INSTITUTIONAL EQUITY RESEARCH Page | 1 | PHILLIPCAPITAL INDIA RESEARCH Ramkrishna Forgings (RMKF IN) Play the cycle, win the game INDIA |AUTOMOBILES | Initiating Coverage 4 September 2017 RMKF faced a thorny two years (FY16‐17), mainly as its key market of US Class‐8 trucks saw a sharp downturn and also because of the delayed ramp up of its new plant. We see the company doing well from here with an improving end‐market outlook and new order wins. Key positives: • New order wins from three OEMs in Europe worth upto EUR 4mn each • Increased penetration within existing domestic OEMs – over five product approvals leading to market‐share gains • The North American Class‐8 market is in a strong sustained growth mode • In advanced stages of winning more orders in the export market • Scouting for orders in new segments – aeronautics, defence, and oil & gas We see RMKF’s financials showing marked improvement from here: • 23% revenue CAGR in FY17‐20 • With the new press reaching optimal utilisation, 270bps improvement in margins to 21.5% in FY20; earnings to rise 8x by FY20 • The capex cycle is over; see substantial improvement in FCF and return ratios Strong order wins and new segments (heavy press) to drive growth RMKF has been consistently working on increasing content per vehicle and gaining market share from key OEM clients, which is visible from its development of +150 new products per year over the last five years. With its heavy 12,500‐tonne press commercialising in early FY17, it has gained considerable capability in manufacturing complex components. While the scaling‐up of its new press has been slower than street expectations, this was because of the sudden collapse of the US Class‐8 truck market. RMKF has come out strong from difficult times and has steadily gained fresh orders – both domestic and export. Its growth outlook looks good with the addition of three new European OEMs, share gain in the domestic and North American market and the improving global CV cycle. We expect strong 23% revenue CAGR in FY17‐20, mainly led by high‐margin exports and complex value‐added products. End market improving Of RMKF’s total FY17 revenues, 70% came from India. With the industry sailing through multiple issues – demonetisation, emission norms, GST transition – we see steady improvement in domestic MHCV sales (PC: 0/11% volume growth in FY18/19). Moreover, our analysis of North American Class‐8 trucks industry suggests a high correlation between ISM new orders and Class‐8 truck demand. With ISM New Orders showing strength, and low inventory, we see robust demand in this market in FY18‐19. Financials strengthening, valuations lucrative We expect a marked improvement in RMKF’s financials – 23% revenue CAGR in FY17‐20. With its capex cycle over, FCF should show substantial improvement and ROE should rise to 16%. Trading at 12x FY20 earnings, we see immense value in the company with its strong potential. Initiate with a BUY rating, valuing the company at Rs 700/share, 15x FY20 earnings, which is a hefty 30%+ discount to Bharat Forge. Key risks to our call include a slowdown in US Class‐8 trucks, slower execution of newly won orders, and market‐share loss by any key OEMs. BUY (Initiate) CMP RS 550 TARGET RS 700 (+27%) COMPANY DATA O/S SHARES (MN) : 33 MARKET CAP (RSBN) : 18 MARKET CAP (USDBN) : 0.3 52 ‐ WK HI/LO (RS) : 583 / 256 LIQUIDITY 3M (USDMN) : 0.4 PAR VALUE (RS) : 10 SHARE HOLDING PATTERN, % Jun 17 Mar 17 Dec 16 PROMOTERS : 50.4 50.4 50.4 FII / NRI : 12.6 12.4 12.6 FI / MF : 11.1 10.6 10.6 NON PRO : 10.1 10.4 10.1 PUBLIC & OTHERS : 15.8 16.2 16.3 PRICE PERFORMANCE, % 1MTH 3MTH 1YR ABS 5.4 19.4 36.9 REL TO BSE 7.8 17.5 25.3 PRICE VS. SENSEX Source: Phillip Capital India Research KEY FINANCIALS Rs mn FY18E FY19E FY20E Net Sales 10,900 13,306 16,145 EBIDTA 2,189 2,803 3,512 Net Profit 529 989 1,521 EPS, Rs 16.2 30.3 46.7 PER, x 34.3 18.4 11.9 EV/EBIDTA, x 10.8 8.0 5.7 P/BV, x 2.5 2.2 1.9 ROE, % 7.2 12.0 15.8 Debt/Equity (%) 93.8 74.0 55.0 Source: PhillipCapital India Research Est. Nitesh Sharma, CFA(+ 9122 6246 4126) [email protected]Dhawal Doshi(+ 9122 6246 4128) [email protected]50 90 130 170 Apr‐16 Oct‐16 Apr‐17 RK Forging BSE Sensex
