Capital Conundrums Series' - Eye (I) On Roce

Eye (I) on RoCE
April 2018
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Edelweiss Securities Limited
Nilesh Aiya Manoj Bahety Ankit Dangayach, CFA Raj Koradia

+91 22 4040 7575 +91 22 6623 3362 +91 22 6620 3077 +91 22 6623 3422
nilesh.aiya@edelweissfin.com manoj.bahety@edelweissfin.com ankit.dangayach@edelweissfin.com raj.koradia@edelweissfin.com
Eye (I) on RoCE
We present a portfolio of capital-efficient companies built on the Incremental RoCE (I-RoCE)

framework. The portfolio consists of players who have consistently and sustainably
redeployed incremental capital at superior returns. We grade companies in two categories:
a) Evergreen; and b) Rising Stars (refer framework). Our top mid-cap picks in the Evergreen
category are Kajaria, Avanti & La Opala; amongst Rising Stars we prefer Heritage, CCL, KPR
and Nilkamal.
1 Edelweiss Securities Limited

Capital Conundrums
Executive Summary
In the second edition of our Capital Conundrum series, we
train focus on yet another vital facet of capital—its efficiency.
And, we believe I-RoCE is the best tool to measure this. I-RoCE
is a true reflection of a management’s ability to redeploy
incremental capital at higher returns, not clouded by past
(Click here for capital allocation decisions. Hence, it’s a lead indicator of
video clip)
future RoCE. In this report, we present an ECS (efficiency,
consistency and sustainability) portfolio of high I-RoCE companies which have
consistently and sustainably redeployed capital at superior returns.
We have divided high I-RoCE companies that meet our consistency and
sustainability framework into two categories: a) Evergreen–Companies
improving or sustaining high RoCE (>20% 10-year average); and b) Rising Stars–
Companies with low historical RoCE (<20% 10-year average), but moving up the
curve. Our top mid-cap picks in the Evergreen category are Kajaria, Avanti and
La Opala; amongst Rising Stars, we prefer Heritage, CCL, KPR and Nilkamal. In
large caps, Eicher, Britannia and DMart feature in our portfolio. We also have a
Potential Winners category, wherein we house players who do not meet our
ECS framework currently, but have shown recent uptick in the RoCE. In this
category, we prefer Blue Star and Jamna Auto amongst mid caps.
I-RoCE: Apt tool to gauge capital efficiency

At times, superior RoCE could camouflage mediocre returns due to managements’ fresh capital
allocation decisions, leading to value destruction in the future. Hence, one should focus on I-
RoCE as: a) it reflects a management’s capability to redeploy incremental capital at superior
returns (only ~25% companies in BSE-500, ex-banks, could do this); b) it’s a better tool to assess
new capital allocation decisions made by CEOs; c) current valuations could be capturing reported
RoCE, but the latter’s direction will determine future valuation; and d) companies with high I-
RoCE have outperformed Nifty & BSE-500 (alpha of ~11-14% CAGR over 10 years).
High I-RoCE companies have clocked stellar performance

Our analysis indicates that within the BSE-500 pack (ex-banks), 205 companies generated
>20% RoCE over FY08-12. Of these, only 107 (~50%; ~25% of BSE-500, ex-banks) were able
to sustain and generate I-RoCE of 20%. These companies clocked superior I-RoCE of 27%
(13%/11% for Nifty/ BSE-500) and shareholders’ returns of 29% CAGR (15%/18% for Nifty/
BSE-500). Back-testing our I-RoCE framework on BSE-500 companies for past five years
(FY12-16) indicates average market cap CAGR of 27% (~12% outperformance over BSE-500).
Framework: How we did it

Amongst BSE-500 (ex-banks), we identified companies with high I-RoCE and split them into
Evergreen and Rising Stars categories. We further tested these companies for consistency +
quality and sustainability of capital efficiency/ RoCE (refer framework). We have considered
companies wherein RoCE has deteriorated temporarily due to significant recent capex
(more than 2x historical average) and not due to structural margin dip. We have consciously
steered clear of companies with high dividend payout and which do not redeploy significant
share of profits back into the business.

Eye (I) on RoCE
Capital efficient portfolio: Sifting the winners

Table 1: ECS portfolio of top 20 companies
Evergreen Rising stars
I-RoCE % I-RoCE expansion x (vs. I-RoCE % I-RoCE expansion x (vs.
Particulars Company Name Company Name
(FY08-17) FY08-12 RoCE) (FY08-17) FY08-12 RoCE)
Covered
Large caps Britannia 58 2.4 DMart 21 1.7
Eicher 47 2.1
Pidilite 38 1.5
Mid caps Kajaria 39 1.9 Heritage 27 2.4

CCL 28 2.3
Finolex Cable 26 2.1
Uncovered
Large caps TVS Motors 23 1.8
Mid caps Avanti 67 7.4 KPR 20 2.4

La Opala 33 2.2 Phoenix 11 2.0
TVS Srich. 42 2.0 Firstsource 14 1.8
Atul 30 1.9 Vardhman 18 1.7
Sheela 36 1.9 Nilkamal 26 1.6
MRF 34 1.8
Source: Edelweiss research
While our preference is not subject to valuations, a majority of these companies is available
at reasonable valuations relative to their earnings growth (PEG); though, on PE basis they
appear expensive.
Sectoral flavour: Making the grade

Sectoral RoCE analysis highlights that while Media & Entertainment, Textiles, Retail &
Building Materials have clocked superior I-RoCE, that of Industrials, Metals & Mining,
Cement, Tea/Coffee/ Sugar, Consumer, Real Estate and Electrical Equipments has
deteriorated as they clocked lower print. Although a part of it can be attributed to the tepid
economic milieu and lack of government & private capex, capital inefficiency is the culprit in
quite a few cases.
Case studies
We have studied top 10 preferred picks from our ECS portfolio of 20 companies with highest
I-RoCE for further detailed analysis.

Capital Conundrums
Crux of our analysis

Fig. 1: Framework
Sustainability test
Coverage High I-RoCE & Top companies
Universe consistency+ with largest RoCE 6
6 quality check expansion 20 high I-RoCE,
BSE-500* (ex- 6 6 Consistent &
banks) 105 companies 30 companies Sustainable companies
("ECS Portfolio")
Note: * Removed high dividend companies, but included companies in capex stage
*Banks and companies with data history of less than 9-10 years have been excluded. Data adjusted for absurdly low/high base
Fig. 2: Consistency + quality check# Fig. 3: “SUSTAIN”ability framework
•Large opportunity size/ scalable

Scalability business
Consistency of Earnings •Strong brand/ distribution, unique

RoCE consistency
Uniquiness positioning, competitive
advantage
•Stickiness of customers/ suppliers,

Stickiness rising/ stable market share
Consistent Consistent and Technology/ •Technological edge/ adaptability

to change/ innovation/ R&D focus
operating cash
flow generation
superior quality
of earnings Adaptability
•High management integrity, good
INtegrity corporate governance
Note: #Refer Annexure1 for details of each of these parameters

We have excluded high dividend companies as their RoCE is optically higher and does not
reflect the I-RoCE of underlying business decisions.
Beyond RoCE and its consistency, we have also tested all companies on consistency of
earnings, operating cash flow generation, earnings-to-cash conversion ratio and acceptable
leverage. “We believe, Return ON Capital should also be accompanied with Return OF
Capital.” Further, we test all the top companies for sustainability of their RoCE.

Eye (I) on RoCE
ECS portfolio
We present an equal weighted portfolio of 20 stocks consisting of high I-RoCE capital-
efficient companies that have passed our consistency and sustainability test.
Chart 1: Portfolio of Top 20 consistent and sustainable capital efficient allocators
80
70
Evergreen Rising Stars
Avanti
7.4
60 Britannia
2.4
50 Eicher
I-RoCE (%)
2.1
TVS Srich.
40 Pidilite 2.0 Kajaria
1.5 1.9Sheela
La Opala 1.9 MRF
2.2 Atul 1.8
30
1.9 Heritage CCL Nilkamal
2.4 2.3 Finolex Cable 1.6
TVS Motors KPR 2.1
20 1.8 DMART 2.4 Vardhman
1.7 1.7
Firstsource
Phoenix 1.8
10
2.0
0
>20 % <20 %
(10 year Average RoCE) (10 year Average RoCE)
Note: * Size of the bubble represents x times I-RoCE expansion (ratio of I-RoCE to historical 5 year (FY08-12) RoCE).
High I-RoCE companies include: a) Evergreen: Companies improving or sustaining their high
RoCE (10-year average RoCE >20%); and b) Rising Stars: Companies with low historical RoCE
(10-year average RoCE <20%), but moving up the curve. While Evergreen companies have
delivered superior RoCE, we focus on the Rising Stars category, wherein historical RoCE is
low, but has already clocked high I-RoCE. We believe, RoCE of these companies is poised to
improve in the long run.
Ensuring margin of safety and refusing to pay too much is the cornerstone of investing, as
popularised by Ben Graham. We believe, buying at a reasonable valuation and with
sufficient margin of safety will drive superior performance and long-term wealth creation.
While our selection is not subject to valuations, most of our preferred picks are at
reasonable valuations relative to the earnings growth (PEG) they offer.

Capital Conundrums
Chart 2: ECS portfolio significantly outperformed index

75
Alpha over BSE-
500 (ex-banks)
60
(M.Cap CAGR %)
ECS portfolio companies clocked 45
38% CAGR in last 10 years, 20%
34
above benchmark BSE-500 (ex- 30
banks) 20
18
15 15
0
1 year 3 year 5 year 10 year
High I-RoCE Portfolio BSE-500 index BSE-500 (ex-banks)
Note: * Market cap CAGR data refers to 10 year median CAGR as on 31 March 2018, post
adjustment for dilution, buy-back and includes dividend
Source: Bloomberg, Ace Equity, Edelweiss research
Table 2: ECS portfolio stocks wealth creation

Evergreen Rising stars
M.cap CAGR %* M.cap CAGR %*
Company 1 Year 3 Year 5 Year 10 Year Company 1 Year 3 Year 5 Year 10 Year
Britannia 48 33 58 36 TVS Motors 44 34 83 45
Eicher 11 22 62 62 DMart # 108 NA NA NA
Pidilite 32 16 29 31 Heritage 30 63 48 30
Avanti 205 95 158 84 KPR -4 40 68 33
La Opala 7 15 56 62 CCL -18 17 63 37
TVS Srich. -7 30 82 46 Finolex Cable 31 34 73 27
Atul 10 33 56 50 Phoenix 57 19 17 5
Kajaria -1 13 44 46 Firstsource 27 20 39 4
Sheela # 33 NA NA NA Vardhman -6 33 38 30
MRF 19 23 44 34 Nilkamal -22 54 57 25
Note: * Market cap CAGR as on March 31, 2018, post adjustment for dilution, buy-back and includes dividend.
# Listing in last 1 year.
Source: Bloomberg, Edelweiss research

Eye (I) on RoCE
Valuation snapshot
Chart 3: I-RoCE vs. PEG (trailing TTM basis)
75
Avanti
65 7.4
Britannia
55 2.4
Eicher
I-RoCE (%)
45 2.1
TVS Srich.
2.0 Kajaria Pidilite
Sheela 1.9
35 MRF 1.5
1.9 La Opala
1.8 Atul
CCL 2.2
Nilkamal KPR 1.9 Finolex Cable
2.3 Heritag
25 1.6 TVS Motors 2.1
2.4 DMART e 2.4
1.8
Vardhman 1.7
15 1.7
Firstsource Phoen
1.8 ix 2.0
5
0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 >3.54.0
Trailing PEG* (TTM)
Note: * PEG based on 3year [FY15-17] earnings growth and TTM PE as on 31 March 2018
Chart 4: I-RoCE vs. PE ratio (trailing TTM basis)
75
Avanti
65 7.4
Britannia
55 2.4
I-RoCE (%)
Eicher
2.1
45
TVS Srich. Sheela
2.0 Kajaria Pidilite
MRF 1.9
35 1.9 1.5
Atul
1.8 La Opala
1.9 CCL
Nilkamal 2.2
2.3 Heritage
25 1.6 TVS Motors DMART 1.7
Finolex 2.4 1.8
KPR
Vardhman 2.4 Cable 2.1
15 1.7 Phoenix
Firstsource
2.0
1.8
5
5 15 25 35 45 55 65 >7575
Trailing PE (TTM)
Note: * TTM PE as on March 31, 2018
Note- Size of the bubble represents x times I-RoCE expansion (ratio of I-RoCE to historical 5 year (FY08-12) RoCE)

Capital Conundrums
Table 3: Valuation snapshot – coverage companies

Sales CAGR(%) PAT CAGR(%) EBIT margin (%) P/E (x) PEG (x) EV/EBITDA (x)
FY14-17
M. Cap Historical FY17- FY14-17 FY17- FY14-17 FY17-20E
I-RoCE % Sales
Company Name Category (INR RoCE % 20E Sales PAT 20E PAT EBIT EBIT TTM FY20E TTM FY20E TTM FY20E
(FY08-17) CAGR
bn) (FY08-12) CAGR (%) CAGR (%) CAGR (%) margin (%) margin (%)
(%)
COVERED
Large Caps
Eicher Evergreen 773 47 23 29 21 43 28 10 to 32 32 to 37 46 22 1.1 0.8 24 14
Britannia Evergreen 597 58 25 9 14 31 20 8 to 15 15 to 17 67 37 2.2 1.9 38 26
Pidilite Evergreen 466 38 26 9 13 24 17 15 to 22 22 to 24 55 33 2.3 2.0 33 23
DMart Rising Stars 827 21 10 37 25 45 41 6 to 7 7 to 9 156 60 3.5 1.4 61 35
Mid Caps
Kajaria Evergreen 91 39 20 12 16 24 24 13 to 17 17 to 18 36 21 1.5 0.9 21 12
Heritage Rising Stars 32 27 8 15 8 13 17 4 to 4 4 to 6 48 25 3.6 1.5 24 13
CCL Products Rising Stars 37 28 12 11 18 28 22 16 to 20 20 to 21 28 15 1.0 0.7 15 10
Finolex Cables Rising Stars 103 26 13 1 18 15 16 11 to 17 17 to 17 26 21 1.7 1.4 24 16
Note: Market cap, P/E, PEG as on March 31, 2018
Table 4: Valuation snapshot – not in coverage

Historical FY14-17 FY14-17 FY14-17
M. Cap I-RoCE % TTM P/E TTM
Company Name Category RoCE % Sales CAGR PAT CAGR EBIT margin EV/EBITDA
(INR bn) (FY08-17) (x) PEG(x)
(FY08-12) (%) (%) (%) (x)
UNCOVERED
Large Caps
TVS Motors Rising Stars 308 23 7 14% 44 4 to 6 58 1.1 31
Mid Caps
Avanti Feeds Evergreen 101 67 9 34% 48 10 to 12 22 0.4 16
La Opala Evergreen 32 33 15 14% 22 25 to 29 58 2.0 31
TVS Srichakra Evergreen 25 42 21 0% 32 7 to 12 17 0.3 11
MRF Evergreen 284 34 19 3% 22 12 to 18 21 0.5 14
Atul Evergreen 78 30 16 5% 13 14 to 16 24 1.2 18
Sheela Foam Evergreen 73 36 24 11% 65 4 to 11 58 1.0 38
KPR Mill Rising Stars 47 20 8 6% 27 13 to 16 17 0.6 9
Phoenix Mills Rising Stars 91 11 6 8% 3 42 to 38 54 8.4 16
Firstsource Rising Stars 36 14 8 4% 13 10 to 11 12 0.7 10
Vardhman Rising Stars 70 18 11 -1% 8 20 to 23 7 0.7 10
Nilkamal Rising Stars 23 26 16 5% 36 6 to 9 19 0.5 11
Source: Ace Equity, Edelweiss research
Note: Market cap, PE as on March 31, 2018

Eye (I) on RoCE
Contents
Why I-RoCE? – Simple but intriguing ...................................................................................... 10
Framework: We introduce concept of I-RoCE ........................................................................ 12
Back testing ............................................................................................................................ 15
Efficient capital allocators ...................................................................................................... 18
Evergreen ...................................................................................................................... 18
Rising stars ..................................................................................................................... 20
Potential Winners ................................................................................................................... 22
Case studies ............................................................................................................................ 24
Kajaria Ceramics ........................................................................................................... 25
Heritage Foods.............................................................................................................. 29
CCL Products (CCL) ........................................................................................................ 33
Avanti Feeds ................................................................................................................. 37
La Opala RG .................................................................................................................. 42
KPR Mills ....................................................................................................................... 46
Nilkamal ........................................................................................................................ 51
Blue Star ....................................................................................................................... 55
Jamna Auto ................................................................................................................... 60
Britannia ....................................................................................................................... 64
Eicher ............................................................................................................................ 68
Avenue Supermart ........................................................................................................ 72
Glimpse of high I-RoCE companies beyond BSE-500 ............................................................. 76
Sectoral flavour ...................................................................................................................... 78
Annexures .............................................................................................................................. 80

Capital Conundrums
Why I-RoCE: Simple, but intriguing

We believe, a CEO’s performance can broadly be analysed by tracking two vital KPIs:
1. RoCE from existing business, which at times could be inherited.

2. I-RoCE from fresh capital allocation.
Investors are willing to pay higher multiples to companies which can redeploy profits at
superior RoCE. However, in case of companies wherein incremental investments are at
significant discount to current RoCE, it may lead to significant value destruction as market
generally values companies based on current steady-state RoCE. Often, past superior
returns can mask inferior returns from fresh investments and, hence, could lead to
significant value destruction.
Therefore, we introduce I-RoCE in our report. We believe, true assessment of a company’s

capital allocation decision is reflected by assessing whether I-RoCE is superior than steady-
state annual RoCE. Data of BSE500 (ex-banks) indicates that of the ~50% companies with
superior historical (FY08-12) returns (RoCE >20%), nearly half (i.e. 25% of BSE-500) were not
able to sustain it incrementally and did not generate higher I-RoCE.
Chart 5: ~25% of BSE-500 companies were able to sustain >20% I-RoCE

BSE500 (ex-banks)
250
201
200
No. of companies
Of the 201 companies with 150 130

historical (FY08-12) RoCE of >20%, 107
only half i.e. 107 (or ~25% of BSE- 100
500 ex-banks) sustained and
generated 20% I-RoCE 50
0
Cos. with 5yr historical Cos. with recent RoCE > Cos. with I-RoCE > 20%
RoCE > 20% 20%
No of companies
Note: * Historical RoCE – FY08-12; Recent RoCE – FY13-17
It is evident from the above data that merely looking at historical steady-state RoCE does
not lead to higher future RoCE. It requires evaluation of I-RoCE, which is the lead indicator
of future RoCE.
As Warren Buffet simply puts it, “You can’t win by being where the ball is, but where it is
going to be.”
Hence, we argue that despite being a simple method, I-RoCE is a better tool to assess a
company’s ability to redeploy capital at higher returns over the long term and not biased by
past capital allocation decisions.

Eye (I) on RoCE
Chart 6: Case study 1 – ABC

28 7.0 24%
1,920 Avg RoCE of 12% but
1,760 low I-RoCE of 9% over 6.0
1,600 18%
FY13-17. 21 5.0
1,440
(no.of times x)
Avg RoCE of 15% but low
1,280
I-RoCE of 10% in FY08-17. 4.0
(INR bn)
1,120
(%)
12%
(%)
960 14
3.0
800
640 2.0
480 7 6%
320 1.0
160
0 0 0.0 0%
FY09
FY12
FY14
FY15
FY17
FY08
FY10
FY11
FY13
FY16
FY08
FY09
FY16
FY17
FY10
FY11
FY12
FY13
FY14
FY15
Capital Employed ROCE (RHS) FATO EBIT Margins (RHS)
Company XYZ’s reported RoCE stood at 12% in five years (FY13-17) and 15% in 10 years (FY08-17), while its I-RoCE was lower at 9% in
five years (FY13-17) and mere 10% in 10 years (FY08-17). Consistent lower I-RoCE will lead to reported RoCE drifting down going ahead
and hence I-RoCE is a crucial matrix to watch for.
The company has delivered 8% CAGR over past 10 years versus 15/18% for Nifty/ BSE-500, ex-banks, respectively.
Chart 7: Case study 2 – XYZ

600 40 2.5 30%
Avg RoCE of 15% but
low I-RoCE of 12% over
480 32 2.0 24%
FY13-17.
(no.of times x)
360 24 1.5 18%

(INR bn)
Avg RoCE of 21% but low
(%)
(%)
I-RoCE of 10% in FY08-17.

240 16 1.0 12%
120 8 0.5 6%
0 0 0.0 0%
FY09
FY10
FY12
FY14
FY15
FY17
FY08
FY11
FY13
FY16
FY15
FY16
FY17
FY08
FY09
FY10
FY11
FY12
FY13
FY14
Capital Employed ROCE (RHS) FATO EBIT Margins (RHS)
Company ABC’s reported RoCE stood at 15% in five years (FY13-17) and 21% in 10 years (FY08-17). However, its I-RoCE consistently
stood below reported RoCE at 12% in five years (FY13-17) and mere 10% in 10 years (FY08-17). It reflects the fact that incrementally
capital is being deployed at much lower rate than historical average RoCE of 27% (FY08-12) and 21% (FY08-17).
The company has delivered 14% CAGR over past 10 years versus 15/18% for Nifty/ BSE-500 (ex-banks) respectively.
Bottom line: I-RoCE better reflects return on new capital deployed versus reported RoCE and acts as a lead indicator of future
direction of RoCE.

