IPO Note | Auto Ancillary
October 3, 2016
Endurance Technologies Limited
SUBSCRIBE
Issue Open: October 5, 2016
On Strong footing
Issue Close: October 7, 2016
Endurance Technologies is an Aurangabad based Auto Ancillary Company. It has
25 manufacturing facilities of which 18 are in India and 7 are in Europe. Its India
Issue Details
business has been an organic growth story while European business is fully
Face Value: `10
acquired. It derives 70% revenues from India and 30% from Europe. Currently
Present Eq. Paid up Capital: `14.06cr
company operates in five segments namely Die-casting (62.8% of revenues),
Suspension (23.3%), Transmission (5.5%), Brake systems (4.6%) and Aftermarket
Fresh Issue: Nil
(3.8%). The company is prominently 2W and 3W component supplier in India
Offer for sale: 2.46 cr (`1,149crs* `1,162crs**)
and 4W auto component supplier in Europe.
Post Eq. Paid up Capital: `14.06crs
Scalable business model: Endurance has a strong business model and is on its
Market Lot: 30 Shares
way to achieve diversification. It is the largest die-casting player in India and has
strong market share in its other products. The die-casting market is expected to
Fresh Issue (amount): Nil
grow at a CAGR of 8-10% between FY16-FY19 whereas market for Suspension,
Price Band: `467-472
transmission and brake systems is expected to grow at a CAGR of 14.3% during
the same period. We believe that there is ample scope of growth from here
Post-issue implied mkt. cap `6,569cr* -`6,639cr**
considering recovery of Indian automobile industry has been better than expected.
Note:*Lower price band **Upper price band
Profitable operations in Europe: Endurance operates 7 manufacturing facilities in
Germany and Italy and its major client there is FCA Italy S.p.A. Its European
operations enjoy have higher EBITDA margins that it’s Indian operations. The
Book Building
revenue in Europe is likely to grow faster as demand for low weight aluminum
QIBs
50%
die-casts is expected to increase due to stringent regulations to control emissions.
Non-Institutional
15%
Consistent profitability over last five years: Endurance has shown decent record of
Retail
35%
profitability despite slower growth in the Indian and European automobile
industry. With its strong focus on cost control and automation, company has
improved its gross margins as well as overall profitability. Endurance also enjoys
~22% return on equity which is better than most of its peers.
Bajaj Auto contributes
38% of total revenues: Endurance has high client
concentration with top three clients contributing 58% of its revenues. In FY2010,
Bajaj Auto contributed 51.5% of its total revenues which has come down to 38%
in FY2016 due to the de-risking measures taken by the company. Endurance
continues to add more clients in India and Europe and this strategy is expected to
decline its client concentration significantly.
Outlook Valuation: At the higher end of the price band, company is asking for a
valuation 22.9x of its FY16 EPS of `20.6. This valuation looks at par with its
peers. We believe that the issue is fairly priced at the current valuation considering
its growth initiatives, scalability in operations, focus on profitability and strong RoE
profile. We recommend to ‘Subscribe’ to this issue.
Key Financials
Y/E March (` cr)
FY2012
FY2013
FY2014
FY2015
FY2016
Total operating income
3,832
3,822
4,212
4,917
5,241
% chg
(0.2)
10.2
16.7
6.6
Reported PAT
182
169
204
252
290
% chg
(7.1)
20.8
23.5
14.8
(% of Net Sales)
4.8
4.4
4.9
5.1
5.5
EPS (`)
13.0
12.0
14.5
17.9
20.6
P/E (on FDEPS)
36.4
39.2
32.5
26.3
22.9
Shrikant Akolkar
RoE
29.9
23.0
20.9
22.1
19.9
+91 22 39357800 Ext: 6846
RoE (%)
5.9
6.7
5.3
10.1
11.4
[email protected]
Source: Company, Angel Research; Note: Valuation ratios based on pre-issue outstanding shares and at upper end of the price band
Please refer to important disclosures at the end of this report
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Endurance Technologies | IPO Note
Company background
Endurance is an Aurangabad based Auto Ancillary company with presence in India
and Europe. The company was officially incorporated as Anurang Engineering
company Private ltd by Mr. Anurang Jain in 1985 and was supplying aluminum die
casts to Bajaj Auto in its initial years. Later, company started suspension products
in 1996, transmission products in 1998 and brake systems in 2004. Starting from
one manufacturing facility in
1985, the company currently operates
25
manufacturing facilities in India and Europe. The company expanded its operations
in European auto ancillary sector by acquiring three companies in Italy and
Europe. Endurance’s clients are Bajaj Auto, Honda Motorcycle and Scooter India
Private Ltd, Hero Motorcorp Ltd, India Yamaha Motor Private Ltd, Royal Enfield,
Tata Motors, FCA Italy S.p.A, etc. Currently company operates in five segments
namely Die-casting (62.8%), Suspension (23.3%), Transmission (5.5%), Brake
systems (4.6%) and Aftermarket (3.8%). Domestic operations contribute 70% of its
revenues whereas 30% comes from Europe. The company is prominently 2W and
3W component supplier in India and 4W auto component supplier in Europe.
