Q1FY2017 earnings preview

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Visit us at www.sharekhan.com July 13, 2016

Flattish growth; pain points remain the same: Q1FY2017 is expected to be another lackluster quarter for corporate results, with aggregate earnings of Sensex companies expected to decline by 1.5% YoY. Interestingly, the weak performance would be limited to certain pockets like global commodities, including Metals (Tata Steel), Oil & Gas (ONGC) and companies with high proportion of overseas business (Tata Motors). Among the domestic sectors, weak results from Capital Goods (largely BHEL) and public sector banks (SBI) would overshadow decent performance of other sectors, besides skewing the aggregate growth figures of Sensex companies. Excluding the five companies mentioned above, the aggregate earnings growth of the remaining 25 Sensex companies works out to be close to 7% YoY for Q1FY2017.

Revenue and margins stable: The aggregate revenue growth of Sesnex companies is estimated at 3.8% YoY, driven by positive growth across sectors [barring Metals and Energy (Oil & Gas)]. This once again highlights the impact of weak global commodity prices. The margins are largely expected to be stable, while aggregate operating profit growth for Sensex companies is estimated at 6.2% YoY.

Earnings estimates stable; management commentary

critical to sustain consensus confidence on earnings

growth: The consensus earnings estimates for FY2017 and FY2018 have been largely stable for the past couple of months, indicating growing confidence in revival of earnings to healthy double-digit growth rates from this fiscal. The optimism stems from the improving outlook for domestic demand on the back of better start to the south-west monsoon season and implementation of the Seventh Pay Commission hikes for government employees. On the other hand, commodity prices have rebounded from extreme low levels and are stabilising

Q1FY2017 earnings preview

Barring usual pain points, aggregate earnings growth in Q1FY2017 is expected to be in high single digits

at higher levels now. The street would keenly watch for positive signals from corporates in their post result commentary for sustaining expectations of healthy earnings growth over FY2017/FY2018.

Valuations seem to factor in strong domestic revival, benign global environment: The recent surge in the Indian equities is driven by positive global sentiments; most global indices have touched new highs on expectations that the Federal Reserve will defer interest rate hikes and world leaders will find a way to avoid or smoothen the impact from ‘Brexit’. Progress on reforms (including the possible passage of Goods & Services Tax Bill), and the move to recapitalise PSBs and repair their balance sheets has also lifted investors’ confidence. Post the recent sharp run-up, Sensex trades at close to 16.5x its one-year forward earnings (based on expectations of aggressive revival in earnings in FY2017/FY2018). We see scope for disappointments in corporate earnings and the possibility of further readjustment in consensus earnings growth estimates over the next few weeks, which could limit upside in the benchmark indices. However, the broader markets could remain buoyant amid expectations of heightened volatility in the earnings season.

Sensex’ one-year forward P/E band

Source: Bloomberg, Sharekhan Research

7.0 10.0 13.0 16.0 19.0 22.0 25.0 Jul -08 Jul -10 Jul -12 Jul -14 Jul -16

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Estimated PAT growth by sector (%) Estimated sector-wise contribution to Sensex’ earnings growth (%)

Source: Bloomberg, Sharekhan Research Source: Bloomberg, Sharekhan Research

Sensex earnings (EPS) consensus estimates Estimated revenue growth by sector (%)

Source: Bloomberg Source: Bloomberg, Sharekhan Research

1400 1600 1800 2000 2200 2400 Jul -15 Oc t-15 Jan -16 Ap r-16 Jul -16

FY17 EPS estimate FY18 EPS estimate

Leaders Laggards

ITC, Marico and GCPL GSK Consumers, Jyothy Laboratories and Emami HDFC Bank, Yes Bank, Capital First Bank of India, IDBI Bank, Punjab National Bank Shree Cements, JK lakshmi Cement India Cement

Hero Motocorp, Ashok Leyland Apollo Tyres, Bajaj Auto

Infosys, Zee Entertainment Wipro, Tech Mahindra, Firstsource Solution

V-guard, Finolex Cables BHEL, Thermax

Aurobindo, Glenmark, Lupin, Sun Pharma Cipla, Torrent Pharma Bharti Airtel, TTK Prestige Orbit Exports, KDDL

25.7 20.4 10.1 6.2 (1.7) (2.4) (6.0) (7.6) (30.2) (69.2) (1.5) -80.0 -60.0 -40.0 -20.0 0.0 20.0 40.0 Po w er Ph ar m a FMC G IT Au to BF SI D iv er si fied Tel ec om C ap . g oods Met al Sen sex 1.2 (1.5) 1.0 0.9 0.6 (0.2) (0.2) (0.3) (0.5) (0.7) (0.8) (2.5) -4.0 -2.0 0.0 2.0 4.0 IT Ph ar m a Po we r FMC G Au to Tel ec om Cap . g oods BFSI Di ver si fied M et al Ene rgy Sen sex 15.3 14.9 14.8 13.8 9.1 8.6 _7.3 5.1 (5.4) (8.9) 3.8 -15.0 -10.0 -5.0 0.0 5.0 10.0 15.0 20.0 25.0 Ph ar m a _IT C ap . g oods BFSI _Power Tel ec om FMC G Au to M et al D iv er si fied Sen sex

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Auto

A mixed bag

Q1FY2017 result expectations

Auto universe (ex-TAMO) to post double-digit topline growth: The automobile companies [ex-Tata Motors (TAMO)] are expected to report a healthy 12% YoY growth in revenues for Q1FY2017. Maruti Suzuki and Mahindra & Mahindra (M&M) are expected to lead the pack with a growth of 14% YoY and 13% YoY, respectively. Eicher Motors and TVS Motors are expected to be other notable performers with impressive double-digit growth. Among the auto ancillary companies, those having higher overseas presence (Bharat Forge, Balkrishna Industries) are likely to report drop in revenue due to subdued demand in their key export markets. Tyre companies are estimated to report a flat topline due to lower realisations (on the back of price cuts to pass on the benefits of lower raw material costs to customers).

Rising cost pressures to lead to marginal decline in margins as commodity benefits start waning: The Auto universe’s

(ex-TAMO) operating margins are likely to decline marginally by 50BPS YoY. Increased cost pressures, coupled with higher marketing expenses (on the back of increased competitive intensity) are likely to be a drag on the operating margins of automotive companies. Further, given the recent uptick in commodity prices (steel and aluminum), the benefits from raw material prices are likely to be only marginal (we expect gross margins to improve 30BPS), and would be more than offset by an increase in other costs. Only Hero MotoCorp (HMCL), Exide Industries and Eicher Motors are likely to witness margin improvement on a YoY basis. Given the pressure on margin, our Auto universe (ex-TAMO) is likely to report mid single-digit PAT growth of 7% YoY despite a double-digit growth in the topline. Ashok Leyland (ALL), Hero MotoCorp and TVS Motors are expected to outperform with strong double-digit profit growth. Tyre companies (Apollo Tyres, Ceat and JK Tyre) are expected to underperform with double-digit decline in their bottomline.

Outlook

After a delayed start, the south-west monsoon has progressed well. Currently, the cumulative rainfall has been 1% above normal compared to an 18% deficiency at the beginning of the period. A good monsoon would increase rural incomes, which is beneficial for auto segments that are dependent on buoyant rural demand, viz two-wheelers and tractors. Also, the increase in government employees’ salaries after the implementation of the Seventh Pay Commission recommendations would further boost demand for two-wheelers and passenger cars. MHCV demand is likely to remain strong (we expect 15% YoY growth in FY2017), underpinned by the expected improvement in rural demand (due to better monsoon) and pre-buying before the introduction of new emission norms. We expect the LCV demand to also gain momentum, driven by the MHCV upcycle over the last 7-8 quarters.

Valuation

In the automotive universe, we prefer M&M as it is a pure rural play and would be key beneficiary of the impending uptick in rural demand due to good monsoon. We also prefer Maruti Suzuki, as it would outpace the passenger vehicle industry growth on the back of robust demand for its newly launched products. We also like Ashok Leyland, as it is a pure CV play and would benefit from strong demand for commercial vehicles.

