Ambit - Strategy eRrgrp-The Lifecycle of Great' Companies

STRATEGY
September 2014
Thematic: Life Cycle of a Great Company

Gaurav Mehta, CFA Rakshit Ranjan, CFA
Analysts:
gauravmehta@ambitcapital.com rakshitranjan@ambitcapital.com
Saurabh Mukherjea, CFA
Karan Khanna Sagar Rastogi
saurabhmukherjea@ambitcapital.com
karankhanna@ambitcapital.com sagarrastogi@ambitcapital.com
Tel: +91 99877 85848
Nitin Bhasin Bhargav Buddhadev
Consultant: Anupam Gupta nitinbhasin@ambitcapital.com bhargavbuddhadev@ambitcapital.com
anupam.gupta@aavanresearch.com
Ashvin Shetty, CFA Pankaj Agarwal, CFA
ashvinshetty@ambitcapital.com pankajagarwal@ambitcapital.com
Strategy
CONTENTS
Strategy: The life cycle of great companies………………………………………………… 3
Forward looking case studies……………………………………………………………….. 35
Youth……………………………………………………………………………………………35
- Mayur Uniquoters…………………………………………………………………………. 35
- VA Tech……………………………………………………………………………………...39
- EClerx……………………………………………………………………………………….. 43
Prime …………………………………………………………………………………………..47
- Page Industries……………………………………………………………………………. 47
- Motherson Sumi Systems………………………………………………………………… 51
- CRISIL……………………………………………………………………………………….. 55
Descent………………………………………………………………………………………... 59
- Apollo Tyres ?……………………………………………………………………………... 59
- Asian Paints………………………………………………………………………………… 63
- Ambuja Cement…………………………………………………………………………… 67
Turnaround………………………………………………………………………………….. 71
- Ashok Leyland…………………………………………………………………………….. 71
- TVS Motor Company……………………………………………………………………… 75
- Bajaj Electricals……………………………………………………………………………. 79
September 17, 2014 Ambit Capital Pvt. Ltd. Page 2

Strategy
THEMATIC September 17, 2014
The lifecycle of ‘great’ companies Key recommendations

Youth Phase
‘Great’ companies evolve and as they do the shareholder returns Mayur Uniquoters
associated with them change dramatically. Whilst investors tend to earn MUNI IN Our stance: NR
the greatest returns when a company is in its ‘youth’ (stage 1), the Mcap (US$ bn): 0.30 ADV (US$ mn): 0.3
variability of returns is the lowest when the company is in its ‘prime’ VA Tech Wabag
(stage 2). This is almost inevitably followed by ‘descent’ (stage 3) and VATW IN Our stance: BUY
then, in 1 out of 3 cases, by a turnaround (stage 4). Mcap (US$ bn): 0.64 ADV (US$ mn): 1.3
Integrating 18 months of work into one framework eClerx
After six thematics on the subject of ‘greatness’, we now integrate them into a ECLX IN Our stance: NR
cohesive framework on how great companies evolve and how that evolution Mcap (US$ bn): 0.68 ADV (US$ mn): 1.0
has a bearing on shareholder returns. Prime Phase
Page Industries
Stage 1: Youth PAG IN Our stance: BUY
The promoters typically start small with a narrow range of products, usually in Mcap (US$ bn): 1.41 ADV (US$ mn): 1.0
the confines of their home state; business performance accelerates but is far Motherson Sumi
from consistent; capital allocation is cautious even as the business takes its first
MSS IN Our stance: NR
steps towards becoming a more substantive franchise. Infosys (1994-2002),
Mcap (US$ bn): 5.96 ADV (US$ mn): 9.8
Berger Paints (1991-2000) and IPCA Laboratories (2003-2014) are
CRISIL
backward-looking examples of ‘youth’ detailed in this note whilst Mayur
Uniquoters, VA Tech Wabag and eClerx are forward-looking CRISIL IN Our stance: NR
recommendations. This is the stage in which investors make the highest returns. Mcap (US$ bn): 2.24 ADV (US$ mn): 0.9
Descent Phase
Stage 2: Prime Apollo Tyres ?
The company is on top of its game at this stage, has acquired a stellar APTY IN Our stance: SELL
reputation, is the market leader in its core segment and is a stockmarket Mcap (US$ bn): 1.63 ADV (US$ mn): 16.3
darling. Often the company chases inorganic growth through large acquisitions
Asian Paints
and announces large capex plans backed by fund-raising plans. Bharti (1999-
APNT IN Our stance: SELL
2009), HDFC Bank (2003-2014) and Sun Pharma (2003-2014) are
backward-looking examples of great companies in their ‘prime’ whilst Page
Industries, Motherson Sumi and CRISIL are forward-looking Ambuja Cement
recommendations. This is the stage where investors have the greatest visibility ACEM IN Our stance: SELL
on returns. Mcap (US$ bn): 5.25 ADV (US$ mn): 8.4
Turnaround Phase
Stage 3: Descent Ashok Leyland
Imprudent capital allocation at the peak of success invariably leads to descent. AL IN Our stance: BUY
Unrelated diversifications made in the past eat into the balance sheet and Mcap (US$ bn): 1.83 ADV (US$ mn): 11.1
capital efficiency suffers. Hubris and arrogance set in as the company
TVS Motor
mistakenly believes itself to be unassailable. Tata Steel (2003-2014), TTK
TVSL IN Our stance: BUY
Prestige (1994-2004) and Suzlon (2008-2014) are backward-looking
examples of ‘descent’ whilst Asian Paints, Ambuja Cements, and
potentially, Apollo Tyres, are forward-looking recommendations. This is the Bajaj Electricals
stage where investors’ returns are most at risk. BJE IN Our stance: BUY
Stage 4: Turnaround
Tough decisions are taken in order to conserve cash, management teams are
replaced, non-core businesses are terminated/sold-off and a turnaround plan Analyst Details
with time-bound, measurable targets is put in place. TTK Prestige (2004- Saurabh Mukherjea, CFA
2014), IndusInd Bank (2008-2011) and Titan (1999-2009) are the
+91 99877 85848
backward-looking examples of ‘turnaround’ whilst Ashok Leyland, TVS
Motors and Bajaj Electricals are our forward-looking recommendations. saurabhmukherjea@ambitcapital.com
Investors’ returns, and the variability associated with them, during this stage Research Team
are similar to those generated during the ‘youth’ stage. +91 22 3043 3000
ambitresearch@ambitcapital.com
Ambit Capital and / or its affiliates do and seek to do business including investment banking with companies covered in its research reports. As a result, investors should be aware that Ambit Capital
may have a conflict of interest that could affect the objectivity of this report. Investors should not consider this report as the only factor in making their investment decision.
Strategy
1. The ‘greatness’ journey so far

Over the last two years, we have used our ’greatness framework‘ to analyse the
capital allocation decisions of India Inc and thereby identify structurally sound
businesses in India.
The ‘greatness’ framework
‘’Greatness is not in where we stand, but in what direction we are moving….’’
– Oliver Wendell Holmes
We study a firm’s structural strengths by focusing not on absolutes but rather on We recap some of our work on the
improvements over a period of time and the consistency of those improvements. subject of analysing management
These firms have gone on to become parts of our very successful ten-bagger strategies and their impact on the
portfolios (click here for the latest iteration published on 26 November 2013) and our fate of their firms
Good & Clean portfolios (click here for the latest iteration published on 25 July 2014).
We look for companies, which have over a six-year period, shown that they can
consistently invest in their business and at the same time grow their RoCEs and cash
flows.
The framework essentially hinges on using publicly available historical data to assess
which firms have, over a sustained period of time (FY08-13), been able to
consistently: Historically, we have used our
(a) Invest capital; greatness framework to identify
structurally sound businesses in
(b) Turn investment into sales;
India
(c) Turn sales into profit;
(d) Turn profit into balance sheet strength;
(e) Turn all of that into free cash flow; and
(f) Invest free cash flows again.
The ’greatness‘ score consists of six equally weighted headings—investments,
conversion to sales, pricing discipline, balance sheet discipline, cash generation and
EPS improvement, and return ratio improvement. Under each of these six headings,
we further look at two kinds of improvements: (1) Percentage improvements in
performance over FY11-13 vs FY08-10; and (2) Consistency in performance over
FY08-13 i.e. improvements adjusted for underlying volatility in financial data.
Exhibit 1: The ’greatness‘ framework
a. Investment (gross b. Conversion of

block) investment to sales
(asset turnover, sales)
c. Pricing discipline
(PBIT margin)
e. Cash generation d. Balance sheet

(CFO) discipline (D/E, cash
ratio)
Source: Ambit Capital research

Strategy
The various metrics used to quantify greatness can be seen in the following exhibit:
Exhibit 2: Factors used for quantifying greatness (as used in the 2013 model)
Head Criteria
1 Investments a. Above median gross block increase (FY11-13 over FY08-10)*
b. Above median gross block increase to standard deviation
2 Conversion to sales a. Improvement in asset turnover (FY11-13 over FY08-10)*
b. Positive improvement in asset turnover adjusted for standard deviation
c. Above median sales increase (FY11-13 over FY08-10)*
d. Above median sales increase to standard deviation
3 Pricing discipline a. Above median PBIT margin increase (FY11-13 over FY08-10)*
b. Above median PBIT margin increase to standard deviation
4 Balance sheet discipline a. Below median debt-equity decline (FY11-13 over FY08-10)*
b. Below median debt-equity decline to standard deviation
c. Above median cash ratio increase (FY11-13 over FY08-10)*
d. Above median cash ratio increase to standard deviation
Cash generation and PAT
5 a. Above median CFO increase (FY11-13 over FY08-10)*
improvement
b. Above median CFO increase to standard deviation
c. Above median adj. PAT increase (FY11-13 over FY08-10)*
d. Above median adj. PAT increase to standard deviation
6 Return ratio improvement a. Improvement in RoE (FY11-13 over FY08-10)*
b. Positive improvement in RoE adjusted for standard deviation
c. Improvement in RoCE (FY11-13 over FY08-10)*
d. Positive improvement in RoCE adjusted for standard deviation
Source: Ambit Capital research; Note: * Rather than comparing one annual endpoint to another annual endpoint (say, FY08 to FY13), we prefer to average the
data out over FY08-10 and compare that to the averaged data from FY11-13. This gives a more consistent picture of performance (as opposed to simply
comparing FY08 to FY13).
Whilst the greatness framework was initially built to identify sound businesses and
efficient capital allocators in India for our model portfolios, over the past 15 months
the framework has been the central inspiration for our series of ‘greatness’ thematics.
The key learnings from these thematics are summarised below.
1. Why do great Indian companies self-destruct? (published on 7 June 2013;
click here for the note)
‘’On a long enough timeline, the survival rate for everyone drops to zero.”
– Chuck Palahniuk in The Fight Club
“Every institution is vulnerable, no matter how great. There is no law of nature that the
most powerful will inevitably remain at the top. Anyone can fall, and most eventually
do.”
- Jim Collins in ‘How the Mighty Fall’ (2009)
In the first note in the ‘greatness’ series, published on 7 June 2013, ‘Why do great
Indian companies self-destruct?’, we analysed the propensity of leading Indian Over 80% of firms that are great
companies to fade away to mediocrity. The note highlighted that: on our framework slide into
mediocrity over a five year
 Over 80% of ‘great’ Indian companies slide to mediocrity in a short span of time timeframe…
led by poor strategic decision-making fuelled by ’hubris and arrogance‘. Such
faulty strategic decisions usually result in poor capital allocation which destroys
RoCE and creates financial stress.
 The average probability of a sector leader remaining a sector leader five years
later is only 17%.
 The average probability of a ‘great’ company becoming a sector laggard five
years later is 25%.

Strategy
Exhibit 3: Probability of self-destruction

Years
2003-08 2004-09 2005-10 2006-11 2007-12 2008-13 average
Probability that sector leaders in Year-0 stay sector leaders in Year-5? 12% 20% 19% 10% 17% 28% 17%
Probability that sector leaders in Year-0 become sector laggards in Year-5? 23% 20% 30% 23% 31% 28% 26%
Source: Ambit Capital research; Note: 2003-08 indicates the probability in Year-5 (2008) for a sector leader in Year-0 (2003)
Further, in this note, using the work of Jim Collins and William Thorndike, we also
presented a ‘five-stage’ framework to explain the lifecycle of a great company.
Exhibit 4: The five-stage framework
Source: From the book ’How The Mighty Fall’ by Jim Collins
Inspired by Jim Collins’ work, this framework contended that even great firms go
through a cycle. We used a modified version of Collins’ framework and Thorndike’s
approach to analyse capital allocation to understand why great Indian companies
slide. The core stages in our framework were as follows:
…thanks primarily to faulty capital
 Stage 1 - Hubris and arrogance: The company is on top of its game. allocation induced by management
Operating margins, RoCE, growth, valuation multiples, etc., are at all-time highs. hubris and arrogance
Captivated by the success in its core business, the management starts believing its
own press. Success and adulation intoxicates the top brass. Arrogance sets in. The
company loses sight of the factors which made it successful in the first place.
 Stage 2 – Unbridled expansion: In search of more growth and more adulation,
the management begins an expansion drive which is often inorganic. The firm
’overreaches‘ into new geographies and product lines where it has no real
experience or expertise. Sub-par capital allocation begins.
 Stage 3 – Stuck in a rut: Often cost discipline and/or product excellence erodes
and prices are then raised. Profits, return multiples and valuation multiples start
sliding. Company politics thrives. The leader becomes increasingly autocratic and
announces 'recovery plans' that aren't based on accumulated experience.
 Stage 4 – Grasping for solutions: The company thrashes around and looks for
a solution even as profits and financial strength continue to slide. Senior
management jobs are on the line. Often a new leader comes in and sometimes
tries to fire silver bullets (eg. a 'transformative' acquisition, a blockbuster product,
a cultural revolution, etc). However, a new leader (ideally, someone from inside)
who takes a long, hard look at the facts and then acts calmly to put in place a
measured recovery strategy with sensible use of cash and capital at its centre,
could be the saviour.
 Stage 5a – Capitulation: The firm is sold or fades into insignificance or, and this
happens rarely, shuts down.
 Or Stage 5b – Recovery: The firm turns the corner and begins the long, slow
climb to recovery.

Strategy
2. The cash flow conundrum for India Inc (published on 31 July 2013; click
here for the note)
“Capital allocation is a CEO’s most important job.”
“What counts in the long run is the increase in per-share value, not overall growth or
size.” Efficient capital allocation extends
- William Thorndike in “The Outsiders” (2012) beyond obsession with growth
alone!
In this note, we demonstrated that efficient capital allocation extends beyond
obsession with growth alone and that in a trade-off between profitability and growth,
profitability is a bigger driver of share prices.
Exhibit 5: Capital allocation has more to it than focus on growth alone
Median outperformance - 10-year CAGR

14%
12.0%
12%
10% 9.0% In a trade-off between profitability
and growth, profitability is a bigger
8% 5.9% driver of share prices
6%
4%
2%
0%
Superior revenue growth Superior RoCE Superior on both
Source: Bloomberg, Ambit Capital research; this exhibit plots share price performance over Mar’ 02-Mar’ 12
(relative to BSE200 index) for three groups of firms - one with more than 15% revenue CAGR, second that have
increased their RoCEs whilst maintaining them above 15%, third with both more than 15% revenue CAGR and Empire building and hoarding cash
increasing RoCEs whilst maintaining them above 15% both negatively impact return ratios
In particular, we found that a focus on profitability in turn may mean moderation of
empire-building ambitions and sometimes returning cash back to shareholders in the
absence of profitable deployment opportunities.
Exhibit 6: Last ten-year (FY03-12) median RoCEs of top Exhibit 7: The cost of hoarding cash - RoCEs lower than
quintiles based on use of cash RoICs for the top quintile on cash retention
Last ten year median ROCE Cost of retaining cash

40%
Cost of
Return ratios (pre-tax)
Universe
30% hoarding
Cash returned (Q1)
Capex (Q1) 20%
Acquisition (Q1)
Cash retained (Q1) 10%
-10% 10% 30% 50% 0%

Median FY12 ROIC Median FY12 ROCE
Source: Ambit Capital research, Bloomberg; Note: This is pre-tax RoCE Source: Ambit Capital research; Note: Both the return ratios are pre-tax;
whilst for RoIC calculation we remove interest plus dividend income and cash
from numerator and denominator respectively; for RoCE, we retain these; the
difference thus accounts for the cash drag to RoCEs
Further, as the two exhibits above demonstrate, just as hoarding cash has a punitive
effect on shareholders, so too does unbridled expansion.

Strategy
3. Greatness at ‘risk’ (published on 14 August 2013; click here for the note)
“We have stopped flying commercial.”
- CFO of a once successful mid-sized Indian company in a meeting with fund
managers (2008)
In the third note in this series we highlighted specific markers which investors can use
to identify ‘great’ firms which are on the cusp of sliding to mediocrity. The markers Is ‘greatness’ at risk for Asian
highlighted were: Paints, Titan and Sun Pharma?
 Hubris and arrogance: This is the single-largest factor that leads to
deterioration in performance. And this is also one of the markers that is easily
discernible, especially if the analyst or investor has been meeting a particular
company management or its promoters over several years; executives gripped by
this malaise love to ‘talk down‘ to investors and/or outline grandiose visions for
global domination. Other indicators are: an obsession with the trappings of
corporate success and waning investor access to the promoter/CEO.
 Shift in strategy: A dramatic shift in strategic stance is another flag to watch out
for and should be of concern if the rationale for the shift is difficult to decipher or
the same is not well articulated by the company. Our research suggests that
instances of such abrupt changes in strategy are more frequent than investors
would like them to be.
 Inter-generational shift or tension within promoters or change in
management: The handover from one generation to another (or from one CEO
to another) is particularly sensitive. The run-up to this transition and the year
following the change tends to be marked by tussles within the firm around capital
allocation, key personnel and corporate turf.
 Capital allocation: Finally the first three factors discussed above –
overconfidence, abrupt changes in strategy, and tensions within the company –
result in poor capital allocation decisions. The inability of these companies to
successfully re-allocate capital is at the core of why over 80% of successful Indian
companies slide to mediocrity.
4. Using the ‘greatness’ framework to identify turnarounds (published on 15

January 2014; click here for the note)
"When everything about you or your business gets really complicated and
overwhelming, you've got to do three things. First, get yourself or the business out of
the ditch (i.e., survival, first and foremost). Second, find out how you or the business got
into the ditch (recognise the signs). Third, make sure you do whatever it takes so you or
the business doesn't go into the ditch again (put a long-term plan in place)."
- Anne Mulcahy, former CEO of Xerox
In our January 2014 note, ‘Deep dives into five turnaround plays’, we looked at the We have also used the ‘greatness’
other end of the greatness spectrum, i.e. at fallen companies that could potentially framework to identify turnaround
turn around. plays…
We used the same framework to assess the probability that sector laggards (defined
as firms which fall in the bottom quartile in their sectors) from five years ago are
amongst today’s sector leaders (i.e. they are in the top quartile of their sector). This,
essentially, is the probability of a firm turning around over a five-year timeframe.
We contrasted this against the probability of enduring ‘greatness’ i.e. what is the
probability that sector leaders from five years ago are still sector leaders today. … Bajaj Electricals, Ashok Leyland,
Our analysis (see exhibit on the next page) suggested that the average probability of Britannia, Bharti and Wipro are five
a laggard company turning around over a five-year period is far greater than the firms that we had analyzed for
average probability of a great company staying great over this timeframe. In effect, turnaround prospects in a Jan’14
our analysis highlighted how difficult it is for great Indian companies to endure note
greatness over meaningful timeframes.

Strategy
Exhibit 8: Probability of ‘turning around’ vs probability of enduring ‘greatness’

Years
2003-08 2004-09 2005-10 2006-11 2007-12 2008-13 average
Probability that sector leaders in Year-0 stay sector leaders in Year-5? 12% 20% 19% 10% 17% 28% 17%
Probability that sector laggards in Year-0 become sector leaders in Year-5? 37% 23% 42% 39% 28% 34% 34%
Source: Ambit Capital research; Note: 2003-08 indicates the probability in Year-5 (2008) for a sector leader in Year-0 (2003)
The above exhibit clearly shows the probability of a company sustaining leadership is
nearly half the probability of a company turning itself around. Whilst the average
probability of a sector laggard becoming a sector leader five years later is 34%, the
average probability of a sector leader remaining a sector leader is only 17%.
We then highlighted a framework the can be used to identify credible turnaround
plays:
 Cash conservation: Survival is the key to ensuring an eventual turnaround.
Survival entails cash conservation and/or cash generation by selling off non-core
assets, cutting unproductive capex and cutting costs.
 A change at the top: A successful turnaround requires admission of error. This
is easier for a new management team.
 A clear, time-bound, focussed turnaround plan: Such a plan should: (a) Cash conservation, admission of
focus on the firm’s core strengths, (b) have a relatively short list of concrete action error and a clear, time-bound
points, (c) have clearly defined timelines and well-defined metrics to measure turnaround plan focused on core
recovery, and (d) a well-aligned incentive structure. strengths of the firm and central to
The five turnaround plays highlighted in the note were Bajaj Electricals (up 27% since a successful turnaround
the note was published), Ashok Leyland (up 126%), Britannia (up 59%), Bharti (up
26%) and Wipro (up 1%).
5. The great Indian midcaps (published on 22 May 2014; click here for the
note)
“I don’t want an easy business for competitors. I want a business with a moat around it.
I want a very valuable castle in the middle and I want the duke who is in charge of that
castle to be very honest and hardworking and able. Then I want a moat around that
castle. The moat can be various things. The moat around our auto insurance business,
GEICO, is low cost.”
– Warren Buffett
In our May 2014 note, we analysed six non-Nifty great firms to understand their
competitive advantages which has allowed them consistently generate outstanding
results over the past 20 years. We used John Kay’s IBAS (Innovation, Brand,
Architecture and Strategic Assets) framework to analyse the enduring greatness of the
following mid-cap firms: Motherson Sumi (up 45% since the note was published),
Pidilite (up 22%), IPCA (down 1%), CRISIL and Berger Paints (up 42% each), and City
Union Bank (up 19%). The IBAS framework focusses on the following as sources of
competitive advantage:
 Innovation: Whilst innovation is often talked about as a source of competitive John Kay’s IBAS framework helps
advantage, especially in the Technology and Pharmaceutical sectors, it is actually analyze sustainability of a firm’s
the most tenuous source of sustainable competitive advantage, as: competitive advantages!
o Innovation is expensive.
o Innovation is uncertain - the innovation process tends to be a ‘hit or miss’.
o Innovation is hard to manage due to the random nature of the process.
 Brands and reputation: In many markets, product quality, in spite of being an
important driver of the purchase decision, can only be ascertained by a long-
term experience of using that product. In many other markets, the ticket price of
the product is high; hence, consumers are able to assess the quality of the
product only after they have parted with their cash.

Strategy
In both these markets, customers use the strength of the company’s reputation
as a proxy for the quality of the product or the service. Since reputation takes
many years to build, reputation tends to be difficult and costly to create. This in
turn makes it a very powerful source for a competitive advantage.
 Architecture: ‘Architecture’ refers to the network of contracts, formal and
informal, that a firm has with its employees, suppliers and customers. Such
architecture is most often found in firms with a distinctive organisational style or
ethos, because such firms tend to have a well-organised and long-established set
of processes or routines for doing business.
 Strategic assets: In contrast to the three distinctive capabilities discussed above,

strategic assets are easier to identify as sources of competitive advantages. Such
assets can come in different guises such as intellectual property, licences and
regulatory permissions, sunk costs, and natural monopolies. Whilst strategic
assets can come in different forms, all of them result in a lower per unit cost of
production for the firm owning the asset relative to its competitors.
6. Small-caps on the ‘cusp of greatness’ (published on 14 July 2014; click

here for the note)
This note analysed seven relatively small companies (market cap between US$300mn
and US$3bn) that have not achieved greatness yet, but appear to be on course for
the same. We used a ‘STAR’ (Sustainable and Tenable Advantages Rank) framework
to analyse these seven potential ‘greats’: Balkrishna Inds, eClerx and Mayur
Uniquoters (up 12% each since the note was published), Marico (up 20%), V-Guard
(up 28%) and Page Inds (down 2%). The framework assessed these firms’ strengths on
the following parameters:
 Competitive advantages: Sustainable competitive advantages allow firms to
add more value than their rivals and to continue doing so over long periods of
time. Using John Kay’s IBAS framework, we discussed the underlying greatness of
these seven firms that we had identified as being on the cusp of greatness.
 Accounting quality: That accounting quality is a significant driver of stock
returns in India is a point we have often made (click here for our 22 November
2013 note). The objective here is to assess the authenticity of the reported
financials. Each of the seven small-cap greats is assessed relative to its own peers
on accounting quality. Companies that fall in the top quartile of its sector are
rewarded the most whilst companies that fall in the bottom quartile receive the
lowest score.
 Capital allocation: Capital allocation is perhaps the single most important Extending beyond competitive
decision through which a management adds value to the firm’s shareholders. advantages, our STAR framework
More importantly, effective capital allocation is not just about growing but provides a more holistic analysis of
growing profitably. In our analysis, we seek to ensure that value-accretive capital a firm’s ability to succeed!
allocation decisions are rewarded with higher scores.
 Centrality of political connect: We assess the seven ‘greats’ on the extent of
political connectivity of the promoter/promoter group. Companies that appear to
have any visible nexus with politicians receive a lower score whilst companies that
do not display any visible, direct connections with any political party are rewarded
the most.
 Treatment of minorities: We assess all the seven companies featured in that
note on various parameters (such as intergroup transactions, insider trading,
disclosure norms, etc) to understand if the company has a good corporate
governance track record so that minority shareholders get their fair share in the
firm’s success.