Exhibit 1: Latest revenue Mix (%)
4.60%
3.80%
5.50%
23.30%
62.80%
Aluminium Casting and Machining
Suspension
Transmission
Braking Systems
Aftermarket
Source: Company, Angel Research
Key Management Personnel
Mr. Naresh Chandra - Chairman and Non-Executive Director - Mr Chandra has
been with Endurance since inception and became the Chairman in 1999. He has
over 33 years in the automobile industry. Mr. Chandra has previously served as
the chairman and managing director on the board of Kaycee Industries Limited.
Mr. Anurang Jain - Promoter and Managing Director - Mr. Jain promoted
Endurance in 1985. He is responsible for the overall operations of the company.
He holds a MBA from the University of Pittsburgh.
Mr. Satrajit Ray - Chief Financial Officer- Mr. Ray has been with Endurance since
2010. He is an associate member of ICAI and has an experience of over 32 years.
He has previously worked with the Indian Aluminum Company Ltd (Indal),
Hindalco Industries Ltd and MIRC Electronics Ltd.
October 3, 2016
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Endurance Technologies | IPO Note
Issue details
The proposed issue is not for raising any fresh capital for the company. This issue
however will allow exit to its current investor (a Private equity), Actis Components
and System Investments (Actis). The promoter of the company, Mr. Anurang Jain
will also sell 5.3 Mn of his shares with this IPO. He holds 42.1% of company
shares which will come down to 38.4% when issue is completed.
Below are the names of the shareholders who are selling their shares through this
IPO.
Exhibit 2: Shareholding pattern
Name of the Shareholder
Shareholding %
Pre-IPO
Post-IPO
Promoter and promoter group
86.28
82.50
Others
13.72
17.50
Total
100
100
Source: Company, Angel Research
Objects of the offer
The company will not receive any IPO proceeds as this IPO is to allow exit for the
current private equity shareholder Actis.
October 3, 2016
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Endurance Technologies | IPO Note
Investment rationale
Largest domestic auto ancillary: Endurance is one of the largest auto ancillary
companies in India with domestic revenues of `3,559cr in FY2016. It is moving
towards a diversified business model at every level of operations such as improving
product mix, geographical mix, client mix, etc. Most facilities are in proximity to the
OEM manufacturing facilities which save logistic costs for the company. Endurance is a
tier-1 supplier for OEMs for most of its products which means it directly supplies
components to the OEMs.
In FY2016, Endurance reported total revenues of `5,628cr of which 70% came
from its domestic operations and
30% come from the European business.
Company forayed in European business by acquiring controlling stakes in three
companies at different times. By FY2016, the European business is fully acquired
by the company. As of FY2016, company operates
7 fully automated
manufacturing facilities in Germany and Italy.
Exhibit 3: Plant Locations
Source: Company, Angel Research
Overall, Endurance has presence in five business segments. Of these segments,
Aluminum Casting and Machining (die-casting) is its largest business segment
which contributes 62.8% of its revenues. Suspension (23.30%), transmission
(5.5%), braking systems (4.60%) and Aftermarket (3.8%) make the rest of its
revenue mix. Endurance is largest die-casting company in India in terms of
capacity and output. This makes Endurance’s business scalable as exposure to
different geographies/ products/vehicle types ensure that the company participates
in the growth story of each of these segments.
