Market Twitter June 2017 – Narnolia Securities Limited

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MARKET twitter
June 2017
Investment Style -Key to Successful Equity
Investing

• How long should SIP be?
• Focus on stock with sustainable growth
• Company Updates
• Index Returns

Inaugurated by Mr. Ramesh Damani
Mutual Fund Write-up by Dhirendra Kumar
(CEO-Value Research)
Inaugurated by Mr. Ramesh Damani
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Content
INVESTMENT STYLE-KEY 03 TO SUCCESSFUL EQUITY INVESTING MUTUAL FUND WRITEUP 05 -BY DHIRENDRA KUMAR CEO-VALUE RESEARCH BANKS 09-12 COMPANY UPDATES 13-33 HDFC BANK KNRCON LT STATE BANK OF INDIA DAILY INVESTMENT TREND 34 NIFTY CONSTITUENTS 35 Quarterly / Yearly Performance INVESTMENT STYLE-KEY 03 TO SUCCESSFUL EQUITY INVESTING MUTUAL FUND WRITEUP 05 -BY DHIRENDRA KUMAR CEO-VALUE RESEARCH BANKS 09-12 COMPANY UPDATES 13-33 HDFC BANK KNRCON LT STATE BANK OF INDIA DAILY INVESTMENT TREND 34 NIFTY CONSTITUENTS 35 Quarterly / Yearly Performance 02 05
FORECASTING PRICES OF 36
NIFTY BANK NIFTY
ECONOMIC CALENDAR 37
IMPORTANT EVENTS
INDEX RETURNS 38 CORPORATE QUARTERLY 39 RESULTS - JUNE 2017 INDEX RETURNS 38 CORPORATE QUARTERLY 39 RESULTS - JUNE 2017 06
INVESTMENT STYLE-KEY TO SUCCESSFUL EQUITY
INVESTING Shailendra Kumar Chief Investment
Officer of Narnolia Securities Ltd.
HOW LONG SHOULD SIP BE? Dhirendra Kumar CEO -
Value Research
FOCUS ON STOCK WITH SUSTAINABLE GROWTH Pradeep
Gokhle Head - Equity Fund Manager Tata Mutual
Fund
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MARKET twitter June 17
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Investment Style-Key to Successful Equity
Investing
Market is hovering around 9700 levels. The Time
In- The -Market Strategy
that was discussed in the last edition is here
for a Test.
Market is never the same at all times. Flavor,
Likings and disliking of market change. We as
investors should chose a style of investing and
stick with it. It is difficult to outperform
market in the long run if we keep changing our
style of investment based on market cycles. We
may be following Time in the market philosophy
but Style drift is Timing inside Time-In the
market strategy.
Shailendra Kumar Chief Investment Officer of
Narnolia Securities Ltd. Market is hovering
around 9700 levels. The Time In- The -Market
Strategy that was discussed in the last edition
is here for a Test. Market is at the threshold
of another immediate high or will rest here for a
while is the question that is haunting most of
the investors. To be invested with the market at
these times requires a strong conviction over
the concept of Time- In The market.
There could be many kinds of investment style-
based on Dividend Yield, Size, Sector, Growth
Parameters, Value parameters, event driven, Micro
Caps or Hi caps etc. Idea is to pick a style
which matches your temperament and have
conviction on it.
In a research Paper- Staying the course.. by
Keith C. Brown, Professor at University of
Texas, it has been
Market is never the same at all times. Flavor,
Likings and disliking of market change. We as
investors should chose a style of investing and
stick with it. It is difficult to outperform
market in the long run if we keep changing our
style of investment based on market cycles. We
may be following Time in the market philosophy
but Style drift is Timing inside Time-In the
market strategy.
Before we develop the confidence to remain Time
In, I would repeat our findings that we discussed
earlier- that world over, across 23 countries
for 20 years, Equity Indices have earned a CAGR
higher than fixed income (except Brazil and
Italy, where also the underperformance has been
marginal). A good portfolio manager / Investment
advisor helps us get an alpha over the benchmark
returns and that may be compounded to handsome
returns for us as investors. And if you attempt
market timing the chances of making 20 -30
less return than simple buy and hold is very
high.
established that there is a high correlation
between Style consistency and Performance
Sustainability. The key takeaway from his
research are-

• a negative relationship exists between portfolio
  style consistency and portfolio turnover

• a positive relationship exists between a funds
  style consistency and the future actual and
  relative returns it produces, and

• a positive relationship exists between the
  consistency of a portfolios investment style and
  the persistence of its performance over time.

