2014 Picks

2014

Year of volatility
2013 was Heightened by volatility, high inflation, slower growth, currency crisis, Deficit issues had effected markets sentiments the most. Despite the challenges Indian equity markets have moved higher breaching all-time highs as they outperform global peers with currency turning a corner. The rally is largely on the back of improving global sentiment (better global macro data, Chinese reforms, easing of geo political tensions) which has kept FII equity inflows supportive helping fund our declining trade deficit . Growth recovery still remains elusive with improvement in agriculture output negated by slowing consumption and lackluster investment. Retail inflationary pressures ex food continue to run high complicating RBIs dilemma. Despite RBIs withdrawal of exceptional measures with the restoration of LAF corridor and deepening of market through term repos, monetary conditions remain tight with G-Secs rates still elevated . Additionally, fiscal balances overshooting is likely as fiscal deficit (up to Sep13) is already 76% of budget driven largely by weaker tax and disinvestment receipts with expenditure growth running similar to previous years. Year of 2014 is influenced by all important election in India. Although state elections results does indicate a tilt of tide towards NDA, and chances of an unstable government formation is less likely, the outcome of the elections would undoubtedly be critical for performance of markets in 2014. Key indicator for turnaround in Indian economy would be revival in private sectors capex cycle. Else, Indias growth could remain range bound and inhibit market valuations. Both Interest rates and inflation numbers are expected to be elevated through 1H of CY2014. Separately, the governments ability to push important fiscal reforms viz. Goods and Services Tax (GST) and Direct Taxes Code (DTC) would also have an important bearing on investor sentiment. Globally effect of gradual decrease in bond purchase program by FED on both emerging markets currency and markets is expect to add fuel to the volatility in markets. Taking into consideration the opportunity and threat for Indian equities in 2014 we recommend a broad based sectoral exposure for investors and recommend following stocks.

Lupin TCS Maruti Suzuki Hero Motocorp Reliance Industries. Industries Indusind Bank Mahindra & Mahindra Financial Services Tata Steel Crompton Greaves Nestle India

2014 Picks

Lupin
Investment Thesis Lupin is the second largest Indian pharma company by market capitalization and a market leader in anti- TB and Cephalosporins segments globally. Lupin has one of the largest numbers of ANDAs (Abbreviated New Drug Application) pending for approval with several litigated products and 25 (12-exclusive) FTFs (First to File). We think some of these opportunities will translate to significant revenues over the next 2-3 years. We also expect Lupin to maintain the filings momentum which will provide medium-long term visibility in the US generics segment. Lupin has been growing its domestic formulation faster than market average. With aggressive marketing, we believe Lupin will maintain the growth momentum and post healthy double digit growth in the domestic market for FY14/15.
Financial Ratios P/E (trailing) P/BV EV/EBITDA Debt to Equity ROE EBITDA Margins % Profit Margins % Net Sales (Mln Rs.) Net Profit (Mln Rs.) 31.3 7.92 12.5 22.1 28.5 24.1 13.6 96,413 13,142

Besides building organic pipeline, it is looking at acquisitions to grow its brand segment in the US and building its ROW presence through inorganic actions. Lupin has applied to RBI for increasing the shareholding limit of Foreign Institutional Investors from 33 per cent to 49 per cent. RBI is examining the request. FII holding in Lupin stood at 31.46 per cent, Approval to Increasing FII limit would be viewed positively by the market participants in the near term. RISK Sustainability of brands: c.8% of sales is from US brand business. Generic entry in these products could impact earnings. US: Quality issues, approval delays and competition remain unknowns.
Net Income

Sales

( Rs in Mln)
120000 100000 80000
57925.9 70649.7 47736.3 37758.8 27063.7 96413

(Rs in Mln)
14000 12000 10000 8000 6000 4000 2000
3086.4 5015.4 4082.5 6816.3 8625.5 8676.5 13141.6

