 13% YoY to Rs.49 crore.
Operating profit declined by 3.7% YoY with margin
contracting 233 bps to 12.1%. CCIL reported EPS of Rs.9
and Rs.18.3 for Q2CY2013 and H1CY2013 respectively.
CCIL has declared an interim dividend of Rs. 10 per share;
CCILs core business (after the sale of 3 units) would continue to
growth with focus on high margin businesses. We expect CCIL to
report an EPS of Rs.25.40 in CY2013. We value the core
business at Rs.254, 10x its CY2013E EPS, which we believe is
conservative given the MNC parentage. Further the company
would have cash per share of Rs.456 per share (Rs.145 existing
+ Rs.311 from land sale), giving a total fair value of Rs.710 per
share over a one year period and recommend Buy.

CMP: Rs.481 52 week H/L Rs. 674/371
Y/E Dec Revenue Adj. PAT Growth % EPS P/E
2011A 979 118 0.9 44.4 10.8
2012A 1,096 95 -20.0 35.5 13.5
2013E 663 68 -28.6 25.4 18.9
2014E 759 77 14.4 29.0 16.5

15

Glaxosmithkline Pharmaceuticals Ltd. (GSKP)
GlaxoSmithKline Pharma (GSKP) is a leading player in the
Indian pharma market with products across therapeutic areas
such as anti-infectives, dermatology, gynecology, diabetes,
oncology, cardiovascular disease and respiratory diseases. The
domestic pharmaceutical market is expected to reach $20 billion
by 2015, making it one of the world's top 10 pharma markets.
Domestic formulations industry is expected to grow at a CAGR
of ~15% over the next decade.
GSKP has a robust product pipeline aided by the strong
backing of its parent company, GlaxoSmithkline Plc, UK.
GSKP is the market leader in the dermatology, vaccines
and hospital segments. Its sales have grown nearly 2.2 fold
over the last 10 years and net profit has grown more than
3.8 times to Rs.662 crore during the last 10 years. GSKP
enjoys EBITDA margins of over 30% which is among the
highest in the industry. GSKP has excellent return ratios
and margin. It achieved ROCE of over 28% and ROE of
over 30% over the last few years. Hence, GSKP commands
a premium valuation over its peers;
GSKP and Biological E have agreed to set up a 50:50 joint
venture (JV) to develop a six-in-one vaccine for polio and
other infectious diseases. The transaction is expected to
complete in 2013 subject to several conditions including
regulatory approval of the JV;
For Q2CY2013, reported net profit declined by 30% YoY to
Rs.115 crore, while revenue declined by 2.5% YoY to
Rs.645 crore. EBITDA declined by 42.6% YoY to Rs.122
crore while EBITDA margins stood at 18.9% as compared
to 32.1% in CY2012. Companys performance suffered due
to supply constraints and trade related issues. Going
forward, GSK revenues would be impacted by ~5% of
annualised sales due to price reduction under new pharma
pricing policy (NPPP);
As per AIOCD AWCS data for the month of July 2013, GSK
sales declined by 5.6% as against the industrys 9.2%;
Recently, the GSK Pte. announced its intension to increase
its stake in its pivotal Indian division, GlaxoSmithKline
Consumer Healthcare from 43.2% to 75%, in a deal worth
591m and representing about 28% premium to the units
closing share price then. The parent has also announced its
plans to increase its stake in GlaxoSmithKline Consumer
Nigeria from 46.4% to 80% with a tender at N48 a share, a
premium of approximately 28%;
GSKP is a cash rich company, with cash and current
investments as of June 2013, stood at Rs.1,829 crore, which is
Rs.216 per share. GSKP has declared a dividend of Rs.50/share
for CY2012 giving a yield of 2.2% at the current price. We expect
GSKPs performance to improve from 2HCY2013 onwards due
to new product launches and growth in existing products. At
CMP of Rs.2,282, the stock is trading at 25.1x CY2013E EPS of
Rs.91. We recommend BUY on GSKP. Moreover, there could be
possibility of open offer even in GSK Pharma like the one
witnessed in case of GSK Consumer.

CMP: Rs. 2,282 52 week H/L Rs. 2,899/1,931
2011A 2,378 648 12.1 76.5 29.8
2012A 2,621 663 2.3 78.2 29.2
2013E 3,014 770 16.1 90.9 25.1
2014E 3,458 899 16.9 106.2 21.5

Siemens Ltd., (India) (SL)
Siemens Ltd., India (SL), a 75% subsidiary of Siemens AG,
Germany (a 78.3 billion company as on Sept,2012) is a zero-
debt & cash-rich company (cash of 11.4 billion as on
Sept,2012). The parent earlier had increased its shareholding by
19.8% in SL from 55.2% to 75% through an open offer in March
2011 and had diluted its stake by 1.2% to 73.8%. The
consolidation of operations and the open offer to increase its
stake gives us enough confidence of an eventual possibility of
delisting SL.
SL is emerging as a key beneficiary of the parent groups
growing global presence and it would become a key sourcing
destination for value-added products offered by it. Two
recent moves by Siemens, AG are expected to be positive
for the SL:
o Siemens group has started an NBFC, which will focus
on sectors like healthcare, infrastructure, energy and
industry, with an initial investment of $50 million from
the parent. This initiative will increase the demand for
capital goods from SL by facilitating capital available to
the customers;
o Siemens AG has charted a new strategy to design and
develop some 60 products especially for India, targeting
$1.3 billion in annual revenues from them alone by
2020;
For Q3SY2013 (September year ending), SL reported a net
loss of Rs.48.8 crore as against a profit of Rs.36.2 crore.
Revenue for the quarter declined by 12.5% YoY to Rs.2,643
crore. SL reported a loss of Rs.6.2 crore at the operational
level as against a profit of Rs.130 crore last year. Pursuant
to the significant developments in certain projects, the
company has revised estimated revenue, costs and project
related provisions and has charged a net amount of
Rs.135.4 crore for the same in Q3SY2013 as against NIL
last year. Order inflow during the quarter stood at Rs.2,620
crore, a 3% YoY decline;
During FY2012 (September year end), the amalgamated
Winergy Drive Systems Pvt. Ltd. with SL. It has also merged
another parent owned company - Siemens Power
Engineering (SPEL) with itself. This was after the company
had already merged Siemens Rolling Stock Pvt. Ltd in May
2011, Siemens VAI Metal Technologies Pvt. Ltd. and
Morgan Construction Company India Pvt. Ltd. in October,
2011;
SL has cash of Rs.344 crore and debt of Rs.320 crore on
books as on 31 March, 2013. Growing opportunities in India
and outsourcing from the parent is expected to lead to strong
earnings growth for SL over FY2013-14. Going forward, we
expect a reversal in the interest rate cycle and also a revival
in the capital goods segment, which will be positive for SL;
SL, with comfortable order book, is poised to benefit from its
NBFC foray & designing of over 60 new products and thereby
improve its growth prospects going forward and holds an
attractive delisting opportunity. Hence, we recommend BUY on
the stock with a target price of Rs.700.

CMP: Rs. 451 52 week H/L Rs. 750/419
Y/E Sept Revenue Adj. PAT Growth % EPS P/E
2011A 12,920 422 -50.1 11.8 38.0
2012A 12,145 430 1.9 12.1 37.3
2013E
13,068 571 32.8 16.0 28.1
2014E
14,205 665 16.5 18.7 24.1

16

Styrolution ABS (India) Ltd. (SAL)
Styrolution ABS (India) Ltd. (SAL) is a 75% subsidiary of
Styrolution Group GmbH, Germany. Styrolution Germany, a $10
billion company is a leading manufacturer of an engineering
plastic namely styrene monomer, polystyrene and ABS and is a
50:50 joint venture between global chemical giants BASF SE
(about $100 billion company) and INEOS ABS ($42 billion
company). The parent had tried to acquire 100% stake in SAL in
the past but has not been successful.
SAL is the market leader in the engineering plastics industry
in India with ~60% market share in ABS resins segment and
~68% in SAN resins segment. Absolac (ABS) is plastic
resin produced from Acrylonitrile, Butadiene & Styrene. Its
application ranges from home appliances to automobile,
consumer durables, business machines;
There is a huge demand supply gap for ABS in India which
is being met through imports over the years. CRISIL
Research estimates that the supply of ABS would grow at
17% CAGR to meet the demand during CY2010-15E. SAL
has expanded its SAN capacity from 36,000 tpa to 65,000
tpa, which has helped increasing its capacity of ABS from
60,000 tpa to 1,00,000 tpa. This expansion has been
funded through internal accruals. We expect the demand
growth to continue and provide steady revenue stream to
SAL;
SAL has been on a steady growth path. Over CY2008-
2012, its revenue and net profit has been consistently
growing at 13.1% CAGR and 36.7% CAGR respectively.
For Q2CY2013 SAL reported 16.5% YoY decline in net
profit to Rs.8.3 crore. Revenue for the quarter declined by
2.5% YoY to Rs.230 crore. Operating profit declined 1.1%
YoY to Rs.14.5 crore with margin remaining flat at 6.3%.
For H1CY2013, while the revenue remained flat at Rs.472
crore, SALs net profit declined by 10.1% YoY to Rs.23.4
crore. Operating profit and margin stood flat at Rs.38 crore
and 8% respectively. SAL reported EPS of Rs.4.7 and
Rs.13.3 for Q2CY2013 and H1CY2013 respectively;
The company has proposed internal re-structuring within its
businesses in India. The parent which has another private
company named Styrolution India private Ltd. is now
evaluating methods to combine the two companies under
one umbrella which would streamline management
operations and functions. We believe this is a likelihood of
merging the unlisted entity with SAL which would be very
positive as this would further improve the business through
better synergies of the combined entity;
We believe the impact of OFS has already been factored in the
price and the current valuation of 8.7x CY2013E EPS of Rs.40.4
offers a great opportunity to accumulate. We value the stock at
14.1x CY2014E EPS estimates to arrive at a fair price of Rs.660
from a long term perspective.

CMP: Rs. 350 52 week H/L Rs. 800/339
2011A 825 54 -22.9 30.7
11.4
2012A 989 63 15.9 35.6
9.8
2013E 1,116 71 13.5 40.4
8.7
2014E 1,273 83 16.2 46.9
7.5

17

Rupee Crash: Net exporters & producers of
import substitutes to benefit

18
Rupee Crash: Net exporters & producers of import substitutes
to benefit
In the three to four decades prior to Lehman crisis, the exchange rate of Indian Rupee (INR) against the US$ had been
depreciating in the range of 4-5% per annum. However, in the last 5 years, INR has witnessed huge volatility and fell more than
15% on four occasions. The first of these was post the Lehman crisis in 2008 and then thrice every year from 2011. INR has
depreciated by about 13% YTD in 2013 and by over 45% in last two years.
Exhibit 13: Sharp movement in INR-USD in the last 5 years
Sl. No From Date INR / USD To Date INR / USD % Change Duration
1 Aug 2008 42.35 Mar 2009 51.30 21% 8 Months
2 Aug 2011 44.08 Dec 2011 53.65 22% 5 Months
3 Mar 2012 49.22 Jun 2012 57.14 16% 4 Months
4 May 2013 53.82 Aug 2013 63.35 18% 4 Months
In our view, two set of reasons have led to such crash in INR. There has been a structural change in the Indian economy with the
ever increasing demand for imports of 5 major commodities Crude oil, Gold, Coal, Edible oil and Fertilizer. In the last 10 years,
the imports of these commodities have gone up from anywhere between 6 to 22 times. However, Indias exports have not kept
pace with its increasing imports leading to a huge negative trade balance, which has gone up 22 fold! On the back of these
structural changes, the pressure on INR compounded by the recent fear over the US Federal Reserve tapering its Quantitative
Easing (QE) and subsequent withdrawal of money from the domestic debt markets by the FIIs.
Exhibit 14: INR movement against USD
35
40
45
50
55
60
65
70
J
a
n
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0
8
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3

The way forward and how to benefit
Going ahead, unless the structural changes are addressed, the pressure on INR is unlikely to ease substantially in the short term. It
is likely to take one to two years for INR to appreciate by 10% to 20%. Meanwhile we believe the companies which are net
exporters or engaged in producing import substitutes would be the major beneficiaries. Hence, we present 6 stocks which were
also filtered in terms of valuations, growth prospects, tactical (like possible de-listing, stake sale, etc), dividend yields, etc.
Exhibit 15: Net Exporters and import substitutes (FY2013 standalone numbers)
Company
Revenue
(Rs. crore)
Net Exports
(Rs. crore)
Net Exports as
% of Revenue
Other positive highlights
Cairn India 9,201 8,708 95%
Largest and cheapest crude oil producer in the country
Oracle Fin Serv. 2,938 1,956 67%
De-listing possibility;
Cash rich
Polaris Fin Tech 1,854 839 45%
Cheapest valuation and Impressive dividend yield;
Management committed to enhance shareholders
value through restructuring
JB Chemicals 816 357 44%
Growing fastest in the domestic pharma space;
Cash rich and Cheapest valuation in the pharma space
Tata Coffee* 598 216 36%
Seen steep correction in stock price;
Subsidiary in the US engaged in coffee retailing doing
extremely well, posted close to 100% YoY profit growth
in Q1FY2014
Hindustan Zinc 12,700 681 5%
Tactical opportunity from divestment of government
stake through auction route; Cash rich;
Major producer of silver whose prices are expected to
rise significantly;
Producer of Zinc, which is a major import substitute

19
Exhibit 16: Valuation Table
Company Name
CMP
(Rs.)
Market Cap
(Rs. Cr.)
Target
Price (Rs.)
Upside
(%)
52 Week
High (Rs.)
52 Week
Low (Rs.)
EPS (Rs.) P/E (x)
FY2014E FY2015E FY2014E FY2015E
Cairn India 311 59,224 375 21.0 367 268 51.5 46.2 6.0 6.7
Oracle Fin. Serv. 2,876 24,181 3,300 15.0 3,415 2,350 143.3 167.8 20.1 17.1
Polaris Fin. Tech 105 1,045 145 38.1 148 96 24.1 27.2 4.4 3.9
JB Chemicals 82 695 120 46.3 96 64 12.9 15.8 6.4 5.2
Tata Coffee* 958 1,789 - - 1,680 880 72.3 84.1 13.3 11.4
Hindustan Zinc 116 49,014 144 24.1 147 94 15.9 16.8 7.3 6.9
* Note: Tata Coffee is not under our coverage. We have started buying this stock for our clients under fund management over the last few months;
Source: Bloomberg, Company, Centrum Wealth Research

Siddhartha Khemka, VP - Research
(siddhartha.khemka@centrum.co.in; +91 22 4215 9857)
Rijul Gandhi - Research Analyst
(rijul.gandhi@centrum.co.in; +91 22 4215 9415)

20

Cairn India Ltd. (CIL)
Cairn India Ltd. (CIL) is one of the largest independent oil and
gas exploration and production companies in India producing
more than 20% of Indias domestic crude oil production. It
operates the largest onshore oil field in India, the MBA (Mangala,
Bhagyam and Aishwariya) fields in Rajasthan, having gross
recoverable oil reserves of ~1 billion barrels and has made over
40 oil & gas discoveries. The production at Rajasthan fields grew
by 32% YoY to 169,390 bpd in FY2013. The average overall
daily gross operated production grew by 19% YoY to 205,323
barrels per day (bpd) in FY2013. The CIL-ONGC JV has started
commercial sale of 5 million standard cubic feet per day of
natural gas initially from its Barmer fields in March 2013, to be
sold at around $5/mBtu. Also, CIL has commenced production at
its Aishwariya field, the 3rd largest discovery in the Rajasthan
block. The field will be ramped up to its plateau of 10,000bpd in
FY2014E.
CIL has recovery and basin production potential of 300,000
bpd from the Rajasthan block. The JV expects product
made its 26th discovery in India so far in the RJ-ON-90/1
block and has commenced drilling of 1st exploration well in
Barmer after a gap of over 4 years which will help realise
the estimated 0.5 billion barrels of oil equivalent (boe) of
risked recoverable prospective resource, amounting to
~1/3rd of the Estimated Ultimate ion rate of 200,000-
215,000 bpd from the block by end FY2014. CIL has also
acquired 600 sq. km of 3D seismic in Block SL 2007-01-001
in early 2012 and spud its 4th exploration well in the block
on February 2, 2013;
CIL is planning to invest more than Rs.16,000 crore ($3
billion) for new exploration till FY2016 including Rs.13,000
crore ($2.4 billion) to drill more than 450 wells in its
Rajasthan block. With these new explorations CIL is
targeting to add 530 million barrels of oil to its reserves. CIL
indicated delayed ramp up of Bhagyam field (in
H2FY2014E) with drilling of 15 additional wells. However, it
is accelerating its plans to drill 30 wells in FY2014 and
FY2015 each. So far CIL has invested a total of Rs.18,000
crore in Rajasthan fields and plans to invest Rs.6,000 crore
in FY2014;
For Q1FY2014, CIL reported a 8.3% YoY decline in
consolidated net profit to Rs.3,127 crore against Rs.3,826
crore in Q1FY2013, mainly led by decline of about 16%
YoY in EBITDA and a 19% YoY increase in depreciation.
The revenue declined by 8.5% YoY to Rs.4,063 crore. CIL
has achieved highest ever gross operated production of
212,442 bpd in Q1FY2014. It plans to increase crude
production in the Rajasthan block from the current 180,000
bpd to 210-215,000 bpd by FY2014. The block also
witnessed a full quarter of gas sales from the Rageshwari
Deep gas field which commenced in March 2013;
Crude Oil (Brent) prices have remained steady with a marginal
fall of 0.8% since the start of 2013 as against the average
decline of about 7% in the international prices of other non agri
commodities during the same period. This is positive for CIL.
The company has net cash reserve of Rs.16,000 crore as on
March 31, 2013 and is expected to generate about Rs.10,000
crore each year for next few years. With most of the regulatory
issues being addressed, CIL is poised to focus on ramping up its
production. Considering capacity expansion, firm oil prices and
substantial cash flow we maintain our BUY on CIL which trades
at 6.7x FY2015E EPS of Rs.46.2/share with a price target of
Rs.375.
CMP: Rs. 310 52 week H/L Rs.366/268
2012A 11,861 7,938 25.3 41.6
7.5
2013A 17,524 11,920 50.2 62.4
5.0
2014E 16,582 9,847 -17.4 51.5
6.0
2015E 17,076 8,827 -10.4 46.2
6.7

J.B. Chemicals & Pharmaceuticals Ltd. (JBC)
JB Chemicals (JBC), a mid-sized pharmaceutical company, had
sold off its OTC business in Russia/CIS in FY2012 for Rs.1,155
crore. It is one of few companies to share the cash proceeds with
the shareholders which indicates a good management - it gave
out a special dividend of Rs.40/share (a total dividend including
dividend tax - of around Rs.400 crore).
JBC has posted an impressive result for Q1FY2014 with its
standalone net profit growing by 4.7 times (372% YoY)
backed by a 24% YoY growth in operating income and
EBIDTA growing by 102% YoY. The formulation exports
business, which accounts for almost 50% of revenue, grew
by 28% during the quarter. The overall sales in domestic
formulations business grew by 19% YoY with API revenue
witnessing a growth of 62% YoY. The total sales under the
supply agreement with Cilag GmBH International, a Johnson
& Johnson affiliate, registered a growth of 15.5% YoY and
this is expected to grow further over the coming quarters;
JBC has been consistently outperforming industry growth
rate since July 2012. We expect this outperformance to
continue going forward. The focus of the company is on the
contract manufacturing opportunities and on niche branded
generics;
On a consolidated basis, the companys net cash for
FY2014, after accounting for the Rs.64.5 crore to be
transferred to Cilag GmBH Intl., is expected at Rs.442 crore
(cash & current investments of Rs.506.4 crore minus debt of
Rs.44.5 crore), which is 64% of current market cap of Rs.695
crore. Its book value stood at Rs.120/share as on March 31,
2013;
Considering revenue growth and current margin, the
company can achieve Rs.12.90 EPS in FY2014E, implying a
P/E of 6.4x at current market price. Further, we estimate net
cash and equivalents (net of debt) of Rs.52/per share as on
June 2013 at current stock price, its net Enterprise value is
just about 25% of its sales which is extremely attractive
when we consider anywhere 3 to 6x valuations given to
recent acquisitions in the pharma space. We reiterate BUY
with a fair value of Rs.120/share in case JBC joins
consolidation process, then it can provide a multi-bagger
opportunity in the medium to long term;
We consider JBC as the most defensive stock operating in
defensive pharma business, growing faster than the domestic
industry since July 2012, investor friendly management (rewarded
with special dividend), sitting on huge cash and also debt free,
and on our expectation of a dividend of Rs.4 per share for
FY2014, also offers 4.9% dividend yield. Hence, we suggest all
our clients continue to accumulate the stock.

