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VISIT NOTE

14 OCT 2014

Ramkrishna Forgings
NOT RATED
INDUSTRY

AUTOS

CMP (as on 13 Oct 2014)

Rs 232

Target Price

NA

Nifty

7,884

Sensex

26,384

KEY STOCK DATA


Bloomberg

RMKF IN

No. of Shares (mn)

27

MCap (Rs bn) / ($ mn)

6.4/104.3

6m avg traded value (Rs mn)

STOCK PERFORMANCE (%)


52 Week high / low

Rs 267/56
3M

6M

12M

Absolute (%)

20.9

81.3

236.2

Relative (%)

15.5

64.7

207.7

SHAREHOLDING PATTERN (%)


Promoters

48.01

FIs & Local MFs

15.93

FIIs

22.01

Public & Others

14.05

Source : BSE

Navin Matta
navin.matta@hdfcsec.com
+91-22-6171-7322

Ready for the big leap


Ramkrishna Forgings (RKF) is in the midst of scaling
up from a predominant domestic CV forgings supplier
to a mid-sized forgings player with potential to
manufacture
complex
heavy
duty
forged
components. By the end of the current fiscal, RKF
would have completed its massive ~Rs 6.8bn capex,
which was undertaken during the down-cycle years
of FY13/14. With this expansion, RKFs production
capacity would rise by more than 2x and peak
revenue potential by 3x over FY14 base. While the
execution risks involved in the ramp-up stage cannot
be undermined, comfort can be drawn from the fact
that RKF has secured a sizable long term contract
from a reputed international company for supplying
heavy forged components.
With an improvement in asset turns and increase in
the mix of higher value add products, we expect
RKFs operating margins to expand by 550bps over
FY14-17E. As a result of weak earnings cycle and high
capex spends, RKFs return ratios had contracted
significantly over the past two years. With a
meaningful ramp-up in RKFs new capacities by FY17,
we expect the companys ROE to scale-up to 22%.
RKFs stock price has seen a sharp run-up in the past
12 months and current valuation stand at 12.7x/7.1x
on EV/EBITDA basis for FY15/FY16.

Building blocks in place for 3x revenue growth and


multi-fold PAT growth over FY14-17E

RKF has already commissioned few of its new press


lines, and the balance capacities would progressively
come on-stream by 2HFY16. RFK expects these new
lines to increase revenue generation potential by ~Rs
10bn at peak utilization levels. The exports order book
has been beefed up by a USD 100 mn/year long term
contract for supply of heavy duty forged components.
RKF would also benefit from the anticipated upturn in
the domestic CV cycle.
RKFs margin profile should also witness substantial
improvement as capacity utilisation improves from
~60% in FY14 to ~80% in FY17E and product mix turns
richer with higher mix of heavy forged components.

Valuation and Views

RKF currently trades at FY15/FY16 EV/EBITDA of


12.7x/7.1x and 21.1x/9.7x on P/E basis. We believe
RKFs FY17 earnings and return ratios would
meaningfully reflect the benefits from its sizable capex,
and based on this, we see healthy upside potential
from a medium term perspective.
FINANCIAL SUMMARY (STANDALONE)

(Rs mn)
Net Sales
EBIDTA
APAT
EPS (Rs.)
P/E (x)
EV/EBITDA
RoE (%)

FY13
4,039
616
110
5.2
44.4
12.1
5.0%

FY14
4,295
576
85
3.2
71.6
19.0
2.9%

FY15E
6,484
1,064
302
11.0
21.1
12.7
8.8%

FY16E
10,916
1,993
688
24.0
9.7
7.1
17.2%

FY17E
13,831
2,616
1,060
37.0
6.3
5.3
22.1%

Source : Company, HDFC sec Inst Research

HDFC securities Institutional Research is also available on Bloomberg HSLB <GO> & Thomson Reuters