There is high degree of comfort in Endurance’s 70% exposure to domestic
operations as growth rate of overall Indian automobile industry is higher than
European automobile industry. The growth rate also has secular drivers such as
growing penetration of the passenger vehicles (favorable for 4 wheelers), huge
October 3, 2016
4
Endurance Technologies | IPO Note
middle-class population (favorable for 2 wheelers), and poor state of the public
transport system (favorable for 3 wheelers).
Exhibit 4: Revenue by vehicle types
34.8%
54.5%
10.6%
Two wheelers
3 Wheelers & others
4 Wheelers
Source: Company, Angel Research
Die-casting -sizable - A scalable opportunity: Die-casting business is a bread
winner of Endurance (62.80% of FY2016 revenues). Die-casting in automobile is
manufacturing of geometrically complex metal parts using reusable molds.
Automobiles consume multiple metal parts manufactured through process of die-
casting. They form integral parts of vehicles and accounts for about 18-19% of 2
wheeler and 3 wheeler automotive components. The aluminum die-casting market
in India is pegged at `7,850cr which is expected to grow at a CAGR of 8-10%
between FY2016-FY2019. Endurance is the largest die-casting company in India
and accounts about ~22% of this market share. The demand for higher fuel
economy class vehicles (bikes and cars) has sparked the demand for the aluminum
parts. Historically this has helped Endurance to scale-up its die-casting business to
the current level. The ongoing recovery in the automobile segment is further
expected to boost the die-casting business in India. Endurance’s strong track
record in this business, well planned capacities, growing client base and strong
market share are some qualitative points that should help the company further
expand its domestic business to newer levels.
Exhibit 5: Casting and Machining - revenue break-up
11%
37%
52%
India
Italy
Germany
Source: Company, Angel Research
October 3, 2016
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Endurance Technologies | IPO Note
The European, die-casting industry was ~$8.5bn (~`56,000cr) in 2015 and is
expected to grow at a CAGR of 6.6% to reach $12.8 billion (~`72,400cr) by
2022. This will be mainly due to the growth in the vehicle sales as economy
continues to recover. Besides the growth in automobile industry, inclusion of
lightweight parts vehicles has also influenced the market growth. The regulations to
curb pollution are another driving force behind the growth of the aluminum die-
casting industry in Europe. Its major client in Europe is FCA Italy S.p.A. which has
brands such as Jeep, Chrysler, Alfa Romeo, Abarth, Fiat and Lancia. Daimler AG
is also its client. Company has said that it has received order from another big
German vehicle manufacturer which is expected to commission in next two year. In
the last three years, Endurance’s European business has grown at a CAGR of
19.41% and it expects to continue to do well in Europe over strong growth drivers,
new client additions and ability to scale-up its business.
Suspension, Transmission and Brake systems: Suspension, Transmission and Brake
systems together form 37% of Endurance’s revenues. Company has seen its
revenues in Suspension and Brake systems growing by
10.8% and
14.8%
respectively in the last three years whereas the revenues from Transmission
business have grown at CAGR of 5.4% during the same period. Company has
been able to grow faster than competition in Suspension and Brake systems
however in Transmission; its growth has remained laggard. The growing demand
for 2 wheelers and 3 wheelers is expected to fuel the demand for Suspension,
Transmission and Brake systems. Overall, the combined market for Suspension,
Transmission and Brake systems is expected to grow from `7,500cr in FY2016 to
`11,200cr in FY2019E showing a CAGR of 14.3%. We also observe that the
company has been able to increase its market share in these categories
from~19% in FY2014 to ~23% in FY2016.