To follow the Time-In theory we need to have
confidence on the theory. What should give us the
confidence to remain invested at such perplexing
times? This will be when we have conviction over
our style of Investment.
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In fact, we also opine that Investor not being
aware of his or her specific style leads to
unintentional style drift that in turn leads to
inferior relative performance.
kept supporting and driving this market higher
for last 4 months is unprecedented. But thinking
this a new normal could prove very costly later
on though at least for now that possibility is
not there.
There are two types of Investment style which are
most common in terms of fundamental analysis-
Value and Growth. Most of the successful styles
are a combination or extremes of these styles.
Value style means buying companies with high
return ratios- like High Return on Equity, High
Return on Capital Employed or High Free cash
Flow. It basically depends on the stability and
growth of Balance sheet of a company. Growth
Style means betting on a company where growth in
Profitability is expected, like there is
improvement or positive change in the operating
drivers of the company, the revenues are
increasing or Profits / Margins are growing.
Last week RBI did not cut rates though
drastically reduced inflation target is
perplexing. Cutting risk weightage to housing
loan now as real estate prices have cooled off
(more time correction) is pragmatic. One of the
major global developments recently was Saudi
Arabia, Egypt, the United Arab Emirates and
Bahrain cutting their ties with Qatar. The
nations accused Qatar of meddling in their
internal affairs and backing terrorism. Question
is whether Qatar will decide to disrupt the
production cutback deal of OPEC and creates
another meltdown in commodity prices triggered
by crude is a major issue for the market going
forward. In another development, the European
Central Bank (ECB) kept interest rates unchanged
in its monetary policy meet and indicated that
the ECB similar to US FED is aiming to end its
ultra-easy monetary policy.
If we assume the Dow Jones Industrial Index since
1995, each of the above style has outperformed
the Index in a period. For eg, 1997-2000, it was
a growth period, 2000-2005 was a growth Era, 05-
07 was again growth Era , 2007-15 was period for
value investing, 15-17 was a blend era and again
post 2017 is a phase of Growth Style companies
outperforming indices.
We are currently trading at 20.1 times FY18 E
EPS. The growth for FY18 is expected at 14 for
FY18. Considering the favorable changes in the
economy and business environment and also
considering the overwhelming Mar 2017 quarterly
results, the growth for 2018E EPS may require
positive upgrades. Though having experience of
negative surprises in terms of earning growth
over last three years, street has yet not
materially changed Sensex EPS for FY18. Though,
smooth GST transition (if that happens so) and
possibility of further rate cut in the second
half of the calendar year may trigger upgrades
going forward.
The point is, every style outperforms for a
period and then does not do that good in other
period. But as various empirical researches
suggest changing style never helps in terms of
absolute or relative performance. So the key is
to pick a style and go with it.
Coming to the near term market structure the way
outstanding open interest of Nifty Put options
has
Happy Investing!
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MARKET twitter June 17
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How long should that SIP be? Have a chunk of
money to invest? You should SIP it, but for how
long a period? One elegant rule of thumb to
invest a lump sum is to do an SIP over half the
period that it has taken you to earn the lump
sum, subject to the maximum of four to five years
It's a question that vexes many mutual fund
investors once they buy into the concept of
investing through a Systematic Investment Plan
(SIP) when you have a lump sum to invest, then
over what period should you spread the SIP? Of
course, for most SIP investments, the question
does not arise. The most common type of SIP
investment is a monthly one that goes out of a
monthly income. However, occasionally, the SIP
investor gets a large sum of money at one go. It
could be a bonus from a workplace or it could be
the proceeds from the sale of some asset like
real estate or it could even be your retirement
kitty. As every saver should know, investing in
an equity-backed mutual fund is the best way to
get great returns over a long period like five
to seven years or more. However, over shorter
periods, equity funds are dangerous. And when
you invest a large sum in one shot, then the
risk is the highest. If the markets turn turtle,
you could lose 10, 20 or even higher percentage
of your invested amount very quickly. Since the
beginning of the Sensex in April 1979, of the
almost 13,900 possible six-month periods, as
many as 2,269 yielded a loss worse than 20 per
cent. If you just happened to catch a period
like that at the beginning, then you would lose
a large chunk of your capital right before it
even starts growing. In theory, you could
eventually recover, but in practice you would
probably panic and pull out your money, making
your loss permanent. The antidote to this is a
Systematic Investment Plan. Spread out your
investment at a monthly periodicity over a
certain period. Your entry price will be averaged
out and you will be saved from the risk of a
sudden decline. Moreover, you will end up buying
more units of the fund when the markets are
lower, which will further enhance the returns
you will eventually get. However, the vexing
question is what is this 'certain period' that I
have referred to? Last time, I wrote about the
research project on historic SIP returns that
Value Research has carried out and we
saw how SIP were truly safe for about four years
and above. In this study, we found that on an
average, if you invest in an SIP over four
years, then your risk of a loss is negligible.
It's also interesting that the risk of loss and
the chance of an outside gain are both higher
over short periods. Over longer periods, the good
times and the bad get averaged out and minima
and the maxima converge. Consider this, for a
typical fund with a multi-decade history, over
all possible one year periods, the maximum
returns are 160 and the minimum -57. Over two
years, this becomes 82 and -34. Over three, 63
and -18. Over five, 54 and 4, meaning never
any loss. Over ten years, the maximum is 30 and
the minimum 13. These are all annualised
figures. The trade-off is crystal clear the
shorter the period, the higher the potential gain
but the worse the possible risk. The
straightforward answer from this data appears to
be that SIPs must last more than three years. And
indeed, if you seek zero risk of loss, then that
is the correct answer. However, for many
investments, this is too long. If you are
getting an annual bonus from your employer, then
it would be ridiculous to spread it over three
or four years. On the other hand, if you have
sold some ancestral property and the sum
realised will be the core of your old-age
income, then you need to be extra cautious about
the risk you take. In a case like this, you
would do well to forego some potential income in
order to ensure that you don't make a loss. One
elegant rule of thumb is that you could invest
the money over half the period that it has taken
you to earn it, subject to the maximum of four
to five years. So the annual bonus could be
invested in six months, while the ancestral
property could take five years. It's basically a
way of linking risk to how significant that sum
of money is for you.
Dhirendra Kumar CEO, Value Research Powered by
Value Research
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Focus on stocks with sustainable
growth Pradeep Gokhale of Tata Mutual Fund is in
charge of the large-cap fund and an
ethical-investing fund. He shares his views on
large-cap valuations, four major trends in play
and why he has low exposure to the metals space.
Pradeep Gokhale Head - Equity Fund Manager
medium-term view in terms of their competitive
position, expected EPS growth, sustainability of
growth, management track record and valuations.
We make changes if our investment thesis is not
playing out or if the stock is fully priced or
if there are better alternatives available.
What is the reason behind metals as a sector not
finding good space in your portfolio? The main
value driver for metals is international
commodity prices, which we find difficult to
understand and forecast. Also, many metal
companies have high debt levels. We have
invested in some metal companies which are very
low-cost producers and have a strong balance
sheet.
Are large-cap valuations expensive in historical
terms? Large-cap indices Sensex and Nifty
are trading at about 18.5x FY18 and 16x FY19 EPS
estimates. These valuation multiples are above
the long-term averages but by no means are very
expensive or near peak. In fact, in a relative
sense, today, large-cap valuations are lower
than mid-cap valuations on a P/E basis.
Across the large-cap space, which sectors
exhibit your higher quality set of businesses
character? Generally, we find higher
quality businesses in sectors such as
automobiles and auto ancillaries, banking and
financial services, consumer staples and
durables, IT, pharma and utilities.
Tata Ethical Fund is a multi-cap fund, but its
returns havent been greater than, for example,
the large-cap fund you manage over the
long-term. Tata Ethical Fund is a thematic
fund, which essentially invests in high- quality
growth companies with low debt levels. They have
good return on capital employed and high cash-
generation ability. Over a complete business
cycle, such a portfolio gives superior returns.
Being a thematic fund with sectoral investment
restrictions, you cannot strictly compare it
with diversified funds.
Do more investment opportunities come up with
your growth-at reasonable-price (GARP) strategy
vis- a-vis one or two years ago? Relative to the
last year, when Sensex was near 24,000 levels,
there are fewer opportunities. However during
the last 12 months, the rally was led by value
stocks rather than growth stocks leaving
opportunities to apply the GARP strategy. We are
focusing on stocks with more sustainable growth,
as market valuations have moved up.
Does your fund seek to maintain its sectoral
weightage within a tight range of the sectoral
allocation of its benchmark index? We follow an
active fund-management strategy and do take
significant positions away from the benchmark,
both in terms of stocks and sectors.

• Can you share any new trends prevailing in the
  market that you may be considering to take
  advantage of? We see four broad trends playing
  out in the economy.
• Higher share of capital investments
• by the public sector/PSUs as compared to the
  private sector.
• Formalisation of the economy due
• to measures such as GST and restrictions on cash
  transactions in business. This can benefit the
  businesses where currently the share of the
  unorganised sector is high.
• Financial inclusion a higher share
• of savings flowing to the financial sector as
  compared to real estate/ gold.
• Higher growth in household debt.
• Indian households are underleveraged even when
  compared to many emerging economies and with
  rising aspirations, the scope for retail loan
  growth is high.

