January 2017

Union Budget 2017-18Expectations

2

Table of Content Page No.

Economic Outlook 3

Essence of Budget Expectation 4

Stock Recommendations 5-11

NBCC 6

NTPC 7

Can Fin Homes 8

KEC International 9

HPCL 10

Chambal Fertilizers 11

Top Tax Paying Companies 12

Budget Option Strategy 13

Inflation 14

Budget 2016-17 Fund Allocation 15

Snapshot of Previous Two Budgets 16

Economy Outlook

3

Factor 2015-16 2016-17E 2017-18E

GDP growth (%) 7.6 7.0 7.5

Will be supported by pick-up in infrastructureinvestments, growth in agriculture, 7th pay commission,increasing positive contributions from exports and arecovery of private investment in the medium term.

CPI Inflation (%) 6.0 5.0 4.5

The after-effect of demonetisation (deflationary) andGST (inflationary) will be the prime factor that will shapeinflation going forward. A normal monsoon andincreased food supply efficiency will control theinflation.

Fiscal Deficit(% of GDP) 3.9 3.5 3.4

Increase in tax inflows by unaccounted money enteringthe taxation system would help to cushion thegovernment's fiscal deficit target. Increased excise dutyon oil and petroleum products will help narrow downthe deficit gap.

10Y G-Sec Yield(% as on 31st Mar) 7.6 6.5 6.2

A lower fiscal deficit target would result in a restrainedmarket borrowing program of the government whichwould help in easing yields.

Subsidy (Rs Crore) 242K 231K 230K

Through new reforms and stable commodity prices, thegovernment will try to control subsidy burden goingforward.

Source: CRISIL

Essence of Budget Expectation

4

Essence of Budget Expectation

• We estimate the FY17-18 budget to spur public spending towards building better infrastructure (roads, power,irrigation and railways), an increase in consumption and strong focus on digitalization.

• The recent demonetisation event has adversely impacted domestic economic growth. In our view, thegovernment is likely to announce progressive policies for various sectors, thereby boosting market sentimentand the economy.

• The government's tax revenues would rise substantially on account of the taxes mopped up postdemonetisation. We expect a host of measures such as increase in tax exemption limit for the salaried class anda lowering of the existing corporate tax rate to stimulate economic growth.

• We see a sustained effort to promote a cashless economy by introduction of tax sops for digital transactions.The government may also announce penalties on cash transactions, imposing taxes on cash withdrawal from thebanking system. Overall market sentiment may dampen if the government raises the long term capital gain taxdefinition beyond the current one year period.

• Budget 2017 is significant for an economy already reeling from the after effects of demonetisation. Already,the World Bank has moderated GDP growth estimates to 7% against its previous 7.6% estimate in October.

Stock Recommendations

Stock CMP Target Price Upside

1 NBCC Rs 267 Rs 320 20%

2 NTPC Rs 172 Rs 201 17%

3 Can Fin Homes Rs 1,729 Rs 2,006 16%

4 KEC International Rs 147 Rs 176 20%

5 HPCL Rs 518 Rs 601 16%

6 Chambal Fertilizer Rs 83 Rs 103 24%

5*CMP as on January 24, 2017.

• NBCC is a Navratna PSU company. The company is present in segments of (i) Project Management Consultancy (PMC), (ii)Real Estate Development (RE) & (iii) EPC Contracting. PMC segment contributes 85-90% of its annual turnover. It gets PMCcontracts on nomination basis, as it is notified as a Public Works Organization.

• PMC has an order book of ~ Rs 71,660 crore as on Jan 15, 2017 of which 88% of the order book belongs to the PMCsegment, 8% to EPC and 4% to commercial real estate. It also recently signed a MoU with AIIMS to build 3,000 flats forhospitals which is estimated at Rs 4,441 Cr. It also has a major pie in re-development of the New Moti Baug high securitygovernment residential complex.

