INDIA DAILY

January 25, 2017 India 24-Jan 1-day 1-mo 3-mo Sensex 27,376 1.0 5.1 (2.5) Nifty 8,476 1.0 6.1 (2.5) Contents Global/Regional indices Dow Jones 19,913 0.6 (0.1) 9.6 Daily Alerts Nasdaq Composite 5,601 0.9 2.5 6.0 Results FTSE 7,150 (0.0) 1.2 1.9 HDFC Bank: Minor bruises Nikkei 19,054 1.4 (1.9) 9.7 Hang Seng 23,066 0.5 6.9 (2.1)

Bharti Airtel: The pain is evident KOSPI 2,067 0.1 1.5 1.5 HCL Technologies: Big bets Value traded – India Cash (NSE+BSE) 233 168 58 Asian Paints: Wait for the right entry price continues Derivatives (NSE) 5,652 3,508 3,765 Zee Entertainment Enterprises: Margin disbelief misplaced Deri. open interest 3,157 2,789 3,068

TVS Motor: Decent results; but expectations of margin expansion could be tested Forex/money market Mahindra & Mahindra Financial: Betting heavily on a recovery Change, basis points 24-Jan 1-day 1-mo 3-mo

Adani Power: Weak generation, rising cost Rs/US$ 68.2 3 39 136 Ashoka Buildcon: Stage well set 10yr govt bond, % 6.8 (1) (6) (20) Net investment (US$ mn) Results, Change in Reco 23-Jan MTD CYTD (1,702 FIIs (38) 2,903 Bharti Infratel: A tough call; downgrade to REDUCE ) MFs 9 1,078 6,951 Change in Reco Top movers Change, % L&T: Domestic hand for real Best performers 24-Jan 1-day 1-mo 3-mo

HNDL IN Equity 187.2 3.0 17.5 24.4

VEDL IN Equity 252.5 2.9 16.5 23.8

SAIL IN Equity 61.9 0.8 25.3 22.2

NMDC IN Equity 147.0 1.1 19.4 19.7

CAIR IN Equity 275.4 1.8 12.9 19.4

Worst performers

DIVI IN Equity 683.1 (0.6) (20.7) (46.5)

RCOM IN Equity 31.2 0.8 (10.2) (33.6)

UT IN Equity 4.5 0.0 11.1 (26.2)

MMFS IN Equity 277.7 1.2 8.5 (22.0)

HDIL IN Equity 62.6 2.4 7.8 (21.9)

Kotak Institutional Equities Research [email protected] . Mumbai: +91-22-4336-0000

For Private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES’ RATING SYSTEM AND OTHER DISCLOSURES. REFER TO THE END OF THIS MATERIAL.

ADD HDFC Bank (HDFCB) Banks JANUARY 25, 2017 RESULT Coverage view: Attractive

Minor bruises. HDFC Bank reported 15% yoy earnings growth, which is lower than Price (`): 1,268 20% growth trends reported in recent past as demonetization took effect. Loan growth Target price (`): 1,350 slowed to 13% yoy and revenue growth was at 15% yoy. CASA growth has been fairly BSE-30: 27,376 strong but loan growth is getting a higher share from unsecured loans. High market share in select products and low growth for the industry resulting in high competition in retail remains the key risk. Maintain ADD with TP at `1,350 (`1,300 earlier).

Company data and valuation summary HDFC Bank Stock data Forecasts/Valuations 2017E 2018E 2019E 52-week range (Rs) (high,low) 1,318-928 EPS (Rs) 57.3 66.7 76.9

Market Cap. (Rs bn) 3,236.1 EPS growth (%) 17.8 16.3 15.3 QUICK NUMBERS Shareholding pattern (%) P/E (X) 22.1 19.0 16.5 Promoters 21.3 NII (Rs bn) 326.1 361.4 403.8  NII grew 18% yoy; FIIs 50.6 Net profits (Rs bn) 144.9 168.5 194.4 MFs 9.3 BVPS 328.6 380.3 438.5 earnings grew 15% Price performance (%) 1M 3M 12M P/B (X) 3.9 3.3 2.9 yoy Absolute 6.9 0.3 23.0 ROE (%) 18.5 18.7 18.6 Rel. to BSE-30 1.6 3.3 9.8 Div. Yield (%) 0.9 1.0 1.2  CASA grew 38% yoy; Gross NPLs at Business slows but impact is lower than expected 1.1%

HDFC Bank reported earnings growth of 15% yoy, one of the lowest in recent history as  Maintain ADD with revenue growth slowed to 15% yoy. NII grew 18% yoy, which is ahead of loan growth of 13% TP at `1,350 (`1,300 yoy while non-interest income grew 9% yoy. Fee income was sluggish at 10% yoy. CASA earlier) growth was strong at 38% yoy with a similar growth trends on savings and current deposits. NIM declined 10 bps qoq to 4.1%. The repatriation of FCNR deposits and lending against these deposits has had an additional impact in the current quarter with deposit growth on adjusted basis higher at 25% (21% yoy reported) and loan growth at ~16% yoy (13% yoy reported). Impairment ratios were stable qoq with gross NPLs at 1.1% and net NPL at 0.3%. Cost-income ratio declined marginally to 42% from 44% in the previous quarter. The performance for the quarter has been marginally higher than expected, especially on fee income.

A few one-off on growth; growth and high share of unsecured loans remains the big concern

The performance on loan growth, adjusted for one-off, continues to impress in an environment where there was a challenge on disbursements. However, two key concerns remain—the weak loan growth at the sector level, which can impact HDFC Bank as gaining market share would be a challenge in this environment. On the other hand, the bank has increased the share of unsecured loans as it is closer to peak levels of ~15% that we saw in FY2008 and yet, margins have already moved towards the lower end at 4-4.4% and we are seeing an increase in loan- loss provisions. There is a concern that this pressure could extend for a few more quarters and M B Mahesh CFA spreads in the lending business could decline further from current levels. [email protected] Mumbai: +91-22-4336-0886

Maintain ADD: revise TP to `1,350 (from `1,300 earlier) Nischint Chawathe [email protected] We maintain our ADD rating post changes to earnings. We value the bank at ₹1,350 (from Mumbai: +91-22-4336-0887 ₹1,300 earlier), which implies 3.3X book and 19X September FY2018E EPS. We expect the Abhijeet Sakhare bank to deliver 16% CAGR in earnings for FY2017-19E and RoEs in the range of 18%. Our [email protected] broad thesis remains intact as we continue to see the bank compounding led by healthy Mumbai: +91-22-4336-0889 balance sheet growth. We see HDFC Bank as a frontrunner in capturing the fast-growing retail opportunity. Even as other banks are getting more active in retail, HDFC Bank’s strong execution track-record of building a strong retail network underpinned by stable liability profile provides comfort on growth and profitability.

Kotak Institutional Equities Research [email protected] Mumbai: +91-22-4336-0000

For Private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES’ RATING SYSTEM AND OTHER DISCLOSURES, REFER TO THE END OF THIS MATERIAL. HDFC Bank Banks

Exhibit 1: HDFC Bank – quarterly performance March fiscal year-ends, 3QFY16-3QFY17 (` mn)

(% chg.) 3QFY17 3QFY17E 3QFY16 2QFY17 3QFY17E 3QFY16 2QFY17 9MFY17 9MFY16 (% chg.) 2017E Interest income 176,056 175,401 154,111 170,699 0.4 14.2 3.1 511,916 442,247 15.8 690,207 Interest on advances 131,756 130,406 114,835 129,014 1.0 14.7 2.1 385,478 328,790 17.2 517,698 Interest on investments 40,493 41,315 36,514 38,181 (2.0) 10.9 6.1 116,767 103,304 13.0 159,097 Other interest 3,806 3,680 2,762 3,505 3.4 37.8 8.6 9,671 10,153 (4.7) 13,412 Interest expense 92,965 94,047 83,426 90,764 (1.2) 11.4 2.4 271,074 240,865 12.5 364,166 Net interest income 83,091 81,353 70,685 79,936 2.1 17.6 3.9 240,841 201,382 19.6 326,042 Non interest income 31,427 29,855 28,722 29,010 5.3 9.4 8.3 88,502 78,859 12.2 118,451 - fee income 22,068 20,649 20,048 21,039 6.9 10.1 4.9 62,886 55,867 12.6 85,168 - exchange income 2,972 3,051 2,774 2,950 (2.6) 7.1 0.7 9,067 9,450 (4.1) 12,277 - sale of invts. 3,986 3,750 3,279 2,835 6.3 21.6 40.6 9,590 6,162 55.6 12,000 Non treasury income 27,441 26,105 25,443 26,175 5.1 7.9 4.8 78,912 72,697 8.6 106,451 Total income 114,518 111,209 99,407 108,945 3.0 15.2 5.1 329,344 280,240 17.5 444,493 Op. expenses 48,425 48,749 42,048 48,700 (0.7) 15.2 (0.6) 144,814 123,954 16.8 194,298 Employee cost 16,886 16,738 14,313 16,572 0.9 18.0 1.9 49,310 42,043 17.3 66,537 Other cost 31,539 32,011 27,736 32,128 (1.5) 13.7 (1.8) 95,504 81,912 16.6 127,761 Operating profit 66,093 62,460 57,359 60,246 5.8 15.2 9.7 184,530 156,286 18.1 250,195 Provisions and cont. 7,158 5,617 6,539 7,490 27.4 9.5 (4.4) 23,315 20,632 13.0 30,625 PBT 58,935 56,843 50,820 52,756 3.7 16.0 11.7 161,215 135,655 18.8 219,570 Tax 20,281 19,057 17,251 18,202 6.4 17.6 11.4 55,619 46,435 19.8 74,711 Net profit 38,653 37,786 33,568 34,553 2.3 15.1 11.9 105,596 89,220 18.4 144,860 Tax rate (%) 34.4 33.5 33.9 34.5 34.5 34.2 34.0 Op.profit excl treasury gains 62,107 58,710 54,080 57,411 5.8 14.8 8.2 174,940 150,124 16.5 238,195 EPS (Rs) 15 13 14 13.8 11.4 41 35 57 Key balance sheet items (Rs bn) Total deposits 6,347 5,240 5,917 21.1 7.3 Savings deposits 1,866 1,354 1,600 37.8 16.7 Current deposits 1,012 740 792 36.7 27.9 Term deposits 3,468 3,145 3,526 10.3 (1.6) CASA ratio (%) 45.4 40.0 40.4

Loans 4,950 4,364 4,944 13.4 0.1 Corporate and others 2,340 2,215 2,420 5.6 (3.3) Retail credit 2,611 2,149 2,524 21.5 3.4 Housing loans 354 284 336 24.6 5.5 Car loans 584 498 565 17.5 3.5 Loan against sec 13 11 13 12.6 0.9 Personal loans 465 351 447 32.5 3.9 Two wheeler 61 52 58 17.3 5.0 Credit cards 237 197 213 20.2 11.0 Commercial vehicles 176 150 166 17.5 5.8 Business Banking 321 269 315 19.3 1.9

Source: Company, Kotak Institutional Equities estimates

Exhibit 2: Revenue growth is similar to loan growth Revenue and earnings growth, March fiscal year-ends, 2010-3QFY17 (%)

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 1QFY17 2QFY17 3QFY17 Net interest income 45.7 40.9 42.0 13.0 25.7 22.2 22.7 16.9 21.2 23.2 21.8 19.6 17.6 Non interest income 35.0 50.4 44.2 15.7 13.9 33.4 18.5 15.6 13.6 19.5 14.0 13.7 9.4 Total revenue 42.4 43.7 42.6 13.8 22.0 25.5 21.4 16.5 18.9 22.1 19.6 18.0 15.2 Total operating expenses 43.2 54.7 47.7 4.2 24.1 29.7 21.1 7.2 16.2 21.4 19.2 16.2 15.2 Loans 33.9 35.1 55.9 27.3 27.1 22.2 22.7 26.4 20.6 27.1 23.2 18.1 13.4 Balance sheet 24.1 46.0 37.6 21.4 24.7 21.8 18.5 22.8 20.1 20.0 20.0 19.5 20.4 Earnings growth 31.1 39.3 41.2 31.4 33.2 31.6 30.2 26.0 20.5 20.4 20.2 20.4 15.1

Source: Company, Kotak Institutional Equities

KOTAK INSTITUTIONAL EQUITIES RESEARCH 3 Banks HDFC Bank

Exhibit 3: HDFC Bank trading at 3.3X one-year forward book Exhibit 4: Valuation premium to ICICI Bank has decreased One-year forward PER and PBR, 2009-16 (X) HDFC Bank PBR to ICICI Bank and Axis Bank PBR, 2009-16 (X)

Rolling PER (X) (LHS) Rolling PBR (X) (RHS) ICICI Bank Axis Bank 30 4.5 3.5

24 3.9 3.0

18 3.3 2.5

12 2.7 2.0

6 2.1 1.5

0 1.5 1.0

Jan-10

Jan-11

Jan-12

Jan-13

Jan-14

Jan-15

Jan-16

Jan-17

Jan-10

Jan-11

Jan-12

Jan-13

Jan-14

Jan-15 Jan-16 Jan-17

Source: Company, Bloomberg, Kotak Institutional Equities estimates Source: Company, Bloomberg, Kotak Institutional Equities estimates

Marginal impact of demonetization on retail loan growth

HDFC Bank reported 13% yoy loan growth, impacted by US$2 bn repayments of loans linked to FCNR deposits. Adjusted for this, loan growth is around 16% yoy. Retail loan growth was impressive at 22% yoy (3% qoq), showing marginal slowdown compared to 25%+ average growth over the past 4-6 quarters. Share of retail has inched up to 52% (~150 bps up qoq) helped by redemption of FCNR-related loans from the non-retail loan book, which grew 6% yoy and declined 3% qoq.

Unsecured loan growth remains high, contributing 27% of retail loans

In line with trends over a few quarters, unsecured loans remained the mainstay of retail loan growth. Personal loan and credit card loans together grew 28% yoy and 6% qoq, but growth was tilted towards personal loan (33% yoy, 4% qoq), compared to credit cards (20% yoy, 11% qoq). Contribution of unsecured retail loans has grown to ~27% from ~22% in FY2014.

With strong support from low-cost funding and yield pressure emerging in the system elsewhere, the bank has been aggressive in growing the unsecured book, thus providing support to the overall margins. Given the strength of the retail balance sheets at the moment, the current level of strong growth does not raise any red-flags at the moment.

Growth in auto loans moderated with car and 2W loan growth of 18% yoy and 4% qoq. CV loan growth was 17% yoy and 6% qoq, while growth in business banking loans (which includes LAP) was 19% yoy and 6% qoq.

HDFC Bank has grown at ~25% yoy in the past four quarters, well above the industry loan growth of below 10%. The bank has indicated in the past that that they intend to grow at 3-6 percent points above the system loan growth and the excess growth over this alpha may taper down. The bank does not explicitly target any share for retail, but the relative slowdown in corporate have led to increase in share of retail loans. Our own state-wise analysis suggests market share gains for HDFC Bank in both deposits and loans across most states.

While 3QFY17 growth reflects the impact of demonetization, we are not too sure if the bank would be able to improve loan growth >25% in the medium term considering that the underlying business environment remains challenging, which implies near-term loan growth

4 KOTAK INSTITUTIONAL EQUITIES RESEARCH HDFC Bank Banks

would be subdued for the industry and the bank is expected to grow at a premium to industry average.

Exhibit 5: Proportion of retail loans inched up in 2QFY17 Break-up of loan book, March fiscal year-ends, 2010-3QFY17 (%)

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 1QFY17 2QFY17 3QFY17 Retail 60.6 60.3 61.9 61.8 50.2 50.1 54.8 56.9 48.0 47.3 48.2 49.5 51.1 52.7 Housing loans — — — 5.1 6.9 7.2 7.3 7.0 6.3 6.6 6.9 7.1 6.8 7.2 Auto loans 33.1 29.4 26.9 25.7 20.4 20.2 21.5 20.9 16.5 15.7 15.1 15.5 16.0 16.6 Commercial vehicles 14.0 10.2 9.4 8.1 4.8 5.1 6.7 6.7 4.3 3.5 3.2 3.3 3.4 3.5 Car loans 13.7 14.9 15.1 15.7 14.3 13.8 13.5 12.9 11.1 11.1 10.8 11.1 11.4 11.8 Two wheelers 5.4 4.3 2.4 1.9 1.3 1.2 1.3 1.3 1.1 1.1 1.2 1.2 1.2 1.2 Unsecured 13.4 13.6 15.5 12.8 10.0 9.5 10.7 11.5 11.1 11.5 12.4 13.1 13.4 14.2 Business loans 6.8 11.1 13.5 12.8 8.7 9.4 9.5 10.2 7.1 5.2 5.4 5.4 6.4 6.5 Others 7.2 6.2 6.1 10.4 11.1 11.0 13.1 14.3 13.2 14.9 15.2 15.5 15.4 15.5 Corporate loans/others 39.4 39.7 38.1 38.2 49.8 49.9 45.2 43.1 52.0 52.7 51.8 50.5 48.9 47.3

Source: Company, Kotak Institutional Equities

Asset quality broadly stable; coverage ratio stable qoq at 70%

Gross NPL and net NPL ratios were broadly stable qoq at 1.1% and 0.3% of loans respectively. Provision coverage was stable qoq at 70%. Management commentary on impact of demonetization was mixed, indicating that there may be marginal impact of spillover in fourth quarter as some of the business banking exposures have taken little longer to fully recover in the 3QFY17 itself.

We are less concerned on the NPL cycle and believe that the risk of further deterioration looks unlikely, which implies that the scope for provisions to remain at these levels would depend upon the change in the loan profile (higher share of lending to the unsecured loan portfolio). We forecast 1.1%-1.2% gross NPL ratio over next two years with credit costs of ~60-65 bps.

Exhibit 6: Provision coverage stable qoq at 70% Break-up of provisions made during a year, March fiscal year-ends, 2010-16 (Rs mn)

2010 2011 2012 2013 2014 2015 2016 NPAs 19,389 7,630 10,918 12,342 16,326 17,236 21,336 Standard assets — — 1,505 1,237 2,213 2,963 4,400 Investment depreciation — — 934 522 (41) (38) 152 Floating 500 6,700 7,000 4,000 300 — 1,150 Securitized assets (0) 26 98 59 (262) 46 (29) Restructured assets 150 (44) (41) (64) (9) 179 (126) Contingencies 1,361 4,749 (1,645) (1,332) (2,654) 365 373 Oustanding provisions 21,400 19,061 18,769 16,764 15,873 20,750 27,256

Notes: (a) Comparison with earlier years will be incorrect as FY2013 has seen a change in reporting where income from written-off loans have been shifted to non-interest income from the earlier practice of netting with provisions. FY2012 numbers restated as per the change in accounting policy.

Source: Company, Kotak Institutional Equities

Calculated NIM stable qoq; growth in unsecured loans supporting yields/spreads

Calculated NIM was largely stable (3 bps down qoq) to 4.3%, with stable spreads at 3.8%. Yield on loans was stable at 10.7% with investment yields improving slightly to 7%. NIM in the quarter reflects the combined impact of (1) higher CASA ratio, (2) phase out of low- margin FCNR related loan book and (3) transient impact of demonetization-related measures such as CRR hike etc.

We would be cautious at the bank’s NIM as we believe that we are currently at peak lending spreads in the business and the high competition and shift to corporate loans would make it challenging to expand NIM from current levels. We expect NII CAGR of ~14% in FY2017-

KOTAK INSTITUTIONAL EQUITIES RESEARCH 5 Banks HDFC Bank

19E and expect it to lag ~15% loan CAGR. We forecast NIM (calculated) to decline by ~50 bps over FY2017-19E.

Core fee growth of 10% yoy

Non-interest income growth of 9% yoy was broadly in line with fee income growth of 10% yoy. Management indicated that transaction fees (interchange, ATM, etc.) may be impacted as the volume growth will likely be offset by fee reduction in the immediate term but improve in the medium to long term as usage of digital channels improve.

Cost growth at 15% yoy, ~200 bps improvement in cost-income ratio

Cost-income ratio improved to 42% from 45% qoq as operating costs declined marginally qoq. Overall operating expense growth was similar to revenue growth at 15% yoy. Slower cost-growth is driven by lower disbursement growth in 2W/auto loans leading to lower dealer commission. Also, ongoing staff efficiency program also led to savings with staff strength shrinking qoq for the bank.

CASA ratio strong at 45%; growth of 37% yoy and 20% qoq

Overall deposit growth was 21% yoy with CASA balances growing by 37% yoy and 20% qoq, reflecting strong positive impact of demonetization. The quarter also witnessed redemption of US$3 bn FCNR deposits, which led to slower growth of 10% yoy in term deposits.

Other key highlights

 Tier-1 ratio stands comfortable at 13.8% with overall CAR at 15.9% as per Basel-3 guidelines.

Exhibit 7: Network expansion was slower in 3QFY17 March fiscal year-ends, 2007-3QFY17 (#)

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 1QFY17 2QFY17 3QFY17 Branches 684 761 1,412 1,725 1,986 2,544 3,062 3,403 4,014 4,520 4,541 4,548 4,555 ATMs 1,605 1,977 3,295 4,232 5,471 8,913 10,743 11,176 12,000 12,000 12,013 12,016 12,087

Source: Company, Kotak Institutional Equities

Exhibit 8: HDFC Bank has one of the highest opex to assets ratios among private sector banks Operating expenses to total assets, March fiscal year-ends, 2013-19E (%)

Opex to total assets Employee costs to total assets 2013 2014 2015 2016 2017E 2018E 2019E 2013 2015 2015 2016 2017E 2018E 2019E Axis Bank 2.2 2.2 2.2 1.8 2.2 2.2 2.2 0.8 0.7 0.7 0.7 0.7 0.7 0.7 HDFC Bank 3.0 2.6 2.6 2.6 2.5 2.4 2.2 1.1 0.9 0.9 0.9 0.9 0.8 0.8 ICICI Bank 1.8 1.9 1.9 1.9 1.9 1.9 1.9 0.8 0.8 0.8 0.7 0.7 0.8 0.8 IndusInd Bank 2.7 2.8 2.8 3.1 3.2 3.0 2.9 1.0 1.0 1.0 1.0 1.0 0.9 0.9 Yes Bank 1.5 1.7 1.9 2.0 2.2 2.3 2.2 0.8 0.8 0.8 0.9 1.0 1.0 0.9 Notes: (a) 2015 figures are estimates for Axis Bank and ICICI Bank. (b) Opex to total assets not comparable for FY2009-10 as the bank has changed its policy with recognition of origination costs in retail loans.

Source: Companies, Kotak Institutional Equities estimates

6 KOTAK INSTITUTIONAL EQUITIES RESEARCH HDFC Bank Banks

Exhibit 9: Earnings growth requires a strong and consistent improvement in cost-income ratio Cost-income ratio, March fiscal year-ends, 2011-19E (%)

2011 2012 2013 2014 2015 2016 2017E 2018E 2019E Axis Bank 42.7 44.7 42.6 40.8 40.7 38.5 41.1 44.8 46.3 HDFC Bank 48.1 49.7 49.6 44.6 44.6 44.3 43.7 42.7 41.7 ICICI Bank 42.2 43.0 40.6 36.8 36.8 34.7 35.4 41.4 41.3 IndusInd Bank 48.2 49.4 48.8 46.8 46.8 47.0 47.3 48.6 49.5 Yes Bank 36.3 37.7 38.4 39.4 41.3 40.9 41.9 44.7 45.1

Source: Companies, Kotak Institutional Equities estimates

Exhibit 10: Earnings growth close to revenue growth in 3QFY17 Exhibit 11: Earning growth was better than loan growth Earnings and revenue growth, March fiscal year-ends, 3QFY14- Earnings and loan growth, March fiscal year-ends, 2QY14-3QFY17 3QFY17 (%) (%)

Revenue growth (LHS) Earnings growth (RHS) Loan growth (LHS) Earnings growth (RHS) 32 28

24 21

14 16

7 8

0 0

3QFY14

3QFY14

4QFY14

4QFY14

1QFY15

1QFY15

2QFY15

2QFY15

3QFY15

3QFY15

4QFY15 4QFY15

1QFY16 1QFY16

2QFY16 2QFY16

3QFY16 3QFY16

4QFY16 4QFY16

1QFY17 1QFY17

2QFY17 2QFY17 3QFY17 3QFY17 Notes: (a) Revenues not strictly comparable as the bank has changed its Source: Company, Kotak Institutional Equities accounting for certain expenses and income.

Source: Company, Kotak Institutional Equities

KOTAK INSTITUTIONAL EQUITIES RESEARCH 7 Banks HDFC Bank

Exhibit 12: HDFC Bank—key parameters and balance sheet March fiscal year-ends, 3QFY16-3QFY17

3QFY16 4QFY16 1QFY17 2QFY17 3QFY17 Yield management measures (%) NIM 4.3 4.3 4.4 4.2 4.1 Asset quality details Gross NPL(Rs mn) 42,552 43,928 49,209 50,690 52,323 Gross NPL (%) 1.0 0.9 1.0 1.0 1.1 Net NPLs (Rs mn) 12,606 13,204 14,934 14,889 15,643 Net NPL (%) 0.3 0.3 0.3 0.3 0.3 Capital adequacy ratios (%) CAR 15.9 15.5 15.5 15.4 15.9 Tier I 13.2 13.2 13.3 13.3 13.8 Tier II 2.7 2.3 2.2 2.1 2.1 Other key details Branches 4,281 4,520 4,541 4,548 4,555 ATM network 11,843 12,000 12,013 12,016 12,087 Balance sheet snapshot (Rs bn) Capital and liabilities Capital 5 5 5 5 5 Reserves and surplus 6,514 6,514 8,323 6,407 7,037 Deposits 5,240 5,464 5,738 5,917 6,347 Borrowings 600 530 689 770 721 Other liabilities and provisions 319 367 361 395 362 Total 6,879 7,088 7,551 7,888 8,280 Assets Cash and balances with RBI 268 301 284 286 500 Balances with banks, money at call and short notice 58 89 119 179 41 Investments 1,823 1,639 2,063 2,067 2,361 Advances 4,364 4,646 4,706 4,944 4,950 Fixed assets 32 33 35 35 35 Other assets 333 381 344 377 393 Total 6,879 7,088 7,551 7,888 8,280

Source: Company, Kotak Institutional Equities

Exhibit 13: HDFC Bank—estimate changes March fiscal year-ends, 2017-19E (` bn)

New estimates Old estimates % change 2017E 2018E 2019E 2017E 2018E 2019E 2017E 2018E 2019E Net loan growth (%) 13.3 16.0 16.5 14.2 15.8 16.3 Total assets 8,357 9,733 11,310 8,384 9,749 11,314 (0.3) (0.2) (0.0) Total income 445 497 561 443 504 573 0.4 (1.5) (2.0) Net interest income 326 361 404 325 368 417 0.4 (1.8) (3.1) NIM (%) 4.5 4.2 4.0 4.4 4.3 4.1 Other income 118 135 157 118 136 156 0.4 (0.6) 0.9 Fee income 85 97 115 83 97 114 2.3 0.0 0.7 Expenses 194 212 234 198 219 241 (1.7) (3.0) (2.8) Employee cost 67 76 85 66 75 84 0.5 0.8 0.9 Other cost 128 137 149 132 144 156 (2.9) (5.0) (4.8) Loan loss provisions 30 34 43 30 34 43 1.2 (0.7) (0.5) PBT 220 250 284 215 250 288 2.2 (0.3) (1.5) PAT 145 169 194 143 169 197 1.4 (0.3) (1.5) PBT-treasury+provisions 238 271 313 233 272 319 2.2 (0.3) (1.8) EPS (Rs) 57 67 77 56 67 78 1.4 (0.3) (1.5)

Source: Company, Kotak Institutional Equities estimates

8 KOTAK INSTITUTIONAL EQUITIES RESEARCH HDFC Bank Banks

Exhibit 14: We expect HDFC Bank to deliver RoEs of 19-20% in the medium term ROE breakup, March fiscal year-ends, 2012-19E (%)

2012 2013 2014 2015 2016 2017E 2018E 2019E Net interest income 4.2 4.3 4.1 4.1 4.2 4.2 4.0 3.8 Other income 1.9 1.9 1.7 1.7 1.7 1.5 1.5 1.5 Treasury (0.1) 0.0 0.1 0.1 0.1 0.2 0.1 0.1 Others 1.9 1.8 1.6 1.6 1.5 1.4 1.4 1.4 Total income 6.0 6.1 5.8 5.8 5.9 5.8 5.5 5.3 Operating expenses 3.0 3.0 2.6 2.6 2.6 2.5 2.4 2.2 Employees 1.1 1.1 0.9 0.9 0.9 0.9 0.8 0.8 Others 1.9 1.9 1.7 1.7 1.7 1.7 1.5 1.4 Pre provision income 3.1 3.1 3.2 3.2 3.3 3.2 3.1 3.1 Loan loss provisions 0.6 0.5 0.4 0.4 0.4 0.4 0.4 0.4 Pre -tax pre extraordinary income 2.4 2.6 2.8 2.8 2.9 2.8 2.8 2.7 RoA pre-tax/prov/treasury/extr. 3.1 3.1 3.1 3.1 3.2 3.1 3.0 3.0 (1- tax rate) 68.8 69.0 66.6 66.6 66.0 66.0 67.5 68.5 RoA 1.7 1.8 1.9 1.9 1.9 1.9 1.9 1.8 Avg assets/avg equity 11.1 11.2 10.3 10.3 9.6 9.9 10.0 10.1 RoE 18.7 20.3 19.4 19.4 18.3 18.5 18.7 18.6

Notes: (a) Net interest income includes income from mutual fund reported under income from investments.

Source: Company, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 9 Banks HDFC Bank

Exhibit 15: HDFC Bank growth rates and key ratios March fiscal year-ends, 2014-19E (%)

2014 2015 2016 2017E 2018E 2019E Growth rates (%) Net loan 26.4 20.6 27.1 13.3 16.0 16.5 Customer assets growth 26.7 19.7 28.3 13.1 15.8 16.4 Retail loans to Customer assets 47.1 47.6 47.6 49.7 50.1 50.0 Net fixed assets 8.8 0.1 (20.3) (13.1) (3.5) (5.2) Cash and bank balance 45.1 (8.2) 7.1 31.1 30.9 32.7 Total Asset 22.8 20.1 20.0 17.9 16.5 16.2 Deposits 24.0 22.7 21.2 18.0 18.2 17.6 Current 17.5 19.6 20.2 16.7 14.5 17.6 Savings 30.2 24.5 22.9 15.3 19.8 18.1 Fixed 16.9 21.1 18.4 24.5 17.1 16.6 Net interest income 16.9 21.2 23.2 18.2 10.8 11.7 Loan loss provisions 7.1 8.5 30.9 13.1 12.9 26.0 Total other income 15.6 13.6 19.5 10.2 14.3 16.1 Net fee income 11.0 14.8 17.8 9.8 14.4 17.8 Net capital gains (31.5) 426.6 25.8 64.0 8.3 3.8 Net exchange gains 38.7 (26.6) 19.4 — 18.0 18.0 Operating expenses 7.2 16.2 21.4 14.4 9.3 10.2 Employee expenses 5.4 13.7 20.0 16.7 13.9 12.2 Key ratios (%) Yield on average earning assets 9.8 9.5 9.9 9.4 8.8 8.5 Yield on average loans 11.7 11.1 10.8 10.4 10.0 9.6 Yield on average investments 7.8 7.2 8.9 8.3 7.5 7.4 Average cost of funds 6.1 5.7 5.9 5.5 5.1 5.0 Interest on deposits 5.7 5.7 5.9 5.4 5.1 5.0 Difference 3.7 3.8 4.0 3.9 3.7 3.5 Net interest income/earning assets 4.4 4.4 4.5 4.5 4.2 4.0 New provisions/average net loans 0.7 0.6 0.6 0.6 0.6 0.7 Interest income/total income 70.0 71.3 72.0 73.4 72.7 72.0 Fee income to total income 21.7 21.0 20.2 19.2 19.6 20.5 Fees income to PBT 44.9 43.0 41.6 38.8 39.0 40.4 Net trading income to PBT 0.9 3.8 3.8 5.4 5.2 4.7 Exchange inc./PBT 11.0 6.7 6.6 5.6 5.8 6.0 Operating expenses/total income 45.6 44.6 44.3 43.7 42.7 41.7 Operating expenses/assets 2.7 2.6 2.6 2.5 2.3 2.2 Operating profit /AWF 3.0 2.9 2.9 2.8 2.8 2.7 Tax rate 33.6 33.4 34.0 34.0 32.5 31.5 Dividend payout ratio 19.4 19.6 19.5 19.5 19.5 19.5 Share of deposits Current 16.7 16.3 16.2 16.0 15.5 15.5 Fixed 55.2 56.0 56.8 55.4 56.2 56.4 Savings 28.1 27.7 27.1 28.6 28.3 28.1 Loans-to-deposit ratio 82.5 81.1 85.0 81.6 80.2 79.4 Equity/assets (EoY) 8.8 10.5 10.3 10.0 10.0 9.9 Asset quality trends (%) Gross NPL 1.0 0.9 0.9 1.0 1.1 1.2 Net NPL 0.3 0.2 0.3 0.2 0.2 0.2 Slippages 1.9 1.6 1.6 1.5 1.5 1.6 Provision coverage (ex writeoff) 72.6 73.9 69.9 78.8 83.3 82.0 Dupont analysis (%) Net interest income 4.1 4.1 4.2 4.2 4.0 3.8 Loan loss provisions 0.4 0.4 0.4 0.4 0.4 0.4 Net other income 1.8 1.7 1.7 1.5 1.5 1.5 Operating expenses 2.6 2.6 2.6 2.5 2.4 2.2 (1- tax rate) 66.4 66.6 66.0 66.0 67.5 68.5 ROA 1.9 1.9 1.9 1.9 1.9 1.8 Average assets/average equity 11.2 10.3 9.6 9.9 10.0 10.1 ROE 21.3 19.4 18.3 18.5 18.7 18.6

Source: Company, Kotak Institutional Equities estimates

10 KOTAK INSTITUTIONAL EQUITIES RESEARCH HDFC Bank Banks

Exhibit 16: HDFC Bank P&L and balance sheet March fiscal year-ends, 2014-19E (` mn)

2014 2015 2016 2017E 2018E 2019E Income statement Total interest income 411,355 484,699 602,214 690,314 761,027 858,521 Loans 316,869 371,808 448,279 517,698 567,566 636,640 Investments 90,368 98,585 141,200 159,203 175,717 199,407 Cash and deposits 4,118 14,306 12,736 13,412 17,743 22,474 Total interest expense 226,529 260,742 326,299 364,166 399,651 454,755 Deposits from customers 190,482 235,138 291,783 324,508 358,536 413,792 Net interest income 184,826 223,957 275,915 326,148 361,376 403,766 Loan loss provisions 18,829 20,424 26,732 30,225 34,111 42,972 Net interest income (after prov.) 165,997 203,533 249,184 295,923 327,264 360,794 Other income 79,196 89,964 107,517 118,451 135,395 157,171 Net fee income 57,349 65,842 77,590 85,168 97,398 114,714 Net capital gains 1,105 5,816 7,317 12,000 13,000 13,500 Net exchange gains 14,010 10,280 12,277 12,277 14,487 17,095 Operating expenses 120,422 139,875 169,797 194,298 212,310 234,007 Employee expenses 41,790 47,510 57,022 66,537 75,759 85,038 Other Provisions (2,915) 365 373 400 500 — Pretax income 127,728 153,295 186,379 219,570 249,774 283,905 Tax provisions 42,944 51,136 63,417 74,711 81,241 89,503 Net Profit 84,784 102,159 122,962 144,860 168,533 194,402 % growth 26.0 20.5 20.4 17.8 16.3 15.3 Operating profit 142,537 168,267 206,167 238,195 271,386 313,377 % growth 27.1 18.1 22.5 15.5 13.9 15.5 Balance sheet Assets Cash and bank balance 395,836 363,315 389,188 510,158 667,552 886,125 Cash 38,505 53,215 55,695 83,542 125,313 187,969 Balance with RBI 214,951 221,890 244,889 293,708 342,878 399,113 Balance with banks 22,948 23,443 9,205 13,808 20,712 31,067 Net value of investments 1,209,511 1,518,201 1,648,817 2,174,371 2,542,542 2,883,242 Govt. and other securities 946,400 1,203,903 1,257,106 1,806,345 2,174,517 2,515,217 Shares 1,348 1,284 739 739 739 739 Debentures and bonds 27,144 11,255 48,874 48,874 48,874 48,874 Net loans and advances 3,030,003 3,654,950 4,645,940 5,263,891 6,106,559 7,115,647 Fixed assets 29,399 29,434 23,472 20,387 19,670 18,652 Net Owned assets 29,399 29,434 23,472 20,387 19,670 18,652 Other assets 251,246 339,131 381,038 388,587 396,890 406,023 Total assets 4,915,995 5,905,031 7,088,456 8,357,393 9,733,214 11,309,690 Liabilities Deposits 3,673,375 4,507,956 5,464,242 6,447,805 7,618,519 8,958,898 Borrowings and bills payable 450,502 512,989 603,970 744,820 783,482 829,109 Other liabilities 357,332 263,991 293,466 326,232 362,657 403,148 Total liabilities 4,481,209 5,284,937 6,361,678 7,518,858 8,764,658 10,191,155 Paid-up capital 4,798 5,013 5,056 5,056 5,056 5,056 Reserves & surplus 429,988 615,081 721,721 833,479 963,500 1,113,478 Total shareholders' equity 434,786 620,094 726,778 838,535 968,556 1,118,535

Source: Company, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 11

BUY Bharti Airtel (BHARTI) Telecom JANUARY 25, 2017 RESULT Coverage view: Cautious

The pain is evident. Bharti’s reported 3QFY17 results were below expectations on Price (`): 317 already subdued estimates. The impact of demonetization and R-Jio showed up in Target price (`): 375 Bharti’s India wireless numbers where EBITDA declined 16% qoq. The data segment BSE-30: 27,376 was especially weak wherein both volumes and realizations fell materially. We expect this pain to continue for the next 3-4 quarters; however, we also expect the overall industry structure to improve substantially once the current tumultuous phase gets over. Bharti would perhaps be in the best position when that happens; we remain believers.

Company data and valuation summary Bharti Airtel Stock data Forecasts/Valuations 2017E 2018E 2019E 52-week range (Rs) (high,low) 385-282 EPS (Rs) 11.9 8.0 12.6 Market Cap. (Rs bn) 1,265.2 EPS growth (%) 21.7 (33.0) 58.6 Shareholding pattern (%) P/E (X) 26.6 39.7 25.1 Promoters 67.1 Sales (Rs bn) 998.3 1,044.7 1,142.8 FIIs 15.7 Net profits (Rs bn) 47.5 31.8 50.5 MFs 2.9 EBITDA (Rs bn) 370.9 366.3 407.3 Price performance (%) 1M 3M 12M EV/EBITDA (X) 6.2 6.3 5.4 Absolute 7.1 3.2 6.0 ROE (%) 7.0 4.6 7.1 Rel. to BSE-30 1.9 6.2 (5.4) Div. Yield (%) 1.0 0.8 1.5

The bleed starts; where do we go from here?

Before we discuss the details of Bharti’s 3QFY17 earnings print, some quick thoughts on sector- wide read-through are in order. Bharti just reported the worst sequential dip in wireless revenues and EBITDA in its history and we believe Bharti may have done better than most other operators during the quarter. Even as demonetization impact likely also played a part, we believe that a good part of the weakness was on account of Jio’s free offering. Some quick thoughts on the likely damage caused by Jio’s free offering:

 Bharti saw a sequential EBITDA decline of nearly ₹10 bn in its India wireless segment in 3QFY17. We would presume Bharti’s share of Jio impact would be lower than its RMS; say this share was 20% (versus a 31% RMS) and we are looking at a nearly ₹50 bn EBITDA shaved off an industry with around ₹125 bn quarterly EBITDA base, pre impact. Annualized 3QFY17 EBITDA for the industry could be as low as ₹300 bn and this is likely to get impacted further; for 3QFY17, Jio likely averaged 40-45 mn subs; this would be closer to 85-90 mn in

4QFY17.  So, we could be down to as low as ₹200-250 bn in annualized EBITDA (ex-Jio; even lower with Jio) for an industry sitting on an aggregate net debt in the vicinity of ₹3 tn+ (ex-Jio, again; ₹4 tn+, including Jio). Distressed as it gets, in our view. Potential impact – likely sharp increase in M&A activity as various boardrooms need to take some tough decisions.

 The exchequer will bear some brunt too, in at least three ways – (1) it would be challenging

to be able to sell much spectrum for the next few years as the sector may not be left with Rohit Chordia much capacity to invest, (2) direct impact of lower sector revenues on recurring license fees [email protected] Mumbai: +91-22-4336-0885 and spectrum usage charges, and (3) BSNL and MTNL are likely to need sustained and meaningful capital infusion from the government to be able to stay relevant. Abhas Gupta [email protected] 3QFY17 earnings print: weak as it gets but likely to get worse in 4Q Mumbai: +91-22-4336-0881

 Consolidated revenue at ₹233.4 bn was down 3.0% yoy and 5.3% qoq (2.4% below our estimate), while EBITDA of ₹84.8 bn was up 0.8% yoy and down 10% qoq (KIE estimate of

₹87.8 bn). EBITDA weakness was primarily on account of sharper-than-expected impact of Jio launch and demonetization on the India wireless business. Kotak Institutional Equities Research [email protected] Mumbai: +91-22-4336-0000

For Private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES’ RATING SYSTEM AND OTHER DISCLOSURES, REFER TO THE END OF THIS MATERIAL. Bharti Airtel Telecom

 Recurring net profit was down around 60% both yoy and qoq to ₹5.9 bn. Miss at the net profit level was driven by a combination of weak EBITDA as well as higher-than-expected provision for taxes. We note that ETR for the India business stood at as high as 47% for the quarter; the company’s guidance for India ETR has been that of marginal tax rate.

 Consolidated capex (ex-spectrum) for the quarter stood at ₹59 bn, taking 9MFY17 capex to ₹161 bn (₹142 bn India/SA + ₹19 bn Africa); we note that India capex is tracking ahead of the company’s guidance while Africa is tracking marginally below. Overall capex could end up being marginally higher than the company’s guidance range.

India wireless performance: R-Jio impact more than visible

India wireless revenue was down 6% qoq and 1% yoy to ₹138.7 bn, 1.5% below KIE estimate of ₹140.4 bn. EBITDA for the quarter was ₹52.6 bn (down a sharp 16% qoq and 3% yoy), missing our estimate of ₹55.9 bn by 6%. Wireless business faced pressure on two fronts in 3QFY17 – (1) demonetization; we believe this should normalize in 4QF17, and (2) R-Jio launch; this resulted in pressure on multiple fronts including data volume shift, data pricing pressure, voice pricing pressure and deterioration in voice traffic mix (in favor of incoming traffic); Jio impact is likely to worsen in 4QFY17 (and continue to worsen till Jio starts charging customers).

Pain in India wireless likely to continue over the next 3-4 quarters

India wireless revenue weakness was significantly higher than expected and portends the start of what could be a weak 3-4 quarters for this business; we expect similar or worse numbers for other players. Bharti has the balance sheet strength to manage the current headwinds while others do not have this luxury. To that extent, we could be entering a phase of accelerated M&A activity in the sector. We retain our faith on emergence of a much-improved industry structure and expect Bharti to be at the forefront when the same happens.

Other key highlights from Bharti’s 3QFY17 earnings print

 Voice business – volumes were up a sharp 5.4% qoq and 13.7% yoy to 330.2 bn minutes (in line with estimates); however, voice revenues declined 4.5% qoq and 1% yoy as realizations fell sharply (9.4% qoq and 13% yoy) to 29.4 paise/min; our expectation was 29.8 paise/min. VRPM pressure reflected – (1) deterioration in mix as Jio’s free offers drove mix in favor of incoming minutes for other players, and (2) pressure on outgoing rates as incumbents had to respond with aggressive price cuts and bundled plans to protect subs base and usage as far as possible.

 Data business – this is where the Jio impact showed up in a big way; data revenues declined 13.5% qoq and 3% yoy to ₹30.9 bn (our expectation was ₹32.5 bn). Data volumes declined 3.5% qoq (up 28.3% yoy) to 171.8 bn MB while data realizations saw 10.5% qoq dip to 18 paise/MB. Most tellingly, data subs base (end of period) fell by 8.6 mn qoq to 54.9 mn with decline in both 3G/4G subs base (down 3.6 mn qoq to 37.7 mn, now 69% of total data subs) as well as 2G data subs. Given that overall subs base still grew (+6 mn qoq to 265.9 mn), it is fairly clear that a good number of users have shifted their data usage to Jio. Even as this is on expected lines directionally, the impact was higher than our anticipation. We note that this impact is likely to only worsen in 4QFY17.

 ARPU (revenue per customer per month, now perhaps the most important KPI to track) down 8% qoq and 10% yoy to ₹172. Our expectation was ₹176.

KOTAK INSTITUTIONAL EQUITIES RESEARCH 13 Telecom Bharti Airtel

 Sharp 440 bps qoq (90 bps yoy) fall in EBITDA margin to 38%, a direct consequence of revenue decline. Absolute costs at ₹85 .8 bn (largely flat both qoq and yoy, likely aided by decline in interconnect costs as outgoing traffic likely fell) were perhaps the only silver lining in the generally weak India wireless print. We note that Jio’s launch has not had a cost push element yet as Jio has essentially used its ‘free’ offering as its marketing and subscriber acquisition tool and hasn’t been aggressive on ads or channel commissions.

 Wireless capex for the quarter was ₹44 bn, taking 9MFY17 capex to ₹113 bn.

 Africa wireless – reported revenues were flat qoq at US$792 mn (marginally below expectations) even as EBITDA (US$190 mn, up around 4% qoq) was ahead of our expectations as the company continued to deliver on its cost-control-driven margin improvement trajectory. EBITDA margin for the quarter was 24.2% (up 110 bps qoq). Africa capex was US$65 mn for the quarter, taking 9MFY17 capex to US$280 mn.

 Other businesses – performance in other businesses was broadly on expected lines at the EBITDA level. Home broadband business delivered a strong 26% yoy growth in EBITDA while India DTH business delivered 22% yoy EBITDA growth; we do note that the sequential EBITDA growth trajectory in both these businesses was also on the weaker side. We believe the weak sequential trajectory in home BB and DTH (both B2C businesses) was on account of demonetization and we expect sequential trajectory to improve from 4QFY17.

 Balance sheet – Net debt, including finance lease obligations, stood at ₹1.03 tn at end- Dec 2016 (3.05X net debt to quarter annualized EBITDA) versus ₹874 bn at end-Sep 2016 (2.31X). Debt levels are now touching the upper-end of the company’s stated comfort zone.