60000 40000
20137.1

20000 0 2007 2008 2009 2010 2011 2012 2013

0 2007 2008 2009 2010 2011 2012 2013

2014 Picks

Tata consultancy Services

Investment Thesis TCS have underperformed relative to its peers over the last TCS forte lies in efficient execution of large deals, it has a quarter mainly due to rich valuation. We believe as outlook for balanced services portfolio which has enabled it to grow even in the US economy improves and discretionary demand picks up in weak IT spending environments. TCS is expected to continue European markets TCS is best positioned to capture this industry leading revenue growth (company expects FY14 to be opportunity. We believe street would eventually upgrade its FYbetter than FY13 with stable margins in constant currency), and 14/15 forecast to 120 plus levels. we expect earning led stock performance. TCS is the largest Indian IT services company with FY13 revenues of US$11.6bn, and employee base of c.276,200 at Risk Mar13. North America contributes the highest or .53% to revenues, followed by 17% from UK, 10% from continental Global macro-economic slowdown, proposed immigration Europe, 8% from India and 12% from rest of world. In terms of reforms, wage inflation and sharp currency appreciation verticals, BFSI leads with 43% revenue share, followed by 13% from Retail & distribution, 10% from telecommunications, 8% from manufacturing, 6% from Hi-Tech, 5% from Life sciences and healthcare and rest from other verticals.
Financial Ratios P/E (trailing) P/BV EV/EBITDA Debt to Equity ROE EBITDA Margins % Profit Margins % Net Sales (Mln Rs.) Net Profit (Mln Rs.) 26.5 8.96 17.4 0.6 38.4 29.5 22.1 629,895 139,173 Sales Net Income
( Rs in Mln)
700000 600000 500000 400000 300000 200000 100000 0 2007 2008 2009 2010 2011 2012 2013
278128.8 186852.1 226195.2 373245.1 300289.2 488938.3 629894.8

(Rs in Mln)
160000 140000 120000 100000 80000 60000 40000 20000 0 2007 2008 2009 2010 2011 2012 2013
42126.3 50260.2 52564.2 70006.4 90570.4 104134.9 139173.1

2014 Picks

Maruti Suzuki India Ltd

Investment Thesis Compared to past few years, we believe Marutis competitive positioning is far stronger today, driven by new product launches (new segments), expanding diesel/CNG portfolio, extensive rural/semi-urban network and moderate competition. This, in our view, would help Maruti to maintain its market leadership without compromising much on profitability. Passenger Vehicle demand in Indian market has been under pressure over the past several quarters due to various macro factors like slowing economy (weak sentiments), rising fuel prices. While demand remains weak, we expect passenger car demand to recover in FY15E. Given the wide product portfolio and extensive dealer network, we expect Maruti to be one of the prime beneficiaries of recovery in domestic passenger car demand.
Financial Ratios P/E (trailing) P/BV EV/EBITDA Debt to Equity ROE EBITDA Margins % Profit Margins % Net Sales (Mln Rs.) Net Profit (Mln Rs.) 22.1 2.87 7.7 8.2 14.2 10.3 5.7 432,159 24,692 Sales
( Rs in Mln)
500000 450000 400000 350000 300000 250000 200000 150000 100000 50000 0
432159 363330 295915 181041 147217 206622 351972

Recent launches from Maruti like Ertiga, new Alto 800 have been well received in the market. Robust sales of Ertiga/Swift/Dzire along with higher diesel car production, will not only support revenue growth, but also lead to significant improvement in sales mix. We expect Maruti EBIDTA margin to remain stable going forward primarily led by: a) favorable currency, b) stable RM prices, and c) localisation. RISK a) Weaker-than-estimated PV demand recovery in FY15, b) resurgence of labor trouble, and c) volatility in forex rates.

