Oct2018 PDF

AUGUST 2, 2017
Monthly Market Strategy October 2018
TABLE OF CONTENTS
Equity Market Outlook
Theme 1 : Pharmaceuticals
Aurobindo Pharma Ltd
Laurus Labs Ltd
Theme 2 : Information Technology
Tech Mahindra
Cyient Ltd
Persistent Systems Ltd
Theme 3 : Defensives/Consumption driven stocks
Maruti Suzuki India Ltd
ITC Ltd
Arvind Ltd
The Phoenix Mills Ltd
Amber Enterprises India Ltd
1M Portfolio : September 2018
October 2018
One month Model Portfolio Performance
Kotak Securities – Private Client Research Please see the Disclosure/Disclaimer on the last page For Private Circulation 2
Teena Virmani
teena.virmani@kotak.com
MONTHLY OUTLOOK FOR OCTOBER 2018
+91 22 6218 6432
Return of volatility
September was a volatile month with domestic markets witnessing sharp correction led by
continued rupee depreciation, higher crude prices, default from large financial institution IL&FS,
higher yields and corresponding stress in NBFCs during the month. High valuation consumption
related sectors also witnessed selling pressure owing to lesser risk reward ratio. Spike in bond
yields, higher crude and depreciated currency has also resulted in valuation de-rating for sectors
where earnings are likely to get impacted in near to medium term.
India is currently facing weaker macros with twin deficits and depreciated currency. Any slip on
fiscal deficit given election year, higher inflation and rising crude can further pressurize INR in
coming months, in our view. Under the given circumstances, we recommend investors to focus
on companies that are capable of delivering strong earnings growth.
Market valuations have corrected in recent months and are trading at 20/17x FY19/20 estimated
earnings but volatility is likely to remain owing to negative global cues as well as domestic factors
such as elections, pressure on CAD and fiscal deficit from higher crude prices. Ideal approach is
to use this volatility to add stocks that are likely to benefit from currency depreciation as well as
healthy growth in respective domains (IT and Pharma), consumption growth as well as various
defensives that have corrected in recent months and available at attractive valuations. Key risks
to our recommendation would come from adverse outcome of further crunch in liquidity, state
elections, further rise in oil prices & yields, shortfall in earnings or decline in liquidity from FIIs
and domestic mutual funds.
Market performance – sector wise (September 2018)

3.0% 1.9%
0.0%
-3.0% -1.8%
-3.7% -4.5%
-6.0%
-6.4% -6.4%
-9.0%
-9.0% -8.8%
-9.4%
-12.0%
-12.2% -12.0%
-13.3%
-15.0%
-15.6%
-18.0%
Source: Bloomberg
GLOBAL MARKETS
Global markets remained weak during the month amid heightened fears surrounding the state
of trade between the U.S. and other major economies. Rising oil prices, higher yields in US, risks
of currency contagion spreading to other emerging markets impacted markets negatively during
the month.
US economy outlook strengthening but interest rate gap has widened with peers
US markets have moved up during the year till date due to front loading of tax reforms,
economic recovery and higher government spending. However, during the month, markets
remained volatile with trade war related concerns. US administration had imposed 10 percent
tariffs on $200 billion worth of Chinese imports, which would rise to 25 percent by year-end.
China also retaliated by announcing levies targeting over 5,000 American products worth $60
billion.
US Fed raised its target overnight rate to a range of 2 percent to 2.25 percent, up from 1.75
percent to 2 percent. This marks the central bank's eighth rate hike since 2015. Fed officials also
upped their outlook for economic growth for this year and next. They now expect US economy
to grow by 3.1 percent in 2018 from 2.8 percent earlier. They also see the economy expanding
2.5 percent in 2019, up from 2.4 percent. Fed rate hike has widened the gap with its peers as
ECB still maintains a policy rate of -0.4 percent till June, 2019 and Bank of Japan is still sticking
with its current rates till 2020. Thus, this hike can force the emerging markets to tighten their
monetary policy to defend their currencies.
US Fed rate (%)
2.5
2.0
1.5
1.0
0.5
0.0
Source: Bloomberg
US unemployment growth (%)

12.0
9.0
6.0
3.0
0.0
Source: Bloomberg
Trade war and impact on currencies

The trade war between US and China is resulting into a currency war among countries with sharp
depreciation being witnessed in emerging market currencies.
US dollar has strengthened compared to other emerging market currencies on the back of
continued strength in the US economy and subsequent rate hikes by the US Fed and trade war
related concerns between US and China. The steps taken by the government on tax cuts and
deregulation are promoting economic growth. However the interest rate differential between
US and other regions is increasing and putting pressure on the exchange rates. Fed has been
indicating faster policy normalization while the rate hikes in EU have been pushed to mid-2019.
This divergence in monetary policy stance is resulting in strengthening of US dollar vis-à-vis
emerging markets.
Apart from US dollar strengthening, adverse risk of trade war, escalating geopolitical tensions,
political and economic uncertainties in Turkey, Argentina and Brazil have sparked the fears of
contagion spreading to other emerging markets particularly the ones with current account
deficit.
Indian rupee has depreciated by 14% since the beginning of 2018. The higher current account
deficit due to higher crude prices, rising US Fed rates and a slowdown in FII inflows into the
Indian capital market is already weakening the Indian currency. The trade war has further
increased the woes of the Indian economy with rupee depreciating by 2% further in September
month itself.
Emerging market currencies – Performance CYTD (%)
30.0%
2.9%
0.4%
0.0%
-2.8%
-3.0%
-4.8%
-5.9%
-8.9%
-10.5%
-14.2%
-14.4%
-15.1%
-30.0%
-24.9%
-60.0%
-62.6%
-107.7%
-90.0%
-120.0%
Source: Bloomberg
China market impacted by trade war

Chinese economy held up well during August 2018 despite escalating trade tensions with the
United States. Industrial production expanded 6.1% annually while nominal retail sales grew
9.0% on an annual basis, a slight acceleration from the 8.8% expansion registered in July.
However, stocks faced selling pressure owing to trade war related concerns. With the latest
round of tariffs on $200 billion worth of Chinese imports to the U.S. at a 10 percent rate before
rising to 25 percent, the GDP growth of the country is likely to be impacted adversely as the
economy is already reeling under high debt, slowdown in property market and potential
corporate defaults. The BATs – Baidu, Alibaba and Tencent – which had become a proxy for the
Chinese economy have underperformed the FANG stocks – Facebook, Amazon, Netflix and
Alphabet (parent of Google) owing to concerns of slowdown in economy, high valuations as well
as trade issues between US and China. Chinese authorities had been trying to rein in the
country's rising debt but as the trade war drags on, China appears to be using investments to
boost the economy again.
Oil prices continue to move up

Oil prices rose sharply during the month as reserves’ drawdown in the US and supply disruptions
from Venezuela and Iran pushed prices higher. During the month President Trump urged OPEC
members to lower the prices. OPEC and allies have ruled out any immediate additional increase
in crude supply to offset a shortage of Iran supplies due to US sanctions which are set to take
effect in November. Once these sanctions are in place from November 2018, there is a possibility
of further increase in brent crude prices if OPEC countries fail to increase supplies in the market.
As per our analysis, every $10 increase in per barrel price of crude has the potential to increase
our import bill by $11.3 bn per annum and erode 40 bps of GDP. Higher crude prices would also
increase raw material cost, working capital requirements and operating cost for user industries
such as lubricant manufacturer, chemicals industry including consumer staples and paints.
Brent Crude (US$/barrel)
85
75
65
55
45
35
Source: Bloomberg
DOMESTIC MARKETS
September was an eventful month with domestic markets witnessing sharp correction led by
continued rupee depreciation, higher crude prices, default from large financial institution IL&FS,
higher yields and corresponding stress in NBFCs during the month. High valuation consumption
related sectors also witnessed selling pressure owing to lesser risk reward ratio. Spike in bond
yields, higher crude and depreciated currency has also resulted in valuation de-rating for sectors
where earnings are likely to get impacted in near to medium term.
Bond market crisis impacted equity markets too

