SEVEN STOCKS TO BUY FOR 2017

1
Seven Stocks To Buy for 2017

CMP Mkt Cap

EV/EBITDA (X)
S.No Stock Name P/E (X) ROE (%)
/Price/BV
(INR) (INR Crs)

FY17E FY18E FY17E FY18E FY17E FY18E

1 Crompton Greaves Consumer Electricals Ltd 140 9,091 28.0 23.1 17 14 102 77

2 Federal Bank Ltd 62 11,194 16.1 9.9 0.4 0.2 8 12

3 Indian Hotels Co. Ltd 97 9,423 65.0 27.5 16 13 5 11

4 Indian Terrain Fashions Ltd 140 530 20.2 15.2 9 7 15 17

5 Precision Camshaft Ltd 147 1,429 16.2 14 11 9 14 14

6 Sudarshan Chemical Industries Ltd 271 1,890 8.0 13.7 12 10 30 31

7 Voltamp Transformers Ltd 869 915 16.8 12.3 13 9 10 13

For Federal Bank Ltd numbers are in Price/BV

CMP updated as on 26th December 2016
2
Crompton Greaves Consumer Electricals Ltd. (CMP: INR 140; Mkt Cap: INR 9,091 crs)

Investment Hypothesis
Premiumisation, innovative offerings driving spurt; sharpening appliance market focus Share Holding Pattern (%)
new growth avenue: Innovative products, deepening distribution reach, operational
efficiencies and strengthening of critical capabilities have anchored CGCELs faster-
than-industry growth pace over the years. Moreover, the companys unwavering focus Promoter 34.3
on product diversification to innovate and introduce premium products with better
aesthetics and new featuresdust free fans, under light fans, sensor fansacross
product categories has fuelled its pole position across product categories. Sharpening Public 65.6
focus on penetrating the appliance business and decorative fan market to cash in on
its robust distribution reach offers humungous untapped growth opportunity.
Others
Strong experienced management team at helm: Post CGCELs demerger from CG, a
new management with wide experience in FMCG and consumer electrical space is at
the helm at the new entity with a mandate to focus on premiumisation and growth.
Moreover, new promoter (Advent) boasts of a long and credible investment history in
consumption sectorsAdvent has invested in nearly 50 consumer products and
industrial companies and is investing in India since 2007; since inception, its entire
portfolio, including realized and unrealized investments, has generated gross IRR of 33%
and gross 2.9x invested capital.
Bolstering already wide distribution reach to enhance market share of nascent 160
appliances business: CGCEL has a robust distribution network in the consumer
electrical space of 3,000 plus distributors and 100,000 plus touch points. Additionally, on
the anvil are plans to further deepen its reach to enhance market share of the fledgling 140
appliance business with the aim to have the right products at the right place.
At current market price of INR 140, the stock is trading at 28x/23x FY17E/FY18E earnings 120
respectively.
Year to March
maintain FY14
BUY rating on the stock FY15 price ofFY16
with the target INR 190. FY17E FY18E
100
Revenues (INR Cr) 2,947 3,321 3,661 4,212 4,832
Rev growth (%) 9.9 12.7 10.2 15.0 14.7
EBITDA (INR Cr) 348 420 384 535 629 80
Net Profit (INR Cr) 237 270 209 318 385
EPS (INR Cr) 4 3 3 5 6
60
EPS growth (%) 13.9 (22.5) 0.0 52.3 20.9

Jun-16

Jun-16
May-16

May-16

Jul-16

Jul-16

Oct-16

Oct-16
Sep-16

Sep-16

Nov-16

Nov-16
Aug-16

Aug-16
P/E (x) 42.6 28.0 23.1
P/B (x) 0.6 0.4 0.2
RoACE (%) 42 50 50 Crompton Sensex
RoAE (%) 91 102 77

