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August 10, 2020 India 7-Aug 1-day 1-mo 3-mo Sensex 38,041 0.0 4.0 20.2 Nifty 11,214 0.1 4.1 21.2 Contents Global/Regional indices Dow Jones 27,433 0.2 5.2 12.7 Daily Alerts Nasdaq Composite 11,011 (0.9) 3.7 20.7 FTSE 6,032 0.1 (1.0) 1.6 Results Nikkei 22,330 (0.4) 0.2 10.7 Mahindra & Mahindra: Automotive division drags profitability Hang Seng 24,532 (1.6) (4.6) 1.2 KOSPI 2,363 0.5 9.9 21.4 Pidilite Industries: Steady recovery in demand, thus far Value traded – India Cipla: Blow-out quarter Cash (NSE+BSE) 629 638 629 22,87 Derivatives (NSE) 9,960 14,679 Lupin: US disappoints 0 Deri. open interest 3,400 3,435 3,107 HPCL: Robust results
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7-Aug 1-day 1-mo 3-mo Dalmia Bharat: Stellar performance in a tough quarter Rs/US$ 75.0 1 (14) (96) Amara Raja Batteries: Impressive quarter 10yr govt bond, % 6.2 - 2 (18) Net investment (US$ mn) JK Lakshmi Cement: In-line quarter 6-Aug MTD CYTD DCB Bank: Net NPL at 1 below 1 FIIs 77 1,168 (120) MFs (36) (35) 4,054 Company alerts Top movers Hindustan Zinc: A fast growing silver behemoth Change, % Best performers 7-Aug 1-day 1-mo 3-mo
Container Corp.: A rude shock and its implications EDEL IN Equity 79 (2.3) 40.1 106.0 Sector alerts TPWR IN Equity 50 0.6 (1.2) 74.4 BAF IN Equity 3,464 3.6 4.5 71.1
Insurance: No mom improvement in July PIEL IN Equity 1,464 0.0 1.1 65.3
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NTPC IN Equity 86 (0.4) (5.1) (1.4)
[email protected] Contact: +91 22 6218 6427
For Private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES’ RATING SYSTEM AND OTHER DISCLOSURES. REFER TO THE END OF THIS MATERIAL. BUY Mahindra & Mahindra (MM) Automobiles & Components AUGUST 08, 2020 RESULT Sector view: Cautious
Automotive division drags profitability. M&M + MVML reported 1QFY21 EBITDA of CMP (`): 600 Rs5.7 bn (-68% yoy), 27% below our estimates due to steep volume decline in the Fair Value (`): 725 automotive division. We expect the near term to remain challenging for the auto BSE-30: 38,041 business given uncertainties related to Covid-19; however, we expect tractor demand to recover as the rural economy remains strong on the back of (1) higher Kharif sowing amid normal monsoons and (2) higher government spending resulting in higher rural cash flows. Also, the focus on tightening capital allocation norms could lead to re-rating of the stock. Maintain BUY on cheap valuations. SoTP based FV unchanged at Rs725.
Mahindra & Mahindra Stock data Forecasts/valuations 2020 2021E 2022E 52-week range (Rs) (high,low) 626-245 EPS (Rs) 23.8 30.0 42.3 Mcap (bn) (Rs/US$) 747/10 EPS growth (%) (50.0) 26.3 40.8 ADTV-3M (mn) (Rs/US$) 3,880/52 P/E (X) 25.2 20.0 14.2 Shareholding pattern (%) P/B (X) 2.0 1.8 1.6 Promoters 18.9 EV/EBITDA (X) 11.6 12.4 9.2 FIIs 37.2 RoE (%) 7.8 9.5 12.1 MFs/BFIs 9.9/13.5 Div. yield (%) 0.4 0.5 1.1 Price performance (%) 1M 3M 12M Sales (Rs bn) 449 395 491 Absolute 7 50 16 EBITDA (Rs bn) 64 58 76 Rel. to BSE-30 3 24 12 Net profits (Rs bn) 27 34 48
1QFY21 EBITDA 27% below estimates due to weak automotive segment performance
M&M+MVML reported net EBITDA Rs5.7 bn (-68% yoy), 27% below our expectations led by weaker-than-expected performance in the automotive segment. Net revenues declined by 56% yoy led by (1) 56% yoy decline in volumes and (2) flattish ASPs due to higher volume mix of the tractor segment. Automotive division revenues came in at Rs20.4 bn, a decline of 75% yoy led by 78% yoy decline in volumes, offset by 13% yoy increase in ASPs due to BS-VI transition in 1QFY21. In terms of segments, automotive EBIT margin came in at -28.6% (decline of 35.1% yoy and decline of 32.7% qoq), which was 23% below our estimates due to negative operating leverage. Tractor EBIT margins came in at 20.4% (+110 bps yoy and +280 bps qoq), which was 240 bps better than our expectations due to cost-cutting initiatives. EBITDA margin came in at 10.3% (-370 bps yoy and -330 bps qoq), 390 bps below our expectations led by weaker-than- expected performance in the automotive segment. Net reported profit came in at Rs678 mn (-97% yoy), 87% below our estimates due to (1) miss at EBITDA level and (2) higher-than- expected finance cost. Also, the company reported consolidated EBIT loss of Rs7 bn in 1QFY21 versus EBIT profit of Rs11.5 bn in 1QFY20 mainly led by losses in the automotive division.
Cut FY2022-23E EPS estimates by 1-2%; maintain BUY on cheap valuation
We have cut our FY2022-23E EPS by 2% on lower volume assumptions partly offset by higher EBITDA margin assumptions on account of cost-cutting initiatives taken up by the company. We expect automotive volumes to remain under pressure over the medium term. However, we expect tractor segment demand to remain buoyant given a strong rural economy amid normal Hitesh Goel monsoon and increased government spending. Also, management’s focus on tighter capital allocation norms may result in further value unlocking. The company has already taken a few steps in these directions by (1) not infusing further capital into Ssangyong, (2) completely Rishi Vora exiting from Genze business and (3) bailed out from the bid to manufacture delivery trucks for the US Postal Service, which would have required investment worth US$500 mn. Maintain BUY rating on attractive valuations; SoTP-based FV unchanged at Rs725.
[email protected] Contact: +91 22 6218 6427
For Private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES’ RATING SYSTEM AND OTHER DISCLOSURES, REFER TO THE END OF THIS MATERIAL. Mahindra & Mahindra Automobiles & Components
Conference call highlights
Domestic tractor industry growth drivers remain intact. The company expects the tractor industry to do well supported by good Rabi output, supported by increased government spend in rural along with improving liquidity conditions in the rural economy. Also Kharif acreage is 19% higher than last year, which augurs well for the rural economy. However, the company did not give any guidance due to Covid-related uncertainty. The company highlighted that >85% dealers have started their operations and plants are operating at >90% capacity utilization. Currently 100% of the suppliers are operating for the company. In 1QFY21, the company market share stood at 39.1% versus 41.2% in FY2020. The company is jointly working on a new platform with Mitsubishi in Japan. The company will be launching 38 new products with four different tractor ranges over the next few years with focus on India, Japan, the US and South-East Asian geographies.
Automotive industry volumes constrained by supply chain disruptions. The company highlighted that automotive plants are running at >50% capacity utilization and >85% of the dealer are operating in 1QFY21. The company is witnessing strong demand for Bolero, Scorpio and Pik-ups in the rural areas. The company is facing certain issues on the supply chain side due to (1) Covid-related uncertainties and (2) fire at one of their suppliers (Varroc Engineering). However, the company expects gradual ramp-up in capacity utilization levels going forward.
Company’s way forward – Walk, Run and Fly. The company highlighted its strategy in both automotive and farm sectors. During 1HFY21 (Walk strategy), the company will be focusing on managing cash, gradually ramping up of operations with safety first, support dealers and suppliers and focus on high growth segments such as rural, goods mobility and B2B. During 2HFY21 (Run strategy), the company will focus on its core business with launch of new models in SUV segment, capex and investment prioritization and work towards aggressive cost optimization. From FY2022 onwards (Fly strategy), the company will leverage its Ford JV to launch two new models (W601 and Z101), focus on EV portfolio, focus on SUV core brand differentiation and will build path to profitability for global subsidiaries. Also, the company highlighted that it will focus on nine sectors which can be multi-bagger over the long term – (1) Powerol, (2) Mahindra Rural Housing Finance, (3) farm implements, (4) Mahindra Accelo, (5) Mahindra Electric, (6) Mahindra two-wheeler (premium motorcycle segment), (7) mobility segment, (8) Mahindra Susten and (9) aftermarket segment.