Capital Conundrums
Framework: We introduce concept of I-RoCE

Building on our earlier report of Capital Efficiency – Vital lynchpin (Link) we introduce I-
RoCE as part of second version under the Capital Conundrum series. Our analysis is based on
the belief that I-RoCE is more crucial than reported RoCE as it better reflects the
management’s fresh capital allocation decisions and forms the crux of our efficiency test.
Fig. 4: I-RoCE definition
“10 Year I-RoCE” = Increase in EBIT* over FY07-17

Increase in capital employed* over FY07-17
“5 Year I-RoCE” = Increase in EBIT* over FY12-17

Increase in capital employed* over FY12-17
Note: * Start and end period data points are averages of three years to smoothen out lumpy
movements and very low/high base have been adjusted
We have selected 105 high I-RoCE companies (refer annexure 2 for detailed list) that are
capital efficient in both 10 and 5 years consistently as per below criteria. Amongst these,
we have built a portfolio of top 20 stocks which meet our sustainability framework.
Fig. 5: Selecting high I-RoCE companies out of BSE500(ex-banks) universe

BSE-500 (ex-banks) # 105 high I- Top 30 companies
RoCE with largest RoCE
companies expansion tested
for sustainability
I-RoCE over 10 Fine tuning for Consistency + Sustainability

year & 5 year high capex and quality framework $
basis * dividend framework $
•I-RoCE >than •Include •Scalability

•Consistent
historical companies
with decline in RoCE, •Uniqueness
RoCE across earnings, and •Stickiness
BSE-500 (ex- I-RoCE due to
high capex in cash flows •Technology/ 20 high I-RoCE,
banks) recent 3 years •Superior and Adaptability Consistent &
•I-RoCE < than (FY15-17) consistent Sustainable
historical •INtegrity
•Exclude quality of companies ("ECS
RoCE, but companies earnings Portfolio")
above 20% with high
•Acceptable
dividend
payout (>50%) leverage
leading to high
RoCE
Note: #Companies with < 9/10 years’ data have been dropped from the universe for this analysis.
* In 10 year (FY08-17) period historical RoCE refers to FY08-12 & for 5 years (FY13-17) it refers to FY13-15.
$ Refer ‘Crux of the analysis’ section above

Eye (I) on RoCE
Performance of high I-RoCE companies
Chart 8: High I-RoCE cos significantly outperformed index …. Chart 9:.…leading to significant wealth creation*
32
10 Year (%)
28 29
27
24
(RoCE %)
18 19
15 15
20 13 13 12
11 10
8
16
12
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
Market Cap Incremental Earnings CAGR Revenue CAGR
ROCE (%)
High I-RoCE cos ROCE - BSE500 Nifty Nifty (ex-banks) High I-RoCE cos. BSE500 (ex-banks)
Source: Ace Equity, Bloomberg, Edelweiss research
Note: *Market cap median CAGR adjusted for dilution, buyback and includes dividend
I-RoCE for Nifty and BSE500 (ex-banks) stood weaker at 13% and 11%, respectively, over 10
RoCE of Nifty/ BSE500 (ex-banks)
years. Consequently, RoCE of Nifty/ BSE500 (ex-banks) has declined from 24%/23% in 2008
declined from 24%/23% in 2008 to
to 15%/13% in 2017. High I-RoCE companies (~105) witnessed increase from 24% to 27%
15%/13% in 2017 versus high I-RoCE
over the past 10 years and their I-RoCE over the period has been at a robust 27%.
companies wherein it jumped from
24% to 27%
Nifty and BSE500 (ex-banks) delivered 15 and 18% returns respectively (median market cap
CAGR adjusted for dividends, dilution and buyback) over 10 years. Higher market cap CAGR
versus earnings CAGR has led to P/E expansion over past 10 years from 15x to 19x for Nifty
and 15x to 23x for BSE500 (ex banks).
Nifty and BSE500 (ex-banks)

High I-RoCE companies delivered highest shareholder returns @ 29% CAGR over 10 years,
delivered 15 and 18% CAGR return
~11-14% Alpha over index—Nifty and broader market (BSE500).
respectively, while high I-RoCE
companies clocked 29% CAGR over
Reinvesting profits at 27% CAGR over the past 10 years implies 10-11x of book value
10 years
accretion, which is generally translated into market cap CAGR.

Capital Conundrums
Categorisation of high I-RoCE companies

We have categorised high I-RoCE companies into two buckets: a) Evergreen–Companies
improving or sustaining their high RoCE; and b) Rising Stars–Companies with low historical
RoCE, but moving up the curve.
Fig. 6: Categorisation of companies
High I-RoCE companies in BSE 500 (ex-banks)
Evergreen Rising Stars
•Companies improving or •Companies with low

sustaining their high RoCE historical 10 year RoCE
(10 year average RoCE > (<20%), but moving up the
20% curve with high I-RoCE
Evergreen companies Rising Stars are

have delivered & expected to emerge as
sustained high I-RoCE winners going ahead
and could have been and create substantial
rewarded by markets sharehoolder wealth
Chart 10: Evergreen companies created siginificant wealth* follwed by Rising Stars
High I-RoCE cos - 10Yr CAGR (%)
Within the high I-RoCE pack,
companies in the Evergreen 31 30
category have delivered higher 25
returns in the past versus Rising
Stars which are expected to 18 19 18
18
emerge as wealth creators of the
future 10
Capital efficiency and, importantly Revenue CAGR Earning CAGR Incremental ROCE Market Cap
I-RoCE are paramount to long- Evergreen Rising stars
term sustainable wealth creation Source: Bloomberg, Ace Equity, Edelweiss research
Note: * Median market cap CAGR adjusted for dilution, buy-back and includes dividend

Eye (I) on RoCE
Back-testing reveals outperformance of average 12%

We back-tested our framework for the past five years by analysing data from 2002 to 2016
based on our I-RoCE framework along with consistency + quality check. Back-testing has
been done without adding sustainability factor, as the same is subject to detailed analysis
and study of individual companies. Further, for selection of stocks in portfolio, we have
adhered to the framework similar to that in our report, i.e., top consistent companies with
largest/ meaningful I-RoCE expansion (atleast ~1.5x of historical RoCE).
Table 5: Equal weighted portfolio of high consistent I-RoCE companies – Buy & hold strategy
Buy and hold individual years portfolio
Portfolio CAGR(%) No. of stocks
No. of No. of Benchmark Outperformance
Portfolio year for no. of years outperforming
stocks years* CAGR(%) - BSE-500 (%)
invested* benchmark
FY12 20 6 24 15 9 14
FY13 14 5 31 16 14 10
FY14 20 4 35 16 19 14
FY15 18 3 19 10 9 13
FY16 27 2 28 19 9 16
Average (FY12-16) 20 n.a. 27 15 12 13
Adding sustainability factor increased outperformance significantly in FY17

FY17 30 1 22 13 9 15
FY17 (with sustainability) 20 1 30 13 17 12
Note: * For e.g: FY12 portfolio is invested and held till March 31, 2018, for six years and portfolio return represents six-year CAGR %
Buy and hold portfolio represents individual portfolios created over FY12-16 and are distinct
from each other. Above portfolio performance represents returns generated if each of these
Adding sustainability factor portfolios were bought and held till date (March 31, 2018) individually.
increased FY17 portfolio’s 1
year performance by 8% Back-testing data reveals an average outperformance of ~12% CAGR without annual churn.
While we did not consider sustainability factor in the past, adding the same in current FY17
portfolio led to 8% higher return from FY17 to March 31, 2018 (1 year).
Table 6: Equal weighted portfolio of high consistent I-RoCE companies – With annual churn
Opening no. Closing no. Gross Churn Portfolio CAGR(%) Outperformance
Portfolio start year Additions Deletions
of stocks of stocks churn (x) with annual churn # (%)
FY12 - - - 20 - - 35 20
FY13 20 5 11 14 16 1.1 41 24
FY14 14 10 4 20 14 0.7 41 25
FY15 20 8 10 18 18 1.0 25 15
FY16 18 13 4 27 17 0.6 31 12
Average (FY12-16) 9 7 16 0.9 35 19
Note: # For e.g: FY12 portfolio invested, churned annually and held till March 31, 2018 (six years) and portfolio return represents six-year
CAGR %
Churn = ratio of gross addition & deletion to total stocks in portfolio (x)

Capital Conundrums
Above analysis represents single portfolio created at different time periods (FY12 to FY16)
and churned annually till FY18. For e.g., FY12 portfolio is created in FY12 and churned every
year till March 31, 2018, to deliver six-year CAGR of 35%. Similarly, 41% CAGR in FY13
represents the same portfolio, but beginning from FY13 till date, i.e., five-years’ holding
period.
On an average, in the past five years, single portfolio churned annually resulted in 35%
CAGR, an outperformance of 19% versus 12% outperformance in case of buy and hold
strategy.
Table 7: Companies from ECS portfolio that featured most in past annual portfolios
No of times repeated 5 yr CAGR %
Particulars
since FY12 return (FY13-18)
On back testing, 11 companies from Kajaria Ceramics 6 44
our ECS portfolio have featured in MRF 6 44
twice or more in past Eicher Motors 5 62
Finolex Cables 4 73
Atul 3 56
Kajaria and MRF have featured in all
Britannia 3 58
6 portfolios while Eicher/ Finolex
cables have featured in atleast 5/4 Avanti Feeds 2 158
out of 6 portfolios CCL Products 2 63
KPR Mill 2 68
La Opala RG 2 56
TVS Srichakra 2 82
Average 3 69
Source: Bloomberg, Edelweiss research
Table 8: List of stocks in each of past five years—Evergreen

2012 2013 2014 2015 2016 2017 2017 (ECS)*
Evergreen
BHEL GMDC Zee Zee Eicher Britannia Britannia
Asian Paints Titan Ajanta Eicher Britannia Eicher Eicher
VIP Supreme Ind. Kajaria DRL Zee Pidilite Pidilite
Titan VIP GMDC HCL Tech Avanti Avanti Avanti
GMDC Amara Eicher Ajanta Ajanta Ajanta La Opala
Amara GSK Consumer VIP Kajaria Caplin Caplin TVS Srich.
Supreme Ind. Greaves Cotton Agro Tech Britannia La Opala La Opala Atul
GE Power Eicher Supreme Ind. PI Ind. Kajaria TVS Srich. Kajaria
Exide Hexaware Supreme Ind. MRF Atul Sheela
Jagran Rallis Amara TVS Srich. Kajaria MRF
GSK Consumer GSK Consumer Kitex PI Ind. Sheela
Bayer Wockhardt Ceat MRF
Zydus Torrent Ph. Kitex Tata Elx
Advanced Enz.

Eye (I) on RoCE
Table 9: List of stocks in each of past five years—Rising Stars

2012 2013 2014 2015 2016 2017 2017 (ECS)*
Rising Star
Zee Zee DRL Finolex Cable BPCL BPCL TVS Motors
Jindal Poly Kajaria BBTC Atul Finolex Cable Aurobindo DMart
Agro Tech GSPL Finolex Cable Finolex Ind. Atul TVS Motors Heritage
Kajaria MRF MRF MRF Finolex Ind. DMART KPR
RCF DRL Finolex Ind. Ceat Essel Propack GHCL CCL
Uflex NHPC Vaibhav Granules Granules Essel Propack Finolex Cable
MRF NHPC NHPC KPR Heritage Phoenix
CCL KPR Firstsource
United Brew. CCL Vardhman
Aarti Finolex Cable Nilkamal
NHPC Phoenix
PVR Firstsource
Suven Vardhman
Nilkamal
Granules
Endurance
Note: * Based on ECS framework by adding sustainability factor
Companies highlighted have moved from Rising Starts to Evergreen category in the
following years. Probability of a Rising Star moving to the Evergreen category in following
years, based on past five years’ back-testing analysis, is ~40%.

Capital Conundrums
Efficient capital allocators

In this section, high I-RoCE companies which have improved in 10 and 5 years and met our
criteria (mentioned above) are divided into two categories: Evergreen and Rising Stars and
further split into large caps and mid caps (market cap of INR300bn plus).
1. Evergreen companies
Chart 11: I-RoCE improvement trend versus PEG ratio—Large caps
Large caps
5.0
4.5 Zee
>4.0
4.0
Dabur
3.5 Asian paints
3.0
PEG ratio (x)
Marico
2.5 Pidilite
Britannia
2.0 TCS
Infosys Motherson HCL tech
1.5 Bosch
Lupin Eicher
1.0 Cadila Maruti
0.5
0.0 Tech M
0.0 0.5 1.0 1.5 2.0 2.5
I-RoCE (FY08-17) / Historical 5Yr (FY08-12) RoCE (x)
Table 10: Top companies with high I-RoCE expansion—Large caps

Trend vs.
FY08-12 FY13-17 FY08-17 avg 3yr capex 10Yr 3Yr
10 Yr History x Trailing M.cap
Company Name Avg RoCE Avg RoCE capital vs. History earnings earnings PEG (x)
I-RoCE (%) (FY08-12 PE (x) (INR bn)
(%) (%) employed (x) (x) CAGR (%) CAGR (%)
RoCE)
Britannia 58 2.4 25 58 3.8 1.5 23 31 2.2 67 597
Eicher 47 2.1 23 44 7.2 2.1 40 43 1.1 46 773
Pidilite 38 1.5 26 37 5.7 1.4 23 24 2.3 55 466
Zee 30 1.4 22 27 2.4 2.8 15 4 11.5 55 553
Marico 46 1.4 33 37 5.9 0.3 23 17 3.0 53 421
HCL tech 32 1.2 27 38 7.9 1.5 21 10 1.6 16 1,348
Maruti 23 1.0 23 23 5.0 1.2 17 37 1.0 36 2,677
Motherson 22 0.9 23 24 21.4 3.0 32 24 1.7 41 655
TCS 43 0.9 49 52 10.9 1.2 20 11 2.0 22 5,454
Lupin 21 0.8 26 31 11.6 7.7 24 11 1.2 13 333
Bosch 23 0.8 30 25 4.8 1.2 16 25 1.5 39 550
Cadila 20 0.8 25 21 7.9 2.5 20 20 1.3 26 387
Infosys 30 0.7 41 35 7.7 1.6 14 11 1.5 16 2,472
Asian paints 39 0.7 58 45 7.2 1.8 21 16 3.5 55 1,075
Dabur 29 0.6 50 33 8.9 1.1 16 12 3.9 45 578

Eye (I) on RoCE
Within large caps, I-RoCE of Britannia, Eicher and Pidilite has jumped more than 1.5x and
are trading at less than 1.5-2.0x PEG multiple (PE/ 3 year [FY15-17] earnings CAGR) with very
high I-RoCE.
Chart 12: I-RoCE improvement trend versus PEG ratio—Mid caps

Midcaps
5.0 V-Mart
Page
>4.5
4.5
4.0
3.5 Amara
Advanced Enz.
3.0 Berger
PEG ratio (x)
Relaxo La Opala
2.5
Ceat
V-Guard
2.0 VIP DB Corp
Torrent Ph. Atul
Kajaria
1.5
Navneet
1.0 Sharda Tata Elx
MRF Caplin
Sonata PI Ind
0.5 Sheela Ajanta
TVS Srich. Avanti
0.0
<(0.5)
0.5 Rallis Mindtree
1.0 1.2 1.4 1.6 1.8 2.0 2.2 < 2.4 2.6
Table 11: Top companies with high I-RoCE expansion—Mid caps

Trend vs. FY08-17
FY08-12 FY13-17 3yr capex 10Yr 3Yr
10 Yr History x avg capital PEG Trailing M.cap
Company Name Avg RoCE Avg RoCE vs. History earnings earnings
I-RoCE (%) (FY08-12 employed (x) PE (x) (INR bn)
(%) (%) (x) CAGR (%) CAGR (%)
RoCE) (x)
Avanti 67 7.4 9 54 4.0 6.0 44 48 0.5 22 101
Ajanta 51 3.0 17 50 5.9 0.5 42 29 0.8 24 122
Caplin 59 2.9 21 65 8.8 1.1 52 55 0.8 45 43
La Opala 33 2.2 15 37 5.6 2.3 28 22 2.6 58 32
TVS Srich. 42 2.0 21 33 5.4 2.3 37 32 0.5 17 25
Atul 30 1.9 16 26 2.9 3.3 29 13 1.8 24 78
Kajaria 39 1.9 20 34 3.3 2.6 41 24 1.5 36 91
Sheela 36 1.9 24 25 3.0 3.3 25 65 0.9 58 73
MRF 34 1.8 19 31 6.3 2.8 43 22 0.9 21 284
Tata Elx 51 1.6 32 51 5.8 1.3 13 34 1.0 35 61
Advanced Enz. 31 1.6 20 30 9.2 0.2 31 8 3.1 26 24
PI Ind 35 1.5 23 34 7.9 2.9 59 35 0.8 26 122
Ceat 26 1.4 18 24 3.6 2.8 24 7 2.4 17 61
Sonata 43 1.4 30 32 3.1 0.0 10 27 0.8 21 33
Sharda 33 1.4 32 30 3.8 2.6 30 20 0.9 18 34
Among mid caps, top companies that standout by virtue of superior capital efficiency are
Avanti, Caplin, Ajanta, La Opala, TVS Srichakra, ATUL, Kajaria, Sheela and MRF.

Capital Conundrums
2. Rising Stars

Large caps
5.0
4.5
Bharat Forge
4.0
3.5 DMART
PEG ratio (x)
3.0
2.5
2.0
1.5
TVS Motors
1.0
UPL
Adani Port Aurobindo
0.5
BPCL
0.0
0.5 1.0 1.5 2.0 2.5

Trend vs. FY08-17 3yr capex
FY08-12 FY13-17 10Yr 3Yr
Company 10 Yr History x avg capital vs. Trailing M.cap
Avg RoCE Avg RoCE earnings earnings PEG (x)
Name I-RoCE (%) (FY08-12 employed History PE (x) (INR bn)
(%) (%) CAGR (%) CAGR (%)
RoCE) (x) (x)
BPCL 24 2.3 11 19 2.9 2.1 14 28 0.3 10 927
Aurobindo 29 2.2 13 24 5.0 0.7 28 25 0.6 14 327
TVS Motors 23 1.8 7 21 2.7 2.1 21 44 1.3 58 308
DMart 21 1.7 10 21 7.8 3.5 75 45 3.5 156 827
UPL 22 1.3 17 20 4.5 2.1 21 22 1.0 21 372
Bharat Forge 14 1.1 12 16 2.9 4.1 7 11 4.4 47 326
Adani Port 13 1.1 13 14 16.2 1.1 35 31 0.6 19 733
In the Rising Stars category, BPCL, Aurobindo, TVS Motors and DMart have increased their
I-RoCE more than 1.5x amongst large caps.

Eye (I) on RoCE

Midcaps
5.5
Greenply
United breweries
4.5 Phoenix
>4.0
3.5 Heritage
Endurance
PEG ratio (x)
Aegis
2.5
Syngene CESC Finolex Cable

1.5
Aarti Ind. KRBL Essel Propack
SJVN Eveready Vardhman Firstsource CCL
Alkem TNPL
Force KPR GHCL
0.5 Nilkamal
Minda
Inox Leisure Granules
<-0.5
Tata Coffee
-0.5
0.5 1.0 1.5 2.0 2.5 >3.0 3.0

Trend vs. FY08-17 3yr capex
FY08-12 FY13-17 10Yr 3Yr
10 Yr History x avg capital vs. Trailing M.cap
Company Name Avg RoCE Avg RoCE earnings earnings PEG (x)
I-RoCE (%) (FY08-12 employed History PE (x) (INR bn)
(%) (%) CAGR (%) CAGR (%)
RoCE) (x) (x)
GHCL 33 3.7 9 21 2.1 3.1 30 40 0.2 7 25
Essel Propack 24 2.6 9 15 1.5 1.6 6 17 1.2 20 38
Heritage 27 2.4 8 26 3.5 1.8 45 13 3.6 48 32
KPR 20 2.4 8 18 4.0 0.9 17 27 0.6 17 47
CCL 28 2.3 12 22 2.9 1.1 13 28 1.0 28 37
Finolex Cable 26 2.1 13 21 2.2 0.4 16 15 1.7 26 103
Phoenix 11 2.0 6 11 13.5 0.4 17 3 8.4 54 91
Firstsource 14 1.8 8 11 3.7 8.9 11 13 0.9 12 36
Vardhman 18 1.7 11 16 2.9 0.7 18 8 1.0 7 70
Nilkamal 26 1.6 16 17 3.2 0.7 37 36 0.5 19 23
Granules 18 1.6 11 18 5.6 2.7 34 23 0.6 14 26
Endurance 24 1.6 10 23 4.7 2.1 22 16 3.3 54 178
United Brew. 19 1.5 13 15 3.2 1.0 15 1 11.1 109 251
Tata Coffee 21 1.4 15 18 3.0 0.6 22 1 na 14 21
Eveready 9 1.4 6 14 0.7 4.3 - to + 90 0.3 29 27
Among mid caps, GHCL, Essel Propack, Heritage, KPR Mills, CCL, Finolex Cable, Phoenix,
Firstsource, Vardhaman, Nilkamal, Granules and Endurance, stand out.

