2018

November 1, 2018

Samvat 2075 – Diwali Sale on Dalal Street, Pick Wisely

The Diwali sale of stocks has begun, and the market offers a wide range of choice for the
investors. Several stocks are trading at 52-week lows and some are at even 5-year low. The
next 12 months will be quite challenging marked by uncertain political events and evolving
macroeconomic scenario. Political events will include assembly elections in 3 major states,
which will set the tone for the upcoming General Elections in 2019. Marco economic scenario
continues to remain a mixed bag with an improving GDP growth and worsening fiscal deficit
and liquidity challenges along with emerging global challenges.

The market is unlikely to see any significant re-rating from the current levels and valuation
multiples are likely to persist or even decrease from the current levels. However, such market
conditions provide great opportunity to accumulate high quality stocks at reasonable valuations
which in normalised conditions are perceived to be expensive that too with limited upside.
While flight to quality is a consensus trade, the market is seeing an interesting trend reversal
with value investing seeing a certain degree of comeback. Thus, exploiting the best of the both
worlds which is “quality backed by value” or “value backed by quality” seems to be the most
apt strategy at this juncture. Value metrics can be defined by simple PE multiples relative to the
sector, while quality parameters can be defined by the financial strength of earnings over the
last 5 years, management bandwidth and return ratios.

We present our Samvat 2075 picks based on the following parameters:

ff Strong earnings visibility over the next one year.
ff Reasonable valuations.
ff Sectors, which are set to turn the current macro situation to their advantage.
ff High quality management with healthy corporate governance.

Our Large-cap Picks

We present 5 large cap companies and 5 mid cap companies, which fit into the themes
well. We prefer large cap companies, as they are likely to gain market share over the next
one year. Our large cap picks have a higher allocation towards banking sector, as we believe
they are well-placed to cash in the current liquidity challenges and gain pricing power to
their advantage, going forward. The large banks with solid retail franchise will be the biggest
beneficiaries. Stock selection in IT, Consumer and Pharmaceutical sectors is based on “value
backed by quality” theme.
Infosys: The stock is steadily gaining ground with the new CEO driving better focus on the core
business, as reflected in all-time high order wins in 2QFY19. Valuation is also reasonable at
15.1x FY20E earnings, with improving growth and cash return themes to drive stock upside. The
IT major is a solid portfolio stock, in our view.
ITC: Its non-cigarette business is gaining solid traction and has started contributing to growth.
The stock, which trades at 24x FY20E earnings, is one of the cheapest consumer stocks with
solid cash flows and robust earnings growth.
ICICI Bank: With fast improving lending book, major clean-up of stressed assets, solid retail
franchise, the Bank is well-placed to gain market share.
HDFC Bank: Bellwether of the sector with all essential elements in place. We believe with solid
platform to grow the book further, the Bank will scale to new heights.
Sun Pharma: Growth drivers to unfold over the next 12 months. Valuations in comfortable zone
post recent correction.

Head of Research: Naveen Kulkarni

Contact : (022) 3303 4660
Email : naveen.kulkarni@relianceada.com

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Wish you all a very happy and prosperous Diwali! Happy Investing!
 2018
November 1, 2018

Our Mid-cap Picks

Amongst mid-cap stocks, we like the following ideas which offer reasonable valuations and
strong earnings visibility over the next one year.

ff Sonata Software: High quality mid cap IT company available at discounted valuations of
12x FY20E earnings.

ff Engineers India: All time high order book provides revenue visibility. Valuations cheap at
13x FY20E earnings.

ff DCB Bank: Building Blocks Faster & Smarter

ff Escorts: Multiple revenue avenues to unfold. Valuation quite reasonable at 11x FY20E
earnings.

ff NBCC India: Giant order book offers revenue visibility.

Focus Charts

Exhibit 1: Real GDP Growth

9.0%
8.3% 8.2%
7.9%
8.0% 7.7% 7.8% 7.8%7.8% 7.7%
7.5% 7.4%
7.2% 7.2%
7.0%
7.0% 6.7%
6.4% 6.6%6.7% 6.5% 6.5%
6.1%
6.0% 5.8% 5.7%
5.4%
5.0%
5.0% 4.6%

4.0%

3.0%
Q1FY13

Q1FY14

Q1FY15

Q1FY16

Q1FY18

Q1FY19
Q3FY13

Q3FY14

Q3FY15

Q3FY16

Q3FY18
Q1FY17

Q3FY17

Real GDP Growth (YoY %) Avg GDP (YoY %)

Source: Bloomberg

Though the GDP growth rate has seen consistent acceleration, sustaining the growth rate above
8% in environment of liquidity tightening seems challenging.

Exhibit 2: Nifty - P/E Trend

30.0

25.0

20.0

15.0
14.9

10.0

5.0

-
Mar-10

Mar-12

Mar-13

Mar-14

Mar-15

Mar-16

Mar-18
Mar-02

Mar-03

Mar-04

Mar-05

Mar-06

Mar-08

Mar-09

Mar-11
Mar-01

Mar-17
Mar-07

1 Year Fwd PE Avg Fwd PE

Source: Bloomberg

Correcting from the recent highs, valuations are now closer to the mean. Also, the improving
earnings growth scenario provides a lot of comfort on valuation front.