RAMKRISHNA FORGINGS : VISIT NOTE

Company background

Ramkrishna Forgings (RKF) commenced operations in


1981 as a supplier of forged components to the
Railway sector. The company expanded operations in
1997 and started supplying forgings to Auto OEMs.
The company went public in 2004 with the objective of
raising funds for expanding its forging capacity (from
5500 tons to 12150 tons) and installing machining
capacities as a forward integration strategy.
The company currently supplies forged engine,
transmission and axle group components Spur gears,
Synchro rings, Shafts, Wheel hubs, Pinions, Clamps and
Spindles. RKF also supplies machined products
including Crown wheels and Ring gears. Post
commissioning its new heavy press lines, RKFs product
portfolio would include heavy duty and complex forged

components like Front Axle Beams, Crankshafts,


Knuckles and Connecting rods.

RKFs customer base includes most major CV makers


such as Tata Motors, Ashok Leyland and VE
Commercial vehicles. It also supplies forged
components to global Tier I suppliers including Meritor,
HEMA, Sisamex etc.

Mr. Mahabir Prasad Jalan is the promoter and


Chairman of the company. He is a Mechanical Engineer
from BITS, Pilani and has over 30 years of experience in
the forging industry. Mr. Naresh Jalan is the Managing
Director of the company. He holds an MBA with a
specialization in Marketing from Symbiosis, Pune and
has 15 years of experience in the forging business.

RKF Product and revenue mix


Production and utilisation trends

Revenue mix

Forging (tons)

Ring rolling (tons)

Forging utilisation % (RHS)

Ring Rolling utilisation % (RHS)

60,000

100%

50,000

80%

40,000

60%

30,000
20,000
10,000
FY09

FY10

FY11

FY12

Source : Company, HDFC sec Inst Research

FY13

FY14

Auto

Railways

Mining

Exports

Others

100%
80%
60%

40%

40%

20%

20%

0%

0%
FY09

FY10

FY11

FY12

FY13

FY14

Source : Company, HDFC sec Inst Research

Page | 2

RAMKRISHNA FORGINGS : VISIT NOTE

Drivers in place for multi-fold revenue growth

Despite a sharp cyclical downturn in the domestic CV


industry, RKF took a bold decision to invest Rs 6.8bn
(almost 3x FY13 net worth) towards acquiring heavy
duty press lines. Once fully commissioned, RKFs
installed capacity would increase by more than 2x to
150,000 tons. With this expansion, RKF would emerge
as a mid-sized forging player with a capability to
manufacture complex forged components. RKF aims to
expand its product range to manufacture Front Axle
Beams, Crankshafts, Knuckles and Connecting rods.
At peak utilization of its existing and new facilities,
RKF can potentially ramp-up its topline to ~ Rs 17bn
(~4X of FY14 revenue).
Few of the new lines have already started commercial
operations, and balance would come on stream in a
staggered format by 2HFY16. RKF has secured a
prestigious USD 100mn/year five-year contract from a
global Tier 1 auto component company. Of the total
order value, USD 25mn worth of orders are for existing

6300 tons

125,000

3150&
4500 tons

100,000

18k

40%
150k

20%
0%

50,000
25,000

MHCV volumes (% YoY)

60%

45k

17k

75,000

RKF Auto revenue (% YoY)

12500 tons

150,000

RKFs Auto segment revenue shows high correlation


with domestic CV volumes

RKF: Ramp-up in forging capacities


175,000

product lines and balance USD 75mn for products likely


to be manufactured from its new lines.
RKFs export revenue has seen 40% CAGR over FY09-14
from a small base. The company supplies forged
components to marquee Tier I auto component players
such as Meritor, HEMA (Turkey), Sisamex (Mexico) etc.
RKF is already in talks with several potential customers
and is confident of bagging new export orders.
RKF expects to see increased traction in the domestic
business as along with the anticipated cyclical upturn in
the domestic CV cycle, the company plans to leverage
on its expanded product range to gain wallet share
from the domestic CV OEM and component suppliers.
While RKF has built-up a sizable order book to fill up
~70% of its capacities, the companys execution
capabilities would be a key monitorable going ahead.
Successful ramp-up would provide the much needed
scale to generate sizable FCF during cyclical upturns,
which in turn could be invested towards growth
capex/deleveraging initiatives.

