Equitymaster Agora Research Private Limited

Independent Investment Research

26 October 2017

This Super Investor Loves Beaten Down Stocks and

Recently Picked Up a Stake in One
Welcome to the sixth issue of Smart Money Secrets!

What if stock markets were to crash suddenly? What if your favourite stock sees its price plunge in a single day?
Most investors would probably panic. They would look to exit as soon as they can.

Not the smart value investor though. For them, all pervading pessimism is an investor's best friend. You see
overall, stock markets are far from perfect.

Sometimes, stock prices run up so high that valuations begin to look extremely stretched. Most investors like a
bull market because that is when they start buying. For us the opposite holds true. In a market, where stock prices
run ahead of fundamentals, we prefer selling.

Like any value investor, we like falling markets. Because that is when you find the best quality stocks available at
bargain prices.

Who doesn't love a good bargain?

Even the best companies with excellent management are prone to oscillations in their stock prices. So even
though the business fundamentals remain intact, the stock prices of these companies see a huge fall in a
pessimistic environment.

Classic case in point is Asian Paints. Way back in 2008, the business of Asian Paints was as robust as ever. But its
stock price crashed because of the negative impact of the global financial crisis; not just on the global markets,
but also on the Indian stock markets.

Those who had invested in Asian Paints during that time would have been richly rewarded.

Infact, we know one such super investor who identified the potential of Asian Paints way back then. He is none
other than Kenneth Andrade of Old Bridge Capital Management. And the stock of Asian Paints has multiplied
almost 10 times since then.

This was not an isolated bet that worked for him. He successfully replicated his bets with others like Page
Industries, MRF, Kaveri Seeds, Bata India, Va Tech Wabag, among others.

We were fortunate enough to meet Kenneth Andrade a few months back. Naturally, we wanted to know more about
his investing style and how he goes about picking winning stocks.

"Buy when no one else is buying. In times of maximum pessimism is when you get right prices to buy. The risk-
reward is most favorable."

But there is more to this.

Andrade typically prefers companies which operate in an industry where competition is low, profitability shows
improvement, and future capital needs are low. More importantly, he stays out of businesses that have too much
debt.

Given that his investment philosophy closely matches ours, we are keen followers of his stock-picking ideas. Thus,
recently, our interest was piqued when he bought a stake in the small cap company Honda Siel Power Products
Ltd.

Demonetization and GST coupled with the improving power situation in the country has hit Honda Siel. The stock
has lost some steam as the genset segment contributes around 62% to the business and declining power deficit is
a concern.

Given his penchant for beaten down stocks, this presented a very good for opportunity for Andrade to pick up a
stake in the business.

Naturally, it also had us looking deeper into Honda Siel's business - its financials and the valuations.

And our research convinced us that the Honda Siel story was compelling enough to recommend under Smart
Money Secrets.

So, without much ado, let me discuss in detail Honda Siel Power Products Ltd, our sixth recommendation under
our service.

A Coin with More than Two Sides...

As many of our readers know the first super investor we met was Kenneth Andrade... He made a very interesting
point about buying a strong company when it is out of favour. 'That's how valuations are in your favor', he said.

Honestly, every business goes through the doldrums, however, in times like this, the market concentrates on the
negative side of the coin and ignores the other possibilities.

This is how an opportunity is created.

First Side of the Coin

Honda Siel Power Products Ltd is the undisputed champion in the domestic genset business. With strong
research & development and support from the parent company 'Honda Motor Co., Japan', it has dominated the
Indian markets for more than two decades now.

It has a unique product profile - portable gensets ranging from 2.1 KVA to 7 KVA. The closest competitor, Cummins
India, has gensets starting 15 KVA.

Now, about the power situation improvements in India (power deficit below 1%), the genset business is under
threat. This is keeping the core business out of favour, and hence an opportunity for people like Andrade...

As he mentioned, he picks companies which have capacity to sail through difficult times. In fact, Honda is one
step ahead of just sailing through the difficult time.

In 2014-15, Government of India banned kerosene based gensets in the country. Kerosene based gensets
dominated the market then and market leader, Honda, faced the heat.

However, the company was prepared well in advance as it started introducing alternate fuel (petrol and diesel)
products before government made it mandatory.
In fact, ever since 2013, it has shifted its focus towards exports, which now contributes 42% as against 14% in
FY13.

This time when the improving power situation in the country is posing a threat for the genset business, it has
geared itself up as follows:

Introduced many new products in the Exports markets like United States, Europe, Middle East, among
others. The company now derives around 40-45% of the genset revenues from exports.

High focus on Portable gensets used for agricultural purposes.

Long term contracts with the Government of India - The company has gotten into long term contracts
with Government's Institutional business (Using Gensets for power back-ups in the rural electrification
programs).

Well, Kenneth has not just seen company's protection from the downside of declining power deficit.

The Second Side of the Same Coin...

In addition to the portable gensets industry, Honda has also changed the dynamics of portable engines (14% of
the revenues) and water pumps (15% of the revenues) used for agricultural purposes.

The company, over the years, has developed an integrated dealership network across the country. It has around
700 dealers, 60 distributors, and 15 retailers.

With government's focus on agriculture and Farm Mechanization, Honda started leveraging the capability of its
parent 'Honda Motor Company, Japan' by introducing unique products in the Indian agricultural markets.

Gearing up for Farm Mechanization

  Category Product Focus

FY10 Genset 5.5 KVA Genset (Super Silent version) Across Segments

FY11 Genset 3.3 KVA Genset Across Segments

FY12 Tillers 5.5 HP Tiller (de-weeder cum tiller) Farm

Mechanization/Agri

FY12 Engines Out Board, Long Tail Board Engines for Marine Segment Marine

FY13 Genset 1 KVA Genset (Exports market) Across Segments

FY14 Tillers 5.5 HP Tiller (Variant of the earlier version) Farm

Mechanization/Agri

FY14 Genset 2 Models in 7 KVA ( EU based - Fuel Injection Technology) ( exports Across Segments
market)

FY15 Genset EU70is (exports Market) Across Segments

FY16 Water Diesel, Gasoline water Pumps (Domestic Market) - Now Present in all Farm
Pumps fuel Mechanization/Agri

FY16 Tillers Variants in 5.5 HP Farm

Mechanization/Agri

FY17 Tillers 2 HP Tillers (Petrol Run Mini Tiller - widely used in international Farm
markets) Mechanization/Agri

FY17 Engines 2 HP Engine Farm

Mechanization/Agri

Source: Company, Equitymaster

After launching products like Brush Cutters, Lawn Movers, Back-pack Sprayer, the company launched a unique
rotary tiller in the year 2012.

With best-in-class technology from Honda and robust distribution network, the company has successfully created
a market for these products.

Since around 85% of the farmers own around one hectare land, low cost, and portable farm equipment will help the
government's farm mechanization dream. We believe Honda Siel is gradually capitalising on this opportunity by
introducing these unique products (portable and modestly priced).

Just to give you a perspective, a power tiller from the market leader 'VST Tillers' costs around Rs 1.5 lakh (eligible
for government subsidy -40%), whereas a tiller from Honda costs around Rs 50 thousand (eligible for government
subidy-40%).

The biggest barrier for farm mechanization is the high cost of ownership. And Honda's products are portable
(favourable for small farms) and competitively priced.

In fact, the company has introduced many variants of these tillers (2 HP and 5.5 HP) to suit specific markets like
South, North, East, and West. This catered to variations in soil of different regions.

With the help of Honda Motor co., Japan (one of the major players in global farm mechanization), we believe
Honda Siel is well placed to ride big on India's agricultural theme for the next one decade...

The Third Side of this Coin...

