Avenue Supermarts (DMART) Research Report by Motilal Oswal

Avenue Supermarts (DMART) owns and operates an emerging national supermarket chain, ‘D-MART’. Focused on value retailing, it offers a wide range of fast-moving consumer (food and non-food) products, general merchandise and apparel. DMART has grown impressively from opening its first store in Mumbai in 2002 to 131 stores spread across 11 states. Over the last five years, it has expanded its total area of operations at a CAGR of 21% to 4.1m sf and grown its sales and PAT at a CAGR of 40% and 51% respectively.

avenue supermarts

Delivering value
Expect PAT CAGR of 41% over FY17-21
Size of India’s retail sector stands at USD616bn with share of organized brick and mortar retail at USD55bn (9%). While overall retail is expected to grow at a CAGR of 11.7% to USD960b by 2020, organized brick and mortar retail is expected to grow at a faster CAGR of 20.2% to USD115b (12%) thereby providing huge opportunity of growth for DMART.

While food and grocery forms the largest share of organized brick and mortar retail in 2016 at 24%, penetration of food and grocery still stood at 3% in 2016 of total retail is expected to improve to 5% by 2020 which should provide significant opportunity for DMART given it derives 53.6% of its revenues from food and grocery segment.

Additionally, DMART derives ~80% of its total revenues from Maharashtra and Gujarat which accounts for 21% of total retail spends in India. DMART intends to invest 75% of its profits in the existing clusters and plans to add 25 stores annually (83.5% increase in area to 7.5m sf by FY21) embellishing its growth potential.

avenue supermarts

Focus on cluster-based approach towards store expansion, rich product assortment, owned store model, centralized sourcing and efficiency (40% of revenues), lower employee cost (below 2% of sales v/s >4.5% for peers), upfront payment to get cash discount have made DMART India’s only retail company to showcase consistent and profitable growth over last decade.

We expect it to deliver 31% revenue CAGR and 41% PAT CAGR over FY17-21. EBITDA margin is likely to expand 60bp to 8.8% by FY21, which along with savings on interest cost, would drive up PAT margin from 4% to 5.4%. With higher asset turns, RoCE and ROE is likely to improve from 14% and 18% in FY17 to 27.5% and 27.4% respectively in FY21.

DMART stock has given 2.7x return from IPO price, which largely captures past track record of creating unique scalable retail business model driven by flawless execution as well as captures the future growth. We value the stock at 45x FY19E EPS, and initiate coverage with a Neutral rating. Our target price of INR804 implies 2% downside.

Massive untapped opportunity offers high growth potential
The Indian retail industry is expected to grow at a CAGR of 11.7% to USD960b by 2020 from USD616b, organized brick and mortar retail is expected to grow at a faster CAGR of 20.2% to USD115b (12%). Thus, we believe, India’s retail Industry offers massive scope for growth. With its strong track record and its clusterbased approach towards expansion, DMART is well placed to benefit. Positioned as a value retailer, its overall revenue has grown at a CAGR of 40% and like-to-like revenue has grown higher than 20% in the last five years. Revenue per square foot has grown at a CAGR of 16% to INR29,019. Unlike most of its peers, DMART has been able to grow profitably without sacrificing on margins. It has grown from one store in 2002 to 131 stores across 11 states/UT’s. It is typically an early mover in areas populated by lower-middle, middle and aspiring upper-middle income
consumers in the income bracket of INR25,000-75,000 per month. DMART plans to open 25 new stores every year. Given that Gujarat and Maharashtra, which contribute ~80% to its revenue, contribute only 21% towards total retail spend in India (USD616b), the growth potential for DMART is immense.

