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9 June 2014


Top Ideas
TP (Rs) FY15
Coal India 340 15 5.7
Sobha 510 18 2.0
Torrent Power 224 17 1.1
HDFC 735 27 2.6
UltraTech 1,785 31 3.9
Hero Motocorp 2,050 20 8.6
Tech Mahindra 1,492 14 3.7
Dabur 146 32 10.3
Source: Bloomberg, Ambit Capital research

Meetings in Delhi with Defence, Finance, Coal and Oil & Gas experts

Analyst Notes: Healthcare: Ranbaxys Taonsa unit clearance by EMA a positive
sign; reiterate BUY on Sun Pharma (TP Rs730)
Aditya Khemka, +91 22 3043 3272
On 5th June, the EMA (European Medicines Agency) concluded that Ranbaxys
Taonsa facility was in compliance with the GMP. The site was put under an import
alert by the USFDA in Jan 2014 and continues to be under scrutiny by the FDA. We
believe clearance from the EMA is a positive as it reinstates confidence in the
corrective actions taken and the quality of the medicines manufactured by the
company. The clearance is a positive for Sun Pharma as it will benefit from a ramp up
in Ranbaxys base business which currently clocks single digit EBITDA margins vs mid-
twenties for peers. We reiterate our BUY stance on Sun Pharma and believe that the
revenue + cost synergies from Ranbaxy acquisition could be significantly higher than
US$250m in Year 3 as guided by the company.
Source: Ambit Capital research

Ambit Capital Pvt Ltd 9 June 2014
Meetings in Delhi with Defence, Finance, Coal and Oil
& Gas experts
On 6 June, we met half a dozen well-connected experts and civil servants
across a range of key ministries. Here are the key messages from the experts
we met: (1) Do not get overexcited about the defence FDI opportunity; (2) Do
not get overoptimistic about the ability of the RBI and/or the Finance Ministry
to bail out the beleaguered banking sector; (3) Expect the diesel subsidy to go
to zero but do not expect cheap gas in India in the next few years; and (4)
Expect major progress on the three key railway lines that are central to Coal
India doubling production. We reiterate our BUYs on ONGC, Oil India and
Coal India.
(The rest of this note is written in the first person as the text below consists entirely of
quotes from our meetings in Delhi.)
Meetings with two top defence experts
Indias failure in defence has been four-fold: (a) You cannot set up a defence
equipment plant in India without permission from the Ministry of Commerce
(MOC). When you go to them, they say that you need a No Objection Certificate
(NOC) from the Ministry of Defence (MOD). When you go to the MoD, they ask
the MoC for clarification on certain issues. As a result, you spend years running
from one ministry to another. (b) Indias defence outlay (revex plus capex) is
around Rs100K cr (US$15bn). Of that amount, around 14% goes into the pockets
of the powers that be. Hence, no political party will participate in a process which
radically disturbs this arrangement. (c) There are nine defence PSUs in India (eg.
BEL, HAL, Mazgaon Dock, Garden Reach, etc) and they do not want to let
foreigners manufacture defence equipment in India. (d) Certain sections of Indian
industry also do not want to let foreigners in and they too lobby to keep foreigners
It is hard to see a credible foreign firm agreeing to technology transfer with India
even if you give them more than a 50% stake. (Below 50% stake, there is no
question of any foreigner giving us any technology.) Even if the foreign company
does want to do a technology transfer, their government will block it unless India
makes a major concession to that country on some other front. So it is all very well
for the Commerce Ministry to publish whitepapers on FDI above 49% with a
technology transfer but the reality is that it will take a long time to attract major
FDI which moves the needle.
At present, India spends around US$15bn on imported defence equipment. At
best five years out, 5-10% of this number will be made indigenously. Things move
so slowly in anything which involves the MOD that it will be a major surprise if five
years hence our local defence production rises above US$1.5bn.
If foreigners do come to India, the most likely partners would be: (a) on land
defence systems: Tata Power Strategic Electronics Division (the most credible
name in this space), Bharat Forge (is working on defence contracts already), L&T
(is working on defence contracts already), and the Mahindras; (b) on naval
defence: Pipavav and ABG; and (c) on air defence: Dynamatic Technologies
(already has a partnership with Boeing). Walchandnagar has also some
The current FDI regime (up to 26% on the automatic route) is a complete non-
starter, and even though, on paper, India has said for the past five years that we
are open to FDI up to 49% with DIPP approval, even credible Indo-foreign JVs (eg.
Mahindras-BAE) have not been given permission. That gives you a sense of how
successful vested interests are in blocking foreign entry.
The MODs procurement plan is a national secret. So none of us really know what
the MOD will spend money on over the next five years.
Quick Insight

Meeting Note

News Impact

Saurabh Mukherjea, CFA
Tel: +91 99877 85848

Ambit Capital Pvt Ltd 9 June 2014
We expect things to improve somewhat under the NDA because of its free market
bent. The previous Defence Minister refused to sign-off on anything.