After the defaults by IL&FS in the past month, liquidity crisis fears started gripping the debt
market which had its adverse impact on equity markets too. There are concerns being raised of
a contagion impact of further defaults in case of more cash worries in the market, especially
when the yields on bonds are rising. The distress selling in DHFL bonds at higher yields sparked
concerns of liquidity crisis over likely further defaults in the bond market, especially after IL&FS
had been unable to make repayments on two of its bond maturities.
10-year GSec yield (%)
8.5
8.0
7.5
7.0
6.5
6.0
Source: Bloomberg
10-year GSec Bond yields have moved up to 8.2% - led by liquidity crunch, advance tax outflows
in second half of the month and government’s borrowing plan in H2FY19. Sharp spike in GSec
yields has now moved up the cost of capital thereby impacting valuations. Recent spike in the
bond yields now calls for rate hike in October meeting from RBI despite sub-5% inflation and
expectation of moderation of growth in H2FY19.
Yields are likely to remain high owing to rising crude prices, rate hikes by central banks, trade
war tensions, uptick in core inflation, pass through of MSPs and possibility of fiscal slippage at
the centre or state level.
As per our currency team, the bear handshake between credit and equity markets is an ominous
development for Rupee. Rising oil prices, elevated levels of yields in DM and EM had caused an
outflow from the markets and now the funding squeeze in the under developed debt market in
India can cause further damage to Rupee and we could see Rupee depreciating towards 75.00
levels on spot. Any slip on fiscal deficit given election year, higher inflation and rising crude can
further pressurize INR in coming months, in our view.
Currency depreciation coupled with higher crude prices to impact sectors in Q2FY19
Impact of INR depreciation and its corresponding impact on overall cost is likely to be reflected
on sectors during Q2FY19/H2FY19 with sectors like IT/Pharma/textile/speciality
chemicals/steel/upstream companies getting positively impacted and negative impact is likely
to be seen for aviation, downstream companies, cement, tiles, selective FMCG companies/power
sector.
IT companies would enjoy both translation and margin gains in the near term but we believe it
will be short lived and eventually companies will pass on the currency benefits to clients over
time.
Pharma sector is also likely to benefit positively as nearly 40% of revenues for most of the leading
players come from US and over 70% revenues are generated outside India (dollar bills), hence
rupee depreciation is also expected to benefit and cushion the earnings growth this year.
For Steel sector, rupee depreciation has lifted import parity price, thereby giving room to the
domestic steel manufacturers to hike prices. We expect, domestic steel prices to stay firm in the
near term. Margins of domestic players are expected to remain strong in 2HF19, supported by
weaker Rupee and strong demand. Downstream oil and gas sector which includes refining
companies like IOC, BPCL and HPCL are negatively impacted due to higher crude oil prices and
depreciated INR as their raw material cost, operating cost, working capital and interest cost
increases. On the top of it, market is concerned about pricing freedom of these companies
especially during election heavy year. Upstream companies like ONGC and Oil India are getting
benefited with higher crude oil price and weaker rupee. Additionally, from 1st Oct’18, domestic
gas prices are expected to rise which will be positive for these companies but will be negative
for city gas distribution companies if they fail to pass on.
However, the rise in gas prices along with rupee depreciation is expected to be negative for
building material companies like tiles as companies would find it difficult to pass on the cost
pressures of higher power cost due to lower than expected demand growth. For cement,
aviation, power etc the cost pressures are going to increase with rupee depreciation and higher
imported coal prices or higher ATF prices.
Despite moderation in inflation, RBI likely to hike rates in October

CPI inflation moderated to 3.69% in August compared to 4.17% in July led by softer food and
core inflation. However, the food inflation is likely to inch up higher led by MSP increases for the
Kharif output. Core inflation (including petrol and diesel) moderated to 6% in August from 6.2%
in July. Even as the fading of adverse base effect will continue to moderate core inflation lower,
our economist estimates average core inflation at 5.7% in FY19.
We remain watchful of the INR depreciation and higher crude prices as it increases the risk of
imported inflation in the near to medium term. Though a sub 5% inflation and expectation of
moderation in growth in 2HFY19 would have provided some room for the MPC to remain on
hold, our economist believes that the MPC will deliver a 25 bps of repo rate hike in the October
policy, possibly with a tweak in the policy stance to take into account the forex and crude price
risks.
FII’s remained net sellers for the month

FIIs remained net sellers for the month due to trade war fears, rise in US yields coupled with
rupee depreciation and sold stocks worth Rs79 bn (till 25th Sep). Buying from mutual funds has
come down and stood at Rs.74 bn (till 25th Sep). For CYTD, FII’s remained net sellers to the tune
of Rs.133 bn and MFs remained net buyers to the tune of Rs.843 bn.
FII & Mutual Fund investment (Rs cr)

40,000
30,000 FII MF
20,000
10,000
(10,000)
(20,000)
Source: Bloomberg
Recommendation
Market valuations have corrected in recent months and are trading at 20/17x FY19/20 estimated
earnings but volatility is likely to remain high owing to negative global cues as well as domestic
factors such as elections, pressure on CAD and fiscal deficit from higher crude prices. Ideal
approach is to use this volatility to add stocks that are likely to benefit from currency
depreciation as well as healthy growth in respective domains (IT and Pharma), consumption
growth as well as various defensives that have corrected in recent months and available at
attractive valuations. Key risks to our recommendation would come from adverse outcome of
further crunch in liquidity, state elections, further rise in oil prices & yields, shortfall in earnings
or decline in liquidity from FIIs and domestic mutual funds.
Preferred picks
Domestic Cyclicals / Investment oriented sectors
Sector Stocks
Automobiles Maruti Suzuki

Building Material Kajaria Ceramics, Century Plyboards, Shankara Building Products
Capital Goods, Engineering Genus Power Infra, L&T, Voltamp, Bharat Electronics
Construction Dilip Buildcon, Nagarjuna Construction, PNC Infratech
Consumber durables Amber Enterprises
Metals & Mining Jindal Stainless (Hisar), MOIL Ltd, National Aluminium
Oil & Gas Petronet LNG
Others CDSL, Mold-tek Packing Ltd, Insecticides India, Mahindra Holidays &
Resorts India, VIP Industries, Wonderla Holidays and Carborundum
Universal, Maharashtra Seamless Ltd, Essel Propack, Quess Corp
Real Estate Phoenix Mills, Arvind Ltd
Transportation Adani Port, Container Corp, VRL Logistics and Cochin Shipyard
Source: Kotak Securities - Private Client Research
Export oriented / Defensive sectors

Sector Stocks
FMCG ITC, Marico

IT Cyient Ltd, Persistent Systems
Paints Akzo Nobel India, Kansai Nerolac Paints Ltd
Cyndrella Carvalho THEME 1: PHARMA SECTOR

cyndrella.carvalho@kotak.com
+91 22 6218 6426 The sector is on radar as we expect earnings growth potential to meaningfully revive. We look
at the sector from four aspects 1) compliance status for various large facilities of many large
players receiving clearance and many of the plants are at better quality process handling status
than earlier. 2) This leads to ANDA approval cycle improving meaningfully and take care of base
earnings from US business for many players, along with niche and complex product pipeline
focus 3) Domestic market which contributes nearly 30% of revenues to the sector is set to reflect
a double digit growth over coming two to three years. Large players are expected to grow above
this industry average over this periods 4) nearly 40% of revenues for most of the leading players
come from US and over 70% revenues are generated outside India (dollar bills), hence rupee
depreciation is also expected to benefit and cushion the earnings growth this year.
We break the pharmaceutical generic space into three major segments i.e – 1) US Generics,
Domestic Branded Generics space and ROW markets business 2) CRAMs space 3) API space. In
the extremely generic space we prefer Aurobindo pharma in near term to play the injectable
opportunity and recent acquisition of Sandoz generics business. The API model has seen some
green shoots with China shutting certain chemical base, however situation is still evolving and
not very clear in terms of capacities coming back on stream. We like the unique opportunity
poised by Laurus Labs in this space as it is forward integrating itself in formulation segment
with all major capex in place.
Apart from this, we also find the business model of Sun Pharma is uniquely placed with a very
good basket of patented products focused on US market which could yield better earnings and
longer sustainability of growth over two to three years. Dr Reddys also offers key niche filings
like gSuboxone, gNuvaring and gCopaxone to play with over coming year which would drive
significant improvement in terms of earnings. CRAMS space is a different business model as it is
insulated from the risk of generic price erosion and works closely with the research end of the
sector. We prefer Divis Labs with a balanced focus on both APIs and CRAMs. On other side we
also quite admire the model of Dishman Cabogen Amcis and Suven Life Sciences. Both these
companies have their niches established in their respective segments.
Aurobindo Pharma Ltd - Accumulate Analyst: cyndrella.carvalho@kotak.com
Current Market Price (Rs) Target Price (Rs) Potential Upside (%) 52 Week H/L (Rs) Mkt Cap (Rs mn)
744 830 11.5% 827 / 527 436179
Investment Argument Price Performance