Net Income
(Rs in Mln)
30000 25000 20000 15000 10000 5000 2007 2008 2009 2010 2011 2012 2013 0 2007 2008 2009 2010 2011 2012 2013
17899 15883 12274 26247 23824 24692

16812

2014 Picks

Hero Motocorp
Investment Thesis Robust rural demand on back of strong monsoon and strong HMCL scooter volumes to witness 20% CAGR between FY13dealership network with good penetration in the rural areas 15, aiding topline growth. Although Hero Motocorp's margins should pave way for higher top line growth over the next few have been under pressure in last few quarters, Management quarters. Demand environment for 2-wheelers has remained sees potential in margin improvement from current levels. challenging in the past few months, impacted by higher fuel Management is hopeful of ramping up exports in FY14 from a prices and inflationary pressure, leading to inventory built-up at small base (c.3% of total sales in FY13) and maintains its aim of dealers end. However, given Hero Motocorp's best in class achieving 1mn exports. network and deep understanding of domestic market, Hero Gearing up to capture the momentum demand particularly in Motocorp could be a prime beneficiary of recovery in domestic scooter segment with its superior presence would aid topline volumes, especially in rural market. Although a late entrant, volume growth. It is also planning to launch 12 products by Hero Motocorp has made significant inroads in the domestic March. scooter segment and is now the second largest player in Risk- Weaker volume growth, and steep competition leading to pricing pressure domestic market (c.20% market share in Jun13). We expect the demand in scooter segment to remain strong and
Financial Ratios P/E (trailing) P/BV EV/EBITDA Debt to Equity ROE EBITDA Margins % Profit Margins % Net Sales (Mln Rs.) Net Profit (Mln Rs.) 20.1 8.49 8.4 0.0 45.6 14.0 9.0 235,827 21,182

Sales

Net Income
( Rs in Mln) (Rs in Mln)
233680.5 192450.3 157581.8 123191.2 98999.6016 103318 235827.4

250000 200000 150000 100000 50000 0 2007 2008 2009 2010 2011

25000 20000 15000 10000 5000

8578.9004 9678.7998 12817.6

22318.3 19279

23781.3 21181.6

2012

2013

0 2007 2008 2009 2010 2011 2012 2013

2014 Picks

Reliance Industries
Investment Thesis RIL is planning to spend US$12bn over the next 3 years on petrochemicals capacity expansion, setting up a refinery offgas cracker (ROGC), petcoke gasification unit and shale gas assets in the US. RIL is also planning additional capex of c.US$6-7bn on E&P assets in India, telecom and retail. Expansion in ROGC, petrochemicals and petcoke gasification will add c.US$3-4bn to RILs standalone EBITDA. Cabinet has allowed RIL to hike gas price to about US$8.4/mmbtu from April 2014 (vs. US$4.2/mmbtu now) in return for a bank guarantee for the incremental revenues until the gas hoarding charges on RIL are settled. We believe gas price hike for KG basin is a key positive development for RIL, moreover its shifts focus on capex and gas output from KG basin which we believe should gradually rise in coming quarters.
Financial Ratios P/E (trailing) P/BV EV/EBITDA Debt to Equity ROE EBITDA Margins % Profit Margins % Net Sales (Mln Rs.) Net Profit (Mln Rs.) 12.6 1.44 8.1 58.6 11.9 8.4 5.3 3,970,620 208,790 Sales

Process of augmenting production from D1-D3 and MA fields continues and should show results over the next 2 quarters. All projects to expand petrochemical capacity are on schedule and will be commissioned by CY2015 in a phased manner. INR depreciation impacts RIL positively as: 1) RILs assets were created when rupee was at c.45/$ and with c.30% INR depreciation, the rupee value of assets has appreciated by c.30%, or 2) Since margins for all products are US$ denominated, INR depreciation increases EBIDTA and improves valuation. Key Risks Volatility in global refining and petchem margins, Sharp INR appreciation.

