Ambit Insight On China Import

AMBIT INSIGHTS
14 July 2020
DAILY
UPDATES
Infra & Industrials (NEGATIVE)
A deep dive into Chinese imports!
Trent (BUY)
Consistent focus on detail
Orient Cement (NOT RATED)

Cost efficiency to be the only certainty
ANALYST NOTES: TCS – Stock price resilient despite growth and margin
disappointments (Ashwin Mehta, CFA, +91 22 6623 3295)
In 5 of 6 quarters, TCS underperformed consensus expectations on CC revenue
growth and EBIT margins, with revenue misses in last 5 quarters. Despite 15% cut in
FY22E consensus EPS, the stock is up 5% over this period, thus re-rating materially. At
CMP, the stock trades at near historical peak of ~26.5x one-year forward P/E at a
premium of 19% to 3-year average. Stock resilience has been driven by management
commentary suggesting return to last year revenues in INR terms by 3Q and CC
terms by 4Q and street hopes of return to double-digit growth in FY22E. The asking
rate for this appears steep to us with implied average incremental revenues addition
of ~USD150mn per quarter (50% higher than seen over last 3 years prior to Covid).
Retain SELL on steep asking rates, macro indicators suggesting a protracted recovery,
adverse segmental skew and expensive valuations. Prefer HCLT/TECHM/Infosys
among BUYs.
Source: Ambit Capital research
HAVE YOU SEEN THIS? TCS is up 5% despite 15% FY22 consensus EPS cut and
miss on revenue growth and margins in 5 of last 6 quarters
150 115
100 110
50 105
0 100
-50 95
-100 90
-150 85
-200 80
-250 75
Aug-19
Nov-19
Oct-19
Jan-20
Sep-19
Jun-19
Jun-20
Dec-19
Mar-20
Feb-20
Jul-19
Apr-19
Apr-20
May-19
May-20
CC Revenue growth surprise (bps) EBIT margin surprise (bps) Please refer to our website for
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ravindra@picocap.in
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Please refer to the Disclaimers at the end of this Report.
AMBIT INSIGHTS
Infra & Industrials NEGATIVE

A deep dive into Chinese imports!
Quick Insight
India-China border skirmishes turned worse recently driving increasing
discussions to place tariff/non-tariff barriers on imports from China. To give a
context, China’s share in India’s imports was the largest at Rs4.6trn in FY20
Analysis 
(14% share). Within that, engineering goods (20%) is the second largest
category. Our analysis of power equipment imports (>30% of engineering Meeting Note
goods imports from China) indicate high dependence on solar cells,
News Impact
transformers and electric motors/generators which together constitute close
to 70%. Our channel checks indicate India has domestic manufacturing
capacity in majority of power equipment imports except for solar panels and
components. Import duty at 18% on solar panels is the lowest vs other power Key Recommendations
equipment imports (28-31%). Import substitution theme in power equipment
L&T SELL
is incrementally positive for KEC and Thermax given their presence in
towers/cables and BTG. Thermax is also a beneficiary of ‘China plus One’ CMP: Rs944 TP: Rs844
strategy in international markets. Exhibit 27 has a detailed list of KEC International BUY
beneficiaries in each segment. CMP: Rs272 TP: Rs412
Techno Electric BUY
China’s share in India’s imports falling but still remains
CMP: Rs183 TP: Rs291
the largest country Ahluwalia BUY
India’s total imports in FY20 amounted to Rs33.6trn with China’s share at 13.8%. CMP: Rs216 TP: Rs278
However, if we include Hong Kong, the share rises to 17.3%. China’s share in total Capacit’e BUY
imports is similar to FY15 when it was 13.5%, but has moderated significantly from
FY18 levels when it reached 16.4%.
Cummins SELL
Exhibit 1: China’s share of total imports in India has fallen to <14% in FY20…
Imports from China - Rs bn % of India's imports - RHS Thermax BUY

6,000 17.0%
16.5%
5,000 AIA Engineering SELL
16.0%
CMP: Rs1,627 TP: Rs1,346
4,000
15.5% Note: Target prices for KEC, Techno,
3,000 15.0% Ahluwalia and Capacit’e are Mar-22 end
and rest are Mar-21 end.
14.5%
2,000
14.0%
1,000
13.5%
- 13.0%
FY15 FY16 FY17 FY18 FY19 FY20P
Source: Ministry of Commerce, Ambit Capital research
Exhibit 2: …but the fall is less severe if we include Hong Kong
7,000 19%
6,000
18%
5,000
Research Analysts
4,000 17%
Varun Ginodia, CFA
3,000 16% varun.ginodia@ambit.co
2,000 Tel: +91 22 6623 3174
15%
1,000 Darshan Mehta
darshan.mehta@ambit.co
- 14% Tel: +91 22 6623 3142
FY15 FY16 FY17 FY18 FY19 FY20P
Imports from China + HK - Rs bn % of India's imports - RHS

ravindra@picocap.in
Ambit Capital Pvt Ltd 14 July 2020
AMBIT INSIGHTS
US and Middle East gaining share from China

We would like to highlight that India’s total imports has registered a CAGR of 6% over
FY18-20, but China’s moderating share is driven by negative 3% CAGR seen in its
exports to India during the same period. The US and Middle East are the key
geographies who have gained share in the last two years. Share of imports from US
has increased to 7.5% in FY20 from 5.7% in FY18 while that of the Middle East has
increased to 12.1% in FY20 from 9.4% in FY18. That being said, share of imports from
China remains elevated at Rs4.6trn at the end of FY20.
Exhibit 3: Country-wise share in India’s total imports and growth – China is giving
away share to US and Middle East
FY18 FY20P 2-year CAGR - RHS 5-year CAGR - RHS

20% 50%
40%
15%
30%
10% 20%
10%
5%
0%
0% -10%
China + HK
Saudi Arabia
UAE
Singapore
China
US
Korea
Switzerland
Indonesia
Iraq
Germany
Electrical products, engineering goods and organic

chemicals are the largest import categories from China
We analysed the imports from China to gauge the key products/commodities being
imported. At the end of FY20, 60% of total imports from China consisted of electrical
products, engineering goods and organic chemicals (largely consist of APIs used in
pharmaceuticals) at 29%, 20% and 12% respectively.
However, looking at historical trends, we would highlight that share of electrical
products in total imports from China is trending down from 38% in FY18 to 29% in
FY20. Electrical products imports from China has seen negative CAGR of 14% over
FY18-20, much weaker than 6% growth seen over FY15-20.
On the contrary, share of engineering goods and organic chemicals in total imports
from China has increased to 20%/12% in FY20 from 18%/9% in FY18. Organic
chemicals have seen a strong growth of 11% CAGR over FY18-20 and ahead of 8%
CAGR seen over last five years.
Engineering goods have seen a growth of 4% CAGR over FY18-20, higher than 3%
decline seen in total imports from China and hence an increase in share as mentioned
above. That said, the growth has moderated from 9% CAGR seen over prior five years.
However, China is ceding share to other geographies, as discussed in next section,
given India’s imports in this segment has seen a CAGR of 12% over FY18-20, ahead
of 10% growth seen in prior five years.
ravindra@picocap.in
AMBIT INSIGHTS
Exhibit 4: Commodity-wise share of imports from China – Exhibit 5: …to 29% in FY20 as engineering goods, organic
share of electrical products went down from 38% in FY18... chemicals (API) and fertilizers gain share
Imports from China - Imports from China -
Rs4.9trn (FY18) Rs4.6trn (FY20)
Aluminium, Aluminium,
1% 1%
Others, 19% Automobiles Others, 19%
Automobiles & parts, 2%
Electrical
& parts, 2% Products,
Electrical
Products, Medical / 29%
Medical /
38% surgical
surgical
instruments,
instruments,
2%
2%
Fertilizers,
Fertilizers,
3%
1%
Misc. / Misc. /
Inorganic Engineering Engineering
Inorganic
Chemicals, goods, 18% goods, 20%
Chemicals,
3% 3%
Plastic Organic Organic
Iron & Steel, Chemicals, Iron & Steel, Plastic Chemicals,
articles, 3%
4% 9% 4% articles, 4% 12%
Source: Ministry of Commerce, Ambit Capital research Source: Ministry of Commerce, Ambit Capital research
Exhibit 6: FY20 – India’s imports from China reported a negative 3% CAGR over FY18-
20 driven by 14% decline in electrical products while engineering goods and organic
chemicals were offset to some extent
FY20 constitutests of imports from China 2-year CAGR - RHS 5-year CAGR - RHS
35% 40%
30% 30%
25% 20%
20%
10%
15%
10% 0%
5% -10%
0% -20%
Automobiles &
Plastic articles
Electrical Products
Fertilizers
Medical / surgical
Engineering goods
Aluminium
Iron & Steel
Organic Chemicals
Misc. / Inorganic
instruments
Chemicals
parts
China ceding share to other geographies in electrical products and

engineering goods
Looking at this data other way around, we had a look at share of China in each of
these key segments in total imports into India to gauge if China is ceding share to
other geographies in any particular product category. Key conclusions from our
analysis:
 Electrical products: China’s share in India’s total imports in this segment
remains elevated at close to 40% in FY20 but has moderated significantly from
close to 60% seen in FY18. Over FY18-20, imports from China has reported a
negative CAGR of 14% compared to 6% growth seen in overall imports into India.
Vietnam (66% CAGR over FY18-20), Singapore (61%) and US (17%) have been
key beneficiaries in this segment.
 Engineering goods: China’s share in India’s total imports in this segment was
31% in FY20, moderating from 36% in FY18. Imports from China over FY18-20
has grown at a modest CAGR of 4% compared to 12% growth seen in overall
imports into India. Singapore (68% CAGR over FY18-20) and Korea (24% CAGR
over FY18-20) have been key beneficiaries gaining share in this segment from
China.
ravindra@picocap.in
AMBIT INSIGHTS
 Organic Chemicals (primarily APIs): On the contrary, China has been gaining
share in this segment with its share in total imports into India reaching 40% in
FY20 vs 37% in FY18. Imports from China over FY18-20 have grown at a CAGR of
11%, almost double the growth rate of 6% seen in overall imports into India.
 Other notables: Other segments where China’s share in total imports into India
is material and remain stable/rising include fertilizers (27% share in FY20 vs 23%
in FY18), automobiles and related components (24% in FY20 vs 25% in FY18) and
aluminium and related products (22% in FY20 vs 17% in FY18).
Exhibit 7: China’s share in India’s total imports commodity wise – China is ceding
share to other countries in electrical products, engineering goods and iron ore and
steel but gaining share in organic chemicals (API), fertilizers and aluminium & related
products
FY18 FY20P
Imports from China - 2-year CAGR - RHS India imports - 2-year CAGR - RHS
80% 40%
30%
60%
20%
40% 10%
0%
20%
-10%
0% -20%
Plastic articles
Electrical Products
Fertilizers
Medical / surgical
Engineering goods
Iron & Steel
Automobiles & parts
Aluminium
Organic Chemicals
Misc. / Inorganic
instruments
Chemicals
China’s share in power equipment imports into India

has moderated significantly to 38% in FY20 from 56% in
FY18
Indian capital goods space bore the brunt from Chinese competition due to cheaper
power equipment imports from China hurting their margins as a consequence. Power
equipment imports is part of engineering imports and its share is 26% of total
engineering imports into India and a bit higher at 32% of engineering goods imports
from China. This share has moderated over past three years with power equipment
share of total engineering goods imports from China moderating from 53% in FY17.
This, in our view, is driven by moderating growth in new power capacity additions. For
instance, power generation capacity in India witnessed a growth of only 4% CAGR
over FY18-20, less than half of 9% growth seen over prior two years.
ravindra@picocap.in
AMBIT INSIGHTS
Exhibit 8: Power equipment share of total engineering Exhibit 9: Within power equipment, China’s share in total
goods imports from China and overall India imports is imports in India is also moderating, breaching 40% mark
moderating – 26-32% in FY20 vs 34-53% in FY17 in FY20 from >55% in FY18
China India Total - Rs bn China - Rs bn

60%
53% China share - RHS
49% 49% 1,000 60%
50%
764
724 791 792 55%
40% 38% 800
34% 35% 664
31% 31% 32% 50%
29% 568
30% 600
26% 26%
393 426 45%
20% 400 336 323 298
235 40%
10% 200 35%
0% - 30%
FY15 FY16 FY17 FY18 FY19 FY20P FY15 FY16 FY17 FY18 FY19 FY20P
Solar cells, transformers and motors constitute close to 70% of total power
equipment imports from China
Power equipment imports into India amounted to Rs792bn in FY20 with China’s share
at 38% or Rs298bn. However, the share of imports from China in power equipment is
moderating significantly; 32% in FY19 from 40% in FY17/18. This is despite the fact
that total power equipment imports share of domestic production has risen to 34% in
FY19 from 32% in FY17.
Exhibit 10: China’s share in total power equipment imports into India has moderated
significantly as other countries are gaining share
Rs bn Domestic Production Total Imports

Imports from China Imports share - RHS
China's share in imports - RHS
2,000 45%
1,500 40%
1,000 35%
500 30%
- 25%
FY17 FY18 FY19
Solar cells, transformers and motors/generators constitute 31%, 21% and 15% of total
imports from China respectively. However, having a closer look, we note that China is
ceding share to other countries in all these three segments. China’s share in total
imports into India in each of these three categories has moderated; solar cells imports
from China has fallen to 78% in FY20 from 89% in FY18, transformers share has
moderated to 40% in FY20 from 46% in FY18 and motors share has moderated to
41% in FY20 from 45% in FY18.
Power projects (16% share in FY20 from 39% in FY18), electrical resistors (26% in
FY20 from 40% in FY18) and wires/cables (31% in FY20 from 42% in FY18) have also
seen sharp moderation in China’s share in total imports into India. Boilers has been
the only notable exception with China’s share rising to 88% in FY20 from 52% in
FY18. However, note that boiler imports from China amount to only Rs6bn in FY20 or
4% market share of total boiler size in India.
ravindra@picocap.in
AMBIT INSIGHTS
According to Directorate General of Commercial Intelligence (DGCI), there is ample

domestic manufacturing capacity for equipment like line towers, conductors, industrial
electronics, transformers, cables, and insulators and BTG. Moreover, as per our
channel checks, the cost differentiation is not more than 5% for these equipment.
Hence, domestic capital goods companies would be a beneficiary of import
substitution in these segments.
The only segment where there is limited alternative to imports from China is solar
panels. According to our channel checks, India is in a position to setup capacity for
solar panels. However, there is no alternative available for components like wafers,
ingots and et al that goes into manufacturing of solar panels. Import duties on solar
cells are low at 18% vs 28-31% for other power equipment imports. News flow
suggests implementation of 20% Basic Customs Duty (from 0% currently) on these
imports which would likely drive higher solar tariffs.
Exhibit 11: Solar cells contribution in power equipment Exhibit 12: …to 31% in FY20P as transformers,
imports from China has gone down from 52% in FY18… switchgears and motors, generators & gensets gained
share
Electrical Diodes, FY20P Diodes,

transformers FY18 Transistors & Others, 9% Transistors &
,static Others, 7% Semiconduct Semiconduct
converters ors, 7% Electrical ors, 8%
and transformers
inductors, ,static
13% converters
and
Electric inductors,
motors, Solar cells, Solar cells,
21%
generators, 52% 31%
gensets &
parts, 9%
Electric
Wires,
Wires, motors,
cables &
Electrical cables & generators, Electrical
conductors,
switchgears, conductors, gensets & switchgears,
7%
5% 6% parts, 15% 8%
Exhibit 13: China’s share in total imports into India segment wise - China is ceding
market share to other countries in power equipment imports in all categories except
boilers/engines
FY18 FY20 China 2-year CAGR - RHS India 2-year CAGR - RHS
120% 120%
80%
80%
40%
0%
40%
-40%
0% -80%
Turbines
Diodes, Transistors
switchgears
Gas generators
Wires, cables &
Power projects
Electricity meter
Solar cells
Electric motors et al
Boilers
Electrical resistors/
Other engines
transformers et al
& Semiconductors
Electrical
conductors
Electrical
capacitor
ravindra@picocap.in
AMBIT INSIGHTS
Potential combination of tariff and non-tariff barriers to restrict imports from