Capital Conundrums
Potential winners: Recently improving companies

We present below a list of companies that have not met our ECS framework over the long
term, but where RoCE has improved over the past one-two years. Some of these could be
cyclical in nature and some structural. We prefer to wait to determine sustainability and
persistency of these companies before including them in our ECS portfolio; nevertheless, we
feature these companies in our report.

Large caps
4.0
3.5
GCPL
3.0
PEG ratio (x)
2.5
2.0
1.5 BEL
1.0
0.5
0.0 Vedanta
1.0 1.1 1.2 1.3 1.4 1.5 1.6 1.7 1.8 1.9
5 Yr I-RoCE /historical 2 yr RoCE trend (x)

FY13-15 I-RoCE trend FY13-17
FY16-17 Avg Increase 5 Yr I- ROCE 3Yr earnings Trailing M.cap
Company Name Avg RoCE % vs. history (x) capital PEG (x)
RoCE % (b) (%) (b-a) (%) CAGR (%) PE (x) (INR bn)
(a) (FY13-15) employed (x)
BEL 18 22 3.3 33 1.8 1.2 16 1.5 24 345
GCPL 20 23 3.0 27 1.4 1.6 17 3.4 57 745
Vedanta 10 13 2.3 13 1.3 na (2) -ve 15 1,033
Among large caps, BEL, GCPL and Vedanta have significantly improved their performance in
the recent one-two years.

Eye (I) on RoCE

Midcaps
2.8
Kalpataru
ABB Bluestar
2.3
PVR
1.8
PEG ratio (x)
Mahindra Holidays
1.3 Jubilant Life
JB Chem.
0.8 GE Shipping
VenkyS Johnson Contrl. Sundram Fast.
KEI Ind.
Indo count Techno
Natco Ramco cement DCM Shriram
0.3
8K Miles Sterlite Tech. Supreme Petro. Nocil
Welspun Varun Bev. Phillips Carbon Meghmani
GNFC Heidelberg Cement Jamna Auto
-0.2
1.5 2.5 3.5 4.5 5.5 >6.0 6.5
5 Yr I-RoCE /historical 2 yr RoCE trend (x)

FY13-15 I-RoCE trend FY13-17
FY16-17 Avg Increase 5 Yr I- 3Yr earnings Trailing M.cap
Company Name Avg RoCE vs. history (x) capital PEG (x)
RoCE % (b) (%) (b-a) ROCE (%) CAGR (%) PE (x) (INR bn)
% (a) (FY13-15) employed (x)
Meghmani 10 18 7 132 12.9 1.0 49 0.5 24 21
Nocil 12 26 14 110 9.6 1.2 57 0.5 26 32
DCM Shriram 13 18 5 91 6.7 1.2 32 0.4 12 69
Blue star 14 20 7 82 6.1 1.2 18 3.2 59 73
Supreme Petro. 22 40 18 123 5.6 1.4 80 0.2 17 31
Jamna Auto 16 48 32 85 5.4 1.2 - to + na 30 31
Sundram Fast. 15 25 9 80 5.2 1.2 41 0.8 34 116
Phillips Carbon 3 9 6 12 4.3 1.3 - to + na 54 37
Ramco cement 11 17 6 45 4.2 1.0 79 0.3 26 170
Sterlite Tech. 5 14 9 18 4.0 0.5 - to + na 62 125
Heidelberg Cement 4 9 5 17 3.7 0.9 - to + na 42 32
GE Shipping 8 10 3 28 3.6 1.1 10 0.7 7 50
Johnson Contrl. 14 20 6 47 3.4 1.2 116 0.7 84 68
Techno 12 19 7 39 3.3 1.0 29 0.8 22 42
PVR 9 17 7 25 2.8 1.3 28 2.1 59 57
Mid caps include Meghmani, Nocil, DCM Shriram, Blue Star, Supreme Petro, Jamna Auto,
Sundaram Fastners, among others.

Capital Conundrums
Case Studies
We have done detailed analysis of 12 companies from our preferred picks across sectors
and categories as under:
Coverage mid cap companies:

Kajaria, Heritage and CCL.
Uncovered mid cap companies:

Avanti, La Opala, KPR Mills, Nilkamal, Blue Star and Jamna Auto.
Large cap companies:

Britannia, Eicher and DMart.

Eye (I) on RoCE
Kajaria Ceramics
(INR bn) OCF (INR bn) Market cap (INR bn)

30 3 100
Revenue CAGR 19% 8.3
PAT CAGR 41% 80
20 2
60 46% CAGR
39% 10 1 3.5
34% 3.0 40
20% 20
0 0
FY08
FY11
FY13
FY16
FY09
FY10
FY12
FY14
FY15
FY17
0
Historical RoCE Current RoCE I-RoCE (FY08-17)
FY10
FY11
FY14
FY15
FY18
FY08
FY09
FY12
FY13
FY16
FY17
FY 08-11 FY 12-14
(FY08-12) (FY15-17) Revenue Adjusted PAT FY 15-17
40% (INR bn) 15 16% Capex (INR bn) PE chart (trailing)

6.8 40
30%
10 30
20% 3.8
20
5 13% 3.0 2.3
10%
10
0% 0 2.7
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
0
10 Yr 3 Yr FY 08-11 FY 12-14
FY10
FY12
FY14
FY17
FY08
FY09
FY11
FY13
FY15
FY16
FY18
Equity Debt RoCE Avg EBIT margins Avg FATO (x) FY 15-17
Promoters stake (%): 47.6 Instituitional holding (%): 37.3 Daily Volume (mn shares): 395.8
Why Kajaria?
Kajaria Ceramics (KJC) enjoys leadership position in the domestic tiles industry with 22%
Leader in tile industry with 22% market share (13% in FY10). Its 20% revenue growth outpaced industry growth of 12%
market share (from 13% in FY10) during FY10-17. Besides, the company clocks highest EBITDA margins (~500bps higher than
and enjoys highest EBITDA margins industry average) along with strong FCF generation. A vibrant product range, aggressive
brand spending, extensive distribution network of 1,100 dealers and 4,000 associate dealers
and sustained capacity expansion have and will continue to anchor KJC’s outperformance
versus peers, and generate higher operating efficiency and asset turnover. Refer our recent
report on Home Dècor (Home Dècor - Home run; sector update).
Fig. 1: Key drivers
High pricing power

driven by strong
brand equity
Asset light outsourcing model to Focus on growth

Focus on value- through
drive expansion and growth going added product organic/inorganic
ahead versus JV model in the past launches driving opportunities in tier
margin expansion II and III cities
Asset light business Focus on R&D to

model driving develop new designs
expansion and lower and create cost-
capital cost effective products

Capital Conundrums
Company overview
KJC is India’s leading manufacturer of ceramic and vitrified tiles. The company was
incorporated in 1985 by Mr. Ashok Kajaria in technical collaboration with the world’s second
largest tiles manufacturer, Todagres. The company’s current aggregate manufacturing
capacity of 68.37MSM is distributed across its eight plants situated in Sikandrabad in Uttar
Pradesh, Gailpur & Malootana in Rajasthan, four plants in Gujarat and one in Vijayawada in
Andhra Pradesh. KJC enjoyed 10.4% share in overall tiles market and 20.9% in the organised
tile sector in FY16. The company sells tiles of different sizes and prices ranging from
affordable to high-end designer tiles catering to different segments.
Fig. 2: Journey so far
2015
1988 Acquired Tauras
Commenced 2010 Tiles Pvt Ltd and
production in technical Entered into an Kajaria Bathware
collaboration with agreement with GAIL Pvt. Ltd and entered
Todagres S.A., Spain at to supply RLNG into JV with AP-
Sikandrabad (UK) based Floera
Ceramics
1998 2011-12 2016

Commissioned Acquired 51% Commissioned the
second plant at stake in Morbi 6.50MSM PVT
Gailpur (Rajasthan) based Soriso, Jaxx, plant at Malutana,
with capacity of Cosa and Rajasthan
6MSM p.a. Vijaywada-based
Vennar
Fig. 3: Opportunity size Fig. 4: Growth drivers
Market size of INR270bn

Tiles
in FY17 (50% organised)
Industry •Government’s focus on housing
and expected to register
Market Size 10.5% CAGR over FY17-22 •Rising construction activity
•Rapid urbanisation
Tiles Industry •Robust exports growth
Organized Market size of INR130bn •GST-led shift of market share from
Tiles and expected to clock unorganised to organised
industry 16% CAGR over FY17-20
market size
Source: Industry, Edelweiss research

Eye (I) on RoCE
Fig. 5: Strategic positioning

Robust dealership Two pronged
Leading Organic/ inorganic
Network and highest strategy to improve
manufacturer of tiles Growth in Tier II/III
Brand Recall profitability
Largest ceramic JVs with Morbi- Focus on large
and vitrified tile Dealer base based players in
increased from 750 format and value-
manufacturer in order to drive added tiles and has
India with in FY12 to 1,100 in revenue share from
FY17 strong pipeline of
manufacturing 0% in FY10 to 33% niche tiles to be
capacity of in FY17. launched in
68.4MSM. Offers wide upcoming years
product basket and Acquisition of six
Product basket incurs lots of companies to
comprises more relationship expand into tier II Continuous cost
than 2,600 building activities cities leading to cut optimisation by
varieties, the with dealers in transit time to eliminating
largest portfolio in deliver to dealers wastages and
India’s ceramic tiles Strongest brand optimising power
sector. recall due to Access to Dealers in and fuel
sustained highest every city and consumption
brand spend in company owned
industry showrooms in all
tier II cities
Source: Company, Edelweiss research
Key Risks
 Prolonged Slowdown in real estate sector
 Intensifying competition with other organized as well unorganized players
 Volatility in natural gas prices which is one of the key input for the tiles industry
 Threat of cheap Chinese imported tiles

Capital Conundrums
Table 1: Financial summary (INR Mn)

Particulars FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18E FY19E FY20E
P&L and BS
Revenue 5,027 6,649 7,355 9,532 13,130 15,833 18,363 21,869 24,135 25,496 27,716 33,307 39,814
EBIT 619 590 939 1,195 1,686 2,040 2,407 3,055 3,942 4,292 3,901 5,442 6,907
EBIT margin (%) 12.3 8.9 12.8 12.5 12.8 12.9 13.1 14.0 16.3 16.8 14.1 16.3 17.3
PAT - Reported 150 89 359 607 818 1,078 1,314 1,849 2,354 2,531 2,606 3,598 4,763
PAT - Adjusted for exceptional items 150 89 359 607 818 1,078 1,314 1,907 2,354 2,531 2,606 3,598 4,763
Adj. PAT margin (%) 3.0 1.3 4.9 6.4 6.2 6.8 7.2 8.7 9.8 9.9 9.4 10.8 12.0
Equity 1,549 1,621 1,893 2,225 2,821 3,609 5,295 7,409 9,719 11,751 13,730 16,374 19,876
Debt 3,373 3,252 2,628 2,880 2,782 3,202 2,364 2,434 2,937 2,132 1,632 1,632 832
Capital Employed 4,921 4,872 4,522 5,105 5,603 6,810 7,660 9,844 12,656 13,883 15,361 18,006 20,707
FATO 1.6 1.9 2.2 2.8 3.1 3.1 3.2 3.3 3.1 2.6 2.2 2.6 3.0
Return Ratios
RoCE 13 12 20 25 31 33 33 35 35 32 27 33 37
RoE 10 6 20 29 32 34 30 29 27 24 19 23 25
Cash Flow
OCF 46 255 1,077 1,594 909 976 1,661 1,803 3,156 3,377 3,740 4,165 5,255
Capex 66 121 471 1,666 725 1,509 1,522 2,646 2,686 1,425 (1,767) (1,500) (1,500)
Free CF (20) 134 607 (72) 184 (533) 139 (843) 126 1,612 1,972 2,665 3,755
Valuation
Market Cap 2,097 2,020 4,529 5,563 12,528 14,147 26,350 63,822 75,708 92,925
EPS 1 1 2 4 5 7 8 11 15 16 16 23 30
PE 14 23 13 9 15 14 21 36 33 37 39 28 21
Source: Company, Ace Equity, Edelweiss research

Eye (I) on RoCE
Heritage Foods
30 (INR bn) 1 OCF (INR bn) Market cap (INR bn)
40
20 PAT CAGR 45% 1 30
2.3
24% 27% 10 0 20 30% CAGR

0.8
10
8% 0 (1)
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
Historical RoCE Current RoCE I-RoCE (FY08- 0
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY 08-11 FY 12-14
(FY08-12) (FY15-17) 17) Revenue Adjusted PAT FY 15-17
(INR bn) 4% Capex (INR bn) PE chart (trailing)

40% 5 3% 300
2.3
30% 4
1.8 200
20% 3
1.2
10% 2 8.6 100
7.1
0% 1
0
-10% 0
FY09
FY11
FY16
FY08
FY10
FY12
FY13
FY14
FY15
FY17
(100)
10 Yr 3 Yr FY 08-11 FY 12-14
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
Why Heritage?
Heritage Foods (HFL), a strong private dairy player in the South (Andhra Pradesh) with 10%
organised market share has commendably expanded its procurement from 20,000LPD
Focusing on high growth/ margin
(litres per day) in 1997 to >1.2mn LPD over 20 years. It has set an impressive revenue target
VADP segment and targeting its
of INR60bn by FY22 with procurement rising to ~2.8mn LPD. With strong franchisee in liquid
share to increase from 24% to 40% of
milk, HFL is diversifying into value added dairy products (VADP) with target to up its share
sales by FY22
from 24% of dairy sales (INR18bn in FY17) to 40%. HFL is prudently straddling the high-RoCE
pouch milk segment and high-growth/margin curd, yogurt and ice‐cream segments to attain
its target. Refer our recent report on Dairy sector (India Dairy - Crème de la crème).
Fig. 1: Key drivers

Completely
integrated dairy
business bringing
cost effeciency
Focus on right Strong procurement

Strong procurement, brand and product mix - high (up from 20,000 to
proportion of milk 1.2mn LPD in 20 yrs),
focus on high RoCE pouch milk, VADP
and curd in its infrastructure, brand
(curd, ice cream, paneer and portfolio and distribution
flavoured milk)
Focused on the high

Moving towards high-
RoCE generating
margin, VADP - curd,
pouch milk category
ice cream, paneer and
with huge
flavoured milk
addressable market

Capital Conundrums
Company overview
HFL sells milk and milk products, such as, curd (largest share), ice cream, paneer, flavoured
milk, ghee, butter and milk powders. Entire dairy sales are B2C and sold under the Heritage
brand. Of FY17 total revenue of INR26.4bn, dairy revenues contribute around 71% INR18bn
and VADP segment within dairy accounts for INR4.4bn (24% of dairy revenues). Dairy
includes Milk constituting ~66%, VADP 24% and fat products 9%.
In South India, HFL is a strong brand particularly in its home state of Andhra Pradesh and
surrounding states. Before the acquisition of Reliance Dairy, ~90% of milk procurement and
sales were in the Southern states of Andhra Pradesh, Telangana, Tamil Nadu and Karnataka.
Post the acquisition, HFL now has widest regional footprint in India among privately held
dairy companies, spread across 15 states with procurement in nine states.
2016
2006-09 Demerged its loss
1988 making retail, agri
Ventured into ice
and bakery
Founded by N cream, retail, agri,
businesses, selling
Chandrababu Naidu & bakery and icecream
them off to Future
family segments
Retail
1994-2006 2012-15 2017

IPO and Ventured into Acquired dairy
Establishing plants Delhi, Rajasthan business of
and consolidating and Haryana Reliance Retail for
position in AP, geographical
Tamil Nadu and expansion in the
karnataka North
INR3.5tn as on FY16 •Rising per capita income

set to rise to INR6.2tn •Vast and growing vegetarian
Milk Market
by FY20. Organised population
Size share to rise from •GST led shift of market share from
22% to 26% unorganised to organised
segments of the market
Dairy Industry •Rising urbanisation propelling
Market size of
INR1.9tn as on FY16 VADP
VADP set to rise to INR3.3tn
market size in FY20. Organised
share to rise from
22% to 26%
Source: Industry, Edelweiss research

Eye (I) on RoCE
Infrastructure for low Right product mix to

Strong procurement Strong brand
cost distribution drive RoCE and growth
Milk sales (65%

Milk sourced directly
Procures milk in nine Strong brand recall with revenue)- a low‐margin
through 12,774
states from 0.35mn dairy direct reach, selling high RoCE and low
collection centres and
farmers (~ 95% direct 100% of its products in growth business, Curd
159 bulk milk coolers &
procurement) the B2C segment (19% revenue) - high
chilling centres
growth and margin
Sells dairy products

Growth in milk pouch
Focus on processes such Network of smaller milk under the Heritage
segment through higher
as complete processing and pouching brand across 15 states in
penetration in existing
transparency, timely plants accross South India via 6,330
market and inorganic
payments through banks India distributors, more than
expansion in other states
118,500 retail outlets
Becoming the farmers’ Cuts down on lead time 1,279 Heritage Parlours Growth in VADP to be
trusted brand by and logistics cost and exclusively offering a supported by low
facilitaing loans from provides flexibility to range of Heritage organised penetration,
commercial banks, cattle adjust to local demands products in turn Inorganic opportunities
insurance and allied and still have a strenghtening brand and benefits from joint
dairy services state‐wide brand visibility venture with Novandie
Key Risks
 High dependency on low margin milk business.
 Increasing competition from co-operatives or private players, either in form of

procurement (by increasing prices to farmers) or selling price (via lower prices).
 Failure to ramp up VADP segment leading as per target.
 Promoters belong to political family, however no impact has been visible in the
business in past.

Capital Conundrums
Table 1: Financial summary (INR mn)

P&L and BS
Revenue 5,880 7,960 9,004 10,961 13,934 16,018 17,220 20,730 23,806 26,429 24,188 28,305 33,396
EBIT 178 (85) 334 224 355 860 770 569 1,044 1,112 988 1,507 2,006
EBIT margin (%) 3.0 (1.1) 3.7 2.0 2.5 5.4 4.5 2.7 4.4 4.2 4.1 5.3 6.0
PAT - Reported 9 (357) 55 11 92 500 453 284 554 668 609 957 1,310
PAT - Adjusted for exceptional items 9 (357) 55 11 92 529 458 284 568 668 609 957 1,310
Adj. PAT margin (%) 0.2 (4.5) 0.6 0.1 0.7 3.3 2.7 1.4 2.4 2.5 2.5 3.4 3.9
Equity 1,189 838 867 863 928 1,417 1,788 1,929 2,399 3,007 3,411 4,164 5,167
Debt 1,536 1,796 1,844 1,860 1,740 1,263 1,415 1,574 1,260 1,584 1,784 1,984 1,784
FATO 7.9 6.2 4.9 5.2 6.4 7.1 7.4 8.2 8.6 8.9 7.0 6.6 6.7
Return Ratios
RoCE 8 (3) 12 8 13 32 26 17 29 27 22 28 32
RoE 1 (35) 6 1 10 43 28 15 26 25 19 25 28
Cash Flow
OCF 84 (89) 314 516 605 973 747 516 1,249 1,119 1,084 1,623 1,946
Capex 1,025 256 265 298 288 296 628 479 666 1,184 1,300 1,200 1,200
Free CF (1,065) (490) (117) 58 138 528 (1) (119) 436 (176) (216) 423 746
Valuation
Market Cap 2,534 623 2,347 2,087 1,614 4,694 4,642 7,642 11,855 24,971
EPS 204 (7,746) 1,196 240 1,993 10,766 9,763 6,112 11,946 14,401 13,130 20,621 28,243
PE 270 0 43 189 18 9 10 27 21 37 54 34 25

Eye (I) on RoCE
CCL products (CCL)

15 2 3.7 50
Revenue CAGR 10% 40
10 PAT CAGR 13% 1 37% CAGR
28% 30
25% 1.6
5 1 1.4
20
12%
10
0 0
FY10
FY13
FY15
FY08
FY09
FY11
FY12
FY14
FY16
FY17
0
Historical RoCE Current RoCE I-RoCE (FY08-
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY 08-11 FY 12-14
(FY08-12) (FY15-17) 17) Revenue Adjusted PAT FY 15-17

30% 10.0 40
15% 1.5
8.0 1.3 1.3
20% 30
6.0
2.6
4.0 20
10%
2.0 2.5 10
0% 0.0
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
0
10 Yr 3 Yr FY 08-11 FY 12-14
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
Why CCL?
Largest manufacturer and exporter CCL Products (CCL) is India’s largest manufacturer and exporter of instant coffee with total
of instant coffee capacity of 30,000 MT p.a. and customer base in >80 countries. The company’s competitive
edge lies in its cost efficient structure, long relationships with customers and focus on value-
added high-margin products, which led to significant RoCE expansion in the past. With large
Vietnam facility ramp up and global opportunity size and higher capacity utilisation at its Vietnam facility, the company is
consequent improvement in embarked on higher growth trajectory going forward. Further, its upcoming facility with
utilisation to drive growth additional 5000MT in India, entry into India with its Continental brand and focus on high-
margin products, CCL is set to witness spike in profitability and RoCE, going ahead.
Fig. 1: Key Drivers

Increase in capacity
utilisation at
Vietnam facility to
fuel higher growth
Proximity to raw Focus on B2C

material, customers branded sales
Focus on B2C branded sales, high and tax benefits at (Continental brand)
margin freeze dried capacity and Vietnam will lead to to improve margins
cost efficiency/ savings to augur cost savings
well for the company going ahead
High margin freeze

Strong competitive dried capacity in
advantage in terms Chittor, India to
of cost efficiency drive margins going
ahead.