Exhibit 6: Total Suspension, Transmission and Brake systems market
12,000
17.3
20.0
12.2
12.5
15.0
10,000
10.4
13.1
10.0
8,000
5.0
6,000
0.0
4,000
-5.0
2,000
(9.6)
-10.0
0
-15.0
FY14
FY15
FY16
FY17E
FY18E
FY19E
Total market size (` Cr)
Growth rate (%)
Source: Company, Angel Research
In India, nearly 3/4th of the vehicle market is motorbikes from which derives more
than half of its revenues. While Bajaj comprises its largest client in two wheelers
and it also has Honda, Royal Enfield, Hero Motorcorp, etc as its customers. With
the improvement in the domestic automobile sales, the company would be able to
cater to the growing demand for two wheelers from each of these companies.
October 3, 2016
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Endurance Technologies | IPO Note
Besides company has also set its focus on scooters which is seeing a huge traction
in sales numbers in India. This will further be positive for the company.
In three wheelers, Bajaj Auto accounts for the nearly 56% of total market share.
Bajaj Auto being the oldest and largest client of Endurance, the business
opportunity in three wheeler segment remains strong and company would be able
to increase its revenues from three wheeler categories as well. Overall we see
improved revenues from this segment due to increasing vehicle sales, client
network and strong market share.
Consistent profitability over last five years: Endurance’s business has shown a
decent record of profitability despite the slower growth witnessed in the Indian and
European automobile industry. Strong cost control and reliance on Automation has
been key drivers of its regular profitability. During the period of the financial crisis
of 2008-09, Endurance had taken high leverages on its balance sheet; however
the global meltdown led to a massive fall in consumer demand including demand
for automobiles. This had a domino effect on the auto ancillary companies
worldwide. Endurance’s profitability shrunk in FY2008 as demand took huge
beating, but company managed to come back to profits very next year, by keeping
tight cost control and outsourcing noncore operations. The company since then
has continued to focus on low costs and improving its profitability. As a result, cost
of material consumed as % of sales has come down from 62.4% in FY2010 to
54.3% in FY2016. Its profitability has improved significantly during this period and
net worth has increased from
`432cr in FY2010 to
`1,454cr in FY2016.
Strategically, company has created a CXO level position for raw material sourcing
which we believe is and out of the box thinking. This also hints that the focus on
tight cost control and improving profitability will remain even in future.
Profitable European operations: Endurance’s European business has been
profitable and company has been able to maintain its profitability till date. We
attribute this to management’s confidence of buying business in Europe and
integrate its operations successfully with its main business. Company has a strategy
to buy a small auto ancillary business with sufficient land instead of buying a big
business. This has helped the company by cautiously invest capital in the business
according to the management’s vision and demand scenario. This is a good
strategy in our opinion as we have seen multiple examples where aggressive
acquired businesses have failed to integrate with the main business or sometimes
eroding the shareholders returns.
Company currently employs 700 employees in Europe and a lot of operations are
performed through automation. This has led to have ~15% EBITDA margins in its
European business (higher than domestic). Endurance expects to maintain its
growth record in Europe and has received orders from a very large German
vehicle manufacturer. Company expects to start working on these orders in the
next year which will bring further revenue upside in its European business.
Endurance believes that electric / self driving cars would be a good opportunity as
these types of cars have more number of parts made up of Aluminum. This
increases a scope of aluminum casting products in the cars and hence a good
opportunity.
October 3, 2016
7
Endurance Technologies | IPO Note
Overall financial performance: Overall, Endurance’s revenues have grown from
`4,521cr in FY2014 to `5,627cr in FY2016, showing a 3 year CAGR of 11.6%.
Gross margins have improved from 41.6% to 45.75% during the same period as
impetus on low material costs and automation has handsomely rewarded its
efforts. EBITDA margins however have remained flat between 12-12.5% as
company absorbed employee costs due to the integration of its European business.
Key highlight however has been its lower finance cost which has declined from
`81cr in FY2014 to `46cr in FY2016. Company has reduced its short term
borrowing and its credit rating has also improved after de-leveraging its balance
sheet. Average interest cost during this period dropped significantly boosting net
profit which is evident from its bottom-line 3 year CAGR of 19.1% vs. top line
CAGR of 11.6%. Company has also maintained RoE at more than 22% which is
higher than its most peers such as Munjal Showa, Gabriel India, Rico Auto, JBM
Auto, etc.
