NOVEMBER 6, 2015

Economy News  In a major reform for the power sector, the Centre has asked states to take over 75 per cent of the debt of power distribution companies (discoms). This would not only help in cleaning of the debt of Rs 4.3 trn accumulated on state-owned discoms, but would also bring relief to lenders. (BS)  Prime Minister Narendra Modi formally launched the government's muchawaited schemes for monetisation of citizens' gold holdings. Depositors will get a 2.25 per cent interest rate for medium-term deposits and 2.5 per cent for long-term ones. Principal and interest under the scheme will be denominated in gold. (BS)

Corporate News  A subsidiary of Virtusa Corporation, the US-based global information technology services entity, is acquiring a 53 per cent stake in Polaris Consulting and Services. Arun Jain, the promoter of Polaris, will be exiting the company. Virtusa will purchase the shares at Rs 220.73 each, aggregating to Rs 11.73 bn. It will also make an open offer to the public shareholders of Polaris to purchase up to an additional 26 per cent. (BS)  ABB is set to convert its India business into a strong platform for its global technology and product operations. The recent appointment of Bazmi Husain, managing director, ABB India, as the global technology head is one such move. It also sees a third of its India product volume feeding the export market in a few years. (BS)  Direct-to-home service provider Dish TV has introduced a new service for is customers in order to upsell products and packages. Named 'Only For You', the service uses the data collected by the company's IT back-end to profile each connection and customise packages. As per the company, this strategy will not only help increase ARPUs, but also reduce churn. (BS)  The department of telecommunications said it was allowing operators to liberalise, meaning to allow use of any technology, their 800 MHz (mainly used in CDMA services) and 1800 MHz spectrum allocation, assigned administratively before an auction policy was put into place. The move is expected to benefit the spectrum sharing arrangement planned between Anil Ambani's Reliance Communications and Mukesh Ambani's Reliance Jio, to offer fourth-generation (4G) services pan-India. (BS)  Cipla Ltd, India's third-largest drugmaker by sales, said its sales for the rest of this year would be lower than that in the first half, after September-quarter earnings came in below analysts' expectations. The company said it will spend heavily on research and development in consumer healthcare and biologics for the rest of the year. (BL)  Higher passenger fee may help GMR Hyderabad International Airport (GHIAL) get back in black as the stoppage of user development fee (UDF) from April, 2014 had pushed the airport operator into losses. Revenue was hit after the Airports Economic Regulatory Authority (AERA) had asked the company to stop collecting User Development Fee (UDF) from embarking passengers beginning April 2014. This order was reversed on Tuesday. (BS)  Merck & Co. wants to expand its presence in India, building on what the $42-billion US pharmaceutical giant calls a "responsible pricing strategy" and heartened by a recent intellectual property rights ruling in its favour. The Delhi High Court decision on its anti-diabetes drug Januvia is among the factors encouraging Merck to invest in India. (ET)  India's oil imports from Iran fell 41.5 percent in October from a year ago to the lowest in seven months, according to tanker arrival data obtained by Reuters, as state-run refiner MRPL cut imports due to a maintenance shutdown. (BL)

Source: ET = Economic Times, BS = Business Standard, FE = Financial Express, BL = Business Line, LM = Live Mint, ToI: Times of India, BSE = Bombay Stock Exchange

Equity % Chg 5 Nov 15 1 Day 1 Mth 3 Mths Indian Indices SENSEX Index NIFTY Index BANKEX Index SPBSITIP Index BSETCG INDEX BSEOIL INDEX CNXMcap Index SPBSSIP Index

26,304 7,955 19,373 11,191 14,520 9,080 13,076 11,119

(0.9) (1.1) (1.5) (1.2) (1.0) (0.9) (1.5) (1.6)

(2.3) (2.4) (3.7) (3.2) (7.7) 0.6 (1.9) (1.6)

(7.0) (7.4) (11.4) 0.2 (21.4) (7.1) (7.5) (8.3)

World Indices Dow Jones Nasdaq FTSE NIKKEI HANGSENG

17,863 5,128 6,365 19,116 23,051

(0.0) (0.3) (0.7) 1.0 (0.0)

6.4 8.0 0.6 5.6 4.7

2.5 1.4 (5.7) (7.1) (6.2)

Value traded (Rs cr) 5 Nov 15

% Chg - Day

3,367 14,054 172,858

27.8 (3.6) 27.4

Cash BSE Cash NSE Derivatives

Net inflows (Rs cr) 4 Nov 15

% Chg

MTD

YTD

67 (90)

(118) (125)

(313) 520

25,466 59,639

FII Mutual Fund

FII open interest (Rs cr)

FII FII FII FII

4 Nov 15

% Chg

16,779 62,647 45,965 2,646

(0.1) 3.2 (1.6) 9.0

Index Futures Index Options Stock Futures Stock Options

Advances / Declines (BSE) 5 Nov 15 Advances Declines Unchanged

A

B

T

44 252 2

371 1,020 42

50 64 11

Total % total 465 1,336 55

Commodity

25 72 3

% Chg 5 Nov 15 1 Day 1 Mth 3 Mths

Crude (US$/BBL) Gold (US$/OZ) Silver (US$/OZ)

45.3 1,106.8 15.0

0.3 (0.4) (0.5)

