Diwali Picks October 09, 2017

India – Torn between structural

improvement and near term growth
Samvat 2073 was unique for India in various ways. We had two disrupting events, namely,
demonetisation and the introduction of GST. Both these impacted sentiments of the
business community and GDP growth for a while. The question that arises is that are
these two events responsible for the slowdown? While the GDP impact has not diminished
Our Market story
completely, we cannot ignore the fact that our economy was slowing down in any case, as
reflected in flat export growth etc. People at large are quite enthusiastic, despite the
so far
pain owing to these events, as they believe that these will, over the medium term,
structurally change the trajectory of India’s growth in a positive manner. In India, Healthcare stocks underperformed
While the Sensex rose 12% in Samvat 2073 (till Sept 30), global markets were also on the through the year (index down 18%), though they
run. The Dow rose 23.5%, DAX (German) 20.3%, CAC (France) 18.2%, Bovespa (Brazil) seem to have formed a bottom in the middle of
14.4% and Nikkei (Japan) 16.8%. Hence, the uprun in most other equity markets was August. There was little activity in IT stocks
higher than that in India. The continuation of an easy monetary policy, resurrection of through the year. It was a superlative year for
growth in advanced economies, and a mild rise in commodity prices were some reasons commodities (Metals, Basic materials, Oil & Gas),
contributing to this. Realty and Consumer Durables stocks. It was a
year of discovery of small cap stocks, as many of
Post the lows in late Dec 2016, Indian markets rose unabatedly, and investors who them rose sharply owing to rerating to catch up on
waited for a correction to enter were left out. Even after such a rise, the amount of the difference in valuation, restructuring and
cash holdings by investors in India is on the higher side, and one reason why the other measures adopted by the promoters.
markets did not display a sharper fall yet.

Our markets seem fairly valued at this point of time, given the delay in revival of corporate earnings, which may happen only after 1-2 quarters.
Liquidity withdrawal and its strong signs by US, Japan and lately UK and Eurozone could create jitters among the equity investors who have entered
into arbitrage trade. The re-rating of stocks in India and even globally over FY2011-16 has largely been driven by the decline in global bond yields. If
global bond yields were to move up from current levels on the back of global economic recovery, this process of rerating would come under threat and
reversal. Local flows have been encouraging so far. However local flows depend on how markets perform. Flows follow returns, not the other way
around. Hence, we will have to track the progress of the flows when markets don’t provide any meaningful return over 3-4 quarters.

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 Diwali Picks

Uncertainty exists regarding the direction of policy in China,

Brexit negotiations, rollback of monetary stimulus in EU and
the quantum (and time) of the US monetary and fiscal policy.
In addition to this, geo-political issues like North Korea also
impact sentiments.
In addition to the above, the macro backdrop in India is
not improving as expected. Fiscal deficit numbers do
not enthuse confidence (India's fiscal deficit in
August-end touched 96.1 per cent of the budget
estimate for 2017-18 vs 76.4% last year) even as GST, RBI
dividend, divestment and telecom receipts’ estimates may
see some shortfall, and an additional fiscal stimulus of
Rs.50,000 cr may bring additional pressure on the deficit.
The recent cut in excise duties on petrol and diesel could
result in a ~Rs.13,000 cr impact on fiscal deficit for FY18.
The growth turnaround is yet to come. The Indian business
cycle should improve as utilisations do (low capex, steady
demand), and the effect of reforms kick in. GST
implementation and wider application of the
Insolvency and Bankruptcy Code are two focus areas
of the government now.
We believe there are fundamental transitions
underway in the Indian economy—its construct,
r e g u l a t o r y f ra m e w o r k , c a p i t a l e f fi c i e n c y a n d
allocation—all of which are happening simultaneously.
These have raised the valuation framework till the gains
actually play through. We believe that the structural
change in the savings habit of Indian households will
continue to support the market.

Though we believe Indian equities are in a bull market, but a combination of different valuation methodologies such as forward P/E, market cap to
GDP, and the spread between bond yields and earnings yields do not indicate we are at the peak of a bull market.
While the Nifty could correct sharply in the early part of the coming Samwat, it could later revisit the highs and attempt to breach them. Auto and
Metals could continue to do well, Realty could be a dark horse, while Healthcare could make a comeback in the coming Samwat.
We have handpicked five investment ideas for you for the coming Samwat. While Bajaj Auto and Divis fit into the above sectoral expectations, Birla
Corp could be a beneficiary of Infra and Realty spends, Persistent Systems could benefit out of its niche positioning in IT services and ICICI Pru Life can
be a beneficiary of a new segment in the BFSI space, attracting more attention.
Happy investing…!
STOCK RECOMMENDATIONS CMP TARGET PRICE
Bajaj Auto Ltd 3137 3820
Birla Corporation Ltd 932 1220
Divis Laboratories Ltd 863 1070
ICICI Prudential Life Insurance Company Ltd 399 520
Persistent Systems Ltd 645 780