Outlook and Valuation
We view Endurance as profitable franchisee and with higher scalability in its
business. We also view cost control measures and integration of European
business as an indication of strong management. We however view strong
dependence on Bajaj Auto as a risk factor but also believe that management has
realized it and is working towards reducing the same.
The company has kept the price band very tight (`467-472) so essentially
company is asking for a valuation of between 22.7x (at lower band) and 22.9x (at
higher band) of its FY2016 EPS of `20.60. This valuation looks at par with the
valuation of Minda Industries and Gabriel India which also enjoy similar return on
equity. The valuation looks quite expensive when compared to other peers JBM
Auto which is priced between 16.4x of their FY2016 EPS but has much less RoE.
We believe that the issue is fairly priced at the current valuation considering its
growth initiatives, scalability in operations, focus on profitability and strong RoE
profile. We recommend to ‘Subscribe’ to this issue.
Risks
The company has strong reliance on Bajaj Auto to generate its revenues.
Though the contribution of Bajaj Auto has come down significantly over last
five years, it remains a risk factor for the company.
The company derives 30% of its revenues from Europe. While European
economy continues to recover from the past slump, any drastic change in the
course of recovery of European economy may have negative impact on
company’s business.
October 3, 2016
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Endurance Technologies | IPO Note
Income Statement
Y/E March (` cr)
FY2012
FY2013
FY2014
FY2015
FY2016
Total operating income
3,832
3,822
4,212
4,917
5,241
% chg
(0.2)
10.2
16.7
6.6
Total Expenditure
3,317
3,330
3,671
4,312
4,564
Raw Material Consumed
2,363
2,400
2,638
2,971
3,053
Personnel Expenses
273
296
334
421
478
Others Expenses
681
634
699
920
1,032
EBITDA
515
493
541
605
677
% chg
(4.3)
9.8
11.9
11.9
(% of Net Sales)
13.4
12.9
12.8
12.3
12.9
Depreciation& Amortization
187
187
208
227
251
EBIT
328
305
333
378
426
% chg
(6.9)
9.1
13.5
12.7
(% of Net Sales)
8.6
8.0
7.9
7.7
8.1
Net Interest charges
85
65
52
19
13
Recurring PBT
243
241
280
359
413
% chg
(0.9)
16.5
28.2
14.9
Extraordinary Expense/(Inc.)
-
8
5
-
-
PBT (reported)
243
233
276
359
413
Tax
60
63
70
105
122
(% of PBT)
24.7
27.2
25.6
29.3
29.6
PAT before MI
183
170
205
254
291
Minority Interest (after tax)
1
0
1
2
1
Profit/Loss of Associate Company
-
-
-
-
-
PAT after MI(reported)
182
169
204
252
290
Exceptional Items
-
-
-
-
-
Reported PAT
182
169
204
252
290
% chg
(7.1)
20.8
23.5
14.8
(% of Net Sales)
4.8
4.4
4.9
5.1
5.5
Basic EPS (`)
13.0
12.0
14.5
17.9
20.6
Fully Diluted EPS (`)
13.0
12.0
14.5
17.9
20.6
% chg
(7.1)
20.8
23.5
14.8
October 3, 2016
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Endurance Technologies | IPO Note
Balance Sheet
Y/E March (` cr)
FY2012
FY2013
FY2014
FY2015
FY2016
SOURCES OF FUNDS
Equity Share Capital
20
19
19
18
18
Reserves& Surplus
590
716
961
1,124
1,437
Shareholders’ Funds
610
736
980
1,142
1,454
Minority Interest
1
2
11
11
-
Total Loans
765
784
497
581
606
Other long term liabilities
3
3
3
3
10
Long-term provisions