Since banking and finance companies are not part
of an ethical fund, doesnt it begin with a
handicap in the first place? The ethical fund
invests in several high-growth sectors such as
auto and auto ancillaries, cement, capital
goods, discretionary consumption, oil and gas,
which are a play on economic recovery and
growth. The volatility in such sectors is also
much lower than that in the banking sector.
Over a 10-year period, your large-cap fund has
returned nearly 12 per cent annually. Do you
think returns of this kind can be expected by
investors who are keen to enter markets now,
when Sensex has crossed 30,000? India is an
economy with high growth potential. It is coming
out of a prolonged period of weak growth. Many
internal factors which impacted growth such as
high inflation, high fiscal and current-account
deficits have been properly addressed and have
shown good improvement. We are seeing some signs
of improvement in global growth as well, as
witnessed in trade and export data. We,
therefore, feel that investors with a long-term
horizon can make good returns from equities even
though the market is trading at new highs.
Your large-cap fund has among the lowest
portfolio turnovers (32 per cent). Are you a
buy-and-hold kind of fund manager? We generally
look at companies with a
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MARKET twitter June 17
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Alls not lost In spite of recent setbacks,
short-term debt funds remain a good parking
place for your one-year-plus money Analysts
Choice
Taking stock today, short-term income funds may
not appear to be the most attractive category of
debt funds to invest in. Falling interest rates
for the last three years have resulted in much
higher interest rates from medium/long- term
gilt funds, income funds, credit-opportunities
funds and other categories. Also, a few funds
in this conservative category have taken
exposure to lower-rated corporate debt and have
suffered mark downs due to defaults and
downgrades.
these funds for their very conservative
portfolios and low credit risk, their tight rein
on portfolio duration and their ability to
deliver good returns with relatively low expense
ratios. We have also run the Altman-Z check on
these funds. It helps determine the risk of
bankruptcy (and hence default) in a company.
AXIS SHORT TERM FUND
9.56
Avg Risk grade
Rating 3-yr ret ()
BIRLA SUN LIFE SHORT TERM FUND
9.51
Avg
Rating 3-yr ret () Risk grade
HDFC SHORT TERM OPPORTUNITIES FUND
-Avg Risk grade
9.09
Aggregate data show that short- term income
funds managed one- and three-year returns of 8.7
and 8.65 per cent on an average as on May 31,
2017. This was for the regular plans. Direct
plans, with their expense ratios 4060 basis
points lower, managed over 9.2 per cent. The
total assets managed by the funds were at 1.87
lakh crore and the funds maintained an average
maturity of 2.38 years.
Rating 3-yr ret ()
ICICI PRU ULTRA SHORT TERM PLAN
9.35 Rating 3-yr ret ()
Avg Risk grade
But despite all this, short-term income funds
are a good parking ground for your one-year-plus
money, especially if you dont like big
year-to-year swings in your debt returns.
SBI SHORT TERM DEBT FUND
9.35 Rating 3-yr ret ()
Avg Risk grade
UTI SHORT TERM INCOME FUND
9.67 Rating 3-yr ret ()
Avg Risk grade
In this months issue, we present short-term
income funds selected not for their
chart-topping returns but for their ability to
finely balance risks with returns. We shortlisted
Short-term category vs CCIL T-Bill Liquidity
Weight
22,000 19,000 16,000 13,000 10,000 7,000
Year Category () CCIL T-Bill Liq Wt
() Expense ratio ()
2008 2009 2010 D ebt Short Te 2011 Short Te 2011 rm C 201 C 201 C 2 IL T Bi ll Liq 2013 ui dity Weig 2014 ht 2015 2 016 2017 2017
10.53 6.02 5.06 9.11 9. 7 4 8.02 10.37 8.16 9.87 9.87 2.80 2.80
6.06 2.61 2.78 4.80 5.60 5.60 5.60 5.50 5.71 5.38 4.73 1.5 7
0.68 1.01 0.86 0.81 0 .9 2 0.86 0.80 0.73 0.73 0.73 0.6 7
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Risk return
Annual returns ()
Credit Dynamic Short Ultra Credit Dynamic Short Ultra Credit Dynamic Short Ultra Credit Dynamic Short Ultra Credit Dynamic Short Ultra Credit Dynamic Short Ultra Credit Dynamic Short Ultra
Year Opp. Bond Income Liquid Term Short Term
2007 7.40 3.84 7.01 7.40 8.15 7.63
2008 7.80 10.13 14.20 8.29 10.53 8.71
2009 6.27 1.25 0.89 4.73 6.02 5.36
2010 4.98 3.40 4.61 5.17 5.06 5.27
2011 8.77 8.73 7.98 8.56 9.11 8.76
2012 9.81 10.41 10.09 9.30 9.74 9.48
2013 7.55 5.52 5.20 9.06 8.02 8.62
2014 11.63 14.02 12.89 8.96 10.37 9.24
5