China
To restrict imports from China, the barriers could be in the form of both tariff and
non-tariff measures. The government is considering a proposal to raise the import
duties on products where domestic supplies can be ramped up easily and where the
inflows of sub-standard products from countries like China are substantial. We believe
transmission equipment, BTG equipment and wires/cables fit into this category.
Moreover, government is also thinking on measures like anti-dumping duty on solar
panels given import prices of solar panels from China into India are lower than in
Japan and Europe. Import duties on solar panels are relatively lower at 18%
compared to 28-31% on other power equipment imports.
With regards to non-tariff measures, government plans to firm up standards for slew
of products to discourage ‘non-essential’ and ‘sub-standard’ imports from China. For
instance, according to an internal analysis of the Indian commerce ministry, China has
put in place 1,516 notifications which are akin to technical barriers to trade, followed
by South Korea (1,036) and Japan (917), while India has initiated only 172. Similarly,
China has notified 1,332 sanitary and phytosanitary (SPS) measures, while South
Korea and Japan have imposed 777 and 754 SPS barriers respectively. In contrast,
India has imposed only 261 SPS measures. (link).
Exhibit 14: Import duties imposed by India on key power equipment imports
28% 28% 28% 28% 28% 28% 28% 31% 31% 31%
18% 18% 18%

Turbines
Gas generators
Diodes, Transistors
switchgears
Electricity meter
Power projects
Solar cells
Boilers
Wires/cables
Electrical resistors/
Other engines
Electric motors et
transformers et al
& Semiconductors
Electrical
Electrical
capacitor
al
Source: Cybex, Ambit Capital research
Ministry of Power also recently announced prior permission would be needed to for
imports of power supply equipment products from China used in transmission and
distribution infrastructure of power which includes transmission towers, transformers,
cables, meters, and motors to avoid any kind of potential malware threat. (link).
ravindra@picocap.in
AMBIT INSIGHTS
Exhibit 15: China’s share in solar cells imports into India is Exhibit 16: China’s share in transformers imports into
moderating but still remains dominant India rose in FY20P
Rs bn Solar cells (LHS) Transfomers, static converters & inductors (LHS)

300 95% China's share in imports (RHS)
Rs bn
250 90% 200 47%
200 45%
85% 150
43%
150
80% 100 41%
100
39%
50 75% 50
37%
- 70%
- 35%
FY14 FY15 FY16 FY17 FY18 FY19 FY20P
FY14 FY15 FY16 FY17 FY18 FY19 FY20P
Exhibit 17: China’s share in electric motors/generators Exhibit 18: China’s share in electric switchgears imports
imports into India has moderated to 40% into India remains in 20-30% range
Rs bn Electric motors,generators, gensets (LHS) Rs bn Electrical switchgears (LHS)

120 50% 120 China's share in imports (RHS) 27%
China's share in imports (RHS)
100 100 26%
45%
25%
80 80
24%
60 40% 60
23%
40 40
35% 22%
20 20 21%
- 30% - 20%
FY14 FY15 FY16 FY17 FY18 FY19 FY20P FY14 FY15 FY16 FY17 FY18 FY19 FY20P
Exhibit 19: China’s share in wires/cables/conductors Exhibit 20: China’s share in power projects imports into
imports into India has moderated to 30% India has fallen significantly to 16% in FY20P
Rs bn Wires, cables & conductors (LHS) Rs bn Items for R&D in power projects (LHS)
100 China's share in imports (RHS) 45% China's share in imports (RHS)
250 70%
80 60%
40% 200
50%
60
150 40%
35%
40 100 30%
30% 20%
20 50
10%
- 25% - 0%
ravindra@picocap.in
AMBIT INSIGHTS
Exhibit 21: China’s share in electrical resistors imports into Exhibit 22: China’s share in boilers imports into India has
India has moderated to 25% risen significantly to close to 90% in FY20P
Rs bn Electrical resistors/ capacitor Rs bn Boilers (LHS)

25 China's share in imports (RHS) 41% 9 China's share in imports (RHS) 100%
39% 8 90%
20 7
37%
80%
6
15 35%
5 70%
33%
4 60%
10 31%
3
50%
29% 2
5
27% 1 40%
- 25% - 30%
Exhibit 23: China’s share in other engines imports into Exhibit 24: China’s share in turbines imports into India
India remains low at close to 15% has moderated significantly to close to 10% in FY20P
Rs bn Other engines Turbines (LHS)

Rs bn
China's share in imports (RHS) China's share in imports (RHS)
30 30% 25 50%
25
25% 20 40%
20
15 30%
15 20%
10 20%
10
15%
5 10%
5
- 10% - 0%
Exhibit 25: China’s share in electric meter parts imports Exhibit 26: China’s share in gas generator imports into
into India was 60% in FY20P India is close to 20% in FY20P
Rs bn Parts of electric meters (LHS) Rs bn Gas generators

1.2 China's share in imports (RHS) 100% 3.0 China's share in imports (RHS) 80%
90% 70%
1.0 2.5
80% 60%
0.8 2.0
70% 50%
0.6 60% 1.5 40%
50% 30%
0.4 1.0
40% 20%
0.2 0.5
30% 10%
0.0 20% 0.0 0%
ravindra@picocap.in
Indian domestic capital goods companies to benefit in the form of higher orders and margin accretion from
moderating competitive intensity from China
We see biggest opportunities for domestic capital goods companies in power generation & transmission equipment like transformers, towers, switchgears, wires and cables. KEC
is a key player here within our coverage universe. We also see opportunities for import substitution in BTG space where Thermax is a key player. Note that cheap imports from
China was the key reason why BTG was a highly competitive space driving margins lower over past few years.
Exhibit 27: Indian domestic capital goods companies’ landscape
Mkt Cap
Company Co. description FY20 5-year CAGR 5-year average
Rs mn
Transformers, Towers,
Capacitors, Switchgears, FY20 share of Chinese imports (30%) - EBITDA RoE EBITDA
Rev EBITDA PAT ND/E Rev EBITDA PAT RoE (%)
Statcoms & other power Rs 116bn Margins (%) Margin
equipment
Siemens offers a wide gamut of power products like
Siemens 421,433 generators, steam turbines, gas & diesel engines, 115,777 10,733 9.3% 8,776 9.7 -0.5 2% 1% -5% 10% 19.5
transmission products, etc.
BHEL is one of the largest companies with products

catering to power sector like boilers, solar
BHEL 145,724 249,668 13,083 5.2% 6,861 2.8 0.0 -4% -12% -14% 4% 1.3
photovoltics, transformers, switchgears, capacitors,
insulators, motors, etc.
KECI is the largest player in T&D towers manufacturing

KEC Int’l 72,692 with presence also in power cables, EPC for T&D, 121,548 12,599 10.4% 5,744 20.8 0.7 8% 17% 29% 10% 20.3
railways, civil, solar
KPP has presence in power T&D manufacturing, T&D

Kalpataru Power 40,071 82,378 8,967 10.9% 5,068 14.8 0.2 13% 16% 25% 12% 12.2
turnkey projects
ABB Power Products makes power transformers, long-

ABB Power Products &
35,745 distance transmission system & other high voltage 30,235 NA NA NA NA 0.4 NA NA NA NA NA
Systems India Ltd
products and transformers.
GE T&D offers products like power transformers, circuit

GE T&D 21,124 breakers, gas insulated switchgears, instrument 32,066 (610) -1.9% (1,582) (12.9) 0.5 -3% -172% -206% 4% 3.4
transformers, substation automation equipment.
Techno Electric has presence in smart meters,

Techno Electric 20,548 10,549 2,401 22.8% 2,039 14.1 0.0 6% 3% 14% 23% 15.7
statcoms, along with EPC in power T&D, etc.
Voltamp has presence in transformers, unitized
Voltamp Transformers 11,202 8,967 1,021 11.4% 1,060 14.4 0.0 12% 27% 30% 10% 12.6
substations
Skipper Limited has presence in transmission, telecom
Skipper Limited 4,148 13,905 1,391 10.0% 415 6.0 0.2 1% -8% -14% 13% 17.2
towers, poles
ravindra@picocap.in
Mkt Cap
Company Co. description FY20 (Rs in mn) 5 year CAGR 5 yr avg
Rs mn
FY20 share of Chinese imports (23%) - EBITDA
BTG Rev EBITDA Margins PAT RoE % ND/E Rev EBITDA PAT RoE %
Rs 17bn Margin
L&T has a JV with Mitsubishi Hitachi Power Systems
Larsen & Toubro 1,326,242 1,507,998 175,838 12% 97,176 14.4 1.9 11% 9% 15% 11% 13.3
catering to boilers market.
Siemens offers a wide gamut of power products like
Siemens 421,433 generators, steam turbines, gas & diesel engines, 115,777 10,733 9% 8,776 9.7 -0.5 2% 1% -5% 10% 19.5
transmission products, etc.
BHEL is one of the largest companies with products
catering to power sector like boilers, solar
BHEL 145,724 249,668 13,083 5% 6,861 2.8 0.0 -4% -12% -14% 4% 1.3
photovoltics, transformers, switchgears, capacitors,
insulators, motors, etc.
Thermax has presence in boilers & heaters, steam
Thermax 92,352 60,739 4,792 8% 3,022 9.6 -0.1 3% 1% 8% 9% 10.2
engineering
GE Power has a vide portfolio of products like boilers,

GE Power India 35,173 24,458 1,640 7% 850 0.1 -0.3 3% -1% -14% 4% 0.7
turbine generators
Triveni Turbine is a dominant industrial steam turbine
Triveni Turbine 24,571 9,023 1,841 20% 1,365 27.9 -0.1 7% 8% 9% 21% 30.2
manufacturer
ISGEC Heavy engineering has presence in Boilers,

ISGEC Heavy 18,971 48,937 2,784 6% 1,531 8.1 0.4 4% 1% 5% 7% 14.2
FGDs besides carrying out EPC work for power plants.

Generators/Gensets Rev EBITDA Margins PAT RoE % ND/E Rev EBITDA PAT RoE %
Rs 50bn Margin
Cummins has presence in power gensets &
Cummins India 115,038 alternative-fuel electrical generators for use in 53,454 6,599 12% 6,554 15.9 0.0 4% -2% -4% 16% 19.2
residential standby, industrial, mining
KOEL is one of the leading manufacturers of

Kirloskar Oil Engines 16,088 Diesel engines and Generating Sets for all residential 34,437 2,821 8% 1,597 3.1 0.0 7% 3% 2% 10% 9.8
and commercial usage.
Cables/wires/Conductors Rev EBITDA Margins PAT RoE % ND/E Rev EBITDA PAT RoE %
Rs 22bn Margin
KEC Int’l 72,692 121,548 12,599 10% 5,744 20.8 0.7 8% 17% 29% 10% 20.3
KEI has presence in power cables, solar cables and

KEI Industries 32,150 50,158 5,330 11% 2,605 20.7 0.1 75% -180% -168% 10% 23.1
other different types of cables
Apar Industries 12,975 Apar has presence in conductors, cabling 81,322 5,048 6% 1,601 12.6 0.1 10% 15% 26% 7% 14.4
Solar Panels & cells Rev EBITDA Margins PAT RoE % ND/E Rev EBITDA PAT RoE %
Rs 91bn Margin
BHEL 145,724 249,668 13,083 5% 6,861 2.8 0.0 -4% -12% -14% 4% 1.3
Source: Ministry of Commerce, Ambit capital research, Bloomberg
ravindra@picocap.in
AMBIT INSIGHTS
Where do we go from here?