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Diwali Picks

Bajaj Auto Ltd

Industry CMP Recommendation Add on Dips to band Target Time Horizon
Automobile Rs. 3137.1 Buy at CMP and add on declines Rs. 2890-2910 Rs. 3820 Till next Diwali
Bajaj Auto Ltd (BAL) belongs to one of the top ten business houses in India, and is engaged in the
HDFCSec Scrip Code BAJLTDEQNR business of 2Ws and 3Ws. It is the second-largest motorcycle manufacturer in India, with
BSE Code 532977 domestic motorcycle market share of ~18%. It is also the largest 3W manufacturer in India. BAL
NSE Code BAJAJAUTO offers products in all motorcycle segments - CT/Platina in entry, Discover and V12/V15 in
executive and Pulsar, Avenger and Dominar in premium. BAL owns ~48% stake in KTM AG, an
Bloomberg BJAUT IN
Austrian company producing and selling motorcycles across the globe.
CMP (as on 06 Oct, 17) Rs. 3137.1
Equity Capital (Rs mn) 2894 Key highlights
Face Value (Rs) 10.00
Equity Sh Outstanding Mn 289.4
Market Cap (Rs Bn) 907.8
Book Value (Rs) 588.7
Avg. 52 Week Volumes 22568
Healthy growth Margins could come Exports showing New non-equity JV
52 Week High Rs. 3208.4 expectations in the back on track to good traction to with global industry
52 Week Low Rs. 2510.0 remaining quarters the normal ~19.5 - reach double-digit major Triumph will
of FY18 20% range from growth help the company
Shareholding Pattern % (June 2017) ~17% in Q1FY18
Promoters 49.3
Institutions 25.8 Healthy growth expectations in the remaining quarters of FY18 for the domestic 2W market
Non Institutions 24.9 will auger well for the company, with a new product range on offer. BAL reported overall 11%
Total 100.00 rise in September volume sales (domestic – 7% and exports – 20%) and 4% de-growth in YTD
volume sales (domestic – (4%) and exports – 7%).
Fundamental Research Analyst: Price rise (in May 2017) and increasing share of revenue from higher value products could help
Arpit Bhatt offset the effects of increasing RM costs and operational deleverage. Margins could come back
arpit.bhatt@hdfcsec.com
on track to the normal ~19.5 - 20% range from ~17% in Q1FY18.

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 Diwali Picks

Bajaj Auto Ltd

Exports (up 21% in Sept 2017 and 8% YTD) showing good traction to reach double-digit growth in the full year’s in export sales.
3W volumes to increase domestically, with newly-introduced cargo vehicles, higher rural demand owing to good monsoon and better regulatory
environment (higher permits in four states). This will benefit the largest player to earn high blended margins for FY18. Management has guided
for an early entry in the electric 3W space, with R&D efforts already in place.
New non-equity JV with global industry major Triumph will help the company foray into unchartered territory of mid-capacity motorcycles and
gain market share lost over the last five years. Global rollout of 400/700 cc Husqvarna under the KTM partnership in 2018 could also bring in more
sales and positive newsflow.

Outlook
We think that the worst faced by the auto sector first due to the BS-IV emission norms and then
due to the destocking on account of advent of GST, is already past. With the recovering demand in
Our View
the auto sector, rising incomes in the rural sector, better branding programs, new product We feel investors could buy the
developments/introductions through JVs, good regulatory environment for the 3Ws, Bajaj Auto is stock at the CMP and add on
set to benefit. This will further improve the return ratios and may help it achieve better dips to Rs. 2890 - 2910 (16.5x
valuations. Valuing the company on a SOTP basis, the per share value of the company includes the FY19E core EPS) for target of
value of its standalone business, its stake in KTM JV (19xFY17 PAT after 30% holdco discount) and Rs. 3820 (23.5x FY19E core
cash per share value.
EPS).
Financial Summary
(Rs mn) FY 15 FY 16 FY 17E FY 18E FY 19E
Net Revenues 216120 229495 217667 250910 281335
EBITDA 41667 50414 44224 50076 58187
APAT 28137 39143 28284 41433 48452
Adjusted EPS (Rs) 97.2 135.3 132.3 143.2 167.4
P/E (x) 32.3 23.2 23.7 22.2 18.7
EV / EBITDA (x) 19.8 16.1 17.4 15.4 12.7
RoE (%) 27.7 32.7 25.3 23.1 24.7
(Source: Company, HDFC sec)
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 Diwali Picks

Bajaj Auto Ltd

Income Statement Balance Sheet
Year ending March (Rs mn) FY16 FY17 FY 18E FY 19E As at March (Rs mn) FY16 FY17 FY 18E FY 19E
Net Revenues 229495 217667 250910 281335 SOURCES OF FUNDS
Growth (%) 6.2 -5.2 15.3 12.1 Equity Capital 2894 2894 2894 2894
EBITDA 50414 44224 50076 58187 Reserves 129772 167448 181101 206016
EBITDA Margin (%) 22 20.3 20 20.7 Total Shareholders Funds 132666 170342 183995 208910
Depreciation 3072 3073 3327 3321 Total Debt 1625 1764 0 0
Other Income (Including EO Items) 9133 12220 14638 15362 Net Deferred Taxes LT Provisions etc. 4128 5311 8434 9231
Interest 5 5 5 8 TOTAL SOURCES OF FUNDS 138419 177416 192430 218142
PBT 56471 53365 61383 70220 APPLICATION OF FUNDS
Tax (Incl Deferred) 17328 15081 19950 21768 Net Block & CWIP 22158 20393 23665 26709
Reported PAT before MI 39143 38285 41433 48452 Investments Goodwill and LT Advances 39585 84053 91825 120062
EO Items - - - - Total Non-current Assets 61743 104446 115490 146771
APAT 39143 38284 41431 48449 Inventories 7191 7284 8249 10020
APAT Growth (%) 39.1 -2.2 8.2 16.9 Debtors 7179 9533 10999 12332
Adjusted EPS (Rs) 135.3 132.3 143.2 167.4 Other Current Assets 3112 9542 10142 10642
Cash & Equivalents 85774 77524 82883 77401
Creditors 20270 22357 24210 25677
Other Current Liabilities & Provns 6310 8556 11123 13347
Net Current Assets 76676 72970 76940 71371
TOTAL APPLICATION OF FUNDS 138419 177416 192430 218142

