Morning Insight

18 February 2016 For private circulation only

Review of Global Economy and Equity Markets

 In Asian markets, the Shanghai Composite Index rose 1.1%, after jumping 3.3%on
Tuesday following record bank lending data while Japan’s Topix ended 1.1% lower.
However, both European and US equity indices gained 1.5% to 2% last night;
 There were a few adverse data points released yesterday:
o Housing starts (new home construction) in the US dropped 3.8% to a 1.1
million annualized rate in January, the weakest in 3 months, from a 1.14
million in the prior month;
o China’s holdings of U.S. Treasuries in December fell to a 10-month low, as
the world’s second-largest economy reduced foreign-exchange reserves to
support a weakening Yuan. Still China is the biggest foreign holder of U.S.
government debt, holding $1.25 trillion in bonds, notes and bills in
December, down $18.4 billion from a month earlier and little changed from a
year earlier. While the portfolio of Japan, the largest holder after China, dropped
$22.4 billion to $1.12 trillion;
o The decline in Singapore’s exports deepened in the first month of the year -
Non-oil domestic exports fell 9.9% in January from a year earlier, worse than the
median estimate of a 7.6% drop and compared to a 7.2% decline in December;
o Taiwan cut its economic growth forecast for 2016 - the economy will expand
1.5% this year, down from an earlier projection of 2.3%, GDP contracted 0.52%
in the fourth quarter from a year earlier, steeper than the originally reported
0.28% decline. The forecast for exports was also lowered to minus 2.8% for
2016, from 2.0% growth seen previously;
 The European Central Bank’s top supervisor informed that, the euro area bank
sector is more resilient than at the height of Europe's crisis in 2012 and lenders
are more capable of absorbing any unexpected headwinds and added that the
quality of the banks' capital has also been substantially improved, thus, the sector
is much more able to absorb unexpected financial or economic headwinds than a
few years ago. This is a major comforting factor in the light of rising global
deflationary scenario;
 South African inflation accelerated to the fastest rate in 17 months in January,
adding pressure on the central bank to continue raising interest rates even as economic
growth is forecast to slump further. The inflation rate jumped to 6.2%, from 5.2% a
month earlier. Core inflation, which excludes food, non-alcoholic beverages, gasoline and
electricity costs, quickened to 5.6% in January, from 5.2% the previous month. That’s the
highest rate since May;
 As the world’s biggest oil producers show they’re willing to cap output to revive
prices, there are increasing signs OPEC’s strategy of driving higher-cost suppliers
out of the market by keeping taps open is bearing fruit. A unit of China
Petrochemical Corp. on Wednesday said it will shut its least profitable fields
because of the price slump. That’s after Cnooc. Ltd., the country’s biggest offshore
crude explorer, announced plans to cut output and capital spending this year. The
nation’s production may slip 3-5% from last year’s record 4.3 million barrels a day, in
what would be the first drop in seven years; Founder &
 Oil prices rose on Wednesday again this morning as efforts led by Russia and Saudi Managing Director
Arabia to broker a deal to freeze production levels and ease a global glut turned to Iran, chokka.g@equinomics.in
which signaled a tough line. Brent crude price shot up to close to $35 a barrel now. The
stock price of Cairn India is likely to remain firm today;
 Taking cues from the markets in the developed world, a majority of the Asian markets
have gained anywhere from 1% to 2% this morning;

