19 FEB 2014

INDIA STRATEGY | Strategy Update

MODEL PORTFOLIO FEBRUARY 2014

Indian politics remains as indeterminate as ever. The possible alternatives post May seem to be a BJP led govt or a Third Front supported by the Cong. However, either of these do not necessarily guarantee full co-operation of the states and coalition members to push through important reforms required. The most important of these are: unleashing GST, unshackling agri-markets and faster project clearances. However, the formation of ANY stable govt is likely to atleast prod from slumber, some of the capex stuck up due to sheer bureaucratic inaction or promoters feeling of uncertainty. Global credit agencies and the RBI are likely to take action only after they see the first Budget of the new Govt in June/ July. Thus, interest rates are likely to remain high till then. On the global front, there has been a slew of disappointing data from the US (ie Manufacturing output saw biggest drop in output in more than 4-1/2 years, retail sales were weak and employment numbers tepid) that raises question marks on US growth trajectory even when seen in the context of weather disruptions. Chinese indicators continue to yo-yo with disappointing PMI readings and a contrasting surge in loan growth (which shot up to a four year high in Jan). The INR has remained remarkably stable even in the backdrop of EM currency pain lately, thanks to narrowing CAD and Fx buffer. With reducing stress on external account the INR may remain stable in the 61-63 range in the near term. Given the above backdrop, and taking into account the verdict (valuations) of the current quarterly results in various stocks, we fine-tune our model portfolio for a pre-election stance as follows: Main changes from the previous version in Dec 2013: Auto: Decreased wtg, removed Bajaj Auto: Urban demand to remain weak

BFSI: Decreased wtg & removed non-Nifty stocks, as asset quality issues remain Cement: Added Ambuja cement as cement profitability bottomed out Engg & Infra: Retain OW position as risk-return at CMP favourable on electoral outcome FMCG: Sharply increased ITC wtg and added various non-Nifty stocks: Earnings visibility for selected Cos strong IT: Increased wtg, esp in HCL Tech: Strong and increasing revenue visibility Resources: Remain UW & deleted Sesa-Sterlite: China remains indeterminate Pharma: Increased wtg, esp in Divis: Overall, strong momentum in the US market; India to revive on low base Telecom: Cut wtg due to increasing cost of business

Rationale for each change in stocks is provided in the attached portfolio Thus our key portfolio stance stands as: Max allowable 10% positions in: ITC, Infosys, RIL OW: Engineering & Infra, Consumer, Pharma UW: BFSI, Cement, Resources, Power Utilities, Telecom OW Nifty Stocks: Tata Motors, Maruti, Hero Motocorp, ICICI Bank, PNB, Ambuja Cement, L&T, HCL Tech, RIL, Sun Pharma, Dr Reddy, Lupin Non-Nifty Stocks: Power Finance, Adani Ports, Emami, Britan nia, Dabur, Dish TV, United Spirits, Hindustan Zinc, Divis, Prestige Please do read the comments alongside all stocks where we have made changes in the portfolio.