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 Diwali Picks

Bajaj Auto Ltd

Cash Flow Statement Key Ratios
Year ending March (Rs mn) FY16 FY17 FY 18E FY 19E As at March FY16 FY17 FY 18E FY 19E
Reported PBT 56471 53365 61383 70220 PROFITABILITY (%)
Non-operating & EO Items 0 0 0 0 EBITDA Margin 22 20.3 20 20.7
Interest Expenses 5 5 5 8 APAT Margin 17.1 17.6 16.5 17.2
Depreciation 3072 3073 3327 3321 RoE 32.7 25.3 23.4 24.7
Working Capital Change -13549 -3478 -1351 -2750 EFFICIENCY
Tax Paid -16716 -13972 -19669 -21581 Fixed Asset Turnover (x) 5.2 4.7 5 5.1
OPERATING CASH FLOW ( a ) 29283 38993 43695 49218 Net D/E (x) -0.7 -0.8 -0.8 -0.8
Capex -2574 -599 -4500 -4500 PER SHARE DATA (Rs)
Investments 66107 19549 68537 47932 EPS 135.3 132.3 143.2 167.4
Non-operating Income 5699 36923 0 0 CEPS 145.9 142.9 154.7 178.9
INVESTING CASH FLOW ( b ) 69232 55873 64037 43432 Dividend 55 70 80 85
Debt Issuance/(Repaid) 501 -1625 0 0 VALUATION
Interest Expenses -5 -5 -5 -8 P/E (x) 23.2 23.7 22.2 18.7
Share Capital Issuance 0 0 0 0 EV/EBITDA (x) 16.1 17.4 15.4 12.7
Dividend -19098 -24306 -27780 -23537 Dividend Yield (%) 1.8 2.2 2.6 2.7
FINANCING CASH FLOW ( c ) -18602 -25936 -27785 -23545 (Source: Company HDFC sec)
NET CASH FLOW (a+b+c) 79913 68930 79947 69105
(Source: Company HDFC sec)

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Diwali Picks

Birla Corporation Ltd

Industry CMP Recommendation Add on Dips to band Target Time Horizon
Cement Rs. 932 Buy at CMP and add on declines Rs. 815-825 Rs. 1220 Till next Diwali
Birla Corporation Ltd. (BCL) is the flagship company of the MP Birla Group (currently run by Harsh
HDFCSec Scrip Code BIRCOREQNR Lodha). It has transformed from a manufacturer of jute goods to that of cement as its core
BSE Code 500335 business activity. BCL acquired the cement business of Reliance Infrastructure for an EV of Rs
NSE Code BIRLACORPN 48bn in Feb-2016, taking its total capacity from 10 MTPA to 15.5 MTPA. Furthermore, the
acquired business has mineral concessions in MP, Maharashtra, Rajasthan, Karnataka, AP, and HP
Bloomberg BCORP IN
for further expansion, VAT benefits and unabsorbed tax benefits of over Rs 20bn. BCL has cement
CMP (as on 05 Oct, 17) 931.85 plants in Rajasthan, MP, UP, Maharashtra and WB. BCL sells under brand names of Birla Cement
Equity Capital (Rs mn) 770.1 SAMRAT, Birla Cement KHAJARAHO, Birla Cement CHETAK and Birla Premium Cement.
Face Value (Rs) 10
Key highlights
Equity Sh Outs. (mn) 77.0
Market Cap (Rs bn) 71.8
Book Value (Rs) 434.8
Avg. 52 Week Volumes 80,000
52 Week High 984.6
52 Week Low 608.9 The demand for BCL has signalled Strategy of cross- CBRI report
cement is expected its intent to add branding of concluded mining
Shareholding Pattern % (June 2017) to grow in the another 4 MTPA production at the operations at the
wake of a near- capacity in acquired Reliance Chanderia plant did
Promoters 62.90 normal monsoon Maharashtra plants not damage the
Institutions 18.13 Chittorgarh Fort
Non Institutions 18.97
Total 100.00
The demand for cement is expected to grow in the wake of a near-normal monsoon and
Fundamental Research Analyst: infrastructural and developmental activities of the Government. While realisations have
Atul Karwa been firm so far, volumes could now start rising.
atul.karwa@hdfcsec.com

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 Diwali Picks

Birla Corporation Ltd

BCL has signalled its intent to add another 4 MTPA capacity in Yavatmal Maharashtra (currently 15.5 MTPA) at a cost of Rs 24bn which would be
funded through a mixture of debt and internal accruals. This is significant, given high leverage (~Rs 39.5bn at FY17 end) and demonstrates
management’s comfort with current cash flows.
Though Q1FY18 was slightly weak, going ahead, the company’s strategy of cross-branding of production at the acquired Reliance plants and
increased capacity utilisation are expected to yield better profitability for the company.
The Supreme Court directed Central Building Research Institute (CBRI) report has concluded that mining operations at the Chanderia plant did
not damage the Chittorgarh Fort. Although the final judgement is still awaited, a favourable judgement could increase EBITDA/tonne for BCL, as
high cost mechanical mining would no longer be required.