Equinomics Research & Advisory Private Limited - Investment Adviser

18 February 2016
Equinomics
Morning Insight
|
Review of Indian Economy and Equity Markets
 Buying in the last hour of trade amid firm European markets helped domestic benchmark indices BSE Sensex and
NSE Nifty to close the day in positive zone in a volatile trading session. Sensex closed 190 points up at 23,382. Nifty
settled 72 points up at 7,120. The broader markets underperformed the benchmarks with BSE Midcap and Small
cap indices ending higher by 0.5% and 0.2% each. The FIIs were net sellers of stock worth Rs.560 crore while the
DIIs were net buyers of stock worth Rs.384.53 crore;
 India’s rupee closed at 68.46 a dollar, down 0.1% from Tuesday, after touching 30-month low intra-day. It
dropped as much as 0.4% earlier to 68.67, near an unprecedented 68.84 reached in August 2013;
 According to media source, India is preparing to pump in a higher-than-anticipated capital sum into poorly
performing PSU banks. This move could see the government infusing as much as $34 billion (Rs.2.32 lakh
crore) additionally into the state banks. Government in August had already pledged to put in Rs70,000 crore
($10.2 billion) into state-run banks through four years to March 2019 as part of a broader banking reforms
programme;
 The RBI is rebuilding the country’s foreign reserves - the currency stockpile grew by $2.3 billion in the week to
February 5, the most since the period ended September 11. The reserves have risen $4.3 billion in three
straight weeks, the longest run since October;
 The Income Tax Department has mopped up Rs.5.74 lakh crore as direct taxes so far this fiscal, achieving over 72%
of its target of Rs.7.96 lakh crore for 2015-16;
 India will save Rs.30,000 crore in FY2016 by cutting down on coal imports as domestic production has picked
up. Imports have already started coming down. This year, imports are already down by 16% resulting in savings of
Rs.22,000 crore so far. This is mainly on account of Coal India increasing the output at record level. We
believe that Coal India will increase the output substantially in the next 4 years and the same would
improve its fundamentals substantially. Hence, we continue to suggest BUY on the stock;
 Yesterday petrol price was cut by 32 paise per litre but diesel price was increased by 28 paise a litre based
on global trends;
 Non-food credit of the banking sector grew at 11.63% yoy in the fortnight ended February 5, 2016. This is
the 5th successive fortnight the credit has grown at about 11%. However, mostly the private banks would
be the beneficiary of turnaround in credit growth. Impacted by the stringent regulatory norms, lower
capital adequacy, losses and downgrades by the international rating agencies would ensure that the most
PSU banks grow their business in single digits. A few PSU banks already started showing de-growth in their
business;
Corporate Development
 According to media sources, Tech Mahindra is said to have hired JP Morgan to advise on its bid to acquire IT
services company Mphasis Ltd, put on the block by its controlling shareholder Hewlett Packard (HP). We
continue to believe, based on the focus of HP worldwide, that Mphasis would join the consolidation and
hence, we suggest our clients to accumulate the stock, which also gives very impressive dividend yield,
whenever it shows some weakness on the markets;
Sector Developments
 India's sugar production up by 3.6% as on February 15 as compared to same period of previous year,
according to industry body Indian Sugar Mills Association (ISMA);
 The government launched its national mineral exploration policy (NMEP) under which it has decided to
award 100 blocks for private sector exploration through a revenue sharing model. Under the new NMEP, the
private sector explorer would be getting a certain share in the revenue - just like state governments receive their
royalty - from the mining operation of the successful bidder who would be auctioned the explored block. The
identified blocks include a total area of around 12,000 square kilometers which have the prospects for
gold, iron, tin, tungsten etc. The selection of the private explorer for each and every block would also be done
through auction process;
 HDFC Chairman Deepak Parekh says “stiff NPA norms can hurt banks”. He further adds that “…too much of
anesthesia can also result in a patient becoming comatose. Yes, we need transparency in accounting for NPAs,
but surely the objective of the clean-up is to fix theEquinomics Research
financial rot, not to &incapacitate
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banks have lost more than Rs.1.80 lakh crore in their market cap”. We appreciate the courageous stance of
Mr.Parekh, who comes from the financial sector;
 Honda Motorcycle and Scooter India (HMSI) has begun operations at its 4th two-wheeler plant in Gujarat.
This is Honda’s first 2-wheeler plant which has 80% complete automation at the painting shop and more than 60
robots at the welding shop. HMSI has already captured about 1/4 th of market share at the cost of domestic players.
This new plant is going to accelerate the competition for the domestic companies like Bajaj Auto and Hero
MotoCorp. HMIS, being unlisted company, can opt for margin sacrifice (price cuts) to take on the
competition;
 India Ratings says that demand for cement is likely to grow by 4-6 % in FY2017, compared to an
expectation of 3% in FY2016. Even 6% growth would not help the industry in coming back to significant
growth in earnings for many cement companies unless they beat this industry growth by big margins;