Nandan Chakraborty MD Institutional Equity Research

nandan.chakraborty@axiscap.in 91 22 4325 1107

Sachchidanand Shukla Sr VP & Economist

sachchidanand.shukla@axiscap.in 91 22 4325 1108 01

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19 FEB 2014
INDIA STRATEGY

Strategy Update

MODEL PORTFOLIO FEB 2014

Nifty-benchmarked Axis Capital Model Portfolio

Po rtfo l io M thl y up date as o f 18- F eb - 14 No tes: a) Nil - c ash p o rtfo l io b ) No n- Nifty sto c k s highl ighted in b l ue, usual l y > US D 1 b n mc ap (unl ess exc ep tio nal & L T returns) & c ap p ed at 2% c ) Al l o c atio ns c ap p ed at 10% (eg R IL , IT C , Info sys) d) T gt p r up sides are b ased o n 1yr anal yst- o utl o o k whil e M o del p o rtfo l io may b e at v arianc e to refl ec t nearer term c o nc erns/ triggers, al l o c ativ e imp erativ es, imp ending c hanges in mul tip l es fo r fac to rs no t yet quantifiab l e into fo rec asts e) H ighl ighted wtgs are tho se that are c hanged fro m p rev io us wtgs, underl ined = majo r OW v s Nifty
We i gh t age s (% ) Se ct or / Com p an y Auto Tata Motors Bajaj Auto Maruti Suzuki Hero Motocorp B an ks & Fi n an ci al Se r vi ce s ICICI Bank HDFC HDFC Bank Axis Bank Indusind Bank IDFC PNB P owe r Fi n an ce 19,247 20,135 25,424 8,779 3,283 2,382 3,158 3,176 1,038 804 661 1,165 389 98 543 150 M cap (U SD m n ) 18,452 8,580 8,292 6,343 CM P (Rs) 391 1,846 1,709 1,978 Ni ft y A xi s Cap Cu r r e n t 1 8 - Fe b - 1 4 9 .4 8 .5 3.7 1.2 1.1 1.2 2 5 .7 5.9 6.2 6.1 1.8 0.8 0.6 0.4 4 .5 0 .0 2 .5 1.5 2 3 .0 7 .0 6 .0 5.0 2.0 0 .0 0 .0 2.0 1.0 1,185 860 735 465 98 695 175 20 0 28 17 14 7 11 1,143 814 682 1,281 446 113 597 162 TP (Rs) 446 2,119 1,670 1,786 U p si de (% ) 14 15 (2) (10) 0 6 - De c- 1 3 P r i ce (Rs) 391 1,951 1,698 2,099 We i gh t s OW/ U W Re ason s for wt g ch an ge s/ Ot h e r com m e n t s, e xce p t wh e r e (% ) wr t Ni ft y ob vi ou s fr om TP u p si de sh own 1 0 .5 Ru r al de m an d r e m ai n s st r on g wh i l e u r b an de m an d i s we ak Strong product portfolio and healthy demand outlook for JLR. Domestic 4 .0 recovery by FY 16 to improve cash flows 2 .0 3 .0 1.5 2 6 .0 1 0 .0 4 .0 5.0 2.0 1 .0 1 .0 2.0 1.0 Always kept Index- neutral as we are a subsidiary CV exposure to remain an overhang Growth uncertainity and no respite on infra asset quality concerns Asset quality trend showing some improvement with valuations at significant discount to mean No signs of urban demand recovery, Proposed ban on imports in Egypt (`5% of profits) endangering exports to all such curr a/c deficit countries Operating leverage benefits and depreciating Yen. Shifting prodn to Suzuki subsidiary to be EBIT-neutral Strong rural franchise No n e ar t e r m r e sol u t i on on asse t qu al i t y i ssu e s; st i ck t o r e t ai l fr an ch i se an d we l l cap i t al i se d b an ks Restructure assets pipeline continues, however valuation provides comfort

continued

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19 FEB 2014
INDIA STRATEGY

Strategy Update

MODEL PORTFOLIO FEB 2014

We i gh t age s (% ) Se ct or / Com p an y Ce m e n t Ambuja Cement En gi n e e r i n g & I n fr a Larsen & Toubro A dan i P or t s A dan i En t e r p r i se s FM CG, M e di a, Re t ai l , e t c ITC Em am i B r i t an n i a I n ds Dab u r Di sh TV U n i t e d Sp i r i t I T - Se r vi ce s Infosys Tech Tata Consultancy Wipro HCL Tech Re sou r ce s Sesa Sterlite H i n du st an Zi n c 9,038 8,161 190 120 33,941 68,148 22,061 16,730 3,680 2,166 557 1,490 M cap (U SD m n ) 3,796 15,158 5,291 4,028 CM P (Rs) 153 1,018 159 228 Ni ft y A xi s Cap Cu r r e n t 1 8 - Fe b - 1 4 2 .7 1 .0 0.6 4 .9 4.1 1 1 .7 8.7 1 8 .1 8.8 5.5 1.8 2.0 4 .4 1.2 1.0 7 .0 5.0 2.0 0 .0 1 6 .0 1 0 .0 1 .0 1 .0 1 .0 2.0 1.0 1 8 .0 1 0 .0 4 .5 1 .0 2 .5 2 .0 0 .0 2.0 178 148 (6) 23 4,200 2,350 585 1,800 14 8 5 21 TP (Rs) 1,213 180 290 19 13 27 U p si de (% ) -