Strategy
 Succession planning: ‘Key man risk’ often poses a challenge to sustaining

greatness over longer timeframes for businesses; especially for promoter-
dominated businesses. The leadership handover from one generation to another
(or from one CEO to another) can be particularly disruptive and can potentially
trigger a slide for even the most successful of firms. Does the company have a
professional CEO or is it a promoter-driven company? Has the promoter given
way to professional management? Is the company making an effort to reward
and promote talent internally? Has the top management stayed relatively stable
over the past decade? We answer these (and similar questions) for these seven
companies to assess their succession plans.
Exhibit 9: ‘STAR’ framework summary
Centrality of
Competitive Accounting Capital Treatment of Succession
Company political Overall Comments
advantages quality allocation minorities planning
connect
Strong brand equity; RoCE
Marico
back in focus
Growth with focus on stable
Page Industries
margins
Sustainable low cost
Balkrishna Industries
advantage
Innovative CPVC market
Astral Poly
leader
Niche KPO with high quality
eClerx Services
client base
Leader in the south India
V-Guard Industries
electrical market
Mayur Uniquoters Harnessing high-value clients
Source: Ambit Capital research; Note: = rating of 4/4; = rating of 3/ 4 and so on.

Strategy
2. The lifecycle of a ‘great’ company

In this thematic, we integrate the preceding six thematics into one unified framework
for looking at great companies in the context of their lifecycle. The trajectory of a
company over this lifecycle, and hence the extent of its success is decided by the
decisions taken by its management at critical junctures (as one stage of a lifecycle
comes to an end and a new one begins). The outcomes of these decisions then,
especially those pertaining to capital allocation, have a significant impact on a
company’s stock price. These four stages, Youth, Prime, Descent and Turnaround, are
discussed below along with historical examples given for each life stage. The exhibit
below shows Infosys going through the various stages of the lifecycle.
Exhibit 10: Lifecycle of Infosys
450% Stage 3: 65
Stage 1: Stage 2: Turnaround
Youth Prime Descent 60
350%
55
250%
150%
50
45
?
40
50%
35
Demise
FY-95
FY-96
FY-97
FY-98
FY-99
FY-00
FY-01
FY-02
FY-03
FY-04
FY-05
FY-06
FY-07
FY-08
FY-09
FY-10
FY-11
FY-12
FY-13
FY-14
-50% 30
Ann. share price returns (LHS) RoCE (%, RHS)
Source: Bloomberg, Capitaline, Ambit Capital research. Note: Infosys was listed in June 1993. Hence,
performance for FY94 has been excluded.
Stage 1: Youth
The promoters typically start small and begin in their home state where they have a
high level of comfort with the local business and political community. Eventually, the
promoter hits on winning product(s) and ramps up production; this is followed up
with the launch of new products and/or experiments with variants. Capital allocation
is cautious, as the business takes its first steps towards growth. The company hits
upon the first few innovative ideas. Once the company hits upon the winning product
and ramps up production, the decision to expand is made, either into other products
or into other geographies. As a result, whilst shareholder returns can be volatile in
this stage, this is the most important stage in a company’s lifecycle in terms of
shareholder returns.
Characteristics typical of a firm in the ‘youth’ stage include: ‘Youth’ is the stage of best
 The company’s product portfolio is focused on a narrow range of segments. opportunity, yet highest variability!
 The company is newly listed or majority of the share price returns that it has
generated have come in the last five years.
 The management has not yet succumbed to big-ticket acquisitions.
 Revenue growth rates are still high and these are accompanied by healthy levels
of RoE, strong operating cash flow generation and rapid reinvestment of
operating cash flows.
 Promoters are relatively young and they (as opposed to their first generation) are
still personally running the company effectively in a CEO-capacity.
 Sell-side coverage is limited and the free float is largely in the hands of retail
investors.
Some notable examples of firms in this stage would be Infosys in the 1994-2002
period, Berger Paints in the 1991-2000 period and IPCA Laboratories in the 2003-
2014 period.

Strategy
Infosys (1994-2002)
Youth phase: The poster boy of Indian IT services
“Young Indian engineers, men and women, walk briskly from building to building,
dangling ID badges. One looked like he could do my taxes. Another looked like she
could take my computer apart. And a third looked like she designed it!”
- Thomas L. Freidman commenting on the Infosys campus in “The World is
Flat” (2005)
Since it was founded in 1981, Infosys embraced and practiced a PSPD model which
had four components:
 Predictability: A good forecasting system for sales based on data gathered from
the trenches ensured predictability of revenue and helped Infosys make better
decisions with respect to hiring and training. This was a key differentiator in the
early days of offshoring when demand was limitless and supply was the key
constraint. It used to give quarterly and annual EPS guidance ever since it listed in
1993.
 Sustainability: To ensure that it was building a business for the long-term, it had
‘best-in-class’ marketing, quality control, billing and collection.
 Profitability: At 35% (average over FY94-02), Infosys had the highest EBITDA
margins in the industry and was famously willing to sacrifice near-term revenue
growth for the sake of profitability. For instance, it walked away from a large
contract from GE when asked for steep price cuts.
 De-risking: It recognised, measured and mitigated risk across every dimension.
For instance, it sought to diversify its business across service-lines even though
demand for plain vanilla application development and maintenance appeared
limitless.
Most competitors did not place as much importance on these aspects and remained
focused on revenue growth. This appeared to be a good strategy as the industry was
growing at more than 40% CAGR and the labour arbitrage between onsite and
offshore wages ensured high RoE. Later on, as they became larger, they found it
difficult to instill these processes.
The company delivered a revenue and EPS CAGR of 76% and 73% respectively over
FY94-02. The share price compounded at an astonishing 77% over the same period
(in spite of the post-dotcom boom correction).

Strategy
Exhibit 11: Infosys’s revenue grew at 76% CAGR over FY94- Exhibit 12: Infosys’s return ratios also increased rapidly as
02 with stable-to-increasing margins it acquired scale in its operations
140% 50% 70% 70%
120% 60% 60%
40%
100% 50% 50%
80% 30% 40% 40%
60% 30% 30%

20%
40% 20% 20%
10% 10% 10%
20%
0% 0% 0% 0%
FY94
FY95
FY96
FY97
FY98
FY99
FY00
FY01
FY02
FY95
FY96
FY97
FY98
FY99
FY00
FY01
FY02
Revenue growth (LHS) EBITDA margin (RHS) ROE (RHS) ROCE (LHS)
Source: Ambit Capital research Source: Ambit Capital research
Exhibit 13: Infosys’s funds were largely generated Exhibit 14: …and reinvested in expansion
internally…
Cumulative funds raised (FY94-02) Cumulative funds spent (FY94-02)
Non
Others
operating
Invstments 1%
income
Dividend
5% 2%
8%
Equity raise
15%
Capex
47%
Cash on
books
CFO 42%
80%
Berger Paints (1991-2000)

Youth phase: Laying the foundations
“We know our supplier system will be a few years behind Asian Paints. But we keep
track of Asian Paints and will keep improving our own system and performance.”
- A senior executive at Berger Paints (June 2013)
Over 1940-2008, all the large players in the Indian paints industry experienced
frequent changes to their ownership structure and hence to their management and
strategies, excluding Asian Paints. Berger’s ownership changed hands five times
between 1947 and 1991. This resulted in Berger not being able to focus on
execution, giving Asian Paints a golden opportunity which it grabbed with both
hands.
However, Berger Paints embarked on establishing a stable and focused business after
the Dhingra family took control of the business in 1991, especially after Mr. Subir
Bose was elevated to Managing Director in 1994.

Strategy
Three key changes marked the beginning of Berger’s upward trajectory in the 1990s:
 the focus on the home décor segment and away from the industrial segment
(launch of colour tinting machines and ramp up of the emulsion business);
 an expansion beyond Berger’s traditional market in eastern India (new paint units
in Pondicherry and Jammu); and
 focus on innovation; examples of innovation include the introduction of colour
tinting machines at the dealers shops and the launch of innovative products like
Breathe-Easy, WeatherCoat All Guard, Easy Clean, and Designer Finishes.
During FY94-99, Berger Paints recorded 22% revenue CAGR, average EBITDA margin
of 10% and average RoCEs of 29%. The steady performance was rewarded, with
Berger’s stock price rising at a CAGR of 22% during FY94-99 (vs 0% for the Sensex).
By the late 1990s, Berger was the #3 player in both the decorative segment (with
11% share, after Asian Paints and Kansai Nerolac) and the industrial paints segment
(14% share, after Kansai Nerolac and Asian Paints). The building blocks for greatness
had by now been put in place.
Exhibit 15: Revenue growth and EBITDA margin for Berger Exhibit 16: RoCE and RoE for Berger Paints (FY95-01)
Paints (FY95-01)
40% 11.5% 19%

35% 18%
11.0% 17%
30%
16%
25% 10.5%
15%
20%
14%
15% 10.0%
13%
10% 12%
9.5%
5% 11%
0% 9.0% 10%
FY95 FY96 FY97 FY98 FY99 FY00 FY01 FY97 FY98 FY99 FY00 FY01
Revenue Growth (LHS) EBITDA Margin (RHS) ROCE ROE
Exhibit 17: Source of funds for Berger Paints (FY95-01) Exhibit 18: Utilisation of funds for Berger Paints (FY95-01)
Proceeds Debt
from Repayment
Shares, , 14%
18% CFO, 30% Net Cash &
Misc/Divid Cash
ends Equivalents
Received, , 13%
1%
Dividends
Interest Paid, 25%
Received,
5% Debt Net Capex,
Raised, 48%
46%

Strategy
IPCA Laboratories (FY04-14)

Youth phase: Going from strength to strength
In 2003 and 2004, Forbes, a leading US business magazine, selected IPCA among its
top 200 successful, rising companies outside USA, with sales under US$1 billion.
IPCA was a dormant and loss-making company when it was acquired by the
Bachchan family, Premchand Godha and M. R. Chandurkar in 1975 from the
founders. Over 1975-2001, we believe IPCA was in its infancy, with FY02 sales of
`4bn and net profit of `320mn. Under the Bachchans’ leadership, IPCA made its
mark in the domestic formulations market with a hint of innovation. In 1976, the
company had introduced sugar-coated chloroquine tablets which went onto become
a large product for the company later. The company’s strategy was to be the lowest
cost producer of the products it was selling and this was ensured by complete vertical
integration in the manufacturing of every product.
In 1997-98, the Bachchans divested their stake in IPCA to Mr. Godha, Mr.
Chandurkar and a private equity fund. In 2000, Premchand Godha took charge of
the company upon the retirement of M. R. Chandurkar. By this stage, the Godha’s
stake in IPCA was at 36%. In the early 2000s, IPCA entered the Psychiatry, Neurology
and Dermatology segments. It entered the youth phase in 2002 (FY03), as FY03 was
the first year when IPCA’s exports overtook its domestic sales in formulations. Further,
the company stated to reduce its risk aversion and focussed more on growth by
extending its expertise in innovating on formulations and API processing to export
markets such as Africa, Europe and the US. Although IPCA currently has low market
shares in the Indian, African and US markets, the company has the R&D capabilities
and the product basket to make its mark. The executive leadership is provided by AK
Jain (JMD), but Premchand Godha’s sons, Prashant Godha and Pranay Godha have a
hands-on approach with the business’ day-to-day activities.
IPCA has reinforced its competitive strengths around: (a) low-cost advantage built
through vertical integration; (b) innovation around products to meet patient needs; (c)
excellence in execution; and (d) rational capital allocation over the last decade. The
company has consistently beaten the broader market growth in India and gained
market share in export geographies as well. The company’s financial performance
over the last decade showcases the fruits of sustaining these competitive advantages.
IPCA has registered revenue CAGR of 19% (FY03-2014) in its youth (as compared to
15% CAGR in FY1994-2003) whilst its RoCE has expanded from 27% to 30% over the
period. The management’s focus on RoCE, innovation and cash flows has translated
into stellar stock performance (46% CAGR over FY03-14). We retain our BUY stance
on IPCA with a target price of ` 949, implying 16% upside.
Exhibit 19: IPCA’s revenue growth has accelerated and its Exhibit 20: IPCA’s RoCE and RoE have expanded since FY08
EBITDA margins have expanded since FY08
35.0% 35.0% 40.0% 40.0%

30.0% 30.0% 35.0% 35.0%
25.0% 25.0%
30.0% 30.0%
20.0% 20.0%
25.0% 25.0%
15.0% 15.0%
20.0% 20.0%
10.0% 10.0%
5.0% 5.0% 15.0% 15.0%
0.0% 0.0% 10.0% 10.0%
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
Revenue growth Operating margins, RHS RoCE RoE, RHS
Source: Ambit Capital research Source: Ambit Capital research.

Strategy
Exhibit 21: IPCA is self-sustaining, as most of its cash Exhibit 22: The youth phase is apparent in the use of
requirement is internally generated (FY03-14) funds where 60% of funds generated were used in capex
(FY03-14)
Interest Dividend Interest Increase

received, Dividend paid, paid, 8.2% in cash
1.8% received, 12.0% and cash
0.2%
equivalent
Debt
, 2.1%
Debt repayment
raised, , 15.9%
Proceeds 26.1%
from Purchase
shares, of Net
CFO, investmen Capex,
0.0% 71.8% t, 1.6% 60.3%
Stage 2: Prime
The company is on top of its game at this stage. It has acquired a stellar reputation
and is the leader or at least in the Top 3 within its sector. As a result, the company
has a strong following amongst institutional investors and equity analysts. The
company chases inorganic growth through large acquisitions and announces large
capex plans backed by fund-raising plans. Promoters yield to unrelated
diversifications into new areas to keep the topline growth momentum intact. In this
stage of a great company’s existence, investors have the greatest visibility (or
certainty) regarding returns.
Characteristics typical of a firm in the ‘prime’ stage include: ‘Prime’ is denoted by consistent
 The company is the market leader in its core segment and in that capacity has a returns with low variability!
strong following in the institutional investor community and in the brokerage
community.
 The company’s product has made the transition from generic to brand.
 Its distribution network and client relationships are at their peak (usually
evidenced by favourable primary data feedback from distributors and clients)
 Operating cash flow generation has remained robust for a long period of time
and the company can now afford to pay a healthy dividend because it is
generating more cash than it can use.
 Acquisitions are relatively frequent and they are NOT ALWAYS related to the core
business.
 Two dozen or more sell-side houses cover the stock and at least half the free float
is with institutional investors.
Some notable examples of firms in this stage would be Bharti in the 1999-2009
period, HDFC Bank in the 2003-2014 period and Sun Pharma in the 2003-2014
period.

Strategy
Bharti Airtel (1999-2009)

Prime phase: Consolidating the Indian wireless wave
“It is such stuff that private-equity dreams are made on.”
- The Economist, September 2005, on Warburg Pincus’ investment in Bharti
Airtel
Bharti was amongst the first to bet
on the potential of mobile
“Between 2000 and 2005, the formative period of this sector, his (Mr. Mittal’s) telephony
perspective was superior. What seemed like recklessness to others was an opportunity
to him. When the sector was shell-shocked, he took the first-mover advantage. He put
out investments and resources by diluting equity to raise money when most operators
were looking inwards. He saw with greater clarity what others didn’t.”
- Sanjeev Aga, former MD of Idea Cellular
After the deregulation of the telecom sector through the National Telecom Policy of
1999, Bharti was amongst the first to bet on the potential of mobile telephony. The
company raised capital through private equity (Warburg Pincus, AIF), global operators
(Singtel) and a public offering in 2002 to acquire a national footprint. This helped the
company achieve economies of scale whilst others struggled with a fragmented
approach.
During this period, the company adopted (and maybe invented) the ‘minutes factory’ It was also amongst the first to
model, which enabled the company to evangelise the market for mobile wireless exploit outsourcing of IT and
services by progressively rationalising calling costs. This led to substantial expansion network maintenance
in network minutes (107% CAGR over FY03-09) and hence exponential revenue
growth (52% CAGR over the same period).
Apart from being amongst the first to create a consolidated pan-India footprint, the
company was also the first to exploit outsourcing of IT and network maintenance with
vendors like IBM and Ericsson. This helped the company achieve significant scale and
led to sustained growth. Revenues and EBITDA grew at a CAGR of 53% and 70%
respectively over FY02-09. Over the same period, RoCE moved from 0% to 38%.
Unsurprisingly, the share price returned 45% CAGR over FY02-09. This period was
Bharti’s high noon, the period when sensible capital allocation combined with smart
operating decisions yielded outstanding results.
Exhibit 23: Bharti’s revenue grew more than 38% in Exhibit 24: Bharti’s return ratios also increased rapidly as
FY2000-09 whilst margins continued to expand it acquired scale in its operations
120% 50% 50% 40%

100% 40% 40%
30%
80% 30%
30%
60% 20% 20%
20%
40% 10% 10%
20% 10%
0%
FY99
FY00
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
0% 0% 0%
-10%
FY00
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
-20% -10%

Strategy
Exhibit 25: Bharti’s funds were largely generated Exhibit 26: …and reinvested in expansion
internally…
Cumulative funds raised (FY99-09) Interest Cumulative funds spent (FY99-09)

paid
4% Invst in
Others Invst subsidiary
Cash on 4%
Debt (net) 0% 5%
books
19%
2%
Equity raise
10%
CFO
70%
Capex
85%
HDFC Bank (FY04-14)

Prime phase: Playing to perfection
“Granular planning has allowed the bank to stagger investment in a way that present
performance doesn't suffer whilst the future growth drivers are also being put in place.”
- The Economic Times, 29 June 2012
HDFC Bank has been celebrated for its track record which has seen the bank post EPS
growth of ~30% (barring the last four quarters) like clockwork. Even as HDFC Bank’s
net profit growth has moderated to 21% in 1QFY15, its earnings growth remains
superior to its peers.
This long-term earnings outperformance of the bank has been supported by:
 Focus on low-cost liabilities: The CASA ratio has averaged at ~50% in the last
14 years (currently at 43%), as the bank tapped both current account
opportunities (through transaction, cash management and stock exchange
settlements services) and savings account opportunities (through a retail network
build-up and corporate salary penetration). A conservative approach with a long-
term strategy about creating a sticky liabilities franchise helped the bank stay
away from relying excessively on wholesale funding for any short-term gains.
 Focus on high-quality assets: The focus on asset quality led to the bank staying
clear of risky project financing loans over FY05-11. A strong retail liability
franchise allowed better penetration of the retail asset opportunity. The bank is
among the market leaders across most retail products.
HDFC Bank was among the first private sector banks to receive a licence in 1994 in a
market which was dominated by PSU banks in terms of reach and by foreign banks in
terms of sophisticated products. The founding team consisted of bankers mostly from
foreign banks and the bank created its own position between the two segments of
PSU banks and foreign banks.
In its evolution since 1994, HDFC Bank differentiated itself from its peers by building
a strong low-cost franchise along with a market-leading position in most retail
products, such as vehicle loans and personal loans. Over the last 20 years, the bank
has focussed on protecting its margins and asset quality rather than pursuing
aggressive growth. A long-term strategy and a conservative business approach along
with a stable management team have allowed the bank to have a consistent
performance.

Strategy
Over FY04-14, its loan book has recorded a CAGR of 33% along with NIMs trending
in a narrow range of 4.2-4.5%. Its RoAs have expanded to ~1.9% in FY14 (vs 1.3% in
FY09) as credit costs declined. This helped the bank to sustain a net profit growth of
~30% YoY, even as balance sheet growth moderated to ~20% YoY. In the last five
years, the stock has returned 24% CAGR vs Sensex CAGR of 11%.
Exhibit 27: HDFC Bank’s loan growth and operating Exhibit 28: HDFC Bank’s RoA and RoE
margin
Loan growth (LHS) Net interest margin (RHS) RoA (LHS) RoE (RHS)
50% 6% 2.0% 25%
40% 5% 20%
1.5%
4%
30% 15%
3% 1.0%
20% 10%
2%
0.5%
10% 1% 5%
0% 0% 0.0% 0%
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
Exhibit 29: HDFC Bank’s gross NPA ratio and provision Exhibit 30: HDFC Bank’s Tier-1 capital ratio
coverage ratio
Gross NPA (LHS) PCR (RHS) Tier-1 capital

14.0%
2.5% 100%
12.0%
2.0% 80%
10.0%
1.5% 60% 8.0%
6.0%
1.0% 40%
4.0%
0.5% 20%
2.0%
0.0% 0% 0.0%
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14

Strategy
Sun Pharmaceuticals (FY04-14)

Prime phase: A shining star
“The next Infosys …Creating long-term value—Sun Pharmaceuticals”
– The Mint newspaper, 10 January 2014
Sun Pharma today is a US$29bn market-cap company and among India’s most well-
known pharmaceutical brands. Sun has successfully evolved from a domestic market–
based generic player to a multinational generic player with specialisation in niche
formulations like dermatology, injectables and inhalers.
Sun Pharma’s success has also been driven by its extraordinary acquisition track
record. The company has not yet failed its internal benchmark of a five-year payback
period for acquisitions. However, the recent acquisition of Ranbaxy may prove to be a
challenge in this regard given the issues faced by Ranbaxy.
Sun’s success in acquisitions stems from: (a) identification of good-quality assets
under stress due to financial or management issues (Caraco, Taro, URL, and Ranbaxy
were all stressed assets when acquired); (b) excellence in integration of acquired
businesses and almost immediate improvement in corporate performance through
establishing of processes and systems; and (c) resolving management issues.
However, the company has also grown organically. Sun Pharma has competitive
advantages like excellence in execution, robust business model, rational capital
allocation and a diversified approach towards risk (operational and investment).
Over the past decade (FY04-14), Sun Pharma has grown revenues and EPS at a
CAGR of 32% and 16% respectively. Even more importantly, in spite of 15
acquisitions in this period, Sun’s RoCE has remained high (39% in FY04, 40% in
FY14). As a result, the company’s share price has compounded at 34% over FY04-14.
At 26.0x one-year forward earnings, valuations fully reflect the positives of the
business (high predictability of earnings, turnaround of Ranbaxy and best-in-class
capital efficiency). Sun’s ‘greatness’ could also be at risk, as it seems increasingly
likely to resort to large-ticket (>US$5bn) specialty acquisitions, which would be a
challenge to integrate given Sun’s lack of exposure to the business segment.
That being said, the odds seem to be in favour of Sun continuing to cruise forward in
prime shape for the next few years. The Ranbaxy acquisition would provide Sun with
a platform in the European markets and in the Rest of the World, which could be
leveraged over time using Sun’s product portfolio from India and the US. The
company is also growing from strength to strength in the US by scaling up the value
chain (complex oncology products like docetaxel, inhalers like azelastine,
dermatology portfolio of Taro, controlled substances from Caraco and complex
formulation like Depo Testosterone) and investing in R&D for more complex products.
We continue to have a BUY stance on Sun Pharma (with our TP under review).
Exhibit 31: Sun Pharma has consistently expanded EBITDA Exhibit 32: Sun has consistently delivered higher than peer
margins and maintained revenue growth average RoCE/RoE
60.0% 50.0% 40% 50%
50.0% 35% 45%
45.0%
40.0% 40%
30%
30.0% 40.0% 35%
20.0% 25%
30%
10.0% 35.0% 20% 25%
0.0% 15%
30.0% 20%
-10.0%
10% 15%
-20.0% 25.0%
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
RoCE RoE, RHS

Revenue growth Operating margins, RHS

Strategy
Exhibit 33: Sun has become a self-funded business with Exhibit 34: Maintenance of high cash balance also
only 25% of financing coming from external sources (FY03- indicates the maturity of the investment cycle at Sun (FY03-
14) 14)
Interest Dividend
received, received,
6.1% 0.0% Increase in
cash and
cash
equivalent,
Debt raised, Interest 36.0%
Proceeds Net Capex,
18.8% paid, 1.0%
from 23.5%
shares, CFO, 74.9%
0.1% Dividend
paid, 13.8% Purchase of
Debt investment,
repayment, 22.1%
3.5%
Stage 3: Descent
Having indulged in excesses at the peak of its success, the company is now on the
path of descent. Hubris and arrogance have set in as the company mistakenly
believes itself to be unassailable. Unrelated diversifications made in the past eat into
balance sheet and capital efficiency starts suffering. The management reduces access
to analysts and investors; in particular, analysts who do not ‘support’ the company
are denied access. This is the stage where investor returns are at the greatest risk.
Characteristics typical of a firm in the ‘descent’ stage include:
 The company has had a very successful track record which has resulted in hubris
and arrogance.
 The company has made expensive forays into new products or new geographies Excesses at the peak of success and
and most likely both and these are weighing down the balance sheet. consequent faulty capital allocation
 A new generation of promoters (or a new management team) is taking over and eventually lead to ‘descent’
wants to drive a shift in strategy away from the traditional core franchise.
 There has been a marked shift in strategy away from the firm’s core strengths.
 The above factors are driving deterioration in capital efficiency and hence R0CE
and RoEs have begun to suffer.
 More than three dozen sell-side houses cover the stock and the stock is a default
holding for most institutional investors.
Some notable examples of firms in this stage would be Tata Steel in the 2003-2014
period, TTK Prestige in the 1994-2004 period and Suzlon in the 2007-2014 period.

