India Strategy Adding currency play to consumption

INSTITUTIONAL EQUITY RESEARCH India Strategy Adding currency play to consumption INDIA STRATEGY 2 August 218 Rupee has weakened past 7 led by dollar strength. While Indian economic fundamentals remain stable, the external sector has been weak, marred by oil prices and Indian exports not gaining global market share. Prior to the up move beyond 69, rupee depreciation wasn t significant enough to drive exports higher sustainably. With the rupee at 7+, we have confidence that its range for the rest of FY19 will shift to 68 73 vs. our earlier expectation of 65 69. Thus, we expect some of the exports sectors to benefit as global growth remain stable. Based on this, we continue to prefer the theme of earnings, and within that, consumption; we add exports (E CE). Positive factors for India Corporate earnings looking good Q1FY19 earnings growth at 17% ex SBI ICICI Commodity prices off highs. Brent off highs. Bloomberg commodity index down 1% since May 218 Inflation in comfortable zone we do not see much inflationary impact from MSP GST While GST collections will be missed for FY19, overall, we see them trending higher. We see growth momentum shifting to the organised sector (from unorganised). Consumerism Trending higher Negative factors for India Dollar strengthening Global liquidity tightening Domestic liquidity tight Global bond yields stable to higher Stable Indian bond yields but higher lending rates Global economic growth stabilizing from rising earlier Mixed indicators: FII capital flows Inverse correlation exists between INR and Debt/Equity FII flows Pace of domestic inflows, which were supporting markets so far (overall, they are likely to remain strong, considering our base case scenario of financial asset holding as percentage of total savings rising) Rupee weakness State and Union elections in the next six months Rupee Our USD INR forecast was 65 69 for FY19, implying average 67. With rupee sustaining at 68 69 and now weakening beyond 7, we are raising our rest of FY19 USD INR range to 68 73. While correlation between currency and exports is weak, with such sustainable rupee weakness, we expect exports to respond positively, at least for some of the fundamentally sound sectors. Risk to our expectations: (1) RBI intervention through NRI bonds can lead to a sharp rupee appreciation. (2) A complete end of ongoing trade wars. MSP led boost to rural consumption We remain positive on rural consumption; this time rural demand boost is expected from MSP implementation and continuing improved implementation of social schemes. Earnings led by rural consumption and exports (we like IT and a few pharma companies) Exports IT: TCS, Infosys, Cyient Pharma: Cadila, Aurobindo Pharma Consumption FMCG: ITC, GSK Consumers, Dabur Consumer durables and electricals: Orient Electric, Bajaj Electricals Anjali Verma (+91 22 6246 4115) anverma@phillipcapital.in Neeraj Chadawar (+91 22 6246 4116) nchadawar@phillipcapital.in Raag Haria (Data contribution) Page 1 PHILLIPCAPITAL INDIA RESEARCH

Rupee at 7 We are changing our rupee range to 68 73 for the rest of FY19 from 65 69 expected earlier, based on the recent rupee and emerging currency s weakness, on going trade wars, FII outflows, widening trade deficit and rising global bond yields. While generally, rupee weakness has not had a significant impact on influencing exports, we expect some positive impact to be felt ahead due to sound global economic growth, sharper rupee weakness, and US trade restriction on China. Currently, forex reserves are sufficient to meet with the import payment of 8.6 months (peak was at 12 months in March 216). Falling forex reserves (currently at US$ 41bn vs. peak of US$ 426bn in April 218) will also limit the scale of RBI s intervention, going ahead. Basis July 218 REER, INR is almost fairly valued. Risk to our rupee estimates: While RBI has been intervening in managing currency volatility, any sharp decline in the rupee may lead to meaningful intervention by RBI, such as raising NRI bonds. US focus on preventing dollar strength as this will be adverse to their economy and exports; something that the President Trump is trying to address by way of trade restrictions. Sharp cool off in global trade wars. Sharp changes in oil prices Annual exports, imports and US$ INR 6 Exports (US$ Bn) Imports (US$ Bn) USD INR (rhs) 5 4 3 2 1 75. 7. 65. 6. 55. 5. 45. 4. Source: RBI, Bloomberg, PhillipCapital India Research Global GDP growth rate (%); expected to remain stable 6 5 4 3 2 1 1 Bloomberg commodity index 25 2 15 1 5 198 1982 1984 1986 1988 199 1992 1994 1996 1998 2 22 24 26 28 21 212 214 216 218 22 222 Source: IMF, Bloomberg Page 2 PHILLIPCAPITAL INDIA RESEARCH