Meeting with a recently retired top civil servant in the Finance Ministry
The RBI governor does not have any experience of dealing with a large and
politically connected machine like the 18,000 RBI officials. I believe he will really
struggle to deal with the mess that is our banking system. The FM does not have a
finance background and neither does his Fin Services Secretary. Moreover, the
Government does not have a Chief Economic Advisor. So I cant see how the
Finance Ministry and the RBI will deal with the mess.
The PMO will announce in the next few days the name of a senior banker who will
advise the PMO on the banking system. This person will pull together the blueprint
of the turnaround for the banking sector. The FM will then follow this plan
broadly. (In fact, this is how every sector will function. The PMO will have 2-3
experts on each subject and they will lay down the blueprint of the turnaround.)
The RBI is a compromised institution and it cant blame the Finance Ministry for
the state of the PSUs. The corruption arises from within the RBI. It is not as if it was
forced upon it by the Finance Ministry. Eg. The RBI sat on SBIs Board and
watched as SBIs asset quality slid.
If the regulator is weak, you cant expect the PSU banking sector to transform

Meeting with a top IAS officer in the Petroleum Ministry
Under-recovery in diesel will fall. I wont be surprised if it goes to zero in the
foreseeable future.
PLNG is struggling in Kerala as it has built the terminal but cant build pipelines.
In any case there is a no demand in that part of the country.
PLNG needs a terminal on the east coast (in Gangavaram) if it is to become
relevant for Indias crying need for gas.
Let me be very clear: there is no supply of cheap gas for India any time soon. LNG
is the only way we will get any more gas and anyone who cant afford that will
have a difficult time.
We will see an improvement in the functioning of the ministry because the PM is
not a populist. Some politicians lead through populism and some through
governance. My read is that the new PM leads through governance. Give the NDA
2-3 months and you will see their philosophy vis-a-vis oil and gas emergeI
doubt that it will be populist.
Note: Paranjoy Guha Thakurtas much talked about book, Gas Wars: Crony
Capitalism and the Ambanis, was displayed prominent on this IAS officers desk.
Ambit view: We believe diesel would be fully de-regulated in FY15, hence expect fuel
under-recoveries to decline by 30-50% in FY15/FY16 vs FY13-FY14. Further, the
Government is likely to provide transparency to subsidy sharing mechanism, triggering
a re-rating of Oil PSUs. In addition, we expect the new Government to approving
doubling of gas price in next couple of months. Hence, we re-iterate our BUY stance
on Upstream PSUs (ONGC and Oil India) and OMCs (HPCL, BPCL, IOCL). Though the
upside on OMCs looks capped after the recent rally, we believe the valuations of
upstream PSUs are still attractive. Key catalysts: Increase in diesel prices, clarity on
subsidy sharing and visibility on net gas price realisation.

Ambit Capital Pvt Ltd 9 June 2014
Meeting with Indian Railways (Director, Planning)
There are three key railway lines as far as Coal India is concerned. Lets label
them: (1) Jharkhand, (2) Orissa, and (3) Chhattisgarh.
Line 1 will run from the Central Coalfieds and it is the responsibility of East
Central Railways. Line 1 has had to be broken in two parts, as there is a reserve
forest in the middle. Lets call them 1a and 1b. Now, 1a is 44km and 1b is 53km.
Line 2 will run from Mahanadi Coalfields and it is the responsibility of South
Eastern Railways. Line 2 is 53km in length.
Line 3 will run from South Eastern Coalfields and is the responsibility of South
Eastern Central Railways. Line 3 is 180km in length.
Line 1a has got almost all its clearances but it can only run in the day time
because the elephants in the forest need to sleep at night. Line 1b is in limbo. I
have got no idea when it will get sorted.
Line 2 has got stage 1 clearance and I am optimistic regarding stage 2 clearance,
as the PM has now clearly said that all clearances have to be given in 60 days.
Line 3 has a long way to go before it gets all its clearance but I am less worried
here as the environmental issues are not pressing. In fact, Line 3 has become a
model agreement for us, as it is an MOU between the Railways and the
Government of Chhattisgarh.
You have to remember that half of the Railways freight tonnage is coal and 30%
of the Railways revs come from coal. We want to get these lines done ASAP. We
have the men, the money, the machines, and the contractors but the clearances
are NOT in our hands. If, as looks possible, the PM can force the pace on
clearances, you will see a major change in coal availability. In fact, I worry
whether four years out we could be in a coal surplus situation.
Getting wagons is a non-issue. A top-end wagon costs Rs31 lakhs and its delivers
around Rs 70 lacs in its first year alone.
The main issue for the Railways is the gridlock on the tracks. We need more tracks
to avoid gridlock.
Ambit View: Completion of railway lines is one of the key volume triggers for Coal
India. Although full completion of these railway lines would take many years, it would
help increase evacuation abilities by ~280-300mt p.a. In the current phase that is
being developed and likely to be completed over FY17-FY19, coal offtake potential of
each of these lines is ~30-35mt p.a. We reiterate our BUY stance on Coal India
driven by our expectation of recovery in production growth and stability in CILs
pricing power. We would be revising our estimates and valuation upwards this week
to factor in the Governments higher focus on improving coal production by improving
the pace of environment/forest clearances and fast tracking railway projects. At
consensus estimates, the stock is currently trading at an FY15 P/E of 14.6x vs the
historical average of 12.7x.