Net Income
( Rs in Mln) (Rs in Mln)
3970620 3585010 2658106 2037397.2 1137701.1 1371466.6 1512240.1

4500000 4000000 3500000 3000000 2500000 2000000 1500000 1000000 500000 0

300000
245031.4

250000
195678.3 192936.8 149687.2 197240

208790

200000 150000 100000 50000

120753.4

2007

2008

2009

2010

2011

2012

2013

0 2007 2008 2009 2010 2011 2012 2013

2014 Picks

Indusind Bank
Investment Thesis The bank has a retail focus with consumer loans (mainly in the auto segment) accounting for almost 50% of its loan book, on Asset side: 50% of loan book are fixed in nature (built in high interest rate environment) and even though yields on corporate portfolio would decline overall decline in yields would be contained. Further, on back of niche presence IIB has been able to grow its balance sheet much faster than peers. IndusInd Bank (IIB) delivered a strong quarter beating street expectations over the past 2 years, with largely stable margins (thanks to tactical tapping of refinancing sources), robust fee income and stable asset quality in a challenging macro environment. Net profit growth at 32% YoY. Despite slowing vehicle finance book we expect other segments to keep the loan growth momentum strong. IIB's 2QFY14 NIM was down only
Financial Ratios P/E (trailing) P/BV EV/EBITDA Total loan to Deposit % ROE ROA Profit Margins % Net Sales (Mln Rs.) Net Profit (Mln Rs.) 17.6 2.7 0.6 85.7 18.3 1.8 29.6 83,407 10,612 Sales

7bps QoQ at 3.65% despite spike in short term rates as the bank; we believe IIB's NIM would relatively remain stable going ahead. We expect IIB to deliver earnings CAGR of 30% (FY1315E), supported by strong asset growth, stable margins, robust fee income growth, and healthy credit quality. Investment Banking business of IndusInd Bank has scaled up significantly over the past four years. Revenues, from a mere Rs 200mn in FY10, are expected to cross Rs 2bn in FY14E. Management believes the bank has captured only a fraction of what the segment offers and with continued expansion in product offerings and resources/capabilities, the best is yet to come. Risk: Sharp Rise in interest rates, competition form new banking candidates.
Net Income

Top Line( Rs in Mln)

90000 80000 70000 60000 50000 40000 30000 20000 10000 0
83407.436 63703.832 43058.781 27963.555 17720.373 21789.095 32944.722

Net Int Inc (Rs in Mln)

25000 20000 15000 10000 5000 0
2717.123 3407.392 4619.125 8893.305 13793.665 17072.224 22358.212

2007

2008

2009

2010

2011

2012

2013

2007

2008

2009

2010

2011

2012

2013

2014 Picks

Mahindra & Mahindra Financial Services Limited

Investment Thesis Mahindra & Mahindra Financial Services Limited (MMFSL), part We expect double digit earnings CAGR over FY1316 on robust of the US$15.9bn Mahindra Group, is one of India's leading nonloan growth, stable margins and improving cost ratios. Post QIP banking finance companies with a pan India presence. Focused issuance the company is well capitalized for next 2 to 3 years of on the rural and semi-urban sector, it provides finance for growth. vehicles and tractors and has the largest network of branches amongst NBFCs operating in these areas. Risk: Significant increase in competitive intensity, Significant economic Rural Play : Above average Monsoon is likely to be a positive for slowdown, Any sustained liquidity shock, Higher than expected 2H farm incomes which augers well for the company. We strong delinquencies believe 2nd half of this FY tends to be stronger both in terms of loan growth and asset quality for NBFCs. With monsoon being the strongest in recent history, state elections/ general elections lined up, sentiment in rural India will likely be far better than last 2 years.