USD country exchange rate (changes between Jan 218 till date); INR has weakened in line with other currencies against Dollar Newzeland ($) Australia ($) Euro Yen Denmark (korne) UK (pound) Euro USD Mexico (Peso) USD Yen UAE (Dirham) S. Arabia (Riyal) Iraq (Dinar) Kuwait (Dinar) Nigeria (Naira) Egypt (pound) Malaysia (ringgit) USD franc Vietnam (Dong) Singapore ($) Thailand (Baht) Sri Lanka (rupee) Canada ($) S. Korea (Won) China (yuan) Phillipine (peso) indonesia (rupiyah Franc INR Nepal (Rupee) USD INR Sweden (korna) Pakistan (rupee) S. Africa (rand) Russia (Ruble) Brazil (real) USD Lira 1% % 1% 2% 3% 4% 5% 6% Source: Bloomberg, PhillipCapital India Research India s CPI/WPI inflation rates Merging together 14 CPI, YoY WPI, YoY 12 1 8 6 4 2 2 4 6 8 Jan 12 Jun 12 Nov 12 Apr 13 Sep 13 Feb 14 Jul 14 Dec 14 May 15 Oct 15 Mar 16 Aug 16 Jan 17 Jun 17 Nov 17 Apr 18 Sep 18 Feb 19 Note: CSO, PIB, Bloomberg, PhillipCapital India Research Estimates Country 1 year bond yields Stable 1. Japan EU United States (RHS).8.6.4.2..2.4 Jan 16 Mar 16 May 16 Jul 16 Sep 16 Nov 16 Jan 17 Mar 17 May 17 Jul 17 Sep 17 Nov 17 Jan 18 Mar 18 May 18 Jul 18 3.5 3. 2.5 2. 1.5 1..5. Page 3 PHILLIPCAPITAL INDIA RESEARCH

NSE indices correlation with Rupee Mixed one We ran correlation between USD INR and Nifty for the period of 199 218, and USD INR with various nifty indices for the period of 24 218. While INR correlation with the Nifty index is not consistently conclusive (varies from negative to positive over a period of time), sector specific correlation exists (positive correlation with IT, Pharma, FMCG). That said, we remain watchful of the weak rupee s impact on the equity markets, as Nifty has rallied decently. Our December Nifty target is at 12. Period wise Rupee correlation with Nifty Index Correlation Rupee average Rupee Max Rupee Min 199 1995.76 28.7 35.7 17.3 1995 2.52 39. 46.9 31.4 2 25.76 46.1 49. 43.2 25 21.24 44.7 52. 39.3 21 215.73 54.9 68.8 44.1 215 218.13 65.6 69.9 61.4 199 218.82 45.8 69.9 17.3 Source: PhillipCapital India Research, Bloomberg Nifty, USD INR trends since 199 Nifty, USD INR trends since 2 Nifty5 USD/INR (RHS) 14 8 14 Nifty5 USD/INR (RHS) 12 7 12 1 6 1 8 5 8 75 7 65 6 6 4 6 55 4 3 4 5 2 2 2 45 1 4 Aug 9 Aug 92 Aug 94 Aug 96 Aug 98 Aug Aug 2 Aug 4 Aug 6 Aug 8 Aug 1 Aug 12 Aug 14 Aug 16 Source: Bloomberg, PhillipCapital India Research Page 4 PHILLIPCAPITAL INDIA RESEARCH

NSE sector indices correlation with USD INR For the period of 24 218, Positive INR correlation exists with Pharma, IT, and FMCG indices (affected positively with Rupee weakness); inverse correlation is seen with metals, banks, and infrastructure indices owing to higher cost of imports, rising domestic borrowing cost (as interest rates rise due to Rupee weakness) and re pricing of external debt. NSE sector rel perf correlation with USDINR rates Quarterly Earnings Growth rate (%).6.4.42.4.36 3% 25%.2.9 2% Ex SBI, ICICI (17%). 15%.2.5 1%.4.6.26.35.35.36.5 5% % 5% Source: PhillipCapital India Research, Bloomberg Bank Nifty index movement with currency and interest rate 3 25 2 15 1 5 NSE BANK USDINR (rhs) 8 7 6 5 4 3 2 1 3 25 2 15 1 5 NSE BANK 1YR BOND (rhs) 1 8 6 4 2 Jan 4 Jan 5 Jan 6 Jan 7 Jan 8 Jan 9 Jan 1 Jan 11 Jan 12 Jan 13 Jan 14 Jan 15 Jan 16 Jan 17 Jan 18 Jan 4 Jan 5 Jan 6 Jan 7 Jan 8 Jan 9 Jan 1 Jan 11 Jan 12 Jan 13 Jan 14 Jan 15 Jan 16 Jan 17 Jan 18 Source: PhillipCapital India Research, Bloomberg Page 5 PHILLIPCAPITAL INDIA RESEARCH