Capital Conundrums
Company overview
The company is one of the leading exporters of instant coffee with customers across the 80
countries. 73% of revenues come from India operations while 27% from overseas facility,
mainly Vietnam. CCL has adapted Brazilian technology, purchased from world renowned
pioneers in turnkey instant/soluble coffee technology at its plant. This adaptation of
technology has enabled CCL to produce international quality soluble coffee. The company’s
cost efficient business model, rich experience and long‐standing relationships with
customers give it an edge over competitors.
Commenced commercial
operations in 1995 as a FY15-17 - Successful
export oriented unit To cater to specific entry in the Freeze-
(EoU) with the ability to markets, the company Dried Coffee segment.
import green coffee & has expanded capacity in Focus on domestic
export the same to any Switzerland and Vietnam branded coffee
part of the world, free of during FY11 and FY14, segment via
all duties. respectively. Continental brand
Adapted Swiss and Commissioned

Brazilian Technology, Vietnam green field
purchased from world project of 10000MT
renowned pioneers in in FY14 for
turnkey manufacturing
Instant/Soluble Coffee instant coffee
technology at its Plant.
Fig. 3: Opportunity Size Fig. 4: Growth drivers
•US is the world’s largest coffee

consumer (~23% of global imports)
followed by Germany and Brazil.
~USD28.1bn (FY16) •Evolution of coffee from being an
Global expected to grow to everyday habit to a healthy lifestyle
market USD42.5bn - 4.8% CAGR choice has led to coffee being the
by FY25 most preferred beverage worldwide.
•China converting to coffee drinking
from traditional tea drinking
Instant coffee market population. China now ranks as the
INR13bn divided between 4th largest global market for Ready to
Domestic Nestle and HUL having Drink coffee in terms of volume, and
market ~49-50% market share fifth in terms of value.
each •Instant coffee industry in the
emerging markets is expected to grow
significantly faster in the next five
years.
Source: Industry, Euromonitor, Company, Edelweiss research

Eye (I) on RoCE
Low cost/ high Entry in branded Focus on value added

Capacity in place
customer relationship market segment
India - 20000MT - Cost-efficient business

Entry in the domestic
Utilisation @ ~77%. model, rich experience High margin freeze dried
and long-standing branded coffee segment
Additional freeze dried capacity in Chittor, India to
relationships with via Continental to aid
capacity of 5000MT p.a. drive margins going ahead
customers give it an edge margin expansion.
coming up in FY19
over competitors
Vietnam - 10,000MT - Continental brand Continental brand B2C

Utilisation at ~60% has currently at INR500mn sales stood at INR120mn
significant potential. Vietnam facility has (5% of sales) with target (of total INR500mn) which
Company is targetting for proximity to raw material to reach INR850mn to is targetted to achieve
>85% utilisation by FY18. and customers. INR1.0bn in FY18. ~INR350mn by FY19.
Switzerland - 3,000MT Tax benefits in Vietnam is

(loss making plant expected to propel growth
currently) and lead to significant cost
savings.
Key risks
a) Sharp movement in currency though partly offset by raw material imports which are
75% of total RM.
b) Unfavorable duty structure in other countries may impact competitiveness of supply
from Vietnam/ India.
c) Sub-optimum utilisation at plants due to weak demand.

d) Failure of Continental brand due to adverse customer response to impact financials
adversely.

Capital Conundrums

P&L and BS
Revenue 4,145 4,682 4,375 3,639 5,022 6,507 7,168 8,806 9,321 9,765 11,725 14,040 15,902
EBIT 481 410 527 553 690 945 1,166 1,474 1,776 2,000 2,118 2,800 3,245
EBIT margin (%) 11.6 8.8 12.0 15.2 13.7 14.5 16.3 16.7 19.1 20.5 18.1 19.9 20.4
PAT - Reported 355 174 283 265 362 474 644 940 1,221 1,343 1,488 2,017 2,422
PAT - Adjusted for exceptional items 355 174 283 265 362 474 644 940 1,221 1,343 1,488 2,017 2,422
Adj. PAT margin (%) 8.6 3.7 6.5 7.3 7.2 7.3 9.0 10.7 13.1 13.8 12.7 14.4 15.2
Equity 1,670 1,756 2,009 2,172 2,397 2,784 3,528 4,216 5,098 6,363 7,369 8,745 10,526
Debt 2,247 2,389 2,366 2,501 2,679 3,020 2,921 2,292 2,103 1,420 1,987 1,987 987
FATO 3.7 2.7 1.9 1.6 2.0 2.5 2.4 2.5 2.7 2.6 2.5 2.5 2.7
Return Ratios
RoCE 13 10 12 12 14 17 19 23 26 27 26 28 30
RoE 23 10 15 13 16 18 20 24 26 23 22 25 25
Cash Flow
OCF 362 432 397 196 113 251 1,248 1,047 1,610 1,050 1,913 1,904 2,465
Capex 253 152 448 437 559 378 596 206 872 199 2,000 800 500
Free CF 72 203 -115 -293 -515 -207 559 787 678 813 -87 1,104 1,965
Valuation
Market Cap 1,831 900 3,034 2,529 1,797 3,453 6,764 23,759 25,947 45,535
EPS 3 1 2 2 3 4 5 7 9 10 11 15 18
PE 5 5 11 10 5 7 11 25 21 34 25 18 15

Eye (I) on RoCE
Avanti Feeds (Avanti)

30 3 5.0 150
Revenue CAGR 34% 2
20 PAT CAGR 44% 100
1
63% 67% 10 84% CAGR
0 50
9% 0.9
0 (1) 0.2
FY09
FY10
FY11
FY15
FY16
FY17
FY08
FY12
FY13
FY14
0
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY 08-11 FY 12-14
(FY08-12) (FY15-17) 17)
Revenue Adjusted PAT FY 15-17
(INR bn) Capex (INR bn) PE chart (trailing)

80% 8.0 11% 1.9 30
60% 6.0
20
40%
4.0 7%
20% 26.7 0.6 10
0% 2.0
15.0 0.1 0
-20% 0.0
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY 08-11 (10)
10 Yr 3 Yr
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY 12-14
Why Avanti?
Avanti is the market leader in Shrimp Feeds, Shrimp Processing & Exports and has etched
Market leader with ~42% market for itself an illustrious growth trajectory. Avanti’s continuous focus on R&D for feed
share in feed business formulation along with strong underlying demand for higher-margin shrimp feed have seen
RoCE expand from 5.2% in FY08 to an impressive 62.6% in FY17. Company is targeting
Target to achieve USD1.0bn revenue of USD1bn by FY22 (USD0.4bn) by focussing more on higher-margin value-added
revenue by FY22 by focusing on products in Shrimp processing and exports for which it has collaborated with Thai Union for
value added shrimp processing technical and marketing support. Quality management, superior execution history and
segment increased focus on value added products to sustain high RoCEs and robust profitability
ahead.
Fig. 1: Key Drivers

Technical and
marketing
Collaboration with
THAI UNION.
Strong Dealership Continuous R&D on

Higher utilisation of recent capacity Network to reach feed formulation
out and win trust of relevant for farmers
additions (from 4.25 to 6.0 LTPA in
the farmers
shrimp feed and 7,000 to 22,000
TPA in shrimp processing) to drive
growth ahead
High utilisation Continued Increase in
(currentlly ~70% in capacity (1.75LTPA
feed & ~45% in added in feed &
processing) to help 15000 TPA in shrimp
improve margins/ processing)
RoCEs

Capital Conundrums
Company overview
Avanti is a lead manufacturer of prawn and fish feeds as well as a prominent shrimp
processor and exporter. The company is in joint venture with Thai Union Frozen Products
PCL., (owns 40% stake in Avanti’s frozen shrimp processing subsidiary) the world's largest
seafood processors and leading manufacturer of prawn and fish feeds in Thailand with
integrated hatchery to shrimp & fish processing facilities as well as exports. Technical and
marketing tie-up will strengthen the company’s capabilities in the field of aqua culture, aid
in new value added product development and entry into niche markets like Japan & Russia.
Avanti has four prawns and a fish feed manufacturing units in Kovvur, Vemuluru and
Bandapuram in West Godavari District, Andhra Pradesh and Pardi in Valsad District, Gujarat,
in India. The company produces nutritionally well balanced and high quality feed catering to
Indian prawn and fish farmers, at their door steps. The shrimp processing and exports unit
is located in Gopalapuram near Ravulapalem, East Godavari District of Andhra Pradesh,
India and conforms to HACCP, USFDA, EU and BRC Global standards.
Chart 1: Revenue segments
FY 12 Shrimp FY 17
Shrimp Processing
Processing 14.1%
30.6%
Shrimp
Feed
69.4% Shrimp
Feed
85.9%

Eye (I) on RoCE
1994
IPO to part finance 2009-12
2016-17
10000 tpa Shrimp Feed Outbreak of Early
Capacity in Kovvur and Mortality Syndrome Divested it's Shrimp
entered into technical (EMS) in South Asian Processing Division
collaboraton with countries and Shrimp to it's subsidiary
Pingtai Enterprises Co, aquaculture wave AFFPL to tie up with
Taiwan starts in India Thai Union
1998-2000 2013-14 2017-18

Increased the Expansion of Addition of 1.75
installed capacity of Shrimp Feed LTPA shrimp feed
feed plant to Capcity in Gujarat capacity (total 6.0
20,000 MTPA and and AP from 1.1 LTPA) and 15000 TPA
made it backward lakh MTPA to 2 shrimp processing
integrated lakh MTPA capacity (total 22000
TPA)

USD 3.1 bn as on 2016 and
India's Shrimp
expected to reach USD 7
Export Market bn by 2022
•Seafood consumption is
Indian Seafood Shrimp increasing world-wide
Export market USD 4.7 bn as on 2016 Market •Changing preference towards
size shrimp within seafood
•International acceptance of
Indian quality of Seafood
FY17 exports (mainly shrimp
Avanti's processing) stood at
export INR3.5bn (~USD55mn) -
mere 2% of India's exports
Source: Company, IMARC, GOAL, Industry, Edelweiss research
Global demand-supply equation

Global shrimp market stood at around ~4-4.5mn tonnes in 2017 expected to grow at CAGR
of 2.8% in next 5 years. Of the total ~4-4.5mn global shrimp production, China accounts and
Southeast Asian countries (mainly Thailand, Indonesia & Vietnam) account for >70% of
shrimp production followed by US and India at ~20% and 10% respectively.
China shrimp exports to world markets have been declining since FY13 led by rising local
demand and consumption. This has led to significant demand in world shrimp market. On
the other hand US shrimp imports for Thailand declined significantly from 2010-2014 with
slight recovery in following years, consequently India and Indonesia have emerged as top
exporters to US.

Capital Conundrums

Largest player in Major Capacity Tie Up with Thai
Shrimp Feed and Rampup Union Frozen R&D and other Focus:
Processed Shrimp Products PCL
Additional capacity Collaboration for Continuous R&D to
Largest produceer of 1,75,000 tpa of
of Shrimp Feed with processing and modify feed
Shrimp Feed by export of marine formulation as per
Capacity of 4,25,000 March'18
tpa products, feed and farmer
hatchery requirements
New Processed
Shrimp capacity of Guiding the farmers
Largest exporter of Support for in seed
15,000 tpa marketing
Processed shrimp including value selection,culture
with capacity of challenge in U.S, practices through
added products major exporting
7,000 tpa started in Aug'17 qualified and
hub for shrimp and experienced
value added technical staff.
exports
Setting up INR 400
Mn Shrimp Seed State of art
Hatchery as part of technology, quality
backward Partnership with consciousness,
integration plan. Thai Union to aid in excellent storage
Operations to developing new facilities, logistics
commence in FY19 vaue added capabilities, timely
products and cater deliveries and
to nicher markets commitment to
like Japan, Russia. customer
satisfaction
Key Risks
 Sharp fall in global shrimp prices leading adverse financial impact.
 Any major disease may affect the shrimp culture in India.
 Rising competitive intensity – led by increase in capacities by new entrants and

domestic players/ government owned agencies getting aggressive in feed pricing.
 Failure to scale up value added Shrimps processing segment.

Eye (I) on RoCE

Particulars FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17
P&L and BS
Revenue 1,028 730 962 2,077 3,934 6,480 11,316 17,807 20,183 27,327
EBIT 63 (28) 8 99 446 492 1096 1815 2377 3400
EBIT margin (%) 6.1 (3.9) 0.9 4.8 11.3 7.6 9.7 10.2 11.8 12.4
PAT - Reported 9 (70) (12) 35 281 302 697 1,166 1,590 2,267
PAT - Adjusted for exceptional items 9 (70) (12) 35 286 313 697 1,155 1,551 2,267
Adj. PAT margin (%) 0.9 (9.6) (1.3) 1.7 7.3 4.8 6.2 6.5 7.7 8.3
Equity 693 681 669 695 947 1,251 1,796 2,652 4,206 6,358
Debt 407 380 341 545 496 611 561 584 107 194
Capital Employed 1,099 1,061 1,010 1,240 1,443 1,862 2,357 3,236 4,313 6,552
FATO 1.4 1.4 3.0 7.2 14.4 18.5 24.1 27.7 24.2 28.2
Return Ratios
RoCE 5 (3) 1 9 33 30 52 65 63 63
RoE 1 (10) (2) 5 34 27 46 52 46 43
Cash Flow
OCF 172 93 39 (77) 504 (206) 556 893 1,220 2,917
Capex 4 0 6 128 114 128 354 163 663 1,071
Free CF 118 55 2 (251) 358 (368) 167 717 538 1,820
Valuation
Market Cap 193 116 180 290 766 909 4,722 13,961 18,087 33,662
EPS 0 (2) (0) 1 7 7 16 26 35 47
PE 22 0 0 8 3 3 7 12 11 16

Capital Conundrums
La Opala RG

1.8 40
Revenue CAGR 18%
PAT CAGR 28% 1
2 30
0 62% CAGR
0.8 20
30% 33% 1
0
0.3 10
15%
0 -
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
0
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY 08-11 FY 12-14
(FY08-12) (FY17) 17) Revenue Adjusted PAT FY 15-17

50% 3.0 29% 0.6 80
40%
2.0 20% 60
30% 0.4
20% 3.3 40
1.0 0.2
10% 2.5
20
0% 0.0
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
0
10 Yr 3 Yr FY 08-11 FY 12-14
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
Why La Opala?
La Opala RG (LOG) the pioneer of the Indian opal-ware market has built brands to help it
Pioneer in opal-ware market with emerge as the strongest competitor in the tableware space. LOG has managed to build a
strong brand led by huge A&P strong network through lucrative trade margins and demand for their brands built through
spend (12.4% of sales) incessant A&P spends (INR326mn, 12.4% of sales) wherein it has tried to change
consumption habit to ‘impulse’ from ‘need-based’. Successfully implementing
premiumisation approach (higher contribution from premium brands) has enabled margin
expansion in a capital efficient manner. We believe LOG has the potential to tap into the
underpenetrated and unorganised tableware space in India and we expect it to consistently
deliver higher returns on its ability to leverage its strong pan-India distribution network,
while expanding its product portfolio at lower incremental cost.
Fig. 1: Key drivers

New product
launches every
year, while offering
the best value
proposition
Investment in state-
of-the-art technology Premiumisation
and equiment to approach will drive
Growth driven by premiumisation, drive better asset margin expansion
new launches and eyeing the turn and RoCEs
underpenetrated and unorganised
tableware market
Strong brand recall GST to drive shift
due to aggressive from large
brand spending unorganised market
(12.4% of FY17 in table ware
sales) segment

Eye (I) on RoCE
Company overview
LOG is engaged in the manufacture of opalware and crystalware products. The company
offers opal glass tableware products across the value chain, such as, plates, bowls, dinner
sets, cup-saucer sets, coffee mugs, coffee cups, tea sets, soup sets, pudding and dessert sets
as well as crystal-ware products comprising barware, vases, bowls and stemware under
various brand names including Diva, Solitare Crystal (premium brands) and La Opala (mass
market). LOG has two manufacturing facilities located at Madhupur, Jharkhand and
Sitargunj, Uttarakhand with combined capacity of 21,000MTPA.
2007 2016
1988 Set up fully automatic Completed major
state-of-the-art plant at expansion at Sitargunj
Commenced operations and plant , Uttarakhand
Sitargung, Uttarakhand, to
set up first opalware glass adding 62% to its
produce opal glass
plant at Madhupur, Bihar installed capacity
tableware
1996 2008
Pioneered 24% lead Launched 'Diva', a hi-
cystal glassware tech, world class opal
technology and brand in the premium
launched it under segment
'Solitaire' brand in India
INR 16.2bn in FY17 and •Rising disposable income

Table ware
expected to grow to •Increasing propensity to spend
market size INR25bn in FY20 •Rising working population
•Change in customer preferences
Opalware Market •GST-led shift of market share from
unorganised to organised
INR4bn in FY17 and
Opalware
expected to grow to
market size ~INR7bn in FY20

Capital Conundrums

Market leadership Favourable product
Strong distribution
in opalware mix led by Brand building
reach
segment premiumisation
First mover advantage Constant updation of Strongest brand equity Robust network of 225
in opalware market product portfolio to due to high brand spend distributors and 12,000
having presence since cater to changing over the years (FY17- retail partners leading ot
1988 customer preferences 12.4% of sales) pan-India presence
Brand building done

Gaining prominence Products accross Strength aided by lucrative
through mass media ad
of opalware as segments offering trade margins and strong
campaigns, celebrity
against plastic and widest price range brand equity
endorsements and
steel ware due to promotional campaigns
broader customer Share of premium
acceptance brands to overall
revenue has improved Brand positioning to Increased focus on
over the years driving cater to aspirational modern retail and
Market characterised margin expansion class of consumers and ecommerce, which
by large unorganised develop impulse based account for 8% and 5% of
segment; potential consumption habit revenue share,
beneficiary of the respectivley
Focus on offering value-
GST-led shift
for-money proposition
(eg: recently launched
"Quadra" value for
money brand )
Source: Company, Industry, Edelweiss research
Key Risks
 Change in consumer fashion/trend preference and failure to adapt to it.
 Consumer slowdown and weak discretionary spending
 Increasing Competitive Intensity and threat from Chinese imports in absence of anti
dumping duty.
 Rising power & fuel cost could impact profitability.