• Budget 2017 is expected to boost the infra-sector with addition of low-cost housing under PMAY. Government schemes like‘Housing For All’ and ‘Smart Cities’ and an expectation of a dedicated infra-development fund augur well for NBCC’s growth.

• We’re positive on NBCC’s business model given the huge set of opportunities in the redevelopment space and its cash richbalance sheet. We expect revenues, earnings to grow at a CAGR of 22%/20%, respectively, in FY16-18E. The stock isattractive, available at ~24.1x FY19E P/E.

• Technical View: The primary trend of the stock is bullish and is currently trading in a 80 point trading band. The stock hasreversed from its upper band which is placed at Rs 280. We expect NBCC to enter into a consolidation phase post which itsprimary trend will resume. A move past its upper band of Rs 280 may trigger a "Rising Channel" breakout which would augurwell for NBCC.

6

Consolidated (Rs Cr) FY15 FY16 FY17E FY18E FY19E REVENUE 4,400 5,838 7,368 9,423 12,342OPM (%) 6.6 6.0 5.7 5.5 5.8PAT 278 311 380 480 640EPS (Rs) 4.6 5.2 6.3 8.2 10.7RoE (%) 21% 21% 23% 24% 27%P/E(x) 56.1 49.6 41 31.5 24.1P/B(x) 12.1 10.8 9.7 8.6 7.5

Financial Summary

NBCC

*Price and valuation ratios as on January 24, 2017.

CMP: Rs 267 BUY TP: Rs 320 Upside: 20%

• Out of 10 captive coal mines allocated by the Central Government, in phase 1, NTPC is developing 5 coal blocks which are30-35% of NTPC’s current coal consumption. This will bring down generation cost and improve plant load factor. UDAY is alsoset to bring out further efficiencies in operations.

• In FY17, NTPC will commence coal mining operations in Pakri-Barwadih after 12 years. It was earlier hampered by landclearances and rehabilitation resistance. NTPC has fast tracked this process by doubling the rehabilitation compensation toRs 20 Lakh/acre. Out of total 4,000 acres, 650 have been paid for. NTPC targets 0.3m MT and 2m MT of coal production inFY17E and FY18E. We expect ramp up to 4m MT in FY19E post completion of rehabilitation process.

• The government’s focus on energy supply to support the infra-sector will provide benefits to domestic energy producers. Weexpect clarity on extension of 80 IA tax holidays for at least a two year period.

• We expect stable RoE from Captive Coal Mines. The variable cost may come down 2-3% post rehabilitation which may betransferred on to consumers. The stock is currently available at 1.3x FY19E P/BV.

• Technical View: The stock has broken out from a classic Cup and Handle pattern with expansion in trading volumes. Thisindicates an extension of the overall bullish structure. NTPC has also negated the negative moving average crossover whichfurther accentuates our bullish stance for the stock. Fresh upswing would re-commence once its January high of Rs 176.25 isbroken convincingly. Crucial support zone is placed at Rs 160 levels.

7

Consolidated (Rs Cr) FY15 FY16 FY17E FY18E FY19EREVENUE 73,059 70,364 78,370 84,065 89,925OPM (% ) 22.2 25.1 27.1 27.3 27.6PAT 10,290 10,242 9,641 10,519 11,315EPS (Rs) 11.9 12 11.7 12.8 13.7RoE (%) 11.3 11.2 10.2 10.6 10.8P/E(x) 14.5 14.3 14.7 13.4 12.6P/B(x) 1.7 1.5 1.5 1.4 1.3

Financial Summary

NTPC

*Price and valuation ratios as on January 24, 2017.

CMP: Rs 172 BUY TP: Rs 201 Upside: 17%

• Can Fin Homes’ main business is to provide loans for the purchase and construction of residential houses. Its sponsored bythe public sector bank, Canara Bank. Can Fin Homes is also permitted by the National Housing Bank to accept deposits fromthe public.