Tighter capital allocations norms. Over the past four years, losses in subsidiaries increased from Rs530 mn in FY2017 to Rs52.6 bn in FY2020. The company highlighted that it will focus on realigning its capital allocation norms. The company has already taken a few steps – (1) no infusion of further capital into Ssangyong, (2) complete exit from Genze business and (3) the company has bailed out from the bid to manufacture small delivery trucks for the United States Postal Service, which would have required investment worth US$500 mn. As a result, the company has written off the investment it had made towards this project. Going forward, the company will continue those subsidiaries, which have clear path to >18% RoE or are of strategic importance. The company will exit all those businesses which have unclear path to profitability.
Other key points. (1) The company will be unveiling New Thar on August 15, 2020, (2) the system inventory (for automotive and tractor segment combined) remains at the lowest level over the past two years, (3) rural mix in the automotive segment stood at 62% in 1QFY21 versus 50% in 1QFY20, (4) Ford JV will commence its operations from October 1, 2020 (delayed due to impact of Covid-19), (5) UV diesel mix stood at 44% in 1QFY21 versus 50% in 4QFY20 for the company, (6) Mahindra USA retail tractor volumes grew by 15% yoy in 1QFY21 and the company expects to cut their losses by half in FY2021E and (7) the company is in talks with several investors for investments in Mahindra Electric.
KOTAK INSTITUTIONAL EQUITIES RESEARCH 3 Automobiles & Components Mahindra & Mahindra
Exhibit 1: 1QFY21 EBITDA was 27% below our estimates due to weaker-than-expected performance of automotive segment Interim results of M&M+MVML, March fiscal year-ends (Rs mn)
(% chg.) 1QFY21 1QFY21E 1QFY20 4QFY20 1QFY21E 1QFY20 4QFY20 FY2021E FY2020 Yoy (%) FY2022E FY2021E Yoy (%) Volumes (units) 95,308 95,308 218,039 151,713 (56.3) (37.2) 651,457 777,954 (16.3) 825,610 651,457 26.7 Net realization (Rs) 586,460 583,524 587,302 593,536 0.5 (0.1) (1.2) 606,978 576,712 5.2 594,768 606,978 (2.0) Net sales 55,894 55,615 128,055 90,047 0.5 (56.4) (37.9) 395,420 448,655 (11.9) 491,047 395,420 24.2 Raw materials (36,240) (33,581) (86,971) (57,898) 7.9 (58.3) (37.4) (259,000) (298,668) (13.3) (319,180) (259,000) 23.2 Staff costs (7,704) (6,500) (8,679) (7,127) 18.5 (11.2) 8.1 (32,237) (32,237) — (38,684) (32,237) 20.0 Other expenses (6,219) (7,649) (14,469) (12,748) (18.7) (57.0) (51.2) (46,108) (54,245) (15.0) (57,635) (46,108) 25.0 Total expenses (50,163) (47,729) (110,119) (77,773) 5.1 (54.4) (35.5) (337,345) (385,150) (12.4) (415,500) (337,345) 23.2 EBITDA 5,732 7,885 17,936 12,275 (27.3) (68.0) (53.3) 58,075 63,506 (8.6) 75,547 58,075 30.1 Other income 1,338 3,200 1,919 3,155 (58.2) (30.3) (57.6) 15,391 15,391 — 16,891 15,391 9.7 Interest expense (768) (375) (302) (359) 104.9 154.6 114.2 (1,245) (1,245) — (1,245) (1,245) — Depreciation expense (5,813) (6,172) (5,839) (6,172) (5.8) (0.4) (5.8) (25,974) (23,631) 9.9 (26,465) (25,974) 1.9 Extraordinary income/exp 288 — 13,671 (35,776) 288 (28,112) — 288 Profit before tax 777 4,538 27,384 (26,877) (82.9) (97.2) 46,535 25,910 79.6 64,728 46,535 39.1 Tax expense (99) (1,144) (4,787) (5,673) (91.4) (97.9) (98.3) (11,839) (18,513) (36.0) (16,570) (11,839) 40.0 Profit after tax 678 3,395 22,597 (32,550) (80.0) (97.0) 34,696 7,397 369.0 48,158 34,696 38.8 Adj PAT 460 3,395 8,927 (5,503) (86.5) (94.8) 34,192 27,075 26.3 48,158 34,192 40.8 Adj EPS 0.4 3.0 7.8 (4.8) (86.5) (94.8) 30.0 23.8 26.3 42.3 30.0 40.8 Raw material cost as % of net sales 64.8 60.4 67.9 64.3 65.5 66.6 65.0 65.5 Staff cost as % of net sales 13.8 11.7 6.8 7.9 8.2 7.2 7.9 8.2 Other expenses as % of net sales 11.1 13.8 11.3 14.2 11.7 12.1 11.7 11.7 Gross margin (%) 35.2 39.6 32.1 35.7 34.5 33.4 35.0 34.5 EBITDA margin (%) 10.3 14.2 14.0 13.6 14.7 14.2 15.4 14.7 Tax rate (%) 12.7 25.2 17.5 (21.1) 25.4 71.5 25.6 25.4 Volumes (units) Automotive division 29,651 29,651 131,689 92,423 (77.5) (67.9) 334,447 476,039 (29.7) 461,047 334,447 37.9 Tractors 65,657 65,657 86,350 59,290 (24.0) 10.7 317,011 301,915 5.0 364,562 317,011 15.0 Total volumes 95,308 95,308 218,039 151,713 (56.3) (37.2) 651,457 777,954 (16.3) 825,610 651,457 26.7 Volume mix (%) Automotive division 31.1 31.1 60.4 60.9 51.3 61.2 55.8 51.3 Tractors 68.9 68.9 39.6 39.1 48.7 38.8 44.2 48.7 Total volumes 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Segmental break up Revenue break up Automotive 20,395 17,664 79,858 55,058 15.5 (74.5) (63.0) 217,187 278,083 (21.9) 280,298 217,187 29.1 Farm Equipment 33,408 34,451 43,822 31,110 (3.0) (23.8) 7.4 164,995 154,025 7.1 193,539 164,995 17.3 Others (including eliminations) 2,205 3,500 5,229 4,518 13,238 16,548 17,210 13,238 EBIT Automotive (5,837) (1,000) 5,180 2,253 8,687 16,824 (48.4) 15,416 8,687 77.5 Farm Equipment 6,823 6,201 8,447 5,488 10.0 (19.2) 24.3 31,349 29,262 7.1 38,708 31,349 23.5 EBIT margin (%) Automotive (28.6) (5.7) 6.5 4.1 4.0 6.1 5.5 4.0 Farm Equipment 20.4 18.0 19.3 17.6 19.0 19.0 20.0 19.0 Average selling prices (Rs) Automotive 687,818 595,720 606,414 595,720 15.5 13.4 15.5 649,392 584,159 11.2 607,958 649,392 (6.4) Farm Equipment 508,832 524,709 507,489 524,709 (3.0) 0.3 (3.0) 520,471 510,158 2.0 530,880 520,471 2.0
Source: Company, Kotak Institutional Equities estimates
4 KOTAK INSTITUTIONAL EQUITIES RESEARCH Mahindra & Mahindra Automobiles & Components
Exhibit 2: Automotive segment EBIT remained negative in 1QFY21 led by steep losses in domestic automotive business and Ssangyong Interim consolidated quarterly results, March fiscal year-ends, 2019-21 (Rs mn, %)