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INSTITUTIONAL EQUITY RESEARCH
Page | 1 | PHILLIPCAPITAL INDIA RESEARCH
Ramkrishna Forgings (RMKF IN)
Play the cycle, win the game INDIA |AUTOMOBILES | Initiating Coverage
4 September 2017
RMKF faced a thorny two years (FY16‐17), mainly as its key market of US Class‐8 trucks saw a sharp downturn and also because of the delayed ramp up of its new plant. We see the company doing well from here with an improving end‐market outlook and new order wins. Key positives: • New order wins from three OEMs in Europe worth upto EUR 4mn each • Increased penetration within existing domestic OEMs – over five product approvals
leading to market‐share gains • The North American Class‐8 market is in a strong sustained growth mode • In advanced stages of winning more orders in the export market • Scouting for orders in new segments – aeronautics, defence, and oil & gas We see RMKF’s financials showing marked improvement from here: • 23% revenue CAGR in FY17‐20 • With the new press reaching optimal utilisation, 270bps improvement in margins to
21.5% in FY20; earnings to rise 8x by FY20 • The capex cycle is over; see substantial improvement in FCF and return ratios Strong order wins and new segments (heavy press) to drive growth RMKF has been consistently working on increasing content per vehicle and gaining market share from key OEM clients, which is visible from its development of +150 new products per year over the last five years. With its heavy 12,500‐tonne press commercialising in early FY17, it has gained considerable capability in manufacturing complex components. While the scaling‐up of its new press has been slower than street expectations, this was because of the sudden collapse of the US Class‐8 truck market. RMKF has come out strong from difficult times and has steadily gained fresh orders – both domestic and export. Its growth outlook looks good with the addition of three new European OEMs, share gain in the domestic and North American market and the improving global CV cycle. We expect strong 23% revenue CAGR in FY17‐20, mainly led by high‐margin exports and complex value‐added products. End market improving Of RMKF’s total FY17 revenues, 70% came from India. With the industry sailing through multiple issues – demonetisation, emission norms, GST transition – we see steady improvement in domestic MHCV sales (PC: 0/11% volume growth in FY18/19). Moreover, our analysis of North American Class‐8 trucks industry suggests a high correlation between ISM new orders and Class‐8 truck demand. With ISM New Orders showing strength, and low inventory, we see robust demand in this market in FY18‐19. Financials strengthening, valuations lucrative We expect a marked improvement in RMKF’s financials – 23% revenue CAGR in FY17‐20. With its capex cycle over, FCF should show substantial improvement and ROE should rise to 16%. Trading at 12x FY20 earnings, we see immense value in the company with its strong potential. Initiate with a BUY rating, valuing the company at Rs 700/share, 15x FY20 earnings, which is a hefty 30%+ discount to Bharat Forge. Key risks to our call include a slowdown in US Class‐8 trucks, slower execution of newly won orders, and market‐share loss by any key OEMs.