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Q1FY2017 results estimates Particulars

Sales (Rs Cr) EBITDA (%) PAT (Rs Cr)

Q1

FY17E FY16Q1 YoY% QoQ % FY17EQ1 FY16Q1 YoYBPS QoQ BPS FY17EQ1 FY16Q1 YoY% QoQ% Maruti Suzuki 15,297.1 13,424.9 13.9 (0.1) 14.9 16.3 (136.5) (41.3) 1,327.2 1,192.9 11.3 17.1 Hero Motocorp 7,695.3 6,955.3 10.6 2.4 16.7 15.1 167.6 109.0 908.5 750.3 21.1 11.6 Bajaj Auto 6,046.4 5,613.5 7.7 11.7 19.4 20.3 (95.1) (192.9) 980.8 1,014.8 (3.4) 22.1 TVS Motors 3,039.0 2,608.2 16.5 7.9 7.2 6.3 91.6 85.1 129.2 90.3 43.1 9.7 M&M # 10,672.6 9,437.1 13.1 5.0 13.8 14.3 (48.7) 135.5 895.0 831.1 7.7 35.2 Ashok Leyland 4,210.3 3,841.2 9.6 (29.3) 10.1 10.1 (4.1) (256.8) 201.8 159.3 26.7 (55.8) Apollo Tyres @ 2,925.0 2,845.4 2.8 (2.2) 14.8 17.7 (284.0) (114.4) 216.0 290.6 (25.7) (11.9) Greaves Cotton 387.3 380.7 1.8 (4.4) 15.8 16.4 (51.4) 23.8 43.3 37.8 14.5 (3.8) Gabriel 385.8 341.9 12.8 5.4 9.2 8.9 34.1 32.1 20.4 17.6 15.6 (3.4) Rico Auto @ 269.1 251.4 7.1 6.3 10.5 8.6 188.2 142.9 11.8 4.9 139.8 41.0 Soft coverage Tata Motors @ 61,936.3 61,302.1 1.0 (23.2) 13.5 14.9 (135.9) (61.3) 2,410.5 2,846.7 (15.3) (47.3) Eicher Motors @ 4,070.0 2,916.7 39.5 8.1 16.8 14.8 203.0 (16.8) 369.1 221.8 66.4 10.3 Exide Industries 1,939.0 1,795.4 8.0 10.4 16.1 14.8 130.0 88.6 185.9 155.2 19.8 4.7 Bharat Forge 1,106.0 1,128.5 (2.0) 9.7 28.8 30.7 (184.3) (75.9) 182.8 195.3 (6.4) 11.1 Suprajit Engg @* 254.1 155.2 63.7 (7.4) 15.6 15.0 54.5 (166.8) 17.4 15.8 10.2 (5.0) Ceat @ 1,430.6 1,465.3 (2.4) (2.0) 12.3 15.2 (291.1) (104.1) 86.8 121.0 (28.3) (24.6) Balkrishna Industries 854.7 869.4 (1.7) (10.1) 25.8 28.2 (248.8) (686.7) 100.2 151.8 (34.0) (35.3) Jk Tyres @ 1,712.2 1,777.2 (3.7) (2.1) 14.1 16.7 (265.0) (133.4) 82.8 127.2 (34.9) (27.4) Jamna Auto Industries @ 319.1 290.1 10.0 (12.9) 12.0 9.7 230.5 (344.1) 17.0 12.8 32.9 (38.9) Auto Universe 124,549.8 117,399.4 6.1 (13.0) 14.3 15.2 (91.6) (32.4) 8,186.4 8,237.3 (0.6) (18.0) Auto universe

(ex TAMO) 62,613.5 56,097.3 11.6 0.2 15.1 15.6 (51.5) (19.2) 5,775.8 5,390.5 7.1 6.7 # MM+MVML ; @ Consolidated; @* not comparable due to Phoenix Acquisition

Valuations

Company CMP (Rs) EPS (Rs) PE (x) Old reco New Reco PT (Rs)

FY16 FY17E FY18E FY16 FY17E FY18E

Maruti Suzuki 4,370 151.3 186.1 236.1 28.9 23.5 18.5 Buy Buy 4,700 Hero Motocorp 3,244 156.9 161.2 176.0 20.7 20.1 18.4 Hold Hold UR Bajaj Auto 2,652 126.3 132.8 150.4 21.0 20.0 17.6 Hold Hold UR TVS Motors 305 9.2 12.1 16.1 33.1 25.2 18.9 Reduce Reduce 250

M&M @ 1,473 53.0 62.3 77.4 27.8 23.6 19.0 Buy Buy 1,580

Ashok Leyland 94 3.9 5.3 6.7 23.9 17.7 14.0 Buy Buy 120

Apollo Tyres # 156 20.7 16.5 19.9 7.5 9.5 7.8 Buy Buy 180

Greaves Cotton 147 7.1 7.8 8.6 20.6 18.8 17.0 Buy Buy 160

Gabriel India 96 5.3 5.8 7.0 18.2 16.5 13.8 Buy Buy 105

Rico Auto Industries # 44 2.5 3.1 4.2 17.3 14.2 10.3 Buy Buy 47

Soft coverage

Tata Motors # 484 36.6 54.1 60.2 13.2 9.0 8.0 Positive Positive Eicher Motors* # 19,669 470.7 587.0 746.4 41.8 33.5 26.4 Neutral Neutral Exide Industries 177 7.3 7.8 9.1 24.3 22.7 19.5 Neutral Neutral Bharat Forge 751 27.9 29.6 39.4 26.9 25.4 19.1 Neutral Neutral Suprajit Engineering # 190 5.2 7.2 9.1 36.5 26.3 20.8 Neutral Neutral

CEAT # 876 113.2 85.3 105.9 7.7 10.3 8.3 Neutral Neutral

Balkrishna Industries 662 60.5 55.8 61.0 10.9 11.9 10.9 Neutral Neutral JK Tyre & Industries # 91 20.4 16.4 19.0 4.4 5.5 4.8 Neutral Neutral Jamna Auto Industries # 172 8.9 11.3 13.7 19.3 15.2 12.6 - Positive *FY16 for 15 Months; @ MM+MVML; # Consolidated Nos; UR-under review

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Banking and NBFC

RBI and government working in tandem; patient, long-term investors to gain Q1FY2017 result expectations

Asset quality woes may continue; government, RBI measures positive: In Q1FY2017, while the gross non-performing assets (GNPA) levels may increase, the gross stress addition is likely to see improvement on a sequential basis before tapering off in the medium term. The government and the Reserve Bank of India (RBI) have taken several positive measures, in tandem, like “Scheme for Sustainable Structuring of Stressed Assets” (S4A), Strategic Debt Restructuring (SDR), 5:25 refinance scheme, Bankruptcy Law etc. These steps will help in faster resolution of the banks’ bad loan problems. Emboldened by these moves, banks too have significantly increased their loan recovery efforts, which should help to gradually reduce and eventually resolve the headline GNPA numbers in the long term.

Moderating cost of funds to help sustain NIMs: The RBI has turned the system liquidity to ‘neutral’ from a liquidity deficit state a quarter ago. An easy liquidity environment will help in the faster transmission of the central bank’s policy rate cuts. Already, most banks have reduced their exposure to bulk deposits, besides cutting deposit rates by 75-200BPS over the past one year. We believe that the softening of interest rates is likely to continue going forward. This would be the first quarter when the new system of Marginal Cost of Funds based lending rate (MCLR) kicks in. Increasingly, MCLR-based loans would result in better synchronisation of lending and borrowing rates. However, in the near term, we expect the Net Interest Margins (NIMs) to remain stable on a sequential basis. NBFCs are dependent on bank funding to a large extent and would benefit from rationalisation of the lending rates.

Outlook

BFSI earnings for the previous quarter were hurt largely by the asset quality stress brought about by the RBI-led Asset Quality Review (AQR) as well as the banks’ willingness to proactively clean up books. However, we don’t see a significant on-ground recovery in industrial activity. Hence, we expect provisions and NPAs to likely remain at elevated levels for 1-2 quarters more. Of late, the invigorated stance of banks has led to significant de-leveraging of highly leveraged borrowers through asset divestments, capital infusion etc. This is a positive trend, giving us a reason to expect better asset quality and overall results in the long term.

Valuation

We expect the NPAs situation to ease from the current elevated levels in the long term, underpinned by government’s fiscal discipline, increasing efforts on removal of policy roadblocks and RBI’s reforms. Improving auto/CV sales, higher cement dispatches, favourable consumer confidence survey (source: RBI) and re-starting of several stalled projects point to a significant though a gradual economic recovery process going forward.

Earnings outperformers in Q1FY2017E: HDFC Bank, Yes Bank, Capital First.