(6.6) (3.3) (5.9)

1.5 1.5 2.0

Debt / forex market 5 Nov 15 1 Day 1 Mth 3 Mths 10 yr G-Sec yield % Re/US$

7.7 65.7

7.7 65.5

7.5 65.3

7.8 63.8

Sensex 30,500 29,500 28,500 27,500 26,500 25,500 24,500 Nov-14

Feb-15

May-15

Aug-15

Nov-15

November 6, 2015

MORNING INSIGHT

ASHOK LEYLAND (ALL)

RESULT UPDATE Arun Agarwal [email protected] +91 22 6621 6143

PRICE: RS.87 TARGET PRICE: RS.94

RECOMMENDATION: ACCUMULATE FY17 EV/EBITDA - 12X

ALL reported strong growth in earnings in 2QFY16 - though the same fell short of our expectation. Standalone revenues grew by 54% YoY to Rs49.4bn. EBITDA margin during the quarter came in at 12%, expanding by 475bps YoY and 191bps QoQ, but lower than our expectation of 12.5%. Led by strong jump in volumes and EBITDA margin expansion, the company reported strong increase in adjusted net profit. However adjusted PAT came in below expectation due to marginal decline in revenues, lower than expected EBITDA margin and higher tax rate. We expect volume growth for the MHCV industry and for ALL to moderate in 2HFY16. EBITDA margin is expected to be strong, but we expect 2HFY16 EBITDA margin to be lower than that witnessed in 1HFY16. We thereby expect earnings growth in 2HFY16 to moderate as compared with 2QFY16 performance. We rate the stock as ACCUMULATE (recommend to buy on declines) with price target of Rs94 (earlier Rs98). We expect the stock to witness some weakness in the near term. Quarterly performance

Summary table (Rs mn)

FY15

FY16E

FY17E

(Rs mn)

2QFY16

2QFY15

YoY (%)

1QFY16

QoQ (%)

Total Revenues

49,397

32,177

53.5

38,412

28.6

Total expenditure

43,453

29,833

45.7

34,525

25.9

RM consumed

34,774

23,682

46.8

26,672

30.4

Employee cost

3,784

2,915

29.8

3,304

14.5

Other expenses

4,895

3,236

51.3

4,549

7.6

EBITDA

5,945

2,344

153.6

3,887

52.9

12.0

7.3

-

10.1

8.3

Sales 135,622 171,376 200,305 Growth (%) 36.4 26.4 16.9 EBITDA 10,266 17,678 21,674 EBITDA margin (%) 7.6 10.3 10.8 PBT 4,422 11,491 16,484 Net profit 3,348 7,814 11,209 EPS (Rs) 1.2 2.7 3.9 Growth (%) 965.3 133.4 43.4 CEPS (Rs) 2.6 4.3 5.5 BV (Rs/share) 18.0 20.2 23.6 Dividend / share (Rs) 0.4 0.5 0.5 ROE (%) 5.6 14.4 18.0 ROCE (%) 8.0 15.9 20.9 Net cash (debt) (25,984) (23,965) (13,059) NW Capital (Days) (5) 1 (1) P/E (x) 73.8 31.6 22.0 P/BV (x) 4.8 4.3 3.7 EV/Sales (x) 2.0 1.6 1.3 EV/EBITDA (x) 26.6 15.3 12.0 Source: Company, Kotak Securities - Private Client Research

Reported PAT

EBITDA margin (%) Depreciation

1,129

1,031

9.6

1,043

Interest cost

702

1,007

(30.3)

766

(8)

Other Income

265

257

3.0

271

(2.3)

Extraordinary income/ (loss)

(52)

1,090

-

-

-

4,326

1,652

161.8

2,349

84.2

8.8

5.1

-

6.1

-

1,458

445

227.3

756

92.9

33.7

27.0

-

32.2

80.0

PBT PBT margins (%) Tax Tax rate (%)

2,868

1,207

137.6

1,593

PAT margins (%)

5.8

3.8

-

4.1

-

Reported EPS (Rs)

1.0

0.4

137.6

0.6

80.0

Source: Company

Result Highlights  Standalone revenues in 2QFY16 grew by 54% YoY from Rs32.2bn in 2QFY15 to Rs49.4bn in 2QFY16. During the quarter, volume grew at a robust pace of 47% and average selling price increased by 4%. Share of MHCV volumes in overall volumes increased from 71.7% in 2QFY15 to 79.9% in 2QFY16.  In comparison with 1QFY16, revenues grew by 29% led by 32% jump in volumes and 3% QoQ drop in ASP. Lower share of defense revenues led to QoQ decline in ASP.