BUY (Initiate) CMP RS 550 TARGET RS 700 (+27%) COMPANY DATA O/S SHARES (MN) : 33MARKET CAP (RSBN) : 18MARKET CAP (USDBN) : 0.352 ‐ WK HI/LO (RS) : 583 / 256LIQUIDITY 3M (USDMN) : 0.4PAR VALUE (RS) : 10 SHARE HOLDING PATTERN, % Jun 17 Mar 17 Dec 16PROMOTERS : 50.4 50.4 50.4FII / NRI : 12.6 12.4 12.6FI / MF : 11.1 10.6 10.6NON PRO : 10.1 10.4 10.1PUBLIC & OTHERS : 15.8 16.2 16.3 PRICE PERFORMANCE, %
1MTH 3MTH 1YRABS 5.4 19.4 36.9REL TO BSE 7.8 17.5 25.3 PRICE VS. SENSEX
Source: Phillip Capital India Research KEY FINANCIALS Rs mn FY18E FY19E FY20ENet Sales 10,900 13,306 16,145EBIDTA 2,189 2,803 3,512Net Profit 529 989 1,521EPS, Rs 16.2 30.3 46.7PER, x 34.3 18.4 11.9EV/EBIDTA, x 10.8 8.0 5.7P/BV, x 2.5 2.2 1.9ROE, % 7.2 12.0 15.8Debt/Equity (%) 93.8 74.0 55.0
Source: PhillipCapital India Research Est. Nitesh Sharma, CFA(+ 9122 6246 4126) [email protected] Dhawal Doshi(+ 9122 6246 4128) [email protected]
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Page | 2 | PHILLIPCAPITAL INDIA RESEARCH
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Strong order wins, new segments to drive growth Focus on new complex products, increasing content per vehicle Develops more than 150 new products every year RMKF has been consistently working on increasing content per vehicle and gaining market share of key OEMs, which is visible in the development of over 150 new products (per annum) over the last five years. Very few companies globally have such heavy‐duty capacities With its heavy 12,500‐tonne press commercialising in early FY17, RMKF gained considerable strength in manufacturing complex components. It spent Rs 700mn to set up four new heavy presses (3,100, 4,300, 6,300, and 12,500 MT), the only company after Bharat Forge to own a 12,500MT press. With sub‐30% utilisation in FY17, this new unit holds a strong opportunity for RMKF, as very few companies globally have such heavy‐duty capacities. At full utilisation, RMKF has the potential to generate Rs 1.2bn revenue from this unit. Sailed through difficult times While the new press’ has scaled up slower than street anticipated, this was because of the sudden collapse of the US Class‐8 truck market. RMKF has sailed through difficult times strongly, and has steadily garnered fresh orders in both domestic and export markets. New product development
Source: Company, PhillipCapital India Research RMKF’s revenue CAGR between FY10‐17 was a strong 19% – with exports posting a stellar 52% CAGR. However, in FY17, its exports revenue declined 36% mainly due to the double‐digit drop in North American Class‐8 truck sales. Our analysis (below) suggests that the Class‐8 truck market is in a strong recovery mode as ISM new orders remain strong and US freight index post robust improvement. In addition, RMKF has recently won multi‐year contracts from three new European OEMs; the execution of these will be mainly towards the end FY18. We see a robust outlook for RMKF with: (1) the three new European OEM contracts, (2) market share gains in the Indian and north American markets, and (3) the improvement in the global CV cycle. We forecast strong 23% revenue CAGR in FY17‐20 mainly led by the high‐margin export segment and complex value‐added products; exports should clock 36% CAGR in FY17‐20.
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We forecast strong 23% revenue CAGR in FY17‐20 mainly led by the high‐margin export segment and complex value‐added products
Page | 3 | PHILLIPCAPITAL INDIA RESEARCH
RAMKRISHNA FORGINGS INITIATING COVERAGE
Exports’ contribution to increase materially Europe to contribute majority of exports growth
Source: Company, PhillipCapital India Research Significant headway in the domestic segment with fresh order wins With its new heavy‐tonnage press, RMKF has increased its capabilities in manufacturing heavy‐ and critical‐forged products – namely front axles, bell crank, connecting rods, crankshafts, and knuckles. With already strong client relationships, RMKF has not only won orders in exports, but has also made significant headway in the domestic segment – where it has won fresh orders from Tata Motors and Ashok Leyland for knuckles, front axles, and bell cranks. RMKF should nearly double its revenue from its key domestic clients (TTMT and AL) based on increasing content and market share wins. Domestic revenue CAGR of 18% in FY17‐20. Topline to see 23% CAGR – mainly led by exports