14 KOTAK INSTITUTIONAL EQUITIES RESEARCH Bharti Airtel Telecom

Exhibit 1: Bharti - 3QFY17 results, Ind-AS, March fiscal year-ends (Rs mn)

Change (%) 3QFY16 2QFY17 3QFY17 qoq yoy 3QFY17E Deviation (%) Consolidated results Revenues 240,659 246,515 233,357 (5.3) (3.0) 238,998 (2.4) Operating costs (156,521) (152,113) (148,542) (151,192) EBITDA 84,138 94,402 84,815 (10.2) 0.8 87,806 (3.4) EBITDA margin (%) 35.0 38.3 36.3 36.7 Depreciation and Amortization (43,541) (49,560) (48,350) (51,600) EBIT 40,597 44,842 36,465 (18.7) (10.2) 36,206 0.7 EBIT margin (%) 16.9 18.2 15.6 15.1 Net finance (cost)/income (13,852) (20,186) (18,565) (20,300) PBT 26,745 24,656 17,900 (27.4) (33.1) 15,906 12.5 Tax provision (13,951) (12,074) (12,883) (8,271) PAT before minority interest 12,794 12,582 5,017 7,635 Minority interest (1,639) (1,581) (1,816) (1,350) Equity in earnings of affiliates 2,722 2,697 2,696 2,950 Extraordinary items (2,795) 909 (860) — Reported net income 11,082 14,607 5,037 (65.5) (54.5) 9,235 (45.5) Adjusted net income 13,877 13,698 5,897 (56.9) (57.5) 9,235 (36.1) Reported EPS 2.77 3.65 1.26 (65.5) (54.5) 2.31 Segmental performance Wireless - India 85,388 84,861 85,812 Revenues 139,750 147,353 138,365 (6.1) (1.0) 140,411 (1.5) EBITDA 54,362 62,492 52,553 (15.9) (3.3) 55,931 (6.0) OPM (%) 38.9 42.4 38.0 39.8 ARPU (Rs/sub/month) 192 188 172 (8.4) (10.4) 176 (2.2) MOU (min/sub/month) 405 406 419 3.2 3.6 420 (0.4) RPM (Rs/min) 0.475 0.463 0.411 (11.3) (13.5) 0.418 (1.9) EPM (Rs/min) 0.187 0.199 0.159 (20.2) (15.0) 0.17 (5.8) Total minutes (bn) 290.5 313.4 330.2 5.4 13.7 331.1 (0.3) Wireless - South Asia Revenues 4,135 4,169 2,454 (41.1) (40.7) 2,600 (5.6) EBITDA (371) 210 162 (22.8) NM (300) (154.0) OPM (%) (9.0) 5.0 6.6 (12) Bharti Africa Revenues 62,506 53,048 53,559 1.0 (14.3) 54,379 (1.5) EBITDA 13,287 12,247 12,945 5.7 (2.6) 12,670 2.2 EBITDA margin (%) 21.3 23.1 24.2 23.3 Home services Revenues 6,343 7,063 7,026 (0.5) 10.8 7,134 (1.5) EBITDA 2,711 3,347 3,414 2.0 25.9 3,353 1.8 OPM (%) 42.7 47.4 48.6 47.0 Airtel Business Revenues 24,043 29,817 27,050 (9.3) 12.5 28,326 (4.5) EBITDA 7,511 8,440 8,287 (1.8) 10.3 8,356 (0.8) OPM (%) 31.2 28.3 30.6 29.5 Passive infra business Revenues 13,979 14,962 15,284 2.2 9.3 15,187 0.6 EBITDA 6,590 7,106 7,291 2.6 10.6 7,305 (0.2) OPM (%) 47.1 47.5 47.7 48.1 Others (incl DTH) Revenues 8,215 9,276 9,399 1.3 14.4 9,783 (3.9) EBITDA 2,074 2,957 3,039 2.8 46.5 2,886 5.3 OPM (%) 25.2 31.9 32.3 29.5

Source: Company, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 15 Telecom Bharti Airtel

Exhibit 2: Bharti - quarterly P&L break-up, India/Africa, March fiscal year-ends (Rs mn)

3QFY16 4QFY16 1QFY17 2QFY17 3QFY17 India/ South Asia business Revenues 178,153 185,085 192,972 193,467 179,798 EBITDA 70,851 76,889 81,483 82,155 71,870 EBITDA margin (%) 39.8 41.5 42.2 42.5 40.0 D&A (32,201) (34,916) (38,379) (38,416) (38,585) EBIT 38,650 41,973 43,104 43,739 33,285 Net interest cost (including FX gains/ (losses)) (10,606) (14,570) (14,713) (12,924) (11,315) PBT 28,044 27,403 28,391 30,814 21,970 Provision for taxes (9,824) (8,281) (9,258) (10,537) (10,245) ETR (%) 35.0 30.2 32.6 34.2 46.6 PAT before min int and share of assoc earnings 18,220 19,122 19,133 20,277 11,725 Minority interest (2,196) (2,750) (2,675) (3,177) (2,320) Share of associates 2,722 2,915 2,548 2,697 2,696 Recurring PAT 18,746 19,288 19,006 19,797 12,101 EPS (Rs/share) 4.7 4.8 4.8 4.9 3.0

Africa business Revenues 62,506 64,511 62,493 53,048 53,559 EBITDA 13,287 14,233 13,998 12,247 12,945 EBITDA margin (%) 21.3 22.1 22.4 23.1 24.2 D&A (11,340) (13,247) (12,023) (11,144) (9,765) EBIT 1,947 986 1,975 1,103 3,180 Net interest cost (including FX gains/ (losses)) (3,246) (2,226) (4,447) (7,262) (7,250) PBT (1,299) (1,240) (2,472) (6,158) (4,070) Provision for taxes (4,127) (3,131) (3,072) (1,537) (2,638) ETR (%) NA NA NA NA NA PAT before min int and share of assoc earnings (5,426) (4,371) (5,544) (7,695) (6,708) Minority interest 557 531 340 1,596 504 Share of associates Recurring PAT (4,869) (3,841) (5,204) (6,099) (6,204) EPS (Rs/share) (1.2) (1.0) (1.3) (1.5) (1.6)

Consolidated Revenues 240,659 249,596 255,465 246,515 233,357 EBITDA 84,138 91,122 95,481 94,402 84,815 EBITDA margin (%) 35.0 36.5 37.4 38.3 36.3 D&A (43,541) (48,163) (50,402) (49,560) (48,350) EBIT 40,597 42,959 45,079 44,842 36,465 Net interest cost (including FX gains/ (losses)) (13,852) (16,796) (19,160) (20,186) (18,565) PBT 26,745 26,163 25,919 24,656 17,900 Provision for taxes (13,951) (11,412) (12,330) (12,074) (12,883) ETR (%) 52.2 43.6 47.6 49.0 72.0 PAT before min int and share of assoc earnings 12,794 14,751 13,589 12,582 5,017 Minority interest (1,639) (2,219) (2,335) (1,581) (1,816) Share of associates 2,722 2,915 2,548 2,697 2,696 Recurring PAT 13,877 15,447 13,802 13,698 5,897 Extraordinary items (2,795) (2,252) 818 909 (860) Reported PAT 11,082 13,195 14,620 14,607 5,037 EPS (Rs/share) 2.8 3.3 3.7 3.7 1.3

Source: Company

16 KOTAK INSTITUTIONAL EQUITIES RESEARCH Bharti Airtel Telecom

Exhibit 3: India wireless revenues and RPM by segment

Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Revenues (Rs mn) India wireless 130,118 131,622 136,000 134,784 137,850 143,975 148,765 145,065 135,554 Voice 100,758 100,457 101,580 97,853 98,038 102,361 105,430 101,604 97,057 Non-voice 29,360 31,165 34,420 36,931 39,812 41,614 43,336 43,461 38,497 SMS and VAS 7,749 7,487 7,731 7,278 7,350 7,419 7,501 7,119 7,049 Data 21,138 23,191 26,090 28,979 31,839 33,552 35,250 35,760 30,906 Others 474 488 600 674 623 644 584 582 542 qoq growth (%) India wireless 4.4 1.2 3.3 (0.9) 2.3 4.4 3.3 (2.5) (6.6) Voice 1.4 (0.3) 1.1 (3.7) 0.2 4.4 3.0 (3.6) (4.5) Non-voice 16.4 6.2 10.4 7.3 7.8 4.5 4.1 0.3 (11.4) SMS and VAS 15.1 (3.4) 3.3 (5.8) 1.0 0.9 1.1 (5.1) (1.0) Data 17.2 9.7 12.5 11.1 9.9 5.4 5.1 1.4 (13.6) Others 4.7 3.1 22.8 12.4 (7.5) 3.3 (9.3) (0.4) (6.9) RPM (Rs/min) India wireless 0.486 0.474 0.468 0.478 0.475 0.467 0.473 0.463 0.411 Voice 0.377 0.362 0.349 0.347 0.338 0.332 0.335 0.324 0.294 Non-voice 0.110 0.112 0.118 0.131 0.137 0.135 0.138 0.139 0.117 SMS and VAS 0.029 0.027 0.027 0.026 0.025 0.024 0.024 0.023 0.021 Data 0.079 0.083 0.090 0.103 0.110 0.109 0.112 0.114 0.094 Others 0.002 0.002 0.002 0.002 0.002 0.002 0.002 0.002 0.002 Contribution (%) India wireless 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Voice 77.4 76.3 74.7 72.6 71.1 71.1 70.9 70.0 71.6 Non-voice 22.6 23.7 25.3 27.4 28.9 28.9 29.1 30.0 28.4 SMS and VAS 6.0 5.7 5.7 5.4 5.3 5.2 5.0 4.9 5.2 Data 16.2 17.6 19.2 21.5 23.1 23.3 23.7 24.7 22.8 Others 0.4 0.4 0.4 0.5 0.5 0.4 0.4 0.4 0.4 RPM growth qoq (%) India wireless 3.0 (2.6) (1.3) 2.1 (0.7) (1.5) 1.1 (2.0) (11.3) Voice 0.0 (4.0) (3.4) (0.7) (2.7) (1.5) 0.8 (3.2) (9.3) Non-voice 14.9 2.2 5.5 10.6 4.7 (1.4) 1.9 0.7 (15.9) SMS and VAS 13.5 (7.0) (1.3) (3.0) (1.9) (4.8) (1.1) (4.7) (6.0) Data 15.7 5.6 7.5 14.5 6.7 (0.6) 2.8 1.9 (18.0) Others 3.3 (0.8) 17.3 15.9 (10.1) (2.6) (11.2) 0.1 (11.6)

Source: Company

Exhibit 4: Key India data business performance indicators shared by Bharti

3QFY15 4QFY15 1QFY16 2QFY16 3QFY16 4QFY16 1QFY17 2QFY17 3QFY17 Data (2G & 3G) KPIs Subs ('000s) 42,249 46,386 49,470 51,013 54,860 58,216 58,903 62,659 54,915 As % of total subs 19.5 20.5 21.4 21.7 23.3 23.2 23.0 24.1 20.7 Total volumes (mn MB) 77,281 86,627 102,015 114,960 133,946 146,768 158,035 178,125 171,817 qoq growth (%) 14.2 12.1 17.8 12.7 16.5 9.6 7.7 12.7 (3.5) Usage per customer (MB) 622 656 706 765 843 859 904 1,000 972 Realization per MB (paise) 27.4 26.8 25.6 25.2 23.8 22.9 22.3 20.1 18.0 qoq growth (%) 2.6 (2.0) (4.6) (1.6) (5.6) (3.8) (2.5) (10.0) (10.5) ARPU (Rs/sub/month) 170 176 181 193 200 196 202 201 175 Implied data revenue (Rs mn) 21,144 23,233 26,090 28,935 31,839 33,566 35,250 35,760 30,876 qoq growth (%) 17.2 9.9 12.3 10.9 10.0 5.4 5.0 1.4 (13.7) yoy growth (%) 74.3 70.3 67.3 60.3 50.6 44.5 35.1 23.6 (3.0) As % of India wireless revenues 16.2 17.7 19.2 21.5 23.1 23.3 23.7 24.7 22.8 3G + 4G KPIs Active 3G subs ('000s) 16,940 19,441 21,360 23,985 28,094 35,460 36,572 41,335 37,690 As % of total data subs 40.1 41.9 43.2 47.0 51.2 60.9 62.1 66.0 68.6

Source: Company

KOTAK INSTITUTIONAL EQUITIES RESEARCH 17 Telecom Bharti Airtel

Exhibit 5: Key operating metrics - India mobile and DTH

Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 India mobile Customer Base ('000s) 217,215 226,017 230,662 235,212 243,289 251,237 255,735 259,941 265,853 VLR (%) 96.1 95.8 95.8 96.2 96.0 97.0 97.5 97.4 97.2 Net Additions ('000s) 5,463 8,802 4,645 4,550 8,077 7,948 4,497 4,206 5,912 Pre-Paid (as % of total base) 94.63 94.60 94.43 94.20 94.10 94.00 93.88 93.70 93.70 Monthly Churn (%) 2.7 2.5 3.3 3.5 3.4 3.3 3.6 3.7 4.1 ARPU (Rs/month) 202 198 198 193 192 194 196 188 172 MOU (min/month) 416 418 424 404 405 415 414 406 419 RPM (Rs/min) 0.486 0.474 0.468 0.476 0.475 0.468 0.473 0.463 0.411 Voice Minutes on network (mn mins) 267,485 277,869 290,802 282,138 290,459 307,988 314,831 313,403 330,217 Voice ARPU (Rs/month) 157 151 148 140 137 138 139 132 123 Voice RPM (Rs/min) 0.377 0.362 0.349 0.346 0.338 0.333 0.335 0.324 0.294 Voice as % of total 77.4 76.3 74.7 72.6 71.1 71.1 70.9 70.0 71.6 Non-voice Non-voice as % of total 22.6 23.7 25.3 27.4 28.9 28.9 29.1 30.0 28.4 SMS & VAS 6.0 5.7 5.7 5.4 5.3 5.2 5.0 4.9 5.2 Data 16.2 17.6 19.2 21.5 23.1 23.3 23.7 24.7 22.8 Others 0.4 0.4 0.4 0.5 0.5 0.4 0.4 0.4 0.4 Data Data subs ('000s) 42,249 46,386 49,470 51,013 54,860 58,216 58,903 62,659 54,915 - 3G subs 16,940 19,441 21,360 23,895 28,094 35,460 36,572 41,335 37,690 Total MBs on the network (mn MBs) 77,281 86,627 102,015 114,960 133,946 146,768 158,035 178,125 171,817 Data ARPU 170 176 181 193 200 196 202 201 175 Data Usage per customer (MB/month) 622 656 706 765 843 859 904 1,000 972 Data Realization per MB (Rs/MB) 0.274 0.268 0.256 0.252 0.238 0.229 0.223 0.201 0.180 Network No. of cell sites 142,898 146,539 147,616 149,518 151,200 154,097 157,055 158,934 160,199 Of which Mobile Broadband towers 45,730 57,078 70,178 88,376 105,465 108,015 110,382 113,367 Total Mobile Broadband Base stations 54,381 66,322 80,432 99,297 118,197 137,567 148,078 170,844 Revenue per cell site per month (Rs) 305,283 303,748 308,227 301,435 305,630 314,570 318,741 306,055 283,359

DTH Digital TV Customers ('000s) 9,810 10,073 10,412 10,576 11,106 11,725 12,149 12,405 12,588 Net additions 270 263 339 164 530 619 424 256 183 Average Revenue Per User (ARPU) 214 214 222 224 229 229 233 232 232 Monthly Churn 1.0 1.0 0.8 1.3 0.7 0.8 0.8 1.2 1.3

Source: Company

18 KOTAK INSTITUTIONAL EQUITIES RESEARCH Bharti Airtel Telecom

Exhibit 6: Key operating metrics - Africa

Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Africa Customer Base ('000s) 74,599 76,263 78,323 80,835 82,070 80,564 76,986 78,145 80,356 VLR (%) 83.99 83.90 83.53 82.41 82.53 84.84 87.13 81.19 81.10 Net Additions 3,232 1,664 2,060 2,512 1,235 (1,505) (3,578) 1,159 2,211 Pre-Paid (as % of total base) 99.36 99.40 99.36 99.35 99.33 99.29 99.18 99.21 99.20 Monthly Churn (%) 5.51 5.80 5.40 5.82 5.88 6.68 4.95 5.25 4.90 ARPU (US$/month) 5.1 4.4 4.3 4.3 4.2 4.2 3.8 3.9 3.9 MOU (min/month) 140 137 141 145 138 143 145 159 152 RPM (US cents/month) 3.63 3.21 3.02 2.94 3.05 2.94 2.65 2.45 2.57 Voice Minutes on network (mn mins) 30,361 31,045 32,791 34,620 33,669 34,940 35,293 36,570 35,913 Voice ARPU 3.9 3.3 2.9 2.8 2.8 2.7 2.6 2.7 2.7 Voice RPM 2.78 2.41 2.04 1.97 2.02 1.91 1.82 1.72 1.78 Voice as % of total 76.5 74.8 72.8 72.7 72.0 70.0 68.7 70.3 69.7 Non-voice Non-voice 23.5 25.2 27.2 27.3 28.0 30.0 31.3 29.7 30.3 SMS & VAS 9.1 9.3 9.7 10.0 10.1 10.5 11.0 10.3 10.4 Data 10.5 11.5 12.9 13.5 14.3 15.5 16.5 16.3 16.7 Others 3.9 4.4 4.6 3.9 3.6 3.9 3.9 3.1 3.2 Data Data subs ('000s) 11,242 12,289 13,039 14,292 15,406 15,788 16,425 18,071 17,948 Total MBs on the network (mn MBs) 9,475 11,256 13,843 16,483 20,049 23,646 28,539 34,269 36,768 Data ARPU 3.18 3.22 3.06 3.10 3.02 3.15 3.17 2.87 2.90 Data Usage per customer (MB/month) 290 321 359 403 453 507 585 670 684 Data Realization per MB (US cents/MB) 1.10 1.00 0.85 0.77 0.67 0.62 0.54 0.43 0.42 Network No. of cell sites 18,347 18,819 19,146 19,330 19,712 20,196 19,793 19,866 20,240 Of which no. of 3G sites 20,095 17,781 17,196 17,449 17,321 13,128 13,186 13,280 13,622

Source: Company

Exhibit 7: Africa performance trajectory

Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Revenues 1,103 1,000 970 967 949 953 936 790 792 EBITDA (A) 241 207 200 195 202 210 209 182 190 EBITDA margin (%) 21.9 20.7 20.6 20.2 21.2 22.0 22.4 23.1 24.0 Capex (B) (284) (364) (150) (162) (184) (276) (112) (102) (65) Cash taxes (C) (23) (7) (46) (22) (54) (38) (41) 1 (32) Net interest cost (D) (167) (249) (150) (166) (49) (33) (66) (108) (108) Cash funding gap = A - B - C - D (232) (413) (146) (155) (86) (136) (10) (27) (15)

Note: (a) We have computed interest as EBIT less PBT; this includes some non-operating cash expenses charges below EBITDA (forex gains or losses, for example) (b) We have not included changes in working capital in the above computations for lack of data.

Source: Company

KOTAK INSTITUTIONAL EQUITIES RESEARCH 19 Telecom Bharti Airtel

Exhibit 8: Bharti - condensed consolidated balance sheet, March fiscal year-ends, 3QFY16-17 (Rs bn)

Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Assets Net fixed assets 637 658 642 643 650 Intangible assets 1,071 1,122 1,157 1,149 1,274 Non-current Investments 86 90 81 112 140 Deferred tax assets 48 47 43 41 37 Other non-current assets 125 112 82 87 81 Total long-term assets 1,968 2,029 2,005 2,032 2,182 Current assets Short term investments 16 16 47 16 20 Inventories 2 2 2 1 1 Receivables 67 66 67 68 63 Receivable from sale of tower assets — — — — — Cash and equivalents 43 51 36 23 15 Other financial assets 23 27 20 23 20 Other current assets 67 60 63 56 59 Total current assets 218 222 235 188 179 Current assets ex-cash and inv 159 154 152 149 144 Current liabilities Payables 260 256 271 279 274 Other current liabilities 218 211 208 205 197 ST provisions 2 2 2 3 2 Total current liabilities 480 469 481 486 473 Net current assets (262) (248) (246) (299) (294) Net current assets ex-cash and inv (321) (315) (329) (337) (329) Assets held for sale 4 7 11 3 3 Total Assets 1,710 1,788 1,770 1,736 1,891 Liabilities and shareholders' equity Share capital 20 20 20 20 20 Reserves and surplus 632 648 623 621 611 Non-controlling interest 53 55 52 45 57 Total Equity 705 723 695 686 688 Borrowings 945 1,005 1,018 988 1,141 DTL 13 13 10 7 11 Other LT liabilities and provisions 46 48 48 55 51 Total liabilities and equity 1,710 1,788 1,770 1,736 1,891

Reported net debt 785 835 835 815 974 Finance lease obligation 57 58 55 59 60 Effective net debt 841 893 889 874 1,034

Source: Company

20 KOTAK INSTITUTIONAL EQUITIES RESEARCH

REDUCE HCL Technologies (HCLT) Technology JANUARY 25, 2017 RESULT Coverage view: Neutral

Big bets. HCLT delivered a solid 3% c/c revenue growth, positive surprise on margins Price (`): 849 and announced third buyout of IP from IBM. The company is taking an aggressive Target price (`): 840 approach to build product portfolio in focus areas by leveraging its ERD capabilities. BSE-30: 27,376 Such bets carry inherently high risk. It is encouraging to see HCLT focus fixing applications and ES practice. We will closely watch the progress. We roll over to FY2019E, lower target multiple to 12.5X PE from 13X to factor H-1B risks and raise TP to ₹840 (₹800 earlier). The stock is fully valued. Retain REDUCE.

Company data and valuation summary HCL Technologies Stock data Forecasts/Valuations 2017E 2018E 2019E 52-week range (Rs) (high,low) 890-706 EPS (Rs) 57.5 61.4 64.6 Market Cap. (Rs bn) 1,197.8 EPS growth (%) 46.4 6.8 5.3 Shareholding pattern (%) P/E (X) 14.8 13.8 13.1 Promoters 60.4 Sales (Rs bn) 471.1 535.4 585.5 FIIs 25.7 Net profits (Rs bn) 82.1 87.9 92.6 MFs 4.9 EBITDA (Rs bn) 103.4 112.9 119.9 Price performance (%) 1M 3M 12M EV/EBITDA (X) 10.4 9.4 8.6 Absolute 6.9 4.7 1.1 ROE (%) 27.3 25.4 24.0 Rel. to BSE-30 1.7 7.8 (9.7) Div. Yield (%) 2.9 3.4 3.9

3QFY17— solid growth with good margin performance HCLT reported revenue growth of 3% in c/c (KIE 2.9%) and 1.3% in US$ terms. Organic c/c growth was about 2% excluding revenues from first IP licensing deal. We like the broad-based growth across service lines. EBIT margin expanded 30 bps qoq to 20.4%, 60 bps ahead of estimate led by lower-than-estimated SG&A costs, likely EBIT accretive IP revenues and operating efficiencies partly offset by 70 bps headwind from wage hike. The management tightened FY2017E c/c growth guidance to 13% from 12-14%. Acquisitions (Geometric, Butler and 2nd and 3rd IP deals) not included in the guidance earlier, would contribute 0.6-1% c/c growth to FY2017 over and above it. Margin band of 19.5 to 20.5% remains unchanged. Net profit at ₹20.7 bn was 3% above estimate led by margin outperformance.

Taking big bets to build product revenue stream HCLT announced its third IP acquisition from IBM at US$155 mn (US$555 mn cumulative). The new CEO detailed the intent to build product revenue stream, core growth strategy. HCLT is attempting this through buyout of IPs with ready client base in areas of strength such as ERD, a pragmatic approach as against building products from scratch. That said, some financial discipline is required in our view. There are inherent risks associated with products business and the company will likely go through a learning curve notwithstanding its strength in ERD practice and experience working with ISVs. We expect the company to have taken care to ensure that these acquisitions do not dilute RoEs in the medium term. We note that these IP deals will be EBIT accretive given high margins in products business and 15-year amortization schedule.

Initial progress on kick-starting new growth engines is encouraging but stock is fully valued Kawaljeet Saluja HCLT stock’s rerating will hinge on its success in broad-basing of growth from current [email protected] Mumbai: +91-22-4336-0860 concentration towards IMS. The composition of growth in December quarter and clear, pragmatic bets in ER&D and enterprise solutions taken by the new CEO are encouraging and Jaykumar Doshi needs to be closely watched. Moderation in attrition is a positive trend. We incorporate [email protected] Mumbai: +91-22-4336-0863 acquisitions (Geometric, Butler and the recent two IP deals) and raise our revenue growth forecast and tweak margins. Net result: 2-3% earnings upgrade over FY2018-19E. We value

HCLT at 12.5X FY2019E EPS (13X FY2018E EPS earlier); our modest cut in target multiple is to factor in incremental risks of increase in minimum H-1B wages. Stock is fully valued, REDUCE.

Kotak Institutional Equities Research [email protected] Mumbai: +91-22-4336-0000

For Private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES’ RATING SYSTEM AND OTHER DISCLOSURES, REFER TO THE END OF THIS MATERIAL. Technology HCL Technologies

Clear focus, aggressive bets to build product revenue stream HCLT’s new CEO, C Vijayakumar, detailed the company’s focus and approach to build products business. HCLT aims to leverage its strength in engineering and R&D practice (ERD) and its experience having worked with a number of product companies to build product revenue stream. The company is approaching it through a mix of (1) takeover of IPs of existing products that have ready client base, annuity revenue and market traction but are struggling for investments. Buyout and invest to modernize these IPs. HCLT’s three buyouts of IPs of select products of IBM in the past six months fall in this category, and (2) carving out platforms from mature enterprises to enhance and take it to broad set of clients. The management indicated that it prefers these two approaches as building product/platforms from scratch involves higher risks and investments. We find the approach pragmatic in view of (1) learning curve for a services company attempting to build product from scratch is steep. Instead, acquisition of IPs with steady and sticky revenues and client base reduces risk and uncertainty, and (2) HCLT’s strength in ERD practice, its relationships and experience working with large independent software vendors would come handy in scouting and evaluating IP and platform acquisition opportunities. That said, we note the risks involved – (1) execution challenges particularly so in event of any attrition in core team acquired along with IPs, and (2) one cannot rule out acquisition of tools as a part of product portfolio that may not be necessarily bet fits.

Capital allocation and financial discipline needs to be watched HCLT management indicated that all incremental cash generated by the business would be potentially available for acquisitions/investments and its aggregate investments in FY2017 could well become representative figure for coming years. That said, the management will likely formally articulate its capital allocation following 4QFY16 results. We note that very high capital allocation towards IP licensing could drag RoEs in the medium term even as these deals are EBIT accretive. The aggregate revenue potential from the three IP licensing deals is about US$150-160 mn annually as against total consideration of US$555 mn. Amortization of software licensing would be over a period of 15 years. These acquisitions will be EBIT accretive and will likely have EBIT margin well in excess of 20% even after operating costs and additional investments that HCLT will make. We expect HCLT to maintain financial discipline, threshold IRR and do adequate risk assessment. IBM’s commentary on IP licensing (excerpts from IBM’s 4QCY16 conference call transcript) Since early 2015 we’ve been talking about ramping the level of investment in the business in areas like cognitive and cloud. Our year-to-year expense dynamics reflect the fact that we’ve wrapped on that higher level of investment. We’re also seeing the yield from some of the workforce rebalancing actions earlier in the year. As we’ve discussed in the past, some of this is being reinvested in other areas, including cost. Our expense dynamics also reflect the success we’ve had in rebuilding our intellectual property income base through IP partnerships. This is a model we’ve developed for some of our high value technologies that are more mature, but not necessarily in a priority investment area for us. So it made sense to work with partners who will invest and build businesses around some of these software assets It’s good for them and it’s good for IBM. We license the intellectual property to these partners, resulting in IP income for us. They take on the development mission, drive future innovation, and ultimately expand the client base as they take the product to market. As we generate revenue from our own sales, we pay our partner a royalty for the development mission they’ve assumed. As the partner expands their client base, they pay us a royalty because we retain ownership of the IP. So with this model, we continue to own the product and our revenue stream, but shift our spending profile to a more variable cost structure, while extending the life of these assets. This is another way of monetizing our research and innovation, while allocating our resources to where we see our best opportunities. This quarter, our IP income reflects licenses for several software products and we have a pipeline that will continue into 2017.

22 KOTAK INSTITUTIONAL EQUITIES RESEARCH HCL Technologies Technology

Acquisitions in ERD space in addition to investments in IP exhibit high focus

We note that HCLT has acquired eight companies in the past 18 months in additions to the three IP buyouts. Majority of these acquisitions are in engineering services space. It acquired four companies for an aggregate consideration of US$292 mn— Geometric (US$195 mn), Butler America Aerospace (US$85 mn), P2P (US$ 10 mn) and C2SIS (US$ 2 mn). Aggregative investment of about US$850 mn including IP deals and acquisitions into ERD services exhibits serious focus.

Renewed focus on ERP practice

The Enterprise solutions practice of HCLT was on decline partly due to structural challenges. The management indicated that it has put concerted effort to focus on select opportunities in the ERP market and align its capabilities with the opportunities. HCLT is confident of being able to arrest revenue decline in this service offering based on initial deal wins.

Moderation in attrition is an encouraging trend

HCLT’s quarterly annualized attrition reduced 70 bps qoq to 26% and is lowest in the past 14 quarters, an encouraging trend. Changes to estimates

We incorporate Geometric and Butler acquisitions and US$15 mn and US$50 mn revenues from the second and third IP licensing deals in our estimates starting 4QFY17. The increase in revenues and revenues growth over FY2017-19 is largely on account of it. The acquisitions are largely EPS neutral while IP deals are marginally EPS accretive. Upgrade in EPS estimates is led by slight increase in margin expectations.

Conference call highlights

 Guidance sharpened. HCLT management expects c/c revenue growth in FY2017 at 13% (mid-point of its c/c guidance band of 12-14%). It implies US$ revenue growth guidance of 10-12% at Dec 31, 2016 exchange rates (versus 11-13% as at end Sep-16 rates). In addition to this, the management expects 0.6-1% growth in FY2017 from acquisitions announced after Sep 30, 2016 and not included in the earlier guidance (Geometric, Butler America Aerospace acquisition and second and third licensing deals with IBM); it implies inorganic revenues of about US$37-62 mn in 4QFY17. We note that the c/c growth guidance translates into about 9% organic c/c revenue growth in FY2017.

 Margin walk-through and guidance. HCLT’s EBIT margin increased 30 bps qoq to 20.4% despite 70 bps headwind from wage hikes. Margin improvement was driven by change in service mix, broad-based growth across all services lines, operational efficiencies and likely higher margins of IP revenues.

 Growth was broad-based across service lines with application services, IMS, ERD and BPO growing 2%, 2.1%, 2.9% and 7.1% qoq in c/c terms. High growth in ERD was partly due to revenues from the first IP licensing deal

 About 60% of the aggregate consideration of US$555 mn for IP deals was paid out as at Dec-16 end.

KOTAK INSTITUTIONAL EQUITIES RESEARCH 23 Technology HCL Technologies

Exhibit 1: HCL Technologies Dec 2016 quarter financial performance

Change (%) (a) Change Dec-16 Dec-16E Sep-16 Dec-15 Dec-16E Sep-16 Dec-15 9MFY17 9MFY16 (%) FY2017E Revenues (US$ mn) 1,745 1,751 1,722 1,566 (0.3) 1.3 11.4 5,158 4,649 11.0 6,985 Revenues 118,140 118,022 115,190 103,410 0.1 2.6 14.2 346,690 302,150 14.7 471,142 Cost of Revenues (78,090) (78,258) (76,523) (67,675) (0.2) 2.0 15.4 (229,017) (199,487) 14.8 (311,632) Gross profit 40,050 39,764 38,667 35,735 0.7 3.6 12.1 117,673 102,663 14.6 159,509 SG&A expenses (13,770) (14,371) (13,552) (13,482) (4.2) 1.6 2.1 (41,070) (38,608) 6.4 (56,138) EBIDTA 26,280 25,393 25,115 22,253 3.5 4.6 18.1 76,604 64,054 19.6 103,371 Depreciation (2,200) (2,022) (1,935) (1,527) 8.8 13.7 44.0 (6,013) (4,124) 45.8 (8,567) EBIT 24,080 23,371 23,180 20,725 3.0 3.9 16.2 70,590 59,930 17.8 94,804 Other Income 2,310 2,310 2,349 3,561 7,190 8,101 9,566 PBT 26,390 25,682 25,529 24,287 2.8 3.4 8.7 77,780 68,031 14.3 104,370 Provision for Tax (5,680) (5,586) (5,376) (5,084) 1.7 5.7 11.7 (16,483) (13,844) 19.1 (22,230) Net Income (before extraordinaries) 20,710 20,096 20,154 19,203 3.1 2.8 7.8 61,297 54,187 13.1 82,141 EPS (Rs/share) 14.7 14.2 14.3 13.6 3.0 2.8 7.8 43.4 38.4 13.1 57.5 No of shares outstanding 1,412.3 1,411.6 1,412.3 1,411.6 1,412.1 1,411.6 1,429.6 Segmental revenues (US$ mn) Software 980 958 924 2.3 6.1 2,886 2,761 4.5 Infrastructure 695 695 555 0.1 25.1 2,063 1,640 25.8 BPO 70 70 87 (0.2) (19.6) 210 248 (15.4) Margins (%) Gross profit margin 33.9 33.7 33.6 34.6 33.9 34.0 33.9 SG&A as % of revenues 11.7 12.2 11.8 13.0 11.8 12.8 11.9 EBITDA Margin 22.2 21.5 21.8 21.5 22.1 21.2 21.9 EBIT Margin 20.4 19.8 20.1 20.0 20.4 19.8 20.1 NPM 17.5 17.0 17.5 18.6 17.7 17.9 17.4

Source: Company, Kotak Institutional Equities

Exhibit 2: Key changes to our FY2017-19E estimates

Revised Old Change (%) US$ mn 2017E 2018E 2019E 2017E 2018E 2019E 2017E 2018E 2019E Revenues 6,985 7,874 8,610 6,950 7,563 8,265 0.5 4.1 4.2 Revenue growth yoy (%) 12.0 12.7 9.4 11.4 8.8 9.3 EBITDA 1,535 1,661 1,763 1,502 1,561 1,661 2.2 6.4 6.2 EBIT 1,408 1,526 1,616 1,385 1,439 1,528 1.6 6.0 5.8 Net Income 1,220 1,292 1,362 1,219 1,241 1,315 0.1 4.1 3.6

EBITDA margin (%) 22.0 21.1 20.5 21.6 20.6 20.1 EBIT 20.2 19.4 18.8 19.9 19.0 18.5 Re/ US$ rate 67.5 68.0 68.0 67.5 68.0 68.0 - - -

EPS Rs/ share 57.5 61.4 64.6 58.1 59.6 63.0 (1.1) 3.0 2.5

Source: Company, Kotak Institutional Equities estimates

24 KOTAK INSTITUTIONAL EQUITIES RESEARCH HCL Technologies Technology

Exhibit 3: Revenue growth across geographies, verticals and service lines (Dec 2016)

Revenues Growth (%) Contribution to (US$ mn) qoq yoy revenues (%) Total revenues 1,745 1.3 11.4 100 Geographical split of revenues US 1,080 1.3 13.1 61.9 Europe 517 2.3 10.3 29.6 Asia Pacific 148 (2.1) 4.1 8.5 Vertical split of revenues Financial services 424 2.2 4.5 24.3 Manufacturing 592 6.7 19.9 33.9 Retail & CPG 164 (8.4) 10.2 9.4 Telecom, media, publishing, entertainment 155 (4.1) 2.2 8.9 Life sciences 209 (3.5) 9.6 12.0 Energy-utilities-public sector 195 4.1 17.7 11.2 Others 7 1.3 (25.7) 0.4 Service line split of revenues Application services 655 0.6 3.5 37.5 Engineering and R&D services 325 6.0 11.6 18.6 Infrastructure services 695 0.1 25.1 39.8 BPO services 70 (1.2) (19.6) 4.0

Source: Company, Kotak Institutional Equities

Exhibit 4: Acquisitions and investments announced by HCL Tech in the past 15 months

Date Target Country Business Description Consideration (mn) Sales (mn) HCL Technologies Externded partnership to cover Application security, B2B 1 Jan-17 Strategic IP partnership with IBM (3) US data transformation, testing automation and $155.0 $50.0 Mainframe management tools Externded IP partnership to cover API/web service 2 Oct-16 Strategic IP partnership with IBM (2) US $55.0 $15.0 enablement of mainframes Provider of engineering and design services to US 3 Oct-16 Butler America Aerospace US $85.0 $85.4 aerospace and defense customers To invest in and grow workload automation and 4 Jun-16 Strategic IP partnership (1) US $350.0 $100.0 DevOps software of a global tech major 5 Apr-16 Geometric India PLM and engineering services $195.0 $135.0 6 Feb-16 Volvo IT AB Sweden External IT services arm of Volvo $134.9 $190.0 7 Jan-16 Point to Point (P2P) UK Workplace engineering services $10.0 $11.5 To operate and expand the existing Core Banking 8 Nov-15 Arrangement with CSC US $53.4 NA business of CSC 9 Oct-15 Powerteam LLC US Professional services for Microsoft Dynamics CRM $41.4 $37.00 10 Oct-15 C2SiS India Engineering services firm $1.9 NA 11 Aug-15 Trygstad Technical Services Inc US Turnkey solutions for a large ISV $9.9 NA Total $1,091.4 $625+

Notes: (1) Geometric acquisition is a share-swap deal (yet to be completed). (2) HCLT has paid about US$330 mn for Strategic IP partnership and balance US$225 mn would be paid over CY2017. (3) For other acquisitions, the consideration is agreed amount and it includes earnouts.

Source: Company

KOTAK INSTITUTIONAL EQUITIES RESEARCH 25 Technology HCL Technologies

Exhibit 5: HCLT's attrition eases but still at high levels

Consolidated attrition (%, quarterly annualized) 40

35

30 26.7

25

20

Jun-10

Jun-11

Jun-12

Jun-13

Jun-14

Jun-15

Jun-16

Sep-10

Sep-11

Sep-12

Sep-13

Sep-14

Sep-15

Sep-16

Dec-10

Dec-11

Dec-12

Dec-13

Dec-14

Dec-15

Dec-16

Mar-10

Mar-11

Mar-12

Mar-13

Mar-14

Mar-15 Mar-16

Source: Company, Kotak Institutional Equities

Exhibit 6: Trends in segmental EBIT margins (%)

IMS Software services BPO 30 25 25 26 26 23 24 25 23 22 26 25 26 21 21 21 21 25 20 20 24 24 21 20 22 22 21 20 21 20 20 21 19 19 15 18 15 13 10 12 13 12 11 9 5 8 8

6 6 6 5

Jun-13

Jun-14

Jun-15

Jun-16

Sep-13

Sep-14

Sep-15

Sep-16

Dec-13

Dec-14

Dec-15

Dec-16

Mar-14 Mar-15 Mar-16

Source: Company, Kotak Institutional Equities

26 KOTAK INSTITUTIONAL EQUITIES RESEARCH HCL Technologies Technology

Exhibit 7: Trend in EBIT margin (%)

EBIT margins (%) 25 24 24 25 24 24 24 21 21 21 20 20 21 20 20 19 19 19 20 19 20

15 15 15 14 15 14 12

10

5

Jun-11

Jun-12

Jun-13

Jun-14

Jun-15

Jun-16

Sep-11

Sep-12

Sep-13

Sep-14

Sep-15

Sep-16

Dec-10

Dec-11

Dec-12

Dec-13

Dec-14

Dec-15

Dec-16

Mar-11

Mar-12

Mar-13

Mar-14 Mar-15 Mar-16

Source: Company, Kotak Institutional Equities

Exhibit 8: Underinvestment in SG&A continues

SG&A as % of revenues 18

16

14

12 11.8

10

Sep-06

Sep-07

Sep-08

Sep-09

Sep-10

Sep-11

Sep-12

Sep-13

Sep-14

Sep-15

Sep-16

Mar-07

Mar-08

Mar-09

Mar-10

Mar-11

Mar-12

Mar-13

Mar-14 Mar-15 Mar-16

Source: Company, Kotak Institutional Equities

KOTAK INSTITUTIONAL EQUITIES RESEARCH 27 Technology HCL Technologies

Exhibit 9: HCLT: quarterly metrics

Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Revenues (US$ mn) 1,491 1,491 1,538 1,545 1,566 1,587 1,691 1,722 1,745 Revenues (Rs mn) 92,830 92,670 97,770 100,970 103,410 106,980 113,360 115,190 118,140 Exchange rate 62.3 62.2 63.6 65.4 66.0 67.4 67.1 66.9 67.7 Geographical mix US 57.4 57.5 58.6 58.7 61.0 62.5 59.9 61.9 61.9 Europe 31.7 31.0 30.4 31.7 29.9 28.4 31.4 29.3 29.6 Asia Pacific 10.9 11.5 11.0 9.6 9.1 9.1 8.7 8.8 8.5 Revenues by service offering -Enterprise application services 15.4 14.2 14.4 - Custom application (Industry solutions) 27.0 27.3 26.5 Application services 42.4 41.5 40.9 40.4 40.4 39.9 38.3 37.8 37.5 Engineering and R&D services 18.3 18.9 18.7 19.2 18.6 18.7 17.7 17.8 18.6 Infrastructure services 34.4 34.5 35.3 35.1 35.5 36.2 39.8 40.3 39.8 BPO services 4.9 5.1 5.2 5.3 5.5 5.2 4.1 4.1 4.0 Revenue by contract type Time and Material 44.2 43.7 43.9 43.8 43.0 43.2 39.1 38.7 36.8 Fixed price 55.8 56.3 56.1 56.2 57.0 56.8 60.9 61.3 63.2 Revenue by vertical (new classification) Financial services 26.6 26.1 26.0 26.1 25.9 25.0 23.6 24.1 24.3 Manufacturing 32.9 33.4 32.7 32.5 31.5 31.4 33.2 32.2 33.9 Retail & CPG 9.7 8.4 8.8 8.8 9.5 9.2 10.0 10.4 9.4 Telecom, media, publishing, entertainment 8.4 9.0 9.5 9.6 9.7 9.9 9.1 9.4 8.9 Life sciences 11.1 11.2 12.0 12.4 12.2 12.8 11.9 12.6 12.0 Energy-utilities-public sector 9.5 10.4 9.7 10.0 10.6 11.1 11.7 10.9 11.2 Others 1.8 1.5 1.3 0.6 0.6 0.5 0.5 0.4 0.4 Number of million dollar clients (LTM) 50 Million dollar + 16 17 17 18 19 19 20 20 24 10 Million dollar + 121 122 124 133 140 144 146 146 148 5 Million dollar + 205 206 211 224 227 233 237 235 241 1 Million dollar + 450 468 476 486 494 482 482 494 496 Client contrubution to revenue Top 5 clients 14.0 13.5 13.2 13.6 13.6 13.6 13.9 13.8 14.2 Top 10 clients 22.3 21.8 21.7 21.9 21.7 21.8 21.8 21.6 21.7 Top 20 clients 32.4 32.2 32.4 32.4 32.4 32.2 31.7 31.8 31.9 Utilization (consol) Blended utilization 82.9 81.9 83.5 83.6 84.7 85.6 85.8 85.3 84.6 Manpower details Consolidated manpower 100,240 104,184 106,107 105,571 103,696 104,896 107,968 109,795 111,092 Total gross addition 11,734 11,041 9,448 7,889 6,234 9,280 10,515 9,083 8,467 Total net addition 4,718 3,944 1,923 (536) (1,875) 1,200 3,072 1,827 1,297 Attrition - IT services (%) 16.4 16.2 16.5 16.3 16.7 17.3 17.8 18.6 17.9 Attrition - consol quarterly annualized (%) 28.7 27.8 28.6 31.8 31.0 31.0 28.0 26.7 26.0

Source: Company, Kotak Institutional Equities

28 KOTAK INSTITUTIONAL EQUITIES RESEARCH HCL Technologies Technology

Exhibit 10: Condensed consolidated financials for HCL Technologies, June/March fiscal year-ends, 2014-2019E (Rs mn)

2014 2015 2016 2017E 2018E 2019E Profit model Revenues 329,180 370,620 311,360 471,142 535,404 585,478 EBITDA 86,667 86,947 66,900 103,371 112,924 119,899 Depreciation (incl amortization of intangibles) (7,329) (4,505) (4,650) (8,567) (9,185) (9,978) Other income (168) 9,114 7,978 9,566 9,667 11,172 Pretax profits 79,169 91,556 70,228 104,370 113,407 121,092 Tax (15,482) (19,074) (14,786) (22,230) (25,517) (28,457) Profit after tax 63,688 72,483 55,442 82,141 87,890 92,636 Diluted earnings per share (Rs) 45.1 51.3 39.2 57.5 61.4 64.6 Balance sheet Total equity 204,918 242,116 278,180 324,273 366,387 403,791 Deferred taxation liability 1,132 784 1,061 1,081 1,089 1,089 Total borrowings 7,662 4,584 9,734 9,912 9,988 9,988 Minority interest 5 6 2,115 2,153 2,170 2,170 Other non-current liabilities 14,206 11,783 11,576 13,277 14,835 15,961 Current liabilities 83,215 90,058 95,106 116,548 116,399 124,159 Total liabilities and equity 311,138 349,329 397,773 467,244 510,867 557,156 Cash 95,826 107,805 113,184 123,323 142,562 169,698 Other current assets 100,337 115,661 131,361 144,821 164,506 179,891 Goodwill and intangible assets 52,544 50,905 64,206 64,835 64,788 64,244 Tangible fixed assets 32,108 37,363 43,239 85,588 87,679 89,478 Investments 6,382 7,604 6,985 7,112 7,167 7,167 Other non-current assets 23,941 29,992 38,796 41,564 44,166 46,679 Total assets 311,138 349,329 397,773 467,244 510,867 557,156 Free cash flow Operating cash flow, excl. working capital 71,049 67,092 53,975 81,338 87,408 91,442 Working capital changes (3,446) (10,661) (14,689) 8,072 (20,445) (9,013) Capital expenditure (4,861) (12,111) (7,311) (49,588) (10,076) (11,233) Acquisition — — (11,787) — — — Other income (168) 9,114 7,978 9,566 9,667 11,172 Free cash flow 62,574 53,435 28,165 49,387 66,554 82,368 Key assumption and ratios (%) US$ revenue growth (b) 14.4 11.1 6.4 12.0 12.7 9.4 EBITDA margin 26.3 23.5 21.5 21.9 21.1 20.5 EBIT margin 24.1 22.2 20.0 20.1 19.4 18.8

Notes: (a) Financial year changed to March-end from June-end in FY2016. (b) Growth rate on like-to-like basis adjusted for change in financial year. (c) Geometric acquisition (largely EPS neutral) and Butler aerospace acquisition are not built in our estimates yet.

Source: Company, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 29

REDUCE Asian Paints (APNT) Consumer Products JANUARY 25, 2017 RESULT Coverage view: Cautious

Wait for the right entry price continues. APNT posted a modest and in-line quarter Price (`): 973 delivering 3% yoy volume growth, decent in the context of demonetization impact Target price (`): 900 even as management termed it as an unsatisfactory performance. Subsidiary business BSE-30: 27,376 fared better than expected this quarter boosting consolidated financials. We have cut our FY2018-19 EPS estimates by 4-5% as we trim our pricing growth assumptions a tad. Despite recent correction, the stock remains expensive trading at 37X FY2019E EPS; retain REDUCE with revised TP of ₹900 (from ₹920) based on December 2018E.

Company data and valuation summary Asian Paints Stock data Forecasts/Valuations 2017E 2018E 2019E 52-week range (Rs) (high,low) 1,227-827 EPS (Rs) 19.8 22.3 26.4 Market Cap. (Rs bn) 933.7 EPS growth (%) 5.8 12.5 18.5 Shareholding pattern (%) P/E (X) 49.1 43.7 36.9 Promoters 52.8 Sales (Rs bn) 152.7 175.5 204.9 FIIs 19.2 Net profits (Rs bn) 19.0 21.4 25.3 MFs 1.9 EBITDA (Rs bn) 30.0 33.8 39.6 Price performance (%) 1M 3M 12M EV/EBITDA (X) 30.5 26.8 22.7 Absolute 11.4 (13.7) 11.9 ROE (%) 31.3 30.4 31.3 Rel. to BSE-30 5.9 (11.1) (0.1) Div. Yield (%) 0.9 1.0 1.2

3QFY17 print – deco business posts modest growth; industrial/IBD business performs well

Headline consolidated results – APNT posted a modest and in-line quarter with net operating revenues up 2% yoy to ₹39.37 bn (2% above our estimates), 1% yoy decline in EBITDA to ₹7.76 bn (2% above our estimates) and 9% yoy decline in recurring PAT to ₹4.77 bn dragged by lower other income and 380 bps yoy spike in ETR. EBITDA growth was impacted largely due to negative leverage as staff costs and other expenses inched up 40 bps and 80 bps yoy respectively; however, GM expanded 50 bps yoy (down 50 bps qoq) to 44%. For 9MFY17, APNT reported net operating revenues, EBITDA and PAT growth of 7%, 11% and 8% yoy respectively; recurring EPS stood at ₹15.4.

Headline standalone results – standalone net operating revenues grew 1% yoy to ₹32.4 bn; we estimate volume growth in domestic paints business stood at 3% yoy (in line with our estimates) – however, price cut of ~2% yoy dragged reported revenue growth. EBITDA declined 6% yoy to ₹6.71 bn as EBITDA margin contracted 150 bps yoy, despite 20 bps yoy expansion in GM (down 120 bps qoq), on account of negative leverage. Recurring PAT declined 13% yoy.

Strong performance in subsidiary business – we note consolidated financials were boosted by robust performance in subsidiaries (consolidated-standalone financials); revenues, EBITDA and recurring PAT grew 13%, 48% and 24% yoy respectively and EBITDA margin witnessed sharp 370 bps yoy expansion largely driven by 220 bps yoy expansion in GM. Industrials and international business did particularly well. Rohit Chordia [email protected] Mumbai: +91-22-4336-0885 Cut estimates; continue to find valuations rich – retain REDUCE with revised TP of ₹900/share Anand Shah APNT’s 3QFY17 performance was aided by a strong festive season, higher exposure to south [email protected] and west regions and temporary surge in cash-based sales; however, it will be critical to track Mumbai: +91-22-4336-0882 volume pickup in 4QFY17, which should give a better reflection of sustainable demand trend. Abhas Gupta Volume pickup is also critical to APNT’s pricing strategy and margin sustenance given its input [email protected] Mumbai: +91-22-4336-0881 basket has started inching up. While we have broadly retained our FY2017 EPS estimates, we have cut our FY2018-19 EPS estimates as we bake in higher input cost inflation and trim our pricing growth assumption a tad. Despite correction, the stock remains expensive at 37X

FY2019E EPS; retain REDUCE with revised TP of ₹900 (from ₹920) based on 35X Dec 2018E EPS.