Index 3
Federal Bank Limited (CMP: INR 62; Mkt Cap: INR 11,194 cr)
Investment Hypothesis
Federal Bank Limited (FBL) has been quite successful in increasing the share of high Share Holding Pattern (%)
yielding advances and low cost funds. FBLs retail is the largest segment which
contributes 41% of total advances while SME and Wholesale contribute 25% and 34%
respectively. In retail category, bank has been moving from unsecured to secured
product and as on date secured loan is about 95-96%. Promoter
Advance growth is expected to accelerate because of aggressive focus in wholesale
and retails. Management has guided to achieve 20%+ loan growth in FY17 on back of
healthy growth in wholesale. In Q2FY17, Bank reported 27% y-o-y growth in advances to Public 100
INR 647 bn on back of 47% y-o-y growth in wholesale and 24% y-o-y growth in retail &
agri. We have assumed 17.4% growth over FY16-FY18 on back of 20%+ growth in
wholesale and retail.
Asset quality of bank improved in its Q2FY17 aided by lower slippage. In Q2FY17, Others --
slippage run rate was 1.84% against 3.26% in Q2FY16 and 2.06% in Q1FY17, resulted
14bps and 7bps improvement in gross NPA (GNPA) and net NPA (NNPA) to 2.78% and
1.61% respectively. In rating matrix, BBB or below is 16% of corporate advances which
were 54% in Q2FY15 and 19% in Q1FY17 and other assets remained largely unchanged.
Profitability is expected to improve significantly over next 2-3 years on account of 120
softening cost-to-income ratio and credit cost. The C/I(x) which was 56.7% in FY16 has
fallen to 51.9% in Q2FY17 and we expect further improvement in it. During Q2FY17,
credit cost improves by 21 bps to 0.65% (annualized) against 2.03% in Q4FY16 and 1.06%
in FY16. We assumed RoE and RoA to improve from 6% and 0.5% to 15% and 1.1% by 100
FY19E respectively.
At CMP of INR 62, the stock is trading at 1.4x of FY17E adjusted book value (ABV) and
1.1x of FY18E ABV. 80

Year to March FY14 FY15 FY16 FY17E FY18E

Net interest income 2,229 2,380 2,504 2,913 3,456
60
Ajd. PAT 1,006 476 685 1,114
839
GNPA (%) 2 2 3 3 2
40
NNPA (%) 1 1 2 1 1

Mar-15

Jul-15

Mar-16

Jul-16
Jan-15

Sep-15

Jan-16

Sep-16
May-15

Nov-15

May-16

Nov-16
Adj. book value per share (INR Cr) 19.4 21.5 41.5 44.5 52.4
P/ABV 3.3 3.0 1.5 1.4 1.2
Diluted EPS (INR Rs) 2 3 3 4 6 Federal Bank Sensex
P/E (x) 26.1 21.8 23.1 16.1 9.9
4
Indian Hotels Co. Ltd. (CMP: INR 97; Mkt Cap: INR 9,423 cr)

Investment Hypothesis
The Indian Hotels Company (IHCL) is one of Asia's largest hotel chain groups operating Share Holding Pattern (%)
under the famous Taj & Vivanta (luxury), Gateway (mid market) and Ginger (budget)
brands.
Promoter 38.6
From 2015, supply has lost pace and the proposed supply growth is estimated to be
muted. However, currently demand is recovering due to multiple reasons, boosting OR
and ARR. Public 61.3
Limited land and high capex requirement are constraining supply of luxury rooms. This is
spurring ORs and ARRs of luxury hotels, which we estimate to outpace the industry. This
is a boon for IHCL as 60% its rooms and 96% of EBIT are contributed by luxury Others
propertiesTaj and Vivanta.
Moreover, a slight growth in OR leads to huge upswing in margin due to operating
leverageat 58% OR in 2012, EBITDA margin was 11%, but with OR at 73% in 2008,
EBITDA margin was at 35%. Hence, we estimate the companys margin to catapult to
22% in FY19E from 13% currently as OR jumps to 70% from 62%.
Despite being over leveraged, it is indeed commendable that IHCL has managed to
consolidate its pole position in India, primarily by prudently shifting to the management
120
contracts business model. Also, debt pruning measures like offloading of stakes in Taj
Boston and Oriental Express have reduced debt to equity to 1.0x in FY18E from 1.9x in
FY15, which entails the potential to yield positive PAT. 110
At CMP of INR 97, the stock is currently trading at 13.5x FY18E EV/EBITDA
100

90
Year to March FY14 FY15 FY16 FY17E FY18E
Revenues (INR Cr) 4,066 4,189 4,591 4,837 5,592
Rev growth (%) 9 3 10 5 16 80
EBITDA (INR Cr) 560 489 617 710 1,044
Net Profit (INR Cr) (554) (378) (60) 171 402 70
EPS (INR Cr) -7 -5 -0.6 2 4
EPS growth (%) NA NA NA NA 105 60

May-15

May-16
Mar-15

Jul-15

Mar-16

Jul-16
Jan-15

Sep-15

Jan-16

Sep-16
Nov-15

Nov-16
P/E (x) NA NA NA 65.0 27.5
P/B (x) 3.4 4.1 3.5 3.5 3.1
RoACE (%) 3 2 4 6 10 Indian Hotel Sensex
RoAE (%) -21 -17 -2 5 11

