Bharat Forge BFRG.NS BHFC IN

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1 Bharat Forge BFRG.NS BHFC IN EQUITY: AUTOS & AUTO PARTS Upgrade to Neutral, TP raised to INR1,217 Downside risks to US CV cycle balanced by upside from new businesses related to Make in India Action: Upgrade to Neutral; SOTP-based TP up to INR1,217 BHFC s stock has corrected by ~11% from its recent peak in Apr-15 (vs. Sensex down 2%). At the current share price we think some of our concerns related to slowdown in order inflows for US trucks (~20% of revenues in FY15) and lower demand from oil & gas business segment (~10% of revenues in FY15) are factored in. We also see potential upsides from the government s focus on the Make in India initiative. This can significantly improve order inflow in segments like defence, railways and aerospace components in future. Hence, in our view the risk-reward is now evenly balanced and we upgrade to Neutral. Within India Auto coverage we prefer the four-wheeler space with Maruti Suzuki (MSIL IN, Buy) as our top pick. 1QFY16 EBITDA at INR3.6bn was broadly in line with our estimate. While revenues came in 6% lower than our forecast, EBITDA margins were higher at 32% (vs our 30% estimate). This was helped by better INR/USD realisation at 66, lower commodity price benefit and improved product mix. While some gains may be passed on to consumers, we expect EBITDA margins to sustain ~31% over FY16-18F (previously ~30%). However, given the slower traction in non-auto revenues, we cut our FY16F revenues for this segment by 4%. Overall, our FY16/17F EPS remain largely changed Catalysts: Potential slowdown in US trucks and Oil & Gas are key risks, winning new defence orders could present significant upside NA Class 8 order inflows have slowed with 9-23% decline in March-June15 Promoter: Kalyani group is vying for various opportunities in the defence segment. Order wins in this segment would present upsides for BHFC. Valuation: Maintain target multiple of 20x FY17F EPS We continue to value BHFC based on SOTP at 20x FY17F EPS of INR57.5, which is in line with its historical average. We roll-forward our TP timeframe to Aug-16 at 12% cost of equity. We value the Alstom JV at a book value of investments at INR12/share. Year-end 31 Mar FY15 FY16F FY17F FY18F Currency (INR) Actual Old New Old New Old New Revenue (mn) 76,248 85,019 84, , , ,953 Reported net profit (mn) 7,625 10,063 10,234 13,283 13,386 15,951 Normalised net profit (mn) 7,238 10,063 10,234 13,283 13,386 15,951 FD normalised EPS FD norm. EPS growth (%) FD normalised P/E (x) 37.9 N/A 26.8 N/A 20.5 N/A 17.2 EV/EBITDA (x) 20.0 N/A 14.9 N/A 11.7 N/A 9.7 Price/book (x) 8.0 N/A 6.6 N/A 5.3 N/A 4.4 Dividend yield (%) 0.6 N/A 0.9 N/A 1.2 N/A 1.4 ROE (%) Net debt/equity (%) net cash Source: Company data, Nomura estimates Key company data: See next page for company data and detailed price/index chart Global Markets Research 4 August 2015 Rating Up from Reduce Neutral Target price Increased from 1154 INR 1217 Closing price 4 August 2015 INR 1177 Potential upside +3.4% Anchor themes We think BHFC is a play on recovery in the domestic and global CV cycles and improvement in non-auto segments. It appears well positioned to take advantage of opportunities in the domestic railways, power and defence segments. Nomura vs consensus Our FY16/17F consolidated EPS estimates are 5/6% ahead of consensus. Research analysts India Autos & Auto Parts Kapil Singh - NFASL kapil.singh@nomura.com Nishit Jalan - NFASL nishit.jalan@nomura.com See Appendix A-1 for analyst certification, important disclosures and the status of non-us analysts.