Strategy
Tata Steel (2003-2014)

Descent phase: A European meltdown
"The group will pursue the optimisation of its European assets, dispose and restructure
assets that are of low profitability..."
– Koushik Chatterjee, CFO, Tata Steel, FY08 Annual Report (i.e. within a year
of the Corus acquisition)
During it successful years (FY01-05), Tata Steel generated more cumulative EBITDA
(`135bn) than it had generated in totality over the previous 15 years, driven by an
upturn in the global steel cycle and by the modernisation efforts of Tata Steel over the
previous decade. Tata Steel’s global foray was not surprising, given that in FY04, the
Chairman wrote to the company’s shareholders: “It (Tata Steel) must explore ways of
enhancing its capacity domestically as also establishing finishing facilities in strategic
location internationally, leveraging its low-cost Indian base and the availability of
domestic iron ore.”
The same year in its MDA, the company stated: “It is the Company’s vision to be a
15mtpa company by year 2010. This would be achieved through organic growth and
through acquisition of steel capacities, both within and outside the country”.
In the following year, the MDA in the FY05 Annual Report said: "In the near term, the
industry cost structure is likely to remain high due to shortage of coking coal and iron
ore. These structural deficiencies in the steel value chain are unlikely to be resolved in
the near future... the company believes that the maximum value can be created by
making semi-finished products (slabs/ billets) at locations where raw materials are
available (or can be competitively assembled), and by finishing them at locations where
customers/ markets currently exists or will grow in future."
In light of the above statements, what was surprising was that the 2006 Corus
acquisition was not consistent with the company’s stated vision – Corus neither had
raw material security nor would it be able to leverage on the low-cost production
base in India. What the acquisition did was it made Tata Steel the fifth largest steel
producer in the world. In its FY07 Annual Report, the Chairman wrote to
shareholders: "The acquisition of Corus has transformed Tata Steel from a domestic
producer to an international steel company with global scale." Such was the hubris that
the then MD of Tata Steel, Ratan Tata, targeted the combined EBITDA margin to
improve to 25% in five years (the combined EBITDA margin was at 14% in FY08).
Unfortunately for Tata Steel, in FY13 and FY14, the combined EBITDA margin
achieved was 9.2% and 11% respectively.
The end of the liquidity-fuelled global growth cycle was especially harsh for European
steel makers, as capacity utilisation in Europe fell from nearly 90% to less than 70%.
Subdued steel prices (down ~15% till date from January 07, when Corus was
acquired) coupled with rising raw material costs (till date from January 07, iron ore
and coking coal costs are up ~17% and 5% respectively) led to Tata Steel Europe
reporting an EBITDA loss in FY10. Since then, the company’s European operations
have been making losses at the PAT level, as interest costs cannot be recovered by
the wafer-thin EBITDA margins. The senior management at Tata Steel Europe has
been changed many times, with the MD being changed thrice within a span of two
years. As a result, Tata Steel’s consolidated RoCE slid from 43% in FY05 to 4% in
FY10 and 8% in FY14. After rising at a CAGR of 17% between CY1990-2007, Tata
Steel’s share price has returned a negative CAGR of 9% over CY08 till date.

Strategy
Exhibit 35: Tata Steel’s revenue growth and EBITDA Exhibit 36: Tata Steel’s RoCE and RoE
margin
1,600 50% 70% 60%
1,400 60%
40% 50%
1,200 50%
1,000 30% 40% 40%
800 30%
600 20% 20% 30%
400 10%
10% 20%
200 0%
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
0 0% -10% 10%
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
-20%
-30% 0%
Revenues (Rs bn) EBITDA margin (RHS) ROE (RHS) ROCE (LHS)
Exhibit 37: CFO and debt were the key sources of capital Exhibit 38: Most of the capital was allocated towards
for Tata Steel (FY04-14) acquisitions and capex (FY04-14)
Dividend
paid
6%
Others Interest
5% paid
16%
Debt raised
26% Capex
CFO
Acquisitions 51%
57%
Equity / JVs
raised 23%
8%
Investments
4%

Strategy
TTK Prestige (1994-2004)

Descent phase: Imploding pressure cooker
“The large US retailers will fleece you until you are bankrupt. They are the worst
counterparties to deal with if your business does not have the scale to help you
negotiate better terms. It was a terrible experience.”
– Mr. T.T. Jagannathan, Chairman, TTK Prestige (2013)
After its success in pressure cookers and pressure pans in India (25% revenue CAGR
and 34% PAT CAGR over FY90-94), TTK Prestige decided to expand its international
operations and to enter into new product segments in India. This included using
`230mn of the total `298mn raised in its 1994 IPO for: (a) international expansion
including the US, the Middle East, the UK and Australia, (b) capacity expansion, and
(c) new product launches.
Unfortunately, the firm materially missed its revenue guidance for FY94-99 (domestic
sales CAGR over FY94-98 at 10% vs 29% projected whilst export sales CAGR over
FY94-98 at 12% vs 22% projected). Moreover, it faced a ‘perfect storm’ between
FY2000-03 due to a combination of: (a) labour unrest in its manufacturing plants in
Bangalore; (b) a 48% YoY decline in international sales in FY2000 due to a weak
macro environment and stiff competition from global manufacturers; and (c) the
unsuccessful launch of ‘Smart Cookers’ .
As a result, the firm’s revenues declined almost every single year in FY2000-03. In
fact, FY03 was the first year in TTK’s 50-year history that the firm posted a loss
(`115mn of loss, representing 14.8% of its FY02 net worth). Whilst the impact on TTK
Prestige’s P&L is shown in the table below, it is worth highlighting the balance-sheet
write-offs that did NOT go through the P&L in FY03.
TTK had written off `196.4mn against securities premium (part of reserves) on the
balance sheet in FY03, which equates to 25.4% of FY02 net worth. These adjustments
to reserves included `88.3mn on account of inventory write-offs, `23.7mn on account
on diminution in the value of investments in TTK Tantex (a textile and personal care
business) and `84.4mn on account of voluntary retirement schemes. If these write-
offs had been routed through the P&L instead, losses for FY03 would have increased
by `130mn (~17% of FY02 net worth), and over FY04-07 (both years included),
amortisation of VRS expenditure would had resulted in ~28% lower profit than that
reported cumulatively during that period.
As its RoCE plunged from ~100% in FY96 to ~20% in FY03, the share price fell from
`96 to `5. TTK Prestige’s shares touched a record low of `5 in March 2003. By that
time the firm was on the verge of bankruptcy.
Exhibit 39: Revenue growth and EBITDA margin for TTK Exhibit 40: RoCE and RoE for TTK Prestige (1994-2003)
Prestige over 1994-2003
50% 20% 25.0% 60%

40% 50%
15% 20.0%
30% 40%
10% 15.0%
20% 30%
10% 5% 10.0% 20%

10%
0% 5.0%
0%
FY94
FY95
FY96
FY97
FY98
FY99
FY00
FY01
FY02
FY03
0%
-10% 0.0%
-5% -10%
FY94
FY95
FY96
FY97
FY98
FY99
FY00
FY01
FY02
FY03
-20%
-5.0% -20%
-30% -10%
Revenue Growth (LHS) EBITDA Margin (RHS) ROCE (LHS) ROE (RHS)

Strategy
Exhibit 41: TTK Prestige’s sources of funds (FY1994-2003) Exhibit 42: TTK Prestige’s utilisation of funds (FY1994-2003)
Proceeds
CFO, 5% Net Cash & Debt
from
Cash Repayment,
Shares,
Equivalents, 12%
23%
2%
Misc/Divide
Dividends
nds Net
Paid, 19%
Received, Investments
1% , 24%
Interest Debt
Received, Raised,
7% 64%
Net Capex,
15% Interest
Paid, 28%
Suzlon (2008-2014)
Descent phase: Spinning into CDR
“In September 2008, when Lehman Brothers collapsed, our sales team could not
believe that the market was not there. The company still believed that it was a
temporary situation and orders would come. But December came and there were still
no orders, and then there was nothing in January or February either. By March 2009,
we realised it was going to be a long-term issue.”
- Robin Banerjee, CFO of Suzlon in ‘The Forbes magazine’ (November 2008
issue)
Suzlon went public in September 2005 on the back of the then prevalent worldwide
craze for wind power (India and the Rest of the World saw capacity addition CAGR in
wind power of 27% and 25% respectively over FY01-04). Lehman’s bankruptcy in
September 2008 punctured the craze for wind power as Lehman was one of the top-
five wind-power lenders on Wall Street at that time. The pace of global and Indian
installations of wind power over FY09-14 slowed down to 14% CAGR (vs 30% CAGR
over FY04-09) and 21% CAGR (vs 25% CAGR over FY04-09) respectively. The share
prices for globally listed wind equipment companies like Vestas and Suzlon are now
trading 60% and 90% respectively lower than their share prices in September 2008.
Suzlon’s problems were compounded by the fact that it acquired Hansen in FY06, at
the height of the craze for wind power, for Eur0.5bn (100% financed by debt); implied
FY06 EV/EBITDA of 11x; and REpower in FY07 for Eur1.2bn (70% financed by debt);
implied FY07 EV/EBITDA of 13.9x. In FY07, Suzlon’s RoCE was 57%. In FY08, with the
debt for both of these acquisitions factored in, Suzlon’s RoCE had dropped to 14%. In
the post-Lehman world, these acquisitions became millstones around Suzlon’s neck.
In FY10, Suzlon incurred a loss of `9.8bn (~14% of its FY10 net worth) on account of
a 21% YoY decline in consolidated revenues and a 630bps YoY decline in EBITDA
margins. Whilst revenue declined on account of an 8% YoY and 62% YoY decline in
Indian and global installations, Suzlon’s EBITDA margin declined due to a 150bps
YoY decline in gross margin and the adverse impact of operating leverage. High
interest cost of `12bn (up 32% YoY due to `126bn of debt (implying 1.4x net
debt:equity) in FY10 drove the ` 9.8bn loss that year. In FY13, Suzlon entered CDR
with a debt load of `122bn, implying 1.3x net debt:equity.
Its balance sheet also came under a lot of stress, with FY13 net debt:equity
deteriorating to 13.4x from 0.3x in FY08. Lastly, Suzlon’s reputation was also hit
when instances of blade cracks were discovered in late-2007 (some of Suzlon’s S88
wind turbines had cracked in the US). These cracked blades had to be replaced by
Suzlon at a cost to the company of US$140mn (or ~7% of FY08 consolidated
revenues).

Strategy
From its IPO in September 2005 at `102/share (adjusted for split), Suzlon’s share
price rose to `425/share in January 2008. It now stands at `23/share.
Exhibit 43: Suzlon’s revenue growth and EBITDA margin Exhibit 44: …and consequently its RoCE and RoE turned
declined sharply after FY09… negative in FY13
100 20
25 50
80 15 20
-
60 15
10
40 10 (50)
5 5
20
- (100)
-
-
FY08
FY09
FY10
FY11
FY12
FY13
FY14
(5)
FY08
FY09
FY10
FY11
FY12
FY13
FY14
(5) (150)
(20) (10)
(40) (10) (15) (200)
Revenue YoY (%) EBITDA margin (%) on RHS Pre-tax RoCE (%) ROE (%) on RHS
Source: Company, Ambit Capital research Source: Company, Ambit Capital research, Note: We have not included FY14
RoE, as the net worth turned negative
Exhibit 45: Suzlon is the most levered amongst its peers Exhibit 46: The global wind sector has yet not recovered,
and hence continues to be loss-making (bar represents as corroborated by the stock prices of global wind
debt:equity) companies
16 500 800
14 700
400
12 600
300 500
10
400
8 200 300
6 200
100
4 100
2 0 0
Jan-08
Jul-08
Jan-09
Jul-09
Jan-10
Jul-10
Jan-11
Jul-11
Jan-12
Jul-12
Jan-13
Jul-13
Jan-14
Jul-14
-
FY11 FY12 FY13
Suzlon Gamesa Corp Vestas Wind Suzlon (INR) Vestas (Euro) on RHS
Source: Bloomberg, Ambit Capital research; Note: For Gamesa Corp and Source: Bloomberg, Ambit Capital research
Vestas Wind we have taken CY11, CY12 and CY13; Suzlon’s net debt:equity
for FY14 cannot be calculated as its net worth turned negative

Strategy
Stage 4: Turnaround
Not all companies are fortunate enough to successfully turnaround. The companies
that do are those where their management teams course-correct with enough cash
left in the tank. Tough decisions are taken, management teams are replaced, non-
core businesses are terminated/sold-off and a turnaround plan with time-bound,
measurable targets is put in place. Investor returns (and the variability associated with
them) in this stage are similar to what they are in the ‘youth’ phase.
Characteristics typical of a firm in the ‘turnaround’ stage include: 1 out of 3 companies then manage
 Correction of incorrect capital allocation decisions with a specific focus on cash to stage a successful turnaround!
flow conservation.
 The promoter has made an admission of mistakes, whether in public or in private.
 Appointment of a new management (with a good track record elsewhere) to turn
around the company.
 A clear and time-bound plan for a turnaround.
 The new management team is re-focusing the firm on its core strengths.
 Sell-side coverage has tailed off and institutional investors, having been burnt in
the ‘descent’ phase, are wary of the company.
Some notable examples of firms in this stage would be TTK Prestige in the 2004-2014
period, IndusInd Bank in the 2008-2011 period and Titan in the 1999-2009 period.
TTK Prestige (2004-2014)

Turnaround phase: 800x growth in the share price!
“The biggest issue we faced was that although we had grown to a decent size, we were
still running TTK Prestige as a small company. Every senior manager was working like a
jack of all trades! We had to change that.”
– Mr. K. Shankaran, Director, TTK Prestige, describing the difficult years
between FY01-04
The seeds of TTK Prestige’s recovery phase were planted by Mr. R. Srinivasan, a
professional management consultant, who was appointed as a non-executive director
on the Board of the company in year FY01. Mr. Srinivasan launched a ‘total
transformation project’ for management restructuring including segregation of
functional responsibilities along the following lines:
 Mr. TT Jagannathan (innovation and R&D),
 Mr. Ravichandran (product launches and operational efficiencies),
 Mr. Shankaran (labour union issues, relationships with bureaucrats/politicians
and investor relations), and
 Mr. Chandru Kalro (sales, marketing and operations).
With greater functional focus after the management restructuring and with the Indian
economy begin to recover from 2004, TTK Prestige saw the following benefits to its
operations after 2004:
 Excise duty on pressure cookers was reduced from 16% to 8% in Feb’03 and non-
stick and cookware was made completely exempt from excise duty, down from
16% duty applicable previously;
 Labour union problems were resolved in FY03 and as a result manufacturing was
back on track, reinstating the supply chain of the company’s products;
 Exclusive brand outlets (Prestige Smart Kitchens) were launched in June 2003.
These outlets helped sell new products including appliances when multi-brand
dealers were reluctant to stock these products when the firm had sold only small-
ticket pressure cookers and cookware previously;

Strategy
 In order to streamline its operations and focus on the core business, the TTK
Group decided to reduce the number of companies in the group down from 20 in
FY01 to 5 in FY02; this, we believe, led to increased focus by the two promoters—
Mr. TT Jagannathan (on TTK Prestige) and Mr. TT Raghunathan (on TTK
Healthcare)—on the strongest areas of the group;
 Consistent focus on product innovation became the biggest competitive
advantage of the firm as it resulted in products like innovative variants of
induction cooktops, veggie cutter, and microwave-safe pressure cookers;
 A management succession plan was put in place with advice from AON Hewitt. In
particular, a detailed plan was created with regard to running the company in the
post-TT Jagannathan world.
Over FY04-14, TTK Prestige reported revenue CAGR of 25% and EPS CAGR of 76%,
as it expanded across India and across product categories by leveraging on its
product innovation, brand and distribution. RoCEs improved from sub-10% in FY04 to
over-30% in FY14. The company made the happy transition from net debt:equity of
1.8x in FY04 to net debt:equity of 0.1x in FY14.
TTK Prestige went public in 1994 at a share price of `110. In 2003, its share price
touched a record-low of `5. The share price now stands at `4,475. We continue to
have a BUY stance on TTK Prestige.
Exhibit 47: Revenue growth and EBITDA margin for TTK Exhibit 48: RoCE and RoE for TTK Prestige
Prestige
60% 18% 60%
50% 16%
50%
14%
40% 40%
12%
30% 10% 30%
20% 8% 20%
6%
10% 10%
4%
0% 2% 0%
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
-10% 0%
Revenue Growth (LHS) EBITDA Margin (RHS) ROCE ROE
Exhibit 49: Source of funds for TTK Prestige (FY04-14) Exhibit 50: Utilisation of funds for TTK Prestige (FY04-14)
Proceeds Net Cash &
Misc/Divide from Shares, Cash
nds 13% Equivalents,
Received, 2% Debt
2% Repayment,
31%
Interest
Received,
1%
Net Capex,
CFO, 62% 46%
Debt Raised, Dividends

22% Paid, 12%
Interest Paid,
9%

Strategy
IndusInd Bank (FY09-11)

Turnaround phase: Waking up from its slumber
“The restructuring was to recapitalise, re-talent and reorganise the bank structure and
also restructure the balance sheet. We focused on the branches. The branch manager
has to take ownership like a CEO right from basic things like branch hygiene to making
the branch profitable. We have drilled this culture into our branch managers. The
bank's turnaround is the result of its current performance culture.”
– Romesh Sobti, MD & CEO, IndusInd Bank in Business Today, 18 November
2011
IndusInd Bank’s emergence as one of the best-performing Indian banks, from being a
relatively sleepy bank six years ago, is a story of a successful top-down overhaul of an
organisation. After having been incorporated in 1994, IndusInd Bank fell behind its
peers, such as HDFC Bank and ICICI Bank, which were set up around the same time.
Over FY1999-2008, IndusInd Bank’s assets grew at 15% CAGR and its RoAs were
languishing at ~0.3% over FY06-09.
The situation changed in February 2008, when Mr. Romesh Sobti, the former
Executive Vice President–Country Executive, India and Head, UAE and Sub-Continent
at ABN-Amro, joined IndusInd as its MD & CEO. Nine members of his 13-strong core
management team at ABN Amro joined along with him and many more joined at the
mid to senior management level. This led to a cultural change and overhaul of
practices at IndusInd. The new team focused on recapitalisation, asset and liability
mix, and aggressive resolution of past bad debts.
A Bloomberg report on 26 February 2013 said that “In the first month, Sobti and his
lieutenants travelled to all 180 bank branches within 15 days, giving local managers a
docket with the bank’s strategic plan and an outline of his or her new role with
responsibility for sales, operations, service, compliance, targets for the next 12 months
and an outline of weekly and monthly reports due at headquarters.” About 150 of
these 180 managers left in subsequent years. The bank also introduced stock options
at all levels to introduce a work culture of ownership.
These efforts have clearly paid off, as IndusInd Bank delivered 53% EPS CAGR in
FY08-14. The robust EPS growth has been primarily driven by: (i) 28% CAGR in the
loan book over FY08-14; (ii) NIM expansion from 1.5% in FY08 to 3.8% in FY14; (iii)
36% CAGR in the fee income over FY08-14; (iv) decline in the cost-to-income ratio
from 67% in FY08 to 48% in FY11; and (v) decline in gross NPAs as a percentage of
the loan book from 3.0% at end-FY08 to 1.0% at end-FY11. After returning a modest
11% CAGR in the ten years to February 2008, IndusInd’s share price has
compounded at 32% since Ramesh Sobti and his team joined the bank.
Exhibit 51: IndusInd’s loan growth and net interest margin Exhibit 52: IndusInd’s RoA and RoE
Loan growth (LHS) Net interest margin(RHS) RoA (LHS) RoE (RHS)
2.0% 30%
40% 4.0%
35% 3.5% 25%
1.5%
30% 3.0%
20%
25% 2.5%
20% 2.0% 1.0% 15%
15% 1.5% 10%
10% 1.0% 0.5%
5%
5% 0.5%
0% 0.0% 0.0% 0%
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14

Strategy
Exhibit 53: IndusInd’s Gross NPA ratio and provision Exhibit 54: IndusInd’s Tier–1 capital ratio
coverage ratio
Gross NPA (LHS) PCR (RHS)

Tier-1 capital
16.0%
4.0% 80%
14.0%
3.5% 70%
12.0%
3.0% 60%
2.5% 50% 10.0%
2.0% 40% 8.0%
1.5% 30% 6.0%
1.0% 20% 4.0%
0.5% 10% 2.0%
0.0% 0% 0.0%
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
Titan (1999-2009)
Turnaround phase: The gold rush
“The jewellery will be "something never seen before in India". Most of the designs,
sourced from overseas, will be classical European styles as well as modern forms. There
will be a few Indian themes also in the 1,000 designs on the anvil.”
— David Saldanha, Group Manager, Tanishq, in Outlook magazine, 1996
"Many people believe we should not be here today. They have kept telling us that the
business logic is against what we set out to do. But I am glad we have proved them
wrong."
— Jacob Kurian, COO (jewellery), Titan, in a Rediff.com article, 2003
After the successful launch of quartz watches in India and its foray into the Middle
East and other South Asian countries over 1987-95, Titan’s management under the
leadership of the iconic Xerxes Desai embarked on an audacious foray into the
European watches market and into jewellery exports. However, these initiatives
backfired badly. The company also experimented in the domestic jewellery segment
with 18ct gold purity in 1994 and this too was not accepted by consumers. The
management eventually took a write-off on the international business. By 1999,
Titan’s RoEs had declined to sub-10% levels from 17% in 1996. The share price had
fallen from ` 11in 1994 to ` 1.5 in 1998 as even revenue growth in the successful
watches division had begun stagnating.
Titan’s management changed both at the divisional and at the company level over
2000-02. Mr. Jacob Kurien took charge as the COO of the Jewellery Division in 2000
(replacing Vasant Nangia) and Bhaskar Bhat took over as the MD in 2002 (replacing
the founding MD of Titan, Xerxes Desai).
The new management started to focus on two aspects of the jewellery business: shift
to conventional 22ct gold jewellery from 18ct and focus on Indian designs. To break
the bond that many Indian women have with the family jeweller, the company put
Karatmeters in every store and asked women to test their jewellery for purity. To
support the Karatmeter initiative, Titan promised to replace the impure jewellery with
pure jewellery and pay the difference between 19ct and 22ct. As a result, many
women realised that they were had been cheated by their family jeweller for decades.
From 1999 to 2009, the jewellery business delivered a revenue CAGR of 43%. By
FY09 turnover had reached `28bn, contributing to 72% of Titan’s overall business.
On the watches side, the company launched Fastrack as the youth brand and focused
on Sonata as the mass market brand.

Strategy
Backed by superb advertising, brand-building support, and efficient execution at the

store level, the management achieved 23% revenue CAGR and 25% EPS CAGR over
FY1999-2009. RoEs revived to 30% in FY09 from the sub-10% levels in FY99 as Titan
consistently allocated capital sensibly and stayed away from initiatives which would
burden its Balance Sheets. Overseas forays in particular were avoided. The stock
price grew at a CAGR of 27% during the same period. The lessons from the difficult
days of the 1990s had been utilised brilliantly by Bhaskar Bhat and his team.
Exhibit 55: Titan’s revenue growth and EBITDA margin Exhibit 56: Titan’s RoCE and RoE (FY1999-2009)
(FY1999-2009)
50% 20% 50%

40% 40%
15%
30% 30%
10%
20% 20%
5%
10% 10%
0% 0% 0%
FY99
FY00
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY99
FY00
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
Revenues Growth (%, LHS)

Operating margins (%, RHS) ROCE ROE
Exhibit 57: Cash generated largely through operations Exhibit 58: Cash was used in lease payments and paying
(FY1999-2009) off debt (FY1999-2009)
Proceeds Interest Proceed Investments Increase in

Net Capex
from Sale of received from Sales - cash and
in Others
investments 3% of FA Subsidiaries cash
incl.
4% 5% & Others equivalents
precision Debt
12% 3%
engg. repayment
5% 19%
Dividend
received Net Capex
1% Proceeds in Jewellery
7% Dividend
from shares
CFO paid
7%
Proceeds 74% Interest paid 13%
from raising Net Capex 30%
debt in Watches
6% 11%

Strategy
3. Forward-looking case studies

A number of investors have told us that it is relatively easy to retrospectively classify
great companies into the four buckets: Youth, Prime, Descent and Turnaround. After-
all, with hindsight, we all have 20-20 vision. However, we have shown in our last
three ‘greatness’ thematics that our frameworks work reasonably well a forward-
looking basis as well.
 In the 15 January 2014 thematic, ‘Deep dives into five turnaround plays’
(click here), we dug deep into the turnaround prospects of five companies,
including Ashok Leyland, Britannia, Bajaj Electricals, Bharti Airtel and Wipro with
the objective of providing cues towards future trajectories of these firms. Barring
Wipro, all of these firms seem to be living up to their billing of being ‘turnaround
plays’.
 In 22 May 2014 thematic, ‘Great Indian Midcaps’ (click here), we analysed six
non-Nifty great firms to understand the competitive advantages which allowed
them to consistently generate outstanding results (ROCEs north of 15% and
topline growth above 10% in at least 17 out of the last 20 years). We used John
Kay’s IBAS (Innovation, Brands, Architecture and Strategic Assets) framework to
analyse the enduring greatness of the following mid-cap firms: Motherson Sumi
(up 45% since the note was published), Pidilite (up 22%), IPCA (down 1%), CRISIL
and Berger Paints (up 42% each), and City Union Bank (up 19%).
 The 14 July 2014 thematic, ‘On the cusp of greatness’ (click here), analysed
seven relatively small companies (market cap between US$300mn and US$3bn)
that have not achieved greatness yet, but appear to be on course for the same.
We used a ‘STAR’ (Sustainable and Tenable Advantages Rank) framework to
analyse these seven potential ‘greats’: Balkrishna Inds, eClerx and Mayur
Uniquoters (up 12% each since the note was published), Marico (up 20%), V-
Guard (up 28%) and Page Inds (down 2%).
Continuing in that vein, having illustrated each stage of the lifecycle using historical
examples, we now use the four-stage framework on a forward-looking basis. We
provide examples of firms that - on a live basis - fall into each of these categories
today. Such a categorisation should help investors assess the future trajectories for
these firms and hence has obvious share price implications.
In the remainder of this note, we highlight 12 firms on this four-stage framework with
at least 2-3 firms each on the four stages of the corporate lifecycle. The objective is to
help investors assess the future trajectories for these firms and hence the consequent
share price implications.