Index 5
Indian Terrain Fashions Ltd. (CMP: INR 140; Mkt Cap: INR 530 cr)

Investment Hypothesis
Share Holding Pattern (%)
Indian Terrains positioning as a mens smart casualwear brand along with its
contemporary designs and superior product quality have lent a competitive edge,
reflected by a 21% CAGR over FY11-16 from INR 121 cr to INR 325 cr. Promoter 29.7
Indian Terrain has positioned itself as a contemporary Smart Mens Casualwear brand.
Indian Terrains Smart Casuals are uniquely positioned, targetting the working class in
the age group of 25-44 years, who are brand and fashion conscious. The brand stands Public 70.2
for masculine sensibility, yet conforms to the popular Friday Dressing concept.
A vibrant pan-India distribution network along with focus on expanding in uncluttered Others
Tier 2 and 3 cities has undeniably reinforced its long-term growth prospects. We expect
revenues to grow at 15% CAGR over FY16-18E
A light asset model due to outsourced manufacturing has lead to high RoCE of +20%
The stock currently trades at 20x FY17E and 15x FY18E EPS of INR 7 and INR 9.2,
respectively.

175

150

125

Year to March FY14 FY15 FY16 FY17E FY18E

100
Revenues (INR Cr) 232 290 325 384 479
Rev growth (%) 48 25 12 18 25
EBITDA (INR Cr) 24 34 41 47 60 75
Net Profit (INR Cr) 10 18 33 26 34
EPS (INR Cr) 4 5 9 7 9
50
EPS growth (%) 142 81 84 -22 33

Mar-15

Jul-15

Mar-16

Jul-16
Jan-15

Jan-16
Sep-15

Sep-16
Nov-15

Nov-16
May-15

May-16
P/E (x) 40.5 28.0 15.8 20.2 15.2
P/B (x) 11.0 4.0 3.3 2.8 2.4
RoACE (%) 23 23 20 17 18 Indian Terrain Sensex
RoAE (%) 32 22 23 15 17

Index 6
Precision Camshaft Ltd. (CMP: INR 147; Mkt Cap: INR 1,429 crs)

Investment Hypothesis
Strong presence in critical camshaft space lends significant competitive edge Share Holding Pattern (%)
Focus on technology (product and process) has enabled Precision Camshaft Ltd (PCL) gain
a strong foot hold in both domestic and global markets. The company has scaled up the
value chain from manufacturing plain vanilla raw chilled iron camshafts to machining and Promoter 63.9
assembled camshafts, which entails 3x higher realization. This, along with various efficiency
measures, has been key driver of significant improvement in the companys profitability.
Enhancing value-added business has benefited PCLs top line as well as profitability over the
past 2-3 years. This is reflected in the fact that during FY12-16, while the companys volume Public 36.0
jumped ~4%, its realization rose ~ 6%.
Quality focus, ability to meet stringent delivery schedules: Entrenching global prowess Others
PCL is among the few camshaft suppliers who have the ability to produce all types of
camshaftscasting, machining, hybrid/ductile and assembled. Unwavering focus on
product quality, ability to meet quality standards along with stringent delivery schedules of
OEMs & Tier-1 suppliers and effective execution have enabled the company match global
standards and enhance its presence in some of the leading OEMs like GM, Ford, Hyundai,
Toyota, etc. Further, various process efficiency measures have pruned clients rejection rate
from ~3-4% 6-7 years ago to 0.5% currentlyan industry benchmark.
Focus on value addition, diversifying client & geography risk: Potent profitability drivers
New product offerings and value addition in camshafts not only aid PCL to establish its 120
technology prowess, but also boost its profitability. The companys efforts to increase the
proportion of machining business from 1/3rd currently to around 50% by FY19 is estimated to
substantially boost EBITDA margin as well as RoCE over the next 2-3 years. Further, its focus to 110
diversify its client base is bound to eliminate concentration risk.