70k

-20%
-40%

FY14

July'14

Mar'15

Source: Company, HDFC sec Inst Research

Sept'15

FY16

FY10

FY11

FY12

FY13

FY14

Source: Company, HDFC sec Inst Research

Page | 3

RAMKRISHNA FORGINGS : VISIT NOTE


FUNDING DETAILS FOR HEAVY PRESS LINES
Source
EXIM Bank
IFC
DBS Bank
LBBW
SBI
Debt
IFC
Wayzata Partners
Promoter group
Internal accruals
Equity

Currency
INR
USD
USD
EUR
INR

Limits
(mn in LC)
1000
14
10
18.3
700

Amount
(Rs mn)
1,000
760
555
1,485
700
4,500
275
494
680
601
2,050

Comments
Cost of debt - 12%
Cost of debt - Libor + 400bps
Cost of debt - Libor + 300bps
Cost of debt - Libor + 125bps
Cost of debt - 12%
Equity shares @ Rs 128/share
Equity shares @ Rs 132.75/share
Equity shares/warrants conversion @ Rs 130/150 share

Source: Company, HDFC sec Inst Research


Note: conversion of USD/Euro debt into INR based on average exchange rates during FY13/FY14 only used for indicative INR debt

RKF has tied-up the entire funding requirement for the


expansion. Long term debt accounts for 70% of project
cost, while the balance is funded through equity.

The company has secured foreign currency debt at


fairly competitive interest rates. Currency risk
associated with foreign currency payables would be
hedged through higher export revenues.

Product mix and operating leverage to boost


operating performance

RKFs operating margins have been on a declining trend


since FY11. In FY14, operating margin was 240bps
lower as compared to its preceding five-year average.
Declining forging and machining capacity utilization led
to a negative operating leverage effect on its margins.

We expect RKFs product mix to improve as its new


products would command ~300-400bps higher margins
compared to its existing products. Further, RKF has
secured its long term contract at a favorable exchange
rate, which should also flow through to its margins.

With a ~3x jump in revenues over FY14-17E, we


expect utilization to improve to 82% by FY17 on its
expanded asset base, which provides significant
headroom for operating leverage gains.

Higher margin machining segment also saw reduced


utilization of 50% in FY14 from ~70% in FY12. Based on
the ensuing product mix, RKF expects to fully utilize its
machining capacities over the next 12-18 months.

Page | 4

RAMKRISHNA FORGINGS : VISIT NOTE


RKF: Forging production and capacity utilisation trend
Tonnage

Capacity utilisation (RHS)

140,000

90%

120,000

80%

100,000
80,000

70%

60,000

60%

40,000

50%

20,000
-

40%
FY12

FY13

FY14

FY15E FY16E FY17E

Source: Company, HDFC sec Inst Research

Financial analysis

We expect RKF to deliver topline CAGR of 48% over


FY14-17E, largely on the back of ramp-up in export
orders and recovery in domestic CV segment. We
expect export revenue mix to increase from 23% in
FY14 to 68% in FY17E as the company ramps-up
supplies for its long term contract and also bags new
export orders for heavy duty forged products.
We expect a 550bps improvement in operating margin
over FY14-17E on the back of i) Operating leverage
benefit through higher capacity utilization, ii) Increase
in mix of higher margin heavy duty forged products
and iii) Higher machining mix. With operating margin
expansion along with financial leverage benefit, we
expect 125% CAGR in earnings over FY14-17E.
Historically, RKF has operated with a fairly long working
capital cycle, which has seen a further bump-up in
FY13/FY14, with average cash conversions increasing
from 115 days in FY10-12 to 150 days in FY13-14. As