Ambit Capital Pvt Ltd 9 June 2014

Institutional Equities Team
Saurabh Mukherjea, CFA CEO, Institutional Equities (022) 30433174 saurabhmukherjea@ambitcapital.com
Analysts Industry Sectors Desk-Phone E-mail
Nitin Bhasin - Head of Research E&C / Infrastructure / Cement (022) 30433241 nitinbhasin@ambitcapital.com
Aadesh Mehta Banking / Financial Services (022) 30433239 aadeshmehta@ambitcapital.com
Achint Bhagat Cement / Infrastructure (022) 30433178 achintbhagat@ambitcapital.com
Aditya Khemka Healthcare (022) 30433272 adityakhemka@ambitcapital.com
Akshay Wadhwa Banking & Financial Services (022) 30433005 akshaywadhwa@ambitcapital.com
Ashvin Shetty, CFA Automobile (022) 30433285 ashvinshetty@ambitcapital.com
Bhargav Buddhadev Power / Capital Goods (022) 30433252 bhargavbuddhadev@ambitcapital.com
Dayanand Mittal, CFA Oil & Gas / Metals & Mining (022) 30433202 dayanandmittal@ambitcapital.com
Deepesh Agarwal Power / Capital Goods (022) 30433275 deepeshagarwal@ambitcapital.com
Gaurav Mehta, CFA Strategy / Derivatives Research (022) 30433255 gauravmehta@ambitcapital.com
Karan Khanna Strategy (022) 30433251 karankhanna@ambitcapital.com
Krishnan ASV Real Estate (022) 30433205 vkrishnan@ambitcapital.com
Nitin Jain Technology (022) 30433291 nitinjain@ambitcapital.com
Pankaj Agarwal, CFA Banking / Financial Services (022) 30433206 pankajagarwal@ambitcapital.com
Paresh Dave Healthcare (022) 30433212 pareshdave@ambitcapital.com
Parita Ashar Metals & Mining / Oil & Gas (022) 30433223 paritaashar@ambitcapital.com
Pratik Singhania Retail (022) 30433264 pratiksinghania@ambitcapital.com
Rakshit Ranjan, CFA Consumer / Retail (022) 30433201 rakshitranjan@ambitcapital.com
Ravi Singh Banking / Financial Services (022) 30433181 ravisingh@ambitcapital.com
Ritesh Vaidya Consumer (022) 30433246 riteshvaidya@ambitcapital.com
Ritika Mankar Mukherjee, CFA Economy / Strategy (022) 30433175 ritikamankar@ambitcapital.com
Ritu Modi Automobile (022) 30433292 ritumodi@ambitcapital.com
Tanuj Mukhija, CFA E&C / Infrastructure (022) 30433203 tanujmukhija@ambitcapital.com
Utsav Mehta Technology (022) 30433209 utsavmehta@ambitcapital.com
Name Regions Desk-Phone E-mail
Sarojini Ramachandran - Head of Sales UK +44 (0) 20 7614 8374 sarojini@panmure.com
Deepak Sawhney India / Asia (022) 30433295 deepaksawhney@ambitcapital.com
Dharmen Shah India / Asia (022) 30433289 dharmenshah@ambitcapital.com
Dipti Mehta India / USA (022) 30433053 diptimehta@ambitcapital.com
Nityam Shah, CFA USA / Europe (022) 30433259 nityamshah@ambitcapital.com
Parees Purohit, CFA UK / USA (022) 30433169 pareespurohit@ambitcapital.com
Praveena Pattabiraman India / Asia (022) 30433268 praveenapattabiraman@ambitcapital.com
Sajid Merchant Production (022) 30433247 sajidmerchant@ambitcapital.com
Sharoz G Hussain Production (022) 30433183 sharozghussain@ambitcapital.com
Joel Pereira Editor (022) 30433284 joelpereira@ambitcapital.com
Nikhil Pillai Database (022) 30433265 nikhilpillai@ambitcapital.com
E&C = Engineering & Construction

Ambit Capital Pvt Ltd 9 June 2014

Explanation of Investment Rating

Investment Rating Expected return
(over 12-month period from date of initial rating)
Buy >5%
Sell <5%


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