• It is one of the most prominent and followed listed housing finance companies. The growth prospects are bright for thecompany with an expected loan growth of 18% CAGR over FY16-19E. The loan against property consisted of 12% of its loanbook in FY16 and is expected to constitute 18% by FY19E driven by its strong positioning in the home loan segment. Thesechanges in loan book composition and reduction in borrowing costs will induce spread expansion from 2.2% in FY16 to 2.7%in FY18E.

• Can Fin Homes has GNPA of 0.25%, lowest amongst its peers ensuring favorable risk exposure. This has further helped it gainlow cost funding through NCD/CP/Public Deposits.

• The likely initiatives of smart cities and affordable housing in Tier 2 cities in the budget will be a major growth driver. Thecompany has set a robust branch expansion target of 175 locations by FY17E Vs. 140 in FY16. The stock is attractive at ~3.1xFY19E P/BV multiple.

• Technical View: The stock is stuck in a narrow consolidation zone. The upper band is placed at Rs 1780 levels. A break abovethe same would mean a fresh outburst post which prices would begin to move with a rising trajectory. Every dip should bean opportunity to accumulate the stock. Can Fin Homes has multiple support zones at Rs 1651 and Rs 1610 levels.

8

Consolidated (Rs Cr) FY15 FY16 FY17E FY18E FY19ENII 176 339 459 586 730NIM (%) 3.4 3.2 3.3 3.5 3.6Loan Book ('000 Cr) 8.0 11.0 14.0 17.0 20.0PAT 86 157 210 276 360RoE (%) 11.1 17.9 20.5 22.7 24.5P/E(x) 32.0 29.2 25.4 21.1 17.3P/B(x) 6.0 5.3 4.4 3.7 3.1

Financial Summary

Can Fin Homes

*Price and valuation ratios as on January 24, 2017.

CMP: Rs 1,729 BUY TP: Rs 2,006 Upside: 16%

• We expect revival of power sector to continue backed by government support to increase availability of power. This will bebeneficial for KEC as it derives ~84% of the revenue from power transmission and distribution (T&D) business.

• In addition, Power Grid & State Electricity Boards (SEB’s) are expected to invest Rs ~45,000 cr (FY17-FY20E) to improve intra-state transmission network. KEC owns 17% market share in power grid transmission EPC orders.

• Revenue is expected to grow at 10% CAGR over FY16-FY19E on the back of strong order book of Rs 10,785 cr at the end ofQ2 FY17. The order book majorly comprises of T&D business-69%, SAE-14%, railways-11% and remaining 2% from cables,water and solar business.

• The increasing focus of railways to build their own transmission lines will help KEC to ramp up its railway order book andgenerate strong revenue growth in the coming years. The railway order book of the company at the end of Q2 FY17 standsat Rs 1,200 cr. We maintain our BUY rating on the stock with target price of Rs 176 (based on 10.9x PE in FY19E.)

• Technical View: Our analysis of the weekly chart suggests the stock has broken out from a “Symmetrical Triangle” patternwhich was accompanied by credible volumes. The stock is also trading comfortably above moving averages on the dailychart. KEC is currently in a consolidation phase and renewed buying will commence once its resistance zone of Rs 150 isbroken on closing basis. Meanwhile, key support is placed at Rs 137 levels.

9

Consolidated (Rs Cr) FY15 FY16 FY17E FY18E FY19EREVENUE 8,346 8,422 9,180 10,097 11,208OPM (% ) 6.1 8.1 8.2 8.4 8.4PAT 161 192 275 313 347EPS (Rs) 6.3 7.5 10.7 12.2 13.5RoE (%) 12.1 12.7 15.7 15.5 15.0P/E(x) 23.5 19.7 13.7 12.1 10.9P/B(x) 2.8 2.5 2.2 1.9 1.6

Financial Summary

KEC International (KEC)

*Price and valuation ratios as on January 24, 2017.

