WEEKENDER REPORT. Macro / political commentary

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1 WEEKENDER REPORT Macro / political commentary With global demand not showing any signs of a pickup, India's merchandise exports contracted for the eighth month running in July, registering a 10.3% drop over last year. The trade deficit widened to $ 12.8 bn in July from $ 10.8 bn in June, data released by the ministry of commerce and industry showed. Imports fell 10.3% to $ bn while exports came in at $23.1 billion. Chart: Trade data (% YoY) 100 exports imports trade deficit (20) (40) Oct-14 Nov-14 Dec-14 Jan-15 Feb-15 Mar-15 Apr-15 May-15 Jun-15 Jul-15 Moody s Investors Service cut its forecast for India s economic growth to around 7% this year from 7.5% because of lower-than-expected rainfall in the ongoing monsoon season. Moody s maintained its forecast of around 7.5% increase in gross domestic product (GDP) for 2016, but pointed to risks ahead that include delays to the government s reform plans. Moody s rates India at its lowest investment grade rating of Baa3 with a positive outlook. PM Narendra Modi announced a mega package of Rs lakh crore in central funds for Bihar, raising the stakes in the battle for the state which votes for a new government by November. An economic package for the underdeveloped state has always been a key issue in elections and the state's BJP leaders are banking on this announcement to give them a massive political advantage. Under the scheme of mega food parks, the Union Food Processing Ministry had sanctioned 42 projects throughout the country. All the food parks approved by the government will become operational by 2019, which will yield a potential investment of about Rs. 14,000 crore, benefit 12.5 lakh farmers & are expected to generate ~3-4 lakh jobs, Minister Harsimrat Kaur Badal said.

2 Buoyed by cheaper raw material, Indian companies reported better than expected margin improvement in 1QFY16 compared with previous quarter. However, sales and profit growth remained subdued. A sample of 2,171 companies, excluding financial and oil & gas companies, reported a 1.3% YoY growth in net sales and 2.2% drop in net profit for 1QFY16. Equity market performance Equity markets globally remained under pressure during the week, and India was no exception. Sensex corrected by 2.5%, small & mid cap indices corrected by 1.3% & 2.1% respectively. Defensive & rupee depreciation beneficiary sectors, like pharma, fast moving consumer goods & information technology, outperformed. Whereas, commodity sectors like metals and oil & gas and rate sensitive banking sector bore the brunt of the selloff. Amongst the Nifty stocks, Bank of Baroda was the best performer, gaining by 8.3% on the back of the PSU bank reforms announced by the government. High beta, rate sensitive bank like Yes Bank fared the worst, declining by 13.1%. Index Value Weekly % Healthcare 18, FMCG 8, IT 11, Small Cap 11,610 (1.3) Mid Cap 11,217 (2.1) Sensex 27,366 (2.5) Cap Goods 17,385 (3.2) Auto 18,795 (3.4) Power 1,941 (3.5) Bankex 20,688 (3.7) Oil & Gas 9,149 (3.8) Metals 7,400 (5.2) Stock INR Weekly % Gainers BOB Lupin 1, Sun Pharma ITC ACC 1, Losers Axis Bank 525 (7.8) Zee Entertainment 383 (8.7) Cairn India 142 (9.0) Vedanta 95 (11.7) Yes Bank 692 (13.1) Currency, commodity & interest rates Indian rupee along with other emerging market currencies continued its decline against the key currencies. It closed at Rs per $. Due to supply glut globally, crude oil declined by 3.7% during the week whereas the volatility in all asset classes helped gold & silver gain this week by 4.3% & 1.1% respectively. Government of India bond yields remained stable. Currency Value Weekly % $ / INR 65.8 (1.1) / INR 74.3 (2.7) / INR (1.5) / INR 53.6 (2.2) Commodity INR Weekly % Crude (1 barrel) 3,077 (3.7) Gold (10 gm) 26, Silver (1 kg) 36, Copper (1 kg) 327 (2.8) Aluminium (1 kg) GoI Bond Rate Weekly % 10-year year year 7.5 (1.1)