Pharma sector: Our analyst prefers Cadila and Aurobindo Pharma at the current valuations. 45 46% of the sales of these companies are from the US. With rupee depreciation, maximum EBITDA and PAT improvement is seen in these two stocks. With INR averaging at 7 for FY19, on an average, EBITDA/PAT will rise by 5%/7%. Pharma companies US sales as % of total sales % of sales in US FY8 FY9 FY1 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19E FY2E Aurobindo Pharma 9.7% 17.4% 25.5% 27.2% 25.6% 29.9% 42.% 39.9% 44.% 45.2% 45.1% 45.% 44.2% Cadila healthcare 11.1% 13.6% 18.2% 2.9% 23.6% 23.7% 29.9% 39.2% 41.8% 38.7% 48.9% 46.1% 45.4% Cipla 6.% 8.3% 6.6% 6.8% 8.5% 7.5% 7.4% 8.% 15.3% 18.% 17.% 17.2% 17.% Dr Reddy's Lab 15.7% 28.6% 23.9% 25.4% 33.% 32.6% 41.8% 43.7% 48.8% 45.2% 42.1% 4.6% 39.7% Glenmark 28.1% 34.7% 28.9% 28.3% 3.2% 33.7% 33.7% 3.7% 32.% 4.3% 35.2% 31.7% 31.% Lupin 24.9% 3.8% 34.1% 34.5% 34.2% 39.1% 43.3% 44.3% 41.7% 47.2% 37.3% 33.2% 32.6% Sun Pharma 42.1% 36.2% 27.% 39.3% 43.3% 54.5% 6.8% 5.1% 47.4% 43.6% 33.% 33.4% 33.7% Source: PhillipCapital India Research Currency (USD INR) sensitivity and its impact on EBITDA and PAT EBITDA PAT FY19 FY2 FY19 FY2 7 72 75 7 72 75 7 72 75 7 72 75 Aurobindo Pharma 6.9% 11.5% 18.4% 7.8% 12.9% 2.7% 8.5% 14.1% 22.6% 9.6% 15.9% 25.5% Cadila healthcare 6.6% 1.9% 17.5% 6.2% 1.4% 16.7% 7.9% 13.2% 21.2% 7.5% 12.4% 19.9% Cipla.7% 1.1% 1.8%.8% 1.3% 2.1% 1.% 1.6% 2.5% 1.1% 1.8% 2.9% Dr Reddy's Lab 5.8% 9.6% 15.3% 5.2% 8.7% 13.9% 8.8% 14.7% 23.4% 7.2% 12.% 19.2% Glenmark 4.3% 7.2% 11.6% 4.% 6.7% 1.7% 6.9% 11.6% 18.5% 5.9% 9.8% 15.6% Lupin 4.2% 7.% 11.2% 3.9% 6.5% 1.4% 7.1% 11.9% 19.% 6.% 1.% 16.1% Sun Pharma 4.8% 8.% 12.7% 4.6% 7.6% 12.2% 6.4% 1.6% 17.% 5.8% 9.6% 15.4% Total 4.8% 8.% 12.7% 4.7% 7.8% 12.5% 6.6% 11.% 17.6% 6.2% 1.4% 16.6% Source: PhillipCapital India Research IT sector details: 5 7% of the revenue exposure of Indian IT companies is in US Dollar. With INR averaging at 7 for FY19, on an average, EBIT/PAT will rise by 7%/5%. IT companies currency exposure as % of Revenue Currency exposure (% of revenue) TCS Infosys Wipro HCLT TechM Cyient USD 53.3% 67.% 58.% 62.% 49.4% 55.4% GBP 13.1% 4.9% 11.% 8.% 12.1% 1.1% Euro 1.2% 12.3% 9.% 21.% 11.7% 12.3% Others 23.4% 15.8% 22.% 9.% 26.8% 22.2% 1.% 1.% 1.% 1.% 1.% 1.% Source: PhillipCapital India Research Currency (USD INR) sensitivity and its impact on EBIT and PAT EBIT PAT FY19 FY2 FY19 FY2 7 72 75 7 72 75 7 72 75 7 72 75 TCS 6.7% 11.1% 17.8% 8.7% 14.5% 23.2% 3.3% 5.6% 8.9% 8.% 13.3% 21.3% Infosys 5.6% 9.3% 14.9% 7.5% 12.4% 19.9% 4.9% 8.1% 13.% 6.7% 11.2% 17.9% Wipro 6.5% 1.8% 17.3% 8.7% 14.4% 23.1% 5.6% 9.3% 14.9% 7.4% 12.4% 19.9% HCL 6.7% 11.2% 18.% 8.7% 14.4% 23.1% 6.3% 1.5% 16.8% 8.4% 13.9% 22.3% TECHM 11.9% 27.9% 39.8% 22.% 44.9% 59.6% 16.% 3.5% 46.5% 25.9% 38.4% 47.3% LTI 9.3% 15.4% 24.7% 12.4% 2.6% 33.% 7.5% 12.4% 19.9% 1.8% 18.1% 28.9% MindTree 15.% 23.1% 34.7% 17.5% 36.% 5.9% 19.4% 29.4% 37.1% 19.1% 3.5% 4.4% LTTS 1.2% 17.% 27.2% 13.3% 22.1% 35.4% 7.9% 13.2% 21.2% 12.4% 2.6% 32.9% Cyient 9.4% 15.7% 25.1% 12.1% 2.1% 32.2% 7.9% 13.1% 21.% 1.5% 17.6% 28.1% Total 6.9% 11.8% 18.6% 9.2% 15.8% 24.7% 5.3% 9.% 14.2% 8.7% 14.3% 22.2% Source: PhillipCapital India Research Page 6 PHILLIPCAPITAL INDIA RESEARCH