CMP: Rs 147 BUY TP: Rs 176 Upside: 20%

• Led by sustained product sales growth of 5-6% pa, driven by auto fuels, LPG, and niche industrial products, EBITDA of themarketing business is projected to grow ~10% CAGR over FY17-19E.

• We expect share of marketing division in consolidated EBITDA to increase by ~400bps through FY17-19E to ~52%. This willbe led by improvement in marketing margins from Rs 1.85/Lit in FY16 to Rs 2.05/Lit in FY19E, and demand for auto fuels.

• The government in the budget may assume higher subsidy provisions and cut in excise duty given the rise in crude oil prices,which would improve HPCL’s profitability.

• Firm outlook on Singapore GRMs and higher complexity should benefit the performance of HMEL (50-50 JV of HPCL andMittal Energy) that operates a 9m MT refinery.

• Over FY14-16, HPCL’s consolidated EPS increased by ~433% respectively, attributed to a steep increase in GRM leading to asharp turnaround of HMEL, deregulation in retail fuel/elimination of subsidy regime in marketing business; and sustainedvolume growth. Going ahead, we expect these positives to sustain and aid earnings growth.

• Our SOTP based target price for HPCL works out at Rs 602/share, based on 5x & 8x EV/EBITDA multiple to refining andmarketing business.

• Technical View: The stock is trading in a resounding uptrend forming an Inverse Head and Shoulder (H&S) pattern which isbullish in nature. HPCL is on the verge of breaking above the neckline of the bullish pattern which is placed at Rs 510.A break above the same will confirm resumption of the uptrend; Rs 475 is the immediate support area for the stock.

10

Consolidated (Rs Cr) FY15 FY16 FY17E FY18E FY19EREVENUE 216,536 187,079 158,431 170,796 184,409OPM (% ) 1.9 6.4 8.6 8.5 8.0PAT 1,479 4,922 6,428 6,702 6,964EPS (Rs) 14.6 48.4 63.2 65.9 68.5RoE (%) 10.6 38.5 32.4 27 23.3P/E(x) 35.5 10.7 8.2 7.9 7.6P/B(x) 3.8 3.0 2.4 1.9 1.6

Financial Summary

HPCL

*Price and valuation ratios as on January 24, 2017.

CMP: Rs 518 BUY TP: Rs 601 Upside: 16%

• The government’s focus to double farmers income will help improve demand for agri-inputs. We believe most of the excesschannel inventory will get consumed during the Rabi season led by improved fertilizer demand, which will aid in gaininghigher profits.

• We believe government may clear most of the old subsidy bills (subsidy receivables) in the budget, which in turn wouldlower the interest cost due to reduction in working capital loans.

• Lower gas prices have lowered the working capital requirement and improved the profits from IPP-linked production (qty.beyond cut offs.)

• It is setting up a new urea plant with 1.3 MTPA capacity (capex ~Rs 6000 cr, commissioning by Jan 19). We expect decentRoE from these investments based on the lower gas prices and higher IPP of urea.

• Chambal intends to focus on its core fertilizer business. In FY16, it had exited from its textile biz and part of its loss making ITsegment. Going forward, it is looking to completely exit the IT and shipping business.

• The stock is trading attractively at 8.6x FY19E earnings. We maintain our BUY rating on the stock with target price of Rs 103(8.1x FY19E EPS).

• Technical View: The current upmove points towards the resumption of primary bullish trend. The stock has broken out froma double bottom pattern and also a consolidation channel pattern breakout. Its upper band is placed at Rs 88.5 above whichit would trigger an “Ascending Triangle” pattern breakout. Crucial support zone is seen at around Rs 74.