Dyna mic Bond 10.11
Short Term Income 9.75
Ult Liquid ra Short T 8.27 8. erm 5 C redit
7.84 Oppo 1 rtunities 0.07
4
3
Risk
2
9
1
2015 9.59 6.84 7.04 8.21 8.16 8.48
0 2016 10.50 13.41 11.84 7.51 9.87 8.56
7.5 8.0 8.5 9.0 3-yr return () 9.5 10.0 10.5 2017 3.58 1.43 2.24 2.55 2.80 2.55 As on May 31, 2017
Credit-rating break-up ()
0.60
0.41
0.06
0.08
4.80 8.61
16.32
AAA/A1
11.65
AA below
SOV
56.10
Cash equivalent
61.28
17.98
22.12
Term deposits
Unrated/others
Value Research Analyst Picks
Returns () Average Rating Regular Direct Expense Ratio () AUM Maturity Scheme Name Regular Direct 1 year 3 year 1 year 3 year Regular Direct ( Cr) (yrs) Returns () Average Rating Regular Direct Expense Ratio () AUM Maturity Scheme Name Regular Direct 1 year 3 year 1 year 3 year Regular Direct ( Cr) (yrs) Returns () Average Rating Regular Direct Expense Ratio () AUM Maturity Scheme Name Regular Direct 1 year 3 year 1 year 3 year Regular Direct ( Cr) (yrs) Returns () Average Rating Regular Direct Expense Ratio () AUM Maturity Scheme Name Regular Direct 1 year 3 year 1 year 3 year Regular Direct ( Cr) (yrs) Returns () Average Rating Regular Direct Expense Ratio () AUM Maturity Scheme Name Regular Direct 1 year 3 year 1 year 3 year Regular Direct ( Cr) (yrs) Returns () Average Rating Regular Direct Expense Ratio () AUM Maturity Scheme Name Regular Direct 1 year 3 year 1 year 3 year Regular Direct ( Cr) (yrs) Returns () Average Rating Regular Direct Expense Ratio () AUM Maturity Scheme Name Regular Direct 1 year 3 year 1 year 3 year Regular Direct ( Cr) (yrs) Returns () Average Rating Regular Direct Expense Ratio () AUM Maturity Scheme Name Regular Direct 1 year 3 year 1 year 3 year Regular Direct ( Cr) (yrs) Returns () Average Rating Regular Direct Expense Ratio () AUM Maturity Scheme Name Regular Direct 1 year 3 year 1 year 3 year Regular Direct ( Cr) (yrs)
Axis Short Term Fund 8.56 8.70 9.31 9.56 0.85 0.25 6,441 2.10
Birla Sun Life Short Term Fund 9.20 9.40 9.31 9.51 0.29 0.19 17,773 2.62
HDFC Short Term Opp. Fund 8.54 8.90 8.70 9.09 0.36 0.21 9,788 1.54
ICICI Pru Ultra Short Term Plan 8.80 8.91 9.19 9.35 0.58 0.26 8,672 2.88
SBI Short Term Debt Fund 8.77 8.84 9.41 9.35 0.91 0.31 8,898 2.48
UTI Short Term Income Fund 9.61 9.13 10.12 9.67 0.84 0.37 9,803 1.90
Returns as on May 31, 2017 Portfolio related
data as on April 30, 2017
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MARKET twitter June 17
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BANKS India at its decades of lowest credit
growth, as per data by RBI. How long this
weakness in credit appetite is going to last?
India at its decades of lowest credit growth, as
per data by RBI. How long this weakness in
credit appetite is going to last? Non-performing
assets has increased by 5 times in just 5 years.
Are stressed assets at peak level or how much
more are still left to be recognized? Transferrin
g power from bankers to RBI- Will lead to fast
resolution of stress assets. Will this hurt banks
autonomy in lending and borrowing? Credit Growth
at its decades of low ! SFortnightly data by RBI
on advances for Indian Banking shows the credit
growth at low of 5.1 in FY17. Why the credit
growth was in its low of decade? Does it mean
that there is lack of credit appetite in Indian
Economy and growth may decline further?
BANKS RATING TARGET YESBANK BUY 1936
Capital raised creates attractive valuation.
Recent weakness -an opportunity
HDFCBANK BUY 1725 Despite consistent
healthy profitability and growth track record,
best is yet to come.
INDUSINDBK
NEUTRAL
1480
With strong fundamentals and higher valuation,
any dips in price will give an opportunity.
AXISBANK
BUY
560
Near-term pressure on profitability but strong
retail liability franchise give us confidence
for mid-long term.
DCBBANK
BUY
205
Answer to this question lies in some fact which
can compel us to think seriously about it. Data
by RBI had not incorporated the reasons for
lowest credit growth this year. Loans which were
given to SEBs have been converted into bonds
under UDAY scheme to the tune of Rs 1.7 lakh
crore. This alone had impacted the loan book by
more than 2. Apart from this there was repayment
of loans linked to FCNR deposits which got
redeemed during December quarter which has
impacted the book to decline by around 75
bps. Demonetization has also certainly impacted
the credit growth during second half of
FY17. Grappling with huge stressed assets in
balance sheet, majority of public sector lenders
and some corporate private lenders have applied
conservative approached towards corporate
lending. Due to this some of corporate borrowers
has resorted to alternative channel of banking
i,e bonds which is growing with a healthy rate
of 15. Adjusting for some of facts our
calculation state the credit growth will be more
than 9 for FY17.
Fastest growing bank in small market cap.
Aggressive expan- sion will lead to better RoA
in mid to long term.
VIJAYABANK NEUTRAL 98 Lowest stress assets
among peers with improving recovery and
slippages but higher on valuation.
INDIANB NEUTRAL 360 Healthy capitalization
with focus on retail banking. Low on stress
assets but high on valuation.
SBIN
BUY
340
Relatively good quality of book among large
players. Merger with associates will give strong
liability franchise and better network coverage.
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Nevertheless if we ignore these facts and go by
RBI data, then the main question which comes to
our mind is that- has the credit growth bottomed
out for system? Recently we interacted with
management of various banks under large, mid and
small market capital during latest result via
concall and interviews. Their views on credit
growth in respective of their banks and industry
were in fact signals for strong growth going
forward. Management of HDFC Bank, the largest
private lenders, indicated that the best is yet
to come in terms of loan growth despite growing
more than 19 in FY17. Yes bank and Indusind
bank is target growth of 25 each in FY18.Public
Sector- Indian Bank and Vijaya bank recently
declared its March result are also targeting for
double digit growth in FY18. Secondly there was
huge capital raised by some of the private banks
and some has pipeline for it to strengthen their
core capital ratio to support the loan growth.
HDFC Bank despite strong capitalization position
plans to raise Rs 50000 Cr of perpetual debt
instrument to provide further strength to its
Tier I ratio. Raising fund at this point of time
shows that management is confident of strong
loan growth going forward. However most of public
banks are struggling with huge stress assets in
their balance sheet due to which they will be
unable to use their full capacity, hence we are
of the opinion that the credit growth in FY18
will be supported by private banks and to some
extent few public banks.
But which are the sectors or area that will drive
the credit growth? Going by the recent
interviews, results and Government initiatives
we analyze that credit growth will be supported
by both Capex and working capital loan demand.
Under capital expenditure we analyze credit
demand to be supported by areas like roads,
cement, railways, renewable energy, housing,
commercial vehicles, consumer durables, and
rural demand. Commodity prices has also picked
up which will boost the working capital demand.
Despite low credit growth in system, listed
private banks has grown by 12.3 YoY in December
quarter which shows thecontinuationof
gainingmarketsharefrompublicbanks, while credit
growth of public banks has declined by 2.2 for
the same period. As on December 2016 private
banks has gained the market share by 3 in a
year to 28. With the weak capitalization and
mounted NPA issue in public banks, we analyze
muted credit growth for most of the public
banks. Whereas relatively strong capitalization
and less stressed assets, most of the private
sector banks are at sweet spot to cash the
opportunity for healthy loan growth.
Date 25-Mar-11 30-Mar-12 31-May-13 28-Mar-14 3-Apr-15 1-Apr-16 31-Mar-17
Food Credit 64,282 79,788 118,042 97,552 69,227 101,205 53,927
Non Food Credit 3,877,801 4,627,145 5,250,736 6,041,493 6,733,294 7,399,292 7,827,601
Bank Credit 3,942,083 4,706,933 5,368,778 6,139,045 6,802,521 7,500,497 7,881,528
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MARKET twitter June 17
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Are the Non-performing assets at peak
level? Gross Non-performing assets of listed
commercial banks has mounted to the level of Rs
7.14 Lakh Cr in December quarter FY17 from Rs 4,
Cr a year back as per our estimates, whereas Net
non-performing assets has increased to 3.95 Lakh
Cr from Rs 2.55 Lakh Cr during the same period.
Net NPA ratio increased to 5.5 against 3.6 a
year ago. Now the question arises are
non-performing assets at peak level? If not then
much more stress assets is still to be
recognized? To answer this, first we will have
to know the genesis of such mounted stress assets
in Indian Economy. Our analysis shows that the
bulky of stress assets were generated mainly from
Iron steel, cement, power and mining. NPA
gener- ated from these sectors were structural
and operational in nature while some more NPAs
were recognized due to willful default in few
accounts. Our analysis shows that banks have
recognized most of the bulky stress assets during
last 5 quarters as directed by RBI in its AQR
list. While assets quality issues continued to
persist in FY17 but the pace for incremental
slippages has slowed down significantly for
majority of banks. Gross slippages during 3Q FY17
were Rs 69,800 Cr against Rs 1,84,900 Cr in 4Q
FY16. Gross slippage ratio has moderated to 96
bps in 3Q FY17 against high of 2.59 in 4Q FY16.
In the latest result of Indian Bank, its
management has indicated the GNPA ratio target of
below 5 in FY18 against current 7.5.Most of
the results by private sector banks has indicated
towards normal level of NPA going forward.
However lately RBI found divergence in
recognition of stress assets among banks from the
list provided under AQR which may impact
slippages to rise in some of banks in coming 1 or
2 quarters. However on the back of our analysis
we found that most of the bulky stress assets
have been recognized in the system and slippages
in FY18 would be significantly lower than that of
FY17.
GNPA FY 11 FY 12 FY 13 FY 14 FY 15 FY 16 3Q FY17
Private Banks 17,905 18,210 20,382 24,184 33,690 55,853 84,409
gtgt GNPA 2.5 2.1 1.8 1.8 2.1 2.8 4.1
Public Banks 71,047 112,489 164,462 227,264 278,468 539,956 629,871
gtgt GNPA 2.3 3.2 3.6 4.4 5.0 9.3 11.5
Total GNPA 88,952 130,699 184,843 251,447 312,158 595,809 714,280
gtgt GNPA 2.3 3.0 3.2 3.8 4.3 7.6 9.2
Source RBI reported excluding foreign banks (3Q
FY17 data -Narnolia research)
11
12
Is latest ordinance to empower RBI is the key for
fast resolution? Going forward profit after tax
of most of PSU banks and large corporate private
lenders depends on fast resolution of stress
assets otherwise it will be most hit by
provisions due to ageing related NPA till FY18.
Now fast resolution of stress assets is the key
for most of banks. To speed up resolution process
Government and RBI have introduced a series of
reforms in banking sector like JLF, SDR and S4A
but the result were not as per the expectations
as banks were unable to find the buyers for the
ownership. Apart from these reforms Government
passed Insolvency and Bankruptcy code 2016.
for clearance and we analyze that if resolution
is delayed than ageing related NPA will badly
hit the PAT in FY18 for big corporate lenders.
Also one basic problem for PSU bank will even
persist in terms of low capitalization and any
delay or huge haircuts under resolution process
will again impact the capitalization.
We maintain our positive stance on private banks
as they will continue to acquire market share
from public banks thus loan growth will remain
healthy going forward. This value migration from
PSU to Private has more legs to go. Continuation
of investment in digitization has resulted in
controlled and declining operating expenses hence
cost to income ratio is improving. Private Banks
have comparatively much less stress assets
against public banks. Healthy capitalization
ratio also helps to increase the business going
forward. However for many banks valuation has
run ahead of their fundamentals. But decline in
prices will give an opportunity. Our top picks
are HDFC Bank, Federal Bank, Yes Bank and Axis
Bank. Apart from this under public sector banks
Indian bank and Vijaya bank were our top picks
based on retail business focus, adequate
capital, relatively low stress assets and higher
recovery than slippages. This tactical stance of
ours helped us ride the PSU banking rallies over
last nine months. First we recommended Indian
Bank at Rs 100 and got neutral near Rs 330 and
recommended Vijaya Bank at Rs 48 and now we have
changed our rating to neutral for Vijaya Bank at
Rs 98. Both Indian Bank and Vijaya Bank are
trading at P/B of 1.0 and do not leave much on
table in context of current fundamental. At this
point, we recommend Buy only on SBI among PSU
Banks as it has relatively better quality of
book and capital ratio than its peers. Merger
will be key monitorable for the bank.
Government has also taken certain steps within
steel sector to improve its efficiency like
intervention in terms of minimum import price
and anti-dumping duty on imports, National steel
policy that favors Indian Steelmak- ers. We
think this type of initiative will be more
favorable for economy and needs more sector
specific decision to combat stress assets.
However in the latest development, Government has
passed an ordinance which will empower RBI to
issue borrower specific direction to banks for
tackling NPA problem. Now RBI can issue
instructions to banks to initi- ate the
resolution under the Insolvency and Bankruptcy
Code 2016. We see this ordinance as welcome step
to fasten the resolutions of stress assets as
earlier to this, slow decision-making process
under PSU banks were hindering the resolution of
large stress assets. But the basic question
remains the same that how this new ordi- nance
will help to get banks money back from stressed
corporate borrower? How and when oversight
commit- tee will be formed by RBI? Is there
chance of conflict of interest between RBI and
management of bank? How much the haircuts would
be taken? Answer to these questions is uncertain
as of now and will take much time
12
MARKET twitter June 17
13
HDFC BANK HDFCBANK remains one of the best in the
industry with stable perfor- mance and healthy
growth of over 20 CAGR over a long period of
time.

