WEEKENDER REPORT. Macro / political commentary

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1 WEEKENDER REPORT Macro / political commentary Finally the US Fed hiked its short term interest rate from 0.25% to 0.5% this week, after almost a decade of near zero interest rate, signalling a recovery in the US economy. With the Fed's policy normalization underway, the Reserve Bank of India's focus during the upcoming monetary policy reviews should increasingly shift to domestic parameters critical being the growth-inflation rhetoric. Fed highlighted that it would continue to decide outcomes based on the data it receives. Credit rating agency Fitch Ratings has said that India's less dependence on exports and improved external balances makes it better placed than many of its peers after the American central bank -- the US Federal Reserve -- raised its key interest rates. Fitch Ratings said that India is not immune to potential market jitters on account of interest rate hike by the US Fed, but favourable economic growth outlook makes it attractive for foreign investors. India's external balances have significantly improved since mid-2013, with foreign exchange reserves rising by $65 bn to $353 bn as of November 2015, and the narrowing of the current account deficit. In FY15, the domestic production of coal was million tonnes (Provisional), against total consumption of million tonnes (provisional).the gap is met through imports. Due to sustained efforts for increase in domestic production, import of coal that was showing positive growth since FY12, registered a decline 12.2% during April-November Now, Cabinet Committee on Economic Affairs has given its approval for allotment of coal blocks to central and state public sector undertakings for the sale of the fossil fuel mainly to medium, small and cottage industries, under the provisions of Coal Mines (Special Provisions) Act, Not only has this ended the 41- year monopoly of central government over mining and sale of coal but also substantiated the claim of the government of co-operative federalism, as coal-rich states will earn more out of this sale. The finance ministry expects that the government will probably face a shortfall of Rs 30,000-40,000 crore in direct tax collection of the Budget Estimate for the current fiscal. Although it is confident of meeting the fiscal deficit target of 3.9% of GDP, without cutting expenditure on the back of robust indirect tax collections. Revenue Secretary Hasmukh Adhia said that in the first eight months of the current financial year, direct tax collection posted a 12.63% growth to Rs 3.69 lakh crore. This is 46.26% of the budgeted target of Rs 7.97 lakh crore. However, the indirect tax collection between April-November 2015 has seen a robust growth of 34.3% to Rs 4.38 lakh crore. Foreign Direct Investment (FDI) in services sector has surged by 20% YoY to $1.46 bn (Rs 9,404 crs) during Apr-Sep 2015, per latest data released by Department of Industrial Policy & Promotion (DIPP). One of the reasons for high inflow is effort by the government to improve ease of doing business & attract investments. It has announced a series of steps like fixing timeliness for approvals, permitted portfolio investors own up to 74% stake in local private banks with full fungibility, hiked FDI cap in insurance sector to 49% etc. Other sectors attracting healthy foreign inflows during the period include computer software & hardware with $3.05 bn, trading $2.3 bn & autos $1.46 bn. Overall FDI is up by 13% to $16.63 bn. Foreign investment helps improve country's balance of payments situation & strengthens INR. Decline in export and import continued as per the trend, in Nov A sharper fall in imports, helped keep the country's trade deficit in check. Exports fell more than 24% $20 bn in November, Page 1 / 9

2 compared with $26.4 bn a year earlier, according to data released by the commerce ministry. Imports declined over 30% to $29.7 bn from $42.7 bn a year ago, led by low crude oil prices and subdued imports of gold, coal and fertilisers. This helped shrank the trade deficit to $9.7 bn from $16.2 bn. The drop in November exports was the steepest in the past couple of years, said SC Ralhan, president of the Federation of Indian Export Organisations. At the current trend, India is expected to end the year with exports of between $260 bn and $270 bn, he added (% YoY) exports imports trade deficit (20) (40) (60) Equity market performance Sensex closed the week up 1.9%, after giving some gains accrued through the week. Small & mid cap indices closed +2.8% & +3.3% respectively. Metals was the best performing sector up 4.1% while defensive sector FMCG closed +0.9%. Adani Ports was the top gainer amongst individual stocks, up by ~8% and Tech Mahindra lost by 2.6%. Index Value Weekly % Metals 7, Power 1, Mid Cap index 10, Small Cap index 11, Healthcare 16, Oil & Gas 9, Sensex 25, Auto 18, IT 10, Bankex 18, Cap Goods 14, FMCG 7, Stock INR Weekly % Gainers Adani Ports Tata Steel Power Grid Yes Bank Ambuja Cement Losers ITC 317 (1.2) M&M 1,243 (1.5) Axis Bank 433 (1.8) Wipro 554 (2.1) Tech Mahindra 523 (2.6) Currency, commodity & interest rates INR gained against all four key currencies, gaining most against British Pound (+1.9%) & Euro (+1.3%). Among the commodities, crude continued to remain weak, declining by 5.5%. Silver was down by 2.2%. GoI bond yields dipped marginally, signalling increase in bond price. 10 year bond s yield dipped by 0.6%. Page 2 / 9