Kotak Institutional Equities Research [email protected] Mumbai: +91-22-4336-0000

For Private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES’ RATING SYSTEM AND OTHER DISCLOSURES, REFER TO THE END OF THIS MATERIAL. Asian Paints Consumer Products

Exhibit 1: Interim consolidated results of Asian Paints (as per Ind-AS), March fiscal year-ends (Rs mn)

(% change) 3QFY17 3QFY17E 3QFY16 2QFY17 KIE Est yoy qoq 9MFY17 9MFY16 (% chg.) Gross revenue 43,057 42,449 41,934 41,897 1 3 3 125,302 116,541 8 Excise (4,170) (4,489) (4,097) (4,691) (7) 2 (11) (13,308) (11,831) 12 Excise as % of sales 9.7 10.6 9.8 11.2 -90 bps -9 bps -152 bps 10.6 10.2 46 bps Net revenue 38,887 37,961 37,837 37,205 2 3 5 111,994 104,711 7 Other operating income 483 615 585 428 (21) (17) 13 1,384 1,337 3 Net operating revenue 39,370 38,576 38,422 37,633 2 2 5 113,378 106,048 7 Material cost (22,045) (21,600) (21,713) (20,876) 2 2 6 (62,112) (60,448) 3 Gross profit 17,325 16,976 16,709 16,758 2 4 3 51,266 45,600 12 Gross margin (%) 44.0 44.0 43.5 44.5 -1 bps 51 bps -53 bps 45.2 43.0 221 bps Employee cost (2,643) (2,758) (2,419) (2,794) (4) 9 (5) (8,211) (7,218) 14 Other expenditure (6,918) (6,590) (6,445) (6,834) 5 7 1 (19,959) (17,661) 13 Total expenditure (31,607) (30,948) (30,577) (30,503) 2 3 4 (90,282) (85,327) 6 EBITDA 7,763 7,628 7,845 7,130 2 (1) 9 23,096 20,721 11 EBITDA margin (%) 19.7 19.8 20.4 18.9 -6 bps -70 bps 77 bps 20.4 19.5 83 bps Other income 415 680 430 791 (39) (4) (48) 1,925 1,658 16 Interest (92) (70) (76) (60) 31 20 52 (216) (258) (16) Depreciation (855) (868) (694) (844) (1) 23 1 (2,554) (2,034) 26 Pretax profits 7,231 7,370 7,504 7,017 (2) (4) 3 22,251 20,087 11 Tax (2,465) (2,351) (2,274) (2,207) 5 8 12 (7,275) (6,165) 18 Recurring PAT 4,766 5,019 5,230 4,810 (5) (9) (1) 14,976 13,923 8 Extraordinary items — — (525) — — (525) Minority interest/share of associates (104) (50) (15) (51) 108 593 106 (204) (134) 53 Net profit (reported) 4,662 4,969 4,690 4,759 (6) (1) (2) 14,772 13,265 11 Recurring PAT post MI 4,662 4,969 5,215 4,759 (6) (11) (2) 14,772 13,789 7 Recurring EPS 4.9 5.2 5.4 5.0 (6) (11) (2) 15.4 14.4 7 Income tax rate (%) 34.1 31.9 30.3 31.5 218 bps 377 bps 263 bps 32.7 30.7 Costs as a % of net operating revenue Material cost 56.0 56.0 56.5 55.5 0 bps -52 bps 52 bps 54.8 57.0 -222 bps Employee cost 6.7 7.1 6.3 7.4 -44 bps 41 bps -71 bps 7.2 6.8 43 bps Other expenditure 17.6 17.1 16.8 18.2 48 bps 79 bps -59 bps 17.6 16.7 95 bps

Source: Company, Kotak Institutional Equities

Exhibit 2: Key changes to consolidated estimates (as per Ind-AS), Asian Paints, March fiscal year-ends, 2017-19E

Revised Earlier Change (%) 2017E 2018E 2019E 2017E 2018E 2019E 2017E 2018E 2019E Revenues (Rs mn) 152,696 175,516 204,937 148,539 173,318 202,405 2.8 1.3 1.3 EBITDA (Rs mn) 29,956 33,804 39,630 28,921 34,554 40,543 3.6 (2.2) (2.3) EBITDA margin (%) 19.6 19.3 19.3 19.5 19.9 20.0 14 bps -68 bps -70 bps Net income (Rs mn) 18,999 21,367 25,318 18,738 22,486 26,495 1.4 (5.0) (4.4) EPS (Rs/share) 19.8 22.3 26.4 19.5 23.4 27.6 1.4 (5.0) (4.4) Other assumptions Gross margin (%) 44.9 44.0 43.8 45.0 44.9 44.7 -8 bps -91 bps -92 bps Volume growth (%) 8.3 13.5 14.0 6.0 15.0 14.0 225 bps -150 bps 0 bps Realisation growth (%) (1.3) 2.0 3.5 (1.5) 2.5 3.5 25 bps -50 bps 0 bps

Source: Company, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 31 Consumer Products Asian Paints

Exhibit 3: Interim standalone results of Asian Paints (as per Ind-AS), March fiscal year-ends (Rs mn)

(% change) 3QFY17 3QFY17E 3QFY16 2QFY17 KIE Est yoy qoq 9MFY17 9MFY16 (% chg.) Gross revenue 35,865 35,973 35,585 35,054 (0) 1 2 104,530 97,895 7 Excise (3,962) (4,317) (3,929) (4,512) (8) 1 (12) (12,715) (11,330) 12 Excise as % of sales 11.0 12.0 11.0 12.9 -96 bps 0 bps -183 bps 12.2 11.6 59 bps Net sales 31,903 31,656 31,656 30,541 1 1 4 91,816 86,565 6 Other operating income 508 555 529 479 (9) (4) 6 1,453 1,393 4 Net operating revenue 32,411 32,212 32,185 31,020 1 1 4 93,268 87,958 6 Material cost (18,015) (17,695) (17,964) (16,859) 2 0 7 (50,250) (49,486) 2 Gross profit 14,396 14,517 14,221 14,161 (1) 1 2 43,019 38,472 12 Gross margin (%) 44.4 45.1 44.2 45.7 -66 bps 23 bps -124 bps 46.1 43.7 238 bps Employee cost (1,800) (1,880) (1,621) (1,927) (4) 11 (7) (5,617) (4,865) 15 Other expenditure (5,886) (5,638) (5,469) (5,922) 4 8 (1) (17,079) (15,017) 14 Total expenditure (25,702) (25,213) (25,054) (24,708) 2 3 4 (72,945) (69,368) 5 EBITDA 6,709 6,999 7,132 6,313 (4) (6) 6 20,323 18,589 9 EBITDA margin (%) 20.7 21.7 22.2 20.3 -103 bps -146 bps 35 bps 21.8 21.1 65 bps Other income 524 800 556 848 (35) (6) (38) 2,159 1,890 14 Interest (46) (50) (58) (44) (8) (21) 4 (132) (131) 1 Depreciation (746) (750) (591) (731) (1) 26 2 (2,217) (1,732) 28 Pretax profits 6,442 6,999 7,038 6,386 (8) (8) 1 20,134 18,616 8 Tax (2,183) (2,240) (2,149) (2,033) (3) 2 7 (6,511) (5,745) 13 Recurring PAT 4,258 4,759 4,889 4,353 (11) (13) (2) 13,623 12,872 6 Extraordinary items — — (653) — — (653) Net profit (reported) 4,258 4,759 4,236 4,353 (11) 1 (2) 13,623 12,219 11 Recurring EPS 4.4 5.0 5.1 4.5 (11) (13) (2) 14.2 13.4 6 Income tax rate (%) 33.9 32.0 30.5 31.8 189 bps 335 bps 205 bps 32.3 30.9 148 bps Costs as a % of net operating revenues Material cost 55.6 54.9 55.8 54.3 65 bps -24 bps 123 bps 53.9 56.3 -239 bps Employee cost 5.6 5.8 5.0 6.2 -29 bps 51 bps -66 bps 6.0 5.5 49 bps Other expenditure 18.2 17.5 17.0 19.1 65 bps 117 bps -93 bps 18.3 17.1 123 bps

Source: Company, Kotak Institutional Equities

Key takeaways from the management concall

 Comments on demand environment. Decoratives business registered low single-digit volume growth (we estimate 3% growth) for the quarter dragged by demonetization impact. Management highlighted – (1) festive season witnessed strong growth, (2) north and central markets remain challenging while south and west witnessed lower impact; we note this has been a common message across consumer companies, (3) January has witnessed some stabilization albeit overall demand environment still remains uncertain and (4) stock-in-trade hasn’t gone up.

 Other businesses perform better versus decoratives. (1) PPG-AP (automotive coatings business) witnessed good demand in auto OEM segment; however, two-wheeler segment posted sluggish growth, (2) AP-PPG (industrial coatings JV) saw good growth in industrial liquid paints and power coatings segment, (3) international business reported good numbers aided by pickup in Nepal, Fiji and certain units in Middle East partly negated by sharp currency devaluation in Egypt and (4) home improvement business (Sleek and Ess Ess) did witness impact of demonetization due to delayed sales.

 Other takeaways. (1) Most RMs have started inching up including Tio2; management indicated that its actual RM consumption basket inched up 1.5% qoq in 3QFY17, (2) capex guidance for FY2017 (on a standalone basis) is ₹6 bn – largely initial spends on large greenfield facilities at Mysore and Vizag (will come up in phases) and (3) management highlighted that other smaller businesses like waterproofing, adhesives and wall papers performed reasonably well despite demonetization.

32 KOTAK INSTITUTIONAL EQUITIES RESEARCH Asian Paints Consumer Products

Exhibit 4: TTM EPS growth slipped to 10% yoy this quarter from 20%+ growth over past four quarters TTM EPS growth trend

Trailing 12 months EPS (Rs/share) (LHS) yoy growth (%) (RHS) 25 30

25 20

20 15 15 10 10

5 5

- -

Jun-13

Jun-14

Jun-15

Jun-16

Sep-13

Sep-14

Sep-15

Sep-16

Dec-13

Dec-14

Dec-15

Dec-16

Mar-14

Mar-15 Mar-16

Source: Company, Kotak Institutional Equities

Exhibit 5: Recurring PAT missed our and consensus estimates this quarter Quarterly earnings surprise trend vs consensus estimates

60

50 56 51 40

30 36

20 25 18 19 10 14 9 6 14 4 8 (2) 12 11 - (9) (9) (9) (4) (7) (9) (6) (11) (13) (12) (6) (10) (7) (6) (15) (19) (18) (20)

(30)

1QFY10

2QFY10

3QFY10

4QFY10

1QFY11

2QFY11

3QFY11

4QFY11

1QFY12

2QFY12

3QFY12

4QFY12

1QFY13

2QFY13

3QFY13

4QFY13

1QFY14

2QFY14

3QFY14

4QFY14

1QFY15

2QFY15

3QFY15

4QFY15

1QFY16

2QFY16

3QFY16

4QFY16

1QFY17

2QFY17 3QFY17

Source: Company, Kotak Institutional Equities

KOTAK INSTITUTIONAL EQUITIES RESEARCH 33 Consumer Products Asian Paints

Exhibit 6: Volume growth dipped to 3% yoy impacted by demonetization; in line with estimates

18 17 15 16 14 13 14 12 12 12 12 11 10 10 10 8 7 7

6 4 4 3

2 3

-

1QFY14

2QFY14

3QFY14

4QFY14

1QFY15

2QFY15

3QFY15

4QFY15

1QFY16

2QFY16

3QFY16

4QFY16

1QFY17

2QFY17 3QFY17

Source: Company, Kotak Institutional Equities

34 KOTAK INSTITUTIONAL EQUITIES RESEARCH Asian Paints Consumer Products

Exhibit 7: Asian Paints: Consolidated profit model, balance sheet (as per Ind-AS from 2016), March fiscal year-ends, 2013-19E

2013 2014 2015 2016 2017E 2018E 2019E Profit model (Rs mn) Net sales 109,386 127,148 141,828 142,811 152,696 175,516 204,937 EBITDA 17,320 19,979 22,354 27,685 29,956 33,804 39,630 Other income 1,145 1,342 1,697 2,134 2,469 2,831 3,417 Interest (367) (422) (348) (407) (270) (219) (207) Depreciation (1,546) (2,457) (2,659) (2,756) (3,440) (4,014) (4,495) Pretax profits 16,552 18,442 21,044 26,656 28,715 32,402 38,345 Tax (4,957) (5,715) (6,495) (8,444) (9,404) (10,693) (12,654) Minority interest (456) (440) (322) (250) (312) (342) (373) Extraordinary items — (100) (276) (525) — — — Net income 11,139 12,188 13,952 17,438 18,999 21,367 25,318 Recurring net income 11,139 12,288 14,227 17,962 18,999 21,367 25,318 Recurring EPS (Rs) 11.6 12.8 14.8 18.7 19.8 22.3 26.4 Balance sheet (Rs mn) Total shareholder's equity 33,843 40,392 47,424 56,053 65,268 75,125 86,630 Total borrowings 2,372 2,400 4,099 3,060 2,211 2,111 2,011 Deferred tax liability 1,544 1,878 1,799 2,171 2,171 2,171 2,171 Minority interest 1,608 2,460 2,637 2,942 3,254 3,596 3,968 Total liabilities and equity 39,366 47,131 55,959 64,225 72,903 83,002 94,781 Net fixed assets 24,560 24,918 26,102 33,162 39,392 44,203 47,160 Goodwill 442 1,414 2,458 1,977 1,977 1,977 1,977 Investments 2,957 14,236 15,878 20,982 20,982 20,982 20,982 Cash 7,367 2,290 2,044 4,204 7,370 12,639 21,457 Net current assets 4,040 4,274 9,477 3,901 3,182 3,201 3,204 Total assets 39,366 47,131 55,959 64,225 72,903 83,002 94,781 Free cash flow (Rs mn) Operating cash flow, excl. working capital 13,455 15,705 16,379 20,816 21,845 24,599 28,712 Working capital (1,587) (1,685) (4,502) 2,517 718 (19) (3) Capital expenditure (6,367) (2,354) (4,377) (8,059) (9,670) (8,825) (7,452) Free cash flow 5,501 11,667 7,500 15,274 12,893 15,755 21,257 Growth (%) Revenue growth 13.6 16.2 11.5 NM 6.9 14.9 16.8 EBITDA growth 14.8 15.4 11.9 23.8 8.2 12.8 17.2 EPS growth 12.7 10.3 15.8 26.3 5.8 12.5 18.5 Ratios (%) Gross margin (%) 41.4 42.3 43.8 43.6 44.9 44.0 43.8 EBITDA margin (%) 15.8 15.7 15.8 19.4 19.6 19.3 19.3 Net profit margin (%) 10.2 9.7 10.0 12.6 12.4 12.2 12.4 RoE (%) 36.3 33.1 32.4 34.7 31.3 30.4 31.3 RoCE (%) 39.1 36.1 34.7 38.3 36.7 37.0 40.6 Key assumptions (%) Volume growth (%) 6.0 10.5 7.0 12.0 8.3 13.5 14.0 Realisation growth (%) 8.2 3.8 3.8 (3.5) (1.3) 2.0 3.5

Notes: (a) FY2016 P&L and forecasts based on IND-AS and hence not strictly comparable to pre-FY2016 P&L which were based on IGAAP.

Source: Company, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 35

BUY Zee Entertainment Enterprises (Z) Media JANUARY 25, 2017 RESULT Coverage view: Attractive

Margin disbelief misplaced. Zee delivered solid 20% yoy growth in EBITDA and net Price (`): 479 profit notwithstanding demonetization-induced weakness in ad growth. The key Target price (`): 540 highlight was peak EBITDA margin of 31.5% (up 440 bps yoy) led by robust growth in BSE-30: 27,376 subscription revenues and impressive tightening of costs. We believe profitability is sustainable adjusted for seasonality and timing mismatch between investments and associated returns. Earnings visibility improves even as near-term ad environment is weak. We roll-over to Dec-18 and revise TP to `540 from `520. Retain BUY.

Company data and valuation summary Zee Entertainment Enterprises Stock data Forecasts/Valuations 2017E 2018E 2019E 52-week range (Rs) (high,low) 590-350 EPS (Rs) 12.5 15.5 18.8 Market Cap. (Rs bn) 460.4 EPS growth (%) 32.9 24.2 21.2 Shareholding pattern (%) P/E (X) 38.4 30.9 25.5 Promoters 43.1 Sales (Rs bn) 65.0 65.9 77.0 FIIs 48.0 Net profits (Rs bn) 12.0 14.9 18.1 MFs 3.4 EBITDA (Rs bn) 19.2 22.1 26.1 Price performance (%) 1M 3M 12M EV/EBITDA (X) 21.6 18.6 15.5 Absolute 8.3 (6.4) 21.2 ROE (%) 15.3 15.1 16.7 Rel. to BSE-30 3.0 (3.6) 8.2 Div. Yield (%) 0.5 0.7 0.8

3QFY17—solid execution on all counts in context of weak ad environment

Zee reported muted 3.4% yoy growth in ad revenues, a deceleration from 17% in 1H due to demonetization impact but better than our estimate of 2%. Its outperformance over industry ad growth (flattish) despite 300/400 bps qoq/yoy decline in ratings market share of ‘Zee TV’ suggests (1) continued ad share gains in regional genres, and (2) network strength that helps Zee TV partly cushion the impact of weak ratings at least in the short term. A 15% yoy growth in domestic subscription revenues (includes catch up revenues) coupled with about 25-30% drop in carriage costs is impressive. EBITDA at `5.2 bn grew 20% yoy partly aided by tightening of cost (1) 12% yoy drop in ad and publicity costs, (2) almost flat programming costs partly due to lower syndication and lower sports costs, (3) 18% yoy decline in other expenses led by drop in carriage costs. EBITDA margin at 31.5% (up 440 bps yoy) was the strongest in the past 27 quarters or more. Net profit (excl. RPS impact) at `3.3bn grew 20% yoy

Underlying profitability is largely sustainable in our view

We believe Zee has the ability to protect earnings in a weak ad-spend environment by exercising tactical margin levers (ad and publicity expense, tweaking content costs). Steady subscription revenue growth lends support. Our comfort on sustainability of profitability in the medium term is given (1) disciplined and judicious programming strategy, (2) portfolio mix that is inherently more profitable, (3) industry dynamics and trends (strong bargaining power versus content producers, modest inflation in movie rights), (4) scale that lends operating leverage, and (5) burgeoning subscription revenue stream.

We like Zee given comfort on long-term strategy, execution and profitability

We tweak our earnings and roll-over to Dec-18 with revised TP of `540 (`520 earlier) valuing

Zee at 28X Dec-18 earnings (excl. RPS impact). We expect ad spends growth to be tad soft in Jaykumar Doshi the near-term on account of broad based weakness in FMCG. Recent decline in ratings of Zee [email protected] Mumbai: +91-22-4336-0863 TV is company-specific headwind; transient in our view. Zee’s strategy, continuous investments, execution on profitability front and structural improvements (digitization) give us comfort in the medium term. We view Zee as a compounding theme. BUY.

Kotak Institutional Equities Research [email protected] Mumbai: +91-22-4336-0000

For Private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES’ RATING SYSTEM AND OTHER DISCLOSURES, REFER TO THE END OF THIS MATERIAL. Zee Entertainment Enterprises Media

Our thoughts on sustainability of Zee’s profitability

Zee’s ability to protect profitability in a weak ad-spend environment positively surprised us. What impressed us even more is the nimbleness with which the company tightened cost structure. We detail our thoughts on profitability and sustainability of the same from near- term and medium term perspective

Tactical levers to protect profitability in a weak ad environment

At a very broad level, we believe that Zee has achieved a scale whereby its incremental ad revenues can comfortably take care of incremental operating costs even in a year of soft ad spends growth. Incremental subscription directly flows through to EBITDA. We note that the company has the flexibility to fine-tune cost structure in the event of weak ad environment. Available levers are (1) pull back in ad and publicity expense that is sizeable at `4.5 bn (7% of revenues), (2) tweaking programming to moderate production costs, (3) discontinuation of underperforming or early evening slots if demand is very weak. We note that the company exercised these levers to a small extent in the December quarter.

Comfort on sustainability of margins over medium-term

Zee’s solid underlying profitability is virtue of several aspects detailed below

 Programming strategy. Key guiding principles of Zee’s programming strategy are (1) focus on fiction content (more profitable) and measured investments in non-fiction that often tends to be less profitable given high costs, (2) negligible dependency on big stars (TV and movie celebrities). Star actors attract viewership but it often comes at the cost of margins and stars may be difficult to retain. For instance, Colors platform enabled Kapil Sharma build his franchise but it could not retain the show once individual franchise became stronger. Zee has judiciously preferred working with less-known actors; it keeps a check on production cost and the risk of any disruption or loss of viewership is low even if an actor quits the show. This programming strategy does impact the glamour quotient but is extremely profitable.

 Portfolio mix. Profitability varies across genres. As per our understanding regional GECs are likely the most profitable genre followed by Hindi GEC while sports and news genres are less profitable/loss making. Regional genres and Hindi GEC account for more than 70% of Zee’s revenues and partly explains the high profitability

 Industry structure and dynamics. The content production industry in India is fragmented. Large broadcasters have strong bargaining power against small content producers. This helps broadcasters keep a check on content cost inflation. Additionally, incredibly high inflow of fresh talent in the television industry allows broadcasters willing to work with fresh faces produce content at low costs. We note that Zee has set up its own studios so that it can move work in house in the event of content producers demanding unrealistic commercial terms. This further strengthens its negotiating power. Large broadcasting networks also have strong bargaining power against distributors and advertisers to some extent although the former can swing a bit in favor of distributors if TRAI releases tariff order.

 Scale. We believe Zee has achieved a scale whereby growth of select cost items could lag revenue growth as operating leverage benefits kick in. Ad and publicity costs leverage can start to kick-in.

All the above factors give us comfort on long term sustainability of Zee’s profitability. A fall out of this trend could be increased competition in select genres, especially regional

KOTAK INSTITUTIONAL EQUITIES RESEARCH 37 Media Zee Entertainment Enterprises

Impressive growth in domestic subscription revenues

Zee’s domestic subscription revenues grew 15% yoy in 3QFY17 and 17.6% yoy in 9MFY17. The management has maintained its guidance of 14% growth for full year FY2018. Separately, we also note that Zee has been successful in reducing carriage costs by more than 25-30% starting 2QFY17. The management indicated that bulk of the gains associated with phase III digitization will be realized over the next 12-18 months. Zee management does not expect meaningful gains from phase IV digitization in view of negligible ARPU. We note that an adverse order from TRAI could pose some risk to domestic subscription revenue growth for a year or so (in our view, the probability of material impact is low).

Zee TV holds the key—we will closely track upcoming program launches

We note that Zee TV’s ratings declined 300/400 bps on qoq/yoy basis in December quarter. This is due to lower programming hours (OPH) which in turn is due to weak performance of certain programs and lack of ready pipeline to replace them. The management indicated that it has taken more time than anticipated to replace discontinued shows and is working to increase original programming hours to 30 from 25 per week for Zee TV in the next 6 months or so. Simultaneously, it also targets an increase in OPH on &TV to 24 from 20. We expect recovery in Zee TV’s ratings within the next quarter or so. Note that, weakness in ratings impact ad revenues with a lag of 4-6 weeks. Given that, weak ratings of Zee TV will likely be a headwind to ad growth in March 2016.

Other highlights—

 Zee management indicated that yoy ad growth trajectory in the month of January 2017 has improved as compared to Dec-16 but it is still flat yoy.

 Zee’s content costs, ad and publicity expenses will increase in coming quarters in line with increase in programming hours. The management indicated that its launch pipeline and plan are independent of ad environment.

38 KOTAK INSTITUTIONAL EQUITIES RESEARCH Zee Entertainment Enterprises Media

Exhibit 1: Interim results of Zee Entertainment, March fiscal year-ends (Rs mn)

chg (%) 3QFY17 3QFY17E 3QFY16 2QFY17 3QFY17E 3QFY16 2QFY17 9MFY17 9MFY16 chg (%) Total revenues 16,391 16,111 15,854 16,954 1.7 3.4 (3.3) 49,062 42,907 14 Advertising revenues 9,554 9,415 9,240 9,592 1.5 3.4 (0.4) 28,265 25,180 12 Subscription revenues 5,935 5,871 5,218 5,833 1.1 13.7 1.7 17,050 14,634 17 --Domestic subscription 4,818 4,691 4,188 4,675 2.7 15.0 3.1 13,672 11,622 18 --International subscription 1,117 1,180 1,030 1,158 (5.3) 8.4 (3.5) 3,378 3,014 12 Other sales (incl. syndication) 902 825 1,399 1,529 9.4 (35.5) (41.0) 3,746 3,092 21 Total expenditure (11,233) (11,810) (11,560) (12,062) (4.9) (2.8) (6.9) (34,480) (31,881) 8 Content and other direct costs (7,035) (7,304) (6,999) (7,688) (3.7) 0.5 (8.5) (21,298) (19,072) 12 Employee costs (1,419) (1,468) (1,253) (1,533) (3.4) 13.2 (7.4) (4,451) (3,764) 18 Advt. and publicity costs (1,049) (1,200) (1,198) (1,153) (12.6) (12.4) (9.0) (3,399) (3,334) 2 Other expenses (1,731) (1,837) (2,110) (1,688) (5.8) (18.0) 2.5 (5,332) (5,711) (7) EBITDA 5,158 4,301 4,295 4,892 19.9 20.1 5.4 14,582 11,026 32 EBITDA margin (%) 31.5 26.7 27.1 28.9 29.7 25.7 Other income 525 500 295 432 4.9 78.1 21.4 1,691 1,576 7 Fair value through P&L (RPS) (714) (303) (362) (829) (2,675) (1,508) 77 Finance costs (90) (103) (106) (86) (12.4) (14.7) 5.5 (251) (265) (5) D&A expenses (249) (340) (204) (336) (26.8) 21.9 (25.9) (836) (568) 47 Pretax profits 4,630 4,055 3,917 4,074 14.2 18.2 13.6 12,512 10,262 22 Extraordinaries — — — — (331) Tax provision (2,081) (1,503) (1,602) (1,634) 38.4 29.9 27.3 (5,341) (3,918) 36 Minority interest (41) (20) (7) (56) (109) (46) 134 PAT (pre RPS impact) 3,281 2,895 2,731 3,273 13.4 20.2 0.3 9,917 7,654 30 PAT (post RPS impact) 2,508 2,532 2,309 2,384 (0.9) 8.6 5.2 7,062 5,967 18 EPS post RPS impact (Rs) 3.4 3.0 2.8 3.4 13.4 20.2 0.3 10.3 8.0 30 EPS pre RPS impact (Rs) 2.6 2.6 2.4 2.5 (0.9) 8.6 5.2 7.4 6.2 Tax rate (%) 38.5 34.0 36.9 32.9 34.8 33.7

Additional data Zee consolidated Total revenues 16,391 16,111 15,854 16,954 2 3 (3) 49,062 42,907 14 Operating profit 4,909 3,961 4,090 4,556 24 20 8 13,746 10,458 31 Entertainment business Total revenues 14,980 14,611 13,940 14,829 3 7 1 43,826 38,196 15 Operating profit 4,832 4,451 4,445 4,724 9 9 2 14,500 11,139 30 Operating Margin (%) 32.3 30.5 31.9 31.9 33.1 29.2 Sports business Total revenues 1,411 1,500 1,914 2,125 (6) (26) (34) 5,236 4,711 11 Operating profit 77 (150) (150) (168) 82 (113) (173) International business Ad revenues 817 890 812 792 (8) 1 3 2,314 NA

Notes: (1) Prior period financials have been restated as per Ind-AS for like-to-like comparison. Key accounting changes are: (a) Change in accounting of IWPL (a JV) to equity accounting from line by line consolidation. It has led to small changes in revenues and costs. (b) Change in PV of RPS has been charged to P&L (referred as Fair value through P&L) and associated dividend tax is included in finance costs.

Source: Company, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 39 Media Zee Entertainment Enterprises

Exhibit 2: Revised earnings estimates of Zee, FY2017E-19E (Rs mn)

Revised Previous Change (%) 2017E 2018E 2019E 2017E 2018E 2019E 2017E 2018E 2019E Consolidated Ad revenues 37,341 42,113 49,273 37,341 42,113 49,273 — - - Subscription revenues 23,245 21,718 24,774 23,245 22,277 25,403 — (2.5) (2.5) Other operating revenues 4,400 2,095 2,968 4,400 2,095 2,968 - - - Total revenues 64,986 65,927 77,014 64,986 66,485 77,644 - (0.8) (0.8) Direct costs 28,340 26,652 31,510 28,340 26,758 31,637 - (0.4) (0.4) Employee cost 5,991 6,084 6,875 5,991 6,084 6,875 - - - SG&A expenses 11,465 11,127 12,541 11,709 11,561 13,005 (2.1) (3.7) (3.6) Total expenditure 45,796 43,863 50,927 46,039 44,403 51,517 (0.5) (1.2) (1.1) EBITDA 19,191 22,064 26,088 18,947 22,082 26,126 1.3 (0.1) (0.1) PAT 35,208 14,900 18,059 35,013 14,912 18,084 0.6 (0.1) (0.1) Adj PAT (excl. RPS impact) 13,450 16,333 19,200 13,255 16,345 19,226 1.5 (0.1) (0.1) EPS (Rs) 36.7 15.5 18.8 36.5 15.5 18.8 0.6 (0.1) (0.1) Adj EPS (Rs) (excl. RPS impact) 14.0 17.0 20.0 13.8 17.0 20.0 1.5 (0.1) (0.1)

Sports Sports revenues 7,186 — — 7,186 — — - — — Sports operating profit (200) — — (200) — — — — — &TV &TV revenues 3,500 6,100 8,250 3,500 6,100 8,250 — — — EBITDA (2,200) (500) 600 (2,200) (500) 600 — — —

Key assumptions Ad revenue growth (%) (a) 11.1 17.5 17.0 11.1 17.5 17.0 Domestic subscription growth (%) (a) 14.0 15.0 16.5 14.0 15.0 16.5 International subscription growth (%) (a) 9.0 5.0 3.0 9.0 5.0 3.0 EBITDA margin (%) 29.5 33.5 33.9 29.2 33.2 33.6

Notes: (a) Ad and subscription revenue growth forecast for FY2017E is like-to-like (adjusted for sale of sports business) and it incorporates acquisition of two channels from RBNL.

Source: Company, Kotak Institutional Equities estimates

40 KOTAK INSTITUTIONAL EQUITIES RESEARCH Zee Entertainment Enterprises Media

Exhibit 3: Ad revenue growth, March fiscal year-ends (yoy %)

Ad revenue growth (yoy %) Non-sports ad revenue growth (yoy %) 35

30

25

20

15

10

5

0

1QFY13

2QFY13

3QFY13

4QFY13

1QFY14

2QFY14

3QFY14

4QFY14

1QFY15

2QFY15

3QFY15

4QFY15

1QFY16

2QFY16

3QFY16

4QFY16

1QFY17 2QFY17 3QFY17

Source: Company, Kotak Institutional Equities

Exhibit 4: Domestic subscription revenue growth aided by catch-up revenues Subscription revenue growth, March fiscal year-ends (yoy %)

Subscription revenue growth (yoy %) Domestic subscription revenue growth (yoy %) 40 33 33 28 30 26 24 25 21 28 21 19 26 20 23 15 14 14 22 12 12 19 19 11 11 16 9 17 16 16 7 10 13 14 14 11 12 10 (1) 6 - 4

2

1QFY13

2QFY13

3QFY13

4QFY13

1QFY14

2QFY14

3QFY14

4QFY14

1QFY15

2QFY15

3QFY15

4QFY15

1QFY16

2QFY16

3QFY16

4QFY16

1QFY17 2QFY17 (10) 3QFY17

Source: Company, Kotak Institutional Equities

KOTAK INSTITUTIONAL EQUITIES RESEARCH 41 Media Zee Entertainment Enterprises

Exhibit 5: Non-sports operating profit and operating margins, March fiscal year-ends (Rs mn, %)

Zee non-sports operating profit (LHS, Rs bn) (Rs bn) Zee non-sports EBIT margin (RHS, %) (%) 4.5 38.3 40 32.9 34.133.0 33.2 4.0 32.1 31.431.7 32.6 31.932.3 35 29.6 29.2 30.1 30.329.9 29.3 3.5 26.5 30 26.7 24.7 3.0 25 19.4 2.5 20 2.0 15 2.2 2.1 2.4 2.2 2.6 2.7 2.9 3.1 3.8 2.6 2.9 3.3 3.6 2.3 2.9 3.3 4.3 4.1 4.1 4.7 4.8

1.5 10

3QFY14

4QFY14

1QFY15

2QFY15

3QFY15

4QFY15

1QFY16

2QFY16

3QFY16

4QFY16

1QFY17

2QFY17

3QFY17

3QFY12

4QFY12

1QFY13

2QFY13

3QFY13

4QFY13

1QFY14 2QFY14

Source: Company, Kotak Institutional Equities

Exhibit 6: Original programming hours in Week 2, 2017 (Week ending 13th Jan 2017)

Weekday Weekend Total STAR Plus 27.5 8.0 35.5 Colors 25.0 6.0 31.0 Life Ok 20.0 8.0 28.0 Zee TV 20.0 3.0 23.0 &TV 17.5 4.0 21.5 Sony 15.0 6.0 21.0 SONY SAB 17.5 - 17.5

Source: BARC ratings, Kotak Institutional Equities

42 KOTAK INSTITUTIONAL EQUITIES RESEARCH Zee Entertainment Enterprises Media

Exhibit 7: Average viewership ratings of fresh (new) episodes across key time slots, Week 2, 2017 (Week ending 13th Jan 2017)

Show Channel Avg TVTs Days/week Show Channel Avg TVTs Days/week Weekday 5.30 to 6.00 pm Weekend 8.00 To 9.00 pm JANA NA DIL SE DOOR STAR Plus 2,832 7 NAAGIN-2 Colors 13,013 2 Weekday 6.00 to 6.30 pm DIL HAI HINDUSTANI STAR Plus 8,078 2 MERE ANGANE MEIN STAR Plus 3,716 7 INDIAN IDOL 9 Sony 6,816 2 Weekday 6.30 to 7.00 pm SAVDHAN INDIA-ANDHVISHWAS KE KHILAAF Life Ok 2,062 2 SUHANI SI EK LADKI STAR Plus 5,328 7 SAVDHAN INDIA WEEKEND MATINEE Life Ok 1,566 1 THAPKI PYAAR KI Colors 4,462 6 Weekend 9.00 To 10.00 pm AJI SUNTE HO Zee TV 806 5 THE KAPIL SHARMA SHOW Sony 9,417 2 Weekday 7.00 to 7.30 pm BIGG BOSS WEEKEND KA VAAR Colors 6,552 1 SAATH NIBHAANA SAATHIYA STAR Plus 8,892 5 BRAHMARAKSHAS JAAG UTHA SHAITAAN Zee TV 5,594 2 DEVANSHI Colors 5,183 5 THE VOICE INDIA THE BLIND AUDITIONS &TV 2,850 2 KAALA TEEKA Zee TV 3,544 5 KHOONKHAR SUPER COPS VS SUPER VILLAINS Life Ok 1,997 2 Weekday 7.30 to 8.00 pm Weekend 10.00 To 11.00 pm SASURAL SIMAR KA Colors 8,504 6 BIGG BOSS WEEKEND KA VAAR Colors 6,552 1 YE HAI MOHABBATEIN STAR Plus 8,259 7 C I D Sony 2,645 1 SANYUKT Zee TV 2,562 5 SAVDHAN INDIA DARR KAR NAHI DAT KAR Life Ok 2,476 2 YARO KA TASHAN SONY SAB 1,679 5 AMUL SA RE GA MA PA Zee TV 1,967 1 HAPPY HOURS &TV 1,002 5 HOSHIYAAR &TV 1,069 2 Weekday 8.00 To 8.30 pm Weekend 11.00 To 12.00 am SHAKTI-ASTITVA KE EHSAAS KI Colors 9,995 5 JHALAK DIKHHLA JAA DANCING WITH THE STAR Colors 2,820 1 MAHEK Zee TV 6,974 5 SAVDHAN INDIA EK AWAAZ Life Ok 1,828 2 PARDES MEIN HAI MERA DIL STAR Plus 5,492 5 SANKAT MOCHAN MAHABALI HANUMAAN Sony 4,428 5 ICHHAPYAARI NAAGIN SONY SAB 2,781 5 BAHU HAMARI RAJNIKANT Life Ok 1,390 5 QUEENS HAIN HUM &TV 642 5 Weekday 8.30 To 9.00 pm UDAAN Colors 8,624 5 TAARAK MEHTA KA OOLTAH CHASHMA SONY SAB 8,233 5 CHANDRA NANDINI STAR Plus 6,240 5 JAMAI RAJA-S2 Zee TV 5,640 5 KALASH Life Ok 2,260 5 EK RISHTA SAJHEDARI KA Sony 1,762 5 GANGAA &TV 1,399 5 Weekday 9.00 To 9.30 pm KUMKUM BHAGYA Zee TV 11,158 5 SHANI Colors 7,256 5 NAAMKARANN STAR Plus 6,319 6 CHIDIYA GHAR SONY SAB 2,819 5 SANTOSHI MAA &TV 2,458 5 BEYHADH Sony 2,196 5 NAGARJUNA EK YODDHA Life Ok 1,614 5 Weekday 9.30 To 10.00 pm YEH RISHTA KYA KEHLATA HAI STAR Plus 8,423 6 EK SHRINGAAR SWABHIMAAN Colors 6,526 5 EK THA RAJA EK THI RANI Zee TV 5,583 5 BADO BAHU &TV 3,107 5 MAY I COME IN MADAM Life Ok 2,133 5 KUCH RANG PYAR KE AISE BHI Sony 1,355 5 TRIDEVIYAAN SONY SAB 1,251 5 Weekday 10.00 To 10.30 pm KASAM Colors 7,160 5 ISHQBAAZ STAR Plus 6,787 6 YEH VAADA RAHA Zee TV 3,117 5 SAVDHAN INDIA DARR KAR NAHI DAT KAR Life Ok 2,476 5 CRIME PATROL DIAL 100 Sony 2,097 5 WAARIS &TV 1,710 5 KHATMAL E ISHQ SONY SAB 813 5 Weekday 10.30 To 11.00 pm BIGG BOSS RACE TO FINALE Colors 3,984 5 BHABHIJI GHAR PAR HAI &TV 2,811 5 SAVDHAN INDIA DARR KAR NAHI DAT KAR Life Ok 2,476 5 CRIME PATROL DIAL 100 Sony 2,097 5 POW BANDI YUDDH KE STAR Plus 1,324 6 DIL DE KE DEKHO SONY SAB 770 5 Weekday 11.00 To 11.30 pm BIGG BOSS RACE TO FINALE Colors 3,984 5 SAVDHAN INDIA EK AWAAZ Life Ok 1,828 5 Weekday 11.30 To 12.00 am SAVDHAN INDIA EK AWAAZ Life Ok 1,828 5

Notes: (a) TVTs – TV view ership in thousands.

Source: Barc Ratings, Kotak Institutional Equities

KOTAK INSTITUTIONAL EQUITIES RESEARCH 43 Media Zee Entertainment Enterprises

Exhibit 8: BARC ratings market share, 09-Oct-15 to 13-Jan-17 (Week 41, 2015 to Week 2, 2017) (%)

Oct-15 Nov-15 Dec-15 Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Hindi GEC- Ratings market share (Urban + Rural) in top 7 channels (%) Star Plus 23.1 22.4 20.4 21.0 21.0 21.1 21.0 20.7 21.3 21.7 22.0 21.9 20.9 20.8 20.7 21.9 Colors 20.0 20.1 21.4 21.5 20.6 20.0 20.7 20.8 20.4 18.2 17.0 17.9 20.8 20.8 20.8 21.8 Zee TV 18.2 18.7 19.7 19.8 19.3 18.5 16.9 17.9 17.5 19.0 18.2 16.9 15.1 14.9 14.6 13.6 Life Ok 14.5 13.8 12.7 12.5 13.1 14.3 14.9 14.2 12.9 13.0 13.1 13.1 12.5 12.0 12.3 10.9 Sony TV 10.4 10.5 10.5 9.7 9.6 8.9 9.3 9.8 11.2 11.6 11.4 12.8 12.8 13.4 13.9 13.4 SAB 9.7 10.2 9.7 10.0 10.6 11.4 11.4 11.3 11.6 11.2 11.7 11.4 12.3 11.9 11.5 11.7 &TV 4.1 4.4 5.6 5.6 5.7 5.8 5.8 5.2 5.0 5.3 6.6 6.1 5.7 6.2 6.2 6.7 Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0

Zee TV's market share in Urban and Rural markets (%) Urban 16.6 16.4 17.2 17.0 17.0 16.2 14.4 15.0 14.8 15.6 15.4 14.6 12.9 12.9 12.6 11.9 Rural 21.5 23.3 24.9 25.6 24.2 23.0 22.3 23.3 22.9 24.7 24.1 21.4 19.3 18.5 18.7 17.3

Network market share (Urban + Rural) in Hindi GEC (%) Zee 22.2 23.1 25.3 25.3 25.1 24.2 22.7 23.1 22.5 24.3 24.8 23.0 20.7 21.0 20.8 20.3 Star 37.6 36.1 33.1 33.4 34.1 35.4 35.9 34.9 34.3 34.7 35.1 35.0 33.4 32.8 33.0 32.8 Sony 20.2 20.7 20.2 19.7 20.2 20.4 20.7 21.1 22.8 22.8 23.1 24.2 25.1 25.4 25.4 25.1 TV18 20.0 20.1 21.4 21.5 20.6 20.0 20.7 20.8 20.4 18.2 17.0 17.9 20.8 20.8 20.8 21.8

Free-to-Air Hindi GEC- Ratings market share (Urban + Rural) in top 4 channels (%) Zee Anmol 39.6 39.3 40.2 34.9 33.0 27.2 26.7 25.7 26.4 29.1 29.4 28.3 29.2 25.8 24.2 22.3 Star Utsav 29.4 28.1 28.3 24.1 24.2 24.6 23.3 26.5 27.7 27.8 30.8 27.0 23.6 24.1 21.8 23.6 Colors Rishtey 17.0 15.5 16.7 21.3 19.4 22.0 22.9 19.6 19.3 17.8 16.6 20.5 22.4 22.2 27.5 30.8 Sony PAL 13.9 17.1 14.8 19.7 23.4 26.3 27.1 28.2 26.6 25.3 23.2 24.2 24.8 27.8 26.5 23.3 Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0

Hindi movies- Ratings market share (Urban + Rural) in top 7 channels (%) Sony Max 28.4 27.9 25.2 25.2 25.7 23.8 40.8 39.7 24.2 20.5 20.1 21.0 21.1 20.5 19.4 19.2 Zee Cinema 23.5 24.2 23.6 24.0 22.1 26.5 20.4 18.2 18.1 18.6 17.7 17.3 18.3 18.5 17.7 18.1 Star Gold 23.8 21.0 22.2 24.5 26.9 22.8 17.9 18.4 18.9 17.2 16.1 17.4 14.5 13.3 13.5 14.4 Movies OK 13.7 16.6 16.6 15.0 13.6 14.5 11.3 8.6 10.2 10.2 9.0 9.0 8.5 9.2 8.9 8.6 & Pictures 10.6 10.3 12.4 11.3 11.7 12.4 9.6 9.2 8.9 9.3 9.1 9.2 9.1 9.6 8.7 10.5 Rishtey Cineplex 5.8 10.0 11.1 9.1 9.2 9.4 11.7 12.6 10.8 Sony Wah 9.7 13.1 18.9 16.8 19.1 17.3 19.2 18.4 Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0

Network market share (Urban + Rural) in Hindi movies (%) Zee 34.1 34.5 36.0 35.4 33.8 39.0 30.0 27.4 27.1 27.9 26.8 26.5 27.3 28.1 26.4 28.6 Star 37.5 37.6 38.8 39.5 40.5 37.3 29.3 27.1 29.1 27.4 25.1 26.4 23.0 22.5 22.4 23.0 Sony 28.4 27.9 25.2 25.2 25.7 23.8 40.8 39.7 33.9 33.6 39.0 37.9 40.2 37.8 38.6 37.7 TV18 — — — — — — — 5.8 10.0 11.1 9.1 9.2 9.4 11.7 12.6 10.8

Notes: (a) Sharp jump in Sony Max ratings in April and May 2016 is due to IPL.

Source: BARC ratings, Kotak Institutional Equities

44 KOTAK INSTITUTIONAL EQUITIES RESEARCH Media Zee Entertainment Enterprises

Exhibit 9: BARC ratings market share, 09-Oct-15 to 13-Jan-17 (Week 41, 2015 to Week 2, 2017) (%)

Oct-15 Nov-15 Dec-15 Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Marathi- Ratings market share in top 7 channels (%) Zee Marathi 38.6 39.8 43.4 40.7 33.8 36.3 37.4 35.7 34.9 36.8 39.4 40.2 45.0 43.3 45.3 48.1 Zee Talkies 19.1 18.6 18.1 17.2 18.4 17.2 17.2 14.8 14.8 15.7 15.9 15.7 13.5 13.1 12.7 12.5 Colors Marathi 21.3 20.4 21.7 22.5 24.4 25.1 25.1 25.4 24.8 22.3 19.8 17.3 16.0 16.7 18.7 15.9 Star Pravah 11.0 12.9 10.0 11.8 11.2 8.4 7.4 7.1 8.3 8.0 8.7 8.9 8.3 9.0 8.9 8.9 Fakt Marathi 0.9 1.1 1.5 2.2 7.6 8.5 7.9 7.3 6.4 8.1 8.1 7.7 5.8 7.0 5.7 5.5 Maiboli 9.2 7.3 5.2 5.6 4.6 4.5 5.0 9.7 10.8 9.1 8.1 5.6 5.1 4.6 4.4 4.1 Zee Yuva — — — — — — — — — — — 4.7 6.3 6.3 4.3 5.1 Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0

Network market share in top 7 Marathi channels (%) Zee Network 57.7 58.3 61.6 57.9 52.1 53.5 54.5 50.4 49.8 52.5 55.3 60.5 64.8 62.7 62.3 65.7

Bangla- Ratings market share in top 5 channels (%) Zee Bangla 28.7 27.0 28.8 29.1 27.6 29.8 30.1 30.9 31.7 34.7 33.2 30.3 30.6 30.0 29.4 31.4 Star Jalsha 46.8 46.5 45.6 46.3 46.2 44.8 44.0 42.3 43.6 41.2 45.1 49.4 46.7 48.4 48.3 49.2 Jalsha movies 12.2 14.3 13.7 12.2 13.2 12.1 11.9 14.0 12.6 12.8 11.2 10.4 12.4 11.4 11.8 9.4 Colors Bangla 6.5 6.1 5.9 5.9 6.2 6.3 6.6 5.8 5.7 5.1 4.1 3.9 4.3 4.4 4.6 4.4 Zee Bangla Cinema 5.7 6.0 6.0 6.5 6.9 7.1 7.3 7.0 6.4 6.1 6.4 6.0 6.0 5.8 5.8 5.6 Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0

Network market share in top 5 Bangla channels (%) Zee Network 34.4 33.1 34.8 35.6 34.5 36.8 37.5 37.9 38.1 40.8 39.6 36.3 36.6 35.8 35.3 37.0 Star Network 59.1 60.8 59.3 58.4 59.3 56.9 55.9 56.3 56.1 54.1 56.3 59.8 59.1 59.8 60.1 58.6

Telugu- Ratings market share in top 5 channels (%) Zee Telugu 19.3 21.6 20.9 22.6 23.5 24.8 25.0 26.0 23.9 22.8 21.5 22.1 21.3 19.7 21.3 21.6 Maa TV 24.5 21.1 23.0 22.4 22.1 22.3 22.0 21.7 21.8 20.0 20.1 19.5 19.7 21.2 21.0 20.6 Gemini TV 19.5 19.1 17.9 18.9 17.7 17.5 19.9 18.7 20.2 23.7 25.5 27.1 27.3 27.8 27.6 26.6 ETV Telugu 25.1 26.1 26.1 24.8 25.5 24.4 23.2 23.3 23.2 22.8 22.8 22.3 23.0 23.0 21.5 22.2 Gemini Movies 11.6 12.0 12.0 11.2 11.2 11.0 9.8 10.4 10.9 10.7 10.2 9.0 8.7 8.3 8.6 8.9 Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0

Kannada- Ratings market share in top 5 channels (%) Colors Kannada 29.9 34.1 34.6 33.0 28.6 29.5 29.1 27.5 30.3 30.2 30.2 31.8 29.8 30.5 29.3 31.2 Colors Super — — — — — — — — — — 2.5 2.2 3.5 3.9 4.3 3.8 Zee Kannada 14.3 15.5 15.7 16.9 18.3 18.2 17.9 20.3 18.7 19.1 19.6 18.1 19.8 20.8 22.0 21.9 Udaya TV 19.1 15.5 16.1 16.1 16.3 14.8 16.4 15.6 17.4 16.7 15.5 15.7 11.7 10.6 9.9 9.2 Suvarna 17.9 16.5 16.5 16.4 20.3 20.6 19.0 17.1 15.0 16.2 17.2 17.0 19.5 19.8 19.4 19.4 Udaya Movies 18.7 18.5 17.1 17.6 16.5 16.9 17.6 19.5 18.6 17.8 15.0 15.3 15.8 14.3 15.0 14.4 Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0

Tamil- Ratings market share in top 5 channels (%) Sun TV 60.9 60.2 58.9 60.5 62.1 61.3 61.1 58.4 56.6 56.5 57.1 56.4 58.9 58.1 57.9 59.5 STAR Vijay 10.9 10.3 12.8 12.3 11.2 11.4 10.1 10.9 11.7 12.6 11.7 11.7 9.8 9.8 10.5 10.8 KTV 19.4 20.0 18.5 17.1 16.6 16.2 17.0 18.7 18.2 16.1 15.0 15.4 13.8 14.8 14.2 13.6 Polimer 5.6 6.2 6.4 5.5 5.0 4.9 4.7 5.2 4.9 4.4 4.6 4.4 4.3 4.0 4.2 4.0 Zee Tamizh 3.2 3.4 3.5 4.5 5.1 6.2 7.2 6.9 8.6 10.3 11.7 12.2 13.2 13.2 13.2 12.2 Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0

Oriya- Ratings market share in top 4 channels (%) Sarthak TV 49.3 50.0 52.7 52.5 52.0 57.8 53.9 51.9 52.7 53.2 53.2 53.5 55.3 54.0 56.1 55.2 Tarang TV 31.1 31.0 31.1 29.7 28.8 27.4 29.9 32.5 34.1 32.6 31.6 30.0 27.3 25.9 25.9 27.3 Odisha TV 9.5 8.9 7.5 7.4 9.1 7.0 7.5 7.8 7.6 9.1 10.3 10.1 9.7 12.3 10.5 9.9 Colors Oriya 10.1 10.1 8.7 10.3 10.2 7.9 8.8 7.9 5.6 5.1 5.0 6.4 7.7 7.9 7.4 7.6 Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0

Source: BARC ratings, Kotak Institutional Equities

10 KOTAK INSTITUTIONAL EQUITIES RESEARCH Media Zee Entertainment Enterprises

Exhibit 10: Consolidated financial summary of Zee Entertainment, March fiscal year-ends, 2013-19E (Rs mn)

Profit model (Rs mn) Total revenues 36,996 44,217 48,837 58,514 64,986 65,927 77,014 EBITDA 9,543 12,033 12,538 15,094 19,191 22,064 26,088 Other income 1,461 1,807 2,278 2,016 793 2,623 3,339 Interest (86) (158) (103) (123) (128) (133) (138) Depreciation (399) (501) (673) (840) (1,249) (1,448) (1,590) Pretax profits 10,519 13,181 14,040 16,147 18,607 23,105 27,698 Extraordinary items — — — (331) 25,795 — — Taxes (3,337) (4,291) (4,284) (5,528) (9,172) (8,183) (9,618) Minority interest 14 21 20 (22) (22) (22) (22) RPS dividends (incl tax) 0 (101) (1,453) (1,457) PAT 7,196 8,810 8,323 8,810 35,208 14,900 18,059 Adj PAT (pre-exceptional; excl RPS impact) 7,196 8,911 9,776 10,482 13,450 16,333 19,200 EPS (Rs) 7.5 9.2 8.7 9.2 36.7 15.5 18.8 Adj EPS (Rs) - (excl RPS impact) 7.5 9.3 10.2 10.9 14.0 17.0 20.0

Balance sheet (Rs mn) Total Equity 39,115 27,207 35,306 42,145 74,462 86,815 101,548 Preference capital 0 20,169 20,192 20,169 20,169 16,136 12,102 Minority interest 33 61 4 85 85 85 85 Total borrow ings 28 29 12 9 9 9 9 Currrent liabilities 11,382 12,850 14,544 16,532 18,071 18,022 21,015 Total capital 39,176 47,467 55,514 62,408 94,726 103,045 113,744 Cash and cash eq 14,353 16,051 20,044 20,266 46,870 50,800 57,337 Inventories 8,745 11,736 11,878 13,160 14,522 16,467 18,673 Receivables 9,890 10,281 10,692 13,245 14,244 14,450 16,880 Loans and advances 6,014 7,645 11,627 12,972 14,831 16,969 19,428 Other current assets 664 1,243 1,706 2,127 2,327 2,627 2,927 Net fixed assets 9,975 11,730 12,254 14,960 17,791 17,543 17,303 Investments 601 1,304 1,314 1,646 1,646 1,646 1,646 Deferred tax assets 288 298 531 556 556 556 556 Total assets 39,176 47,467 55,514 62,408 94,726 103,045 113,744

Free cash flow (Rs mn) Operating cash flow , excl. W-cap, ex-taxes 9,884 12,976 13,209 15,713 44,974 23,552 27,375 Working capital (2,342) (4,904) (2,236) (2,632) (2,882) (4,638) (4,402) Taxes paid (3,669) (4,242) (4,164) (5,827) (9,172) (8,183) (9,618) Capital expenditure (757) (1,482) (1,147) (4,064) (4,080) (1,200) (1,350) Other income (net) 853 1,108 1,126 1,003 2,122 3,923 4,342 Free cash flow (prior to RPS dividends) 3,969 3,456 6,788 4,193 30,962 13,452 16,348 RPS dividends — (101) (1,453) (1,457) (1,457) (1,433) (1,141) Free cash flow to equity holders 3,969 3,355 5,335 2,736 29,505 12,020 15,206

Key assumptions / metrics Ad revenue grow th (%) 24.0 21.2 11.8 28.9 11.1 17.5 17.0 Domestic subscription revenue grow th (%) 26.2 13.2 8.0 14.5 14.0 15.0 16.5 Overseas subscription revenue grow th (%) 14.0 5.5 (23.6) 15.7 9.0 4.0 3.0 Content cost as % of revenue 37.5 37.7 38.6 41.2 42.2 41.5 38.2 Effective tax rate (%) 31.7 32.6 30.5 34.2 49.3 35.4 34.7 EBITDA margin (%) 25.8 27.2 25.7 25.8 29.5 33.5 33.9 ROAE 19.6 26.6 26.6 22.7 60.4 18.5 19.2 ROACE 23.4 24.9 21.8 21.6 14.8 16.5 18.0 Sports operating profit (870) (976) (266) (349) (200) — — &TV operating profit - - (1,250) (2,600) (2,200) (500) 600

Source: Company, Kotak Institutional Equities estimates

46 KOTAK INSTITUTIONAL EQUITIES RESEARCH

SELL TVS Motor (TVSL) Automobiles JANUARY 25, 2017 RESULT Coverage view: Neutral

Decent results; but expectations of margin expansion could be tested. TVS Motor Price (`): 400 reported EBITDA of ₹2.2 bn (+4% yoy), which is largely in line with Street estimates but Target price (`): 260 ahead of our estimates due to limited impact from increase in commodity prices. We BSE-30: 27,376 note that barring new moped and Apache bike, volumes of all other models for the company are under pressure. We believe the company’s guidance of achieving 10% EBITDA margin in FY2018 is highly unlikely given rise in competitive intensity and commodity costs. Retain SELL with revised TP of `260 (from `245 earlier).