per the company, higher export revenue mix has


lengthened the inventory/receivable cycle. Company
expects inventory days to decline from current levels
on the back of lower finished goods stock. This could
lead to marginal improvement in its working capital
cycle.
Although RFK would complete its heavy press lines
capex in FY15, an increase in working capital
requirement is likely to result in negative FCF during
FY15/FY16. With healthy cash profit generation in
FY17, we expect FCF to turn positive in the respective
year.
RKFs net debt/equity is likely to peak out in FY15 at
1.9x, once its capex gets completed. Thereafter, with
healthy increase in networth, gearing should settle at
1.3x in FY17E.
RFKs return ratios deteriorated quite sharply over
FY11-14 as capacity utilization declined, margins
contracted and debt levels increased. We expect
ROE/ROCE to improve from 2.9%/3.3% in FY14 to
22%/11% in FY17E with improvement in asset turns
and margins.

RKF : Weak FCF with high capex/working capital intensity


(Rs in mn)
OFC (pre
working cap)
Chg in
working cap
CFO
Capex
FCF

FY12

FY13

FY14 FY15E FY16E

694

540

532

79

(562)

163

773

(22)

696

(534)
239

928

FY17E

1,654

2,094

(602) (1,625)

(936)

327

29

1,158

(1,117)

(3,416) (2,501)

(150)

(250)

(1,139)

(2,720) (2,174)

(121)

908

Source: Company, HDFC sec Inst Research

Page | 5

RAMKRISHNA FORGINGS : VISIT NOTE


Strong revenue growth and margin expansion
Revenue (Rs mn)

Gearing likely to peak in FY15E

OPM % - RHS

15,000
12,000

Net debt (Rs mn)


20%

8,000

18%

6,000

16%

4,000

Net debt/equity (x) - RHS


2.5
2.0

9,000
6,000

1.5
1.0

14%

3,000
-

12%
FY12

FY13

FY14

FY15E FY16E FY17E

Source: Company, HDFC sec Inst Research

2,000

0.5

FY12

FY13

FY14

FY15E FY16E FY17E

Source: Company, HDFC sec Inst Research

High working capital intensity

Return ratios to recover

Working capital days

Inventory days

Debtor days

Creditor days

ROAE %

ROACE %

25%

165

20%

140
15%

115

10%

90

5%

65
40
FY12

FY13

FY14

FY15E

Source: Company, HDFC sec Inst Research

FY16E

FY17E

0%
FY12

FY13

FY14

FY15E

FY16E

FY17E

Source: Company, HDFC sec Inst Research

Page | 6

RAMKRISHNA FORGINGS : VISIT NOTE

Valuations and View

Key risks

RKF currently trades at an EV/EBITDA of 12.7x/7.1x on


FY15/FY16E. While one year forward valuations are
broadly in-line with past five-year average, we believe
that RKF would need to prove its execution capabilities
in the heavy duty forging product segments before the
stock could get further re-rated from these levels.
Although we would not look to discount FY17 just yet,
we take cognizance of the fact that FY17 earnings are
likely to jump by 54% YoY as RKFs new capacities reach
meaningful utilization levels. We would therefore
argue that decent stock returns potential exists from a
medium term horizon.
RKF: One year forward EV/EBITDA band chart

EV/EBITDA (x)

Mean

+1 SD

-1 SD

14.0

RKF is attempting to scale-up its operations by entering


into heavy duty forgings. While the company has
ensured it sources its equipment from reputed vendors
(SMS Meer, Germany for supply of 12500 ton press),
the complexity involved in manufacturing of higher
tonnage new products does increase execution risks in
the business.
RKF has significantly leveraged its balance sheet to
fund the capex for the heavy press lines. Inability to
scale-up the new capacities as per expectation would
adversely impact its debt servicing ability.
Company management expects export revenue to act
as a natural hedge against the existing foreign currency
liabilities on its balance sheet. However, in the event
that export revenue growth lags expectations, RKF
would need to build hedges to mitigate currency risk.