• Key Highlights of the report
• HDFCBANK remains one of the best in the industry
  with stable performance and healthy growth of
  over 20 CAGR over a long period of time.
• Strategically growing the business as per the
  growth of economy and diversification of
  portfolio has paid with the finest return ratios
  in the industry.
• Healthy CRAR of 14.6, Tier I of 12.8 and CASA
  at 48 level augurs well for strong growth
  opportunity and gaining the market share from
  its peers.
• HDFCBANK has one of the best assets quality in
  the banking industry with the GNPA ratio of just
  1.05 and PCR at 69.
• Healthy NII growth coupled with strong other
  income led the profitability to grow by 18 4Q
  FY17.
• HDFCBANK is currently trading at 3.5x P/B FY19
  and we value it (3.9x P/B, EPS growth 20 FY19)
  at Rs 1758 and recommend BUY.
• At FY19 B/V, HDFCBANK is trading below its
  historical trend

Company Data Company Data
CMP CMP 1699 1699
Target Price Target Price 1758 1758
Previous Target Price Previous Target Price
Upside Upside 3 3
Change from Previous Change from Previous
52wk Range H/L 52wk Range H/L 1582/1134 1582/1134
Mkt Capital (Rs Cr) Mkt Capital (Rs Cr) 402344 402344
Av. Volume (,000) Av. Volume (,000) 80 80
Share Holding Pattern Share Holding Pattern
4QFY17 3QFY17 2QFY17
Promoters 26.0 26.1 26.2
DII 12.9 15.0 14.3
FII 42.1 39.2 39.4
Others 18.9 19.7 20.1
Financials/Valuation FY15 FY16 FY17 FY18E FY19E
NII 22,396 7,592 33,139 39,009 45,302
PPP 17,404 21,364 25,732 30,313 35,887
PAT 10,216 12,296 14,550 17,281 20,809
NIM 4.5 4.5 4.4 4.4 4.3
EPS (Rs) 40.8 48.6 56.8 67.4 81.2
EPS growth () 15.3 19.3 16.7 18.8 20.4
ROE () 19.4 18.3 17.9 18.3 19.3
ROA () 2.0 2.0 1.9 2.0 2.0
BV 245 285 347 386 451
P/B (X) 4.2 3.8 4.2 4.1 3.5
P/E (x) 25.1 22.0 25.4 23.3 19.4
Stock Performance
Recent Development Key Highlights of Result
Update
1Mn 1Yr YTD
Absolute 2.1 37.6 31.0
Rel.to Nifty 1.3 16.4 16.3

• HDFCBANK reported strong growth of 27 in its
  operating profit backed by cost control and
  healthy growth in NII and other income. However
  increased provisioning resulted in 18 PAT growth
  YoY.
• Staff count reduce by 6k in 4Q FY17 and by 10K in
  latter half part of FY17.
• Advances grew with the robust rate of 19.4 YoY
  and 12 QoQ despite one time hit in previous
  quarter due to loan repayment linked to FCNR
  deposits. Domestic loan was even stronger with
  23.3 YoY. Domestic corporate loan book saw some
  traction with gain in market share from other
  banks.
• Tier I capital of bank declined to 12.8 against
  13.2 on FY16 due to increase in risk weighted
  assets.
• Slippages ratio was 1.5 in which around Rs 250
  Cr was related to RBI dispensation. Provision
  coverage ratio was 69 against 70 QoQ.

13
14
Quarterly Performance
Financials 4QFY16 1QFY17 2QFY17 3QFY17 4QFY17 YoY QoQ FY16 FY17 YoY
Interest Inc. 15,997 16,516 17,070 17,606 18,114 13.2 2.9 60,221 69,306 15.1
Interest Exp. 8,543 8,735 9,076 9,297 9,059 6.0 -2.6 32,630 36,167 10.8
NII 7,453 7,781 7,994 8,309 9,055 21.5 9.0 27,592 33,139 20.1
Other Income 2,866 2,807 2,901 3,143 3,446 20.3 9.7 10,752 12,296 14.4
Total Income 10,319 10,588 10,895 11,452 12,501 21.1 9.2 38,343 45,436 18.5
Ope Exp. 4,584 4,769 4,870 4,843 5,222 13.9 7.8 16,980 19,703 16.0
PPP 5,735 5,819 6,025 6,609 7,279 26.9 10.1 21,364 25,732 20.4
Provisions 662 867 749 716 1,262 90.5 76.3 2,726 3,593 31.8
PBT 5,072 4,952 5,276 5,893 6,018 18.6 2.1 18,638 22,139 18.8
Tax 1,698 1,714 1,820 2,028 2,028 19.4 0.0 6,342 7,589 19.7
Net Profit 3,374 3,239 3,455 3,865 3,990 18.3 3.2 12,296 14,550 18.3

• Operating profit remained healthy despite
  tumultuous last quarter
• HDFCBANK reported strong growth of 27 in its
  operating profit backed by cost control and
  healthy growth in NII and other income. However
  increased provisioning resulted in 18 PAT growth
  YoY.
• NII grew by 21.5 YoY due to strong loan growth
  and NIM expansion of 20 bps QoQ to 4.3. NIM
  expansion was mainly benefitted from spike in
  CASA ratio during demonetization period.
• Other income grew by 20.3 of which fee income
  registered growth of 17 YoY, whereas profit on
  sale of investment saw 56 of growth YoY.
  Recovery from written-off accounts was strong
  this quarter with 31 YoY growth.
• Cost to income ratio declined to 41.8 against
  44.4 a year back. Employee cost increased by
  just 3 YoY whereas it declined by 8 QoQ on the
  back of reduction in staff count by 6k in 4Q
  FY17. As a whole in the latter half of the year
  it reduced around 10k employee. However
  management continuous to invest in digital
  strategy to improve productivity. Overall
  operating expenses grew by only 14 YoY.
• Provision increased by 90 YoY due to increase in
  standard assets provisioning and on account of
  NPA that received RBI dispensation in 3Q FY17.