Consolidated Financial Summary (Rs. Cr.)
CMP: Rs. 82 52 week H/L Rs. 96/64
2012A 802 68 -51.3 8.0 10.2
2013A 866 79 17.2 9.4 8.7
2014E 1,017 109 37.2 12.9 6.4
2015E 1,220 134 23.2 15.8 5.2

21

Oracle Financial Services Software Ltd. (OFSS)
Oracle Financial Services Software (OFSS), a subsidiary of
Oracle Corp. USA, the global leader in providing software
platforms to Banking and Financial Services Industry (BFSI) and
enterprise solutions.
The company witnessed revenue growth of 10% in FY2013
after a slower growth of an average 2% over FY2010-12.
For FY2013, the product revenue (which contributes 75% to
the total revenue), grew by 14% and helped the overall
growth momentum;
For Q1FY2014 on a consolidated basis, OFSS reported a
growth in net profit by 30.2% QoQ (declined by 0.5% YoY)
to Rs.366 crore. The companys revenue grew by 2% QoQ
(declined by 5% YoY) to Rs.899 crore. EBIT grew by 1.7%
QoQ (declined by 14% YoY) to Rs. 320 crore. The EBIT
margins stood at 35.5% for the quarter. The company
signed new licenses worth $18 million and 10 new
customers for the product portfolio in Q1FY2014. The EPS
for the quarter stood at Rs.43.6 as against Rs.43.7 in
Q1FY2013. On a segmental basis, the revenue from the
Product business grew marginally by 0.8% QoQ (declined
by 3.4% YoY) to Rs. 687 crore. The services business grew
by 8.2% QoQ (declined by 10.7%YoY) to Rs.191 crore. On a
geographical basis, North America grew by 23% QoQ
(declined 7.6% YoY) to Rs. 315 crore. Asia Pacific declined
by 14.1% QoQ and 5% YoY to Rs. 288 crore. Europe,
Middle East and Africa (EMEA) grew by 2% QoQ (declined
2% YoY )to Rs. 297 crore;
Over the last 5 quarters, OFSS has added 51 new clients
set across various geographies thereby increasing its
market share. It signed license agreements worth $80.3
million over the last 5 quarters. It diversified its hold in to
new geographies by signing licenses in nations such as
Ethopia, Kenya, Nigeria, Zambia, Oman and Myanmar
which have high growth prospective. Going forward, we
expect the revenue to grow at 13-14% over FY2013-15E, in-
line with the expected industry growth of 12-14% for FY2014
by NASSCOM;
As on June 2013, the company was sitting on a cash of
Rs.5,792 crore which is about 24% of the current market
capitalization. Oracle Corp has a history of not declaring
dividends and the investors had to wait for 23 years when it
first declared a dividend in 2009. Since then both Oracle
Corp (US) and Oracle Japan have been declaring regular
dividends. OFSS last declared a dividend of Rs.5 per share
in 2006. Going forward, considering the improvement in
profitability and the significant cash in books, we believe
OFSS might follow its parent and start declaring regular
dividends;
OFSS enjoys one of the highest net profit margins in the
industry at 31%. The companys return on capital employed
(RoCE) has historically remained above 20% despite the
high level of cash in balance sheet;
At the current price, the stock is trading at 20.1x FY2014E and
17.1x FY2015E earnings estimate which is in line with large IT
services companies. We believe that the stock is attractive
considering 1) expected improvement in financial performance
going forward; 2) strong balance sheet with cash of Rs.653 per
share (23% of the CMP); and 3) strong balance sheet of parent
(net cash of close to $14 billion) and INR depreciation of close to
39% in the last two years can lead to buy back or de-listing would
offer tactical opportunity.

CMP: Rs. 2,876 52 week H/L Rs. 3,414/2,350
2012A 3,147 909 -18.0 108.2 26.6
2013A 3,474 1,075 18.2 128.0 22.5
2014E 3,891 1,204 12.0 143.3 20.1
2015E 4,475 1,409 17.1 167.8 17.1

Polaris Financial Technology Ltd. (Polaris)
Polaris Financial Technology Limited (Polaris) a leading global
player in Specialty Application Development for the BFSI sector.
Over the years, the company has strengthened its product and
services profile with the help of global acquisitions. Polaris has a
strong base of more than 200 customers with 80 of them as
strategic accounts. It gets around 58% of revenues from its top 10
clients with Citigroup forming a bulk of it, with whom it has been
dealing since last 15 years.
Recently, Polaris approved of an organizational
restructuring. Polaris currently operates in three verticals -
software services, products and cloud computing. Polaris
has planned five chief executive officers for different verticals
to improve focus and client success ratio;
With acquisition of Patni by iGate, we believe there can be
further consolidation in the mid and small sized IT
companies and the average PE multiple of companies like
Polaris, which are witnessing strong operating performance,
should shift vertically. The company is exploring options
including appropriate restructuring, that would provide an
impetus for the next stage of its growth, in order to maximize
shareholder value;
For Q1FY2014, Polaris reported a decline in PAT by 1.4%
QoQ and 29.4% YoY to Rs.43 crore. The decline was on
account of forex loss and higher software development
expenses. Revenue grew by 5% QoQ and 0.4% YoY to
Rs.584 crore. The operating profit grew by 8.9% QoQ,
however the same declined 8.5% YoY to Rs.101.4 crore.
The EBITDA margins stood at 17.3% in Q1FY2014. The
company acquired 11 new clients during Q1FY2014. The
debtor collection period improved to 107 days as compared
to 118 days in Q1FY2013. The cash and cash equivalents as
on June 30, 2013 stood at Rs.571 crore which is 54% of the
current market cap;
The company is looking at divesting its stake in IdenTrust Inc
due to security reasons raised by the US government.
Polaris acquired 85% stake in the company for US$19
million. The management do not expect any significant
losses from this sale;
Polaris has been improving its dividend payout over the
years and had paid Rs.4.50 and Rs.5 in FY2011 and
FY2012 respectively. The Board paid a final dividend of Rs.5
for FY2013 which translates into a yield of 4.8%;
At the current price of Rs.105, the stock is available at an
attractive valuation of 4.4x FY2014E EPS of Rs.24.1 and 3.9x
FY2015E EPS of Rs.27.2. While the result subdued, we believe
that consolidation story would play out within IT sector and Polaris
would be one such company to benefit from this theme.
Considering business restructuring plan and mandate to enhance
shareholder value indicated by the management, we recommend
investors to Buy Polaris for a target of Rs.145, giving an upside of
38% from current levels.

CMP: Rs. 105 52 week H/L Rs. 147/96
2012A 2,049 221 13.8 22.2 4.7
2013A 2,308 201 -8.9 20.2 5.2
2014E 2,597 239 19.1 24.1 4.4
2015E 2,909 271 13.1 27.2 3.9

22

Tata Coffee Ltd. (TCL)
Tata Coffee Ltd (TCL) is the largest integrated coffee plantation
company in the world with business ranges from growing and
curing of coffee & tea to manufacture and marketing of value
added coffee products. TCL has a huge plantation area of
25,447 acres or 10,303 hectares, as of FY2013. Around 77% of
standalone revenue comes from the coffee segment while Tea,
Pepper and Estate supplies contribute 12%, 5% and 6%
respectively.
Acquisition of Eight Oclock coffee (EOC), helped TCL to
transform from being just a commodity player into a
significant branded player. EOC contributes around 65% of
the consolidated top-line of TCL numbers. EOC registered
sales CAGR of 10.2% to Rs.1,099 crore over FY2008-2013.
Furthermore EOC, re-launched its brand and introduced
new products in US and Canadian market which would
drive growth growing forward;
Instant coffee share in the standalone revenue is
consistently increasing, from 38% in FY2010 to 54% in
FY2013 and is expected to be around 75% going ahead.
The segment has higher margins and is helping the overall
PAT margins to improve (from 9.8% in FY2010 to 16.8% in
FY2013). Company is planning to invest more than Rs.300
crore over the next 3 years to increase its instant coffee
production capacity, which may partly be achieved via
acquisitions outside India;
TCLs has made an agreement to supply coffee beans to JV
Tata Starbucks in India and also to Starbucks operations
in South East Asia. Tata Starbucks currently operates
around 17 outlets and it plans to have 50 outlets in the
country by 2013. Further, Starbucks (Global) approximately
has 700 retails (licensed and company operated) chains in
South East Asia. Supplying coffee beans to these chains
would boost TCL standalone revenue going ahead;
TCL is a net exporter and as of March 2013, its net forex
earnings stood at Rs.216 crore, 36% of the companys
standalone revenue and hence INR depreciation is
beneficial for TCL;
During Q1FY2014, Average Arabica coffee prices are down
by 21.9% YoY to 132.4 cents/lb while Robusta prices are
down 7.4% YoY to $1,916 tonne. EOC uses Arabica and
Robusta green beans as its raw material and hence fall in
their prices would be margins accretive for the company.
On a consolidated basis, for Q1FY2014, net profit grew by
43% to Rs 40.4 crore while total income was up 1% YoY to
Rs.418 crore. EBITDA grew by 49.3% YoY to Rs.103 crore
while margins stood at 24.5% as compared to 16.6% in
Q1FY2013;
TCL stock has corrected by 42.8% from its 52-week high of
Rs.1,675. The stock is currently trading at attractive valuation of
11.4x its consensus FY2015E EPS of Rs 84.1 per share. We
believe that TCL is strong play on branded coffee retail (EOC)
and growing demand for coffee & tea. Hence we are positive on
the company.

CMP: Rs. 958 52 week H/L Rs. 1,675/880
2012A 1,549 81 11.9 43.5 22.0
2013A 1,697 116 43.2 62.2 15.4
Source: Company; Centrum Wealth Research

23

Sector strategy during turbulent time

24
Sector strategy during turbulent time
We expect the domestic economic growth to remain subdued for another 3 to 6 months and GDP growth to continue to remain
below 5% till 3rd quarter of FY2014. This low growth scenario for next 3 to 6 months would be characterized by high borrowing
costs, deterioration in quality of banking assets, subdued capital expenditure, lower level of job opportunities and income
generation especially in the urban economy and continued stress on both exchange rate of Rupee and the fiscal balance.
Considering this environment, we suggest the following sector strategy for the period till elections.
Exhibit 17: Sector Strategy
Sector
Recommenda
tion
High conviction
Stocks
Remarks
Banking &
Financials
Neutral
Karur Vysya,
City Union,
HDFC Bank,
J&K Bank,
YES Bank
Asset quality would continue to deteriorate especially for the PSU banks;
Credit growth to remain subdued due to high interest regime maintained over
last 2 years and with further tightening of liquidity by RBI.
Information
Technology
Overweight
Oracle FinServe,
Polaris, CMC
#

Over 45% fall in exchange rate in the last 2 years of INR is positive;
It would be very difficult for INR to recover beyond 10% in next 6 months. In case
of any rating downgrade INR can fall further, significantly. The IT sector would
remain a safe bet in this environment;
Further revival of US economy would also be positive for Indian IT industry.
Energy Neutral RIL, Cairn India
While INR fell 13% YoY, oil prices remain quite firm leading to more stress on oil
under-recovery. Difficult for the government to shift the entire burden on people
during the election time, hence PSU upstream and oil marketing companies
would share larger burden;
Prefer private operators as they are likely to benefit from INR depreciation,
volume growth and increase in gas prices.
FMCG Overweight
ITC, Tata Coffee
#
,
Britannia
#
, Akzo
Long term growth prospects still remain better, compared to other sectors;
FMCG would remain the best defensive and can mitigate any possible risk
arising from further domestic shocks
Automobiles
&
Components
Neutral
M&M, MRF,
Bosch, JK Tyre
Low GDP growth and high interest regime would lead to continued deceleration
in automobile sales for at least next 3 months;
Competition cutting across segments (car producers getting into SUVs, high-end
car producers getting into small cars, etc) would provide further pressure to
automobile producers;
While M&M set to gain in tractor segment due to successful monsoon, ancillaries
would gain from recent boom in automobile population and consequent robust
demand from replacement markets.
Capital
Goods
Underweight
SIEMENS, BHEL,
L&T
Sector would continue to suffer poor order inflows, slow execution and high
interest costs;
While long term investments can be made in L&T and BHEL, investors can bank
on Siemens for tactical reasons (possible delisting).
Metals/Mining
Underweight
on Metals;
Overweight on
resource
producers
HZL, NMDC, MOIL
Growth slowdown to be negative for metal companies;
However, competition among resource companies is less intense and some are
debt-free, cash rich and make extra-ordinary profit margins hence, better
positioned to change their fortunes in a big way as and when economic
conditions turnaround.
Telecommuni
cation
Services
Neutral None
Reliance Jio launch can increase the competitive intensity again in the data
business;
Balance sheets still under pressures for most players;
Sector would start witnessing renewal of spectrum and licenses at circle level
which would increase balance sheet pressure.
Healthcare Neutral
J B Chemicals,
Indoco Remedies,
Wockhardt*
Prefer domestic pharma players as they continue to get benefit from off-patent
blockbuster drugs and are relatively least impacted from pharma pricing policy ;
Sector is expected to grow ~18% over the next 2-3 years.
Real Estate/
Infra
Underweight NESCO
Sector is facing challenge from slowdown in the economy and hence, poor
demand, and high interest rate regime;
Recommend BUY on NESCO alone at this juncture as its revenue model is
based on rental income from exhibition centre & IT Parks.
Note: *Recommended exclusively for risk-taking investors while investors may lose about 20% in the worst case scenario, if company
successfully comes out from the US FDA Alert, then stock can be a multi-bagger.
#
Not under our coverage, however, we have started buying these
stocks for our clients under fund management over the last few months;

25
Portfolio Allocation and Investment Suggestion
Considering the substantial volatility expected in equity markets during the next 6 months, we prefer a defensive strategy. Hence,
we suggest having minimum 15% cash within equity asset class for another 3 months or till individual stocks are further beaten
down badly. Within the equity asset class, we would prefer large cap and fairly large mid cap companies for investments. Within
this framework, we prefer export oriented sectors, import substitutes, domestic demand themes, high dividend yi eld stocks and
beaten down value stocks. Investors should avoid highly leveraged companies and stocks with high promoter pledging.
Exhibit 18: Sectoral Allocation and preferred stocks
Allocation by Sector / Theme Allocation Stock Picks in the sector
FMCG 15% ITC, Tata Coffee
#
, Britannia
#
, Akzo
IT 10% Oracle, CMC
#
, Polaris, Infosys - Hold
Pharma/ Healthcare 10% Biocon, JB Chemical, Indoco
Dividend Yield 20% KCP Sugar, Surya Roshni, HIL, Indraprastra Medical, BLIL
Banking (Value picks) 15% HDFC Bank, KVB, CUB
Beaten Down Value stocks 15%
Balmer Lawrie, Andhra Sugar, BASF, Linde*, NMDC, MOIL, JK Tyre,
Nesco, BBTC, Wockhardt*
Cash 15%
Total 100%
Note: *Recommended exclusively for risk-taking investors while investors may lose about 20% in the worst case scenario, if company successfully
comes out from the US FDA Alert, then stock can be a multi-bagger.
#
Not under our coverage, however, we have started buying these stocks for
our clients under fund management over the last few months;


26
FMCG
Akzo Nobel India Ltd. (Akzo)
Akzo (previously known as ICI India) is a strong player in paints and chemicals business with over 100 years of presence in India. In 2008,
Akzo Nobel NV, Netherlands took equity ownership of Imperial Chemical Industries, UK and currently has 72.96% equity stake in the
Indian subsidiary. During FY2012, Akzo commissioned two new plants one in Hyderabad for decorative paints and another in Bangalore
for coil coatings increasing its total facilities to 5 plants.
Further the greenfield expansion at the Gwalior plant (mainly for its decorative segment) is expected to get commissioned in 2 phases
of 50 milllion litres per annum each, of which 1st phase would be commissioned in next few months. This facility would help address
growing demand from the North and East India. The company is currently focusing on decorative segment which contributes around
57% of its total sales. We believe this would improve the overall profitability of the company, as this segment enjoys higher margins;
During Q1FY2013, Akzo merged three parent owned unlisted entities in India with itself, which led to increase in promoter holding to
68.9% from 59.6%. The company believes that the merger has created an integrated coatings and chemicals company, with
significant synergies in several segments, namely, premium decorative, industrial and automotive coatings;
In July 2012, the company completed buyback of 13 lakh equity shares at Rs.920 per share which increased the promoter stake t o
70.8%. The promoters further acquired 10 lakh shares in the company in August 2012 increasing their holding to current 72.96%. We
believe that consolidation in the business and increasing promoter stake signals a strong case for de-listing. Akzo has cash and
investments of Rs.1,033 crore or Rs.221 per share as on March 31, 2013 which is 18.9% of current market capital. We believe that the
company may go for another round of buyback before eventually going for de-listing;
For Q1FY2014, net profit declined by 43% YoY to Rs.35 crore mainly on the back of decline in other income, even as revenue gr ew
2% YoY to Rs.574 crore. EBITDA declined by 8% YoY to Rs.49 crore, with margins contracting by 93 bps YoY to 8.5%. Other income
fell by 71% YoY to Rs.10 crore. For FY2013, while the net income rose 12.3% to Rs.2,232 crore, the company's net profit increased
8.45% YoY to Rs.218.8 crore;
Akzo at the current price is trading at 16.1x FY2014E EPS of Rs.51.5 and is the most attractive as compared to other listed paint
companies. We believe the company is well placed to benefit from the improved outlook for the paints industry combined with the expected
higher dividend and a possibility of de-listing. Hence we recommend BUY on the stock with a target price of Rs.1,300 per share.

CMP: Rs.828 52 week H/L Rs. 1,196/820
Y/E Mar Revenue Growth % EBIDTA EBIDTA (%) Adj. PAT Growth % EPS (Rs.) P/E
2012A 1,988 81.2 175 8.8 202 14.1 43.3 19.1
2013A 2,232 12.3 189 8.5 219 8.4 47.0 17.6
2014E 2,510 12.5 210 8.4 240 9.6 51.5 16.1
2015E 2,875 14.5 245 8.5 303 26.3 65.0 12.7

Britannia Industries Ltd.
Britannia is the largest player in the fast growing biscuits category with a market share of over 30% with a strong portfolio of brands like
Tiger, 50:50, MarieGold, Good Day, Milk Bikis, Treat and NutriChoice. Britannia is focusing on premiumisation of its product portfolio. We
believe it will help the company achieve better margins in the long term.
The recent management change in Britannia appears more likely to be related to building its snack food franchise. Dairy is also a large
opportunity and Britannia offers a great proposition in the segment given the quality of its product portfolio. Britannia is setting up
plants in different geographic locations (two new units at Patna and Odisha, new bakery plant in Gujarat at a cost of Rs.50 crore) to
reduce freight cost. This will help reduce lead distance by 100-150kms. The company has also implemented initiatives like alternative
fuels to keep costs as low as possible;
Britannia has come out with strong Q1FY2014 results. On a consolidated basis, Britannias net profit grew by 93% YoY to Rs.89.5
crore while revenue increased by 15% YoY to Rs.1,552 crore. EBITDA increased by 73% YoY to Rs.138 crore, while EBITDA margins
expanded by 300bps YoY to 8.9%. EPS for the Q1FY2014 stood at Rs.7.48 as compared to Rs.3.89 per share in Q1FY2013;
At the current market price of Rs.715, the stock is trading at 28.6x FY2014E consensus EPS of Rs.25 and at 24.0x its consensus
FY2015E EPS of Rs.29.80. The stock is one of the cheapest in the FMCG space with market cap to sales of 1.4x on FY2013
compared to other domestic firms which are trading at anywhere between 3-5x market cap to sales;
We believe that it is one the preferred branded plays in the biscuits space and is a possible acquisition target of firm like ITC which is
scouting for inorganic ways to grow its business. Considering its size and cheap valuations it could be one of the preferred companies for
any acquisition. Hence, we recommend accumulating the stock considering medium to long term investment horizon.

CMP: Rs. 715 52 week H/L Rs. 775/400
Y/E Mar Revenue Growth % EBIDTA EBIDTA (%) Adj. PAT Growth % EPS (Rs.) P/E (x)
2012A 5,485 19.0 311 5.7 200 48.9 16.7 42.9
2013A 6,185 12.8 421 6.8 260 30.0 21.7 33.0

27
Information Technology
CMC Ltd.
CMCs unique solutions approach in the System Integration space along with focus in the hi -tech space has enabled it to post robust
growth in an uncertain environment and also ensures revenue stickiness for the future. The company has been working for the last several
years with TRW, a large automotive electronic player, primarily due to its unique domain capabilities and hi -tech approach.
We believe that like other successful mid cap focused players, CMCs expertise has been the hi -tech space where competition has
been limited, which has enabled significant revenue and client stickiness. The solutions and technology approach, along with TCS
parentage provides it with all advantages of a large player (in spite of being a small player), right from capabilities to offer services
across geographies to a large balance sheet required to participate in huge projects like the Indian passport project;
For Q1FY2014 on a consolidated basis, CMC reported a net profit decline of 13.4% QoQ and 9.1% YoY to Rs.53.1 crore. Revenue
declined 7.1% QoQ (grew by 7.6% YoY) to Rs.486.6 crore. EBITDA declined by 5.8% QoQ (grew by 2.4% YoY) to Rs.77 crore and
the EBITDA margins stood at 15.8% for the quarter. On a segmental basis, system integration (SI) segment which contributes around
58% of the total revenue grew by 7.8% QoQ and 10.8% YoY to Rs.293 crore. CMC added 16 new clients (14 domestic and 2
international) in the quarter. The management has planned for a capex of Rs.230 crore for FY2014 and has incurred a capex of Rs.38
crore in Q1FY2014;
We expect CMC to continue its endeavor to enhance revenue contribution of high margin SI and ITES segments. Further, with its focus on
higher off-shoring in the SI segment we expect the overall margins to improve over the next two years. At the current price of Rs.1,262 the
stock is trading at P/E of 13.7x its FY2014E consensus EPS of Rs.92.11 and at 11.1x its consensus FY15E EPS Rs.114.16 respectively.