Strategy
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Mayur Uniquoters
NOT RATED
COMPANY UPDATE MUNI IN EQUITY September 17, 2014
Mayur Uniquoters’ scale, superior quality and well-established

relationship with domestic footwear manufacturers and domestic/global YOUTH PHASE
auto OEMs set it apart in a fragmented synthetic leather industry.
Despite stellar growth over the last decade, the firm has only just begun Recommendation
making a mark in the global synthetic leather industry. Whilst the Mcap (bn): `19.6/US$0.3
management has displayed exceptional capital deployment so far, its 3M ADV (mn): `13.72/US$0.2
behaviour as the firm ramps up will hold the key to future success. The CMP: `472
stock is trading at 22.0x FY16 consensus EPS.
A leader in synthetic leather manufacturing Flags
Mayur Uniquoters, India’s largest synthetic leather manufacturer, has built strong Accounting: GREEN
manufacturing capabilities in its two decades of existence (with five Italian Predictability: GREEN
coating lines and addition of the sixth line likely in FY16). In a seemingly Earnings Momentum: GREEN
commoditised business segment, the company built its competitive advantage by:
(a) investing in high-quality manufacturing capabilities, and (b) forging strong
relationships with India’s largest footwear manufacturers, domestic auto OEMs
and lately with global auto OEMs. Catalysts
Textbook capital deployment  Addition of new global auto OEM

clients
Mayur’s scale increased 5x (to ~30mn metres in FY14 from 6mn metres in FY04)
and was supplemented by an increase in asset turnover (to 3.5x over FY08-14 vs  Successful commissioning of
2.4x over FY04-08) and expansion in EBITDA margin (to 16.6% over FY09-14 vs polyurethane plant
11% over FY04-08), leading to sharp RoCE improvement (to 51% in FY14 vs 16%  Rising volumes to furnishing industry,
in FY05). The management’s proactive approach to add capacity ahead of both domestic and exports
demand growth, moving up the product value chain (addition of polyurethane
plant) and backward integration should enable it to consistently service premium Performance
global clients.
32000 500
Building credibility in the big league 400
27000
Mayur is one of the two Asian suppliers of artificial leather to US-based auto 300
OEMs. The company added Ford and Chrysler to its client base in FY09, and 22000
200
from FY09-14 its exports grew at a sharp 55% CAGR (export contribution 17000 100
Aug-13
Oct-13
Dec-13
Aug-14
Feb-14
Apr-14
Jun-14
increased to 21% in FY13 vs 10% in FY09). Addition of such large clients is a
time-taking process given strict quality control; however, once the relationship is
established, it provides visibility for long-term profitable growth.
Still to make a global mark but the early signs are positive SENSEX Mayur
The company is chasing more global auto majors like BMW and GM and
establishing relationships with European distributors for furnishings. Whilst the Source: Bloomberg, Ambit Capital research
addressable market is large, Mayur’s growth hinges on its ability to increase
global clientele, further improve process efficiency, manage product
development and maintain focus on capital allocation.
Valuation
Mayur’s multiple re-ratings in the last five years were a function of consistent
earnings growth (and a sharp improvement in RoIC/RoE). The stock is currently
trading at 22.0x FY16 P/E; consensus expects 25% earnings CAGR in FY14-16.
(three-year average of 8.6%).
Key financials - standalone
Y/E Mar (` mn) FY10 FY11 FY12 FY13 FY14
Revenues Analyst Details
1,647 2,486 3,109 3,692 4,556
Adjusted EBITDA 282 410 533 690 932 Achint Bhagat
EBITDA margin (%) 17.1% 16.5% 17.1% 18.7% 20.5% +91 22 3043 3178
Net Profit (`) 162 253 334 442 568 achintbhagat@ambitcapital.com
ROCE (%) 49.0% 51.1% 48.1% 45.9% 42.5%
Nitin Bhasin
ROIC (%) 59.9% 77.1% 66.1% 57.6% 51.9%
+91 22 3043 3241
P/E (x) 115.8 74.3 56.3 42.5 33.1
nitinbhasin@ambitcapital.com
Source: Company, Ambit Capital research
Mayur Uniquoters
Exhibit 1: Sustained high revenue growth and expanded Exhibit 2: Sharp improvement in RoCE/RoE has been a
margins function of exemplary capital deployment
60% 25% 80% 60%
50% 20% 60%
40% 40%
15%
30% 40%
10%
20% 20%
20%
10% 5%
0% 0% 0% 0%
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
Revenue growth EBITDA margin (RHS) RoCE RoE (RHS)
Source: Company, Ambit Capital research. Source: Company, Ambit Capital research.
Exhibit 3: Reinvested 80% of CFO in the last decade to Exhibit 4: Increasing share of exports with addition of
ramp up scale marquee global auto OEM clients
(` mn) (` mn)
500 30 1,200 25%
400 25 1,000 19% 21% 20%
16% 21%
300 800
20 10% 15%
200 600 11%
15 10%
100 400 10%
10 200 5%
-
- 0%
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
(100) 5
FY08
FY09
FY10
FY11
FY12
FY13
FY14
(200) -
CFO FCF Capacity (mn metres) Exports Exports as a % of sales (RHS)
Source: Company, Ambit Capital research Source: Company, CMA, Ambit Capital research
Exhibit 5: P/E multiples have re-rated several times over Exhibit 6: Mayur is trading at peak P/B multiple of 4.4x
the last three years
(X) (X)
30 5
25 4
20
3
15
2
10
5 1
0 0
May-11
Aug-11
Nov-11
Feb-12
May-12
Aug-12
Nov-12
Feb-13
May-13
Aug-13
Nov-13
Feb-14
May-14
Aug-14
May-11
Aug-11
Nov-11
Feb-12
May-12
Aug-12
Nov-12
Feb-13
May-13
Aug-13
Nov-13
Feb-14
May-14
Aug-14
One-yr fwd P/E 5-yr average P/E One-yr fwd P/B 3-yr average P/B
Source: Company, Bloomberg, Ambit Capital research Source: Company, Bloomberg, Ambit Capital research
Exhibit 7: Explanation for the flags

Segment Score Comments
On our forensic accounting screener of 127 mid-cap stocks, Mayur ranks 11th due to
Accounting GREEN high CFO/EBITDA (80% conversion ratio), low audit fees and no material unclassified
loans or contingent liabilities.
Mayur has made timely announcements of capacity additions and volume growth
Predictability GREEN
guidance has been fair.
Earnings
GREEN Consensus EPS estimates have been revised upwards by 9% in the last six months.
momentum
Source: Company, Bloomberg, Ambit Capital research

Mayur Uniquoters
Balance sheet (standalone)

Year to March (` mn) FY10 FY11 FY12 FY13 FY14
Share capital 54 54 54 108 108
Reserves and surplus 366 556 805 1,076 1,503
Total Networth 421 610 859 1,185 1,611
Loans 44 78 29 46 157
Sources of funds 482 708 918 1,266 1,827
Net block 231 313 451 547 977
Capital work-in-progress 3 34 40 189 266
Investments 1 1 1 1 1
Cash and bank balances 196 228 190 107 134
Sundry debtors 256 316 406 565 671
Inventories 98 146 307 442 638
Loans and advances 27 40 34 68 125
Total Current Assets 586 742 1,072 1,351 1,741
Current liabilities and provisions 338 382 667 869 1,177
Net current assets 248 360 405 482 564
Application of funds 482 708 918 1,266 1,827
Income statement (standalone)

Revenue 1,647 2,486 3,109 3,692 4,556
yoy growth 43% 51% 25% 19% 23%
Total expenses 1,366 2,076 2,642 3,115 3,764
EBITDA 282 410 533 690 932
yoy growth 136% 46% 30% 30% 35%
Net depreciation / amortisation 22 27 39 52 70
EBIT 266 394 511 666 879
Net interest and financial charges 13 19 20 24 43
Other income 6 11 17 27 18
PBT 252 375 492 642 836
Provision for taxation 90 122 158 206 269
Adjusted PAT 162 253 334 436 568
yoy growth 163% 56% 32% 31% 30%
Reported PAT 162 253 334 436 568
EPS (`) 4 6 8 10 13

Mayur Uniquoters
Cash flow statement (standalone)

Net profit before tax 252 375 492 642 836
Depreciation 22 27 39 52 70
Others 1 (3) (2) (4) 43
Tax (83) (141) (153) (194) (269)
(Incr)/decr in net working capital 17 (89) (91) (213) (109)
Cash flow from operations 216 172 281 272 555
Capex (net) 25 130 127 365 506
(Incr)/decr in investments 10 - (117) (19) 38
Other income (expenditure) 6 8 9 14 5
Cash flow from investments
Net borrowings (34) 34 (23) 181 111
Issuance/buyback of equity - - - - -
Interest paid (28) (45) (69) (96) (46)
Dividend paid (6) (7) (8) (9) (43)
Cash flow from financing (69) (18) (99) 77 22
Net change in cash 138 32 (50) (10) 126
Free cash flow (before investments) 191 42 154 (93) 48
Ratio analysis (standalone)

Year to March FY10 FY11 FY12 FY13 FY14
EBITDA margin (%) 17.1 16.5 17.1 18.7 20.5
EBIT margin (%) 16.1 15.9 16.5 18.0 19.3
Net prof. (bef min int) margin (%) 9.8 10.2 10.7 11.8 12.5
RoCE (pre-tax) (%) 64 68 65 63 59
RoIC (%) 60 77 66 58 52
RoE (%) 49 51 48 46 42
Source: Company, Ambit Capital research, Note: * excluding revaluation reserve
Valuation parameters (standalone)

Year to March FY12 FY13 FY14 FY15E FY16E
P/E (x) 115.8 74.3 56.3 43.1 33.1
P/B(x) 44.7 30.8 21.9 15.9 11.7
Debt/Equity(x) 0.1 0.1 0.0 0.0 0.1
Net debt/Equity(x) (0.4) (0.2) (0.1) 0.0 0.1
EV/EBITDA(x) 71.5 49.1 37.7 29.1 21.6

VA Tech
BUY
COMPANY INSIGHT VATW IN EQUITY September 17, 2014
Over the last five years, VA Tech has increased its presence in fast-
YOUTH PHASE
growing emerging markets through unmatched competitive advantages
(low-cost employee talent pool and a strong execution track record). VA
Tech has experienced promoter-managers and it is building a second Recommendation
line of management (such as country heads and SBU heads) to increase Mcap (bn): `39/US$0.6
scale in new geographies across water treatment, desalination and 3M ADV (mn): `84/US$1.4
O&M projects. VA Tech’s RoCE is likely to increase to 21% in FY16 (vs CMP: `1,448
13.6% in FY14) led by higher subsidiary EBITDA margin and higher TP (12 mths): `1,578
working capital turnover. Rich valuations of 18.2x FY16E EPS are Upside (%): 9
sustainable, as we expect 31% adjusted EPS CAGR over FY14-16E.
Leading asset-light water treatment player in emerging markets Flags
VA Tech is an asset-light water treatment project management company with a Accounting: AMBER
leadership in India and presence in more than 19 countries. Higher penetration Predictability: GREEN
in emerging markets (India, South East Asia and the Middle East) led to 20% Earnings Momentum: GREEN
order intake CAGR in the last five years and revenue CAGR of 15% over FY09-
14. Whilst surplus cash (net debt:equity -0.4x) led to low average RoCE of 12.8% Catalysts
in the last five years, average RoIC was 22.4% in FY09-14.
 US$50mn-100mn desalination order
Superior capability and financial strength to its domestic peers inflow
VA Tech has unmatched competitive advantages emanating from: (a) technical  Higher RoCE through efficient capital
capability superior to domestic peers, (b) lower employee costs vs MNC water allocation
treatment players, and (c) strong track record in fast-growing emerging markets.  Higher subsidiary EBITDA margin
Whilst completion of the Chennai desalination plant has boosted VA Tech’s through economies of scale
credentials in the imminent Indian and Middle East (ME) opportunity, the
leverage-led issues of Indian contractors would keep competition low. Performance
Experienced management with low employee costs
30,000 1800
Whilst several companies in the E&C industry have questionable management
25,000 1300
quality, VA Tech has an experienced management team which does not raise
corporate governance concerns. VA Tech has built a second line of management 20,000 800
through country heads and SBUs to increase its presence in new markets. In 15,000 300
Jul-13
Sep-13
Nov-13
Jan-14
May-14
Jul-14
order to retain its low-cost talent pool, VA Tech offered ESOPs to all its
Mar-14
employees and it has a history of promoting talent from within the company.
Well placed to capitalise on fast-growing water treatment opportunity
Sensex VA Tech (RHS)
VA Tech’s FY14-18E order inflow CAGR of 20% would be driven by its rising
scale in emerging countries across water treatment, desalination and
Source: Bloomberg, Ambit Capital research
standalone O&M projects. Economies of scale in emerging markets, operating
leverage due to lower employee to sales ratio, and higher working capital
turnover would likely increase RoCE to 21% in FY16 vs 13.6% in FY16E.
Valuation of 18.2x FY16E P/E sustainable given high growth potential
Our DCF-based target price of `1,578/share implies 20.0x FY16E EPS. VA
Tech’s 18.2x FY16E EPS is sustainable given its competitive advantages
(emanating from its technical capability) and unmatched cost advantages
(relative to global peers).
Year to March (` mn) FY12 FY13 FY14 FY15E FY16E
Net Sales 14,435 16,189 22,386 28,970 36,131
EBITDA 1,300 1,549 2,090 2,755 3,543 Analyst Details
EBITDA (%) 9.0% 903 1,239 1,615 2,110 Nitin Bhasin
EPS (`) 27.9 34.0 46.7 60.9 79.5 +91 22 3043 3241
13.3% 15.9% 17.8% 19.9%
RoCE (%) 11.6%
Tanuj Mukhija, CFA
RoE (%) 12.2% 12.2% 13.6% 17.8% 20.7%
+91 22 3043 3203
P/E (x) 53.0 42.2 31.0 23.7 18.2 tanujmukhija@ambitcapital.com
VA Tech
Exhibit 1: Revenue CAGR of 15% over FY09-14 with stable Exhibit 2: RoCE and RoE over the last five years
EBITDA margins
50% 10.0% 20% 20%
40% 9.5% 15% 15%

30% 9.0%
10% 10%
20% 8.5%
5% 5%
10% 8.0%
0% 0%
0% 7.5%
FY09
FY10
FY11
FY12
FY13
FY14
FY10
FY11
FY12
FY13
FY14
Revenue YoY Growth % EBITDA Margin (%, RHS) RoCE RoE (RHS)
Exhibit 3: Cost rationalisation in subsidiaries - the key Exhibit 4: Economies of scale would lead to higher
driver of lower consolidated employee to sales ratio subsidiaries EBITDA margin
1,500 30% 55% 15%
50%
1,000 20% 10%
45%
500 10% 40%

5%
35%
0 0% 30% 0%
FY10 FY11 FY12 FY13 FY14 FY11 FY12 FY13 FY14 FY15E FY16E FY17E
Subsidiary Employee cost (Rs mn) Revenue share of subsidiaries

Standalone Employee cost (Rs mn)
Standalone Employee cost to sales (RHS) Subsidiaries EBITDA margins (RHS)
Subsidiary Employee cost to sales (RHS) Consolidated EBITDA margins (RHS)
Source: Company, Ambit Capital research Source: Company, Ambit Capital research
Exhibit 5: VA Tech trades at a justified premium to its Exhibit 6: VA Tech trades at a justified premium to its
average one-year forward P/E average one-year forward P/B
30 5
25 4
20
3
15
10 2
5 1
0 0
Oct-10
Jan-11
Apr-11
Jul-11
Oct-11
Jan-12
Apr-12
Jul-12
Oct-12
Jan-13
Apr-13
Jul-13
Oct-13
Jan-14
Apr-14
Jul-14
May-11
Aug-11
Nov-11
Feb-12
May-12
Aug-12
Nov-12
Feb-13
May-13
Aug-13
Nov-13
Feb-14
May-14
VA Tech 1-year fwd PE VA Tech 1-year fwd PB

Average VA Tech 1-year forward PB
Average VA Tech 1-year forward PE
Explanation of our forensic accounting scores on the first page

VA Tech is a strong player on parameters such as gross block turnover, CWIP as a percentage of gross block,
Accounting AMBER miscellaneous expenses to revenues, and other loans and advances to net worth; however, the company scores
poorly on parameters such as CFO/EBITDA, depreciation rate and contingent liabilities to net worth.
VA Tech has made timely announcements on order flow and revenue growth momentum in its conference calls.
The company has always informed the market in case of any expected execution delays, margin pressures, etc.
VA Tech’s consolidated consensus EPS estimates for FY15 and FY16 have been upward revised by 5% in the past
Earnings Momentum GREEN
six months.

VA Tech
Balance sheet (Consolidated)

Shareholders' equity 53 53 68 68 68
Reserves and surpluses 6,367 7,100 8,356 9,662 11,385
Total net worth 6,420 7,153 8,424 9,730 11,453
Debt 1,248 822 1,583 883 883
Deferred tax liability 0 2 37 37 37
Total liabilities 7,677 7,996 10,072 10,677 12,400
Gross block 1,068 1,143 2,436 2,686 2,961
Net block 507 510 1,876 1,916 1,965
CWIP 180 478 7 7 7
Investments (non-current) 36 33 232 238 245
Cash & cash equivalents 3,383 2,867 3,702 3,094 3,199
Debtors 10,926 11,095 13,875 17,620 21,580
Inventory 499 405 350 635 693
Loans & advances 871 1,156 1,004 1,077 1,339
Total current assets 16,912 17,770 22,148 26,141 31,677
Current liabilities 8,639 9,320 12,564 15,938 19,729
Provisions 1,424 1,588 1,734 1,795 1,872
Total current liabilities 10,062 10,909 14,298 17,733 21,601
Net current assets 6,850 6,862 7,850 8,409 10,075
Miscellaneous expenditure 104 115 107 107 107
Total assets 7,677 7,996 10,072 10,677 12,400
Income statement (Consolidated)

Net Sales 14,435 16,189 22,386 28,970 36,131
% growth 16.2% 12.1% 38.3% 29.4% 24.7%
Operating expenditure 13,135 14,640 20,501 26,215 32,588
EBITDA 1,300 1,549 1,885 2,755 3,543
Depreciation 86 109 150 210 226
EBIT 1,214 1,440 1,735 2,545 3,317
Interest expenditure 255 212 252 273 305
Non-operating income 151 132 129 94 81
Adjusted PBT 1,110 1,360 1,816 2,366 3,092
Tax 379 456 526 757 990
Adjusted PAT 731 904 1,242 1,609 2,103
% growth 5.1% 5.6% 5.5% 5.6% 5.8%
Extraordinary income/ (expense) 0 0 -51 0 0
Reported PAT after minority interest 737 912 1,134 1,615 2,110

VA Tech
Cash flow statement (Consolidated)

Net profit before tax 1,110 1,360 1,611 2,366 3,092
Depreciation 86 109 150 210 226
Others -127 851 767 178 225
Tax -360 -343 -566 -757 -990
(Incr)/decr in net working capital -1,636 -1,152 -838 -1,056 -1,175
Cash flow from operations -926 826 1,124 941 1,379
Capex (net) -217 -413 -1,026 -250 -275
(Incr)/decr in investments 0 0 0 0 0
Other income (expenditure) 926 11 54 -77 -384
Cash flow from investments 709 -403 -972 -327 -659
Net borrowings 821 -426 761 -700 0
Issuance/buyback of equity 13 32 15 0 0
Interest paid -111 -73 -82 -273 -305
Dividend paid 0 -187 -217 -248 -310
Cash flow from financing 723 -654 477 -1,221 -615
Net change in cash 506 -231 629 -608 105
Free cash flow (before investments) -1,152 407 92 691 1,104
Ratio analysis (Consolidated)

EBITDA margin (%) 9.0% 9.7% 9.3% 9.5% 9.8%
EBIT margin (%) 8.4% 8.9% 7.7% 8.8% 9.2%
Net prof. (bef min int) margin (%) 5.1% 5.6% 5.1% 5.6% 5.8%
Dividend payout ratio (%) 25.1% 23.8% 21.8% 19.2% 18.3%
Net debt: equity (x) * -0.33 -0.30 -0.25 -0.23 -0.23
RoCE (pre-tax) (%) 12.3% 14.5% 13.5% 19.2% 21.8%
RoIC (%) 12.0% 12.3% 13.3% 17.1% 20.0%
RoE (%) 11.5% 12.7% 14.7% 16.6% 18.4%
Valuation parameters (Consolidated)

EPS (`) 27.9 34.4 46.7 60.9 79.5
Diluted EPS (`) 27.9 34.4 46.7 60.9 79.5
Book value per share (`) * 243 270 318 367 433
Dividend per share (`) 6.0 7.0 8.0 10.0 12.5
P/E (x) 51.9 42.2 31.0 23.8 18.2
P/BV (x) 6.0 5.4 4.6 3.9 3.3
EV/EBITDA (x) 27.8 22.8 16.9 12.7 9.7
EV/EBIT (x) 29.7 24.5 20.4 13.8 10.4

eClerx
NOT RATED
COMPANY INSIGHT ECLX IN EQUITY September 17, 2014
Revenue growth and margins have been poor in the last few quarters,
YOUTH PHASE
largely driven by company-specific issues at two of its top five clients.
eClerx’s competitive advantages in offshore delivery of small, complex
processes should sustain in the long term (FY14 RoE: 50%). These include Recommendation
a niche focus, a strong knowledge management system, a sticky Mcap (bn): `39/US$0.6
customer franchise and a systematic approach towards client mining. It 6M ADV (mn): `52/US$0.9
offers significant cost-savings to clients on their business process spend. CMP: `1,379
We like its superior capital allocation as well. It pays high dividends
(2.5% dividend yield) and has a sensible acquisition policy. Flags
Accounting: GREEN
A featherweight champion Predictability: AMBER
eClerx is a knowledge process outsourcing company that specialises in providing Earnings Momentum: AMBER
middle and back office support to Fortune 500 companies across the world.
Almost all delivery employees are based offshore. The company has recorded Catalysts
34% revenue CAGR over FY09-14 whilst maintaining RoEs in excess of 40%. It
 Margin improvement in the next
has three segments—financial services (~40% of revenues), digital marketing few quarters could drive EPS
services (~40%) and cable and telecom (~20%). upgrades
Niche focus  Revenue growth to accelerate as
eClerx is focused on small, critical and complex processes unlike its larger peers client-related issues subside
that prefer high-volume, simple processes. It also creates high entry barriers for
new entrants, as it is disruptive for customers to switch vendors. This was Performance
evidenced post the 2008 financial crises when one of its largest customers,
27,000 1500
Lehman Brothers, filed for bankruptcy. eClerx recovered in the following quarter
by retaining its position with the successor entity. It has been able to successfully 24,000
1200
extend its business model to different industry segments, which makes us 21,000
confident of its long-term growth. 900
18,000
A strong knowledge management system and ability to mine clients
15,000 600
eClerx has created and maintains an intensive knowledge management system
Aug-13
Nov-13
Feb-14
May-14
Aug-14
which enables the company to ramp up projects in a time efficient manner,
minimises the impact of attrition and allows the company to follow the ‘just-in- Sensex eClerx (Rs)
time’ hiring model. This gives the management significant control over critical
revenue and margin drivers in the business. Further, eClerx has displayed a
strong ability to mine its customers. The company starts with offshoring a few,
relatively less critical processes. As the relationship evolves, it offshores more
processes, with steadily increasing importance across a wider geography for the
same client, resulting in higher realisation per client.
Will the company graduate to the next phase of the ‘greatness’ cycle?
Yes. Given the size of the addressable market and its strong competitive
positioning, this company could record more than 15% earnings CAGR over the
next ten years. The company currently trades at 13.5x consensus FY16 EPS. It
currently holds significant cash (~16% of market-cap) and has a sensible
acquisition policy. It has a track record of making EPS-accretive acquisitions.
Key financials
Net Revenues (US$ mn) 55 76 98 122 138 Analyst Details
EBIT (` mn) 933 1,254 1,770 2,291 3,204
Sagar Rastogi
EBIT margin 36% 37% 37% 35% 38%
+91 22 3043 3291
Diluted EPS (`) 25.1 41.1 53.0 56.9 83.7
sagarrastogi@ambitcapital.com
RoE (%) 40% 61% 55% 44% 50%
P/E (x) Utsav Mehta
54.8 33.5 25.9 24.1 16.4
EV/EBITDA (x)
+91 22 3043 3209
38.7 28.8 20.4 15.2 11.0
utsavmehta@ambitcapital.com
eClerx
Exhibit 1: The company has sustained its strong revenue Exhibit 2: …leading to sustained high return ratios
growth and high margins…
70% 45% 70% 70%
60%
50% 60% 60%
40%
40% 50% 50%
30%
20% 40% 40%
10%
0% 35% 30% 30%
FY09
FY10
FY11
FY12
FY13
FY14
FY09
FY10
FY11
FY12
FY13
FY14
Exhibit 3: Customer stickiness was evidenced during the Exhibit 4: Its RoE is significantly higher than its IT services
financial crises of 2008 and BPO peers
20% Revenue growth (US$; QoQ) 60% RoE (YE Mar-14)
16% 50%
Lehman 13%
15% filed for
9% bankruptcy 40%
10% 6% 6%
6% 30%
5% 2% 23%
20% 17%
0% 13% 13%
-5%
-4%
-10% 0%
cos avg*
WNS
Top 6
EXL
eClerx
Genpact
Sep-08
Dec-08
Mar-09
Sep-09
Dec-09
Mar-10
Jun-09
Jun-10
Midcap
avg
cos
Exhibit 5: The share price is trading at a 16% premium to Exhibit 6: However, it trades close to its five-year average
its five-year average one-year forward P/E one-year forward P/B
20 8
7
15 6
5
10 4
3
5 2
1
0 0
Nov-09
May-10
Nov-10
May-11
Nov-11
May-12
Nov-12
May-13
Nov-13
May-14
Sep-09
Sep-10
Sep-11
Sep-12
Sep-13
Sep-14
Mar-10
Mar-11
Mar-12
Mar-13
Mar-14
P/E(x) Avg PE (x) P/B (x) Average P/B (x)
Source: Company, Reuters, Ambit Capital research Source: Company, Bloomberg, Ambit Capital research
Exhibit 7: Explanation for Flags