Kotak Securities Limited has two independent equity research groups: Institutional Equities and Private Client Group. This report has been prepared by the Private Client Group. The views and opinions expressed in this document may or may not match or may be contrary with the views, estimates, rating, target price of the Institutional Equities Research Group of Kotak Securities Limited. Kotak Securities - Private Client Research

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November 6, 2015

MORNING INSIGHT

 During the quarter, domestic trucks accounted for ~64% of overall revenues, bus ~13%, exports ~8-9%, LCV~6.5% and balance were spares/engine/defense.  In 2QFY16, average discounts were in the range of Rs200,000 - 225,000 per unit.  Gross margins during the quarter expanded from 26.4% in 2QFY15 to 29.6%. Soft commodity prices, company's input cost reduction efforts and price hikes taken in the past one year aided gross margin expansion. ALL undertook 1% price hike, each in 1QFY16 and 2QFY16. Sequentially gross margins declined by 100bps on account of lower share of exports/defense revenues over 1QFY16.  Employee cost during the quarter remained at elevated levels. On a YoY basis, employee cost was higher by 30% on account of impact of annual increments and bonus/variable increments. On a QoQ basis too, employee cost was up by 15% and was above expectation as the company looked at retaining talent.  Other expenses during the quarter rose sharply YoY from Rs3,236mn in 2QFY15 to Rs4,895mn in 2QFY16. Rise in other expenses was largely due to 47% jump in sales volume. Over 1QFY16, other expenses increased by 8% (on a relatively high base) due to 29% increase in sales volumes.  EBITDA margin during the quarter came in at 12%, expanding by 475bps YoY and 191bps QoQ. On a YoY basis, EBITDA margin increased on account of higher gross margin and some operating leverage benefits arising out of strong volume growth. Sequentially EBITDA margin improvement was completely driven by operating leverage benefit.  Interest cost declined by 30% YoY and 8% QoQ, as debt remained under control on strong cash flows from improved business and divestments in nonstrategic investments. Income tax during the quarter was higher and the company guided for 32-33% tax rate for entire FY16.  During the quarter, the company booked profit of Rs1,518mn on sale of IndusInd shares and the same was offset on account of Rs1,570mn diminution in the value of JV with John Deere. ALL has impaired it to the book value of JV as of 30th September 2015.  Led by strong jump in volumes and EBITDA margin expansion, the company reported strong increase in adjusted net profit. In 2QFY16, adjusted net profit increased from Rs444mn in 2QFY15 and Rs1,593mn in 1QFY16 to Rs2,904mn in 2QFY16. However adjusted PAT came in below expectation due to marginal decline in revenues, lower than expected EBITDA margin (12% versus estimate of 12.5%) and higher tax rate.

Conference Call Highlights  In 2QFY16, domestic MHCV segment reported 44% growth in volumes aided by lower base, pent-up demand and pre-buying on account of regulatory changes. During the same period, ALL reported 78% growth in domestic MHCV volumes. Over the past 1.5 years, ALL has been gaining market share in the domestic MHCV segment that now stands at 33%, up from 26% in FY14.  Company expects the MHCV domestic industry to grow upwards of 20% in 2HFY16. Management indicated that they will continue to pursue profitable market share. ALL enjoys market share upwards of 22-23% in all the regions.

Kotak Securities - Private Client Research

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November 6, 2015

MORNING INSIGHT

 Exports during the quarter was low. Management highlighted that exports is likely to improve in 2HFY16. Going ahead, the company is looking at 15-20% growth in exports. Over the longer term (3-5 years), the company maintained its view of making exports one third of revenues.  As of end 1HFY16, debt stood at Rs3bn and Debt/Equity was at 0.7x. In 2QFY16, ALL generated cash of Rs8.23bn. Cash flow from operation increased from Rs3.23bn in 4QFY15 to Rs6.03bn in 2QFY16. During end FY15, company had negative working capital due to high advances. As of end 1HFY16, ALL had 5 days of negative capital.  Company said that full benefit of fall in commodity prices has still not come in.  In 1HFY16, capex and investments accounted for Rs550mn (includes Rs130mn of investments). For FY16, ALL has earmarked Rs5bn towards capex and investments.  Dealer inventory in September 2015 was at 7,600 units.  Current MHCV production capacity stands at 150,000 units. Management indicated that they can increase capacity by adding shift and through debottlenecking and thereby believes that current capacity can sustain growth in demand for next couple of years. In Pantnagar, company crossed 5,000 units monthly production in September 2015. Excise duty benefit for the Pantnagar plant is available up to March 2020.  From October 2015 onwards, the company passed on the increase in cost due to regulatory changes. Company increased prices in the range of Rs30,000 - 90,000 per unit, average price hike was ~70,000 per unit.

Outlook  In 1HFY16, ALL reported 63% growth in domestic MHCV volumes and we expect volume growth to moderate significantly in 2HFY16. However having said that, absolute volumes in 2HFY16 is likely to be marginally lower than 1HFY16 volumes. Higher base of 2HFY15 and impact of pre-buying in 1HFY16 will lead to tapering of volume growth for ALL and the domestic MHCV industry.  EBITDA margin is expected to be strong, but we expect 2HFY16 EBITDA margin to be lower than that witnessed in 1HFY16. We expect EBITDA margin of 10.3%/10.8% in FY16/FY17 respectively.  We have lowered our FY17 earnings by 6% due to lowering of EBITDA margin assumption. For FY16, our revised net profit stands marginally higher by 1%. We recommend ACCUMULATE on Ashok Leyland with a price target of Rs.94

 Strong EBITDA growth will lead to improvement in cash flows and aid in lowering debt and interest outflow. Healthy revenue growth, EBITDA margin expansion and reduction in interest outgo will lead to healthy earnings growth for the company in coming years.  After witnessing strong earnings growth in 2QFY16, we expect performance in 2HFY16 to moderate as compared with 2QFY16 performance. We rate the stock as ACCUMULATE (recommend to buy on declines) with price target of Rs94 (earlier Rs98). We expect the stock to witness some weakness in the near term.