As mentioned earlier, the company has been able to introduce products with the help of its parent company. In
fact, in earlier days it used to import products/parts from Japan and assemble and sell in the domestic market.

This led to higher pricing (custom duty), yet lower margins.

The company began sourcing and manufacturing in India in a big way from FY10. In fact, now it exports Gensets
to Japan itself.

This has helped the company in improving its profitability substantially.

In fact, the company has adopted a unique strategy: 'Introducing a new product out of the robust product pro le of
its parent company by importing it'.

Now, if the product is successful and accepted in the domestic market it starts manufacturing it in India. Once
manufactured in India, it helps in improving overall profitability due to lower production cost.

Interestingly, in FY17 the company has started manufacturing tillers in India. This is expected to boost both the
demand and profitability of the tillers.

Shifting the Manufacturing Base in India

  India Imported % of Revenue

Gensets 100% 0% 63%

Engines 74% 26% 15%

Water Pumps 100% 0% 14%

Brush Cutters 0% 100% 4%

Tillers 38% 62% 2%

   India Imported % of Revenue

Lawn Movers 0% 100% 1%

Source: Company, Equitymaster

The shifting of manufacturing base has not only improved the demand for its products, but it has also helped
improve its profitability... the bottomline grew at a CAGR of 44% in the last three years.

Exports + Make in India = Improved Pro tability!

It has also helped the company improve its return ratios from 8% in FY13 to 15% in FY17.

If fact, it has improved its cash conversion cycle from 47 days to 26 days, which has helped generate robust free
cash flows.

With no debt on the balance sheet and total cash and cash equivalents of around Rs 1.93 billion, the company has
a very strong balance sheet.

We believe that the market is looking at the risk the company is facing with the improving power situation in the
country. However, Andrade, our super investor, and we know that the company is very comfortably placed.

Company Pro le - Honda Siel Power Products Ltd.

Honda Siel Power Products Limited (HSPPL), is a subsidiary of Honda Motor Co. Japan and started its operations
in 1985. HSPPL is the undisputed leader in the power products industry, manufacturing and marketing a range of
portable generators, water pumps and general-Purpose engines. Recently, the company introduced farm-related
equipment such as lawn mower, brush cutter, long tailed outboard motors and power tiller.

HSPPL has been benefiting from the rich experience of Honda Motors who is one of the leading engine
manufacturers in the world. Because of its strong emphasis on R&D and in-house technical innovation, every
product manufactured is the result of persistence in quality control.

Due to its extensive focus on R&D, HSPPL launches a new product every year. In the last two years, the company
has aggressively launched farm-related products.

HSPPL's New Product Launch in Recent Years

Year Category Product

FY10 Genset 5.5 KVA Genset (Super Silent version)

FY11 Genset 3.3 KVA Genset

FY12 Tillers 5.5 HP Tiller (de-weeder cum tiller)

FY12 Engines Out Board, Long Tail Board Engines for Marine Segment

FY13 Genset 1 KVA Genset (Exports market)

FY14 Tillers 5.5 HP Tiller (Variant of the earlier version)

FY14 Genset 2 Models in 7 KVA (EU based - Fuel Injection Technology) (exports market)

FY15 Genset EU70is (exports Market)

FY16 Water Pumps Diesel, Gasoline water Pumps (Domestic Market) - Now Present in all fuel

FY16 Tillers Variants in 5.5 HP

FY17 Tillers 2 HP Tillers (Petrol Run Mini Tiller - widely used in international markets)

FY17 Engines 2 HP Engine

Source: Annual Report

Another interesting thing while launching a new product is consideration of the local requirement and introducing
a product with a special feature as per the geographical requirement. For e.g. soil conditions are different in each
region.

Honda rotary tiller is used for removing grass surrounding the trees. However, in Kashmir, the soil is hard with
small and big stones, so the company introduced different type size and strength. With such localization, HSPPL
captured market share in Kashmir.

Similarly, with the introduction of accessories, HSPPL transformed the tiller as a multipurpose machine.

Tiller was firstly made for removing the grass from the field, but after some time, on farmers' demand, the
company developed customized accessories for this machine. Now, this can be used for tilling, levelling, weeding
and for ridges or furrow formation. This shows active R&D, feedback from the end users in developing and
improving the existing product.

The company manufactures generators, water pumping sets and general-purpose engines at manufacturing
plants located in Greater Noida and Pondicherry.

HSPPL has a wide distribution network with 700 dealers, 60 distributors and 15 retailers all over India.

HSPPL Product Pro le

# Genset Business
The genset business segment contributes ~63% of sales. The revenue contribution from this segment remained
stable in the last twenty years. In the early 2000s, HSPPL used to import gensets from Japan (from its parent
company) and sell in India. However, HSPPL slowly started manufacturing various parts in India. Between 2010
and 2013, the company completely absorbed technology and started manufacturing the entire set in India. This
has resulted in:

Improvement in operating profit margin owing to cheap labour and cost savings in custom duties and

Robust delivery schedule.

 Portable Gensets

Despite its strong presence and market leadership in genset business, this segment has witnessed many
regulatory as well as structural changes. However, HSPPL anticipated the threats well in advance and responded
effectively.

Banning of kerosene run gensets - In FY14-15, the government banned kerosene run gensets on the
back of introduction of revised CPCB (Central Pollution Control Board) norms for noise and emission.
Although, this move affected the sales, HSPPL in earlier years introduced emission compliant genset
range and became the first company to launch emission complied products in the country.

Lowering power de cit in India - India's power deficit dropped to a historical low of less than 1% in
FY17, thanks to record electricity generation capacity added over the last few years, adequate coal
stocks and transmission facilities, coupled with meagre growth in electricity demand. However, HSPPL
is aiming to de-risk genset business by focusing on exports. In FY17, exports contributed 40% of the
revenue from the genset business. The company exports gensets to markets like Middle East and Latin
America. Similarly, HSPPL is focusing on the North American market. The company launched two new
products in the 7 KVA category. Going forward, the company expects a higher portion from the Northern
American markets.

The genset market has been sluggish in the last few years on the back of a change in emission norms by the
government, which made gensets more expensive and due to industrial and construction slowdown. Despite,
lowering power deficit, ~28% of the energy generated in India is lost due during transmission or stolen. Also, peak
power supply falls short and frequent power outages last for hours in many regions in the country.

Power sensitive sectors such as hospitals, airports, data centres, telecom, manufacturing facilities, and water &
sewage facilities, etc. continue to be the biggest users of gensets. Similarly, in the coming years, the demand is
expected to revive on the back of rising telecom infrastructure, expansion of public infrastructure, and smart city
projects etc.

HSPPL's gensets suit the requirements of a variety of customer segments in agriculture, domestic and
commercial.

Engines and Water Pumps

The engine and water pump segment contribute ~29% of sales. HSPPL has the advantage of the world's second
largest engine manufacturer in the world - Honda Motor Co.

The Honda engines are used in power sprayers, air compressors, rail drilling machines, pump sets and concrete
saw cutting machines to name a few applications. Farm mechanisation and a shortage of labour are expected to
grow the demand for the portable engines of the company.

In FY17, HSPPL launched 2 HP Petrol Engine. This product is expected to see a good growth from horticulture and
construction applications. The company is conducting various demonstrations across rural India to create
awareness for agricultural and horticultural purposes. In FY17, engine business registered a good growth due to
good response for sprayer application usage and support for agriculture and horticulture sector from various state
governments.

Portable Engines

The water pumps are used for irrigation in small land holdings (Up to ~ 5 Acres). The pumps come in three
varieties - Kerosene, Diesel and Petrol.

Portable Water Pumps

Honda Water pump in Action

HONDA PUMPSET WB30X

Source: UDAY SHANKAR

 Farm Mechanisation - Structural Megatrend in the Making -HSPPL is a Key Bene ciary
Agriculture plays a vital role in India's economy, and more than 58% of rural households depend on agriculture
for their principal means of livelihood. That's a big chunk of the population.