3 Currency Value Weekly % $ / INR / INR / INR / INR Commodity INR Weekly % Crude (1 barrel) 2,507 (5.5) Gold (10 gm) 24,954 (1.1) Silver (1 kg) 32,872 (2.2) Copper (1 kg) 300 (1.6) Aluminium (1 kg) GoI Bond Yield Weekly % 10-year 7.7 (0.6) 5-year 7.8 (0.1) 1-year 7.2 (0.1) Key economic events next week India s inflation data came in slightly higher than expected, WPI at -1.99% and CPI at 5.41%. CPI reading for UK came in, in positive territory at 0.1% against previous reading of -0.1% while that of Europe stood at 0.2%. US Fed met & finally raised interest rate, although the hike is measly 25 bps. Little data will be reported next week. Almost all the markets including India will remain closed on 25 th for Christmas. UK & US GDP data will be reported and new home sales for US will be out too. Date Event Forecast Previous India Friday, December 25, 2015 Holiday - Christmas Europe Wednesday, December 23, 2015 UK GDP (3Q; YoY) 2.3% 2.3% US Tuesday, December 22, 2015 GDP (3Q; QoQ) 2.1% 2.1% Wednesday, December 23, 2015 New home sales (Nov) 500, ,000 Sector / company specific news Competition Appellate Tribunal revoked Competition Commission of India's order imposing a combined penalty of Rs.6,316 crs on 11 cement companies for allegedly forming a price cartel. It also allowed them to withdraw Rs.630 crs (10% of penalty) deposited by them in compliance of its interim order. In June 2012, the commission had fined ACC, Ambuja Cements, UltraTech Cement & Jaiprakash Associates a little over Rs 1,000 crore each for forming a cartel. The other companies fined included Madras Cements, Century Cement, Binani Cement, Lafarge India, JK Cement, India Cements & Grasim Cements (now merged with UltraTech). Cement Manufacturers' Association was also a party in this case and it was fined a token amount. Hindustan Sanitaryware India Ltd. (HSIL) is looking to double its revenue to Rs.2,000 crs from its building product division in the next five years. It expects increase in demand of premium products & consumption growth from tier 2 & 3 markets in coming years. It is also looking at a three-fold increase in 125 showcase stores over the next 2-3 years. The building products industry is growing around 8-10% & HSIL is growing ~14-15% p.a. It is one of the leading domestic players in container glass & building products segments. Under the second segment, the company manufactures & trades in sanitary ware products, faucets & wellness products. Coromandel International has resumed operations at its complex fertiliser manufacturing unit at Ennore in Tamil Nadu, which was shut down due to flooding in and around area caused by heavy rains in Chennai. The company has resumed its operations at manufacturing unit from December 14, Disruption of operations in its Ennore Unit for a short period is not likely to have any Page 3 / 9