RMKF should nearly double its revenue from its key domestic clients (TTMT and AL) based on increasing content and market share wins
Page | 4 | PHILLIPCAPITAL INDIA RESEARCH
RAMKRISHNA FORGINGS INITIATING COVERAGE
End‐market improvement Class‐8 trucks should see healthy double‐digit growth rates until 2019 Our analysis suggests that the North American Class‐8 truck market is highly correlated to the US ISM New Orders Index (see chart below). Class‐8 truck orders saw a sharp 36% drop in 2016 mainly as the ISM new orders and freight shipments remained in the negative territory – which led to sharp inventory correction by OEMs. With steady improvement in the ISM New Orders Index and a pick up in freight demand, the Class‐8 orders have seen a sharp jump of 42% YTD‐CY17. This segment should report healthy double‐digit growth rates until 2019. Historically, the Class‐8 industry has seen a 3‐5 years of growth cycle before falling off – ze believe the industry is in its early days of recovery, and this is beneficial for RMKF, which has a meaningful exposure to the segment. North American Class‐8 orders are highly correlated with ISM New Orders Index
Source: Company, PhillipCapital India Research Class‐8 orders are up 42% YTD CY17 after posting a 36% decline in 2016
Source: Company, PhillipCapital India Research
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We believe the industry is in its early days of recovery, and this is beneficial for RMKF, which has a meaningful exposure to the segment
Page | 5 | PHILLIPCAPITAL INDIA RESEARCH
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Our analysis of historical data suggests that after 2‐3 years of falling, North American Class‐8 truck sales see a 3‐5‐year growth cycle. With Class 8 vehicle sales in North America recently picking up sharply, we expect the industry to remain in an upswing until 2020 – going by historical precedents. NA Class‐8 sales have historically seen a 3‐5 year growth cycle
Source: Company, PhillipCapital India Research Cass freight shipments Index, which measures freight activity, has steadily been in the positive territory since mid‐2016 Cass Freight Shipments Index
Source: Company, PhillipCapital India Research
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Our analysis of historical data suggests that after 2‐3 years of falling, North American Class‐8 truck sales see a 3‐5‐year growth cycle. With Class 8 vehicle sales in North America recently picking up sharply, we expect the industry to remain in an upswing until 2020 – going by historical precedents.
Cass freight shipments Index, which measures freight activity, has steadily been in the positive territory since mid‐2016
Page | 6 | PHILLIPCAPITAL INDIA RESEARCH
RAMKRISHNA FORGINGS INITIATING COVERAGE
After peaking out in 2016, Class‐8 inventory levels remained at comfortable levels, providing more legs to the recovery. Also, inventory/sales ratio remains below the historical average of 2.5x. North American Class‐8 inventory at comfortable levels… …and inventory‐to‐sales below historical average
Source: Company, PhillipCapital India Research
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Page | 7 | PHILLIPCAPITAL INDIA RESEARCH
RAMKRISHNA FORGINGS INITIATING COVERAGE
Europe cooling off, but not a problem While North America is experiencing strong growth in its Class‐8 truck market, the European region is seeing steady yet slowing growth. However, this is not a concern as the company generates less than 4% revenue from European OEMs and has recently won orders from three OEMs – worth upto EUR 4mn each. European heavy commercial vehicle growth cooling off
Source: Company, PhillipCapital India Research Domestic MHCV market bottoming out The domestic MHCV segment has seen declining volumes over the past 12 months, mainly impacted by demonetisation, GST, and the emission‐norms transition. With these behind, a smooth roll out of GST, and recovering rural demand should see the MHCV segment remaining flattish in FY18 and posting double‐digit growth in FY19/20. RMKF is likely to see higher‐than‐industry growth as it has recently received approvals for more varieties of front‐axle beams, knuckles, and crankshafts from Ashok Leyland and Tata Motors. We estimate its domestic revenues to clock 18% CAGR in FY17‐20. Domestic MHCV market has bottomed out