A typical farmer owns less than 1.2 hectares of land. This fragmented land holding makes tractor ownership
difficult. It is not feasible for a small farmer to own a tractor as it wouldn't be used optimally. Further, manual
labour is dwindling in rural India as the rural workforce migrates to the cities for better opportunities and
wages.

HSPPL entered into the field of farm machinery with products useful for the small and marginal farmers. The
company understood the requirements of farmers through a survey.

Three important things came out from the survey:

1. Farmers need products having light weight (Portable)

2. Low running costs and less maintenance and,

3. Easy to operate

HSPPL always endeavours to provide need-based products to farmers. The company considers initial cost,
running cost and maintenance cost while coming out with a new product. The farmer always gets attracted
towards low cost and good feature products while purchasing any farm product. The second thing is running
cost (i.e. product should be very fuel efficient) and the last thing is low maintenance cost.

HSPPL's products such as tillers, pump sets, sprayers etc. are at a very affordable price; a farmer can easily
buy them and after utilizing in his own field, he can also give them on rent to other fellow farmers to earn
some extra money.

Farm mechanisation in India is still at a nascent stage. Needless to say, the scope for growth is huge.

Going forward, the management expects farm mechanisation, increasing farm income, government support and
scarcity of farm labour as key triggers for increasing demand for engines and water pumps.

Agriculture Related Equipment

Agriculture-related equipment contributes ~7% of sales. This segment has witnessed a massive growth in the last
four years with the revenue growing at a CAGR of 43%.

HSPPL manufactures the following range of products in this category:

Rotary Tiller

Lawn mover

Bruch cutter

Backpack sprayer
Rotary Tiller
Back in 2012, HSPPL used to import tillers (Power de-weeder cum Tillers -5.5 HP) from Japan to sell in India.
However, from FY17, the company started manufacturing rotary tillers in India (introduced petrol based tillers).

Honda Rotary Tillers

Honda FJ 500

Honda FJ 500

Source: CepreÑ 3axapNH

In FY17, HSPPL introduced a 2 HP Tiller. Small tiller is useful for small vegetable gardens as well as the plantation
for initial land preparation and de-weeding. Also, new tiller attachments for multiple applications were launched
during the year to enhance the farm productivity.

Similarly, the company introduced a mini Tiller (Model F300), in Asia & Oceania region. Currently, HSPPL is
exporting to Indonesia, Taiwan, South Africa and other markets and gradually, its market will be expanded further.
 F 300 Mini Tiller

New F 300 - Small Mini Tiller from HONDA.

Source: RAM Tech's

Brush Cutters

The company addressed the demand of the western and southern farmers to replace the manual practices of de-
weeding with an automated brush cutter series. The brush cutter was launched by the company in FY07. it is
entirely imported on CBU basis.

The company currently sells the product in southern and western markets and now plans to market it in the north
and east.

Brush Cutter in Action

HONDA BRUSH CUTTER UMK435

Source: Hindu ved puran Katha

HSPPL is the market leader in the brush cutter segment. The southern market continues to be the major market
for the company. The company is focusing very strongly on the after-sales support services and introduction of
the new variants in the brush cutter segment. Recently, Honda brush cutter has been accepted by diary segment
as fodder cutter machine.

Going forward, increased support from the government in areas such as plantations and horticulture will provide
the impetus to grow this business.

Other Products

Other Agri. Products

Growing Export Business + Make in India = Improved Margins and Return Ratios
There has been a shift in the HSPPL's financials in the last five years. During this time, the company started
focusing on the export market to diversify its business.

Increasing Export Contribution

(in %) FY13 FY14 FY15 FY16 FY17

Domestic Business 86% 72% 58% 59% 58%

Exports 14% 28% 42% 41% 42%

Source: Company, Equitymaster

Similarly, the company focused on manufacturing in India.

Make in India

Manufacturing in India Imports (from Japan) % of Revenue

Gensets 100% 0% 63%

Engines 74% 26% 15%

Water Pumps 100% 0% 14%

Brush Cutters 0% 100% 4%

Tillers 38% 62% 2%

Lawn Movers 0% 100% 1%

Source: Company, Equitymaster

This has resulted in improvement in margin profile and return ratios. It is important to note that export segment is
a high margin business. Similarly, manufacturing in India helped the company to save on custom/import duties
thereby selling products at a cheaper rate which in turn, helped HSPPL to gain market share.
 Improvement in Margin Pro le

Margins (in%) FY13 FY14 FY15 FY16 FY17

Gross Margins 36 39 40 41 41

EBITDA 8 10 12 14 15

PAT 4 3 6 7 8

Source: Equitymaster, ACE Equity

Steady Improvement in Return Ratios

Return ratios (in %) FY13 FY14 FY15 FY16 FY17

ROA 4 4 7 8 8

ROE 8 7 13 14 15

ROCE 12 10 19 22 22

Source: Equitymaster, ACE Equity

It is important to note that the company has nearly Rs 1.93 billion of cash and cash equivalent (as of FY17) sitting
on the balance sheet. Due to this, return ratios are slightly suppressed. HSPPL is also a debt free company. This
provides a strong and safe base to grow from in the future.

Who Owns the Company?

Our love to find owner-operators is well known to our subscribers. What we mean by owner-operator setup is
owners who are involved in the operations of the business. This gives us the comfort on the incentives of the
owners.

Honda Siel Power Products Limited is promoted by 'Honda Motor Co., Japan'. Honda Japan, which is the second
largest manufacturer of engines worldwide, owns 66.7% in the company.

Promoters have not diluted the stake in the company for more than a decade. In fact, it has helped the company
by providing the best in class technology and high-level research and development support.

The company has been able to dominate the domestic market for more than two decades with unique product
profile in the power segment due to the advanced technologies. The parent company charges royalty for using the
technical know-how (~4% of the total revenues).

Honda Motor Co. is well known for its technical know-how across the globe and this has helped Honda Siel in
entering exports markets since 2013 (exports now form 42% of the total revenues against 14% in FY13).

In fact, the parent company is now focusing on shifting the manufacturing base to India due to the low-cost
advantage. In fact, Honda Siel has also started exporting to Japanese markets in last two to three years.

We really like promoters holding the company so closely. This keeps the promoter company's soul in the game.

Apart from the promoters, what we like more is the recent entry of one our Super Investors - Kenneth Andrade (CIO
- Old Bridge Capital).

As many of our readers know we really admire Kenneth and his investment philosophy. Recently Kenneth entered
the stock by entering a bulk deal:

Super Investor: Kenneth Andrade Bought in Bulk

 Super Firm Name Deal Date Deal Current
Investor Type Price Price

Kenneth OLD BRIDGE CAPITAL MANAGEMENT BSE - 25th July 1,359 1,322
Andrade PRIVATE LIMITED ALL CAP STRATEGY Bulk 2017

Source: Stock Exchnage, Equitymaster

Kenneth bought around 64, 503 shares in the company which turns to around 0.6% of the company. The company
fits perfectly in Kenneth's investment philosophy i.e. out of favour and agri-focused.

Kenneth believes India is going to see great modernization in agriculture in next one decade and companies
capitalizing on the same will be major beneficiaries.

Other than Kenneth, some other mutual funds and Mukul Agarwal of Param Capital are also invested in the
company. In fact, mutual funds are increasing stake at this price.

Smart Money Invested

We believe smart money catalyst is present in Honda Siel Power Products Limited.

About the Owners:

Honda Motor Co., Japan is the promoter and owner of the company and holds around 66.7% in the company and
around 1% is held by one of the group company Usha International.