3 Key economic events next week (August 17, 2015 August 21, 2015) Consumer price inflation in both US & UK stood at 0.1%. It was lower than expected in US, which can make Federal Reserve rethink its rate hike decision. Next week will throw up two more important indicators again from US & UK. This time, they ll report the June ending quarter s gross domestic product (GDP) numbers which is a barometer of the performance of the economy and hence will be important to watch out. Date Event Forecast Previous U.S. 25-Aug New home sales (July) 482, Aug GDP (Q2; QoQ) 3.1% 2.3% Europe 28-Aug UK GDP (Q2; YoY) 2.6% Sector / company specific news Birla Corp. Ltd on Monday said it had agreed to acquire two cement assets from the local arm of Lafarge SA with a combined production capacity of around 5.15 million tonnes (mt) for a total enterprise value of Rs.5,000 crore. The two units being sold by Lafarge are among the most profitable cement plants in India, partly because of the availability of raw materials in close proximity to the plants. Hindustan Unilever (HUL) is slowly taking the e-commerce route to launch its products. The strategy is also in line with its parent company Unilever s plan to garner significant sales volumes through the e-commerce channel globally. HUL has exclusively tied up with online grocery portal BigBasket.com to launch two new variants of Knorr brand of soups for sale online. For Unilever, Knorr International Soups is one of the first food brands that has been launched exclusively online. Maruti Suzuki India Ltd. has seen a surge in demand for its DZire Tour sedan because of the rising popularity of car-booking apps, said R.S. Kalsi, executive director at India s largest car maker. Toyota Motor Corp. is offering special deals to woo drivers and fleet operators that are boosting orders for its Etios sedan, which starts at Rs.6.11 lakh. The services have created a boom in demand from forhire car companies expanding their fleets and from individual operators buying new cars.

4 Infosys has created an Uber-like software application for its employees to apply for different projects that need workers based on their skills, just like Uber drivers pick up passengers through a mobile app. The move is part of its effort to keep a leaner, more disciplined bench and utilise existing company resources better under an initiative called 'Zero Bench' that will aim to work towards 100% utilisation, three people familiar with the developments said. Cipla has emerged as the sole Indian contender for Kremers Urban Pharmaceuticals Inc, the specialty generics drug business of the $4 bn Belgian drug maker UCB. If Cipla is able to close it, the deal, pegged at around $1.3 bn, will eclipse Lupin's recent $880 mn buyout of Gavis Pharma. Coffee Day Enterprises, which runs the country s biggest coffee chain Cafe Coffee Day, has received markets regulator SEBI s go ahead to raise Rs. 1,150 crore through initial public offering (IPO) to aid its expansion plans and pay off debt. Coffee Day Global Ltd. had a total income of Rs. 1,154 crore and operating profit of Rs. 189 crore in FY14. Paving the way for revolutionising cashless payments services in the country, RBI granted payment bank licences to 11 firms. Payments banks differ from conventional banks as they are not allowed to lend to customers or issue credit cards. They can, however, accept deposits of up to Rs. 1 lakh and can offer current and savings account deposits. They can also issue debit cards and offer internet banking. Outlook for forthcoming week This week witnessed a rout in equity markets globally. It started last week, with China devaluing its currency, followed by widespread concern of a currency war amongst the emerging markets. The glut in crude oil stock raised concerns over economic slowdown, however, in the long run; benign crude oil price is beneficial for India. While there was expectation of some rate action by RBI, but it has not materialized so far. Market will continue to remain volatile, looking at global events for cues, while domestically RBI action could help the market find its direction. Sensex Chart 29,900 29,400 28,900 28,400 27,900 27,400 26,900 26,400 25,900 Aug-14 Oct-14 Dec-14 Feb-15 Apr-15 Jun-15 Aug-15