Profitability Metrix 4QFY16 1QFY17 2QFY17 3QFY17 4QFY17 YoY(/-) QoQ(/-) FY16 FY17 YoY
C/I Ratio 44.4 45.0 44.7 42.3 41.8 -2.65 -0.52 46.4 45.6 -0.83
Empl. Cost/ Tot. Exp. 32.7 33.2 34.0 34.9 29.7 -2.94 -5.14 33.6 32.9 -0.68
Other Exp/Tot. Exp. 67.3 66.8 66.0 65.1 70.3 2.94 5.14 66.4 67.1 0.68
Provision/PPP 11.6 14.9 12.4 10.8 17.3 5.78 6.50 12.8 14.0 1.21
Provision/Avg. Advances 0.6 0.7 0.6 0.6 1.0 0.37 0.38 0.7 0.7 0.05
Tax Rate 33.5 34.6 34.5 34.4 33.7 0.21 -0.72 34.0 34.3 0.25
Int Exp./Int Inc. () 53.4 52.9 53.2 52.8 50.0 -3.40 -2.79 54.2 52.2 -2.00
Other Inc./Net Inc. 27.8 26.5 26.6 27.4 27.6 -0.21 0.12 28.0 27.1 -0.98
PAT/ Net Income 32.7 30.6 31.7 33.8 31.9 -0.78 -1.84 32.1 32.0 -0.05
PAT Growth 20.2 20.2 20.4 15.1 18.3 -1.96 3.10 20.4 18.3 -2.04
NII Growth (YoY) 24.0 21.8 19.6 17.6 21.5 -2.46 3.94 23.2 20.1 -3.09
Operating Profit Growth YoY 21.5 20.0 19.5 15.2 26.9 5.48 11.70 22.7 20.4 -2.30
RoE 18.7 17.4 17.6 18.7 18.3 -0.36 -0.38 18.3 17.9 -0.31
RoA 1.9 1.7 1.8 1.9 1.9 0.01 -0.03 2.0 1.9 -0.04
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MARKET twitter June 17
15

• NIM expanded, benefitting from declining cost
• NIM improved from 4.1 a quarter back to 4.3
  benefitted from increased CASA level. NIM
  remained at the higher range of guidance given
  by management.
• Intensive competition in retail lending has
  resulted in NIM pressure but strategically mix of
  loan portfolio and improved CASA has helped
  HDFCBANK to maintain its margin.
• Going forward we margin to sustain at current
  level due to improvement in CASA level despite
  reduction in yields due to MCLR.
• Margin Performance

Margin 4QFY16 1QFY17 2QFY17 3QFY17 4QFY17 YoY(/-) QoQ(/-) FY16 FY17 YoY
Yield (Total Assets) 10.0 9.8 9.7 9.7 9.7 -0.38 -0.01 9.7 9.2 -0.47
Cost Of Funds 5.4 5.6 5.6 5.3 4.9 -0.55 -0.45 5.6 5.2 -0.44
NIM 4.3 4.4 4.2 4.1 4.3 0.00 0.20 4.5 4.4 -0.03

• Other Income growth remained healthy
• Other income grew by 20 YoY given the pickup in
  fee income. Core fee income grew by 16.1 YoY,
  Forex and derivatives segment grew by 26.1
• Due to increase in G-Sec bond yield of around 18
  bps during the quarter trading gain declined by
  more than 50 QoQ as per the expectation.

Other Income Break Up 4QFY16 1QFY17 2QFY17 3QFY17 4QFY17 YoY(/-) QoQ(/-) FY16 FY17 YoY(/-)
Fees Commissions 2,172 1,978 2,104 2,207 2,523 16.1 14.3 7,759 8,812 13.6
FX Derivatives 283 315 295 297 357 26.1 20.0 1,228 1,263 2.9
Profit / (loss) on Investments 116 277 284 399 180 56.2 -54.7 732 1,139 55.7
Miscellaneous Income Includ- ing Recoveries 295 237 219 240 386 30.8 60.9 1,033 1,082 4.7
Other Income 2,866 2,807 2,901 3,143 3,446 20.3 9.7 10,752 12,297 14.4
15
16

• Healthy Balance sheet growth
• Advances grew with the robust rate of 19.4 YoY
  and 12 QoQ despite one time hit in previous
  quarter due to loan repayment linked to FCNR
  deposits. Domestic loan was even stronger with
  23.3 YoY.
• Advances growth was backed by healthy growth in
  retail assets which grew by 27 YoY as per
  regulatory classification. However HDFCBANK also
  saw pick up in its domestic corporate lending by
  20 YoY due to gain in market share from other
  banks.
• Strong retail assets growth was spread over the
  book with 35 in personal loan, 43 in business
  banking, 27 credit cards, 20 home loan, 24
  auto loan and 31 CV/CE segment.
• Vehicle segment growth (auto, cv/ce, 2wheeler)
  picked upto 25 growth this year. Whereas,
  unsecured loan contributed 32 growth in overall
  book. Share of unsecured loan is at 13.7 against
  12.4 a year back.
• As per the regulatory classification, domestic
  retail loan book constitute 53 and wholesale
  segment is 47 against 51 and 49 a year back.
• It is notable that the deposits were impacted in
  3Q FY17 due to FCNR redemption however HDFCBANK
  saw tremendous growth in deposits of 14 QoQ and
  18 YoY.
• CASA registered healthy growth of 31 YoY backed
  by strong growth in both SA and CA of 31
  eventually. This increase in CASA was mainly
  attributed to demonetization exercise. CASA ratio
  now stands at 48 from 45 in 3Q FY17.
• Stable Assets Quality
• Assets quality remains intact for HDFCBANK this
  quarter. GNPA was flat on sequential basis with
  1.05 and NNPA was 0.33 against 0.32.
• Slippages ratio was 1.5 in which around Rs 250
  Cr was related to RBI dispensation. Provision
  coverage ratio was 69 against 70 QoQ.
• Assets quality of HDFCBANK remains one of the
  best in the industry. Going forward we are less
  concerned about the assets quality given its
  portfolio mix towards secured retail loans and
  better rated corporate loan.