CMP: Rs.1,262 52 week H/L Rs. 1,523/951
2012A 1,463 35.5 224 15.3 152 45.5 50.0 25.2
2013A 1,928 31.2 317 16.4 230 51.7 76.0 16.6

Infosys Ltd.
Infosys is the second-largest IT services company in India with revenue of ~$7.4b (FY2013) and employing over 157,000 people. It offers
IT and IT-enabled business solutions to its clients across more than 30 countries. Infosys has 87 global development centers and 69 sales
offices. Its wide service offerings include business and technology consulting, ADM, SI, product engineering, IT infrastructure services and
BPO.
According to NASSCOM, Indian IT exports are expected to grow by 12-14% to $87 billion in FY2014 as against growth of 10% in
FY2013 at $75.8 billion. Moreover, the expectation of economic revival in US can further improve demand for Indian IT sector. Post
Q1FY2014 results, Infosys management maintained its revenue growth guidance of 6-10% in dollar terms and 13%-17% in INR terms
for FY2014;
For Q1FY2014, on a consolidated basis, revenues grew by 7.8% QoQ (17.2% YoY basis) to Rs.11,267 crore aided by volume growth
of 4.1% QoQ (5.8% onsite and 3.3% offsite). Net profit declined by 0.8% QoQ (3.7% growth on YoY basis) to Rs.2,374 crore. EBIT
grew by 8.2% QoQ to Rs.2,664,crore, maintaining the margins at 23.6%;
Lodestone Holdings AG (contributing ~6% of the consolidated revenue in FY2013) which was acquired by Infosys in October 2012
saw a turnaround in the current quarter. Lodestone posted a net profit of $1.88 million as compared to a loss of $3.44 million in
Q4FY2013. Its revenue grew by 29% QoQ to $90.67 million;
Infosys won 7 large deal wins with total contract value of $600 million in 1QFY2014, of which 6 are in the US. Over the past three
quarters, Infosys has bagged large deals worth around $1.6b, largely in outsourcing, which could drive growth in Business IT Service
(BITS) going forward. The company has scope to improve operating margin going forward by way of increased utilization and revenue
proportion from offshore;
The company has cash and equivalents of Rs.24,078 crore as on June 30, 2013, which translates to Rs.421 per share (14% of the
current market price). In terms of cash utilization, we believe the company may opt for any of the following : 1) Acquisition outside
India which could further help achieve growth apart from hedging the risk of the proposed new US Visa Bill; 2) Buy-back of shares or
special dividend; 3) Invest in products, platforms and solutions ideas in line with Infosys 3.0 strategy (the company has alr eady set
aside up to Rs.550 crore for this);
At CMP, the stock is trading at 16.2x FY2015E EPS of Rs.185 per share. We believe that the stock is fairly priced considering valuation
and the fact that Q2FY2014 may face margin pressure due to impact of wage hike. We advise Hold on the stock only for the long term
investors as IT sector becomes a defensive in case of further Rupee depreciation.

CMP: Rs.2,999 52 week H/L Rs. 3,098/2,190
2012A 33,734 22.7 10,749 31.9 8,332 6.3 146 20.6
2013A 40,352 19.6 11,569 28.7 9,421 13.1 165 18.2
2014E 43,958 8.9 12,033 27.4 9,602 1.9 168 17.8
2015E 48,410 10.1 13,190 27.2 10,545 9.8 185 16.2

28
Pharma
Biocon Ltd.
Biocon is present across the entire biogenerics space and has strong technological skill-sets to develop complex biotechnology products
on its own. In the next 5 years nearly $33 billion ($17 billion in US alone) worth of biotechnology products are likely to lose patent protection
globally. Biocon is likely to benefit from this as its plans to file 20 ANDAs in the US market post FY2015.
Biocon has identified 5 growth verticals API business, Bio-simillars, formulations business, novel programme vertical and research
services. With low leverage and as a net exporter (about 10% of total revenues), Biocon is better placed than a lot of its domestic
peers. Recently, Biocon has hired the services of global consulting giant McKinsey to create a new structure to help the company
achieve its ambitious target of $700 million revenue in 2015 and $1-billion revenue target by 2018;
Biocon is the leading supplier of Orlistat API (anti-obesity drug) to the developed markets and generated sales of over Rs.100 crore
per annum. It has entered into collaboration with Abbott Labs, US for neutraceutical research. Biocon is likely to spend Rs.200 crore
on its new R&D centre and aims to build its Rs.300 crore healthcare business to Rs.1,000 crore in 5 years;
Biocon has launched ALZUMAb, a new biologic for treatment of psoriasis at about 50% cheaper than other psoriasis drugs for which
the domestic market size is around Rs.200 crore. If successful, Biocon plans to market the drug in international market which is
expected to be about $8 billion by 2016;
Biocon has entered into an option agreement with Bristol-Myers Squibb (BMS) for IN-105, an oral insulin drug candidate. If BMS
exercises its option to license IN-105 following the successful completion of Phase II trial, it will assume full responsibility for the
programme including development and commercialization outside India. Biocon will receive a license fee in addition to potential
regulatory and commercial milestone payments, and royalties on sales outside India;
On a consolidated basis, for Q1FY2014, Biocons net profit grew by 21.3% YoY to Rs.97 crore backed by a 24.6% YoY growth in
EBIDTA. Sales grew by 21.5% YoY backed by a 21% YoY growth in the biopharma segment, 17% YoY in branded formulations and
26% in research services. The company incurred R&D expenses of Rs.43 crore which were 10% of the Biopharma revenue. Biocon
paid a dividend of Rs.5/share along with a special dividend of Rs.2.50/share for FY2013;
Biocon is a net debt-free company with borrowings of Rs.374 crore as against cash and cash equivalents of Rs.652 crore and current
investments of Rs.633 crore as on June 30, 2013. The stock is currently trading at an attractive valuation of 14x its FY2015E earnings of
Rs.24.3/share. We recommend a BUY on the stock with a fair value of Rs.390/share.
CMP: Rs.341 52 week H/L Rs. 352/243
2012A 2,087 -24.7 517 24.8 338 -0.8 16.9 20.2
2013A 2,428 16.4 486 20.0 307 -9.3 15.4 22.2
2014E 2,938 21.0 595 20.3 380 23.8 19.0 17.9
2015E 3,672 25.0 727 19.8 486 28.0 24.3 14.0

Indoco Remdies Ltd. (IRL)
Indoco Remedies Ltd (IRL) has a strong brand portfolio of 120 products across various therapeutic segments with its top 10 brands
contributing about 60% to its domestic sales and has 5 brands in top 500 brands globally. IRL is looking to expand its presence in other
regulated markets like US and emerging nations. It is targeting exports business to grow at 25-30% CAGR over the next 2-3 years and to
contribute close to 45% of the revenues by FY2015E.
IRL is planning to file 9 ANDAs in FY2014 of which 3 will be with Watson Pharma, US. IRL has also entered into an alliance wi th
Aspen Pharma (a South African MNC) for emerging markets and with DSM, a 9 billion Dutch company, for marketing & distribution in
Australia. The total number of patent applications filed as on June 30, 2013 are 55, out of which 37 pertain to API processes and 18
pertain to finished dosages;
IRL has posted muted results in Q1FY2014 with net profit declining by 11% YoY and net sales declining by 2% YoY mainly on the
back of decline in international sales of formulations (lower tender business in Germany). However, the management has re-iterated
its revenue guidance of over Rs.700 crore and Rs.1,000 crore, with EBITDA margins (ex-R&D) at 18% and 20% for FY2014 and
FY2015, respectively. This would be on the back of ramp up in the Watson Pharma and Aspen Pharma businesses and revival of
growth in domestic business with chronics contributing close to 20% of the revenues, from 10% currently. IRLs Goa I facility has got
USFDA approval and the company is likely to launch one drug from this facility in September 2013. The Goa II facility is awai ting
ANDA approvals for the Watson alliance which are expected post the USFDAs routine re-inspection expected in August 2013 end;
IRL expects spurt in international business with commencement and ramp up of sales of sterile formulations in US. The strategy to
partially replace contract manufacturing business with supplies against own dossiers/ marketing authorizations in European markets
would help to improve margins and sustainability. The API business is expected to grow at faster pace due to its low base and is also
likely to contribute to the growth of the formulation business through backward integration in select APIs. Moreover, on the new
pharma pricing policy, IRL does not expect any major negatives as the potential impact could be only to the tune of Rs.4-5 crore;
We believe that the firm is well poised to grow its revenue at 20% plus over FY2013-15E and with expected improvement in margins we
believe that the PAT CAGR would be in excess of 25%. Improved traction in the domestic business coupled with growth driver in
international business coming from new tie ups would help IRL to re-rate closer to the large-cap pharma companies which are trading at an
average of 18x one year forward earnings. We recommend BUY on IRL with a fair value of Rs.73 per share.
CMP: Rs.64 52 week H/L Rs. 83/55
2012A 569 18.2 85 14.9 46.3 -9.4 5.0 12.7
2013A 630 10.8 94 14.9 43.0 -7.2 4.7 13.7
2014E 782 24.0 141 18.0 53.3 24.0 5.8 11.1
2015E 977 25.0 195 20.0 66.7 25.0 7.2 8.8

29
Banks
HDFC Bank Ltd.
HDFC Bank is one of the largest private sector banks in India. The business of HDFC Bank has grown over ~16 fold over the last ten years
from Rs.34,131 crore as on March 31, 2003 to Rs.535,968 crore as on March 31, 2013. HDFC Bank has been a top performer compared
to peers due to its consistent 30% YoY profit growth over the last several years. The Banks net profit has grown 17-fold over the decade
from Rs.387 crore in FY2003 to Rs.6,726 crore in FY2013. This consistency in financial performance is the result of maintaining a fine
balance between balance sheet growth, profitability and asset quality. The consistent performance over the years has enabled HDFC Bank
to command premium valuations compared to its peers.
HDFC Bank has the best asset quality amongst its larger private sector peers like ICICI Bank and Axis Bank. The gross NPA% of the
bank remained unchanged at 1.0% while its net NPA% increased by 10bps to 0.3% as on June 30, 2013. In value terms, the net NPA
grew at a higher pace than the gross NPA on lower provisioning. The total restructured loans stood at 0.2% of the total advances as
on June 30, 2013 compared to 0.3% last year;
HDFC Bank posted a 30% YoY growth in net profit for the 55
th
consecutive quarter backed by a 23.6% YoY growth in its pre
provisioning profit (PPP). NII of the bank grew by 21% YoY backed by a 18.1% YoY growth in interest earned compared with a 15.9%
YoY growth in interest expended. The non interest income grew by 17% YoY driven mainly by a 11.7% YoY growth in the income from
fees and commissions. The CAR as per the Basel III norms stood at 15.5% of which 10.5% was Tier I capital, as on June 30, 2013.
The bank has a negligible level of bulk deposits and does not foresee any impact of the RBIs liquidity tightening measure on the
margins going forward. The banks loan book is largely funded by deposits and leaves marginal scope for borrowings. The CD ratio
(credit-deposit ratio) of the bank stood at 52.3% as on June 30, 2013;
The overall business of the bank grew by 19.3% YoY to Rs.561,904 crore as on June 30, 2013. The advances growth of 21.2% YoY
as on June 30, 2013 was driven by 25.5% YoY growth in the retail loan book and a 16.5% YoY growth in the wholesale lone book.
The deposits during the period grew by 17.8% YoY with the savings and current account deposits growing by 16.7% YoY and 10.5%
YoY, respectively. The CASA of the bank stood at 44.7% as on June 30, 2013. The banks network stood at 3,119 branches and
11,088 ATMs, of which 54% are in semi-urban and rural regions. The bank plans to add about 250-300 branches in FY2014;
The bank is currently trading at 3.9x its Adj. BV of Rs.157.9/share as on June 30, 2013. With the ongoing expansion in the banks business
and extension of the branch distribution network, we expect HDFC Bank to continue its robust business growth and maintain good asset
quality going forward also. We expect the banking credit growth to improve from 14.9% as on July 26, 2013, going forward. Hence, we
recommend BUY on the stock of HDFC Bank with a fair value of Rs. 840/share.
CMP: Rs.608 52 week H/L Rs. 727/566
Y/E Mar NII Growth % Adj. PAT Growth (%) EPS (Rs.) P/E Adj. BV P/Adj. BV
2012A 12,884 16.6 5,167 31.6 22.1 27.5 126.0 4.8
2013A 15,811 22.7 6,726 30.2 28.5 21.3 150.2 4.0
2014E 19,448 23.0 8,744 30.0 36.7 16.6 175.7 3.5
2015E 24,018 23.5 11,367 30.0 47.8 12.7 209.0 2.9
Jammu & Kashmir Bank Ltd.
Jammu & Kashmir Bank (J&K Bank), incorporated in 1938 functions as a universal bank in Jammu & Kashmir and as a specialized bank in
the rest of India. The state government holds 53.2% stake in the bank as on June 30, 2013. It is also designated as RBIs agent for banking
business and carries out banking business of the Central Government, besides collecting central taxes for CBDT. It operates on the
principle of 'socially empowering banking' seeking to deliver innovative financial solutions for household, small and medium enterprise. In
FY2013, the bank added 70 branches and 105 ATMs taking its overall network to 685 branches and 613 ATMs. The bank has targeted to
open 100 more branches in J&K state itself in FY2014.
During the last 5 years (FY2009-2013), its banking business has grown by 91%, total income up 104%, while the net profit grew by
157%. Despite steep increase in its business, its outstanding net NPA (non-performing assets) has come down in absolute terms from
Rs.285 crore in FY2009 to mere Rs.54 crore in FY2013. The net NPA stands at 0.14%, among the lowest in the industry;
As on June 30, 2013, the overall business of the bank grew by 13.4% YoY to Rs.86,342 crore with a growth of 18.2% YoY in
advances and 10.3% YoY growth in deposits. The CD ratio stood at 62.6% as on June 30, 2013. The overall business growth is
expected to be around 20%, (of which credit growth would be 22%, while the deposit growth would be 19% for FY2014). The
advances growth outside J&K state is expected to be around 15-20% and in the state at around 20-25% for FY2014. The bulk
deposits for the full year are expected to be around 15% of total deposits. Considering the past growth trend of J&K Bank, we believe
their growth targets for FY2014 are achievable and we remain positive on the bank;
For Q1FY2014, the net profit of J&K Bank grew by 25.1% YoY backed by a 15.9% YoY growth in PPP (pre-provisioning profit) during
the quarter. The Net Interest Income (NII) grew by 22.2% YoY. Provisions declined 28.1% YoY to Rs.36.2 crore. The bank has made
a provision of Rs.54 crore pertaining to the settlement of wage revision which shall have effect from November 2012;
J&K Bank is the cheapest midcap banking stock among the set of banks with high quality assets. Its net NPA is mere 0.14% as on
June 30, 2013. Its outstanding net NPA is Rs.56 crore while its June 2013 quarterly net profit alone is Rs.308 crore about 5.5 times
its outstanding net NPA. Against the regulatory norm of 70%, the NPA Coverage Ratio of the Bank is at 94.01% for Q1FY2014, which
is one of the best in the industry;
For FY2013, the bank has recommended a dividend of Rs.50/share (500%) which translates into dividend yield of 4.5% at the cur rent
price. With consistent increase in dividend payout over the years, considering Rs55 as dividend for FY2014 , the yield would be 4.9%. The
stock of J&K Bank is currently trading at 1.13x its FY2013A Adj. BV of its Rs.992 and at 0.75x its FY2015E Adj. BV of Rs.1,503/share. We
believe that the stock is worth considering for accumulation with a target price of Rs.1,709 which is 1.4x its FY2014E Adj. BV of Rs.1,221.
We strongly suggest investors to consider accumulating the stock.
CMP: Rs.1,124 52 week H/L Rs. 1,473/881
Y/E Mar NII Growth % Adj. PAT Growth (%) EPS (Rs.) P/E Adj. BV P/Adj. BV
2012A 1,839 37.9 803 20.1 165.6 6.8 834 1.35
2013A 2,316 25.9 1,055 31.4 217.6 5.2 992 1.13
2014E 2,766 19.4 1,330 26.1 274.4 4.1 1,221 0.92
2015E 3,596 30.0 1,729 30.0 356.7 3.2 1,503 0.75

30

Five high conviction large cap stocks

31
Five high conviction large cap stocks
In line with our equity investment strategy to address the volatility, we have identified select sectors which depend on domestic
demand. We believe that sectors such as metals, infrastructure, capital goods, realty and PSU banks are affected the most on the
profitability front due to slowdown in the economy, weakening of Rupee, higher interest payout (highly leveraged balance sheet)
and growing non performing assets.
We have picked up the following five large cap stocks which we believe will successfully tide over the pressures coming from
slowdown in GDP growth, crash in Rupee exchange rate and high interest regime due to their own inherent strength or continued
positive outlook for their business models.
Hindustan Zinc Ltd. (HZL)
Hindustan Zinc Ltd. (HZL), is one of the largest fully integrated
zinc-lead players and also one of the lowest cost producer of
Zinc in the world with a combined reserve base of 348.3 MT at
the end of FY2013. HZL enjoys the best EBIDTA margin (52%)
amongst its global peers and also gets Silver as a byproduct
which is free to EBIDTA.
The government currently holds 29.54% in HZL and is
considering various options for divesting the stake, while
Sterlite Industries (promoter) holds 64.92%. We believe that
whenever the government divests its stake, it would do it at
a significant premium to the current price considering HZLs
strong fundamentals and solid cash/ liquid investments;
HZL plans to raise its mined metal output to 1.2MT from
current 0.87MT via a number of Greenfield and Brownfield
projects at a cost of around $250 million per year over next
6 years. The plan includes development of 3.75MT
underground mine in Rampura Agucha, additional 1.75MT
(to 3.75MT) in Sindesar Khurd mine and 3.8MT (to 5MT) in
Zawar;
Production volumes for HZL continued to increase in
FY2013 with total mined metal production up 5% to 0.87 MT
in FY2013. Though the integrated refined zinc production
declined by 12% in FY2013 to 0.66MT, lead production
increased by 20% in FY2013 to 0.107 MT. Silver production
grew by 35% YoY to 321 tonne while the volumes grew by
69% YoY to 408 tonne during FY2013. Silver being a
byproduct of lead manufacturing process, the entire silver
revenues are free to EBIDTA. For FY2013 HZLs income
from silver rose by ~85% to Rs.2,093 crore;
For Q1FY2014, HZL reported 5% YoY growth in adjusted
net profit to Rs.1,660 crore. Revenue grew by 8.6% YoY to
Rs.2,984 crore. EBITDA for the quarter grew by 5.2% YoY
while the margin contracted by 162 bps mainly on account
of higher expenses (i.e. royalty, mining and other expenses)
which together increased by 565 bps to 26.2% of the
revenue. The companys mined metal production in
Q1FY2014 grew by 27% YoY to 2.38 lakh tonne and is in
line with HZLs target of achieving 10 lakh tonne (15% YoY
growth) mined production for FY2014. Zinc production grew
by 10% YoY to 1.73 lakh tonne on higher smelter utilization
rate;
HZL has cash and cash equivalents worth Rs.22,365 crore as of
June 30, 2013, which translates into Rs.52.9/share or about 46%
of its current market price. Considering solid cash on books,
highest operating margins, growth prospects through expansions
proposed and fact that the company has managed to post growth
in both revenue and profits in the latest despite tough
environment for the metal sector, we consider HZL stock as a
great value play in the large cap space and hence, recommend a
BUY with a fair value of Rs.144.