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Manpasand Beverages BUY Research Report by Prabhudas Lilladher

We initiate coverage on Manpasand Beverages (MANB) with a BUY rating and 18-month target price of Rs1009 (26.3% upside). We estimate sales and PAT CAGR of 34% and 38.5% over FY17-20 and value the stock at 30x FY20 EPS. MANB trades at significant discount to global majors on PEG (0.7x v/s 1.5-2.7x) and EV/EBIDTA (11.3x v/s 11.6-17.3x), which should narrow down in coming years as MANB improves its ROE from 7-8% to 13% by FY20.

manpasand beverages

MANB mainly caters to the untapped growth opportunity in BHARAT (rural and small town India) led by small packs (<Rs10, 40% of Mango Sip sales) and product availability to capitalise on distribution gaps of majors like Coke, Pepsi and Frooti. MANB is likely to grow at above market rates led by 1) 1.2x capacity expansion to 370,000 cases/day 2) entry in new geographical regions in North, South and East by setting up new units in TN, Odisha and Haryana 3) allocation of 40% of incremental capacity for fruit based carbonated drinks (Fruits Up CSD) and 4) distribution expansion in modern trade and institutional segment (~25% of sales).


MANB is increasing focus on “Fruits UP” (launched in 2014) in order to grow in carbonated soft drinks segment and premium fruit based drinks. We note that these are ~25% of sales despite lack of capacity and limited distribution. Concessional GST rates for fruit based beverages (12% v/s 40% for aerated drinks) gives an advantage of Rs9.6/600ml which will enable the company to spend on advertising, distribution and marketing in Rs200bn CSD segment dominated by Coke and Pepsi. We estimate 81% sales CAGR in carbonated drinks over FY17-20. Manpasand is driven by first generation entrepreneur (Mr. Dhirendra Singh) which increases key man risk, however we expect MANB to have additional systems and processes in place as it scales up its operations to emerge as a pan India player.

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Fortis Healthcare BUY Research Report by Motilal Oswal

Possibility of three-step value unlocking
According to media reports, IHH Healthcare Bhd, Asia’s largest private hospital operator, may announce acquisition of a controlling stake in Fortis Healthcare Ltd (FORH) and SRL Diagnostics. In this note, we have evaluated the possibility of a three-step value unlocking in FORH: 1) IHH/private equity buying a controlling stake in FORH, 2) fresh equity infusion, which will be used to buyback RHT and 3) acquisition of a controlling stake in SRL to help provide exit to the existing private equity players. We have tried and analyzed the impact of all the three events.

fortis logo

Step-1: IHH/private equity buys controlling stake in FORH: According to media reports, IHH may buy a controlling stake in the company from the promoters, valuing FORH at INR140b. This would mean a fair value of INR270/ share (>35% upside from current levels).

Step-2: Fresh equity infusion in FORH to execute RHT buyback; TP will increase by ~20%: RHT is listed in Singapore with a market cap of ~INR35b in INR terms. Given that FORH will pay business trust (BT) cost of >INR4b to RHT in FY19E, at current market cap, RHT trades at 10.75x FY19E EV/EBITDA, significantly below hospital asset valuation of 20-22x forward EV/EBITDA. We believe that the acquisition of RHT will increase EV of FORH by ~INR60b. FORH owns ~30% stake in RHT, and thus, it will have to buy back the remaining stake (worth INR25b), for which it may look to raise fresh equity. Even after assuming dilution through fresh equity (share count increasing from 523m to 642m), our TP for FORH will increase from ~INR240 currently to INR290.

fortis financials

Step-3: Acquisition of controlling stake in SRL can defer demerger: According to media reports, IHH may look to buy controlling stake in SRL. This will help provide partial/complete exit to the existing private equity. According to FORH, the demerger process will complete by July-17 end/ Aug-17 beginning. We believe that the SRL business demerger, coupled with stake acquisition in FHTL and asset sweating in existing hospitals, will help unlock significant value for FORH’s shareholders.

Hospital business EBITDAC to grow 3x over FY17-19E: Given that a large part of BT cost is fixed (except Chennai, no major greenfield addition expected in the near term), we expect normalized growth in BT cost to be in mid-singledigits (much lower than EBITDAC CAGR of ~20%). The impact of one-time reduction of INR1b in BT cost on annualized basis due to the FHTL transaction will also come in FY18. Lower base, coupled with strong growth in EBITDAC and relatively flattish BT cost, would result in a multifold increase in hospital EBITDA for FORH from INR0.5b in FY16 to INR5.4b in FY19E.