11

Consolidated (Rs Cr) FY15 FY16 FY17E FY18E FY19EREVENUE 9,724 10,527 9,642 9,856 10,098OPM (% ) 7.5 8.2 8.3 8.3 8.3PAT 284 401 369 395 426EPS (Rs) 6.8 9.6 8.9 9.5 10.2RoE (%) 13.2 17.4 14.7 14.1 13.4P/E(x) 12.1 8.5 9.3 8.7 8.1 P/B(x) 1.5 1.4 1.3 1.2 1.0

Financial Summary

Chambal Fertilizer

CMP: Rs 83 BUY TP: Rs 103 Upside: 24%

*Price and valuation ratios as on January 24, 2017.

Top Tax Paying Companies

12

Company Sector Corporate Tax

Mahindra & Mahindra Financial Services Ltd. Finance 36%

LIC Housing Finance Ltd. Finance 35%

Zee Entertainment Enterprises Ltd. Media & Entertainment 35%

Bajaj Finance Ltd. Finance 35%

Idea Cellular Ltd. Telecom 35%

ITC Ltd. FMCG 35%

Bharat Forge Ltd. Automobile & Ancillaries 34%

HDFC Bank Ltd. Bank 34%

United Breweries Ltd. Alcohol 34%

Bharti Infratel Ltd. Telecom 34%

Axis Bank Ltd. Bank 34%

IndusInd Bank Ltd. Bank 34%

The Federal Bank Ltd. Bank 34%

Coal India Ltd. Mining 34%Source: Ace Equity

Budget Option Strategy

Bank Nifty-Nifty 50 Correlation Strategy -(1 lot of each strike of 23rd Feb, 2017 EXPIRY)

13

Average last 3 budgets

Current

Premium Paid 1.74% 0.7%

Bank Nifty Movement outperformance (5 day movement from budget day)

2.98% --

HV Ratio 1.42 1.41

Bank Nifty/ Nifty Premium Long-Short Ratio 1.43 1.22

Correlation 0.8723 0.8699

BUY BANK NIFTY 19500CE @ 332 & 19500PE @415SELL NIFTY 8400CE @ 132 & 8400 PE @ 138Stop Loss = Rs 2500 per strategy

Rationale/View:The movement in Bank Nifty in comparison to Nifty will be higher than average. The premium paid is lowerthan the historic premium before budget.

Important Note:Pl execute the above mentioned 4 leg strategy at the same time. Each of the 4 legs is a sub-part of the mainstrategy, so trading based on bifurcation of each leg should be avoided as it may result in unwantedpayoffs.

Inflation

14

2016 2017

• CPI inflation fell to 3.4% in December from 4.4%in September, driven by a drop in food inflation,which dropped from 3.9% in September to 1.4%in December.

• We think the positive impact of a favorablemonsoon this year is reflecting in lower foodprices along with the demonetisation.

• Wholesale price index (WPI), rose to 3.39% inDecember as compared to 3.15% in November.

• Rural inflation fell to 3.8% in December from4.1% in November.

• Urban Inflation fell to 2.9% in December from3.1% in November.

• The central bank has retained its March 2017inflation target of 5%.

• Inflation to trend lower by averaging at 4.8% inthe second half of FY17, because of lowerconsumption due to demonetisation.

• Demonetisation will add to downward pressureson inflation going ahead.

• Rural areas which have a higher share of cashtransactions could see a sharper dip in inflationcompared with urban for most categories.

• We expect oil prices to remain contained at $50-55 per barrel in FY18 which will help keep fuelinflation under check.

• Normal monsoon this year is expected to pushfood inflation further down in FY18 withincrease in food supply and governmentcontinuing to take steps to reduce supplyconstraints and improve efficiency throughreforms.

• We believe GST implementation, expected inJuly 2017, might lead to increased inflation inthe service category which presently has acomparatively lower indirect tax rate.