1QFY21 1QFY20 4QFY20 Yoy (%) QoQ (%) FY2020 FY2019 Yoy (%) Revenues (Rs mn) Automotive segment 65,086 135,478 97,335 (52.0) (33.1) 486,417 591,726 (17.8) Farm equipment 49,069 60,779 42,088 (19.3) 16.6 211,132 224,032 (5.8) Financial Services 30,317 28,220 30,883 7.4 (1.8) 118,276 103,451 14.3 Hospitality 2,943 6,125 6,173 (52.0) (52.3) 23,738 22,406 5.9 Real estate 168 1,196 1,104 (86.0) (84.8) 6,391 6,197 3.1 Others 17,677 35,051 29,255 (49.6) (39.6) 128,210 127,454 0.6 Total 165,259 266,850 206,839 (38.1) (20.1) 974,163 1,075,266 (9.4) Less: Inter-segment revenue 2,046 6,439 5,016 (68.2) (59.2) 22,373 28,059 (20.3) Consolidated revenues 163,213 260,410 201,823 (37.3) (19.1) 951,791 1,047,207 (9.1) EBIT (excluding exceptional) Automotive segment (14,764) 1,121 (4,921) (9,154) 21,411 Farm equipment 6,134 7,664 2,299 (20.0) 166.8 22,766 23,816 (4.4) Financial Services 2,323 1,303 2,638 78.3 (11.9) 14,498 27,030 (46.4) Hospitality (330) 215 384 1,280 968 32.2 Real estate (220) 111 (493) (500) 368 Others (119) 1,062 (490) 437 (246) Consolidated EBIT (6,977) 11,474 (583) 29,328 73,347 (60.0)
Source: Company, Kotak Institutional Equities estimates
Exhibit 3: Mix of XUV300 has improved sequentially in 1QFY21 Model-wise volumes of M&M, 1QFY17-1QFY21 (units, %)
1QFY17 2QFY17 3QFY17 4QFY17 1QFY18 2QFY18 3QFY18 4QFY18 1QFY19 2QFY19 3QFY19 4QFY19 1QFY20 2QFY20 3QFY20 4QFY20 1QFY21 Volumes (units) Bolero 13,903 14,514 19,190 21,721 19,480 21,742 18,835 25,311 22,822 19,635 17,636 23,991 16,375 12,618 16,672 13,379 5,007 Scorpio 11,956 11,300 11,906 14,155 12,498 15,035 10,415 15,986 11,455 11,423 10,199 14,760 10,477 9,326 12,162 6,861 3,287 Xylo 1,521 1,831 1,396 1,840 1,691 2,131 1,351 2,146 1,465 1,783 863 1,140 1,066 735 215 56 — XUV500 7,373 7,127 5,397 6,997 5,690 8,594 5,345 5,784 8,482 6,746 4,329 6,381 3,832 3,204 3,758 1,808 267 Quanto/NuvoSport 1,145 696 375 201 137 71 42 4 1 1 — — — 8 11 — — Rexton/Alturas G4 21 13 83 4 3 1 18 64 6 37 357 1,072 484 227 259 106 — TUV300 5,552 7,309 6,183 7,197 6,450 7,360 6,717 8,491 5,803 5,803 4,174 3,444 3,853 3,176 2,813 1,701 — KUV100 13,086 8,268 5,751 8,593 5,579 4,263 7,471 8,229 4,509 3,635 2,051 1,502 786 517 302 198 73 Jeeps, Gio and Maximo 4,215 3,937 3,292 4,861 4,207 6,245 4,600 6,127 5,729 6,878 4,778 6,161 4,056 2,583 1,559 632 238 Marazzo — — — — — — — — — 4,591 10,403 9,136 4,279 2,545 3,343 2,526 — XUV300 — — — — — — — — — — 9,532 14,082 9,488 7,401 6,605 3,069 Domestic utilitiy vehicles 58,772 54,995 53,573 65,569 55,735 65,442 54,794 72,142 60,272 60,532 54,790 77,119 59,290 44,427 48,495 33,872 11,941 Volume Mix (%) Bolero 23.7 26.4 35.8 33.1 35.0 33.2 34.4 35.1 37.9 32.4 32.2 31.1 27.6 28.4 34.4 39.5 41.9 Scorpio 20.3 20.5 22.2 21.6 22.4 23.0 19.0 22.2 19.0 18.9 18.6 19.1 17.7 21.0 25.1 20.3 27.5 Xylo 2.6 3.3 2.6 2.8 3.0 3.3 2.5 3.0 2.4 2.9 1.6 1.5 1.8 1.7 0.4 0.2 — XUV500 12.5 13.0 10.1 10.7 10.2 13.1 9.8 8.0 14.1 11.1 7.9 8.3 6.5 7.2 7.7 5.3 2.2 Quanto/NuvoSport 1.9 1.3 0.7 0.3 0.2 0.1 0.1 0.0 0.0 0.0 — — — 0.0 0.0 — — Rexton 0.0 0.0 0.2 0.0 0.0 0.0 0.0 0.1 0.0 0.1 0.7 1.4 0.8 0.5 0.5 0.3 — TUV300 9.4 13.3 11.5 11.0 11.6 11.2 12.3 11.8 9.6 9.6 7.6 4.5 6.5 7.1 5.8 5.0 — KUV100 22.3 15.0 10.7 13.1 10.0 6.5 13.6 11.4 7.5 6.0 3.7 1.9 1.3 1.2 0.6 0.6 0.6 Jeeps, Hard Tops 7.2 7.2 6.1 7.4 7.5 9.5 8.4 8.5 9.5 11.4 8.7 8.0 6.8 5.8 3.2 1.9 2.0 Marazzo — — — — — — — — — 7.6 19.0 11.8 7.2 5.7 6.9 7.5 — XUV300 — — — — — — — — — — — 12.4 23.8 21.4 15.3 19.5 25.7 Domestic utilitiy vehicles 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Source: Company, Kotak Institutional Equities estimates
KOTAK INSTITUTIONAL EQUITIES RESEARCH 5 Automobiles & Components Mahindra & Mahindra
Exhibit 4: We have reduced our FY2022-23E EPS estimates by 1-2% due to cut in volume estimates Earnings revision table, M&M+MVML, March fiscal year-ends, 2021-23E (Rs mn, %)
New estimates Old estimates % change 2021E 2022E 2023E 2021E 2022E 2023E 2021E 2022E 2023E M&M+MVML Volumes (units) 651,457 825,610 905,297 668,788 831,971 912,168 (2.6) (0.8) (0.8) Net sales 395,420 491,047 546,798 421,920 519,897 579,044 (6.3) (5.5) (5.6) EBITDA 58,075 75,547 84,654 59,080 75,473 84,752 (1.7) 0.1 (0.1) EBITDA margin (%) 14.7 15.4 15.5 14.0 14.5 14.6 Profit after tax 34,192 48,158 54,792 35,900 48,847 55,609 (4.8) (1.4) (1.5) EPS FD 30.0 42.3 48.1 31.5 42.9 48.9 (4.8) (1.4) (1.5)
Source: Company, Kotak Institutional Equities estimates
Exhibit 5: We value M&M at Rs725/share SoTP, March fiscal year-ends (Rs)
Value per share (Rs) Comment Tractor segment 440 DCF based methodology UV segment 21 DCF based methodology LCV segment 140 DCF based methodology Core business value 601 Tech Mahindra 139 Based on KIE fair value of Rs770/share Mahindra Logistics 9 Based on current market price Mahindra Holidays 8 Based on current market price Mahindra CIE Automotive Limited 5 Based on current market price Mahindra Lifespace Developers Ltd 3 Based on current market price Other domestic listed subsidiary 55 Other subsidiaries (92) Assuming FY2023E losses sustains for next 10 years Subsidiaries 126 SOTP-based fair value 725
Source: Company, Kotak Institutional Equities estimates
6 KOTAK INSTITUTIONAL EQUITIES RESEARCH Mahindra & Mahindra Automobiles & Components
Exhibit 6: We value tractor business at Rs440/share DCF analysis of M&M tractor division, March fiscal year-ends, 2019-36E (Rs mn, %)