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Banks

Net interest income Pre-provisioning profit Profit after tax

Q1

FY17E FY16Q1 YoY % QoQ % FY17EQ1 FY16Q1 YoY % QoQ % FY17EQ1 FY16Q1 YoY % QoQ % Public SBI 16,085.1 13,732.0 17.1 5.2 10,494.7 9,202.1 14.0 -26.1 2,470.7 3,692.4 -33.1 95.5 PNB 3,955.5 4,102.5 -3.6 42.9 2,888.1 3,132.1 -7.8 -10.5 (147.6) 720.7 -120.5 NA Bank of Baroda 2,850.1 3,459.6 -17.6 -14.4 1,878.8 2,202.0 -14.7 -27.0 532.0 1,052.2 -49.4 NA Bank of India 3,175.6 2,912.7 9.0 -0.4 2,012.6 1,704.2 18.1 37.5 (200.2) 129.7 -254.3 NA Union Bank 2,126.4 2,130.2 -0.2 2.0 1,420.2 1,488.2 -4.6 0.7 108.2 518.8 -79.1 12.6 Corporation Bank 937.3 1,080.7 -13.3 -5.4 657.9 808.5 -18.6 -9.2 (65.0) 204.3 -131.8 NA Allahabad Bank 1,490.4 1,587.1 -6.1 17.0 1,174.5 1,241.5 -5.4 34.5 77.9 146.9 -46.9 NA IDBI Bank 1,112.0 1,494.3 -25.6 -22.1 770.2 1,138.2 -32.3 -51.7 (314.3) 135.2 -332.5 NA PSBs total 31,732.4 30,499.1 4.0 4.5 21,296.9 20,916.7 1.8 -18.3 2,461.8 6,600.1 -62.7 NA Private ICICI Bank 5,286.5 5,115.1 3.4 -2.2 5,002.5 5,037.8 -0.7 -29.6 2,579.4 2,976.2 -13.3 267.5 HDFC Bank 7,459.3 6,388.8 16.8 0.1 5,597.8 4,849.9 15.4 -2.4 3,225.2 2,695.7 19.6 -4.4 Axis Bank 4,578.7 4,056.2 12.9 0.6 4,427.9 4,092.1 8.2 0.7 2,190.1 1,978.4 10.7 1.7 Federal Bank 656.1 604.8 8.5 -4.3 394.8 367.2 7.5 0.1 164.9 141.4 16.7 1507.5 Yes Bank 1,266.8 1,059.8 19.5 2.0 1,125.3 908.3 23.9 -8.2 677.9 551.2 23.0 -0.6 Private banks total 19,247.4 17,224.7 11.7 -0.5 16,548.3 15,255.2 8.5 -12.3 8,837.5 8,342.9 5.9 27.7 Grand total 50,979.8 47,723.8 6.8 2.6 37,845.2 36,171.9 4.6 -15.8 11,299.3 14,943.0 -24.4 -267.9 NBFCs

HDFC** 2,233.7 2,038.5 9.6 -9.5 3,096.9 2,002.0 54.7 -26.0 1,933.6 1,361.0 42.1 -25.8 LIC Housing Finance 819.2 658.9 24.3 -0.3 738.4 623.4 18.4 0.9 450.8 382.1 18.0 0.6 Capital First 314.6 160.3 96.3 23.3 181.3 101.4 78.8 22.5 55.9 33.1 68.9 17.7 Bajaj Finance 1,220.9 894.6 36.5 20.3 778.3 525.7 48.0 20.6 386.7 275.6 40.3 22.7 PTC India Fin. Ser. 125.8 97.4 29.1 9.6 118.6 95.0 24.8 4.0 75.1 61.4 22.4 53.2 NBFC Total 4,714.3 3,849.7 22.5 0.8 4,913.5 3,347.5 46.8 -15.7 2,902.1 2,113.2 37.3 -16.3 ** Profitablity boosted by one time Profit on Sale of investment of HDFC Ergo of Rs 920 crores (post tax) Q1FY2017 estimates of Sharekhan’s banking and NBFC universe

Valuation summary

Banks Reco Target Price (Rs)

CMP (Rs)

RoA (%) RoE (%) P/BV (x)

FY16 FY17E FY18E FY16 FY17E FY18E FY16 FY17E FY18E Public

State Bank of India Buy 251 226 0.5 0.5 0.6 7.3 8.4 9.4 1.3 1.2 1.1

Punjab National Bank Hold UR 126 -0.6 0.2 0.5 -10.3 4.4 8.5 0.7 0.7 0.6

Bank of Baroda Buy 180 161 -0.8 0.3 0.5 -13.5 5.5 8.4 0.9 0.9 0.8

Bank of India Reduce 75 114 -1.0 0.2 0.2 -19.1 2.9 3.7 0.3 0.3 0.3

Union Bank Hold UR 138 0.3 0.5 0.5 6.3 8.3 9.3 0.5 0.4 0.4

Corporation Bank Reduce 30 44 -0.2 0.1 0.2 -4.6 1.9 2.4 0.4 0.4 0.4

Allahabad Bank Reduce 44 81 -0.3 0.3 0.3 -5.4 4.4 5.6 0.4 0.3 0.3

IDBI Bank Reduce 58 76 -1.0 0.3 0.4 -14.1 3.5 5.2 0.6 0.6 0.6

PSBs total / avg. -0.4 0.3 0.4 -6.7 4.9 6.3 0.6 0.6 0.6

Private

ICICI Bank Hold UR 262 1.4 1.4 1.6 11.4 12.3 14.2 1.8 1.7 1.6

HDFC Bank Buy 1,300 1,200 1.9 1.9 1.9 18.3 18.9 20.0 4.2 3.6 3.1

Axis Bank Buy 590 561 1.7 1.7 1.7 16.8 16.5 17.2 2.5 2.2 1.9

Federal Bank Buy UR 63 0.5 0.7 0.8 6.0 8.8 11.1 1.4 1.3 1.2

Yes Bank Buy 1,200 1,154 1.7 1.8 1.9 19.9 20.9 22.6 3.5 3.0 2.5

Private banks total / avg. 1.4 1.5 1.6 14.5 15.5 17.0 2.7 2.4 2.0

Grand total / avg. 0.3 0.8 0.8 1.5 9.0 10.4 1.4 1.3 1.1

NBFCs

HDFC Ltd Buy 1,380 1,333 2.6 2.5 2.4 21.7 21.2 21.1 6.2 5.5 4.9

LIC Housing Finance Buy 558 521 1.5 1.5 1.5 19.6 20.1 20.3 2.9 2.5 2.1

Capital First Buy 625 607 1.3 1.4 1.6 10.1 12.7 15.8 3.3 2.9 2.6

Bajaj Finance Hold UR 8,625 3.2 3.0 3.0 20.9 19.3 20.5 6.2 5.3 4.4

PTC India Fin. Ser. Buy 55 41 5.0 3.2 3.2 24.6 18.0 20.3 1.3 1.2 1.0

NBFCs Average 2.7 2.3 2.3 19.4 18.3 19.6 4.0 3.4 3.0

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Capital goods and engineering

Momentum continues but in select areas only; remain selective Q1FY2017 result expectations

Revenue traction healthy on adjusted basis: The revenue performance of our capital goods and engineering universe is likely to be ~6-7% in Q1FY2017. Most of the coverage companies are likely to deliver double-digit topline growth, but Crompton Greaves (CGL) is expected to witness a drop in its topline. However, Q1FY2017 numbers for CGL are not comparable, as the company is in the process of selling its overseas business. Therefore, we have estimated numbers for its retained business only. Thermax is also expected to report a 9% decline in its revenue, while all the other companies are expected to record double-digit topline growth on a YoY basis.

Ex-BHEL, healthy earnings show: The overall earnings of our coverage universe are likely to be negative due to significant

loss in BHEL. However, (ex-BHEL), we expect earnings to show a 28% YoY growth in this quarter. The key drivers for the

strong growth are 1) healthy earnings growth in L&T (heavyweight) and 2) expected profit against loss for some companies

(Va Tech Wabag and CGL). Among the smaller companies, we expect strong earnings growth in V-Guard Industries (V-Guard) and Finolex Cables. On the other hand, Thermax is expected to report weak earnings in Q1FY2017.

Outlook

Domestic capex cycle remains static; only select areas seeing positive momentum: The capital expenditure (capex) cycle

is yet to kick off in a meaningful way, with status quo maintained in new order inflows (as most of the industrial sectors are

either having overcapacity or yet to witness incremental demand). However, the ordering activity in select segments like Power Transmission and Road Construction continues to be robust. Some green shoots are also visible in the Railways and

Defence segments, which are potentially large areas. Overseas news flow remains unfavourable and is adding to the ongoing

woes of the companies with an international exposure. Hence, domestic-focused companies with an exposure to the above mentioned pockets are likely to see better business traction in the near to medium term.