Top pick in healthcare delivery space: Although RHT buyback could act as a significant catalyst (will increase the TP by INR50), regardless of this event, we argue for a multiple re-rating in the stock on the back of a multifold increase in hospital business EBITDA, SRL demerger, asset light expansion strategy and FHTL transaction. We have rolled forward our valuation multiple to FY19E from 1HFY19E. We have valued the hospital business based on 20x FY19E EV/EBITDA and the diagnostics business based on 25x FY19E EV/EBITDA. FORH remains our top pick in the healthcare delivery space with a TP of INR240.

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Magma Fincorp is a Buy – Nirmal Bang Research Report

Magma Fincorp Ltd. (Magma) is pan India NBFC engaged in the business of financing across the assets classes across the various geographies in India. It has a diversified portfolio consisting of cars and utility vehicles (UV), commercial vehicles (CV), construction equipment (CE), tractors (Agri), used vehicles, SME businesses and mortgage finance, Housing Finance and in addition to this Magma is engaged in General Insurance business.

magma fincorp

Investment Rationale:

Earlier during 2012 and 2013, Magma aggressively expanded its presence both in term of branches and employees. But due to two consecutive weak monsoons and slowdown in rural economy growth momentum could not sustain. However the demand in rural economy is picking up and with expectations of normal rainfalls this year the growth is likely to rebound. In addition to this Magma has changed the business processes internally with the clear focus on growth and quality of book.

Historically Magma has limited exposure to Car, CV and CE financing which was low yielding business. However the company has diversified in last three years to high yield portfolios which contributes 61.6% in FY17 as compared to 42.5% in FY14. This strategic change has led to improved profitability. Magma has implemented better credit monitoring systems and is now doing business under predefined frame work which is leading to minimal credit losses from the new business under this strategy. And by FY18E almost 70-75% of the book will be under this mechanism.

Net Interest Margins for the company are improving steadily over the years led by better mix of high yielding assets and efficient liability profile. We have projected NIMs at 7.5% for FY1 9E.

Valuation and Recommendation:

We initiate coverage with a BUY rating on Magma Fincorp Ltd. with target price of Rs. 183 (1.7x FY19E book value) implying an upside of 30% from current levels.

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Tejas Networks IPO – Should You Invest?

Tejas Networks incorporated in 2000 is an India based optical and data networking company with a customer base across 60 countries. Tejas designs, develops and sells products to telecommunication service providers, internet service providers, utility companies and government entities. The products are used to build communication network that carry voice, data and video traffic.

tejas networks

As of FY17, 63% of the business is derived from India and 27% is derived from rest of the world (Africa, Latin America, Malaysia). The company plans to raise Rs7,766mn through issue of 30.7mn shares (of which Rs4500mn is amount raised from fresh issue of shares and Rs3276mn is offer for sale of shares from existing investors). The funds raised would be predominantly used for Working capital requirements. We note the company has show strong
growth with revenues growing at 27.5% CAGR over FY14 ‐ FY17. However, historic performance of earlier years (FY07 ‐ FY11) shows huge volatility in the revenue as well profitability.

Also, Tejas Networks derives a huge chunk of business from PSU’s which contributed to 44% of net revenues for FY17 (Bharat Broadband Network Limited, BSNL, Power Grid Corporation of India, Railtel Corporation of India Limited). The strong revenue growth over the past two years was led by PSU clients and international markets. Our view is that company would have benefited from government initiatives to expand Broadband connectivity to villages. Business is also working capital heavy with net working capital cycle at 166 days as on FY17.

We have also observed volatile operating and free cash flow trajectory over the past five years. We believe strong growth might not be accompanied by free cash flow generation (For FY17, company generated Rs315mn in FCF, implying a FCF yield of 1.3%). At Rs250 ‐ 257/sh, the IPO is priced at 24x FY17 Adjusted EPS on post issue diluted equity capital. While growth might remain strong over next two years, we believe cyclical volatility and  high dependence on PSU’s is a concern. IPO appears to be priced at 15.5x FY19E. We recommend “Avoid” the issue.