Source: CRISIL

Budget 2016-17 Fund Allocation

15

Sector Allocation in 2016-17(Rs Crore) Allocation (%)

Agriculture and Allied Activities 19,394 2.7%

Rural Development 2,751 0.4%

Irrigation and Flood Control 1,024 0.1%

Energy 205,878 29.2%

Industry and Minerals 49,372 7.0%

Transport 229,874 32.5%

Communications 13,806 2.0%

Science, Technology & Environment 20,926 3.0%

General Economic Services 46,685 6.6%

Social Services 100,291 14.2%

General Services 16,247 2.3%

Total 706,248Source: indiabudget.nic.in

Snapshot of Previous Two Budgets

16

2015-16 (Rs in Crore)

2016-17E (Rs in Crore)

Revenue Receipts 1,206,084 1,377,022

Capital Receipts 579,307 601,038

Total Receipts 1,785,391 1,978,060

Non-Plan Expenditure 1,308,194 1,428,050

Plan Expenditure 477,197 550,010

Total Expenditure 1,785,391 1,978,060

Fiscal Deficit 535,090 533,904

Source: indiabudget.nic.in

Disclaimer

17

Recommendation Parameters for Fundamental Reports:Buy – Absolute return of over +10%Accumulate – Absolute return between 0% to +10%Reduce – Absolute return between 0% to -10%Sell – Absolute return below -10%

Past performance should not be taken as an indication or guarantee of future performance, and no representation or warranty, express or implied, is made regarding futureperformance. Information, opinions and estimates contained in this report reflect a judgment of its original date of publication by IIFL and are subject to change withoutnotice. The price, value of and income from any of the securities or financial instruments mentioned in this report can fall as well as rise. The value of securities and financialinstruments is subject to exchange rate fluctuation that may have a positive or adverse effect on the price or income of such securities or financial instruments.

The Report also includes analysis and views of our research team. The Report is purely for information purposes and does not construe to be investmentrecommendation/advice or an offer or solicitation of an offer to buy/sell any securities. The opinions expressed in the Report are our current opinions as of the date of theReport and may be subject to change from time to time without notice. IIL or any persons connected with it do not accept any liability arising from the use of this document.Investors should not solely rely on the information contained in this Report and must make investment decisions based on their own investment objectives, judgment, riskprofile and financial position. The recipients of this Report may take professional advice before acting on this information.

IIL has other business segments / divisions with independent research teams separated by 'Chinese walls' catering to different sets of customers having varying objectives,risk profiles, investment horizon, etc and therefore, may at times have, different and contrary views on stocks, sectors and markets.

Please refer to http://www.indiainfoline.com/research/disclaimer for additional recommendation parameters, analyst disclaimer and other disclosures.

Published in 2016. © India Infoline Ltd 2016India Infoline Limited (Formerly “India Infoline Distribution Company Limited”), CIN No.: U99999MH1996PLC132983, Corporate Office – IIFL Centre, Kamala City, SenapatiBapat Marg, Lower Parel, Mumbai – 400013 Tel: (91-22) 4249 9000 .Fax: (91-22) 40609049, Regd. Office – IIFL House, Sun Infotech Park, Road No. 16V, Plot No. B-23, MIDC,Thane Industrial Area, Wagle Estate, Thane – 400604 Tel: (91-22) 25806650. Fax: (91-22) 25806654 E-mail: mail@indiainfoline.com Website: www.indiainfoline.com, Referwww.indiainfoline.com for detail of Associates.National Stock Exchange of India Ltd. SEBI Regn. No. : INB231097537/ INF231097537/ INE231097537, Bombay Stock Exchange Ltd. SEBI Regn. No.:INB011097533/INF011097533/ BSE-Currency, MCX Stock Exchange Ltd. SEBI Regn. No.: INB261097530/ INF261097530/ INE261097537, PMS SEBI Regn. No. INP000002213, IA SEBI Regn. No.INA000000623, SEBI RA Regn.:- INH000000248.

For Research related queries, write to research@indiainfoline.comFor Sales and Account related information, write to customer care: cs@indiainfoline.com or call on 91-22 4007 1000