Kotak Securities - Private Client Research

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November 6, 2015

MORNING INSIGHT

BAJAJ ELECTRICALS LTD (BAEL)

RESULT UPDATE Ruchir Khare [email protected] +91 22 6621 6448

PRICE: RS.240 TARGET PRICE: RS.265

RECOMMENDATION: ACCUMULATE FY17E P/E: 15.5X

BAEL reported Q2FY16 result below estimates on profitability front; loss minimization in E&P business got offset by sub-optimal performance in consumer durable business. We tweak FY16/FY17 estimates to factor subdued performance in consumer durable business. In our DCF, we reduce operating margin estimate in short/medium term to reflect change in company's sales strategy (as company focus more on improving secondary sales resulting in likely subdued margin in near/medium term). We downgrade recommendation to 'ACCUMULATE' from 'BUY' earlier on company's stock with DCF based revised price target of Rs 265 (Rs 315 earlier). Summary table (Rs mn)

Quarterly performance FY15 FY16E FY17E

Sales 42581 Growth (%) 5.7 EBITDA 890 EBITDA margin (%) 2.1 PBT -207 Net profit -138 EPS (Rs) -1.4 Growth (%) CEPS 1.5 BV (Rs/share) 69.5 DPS (Rs) 1.5 ROE % -2.0 ROCE % -1.2 Net cash (debt) (3493) NW Capital (Days) 20 EV/Sales (x) 0.6 EV/EBITDA (x) 27.9 P/E (x) -171.8 P/Cash Earnings 156.0 P/BV (x) 3.5

48656 14.3 1946 4.0 836 552 5.6 8.7 72.9 2.0 7.8 4.7 (4135) 22 0.5 12.7 43.0 27.5 3.3

56540 16.2 3392 6.0 2312 1526 15.4 176.5 18.8 85.2 2.2 19.5 12.2 (3768) 21 0.4 7.3 15.5 12.8 2.8

Source: Company, Kotak Securities - Private Client Research

(Rs mn) Net Sales Other Income

Q2FY16

Q2FY15

YoY (%)

Q1FY16

QoQ (%)

11277

10295

9.5

10091

11.7

50

29

75.6

51

(1.6)

-125

106

-

419.6

(129.8)

Purchase of traded goods

8072.4

7794.6

3.6

6821

18.3

Employee cost

1222.9

710.8

72.0

1008

21.3

other expenditure

1645.8

1585.2

3.8

1240.1

32.7

Total expenditure

10816

10197

6.1

9489

14.0

460

98

63

72

(12.1)

70 583

Raw material cost

EBITDA Depreciation

602

PBIT

447

55

714.9

Interest expense

262

258

1.4

PBT

186

(203)

346

73

(61)

143

Tax Expense PAT

237

112.5

(142.0)

203.1

EPS (adj)

1.1

(1.4)

2.1

EBITDA (%)

4.1

1.0

6.0

Tax (%)

39.5

30.0

41.4

RM/Sales (%)

70.5

76.7

71.8

(9.4) 10.4

Source: Company

Result Highlights In Q2FY16, BAEL revenues stood at Rs 11.2 Bn up 9.5% YoY driven by lighting and project business. Operating margins reported at 4.1% declined QoQ due to sharp margin contraction in the consumer durable business offsetting the impact of margin recovery in E&P business. E&P segment reported revenue at Rs 4.1 Bn vis-à-vis Rs 3.3 Bn in Q2FY15. Operating profit for the segment stood at Rs 170 mn vis-à-vis loss of Rs 281 mn in Q2FY15. Management has stated that the loss making legacy orders in E&P segment are over and current orders enjoys superior margin. Current order book in E&P segment stands close to Rs 30 Bn.

Kotak Securities Limited has two independent equity research groups: Institutional Equities and Private Client Group. This report has been prepared by the Private Client Group. The views and opinions expressed in this document may or may not match or may be contrary with the views, estimates, rating, target price of the Institutional Equities Research Group of Kotak Securities Limited. Kotak Securities - Private Client Research

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November 6, 2015

MORNING INSIGHT

Consumer appliances division disappointed in Q2FY16; revenues stood at Rs 4.4 Bn vis-à-vis Rs 4.6 Bn in Q2FY15. EBITDA margin for the segment contracted sharply to 2.6% in Q2FY16 vis-à-vis 6% in Q2FY15 and 6.3% in Q1FY16 due to drop in primary sales. Management has stated that the company has been trying to increase secondary sales and several initiatives have been taken to reduce channel inventory. We believe that this could affect company's sales/profitability in short to medium term. However management stated that in the current quarter, company has started to observe traction and anticipates superior performance in 2HFY16 on back of sharp correction in channel inventory. Morphy Richards's revenues stood at Rs 556 mn (down 2.4% YoY) in Q2FY16. Fans segment reported sales grew by 2.7% YoY, stood at Rs 1.2 Bn in the quarter. For the segment, management has cut operating margin guidance to 6% against 8% earlier. Lighting/luminaries division reported 17% YoY growth with revenues at Rs 2. 6 Bn in the quarter mainly due to execution of orders in LED lighting. BAEL has been trying to gain capabilities in LED segment and expects significant contribution going ahead. EBIT margin in EBIT segment stood at 6.1% in Q2FY16. Segment Results Rs (mn) Consolidated revenues