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Ventura Research Report – Suzlon Energy

Based on our interactions, we have marginally upgraded our target on Suzlon by 4% to Rs 44.5 (12xFY20EV/EBIDTA). Our confidence in the sector has been bolstered given India’s recent commitment (at the Plenary Session of St. Petersburg International Economic Forum (SPIEF 2017) to cut back on carbon emissions. In addition Suzlon is also looking to monetize its assets (via IPO for its O&M subsidiary) and this gives confidence to the fact that the company is moving forward on its stated objective of debt reduction. Key takeaways of our interactions is as under:

suzlon share price

1. The company delivered volumes of 1573MW in wind and 109MW in Solar for FY16-17 which is 49% higher than the volumes of FY16. The wind power volume for Q4FY17 stood at 554MW as against our estimation of 720MW. The company was able to clock revenues of Rs 12,714 crore as against our estimate of Rs 12917 crore as the realizations were far higher than our initial assumption. However, we continue to build in lower realizations over the forecast period given that reverse bidding will lead to lower IRRs for the IPP. This in turn would be passed on to vendors.

suzlon financials

2. The gross margins came in at 40.6% and EBIDTA margins were 17.3% which was in line with our expectations. However the higher margins may not be able to sustain in future and would come down as the industry shifts to reverse bidding from FIT regime. The company reported EBIDTA of Rs 2248.3 crore against our estimates of Rs 2202.5 crore. The interest costs were 32 crores less than our estimates of Rs 1319.7 crore. The depreciation number was in line with the projections. However the company reported PAT of Rs 839.5 crore beating our expectation of Rs 601.1 crore. This was mainly due to forex gain of Rs 296.9 crore due to MTM of forex loan portfolio.

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Axis Research Report – KRBL

KRBL in Q4FY17 posted revenues of Rs 913 Cr. (up 28% YoY, up 14% QoQ), on account of 26% volume growth in the overall rice production. Due to brand strength, lower cost of material consumed, higher price realizations in domestic market and other efficiencies, KRBL recorded PAT of Rs 110 Cr. (up 18% YoY, down 1% QoQ).


With 25% growth in the domestic market in FY17, KRBL currently enjoys a market share of 32% in rice production. KRBL due to its financial strength and storage capability has an inventory worth Rs 1910 Cr (paddy and rice) which provides revenue visibility.

We believe changes in consumer preference towards branded Basmati rice in domestic market, Iran resuming purchases and entry into premium health foods segment augurs well for KRBL’s earnings. We value KRBL at 20x FY19E EPS and maintain BUY recommendation with a Target Price of Rs. 440

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Mahindra & Mahindra Stock Buy Report – Prabhudas Lilladher

Mahindra &Mahindra’s standalone adjusted results in Q4FY17 were below expectations as its EBITDA declined 12.8% YoY. While revenues grew 3.3% YoY to Rs111.3bn (PLe: Rs115.1bn), M&M’s EBITDA margin stood at 8.4%, lower 160bps YoY and 340bps QoQ. However, if we adjust for the one‐time discounts given by the company owing to BS III inventory clearance, the EBITDA margin stands at 10% (PLe:10.5%). The product mix was also slightly unfavourable, with tractors constituting 26.7% of total volumes (against 38.8% in Q3FY17 and 23.6% in Q4FY16). The farm equipment segment again benefitted from higher operating leverage YoY (on lower base) and its segmental EBIT margin improved 260bps YoY to 15.5% (lower 180bps QoQ). Boosted by higher non‐operating income, adjusted profit in Q4FY17 grew 11.4% YoY to Rs6.55bn (v/s expectation of ~Rs7bn).

mahindra share price

With government policies and budget 2017‐18 focusing on rural development, Mahindra &Mahindra’s tractor division should be a beneficiary. While the automotive division outlook remains subdued, better pick‐up sales and an early mover advantage in evehicles vis‐s‐vis domestic competitors provides better longer‐term outlook. We increase estimates by 4% for FY18e as well as FY19e. We maintain ‘Accumulate’ with a price target of Rs1,478 (previously Rs1,367), based on a core PE of 12x Mar’19e (Rs887) and value of investments and subsidiaries at Rs591.