2 Key data on Bharat Forge Relative performance chart Source: Thomson Reuters, Nomura research Notes: Performance (%) 1M 3M 12M Absolute (INR) M cap (USDmn) 4,297.5 Absolute (USD) Free float (%) 77.0 Rel to MSCI India mth ADT (USDmn) 24.7 Income statement (INRmn) Year-end 31 Mar FY14 FY15 FY16F FY17F FY18F Revenue 67,161 76,248 84, , ,953 Cost of goods sold -47,005-50,142-52,481-63,875-74,132 Gross profit 20,156 26,106 31,610 39,015 44,820 SG&A -5,563-6,271-6,599-7,908-8,263 Employee share expense -7,901-9,051-9,819-11,778-13,678 Operating profit 6,693 10,784 15,192 19,328 22,880 EBITDA 10,272 14,408 19,180 23,751 27,522 Depreciation -3,579-3,624-3,987-4,423-4,643 Amortisation EBIT 6,693 10,784 15,192 19,328 22,880 Net interest expense -1,692-1,356-1, Associates & JCEs Other income 1,249 1, ,013 1,071 Earnings before tax 6,250 10,795 14,927 19,525 23,597 Income tax -2,100-3,587-4,693-6,139-7,646 Net profit after tax 4,150 7,208 10,234 13,386 15,951 Minority interests Other items Preferred dividends Normalised NPAT 4,178 7,238 10,234 13,386 15,951 Extraordinary items Reported NPAT 4,985 7,625 10,234 13,386 15,951 Dividends -1,048-1,746-2,513-3,295-3,927 Transfer to reserves 3,938 5,879 7,721 10,091 12,024 Valuations and ratios Reported P/E (x) Normalised P/E (x) FD normalised P/E (x) Dividend yield (%) Price/cashflow (x) Price/book (x) EV/EBITDA (x) EV/EBIT (x) Gross margin (%) EBITDA margin (%) EBIT margin (%) Net margin (%) Effective tax rate (%) Dividend payout (%) ROE (%) ROA (pretax %) Growth (%) Revenue EBITDA Normalised EPS Normalised FDEPS Source: Company data, Nomura estimates Cashflow statement (INRmn) Year-end 31 Mar FY14 FY15 FY16F FY17F FY18F EBITDA 10,272 14,408 19,180 23,751 27,522 Change in working capital -2,775-4,452-1, Other operating cashflow -1,708-4,566-5,856-6,857-7,668 Cashflow from operations 5,789 5,389 11,885 16,470 19,588 Capital expenditure -2,228-6,850-6,900-6,000-5,000 Free cashflow 3,561-1,460 4,985 10,470 14,588 Reduction in investments Net acquisitions 0 Dec in other LT assets Inc in other LT liabilities Adjustments CF after investing acts 4,037-1,155 4,985 10,470 14,588 Cash dividends ,226-2,043-2,940-3,856 Equity issue Debt issue -2, ,659-6,344-9,761 Convertible debt issue 0 0 Others 1,640 1,967 CF from financial acts -1, ,702-9,285-13,616 Net cashflow 2, ,717 1, Beginning cash 9,428 11,949 11,386 9,669 10,855 Ending cash 11,949 11,387 9,669 10,855 11,827 Ending net debt 13,664 14,078 11,136 3,606-7,127 Balance sheet (INRmn) As at 31 Mar FY14 FY15 FY16F FY17F FY18F Cash & equivalents 11,949 11,386 9,669 10,855 11,827 Marketable securities Accounts receivable 8,660 8,535 11,277 13,873 16,016 Inventories 10,386 10,339 11,132 13,615 15,858 Other current assets 10,270 14,182 14,656 15,178 15,752 Total current assets 41,264 44,442 46,735 53,521 59,454 LT investments Fixed assets 31,110 34,336 37,248 38,825 39,183 Goodwill Other intangible assets Other LT assets 2,623 2,635 2,635 2,635 2,635 Total assets 75,345 82,359 87,564 95, ,218 Short-term debt 10,401 5,649 3,420 3,420 3,420 Accounts payable 10,554 11,016 11,925 14,575 16,855 Other current liabilities 9,181 8,007 9,669 12,196 14,611 Total current liabilities 30,137 24,672 25,014 30,191 34,886 Long-term debt 15,212 19,815 17,385 11,041 1,280 Convertible debt Other LT liabilities 2,994 3,430 3,430 3,430 3,430 Total liabilities 48,342 47,917 45,829 44,662 39,596 Minority interest Preferred stock Common stock Retained earnings 26,367 33,976 41,270 50,800 62,156 Proposed dividends Other equity and reserves Total shareholders' equity 26,832 34,442 41,735 51,266 62,622 Total equity & liabilities 75,345 82,359 87,564 95, ,218 Liquidity (x) Current ratio Interest cover Leverage Net debt/ebitda (x) net cash Net debt/equity (%) net cash Per share Reported EPS (INR) Norm EPS (INR) FD norm EPS (INR) BVPS (INR) DPS (INR) Activity (days) Days receivable Days inventory Days payable Cash cycle Source: Company data, Nomura estimates 2