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November 1, 2018

Exhibit 3: Nifty Earnings Growth

Source: Bloomberg

Though earnings growth rate of the benchmark indices has improved significantly, meeting
consensus estimates of almost 20% CAGR over the next two years appears to be unlikely at this
juncture. Nonetheless, even in stressed case scenario, earnings growth of 12%-15% is achievable
in FY19, which will be one of the highest in last 8 years.
Exhibit 4: India VIX
30
28
26
24
22
20
18
16
14
12
10
Oct-15

Oct-16

Oct-18
Oct-17
Jan-15

Jan-16

Jan-18
Apr-15

Apr-16

Apr-18
Jul-15

Jul-16

Jul-18
Jan-17

Apr-17

Jul-17

India VIX

Source: Bloomberg

Volatility has risen significantly this year and now it continues to remain at elevated levels. Higher
volatility manifests itself in terms of higher equity risk premium, translating to compression in
multiple. With the upcoming political events, VIX is unlikely to see the steady levels of 2017.

Exhibit 5: Crude Oil ($/bbl)

90
85
80
75
70
65
60
55
50
45
40
Nov-17

May-18

Oct-18
Mar-18

Aug-18

Sep-18
Jul-18
Oct-17

Jun-18
Jan-18
Dec-17

Feb-18

Apr-18

Source: Bloomberg

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November 1, 2018

Crude prices have been dominated by supply side issues. Though the demand scenario is not
particularly buoyant with slowing growth in China, supply issues will continue to dominate the
crude prices. We take a conservative outlook and expect crude to hover in the range of US$80-
85 in the next 12 months.

Exhibit 6: FII & DII Investment

36,227
140,000 35,000
34,057

30,000
28,452
27,499
90,000 26,117
25,000
21,171
20,287 20,509 20,000
19,426
40,000 17,465
15,455 15,000
13,787

9,398 9,647 10,000

(10,000)
5,839 6,603 5,000
3,972 3,262 3,377

(60,000) 0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

FII (Rs cr) DII (Rs cr) Sensex (RHS)

Source: Bloomberg

Rising volatility and decreasing USD-denominated returns have led to a major sell-off by the FIIs.
This could continue for the next 6-9 months till political scenario becomes clear.

Exhibit 7: MSCI Value vs. Growth

Value Outperforms
0.70

0.65

0.60

0.55
Growth Outperforms
0.50
Oct-14

Oct-15

Oct-16

Oct-18
Oct-17
Jan-14

Jan-15

Jan-16

Jan-18
Apr-14

Apr-15

Apr-16

Apr-18
Jul-14

Jul-15

Jul-16

Jul-18
Jan-17

Apr-17

Jul-17

MSCI Value vs. Growth

Source: Bloomberg

Interestingly, value has outperformed this year. Value investing has a positive correlation with a
rising interest rate cycle in the long-term. The effects are now becoming more evident.

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November 1, 2018

Exhibit 8: MSCI Large Cap vs. Mid-cap

1.0
Large Cap outperforms
0.9

0.8

0.7

0.6
Mid-Cap outperforms
0.5

Oct-18
Dec-15
Feb-13

Jul-14

May-17
Sep-11

MSCI Large vs Mid-Caps

Source: Bloomberg

Large-caps have outperformed the mid-caps and small-caps over the last one year.

Exhibit 9: MSCI Large Cap vs. Small-cap

1.5
1.4 Large Caps outperform
1.3
1.2
1.1
1.0
0.9 Small Cap
0.8 outperforms
0.7
0.6
Sep/11 Sep/12 Sep/13 Sep/14 Sep/15 Sep/16 Sep/17 Sep/18

MSCI Large Cap vs. Small Cap

Source: Bloomberg

Exhibit 10: MSCI Quality Index

13%

8%

3%

-2%

-7%

-12%
Oct-10

Oct-12

Oct-13

Oct-14

Oct-15

Oct-16

Oct-18
Oct-11
Oct-09

Oct-17

MSCI Quality Index

Source: Bloomberg

With increased momentum, the quality index has been strong for most part of the year. We
expect quality to continue to dominate.

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 2018
November 1, 2018

HDFC Bank (CMP: Rs1,912; Target Price: Rs2,471)

Background & Business
HDFC Bank is the second largest private bank in India with a balance sheet size of Rs10,804bn
as of Jun‘18. HDFC Ltd. currently holds 25.5% stake in the Bank. The Bank has 4,804 branches
across 2,666 cities/towns and 12,808 ATMs. Out of the total branches, 52% branches are located
in semi-urban and rural areas. Notably, the Bank is among the Top-5 players in personal, auto
and CV loans.
Investment Rationale
ff Strong Business Growth to Continue: The Bank’s loan book grew by 24.2% YoY and 6% QoQ
to Rs7,510bn in 1QFY19 owing to strong sequential growth in Retail, Business Banking and
Corporate Banking segments. Its deposits grew by 20.9% YoY and 3.4% QoQ to Rs8,335bn in
1QFY19. We expect its loan book to grow by 15-20% CAGR over the next few yearsled by the
growth in all major segments. The Bank is gaining market share of PSU banks in small-ticket
working capital financing segment and we expect this trend to continue, going forward as
well.
ff Strong Capital Base to Aid Growth: HDFC Bank has raised Rs240bn in equity in 2QFY19 to
support its growth plan over next few years and meet higher capital requirement due to its
classification as systematically important bank by the RBI.
ff Bottom-line Growth Expected to Remain Robust: Led by strong growth in loan book, best-
in-class NIMs of 4.2% and higher fee-based and forex income, the Bank continued to deliver
a healthy performance on operating and bottom line front. Its NII grew by 20.6% YoY and
8.8% QoQ to Rs117.6bn in 2QFY19 aided by higher loan growth and healthy margin. Its net
profit grew by 20.6% YoY to Rs50.1bn. Further, its credit cost is among the lowest among the
large banks in country. We expect the Bank to deliver above-industry earnings growth of 18-
22% CAGR over FY19-22E and sustain superior return on asset of 2%.
ff Best-in-class Asset Quality: The Bank continues to maintain best-in-class asset quality, as it
follows stringent credit standards, which manifests in one of the lowest industry-wide GNPA
ratios of 1.3% and net NPA ratio of 0.4% as of Jun’18. A detailed analysis of loan book and
credit process clearly indicates that its asset quality will continue to remain the best vs. its
peers.
Outlook & Valuation
Despite adverse operating environment, HDFC Bank continued to deliver strong growth on
operating and asset quality front. We expect it to be major beneficiaries of the current liquidity
crisis for NBFC segment. Further, incremental capital will help the Bank to support its growth plan
over next 3-4 years. We are having a positive view on the banks and recommend BUY.
Risks
ff Major slowdown in economy may impact the expected business growth.
ff Intensifying competition in both Corporate & Retail segments.