Parameter Flag Comment
eClerx ranks in the top quartile on accounting. It scores well on cash conversion, stable
Accounting GREEN
depreciation rates and strong FCF generation.
Whilst eClerx's revenue growth rarely surprises consensus estimates materially, its margins are
Predictability AMBER
often a source of surprise.
Earnings Momentum AMBER The company's revenue growth has been decelerating through FY14 due to client-related issues.

eClerx
Balance sheet
Year to March (` mn) FY11 FY12 FY13 FY14
Net Worth 2,383.8 3,432.0 4,383.3 5,889.6
Other Liabilities - 1.7 9.9 18.8
Capital Employed 2,383.8 3,433.7 4,393.2 5,908.4
Net Block 370.0 488.7 1,355.2 1,559.5
Curr. Assets 3,087.7 4,038.8 4,521.3 6,138.0
Debtors 659.4 421.8 654.8 996.3
Cash & Bank Balance 1,793.6 2,685.4 2,700.1 3,560.4
Current Liab. & Prov 1,144.3 1,182.2 1,628.2 2,005.5
Net Current Assets 1,943.4 2,856.6 2,893.2 4,132.5
Application of Funds 2,383.8 3,433.7 4,393.2 5,908.4
Source: Company
Income statement
Revenue (US$ mn) 76 98 122 138
Revenue 3,420.3 4,729.1 6,605.3 8,409.9
Cost of goods sold 1,280.8 1,713.2 2,509.1 3,074.0
SG&A expanses 885.5 1,245.8 1,805.6 2,132.1
EBITDA 1,345.2 1,899.0 2,546.1 3,534.6
Depreciation 91.2 128.9 255.5 330.8
EBIT 1,254.0 1,770.1 2,290.6 3,203.9
EBIT Margin 36.7% 37.4% 34.7% 38.1%
Other Income 240.2 223.0 (181.3) 110.3
PBT 1,494.3 1,993.1 2,109.3 3,314.2
Tax 166.3 393.8 393.0 759.1
Rate (%) 11% 20% 19% 23%
Reported PAT 1,327.9 1,599.4 1,716.3 2,555.0
PAT Margin 38.8% 33.8% 26.0% 30.4%
Diluted EPS 41.1 53.0 56.9 83.7
DPS 29.0 23.0 25.0 35.0
Source: Company

eClerx
Cash flow statement

PBT 1,392 1,992 2,109 3,316
Depreciation 91 129 180 203
CF from Operations 1,510 1,992 2,284 3,508
Cash for Working Capital (324) 113 (348) (791)
Taxes (166) (384) (403) (767)
Net Operating CF 1,020 1,721 1,533 1,950
Net Purchase of FA (240) (251) (267) (212)
Net Cash from Invest. 332 (832) (349) (1,117)
Proceeds from Equity & other 25 33 70 85
Dividend Payments (335) (758) (597) (911)
Cash Flow from Fin. (310) (725) (527) (825)
Free Cash Flow 780 1,469 1,266 1,734
Opening cash balance 472 1,515 1,687 2,349
Net Cash Flow 1,042 163 658 8
Closing Cash Balance 1,515 1,686 2,349 2,406
Source: Company
Key ratios
FY11 FY12 FY13 FY14
Valuation (x)
P/E 33.5 25.9 24.1 16.4
EV/EBITDA 28.8 20.4 15.2 11.0
EV/Sales 11.3 8.2 5.9 4.6
Price/Book Value 17.8 12.3 9.7 7.2
Dividend Yield (%) 2.1% 1.7% 1.8% 2.5%
Return Ratios (%)
RoE 61% 55% 44% 50%
RoCE 51% 49% 48% 48%
Turnover Ratios
Receivable days (Days) 71 31 36 44
Fixed Asset Turnover (x) 18.5 11.0 7.2 5.8
Source: Company

Page Industries
BUY
COMPANY INSIGHT PAG IN EQUITY September 17, 2014
Page is likely to deliver 30% EPS CAGR over FY14-20, with RoEs at ~60%
PRIME PHASE
through: (a) backward-integrated manufacturing (delivering a high-
quality product at affordable prices); (b) aggressive approach towards
distribution expansion; and (c) a highly aspirational brand recall for Recommendation BUY
‘Jockey’. Factoring in the longevity of its growth momentum, our DCF Mcap (bn): `88/US$1.4
model generates a TP of Rs9,082 (15% upside), implying an FY16 P/E of 3M ADV (mn): `63/US$1.0
37.3x. We reiterate our BUY stance. CMP: `7879
TP (12 mths): `9082
Over FY09-14 Page has delivered 36% revenue CAGR with 37% RoCE
Upside (%): 15
Page was founded in 1995. It manufactures, distributes and markets Jockey
products in India in the mid-premium innerwear & leisurewear segments. The
Flags
firm has delivered 36% revenue CAGR with steady EBITDA margins of ~20% and
Accounting: GREEN
RoE of ~60% over FY09-14. Out of the ~`4.6bn capital inflow over FY09-14
(including CFO and debt; debt:equity maintained at ~0.5x), 44% was deployed Predictability: GREEN
towards core capex and the balance was distributed as dividends. Earnings Momentum: GREEN
Manufacturing prowess: Page’s unsung competitive advantage Catalysts

Page offers a unique combination of comfortable, durable and indigenised  Robust sales growth during FY15
product designs at affordable prices to its customers. This is due to the backward despite a weak economy
integration of the manufacturing process, providing it with complete control on  Successful roll-out of new products in
fit, fabric, elastic and construction of innerwear. The firm overcomes labour 3QFY15
management challenges through proactive hiring and training of the workforce,
with 16% CAGR in revenue per employee achieved over FY10-14.
Performance
Distribution aggression supports expansion across cities and SKUs
30,000 10000
Page will continue to generate strong push-based demand through retailers due
to: (a) superior channel incentive programmes with working capital management 27,000
8000
support; (b) forthcoming IT investments to improve performance measurement of 24,000
retailers and sales team; and (c) expansion of exclusive brand outlets (~160 6000
21,000
currently) to push new product launches. Also, it proactively addresses bandwidth
challenges in the channel as it expands. 18,000 4000
Sep-13
Sep-14
Jan-14
May-14
Will Page witness the next phase of the ‘greatness’ cycle - Descent?
Page will generate ~`21bn of CFO over FY15-20, out of which ~`15bn will be
Sensex Page Industries
available with the firm for dividend payout. We do not expect meaningful capital
misallocation because thanks to strong aspirational demand and the quality of
the management team. The fact that the promoters intend to focus only on the Source: Bloomberg, Ambit Capital research
core business and the fact that the company has a 50-60% dividend payout ratio
also helps.
Longevity of high EPS growth rates and RoEs justify rich multiples
We expect 30% EPS CAGR with stable RoEs at ~60% over FY14-20 and a high
dividend payout ratio (55-60%) over FY14-20. Our three-stage DCF gives a fair
value of Rs9,082 (17% upside), implying an FY16 P/E of 37.3x. Page’s P/E
premium multiples are justified given the stickiness of a satisfied consumer’s
behaviour towards an innerwear brand (something that cannot be replicated in
other categories like FMCG or dining).
Key financials - consolidated
Net Sales 6,966 8,758 11,876 15,567 20,267
EBITDA 1,462 1,766 2,511 3,323 4,358
EBITDA (%) 21.0 20.2 21.1 21.3 21.5
EPS (`) 80.7 100.9 137.8 182.5 243.5 Analyst Details
RoCE (%) 39.3 42.4 41.9 44.8 49.4 Rakshit Ranjan, CFA
RoE (%) 62.1 59.3 61.2 60.8 61.5
+91 22 3043 3201
P/E (x) 97.7 78.1 57.2 43.2 32.4
rakshitranjan@ambitcapital.com
Page Industries
Exhibit 1: Revenue growth and EBITDA margin for Page Exhibit 2: RoCE (LHS) and RoE (RHS) for Page Industries
Industries over 2004-14 over 2004-14
50% 25% 60% 140%

50% 120%
40% 20%
40% 100%
30% 15% 80%
30%
20% 10% 60%
20% 40%
10% 5% 10% 20%
0% 0% 0% 0%
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
Revenue Growth (LHS) EBITDA Margin ROCE ROE
Exhibit 3: Sources of funds for Page Industries over Exhibit 4: Utilisation of funds for Page Industries over
2004-14 2004-14
Dividend Proceeds Net

Debt Received, from Investment
Raised, 0% Shares, s, 0% Dividend
9% 7% Paid, 49%
Interest Net
Received, Capex,
1% 43%
Cash &
Interest Cash
equivalent
Paid, 7%
s, 1%
CFO, 83%
Exhibit 5: Historical one-year forward EV/EBITDA multiples Exhibit 6: Historical one-year forward P/E multiples
11,000 30x 8,000 40x

7,000 35x
9,000 26x
6,000 30x
7,000 22x 25x
5,000
18x 4,000 20x
5,000
14x
3,000
3,000
2,000
1,000 1,000
Mar-11
May-12
Dec-12
Mar-13
May-14
Mar-11
Nov-11
Sep-12
Nov-12
Sep-13
Dec-13
Mar-14
May-14
Jul-11
Oct-11
Jan-12
Aug-12
Jul-13
Oct-13
Feb-14
Aug-14
Jun-11
Aug-11
Jan-12
Apr-12
Jun-12
Feb-13
Apr-13
Jul-13
Aug-14
Exhibit 7: Explanation for our flags

Segment Score Comment
Page Industries' cash conversion has remained healthy and this has resulted in cumulative CFO (pre-tax)/EBITDA to
Accounting GREEN be above around 72% in FY05-14. Page has maintained effective control on the working capital cycle, and hence
despite high sales growth, WC days have increased marginally from 63 days in FY09 to 69 days in FY14.
Historically, Page Industries has beaten consensus estimates for net profits most of the time. Whilst the company has
either missed consensus revenue estimates by less than 1% or it has beaten revenue estimates by 1-4%.
Consensus earnings forecasts for Page have been increased by 10% and 11% for FY15 and FY16 respectively. Hence,
Earnings momentum GREEN
the earnings momentum remains on an upward trajectory.

Page Industries
Balance sheet (consolidated)

Total net worth 1,658 2,135 2,890 3,806 5,028
Debt 759 1,007 1,632 1,162 1,322
Gross block 1,504 1,860 2,404 3,125 3,917
Net block 1,076 1,322 1,728 2,272 2,845
CWIP 165 138 36 36 36
Cash & cash equivalents 31 46 35 34 39
Debtors 437 581 727 853 1,111
Inventory 1,726 2,350 3,626 3,796 4,942
Loans & advances 137 130 328 426 555
Provisions 155 216 241 256 333
Miscellaneous expenditure 2,453 3,199 4,617 5,063 6,445
Total assets
Income statement (consolidated)

Net Sales 6,966 8,758 11,876 15,567 20,267
% growth 40.0% 25.7% 35.6% 31.1% 30.2%
EBITDA 1,462 1,766 2,511 3,323 4,358
% growth 52.2% 20.8% 42.3% 32.3% 31.1%
Depreciation 106 114 139 176 219
EBIT 1,356 1,652 2,372 3,147 4,138
Adjusted PBT 1,341 1,657 2,334 3,085 4,115
Tax 441 531 797 1,049 1,399
Adjusted PAT 900 1,125 1,537 2,036 2,716
% growth 53.7% 25.1% 36.6% 32.4% 33.4%
Extraordinary income/ (expense) - - - - -
Reported PAT after minority interest 900 1,125 1,537 2,036 2,716

Page Industries
Cash flow statement (consolidated)

Depreciation 106 114 139 176 219
Others 59 74 67 62 23
Tax (427) (516) (750) (1,049) (1,399)
(Incr)/decr in net working capital 147 (457) (1,051) 98 (805)
Cash flow from operations 1,226 871 740 2,372 2,154
Capex (net) (271) (449) (473) (721) (792)
(Incr)/decr in investments 14 7 19 - -
Cash flow from investments (253) (419) (441) (643) (691)
Net borrowings (503) 238 543 (470) 160
Interest paid (63) (80) (97) (140) (124)
Dividend paid (402) (596) (756) (1,120) (1,494)
Cash flow from financing (968) (438) (310) (1,730) (1,458)
Net change in cash 5 14 -11 0 5
Free cash flow (before investments) 959 430 280 1,729 1,463
Ratio analysis (consolidated)

EBITDA margin (%) 21.0 20.2 21.1 21.3 21.5
EBIT margin (%) 19.5 18.9 20.0 20.2 20.4
Net prof. (bef min int) margin (%) 12.9 12.8 12.9 13.1 13.4
Dividend payout ratio (%) 53 58 51 55 55
Net debt: equity (x) * 0.4 0.5 0.6 0.3 0.3
RoCE (pre-tax) (%) 39.3 42.4 41.9 44.8 49.4
RoIC (%) 39.3 42.4 41.9 44.8 49.4
RoE (%) 62.1 59.3 61.2 60.8 61.5
Valuation parameters (consolidated)

EPS (`) 80.7 100.9 137.8 182.5 243.5
Diluted EPS (`) 80.7 100.9 137.8 182.5 243.5
Book value per share (`) * 149 191 259 341 451
P/E (x) 97.7 78.1 57.2 43.2 32.4
P/BV (x) 53.0 41.2 30.4 23.1 17.5
EV/EBITDA (x) 60.6 50.3 35.6 26.8 20.5
EV/EBIT (x) 65.4 53.8 37.7 28.3 21.5

Motherson Sumi Systems
NOT RATED
COMPANY INSIGHT MSS IN EQUITY September 17, 2014
Besides building a strong franchise in the wiring harness business (with
its JV partner, Sumitomo), Motherson Sumi (MSSL) has evolved into a PRIME PHASE
multi-product, multi-country company, due to its acquisition of VisioCorp
and Peguform. Whilst the performance of both these acquisitions has Recommendation
improved since being taken over by MSSL, we believe there are further Mcap (bn): `366/US$6.0
levers available for further margin and business growth in these entities. 3M ADV (mn): `703/US$11.5
However, a convoluted holding structure and conflict of interests for the CMP: `415
promoter present key risks to the stock. TP (12 mths): NA
Background Upside (%): NA
Whilst traditionally catering to automotive wiring harness (through its JV with
Sumitomo, Japan), MSSL has diversified into newer products including rear view Flags
mirrors (through acquisition of VisioCorp, now Samvardhana Motherson
Accounting: AMBER
Reflectec or SMR) and polymers (through acquisition of Peguform now
Predictability: AMBER
Samvardhana Motherson Peguform or SMP). MSSL has recorded strong growth in
Earnings Momentum: AMBER
recent years with 64% consolidated revenue CAGR, 57% EBITDA CAGR and 35%
PAT CAGR over FY09-14.
Catalysts
Strong franchise in the domestic wiring harness business
Backed by Sumitomo’s technology, MSSL has established itself in the domestic  Improvement in profitability at SMR
automotive wiring harness, commanding a market share of close to 65%. Despite and SMP
subdued demand in the domestic passenger vehicle (PV) industry in recent years,  Improvement in domestic PV volumes
MSSL has been able to grow faster than the domestic PV industry (FY14 revenue
growth of 5% despite 6% fall in domestic PV volumes) helped by the increasing Performance
size of cars and increasing electronic applications. 30,000 500
A multi-product, multi-country company 400
25,000
Whilst MSSL has started diversifying beyond the wiring harness business since the 300
early 2000s, two major acquisitions have defined MSSL’s growth over the past 4- 20,000
200
5 years. In March 2009, MSSL acquired VisioCorp, the largest global automotive
15,000 100
rearview mirror maker at an attractive valuation of €25mn (SMR’s 2008 revenues
Sep-13
Oct-13
Dec-13
Jan-14
Mar-14
Apr-14
Jun-14
Jul-14
Sep-14
were €660mn). In November 2011, MSSL acquired Peguform, a leading
automotive polymer supplier, for a competitive enterprise valuation of €308mn
Sensex Motherson Sumi (Rs)
(EV/EBITDA multiple of 5.0x). Both these acquisitions now contribute to most of
the company’s revenues (80% in FY14).
Further levers for business growth
Whilst the size of MSSL’s acquisitions appears aggressive, it is worth noting that
the acquisitions (SMR and SMP) were carried out at competitive prices and were
done in consultation and with the support of its overseas clients such as BMW,
Volkswagen, and Audi. The performance of both SMR and SMP has improved
since acquisition (EBITDA margin expansion of 400bps and 420bps respectively).
However, we believe there are opportunities for further margin and business
growth in these entities. A convoluted holding structure and conflict of interests
(between the promoter’s interest in MSSL and his unlisted companies) are the key
risks associated with the stock.
Valuation
MSSL currently trades at 23.6x one-year forward net earnings, a premium of 52%
to its eight-year historical average P/E of 15.5x. We believe the premium to the
historical average is justified given the strong ongoing performance of the
standalone business and headroom for operating performance improvement in
the overseas subsidiaries.
Key financials – consolidated Analyst Details
Net Sales 147,766 253,124 304,279 357,408 422,817 Ashvin Shetty, CFA
EBITDA 9,462 16,424 25,852 35,200 46,802 +91 22 3043 3285
EBITDA (%) 6.4% 6.5% 8.5% 9.8% 11.1%
ashvinshetty@ambitcapital.com
EPS (`) 4.5 6.9 10.8 13.9 20.3
Book Value (`) 21.5 26.0 33.6 43.5 58.5 Ritu Modi
RoE (%) 23% 29% 36% 36% 40% +91 22 3043 3292
P/E (x) 97.0 63.1 40.4 31.4 21.5
Source: Company, Bloomberg
ritumodi@ambitcapital.com
Exhibit 1: MSSL’s revenues and EBITDA have recorded a Exhibit 2: Consolidated return ratios have improved driven
strong CAGR of 64% and 35%, respectively over the last by improvement in the profitability of SMR and SMP
five years
350,000 11.0% 40%
300,000 10.0% 35%
250,000 9.0%
30%
200,000 8.0%
25%
150,000 7.0%
100,000 6.0% 20%
50,000 5.0% 15%
- 4.0% 10%
FY09
FY10
FY11
FY12
FY13
FY14
FY09
FY10
FY11
FY12
FY13
FY14
Revenue (Rs mn) EBITDA margin - RHS RoE RoCE
Exhibit 3: Strong free cash generation in FY13 and FY14 led Exhibit 4: MSSL’s funds over FY09-14 have been mainly
to reduction in net debt levels used for capex and interest payments
30,000 2.4 Dividends
` mn
11%
25,000 2.0
20,000 1.6 Interest `7.2bn
15,000 1.2 13%
`8.2bn
10,000 0.8
5,000 0.4
Investment `48.7bn
- -
1%
(5,000) (0.4)
FY09 FY10 FY11 FY12 FY13 FY14
Capex
76%
CFO
Exhibit 5: On P/E, Motherson is currently trading at a 48% Exhibit 6: On EV/EBITDA, Motherson is currently trading at
premium to its five-year historical average a 24% premium to its five-year historical average
30 12
11
25
10
20 9
15 8
7
10 6
5 5
Sep-09
Sep-10
Mar-10
Mar-11
Aug-11
Feb-12
Aug-12
Feb-13
Aug-13
Feb-14
Aug-14
Sep-09
Mar-10
Sep-10
Mar-11
Aug-11
Feb-12
Aug-12
Feb-13
Aug-13
Feb-14
Aug-14
Motherson 1-yr fwd P/E Avg P/E Motherson 1-yr fwd EV/EBITDA Avg EV/EBITDA
Source: Bloomberg, Ambit Capital research. Note: P/E bands arrived at using Source: Bloomberg, Ambit Capital research. Note: EV/EBITDA bands arrived
Bloomberg consensus estimates for the respective periods at using Bloomberg consensus estimates for the respective periods
Exhibit 7: Explanation for our forensic accounting scores on the cover page
MSSL’s average accounting score based on Ambit’s forensic accounting analysis ranks in
Accounting AMBER
line with the sector (auto-ancillary) average.
Predictability AMBER Quarterly earnings reported by the company tend to be unpredictable.
Bloomberg consensus earnings show marginal downgrades to FY15 and FY16 EBITDA and
Earnings momentum AMBER
EPS estimates over the past four weeks.


Total net worth 11,649 16,088 18,717 22,890 29,593
Debt 8,179 12,607 46,023 49,039 48,397
Minority interest 2,027 2,276 5,027 4,025 7,896
Gross block 31,821 38,195 94,324 107,425 126,336
Net block 14,548 17,645 46,922 52,770 59,189
CWIP 1,808 3,921 4,458 3,859 6,471
Debtors 7,688 9,560 30,127 29,400 32,384
Inventory 6,752 10,376 22,496 26,036 32,822
Loans & advances 3,101 5,628 10,160 8,668 11,763
Provisions 2,861 3,856 4,612 5,255 6,742
Misc expenses not written off 18 - - - -
Total assets 21,896 30,981 70,369 76,513 86,382

Revenues 67,022 82,491 147,766 253,124 304,279
% growth 158% 23% 79% 71% 20%
EBITDA 3,348 7,682 9,462 16,424 25,852
% growth 23% 129% 23% 74% 57%
Depreciation 2,601 2,479 3,814 7,145 8,172
EBIT 747 5,203 5,648 9,279 17,680
Interest expenditure 635 576 1,649 2,495 2,943
Non-operating income 2,745 1,243 1,445 3,215 3,106
Adjusted PBT 2,857 5,870 5,444 9,999 17,843
Tax 1,094 1,885 2,153 3,835 4,994
Adjusted consol PAT 1,855 3,464 3,924 6,102 9,531


Depreciation 2,601 2,479 3,814 7,145 8,175
Others (6) (48) 2,534 4,046 6,009
Tax (1,281) (1,555) (2,031) (3,662) (5,597)
(Incr)/decr in net working capital (661) (3,085) (3,357) (1,019) 2,403
Cash flow from operations 4,083 4,105 5,887 14,860 26,950
Capex (net) (3,780) (7,568) (10,337) (10,895) (13,517)
(Incr)/decr in investments (10) 7 (22) (13) (6)
Others 32 (493) (10,339) 118 (200)
Cash flow from investments (3,758) (8,054) (20,698) (10,790) (13,723)
Net borrowings 764 2,853 16,603 1,835 (6,001)
Interest paid (496) (568) (1,471) (2,537) (2,881)
Dividend paid (479) (677) (1,063) (1,988) (1,735)
Cash flow from financing 312 4,010 13,800 (2,558) (10,801)
Net change in cash 637 61 (1,011) 1,512 2,426
Free cash flow 303 (3,463) (4,450) 3,965 13,433

EBITDA margin (%) 5.0% 9.3% 6.4% 6.5% 8.5%
EBIT margin (%) 1.1% 6.3% 3.8% 3.7% 5.8%
Net prof. margin (%) 2.8% 4.2% 2.7% 2.4% 3.1%
Net debt: equity (x) 0.41 0.56 2.22 1.88 1.33
Gross block turnover (x) 2.19 2.36 2.23 2.51 2.60
RoCE (pre-tax) (%) 17.1% 24.4% 14.1% 17.1% 25.7%
RoIC (%) 5.3% 28.0% 13.9% 15.0% 26.8%
RoE (%) 19.0% 25.0% 22.5% 29.3% 36.3%

Diluted EPS (`) 2.2 4.0 4.5 6.9 10.8
Book value per share (`) 13.8 18.4 21.5 26.0 33.6
P/E (x) 198.3 109.9 97.0 63.1 40.4
P/BV (x) 31.6 23.7 20.3 16.8 13.0
EV/EBITDA (x) 111.9 51.0 45.1 26.3 16.7
EV/EBIT (x) 501.5 75.3 75.6 46.6 24.4

CRISIL
NOT RATED
COMPANY INSIGHT CRISIL IN EQUITY September 17, 2014
CRISIL’s reputation of being an independent, knowledge-based

PRIME PHASE
organisation and its timely entry into the KPO business has driven its
robust growth and profitability for years (as demonstrated by PAT CAGR
of 34% over FY02-CY13). With sustainable growth underpinned by Recommendation
formidable competitive advantages, CRISIL is currently valued at 41x Mcap (bn): `39/US$2.3
one-year forward P/E, a 57% premium to its peers and an 80% premium 3M ADV (mn): `81/US$1.3
to its cross-cycle average. CMP: `1976
TP (12 mths): NA
Background
Upside (%): NA
CRISIL was India’s first rating agency formed in 1987 and promoted by the
erstwhile ICICI Ltd along with UTI and other financial institutions. Whilst its initial
Flags
focus was on the rating business, it successfully diversified into research, analytics
Accounting: GREEN
and advisory businesses over the years through organic and inorganic routes. A
debt-free company, CRISIL has delivered 17% revenue CAGR with EBITDA Predictability: GREEN
margins of ~32-37% and RoE of ~48% over CY09-14. Earnings Momentum: GREEN
The Irevna acquisition: a game-changer Catalysts