Company data and valuation summary TVS Motor Stock data Forecasts/Valuations 2017E 2018E 2019E 52-week range (Rs) (high,low) 420-256 EPS (Rs) 11.5 14.3 17.4 Market Cap. (Rs bn) 190.2 EPS growth (%) 50.2 24.4 21.1 Shareholding pattern (%) P/E (X) 34.8 27.9 23.1 Promoters 57.4 Sales (Rs bn) 125.2 139.4 155.7 FIIs 16.7 Net profits (Rs bn) 5.5 6.8 8.3 MFs 10.9 EBITDA (Rs bn) 9.7 11.7 13.6 Price performance (%) 1M 3M 12M EV/EBITDA (X) 20.3 16.6 13.9 Absolute 8.0 1.2 40.2 ROE (%) 30.9 31.0 30.3 Rel. to BSE-30 2.8 4.1 25.1 Div. Yield (%) 0.8 0.9 1.1

3QFY17 results are ahead of our estimates but largely in line with Street estimates

TVS reported 3QFY17 EBITDA of `2.2 bn (+3.9% yoy), which was 19% ahead of our estimates but largely in line with consensus estimates. Revenues increased by 3% yoy led by 2.3% yoy volume growth and marginal increase in realizations. The company has reported EBITDA margin of 7.3% (flat yoy; down 80 bps yoy), which is above our estimate of 6.2% but largely in line with consensus estimates of 7%. We were building in 40 bps sequential decline in gross margin due to higher commodity prices but as per the company there was negligible impact of commodity prices in the quarter. The company reported net profit of `1.33 bn (+10.4% yoy), which was 26% above our estimates due to lower-than-expected tax rate. Tax rate during the quarter was 21.9% while we were building in 25% tax rate.

Double-digit EBITDA margin unlikely; don’t expect significant market share gain going ahead

We note that barring new moped and Apache bike, volumes of all other models for the company are under pressure. Jupiter volumes are declining as the model is facing severe competition from Honda Motorcycles while Victor has not been a successful launch, according to us. We expect the company’s volumes to grow at 10% CAGR over the next two years; largely in line with our industry growth assumptions. We note that for 9MFY17, EBIT for the company has increased by only 10% yoy as against 12% volume growth, which implies EBIT margin has come off marginally on yoy basis (EBIT is more comparable due to changes in line items under Ind-AS). We believe that TVS will have to continue its investments in building brands and therefore, EBITDA margin is unlikely to improve meaningfully beyond 8% levels. Hitesh Goel Fine-tune earnings estimates, reiterate SELL with revised target price of ₹260 [email protected] Mumbai: +91-22-4336-0878 We have increased our FY2017E EPS estimates by 6% due to increase in volume growth Nishit Jalan assumptions. Our FY2018-19E EPS estimates for the company remain largely unchanged. [email protected] We maintain our SELL rating as we find the stock expensive at 28X FY2018E EPS and expect Mumbai: +91-22-4336-0877 earnings downgrades from consensus led by downward revision in EBITDA margin estimates. We have revised our target price to ₹260 (₹245 earlier) due to roll-over to December 2018E. Our target price is based on 15X December 2018E EPS and ₹8/share value of TVS-BMW venture.

Kotak Institutional Equities Research [email protected] Mumbai: +91-22-4336-0000

For Private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES’ RATING SYSTEM AND OTHER DISCLOSURES, REFER TO THE END OF THIS MATERIAL. Automobiles TVS Motor

Conference call takeaways

 Rural demand over the last couple of months was particularly impacted by demonetization. The demand has improved in January but still remains below normal levels. Inventory levels for the company are around the normal levels (28-32 days) in January. In the moped segment, the company believes that the growth spurt in FY2017 so far is largely due to slower growth (relative to two-wheeler industry) over the past few years. The company does not expect moped segment to increase over the next two years.

 Exports to some of the key African markets such as Nigeria continue to be impacted by macroeconomic scenario and lack of dollar availability. The company is hopeful of some recovery in FY2018E.

 During the quarter, commodity prices remained largely stable (with marginal upwards bias) for the company. The company has increased prices by `200-600/unit across models in January 2017; as per the management, this will take care of any increase in commodity costs next quarter. We note that domestic steel prices have increased by 25% from 2QFY17 levels and this could ideally impact EBITDA margin by 150-170 bps in the coming quarters, as per our calculations

 With shift towards BS-IV emission norms, vehicle prices will likely go up by `500-1,800 across segments.

 The company has invested `967 mn in subsidiaries in this quarter (`1.5 bn in 9MFY17); of this (1) `400 mn is invested in Emerald Haven Realty (an associate company of TVS Motor), (2) `334 mn in TVS Indonesia, (3) `200 mn in Sundaram Auto Components and (4) `34 mn in TVS Motor (Singapore). The company will invest another `250-300 in Indonesia subsidiary in 4QFY17.

 The company is guiding towards capex of ₹4 bn in FY2017E. Company has invested `3.5 bn in 9MFY17. As per the management, free cash flow generation was only around `1 bn in 9MFY17. Tax rate will likely remain within 24-25% range in FY2017-18E.

48 KOTAK INSTITUTIONAL EQUITIES RESEARCH TVS Motor Automobiles

Exhibit 1: TVS Motor’s 3QFY17 results were above our estimates TVS Motor, standalone interim results, March fiscal year-ends (₹ mn)

(% chg.) 3QFY17 3QFY17E 3QFY16 2QFY17 3QFY17E 3QFY16 2QFY17 9MFY17 9MFY16 YoY (%) FY2017E Volumes (units) 718,562 718,562 702,109 815,562 2.3 (11.9) 2,252,088 2,018,111 11.6 2,974,692 Net realisations (Rs/vehicle) 41,519 41,182 41,246 42,014 0.8 0.7 (1.2) 41,254 41,164 41,286 Net sales 29,834 29,592 28,959 34,265 0.8 3.0 (12.9) 92,908 83,074 11.8 122,812 Inc/dec in stock 595 — (191) 448 883 (558) Raw materials (22,086) (21,500) (20,739) (25,225) (0.0) 2.7 (13.3) (68,054) (59,613) (88,793) Staff costs (1,919) (2,000) (1,757) (1,986) (4.1) 9.3 (3.4) (5,719) (4,931) (7,639) Other expenses (4,239) (4,262) (4,171) (4,736) (0.5) 1.6 (10.5) (13,062) (11,873) (17,032) Total expenses (27,649) (27,762) (26,857) (31,498) (0.4) 2.9 (12.2) (85,953) (76,974) (113,464) EBITDA 2,185 1,829 2,102 2,767 19.4 3.9 (21.0) 6,956 6,100 14.0 9,348 Depreciation expense (720) (730) (621) (724) (1.4) 16.0 (0.6) (2,104) (1,690) (2,816) EBIT 1,465 1,099 1,482 2,043 33.3 (1.1) (28.3) 4,852 4,410 10.0 6,532 Other income 348 400 248 392 (13.0) 40.3 (11.2) 1,102 653 1,452 Interest expense (net) (115) (100) (98) (94) (307) (343) (428) Profit before tax 1,698 1,399 1,631 2,340 21.3 4.1 (27.4) 5,647 4,720 7,556 Tax expense (371) (350) (429) (567) 6.1 (13.5) (34.5) (1,334) (1,187) (1,813) Profit after tax 1,327 1,050 1,202 1,774 26.4 10.4 (25.2) 4,313 3,533 22.1 5,742 EPS 2.8 2.2 2.5 3.7 26.4 10.4 (25.2) 9.1 7.4 22.1 12.1 Ratios (%) Raw material cost to net sales 72.0 72.7 72.3 72.3 72.3 72.4 72.3 Staff cost to net sales 6.4 6.8 6.1 5.8 6.2 5.9 6.2 Other expenses to net sales 14.2 14.4 14.4 13.8 14.1 14.3 13.9 EBITDA margin (%) 7.3 6.2 7.3 8.1 7.5 7.3 7.6 No of shares 475.1 475.1 475.1 475.1 475.1 475.1 475.1 Tax rate (%) 21.9 25.0 26.3 24.2 23.6 25.2 24.0 Volume break up (units) Motorcycles 179,168 190,195 253,734 (5.8) (29.4) 643,460 538,219 19.6 852,346 Scooters 209,685 220,352 216,999 (4.8) (3.4) 610,438 582,906 4.7 800,673 Mopeds 228,288 179,594 228,830 27.1 (0.2) 674,168 532,568 26.6 882,996 Three-wheelers 2,764 3,894 3,546 (29.0) (22.1) 9,901 11,366 (12.9) 13,206 Total domestic sales 619,905 594,035 703,109 4.4 (11.8) 1,937,967 1,665,059 16.4 2,549,220 Motorcycles 68,467 69,578 78,336 (1.6) (12.6) 218,686 231,233 (5.4) 295,661 Scooters 11,403 12,211 12,456 (6.6) (8.5) 36,419 31,809 14.5 48,663 Mopeds 5,470 3,954 4,806 38.3 13.8 15,098 12,000 25.8 19,214 Three-wheelers 13,317 22,331 16,855 (40.4) (21.0) 43,918 78,010 (43.7) 61,935 Total export sales 98,657 108,074 112,453 (8.7) (12.3) 314,121 353,052 (11.0) 425,473 Volume mix (%) Motorcycles 24.9 27.1 31.1 28.6 26.7 28.7 Scooters 29.2 31.4 26.6 27.1 28.9 26.9 Mopeds 31.8 25.6 28.1 29.9 26.4 29.7 Three-wheelers 0.4 0.6 0.4 0.4 0.6 0.4 Total domestic sales 86.3 84.6 86.2 86.1 82.5 85.7 Motorcycles 9.5 9.9 9.6 9.7 11.5 9.9 Scooters 1.6 1.7 1.5 1.6 1.6 1.6 Mopeds 0.8 0.6 0.6 0.7 0.6 0.6 Three-wheelers 1.9 3.2 2.1 2.0 3.9 2.1 Total export sales 13.7 15.4 13.8 13.9 17.5 14.3

Source: Company, Kotak Institutional Equities estimates

Exhibit 2: We have increased our FY2017E EPS estimates by 6% but FY2018-19E EPS estimates remain unchanged Consolidated earnings revision table, March fiscal year-ends, 2017-19E (₹ mn)

New Old % change 2017E 2018E 2019E 2017E 2018E 2019E 2017E 2018E 2019E Volumes (units) 2,974,692 3,273,518 3,591,963 2,870,209 3,203,733 3,510,987 3.6 2.2 2.3 Net sales 125,193 139,437 155,677 120,226 136,256 151,823 4.1 2.3 2.5 EBITDA 9,712 11,698 13,619 9,428 11,666 13,656 3.0 0.3 (0.3) EBITDA margin (%) 7.8 8.4 8.7 7.8 8.6 9.0 Adjusted net profit 5,473 6,812 8,252 5,160 6,737 8,234 6.1 1.1 0.2 EPS 11.5 14.3 17.4 10.9 14.2 17.3 6.1 1.1 0.2

Source: Company, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 49 Automobiles TVS Motor

Exhibit 3: We expect overall volumes to grow at 10% CAGR over FY2017-19E TVS Motor, volume break-down across segments, March fiscal year-ends, 2010-19E (units)

2010 2011 2012 2013 2014 2015 2016 2017E 2018E 2019E Volumes (units) Domestic volumes Motorcycles 493,396 632,150 621,738 558,468 572,732 667,624 712,002 852,346 952,738 1,023,492 Economy (Star City) 345,395 422,733 466,745 392,931 343,960 432,620 384,545 361,472 361,472 361,472 Executive (Victor & Phoenix) 38,258 66,239 10,185 43,475 88,357 37,660 65,828 190,000 224,200 239,894 Premium (Apache) 109,743 143,178 144,808 122,062 140,415 197,344 261,629 300,873 367,065 422,125 Scooters 299,370 446,776 496,584 424,183 456,975 684,569 773,597 800,673 920,774 1,058,890 Mopeds 564,584 697,778 776,916 788,761 722,920 755,503 723,767 882,996 944,805 992,046 Total domestic 2W 1,357,350 1,776,704 1,895,238 1,771,412 1,752,627 2,107,696 2,209,366 2,536,014 2,818,317 3,074,427 3 Wheelers 13,400 22,357 14,172 15,616 12,515 17,606 15,536 13,206 13,866 14,559 Total domestic 1,370,750 1,799,061 1,909,410 1,787,028 1,765,142 2,125,302 2,224,902 2,549,220 2,832,183 3,088,986 Export volumes Motorcycles 148,443 205,103 219,624 191,338 220,747 292,935 304,805 295,661 304,531 350,210 Scooters 9,192 18,156 32,199 17,369 18,693 22,457 38,930 48,663 54,502 59,952 Mopeds 6,905 6,295 9,076 3,308 7,252 9,679 14,780 19,214 20,367 21,589 Total exports 2W 164,540 229,554 260,899 212,015 246,692 325,071 358,515 363,537 379,400 431,751 3 Wheelers 1,716 17,503 25,567 33,574 68,327 90,773 95,285 61,935 61,935 71,226 Total exports 166,256 247,057 286,466 245,589 315,019 415,844 453,800 425,473 441,335 502,977 Total volumes 1,537,006 2,046,118 2,195,876 2,032,617 2,080,161 2,541,146 2,678,702 2,974,692 3,273,518 3,591,963 YoY growth (%) Domestic volumes Motorcycles 7.8 28.1 (1.6) (10.2) 2.6 16.6 6.6 19.7 11.8 7.4 Economy (Star City) — 22.4 10.4 (15.8) (12.5) 25.8 (11.1) (6.0) 0.0 0.0 Executive (Victor & Phoenix) — 73.1 (84.6) 326.9 103.2 (57.4) 74.8 188.6 18.0 7.0 Premium (Apache) — 30.5 1.1 (15.7) 15.0 40.5 32.6 15.0 22.0 15.0 Scooters 23.8 49.2 11.1 (14.6) 7.7 49.8 13.0 3.5 15.0 15.0 Mopeds 30.9 23.6 11.3 1.5 (8.3) 4.5 (4.2) 22.0 7.0 5.0 Total domestic 2W 20.0 30.9 6.7 (6.5) (1.1) 20.3 4.8 14.8 11.1 9.1 3 Wheelers — 66.8 (36.6) 10.2 (19.9) 40.7 (11.8) (15.0) 5.0 5.0 Total domestic 20.8 31.2 6.1 (6.4) (1.2) 20.4 4.7 14.6 11.1 9.1 Export volumes Motorcycles (16.6) 38.2 7.1 (12.9) 15.4 32.7 4.1 (3.0) 3.0 15.0 Scooters 10.6 97.5 77.3 (46.1) 7.6 20.1 73.4 25.0 12.0 10.0 Mopeds (1.9) (8.8) 44.2 (63.6) 119.2 33.5 52.7 30.0 6.0 6.0 Total exports 2W (14.9) 39.5 13.7 (18.7) 16.4 31.8 10.3 1.4 4.4 13.8 3 Wheelers — — 46.1 31.3 103.5 32.9 5.0 (35.0) 0.0 15.0 Total exports (14.0) 48.6 16.0 (14.3) 28.3 32.0 9.1 (6.2) 3.7 14.0 Total volumes 15.7 33.1 7.3 (7.4) 2.3 22.2 5.4 11.0 10.0 9.7

Source: Company, Kotak Institutional Equities estimates

50 KOTAK INSTITUTIONAL EQUITIES RESEARCH TVS Motor Automobiles

Exhibit 4: We expect overall revenues to grow at 11% CAGR over FY2017-19E TVS Motor, revenue break-down across segments, March fiscal year-ends, 2010-19E (units)

2010 2011 2012 2013 2014 2015 2016 2017E 2018E 2019E Revenues (Rs mn) Domestic revenues Motorcycles 15,854 21,176 21,260 19,878 20,862 24,952 28,312 35,347 40,375 44,015 Economy 9,412 11,879 13,539 11,871 10,307 12,931 11,681 11,025 11,025 11,025 Executive 1,339 2,451 407 1,782 3,534 1,582 2,765 8,075 9,529 10,195 Premium 5,103 6,847 7,313 6,225 7,021 10,439 13,866 16,247 19,822 22,795 Scooters 7,945 12,880 15,203 13,735 15,337 23,405 28,932 30,426 34,989 40,238 Mopeds 9,389 12,235 14,420 15,386 14,509 15,276 15,138 18,543 19,841 20,833 Total domestic 2W 33,188 46,291 50,882 49,000 50,708 63,633 72,382 84,316 95,205 105,086 3 Wheelers 1,051 1,568 941 1,379 1,198 1,581 1,395 1,189 1,248 1,310 Total domestic 34,239 47,859 51,823 50,379 51,907 65,214 73,777 85,504 96,453 106,396 Export revenues Motorcycles 4,608 6,312 7,753 8,071 9,751 13,199 14,050 14,044 14,465 16,635 Scooters 275 527 1,055 680 761 915 1,617 2,044 2,289 2,518 Mopeds 136 120 194 85 193 253 410 538 570 604 Total exports 2W 5,019 6,959 9,002 8,836 10,706 14,367 16,077 16,626 17,325 19,757 3 Wheelers 154 1,575 2,301 3,022 6,491 8,179 8,844 5,822 5,822 6,695 Total exports 5,173 8,534 11,303 11,858 17,197 22,546 24,921 22,448 23,146 26,453 Total vehicle revenues 39,412 56,394 63,127 62,237 69,103 87,760 98,698 107,952 119,600 132,849 Accessories and spare parts 4,218 5,402 6,966 7,417 9,473 10,931 12,384 14,861 17,090 19,653 Total revenues 43,631 61,796 70,093 69,654 78,577 98,691 111,082 122,812 136,689 152,502 YoY growth (%) 41.6 13.4 (0.6) 12.8 25.6 12.6 10.6 11.3 11.6 Revenue mix (%) Motorcycles 36.3 34.3 30.3 28.5 26.6 25.3 25.5 28.8 29.5 28.9 Economy 21.6 19.2 19.3 17.0 13.1 13.1 10.5 9.0 8.1 7.2 Executive 3.1 4.0 0.6 2.6 4.5 1.6 2.5 6.6 7.0 6.7 Premium 11.7 11.1 10.4 8.9 8.9 10.6 12.5 13.2 14.5 14.9 Scooters 18.2 20.8 21.7 19.7 19.5 23.7 26.0 24.8 25.6 26.4 Mopeds 21.5 19.8 20.6 22.1 18.5 15.5 13.6 15.1 14.5 13.7 Total domestic 2W 76.1 74.9 72.6 70.3 64.5 64.5 65.2 68.7 69.7 68.9 3 Wheelers 2.4 2.5 1.3 2.0 1.5 1.6 1.3 1.0 0.9 0.9 Total domestic 78.5 77.4 73.9 72.3 66.1 66.1 66.4 69.6 70.6 69.8 Export revenues Motorcycles 10.6 10.2 11.1 11.6 12.4 13.4 12.6 11.4 10.6 10.9 Scooters 0.6 0.9 1.5 1.0 1.0 0.9 1.5 1.7 1.7 1.7 Mopeds 0.3 0.2 0.3 0.1 0.2 0.3 0.4 0.4 0.4 0.4 Total exports 2W 11.5 11.3 12.8 12.7 13.6 14.6 14.5 13.5 12.7 13.0 3 Wheelers 0.4 2.5 3.3 4.3 8.3 8.3 8.0 4.7 4.3 4.4 Total exports 11.9 13.8 16.1 17.0 21.9 22.8 22.4 18.3 16.9 17.3 Total vehicle revenues 90.3 91.3 90.1 89.4 87.9 88.9 88.9 87.9 87.5 87.1 Accessories and spare parts 9.7 8.7 9.9 10.6 12.1 11.1 11.1 12.1 12.5 12.9 Total revenues 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0

Source: Company, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 51 Automobiles TVS Motor

Exhibit 5: We build in sales volume of 38,000 units from TVS-BMW JV in FY2020E Key assumptions of TVS-BMW JV, March fiscal year-ends, 2018-20E

2018E 2019E 2020E Volumes (units) India 4,000 6,000 8,000 Outside India 18,000 22,000 30,000 Total volumes 22,000 28,000 38,000

ASP (Rs/unit) India 125,000 127,500 130,050 Outside India 350,000 360,500 371,315

Revenue (Rs mn) India 500.0 765.0 1,040.4 Outside India 630.0 793.1 1,113.9 Total Revenues 1,130.0 1,558.1 2,154.3

EBITDA (Rs mn) 350 450 630 Tax expense (88) (113) (157) PAT (Rs mn) 263 338 472

Number of shares (mn) 475.1 475.1 475.1 EPS (Rs) 0.6 0.7 1.0

Target value on FY2020E (Rs) 9.9 Target value on FY2018E (Rs) 7.8

Source: Kotak Institutional Equities estimates

52 KOTAK INSTITUTIONAL EQUITIES RESEARCH TVS Motor Automobiles

Exhibit 6: We expect standalone net profit to grow at 19% CAGR over FY2017-19E TVS Motor, standalone financial summary, March fiscal year-ends, 2012-19E (units)

2012 2013 2014 2015 2016 2017E 2018E 2019E Profit model (Rs mn) Net sales 71,262 71,693 79,659 100,423 112,439 122,812 136,689 152,502 EBITDA 4,694 4,090 4,822 6,066 7,507 9,348 11,103 12,755 Other income 217 238 302 303 513 1,452 1,552 1,652 Interest (571) (480) (254) (274) (462) (428) (310) (128) Depreciation (1,175) (1,304) (1,317) (1,533) (1,898) (2,816) (3,088) (3,361) Exceptional income — (908) (28) — — — — — Profit before tax 3,165 1,636 3,525 4,562 5,660 7,556 9,257 10,918 Tax expense (674) (476) (909) (1,083) (1,338) (1,813) (2,314) (2,730) Reported PAT 2,491 1,160 2,616 3,478 4,321 5,742 6,943 8,189 Adjusted net profit 2,491 1,804 2,637 3,478 4,321 5,742 6,943 8,189 Earnings per share (Rs) 5.2 3.8 5.6 7.3 9.1 12.1 14.6 17.2 Balance sheet (Rs mn) Equity 11,693 12,247 14,153 16,454 19,368 23,388 28,248 33,980 Deferred tax liability 976 931 1,247 1,528 1,757 1,757 1,757 1,757 Total Borrowings 8,311 6,345 5,276 9,705 7,585 5,585 3,942 — Current liabilities 9,363 10,767 13,760 16,869 19,932 21,356 23,261 25,432 Other liabilities 1,063 1,066 1,211 1,488 985 985 985 985 Total liabilities 31,405 31,356 35,647 46,042 49,626 53,070 58,193 62,153 Net fixed assets 10,781 10,476 11,738 14,190 16,238 17,393 17,805 17,945 Investments 9,309 8,688 8,959 10,125 11,846 13,654 15,154 16,654 Cash 130 175 826 54 328 753 2,370 2,875 Other current assets 11,185 12,017 14,124 21,674 21,214 21,270 22,863 24,679 Total assets 31,405 31,356 35,647 46,042 49,626 53,070 58,193 62,153 Free cash flow (Rs mn) Operating cash flow excl. working capital 3,783 3,685 3,625 4,699 6,275 7,564 8,788 10,026 Working capital changes 626 643 1,613 (3,851) 2,182 1,368 312 355 Capital expenditure (1,768) (995) (2,580) (4,052) (4,451) (4,000) (3,500) (3,500) Free cash flow 2,640 3,333 2,658 (3,203) 4,005 4,932 5,600 6,881 Ratios EBITDA margin (%) 6.6 5.7 6.1 6.0 6.7 7.6 8.1 8.4 PAT margin (%) 3.5 2.5 3.3 3.5 3.8 4.7 5.1 5.4 Net debt/equity (X) 0.7 0.5 0.3 0.6 0.4 0.2 0.1 (0.1) Book Value (Rs/share) 24.6 25.8 29.8 34.6 40.8 49.2 59.5 71.5 RoAE (%) 23.0 15.1 20.0 22.7 24.1 26.9 26.9 26.3 RoACE (%) 14.8 10.3 14.1 15.5 16.2 18.1 20.7 23.1

Source: Company, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 53 Automobiles TVS Motor

Exhibit 7: We expect consolidated net profit to grow at 23% CAGR over FY2017-19E TVS Motor, consolidated financial summary, March fiscal year-ends, 2012-19E (units)

2012 2013 2014 2015 2016 2017E 2018E 2019E Profit model (Rs mn) Net sales 74,198 75,105 83,836 102,558 115,163 125,193 139,437 155,677 EBITDA 4,591 4,383 4,915 6,052 7,577 9,712 11,698 13,619 Other income 144 242 267 213 385 387 383 327 Interest (883) (1,034) (801) (621) (675) (684) (615) (407) Depreciation (1,583) (1,756) (1,490) (1,786) (2,163) (1,963) (2,141) (2,319) Exceptional income — 1,062 180 583 — — — — Profit before tax 2,270 2,897 3,071 4,442 5,124 7,453 9,325 11,220 Tax expense (946) (915) (1,202) (1,239) (1,480) (1,979) (2,514) (2,968) Minority interest — (6) (6) 80 49 — — — Reported PAT 1,323 1,975 1,863 3,283 3,693 5,473 6,812 8,252 Adjusted net profit 1,323 1,249 1,754 2,862 3,644 5,473 6,812 8,252 Earnings per share (Rs) 2.8 2.6 3.7 6.0 7.7 11.5 14.3 17.4 Balance sheet (Rs mn) Equity 7,253 8,983 11,608 13,246 15,829 19,579 24,308 30,103 Deferred tax liability 551 818 1,333 1,602 1,848 1,848 1,848 1,848 Total Borrowings 13,044 10,062 6,776 11,191 8,993 7,493 5,493 2,493 Current liabilities 11,419 12,673 15,250 18,036 21,474 23,150 25,432 28,009 Other liabilities 1,193 1,274 1,348 1,618 1,072 1,072 1,072 1,072 Total liabilities 33,459 33,809 36,316 45,693 49,216 53,142 58,153 63,525 Net fixed assets 16,579 16,292 15,654 17,296 19,969 21,506 22,865 24,046 Investments 3,184 3,477 4,387 5,393 6,484 6,484 6,484 6,484 Cash 1,375 796 985 278 537 761 1,666 2,744 Other current assets 12,321 13,244 15,291 22,726 22,226 24,391 27,138 30,252 Total assets 33,459 33,809 36,316 45,693 49,216 53,142 58,153 63,525 Free cash flow (Rs mn) Operating cash flow excl. working capital 3,534 4,909 3,315 4,321 6,146 8,139 9,568 10,978 Working capital changes 1,293 (272) 1,388 (3,493) 2,378 (489) (465) (537) Capital expenditure (4,409) (1,087) (2,737) (3,434) (4,581) (3,500) (3,500) (3,500) Free cash flow 417 3,550 1,966 (2,606) 3,944 4,150 5,603 6,941 Ratios EBITDA margin (%) 6.2 5.8 5.9 5.9 6.6 7.8 8.4 8.7 PAT margin (%) 1.8 1.7 2.1 2.8 3.2 4.4 4.9 5.3 Net debt/equity (X) 1.6 1.0 0.5 0.8 0.5 0.3 0.2 (0.0) Book Value (Rs/share) 15.3 18.9 24.4 27.9 33.3 41.2 51.2 63.4 RoAE (%) 18.8 15.4 17.0 23.0 25.1 30.9 31.0 30.3 RoACE (%) 9.9 9.7 11.7 14.8 15.9 22.5 25.6 28.7

Source: Company, Kotak Institutional Equities estimates

54 KOTAK INSTITUTIONAL EQUITIES RESEARCH

REDUCE Mahindra & Mahindra Financial (MMFS) NBFCs JANUARY 25, 2017 RESULT Coverage view: Neutral

Betting heavily on a recovery. Mahindra Finance is betting on a sharp recovery in Price (`): 278 collections during 4QFY17, to catch up on its annual performance. Net loss in 3QFY17 Target price (`): 260 was driven by provisions on existing NPLs, interest reversals and lower securitization BSE-30: 27,376 income; the impact of large (unrecognized) NPL slippages is not even reflected. We revise estimates down, still betting on 4Q recovery but retain REDUCE rating to reflect the unfavorable risk-return tradeoff. TP: `260 remains unchanged.

Company data and valuation summary Mahindra & Mahindra Financial Stock data Forecasts/Valuations 2017E 2018E 2019E 52-week range (Rs) (high,low) 405-173 EPS (Rs) 10.6 14.3 18.5

Market Cap. (Rs bn) 157.9 EPS growth (%) (10.7) 34.5 29.0 QUICK NUMBERS Shareholding pattern (%) P/E (X) 26.1 19.4 15.0 Promoters 51.9 NII (Rs bn) 27.9 32.6 38.1  Loss before tax of FIIs 32.5 Net profits (Rs bn) 6.0 8.1 10.4 MFs 7.5 BVPS 107.9 119.5 130.8 `1.77 bn (excluding Price performance (%) 1M 3M 12M P/B (X) 2.6 2.3 2.1 NPL dispensation) Absolute 8.5 (22.2) 39.1 ROE (%) 9.5 11.9 14.0 Rel. to BSE-30 3.2 (20.0) 24.2 Div. Yield (%) 1.0 1.3 1.7  Loan book up 13% yoy 3Q performance disappointing  GNPL 11.1% (post MMFS reported net loss after tax of `156 mn. Loss before tax was `241 mn supported by RBI NPL dispensation) dispensation for NPL classification; this would otherwise be `1.77 bn. Key reasons for weak and 12.5% earnings: (1) interest reversals of `650 mn, (2) yoy decline in securitization income by `320 mn otherwise and large provisions (`3.9 bn) on existing NPLs/rise in NPLs in October 2016. GNPLs were up 21% qoq to 12.5% of gross advances though the RBI dispensation on NPL classification capped the rise to 7% qoq to 11.1% of gross advances.

Betting on a strong 4Q

MMFS is a strong bet on recovery of cash flows in rural India. Postponement in crop realizations due to demonetization was the likely reason for the weak 3Q. This, coupled with the proceeds of the winter crop, will lead to a stronger 4QFY17, in our view. MMFS has reported sharp seasonal swings in the past and the impact of demonetization make its more challenging to forecast. Our revised 4QFY17 estimate (after 6-11% cut in estimates for FY2017-19E) factors in (1) sharp catch up in securitization income to reflect immediate impact of 4Q recovery

(securitization income flat yoy at `2 bn for FY2017E versus 76% decline in 9MFY17) and (2) calculated NIM of 11.5% in 4QFY17 versus 11% in 4QFY16 and (3) credit cost of `1 bn in 4QFY17 (almost stable yoy). The company reported 20% qoq decline in NPLs in 4QFY16; we expect a similar qoq decline in 4QFY17 as well, without considering the benefit of dispensation. Nischint Chawathe Retain REDUCE; risk-return trade off unfavorable [email protected] Mumbai: +91-22-4336-0887 Post the revision in estimates, we expect MMFS to deliver 10% near-term RoE which will likely M B Mahesh CFA increase to 14% in FY2019E. We continue to believe that recovery in this segment can be very [email protected] sharp and challenging to predict; medium-term RoE will likely be about 18-20%. MMFS’s Mumbai: +91-22-4336-0886 growth momentum poses significant risks in case rural cash flows do not bounce back. Near- Abhijeet Sakhare term recovery trends and recent high-growth trajectory (despite NPL issues) do not warrant the [email protected] current valuation and we await better entry points. Retain REDUCE with RGM-based price Mumbai: +91-22-4336-0889 target of `260 (2X FY2019E).

Kotak Institutional Equities Research [email protected] Mumbai: +91-22-4336-0000

For Private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES’ RATING SYSTEM AND OTHER DISCLOSURES, REFER TO THE END OF THIS MATERIAL. NBFCs Mahindra & Mahindra Financial

Exhibit 1: Mahindra Finance, Quarterly results March fiscal year-ends, 3QFY15-3QFY16 (` mn)

(% chg.) 3QFY17 3QFY17E 3QFY16 2QFY17 3QFY17E 3QFY16 2QFY17 9MFY17 9MFY16 (% chg.) FY2017E Total interest income 14,904 — 14,002 14,916 6 (0) 43,485 41,810 4 63,943 Securitization income (197) — 123 452 (260) (144) 316 1,336 (76) Total interest expense 7,441 — 6,696 7,086 11 5 21,437 19,682 9 29,777 Net interest income 7,463 8,874 7,306 7,831 (16) 2 (5) 22,048 22,128 (0) 34,166 Provisions and write/off 4,190 3,500 3,406 3,042 20 23 38 9,477 9,406 1 10,506 Net interest income (after prov.) 3,273 5,374 3,900 4,789 (39) (16) (32) 12,571 12,722 (1) 23,660 Other income 130 250 85 241 (48) 53 (46) 464 344 35 50 Total income pre provisions 7,593 9,124 7,391 8,071 (17) 3 (6) 22,511 22,472 0 34,216 Operating expenses 3,645 3,750 2,946 3,567 (3) 24 2 10,472 8,390 25 14,646 Employee expenses 1,627 1,750 1,354 1,710 (7) 20 (5) 5,012 4,032 24 6,600 Depreciation 111 100 104 107 11 7 4 325 304 7 677 Other expenses 1,907 1,900 1,488 1,749 0 28 9 5,135 4,054 27 7,369 Pretax income (241) 1,874 1,039 1,462 (113) (123) (116) 2,563 4,676 (45) 9,065 Tax provisions (85) 656 367 514 (113) (123) (117) 901 1,652 (45) 3,058 Net Profit (156) 1,218 672 948 (113) (123) (116) 1,662 3,023 (45) 6,006 Tax rate (%) 35 35 35 35 35 35 34 PBT before provisions 3,949 5,374 4,445 4,504 (27) (11) (12) 12,040 14,082 (15) 19,570 EPS (Rs) (0.3) 2.2 1.2 1.7 (123) (116) 3 5 (45) 11

Other operational details Value of asset financed (Rs bn) 92 80 75 15 22 Outstanding assets (Rs bn) 448 389 427 15 5 Managed loan assets (Rs bn) 457 447 403 439 2 13 4

NIMs - KS calculations (%) 7.3 8.8 8.3 8.1 Cost to income (%) 48.0 39.9 44.2 Exp/ ave assets (%) 3.5 3.1 3.5

Total income/ average assets (%) 14.5 15.8 14.7 Interest / average assets (%) 7.1 7.4 7.1 Difference (%) 7.4 8.4 7.6

Credit costs/ AUMs (%) 3.7 3.5 2.8 8 32 Gross NPLs (Rs mn) 50,589 39,851 47,481 27 7 Gross NPL ratio (%) 11.1 10.1 11.0 Net NPLs (Rs mn) 22,074 17,016 22,862 30 (3) Net NPL ratio (%) 5.2 4.6 5.6

CAR (%) 17.9 17.8 18.1 Tier I (%) 13.3 15.0 13.2 Segment-wise disbursements (%) Auto/ utility vehicles 28 31 28 Tractors 20 16 17 Cars 23 23 22 Commercial vehcles 11 10 12 Refinance and others 18 20 21 Segment-wise AUMs (%) Auto/ utility vehicles 28 31 28 Tractors 20 16 17 Cars 23 23 22 Commercial vehcles/CEs 11 10 12 Refinance and others 18 20 21 Funding Mix, excluding assignments (%) Banks 43 46 46 Insurance 8 17 8 Mutual funds 24 22 21 Others 25 16 25

Source: Company, Kotak Institutional Equities estimates

56 KOTAK INSTITUTIONAL EQUITIES RESEARCH Mahindra & Mahindra Financial NBFCs

Exhibit 2: Mahindra Finance : Balance sheet March fiscal year-ends, 3QFY15-3QFY17 (` mn)

2QFY15 3QFY15 4QFY15 1QFY16 2QFY16 3QFY16 4QFY16 1QFY17 2QFY17 3QFY17 Balance sheet Sharecapital 1,128 1,128 1,128 1,128 1,128 1,128 1,128 1,128 1,128 1,128 Reserves 53,418 54,851 55,566 56,498 58,002 58,718 59,752 60,417 61,402 61,270 Total Borrowings 263,524 271,385 262,538 283,890 291,000 303,000 308,456 311,952 333,933 344,575 Current Liabilities 18,952 20,885 31,509 20,974 19,976 26,353 26,458 31,553 30,062 40,609 Total liabilities and 337,022 348,249 350,741 362,490 370,106 389,199 395,795 405,051 426,526 447,584 Loans & Avd 318,000 329,040 329,260 336,020 344,760 363,300 366,580 373,870 399,120 418,740 Investments 6,752 7,227 8,536 8,851 10,413 10,723 14,833 12,528 10,002 14,392 Deferred tax 3,517 3,718 4,153 4,280 4,490 4,586 5,853 6,133 6,579 6,363 Current Assets 7,696 7,202 7,692 12,233 9,350 9,483 7,394 11,359 9,509 6,938 Fixed assets 1,057 1,062 1,100 1,106 1,093 1,107 1,135 1,161 1,316 1,151 Total assets 337,022 348,249 350,741 362,490 370,106 389,199 395,795 405,051 426,526 447,584

Source: Company, Kotak Institutional Equities

Exhibit 3: MMFS's performance has been cyclical Key parameters of MMFS, March fiscal year-ends, 2007-2019E

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017E 2018E 2019E Disbusements (% yoy) 22 8 7 42 62 35 22 7 (5) 10 23 19 19 Loan growth (% yoy) 32 13 3 22 49 40 37 23 11 11 18 17 18 NIM (%) 8.1 9.9 10.6 10.9 10.6 8.2 8.1 7.8 7.4 7.1 6.5 6.7 6.7 Credit cost/ assets (%) 2.2 3.7 3.9 2.7 1.4 1.0 1.3 1.8 2.5 2.8 2.2 2.2 2.0 Opex/ assets (%) 3.5 3.8 3.7 3.9 4.3 3.7 3.4 3.2 3.0 3.2 3.4 3.3 3.2 Gross NPLs (%) 5.5 7.6 9.6 7.0 4.2 3.1 3.1 4.4 5.9 8.0 8.0 7.0 7.0 Net NPLs (%) 2.5 2.9 2.9 1.0 0.6 0.7 1.1 1.9 2.5 3.4 3.0 2.1 2.3 RoA (%) 2.4 2.7 3.0 4.2 4.1 3.8 4.1 3.1 2.5 1.8 1.6 1.7 1.9 RoE (%) 18.1 16.9 15.4 21.5 22.0 22.8 24.5 18.6 15.5 11.4 10.7 12.5 14.8

Source: Company, Kotak Institutional Equities

Exhibit 4: MMFS's NPLs have been high in years of large deficit in monsoon Monthly deficit during monsoons, gross NPLs of MMFS in following financial years, 2002-17

June-Sept Gross NPLs June July August September (cumulative) of MMFS

Year (%) (%) (%) (%) (%) (%) 2002 32.4 (10.5) (23.5) (42.3) (15.4) 7.4 2003 12.5 (46.1) (18.1) (5.3) (19.2) 7.8 2004 1.6 2.7 (1.0) 2.8 1.3 8.1 2005 18.0 (34.4) 1.2 (44.1) (18.9) 6.8 2006 (43.6) 11.0 (17.6) 0.6 (6.8) 4.9 2007 (1.8) (7.1) 13.5 (4.6) 0.0 5.5 2008 5.7 (0.4) (1.6) 9.5 2.8 7.6 2009 22.3 (24.6) 0.3 0.6 (2.2) 9.6 2010 (50.8) (3.1) (30.5) (11.3) (21.6) 7.0 2011 (10.6) (4.1) 3.2 25.8 3.2 4.2 2012 11.0 (10.3) 2.8 21.0 3.0 3.1 2013 (24.0) (21.8) (1.1) 76.7 4.3 3.1 2014 38.1 6.8 (1.3) (13.5) 4.9 4.4 2015 (38.2) (17.2) (5.1) (0.6) (13.5) 5.9 2016 20.0 (13.2) (25.6) (21.7) (13.8) 8.0 2017 (10.6) 7.8 (8.1) (3.2) (3.0) NA

Source: IMD, Kotak Institutional Equities

KOTAK INSTITUTIONAL EQUITIES RESEARCH 57 NBFCs Mahindra & Mahindra Financial

Exhibit 5: Volatile qoq performance of MMFS Key quarterly highlights, 3QFY15-3QFY17

3QFY15 4QFY15 1QFY16 2QFY16 3QFY16 4QFY16 1QFY17 2QFY17 3QFY17 AUM (Rs bn) 365 369 376 384 403 409 417 439 457 Gross NPL ratio (%) 7.1 5.9 8.0 9.4 10.1 8.0 10.7 11.0 11.1 Provisions and write/off 2,690 1,493 3,228 2,772 3,406 1,089 2,245 3,042 4,190 Net Profit 1,365 3,334 890 1,462 672 3,702 870 948 -156 NIMs - KS calculations (%) 9.1 10.7 8.6 9.0 8.3 11.0 7.3 8.1 7.3

Source: Company, Kotak Institutional Equities

Strong AUM growth of 13%

MMFS’s AUM grew 13% yoy (4% qoq) to `457 bn, higher than expectations in the wake of demonetization and severe asset quality challenges which would have typically made managements go slow on new businesses.

Disbursement growth was 15% yoy to `92 bn. AUM growth was driven by CV/CE (23% yoy, 4% qoq), tractors (20% yoy, 10% qoq), auto/UV (13% yoy, 8% qoq) and cars (13% yoy, 9% qoq). Disbursement growth of 15% yoy was driven by tractors (up 30% yoy growth) and CVs growing by ~50% yoy on a smaller base. The management highlighted that growth is in new segments like non-M&M tractors, cars, excluding Maruti and used vehicles and as such underwriting has not been compromised.

We expect MMFS’s loan growth to move up to 16-17% over the next two years. Some of the short to medium-term growth drivers for MMFS are -

 Tractors. Growth in tractors driven by both farm and infrastructure related-activities and further aided by incremental business from non-Mahindra OEMs.

 Cars. Continued benefit from growth in Maruti volumes as well as gaining share of other OEMs (Hyundai, Nissan, etc.) who have increased focus on rural markets.

 Used vehicles. Increasing share of used vehicles to 15% of assets from ~10% currently.

Exhibit 6: Share of auto and refinance has increased Exhibit 7: Loan growth has slowed in last three years AUM break-up, March fiscal year-ends, 2012-1QFY17 (Rs bn) Loans and yoy growth, March fiscal year-ends, 2010-19E (Rs bn)

Refinance and others Tractors Commercial vehcles/CEs Cars Loans (Rs bn) (LHS) YoY growth (%) (RHS) Auto/ utility vehicles 720 60 480 64 600 50 75 384 65 62 82 55 75 480 40 44 70 71 288 20 66 59 65 49 54 57 360 30 53 48 14 51 110 192 36 98 100 101 41 85 240 20 25 89 82 96 64 142 120 10 99 114 127 129 132 62 81

0 - -

2012

2013

2014

2015

2016

2010

2011

2012

2013

2014

2015

2016

2017E

2018E

2019E

1QFY17 2QFY17 3QFY17

Source: Company, Kotak Institutional Equities Source: Company, Kotak Institutional Equities

58 KOTAK INSTITUTIONAL EQUITIES RESEARCH Mahindra & Mahindra Financial NBFCs

Exhibit 8: High qoq growth in tractors AUM break-up, March fiscal year-ends, 3QFY14-3QFY17 (` bn)

3QFY15 4QFY15 1QFY16 2QFY16 3QFY16 4QFY16 1QFY17 2QFY17 3QFY17 YoY (%) QoQ (%) Total 365 369 376 384 403 409 417 439 457 13 4 Auto/ utility vehicles 110 114 116 119 125 127 129 132 142 13 8 Tractors 69 66 68 69 68 70 71 75 82 20 10 Cars 84 85 86 88 97 98 100 101 110 13 9 Commercial vehcles 47 48 49 46 48 49 54 57 59 23 4 Refinance and others 55 55 56 61 64 65 62 75 64 (1) (14)

YoY (%) 11 8 10 8 10 11 11 14 13

Source: Company, Kotak Institutional Equities

NIM impacted due to reversals and lower securitization income

NIM (calculated) declined ~80 bps qoq and ~100 bps yoy to 7.3%.As discussed above, NIM decline is on account of (1) interest reversal of `650 mn and (2) decline in excess interest spread on securitized loans. Adjusted for these, NIM is likely to have been stable qoq.

Calculated cost of borrowings was stable qoq. The share of bank loans is 26% while NCD/CP contributes 58% of borrowing. MMFS will benefit from declining interest rates and recent MCLR cuts by banks.

The share of bank term loans grew sharply as banks reduced benchmark lending rates. Borrowings from MFs were up 30% yoy; the company will incrementally raise bonds.