CAGR (%) 2019 2020 2021E 2022E 2023E 2024E 2025E 2026E 2027E 2028E 2029E 2030E 2036E (FY2020-36E) Tractor population in India (mn units) 5.9 6.2 6.5 6.8 7.2 7.5 8.0 8.7 9.4 9.9 10.5 11.3 16.2 Industry sales volumes (units) 788,396 705,018 740,269 829,101 912,011 984,972 1,063,770 1,148,872 1,240,781 1,315,228 1,394,142 1,477,790 2,018,282 6.8 Yoy growth (%) 7.8 (10.6) 5.0 12.0 10.0 8.0 8.0 8.0 8.0 6.0 6.0 6.0 5.0 M&M market share (%) 40.2 41.4 41.4 42.5 42.0 42.0 42.0 42.0 42.0 42.0 42.0 42.0 42.0 Domestic volumes of M&M (units) 316,742 291,901 306,496 352,470 387,718 413,688 446,783 482,526 521,128 552,396 585,540 620,672 847,678 6.9 Export volumes of M&M(units) 13,694 10,014 10,515 12,092 13,301 13,966 14,664 15,398 16,168 16,976 17,825 18,716 25,081 5.9 Total volumes of M&M (units) 330,436 301,915 317,011 364,562 401,019 427,654 461,448 497,924 537,296 569,372 603,364 639,388 872,759 6.9 Yoy growth (%) 3.4 (8.6) 5.0 15.0 10.0 6.6 7.9 7.9 7.9 6.0 6.0 6.0 5.0 ASPs 498,634 496,976 502,894 509,482 516,210 526,534 537,064 547,806 558,762 569,937 581,336 592,963 667,772 1.9 Tractor revenues 164,767 150,045 159,423 185,738 207,010 225,175 247,827 272,765 300,220 324,506 350,757 379,133 582,804 8.9 Farm implements revenues 3,980 3,980 5,572 7,801 10,141 13,183 17,138 20,566 24,679 29,615 35,538 42,646 112,076 23.2 Overall revenues 168,747 154,025 164,995 193,539 217,151 238,358 264,966 293,332 324,900 354,121 386,295 421,779 694,880 9.9 Yoy growth (%) 6.8 (8.7) 7.1 17.3 12.2 9.8 11.2 10.7 10.8 9.0 9.1 9.2 8.3 EBIT 32,651 29,262 31,349 38,708 43,430 45,288 50,343 55,733 58,482 63,742 69,533 75,920 104,232 EBIT margin (%) 19.3 19.0 19.0 20.0 20.0 19.0 19.0 19.0 18.0 18.0 18.0 18.0 15.0 EBIT (1-tax) 22,856 21,771 23,324 28,799 32,312 33,694 37,456 41,465 43,511 47,424 51,733 56,485 77,549 8.3 Depreciation 3,080 4,125 4,645 5,212 5,721 5,829 6,453 7,148 7,082 7,726 8,436 12,508 Increase/(Decrease) in working capital (807) 601 1,564 1,294 1,162 1,458 1,554 1,730 1,601 1,763 1,944 1,014 Capex (4,542) (4,860) (5,200) (5,564) (6,009) (6,490) (7,009) (7,570) (8,175) (8,829) (9,535) (15,132) Free cash flow 19,503 23,190 29,808 33,254 34,568 38,253 42,464 44,819 47,932 52,392 57,329 75,939 8.9 Years discounted 0.5 1.5 2.5 3.5 4.5 5.5 6.5 7.5 8.5 14.5 Discount factor 0.9 0.8 0.7 0.7 0.6 0.5 0.5 0.4 0.4 0.2 Discounted free cash flow 28,041 27,683 25,467 24,940 24,500 22,884 21,658 20,950 20,287 12,907
WACC (%) 13.0 Terminal growth (%) 5.0 Capitalization rate (%) 8.0 Sum of free cash flows 313,082 Cash flow of terminal value 75,939 Terminal value 996,703 Discounted terminal value 169,406 Enterprise value 482,487 Net debt/(cash) - March 2020 (20,000) Equity value 502,487 Shares outstanding (mn) 1,138 DCF-based fair value 440
Source: Company, Kotak Institutional Equities estimates
Exhibit 7: We value UV business at Rs21/share DCF analysis of M&M UV division, March fiscal year-end, 2020 (Rs mn, %)
Pro-forma financials Total volumes of M&M (units) 225,000 ASPs 750,000 Overall revenues 168,750 EBIT 6,833 EBIT margin (%) 4.0 EBIT (1-tax) 5,084 Depreciation 5,063 Increase/(Decrease) in working capital (2,000) Capex (5,063) Terminal free cash flow 3,084 Valuation Terminal free cash flow 3,084 No-growth mutiple (EV/FCF) 8.3 Implied EV value (Rs mn) 25,696 Net debt as of March 2020 (Rs mn) 2,094 Implied market capitlization (Rs mn) 23,602 Shares outstanding (mn) 1,138 DCF-based value 21
Source: Company, Kotak Institutional Equities estimates
KOTAK INSTITUTIONAL EQUITIES RESEARCH 7 Automobiles & Components Mahindra & Mahindra
Exhibit 8: We value LCV business at Rs140/share DCF analysis of M&M LCV division, March fiscal year-ends, 2019-40E (Rs mn, %)
CAGR (%) 2019 2020 2021E 2022E 2023E 2024E 2025E 2026E 2027E 2028E 2029E 2030E 2040E (FY2020-40E) Industry domestic LCV sales volumes (units) 616,626 492,882 394,306 512,597 615,117 676,628 744,291 818,720 900,592 990,652 1,089,717 1,198,689 2,492,919 8.4 Industry domestic goods carrier LCV volumes (<3.5 T) 515,229 411,285 331,296 427,535 504,536 554,989 610,488 671,537 738,691 814,308 897,628 989,430 1,998,047 8.2 Industry domestic goods carrier LCV volumes (>3.5T) 49,223 36,228 28,982 39,126 50,864 55,951 61,546 67,700 74,470 81,917 90,109 99,120 257,091 10.3 M&M domestic goods carrier LCV market share (<3.5 T) 44.5 45.7 45.0 45.0 45.0 44.0 44.0 44.0 43.0 43.0 43.0 43.0 40.0 M&M domestic goods carrier LCV market share (>3.5 T) 9.1 8.1 7.0 7.0 7.0 7.0 7.0 7.0 6.0 6.0 6.0 6.0 5.0 Total LCV volumes of M&M (units) 255,563 204,333 161,946 208,130 244,902 263,127 288,689 316,770 339,487 373,319 410,550 451,524 844,850 7.4 Total M&HCV volumes of M&M (units) 12,802 6,987 4,192 5,869 7,630 8,011 8,412 8,832 9,274 9,738 10,225 10,736 17,488 4.7 Total 3W volumes of M&M (units) 33,718 34,076 17,038 23,853 27,431 30,174 32,286 34,547 36,965 39,552 42,321 45,283 71,642 3.8 Total volumes of M&M (units) 302,083 245,396 183,176 237,852 279,963 301,313 329,387 360,149 385,726 422,609 463,096 507,544 933,980 6.9 Yoy growth (%) (5.5) (18.8) (25.4) 29.8 17.7 7.6 9.3 9.3 7.1 9.6 9.6 9.6 5.2 ASPs 596,203 635,704 711,936 630,381 647,714 660,668 673,882 687,359 701,106 715,129 729,431 744,020 906,956 1.8 Overall revenues 180,103 155,999 130,410 149,937 181,336 199,068 221,968 247,552 270,435 302,220 337,797 377,622 847,078 8.8 Yoy growth (%) 14.0 (13.4) (16.4) 15.0 20.9 9.8 11.5 11.5 9.2 11.8 11.8 11.8 7.3 EBIT 22,942 16,164 8,268 13,220 15,029 15,925 17,757 19,804 21,635 24,178 23,646 26,434 59,295 EBIT margin (%) 12.7 10.4 6.3 8.8 8.3 8.0 8.0 8.0 8.0 8.0 7.0 7.0 7.0 EBIT (1-tax) 16,059 12,026 6,151 9,836 11,182 11,849 13,212 14,734 16,096 17,988 17,592 19,667 44,116 6.7 Depreciation 7,800 7,173 7,497 9,067 9,953 11,098 12,378 13,522 15,111 16,890 18,126 40,660 Increase/(Decrease) in working capital 991 1,052 (803) (1,290) (729) (941) (1,051) (940) (1,306) (1,462) (1,637) (1,217) Capex (13,625) (12,263) (11,650) (11,650) (12,582) (13,588) (14,675) (15,849) (17,117) (18,486) (19,965) (41,906) Free cash flow 7,191 2,113 4,880 7,309 8,492 9,781 11,385 12,828 14,676 14,534 16,190 41,653 9.2 Years discounted 0.5 1.5 2.5 3.5 4.5 5.5 6.5 7.5 8.5 18.5 Discount factor 0.9 0.8 0.7 0.7 0.6 0.5 0.5 0.4 0.4 0.1 Discounted free cash flow 4,591 6,085 6,256 6,377 6,569 6,550 6,631 5,812 5,729 4,342
WACC (%) 13.0 Terminal growth (%) 5.0 Capitalization rate (%) 8.0 Sum of free cash flows 104,121 Cash flow of terminal value 41,653 Terminal value 546,692 Discounted terminal value 56,989 Enterprise value 161,110 Net debt/(cash) - March 2020 5,000 Equity value 156,110 Shares outstanding (mn) 1,138 DCF-based fair value 140