M&M+MVML performance: Revenues grew by 4.3% YoY to Rs106.1bn (lower than expectations of Rs110.6bn). Gross margins were marginally lower by 20bps YoY as well as QoQ. Other expenditure / sales ratio was higher 40bps YoY and 340bps QoQ while staff cost / sales ratio was higher 90bps YoY but lower 80bps QoQ. Resultantly, EBITDA margin was lower 100bps YoY and 200bps QoQ at 11.7%, with EBITDA declining 4.4% YoY to Rs12.4bn (exp Rs13.9bn). With nonoperating income higher ~207% YoY, adjusted profit growth was 16.9% YoY to Rs8.04bn (PLe: Rs7.4bn).

mahindra financials

Standalone performance

M&M’s standalone revenues grew by 3.3% YoY to Rs111.3bn (exp Rs115.1bn). This was on the back of volume growth of 2.4% YoY and marginal improvement of 0.9% in blended realizations. Of the overall volume growth in Q4FY17, tractor volume growth was at a decent 16% YoY, while automotive volume decline was 1.8% YoY. As for the product mix, tractors constituted 26.7% of the volumes (as compared to 38.8% in Q3FY17 and 23.6% in Q4FY16).

Q4FY17 gross margins were slightly lower, down 40bps YoY (lower 160bps QoQ). Staff costs as well as other expenditure as a % of sales were higher 70bps YoY (lower 80bps QoQ) and 60bps YoY (higher 260bps QoQ) respectively leading to EBITDA margin being lower 160bps YoY and 340bps QoQ to 8.4%, with EBITDA declining 12.8% YoY to Rs9.4bn (lower than expected). However, adjusting for the discounts given by the company on account of BS III inventory clearance (amounting to Rs1.7bn), EBITDA margin stands at 10%. (PLe: 10.5%).

In the segmental mix, automotive EBIT margin was 3.2% (down 280bps YoY and 130bps QoQ), while the FES EBIT margin was 15.5% (up 260bps YoY but lower 180bps QoQ).

Significantly higher‐than‐expected non‐operating income at Rs3.08bn (up ~170% YoY), coupled with a relatively lower tax rate helped M&M’s one time gain (of Rs937mn) adjusted profit to grow 11.4% YoY to Rs6.55bn (PLe: Rs6.99bn).

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Alkem Laboratories Research Report by Angel Broking

Slower growth in domestic and US business: Alkem reported yoy revenue grew of 9% in 4QFY17. Domestic revenue grew by 7% yoy to `856cr while exports grew by 14.5% to `385cr. US revenue grew by 19.4% yoy to `291cr. Other exports were flat at `95cr. Domestic business contributed 69% of the total revenue during the quarter. Exports mix remains unchanged (vs. 3QFY17), with US contribution remaining at 23% of total revenues in 4QFY17. Gross margins declined by ~35bps on qoq basis but improved by 67bps on yoy basis. EBITDA declined by 4.2% yoy at `149cr vs. `156r in 4QFY16. EBITDA margins were at 11.9% vs. 13.6% in 4QFY16 and 18.1% in 3QFY17. The decline in EBITDA margins was largely on account of higher employee cost and increased R&D expenditure. PAT was at `137cr in 4QFY17 showing a yoy growth of 58.6%, due to the lower tax in the quarter.

alkem labs share price

Outlook and valuation: The stock at the CMP of `1,868 is available at P/E of 18.6x of FY19E EPS of `101. We have cut our EPS estimates by ~5% due to the recent slowdown in domestic business, likely disruption in the pharma industry due to higher GST and pricing pressure in the US. We expect company to report CAGR of 15.8% and 15.3% in top line and bottom line respectively in next two years. The company is expected to witness improvement in its return ratios owing to the rising profitability of US business. Moreover Alkem’s all manufacturing facilities are current with USFDA which gives confidence that company will deliver strong results over next two years. Considering these factors, we rate Alkem BUY with price target of Rs 2,161 based on 21.5x of FY19E EPS.

Alkem reported revenue grew of 9% yoy. Domestic revenue grew by 7% yoy to `856cr while exports grew by 14.5% to `385cr.

In the therapeutic segments, company grew by 4.7% in the quarter underperforming industry growth of 6.6%. Main reason behind this is negative growth rate that company clocked in Anti-infective and respiratory segments.