CMP: Rs. 116 52 week H/L Rs. 147/94
2012A 11,255 5,526 12.8 13.1 8.9
2013A 12,526 6,900 24.9 16.3 7.1
2014E 12,809 6,724 -2.5 15.9 7.3
2015E 13,463 7,091 5.5 16.8 6.9

ITC Ltd.
ITC is a 100-year old company and a leading player in the
tobacco and FMCG space. ITCs revenues and net profit have
grown 5.1 and 5.5 times over FY2003-FY2013 to Rs.31,627 crore
and Rs.7,608 crore respectively.
The company has accelerated its capex plan and is likely to
spend Rs.25,000 crore over the next 5-7 years, mainly in
non-cigarette businesses. It has already committed
investment in 40 projects which are under implementation.
We believe that capex would help maintain its revenue
growth momentum at 14-15% CAGR over FY2012-2015. The
company launched its super premium luxury hotel having 600
keys, ITC Grand Chola, the worlds largest LEED Platinum
green hotel, with an investment of around Rs.1,200 crore;
ITC has entered new segments in the FMCG food space as
well as a portfolio of personal care products which are
gaining market share. Launch of new variants and increase
in distribution network is expected to aid further growth. The
other businesses like hotels, agri-products, non-cigarette
FMCG business, paper, paperboard and packaging are now
profit making and performing well (for FY2013, on a
consolidated basis company posted PBIT grew of 7.9% YoY
to Rs.1,892 crore);
We believe that regulatory concerns such as Australia calling
on the world to match its tough new anti-tobacco marketing
laws that will ban logos on cigarette packs and consistent
increase in tax and duties on cigarettes have been overdone
in India. Cigarettes have been a dominant contributor of tax
to the government and historical trends indicate that the
company has always been able to pass on the incremental
tax liability by raising product prices. EBIT has been growing
between 15-20% since past 8 years despite consistent
increases in tax liability;
For Q1FY2014, net sales was up 10.3% YoY to Rs.7,339
crore, while net profit grew by 18.1% YoY to Rs.1,891 crore.
EBITDA increased by 17.5% YoY to Rs.2,791 crore. EBITDA
margin stood at 37.7% as compared to 35.4% in Q1FY2013.
On a consolidated basis, for FY2013, net sales increased by
19.2% YoY to Rs.31,627 crore, while its net profit grew by
21.6% YoY to Rs.7608 crore. Balance sheet remains strong
with cash on books of Rs.3,828 crore and current
investments of Rs.5,167 crore as on March 31, 2013. It has
been consistently maintaining high dividend payout ratio of
55-60% every year;
ITCs performance has been spectacular and the stock has given
return of ~17.7% over the last one year vis--vis the Sensex 1-
year return of ~4.7%. ITC remains attractive at the current levels
considering higher capex and turnaround expected in non
cigarette FMCG segments. We suggest investors consider ITC
from a medium to long term perspective. Going forward, we
believe that price hikes taken in the cigarette segment would
further help improve growth and profitability for the company. At
current market price the stock is trading at 23x FY2015E EPS of
Rs.13.4 per share. We continue to remain positive on the stock.
CMP: Rs.308 52 week H/L Rs. 380/251
2012A 26,525 6,258 26.3 8.0 38.5
2013A 31,627 7,608 21.6 9.6 32.1
2014E 36,650 8,950 17.6 11.3 27.3
2015E 42,500 10,575 18.2 13.4 23.0

32

Mahindra & Mahindra Ltd. (M&M)
M&M enjoys leadership position in the UV and tractor segments
with market share of 47.7% and 40.2% respectively in FY2013.
Over the past 3-4 years, M&M has diversified its business
portfolio by venturing into two-wheelers, commercial vehicles,
electric-cars and auto components through the acquisition/JV
route.
M&Ms Korean subsidiary SsangYong (73% stake) is
improving its performance with sales volume growing by
6.8% YoY to 120,717 units in 2012. Further, its operating
loss declined to Rs.507 crore in 2012 from Rs.730 crore in
2011. To expand its auto component business globally,
M&M recently picked up 13.5% stake in Spain's auto
component maker CIE Automotive for 96.24 million euros.
As of FY2012, M&M has 114 subsidiaries, 6 joint ventures
and 11 associates with interests in financial services (M&M
Financial Services), aerospace, auto components, engine,
hospitality (Mahindra Holidays and Resorts), real estate,
software services (Tech Mahindra), logistics, and steel
(Mahindra Ugine Steel) etc. Many of these subsidiaries are
in nascent phase and growing fast which would benefit its
parent firm (M&M) going ahead;
For FY2013, the Passenger Vehicle (PV) segment (which
includes UVs, Cars & Vans) of M&M grew by 26.5% YoY to
310,707 units as compared to the industry growth of 2.1%.
However, M&Ms domestic tractor sales declined by 4.6%
YoY to 223,885 units in FY2013 as against a decline of
1.7% in industry. From beginning FY2014, domestic
demand for tractor recovered and sales grew by 38.3% and
24.7% YoY respectively in the month of April and May 2013
respectively. We believe that M&M being the market leader
in the segment would benefit from the normal monsoon
expected this year;
On a standalone basis, for Q1FY2014, net sales grew by
7% YoY to Rs.10,023 crore, while its net profit increased by
29% YoY to Rs.938 crore. EBITDA increased by 16% YoY
to Rs.1,287 crore, with EBITDA margins improving by 100
bps to 12.85%. EPS for the quarter stood at Rs.15.27 per
share as compared to Rs.11.82 per share in Q1FY2013. On
a segmental basis, the revenue from the automotive
segment declined by 2.5% YoY to Rs. 6120.5 crore where
as the Farm equipment segment grew by 26.6% YoY to
Rs.3899.5 crore. Mahindra Ssangyong, the South Korean
subsidiary of M&M, reported its first quarterly profit in 6
years. The company posted a net profit of around 8 billion
Won (Rs.50 crore) in the quarter ended June 30, 2013
compared with a loss of 21.5 billion Won in the
corresponding period last year;
M&M plans to launch various variants of existing product
portfolio and also new products going ahead. The company
has a capex plan of around Rs.10,000 crore spread over
the next 3 years. Of the total, around Rs.2,500 crore would
be invested in its subsidiaries while the remaining Rs.7,500
crore would be for its Automotive and Farm segment. M&M
is also planning to set up new Automotive plant going
ahead;
At the CMP of Rs.814 the stock is trading at 13.4x its FY2014E
EPS of Rs.60.8 and at 12x its FY2015E EPS of Rs.68.1. With
the expectation of a normal monsoon and continuing consumer
preference for UVs, we remain positive on M&M for a medium to
long term perspective.

CMP: Rs. 814 52 week H/L Rs. 1,026/741
2012A 31,370 2,997 11.5 48.8 16.7
2013A 38,357 3,634 21.3 59.2 13.8
2014E 39,681 3,730 2.6 60.8 13.4
2015E 44,198 4,181 12.1 68.1 12.0

Reliance Industries Ltd. (RIL)
RIL market cap is at 3/4th of the level seen in 2009 as its profits
stagnated since FY2008 at around Rs.19,000 crore level.
However, in FY2013 RILs net profit has surpassed the Rs.21,000
crore mark, growing by 8.5% YoY and is expected to grow
substantially beyond FY2015. Going forward, we believe RILs
alliance with British Petroleum (BP), acquisition of shale gas
assets in US, its foray into retail business and likely revision of
gas price in 2014 would all lead to breaking away from the
stagnation in its profits and also in rerating of the stock. BP holds
30% stake in 21 oil & gas blocks of RIL and plans to import
liquefied natural gas (LNG) through RIL to service India's
burgeoning energy demand.
RIL and Russian rubber giant Sibur JV (74.9%:25.1%) has
begun construction on a $450 million butyl rubber plant in
Gujarat - expected to commission in 2015. The plant with a
manufacturing capacity of 100,000 TPA would be the only
one in India and become the 4th largest global supplier of
butyl rubber - an input for tyres;
RIL has encountered natural gas in the first exploration well
(MJ1) it spud in over 5 years on the KG-D6 block as it looks
for new reserves to supplement falling output. Moreover, the
CCI has cleared RILs plan to invest in exploring for oil and
gas in areas within the KG-D6 and NEC-25 blocks. In order
to fund its huge capex plans, RIL has so far raised $4 billion
in the form of long-term debt from overseas markets;
RIL plans to double its petrochemical business by investing
across the entire value chain business. The refining business
is also expected to grow considerably in the future.
Moreover, RILs Reliance Jio Infocomm is likely to roll out its
wireless broadband business in the second half of 2013
using fourth-generation (4G) technology;
In Q1FY2014, RILs net profit grew by 19.7% YoY backed by
a 4% YoY increase in operating profit and a 13% decline in
depreciation. Net sales declined by 4.6% YoY. The overall
EBIDTA margin improved by 66 bps YoY to 8.07%. The total
exports of RIL increased by 3.2% YoY to Rs.57,026 crore.
GRM increased by 10.5% to $8.4/barrel compared to
$7.6/barrel in Q1FY2013. RILs share of gross production in
its shale gas investment stood at 37.7 Bcfe in 1QFY2014, a
growth of 71% YoY and 4% QoQ. Moreover, RIL is in the
process of raising ~$1 billion from global financial institutions
and banks against its shale gas reserves in the US. Also, the
RIL group is infusing Rs.8,575 crore in its gas and port
companies;
Also, the turnover from retail business increased by 53%
YoY to Rs.3,474 crore in Q1FY2014 compared to Rs.2,269
crore in corresponding quarter last year. The business
achieved PBDIT of Rs.70 crore for the quarter. It has
initiated a process to consolidate all its 8 retail ventures
under a single entity - Reliance Fresh. RIL aims for revenues
from the retail venture to grow by 5-6 times to Rs.40,000-
50,000 crore in the next 3-4 years, making it one of the large
businesses for RIL;
In January 2013, RIL has closed its share buy-back through
which it bought back about 34% of targeted value hence, there
exists possibility of another buyback in the near future, which
would provide some comfort on any possible downside. RIL has
total cash and cash equivalents of Rs.93,066 crore ($15.7 billlion)
as on June 30, 2013 and is debt free on net basis. We
recommend BUY on RIL which is available at attractive valuation
of 10.8x its FY2015E EPS of Rs.76 with a target price of
Rs.1,042.
CMP: Rs. 819 52 week H/L Rs. 955/760
2012A 329,904 20,040 -1.2 62.1 13.2
2013A 360,297 21,003 4.8 65.0 12.6
2014E 369,942 21,367 1.7 66.2 12.4
2015E 382,847 24,541 14.9 76.0 10.8

33

YES Bank Ltd.
YES Bank is the fast growing private sector bank in India and
during FY2007-2013, has achieved about 8.9 times growth in its
balance sheet from Rs.11,105 crore in FY2007 to Rs.99,104
crore in FY2013 and 13.8 fold increase in net profit to Rs.1,301
crore. Its overall business (advances + deposits) has grown by
80 fold since commencement of operations in FY2005,
registering the highest growth in the industry. Under the banks
Version 2.0 Program it aims to grow its balance sheet size to
Rs.150,000 crore by FY2015 from Rs.99,000 crore as on March
31, 2013. In FY2013, advances grew by 23.7% YoY to
Rs.47,000 crore while its deposits grew by 36.2% YoY to
Rs.66,955 crore. For FY2014, the banks advances and deposits
are expected to grow by 25-30% each.
YES Bank is among the best banks in terms of quality of
assets with its net non-performing assets (NPA) at 0.03%
as on June 30, 2013. Moreover, the banks quarterly net
profit of Rs.401 crore in Q1FY2014 is over 33 times its net
NPA as on June 30, 2013;
For Q1FY2014, YES Bank reported a net profit growth of
38.2% YoY to Rs.401 crore, backed by a 48% YoY increase
in the pre-provisioning profit (PPP). The banks net interest
income (NII) during the quarter grew by 39.6% YoY to
Rs.659 crore. The NIM (net interest margin) improved by
20bps YoY to 3.0% as on June 30, 2013. The capital
adequacy ratio (as per Basel III norms) of the bank stood at
15.4% as on June 30, 2013;
The recent RBI measures for liquidity tightening are likely to
impact the NIM of the bank to an extent of 10-15bps as it
has over 10% exposure to wholesale deposits. However,
YES Bank has guided that this impact would be offset
considerably as the bank has a large amount of loan assets
coming up for re-pricing over the coming quarters which will
be at higher rates so as to pass on the increase in cost of
funds to the customers. As a result, the NIM of the bank is
not likely to be impacted negatively. Moreover, the bank
aims at 30% CASA deposits by FY2015 of which it has
already achieved 20.2% as on June 30, 2013;
The bank has recently received RBI approval for opening
150 branches in Tier I cities and is also free to open an
equal number of branches in Tier II-IV cities as well. Hence,
it is well placed to open around 300 new branches in
FY2014. The bank, under its Version 2.0 program, has set a
target to reach 900 branches, 2,000 ATMs and 12,750
employees by the end of FY2015;
At the current market price of Rs.259/share, the stock of YES
Bank is trading at an attractive valuation of 1.0x its FY2015E Adj.
BV of Rs.269/share. The stock has corrected by over 52% from
its 52 week high of Rs.547/share made in May 2013.
Considering the robust business growth expectations and the
consistent net profit growth, we believe YES Bank is likely to
attract higher valuations and recommend a BUY on the stock
with a fair value of Rs.564/share.

CMP: Rs. 259 52 week H/L Rs. 547/220
Y/E Mar NII Adj. PAT Growth % Adj. BV P/Adj. BV
2012A 1,616 977 34.4 130 2.0
2013A 2,219 1,301 33.1 162 1.6
2014E 2,938 1,699 30.6 207 1.2
2015E 3,692 2,179 28.3 269 1.0

Mrinalini Chetty - Research Analyst
(mrinalini.chetty@centrum.co.in; +91 22 4215 9910)

34

New Banking Licenses : benefit to old private sector banks

35
New Banking Licenses : benefit to old private sector banks
Why do we believe that the issuance of New Banking Licenses is positive for Old Private Sector
Banks?
In the first issuance of fresh banking licenses in 1993, 10 new banks were formed, namely - Global Trust Bank Ltd, ICICI Bank Ltd,
HDFC Bank Ltd, UTI Bank Ltd (renamed Axis Bank Ltd), Bank of Punjab Ltd, IndusInd Bank Ltd, Centurion Bank Ltd, IDBI Bank
Ltd, Times Bank Ltd and Development Credit Bank Ltd. Later in the year 2003-04, two more fresh licenses were given to the Kotak
Mahindra Bank and YES Bank. These new private banks (NPSB) have shown robust growth in their overall businesses and profits
since inception. They also penetrated into the regions (rural as well as urban) where there were minimal banking facilities and have
made banking available to a larger part of the country today.
Since the 1st issuance of new banking licenses to FY2013, the overall banking credit grew more than 34 times from Rs.1.58
lakh crore at the end of FY1993 to Rs.53.95 lakh crore at the end of FY2013. Between the years FY1993 to FY2004, the
banking credit grew at a CAGR of 16.6%.
Exhibit 19: Industry credit growth over the years
0%
5%
10%
15%
20%
25%
30%
35%
40%
0
1,000
2,000
3,000
4,000
5,000
6,000
F
Y
1
9
9
3
F
Y
1
9
9
4
F
Y
1
9
9
5
F
Y
1
9
9
6
F
Y
1
9
9
7
F
Y
1
9
9
8
F
Y
1
9
9
9
F
Y
2
0
0
0
F
Y
2
0
0
1
F
Y
2
0
0
2
F
Y
2
0
0
3
F
Y
2
0
0
4
F
Y
2
0
0
5
F
Y
2
0
0
6
F
Y
2
0
0
7
F
Y
2
0
0
8
F
Y
2
0
0
9
F
Y
2
0
1
0
F
Y
2
0
1
1
F
Y
2
0
1
2
F
Y
2
0
1
3
F
Y
2
0
1
4
*
('000 Rs. Crore)
Banking Credit (LHS) YoY % Change (RHS)

* Note: data till July 26, 2013; Source: Bloomberg, RBI, Centrum Wealth Research
New Private Sector Banks post robust Credit and Profit Growth
The overall advances growth of the large private banks formed post the 1st issuance of banking licenses is far higher than the
industry advances growth. For instance, the credit base of ICICI Bank and HDFC Bank have gone up 79 and 71 fold respectively as
compared to 12 times jump in the banking industrys overall credit growth during the period FY2000-FY2013.
Exhibit 20: Overall Credit growth FY2000 FY2013 (no. of times increase over the years)
12
56
71
79
0 10 20 30 40 50 60 70 80 90
Industry
Axis Bank
HDFC Bank
ICICI Bank

Note: Considering only the large private banks that received license in year 1993
Source: Capitaline, RBI, Centrum Wealth Research

36
Moreover, the share of these new private banks in the total business pie of the Indian banking industry has increased from 11.3%
at the end of FY2005 to 15.2% at the end of FY2013.
These NPSBs have also posted very impressive profit growth for instance, during FY2005 - FY2013, the aggregate net profit of
these new private banks grew at an average growth of 28% with YES Bank posting highest average annual growth of 59% followed
by IndusInd Bank with 48% and Kotak Mahindra Bank with 46% average annual growth.
Exhibit 21: Growth in Profit of New Private Banks since FY2005
42
34
48
20
59
46
0
10
20
30
40
50
60
70
Axis Bank HDFC Bank IndisInd Bank ICICI Bank YES Bank KMB
Growth in Net Profit (%) (FY2005 - FY2013)

Note: PAT growth for YES Bank is taken from FY2006 as it incurred losses in FY2005
Source: Capitaline, RBI, Centrum Wealth Research
A lot of aspirants for new banking licenses, however, the Banking Credit growth tapering off
On February 22, 2013, RBI announced the final guidelines for issuance of new banking licenses. In all 26 companies have applied
for the fresh banking licenses in the 3rd set of issuance. Among these are - Tata Sons Ltd seeking to set up the first new Indian
banks since 2004, Bajaj Finance, LIC Housing Finance, L&T Finance Holdings, Reliance Capital, Edelweiss Financial Services,
IDFC, IFCI, Indiabulls Housing Finance Ltd, India Post, Aditya Birla Nuvo, Religare Enterprises and others.
Post the 1
st
issuance of banking licenses, the average credit growth (during the years FY2000 to FY2004) in the industry stood at
17.9%. It further improved to 24.5% for the period FY2005 to FY2009 post the 2
nd
issuance of licenses in FY2004, with the highest
growth in the 4 years coming from the newly started YES Bank at 115%. The average credit growth of NPSBs was 33% duri ng the
period FY2005 to FY2009.
However, after FY2005 this trend of robust credit growth has slowed down. Over the last 4 years the average industry credit growth
was 18% and the average growth rate of the new private banks also declined to 19%. Industry credit growth declined further to 17%
per annum over the last 2 years (FY2012 & FY2013) (see Exhibit 19) and recorded a dismal growth of 15% in the current fiscal up
to July 26, 2013.
In our view, the main reasons for the slowdown in the credit growth are base effect and severe slowdown in the industrial economy
in the recent years. The banking industrys credit base went up 35 fold from mere Rs.1.58 lakh crore in FY1993 to about Rs.55 lakh
crore as of today. Hence, it will be very difficult for the new players in the banking industry to grow in a robust manner going ahead.
Therefore, we see a greater opportunity in inorganic route for growth through acquisition of Old Private Sector Banks (OPSBs).
We believe that 3
rd
issuance of fresh banking licenses would lead to further consolidation in the sector due to following reasons as
well:
The sticky nature of OPSBs having about 100 years of successful relationships with SMEs (Small and Medium Enterprises)
would be an attraction;
There is a possibility of already successfully established private banks like HDFC Bank and ICICI Bank - which got licenses
and also grew in size partly through acquisition pre-empting the possible moves of new entrants in the industry by
taking over existing efficient OPSBs such as City Union Bank, Karur Vysya Bank, etc;
The stipulation to open 25% branches in the rural unbanked areas for the new players gives us further comfort that the
OPSBs would be preferred for acquisition as they already have good presence in the rural parts of the country. City Union
Bank has 47% of its branches in rural and semi-urban areas while Karur Vysya Bank has close to 58% of its branches in such
areas;
Most of the OPSBs have either zero or miniscule promoters holdings hence, we believe that the regulator would also
encourage merger of such banks with the larger ones;
We believe that for the reasons mentioned above, the OPSBs would again become acquisition targets of the new players in the
banking industry.

37
Past acquisition trends in the banking industry
Post the issuance of banking licenses in 1993, Bank of Madura an Old Private Sector Bank (OPSB) was acquired by ICICI Bank at
a P/BV multiple of around 1.5x. Thereafter, new banking licenses were issued in the year 2001, post which banks such as Lord
Krishna Bank were acquired at a multiple of 1.9x P/BV while Centurion Bank of Punjab and Bank of Rajasthan were acquired at a
multiple of 4.5x and 5.5x P/BV, respectively. Considering the recent contraction of valuation multiple of overall banking sector, we
firmly believe that the valuation multiple for any possible acquisition of efficient (in terms of quality of assets and interest
margins) OPSB would be around 3x Adjusted Book value, if not more.
Exhibit 22: Range of valuations for past consolidation in the midcap banking space
Date Acquirer Target Bank Acquisition Valuation: P/BV
Dec-00 ICICI Bank Bank of Madhura 1.5
Jun-05 Centurion Bank Bank of Punjab (BOP) 1.9
Aug-06 Centurion BOP (CBOP) Lord Krishna Bank 1.9
Apr-08 HDFC Bank CBOP 4.5
Aug-10 ICICI Bank Bank of Rajasthan 5.5
Exhibit 23: Valuations of OPSBs (Figures as on June 30, 2013)
No. Banks
CMP Net NPA Gross NPA
PAT
(Q1FY2014)/
Outstanding
Net NPA (x)
Op. Eff.
P /
current
Adj. BV
Promoter
Holding %
23-Aug-13 Rs. Cr. (%) Rs. Cr. (%) Ratio
1 City Union 44 97 0.63 192 1.25 0.93 1.7 1.4 0.00
2 Dhanlaxmi 30 307 4.10 440 5.78 0.01 0.8 0.8 0.00
3 Federal 286 374 0.91 1,483 3.51 0.28 1.6 0.8 0.00
4 Karnataka 77 492 1.96 823 3.22 0.19 1.3 0.6 0.00
5 Karur Vysya 330 155 0.50 466 1.51 0.78 1.5 1.2 3.08
6 Lakshmi Vilas 62 435 3.74 625 5.27 0.06 1.3 1.0 9.93
7 South Indian 20 348 1.12 493 1.57 0.33 1.7 1.0 0.00
Note: Op. Eff. Ratio = Net Interest Income / Total operating expenses
Based on the previous consolidation trends, we believe that the efficient OPSBs can command much higher valuations if they are
to be merged with the larger banks. Among these OPSBs banks, we reiterate our conviction on 2 value picks viz., City Union
Bank and Karur Vysya Bank, based on consistent growth in business and profits, quality of assets and co-operative
nature of their trade unions.
Moreover, these OPSBs have also created considerable wealth for the investors in the last 13 years (starting from FY2000). The
market cap of CUB and KVB has grown by 18x and 7x over the last 10 years, respectively. During the same period the BSE
Bankex index has increased by 5.4x. We believe these banks have tremendous potential going ahead.
Exhibit 24: Valuation and Recommendation
BANKS
CMP (Rs.)
23 Aug 2013
Target
Price (Rs.)
Expected
Return (%)
Net Profit
Growth (%) FY2015E
P / Adj. BV
(FY2015E)
Dividend yield %
City Union 44 65 48 28.1 1.0 2.3
Karur Vysya 330 600 82 26.5 0.9 4.2

Payal V. Pandya - Research Analyst
(payal.pandya@centrum.co.in; +91 22 4215 9926)