Financial Ratios P/E (trailing) P/BV EV/EBITDA Total loan to Deposit % ROE ROA Profit Margins % Net Sales (Mln Rs.) Net Profit (Mln Rs.) 18.0 3.9 24.4 4.0 22.5 41,124 9,270

Sales

Net Income
Top Line( Rs in Mln) Net Int Inc (Rs in Mln)
41124.192

45000 40000 35000 30000 25000 20000 15000 10000 5000 0

25000
20140.68

29083.672 20742.716 12365.824 8497.816 14003.931 15953.988

20000
14751.666

15000
9356.295

12922.79 7722.951

10000
4652.745

6648.027

5000 0 2007 2008 2009 2010 2011 2012 2013 2007 2008 2009 2010 2011 2012 2013

2014 Picks

Tata Steel
Investment Thesis Tata Steel has 100% captive iron ore and 50% captive coking Commissioning of the Odisha phase-1 project in November 2014 coal making it the most profitable steel producer in India. Early would drive the next phase of volume growth over the period signs of a demand rebound in Europe, flexibility in India capex 2015-16 to 2017-18. We believe the integrated standalone (capital expenditure) plans (Odisha Phase-II), strategic stake Indian business should maintain EBITDA/ton of Rs14k+ for sales of non- core assets, and improving volume growth visibility FY14/15 while the less profitable Corus operations should deliver in the India business make us positive on the stock. Both steel EBITDA/ton of $30+/ton. demand and prices are at their multi-year lows, offer decent margin of safety to steel demand and prices from here on. Tata Delays in execution of capacity expansion at Kalinganagar, Steel has undertaken various efficiency improvement and cost Orissa and ramping up of production at new facilities at reduction measures in the past, which is now yielding results. Jamshedpur would affect volume growth. Profitability at Corus This augurs well for Tata Steel's European subsidiary, which would be severely affected if Eurozone goes through a contributed 72% of consolidated revenues in 2012-13 (Apr-Mar). protracted slowdown. A delay in raw material linkages would Revival in construction activity will aid demand for Tata Steel make the new steel production capacities less profitable. The Europe's long products, which form 60% of capacity. proposed 26% profit sharing clause for coal miners could be drag on the stock in near term.
Financial Ratios P/E (trailing) P/BV EV/EBITDA Debt to Equity ROE EBITDA Margins % Profit Margins % Net Sales (Mln Rs.) Net Profit (Mln Rs.) 1.19 7.1 184.2 -18.4 9.1 -5.2 1,347,115 -70,576 Sales Net Income
( Rs in Mln)
1600000 1400000 1200000 1000000 800000 600000 400000 200000 0 2007 2008 2009 2010 2011 2012 2013 -100000 2007 2008 2009 2010 2011 2012
252133.1 1315336.3 1187531.2 1023931.2 1473292.6 1328997 1347115.4

(Rs in Mln)
150000 100000 50000 0 -50000
-20092.2 -70576.2 41772.7 49509 123499.8 89826.9 53897.7

2013

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2014 Picks

Crompton Greaves
Investment Thesis Crompton is expected to turn around its business as the International subsidiariesEurope subsidiary is expected to company is looking to expand into new market & segments in the continue with its improving trend in profitability; US, Canada and power business. Besides, cost optimization strategies and other regions to report similar level of losses in the near term: increased sourcing from low-cost manufacturing locations is However, the management is taking steps to largely get over the expected to augur well for its turnaround story. losses in its international operations by FY2016, which would boost the consolidated earnings and act as a big re-rating trigger Steady improvement in standalone power systems margins for the stock. indicates that the business is on a recovery path. Export led growth would support domestic power systems revenue Risk trajectory. Management targets 400bps margins improvement powerbusiness remains under pressure (in India and globally) over 3 years, to be driven mainly by reversal of losses in IB with high competition and a shrinking market, slowdown in business (40% of consolidated FY13), and sustenance of US/Europe, impacting future revenues/margins. profitability in India business.