12.0
10.0
8.0
6.0
4.0
Sep-09

Sep-10

Sep-11

Sep-12

Sep-13

Sep-14

Source: Company, HDFC sec Inst Research

COMPARATIVE VALUATIONS
Company

Mcap
(Rs mn)

2Yr EPS
CAGR

P/E

EV/EBITDA

ROE %

FY15E

FY16E

FY15E

FY16E

FY15E

FY16E

FY15E

FY16E

18.5%

19.2%

28.3

21.3

14.3

11.5

22%

24%

Bharat Forge

179,256

Amtek Auto*

39,985

42%

20.3%

20.5%

4.2

3.3

5.3

4.6

11%

12%

6,373

172%

16.4%

18.3%

21.1

9.7

12.7

7.1

9%

17%

Ramkrishna Forgings

30%

EBITDA margin

Source: Company, HDFC sec Inst Research *September year ended

Page | 7

RAMKRISHNA FORGINGS : VISIT NOTE


INCOME STATEMENT : STANDALONE

BALANCE SHEET : STANDALONE

As at March (Rs mn)

FY13

FY14

FY15E

FY16E

FY17E

As at March (Rs mn)

Net Sales

4,039

4,295

6,484

10,916

13,831

SOURCES OF FUNDS

Growth (%)

-19%

6%

51%

68%

27%

Material Expenses

2,085

2,277

3,307

5,534

6,985

281

292

417

668

835

1,057

1,151

1,696

2,721

616

576

1,064

1,993

15.2%

13.4%

16.4%

18.3%

18.9%

Employee Expenses
Other Operating Expenses
EBIDTA
EBIDTA (%)
EBIDTA Growth (%)

Share Capital

261

275

287

287

3,385

4,075

4,949

Total Shareholders Funds

2,541

3,232

3,659

4,362

5,236

3,395

Long Term Debt

1,583

3,893

5,643

5,643

5,243

2,616

Short Term Debt

1,015

1,148

1,648

2,048

2,048

Total Debt

2,598

5,041

7,291

7,691

7,291

318

309

357

491

696

5,458

8,582

11,308

12,544

13,223

2,422

2,337

7,950

7,590

7,522

998

4,249

750

750

500

134

233

242

251

261

1,492

1,571

2,185

3,678

4,661

803

1,150

1,741

2,931

3,714

Deferred Taxes

31%

Other Income

13

24

128

13

15

Depreciation

226

249

387

511

568

APPLICATION OF FUNDS

Interest

217

223

368

468

481

Net Block

PBT

186

128

437

1,027

1,582

TOTAL SOURCES OF FUNDS

CWIP
Goodwill

Tax

76

43

136

339

522

PAT

110

85

302

688

1,060

Investments, LT Loans & Advances

Source: Company, HDFC sec Inst Research

110

85

302

688

1,060

Inventories

-54.6%

-23.3%

257.0%

128.1%

54.0%

Debtors

5.2

3.2

11.0

24.0

37.0

-61%

-38.0%

239.2%

118.5%

FY17E

2,971

87%

EPS Growth (%)

FY16E

211

85%

EPS

FY15E

2,330

-6%

APAT Growth (%)

FY14

Reserves

-24%

APAT

FY13

54.0%

Cash & Equivalents

30

143

153

125

186

385

442

416

520

569

2,844

3,539

4,737

7,506

9,391

Creditors

535

1,022

1,510

2,542

3,221

Other Current Liabilities & Provns

271

521

619

759

969

ST Loans & Advances, Others


Total Current Assets

Total Current Liabilities


Net Current Assets
Misc Expenses & Others
TOTAL APPLICATION OF FUNDS

806

1,543

2,129

3,301

4,189

2,038

1,996

2,607

4,204

5,201

5,458

8,582

11,308

12,544

13,223

Source: Company, HDFC sec Inst Research

Page | 8

RAMKRISHNA FORGINGS : VISIT NOTE


CASH FLOW : STANDALONE
As at March (Rs mn)