4 significant impact on its turnover or profit. The company has adequate insurance cover against any natural calamities. Corporation Bank, a public sector lender, is reportedly planning to sell Rs 1800 crore of nonperforming assets to an asset reconstruction company (ARCs), for which it has already issued tenders. The bank is hopeful of achieving the target of recovering Rs.1,000 crore by the end of December. Recently, the bank's gross non-performing assets have increased to 5.32% for 2QFY16 as against 4.45% in 2QFY15. The bank's Net NPA stood at 3.54% in 2QFY16. Debt laden Hotel Leelaventure has received an approval from the Competition Commission of India (CCI) for sale of its Goa property. CCI approved acquisition of Hotel Leelaventure's Goa property by Malaysia-based MetTube. As part of the debt restructuring plan, the hospitality chain had entered into a pact with MetTube to sell the Goa property for Rs 725 crore. Under the deal, the property would be purchased by Ceres Hotels, a wholly-owned Indian subsidiary of MetTube. Kolte Patil Developers has entered into a Rs 120 crore co-development agreement with J.P.Morgan Asset Management managed entity Metropolitan Lifespace Real Estate Developers for redeveloping Jay Vijay Society in Vile Parle (East) Mumbai. The Jay Vijay CHS has 2.25 acres plot area and at a prime location off the western express highway. Kolte Patil has the economic interest of 1.65 lakh sq ft. The project is expected to be completed in months. ERGO Insurance Group will increase its stake in HDFC ERGO General Insurance Company. Under the shareholders' agreement between HDFC Ltd. & ERGO, latter had the right to increase its shareholding from 26% in HDFC ERGO as & when laws permitted such increase. ERGO will acquire 22.9% stake of HDFC ERGO at a price of Rs per share aggregating to Rs.1,122 crore, valuing HDFC ERGO at Rs.4,900 crs. The transaction is subject to receipt of all necessary approvals, including but not limited to approvals from the Insurance Regulatory & Development Authority of India, Competition Commission of India & Foreign Investment Promotion Board. Tata Steel, one of the world's top steel producers, has unveiled two new innovative products, offering a complete range of structural steel product to its vast customer base. A high strength variant of steel hollow sections called Tata Structura 355, which has enhanced yield strength and an additional variant with fire-resistance properties. Tata Structura hollow sections are best known and preferred for their cost effectiveness, concentric strength, resistance to corrosion, convenience of fabrication and creativity. Architects and engineers prefer these structural tubes over others because of these strengths. Sun Pharmaceutical has decided to sell its Bryan (Ohio) unit in the US to Nostrum Laboratories Inc. The size of the deal was not disclosed. Sun had acquired the Ohio facility in 2005 to target opportunities in liquids and semisolids. In July, Sun s MD Dilip Shanghvi had laid out the roadmap on divestment that they would discontinue non-strategic assets, following its $4 billion merger of Ranbaxy. In September, Sun put its Ireland facility on the block, following it up with an agreement to sell two units marketing central nervous system products to Strides Arcolab for Rs165 crore. Following the odd-even numbered cars on alternate days scheme, floated by Delhi government, in a knee jerk move, Supreme Court has gone ahead with its observation & has banned registration of new diesel cars & SUVs above 2000cc. The ban will be in place till March 2016 & will be across National capital region. The biggest loser of this ruling in mass segment will be Mahindra and Page 4 / 9

5 Mahindra (M&M). Some of the best-selling utility vehicles in India are from M&M like Bolero, Scorpio & XUV500. Mahindra gets 2% of its sales from Delhi which is almost entirely diesel vehicles. US-based biotechnology firm Acorda Therapeutics has entered into a settlement agreement with Aurobindo Pharma to resolve pending patent litigation involving Ampyra (dalfampridine) extendedrelease tablets. It had filed a patent litigation against Aurobindo in the US district court of Delaware in response to Aurobindo's submission of an Abbreviated New Drug Application to the US Food and Drug Administration seeking marketing approval for a generic version of Ampyra. Now, Aurobindo will be permitted to market a generic version of Ampyra in the US at a specified date in 2027, or potentially earlier under certain circumstances. Outlook for forthcoming week After lot of uncertainty two major events unfolded during the past week. US Fed hiked interest rate for the first time in decade and GST is almost buried as far as winter session is concerned. Lot of noise was created by political parties, obstructing the passage of GST Bill. And Supreme Court also threw its hat in the ring by announcing ban of diesel vehicles in NCR adding to further volatility especially for auto companies. Now that lot of overhang is behind, market may start re-assessing company fundamentals rather than moving on the noise. Also earning expectations for 3Q will start taking shape as we move towards the end of the quarter. Sensex Chart 30,000 29,250 28,500 27,750 27,000 26,250 25,500 24,750 Aug-14 Oct-14 Dec-14 Feb-15 Apr-15 Jun-15 Aug-15 Oct-15 Dec-15 Page 5 / 9

6 Weekender Stock Idea Britannia Industries (Rating: Buy; Price: Rs.2,890; Target: Rs.3,500; Upside: 21%) Shareholding Stock performance Key data Category Stake Perf. 1M YTD 1Y Particulars FY15 FY16e FY17e FY18e Promoter 50.7% Company 0.4% 57.1% 65.9% P/E (x) FII 19.8% Sensex -1.3% -7.2% -5.9% EPS growth 30.4% 85.9% 25.9% 30.7% DII 8.8% FMCG -3.2% -1.6% -1.8% ROE 55.3% 47.2% 38.9% 34.3% Others / public 20.6% Dividend yield 0.7% 0.8% 0.9% 1.0% Background Britannia Industries (mkt. cap Rs.34,679 crs) is one of the strongest companies in the FMCG segment, specifically biscuits & related bakery products. It has to its credit, various household brands like Good Day, Tiger, and Marie etc. Investment Argument Biscuit industry Biscuit industry in India is dominated by three companies, Parle, Britannia and ITC, together accounting for ~80% of market share of the Rs.20,000 crs industry. While Parle is clearly dominant in value offerings, Britannia is strong in cookies and ITC in cream. Cookies and cream together form ~30% of the industry and form the premium end. Chart 1: Market share Others, 14.6% Surya Foods, 5.8% Britannia, 35.3% ITC, 14.8% Parle, 29.5% Revamp of Britannia paying dividend Britannia & Parle have been the market leaders. However, over the years, the product mix has undergone tremendous shift. Plain biscuit (value offering) was the dominant form of biscuit being consumed 8-9 years back. However that has changed today and premium offerings like, cream biscuits, cookies etc. are witnessing increase in consumption. Britannia has adapted with the changing consumption pattern and has introduced several premium brands especially in the cookies & chunkies segment and is the leader in it. Page 6 / 9