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MARKET twitter June 17
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4QFY16 1QFY17 2QFY17 3QFY17 4QFY17 YoY(/-) QoQ(/-) FY16 FY17 YoY
GNPA (Rs) 4,393 4,921 5,069 5,232 5,886 34.0 12.5 4,393 5,886 34.0
GNPA 0.9 1.0 1.0 1.1 1.1 0.11 0.00 0.9 1.1 0.11
NNPA (Rs) 1,320 1,493 1,489 1,564 1,844 39.7 17.9 1,320 1,844 39.7
NNPA 0.3 0.3 0.3 0.3 0.3 0.05 0.01 0.3 0.3 0.05
Slippages (Rs) 1,700 1,761 1,440 1,700 2,100 23.5 23.5 5,941 7,001 17.8
Restructured Assets 0.1 0.1 0.1 0.1 0.1 0.00 0.00 0.1 0.1 0.00
Specific PCR 69.9 69.7 70.6 70.1 68.7 -1.27 -1.43 69.9 68.7 -1.27

• Concall Highlights
• Provisons spiked due to incremental provisions on
  NPA related to dispensation provided by RBI in
  last quarter. Standard assets provisioning also
  increased due strong assets growth.
• Will open 100 to 200 branch per year going
  forward as against 300-400 earlier.
• Corporate loan picked up in the quarter. Gaining
  market share from both public as well as private
  banks.
• The bank managed recoveries from about 25 of
  accounts that benefited from RBI dispensation in
  the prior quarter
• Slippage was at 1.5 excluding RBI dispensation
  of Rs 245 Cr.
• Floating Provisions were Rs 1248 Cr as on 4Q
  FY17.
• No ARC sale in this quarter.
• CASA ratio was higher due to some traction from
  capital market.
• View and Valuation
• We continue to like HDFC Bank given its strong
  fundamentals, steady loan growth, adequate
  capital, best in assets quality, strong branch
  network and intensive digitalization initiatives.
  With all levers set, HDFCBANK is poised for
  strong business growth from the expected upturn
  in economy. Continuation of strong loan growth
  has resulted in gain of market share from its
  peers. Due to intensive investment in
  digitalization and slow down in employee
  expenses, we expect productivity to improve
  further and hence will result in cost reduction.
  Increase in CASA during demonetization period
  will help NIM to sustain at current levels
  despite reduction in rates due to MCLR. With the
  healthy capitalization ratio of Tier 1 at 12.8
  we expect RoE in the range of 19-19.5 and RoA
  of 2 in FY19. HDFCBANK is currently trading at
  3.5x P/B FY19 and we value it (3.9x P/B, EPS
  growth 20 FY19) at Rs 1758 and recommend BUY.

17
18
KNRCON KNRCON has clocked 63 YoY revenue growth
to Rs. 482 Cr ahead of our estimate. Strong
execution of orders received in previous year has
helped to post robust growth in FY17 Key
Highlights of the report
Company Data Company Data
CMP CMP 208 208
Target Price Target Price 230 230
Previous Target Price Previous Target Price
Upside Upside 11 11
52wk Range H/L 52wk Range H/L 215/104 215/104
Mkt Capital (Rs Cr) Mkt Capital (Rs Cr) 2,823 2,823
Av. Volume (,000) Av. Volume (,000) 60 60
Av. Volume (,000) Av. Volume (,000) 80 80

Share Holding Pattern Share Holding Pattern
4QFY17 3QFY17 2QFY17
Promoters 58.0 58.1 58.1
DII 42.1 41.9 41.9
FII 100.0 100.0 100.0
Others 18.9 19.7 20.1

• KNRCON has clocked 63 YoY revenue growth to Rs.
  482 Cr ahead of our estimate. Strong execution
  of orders received in previous year has helped
  to post robust growth in FY17.
• EBITDA and PAT margin are in line with our
  expectation in Q4FY17 and FY17. Management has
  guided EBITDA margin of 13.5-14.5 going ahead.
• Considering the current market scenario
  management is open to take HAM projects and
  expects to win Rs. 2000 Cr of new projects in
  FY18 (50 from HAM and rest from EPC).
• Currently, stock is trading at 12.3x EV/EBITDA of
  FY18. We have positive stance on the stock and
  we recommend BUY with target price 230.

Financials/Valuation FY14 FY15 FY16 FY17 FY18E
Net Sales 835 876 903 1,541 1,760
EBITDA 126 126 153 230 259
EBIT 69 72 111 166 197
PAT 61 73 161 158 175
EPS (Rs) 4 5 11 10 12
EPS growth () 17 20 121 -2 11
ROE () 12 13 22 18 16
ROCE () 12 11 13 16 16
BV 34 38 48 60 71
P/B (X) 0.4 1.4 2.2 2.4 2.9
P/E (x) Recent Development 3.4 11.0 9.9 13.5 17.8
Stock Performance
1Mn 1Yr YTD
Absolute 1.0 11.6 86.2
Rel.to Nifty (2.4) 3.2 68.6

• KNRCON has received appointment date for the
  Hubali hospet project in Karnataka on 15th march
  and work has started on it. Management has
  expects revenue contribution from Q1FY17.
• KNR has signed stake sell agreement with Essel
  group and presently waiting for NHAI approval
  for the deal. Management of the company expects
  approval in month time.
• Earlier Management is reluctant to take HAM
  projects but considering the current market
  scenario, management is open to take HAM and
  expects Rs. 1000 Cr of orders in FY18 via HAM
  mode.
• Management expects to complete Thiruvananthapuram
  Bypass and Madurai -Ramanathpuram Section of
  NH-49 by January 2018 and April 2018
  respectively.

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MARKET twitter June 17
19
Quarterly Performance
Financials 4QFY16 1QFY17 2QFY17 3QFY17 4QFY17 YoY QoQ FY16 FY17 YoY
Sales 294 317 371 423 485 65 15
Other Operating In- come 1.52 Other Operating In- come 1.52 (0.47) 10.26 1.73 (3.01) -299 -274
Company's share in JV - 14 8 43 - -100
Net Sales 296 303 373 382 482 63 26 903 1,541 71
Other Income 16 6 13 10 1 -94 -90 32 30 -5
COGS 203 217 271 277 349 72 26 606 1,115 84
Employee Expenses 11 13 13 15 15 27 -2 43 55 28
Other Expenses 39 29 33 32 47 21 44 100 142 41
Total Expenditure 253 259 318 325 410 62 26 750 1,311 75
EBITDA 43 44 56 58 72 69 25 153 230 50
EBITDA M 14.5 14.4 15.0 15.1 15.0 17 15
Depreciation 11 13 15 17 19 81 17 42 64 51
EBIT 32 31 41 41 53 64 28 111 166 50
Intreset 4 4 6 7 5 31 -18 13 22 65
Exceptional Item - - - 11 - - 11
PBT 44 32 49 45 48 11 8 129 163 26
Tax (14) 2 5 3 (4) -70 -232 (32) 6 -119
PAT 57 30 44 31 53 -7 74 161 158 -2
PAT 19.4 9.9 11.7 8.0 11.0 18 10

• Strong Execution capabilities led to robust
  revenue growth
• HKNRCON has posted strong top line growth of 59
  YoY to Rs.482 Cr ahead of our estimate. We are
  expecting slower execution because of delay in
  quarry approval on account of unstable political
  situation in state of Tamil Nadu.
• For the full year FY17 KNRCON revenue clocked by
  71 YoY to Rs. 1541 Cr as compared to Rs. 903 Cr
  a year back. Strong ordering momentum in FY16
  has helped to post robust revenue growth.
• EBITDA during the quarter grew by 65 YoY to Rs.
  72 Cr as against Rs. 43 Cr in same period last
  year. For the full year EBITDA stood at Rs. 230
  Cr compared to 153 Cr.
• However, PAT during the Q4FY17 down by 7 YoY to
  Rs. 53 Cr compared to Rs.57 Cr on account of
  lower tax reversal. In Q4FY16 KNRCON has tax
  reversal of 14 Cr on back of 80IA benefit.
• During the quarter KNRCON does not witness any
  new order and order book at the end of the Q4FY17
  stand at Rs. 3762 Cr. Management expects to
  receive new orders in Q2FY18 and Q3FY18.