Eye (I) on RoCE

P&L and BS
Revenue 509 620 750 964 1,150 1,539 1,779 2,233 2,493 2,630
EBIT 35 58 91 169 224 367 440 566 789 757
EBIT margin (%) 6.8 9.4 12.1 17.5 19.5 23.8 24.8 25.3 31.6 28.8
PAT - Reported 10 8 28 93 126 229 300 417 587 550
PAT - Adjusted for exceptional items 10 8 28 93 127 229 300 417 587 550
Adj. PAT margin (%) 2.0 1.3 3.7 9.7 11.0 14.9 16.8 18.7 23.6 20.9
Equity 353 362 380 454 555 741 978 1,854 2,320 2,736
Debt 334 446 390 291 251 297 142 79 61 1
Capital Employed 687 808 770 744 807 1,038 1,120 1,932 2,381 2,738
FATO 2.1 1.5 1.3 1.8 2.3 3.1 3.2 3.3 3.6 3.1
Return Ratios
RoCE 6 8 11 22 29 40 41 37 37 30
RoE 3 2 7 22 25 35 35 29 28 22
Cash Flow
OCF 52 (37) 141 158 143 311 393 467 610 691
Capex 160 16 35 21 47 215 161 77 446 125
Free CF (128) (94) 66 111 72 60 201 382 155 558
Valuation
Market Cap 275 161 424 630 1,140 3,336 7,508 20,935 32,934 29,862
EPS 0 0 1 2 2 4 6 8 11 10
PE 27 20 15 7 9 15 25 50 56 54

Capital Conundrums
KPR Mills

32 4.0 60
Revenue CAGR 19%
24 PAT CAGR 17% 3.0 9.9 33% CAGR
9.0
40
16 2.0
19% 20%
8 1.0 3.4 20
8%
0 0.0
FY09
FY10
FY13
FY14
FY17
FY08
FY11
FY12
FY15
FY16
FY09
FY11
FY14
FY16
FY18
FY08
FY10
FY12
FY13
FY15
FY17
(FY08-12) (FY15-17) 17) FY 08-11 FY 12-14

25% 25 7.2 20
20% 20 12% 5.8
5.2 15
15% 15
10% 10 2.2 10
1.6
5% 5 5
0% 0 0
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY12
FY14
FY16
FY08
FY09
FY10
FY11
FY13
FY15
FY17
FY18
10 Yr 3 Yr FY 08-11 FY 12-14
Why KPR?
KPR Mills (KPR), one of the vertically integrated manufacturers, has expanded its capacity in
Vertically integrated and largest the last decade to become the largest garment producer in India. It is clearly moving up the
garment producer moving up the value chain led by rising share of high-margin garment business from 15-16% in FY13-14 to
curve by focusing on high margin ~26% of revenue in FY17, leading to higher profitability and RoCE. With sharpened
garment segment management focus on further enhancing share of the garments and strong balance sheet, KPR
is poised to clock higher margins, profitability and RoCE going forward.
Fig. 1: Key Drivers

Focus on high margin
(>20%) garment
segment (~26% of FY17
revenue - entirely
exports)
Increase in garment Stable margins due to

capacity and higher vertical integration (from
utilisation to help yarn to readymade
improve margins and garments)
Stable margins, low cost, and RoCE
higher capacity utilisation to spur
growth and profitability ahead
Increase in labor and Low cost and

production cost for uninterrupted power
China to help Indian supply due to captive
manufacturers wind and co-gen plants

Eye (I) on RoCE
Company overview
KPR has one of the largest vertically integrated manufacturing capacities in India producing
superior quality readymade knitted apparel, fabrics, compact, melange, carded & combed
yarn. Other businesses, contributing less than 15% to revenue, are sugar (molasses & co-gen
power), auto and cotton waste. The company has 11 manufacturing facilities in Tamil Nadu
and one in Karnataka. Exports contributed ~40% to FY17 revenue.
Chart 1: Segmental revenue split
FY 13 FY 17
Others Garment Others
10% 16% 14% Garment
26%
Fabric
14%
Fabric
15%
Yarn Yarn
60% 45%
Note: Others include sugar (molasses & co-gen power), auto and cotton waste
1980-2000
Commenced operations 2010-2013 2015-2017
in Coimbatore in 1984, Expansion of spiinnig Set up another green field
started exporting capacity, garment unit with 36mn
garments from Tirupur, mordernisation of mills, pcs capacity and new Eco-
Set up first spinning unit Melange yarn project (in friendly Processing
at Sathyamangalam in 2012) and Co-gen sugar capacity with Advanced
1995. plant. Technology - 9000 MT.
2000-2010 2014-15
Added 3 more spinning New green field garment
mills taking capacity capacity with 12mn pcs.,
from 6,000 spindles to expansion of garment
more than 200,000 facility in Arasur by 10mn
spindles. Started pcs.
knitting and garmenting
facility in 2005 with
captive windmill.

Capital Conundrums
•Largest source of employment

•Contributes 14% to the industrial
production and 4% to GDP
Textile Overall market size of •Structural growth drivers (higher
market size USD120bn disposable income, increased
penetration, booming e-commerce
Domestic industry & retail sector, changing lifestyles)
•Incremental market share gains
from unorganised players (~70%)
Expected to grow @12%
Branded
CAGR and reach
apparel USD180bn by 2020
•Accounts for nearly 15% of India’s
total exports.
•Developed nations largely on the
consumption side as manufacturing
widely present in low cost nations
like China (dominant player), India,
Vietnam and Bangladesh.
•Rising labor and manufacturing cost
in china, increased environmental
Exports market compliance and changing currency
dynamics (yuan appreciation and
INR depreciation vs. USD) benefiting
Indian manufactures

Cumulative capacity
Captive power Greeen field Garment Value added yarn
of 3,53,616 spindles
generation mfg facility segment
to produce
66 windmills with Successfully Upgraded enitre

90,000MT of yarn &
total power commissioned green yarn facility to value
27,000MT of fabrics
generation capacity field garment mfg added/ speciality
knitting facility p.a.
of 61.92MW facility yarns
Garmenting facility Co-gen Cum Sugar Commenced Strong shift over the
of 95mn pieces p.a. Plant with a capacity operations of eco- years towards value
(largest garment of 30MW and friendly facility added yarns like
producer in India); 5,000TCD. which reduces Compact, Melange,
water consumption Carded & Combed
by 30% and lowers Yarn
overall cost
ETP embedded
fabric processing
unit with 18,000MT
p.a.

Eye (I) on RoCE
Key risks
a) Adverse movement in key raw material - Cotton prices which have been volatile and
has high dependency on monsoon, sowing and consequently the supply of cotton.
Chart 2: Cotton prices
160.0
Cotton prices (INR/kg)
140.0
120.0
100.0
80.0
60.0
FY10Q4 FY11Q4 FY12Q4 FY13Q4 FY14Q4 FY15Q4 FY16Q4 FY17Q4
Source: Ministry of textiles, Edelweiss research
b) Adverse currency movement impacting profitability (exports stood @~40% of sales).
c) Weak demand & failure to ramp up garment facility leading to adverse financial impact.
d) Change in domestic or international regulations (eg: FTAs, TUFs, environmental

regulations) to adversely impact demand and profitability.

Capital Conundrums

P&L and BS
Revenue 5,740 7,182 8,032 11,074 12,654 16,647 23,710 25,658 26,005 28,166
EBIT 1,002 567 967 1,258 831 2,421 2,966 3,073 3,414 4,414
EBIT margin (%) 17.5 7.9 12.0 11.4 6.6 14.5 12.5 12.0 13.1 15.7
PAT - Reported 793 101 504 722 328 1,030 1,417 1,736 2,107 2,868
PAT - Adjusted for exceptional items 793 101 504 722 328 1,030 1,417 1,736 2,107 2,868
Adj. PAT margin (%) 13.8 1.4 6.3 6.5 2.6 6.2 6.0 6.8 8.1 10.2
Equity 5,087 5,099 5,362 5,964 6,225 7,063 8,145 9,452 11,006 12,860
Debt 6,445 5,289 4,550 7,155 8,019 10,082 9,620 8,243 8,827 7,790
FATO 1.1 1.0 1.0 1.4 1.6 1.7 2.0 2.0 2.1 2.4
Return Ratios
RoCE 11 5 10 11 6 15 17 17 18 22
RoE 19 2 10 13 5 16 19 20 21 24
Cash Flow
OCF (403) 1,547 1,570 638 2,611 2,145 4,219 3,101 2,048 4,770
Capex 2,262 300 441 2,790 2,465 2,535 2,240 1,274 1,974 1,983
Free CF (2,841) 863 855 (2,453) (325) (1,272) 878 1,015 (556) 2,150
Valuation
Market Cap 3,685 791 4,217 6,698 3,203 3,894 4,546 18,124 31,325 48,619
EPS 11 1 7 9 4 14 19 23 28 39
PE 5 8 8 9 10 4 3 11 15 17

Eye (I) on RoCE
Nilkamal
20 (INR bn) 1.5 OCF (INR bn) Market cap (INR bn)
Revenue CAGR 15% 40
16 PAT CAGR 37% 1.2 4.6
25% CAGR
12 0.9 30
3.1
26% 8 0.6 20
21% 1.8
16% 4 0.3 10
0 0.0
0
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY08
FY09
(FY08-12) (FY15-17) 17) FY 08-11 FY 12-14
30% (INR bn) 10.0 Capex (INR bn) PE chart (trailing)

8% 2.8
8.0 25
20% 20
6.0 1.8
1.3 15
4.0 6.0
10% 8% 10
2.0
5
0% 0.0 5.7
0
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
10 Yr 3 Yr FY 08-11 FY 12-14
Why Nilkamal?
Nilkamal is undisputed leaders with market share more than double its closest rival. The
company has been laying emphasis on expanding its distribution reach in past couple of
Undisputed leader in plastic years. Moderate growth in moulded furniture segment (8% volume growth) amid a
furniture segment, focusing on challenging environment is expected to further accelerate. Nilkamal’s newly introduced
expanding reach and new products mattress segment targets to grow 4x in three years from INR480mn (2.5% of sales) in FY17.
launches Strong new product launches (25-30 products across categories) and increased focus on
ready furniture segment along with significant expansion in distribution network (40% CAGR
in past three years) will lead to higher growth, margins and RoCE going forward.
Fig. 1: Key Drivers

Focus on three verticals
i.e. Moulded Furniture,
Ready Furniture and
Mattress to deliver
doubel digit growth
Prudent expansion in
@Home stores - closed Continued focus on
10 non-profitable expanding distribution
Focusing key segments (furniture
stores. Currently have reach (~3x /40% CAGR
and mattress), prudent retail store 17 large format stores in past 3 yrs)
expansions and new product and 8 shop-inshop.
launches to drive growth ahead
New product launches

across categories. 4x growth targetted
New models launched by management in
in high margins mattress business
premium range

Capital Conundrums
Company overview
Nilkamal is a leading manufacturer of plastic products. The company’s core business
includes material handling solutions, moulded furniture, mattress, Home Ideas (the home
furnishing store) and @home, the mega home store retail chain. Plastic segment contributes
almost 90% of total revenues and includes material handling and moulded furniture
business. The company has eight large manufacturing plants across India.
1990 to 2000 - Begins 2010 to 2017 -

Started in 1934 by Shri. moulded furniture Established as undisputed
Vrajlal Parekh, company manufacturing plant in leader in moulded
forayed in full fledged Sinnar, Maharashtra. furniture segment,
household items by 1964. Opens 3 new plant in @Home chain spread
Started factory at Powai in North, South and West across country with 16
1970. India. large format stores.
Begins creates 2000 to 2010 - Starts

manufacturing in 1984 new plant in West
and becomes official bengal, Inaugration of
crates supplier to Coca "@home" retail chain,
Cola and Pepsi in 1994. entered JV with BITO
Lagertechnik Bittman
GmbH,Germany.
•Per capita consumption of plastic

is expected to double in the next
5 years.
•Accelerated shift towards
organized Ready Furniture sector
Furniture INR750bn - of which 85% due to better aesthetics
industry unorganised Plastics business, /design/quality/scalability in
moulded furniture & manufacturing/paucity of labour
matress segment & time
•GST to help the growth of the
Mattress Organised market size of organized sector due to expected
segment INR32bn expected to grow reduction in unorganized sector
at 12-15% p.a. sales due to stringent statute
compliance.

Eye (I) on RoCE
Newly entered
Leadership in Ready furniture Widening distribution
mattress segment
moulded furniture segment growth reach
focus
Market leader with 980 channel Integration of

Large unorganised mattress business
more than double partners, 15000
market (85%) with helped higher
market share than dealers and 40
higher market share growth in furniture
next competitor depots.
segment (44% YoY
growth)
Investing in a range Offers a range of 450 Commissioned 33

of differentiated products helping in DODOs (Dealer Current
products to fill in the growing higher than Owned Dealer manufacturing
product gap industry Operated) stores facility in Southern
and Eastern part of
country
@home has 17 large 15 “Nilkamal Home
Thrust continues to format stores, one Ideas” stores ranging
be on expanding Go-to-Market store Plans to enlarge
from 4,000-8,000
reach/distribution and 8 shop-in-shop footprint by setting
sq.ft in various 2-3
and brand recall stores (Shoppers up in North and west
tier cities
Stop), across 14 in FY18-19
cities.
Key risks
a) Raw material price volatility (mainly crude oil) could impact margins and profitability
due to stiff competition and inability to quickly pass on to customers.
b) Weak demand and strong competition from unorganised players.

c) Failure to ramp up “@Home” retail stores leading to low/ negative returns on
investments.

Capital Conundrums

P&L and BS
Revenue 8,379 9,513 10,950 13,181 15,165 17,022 17,418 18,946 19,265 20,240
EBIT 639 719 1,046 1,049 1,193 926 1,084 1,033 1,808 1,872
EBIT margin (%) 7.6 7.6 9.6 8.0 7.9 5.4 6.2 5.5 9.4 9.2
PAT - Reported 544 110 521 542 619 379 476 513 1,085 1,192
PAT - Adjusted for exceptional items 78 110 521 542 619 379 476 513 1,085 1,192
Adj. PAT margin (%) 0.9 1.2 4.8 4.1 4.1 2.2 2.7 2.7 5.6 5.9
Equity 2,005 2,105 2,536 3,595 4,141 4,449 4,868 5,250 6,275 7,419
Debt 3,381 3,856 2,876 3,054 3,689 4,081 3,240 2,090 1,050 830
FATO 7.8 5.5 4.5 5.4 5.9 5.4 4.9 5.2 5.8 7.0
Return Ratios
RoCE 15 13 18 17 16 11 13 13 25 24
RoE 33 5 22 18 16 9 10 10 19 17
Cash Flow
OCF 155 443 733 487 654 740 1,732 1,671 1,826 1,142
Capex 1,069 397 202 1,143 882 572 338 160 394 788
Free CF (1,229) (439) 258 (976) (629) (281) 961 1,183 1,225 209
Valuation
Market Cap 2,430 573 3,298 4,481 3,203 2,561 2,944 6,300 16,492 29,122
EPS 39 8 40 36 41 25 32 34 76 82
PE 5 5 6 8 5 7 6 12 14 24

Eye (I) on RoCE
Blue Star
50.00 3.0 80
40.00 PAT CAGR 6% 2.0
60 8% CAGR
30.00 1.0 3.1
82% 20.00 0.0 40
10.00 (1.0) 20
14% 20% 0.00 (2.0)
0
FY09
FY12
FY15
FY08
FY10
FY11
FY13
FY14
FY16
FY17
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
(FY13-15) (FY16-17) 17) Revenue Adjusted PAT FY 16-17 FY 13-15

130% 15.0 80
1.5
80% 10.0 60
40
30% 5.0 4% 15.9
0.5 20
14.6
-20% 0.0 0
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
5 Yr 2 Yr
Equity Debt RoCE Avg EBIT margins Avg FATO (x) FY 16-17 FY 13-15
Why Blue Star?

Blue Star is India's leading air conditioning (AC) and commercial refrigeration company. Its
Leading commercial refrigeration integrated business model - manufacturer, contractor and after-sales service provider,
company, increasingly focusing on enables it to offer end-to-end solution to its customers, which has proved to be a significant
high margin/ RoCE segments like differentiator in market place. Blue Star is among the lead players in commercial
room ACs, water purifiers, air refrigeration and HVAC (>30% market share) segments. The company is incrementally
coolers and purifiers focusing on the high-margin and high-RoCE unitary products segment where it offers room
ACs (11.5% market share in FY17, up from 6% in FY13), air coolers and air & water purifiers.
With higher share of unitary products, focus on gaining market share and strong growth
drivers, we expect Blue Star to maintain momentum in growth, profitability and RoCE.
Fig. 1: Key drivers

Inverter technology and energy Focus on high-RoCE
efficient products driving growth unitary segment (room
ahead, strong demand led by ACs, water pruifiers, air
coolers and purifiers)
Government’s Infra push and Tier
II/III/IV cities in MEP segment Demand from tier-
II/III/IV cities with the Inverter technology
shopping malls, retail and energy-efficient
complexes, airports products driving
lending further higher growth
impetus to growth
Market leader in
Goverment's infra
MEP business;
push to aid medium
superior project
term growth at the
management
metros, airports,
capabalities and
etc
execution skills

Capital Conundrums
Company overview
Blue Star is India's leading AC and commercial refrigeration company, with five
manufacturing facilities, 2,200 dealers and 600 retailers. The company’s integrated business
model - manufacturer, contractor and after-sales service provider, enables it to offer end-
to-end solutions to its customers, which acts as a major differentiator in market. Blue Star
recently forayed into the residential water purifiers business as well as air purifiers and air
cooler segments. The company also has expertise in allied contracting activities, such as,
electrical, plumbing, fire-fighting and industrial projects on account of which it offers
turnkey solutions, apart from executing specialised industrial projects.
Chart 1: Segmental revenue split
FY 13 FY 17
PEIS PEIS
6% 4%
Unitary
33%
Unitary
45%
EMP
51%
EMP
61%
* EMP - Electro Mechanical Projects and Packaged Air-conditioning Systems

* PIES - Professional Electronics and Industrial Systems
Source: Company, Edelweiss reserach
Unitary products include rooms ACs, commercial refrigerant products, water purifiers, air
purifiers and air coolers. In past five years, Blue Star has seen increase in revenue
contribution from high-margin and RoCE (10% EBIT margins/>75% RoCE vs. 4%/25-30% in
EMP) unitary products from 33% to 45%. The company has improved its market share in
this segment from 6%/7.5% in FY13/14 to 11.5% in FY17, and targets to achieve 12-13%
market share by expanding reach.

Eye (I) on RoCE
Added first HP plant in Today its established as a

2005, and in-house manufacturer of India's
expertise helped meet widest range of ACs &
Started in 1940s, from a the rising demand for refrigeration products
small office in Mumbai, room ACs. Largest from its five plants. The
Blue Star expanded manufacturing unit was company plans to setup
operations by setting up a set up in 2008 at two more production
plant in the mid 1960s Himachal Pradesh facilities giong ahead
Inaugrated world class Second HP factory was

factory in Dadra in inaugurated in 2011,
1997, replicated the then expanded capacity
sucess in two other for refrigeration
locations (Himachal products at another
Pradesh [HP] and plant in Ahmedabad in
Ahemdabad) 2012, driven by the
growth in ice creams,
frozen foods and dairy
segments
•Infrastructure investments with the government

spending expected to drive growth in medium term.
Central Overall market size at •Metros rail, healthcare, education, airports, light
AC INR65bn industrial projects & commercial offices would see
significant capex.
•investments in tier-II/III/IV cities' shopping malls,
HVAC retail complexes, airports, etc., to lend further push
to growth.
Room ACs- INR120bn,
Air coolers - INR30bn,
Unitary
Air purifiers - •Low penetration in India at 4% versus 25% in China
products INR1.8bn, water and global average of 30% exhibits huge scope for
purifiers - INR42bn growth ahead.
•Shift in consumer preference towards energy-
Unitary efficienct and inverter ACs.
products
•Inverter AC the next growth driver - currently small
at11% of market (20% for Blue Star) and growing at
fast pace.
•Rising disposable incomes of the growing middle-
class consumers & enhanced demand from tier
III/IV/V markets.

Capital Conundrums

Leading MEP and
Commercial
commercial Decades of Unitary products -
refrigeration - leader
refrigeration experience high focus area
in most segments
company
Expertise of over seven Installed base of over Wide range of

Employee strength: decades in system 2mn units; products commercial
2,700; network of 35 design, contracting, available at 4,200 refrigeration
offices, 2,200 dealers installation and outlets in more than equipment and is
and 600 retailers maintenance; expert 650 locations across market leader in most
turnkey solution the country segments
provider
Focus on inverter
Presence in 19 global technology, energy - Products with latest
markets in the Middle Significant market fficient products, technology &
East, Africa and South share in segments, such residential as well as innovative features
Asia. Five modern as, Industrial, corporate & (eg: deep frezers,
manufacturing facilities Infrastructure, Metro, commercial customers bottle coolers, cold
Power, Hospitality, rooms, professional
Education, IT/ITeS, kitchen & healthcare
Design, supply, Retail and Healthcare Entered residential refrigeration,etc)
installation & water purifiers
commissioning of business in 2016 -
turnkey industrial offers premium &
Superior project
projects. Holds 30% differentiated range of
management
market share in HVAC RO+UV+UF products.
capabilities resulting in
segment (37% of Investing in recently
on-time delivery, high
industry) launched air purifiers
project quality and
seamless coordination
at all levels
Key risks
a) Intense competition led by entry of global players (Daikin, Hitachi, etc) due to growth
potential in India.
b) Currency fluctuation, leading to higher cost of imports.
c) Weak demand, delays in order inflow and execution risks in MEPPACS segment.
d) Commodity price pressures (key raw materials include copper, steel and gases).