5 Weekender Stock Idea Bata India Ltd. (Rating: Buy; Price: Rs. 1,127; Target: Rs. 1,419; Upside: 26%) Shareholding Stock performance Key data Category stake Perf. 1M YTD 1Y Particulars CY13 FY15 FY16e FY17e Promoter 53% Company -2.6% -13.7% -10.0% P / E FII 14% Sensex -3.5% -0.5% 3.6% EPS growth 17% -20% 43% 14% DII 14% FMCG 1.7% 3.1% 11.7% ROE 24% 16% 19% 19% Others / public 19% Dividend yield 0.6% 0.6% 0.6% 0.7% Note: Bata changed its financial year from December to March ending, in All ratios for FY15 & FY16 are adjusted for 15-month period Background Bata India Ltd is the part of the Bata Shoe Organisation headquartered in Switzerland, Europe currently. It is the largest organized manufacturer & retailer of footwear in India. It has had presence in India since Investment argument Diversified product portfolio Over the past few years, the company has improved its product portfolio (by adding more products in the leather segment and increasing focus on women s segment), which now covers various price points. In our opinion, this move has given Bata a clear competitive edge versus the competition as we believe no other player has a portfolio which is relevant for consumers across various price segments. This has also made a significant change in terms of the brand perception. Chart 1: Bata India brand portfolio

6 Increasing offerings for women customers Traditionally, the company s focus had been on a range of footwear for men and children. As a brand, Bata never really competed in the women s segment. This, however, appears to be changing rapidly and is a sound strategy, in our view. Women s shoes currently account for ~25% of India s shoe market. Given the company s focus on this segment over the next few years, its share is likely to move up relative to men s footwear. Introduction of accessories Bata has also fairly effectively diversified into accessories business. The portfolio is largely comprised of women s handbags and men s belts. While in terms of revenue contribution, this segment is still fairly small at 3%, but is growing fast at ~50% p.a. Outsourcing of production Company also started outsourcing production. This move was particularly effective in the case of rubber footwear, where gross margins and realisations are lower. The % of outsourced production of total quantity sold in the rubber footwear segment has increased from ~9% to 59%. This is the primary reason for the reduction in Bata s manufacturing costs. Improving profitability Due to various initiatives enumerated above, i.e., increasing brands, focus on products for women, changing product mix, cost controls, outsourcing production etc. Bata s profitability has improved significantly. EBITDA margin has improved from low single digits 8-10 years back to mid-teens currently. 18% 15% 12% 9% 6% 3% EBITDA margin PAT margin 0% CY05 CY06 CY07 CY08 CY09 CY10 CY11 CY12 CY13 FY15 1QFY16

7 Pan-India store network Out of the ~1,300 stores that Bata has in India, 65% are outside the top 10 cities. This gives the company a significant competitive advantage, as a large part of the market is outside the top 10 cities. More importantly, many of the stores for the two main competing brands (Nike and Adidas) are in the top 20 cities, with their penetration in smaller towns and cities much less than Bata s. Working capital has seen a big improvement One measure to improve efficiency for the company has been to reduce the working capital. Historically, the company carried a significant amount of inventory on its books, which meant two things a) high levels of working capital blocked & b) risk of styles going out of fashion and the company having to sell off inventory at cut rate prices, which affected realisations. However, this has now been fixed, with inventory levels down significantly and that, in turn, has helped to improve Bata s working capital. Chart 3: Inventory days and cash conversion cycle Inventory days Working capital cycle CY05 CY06 CY07 CY08 CY09 CY10 CY11 CY12 CY13 FY15 Investment Valuation Bata is well placed in terms of product portfolio, distribution network, brand name and efficient working capital management to take an advantage of rise in consumer spending. The company has high free cash flow in the last two years which we believe remain high going forward. It is trading at 28x FY17e earnings with return on equity of 19%. We recommend a buy rating on Bata with target price of Rs. 1,419 implying an upside of 26%.