Outlook
The acquisition of Reliance Cement has provided an entry to BCL in the central region, Our View
apart from the north and east. The proposed greenfield expansion would take care of the
west, making it a formidable player in the industry. Various cost reduction measures like At the CMP of Rs 932 BCL quotes at
use of pet coke, alternative fuels, higher use of fly ash and slag are likely to result in higher EV/ton of $100. We think that
growth in EBITDA/tonne. Its jute business is turning around. Given the fact that post the investors could buy the stock at the
proposed expansion, it would become the 5th largest cement company in India, we feel it CMP and add on declines to Rs. 815-
deserves to get a higher valuation. 825 band (EV/Tonne of $92 and 8x
FY19E EV/EBITDA) for target of Rs.
Financial Summary 1220 (EV/Tonne of $120 and 10.5x
FY19E EV/EBITDA).
(Rs mn) FY 16 FY 17E FY 18E FY 19E
Net Revenues 32,682 43,477 55,128 60,023
EBITDA 3,029 6,451 9,980 11,574
APAT 1,678 2,195 2,954 4,144
Diluted EPS (Rs) 21.8 28.5 38.4 53.8
P/E (x) 42.8 32.7 24.3 17.3
EV / EBITDA (x) 22.2 17.7 11.2 9.2
RoE (%) 5.8 7.0 8.6 11.1
(Source: Company, HDFC sec)

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 Diwali Picks

Birla Corporation Ltd

Income Statement Balance Sheet
Year ending March (Rs mn) FY16 FY17 FY 18E FY 19E As at March (Rs mn) FY16 FY17 FY 18E FY 19E
Net Revenues 32,682 43,477 55,128 60,023 SOURCES OF FUNDS
Growth (%) 3.7 33.0 26.8 8.9 Equity Capital 770 770 770 770
EBITDA 2,861 6,229 9,965 11,558 Reserves 28,483 32,280 34,677 38,266
EBITDA Margin (%) 8.8 14.3 18.1 19.3 Total Shareholders Funds 29,253 33,050 35,448 39,036
Depreciation 1,488 2,555 3,046 3,091 Total Debt 13,059 43,328 43,114 43,114
Other Income (Including EO Items) 1,291 1,175 816 755 Net Deferred Taxes, LT Provisions, etc. 5,712 10,226 10,226 10,226
Interest 823 2,768 4,057 4,057 TOTAL SOURCES OF FUNDS 48,024 86,604 88,788 92,376
PBT 2,010 2,303 3,692 5,180 APPLICATION OF FUNDS
Tax (Incl Deferred) 332 108 738 1,036 Net Block & CWIP 21,042 62,517 60,720 58,879
Reported PAT before MI 1,678 2,195 2,954 4,144 Investments, Goodwill and LT Advances 2,322 13,347 13,347 13,347
EO Items - - - - Total Non-current Assets 23,363 75,864 74,066 72,225
APAT 1,678 2,195 2,954 4,144 Inventories 5,674 6,302 7,077 8,545
APAT Growth (%) (4.4) 30.8 34.6 40.3 Debtors 942 1,325 2,149 1,634
Adjusted EPS (Rs) 21.8 28.5 38.4 53.8 Other Current Assets 2,704 6,797 6,797 6,797
Cash & Equivalents 19,530 6,614 8,935 13,984
Creditors 1,627 3,679 3,619 4,192
Other Current Liabilities & Provns 2,562 6,619 6,619 6,619
Net Current Assets 24,661 10,740 14,719 20,149
TOTAL APPLICATION OF FUNDS 48,023 86,604 88,786 92,374

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 Diwali Picks

Birla Corporation Ltd

Cash Flow Statement Key Ratios
Year ending March (Rs mn) FY16 FY17 FY 18E FY 19E Year ending March FY16 FY17 FY 18E FY 19E
Reported PBT 2,010 2,303 3,692 5,180 PROFITABILITY (%)
Non-operating & EO Items -956 4,370 -816 -755 EBITDA Margin 9.3 14.8 18.1 19.3
Interest Expenses 823 2,768 4,057 4,057 APAT Margin 5.1 5.0 5.4 6.9
Depreciation 1,473 2,405 3,046 3,091 RoE 5.8 7.0 8.6 11.1
Working Capital Change -163 3,193 -1,658 -380 EFFICIENCY
Tax Paid -332 -108 -738 -1,036 Asset Turnover (x) 1.0 0.7 0.6 0.7
OPERATING CASH FLOW ( a ) 2,854 14,931 7,583 10,158 Net D/E (x) 0.45 1.31 1.22 1.10
Capex -1,909 -53,234 -1,250 -1,250 PER SHARE DATA (Rs)
Investments 175 -1,152 0 0 EPS 21.8 28.5 38.4 53.8
Non-operating Income 956 -4,370 816 755 CEPS 40.9 59.7 77.9 94.0
INVESTING CASH FLOW ( b ) -778 -58,756 -434 -495 Dividend 6.0 6.0 6.0 6.0
Debt Issuance/(Repaid) -346 34,084 -214 0 VALUATION
Interest Expenses -823 -2,768 -4,057 -4,057 P/E (x) 42.8 32.7 24.3 17.3
Share Capital Issuance 0 0 0 0 EV/EBITDA (x) 22.2 17.7 11.2 9.2
Dividend -556 -556 -556 -556 Dividend Yield (%) 0.7 0.7 0.7 0.7
FINANCING CASH FLOW ( c ) -1,725 30,760 -4,827 -4,613
NET CASH FLOW (a+b+c) 351 -13,065 2,321 5,049
(Source: Company, HDFC sec)