Honda Group is one of the renowned groups worldwide. Honda has a strong global brand, world-class technology,
strong R&D capabilities and is the world's second largest engine manufacturer.

In the power segment, it has a unique product profile with very advanced technologies which are difficult to
replicate.

It has been launching the same products in the Indian market through its closely held subsidiary Honda Siel Power
Products Limited. However, earlier, the subsidiary used to import the components and sell it by assembling it.

This led to lower profitability for the group (High import duties in India coupled with high manufacturing cost in
Japan).
 Robust Product Pro le of the Honda Motor Co. Japan

The second largest engine maker has shifted its focus towards the listed Indian company i.e. Honda Siel Power
Products by supplying it technology and R&D support.

Given the low-cost advantage in India (low labor cost and no import duty to be paid), the parent company is
gradually shifting its manufacturing base to the Indian listed company 'Honda Siel Power Products Limited'.

We believe with soul in the game the incentives for running a profitable listed company are perfectly aligned.

In fact, in the last three years, the increasing exports from the Indian company (42% from 14%) is also an
indication of exporting from the Indian company instead of the parent company Japan (overall higher profitability
for the group).
 Closely Held by the Owners

Does the Company Qualify on Equitymaster's Smart Money ScoreTM?

We believe, any good business needs to pass our checklist i.e. smart money score. You can find a detailed
explanation of what the smart money score in our guide. Smart Money Secrets - A Quick Start Guide.

1. Smart Money Invested - One of the important catalysts we look for in a stock is the smart money. Based on
the holding (higher the better) and our comfort with super investor we assign a rating on a scale of 10.

We also like to see either the super investor or the promoters of the company increase their stake in the
company.

In the case of Honda Siel Power Products Ltd, Kenneth Andrade's Old Bridge Capital Management bought a
stake in the company in July 2017 in bulk (64,503 shares) which turns to be around 0.6% in the company.

Super Investor: Kenneth Andrade Entering the Stock

Super Investor Firm Name Deal Date Deal Current

Type Price Price

Kenneth OLD BRIDGE CAPITAL MANAGEMENT BSE- 25th July 1,359 1,322
Andrade PRIVATE LIMITED ALL CAP STRATEGY Bulk 2017

Source: Stock Exchnage, Equitymaster

The promoters (the parent company Honda Motor Co Ltd) also have a robust stake in the company.

Honda Motor Co holds around 66.7% in the company and this they have maintained over the years. Honda
Motor Co is an engineering behemoth in Japan.

This essentially means that Honda Siel has access to the latest state-of-the-art technology of its Japanese
parent. And the fact that Honda Motor Co has maintained its stake in the company over the years means that
they are serious about India and it is an important market for them.

Promoters Closely Holding the Stake

Promoters: Honda Motor Co. (Japan) Mar-13 Mar-14 Mar-15 Jun-16 Mar-17

Honda Motor Co. Ltd. 66.7 66.7 66.7 66.7 66.7

Usha International Limited 1.0 1.0 1.0 1.0 1.0

 Promoters: Honda Motor Co. (Japan) Mar-13 Mar-14 Mar-15 Jun-16 Mar-17

Total 67.7 67.7 67.7 67.7 67.7

Source: Stock Exchange, Equitymaster

Keeping in mind that there is a super investor catalyst (Kenneth Andrade buying in bulk) and the promoters
maintaining their stake, we assign a rating of 10 to Honda Siel Power Products Ltd.

2. Business Quality - One reason that makes Honda Siel Power Products such a compelling story is the strength
of its business and strong support from its Japanese parent Honda Motor Co.

Indeed, Honda Siel Power Products is the undisputed champion in the domestic genset business. Banking on
the strong research and development from Honda Motor Co, the company has dominated the India markets
for more than two decades now.

The company has always been able to foresee trends in the Indian market and stay ahead of the curve. For
instance, kerosene based gensets were banned by the government in 2014-15. But the company knew much
before that this scenario is likely to play out and had accordingly began transitioning its portfolio towards
diesel and petrol based gensets. So, when the kerosene genset ban came into effect, Honda Siel was geared
for the same.

As far as its products go, it has a unique product profile - portable gensets ranging from 2.1 KVA to 7 KVA. In
addition to the portable gensets industry, Honda has also changed the dynamics of portable engines (14% of
the revenues) and water pumps (15% of the revenues) used for agricultural purposes.

The company, over the years, has developed a very strong dealer network across the country. It has around
700 dealers, 60 distributors and 15 retailers across the country.

The company is betting on farm mechanization in a big way and has also introduced various products such as
brush cutters and tillers for the small farmer. Although still small, we believe revenues from tillers are expected
to grow at a scorching pace going forward and contribute to margin expansion.

Not just that, Honda Siel Power Products is also expected to benefit in the form of improving profitability by
shifting the manufacturing of its engines, brush cutters and tillers to India.

Exports + Make in India = Boost Pro tability!

Infact, we believe that all these initiatives will not only help expand Honda Siel Power Products' margins but
will also help improve its return ratios.

The quality of Honda Siel Power Porducts' business is reflected in the following metrics.:

Business Quality

Return Ratios Last 10 year Average Next 5 Year Average Score (out of 3)

ROEs (out of 1.5) 12% 17% 0.5

ROCES (out of 1.5) 19% 25% 1.5

Total     2

       

Topline & Bottomline CAGR 10 years > 10% Last 10 year Average Next 5 Year Average Score (out of 3)
 Return Ratios Last 10 year Average Next 5 Year Average Score (out of 3)

Topline Growth (out of 1) 11% 12% 0.5

Bottomline Growth (out of 1) 13% 18% 1

Operating Profits (out of 1) 14% 17% 1

Total     2.5

       

Debt to Equity Last 10 year Average Next 5 Year Average Score (out of 2)

D/E 0.0 0.0 2

       

Operating Cash Flow/ PAT Last 10 year Average Next 5 Year Average Score (out of 2)

OCF/PAT 1.0 1.1 2

Source: Ace Equity, Equitymaster

As can be seen, the company has a lean balance sheet - there is no debt on its books. Its profit growth has
been healthy on account of margin expansion; a trend we believe will play out over the next few years as well.

Having said that, although we expect return ratios to improve going forward, at present, the company does not
score too well on this front (even though ROE has improved from 8% in FY13 to 15% in FY17). Thus, we have
penalized the company for the same. Thus, we assign a rating of 8.5 on business quality.

3. Competitive Advantage: One of the important factors super investors look for is sustainable competitive
advantages aka economic moats. They love to invest in companies focusing on widening of moats.

So what makes Honda Siel Power Products stand out?

First, the company has a strong backing from its parent Honda Motor Co Japan.

The Japanese parent has world class research and development capabilities, which has enabled it to develop
and launch cutting edge products.

Honda Siel Power Products has benefitted immensely from the same. Each and every product that the
company has launched from its parent's stable in India is one of its kind and there is no real close competitor.

This is not just in its current mainstay business (portable gensets) but also in the smaller but faster growing
businesses such as portable engines, lawn movers, back sprayers, brush cutters and tillers.

Second, Honda Siel Power Products boasts of a robust distribution reach. The company, over the years, has
developed a very strong dealer network across the country. It has around 700 dealers, 60 distributors and 15
retailers across the country. This is important given that its products largely cater to the rural regions where a
robust reach is essential.

Third, Honda Siel Power Products stands to bene t from the farm mechanization story in a big way.
Agriculture plays a vital role in India's economy. Now, a typical farmer owns less than 1.2 hectares of land.
This fragmented land holding makes tractor ownership difficult. It is not feasible for a small farmer to own a
tractor as it wouldn't be used optimally. Further, manual labour is dwindling in rural India as the rural
workforce migrates to the cities for better opportunities and wages.
 Thus, farm mechanization is a key trend that is expected to play out in the coming years. And Honda Siel
Power Products is well poised to capitalize on the same through range of products suited for the small farmer
and that too at an affordable cost.