38

City Union Bank Ltd. (CUB)
CUB, a 108-year-old regional bank, has performed well
consistently through business cycles and has shown steady
improvement in its business growth and asset quality.
Considering the consistently good business growth, impressive
asset quality and the possibility of further consolidation in private
regional banks, we expect CUB to continue to create significant
wealth going forward.
The Banking Laws (Amendment) Bill which was passed in
the Parliament, is aimed at strengthening the powers of RBI
and to further develop the banking sector in India. It aims to
increase the voting rights to 26% which is a very positive
development for the OPSBs which lack identifiable
promoters or have low promoter holding such as CUB (with
zero promoter holding). This is expected to attract foreign
banks, overseas investors as well as the domestic NBFCs
(especially the ones which aspire to apply for banking
licenses) to explore the opportunities to acquire up to 26%
equity stake in efficient OPSBs with possible approval of the RBI;
CUB has maintained a loan book CAGR of 28% over the
past five years and we expect the bank to maintain a loan
growth CAGR of over 25% in the next five years as well,
considering its strong presence in the SME (Small &
Medium Enterprises) space. The overall business of CUB
grew by 24.8% YoY to Rs.35,551 crore as on March 31,
2013 backed by a 25.6% YoY growth in its advances and a
24.3% YoY growth in its deposits. The CD ratio of the bank
improved by 81 bps YoY to 75.1% as on March 31, 2013.
The bank is focusing on expansion and has added about
125 branches over the last 2 years of which over 50% have
already achieved breakeven. Most of the others are
expected to breakeven in FY2014. The bank further expects
to add about 70-80 branches in FY2014;
CUB posted impressive result in Q1FY2014 despite stress
on asset quality across industry: net profit of CUB grew by
22.2% YoY to Rs.90 crore backed by a 41.5% growth in
PPP (pre provisioning profit) to Rs.162 crore in Q1FY2014.
The NII (net interest income) grew by 21.8% YoY to
Rs.1,061 crore. CUB has maintained its healthy asset
quality despite stress on NPAs across the industry. The
gross and net NPA% grew by 18bps YoY to 1.25% and by
13bps to 0.63%, respectively, as on June 30, 2013. The
current quarterly net NPA of CUB is almost equivalent (1.1
x) to its net NPA of Rs.97 crore as on June 30, 2013. This
when compared to various PSU banks which have net
NPAs above 7-8 times their net profits for the quarter,
implying that CUBs asset quality is well under control;
CUB has plans to raise capital by Rs.350 crore through QIP
route. The bank is looking to increase its loan book at about
Rs.30,000 crore by FY2016 for which the bank will require
net owned funds of Rs.3,000 crore. As a result of this, CUB
plans to raise about Rs.1,000 crore over next 3-4 years and
has already received shareholders approval for the same.
CUB has also raised about Rs.250 crore via rights issue in
the ratio 1:4 at a rights price of Rs.20/share which is fully
paid up as on July 30, 2013;
CUB is expected to be a major beneficiary of the consolidation in
the OPSB space. L&T Finance Holdings has a 4.59% stake in
CUB as on June 30, 2013. Acquisitions in OPSB space have
taken place at 2.5x-6x Adj. Book Value in the past, whereas
CUB currently trades at 1.0 x FY2015E Adj. Book Value. Hence,
we maintain BUY on CUB with a fair value of Rs.65 which is 1.5x
FY2015E Adj. Book Value.
CMP: Rs. 44 52 week H/L Rs. 66/42
2012A 500 280 30.3 29.1 1.5
2013A 624 322 14.9 30.2 1.5
2014E 778 389 20.7 36.5 1.2
2015E 1,009 498 28.1 44.4 1.0

Karur Vysya Bank Ltd. (KVB)
KVB, a nearly 100 year old bank, successfully survived business
cycles and has grown consistently over the decades. KVB is
known for consistent wealth creation for shareholders with market
cap increasing 14 times in the last 10 years and 2.6 times in the
last 5 years. KVBs asset quality is among the best in the industry
with minimal exposure to risky assets and over 95% of its loans
secured. Net Non-Performing Assets (NPAs) are very low at mere
0.50%. Over the last 10 years, its business has grown 8 fold to
Rs.68,133 crore while its Gross NPA on absolute basis has
remained similar levels at Rs.286 crore as on March 31, 2013.
KVB has posted good quarterly results: Despite the
macroeconomic pressures, the Net NPAs continue to be at a
comfortable territory of 0.5% much better than industry
average. For Q1FY2014, the NII (Net Interest Income) and
the PPP (pre-provisioning profit) grew by 30.7% YoY to
Rs.332 crore and by 57.2% YoY to Rs.319 crore,
respectively. The gross and net NPA (in absolute terms)
increased by 23.8% YoY and 67.4% YoY, respectively.
However, the gross NPA% declined by 2bps to 1.51% while
the net NPA% increased by 12 bps to 0.50%, as on June 30,
2013. The banks PCR (provision coverage ratio stood at
75.03% as on June 30, 2013;
KVBs overall business grew by 21.5% in FY2013 with its
advances growing at a faster pace of 23.1% YoY compared
to the industry growth of around 16% YoY during the period.
For FY2014, the bank expects its overall business to grow by
about 25% YoY with focus on SME and small ticket
advances to counter weak spreads in corporate segment. In
FY2016, its centenary year, we expect KVB to reward its
shareholders through attractive rights/ bonus issues (in line
with past trend of giving such rewards once in 3 to 4 years);
Successful passage of Banking Laws (Amendment) Bill,
which facilitates increase in the cap on shareholders voting
rights in private banks to 26% from 10% earlier, is expected
to attract foreign banks as well as the domestic NBFCs
(especially the ones which aspire to apply for banking
licenses) to explore the opportunities to acquire up to 26%
equity stake in efficient banks like KVB. Moreover, the
proposed implementation of Basel III norms, which will
gradually increase the total capital requirement to 11.5% by
FY2018, will not impact on KVB as it is already well
capitalized with its CAR at a comfortable at 12.52% as per
Basel III, as on June 30, 2013;
KVB is expected to be a major beneficiary of the consolidation in
the Old Private Sector Banking (OPSB) space as the promoters
equity stake is only 3.08% as on June 30, 2013. Past acquisitions
in OPSB space were at 2.5x 6x Adj. BV. KVB trades at very
attractive valuation of 1.0x FY2014E Adj. Book Value of Rs.320.
KVB will complete 100 years in 2016 and the stock price could
double or triple by then as the management (with a proven track
record) is targeting a business growth of 2x to Rs.1.25 lakh crore
by 2016. We recommend a BUY on the stock of KVB with a long
term fair value of Rs.1,200, expecting the stock price to
appreciate by about 3.7 times from current level by the end of
FY2016.

CMP: Rs. 330 52 week H/L Rs. 592/307
2012A 917 502 20.1 245 1.3
2013A 1,158 550 9.7 278 1.2
2014E 1,426 687 24.7 320 1.0
2015E 1,804 868 26.5 378 0.9

39

High dividend yield stocks with diversified business models

40
High dividend yield stocks with diversified business models

Of late, equity markets have seen huge volatility and some of good value stocks with relatively high dividend yields also been
adversely impacted. We have selected 5 such good value stocks which not only offer regular and stable dividend income but also
have a lot of potential for capital appreciation in the long term. These companies have dividend yield of anywhere between 5-7% for
FY2013, and are likely to maintain such high dividend payout going forward as well. Even if they maintain dividend for FY2014 at
the FY2013 rate, these stocks are very attractive. Hence, we suggest accumulating the following stocks:
Exhibit 25: High dividend yield stocks with diversified business models
Company CMP (Rs.)
FY2013
FY2013 EPS
(Rs.)
Dividend
Payout (%)
Div. per share
(Rs.)
Yield (%)
Balmer Lawrie Investments 203 11.0 5.4 14.0 78.6
HIL Ltd. 295 20.0 6.8 81.0 24.7
Indraprastha Medical Corp. Ltd. (IMCL) 32 1.6 5.0 3.1 51.6
KCP Sugar & Industries (KCPS) 16 1.0 6.3 3.4 29.2
Surya Roshni Ltd. (SRL) 63 4.0 6.3 15.8 25.3

Balmer Lawrie Investments Ltd.
Balmer Lawrie Investments Ltd. (BLIL), the holding company for Balmer Lawrie & Company (BLC), was incorporated in 2001 with
the sole aim of disinvesting its 61.8% holding in BLC. The company does not transact any other business and will be wound up
once divestment process in BLC is completed.
BLILs stake in BLC, at the current price of Rs.333, is worth Rs.587 crore, whereas, BLILs own market cap is just Rs.449
crore, leaving huge discount to valuation of Rs.138 crore. This discount could vanish, if it divests its stake in BLC;
Divestment of stake in BLC can even triple stock price of BLIL as the stock price of BLC can move up at least 50% as it holds a
lot of properties and is deeply undervalued at present;
BLIL, for Q1FY2014 reported a 4% YoY growth in net profit to Rs.0.76 crore. Other income grew by 5% YoY to Rs.1.2 crore.
EPS for the quarter stood at Rs.0.34. For FY2013, net profit grew by 9.4% YoY to Rs.31.1 crore while revenue grew by 7.7%
YoY to Rs.28.2 crore. Cash on books as on March 31, 2013 was Rs.58.2 crore;
BLIL, at the current market price (CMP) of Rs.203 is trading 15% below its 52 week high of Rs.238. BLIL has consistently
increased the dividend - from Rs.6.40 per share in FY2009 to Rs.10 per share in FY2012. For FY2013, the board has
recommended a dividend of Rs.11 per share (payout is historically in the month of September) which at the CMP translates
into a yield of 5.4%. We expect the company to declare a dividend of Rs.11.50 per share for FY2014. Thus the cumulative
dividend in the next 13-14 months could stand at Rs.22.50 per share which translates into a yield of 11.1% at CMP;
While BLIL is a strong play on divestment of its stake in BLC, till the divestment unfolds it is a safe play on dividend yield.
CMP: Rs. 203 52 week H/L Rs. 238/165
2012A
25.3 24.2 14.8 10.9 18.6
2013A
26.2 28.4 17.4 12.8 15.8
2014E
28.2 31.1 9.6 14.0 14.4
2015E
40.2 37.7 21.2 17.0 11.9

Vidrum Mehta - Research Analyst
(vidrum.mehta@centrum.co.in; +91 22 4215 9605)

41

HIL Ltd.
HIL Ltd (earlier Hyderabad Industries Ltd) is the market leader in
the fibre cement roofing industry with a market share of 20%.
This segment consists of Fibre Cement Corrugated Sheets,
Autoclaved, Aerated Concrete Blocks and Aerocon Panels. Fibre
cement sheets and flat products are the major revenue
generators for the company, accounting for ~81% of revenues in
FY2013. With the right pricing, HILs Aerocon Block products
could witness significant growth in volumes in the coming years
as builders move from conventional red clay bricks to
environment friendly Aerated Autoclaved Concrete blocks.
HIL has created significant wealth for its shareholders and
its market cap has increased ~2.3x over the last 4 years.
HIL has been consistently increasing the dividend over the
last 5 years. Over FY2008-13, though HIL witnessed
fluctuating profits, its net sales grew at a CAGR of 16.6%.
HIL also has low debt of about 44% of the capital employed.
Considering HILs dominant position in the industry we
believe it would continue to generate wealth for
shareholders going ahead as well;
The government is keen on rural development and has
increased its spending at 12.5% CAGR over FY2008-13 to
Rs.52,000 crore. In FY2014 budget it has proposed a 46%
hike in rural development expenditure. HIL being a market
leader, with a strong brand "CHARMINAR" and extensive
distribution network, is well poised to capitalize on the
opportunities in rural India;
For Q1FY2014, net profit declined by 64.9% YoY to Rs.11.4
crore while sales declined by 18.7% YoY to Rs.270.5 crore.
EBITDA declined by 53.1% YoY to Rs.25.7 crore while
margin contracted by 699 bps YoY to 9.5%. Profit declined
due to higher raw material cost, which as a percentage of
sales increased by 575 bps YoY to 60.4%. EPS for the
quarter stood at Rs.15.3. For FY2013 HIL declared a final
dividend of Rs 12.50, taking the total dividend to Rs.20 per
share, translating to a yield of 6.8%;
HIL owns a large land in a prime location of Hyderabad
(Sanatnagar), which according to secondary research is
around 70 acres and would be worth about Rs.1,750 crore
(even 50% of the value would be Rs.1,172 per share). As
per media reports, some industries have already shifted
from this area. In our opinion, with 13 plants located across
India and recent capacity expansion in UP, it would be easy
for HIL to shift from this location. Though this may not
happen in the next 3-6 months, we believe this would be
one of the major value unlocking propositions from a long
term perspective as HIL would eventually shift out of this
location;
Considering its dominant position in the industry and strong
fundamentals (i.e. despite fluctuations in profits due to raw
materials, the RoCE has been above 20% over 4 years), we
believe the stock is deeply undervalued. Further, it has the
potential to unlock significant value from land in one or two of its
13 manufacturing units which are in major cities and are now
within residential area. The stock is currently trading 46% below
its 52-week high of Rs.547 and 3.1x its FY2014E EPS of
Rs.94.6. Hence we recommend a BUY.

CMP: Rs. 295 52 week H/L Rs. 547/275
2012A 858 61 1.0 81.2 3.6
2013A 1,037 61 -0.7 81.0 3.6
2014E
1,165 70 15.5 94.6 3.1
2015E
1,300 94 34.3 127.3 2.3

Indraprastha Medical Corporation Ltd.
Indraprastha Medical Corporation Ltd. (IMCL), an Apollo Hospital
group company, is into multi-disciplinary super specialty territory
care at New Delhi. It is the first hospital in India to receive
accreditation from the prestigious Joint Commission International,
USA for delivery of quality healthcare services and meeting
patient safety needs. It has created a differentiating edge for itself
with its special focus on core specialties - cardiology, oncology,
neurology, orthopedics, emergency to name a few.
In the healthcare infrastructure, there exists a significant
demand supply gap - currently India has a bed to population
ratio of only 9 beds per 10,000 persons (global median of 24
per 10,000 persons). Hence huge untapped potential for
growth exists in the industry. Further, Indias growing
population and increasing preference for private healthcare
services over public services is augmenting the growth of the
healthcare delivery market. We believe the healthcare
delivery industry is favorably placed for steady growth
ahead;
IMCL has been on a steady growth path - while its net sales
increased at a CAGR of 13.4% to Rs.591 crore over
FY2008-2013, its profit grew at 12.2% to Rs.28.7 crore over
the same period. IMCL expanded its total capacity to 683
beds by adding 127 beds in FY2012. It also improved its
average daily bed occupancy to 516 beds in FY2012 from
477 in FY2011;
IMCL for Q1FY2014, net profit grew by 18.3% YoY to Rs.9.6
crore while Revenue grew 11.6% YoY to Rs.166 crore.
Operating profit increased by 24% YoY to Rs.23.8 crore and
margin improved by 144 bps to 14.3% as against 12.9% in
Q1FY2013. For FY2013, IMCL reported a 6.6% YoY
increase in net profit to Rs.28.8 crore and revenue increased
by 17.5% YoY to Rs.591 crore. EPS for FY2013 stood at
Rs.3.14 as against Rs.2.94 in FY2012;
IMCL is one of the least leveraged company its total debt
at the end of March 2013 stood at Rs.52 crore which is
21.4% of the total capital employed of Rs.242 crore. IMCL
has been paying dividends consistently for the past 13 years,
the board has declared a dividend of Rs.1.6 per share for
FY2013 which at the current market price would offer a yield
of 5%;
We believe IMCL is well poised to grow its revenue CAGR at 20%
ahead. With continuous demand for healthcare services, the PAT
CAGR for IMCL would be in excess of 20%. Higher disposable
income, coupled with population growth and increasing demand
for specialized services would help IMCL to command premium
compared to its peers and would shift its valuation vertically.
IMCL is currently trading at 24.5% below its 52 week high of
Rs.42.4 and at 8x FY2014E EPS. We recommend Buy on the
stock with a fair value of Rs.43.

CMP: Rs. 32 52 week H/L Rs. 42/31
2012A 503 27 12.1 2.9 11.0
2013A 591 29 2.3 3.1 10.3
2014E 700 37 16.1 4.0 8.0
2015E 840 49 16.9 5.3 6.0

42

KCP Sugars and Industries Corporation Ltd.
KCP Sugars (KCPS), the most efficient producer of sugar in the
country, made profits and paid dividends almost consistently
over the last 15 years despite the industry going through severe
cyclical downturn. Only in FY2003, it posted some loss and
skipped dividend as the sugar realization touched a 14-year low
at Rs.12.9 per kg.
We believe KCPS would be one of the major beneficiaries
of sugar de-control. As of March 2013, it had a sugar
inventory worth Rs.217 crore while its total debt stood at
Rs.48 crore (18% of total capital employed Rs.267.6 crore -
one of the least leveraged companies in the industry)
implying the company has been utilising 78% of its owned
funds to manage inventory. This means even if there is
decline in sugar prices, KCPS can hold sugar stock and sell
at higher margins when the price increases;
In Q1FY2014 on a standalone basis, KCPS reported a
decline in net profit by 10.3% YoY to Rs.11.3 core. Revenue
declined by 11.5% YoY to Rs. 93 crore. EBITDA declined
by 16% YoY to Rs. 14.7 crore and the margins declined by
83bps YoY to 15.7%. On a segmental basis, the sugar
segment reported a decline in revenue by 6.5% YoY to Rs.
84.8 crore but posted a marginal decline in profit by 1.3%
YoY to Rs.13.15 crore;
Eimco KCP Ltd, a wholly owned subsidiary of KCPS
reported profit before tax of Rs.9.1 crore as against Rs.0.63
crore in Q1FY2013. The subsidiary achieved record
revenue of Rs.27.2 crore as against Rs.6.9 crore in
Q1FY2013. For FY2013, it had reported a net profit of
Rs.2.2 crore and revenue of Rs.44.7 crore. The export
earnings which contributed 21% of the revenue grew by
2.3x to Rs.9.3 crore. We believe such performance going
forward would boost the consolidated profits substantially;
For FY2013, KCPS on a standalone basis posted 47% YoY
growth in net profits to Rs.38.8 crore with EPS at Rs.3.42.
The operating income grew 23.1% YoY to Rs.506 crore.
KCPS paid dividend of Re.1 per share for FY2013 as
against Rs.0.70 for FY2012. Even if we consider it
continues to declare a dividend of Re.1 per share for
FY2014, the yield would be 6.3% at CMP;
We believe KCPS holds surplus land bank worth over
Rs.350 crore in Chennai which alone would be more than
its enterprise value (EV) of Rs.222 crore. In addition, it has
major manufacturing assets like sugar plants, acetic acid
plant and co-generation of power. The value of its land bank
and plants are worth about Rs.1,000 crore, which is ~4.5
times its current EV. Considering the huge gap between its
EV and value of assets, and also promoters lacking
majority control (holding of ~39%), we believe there also
exist a possibility of its takeover. For the last few years, the
promoters have also been regularly buying the stock from
the market, which enhances our conviction;
The stock trades at an attractive valuation of 3.4x FY2015E
EPS. We believe the stock could be a multi-bagger if it becomes
a target of any possible acquisition. Further, with the government
initiating policy level changes starting with partial de-control of
the sector, we believe these measures would benefit efficient
sugar producer like KCPS. Hence, we recommend a BUY with a
fair value of Rs.32 with a 2 year perspective.

CMP: Rs. 16 52 week H/L Rs. 26/16
2012A 411 26 123.4 2.3 6.9
2013A 506 39 46.8 3.4 4.7
2014E 540 43 10.1 3.8 4.2
2015E 621 53 25.0 4.7 3.4

Surya Roshni Ltd.
Surya Roshni Ltd. (SRL), is a leader in both the steel pipe and
lighting industry. In the steel division, SRL manufactures electrical
resistance welded (ERW) steel pipes and tubes, cold-rolled
formed sections and profiles and cold-rolled (CR) strips. The
lighting division manufactures fluorescent tube lamps (FTL),
general lighting systems (GLS), glass shells for lamps, filaments,
and sodium and mercury vapor lamps. SRL has also set up a joint
venture with Osram, under the name Osram Surya Pvt Ltd to
manufacture compact fluorescent lamps. The steel segment
contributes around 70%, while the branded sales of the lighting
division contribute 30% to the total revenue; Surya has witnessed
robust growth in its sales over the last 10 years. The company
has also consistently paid dividends for the past 22 years, except
for FY2012.
India has become the global pipe manufacturing hub
primarily due to the benefits of its lower cost, high quality and
geographical advantages. The steel tube division caters
mainly to the oil and gas sector, which is seeing heightened
activity these days and from the governments thrust on
water and irrigation projects, which augur well for the steel
tube division of the company;
SRL has a strong brand and wide distribution network. It
sells lamps under the well established and renowned Surya
brand with export presence in over 40 countries. Exports
contributed 12.2% to total revenue in FY2012. SRL has a
wide marketing and distribution network of 30 branch offices,
over 1,500 dealers and more than 100,000 retailers. Further
SRL has taken up expansion plans of its lighting division and
is looking at achieving revenues of Rs.250 crore from LED
segment by 2016;
The company owns the largest ERW pipe manufacturing
plant in India and two plants for lighting products at Malanpur
(Madhya Pradesh) and Kashipur (Uttarakhand). SRL is the
only lighting company in India with 100% backward
integration;
For Q1FY2014, SRLs net profit grew by 19.1% YoY to
Rs.14.2 crore while revenue increased by 12.8% YoY to
Rs.709 crore. Further, EBITDA grew by 11.8% YoY to Rs.54
crore, while EBITDA margin remained unchanged at 7.7%
on YoY basis. For FY2013, SRL reported a 34% YoY growth
in net profit to Rs.69.3 crore while the revenue grew by
15.9% YoY to Rs.2,959 crore. The company has declared a
final dividend of Re.1 per share together with the interim
dividend of Rs.3 per share resulting in a total dividend of
Rs.4 per share for FY2013 which at the current market price
of Rs.63 translates to a yield of 6.3%;
Further, SRLs lighting branded business for FY2013 stood at
close to Rs.1,000 crore (as compared to Rs.954 crore in
FY2012). This gives us comfort on the valuation front.
Additionally, the company is in process of preparing a roadmap
on value creation and business reorganization of the company,
which we believe is a positive move for share holders over the
medium to long term. Considering its vast product range, strong
position in the industry, growth prospects and strong
fundamentals we believe its P/E valuation should shift vertically to
around 7x-8x. Hence we recommend a BUY on this stock with a
target price of Rs.90 (conservatively valuing it at ~4x FY2015E
earnings).