3 North America Class 8 order inflows have significantly slowed over the past 4 months After strong growth over the past two years, order inflows of Class 8 trucks in the US have slowed in the past four months. In fact, y-y growth has turned negative in the past two months, as order inflows declined by 9-23% y-y in Mar-June This could be due to bunching up of some orders in Oct-Dec as well. In our view, order inflow is a lead demand indicator and it affects production with a lag of two to three quarters. Thus, if the current trend in order inflows continues over the next few months, there could be a decline in production in CY16F. For BHFC, we are building in 15% volume growth in Class 8 trucks for FY16F and 5% growth in FY17F. Fig. 1: North America Class 8 Trucks: order inflow has slowed over the past four months 51,000 46,000 41,000 36,000 31,000 26,000 21,000 16,000 Order Inflow (Units) - LHS YoY Nov-11 Jan-12 Mar-12 May-12 Jul-12 Sep-12 Nov-12 Jan-13 Mar-13 May-13 Jul-13 Sep-13 Nov-13 Jan-14 Mar-14 May-14 Jul-14 Sep-14 Nov-14 Jan-15 Mar-15 May % 100% 80% 60% 40% 20% 0% -20% -40% -60% -80% Source: Bloomberg, Nomura research Fig. 2: North America Class 8 trucks: order inflow affects production with a lag 120% 100% 80% 60% 40% 20% 0% -20% -40% -60% Production (YoY) Order Inflow (YoY) -80% Jan-12 Mar-12 May-12 Jul-12 Sep-12 Nov-12 Jan-13 Mar-13 May-13 Jul-13 Sep-13 Nov-13 Jan-14 Mar-14 May-14 Jul-14 Sep-14 Nov-14 Jan-15 Mar-15 May-15 Source: Bloomberg, Nomura research 3

4 Fine-tuning our FY16/17F earnings For the standalone business, we have marginally cut our FY16/17F revenues (~2%) as we build in slightly lower growth in the Non-Auto segment. We lift our FY16-17F EBITDA margins by bps largely to factor in the impact of INR depreciation and some benefit from reduction of commodity prices. We now build in a USD:INR rate of 66 vs. 64 previously; note that 1QFY16 USD:INR realisation was 66. Overall, we raise our FY16/17F standalone PAT by 1/2%. Our FY16/17F earnings for subsidiaries remain unchanged. We lift our FY16/17F consolidated EPS by 2%/1%. Fig. 3: Bharat Forge: estimate revisions Ne w Old % Change Standalone (INR mn) FY16F FY17F FY15F FY16F FY17F FY16F FY17F Revenues - Autos 31,459 39,427 25,676 31,407 39, YoY (%) Revenues - Non Autos 23,556 29,445 20,150 24,538 30,672 (4.0) (4.0) YoY (%) Total revenues 55,015 68,872 45,826 55,944 69,993 (1.7) (1.6) YoY (%) EBITDA 17,124 21,401 13,491 16,676 21, EBITDA Margin (%) Adj. PAT 9,801 12,852 7,303 9,630 12, EPS (INR) Ne w Old % Change Subsidiaries (INR mn) FY16F FY17F FY15F FY16F FY17F FY16F FY17F Revenue 29,075 34,017 30,349 29,075 34,018 (0.0) (0.0) YoY (5.5) 17.0 (8.5) (5.5) 17.0 EBITDA 2,056 2,350 1,868 2,056 2,350 (0.0) (0.0) EBITDA Margin (%) Adj. PAT (0.0) (0.0) EPS (INR) (0.0) (0.0) Ne w Old % Change Consolidated (INR mn) FY16F FY17F FY15F FY16F FY17F FY16F FY17F Revenue 84, ,889 76,176 85, ,011 (1.1) (1.1) EBITDA 19,180 23,751 15,359 18,732 23, EBITDA Margin (%) Adj. PAT 10,234 13,386 7,491 10,063 13, EPS (INR) Source: Bloomberg, Nomura estimates Fig. 4: Bharat Forge: consolidated financials Nomura vs. consensus Consolidated INR mn Nomura Consensus % Difference FY16F FY17F FY16F FY17F FY16F FY17F Revenues 84, ,889 87, , EBITDA 19,180 23,751 18,003 22, OPM 22.8% 23.1% 20.7% 21.5% 2.2% 1.6% PAT 10,234 13,386 9,642 12, EPS Source: Bloomberg, Nomura estimates 4

5 Upgrade to Neutral; TP lifted to INR1,217 We continue to value BHFC on a sum-of-the-parts (SOTP) valuation to arrive at our new TP of INR1,217. We value the core business at INR1,205, based on 20x FY17F EPS of INR57.5 which is rolled forward by five months to Aug-16 at 12% cost of equity. Our target valuation multiples are in line with the stock s five-year average. We value the Alstom JV business at INR12/sh, based on 1x book value. Our target price increases by ~5% from INR1,154 largely due to the roll forward of our TP to Aug-16 from Mar-16 earlier. Fig. 5: Bharat Forge: Target price build-up (INR mn) FY17F Consol