 ARBP has significantly scaled up its injectables filings with cumulative filings at
91 ANDAs, of which 41 ANDAs are pending approval. We expect the 160 Aurobindo Pharma Nifty
injectables momentum to continue through FY2019, with interesting launches 140
such as fondaparinux (launched), and ertapenem (approval received 1Q/2Q
FY18). We expect the injectables pipeline to further evolve with the expected 120
approvals for aztreonam (FY2019) and potentially, iron sucrose (FY2020).
100
 We also expect ARBP to file triamcinolone injection and Copaxone 20/40mg
filings in FY2019, and while Copaxone market will likely turn competitive by the 80
time ARBP launches, we believe triamcinolone injection will likely be a limited
60
competition opportunity with potential to add US$20-25 mn sales on a steady-
state basis from FY2021.
 Apart from the generic injectables strategy, we expect ARBP to launch two
505(b)(2) RTU (ready-to-use) injectable products in FY2020, namely,
cyclophosphamide RTU and vancomcycin RTU, both of which are likely to be Source: Bloomberg
long-tailed, >US$25 mn opportunities for ARBP.
 ARBP announced the acquisition of Sandoz’s US dermatology and oral solids Share Holding Pattern (%)
business for up to US$1 bn in cash, implying ~5X FY2020E EV/EBITDA, and
Others
driving ARBP’s US sales to US$2.1 bn in FY2020.
14.49%
Risks & Concerns
Exports contribute major part of ARBP’s revenues. Any regulatory or currency risk DII
can be critical for the company. 15.64%
Company Background Promoter

51.88%
Aurobindo Pharma Limited, manufactures generic pharmaceuticals and active
pharmaceutical ingredients. The revenues for FY18 were spread as US (45%), EU
(26%), ROW (6%), ARV (5%) and API (18%). The company’s robust product portfolio FII
is spread over 7 major therapeutic/product areas encompassing Antibiotics, Anti- 17.99%
Retrovirals, CVS, CNS, Gastroenterologicals, Anti-Allergies and Anti-Diabetics,
supported by an outstanding R&D set-up.
Source: Bloomberg
Financials (Rs mn) FY18 FY19E FY20E ROAE and ROACE to remain strong
Sales 164,998 185,448 270,747
40 ROAE (%) ROACE (%)
Growth (%) 9.3 12.4 46.0
EBITDA 37,885 39,885 60,930
30
EBITDA margin (%) 23.0 21.5 22.5
PBT 32,579 31,582 44,011
20
Net profit 24,399 24,637 33,451
EPS (Rs) 41.8 42.2 57.3
10
Growth (%) 6.1 1.0 35.8
CEPS (Rs) 51.2 52.7 69.3
Book Value per share (Rs.) 199.4 236.2 287.1 0
FY16 FY17 FY18 FY19E FY20E
Dividend per share (Rs) 3.8 3.0 3.0
ROAE (%) 23.2 19.3 21.8 Source: Company, KIE
ROACE (%) 23.6 20.3 21.9
Net cash (debt) (29,094) (34,689) (100,213) Revenue / PAT to remain strong
200,000 25
Valuattion Parameters FY18 FY19E FY20E 150,000

20
P/E (x) 17.8 17.6 13.0
15
P/BV (x) 3.7 3.2 2.6 100,000
EV/Sales (x) 2.8 2.5 2.0 10
EV/EBITDA (x) 12.3 11.8 8.8 50,000
5
Price Performance (%) 1M 3M 6M 0 0
8.5 23.9 33.4 FY16 FY17 FY18 FY19E FY20E
Source: Bloomberg, Company, KIE Source: Company, KIE
Laurus Lab Ltd - Buy Analyst: cyndrella.carvalho@kotak.com
433 500 15.6% 580 / 415 45879
Investment Argument
Price Performance
 Laurus presents a unique business model offering a hybrid of rapidly growing
synthesis business, an emerging formulations business along with a steady 160 Laurus Lab Nifty
ARV business. While the recent quarters have seen delays to the strategy on
account of Hep-C declines and China cost push, we expect ARV revenues to 140
continue to grow in high single digit over the next two years with increasing
contribution from EU/US formulations, first supplies to ARV tenders in LMIC 120
countries, as well as LMV/RTV API supplies from 2QFY19.
 This, along with strong scale-up of the synthesis business, particularly for 100
Aspen and C2 Pharma, will likely drive profitability.
 Laurus has filed a total of 13 ANDAs, and is targeting 10 more ANDA filings in 80
FY2019, with tenofovir having been launched in 4QFY18 (Rs 51 mn revenues in
1QFY19) and three other ANDAs expected to be launched in FY2019.
 Over the past three years, Laurus has made meaningful investments in
capacities with gross block of Rs 8 bn yet to generate revenues (units 2, 4, 5
and 6) with operating costs of Rs1.4bn in FY2018 (Rs 274 mn in 1QFY19), Source: Bloomberg
including its formulations investments, which we expect to break even only in
FY2020 (FY2018 loss of ~Rs1 bn). Share Holding Pattern (%)
 Laurus has now received approval for its TLD combination and we expect it to
enter the LMIC tender market from 3QFY19, with ramp-up in FY2020, once TLE, Others
TLE400 and TEE formulations are approved in key markets. 14.49%
 With target price to Rs 500, ~16X June 2020E EPS.
DII
Risks & Concerns
Any regulatory or currency risk can be critical for the company. ANDA approval 15.64%
delays and prolonged margin pressure due to China. Promoter
51.88%
Company Background
Laurus Labs is a leading research and development driven pharmaceutical company
in India. The company has grown consistently to become one of the leading
FII
manufacturers of Active Pharmaceutical Ingredients (APIs) for anti-retroviral (ARV)
17.99%
and Hepatitis C. Laurus Labs also manufactures APIs in oncology and other
therapeutic areas. Its strategic and early investments in R&D and manufacturing
Source: Bloomberg
infrastructure have enabled it to become one of the leading suppliers of APIs in the
ARV therapeutic area.
Financials (Rs mn) FY18 FY19E FY20E ROAE and ROACE to remain strong
Sales 20,690 23,916 28,341
20 ROAE (%) ROACE (%)
Growth (%) 7.1 15.6 18.5
EBITDA 4,133 4,540 6,493
15
EBITDA margin (%) 20.0 19.0 22.9
PBT 2,374 2,335 4,172
10
Net profit 1,676 1,716 3,087
EPS (Rs) 15.9 16.2 29.2
5
Growth (%) (11.7) 1.9 80.2
CEPS (Rs) 5.0 5.6 8.2
Book Value per share (Rs.) 139.8 157.8 186.2 0
FY16 FY17 FY18 FY19E FY20E
ROAE (%) 11.3 10.4 15.7 Source: Company, KIE
ROACE (%) 11.7 11.2 16.2
Net cash (debt) (9,768) (10,297) (9,859) Revenue / PAT to remain strong
30,000 25
Valuation Parameters FY18 FY19E FY20E 25,000 20

P/E (x) 27.2 26.7 14.8 20,000
15
P/BV (x) 3.1 2.7 2.3 15,000
EV/Sales (x) 2.3 2.1 1.8 10
EV/EBITDA (x) 11.4 10.9 7.8 10,000
5,000 5
Price Performance (%) 1M 3M 6M
0 0
(2.2) (4.3) (14.0) FY16 FY17 FY18 FY19E FY20E
Source: Bloomberg, Company, KIE Source: Company, KIE
Nipun Gupta THEME 2: IT SECTOR

nipun.gupta@kotak.com
+91 22 6218 6433 The volatility in exchange rates and positive commentary on improving deal activity over last
few months has brought the focus back on Indian IT companies. INR has depreciated by around
6.5% v/s the USD in last three months. Companies would enjoy both translation and margin
gains in the near term but we believe it will be short lived and eventually companies will pass on
the currency benefits to clients over time. Apart from the short term benefits the INR
depreciation would allow companies to reinvest in strengthening its market share penetration
in new markets or new service lines in long term. From mid to long term perspective we believe
demand acceleration with revenue growth is important for IT stocks. Given this, we recommend
Tech Mahindra, Cyient and Persistent where relative valuations are still inexpensive with
sustainable growth.
Companies delivered a strong growth rate in 1Q. Factors helping the growth rate were 1) market
share gains in a robust spending environment by clients 2) Incremental revenue from digital
business with lesser lag from the legacy business 3) strong deal flow which has picked up from
past year. We believe Cyient will post robust growth as it transforms to a full scale solutions
company which would expand its addressable market. Whereas we expect a turnaround of
revenue and margin trajectory making a case for both earning growth and upgrade of valuation
multiples.
The key factors that will determine the sector’s earning sensitivity to currency fluctuation are:
 Hedging Policy: Even as INR has depreciated, the impact of the same on immediate
earnings will be a function of hedging policy and instrument used by the company. This
means the quantum of cash flow being hedged and instrument used for hedging. We believe
gains would be limited for companies that are heavily hedged at previous currency rates.
 Exposure to different currencies: Companies have different level of exposure across
currencies which can lead to lowering of margin benefits due to cross currency impact. Since
the depreciation in USD INR is accompanied with depreciation of other currencies too the
gains could be limited in terms of margins.
 Onsite offshore mix: The onsite offshore mix is an important factor to determine the
sensitivity, as it creates a natural hedge reducing sensitivity for companies having higher
onsite revenues with higher foreign denominated expenses and reducing exposure to other
currencies. Companies having higher offshore revenue would be more sensitive to currency
movements and would have bigger benefits due to the recent INR depreciation. Broadly we
believe the gains depends on nature of contract (time and material or fixed price), duration
of contract and nature of service offerings.
 Nature of the contract: Companies with greater percentage of annuity deals in revenue
would have greater benefit. Generally Time and Material (T&M) contracts are Master
Services Agreeement (MSA) based 2-3 year timeframe contracts which do not undergo
frequent changes unless client asks for it, whereas fixed price projects depends on the type
of contract i.e Application management or an IMS contract which are of longer tenure can
undergo re-negotiation in case of significant INR depreciation.
Given the above factors we would recommend stocks where relative valuations are still
inexpensive and could benefit from demand recovery. We recommend Tech Mahindra, Cyient
and Persistent Systems in the IT space.
Tech Mahindra Ltd - Accumulate
746 793 6.4% 780 / 447 730829