Q2FY16

Q2FY15

YoY%

Q1FY15

Lighting

2638

Consumer Durables

4475

Engg Projects

4160

QoQ %

2260

17

2029

30.0

4657

(4)

4758

(5.9)

3373

23

3302

26.0

PBIT Lighting

160

64

149

85

89.1

Consumer Durables

117

278

(58)

302

(61.2)

Engg Projects

170

(281)

193

Lighting

6.1

2.8

4.2

Consumer Durables

2.6

6.0

6.3

Engg Projects

4.1

-8.3

5.8

PBIT (%)

Source: Company

Management maintained guidance for advertising expanses of Rs 630-650 mn range in FY16. Interest charges stood at Rs 262 mn in Q2FY16 vis-à-vis Rs 258 mn last year. Tax expense stood high at Rs 73 mn resulting in net profit of Rs 112 mn vis-à-vis loss of Rs 142 mn in Q2FY15.

Company likely to report margin expansion and sustain revenue growth in E&P business through FY16-FY17E We project revenue growth at 15.2% CAGR between FY15-17 from Rs 42.5 bn in FY15 to Rs 56.5 Bn in FY17 on back of 14% and 7% CAGR growth in lighting and consumer durable business respectively in the same period. In E&P business, we build growth at 26% CAGR between FY15-17 driven by 1) current order book at Rs 32 Bn and 2) expected pick up in infrastructure projects mainly in T&D space. Considering that majority of low margin legacy orders are over, we believe that the company would likely report margin expansion in E&P business in FY16/FY17. We project EBITDA margin at 4.5% and 5% for FY16 and FY17 respectively for the segment.

Kotak Securities - Private Client Research

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November 6, 2015

MORNING INSIGHT

Change in DCF Assumptions  We build lower operating margin in consumer business in near/medium term due to change in sales strategy of the company.  We expect EBITDA margin of 4% (5% earlier; management has cut EBIT margin guidance for consumer durable segment by 200 bps to 6% for FY16) and 6% (6.5% earlier) in FY16 and FY17 respectively.

Change in target price We arrive at DCF based target price of Rs 270 (Rs 315 earlier).

Valuation & Recommendation At current price of Rs.240, company's stock is trading at 15.5x P/E and 7.3 x EV/ EBITDA on FY17E earnings. We recommend ACCUMULATE on Bajaj Electricals with a price target of Rs.265

Kotak Securities - Private Client Research

We tweak FY16/FY17 estimates to factor subdued performance in consumer durable business. In our DCF, we reduce operating margin estimate in short/medium term to reflect change in company's sales strategy (as company focus more on improving secondary sales resulting in likely subdued margin in near/ medium term). We downgrade recommendation to 'ACCUMULATE' from 'BUY' earlier on company's stock with DCF based revised price target of Rs 265 (Rs 315 earlier).

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November 6, 2015

MORNING INSIGHT

ENGINEERS INDIA LTD (EIL)

RESULT UPDATE Ruchir Khare [email protected] +91 22 6621 6448

PRICE: RS.190 TARGET PRICE: RS.240

RECOMMENDATION: BUY FY17E P/E: 13.3X

EIL reported Q2FY16 operating profit below our estimate due to subdued performance in LSTK segment. Order inflows remained sluggish in the quarter due to lackluster ordering in the domestic hydrocarbon space. LSTP division reported improvement on the negative base of previous year (Q2FY15 was weakened by one off factors). We tweak FY17 estimates downward to build much slower than anticipated ordering in large hydrocarbon projects. We believe that EIL stock price would be susceptible on order book growth of the company. At current price, company's stock looks attractively valued on a discounted cash flow basis. We maintain BUY rating on company's stock with a DCF based revised target price of Rs.240 (Rs 250 earlier). Summary table (Rs mn)

Consolidated Quarterly financials FY15 FY16E FY17E

Sales 17,412 17,713 Growth (%) (5.7) 1.7 EBITDA 2,239 3,011 EBITDA margin (%) 12.9 17.0 PBT 4766 5811 Net profit 3,124 3,893 EPS (Rs) 9.3 11.6 Growth (%) (35.3) 24.6 CEPS (Rs) 9.9 12.1 BV (Rs/share) 78.1 83.1 DPS (Rs) 5.6 5.6 ROE (%) 12.1 14.3 ROCE (%) 12.0 14.2 Net cash (debt) 24,198 26,718 NW Capital (Days)(100.1) (109.1) EV/Sales (x) 2.6 2.6 EV/EBITDA (x) 20.4 15.2 P/E (x) 20.5 16.4 P/Cash Earnings (x) 19.3 15.6 P/BV (x) 2.4 2.3

20,529 15.9 4,311 21.0 7202 4,825 14.3 23.9 14.9 90.8 5.7 16.5 16.4 29,234 (95.3) 2.2 10.6 13.3 12.7 2.1

Source: Company, Kotak Securities - Private Client Research

(Rs mn)

Q2FY16

Q2FY15

YoY (%)

Q1FY16

QoQ (%)

Revenues

4505

3906

15.3

3905

15.4

Employee expenses

1461

1450

0.8

1516

(3.6)