EPS 57.5 PE multiple 20.0 Price/share 1,150 Roll fw d to Aug-16 1,205 Book Value of Alstom JV - B 12 Target Price (INR) - A+B 1,217 Source: Bloomberg, Nomura estimates Fig. 6: Consol 1-year forward P/E Indian MHCVs downcycle starts US truck downcycle starts Slowdown in NA class 8 orders and Oil & Gas segment SD SD Aug-10 Oct-10 Dec-10 Feb-11 Apr-11 Jun-11 Aug-11 Oct-11 Dec-11 Feb-12 Apr-12 Jun-12 Aug-12 US trucks cycle pick up starts Oct-12 Dec-12 Feb-13 Apr-13 Jun-13 Aug-13 Oct-13 Dec-13 Indian MHCV upcycle begins Feb-14 Apr-14 Jun-14 Aug-14 Oct-14 Dec-14 Feb-15 Apr-15 Jun-15 Source: Bloomberg, Nomura estimates Investment risks Downside risks Continued weakness in non-auto exports: Non-auto export revenues declined by 22% q-q (flat y-y) due to the steep decline in Oil & Gas segment. Management is guiding for improvement from current levels; if this does not materialise, there could be downside risks to our estimates. Decline in North America truck volumes: Order inflow of North America Class 8 trucks declined in the past four months; if this sustains we could see industry volume decline in FY17F. We currently build in 15% growth in this segment in FY16F and 5% in FY17F. Upside risks Significant order inflow from domestic non-auto and Defence segments: We built in 22% revenue CAGR in non-auto revenues over FY15-17F. This builds in strong improvement in domestic non-auto revenues as well. However, if the order wins are stronger than our expectation, there could be upside to our estimates. 5

6 Sharp INR depreciation: If INR depreciates further from current levels, there could be downside risks to our EBITDA margin estimates. 1QFY16: EBITDA in line with our estimates 1QFY15 Adj EBITDA came in at INR3.6bn which is largely in line with our estimate but 4% ahead of consensus. Revenues grew by 14% y-y to INR11.3bn which is 6/7% below our/consensus estimates. However, this was offset by higher-than-expected margins. EBITDA margins came in at 31.8% vs our estimate of 30% and consensus at 28.5%. Margin improvement was led by higher export realisation, lower commodity prices and also better product mix. Adj PAT came in at INR2.04bn, which was 3% below our forecast but 6% ahead of consensus. Forex loss was INR129mn; our numbers are adjusted for the same. Fig. 7: 1QFY16: Comparison of results with our forecasts and consensus INR m % difference from INR mn Actual Consensus Nomura Consensus Nomura Net Sales 11,285 12,175 11, % -5.6% EBITDA 3,590 3,465 3, % 0.1% Margin 31.8% 28.5% 30.0% Adj net profit 2,040 1,932 2, % -3.5% Source: Company data, Bloomberg consensus, Nomura estimates Other key details Overall production volumes were up 6% y-y and down 8% q-q. Domestic revenues were up 6% y-y (in line with our estimate), while USA revenues were up 33% y-y. Europe revenues are down 5% y-y. EBITDA margins of subsidiary were 6.3% vs. 6% q-q. Net debt in the standalone business was INR7.2bn vs. INR7.8bn q-q. Key takeaways from the conference call Management stated that it sees India MHCVs segment having 15-20% growth. Its customers are expecting 20% growth. It also looks for positive growth in the EU and the US markets. In the Oil & Gas segment, new capex is slow, though replenishment related capex is still happening. Management believes revenues in this segment to have bottomed on a quarterly basis. Oil & Gas segment contribution is 10% of standalone revenues. For the Aerospace segment orders company will utilise existing facilities no new dedicated capacities are being created. Focus is to benefit from operating leverage and higher ROCE. Margins in this quarter were helped by better product mix, commodity and INR realisation. Similar gross margins appear sustainable. Guidance is for EBITDA margins in 29-31% band. BHFC has seen two-thirds of Commodity prices benefit in this quarter. It expects more benefit in the coming quarters. These benefits are pass-through with a lag of one to two months for long term contracts. In Europe North EU-based