Eye (I) on RoCE

P&L and BS
Revenue 21,967 25,026 24,984 29,807 28,204 29,240 29,343 31,819 37,980 43,877
EBIT 2,496 2,555 2,711 2,562 (313) 935 1,305 1,326 1,875 1,964
EBIT margin (%) 11.4 10.2 10.9 8.6 (1.1) 3.2 4.4 4.2 4.9 4.5
PAT - Reported 1,741 1,803 2,115 1,583 (1,046) 381 739 505 1,048 1,220
PAT - Adjusted for exceptional items 1,741 1,803 1,975 1,579 (1,046) 381 741 920 1,167 1,220
Adj. PAT margin (%) 7.9 7.2 7.9 5.3 (3.7) 1.3 2.5 2.9 3.1 2.8
Equity 2,621 3,665 4,917 5,112 3,953 4,007 4,785 4,556 6,304 7,571
Debt 365 273 660 4,445 3,974 4,216 4,944 3,977 3,647 2,211
FATO 20.8 19.9 15.4 15.5 14.4 14.6 13.5 13.2 14.8 17.0
Return Ratios
RoCE 83 74 57 34 (4) 12 15 15 20 20
RoE 73 57 49 32 (23) 10 17 11 19 18
Cash Flow
OCF 1,338 1,896 911 (1,132) 2,441 262 666 2,149 2,567 1,585
Capex 1,125 851 239 505 529 244 (57) 352 486 1,060
Free CF 213 873 587 (1,889) 1,196 (519) 187 1,301 1,652 143
Valuation
Market Cap 37,467 13,922 32,647 33,443 16,953 14,192 18,104 27,682 34,510 66,211
EPS 19 20 24 18 (12) 4 8 6 12 13
PE 22 8 15 21 0 36 24 51 33 54

Capital Conundrums
Jamna Auto
16 (INR bn) 1.5 OCF (INR bn) Market cap (INR bn)
40
12 Revenue CAGR 17% 1.0
2.3 30
PAT CAGR 29% 31% CAGR
8 0.5
20
85%
4 0.0
48% 2.2 10
16% 0 (0.5) 0
FY08
FY15
FY16
FY17
FY09
FY10
FY11
FY12
FY13
FY14
FY09
FY11
FY16
FY18
FY08
FY10
FY12
FY13
FY14
FY15
FY17
(FY13-15) (FY15-17) 17) Revenue Adjusted PAT FY 16-17 FY 13-15

60% 5 1.6 40
11%
4
40% 30
3 7%
2 0.6 20
20% 5.4
1 10
4.8
0% 0 0
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
5 Yr 2 Yr
Equity Debt RoCE Avg EBIT margins Avg FATO (x) FY 16-17 FY 13-15
Promoters stake (%): 47.9 Instituitional holding (%): 11.7 Daily Volume (mn shares): 2,189.5
Why Jamna Auto?

Jamna Auto (JAI) is market leader (64% market share) in the conventional leaf spring and
parabolic spring segments for the domestic commercial vehicle (CV) industry with nine
Leader in conventional leaf spring state-of-the-art and strategically located plants driving cost efficiencies through customer
and parabolic segment (64% market proximity. It aims to raise its revenue mix from new products (including parabolic springs)
share) and ventured into air suspension and lift axle segments to derisk it’s product portfolio from
end segment cyclicality. The company is also building and scaling up capacities in export
markets and focusing on gaining presence in the aftermarket segment to benefit from GST-
led shift from unorganised to organised players. Being the industry leader, JAI is expected to
be biggest beneficiary of recovery in the domestic M&HCV cycle.
Fig. 1: Key drivers
Strong top-line
growth led by
MHCV recovery
Leveraging on Focusing on gaining

technical assistance share in aftermarket
Beneficiary of MHCV demand, focus programme with sales market
on aftermarket sales and cost Ridewell Corporation, dominated largely by
efficiency driving margins and USA, to introduce unorganised players
suspension products
profitability
Cost-effecient Customer proximity

approach to manage through multiple
cyclicality in end- location
segment manufacturing

Eye (I) on RoCE
Company Overview
Jamna Auto Industries (JAI) is India's largest, and the world's third largest manufacturer of
tapered leaf and parabolic springs for automobiles. The company was the first to introduce
parabolic springs in India and has been a trusted and preferred supplier of Leaf and
Parabolic Springs to all major CV manufacturers for over 50 years. The Company is fast
expanding its presence in new-generation products, like air suspension and lift axle. It is
leader with 64% market share in India’s OEM segment and manufactures over 410 modes of
springs for OEMs. JAI has nine strategically located facilities at Yamuna Nagar, Malanpur,
Jamshedpur, Pune, Chennai, Pilliapakkam, Hosure and Pant Nagar, Lucknow ( both under a
subsidiary). The company’s vision is to become a global leader in automobile suspension
solutions.
2010
Enters technical 2013
1988-99
assistance agreement Lift axle and air
Launches parabolic with Ridewell suspension products
springs and expands Corporation (USA), for launched with
production to Central air suspension and lift agreement to supply
and South India axle to Ashok Leyland
2007 2012 2013-15

Strategic Launches Capacity
acquisition of Tata ’Lakshya’, an expansion at
Motors' springs aggressive internal Malanpur and
manufacturing strategic plan for Hosur plants
plant in global leadership
Jamshedpur and sustainable
growth
Fig. 3: Opportunity Size Fig. 4: Growth Drivers
•Upcycle in CV demand
Leaf spring Market size of •Higher adoption of parabolic
market size INR18bn as on FY17 springs due to increased level of
modernisation expected in Indian
truck industry
OEM industry •GST-led shift of market share
from unorganised to organised
0.7 mn units in FY17 segment in aftersales market
CV market
set to grow at 15%
size CAGR over FY 17-20E

Capital Conundrums
Focus on new R&D capabilities

Customer proximity
Market leader products and new and technical
and cost effeciency
markets collaboration
Indigenous R&D
Market leader in the Aims to raise revenue centre to design
domestic leaf and Nine strategically
located mix from new products for all
parabolic springs products (including automobile
segments and among manufacturing
facilities in close parabolic springs) to applications by
top three 33% (17% as on FY17) working closely with
manufacturers of proximity to major
CV manufacturing customers
multi-leaf springs
hubs to gain freight Ventured into air
globally
cost benefit suspension and lift
axle segments to Leveraged erstwhile
cater to steady technical
Steel supplier modernisation and collaboration with
Vision is to become a depots present NHK Springs to
global leader in higher tonnage
outside most of JAI’s vehicles trend develop an extensive
automobile facilities allow multi-leaf spring
suspension solutions better inventory range
management Focusing on
enhanced
penetration into
Looking to lower after-market segment Signed technical
Project Lakshya - 33% breakeven and expanding assistance agreement
rule to achieve the utilisation from 50% presence in Export with Ridewell
vision currently to ~33% Market Corporation, USA, in
to offset 2010 for introducing
detrimental effect suspension products
of M&HCV cycle on
profitability
Key Risks
 Revenue driven by highly cyclical M&HCV segment
 High customer concentration

Eye (I) on RoCE

P&L and BS
Revenue 4,670 4,593 6,131 9,033 11,197 9,802 8,333 10,951 12,558 12,995
EBIT 525 195 504 762 700 589 232 654 1,253 1,591
EBIT margin (%) 11.2 4.2 8.2 8.4 6.3 6.0 2.8 6.0 10.0 12.2
PAT - Reported 161 (126) 191 372 422 277 138 294 715 1,047
PAT - Adjusted for exceptional items 215 (126) 188 372 422 277 (37) 294 715 1,047
Adj. PAT margin (%) 4.6 (2.7) 3.1 4.1 3.8 2.8 (0.4) 2.7 5.7 8.1
Equity 512 431 544 1,344 1,546 1,745 1,815 1,963 2,422 3,330
Debt 1,758 1,612 1,188 1,381 1,827 1,662 1,253 643 158 731
FATO 9.0 6.2 6.2 7.3 7.0 5.5 3.7 4.2 5.0 5.7
Return Ratios
RoCE 31 9 27 34 23 17 7 23 48 48
RoE 38 (18) 25 34 29 17 8 16 33 36
Cash Flow
OCF (36) 417 826 1,243 711 867 447 981 1,379 821
Capex 783 347 277 627 857 330 59 227 679 880
Free CF (819) 70 549 370 (328) 270 254 646 641 (110)
Valuation
Market Cap 2,072 391 3,031 5,267 4,139 3,116 2,814 9,621 11,035 16,930
EPS 0 (0) 1 1 1 1 0 1 2 3
PE 13 0 16 14 11 11 21 33 15 16

Capital Conundrums
Britannia

100 10 800
19.
80 Revenue CAGR 15% 8 8
PAT CAGR 23% 600
60 6 12.
36% CAGR
4 400
58% 40 4 8.5
52%
20 2 200
25%
0 0
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
0
FY08
FY12
FY16
FY09
FY10
FY11
FY13
FY14
FY15
FY17
FY18
Historical RoCE RoCE (FY17) I-RoCE (FY08- FY 08-11 FY 12-14
(FY08-12) 17) Revenue Adjusted PAT FY 15-17
(INR bn) 8% 13% Capex (INR bn) PE chart (trailing)

80% 30.0 5.6 5.5 80
60% 60
20.0
40% 3.2
40
10.0 10 10
20%
20
0% 0.0
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
0
10 Yr 3 Yr
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY 08-11 FY 12-14
Why Britannia?
Leading biscuit manufacturer with
A leading biscuit manufacturer transitioning to become a leading food company, Britannia is
an ambition to be a leading foods
one of the strongest and valuable brands in India. The company’s focus on cost leadership is
company
unmatched, as reflected by the significant improvement in past few years thereby giving it
an edge over competition. Focus on innovation-led premiumisation, new product launches,
Unmatched cost efficiency focus by
expanding into adjacent categories, cost leadership/efficiency; target to penetrate into rural
management (especially after Varun
areas and eye on large opportunity in dairy segment will culminate into high growth and
berry elevated as managing director
profitability along with superior RoCE going ahead.
in April 2014)
Fig. 1: Key Drivers
Large opportunity in
bakery and adjacent
categories and dairy
segment
Cost leadership driven

GST offers level by innovation and
playing field for efficiency (in-house
Expanding rural reach, innovation, expansion and manufacturing share
strong brand and focus on cost to competing with local/ up from 30% to >50%
drive growth ahead regional players in last 3-4 years)
Strong brand recall, Expanding rural

maintained reach and
leadership position distribution (2.2x
(No.1 in bread, acheived in past
biscuits, cakes) three years)

Eye (I) on RoCE
Company overview
Britannia is one of India’s leading food companies with presence in categories, such as,
biscuit, bread, cake, rusk and dairy. The company’s products are available across ~5mn retail
outlets and reach over 50% of Indian homes. Dairy segment (contributes 5% of sales)
includes value-added products like cheese, yogurt, flavoured milk, butter, etc., with direct
reach across 100,000 outlets. The company enjoys strong brand recall with bread being the
largest brand with >1lakh tonne volumes and INR4.5bn in value terms. The company also
exports to more than 60 countries across the globe, which contributes 5% of sales currently.

2010 to 2015 -
Established in 1975 to 2000 - Bourbon received
Kolkata in 1892 Lauched variety of the Most Popular
with investment products (Good Confectionery
of INR295, Day, CirCut, Pure Product, Chunkies
became public magic, MilkBikis, Tie-up with Amazon.
company in 1918 Little hearts, Varun berry
manufacturing Marie, etc). Wadia elevated as new
bakery, soyabean group becomes managing director
products. equal partner. in April 2014
From 1920 to 1975 - 2000-2010 - Launches 2016 to17 - Setup

Pioneered high flavoured milk R&D Centre facility in
quality sliced and products, entered JV Karnataka. Launches
wrapped bread first with Fonterra (NZs Cake Biscotti (product
introduced in Delhi leading dairy combining a cake &
then in Calcutta and cooperative) and later cookie), entered JV
Chennai, launches bought out. Lauched with Chipita S.A., a
Bourbon bscuit & Nutri products, Tiger Greek co, in ready to-
cakes. brand, eat croissants.
•Growing awareness about

healthier lifestyle and eating
habits, leading to preference for
Biscuits - ~USD4bn branded players
•Reduction in time available to
Bakery* Bread - ~USD1.4bn manage households, consumers
Cake & rusk - ~USD2bn seek day-to-day needs in ready-
to-consume and convenient forms
Domestic market
•Rising health preferences and
Overall INR5.4tn (80% value-added products to drive
unorganised) growth ahead
Dairy
Value added# (34% of •Large opportunity with major
industry) - INR1.9tn unorganised presence to aid
branded players' growth led by
penetration

* Packaged food market stood at USD54bn of which biscuits account for ~USD4bn (35% of
market doSminated by local/ unorganised players). Bread market is highly unorganised.

Capital Conundrums
# Value added include traditional (ghee, curd, paneer, butter, butter milk) and emerging (Whey,
flavoured milk, UHT, yogurt, cheese) products.
Leveraging brand in Premiumisation/ Remain cost

Expanding reach
new categories innovation competitive
Solid brand recall and Targets to enter in Making in-roads in Cost leadership
trust amongst new product rural market to through efficiency
customers. categories to be a expand reach. and waste reduction
Maintained 'Total Foods Focusing on reducing (visible from margin
leadership position Company'. the gap with improvement since
(No.1 in bread, Premiumisation to competitor Parle. Varun Berry
biscuits) be steered by becoming MD from
innovation. 2014)
Expanding into bakery Expanded its direct

segment eg: bread reach by 2.2x in last 3 Initiatives like
Targeting strong reducing distance to
variants, cake and product pipeline by years. Competiting
rusk innovations/ new with local/ regional market, use of
new product technology, reducing
formats. launches and players. GST has led
to level playing field. market write offs/
relaunch of key trade loads, etc led to
Eyieng adjacent brands (GoodDay, maintaining cost
categories (croissants Milk BIkis and Tiger) leadership.
- JV with Chipita) and Targets to enter one
focus on value added new geography
dairy segment,a large Commissioning of its internationally every Larger share of in-
opportunity R&D facility to give a year. house manufacturing
boost to innovation (from 30% to >50% in
last 3-4 years) drives
higher produtivity
and reduction in
costs.
Key risks
a) Adverse movement in key raw material prices (flour, fats, oil and sugar).
b) High competitive pressure from peers/ unorganised players, increased A&P spends
could add pressure on margins.
c) Rural slowdown - as Britannia is focusing to expand in rural areas.
d) Unsuccessful R&D/ Innovation efforts can dent margins.

Eye (I) on RoCE
Table 1: Financial summary (INR bn)

P&L and BS
Revenue 28 34 38 46 55 62 69 79 84 91 98 114 132
EBIT 2 2 2 2 3 4 6 8 12 13 13 16 19
EBIT margin (%) 8.3 6.2 4.3 5.0 5.6 6.5 8.4 10.3 14.6 14.5 13.7 14.2 14.5
PAT - Reported 2 1 1 1 2 3 4 7 8 9 10 12 15
PAT - Adjusted for exceptional items 2 1 1 1 2 3 4 5 8 9 10 12 15
Adj. PAT margin (%) 6.1 3.7 3.5 2.9 3.6 4.2 5.7 6.9 9.8 9.8 10.6 10.9 11.6
Equity 7 7 3 3 4 6 8 12 21 27 32 38 46
Debt 3 3 7 6 6 4 1 1 1 1 2 2 2
Capital Employed 9 10 9 9 10 9 9 14 22 28 34 40 47
FATO 11.0 9.0 8.7 9.5 10.9 11.0 10.2 9.9 9.9 10.1 7.7 7.8 8.1
Return Ratios
RoCE 28 22 17 24 31 41 61 69 68 52 49 49 51
RoE 28 20 21 44 54 54 58 67 49 37 35 35 36
Cash Flow
OCF 1 2 2 3 2 3 7 6 10 4 12 12 14
Capex 1 1 1 1 2 2 1 (0) 2 4 4 4 4
Free CF (0) 1 2 2 (0) 1 6 6 7 1 8 9 11
Valuation
Market Cap 32 34 38 44 71 63 101 259 321 406
EPS 15 13 9 11 17 22 33 57 69 74 87 103 127
PE 18 22 37 33 35 24 26 38 39 46 55 46 37

Capital Conundrums
Eicher
42. 1,000
80 Revenue CAGR 14% 15 2 800
60 PAT CAGR 40%
600 62% CAGR
46% 47% 10 16.
40
2 400
23% 20 5
7.0
200
0 0
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY09
FY10
FY14
FY18
FY08
FY11
FY12
FY13
FY15
FY16
FY17
(FY08-12) (CY13-FY17) 17) FY 08-11 FY 12-14

60% 60 12% 24% 80
19. 20.
0 2
40% 40 60
8.8 40
20% 20
4.8 3.3 20
0% 0
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
0
10 Yr 3 Yr
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY 08-11 FY 12-14
Why Eicher?
Eicher Motors’ (Eicher) iconic brand, Royal Enfield (RE), is market leader in the >250cc
Market leader in premium (>250cc) premium segment with >95% market share. Through RE and recent launches the company
segment with >95% market share has created unique positioning in the country, and with launch of “Himalayan” it has started
a new adventure touring culture in India. Eicher has been the biggest beneficiary of the shift
in demand and rising preference for leisure biking, leading to significant increase in sales,
Key beneficiary of rising preference profitability and RoCE over the years. The company is poised to consistently grow going
for leisure biking amongst youths ahead led by: a) expanding reach and penetration domestically; b) leveraging its expertise
by foray into addressable international markets; c) R&D and innovation focus; and d)
renewed demand in commercial vehicle (CV) segment.
Fig. 1: Key Drivers

Unique brand
proposition through
RE and new launches
(Continental,
Himalayan)
Investing in CV Rising two-wheeler
segment, strong penetration and
partner (Volvo) and shift in demand for
Unique brand proposition, rising renewed demand in liesure
domestic demand and entry in Infra sector, roads, (>150cc/250cc) bikes
newer global geographies leads to construction.
significant growth opportunities
ahead
Innovation and Large opportunity
R&D focus led new in global markets
launches. with focus on key
Dedicated tech addressable
centre setup in UK. regions

Eye (I) on RoCE
Company overview
Eicher is a leading player in the Indian automotive space which owns the iconic Royal Enfield
(RE) motorcycle business, leading the premium motorcycle segment in India. RE has
witnessed a huge surge in demand in the recent past, and is charting its course to be the
leading player in the mid-sized motorcycle segment globally. The Company’s joint venture
with the Volvo group, VE Commercial Vehicles Limited (VECV), designs, manufactures and
markets reliable, fuel-efficient trucks and buses; and is leading the path in driving
modernization in commercial transportation in India and other developing markets.

2010 to 2017 - Launched
1990 to 2000 - Acquires Thunderbird 500 and 350
Started in 1948 with majority stake in Enfield motorcyle models, opened
importing and selling India (60% stake) in 1993 2nd & 3rd facility in Tamil
tractors and later renamed to Royal nadu, globally launched
transitioned to a Enfield, merged tractor Royal Enfield and
indigenous tractor and motorcyle business Continental, opened
manufacturer by 1975. in Eicher Ltd. exlcusive store in London
From 1980 to 1990 - 2000-2010 - Divested

Entered in LCV segment tractors business i 2005,
by collaborating with formed JV with Volvo for
Mitsibushi Japan, VECV in 2008, launched
incorporated Eicher heavy duty trucks
motors and eicher
tractors went public.
1) Motorcycles -11mn p.a

•Rising two-wheeler penetration in urban
(6% Eicher's market share) and rural India
Domestic 2) >150cc bikes -2.4mn p.a •Shift in demand towards mid-premium
market (24% market share) and and >150/250cc category bikes.
>250cc bikes -0.7mn p.a •Rising liesure biking peference amongst
(95% market share) youths leading to huge demand for
Premium motorcycle adventure/ liesure bikes.
market and CVs •Increasing income levels and
premiumisation a long term growth
Large market with driver.
Global addressable opportunities in •Waiting period for RE has shortened but
opportunity South East Asia, Latam and still ahead of the supply.
North America

Capital Conundrums
Domestic and
Unique brand Innovation/ R&D led Investing in CV
International
positioning launches business
expansion
Iconic RE brand has Launch several Taking the RE brand Investing in Trucks &
unique positioning in variants to cater success to the next level Buses segment on
mid-premium liesure various class and by expanding globally in new technology,
biking segment in sub-class of strategically important capacity & market
India. 6% domestic customers eg: markets. development for
market share Launch of sustained growth.
Thunderbird, INR4.5bn capex
Continental, Presence in markets
planned in VECV for
Himalayan (launched Himalayan, Classic like Columbia,
coming year.
in early 2016) has 350. Thailand, Indonesia,
created an entirely Brazil and other key
new segment of South east and Latam
New model Pro 5000
adventure touring in region. Have 25
New Tech Centre at in truck segment and
India. Bagged exclusive stores in
Leicester, UK with Skyline Pro in Bus
Motorcycle of the leading cities with 568
100 employees part segment to be
year awards in 2017. multi-brand
of the engineering, launched in the
dealerships.
product design, coming year.
product strategy and
Eyeing key other technical
international teams. Domestically
Rising Infra sector
(emerging and expanding reach with
investments, focus on
mature) markets to now 675 dealers across
roads & highways
leverage existing country.
construction and
strong brand rising port traffic, to
proposition. maintain growth
momentum in VECV
business.
Key risks
a) New entrants and intense competition in mid-premium category.
b) Supply constraints – Inability to increase capacity to capitalise on strong demand.

c) High reliance on single model – ‘Classic’ model accounts for ~70% sales.
d) Currency risk on exports which is expected to grow in ensuing years.