Equinomics Research & Advisory Private Limited - Investment Adviser

 18 February 2016
Equinomics
Morning
MorningInsight | Equinomics Research & Advisory Private Ltd
Insight
We reiterate our ‘BUY’ recommendation on KCP Ltd
The stock price of KCP Ltd has got corrected by around 40% from its 52W High of Rs.101. The company has reported
an excellent performance for the quarter ended December 2015 – during the quarter, the net profit soared 4
fold to Rs.5.26 crore as compared to Rs.1.01 crore last year. Net sales for the quarter grew by 9.9% yoy to Rs.165.9
crore as compared to Rs.150.9 crore last year. Hence we recommend our investors to use this correction as an
opportunity to accumulate such quality stock.
There are two key reasons, which give us enormous confidence in this stock:
At a time when globally sugar prices were hovering at a 6 year low, KCP reported impressive performance
from its sugar business situated in Vietnam due to lucrative realizations and low sugarcane cost in Vietnam for
the year ended March 2015. The sugar business in Vietnam recorded a 45% yoy growth in its Net Sales for the
year ended March 2015. Profit from the sugar segment grew 13% yoy to Rs.58 crore, the second largest
after Rs.72 crore contributions from the domestic cement segment. The global sugar prices have
improved from the bottom and we believe that KCP would increase its profits from sugar business
substantially in the future. KCP has been receiving substantial dividends from its Vietnam business and uses
the same to reward its own shareholders. KCP has reported that the Vietnam government has permitted
the capacity expansion from 6,000 tcd to 10,000 tcd in 2 phases in FY2016 and FY2018. The capacity
expansion would be a major game changer for this company in the medium term;
KCP has got another distinction - its power division has set up facilities for generating power from all
possible sources – wind energy, solar, hydel, thermal and power from waste heat recovery system. This
enabled the company to gradually increase the captive power supply for its cement business. During the first
half of FY2016, the segment profit from the cement division rose 3-fold to Rs.63.56 crore from Rs.21.01 crore
during the corresponding period of last year. Despite tough environment for the industrial
economy, KCP managed segment profit margin of 16.6% from the cement division during the first half of
FY2016;
KCP has been consistently paying dividend over the last 25 years despite being engaged in highly
cyclical business like cement and sugar;

Apart from this superior sugar business, our conviction in the stock emanates from the following:-
Post-bifurcation of the state of Andhra Pradesh, both the states are having healthy competition for attracting
investments into their states. The state of Telengana has already proposed several thousands of crore of fresh
investments into the state. The same would augur well for the cement business of KCP.
Both the cement plants are located within a 125- 175 km range of the proposed Amaravati capital city (Area:
212 sq.km) located centrally in the proposed Andhra Pradesh capital region site (Area: 7,420 sq. km)
spreading from Vijayawada to Guntur. In addition to this, there are a lot of infrastructure projects in the
pipeline for Andhra Pradesh and Telangana which would drive cement demand;

Outlook and Valuation

Sugar prices globally have recovered from the bottom and we believe that the prices would firm as 2015-16 is forecast
to be the first year of global sugar deficit for five years. We also expect its cement sales to improve significantly
consequent to the bifurcation of the state of Andhra Pradesh. Hence, we expect KCP to improve its bottom line
significantly going forward. At the current market price of Rs.61, the stock trades at 11.8x FY2015 Consolidated EPS of
Rs.5.17. We expect KCP to post a Consolidated EPS of Rs.6 in FY2016E and Rs.8.5 in FY2017E to be aided by
turnaround in the engineering division and robust rise in sugar prices). Hence we recommend a BUY on the
stock with a target price of Rs.100/- assuming 10x FY2017E EPS. We firmly believe that this stock may emerge as
a multi-bagger in the next 2 to 3 years.

Suitability: This stock is suitable only for long term investors with an investment horizon of 1-2 years;

Disclosure: I, G.Chokkalingam, personally do not hold the shares of KCP Ltd directly or indirectly through friends,
relatives or any proxies.

Equinomics Research & Advisory Private Limited - Investment Adviser

18 February 2016
Equinomics
Morning Insight
KCP Ltd: Risk Profile and Investment Horizon

Stock Risk Profile Low Moderate High Very High

√
Investment Horizon 1 Year 1-2 years 2-3 years 3 years & Above
√
Disclosure: I, G.Chokkalingam, do not hold the stock directly or indirectly through friends, relatives or any proxies. And
I declare that I haven’t obtained any monetary benefit from the company, which is recommended here.

Stock Disclosure: Whether Stock Held By:

G.Chokkalingam & Family Equinomics

KCP Ltd NO NO
Equinomics Research & Advisory Private Ltd
Investment Adviser
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G. Chokkalingam - Founder & Managing Director

Head Office – Mumbai
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