15
20
21
38
38
Deferred Tax Liability
8
4
2
1
1
Total Liabilities
1,402
1,549
1,515
1,775
2,109
APPLICATION OF FUNDS
Gross Block
2,201
2,341
2,639
2,989
3,515
Less: Acc. Depreciation
1,121
1,277
1,505
1,648
1,914
Net Block
1,080
1,064
1,133
1,342
1,601
Capital Work in Progress
57
32
14
22
82
Goodwill
115
117
138
111
145
Investments
0
8
10
1
1
Other long term assets
43
57
82
119
127
Current Assets
1,041
1,065
1,141
1,191
1,335
Inventories
223
225
265
386
407
Sundry Debtors
611
621
675
579
593
Cash
147
150
119
94
167
Loans & Advances
46
53
66
112
110
Other Assets
15
16
16
20
59
Current liabilities
934
793
1,003
1,010
1,183
Net Current Assets
107
271
139
181
153
Total Assets
1,402
1,549
1,515
1,775
2,109
October 3, 2016
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Endurance Technologies | IPO Note
Cash Flow Statement
Y/E March (` cr)
FY2012
FY2013
FY2014
FY2015
FY2016
Profit before tax
243
233
280
359
413
Depreciation
187
187
208
227
251
Change in Working Capital
60
(102)
81
(13)
49
Interest / Dividend (Net)
91
89
72
50
44
Direct taxes paid
(56)
(68)
(79)
(109)
(105)
Others Expenses
17
6
7
(101)
34
Cash Flow from Operations
542
345
569
413
686
(Inc.)/ Dec. in Fixed Assets
(252)
(198)
(240)
(300)
(472)
(Inc.)/ Dec. in Investments
(4)
2
(2)
(11)
(80)
Others Expenses
17
(6)
30
13
6
Cash Flow from Investing
(239)
(203)
(212)
(299)
(547)
Issue of Equity
0.6
(42.4)
-
(1.7)
-
Inc./(Dec.) in loans
(138.5)
(10.7)
(289.7)
(81.7)
(1.5)
Dividend Paid (Incl. Tax)
(2.2)
(4.0)
(4.3)
(6.4)
(29.6)
Interest / Dividend (Net)
(95.1)
(94.7)
(83.0)
(49.0)
(32.5)
Cash Flow from Financing
(235)
(152)
(377)
(139)
(64)
Inc./(Dec.) in Cash
68
(10)
(20)
(24)
76
Opening Cash balances
65
133
124
104
90
Closing Cash balances
133
124
104
80
166
October 3, 2016
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Endurance Technologies | IPO Note
Key Ratios
Y/E March
FY2012
FY2013
FY2014
FY2015
FY2016
*Valuation Ratio (x)
P/E (on FDEPS)
36.4
39.2
32.5
26.3
22.9
P/CEPS
18.0
18.6
16.1
13.9
12.3
P/BV
10.9
9.0
6.8
5.8
4.6
Dividend yield (%)
0.0
0.1
0.1
0.1
0.4
EV/Sales
1.8
1.8
1.7
1.4
1.3
EV/EBITDA
13.7
14.3
13.0
11.6
10.4
EV / Total Assets
3.0
3.0
2.8
2.5
2.1
Per Share Data (`)
EPS (Basic)
13.0
12.0
14.5
17.9
20.6
EPS (fully diluted)
13.0
12.0
14.5
17.9
20.6
Cash EPS
26.3
25.4
29.3
34.1
38.4
DPS
0.2
0.3
0.3
0.5
2.1
Book Value
43.3
52.3
69.7
81.2
103.4
Returns (%)
ROCE
23.9
20.1
22.5
21.9
20.7
Angel ROIC (Pre-tax)
28.0
23.0
24.9
23.5
23.5
ROE
29.9
23.0
20.9
22.1
19.9
Turnover ratios (x)
Asset Turnover (Gross Block)
1.7
1.6
1.6
1.6
1.5
Inventory / Sales (days)
34
34
37
47
49
Receivables (days)
55
55
54
40
38
Payables (days)
98
82
94
82
88
WC cycle (ex-cash) (days)
(9)
7
(3)
6
(1)
Solvency ratios (x)
Net debt to equity
1.0
0.9
0.4
0.4
0.3
Net debt to EBITDA
1.2
1.3
0.7
0.8
0.6
Interest Coverage (EBIT / Int.)
3.9
4.7
6.3
20.4
32.7
*Valuation ratios calculated on upper price band
October 3, 2016
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Endurance Technologies | IPO Note
Research Team Tel: 022 - 39357800
E-mail: [email protected]
Website: www.angelbroking.com
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October 3, 2016
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