NIM will be influenced by mix effect as MMFS focusses on cars on one hand and used vehicles and tractors on the other. We estimate NIM to inch up to 6.6% over FY2018-19E from 6.5% in FY2017. Better collections will drive higher NIM though offset by transition to 90 dpd NPL norm.

Exhibit 9: We expect NIM to remain stable Yield on loans, cost of funds and NIM, March fiscal year-ends, 2010-2019E (%)

Yield on average earning assets Average cost of funds NIM

20.0 12.0 18.5 18.0 16.3 16.4 16.5 15.9 16.0 15.3 10.8 10.9 10.7 14.5 14.3 14.3

12.0 9.6 9.6 9.9 9.8 9.3 9.2 8.9 8.6 8.2 8.6 8.6 8.0 8.2 8.1 8.4 7.8 7.4 7.2 4.0 7.2 6.5 6.6 6.6 - 6.0 2010 2011 2012 2013 2014 2015 2016 2017E 2018E 2019E

Source: Company, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 59 NBFCs Mahindra & Mahindra Financial

Exhibit 10: Gross NPLs have increased in 3QFY17 NPLs and credit costs, March fiscal year-ends, 3QFY08 -3QFY17

Gross NPLs (Rs bn) (LHS) Gross NPLs (%) (RHS) 60 12

50 10 40 7 30 5 20

10 2

- 0

3QFY08

1QFY09

3QFY09

1QFY10

3QFY10

1QFY11

3QFY11

1QFY12

3QFY12

1QFY13

3QFY13

1QFY14

3QFY14

1QFY15

3QFY15

1QFY16

3QFY16 1QFY17 3QFY17

Source: Company, Kotak Institutional Equities

NPL and provisions increase qoq

MMFS had another quarter of high credit cost as gross NPL increased 7% qoq to 11.1%; however credit cost increased 100 bps qoq to 4.1%. Higher provisions of `4.2 bn was the result of greater ageing of existing NPLs.

MMFS has deferred classification of ~32,000 borrowers with loans of `6.7 bn, involving provisions of `1.5 bn (including income de-recognition). MMFS has indicated that these mainly correspond to tractor and agri related loans impacted by demonetization. Notably, contracts which were highly delinquent and car loans which were not impacted by demonetization were not considered for utilizing RBI’s dispensation.

MMFS indicated that Q3 started on a strong note with October seeing 20% disbursement growth, followed by 20% drop in collection efficiency in November. December collections improved but only enough to collect November overdues.

MMFS is betting on strong recovery in farm/rural segment in the fourth quarter, led by cash flows from November and January crops. This is expected to result in substantial correction in overdues in February and March.

We maintain our view that forecasting NPL and credit cost is challenging for the nature of business MMFS is engaged in. We forecast 2.7% credit cost in FY2017E, lower than 3.0% in FY2016 helped by better collections in 4QFY17. We expect GNPL ratio to remain high at 10.0% in FY2017E and expect write-offs of 1.8%, similar to FY2016. We believe MMFS’s localized and deep presence in rural areas renders greater effectiveness in improving collections as soon as customer cash flows start to improve.

Operating expenses high

MMFS has reported 24% growth in operating expenses on the back of (1) high costs of collections/ recoveries, (2) legal charges. The company restructured its operations to follow a product-driven structure from branch-driven structure; this has entailed recruitment of new employees.

60 KOTAK INSTITUTIONAL EQUITIES RESEARCH Mahindra & Mahindra Financial NBFCs

Performance of subsidiaries

High growth in rural housing finance

Strong business momentum. Mahindra Rural Housing Finance continues to deliver high growth: ~50% yoy loan growth to `42 bn on the back of 34% growth in loan contracts. Over the last three years, the company has reported ~50% CAGR in its loan book, on a low base.

Focusing on affordable housing. Mahindra Housing now proposes to diversify into affordable in semi-urban India (i.e. tier 4/5 towns) with ticket size of `0.5-1.0 mn – marginally lower than Dewan and REPCO. The company will initially work on synergies with Mahindra Lifespaces. This segment will contribute to about 25% of its business over the next few quarters; current focus is on low ticket (`1,00,000-1,50,000) rural housing, similar to loans offered by the NBFC subsidiaries/ affiliates of some of the MFIs.

High RoEs. We see this business to be in a sweet spot where large opportunity size and its small base provide tremendous opportunity for multi-year growth. The company is able to charge high (about 17%) loan yields on the back of high cost of distribution to reach out in rural India. Its RoE in FY2016 was 31% with RoA of 2.3%. Quarterly performance remains fairly volatile.

Moderate performance of insurance distribution

Mahindra Insurance Brokers (MIBL) reported moderate results with PAT of ₹151 mn in 3QFY17, up 8% yoy due to net premium growth of 21% yoy, leading to 14% yoy income growth.

MIBL operates as a composite broker, i.e. offers broking in both direct insurance and re- insurance. Although MIBL operates across retail and corporate segments in both life and non-life, we believe major business is generated from credit term plan (life product covering outstanding loan) and motor insurance. Our positive view on this business is more longer term given the nascent stage of the insurance business itself in India. We see the reinsurance segment as uniquely positioned to grow once there is an active re-insurance market in India. MIBL has an aspirational goal of being in the top hundred insurance brokers in the world.

Exhibit 11: Mahindra Rural Housing Finance - summary financials March fiscal year-end, 3QFY15-3QFY17

3QFY15 4QFY15 1QFY16 2QFY16 3QFY16 4QFY16 1QFY17 2QFY17 3QFY17 YoY (%) Disbursements (Rs mn) 2,160 3,465 3,392 3,417 3,411 5,305 4,050 4,535 4,627 36 Customers (#) 17,540 33,517 25,048 24,967 27,468 47,591 28,654 34,428 36,769 34 Loan per customer (Rs) 123,147 103,380 135,420 136,861 124,181 111,471 141,342 131,724 125,840 1 Loan book (Rs mn) 18,312 20,983 23,646 26,224 28,584 32,645 35,576 38,818 42,311 48 Total income (Rs mn) 826 1,016 996 1,135 1,273 1,550 1,437 1,680 1,718 35 PBT (Rs mn) 124 321 105 151 259 452 124 306 241 (7) PAT (Rs mn) 76 216 68 99 161 299 81 199 161 - RoA (%) 2 4 1 2 2 4 1 2 2 (32) Networth - calculated (Rs mn) 1,042 1,258 1,326 1,425 1,586 1,885 1,966 2,165 2,326 47 RoE (%) 30 75 21 29 43 69 17 39 29 - Asset/ equity (X) 18 17 18 18 18 17 18 18 18 -

Source: Company, Kotak Institutional Equities

KOTAK INSTITUTIONAL EQUITIES RESEARCH 61 NBFCs Mahindra & Mahindra Financial

Exhibit 12: Mahindra Insurance Brokers Ltd. - summary financials March fiscal year-end, 3QFY15-3QFY17 (Rs mn)

3QFY15 4QFY15 1QFY16 2QFY16 3QFY16 4QFY16 1QFY17 2QFY17 2QFY17 YoY (%) Premium 2,295 3,038 2,499 1,916 2,785 3,670 2,680 2,797 3,381 21 Income 345 356 317 309 407 459 365 378 463 14 Expenses 153 160 171 170 189 210 211 246 228 21 PBT 192 196 146 139 218 249 154 132 235 8 PAT 126 128 96 90 140 159 101 85 151 8 Policies (#) 300,211 312,156 300,483 291,400 368,298 370,748 360,128 339,838 420,912 14

Source: Company, Kotak Institutional Equities

Exhibit 13: Mahindra Finance trading at 2.2X one-year forward book Rolling one-year forward PER and PBR, Jan 2009 – Jan 2017 (X)

Rolling PBR (X) (LHS) Rolling ROE (%) (RHS) 4.0 30

3.2 24

2.4 18

1.6 12

0.8 6

0.0 -

Jul-09

Jul-10

Jul-11

Jul-12

Jul-13

Jul-14

Jul-15

Jul-16

Jan-09

Jan-10

Jan-11

Jan-12

Jan-13

Jan-14

Jan-15

Jan-16 Jan-17

Source: Company, Kotak Institutional Equities

62 KOTAK INSTITUTIONAL EQUITIES RESEARCH Mahindra & Mahindra Financial NBFCs

Exhibit 14: MMFS - change in estimates March fiscal year-ends, 2017-19E (` mn)

New estimates Old estimates % change 2017E 2018E 2019E 2017E 2018E 2019E 2017E 2018E 2019E Net interest income 27,853 32,617 38,089 28,049 33,631 39,461 (1) (3) (3) Loan book (Rs bn) 426 497 583 432 507 597 (1) (2) (2) Loan growth (%) 16 17 17 18 17 18 NIM (%) 6.5 6.6 6.6 6.5 6.7 6.7 NPL provisions 10,506 10,851 11,345 9,585 11,039 11,597 10 (2) (2) Other income 6,364 7,318 8,416 6,383 6,702 7,708 (0) 9 9 Securitization ------Operating expenses 14,646 16,945 19,550 14,646 16,429 18,914 0 3 3 Employee 6,600 7,679 8,708 6,600 7,679 8,708 - - - Others 8,046 9,266 10,842 8,046 8,750 10,206 0 6 6 PBT 9,065 12,139 15,610 10,201 12,865 16,659 (11) (6) (6) Tax 3,058 4,058 5,184 3,427 4,295 5,527 (11) (6) (6) PAT 6,006 8,081 10,426 6,774 8,570 11,132 (11) (6) (6) PBT+provisions 19,570 22,990 26,955 19,786 23,904 28,256 (1) (4) (5) EPS (Rs) 11 14 18 12 15 20 (11) (6) (6)

Source: Company, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 63 NBFCs Mahindra & Mahindra Financial

Exhibit 15: Mahindra Finance - key assumptions, ratios and growth rates March fiscal year-ends, 2014-2019E (%)

2014 2015 2016 2017E 2018E 2019E Growth in key parameters (%) Total interest income 30 12 7 9 15 17 Total interest expense 35 14 6 13 13 17 Net interest income 25 10 8 4 17 17 Loan loss provisions 79 64 27 0 3 5 Total income 18 12 6 5 17 16 Operating expenses 23 10 17 24 16 15 Employee expenses 33 54 22 18 16 13 Net loans 23 11 11 16 17 17 Total assets 24 11 13 16 16 17 Total Borrowings 27 7 17 17 17 17 Shareholders fund 14 11 7 7 9 10 Asset management measures (%) Yield on average earning assets 16.5 15.9 15.3 14.5 14.3 14.3 Average cost of funds 9.9 9.8 9.2 8.9 8.6 8.6 Difference 6.5 6.0 6.0 5.6 5.8 5.7 Net interest income/earning assets 7.8 7.4 7.2 6.5 6.6 6.6 Spreads on lending business 6.5 6.0 6.0 5.6 5.8 5.7 Net interest income/EA (after prov) 6 5 4 4 5 5 Tax rate 34 34 35 34 33 33 Dividend payout ratio 24 28 26 26 26 26 Profitability measures (%) Interest income/total income 81 80 82 81 82 82 Other income / total income 19 20 18 19 18 18 Operating expenses/total income 33 33 36 43 42 42 Payout ratio 24 28 34 26 26 26 Equity/assets (EoY) 16 16 15 14 13 13 ROA decomposition - % of avg. assets Net interest income 7.8 7.4 7.1 6.5 6.6 6.6 Loan loss provisions 1.8 2.5 2.8 2.5 2.2 2.0 Net other income 1.9 1.9 1.6 1.5 1.5 1.5 Gains on securitization 0.0 0.0 0.0 0.0 0.0 0.0 Operating expenses 3.2 3.0 3.2 3.4 3.4 3.4 (1- tax rate) 65.9 66.3 64.8 66.3 66.6 66.8 ROA 3.1 2.5 1.8 1.4 1.6 1.8 Average assets/average equity (X) 6.0 6.2 6.3 6.8 7.3 7.7 ROE 18.6 15.5 11.4 9.5 11.9 14.0

Source: Company, Kotak Institutional Equities estimates

64 KOTAK INSTITUTIONAL EQUITIES RESEARCH Mahindra & Mahindra Financial NBFCs

Exhibit 16: Mahindra Finance - income statement & balance sheet March fiscal year-ends, 2014-2019E (` mn)

2014 2015 2016 2017E 2018E 2019E Income statement Total interest income 44,187 49,576 53,072 57,629 66,165 77,261 Total interest expense 21,880 24,967 26,393 29,777 33,548 39,172 Net interest income 22,307 24,609 26,679 27,853 32,617 38,089 Provisions and write/off 5,058 8,275 10,495 10,506 10,851 11,345 Other income 5,343 6,270 5,978 6,364 7,318 8,416 Operating expenses 9,134 10,068 11,781 14,646 16,945 19,550 Pretax income 13,458 12,536 10,381 9,065 12,139 15,610 Tax provisions 4,586 4,219 3,656 3,058 4,058 5,184 Net Profit 8,872 8,317 6,725 6,006 8,081 10,426 PBT - securitization income + provisioning expense 18,516 20,811 20,876 19,570 22,990 26,955 EPS (Rs) 16 15 12 11 14 18 BPS (Rs) 90 101 108 115 125 138 ABVPS (Rs) 87 96 101 103 113 124 Balance sheet Net loans 296,000 329,260 366,580 426,301 497,171 583,326 Total Investments 8,692 8,536 14,833 15,575 16,353 17,171 Cash & deposits 3,829 4,794 5,890 6,538 7,257 8,055 Loans and advances and other assets 3,790 2,898 1,467 1,467 1,467 1,467 Deferred tax assets 3,151 4,153 5,890 6,185 6,494 6,818 Net fixed assets 913 768 753 1,128 821 637 Capital work in progress 282 332 382 432 482 532 Total assets 316,657 350,741 395,795 457,626 530,045 618,006 Liabilities Total loans and bonds 237,654 254,680 301,383 354,454 421,265 494,350 Total Borrowings 246,386 262,538 308,460 360,819 421,265 494,350 Current liabilities 19,329 31,509 26,454 31,745 38,094 45,713 Total liabilities 265,715 294,047 334,914 392,564 459,358 540,062 Share capital 1,127 1,128 1,129 1,129 1,129 1,129 Reserves 49,815 55,566 59,752 63,933 69,558 76,815 Shareholders fund 50,942 56,694 60,881 65,062 70,687 77,944

Source: Company, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 65

SELL Adani Power (ADANI) Utilities JANUARY 25, 2017 RESULT Coverage view: Attractive

Weak generation, rising cost. Adani Power continues to report weak earnings, Price (`): 35 despite accruing compensatory tariffs of ₹4.8 bn that are still contingent on the Target price (`): 24 outcome of the hearing by the regulator. Capacity utilization continues to struggle BSE-30: 27,376 (70% PLF for 9MFY17) and prices of imported coal have risen substantially, further adding to the woes of the company. Maintain SELL rating with revised target price of ₹24/share (from `26)—our fair value estimate assumes a favorable outcome on the issue of compensatory tariffs.

Company data and valuation summary Adani Power Stock data Forecasts/Valuations 2017E 2018E 2019E 52-week range (Rs) (high,low) 39-22 EPS (Rs) (2.0) 4.2 4.2 Market Cap. (Rs bn) 122.3 EPS growth (%) (233.7) 315.3 (0.2) Shareholding pattern (%) P/E (X) (18.0) 8.3 8.4 Promoters 64.0 Sales (Rs bn) 241.7 281.0 281.1 FIIs 17.0 Net profits (Rs bn) (6.5) 14.1 14.0 MFs 0.8 EBITDA (Rs bn) 71.9 93.8 92.8 Price performance (%) 1M 3M 12M EV/EBITDA (X) 8.7 6.3 5.9 Absolute 20.8 30.6 26.8 ROE (%) (9.3) 18.9 15.9 Rel. to BSE-30 14.9 34.4 13.2 Div. Yield (%) 0.0 0.0 0.0

Lower unit sales, rising fuel cost hamper earnings prospects

Adani Power sold 15 BU in 3QFY17—10% yoy decline and 8.6% below our estimates resulting in revenue of ₹58 bn (-6.2% yoy, +0.7% qoq). Blended fuel cost increased 9.2% yoy to ₹2.3/kwh reflecting the increase in prices of imported coal, although the same was partially offset by 5% yoy increase in realizations to ₹3.6/kwh. Reported losses of ₹3.2 bn include compensatory tariffs of ₹4.8 bn as cash EBITDA of ₹11.5 bn would fall short of interest cost of ₹14.3 bn.

Recovery is contingent on resolution of tariff-related issues, improving capacity utilization

Adani Power’s PLF for 3QFY17 was down to 70%, with Udupi power plant being the only one standing out with 85% utilization. In comparison, capacity utilization for FY2016 was meaningfully higher at 80%. It is pertinent for Adani Power to resolve tariff-related issues as well as improve overall capacity utilization, especially with prices of imported coal having risen to US$85/ton. We highlight that APL uses imported coal at Mundra (4.6 GW) and Udupi (1.2 GW), which together account for 56% of its total portfolio. While Udupi operates under the cost-plus regime and the rise in prices of imported coal will be passed on to the beneficiary state, Mundra will have to bear the cost burden of higher imported coal.

Maintain SELL with revised target price of ₹24/share

APL’s consolidated profit of ₹4.9 bn for FY2016 was aided by accruing compensatory tariff of

₹29.7 bn. A turnaround of fortunes is contingent on cash receipt of tariff though management is more confident post the APTEL ruling in April 2016. Maintain SELL with a revised target price Murtuza Arsiwalla of ₹24/share. Our revised earnings factor lower unit sales and higher fuel costs, partially offset [email protected] by higher compensatory tariff. We now factor losses of ₹2/share (₹2.3/share previously) for Mumbai: +91-22-4336-0870 FY2017E and ₹4.2/share (from ₹4.7/share) for FY2018E. Ajinkya Bhat [email protected] Mumbai: +91-22-4336-0888

Kotak Institutional Equities Research [email protected] Mumbai: +91-22-4336-0000

For Private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES’ RATING SYSTEM AND OTHER DISCLOSURES, REFER TO THE END OF THIS MATERIAL. Adani Power Utilities

Exhibit 1: Net loss increased to Rs3.2 bn on account of drop in generation and rising fuel costs Interim results for Adani Power (consolidated), March fiscal year-ends (Rs mn)

(% Chg.) 3QFY17 3QFY17E 3QFY16 2QFY17 3QFY17E 3QFY16 2QFY17 9MFY17 9MFY16 (% Chg.) FY2017E FY2016 (% Chg.) Net sales 58,035 63,360 61,841 57,643 (8.4) (6.2) 0.7 171,451 178,316 (3.8) 241,741 251,983 (4.1) Operating costs Cost of fuel (36,793) (38,368) (37,696) (34,617) (4.1) (2.4) 6.3 (102,604) (110,314) (149,830) (147,263) 1.7 O&M (4,850) (5,035) (4,138) (4,934) (3.7) 17.2 (1.7) (15,211) (14,281) (20,061) (19,523) 2.8 EBITDA 16,392 19,957 20,007 18,093 (17.9) (18.1) (9.4) 53,636 53,722 (0.2) 71,850 85,197 (15.7) EBITDA margin (%) 28 31 32 31 31 30 30 34 Other income 691 313 267 1,056 2,166 1,140 2,760 2,350 Interest & finance charges (14,302) (14,767) (13,182) (14,337) 8.5 (43,154) (44,622) (57,597) (59,642) Depreciation (6,077) (6,026) (6,074) (5,977) (18,039) (17,580) (24,048) (23,362) PBT (3,296) (523) 1,018 (1,165) 529.9 (424) 183 (5,391) (7,339) (27) (7,035) 4,544 (255) Provision for tax (net) 60 — — 31 708 134 505 341 Net profit (3,236) (523) 1,018 (1,134) 518.4 (418) 185 (4,682) (7,205) (35) (6,530) 4,885 (234) Extraordinary — — — — — — — — EPS (Rs/share) (1) (0) 0 (0) (1.4) (2.5) (2) 2 EBITDA margin (%) 28 31 32 31 31 30 30 34 Tax rate (%) 2 — — 3 13 2 7 (8) Key operating parameters Units sold (mn units) 14,900 16,293 16,610 15,040 (8.6) (10.3) (0.9) 43,900 47,570 (7.7) Average realization (Rs/kwh) 3.6 3.6 3.5 3.5 1.2 5.0 2.7 3.9 3.7 4.2 Fuel cost (Rs/kwh) 2.3 2.2 2.1 2.1 5.9 9.2 8.4 4.7 7.0 (33.7) O&M (Rs/kwh) 0.3 0.3 0.2 0.3 6.4 31.1 0.2 0.7 0.9 (24.1)

Source: Company, Kotak Institutional Equities estimates

Exhibit 2: Weak generation and rising input cost dented standalone earnings Interim results for Adani Power (standalone), March fiscal year-ends (Rs mn)

(% Chg.) 3QFY17 3QFY16 2QFY17 3QFY16 2QFY17 9MFY17 9MFY16 (% Chg.) FY2017E FY2016 (% Chg.) Net sales 28,866 30,658 28,279 (5.8) 2.1 85,811 90,596 (5.3) 114,217 126,856 (10.0) Operating costs Cost of fuel (18,661) (16,946) (16,715) (50,491) (51,326) (69,263) (68,185) O&M (6,472) (5,729) (4,944) (17,519) (17,370) (24,083) (25,086) EBITDA 3,733 7,984 6,619 (53.2) (43.6) 17,801 21,901 (18.7) 20,871 33,585 (37.9) EBITDA margin (%) 13 26 23 21 24 18 26 Other income 1,774 1,295 2,001 5,220 4,045 6,844 5,414 Interest & finance charges (7,848) (7,003) (7,566) (22,801) (22,173) (30,676) (29,515) Depreciation (2,443) (2,604) (2,409) (7,245) (7,338) (9,784) (9,769) PBT (4,784) (328) (1,355) 1,359.3 253.1 (7,024) (3,564) 97.1 (12,745) (285) 4,375.2 Provision for tax (net) 0 — — 833 — — 341 Net profit (4,783) (328) (1,355) 1,359.2 253.0 (6,191) (3,564) 73.7 (12,745) 56 (22,778.6) Extraordinary — — — — — — — EPS (Rs/share) (1) (0) (0) (2) (1) (4) 0 EBITDA margin (%) 13 26 23 21 24 18 26 Tax rate (%) 0 — — 12 — — 120

Source: Company, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 67 Utilities Adani Power

Exhibit 3: Valuation of power project portfolio of Adani Power

Capacity Cost Value Project Type (MW) (Rs bn) (Rs mn / MW) (Rs bn) Mundra Thermal 4,620 240 52 17 Tiroda 1 Thermal 3,300 186 56 42 Kawai Thermal 1,320 81 62 2 Udupi Thermal 1,200 63 52 10 Total 10,440 570 55 72 Cash 9 Total value 80 No. of Shares 3 Value per share 24

Source: Kotak Institutional Equities estimates

Exhibit 4: We have revised earnings to factor the weak performance during the current quarter Change in estimates for Adani Power, March fiscal year-ends, 2017-19E (Rs mn)

2017E 2018E 2019E Old New Revision (%) Old New Revision (%) Old New Revision (%) Revenue 263,062 241,741 (8.1) 285,584 281,004 (1.6) 285,652 281,072 (1.6) EBITDA 86,674 71,850 (17.1) 96,740 93,796 (3.0) 95,720 92,806 (3.0) PAT 7,722 (6,530) (184.6) 15,752 14,057 (10.8) 15,291 14,025 (8.3) EPS 2.3 (2.0) (184.6) 4.7 4.2 (10.8) 4.6 4.2 (8.3)

Source: Company, Kotak Institutional Equities

68 KOTAK INSTITUTIONAL EQUITIES RESEARCH Adani Power Utilities

Exhibit 5: Profit model, balance sheet, cash model of APL, March fiscal year-ends, 2012-19E (Rs mn)

2012 2013 2014 2015 2016 2017E 2018E 2019E Profit model Net revenues 40,898 67,748 157,681 187,962 251,983 241,741 281,004 281,072 EBITDA 13,252 10,634 46,726 51,318 85,197 71,850 93,796 92,806 Other income 1,980 1,952 1,863 2,690 2,350 2,760 3,025 2,480 Interest (expense)/income (7,375) (16,464) (40,100) (48,635) (59,642) (57,597) (58,816) (55,027) Depreciation (5,904) (12,897) (22,185) (18,182) (23,362) (24,048) (23,948) (23,948) Pretax profits 1,952 (16,774) (13,696) (12,809) 4,544 (7,035) 14,057 16,311 Tax — — — — — — — (2,236) Deferred taxation (2,948) (4,768) 10,790 — 341 505 — (50) Minority interest 72 — — — — — — — Net income (924) (21,542) (2,906) (12,809) 4,885 (6,530) 14,057 14,025 Extraordinary items (1,949) (1,409) (7,400) 4,653 — — — — Reported profit (2,873) (22,950) (10,306) (8,156) 4,885 (6,530) 14,057 14,025 Earnings per share (Rs) (0.4) (9.0) (1.0) (4.5) 1.5 (2.0) 4.2 4.2 Balance sheet Paid-up common stock 21,800 23,933 28,719 28,719 33,339 33,339 33,339 33,339 Total shareholders' equity 60,413 42,934 65,434 57,246 73,765 67,236 81,293 95,318 Deferred taxation liability 6,023 10,790 — — 1,851 1,346 1,346 1,396 Minority interest 5,590 — — — — — — — Total borrowings 386,003 399,569 441,502 447,420 530,517 506,693 476,222 437,752 Total liabilities and equity 458,030 453,293 506,936 504,666 606,133 575,274 558,861 534,465 Net fixed assets 158,042 290,817 463,576 450,727 496,818 470,935 446,987 423,039 Capital work-in progress 267,215 189,765 36,598 1,913 880 880 880 880 Investments 190 224 1,153 3,573 1 1 1 1 Goodwill — 70 70 70 7,367 7,367 7,367 7,367 Cash 32,408 17,181 8,306 8,563 8,687 2,414 8,901 8,585 Net current assets (excl. cash) 175 (44,762) (2,767) 39,820 92,381 93,679 94,726 94,594 Net current assets (incl. cash) 32,583 (27,581) 5,539 48,383 101,068 96,092 103,627 103,180 Total assets 458,030 453,293 506,936 504,666 606,133 575,274 558,861 534,465 Free cash flow Operating cash flow, excl. working capital 6,539 (5,285) 1,089 10,026 27,906 17,013 38,005 38,023 Working capital changes (20,524) 44,937 (41,995) (42,587) (52,561) (1,297) (1,047) 132 Capital expenditure (107,045) (67,641) (41,701) 34,145 (79,484) 1,835 — — Free cash flow (121,029) (27,989) (82,607) 1,583 (104,140) 17,551 36,958 38,155 Ratios Net debt/equity (%) 535.7 890.6 662.0 766.6 707.4 750.0 574.9 450.2 Return on equity (%) (1.5) (41.7) (5.4) (20.9) 7.5 (9.3) 18.9 15.9 Book value per share (Rs) 30.5 22.4 22.8 19.9 22.7 20.6 24.8 29.0 ROCE (%) (0.3) (4.7) (0.6) (2.5) 0.9 (1.1) 2.5 3.0

Source: Company, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 69

BUY Ashoka Buildcon (ASBL) Infrastructure JANUARY 25, 2017 RESULT Coverage view: Attractive Stage well set. 3QFY17 marks the start of an extended period of 20%+ revenue growth, Price (`): 173 related operating leverage benefits and nonlinear growth in BOT cash profits. This Target price (`): 235 would be driven by an envious backlog and linkage to MCLR for most of the company’s project debt. The swap of stake of SBI-Macquarie by a third-party investor without BSE-30: 27,376 invoking the 12% assured return clause of the JV agreement represents the key upside risk to our SoTP. We build in the outperformance on standalone results, steady toll collection and benefits of interest rate cuts in our estimates; revise TP to ₹235 (from ₹210).

Company data and valuation summary Ashoka Buildcon Stock data Forecasts/Valuations 2017E 2018E 2019E

52-week range (Rs) (high,low) 197-111 EPS (Rs) 5.9 5.5 5.9 Market Cap. (Rs bn) 32.3 EPS growth (%) 88.8 (5.7) 6.9 Shareholding pattern (%) P/E (X) 29.3 31.1 29.1 Promoters 56.7 Sales (Rs bn) 27.5 37.7 40.6 FIIs 8.4 Net profits (Rs bn) 1.1 1.0 1.1 MFs 22.0 EBITDA (Rs bn) 7.4 8.9 10.0 Price performance (%) 1M 3M 12M EV/EBITDA (X) 10.0 8.7 7.8 Absolute 11.3 4.6 (4.4) ROE (%) 5.8 5.3 5.5 Rel. to BSE-30 5.9 7.7 (14.7) Div. Yield (%) 1.1 1.4 1.6

Envious order backlog; macro can drive further increase An order backlog of ₹62 bn (up 50% yoy) provides 3 years of visibility and is driving the 25% revenue growth guidance for FY2018. Eventual growth can be higher, in our view, based on pending L1 order of ₹9 bn Lucknow-Ballia expressway and potential ₹10-20 bn of additional orders in 4QFY17 (₹350-400 bn of active tenders from NHAI). Of the ₹62 bn backlog, most orders have started execution. Key among yet-to-start projects is Kharar-Ludhiana, where 80% of land has been acquired and financial closure is expected by February 2017. Such a strong growth in execution will also support margin recovery. We estimate a 27% EPC revenue CAGR over FY2017E-19E and an 80 bps increase in margin.

Steady toll collections; interest rate cut from 1QFY18 Toll collection for the roads portfolio, adjusted for 23 days of toll ban, was broadly flat versus 3QFY16 levels of ₹2.3 bn. The portfolio continues to generate cash profits as is evident from flat qoq project debt of ₹37.4 bn, despite the 23 days of loss of toll revenues (~₹400 mn). Such cash profits should further increase as benefits of decline in MCLR start flowing from 1QFY18. The company shared that most of its project debt is linked to MCLR with one-year reset period and expects a 60 bps benefit on this count.

JV exit may become a non-event for Ashoka Buildcon ACL, the road JV with SBI-Macquarie, is seeing good interest for its 39% stake. The entity has invested ~₹8 bn in the JV with book value of ₹18.5 bn for such stake and a cushion of a 12% return on ₹7 bn of this investment for five years assured by Ashoka Buildcon. As per Ashoka Buildcon, such 39% stake is being valued by interested buyers much ahead of the 12% assured Aditya Mongia return. This represents a key upside risk to our SoTP in which we assume negative ₹15 per share [email protected] for making good the 12% assured return. Mumbai: +91-22-4336-0883

Ajinkya Bhat 3QFY17: strong all-round performance [email protected] Mumbai: +91-22-4336-0888 3QFY17 EBITDA at ₹620 mn grew 23% yoy and 9% ahead of our estimate. Moderating working capital and depreciation coupled with 80IA benefits on roads EPC projects led to a 115% growth in PAT to ₹427 mn, 31% ahead of our estimate. We increase our standalone estimates by 13-19% to ₹10.8, ₹13.8 and ₹15.3 for FY2017E-19E to factor in the strong order backlog and lower tax rate.

Kotak Institutional Equities Research [email protected] Mumbai: +91-22-4336-0000

For Private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES’ RATING SYSTEM AND OTHER DISCLOSURES, REFER TO THE END OF THIS MATERIAL. Ashoka Buildcon Infrastructure

Strong on execution, steady on margins; backlog sharply up yoy

 Revenues up 18% yoy, margins up 50 bps yoy. Ashoka Buildcon reported 3QFY17 standalone revenues of ₹5.2 bn, up 18% yoy and 12% above estimates. The strong execution was led by (1) good contribution from recently started projects and (2) limited impact of demonetization. Power T&D contributed 16% of EPC revenues in 3QFY17 but may increase going forward given the large ₹9.5 bn rural electrification order from Bihar.

 EBITDA margin impacted by costs booked in Kharar-Ludhiana project. The company reported 3QFY17 EBITDA of ₹620 mn, up 23% yoy. EBITDA margin was steady at 11.8% (+50 bps yoy), marginally below our estimate of 12.2% suggesting limited contribution of early completion benefits from T&D projects. The company also mentioned that in certain projects such as Kharar-Ludhiana, the company has not crossed margin recognition threshold thereby impacting the reported margins in the quarter.

 PAT up 115% of strong execution, limited depreciation and low tax rate. The company reported PAT of ₹427 mn, up 115% yoy led by lower depreciation, interest expense and tax rate. Depreciation was lower due to (1) extension of concession for Ahmednagar-Aurangabad project that has been fully amortized as of 2QFY17 (₹40-45 mn impact) and (2) change in life of assets due to the new company law provisions. Depreciation would remain marginally low in the coming year on account of the stated fully amortized asset. Interest expense was lower on account of lower working capital and associated loan while the tax rate was lower on account of 80IA benefits (would remain ~20% for 1-2 years). The company’s reported PAT was thus 31% above estimate.

 Order backlog provides three years of visibility. Based on the strong ₹9.5 bn of orders from rural electrification in the quarter, order backlog has increased to ₹62.2 bn (+50% yoy) as of 3QFY17. This is against our estimate of ₹20.5 bn of FY2017E revenues. The company has achieved L1 position in the Lucknow-Ballia project that will contribute ₹9 bn to the order backlog (50% share in JV in the ₹18 bn project) once awarded. We also note the scope of further increase in backlog on account of ₹350-400 bn of NHAI tenders due for getting awarded in 4QFY17.

 Debt levels continue to moderate. Consolidated debt at ₹38.8 bn (IGAAP) has declined qoq from ₹39.5 bn at end-2QFY17 and ₹41 bn at end-3QFY16, benefitting from a cash-generating BOT portfolio and closure of T&D jobs (working capital down ₹0.3 bn qoq). This would imply better levels at present versus 2.2X of net debt to equity reported at end-FY2016 (IGAAP).

 Toll collection holds up well. Reported toll collection at ₹1.8 bn for 3QFY17 would have been ₹2.3 bn if proportionately increased for the period of the toll ban. This would imply a flattish yoy level of activity.

KOTAK INSTITUTIONAL EQUITIES RESEARCH 71 Infrastructure Ashoka Buildcon

Exhibit 1: Strong on execution, steady on margins; PAT boosted by lower below-EBITDA expenses Ashoka Buildcon 3QFY17 results (standalone), March fiscal year-ends (Rs mn)

% change IGAAP 3QFY17 3QFY17E 3QFY16 2QFY17 vs est. yoy qoq 9MFY17 9MFY16 % change FY2017E FY2016 % change Total sales 5,240 4,673 4,435 4,428 12.1 18.2 18.4 14,351 13,861 3.5 20,894 19,358 7.9 Expenses (4,620) (4,103) (3,932) (3,730) 12.6 17.5 23.9 (12,437) (12,049) 3.2 (18,158) (16,706) 8.7 RM / operating expenses (4,235) (3,616) (3,352) 17.1 26.3 (11,350) (11,164) 1.7 (16,686) (15,516) 7.5 Employee benefit expenses (244) (178) (207) 36.6 17.6 (649) (526) 23.4 (883) (722) 22.4 Other expenses (142) (138) (171) 2.7 (17.1) (438) (359) 21.9 (589) (468) 25.8 EBITDA 620 570 503 698 8.8 23.3 (11.1) 1,913 1,812 5.6 2,736 2,652 3.1 Other income 115 113 112 90 1.4 3.0 27.5 287 436 (34.2) 680 887 (23.3) Interest (90) (76) (138) (80) 17.9 (34.6) 12.6 (246) (389) (36.7) (312) (558) (44.1) Depreciation (107) (143) (164) (130) (25.3) (34.8) (17.7) (360) (468) (23.0) (491) (648) (24.3) PBT 538 464 313 578 16.0 72.1 (6.9) 1,594 1,391 14.6 2,613 2,333 12.0 Tax (111) (138) (114) (125) (19.7) (2.3) (10.8) (405) (421) (3.7) (585) (644) (9.1) Net profit 427 326 199 453 31.1 114.7 (5.8) 1,188 970 22.5 2,028 1,689 20.0 Key ratios (%) Construction exp./ sales 80.8 81.5 75.7 79.1 80.5 79.9 80.2 Staff cost/ sales 4.6 4.0 4.7 4.5 3.8 4.2 3.7 Other exp./ sales 2.7 3.1 3.9 3.1 2.6 2.8 2.4 EBITDA margin 11.8 12.2 11.3 15.8 13.3 13.1 13.1 13.7 PBT margin 10.3 9.9 7.1 13.1 11.1 10.0 12.5 12.1 Effective tax rate 20.7 29.8 36.4 21.6 25.4 30.3 22.4 27.6 PAT margin 8.1 7.0 4.5 10.2 8.3 7.0 9.7 8.7 EPS (Rs) 2.3 1.7 1.1 2.4 6.3 5.2 10.8 9.0

Source: Company, Kotak Institutional Equities estimates

Exhibit 2: Share of power T&D in EPC business declined further but will improve on Bihar order win Trends in share of T&D revenues and EBIT margin of EPC business of Ashoka Buildcon, March fiscal year-ends, 1QFY15-3QFY17 (%)

Share of power in EPC revenues (LHS, %) EBIT margin of EPC business (RHS, %) 70 17.1 18 59 58 16 60 13.1 13.5 13.3 12.6 12.5 14 11.6 50 50 11.4 10.9 10.1 12 38 9.3 40 33 10 30 29 8 30 25 23 6 20 16 12 4 10 2

- -

1QFY15

2QFY15

3QFY15

4QFY15

1QFY16

2QFY16

3QFY16

4QFY16

1QFY17 2QFY17 3QFY17

Source: Company, Kotak Institutional Equities

72 KOTAK INSTITUTIONAL EQUITIES RESEARCH Ashoka Buildcon Infrastructure

Exhibit 3: Adjusted for the toll-ban period post demonetization, traffic numbers would imply a flattish level of activity Trajectory of toll collections for key BOT projects

Revenues (Rs mn) 1QFY15 2QFY15 3QFY15 4QFY15 1QFY16 2QFY16 3QFY16 4QFY16 1QFY17 2QFY17 3QFY17 Quarterly collections Bhandara 126 120 136 142 142 134 154 162 155 146 111 Durg 160 152 170 180 179 169 189 197 189 179 138 Jaora-Nayagaon 316 324 341 354 381 411 440 406 407 425 339 Indore Edlabad (ABL) 281 259 258 267 325 300 302 311 351 303 219 Belgaum Dharwad 164 155 162 170 178 167 171 179 186 178 141 Pimpalgaon – Nasik – Gonde 170 219 231 239 202 232 246 258 — — — Dhankuni- Kharagpur 533 520 532 570 585 562 597 669 659 651 478 Total 1,750 1,749 1,830 1,921 1,992 1,975 2,099 2,183 1,947 1,882 1,427 Revenue growth (%) Bhandara 10.1 8.8 12.0 8.5 12.8 11.8 13.2 14.5 9.1 8.7 (27.8) Durg 8.7 8.8 12.0 9.5 11.8 11.0 11.2 9.8 5.7 6.2 (26.9) Jaora-Nayagaon 7.5 0.2 4.9 9.0 20.6 27.0 29.0 14.8 6.9 3.4 (22.9) Indore Edlabad 32.3 45.5 38.4 25.4 15.5 15.7 17.1 16.6 8.0 0.9 (27.4) Belgaum Dharwad 7.6 9.3 10.4 12.2 8.6 7.6 5.7 5.7 4.3 6.7 (17.5) Pimpalgaon – Nasik – Gonde 52.7 149.7 136.0 128.6 18.9 6.0 6.5 7.8 Dhankuni- Kharagpur 2.2 6.2 8.7 9.0 9.7 8.1 12.2 17.3 12.6 15.8 (19.9) Tariff hike (%) Bhandara 7.7 7.7 5.9 5.9 5.9 3.5 3.5 3.5 2.3 0.7 0.7 Durg 8.1 6.7 6.1 6.1 6.1 3.6 3.6 3.6 2.3 0.7 0.7 Jaora-Nayagaon 7.0 7.0 7.0 7.0 7.0 7.0 7.0 7.0 7.0 7.0 7.0 Indore Edlabad 7.0 7.0 7.0 7.0 7.0 7.0 7.0 7.0 7.0 7.0 7.0 Belgaum Dharwad 5.4 5.4 5.4 5.4 2.8 2.8 2.8 2.8 1.9 1.9 1.9 Pimpalgaon – Nasik – Gonde 5.8 5.8 5.8 5.8 2.5 2.5 2.5 2.5 2.5 2.5 2.5 Dhankuni- Kharagpur 5.0 5.0 5.0 5.0 4.0 4.0 4.0 4.0 1.9 1.9 1.9 Total Traffic growth (%) Bhandara 2.3 1.1 5.8 2.5 6.5 8.0 9.3 10.6 6.7 7.9 (28.3) Durg 0.6 2.0 5.6 3.2 5.4 7.2 7.4 6.0 3.3 5.5 (27.5) Jaora-Nayagaon 0.5 (6.3) (2.0) 1.9 12.7 18.7 20.6 7.3 (0.1) (3.4) (28.0) Indore Edlabad 23.6 36.0 29.4 17.2 8.0 8.1 9.4 9.0 0.9 (5.7) (32.1) Belgaum Dharwad 2.1 3.7 4.7 6.4 5.7 4.7 2.9 2.9 2.4 4.7 (19.1) Pimpalgaon – Nasik – Gonde 44.2 135.9 122.9 115.9 15.9 3.4 3.9 5.1 NA NA NA Dhankuni- Kharagpur (2.7) 1.1 3.5 3.8 5.5 4.0 7.9 12.8 10.5 13.6 (21.4) Total 3.9 5.8 7.0 5.6 8.4 8.2 9.9 8.7 4.8 4.6 (25)

Source: Company, Kotak Institutional Equities

Exhibit 4: Ashoka Buildcon average daily toll collections, March fiscal year-ends (Rs mn)

% change Growth of Dec-2016 toll collections over Dec-2015 Ashoka Buildcon Dec-16 Dec-15 Oct-16 Dec-15 Oct-16 and Oct-2016 (%) 10 Belgaum – Dharwad 2.08 1.97 2.03 5.6 2.5 7.6 Dec-15 Oct-16 Dhankuni – Kharagpur 6.94 7.03 6.95 (1.3) (0.1) Bhandara 1.61 1.79 1.65 (10.1) (2.4) 5 Durg 2.04 2.19 2.04 (6.8) — NA Jaora – Nayagaon 4.66 4.71 5.21 (1.1) (10.6) 0 Sambhalpur 1.47 1.25 1.38 17.6 6.5 Ahmednagar-Aurangabad 0.54 0.46 0.54 17.4 — (1.4) (1.6) (5) Indore-Edalabad 3.11 3.35 3.19 (7.2) (2.5) (3.8) Wainganga Bridge 0.81 0.87 0.79 (6.9) 2.5 (5.7) Katni Bypass 0.52 0.55 0.51 (5.5) 2.0 (10) Others 1.85 1.82 1.76 1.6 5.1 Ashoka Buildcon Sadbhav Engineering IRB Infrastructure Total 25.63 25.99 26.05 (1.4) (1.6)

Notes: (a) Toll collection was suspended for 23 days from the afternoon of 9 November 2016 to the midnight of 2 December 2016.

Source: Company, Kotak Institutional Equities

KOTAK INSTITUTIONAL EQUITIES RESEARCH 73 Infrastructure Ashoka Buildcon

Exhibit 5: Ashoka Buildcon 3QFY17 segmental results (standalone), March fiscal year-ends (Rs mn)

% change % change IGAAP IGAAP % change 3QFY17 3QFY16 2QFY17 yoy qoq 9MFY17 9MFY16 yoy FY2016 FY2015 yoy Revenues Construction & Contract 4,863 4,136 4,079 17.6 19.2 13,253 12,837 3.2 18,002 18,185 (1.0) BOT 61 80 84 (24.0) (28.0) 205 188 9.0 256 552 (53.6) Sale of Goods (net of excise duty) 317 219 264 44.9 19.7 892 836 6.7 1,100 929 18.4 Total 5,240 4,435 4,428 18.2 18.4 9,111 9,427 (3.3) 19,358 19,667 (1.6) Segment result Construction & Contract 609 418 697 45.7 (12.7) 1,778 1,584 12.2 2,074 2,233 (7.1) BOT 48 (1) 28 (8,033.2) 72.0 90 30 197.7 52 89 (41.2) Sale of Goods 53 34 22 54.7 144.7 167 121 37.9 181 157 15.2 Total 710 452 747 57.2 (4.9) 1,326 1,284 3.2 2,307 2,478 (6.9) Margin (%) Construction & Contract 12.5 10.1 17.1 13.4 12.3 11.5 12.3 BOT 79.2 (0.8) 33.2 44.1 16.1 20.3 16.0 Sale of Goods 16.8 15.8 8.2 18.7 14.5 16.4 16.9 Total 13.6 10.2 16.9 14.5 13.6 11.9 12.6

Source: Company, Kotak Institutional Equities

3QFY17 earnings call takeaways

 Strong revenue growth guidance for FY2018 on healthy backlog. The management has guided for 20-25% revenue growth for FY2018 on the back of strong order backlog and low share of slow-moving orders. At present, the two key orders moving slowly are: (1) EPC order in Jharkhand for NH-432 (Chaas) worth ₹482 mn, that is yet to get appointed date but expected in 1-2 months and (2) Islampur bypass project worth ₹2.8 bn that is yet to get appointed date due to land acquisition issues with no immediate resolution in sight. If these projects get moving, the company may as well post higher execution growth than the guidance.

 The company is targeting to win additional orders worth ~₹20 bn in 4QFY17 (₹10 bn each in EPC and HAM projects, not much in T&D). The company will also participate in 3,000 km road awards pipeline by MSRDC for select projects (barring trans-harbor link and coastal roads for lack of qualification) and may put bids worth more than ₹10 bn.

 On margins, the management highlighted that the flattish margin this quarter were on account of Kharar-Ludhiana projects where only costs were booked in expenses and revenues as the margin threshold criteria was not crossed. As per the management, once these margins start getting booked, the overall EBITDA margin would improve to 12.5- 13%.

 Valuation for SBI-Macquarie’s stake may be much higher than 12% IRR. The company expressed confidence that as it searches for a replacement investor for the SBI- Macquarie stake, the valuation fetched for the stake may be much higher than the one implied by a committed 12% IRR to SBI-Macquarie. If such an attempt fails, then the secondary options such as InvIT or IPO may be considered. The consortium has an equity investment of ₹7.9 bn in ACL.

 No clarity on compensation for toll suspension post demonetization. The management highlighted that NHAI has proposed to pay highway toll operators ~₹9.2 bn in total as compensation for the suspension of toll from Nov 9, 2016 to Dec 2, 2016 due to demonetization. Out of this quantum, Ashoka Buildcon has claimed ₹400 mn as cash compensation for the entire portfolio of ACL and ₹300 mn of interest. However, the company mentioned that the funds release requires cabinet approval and NHAI has stressed on the extension of concession agreement in the cabinet note circulated. Thus the final decision on mode of payment is yet unknown. However, the management expressed the preference on getting cash components to help infrastructure companies manage the cash flows.

74 KOTAK INSTITUTIONAL EQUITIES RESEARCH Ashoka Buildcon Infrastructure

 Large benefit may accrue from MCLR-linked interest rates. The company has recently refinanced outstanding debt on several projects linked to the MCLR that has an annual reset date in the month of May every year. In the upcoming reset, the company expects an average rate reduction of ~60 bps to less than 9.5% given that several banks have reduced MCLR by 60-75 bps. Such a reduction can provide large savings on interest expense for the company.

 Other takeaways.

. In January so far, the average traffic growth across the company’s portfolio has been flattish as the expected traffic growth did not materialize.

. The company has a pending BOT equity contribution of ₹1.5 bn for Kharar-Ludhiana project and ₹500 mn each for two BOT projects in Karnataka.

. Loss-funding in Sambalpur project has been to the tune of ₹1.2 bn included in the ₹10.5 bn equity contributed to ACL.

. Land acquisition had been a challenge for some projects during the overlap period of nearly 9 months where land was acquired under old land acquisition law and faced protests from farmers to get higher compensation as per the new law. However, the company feels that this issue will not arise going forward since the farmers are usually ready to hand over the land if the compensation is high enough.

. Lucknow-Ballia project had a small 2-3% difference between L1 and L2 bids indicating the competitive intensity in this state-funded EPC project. The company mentioned that NHAI, however, remains focused on HAM model for project awards.