KEY RATIOS : STANDALONE


FY13

FY14

FY15E

FY16E

FY17E

Reported PAT

110

85

302

688

1,060

Non-operating & EO items

(13)

(24)

(128)

(13)

(15)

97

61

174

675

1,045

217

223

368

468

481

226

249

387

511

568

(562)

163

(602)

(1,625)

(936)

PAT from Operations


Interest expenses
Depreciation
Working Capital Change
OPERATING CASH FLOW ( a )

FY13

FY14

FY15E

FY16E

FY17E

GPM

48.4%

47.0%

49.0%

49.3%

49.5%

EBITDA Margin

15.2%

13.4%

16.4%

18.3%

18.9%

APAT Margin

2.7%

2.0%

4.7%

6.3%

7.7%

RoE

5.0%

2.9%

8.8%

17.2%

22.1%

RoIC or Core RoCE

4.3%

2.6%

4.2%

8.0%

10.5%

5.1%

3.3%

5.6%

8.4%

10.7%

40.7%

33.9%

31.0%

33.0%

33.0%

PROFITABILITY (%)

(22)

696

327

29

1,158

RoCE

Capex

(1,117)

(3,416)

(2,501)

(150)

(250)

EFFICIENCY

Free cash flow (FCF)

(1,139)

(2,720)

(2,174)

(121)

908

Investments
INVESTING CASH FLOW ( b )
Debt Issuance
Interest expenses
Share capital Issuance
Dividend

Tax Rate (%)

(59)

(8)

Asset Turnover (x)

0.7

0.5

0.6

0.9

1.0

(1,176)

(3,424)

(2,501)

(150)

(250)

Inventory (days)

135

134

123

123

123

817

2,443

2,250

400

(400)

Debtors (days)

73

98

98

98

98

(217)

(223)

(368)

(468)

(481)

Payables (days)

48

87

85

85

85

377

661

178

180

Cash Conversion Cycle (days)

159

144

136

136

136

4.2x

8.8x

6.9x

3.9x

2.8x

1.0

1.5

1.9

1.7

1.3

1.9x

1.6x

2.2x

3.2x

4.3x

EPS (Rs/sh)

5.2

3.2

11.0

24.0

37.0

CEPS (Rs/sh)

15.9

12.8

25.1

41.8

56.8

DPS (Rs/sh)

1.2

1.0

1.6

3.6

5.5

BV (Rs/sh)

120

124

133

152

183

44.4

71.6

21.1

9.7

6.3

(29)

(31)

(53)

(121)

(186)

Debt/EBITDA (x)

1,211

2,817

2,056

80

(862)

Net D/E

NET CASH FLOW (a+b+c)

14

89

(118)

(41)

46

Interest Coverage

Non-operating and EO items

13

24

128

13

15

PER SHARE DATA

Closing Cash & Equivalents

30

143

153

125

186

FINANCING CASH FLOW ( c )

Source: Company, HDFC sec Inst Research

VALUATION
P/E
P/BV
EV/EBITDA

1.9

1.9

1.7

1.5

1.3

12.1

19.0

12.7

7.1

5.3

OCF/EV (%)

(0.3)

6.4

2.4

0.2

8.4

FCF/EV (%)

(15.3)

(24.8)

(16.1)

(0.8)

6.6

0.5%

0.4%

0.7%

1.6%

2.4%

Dividend Yield (%)


Source: Company, HDFC sec Inst Research

Page | 9

RAMKRISHNA FORGINGS : VISIT NOTE

Rating Definitions
BUY

Where the stock is expected to deliver more than 10% returns over the next 12 month period

NEUTRAL

Where the stock is expected to deliver (-)10% to 10% returns over the next 12 month period

SELL

Where the stock is expected to deliver less than (-)10% returns over the next 12 month period

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