 Tech Mahindra has impressed with progress on margin normalization initiatives,
benefits of which will accrue further in FY19. EBIT margins increase was helped 160
Tech Mahindra Ltd Nifty
by rupee depreciation, strength in Comviva business and improved utilization. 140
 Drag from LCC, Comviva had prevailed leading to little revenue growth to
revenue decline in past two years. This growth will accelerate as network 120
spending increases led by 5G spending. 100
 Enterprise segment grew by 18.5% YoY, on organic basis revenue grew by
80
~16%. Revenue growth was led by – manufacturing vertical, BFSI vertical and
other segment comprising HCI acquisition and public sector that grew by 4.6%. 60
 Digital remains strong and reported 26-27% of its revenue from digital. Digital
revenue have grown at a healthy rate of 30% YoY.
 Outlook remains promising on the back of new deal closures in the telecom
vertical and sustained revenue momentum from the enterprise segment.
Source: Bloomberg
 We believe company is well on the recovery path with company’s margin
expansion story on track by pricing discipline, operating efficiencies and
Share Holding Pattern (%)
improving profitability of subsidiaries.
Risks & Concerns Others
 Significant decline in the business at the existing telecom clients could impact 19.0%
the revenue growth. Promoter
DII 36.0%
 Rupee appreciation beyond the levels assumed and cross currency movements 7.4%
could impact the amrgins.
Company Background
Tech Mahindra represents the connected world, offering innovative and customer-
centric information technology services and solutions, enabling Enterprises,
Associates and the Society to Rise™. It is a USD3.5b company with ~98,000+ FII
professionals across 51 countries, helping over 674 global customers including 37.6%
Fortune 500 companies. It is a part of the USD 16.7 billion Mahindra Group that
Source: Capitaline
employs more than 180,000 people in over 100countries.
Financials (Rs mn) FY18 FY19E FY20E Client Contribution(%)

Sales 307,730 348,702 380,933 70
Growth (%) 5.6 13.3 9.2 Top 5 Client Top 10 Client Top 20 Client
60
EBITDA 47,170 60,420 70,144
EBITDA margin (%) 15.3 17.3 18.4 50
PBT 48,789 54,296 65,319 40
PAT (recurring) 38,000 41,180 49,101
30
Exceptional items - - -
PAT 38,000 41,180 49,101 20
EPS (Rs) 42.6 46.2 54.6 10
Growth (%) 32.7 8.5 18.2
0
Book value per share 211.2 246.8 287.3
FY16 FY17 FY18
ROAE (%) 21.5 20.2 20.5
Debt/Equity 0.1 0.1 0.1 Source: Company
Utilization Rate (%)

90
Valuation Parameters FY18 FY19E FY20E

P/E (x) 17.5 16.1 13.7
P/BV (x) 3.5 3.0 2.6 80
EV/Sales (x) 2.3 2.1 1.9
EV/EBITDA (x) 15.3 11.9 10.2
70
1.3 12.2 16.7
Source: Bloomberg, Company, KIE Source: Company
Cyient Ltd - Buy Analyst: nipun.gupta@kotak.com

Last report at Rs.717 on 30 August 2018
745 810 8.7% 887 / 493 84139

 Cyient is transitioning towards a solution company with its S3 strategy which
190
would enable in garning higher wallet share of clients spends. The Cyient Ltd Nifty
addressable market share for its expanded offerings would be much higher
than its present addressable market. 150
 Company is gaining traction in its key transportation and communication
vertical. Within transportation Rail is a key area of strength for Cyient and the
110
momentuem is expected to sustain thus aiding overall revenue growth for
the company.
 DLM after incurring losses turned profitable in 4QFY18 and achieved 2% 70
margins for FY18. By FY21 company aims to gradually exit B2P business and
not engage any further in low margin contract manufacturing business.
 Margins are expected to stabilize at these levels going forward with company
investing about 100bps of operating margins into initiatives like New
Source: Bloomberg
Business Accelerator, wherein the company will make investment in
emerging technologies.
 Management has guided for a double digit revenue growth in the services
business in FY19, on the back of strong order backlog and a deal pipeline, Others
which it stated was one of the healthiest. Commentary remains largely Promoter
16.1%
positive across all the verticals. 22.2%
Risks & Concerns

 Significant appreciation of INR against USD, EUR and GBP. DII
 Sustained slowdown in engineering and service spending.
20.3%
 Risk of an expensive acquisition or integration risk.
Company Background FII

Cyient Ltd provides engineering services, data analytics and data, networks and 41.4%
operations solutions. The company offers its services to the aerospace and
defense, energy, heavy machinery, consumer, medical utility, communications,
semi-conductor, and transportation industries around the world. Source: Capitaline
Financials (Rs mn) FY18 FY19E FY20E Order Intake (in USD) -DLM
Sales 39,177 45,733 51,589 35
Growth (%) 8.8 16.7 12.8
30
EBITDA 5,494 6,331 7,498
EBITDA margin (%) 14.0 13.8 14.5 25
PBT 5,649 6,049 7,303 20
PAT 4,286 4,833 5,891
15
Exceptional items - - -
PAT 4,286 4,833 5,891 10
EPS (Rs) 38.0 42.9 52.3 5
Growth (%) 15.5 12.9 21.9
0
Book value per share 208.0 244.7 290.8
1QFY18 2QFY18 3QFY18 4QFY18 1QFY19
RONW (%) 19.2 18.9 19.5
ROCE (%) 24.4 23.1 23.7 Source: Company
Debt/Equity - - -
Order Intake (in USD) -Service
300
250
Valuation Parameters FY18 FY19E FY20E
P/E (x) 19.6 17.4 14.2 200
P/BV (x) 3.6 3.0 2.6 150
EV/Sales (x) 1.9 1.6 1.4
100
EV/EBITDA (x) 13.9 11.3 9.3
50
Price Performance (%) 1M 3M 6M 0
3.8 (0.5) 7.2 1QFY18 2QFY18 3QFY18 4QFY18 1QFY19
Source: Bloomberg, Company, Kotak Securities - Private Client Research Source: Company
Persistent Systems Ltd - Buy Analyst: sumit.pokharna@kotak.com

Last report at Rs.827 on 31 July 2018
788 1025 30.0% 915 / 629 63072

 Persistent specializes in software product development and technology
170 Persistent Systems Ltd Nifty
services. It helps enterprises to transform their business to software-driven
business in North America, Europe, and Asia. It has moved away from effort- 150
based business (low growth prospects) to value-based business (high growth
130
prospects and better margins).
 Persistent expects to outperform industry-growth rates and report overall 110
double-digit revenue growth for FY19E.
90
 Margin improvement and strong revenue visibility makes us positive on its
growth prospects. Additionally, cash rich balance sheet, strong free cash flow 70
and healthy return ratios also provide high comfort.
Risks & Concerns