Power T&D segment screens better than Roads/Railway contracting given higher
investments, especially compared to roads, lower competitive intensity and low
regulatory hurdles. The key issue with the roads sector is very high competitive
intensity in EPC projects with normally ~10 competitors for every project. Highways
are susceptible to land acquisition issues. (note).
Hence, we recommend investors a two-year holding horizon for small/mid-cap names
under our coverage with our preference for segments where capex stickiness is high,
like power T&D, railways, affordable housing and hospitals. Our stock picks are
aligned with this thought process.
KEC International is our top industrial pick and Techno is our top small-cap
pick given both have exposure to power T&D capex which is relatively sticky in nature.
KEC also has exposure to transmission towers and cables and hence is a beneficiary of
China import substitution.
For Ahluwalia, current book-to-bill provides growth runway for the next 4 years.
Also, 48% of orderbook is in hospitals while 80% is from government which provides
downside support.
For Capacit’e, valuations of 5.1x FY22 P/E provides comfort. Cidco order is expected
to commence work in coming weeks as sites have already been handed to the
company. We expect 2HFY21E-FY23E to be the peak years of execution of Cidco
project driving support to the revenue.
Our concerns on L&T are underpinned by weak domestic public capex, low crude oil
price and listed subsidiaries turning into headwinds. Moreover, working capital
requirements would remain elevated as vendor financing continues while mobilization
advances would come under pressure over next two years due to balance sheet stress
at the central/state governments and government agencies. Lastly, L&T has two
potential assets in Hyderabad Metro and Nabha Power which it is looking to
monetize. However, with WFH becoming an integral part in IT companies and
Hyderabad being an IT hub, it would make it difficult to monetize the Hyderabad
Metro given the uncertainty in ridership estimates going forward. Moreover, there is a
potential risk of write-off of Rs38bn due from the state government related to project
cost overruns where there is little clarity.
Thermax is our top Capital Goods pick given its diversified exposure globally and
uptick from chemicals business and support from FGDs and WHRS domestically.
Digitization/automation would also drive operating efficiency and hence margin
accretion. Thermax is also a beneficiary from China import substitution in domestic
market and ‘China plus one’ strategy in international markets.
Our concerns on Cummins are driven by low domestic powergen demand given
exposure to real estate and retail; and industrials demand where 60-70% of demand
is driven by infra where the outlook remains cautious. 50% of exports come from
Europe/Middle East followed by Africa and exposure to oil-related economies remains
high. Moreover, imports from China are largely in areas of electrical
generators/motors where Cummins India has a limited presence. 19x FY22 P/E is
expensive on our expectation of mid-single digit revenue/EBITDA CAGR over FY20-
23E.
ravindra@picocap.in
AMBIT INSIGHTS
Exhibit 28: Our Top picks: KEC International in industrials, Thermax in capital goods and Techno in small-cap contractors
Implied Current
WC as %
Rev. EBITDA PBT FY22E 12M Potential
FY20-23E Rating of sales - Comments
CAGR CAGR CAGR Target forward upside
Average
P/E P/E
Lower crude oil price and unfavourable fiscal
situation would keep earnings growth muted;
L&T - core SELL 2% 1% 0% 23% 17.5 20.9 -12%
working capital would remain elevated; support
from listed subsidiaries also not as strong
Strong order book and exposure to Green Energy
KEC International* BUY 16% 16% 19% 28% 10.4 9.1 74% Corridors/Railways provide visibility for growth;
working capital would remain elevated
A pure green energy play with strong balance
Techno – core* BUY 30% 27% 29% 30% 9.7 4.2 74%
sheet
Ahluwalia* BUY 12% 18% 21% 24% 11.2 11.2 56% Exposure to hospitals provides cushion
Deep value with exposure to affordable housing.
Capacit'e* BUY 25% 22% 20% 29% 11.3 7.2 164% Low stock liquidity and significant slowdown in real
estate are key concerns
Exports business would remain under pressure
while industrials segment face downside risk due to
Cummins SELL 6% 10% 7% 19% 15.1 16.5 8%
lower infrastructure capex. Diesel genset demand
also face structural downturn
Earnings growth would be helped by chemicals
segment and turnaround of International business;
Thermax BUY 13% 20% 21% 15% 25.4 28.1 17% FGDs and WHRS would also provide support;
moderation/cancellation in refinery capex is a key
risk
Earnings would come under pressure driven by
global demand recession; working capital would
AIA Engg. SELL 13% 14% 12% 50% 19.1 24.7 -10% also deteriorate as seen during GFC. Volatile
commodity prices are also not positive for AIA
Engineering volumes
Source: Ambit Capital research. Note: Small/mid-cap stocks like KEC, Techno, Ahluwalia and Capacit’e have Mar-22 target prices. Thus, implied target P/E is
based on FY23E
Exhibit 29: Key challenges that companies should keep an eye on in FY21/22E
Company Key challenges in FY21 Key challenges in FY22
 Domestic order inflows remain under pressure
 Continued crude oil price pressure driving weaker International  Revenue/earnings growth moderating as order inflow weakness
L&T
order flows flows into earnings with a lag
 WC to remain under pressure
 Revenue/earnings growth moderating as order inflow weakness
KEC  Order inflows slowing down
flows into earnings with a lag
International  WC under pressure
 Deleveraging taking a back seat
 Order inflows slowing down  Revenue/earnings growth moderating as order inflow weakness
Techno
 Delay in monetization of wind assets flows into earnings with a lag
 Revenue/earnings growth moderating with a lag
 WC under pressure as end-customer faces liquidity pressure
Ahluwalia  ND/E to worsen driven by lower earnings growth and
 Real estate slowdown
deteriorating working capital
 Real estate slowdown especially in Mumbai
 ND/E to worsen driven by lower earnings growth and
Capacit'e  Delayed collection of receivables hampering execution
deteriorating working capital
 Liquidity pressure hurting execution of CIDCO order
 Export revenue to remain under pressure as global genset
demand fail to pick-up  DBT scheme to improve discom health and hence hurt back-up
Cummins
 Industrials revenue hurt by slower-than-expected growth in infra demand
capex
 Refinery capex taking a backseat  EBITDA margin remain in mid-to-high single digits due to
 Delay in turnaround of Danstoker Group in Europe unfavourable sales mix
Thermax
 Enquiries not converting into orders again driving lower  Global stimulus driving higher commodity prices and hence
execution hurting gross margins
 Global mining demand coming under pressure hurting volumes  Global stimulus driving higher ferro chrome and ferro scrap
AIA Engg
 WC coming under pressure prices and hence hurting gross margins
Source: Ambit Capital research
ravindra@picocap.in
AMBIT INSIGHTS
Exhibit 30: Valuation comparison

Transformers, Towers, CAGR FY20-22 FY19 P/E P/B EV/EBITDA RoE % Div yield%
M.cap
Capacitors, Switchgears,
Rs mn
Statcoms & other power Rev EBITDA PAT RoCE FY21 FY22 FY21 FY22 FY21 FY22 FY21 FY22 FY21 FY22
equipment
Siemens 421,433 13% 23% 22% 12.8 37.4 31.1 4.0 3.7 27.3 23.3 11.5 12.3 0.8 0.9
BHEL 145,724 4% 21% 24% 3.5 41.4 13.8 0.5 0.5 19.0 6.9 2.5 2.5 1.9 3.3
KEC Int’l 72,692 6% 5% 6% 17.9 13.7 11.0 2.2 1.9 7.8 6.7 17.0 18.1 1.1 1.4
Kalpataru Power 40,071 4% 2% 1% 13.2 9.0 7.6 1.0 0.9 5.9 5.2 11.6 12.4 1.4 1.5
GE T&D 21,124 6% 39% NA 18.2 N/A 23.4 2.0 1.9 21.8 11.5 NA 8.2 1.4 1.8
Techno Electric 20,548 18% 11% 9% 9.9 10.7 8.4 1.2 1.1 6.2 5.1 13.0 14.3 4.3 7.0
Voltamp Transformers 11,202 1% 2% -3% 13.0 11.7 11.2 1.4 1.3 10.1 10.1 12.1 11.9 2.1 2.5
Skipper Limited 4,148 13% 22% 28% 8.8 31.1 6.0 0.6 0.5 6.2 4.0 1.9 9.3 NA NA
Median 6% 16% 9% 12.9 13.7 11.1 1.3 1.2 8.9 6.8 11.6 12.1 1.4 1.8
BTG
L&T 1,326,242 5% 5% 3% 6.3 15.0 13.0 1.8 1.7 14.8 13.4 12.5 13.2 2.2 2.4
Siemens 421,433 13% 23% 22% 12.8 37.4 31.1 4.0 3.7 27.3 23.3 11.5 12.3 0.8 0.9
BHEL 145,724 4% 21% 24% 3.5 41.4 13.8 0.5 0.5 19.0 6.9 2.5 2.5 1.9 3.3
Thermax 92,352 0% 4% 10% 10.8 33.4 24.9 2.7 2.6 20.8 15.8 8.1 10.7 1.0 1.2
Triveni Turbine 24,571 1% -1% -1% 22.8 21.4 17.6 4.1 3.6 15.0 12.4 19.9 21.7 1.3 1.3
ISGEC Heavy 18,971 -5% 6% 8% 9.1 13.9 10.6 1.2 1.1 8.0 6.5 8.9 10.8 1.4 1.4
Median 2% 5% 9% 9.9 27.4 15.7 2.3 2.1 17.0 12.9 10.2 11.6 1.4 1.4
Generators/Gensets
Cummins India 115,038 -1% -2% -2% 16.9 21.2 18.2 2.7 2.6 22.1 17.0 12.2 14.4 3.1 3.7
Kirloskar Oil Engines 16,088 5% 8% 13% 13.0 9.7 7.9 0.9 0.8 4.5 3.8 9.3 10.6 5.8 6.3
Median 2% 3% 5% 14.9 15.4 13.1 1.8 1.7 13.3 10.4 10.7 12.5 4.5 5.0
Cables/wires/Conductors
KEC Int’l 72,692 6% 5% 6% 17.9 13.7 11.0 2.2 1.9 7.8 6.7 17.0 18.1 1.1 1.4
KEI Industries 32,150 3% 4% 6% 18.4 16.7 11.0 1.8 1.5 8.0 5.8 15.0 15.5 0.4 0.6
Apar Industries 12,975 9% 5% 7% 16.3 8.9 7.1 0.9 0.9 2.9 2.6 10.8 13.0 3.0 3.4
Median 6% 5% 6% 17.9 13.7 11.0 1.8 1.5 7.8 5.8 15.0 15.5 1.1 1.4
Solar Panels & cells
BHEL 145,724 4% 21% 24% 3.5 41.4 13.8 0.5 0.5 19.0 6.9 2.5 2.5 1.9 3.3
Source: Ambit capital research, Bloomberg
ravindra@picocap.in
AMBIT INSIGHTS
Trent BUY
Consistent focus on detail
Trent’s annual report provides insights into its consistent strategy of a)
Quick Insight
continuously offering value to customers as Westside GMs were cut again this
year driving best-in-class SSGs (12.6% YTDFeb’20); b) focus on building Analysis 
strengths in supply chain, store experience and store economics; using these Meeting Note
to incubate new formats like Zudio, Utsa and accelerate Westside rollout. On News Impact
the flip side, investments in other Tata group entities and losses in Star
Bazaar remain a drag on overall business. Phillip Auld (key architect of
Trent’s success) is stepping down as MD and is replaced by Stephen Rayfield – Stock Information
Marks & Spencer veteran; his successor clearly will have big shoes to fill. KMP Bloomberg Code: TRENT IN
salaries dropped likely due to lower payout ahead of Covid; CFO/FCF CMP (Rs): 629
improved meaningfully though. While near term will see sharp pain given TP (Rs): 725
reduced footfalls in stores and consumer shifting to online, we expect Trent to
Mcap (Rs bn/US$ bn): 224/3.0
be a significant beneficiary in offline channel for apparels post Covid-led
consolidation. 3M ADV (Rs mn/US$ mn): 313/4.2
Stock Performance (%)

Westside: Expanding market and not margins 1M 3M 12M YTD
Westside added 15 stores (gross 20, closed 5), behind our expectations. However, LFL Absolute 22 35 39 19
revenue growth of 12.6% until pre-Covid was impressive and continues to drive sharp Rel. to Sensex 13 16 44 31
operating leverage. Management continues to pass on benefits of operating leverage Source: Bloomberg, Ambit Capital research
with pricing cuts (180bps GM dip in FY20) keeping EBITDAM broadly flat. Focus on
private labels backed by efficient supply chain continues to improve agility in reacting
Ambit Estimates (Rs mn)
to latest fashion trends while keeping inventory turns and profitability healthy. We
believe this strategy (private labels at sharp pricing) is more sustainable than FY20 FY21E FY22E
departmental stores selling third-party brands (like Shoppers Stop and Lifestyle). Revenues 31.8 21.4 41.2
EBITDA 5.6 1.9 7.8
Learnings from Westside are being transferred to Zudio EPS (Rs) 4.3 (2.2) 7.3
Source: Bloomberg, Ambit Capital research
Westside’s prowess across value chain, design, branding, sourcing, logistics, pricing,
display, promotion and selling, is well established. However, price points and format
(18k sqft stores) have challenges on rapid expansion. Trent leverages strengths of
Westside and replicates it in value fashion (75% of Indian apparel market) under
Zudio format. Zudio doubled store counts this year with 2.5x revenues vs last year.
Sales/sqft of Rs15k vs Rs10.4k for Westside. While Zudio’s GM of 31% (FY19 AGM
disclosure; scope to improve led by sourcing efficiencies) is lower than Westside’s GM
of ~56%, the difference on GM/sqft is only ~15%. This is further offset by lower
rentals and employee costs given relatively less premium locations for Zudio. Capital
investments (including inventory) for Zudio (Rs30-40mn) are lower than Westside
(Rs60-70mn) implying comparable or better ROCEs. We believe Zudio has far more
scalability than Westside. Utsa is another Indian ethnic-focused format that Westside
is building up (2 stores added in FY20). Trent may introduce more formats as
opportunities arise post COVID.
Phillip Auld retiring from the business; Stephen Rayfield is the new CEO
Stephen Rayfield, M&S veteran, has replaced Phillip Auld (MD Nov’14-Apr’20; CEO Research Analysts
Apr’11-Nov’14). Trent has also beefed up the second layer of leadership talent. Venu Ritesh Gupta, CFA
Nair (another ex-M&S) has been appointed as CEO of Westside business. Another ritesh.gupta@ambit.co
foreigner Marjolein Brandwijk is heading Zudio business since end-2017 (ex-Etam Tel: +91 22 6623 3242
China). KMPs took a salary cut during the year likely to due to lower variable payout Ashish Kanodia, CFA
in light of Covid impact. ashish.kanodia@ambit.co
Tel: +91 22 6623 3264
ravindra@picocap.in
AMBIT INSIGHTS
Capital allocation beyond fashion business remains a challenge

Star Bazaar’s 9.9% LFL growth and 24% revenue growth are encouraging, loss of
Rs1.8bn (-13% PAT margin) on a topline of Rs13.6bn is far away from finding a viable
and scalable business model, in our view. Acquisition of Booker India has further
aggravated losses from grocery retail format. Management believes they have made
significant progress in finding a viable and scalable business model though it remains
a drag on overall business (consolidated PAT of Rs1.1bn vs standalone Rs1.6bn). RoIC
in overall business (ex-investments in THL, other Tata group entities) remain
reasonable at ~15% though headline RoCE remains weak at ~9%.
Westside: The perfectionist

Westside’s FY20/YTD Feb’20 LTL growth rate of 7%/12.6% was ahead of other
industry peers like Pantaloons (2.7%/6.8%). Westside’s GM continued to
shrink and were rationalized by ~180bps during FY20 (390bps during FY18- We are actively grappling with
20) to offer better pricing. Westside made up for the decline in GM by the challenges as we seek to
bettering operating leverage which can be corroborated from the fact that deliver our ongoing expansion
Westside’s EBITDA margin remained constant YoY at 11% despite decrease in aspirations. We are evaluating
GM by 180bps. Gross/net store addition of 20/15 was lower than our numerous emerging micro-
expectation. Management noted that the outcome was well below their markets with significant growth
aspiration, notwithstanding the deferral of 4 stores under fit-outs in potential across India to pursue a
March/April 2020 and attributed the subdued performance to both internal disciplined expansion strategy
and market related. with strong focus on store level
economics – FY20 Annual report
FY20 - An operational mixed bag for Westside
Customer walk-ins for Westside increased by 13% YoY (vs 24% in FY19) to 51mn in
FY20 led by 15 net store additions partially offset by impact of Covid-led decline in
footfalls during the last 2-3 weeks of March. Overall LTL/revenue growth was
restricted to 7%/16% in FY20 given: (a) only 1% growth in average bill size (lowest in
last 10 years) to Rs2,357 due to price corrections in Westside; (b) Conversion rate
remaining flat YoY ~21% in FY20; and (c) impact of Covid-led decline in footfalls
during the last 2-3 weeks of March given YTD Feb’20 LTL growth was significantly
high at 12.6%.
Exhibit 1: Store addition during FY20 was below our and management expectations
and will remain subdued in FY21 due to Covid
Gross store addition (LHS) No of Westside stores (RHS)