CMP: Rs. 63 52 week H/L Rs. 84/46
2012A
2,554 51.7 -23.0 11.8 5.3
2013A
2,959 69.3 34.0 15.8 4.0
2014E 3,440 82.0 18.3 18.7 3.4
2015E 4,020 104.0 26.8 23.7 2.7

43

Beaten Down Value Stocks

44
Beaten Down Value Stocks

Andhra Sugars Ltd. (ASL)
Andhra Sugars Ltd. (ASL) incorporated in 1947, is engaged in
manufacturing of sugar, chemicals and oils. The company
manufactures more than 15 products, with sugar and caustic
soda accounting for majority of the revenues. ASL holds rich
assets and investments in various listed and unlisted entities.
ASL owns 55% stake in the efficient fatty acids manufacturer
JOCIL, 28.98% stake in Andhra Petrochemicals and has 1 crore
shares in unlisted entity Andhra Pradesh Gas Power Corporation
Ltd. (APGPCL). We believe the current value of these
investments alone would be a little more than the market cap of
ASL. The value of investments and replacement cost of assets is
estimated to be close to Rs.1,900 crore, which is nearly 4.3
times the current enterprise value (EV) of about Rs.443 crore.
ASL is the 2nd largest producer of caustic soda and one of
the most efficient producers of both caustic soda and sugar
in India. While power constitutes about 60-65% of the
production cost of caustic soda, ASL has access to cheaper
power through APGPCL, as it provides power to it at 50%
below the State tariff. In the sugar business, ASL is able to
maintain sugar recovery rate close to 10.5% in a normal
year of cane availability;
In April the government abolished the levy sugar
mechanism which required the sugar mills to sell 10% of
their output at subsidized rate of around Rs.19 per kg to
government for PDS. Further, the government has
increased import duty on sugar to 15% from 10%. With the
imports declining we expect sugar prices to increase, which
would result in improvement of margins for efficient sugar
producers like ASL;
ASL has a consistent track record of making profits despite
being engaged in highly cyclical businesses and not having
faced any major labour unrest. ASL has maintained strong
dividend historically (paid consistently for the last 50 years).
Even for FY2013, despite a 20% fall in profit, ASL paid a
dividend of Rs.6 (Rs.7 previous year) which gives a yield of
6% at current price;
For Q1FY2014 on a standalone basis, net profit declined by
38% YoY to Rs.11.7 crore. Revenue declined by 18% YoY
to Rs.176.4 crore. EBITDA fell by 27% YoY to Rs.31 crore
while margins declined by 216bps YoY to 17.7%. On a
segmental basis, revenue from the sugar segment declined
by 61% YoY to Rs.33 crore. The company reported an
operating loss of Rs.9.4 crore as compared to a profit of
Rs.44 lakh in Q1FY2013. The quarterly result of the sugar
segment is highly volatile and depends upon the inventory
adjustments. This quarter, draw down of sugar was
substantially less as compared to corresponding quarter last
year. On the other hand, revenue from the caustic soda
segment grew by 16% YoY to Rs. 110 crore. The profit from
the segment grew by 9.4% YoY to Rs. 26.4 crore even
though average domestic caustic soda prices for the quarter
declined by 18.6% YoY & 14.3% QoQ to Rs.1,609/ 50kgs;
ASLs promoter holding is extremely fragmented with 80
individuals/individual entities holding 46.47% as on March 31,
2013, making it an easy takeover target. In case it becomes a
target of M&A, the stock can become a multi-bagger. At the CMP
of Rs.100, the stock is trading at a PE of 2.2x FY2015E EPS
(standalone) of Rs.45.8. We recommend BUY with a fair value of
Rs.165 at 3.6x its FY2015E.

CMP: Rs. 100 52 week H/L Rs.160/97
2012A 714 96 172 35.5 2.8
2013A 800 93 -3.9 34.1 2.9
2014E 825 100 8.1 36.9 2.7
2015E 949 124 24.0 45.8 2.2

Balmer Lawrie & Co. Ltd. (BLC)
Balmer Lawrie & Co (BLC), a 100-year old cash & asset rich
company, is a rare player in the logistics segment with huge real
estate & land assets spread over more than 30 locations mainly
in metros. It has presence in industrial packaging, lubricants,
logistics services, travel and tours. Balmer Lawrie Investments
Ltd. (BLIL), the holding company for BLC, has given an
undertaking to the regulator (RBI) that it will divest its stake in
BLC (source: www.blinv.com). Being asset-rich, this provides
multi-bagger opportunity in long term.
On a consolidated basis, BLC had cash on books of Rs.412
crore as on March 31, 2013 (Rs.145/share) which is 43% of
the current market cap. The company has recommended a
dividend of Rs.17.60 per share for FY2013 which translates
to a yield of 5.3%. BLC had issued bonus shares in the ratio
of 3:4 on 23 May 2013. We believe this is a positive as it
would help improve the dividend yield further. We expect the
dividend for FY2014 to be about Rs.20 per share giving a
yield of 6%;
BLC has posted impressive growth during FY2003-FY2013,
while its total income increased nearly 3.2 times to Rs.3,018
crore, net profit increased more than 7 fold to Rs.148 crore.
BLC has consistently increased the dividend 10 fold from
Rs.1.80 for FY2003 to Rs.17.60 per share for FY2013. For
Q1FY2014, on a standalone basis, BLC reported a 24% YoY
decline in net profit to Rs.34.6 crore while its revenue grew
by 2.7% YoY to Rs.683 crore. EBITDA declined by 21% YoY
to Rs.40.8 crore with margins contracting by 180 bps YoY to
6.0% on account of higher employee and other operating
expenses. EPS for the quarter stood at Rs.12.15 as against
Rs.16.01 in Q1FY2013;
BLC plans to acquire a mid-sized domestic tour company
offering tour packages to various locations. The travel
division of BLC, Balmer Lawrie Tours and Travel (BLTT)
revenue grew 9% YoY in Q1FY2014 to Rs.313 crore (~46%
of total revenues). BLC plans to invest Rs. 500 crore over
the next 2-3 years in new projects including a container
manufacturing facility at Navi Mumbai (~Rs.100 crore), a
multi-modal logistic hub at Visakhapatnam (~Rs.150 crore),
an independent facility for producing construction chemical
in Chennai (~Rs.40 crore) and a travel portal (~Rs.25 crore).
Further, BLC has also got the boards approval to set up a
logistics park at Dankuni, Kolkata involving an investment of
Rs 150 crore. It is expected to acquire 55 acres of land for
setting up the logistic hub;
BLC further plans: a) Foraying into the Rs.1,800 crore
construction chemical business, b) Focusing on branding by
launching new packaging for Balmerol, with its goal to
emerge as a globally competitive, transnational lubricants
solution and service provider, and c) Its subsidiary, Balmer
Lawrie (UK) is proposing acquisitions outside India;
It holds huge land bank its logistics segment alone owns 63
acres of land in metros. In our view, its assets are worth more
than 4-5 times its net Enterprise Value. Hence, we believe that
BLC is well placed to benefit and can emerge as a multi-bagger if
the divestment takes place. Further, we also believe that the
investors are likely to get close to 10% return from the dividend
alone in the next 14 months (i.e dividend of FY2013 & FY2014).
Along with these dividends, we believe that there is a good
opportunity to participate in the capital appreciation as well. The
stock is currently trading at a low P/E of 4.3x FY2015E EPS of
Rs.77.9, we recommend a BUY on the stock.
CMP: Rs. 333 52 week H/L Rs. 410/308
2012A 2,671 148 15.4 51.9 6.4
2013A 3,023 167 12.8 58.6 5.7
2014E 3,428 191 14.4 67.0 5.0
2015E 3,906 222 16.2 77.9 4.3

45
Bombay Burmah Trading Corp. Ltd. (BBTC)
Bombay Burmah Trading Corporation (BBTC), a 142-year-old
company, is a leading company of the Wadia Group with diverse
business interests. BBTC is an asset and investment rich
company with 2,822 hectares of tea and 972 hectares of coffee
plantations. It is also engaged in other businesses including
healthcare and horticulture. BBTC has large tracts of real estate
under development with book value of ~Rs.18 crore. But, the
current value of this land is expected to be significantly higher.
BBTC also holds 50.96% stake in Britannia Industries (a leading
FMCG company in India) and 14.35% stake in Bombay Dyeing.
BBTC started restructuring its businesses in FY2012 and
sold its sunmica and springs divisions for a profit of
Rs.39.77 crore and Rs.124.93 crore respectively. We
expect the company to continue restructuring the business
and unlock huge hidden value in the consolidated company;
Valuation of equity stake in Britannia and Bombay Dyeing
alone is worth around Rs.4,503 crore a gap of Rs.3,760
crore compared to its net Enterprise Value of Rs.743 crore.
This valuation gap alone works out to Rs.539 per share.
The total investment in Britannia and Bombay Dyeing
comes to Rs.646/share. The current market price of the
stock is ~17.8% of its valuation gap (a discount of 82.2%, or
a gap of Rs.539/share);
BBTC sees opportunity in washed robusta. Indian washed
robusta continues to be the preferred choice of roasters
specializing in espresso in Europe and no real competition
from other countries is noticed in this niche market;
For Q1FY2014, on a standalone basis, net profit grew by
15.5% YoY to Rs.3.4 crore, while revenue increased
marginally by 1% to Rs.68 crore. EBITDA increased by
19.5% YoY to Rs.7.5 crore, with margins improving by 170
bps YoY to 11.1%, mainly on the back of lower raw material
cost. Both the major segments Plantation and Auto Electric
component performed well during Q1FY2014, with profit
growing by 166% and 22% YoY to Rs.4.1 crore and Rs.4.3
crore respectively. For FY2013, on a standalone basis,
BBTCs net profit declined by 86.1% YoY to Rs.18.9 crore,
while profit before tax and exceptional item grew by 52%
YoY to Rs.18.0 crore. After adjusting for exceptional items
(profit of sale of divisions) the adjusted net profit declined
marginally by 1.5% to Rs.12.8 crore as against Rs.13 crore
last year. Revenue for the year declined by 8.4% YoY to
Rs.249 crore. The board has recommended a dividend of
Rs.3 per share for FY2013, resulting in dividend yield of
3.1%;
The stock is currently available at an attractive valuation of 4.4x
its FY2014E consolidated EPS of Rs.22/share and we
recommend investors to accumulate the stock with a medium to
long term investment horizon.

CMP: Rs. 96 52 week H/L Rs. 159/84
2012A 5,930 230 94.9 33.0 2.9
2013A 6,519 132 -42.6 18.9 5.1
2014E 7,497 152 15.2 21.8 4.4
2015E 8,650 179 17.8 25.7 3.7

Linde India Ltd.
Linde India Limited (formerly known as BOC India Ltd.) is a part
of Linde group (a world leading engineering and gas company)
and has nearly 8 decades of presence in India. The company has
strong technological capability and operates Indias largest air
separation plant and supplies more than 20,000 gases and
mixtures. It runs more than 20 production facilities and filling
stations across the country.
Linde India has strong financial track record with both
revenue and operating profit registering 25% CAGR and
23.6% CAGR over CY2008-2012. The company has built
further capacity in 2012 to fuel growth. However, the same
was not fully supported by macro environment, resulting in
lower than full capacity utilization;
Linde Indias primary markets, viz. steel, glass, automobile,
pharmaceuticals, construction and infrastructure sectors
demonstrated lower investment appetite for growth. The
slowdown in the automobile sector impacted the demand for
gases. However, with likely improvement in macro
environment especially in the second half of 2013 and 2014
would revive the investment cycle which would revive
demand for gases. Moreover, export opportunities would
also help grow revenue going forward;
Linde for Q2CY2013 reported 71% YoY decline in net profit
to Rs.5.9 crore led by higher depreciation and interest costs.
Revenue for the quarter declined by 5% YoY to Rs.331
crore. The company operationally witnessed growth, with
profit increasing by 5.5% YoY to Rs.58 crore. Operating
margin also improved by 174 bps to 17.6%. For H1CY2013,
while revenues grew by 1.9% YoY to Rs.662 crore, the
companys net profit declined by 69% YoY to Rs.12 crore.
Linde reported EPS of Rs.0.7 and Rs.1.4 for Q2CY2013 and
H1CY2013 respectively;
Linde is targeting to double its revenue in the next four years
with focus on the three areas of tonnage, cylinder and
health-care businesses. Linde Group has committed
investments in India worth Rs.2,500 crore till date and is
going to continue its investments in the country as it sees
turnaround in the near future;
The parent has already diluted its stake to 75% via offer for sale
route (floor price of Rs.230/share) which got oversubscribed by
157%. In our view, the OFS was a major dragger for the stock. At
CMP, we believe that the negatives are priced in and the likely
improvement in the investment across industries would help
accelerate growth for the company. Hence, we recommend BUY
on the stock with a target price of Rs.302 considering 19.5% fall
in last 6 months and attractive valuation of 15.9x CY2014E
earnings estimates.

CMP: Rs. 240 52 week H/L Rs. 474/230
2011A 1,153 118 25.5 13.8 17.3
2012A 1,324 52 -55.9 6.1 39.4
2013E 1,444 74 42.3 8.7 27.7
2014E 1,646 129 74.3 15.1 15.9

46

MOIL Ltd. (MOIL)
MOIL Ltd. (MOIL), India's largest producer of manganese ore,
has a dominant position (51% share) in the domestic industry
with good quality ore, centrally located mines and mine life of 22
years. MOIL is a debt free, cash rich company with cash balance
of Rs.2,277 crore as of March 2013, which is equal to 65% of its
current market cap. The cash on books translates to a strong
Rs.135/share.
MOIL currently has beneficiation plants of 0.4 MT at Dongri
Buzurg mine and of 0.5 MT at Balaghat mine to upgrade the
quality of ore produced. MOIL intends to expand its value-
added capacity and has entered into JVs with SAIL and
Rashtriya Ispat Nigam Ltd (RINL) to set up two ferro alloy
plants in Chhattisgarh and Andhra Pradesh. The proposed
installed capacity in case of the JV with SAIL is 1,06,000
tonne and that in case of RINL is 57,500 tonne. Further it
has started expanding its existing mines to augment its
production capacity to 1.5 MT by FY2016 from 1.2 MT in
FY2013;
Global manganese ore prices which had hit a low of
$4.6/dmtu in Feb 2012, have gained 11% since to
$5.1/dmtu currently. We believe that global prices have
bottomed out on account of low inventories in China and
lower production worldwide. Further INR has also
depreciated 14% in the last 3 months making imports
expensive. We believe these are positive developments as
MOIL would be able to command higher price in the market,
which in turn would improve its realization;
MOIL for Q1FY2014, reported 12.7% YoY growth in net
profit to Rs.112 crore led by lower raw material costs.
Revenue for the quarter declined by 1.5% YoY to Rs.239
crore. The companys operating profit increased by 14%
YoY to Rs.117 crore with margin improving by 665 bps to
48.8%. EPS for the quarter stood at Rs.6.7;
MOIL currently trades at a 7.9x its FY2014E earnings, which is
low considering its leadership position in the Indian manganese
ore segment, sound financials and cash rich status. We continue
to maintain a positive view on the stock with a fair value of
Rs.285.

CMP: Rs. 210 52 week H/L Rs. 275/182
2012A 900 411 -0.8 24.5 8.6
2013A 967 432 5.1 25.7 8.2
2014E 985 447 3.6 26.6 7.9
2015E 1,029 460 2.9 27.4 7.7

Nesco Ltd. (NESCO)
NESCO is a zero-debt, cash rich company holding about 70 acres
of land at Goregaon, Mumbai. It has completed its third building
for IT Park. NESCO already has 3.9 lakh sq ft of exhibition centre
and 3 buildings for IT Parks with 10.2 lakh sq ft area. It is a
perfect hedge on inflation and a thematic play on Mumbais
scarcity of land on the one hand and its ever growing prosperity
on the other. Due to these factors, its 70-acre plot would remain a
cash cow for decades to come - its real estate asset is located on
a highway and close to domestic airport and a 5-Star Hotel. It
drives more than 95% of profits from real estate based assets and
the rest from capital goods segment. Also, NESCO had cash and
liquid investments worth Rs.182 per share as of March 31, 2013.
It is believed to have 40 acres out of its total 70 acres of land
still vacant in Mumbai, where it is very difficult to find large
surplus land that too on a highway, it would be major trigger
in the long term for NESCOs shareholders. In future, the
profits can multiply when its entire land is fully utilized and
also inflation driven rise in revenues;
NESCOs additional capacity should drive significant profits
going forward as the operating margins in the business are
more than 65%. NESCOs third building for IT Park, with 6.6
lakh sq ft of leasable area is completed and half of it has
already been leased out. The company expects to lease the
remaining area by end of CY2013. Further, it has chalked
out robust expansion plans:
o It expects to start construction of the 4th IT building
during FY2014 and has already initiated steps to secure
required approvals for this. The expansion would be
funded through internal accruals;
o Plans to expand Bombay Exhibition Centre (BEC) to 10
lakh sq. ft. from the current 3.9 lakh sq. ft. Also, it has
applied for double FSI for BEC. This would help it
expand further by another 10 lakh sq. ft. to a total of 20
lakh sq. ft.;
NESCO for Q1FY2014 reported 29% YoY growth in net
profit to Rs.16 crore and 28% YoY growth in revenue to
Rs.24 crore. Its operating profit grew by 25% YoY to Rs.15
crore despite margin contracting by 171 bps YoY to 61.4%.
On a segmental basis, revenue from Bombay Exhibition
Centre and IT Park grew by 50% YoY to Rs.20 crore, while
EBIT grew by 25% YoY to Rs.20.1 crore. EPS for the quarter
stood at Rs.11.33 as against Rs.8.77 last year. For FY2014,
NESCO expects to grow its revenue and profits by more
than 20%;
NESCO trades at a P/E of 9.2x FY2014E earnings. However, its
P/E should shrink substantially over the next 3 years (to less than
7 and cash & liquid investments should be little more than 1/3rd
of its current market cap in FY2014). Further the value of its total
land bank would be much more than its current enterprise value.
We believe NESCO is a long term wealth creating idea and
suggest investors to consider the stock with a fair value of
Rs.980.

CMP: Rs. 647 52 week H/L Rs. 862/621
2012A 129 67.4 -15.1 47.8 13.5
2013A 144 81.7 21.2 58.0 11.1
2014E 159 99.3 21.5 70.5 9.2
2015E 181 122.0 22.9 86.6 7.5

47

NMDC Ltd.
NMDC is the largest domestic iron ore miner by volume with
annual production capacity of 32 MTPA and high grade (66% fe
average) reserves of 1,160 million tonne (MT) in Chhattisgarh
and Karnataka. The company sells 37% of its volumes in the
form of lumps, which commands a significant premium over iron
ore fines. NMDC plans to expand its capacity to 48 MTPA by
FY2015E. It is also planning to enter value added products like
pellet and steel in the next two years.
The global iron ore price has increased 49% from a low of
$94/tonne in September 2012 to $140/tonne currently on
hopes of steel industry recovery in 2013 and increased iron
ore demand from China. Combined with the shortage of iron
ore in the domestic market, this can lead to firm domestic
iron ore prices and may help NMDC to improve its
realizations and margins;
NMDC boasts of a strong balance sheet with zero debt and
cash on books exceeding Rs.21,026 crore as on 31st March
2013 (45% of current market cap). With the huge cash
balance on its books, NMDC is aggressively looking at
entering into partnerships and JVs with global steel players
and miners to acquire stakes in various resource assets.
NMDC bought 50% stake in Legacy Iron Ore, Australia, for
Rs.92 crore during FY2012. NMDC is also looking at
reviving its equal JV with global mining giant Rio Tinto. It is
also eyeing Rs.8,000-10,000 crore from the sale of its 50%
stake in the upcoming 3 MTPA steel plant in Chhattisgarh to
a strategic partner to bring in necessary technologies
capable of producing high-end steel products like CRGO,
CRNO and auto-garde steels;
NMDC, for Q1FY2014 reported 17.5% YoY decline in net
profit to Rs.1,572 crore. Revenue grew by 1% to Rs.2,871
crore due to fall in average realization. The companys
operating profit declined by 17.2% YoY to Rs.1,905 crore
with margins contracting by 1,468 bps to 66.4%. This was
mainly led by 7x increase in selling expenses including
freight costs to Rs.291 crore. As a percentage of revenue,
selling costs increased by 887 bps to 10.1%. However on a
sequential basis, operating margin improved by 1,176 bps
QoQ. EPS for the quarter stood at Rs.4. The company
incurred a capital expenditure of Rs.526 crore during the
quarter. For August 2013, NMDC has cut price for iron ore
lumps by Rs.200 to Rs.4,300 per tonne and kept price of
fines unchanged at Rs.2,510 per tonne;
NMDC for FY2013 has recommended a total dividend of
Rs.7 per share which translates to a yield of 6% at the
current market price. The final dividend of Rs.4 is yet to be
paid;
NMDC achieved an output of 27.2 MT in FY2013 and is
targeting an output of 30-32 MT during FY2014 (17.7% YoY
increase). Further, it is planning to incur capex of Rs.2,720
crore (70% YoY increase) in FY2014 mainly for its JV into
steel project. We believe there may be some value
unlocking through divestment of stake;
The stock of NMDC has seen sharp correction of 42% from its
52 week high of Rs.201 and at the current price, the stock trades
at 7.6x FY2015E EPS of Rs.15.4. Considering NMDCs high
margins, robust free cash flow generation and cash rich balance
sheet, we maintain BUY on NMDC with a fair value of Rs.170.