 Wide currency fluctuation and INR appreciation will impact earnings.
 Volatility in revenues sourced through the partners.
Source: Bloomberg
 Any major slowdown in economy can impact our growth assumption.
Company Background
Incorporated in 1990, Persistent is founded by Anand Deshpande. It provides Others
product engineering services, platform based solutions and IP-based software 25.1% Promoter
products to its global customers. It designs, develops and maintains software 31.5%
systems and solutions, creates new applications and enhances the functionality of
the customer’s existing software products.
Sector Background
DII
Nasscom expects that the future of the industry will lie in 'Digital at Scale' as global
16.3%
digital spending is growing at 20% annually. India's digital revenues grew at 30% in
FY18. Nasscom has a vision to build a US$1 tn digital economy by 2022 supported FII
by growth across all segments — established and new-age companies, technology 27.1%
service companies, product companies, consumer internet companies and
increased adoption of digital across enterprises, government and MSME in India. Source: Capitaline
Financials (Rs mn) FY18 FY19E FY20E Revenue Breakup (%)

Sales 30,337 36,028 40,723
ISV Enterprise IP Led
Growth (%) 5.4 18.8 13.0 70%
EBIDTA 4,687 6,037 7,222
60%
EBIDTA margin (%) 15.5 16.8 17.7
50%
PBT 4,292 5,543 6,849
PAT 3,230 4,180 5,205 40%
PAT Margin (%) 10.6 11.6 12.8 30%
EPS (Rs) 40.4 52.2 65.1 20%
Growth (%) 7.2 29.4 24.5 10%
CEPS 52.9 67.2 80.3
0%
Book Value (Rs / Share) 266 302 349
FY15 FY16 FY17 FY18
Dividend per Share (Rs) 10.0 13.0 15.1
ROE (%) 16.0 18.4 20.0 Source: Company, P&S: People and services, GTS: Global technology solutions
ROCE (%) 18.4 21.9 23.8 IFM: Integrated facility management
Net cash/(debt) 2,397 5,316 9,259
Net working capital (Days) 38 41 41 Geography: Revenue Mix (%)
India ROW
6% 3%
Valuation Parameters FY18 FY19E FY20E Europe
P/E (x) 19.5 15.1 12.1 7%
P/BV (x) 3.0 2.6 2.3
EV/Sales (x) 2.0 1.6 1.3
EV/EBITDA (x) 12.9 9.6 7.5
North
Price Performance (%) 1M 3M 6M America
(6.9) 0.7 13.6 84%
THEME 3: DEFENSIVES/CONSUMPTION DRIVEN STOCKS

Consumption driven defensive stocks at attractive valuations
Considering the developments in the financial markets with rising yields and currency
depreciation, it is imperative to have an allocation towards defensive stocks driven by
consumption and available at attractive valuations. Going by the recent volatility and swings in
global markets the ride ahead may be challenging. Hence there is a need to balance individual
portfolios with some safer names in them.
We have selected a few names across sectors which have corrected in recent times and are
currently available at attractive valuations. With consumer facing business models, these
companies are likely to drive growth from strong consumption growth. Other common thread
between these defensive stocks is strong management, large addressable market size and high
growth visibility on the business side. Most of these stocks are financially very sound having
improving earnings profile, healthy return ratios and generating consistent free cash flows.
Stocks looking attractive in valuations are:

Companies Growth driver
Maruti Volume growth expected to stay healthy; gaining market share
ITC Attractive valuations
Arvind De-merger of branded apparel and engineering business will unlock value
Phoenix Mills Ltd Strong consumption across its retail assets
Amber Enterprises Strong demand for room air conditioner from brands
Maruti Suzuki India Ltd - Accumulate Analyst: arun.agarwal@kotak.com

7348 10360 41.0% 10000 / 7294 2219669

 We expect MSIL's volumes to grow at a strong pace aided by recovery in
rural areas, continued robust demand for new launches, expansion of Nexa 230 Maruti Suzuki India Ltd Nifty
network and demand in favor of petrol run vehicle. Furthermore facelifts,
upgrades and variants of existing models will also drive sales for the 185
company.
 Management re-iterated its expectation of 8-9% industry growth in FY19 140
and MSIL to witness double-digit volume growth. In July 2018, MSIL shared
that they are witnessing 15% higher enquires and 13% increase in bookings. 95
 MSIL’s market share in the domestic passenger car market increased from
50
47.4% in FY17 to 50% in FY18 and stood at 52.2% as of end August 2018.
 MSIL generates one third sales volume from rural areas. In July 2018,
management highlighted that rural retail demand is growing by 15%. With
strong presence in rural areas and dominance in the entry level car segment,
MSIL will be the key beneficiary of rural demand recovery. Source: Bloomberg
 In recent years, the company made substantial strides in the premium car
segment. MSIL has big opportunity to gain market share in the premium Share Holding Pattern (%)
segment. Focus on premium products and scaling-up of distribution
network will translate into share of premium products in MSIL's product mix Others
increase in a meaningful way DII 7.0%
 We expect MSIL's EBITDA margin to remain impacted in the near term on 11.0%
account of commodity price increase and INR depreciation (company is net
importer).
Risks & Concerns

Lower than anticipated growth will jeopardize our revenue and profit estimates.
Promoter
MSIL benefits from yen depreciation. Any unfavorable movement of yen can FII 56.2%
have significant impact on the company's profitability. 25.8%
Company Background
MSIL, India's largest passenger car company, is a subsidiary of Suzuki Motor
Corporation of Japan. Formed as a government owned company (Maruti Udyog Source: Bloomberg
Limited), it entered into a JV with Suzuki Motor Corporation. Over the years the
company has been one the most successful player in the Indian car market.
Financials (Rs Mn) FY18 FY19E FY20E Sales Volumes (Units)

Sales 797,627 923,995 1,071,676 2,100,000
Growth (%) 17.2 15.8 16.0
1,800,000
EBITDA 120,615 142,100 176,182
1,500,000
EBITDA margin (%) 15.1 15.4 16.4
PBT 110,034 137,502 177,563 1,200,000
Net profit 77,218 96,939 125,182 900,000
EPS (Rs) 255.6 320.9 414.4 600,000
Growth (%) 5.1 25.5 29.1
300,000
CEPS (Rs) 346.9 417.8 521.5
0
Book value (Rs/share) 1,382.3 1,606.8 1,924.8
FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18
ROE (%) 19.8 21.5 23.5 Source: Company
ROCE (%) 28.4 30.0 32.8
Net cash (debt) 352,505 408,149 508,313 Market Share (%)
Net Working Capital (Days) (26.9) (21.6) (21.6) 55
Valuation Parameters FY18 FY19E FY20E 50.0

50
P/E (x) 28.7 22.9 17.7
46.8 47.4
P/BV (x) 5.3 4.6 3.8 46.5
45.3
45 44.7 45.0
EV/Sales (x) 2.4 2.0 1.6
EV/EBITDA (x) 15.6 12.8 9.8 42.1
40 40.1
38.4
35
(22.1) (16.2) (17.1)
FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18
ITC Ltd - Buy Analyst: agarwal.amit@kotak.com

297 330 11.2% 323 / 250 3443797

 Cigarette volume increased by 1% in Q1FY19 which saw a significant 170 ITC Ltd Nifty
improvement from 4% decline in Q4FY18.
 ITC’s EBITDA/ PAT growth was reasonably healthy at +19.2%/+18.2% 145
YoY, well ahead of our and consensus estimates with significant
improvement in performance in cigarettes/ other segments in the 120
aggregate.
95
 The GST council had not touched the GST rate on cigarettes in its latest
meet which suggest stability in indirect taxation on cigarettes.
70
 The company continues to be largely dependent on cigarettes for its
profits; with sectors like FMCG and Paperboard doing well in Q1FY19
and expected to do well in the rest of FY19.
 ITC remains relatively attractively valued, at 25x PER FY20E, versus 35x- Source: Bloomberg
45x FY20E for larger FMCG companies. We expect that the company to
experience a gradual re-rating as growth in cigarette profits rises to Share Holding Pattern (%)
double digits over the next few quarters.
Other
Risks & Concerns Corporate 1% FPIs
Regulation remains the largest risk for the company. Other risks are Bodies 20%
economic/ competitive in nature. 34%
Company Background
Financial
ITC is India's largest cigarette company, with c.80% market share. The Institutions/
company is also involved in several other segments, which include non- Banks
cigarette FMCG goods, paper, paperboards, and packaging, hotel, and agri-
Non- Insurance 11%
business.
Institutions Companies
Sector Background 10% 21%
Indian FMCG sector’s size is pegged at Rs 4 Trillion with rural India Source: Capitaline
contributing to about a third of the revenues.
Financials (Rs mn) FY18 FY19E FY20E Cigarette Volume Growth (Est., %, y/y)
Sales 443,874 502,808 551,334 10
Growth (%) NM 13.3 9.7
5
EBITDA 158,161 182,504 201,778
0
EBITDA margin (%) 35.6 36.3 36.6
PBT 167,611 192,880 211,692 -5
Net profit 108,947 125,372 141,833 -10
EPS (Rs) 9.1 10.4 11.8 -15
Growth (%) 4.0 15.1 13.1 -20
CEPS (Rs) 9.8 11.3 12.7
2QFY14
4QFY14
1QFY16
3QFY16
4QFY17
2QFY18
1QFY19
1QFY14
3QFY14
1QFY15
2QFY15
3QFY15
4QFY15
2QFY16
4QFY16
1QFY17
2QFY17
3QFY17
1QFY18
3QFY18
4QFY18
Book value (Rs/share) 39.3 41.3 44.9