Source: Company, Kotak Institutional Equities estimates
8 KOTAK INSTITUTIONAL EQUITIES RESEARCH Mahindra & Mahindra Automobiles & Components
Exhibit 9: We expect losses from other subsidiaries to decline to Rs10.5 bn in FY2023E from Rs33.6 bn in FY2020 M&M subsidiaries financial forecast, March fiscal year-ends, 2015-23E (Rs mn)
2015 2016 2017 2018 2019 2020 2021E 2022E 2023E Financial performance (Rs mn) Standalone PAT (before exceptional) 29,854 31,358 30,949 39,224 48,258 33,445 34,408 48,158 54,792 Subsidiaries profit (6,676) (4,591) (3,909) 3,000 (3,998) (27,342) (23,600) 2,537 12,275 Share of profit from associates 7,887 8,460 8,994 11,073 13,665 10,426 7,440 12,364 15,984 Minority interest 2,439 4,061 3,525 4,474 7,014 (4,480) (2,194) 6,300 9,940 Consolidated PAT (before exceptional) 28,626 31,167 32,509 48,823 50,911 21,009 20,442 56,758 73,112 Key subsidiaries/associates PAT (Rs mn) Domestic listed subsidiaries/associates PAT (Rs mn) Associates profit contribution (Rs mn) Tech Mahindra 7,018 8,267 7,406 9,951 12,452 11,651 10,371 13,039 15,497 Mahindra CIE (158) 284 292 618 658 405 70 325 487 Total domestic listed associates PAT 6,860 8,551 7,697 10,569 13,109 12,056 10,440 13,364 15,984 Subsidiaries profit (Rs mn) Mahindra Lifespace Developers 3,377 1,417 706 789 586 (2,260) (3,000) (500) 400 Mahindra Holiday & Resorts India 1,050 1,721 2,009 2,072 639 (1,082) (500) (200) 500 Mahindra Logistics 621 373 483 974 844 551 376 694 945 Other listed subsidiary 12,536 10,382 6,201 13,728 15,571 9,064 10,320 15,293 20,930 Total domestic listed subsidiaries PAT 17,584 13,893 9,399 17,562 17,640 6,273 7,196 15,287 22,775 Other subsidiaries/associates PAT (Rs mn) Other associates profit contribution (Rs mn) Other associates PAT contribution 1,027 (90) 1,297 504 556 (1,630) (3,000) (1,000) — Other subsidiaries PAT (Rs mn) Mahindra Electric mobility (534) (916) (1,132) (1,290) (530) (552) (1,000) (1,000) (1,000) SsangYong Motor company (7,169) (3,303) 3,196 (5,562) (3,974) (21,060) (15,000) — — Automobili Pininfarina GmbH — — — — (961) (1,296) (1,296) (1,500) (1,500) Mahindra USA 246 414 426 391 (5,493) (5,071) (4,000) (4,000) (4,000) Rural housing subsidiary 653 967 439 2,246 2,505 1,486 500 750 1,000 Peugeot Motorcycles (486) (1,665) (1,731) (1,715) (2,814) (2,558) (3,000) (2,000) — Mahindra Tractor Assembly (35) (959) (1,124) (1,345) (2,429) (2,216) — — — Mahindra Aerospace Private Limited (12) (1,399) (53) (1,331) (1,798) (3,194) (1,000) (1,000) (1,000) Other subsidiaries profit (16,924) (11,625) (13,330) (5,957) (6,143) 845 (6,000) (4,000) (4,000) Other subsidiaries PAT (24,260) (18,484) (13,308) (14,562) (21,637) (33,615) (30,796) (12,750) (10,500) Total subsidiaries profit (6,676) (4,591) (3,909) 3,000 (3,998) (27,342) (23,600) 2,537 12,275 Minority interest 2,439 4,061 3,525 4,474 7,014 (4,480) (2,199) 6,295 9,934 Profit from associates 7,887 8,460 8,994 11,073 13,665 10,426 7,440 12,364 15,984
Source: Company, Kotak Institutional Equities estimates
Exhibit 10: We expect consolidated RoE (excluding financial subsidiaries) to improve to 18% in FY2023E M&M consolidated RoIC forecast, March fiscal year-ends, 2015-23E (Rs mn)
2015 2016 2017 2018 2019 2020 2021E 2022E 2023E Consol PBT 40,378 47,942 50,038 65,901 72,800 25,859 14,411 67,593 89,423 Minus: financial subsidiaries PBT 13,209 11,348 7,468 18,431 27,486 15,494 14,538 21,555 29,465 Minus: financial subsidiaries interest expense 26,379 28,526 31,553 34,636 44,621 54,237 53,273 54,464 61,901 Add: Consol interest expense 31,567 33,676 36,485 39,871 50,214 60,647 58,714 59,464 66,901 (Consol EBIT - finance EBIT)*(1-tax) 22,650 29,221 33,250 36,894 35,634 11,742 3,985 38,278 48,718 Consol Equity 258,564 264,927 297,380 367,752 399,834 399,693 416,716 466,250 531,143 Consol net debt 329,996 370,254 441,079 493,503 621,134 741,814 677,790 691,833 738,507 Minus: financial subsidiaries finance equity 58,426 63,639 69,352 103,674 120,351 126,120 136,149 149,117 167,153 Minus: financial subsidiaries net debt 275,484 314,812 384,833 447,985 582,090 641,329 589,409 650,609 758,860 Consol capital employed ex financial subsidiaries 254,651 256,730 284,274 309,597 318,527 374,058 368,948 358,358 343,637 Consol ROIC (post-tax) ex financial subsidiaires 8.9 11.4 11.7 11.9 11.2 3.1 1.1 10.7 14.2 Consol book value per share 227.2 232.8 261.3 323.2 351.3 351.2 366.2 409.7 466.7 Consol RoE ex financial subsidiaries 14.1 16.7 15.4 17.5 18.2 7.1 3.9 16.0 18.4
Source: Company, Kotak Institutional Equities estimates
KOTAK INSTITUTIONAL EQUITIES RESEARCH 9 Automobiles & Components Mahindra & Mahindra
Exhibit 11: We expect overall volume to grow at a CAGR of 5% over FY2020-23E Volume assumptions, March fiscal year-ends, 2012-23E (units)
2012 2013 2014 2015 2016 2017 2018 2019 2020 2021E 2022E 2023E Volumes (units) Bolero 104,064 117,665 107,178 100,553 81,559 69,328 85,368 84,144 59,044 44,283 57,568 62,173 Scorpio 50,985 50,168 50,950 51,553 48,087 49,317 53,934 47,837 38,826 27,178 35,332 38,158 Xylo 27,691 25,067 13,970 8,472 7,274 6,588 7,319 5,251 2,072 1,450 1,886 2,036 XUV500 13,819 45,418 30,007 34,418 36,320 26,894 25,413 25,938 12,602 9,452 12,287 13,270 Quanto/Nuvo Sport — 16,434 7,415 1,939 1,815 2,417 254 2 19 17 — — Rexton — 1,783 1,843 1,010 228 121 86 — — — — — Jeeps, Hard Tops 5,602 7,199 8,058 8,804 6,525 5,935 6,981 6,095 2,151 1,291 1,678 1,812 TUV300 — — — — 24,189 26,241 29,018 19,264 11,543 6,926 9,004 9,724 KUV100 Petrol — — — — 6,395 17,000 14,000 7,000 800 400 520 520 KUV100 Diesel 7,816 18,698 11,542 4,697 1,003 502 652 652 Verito/Alturas G4 17,895 15,348 9,734 3,184 3,393 3,219 725 3,010 1,934 967 967 967 Marazzo — — — — — — — 24,130 12,693 8,885 11,551 12,475 XUV300 — — — — — — — 9,532 37,576 30,061 39,079 42,987 Exports 29,176 