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Diwali Picks

Divis Laboratories Ltd

Industry CMP Recommendation Add on Dips to band Target Time Horizon
Pharmaceuticals Rs. 863 Buy at CMP and add on declines Rs. 775-787 Rs. 1070 Till next Diwali
Divis Lab, established in the year 1990, is engaged in manufacturing leading generic compounds,
HDFCSec Scrip Code DIVLABEQNR Nutraceutical ingredients and custom synthesis of APIs and intermediates for global innovator
BSE Code 532488 companies. It has four manufacturing facilities, market presence across several countries and a
NSE Code DIVISLAB team of 9,735 people (FY17). Divis is a partner for most of the top-25 innovators, and is in an
aggressive expansion mode with several of them. Divis Lab has set up a 500 acre site at
Bloomberg DIVI IN
Hyderabad (Unit-I) and the plant comprises of 13 multi-purpose production blocks and has space
CMP (as on 06 Oct, 17) Rs. 863 for further growth and expansion. This unit contributes 35% of revenues, of which 22% is to the
Equity Capital (Rs cr) 53.1 US. Divis Lab set up its second manufacturing facility on a 350 acre site at Visakhapatnam (Unit-
Face Value (Rs) 2.0 II) in the year 2002. This site has 14 multi-purpose production blocks. This unit brings US sales
Equity Sh Outstanding crs 26.5 amounting to 11% of total revenues.
Market Cap (Rs cr) 22869.5 Key highlights
Book Value (Rs) 201.8
Avg. 52 Week Volumes 1991177
52 Week High Rs. 1319.0
52 Week Low Rs. 533.1

Received Import alert lifted If alert under Company has cash

Shareholding Pattern % (June 2017)
environmental under clause 99-32 clause 66-40 is of ~Rs 1700 cr. This
Promoters 52.1 clearance for on the company's lifted, FY19 could may be used for
Institutions 31.0 modernisation of Unit-II at see a sharp rise in buyback/special
Non Institutions 16.9 its bulk drug unit Visakhapatnam revenues dividend
Total 100.00
Fundamental Research Analyst:
Abdul Karim,
abdul.karim@hdfcsec.com

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 Diwali Picks

Divis Laboratories Ltd

Divi’s Laboratories has received environmental clearance for modernisation of its bulk drug unit in Visakhapatnam, which will entail a cost of Rs.
100 crore. Apart from this, the company is in the process of setting up a manufacturing facility on a greenfield site at Ontimamidi near Kakinada,
Andhra Pradesh. The investment in the plant could be to the tune of Rs 500 crore. As per the original plan, the plant was expected to be operational
in 2017-18.
USFDA inspected its Unit-2 plant in Sept 2017. The plant was last inspected in Dec 2016 and was issued an import alert in Mar-17 (under clause 66-40
– CGMP related). The current inspection comes as a positive surprise happening within six months of the issuance of the import alert. If this alert is
lifted by end of FY18, FY19 could see a sharp rise in revenues/profits.
In Jul-17, the US FDA had lifted the import alert under clause 99-32 on the company's Unit-II at Visakhapatnam. The USFDA issued an import alert
under clauses 99-32 (allowing access to location/data) in Mar-17, followed by a warning letter in May-17.
Divis Lab has cash of ~Rs 1700 cr. This may be used for buyback/special dividend, which could provide support to the stock price.

Outlook
Legal tangles related to land acquisition have been delaying the proposed greenfield expansion of Divi’s
Lab. Although there has been no major customer fallout till now, a continued delay in supplies would
remain a cause for concern for clients.
Our View
Early clearance of Unit I in the recent inspection and INR depreciation against the USD could lead to higher We feel investors
margins. With the import alert (IA) on its crucial Unit-II facility coming into force at the end of Mar-17, could buy the stock at
1QFY18 results were not encouraging at all. The management has guided for flattish revenue growth for the CMP and add on
the rest of the year, and profitability that will be lower than FY17 owing to remediation costs. However, dips to the Rs. 775-
most of these negatives are already in the price. Early resolution of IA/clearance of the two units could 787 band (19.0x
lead to a much better FY19. Its stock price could get rerated, based on events/developments. FY19EEPS) for a target
Financial Summary of Rs. 1070 (26.0x
FY19E EPS).
(Rs mn) FY 16 FY 17E FY 18E FY 19E At a CMP of Rs 863, the
Net Revenues 38,049 41,063 36,854 40,364 stock trades at 21.0x
EBITDA 14,174 14,460 11,720 14,329 FY17E EPS.
APAT 11,258 10,604 8,813 10,917
Diluted EPS (Rs) 42.4 39.9 33.2 41.1
P/E (x) 20.3 21.6 26.0 21.0
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 Diwali Picks

Divis Laboratories Ltd

Income Statement Balance Sheet
Year ending March (Rs mn) FY16 FY17 FY 18E FY 19E As at March (Rs mn) FY16 FY17 FY 18E FY 19E
Net Revenues 38,049 41,063 36,854 40,364 SOURCES OF FUNDS
Growth (%) 22.1 7.9 -10.2 9.5 Equity Capital 531 531 531 531
EBITDA 14,174 14,460 11,720 14,329 Reserves 42,402 53,043 58,772 65,322
EBITDA Margin (%) 37.3 35.2 31.8 35.5 Total Shareholders’ Funds 42,933 53,574 59,303 65,853
Depreciation 1,182 1,233 1,335 1,498 Total Debt 419 357 357 357
Other Income (Including EO Items) 974 749 950 1,200 Net Deferred Taxes, LT Prov, etc. 847 1,381 1,398 1,418
Interest 38 23 35 35 TOTAL SOURCES OF FUNDS 44,198 55,313 61,058 67,629
PBT 13,928 13,953 11,299 13,996 APPLICATION OF FUNDS
Tax (Incl Deferred) 2,670 3,349 2,486 3,079 Net Block & CWIP 14,358 15,559 22,660 27,662
Reported PAT before MI 11,258 10,604 8,813 10,917 Investments, Goodwill and LT Adv 4,322 5,853 4,750 5,200
EO Items 0 0 0 0 Total Non-current Assets
Reported PAT after MI 11,258 10,604 8,813 10,917 Inventories 12,078 13,199 11,793 13,320
APAT Growth (%) 32.2 -5.8 -16.9 23.9 Debtors 8,809 8,985 7,739 9,082
Adjusted EPS (Rs) 42.4 39.9 33.2 41.1 Other Current Assets 620 827 1,106 1,211
Cash & Equivalents 8,792 17,127 18,927 17,233
Creditors 4,759 6,224 5,897 6,055
Other Current Liabilities & Prov 22 13 20 25
Net Current Assets 16,727 16,774 14,722 17,533
TOTAL APPLICATION OF FUNDS 44,199 55,313 61,059 67,629