Valuation

View-Earnings performance reflected in valuation recovery: Amidst the broad index recovery of around 10% in the last 3-6

months, most of our coverage companies in capital goods and engineering universe have witnessed a sharp appreciation (30-50%, especially where earnings growth has been healthy). In our earlier sector preview note (dated April 05, 2016), we had highlighted that post correction, and valuations had come to a reasonable level for most coverage companies. We believe that after the sharp appreciation in most of the stocks in our coverage, only those companies that surprise on earnings could outperform. Nevertheless, favourable trend in public spending, select private capex and gradual rate cuts by the RBI could be the probable catalysts in the near to medium term.

Preferred picks this earnings season: We prefer L&T in the heavyweight while among the smaller companies we prefer Kalpataru Power Transmission, V-Guard, Triveni Turbine and Finolex Cables for likely momentum in earnings growth.

Q1FY2017 results estimates Rs cr

Company Net sales (Rs cr) OPM (%) PAT (Rs cr)

Q1FY17E YoY growth Q1FY17E BPS (YoY) Q1FY17E YoY growth (%)

BHEL 4,737 10.7 (12.4) (560) -255 PL

Crompton Greaves (Restated) 1,399 -55.8 8.0 551 27 LP

L&T 23,427 15.7 11.1 (21) 702 15.8 KPTL (standalone) 1,274 8.9 10.2 (26) 62 16.1 Thermax (Standalone) 912 -8.9 9.0 (10) 59 -4.4 Finolex Cables 623 5.9 13.7 128 59 23.1 V-Guard Industries 567 13.5 9.8 109 36 41.4 Va Tech Wabag 513 12.4 7.6 491 16 LP Skipper 277 18.1 12.7 (46) 10 15.2 Triveni Turbines 146 18.0 18.0 168 17 19.4 Sharekhan coverage 33,874 6.6 7.6 (17) 733 -9.1 Ex-BHEL 29,137 6.0 10.9 82 988 27.9

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Consumer goods and services

No major revival in sales volume; margin expansion to taper down

Valuations

Company CMP (Rs) _FY2016 _FY2017EEPS _FY2018E CAGR over FY16-18E _{FY2016 FY2017E FY2018E}PE (x)

BHEL 137 (3.7) (0.4) 3.9 NA NA NA 35.1

Crompton Greaves (Restated) 73 2.0 3.4 3.7 36.0% 36.5 21.5 19.7

L&T 1,552 50.8 57.4 65.1 13.2% 30.6 27.0 23.8 KPTL # 265 13.0 16.3 18.1 18.0% 20.4 16.3 14.6 Thermax # 899 25.6 24.4 26.8 2.3% 35.1 36.8 33.5 Finolex Cables 372 16.3 17.7 19.7 9.9% 22.8 21.0 18.9 V-Guard Industries 1,409 37.1 43.7 52.8 19.3% 38.0 32.2 26.7 Va Tech Wabag 589 15.8 23.7 30.2 38.3% 37.3 24.9 19.5 Skipper 160 8.1 9.3 11.3 18.1% 19.8 17.2 14.2 Triveni Turbines 119 3.3 4.5 5.2 25.5% 36.1 26.4 22.9 # stand-alone

Revenue growth to stay in single digits: With no major improvement in the demand environment, the revenue growth of FMCG companies under our coverage [barring Emami and Godrej Consumer Products (GCPL)] is expected to remain in single digits (range of 5-9%) in Q1FY2017. The revenue growth will largely be driven by volume growth, which is expected to remain stagnant on a quarter-on-quarter (QoQ) basis due to slowdown in rural demand and no major improvement in the urban consumer demand environment. Hindustan Unilever (HUL) is expected to see 5-6% volume-led revenue growth, while ITC’s core cigarette business is expected to see flat sales volume (leading to 7% revenue growth). Britannia, Dabur and Marico are expected to achieve revenue growth in the range of 6-8%.

Margin expansion to taper down: During FY2016, FMCG companies gained substantially from lower raw material (RM) prices, resulting in double-digit earnings growth for most during the year. However, with key input prices (including palm oil, sugar and milk) trending upwards, the benefits of lower RM costs will taper down in Q1FY2017. The operating margin expansion is expected to be in the range of 0-100BPS (barring Marico which is likely to see significant improvement due to 40% drop in copra prices). Emami’s margins will get support from the contribution of high-margin products such as ‘Kesh King’. Therefore, we expect 170BPS improvement in Emami’s operating margin on a year-on-year (YoY) basis.

Outlook

Monsoon begins on positive note; benefits of better monsoon and implementation of 7th pay commission hikes

would come in H2FY2017: The south-west monsoon began on a positive note, with cumulative rainfall during the period of June 1–July 6 standing at 1% above the long period average (LPA) on the back of strong revival in rainfall in July. If the progress of monsoon continues in the coming months (July-August period crucial period for Kharif crop), it will give a boost to the rural economy. Improved kharif output will lift the rural demand for consumer products in the second half of FY2017. Also, the implementation of the Seventh Pay Commission’s recommended pay hikes for Central Government employees will play a key role in driving urban demand over the next few quarters. On the other hand, RM prices have started trending upwards. Hence, margin expansion would be a function of prudent price hikes and operating efficiencies in the coming quarters. The introduction of GST and stable commodity prices will determine the growth prospects of FMCG companies in the near term to medium term.

Valuation

In the volatile global market environment, consumer goods companies with strong growth prospects, sturdy balance sheet and limited exposure to currency headwinds are getting more preference from investors. In view of this, we like ITC (discounted valuations and reducing concerns on core cigarette business) and HUL (expected improvement in rural sales) in the large-cap space, while in the mid-cap space, we prefer Britannia Industries (on the back of its long-term growth prospects), Emami (well balance product portfolio to tap rural and urban markets) and Kansai Nerolac (due to expected improvement in decorative as well as auto paints businesses). In the consumer services space, we continue to like Wonderla Holidays and Thomas Cook India.

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Preferred picks: HUL, ITC, Britannia, Emami and Wonderla Holidays Earnings outperformers in Q1FY2017: ITC, Marico and GCPL

Earnings underperformers in Q1FY2017: GSK Consumers, Jyothy Laboratories and Emami

Q1FY2017 results estimates

Companies Net sales YoY (%) OPM (%) _{YoY (%)}BPS Adjusted PAT YoY (%) Q1FY17E Q1FY16 Q1FY17E Q1FY16 Q1FY17E Q1FY16

FMCG companies under coverage

HUL 8,421.4 7,973.4 5.6 18.0 17.2 78 1,144.0 1,049.5 9.0 ITC 9,224.7 8,587.7 7.4 38.1 37.9 12 2,334.0 2,137.9 9.2 Britannia Industries 2,192.9 2,018.6 8.6 14.4 14.3 14 206.9 189.6 9.2 GSK Consumer 1,020.2 990.3 3.0 12.6 14.6 -200 158.5 155.0 2.3 Emami 682.3 589.9 15.7 18.6 16.9 170 90.3 101.1 -10.6 GCPL 2,335.5 2,097.7 11.3 15.8 15.0 78 261.3 224.2 16.6 Marico 1,890.8 1,783.2 6.0 21.5 18.2 324 277.1 229.8 20.6 Jyothy Laboratories 454.3 414.3 9.7 14.6 13.8 81 46.0 44.6 3.2 Zydus Wellness 109.6 104.1 5.3 16.9 16.1 78 21.3 19.9 6.8

Under soft coverage

Bajaj Corp 212.6 219.1 -3.0 31.6 30.8 84 57.8 57.9 -0.2

Dabur India 2,227.4 2,064.1 7.9 16.0 15.6 36 287.4 262.1 9.7

Kansai Nerolac 1,076.6 999.8 7.7 15.5 14.9 62 109.5 94.0 16.5

Total 29,848.6 27,842.1 7.2 23.6 23.1 57 4,994.2 4,565.6 9.4

Consumer discretionary

Cox & Kings * 704.9 683.6 3.1 47.4 48.7 -132 157.0 164.0 -4

Speciality Restaurants 84.1 80.1 5.0 4.3 9.0 -472 -1.9 2.3

-Thomas Cook (India) 1,214.9 929.2 30.8 6.0 9.0 -302 24.7 42.0 -41

Wonderla Holiday 98.0 67.2 45.7 56.1 60.7 -461 36.3 28.0 29

* Cox & Kings earnings estimates are not comparable on y-o-y basis due to hive off of Superbreak business

Valuations

Companies under coverage CMP _(Rs) Reco EPS (Rs) PE (x)