ROE (%) 23.1 25.2 26.3 Source: Kotak Securities - Private Client Research
ROCE (%) 22.3 24.8 26.3
Net cash (debt) 121,364 128,528 154,013 Cigarette EBIT Growth (%, y/y)
Net Working Capital (Days) 45 36 44 20.00%
Valuation Parameters FY18 FY19E FY20E 15.00%

P/E (x) 32.7 28.5 25.2
10.00%
P/BV (x) 7.6 7.2 6.6
EV/Sales (x) 7.5 6.6 6.0 5.00%
EV/EBITDA (x) 21.0 18.2 16.3
0.00%

(4.8) 13.9 16.1
Arvind Ltd - Buy Analyst: pankajr.kumar@kotak.com

318 500 57.3% 479 / 313 82227
Investment Argument
Price Performance
 Arvind has a portfolio of 15 international licensed brands and 12 in-house
brands targeting different segments and are managed by qualified and 160 Arvind Ltd Nifty
experienced professionals. We expect all its brands to be profitable in FY19E,
resulting in 230 bps improvement in EBITDA margins of the branded apparel 135
business between FY18-20E.
 Arvind has adopted verticalization strategy in its textiles business by focusing 110
on garmenting business which would positively impact its RoCE.
 The process of demerger of branded apparel and engineering business is 85
proceeding as per plan and is presently at the final stage. We believe that
the demerger would unlock value of each of the businesses post listing. 60
 The company has maintained guidance for 10% growth in textiles
business with flattish margin, 20- 24% yoy growth in brand and retail
business with 100 bps improvement in margins and 10-12% growth in
engineering business with flattish margin. Source: Bloomberg
 We expect company’s revenue and PAT to grow at a CAGR of 13.3% and
43.5%, respectively in FY18-20E driven by 27% volume CAGR in garments Share Holding Pattern (%)
business, 20.6% CAGR growth in branded retail business, all brands
turning profitable and improved operating leverage across segments. Others
 We arrive at sum of the parts (SOTP) based target price of Rs 500 by 17%
assigning FY20E EV/EBITDA multiple of 16x to the branded apparel
Promoter
business, 8x to the textile business and 13x to the engineering business.
DII 43%
Risks & Concerns 18%
Major revision in license terms of foreign brands, Lower export incentive, Raw
material or forex volatility.
Company Background
Arvind Ltd promoted by Lalbhai family, is a leading textiles company with FII
presence in textiles, branded apparel and engineering business. The company 22%
manufactures and sells about 300 million meters of fabrics and over 30 mn pieces
of garments (FY18). The company owns brands such as Flying Machine, Colt, Source: Company
Ruggers, etc has licensed brands such as US Polo, Arrow, Tommy Hilfiger, Gap,
Calvin Klein, etc.
Financials (RS mn) FY18 FY19E FY20E Performance of Power Brand

Sales 108,261 121,495 139,008
30,000 Revenue (Rs mn, LHS) 12.5%
Growth (%) 17.2 12.2 14.4 EBITDA (Rs mn, LHS)
EBITDA 9,650 11,464 14,723 EBITDA Margins (%, RHS)
12.0%
EBITDA margin (%) 8.9 9.4 10.6 20,000
PBT 3,904 5,518 8,526
11.5%
Net profit 3,158 4,211 6,506
EPS (Rs) 12.2 16.3 25.2 10,000
11.0%
Growth (%) (1.3) 33.3 54.5
CEPS (Rs) 26.1 31.7 41.9
Book value (Rs/share) 158.1 171.5 193.9 0 10.5%
FY13 FY14 FY15 FY16 FY17 FY18
ROE (%) 8.1 9.9 13.8 Source: Company
ROCE (%) 8.8 10.2 13.3
Net cash (debt) (31,171) (30,741) (29,730) Textile and apparel industry in India (US$ billion)
Net Working Capital (Days) 105 102 103
300
250
Valuation Parameters FY18 FY19E FY20E 250
P/E (x) 26.0 19.5 12.6 200
P/BV (x) 2.0 1.9 1.6 150
137
150
EV/Sales (x) 1.0 0.9 0.8 108
EV/EBITDA (x) 11.7 9.8 7.6 100
50
0
(20.2) (17.8) (17.0)
2015 2016 2017 2019F
Source: Bloomberg, Company, Kotak Securities - Private Client Research Source: IBEF
The Phoenix Mills Ltd - Buy Analyst: teena.virmani@kotak.com

561 707 26.0% 732 / 479 85939

 Rental growth for the company is being driven by the strong operational
250
performance of Market City malls -PMC Chennai, PMC Pune & PMC Phoenix Mills Ltd Nifty
Mumbai as well as High Street Phoenix & Palladium. 220
 Commercial and hospitality segment also registered healthy YoY growth 190
respectively led by improvement in rentals and ARRs. 160
 Growth going ahead is likely to be led by improvement in rentals as well as 130
uptick in residential segment revenue booking.
100
 Rental renegotiations and consumption improvement is likely to drive
healthy growth in revenues going forward. Residential segment revenues 70
are likely to improve with improvement in market activity in its key regions.
 Company has closed 4 acquisitions which include land parcels in Bangalore,
Ahmedabad, under construction retail assets in Lucknow and Indore
Source: Bloomberg
between April-July 2018 which is in line with its growth strategy of
increasing retail led mixed use development area going forward.
Risks & Concerns
 Oversupply in retail and commercial may keep rentals subdued DII Others
 Delay in launching residential sales may impact revenues and can keep 2.9% 3.9%
borrowings higher on consolidated level.
Company Background
FII
Phoenix mills ltd (PML) has emerged as a key beneficiary of growing demand in
30.4%
the retail sector with its flagship premium mall High Street Phoenix (HSP)
located in central Mumbai. Promoter
62.9%
Sector Background
Residential and commercial segment of real estate is currently impacted by real
estate slowdown. However, retail segment continues to do well in terms of Source: Bloomberg
higher consumption/higher occupancies and improved rentals.
High Street Phoenix portfolio
Consolidated financials (Rs mn) FY18 FY19E FY20E
Sales 16,198 17,755 18,684 Hospitality
Growth (%) -11.0% 9.6% 5.2% 19%
EBITDA 7,774 8,645 9,254 Commercial
EBITDA margin (%) 48.0% 48.7% 49.5% 4%
PBT 2,871 3,294 3,839
Net profit 2,422 2,746 3,149 Residential
EPS (Rs) 15.8 17.9 20.6 7%
Growth (%) 27.0% 13.4% 14.7%
Retail
CEPS (Rs) 28.8 32.7 36.0
70%
Dividend per share (Rs) 2.6 2.6 2.6 Source: Company, Kotak Securities - Private Client Research
ROE (%) 9.6 9.3 9.8
ROCE (%) 8.9 8.8 9.5 Phoenix mills rental portfolio (mn sq ft)
Net debt (cash) 41,909 38,822 35,950
6.0 Palladium(chennai)
Net Working Capital (Days) 144.0 144.0 144.0 0.31
0.33 Bareilly
4.5 1
Valuation Parameters FY18 FY19E FY20E Lucknow
P/E (x) 35.5 31.3 27.3 1 Chennai
3.0
P/BV (x) 3.0 2.8 2.6 1.1 Bangalore
EV/Sales (x) 7.9 7.0 6.5
1.5 Mumbai(Kurla)
EV/EBITDA (x) 16.4 14.4 13.2 1.19
Pune
0.9 0.74
0.0 HSP
FY11 FY18
(7.7) (13.5) (5.1)
Amber Enterprises Ltd - Buy Analyst: sanjeev.zarbade@kotak.com