Domestic MHCV industry to see 11% volume CAGR in FY18‐20
Source: Company, PhillipCapital India Research
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Page | 9 | PHILLIPCAPITAL INDIA RESEARCH
RAMKRISHNA FORGINGS INITIATING COVERAGE
Financials strengthening, valuations lucrative Financials to make a sharp improvement • With improving demand outlook and strong order wins, RMKF should post strong
23% CAGR in revenue in FY17‐20. o Exports should clock 36% CAGR, led by fresh new orders from European
OEMs, ramp up of existing clients Dana and Meritor, and overall strong market outlook
o Domestic revenue CAGR should be 18%, led by increasing content and market‐share wins from key clients (TTMT and AL)
• Utilisation levels will cross 90% in FY20 • Margins will see significant (270bps) improvement in FY17‐20 as operating
leverage kicks in • Profits will increase 8x to Rs 1.5bn in FY20 (PAT) Strong revenue CAGR of 23% over FY17‐20
Free cash flow and return ratios to perk up With big capex (new presses) over, and a material turnaround in outlook, RMKF will see a strong increase in free cash flows, as it sweats assets. We expect ROE and ROCE to increase to 17% by FY20. FCF to improve as capex cycle is behind
Source: Company, PhillipCapital India Research
Return ratios to improve substantially
Source: Company, PhillipCapital India Research
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Page | 11 | PHILLIPCAPITAL INDIA RESEARCH
RAMKRISHNA FORGINGS INITIATING COVERAGE
Valuation Trading at 12x FY20 earnings, we see immense value in the company with its strong potential. Initiate with a BUY rating, valuing the company at Rs 700/share, 15x FY20 earnings, which is a hefty 30%+ discount to Bharat Forge 1yr forward band chart
Source: Company, PhillipCapital India Research
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Page | 12 | PHILLIPCAPITAL INDIA RESEARCH
RAMKRISHNA FORGINGS INITIATING COVERAGE
Company snapshot • Second‐largest forgings player in India, established in 1981. • Total capacity of 150,000 tonnes of which press lines constitute 80,000MT. • Key clientele: Tata Motors, Ashok Leyland, Dana Corp, Meritor. • Plants in Jamshedpur (Jharkhand) and Howrah (West Bengal). Revenue CAGR of 19% over FY10‐17 Consistent improvement in margin profile
Source: Company, PhillipCapital India Research
Well‐diversified revenue
Source: Company, PhillipCapital India Research
Key risks • Slowdown in the US Class‐8 trucks • Slower execution of newly won orders • Market‐share loss by any key OEMs
SWOT analysis Strengths Weaknesses • Robust new product development capabilities • Graduated from component manufacturer to
• No major OEM exposure in exports • Lack of experience in heavy forged parts • Non‐auto exposure is low
Opportunities Threats • Increasing market‐share with existing
relationships • Improving exposure to the non‐auto segment
• Highly dependent on the MHCV industry • Raw‐material volatility
Source: Company, PhillipCapital India Research
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Page | 13 | PHILLIPCAPITAL INDIA RESEARCH
RAMKRISHNA FORGINGS INITIATING COVERAGE
Key people Mr Mahabir Prasad Jalan – Chairman • Promoter, Experienced technocrat • BITS, Pilani (1970) – Mechanical Engineering • He has more than 45 years of experience in the forgings industry • Promoted Ramkrishna Forgings in 1981 Mr. Naresh Jalan – Managing Director • MBA in Finance & Marketing • 20 years of experience in forgings Mr Pawan Kumar Kedia – Executive Director • Diploma in taxation • 28 years total experience • Joined the company in 1998 Mr Sandipan Chakravortty – Independent Director • Mechanical Engineering Graduate from IIT Kharagpur (1970) • M.Tech in Industrial Engineering in Operations Research from from IIT Kharagpur
(1972) • More than 40 years in Tata Steel and its group companies
Rating Methodology We rate stock on absolute return basis. Our target price for the stocks has an investment horizon of one year. Rating Criteria Definition
BUY >= +15% Target price is equal to or more than 15% of current market price
NEUTRAL ‐15% > to < +15% Target price is less than +15% but more than ‐15%
SELL <= ‐15% Target price is less than or equal to ‐15%.