Eye (I) on RoCE
Table 1: Financial summary (INR bn)

Particulars FY08 CY08 CY09 CY10 CY11 CY12 CY13 CY14 FY16 FY17 FY18E FY19E FY20E
P&L and BS
Revenue 23 17 29 44 57 64 68 87 62 70 89 108 126
EBIT 1 0 2 4 7 6 7 10 17 22 26 34 42
EBIT margin (%) 4.2 1.7 6.7 9.7 11.7 9.4 10.0 11.5 28.0 32.0 29.4 31.3 33.2
PAT - Reported 1 1 1 3 5 5 5 7 12 15 22 28 35
PAT - Adjusted for exceptional items 1 0 1 3 5 5 5 7 12 15 22 28 35
Adj. PAT margin (%) 2.4 1.6 4.4 7.0 8.8 7.4 7.7 8.0 19.3 21.7 24.8 26.0 27.5
Equity 4 11 11 12 15 18 21 25 37 53 72 95 124
Debt 2 2 1 1 0 0 1 1 0 0 0 0 0
Capital Employed 7 13 12 13 15 18 21 26 37 54 72 95 124
FATO 7.4 5.6 9.1 12.7 15.2 14.4 9.1 6.6 3.1 4.5 5.8 5.6 5.8
Return Ratios
RoCE 15 3 16 34 47 36 35 43 55 50 48 46 43
RoE 13 9 12 27 37 29 28 31 39 34 35 34 32
Cash Flow
OCF 1 (1) 4 3 4 5 7 10 15 17 23 29 34
Capex 1 1 1 1 4 8 7 10 5 5 8 5 5
Free CF (0) (2) 3 2 (0) (3) 0 1 10 12 15 24 29
Valuation
Market Cap 7 7 8 33 40 78 135 409 520 695
EPS 19 22 66 70 114 120 146 227 493 613 815 1,037 1,275
PE 13 11 10 18 13 24 34 67 39 42 34 27 22

Capital Conundrums
Avenue supermart (DMART)

150 6 11. 1,000
Revenue CAGR 45% 1
800
100 PAT CAGR 75% 4
600 108% CAGR
22% 21% 400
50 2 3.9
10% 1.1 200
0 0 0
FY09
FY10
FY12
FY15
FY08
FY11
FY13
FY14
FY16
FY17
Jul-17
Sep-17
Jan-18
May-17
Nov-17
Mar-17
Mar-18
Historical RoCE Current RoCE I-RoCE (FY09- FY 08-11 FY 12-14
(FY09-12) (FY17) 17) Revenue Adjusted PAT FY 15-17

30% 60.0 200
5% 17
150
20% 40.0
6.4 100
10% 20.0 6.9
4.7 50
5.4
0% 0.0 0
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
Jul-17
Sep-17
Jan-18
May-17
Nov-17
Mar-18
Mar-17
10 Yr 3 Yr FY 08-11 FY 12-14
Why DMART?
Amongst the rarest of profitable retailers, DMart has successfully created strong business
moat and unique business model. Important features include:- a) consistent and efficient
store formats/size and product mix; b) low-cost structure (daily low pricing, owned vs.
rental model, higher cash discounts from suppliers); c) efficient back-end distribution and
Driven by unique business model
and strong moat, DMart is amongst packing centers; and d) strong balance sheet, operating cash flows and RoCE’s despite rapid
the rare profitable retailers store expansion. Apart from the growth drivers (rising disposable income, attractive
demographic and rapid urbanisation), the recent structural changes (DeMon, GST, etc) will
lead to shift of demand to organised retailers. DMart is best positioned to capture this huge
opportunity via its store expansion, high return ratios and strong balance sheet.
Fig. 1: Key Drivers

Strong competitive
advantage (low rentals
due to ownership
model, low
procurement cost and
high volume)
Low operating cost, efficient Faster payback of
Rising penetration led
procurement and rapid store stores (~3-4 yrs), high
by consistent and
expansion would lead to higher margins, cash flows
efficient store
and strong balance
profitability, cash flows and RoCEs expansion to fuel
sheet to support future
growth
going ahead expansion
E-Commerce foray, Consistent product

DMART ready stores mix enabling high
and private labels price differential
(margin accretive) to leading to customer
aid profitability stickiness

Eye (I) on RoCE
Company overview
DMart is a one-stop supermarket chain offering a wide range of products under one roof
with the core objective to offer great value to customers. Started by Mr. Radhakishan
Damani, it has expanded from its first store in Powai in 2002, to having a well-established
presence in 149 locations across Maharashtra, Gujarat, Andhra Pradesh, Madhya Pradesh,
Karnataka, Telangana, Chhattisgarh, NCR, Tamil Nadu, Punjab and Rajasthan. Its mission is
to be the lowest priced retailer in the regions where it operates. It is one of the few
profitable retailers that have successfully created a strong business model and growing
rapidly with new locations planned in more cities.
Started by Mr. Entered NCR region in

Radhakishan Damani 2017. DMart today has a
and his family with Continued to expand well-established presence
launch of its first store footprint by increasing in 154 locations across
in Powai, Mumbai in stores from 50 to 75 in states with total 131
2002 2014. stores by FY17.
Opened 1st store in In 2015 entered Madhya

Gujarat in 2007. By Pradesh and
2011 opened stores Chattisgarh. Opened 21
in Andhra Pradesh stores in 2016, highest
and Karnataka . Total ever in a year taking
stores count reached total count to 110
55 by 2012 inlcuding stores.
34 in Maharashtra.
•Rising disposable incomes and

improving consumer sentiments
•Attractive demographics–Median
~USD616bn (FY16)
age of 27 with ~50% of population
Retail expected to grow to
in working age bracket
market USD970bn - 13% CAGR by
FY20 •Rising urbanisation: 41% of
population estimated to reside in
urban areas by 2030 from 31.2%
Organised retail
in FY11
Organised retail industry
•Acceleration of demand shift from
Organised penetration is mere 9% unorganised to organised led by
market expected to reach 12% by structural reforms like GST.
FY20

Capital Conundrums
Consistent format Large scale and higher Strong balance sheet

Low cost structure
across stores profits for future growth
Every Day Low Lower supplier credit Owned vs. rentals

Consistent store Pricing (EDLP) / (eight-ten days) leads model leads to initial
format and products Every Day Low Cost to higher discounts cash outflow, but
help improve (EDLC) model equips that can be passed on scale advantage leads
customer stickiness, to offer low prices - to consumers to quicker payback
visible by rising sales driven by low period of ~three-four
per sqft. procurement and years
operational costs Low cost structure
and volume discounts
when passed on too
Rentals at 0.3% of Strong balance sheet
consumers leads to
Consistent product sales (vs. >5% for versus peers led by
low margin but high
mix peers). Stores largely high margins, cash
turnover (Evident by
(Food/nonfood/other owned (<four yrs flows and RoE/RoCE
consistent SSSG
s - 53-21-26%) for payback) or have despite rapid store
growth >20%)
more than five years long term leases expansion
enables >10% pricing (>30 yrs) - a strong
differential amongst MOAT.
competitors Private labels, though
small currently is
Distribution and margin accretive and
packing centers a aids to profitability
major cost which is
efficiently used led by
cluster based
expansion. "DMART
Ready" is another
efficient logistics
model
Key risks
a) Strong competition from peer retailers, e-commerce companies in terms of adverse
pricing strategies following shift of consumers.
b) Inability to continue ‘ELDP’ program due to change in suppliers/ vendors relationship

and strategies.
c) Failure of new stores leading to increase in financial burden as stores are either self
owned or on long term leases.

Eye (I) on RoCE

Particulars FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18E FY19E FY20E
P&L and BS
Revenue 10,953 16,887 22,086 33,409 46,865 64,394 86,605 119,734 147,845 185,324 235,082
EBIT 450 797 1,144 1,835 3,006 3,957 5,831 8,820 11,677 15,465 20,277
EBIT margin (%) 4.1 4.7 5.2 5.5 6.4 6.1 6.7 7.4 7.9 8.3 8.6
PAT - Reported 212 414 604 939 1,614 2,117 3,203 4,917 7,836 10,298 13,537
PAT - Adjusted for exceptional items 212 414 604 939 1,614 2,117 3,203 4,917 7,836 10,298 13,537
Adj. PAT margin (%) 1.9 2.4 2.7 2.8 3.4 3.3 3.7 4.1 5.3 5.6 5.8
Equity 4,180 5,844 6,817 7,895 9,556 11,992 15,204 38,418 46,254 56,551 70,089
Debt 1,829 2,987 0 5,261 6,408 9,043 11,923 14,973 4,698 2,698 1,698
Capital Employed 6,009 8,831 6,817 13,156 15,964 21,035 27,128 53,391 50,951 59,249 71,787
FATO 5.9 3.9 3.9 4.8 5.5 6.1 6.4 6.6 5.2 5.4 5.8
Return Ratios
RoCE 9 11 15 18 21 21 24 22 25 29 32
RoE 6 8 10 13 18 20 24 18 19 20 21
Cash Flow
OCF 342 468 654 1,271 1,981 2,220 4,335 4,578 8,617 10,099 12,735
Capex 1,404 2,212 1,833 2,377 2,706 4,770 6,350 6,354 9,221 8,000 8,500
Free CF (1,170) (1,937) (1,428) (1,528) (1,277) (3,170) (2,949) (2,979) (605) 2,099 4,235
Valuation
Market Cap 0 0 0 0 0 0 0 398,135
EPS 1 1 0 2 3 4 6 8 13 17 22
PE 0 0 0 0 0 0 0 83 104 79 60

Capital Conundrums
Glimpse of high I-RoCE companies beyond BSE500

We have replicated our framework, without applying sustainability test, on companies
beyond BSE500 with market capitalisation of INR5bn plus. We present top 15 names in
order of highest I-RoCE expansion versus history in each of the categories i.e., Evergreen,
Rising Stars and Potential Winners.
Table 1: Top 15 Evergreen companies in terms of RoCE expansion

Trend vs. FY08-12 FY13-17 Increase in 10Yr Earnings 3Yr Earnings
10 Yr I- Trailing M.cap
Company Name History (x) Avg RoCE Avg RoCE capital growth CAGR growth CAGR PEG (x)
RoCE (%) PE (x) (INR bn)
(FY08-12) (%) (%) employed (x) (%) (%)
MPS 50 6.4 8 49 1.7 6 21 0.6 13 9

Bodal 44 4.6 10 32 7.6 39 6 1.7 10 15
Harita 44 4.4 10 30 2.6 17 47 0.6 27 8
Atul Auto 71 3.4 21 50 1.8 21 8 3.3 26 10
Multibase 34 2.4 14 29 3.4 16 38 1.4 53 7
Stovec 55 2.0 27 38 2.9 25 33 0.7 23 6
Sterling 32 1.8 18 22 2.3 16 31 1.0 32 13
Bharat Rasayan 30 1.8 17 25 8.1 43 39 0.9 34 18
Kovai 28 1.7 16 25 8.7 28 36 0.6 23 14
Kitex 41 1.6 26 37 6.3 34 17 1.0 18 15
Gabriel 24 1.5 16 23 2.0 8 21 1.1 24 20
HMVL 23 1.4 16 26 na 40 20 0.4 9 16
Mirza 24 1.4 16 23 2.8 13 18 1.2 21 15
Wim Plast 37 1.4 27 33 3.9 39 14 2.0 29 14
Mold-Tek 26 1.3 21 21 na 39 36 0.9 33 9
Table 2: Top 15 Rising Stars companies in terms of RoCE expansion

Trend vs. FY08-12 FY13-17 Increase in 10Yr Earnings 3Yr Earnings
10 Yr I- Trailing M.cap
Company Name History (x) Avg RoCE Avg RoCE capital growth CAGR growth CAGR PEG (x)
RoCE (%) PE (x) (INR bn)
(FY08-12) (%) (%) employed (x) (%) (%)
Guj. Borosil 12 19.1 -1 9 2.3 3 59 0.7 43 6

Century Enka 94 9.1 10 12 1.1 9 16 0.5 7 7
Bhansali 151 9.1 17 18 1.1 10 186 0.4 81 28
IG Petro 110 7.6 14 20 1.3 19 69 0.3 19 20
Saregama 5 6.4 1 12 2.1 2 -28 -ve 192 11
Igarashi 39 5.4 7 28 2.8 36 25 1.4 34 25
EIH 45 3.8 12 19 1.4 18 22 1.5 34 15
Federal Mogul 48 3.3 15 15 1.4 20 31 1.0 31 23
Ion Ex. 43 3.2 14 20 1.5 19 82 0.3 25 7
UFO 19 3.1 -6 15 20.4 - to + 4 3.6 16 11
Ambika 34 2.9 12 20 1.6 12 5 2.7 14 7
Garware-Wall 36 2.8 13 20 1.9 14 46 0.5 24 20
Byke Hosp. 29 2.6 11 27 18.3 28 26 0.8 21 7
Alkyl Amin 30 2.2 14 24 2.8 24 5 5.1 24 12
SMS Pharma 16 2.1 8 11 3.0 11 33 0.5 15 6

Eye (I) on RoCE
Table 3: Top 15 Potential Winners recently improving in terms of RoCE expansion

I-RoCE FY13-17 3Yr
FY13-15 FY16-17
Increase 5 Yr I- trend vs. capital Earnings Trailing M.cap
Company Name Avg RoCE % Avg RoCE PEG (x)
(%) (b-a) ROCE (%) history (x) employed growth PE (x) (INR bn)
(a) % (b)
(FY13-15) (x) CAGR (%)
Intl. Paper 3 9.3 3 99 37.0 0.9 - to + NA 19 12
NACL 5 11.6 5 70 13.1 1.2 - to + NA 1,221 128
Intrasoft Technologies 3 12.5 3 37 12.0 1.2 89 0.8 73 10
JK Paper 3 12.0 3 36 11.5 1.1 - to + NA 12 24
Pokarna 12 32.5 12 89 7.4 1.5 155 0.1 8 6
ADF Foods 6 9.0 6 41 6.6 0.9 31 1.3 40 4
Maithan 13 32.9 13 87 6.5 1.4 157 0.1 12 23
Sunflag Iron 9 14.4 9 59 6.3 1.0 45 0.5 21 14
Automotive Axles 8 18.1 8 38 5.0 1.1 39 1.2 45 22
Balaji 18 26.9 18 74 4.1 1.1 35 0.6 22 18
Sharda Motor 14 21.9 14 55 3.9 1.1 63 0.3 19 11
Nirlon 12 15.2 12 43 3.6 1.2 26 1.2 31 18
Filatex India 7 13.5 7 25 3.4 1.5 - to + NA 16 7
Voltamp 9 15.6 9 28 3.0 1.3 37 0.4 16 11
Amrutanjan 22 28.8 22 62 2.8 1.3 15 2.6 37 8

Capital Conundrums
Sectoral Flavour
Chart 1: Sectoral I-RoCE versus reported historical RoCE
25%
Declining trend Improving trend
20%
15%
15%
18% 12% 12%
11% 11%
10% 20% 8% 8% 8% 8%
14% 16% 7% 14%
5% 15%
12% 6% 5% 13% 13% 11% 11% 10% 13% 12%
5% 7% 11% 10%
8% 9% 9% 8%
10% 8% 7% 11% 6%
1% 0% 10%
0%
Infrastructure
Agri & Acqua
Telecom
Textiles
Tea/ Coffee/ Sugar
Chemicals
Cement
Plastic & Packaging

Hospitals & Diagnostics
Hotels, Restaurants &
Oil & gas
FMCG Retail
Utilities
Real Estate
Leisure
Historical 5 year Avg Recent 5 year Avg 10 year I-RoCE
60% Declining trend

Improving
50% trend
38%
40%
33%
30% 30%
30%
50% 21% 20% 21%
20% 43% 38% 16% 16% 34%
39% 35% 13%
22% 24% 34% 12% 20%
38%
10% 7% 20% 19% 20% 16% 22% 20%
5% 14% 23% 20% 15% 18%
12% 12% 16% 16%
0%
Automobile/ 2W/ 3W
Auto Ancillaries
Beverage & Tobacco
Pharmaceuticals
Agrochem & Fertilizers
Media & Entertainment

Logistics & Ports
Metals & Mining
FMCG Staples
Building Materials
Industrials
FMCG Consumer
IT - ITeS
Historical 5 year Avg Recent 5 year Avg 10 year I-RoCE

Media & Entertainment, Textiles, Retail and Building Material sectors have improved on I-
RoCE basis over 10 years versus their historical steady-state RoCE. Plastics & Packaging,
Hospitals/ Diagnostics, Utilities, Infra, Auto Ancillaries, Logistics and Chemicals have been
flattish-to-marginal declining sectors.

Eye (I) on RoCE
Top sectors where significant RoCE deterioration has been observed are Industrials, Metals
& Mining, Cement, Tea/Coffee/Sugar, FMCG Consumer, Real Estate and Electrical
Equipments.
While the number of sectors that have declined on I-RoCE basis is much higher than those
improving, a few sectors that are showing some signs of uptick in recent two-three years
and seem to be coming out of the woods are Chemicals, Oil & Gas, Infra, Retail and
Tea/Coffee/Sugar.
Table 1: 10 yrs sectoral RoCE for BSE 500 (ex-banks) – major sectors
Particulars FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 Average RoCE
Cement 31% 21% 20% 14% 15% 14% 9% 9% 9% 10% 15%
Real Estate 33% 14% 8% 8% 7% 7% 7% 7% 7% 7% 10%
Oil & gas 23% 16% 18% 16% 16% 13% 13% 10% 12% 14% 15%
Tea/ Coffee/ Sugar 9% 8% 14% 11% 11% 9% 5% 3% 5% 6% 8%
Hotels, Restaurants & Leisure 20% 11% 7% 8% 7% 7% 9% 8% 8% 9% 9%
Agri & Acqua 16% 13% 17% 17% 13% 12% 14% 13% 11% 14% 14%
Chemicals 17% 16% 15% 15% 17% 14% 11% 12% 14% 15% 15%
Telecom 17% 14% 11% 7% 7% 7% 9% 11% 10% 8% 10%
Utilities 12% 10% 11% 10% 10% 10% 9% 9% 9% 9% 10%
Infrastructure 12% 9% 10% 9% 8% 7% 7% 7% 8% 10% 9%
Hospitals & diagnostics 8% 8% 7% 6% 9% 8% 6% 6% 7% 7% 7%
Plastic & Packaging 13% 9% 13% 20% 14% 13% 13% 13% 13% 15% 14%
Textiles 9% 7% 11% 14% 11% 12% 13% 13% 12% 10% 11%
FMCG Retail 7% 0% 9% 10% 7% 8% 8% 9% 11% 13% 8%
Particulars FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 Average RoCE
Metals & Mining 31% 20% 21% 22% 18% 15% 14% 13% 8% 11% 17%
Industrials 29% 24% 23% 22% 20% 15% 12% 11% 11% 13% 18%
FMCG Staples 54% 58% 53% 44% 40% 41% 45% 45% 43% 40% 46%
FMCG Consumer 32% 30% 43% 43% 44% 40% 35% 34% 32% 30% 36%
Agrochem & Fertilizers 19% 27% 17% 20% 19% 14% 14% 14% 13% 15% 17%
Automobile/ 2W/ 3W 26% 12% 23% 27% 25% 21% 21% 20% 19% 16% 21%
Beverage & Tobacco 36% 33% 38% 41% 44% 42% 43% 41% 35% 32% 38%
Pharmaceuticals 23% 20% 20% 19% 19% 21% 23% 20% 19% 16% 20%
IT - ITeS 37% 35% 32% 32% 34% 35% 39% 37% 34% 31% 35%
Logistics & ports 18% 17% 15% 17% 14% 13% 15% 16% 14% 14% 15%
Auto Ancillaries 24% 16% 21% 21% 18% 18% 21% 23% 25% 21% 21%
Media & Entertainment 16% 10% 14% 21% 17% 17% 18% 19% 21% 18% 17%
Building materials 18% 11% 18% 17% 17% 18% 19% 18% 22% 22% 18%

Capital Conundrums
Annexure 1 – Details of consistency and quality test parameters
Table 1: Detailed criteria for consistency and quality framework

10 year criteria 5 year criteria
High I-RoCE High I-RoCE

I-RoCE greater than historical 5 year (FY08-12) average RoCE or I- I-RoCE greater than historical 2 year (FY13-14) average RoCE or I-
RoCE is greater than 20% RoCE is greater than 20%
*Low base companies have been ignored *Low base companies have been ignored
Capex stage companies Capex stage companies

1. Low I-RoCE companies in which recent 3 year (FY15-17) capex 1. Low I-RoCE companies in which recent 2 year (FY16-17) Capex
has been double of their historic 7 year (FY08-14) capex has been double of their historic 2 year (FY13-14) Capex
AND AND
2. Consequently led to increase in capital employed 2. Consequently led to increase in capital employed
High dividend paying companies High dividend paying companies

10 years dividend payout is greater than 50% 5 years dividend payout is greater than 50%
Consistency checks Consistency checks

RoCE halved or doubled more than 5 times in last 10 years with RoCE halved or doubled more than 2 times in last 5 years with
exception of secural/ continous up trends recently (FY13-17) exception of secural/ continous up trends recently (FY15-17)
PAT halved or doubled more than 5 times in last 10 years with PAT halved or doubled more than 2 times in last 5 years with
exception of secural/ continous up trends recently (FY13-17) exception of secural/ continous up trends recently (FY15-17)
Quality Checks Quality Checks