0 6 - De c- 1 3 P r i ce (Rs) 185 1,097 163 274 We i gh t s OW/ U W (% ) wr t Ni ft y 1 .0 1.0 9 .0 5.0 2.0 2 .0 9 .0 6 .0 0 .0 0 .0 0 .0 2.0 1.0 1 6 .0 3,327 2,000 493 1,127 9 .0 4 .0 1 .5 1 .5 3 .0 182 126 1 .0 2.0 Aluminium price remains weak on excess supply in China Zinc/Lead prices strong on depletion of large mines of global players Expect higher S&M Highest renewal deals in Infra Management, Margin can surprise: utilisation will sustain + higher BPO profitability Re ason s for wt g ch an ge s/ Ot h e r com m e n t s, e xce p t wh e r e ob vi ou s fr om TP u p si de sh own I n du st r y p r ofi t ab i l i t y b ot t om e d ou t i n De c qt r e xce p t Sou t h No exposure to South. Bring up to Index-neutral At CMP, risk return in favour in case of a stable govt. Expansion to east coast St r on g e ar n i n gs vi si b i l i t y No excise increase on vote-on-account, SUTTI over hang behind us. High earnings visibility Seasonal impact on volume behind us. Valuation at huge discount Premiumization led margin improvement continues to surprise Volume growth ahead of peers, plus margin tailwind Improving per sub economics leading to FCF generation We believe the following would be key triggers for UNSP in FY15 (1) sale of Whyte & Mackay, (2) likely creeping/open offer, (3) new management taking charge, and (4) likely margin expansion V i si b i l i t y st r on g an d i m p r ovi n g Cost initiatives yielding results, deal wins increasing

40,479 1,588 1,762 4,791 808 5,519

317 436 915 171 47 2,365

371 535 1,050 200 75 2,882

17 23 15 17 59 22

312 869 164 61 2,555

continued

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19 FEB 2014
INDIA STRATEGY

Strategy Update

MODEL PORTFOLIO FEB 2014

We igh t age s (% ) Se ct or / Com p an y Oil & Gas Reliance Inds Cairn BPCL P h ar m ace u t ical s Sun Pharma Dr Reddy Lupin B iocon Divi's Lab P owe r U t il it ie s NTPC JSW En e r gy Re al Est at e P r e st ige Est at e Te l e com m u n icat ion s Bharti Airtel I de a Ce l l u l ar Nift y I n de x Nift y I n de x p e r for m an ce A xis Mode l P or t fol io p e r for m an ce Source: Bloomberg; Axis Capital 19,403 6,991 302 131 6 ,1 2 7 760 135 17,727 1,250 134 47 20,259 7,232 6,627 1,402 2,902 609 2,648 920 436 1,361 Mcap (U SD m n ) 42,187 9,901 4,119 CMP (Rs) 813 323 355 Nift y A xis Cap Cu r r e n t 1 8 - Fe b - 1 4 1 1 .2 1 1 .0 6.6 0.9 0.5 6 .2 2.3 1.7 1.1 3 .5 1.4 0 .3 1 .8 1.8 1 0 0 .0 10.0 1.0 0 .0 1 0 .5 3 .5 3.0 2 .0 0 .0 2 .0 1 .0 1.0 0 .0 1 .0 1.0 1 .0 1 .0 0 .0 1 0 0 .0 1 6 .4 2 6 .3 177 31 171 60 28 26 700 3,000 971 417 1,516 15 13 6 (4) 11 TP (Rs) 1,100 385 U p side (% ) 35 19 -

0 6 - De c- 1 3 P r ice (Rs) 867 325 364 We igh t s OW/ U W (% ) wr t Nift y 1 2 .0 10.0 1.0 1 .0 8 .0 582 2,422 858 403 1,139 2 .0 3.0 1 .0 1 .0 1 .0 2 .0 149 55 153 332 176 1.0 1 .0 1 .0 1.0 2 .5 1 .5 1 .0 1 0 0 .0 Steady sales and impressive execution ramp up H igh e r cost of b u sin e ss Coal availability to improve. Possibility of a special dividend if capex target not met Lack of clarity on pending issues like mine clearances, PPA etc. Volume pick-up with commercialisation of CWIP coupled with INR benefits Re ason s for wt g ch an ge s/ Ot h e r com m e n t s, e xce p t wh e r e ob viou s fr om TP u p side sh own Earnings growth from Q1FY15 driven by gas price hike, petchem capacity expansion and improvement in GRMs Buyback offers downside protection; Reserve announcement during Q1FY15 a positive trigger No near term triggers, though valuations reasonable St r on g m om e n t u m in t h e U S m ar ke t ; I n dia t o r e vive on l ow b ase Doxil ramp-up, niche US launches (Temodar in Feb '14); sustained India growth Ramp-up of recent niche launches in US; recovery in Russia growth Niaspan launch in Mar '14; expected increase in FII limit

From Inception 7-Jan-10 From Inception 7-Jan-10

Note: Sector totals include that of Nifty stocks where we have Nil wtg

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19 FEB 2014
INDIA STRATEGY

Strategy Update

MODEL PORTFOLIO FEB 2014

Axis Capital Limited

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