32,457 29,660 30,196 36,033 37,241 28,221 38,595 27,743 22,194 28,853 32,315 Passenger vehicles 249,232 311,539 258,815 240,129 259,633 262,999 262,861 275,495 208,006 153,606 199,375 217,089 Yoy growth (%) 25.0 (16.9) (7.2) 8.1 1.3 (0.1) 4.8 (24.5) (26.2) 29.8 8.9 MTBL 13,818 11,902 8,161 8,915 12,130 14,341 17,228 19,249 11,272 7,327 10,990 12,639 Pick ups 73,134 102,885 123,715 129,800 140,219 150,381 184,649 214,530 158,099 110,669 154,937 170,431 Maxximo and Gio 79,539 71,348 53,872 29,157 27,141 26,598 29,790 32,769 36,475 25,533 35,746 39,320 3 wheelers 67,440 65,510 62,614 56,764 54,975 52,306 54,625 66,699 62,187 37,312 60,000 64,800 Tractors 235,452 223,885 267,634 234,025 213,591 262,992 319,623 330,436 301,915 317,011 364,562 401,019 Total volumes 718,615 787,069 774,811 698,790 707,689 769,617 868,776 939,178 777,954 651,457 825,610 905,297 Yoy growth (%) 9.5 (1.6) (9.8) 1.3 8.8 12.9 8.1 (17.2) (16.3) 26.7 9.7
Source: Company, Kotak Institutional Equities estimates
Exhibit 12: We expect M&M’s EBITDA to increase by 10% CAGR over FY2020-23E M&M+MVML profit model, balance sheet and cash flow, March fiscal year-ends, 2012-23E (Rs mn)
2012 2013 2014 2015 2016 2017 2018 2019 2020 2021E 2022E 2023E Volumes 718,615 787,069 774,811 698,790 707,689 769,617 868,776 939,178 777,954 651,457 825,610 905,297 Avg realization 436,689 487,335 500,988 529,025 549,505 537,643 547,637 562,707 576,712 606,978 594,768 603,998 Net sales 313,811 383,566 388,171 369,677 388,879 413,779 475,774 528,482 448,655 395,420 491,047 546,798 Raw materials 223,947 273,971 269,199 257,269 265,013 280,192 316,280 359,977 298,668 259,000 319,180 355,419 Staff costs 17,946 19,977 23,108 24,936 25,720 29,920 31,630 32,830 32,237 32,237 38,684 43,326 Other expenses 30,306 36,326 43,383 41,440 45,683 49,625 57,429 60,375 54,245 46,108 57,635 63,399 Total expenses 272,199 330,274 335,690 323,645 336,416 359,737 405,339 453,182 385,150 337,345 415,500 462,144 EBITDA 41,613 53,292 52,481 46,033 52,463 54,042 70,435 75,301 63,506 58,075 75,547 84,654 Other income 4,735 5,697 6,648 8,201 7,845 12,064 9,517 16,303 15,391 15,391 16,891 18,891 Interest expense 2,874 2,964 3,611 3,039 2,653 2,426 1,882 1,467 1,245 1,245 1,245 1,245 Depreciation 6,699 8,178 9,760 10,980 12,047 16,745 16,254 20,030 23,631 25,974 26,465 28,655 Extraordinary income 1,083 906 528 3,357 60 5,485 4,336 (227) (28,112) 288 — — Profit before tax 37,858 48,753 46,286 43,572 45,667 52,420 66,152 69,879 25,910 46,247 64,728 73,645 Tax expenses 7,887 12,410 7,235 9,339 12,230 13,181 19,920 15,867 18,513 11,839 16,570 18,853 Profit after tax 29,970 36,343 39,051 34,233 33,438 39,239 46,232 54,012 7,397 34,408 48,158 54,792 Adj profit after tax 28,888 35,437 38,523 30,876 33,394 35,400 43,197 54,159 27,075 34,192 48,158 54,792 EPS FD 25.4 31.1 33.9 27.1 29.3 31.1 38.0 47.6 23.8 30.0 42.3 48.1 EPS FD ex subs dividends 24.5 30.2 31.9 24.1 26.3 26.5 33.9 39.7 15.5 24.3 35.1 40.5 Ratios (%) EBITDA margin (%) 13.3 13.9 13.5 12.5 13.5 13.1 14.8 14.2 14.2 14.7 15.4 15.5 Gross margin (%) 28.6 28.6 30.6 30.4 31.9 32.3 33.5 31.9 33.1 34.5 35.0 35.0 Raw material cost as % of sales 71.4 71.4 69.4 69.6 68.1 67.7 66.5 68.1 66.9 65.5 65.0 65.0 Staff cost as % of sales 5.7 5.2 6.0 6.7 6.6 7.2 6.6 6.2 7.2 8.2 7.9 7.9 Other expenses as % of sales 9.7 9.5 11.2 11.2 11.7 12.0 12.1 11.4 12.1 11.7 11.7 11.6 Effective tax rate (%) 20.8 25.5 15.6 21.4 26.8 25.1 30.1 22.7 71.5 25.6 25.6 25.6
Source: Company, Kotak Institutional Equities estimates
10 KOTAK INSTITUTIONAL EQUITIES RESEARCH REDUCE Pidilite Industries (PIDI) Speciality Chemicals AUGUST 09, 2020 RESULT Sector view: Attractive
Steady recovery in demand, thus far. PIDI’s 56% decline in sales was on expected CMP (`): 1,377 lines whereas profitability was a tad weaker than expected as the benefit of lower RM Fair Value (`): 1,400 prices is yet to fully reflect on financials. The management indicated that demand is BSE-30: 38,041 recovering well— July was better than June. PIDI’s investments in distribution, recent JVs/acquisition/investments and product portfolio/end-market development capabilities position it well from a medium-term perspective. We like the business but the stock is fairly valued; await a better entry price. REDUCE with FV of Rs1,400 (Rs1,325).
Pidilite Industries Stock data Forecasts/valuations 2020 2021E 2022E 52-week range (Rs) (high,low) 1,710-1,186 EPS (Rs) 23.1 18.3 28.4 Mcap (bn) (Rs/US$) 700/9.4 EPS growth (%) 30.1 (20.4) 54.9 ADTV-3M (mn) (Rs/US$) 1,301/17 P/E (X) 59.7 75.0 48.5 Shareholding pattern (%) P/B (X) 15.7 14.0 12.0 Promoters 69.9 EV/EBITDA (X) 43.6 51.6 34.0 FIIs 11.5 RoE (%) 27.2 19.7 26.7 MFs/BFIs 3.4/4.2 Div. yield (%) 0.5 0.5 0.7 Price performance (%) 1M 3M 12M Sales (Rs bn) 73 63 84 Absolute (2) 2 7 EBITDA (Rs bn) 16 13 20 Rel. to BSE-30 (5) (16) 3 Net profits (Rs bn) 12 9 14
1QFY21—Topline performance broadly in line, gross margin a tad weaker than expected
Consolidated— Revenues declined 56% to Rs8.8 bn. GM stood at 53.5% (+210/-190 bps yoy/qoq; KIE 56.1%). A sequential decline in GM despite deflationary RM trends was due to (1) a time lag between RM consumption cost and spot prices, and (2) rupee depreciation and (3) lower RM costs in 4Q on account of annual volume discounts. EBITDA at Rs664 mn was down 85% yoy and EBITDA margin was down 1,450 bps to 7.6% (KIE 10.1%). Employee costs declined 11% yoy and other expenses were down 46% yoy likely due to a sharp cut in A&P spends. Recurring PAT declined 91% yoy to Rs268 mn.
Standalone— Revenues declined 57% yoy to Rs7.7 bn. The core Construction & Bazaar segment declined 57% yoy led by 58.6% decline in volume/mix. B2B segment sales declined 53% led by 53.7% decline in volume/mix. The management indicated that construction chemicals, DIY segment and emerging India (small towns) performed relatively better.