1. Positive Operating Cash Flow post Interest for more 50% time 1. Positive operating cash flow post Interest for more 50% time
period and 2 out of recent 3 years (FY15-17) period and 1 out of recent 2 years (FY16-17)
2. Cash Conversion more than 60% in atleast half of time period 2. Cash Conversion more than 60% in atleast half of the time
(FY08-17) and in 1 of recent 3 years (FY15-17) period (FY13-17) and in FY17
3. Leverage less than 2.0x for more than 50% time (FY08-17) and in 3. Leverage less than 2.0x for more than 50% time (FY13-17) and in
1 of recent 3 years (FY15-17), with exception for secular/ FY17, with exception for secular/ continous improvement
continous improvements

Eye (I) on RoCE
Annexure 2 – Detailed list of 105 high I-RoCE companies
Table 2: List of high I-RoCE companies

EBIT Margins FATO
Capex -
I-RoCE vs. I-RoCE Avg Avg Avg capex (Avg FY15-
Company 10 year Avg 5 year vs. Avg (FY13-17) (FY08-12) Avg Avg (FY15-17) 17/Avg M. Cap
Name I-RoCE (FY13-17) I-RoCE (FY15-17) (%) (%) (FY13-17) (FY08-12) (INR bn) Avg08-14) PEG TTM PE (INR bn)
3M 26.3 0.9 67.7 4.8 9.9 12.5 5.5 9.0 0.1 0.1 1.4 90.8 218.7
Aarti 19.6 1.1 21.0 1.1 14.4 11.9 3.1 3.6 4.2 3.3 1.1 29.8 93.2
Abbott 30.4 0.7 32.6 0.8 14.2 13.2 23.1 19.2 0.2 1.6 2.5 41.9 74.6
Adani Port 13.3 1.1 17.6 1.3 61.9 59.7 0.3 0.3 25.3 1.1 0.7 18.7 733.3
Advanced 30.7 1.6 51.3 1.9 40.6 19.4 1.6 2.3 0.1 0.2 2.2 26.0 23.8
Aegis 23.4 1.3 11.1 0.7 4.3 10.9 10.2 6.4 1.3 2.5 2.0 72.1 86.7
AIA 25.2 0.9 30.3 1.1 25.9 23.3 4.3 4.6 1.4 2.0 1.7 29.8 136.0
Ajanta 51.4 3.0 49.9 1.0 29.3 15.0 4.3 3.0 0.3 0.5 0.6 24.1 122.4
Alkem 18.5 0.9 35.1 2.5 17.7 19.3 3.0 3.3 3.4 2.9 1.0 26.6 237.7
Amara 33.0 1.0 24.4 0.6 14.8 14.0 5.7 5.9 4.4 3.9 2.1 28.4 135.8
Apar 24.6 0.8 23.1 1.1 7.2 6.9 14.4 15.6 1.2 2.3 1.2 15.9 27.9
Apollo 20.2 0.9 16.2 0.7 11.8 8.9 2.7 3.5 18.4 2.8 1.3 12.8 158.5
Asian paints 38.6 0.7 30.2 0.6 16.8 15.7 5.1 7.4 6.4 1.8 3.5 55.4 1074.7
Atul 30.4 1.9 23.8 0.9 14.1 8.4 4.2 3.5 2.5 3.3 1.2 24.0 77.5
Aurobindo 28.6 2.2 37.5 1.7 19.1 14.3 3.2 2.3 2.8 0.7 0.3 14.2 326.8
Avanti 67.0 7.4 64.0 1.3 10.3 3.8 18.9 5.3 0.6 6.0 0.4 22.4 101.5
DMart 20.6 1.7 19.3 1.0 6.4 4.2 4.6 3.0 5.8 3.5 3.3 156.0 826.8
Bayer 26.8 0.9 24.8 0.9 15.5 10.5 11.6 6.6 (0.0) (0.1) 1.7 51.4 167.0
Berger 27.4 1.1 40.5 1.6 11.9 9.6 5.0 6.3 1.8 1.2 2.8 52.6 249.3
Bharat Forge 14.0 1.1 15.8 1.0 13.9 9.3 2.3 2.2 7.5 4.1 2.2 47.1 325.7
BPCL 24.4 2.3 74.9 4.9 4.5 2.7 8.4 8.6 101.9 2.1 0.2 9.6 927.2
Bosch 23.3 0.8 21.3 0.9 17.6 18.6 10.7 11.2 4.9 1.2 1.8 38.8 549.9
Britannia 58.1 2.4 59.1 1.0 10.8 5.9 9.0 8.4 1.8 1.5 1.8 67.4 596.8
Cadila 19.6 0.8 19.6 1.0 17.6 18.0 2.4 2.3 14.8 2.5 0.9 26.0 386.8
Caplin 59.2 2.9 55.3 0.8 23.3 8.5 2.7 3.6 0.2 1.1 0.9 44.7 43.1
CCL 28.4 2.3 52.2 2.6 17.4 12.3 2.3 1.9 0.4 1.1 0.9 27.6 37.0
Ceat 25.9 1.4 27.4 1.1 10.3 5.7 3.2 4.5 5.3 2.8 0.8 16.9 60.9
Century 22.8 1.0 79.8 5.0 12.4 16.1 5.4 3.9 1.5 0.8 0.9 38.1 72.6
Cera 27.8 1.0 25.7 0.8 14.6 16.4 4.3 2.8 0.8 3.7 2.0 46.2 44.9
CESC 9.3 1.2 11.9 1.3 16.7 11.9 0.6 0.7 15.4 0.8 1.5 18.5 128.1
Dabur 28.7 0.6 30.7 0.9 18.6 17.2 4.2 5.0 3.1 1.1 3.1 45.3 578.5
DB Corp 38.9 1.3 43.7 1.3 23.9 23.0 2.3 2.4 1.1 0.9 1.8 15.3 57.3
Dhanuka 31.2 0.8 34.0 1.0 16.9 13.9 9.8 13.7 0.2 1.7 1.8 22.6 27.0
Divis 29.2 0.8 26.5 0.8 36.3 38.0 2.6 2.2 3.6 1.8 1.6 27.3 289.4
Dr.Lal 40.0 0.9 32.1 0.6 22.3 18.6 4.5 4.0 0.4 1.8 1.7 47.1 73.0
eClerx 37.6 0.7 31.9 0.6 34.2 39.0 5.6 9.8 0.5 2.6 0.8 13.8 46.4
Eicher 47.4 2.1 47.1 1.2 18.2 6.8 6.1 9.1 6.7 2.1 1.2 46.3 773.3
Endurance 23.5 1.6 34.5 1.5 8.2 4.8 3.4 2.6 3.8 2.1 2.9 53.9 177.9
Essel Propack 24.1 2.6 117.1 8.5 12.7 10.2 2.2 1.4 2.0 1.6 0.9 19.7 37.6
Eveready 8.6 1.4 19.2 2.5 6.9 5.6 2.5 1.1 0.6 4.3 0.3 29.1 27.2
Exide 23.4 0.6 21.5 0.8 10.7 15.9 5.1 5.5 4.0 2.3 2.1 23.6 189.4
FDC 18.6 0.7 13.8 0.5 24.8 22.4 2.3 2.7 1.2 2.5 3.0 23.5 44.3
Finolex Cable 26.2 2.1 20.4 1.0 12.4 6.6 5.3 5.0 0.3 0.4 1.7 25.8 103.2
Firstsource 13.9 1.8 37.9 4.2 10.2 10.2 1.3 0.9 0.7 8.9 0.7 12.1 36.4
Force 18.0 1.2 39.2 6.4 5.4 3.7 3.7 3.3 2.0 1.3 0.4 20.0 35.6
GHCL 33.5 3.7 74.9 4.2 18.8 11.8 1.2 1.1 2.5 3.1 0.2 6.8 25.2
Glaxo 38.1 0.8 25.5 0.5 22.6 19.3 12.3 9.5 0.7 0.9 6.0 39.1 256.5
Granules 18.1 1.6 17.9 1.0 13.2 9.4 2.6 2.0 2.1 2.7 0.4 13.7 26.2
Greenply 21.1 1.4 26.0 1.5 11.1 8.1 3.0 3.2 1.5 1.2 13.6 29.6 37.4
HCL tech 31.9 1.2 24.7 0.6 23.3 15.4 4.1 4.0 10.4 1.5 1.5 16.1 1348.5
Heritage 27.3 2.4 32.4 1.3 4.2 2.1 7.6 4.9 0.8 1.8 6.2 48.5 32.4
ICRA 26.3 0.8 24.9 1.0 33.4 41.6 4.3 5.1 0.1 0.5 8.7 47.3 36.1
IGL 25.1 0.6 21.6 0.7 18.2 28.1 1.9 2.0 2.4 0.6 3.3 32.3 195.6
Infosys 29.6 0.7 23.2 0.6 30.6 33.4 5.6 5.4 25.8 1.6 1.4 16.2 2472.0
Inox 8.5 1.1 17.5 1.7 7.6 10.2 1.6 1.0 1.2 2.1 3.1 79.6 25.6

Capital Conundrums
Table 2: List of high I-RoCE companies (Contd…)

EBIT Margins FATO
Capex -
I-RoCE vs. I-RoCE Avg Avg Avg capex (Avg FY15-
Company 10 year Avg 5 year vs. Avg (FY13-17) (FY08-12) Avg Avg (FY15-17) 17/Avg M. Cap
Name I-RoCE (FY13-17) I-RoCE (FY15-17) (%) (%) (FY13-17) (FY08-12) (INR bn) Avg08-14) PEG TTM PE (INR bn)
ISGEC 20.5 0.9 33.3 2.4 7.0 6.9 6.0 5.7 1.0 1.2 0.3 19.8 47.8
Jagran 24.8 0.9 27.7 1.2 21.9 22.3 1.9 2.7 0.8 0.7 1.6 16.3 53.8
Kajaria 39.1 1.9 31.9 0.9 14.6 11.9 2.6 2.1 2.3 2.6 1.3 36.0 91.0
Kansai 22.7 0.9 24.1 1.0 13.0 12.0 4.2 6.7 (0.5) (0.3) 1.7 53.6 272.6
KPR 20.4 2.4 50.3 3.0 13.6 11.1 2.0 1.1 1.7 0.9 0.6 16.6 46.7
KRBL 20.6 1.4 26.2 1.5 14.7 12.9 4.9 5.0 2.0 2.4 1.1 25.7 102.7
La Opala 33.4 2.2 29.2 0.7 26.9 13.1 2.8 1.6 0.2 2.3 2.0 57.9 31.8
Lupin 21.5 0.8 13.9 0.4 23.5 18.0 2.8 2.9 30.8 7.7 0.9 13.0 332.7
Marico 45.7 1.4 71.3 2.3 16.0 11.8 4.9 6.7 0.7 0.3 2.6 52.5 420.9
Maruti 23.1 1.0 39.5 2.1 10.9 10.0 4.7 6.0 30.6 1.2 1.0 35.6 2676.8
Minda 16.5 1.0 21.5 2.0 4.8 6.9 4.9 3.6 1.8 2.4 0.5 50.4 92.5
Mindtree 28.9 1.2 22.4 0.6 16.7 12.9 7.5 4.8 1.4 1.4 3.7 26.5 126.5
Motherson 21.6 0.9 26.8 1.2 6.4 8.6 5.3 4.2 21.8 3.0 1.2 41.0 654.6
MRF 33.6 1.8 39.3 1.5 13.9 6.9 4.2 6.4 16.4 2.8 0.5 20.7 284.3
Navneet 33.2 1.2 36.5 1.2 21.2 19.3 5.4 5.3 0.2 0.6 1.9 19.9 33.4
NBCC 30.0 0.5 26.9 0.8 9.0 10.9 144.6 148.7 0.1 6.2 4.3 48.3 171.4
Nilkamal 26.5 1.6 162.4 12.9 7.2 8.1 5.9 4.6 0.4 0.7 0.5 18.5 22.7
Page 57.9 1.3 55.3 0.9 20.2 19.5 8.1 5.9 0.5 1.4 4.1 95.0 253.0
Phoenix 11.5 2.0 19.8 1.8 42.3 74.4 0.4 0.3 2.3 0.4 8.4 53.9 90.6
PI Ind 34.8 1.5 36.0 1.1 17.8 11.6 3.2 3.2 2.1 2.9 0.7 26.5 122.1
Pidilite 38.2 1.5 46.8 1.4 17.9 13.9 5.5 4.4 2.3 1.4 2.3 54.7 466.1
Rallis 21.3 0.6 8.4 0.3 13.2 17.4 2.9 4.7 0.3 0.6 (10.6) 33.4 46.3
Relaxo 28.8 1.3 32.3 1.2 10.4 8.8 3.4 3.3 1.2 2.4 2.1 62.7 77.3
Sharda 32.8 1.4 40.4 1.4 19.1 14.7 11.7 14.2 1.2 2.6 0.8 18.1 34.4
Sheela 36.3 1.9 110.0 6.6 7.2 4.8 5.2 9.3 0.6 3.3 1.0 58.3 72.8
SJVN 17.7 1.2 15.2 1.1 75.7 76.7 0.3 0.2 6.0 2.1 0.8 8.9 130.1
Solar ind. 22.5 0.7 22.2 1.1 17.8 19.9 2.6 4.2 1.5 2.8 5.0 52.1 96.7
Sonata 43.2 1.4 76.6 2.8 8.3 6.6 45.3 8.2 0.0 0.0 0.5 21.4 32.9
Suprajit 21.2 0.8 19.3 0.7 16.0 13.7 3.7 3.7 0.6 3.0 1.0 31.4 39.0
Symphony 50.6 0.5 52.4 0.9 29.1 26.5 7.3 12.4 0.1 1.1 4.3 75.7 125.4
Syngene 15.7 1.0 14.3 0.6 24.6 19.0 1.8 1.0 2.7 3.0 1.3 40.6 119.4
TNPL 11.4 1.0 16.9 1.4 16.6 16.9 0.9 0.9 5.8 2.0 0.3 9.1 24.1
Tata Coffee 20.9 1.4 17.7 1.0 17.9 14.5 1.0 1.0 0.2 0.6 (4.6) 14.0 21.1
TCS 43.0 0.9 38.7 0.7 29.2 26.8 8.7 5.5 22.9 1.2 1.5 21.6 5454.1
Tata Elx 51.3 1.6 83.2 1.9 17.0 12.9 9.0 4.7 0.3 1.3 0.8 35.4 61.3
Tech M 22.5 0.5 24.7 0.8 16.3 21.2 7.1 8.8 9.1 2.6 1.1 17.7 625.7
Timken 22.4 0.9 21.9 1.0 11.8 16.0 8.1 7.9 0.7 3.5 1.7 49.3 48.0
Torrent Ph. 30.1 1.2 32.9 1.0 25.7 16.3 3.1 3.5 4.4 2.1 0.6 22.7 211.5
TVS Motors 23.0 1.8 31.1 1.7 4.8 1.9 5.7 4.1 5.0 2.1 1.1 57.6 308.2
TVS Srich. 42.2 2.0 74.1 2.9 9.4 7.1 5.8 7.8 1.3 2.3 0.3 16.7 24.6
United Brew. 19.2 1.5 36.6 2.5 9.6 9.4 2.7 2.5 3.0 1.0 211.9 108.9 250.6
UPL 21.7 1.3 27.0 1.4 15.8 16.0 3.3 2.8 10.0 2.1 1.1 21.4 371.9
Vardhman 18.3 1.7 48.9 3.2 17.0 12.7 2.1 1.5 3.0 0.7 0.7 7.5 70.2
V-Guard 32.4 1.3 51.3 1.9 8.2 9.6 11.1 6.4 0.2 1.1 2.4 61.9 94.6
Vinati 35.1 0.9 46.1 1.4 25.5 20.6 2.1 3.8 0.8 1.7 1.6 33.4 46.4
VIP 33.2 1.2 48.5 2.4 7.5 9.9 14.7 8.1 0.1 0.5 2.0 53.7 45.0
V-Mart 45.7 1.0 43.0 1.0 14.6 14.4 7.0 6.6 0.2 1.7 5.5 86.8 34.4
Whirlpool 39.6 1.0 29.9 0.9 8.9 6.9 8.7 7.2 0.9 1.4 2.1 61.7 191.6
Zee 30.3 1.4 19.0 0.7 28.6 31.0 4.7 1.9 2.2 2.8 14.3 55.4 552.7
Zensar 27.9 0.8 21.3 0.7 13.6 13.4 6.1 6.1 1.3 4.0 2.0 17.2 40.5
Source: Bloomberg, Ace equity, Edelweiss research

Eye (I) on RoCE
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ADITYA
Digitally signed by ADITYA NARAIN
DN: c=IN, o=EDELWEISS SECURITIES LIMITED,
Aditya Narain ou=HEAD RESEARCH, cn=ADITYA NARAIN,
serialNumber=e0576796072ad1a3266c2799
0f20bf0213f69235fc3f1bcd0fa1c30092792c2
Head of Research
NARAIN
0, postalCode=400005,
2.5.4.20=3dc92af943d52d778c99d69c48a8e
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aditya.narain@edelweissfin.com st=Maharashtra
Date: 2018.04.20 00:18:13 +05'30'
Distribution of Ratings / Market Cap

Edelweiss Research Coverage Universe Rating Interpretation
Buy Hold Reduce Total Rating Expected to
Rating Distribution* 161 67 11 240 Buy appreciate more than 15% over a 12-month period
* 1stocks under review
Hold appreciate up to 15% over a 12-month period
743 > 50bn Between 10bn and 50 bn < 10bn
Reduce depreciate more than 5% over a 12-month period
Market Cap (INR) 156 62 11
594
446
(INR)
297
149
-
Apr-14
Sep-14
Feb-14
Mar-14
Jun-14
Dec-14
Jul-14
Aug-14
Oct-14
Nov-14
May-14
Jan-14

Capital Conundrums
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Eye (I) on RoCE
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Capital Conundrums Series' - Eye (I) On Roce

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Eye (I) on RoCE

Edelweiss Securities Limited

Nilesh Aiya Manoj Bahety Ankit Dangayach, CFA Raj Koradia

We present a portfolio of capital-efficient companies built on the Incremental RoCE (I-RoCE)

1 Edelweiss Securities Limited

I-RoCE: Apt tool to gauge capital efficiency

High I-RoCE companies have clocked stellar performance

Framework: How we did it

2 Edelweiss Securities Limited

Capital efficient portfolio: Sifting the winners

Mid caps Kajaria 39 1.9 Heritage 27 2.4

Mid caps Avanti 67 7.4 KPR 20 2.4

Sectoral flavour: Making the grade

3 Edelweiss Securities Limited

Crux of our analysis

Fig. 2: Consistency + quality check# Fig. 3: “SUSTAIN”ability framework

•Large opportunity size/ scalable

Consistency of Earnings •Strong brand/ distribution, unique

•Stickiness of customers/ suppliers,

Consistent Consistent and Technology/ •Technological edge/ adaptability

Note: #Refer Annexure1 for details of each of these parameters

4 Edelweiss Securities Limited

Chart 1: Portfolio of Top 20 consistent and sustainable capital efficient allocators

5 Edelweiss Securities Limited

Chart 2: ECS portfolio significantly outperformed index

Table 2: ECS portfolio stocks wealth creation

6 Edelweiss Securities Limited

Chart 4: I-RoCE vs. PE ratio (trailing TTM basis)

7 Edelweiss Securities Limited

Table 3: Valuation snapshot – coverage companies

Table 4: Valuation snapshot – not in coverage

8 Edelweiss Securities Limited

Framework: We introduce concept of I-RoCE ........................................................................ 12

Back testing ............................................................................................................................ 15

Efficient capital allocators ...................................................................................................... 18

Rising stars ..................................................................................................................... 20

Potential Winners ................................................................................................................... 22

Case studies ............................................................................................................................ 24

Kajaria Ceramics ........................................................................................................... 25

CCL Products (CCL) ........................................................................................................ 33

Avanti Feeds ................................................................................................................. 37

KPR Mills ....................................................................................................................... 46

Blue Star ....................................................................................................................... 55

Jamna Auto ................................................................................................................... 60

Avenue Supermart ........................................................................................................ 72

Glimpse of high I-RoCE companies beyond BSE-500 ............................................................. 76

Sectoral flavour ...................................................................................................................... 78

9 Edelweiss Securities Limited

Why I-RoCE: Simple, but intriguing

1. RoCE from existing business, which at times could be inherited.

Therefore, we introduce I-RoCE in our report. We believe, true assessment of a company’s

Chart 5: ~25% of BSE-500 companies were able to sustain >20% I-RoCE

Of the 201 companies with 150 130

10 Edelweiss Securities Limited

Chart 6: Case study 1 – ABC

Chart 7: Case study 2 – XYZ

360 24 1.5 18%

Avg RoCE of 21% but low

I-RoCE of 10% in FY08-17.

Capital Employed ROCE (RHS) FATO EBIT Margins (RHS)

11 Edelweiss Securities Limited

Framework: We introduce concept of I-RoCE

Fig. 4: I-RoCE definition