The acquisition of Irevna in 2005 led to CRISIL acquiring global research  Pickup in loan growth/bond
capabilities and, equally importantly, revenue diversification. This diversification
issuances in India
has paid off, as Irevna grew at a CAGR of 41% over CY06-11, thus
compensating for CRISIL’s struggling advisory business which reported a CAGR of  Maintaining EBITDA margins
-9% over the same period. Acquisitions of Pipal in September 2010 and Coalition
in August 2012 also seem to be steps in the right direction.
Performance
S&P collaboration and strong brand - key strategic assets 200
CRISIL’s technical collaboration with S&P not only helps CRISIL get S&P’s 180
160
outsourcing contracts but also helps it win research offshoring mandates with 140
major global investment banks. Further, its strong brand allows it to command a 120
100
premium in the ratings/research business and its reputation in the job market 80
60
allows it to attract high-quality talent at a lower cost.
May-14
Jul-14
Sep-13
Nov-13
Jan-14
Mar-14
CRISIL could witness DESCENT
At ~32%, EBITDA margins are currently at an all-time high for CRISIL and are Sensex CRISIL
mostly derived from its high-margin research business. However, margins could
decline from the current levels, as: (i) growth in Irevna’s key accounts stagnates; Source: Bloomberg, Ambit Capital research
(ii) Irevna’s incremental growth comes from smaller accounts which involve
higher opex; (iii) competition from captives intensifies; and (iv) newer acquisitions
come with lower margins (like Coalition which is onsite).
Premium return ratios justify premium valuations
At CMP, the stock is trading at 41x one-year forward earnings, which is an 80%
premium to its six-year average. Also, CRISIL trades at a ~58% premium (P/E
multiple) in comparison with its peer group (ICRA and CARE). Whilst this appears
justified given CRISIL’s superior RoEs (50% premium to its peers) and more
diversified revenue stream (not dependent on the ratings business), the risk to
the company comes from itself (as explained in the above paragraph). Analyst Details
Key financials - standalone Aadesh Mehta
Year to March (` mn) CY09 CY10 CY11 CY12 CY13 +91 22 3043 3239
Net Sales 5,373 6,284 8,070 9,777 11,106

aadeshmehta@ambitcapital.com
EBITDA 1,993 2,151 2,624 3,276 3,606 Pankaj Agarwal, CFA

EBITDA (%) 37% 34% 33% 34% 32% +91 22 3043 3206
EPS (`) 22.3 29.3 29.5 31.4 42.2 pankajagarwal@ambitcapital.com
RoCE (%) 37% 53% 49% 42% 44% Ravi Singh
RoE (%) 41% 50% 51% 47% 49% +91 22 3043 3181
P/E (x) 88.6 67.4 67.0 62.9 46.8 ravisingh@ambitcapital.com
CRISIL
Exhibit 1: Revenue growth and EBITDA margins over the Exhibit 2: RoCE and RoE over the past five years
past five years
30% 38% 55% 52%
25% 50% 50%
36%
20% 48%
45%
15% 34% 46%
40%
10% 44%
32%
5% 35% 42%
0% 30% 30% 40%
CY09
CY10
CY11
CY12
CY13
CY09
CY10
CY11
CY12
CY13
Revenue growth (LHS, %) EBITDA Margin (RHS, %) ROCE (LHS, %) RoE (RHS, %)
Exhibit 3: EBITDA margins and cash generation over FY99- Exhibit 4: EBITDA margins and cash generation over CY06-
05 13
100% 80% 100% 70%
80% 80%
60% 50%
60% 60%
40% 30%
40% 40%
20% 10%
20% 20%
0% 0% 0% -10%
FY99
FY00
FY01
FY02
FY03
FY04
FY05
CY06
CY07
CY08
CY09
CY10
CY11
CY12
CY13
EBITDA Margin (RHS, %) CFO/EBITDA (LHS, %) EBITDA Margin (RHS, %) CFO/EBITDA (LHS, %)
Exhibit 5: Cross-cycle P/E at an 80% premium over the past Exhibit 6: Cross-cycle P/E at a 58% premium over the past
six years six years
45 Average P/E PE Average P/B PB

40 20
35
15
30
25 23x
10 9.8x
20
15 5
10
5 0
Sep-08
Mar-09
Sep-09
Mar-10
Sep-10
Mar-11
Sep-11
Mar-12
Sep-12
Mar-13
Sep-13
Mar-14
Sep-14
Sep-08
Mar-09
Sep-09
Mar-10
Sep-10
Mar-11
Sep-11
Mar-12
Sep-12
Mar-13
Sep-13
Mar-14
Sep-14

CRISIL’s CFO/EBITDA has ranged ~70-99% over the past 5 years, demonstrating the high cash conversion of the
Accounting GREEN business. Consequently, we believe that the company’s reported profitability is a true reflection of the actual
profitability of the firm.
The management has guided the markets and the analysts in a timely manner regarding revenue growth guidance
and acquisitions.
Earnings momentum GREEN Consensus has upgraded its earnings estimates for the company by ~6% over the past three months.

CRISIL
Income statement – consolidated

Particulars CY09 CY10 CY11 CY12 CY13
Operating Income 5,373 6,284 8,070 9,777 11,106
Advisory 599 516 573 553 557
Ratings 2,389 2,841 3,260 3,964 4,139
Research 2,385 2,928 4,237 5,260 6,411
Operating Expenses 3,380 4,133 5,446 6,501 7,501
Employee Cost 2,060 2,557 3,523 4,390 5,155
General and Administration Expenses 999 1,216 1,563 1,696 1,868
Others 321 360 359 415 479
EBITDA 1,993 2,151 2,624 3,276 3,606
Other Income 230 730 428 204 366
Operating profits 2,223 2,881 3,052 3,480 3,972
Depreciation 149 213 298 343 379
Profit Before Taxation & Exceptional Items 2,075 2,669 2,754 3,137 3,593
Exceptional Income / Expenses - - - - 659
Profit Before Tax 2,075 2,669 2,754 3,137 4,252
Provision for Tax 467 587 690 933 1,273
Profit After Tax 1,608 2,082 2,064 2,204 2,978
Balance sheet - consolidated

Share Capital 72 71 70 70 71
Total Reserves 4,266 3,874 4,109 5,220 6,674
Shareholder's Funds 4,338 3,945 4,179 5,290 6,745
Total Non-Current Liabilities (101) (142) 80 5 (48)
Deferred Tax Assets / Liabilities (101) (142) (131) (175) (229)
Other Long Term Liabilities 52 14 23
Long Term Trade Payables 159 165 157
Total Current Liabilities 2,002 2,139 2,641 4,361 4,541
Trade Payables 856 780 958 1,135 1,122
Other Current Liabilities 759 897 1,151 2,503 2,038
Short Term Provisions 387 462 533 723 1,381
Total Liabilities 6,240 5,941 6,900 9,656 11,237
Total Non-Current Assets 1,899 2,411 2,808 5,238 5,119
Net Block 1,201 2,248 2,263 4,668 4,493
Capital Work in Progress 637 1 6 - -
Non Current Investments 62 162 56 66 56
Long Term Loans & Advances - - 398 443 473
Other Non-Current Assets - - 85 60 98
Total Current Assets 4,340 3,530 4,093 4,418 6,118
Currents Investments 1,114 100 102 1,084 2,387
Sundry Debtors 922 1,086 924 1,172 1,195
Cash and Bank 1,576 1,613 2,542 1,528 1,899
Other Current Assets 111 221 419 461 523
Short Term Loans and Advances 618 510 105 172 113
Miscellaneous Expenses not written off - - - - -
Total Assets 6,240 5,941 6,900 9,656 11,237

CRISIL
Ratio analysis - consolidated

Revenue growth (%) 4% 17% 28% 21% 14%
PAT growth (%) 14% 30% -1% 7% 35%
EBITDA Margin (%) 37% 34% 33% 34% 32%
ROCE (%) 37% 53% 49% 42% 44%
CFO/EBITDA (%) 87% 68% 99% 68% 70%
FCF/EBITDA (%) 47% 76% 63% 56% 86%
CE/Turnover (%) 81% 63% 52% 54% 61%
RoA (%) 28% 34% 32% 27% 29%
RoE (%) 41% 50% 51% 47% 49%
Valuation parameters - consolidated

EPS 22.3 29.3 29.5 31.4 42.2
Book Value ( per share) 60.0 55.6 59.7 75.3 95.5
P/E (x) 88.6 67.4 67.0 62.9 46.8
P/BV (x) 32.9 35.5 33.1 26.2 20.7

Apollo Tyres
SELL
COMPANY INSIGHT APTY IN EQUITY September 17, 2014
Due to the benign rubber price environment, the successful acquisition of POTENTIALLY IN DESCENT PHASE
Vredestein in May 2009 and due to the first-mover advantage in the
truck radial segment, Apollo Tyres has performed exceptionally well in Recommendation
recent years. However, the management’s aggressive intentions, Mcap (bn): `100/US$1.6
manifested by its large capex plans and its aborted acquisition of Cooper 3M ADV (mn): `1,053/US$17.2
Tire, have the potential to spoil the dream run.
CMP: `196
A strong run over the past five years TP (12 mths): `180
Apollo Tyres has performed superbly over the past five years, with 22% revenue Downside (%): 8
CAGR and 35% EBITDA CAGR over FY09-14. This has been complemented by
strong operational cash flow (CFO/EBITDA average of 90%), decline in net debt Flags
levels (by 29%) and expansion in return ratios (RoCE expanded from 15.6% in Accounting: AMBER
FY09 to 25.5% in FY14). The factors contributing to this performance are the Predictability: AMBER
growth of the Indian auto industry, benign rubber prices and the successful
Earnings Momentum: GREEN
acquisition of Vredestein (acquired for EV/sales of a mere 0.5x in FY10).
Aggressive capex plans for domestic business amidst rising competition Catalysts
Apollo enjoys leadership in the truck bus radial (TBR) segment (market share of
 Market share loss in the truck-bus
28%) due to its first-mover advantage. The company has recently announced
radial segment
plans to expand its TBR capacity by nearly 50% with a total capex of `15bn (15%
of the firm’s market-cap). With the increasing focus and technological  FCF getting impacted due to high
advantages of MNCs in the TBR segment, we expect MNCs’ market share in TBR capex
to increase from 2-3% currently to 30% by FY18. In this context, Apollo’s capex
plan for the TBR segment appears aggressive. Performance
Vredestein success fuels Western dream 30,000 250

200
The company plans to set up a greenfield project in Eastern Europe at a cost of 25,000
150
Euro500mn (37% of the firm’s market cap) over the next four years. Besides 20,000 100
passenger car capacity, the project would entail 3,000 TBR/day. The greenfield
project for TBR (which is intended to be sold in the Western markets) would be 15,000 Sep-13 50
Oct-13
Dec-13
Jan-14
Mar-14
Apr-14
Sep-14
Jun-14
Jul-14
unchartered territory for Apollo, and it would compete against stronger brands
(such as Michelin and Continental) on their home turf.
Can the management’s ambitions disrupt the run? Sensex Apollo Tyres (Rs)
Helped by multi-year low rubber prices and improving domestic demand, tyre
makers including Apollo face strong near-term prospects. However, we believe
there is a high risk of Apollo letting this success fuel ‘hubris and arrogance’ and
entering the descent phase. Our concerns primarily stem from the company’s
aggressive ambitions, manifested by its previous flirtation with Cooper Tire
(which was >2x Apollo’s size when Apollo was trying to buy it) and aggressive
capex plans. Moreover, the company recently passed a resolution to raise up to
US$200mn through an issue of securities (we believe that the company’s capex
plans can be comfortably met from internal accruals).
Valuation
Our DCF assumes a WACC of 14% and terminal growth of 4%, translating into a
one-year target price of `180 and implying 8.6x FY16 net earnings. This is at a
premium of around 22% to the average multiple at which Apollo has traded over
the past five years.
Year to March (` mn) FY12 FY13 FY14 FY15E FY16E Analyst Details
Net Sales 121,533 127,946 134,085 142,644 152,158 Ashvin Shetty, CFA
EBITDA 11,661 14,567 18,720 18,801 19,445
+91 22 3043 3285
EBITDA (%) 9.6% 11.4% 14.0% 13.2% 12.8%
EPS (`) 8.72 11.8 20.9 19.9 21.0
RoE (%) 17% 19% 26% 20% 18% Ritu Modi
RoCE (%) 15% 18% 24% 24% 22% +91 22 3043 3292
P/E (x) 22.4 16.6 9.4 9.8 9.3 ritumodi@ambitcapital.com
Apollo Tyres
Exhibit 1: Apollo’s revenues and EBITDA have recorded Exhibit 2: Strong operational performance supported
strong CAGR of 22% and 35%, respectively over the last Apollo’s return ratios
five years
135,000 15% 35%
120,000 30%
13%
105,000 25%
90,000 11% 20%
75,000 15%
9%
60,000 10%
45,000 7% 5%
FY09
FY10
FY11
FY12
FY13
FY14
FY09
FY10
FY11
FY12
FY13
FY14
Exhibit 3: Strong free cash generation over the years led to Exhibit 4: Apollo’s funds over FY09-14 have been mainly
reduction in net debt levels used for capex and interest payments
17,000 1.1 Dividends
14,000 0.9 3%
Interest
11,000 0.7 21%
8,000 0.5
5,000 0.3 `12.9bn
2,000 0.1
(1,000) (0.1)
(4,000) (0.3) Investment `45.4bn
(7,000) (0.5) 1%
FY09 FY10 FY11 FY12 FY13 FY14 Capex
CFO FCF Net debt:equity (x) - RHS 74%
Exhibit 5: On P/E, Apollo is currently trading at a 41% Exhibit 6: On EV/EBITDA, Apollo is currently trading at a
premium to its historical five-year average 27% premium to its historical five-year average
11 6.0
10 5.5
9 5.0
8 4.5
7 4.0
6 3.5
5 3.0
4 2.5
3
Sep-09
Jan-10
May-10
Sep-10
Jan-11
May-11
Aug-11
Dec-11
Apr-12
Aug-12
Dec-12
Apr-13
Aug-13
Dec-13
Apr-14
Aug-14
Sep-09
Jan-10
May-10
Sep-10
Jan-11
May-11
Aug-11
Dec-11
Apr-12
Aug-12
Dec-12
Apr-13
Aug-13
Dec-13
Apr-14
Aug-14
Apollo 1-yr fwd EV/EBITDA

Apollo 1-yr fwd P/E Avg 1-yr fwd P/E Avg 1-yr fwd EV/EBITDA

Apollo’s average accounting score based on Ambit’s forensic accounting analysis ranks in line with the sector
Accounting AMBER
(auto-ancillary) average.
Quarterly earnings reported by the company tend to be unpredictable. Given the high level of fixed costs
(including depreciation and interest expenses), any marginal outperformance/underperformance at the topline
Predictability AMBER level tends to have a magnified impact at the net earnings level. However, this is an industry-wide phenomenon.
That said, the company has been regular in communicating any exceptional events such as the Perambra facility
shutdown in 2010 to shareholders.
Earnings momentum GREEN Bloomberg consensus earnings show significant upgrades in the past one month.

Apollo Tyres

Reserves & surpluses 27,824 33,397 45,134 54,673 64,473
Total networth 28,328 34,009 45,746 55,182 64,982
Minority Interest 8 - - - -
Debt 28,720 26,507 16,134 13,134 8,134
Deferred tax liability 4,025 4,928 5,241 5,241 5,241
Gross block 80,344 85,219 94,681 96,261 111,399
Net block 40,238 41,693 44,558 41,823 52,133
CWIP 4,225 3,878 883 5,000 7,000
Goodwill on Consolidation 1,338 1,436 1,376 1,376 1,376
Cash & Cash equivalents 1,730 3,348 6,541 11,402 3,655
Debtors 11,458 9,908 10,427 10,584 10,877
Inventory 19,991 20,311 20,664 21,588 23,030
Loans & advances 4,781 4,136 5,254 5,493 5,840
Provisions 5,028 5,884 6,963 7,237 7,808
Total assets 61,081 65,444 67,122 73,558 78,358

Net Sales 121,533 127,946 134,085 142,644 152,158
% growth 37% 5% 5% 6% 7%
EBITDA 11,661 14,567 18,720 18,801 19,445
% growth 19% 25% 29% 0% 3%
Depreciation 3,256 3,966 4,109 4,314 4,828
EBIT 8,405 10,601 14,611 14,486 14,617
Interest expenditure 2,873 3,128 2,838 1,859 1,351
Non-operating income 326 944 1,014 1,019 1,167
Adjusted PBT 5,858 8,418 12,787 13,647 14,433
Tax 1,444 2,448 2,269 3,516 3,746
Adjusted PAT/ Net profit 4,393 5,958 10,518 10,130 10,687
% growth 0% 36% 77% -4% 5%
Extraordinary Expense/(Income) (294) 169 (468) - -
Reported PAT / Net profit 4,687 5,789 10,986 10,130 10,687

Apollo Tyres

Net Profit Before Tax 5,565 8,586 12,319 13,647 14,433
Depreciation 3,256 3,966 4,109 4,314 4,828
Others 2,825 2,817 1,111 1,747 1,273
Tax (953) (1,134) (2,386) (3,516) (3,746)
(Incr) / decr in net working capital (3,100) (1,454) 1,302 (342) (532)
Capex (net) (7,895) (5,999) (4,905) (5,697) (17,138)
(Incr) / decr in investments (43) (13) 3,640 - -
Cash flow from investments (7,879) (5,944) (951) (5,586) (17,060)
Net borrowings 3,372 (1,782) (8,897) (3,000) (5,000)
Issuance of equity - 108 - (103) 0
Interest paid (2,769) (3,085) (2,881) (1,859) (1,351)
Dividend paid (293) (293) (297) (442) (592)
Cash flow from financing 309 (5,053) (12,075) (5,404) (6,942)
Net change in cash 23 1,784 3,429 4,861 (7,746)
Closing cash balance 1,730 3,347 6,541 11,402 3,655
Free cash flow (302) 6,782 11,550 10,153 (882)

EBITDA margin (%) 9.6% 11.4% 14.0% 13.2% 12.8%
EBIT margin (%) 6.9% 8.3% 10.9% 10.2% 9.6%
Net profit margin (%) 3.6% 4.7% 7.8% 7.1% 7.0%
Dividend payout ratio (%) 6% 4% 4% 5% 7%
Net debt: equity (x) 1.0 0.7 0.2 0.0 0.1
Working capital turnover (x) 10.2 9.0 9.4 10.4 10.7
RoCE (pre-tax) (%) 15.5% 17.9% 24.5% 24.2% 21.8%
RoIC (%) 11.7% 12.7% 20.1% 18.0% 16.1%
RoE (%) 16.7% 19.1% 26.4% 20.1% 17.8%

EPS (`) 8.7 11.8 20.9 19.9 21.0
Diluted EPS (`) 8.7 11.8 20.9 19.9 21.0
P/E (x) 22.4 16.6 9.4 9.8 9.3
P/BV (x) 3.5 2.9 2.2 1.8 1.5
EV/EBITDA (x) 9.3 7.4 5.8 5.8 5.6
EV/EBIT (x) 12.9 10.2 7.4 7.5 7.4

Asian Paints
SELL
COMPANY INSIGHT APNT IN EQUITY September 17, 2014
Asian Paints runs the risk of capital misallocation as it targets: (a) the
DESCENT PHASE
development of ‘home improvement’ (lower RoCE relative to paints) in
the firm’s largest division; and (b) strategic initiatives around Berger
International, a division that has generated sub-par RoCEs over the past Recommendation
decade. These targets coincide with: (a) an inter-generational shift Mcap (bn): `634/US$10.5
amongst promoters; (b) surplus capital accumulation; and (c) lack of 3M ADV (mn): `601/US$9.9
proven M&A integration capabilities internally. We reiterate SELL. CMP: `661
TP (12 mths): `530
EPS CAGR of ~25% and RoCE of ~40% over FY09-14 Downside (%): 20
Asian Paints is India's leading decorative paints company, with a market share of
more than 50%. Over the last five years, the company's revenues have increased Flags
at a CAGR of 18% and net profits have increased at a CAGR of 25% with Accounting: GREEN
operating margins at ~16%. The firm has reported steady RoCE, averaging Predictability: GREEN
around 40% over this period, with net debt:equity ratio reducing from 0.3x in Earnings Momentum: AMBER
FY07 to net cash from FY11 onwards.
Supply chain efficiencies are its biggest competitive advantage Catalysts
Asian Paints’ supply chain efficiencies are its biggest source of competitive  Large acquisitions that are RoCE-
dilutive
advantage, as it enables outperformance around product availability on shop
 Capex behind expansion of
floors whilst expanding across products and geographies. This includes the use of
businesses like Sleek
technology to integrate manufacturing plants, processing centres and depots and
thereby accurately forecast demand and track the performance of dealers.
Consistent focus on further supply chain efficiencies allows it to maintain its Performance
dominance (and hence market shares) over peers in the paints industry.
30,000 700
Superior quality of senior/middle management team for paints division
27,000
Asian Paints has retained its dominance over its peers by benefitting from its 600
competitors’ lack of focus, due to: (a) several changes in controlling 24,000
shareholders for its peers; and (b) the significant presence of a foreign entity on 500
21,000
the Board of its peers. Moreover, Asian Paints has a reputation of hiring and
retaining high-quality professionals, including graduates from top business 18,000 400
schools, as early as the 1970s and 1980s. Sep-13 Jan-14 May-14 Sep-14
Sensex Asian Paints
However, capital misallocation likely to be an overhang on RoCEs
The firm has said that the ‘home improvement’ division is likely to be larger than Source: Bloomberg, Ambit Capital research
the paints division, even though home improvement is a lower RoCE business
than paints. Also, the recent de-listing of Berger International by Asian Paints is
intended to help the firm explore ‘more options’ of operating in international
markets despite the business generating sub-par returns historically. These
statements come at a time when the firm is beginning to generate surplus capital
amidst an inter-generational shift amongst promoters.
Valuations stretched: We reiterate SELL
We expect Asian Paints to deliver 18% revenue CAGR and 24% PAT CAGR over
FY14-17. Whilst we expect Asian Paints to sustain its dominance in the decorative
paints sector, our DCF model generates a fair value of `530, implying an FY16
P/E of 26x, 20% lower than its current multiple of 32.2x.
Net Sales 96,322 109,707 127,148 149,632 177,121
EBITDA 15,087 17,319 19,979 25,215 30,595
EBITDA (%) 16% 16% 16% 17% 17%
Analyst Details
EPS (`) 10.3 11.6 12.7 16.6 20.5
RoCE (%) 38% 35% 31% 35% 37% Rakshit Ranjan, CFA
RoE (%) 40% 36% 33% 36% 38% +91 22 3043 3201
P/E (x) 64 57 43 40 32 rakshitranjan@ambitcapital.com
Asian Paints
Exhibit 1: Revenue growth and EBITDA margin for Asian Exhibit 2: RoCE and RoE for Asian Paints (2004-14)
Paints (2004-14)
30% 60%
55%
25% 50%
45%
20% 40%
35%
15% 30%
25%
10% 20%
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
Revenue Growth EBITDA Margin ROCE ROE
Exhibit 3: Sources of funds for Asian Paints (2004-14) Exhibit 4: Utilisation of funds for Asian Paints (2004-14)
Interest/Di Net
vidend Investment
Debt Received, s, 8% Dividend
Raised, 4.4% Paid, 36%
5.2%
Net Capex,
40%
Increase in
Cash &
CFO, Cash
Interest equivalents
90.5%
Paid, 4% , 12%
Exhibit 5: Historical one-year forward EV/EBITDA multiples Exhibit 6: Historical one-year forward P/E multiples for
for Asian Paints (2008-14) Asian Paints (2008-14)
650 32x 600

40x
29x 500
550 26x 35x
450 23x 400 30x
20x 300 25x
350
250 200 20x
150 100
50 -
Jan-08
Jun-08
Nov-08
Apr-09
Sep-09
Feb-10
Jul-10
Dec-10
May-11
Oct-11
Mar-12
Aug-12
Jan-13
Jun-13
Nov-13
Apr-14
Sep-14
Nov-08
Apr-09
Sep-09
Feb-10
Dec-10
May-11
Mar-12
Nov-13
Apr-14
Sep-14
Jan-08
Jun-08
Jul-10
Oct-11
Aug-12
Jan-13
Jun-13

Segment Score Comment
Asian Paints has in the past, reported high cash conversion, efficient management of working capital and low levels of
Accounting GREEN
loans and advances and contingent liabilities. Consequently, we give a high rating to the quality of its accounting.
Due to a combination of high pricing power, presence across products, categories and SKUs, and exposure
Predictability GREEN predominantly to the consumer activity–led sector of the economy, earnings show stability across the economic cycle.
Hence, visibility of cash flows in the future is high
Earnings momentum AMBER No major changes in consensus earnings in the last 4 weeks.