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 Diwali Picks

Divis Laboratories Ltd

Cash Flow Statement Key Ratios
Year ending March (Rs mn) FY16 FY17 FY 18E FY 19E Year ending March FY16 FY17 FY 18E FY 19E
Reported PBT 13,928 13,953 11,299 13,996 PROFITABILITY (%)
Non-operating & EO Items 0 0 0 0 EBITDA Margin 37.4 37.3 35.2 31.8
Interest Expenses (937) (726) (915) (1,165) APAT Margin 27.3 29.6 25.8 23.9
Depreciation 1,182 1,233 1,335 1,498 RoE 28.9 22.0 15.6 17.4
Working Capital Change (5,065) 256 1,236 (2,992) EFFICIENCY
Tax Paid (3,373) (2,355) (2,486) (3,079) Fixed Asset Turnover (x) 1.7 1.7 1.1 1.0
OPERATING CASH FLOW ( a ) 5,736 12,361 10,470 8,258 Net D/E (x) (0.2) (0.3) (0.3) (0.3)
Capex (545) (4,281) (6,500) (6,750) PER SHARE DATA (Rs)
Investments (699) (8,279) - - EPS 42.4 39.9 33.2 41.1
Non-operating Income 974 749 950 1,200 Dividend 10.0 10.0 9.7 13.7
INVESTING CASH FLOW ( b ) (269) (11,811) (5,550) (5,550) Book Value 161.7 201.8 223.4 248.1
Debt Issuance/(Repaid) (1,424) 2,724 - (0) VALUATION
Interest Expenses (38) (23) (35) (35) P/E (x) 20.3 21.6 26.0 21.0
Share Capital Issuance - - - - EV/EBITDA (x) 15.6 14.7 18.0 14.8
Dividend (3,195) (3,195) (3,085) (4,367) Dividend Yield (%) 1.2 1.2 1.1 1.6
FINANCING CASH FLOW ( c ) (4,657) (493) (3,120) (4,402)
NET CASH FLOW (a+b+c) 810 57 1,800 (1,694)
(Source: Company, HDFC sec)

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Diwali Picks

ICICI Prudential Life Insurance Company Ltd

Industry CMP Recommendation Add on Dips to band Target Time Horizon
Life Insurance Rs. 399 Buy at CMP and add on declines Rs. 370 - 399 Rs. 520 Till next Diwali
ICICI Prudential Life Insurance Company (Ipru) is a joint venture between ICICI Bank Ltd and
HDFC Scrip Code ICIPRUE Prudential Corporation Holdings Ltd. It has commenced operations in the fiscal year 2001, and
BSE Code 540133 has consistently been the market leader amongst private players in the Indian life insurance
NSE Code ICICIPRULI sector. The Company offers a range of life insurance, health insurance and pension products and
services to its customers. The penetration of insurance in the market is very low compared to
Bloomberg IPRU
other emerging economies. India holds immense opportunities to expand their life insurance
CMP (as on 06 Oct, 17) 399 business, given the vast untapped potential, favourable demographics, rising prosperity, rising
Equity Capital (Rs crs) 1435.47 household income and an increasing awareness of the need for financial protection.
Face Value (Rs) 10 Key highlights
Equity Sh. Outstanding 143.5
Market Cap (Rs crs) 57,261
Book Value (Rs) 45
Avg. 52 Week Volumes 1337841
52 Week High 508
52 Week Low 273 Persistency ratio Attractive ROE and The expense ratio
and solvency ratio dividend pay-out is very low, with a
are higher ratio declining trend
Shareholding Pattern % (June 2017)
Promoters 80.7
Institutions 9.7 ICICIPRU has strong financials and a healthy balance sheet.
Non Institutions 9.6 Persistency ratio and solvency ratio are higher than other players.
Total 100 The expense ratio is very low, with a declining trend.
ROE and dividend pay-out ratio of the company are also attractive.
Fundamental Research Analyst:
Nisha Sankhala The company has also adopted strategies like expanding the protection business, improving
nishaben.shankhala@hdfcsec.com customer retention, maintaining market-leading cost efficiency etc. to generate new business
at high levels of growth.
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 Diwali Picks

ICICI Prudential Life Insurance Company Ltd

Outlook
Ipru is currently trading at 3.7x P/EV for FY17, which is
lower than the recent listing of SBI Life insurance at 4.1x
P/EV for FY17. Our target 1-yr fwd multiple of 3.8x FY19E
P/EV yields 12M TP of Rs 520.
Our View
We recommend ICICI Prudential Life Insurance as BUY at CMP and
add on declines to Rs 380 for the target of Rs 520.