Fourth, is the management's ability to foresee trends and adapt quickly to a changing environment. For
instance, even though power deficit trend in India is declining, the company has created a market for its
portable gensets overseas. This will ensure that even if growth from the genset business in India starts
stagnating, it can be offset by the export markets. The other instance where the company management
displayed its foresight was to transition from kerosene based gensets to diesel & petrol based ones. So when
kerosene based gensets were banned by the government, Honda Siel Power Products was geared for the
same.

Thus, after doing a detailed analysis regarding Industry Rivalry, Bargaining Power of Buyers, Bargaining Power
of Suppliers, Threat of New Entrants and Threat of Substitutes, we assign a rating of 9 to Honda Siel Power
Products for its economic moat.

4. Soul in the Game - The idiom of soul in the game stands for the owner operated companies i.e. companies
where owners and operators of the business are same. We believe higher stake and active involvement in the
business puts the incentives perfectly aligned.

So, we look out for companies owned and operated by good managers.

The largest promoter holding is by the Japanese parent company Honda Motor Co. It has maintained its stake
in Honda Siel Power Products over the last many years at 66.7%.

This means that Honda Motor Co is serious about India and it is an important market for them. It also means
that Honda Siel Power Products has access to the parent company's superb R&D capabilities enabling it to
launch unique products in India too. Mr Yoshifumi Iida has been the President and CEO of Honda Siel Power
Products since March 2015 and before him this post was held by Mr Takashi Hamasaki.

Further, in FY12-17, the total salary drawn stood at 8% of the total profits earned during the same period. In
FY17, in particular, salaries accounted for 6% of net profits.

Also, we have gone through the auditor's report and Related Party Transactions; even though the company
has entered in some related party transactions, we do not find any material transactions which may raise
questions on the management integrity.

We believe, management has put its soul in the business. This is a kind of pattern our Super Investors look out
for. Thus, we assign a rating of 9 on this parameter.

5. Capital allocation - One of the patterns our super investors and we seek for is the efficient capital allocation
by the management. The best way to evaluate this could be to look at both the sources and the application of
the funds by the management over a period.

Sources of Funds
By sources of funds we mean the money raised by the company to grow its business. Typically, there are three
big sources i.e. Equity Dilution, Raising Debt and Internal Accruals (cash generated by the business).

We love the companies with capabilities of funding their growth using cash generated by the business itself.
Further, if these companies are present in the industries with big market opportunity, sky is the limit for them.
In case of Honda Siel Power Products Ltd, in the period FY12-17, of the total funds raised by the company,
over 80% of the total funds were generated by the business. We believe this shows the robustness of the
company's business model. This shows the growth has been funded by cash generated by the business.

Sources of Funds over FY12-17

Application of Funds

After sourcing the capital, the next and most important aspect is the allocation of the raised money. We
believe generating cash from the business is not enough, it is very important for the company to deploy the
same in profitable ventures.

In the case of Honda Siel Power Products Ltd, around 35% has gone towards growth capex, around 15%
towards the payment of dividend. The payment of dividend again gives us comfort for the shareholders of the
company.

However, the use of cash has not been optimal. Indeed, over this period, around 26.3% of the cash has been
used for purchase of investments and the increase in cash itself has been around 23.4%. Much of this cash
can be utilized by either increasing dividend payouts to shareholders or investing more of it fruitfully back in
the business.

Application of Funds over FY12-17

Thus, while Honda Siel Power Products scores strongly in terms of its business generating healthy cash, we
believe there is scope to improve when it comes to allocating this capital. We, thus, assign a rating of 7 for
capital allocation.
6. Earnings Quality - One of the key challenges while evaluating small and mid-cap companies is the quality of
their earnings.

The growth in the sales and profits should translate into cash flows for the company. There should be a good
comparison between the accounting and cash profits to understand the quality of the earnings.

One crucial tool to check the earnings quality is the proper analysis of the Cash Flow Statements (which many
people miss to look at).

Over the years, we have found a similar pattern in companies that were fraudulent or bankrupt or both in India
and abroad. The usual culprit in both the cases involved money stuck in their working capital which meant
accounting profits weren't converted into cash profits.

We have devised a simple way to inspect earnings quality of any company. We begin with cash flow from
operations. Divide it in two parts i.e. Gross Cash Flow from Operations (GCFO) and Net Cash Flow from
Operations (NCFO). The difference being the 'changes in working capital'.

As a thumb rule, for a manufacturing company NCFO as a percentage of GCFO should not be signi cantly
below sixty percent. This simply means ideally not more than forty percent of the money should be stuck in
working capital.

We applied the same rule on Honda Siel Power Products Ltd and over FY12-17 this number on an average
stood at 103% which well above the sixty percent rule.

We also compare the net cash flow from operations with operating profits because theoretically they should
be close to each other.

For Honda Siel Power Products Ltd both accounting and cash operating profits were close.

Further, the company also has a robust cash conversion cycle of 26 days.

We assign a rating of 10 for earnings quality.

7. Scalability of the Business - Identifying a good business is one thing, identifying a good business with
potential to grow at decent rates for years to come is another. One crucial factor for a business is the size of
the market it caters to.

Honda Siel Power Products is a big play on the farm mechanization story. With the government's focus on
agriculture and farm mechanization, Honda Siel started leveraging the capability of its parent 'Honda Motor
Company, Japan' by introducing unique products in the Indian agricultural markets. After launching products
like Brush Cutters, Lawn Movers, Back-pack Sprayer, the company launched a unique rotary tiller in the year
2012.

With best-in-class technology from Honda and robust distribution network, the company has successfully
created a market for these products.

There is a big opportunity for Honda Siel Power Products to capitalize on the farm mechanization story. India's
land and water resources are just not enough to feed its growing population and its livestock. This makes a
compelling case for improving crop yields. Further, there is a shift taking place in terms of labour moving from
rural to urban areas making labour availability for agriculture difficult. Agriculture so far has been labour
intensive. But all this is set to change as farm mechanization is expected to play a big role.
 Essentially farm mechanization means using machinery such as tractors, tillers, brush cutters, water pumps,
etc. for various agricultural tasks. The level of farm mechanization in India stands at around 40%, while for
developed countries like the US, the number stands at around 95%. This shows that there is huge scope for
farm mechanization to grow in India (especially given the government's thrust too). Therefore, companies
capitalizing on the farm mechanization story such as Honda Siel Power Products Ltd are expected to benefit
immensely. In other words, there is a healthy scope for Honda Siel to scale up its business in this space.

Further, since around 85% of the farmers own less than a hectare land, low cost and portable farm equipment
will help the government's farm mechanization dream. Tillers, in particular, have grown at a scorching pace. It
accounted for a mere 1% of sales in FY16. But we expect growth to be robust going forward so that tillers are
expected to account for around 9% of sales over the next 4 years.

Having said that, gensets still account for 62% of the company's sales and this business could stagnate as the
power deficit in the country has been declining. The good thing though is that the company has managed to
create an export market for gensets so that it is not overly dependent on India.

Honda Siel Power Products'' sales and profits have grown at a CAGR of 11% and 13% respectively in the last
ten years. We expect the company to deliver revenue and profit CAGR of 12% and 18% respectively over FY17-
22. Profit growth will be stronger because we expect margins to improve as more of the manufacturing shifts
to India and tillers grow at a robust pace. (Exports + Make in India = Higher Profitability).

Thus, given all these factors, we assign a rating 8 based on scalability of business parameter.