580

1055

(45.0)

617

(5.9)

1636

477

242.9

1072

52.6

Other expenses

291

846

(65.6)

417

(30.2)

Total Expenses

Sub-Contract Payments Constrction Material

3968

3827

3.7

3620

9.6

EBITDA

537

79

578.5

285

88.7

Other income

604

839

(28.0)

687

(12.0)

Depreciation

52

35

48.3

85

(38.4)

1089

883

23.3

886

22.9

0

0

EBIT Net Interest PBT

0

1089

883

23.3

886

22.9

Total tax

392

296

32.7

317

23.7

PAT

697

587

18.6

569

22.4

2.1

1.7

18.6

1.7

22.4

EPS (Rs) EBITDA (%)

11.9

2.0

7.3

63.6

Tax Rate (%)

36.0

33.5

35.8

0.7

Source: Company

Result Highlights Consolidated revenues increased 15.3% YoY to Rs 4.5 Bn in Q2FY16 driven by overseas Consultancy business and LSTK division. Operating margins at 11.7% posted sharp YoY expansion against 2% EBITDA margin in Q2FY15. We highlight that in Q2FY15, company had made provision of Rs 280 mn (Rs 750 mn in FY15) with respect to ‘change order’ in CPCL Coker plant project. In Q2FY16, operating margin has also been driven by reported contractual obligation write back of Rs 310 mn (other expenses at Rs 267 mn down by 68% YoY). Consolidated consultancy division reported 16% YoY increase in sales in Q2FY16 reported at Rs 2.5 Bn and EBIT margin for the segment stood at 26.2% vis-à-vis 25.5% in Q2FY15 and 18.47% in Q1FY16. Management stated that international revenue booking has remained robust so far and margins are likely to remain strong going ahead. Execution in Dangote refinery (EIL largest overseas order of Rs 8.5 Bn), Nigeria is progressing satisfactorily.

Kotak Securities Limited has two independent equity research groups: Institutional Equities and Private Client Group. This report has been prepared by the Private Client Group. The views and opinions expressed in this document may or may not match or may be contrary with the views, estimates, rating, target price of the Institutional Equities Research Group of Kotak Securities Limited. Kotak Securities - Private Client Research

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Management believes that increased activity in domestic Hydrocarbon space could lead to significant margin expansion going ahead. LSTP division revenue stood at Rs 1.9 Bn in Q2FY16 up 14.3% YoY. LSTP division reported operating profit at Rs 71 mn vis-à-vis loss of Rs 200 mn in Q2FY15 (due to CPCL Coker provisioning of Rs 280 mn). We highlight that LSTP division has reported operating loss in 1HFY15 on back of provisions made for ‘change order’ in CPCL Coker plant. Management has stated that there could be potential write back of Rs 750mn provision for this project in FY16. Other income stood at Rs 604 mn in the quarter on back of strong balance sheet with net cash at Rs 23 Bn in the end of Q2FY16 Segment Results (Rs mn)

Q2FY16

Q2FY15

YoY (%)

Q1FY16 QoQ (%)

Consultancy & Engineering projects

2560

2204

16.1

2251

13.8

Lumpsum Turnkey Projects

1945

1702

14.3

1655

17.6

671

562

19.4

416

61.5

71

-200

-

629

-

26.2

44.3

18.5

41.9

3.7

7.2

38.0

-

Consultancy & Engineering projects Consultancy & Engineering projects Lumpsum Turnkey Projects Segment Margins (%) Consultancy & Engineering projects Lumpsum Turnkey Projects Source: Company

Order inflows remained weak in the quarter EIL's current order book stands close to Rs 34.5 Bn offering eighteen months visibility. Consultancy order book stands close to Rs 26.8 Bn and turnkey orders stands at Rs 7.3 Bn. Order inflows at Rs 1.3 Bn in the quarter were entirely constituted by consultancy division. In FY16, management expects order book to grow on back of consultancy orders. Management also stated that the domestic outlook for hydrocarbons is currently challenged but could see improvement (mainly driven by brownfield expansions) through FY17/FY18. We believe that lower crude oil prices auger well for key refiners leading to increased capex in domestic Hydrocarbon sector. On overseas business front, EIL continues to maintain positive view and has bid for over Rs 5 Bn worth of orders. We note that the company has been successful in expanding its footprints in overseas geographies like Indonesia, Turkey, Angola and Nigeria, Algeria, Oman and Bahrain. Management has maintained its view that ordering from PSU clients like IOC, HPCL, BPCL could modestly improve going ahead. Some of the potential orders can arise from the following Hydrocarbon expansion plans.

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Potential orders in FY16/FY17 Project

Client

Scope

Bina refinery expansion

BPCL

Expansion from 6 mn MT to 7.8 mn MT

Bina refinery expansion

BPCL

9 mn MT Grassroot expansion

Kochi propylene derivatives

BPCL

Propylene derivatives

Bina refinery expansion

BPCL

9 mn MT Grassroot expansion

Bhatinda Expansion Expansion

HPCL

a) Low cost initial expansion. B) Doubling of capacity. C) Petrochemical integration.