Financial Summary
(Rs cr) FY 16 FY 17E FY 18E FY 19E
Net Revenues 1,812.2 1,824.0 2,035.2 2,134.7
APAT 1653 1681 1842 1927
Diluted EPS (Rs) 11.5 11.7 12.9 13.5
P/E (x) 34.6 34.0 30.9 29.5
Embeded Value 13,900 16,200 17,800 19,700
P/EV (x) 4.2 3.7 3.2 3.0
RoE (%) 31.2 28.7 27.5 26.3
(Source: Company, HDFC sec)

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 Diwali Picks

ICICI Prudential Life Insurance Company Ltd

Technical Account Balance Sheet
(Rs Cr) FY15 FY16 FY17 FY 18E FY 19E As at March FY15 FY16 FY17 FY 18E FY 19E
15160 18999 22156 26154 29550 SOURCE OF FUNDS
18739 1208 14977 14528 14964 Share Capital 1431.7 1432.3 1432.3 1432.3 1432.3
18 21 61 25 30 Reserves 3431 3640 4698 5318 5952
33956 20228 37194 40707 44543 Fair value change account 403 251 273 250 250
103 -94 1139 -3 3 Shareholders' Funds 5265.5 5323.3 6402.9 7000.7 7634.7
553 620 759 926 1185 Total Policy holder's Fund 93265.7 96578.4 114934.0 110312.8 106926.2
1968 2253 2357 2828 3338 Funds for Future Appropriations 527.5 661.9 603.8 650.8 650.8
12248 12406 14964 15862 16496 Total Source of Funds 99059 102564 121941 117964 115212
12 19 34 34 34 APPLICATION OF FUNDS
Investments 99491 103024 121585 117281 115132
17956 3515 17531 19635 21991 Loan 20.0 44.3 81.0 50.0 50.0
-51 -70 -78 -78 -100 Fixed Assets 215 220 214 225 231
Total Current Assets 1489 1477 2897 3101 3235
31 134 -58 50 80 Total Current Liabilities 2154.9 2201.3 2836.4 2977.6 3273.7
1137 1210 1134 1294 1319 Net Current Assets -666.1 -724.0 60.6 123.4 -38.7
Debit Balance in P & L Account 19.1 44.2 50.0 50.0 50.0
Total Application of Funds 99059 102564 121941 117964 115211

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 Diwali Picks

ICICI Prudential Life Insurance Company Ltd

Income Statement Key Ratios
(Rs Cr) FY15 FY16 FY17 FY 18E FY 19E Year ending March FY15 FY16 FY17 FY 18E FY 19E
Amounts transferred from 1137 1210 1134 1294 1319 APAT Margin 97.7 91.2 93.6 90.5 90.3
Technical A/C NBV growth 28.7 29.4 42.5 25.3 28.5
Income from investments 536 602 662 741 816 RoE 31.9 31.2 28.7 27.5 26.3
Revenue From Operations(Net) 1673 1812 1796 2035 2135 EPS / Share 11.4 11.5 11.7 12.9 13.5
Other income 1 0 28 0 0 BV / Share 36.8 37.2 44.7 48.9 53.3
Total Income 1674 1812 1824 2035 2135 Dividend / Share 5.8 8.4 7.4 8.5 9.0
Growth % 1 8 1 12 5 Embedded Value / Share 96.0 97.0 113.1 124.3 137.5
Total Expenses 90 38 40 33 40 P/E 34.9 34.6 34.0 30.9 29.5
PBT 1584 1774 1784 2002 2095 P/BV 11.0 10.8 9.1 8.3 7.5
Growth % 4 12 1 12 5 Dividend Yield (%) 1.4 2.0 1.8 2.1 2.2
Tax Expenses -50 121 103 160 168 (Source: Company, HDFC sec)
PAT 1634 1653 1681 1842 1927
Growth % 4 1 2 10 5
EPS 11 12 12 13 13
BV 37 37 45 49 53
(Source: Company, HDFC sec)

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Diwali Picks

Persistent Systems Ltd

Industry CMP Recommendation Add on Dips to band Target Time Horizon
IT Consulting & Software Rs. 645 Buy at CMP and add on declines Rs. 590-645 Rs. 780 Till next Diwali
Persistent Systems is a global software company specialising in product and technology services.
HDFC Scrip Code PERSYS It develops best-in-class solutions in key next-generation technology areas like Analytics, Big
BSE Code 533179 Data, Cloud Computing, Mobility and Social for the telecommunications, life sciences,
NSE Code PERSISTENT Healthcare and BFSI verticals. Company derives North America (~87% of revenues), Europe (5% of
revenues) and RoW (~8% of revenues). It provides product engineering services, platform-based
Bloomberg PSYS
solutions and Internet protocol (IP)-based software products to its global customers.
CMP (as on 06 Oct, 17) 645
Equity Capital (Rs cr) 80 Key highlights
Face Value (Rs) 10
Equity Sh. Outstanding 8
Market Cap (Rs cr) 5165
Book Value (Rs) 237
Avg. 52 Week Volumes 229013
Focus on Internet- Strengthened the Digital business is
52 Week High 707
of-Things (IoT) and existing growing at strong
52 Week Low 558 gesture-based relationship with pace
computing IBM
Shareholding Pattern % (June 2017)
Persistent systems identified digital transformation as a strategic area of future growth and
Promoters 30.7 have invested heavily behind it. Company has identified future opportunities in four buckets:
Institutions 40.3 social, mobile, analytics and cloud (SMAC) and has an early mover advantage.
Non Institutions 29.0 Along with SMAC, Internet-of-Things (IoT) and gesture-based computing being the future of
technology are the focused areas for the company.
Fundamental Research Analyst: IBM has been the largest client of Persistent and service offerings include product engineering
Kushal Rughani services and support. Persistent has strengthened the existing relationship with IBM by
kushal.rughani@hdfcsec.com signing-up to support and extend the IBM Continuous Lifecycle Management.
Its Digital business is growing at strong pace.
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 Diwali Picks

Persistent Systems Ltd

Outlook
Company is seeing good traction in the partnership-
driven digital business as well as direct deal wins.
Persistent has been securing multi-year multi-million
dollar deals.
Our View
We believe Persistent is one of the best players in the Mid Cap IT
universe; recommend BUY at CMP of Rs 645, and add on dips to Rs
595 with TP of Rs 780 (~16x FY19E EPS).