7 10.3% 12.8% 11.8% 13.7% 19.0% 22.5% 23.2% 22.2% Research Desk Chart 2: Sales growth 17% CAGR FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 Operational improvements leading to improving EBITDA margin Strong growth in revenue has not come at the expense of margin. On the contrary, Britannia has imroved margin profile substantially. Its EBITDA margin stood at 5.7% in FY07 and in FY15 it moved up to 11%. This has happened due to stronger focus on premium (high margin) segments, rationalisation of product portfolio and focussed marketing of less number of brands, introduction of new products under the cookies & chunkies segment, etc. Chart 3: Sales value & EBITDA margin 9,000 Sales (Rs.crs;LHS) 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 EBITDA margin (RHS) 16% 14% 12% 10% 8% 6% 4% 2% - FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 1HFY16 0% Growth & margin improvement look sustainable We believe that the revenue growth in mid-teens and further improvement in margin is possible. This is due to the fact that Britannia has room to increase its penetration to get growth. It reaches out to 36 lakh retail outlets compared to Parle s 58 lakh. Also the penetration in rural is lower for Britannia. Re-launch of brand Tiger (glucose) will help Britannia in competing with Parle-G. It has reduced dependence on contract manufacturing and has added new manufacturing facilities to facilitate in-house manufacturing. It will give Britannia more control over innovation, lower conversion charges and lower freight costs. Financials Britannia s financials are very strong. It is a net cash company and has very high return ratios with return on capital employed 58%. It is a negative working capital company and thus doesn t need to block money for working capital. Dividend pay-out has been with the company paying at least a quarter of its annual profit as dividend. Page 7 / 9

8 25.3% 31.8% 44.6% 39.2% 36.4% 37.6% 50.9% 57.8% 71.6% Research Desk Chart 4: Dividend payout ratio FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 Valuation & view We like Britannia for the growth opportunity it has in the biscuit space, plus the way management has adapted to the changing consumption pattern. Strong return ratios, dividend pay-out and robust financials lend weight to our buy rating. At current price of Rs.2,890 Britannia Industries is trading at 30x FY18e earnings. We recommend buying Britannia Industries with a target price of Rs.3,500 implying an upside of %. Income statement & balance sheet data & ratios INR crs FY15 FY16e FY17e FY18e Ratios FY15 FY16e FY17e FY18e Sales 7,858 8,811 10,045 11,551 EBITDA margin 11.0% 14.9% 15.0% 15.2% EBITDA 864 1,313 1,507 1,756 PAT margin 8.8% 9.9% 9.9% 10.0% Net Profit ,155 Dividend payout 38% 30% 30% 30% Networth 1,245 1,859 2,555 3,363 RoCE 58% 64% 54% 49% Fixed assets Net Debt / Equity -48% -66% -75% -79% Capital employed 1,392 2,052 2,748 3,556 Working capital (days) Net Debt ,224-1,925-2,668 Company price chart Page 8 / 9

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 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. 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. 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 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. Registered Office: 124 Viraj, S,V.Road, Khar (W), Mumbai Tel. (022) , Fax (022) research@lmspl.com, LMSPL Network : Fort, Mahalaxmi, Parel, Bandra, Santacruz, Vile Parle, Andheri, Malad, Kandivili, Borivali, Bhayender, Ghatkopar, Mulund, Chunabhatti, Jacob Circle, Masjid Bunder, Cotton Green, Thane, Bhiwandi, Panvel, Pune, Sholapur, Nasik, Malegoan, Ahmednagar, Aurangabad, Akola, Mahekar, Nagpur, Surat, Karjan(Baroda), Khambat, Ahmedabad, Rajkot, Surendranagar, Porbandar, Amreli, Bharuch, Anand, Chennai, Vishakhapatnam, Vizianagaram, Palasa, Kakinada, Karnal, Kolkatta, Bhubhaneshwar, Hyderabad, Bangalore, Jafrabad, Chital, Kodinar, Keshod, Gondal, Haryana, Srikakulam, Mehkar (Buldhana), Jamnagar, Bangalore, Jodhpur, Jalgaon, Malkangiri (Orissa), Karimnagar Dist. (Andhra Pradesh). Registered Office: 124 Viraj, S.V Road, Khar (W), Mumbai Follow Us On: Page 9 / 9