8. Market Leadership - Honda Siel Power Products Ltd is the undisputed leader in the power products industry,
manufacturing and marketing a range of portable generators, water pumps and general-purpose engines.

It has a unique product profile - its main business, portable gensets, range from 2.1 KVA to 7 KVA. The closest
competitor Cummins India has gensets starting 15 KVA.

Further, the company has introduced a range of products catering to the small farmer and in all of these, the
company mostly has no real competition. For instance, in the tillers business, VST Tillers could probably be
considered a close competitor. But even then, VST Tillers manufactures and sells relatively bigger range tillers.
Honda Siel is present in small tillers. Small tillers are useful for small vegetable gardens as well as the
plantation for initial land preparation and de-weeding. There is no player other than Honda Siel Power
Products present in this space.

Keeping these aspects in mind, we have assigned a rating of 9 to the company on this parameter.

Considering the above analysis, the total ranking assigned to the company is 70.5 (out of 80). On a weighted
basis, it stands at 8.9. This indicates that fundamentals of the business are robust.

Equitymaster Smart Money ScoreTM

Smart Money Score (A) Weightage Weighted

Equitymaster's
(B) (A*B)
Smart Money Points High - Medium - Low
Score
1 2 3 4 5 6 7 8 9 10

Smart Money 10.0                     15.0% 1.5

Invested

Business Quality 8.5                     15.0% 1.3

 Smart Money Score (A) Weightage Weighted
Equitymaster's
(B) (A*B)
Smart Money Points High - Medium - Low
Score
1 2 3 4 5 6 7 8 9 10

Competitive 9.0                     10.0% 0.9

Advantage

Soul in the Game 9.0                     10.0% 0.9

Capital Allocation 7.0                     10.0% 0.7

Earnings Quality 10.0                     15.0% 1.5

Scalablilty in the 8.0                     15.0% 1.2

Business

Market 9.0                     10.0% 0.9

Leadership

Final Rating 70.5   8.9

What are the Risks to be looked out for?

Improving power situation in the country: It is a well-known fact that the power infrastructure in India
leaves a lot to be desired. The supply of power has not been able to cater to the increasing demand
every year across the country. The problems plaguing the sector are many. Loss making distribution
companies, inefficiencies in the upstream segment, theft and loss of power, peak deficit are some of
them to name a few.

Because of all these problems, generators have done well in India so far. Typically, in industrial setups,
generators are very useful because of high and uninterrupted power output desired.

Having said that, this power deficit trend has been declining (power deficit is now less than 1%). In other
words, the transition from a power deficit country to a power surplus one is expected to happen in the
longer term, albeit gradually.

Once that happens, the demand for gensets will decline. Infact, as per the company's annual report,
demand for gensets in the urban areas has already reduced. This will be a key concern for Honda Siel
given that it derives around 62% of its revenues from gensets.

Volatile fuel prices: Honda Siel transitioned from developing kerosene run gensets to petrol and diesel
run ones in 2013-14. Ever since petrol and subsequently diesel prices have been de-regulated, market
prices have been determining the price of these fuels.

Fuel prices have been on the lower side for the last few years because of a fall in global oil prices on the
back of excess supply. However, historically, fuel prices have been volatile. This means that a rise in fuel
prices could impact demand for the company's products in the future.

Agricultural problems: Honda Siel has developed a wide range of products for the small farmer such as
brush cutters, engines, water pumping sets and tillers. Agricultural growth depends a lot on monsoons.
So in a scenario where monsoons are poor, agricultural production will likely get hampered. This in turn
will have a negative bearing on farmer incomes restricting their purchasing power.

The other risk is with subsidy disbursals. Any delay in this or a change in the subsidy process will hurt
incomes and therefore demand.
 Cash in the Balance Sheet: As mentioned earlier, given the robust improvement in the cash conversion
cycle and cash flows, the company has accumulated huge cash in its balance sheet in the tune of Rs
1.93 billion. This acts as a deterrent to return ratios and raises a question on capital allocation.

Updates On HONDA SIEL POWER: Valuations

Add: Alert | Portfolio
We have valued Honda Siel Power Products
Market Data Ltd based on price to earnings. In fact, given One could
the recent improvement in company's consider
Price On Reco. Date (Rs) 1,322 (BSE)
earnings (grew at a CAGR of 43% in last three buying the
CMP - BSE / NSE (Rs) 1,314 / 1,318 years), we believe it can surprise our stock of
Change Since Reco.  -0.6% conservative assumptions on the positive Honda Siel
52-week High/Low (Rs) 1,750 / 1,296 side, so we have conducted a scenario
Power
Products Ltd
NSE Symbol HONDAPOWER analysis.
at current
BSE Code 522064
What we have essentially done is kept both price or lower.
No. Of Shares 10.1 m
the earnings growth and the PE multiple in a
Face value 10.0
range that we are comfortable with and have tried to deduce target price
FY17 dividend/share (Rs) 7.5
based on different combinations of the same.
Dividend yield (%) 0.6%

Stock Classification Small cap The below permutations and combinations based on earnings growth and
Free Float 32.3% P/E multiples gives a fair idea about the potential upside for the stock.
Market Cap (Rs m) 13,352 However, in addition to this we have derived a target price on basis of our
numbers.
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More On HONDA SIEL POWER

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Expected Target Price (FY22) Under Di erent Assumptions of Earnings Growth and P/E Multiples

Earnings CAGR (FY17-FY22E)

Forward PE Multiple   14% 15% 20% 25% 30%

15 5% 6% 11% 17% 22%

16 7% 8% 13% 18% 24%

18 10% 11% 16% 22% 27%

20 12% 13% 19% 24% 30%

Source: Ace Equity, Equitymaster

Honda Siel Power Products has dominated India's power products market for more than two decades. It has a very
strong brand image in rural parts of the country due to portability and affordability of its products across
segments it operates.

The company with a strong technological and R&D support from its parent Honda Motor co., Japan has kept the
competition at bay. Over the years, the company has introduced products in the domestic market from the robust
product profile of its parent company (which is a renowned power product player globally).

In the last five years, it has diversified from a genset focused company to an agri-focused company. It has
launched many products for farm mechanisation which suits the Indian market i.e. portable and affordable as the
average land holding in India is small (around 1 hectare).

Exports + Make in India = Higher Pro tability!

The cherry on cake is the company's diversification towards the exports market as the company has in the last
three to four years increased the share of exports from 14% to 42%. This coupled with shifting of manufacturing
base to India has resulted in higher profitability.

This has helped the company to improve its return ratios (RoEs) to 15% in FY17 from 8% in FY13. In fact, the
company has improved its working capital cycle from 46 days to 26 days which has again resulted into higher
cash flow generation in the business.

Honda has a very strong balance sheet with no debt and cash and cash equivalents of Rs 1.93 billion. This makes
a strong case for future expansions from internal accruals.

In fact, the cash in the balance sheet comprises around 14% of the current market capitalisation of the company,
which we believe is a downside protection to the current valuations.

Now, given the MNC parentage, high corporate governance standards and robust product profile, the stock has
always commanded a premium valuation. In the last ve years, it has traded at an average price to earnings of 28
times and median price to earnings ratio of 26 times.

Now, at current price of Rs 1,322, the stock is trading at a trailing price to earnings ratio of 23.1 times. As
mentioned earlier this is also because of suppressed earnings - thanks to poor results in the last three quarters
due to demonetisation and GST.

Even though the current valuations look slightly expensive, we believe given the MNC parentage and improving
return ratios, the company is expected to command premium valuations going ahead as well.

In fact, if we strip the cash from the current market cap, the stock is trading at an adjusted price to earnings ratio
of 19.9 times its FY17 earnings. We are valuing the company by assigning a price to earnings multiple of 18 times
from FY22 perspective.