8 Income statement & balance sheet data & ratios INR crs CY13 FY15 FY16e FY17e Ratios CY13 FY15 FY16e FY17e Sales 2,065 2,694 2,669 3,069 EBITDA margin 16% 12% 12% 14% EBITDA PAT margin 10% 7% 9% 8% Net Profit Dividend payout 21% 26% 20% 20% Networth 840 1,021 1,195 1,394 RoCE 36% 26% 28% 29% Fixed assets Net Debt / Equity -29% -29% -22% -14% Capital employed ,125 1,324 Working capital (days) Debt Note: Bata changed its financial year from December to March ending, in All ratios for FY15 & FY16 are adjusted for 15-month period Company price chart

9 Disclosures: (a) The research analyst or research entity or his/their associates or his/their relatives do not have actual/beneficial ownership of one per cent or more securities of the subject company or any financial interest in the subject company (b) The research analyst or research entity or his/their associates or his/their relatives do not have any other material conflict of interest at the time of publication of the research report or at the time of public appearance (c) The research analyst or research entity or its associates have not received any compensation for investment banking or merchant banking or brokerage services nor received any compensation for products or services from the subject company in the past twelve months (d) The research analyst or research entity or its associates have not received any other benefits from the subject company or third party in connection with the research report (e) The subject company is not or was not a client during twelve months preceding the date of distribution of the research report and the types of services provided by the research analyst or research entity or his/their associates or his/their relatives (f) The research analyst has not served as an officer, director or employee of the subject company (g) The research analyst or research entity has not been engaged in market making activity for the subject company Happy investing and have a good weekend! THANK YOU Disclaimer: This report has been prepared by Latin Manharlal Securities Pvt Ltd. The information and opinions contained herein have been compiled or arrived at, based upon information obtained in good faith from sources believed to be reliable. Such information has no guaranty, representation of warranty, express or implied, is made as to its accuracy, completeness or correctness. All such information and opinions are subject to change without notice. This document is for information purposes only. Latin Manharlal Securities Pvt Ltd. may from time to time solicit from, or perform broking, or other services for, any company mentioned in this mail and/or its attachments. Latin Manharlal Securities Pvt Ltd., its directors, analysts or employees do not take any responsibility, financial or otherwise, of the losses or the damages sustained due to the investments made or any action taken on basis of this report, including but not restricted to, fluctuation in the prices of shares and bonds, changes in the currency rates, diminution in the NAVs, reduction in the dividend or income, etc. Neither Latin Manharlal Securities Pvt Ltd. nor any of its employees shall be liable for any direct, indirect, special, incidental, consequential, punitive or exemplary damages, including lost profits arising in any way from the information contained in this material. Office: V.Road, Khar (W), Mumbai , Fax (022) research@lmspl.com, work : laxmi, Parel, Bandra, Santacruz, Vile Parle, Andheri, Malad, Kandivili, Borivali, Bhayender, Mulund, Chunabhatti, Jacob Circle, Masjid Bunder, Cotton Green, Thane, Bhiwandi, Panvel, Pune, Nasik, Malegoan, Ahmednagar, Aurangabad, Akola, Mahekar, Nagpur, Surat, Karjan(Baroda), Ahmedabad, Rajkot, Surendranagar, Porbandar, Amreli, Bharuch, Anand, Chennai, tnam, Vizianagaram, Palasa, Kakinada, Karnal, Kolkatta, Bhubhaneshwar, Hyderabad, Bangalore, hital, Kodinar, Keshod, Gondal, Haryana, Srikakulam, Mehkar (Buldhana), Jamnagar, Bangalore, gaon, Malkangiri (Orissa), Karimnagar Dist. (Andhra Pradesh). Registered Office: 124 Viraj, S.V Road, Khar (W), Mumbai Follow Us On: Website: I Call: I Mail: business@lmspl.com