925 1145 23.8% 1329 / 880 29088

 Amber Enterprises (AEL) is the leading OEM/ODM for several room AC (RAC)
brands in India, with a ~55.4% market share. 110 Amber Enterprises Ltd Nifty
 The Indian RAC market has been witnessing robust growth trend in the past
five years with a CAGR of 9.4% by volumes. In the next five years, the market is 100
expected to witness a CAGR of 12.8% reinforced by the surge in rural
consumption, shorter replacement cycles, energy-efficient RACs and availability 90
of multiple brands at various price points.
 The share of manufacturing in RACs by OEMs/ODMs has been consistently
80
going up from 16% in FY12 to 34% in FY17 and is projected to reach 44% by
FY22E.
70
 The government has recently raised import duty on ACs which will further spur
shift from direct imports to domestic manufacturing, thereby benefiting
contract manufacturers like Amber
 With a view to increase wallet share, AEL is 1) filling product gaps 2) entry into
newer brands through components and 3) acquisitions to add competencies. It Source: Bloomberg
added four customers in Q4FY18 and two more additions is in the pipeline. To
bolster its component offering, the company has made two acquisitions in FY18
which adds electronic PCBs into its portfolio.
Risks & Concerns Others
Majority of AEL’s revenue is derived from top 10 customers (92.5% in FY17). The 37.3%
loss of, or a significant reduction in purchases by such customers could adversely
Promoter
affect business of the company.
44.0%
Company Background
Amber Enterprises Ltd was incorporated as Amber Enterprises India Private Limited
and set up its first factory in Rajpura, Punjab, which commenced operations in 1994.
Since then, the company has today grown to 10 manufacturing facilities across
seven locations in India. DII
Sector Background 7.9%
FII
The RAC penetration level in India (4%) lags when compared to the global level 10.8%
(30%) implying the room for growth. Overall Indian market remains at sub-par level
when compared to the global average. With increase in rural market sales and Source: Bloomberg
product lining strategies, the market penetration is expected to improve in future.
Financials (Rs mn) Consolidated FY18 FY19E FY20E Household Penetration across consumer durables category (%)
Sales 21,281 26,342 31,577 70
Growth (%) 29.4 23.8 19.9 60.0
60
EBITDA 1,835 2,110 2,700
50
EBITDA margin (%) 8.6 8.0 8.6
Net profit 623 1,052 1,459 40
EPS (Rs) 19.8 33.5 46.5 30
20.0
Growth (%) 123.3 68.8 38.7 20
17.0
10.0
10 4.0
Dividend per share (Rs) - - -
0
ROE (%) 9.9 11.1 13.6
Room AC Refrigerator WM FPD TV Air Cooler
ROCE (%) 16.0 15.1 18.4
Net Working Capital 24.5 24.8 26.0 Source: Company
Net Cash 284 964 1,713
Revenue mix (%)
Non AC
Components
Valuation parameters FY18 FY19E FY20E RAC 14%
P/E (x) 46.6 27.6 19.9 Components
P/BV (x) 3.3 2.9 2.5 11%
EV/Sales (x) 1.4 1.1 0.9
EV/EBITDA (x) 15.7 13.3 10.1
Price Performance (%) 1M 3M 6M RACs

(4.3) 4.0 (13.5) 75%
1-Month Portfolio
SEPTEMBER 3, 2018
1-MONTH PORTFOLIO (PF) – SEPTEMBER 2018

NIFTY: 11680
This was the portfolio which we had recommended for September 2018. The recommendation in this portfolio now
stands closed.
Stock M Cap Current
(Rs mn) Price PE (x) Comment
(Rs) FY19E FY20E
L&T 1,920,740 1,370 22.5 19.6  Company reported stronger than expected results in Q1FY19.
 The company has strong ordering and order pipeline
dominated by government spending.
Grasim 703,754 1,071 23.2 19.5  Grasim is likely to benefit from improved VSF and chemical
volumes along with higher volumes in cement.
 Stock is trading at attractive valuations
Tech Mahindra 750,680 766 16.7 13.9  Tech Mahindra reported better than expected results in
1QFY19.
 Overall outlook remains promising on the back of new deals
closures in the telecom vertical and sustained revenue
momentum from the enterprise segment
 Ramp ups from high quality accounts signed in the past 18
months will too power medium term growth.
Aurobindo Pharma 417,818 713 17.8 14.9  We believe ARBP is also well positioned to gain volumes in the
US where the management expects US$100 mn worth of
NBO’s in FY2019 and is well placed to capitalize on any
disruptions in US orals (e.g. valsartan)
Petronet LNG 372,000 248.0 15.4 13.3  We believe PLNG’s earnings to rise over the next 2-3 years,
driven by higher RLNG volumes from both Dahej and Kochi
terminals. Construction of the pipeline to evacuate gas from
Kochi is progressing well.
Kansai Nerolac 278,124 516 43.4 38.2  Volume trends remain strong for the company and we expect
the trend to continue in medium term.
 Reduction in GST (from 28% to 18%) bodes well for paint
companies including Kansai Nerolac.
 Kansai is one of the most attractively valued paint company
Jubilant Foodworks 205,368 1,557 62.3 44.5  Company reported stronger than expected results in Q1FY19
 New management’s interventions continue to drive strong
momentum in the business.
Maharashtra Seamless 32,763 489 7.9 6.8  We believe that MSL valuations can get rerated on back of 1)
recovery in demand for seamless pipes in the
domestic/international market 2) limited competition from
domestic players who are struggling with their highly
leveraged balance sheets.
PNC Infratech 42,587 166 18.4 14.1  Robust order book of over Rs 150 bn gives very strong revenue
growth visibility for the next three years.
 PNC is targeting over 40% revneue growth in FY18-20E based
on its current orderbook and stage of execution.
Talbros Auto 3,616 294 13.7 10.4  VTBA’s gasket business that accounts for majority revenues for
the company is witnessing robust growth.
 Given current order book status, revenue growth in this
business is expected to continue strong growth in FY19/FY20.
In 1QFY19, revenues in the forging business stood at Rs417mn,
115% growth YoY.
 It is estimated to report 25% earnings CAGR over FY18-FY20E,
stock is available at attractive valuation.
Source : Kotak Securities - Private Client research
1-Month Portfolio
OCTOBER 1, 2018
1-MONTH PORTFOLIO (PF) – OCTOBER 2018

NIFTY: 10930
We expect the following stocks in 1 month portfolio to outperform the benchmark index Nifty in the month of October
2018. We rate these stocks as “Short Term Buys” with a time frame of 1 month.
Stock M Cap Current

(Rs mn) Price PE (x) Comment
(Rs) FY19E FY20E
Infosys 3,323,937 732 20.1 17.7  Management is confident of achieving near term financial
objectives and is making progress in strengthening lag areas
like large deals and digital.
 Company has developed significant competencies within
Digital which has higher gross margin, revenue per person and
growth rates.
Vedanta 862,738 232 7.2 6.0  We expect Vedanta to deliver the highest volume growth over
the next two years led by zinc, oil & gas and aluminum
operations—these businesses account for 90% of VEDL’s
EBITDA.
Hero MotoCorp 582,600 2,913 15.9 14.3  Through new products, HMC is making an attempt to improve
its presence in the scooter and premium motorcycle segment.
 Pickup in rural demand, (HMC is large player in rural areas) has
led to improved demand for motorcycle.
Marico 426,990 331 46.0 37.2  In Q1FY19, Marico delivered strong performance in an
extremely challenging input cost environment, with healthy
volume growth across key segments
 Company continues to maintain/ gain market share in most of
its categories
 Downward trend in Copra prices is healthy for Marico
Grasim Ind 670,242 1,020 22.1 18.6  Grasim is likely to benefit from improved VSF and chemical
volumes along with higher volumes in cement.
Aurobindo Pharma 435,398 743 18.6 15.5  We believe ARBP is also well positioned to gain volumes in the
US where the management expects US$100 mn worth of
NBO’s in FY19 and is well placed to capitalize on any
disruptions in US orals (e.g. valsartan).
Cummins India 187,110 675 24.3 20.6  Cummins reported margin improvement in Q1FY19 after six
quarters of disappointment. We expect the trend would
continue in Q2FY19 as well leading to stock re-rating.
 Currently stock is trading at attractive valuations
Jubilant Foodworks 163,820 1,242 49.7 35.5  Company reported stronger than expected results in Q1FY19.
 New management’s interventions continue to drive strong
momentum in the business.
Amber Enterprises 29,108 927 27.7 19.9  Highest market share in contract manufacturing of room ACs.
 Hike in import duty on ACs to benefit contract manufacturers
Cyient 84,450 750 17.5 14.3  Continued traction in transportation and communications
verticals along with strategic acquisitions would drive revenue
growth.
 Company has taken several steps to facilitate successful
execution of its S3 strategy.
 Stock is trading at reasonable valuations.
Source: Kotak Securities - Private Client research
ONE MONTH MODEL PORTFOLIO PERFORMANCE

Portfolio (PF) returns vs Nifty Returns and outperformance of portfolio vis-à-vis Nifty
Graph 1 depicts the monthly returns of the portfolio vs monthly returns of Nifty and its
outperformance
PF monthly performance vs Nifty monthly performance
One Month Portfolio (LHS) Nifty returns (LHS) Outperformance (RHS)