Key Financials (Rs mn) FY17 FY18 FY19E FY20E

Loan & Advances 5,545,682 6,583,331 7,867,080 9,361,826
Net Interest Income 331,392 400,949 484,754 586,292
PPP ex Except. Items 257,324 326,248 392,922 472,252
Reported Profits 145,496 174,867 213,405 262,202
Earnings Per Share 56.8 67.4 78.5 96.5
P/E (x) 34.7 29.2 25.1 20.4
Adj. BV 349.1 409.6 538.1 617.8
P/ABV (x) 5.6 4.8 3.7 3.2
Gross NPAs Ratio (%) 1.1 1.3 1.2 1.3
Adj. RoA 1.8 1.8 1.9 2.1
Adj. RoE 17.9 17.9 16.8 16.6
Source: Company, RSec Research

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November 1, 2018

Infosys (CMP: Rs666; Target Price: Rs795)

Background & Business
Infosys – third-largest IT services firm with US$10.9bn in FY18 revenue – offers IT services including
ADM, IMS, enterprise solutions, analytics, cloud, systems integration and BPO to several industries
mainly Financial Services, Manufacturing, Communications, Retail, Healthcare, Energy & Utilities,
and Public Services. Infosys earns a major chunk of its revenue from North America (60.3%)
followed by Europe (24%). Infosys has grown revenue, EBITDA and PAT at CAGRs of 11.8%, 10.5%
and 11.2%, respectively over FY13-FY18.
Investment Rationale
ff Robust Deal Wins Boost Revenue Visibility: Infosys has consistently recorded impressive
deal wins with its latest TCV in 2QFY19 at its highest-ever level, marking the 5th successive
quarter of rising deal wins. The IT major won total large deal TCV of >US$2bn, implying 82%
QoQ growth. To put this figure into perspective, Infosys won large deals worth US$3.07bn in
the entire FY18. Thus, 2QFY19 deal wins alone were 66% of FY18 deal wins. Further, 1HFY19
deal wins rose by 127% YoY vs. 1HFY18. The improving growth momentum in large deal wins
signifies improving revenue visibility, in our view. The IT major’s overall 2QFY19 performance
was also encouraging, with revenue rising by 4.2% QoQ in CC terms (3.2% in USD terms) led
by Financial Services (+5.8% QoQ in CC terms), Retail (+5.9%) and MFG (+4.8%) verticals.
ff Strong Cash Flow, Subdued Inorganic Activity Ensure High Cash Return: A positive aspect
is Infosys’ high cash return to shareholders, with up to 70% of FCF to be paid out, in addition
to which the IT major will pay out Rs130bn with Rs26bn in the form of a special Rs10/share
dividend and the balance potentially through a share buy-back. Infosys has already carried
out one buy-back in Dec’17 worth Rs130bn leading to lower equity and higher RoE. Thus, there
could be a potential buyback towards 2018-end or early 2019. Infosys also issued a 1:1 bonus
this year. Even after carrying out one buy-back and paying out dividends, the IT major still had
>US$3.5bn on its balance sheet as of 2QFY19-end. We expect continued high cash pay outs,
going forward, given strong cash generation and subdued activity on the inorganic front.
ff New CEO, IT Budget Outlook – Positives: With a new CEO at the helm, Infosys seems to
have renewed focus on its core business, as reflected by strong deal wins. In addition, a
positive IT budget outlook and improvement in the US economy led by tax cuts are key drivers
for improving financial performances. Potential share buy-back and higher cash return to
shareholders provide further cushion to the stock price, in our view.
Outlook & Valuation
Robust deal wins, impressive performances in Financial Services and Retail verticals and positive
business outlook in the key US and European geographies drive our confidence on Infosys’
underlying growth trajectory. We expect increased business investments to reflect in better
revenue growth and ultimately in margins. We have a BUY recommendation on the stock with
a Target Price of Rs795.
Risks
ff Event-specific risks, which could impact IT budgets, cut discretionary spend and delay new
deals.
ff Cost escalation can lead to execution risks and margin pressure.
ff Global trade wars and volatile macroeconomic environment.
ff Currency risk.
Key Financials (Rs mn) FY17 FY18 FY19E FY20E
Net Sales 684,850 705,220 819,085 926,254
EBIT 169,020 171,480 196,962 225,908
RPAT 143,540 160,290 170,159 199,058
Diluted EPS (Rs) 31.8 35.5 37.7 44.1
P/E (x) 21.0 18.8 17.7 15.1
EV / EBITDA (x) 15.0 14.8 12.9 11.2
RoE (%) 22.0 23.9 25.3 27.5
Source: Company, RSec Research