Positive correlation of FMCG index with INR is based on market share gain of listed entities as unorganised players get impacted from higher import cost. Our analyst believes that organised players are able to pass on the higher prices of crude derivatives while unorganised players find it hard to sustain. Additionally, we expect FMCG companies to benefit from higher MSPs leading to higher rural demand (we expect government to transfer the benefit to farmers through price deficiency mechanism). Company wise PE, EPS and our rating PE (x) EPS (Rs) Export Play Rating Mcap (Cr) 218 219 22 218 219 22 TCS IT BUY 77596 21.2 25.1 22.6 67 8 89 Infosys IT BUY 31247 15.9 19.6 17.8 71 73 8 Cyient IT BUY 8346 19.3 18.2 15.2 36 41 48 Cadila Pharma BUY 36573 21.6 19.4 17. 17 18 21 Aurobindo Pharma BUY 3843 13.5 15.2 13.4 41 43 49 Consumption play ITC FMCG BUY 383477 27.7 31. 27.3 9 1 11 GSK Consumer FMCG BUY 28142 36.6 34. 3.2 166 197 221 Dabur FMCG BUY 8577 42.7 5.2 42.9 8 9 11 Orient Electric Cons Durable BUY 3215 na 27.5 2.5 3 6 7 Bajaj Electricals Cons Durable BUY 5569 68.5 25.3 2.3 8 22 27 Source: Bloomberg, PhillipCapital India Research Page 7 PHILLIPCAPITAL INDIA RESEARCH

Rating Methodology We rate stock on absolute return basis. Our target price for the stocks has an investment horizon of one year. Rating Criteria Definition BUY >= +15 Target price is equal to or more than 15 of current market price NEUTRAL 15 > to < +15 Target price is less than +15 but more than 15 SELL <= 15 Target price is less than or equal to 15. Disclosures and Disclaimers PhillipCapital (India) Pvt. Ltd. has three independent equity research groups: Institutional Equities, Institutional Equity Derivatives, and Private Client Group. This report has been prepared by Institutional Equities Group. The views and opinions expressed in this document may, may not match, or may be contrary at times with the views, estimates, rating, and target price of the other equity research groups of PhillipCapital (India) Pvt. Ltd. This report is issued by PhillipCapital (India) Pvt. Ltd., which is regulated by the SEBI. PhillipCapital (India) Pvt. Ltd. is a subsidiary of Phillip (Mauritius) Pvt. 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