CMP: Rs. 117 52 week H/L Rs. 201/93
2012A 11,262 7,265 11.8 18.3 6.4
2013A 10,699 6,342 -12.7 16.0 7.3
2014E 10,178 5,667 -10.7 14.3 8.2
2015E 10,954 6,092 7.5 15.4 7.6

JK Tyre & Industries Ltd. (JKT)
JK Tyre & Industries (JKT), the third largest tyre manufacturer in
India and ranked 19th in the world, has presence in 80 countries
across 6 continents. JKT has 9 plants (6 in India & 3 in Mexico)
with total capacity of 19.8 million tyres and utilization level of 75%.
The current market cap (Rs.365 crore) of JKT is less than
the cumulative advertisement expenditure incurred over the
last 15 years (Rs.444 crore). Considering its 3rd largest
position in the market and real value of these nominal ad
expenses, we believe that the companys real value of
intangible asset alone would be in multiple of its current
market cap;
JKT posted an impressive performance for its Mexican
operations in FY2013, with a segment profit of Rs.129 crore
on a net capital employed of Rs.170 crore and improved its
RoCE to 76%. Revenue of JK Tornel (the Mexican
operations) registered 21% CAGR to Rs.1,571 crore over
FY2010-2013, while PBIT witnessed 16% CAGR to Rs.129
crore during the same period. JKT had bought Tornel in
FY2008 for about Rs.270 crore and turned it around
immediately. Further contribution from Mexico to its overall
revenues has doubled in the last four years from 11% in
FY2009 to 22% in FY2013;
The replacement demand accounts for more than 75% of
JKTs total turnover. We believe that there is a strong case
for revival in demand from replacement market considering
1) Reversal of interest rate cycle and acceleration in
infrastructure investment going forward; 2) The current Truck
and Bus Radialisation (TBR) in India which is just 22% is
expected to increase to 45% by FY2015 and JKT would be
the biggest beneficiary due to its leadership position in the
segment. Considering the slowdown in the auto sales
globally, we expect lower demand for Natural Rubber (NR).
NR prices are likely to fall by 5% to 10% going ahead, which
would be positive for tyre companies including JKT;
On a consolidated basis, for Q1FY2014, net profit grew by
236% YoY to Rs.55 crore while revenue grew by 3.2% YoY
to Rs.1,876 crore. EBITDA grew by 48.4% YoY to Rs.235
crore while margin expanded by 382 bps YoY to 12.54%. On
the segmental front, profit from Mexico operations grew by
115% YoY to Rs.59 crore as compared to Rs.27 crore in
Q1FY2013. PBIT Margins from Mexico operations improved
substantially to 14.6% during Q1FY2014 as against 7% last
year. For FY2013, net sales grew by 3% YoY to Rs.6,985
crore, while company posted a net profit of Rs.203 crore
against a loss of Rs.32 crore in FY2012;
JKT is expanding its existing Chennai capacity (of TBR &
Passenger Car Radial) to an aggregate of 2.9 million tyres
p.a. and its Mexican operations, JK Tornel by 0.9 million tyre
p.a. which will take the aggregate net capacity to 23.6 million
tyre p.a. by FY2015. Chennai expansion would require a
capex of Rs.800 crore while the capex for Tornel is Rs.137
crore;
At CMP, the stock is trading at 1.4x FY2015E EPS of Rs.62.8.
Considering JKTs strong brand value, improvement in demand,
acceleration in revenue growth from its Mexican operations, we
believe that there is a strong case for re-rating of P/E multiple. We
recommend BUY and ascribe conservatively 2.5x FY2015E EPS
of Rs.62.8 to arrive at target price of Rs.157 per share.

CMP: Rs. 89 52 week H/L Rs. 131/84
2012A 6,783 -32 NA NA NA
2013A 6,985 203 NA 49.4 1.8
2014E 7,850 235 15.8 57.2 1.6
2015E 8,900 258 9.8 62.8 1.4

48

Wockhardt Ltd.
Wockhardt is an integrated pharma company with a strong
global presence with the geographical segments of US, Europe,
India and RoW. The company has 12 manufacturing facilities
across the globe of which 9 are in India while others are in US,
UK and Ireland. It is a leading generic player in the US market
and derives 52% of its revenues from there, followed by 24%
each from Europe and India. It is the 3rd largest generic player
and No.2 in hospital segment in UK. While its US revenues grew
by 52% in FY2013, its UK operations grew by 24% indicating
strong growth in global markets.
For Q1FY2014, on a consolidated basis, Wockhardt
reported 14.5% YoY decline in net profit to Rs.323 crore.
Revenue grew by 1.3% YoY to Rs. 1,358 crore. EBITDA
declined by 12.8% YoY to Rs.421 crore, while EBITDA
margins declined by 499 bps YoY to 31%. The company
reduced its interest expenses by 67% to Rs.17.4 crore
during the quarter. EPS for Q1FY2014 stood at Rs.29.19 as
compared to Rs.34.08 in Q1FY2013. The promoters
released their pledged shares i.e. 7.01 crore equity shares
of the company at the end of Q1FY2014 and accordingly
none of the promoters shares in the company are presently
pledged;
Wockhardt has reduced its net debt by 79% in the last 2
years from Rs.2,701 crore in FY2011 to Rs.561 crore in
FY2013. It has also paid off its domestic debt and come out
of CDR (corporate debt restructuring). We expect the net
debt to become zero by FY2014;
Wockhardt has filed 20 new product applications with
USFDA and received approvals for 12 products in FY2013.
The cumulative products pending approval with US FDA
stood at 46 as on March 31, 2013. It has also filed for 162
patents in FY2013 taking the cumulative filings to 1,733 and
has been granted 52 patents during the year taking the
cumulative patents granted to 206;
In addition to Waluj plant, another plant in Chikalthana,
Aurangabad, which was inspected by US FDA recently, has
received several observations in the Form 483. The
company plans to address all the concerns in a
comprehensive response along with corrective measures
and is hopeful that US FDA would clear the unit;
While these alerts have an immediate impact on the
companys revenue, we believe that the issues raised can
be resolved over the next 1-2 years. Other Indian
companies which had received alerts from US FDA in past
have managed to resolve the issues and restart exports
from those facilities. Aurobindos Unit VI facility was able to
restart exports within 25 months, while Claris Lifesciences
restarted within 20 months as the US FDA lifted its ban after
these firms took corrective actions;
The current prices assume more than 40%-50% decline in its
global revenues which we believe is a low probability. At CMP of
Rs.447, the stock is trading at 4.5x its FY2014E EPS of Rs.100.
Although the current issues are serious, we believe that they are
already factored in the stock price. We suggest investment in
Wockhardt only for risk taking investors, at current levels
considering the risk reward scenario.

CMP: Rs. 447 52 week H/L Rs.2,166/344
2012A 4,614 343 49.6 31.3 14.3
2013A 5,609 1,594 365.2 145.5 3.1
2014E 5,500 1,096 -31.2 100.0 4.5
2015E 6,200 1,315 20.0 120.0 3.7

Mrinalini Chetty - Research Analyst
(mrinalini.chetty@centrum.co.in; +91 22 4215 9910)

49

Silver: Set to shine

50
Silver: Set to shine
Last year we saw the silver price correcting downwards from record high reached during 2011, with an annual average of $31.15
(per oz) in 2012 a fall of 11% from 2011 average of $35.12 and 28% from April 2011 average of $43.10. In 2013 the price
correction continued and it reached a three year low of $18.49 per ounce in July 2013. Silver now trades at $24.07 an ounce, down
23% compared to its 2012 annual average price of $31.2 per ounce.
In the domestic markets, in July 2013, silver was trading at Rs.38,796 per kg - the lowest level since November 2010. Currently it
trades around Rs.53,473 which is 18% below its 52-week high of Rs.65,292.
Going forward, we believe that silver will provide decent returns. It has been high beta commodity in both upward and downward
movements. The reasons for silver price to firm up are:
Declining silver Supply
Over the last 58 years, average silver ore grades (quality of ore) have declined by 92%. During this period, the amount of milled ore
has increased a staggering 1,240%, but final silver output increased by just 7.8% due to poor quality of ore grades! These fi gures
include the production of metal ores from gold, silver, copper, lead and zinc mines. This trend of falling ore grades is also taking
place in the two largest silver mines in the world. The top 2 silver producing companies KGHM Polska and BHP Billiton reported a
decline in their Jan-June 2013 silver production by 17% and 5.6% respectively.
Also, if silver prices remain around $22-$24 per oz, it is highly likely that more primary silver miners will be forced to put their high
cost mines on care & maintenance until prices recover. U.S. Silver has already announced they were cutting a third of their staff
and Alexco Resources is planning to put their only commercially producing mine (Bellekeno) on care and maintenance in the
winter, hoping prices will recover in 2014. If more companies elect to shut down their marginal mines until prices recover, we could
see overall silver production to decline even further in 2013-2014. The stress on supply side and increasing demand will eventually
lead to prices rising further.
ETF Holding Global investors stick to Silver assets
ETF holdings had seen a sharp increase post 2009 as investors got into gold and silver ETFs as a safe haven investment. The total
holding of gold and silver in ETFs had reached a peak of 2,633 Metric Tonne (MT) in December 2012 and 20,022 MT in August
2013 respectively. However, investors have already pulled out 26% (684 MT) of their holdings in gold ETFs which are near thei r
three year low holding of 1,948 MT as of mid August 2013. However, ETF holding in silver has increased by 5.8% (i.e. an addition
of 1,105 MT) during the same period. At the same time, silver prices were down by 21%. The underperformance of silver may not
induce any significant withdrawal of ETFs rather there are possibilities of these funds adding more silver to ETFs as silver is at a
bottom and also has very high beta any recovery from this bottom can fetch significant profits.
Exhibit 26: Silver ETF holding trend in relation to its price movement
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5.00
10.00
15.00
20.00
25.00
30.00
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18,900
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Silver ETF Holding (MT) (LHS) Price ($/oz) (RHS)

Silver demand set to grow
High industrial demand:
Silver has a wide range of industrial uses compared to gold. There's currently growing demand from an increasing number of
industrial applications, including lighting, electronics, hygiene and medicine, food packaging, and water purification, to name a few.
The world economy, especially the developed world is expected to improve its growth in 2014, which in turn would improve the
global industrial demand for silver. The Silver Institute reports that industrial demand of the white metal is expected to average
more than 483 million ounces from 2012 to 2014, a level 53% greater than the average annual industrial fabrication demand of
313.4 million ounces from 1992-2001.
Demand from solar panel to grow
Solar panel demand is growing and silver is needed to make them. The average panel requires about two thirds of an ounce. Since
2000 the adoption of solar panel technology has meant a 50% annual increase in silver usage each year, going from 1 million
ounces in 2002 to 60 million ounces last year, representing nearly 11% of all industrial demand. Adding fuel to the fire, Japan has
recently offered to pay utilities three times the price for electricity generated from solar versus conventional methods. Japan plans

51
to increase its solar generation capacity by about 5.3 GW in 2013. The countrys domestic solar power market is expected to reach
$19.8 billion, meaning that it will pass Germany as the worlds largest solar market.
Exhibit 27: Silver demand from solar industry improving over the years

Various countries are pushing solar energy as an alternative to present energy sources. According to media reports, Chinas State
Council has raised the countrys solar generating capacity target to 35 gigawatts (GW) by 2015, 67% higher than the previous
target of 21 gigawatts (GW) and will mean a yearly addition of 10 GW from 2013 to 2015. China's proposed boost would translate
into a global increase of 27%, from 102.2 GW last year to 130.2 GW in 2015. On a worldwide basis, solar power generating
capacity is projected to be 20 to 40 times the amount of current capacity by 2020.
According to the Silver Institute, approximately 80 tonnes of silver are required to generate one GW of electricity. With 5.3 GW of
new capacity in Japan in 2013 and 30 GW from China, a staggering 2,824 tonnes, or roughly 91 million ounces of silver, will be
required over the next three years for just this industry. This amount is nearly twice the current worldwide demand from the PV
industry and 11% of global mine supply by 2012 numbers.
Further, silver used in solar panels cannot be recycled; once it is used, it is gone forever. That means solar power generation has
the potential to put ever-increasing pressure on the silver market, particularly if other countries follow China and Japans lead in
upping their solar generation capacity.
Silver: Finding new applications:
Further, there are numerous new applications for silver that have potential to make a big difference to demand, over time. Many of
these new applications are using nano-technology where they use tiny amounts of silver per application, but they have potential to
be used extensively. In addition, because the amount of silver per application is so small, demand is likely to remain price inelastic.
Another new application that looks promising and has potential to become a major user of the metal is silverzinc batteries. These
rechargeable batteries are being considered as the next generation of high performance batteries for laptops and mobile elect ronic
devises. Ninety five percent of the primary elements within the battery can be recycled and re-used to make batteries again (i.e.
after recycling there is no loss of quality in the material and a closed-loop recycling system could be introduced). Judging by the
size of the market for rechargeable batteries in laptops and mobile devices this could potentially become a large growth area for
silver demand.
Our view
We believe that silver price can rise to $31 per ounce in next 12 months which is about 29% increase from the current price of
$24.07. However, in Rupee terms we expect about 20% return i.e. a target price of Rs.64,250 per kg - from silver as we believe
that Indian Rupee can appreciate about 10% in the next one year. The risk to our view would be any possible steep appreciation of
Rupee beyond our expectation of 10% in next one year. We believe such steep appreciation is most unlikely considering
uncertainty on the eve of forthcoming General Elections and also considering the fact that there are no signs of any moderati on in
import of coal, crude oil and fertilizers in the years to come. The imports of these commodities would continue to apply major
pressure on the current account balance of our Balance of Payments. The second risk to our view on silver can come from any
possible recession in the developed world, which would suppress the industrial demand and hence, international prices of silver.

Sanket Daragshetti - Research Analyst
(sanket.daragshetti@centrum.co.in@centrum.co.in; +91 22 4215 9423)

52

Gold: A defensive bet against falling Rupee

53
Gold: A defensive bet against falling Rupee
In our strategy note released in April 2013, we had given a target of Rs.24,000 per 10 grams by end of 2013. However, the
domestic gold prices have jumped by 22% to Rs.31,905 from Rs.26,164 on April 23, 2013. In April 2013, INR was quoting at
Rs.54.39 against the USD and we expected that it would appreciate to Rs.52 by the end of 2013, believing that the government
would take effective control over import of gold. However, the import of gold actually zoomed in April and May 2013 applying a lot of
pressures on demand for USD. Sale of debt instruments by FIIs added to woes of INR. Eventually INR depreciated by 12% since
April 2013 and the government also increased the import duty on gold by 400 bps to 10% after April 2013. It also tightened
restrictions on import of gold and hence, the premium on the domestic gold price also increased. Actually the international price of
gold fell 1% since April from $1,413 per oz to $1,398 at present. However, the domestic gold price jumped by 22% during the same
period mainly because of 16% impact from INR depreciation and duty hike, and premium offered on domestic gold.
Going forward, the call on gold price for the next one year essentially hangs equally on both the domestic factors (the movements
in INR and the government policy towards import duty on gold) and global factors like recovery in the economies of the US and the
Euro Zone, response of ETFs towards gold and Chinese demand. Considering the following global factors, we expect the
international gold prices to fall to $1,300/oz by end of 2013.
The U.S. economy appears to be recovering
The latest figures indicate that the unemployment rate has dropped to 7.4%, the lowest level since December 2008. U.S. consumer
spending rose in July at its fastest pace in seven months. US economic growth unexpectedly accelerated in the second quarter at a
1.7% annual rate. Exports too witnessed some rebound, showing the largest percentage gain since the Q3CY2011, even as
demand weakened in Europe and China. Many economists now predict that 2014 will be the best year for growth since 2005, while
joblessness is expected to click below 7% next year for the first time since 2008. The Fed is also likely to start tapering off
Quantitative Easing before end of 2013.
Eurozone comes out of recession reports growth in Q2CY2013
According to Eurostat, the Eurozone escaped recession, recording GDP growth of 0.7% in Q2CY2013 the fastest growth seen
since the first three months of 2011. This was led by stronger consumption and investment in Germany as well as growth in France.
The official figures suggest that a fragile recovery is underway. Surveys of manufacturers have shown increased optimism.
Industrial production in June grew at the fastest rate for three years. Some countries like Spain, have seen a surge in exports.
Although some of the economies in southern Europe are still shrinking, the rate of decline is slowing.
Global gold demand rebalancing
The fall in international price of gold in the last one year has led to a dramatic structural change in gold demand across the world.
Some of statistics for Apr-June 2013 quarter show interesting trends:
There has been significant increase in gold demand for jewellery from India and China by far the biggest markets for gold.
Together they accounted for 60% world demand in this quarter. Demand for gold in June 2013 quarter went up by 54% and
51% respectively in China and India. India's overall consumption of gold grew by 71% YoY to 310 tonne in Q2CY2013, its
highest in the last 10 years;
There were also significant increases in demand for gold jewellery in other parts of the world the Middle East region was up
by 33% and in Turkey demand grew by 38%;
Bar and coin investment grew 78% globally compared to June 2012 quarter, topping 500 tons in a quarter for the first time. In
China and India, the demand for bar & coins went up by 157% and 116% respectively in this quarter;
Meanwhile gold held in gold-backed ETFs, which accounted for 6% of the worlds gold demand, fell by 400 tonnes, driven by
hedge funds and other speculative investors continuing to exit their positions. This was predominantly in the US.
Overall demand for gold in June 2013 quarter was down 12% at 856 tons June 2013 quarter continued to see rebalancing in the
market as gold coming into the market from ETF sales met with demand for bars and coins, as well as jewellery.
Though the central banks were net buyers of gold for the tenth consecutive quarter, purchasing 71 tons, their net purchases are
down 57% yoy.
ETF Holdings in Gold drop
ETF holding had seen a sharp increase post 2009 as investors got into gold and silver ETFs as a safe haven investment. The total
holding of gold and silver in ETFs had reached peaks of 2,633 Metric Tonne (MT) in December 2012 and 19,738 MT in March
2013, respectively. However, the decline in gold and silver prices and possible recovery in the global growth towards the end of
2014 have set a vicious cycle whereby investors pulled out money of ETFs. Year-to-date, investors have already pulled out money
from gold ETFs by 26% to near its three year low holding of 1,948 MT as of mid August 2013, a withdrawal of 684 MT.
While India curtails import of gold, China increases domestic production of gold
Recently, the Indian government raised customs duties on gold 10% from 8% earlier to help curtail the imports to 850 tonnes (950
tonnes last year) this fiscal, contributing towards reducing the current account deficit to 3.7% of the GDP in FY2014 from 4.8% in
the previous year. Further it has prohibited import of gold in the form of coins and medallions. All imports of gold in any f orm or
purity shall be subject to a license issued by DGFT prescribing 20-80 scheme. All India Gems & Jewellery Trade Federation
expects import of gold to fall by 69% YoY to 150 tonne in the H2CY2013 as compared to 478 tonne last year.
According to China Gold Association, the countrys gold production reached during H1CY2013 grew by 8.9% YoY to 192.82 tons.
Gold mine production achieved 159.26 tons, with gold recovered as a by-product from the smelting of other ores reached 33.56
tons, YoY increase of 8.9% and 9.3% respectively.

54
Recycled gold
While mine production of gold is relatively inelastic, the recycling of gold ensures there is a potential source of readily available
supply when needed. For H12013, the total mine supply and recycled gold was down by 1.4% to 1382.7 tons and 12.9% to 672.1
tones respectively as compared with the same period last year. The high value of gold makes recovery economically viable, as long
as the precious metal is in a form that is capable of being extracted, melted down, re-refined and reused. Between 2008 and 2012
recycled gold contributed an average 39% to annual supply flows. The hike in gold import duty to 10% in India to restrain imports of
gold will increase constraints on the supply side. Going forward this supply crunch could be compensated by higher contributi on in
recycled gold which would helps to cater for an increase in demand and keep the gold price stable.
Conclusion
Considering these developments, wherein both positive and negative forces of demand are being rebalanced, we expect
international gold prices to tend marginally lower at $1,350 by end of 2013. In case Fed withdraws QE substantially (more than half
of $85 billion per month) before 2013 end instead of doing it in a phased manner, then the gold price can fall $1,250 by 2013.
However on the domestic front, considering the tremendous pressures on availability of USD and financing of Current Account
Deficit, we believe that the government is unlikely to drop the import duty on gold. We expect INR to trade against the USD i n the
range of Rs.60-62 by end of 2013. Considering the General Election to be held in early 2014, we expect the net inflows from the
FIIs to come down significantly in the last quarter of 2013 which in turn would apply pressures on INR in that quarter.
Hence, our optimistic target for domestic gold price is Rs.31,000 per 10 grams by end of December 2013, incorporating 10% import
duty and some premium of domestic gold as imports are expected to fall further at the expected international price of $1,350.
Though in our view, the domestic gold price is likely to remain around current levels, we suggest investors park about 5% of wealth
in gold at this juncture. In case India struggles to finance CAD and opts for another significant withdrawal from forex reserves, or
the reputed international rating agencies downgrade sovereign rating of India, or FIIs decide to pull out even $5 billion from Indian
equities before end of 2013 due to election uncertainty, then there is a risk of further steep fall in exchange rate of INR. In such a
scenario, investing in gold can provide some protection against both falling INR and domestic equities. Hence, we suggest medium
to long term investors invest in gold at current prices. Risk to our view on gold would be any decision by the Fed to withdraw entire
QE before end of 2013 and/ or any steep inflow of FDI and investments by the FIIs before elections are held, considering the
opportunity available from about 45% crash in INR over the last two years. In such a scenario, domestic gold prices can fall to
around Rs.27,000 level. However, odds are in favour of retaining gold at this juncture.