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November 1, 2018

ICICI Bank (CMP: Rs354; Target Price: Rs390)

Background & Business
ICICI Bank is the largest private bank in India with a balance sheet size of Rs8,743bn as of Sep‘18.
The Bank has 4,867 branches and 14,417 ATMs. Further, the Bank through its subsidiaries has
established a strong presence in AMC, life insurance, general insurance and capital market
business. All of these subsidiaries are among the top 3 players in their respective segments.
Investment Rationale
ff Uptick in Business Growth to Sustain: Its overall loans grew 11% YoY and 3% QoQ led by
15.7% YoY and 5.2% QoQ growth in domestic loans growth. The strong growth in domestic
loan book was led by growth in retail loans (+20.5% YoY & 5.0% QoQ) and SME (+21.8% YoY
& 5.8% QoQ) segment. Even domestic corporate loan – excluding the gross NPA and write-off
– grew in double digit. Further, we expect the Bank to be a major gainer of the current crisis in
NBFC space, as it has best-in-class liability franchises along with superior customer outreach
across business segments.
ff Worst of Loan Rating Downgrade Cycle is Behind: We believe that the Bank is approaching
the end of recognition of stressed loan cycle, post accelerated recognition through FY18.
Headline gross and net NPAs improved to 8.54% and 3.65%, respectively in Sep’18 compared
to 8.8% and 4.8%, respectively in Mar’18. The watch list dipped ~83% since Mar’17 to ~Rs
32.8bn (0.5% of loans), which along with improving PCR clearly indicates sharp moderation
in credit cost from 2HFY19E onwards. PCR – excluding technical w/o accounts improved by
467bps QoQ to 59.5% and PCR on accounts referred to NCLT now stood at 70.2% in 2QFY19.
ff Bottom-line Growth – Expected to Improve Substantially in FY20E: We expect the Bank’s
operating performance to improve substantially from FY20E onwards led by sharp moderation
in credit cost and sustained improvement in operating performance. PCR – excluding technical
w/o accounts – improved by 467bps QoQ to 59.5%, which clearly indicates substantially
lower provisioning expenses in coming quarters. We believe that the Bank’s performance on
operating metrics front may continue to improve in coming quarters on the back of sustained
changes in loan book mix and favourable AML.
Outlook & Valuation
We believe that the Bank is approaching the end of recognition of stressed loan cycle, which
along with improving PCR clearly indicates sharp moderation in credit cost from 2HFY19E
onwards. Further, overhang of controversy relating to top management team is behind and new
management seems to be confident to maintain the Bank’s leadership in private banking space.
Further, we expect the Bank to be a major gainer of the current crisis in NBFC space, as it has best-
in-class liability franchises along with superior customer outreach across business segments.
Looking ahead, we expect the Bank to deliver sustained improvement in operating metrics led
by dwindling headwinds on asset quality front and improving balance sheet especially in Retail
segment. We are having a positive view on the banks and recommend BUY.
Risks
ff Any major account downgrade.
Key Financials (Rs mn) FY17 FY18 FY19E FY20E
Loan & Advances (Rs mn) 4,642,321 5,123,953 5,892,546 6,805,890
Net Interest Income 217,373 230,259 262,922 301,641
PPP ex Except. Items 264,867 247,416 218,126 253,487
Reported Profits 98,011 67,774 50,877 109,986
Earnings Per Share (Rs) 15.3 10.5 7.9 17.1
P/E (x) 20.6 29.9 39.9 18.5
Adj. BV (Rs) 131.5 120 123.8 138.8
P/ABV (x) 2.4 2.6 2.5 2.3
Gross NPAs Ratio (%) 8.7 8.8 7.8 5.6
Adj. RoA 2.8 2.1 0.6 1.1
Adj. RoE 22.3 17 4.8 9.7
Source: Company, RSec Research
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November 1, 2018

ITC (CMP: Rs277)

Background & Business
ITC is one of the largest consumer goods conglomerates in India trading at attractive valuations.

Investment Rationale
ff Cigarettes Business Volumes Normalising: Cigarettes volumes grew by a healthy ~7% YoY
in Q2FY19 albeit a low base. Notably, the cigarettes volumes have started normalising after
years of sluggishness, but the future continues to remain uncertain. Whilst the volume growth
ahead largely depends on taxation environment, the high growth of illicit cigarettes owing
to high tax environment has markedly dented the legal cigarette business. Even though
there are challenges in the cigarettes business, the other segments notably the FMCG others
segment has garnered significant scale and its profit contribution is rising at a faster pace.

ff Robust Growth in FMCG Others Segment: Growing at solid pace, the FMCG others segment
has become a sizeable business now with an annualised rate of Rs120bn. This business is
set to deliver an annual turnover of >Rs200bn in revenues in the next five years. ITC’s FMCG
others business is now larger than that of Nestle India and significantly ahead of Dabur,
Marico and Colgate in terms of revenue scale. Thus, its contribution is now increasing at
brisk pace and has solved the growth challenges emerging from sluggishness in cigarettes
business.

ff Other Segments Gaining Traction: Hotels business registered a solid revenue growth of 21%
YoY in Q2FY19 with all the key operating metrics registering an upbeat performance. Paper
and Paperboards business grew by 9% YoY after reporting sluggish growth for a prolonged
period. The paper business is impacted by the cigarettes business volume growth to certain
extent, which has seen recovery. EBIT growth of hotels business remained strong at 270% YoY,
while the Paper segment registered an EBIT growth of 13% YoY. Thus the other segments are
also gaining solid traction.