35 30 250
30 27
200
25 20
20
20 17 150
15 13 10
10 8 10 100
10 7
50
5
0 0
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19
FY20
FY21E
FY22E
Source: Ambit Capital research, Company
Value works - Operating leverage and cost efficiencies passed on to

consumers
Westside’s GM dipped by 180bps YoY to 56.1% in FY20 while EBITDA/EBIT margin
remained flat at 11%/9% during FY20. However, decline in GM follows improvement
from 52.8% in FY14 to 56.1% in FY20 led by: (a) increase in share of own brands
from 83% in FY14 to 99% in FY20; (b) increased acceptance of the Westside label as a
format; and (c) sourcing and supply chain efficiencies with shrinkage down to 0.17%
in FY20 from 0.5% in FY14. The above aspects coupled with improvement in inventory
turns to 5.9x in FY20 (6.1x in FY19) from 5.5x in FY14 indicate higher full-priced
sales.
ravindra@picocap.in
AMBIT INSIGHTS
Exhibit 2: EBITDA/EBIT margin remained flat despite fall in Exhibit 3: Trent has been successful in driving 440bps
GM during FY18-20 operating cost efficiency across some of the key cost items
during FY16-20
%
GM (LHS) EBITDA margin (RHS) As % of change
FY16 FY17 FY18 FY19 FY20
EBIT margin (RHS) revenue during
FY16-20
62% 12%
Employee cost 8.9% 9.6% 9.8% 10.0% 9.9% -1.0%
60% 10%
Repairs 4.5% 4.1% 3.7% 3.2% 2.4% 2.1%
58%
8% Power and fuel
3.0% 2.8% 2.4% 2.2% 1.9% 1.1%
56% cost
6%
54% Advertisement 2.8% 2.7% 1.9% 1.7% 1.6% 1.3%
4% General
52% 2.5% 2.6% 2.8% 2.9% 2.7% -0.2%
expenses
50% 2%
Sourcing fee 2.3% 1.8% 1.4% 1.3% 1.0% 1.3%
48% 0% Freight and
2.2% 2.2% 2.8% 2.9% 2.4% -0.2%
FY14 FY15 FY16 FY17 FY18 FY19 FY20 forwarding
Total 26.2% 25.7% 24.8% 24.2% 21.8% 4.4%
Source: Ambit Capital research, Company Source: Ambit Capital research, Company
:
Exhibit 4: Westside continued with its cluster-based store expansion and added only 1
new state in FY20
Sikkim
Nagaland FY19 FY20
Mizoram
Jammu & Kashmir
Himachal
Odissa
Jharkhand
Goa
Chhattisgarh
Bihar
Assam
Uttarakhand We are evaluating numerous
Haryana emerging micro-markets with
Kerala significant growth potential
Rajasthan
Punjab
across India to pursue a
Andhra Pradesh disciplined expansion strategy
West Bengal with strong focus on store level
Madhya Pradesh economics – FY20 Annual report
Delhi
Telangana
Tamil Nadu
Uttar Pradesh
Gujarat
Karnataka
Maharashtra
0 5 10 15 20 25 30
ravindra@picocap.in
AMBIT INSIGHTS
Exhibit 5: Walk-ins have improved while conversions Exhibit 6: Bill size remains flat YoY while LTL slowed down
remained flat to ~7%
Westside's customer walk-ins (LHS) Westside's bill size (Rs - LHS)

Westside's conversion (RHS) Westside's LTL (RHS)
60 35% 2,500 12%
50 30% 10%
2,000
40 25% 8%
20% 1,500
30 6%
15% 1,000
20 10% 4%
10 500 2%
5%
- 0% - 0%
FY14
FY15
FY16
FY17
FY18
FY19
FY20
FY14
FY15
FY16
FY17
FY18
FY19
FY20
Operating leverage offset the impact of gross margin contraction

Standalone gross margin declined 180bps YoY to 49.5% led by 180bps dip in gross
margin for Westside (80% of sales) to 56.1%. We continue to believe gross margin
may remain range-bound as Trent quickens store addition for Zudio as the format We continue to focus on
caters to the value segment and has lower gross margin. However, higher asset turn improving our customers’ price
and revenue per sq ft for Zudio vis-à-vis Westside is likely to offset the impact of lower and value perceptions. We are
gross margin on RoCE. Zudio already operates ~1.4x sales/sq ft vs. Westside. increasingly leveraging data led
insights to tailor our price
The GM gap between Standalone and Westside has continuously increased from lows decisions and profitably drive
of 390bps in FY15 to 660bps in FY20. However, during the same period, the gap in sales – FY20 Annual report
EBITDA margin declined from 500bps to 400bps led by operational efficiency.
Exhibit 7: Gap of 660bps between standalone and Exhibit 8: Gap between Westside and standalone EBITDA
Westside GM is likely due to lower GM in Zudio margins increased to 400bps in FY20
Standalone GM (%) Westside GM (%) Standalone EBITDA (%) Westside EBITDA (%)
61% 12%
58% 10%
55%
8%
52%
6%
49%
4%
46%
43% 2%
40% 0%
FY15 FY16 FY17 FY18 FY19 FY20 FY15 FY16 FY17 FY18 FY19 FY20
Source: Company, Ambit Capital research Source: Company, Ambit Capital research
ravindra@picocap.in
AMBIT INSIGHTS
Exhibit 9: In spite of increasing share of revenue from Exhibit 10: Freight costs decreased to 2.4% of revenues in
private labels, GM declined in FY20 due to price cuts taken FY20 while employee cost decreased marginally to 9.9%
at Westside
Share of own brands (RHS) Freight cost as% of sales (LHS)

Standalone GM (LHS)
Westside revenue share (RHS) 3.5% Employee cost as % of sales (RHS) 11%
55% 100% 3.0%
53% 2.5% 10%
95%
51% 2.0%
90% 9%
1.5%
49%
1.0% 8%
47% 85%
0.5%
45% 80% 0.0% 7%
FY15
FY16
FY17
FY18
FY19
FY20
FY15
FY16
FY17
FY18
FY19
FY20
Given aggressive store expansion across Westside and Zudio, EBITDA margin is likely
to stay subdued for 2 years as Trent will need to front load some of the expenses even We are committed to investments
before the benefits/revenue from new stores start to accrue. For example, usually in scaling and upgrading our
even before a store is opened, sales and store manager are hired 45 to 60 days in supply chain network with a view
advance and are trained under the existing stores. Similarly, investment in inventory to enabling sustainable long term
also takes place at least 3 to months in advance, impacting working capital which in business growth – FY20 Annual
turn leads to higher financing cost. report
Exhibit 11: Inventory days remain ~2 months despite rapid store expansion over last
two years
Standalone CFO (pre-tax)/EBITDA (LHS) Standalone avg inventory days (RHS)
160% 120
140% 100
120%
100% 80
80% 60
60% 40
40%
20% 20
0% 0
FY14
FY15
FY16
FY17
FY18
FY19
FY20
FY21E
FY22E
FY23E
Source: Company, Ambit Capital research
Trent clocked positive FCF; CFO improves

Trent reported positive FCF for the first time in last 5 years led by healthy cash flow
generation. Trent’s standalone capex stood at Rs1.5bn for FY20 which was largely
incurred for the 63 gross stores added (20 under Westside, 41 under Zudio and 2
under Utsa) during the year. The company also renovated 8 stores in FY20.
ravindra@picocap.in
AMBIT INSIGHTS
Exhibit 12: Trent reported positive FCF in FY20 led by better cash flow generation
We will continue to pursue our
store expansion agenda once we
CFO FCF
10,000 have our existing portfolio back
in business. Given both internal
8,000
as well as external challenges,
6,000 we did not meet our aspiration
4,000 for store additions in FY20.
Rs mn
However, we are committed to

2,000 resolving the challenges and
0 pursuing accelerated expansion
in the future. We also continue to
(2,000)
monitor the existing stores and
(4,000) refresh the portfolio through
FY15 FY16 FY17 FY18 FY19 FY20 FY21E FY22E multiple initiatives including
absorption/refurbishment of
Source: Ambit Capital research, Company brand diluting stores – FY20
Annual report.
Exhibit 13: New stores have ramped up quickly, providing Exhibit 14: Cash conversion days deteriorated by 4 days
confidence to expand into newer towns during FY20 led by increase in inventory days and decrease
in creditor days
Westside FY16 FY17 FY18 FY19 FY20E FY21E FY22E Working capital
management
Sales Growth 14% 17% 20% 17% 16% -35% 80%
Inventory days 66 60 56 60 62
SSG 8% 9% 9% 9% 7%* -36% 70%
Debtor days 0 1 1 2 2
Sales growth from
6% 8% 11% 8% 9% 1% 10% Creditor days 37 32 31 31 28
new Stores
% of new stores Cash conversion
30 28 27 31 35
added (time days
5% 4% 8% 8% 10% 5% 3%
weighted adjustment Source: Ambit Capital research, Company
50%)
Stores 93 107 125 150 165 175 205
Sales per sq ft (Rs) 9,127 9,870 10,507 9,980 9,685 5,915 9,682
Source: Company, Ambit Capital research. * 12.6% pre-COVID.
Exhibit 15: Trent has increased its investment to Rs16bn Exhibit 16: …which adversely impacted RoCE
Investments in FY16-20
(Rs bn) cumulative
Subsidiaries (Fiora,
RoCE (pre tax) RoIC (pre tax)
1.3 1.4 1.4 1.5 2.0 0.7
Trent Brand, etc)
20%
Trent Hypermarket 4.1 4.1 4.1 4.9 5.1 1.1
Zara+Massimo
0.4 0.4 0.5 0.5 0.5 0.1
Dutti 15%
Tata Unistore 0.2 0.4 0.6 0.9 0.9 0.7
Tata Group cos
0.7 1.2 1.2 0.7 0.6 (0.1) 10%
Bonds and NCDs
Tata sons and Tata
0.2 0.2 0.3 0.3 0.1 (0.1)
capitals Pref shares
5%
Others 0.0 0.0 0.0 0.0 0.0 0.0
Non-current MFs 3.8 2.7 2.3 - - (3.8)
0%
Total LT
10.8 10.4 10.3 8.8 9.3 (1.5) FY16 FY17 FY18 FY19 FY20
investment
Current investment 0.1 0.7 0.2 0.6 6.8 6.7
Source: Ambit Capital research, Company. RoIC largely gives you return
Total investment 10.9 11.1 10.5 9.4 16.1 5.2 ratios for apparel business.
Incremental
0.4 0.3 (0.6) (1.1) 6.7
investment
% of CFO 35% 42% -59% -393% 181% 78%
ravindra@picocap.in
AMBIT INSIGHTS
Employee evaluation parameters lay emphasis on performing as a team

Trent follows a matrix culture to encourage team building and channelize focus of all
functions to enhance customer satisfaction. Management, with a view to identify and
encourage leaders across different functions, introduced a program called ‘Personal
Development Laboratory’ in FY18. In FY20, master classes by international experts on
various functions of retail were added.
Trent also launched a program to identify and groom high potential leaders with a
view to strengthen the company’s leadership pipeline.
Exhibit 17: Trent has ramped up its capability led by recent senior/mid management hiring over last few years
Experience
Name Current designation Working since Previous experience
(years)
Stephen Rayfield CEO Jan-20 21 Marks and Spencer
Venu Nair CEO - Westside Apr-17 26 Marks and Spencer, Aditya Birla Nuovo, Arvind Worldwide
Head Of Sourcing-
Raja Harbinder Singh Dec-19 23 Carrefour Global Sourcing
Westside
Etam (China), Truworths (South Africa), Bestseller Fashion Group
Head - Zudio Nov-17 22
Marjolein Van Brandwijk (China), Mexx (Netherlands)
National Head -
Deepali S Learning and Jul-18 15 Aditya Birla Retail, Adidas, Gini & Jony, Hope and Glory
Development
Sunil Pai Head of Procurement Oct-18 22 Reliance Industries, DMart, Aditya Birla Retail, Shoppers Stop
Amita P Design Head- Projects Jul-18 20 Landmark Group, WD Partners, Aditya Birla Retail
Rakesh N Head Franchising May-18 17 Lenskart, Titan, Arvind, Welspun, Raymond, Kewal Kiran Clothing
Source: Ambit Capital research, LinkedIn
Exhibit 18: Employee per store has been declining Exhibit 19: Revenue and EBITDA per employee have
primarily led by increase in smaller format Zudio stores declined led by price correction undertaken in Westside
and rapid store expansion
Employee cost as % of sales EBITDA/employee (Rs - LHS)
11% Employee per store 46 0.4 Revenue/employee (Rs - RHS) 5

44
10% 4
42 0.3
9% 40 3
38 0.2
8% 36 2
34 0.1
7% 1
32
6% 30 - 0
FY16 FY17 FY18 FY19 FY20 FY16 FY17 FY18 FY19 FY20
Zudio: Adds another cylinder to growth engine

Zudio has been quickly ramped up with sales per sq ft reaching ~1.4x of
Westside (~Rs15,000/sq ft for Zudio vs ~Rs10,400/sq ft for Westside) aiding
stores to break even at EBITDA level already. Management is also trying to
build an ethnic wear dedicated format “Utsa”, organically with 2 stores
already being opened in Pune and Vadodara. They have also successfully
expanded into footwear, innerwear and athleisure categories through private
labels. Zudio’s share of revenue to standalone revenue has doubled from 8%
in FY19 to 16% in FY20. Store expansion under Zudio has been much faster vs
Westside store given smaller format (average ~7,000 sq ft per store vs
~18,000 sq ft per store for Westside). This can be corroborated from the fact
that while Westside took 16 years to reach the store count of 80, Zudio
achieved the 80 stores count in only 4 years after incubating out of Westside.
ravindra@picocap.in
AMBIT INSIGHTS
Exhibit 20: Store expansion has ramped up for Zudio and outpaced Westside in terms
of net store addition in FY19 and FY20
60 Westside store addition Zudio store addition 250

Westside stores (RHS) Zudio stores (RHS)
50 200 Westside took 16 years to reach
40 the store count of 80 while Zudio
150 achieved the 80 stores count in
30 only 4 years after incubating out
100 of Westside
20
10 50
0 0
FY16 FY17 FY18 FY19 FY20 FY21E FY22E
Exhibit 21: Sales per sq ft for Zudio has surpassed Exhibit 22: Zudio’s revenue grew by 149% YoY led by
Westside and is now ~1.4x that of Westside strong LFL and store count doubled from 40 in FY19 to 80
in FY20
Westside's sales/sq ft (Rs) Zudio's sales/sq ft (Rs) Zudio's sales (LHS) YoY growth (RHS)
16,000 6,000 160%

140%
5,000
12,000 120%
4,000 100%
Rs mn
80%
8,000 3,000
60%
2,000 40%
4,000 20%
1,000
0%
0 0 -20%
FY16
FY17
FY18
FY19
FY20
FY16
FY17
FY18
FY19
FY20
Ripe for expansion