Subsidiaries— International subsidiaries declined 36% in c/c led by Asia (-49% yoy), MEA (-30%) and Americas (-25%). Domestic subsidiaries declined 82% on account of the nation- wide lockdown (Nina Percept -88%; ICA-PIDI -78% and CIPY PU -76%). At an aggregate level, subsidiaries reported EBITDA loss of Rs290 mn (EBITDA of Rs258 mn in 1QFY20).
Investments in business augur well for LT growth; Stock is fairly valued, we await better price Rohit Chordia PIDI has made significant investments over the past 2-3 years: (1) rural distribution expansion, (2) JV/acquisition/partnerships (Grupo Puma- Spain, Litokol- Italy, Tenax India and WD-40), and Jaykumar Doshi (3) investments in ecommerce/services startups (Pepperfry, HomeLane and Aapkapainter). These initiatives augur well from a long term perspective. Growth acceleration in the near-to-medium term hinges on revival of the economy and on construction activity; it is difficult to accurately Aniket Sethi assess the second-derivative impact of Covid on demand.
We increase FY2021E as we raise our revenue forecast and broadly maintain FY2022-23 estimates. We now model revenue CAGR of 6.8% over FY2020-22E versus 5.8% earlier. We rollover to Sep 2021 and revise our DCF-based fair value to Rs1,400 (Rs1,3225). We like PIDI for its dominant positioning in a high-growth segment, and track record of expanding product portfolio and developing end-markets; await a better entry price. [email protected] Contact: +91 22 6218 6427
For Private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES’ RATING SYSTEM AND OTHER DISCLOSURES, REFER TO THE END OF THIS MATERIAL. Speciality Chemicals Pidilite Industries
Conference call takeaways
Demand recovery. The management indicated that with easing of lockdowns, it is witnessing better recovery of growth than anticipated earlier. Following complete lockdown in April, business gradually recovered starting May (50% outlets open) and improved further in June (80% of outlets open) and July (more than 90% of outlets open). Its Emerging India business (about 30% of domestic Consumer and Bazaar segment) covering rural and small towns is growing in double digits since a couple of months. Likewise, retail construction chemicals portfolio is also registering double-digit growth since two months. DIY portfolio (Fevikwik, M-seal and Steelgrip) is also witnessing good demand. Overall, July was better than June driven by C&B segment, notwithstanding the localized lockdown in a few states. While PIDI’s 1Q topline performance (57% decline) was weaker than paint companies (44-49% decline), the gap may narrow in 2Q as PIDI’s growth recovery in 2Q may be a bit better than that of paint companies.
Margin outlook. PIDI’s gross margin declined 190 bps qoq to 53.5%. The management indicated that spot prices trended down sequentially in 1QFY21 but the benefit of the same is yet to reflect on P&L. Lower VAM price has not fully reflected on GM, yet (VAM consumption cost was US$825/t in 1Q as against spot price of US$650-700/t); VAM consumption cost declined sequentially to US$825/t from US$845/t but the benefit was offset by rupee depreciation. Full benefit of benign RM price environment would reflect starting 2Q/3QFY21. Further, we expect operating leverage benefits (especially better employee efficiency) over the next couple of years.
Competition from paint companies in construction chemicals. The management acknowledged that paint companies have gained traction in some areas of waterproofing led by (1) conversion of traditional products such as primer and top coats into waterproofing products, and (2) education of painters to use more such value-added products. That said, the management indicated that overall construction chemicals market is very large with different type of end users such as civil contractors, masons, waterproofing contractors and painters. Pidilite is agile and watchful of competition.
International business outlook. The management indicated that SAARC region was significantly impacted in 1QFY21 by Covid lockdowns. However, this region registered growth in June and showed similar trends in July. Overall, the company remains optimistic on growth and profitability outlook of international business.
12 KOTAK INSTITUTIONAL EQUITIES RESEARCH Pidilite Industries Speciality Chemicals
Exhibit. 1: Interim consolidated results of Pidilite Industries, March fiscal year-ends (Rs mn)
% chg. 1QFY21 1QFY21E 1QFY20 4QFY20 KIE Est yoy qoq FY2021E FY2020 % chg. Net operating revenue 8,778 8,588 20,168 15,447 2 (56) (43) 62,902 72,947 (14) Material cost (4,085) (3,771) (9,805) (6,895) 8 (58) (41) (28,269) (34,025) (17) Gross profit 4,694 4,817 10,363 8,552 (3) (55) (45) 34,634 38,922 (11) Gross margin (%) 53.5 56.1 51.4 55.4 -262 bps 208 bps -190 bps 55.1 53.4 170 bps Employee cost (2,157) (2,021) (2,436) (2,131) 7 (11) 1 (9,027) (9,272) (3) Other expenditure (1,873) (1,929) (3,490) (3,412) (3) (46) (45) (12,352) (13,889) (11) Total expenditure (8,115) (7,721) (15,731) (12,438) 5 (48) (35) (49,648) (57,186) (13) EBITDA 664 867 4,437 3,009 (23) (85) (78) 13,255 15,760 (16) EBITDA margin (%) 7.6 10.1 22.0 19.5 -254 bps -1445 bps -1192 bps 21.1 21.6 -54 bps Other income 200 210 399 140 (5) (50) 43 1,608 1,494 8 Interest (91) (55) (73) (98) 65 24 (7) (374) (336) 11 Depreciation (461) (460) (377) (501) 0 22 (8) (2,013) (1,699) 18 Pretax profits 312 562 4,385 2,550 (44) (93) (88) 12,476 15,219 (18) Tax (159) (139) (1,444) (689) 14 (89) (77) (3,138) (3,757) (16) Share of Profit/ (Loss) of associates 5 (5) 3 1 (194) 62 370 33 30 10 Minority Interest 110 (10) (15) 10 (1,196) (831) 975 (48) (56) (15) Recurring PAT 268 408 2,929 1,872 (34) (91) (86) 9,324 11,436 (18) Extraordinary items — — — (297) — (272) Net profit (reported) 268 408 2,929 1,575 (34) (91) (83) 9,324 11,164 (16) Recurring EPS 0.5 0.8 5.8 3.7 (34) (91) (86) 18.4 22.5 (18) Income tax rate (%) 50.8 24.7 32.9 27.0 2612 bps 1786 bps 2378 bps 25.1 24.7 46 bps Costs as a % of net operating revenues Material cost 46.5 43.9 48.6 44.6 261 bps -209 bps 189 bps 44.9 46.6 -171 bps Employee cost 24.6 23.5 12.1 13.8 103 bps 1249 bps 1077 bps 14.4 12.7 164 bps Other expenditure 21.3 22.5 17.3 22.1 -113 bps 403 bps -76 bps 19.6 19.0 59 bps