Outlook & Valuation

Overall, ITC is witnessing improved traction across verticals. We believe that the FMCG others
business has gained scale and will drive profitability, going forward. At CMP, the stock trades
at attractive valuations of 24x FY20E earnings, which discounts the regulatory challenges of
cigarettes business, but the other fast-growing businesses are undervalued. We remain positive
on ITC on attractive valuation and improving business prospects.
Risks
ff Regulatory risks in cigarettes business like imposition of higher cess and sever excise duty
hikes

Key Financials (Rs mn) FY17 FY18 FY19E FY20E

Net Sales 428,036 434,489 470,447 514,059
EBIDTA 154,359 164,830 179,477 198,205
Net Profit 104,713 110,722 122,992 137,769
EPS, Rs 8.7 9.2 10.2 11.5
PER, x 31.8 30.1 27.1 24.2
EV/EBIDTA, x 21.4 20.0 18.2 16.5
ROE, % 22.6 21.1 22.7 23.7
Source: Company, RSec Research

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November 1, 2018

Sun Pharma: (CMP Rs571; Target Price Rs:685)

Background & Business
Sun Pharmaceuticals Industries (SUNP) is the largest Indian pharmaceutical company in domestic
formulation market (number one) as well as in the US market (5th rank). It is also the largest Indian
pharma company in Emerging Markets. SUNP manufactures and market specialty products,
branded generics, complex generics, pure generics and APIs in developed and developing
markets. The Company has strong track record of transforming acquired assets (Taro/Caraco/
Dusa/InSite Vision in US and Ranbaxy in India). Its cumulative pending ANDAs for the US market
stood at 135 as of 1QFY19 (approved ANDAs: 428).

Investment Rationale
ff Specialty Biz – Key Growth Driver for US Biz (36% of Sales): SUNP has been investing
significantly in building its specialty franchise. We expect SUNP to generate sales of US$65mn
and US$235mn from its specialty segment (products i.e. Yonsa, Ilumya, Seciera and Elepsia
etc.) in the US in FY19E and FY20E, respectively. We expect a ramp-up in US launches over the
next two years. Notably, SUNP have strong pending pipeline of 135 ANDAs. We expects its
US business to clock 26% CAGR over FY18-20E led by low base in FY18, new product launches
(including Taro) and specialty product launches. Looking ahead, complex generics/specialty
product launches will be the key growth driver for the US market, in our view.

ff Healthy Growth in India Biz (30% of Sales): With Ranbaxy’s addition, SUNP became
the largest company in domestic market with 8.4% market share. We expect its domestic
formulation business to clock a healthy 15% CAGR (outperforming the IPM market) over FY18-
20E led by improvement in sales force productivity, increased focus on chronic therapy and
new launches.

ff EBITDA Margin to Improve: Given that healthy growth in India, strong ramp-up in US
business led by specialty launches, overall cost controls measures post Halol plant resolution,
and lower base in FY18 (21.2%), we expect EBITDA margin expansion of 433bps to 25.5% over
FY18-20E.

Outlook & Valuation

SUNP has been investing significantly for building US specialty franchise. Further, due to successful
US FDA clearance for Halol facility, best-in-class franchise, strong track record of transforming
acquired assets, we see multiple growth drivers for SUNP. We expect SUNP’s overall sales/
earnings to clock 19%/45% CAGR over FY18-20E, while EBITDA margin is expected to expand by
433bps to 25.5%. With favourable currency movement, healthy growth in India business, strong
outlook for ex-Taro US business led by launch of specialty products, and positive operating
leverage, we maintain our BUY recommendation on the stock with a Target Price of Rs685.

Risks
ff Delayed recovery in domestic business.
ff Lower-than-expected growth in US revenue led by delay in product approval from USFDA

Key Financials (Rs mn) FY17 FY18 FY19E FY20E

Sales 3,15,784 2,64,895 3,16,673 3,74,587
EBITDA 1,00,893 56,081 71,251 95,520
Adj. PAT 69,648 31,120 42,636 65,748
EPS (Rs) 29.0 13.0 17.8 27.4
P/E (x) 19.7 43.9 32.1 20.8
EV/Sales (x) 4.7 5.7 4.7 3.8
EV/EBITDA (x) 14.7 26.7 20.7 15.0
ROE (%) 19.0 5.7 10.2 13.9
ROCE (%) 16.9 8.6 10.9 14.4
Source: Company, RSec Research

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November 1, 2018

Sonata Software: (CMP Rs311; Target Price Rs:420)