Exhibit 6: Segmental break-up of standalone financials of Ashoka Buildcon, March fiscal year-ends, 2015-19E (Rs mn)

2015 2016 2017E 2018E 2019E Total Order inflows 13,775 28,250 43,075 40,736 38,736 Order backlog 31,050 41,110 65,187 77,623 85,679 Revenues 19,666 19,541 20,699 30,201 32,629 Yoy growth (%) 26 (1) 6 46 8 EBITDA 2,504 2,674 2,736 3,580 3,961 Yoy growth (%) 26 7 2 31 11 EBITDA margin (%) 12.7 13.7 13.2 11.9 12.1 Roads Order inflows 2,410 28,250 31,075 35,736 35,736 Order backlog 13,620 32,910 50,043 66,478 77,982 Revenues 12,460 8,955 13,942 19,301 24,232 EBITDA 1,558 1,343 1,743 2,220 2,908 EBITDA margin (%) 12.5 15.0 12.5 11.5 12.0 Power T&D Order inflows 11,365 0 12,000 5,000 3,000 Order backlog 17,430 8,200 15,144 11,145 7,696 Revenues 5,725 9,230 5,056 8,998 6,449 EBITDA 458 1,015 556 855 613 EBITDA margin (%) 8.0 11.0 11.0 9.5 9.5 Sales Revenues 929 1,100 1,320 1,452 1,597 EBITDA 74 110 132 145 160 EBITDA margin (%) 8.0 10.0 10.0 10.0 10.0 BOT Revenues 552 256 381 450 351 EBITDA 414 205 305 360 281 EBITDA margin (%) 75.0 80.0 80.0 80.0 80.0

Source: Company, Kotak Institutional Equities

KOTAK INSTITUTIONAL EQUITIES RESEARCH 75 Infrastructure Ashoka Buildcon

Exhibit 7: Revision in estimates for Ashoka Buildcon standalone, March fiscal year-ends, 2016-19E (Rs mn)

New estimates Old estimates % revision 2016 2017E 2018E 2019E 2017E 2018E 2019E 2017E 2018E 2019E Income statement New orders 28,250 43,075 40,736 38,736 34,288 35,488 36,000 25.6 14.8 7.6 Yoy growth (%) 105.1 52.5 (5.4) (4.9) 21.4 3.5 1.4 Net revenue 19,358 20,894 30,396 32,823 20,318 26,235 29,879 2.8 15.9 9.9 Yoy growth (%) (1.6) 7.9 45.5 8.0 5.0 29.1 13.9 EBITDA 2,652 2,736 3,580 3,961 2,677 3,185 3,544 2.2 12.4 11.8 EBITDA margin (%) 13.7 13.1 11.8 12.1 13.2 12.1 11.9 -9 bps -37 bps 20 bps Interest & finance charges (558) (312) (301) (152) (306) (224) (147) 2.0 34.6 3.2 Depreciation (648) (491) (554) (617) (573) (646) (720) (14.3) (14.3) (14.3) PBT 2,333 2,613 3,454 3,987 2,479 3,044 3,472 5.4 13.5 14.8 Tax (644) (585) (864) (1,116) (694) (883) (1,042) PAT 1,689 2,028 2,591 2,871 1,785 2,161 2,430 13.6 19.9 18.1 EPS (Rs) 9.0 10.8 13.9 15.4 9.5 11.6 13.0 13.6 19.9 18.1

Source: Company, Kotak Institutional Equities estimates

Exhibit 8: Standalone financial snapshot of Ashoka Buildcon, March fiscal year-ends, 2012-19E (Rs mn)

2012 2013 2014 2015 2016 2017E 2018E 2019E Profit model Total sales 13,380 16,376 15,566 19,667 19,358 20,894 30,396 32,823 Expenditure (11,445) (14,354) (13,582) (17,169) (16,706) (18,158) (26,816) (28,863) Operating expenses (10,797) (13,489) (12,726) (16,075) (15,516) (16,686) (24,675) (26,550) Employee cost (372) (431) (492) (614) (722) (883) (1,285) (1,388) Other expenses (276) (434) (365) (481) (468) (589) (857) (925) EBITDA 1,935 2,022 1,984 2,498 2,652 2,736 3,580 3,961 PBT 1,369 1,711 1,690 1,939 2,333 2,613 3,454 3,987 Tax (325) (533) (499) (517) (644) (585) (864) (1,116) PAT 1,045 1,178 1,191 1,422 1,689 2,028 2,591 2,871 Weighted diluted number of shares 106 160 159 159 188 188 188 188 EPS based on diluted shares (Rs) 9.8 7.4 7.5 9.0 9.0 10.8 13.8 15.3 Balance sheet Shareholders funds 7,817 8,539 9,328 10,543 16,798 18,395 20,435 22,696 Share capital 552 527 790 793 936 936 936 936 Reserves & surplus 7,264 8,013 8,538 9,750 15,862 17,459 19,500 21,761 Loan funds 3,122 2,733 2,240 4,447 3,870 2,398 2,408 1,215 Deferred tax liabilities (net) 10 (7) (20) (99) (199) (199) (199) (199) Total sources of funds 10,949 11,265 11,547 14,891 20,469 20,594 22,644 23,713 Net fixed assets 2,728 2,416 2,267 1,871 1,510 1,719 1,865 1,948 Investments 4,424 7,454 9,757 10,904 11,376 11,376 11,376 11,376 Cash & bank balances 386 338 305 256 270 500 1,000 2,000 Net current assets (excl. cash) 3,412 1,057 (782) 1,861 7,313 6,999 8,403 8,388 Total application of funds 10,949 11,265 11,547 14,891 20,469 20,594 22,644 23,713 Cash flow statement Cash flow from operating activities Operating profit before working capital changes 2,161 2,332 2,055 2,772 2,939 3,074 3,967 4,414 Adjustments for working capital changes 912 2,345 1,803 (3,030) (5,787) 313 (1,404) 15 Income tax paid (310) (453) (478) (489) (696) (585) (864) (1,116) Net cash flow from operating activities 2,763 4,271 3,380 (747) (3,544) 2,802 1,700 3,312 Purchase of fixed assets (430) (517) (367) (199) (314) (700) (700) (700) Purchase of non-current investments (1,522) (2,789) (2,306) (1,014) (360) — — — Net cash flow from investing activities (1,871) (3,243) (2,337) (913) (167) (358) (358) (358) FCF 890 1,026 1,039 (1,660) (3,740) 2,444 1,342 2,954 Proceeds from issue of shares 2 1 — 43 4,916 — — — Proceeds from borrowings (418) (493) (475) 2,380 (64) (1,472) 10 (1,192)

Source: Company, Kotak Institutional Equities estimates

76 KOTAK INSTITUTIONAL EQUITIES RESEARCH Ashoka Buildcon Infrastructure

Exhibit 9: Consolidated financial snapshot of Ashoka Buildcon, March fiscal year-ends, 2012-19E (Rs mn)

2012 2013 2014 2015 2016 2017E 2018E 2019E Profit model Revenues 15,000 18,527 17,949 23,197 26,145 27,470 37,670 40,565 EBITDA 3,250 3,719 3,945 5,110 7,722 7,389 8,889 9,953 Interest cost (1,144) (1,395) (1,335) (2,721) (4,478) (4,128) (4,582) (4,838) Depreciation (850) (1,324) (1,389) (1,517) (2,491) (2,798) (3,708) (4,236) Net PAT 1,159 609 779 275 300 (50) (142) (77) Reported PAT 1,248 842 975 815 585 1,104 1,041 1,113 EPS based on diluted shares (Rs) 11.7 6.3 7.1 5.1 6.1 5.9 5.5 5.9 Balance sheet Shareholders funds 10,341 10,507 12,628 13,569 18,687 19,361 19,851 20,354 Minority interest 630 2,787 4,645 5,047 4,995 3,888 2,869 1,969 Loan funds 17,069 24,535 31,926 38,730 41,150 42,563 45,719 46,704 Premium payable to NHAI 20,943 79,023 77,606 77,797 76,132 75,735 75,061 74,219 Total sources of funds 48,993 116,845 126,785 135,044 140,744 141,325 143,279 143,025 Net fixed assets 43,038 111,100 119,871 127,217 129,286 130,262 130,463 129,300 Investments 2,052 2,824 2,847 2,345 3,367 3,367 3,367 3,367 Cash & bank balances 500 517 945 410 1,680 1,053 1,032 1,577 Net current assets (excl. cash) 3,402 2,404 3,122 5,072 6,411 6,644 8,417 8,782 Total application of funds 48,993 116,845 126,785 135,044 140,744 141,325 143,279 143,025 Cash flow statement Cash flow from operating activities Net profit before extraordinary items and taxation 1,610 1,294 1,394 782 563 777 961 1,308 Operating profit before changes in working capital 3,495 4,084 4,334 5,367 7,543 7,656 9,088 10,091 Working capital changes 21,595 61,230 (38) (1,317) (1,949) (629) (2,448) (1,207) Cash generated from operations 25,089 65,315 4,295 4,051 5,594 6,398 4,193 7,677 Minority interest 86 387 264 722 796 1,108 1,019 900 Cash flow from investing activities Purchase / sale of Fixed Assets (27,632) (69,694) (10,802) (8,872) (4,546) (3,774) (3,909) (3,072) Purchase / sale of Investments (net ) (657) (772) (25) 507 (1,564) — — — Net cash flow from investing activities (27,981) (70,740) (9,223) (8,122) (6,038) (3,774) (3,909) (3,072) Cash flow from financing activities Proceeds from issue of shares including premium 2 1 — 43 4,916 — — — Proceeds from Borrowings 15,967 16,129 20,718 (6,811) (1,276) 1,413 3,156 986 Dividend and Distribution Tax — (250) (266) (290) (338) (431) (550) (610) Interest, commitment & finance charges paid (1,144) (1,395) (1,335) (2,721) (4,478) (4,128) (4,582) (4,838) Net cash flow from financing activities 3,051 5,758 5,790 3,694 1,375 (3,146) (1,977) (4,462) Net increase in cash & cash equivalents (211) 17 425 (530) 632 (242) (1,777) (342) Cash at the beginning of the year 711 500 263 689 158 1,680 1,053 1,032 Cash at the end of the year 500 517 689 158 791 1,438 (724) 689

Source: Company, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 77 Infrastructure Ashoka Buildcon

Exhibit 10: SoTP break-up of Ashoka Buildcon

Value Stake Proportional value Per share value (Rs mn) (%) (Rs mn) (Rs) Methodology Ashoka Concession Limited (ACL) 61 13,114 70 Bhandara 371 51 115 1 Dec-18 FCFE valuation Durg 1,629 51 507 3 Dec-18 FCFE valuation Jaora - Nayagaon 14,953 38 3,439 18 Dec-18 FCFE valuation Belgaum Dharwad 811 100 495 3 Dec-18 FCFE valuation Pimpalgaon-Nasik-Gonde 1,283 26 203 1 Average of FCFE valuation and claim on NHAI Sambalpur Baragarh 758 100 462 2 Dec-18 FCFE valuation Dhankuni- Kharagpur 10,218 100 6,233 33 Dec-18 FCFE valuation Chennai ORR upside 2,921 50 891 5 Dec-18 FCFE valuation Kharar Ludhiana 1,056 100 644 3 Dec-18 FCFE valuation less investment 23 days of lost revenues 326 63 125 1 Less value to make good 12% IRR (1) (2,634) (14) Dec-18E valuation Core construction business 21,311 100 21,311 114 6X Dec-18E EBITDA less debt Value of ABL projects 45 ABL asset portfolio (including 23 days of revenues) 2,323 100 2,323 12 NPV of remaining year EBITDA less debt Jaora - Nayagaon (including 23 days of revenues) 15,066 36 4,263 23 Dec-18 FCFE valuation Chennai ORR Investment 1,890 50 945 5 1X book KSHIP-II 747 100 397 2 Dec-18 FCFE valuation Bagewadi Saundatti 252 100 252 1 Dec-18 FCFE valuation less investment Hungund Talikot 197 100 197 1 Dec-18 FCFE valuation less investment Other investments 3,303 100 3,653 20 Land investments 2,763 100 3,113 17 1X investments Other investments 541 100 541 3 1X investments Total 43,820 234

Source: Company, Kotak Institutional Equities estimates

78 KOTAK INSTITUTIONAL EQUITIES RESEARCH

REDUCE Bharti Infratel (BHIN) Telecom JANUARY 25, 2017 RESULT, CHANGE IN RECO. Coverage view: Cautious

A tough call; downgrade to REDUCE. Bharti Airtel’s dismal 3QFY17 print for the Price (`): 351 India wireless business (and its read-through for the rest of the sector) raises risks on Target price (`): 335 three fronts for Bharti Infratel, in our view – (1) potential cut in capex by ex-Jio operators, BSE-30: 27,376 (2) likely pressure on rentals as incumbents look at all sources of opex cuts, and (3) consolidation within the anchor tenant pack. We bake in the first two in our forecasts while ascribing an absolute discount to fair value to factor in the third. TP stands revised down to ₹335 (from ₹410); cut rating to REDUCE from ADD.

Company data and valuation summary Bharti Infratel Stock data Forecasts/Valuations 2017E 2018E 2019E 52-week range (Rs) (high,low) 414-302 EPS (Rs) 14.5 15.8 17.5 Market Cap. (Rs bn) 648.6 EPS growth (%) 15.3 8.9 10.7 Shareholding pattern (%) P/E (X) 24.2 22.2 20.1 Promoters 72.0 Sales (Rs bn) 133.5 141.7 148.7 FIIs 25.2 Net profits (Rs bn) 26.8 29.2 32.3 MFs 0.3 EBITDA (Rs bn) 58.5 62.7 66.7 Price performance (%) 1M 3M 12M EV/EBITDA (X) 10.7 9.9 9.1 Absolute 4.2 (5.2) (3.3) ROE (%) 15.3 17.3 18.5 Rel. to BSE-30 (0.8) (2.4) (13.7) Div. Yield (%) 3.0 3.1 3.5

Headwinds emerge as anchor clients likely to be in more pain than anticipated

Even as Bharti’s announced stake sale in BHIN and news flow around the same continues to remain a factor, we believe there is a more important read-through for BHIN from Bharti’s announced 3QFY17 earnings print. Bharti has reported 16% qoq decline in India wireless EBITDA in 3QFY17 and we believe that the pressure on other operators could be even higher. Essentially, there is material and higher-than-expected pain for BHIN’s customer industry. We believe this could be negative for BHIN on one or more of the following three fronts –

 Potential cut in capex by ex-Jio operators and a potential rethink even by R-Jio. This could mean that the strong tenancy addition momentum seen in 3QFY17 fades as soon as 1Q/2QFY18.

 Likely pressure on rentals as ‘incumbents’ look at cutting opex. Recent MSA renegotiation

notwithstanding, one can never rule out a scenario where a vendor has to share the pain of its customers in a B2B construct. We have baked in the above two factors into our model to some extent, cutting our EBITDA forecasts for FY2018/19E by 2-3%.

 Consolidation within the anchor tenant pack. We bake in this factor through an explicit discount to our fair value target. A 50%-probability impact of an Idea-Vodafone merger with

50% of business from Idea lost to network consolidation works out to ₹20/share for BHIN. Rohit Chordia Our revised TP works out to ₹335/share. We cut our rating on the stock to REDUCE from ADD. [email protected] Mumbai: +91-22-4336-0885 Key changes to our earnings model Abhas Gupta As discussed above, we have cut our EBITDA estimates for FY2018-19E by 2-3%; increase in [email protected] Mumbai: +91-22-4336-0881 capex estimates and cut in cash yield assumptions drive a sharper 7-9% cut in EPS forecasts. We do note that our tenancy assumptions have gone up versus earlier; this is on account of increase in expected tenancies from R-Jio. We are now looking at BHIN delivering 6-7% EBITDA CAGR in the medium term, assuming the big-4 structure does not change into a big-3 one.

Kotak Institutional Equities Research [email protected] Mumbai: +91-22-4336-0000

For Private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES’ RATING SYSTEM AND OTHER DISCLOSURES, REFER TO THE END OF THIS MATERIAL. Telecom Bharti Infratel

Takeaways from the earnings call

The management highlighted the following during its 3QFY17 earnings call—

 BHIN, with its consortium partners, has been awarded a contract for the Bhopal Smart City project to deploy fiber and wifi. The company believes that this project together with other similar projects have potential to grow in the future.

 High energy margins in the current quarter was more a reflection of seasonality, the company’s margins are typically strong in 3Q and 4Q, long-term sustainable energy margins are expected to be in the range of 3-5%.

 On new contracts, the management stated that close to 74% of all customers had moved to the new contract structure.

 On standalone data towers, the company stated that they are running pilots, currently have not seen any large scale-up.

 In terms of diversification, the company stated that optic fiber and wifi could be potential revenue drivers in the future.

 High capex this quarter was largely driven by increasing volumes; upgrade capex, i.e. capex related to new tenancy on an existing site, was especially higher due to a sharp acceleration in tenant additions.

Exhibit 1: Bharti Infratel – key changes to estimates, March fiscal year-ends, 2017-19E

Revised Earlier Change (%) 2017E 2018E 2019E 2017E 2018E 2019E 2017E 2018E 2019E Consolidated financials Revenues (Rs mn) 133,466 141,728 148,661 132,791 141,289 149,341 0.5 0.3 (0.5) Service revenues (Rs mn) 84,232 89,818 94,936 84,456 90,564 96,465 (0.3) (0.8) (1.6) EBITDA (Rs mn) 58,508 62,743 66,651 59,220 63,961 68,594 (1.2) (1.9) (2.8) EBITDA margin (%, on service revenues) 69.5 69.9 70.2 70.1 70.6 71.1 PAT (Rs mn) 26,774 29,163 32,294 29,187 31,467 35,297 (8.3) (7.3) (8.5) EPS (Rs/share) 14.5 15.8 17.5 15.8 17.0 19.1 (8.3) (7.3) (8.5) Capex (Rs mn) 19,668 19,980 18,413 19,533 19,020 17,663 0.7 5.0 4.2 Operational metrics (standalone) # of towers 39,358 40,208 40,958 39,358 40,258 41,008 ― (0.1) (0.1) Tenancy ratio (X) 2.25 2.32 2.39 2.19 2.28 2.34 2.7 1.9 1.9 Service rental/ tenant/ month (Rs) 37,072 37,070 37,446 37,794 38,142 38,524 (1.9) (2.8) (2.8) Operational metrics (Indus) # of towers 122,881 125,381 126,381 123,381 125,581 126,581 (0.4) (0.2) (0.2) Tenancy ratio (X) 2.36 2.43 2.49 2.31 2.42 2.49 2.3 0.6 0.1 Service rental/ tenant/ month (Rs) 32,855 32,931 33,323 33,182 33,629 34,065 (1.0) (2.1) (2.2)

Source: Kotak Institutional Equities estimates

80 KOTAK INSTITUTIONAL EQUITIES RESEARCH Bharti Infratel Telecom

Exhibit 2: SOTP-based valuation of Bharti Infratel

Rs mn Sep-2018E Bharti Infratel standalone EV (DCF-based) 311,633 Net debt/ (cash) (71,603) Equity value - A 383,237 Implied EV/tower (Rs mn) 7.7 Implied EV/EBITDA (X) 10.1 42% stake in Indus Indus EV (DCF-based) 862,802 Net debt/ (cash) 41,005 Equity value 821,797 Attributable equity value for BIL's 42% stake - B 345,155 Implied EV/tower - Indus (adjusted) (Rs mn) 6.9 Implied EV/EBITDA - Indus (adjusted) (X) 10.7 Overall valuation Total EV 601,535 Total EV (US$ mn) 9,114 Implied EV/EBITDA (X) 9.3 Total Equity value = A + B 659,361 Implied PE (X) 22.6 Total Equity value (US$ mn) 9,990 Fair value estimate (Rs/share) 356 Anchor-tenant consolidation discount (Rs/share) 20 Target price (Rs/share) 336 Key assumptions BIL (standalone) WACC (%) 10.5 BIL (standalone) terminal growth (%) 3.5 Indus WACC (%) 10.0 Indus terminal growth (%) 3.5

Source: Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 81 Telecom Bharti Infratel

Exhibit 3: Condensed financial statements, BIL consolidated, March fiscal year-ends, 2015-19E (Rs mn)

2015 2016 2017E 2018E 2019E Key financials Income statement Gross revenues 116,683 123,314 133,466 141,728 148,661 Service revenues 71,261 78,105 84,232 89,818 94,936 Power and fuel reimbursements 45,450 45,209 49,234 51,910 53,724 EBITDA 50,041 54,108 58,508 62,743 66,651 EBIT 28,194 31,872 35,796 39,740 43,478 PBT 30,515 35,766 42,731 46,022 50,979 PAT 19,924 22,474 26,774 29,163 32,294 OPM (on gross,%) 42.9 43.9 43.8 44.3 44.8 OPM (on net,%) 70.2 69.3 69.5 69.9 70.2 EPS (Rs/share) 10.52 11.85 14.48 15.77 17.46 Balance sheet Total Equity 170,200 182,262 166,240 171,526 177,045 Borrowings 17,131 17,046 19,146 21,246 21,246 Other liabilities 84,216 45,469 47,893 49,704 51,088 Total equity and liabilities 271,547 244,777 233,280 242,475 249,379 Net fixed assets 150,381 142,019 138,974 135,951 131,192 Cash and equivalents 40,560 49,193 39,059 49,913 60,435 Other assets 80,606 53,565 55,246 56,611 57,753 Total assets 271,547 244,777 233,280 242,475 249,379 Cash flow statement Operating cash flow 39,895 33,041 43,295 46,329 48,208 Capex (18,144) (20,645) (19,668) (19,980) (18,413) Free cash flow 21,751 12,396 23,627 26,349 29,795 Key operating metrics End-period tower base (#) 85,892 88,808 90,968 92,868 94,038 End-period tenants (#) 182,294 195,035 210,411 221,315 229,890 Tenancy (X) 2.12 2.20 2.31 2.38 2.44 Rental/tenant/month (Rs) 33,983 34,499 34,625 34,674 35,068 Revenue/tower/annum 842,030 894,163 937,079 977,153 1,015,872 EBITDA/tower/annum 591,292 619,440 650,903 682,601 713,198

Source: Company, Kotak Institutional Equities estimates

82 KOTAK INSTITUTIONAL EQUITIES RESEARCH Bharti Infratel Telecom

Exhibit 4: Condensed financial statements, BIL standalone, March fiscal year-ends, 2016-19E

2016 2017E 2018E 2019E Key financials Income statement Gross revenues 55,584 60,187 64,037 67,434 Service revenues 34,616 37,860 40,431 42,891 Power and fuel reimbursements 20,968 22,327 23,606 24,543 EBITDA 24,884 27,891 29,949 31,937 EBIT 13,334 16,178 18,083 19,946 PBT 18,723 35,402 36,603 40,521 PAT 12,623 25,490 26,354 29,175 EPS (Rs/share) 13,274.00 26,936.56 26,354.20 29,175.22 Balance sheet Total Equity 182,420 164,308 165,980 167,575 Borrowings ― ― ― ― Other liabilities 24,612 26,092 27,282 28,292 Total equity and liabilities 207,032 190,400 193,262 195,868 Net fixed assets 61,332 56,770 52,326 47,810 Cash and equivalents 72,267 59,494 66,211 72,813 Other assets 73,433 74,137 74,725 75,244 Total assets 207,032 190,400 193,262 195,868 Key operating metrics End-period tower base (#) 38,458 39,358 40,208 40,958 End-period tenants (#) 81,632 88,577 93,201 97,700 Tenancy (X) 2.12 2.25 2.32 2.39 Rental/tenant/month (Rs) 36,642 37,072 37,070 37,446 Revenue/tower/annum 915,114 973,067 1,016,296 1,056,872 EBITDA/tower/annum 657,837 716,834 752,820 786,960

Source: Company, Kotak Institutional Equities estimates

Exhibit 5: Condensed financial statements, Indus Towers, March fiscal year-ends, 2016-19E

2016 2017E 2018E 2019E Key financials Income statement Gross revenues 161,262 174,474 184,977 193,397 Service revenues 103,545 110,410 117,587 123,917 Power and fuel reimbursements 57,717 64,064 67,390 69,480 EBITDA 69,581 72,900 78,081 82,651 EBIT 44,138 46,708 51,564 56,029 PBT 40,576 44,974 49,181 54,605 PAT 26,350 30,582 33,443 37,131 Balance sheet Total Equity 133,752 131,306 132,644 134,129 Borrowings 40,586 45,586 50,586 50,586 Other liabilities 49,998 52,246 53,723 54,613 Total equity and liabilities 224,336 229,138 236,952 239,328 Net fixed assets 192,486 194,181 195,648 193,150 Cash and equivalents 3,455 4,235 8,733 12,124 Other assets 28,395 30,722 32,571 34,054 Total assets 224,336 229,138 236,952 239,328 Key operating metrics End-period tower base (#) 119,881 122,881 125,381 126,381 End-period tenants (#) 270,006 290,083 305,035 314,737 Tenancy (X) 2.25 2.36 2.43 2.49 Rental/tenant/month (Rs) 32,964 32,855 32,931 33,323 Revenue/tower/annum 878,161 909,612 947,284 984,400 EBITDA/tower/annum 590,112 600,585 629,018 656,578

Source: Company, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 83

BUY L&T (LT) Industrials JANUARY 25, 2017 CHANGE IN RECO. Coverage view: Cautious

Domestic hand for real. Our meetings with ministries/state entities suggest renewed Price (`): 1,420 interest to kick-start investments in new segments (port connectivity, railways EPC, Target price (`): 1,640 smart cities/metros, downstream O&G). These may add ~₹1.5 tn to the annual sectoral BSE-30: 27,376 prospects for L&T versus a current sub-₹0.5 tn share. Such ₹1 tn addition can drive 15% CAGR in the ₹6 tn sectoral opportunity of L&T over the medium term, assuming steady growth in base businesses. This has positive implications for both margin and execution. We revise target price for L&T to ₹1,640 on 3-7% higher estimates and roll- forward to December 2018E; upgrade rating to BUY (from REDUCE).

Company data and valuation summary Larsen & Toubro Stock data Forecasts/Valuations 2017E 2018E 2019E 52-week range (Rs) (high,low) 1,615-1,016 EPS (Rs) 56.9 73.6 92.0 Market Cap. (Rs bn) 1,324.2 EPS growth (%) 11.7 29.4 25.0 Shareholding pattern (%) P/E (X) 25.0 19.3 15.4 Promoters 0.0 Sales (Rs bn) 1,076.4 1,264.9 1,489.0 FIIs 19.3 Net profits (Rs bn) 52.8 68.4 85.5 MFs 9.8 EBITDA (Rs bn) 116.2 148.1 183.4 Price performance (%) 1M 3M 12M EV/EBITDA (X) 20.4 16.9 14.3 Absolute 6.2 (4.9) 24.3 ROE (%) 13.7 16.3 18.6 Rel. to BSE-30 1.0 (2.1) 11.0 Div. Yield (%) 1.7 2.1 2.6

New sectors can account for a material 20-25% share of sectoral opportunity for L&T

Through our interaction with ministries, we were enthused by the shift towards faster finalization of projects, shift towards SPV-based model of project implementation and funding being no more a constraint (especially for bankable projects). Their success would still depend on specific factors, which we discuss below. Medium-term opportunity for L&T from these segments can be large versus sub-10% share in its current ₹6 tn annual ordering opportunity.

 Sagarmala (₹0.4-0.6 tn prospects p.a.) appears to be the most promising of the government’s programmes in terms of its ability to work across ministries and focus on implementation rather than owning projects. L&T would be a key beneficiary of the port- connectivity projects though may not participate in the port-modernization/expansion projects. This program has limited ₹10 bn projects under implementation. Sagarmala’s success would depend on bankability of projects as no sovereign guarantee is provided for debt funding.

 Railways (₹0.5-0.7 tn prospects p.a.) has upped the ante in terms of spending (up 40% yoy YTD) and new project finalizations (₹0.5 tn of new line/doubling projects finalized in CY2016). Its focus on railway decongestion rather than rolling stock would work in favor of L&T. The opportunity for the EPC operators like L&T would depend on zonal railways (large share of prospects) moving away from the practice of breaking jobs/awarding rate-based contracts. This

limits present prospects of L&T for doubling/new lines/electrification to ₹100-150 bn.

 Smart cities and metros (₹0.4-0.6 tn prospects per annum) both come under the gamut of Aditya Mongia Ministry of Urban Development, the most active ministry in terms of project approvals in [email protected] CY2016. Success of smart cities depends on ability of select cities (20 have formed SPVs) to Mumbai: +91-22-4336-0883 launch and complete projects; others (40 yet to form SPVs) may follow suit. Metros may be a Ajinkya Bhat similar-sized though more bankable opportunity. Metros and smart cities likely account for [email protected] ₹200-400 bn of annual sectoral opportunity for L&T. Mumbai: +91-22-4336-0888

 Downstream oil and gas (₹0.3-0.5 tn prospects per annum). We include announced plans of OMCs for refineries, petrochemicals and fertilizer plants in our ₹1-1.2 tn medium-term

sectoral opportunity for L&T. This segment accounts for ₹100-150 bn of sectoral opportunity for L&T. Kotak Institutional Equities Research [email protected] Mumbai: +91-22-4336-0000

For Private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES’ RATING SYSTEM AND OTHER DISCLOSURES, REFER TO THE END OF THIS MATERIAL. L&T Industrials

L&T – ordering CAGR may exceed 15% over the next three years

We increase our consolidated ex-services estimates to ₹38.9, ₹54.5 and ₹71.8 from ₹38.9, ₹53.3 and ₹67.3 for FY2017E-19E, factoring in part benefits of our 15% ordering CAGR estimate over the next three years. Revision in earnings coupled with roll-over to December 2018E (discounted March 2019E EPS) and 18X multiple yields a revised ₹1,640 SoTP (versus ₹1,430 earlier).

Exhibit 1: FY2017 ordering prospects amounted to Rs6 tn Sector-wise breakup of ordering prospects, March fiscal year-ends

Sectoral ordering pipeline for FY2017 as per L&T's targeted order inflows for FY2017 L&T at start of the year (US$90 bn) (US$23 bn)

Others Buildings & Buildings & 11% Factories Others Factories 12% 22% 17% Hydrocarbon 14% Transportation/he avy civil Infra Transportation/h Metallurgical & 23% Hydrocarbon eavy civil Infra Material 9% 17% Handling 5% Metallurgical & Power Material 8% Water, Smart Handling Water, Smart World & 4% Power World & Power T&D Communications 8% Power T&D Communications 15% 12% 14% 9%

Source: Company, Kotak Institutional Equities

Opportunity sizing for L&T from new sectors

We detail below our assumptions behind the ₹7.5-8 tn bidding opportunity for L&T from new sectors over the next 3-5 years. This translates into an annual opportunity of ~₹1.5-2 tn, significant versus current contribution of ~₹0.5-0.7 tn of such sectors within the overall ₹6 tn annual ordering opportunity for L&T within relevant sectors.

 Railways. L&T bids for EPC work of sizable cost in doubling/tripling of lines, electrification and possibly new line construction. L&T is unlikely to bid for direct rolling stock orders. L&T’s participation in overall capex for railways is likely to increase going forward based on (1) focus on rail decongestion by Indian Railways in its capex plans, (2) increased acceptance from zonal railways for large-sized EPC projects as default mode of award and improved payment terms and (3) potential play in station redevelopment program (EPC, development). Of the remaining ₹7 tn of ₹8.65 tn of spending planned over the next 3-3.5 years, we assume 50% exposure for L&T. We expect the implied ₹3.5 tn of sectoral opportunity for L&T to materialize over the next five years.

 Urban infrastructure.

. Smart cities. L&T is capable of bidding for most of the projects on offer but for the size constraint (average project size of ₹0.5 bn). Also given that the programme is in its nascent stage, eventual ordering as part of the programme could be very different versus ₹1.3 tn of approved projects. We assume a ₹0.25 tn of near-term sectoral opportunity for L&T, all related to the 20 cities where SPVs have been formed. Eventual ₹1.3 tn of opportunity relates to 60 cities and would depend on the success of these initial 20 cities.

. Metros. Metros is again a large play for L&T; would be bidding for most projects but would have limited value add for rolling stock. Of the ₹1.4 tn of projects likely to be awarded over the next few years, we assume a ~₹1 tn of projects where L&T can bid.

 Sagarmala. Sagarmala project envisages about ₹4 tn of spending over the next decade, implying a similar level of ordering over the next five years. We assume 75% share of such ordering to happen over the next five years. Of this, L&T would be capable to

KOTAK INSTITUTIONAL EQUITIES RESEARCH 85 Industrials L&T

participate in most projects but for the port-related capex; mostly concentrated in dredging and equipment related capex where overseas players have a competitive advantage. This coupled with the low ₹5 bn of average project size for the program would limit the sectoral opportunity for L&T to about 70% share or ₹2 tn.

 Downstream O&G. This is another segment where refinery and petrochemicals capex has been muted in the past few years. Add to this the opportunity from planned fertilizer plants and we arrive at a ₹1.2 tn opportunity for L&T in downstream capex. Within this largely refinery-based opportunity, L&T would likely bid for most projects excluding project management consultancy (3-5% of project cost) and select process units jobs excluding cracker unit (15-20% share). At a 75% share, the sectoral opportunity for L&T would be at ~₹1 tn. We have not included the refinery modernization capex in this opportunity set on account of potentially limited share of value addition from L&T.

Exhibit 2: Incremental opportunity from targeted government programs could be ~Rs8 tn Details of additional ordering that may be expected over the next few years, March fiscal year-ends, 2016-20E (Rs bn)

Smart Cities Metro rail Sagarmala Railways Oil & Gas Total Opportunity Total Opportunity Total Opportunity Total Opportunity Total Opportunity Sector Construction capability opportunity for L&T opportunity for L&T opportunity for L&T opportunity for L&T opportunity for L&T Construction 60 60 — — 367 367 — — — — Buildings & factories Residential realty (housing) 60 60 — — — — — — — — Buildings & factories Other buildings — — — — 367 367 — — — — Buildings & factories Factories — — — — — — — — — — Roads & elevated corridors 55 55 — — 1,317 856 — — — — Roads & elevated corridors EPC — — 856 856 — — — — Roads & elevated corridors PPP — — 461 — — — — — Railways — — 241 241 6,983 3,482 — — Railways Civil & track works — — — — Railways Signalling & telecommunication — — — — 55 55 2,482 2,482 Railways Electrification — — — — Railways Bridges & tunnels — — 241 241 — — Railways Rolling stock — — 1,020 — — — Railways Stations — — 1,000 1,000 — — Railways Item-rate contracts — — 2,482 — — — Metro rail — — 1,404 1,194 — — — — — — Metro rail Civil structure — — — — — — — — Metro rail Depots and stations — — — — — — — — 1,194 1,194 Metro rail Traction and auxiliary substations — — — — — — — — Metro rail Interface systems — — — — — — — — Metro rail Rolling stock — — 211 — — — — — — — Ports — — — — 727 145 — — — — Ports EPC - Breakwater structures — — — — — — — — Ports EPC - Shore protection works — — — — 145 145 — — — — Ports EPC - Marine construction works — — — — — — — — Ports Dredging — — — — — — — — — 582 Ports Equipment — — — — — — — — — Power T&D 40 40 — — — — — — — — Water & effluent treatment 50 50 — — — — — — — — Urban & rural water supply Transmission & distribution — — — — — — — — Urban & rural water supply Desalination 29 29 — — — — — — — — Urban & rural water supply Water treatment — — — — — — — — Industrial water supply Collection, treatment and distribution — — — — — — — — — — Waste water treatment and network Collection, treatment, recirculation and reuse 21 21 — — — — — — — — Smart infrastructure 29 29 — — — — — — — — City surveillance Equipment and backbone network 4 4 — — — — — — — — Transportation Intelligent traffic management systems — — — — — — — — — — Transportation Fleet management — — — — — — — — — — Transportation Vehicle tracking systems — — — — — — — — — — Communication systems Optical fiber deployment and management — — — — — — — — Communication systems IP multimedia subsystems — — — — — — — — Communication systems GSM/satellite/microwave radio networks — — — — — — — — 25 25 Communication systems Fixed/wireless broadband access networks — — — — — — — — Communication systems Data centres — — — — — — — — Communication systems Green energy management (solar and wind) — — — — — — — — Hydrocarbons (O&G) — — — — 520 520 — — 1,202 1,027 Onshore & offshore Oil & gas processing — — — — — — — — Onshore & offshore Petroleum refining - process units — — — — — — 175 — Petroleum refining - cracking complex, pipelines Onshore & offshore 525 525 and others 520 520 Onshore & offshore Petrochemical & chemical plants — — — — — — 251 251 Onshore & offshore Fertilizer plants — — — — — — 195 195 Onshore & offshore POL / LNG pipelines & terminal — — — — — — 56 56 Total 234 234 1,404 1,194 3,172 2,129 6,983 3,482 1,202 1,027

Total opportunity 12,995 Total opportunity for L&T 8,066

Source: Government reports, Kotak Institutional Equities

86 KOTAK INSTITUTIONAL EQUITIES RESEARCH L&T Industrials

Exhibit 3: L&T is well-geared to cater to an array of infrastructure sectors where large domestic ordering is expected in the near term Sector-wise offerings of L&T in key infrastructure areas

Subsector L&T's offerings Buildings & factories Design, engineering and construction of residential buildings, factories, healthcare centres, airports, commercial buildings, etc. Transportation infrastructure Design, engineering and construction of roads, runways, elevated corridorss, railways (civil, electrification and signalling works). Design, engineering and construction of hydroelectric plants, nuclear power plants, ports, tunnelss, special bridges and metro rail. Heavy civil infrastructure This subsegment also caters to defence structures such as military bases, ordinance factories, weapon test ranges, underground structures, storage facilities, high altitude area shelters, watch towers and surveillance systems, etc.

Power T&D Design, engineering and construction of substations, transmission lines, distribution infrastructure and industrial electrification. Solutions for water supply transmission and distribution systems, desalination and management of water projects, water treatment, Water & effluent treatment watewater collection, treatment, recirculation and reuse, industrial water and effluent treatment and lift irrigation systems. Design, engineering and construction of utility scale solar PV projects, concentrating solar power (CSP) projects including standalone Renewable energy CSP, solar combined cycle and hybrid plants, solar cooling and heating applications, solar desalination, solar enhanced oil recovery systems. The company also offers construction of rooftop PV systems and microgrids.

Comprehensive concept-to-commissioning offerings in smart security systems including surveillance equipment, monitoring systems, vehicle tracking systems, emergency call box, etc. The offerings in smart communication network and telecom infrastructure include deployment of wired and wireless networks including optical fiber, DWDM, GSM, satellite and microwave RF links. The company Smart world & communication also provides network testing and monitoring systems, intrusion detection systems, etc. The smart infrastructure offerings largely include surveillance systems, access control, public address, command and control, analytics systems, fleet * logistics management systems, smart water and energy solutions.

Source: Company, Kotak Institutional Equities

Analysis of the ordering opportunity on offer from new segments

Smart cities The smart cities programme remains the key spending programme of the Ministry of Urban development. CY2016 was a watershed year for the programme with the ministry approving ₹1.3 tn of projects from states. About ₹60 bn of projects are currently under implementation out of potential ₹370 bn of capex for the 20 cities in phase I of the programme. Success of such initial few projects can pave the way for the realization of the full ₹1.3 tn spending opportunity.

 Program. The smart city program is being driven by the Ministry of Urban Development. Under the gamut of smart cities programme, 60 cities have shared with the ministry, projects worth ₹1.3 tn. These projects cover most areas of investment including housing, energy, water supply, sanitation, transportation and connectivity. The ministry has approved such projects and would start disbursing its share of funding once the detailed project reports (DPR) are completed and projects start getting executed.

Exhibit 4: The total cost of proposed projects under Smart Cities mission stands at Rs1.3 tn Snapshot of the Smart Cities mission

Population Project proposals cost (Rs bn) No. of cities impacted (mn) Pan-city solutions Area-based development Total Round 1 20 37 109 371 481 Fast track 13 9 38 260 298 Round 2 27 26 114 425 539 Total 60 72 261 1,056 1,318

Source: Smartnet portal, Kotak Institutional Equities

 Status. Of the 60 cities, 20 cities have formed SPVs and 14 of these have appointed a project management consultant. Appointment of PMCs with dedicated CEOs and CFOs for various projects/SPVs would further speed up the implementation. For the 20 cities in round 1, a total of ₹370 bn of projects have been approved. As per a recent PIB press release, 87 projects in 19 cities worth ₹58 bn are under execution with seven of them already completed.

KOTAK INSTITUTIONAL EQUITIES RESEARCH 87 Industrials L&T

Exhibit 5: 37% of the 611 proposed projects for round 1 cities are in various stages of implementation Status of projects proposed under round 1 of Smart Cities mission as of Dec 2016, March fiscal year-ends (#)

Round 1 cities implementation Status No. of projects Contract signed started RFP issued Project To be initiated 385 2% 4% 7% completed Feasibility in progress 84 DPR completed 1% Feasibility completed 28 4% DPR completed 27 Feasibility RFP issued 42 completed 5% Contract signed 10 Feasibility in implementation started 26 progress Project completed 9 14% To be initiated 63% Total 611

Source: Smartnet portal, Kotak Institutional Equities

Exhibit 6: Housing, urban transport and area-based development comprise nearly 50% of the total spending Sector-wise split of projects proposed in round 1 of Smart Cities mission, March fiscal year-ends

Round 1 cities Sector Project cost (Rs bn) Safety & Others Water supply Water supply 29.5 security 3% 8% Energy 40.4 Area 1% Energy development 11% Sewerage & septage 20.7 19% Solid waste management 6.0 Sewerage & septage Storm water drainage 14.1 Economic 6% Urban transport 54.7 development 4% Non-motorized transportation 9.7 Solid waste management Housing 59.9 Social sectors 2% IT connectivity 24.9 0% Storm water Environment Social sectors 1.4 drainage Environment 3.4 1% 4% Economic development 13.3 IT connectivity Urban Area development 70.8 7% transport 15% Safety & security 4.1 Housing Non-motorized Others 13.0 16% transportation 3% Total 366

Source: Smartnet portal, Kotak Institutional Equities

 Funding. The Smart Cities program promises ₹5 bn of central assistance to each city and another ₹5 bn from the respective state government. The rest of the funding has to be raised from market sources through SPVs and PPP or other modes. This likely funding roadmap for each city was received by the central government when the Smart City challenge was hosted and the selected cities would move forward as per the proposed roadmap to complete their respective projects. The eventual investment may be higher or lower than the proposed figure depending on the respective state governments and finalization of scope in detailed project reports (DPRs).

88 KOTAK INSTITUTIONAL EQUITIES RESEARCH L&T Industrials

Exhibit 7: Out of Rs366 bn worth of proposed projects under the round 1 (20 cities), Rs236 bn worth of funding plan has been laid down Funding plan for Smart Cities selected in round 1, March fiscal year-ends

Total no. Projects Sources of funds (Rs mn) No. City of projects initiated Smart Cities mission Central missions State missions PPP Debt Own resources Other sources Total 1 Bhubaneswar 26 4 1,491 11 600 6,000 1,600 — 6 9,708 2 Pune 31 18 11,762 5,630 — 900 — 8,562 2,000 28,854 3 Jaipur 37 1 12,222 — 4,280 1,650 2,664 44 3,904 24,763 4 Surat 39 31 11,030 1,890 2,510 7,950 — 800 1,790 25,970 5 Kochi 8 5 — — 420 — — 607 — 1,027 6 Ahmedabad 10 8 9,480 1,590 — 5,940 2,000 750 — 19,760 7 Jabalpur 69 33 32,842 900 930 — — — — 34,672 8 Visakhapatnam 32 28 7,712 820 5,880 940 — — — 15,352 9 Solapur 9 2 NA NA NA NA NA NA NA — 10 Davanagere 2 — NA NA NA NA NA NA NA — 11 Indore 71 17 9,869 4,758 — 13,553 5,477 600 141 34,398 12 NDMC 41 11 129 1,206 — 22 — 4,549 — 5,906 13 Coimbatore 14 4 NA NA NA NA NA NA NA — 14 Kakinada 70 20 9,374 3,822 1,811 2,726 — - 616 18,348 15 Belagavi 3 1 — 50 — — — — — 50 16 Udaipur 49 6 97 — — — — — — 97 17 Guwahati 6 6 9,250 — — 4,280 — — — 13,530 18 Chennai 48 — NA NA NA NA NA NA NA — 19 Ludhiana 24 24 NA NA NA NA NA NA NA — 20 Bhopal 22 7 488 — — 3,497 — — — 3,985 Total 611 226 115,745 20,677 16,431 47,458 11,741 15,912 8,456 236,419

Source: Smartnet portal, Kotak Institutional Equities

Metro transportation is another key area of spending for the Ministry of Urban Development. We detail a ₹1.2 tn opportunity over the medium term. The ministry has approved 65 kms of metro projects have been approved during CY2016 with an investment of ₹221 bn. These include Lucknow Metro (22 km with a cost of ₹70 bn), Chennai Metro Extension (9 km, ₹37 bn) and Pune Metro (31 km, ₹114 bn).

Exhibit 8: Large metro rail opportunity of Rs1.4 tn exists in the medium term (next 3-4 years) Details of upcoming metro rail projects in India, March fiscal year-ends

Upcoming projects Project cost (Rs bn) Status Rs108 bn phase-1 construction underway with completion expected by FY2022 (original target Ahmedabad Metro - phase 2 108 FY2018). DPR responsibility for phase-2 worth Rs65 bn has been assigned to DMRC. Phase-2 approved in Nov-2015 at an estimated cost of Rs264 bn with first section to open by FY2019. Bangalore Metro - phase 2 264 Phase-1 has been largely completed (barring some sections) at a total cost.of Rs138 bn. Chennai Metro - phase 1 Phase-1 extension worth Rs37 bn approved and expected by FY2019. Phase-2 worth Rs440 bn (initial 37 extension and phase 2 estimates for overground corridor) is proposed. In-principle approval received for phase-4, with tentative deadline of FY2020. Three phases of DMRC Delhi Metro - phase 4 550 have been completed or in final stages of completion. Kochi Metro - phase 1 Phase-1's 11 km long extension in final stages of state government approval and will go for centre's 26 extension approval thereafter. Original phase-1 is in last stages of completion (expected June-2017). Line 2-b worth Rs110 bn and Line-4 (Wadala-Thane) worth Rs145 bn approved. Line-3 has been Mumbai Metro 255 awarded (in various packages) and is under construction. Nagpur Metro 87 Project approved in FY2015, expected to be completed by FY2018. Phase-1 (two corridors, total 31 km) approved by the cabinet, expected to be completed within five Pune Metro - phase 1 114 years from the start of the construction. Total 1,441

Notes: (1) L&T is already building Hyderabad Metro and while phase-2 of the same is proposed, there is no clear approval yet. (2) Lucknow Metro phase 1 is in final trial stage and will open by March-2017. Additional phases are in proposal stage.

Source: Ministry of Urban Development, PIB, news reports, Kotak Institutional Equities

KOTAK INSTITUTIONAL EQUITIES RESEARCH 89 Industrials L&T

At first glance, Sagarmala seems another government-sponsored scheme with tall claims. Sagarmala Program Our interaction with the ministry helps us better appreciate its (1) focus on funding only bankable projects, (2) impetus on finalizing and monitoring such projects (not on owning/implementing) and (3) authority and ability to work across ministries. This bodes well for the program as it ramps up from ₹10 bn (projects under implementation) to ₹1 tn (projects in advanced stages) to ₹4 tn (spending over the next decade).

 Programme. Sagarmala is the flagship program of the Ministry of Shipping, aimed at supporting industrial growth in the country. It would do so by creating manufacturing hubs in coastal regions, connecting these and existing hubs to ports and making ports more efficient. Unlike other programs, Sagarmala appears to be moving fast with ₹10 bn of projects under implementation and another ₹1 tn of projects in advanced stages of tendering. This ₹1 tn batch contains most of the key projects in port modernization and connectivity, which the Sagarmala Development Corporation (SDC) aims to complete to a large extent before the 2019 general elections. Eventual opportunity from the program is large at ₹4 tn over the next decade and ₹8 tn over the next two decades.

Exhibit 9: Medium-term opportunity of Rs1 tn focused in port connectivity and modernization; ~Rs8 tn opportunity over two decades Details of projects and investments envisaged under Sagarmala programme, March fiscal year-ends, 2016-35E

FY2015-16 FY2016-17 FY2017-18 Total No. of Cost Average project No. of Cost Average project No. of Cost Average project No. of Cost Average project No. Project theme projects (Rs bn) size (Rs bn) projects (Rs bn) size (Rs bn) projects (Rs bn) size (Rs bn) projects (Rs bn) size (Rs bn) 1 Port modernisation 62 277 4.5 46 227 4.9 13 22 1.7 121 526 4.3 2 Connectivity enhancement 30 159 5.3 58 289 5.0 28 166 5.9 116 614 5.3 3 Port-linked industrialisation 2 3 1.6 1 30 30.0 2 50 25.0 5 83 16.7 4 Coastal community development 4 1 0.2 4 5 1.3 3 1 0.4 11 7 0.7 Total 98 440 4.5 109 551 5.1 46 240 5.2 253 1,231 4.9

Medium-term ordering opportunity

FY2018-19 FY2019-20 to FY2024-25 FY2025-26 to FY2034-35 Total No. of Cost Average project No. of Cost Average project No. of Cost Average project No. of Cost Average project No. Project theme projects (Rs bn) size (Rs bn) projects (Rs bn) size (Rs bn) projects (Rs bn) size (Rs bn) projects (Rs bn) size (Rs bn) 1 Port modernisation 20 355 17.8 27 266 9.8 21 282 13.4 68 903 13.3 2 Connectivity enhancement 26 1,397 53.7 17 212 12.5 11 82 7.5 54 1,691 31.3 3 Port-linked industrialisation 17 944 55.5 11 3,181 289.2 - - NA 28 4,126 147.3 4 Coastal community development 4 7 1.7 8 28 3.5 - - NA 12 35 2.9 Total 67 2,703 40.3 63 3,687 58.5 32 364 11.4 162 6,754 41.7

Source: PIB release, Kotak Institutional Equities

90 KOTAK INSTITUTIONAL EQUITIES RESEARCH L&T Industrials

Exhibit 10: Over the next five years, the largest opportunity under Sagarmala project would be available in NHAI road construction and port modernization projects Split of investment required by implementing agencies for various Sagarmala projects, March fiscal year-ends (%)

2016-20E 2021-24E IWAI IWAI Other 3% Other 2% projects projects Port Trust 13% MoTourism 9% MoTourism 0% 0% Port Trust 0% IPRCL 27% 0% DIPP DIPP 15% Indian 7% Railways Concor Concor 4% 0% 0%

IPRCL MoPNG 7% MoPNG 8% Indian 23% Railways NHAI 3% NHAI 42% 37%

Source: Sagarmala release, Kotak Institutional Equities

 SPV-based approach to projects and focus on monitoring rather than implementing projects. Sagarmala envisages its role more in ensuring timely project vetting and finalization rather than on owning projects, a key differentiator versus other programs of ministries. For these projects, it aims to handhold other ministries, states and private investors and monitor projects through a minority equity share. Also unlike other programs, Sagarmala’s funding does not assure any sovereign guarantees, a natural filter for supporting only bankable projects.