As such, we have arrived at a target price of Rs 2,387 for the company (from FY22 perspective). This implies a
CAGR of 14% (excluding dividend yield of ~0.5%) and a point to point upside of 81%.

The maximum buy price for the stock is Rs 1,400.

According to us, in a scenario of ideal allocation of funds, predominantly mid and small-cap stocks could be
considered to comprise of not more than 30-40% of your total equity portfolio. Further, we believe a single small
cap stock should not form more than 2-3% of the total portfolio. Please note that this allocation will vary from
person to person. For something that works best for you, we recommend you talk to your investment advisor.
Consolidated Financials

(Rs m) FY15 FY16 FY17 FY18E FY19E FY20E FY21E FY21E

Sales 6,307 6,728 7,016 7,894 8,802 9,839 11,019 12,262

Sales growth (%) 17% 7% 4% 13% 12% 12% 12% 11%

Gross Profit 2,507 2,742 2,859 3,217 3,587 4,009 4,490 4,997

Gross Profit Margin (%) 40% 41% 41% 41% 41% 41% 41% 41%

Operating Profit 695 871 945 1,157 1,395 1,599 1,824 2,054

Operating Profit Margin (%) 11% 13% 13% 15% 16% 16% 17% 17%

Net Profit 380 497 579 728 889 1,029 1,185 1,345

Net Profit Margin (%) 6% 7% 8% 9% 10% 10% 11% 11%

                 

Balance Sheet                

Fixed Assets 1,230 1,125 1,051 966 913 844 758 656

Other Assets 1,809 2,016 2,476 2,479 2,706 2,965 3,260 3,571

Inventories 1,183 886 1,143 1,142 1,273 1,423 1,594 1,773

Receivables 384 336 293 346 386 431 483 538

Cash and Bank Balances 639 1,554 1,421 1,912 2,317 2,806 3,350 4,026

Current Assets 3,037 3,628 4,142 4,797 5,516 6,332 7,278 8,360
Total Assets 6,076 6,769 7,669 8,242 9,135 10,141 11,296 12,586

                 

Net Worth 3,251 3,666 4,237 4,834 5,531 6,313 7,214 8,236

Long Term Debt 0 0 0 0 0 0 0 0

Short Term Debt 0 0 0 0 0 0 0 0

Other Non Current Liabilities 1,428 1,618 1,703 1,703 1,703 1,703 1,703 1,703

Current Liabilities 1,397 1,485 1,728 1,704 1,900 2,124 2,379 2,647

Total Liabilities 6,076 6,769 7,669 8,242 9,135 10,141 11,296 12,586

Key Financial Ratios

Ratios FY15 FY16 FY17 FY18E FY19E FY20E FY21E FY22E

Operational & Financial Ratios                

EPS (Rs.) 37 49 57 72 88 101 117 133

Book Value per share (Rs.) 320 361 418 477 545 622 711 812

Dividend Payout Ratio (%) 16% 12% 13% 15% 18% 20% 20% 20%

                 

Margin ratios (%)                

EBITDA Margins 11% 13% 13% 15% 16% 16% 17% 17%

EBIT Margins 9% 11% 13% 14% 15% 16% 16% 17%

PBT Margins 9% 11% 13% 14% 15% 16% 16% 17%

PAT Margins (adj) 6% 7% 8% 9% 10% 10% 11% 11%

                 

Performance Ratios (%)                

ROE 13% 14% 15% 16% 17% 17% 18% 17%

ROCE 18% 22% 22% 24% 26% 26% 27% 26%

ROIC 22% 32% 31% 36% 40% 42% 45% 49%

 Ratios FY15 FY16 FY17 FY18E FY19E FY20E FY21E FY22E

                 

Turnover Ratios Days                

Debtors 23 20 16 15 15 15 15 15

Inventory 65 56 53 53 50 50 50 50

Creditors 36 36 35 34 33 33 33 33

Cash Conversion Cycle (days) 52 40 34 33 32 32 32 32

Fixed Assets turnover (x) 3 3 3 3 3 3 3 3

                 

Financial Stability Ratios (x)                

Debt-equity 0 0 0 0 0 0 0 0

Current ratio 2 2 2 3 3 3 3 3

                 

Growth Ratios                

Net Sales growth (%) 17% 7% 4% 13% 12% 12% 12% 11%

PAT growth (%) 104% 27% 16% 26% 22% 16% 15% 14%

                 

Valuation Ratios                

Price to earnings (x) 35 27 23 18 15 13 11 10

Price to book value (x) 4 4 3 3 2 2 2 2

Price to sales (x) 2 2 2 2 2 1 1 1

*Based on FY17 figures

Performance Review
This is as per the closing prices for the stocks as on 26th October.

The stock of SP Apparels has gained in the last one month but is still trading below the price at which we had
originally recommended the stock. Our maximum Buy price for the stock is Rs 460. Thus, we maintain BUY view
on the stock of SP Apparels.

Our view on the stock of TCPL Packaging Ltd remains a HOLD considering the steep run-up in its prices post our
recommendation. Please note the maximum Buy price for the company is Rs 600.

The stock of Ador Fontech Ltd has gained a bit in the last one month. The maximum Buy price for the company is
Rs 100. Given the current price, we change our view on the stock of Ador Fontech from BUY to HOLD.

Mayur Uniquoters has also gained considerably since we recommended the stock. The maximum Buy price for
this stock is Rs 400. Since the current price is above our maximum Buy price, we change our view on the stock of
Mayur Uniquoters from BUY to HOLD.

TVS Srichakra Ltd has marginally corrected since we recommended the stock last month. The maximum Buy price
for this stock is Rs 3,250. Thus, we maintain BUY view on the stock of TVS Srichakra Ltd.

The performance review of our open positions table is mentioned below:

Summary of Open Positions for Smart Money Secrets as on 26 th October 2017

 Company Reco. Reco. Reco. Target Price as Change View as Expected
Date Price Price on 26th (%) on 26th Return
(Rs) (Rs) Oct Oct From
2017 2017 Current
Price (%)

SP Apparels Ltd 3-Jun-17 Buy 420 766 389 -7% Buy 97%

TCPL Packaging 23-Jun-17 Buy 521 1,100 650 25% Hold 69%
Ltd

Ador Fontech Ltd 27-Jul-17 Buy 95 169 103 9% Hold 64%

Mayur Uniquoters 21-Aug-17 Buy 359 673 441 23% Hold 53%
Ltd

TVS Srichakra Ltd 25-Sep-17 Buy 3,127 4,934 3,055 -2% Buy 62%

Honda Siel Power 26-Oct-17 Buy 1,322 2,387 1,322 0% Buy 81%
Products Ltd

Kunal Thanvi (Research Analyst), Managing Editor, Smart Money Secrets , a member
of the Institute of Chartered Accountants and the Companies Secretaries of India. He
started his career with a PMS as a buy-side analyst. He is a balance sheet driven
analyst who loves niche businesses with competitive advantages.

He practices value investing based on Ben Graham's principles of 'Margin of Safety'

and 'Mr Market'. He is an avid reader who believes it's better to learn vicariously than
the hard way.

Where Smart Money Secrets Fits In...

Our team will focus primarily in the mid and small cap domain. Having said that, we will remain market-cap agnostic towards
mispriced opportunities that the markets may present to us.

Market participants must note that stock markets tend to be very volatile. Mid and Small cap stocks are inherently riskier
compared to large blue-chip stocks. On the brighter side, they present a huge growth potential. It is not unusual for a good small
and mid-cap stock to turn a multibagger in a short period of time. But on the flipside, there is a considerable risk attached. And
putting too much money in a single stock or sector can be very risky.