Background & Business
Sonata Software is a mid-sized IT services company having presence in the US, the UK, Europe,
APAC, & Middle East. It operates through two business units i.e. International IT Services (IITS) and
Domestic Products & Services (DPS). Within IITS (37.5% of gross revenue in FY18), Sonata caters
to Travel, Retail & Distribution and OPD verticals. In terms of service lines, it provides consulting,
ADM, ERP, Microsoft Dynamics AX, testing, IMS, cloud, mobility and platform services. A key focus
area for Sonata is platforms - it offers platforms to Travel (Rezopia) & Retail (RETINA) verticals, and
also offers Halosys (a vertical-agnostic enterprise mobility platform) to clients. In DPS segment
(62.5% of revenue in FY18) – Sonata sells software products including licences for Microsoft, SAP,
Oracle, Abode, IBM, HP & TIBCO in India through its subsidiary i.e. Sonata Information Technology.
Investment Rationale
ff ‘Platformation’ strategy to drive growth, MS Alliance the key: Sonata is aiming to become
a strategic partner for its clients and is focusing on ‘Platformation’ to achieve this objective,
which will drive customer stickiness, in our view. Aided by Platformation, Sonata is looking to
scale client engagement size substantially. Currently, it counts 7 clients with annual revenue
of >US$5mn, while 22 clients give >US$1mn in annual revenue. Sonata is targeting 60 clients
with average size of US$5mn over 4-5 years, which will drive US$300mn in revenue (15-20%
CAGR). Microsoft Alliance is a critical part of the pie, with the AX platform contributing 18% to
revenue in 1QFY19, and AX revenue has clocked a strong 4.8% USD revenue CQGR over the
past 8 quarters (>20% annualised growth). Aided by Platformation and the MS Alliance, we
expect Sonata to clock 15% CAGR in USD revenue in its IITS business over FY18-FY20E.
ff High Dividend Yield Provides Cushion to Stock Price: Sonata’s dividend/share has risen
steadily over last 4 years. We expect high dividend payouts to sustain. Sonata had gross/
net cash equivalents of ~Rs4.8bn/~Rs4.6bn, respectively as of FY18-end. Based on our FY20E
dividend/share estimate (Rs12), dividend yield is 3.9%, providing good downside protection.
ff No Dilution, Interest Coverage Reflect Healthy Cash Flow: Sonata has not raised equity
since April 2001. Gross debt-equity ratio ranged between 0-0.4x over the past 4 years. Interest
coverage ranged between 19-59x, reflecting comfortable debt servicing capability, boosting
confidence on ability to generate healthy cash flow and maintain a prudent capital structure.
Outlook & Valuation
We like Sonata’s differentiated business, quality balance sheet, high RoE and lack of equity dilution
for last 17 years. We expect the MS Alliance to be a key growth driver, and Sonata has conducted MS
showcases in Dubai, London, the US and India, and won deals as well. Acquisitive opportunities
are also being closely evaluated with potential US$5-25mn size, mainly in the MS ecosystem. The
stock currently trades at 12.0x FY20E EPS, on a healthy 18.8% EPS CAGR over FY18-FY20E. We
have a BUY recommendation on the stock with a Target Price of Rs420.
Risks
ff Client-specific issues emanating from any of its top-10 clients.
ff Event-specific risks could impact IT budgets, cut discretionary spend and delay new deals.
ff Cost escalation could impact project delivery and margins.
ff Currency risk.

Key Financials (Rs mn) FY17 FY18 FY19E FY20E

Net Sales 23,708 24,539 28,359 31,769
EBITDA 1,916 2,310 3,087 3,702
APAT 1,563 1,925 2,246 2,715
Diluted EPS (Rs) 14.9 18.3 21.4 25.8
P/E (x) 20.9 17.0 14.6 12.0
EV / EBITDA (x) 15.8 12.7 9.3 7.6
RoE (%) 29.5 31.0 32.6 34.9
Source: Company, RSec Research

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 2018
November 1, 2018

Engineers India (CMP: Rs118, Target Price: Rs169)

Background & Business
Engineers India (ENGR) – a public sector undertaking under the Ministry of Petroleum & Natural Gas
(MoPNG) – has emerged as a market leader in Indian hydrocarbon space with strong expertise in
design, engineering and implementation of projects. Notably, 19 out of 22 refineries in India are
built by the Company, while it is the market leader in petrochemical space by establishing 7 out of
9 mega complexes

Investment Rationale
All-time High Order Book Offers Promising Revenue Visibility: ENGR’s current order backlog at
record high of ~Rs123 bn (7x of FY18 revenue) provides promising revenue visibility in next couple
of years. Recently, the Company has announced the largest ever order win of >Rs50 bn from
HPCL for Greenfield refinery and petrochemical complex in Barmer, Rajasthan. Looking ahead,
we expect order inflow to remain strong in domestic market driven by Brownfield expansion of
several small-sized refineries through FY18-20.
Sound Business Model & Strong Project Execution Skills: ENGR has emerged as a market leader
in Indian hydrocarbon segment with strong expertise in design, engineering and implementation
of projects. It has maintained a strong track record in executing several domestic orders on
negotiated basis, while maintaining long-term relationship with the key clients.

The Worst is Behind – Multiple Tailwinds to Boost Performance: With order book at all-time
high, we expect ENGR to report strong performance in next couple of years. Looking ahead, we
expect ENGR’s revenue and earnings to clock 21% and 19% CAGR, respectively through FY18-20E,
while operating margin is expected to decline to 20.4% in FY20E from peak margin of 27.1% in
FY17, primarily due to rising increasing contribution of turnkey segment.

Outlook & Valuation

We believe ENGR will remain highly cash-rich and maintain its dividend payout of ~50%
during FY18-20E. At CMP, the stock trades at 17.0x FY19E and 13.9x FY20E earnings respectively.
Considering sizeable growth potential in sector, huge imminent capex in hydrocarbon sector,
asset-light business model, foray into newer segments/sectors, debt-free balance-sheet, healthy
revenue and earnings growth and robust return ratios, we believe that the stock is trading at
attractive valuation for investment. We maintain our BUY recommendation on the stock with
a Target Price of Rs169.