10 8.7 10.00
7.5 7.5
5.8 5.6 6.0 6.2 6.0
5.2 4.7
5 3.4 5.00
3.0 2.9 2.8
1.4 1.7
1.0
0.2 -0.4 0.2
0 0.00
-0.1 -0.1 0.0 -0.2
-1.0 -1.2 -0.8
-1.6 -1.3
-2.8
-5 -3.6 -4.1 -5.00
-6.4 -6.4
-10 -8.3 -8.8 -10.00

Sep-17
Sep-18
Jul-17
Dec-17
Jan-18
Jul-18
Apr-17
Mar-18
Apr-18
Jun-17
Oct-17
Jun-18
May-17
Nov-17
May-18
Aug-17
Feb-18
Aug-18
Source: Kotak Securities – Private Client Research, NSE
Graph 2 depicts the performance of monthly, 3 monthly, 6 monthly and yearly basis and
corresponding outperformance. 3 monthly PF returns are calculated by adding the returns of
last three months, 6 monthly PF returns are calculated by adding the returns of last six months,
1 yearly PF returns are calculated by adding the returns of last 12 months. Nifty returns for the
same periods have been calculated by using the actual opening and closing value for the said
period such as monthly, 3 monthly, 6 monthly and yearly.
PF performance vs Nifty performance
20.0 PF Nifty Outperformance -

16.3
(2.4) (2.0)
15.0
(3.5)
8.5 (4.0)
10.0
4.6 (6.0)
5.0 2.5
(8.0)
0.0
(10.0)
-1.1
-5.0 (11.7)
(12.0)
-6.4 -5.9
-10.0 (14.0)
-8.8
(14.4)
-15.0 (16.0)
1 month 3 month 6 month 1 year
Source: Kotak Securities – Private Client Research, NSE
RATING SCALE
Definitions of ratings
BUY – We expect the stock to deliver more than 12% returns over the next 12 months
ACCUMULATE – We expect the stock to deliver 5% - 12% returns over the next 12 months
REDUCE – We expect the stock to deliver 0% - 5% returns over the next 12 months
SELL – We expect the stock to deliver negative returns over the next 12 months
NR – Not Rated. Kotak Securities is not assigning any rating or price target to the stock. The report has been prepared for
information purposes only.
RS – Rating Suspended. Kotak Securities has suspended the investment rating and price target for this stock, either because there
is not a Sufficient fundamental basis for determining, or there are legal, regulatory or policy constraints around publishing,
an investment rating or target. The previous investment rating and price target, if any, are no longer in effect for this stock
and should not be relied upon.
NA – Not Available or Not Applicable. The information is not available for display or is not applicable
NM – Not Meaningful. The information is not meaningful and is therefore excluded.
NOTE – Our target prices are with a 12-month perspective. Returns stated in the rating scale are our internal benchmark.
Rating scale for 1 month portfolio

Benchmark – Nifty
Time horizon – 1 month
Short term buys – Stocks expected to outperform the benchmark Nifty in the said time horizon
FUNDAMENTAL RESEARCH TEAM

Rusmik Oza Arun Agarwal Amit Agarwal Nipun Gupta Deval Shah
Head of Research Auto & Auto Ancillary Transportation, Paints, FMCG Information Tech, Midcap Research Associate
rusmik.oza@kotak.com arun.agarwal@kotak.com agarwal.amit@kotak.com nipun.gupta@kotak.com deval.shah@kotak.com
+91 22 6218 6441 +91 22 6218 6443 +91 22 6218 6439 +91 22 6218 6433 +91 22 6218 6423
Sanjeev Zarbade Ruchir Khare Jatin Damania Cyndrella Carvalho Ledo Padinjarathala
Cap. Goods & Cons. Durables Cap. Goods & Cons. Durables Metals & Mining, Midcap Pharmaceuticals Research Associate
sanjeev.zarbade@kotak.com ruchir.khare@kotak.com jatin.damania@kotak.com cyndrella.carvalho@kotak.com ledo.padinjarathala@kotak.com
+91 22 6218 6424 +91 22 6218 6431 +91 22 6218 6440 +91 22 6218 6426 +91 22 6218 7021
Teena Virmani Sumit Pokharna Pankaj Kumar Jayesh Kumar Krishna Nain
Construction, Cement, Buildg Mat Oil and Gas, Information Tech Midcap Economist M&A, Corporate actions
teena.virmani@kotak.com sumit.pokharna@kotak.com pankajr.kumar@kotak.com kumar.jayesh@kotak.com krishna.nain@kotak.com
+91 22 6218 6432 +91 22 6218 6438 +91 22 6218 6434 +91 22 6218 5373 +91 22 6218 7907
K. Kathirvelu
Support Executive
k.kathirvelu@kotak.com
+91 22 6218 6427
TECHNICAL RESEARCH TEAM

Shrikant Chouhan Amol Athawale
shrikant.chouhan@kotak.com amol.athawale@kotak.com
+91 22 6218 5408 +91 20 6620 3350
DERIVATIVES RESEARCH TEAM

Sahaj Agrawal Malay Gandhi Prashanth Lalu Prasenjit Biswas, CMT, CFTe
sahaj.agrawal@kotak.com malay.gandhi@kotak.com prashanth.lalu@kotak.com prasenjit.biswas@kotak.com
+91 79 6607 2231 +91 22 6218 6420 +91 22 6218 5497 +91 33 6625 9810
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AUGUST 2, 2017

Monthly Market Strategy October 2018

One month Model Portfolio Performance

Market performance – sector wise (September 2018)

US Fed rate (%)

US unemployment growth (%)

Trade war and impact on currencies

Emerging market currencies – Performance CYTD (%)

China market impacted by trade war

Oil prices continue to move up

Brent Crude (US$/barrel)

Bond market crisis impacted equity markets too

10-year GSec yield (%)

Despite moderation in inflation, RBI likely to hike rates in October

FII’s remained net sellers for the month

FII & Mutual Fund investment (Rs cr)

Automobiles Maruti Suzuki

Export oriented / Defensive sectors

FMCG ITC, Marico

Cyndrella Carvalho THEME 1: PHARMA SECTOR

Aurobindo Pharma Ltd - Accumulate Analyst: cyndrella.carvalho@kotak.com

Investment Argument Price Performance

Company Background Promoter

Valuattion Parameters FY18 FY19E FY20E 150,000

Source: Bloomberg, Company, KIE Source: Company, KIE

Laurus Lab Ltd - Buy Analyst: cyndrella.carvalho@kotak.com

Valuation Parameters FY18 FY19E FY20E 25,000 20

Source: Bloomberg, Company, KIE Source: Company, KIE

Nipun Gupta THEME 2: IT SECTOR

Tech Mahindra Ltd - Accumulate

Investment Argument Price Performance

Financials (Rs mn) FY18 FY19E FY20E Client Contribution(%)

Utilization Rate (%)

Valuation Parameters FY18 FY19E FY20E

Source: Bloomberg, Company, KIE Source: Company

Cyient Ltd - Buy Analyst: nipun.gupta@kotak.com

Investment Argument Price Performance

Risks & Concerns

 Risk of an expensive acquisition or integration risk.

Company Background FII

Persistent Systems Ltd - Buy Analyst: sumit.pokharna@kotak.com

Investment Argument Price Performance

Risks & Concerns

Financials (Rs mn) FY18 FY19E FY20E Revenue Breakup (%)

THEME 3: DEFENSIVES/CONSUMPTION DRIVEN STOCKS

Stocks looking attractive in valuations are:

Maruti Suzuki India Ltd - Accumulate Analyst: arun.agarwal@kotak.com

Investment Argument Price Performance

Risks & Concerns

Financials (Rs Mn) FY18 FY19E FY20E Sales Volumes (Units)

Valuation Parameters FY18 FY19E FY20E 50.0

ITC Ltd - Buy Analyst: agarwal.amit@kotak.com

Investment Argument Price Performance

Book value (Rs/share) 39.3 41.3 44.9

Valuation Parameters FY18 FY19E FY20E 15.00%

Price Performance (%) 1M 3M 6M

Arvind Ltd - Buy Analyst: pankajr.kumar@kotak.com

Financials (RS mn) FY18 FY19E FY20E Performance of Power Brand

The Phoenix Mills Ltd - Buy Analyst: teena.virmani@kotak.com

Investment Argument Price Performance

Amber Enterprises Ltd - Buy Analyst: sanjeev.zarbade@kotak.com

Investment Argument Price Performance

Price Performance (%) 1M 3M 6M RACs