Zudio’s business is far more amenable to scale vs Westside. It is disproportionately
easy to find a suitable 8,000 sq ft space to open a Zudio store vs finding an 18,0000
sq ft space to open a Westside store. Mix of Zudio vs Westside stores for future
expansion will favour Zudio. In terms of proposition on fashion, pricing and
convenience, Zudio fits perfectly in all three.
Exhibit 23: Zudio’s potential to add stores/cities is highest given lower price points and
smaller store format
FY15 FY20 Average store size Potential
Retail concepts
Stores Cities Stores Cities (sq ft) cities
Westside 85 53 165 87 17,000-21,000 103
Zudio - - 80 44 6,000-8,000 170
Star 20 7 57 7 5,000-10,000 103
Zara 16 10 22 12 18,000-20,000 55
Booker - - 6 3 DNA NA
Landmark 5 4 4 3 DNA 103
Massimo Dutti - - 3 2 DNA 19
Utsa - - 2 2 2,000-3,000 103
Source: Ambit Capital research, Company; for Massimo Dutti we have considered cities with population >2mn;
for Zara we have considered cities with population >1mn; for Westside, Utsa, Star and Landmark, we have
considered cities with population >0.5mn; for Zudio, we have considered cities with population >0.3mn; DNA
means data not available
ravindra@picocap.in
AMBIT INSIGHTS
Star: Numbers and narrative do not tie

Whilst the format has found it hard to achieve profitability in its 15 years of
operations, management believe they have made significant progress in
finding a viable and scalable business model. While, LFL growth of 9.9% and
revenue growth of 24% are encouraging, loss of Rs1.8bn (-13% PAT margin)
on a topline of Rs13.6bn is far away from finding a viable and scalable
business model, in our view. Trent has been able to keep cost low and loss
under control led by (a) clustered-based expansion; and (b) focus on private
label brands (high GM). However, foray into online under “Starquik” and
aggressive store expansion under the Star format could lead to further
increase in loss.
Trent is present in food, grocery and FMCG retailing (hypermarket and supermarket
store chain) under the “Star” banner. Current portfolio comprises (a) 10 Star Hyper
and 39 Star Market stores primarily concentrated in Bengaluru, Hyderabad, Mumbai
and Pune under Trent Hypermarket Private Limited (THL) - a 50:50 JV between Trent
Ltd & Tesco Plc UK; and (b) 2 Star Hyper and 6 Star Market stores primarily
concentrated in Ahmedabad and Surat under Fiora Hypermarket Ltd (FHL), subsidiary
of Trent.
Trent added net 13 new stores under the Star Market format during FY20 with
increasing focus on fresh offering. Star directly engages with ~800 farmers and a
significant proportion of vegetables & fruits are directly sourced and serviced through
a network of collection/distribution centres.
Exhibit 24: Trent has accelerated its store expansion under Star Market format
Market Daily Hyper

Star witnessed encouraging
traction during the year and the
Star Market format is increasingly
12
viewed as a differentiated &
sustainable model affording
12 12
further expansion with better
12 returns and throughput – FY20
12 19 3 45 Annual report
32
10 20
12
4
Despite reporting industry-leading LFL growth of 9.9% in FY20 (vs 10.9% by DMart),
THL and FHL continue to report PAT level loss in FY20. Management attributed loss
under the Star format to: (a) emphasis on sharp pricing; (b) lower other income; and
(c) impact of Ind-AS 116.
ravindra@picocap.in
AMBIT INSIGHTS
Exhibit 25: THL: Revenue growth was strong at 23% in Exhibit 26: …however, loss during FY20 doubled to Rs1.7bn
FY20…
Revenue (Rs mn) YoY growth PAT (Rs mn) PAT margin
14,000 25%
- 0%
12,000 (200) -2%
20%
10,000 (400) -4%
15% (600)
8,000 -6%
(800)
-8%
6,000 10% (1,000)
-10%
4,000 (1,200)
(1,400) -12%
5%
2,000 -14%
(1,600)
- 0% (1,800) -16%
Exhibit 27: FHL: Revenue growth was strong at 33% during Exhibit 28: …however, loss during FY20 increased
FY20… substantially to Rs114mn
Revenue (Rs mn) YoY growth PAT (Rs mn) PAT margin
1,400 40%
- 0%
1,200 30%
(20) -2%
1,000 20%
10% (40)
800 -4%
0% (60)
600
-10% -6%
400 (80)
-20%
(100) -8%
200 -30%
- -40% (120) -10%
Star format’s competition in the organised market is DMart, Big Bazaar and Spencer’s
Retail. Within all these players, DMart has been the only company to scale its business
profitably and hence we compare the same with THL. We agree that DMart may not
be the completely right benchmark for THL due to its large scale and hence we
compare DMart revenue and profitability of FY06-10 with THL’s FY16-FY20 numbers.
For the sake of clarity, Year 1 will be FY06 for DMart and FY16 for THL and similarly
Year 5 is FY10 for DMart and FY20 for THL.
During Year 1 to Year 5, while DMart’s revenue started with a small base of Rs2.5bn
(vs Rs7.8bn for THL), its revenue CAGR of 59% has outpaced THL’s 12% CAGR by 5x.
DMart was able to scale its business given during Year 1 it was still profitable (Rs38mn
PAT) vs THL’s loss of Rs621mn.
ravindra@picocap.in
AMBIT INSIGHTS
Exhibit 29: THL’s revenue growth has been slow… Exhibit 30: …as it continue to incur loss
THL Revenue (Rs mn) DMart Revenue (Rs mn) THL PAT (Rs mn) DMart PAT (Rs mn)
18,000 1,000
16,000
500
14,000
12,000 -
10,000
(500)
8,000
6,000 (1,000)
4,000
(1,500)
2,000
- (2,000)
Year 1 Year 2 Year 3 Year 4 Year 5 Year 1 Year 2 Year 3 Year 4 Year 5
Source: Ambit Capital research, Company, Year 1 for THL/DMart is Source: Ambit Capital research, Company, Year 1 for THL/DMart is
FY16/FY06 and similarly Year 5 for THL/DMart is FY20/FY10 FY16/FY06 and similarly Year 5 for THL/DMart is FY20/FY10
Akin to private label brands under Westside and Zudio, Trent is experimenting the
private label strategy in the Star format as well. Own branded offerings (excluding
staples, fresh & apparel) comprised 9% share amongst participating categories in
FY20. It has over 500 SKUs under its own brands in the following three categories:
 Klia: Cleaning-aids & home care products
 Fabsta: Packaged food and beverages
 Skye: Personal care products
Exhibit 32: Multiple strategies to scale profitably but proof of concept is yet to be
established
Strategy Comments
“It is critical to establish a reputation for a very compelling price proposition and hence
Price ensuring that our prices are comparable vis-à-vis other food retailers”
proposition “An aggressive promotional plan coupled with competitive pricing is delivering strong
customer traction”
Cost “To recoup margins and deliver sustainability, we are emphasizing efficiency across the
rationalization board and seek to shrink overheads materially”
“Focus areas is on providing quality & reasonably priced range of fresh products comprising
Fresh food
farm produce, a compelling non-vegetarian range and bakery”
“In several sub-categories, own brands rank one or two in terms of sales and hence compete
Own brands
effectively with third-party brands in our stores”
“Continued to pursue a clustered approach with stores in the states of Maharashtra,
Clustered Karnataka, Telangana and Gujarat with an aim of creating local scale and being closer to
expansion customers. This allows us to achieve (a) better understanding of local needs and preferences,
(b) cost efficiency due to economies of scale, and (c) increase brand visibility”
“Starquik – online grocery portal is integrated with stores bringing omni-channel
Online convenience for the customer. This has allowed the business to leverage the capabilities and
presence infrastructure across channels. The intent is to scale up the omni-channel operations over
time.”
ravindra@picocap.in
AMBIT INSIGHTS
Subsidiaries: Continue to be a drag

Trent’s standalone entity’s profitability (Rs1.6bn PAT; 4.9% PAT margin in
FY20) gets masked by losses incurred under various subsidiaries, JVs and
associates leading to muted consolidated PAT of Rs1.1bn and PAT margin of
3%. During FY20, barring Inditex JV, all the other subsidiaries, JVs and
associates has been a drag on overall profitability.
Exhibit 33: Standalone (housing apparels business) and Inditex JV are the only
meaningful profitable venture for Trent
FY20
Entity
Revenue (Rs mn) PAT (Rs mn) PAT margin (%)
Standalone 31,777 1,547 4.9%
Inditex Trent Retail India 15,705 1,041 6.6%
Trent Hypermarket 12,289 (1,551) -12.6% Booker, acquired in FY20, is a
Booker India 2,670 (377) -14.1% drag on profitability as well with
Fiora Hypermarket 1,235 (114) -9.2% reported loss of ~Rs420mn in
Massimo Dutti India 670 (78) -11.7%
FY20
Booker Satnam Wholesale 504 (43) -8.5%
Fiora Services 344 (0) -0.1%
Fiora Online 334 (213) -63.7%
Fiora Business Support Services 179 9 5.0%
Exhibit 34: Subsidiaries, JVs and associates continue to be a drag on overall

profitability of Trent…
Standalone PAT Consol PAT Consol PAT as % of standalone PAT

1,800 80%
1,600 70%
1,400 60%
1,200
50%
Rs mn
1,000
40%
800
30%
600
400 20%
200 10%
0 0%
Exhibit 35: …share of loss has increased substantially to Rs486mn in FY20
Share of loss from subsidiaries, JVs and associates

0
(100)
(200)
Rs mn
(300)
(400)
(500)
(600)

ravindra@picocap.in
AMBIT INSIGHTS
Exhibit 36: Revenue growth rate for Zara has moderated Exhibit 37: FY20 PAT margin improved by 160bps YoY (vs
during FY19 and FY20 GM improvement of 40bps YoY) led by benefit of
operating leverage
Revenue (Rs mn) Growth YoY Gross margin PAT margin
18,000 25% 48% 12%

16,000
20% 45% 10%
14,000
12,000 42% 8%
15%
10,000
39% 6%
8,000
10%
6,000 36% 4%
4,000 5% 33% 2%
2,000
- 0% 30% 0%
Governance has some hits and some misses

Trent scores high on governance with 50% independent board members and
only 1 independent director with tenure of more than 10 years. Attendance of
board meeting has been satisfactory; 90% of the directors attended 75% or
more board meetings in the last 3 years. Remuneration to MD and KMP as a
percentage of PBT has declined from 7.4% in FY16 to 3.6% in FY20. We flag
Trent on Sexual harassment complaints which increased to 19 in FY20 of
which 2 were still pending.
Exhibit 38: 90% of the directors attended 75% or more Exhibit 39: While 50% of the board members were
number of board meetings during the last 3 years independent, only 1 female member was on board of
Trent
50%
No of board meetings held
Directors with attendance below 75% (RHS)
10 12%
8 10%
8%
6
6% 10% 10%
4
4%
2 2%
Independent Female directors Independent
0 0% Directors on board directors with
FY18 FY19 FY20 tenure >10yrs*
Source: Ambit Capital research, Company Source: Ambit Capital research, Company, * ceased to be the director w.e.f
April 25, 2020
ravindra@picocap.in
AMBIT INSIGHTS
Exhibit 40: Remuneration to MD and KMP as a percentage Exhibit 41: FY15-20 CAGR in remuneration to BoD has
of PBT has declined from 7.4% in FY16 to 3.6% in FY20 been in line with PBT CAGR
Remuneration of MD and KMP as % of PBT FY15-20 CAGR

7.4%
21%
6.3% 19%
5.3% 5.2% 5.2%
12% 12%
3.6%
BoD Employee PBT Revenue

FY15 FY16 FY17 FY18 FY19 FY20 remuneration expense
Exhibit 42: No major findings related to lapse in regulatory filings
Source: Ambit Capital research, watchoutinvestors.com
Exhibit 43: ~33% of permanent workforce of Trent Exhibit 44: FY20 witnessed spike in sexual harassment
comprises women complaints to 19 of which 2 were still pending
Permanent women employees No of sexual harassment complaints (LHS)

Women employees as % of overall employees No of complaints pending as on end of the FY
20 3
3,500 35%
3,000 15
34%
2,500 2
2,000 33%
10
1,500 32% 1
1,000 5
31%
500
- 30% 0 0
ravindra@picocap.in
AMBIT INSIGHTS
Where do go from here?

Our long-term view
We continue to like Trent within the ambit of all the apparel players in India given the
quality of business from their attention to detail across the value chain of the business.
This is evident from its industry-leading SSSG, EBITDA margin expansion and faster
ramp-up of stores in new towns. Westside continues to be the key driver of valuations
as it occupies a small share of the USD18bn women’s wear market. We believe Zudio
would better the legacy that Max (owned by Lifestyle) has carved in the value fashion
market. The scalability of this format is also likely to be much superior than Westside.
We also believe Trent may benefit from consolidation post COVID as many existing
player face balance sheet issues (largely due to weaker store economics) and may
either wind up or significantly tone down their overall presence. Trent may use the
opportunity to build more formats which may help it to build stronger presence in
male apparel space too.
Short-term view
We believe the business may struggle in the near term due to Covid as footfalls into
physical stores may remain challenged even as lockdown eases. Inventory risks over
the near term too would be a challenge where discounting would be necessary to
clear inventories in 2Q/3Q as lockdowns are lifted. However, the same would have
lower impact on Trent vs other apparel players given Trent’s efficient supply chain
(lower inventory) and its 12-season model.
Trent has accelerated its store expansions meaningfully across all three fashion
formats (Westside, Zudio, Utsa) adding ~50% of their ~250 fashion stores in the last
2 years. While pace of store rollouts in FY21 would get hit, it would recover to pre-
Covid pace in FY22. Remain BUYers with TP of Rs725, implying 18% upside. The stock
now trades at 51x EV/EBITDA (post Ind-AS where we add both lease liability into EV
and compare it to Ind-AS FY20 EBITDA) on TTM basis, in line with last 3-year average
of 51x EV/EBITDA (pre Ind-AS). We build in 30%/38%/68% revenue/EBITDA/PAT
CAGR over FY20-22 led by 10/30 and 15/55 store additions in FY21/FY22 for
Westside (165 store in FY20) and Zudio (80 store in FY20) respectively.
Exhibit 45: Trent SOTP: Most of our valuation for Trent comes from apparel business
FY22 FY22
Format DCF (Rs/share) Share of Trent Fair value (Rs) EV/EBITDA Sales (Rs bn) EV/Sales
EV (Rs bn) EBITDA (Rs bn)
Standalone 543 100% 543 196.9 7.7 25 41.2 4.8
THL/Star 66 50% 33 25.1 (0.7) NA 14.0 1.8
Zara and Massimo Dutti 303 49% 148 107.6 2.8 39 17.4 6.2
Total 912 725 329.6 9.8 34 72.6 4.5
Exhibit 46: Trent has traded at rich multiple and has de- Exhibit 47: …led by increase in losses from subsidiaries and
rated in the past 3 years… JVs
90 TTM EV/EBITDA 3yr avg Share of loss from subsidiaries and JVs
80
0
70
60 (100)
50
(200)
40
` mn
30 (300)
20
(400)
10
0 (500)
Jun-20
Jun-18
Jun-19
Oct-19
Oct-17
Oct-18
Jun-15
Jun-16
Jun-17
Oct-15
Oct-16
Feb-18
Feb-19
Feb-20
Feb-16
Feb-17
(600)
Source: Ambit Capital research Source: Ambit Capital research

ravindra@picocap.in
AMBIT INSIGHTS
Exhibit 48: We like Titan, Trent and Jubilant Foodworks
Mcap ADVT - EV/EBITDA (x) P/E (x) CAGR (FY20-22) RoCE