Risks
ff Lower capex in the Oil & Gas sector.

ff Lower margin due to high share of turnkey projects.

Key Financials (Rs mn) FY17 FY18 FY19E FY20E

Sales 14,486 17,876 21,220 26,255
EBITDA 3,929 4,130 4,276 5,367
EBITDA Margin (%) 27.1 23.1 20.2 20.4
Net profit 3,291 3,779 4,365 5,334
ROE (%) 11.6 14.8 18.4 20.4
P/E (x) 22.6 19.7 17.0 13.9
P/B (x) 2.6 3.3 3.0 2.7
EV/EBITDA (x) 11.4 11.3 10.6 7.7
Source: Company, RSec Research

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 2018
November 1, 2018

DCB Bank (CMP: Rs159; Target Price: Rs207)

Background & Business
DCB Bank is a private sector scheduled commercial bank with presence across MSME, Agri,
Corporate and Retail banking segments. The Bank is headquartered in Mumbai and operating
through 328 branches spread across 19 states and 3 union territories. Currently, Mr. Murali Natrajan
is MD & CEO of the Bank (since 2009), who has been instrumental in complete turnaround of the
Bank. It has total loan book of Rs220bn and deposit base of Rs262bn.
Investment Rationale
ff Robust Loan Growth to Sustain: DCB Bank is continuously doubling its loan book every 3-3½
years and is looking forward to maintain this growth momentum over the coming years. Loan
book analysis of the Bank suggests that it will sustain robust growth in the foreseeable future
led by large market size and low formal financing penetration. The Company has built a niche
presence in lending to self-employed individuals, which will aid its strong growth trajectory
in coming years.
ff Operating Leverage to Drive Profitability: The Bank opened 56 new branches in FY18 and
has completed physical expansion drive, which was started in 2QFY16. Going forward, the
Bank will expand its branch network in a suitable manner without affecting its overall C/I
ratio and profitability. The Bank expects C/I ratio to reduce owing to likely improvement in
operational efficiency of existing branches and other distribution channels. As a result, we
expect sustain improvement in profitability led by improvement in C/I ratio.
ff Best-in-Class Asset Quality: Despite servicing to self employed segment, the Bank continues
to maintain best-in-class asset quality as it follows stringent credit standards, which manifests
in one of the lowest industry-wide GNPA ratios of 1.8% and net NPA ratio of 0.7% as of Sep’18.
The Management is quite comfortable till the gross NPAs remain below 2% and net NPAs
below 1%, as the Bank’s customers are predominately SME and mid-size business houses.
Outlook & Valuation
Continued focus on increasing loan book in low-ticket Retail, SME and AIB segments, the Bank is
augmenting its footprint both on physical and digital front. Though these aggressive expansion
strategies have impacted the Bank’s return ratios, we believe it is beneficial from long-term
perspective. Further, focus on increasing efficiency of existing network is expected to reduce
C/I ratio in the long-term, which may eventually lead to sustained earnings growth. Further,
we expect the Bank to be one of the key beneficiaries of current crisis in the NBFC space, as it
witnessed substantially higher competition in last few years from the NBFCs among its customer
base. We maintain our BUY recommendation on the stock with an unrevised Target Price of
Rs207 (based on 2x FY20E Adjusted book value).
Risks
ff Lowe-than-anticipated performance of new branches may increase C/I ratio.
ff Any major deterioration in macroeconomic environment may impact the Bank’s growth plan
as well as asset quality, which will in turn impact its financial performance.

Key Financials (Rs mn) FY17 FY18 FY19E FY20E

Loan & Advances 158,176 203,367 254,209 316,490
Net Interest Income 7,971 9,954 12,422 15,732
PPP ex Except. Items 4,182 5,250 6,849 9,187
Reported Profits 1,997 2,453 3,280 4,392
Earnings Per Share 7 8 10.6 14.3
P/E (x) 22.4 19.7 14.7 11
Adj. BV 68.2 83 90.2 103.3
P/ABV (x) 2.3 1.9 1.7 1.5
Gross NPAs Ratio (%) 1.6 1.8 1.7 1.6
Adj. RoA 0.9 0.9 1 1.1
Adj. RoE 10 9.8 11.1 13.4
Source: Company, RSec Research

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 2018
November 1, 2018

Escorts (CMP: Rs674, Target Price: Rs1,015)