Dhaval Sangoi - Research Analyst
(dhaval.sangoi@centrum.co.in; +91 22 4215 9980)

55

Fixed Income outlook and strategy:
Currency defense pushes up bond yields

56

Fixed Income outlook and strategy: Currency defense pushes up
bond yields
Market Overview
Since our last communication, bond markets have swung violently from a phase of significant gains (1Q-CY13) to steep losses (3Q-
CY13) with the yield on the benchmark 10-year rising sharply from a low of 7.11% in May13 to a high of 9.45% in Aug13 the
benchmark trades closer to 8.26% levels, as we write this note. The volatility seen in the bonds market over the past 4 6 weeks
has been unprecedented as circuit filters were breached, triggering a brief halt in market trading as well - perhaps for the first time
in over 2-decades.
The scenario was rosier from the start of the year 2013 began with cheer as the broad macro-environment seemed to favor a
prolonged rally in bonds i.e. falling WPI inflation, reduced pricing power, good monsoons, subdued international commodity prices,
slowing growth all pointing to an imminent turn in the local rate cycle.
However, a sudden change in the US Federal Reserves long-held accommodative stance in May13 and increasing chatter of a
roll-back in its QE-program by as early as September 2013, led to US Treasury yields spurting and as a result, triggering the
unwinding of large carry trades into many Emerging Markets (EMs). Countries with large twin deficits on the current account and
the fiscal account came in for special punishment through large depreciation in their exchange rates. The INR was a victim of this
move and witnessed sharp and swift depreciation, pushing it to record lows vis--vis the USD. Bonds were hit by a wave of FII
outflows (~USD 10B between May July13), as interest rate differentials turned unattractive after the steep rise in US Treasury
yields. While almost all of such investments would have been fully hedged, their swift exodus had a cascading impact on a falling
INR that was anyway reeling from a global re-allocation of flows away from EMs that were characterized by the twin deficits.
Exhibit 28: Expectations of QE tapering have pushed Treasury Yields sharply higher
1.5
1.7
1.9
2.1
2.3
2.5
2.7
2.9
Dec-12 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13
1
0
-
y
r

U
S

T
r
e
a
s
u
r
y

Y
i
e
l
d

(
%
)

Source: www.treasury.gov
The RBI responded swiftly by tightening system liquidity and hiking money market rates by a whopping 300 bp, apart from
enforcing other measures like limiting open forex positions for banks/ market participants in order to curb speculation and reduce
the volatility in the INR. In two phases, the RBI significantly narrowed the liquidity window it earlier offered to banks to fund their
short-term liquidity requirements. Tight liquidity and a significantly higher marginal cost of overnight funding reverberated through
the yield curve, pushing yields sharply higher 1-3 year bond yields soared by 150-250 bp and swap rates were up by 200 bp (1-
year), while the benchmark 10-year g-sec yield closed July higher by about 65 bp since the first round of measures on 15th July.
The RBIs twin moves in July helped in lowering the volatility on the INR in the run up to the 30th July monetary policy, where
expectations centered around possible cues from the central bank with regard to the eventual unwinding of the currency stabilizing
measures.
The policy itself though revealed a divided opinion of the RBI with the central bank sounding a dovish note by revealing its
preference for softer rates to bolster growth once the INR volatility issue had been conquered. The dovish interest rate view
spooked the FX market with the INR tumbling to fresh lows on the policy day and continuing to weaken further thereafter.

57

Exhibit 29: Volatility in the INR

Source: Bloomberg, INR/USD 1-mth ATM option volatility (notation is ours)
INR volatility spurted since then and was aided in large measure by the absence of any large and concrete USD mobilization
measures by the policy making establishment. Alongside this, liquidity in the system eased as the RBI paid out its annual profit of
INR 330.01 B to the Government, which in turn was running occasional overdrafts too with the RBI. In order to staunch the vol atility
in the INR, the RBI announced further moves aimed at:
Tightening liquidity through the weekly planned issuance of Cash Management Bills (CMB) of INR 220 B
Restricting USD outflows through limiting remittances by resident individuals and companies
While the liquidity extraction measures helped in ensuring a tight liquidity situation, the restriction on USD outflows was widely
interpreted as capital control measures and thus sparked off another round of panic-driven weakness in the INR that pushed up
bond yields dramatically the 10-year rose from 8.30-8.50% prior to these measures to intra-day highs of 9.45%.
Realizing the impact on long-bond yields, the RBI then stepped in with what is now viewed as Indias version of the USs Operation
Twist, where it announced its explicit preference for lower long bond yields and backed it through open market purchases of long
bonds.
Outlook
By doing so, as was the intended objective of the US version, the RBI has effectively placed a cap on long-bond yields and in the
process implicitly loosened its grip on the INR/USD. For the bonds market, this latest move and the accompanying dovish
statements from the central bank signaled its clear preference for supporting growth once the INR stabilizes. Thus, current yields
that are about 100 bp higher than those on 15th July 13, when the INR stabilization measures were initiated, present a strong
opportunity for investors. More importantly, with inflation pressures (especially core inflation) abating (although these may
temporarily spike owing to the cost push effects of the INR depreciation) and the RBI turning its focus on supporting an economy
battered by a recent currency crisis, yields can ease appreciably over the next 1- 1 years from the current elevated levels. Also,
given the RBIs recent position, the element of uncertainty and volatility on bonds appears to have reduced substantially. Finally,
the extraordinary measures on liquidity may likely be withdrawn sooner rather than later once the RBI finds a window for doing so,
given that these have now lost their relevance largely and also given the potential harmful impact they can have on the economy if
sustained for a long period. While the next 1 1 years may therefore witness easing yields, the path may well be jagged (marked
by two-way movements) than smooth.
Over the near term though, the market may remain victim to:
the swings in the FX market, especially in the run-up to and following the US Feds policy on 17th/18th September
the Governments borrowing programme which remains fairly large besides, over the next few months, the market will be
sniffing for any potential slippages in the fisc, despite the Finance Ministers assurance
Any exuberance may be tempered by:
hints of possible RBI interventions although the last move by the RBI provided comfort, the markets may not want to rule out
such a possibility in the event of drastic movements in the FX market
increasing credit risk in the system arising from the economic slowdown

58
Investment Strategy
Existing Investors: We recommend investors in dynamic/medium term and high yield funds to stay invested and extend their
investment horizon by 9-15 months hereon depending upon the category of funds invested into, as we believe that the volatility
in bond markets could offer fund managers opportunities to offset the recent underperformance. That said, while performance
of these funds from hereon could be higher than that was expected prior to the recent liquidity tightening measures, although
overall holding period returns may be colored by the sharp cut suffered in July.
New Investors: Given the volatility in bond markets, we suggest investing into a diversified portfolio across a select category
of products described below and most importantly, in a phased manner over the next 4 6 weeks so as to be able to navigate
the near term volatility in bond yields.
Dynamic Bond Funds
Suggested allocation: 40%
In an environment where we foresee volatility in g-sec and corporate bond yields, Dynamic Bond Funds that actively switch
between duration - accruals strategies seem to present an attractive investment opportunity, especially after the recent spike in
yields. Such investments may see heightened volatility over the next 1-2 months, but seem attractive over a 15 18 month time-
frame. While the longer end of the curve could head lower over the medium term driven by broader macroeconomic considerations
such as slowing growth, moderating inflation etc., the path is unlikely to be unidirectional these funds are best positioned to
operate in such an environment by actively straddling across tenors/ curves and trading into short term, tactical opportunities
within the broader trade of the season. We therefore prefer such funds to dedicated long-term funds that generally adopt a less
active approach to asset allocation and are also constrained by internal exposure limits on asset classes. Even within this category,
we suggest investing into a diversified set of 2 3 funds with varying investment styles. As mentioned earlier, investors
considering such products should necessarily have an investment horizon of 15-18 months or more.
Medium Term Income Funds and High Yield Funds
These funds are well suited for investors with an investment horizon of 12 - 15 months and seek to not only benefit from accrual
income but also participate in duration linked strategies through limited exposure to g-secs.
In the current macro-environment, most such funds remain invested in the short - medium segment of the g-sec/ corporate bond
curve (i.e. T-Bills/CPs/CDs - 5 / 7 years) with a primary focus on accrual income - whilst maintaining an exposure of not more than
10 - 20% into medium - long-dated g-secs so as to participate in possible short-term trading rallies in g-secs. As such, these funds
typically maintain a portfolio maturity/ duration cap of ~3 4 years, thereby reducing the potential volatility associated with high-
duration portfolios.
There are high yield variants in this segment too which invest into reasonably good quality, sub-AAA rated securities. Not only are
these funds likely to benefit from high yields, but would also benefit from any improvement in system liquidity that would help
narrow corporate bond spreads over the next 3 6 months. However, these funds are only suited for investors with an investment
horizon of 24 30 months and without any interim liquidity requirements.
Open-ended Bank CD funds and
Fixed Maturity Plans (FMPs) that seek to lock-in the current high money market yields seem attractive especially considering their
low volatility. These funds offer highly visible returns over a 1 -2 year horizon and help reduce the volatility in the overall portfolio.
However, these are close ended funds, offering virtually no exit route and hence, the investment horizon must necessarily be
aligned to the tenor of the product. A few AMCs have introduced open-ended ultra short term dedicated Bank CD/ CP funds
these are akin to open-ended FMPs investing into CDs/CPs but 1) offering liquidity and 2) marginal upside potential, with
relatively lower mark-to-market risk vs. short term funds. We prefer the open-ended variety of funds to the conventional FMPs.
Bonds
The next few months may witness a spate of tax-free bond issuances from Government-owned companies (mainly public utilities).
These are bonds issued for 10/15/20 years, but offer reasonably good liquidity (from past experience) for investors choosing to exit
their investments in the interim. As their coupons at issuance are linked to g-sec yields, which are currently elevated, these can be
very attractive options over the near term. The consistency of returns over a 10/15/20-year term is an added benefit that makes
them a necessary consideration in every fixed income portfolio.
Investors can also selectively consider medium-term bonds from good quality NBFCs (non-bank finance companies) that generally
provide higher yields vis--vis their counterparts in other sectors. Going by recent experience, such bonds offer around 11-11.5%
p.a. over 3-5 year periods. They therefore compare well with traditional bank or company deposits, as these are secured and also
as they offer higher return stability (through fixed coupon payments) vis--vis fixed income funds where returns tend to vary through
interest rate cycles.

59
Two important caveats that need to be borne in mind while considering private sector corporate bonds are:
1. Credit quality investors should only invest into bonds issued by high quality companies having a superior credit rating we
suggest a minimum credit rating of AA (or equivalent). Within this, we prefer issuances from companies belonging to large, well
established business groups and those from large manufacturing companies. We would prefer to be highly selective in
considering bonds from NBFCs with a bias for companies engaged mainly in secured lending in non-capital market linked
segments. This factor is especially key, given the current financial stress seen across companies and sectors.

2. Liquidity while bond issuances have increased sharply in recent times, the bonds market remains fairly illiquid for individual
investors (with transaction size of under INR 5 crores). Specifically, a fresh supply of bonds can significantly impact the price/
yield levels. Investors should bear in mind this risk and not depend on investments into bonds to meet contingencies or
unforeseen liquidity requirements.
Specialty High Yield Debt Products
Investors with a moderately high risk appetite and seeking a high yield premium over a 3 3.5 year time-frame can consider
investing into niche high yield debt products which invest into a pool of carefully identified NCDs issued by good quality real estate
companies. These NCDs are secured with multiple layers of collaterals.
Such products typically offer regular coupon income (typically from 3 6 months from date of investment) and are structured in a
tax-efficient manner so as to maximize the net yield to the investor. However, such products are suitable only for investors with a
high risk appetite and with an investment horizon of at least 3 years. Given the higher risk associated, investors should necessarily
restrict exposure to this asset class.
Market-linked structured debentures
Market-linked debentures can provide non-linear pay-off profiles for investors and thus act as an effective diversification tool in
portfolios. While there is an undeniable linkage to an underlying asset class (mostly, an equity index in India), the returns to
investors may not be in lock-step with equities.
With yields having gone up in recent weeks (high yields increase the attractiveness of structures), the swings in equity market
volatility may help in offering attractive payoff possibilities for investors.
We suggest investors to consider a mix of:
1. High-coupon based structures over a 3-4 year period. Such structures currently offer high coupon rates that are premised upon
low to moderate upsides in the equity markets over a 3-year period.

2. High-equity participation structures over a 3-4 year period, where investors with a favourable equity market outlook over this
period can look to beat equity index performance by a large margin.
Global opportunities
Investors could selectively consider exposures to certain global geographies or themes to effectively diversify their predominantly
domestic equity and debt portfolios. Many of these ideas are worthy of consideration for their own individual merits as growt h
opportunities, while others could be poorly correlated with India and therefore act as good portfolio diversification options. Some
such ideas include US equities, Emerging Market equities, select thematic plays such Global Real Assets, Agriculture, etc. These
funds also help as a hedge against the movement of the INR, as the underlying assets are denominated in foreign currency. For
domestic investors with portfolios that are largely positively correlated with the INR, these options can help as effective currency
hedge. A caveat on the other hand is the significant volatility in some of these asset classes (e.g. commodities). However, with the
steep depreciation in the INR in recent times, the attraction of some of these ideas may be diminished for investors over the short-
term. These ideas should necessarily be considered for periods of 3-years or more for the benefits outlined above.
Commodity-based funds
Such ideas offer good opportunities as the commodity complex is fairly diversified and offers effective diversification both within this
asset class and vis--vis conventional assets. Investors can consider regulated products that are designed within strong risk-
management frameworks and designed to deliver outperformance over conventional debt products.

R. Shankar Raman, Head Third Party Products Advisory
(shankar.raman@centrum.co.in; +91 22 4215 9684)
Mangala Pruthi, AVP Third Party Products Advisory
(mangala.pruthi@centrum.co.in; +91 22 4215 9632)

60
Appendix A
Disclaimer
Centrum Broking Limited (Centrum) is a full-service, Stock Broking Company and a member of The Stock Exchange, Mumbai (BSE), National Stock
Exchange of India Ltd. (NSE) and MCX-SX Stock Exchange Limited (MCX-SX). One of our group companies, Centrum Capital Ltd is an investment banker
and an underwriter of securities. As a group Centrum has Investment Banking, Advisory and other business relationships with a significant percentage of the
companies covered by our Research Group. Our research professionals provide important inputs into the Group's Investment Banking and other business
selection processes.
Recipients of this report should assume that our Group is seeking or may seek or will seek Investment Banking, advisory, project finance or other businesses
and may receive commission, brokerage, fees or other compensation from the company or companies that are the subject of this material/report. Our
Company and Group companies and their officers, directors and employees, including the analysts and others involved in the preparation or issuance of this
material and their dependants, may on the date of this report or from, time to time have "long" or "short" positions in, act as principal in, and buy or sell the
securities or derivatives thereof of companies mentioned herein CBL or its affiliates do not own 1% or more in the equity of this company Our sales people,
dealers, traders and other professionals may provide oral or written market commentary or trading strategies to our clients that reflect opinions that are
contrary to the opinions expressed herein, and our proprietary trading and investing businesses may make investment decisions that are inconsistent with the
recommendations expressed herein. We may have earlier issued or may issue in future reports on the companies covered herein with recommendations/
information inconsistent or different those made in this report. In reviewing this document, you should be aware that any or all of the foregoing, among other
things, may give rise to or potential conflicts of interest. We and our Group may rely on information barriers, such as "Chinese Walls" to control the flow of
information contained in one or more areas within us, or other areas, units, groups or affiliates of CBL. CBL or its affiliates do not make a market in the
security of the company for which this report or any report was written. Further, CBL or its affiliates did not make a market in the subject companys securities
at the time that the research report was published.
This report is for information purposes only and this document/material should not be construed as an offer to sell or the solicitation of an offer to buy,
purchase or subscribe to any securities, and neither this document nor anything contained herein shall form the basis of or be relied upon in connection with
any contract or commitment whatsoever. This document does not solicit any action based on the material contained herein. It is for the general information of
the clients of CBL Though disseminated to clients simultaneously, not all clients may receive this report at the same time. Centrum will not treat recipients as
clients by virtue of their receiving this report. It does not constitute a personal recommendation or take into account the particular investment objectives,
financial situations, or needs of individual clients. Similarly, this document does not have regard to the specific investment objectives, financial
situation/circumstances and the particular needs of any specific person who may receive this document. The securities discussed in this report may not be
suitable for all investors. The securities described herein may not be eligible for sale in all jurisdictions or to all categories of investors. The countries in which
the companies mentioned in this report are organized may have restrictions on investments, voting rights or dealings in securities by nationals of other
countries. The appropriateness of a particular investment or strategy will depend on an investor's individual circumstances and objectives. Persons who may
receive this document should consider and independently evaluate whether it is suitable for his/ her/their particular circumstances and, if necessary, seek
professional/financial advice. Any such person shall be responsible for conducting his/her/their own investigation and analysis of the information contained or
referred to in this document and of evaluating the merits and risks involved in the securities forming the subject matter of this document.
The projections and forecasts described in this report were based upon a number of estimates and assumptions and are inherently subject to significant
uncertainties and contingencies. Projections and forecasts are necessarily speculative in nature, and it can be expected that one or more of the estimates on
which the projections and forecasts were based will not materialize or will vary significantly from actual results, and such variances will likely increase over
time. All projections and forecasts described in this report have been prepared solely by the authors of this report independently of the Company. These
projections and forecasts were not prepared with a view toward compliance with published guidelines or generally accented accounting principles. No
independent accountants have expressed an opinion or any other form of assurance on these projections or forecasts. You should not regard the inclusion of
the projections and forecasts described herein as a representation or warranty by or on behalf of the Company, CBL, Centrum group , the authors of this
report or any other person that these projections or forecasts or their underlying assumptions will be achieved. For these reasons, you should only consider
the projections and forecasts described in this report after carefully evaluating all of the information in this report, including the assumptions underlying such
projections and forecasts.
The price and value of the investments referred to in this document/material and the income from them may go down as well as up, and investors may realize
losses on any investments. Past performance is not a guide for future performance. Future returns are not guaranteed and a loss of original capital may
occur. Actual results may differ materially from those set forth in projections. Forward-looking statements are not predictions and may be subject to change
without notice. We do not provide tax advice to our clients, and all investors are strongly advised to consult regarding any potential investment. CBL and its
affiliates accept no liabilities for any loss or damage of any kind arising out of the use of this report. Foreign currencies denominated securities are subject to
fluctuations in exchange rates that could have an adverse effect on the value or price of or income derived from the investment. In addition, investors in
securities such as ADRs, the value of which are influenced by foreign currencies effectively assume currency risk. Certain transactions including those
involving futures, options, and other derivatives as well as non-investment-grade securities give rise to substantial risk and are not suitable for all investors.
Please ensure that you have read and understood the current risk disclosure documents before entering into any derivative transactions.
This report/document has been prepared by CBL, based upon information available to the public and sources, believed to be reliable. No representation or
warranty, express or implied is made that it is accurate or complete. CBL has reviewed the report and, in so far as it includes current or historical information,
it is believed to be reliable, although its accuracy and completeness cannot be guaranteed. The opinions expressed in this document/material are subject to
change without notice and have no obligation to tell you when opinions or information in this report change.
This report or recommendations or information contained herein do/does not constitute or purport to constitute investment advice in publicly accessible media
and should not be reproduced, transmitted or published by the recipient. The report is for the use and consumption of the recipient only. This publication may
not be distributed to the public used by the public media without the express written consent of CBL. This report or any portion hereof may not be printed, sold
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The distribution of this document in other jurisdictions may be restricted by law, and persons into whose possession this document comes should inform
themselves about, and observe, any such restrictions. Neither CBL, nor its directors, employees, agents or representatives shall be liable for any damages
whether direct or indirect, incidental, special or consequential including lost revenue or lost profits that may arise from or in connection with the use of the
information.
This document does not constitute an offer or invitation to subscribe for or purchase or deal in any securities and neither this document nor anything
contained herein shall form the basis of any contract or commitment whatsoever. This document is strictly confidential and is being furnished to you solely for
your information, may not be distributed to the press or other media and may not be reproduced or redistributed to any other person. The distribution of this
report in other jurisdictions may be restricted by law and persons into whose possession this report comes should inform themselves about, and observe any
such restrictions. By accepting this report, you agree to be bound by the fore going limitations. No representation is made that this report is accurate or
complete.
The opinions and projections expressed herein are entirely those of the author and are given as part of the normal research activity of CBL and are given as
of this date and are subject to change without notice. Any opinion estimate or projection herein constitutes a view as of the date of this report and there can
be no assurance that future results or events will be consistent with any such opinions, estimate or projection.
This document has not been prepared by or in conjunction with or on behalf of or at the instigation of, or by arrangement with the company or any of its
directors or any other person. Information in this document must not be relied upon as having been authorized or approved by the company or its directors or
any other person. Any opinions and projections contained herein are entirely those of the authors. None of the company or its directors or any other person
accepts any liability whatsoever for any loss arising from any use of this document or its contents or otherwise arising in connection therewith.
CBL and its affiliates have not managed or co-managed a public offering for the subject company in the preceding twelve months. CBL and affiliates have not
received compensation from the companies mentioned in the report during the period preceding twelve months from the date of this report for service in
respect of public offerings, corporate finance, debt restructuring, investment banking or other advisory services in a merger/acquisition or some other sort of
specific transaction.

61
Member (NSE and BSE)

Regn No.:
CAPITAL MARKET SEBI REGN. NO.: BSE: INB011454239
CAPITAL MARKET SEBI REGN. NO.: NSE: INB231454233
DERIVATIVES SEBI REGN. NO.: NSE: INF231454233
(TRADING & CLEARING MEMBER)
CURRENCY DERIVATIVES SEBI REGN NO. : MCX-SX INE261454230

Distributor Mutual fund
ARN : 1833

Depository Participant (DP)
CDSL DP ID: 120 12200
SEBI REGD NO. : CDSL : IN-DP-CDSL-661-2012

PORTFOLIO MANAGER

SEBI REGN NO.: INP000004383

Website: www.centrum.co.in
Investor Grievance Email ID: investor.grievances@centrum.co.in

Compliance Officer Details:
Mr. Ashok Devarajan; Tel: (022) 4215 9437; Email ID: compliance@centrum.co.in

Centrum Broking Ltd.
REGD. OFFICE Address
Bombay Mutual Bldg.,
2nd Floor,
Dr. D.N. Road,
Fort,
Mumbai - 400 001
Correspondence Address
Centrum House
6th Floor, CST Road,
Near Vidya Nagari Marg,
Kalina, Santacruz (E)
Mumbai 400 098.
Tel: (022)4215 9000
Fax: +91 22 4215 9344

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