HUL 928 Buy 19.1 22.4 26.8 48.6 41.4 34.6 ITC 249 Buy 8.2 9.0 10.6 30.4 27.7 23.5 Britannia 2,862 Buy 67.8 83.9 102.0 42.2 34.1 28.1 GSK Consumer 6,090 Buy 162.6 187.7 207.5 46.8 32.4 29.3 Emami 1,107 Buy 23.2 27.2 35.6 59.6 40.7 31.1 GCPL 1,659 Hold 33.5 38.9 47.8 49.5 42.6 34.7 Marico 269 Hold 5.5 6.6 7.9 48.8 40.7 34.0

Zydus Wellness 789 Buy 26.5 30.2 35.3 29.8 26.1 22.4

Jyothy Laboratories 295 Buy 8.7 10.0 12.0 33.9 29.5 24.6

EV/EBIDTA (X)

Cox & Kings 188 Buy 16.8 17.9 25.2 7.1 7.2 5.8

Speciality Restaurants 95 Hold 0.0 3.1 5.6 21.6 9.5 6.4

Thomas Cook India 220 Buy 0.8 3.0 6.5 33.4 22.3 12.8

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Consumer discretionary

On ground cheer still awaited Q1FY2017 result expectations

Real consumption demand continues to be soft: The last two quarters have been rather muted in terms of consumer demand due to a mediocre festival season and a dull ‘End-of-Season’ sale. The present quarter also continues to witness subdued consumer demand with only tentative signs of revival. The highlight of the latest quarter was the extended ‘End–of-Season’ sale for all the players, along with some rational behavior from the online (e-commerce) players. We expect the consumer discretionary companies within our coverage universe to post low double-digit revenue growth (at 11.6% YoY) on an aggregate basis.

Commodity prices stable, but higher base and lack of leverage to impact margins: Stable commodity prices are likely to keep margins intact despite high gross margins reported by most players last year (due to steep fall in commodity prices). However, a weak revenue profile is likely to restrict the benefits from flowing into the operating performance (higher fixed costs would negate the benefits of lower/stable commodity prices). Therefore, we expect the margins to remain largely stable with only limited contraction. We expect KDDL’s consolidated margins to be lower by 775BPS mainly due to low revenues from Ethos (on account of new regulation on PAN disclosure on transactions at or above Rs2 lakh).

Outlook

Maintain our positive stance: We believe that urban discretionary spending is in the early stages of revival. It will witness further improvement as the economy grows and the confidence among the salaried class improves in terms of income growth prospects. Besides, the implementation of the Seventh Pay Commission’s recommendations would boost the passenger vehicle industry, apart from lifting the demand for medium-ticket items like branded apparels, home improvement products, jewellery, consumer durables and kitchen appliances. Thus, we believe that retail players with strong consumer connect & brand equity, wide distribution reach (judicious mix of online and stores) and robust balance sheet are likely to emerge as winners in the medium to long term. Sales volumes would improve and operating leverage will kick in, resulting in a disproportionate growth in their earnings.

Valuation

Barring premium valuation of Page Industries (trading at over 45x one-year forward earnings), the other consumer discretionary stocks in our universe are trading at an average range of 20-22x FY2018E earnings. We continue to remain positive on the sector.

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Q1FY2017 results estimates Rs cr Company

Sales OPM (%) Adjusted PAT

Q1

FY17 FY16Q1 YoY (%) QoQ(%) FY17Q1 FY16Q1 (BPS)YoY (BPS)QoQ FY17Q1 FY16Q1 YoY (%) QoQ(%)

Raymond 1,195.5 1,109.2 7.8 -20.9 6.7 4.3 241 -363 7.1 -13.3

Relaxo Footwear 508.0 453.6 12.0% 4.7 0.2 0.15 -19 122 39.0 35.9 8.6 18.7 Kewal Kiran Clothing 102.2 92.4 10.6 -19.3 21.5 16.5 502 -538 13.7 11.4 20.5 -37.1 Century Plyboards 408.3 370.9 10.1 -10.2 17.5 18.0 -50 50 39.5 38.7 2.2 0.3 Orbit Exports 37.6 43.7 -13.9 13.0 30.0 29.6 36 884 6.3 8.6 -26.4 114.7 KDDL 107.9 100.2 7.7 -0.2 5.4 7.8 -775 199 -2.5 1.3 Soft coverage Arvind 2,082.8 1,876.9 11.0 -10.2 13.9 12.1 178 95 70.0 60.9 15.0 -36.6 Titan Company 2,967.2 2,708.6 10 20.8 8.1 8.2 -10 -44 154.5 151.1 2.3 -16.1 Page Industries 506.2 446.5 13.4 16.2 22.5 23.9 -136 146 71.6 63.2 13.3 25.1 Jubilant FoodWorks 618.0 542.1 14.0 8.3 12.1 12.9 -79 -21 29.5 31.5 -6.6 -0.0 TTK Prestige 372.1 348.6 6.7 20.9 12.0 11.0 103 103 29.0 25.7 13.0 34.3 IFB Industries 429.1 346.7 23.8 16.5 6.8 7.3 -48 247 11.5 10.5 9.4 129.8 Welspun India 1,634.8 1,388.5 17.7 0.4 26 26 -42 -47 177.9 163.2 9.1 -8.0 Valuations

Company CMP (Rs) targetPrice Rec/view EPS FY16-18ECAGR PER

Raymond 480 520 Hold 20.3 23.1 32.3 26.1 23.6 20.8 14.9 Relaxo Footwear 465 575 Buy 10.0 13.0 17.0 30.4 46.5 35.8 27.4 Kewal Kiran Clothing 1,770 2,360 Buy 55.1 68.9 78.9 19.7 32.1 25.7 22.4 Century Plyboard 182 215 Buy 7.5 8.9 10.3 17.2 24.3 20.4 17.7 KDDL 214 230 Buy 5.2 8.6 16.4 77.6 41.2 24.9 13.0 Orbit Exports 222 375 Buy 16.0 17.6 20.8 14.0 13.9 12.6 10.7 Soft coverage

Arvind 311 Positive 14.1 17.3 21.6 23.8 22.1 18.0 14.4 Titan Company 364 Neutral 7.8 9.7 11.5 21.4 46.7 37.5 31.7 Page Industries 14,050 Neutral 208.6 260.3 323.6 24.6 67.4 54.0 43.4 Jubilant FoodWorks 1,056 Neutral 15.9 22.5 31.4 40.5 66.4 46.9 33.6 TTK Prestige 4,575 Neutral 98.6 133.4 168.6 30.8 46.4 34.3 27.1 IFB Industries 336 Positive 7.6 12.3 17.7 52.6 44.2 27.3 19.0 Welspun India 107 Positive 7 8.3 9.8 18.3 15.3 12.9 10.9

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Cement

Cost rationalisation, higher operating leverage to support earnings growth

Q1FY2017 results estimates Rs cr

Company

Sales OPM (%) PAT (Rs cr)

Q1

FY17E FY16Q1 YoY(%) QoQ(%) FY17EQ1 FY16Q1 (BPS)YoY (BPS)QoQ FY17EQ1 FY16Q1 YoY(%) QoQ(%) Coverage

Grasim 9,361 8,706 7.5 4.9 16.3 16.5 -23 -165 531 515 3.0 -18.3

UltraTech 6,590 6,038 9.1 2.4 18.8 18.1 72 -115 674 591 14.2 -1.0

Shree Cement 2,040 1,725 18.3 1.1 25.8 20.7 509 74 228 128 77.9 2.0

The Ramco Cements 949 951 -0.2 -4.8 29.0 26.4 259 -385 128 97 31.7 -31.2

Soft coverage

India Cements 1,109 1,075 3.1 -3.3 17.4 18.5 -113 -103 30 51 -40.4 -40.8

JK Lakshmi 761 591 28.8 3.5 15.0 8.6 643 333 37 -18 NA NA

Mangalam Cement 255 211 20.8 21.4 7.4 -1.9 939 -655 8 -19 NA NA

Total 21,065 19,298 9.2 2.9 18.5 17.5 94 -129 1,637 1,346 21.6 -11.7

Higher realisation (northern and central players), cost rationalisation to support earnings: We expect the revenues of the cement companies under our coverage (active and soft) to increase by 9.2% YoY, largely supported by higher volumes (due to enhanced capacities). On the realisation front, the northern and central regions have maintained pricing discipline with prices up 15.6% YoY and 7.5% YoY, respectively (up 14.0% QoQ and 10.1% QoQ). Realisations in other regions have remained more or less flat sequentially while showing a downward trend YoY (southern and eastern regions’ realisations down 7% YoY). Higher realisations and cost rationalisation measures are likely to benefit cement players like UltraTech, Shree Cement, JK Lakshmi and Mangalam Cement.