Asian Paints

Total net worth 27,485 33,843 40,392 47,347 55,791
Debt 3,359 2,377 2,400 2,400 2,400
Deferred tax liability 928 1,544 1,878 1,878 1,878
Gross block 21,458 34,294 38,035 40,035 42,035
Net block 13,006 24,410 25,616 24,982 24,209
CWIP 6,171 592 716 1,000 1,000
Investments (non-current) 3,547 2,807 7,212 4,000 4,000
Debtors 7,813 9,809 11,103 12,299 14,558
Inventory 15,989 18,303 20,699 25,007 29,601
Loans & advances 5,135 3,211 3,767 4,919 5,823
Provisions 4,449 5,394 6,679 6,969 8,249
Miscellaneous expenditure 0 0 0 0 0
Total assets 33,139 39,371 47,131 54,614 63,690

Net Sales 96,322 109,707 127,148 149,632 177,121
% growth 25.0% 13.9% 15.9% 17.7% 18.4%
EBITDA 15,087 17,319 19,979 25,215 30,595
% growth 14.9% 14.8% 15.4% 26.2% 21.3%
Depreciation 1,211 1,546 2,457 2,633 2,773
EBIT 13,876 15,773 17,522 22,581 27,822
Non-operating income 1,074 1,145 1,342 1,611 1,933
Adjusted PBT 14,540 16,552 18,442 23,856 29,418
Tax 4,335 4,957 5,715 7,395 9,120
Adjusted PAT 10,205 11,595 12,727 16,460 20,299
% growth 14% 10% 29% 23%
Extraordinary income/ (expense) 0 0 0 0 0
Reported PAT after minority interest 9,887 11,139 12,287 15,933 19,666

Asian Paints

Depreciation 1,211 1,546 2,556 2,633 2,773
Others (807) (625) (937) - 0
Tax (4,296) (4,385) (4,802) (7,395) (9,120)
(Incr)/decr in net working capital (2,795) (1,587) (1,682) (1,059) (979)
Capex (net) (6,732) (6,367) (2,336) (2,284) (2,000)
(Incr)/decr in investments 1,075 973 (4,113) 3,212 -
Other income (expenditure) 478 438 799 - -
Cash flow from investments (5,121) (4,843) (6,029) 928 (2,000)
Net borrowings 970 (1,016) (369) - -
Interest paid (404) (371) (423) (336) (336)
Dividend paid (3,831) (4,621) (5,467) (8,978) (11,222)
Cash flow from financing (3,265) (6,007) (6,259) (9,314) (11,558)
Net change in cash -123 1,018 1,712 9,985 8,871
Free cash flow (before investments) 1,532 5,501 11,664 16,087 20,429

EBITDA margin (%) 16.8% 16.8% 16.8% 17.9% 18.4%
EBIT margin (%) 15.5% 15.4% 14.8% 16.2% 16.8%
Net prof. (bef min int) margin (%) 10.3% 10.2% 9.6% 10.6% 11.1%
Net debt: equity (x) * (0.1) (0.2) (0.2) (0.4) (0.5)
RoCE (pre-tax) (%) 38.1% 35.3% 33.0% 34.9% 36.9%
RoIC (%) 53.3% 46.4% 39.2% 48.7% 62.2%
RoE (%) 40.1% 36.3% 33.1% 36.3% 38.1%

EPS (`) 10.3 11.6 12.7 16.6 20.5
Diluted EPS (`) 10.3 11.6 12.7 16.6 20.5
Book value per share (`) * 28.7 35.3 42.1 49.4 58.2
P/E (x) 64.1 56.9 52.0 39.8 32.2
P/BV (x) 23.1 18.7 15.7 13.4 11.4
EV/EBITDA (x) 39.4 34.5 29.8 23.7 19.6
EV/EBIT (x) 42.6 37.6 33.7 26.3 21.4

Ambuja Cement
SELL
COMPANY UPDATE ACEM IN EQUITY September 17, 2014
Ambuja’s strong profitability over CY02-09 was driven by efficient

DESCENT PHASE
capital allocation, cost efficiency and premium brand positioning.
However, it chose to hoard cash over CY09-14 rather than re-invest for
growth and thus it lost market share (8.7% in CY13 vs 10.1% in CY07). Recommendation
Holcim’s excessive control on capital allocation could hinder expansion Mcap (bn): `104/US$1.7
and lead to lower-than-industry volume growth for at least the next two 3M ADV (mn): `525/US$8.7
years. The stock is trading at 11.8x CY15 EBITDA, a 20% premium to its CMP: `212
five-year average. We reiterate our SELL stance. TP (12 mths): `202
A great cement franchise… Downside (%): 5%
Ambuja, the third-largest Indian cement manufacturer, is a premium cement
brand with a history of exceptional capital allocation and profitability. In its Flags
heydays i.e. over CY02-09: (a) its volumes expanded at 15% CAGR, (b) EBITDA Accounting: GREEN
and CFO expanded at 23% CAGR, and (c) its RoCE averaged 20%. The Predictability: AMBER
company’s capacity increased to 22mn tonnes in CY09 from 9mn tonnes in Earnings Momentum: GREEN
CY03 and it clocked 10% higher volume growth than the industry over CY02-
09. Furthermore, Ambuja has been one of the most fuel-efficient Indian cement Catalysts
companies in the last decade.
 Further decline in market share in
… descending to mediocrity key markets
Ambuja’s decision to not re-invest for capacity expansion at a time when  Further delay in capacity additions
regional players aggressively built scale has led to market share erosion in key  Poor pricing discipline and hence
markets like north and west India (it has lost its leadership position to Shree declining realisations
Cement in north India). The company’s market share dropped to 8.7% in CY13
vs 10.1% in CY07 and it has grown slower than the industry in 5 out of the last
Performance
6 years (3.7% volume CAGR over CY09-13 vs 7% industry volume CAGR).
29,000 250
Excessive control of the global parent 27,000 230
Holcim controls the capital allocation decisions of Ambuja and in the last five 25,000
210
years it has preferred to hoard cash rather than invest for growth. ACC and 23,000
21,000 190
Ambuja accounted for 16%/22%/54% of Holcim’s global sales/EBITDA/cash in 170
19,000
CY13 and hence have a major bearing on Holcim’s credit rating. With Holcim
17,000 150
merging with Lafarge globally, the management’s bandwidth in India might be
Sep-13
Nov-13
Jan-14
Mar-14
May-14
Jul-14
Sep-14
limited and delay decision-making in India. Also, the management’s guidance
on the savings generated from ACC’s absorption appears to be over-estimated.
Sensex ACEM (RHS)
Market share erosion to continue
Significant increase in industry-wide capacities (up 40% over CY09-13) amidst
Ambuja’s minimal additions (up 12%) would lead to continued loss of market
share and lower growth than industry for at least the next two years. We build in
volume growth of 7.5%/8% in CY15/CY16 vs our industry growth expectations
of 8%/10%.
Valuation
The stock is trading at 11.8x CY15 EBITDA, a 20% premium to its five-year
average. We find valuations expensive and despite building in a strong 31%
EBITDA CAGR in CY13-15, we expect RoCEs to remain low (14.5-15.5% vs five-
year average of 16.5%). Our target price of `202 implies 9.7x CY15 EBITDA.
Y/E Dec (` mn) CY11 CY12 CY13 CY14E CY15E Analyst Details
Operating Income (` mn) 85,907 97,302 91,604 104,903 119,265 Nitin Bhasin
EBITDA (` mn) 19,845 24,730 16,507 23,797 28,258 +91 22 3043 3241
EBITDA margin (%) 23.1 25.4 18.0 22.7 23.7
EPS (`) 7.7 8.4 8.4 10.1 11.7
RoCE (%) 15.4 17.0 11.0 14.7 15.5 Achint Bhagat
RoIC (%) 24.8 29.2 20.2 26.4 26.5 +91 22 3043 3178
EV/ EBITDA (x) 15.6 12.2 18.1 12.4 10.5 achintbhagat@ambitcapital.com
Ambuja Cement
Exhibit 1: Revenue growth decelerated significantly and Exhibit 2: RoCE/RoE dropped with low EBIT growth and
EBITDA margin declined excessive cash in the books
60% 35% 60% 40%
50% 30%
45% 30%
40% 25%
30% 20% 30% 20%
20% 15%
15% 10%
10% 10%
0% 5% 0% 0%
FY04
FY05
CY07
CY08
CY09
CY10
CY11
CY12
CY13
CY06*
FY04
FY05
CY07
CY08
CY09
CY10
CY11
CY12
CY13
CY06*
-10% 0%
Revenue growth EBITDA margin (RHS) Pre-tax RoCE RoE (RHS)
Source: Company, Ambit Capital research. Note: CY06 is an 18-month Source: Company, Ambit Capital research. Note: CY06 is an 18-month
period, and we annualise the same for our analysis period, and we annualise the same for our analysis
Exhibit 3: Hoarding cash and no major capacity addition… Exhibit 4: …leading to declining market share
(` mn) 10.5%
50 45%
10.0%
40 9.5%
35% 9.0%
30 8.5%
25% 8.0%
20 7.5%
7.0%
10 15% CY08 CY09 CY10 CY11 CY12 CY13
CY08 CY09 CY10 CY11 CY12 CY13
Market share Capacity share
Cash Cash as a % of networth (RHS)
Source: Company, Ambit Capital research Source: Company, CMA, Ambit Capital research
Exhibit 5: Ambuja is trading at a 20% premium to its five- Exhibit 6: Ambuja is trading at a 32% premium to its five-
year average EV/EBITDA year average EV/tonne
(X) (`)
20 11,000
16 9,000
12 7,000
8 5,000
4 3,000
Apr-09
Oct-09
Apr-10
Oct-10
Apr-11
Oct-11
Apr-12
Oct-12
Apr-13
Oct-13
Apr-14
Apr-09
Oct-09
Apr-10
Oct-10
Apr-11
Oct-11
Apr-12
Oct-12
Apr-13
Oct-13
Apr-14
One-yr fwd EV/EBITDA 5-yr average EV/EBITDA One-yr fwd EV/Tonne 5-yr average EV/tonne
Exhibit 7: Explanation for the flags

Ambuja ranks the third highest amongst the top-12 Indian cement companies on our forensic accounts screener. Note that
Accounting GREEN
the company has consistently maintained 90% plus CFO/EBITDA over the last decade
Uncertain demand environment and poor pricing discipline has led to significant volatility in EBITDA/tonne of the company.
Predictability AMBER EBITDA growth is highly sensitive to realisations, which in turn is a function of production discipline
Earnings momentum GREEN Consensus CY15 EPS estimates have been revised upwards by 2%/10% in the last 3/6 months respectively.
Source: Company, Bloomberg, Ambit Capital research

Ambuja Cement

Year to March (` mn) CY11 CY12 CY13 CY14E CY15E
Share capital 3,069 3,084 3,092 3,092 3,092
Reserves and surplus 77,305 84,728 91,764 101,394 112,136
Total Networth 80,694 88,050 94,855 104,485 115,228
Loans 494 428 405 - -
Deferred tax liability (net) 6,436 5,483 5,643 5,643 5,643
Sources of funds 87,624 93,961 100,904 110,129 120,872
Net block 61,865 58,624 60,625 71,948 82,479
Capital work-in-progress 5,773 5,201 6,949 6,949 6,949
Investments 8,643 16,568 17,885 17,885 17,885
Cash and bank balances 20,712 22,537 23,411 25,679 26,111
Sundry debtors 2,409 2,134 2,315 2,874 3,268
Inventories 9,250 9,839 9,339 12,071 13,724
Loans and advances 5,676 8,964 9,122 7,185 8,169
Other current assets 237 390 251 287 327
Total Current Assets 38,283 43,863 44,438 48,097 51,598
Current liabilities and provisions 26,942 30,298 28,994 34,751 38,040
Application of funds 87,624 93,961 100,904 110,129 120,872
Share capital 3,069 3,084 3,092 3,092 3,092
Reserves and surplus 77,305 84,728 91,764 101,394 112,136
Total Networth 80,694 88,050 94,855 104,485 115,228

Revenue 85,907 97,302 91,604 104,903 119,265
yoy growth 15% 13% -6% 14.5% 13.7%
Total expenses 66,062 72,572 75,096 81,106 91,007
EBITDA 19,845 24,730 16,507 23,797 28,258
yoy growth 3% 25% -33% 44.2% 18.7%
Net depreciation / amortisation 4,452 5,653 4,901 5,842 6,977
EBIT 15,393 19,077 11,607 17,955 21,281
Net interest and financial charges 526 757 651 - -
Other income 2,405 3,489 3,936 4,161 4,333
PBT 17,029 19,018 15,140 22,115 25,614
Provision for taxation 4,740 6,048 2,196 6,635 7,684
Adjusted PAT 11,858 15,743 10,289 15,481 17,930
yoy growth -1% 33% -35% 50.5% 15.8%
Reported PAT 12,289 12,970 12,945 15,481 17,930
EPS basic (`) 7.7 8.5 8.5 10.1 11.7

Ambuja Cement

PBT 17,029 19,018 15,141 22,115 25,614
Depreciation 4,452 5,653 4,901 5,842 6,977
Others 2,782 5,055 1,467 1,636 2,293
Interest paid (net) (4,161) (4,333) (4,850) (5,797) (6,626)
CFO before change in WC 20,101 25,393 16,658 23,797 28,258
Change in working capital 795 (417) 446 2,495 (1,116)
Direct taxes paid (4,725) (6,399) (5,101) (6,635) (7,684)
CFO 16,171 18,577 12,003 19,657 19,458
Capex (6,991) (6,870) (6,884) (17,165) (17,509)
Investments 80 277 782 - -
Others 1,592 2,664 1,366 4,161 4,333
CFI (5,319) (3,929) (4,736) (13,005) (13,175)
Proceeds from borrowings 5 94 (23) (405) -
Change in share capital 462 831 368 0 (0)
Interest & finance charges paid (251) (275) (270) - -
Dividends paid (4,964) (4,899) (6,467) (5,851) (7,187)
CFF (4,748) (5,044) (6,258) (6,255) (7,187)

Year to March CY11 CY12 CY13 CY14E CY15E
Revenue growth 14.5 13.3 (5.9) 14.5 13.7
EBITDA growth 2.6 24.6 (33.2) 44.2 18.7
PAT growth (2.8) 5.5 (0.2) 19.6 15.8
EPS norm (dil) growth (3.2) 28.1 (34.6) 50.5 15.8
EBITDA margin 23.1 25.4 18.0 22.7 23.7
EBIT margin 17.9 19.6 12.7 17.1 17.8
Net margin 13.8 16.2 11.2 14.8 15.0
RoCE 15.4 17.0 11.0 14.7 15.5
RoE 16.0 15.4 14.2 15.5 16.3
RoIC 24.8 29.2 20.2 26.4 26.5

Year to March CY11 CY12 CY13 CY14E CY15E
P/E (x) 26.9 21.0 32.1 21.3 18.4
P/B (x) 4.1 3.7 3.5 3.2 2.9
Debt/Equity (x) 0.0 0.0 0.0 0.0 0.0
Net debt/Equity (x) (0.3) (0.4) (0.4) (0.4) (0.4)
EV/Sales (x) 3.4 2.9 3.1 2.7 2.4
EV/EBITDA (x) 14.9 11.6 17.2 11.8 10.0
EV/tonne (`) 10,806 10,488 10,103 10,008 9,344
EV/tonne (US$) 180 175 168 167 156

Ashok Leyland
BUY
COMPANY INSIGHT AL IN EQUITY September 17, 2014
Ashok Leyland’s aggressive capex and investments in FY08-13 coupled

with the industry slowdown since FY13 led to debt:equity rising to 1.9x by TURNAROUND PHASE
end-September 2013 and bottom-line losses in FY14. However, with the
management’s debt and cost reduction efforts beginning to bear fruit Recommendation
and with the commercial vehicle (CV) industry exhibiting signs of revival, Mcap (bn): `112/US$1.8
we believe Ashok Leyland has strong prospects in the coming years as 3M ADV (mn): `746/US$12.2
the new management team re-allocates capital sensibly. CMP: `39
Significant capex/investments at the wrong time TP (12 mths): `44
Ashok Leyland (AL), the second-largest CV manufacturer in India, has had a Upside (%): 12
rough time over the past five years. The company’s aggressive capex and
investments in FY08-13 (`56bn at nearly 4x the FY02-07 levels) coupled with the Flags
industry slowdown led to its net debt:equity level increasing from 0.03x in FY08
Accounting: AMBER
to 1.9x in 1HFY14. The company reported a dismal EBITDA margin of 1.7% and
Predictability: RED
net adjusted loss of `4.8bn in FY14.
Earnings Momentum: AMBER
Focus on debt reduction paying off
Given the significant deterioration in financial health, the new management (led Catalysts
by Mr Vinod Dasari, MD since April 2013) focused on reducing debt and
increasing profitability through sale of non-core assets. These efforts have  Recovery in MHCV volumes
resulted in: (a) net debt levels declining from `61bn in August 2013 to `45bn in  Reduction in debt levels
June 2014; and (b) EBITDA margin improving significantly in 4QFY14 and
1QFY15. Furthermore, the company has done away with its complex and opaque
holding structure. Performance
29,000 45
Increasing market share and export/bus business 40
27,000
Besides profitability and balance sheet health, the company is focused on 25,000 35
expanding the business through new launches and stepping up its marketing 30
23,000
efforts. This has resulted in the company’s market share increasing from 21.1%% 25
21,000 20
in 1HFY14 to 24.5% in 2HFY14 and further to 25.3% in April-August 2014. Our
19,000 15
channel checks suggest that AL is indeed making inroads into northern and
17,000 10
eastern India. In addition, the company has benefited from significant orders for
Sep-13
Oct-13
Dec-13
Jan-14
Mar-14
Apr-14
Jul-14
Sep-14
Jun-14
its buses from export markets (Sri Lanka recently placed an order for 2,200
buses) and state undertakings (4,000 buses from JNNURM) in recent months.
Sensex Ashok Leyland (Rs)
Significantly better prospects
With the Indian CV market now showing clear signs of being in the early stages
of a cyclical revival, we believe AL is nicely positioned. With moderation in
discounts, operating leverage benefits from higher volumes and the
management’s cost reduction efforts, we expect margins of 7.1% in FY15 and
9.8% in FY16 (vs 1.7% in FY14). Similarly, we expect improving profitability,
moderation in capex/investments, sale of non-core assets and the recent QIP
issue of `6.67bn to result in net debt:equity declining further to 0.9x as at end-
FY15 and further to 0.7x as at end-FY16.
Valuation
Our core CV business valuation of `37/share (DCF-based) implies 9.3x FY16
EBITDA (a 15% premium to the historical average). Valuing other investments
(Nissan, John Deere JVs, Hinduja Leyland Finance and IndusInd Bank) at
`7/share translate into an SOTP-based TP of `44/share.
Key financials - standalone Analyst Details
Ashvin Shetty, CFA
Net Sales 128,420 124,817 99,434 119,837 151,432
EBITDA 12,561 8,770 1,666 8,465 14,827 +91 22 3043 3285
EBITDA (%) 9.8% 7.0% 1.7% 7.1% 9.8% ashvinshetty@ambitcapital.com
EPS (`) 2.12 0.54 (1.79) 0.34 2.19
Ritu Modi
RoCE (%) 14% 7% -3% 7% 17%
RoE (%) 19% 5% -15% 2% 14% +91 22 3043 3292
P/E (x) 18.5 72.2 NM NM 17.9 ritumodi@ambitcapital.com
Ashok Leyland
Exhibit 1: Revenue and EBITDA margin over the last five Exhibit 2: RoCE and RoE over the last five years
years
125,000 12.0% 30%
115,000 10.0% 20%
105,000
8.0%
95,000 10%
6.0%
85,000 0%
4.0%
75,000
65,000 2.0% -10%
55,000 0.0% -20%

FY09
FY10
FY11
FY12
FY13
FY14
FY09
FY10
FY11
FY12
FY13
FY14
Exhibit 3: AL’s capital allocation over FY08-13 was Exhibit 4: …the capital allocation in FY02-07
significantly aggressive than…
Exhibit 5: On EV/EBITDA, Ashok Leyland currently trades at Exhibit 6: On P/B, Ashok Leyland currently trades at a 36%
a 56% premium to its five-year historical average premium to its five-year historical average
16 3.0
14 2.5
12
2.0
10
1.5
8
1.0
6
4 0.5
Sep-09
Sep-10
Sep-11
Sep-12
Sep-13
Sep-14
Mar-10
Mar-11
Mar-12
Mar-13
Mar-14
Sep-09
Mar-10
Sep-10
Mar-11
Sep-11
Mar-12
Sep-12
Mar-13
Sep-13
Mar-14
Sep-14
AL 1-yr fwd EV/EBITDA Avg EV/EBITDA AL 1-yr fwd P/B Avg P/B
Source: Company, Bloomberg Source: Company, Bloomberg

In most of the key accounting parameters used by us to analyse the accounting quality, AL has seen an improvement/stable
Accounting AMBER trend in FY14 as compared to the five-year FY08-13 average. Further, the company has reported consolidated accounts for
FY14 for the first time.
Whilst volumes are reported by the company on a monthly basis (in line with the industry practice), the margin performance
reported in the quarterly earnings tends to be unpredictable due to the high amount of fixed costs involved in the business.
Whilst this is an industry-wide phenomenon, AL’s margin performance has been generally more volatile relative to its peers
Predictability RED
due to several one-offs usually contained in its results. Consequently, AL’s results tend to either significantly surprise or
disappoint market expectations. Furthermore, the increased significance of capex and investments over the years has also
increased the degree of volatility in the company’s financial performance.
Bloomberg consensus earnings show marginal downgrades to FY15 and FY16 EBITDA and EPS estimates over the past four
weeks.

Ashok Leyland

Shareholders' equity 2,661 2,661 2,661 2,846 2,846
Total net worth 42,082 44,551 44,479 52,100 55,004
Debt 30,979 43,554 46,903 36,903 31,903
Deferred tax liability 4,904 5,274 4,068 4,068 4,068
Gross block 72,564 79,913 86,723 88,723 90,723
Net block 49,135 52,819 56,599 54,476 52,259
CWIP 6,903 7,057 1,919 1,919 1,919
Cash & cash equivalents 326 139 117 1,246 2,817
Debtors 12,302 14,194 12,990 15,656 19,783
Inventory 22,306 18,960 11,887 14,326 18,103
Loans & advances 12,767 14,421 16,672 18,222 22,554
Provisions 4,969 3,872 1,560 1,880 5,696
Miscellaneous expenditure 73 - - - -
Total assets 78,000 93,379 95,450 93,071 90,974

Net Sales 128,420 124,817 99,434 119,837 151,432
% growth 15% -3% -20% 21% 26%
EBITDA 12,561 8,770 1,666 8,465 14,827
% growth 3% -30% -81% 408% 75%
Depreciation 3,528 3,808 3,770 4,123 4,217
EBIT 9,033 4,962 (2,105) 4,342 10,610
Interest expenditure 2,553 3,769 4,529 3,981 3,268
Adjusted PBT 6,884 1,817 (5,969) 1,193 8,298
Tax 1,240 370 (1,206) 239 2,074
Adjusted PAT 5,644 1,447 (4,763) 954 6,223
% growth -11% -74% -429% -120% 552%
Extraordinary income/ (expense) 16 2,896 5,057 - -
Reported PAT after minority interest 5,660 4,342 294 954 6,223

Ashok Leyland

Net profit before tax 6,900 4,707 (912) 1,193 8,298
Depreciation 3,528 3,865 3,789 4,123 4,217
Others 2,024 296 (1,183) 3,981 3,268
Tax (1,500) (1,100) (297) (239) (2,074)
(Incr)/decr in net working capital 218 (485) 4,168 (1,207) (1,869)
Capex (net) (7,712) (6,492) (2,198) (2,000) (2,000)
(Incr)/decr in investments (3,031) (5,136) (5,379) 1,528 -
Other income (expenditure) 168 (16) 279 - -
Cash flow from investments (10,575) (11,643) (7,298) (472) (2,000)
Net borrowings 3,150 11,004 1,827 (10,000) (5,000)
Issuance/buyback of equity - - - 6,667 (0)
Interest paid (2,166) (3,628) (4,358) (3,981) (3,268)
Dividend paid (3,092) (3,092) (1,868) - -
Cash flow from financing (2,109) 4,283 (4,398) (7,314) (8,268)
Net change in cash (1,513) (77) (6,132) 66 1,572
Free cash flow (before investments) 3,459 791 3,367 5,852 9,840

EBITDA margin (%) 9.8% 7.0% 1.7% 7.1% 9.8%
EBIT margin (%) 7.0% 4.0% -2.1% 3.6% 7.0%
Net prof. (bef min int) margin (%) 4.4% 1.2% -4.8% 0.8% 4.1%
Net debt: equity (x) * 1.1 1.4 1.4 0.9 0.7
RoCE (pre-tax) (%) 14% 7% -3% 7% 17%
RoIC (%) 12% 6% -3% 5% 13%
RoE (%) 19% 5% -15% 2% 14%

EPS (`) 2.12 0.54 (1.79) 0.34 2.19
Diluted EPS (`) 2.12 0.54 (1.79) 0.34 2.19
Book value per share (`) * 10.9 11.9 12.3 14.2 15.2
Dividend per share (`) 1.0 0.6 - - 1.0
P/E (x) 18.5 72.2 NM NM 17.9
P/BV (x) 3.6 3.3 3.2 2.8 2.6
EV/EBITDA (x) 11.2 16.0 84.1 16.5 9.4
EV/EBIT (x) 15.5 28.2 (66.6) 32.3 13.2