Companies
($ mn) 6m ($ mn) FY20E FY21E FY22E FY20E FY21E FY22E Sales EBITDA EPS FY20 FY21E FY22E
DMart 20,011 23.1 72 91 54 111 145 83 16% 15% 16% 15% 8% 14%
Titan 11,357 48.2 37 56 33 56 89 48 6% 5% 8% 17% 9% 14%
Jubilant Foodworks 2,845 29.5 26 39 20 67 155 45 8% 12% 21% 29% 11% 25%
Page Industries 2,951 11.8 40 97 33 62 204 50 4% 11% 12% 43% 14% 42%
Trent 2,973 4.4 43 129 31 145 NA 86 14% 17% 30% 8% -1% 9%
Bata 2,173 18.6 20 45 21 50 252 47 -2% -1% 3% 15% 3% 11%
Relaxo Footwears 2,098 2.7 39 75 30 70 222 51 6% 13% 17% 20% 5% 20%
ABFRL 1,269 3.5 25 62 16 NA NA 37 -4% 25% NA 7% -1% 9%
PVR 715 29.6 9 NA 10 197 NA NA -6% -5% NA 8% -5% 5%
Hawk Scores
In our forensic score analysis, Trent is in D8 decile (zone of darkness). Trent has been
penalized for low CFO/EBITDA, higher CAGR in auditor remuneration, low cumulative
FCF, high change in depreciation rate, and higher contingent liability as a percentage
of networth. Trent continues to score high on parameters like provision on debtors
outstanding for >180 days, advances to related parties and better cash yields.
Post FY20 AR, we expect improvement in Trent’s score on accounting quality as well
as on greatness given:
 Improvement in Pre-Tax CFO/EBITDA to 81%
 FCF generation of ~Rs2.4bn
 Decrease in CWIP as % of Gross block to 2%
Exhibit 49: Trent lies in D8 “Zone of Darkness” Exhibit 50: Trent is in the “Zone of Good, not great”
ravindra@picocap.in
AMBIT INSIGHTS
Exhibit 51: Trent’s Forensic accounting contributors Exhibit 52: Trent’s Greatness score contributors
Exhibit 53: Trent’s accounting ratios have improved over the last 2-3 years
Category Ratios Comments
Trent's 6-year cumulative CFO/EBITDA of 52% is lower than BSE500. This is due
(1) CFO/EBITDA to EBITDA losses incurred in earlier years. During FY20, CFO/EBITDA improved to
81%
P&L
misstatement Change in depreciation rate is due to change in mix of assets depreciated at
(2) change in depreciation rate
checks different rates and due to pick-up in the pace of store expansion
(3) Provisions for doubtful debts as a proportion of
None of the debtors were due for more than six months
debtors more than six months
(1) Cash yield Trent's average cash yield of ~9% in FY20 was in line with ongoing interest rates
Balance sheet (2) Change in reserves (excluding share premium) to Trent has not set off any items directly to the reserves over the last 3 years.
misstatement net income excluding dividends However, in FY15, it knocked off losses arising on merger directly from reserves
checks
Contingent liabilities as a percentage of networth has come off from the highs of
(3) contingent liability as a proportion of net worth
15.2% in FY15 to 2.1% in FY20
(1) Miscellaneous expenses as a proportion of total Trent's miscellaneous expenses as a percentage of revenue have reduced from
revenues the highs of 6% in FY15 to 0% in FY20
Cash pilferage (2) Adv. to related parties/CFO Trent has not provided any advance to any of its related parties
checks (3) CWIP to gross block CWIP to gross block is higher for Trent led by store expansion
Cumulative FCF is negative for Trent as it has been adding stores over the last 3-
(4) cumulative CFO plus CFI to median revenues
5 years. However, it reported positive FCF during FY20
Audit quality (1) CAGR in auditor’s remuneration to CAGR in Payment to auditor in FY20 was merely Rs10.7mn (0.03% of revenue) and hence
checks consolidated revenues not a red flag
ravindra@picocap.in
AMBIT INSIGHTS
Financials - Standalone
Income Statement
Year to March (Rs Mn) FY19 FY20 FY21E FY22E FY23E
Revenue 25,317 31,777 21,373 41,198 50,793
yoy growth 23% 26% -33% 93% 23%
EBITDA 2,365 5,633 1,894 7,751 9,935
Depreciation 465 2,311 2,560 2,851 2,497
EBIT 1,901 3,321 (666) 4,900 7,438
Interest and financial charges 368 2,383 1,501 2,729 2,536
Other income 363 1,518 1,114 1,306 1,542
PBT 1,896 2,456 (1,053) 3,477 6,444
PAT 1,275 1,547 (788) 2,602 4,822
EPS (Rs) 3.8 4.4 (2.2) 7.3 13.6
Balance Sheet
Share capital 332 355 355 355 355
Reserves and surplus 16,636 24,634 23,846 26,448 31,270
Total Networth 16,968 24,990 24,202 26,803 31,625
Loans 3,942 2,997 2,997 2,997 2,997
Lease liability - 22,296 22,920 25,717 27,950
Deferred tax liability (net) (72) (1,070) (1,070) (1,070) (1,070)
Sources of funds 20,838 49,214 49,049 54,449 61,503
Net block 6,271 6,854 6,224 6,205 6,778
Lease assets - 19,041 19,573 21,963 23,869
Capital work-in-progress 850 231 231 231 231
Investments 8,809 9,556 9,556 9,556 9,556
Cash and bank balances 510 441 996 4,744 8,919
Sundry debtors 141 133 59 113 139
Inventories 4,894 5,865 5,530 6,791 8,242
Loans and advances 1,809 1,957 1,817 2,472 2,540
Other current assets 2,249 8,803 8,723 9,272 9,847
Total Current Assets 9,603 17,199 17,125 23,391 29,686
Current Liabilities 4,510 3,450 3,339 6,279 7,856
Provisions 186 218 321 619 763
Current liabilities and provisions 4,696 3,668 3,660 6,898 8,618
Net current assets 4,907 13,531 13,464 16,493 21,068
Application of funds 20,838 49,214 49,049 54,449 61,503
ravindra@picocap.in
AMBIT INSIGHTS
Cash Flow Statement

PBT 1,896 2,455 (1,053) 3,477 6,444
Depreciation 465 2,311 2,560 2,851 2,497
Interest paid (net) 160 1,912 387 1,423 994
CFO before change in WC 2,419 5,605 1,894 7,751 9,935
Change in working capital (1,356) (1,112) 623 719 (400)
Direct taxes paid (781) (807) 265 (875) (1,622)
CFO 282 3,686 2,782 7,594 7,913
Net capex (1,859) (1,050) (2,463) (5,222) (4,977)
Net investments 1,203 (6,320) - - -
Interest received 177 336 1,114 1,306 1,542
CFI (457) (7,570) (1,349) (3,915) (3,435)
Net borrowings 1,061 (2,726) 624 2,798 2,232
Change in share capital - 9,498 (0) 0 -
Interest & finance charges paid (220) (2,437) (1,501) (2,729) (2,536)
Dividends paid (459) (520) - - -
CFF 382 3,815 (877) 68 (304)
FCF (1,577) 2,636 319 2,373 2,936
Ratio analysis / Valuation parameters

Valuation metrics FY19 FY20 FY21E FY22E FY23E
Revenue growth (%) 23 26 (33) 93 23
EBITDA growth (%) 17 138 (66) 309 28
PAT growth (%) 9 21 (151) (430) 85
EBITDA margin (%) 9.3 17.7 8.9 18.8 19.6
EBIT margin (%) 7.5 10.5 (3.1) 11.9 14.6
Net margin (%) 5.0 4.9 (3.7) 6.3 9.5
RoCE (Pre-Tax) (%) 17.4 12.6 (1.6) 11.3 15.0
RoCE (Post-Tax) (%) 11.5 7.8 (1.2) 8.5 11.2
RoE (%) 7.7 7.4 (3.2) 10.2 16.5
P/E (x) 162.1 142.9 (280.5) 85.0 45.9
P/B (x) 12.2 8.8 9.1 8.2 7.0
Debt/Equity (x) 0.2 0.1 0.1 0.1 0.1
Net debt/Equity (x) 0.2 (0.2) (0.2) (0.3) (0.4)
EV/Sales (x) 9.7 7.7 11.5 6.0 4.8
EV/EBITDA (x) 104.0 43.7 129.9 31.7 24.8
ravindra@picocap.in
AMBIT INSIGHTS
Orient Cement NOT RATED

Cost efficiency to be the only certainty
Quick Insight
In FY20 annual report, management guided for an uncertain FY21. It remains
focused on further improving its efficiency/margins by higher trade & PPC Analysis
sales by increasing rural presence and share of premium brand to double

digit of overall volume and optimise logistics. However, the company has Meeting Note
delayed addition of WHRS for Karnataka plant. With majority of CFO utilised News Impact
for debt servicing, capex/depreciation has fallen to 20%. Over FY17-20,
working capital cycle has consistently increased to 17 days, resulting in
relatively low cash conversion of ~85% in FY20. Some corporate governance Stock Information
things to watch out are high managerial remuneration (~11% of PBT, despite Bloomberg Code: ORCMNT IN
some taking sharp cuts), poor rotation of independent directors and limited
CMP (Rs): 65
attendance of independent directors at AGM. Orient Cement currently trades
at 7x one-year forward EV/EBITDA or at 60% discount to replacement costs TP (Rs): NR
given high leverage, unpredictable margins and low growth. Mcap (Rs bn/US$ mn): 13.4/179
3M ADV (Rs mn/US$ mn): 70/0.9
Focus is to reduce costs probably through digitisation

and increase in trade/blended sales Stock Performance (%)
1M 3M 12M YTD
Recap FY20: Orient Cement operated primarily in markets of Maharashtra (50% of
Absolute (25) 28 (40) (9)
volumes), Telangana (25-30%) and Karnataka (10%). These are highly competitive
Rel. to Sensex (23) 8 (34) 2
markets with significant over capacity. In FY20, company’s volumes declined by 9% as
sales were impacted by general elections, state elections in Maharashtra, extended Source: Bloomberg, Ambit Capital research
monsoons and lower investment by AP&T on irrigation projects. Also, in 2QFY20, the
company had difficulties to source fly ash at Jalgaon as Bhusawal Thermal Power
Ambit Estimates (Rs bn)
Station (BTPS) had temporary shutdown in operations for lack of demand.
FY18 FY19 FY20
But with rail siding at Chittapur, Karnataka from FY20, Orient was able to service
Revenues 22 25 24
quickly farther distance for better realisations. This together with general price
EBITDA 3.1 3.1 3.8
increase helped in 4% realisation growth in FY20 more than offsetting the increase in
other overheads for lower fixed cost absorption. EBITDA/t for FY20 was Rs695, up EPS (Rs) 2.2 2.3 4.2
16% YoY and EBITDA was Rs3.8bn, an increase of 23% YoY. However, due to poor Source: Bloomberg, Ambit Capital research
margins, higher interest cost and depreciation, the company was able to pay down
debt by only 5% in FY20.
Exhibit 1: FY20 performance recap
3 yr.
FY17 FY18 FY19 FY20 YoY %
CAGR
(Rs mn, unless specified)
Revenue 18,748 22,223 25,222 24,218 -4% 9%
EBITDA 1,806 3,052 3,120 3,829 23% 28%
Margin (%) 9.6 13.7 12.4 15.8 28% 18%
EBIT 591 1,790 1,793 2,420 35% 60%
Interest 1,353 1,292 1,185 1,223 3% -3%
Other Income 123 202 140 177 27% 13%
PBT (640) 700 748 1,374 84% NM
PAT (296) 442 476 866 82% NM Research Analysts
Unitary details (Rs. Unless specified) Prateek Maheshwari
Volume (MTs) 5.52 5.75 6.41 5.81 -9% 2% prateek.maheshwari@ambit.co
Tel: +91 22 6623 3234
Realizations 3,388 3,858 3,927 4,104 4% 7%
Variable cost/t 2,265 2,499 2,588 2,561 -1% 4% Nitin Bhasin
nitin.bhasin@ambit.co
Fixed overheads/t 805 837 860 948 10% 6% Tel: +91 22 6623 3241
EBITDA/t 531 479 599 694 16% 9%
Source: Company, Ambit Capital Research
ravindra@picocap.in
AMBIT INSIGHTS
Exhibit 2: Performance across sustainability parameters has improved. Also, for Orient
now alternative fuels constitute 8% of total fuel requirement
Particulars FY17 FY18 FY19 FY20
Water consumption (in CBM/t) 0.13 0.15 0.13 0.17
Water recycled (in CBM) 60,704 75,040 85,849 83,676
Non-hazardous waste (MTs) 16,455 19,048 22,223 17,339
SO2 emission (MTs) 1,312 1,848 1,473 932
NOX emission (MTs) 4,889 6,200 5,201 1,809
# of trees/saplings planted 59,322 26,288 38,180 49,071
For FY21 guidance, management believes any guidance in present situation is not
practical. However, the company in its AR expects 20% demand decline and 2-3%
realisation decline for FY21 predicted by other rating agencies and industry research
houses. While the company is first focused on the health & safety of its employees, it
has also mentioned below the strategic plan for FY21.
 To further improve realisations by improving its trade sales, increasing share of
premium brand “Birla A1 StrongCrete” to double digits of overall volumes. To
increase rural foot print and expand PPC sales (~57% in FY20.)
 Digitize and use data analytics in decision making, strengthen performance and
drive efficiency improvements. The company plans to develop a proprietary e-
commerce facility and invest in digital PR campaigns.
 With rail siding at Chittapur started in FY20, the company is penetrating deeper
into Maharashtra, Telangana and Karnataka. Rail share of volume in FY20
increased to 16% vs. 12% in FY19. Orient is focused to optimise road-based
deliveries with increased direct dispatches. The company in FY20 had set new
warehouses in prime markets to enhance product availability. The company is
focused to limit its average lead distance to within 300kms from its cement plants.
Still not comfortable enough to take growth capex