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Additional Disclosures of Interest: Unless specifically mentioned in Point No. 9 below: 1. The Research Analyst(s), PCIL, or its associates or relatives of the Research Analyst does not have any financial interest in the company(ies) covered in
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research report. 4. The Research Analyst, PCIL, and its associates have not received compensation for investment banking or merchant banking or brokerage services or for
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connection with the research report. 7. The Research Analyst has not served as an Officer, Director, or employee of the company (ies) covered in the Research report. 8. The Research Analyst and PCIL has not been engaged in market making activity for the company(ies) covered in the Research report. 9. Details of PCIL, Research Analyst and its associates pertaining to the companies covered in the Research report: Sr. no. Particulars Yes/No
1 Whether compensation has been received from the company(ies) covered in the Research report in the past 12 months for investment banking transaction by PCIL
No
2 Whether Research Analyst, PCIL or its associates or relatives of the Research Analyst affiliates collectively hold more than 1% of the company(ies) covered in the Research report
No
3 Whether compensation has been received by PCIL or its associates from the company(ies) covered in the Research report No4 PCIL or its affiliates have managed or co‐managed in the previous twelve months a private or public offering of securities for the
company(ies) covered in the Research report No
5 Research Analyst, his associate, PCIL or its associates have received compensation for investment banking or merchant banking or brokerage services or for any other products or services from the company(ies) covered in the Research report, in the last twelve months
No
Independence: PhillipCapital (India) Pvt. Ltd. has not had an investment banking relationship with, and has not received any compensation for investment banking services from, the subject issuers in the past twelve (12) months, and PhillipCapital (India) Pvt. Ltd does not anticipate receiving or intend to seek compensation for investment banking services from the subject issuers in the next three (3) months. PhillipCapital (India) Pvt. Ltd is not a market maker in the securities mentioned in this research report, although it, or its affiliates/employees, may have positions in, purchase or sell, or be materially interested in any of the securities covered in the report.
Suitability and Risks: This research report is for informational purposes only and is not tailored to the specific investment objectives, financial situation or particular requirements of any individual recipient hereof. Certain securities may give rise to substantial risks and may not be suitable for certain investors. Each investor must make its own determination as to the appropriateness of any securities referred to in this research report based upon the legal, tax and accounting considerations applicable to such investor and its own investment objectives or strategy, its financial situation and its investing experience. The value of any security may be positively or adversely affected by changes in foreign exchange or interest rates, as well as by other financial, economic, or political factors. Past performance is not necessarily indicative of future performance or results.
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RAMKRISHNA FORGINGS INITIATING COVERAGE
Sources, Completeness and Accuracy: The material herein is based upon information obtained from sources that PCIPL and the research analyst believe to be reliable, but neither PCIPL nor the research analyst represents or guarantees that the information contained herein is accurate or complete and it should not be relied upon as such. Opinions expressed herein are current opinions as of the date appearing on this material, and are subject to change without notice. Furthermore, PCIPL is under no obligation to update or keep the information current. Without limiting any of the foregoing, in no event shall PCIL, any of its affiliates/employees or any third party involved in, or related to computing or compiling the information have any liability for any damages of any kind including but not limited to any direct or consequential loss or damage, however arising, from the use of this document.
Copyright: The copyright in this research report belongs exclusively to PCIPL. All rights are reserved. Any unauthorised use or disclosure is prohibited. No reprinting or reproduction, in whole or in part, is permitted without the PCIPL’s prior consent, except that a recipient may reprint it for internal circulation only and only if it is reprinted in its entirety.
Caution: Risk of loss in trading/investment can be substantial and even more than the amount / margin given by you. Investment in securities market are subject to market risks, you are requested to read all the related documents carefully before investing. You should carefully consider whether trading/investment is appropriate for you in light of your experience, objectives, financial resources and other relevant circumstances. PhillipCapital and any of its employees, directors, associates, group entities, or affiliates shall not be liable for losses, if any, incurred by you. You are further cautioned that trading/investments in financial markets are subject to market risks and are advised to seek independent third party trading/investment advice outside PhillipCapital/group/associates/affiliates/directors/employees before and during your trading/investment. There is no guarantee/assurance as to returns or profits or capital protection or appreciation. PhillipCapital and any of its employees, directors, associates, and/or employees, directors, associates of PhillipCapital’s group entities or affiliates is not inducing you for trading/investing in the financial market(s). Trading/Investment decision is your sole responsibility. You must also read the Risk Disclosure Document and Do’s and Don’ts before investing.
Kindly note that past performance is not necessarily a guide to future performance.
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For U.S. persons only: This research report is a product of PhillipCapital (India) Pvt Ltd., which is the employer of the research analyst(s) who has prepared the research report. The research analyst(s) preparing the research report is/are resident outside the United States (U.S.) and are not associated persons of any U.S.‐regulated broker‐dealer and therefore the analyst(s) is/are not subject to supervision by a U.S. broker‐dealer, and is/are not required to satisfy the regulatory licensing requirements of FINRA or required to otherwise comply with U.S. rules or regulations regarding, among other things, communications with a subject company, public appearances, and trading securities held by a research analyst account.
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