customers are seeing growth, but southern EU-based customers are not. BHFC has a very high share with southern customers. The company has a total consolidated net debt is ~INR11bn. Future growth drivers for BHFC would be: new passenger car programme, railway business and aerospace business. BHFC has also won some new orders in the CV business. In the new Passenger cars business, the company aims to triple revenues from <USD10mn currently. It also plans to take them up to ~USD100mn by BHFC s domestic sales were dragged down by Tractors, UVs and low growth for some customers in MHCVs. Its domestic non-auto business was flat. 6

7 On GoI s Make in India initiative: engagement is strong with the government. BHFC has begun to receive some orders which are scheduled to be executed from Oct-15. On NA Class 8 trucks in the US: BHFC expects 12% growth in 2015 and 12-15% growth in CY16. This segment accounts for 20% of revenues (FY15). Current Utilisation level is ~70%. The company realised INR/USD at 66 and EUR/USD at 69 to70. This was 64 and 72 in Q4FY15, respectively. Railway orders will commence production from Oct-Nov Bhart Forge Aluminiumtechnik GmbH product validation will be done in the next 2 quarters. Machining 1.2mn crankshafts. Setting up new capacity. Cumulative capex FY15-17 of INR10bn; INR3.5bn in FY16F. Total forging capacity of the company is 560,000 tonnes. Out of this, 380,000 tonnes are in India, which will increase to 425,000 tonnes taking total capacity to 600,000 tonnes. The company is also planning to double machining capacity by de-bottlenecking. Current Machining mix is 50%. In the case of the Industrial segment this is higher. In the case of European CV exposure - All machined components are from India. 65% of sales to Europe sales are derived from India in terms of value. In 1Q, total non-auto comprised more than 40% of revenues. 60% of this was for exports. In Domestic passenger cars, market share is less than 10%. The company is working on adding new products. Current passenger car mix is 10% of domestic and 5% of exports. In Asia new exports to Japan has helped growth. On the Artillery guns - Defense order win is 1-2 years away. Metal components form 30-50% of value and will be sourced from Bharat Forge. Aerospace segment will not be fully machined initially, Alstom JV has commenced production and is profitable now. It has nine sets of orders between MW deliverable over the next three years. Key numbers Net sales came in at INR11.3bn compared with our estimate of INR12bn. Adj EBITDA margin came in at 31.8%, above our 30% forecast. RM/sales came in at 35.3% compared with our projection of 38.7%. Manufacturing exp/sales came in at 16.2% compared with our assumption of 15%. Employee cost/sales came in at 8.2% compared with our 7.8% forecast. Other expenses/sales came in at 8.6% vs our estimate of 8.5%. Other income came in at INR288mn compared with our projection of INR200mn. Interest expenses were INR213mn vs our assumption of INR204mn. Tax rate was 32.5% compared with our 31.5% forecast. There was a forex loss of INR129mn. 7

8 Nomura Bhara t Forge 4 August 2015 Fig. 8: 1QFY16 results INR mn 1QFY15 4QFY15 1QFY16 QoQ (%) YoY (%) 1QFY16F Production (tons) 49,123 56,679 51,984 (8.3) Realization/tonne (INR) 196, , , #DIV/0! Net Sales 9,881 12,239 11,285 (7.8) ,956 (Inc)/dec Stock (648) 645 (253) - Consumption of RM 4,240 4,133 4,232 - Net RM cost 3,591 4,778 3,979 (16.7) ,627 Other Expenditure 737 1, (6.6) ,015 Manufacturing Expenses 1,849 1,861 1,825 (2.0) (1.3) 1,793 Employee Cost Total Cost 6,973 8,564 7,695 8,368 Operating Profit 2,908 3,675 3,590 (2.3) ,588 OPM 29.4% 30.0% 31.8% 30.0% Other Income Interest Depreciation Exceptional/Forex Inc/(exp) (75) (73) (129) - PBT 2,101 3,081 2,894 (6.1) ,087 Tax 651 1, Net Profit 1,450 2,032 1,953 (3.9) ,114 Adj. Net profit 1,525 2,080 2,040 (1.9) ,114 Adj. EPS Source: Company data, Nomura estimates Fig. 9: Ratios Cost Ratios (%) 1QFY15 4QFY15 1QFY16 QoQ (%) YoY (%) 1QFY16F RM/Sales Mfg Expenses/Sales Other Exp/ Sales Emp. Cost/sales OPM Source: Company data, Nomura estimates 8