According to us, in a scenario of ideal allocation of funds, predominantly mid and small-cap stocks could be considered to
comprise of not more than 30-40% of your total equity portfolio. Further, we believe a single small cap stock should not form more
than 2-3% of the total portfolio. Please note that this allocation will vary from person to person. For something that works best for
you, we recommend you talk to your investment advisor.

Frequently Asked Questions

These are some of the Most Frequently Asked Questions on Smart Money Secrets. Please view the others here.

If the stock price runs up post the recommendation and trades at levels higher than the
buy price, should one still buy the stock?

Please note that small and midcap stocks, in general, have low market capitalisation and liquidity. There is always
the possibility that these stocks may shoot up in price in no time, even at the time of our recommendation.

Therefore, we would like to recommend to our subscribers not to chase prices and not to consider buying a stock
once it goes beyond our recommended maximum buy price. There will be enough recommendations in a year so
that the pain of missing out on a few recommendations is eased considerably.

Do note that we give maximum buy price range for every stock we recommend in Smart Money Secrets.

Can there be an overlap or contrary views on the stocks recommended under this service
and that of the other Equitymaster services?
We believe that earning good returns from stocks is all about following a well-defined process.

In line with this, each of our product teams, be it the Smart Money Secrets team or Hidden Treasure or The India
Letter, has its own unique screen and checklist for selecting and recommending stocks. In rare cases, where there
is a compelling proposition to recommend a stock in more than one service simultaneously, could there be an
overlap in stocks.

For example, the Smart Money team has unique smart money screener for any stock to pass i.e. 1) Greater than 1%
shareholding of Super Investors; 2) Bulk & Block Deals; and 3) Increasing Promoter Shareholding. On the other
hand, same stock could be recommended under another service irrespective of the smart money screener. In fact,
any service may have recommend a stock and now smart money has entered the stock, it becomes a candidate
for Smart Money Team.

Thus, there could be recommendations that overlap with those in our other services. This aspect also leaves the
stage open for sometimes contradictory recommendations.

What does 'Closed Position' mean?

StockSelect recommendations are meant to meet the target prices within a time frame of three years. So when the
stock meets target price or completes the time frame we 'close the recommendation'. However, since we keep
reviewing our assumptions and estimates for the stock even in the interim, the view or target price on the stock
may warrant a change. This could be a revision upwards or downwards. In such cases, if the previous
recommendation on the stock is no longer valid we close that recommendation. So we essentially close
recommendations either by giving a Sell view or putting out a changed view.

How to read the returns calculations?

For positions that are not closed returns are calculated from date of recommendation till date.

For closed positions, there can be two types of calculations.

Assuming we initially gave a Buy on a stock with no subsequent recommendations on the same stock.
In that case the calculation is fairly simple. The returns shown in this case is simply the change in stock
price from the date of recommendation till the date on which the position was closed.

Now let us take a case where we initiated with a Buy (1st position) and subsequently came with another
recommendation (2nd position) on the same stock. Let us assume that the subsequent recommendation
was also a buy. In such cases, the return calculation depends on whether the 1st position is closed or
not. If the first position is closed before we reiterate buy then the return on the first position will be
calculated as shown previously. However, if 1st position was not closed before we reiterated buy, then
the return calculation is from the earlier buy recommendation till the date on which the position was
closed. Basically where we have reiterated view on a stock we try to show cumulative returns. The same
logic applies with Hold recommendations as well.

Now let us look at Sell recommendations. There can be two situations here.

If there is no recommendation subsequent to the Sell recommendation we show maximum drop in stock
price from date of sell recommendation till date.

If the Sell recommendation is followed up by another recommendation, we show maximum drop in stock
price between the two recommendation dates.
Basically we have tried to cover all hypothetical instances in this note that may help you better understand the
return calculations and closed positions of our recommendations. If you have any query pertaining to it please do
write in to us for further clarifications.

De nitions of Terms Used

Buy recommendation: This means that the subscribers could consider buying the concerned stock at
current market price keeping in mind the tenure and objective of the recommendation service.

Hold recommendation: This means that the subscribers could consider holding on to the shares of the
company until further update and not buy more of the stock at current market price.

Buy at lower price: This means that the subscribers should wait for some correction in the market price
so that the stock can be bought at more attractive valuations keeping in mind the tenure and the
objective of the service.

Sell recommendation: This means that the subscribers could consider selling the stock at current
market price keeping in mind the objective of the recommendation service.

To enhance your experience of using Smart Money Secrets and to ensure that this journey is smooth for you we have compiled a
list of Frequently Asked Questions.

DISCLOSURES UNDER SEBI (RESEARCH ANALYSTS) REGULATIONS, 2014

INTRODUCTION:
Equitymaster Agora Research Private Limited (hereinafter referred to as "Equitymaster"/"Company") was incorporated on October 25, 2007. Equitymaster is a joint
venture between Quantum Information Services Private Limited (QIS) and Agora group. Equitymaster is a SEBI registered Research Analyst under the SEBI (Research
Analysts) Regulations, 2014 with registration number INH000000537.

BUSINESS ACTIVITY:
An independent research initiative, Equitymaster is committed to providing honest and unbiased views, opinions and recommendations on various investment
opportunities across asset classes.

DISCIPLINARY HISTORY:
There are no outstanding litigations against the Company, it subsidiaries and its Directors.

GENERAL TERMS AND CONDITIONS FOR RESEARCH REPORT:

For the terms and conditions for research reports click here.

DETAILS OF ASSOCIATES:
Details of Associates are available here.

DISCLOSURE WITH REGARDS TO OWNERSHIP AND MATERIAL CONFLICTS OF INTEREST:

a. 'subject company' is a company on which a buy/sell/hold view or target price is given/changed in this Research Report.
b. Neither Equitymaster, it's Associates, Research Analyst or his/her relative doesn't have any financial interest in the subject company.
c. Neither Equitymaster, it's Associates, Research Analyst or his/her relative have actual/beneficial ownership of one percent or more securities of the subject
company at the end of the month immediately preceding the date of publication of the research report.
d. Neither Equitymaster, it's Associates, Research Analyst or his/her relative have any other material conflict of interest at the time of publication of the research
report.
e. Equitymaster's technical team/other research services have given a 'Buy' view on Mayur Uniquoters.

DISCLOSURE WITH REGARDS TO RECEIPT OF COMPENSATION:

a. Neither Equitymaster nor it's Associates have received any compensation from the subject company in the past twelve months.
b. Neither Equitymaster nor it's Associates have managed or co-managed public offering of securities for the subject company in the past twelve months.
c. Neither Equitymaster nor it's Associates have received any compensation for investment banking or merchant banking or brokerage services from the subject
company in the past twelve months.
d. Neither Equitymaster nor it's Associates have received any compensation for products or services other than investment banking or merchant banking or
brokerage services from the subject company in the past twelve months.
e. Neither Equitymaster nor it's Associates have received any compensation or other benefits from the subject company or third party in connection with the
research report.

GENERAL DISCLOSURES:

a. The Research Analyst has not served as an officer, director or employee of the subject company.
 b. Equitymaster or the Research Analyst has not been engaged in market making activity for the subject company.

De nitions of Terms Used:

a. Buy recommendation: This means that the subscriber could consider buying the concerned stock at current market price keeping in mind the tenure and objective
of the recommendation service.
b. Hold recommendation: This means that the subscriber could consider holding on to the shares of the company until further update and not buy more of the stock
at current market price.
c. Buy at lower price: This means that the subscriber should wait for some correction in the market price so that the stock can be bought at more attractive
valuations keeping in mind the tenure and the objective of the service.
d. Sell recommendation: This means that the subscriber could consider selling the stock at current market price keeping in mind the objective of the
recommendation service.

Feedback:

If you have any feedback or query or wish to report a matter, please do not hesitate to write to us.

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