Background & Business
Escorts (ESC) is present in three distinct business verticals i.e. agri machinery, railway equipment
and construction equipment business. Agri machinery vertical continues to remain the key revenue
and profitability generator. The Company is one of the Top-4 tractor manufacturers in India with
very strong position in 31-50HP segment (91% of volume share vs. industry volume share of 78%).
While it enjoys 10% market share in domestic tractor industry, its market share stands at ~12% in
31-50HP segment. Notably, its operational efficiency improved over last two year in the aftermath
of change in top management led by focus on higher HP segment and brand building.
Investment Rationale
ff Favourable Geographical Mix to Aid Outperformance in Tractors: We believe normal
monsoons in ESC’s key markets of North and Central zone would support its strong
outperformance in tractor industry in 2HFY19. Further, favourable geographical mix, strong
marketing and distribution strategy would aid ESC to deliver double-digit volume growth,
going forward.
ff Traction in Other Biz to Boost Profit & Reduce Cyclicality: We also expect its construction
equipment business to sustain positive traction on the back of increasing construction
activities. EBIDTA margin is expected to expand by 100bps over FY18-FY20E led by cost control
measures, scale and turnaround in construction equipment segment. We expect focus on agri
implements, railways and construction equipment segments to reduce ESC’s dependence on
tractor business, going forward, which would attract higher than historical average valuation
multiple for the stock led by reduction in cyclicality of business.
ff Strong Focus on core Business with 5-Year Game-plan: Further, five year game plan and
focus on non-tractor business through Vision-2022 further strengthens our positive view on
Escorts. In its Vision-2022, Escorts looks forward to ~2.5x FY17 revenue over FY17-FY22 led by
new products, JVs and potential acquisition. This would benefit margin expansion and higher
profitability going forward.
Outlook & Valuation
Looking forward, we expect ESC’s revenue to clock 16% CAGR through FY18-20E, supported by
incremental revenues from spares and new segments, its EBITDA margin is expected to expand
to 12.1% in FY20E from 11.2% in FY18. In view of strong industry performance, better traction
from railway business and healthy margin profile, we reiterate our BUY recommendation
on the stock with Target Price of Rs1,015, valuing it at 16.5x FY20E EPS.
Risks
ff Any major economic slowdown or unfavourable whether condition for upcoming crop
seasons.
ff Higher competitive intensity and sharp rise in input cost.
ff Slowdown in its Other business segments and
ff Any adverse regulatory change.

Key Financials (Rs mn) FY17 FY18 FY19E FY20E

Net Sales 40,932 49,951 59,644 67,174
EBITDA 3,238 5,572 7,117 8,099
EBITDA margin (%) 7.9 11.2 11.9 12.1
Adj. Net Profit 1,984 3,493 4,670 5,271
EPS (Rs.) 24.2 40.8 54.5 61.5
YoY growth (%) 102.6 68.6 33.7 12.9
ROE (%) 10.3 15.3 16.8 16.2
ROCE (%) 10.3 15.5 16.9 16.3
PER (x) 27.9 16.6 12.4 11.0
P/BV (x) 2.8 2.3 1.9 1.6
EV/ EBITDA 17.1 9.8 7.8 6.6
Source: Company, RSec Research

14
 2018
November 1, 2018

NBCC (India) (CMP Rs58; Target Price Rs:103)

Background & Business
NBCC (India) was incorporated in November 1960 as a wholly owned Government of India
undertaking under the Ministry of Urban Development (MoUD). The Government granted it Schedule
‘A’ PSU status in October 2008. Subsequently, the Government of India conferred Navratna status
to NBCC June 24, 2014. The company is engaged in Project Management Consultancy (PMC), EPC
works (especially for power sector) and real estate development.

Investment Rationale
Giant Order Backlog Offers Promising Visibility: NBCC’s current order book stands at Rs800bn
(13.6x FY18 revenue) – unmatched by any other company – which provides robust growth visibility,
going ahead. NBCC – which secured orders worth Rs40bn in 1QFY19 – expects total order inflow
worth Rs250bn in FY19. Further, the Company is in negotiation with or at advance stages of securing
more projects in coming months i.e. Railway redevelopment and Dharavi redevelopment.

Re-development Business – Huge Opportunity: NBCC has enormous scope for business
opportunities in the form of re-development of old government colonies in India. The Company
is expected to amass substantial contracts in ensuing months, as discussions are currently
underway with various state governments.

Sound Corporate Governance & Healthy B/s Offers Confidence: Being a government entity,
it has maintained high standard of corporate governance over the years. Further, it is a net cash
company, as it has adopted a asset light business model. We note that NBCC primarily holds
government contracts in its kitty, which mitigate the risk of payment defaults. Notably, the Company
has been maintaining working capital cycle of 50-60 days over the years.

Outlook & Valuation

We continue to view NBCC as a robust growth story owing to its PWO status and niche presence
in redevelopment of government’s old colonies. Further, a debt-free balance-sheet and superior
return ratios augur well for the Company. Following sharp correction in last four months, current
valuations at 23x and 16x EPS FY19E and FY20E, respectively appear to be attractive. We maintain
our BUY recommendation on the stock with a Target Price of Rs103.

Risks
ff Execution delays.
ff Spike in operating cost.

Key Financials (Rs mn) FY17 FY18 FY19E FY20E

Revenue 62,112 58,717 75,257 1,08,043
EBITDA 3,343 3,661 4,805 7,114
EBITDA Margin (%) 5.4 6.2 6.4 6.6
Adj. PAT 3,512 3,336 4,252 6,193
RoE (%) 22.0 19.1 22.0 27.7
P/E (x) 29.7 29.7 23.3 16.0
P/BV (x) 6.2 5.4 4.9 4.1
EV/EBITDA (x) 26.6 22.3 16.9 10.7
Source: Company, RSec Research

15
 2018
November 1, 2018
Digitally signed by NAVEEN KULKARNI

NAVEEN
DN: c=IN, o=Personal,
2.5.4.20=0c1ff234f79bd813e0368a6dc0
3b4ca15b14b3b5a481882c186a1ef7b63
30566, postalCode=400072,

KULKARNI
st=MAHARASHTRA,

“For detailed report of each of the above fundamental recommendation, kindly visit to research
serialNumber=97c18031b020ff979ee60
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bf99bbde3, cn=NAVEEN KULKARNI

section under our website www.reliancesmartmoney.com”

Date: 2018.11.01 20:46:44 +05'30'

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