Numaligarh Expansion

BPCL

Expansion of Vishakapatnam refinery

HPCL

Expansion by 9 mn mt

Barauni Refinery

IOC

Expansion by 6 mn MT and petrochemical integration

West Coast refinery

IOC

Source: Company, Kotak Securities - Private Client Research

EIL has been exploring new avenues of growth (mainly consultancy growth) and is positive on the fertilizer and smart cities space.

Valuation and Recommendation At the current price of Rs 190, EIL stock is trading at 13.3 x P/E on FY 17E earnings. We recommend BUY on Engineers India Ltd with a price target of Rs.240

Kotak Securities - Private Client Research

We tweak FY17 estimates downward to build much slower than anticipated ordering in large hydrocarbon projects. We believe that EIL stock price would be susceptible on order book growth of the company. At current price, company's stock looks attractively valued on a discounted cash flow basis. We maintain BUY rating on company's stock with a DCF based revised target price of Rs.240 (Rs 250 earlier).

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CIPLA LTD

RESULT UPDATE Meeta Shetty [email protected] +91 22 6621 6309

PRICE: RS.658 TARGET PRICE: RS.650

RECOMMENDATION: SELL FY17E P/E: 22X

Cipla reported inline results on both revenues as well as PAT. Revenues came in at Rs 33.6bn, up 28% YoY but down 11% QoQ. Revenues were lower QoQ mainly due to lower sales from gNexium (a one-time opportunity). Domestic formulations segment posted flat growth at 0.9% YoY, impacted by seasonal slowdown. Export revenues though grew 52% YoY,QoQ were down 12%. EBIDTA margins 22.9% was up 268bps YoY but down 410bps QoQ as high margin opportunity subsided. PAT at Rs 4.3bn, was up 44% YoY but down 34% QoQ. Cipla has maintained its guidance of 20-22% growth and EBIDTA margins expansion of 100-150bps. So far in 1HFY16, company has already grown at 33% and EBIDTA margin stands at 25%. Hence, 2HFY16 is expected to be weak. However, we believe management is being conservative in margin guidance and hence build ~23% EBIDTA margins for FY16E vs expectation of ~21-21.5%. We have been cautious on Cipla owing to increasing other expenses/ employee cost in efforts of putting up front end presence in various markets globally coupled with lower visibility on timelines for inhaler revenues from EU/US markets over the next few years. We believe the competitive scenario in the inhaler markets is a crucial thing to watch out wherein Cipla may not be amongst the first few entrants in the US market (which is the largest market for combination inhalers). We retain our negative stance on Cipla and maintain Sell with a TP of Rs 650, 20x FY17E EPS of Rs 29.9 plus NPV of Rs 52 (for inhalers - we revise it lower by Rs 15, as we built delay in UK launch). Quarterly Financials - Snapshot (Rsmn)

2QFY15

3QFY15

4QFY15

1QFY16

2QFY16

YoY (%)

QoQ (%)

Net Sales Material Expenses Employee Expenses Other Operating Expenses Operating Profits Other Operating Income EBITDA Interest Cost Depreciation Other Income PBT Tax Minority interest RPAT APAT Margin Analysis (%) Raw mat cost (%) Employee cost (%) Other expenses (%) Operating Margin (%) EBITDA Margin (%) APAT Margin (%) Tax Rate (%)

26298.1 10159.3 4735.1 7194.1 4209.6 1374.8 5584.4 468.8 1220.4 233.0 4128.2 1007.0 (134.4) 2986.8 2986.8

26247.1 9897.5 5054.6 7164.2 4130.8 1407.5 5538.3 447.3 1215.9 406.6 4281.7 944.3 (58.9) 3278.5 3278.5

29806.9 11588.0 5147.2 9115.2 3956.5 1120.0 5076.5 433.6 1356.8 612.0 3898.1 1030.2 (271.3) 2596.6 2596.6

37768.2 12516.2 6202.6 9419.0 9630.4 759.5 10389.9 513.6 1287.9 489.3 9077.7 2502.8 (68.8) 6506.1 6506.1

33617.3 12169.4 5859.1 8601.6 6987.2 906.8 7894.0 502.7 1339.6 259.2 6310.9 1812.4 (186.1) 4312.4 4312.4

27.8 19.8 23.7 19.6 66.0 (34.0) 41.4 7.2 9.8 11.2 52.9 80.0

(11.0) (2.8) (5.5) (8.7) (27.4) 19.4 (24.0) (2.1) 4.0 (47.0) (30.5) (27.6)

44.4 44.4

(33.7) (33.7)

38.6 18.0 27.4 16.0 20.2 10.8 24.4

37.7 19.3 27.3 15.7 20.0 11.9 22.1

38.9 17.3 30.6 13.3 16.4 8.4 26.4

33.1 16.4 24.9 25.5 27.0 16.9 27.6

36.2 17.4 25.6 20.8 22.9 12.5 28.7

(243.1) (57.7) (176.9) 477.7 268.5 169.8 432.5

306.0 100.6 64.8 (471.4) (410.2) (439.6) 114.8

Source: Company

Kotak Securities Limited has two independent equity research groups: Institutional Equities and Private Client Group. This report has been prepared by the Private Client Group. The views and opinions expressed in this document may or may not match or may be contrary with the views, estimates, rating, target price of the Institutional Equities Research Group of Kotak Securities Limited. Kotak Securities - Private Client Research

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Quarterly - Segmental Mix (Rsmn)