The company is comfortable to meet its debt repayment and interest commitments of
Rs1.8-2bn in FY21 but has delayed its plan to add WHRS (8-9MW @ ~Rs1bn).
Further, the company will continue to try to deleverage and has not discussed any
major capex towards its previous (in FY18) communicated plans to reach 15MTPA in
capacity.
Exhibit 3: Plan to reach 15MTPA (discussed in FY18 AR) is Exhibit 4: …reduces leverage. Orient has also delayed its
stalled until company further… plans to add WHRS at Chittapur, Karnataka
(Rs mn) Capex (LHS) Net Debt/Equity (LHS)

(x) (x)
Capex/Depreciation (RHS) Net Debt/EBITDA (RHS)
4,000 250% 1.4 8.0
3,500 1.2 7.0
200%
3,000 1.0 6.0
2,500 150% 5.0
0.8
2,000 4.0
100% 0.6
1,500 3.0
1,000 0.4 2.0
50%
500 0.2 1.0
- 0% - -
FY16
FY17
FY18
FY19
FY20
FY16
FY17
FY18
FY19
FY20
ravindra@picocap.in
AMBIT INSIGHTS
Exhibit 5: CFO has been the chief source of fund for Orient Exhibit 6:...which was mainly utilised towards interest and
over last 3 years… debt repayments leaving only enough to meet routine
capex
FY18-20 Sources of funds: ~Rs9bn FY18-20 Application of funds: ~Rs9bn

Interest
received Cash & Capex
1% banks Dividend 39%
3% paid
5% Net
investment
s
1%
Interest
CFO payments Debt
96% 42% Repaymen
ts
13%
Exhibit 7: Employee cost and other expenses jumped ~Rs90/t in FY20 for lower absorption of non-discretionary costs and
increase in variable costs. In FY20, of the below expenses ~10%/~410/t is variable or semi variable in nature where Orient
has scope for reduction to manage operating margins
Employee & Other overheads Absolute (Rs mn As % of net sales As Rs/tonne of cement sales
FY18 FY19 FY20 FY18 FY19 FY20 FY18 FY19 FY20
Non-Discretionary 2,656 3,149 3,132 12% 12% 13% 462 491 539
Employee cost 1,385 1,550 1,549 6% 6% 6% 241 242 267
Repairs and maintenance 501 568 605 2% 2% 2% 87 89 104
Rent & hire charges 172 511 464 1% 2% 2% 30 80 80
Professional & consultancy charges 179 152 163 1% 1% 1% 31 24 28
Others 420 369 351 2% 1% 1% 73 57 60
Discretionary 602 607 611 3% 2% 3% 105 95 105
Advertising and sales promotion 349 332 331 2% 1% 1% 61 52 57
Commission on sales 164 202 171 1% 1% 1% 29 32 29
CSR expenditure 44 53 50 0% 0% 0% 8 8 9
Others 44 19 60 0% 0% 0% 8 3 10
Variable 1,561 1,759 1,766 7% 7% 7% 272 274 304
Royalty, cess and other charges 630 816 754 3% 3% 3% 110 127 130
Consumption of stores and spares 718 712 749 3% 3% 3% 125 111 129
Handling & other charges to contractors 213 232 263 1% 1% 1% 37 36 45
Total 4,819 5,515 5,509 22% 22% 23% 839 860 948
ravindra@picocap.in
AMBIT INSIGHTS
Earnings quality and accounting checks

Orient’s cash conversion in FY20 dropped to 84% with increased working capital
requirement to support higher inventory and reduce payable cycle. Depreciation rate
has been very stable for last 5 years; miscellaneous expenses are comfortable at 1%
of net revenues and cash yield, which was poor until FY18 has consistently improved
in FY19 and FY20.
Exhibit 8: Cash conversion in FY20 fell to 84%… Exhibit 9: …due to further increase in working capital
given higher inventory and reduced credit cycle
In days FY16 FY17 FY18 FY19 FY20
Pre-tax CFO/EBITDA 5 year average Inventory days 34 27 26 25 32
160% Debtors days 23 19 21 24 26
140% Other asset days 38 31 28 21 17

120% Creditor days 48 92 83 73 69
100% other liabilities days 49 (14) (12) (11) (12)
80% Cash conversion
(3) (0) 5 9 17
60% cycle
Industry 27 29 27 28 28
40%
20% Source: Company, Ambit Capital research. Note: (a) Above calculation is on
average for balance sheet items. (b) Industry includes top 11 listed cement
0% manufacturers.
FY16
FY17
FY18
FY19
FY20
Exhibit 10: Orient Cement’s depreciate rate has been very stable compared to other cement manufacturers
Company/Metric Depreciation as a % of average gross block Change in Depreciation rate (in bps)
UltraTech 5% 5% 5% 5% 5% 67 46 26 (47) (23)
Shree Cement 13% 29% 16% 18% 18% 133 1,534 (1,247) 197 (38)
ACC 6% 5% 7% 9% 7% 83 (109) 184 231 (166)
Ambuja 5% 6% 5% 7% 7% 76 88 (111) 232 (60)
Dalmia Bharat 6% 10% 9% 9% 10% 223 385 (153) 29 107
The Ramco Cement 4% 3% 4% 3% 3% 2 (22) 14 (7) (6)
JK Cement 4% 4% 4% 4% 4% 24 6 6 2 0
Heidelberg Cement 4% 5% 5% 5% 5% (102) 50 (2) (4) 21
JK Lakshmi Cement 6% 6% 6% 5% 5% 276 (25) (15) (14) (3)
Birla Corporation 6% 6% 4% 4% 4% 119 14 (124) (34) (1)
Orient Cement 5% 5% 5% 5% 5% 142 4 (11) (5) 3
Average 6% 7% 6% 6% 6% 65 117 (61) 30 (6)
Exhibit 11: Misc. expenses as % of revenues is just 1% Exhibit 12: Cash yield has recently improved to 9%/13% in
for Orient Cement FY19/20
Particulars Particulars (Rs mn) FY16 FY17 FY18 FY19 FY20
(Rs mn)
Interest/dividend received 14 22 20 26 45
Misc. Expenses 255 330 367 293 272
Cash yield (%) 4% 3% 6% 9% 13%
as % of revenues 1.7% 1.8% 1.7% 1.2% 1.1%
ravindra@picocap.in
AMBIT INSIGHTS
Corporate Governance checks

Orient in FY20 did not have material and unusual related party transactions. Its
contingent liabilities (mainly relating to tax disputes) increased by 9% YoY but remain
comfortable under 3%/6% of revenue/net worth.
S.R. Batliboi (EY) was the statutory auditor for Orient Cement and was in its 7th year
auditing Orient’s accounts. Auditor is expected to be rotated in upcoming AGM.
While 2/3rd of Orient’s board is constituted by independent directors, majority of them
did not attend the last AGM and have now completed over 5 years on the company
board and should ideally be rotated. We note that Orient has submitted resolution for
Mr. Swapan Dasgupta, who has recently completed 5 years as independent director at
Orient to be re-appointed for another term of 5 years. This may be a worry for
investors as long association with the company and management may impede
independence of directors.
Orient Cement continues to pay handsomely to its senior management; has among
the highest managerial remuneration as a percentage of PBT. In FY21, senior and
middle management decided to take pay cuts in the range of 10-20% at Orient for
expected weak demand in FY21.
Exhibit 13: M/s S.R. Batliboi & Co. LLP (EY) has been statutory auditors for Orient
Cement for last 7 years and due to retire by rotation in upcoming AGM
Company Auditor Auditor Since
UltraTech KPMG FY16
Shree Cement M/s. Gupta & Dua FY18
ACC Deloitte CY17
Ambuja Deloitte CY17
Dalmia Bharat S S Kothari Mehta & Co. Over 9 years
Ramakrishna Raja & Co./ S.R.S.R.
Ramco Cement FY18
Associates
JK Lakshmi Cement S S Kothari Mehta & Co. FY18
Orient Cement EY FY14
Heidelberg Cement S N Dhawan & Company FY18
Exhibit 14: Managerial Remuneration paid to CEO, CFO, CS and other directors was
11% (vs 18% in FY19) of PBT in FY20. This is still among the highest by a cement
company.
(Rs mn, unless specified) FY16 FY17 FY18 FY19 FY20
Managerial Remuneration(MR)(Rs mn) 80 91 118 133 154
Promoter’s Remuneration % of MR 3% 1% 2% 2% 2%
MR % of PBT adj. 13% -14% 17% 18% 11%
MR % of Employee cost 9% 8% 9% 9% 10%
Employee remuneration (Rs mn) 898 1,184 1,385 1,550 1,549
PBT adj. (Rs mn) 609 (665) 700 748 1,374
Exhibit 15: In FY21, senior management has taken pay cut in the range of 10-20%
Proposed remuneration for MD &
FY20 FY21 YoY %
CEO (Rs mn, unless specified)
Salary and allowances 83 73 -12%
Performance related pay 18 11 -36%
Perquisites 1 1 0%
Total 102 85 -16%
as % of last year’s PBT 14% 6%
Retiral benefits 11 11
# Stock options @ Rs135 831,900 831,900
Source: Company, Ambit Capital Research. Note that remuneration paid to MD & CEO of Orient Cement in
FY18/19 was only 35%/25% discount to that of KK Maheshwari, MD UltraTech.
ravindra@picocap.in
AMBIT INSIGHTS
Exhibit 16: Two-third of Orient Cement’s board is independent but most have completed 5-year terms and should be
rotated. Also, independent directors’ attendance were poor in its last AGM
Appointed Attendance at the FY19 Attendance at FY20 board
Name of the director Type of directorship
date AGM meetings
Mr. Chandrakant Birla Promoter Director, Chairman 23-Jul-11 No 100%
Mrs. Amita Birla Promoter Director 27-Mar-15 No 60%
Mr. Rajeev Jhawar Independent Director 9-Aug-14 No 80%
Mr. Rabindranath
Independent Director 9-Aug-14 No 40%
Jhunjhunwala
Mr. Janat Shah Independent Director 30-Apr-14 No 100%
Mr. Swapan Dasgupta Independent Director 4-Aug-15 No 100%
Mr. I.Y.R. Krishna Rao Independent Director 5-May-17 Yes 100%
Mrs. Varsha Vasant Purandare Independent Director 8-Feb-19 Yes 100%
Mr. Desh Deepak Khetrapal Managing Director & CEO 2-Apr-12 Yes 100%
Exhibit 17: Contingent liability is mainly relating to dispute with tax authorities arising
in normal course of business. Over FY19-20, contingent liabilities increased 9% but
remains 3%/~6% of revenues/networth
(Rs mn) As % of revenues As % of net worth
Contingent liabilities
FY19 FY20 FY19 FY20 FY19 FY20 For whom has the company given
Related to sales tax, a bank guarantee? We didn’t find
154 178 1% 1% 1% 2%
excise duty and customs
the mention in the AR FY20.
Income Tax 59 94 0% 0% 1% 1%
Electricity Duty 169 169 1% 1% 2% 2%
Bank Guarantee 60 60 0% 0% 1% 1%
Others 165 158 1% 1% 2% 1%
Total 607 659 2% 3% 6% 6%
Exhibit 18: There were no material related party transactions reported by Orient.
However, the company had following payments to related entities of the promoter
group
As % of As % of
(Rs mn)
Particulars revenues net worth
FY19 FY20 FY19 FY20 FY19 FY20
Purchase of goods & services from other
80 100 0.3% 0.4% 1% 1%
related entities
Payment of rent and office maintenance
17 17 0.1% 0.1% 0% 0%
from other related entities
Total 97 117
ravindra@picocap.in
AMBIT INSIGHTS
Leverage keeps investors shy despite deep value

After sharp correction in cement prices in Maharashtra, Orient Cement’s
valuation has consistently fallen from 13x in Sept’16 to 7x today on one-year
forward EV/EBITDA. On EV/tonne, the company now currently trades at
~Rs3,000/tonne, which is 30% discount to its last three-year average
valuation and 60% discount to replacement. The unpredictable margin in
AP&T & Maharashtra, limited growth and sticky leverage are possibly the
reasons for this valuation. We believe leverage will not reduce materially in
FY21/22 and margins will be volatile. Strong CFO growth driven by price
recovery/growth especially in West is a factor for the stock from hereon. This
expectation/ hope is already priced in the punchy valuations of some of the
large-cap cement names.
Exhibit 19: At CMP, Orient trades at 7x one-year forward Exhibit 20: On EV/tonne, at CMP, Orient currently is
EV/EBITDA, which is close to its recent 3-year average but valued at Rs2,950, which is 30% discount to its recent 3-
on depressed margins and EBITDA expected for FY21 year average and 60% discount to replacement cost
(x) 1-yr fwd EV/EBITDA Rs/tonne

3 yr. avg. 1-yr fwd EV/EBITDA EV/tonne 3 year avg. EV/tonne
14
7,500
12 6,500
10 5,500
4,500
8
3,500
6
2,500
4 1,500
Jan-15
Jan-16
Jan-17
Jan-18
Jan-19
Jan-20
Jul-14
Jul-15
Jul-16
Jul-17
Jul-18
Jul-19
Jul-20
Jan-15
Jan-16
Jan-17
Jan-18
Jan-19
Jan-20
Jul-14
Jul-15
Jul-16
Jul-17
Jul-18
Jul-19
Jul-20
Source: Bloomberg, Ambit Capital research Source: Bloomberg, Ambit Capital research. Note: Replacement cost is
US$100/t
Exhibit 21: Over last 3 years, volume CAGR was only 2% Exhibit 22: Supported by its efficient cost structure, Orient
but unitary EBITDA recently improved to Rs660/t is gradually improving its return profile and balance
sheet
(Rs/t) EBITDA/t (LHS) (%) Post tax RoCE (LHS) Net debt/EBITDA (RHS)(x)
3 year volume CAGR (RHS)
700 16% 12 8
600 14% 7
10
12% 6
500 8
10% 5
400
8% 6 4
300 3
6% 4
200 2
4%
2
100 1
2%
0 -
- 0%
FY16
FY17
FY18
FY19
FY20
FY1
FY1
FY1
FY1
FY2
6
ravindra@picocap.in
AMBIT INSIGHTS
Ambit’s Hawk Analysis