Indian Railways Indian Railways has shown a sharp uptick in ordering in YTD-FY2017. Key driver of the change is the assured nature of funding availability over the coming years, incentivizing long-term planning. Such shift towards external funding would eventually drive the shift in ordering to EPC from item-rate contracts. This can further drive the bid pipeline for L&T, which presently bids selectively for EPC jobs on offer.

 Large opportunity starting to reflect in spending in YTD-FY2017. The spending planned is of Rs8.65 tn over a five year-period of which the first two years have seen good levels of spending (Rs0.8 tn in FY2016 likely Rs1.1-1.2 tn of spending in FY2017). Note that overall spending by Indian Railways over April-Nov 2016 is Rs632 bn, up 40% yoy, with most key segments (new lines, gauge conversion, traffic facilities, rolling stock) at 45-60% of the annual budgeted target. It is only in doubling of lines that spending has been below expectations.

 Opportunity for L&T. Most of this opportunity and the recent uptick seen is yet to reflect in a quantum jump for EPC players such as L&T. This would happen once EPC mode of award becomes default and size of orders increases. Presently, large EPC jobs for Indian railways remain limited to select railway entities in IRCON, RVNL and CORE. Normally zonal railway contracts (account for large share of ordering) have not yet switched to EPC. The Indian Railways is pushing them to do so and expect the same to happen over a period of two years. It is cognizant of the hurdles along the way to transitioning from input-based spending (item-rate contracts) to output-based contracting (EPC contracts). It expects project-based financing and related strict timelines to drive this shift towards EPC projects.

KOTAK INSTITUTIONAL EQUITIES RESEARCH 91 Industrials L&T

Exhibit 11: We envisage a large Rs2.5 tn near-term opportunity in railways including budgeted expenditure and new projects Indian Railways' planned spending under various heads, new projects and their progress, March fiscal year-ends, 2011-17BE (Rs bn)

Potential near-term 2011 2012 2013 2014 2015 2016 RE 2017 BE capex (opportunity) Comments Budget plans New lines (construction) 53 53 53 58 71 135 156 360 Cabinet approval for Rs360 bn received in CY2016. Gauge conversion 32 28 27 31 37 43 43 43 Doubling 22 23 25 30 39 90 251 180 Cabinet approval for Rs180 bn received in CY2016. Traffic facilites 8 6 8 7 8 12 12 12 Rolling stock 147 164 184 175 165 191 273 273 Leased Assets 28 35 42 50 54 63 70 70 Road safety,track renewals 64 69 73 73 80 86 138 138 Inv. In undertakings 18 26 34 47 51 70 111 111 Metro transport projects 5 10 12 9 10 234 14 14 Others 31 36 47 60 142 77 102 102 Total 408 451 504 540 658 1,000 1,170 1,303 New projects Station redevelopment NA NA NA NA NA NA NA ~25 Rs1 tn project for redevelopment of 400 stations, 8 stations is the near-term opportunity (Anand Vihar, Bijwasan, Chandigarh, Gandhinagar, Habibganj (Bhopal), Shivaji Nagar (Pune), SAS Nagar (Mohali) and Surat). Estimated cost for each of the eight stations between Rs1-4 bn. Mumbai-Ahmedabad bullet NA NA NA NA NA NA NA 1,000 Rs1 tn Mumbai-Ahmedabad bullet train project - agreement train project likely to be signed in early 2017. Mumbai Urban Transport NA NA NA NA NA NA NA 110 MUTP-phase 3 includes new suburban rail corridors in Project (MUTP) - 3 Mumbai. The project received cabinet approval in Dec-2016. Grand total 2,438 Large Rs2.5 tn worth of near-term railway capex expected

Source: Indian Railways, PIB releases, Kotak Institutional Equities estimates

 Funding avenues a limited issue as per Indian Railways. Funding is a limited deterrent to capex spending for Indian Railways. The current modest levels of borrowings raised are a function of other factors: (1) delay in borrowing on expectation of declining interest rates (recently borrowed first tranche) and (2) projects implemented YTD had higher share of funding from gross-budgetary support/internal accruals. For the electrification projects and passenger coaches/passenger services, Indian Railways continues to fund the spending through internal/budgetary resources. Locomotives and wagons for Indian railways are generally funded through external sources.

Downstream O&G Our assessment of the potential ordering for new refineries suggests a ~30 mn tons opportunity for award over the next two years (based on FY2020 commissioning target). This would equate to an ordering of ₹700 bn. Petchem capacity additions by IOCL may attribute another ₹200 bn of ordering over the next two years.

92 KOTAK INSTITUTIONAL EQUITIES RESEARCH L&T Industrials

Exhibit 12: Large opportunity worth Rs1 tn seen in oil & gas expansion in the coming years Details of planned capacity expansion and other large projects planned by key players, March fiscal year-ends (Rs bn)

Capacity (mtpa) Capex Existing Expansion (Rs bn) Completion BPCL Kochi petchem complex 46 FY2019 Bina creeping expansion 30 HPCL Visakh refinery expansion 8.3 6.7 FY2020 200 Mumbai refinery expansion 6.5 2.5 FY2020 IOCL Refining Panipat refinery expansion 15.0 5.2 80 FY2020 Koyali refinery expansion 13.7 6.3 110 FY2020 Barauni refinery expansion 6.0 3.0 60 FY2020 BS-VI upgrade projects 110 FY2020 Petchem PX-PTA expansion at Paradip 77 Ethylene glycol at Paradip 38 C2-C3-C4 at Panipat 50 Oxyalchohol at Gujarat 40 ONGC Mangalore Refinery (MRPL) 15.0 10.0 110 FY2022 Swan Energy (private company) Floating LNG Terminal — 5.0 56 FY2019 (in JV with Exmar, Belgium) Total 1,007

Source: Company, Kotak Institutional Equities estimates

Exhibit 13: Revision in consolidated financials of L&T, March fiscal year-ends, 2016-19E (Rs mn)

New estimates Old estimates % revision 2016 2017E 2018E 2019E 2017E 2018E 2019E 2017E 2018E 2019E Income statement Revenues 1,026,317 1,076,439 1,264,945 1,489,021 1,076,439 1,241,725 1,427,625 — 1.9 4.3 Expenditure (902,890) (960,258) (1,116,795) (1,305,585) (960,258) (1,095,737) (1,252,229) — 1.9 4.3 EBITDA 123,427 116,181 148,150 183,437 116,181 145,988 175,396 — 1.5 4.6 EBITDA margin (%) 12.0 10.8 11.7 12.3 10.8 11.8 12.3 Interest & finance charges 30,412 17,006 21,682 29,059 17,006 21,682 29,059 — — — Depreciation 27,560 21,084 23,319 26,934 21,084 23,063 26,300 — 1.1 2.4 PBT 77,285 91,342 113,156 137,017 91,342 111,594 130,589 — 1.4 4.9 Tax 25,487 28,508 36,892 46,014 28,508 36,330 43,701 — 1.5 5.3 PAT 47,324 52,848 68,380 85,504 52,848 67,364 81,342 — 1.5 5.1 EPS (Rs) 50.9 56.9 73.6 92.0 56.9 72.5 87.5 — 1.5 5.1 Yoy growth (%) Revenues 13.2 4.9 17.5 17.7 4.9 15.4 15.0 EBITDA 23.6 (5.9) 27.5 23.8 (5.9) 25.7 20.1 PAT 45.0 11.7 29.4 25.0 11.7 27.5 20.8

Source: Company, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 93 Industrials L&T

Exhibit 14: Revision in estimates of consolidated (ex-services) business of L&T, March fiscal year-ends, 2016-19E

New estimates Old estimates % change 2016 2017E 2018E 2019E 2017E 2018E 2019E 2017E 2018E 2019E Consolidated (ex-services) Orders received 1,144,633 1,331,202 1,496,529 1,778,149 1,331,202 1,458,001 1,634,981 — 2.6 8.8 % growth (16.3) 16.3 12.4 18.8 16.3 9.5 12.1 Net sales 809,990 857,274 1,016,785 1,205,801 857,274 993,565 1,144,405 — 2.3 5.4 % growth 11.1 5.8 18.6 18.6 5.8 15.9 15.2 Bill to book ratio (%) 29.0 27.9 28.0 28.4 27.9 27.5 27.5 EBITDA margin (%) 9.9 9.4 10.4 10.8 9.4 10.4 10.7 0 bps -3 bps 12 bps Infrastructure Orders received 848,170 890,579 1,068,694 1,282,433 890,579 1,024,165 1,147,065 — 4.3 11.8 % growth (1.1) 5.0 20.0 20.0 5.0 15.0 12.0 Revenues 486,900 534,899 649,442 787,193 534,899 634,114 741,412 — 2.4 6.2 % growth 12 10 21 21 10 19 17 Bill to book ratio (%) 26 26 26 27 26 26 26 EBITDA margin (%) 11.7 10.2 10.7 10.9 10.2 10.7 10.7 0 bps 0 bps 20 bps Metallurgical and material handling Orders received 36,610 25,627 28,190 32,418 25,627 28,190 32,418 — — — % growth (40.3) (30.0) 10.0 15.0 (30.0) 10.0 15.0 Revenues 23,800 20,969 20,814 23,087 20,969 20,814 23,087 — — — % growth (24) (12) (1) 11 (12) (1) 11 Bill to book ratio (%) 19 18 17 18 18 17 18 EBITDA margin (%) 5.5 (2.0) 4.0 6.0 (2.0) 4.0 6.0 0 bps 0 bps 0 bps Heavy engineering Orders received 22,950 120,000 80,000 96,000 120,000 80,000 96,000 — — — % growth (54.0) 422.9 (33.3) 20.0 422.9 (33.3) 20.0 Revenues 30,500 28,350 47,530 61,780 28,350 41,330 50,664 — 15.0 21.9 % growth (10) (7) 68 30 (7) 46 23 Bill to book ratio (%) 32 21 23 25 21 20 20 EBITDA margin (%) (0.7) 15.0 15.0 15.0 15.0 15.0 15.0 0 bps 0 bps 0 bps Electrical and automation Orders received 47,915 57,498 64,398 72,125 57,498 64,398 72,125 — — — % growth (22.9) 20.0 12.0 12.0 20.0 12.0 12.0 Revenues 46,500 46,727 56,160 65,031 46,727 56,160 65,031 — — — % growth (3) 0 20 16 0 20 16 Bill to book ratio (%) 72 66 65 65 66 65 65 EBITDA margin (%) 13.9 12.0 12.0 12.0 12.0 12.0 12.0 0 bps 0 bps 0 bps Hydrocarbons Orders received 104,470 120,000 144,000 172,800 120,000 132,000 145,200 — 9.1 19.0 % growth (2.5) 10.0 20.0 20.0 10.0 10.0 10.0 Revenues 87,700 98,135 113,729 137,296 98,135 110,633 126,092 — 2.8 8.9 % growth 20 12 16 21 12 13 14 Bill to book ratio (%) 44 43 43 44 43 43 44 EBITDA margin (%) 2.2 5.0 7.0 8.0 5.0 7.0 8.0 0 bps 0 bps 0 bps Power Orders received 27,020 60,000 48,000 52,800 60,000 66,000 72,600 — (27.3) (27.3) % growth (82.1) 122.1 (20.0) 10.0 122.1 10.0 10.0 Revenues 69,700 68,800 62,992 58,716 68,800 64,387 65,399 — (2.2) (10.2) % growth 48 (1) (8) (7) (1) (6) 2 Bill to book ratio (%) 29 32 31 31 32 31 31 EBITDA margin (%) 11.6 5.0 6.0 6.0 5.0 6.0 6.0 0 bps 0 bps 0 bps Others Orders received 57,498 57,498 63,248 69,573 57,498 63,248 69,573 — — — % growth (26) — 10 10 — 10 10 Revenues 65,200 59,722 66,509 73,160 59,722 66,509 73,160 — — — % growth 5 (8) 11 10 (8) 11 10 — Bill to book ratio (%) 77 67 78 84 67 78 84 EBITDA margin (%) 20.8 13.6 14.6 16.3 13.6 15.5 17.1 0 bps -81 bps -81 bps

Source: Company, Kotak Institutional Equities estimates

94 KOTAK INSTITUTIONAL EQUITIES RESEARCH L&T Industrials

Exhibit 15: Consolidated ex-services business of L&T, March fiscal year-ends, 2015-19E

2015 2016 2017E 2018E 2019E Consolidated (ex-services) Orders received 1,367,134 1,144,633 1,331,202 1,496,529 1,778,149 % growth 21.5 (16.3) 16.3 12.4 18.8 Net sales 728,750 809,990 857,274 1,016,785 1,205,801 % growth 1.4 11.1 5.8 18.6 18.6 Order backlog - year end 2,324,774 2,515,450 2,986,274 3,468,890 4,044,364 % growth 28 8 19 16 17 Order execution days 881 1,016 1,039 1,046 1,028 Bill to book ratio (%) 30.3 29.0 27.9 28.0 28.4 EBITDA 67,940 80,420 80,459 105,667 130,666 EBITDA margin (%) 9.3 9.9 9.4 10.4 10.8 Infrastructure Orders received 857,630 848,170 890,579 1,068,694 1,282,433 % growth 5.4 (1.1) 5.0 20.0 20.0 Domestic OI 672,990 606,180 641,217 801,521 961,825 % 78 71 72 75 75 International OI 184,640 241,990 249,362 267,174 320,608 % 22 29 28 25 25 Revenues 432,900 486,900 534,899 649,442 787,193 % growth 19 12 10 21 21 Order backlog - year end 1,661,200 1,875,000 2,230,679 2,649,932 3,145,172 % growth 28 13 19 19 19 Order execution days 1,094 1,245 1,279 1,254 1,229 Bill to book ratio (%) 29 26 26 26 27 EBITDA 48,052 56,840 54,560 69,490 85,804 EBITDA margin (%) 11.1 11.7 10.2 10.7 10.9 Metallurgical and material handling Orders received 61,360 36,610 25,627 28,190 32,418 % growth 127.6 (40.3) (30.0) 10.0 15.0 Revenues 31,500 23,800 20,969 20,814 23,087 % growth (43) (24) (12) (1) 11 Order backlog - year end 106,900 103,680 108,338 115,714 125,046 % growth 9.2 (3) 4 7 8 Order execution days 1,134 1,639 1,805 1,900 1,829 Bill to book ratio (%) 24 19 18 17 18 EBITDA 3,339 1,300 (419) 833 1,385 EBITDA margin (%) 10.6 5.5 (2.0) 4.0 6.0 Heavy engineering Orders received 49,890 22,950 120,000 80,000 96,000 % growth 35.3 (54.0) 422.9 (33.3) 20.0 Revenues 34,000 30,500 28,350 47,530 61,780 % growth (22) (10) (7) 68 30 Order backlog - year end 83,870 75,000 166,650 199,121 233,340 % growth 23.0 (10.6) 122.2 19.5 17.2 Order execution days 732 1,004 966 1,280 1,176 Bill to book ratio (%) 37 32 21 23 25 EBITDA 4,148 (210) 4,253 7,129 9,267 EBITDA margin (%) 12.2 (0.7) 15.0 15.0 15.0 Electrical and automation Orders received 62,160 47,915 57,498 64,398 72,125 % growth 22 (23) 20 12 12 Revenues 47,900 46,500 46,727 56,160 65,031 % growth 5 (3) 0 20 16 Order backlog - year end 30,960 30,550 41,321 49,559 56,654 % growth 5 (1) 35 20 14 Order execution days 462 431 463 478 481 Bill to book ratio (%) 66 72 66 65 65 EBITDA 7,089 6,460 5,607 6,739 7,804 EBITDA margin (%) 14.8 13.9 12.0 12.0 12.0 Hydrocarbons Orders received 107,160 104,470 120,000 144,000 172,800 % growth 9.6 (2.5) 10.0 20.0 20.0 Revenues 73,300 87,700 98,135 113,729 137,296 % growth (27) 20 12 16 21 Order backlog - year end 136,840 156,220 178,085 208,357 243,861 % growth 33.1 14.2 14.0 17.0 17.0 Order execution days 779 787 804 803 784 Bill to book ratio (%) 44 44 43 43 44 EBITDA (11,288) 1,973 4,907 7,961 10,984 EBITDA margin (%) (15.4) 2.2 5.0 7.0 8.0 Power Orders received 151,250 27,020 60,000 48,000 52,800 % growth 243 (82) 122 (20) 10 Revenues 47,200 69,700 68,800 62,992 58,716 % growth (23) 48 (1) (8) (7) Order backlog - year end 234,720 200,000 191,200 176,208 170,292 % growth 45 (14) (4) (8) (3) Order execution days 1,252 1,229 1,061 1,108 1,095 Bill to book ratio (%) 24 29 32 31 31 EBITDA 7,694 8,110 3,440 3,780 3,523 EBITDA margin (%) 16.3 11.6 5.0 6.0 6.0

Source: Company, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 95 Industrials L&T

Exhibit 16: Key financials for core E&C business of L&T (consolidated), March fiscal year-ends, 2013- 19E (Rs mn)

(Rs mn) 2013 2014 2015 2016 2017E 2018E 2019E P&L statement Net sales 640,590 719,000 728,750 809,990 857,612 1,017,201 1,206,303 % growth 12.2 1.4 11.1 5.9 18.6 18.6 EBITDA 66,910 79,280 67,940 80,420 80,459 105,669 130,669 % growth 18.5 (14.3) 18.4 0.0 31.3 23.7 EBITDA margin (%) 10.4 11.0 9.3 9.9 9.4 10.4 10.8 Other income 9,140 7,700 8,080 7,560 10,202 7,704 7,369 Depreciation (10,950) (14,610) (18,080) (16,570) (17,216) (18,663) (20,534) EBIT 65,100 72,370 57,940 71,410 73,445 94,710 117,504 EBIT margin (%) 10.2 10.1 8.0 8.8 8.6 9.3 9.7 Interest cost (3,160) (18,510) (17,430) (16,800) (16,099) (16,099) (16,099) PBT 61,940 53,860 40,510 54,610 57,346 78,610 101,405 Income tax (17,600) (20,590) (15,680) (17,480) (20,645) (28,300) (36,506) Tax rate (%) 28.4 38.2 38.7 32.0 36.0 36.0 36.0 Recurring PAT before minority 44,340 33,270 24,830 37,130 36,701 50,311 64,899 interest and associate profits % growth (25.0) (25.4) 49.5 (1.2) 37.1 29.0 PAT margin (%) 6.9 4.6 3.4 4.6 4.3 4.9 5.4

PAT for core E&C business (consolidated) 30,642 21,671 36,103 36,244 50,738 66,927 EPS for core E&C business (consolidated) 32.9 23.3 38.8 38.9 54.5 71.8

Source: Company, Kotak Institutional Equities estimates

Exhibit 17: EPS for core E&C business of L&T (consolidated), March fiscal year-ends (Rs)

80 EPS for core E&C business (consolidated) 71.8 70

60 54.5

50 38.8 38.9 40

30 23.3 20

10

0 2015 2016 2017E 2018E 2019E

Source: Company, Kotak Institutional Equities estimates

96 KOTAK INSTITUTIONAL EQUITIES RESEARCH L&T Industrials

Exhibit 18: L&T – SoTP-based target price of Rs1,630/share

March-18 Earnings/Book Target multiple Value Valuation basis Stake Value Per share (Rs bn) (X) (Rs bn) (%) (Rs bn) (Rs) Core E&C business (consolidated) 66,925 18.0 1,205 P/E 100.0 1,205 1,293 L&T Finance Holdings 215 (at KIE TP) 66.7 143 154 IDPL Roads, Ports, Transmission 66,415 1.3 86 P/B 97.4 84 90 Hyderabad Metro 30,951 0.0 0 P/B 97.4 0 0 Power development 31,127 1.0 31 P/B 100.0 31 34 Total subsidiaries 437 20% holding co. disc. 0.0 351 377 Grand total 1,671 Discounted december 2018 SOTP 1,634

Source: Company, Kotak Institutional Equities estimates

Exhibit 19: Consolidated financials of L&T, March fiscal year-ends, 2011-19E (Rs mn)

2011 2012 2013 2014 2015 2016 2017E 2018E 2019E Income statement Revenues 520,891 643,131 744,980 851,284 906,546 1,026,317 1,076,439 1,264,945 1,489,021 Expenditure (443,982) (555,711) (646,894) (743,986) (806,690) (902,890) (960,258) (1,116,795) (1,305,585) EBITDA 76,910 87,420 98,087 107,298 99,856 123,427 116,181 148,150 183,437 EBITDA margin (%) 14.8 13.6 13.2 12.6 11.0 12.0 10.8 11.7 12.3 Other income 8,532 8,290 10,959 9,818 10,072 11,830 13,251 10,007 9,572 Interest & finance charges 8,309 11,019 20,950 31,380 28,507 30,412 17,006 21,682 29,059 Depreciation 12,432 15,523 16,371 14,458 26,225 27,560 21,084 23,319 26,934 PBT 64,701 69,167 71,725 71,277 55,195 77,285 91,342 113,156 137,017 Tax 23,479 22,826 23,855 26,284 20,876 25,487 28,508 36,892 46,014 PAT 42,879 47,151 48,976 45,468 32,631 47,324 52,848 68,380 85,504 EPS (Rs) 46.1 50.7 52.7 48.9 35.1 50.9 56.9 73.6 92.0 Reported PAT 46,218 47,719 53,124 49,020 47,648 50,905 56,872 68,380 85,504 Balance Sheet Share holder's funds 260,766 311,402 365,126 408,908 459,077 507,605 537,184 572,748 617,219 Capital 1,218 1,225 1,231 1,854 1,859 1,863 1,863 1,863 1,863 Reserves and surplus 249,288 292,643 337,366 375,262 407,232 438,054 467,633 503,198 547,668 Minority interest 10,260 17,535 26,529 31,792 49,986 67,688 67,688 67,688 67,688 Loan funds 328,285 471,501 619,937 803,304 905,714 1,013,066 1,111,264 1,229,466 1,337,403 Deferred tax liability 3,101 818 1,837 3,375 (1,846) (3,918) (3,918) (3,918) (3,918) Total sources of funds 637,269 827,898 986,900 1,250,405 1,393,267 1,627,257 1,755,033 1,908,800 2,061,207 Gross block 205,216 257,568 382,216 414,765 457,586 563,699 617,460 801,254 873,281 Acc. depreciation 48,975 63,560 77,884 90,790 110,206 130,883 151,967 175,286 202,219 Net block 156,242 194,008 304,332 323,975 347,381 432,816 465,493 625,968 671,062 Cash & bank balances 36,446 35,221 36,312 41,353 58,555 60,032 60,311 46,291 35,819 Investments 92,158 87,895 87,675 81,090 96,121 100,800 100,800 100,800 100,800 Loans & advances towards financing activities 173,664 247,732 320,021 438,517 553,669 658,094 756,809 870,330 1,000,879 Net current assets 53,363 113,915 125,492 223,686 182,304 200,615 203,491 211,402 232,532 Total application of funds 637,268 827,898 986,900 1,250,405 1,393,267 1,627,257 1,755,033 1,908,800 2,061,207 Yoy growth (%) Revenues 18.5 23.5 15.8 14.3 6.5 13.2 4.9 17.5 17.7 EBITDA 18.1 25.2 16.4 15.0 8.4 11.9 6.4 16.3 16.9 PAT 16.1 10.0 3.9 (7.2) (28.2) 45.0 11.7 29.4 25.0

Source: Company, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 97 Industrials L&T

APPENDIX: DETAILED TAKEAWAYS FROM MEETINGS

Ministry of Railways

 Near-term financials unlikely to impact the impetus on capex. The Indian Railways defended itself as being the only government department that sells services and funds its own expenses. From that perspective, the merger of rail budget with the general budget may help get better budgetary support to Indian Railways for expansion that will lead to long-term benefits. The weakness in recent financials is based on muted volumes, impact of pay commission and productivity-linked bonus shared with employees. From a pay commission perspective, only allowances have been withheld for now; pending decision from the finance ministry.

 Financial viability is the key for success; tariff rationalization is a focus area. The Railways acknowledged the need for rationalization of pricing between freight and passenger segments. The focus here would be less on revising AC fares (risk of becoming uncompetitive vis-à-vis airlines) but more on other passenger fares. On freight rates, a decline in rates would unlikely happen though absolute rates may not get changed over the medium term. The process of setting up an independent regulator would likely take another six months as the same would require a legislative order for the amendment to Railways act. Post such legislative order, the Indian Railways would propose changes to rates for the approval of the regulator.

 Station redevelopment a self-funding programme. Station redevelopment programme is aimed to reduce the burden of the ₹300 bn or so of annual losses on the passenger segment. Indian Railways has limited finances on this count though expects private sector to invest in the station redevelopment programme. For its investment in the railway stations, the concessionaires would be able leverage the in-station and nearby real-estate space.

 Talcher-Paradip – a key connectivity project. The current stretch can take 40% more traffic and then would become a bottleneck. With the 3rd and 4th dedicated line getting planned, the same would be able to take care of traffic for the next fifty years; note that heavy haul nature of the corridor would support 4X the tonnage of current rakes. The government has reduced delays for such projects by ensuring conceptualization to tendering within one year.

 From infrastructure deficit to infrastructure surplus. The meeting reinforced the focus of Indian Railways on decongesting the existing rail network as well as putting up capacities for future expansion. Such capacities would be set up to create an infrastructure surplus for future demand and may not yield commensurate returns in the near-term for the ministry.

 Experimenting with EPC contracts. Indian Railways has so far awarded only item-rate based contracts. However, the department is experimenting with EPC contracts now. An EPC contract requires a lot of preparation, site planning and detailed project specifications and thus the department would be cautious while awarding such contracts.

 Partial commissioning of DFC is likely. The focus of Indian Railways is not on monetizing the corridor and its assets but on operationalizing it as soon as possible. Thus, even though the full commissioning of the corridor may not happen until 2021-22, partial commissioning of completed segments is highly likely (we note the possibility of commissioning of Rewari-Vadodara WDFC segment awarded to L&T as the project is well on track and may be completed on schedule).

 Land acquisition is not a major issue for doubling projects. The Indian Railways already has surplus land in most places. Also, the land along the freight track routes is usually unoccupied and thus easily available for expansion.

98 KOTAK INSTITUTIONAL EQUITIES RESEARCH L&T Industrials

Sagarmala programme

 Industrial growth is at the heart of the Sagarmala project. The broad aim of the Sagarmala project is to promote industrial growth, jobs and prosperity. It would do so by creating manufacturing hubs in coastal regions, connecting these and existing hubs to ports and making ports more efficient. Key target for the programme is to take port cargo throughput and coastal shipping to 2.5X current levels over the next decade.

 The move from ₹10 bn to ₹1 tn to ₹4 tn of projects. Of the ₹8 tn of overall opportunity, the focus of the Sagarmala Committee is on ₹4 tn of projects that would see the light of the day before the 2019 general elections. Within this subset, the focus is more on the Rs1 tn of projects in advanced stages that would be close to completion by the 2019 general elections. This by itself appears a large jump from ₹9-10 bn of projects awarded/under implementation.

 Project is the king, Sagarmala the monitoring agency. Unlike other state programs, Sagarmala Development Corporation would act as a holding company. For none of its projects does it envisage to be the lead member, letting other state (NHAI, RVNL, ports trusts, state governments) and private entities to be the leading investment partners. Its scope is limited to (1) fast-track finalization of bankable projects, (2) bringing together stakeholders (private, state entities) for investments and (3) to have the stake enough to monitor the progress of such projects. Sagarmala in no way would provide any sovereign guarantee to any of its projects. Most projects would involve a project management consultant designing the project and an SPV monitoring the same.

 Select projects of relevance

. Heavy haul corridor. This is the key rail connectivity project connecting Salegaon to Paradip. The ₹40 bn project cost would eventually pave the way for moving the 250 MMT 2020 aspirational target of coal production by MCL (3X of current throughput) by coastal shipping (8X the current coastal throughput of coal). This project has several firsts: (1) the part from Salegaon to Paradip is being developed without equity participation by Indian Railways, (2) the heavy haul corridor would have the capability to carry 4X the load of a normal rake (superior engines, wagon and structures), (3) heavy haul nature of corridor would lead to a longer 5-year period of implementation versus a normal 3-year period of doubling and (4) the additional 3rd and 4th line would be dedicated to freight movement. The base-case IRR for the project is more than 25%; 15%+ even in cash of a stressed scenario. The same would be accompanied by development of the outer harbor by Paradip port (lead member in the project).

. Coastal economic zones. While 14 coastal economic zones are being targeted, the initial focus remains on four. These include Vizag and Kandla CEZs as well as other CEZs planned in Maharashtra and Tamil Nadu.

. Dighi port. Dighi port is a good example of a bankable project. The port is operating at one-third of its capacity on account of evacuation constraints. The related project SPV has the port promoter and RVNL as lead members and with Sagarmala Development Corporation as a 12% shareholder in the ₹7.7 bn project.

. Vizag connectivity project. For the ₹5 bn road connectivity project for Vizag port, an SPV has been formed with the government of AP State Public Works Department (₹2.5 bn) and SDC (₹1 bn). For the remaining ₹1.5 bn, means of funding being considered are (1) ₹1 surcharge per container serviced and (2) raising the same through loans (AAA rating achieved for the same with the support of the government).

 Fishing harbor project. The fishing harbor being planned in Andhra Pradesh district would give fishermen access to various services including cold-chain. Eventually fishermen would pay for such services. SDC is again a minority 25% shareholder in the project SPV.

KOTAK INSTITUTIONAL EQUITIES RESEARCH 99

December 2016: Results calendar Daily Summary India

KOTAK INSTITUTIONAL EQUITIES EQUITIES INSTITUTIONAL KOTAK Mon Tue Wed Thu Fri Sat Sun 23-Jan 24-Jan 25-Jan 26-Jan 27-Jan 28-Jan 29-Jan Ashoka Buildcon Ajanta Pharma Alembic Pharma Bharat Electron Larsen & Toubro Asian Paints Bharat Financial Arvind Ltd Colgate-Palmolive Bharti Infrastructure Bharti Airtel Ashok Leyland India Cements Hindustan Unilever Biocon Cholamandalam Inv.&Fn ITC Idea Cellular HCL Technologies Exide Industries Just Dial JSW Energy HDFC Bank IDFC Bank SPARC Karnataka Bank IDBI Bank IIFL Holdings

Tata Comm Karnataka Bank IRB Infra.Devl. L&T Fin.Holdings Karur Vysya Bank M & M Fin. Services Kotak Mah. Bank TVS Motor Co. Maruti Suzuki

Wockhardt Oberoi Realty - RESEARCH

Supreme Inds. January 25, 2017 Tata Elxsi UPL Wipro

30-Jan 31-Jan 1-Feb 2-Feb 3-Feb 4-Feb 5-Feb Bajaj Finance Bajaj Auto Apollo Tyres Dr Lal Pathlabs ACC Carborundum Universal Bajaj Finserv Bajaj Holdings Cummins India Glenmark Pharmaceuticals Aditya Bir. Fas. Divi's Laboratories Dish TV Cadila Healthcare Eicher Motors Godrej Properties Dalmia Bharat Dr Reddy's Labs Emami Century Textiles Equitas Holdings TeamLease Services JK Lakshmi Cement J K Cement GE T&D India Dabur India Guj Pipavav Port Timken MRF J&K Bank Godrej Consumer I D F C Pidilite Inds. Torrent Pharma. Orient Cement Grasim Inds I O C L Tata Global H D F C ICICI Bank

Info Edge (India) Interglobe Aviat Pfizer JSW Steel Shree Cement Kansai Nerolac Shri.City Union. Kaveri Seed Tech Mahindra KEC International MphasiS O N G C Oil India Shriram Trans. WABCO India 6-Feb 7-Feb 8-Feb 9-Feb 10-Feb 11-Feb 12-Feb Guj.St.Petronet Blue Dart Exp. Coffee Day Enterprises A B B Berger Paints Glaxosmit Pharma Jubilant Foodw orks Cera Sanitaryw are Thermax B P C L M & M Dhanuka Agritech Union Bank (I) Bata India Tata Pow er Co. Gillette India Lupin Hexaw are Technology Magma Fincorp IDBI Bank Page Industries Jubilant Life Torrent Pow er P & G Hygiene

Rajesh Exports Daily Summary India The Ramco Cement Titan Company

13-Feb 14-Feb 15-Feb 16-Feb 17-Feb 18-Feb 19-Feb Britannia Industries Apollo Hospitals Container Corporation Godrej Inds. Hindalco Industries P I Inds. Motherson Sumi S H Kelkar and Company Suprajit Engineering 20-Feb 21-Feb 22-Feb 23-Feb 24-Feb 25-Feb 26-Feb Mahindra CIE Automotive

Source: NSE, Kotak Institutional Equities -

January January 25, 2017 100

Kotak Institutional Equities: Valuation summary of KIE Universe stocks

Target O/S 101 Price (Rs) price Upside Mkt cap. shares EPS (Rs) EPS growth (%) PER (X) EV/EBITDA (X) Price/BV (X) Dividend yield (%) RoE (%) ADVT-3mo Company Rating 24-Jan-17 (Rs) (%) (Rs mn) (US$ mn) (mn) 2017E 2018E 2019E 2017E 2018E 2019E 2017E 2018E 2019E 2017E 2018E 2019E 2017E 2018E 2019E 2017E 2018E 2019E 2017E 2018E 2019E (US$ mn)

Automobiles Amara Raja Batteries SELL 858 765 (10.8) 146,574 2,151 171 29.4 34.7 39.4 2.6 18.1 13.5 29.2 24.7 21.8 16.7 14.4 12.8 5.9 5.0 4.3 0.7 0.8 0.9 21.9 21.9 21.1 3.7 Apollo Tyres BUY 185 250 35.1 94,195 1,382 509 20.6 21.9 27.6 2.1 6.3 26.1 9.0 8.5 6.7 5.8 5.4 4.2 1.4 1.2 1.0 1.0 1.1 1.4 16.0 15.1 16.5 7.8 Ashok Leyland SELL 89 70 (21.1) 252,429 3,704 2,846 3.7 4.5 5.5 4.6 23.1 21.3 24.3 19.7 16.3 12.8 10.9 9.3 4.1 3.6 3.2 1.2 1.5 1.8 17.8 19.4 20.7 13.0 Bajaj Auto ADD 2,799 2,850 1.8 809,924 11,885 289 138.4 158.7 182.1 9.7 14.7 14.7 20.2 17.6 15.4 14.7 12.4 10.3 5.6 4.8 4.1 2.0 2.3 2.6 30.0 29.4 28.8 10.7 Balkrishna Industries ADD 1,126 1,250 11.0 108,881 1,598 97 71.7 85.5 99.2 20.3 19.2 16.1 15.7 13.2 11.4 10.0 8.2 6.7 3.2 2.6 2.2 0.5 0.6 0.6 22.4 21.8 20.9 1.9 Bharat Forge SELL 941 810 (13.9) 219,118 3,215 237 25.6 34.3 43.2 (6.5) 34.3 25.6 36.8 27.4 21.8 18.1 14.4 11.8 5.5 4.8 4.1 0.6 0.8 1.0 16.0 18.8 20.5 12.3 Eicher Motors SELL 23,001 17,300 (24.8) 625,701 9,182 27 599.3 739.6 877.1 27.4 23.4 18.6 38.4 31.1 26.2 28.6 23.4 19.0 17.6 11.9 8.6 0.1 0.1 0.1 46.5 45.7 38.0 20.9 Exide Industries SELL 197 165 (16.2) 167,323 2,455 850 7.9 8.6 9.3 8.3 8.4 8.5 24.8 22.9 21.1 15.0 13.9 12.6 3.4 3.2 2.9 1.3 1.5 1.5 14.5 14.4 14.4 5.7 FAG Bearings BUY 3,900 5,000 28.2 64,807 951 17 120.4 161.3 196.3 1.3 34.0 21.7 32.4 24.2 19.9 18.5 14.3 11.6 4.4 3.9 3.5 0.3 0.8 1.5 14.5 17.1 18.4 0.3 Hero Motocorp REDUCE 3,134 2,900 (7.5) 625,893 9,185 200 174.0 187.4 204.8 11.0 7.6 9.3 18.0 16.7 15.3 12.0 11.0 9.8 6.7 5.8 5.0 2.8 3.0 3.3 40.2 37.1 35.2 18.8 Mahindra & Mahindra ADD 1,221 1,375 12.6 758,167 11,126 569 65.8 74.2 83.2 13.5 12.7 12.2 18.6 16.5 14.7 12.5 11.1 9.9 2.8 2.5 2.2 1.3 1.5 1.7 15.8 15.9 16.0 17.6 Maruti Suzuki BUY 5,737 6,300 9.8 1,733,094 25,432 302 249.0 299.2 347.1 64.5 20.2 16.0 23.0 19.2 16.5 14.3 11.2 9.3 5.4 4.5 3.8 1.1 1.3 1.5 25.4 25.5 24.8 60.8 Minda Corp. REDUCE 93 105 13.1 19,435 285 209 5.5 6.6 8.4 19.0 19.1 28.1 16.8 14.2 11.0 8.7 7.4 6.2 3.0 2.5 2.1 0.6 0.6 0.7 18.8 19.1 20.4 0.3 Motherson Sumi Systems SELL 331 280 (15.4) 464,314 6,814 1,323 11.7 14.6 17.3 20.6 25.7 18.2 28.4 22.6 19.1 11.5 9.4 7.9 5.9 5.0 4.3 1.1 1.3 1.6 27.0 24.1 24.3 11.8 SKF REDUCE 1,289 1,400 8.6 67,959 997 53 48.0 55.6 64.5 (0.5) 15.9 16.0 26.9 23.2 20.0 17.4 14.8 12.5 3.9 3.5 3.2 1.1 1.3 1.5 15.3 16.1 16.8 0.7 Suprajit Engineering REDUCE 194 190 (1.9) 25,434 373 131 7.6 9.1 10.8 39.5 18.9 19.0 25.3 21.3 17.9 14.2 12.2 10.5 4.8 4.1 3.5 0.7 0.9 1.1 20.6 20.8 21.1 0.1 Tata Motors BUY 542 600 10.8 1,735,735 25,471 3,396 34.1 49.7 59.5 (11.8) 45.5 19.7 15.9 10.9 9.1 5.8 4.5 3.8 2.0 1.7 1.4 - - - 13.4 16.7 16.9 56.8 Timken ADD 643 630 (2.0) 43,704 641 68 16.2 21.2 26.4 17.4 30.5 24.7 39.6 30.4 24.4 22.9 17.7 14.5 7.1 5.9 5.1 0.3 0.3 1.2 19.3 21.1 22.4 0.5 TVS Motor SELL 400 260 (35.1) 190,225 2,791 475 11.5 14.3 17.4 50.2 24.4 21.1 34.8 27.9 23.1 20.3 16.6 13.9 9.7 7.8 6.3 0.8 0.9 1.1 30.9 31.0 30.3 9.1 WABCO India BUY 5,248 6,300 20.1 99,535 1,461 19 133.8 157.2 191.1 24.0 17.5 21.6 39.2 33.4 27.5 24.9 20.8 16.8 7.8 6.4 5.3 0.2 0.2 0.3 21.7 21.0 21.1 1.1 Automobiles Neutral 8,326,155 122,183 10.7 25.5 17.1 20.8 16.6 14.2 10.4 8.4 7.1 3.7 3.2 2.7 1.0 1.1 1.3 17.9 19.1 19.0 254.4 Banks Axis Bank ADD 451 500 10.8 1,079,158 15,836 2,383 14.4 29.9 42.6 (58.1) 106.6 42.6 31.2 15.1 10.6 — — — 2.2 1.9 1.6 0.5 1.0 1.5 6.3 12.1 15.4 65.3 Bank of Baroda REDUCE 156 160 2.5 359,564 5,276 2,310 7.8 19.7 24.9 133.3 153.4 26.6 20.1 7.9 6.3 — — — 1.5 1.2 1.0 1.0 2.5 3.2 4.9 11.6 13.4 22.3 Bank of India ADD 115 125 8.8 121,132 1,778 817 (2.3) 28.0 38.8 96.9 1,303.6 38.8 (49.4) 4.1 3.0 — — — 1.0 0.7 0.5 (0.4) 4.9 6.8 (0.9) 9.9 12.6 6.5 Canara Bank REDUCE 278 275 (1.0) 150,843 2,214 543 20.8 55.8 60.6 140.2 167.5 8.6 13.3 5.0 4.6 — — — 1.1 1.0 0.7 — — — 3.5 9.3 9.6 15.3 City Union Bank REDUCE 144 140 (2.6) 86,020 1,262 598 8.1 9.6 10.7 9.4 18.3 10.8 17.7 14.9 13.5 — — — 2.7 2.3 2.0 0.9 1.1 1.2 15.0 15.6 15.3 1.8 DCB Bank ADD 119 140 17.5 33,948 498 284 6.8 7.9 10.3 (1.0) 17.4 29.3 17.6 15.0 11.6 — — — 1.9 1.7 1.4 — — — 10.5 11.0 12.7 2.7 Equitas Holdings ADD 160 170 6.3 53,643 787 270 4.7 6.0 8.7 (24.6) 29.2 44.2 34.3 26.5 18.4 — — — 2.5 2.3 2.1 — — — 8.8 8.7 11.4 2.4 Federal Bank BUY 79 90 14.6 135,155 1,983 1,719 4.8 6.2 6.9 74.7 27.6 11.8 16.2 12.7 11.4 — — — 1.7 1.5 1.4 1.6 2.0 2.2 9.9 11.7 12.0 11.8 HDFC Bank ADD 1,268 1,350 6.5 3,236,052 47,488 2,528 57.3 66.7 76.9 17.8 16.3 15.3 22.1 19.0 16.5 — — — 3.9 3.3 2.9 0.9 1.0 1.2 18.5 18.7 18.6 28.7 ICICI Bank BUY 257 320 24.4 1,496,802 21,965 5,849 16.2 21.1 25.8 (2.4) 29.9 22.2 15.8 12.2 10.0 — — — 1.9 1.7 1.5 1.9 2.5 3.0 10.2 12.3 13.8 63.9 IDFC Bank ADD 64 80 25.7 216,148 3,172 — 3.4 4.2 5.6 182.4 23.1 34.3 18.8 15.2 11.3 — — — 1.5 1.4 1.3 1.1 1.3 1.8 8.2 9.4 11.6 13.4 IndusInd Bank ADD 1,252 1,275 1.9 748,054 10,977 595 48.7 56.8 65.9 26.7 16.5 16.1 25.7 22.1 19.0 — — — 3.8 3.3 2.9 0.5 0.6 0.7 15.8 15.9 16.1 23.2 J&K Bank BUY 63 80 26.8 30,589 449 485 (15.3) 12.6 15.7 (278.2) 182.2 24.8 (4.1) 5.0 4.0 — — — 0.9 0.6 0.5 (4.9) 4.1 5.1 (12.1) 10.0 11.5 0.9 Karur Vysya Bank BUY 85 100 17.0 51,639 758 609 9.8 10.4 13.9 4.8 7.0 33.1 8.8 8.2 6.1 — — — 1.1 1.0 0.9 14.3 15.3 20.3 12.4 12.2 14.8 1.0 Oriental Bank of Commerce ADD 114 120 5.3 39,463 579 321 14.0 26.7 48.4 189.0 90.4 81.3 8.1 4.3 2.4 — — — 0.7 0.6 0.4 2.5 4.7 8.5 3.0 5.5 9.5 5.9 India Daily Summary Daily Summary India Punjab National Bank REDUCE 131 125 (4.9) 279,615 4,103 1,964 8.0 23.7 25.8 139.3 197.2 9.2 16.5 5.6 5.1 — — — 1.8 1.2 0.9 1.2 3.6 3.9 4.5 12.2 12.1 22.6 Ujjivan Financial Services ADD 351 375 7.0 41,444 608 101 20.1 14.6 15.0 14.5 (27.0) 2.5 17.5 23.9 23.4 — — — 2.3 2.2 2.0 0.4 0.4 0.4 16.0 9.4 8.8 6.2 State Bank of India BUY 255 320 25.5 1,978,732 29,037 7,763 16.4 28.5 35.5 28.1 73.4 24.5 15.5 8.9 7.2 — — — 1.4 1.2 1.0 1.1 1.2 1.3 7.7 11.3 12.6 65.8 Union Bank ADD 139 145 4.4 95,451 1,401 687 15.1 36.4 47.0 (23.3) 141.5 29.0 9.2 3.8 3.0 — — — 1.0 0.7 0.5 1.1 2.6 3.4 5.0 11.1 12.8 10.1 YES Bank REDUCE 1,359 1,275 (6.2) 574,785 8,435 421 76.1 79.9 93.2 26.0 5.0 16.6 17.9 17.0 14.6 — — — 3.6 3.1 2.7 0.9 1.0 1.1 21.2 19.0 19.0 48.8 Banks Attractive 10,808,238 158,606 76.9 61.7 23.1 19.6 12.1 9.9 1.6 1.4 1.3 1.0 1.4 1.7 7.9 11.7 12.9 418.7 NBFCs Bajaj Finserv REDUCE 3,129 2,950 (5.7) 497,891 7,306 159 143.4 170.4 203.2 17.1 18.8 19.2 21.8 18.4 15.4 — — — 3.5 3.0 2.6 0.4 0.4 0.4 16.4 17.4 17.9 11.6 Cholamandalam ADD 1,010 1,250 23.8 157,828 2,316 156 44.7 55.1 67.3 23.4 23.4 22.1 22.6 18.3 15.0 — — — 4.0 3.4 2.9 0.5 0.7 0.8 17.6 18.6 19.3 5.8 HDFC ADD 1,281 1,550 21.0 2,029,860 29,787 1,580 51.0 55.6 64.8 7.8 9.0 16.5 25.1 23.0 19.8 — — — 5.0 4.4 3.6 1.4 1.5 1.8 21.4 20.4 20.4 48.7 IDFC BUY 59 80 36.4 93,602 1,374 1,594 5.4 6.5 8.5 192.7 18.7 31.0 10.8 9.1 6.9 — — — 0.8 0.8 0.7 0.5 0.6 0.7 12.6 14.0 16.9 4.6 IIFL Holdings ADD 286 330 15.2 90,918 1,334 317 21.6 23.5 27.8 34.1 8.7 18.2 13.2 12.2 10.3 — — — 2.1 1.8 1.6 1.0 1.1 1.2 21.2 19.0 19.6 1.0 L&T Finance Holdings BUY 98 125 27.4 172,248 2,528 1,754 2.9 7.5 8.4 (40.0) 157.6 11.9 33.6 13.0 11.7 — — — 2.3 2.0 1.8 0.8 2.0 2.2 7.0 16.3 16.3 8.2

KOTAK INSTITUTIONAL EQUITIES RESEARCH EQUITIES INSTITUTIONAL KOTAK LIC Housing Finance BUY 526 650 23.5 265,629 3,898 505 42.2 46.5 55.3 16.4 10.0 19.1 12.5 11.3 9.5 — — — 2.3 1.9 1.6 1.2 1.3 1.6 19.4 20.1 20.3 22.8 Mahindra & Mahindra Financial REDUCE 278 260 (6.4) 157,946 2,318 565 10.6 14.3 18.5 (10.7) 34.5 29.0 26.1 19.4 15.0 — — — 2.7 2.4 2.2 1.0 1.3 1.7 9.5 11.9 14.0 10.2 Max Financial Services ADD 563 595 5.7 150,486 2,208 267 7.0 7.1 7.2 62.8 1.5 1.5 80.2 79.0 77.8 — — — 0.5 0.5 0.5 10.9 10.5 10.0 2.0 Muthoot Finance ADD 299 375 25.5 119,256 1,750 399 26.8 27.9 30.1 32.2 4.0 7.8 11.1 10.7 9.9 — — — 1.9 1.7 1.5 2.7 2.8 3.0 17.9 16.7 16.2 2.4

PFC REDUCE 134 120 (10.7) 354,959 5,209 2,640 23.9 21.5 25.5 3.3 (10.3) 18.7 5.6 6.3 5.3 — — — 0.9 1.1 1.0 3.6 3.2 3.8 15.5 12.5 13.4 7.1 -

Rural Electrification Corp. ADD 142 145 2.4 279,747 4,105 1,975 29.0 19.8 21.8 1.8 (31.9) 10.3 4.9 7.2 6.5 — — — 1.0 1.1 1.0 4.4 3.0 3.3 19.2 12.0 12.1 10.4 January 25, 2017 Shriram City Union Finance REDUCE 1,999 1,900 (4.9) 131,798 1,934 66 99.7 132.5 167.2 24.5 32.8 26.2 20.0 15.1 12.0 — — — 2.7 2.4 2.1 0.6 0.7 0.9 13.5 15.8 17.2 1.8 Shriram Transport ADD 943 1,250 32.5 214,030 3,141 223 69.8 83.8 99.6 32.2 20.0 18.8 13.5 11.3 9.5 — — — 2.0 1.8 1.6 1.0 1.2 1.5 14.4 15.3 15.9 12.7 NBFCs Neutral 4,809,760 70,581 15.7 3.9 18.5 14.6 14.1 11.9 2.4 2.2 1.9 1.5 1.5 1.7 16.5 15.4 15.8 418.7