Healthy order book, 2.4x of TTM
Order Book Break Up
19
20
Advances Performance
Margin 4QFY16 1QFY17 2QFY17 3QFY17 4QFY17 YoY(/-) QoQ(/-) FY16 FY17 YoY(/-)
Gross Margin 76.10 73.80 79.20 78.90 79.80 3.70 0.90 69.1 78.3 9.20
EBITDA Margin 14.50 14.40 15.00 15.10 15.00 0.50 -0.10 16.9 14.9 -2.00
PAT Margin 19.40 9.90 11.70 8.00 11.00 -8.40 3.00 17.8 10.2 -7.60

• EBITDA and PAT margin in line with Our estimate
• EBITDA margin has improved by 50 bps to 15 in
  Q4FY17 v/s 14.5 in same period last year on
  account of operational efficiency.
• KNR has reported PAT margin of 11 in line with
  our expectation. PAT margin down by 840 bps YoY
  on account of tax reversal of Rs. 18 Cr in
  Q4FY16.
• For the full year FY17 KNRCONs EBITDA and PAT
  margins are in line with our expectation.
• Management exepects to maintain EBITDA margin in
  range of 13.5-14.5 going ahead.
• Robust Revenue growth Strong Debt to Equity

EBITDA (cr) and EBITDA margin trend
PAT (cr) and PAT margin trend
20
MARKET twitter June 17
21

• Investment Argument
• Healthy Order Book - Order book at the end of
  the FY17 stands at Rs. 3762 Cr with 2.4x of TTM,
  which provides revenue visibilities of more than
  two years. Strong growth in orders inflow in FY16
  resulted into robust revenue growth of 71 in
  FY17. Management is expecting to receive Rs. 2000
  Cr of new orders which gives us confidence of
  healthy revenue growth in FY19. Smooth progress
  of current order book ensures the 14 revenue
  growth in FY18 and management expects to
  complete couple of projects ahead of its schedule
  time line.
• Strong Debt to Equity - Superior execution
  capabilities have resulted into combatable Debt
  to Equity position. Now, management is ready to
  take up HAM projects and expects to win Rs.1000
  Cr of new orders in FY18 via HAM mode. KNRCONs
  strong debt to equity position will help to
  leverage its balance sheet and help to take up
  HAM projects in bigger way. Currently KNRCONs
  debt to equity is 0.15x and it will remain in the
  same range going ahead(without considering HAM
  projects).
• Concall Highlight
• HKNManagement has guided for Rs.1700-1800 Cr and
  Rs.2000 Cr of top line in FY18 and FY19
  respectively
• Company target to win new projects worth of
  Rs.2000 Cr. Management expect order inflow from
  Q2FY18. Out of which Rs.1000 Cr of orders from
  HAM projects.
• Unexecuted portion of Arcot Villupuram project is
  30.
• Tax Rate in FY18 will be around 7-8 and 15 in
  FY19.
• FY20 will attract full tax rate.
• KNR has received appointment date on Hubli Hospet
  road project in Karnataka and work has started
  from 15th March 20147.
• Gross debt as on 31st March 2017 on standalone
  books is Rs.144 Cr and out of this 120 Cr loan
  from promoter of the company.
• Rs. 100 Cr of capex is requires in FY18 and FY19
  each.
• Except Chittagong ORR project in Bangladesh
  project all other projects are progressing well.
• Unexecuted portion of Chittagong ORR project is
  around 200 Cr (KNR Share)
• Management expects to complete Thiruvananthapuram
  Bypass in January 2018 and Madurai Ramanathpuram
  ij April 2018
• KNR has received Rs. 21 cr of arbitration award
  in Q1FY18. Which will directly contributes 75-80
  in EBITDA.
• Till date KNR has invested equity of Rs. 397 Cr
  in Walayar BOT and Rs. 52 Cr in Muzaffarpur
  Barauni BOT toll project. Need further equity of
  Rs. 25 Cr in Muzaffarpur project.
• Toll collection on Muzaffarpur will go upto 17
  lakh/day post 100 CoD.
• Other Income will be in range of 25-30 Cr going
  forward.

21
22
LT KNRCON has clocked 63 YoY revenue growth to
Rs. 482 Cr ahead of our estimate. Strong
execution of orders received in previous year has
helped
to post robust growth in FY17 Key Highlights of
the report
Company Data CMP 1736 Target Price 1860 Previous
Target Price 1780 Upside 7 52wk Range
H/L 1834/1295 Mkt Capital (Rs Cr) 164,895 Av.
Volume (,000) 60 Av. Volume (,000) 80 RoE
will maintain over 13

• KInfrastructure, Financial Services and and IT
  business lead to revenue growth of 12 YoY in
  Q4FY17.
• Higher provision at LT Financial Holding and
  impairment of sea woods and Hazira yard
  depressed EBITDA. EBITDA margin down by 190 bps
  YoY in Q4FY17.
• Strong opening order book ensures healthy revenue
  growth on 10- 11 in FY18 with improvement in
  EBITDA margin.
• Management expect 10-15 growth in order inflow
  in FY18.
• Considering the strong revenue growth along with
  margin and working capital improvement we
  recommend HOLD with revised target price of
  1860.

Financials/Valuation FY15 FY16 FY17 FY18E FY19E
Net Sales 92,005 101,975 110,011 121,562 135,069
EBITDA 11,336 10,465 11,075 12,642 14,047
EBIT 8,713 8,678 8,705 10,418 11,575
PAT 4,765 4,547 6,485 6,771 7,523
EPS (Rs) 51 49 70 73 81
EPS growth () -3 -5 42 4 11
ROE () 11.6 10.3 14.7 13.1 13.4
ROCE () 7.1 6.4 7.2 7.8 8.3 Share Holding Pattern
BV 440 473 474 538 553 4QFY17 3QFY17 2QFY17
P/B (X) 3.9 2.6 3.3 3.3 3.2 Promoters - - -
P/E (x) 33.5 24.9 22.4 24.3 21.9 Public 100.0 100.0 100.0
Recent Development
Total
100.0
100.0
100.0
Others 18.9 19.7 20.1 Stock Performance

• The construction arm of LT has secured orders
  worth of 5146 Cr across various business
  segments on 30th May 2017. These orders are over
  and above of 2613 bn of order book at the end of
  the year.
• Power Transmission Distribution segment has
  secured major orders worth of 2780 Cr from
  domestic and international markets.
• Another big order of 1292 Cr from Government of
  Gujarat for EPC work for Sauni Yojana link 2
  package.
• LT has secured small orders of 221 Cr in smart
  world communication, 534 Cr in BF, 319 Cr in
  Metallurgical and material and rest from the
  ongoing jobs.
• Board of directors has approved issue of bonus
  share to the equity share holders in the ratio
  of 12, which is the subject of shareholders
  approval.

1Mn 3Mn 1Yr
Absolute 1.1 20.2 19.8
Rel.to Nifty (2.4) 11.8 1.8
22
MARKET twitter June 17
23
Quarterly Performance
Financials 4QFY16 1QFY16 2QFY17 3QFY17 Q4FY17 YoY QoQ FY16 FY17 YoY
Sales 32,876 21,719 24,924 26,018 36,828 12 42
Other Operating Income - 155 98 269 -
Net Sales 32,876 21,874 25,022 26,287 36,828 12 40 1,020 1,100 8
Other Income 145 302 470 257 399 175 56 9 14 55
COGS 12,539 7,576 9,082 9,495 13,101 4 38 366 388 6
Finance cost of Fin. Services 3,4