Southern players’ operating performance to be affected by lower blended realisations: Southern cement players are expected to show weaker operating performance YoY, as prices for Q1FY2017 are down 7% YoY. We expect India Cements and The Ramco Cements to be affected by lower realisations. Despite lower prices, Ramco is still expected to post earnings growth on account of cost efficiencies (leading to better operating performance).

Outlook

We expect strong pricing discipline in northern and central belts to benefit pan-India and regional cement players. The key moniterable for the southern region will be revival in cement prices. Overall, we expect rural demand for housing to pick up pace in H2FY2017 due to a better monsoon while government spending on infrastructure is also expected to increase.

Valuation

Most of the cement players continue to trade at higher valuations, buoyed by revival in government spending and operating leverage whereas demand is yet to pick up meaningfully. We remain selective in the cement space and advise to enter on correction.

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Valuations

Company Reco _TargetPrice CMP (Rs) EPS (Rs) PE (x)

Shree Cement* Hold UR 15,499 136.2 317.5 410.7 114 49 38

Ultratech Hold 3,580 3,436 80.5 101.4 129.9 43 34 26

Grasim Buy 5,195 4,615 251.4 325.3 399.8 18 14 12

The Ramco Cement Hold UR 576 21.7 25.8 31.0 27 22 19

India Cements# UR NA 113 4.6 8.7 13.4 25 13 8

JK Lakshmi# UR NA 396 1.4 8.9 15.4 - 44 26

Mangalam Cement# UR NA 297 -7.7 13.7 23.8 - 22 12

UR – Under Review # soft coverage * Shree cement 9MFY2016, change in accounting year to march

IT

Good quarter, sentiment weak owing to macro overhang Q1FY2017 result expectations

Seasonally strong quarter: Strong seasonality, coupled with the impact of cross-currency tailwinds (10-40BPS) will drive the reported USD revenue performance for the April to June quarter. For the quarter under review, we expect a constant-currency (CC) growth in the range of negative 0.2% to 5.4%. However, the Indian Rupee’s appreciation against USD (~1% QoQ) will affect revenue growth in rupee terms. On an organic basis, the growth will be led by Infosys (4.2%), followed by Tata Consultancy Services (TCS; 3.2%), HCL Technologies [HCL Tech; 5.4% (including inorganic Volvo IT); organic growth at 2.2%], Wipro [2.2% (including inorganic HPS); organic growth at 0.2%], and Tech Mahindra (a negative growth of 0.2%). On a reported basis, growth will be in the range of 0.1-5.6%. On the margins front, we expect decline in margins (10-180BPS) on a sequential basis owing to wage hikes, consolidation of acquisitions (Wipro, HCL Tech and Tech Mahindra), visa costs and rupee appreciation.

Key issues to watch out for would be: (1) Management commentary on Brexit (business impact), impact on deal closures & renewals besides impact on other geographies (2) Demand visibility in FY2017E and outlook on different verticals (Infosys in recent investors meet has highlighted headwinds in Retail, Healthcare and Insurance verticals) (3) Commentary on digital

space, specifically deal wins and outlook (all the companies are positive on the deal flows and outlook) (4) Commentary on

the troubled verticals like Energy, Utilities and Telecommunications; (5) Commentary on margins and pricing (more pressure in pricing are evident in deal renewals given that the legacy services are under pricing pressure) and (6) Infosys is likely to keep its guidance unchanged at 11.5-13.5% YoY growth on CC basis for FY2017.

Outlook

Sentiment weak owing to macro overhang: After an in-line January-March quarter, the April to June quarter is expected to be a good quarter on account of strong seasonality. However, the sector’s investment sentiment has weakened in the recent months, owing to the negative impact of ‘Brexit’, fragile demand and cautious pricing commentary from top-tier IT companies. Additionally, election rhetoric in the US ahead of the presidential election will restrict the stock’s outperformance in the near term.

Overall, we expect that the growth should pick up pace in the coming years, with higher incremental spending in the digital space, coupled with stabilisation in growth deceleration in Insurance and Energy. Nevertheless, we maintain our thesis that the industry is in a transition phase (it is building and adding capabilities for newer technologies in the digital space). Also, the industry is revamping the execution process and operations in the traditional services space (which is gradually getting commoditised). This transition phase will take some time (may be 2-3 years) and would result in volatility in earnings in the near-to-medium term.

Valuation

We remain selective in the IT sector and expect the demand environment to gradually pick up pace in FY2017 and FY2018. However, clarity on business impact from Brexit and commentary on demand improvement will be key to stock performance in the near-to-medium term. We keep our estimates for FY2017/2018E unchanged and will revise the same post the Q1FY17E earnings.

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Oil & gas

Recovery in crude oil prices not enough to lift profits; benchmark GRM also softer

Crude oil prices recover but Natural Gas price to be a drag: Crude oil prices rebounded from ~$35/bbl in Q4FY2016 to cross $45/bbl in Q1FY2017. Therefore, realisations for crude oil would be roughly 35-40% higher sequentially. This would positively impact revenues of upstream companies. However, the 20% QoQ downward revision in natural gas prices in Q1FY2017 will lower gas revenues for these companies. On the macro-economic front, the Indian Rupee-Dollar exchange rate remained fairly stable during the quarter. Consequently, we expect the crude oil revenue of Oil India (OIL) to be higher by 34% QoQ while natural gas revenue will decline by 11% QoQ, resulting in a 20% QoQ revenue growth Rs2,076 crore.

Weak refining margins to weigh on refiners: With recovery in crude oil prices, the Asian benchmark gross refining

margin (GRM; Singapore GRM) is expected to be weak at around $5-5.5/bbl in Q1FY2017. We expect Reliance Industries (RIL) to earn a premium of ~$3.5/bbl over Singapore GRM, taking the company’s Q1FY2017 GRM to $9/bbl as against $10.8/bbl in Q4FY2016. On the positive side, RIL’s petrochemicals business would continue to perform well. In this backdrop, we expect RIL to report earnings of Rs6,362 crore, down 13% QoQ. We believe that the public sector oil marketing companies (OMCs) like Indian Oil Corporation (IOC), Hindustan Petroleum Corporation (HPCL) and Bharat Petroleum Corporation (BPCL) would struggle to maintain steady GRM.

Q1FY2017 results estimates Particulars

Sales (Rs cr) OPM (%) Net profit (Rs cr)

Q1

FY17E FY16Q1 YoY (%) QoQ (%) FY17EQ1 FY16Q1 (BPS)YoY (BPS)QoQ FY17EQ1 FY16Q1 YoY (%) QoQ (%) Infosys 17,115 14,354 19.2 3.4 26 26 - (182) 3,375 3,030 11.4 (6.2) TCS 29,219 25,668 13.8 2.7 26 28 (208) (182) 6,051 5,709 6.0 (4.6) Wipro 13,721 12,238 12.1 0.7 20 21 (94) (21) 2,174 2,188 (0.6) (2.7) HCL Tech 11,226 9,777 14.8 4.9 21 21 (51) (127) 1,919 1,782 7.7 (0.4) Tech Mahindra 6,841 6,294 8.7 (0.6) 16 15 62 (124) 699 676 3.4 (22.0) Persistent Systems 717 500 43.2 5.8 16 19 (362) (11) 76 67 13.8 (5.3) FSL 833 747 11.6 (4.5) 12 12 15 (116) 67 56 19.1 (15.7)

Source: Company, Sharekhan Research

Valuations

Company Reco target Price

(Rs) CMP (Rs)

EPS (Rs) P/E (x)

Infosys Buy 1,430 1,157 59.0 67.5 75.3 19.6 17.2 15.4

TCS Buy 2,750 2,429 123.6 135.9 151.6 19.6 17.9 16.0

Wipro Hold 650 561 36.2 40.5 45.1 15.5 13.9 12.5

HCL Tech* Buy 950 717 40.3 56.9 65.4 17.8 12.6 11.0

Tech Mahindra Neutral NA 504 36.3 36.4 43.1 13.9 13.8 11.7

Persistent Systems Buy 820 671 37.2 42.2 49.9 18.1 15.9 13.4

FSL Hold UR 48 3.9 4.9 5.7 12.2 9.9 8.4

*Changed its financial year ending from June-end to March-end during March 2016-ending quarterly results; hence, FY2016 consists only 9-month period Source: Company, Sharekhan Research