Financial Summary
YE March (Rs bn) FY 15 FY 16 FY 17E FY 18E FY 19E
Net Sales 18.91 23.12 28.78 31.10 35.37
EBITDA 3.91 4.17 4.54 4.93 6.13
APAT 2.91 2.97 3.01 3.17 3.98
Diluted EPS (Rs) 36.3 37.2 38.8 39.8 49.7
P/E (x) 17.8 17.3 16.6 16.2 13.1
EV / EBITDA (x) 13.0 12.2 11.3 9.6 7.7
RoE (%) 22.1 19.5 17.0 15.7 17.0
(Source: Company, HDFC sec)

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 Diwali Picks

Persistent Systems Ltd

Income Statement Balance Sheet
Year ending March (Rs bn) FY15 FY16 FY17 FY 18E FY 19E As at March FY15 FY16 FY17 FY 18E FY 18E
Revenues 18.91 23.12 28.78 31.10 35.37 SOURCES OF FUNDS
Growth (%) 13.3% 22.3% 24.5% 8.2% 10.8% Share Capital - Equity 0.80 0.80 0.80 0.80 0.80
EBITDA 3.91 4.17 4.54 4.93 6.13 Reserves 13.26 15.59 18.19 20.88 24.33
EBITDA Margin (%) 20.7% 18.0% 15.8% 15.9 17.3% Total Shareholders’ Funds 14.06 16.39 18.99 21.68 25.23
Depreciation 0.94 0.97 1.49 1.67 1.77 Long-term Provisions & Others 0.12 0.13 0.17 0.18 0.20
EBIT 2.97 3.21 3.05 3.27 4.38 TOTAL SOURCES OF FUNDS 13.88 16.31 18.98 21.86 25.43
Other Income (Including EO Items) 0.94 0.75 0.96 0.94 0.92 APPLICATION OF FUNDS
PBT 3.90 3.96 4.01 4.22 5.28 Net Block 3.06 3.01 2.82 3.18 3.57
Tax 0.99 0.98 0.99 1.05 1.29 Goodwill & intangibles,
RPAT 2.91 2.97 3.01 3.17 3.98 investments and LTA 3.27 4.67 6.28 4.6 5.07
APAT Growth (%) 16.6% 2.3% 4.4% 1.8% 25.8% Total Non-current Assets 6.36 7.70 9.49 7.78 8.62
EPS (Rs) 36.3 37.2 38.8 39.8 49.7 Debtors 3.59 4.28 4.75 5.29 5.92
Other Current Assets 1.45 2.60 3.28 3.55 3.97
Cash & Equivalents 6.04 6.26 5.63 9.32 11.5
Total Current Assets 11.07 13.14 13.67 18.17 21.39
Creditors 0.53 1.65 1.21 1.11 1.23
Other Current Liabilities & Prov. 3.02 2.87 2.96 3.01 3.35
Total Current Liabilities 3.55 4.52 4.17 4.12 4.58
Net Current Assets 7.53 8.61 9.49 14.05 16.81
TOTAL APPLICATION OF FUNDS 13.88 16.31 18.98 21.86 25.43

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 Diwali Picks

Persistent Systems Ltd

Cash Flow Statement Key Ratios
Year ending March (Rs bn) FY15 FY16 FY17 FY 18E FY 19E Year ending March FY15 FY16 FY17 FY 18E FY 19E
3.90 3.96 4.01 4.22 5.28 PROFITABILITY (%)
0.94 0.97 1.49 1.67 1.77 APAT Margin 15.4 12.9 10.5 10.2 11.3
(0.99) (0.98) (0.99) (1.05) (1.29) RoE 22.1 19.5 17.0 15.5 17.1
4.25 1.07 3.67 4.73 5.32 RoCE 22.1 19.7 17.1 15.3 17.3
(0.96) (1.66) (2.18) (2.02) (2.27) PER SHARE DATA (Rs)
3.30 (0.59) 1.50 2.71 3.07 Dividend 10 8 9 10 12
(1.36) 0.50 0.07 2.84 1.03 Book Value 177 205 237 271 314
(2.32) (1.16) (2.11) 0.82 (1.22)
3.29 (0.59) 1.49 2.71 3.08
(0.47) (0.38) (0.42) (0.47) (0.57)
(0.48) (0.38) (0.43) (0.47) (0.56)
1.46 (0.47) 1.13 5.08 3.53
(Source: Company, HDFC sec)

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Diwali Picks

Price charts of covered companies

Bajaj Auto Ltd Birla Corporation Ltd

Divis Laboratories Ltd ICICI Prudential Life Insurance Ltd

Persistent Systems Ltd

23
 Diwali Picks

Disclosure
Company Analyst Team Holding
Bajaj Auto Ltd CA Arpit Bhatt Retail NO
Birla Corporation Ltd Atul Karwa, MMS Retail NO
Divis Laboratories Ltd Abdul Karim, MBA Retail NO
ICICI Prudential Life Insurance Company Ltd Nisha Sankhala ,MBA PCG YES
Persistent Systems Ltd Kushal Rughani, MBA PCG NO
HDFC securities Limited, I Think Techno Campus, Building - B, "Alpha", Office Floor 8, Near Kanjurmarg Station, Opp. Crompton Greaves, Kanjurmarg (East), Mumbai 400 042 Phone: (022) 3075 3400
Fax: (022) 2496 5066
Website: www.hdfcsec.com Email: hdfcsecretailresearch@hdfcsec.com.
Compliance Officer: Binkle R. Oza Email: complianceofficer@hdfcsec.com Phone: (022) 3045 3600

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 Diwali Picks

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