9 Appendix A-1 Analyst Certification We, Kapil Singh and Nishit Jalan, hereby certify (1) that the views expressed in this Research report accurately reflect our personal views about any or all of the subject securities or issuers referred to in this Research report, (2) no part of our compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this Research report and (3) no part of our compensation is tied to any specific investment banking transactions performed by Nomura Securities International, Inc., Nomura International plc or any other Nomura Group company. Issuer Specific Regulatory Disclosures The term "Nomura Group" used herein refers to Nomura Holdings, Inc. or any of its affiliates or subsidiaries, and may refer to one or more Nomura Group companies. Materially mentioned issuers Issuer Ticker Price Price date Stock rating Sector rating Disclosures Bharat Forge BHFC IN INR Aug-2015 Neutral N/A Maruti Suzuki MSIL IN INR Aug-2015 Buy N/A Bharat Forge (BHFC IN) Rating and target price chart (three year history) INR 1177 (04-Aug-2015) Neutral (Sector rating: N/A) Date Rating Target price Closing price 21-May-15 Reduce 1, May-15 1, , Feb-15 1, , Nov-14 1, Jul May Feb Oct Aug May Mar For explanation of ratings refer to the stock rating keys located after chart(s) Valuation Methodology We value BHFC on sum-of-the-parts (SOTP) valuation to arrive at our target price of INR1,217. We value core business at 20x FY17F EPS of INR57.5, which is in line with the historical average. We roll-forward our TP timeframe to Aug-16 at 12% cost of equity. We value the Alstom JV at a book value of investments at INR12/share. Risks that may impede the achievement of the target price Significant order inflow from domestic non-auto and Defence segments: Overall, we have built in 25% YoY growth in non-auto revenues for both FY16 and FY17. This builds in strong improvement in domestic non-auto revenues as well. However, if the order wins are stronger than our expectation, there could be upside to our estimates. Sharp INR depreciation: If INR depreciates sharply from current levels, there could be downside to our EBITDA margin estimates. 9

10 Maruti Suzuki (MSIL IN) Rating and target price chart (three year history) INR 4438 (04-Aug-2015) Buy (Sector rating: N/A) Date Rating Target price Closing price 29-Jul-15 5, , Apr-15 4, , Jan-15 4, , Jan-15 4, , Oct-14 3, , Jul-14 3, , Apr-14 2, , Apr-14 2, , Jan-14 2, , Oct-13 1, , Jul-13 1, , Apr-13 2, , Jan-13 1, , Oct-12 Buy 1, Oct-12 1, , For explanation of ratings refer to the stock rating keys located after chart(s) Valuation Methodology We value the stock at 20x FY17F consolidated core EPS of ~INR 214. We roll forward our target price by 4 12% cost of equity to Jul-16 to arrive at the core business valuation of INR 4,439/sh. We add Fy16F cash per share of INR 596/sh to arrive at our target price of INR 5,034. The benchmark index for the stock is MSCI India. Risks that may impede the achievement of the target price Slower-than-expected recovery in industry growth: We build in ~16% volume growth in domestic volumes in FY16-17F. If industry volumes remain weak, there could be downside risk to our earnings estimates. JPY appreciation against the INR: If the JPY appreciates from current levels, there could be a downside risk to our estimates. Every 1% JPY appreciation could negatively affect our EBITDA margin estimates by ~15 bps and PAT estimates by ~1.5%, according to our calculations. Our current estimate for JPY: INR rate is ~0.52. Significant increase in raw material costs: If commodity costs increase significantly from current levels, there could be downside risks to our EBITDA margin estimates. Important Disclosures Online availability of research and conflict-of-interest disclosures Nomura research is available on Bloomberg, Capital IQ, Factset, MarkitHub, Reuters