As of analysis up to FY19, Orient Cement scored poorly on our account framework for
high growth in auditor’s remuneration vs. that of revenues, low provisions for doubtful
debts, poor cumulative FCF of last 3 years vs. median revenues and for change in
reserves not adequately reflecting in profits ex of dividend.
Even on our greatness framework, Orient Cement is a good but not great company.
This is due to its tepid capex, poor margins & capital employed turnover and high
leverage.
Forensic Score Percentile Greatness Score Percentile
Source: Company, Ambit Hawk Source: Company, Ambit Hawk
Forensic Accounting Contributors Greatness Score Contributors
ravindra@picocap.in
AMBIT INSIGHTS
Forensic Score - Evolution Greatness Score - Evolution
ravindra@picocap.in
AMBIT INSIGHTS
Financials
Balance sheet
Particulars (Rs Mn) FY16 FY17 FY18 FY19 FY20
Share capital 205 205 205 205 205
Reserves and surplus 9,958 9,667 10,016 10,330 10,979
Total Net worth 10,163 9,872 10,221 10,535 11,184
Loans 12,898 13,362 13,136 12,898 12,298
Deferred tax liability (net) 1,228 750 854 961 1,219
Sources of funds 24,289 23,983 24,212 24,394 24,701
Net block 21,497 22,956 22,507 23,545 22,715
Capital work-in-progress 2,391 981 1,582 478 668
Cash and bank balances 378 639 331 288 360
Sundry debtors 921 1,055 1,551 1,795 1,618
Inventories 1,410 1,467 1,642 1,860 2,366
Loans and advances 1,771 1,677 1,732 1,118 1,108
Total Current Assets 4,744 4,894 5,320 5,245 5,615
Current liabilities and provisions 4,344 4,851 5,197 4,875 4,297
Net current assets 400 42 122 370 1,318
Application of funds 24,289 23,983 24,212 24,394 24,701
Income statement
Revenue 15,092 18,748 22,223 25,222 24,218
Total expenses 13,258 16,941 19,172 22,101 20,389
EBITDA 1,834 1,806 3,052 3,120 3,829
Net depreciation 763 1,215 1,262 1,327 1,409
EBIT 1,071 591 1,790 1,793 2,420
Interest 544 1,353 1,292 1,185 1,223
Adj PBT 603 (640) 700 748 1,374
Adj PAT 623 (296) 442 476 866
Reported PAT 623 (296) 442 476 866
EPS (Rs) 3.0 (1.4) 2.2 2.3 4.2
ravindra@picocap.in
AMBIT INSIGHTS
Cash flow statement

PBT 602 (665) 700 748 1,374
Interest paid (net) 544 1,353 1,292 1,185 1,223
Change in working capital 824 720 (222) (209) (634)
Direct taxes paid (134) 9 (121) (167) (307)
CFO 2,576 2,588 2,792 2,813 2,918
Net capex (3,697) (1,061) (1,470) (1,212) (766)
Interest received 6 25 19 24 50
CFI (3,691) (1,241) (1,485) (1,199) (732)
Proceeds from borrowings 1,841 542 (233) (250) (643)
Interest & finance charges paid (519) (1,376) (1,259) (1,279) (185)
CFF 1,065 (1,079) (1,615) (1,714) (2,059)
Net increase in cash (50) 267 (309) (100) 127
FCF (1,121) 1,526 1,322 1,600 2,151
Ratio analysis
Particulars (In %, unless specified) FY16 FY17 FY18 FY19 FY20
Revenue growth (2) 24 19 13 (4)
EBITDA growth (40) (2) 69 2 23
PAT growth (68) (147) (249) 8 82
EPS norm (dil) growth (68) (147) (250) 8 82
EBITDA margin 12 10 14 12 16
EBIT margin 7 3 8 7 10
Net margin 4 (2) 2 2 4
Post tax RoCE 3 2 7 7 10
RoIC 5 3 8 8 10
RoE 6 (3) 4 5 8
Debt/Equity(x) 1 1 1 1 1
Net debt/Equity(x) 1 1 1 1 1
ravindra@picocap.in
AMBIT INSIGHTS
Institutional Equities Team

Research Analysts
Name Industry Sectors Desk-Phone E-mail
Nitin Bhasin - Head of Research E&C / Infra / Cement / Home Building / Aviation (022) 66233241 nitin.bhasin@ambit.co
Ajit Kumar, CFA, FRM Banking / Financial Services (022) 66233252 ajit.kumar@ambit.co
Amandeep Singh Grover Mid-Caps / Hotels / Real Estate (022) 66233082 amandeep.grover@ambit.co
Ashish Kanodia, CFA Consumer Discretionary (022) 66233264 ashish.kanodia@ambit.co
Ashwin Mehta, CFA Technology (022) 6623 3295 ashwin.mehta@ambit.co
Basudeb Banerjee Automobiles / Auto Ancillaries (022) 66233141 basudeb.banerjee@ambit.co
Darshan Mehta E&C / Infrastructure / Aviation (022) 66233174 darshan.mehta@ambit.co
Deep Shah Media / Telecom / Oil & Gas (022) 66233064 deep.shah@ambit.co
Dhruv Jain Mid-Caps (022) 66233177 dhruv.jain@ambit.co
Karan Khanna, CFA Mid-Caps / Hotels / Real Estate (022) 66233251 karan.khanna@ambit.co
Karan Kokane Automobiles / Auto Ancillaries (022) 66233028 karan.kokane@ambit.co
Kushagra Bhattar Healthcare (022) 66233062 kushagra.bhattar@ambit.co
Nikhil Mathur, CFA Healthcare (022) 66233220 nikhil.mathur@ambit.co
Pankaj Agarwal, CFA Banking / Financial Services (022) 66233206 pankaj.agarwal@ambit.co
Prasenjit Bhuiya Agri & Chemicals (022) 66233132 prasenjit.bhuiya@ambit.co
Prateek Maheshwari Cement (022) 66233234 prateek.maheshwari@ambit.co
Ritesh Gupta, CFA Consumer Discretionary / Agri & Chemicals (022) 66233242 ritesh.gupta@ambit.co
Satyadeep Jain, CFA Metals & Mining (022) 66233246 satyadeep.jain@ambit.co
Shreya Khandelwal Banking / Financial Services (022) 6623 3292 shreya.khandelwal@ambit.co
Sumit Shekhar Economy / Strategy (022) 66233229 sumit.shekhar@ambit.co
Udit Kariwala, CFA Banking / Financial Services (022) 66233197 udit.kariwala@ambit.co
Varun Ginodia, CFA E&C / Infrastructure / Aviation (022) 66233174 varun.ginodia@ambit.co
Vinit Powle Strategy / Forensic Accounting (022) 66233149 vinit.powle@ambit.co
Vivekanand Subbaraman, CFA Media / Telecom / Oil & Gas (022) 66233261 vivekanand.s@ambit.co
Sales
Name Regions Desk-Phone E-mail
Dhiraj Agarwal - MD & Head of Sales India (022) 66233253 dhiraj.agarwal@ambit.co
Bhavin Shah India (022) 66233186 bhavin.shah@ambit.co
Dharmen Shah India / Asia (022) 66233289 dharmen.shah@ambit.co
Abhishek Raichura UK & Europe (022) 66233287 abhishek.raichura@ambit.co
Pranav Verma Asia (022) 66233214 pranav.verma@ambit.co
USA / Canada
Hitakshi Mehra Americas +1(646) 793 6751 hitakshi.mehra@ambitamerica.co
Achint Bhagat, CFA Americas +1(646) 793 6752 achint.bhagat@ambitamerica.co
Singapore
Srinivas Radhakrishnan Singapore +65 6536 0481 srinivas.radhakrishnan@ambit.co
Sundeep Parate Singapore +65 6536 1918 sundeep.parate@ambit.co
Production
Sajid Merchant Production (022) 66233247 sajid.merchant@ambit.co
Sharoz G Hussain Production (022) 66233183 sharoz.hussain@ambit.co
Jestin George Editor (022) 66233272 jestin.george@ambit.co
Richard Mugutmal Editor (022) 66233273 richard.mugutmal@ambit.co
Nikhil Pillai Database (022) 66233265 nikhil.pillai@ambit.co
Babyson John Database (022) 66233209 babyson.john@ambit.co
ravindra@picocap.in
AMBIT INSIGHTS
Stock price performance – Constn & Infra

Larsen & Toubro Ltd (LT IN, SELL) AIA Engineering Ltd (AIAE IN, SELL)
1,800 2,500
1,600
1,400 2,000
1,200
1,000 1,500
800 1,000
600
400 500
200
0 0
Jun-17
Jun-18
Jun-19
Jun-20
Jun-17
Jun-18
Jun-19
Jun-20
Mar-18
Mar-19
Mar-20
Mar-18
Mar-19
Mar-20
Sep-17
Sep-18
Sep-19
Sep-17
Sep-18
Sep-19
Dec-17
Dec-18
Dec-19
Dec-17
Dec-18
Dec-19
Larsen & Toubro Ltd AIA Engineering Ltd
Source: Bloomberg, Ambit Capital research Source: Bloomberg, Ambit Capital research
Capacit'e Infraprojects Ltd (CAPACITE IN, BUY) Techno E&E Co. (TEEC IN, BUY)
450 330
400 310
290
350 270
300 250
250 230
200 210
190
150 170
100 150
May-19
May-20
Nov-17
May-18
May-20
Nov-19
Nov-18
May-19
Nov-19
Mar-18
Mar-19
Mar-20
Mar-19
Mar-20
Sep-19
Sep-18
Sep-19
Jan-18
Jul-18
Jan-19
Jul-19
Jan-20
Jan-19
Jul-19
Jan-20
Capacit'e Infraprojects Ltd Techno Electric & Engineering Co Ltd
Ahluwalia Contracts (AHLU IN, BUY) KEC International Limited (NBCC IN, BUY)
450 500
400
350 400
300
300
250
200 200
150
100 100
50
0 0
Jun-17
Jun-18
Jun-19
Jun-20
Mar-18
Mar-19
Mar-20
Sep-17
Sep-18
Sep-19
Dec-17
Dec-18
Dec-19
Oct-17
Oct-18
Oct-19
Apr-19
Apr-20
Apr-17
Apr-18
Jul-19
Jan-20
Jan-17
Jul-17
Jan-18
Jul-18
Jan-19
Ahluwalia Contracts India Ltd KEC International Limited
ravindra@picocap.in
AMBIT INSIGHTS
Thermax Ltd (TMX IN, BUY) Cummins India Ltd (KKC IN, SELL)
1,600 1,200
1,400 1,000
1,200
1,000 800
800 600
600 400
400
200 200
0 0
Jun-17
Jun-18
Jun-19
Jun-20
Jun-17
Jun-18
Jun-19
Jun-20
Mar-18
Mar-19
Mar-20
Mar-18
Mar-19
Mar-20
Sep-17
Sep-18
Sep-19
Sep-17
Sep-18
Sep-19
Dec-17
Dec-18
Dec-19
Dec-17
Dec-18
Dec-19
Thermax Ltd Cummins India Ltd
Trent Ltd (TRENT IN, BUY)
900
800
700
600
500
400
300
200
100
0
Aug-19
Aug-17
Aug-18
Jun-20
Jun-19
Oct-19
Jun-17
Jun-18
Oct-17
Oct-18
Feb-20
Feb-18
Feb-19
Apr-20
Apr-18
Apr-19
Dec-19
Dec-17
Dec-18
Trent Ltd
Orient Electric Ltd (ORIENTEL IN, NOT RATED)
300
250
200
150
100
Aug-18
Aug-19
May-19
Jun-19
May-20
Jun-20
Oct-18
Nov-18
Oct-19
Nov-19
Mar-19
Mar-20
Sep-18
Sep-19
Feb-19
Feb-20
Apr-19
Apr-20
Jul-18
Dec-18
Jan-19
Jul-19
Dec-19
Jan-20
Orient Electric Ltd
ravindra@picocap.in
AMBIT INSIGHTS
Explanation of Investment Rating - Our target prices are with a 12-month perspective. Returns stated are our internal benchmark
Investment Rating Expected return (over 12-month)
BUY We expect this stock to deliver more than 10% returns over the next12 months
SELL We expect this stock to deliver less than or equal to 10 % returns over the next 12 months
UNDER REVIEW We have coverage on the stock but we have suspended our estimates, TP and recommendation for the time being
NOT RATED We do not have any forward-looking estimates, valuation, or recommendation for the stock.
POSITIVE We have a positive view on the sector and most of stocks under our coverage in the sector are BUYs
NEGATIVE We have a negative view on the sector and most of stocks under our coverage in the sector are SELLs
NO STANCE We have forward looking estimates for the stock but we refrain from assigning valuation and recommendation
Note: At certain times the Rating may not be in sync with the description above as the stock prices can be volatile and analysts can take time to react to development.
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AMBIT INSIGHTS
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Ambit Insight On China Import

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AMBIT INSIGHTS

Orient Cement (NOT RATED)

Infra & Industrials NEGATIVE

Imports from China - Rs bn % of India's imports - RHS Thermax BUY

Exhibit 2: …but the fall is less severe if we include Hong Kong

Imports from China + HK - Rs bn % of India's imports - RHS

Source: Ministry of Commerce, Ambit Capital research

US and Middle East gaining share from China

FY18 FY20P 2-year CAGR - RHS 5-year CAGR - RHS

Source: Ministry of Commerce, Ambit Capital research

Electrical products, engineering goods and organic

Source: Ministry of Commerce, Ambit Capital research

China ceding share to other geographies in electrical products and

Iron & Steel

Automobiles & parts

Source: Ministry of Commerce, Ambit Capital research

China’s share in power equipment imports into India

China India Total - Rs bn China - Rs bn

Rs bn Domestic Production Total Imports

Source: Ministry of Commerce, Ambit Capital research

According to Directorate General of Commercial Intelligence (DGCI), there is ample

Electrical Diodes, FY20P Diodes,

Source: Ministry of Commerce, Ambit Capital research

Potential combination of tariff and non-tariff barriers to restrict imports from

18% 18% 18%

Source: Cybex, Ambit Capital research

Rs bn Solar cells (LHS) Transfomers, static converters & inductors (LHS)

Rs bn Electric motors,generators, gensets (LHS) Rs bn Electrical switchgears (LHS)

Rs bn Electrical resistors/ capacitor Rs bn Boilers (LHS)

Rs bn Other engines Turbines (LHS)

Rs bn Parts of electric meters (LHS) Rs bn Gas generators

BHEL is one of the largest companies with products

KECI is the largest player in T&D towers manufacturing

KPP has presence in power T&D manufacturing, T&D

ABB Power Products makes power transformers, long-

GE T&D offers products like power transformers, circuit

Techno Electric has presence in smart meters,

GE Power has a vide portfolio of products like boilers,

ISGEC Heavy engineering has presence in Boilers,

FY20 share of Chinese imports (36%) - EBITDA

KOEL is one of the leading manufacturers of

KEI has presence in power cables, solar cables and

Where do we go from here?

Exhibit 30: Valuation comparison

Stock Performance (%)

Capital allocation beyond fashion business remains a challenge

Westside: The perfectionist

Gross store addition (LHS) No of Westside stores (RHS)

Source: Ambit Capital research, Company

Value works - Operating leverage and cost efficiencies passed on to

Source: Ambit Capital research, Company

Westside's customer walk-ins (LHS) Westside's bill size (Rs - LHS)

Operating leverage offset the impact of gross margin contraction

Share of own brands (RHS) Freight cost as% of sales (LHS)

Standalone CFO (pre-tax)/EBITDA (LHS) Standalone avg inventory days (RHS)

Source: Company, Ambit Capital research

Trent clocked positive FCF; CFO improves

However, we are committed to

Employee evaluation parameters lay emphasis on performing as a team

Employee cost as % of sales EBITDA/employee (Rs - LHS)

11% Employee per store 46 0.4 Revenue/employee (Rs - RHS) 5

Zudio: Adds another cylinder to growth engine

60 Westside store addition Zudio store addition 250