Source: Company, Bloomberg, Kotak Institutional Equities estimates

Kotak Institutional Equities: Valuation summary of KIE Universe stocks India Daily Summary Daily Summary India Target O/S Price (Rs) price Upside Mkt cap. shares EPS (Rs) EPS growth (%) PER (X) EV/EBITDA (X) Price/BV (X) Dividend yield (%) RoE (%) ADVT-3mo Company Rating 24-Jan-17 (Rs) (%) (Rs mn) (US$ mn) (mn) 2017E 2018E 2019E 2017E 2018E 2019E 2017E 2018E 2019E 2017E 2018E 2019E 2017E 2018E 2019E 2017E 2018E 2019E 2017E 2018E 2019E (US$ mn)

KOTAK INSTITUTIONAL EQUITIES EQUITIES INSTITUTIONAL KOTAK Cement ACC SELL 1,359 1,275 (6.2) 255,128 3,744 188 31.7 49.5 73.2 (20.0) 56.2 47.9 42.9 27.5 18.6 19.9 14.0 10.0 3.0 2.8 2.5 1.3 1.3 1.3 7.0 10.4 14.2 8.7 Ambuja Cements REDUCE 223 210 (6.0) 443,593 6,510 1,552 5.5 7.9 11.5 (0.4) 41.9 45.7 40.3 28.4 19.5 15.0 10.4 7.4 3.2 3.0 2.8 1.5 1.5 1.5 8.8 10.9 14.9 10.5 Dalmia Bharat ADD 1,835 1,800 (1.9) 163,142 2,394 89 27.6 86.7 121.7 28.6 214.0 40.2 66.4 21.2 15.1 12.9 9.3 7.5 4.0 3.4 2.8 0.1 0.1 0.1 6.2 17.3 20.2 1.9 Grasim Industries ADD 911 990 8.6 425,416 6,243 467 71.8 85.9 98.2 30.7 19.7 14.3 12.7 10.6 9.3 6.3 4.8 3.7 1.5 1.3 1.1 0.5 0.5 0.5 12.2 13.0 13.1 9.7 India Cements SELL 143 95 (33.7) 44,019 646 307 4.7 7.5 9.3 3.0 57.7 25.1 NM 19.2 15.4 9.5 8.0 7.1 1.2 1.1 1.1 1.5 1.5 1.5 3.9 6.0 7.2 8.1 J K Cement ADD 730 880 20.5 51,055 749 70 23.4 66.5 87.5 174.4 183.7 31.7 31.2 11.0 8.3 11.9 7.4 6.0 2.9 2.3 1.8 0.5 0.5 0.5 9.7 23.6 24.7 0.3 JK Lakshmi Cement ADD 355 440 24.0 41,749 613 118 6.6 26.9 40.6 234.0 307.2 51.0 53.8 13.2 8.7 14.9 7.4 5.6 3.0 2.5 2.0 0.6 0.6 0.6 5.7 20.5 25.0 0.8 Orient Cement ADD 128 160 25.1 26,203 385 205 0.7 12.1 16.3 (77.9) 1,691.1 35.6 190.1 10.6 7.8 17.1 7.3 5.9 2.7 2.2 1.8 1.4 1.4 1.4 1.4 22.7 25.1 0.8

Shree Cement SELL 15,698 12,750 (18.8) 546,882 8,025 35 438.6 569.6 735.7 280.2 29.9 29.2 35.8 27.6 21.3 18.6 14.4 11.4 7.2 5.8 4.6 0.2 0.2 0.2 22.2 23.2 23.9 4.1 UltraTech Cement SELL 3,657 2,750 (24.8) 1,003,696 14,729 274 96.3 126.3 159.2 21.5 31.2 26.0 38.0 28.9 23.0 20.7 16.1 13.0 4.4 3.8 3.3 0.3 0.3 0.3 12.1 14.1 15.5 21.4 Cement Cautious 3,000,882 44,037 36.5 41.8 28.5 30.4 21.5 16.7 13.7 10.1 8.0 3.2 2.8 2.5 0.6 0.6 0.6 10.5 13.2 14.7 66.1 Consumer products

Asian Paints REDUCE 973 900 (7.5) 933,731 13,702 959 19.8 22.3 26.4 5.8 12.5 18.5 49.1 43.7 36.9 30.5 26.8 22.7 14.3 12.4 10.8 0.9 1.0 1.2 31.3 30.4 31.3 23.6 -

RESEARCH

Bajaj Corp. BUY 394 450 14.3 58,063 852 148 16.8 18.8 21.0 5.9 11.8 11.7 23.4 21.0 18.8 20.0 17.2 14.7 11.4 10.4 9.5 2.9 3.3 3.7 50.0 52.0 53.2 0.4 Britannia Industries ADD 3,148 3,300 4.8 377,805 5,544 120 71.8 91.1 110.6 3.3 26.8 21.4 43.8 34.6 28.5 29.4 23.0 18.8 16.6 12.9 10.1 0.8 1.0 1.1 42.7 42.0 39.7 8.0 January 2017 25, Coffee Day Enterprises ADD 197 250 26.7 40,654 597 206 2.0 6.2 9.1 142.1 218.7 46.2 100.8 31.6 21.6 12.0 10.3 9.2 1.9 1.8 1.6 — — — 1.9 5.7 7.8 0.4 Colgate-Palmolive (India) ADD 899 1,040 15.7 244,461 3,587 272 22.2 26.8 32.6 4.6 20.9 21.5 40.5 33.5 27.6 24.0 20.0 16.5 19.4 15.5 12.4 1.3 1.4 1.7 52.9 51.4 49.8 3.9 Dabur India REDUCE 277 270 (2.6) 488,470 7,168 1,759 7.0 8.1 9.2 0.3 15.3 13.5 39.4 34.2 30.1 32.6 27.9 24.2 10.2 8.8 7.7 1.0 1.1 1.4 27.7 27.6 27.2 5.8

GlaxoSmithKline Consumer ADD 5,052 5,700 12.8 212,479 3,118 42 146.3 169.1 192.8 (5.3) 15.5 14.0 34.5 29.9 26.2 23.5 19.8 16.8 8.0 7.4 6.8 1.6 1.9 2.2 24.1 25.6 26.9 3.2 Godrej Consumer Products REDUCE 1,530 1,330 (13.1) 521,051 7,646 341 38.4 44.3 50.9 10.8 15.2 14.9 39.8 34.5 30.1 28.8 24.4 20.9 8.9 7.4 6.2 0.4 0.4 0.4 24.0 23.5 22.4 4.8 Hindustan Unilever REDUCE 860 860 (0.0) 1,862,034 27,325 2,164 19.3 22.0 25.4 0.6 14.3 15.3 44.7 39.1 33.9 30.6 26.5 22.7 29.8 29.3 29.0 2.0 2.1 2.4 66.5 75.5 85.9 14.2 ITC ADD 260 260 0.1 3,149,736 46,221 12,104 8.0 9.3 10.5 4.0 16.2 12.6 32.4 27.9 24.7 21.3 18.2 16.0 9.0 8.5 8.1 2.0 2.4 2.9 26.3 29.8 32.9 38.8 Jubilant Foodworks REDUCE 840 820 (2.3) 55,363 812 66 14.8 20.9 30.4 (6.7) 41.1 45.3 56.6 40.1 27.6 19.1 14.7 10.9 7.0 6.3 5.5 0.5 0.7 1.0 12.8 16.5 21.2 7.8 Jyothy Laboratories NR 352 — — 63,983 939 181 9.5 10.7 11.1 31.6 12.3 3.9 36.9 32.8 31.6 25.9 22.1 19.3 8.0 7.4 7.0 1.4 1.7 2.0 26.5 23.5 22.8 0.5 Manpasand Beverages REDUCE 621 660 6.2 35,557 522 50 13.0 19.7 27.2 28.9 51.6 38.0 47.7 31.5 22.8 21.9 16.0 10.7 3.1 2.8 2.5 0.2 0.3 0.5 8.4 9.3 11.7 1.2 Marico REDUCE 259 255 (1.4) 333,561 4,895 1,290 6.0 7.2 8.2 7.9 19.1 14.4 42.9 36.0 31.5 29.4 24.8 21.5 13.8 11.9 10.3 1.2 1.4 1.5 34.5 35.6 35.1 5.5 Nestle India SELL 5,958 5,550 (6.8) 574,421 8,429 96 105.8 131.7 156.3 14.1 24.5 18.7 56.3 45.2 38.1 30.9 25.7 22.0 18.8 17.2 15.8 1.1 1.4 1.8 34.7 39.7 43.2 3.9

Page Industries SELL 14,327 11,500 (19.7) 159,798 2,345 11 231.9 290.1 362.2 11.2 25.1 24.9 61.8 49.4 39.6 38.9 31.5 25.4 25.1 19.5 14.8 0.7 0.7 0.7 45.3 44.5 42.5 2.6

PC Jeweller REDUCE 397 360 (9.2) 71,031 1,042 179 20.4 22.2 26.0 (5.0) 8.9 17.0 19.5 17.9 15.3 10.0 8.0 7.1 2.5 2.2 2.0 1.0 1.2 1.4 14.1 13.5 13.4 3.9 Pidilite Industries ADD 656 680 3.6 336,546 4,939 513 16.5 18.5 21.3 11.9 12.3 15.2 39.8 35.5 30.8 26.3 23.3 20.0 10.2 8.7 7.4 0.8 0.9 1.1 27.7 26.3 25.9 3.9 S H Kelkar and Company SELL 319 250 (21.6) 46,112 677 145 7.8 9.5 10.7 48.1 21.4 13.0 40.9 33.7 29.8 24.3 20.9 18.3 5.5 5.0 4.5 0.7 0.9 1.0 14.1 15.5 15.9 0.8 Tata Global Beverages ADD 128 140 9.0 81,069 1,190 631 6.5 7.5 8.6 31.5 14.8 14.9 19.6 17.1 14.9 9.9 8.9 7.9 1.4 1.3 1.2 1.8 1.9 2.3 7.1 7.8 8.5 3.7 Titan Company REDUCE 364 330 (9.4) 323,465 4,747 888 9.6 11.3 13.0 22.6 18.1 15.2 38.0 32.2 27.9 25.7 21.5 18.3 8.1 7.0 6.1 0.9 1.0 1.2 22.7 23.3 23.4 9.8 United Breweries SELL 824 680 (17.5) 217,870 3,197 264 11.6 15.3 19.0 3.0 31.9 23.7 70.8 53.7 43.4 29.3 24.6 21.2 9.2 8.1 7.0 0.2 0.3 0.3 13.8 16.1 17.3 4.0 United Spirits ADD 2,209 2,400 8.7 320,971 4,710 145 30.8 47.4 66.4 154.9 54.1 40.1 71.8 46.6 33.2 31.3 24.8 19.2 13.7 9.1 6.4 — — — 21.7 23.5 22.7 11.5 Consumer products Cautious 10,508,230 154,204 7.0 17.6 15.9 39.6 33.7 29.1 25.5 21.7 18.6 10.7 9.6 8.6 1.4 1.6 1.9 27.1 28.5 29.7 162.1 Energy BPCL REDUCE 682 660 (3.3) 986,865 14,482 1,446 56.1 54.0 57.7 9.1 (3.7) 6.8 12.2 12.6 11.8 8.5 7.8 7.3 3.1 2.6 2.3 2.5 2.4 2.5 27.3 22.4 20.9 25.4 Cairn India ADD 275 260 (5.6) 516,517 7,580 1,875 12.8 15.8 20.0 11.7 24.0 26.1 21.5 17.4 13.8 10.5 9.9 7.4 1.0 1.0 0.9 1.3 1.6 2.5 4.8 5.8 7.0 9.3 Castrol India ADD 402 470 16.9 198,789 2,917 495 13.5 14.8 16.0 12.0 9.5 8.1 29.8 27.2 25.2 19.1 17.9 16.5 30.6 27.4 23.9 2.5 2.7 2.9 108.9 106.2 101.3 5.1 GAIL (India) ADD 475 490 3.3 601,956 8,833 1,268 29.5 36.0 40.1 64.4 22.0 11.3 16.1 13.2 11.8 9.9 8.3 7.4 1.8 1.7 1.5 2.1 2.3 2.5 11.7 13.1 13.4 14.2 GSPL ADD 155 175 12.9 87,373 1,282 563 8.8 11.2 12.1 11.9 27.1 8.1 17.6 13.8 12.8 9.0 7.1 6.4 2.0 1.8 1.7 1.3 1.8 2.3 12.0 13.9 13.7 1.0 HPCL REDUCE 518 460 (11.2) 526,176 7,721 1,017 48.1 42.9 43.7 26.7 (10.8) 1.8 10.8 12.1 11.8 7.9 8.5 8.6 2.5 2.2 1.9 2.8 2.5 2.6 24.6 19.1 17.3 27.9 Indraprastha Gas ADD 930 880 (5.4) 130,221 1,911 140 46.6 51.1 55.1 40.5 9.7 7.9 20.0 18.2 16.9 11.9 10.8 9.9 4.7 4.1 3.7 1.3 1.7 2.1 25.1 24.1 23.2 8.6 IOCL BUY 367 400 9.1 1,781,146 26,138 4,856 34.9 34.7 35.8 78.8 (0.5) 3.1 10.5 10.6 10.2 6.5 6.4 6.1 2.1 1.9 1.7 2.9 2.9 3.0 21.4 18.7 17.2 18.8 Mahanagar Gas SELL 876 730 (16.6) 86,495 1,269 99 39.8 42.0 44.4 27.2 5.6 5.7 22.0 20.9 19.7 13.2 12.3 11.5 5.0 4.5 4.2 2.0 2.2 2.5 24.2 22.9 22.0 - ONGC SELL 202 180 (10.7) 2,587,180 37,966 12,833 16.0 17.6 19.5 18.5 10.2 10.8 12.6 11.4 10.3 5.4 4.9 4.4 1.3 1.2 1.1 2.7 3.0 3.2 10.7 11.1 11.5 24.1 Oil India SELL 337 320 (5.1) 270,391 3,968 802 29.3 30.5 32.8 0.9 4.2 7.4 11.5 11.0 10.3 6.8 6.5 6.1 1.2 1.1 1.0 3.6 3.7 3.9 10.3 10.1 10.3 3.8 Petronet LNG ADD 372 415 11.7 278,700 4,090 750 21.5 26.1 28.6 91.3 21.8 9.3 17.3 14.2 13.0 11.0 8.8 7.6 3.7 3.1 2.7 1.3 1.9 2.4 23.1 23.9 22.5 9.5 Reliance Industries ADD 1,027 1,160 12.9 3,025,903 44,404 3,240 96.7 100.8 107.7 14.2 4.3 6.8 10.6 10.2 9.5 10.3 8.4 7.5 1.2 1.1 1.0 1.2 1.3 1.5 12.4 11.7 11.3 47.3

India Daily Summary Daily Summary India Energy Attractive 11,077,712 162,561 25.5 5.0 7.7 11.8 11.2 10.4 7.8 7.0 6.4 1.5 1.4 1.3 2.2 2.3 2.6 12.9 12.4 12.3 194.9

Source: Company, Bloomberg, Kotak Institutional Equities estimates

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January January 25, 2017

102

Kotak Institutional Equities: Valuation summary of KIE Universe stocks

103 Target O/S Price (Rs) price Upside Mkt cap. shares EPS (Rs) EPS growth (%) PER (X) EV/EBITDA (X) Price/BV (X) Dividend yield (%) RoE (%) ADVT-3mo Company Rating 24-Jan-17 (Rs) (%) (Rs mn) (US$ mn) (mn) 2017E 2018E 2019E 2017E 2018E 2019E 2017E 2018E 2019E 2017E 2018E 2019E 2017E 2018E 2019E 2017E 2018E 2019E 2017E 2018E 2019E (US$ mn)

Industrials ABB SELL 1,116 1,050 (5.9) 236,500 3,471 212 17.8 25.6 35.2 26.0 43.6 37.6 62.6 43.6 31.7 30.9 23.3 18.2 7.2 6.5 5.7 0.4 0.6 0.8 12.0 15.7 19.2 1.1 BHEL SELL 132 115 (12.7) 322,471 4,732 2,448 2.6 5.5 8.6 169.0 114.8 54.8 51.2 23.8 15.4 22.1 9.2 4.8 1.0 0.9 0.9 0.4 1.1 1.7 1.9 4.0 6.0 11.2 Carborundum Universal REDUCE 249 250 0.3 47,024 690 188 9.7 13.0 16.2 27.0 33.9 24.7 25.8 19.2 15.4 14.3 10.9 8.9 3.6 3.2 2.8 1.2 1.6 1.9 14.7 17.7 19.5 0.8 Crompton Greaves REDUCE 64 60 (6.0) 40,080 588 627 2.2 3.6 5.0 (6.2) 62.7 41.5 29.2 18.0 12.7 9.7 8.2 5.1 0.9 0.9 0.8 0.7 1.0 1.6 3.0 5.0 6.9 5.9 Crompton Greaves Consumer ADD 171 165 (3.7) 107,362 1,575 627 4.0 4.7 5.8 4.6 17.6 23.6 42.8 36.4 29.4 25.6 22.2 18.3 25.1 16.2 11.2 0.6 0.9 1.2 76.6 54.2 45.1 2.0 Cummins India REDUCE 840 850 1.2 232,751 3,416 277 27.6 30.8 34.6 4.4 11.4 12.4 30.4 27.3 24.3 28.5 24.9 21.8 6.7 6.1 5.5 1.7 1.9 2.1 23.0 23.3 23.8 2.4 Havells India REDUCE 413 370 (10.4) 257,940 3,785 624 9.6 11.4 13.0 23.3 18.6 14.7 43.1 36.4 31.7 29.0 23.8 20.3 8.1 7.2 6.6 1.0 1.1 1.4 19.8 21.0 21.7 8.3 Kalpataru Power Transmission BUY 271 300 10.6 41,634 611 153 10.2 13.5 20.2 33.0 32.5 49.9 26.6 20.1 13.4 8.3 7.3 5.9 1.7 1.6 1.4 0.6 0.6 0.6 6.5 8.1 11.2 0.4 KEC International ADD 148 170 15.2 37,946 557 257 9.9 13.3 16.5 33.2 33.6 24.4 14.9 11.1 8.9 7.5 6.5 5.7 2.2 1.9 1.6 0.9 1.2 1.5 15.8 18.2 19.3 0.9 L&T BUY 1,420 1,640 15.5 1,324,215 19,432 930 56.9 73.6 92.0 11.7 29.4 25.0 25.0 19.3 15.4 20.4 16.9 14.3 3.3 3.0 2.7 1.7 2.1 2.6 13.7 16.3 18.6 34.1 Siemens SELL 1,164 900 (22.7) 414,631 6,085 356 23.6 29.3 36.2 38.8 24.2 23.7 49.3 39.7 32.1 29.9 24.2 19.4 6.0 5.7 5.3 1.0 1.3 1.6 12.4 14.6 17.0 3.3 Thermax REDUCE 811 810 (0.2) 96,683 1,419 119 26.8 29.6 37.2 15.8 10.5 26.0 30.3 27.5 21.8 21.6 18.3 15.3 3.7 3.4 3.0 0.7 0.8 0.9 12.9 12.9 14.7 0.3 Voltas ADD 324 325 0.2 107,273 1,574 331 11.2 12.7 15.6 7.0 14.0 22.9 29.0 25.5 20.7 24.2 19.9 15.5 4.1 3.7 3.4 1.0 1.4 1.9 14.7 15.3 17.2 6.9 Industrials Cautious 3,266,511 47,935 37.4 32.0 27.7 32.1 24.3 19.1 21.0 16.8 13.7 3.1 2.9 2.6 1.2 1.5 1.9 9.6 11.8 13.9 77.6 Infrastructure Adani Port and SEZ ADD 293 325 10.9 607,100 8,909 2,085 16.9 14.0 14.7 23.2 (17.2) 4.7 17.3 20.9 19.9 15.2 13.7 13.0 3.7 3.2 2.9 0.5 0.7 0.9 23.8 16.6 15.3 18.9 Ashoka Buildcon BUY 173 235 36.2 32,283 474 188 5.9 5.5 5.9 88.8 (5.7) 6.9 29.3 31.1 29.1 10.0 8.7 7.8 1.7 1.6 1.6 1.1 1.4 1.6 5.8 5.3 5.5 0.3 Container Corporation REDUCE 1,192 1,150 (3.5) 232,360 3,410 195 35.7 40.9 47.2 (11.7) 14.6 15.3 33.4 29.1 25.3 20.9 17.1 14.3 2.7 2.6 2.4 1.0 1.1 1.3 8.4 9.1 9.9 3.9 Gateway Distriparks BUY 242 280 15.7 26,318 386 109 9.6 11.7 15.7 (5.0) 22.3 33.8 25.2 20.7 15.4 10.4 7.9 5.9 2.0 1.9 1.8 1.2 1.5 1.9 8.2 9.5 11.8 0.5 Gujarat Pipavav Port BUY 140 155 11.1 67,440 990 483 4.8 5.5 7.4 40.8 13.9 34.3 28.8 25.3 18.8 15.9 13.1 10.7 3.5 3.5 3.5 2.9 3.3 4.4 12.2 13.8 18.5 0.8 IRB Infrastructure BUY 217 270 24.2 76,388 1,121 351 17.5 17.0 19.6 (3.3) (2.6) 15.1 12.5 12.8 11.1 7.0 7.1 6.3 1.3 1.2 1.2 1.7 1.7 1.8 11.4 9.5 10.5 5.4 Sadbhav Engineering ADD 271 300 10.7 46,496 682 172 10.5 12.7 14.7 33.9 20.8 16.6 25.9 21.4 18.4 16.2 12.8 11.3 2.9 2.6 2.3 — — — 11.6 12.6 13.1 0.3 Infrastructure Attractive 1,088,384 15,972 15.0 (7.9) 10.5 19.9 21.6 19.6 13.0 11.7 10.5 2.9 2.6 2.4 0.9 1.1 1.3 14.5 12.1 12.4 30.0 Internet Info Edge ADD 851 990 16.3 103,088 1,513 121 16.2 21.1 27.1 38.5 30.3 28.2 52.5 40.3 31.4 36.7 27.5 20.4 5.4 4.9 4.5 0.5 0.6 0.8 10.7 12.8 14.9 0.8 Just Dial REDUCE 359 430 19.8 24,948 366 69 17.1 18.8 21.0 (16.3) 10.3 11.5 21.0 19.0 17.1 12.9 9.3 7.5 3.2 2.8 2.4 0.5 0.5 0.6 16.4 15.7 15.3 7.7 Internet Attractive 128,036 1,879 11.1 22.8 22.5 40.7 33.1 27.0 28.6 21.4 16.6 4.8 4.3 3.8 0.5 0.6 0.8 11.8 13.0 14.2 8.5 Media DB Corp. REDUCE 364 380 4.4 66,941 982 184 21.2 24.3 29.2 31.3 14.7 19.8 17.2 15.0 12.5 9.6 8.3 6.7 4.5 4.1 3.7 3.0 3.8 4.7 27.4 28.4 30.8 0.5 DishTV BUY 86 105 22.2 91,614 1,344 1,066 1.9 3.3 4.7 (70.5) 74.6 41.0 NM 25.7 18.2 8.8 7.3 6.4 5.5 5.5 5.5 — — 1.2 12.3 21.4 30.2 7.4 Jagran Prakashan REDUCE 180 180 0.0 58,828 863 327 11.3 12.9 15.0 8.8 14.3 16.1 15.9 13.9 12.0 9.2 7.8 6.7 3.4 3.2 2.8 3.3 3.9 3.9 22.4 23.6 24.9 0.5 Ortel Communications BUY 137 185 35.0 4,162 61 30 4.0 5.6 12.5 1.7 40.6 122.6 34.4 24.4 11.0 8.3 6.9 5.3 2.7 2.5 2.0 — — — 8.3 10.6 20.2 0.0 PVR ADD 1,298 1,250 (3.7) 60,648 890 47 22.3 32.9 42.1 (17.1) 47.8 28.0 58.3 39.4 30.8 18.4 14.6 12.3 6.3 5.5 4.8 0.2 0.3 0.3 11.4 14.9 16.6 3.3 Sun TV Network ADD 525 525 0.0 206,816 3,035 394 26.0 28.5 33.0 11.1 9.6 15.7 20.2 18.4 15.9 12.6 11.2 9.6 5.4 5.0 4.5 2.9 3.2 3.6 27.8 28.1 29.8 15.8 Zee Entertainment Enterprises BUY 479 540 12.6 460,439 6,757 960 12.5 15.5 18.8 32.9 24.2 21.2 38.4 30.9 25.5 21.6 18.6 15.5 4.9 4.5 4.1 0.5 0.7 0.8 15.3 15.1 16.7 16.0

Media Attractive 949,447 13,933 0.4 21.4 21.4 28.7 23.7 19.5 14.3 12.2 10.4 4.9 4.5 4.1 1.3 1.6 1.9 17.1 19.2 21.2 43.5 India Daily Summary Daily Summary India Metals & Mining Coal India REDUCE 309 325 5.0 1,920,883 28,188 6,316 20.7 27.9 31.2 (8.9) 34.9 11.8 15.0 11.1 9.9 9.4 7.2 6.5 5.9 5.4 4.9 4.7 6.3 7.0 36.8 50.7 51.6 14.7 Hindalco Industries REDUCE 187 150 (19.9) 386,679 5,674 2,065 11.8 12.4 12.6 334.9 5.3 1.4 15.9 15.1 14.9 7.8 7.3 7.1 1.0 0.9 0.9 0.5 0.5 0.5 6.2 6.1 5.9 31.6 Hindustan Zinc ADD 304 265 (12.7) 1,283,018 18,828 4,225 19.4 21.6 23.2 0.3 11.0 7.7 15.6 14.1 13.1 10.8 8.6 7.1 3.0 2.6 2.2 1.4 1.4 1.4 20.4 19.5 18.2 8.5 Jindal Steel and Power SELL 81 60 (26.0) 74,153 1,088 915 (24.8) (10.1) (2.8) (36.4) 59.4 72.3 (3.3) (8.0) (28.9) 13.1 9.1 7.6 0.2 0.2 0.2 — — — (8.5) (2.7) (0.7) 9.8 JSW Steel ADD 194 190 (2.0) 468,820 6,880 2,417 9.1 16.1 18.9 961.8 77.3 17.4 21.4 12.1 10.3 8.4 6.8 6.1 2.3 1.9 1.6 0.4 0.4 0.4 10.4 17.3 17.2 15.9 National Aluminium Co. SELL 75 42 (44.3) 145,646 2,137 2,577 3.1 3.4 3.4 15.5 9.0 0.1 24.2 22.2 22.2 11.5 9.6 9.2 1.4 1.3 1.3 1.3 1.3 1.3 5.2 6.2 5.9 2.8 NMDC SELL 147 95 (35.4) 465,092 6,825 3,965 9.1 8.6 8.5 14.4 (5.3) (1.7) 16.2 17.1 17.4 11.3 11.2 11.3 2.0 2.0 1.9 4.1 4.1 4.1 10.8 11.6 11.3 9.4 Tata Steel ADD 464 460 (0.9) 450,887 6,617 971 15.1 50.1 58.7 164.3 232.4 17.1 30.8 9 7.9 9.9 6.8 6.2 1.8 1.5 1.3 1.7 1.7 1.7 5.4 17.7 17.9 37.0 Vedanta ADD 252 235 (6.9) 748,437 10,983 2,965 20.7 26.0 31.3 163.8 25.4 20.4 12.2 9.7 8.1 6.9 5.8 4.7 1.5 1.3 1.2 1.1 1.1 1.1 14.4 14.5 15.4 42.4 Metals & Mining Cautious 5,943,615 87,220 43.9 38.3 13.8 16.5 11.9 10.5 9.0 7.2 6.4 2.0 1.8 1.7 2.5 3.1 3.3 12.2 15.5 16.0 172.1 Pharmaceutical Apollo Hospitals REDUCE 1,174 1,325 12.8 163,389 2,398 139 23.9 33.6 43.0 10.4 40.4 28.1 49.0 34.9 27.3 22.6 18.4 15.6 4.4 4.1 3.7 0.5 0.7 0.9 9.3 12.1 14.2 3.2

KOTAK INSTITUTIONAL EQUITIES RESEARCH EQUITIES INSTITUTIONAL KOTAK Aurobindo Pharma ADD 712 770 8.2 416,407 6,111 584 43.4 47.8 52.3 28.0 10.0 9.4 16.4 14.9 13.6 11.8 10.3 9.1 4.4 3.4 2.8 0.3 0.3 0.4 30.5 25.7 22.4 21.8 Biocon SELL 999 585 (41.4) 199,790 2,932 200 28.7 27.5 32.1 43.8 (4.3) 16.9 34.8 36.3 31.1 20.6 16.9 13.8 4.2 3.8 3.5 1.0 1.0 1.1 12.6 11.0 11.8 12.7 Cipla BUY 580 650 12.1 466,479 6,845 805 19.5 27.3 35.9 16.5 39.8 31.4 29.7 21.2 16.2 17.4 13.0 10.1 3.5 3.1 2.7 0.7 1.0 1.3 12.5 15.6 — 9.6

Dr Lal Pathlabs SELL 1,104 1,000 (9.4) 91,407 1,341 83 20.6 24.1 28.5 29.2 17.0 18.3 53.7 45.9 38.8 34.0 28.3 23.7 14.3 11.4 9.2 0.3 0.3 0.4 29.8 27.6 26.2 1.6 -

Dr Reddy's Laboratories SELL 2,973 2,500 (15.9) 492,563 7,228 171 75.9 125.1 151.6 (45.5) 64.8 21.2 39.2 23.8 19.6 20.2 12.4 9.5 4.0 3.5 3.0 0.4 0.6 0.8 10.0 15.7 16.6 14.1 January January 2017 25, HCG BUY 237 270 14.2 20,120 295 85 2.1 2.2 4.3 1,331.8 4.1 97.6 113.3 108.8 55.1 23.0 18.4 14.2 3.6 3.5 3.3 — — — 3.3 3.3 6.2 0.4 Lupin REDUCE 1,505 1,600 6.3 679,235 9,967 450 65.5 72.7 87.4 29.8 11.0 20.2 23.0 20.7 17.2 15.0 12.9 10.4 5.0 4.2 3.4 0.7 0.7 0.9 24.0 21.9 21.9 20.9 Sun Pharmaceuticals REDUCE 641 715 11.5 1,538,854 22,582 2,406 31.9 32.8 36.9 44.5 2.6 12.7 20.1 19.6 17.4 11.7 10.7 9.0 4.0 3.4 2.9 1.0 1.0 1.2 22.0 18.8 18.0 50.0 Torrent Pharmaceuticals REDUCE 1,293 1,350 4.4 218,856 3,212 169 57.1 61.1 78.3 (44.3) 7.1 28.1 22.7 21.2 16.5 14.8 13.3 10.9 5.3 4.4 1.0 1.1 1.4 25.7 22.8 22.3 3.4 Pharmaceuticals Cautious 4,287,099 62,911 13.8 13.4 17.7 23.7 20.9 17.8 14.6 12.2 10.1 4.3 3.6 3.1 0.7 0.8 1.0 17.9 17.3 17.3 137.7

Source: Company, Bloomberg, Kotak Institutional Equities estimates

Kotak Institutional Equities: Valuation summary of KIE Universe stocks India Daily Summary Daily Summary India Target O/S Price (Rs) price Upside Mkt cap. shares EPS (Rs) EPS growth (%) PER (X) EV/EBITDA (X) Price/BV (X) Dividend yield (%) RoE (%) ADVT-3mo Company Rating 24-Jan-17 (Rs) (%) (Rs mn) (US$ mn) (mn) 2017E 2018E 2019E 2017E 2018E 2019E 2017E 2018E 2019E 2017E 2018E 2019E 2017E 2018E 2019E 2017E 2018E 2019E 2017E 2018E 2019E (US$ mn)

KOTAK INSTITUTIONAL EQUITIES EQUITIES INSTITUTIONAL KOTAK Real Estate DLF BUY 132 160 21.6 234,684 3,444 1,784 3.7 1.6 1.9 18.7 (55.2) 14.2 36.0 80.3 70.3 14.6 15.3 15.0 0.8 0.8 0.8 1.5 1.5 1.5 2.2 1.0 1.1 19.1 Godrej Properties REDUCE 324 280 (13.5) 70,005 1,027 216 9.7 10.5 11.4 (9.3) 8.5 8.3 33.4 30.8 28.4 63.6 52.5 31.8 3.0 2.8 2.6 0.5 0.8 0.8 9.3 9.4 9.5 0.9 Oberoi Realty BUY 313 350 11.9 106,187 1,558 339 10.8 30.9 43.2 (13.7) 185.2 39.9 28.9 10.1 7.2 19.1 6.2 6.5 1.9 1.6 1.3 0.6 0.6 0.6 6.7 17.3 20.2 1.9 Prestige Estates Projects BUY 166 225 35.5 62,288 914 375 7.0 8.4 8.9 (24.8) 18.7 6.3 23.6 19.9 18.7 12.0 11.6 11.1 1.4 1.4 1.3 0.9 0.9 0.9 6.2 7.0 7.1 0.6 Sobha BUY 260 395 51.9 25,044 368 98 14.1 17.3 21.2 (9.9) 22.7 22.8 18.5 15.0 12.3 11.1 10.1 8.9 1.0 0.9 0.9 2.7 2.7 2.7 5.3 6.4 7.5 0.3 Sunteck Realty BUY 240 360 50.2 15,090 221 60 55.8 57.8 113.7 105.4 3.7 96.6 4.3 4.1 2.1 5.3 3.8 1.6 0.7 0.6 0.8 0.8 0.8 18.6 16.3 26.0 0.4 Real Estate Attractive 513,297 7,532 4.9 22.0 36.4 26.1 21.4 15.7 14.7 12.4 11.2 1.1 1.1 1.0 1.2 1.2 1.2 4.3 5.0 6.5 23.3 Technology

HCL Technologies REDUCE 849 840 (1.0) 1,197,825 17,578 1,413 57.5 61.4 64.6 46.4 6.8 5.3 14.8 13.8 13.1 10.4 9.4 8.6 3.7 3.3 3.0 2.9 3.4 3.9 27.3 25.4 24.0 19.1 Infosys ADD 946 1,140 20.6 2,171,876 31,871 2,286 63.0 67.9 74.0 6.7 7.8 9.0 15.0 13.9 12.8 9.6 8.6 7.5 3.3 3.0 2.7 2.9 3.2 3.7 23.5 22.7 22.3 56.2 Mindtree REDUCE 470 490 4.2 78,998 1,159 168 26.0 32.5 39.3 (27.4) 24.8 20.8 18.1 14.5 12.0 10.2 8.1 6.5 2.9 2.6 2.3 1.5 1.9 2.3 17.2 19.0 20.1 4.9 Mphasis SELL 529 460 (13.1) 111,372 1,634 210 38.6 39.8 40.3 11.9 3.2 1.3 13.7 13.3 13.1 8.5 7.8 7.4 1.7 1.6 1.5 3.8 3.8 3.8 12.6 12.3 11.9 0.9

TCS REDUCE 2,318 2,415 4.2 4,568,142 67,036 1,970 134.7 143.2 156.4 9.6 6.3 9.2 17.2 16.2 14.8 12.6 11.2 10.0 5.3 4.5 3.9 2.3 2.5 2.7 33.1 29.9 28.1 41.1 -

RESEARCH Tech Mahindra BUY 470 520 10.7 457,271 6,710 872 33.9 39.9 45.4 (5.3) 17.9 13.8 13.9 11.8 10.3 9.4 7.5 6.2 2.6 2.2 1.9 2.6 1.3 1.5 19.4 19.9 19.3 18.9

Wipro REDUCE 482 485 0.7 1,170,466 17,176 2,467 34.4 38.5 41.3 (4.6) 12.1 7.2 14.0 12.5 11.7 8.4 7.3 6.2 2.3 2.1 1.8 1.0 1.0 1.0 17.2 17.3 16.4 9.2 January 2017 25, Technology Neutral 9,815,600 144,040 9.0 8.0 8.6 15.8 14.6 13.5 10.7 9.5 8.4 3.7 3.3 2.9 2.4 2.5 2.8 23.7 22.6 21.6 153.3 Telecom Bharti Airtel BUY 317 375 18.5 1,265,177 18,566 3,997 11.9 8.0 12.6 21.7 (33.0) 58.6 26.6 39.7 25.1 6.2 6.3 5.4 1.8 1.8 1.8 1.0 0.8 1.5 7.0 4.6 7.1 12.9 Bharti Infratel REDUCE 351 335 (4.5) 648,565 9,517 1,897 14.5 15.8 17.5 15.3 8.9 10.7 24.2 22.2 20.1 10.7 9.9 9.1 3.9 3.8 3.7 3.0 3.1 3.5 15.3 17.3 18.5 10.4 IDEA BUY 76 100 31.8 273,340 4,011 3,601 0.5 (4.8) (3.0) (94.4) (1,095.9) 37.2 157.3 (15.8) (25.2) 6.9 7.4 6.3 1.2 1.3 1.5 1.4 2.7 4.1 0.7 (7.9) (5.6) 9.7 Tata Communications ADD 709 670 (5.5) 202,037 2,965 285 23.1 22.7 28.6 1,306.8 (1.9) 26.5 30.7 31.3 24.7 9.0 8.0 7.3 825.1 30.1 13.6 0.9 0.9 0.9 (334.2) 185.4 75.5 7.5 Telecom Cautious 2,389,119 35,059 (12.2) (39.3) 59.7 28.9 47.6 29.8 7.0 7.0 6.1 2.2 2.2 2.2 1.5 1.6 2.2 7.6 4.6 7.3 40.6 Utilities Adani Power SELL 35 24 (31.8) 122,291 1,795 3,334 (2.0) 4.2 4.2 (233.7) 315.3 (0.2) (18.0) 8.3 8.4 8.7 6.3 5.9 1.7 1.4 1.2 — — — (9.3) 18.9 15.9 5.9 CESC ADD 736 650 (11.7) 97,595 1,432 133 51.4 70.8 92.0 83.9 37.8 30.0 14.3 10.4 8.0 7.8 7.1 6.2 1.0 1.0 0.9 1.4 1.4 1.5 7.4 9.7 11.7 4.4 JSW Energy ADD 61 70 14.5 100,289 1,472 1,640 5.0 6.5 6.8 (33.6) 28.4 5.3 12.1 9.4 9.0 6.5 5.6 5.1 1.1 1.0 1.0 3.3 3.3 3.3 9.4 11.4 11.2 3.5 NHPC ADD 28 27 (2.7) 307,211 4,508 11,071 3.2 3.4 3.6 34.1 6.7 7.2 8.7 8.2 7.6 8.4 6.8 5.9 0.9 0.9 0.9 6.5 6.8 7.3 11.0 11.3 11.7 3.4

NTPC BUY 172 180 4.4 1,421,106 20,854 8,245 12.1 15.3 16.9 (2.3) 26.2 10.5 14.2 11.2 10.2 11.5 9.7 7.9 1.5 1.4 1.3 2.1 2.7 2.9 10.9 12.7 12.9 10.3

Power Grid BUY 203 210 3.3 1,063,844 15,611 5,232 14.5 15.6 17.9 26.9 7.8 14.5 14.1 13.0 11.4 9.9 8.6 7.5 2.2 1.9 1.7 1.4 1.6 1.8 16.6 15.8 16.0 14.4 Reliance Power SELL 44 36 (18.3) 123,566 1,813 2,805 4.8 5.3 5.9 (1.1) 11.1 10.1 9.2 8.3 7.5 8.9 7.7 7.4 0.6 0.5 0.5 — — — 6.2 6.5 6.7 1.8 Tata Power ADD 80 85 6.4 216,111 3,171 2,800 4.6 7.3 9.5 (16.1) 57.3 31.6 17.3 11.0 8.4 10.6 9.0 8.1 1.4 1.3 1.1 1.5 1.5 1.5 8.4 12.3 14.4 5.4 Utilities Attractive 3,452,013 50,657 3.2 28.0 12.4 14.0 11.0 9.8 9.9 8.3 7.3 1.4 1.3 1.2 2.1 2.4 2.6 10.3 12.1 12.4 49.3 Others Astral Poly Technik SELL 380 360 (5.2) 45,481 667 120 10.2 13.0 16.1 21.0 28.2 23.2 37.4 29.2 23.7 19.2 15.4 12.5 5.4 4.6 3.9 0.1 0.2 0.2 15.0 17.1 17.9 0.2 Cera Sanitaryware REDUCE 2,169 2,050 (5.5) 28,205 414 13 73.7 93.2 112.2 14.9 26.4 20.4 29.4 23.3 19.3 17.1 13.6 11.4 5.6 4.6 3.8 0.4 0.5 0.5 20.8 21.8 21.7 0.2 Dhanuka Agritech BUY 739 820 11.0 36,962 542 50 25.6 30.5 37.5 22.4 19.3 22.9 28.9 24.2 19.7 20.5 16.9 13.5 6.4 5.3 4.4 1.0 1.2 1.4 24.1 23.8 24.2 0.3 Godrej Industries REDUCE 430 390 (9.4) 144,641 2,123 336 17.6 20.6 21.7 22.4 17.0 5.0 24.4 20.8 19.8 19.0 16.9 16.8 3.6 3.1 2.7 0.4 0.4 0.4 15.8 16.1 14.7 1.9 HSIL ADD 295 345 17.0 21,324 313 72 16.7 19.1 24.2 35.3 14.9 26.7 17.7 15.4 12.2 8.1 7.0 5.9 1.5 1.4 1.2 1.4 1.4 1.4 8.5 9.1 10.7 0.4 InterGlobe Aviation ADD 930 1,060 14.0 336,166 4,933 351 54.7 76.0 95.1 (3.6) 39.0 25.2 17.0 12.2 9.8 11.6 8.0 6.2 13.4 9.3 6.7 2.9 4.1 5.1 94.1 89.8 79.7 2.7 Kaveri Seed BUY 490 470 (4.2) 33,868 497 69 27.3 38.0 46.2 9.0 38.9 21.8 17.9 12.9 10.6 15.2 10.1 7.9 3.3 2.8 2.5 1.7 2.3 3.3 19.5 23.6 24.8 3.9 PI Industries ADD 894 940 5.2 122,954 1,804 136 31.4 36.1 42.2 35.8 14.9 17.0 28.5 24.8 21.2 22.3 18.5 15.3 8.0 6.3 5.0 0.5 0.5 0.6 31.7 28.3 26.3 3.0 Rallis India ADD 222 250 12.4 43,240 635 194 9.7 12.2 15.3 32.3 25.9 24.7 22.8 18.2 14.6 15.2 11.8 9.3 3.8 3.3 2.9 1.3 1.5 1.6 18.6 19.6 21.2 0.8 SRF BUY 1,665 1,910 14.7 95,605 1,403 57 86.0 102.3 117.6 16.8 19.0 15.0 19.4 16.3 14.2 11.2 9.7 8.5 3.1 2.7 2.3 0.7 0.7 0.8 17.2 17.6 17.4 5.3 Tata Chemicals ADD 521 550 5.6 132,690 1,947 255 32.3 44.6 50.4 5.4 38.0 13.2 16.1 11.7 10.3 8.9 7.0 6.0 2.0 1.5 1.4 1.9 1.9 1.9 12.6 14.6 13.8 6.0 TeamLease Services ADD 887 1,100 24.0 15,165 223 16 22.2 26.8 34.7 39.2 21.0 29.4 40.0 33.1 25.6 29.1 19.0 14.3 4.3 3.8 3.3 — — — 11.5 12.3 14.0 0.2 UPL ADD 730 760 4.2 369,846 5,427 429 34.1 43.7 51.8 7.3 28.1 18.6 21.4 16.7 14.1 12.2 10.3 8.7 3.9 3.2 2.6 0.6 0.7 0.8 21.2 21.0 20.4 15.0 Whirlpool SELL 914 980 7.2 115,961 1,702 127 26.4 32.0 38.5 34.7 21.2 20.6 34.6 28.6 23.7 20.6 17.2 14.3 7.7 6.4 5.3 — 0.7 0.8 25.2 24.5 24.5 1.2 Others 1,569,966 23,039 14.8 27.6 18.2 20.3 15.9 13.5 12.5 10.2 8.6 4.2 3.4 2.9 1.2 1.6 1.9 20.6 21.5 21.5 41.3 KIE universe 81,983,593 1,203,076 21.9 20.6 15.8 18.8 15.6 13.4 10.9 9.3 8.2 2.5 2.3 2.0 1.6 1.8 2.0 13.3 14.5 15.1 KIE universe (ex-energy) 70,905,880 1,040,515 20.9 24.9 17.7 20.7 16.6 14.1 11.9 10.1 8.7 2.8 2.5 2.2 1.5 1.7 2.0 13.4 15.0 15.8

India Daily Summary Daily Summary India

Notes: (a) We have used adjusted book values for banking companies. (b) 2017 means calendar year 2016, similarly for 2018 and 2019 for these particular companies. (c) Exchange rate (Rs/US$)= 68.15 Source: Company, Bloomberg, Kotak Institutional Equities estimates

-

January January 25, 2017

104

Disclosures

Disclosures

"Each of the analysts named below hereby certifies that, with respect to each subject company and its securities for which the analyst is responsible in this report, (1) all of the views expressed in this report accurately reflect his or her personal views about the subject companies and securities, and (2) no part of his or her compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this report: Kawaljeet Saluja, Rohit Chordia, Hitesh Goel, Murtuza Arsiwalla, M.B. Mahesh, Nischint Chawathe, Aditya Mongia, Jaykumar Doshi."

Kotak Institutional Equities Research coverage universe Distribution of ratings/investment banking relationships Percentage of companies covered by Kotak Institutional 70% Equities, within the specified category.

60% Percentage of companies within each category for which Kotak Institutional Equities and or its affiliates has 50% provided investment banking services within the previous 12 months. 40% 36.8% * The above categories are defined as follows: Buy = We expect this stock to deliver more than 15% returns over 30% 26.3% the next 12 months; Add = We expect this stock to deliver 5-15% returns over the next 12 months; Reduce 20.0% = We expect this stock to deliver -5-+5% returns over 16.8% 20% the next 12 months; Sell = We expect this stock to deliver less than -5% returns over the next 12 months. Our 10% target prices are also on a 12-month horizon basis. 4.2% These ratings are used illustratively to comply with 1.1% 2.1% 2.1% applicable regulations. As of 31/12/2016 Kotak 0% Institutional Equities Investment Research had BUY ADD REDUCE SELL investment ratings on 190 equity securities. Source: Kotak Institutional Equities As of December 31, 2016

Ratings and other definitions/identifiers

Definitions of ratings

BUY. We expect this stock to deliver more than 15% returns over the next 12 months.

ADD. We expect this stock to deliver 5-15% returns over the next 12 months.

REDUCE. We expect this stock to deliver -5-+5% returns over the next 12 months.

SELL. We expect this stock to deliver <-5% returns over the next 12 months.

Our target prices are also on a 12-month horizon basis.

Other definitions

Coverage view. The coverage view represents each analyst’s overall fundamental outlook on the Sector. The coverage view will consist of one of the following designations: Attractive, Neutral, Cautious.

Other ratings/identifiers

NR = Not Rated. The investment rating and target price, if any, have been suspended temporarily. Such suspension is in compliance with applicable regulation(s) and/or Kotak Securities policies in circumstances when Kotak Securities or its affiliates is acting in an advisory capacity in a merger or strategic transaction involving this company and in certain other circumstances.

CS = Coverage Suspended. Kotak Securities has suspended coverage of this company.

NC = Not Covered. Kotak Securities does not cover this company.

RS = Rating Suspended. Kotak Securities Research has suspended the investment rating and price target, if any, for this stock, because there is not a sufficient fundamental basis for determining an investment rating or target. The previous investment rating and price target, if any, are no longer in effect for this stock and should not be relied upon.

NA = Not Available or Not Applicable. The information is not available for display or is not applicable.

NM = Not Meaningful. The information is not meaningful and is therefore excluded.

105 KOTAK INSTITUTIONAL EQUITIES RESEARCH

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Website: www.kotak.com. SEBI Registration No: NSE INB/INF/INE 230808130, BSE INB 010808153/INF 011133230, MSEI INE 260808130/INB 260808135/INF 260808135, Research Analyst INH000000586, AMFI ARN 0164 and PMS INP000000258. NSDL: IN-DP-NSDL-23-97. CDSL: IN-DP-CDSL-158-2001. Compliance Officer Details: Mr. Manoj Agarwal. Call: +91-22-4285 6825, or Email: [email protected]. In case you require any clarification or have any concern, kindly write to us at below email ids: Level 1: For Trading related queries, contact our customer service at '[email protected]' and for demat account related queries contact us at [email protected] or call us on: Online Customers - 30305757 (by using your city STD code as a prefix) or Toll free numbers 18002099191 / 1800222299, Offline Customers - 18002099292 Level 2: If you do not receive a satisfactory response at Level 1 within 3 working days, you may write to us at [email protected] or call us on +91-22-4285 8445 and if you feel you are still unheard, write to our customer service HOD at [email protected] or call us on +91-22-4285 8208. Level 3: If you still have not received a satisfactory response at Level 2 within 3 working days, you may contact our Compliance Officer (Name: Manoj Agarwal) at [email protected] or call on +91-22-4285 6825. Level 4: If you have not received a satisfactory response at Level 3 within 7 working days, you may also approach CEO (Mr. Kamlesh Rao) at [email protected] or call on +91-22-6652 9160. First Cut notes published on this site are for information purposes only. They represent early notations and responses by analysts to recent events. Data in the notes may not have been verified by us and investors should not act upon any data or views in these notes. Most First Cut notes, but not necessarily all, will be followed by final research reports on the subject. There could be variance between the First cut note and the final research note on any subject, in which case the contents of the final research note would prevail. We accept no liability for the contents of the First Cut Notes.