Financial Ratios P/E (trailing) P/BV EV/EBITDA Debt to Equity ROE EBITDA Margins % Profit Margins % Net Sales (Mln Rs.) Net Profit (Mln Rs.) 2.3 18.3 56.8 -1.0 3.2 -0.3 120,944 -361

Sales
( Rs in Mln)
140000 120000 100000 80000 60000 40000 20000 0 2007 2008 2009 2010 2011 2012 2013
68323.37 56395.6 87372.6 91408.7 112485.8 100051.1 120944.4

Net Income
(Rs in Mln)
10000 8000 6000 4000 2000 0 -2000 2007 2008 2009 2010 2011 2012
-361.4 2817.45 5599 4067.18 3735.9 8598.7 8886.7

2013

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2014 Picks

Nestle
Investment Thesis Stock has underperformed over the two years and now stock is Many multinational companies are planning to increase their positioned for a decent growth as capex programme ends and stakes or go for a merger or delisting of their Indian arms. The better earnings visibility on being less import dependence on its recent announcement from the Reserve Bank of India (RBI) that inputs compared to its peers. foreign promoters can hike stake without taking its nod is a sign of encouragement for parent companies. Nestle is forefront being Domestic sales have grown at sub 10 % yoy over the past year. a MNC that its parent (NESTLE SA) might hike stake in its Indian Volume growth across categories and especially for instant food Unit. The Swiss multinational food and beverage company might categories (instant noodles) moderated significantly over FY12intend to raise its stake in Nestle India to 75.0% from the current 13. We expect volume growth rates to recover in CY14-15 (off a 62.76%, held along with Maggi Enterprises. subdued base) supported by new capacity commissioning, more product launches and pricing power across the categories. Risk- Slower than expected sales volume growth, sharp rise in dairy and other input cost.

Financial Ratios P/E (trailing) P/BV EV/EBITDA Debt to Equity ROE EBITDA Margins % Profit Margins % Net Sales (Mln Rs.) Net Profit (Mln Rs.) 49.3 29.29 25.4 58.4 69.5 23.1 12.9 83,023 10,679

Sales

Net Income
( Rs in Mln) (Rs in Mln)
83022.6 74908.2 62547.425 51293.767 43242.45 35043.532 28160.646

90000 80000 70000 60000 50000 40000 30000 20000 10000 0

12000 10000 8000 6000

4138.122 5340.822 3150.965 6550.028 9615.5 8186.648

10679.3

4000 2000 2006 2007 2008 2009 2010 2011 2012 0

2006

2007

2008

2009

2010

2011

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Disclaimer
This report and information contained in this report is solely for information purpose and may not be used or considered as an offer document or solicitation of offer to buy or sell or subscribe for securities or other financial instruments. The opinion expressed and the investment as mentioned in this report may not be suitable for all investors. investors In rendering this information, we assumed and relied upon, without independent verification, the accuracy and completeness of all information that was publicly available to us. The information has been obtained from the sources we believe to be reliable as to the accuracy or completeness. While every effort is made to ensure the accuracy and completeness of information contained, JM Financial Services and its affiliates takes no guarantee and assumes no liability for any errors or omissions of the information. This information is given in good faith and we make no representations or warranties, express or implied as to the accuracy or completeness of the information. information No one can use the information as the basis for any claim, demand or cause of action. JM Financial Services and its affiliates shall not be liable for any direct or indirect losses or damage of any kind arising from the use thereof. Opinion expressed is our current opinion as of the date appearing in this report only and is subject to change without any notice. JM Financial Services may take investment decisions that are inconsistent with the views expressed in this report. Recipients of this report must make their own investment decisions, based on their own investment objectives, financial positions and needs of specific recipient. The recipient should independently evaluate the investment risks and should make such investigations as it deems necessary to arrive at an independent evaluation of an investment in the securities of companies referred to in this document and should consult their own advisors to determine the merits and risks of such an investment. Any comments or statements made herein are those of the Analyst and do not necessarily reflect those of JM Financial Services and its affiliates. The report and information contained herein is strictly confidential and meant solely for the selected recipient and is not meant for public distribution. This document should not be altered in any way, transmitted, copied or distributed, in part or in whole, to any other person or to the media or reproduced, duplicated or sold in any form.

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