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Q1FY2017 results estimates Company

Sales (Rs cr) OPM (%) PAT (Rs cr)

Q1

FY17E FY16Q1 YoY(%) QoQ(%) FY17EQ1 FY16Q1 (bps)YoY (bps)QoQ FY17EQ1 FY16Q1 YoY(%) QoQ(%) Coverage RIL 59,695.4 65,817 -9.3 19.5 17.0 14.1 287 -446 6,362 6,318 1 -13.1 Oil India 2,413 2,883 -16.3 20.1 38.3 42.2 -392 136 571 775 -26 -17 Non coverage GAIL 12,306 12,565 -2.1 4.9 12.1 8.3 382 169 775 424 83 1 ONGC 18,686 22,825 -18.1 14.0 45.3 46.4 -102 1,796 3,776 5,460 -31 -14 Valuations Company CMP EPS (Rs) CAGR over FY15-17E(%) PER (x) New

Reco TargetPrice FY16 FY17E FY18E FY16 FY17E FY18E

Coverage

RIL 1,013 92 95 110 9.3 11 11 9 Buy 1,250

Oil India 374 42 34 40 -3.1 9 11 9 Hold 400

Non Coverage

GAIL 390 18 28 32 33.9 22 14 12 NA NA

ONGC 237 19 19 26 17.2 13 12 9 NA NA

Outlook

The sector has witnessed significant swings in the last 24 months, with the energy prices (both crude oil and natural gas) correcting sharply and challenging many pre-existing sector dynamics. To some extent, the price recovery has brought about changes in some key statutory levies and regulations. Amidst all, the reform process continues. The gradual deregulation of diesel prices was followed by reforms in LPG through the direct benefit transfer (DBT) mechanism. Now, the government has approved a gradual price hike in kerosene, which will eventually make oil under recoveries negligible. Apart from the obvious benefits to OMCs and upstream companies, the staggered decontrol of kerosene prices will boost investors’ confidence. We believe that most of the uncertainties related to under-recoveries are over now. Going forward, the energy price movement and efficiency of the companies would drive earnings as well as valuations.

Valuation

With energy prices still trading low, profitability of OIL and ONGC is likely to be modest. However, the current stock prices factor in the lower energy prices for the long term. Crude oil prices look like bottoming and potentially finding some stability now. Against this backdrop, we retain our Hold rating on OIL. RIL will continue to outperform its peers, backed by strong premium to Singapore GRM and improvement in petrochemicals business. Further, the full-scale commercial launch of Reliance Jio’s 4G service is also a potential trigger for RIL. Therefore, we retain our Buy rating on the stock.

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Power generation in India is expected to grow by 9% YoY and 7% QoQ to 256 billion units (BU) in Q1FY2017. During the quarter, we expect energy deficit to slip below 1% YoY, as supply is likely to be 11% against the required growth of 9%. Consequently, merchant power prices are under pressure. One positive development for the power sector has been the improvement in domestic coal supply situation.

We expect CESC to report a decent earnings growth of 7% YoY, although the sequential numbers would be lower (not comparable as Q4FY2016 results included prior period tariff adjustments). We expect the company’s power generation to be lower (strategically sourcing more power from new plant at Haldia) over the last year. But, the total energy outgo will be higher by 3%, resulting into 8% higher volumes sourced from outside (majorly from Haldia). Factoring in the revised tariff, we expect CESC’s earnings to grow by 7% YoY to Rs163 crore in Q1FY2017. PTC India is expected to witness a healthy ~20% YoY volume growth, but due to lower realisations (weak merchant power prices), its revenue is estimated to grow by 6% YoY to Rs3,500 crore. We build in operating margin of ~6 paise per unit and estimate PAT of Rs55 crore for PTC India. Among the non-rated companies, we expect both Power Grid Corporation of India and NPTC to report healthy earnings growth in this quarter.

Outlook

After several years, Coal India (CIL) has managed to record a meaningful growth recently while the power deficit in the country is now below 1%. The aggregate capacity utilisation of coal-fired power plants continues to be lower (around 60% currently). On the other hand, the government’s UDAY scheme has been well accepted by several states. Still, some states needed more time to comply with the financial restructuring of their own accounts. Hence, the Union Cabinet has approved an extension in the deadline for implementing UDAY to March 31, 2017. This would offer a window to few more states to join UDAY. Among our coverage companies, we have revised down our rating on PTC India from Buy to Hold, considering the limited upside potential in the stock post a sharp run-up. We keep CESC’s rating as under review.

Preferred stocks: PTC India, Power Grid

Q1FY2017 results estimates Company

Sales (Rs cr) OPM (%) PAT Sales (Rs cr)

Q1

FY17E FY16Q1 YoY(%) QoQ(%) FY17EQ1 FY16Q1 (BPS)YoY (BPS)QoQ FY17EQ1 FY16Q1 YoY(%) QoQ(%) Coverage CESC 1,744 1,704 2.3 19.0 23.3 22.7 64 -915 163 152 6.9 -34 PTC India 3,500 3,296 6.2 15.0 2.1 1.7 33 9 55 48 14.8 19.6 Non coverage NTPC 18,640 17,085 9.1 2.9 29.4 20.1 924 -77 2,685 2,136 25.7 -1.1 Power Grid 5,815 4,718 23.3 1.0 87.9 87.7 21 -53 1,614 1,367 18.1 0.9 Valuations

Company CMP _(Rs) Book value per share CAGR over FY15-18E (%)

PB (x) _Price Target

Coverage CESC 557 651 691 702 4 0.9 0.8 0.8 580 PTC India 72 94 99 104 5 0.8 0.7 0.7 90 Non coverage NTPC 151 108 113 121 6 1.4 1.3 1.2 NA Power Grid 153 82 95 107 14 1.9 1.6 1.4 NA

Power

A steady quarter

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Pharma

Steady performance; Remain selective with positive long-term outlook

Steady quarter due to favorable currency movements: During Q1FY2017, INR depreciated by 7% (YoY) against USD. A weaker INR will thus support revenue growth in US generics (and to some extent will help to mitigate pricing pressure). As far as Emerging Market (EM) currencies are concerned, YoY movements were unfavorable, but there has been some improvement on a sequential basis. This will lead to some recovery in EM as well as the rest of the world (RoW) markets (Brazil, Russia etc will see stable growth; Brazilian Real lost 10% while Russian Rouble is down by 13%). Better approval rate, ongoing exclusivities to support growth: Continuing business from exclusive opportunities (gGleevec, gGlumetza), coupled with the improved product approval rate will help to counter the recent pricing concerns in the US. The performance in the US market will vary significantly during the quarter, since it will be based on product launches. We expect Lupin, Sun Pharma and Glenmark to record robust growth in the US, while Torrent Pharma and Cadila are likely be the laggards.

We expect our pharma coverage universe to report sales and profit growth of 14% YoY and 22% YoY, respectively. We expect Aurobindo Pharma, Glenmark, Lupin and Sun Pharma to report strong quarterly performance while Cipla and Torrent Pharma to be the laggards (due to high base in Q1FY2016 on the back of one off sales opportunities).

Outlook & Valuation

Long-term outlook remains healthy; remain selective: We expect steady earnings growth in FY2017 and FY2018, as favorable sequential currency movements will result in stronger US generic sales and recovery in EM and RoW businesses. Continued impact of exclusive opportunities (gGleevec; gGlumetza; gZetia etc) and improved product approval rate will maintain steady growth in US generics despite the recent pricing concerns. Also, growth in the next two years is likely to be driven by the domestic market (which is witnessing a robust volume growth) and introduction of new drugs. Therefore, we remain positive on the long-term prospects of the pharma sector and advise to stay selective). We also see some of the headwinds on account of the USFDA warning letters getting resolved.

Preferred picks this earnings season:Aurobindo, Glenmark and Sun Pharma.

Earnings outperformers in Q1FY2017: Aurobindo, Glenmark, Lupin and Sun Pharma. Earnings laggards in Q1FY2017: Cipla and Torrent Pharma.