TVS Motor Company
BUY
COMPANY INSIGHT TVSL IN EQUITY September 17, 2014
Over the past year, TVS Motor’s flagging fortunes have revived, with its
2W market share improving from 7.0% in March 2013 to 9.6% in August TURNAROUND PHASE
2014. Alongside domestic market share gains, the company’s export
revenue growth has also gained momentum (FY14 export growth of Recommendation
28%). Increasing capacity utilisation and higher share of Mcap (bn): `100/US$1.6
motorcycles/bigger scooters should narrow down its margin gap with 2W 3M ADV (mn): `694/US$11.4
leaders and provide more fuel for the revival. CMP: `211
Background TP (12 mths): `270
TVS Motor (TVSM) is the fourth-largest player in the two-wheeler (2W) segment Upside (%): 28
with a presence in motorcycles, scooters as well as mopeds. The company
commands a low market share in the motorcycle segment (6.0%) but a higher Flags
share in scooters (15.6%) and has a monopoly in mopeds. TVSM also forayed in Accounting: AMBER
the 3W passenger segment in 2008 and commands a market share of 3.9%. The Predictability: AMBER
company is, after Bajaj, the second-largest exporter of 2Ws from India. Earnings Momentum: AMBER
Spate of successful product launches
Post the split with Suzuki in 2002, whilst TVSM maintained a steady pace of Catalysts
innovation, it was less than successful in the motorcycle segment, with its market  Market share gain in domestic
share declining from 19.5% in FY03 to 5.5% in FY13 and EBITDA margin motorcycle segment
declining from 10.2% in FY03 to 5.7% in FY13. However, TVSM’s domestic  EBITDA margin improvement
business has revived in the last 12 months due to the tremendous customer
response to its recent launches (scooter Jupiter and motorcycle Star City+). The Performance
company’s launch pipeline also looks healthier, with Victor and new Apache
motorcycles set to be launched in the next 6-8 months. 29,000 260
200
Export engine is finally firing 25,000
140
TVS’s 2W+3W export revenue growth (28% YoY in FY14 vs FY11-13 CAGR of flat 21,000
growth) has perked up for TVSM thanks to the positive response to the new 80
models as well as penetration into new countries. TVS has been particularly 17,000 20
Sep-13
Oct-13
Dec-13
Jan-14
Mar-14
Apr-14
Jun-14
Jul-14
Sep-14
successful in Africa (70% of total exports), LatAm, Sri Lanka and Bangladesh. In
the past two years, moderation of investments into Indonesia and divestment of
some non-core investments have led to balance sheet improvement. Its net Sensex TVS (Rs)
debt:equity declined from 0.7x in FY12 to 0.3x in FY14.
Will the company graduate to the next phase of the ‘greatness’ cycle? Source: Bloomberg, Ambit Capital research
Whilst TVSM’s volumes have rebounded in recent months, its EBITDA margin at
6.0% (vs 14.0% for Hero MotoCorp and 22.0% for Bajaj Auto) leaves scope for
improvement. We believe TVSM should benefit strongly from operating leverage,
as capacity utilisation improves (>90% in FY16 vs 66% in FY14) and the product
mix improves with a higher share of motorcycle and ‘bigger’ scooters in overall
revenues. Furthermore, we expect the tie-up with BMW to help TVSM significantly
in the premium bike segment, which would also be a source of potential export
revenues.
Valuation
Our DCF model values the standalone entity at `261/share, implying 14.0x one-
year forward net earnings, a discount of 5% to Hero’s and Bajaj Auto’s multiples
and `9/share to the investment in TVS Motor Services (at 1.0x end-FY15 book
value) to arrive at a October 2015 SOTP TP of `270/share. We are not
attributing any value to the BMW tie-up or to TVS Indonesia. Analyst Details
Ashvin Shetty, CFA
Year to March (` mn) FY13 FY14 FY15E FY16E FY17E
Operating Income 71,693 79,619 104,947 127,309 146,915 +91 22 3043 3285
EBITDA 4,090 4,781 7,344 11,504 14,640
EBITDA margin 5.7% 6.0% 7.0% 9.0% 10.0%
Adjusted EPS (`) 4.35 5.08 9.26 16.1 20.7 Ritu Modi
Debt:Equity (x) 0.5 0.3 0.2 (0.1) (0.3)
+91 22 3043 3292
RoE (%) 17% 18% 28% 39% 38%
P/E (x) 48.4 41.5 22.8 13.1 10.2 ritumodi@ambitcapital.com
TVS Motor Company
Exhibit 1: TVSM’s revenues and EBITDA have recorded Exhibit 2: Improving profitability led to an improvement in
CAGR of 16% and 22%, respectively over FY09-14 return ratios
85,000 7.0% 25%
75,000 6.5%
20%
6.0%
65,000 15%
5.5%
55,000
5.0% 10%
45,000 4.5%
5%
35,000 4.0%
FY09
FY10
FY11
FY12
FY13
FY14
0%
FY09
FY10
FY11
FY12
FY13
FY14
Revenue (Rs mn) EBITDA margin - RHS
RoE RoCE
Exhibit 3: Strong FCF generation has led to declining net Exhibit 4: TVSM’s 2W market share has improved mainly
debt:equity driven by new launches like Jupiter and Star City+
5,500 1.0 1,200 10.5%
0.9 1,100
4,500 1,000 9.5%
0.8
3,500 0.7 900
0.6 800 8.5%
2,500 0.5 700
0.4 600 7.5%
1,500 500
0.3
500 0.2 400 6.5%
FY09
FY10
FY11
FY12
FY13
FY14
YTDFY15
FY09
FY10
FY11
FY12
FY13
FY14
` mn
TVS domestic 2W vols ('000s)
CFO FCF Net debt:equity (x) - RHS TVS market share - RHS
Source: Company, Ambit Capital research Source: SIAM, Ambit Capital research. Note: YTDFY15 indicates April-August
2014.
Exhibit 5: On P/E, TVSM is currently trading at a significant Exhibit 6: On EV/EBITDA, TVSM is currently trading at a
premium to its historical five-year average significant premium to its historical five-year average
26.0 16.0
24.0 14.0
22.0
20.0 12.0
18.0
16.0 10.0
14.0 8.0
12.0
10.0 6.0
8.0 4.0
6.0
4.0 2.0
Sep-09
Sep-10
Jan-10
May-10
Jan-11
May-11
Aug-11
Dec-11
Apr-12
Aug-12
Dec-12
Apr-13
Aug-13
Dec-13
Apr-14
Aug-14
Sep-09
May-10
Sep-10
May-11
Dec-11
Dec-12
Dec-13
Jan-10
Jan-11
Aug-11
Apr-12
Aug-12
Apr-13
Aug-13
Apr-14
Aug-14
TVS 1-yr fwd P/E Avg P/E TVS 1-yr fwd EV/EBITDA Avg EV/EBITDA

TVS Motor’s accounting score is in line with the sector average accounting score. Whilst rising investments outside of the
Accounting AMBER standalone business, particularly in unrelated ventures such as housing and energy, were causes for concern, the recent
developments such as divestment of stake in TVS Energy are positive developments.
Given that automobile companies publish their volume numbers on a monthly basis, generally no significant
Predictability AMBER positive/negative surprises are seen in revenues. However, the margins tend to be less predictable and are generally
the source for actual results coming in above/below consensus expectations.
Bloomberg shows marginal downgrades to consensus numbers in recent weeks given the lower-than-expected
performance of the company in 1QFY15.

TVS Motor Company

Total net worth 12,247 14,153 17,139 22,328 29,001
Debt 6,345 5,276 3,856 3,793 3,729
Deferred tax liability 931 1,247 1,247 1,247 1,247
Gross block 22,500 24,723 26,723 29,269 32,208
Net block 10,135 11,257 11,823 12,808 14,032
CWIP 458 544 544 544 544
Cash & cash equivalents 175 826 1,011 6,282 12,446
Debtors 3,169 3,341 4,404 5,343 6,165
Inventory 5,097 5,482 7,225 8,765 10,115
Loans & advances 3,656 5,238 6,751 8,088 9,259
Provisions 1,066 1,211 2,469 3,737 4,637
Net current assets 262 (85) (328) 3,813 9,198
Total assets 19,523 20,676 22,242 27,368 33,977

Revenues 71,693 79,619 104,947 127,309 146,915
% growth 1% 11% 32% 21% 15%
EBITDA 4,090 4,781 7,344 11,504 14,640
% growth -13% 17% 54% 57% 27%
Depreciation 1,304 1,317 1,434 1,561 1,714
EBIT 2,786 3,465 5,910 9,943 12,926
Adjusted PBT 2,544 3,513 6,113 10,266 13,290
Tax 476 1,101 1,712 2,618 3,455
Adjusted PAT 2,069 2,411 4,401 7,648 9,834

TVS Motor Company

Depreciation 1,304 1,317 1,434 1,561 1,714
Others 1,281 58 (203) (323) (363)
Tax (535) (1,275) (1,712) (2,618) (3,455)
(Incr)/decr in net working capital 643 1,613 (574) 86 76
Capex (net) (995) (2,580) (2,000) (2,546) (2,938)
(Incr)/decr in investments (295) (276) (1,244) (0) (0)
Others 217 257 347 400 439
Cash flow from investments (1,073) (2,598) (2,896) (2,147) (2,499)
Net borrowings (128) (886) (1,420) (63) (63)
Interest paid (530) (230) (145) (76) (76)
Dividend paid (715) (690) (412) (1,415) (2,459)
Cash flow from financing (1,373) (1,806) (1,977) (1,555) (2,598)
Net change in cash 1,874 793 186 5,271 6,163
Free cash flow 3,077 1,288 1,809 6,426 8,322

Year to March (%) FY13 FY14 FY15E FY16E FY17E
EBITDA margin (%) 5.7% 6.0% 7.0% 9.0% 10.0%
EBIT margin (%) 3.9% 4.4% 5.6% 7.8% 8.8%
Net prof. margin (%) 2.9% 3.0% 4.2% 6.0% 6.7%
Net debt: equity (x) 0.5 0.3 0.2 (0.1) (0.3)
Average Working capital days (x) 1.7 (2.2) (2.4) (1.3) (1.3)
RoCE (pre-tax) (%) 25% 32% 52% 80% 96%
RoIC (%) 21% 22% 37% 60% 71%
RoE (%) 17% 18% 28% 39% 38%

Year to March FY13 FY14 FY15E FY16E FY17E
Diluted EPS (`) 4.35 5.08 9.26 16.1 20.7
P/E (x) 48.4 41.5 22.8 13.1 10.2
P/BV (x) 8.2 7.1 5.8 4.5 3.5
EV/EBITDA (x) 25.6 21.9 14.2 9.1 7.1
EV/EBIT (x) 1.6 1.3 0.8 0.4 0.3

Bajaj Electricals
BUY
COMPANY INSIGHT BJE IN EQUITY September 17, 2014
Bajaj Electricals’ share price has increased by 23% YTD due to the E&P
TURNAROUND PHASE
business turning around. Bajaj Electricals (BJE) has been ranked as the
top E&P player by Power Grid (PGCIL). In FY14, the E&P division’s order
inflow rose 78%, its losses declined and its capital employed turnover Recommendation
improved from 1.4x in FY13 to 2.1x in FY14. With PGCIL & SEBs preferring Mcap (bn): `28/US$0.5
to give orders to players with a proven track record, BJE finds itself in a 3M ADV (mn): `105/US$1.7
sweet spot. We expect the E&P division to report PAT of `0.8bn in FY15; CMP: `279
hence expect pre-tax RoCE (consolidated) to improve by 8.8% points. TP (12 mths): `308
Upside (%): 10
Strong consumer franchise; E&P business recovering
BJE is a strong player in lighting and consumer durables, with leadership in small
Flags
appliances. In FY09-14, this segment reported strong RoCE of 121% driven by an
average operating margin of 8.9% and high asset turns (average of 13.9x in Accounting: AMBER
FY09-14). It is also present in the Engineering & Projects (E&P) segment (28% of Predictability: RED
FY14 revenues) which made a loss of `1.0bn in FY14 (15% of FY14 net worth) Earnings Momentum: RED
but is likely to turnaround in FY15, as the execution of loss-making orders will be
over by 2QFY15 and new orders are at 7-8% operating margins. Catalysts
New management to the rescue  Success in LED lights
 Improvement in non-E&P margins
After Mr Rakesh Markhedkar took charge as the CEO of the E&P business in July  Turnaround of E&P division
2013, the E&P division has improved significantly. FY14 revenue growth was 67%
YoY. More importantly, FY14 order intake grew by 78% YoY and the order book
grew by 85% YoY in FY14. The strong order intake has been primarily on account Performance
of PGCIL upgrading Bajaj’s rating for strong execution in E&P to number 1 from 430 28,000
number 12 previously for FY14. 26,000
Consolidation bringing in price discipline in E&P 330 24,000
22,000
Industry consolidation in E&P driven by tightening of pre-qualification norms by 230 20,000
PGCIL post FY12 led to a decline in the number of players bidding for PGCIL 18,000
orders from 50 in FY12 to 19 in FY13. Thus, the pricing scenario improved. 130
Oct-13
16,000
Feb-14
Apr-14
Aug-13
Dec-13
Aug-14
Jun-14
Further, with PGCIL increasing its capex outlay (from `1.1trn in the XIIth and
`1.6trn (estimated) in the XIIIth Plan) and with the introduction of the feeder
separation scheme (latest Union Budget allocation of `43bn), order flow is likely
to improve. BJE on LHS Sensex
Will the company graduate to the next phase of the ‘greatness’ cycle?
We believe the E&P business will become profitable in FY15. There are visible
signs of a turnaround, with capital employed turnover improving from 1.4x in
FY13 to 2.1x in FY14, as Bajaj has started collecting payment for old loss-making
projects by closing sites at a faster pace. We expect FY15 PAT of `1.3bn and PAT
CAGR of 38% over FY15-17. With this, the company’s RoCE is likely to improve
from 7.4% in FY14 to 23.6% in FY15 and 35.7% over FY16-18.
Attractive valuation for a solid franchise

At CMP, the stock is trading at 12.8x FY16 P/E. We value the non-E&P business at
`258/share (implied FY16 P/E of 17.9x, a 23% discount to peers like Havells and
V-Guard) and the E&P business at `50/share (implied FY16 P/E of 6.3x, a 30%
discount to peers like Jyoti, Kalpataru and KEC International)
Key financials
Net Sales 30,990 33,875 40,298 47,654 55,849 Analysts Details
EBITDA 2,371 1,109 818 2,759 3,601
Bhargav Buddhadev
EBITDA (%) 7.7 3.3 2.0 5.8 6.4 bhargavbuddhadev@ambitcapital.com
EPS (`) 11.8 2.7 - 0.5 12.4 21.9 Tel: +91 22 3043 3252
RoCE (%) 18 8 5 15 17 Deepesh Agarwal
RoE (%) 18 7 - 1 17 25 deepeshagarwal@ambitcapital.com
P/E (x) 23.6 104.4 NA 22.5 12.8 Tel: +91 22 3043 3275
Bajaj Electricals
Exhibit 1: Revenue growth and EBITDA margin declined to Exhibit 2: …as did RoCE and RoE
their lowest in ten years in FY13 and FY14 …
32% 12% 50%

55%
40%
24% 9% 40%
30%
16% 6% 25%
20%
8% 3% 10% 10%
0% -5%
0% 0%
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
Revenue YoY (%) on LHS
EBITDA margin (%) on RHS Pre-tax RoCE (%) on LHS RoE (%) on RHS
Exhibit 3: However, we expect EBITDA margin and RoCE to Exhibit 4: ..given our thesis of E&P turning around (data
improve going forward… labels represent EBITDA margin)
50 12 25 7.2% 2.4
6.0%
10 20 2.2
40 5.0%
8 2.0
30 15 -9.0%
3.2% 1.8
6 10 10.7% 8.9% 18.1%
20 1.6
4
5 1.4
10 2
- 1.2
FY15E
FY16E
FY17E
FY10
FY11
FY12
FY13
FY14
- -
FY15E
FY16E
FY17E
FY10
FY11
FY12
FY13
FY14
Revenues (Rsbn) on LHS

Pre-tax RoCE (%) on LHS EBITDA margin (%) Capital employed turnover (x)
Exhibit 5: Relative valuation – P/E over the last five years Exhibit 6: Relative valuation – P/B over the last five years
400 400
22x
350 350
300 19x 300 3.5x
250 250 3.5x
16x
200 200
3.0x
150 13x 150
2.5x
100 10x 100
50 50 2.0x
- -
Apr-10
Oct-10
Apr-11
Oct-11
Apr-12
Oct-12
Apr-13
Oct-13
Apr-14
Apr-10
Oct-10
Apr-11
Oct-11
Apr-12
Oct-12
Apr-13
Oct-13
Apr-14
Exhibit 7: Explanation for flags

Field Score Comments
In our accounting analysis of consumer durables, Bajaj scores in the median quadrant. It scores well on inventory
Accounting AMBER
days, CWIP and contingent liabilities. However, it scores poor on CFO/EBITDA, receivable days and cash yield.
Over the past two quarters the stock has surprised consensus unfavorably by an average of 14% due to weak
Predictability RED
performance of non-E&P business.
Earnings momentum RED Over the past six months, consensus has downgraded FY15 EPS estimates by 28%.

Bajaj Electricals
Balance sheet
Cash 536 500 544 6,110 7,561
Debtors 11,084 12,020 16,450 12,773 15,083
Inventory 3,552 4,212 4,467 5,393 6,337
Loans & advances 2,015 2,130 2,020 2,513 2,911
Other Current Assets - - - - -
Investments 441 297 673 673 673
Fixed assets 1,870 2,349 2,518 2,728 3,033
Miscellaneous 39 82 - - -
Total assets 19,536 21,590 26,673 30,192 35,598
Current liabilities & provisions 10,483 12,723 16,387 18,454 21,679
Debt 2,074 1,661 3,443 3,943 4,443
Other liabilities - 19 - 79 - 253 - 253 - 253
Reserves & surpluses 6,799 7,086 6,891 7,843 9,524
Total net worth 6,999 7,285 7,096 8,048 9,728
Net working capital 6,168 5,639 6,551 2,226 2,651
Net debt (cash) 1,538 1,161 2,899 - 2,167 - 3,118
Income statement
Operating income 30,990 33,875 40,298 47,654 55,849
% growth 13.0 9.3 19.0 18.3 17.2
EBITDA 2,371 1,109 818 2,759 3,601
% growth (7.0) (53.2) (26.2) 237.3 30.5
Depreciation 125 144 247 251 294
EBIT 2,246 965 571 2,508 3,307
Non-operational income / Exceptional items 144 416 153 148 928
PBT 1,760 691 (60) 1,924 3,395
Tax 581 178 (7) 654 1,154
Reported PAT 1,179 513 (53) 1,270 2,241
Adjustments - 247 - - -
Adjusted PAT 1,179 266 (53) 1,270 2,241
% growth (21.5) (77.5) (120.0) (2,489.7) 76.5

Bajaj Electricals

PBT 1,759 690 (60) 1,924 3,395
Depreciation 125 144 247 251 294
Interest 607 671 728 732 839
Tax (599) (398) (302) (654) (1,154)
(Incr) / decr in net working capital (1,047) 173 (1,294) 4,325 (425)
Others 56 142 614 - -
Cash flow from operating activities 901 1,422 (65) 6,578 2,950
(Incr) / decr in capital expenditure (463) (608) (472) (462) (599)
(Incr) / decr in investments (75) 404 (376) - -
Others (137) 203 83 - -
Cash flow from investing activities (675) (1) (765) (462) (599)
Issuance of equity 38 12 41 - -
Incr / (decr) in borrowings 750 (439) 1,844 500 500
Others (957) (1,030) (1,017) (1,050) (1,400)
Cash flow from financing activities (169) (1,457) 867 (550) (900)
Net change in cash 57 (36) 38 5,566 1,451
Ratio analysis
Year to March (%) FY12 FY13 FY14 FY15E FY16E
EBITDA margin 7.7 3.3 2.0 5.8 6.4
EBIT margin 7.2 2.8 1.4 5.3 5.9
Net profit margin 3.8 1.5 -0.1 2.7 4.0
Return on capital employed 18.5 7.9 5.2 14.7 16.7
Return on equity 18.0 7.2 -0.7 16.8 25.2
Current ratio (x) 1.6 1.5 1.4 1.5 1.5
Valuation parameters
EPS (`) 11.8 2.7 -0.5 12.4 21.9
P/E (x) 23.6 104.4 -538.2 22.5 12.8
P/BV (x) 4.0 3.8 4.0 3.6 2.9
EV/EBITDA (x) 12.9 27.7 37.5 11.1 8.5
EV/Sales (x) 1.0 0.9 0.8 0.6 0.5
EV/EBIT (x) 13.7 31.8 53.8 12.2 9.3
CFO/EBITDA 63% 164% 29% 262% 114%
Gross Block Turnover (x) 12.3 11.3 11.5 12.1 12.5
Working Capital Turnover (x) 5.6 5.7 6.6 10.9 22.9

Bajaj Electricals
Institutional Equities Team

Saurabh Mukherjea, CFA CEO, Institutional Equities (022) 30433174 saurabhmukherjea@ambitcapital.com
Research
Analysts Industry Sectors Desk-Phone E-mail
Nitin Bhasin - Head of Research E&C / Infra / Cement / Industrials (022) 30433241 nitinbhasin@ambitcapital.com
Aadesh Mehta Banking / Financial Services (022) 30433239 aadeshmehta@ambitcapital.com
Achint Bhagat Cement / Infrastructure (022) 30433178 achintbhagat@ambitcapital.com
Aditya Khemka Healthcare (022) 30433272 adityakhemka@ambitcapital.com
Ashvin Shetty, CFA Automobile (022) 30433285 ashvinshetty@ambitcapital.com
Bhargav Buddhadev Power Utilities / Capital Goods (022) 30433252 bhargavbuddhadev@ambitcapital.com
Dayanand Mittal, CFA Oil & Gas / Metals & Mining (022) 30433202 dayanandmittal@ambitcapital.com
Deepesh Agarwal Power Utilities / Capital Goods (022) 30433275 deepeshagarwal@ambitcapital.com
Gaurav Mehta, CFA Strategy / Derivatives Research (022) 30433255 gauravmehta@ambitcapital.com
Karan Khanna Strategy (022) 30433251 karankhanna@ambitcapital.com
Krishnan ASV Real Estate (022) 30433205 vkrishnan@ambitcapital.com
Pankaj Agarwal, CFA Banking / Financial Services (022) 30433206 pankajagarwal@ambitcapital.com
Paresh Dave Healthcare (022) 30433212 pareshdave@ambitcapital.com
Parita Ashar Metals & Mining / Oil & Gas (022) 30433223 paritaashar@ambitcapital.com
Rakshit Ranjan, CFA Consumer / Retail (022) 30433201 rakshitranjan@ambitcapital.com
Ravi Singh Banking / Financial Services (022) 30433181 ravisingh@ambitcapital.com
Ritesh Gupta, CFA Midcaps – Chemical / Retail (022) 30433242 riteshgupta@ambitcapital.com
Ritesh Vaidya Consumer (022) 30433246 riteshvaidya@ambitcapital.com
Ritika Mankar Mukherjee, CFA Economy / Strategy (022) 30433175 ritikamankar@ambitcapital.com
Ritu Modi Automobile (022) 30433292 ritumodi@ambitcapital.com
Sagar Rastogi Technology (022) 30433291 sagarrastogi@ambitcapital.com
Sumit Shekhar Economy / Strategy (022) 30433229 sumitshekhar@ambitcapital.com
Tanuj Mukhija, CFA E&C / Infra / Industrials (022) 30433203 tanujmukhija@ambitcapital.com
Utsav Mehta Technology (022) 30433209 utsavmehta@ambitcapital.com
Sales
Name Regions Desk-Phone E-mail
Sarojini Ramachandran - Head of Sales UK +44 (0) 20 7614 8374 sarojini@panmure.com
Deepak Sawhney India / Asia (022) 30433295 deepaksawhney@ambitcapital.com
Dharmen Shah India / Asia (022) 30433289 dharmenshah@ambitcapital.com
Dipti Mehta India / USA (022) 30433053 diptimehta@ambitcapital.com
Hitakshi Mehra India (022) 30433204 hitakshimehra@ambitcapital.com
Nityam Shah, CFA USA / Europe (022) 30433259 nityamshah@ambitcapital.com
Parees Purohit, CFA UK / USA (022) 30433169 pareespurohit@ambitcapital.com
Praveena Pattabiraman India / Asia (022) 30433268 praveenapattabiraman@ambitcapital.com
Production
Sajid Merchant Production (022) 30433247 sajidmerchant@ambitcapital.com
Sharoz G Hussain Production (022) 30433183 sharozghussain@ambitcapital.com
Joel Pereira Editor (022) 30433284 joelpereira@ambitcapital.com
Nikhil Pillai Database (022) 30433265 nikhilpillai@ambitcapital.com
E&C = Engineering & Construction

Bajaj Electricals
Explanation of Investment Rating
Investment Rating Expected return

(over 12-month period from date of initial rating)
Buy >5%
Sell <5%
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Ambit - Strategy eRrgrp-The Lifecycle of Great' Companies

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STRATEGY

Thematic: Life Cycle of a Great Company

Forward looking case studies……………………………………………………………….. 35

- Motherson Sumi Systems………………………………………………………………… 51

- Apollo Tyres ?……………………………………………………………………………... 59

- TVS Motor Company……………………………………………………………………… 75

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THEMATIC September 17, 2014

The lifecycle of ‘great’ companies Key recommendations

1. The ‘greatness’ journey so far

a. Investment (gross b. Conversion of

e. Cash generation d. Balance sheet

Source: Ambit Capital research

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Exhibit 3: Probability of self-destruction

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Median outperformance - 10-year CAGR

Last ten year median ROCE Cost of retaining cash

-10% 10% 30% 50% 0%

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4. Using the ‘greatness’ framework to identify turnarounds (published on 15

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Exhibit 8: Probability of ‘turning around’ vs probability of enduring ‘greatness’

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 Strategic assets: In contrast to the three distinctive capabilities discussed above,

6. Small-caps on the ‘cusp of greatness’ (published on 14 July 2014; click

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 Succession planning: ‘Key man risk’ often poses a challenge to sustaining

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2. The lifecycle of a ‘great’ company

Ann. share price returns (LHS) RoCE (%, RHS)

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80% 30% 40% 40%

60% 30% 30%

Source: Ambit Capital research Source: Ambit Capital research

Berger Paints (1991-2000)

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40% 11.5% 19%

Revenue Growth (LHS) EBITDA Margin (RHS) ROCE ROE

Source: Ambit Capital research Source: Ambit Capital research

Source: Ambit Capital research Source: Ambit Capital research

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IPCA Laboratories (FY04-14)

35.0% 35.0% 40.0% 40.0%

Revenue growth Operating margins, RHS RoCE RoE, RHS

Source: Ambit Capital research Source: Ambit Capital research.

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Interest Dividend Interest Increase

Source: Ambit Capital research Source: Ambit Capital research

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Bharti Airtel (1999-2009)

120% 50% 50% 40%

Source: Ambit Capital research Source: Ambit Capital research

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Cumulative funds raised (FY99-09) Interest Cumulative funds spent (FY99-09)

Source: Ambit Capital research Source: Ambit Capital research

HDFC Bank (FY04-14)

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Gross NPA (LHS) PCR (RHS) Tier-1 capital

Source: Ambit Capital research Source: Ambit Capital research

September 17, 2014 Ambit Capital Pvt. Ltd. Page 20