2QFY15

3QFY15

4QFY15

1QFY16

2QFY16

Domestic formulations

12510.0

11990.0

10860.0

13970.0

12620.0

0.9

(9.7)

Exports

13790.0

14260.0

18950.0

23800.0

21000.0

52.3

(11.8) (13.8)

- Exports formulations

YoY (%)

QoQ (%)

12430.0

12750.0

16900.0

21740.0

18740.0

50.8

- Exports API

1360.0

1510.0

2050.0

2060.0

2260.0

66.2

9.7

Net revenues

26300.0

26250.0

29810.0

37770.0

33620.0

27.8

(11.0)

Source: Company

Key results/con-call highlights

Summary table (Rs mn)

FY15 FY16E FY17E

Sales 108,824 133,969 154,920 Growth (%) 11.1 23.1 15.6 EBITDA 21,617 32,108 38,610 EBITDA margin (%) 19.1 23.2 24.2 PBT 16,543 26,798 33,411 Net profit 11,808 19,242 24,059 EPS(Rs) 14.7 23.9 29.9 Growth (%) -15.0 63.0 25.0 CEPS(Rs) 21.0 30.9 37.3 BVPS(Rs) 134.3 155.4 182.4 DPS (Rs) 2.0 2.5 2.5 ROE (%) 11.1 16.5 17.7 ROCE (%) 14.6 20.1 21.7 Net debt 11,375 7,839 (6,007) NW capital (Days) 128.6 133.9 145.7 P/E (x) 44.8 27.5 22.0 P/BV (x) 4.9 4.2 3.6 EV/Sales (x) 5.0 4.0 3.4 EV/EBITDA (x) 25.0 16.7 13.5 Source: Company, Kotak Securities - Private Client Research

 Cipla expects its 2HFY16 growth to be lower than 1HFY16. 1HFY16 revenues have grown at 33%. Cipla has guided for revenue growth of 20-22% for FY16, which imply a growth of less than 5% for 2HFY16.  As far as margin guidance is concerned, Cipla has maintained that the margins would expand by ~100-150bps YoY in FY16. In 1HFY16 margins have been at ~25% vs EBIDTA margins of 19.1% in FY15. Going by the guidance, margins for 2HFY16 are pegged at ~18%.  Though the margin guidance has been weak, management expects an increase in R&D spend (included in guidance). Cipla has already seen a sharp 40% increase in R&D expenses in 1HFY16. Cipla does not share R&D spend details on quarterly basis.  Cipla's domestic revenues posted a flat 0.9% growth in revenues at Rs 12.6bn. The business is split between Rx and generic-generic segment wherein the Rx accounts for 80% of domestic revenues. Cipla indicated that the Rx business has grown in mid-teens but the generic-generic segment has de-grown by 20%.  Cipla's export revenues posted 52.3% growth at Rs 21.0 bn. Export formulations revenues were at Rs 18.7bn, up 51% YoY but down 14% QoQ led by lower gNexium revenues. Over the coming quarters, company expects gNexium revenues to dip further; however, Pulmicort launch will negate the impact to some extent.  Employee cost though has gone up 24% YoY in 2QFY16, QoQ it has dipped 5.5%. The dip is due to lower hiring cost as well as lower incentives. Cipla has seen a sharp increase in employee expenses over the last three years due to front end expansion and hiring of senior managements. Going ahead though, management expects the cost to stabiles with marginal increase YoY.  As far as respiratory launches in EU are concerned, company refrained from guiding a specific timeline for UK launch (UK launch has been awaited since one year). However, company expects to launch the combination inhaler product in few EU countries, including UK, over the next 12 months.  US filing for generic DPI-Advair is scheduled in 2019 or beyond as guided earlier.  Cipla has filed 4 ANDAs in US and 19 dossiers in EU till 1HFY16. Cipla expects to launch 10 ANDAs in the US in FY17 through its own front end.  For the 1HFY16 capex stood at 5.5% of revenues. Capex for FY15 was ~Rs 6.0bn or ~6% of revenues. Cipla expects capex to be ~8% of revenues or ~Rs 10.0bn.  Cipla expects to close the deal for Invagen and Exelan by Dec-2015, most of the amount paid for the acquisition will stand as a goodwill in Cipla's balance sheet, which will be amortized over the next few years.

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 Company refrained from commenting on the compliance status of the facilities of Invagen, which had received Form 483 in May-15, before Cipla announced the acquisition.  Cipla's US denominated revenues stood at ~60% or US$330-340mn for 1HFY16, with favorable currency movements, we expect the company stands to benefit on margins.

Outlook and Valuation We have been cautious on Cipla owing to increasing other expenses/employee cost efforts of putting up front end presence in various markets globally coupled with lower visibility on timelines for inhaler revenues from EU/US markets over the next few years. We believe the competitive scenario in the inhaler markets is a crucial thing to watch out wherein Cipla may not be amongst the first few entrants in the US market (which is the largest market for combination inhalers). We maintain SELL on Cipla with a price target of Rs.650

Kotak Securities - Private Client Research

We expect the company to post 19%/43% CAGR in revenues/PAT over FY1517E. Though Cipla stands out amongst peers for PAT CAGR, on valuations front, Company is trading at 22x FY17E EPS. With RoE of