and ThomsonOne. Important disclosures may be read at or requested from Nomura Securities International, Inc., on If you have any difficulties with the website, please grpsupport@nomura.com for help. The analysts responsible for preparing this report have received compensation based upon various factors including the firm's total revenues, a portion of which is generated by Investment Banking activities. Unless otherwise noted, the non-us analysts listed at the front of this report are not registered/qualified as research analysts under FINRA/NYSE rules, may not be associated persons of NSI, and may not be subject to FINRA Rule 2711 and NYSE Rule 472 restrictions on communications with covered companies, public appearances, and trading securities held by a research analyst account. Nomura Global Financial Products Inc. ( NGFP ) Nomura Derivative Products Inc. ( NDPI ) and Nomura International plc. ( NIplc ) are registered with the Commodities Futures Trading Commission and the National Futures Association (NFA) as swap dealers. NGFP, NDPI, and NIplc are generally engaged in the trading of swaps and other derivative products, any of which may be the subject of this report. Any authors named in this report are research analysts unless otherwise indicated. Industry Specialists identified in some Nomura International plc research reports are employees within the Firm who are responsible for the sales and trading effort in the sector for which they have coverage. Industry Specialists do not contribute in any manner to the content of research reports in which their names appear. Distribution of ratings (Global) The distribution of all ratings published by Nomura Global Equity Research is as follows: 47% have been assigned a Buy rating which, for purposes of mandatory disclosures, are classified as a Buy rating; 42% of companies with this rating are investment banking clients of the Nomura Group*. 42% have been assigned a Neutral rating which, for purposes of mandatory disclosures, is classified as a Hold rating; 55% of companies with this rating are investment banking clients of the Nomura Group*. 11% have been assigned a Reduce rating which, for purposes of mandatory disclosures, are classified as a Sell rating; 21% of companies with this rating are investment banking clients of the Nomura Group*. As at 30 June *The Nomura Group as defined in the Disclaimer section at the end of this report. 10

11 Explanation of Nomura's equity research rating system in Europe, Middle East and Africa, US and Latin America, and Japan and Asia ex-japan from 21 October 2013 The rating system is a relative system, indicating expected performance against a specific benchmark identified for each individual stock, subject to limited management discretion. An analyst s target price is an assessment of the current intrinsic fair value of the stock based on an appropriate valuation methodology determined by the analyst. Valuation methodologies include, but are not limited to, discounted cash flow analysis, expected return on equity and multiple analysis. Analysts may also indicate expected absolute upside/downside relative to the stated target price, defined as (target price - current price)/current price. STOCKS A rating of 'Buy', indicates that the analyst expects the stock to outperform the Benchmark over the next 12 months. A rating of 'Neutral', indicates that the analyst expects the stock to perform in line with the Benchmark over the next 12 months. A rating of 'Reduce', indicates that the analyst expects the stock to underperform the Benchmark over the next 12 months. A rating of 'Suspended', indicates that the rating, target price and estimates have been suspended temporarily to comply with applicable regulations and/or firm policies. Securities and/or companies that are labelled as 'Not rated' or shown as 'No rating' are not in regular research coverage. Investors should not expect continuing or additional information from Nomura relating