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Q1FY2017 results estimates Rs cr Companies _Q1FY17E Net sales_Q1FY16 _{YoY %} _Q1FY17EOPM (%)_Q1FY16 BPS _YoY _Q1FY17EAdjusted PAT_Q1FY16 _{YoY %} Pharma companies under coverage

Aurobindo 3,786.0 3,320.0 14.0 24.1 21.8 227.4 572.5 458.0 25.0 Cadila 2,542.0 2,434.0 4.4 23.3 22.0 136.2 405.0 354.0 14.4 Cipla 3,925.0 3,853.0 1.9 15.9 27.0 -1,104.2 372.0 650.5 -42.8 Divis 938.0 808.8 16.0 36.0 37.1 -103.5 265.7 243.2 9.3 Glenmark 2,017.4 1,655.3 21.9 22.3 21.7 57.1 248.1 191.0 29.9 Lupin 4,235.0 3,150.0 34.4 31.1 25.9 516.5 709.9 525.0 35.2 Sun Pharma 7,931.0 6,522.0 21.6 30.5 30.1 37.1 1,973.0 1,164.0 69.5 Torrent Pharma 1,620.8 1,886.0 -14.1 33.7 48.2 -1,446.1 373.0 449.0 -16.9 Total - A 26,995.2 23,629.1 14.2 26.7 28.1 -146.3 4,919.2 4,034.7 21.9

Under soft coverage

Granules India 380.5 345.9 10.0 20.1 17.9 219.9 32.1 27.2 18.1 Dr Reddy's Lab 3,842.3 3,757.8 2.2 23.5 26.5 -290.9 515.0 625.7 -17.7 Natco Pharma 343.7 223.7 53.6 23.0 25.7 -269.0 51.5 28.2 82.6 Jubilant Lifesciences 1,475.0 1,459.0 1.1 21.5 22.6 -109.2 115.0 128.1 -10.2 Biocon 926.2 824.4 12.3 22.3 24.7 -239.4 119.2 126.0 -5.4 Total - B 6,967.6 6,610.8 5.4 22.7 24.9 -217.7 832.8 935.1 -10.9 Grand Total (A+B) 33,962.8 30,239.9 12.3 25.9 27.4 -156.6 5,752.0 4,969.8 15.7

Valuations

Company CMP

(Rs) Reco

EPS (Rs) PE (x) RoCE (%)

FY16 FY17E FY18E FY16 FY17E FY18E FY16 FY17E FY18E

Aurobindo 775 Buy 35.0 44.9 59.0 22.1 17.3 13.1 27.9 29.4 33.1 Cadila 370 Hold 14.9 18.3 22.1 24.8 20.2 16.7 28.3 28.5 31.3 Cipla 516 Hold 19.5 24.6 33.5 33.1 21.0 15.4 14.2 14.5 17.4 Divis 1,160 Hold 41.9 46.2 57.2 27.7 25.1 20.3 30.8 32.3 32.9 Glenmark 835 Buy 37.8 51.5 54.8 22.1 16.2 15.2 19.6 23.8 23.0 Lupin 1,672 Hold 50.4 67.4 84.1 33.2 24.8 19.9 18.7 22.2 25.6

Sun Pharma 785 Buy 22.4 30.4 33.8 35.0 25.8 23.2 20.3 23.5 24.2

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Telecom

Good EBITDA traction, net earnings impacted by fixed cost

Decent topline aided by combination of voice and data growth: Telecom service providers’ [Bharti Airtel (Bharti) and Idea Cellular (Idea)] wireless business performance is expected to be decent on revenue and EBITDA front. We expect Bharti (domestic mobile business) and Idea’s consolidated revenue to post 3.2% and 3% growth (QoQ), respectively. Bharti’s DTH and Enterprise businesses are expected to post robust results, while its African and South Asian results are expected to remain subdued (largely led by weakness in Narobi). We expect both, Bharti and Idea to post a traffic growth of 3.5% and 3.2% QoQ, respectively while the pricing is expected to remain stable. Data volume is expected to continue its double-digit sequential growth momentum (averaging 12-14% QoQ) for both Bharti as well as Idea, but pricing pressures will persist.

Despite network expansion, EBITDA margins to remain intact: Telecom players across the board have upped their ante in terms of network expansion and rolling out of data services (3G + 4G) across geographies. This would entail an increase in the network operating cost, compressing margins on a QoQ basis. On a YoY basis, we expect Bharti and Idea to witness margin expansion. We expect Bharti to post the highest margin at ~40% for the Indian mobile business, driven by improving traffic growth momentum and data growth traction (3G + 4G).

Net earnings to be hit by higher fixed cost: The investments made in spectrum acquisition would continue to reflect

in the financials of the telecom service providers in the form of higher depreciation and interest costs, which in turn will impact the earnings.

Bharti Infratel impacted on tenancy and lower energy spread: Bharti Infratel’s consolidated topline is expected to grow by 1.9% QoQ, largely led by an improvement in the average sharing factor. A sizeable effect of the same through the utilisation of Reliance Jio towers would be visible in the company’s financials from Q4FY2017 onwards. Lower energy spread, coupled with flat rentals are likely to have a marginal impact on the company’s margins.

Outlook

Despite a strong market for data growth, the impending launch of Reliance Jio’s 4G services (commercial launch now expected in September after several delays), and the strategy adopted by a financially-strong competitor remains the key overhang for the sector. Further, regulations continue to be stringent, with the latest call drop penalty issue (pending in court) being the case in point. This continues to weigh heavily on the sentiment as well as the financials. Valuation

Over the last four years, the telecom stocks have been shunned by investors owing to various regulatory issues and a fierce competitive environment. Thus, the telecom stocks were commanding lower valuations on account of the lingering uncertainty over the sector. The shares of telecom operators are currently trading at 6-7x one-year forward EV/EBITDA. We believe that with its healthy spectrum inventory and first-mover advantage in rolling out 4G services, Bharti is the best placed to withstand future competition from Reliance Jio. We currently have a Hold rating on Bharti with a price target of Rs425.

Preferred picks this earnings season: Bharti Airtel Q1FY2017 results estimates

Company

Sales (Rs cr) OPM (%) PAT (Rs cr)

Q1

FY17E FY16Q1 YoY % QoQ % FY17EQ1 FY16Q1 YoY BPS QoQ BPS FY17EQ1 FY16Q1 YoY % QoQ % Bharti Airtel 25,723 23,681 8.6 3.0 35.7 34.9 82 (89) 1,436.6 1,554.3 (8) 11.3 Idea Cellular 9,763 8,798 11.0 2.9 37.5 36.7 81 (63) 586.4 930.8 (37) 1.9

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Miscellaneous

Q1FY2017 results snapshot Company

Net Sales (Rs cr) OPM (%) Adjusted PAT (Rs cr) Q1FY17E Q1FY16 YoY

(%) QoQ (%) Q1FY17E Q1FY16 (BPS)YoY (BPS)QoQ Q1FY17E Q1FY16 YoY (%) QoQ (%) Ratnamani Metal 462.3 429.8 7.6 -8.8 19.3 20.5 -120.0 290.0 51.5 49.9 3.2 11.7 BEL 1206.1 1095.3 10.1 -62.5 -1.0 -0.5 -50.0 -3210.0 65.9 60.7 8.5 -91.8 UPL 3308.5 3064.6 8.0 -23.8 19.5 19.2 30.0 50.0 308.1 329.8 -6.6 -49.5 PI Industries 610.3 554.8 10.0 4.4 24.0 24.5 -50.0 570.0 98.4 83.2 18.3 5.4 Gateway Distriparks 268.2 262.8 2.1 4.5 24.6 26.3 -165.1 552.5 32.9 35.6 -7.8 24.1 IRB 1370.6 1108.9 23.6 -10.8 52.9 56.7 -377.7 477.3 173.7 165.9 4.7 14.9 Gayatri Projects 476.4 405.1 17.6 -28.7 14.7 14.2 48.7 100.2 13.4 11.2 20.4 -52.9 ITNL 1940.4 1644.4 18.0 -23.8 31.5 32.2 -74.5 100.3 14.4 2.9 395.4 -82.1 ZEE Ent 1546.5 1339.8 15.4 1.0 25.5 23.2 227.7 -150.2 278.0 243.7 14.1 6.7 Inox Leisure 365.0 348.7 4.7 27.2 18.0 18.8 -80.2 1275.5 26.0 25.3 2.7 61.1 Info Edge 204.6 171.8 19.1 0.2 29.5 13.9 1562.5 -102.2 52.6 28.7 83.0 -8.0 Supreme Ind 890.0 772.8 15.2 -30.4 11.5 11.7 -20.0 -530.0 37.9 24.3 56.0 -61.4 Disclaimer

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Valuations

Particulars CMP _(Rs) _targetPrice Reco/view EPS _CAGREPS EV/EBITDA

Bharti Airtel 362 425 Hold 11.9 16 20.3 30.6 6.7 6.2 5.5

Idea Cellular 106.3 NR Neutral 8.6 4.9 5.6 (19.3) 5.7 5.2 4.7