At CMP of INR 147, the stock is trading at a PE of 14.0x in FY18E expected EPS of INR 10.2 100

Year to March FY14 FY15 FY16 FY17E FY18E

90
Revenues (INR Cr) 43,840 514 438 484 548
Rev growth (%) 0.5 12 -15 10 13
EBITDA (INR Cr) 5,070 138 118 140 168
80

Net Profit (INR Cr) 2,748 46 64 84 97

EPS (INR Cr) 91 5.7 6.7 8.8 10.2 70

Jun-16
Feb-16

May-16
Mar-16

Jul-16

Sep-16

Oct-16

Nov-16
Apr-16

Aug-16
EPS growth (%) 15 NA 19 31 16
P/E (x) 41.9 25.3 21.2 16.2 14.0
RoACE (%) 18 28 23 26 25 Precision Sensex
RoAE (%) 14 23 14 14 14

Index 7
Sudarshan Chemical Industries Ltd. (CMP: INR 271; Mkt Cap: INR 1,890 cr)
Investment Hypothesis
Leading pigment producer in India: Sudarshan is one of the leading pigment producers Share Holding Pattern (%)
in India with a domestic market share of 35%

Mix shifting towards higher margin HPP and effect pigments: The company in its Promoter 52.9
profitability quest, is enhancing the proportion of higher margin / realisation sub-
segments like HPP and effect pigments in its product mix and moving away from the
more commoditised classical azo range Public 47.1

Huge capex plan to drive growth: Sudarshan is planning to invest ~1000 crores in new
capacities over the next five years at its Roha site. The investment is likely to generate Others --
asset turns of 4x with an ROCE of 30% which is likely to drive revenue growth CAGR of
~17% over FY16-20E

End user industries likely to post significant growth: The three key end-user industries:
coatings, plastics, ink and cosmetics; each contribute a third to Sudarshans revenue.
Each of these industries, with the exception of ink used in publications, is likely to post 5-
8% global and about 13-14% domestic growth driving revenue growth for the company.
Management expects to grow atleast 2x the industry growth rate 390

At CMP of INR 271, the stock is trading at a PE of 13.7x in FY18E expected EPS of INR 20
320

250

Year to March FY14 FY15 FY16 FY17E FY18E

180
Revenues (INR Cr) 1,119 1,218 1,409 1,549 1,828
Rev growth (%) 28 9 16 10 18
EBITDA (INR Cr) 131 130 170 216 281 110
PAT (INR Cr) 36 54 70 104 136
EPS (INR) 51 8 10 15 20
40
EPS growth (%) 59 (85) 29 48 32

May-15

May-16
Mar-15

Jul-15

Mar-16

Jul-16
Jan-15

Sep-15

Jan-16

Sep-16
Nov-15

Nov-16
P/E (x) 5.3 34.5 26.8 18.0 13.7
P/B (x) 0.7 7.1 6.0 4.8 3.9
RoACE (%) 13 12 16 19 21 Sudarshan Sensex
RoAE (%) 13 20 24 30 31
Index 8
Voltamp Transformers Ltd (CMP: INR 869; Mkt Cap: INR 915 cr)
Investment Hypothesis
Share Holding Pattern (%)
1. Voltamp Transformer (VTL) is a major manufacturer of distribution, power and dry-
type transformers in India and expected to get significant benefit of spending of
central sponsored schemes (IPDS and DDUGJY) to bolster transmission and Promoter 47.4
distribution infrastructure in India.

2. The company is also a major beneficiary of the standardization drive in distribution Public 52.5
transformer segment which will reduce unorganized players and thereby bring in
industry consolidation and hence stable realization.
Others
3. VTL is expected to report 19% revenue CAGR and 300 bps of operating margin
expansion during FY16-18E.

4. VTL has been the best managed balance sheet in a industry which has affected
by low utilization, stretched working capital, high debt and low RoCE.

5. With the expansion in operating margin and increase in asset utilization, RoCE is 140
expected increase to 20% in FY18E against 12.8% in FY16.

6. At CMP of INR 869, VTL trades at P/E of 12.3x to FY18E EPS of INR 71. 120

100

Year to March FY14 FY15 FY16 FY17E FY18E

80
Revenues (INR Cr) 445 517 563 648 815
Rev growth (%) -14 16 9 15 26
EBITDA (INR Cr) 15 20 37 52 77 60
Net Profit (INR Cr) 26 28 44 53 72
EPS (INR Cr) 26 28 43 52 71
40
EPS growth (%) -20 9 56 21 36

May-15

May-16
Mar-15

Jul-15

Mar-16

Jul-16
Jan-15

Sep-15

Jan-16

Sep-16
Nov-15

Nov-16
P/E (x) 18.9 23.0 20.3 16.8 12.3
P/B (x) 1.2 1.5 1.9 1.8 1.6
ROCE (%) 4 6 13 15 21 Voltamp Sensex
ROE (%) 6 6 9 10 13

Index 9
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