to such securities and/or companies. Benchmarks are as follows: United States/Europe/Asia ex- Japan: please see valuation methodologies for explanations of relevant benchmarks for stocks, which can be accessed at: Global Emerging Markets (ex-asia): MSCI Emerging Markets ex-asia, unless otherwise stated in the valuation methodology; Japan: Russell/Nomura Large Cap. SECTORS A 'Bullish' stance, indicates that the analyst expects the sector to outperform the Benchmark during the next 12 months. A 'Neutral' stance, indicates that the analyst expects the sector to perform in line with the Benchmark during the next 12 months. A 'Bearish' stance, indicates that the analyst expects the sector to underperform the Benchmark during the next 12 months. Sectors that are labelled as 'Not rated' or shown as 'N/A' are not assigned ratings. Benchmarks are as follows: United States: S&P 500; Europe: Dow Jones STOXX 600; Global Emerging Markets (ex-asia): MSCI Emerging Markets ex-asia. Japan/Asia ex-japan: Sector ratings are not assigned. Explanation of Nomura's equity research rating system in Japan and Asia ex-japan prior to 21 October 2013 STOCKS Stock recommendations are based on absolute valuation upside (downside), which is defined as (Target Price - Current Price) / Current Price, subject to limited management discretion. In most cases, the Target Price will equal the analyst's 12-month intrinsic valuation of the stock, based on an appropriate valuation methodology such as discounted cash flow, multiple analysis, etc. A 'Buy' recommendation indicates that potential upside is 15% or more. A 'Neutral' recommendation indicates that potential upside is less than 15% or downside is less than 5%. A 'Reduce' recommendation indicates that potential downside is 5% or more. A rating of 'Suspended' indicates that the rating and target price have been suspended temporarily to comply with applicable regulations and/or firm policies in certain circumstances including when Nomura is acting in an advisory capacity in a merger or strategic transaction involving the subject company. Securities and/or companies that are labelled as 'Not rated' or shown as 'No rating' are not in regular research coverage of the Nomura entity identified in the top banner. Investors should not expect continuing or additional information from Nomura relating to such securities and/or companies. SECTORS A 'Bullish' rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a positive absolute recommendation. A 'Neutral' rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a neutral absolute recommendation. A 'Bearish' rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a negative absolute recommendation. Target Price A Target Price, if discussed, reflects in part the analyst's estimates for the company's earnings. The achievement of any target price may be impeded by general market and macroeconomic trends, and by other risks related to the company or the market, and may not occur if the company's earnings differ from estimates. Disclaimers This document contains material that has been prepared by the Nomura entity identified on page 1 and/or with the sole or joint contributions of one or more Nomura entities whose employees and their respective affiliations are also specified on page 1 or identified elsewhere in the document. The term "Nomura Group" used herein refers to Nomura Holdings, Inc. or any of its affiliates or subsidiaries and may refer to one or more Nomura Group companies including: Nomura Securities Co., Ltd. ('NSC') Tokyo, Japan; Nomura International plc ('NIplc'), UK; Nomura Securities International, Inc. ('NSI'), New York, US; Nomura International (Hong Kong) Ltd. ( NIHK ), Hong Kong; Nomura Financial Investment (Korea) Co., Ltd. ( NFIK ), Korea (Information on Nomura analysts registered with the Korea Financial Investment Association ('KOFIA') can be found on the KOFIA Intranet at Nomura Singapore Ltd. 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