US revenue was at `291cr vs. `243cr in 4QFY16. US revenue growth was at 19.4% yoy, slower than our expectations. Other exports were flat on yoy basis to `95cr in 4QFY17. Company continues to focus on the US market which is clearly reflected in the numbers.

alkem labs financials

The company continues to maintain its market share in the Anti-infective, GI and pain management segments. In the acute segment, company has mainly put a subdued performance, however in the chronic segment; company has gained market share, especially in derma, cardiac and anti-diabetic segments. Domestic business contributed 69% of the total revenue while exports contributed the rest.

Export mix remains unchanged with US contribution at 23% in 4QFY17 vs.23.2% in 3QFY17. On yoy basis, this contribution has grown by 200bps.

Gross margins improved by~67bps on yoy basis but declined by 35bps on qoq basis.

Staff costs was at `229cr, showing a yoy increase of 19.3%. As % of net sales, staff cost was at 18.3% in the quarter vs. 16.7% in 4QFY16 and 18.3% in 3QFY17.

EBITDA came in at `149cr vs. `156cr in 4QFY16 showing a yoy decline of 4.2%.

EBITDA margins at 11.9% in the quarter declined by ~164bps on yoy basis and by ~616bps on qoq basis, mainly due to higher R&D and staff costs as mentioned above.

Net profit grew by 58.6% yoy from `87cr in 4QFY16 to `137cr in 4QFY17. This was due to lower tax rate in the quarter.

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HDFC Securities Research Report – JK Tyre & Industries Ltd

JK Tyre & Industries (JKTL) is the flagship company of the JK organization which has other interests in paper, cement, seeds and dairy. It is one of India’s leading tyre brands (pioneer in truck radials) and among the 25 largest tyre companies in the world. JKTL started manufacturing tyres in 1977 with a capacity of 0.5 mn tyres per annum which has grown to 35 mn tyres per annum currently through organic and inorganic route. The company is the market leader in truck/bus radial tyres. It has 9 manufacturing plants in India strategically located across the country – Mysuru, Banmore, Kankroli, Chennai and Haridwar and 3 in Mexico.

jktyre share price

Investment Rationale:
Improvement in road infrastructure to drive higher sales of CVs
Cavendish acquisition facilitates 2/3W segment entry and capacities for TBB/TBR
Increasing radialisation in commercial vehicles
Capex completed, revenue growth to kick in
Price hikes taken to compensate increase in rubber prices
Signs of dumping by China fading away

Raw material price volatility
Dumping of tyres by China
Slowdown in automobile growth
High competition from peer companies
Tornell unit could come under US trade restrictions

jktyre financialsView and Valuation
The acquisition of Cavendish (from Kesoram Industries Ltd) in April 2016 has given the company entry into the high volume 2/3W segment and additional TBR capacity which would drive its growth in the near term. Capacity expansions at its Chennai has also been completed and capacity utilization has been ramped up. The dwindling threat of Chinese imports should result in higher volumes and better margins for the company. Softening raw material prices and recent price hikes taken would lead to higher revenues and better margins in the coming year/s. The management is focusing on reducing debt which at 2.8x is the highest amongst the listed peer companies. JK Tyres has a successful track record of inorganic growth (Tornell in the past) and would soon succeed in reaping the benefits of Cavendish acquisition.

The whole tyre sector trades at low P/E multiple, we see scope for a rerating of the sector. Easing competitive intensity and price aggression leading to cross‐cycle margin flexibility could lead the rerating for a sector that otherwise enjoys healthy return ratios and has a very high exposure to the lucrative after‐market (like the battery sector, which trades at a 100%+ premium to tyres). JK Tyres quotes at an even lower P/E compared to its peers probably due to the high debt on its books. The brand names of the tyres remain visible in the vehicles resulting in brand recall (contrary to a lot of other auto ancilliary items including Batteries which are hidden in the vehicle).

At CMP of Rs 175 the stock quotes at 7.3x FY19E EPS (5.6xFY19 EV/EBITDA). We feel investors could BUY the stock at the CMP and add on dips to Rs 153-157 band (6.5xFY19E EPS; equivalent to 5.3xFY19 EV/EBITDA) for sequential targets of Rs.203 (8.5xFY19E EPS; equivalent to 6xFY19 EV/EBITDA) and Rs 227 (9.5xFY19E EPS; equivalent to 6.4xFY19 EV/EBITDA) in 2-3 quarters.

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