Segment results Revenues Consumer & Bazaar products 7,020 15,743 11,244 (55) (38) B2B 1,882 4,592 4,411 (59) (57) Others 18 233 151 (92) (88) Less: intersegment (142) (402) (359) (65) (60) Total segment revenue 8,778 20,166 15,447 (56) (43) Segment PBIT Consumer & Bazaar products 1,305 4,423 2,787 (70) (53) B2B (220) 653 732 (134) (130) Others (35) (12) (11) 189 224 Total segment EBIT 1,050 5,064 3,509 (79) (70) Segment PBIT margins (%) Consumer & Bazaar products 18.6 28.1 24.8 -951 bps -620 bps B2B (11.7) 14.2 16.6 -2594 bps -2832 bps Others (193.4) (5.2) (7.1) NM -18623 bps Capital employed Consumer & Bazaar products 23,831 17,844 21,082 34 13 B2B 6,735 5,943 6,862 13 (2) Others 680 756 716 (10) (5) Unallocated corporate 15,727 21,914 18,053 (28) (13) Total capital employed 46,974 46,457 46,713 1 1
Source: Company, Kotak Institutional Equities
KOTAK INSTITUTIONAL EQUITIES RESEARCH 13 Speciality Chemicals Pidilite Industries
Exhibit 2: Interim standalone results of Pidilite Industries, March fiscal year-ends (Rs mn)
(% change) 1QFY21 1QFY21E 1QFY20 4QFY20 KIE Est yoy qoq FY2021E FY2020 (% chg.) Net operating revenue 7,724 7,399 17,791 13,186 4 (57) (41) 54,987 63,328 (13) Material cost (3,514) (3,219) (8,616) (5,813) 9 (59) (40) (24,469) (29,364) (17) Gross profit 4,210 4,181 9,174 7,373 1 (54) (43) 30,518 33,964 (10) Gross margin (%) 54.5 56.5 51.6 55.9 -200 bps 293 bps -141 bps 55.5 53.6 186 bps Employee cost (1,717) (1,639) (1,987) (1,643) 5 (14) 4 (7,286) (7,369) (1) Other expenditure (1,539) (1,688) (3,008) (2,878) (9) (49) (47) (10,508) (11,759) (11) Total expenditure (6,770) (6,546) (13,611) (10,334) 3 (50) (34) (42,263) (48,492) (13) EBITDA 954 854 4,180 2,852 12 (77) (67) 12,724 14,836 (14) EBITDA margin (%) 12.4 11.5 23.5 21.6 81 bps -1115 bps -928 bps 23.1 23.4 -29 bps Other income 197 250 390 165 (21) (50) 19 1,574 1,519 4 Interest (34) (30) (27) (37) 12 24 (9) (150) (128) 17 Depreciation (348) (350) (281) (357) (1) 24 (2) (1,541) (1,258) 23 Pretax profits 769 724 4,262 2,623 6 (82) (71) 12,607 14,968 (16) Tax (202) (182) (1,387) (694) 11 (85) (71) (3,177) (3,630) (12) Recurring PAT 567 541 2,876 1,929 5 (80) (71) 9,430 11,338 (17) Extraordinary items — — — (333) — (316) Net profit (reported) 567 541 2,876 1,596 5 (80) (64) 9,430 11,022 (14) Recurring PAT post MI 567 541 2,876 1,929 5 (80) (71) 9,430 11,338 (17) Recurring EPS 1.1 1.1 5.7 3.8 5 (80) (71) 18.6 22.3 (17) Income tax rate (%) 26.3 25.2 32.5 30.3 107 bps -627 bps -404 bps 25.2 24.8 42 bps Costs as a % of net operating revenue Material cost 45.5 43.5 48.4 44.1 199 bps -294 bps 140 bps 44.5 46.4 -187 bps Employee cost 22.2 22.1 11.2 12.5 8 bps 1106 bps 976 bps 13.3 11.6 161 bps Other expenditure 19.9 22.8 16.9 21.8 -289 bps 301 bps -191 bps 19.1 18.6 54 bps
Segment results Revenues Consumer & Bazaar products 6,145 14,349 9,939 (57) (38) B2B 1,683 3,563 3,332 (53) (49) Others 18 233 151 (92) (88) Less: intersegment (122) (356) (237) (66) (49) Total segment revenue 7,724 17,789 13,186 (57) (41) Segment PBIT Consumer & Bazaar products 1,464 4,378 2,832 (67) (48) B2B 62 566 746 (89) (92) Others (35) (12) (11) 189 224 Total segment EBIT 1,491 4,932 3,567 (70) (58) Segment PBIT margins (%) Consumer & Bazaar products 23.8 30.5 28.5 -669 bps -467 bps B2B 3.7 15.9 22.4 -1223 bps -1874 bps Others (193.4) (5.2) (7.1) NM-18623 bps Capital employed Consumer & Bazaar products 15,433 10,921 13,502 41 14 B2B 5,181 4,156 4,971 25 4 Others 680 756 716 (10) (5) Unallocated corporate 28,798 28,954 25,459 (1) 13 Total capital employed 50,092 44,786 44,648 12 12
Source: Company, Kotak Institutional Equities
14 KOTAK INSTITUTIONAL EQUITIES RESEARCH Pidilite Industries Speciality Chemicals
Exhibit 3: Key changes to earnings model, Pidilite Industries
FY2020-22E Revised Earlier Change (%) CAGR (%) / Change (bps) 2021E 2022E 2023E 2021E 2022E 2023E 2021E 2022E 2023E Revised Earlier Revenues (Rs mn) 62,902 84,170 95,000 58,570 81,687 93,302 7.4 3.0 1.8 7.4 5.8 Revenue growth (%) (13.8) 33.8 12.9 (19.7) 39.5 14.2 Gross margin (%) 55.1 54.5 54.5 55.2 54.5 54.5 -11 bps 0 bps 0 bps 114 bps 113 bps EBITDA (Rs mn) 13,255 19,852 22,865 12,464 19,387 22,444 6.3 2.4 1.9 12.2 10.9 EBITDA (%) 21.1 23.6 24.1 21.3 23.7 24.1 -21 bps -15 bps 1 bps 197 bps 212 bps PAT (Rs mn) 9,324 14,439 17,074 8,846 14,237 16,809 5.4 1.4 1.6 11.0 10.2 EPS (Rs/share) 18.3 28.4 33.6 17.4 28.0 33.1 5.4 1.4 1.6 11.0 10.2
Source: Company, Kotak Institutional Equities estimates
Exhibit 4: VAM spot price is in US$650-700 range as against consumption cost of US$825/t in 1QFY21
VAM prices (LHS, Rs/Mt) VAM growth (RHS, yoy %) 100,000 80
52 60 80,000 38 34 40 60,000 22 15 19 20 40,000 (6) (2) (4) (5) (9) (8) 0 (12) (16) (22) 20,000 (24) (28) (20)
0 (40)
1QFY16 3QFY16 2QFY17 1QFY18 4QFY18 2QFY19 3QFY19 1QFY20 4QFY20 2QFY16 4QFY16 1QFY17 3QFY17 4QFY17 2QFY18 3QFY18 1QFY19 4QFY19 2QFY20 3QFY20 1QFY21
Source: Bloomberg, Kotak Institutional Equities
Exhibit 5: We expect Pidilite’s gross margins to improve in 2HFY20 in view of benign RM prices Trends in RM prices Pidilite’s standalone gross margin
VAM prices (LHS, Rs/Mt) Crude price- Brent (LHS, Rs per 10 Barrels) PIDI's standalone GM (RHS, %) 90,000.0 57.0
80,000.0 55.0
70,000.0 53.0
60,000.0 51.0
50,000.0 49.0
40,000.0 47.0
30,000.0 45.0
20,000.0 43.0
1QFY13 2QFY13 2QFY14 2QFY15 2QFY16 2QFY17 3QFY17 3QFY18 3QFY19 3QFY20 4QFY13 1QFY14 3QFY14 4QFY14 1QFY15 3QFY15 4QFY15 1QFY16 3QFY16 4QFY16 1QFY17 4QFY17 1QFY18 2QFY18 4QFY18 1QFY19 2QFY19 4QFY19 1QFY20 2QFY20 4QFY20 1QFY21 3QFY13
Source: Bloomberg, Kotak Institutional Equities
KOTAK INSTITUTIONAL EQUITIES RESEARCH 15 Speciality Chemicals Pidilite Industries
Exhibit 6: Performance of domestic and overseas subsidiaries (Rs mn)
Domestic Subs 1QFY21 1QFY20 % chg. International business 1QFY21 1QFY20 % chg. Revenues Revenues Nina Percept 75 634 (88) Asia 303 591 (49) ICA - Pidilite 117 534 (78) Middle East and Africa 267 383 (30) Cipy Polyurethane 76 318 (76) Americas 383 512 (25) Others 27 168 (84) Total 953 1,486 (35.9) Total 295 1,654 (82.2) EBITDA EBITDA Asia 15 67 (78) Nina Percept -153 63 (343) Middle East and Africa -31 -13 138 ICA - Pidilite -57 54 (206) Americas 15 39 (62) Cipy Polyurethane -61 36 (269) Total (1) 93 (101.1) Others -37 23 (261) EBITDA margin (%) Total (308) 176 (275.0) Asia 5.0 11.3 -639 bps EBITDA margin (%) Middle East and Africa (11.6) (3.4) -822 bps Nina Percept (204.0) 9.9 -21394 bps Americas 3.9 7.6 -371 bps ICA - Pidilite (48.7) 10.1 -5884 bps Total (0.1) 6.3 -637 bps Cipy Polyurethane (80.3) 11.3 -9159 bps Others (137.0) 13.7 -15073 bps Total (104.4) 10.6 -11505 bps
Source: Company, Kotak Institutional Equities
Exhibit 7: Consolidated gross margin improved 210 bps yoy but declined 190 bps qoq to 53.5%
58 55.2 55.4 56 53.8 53.5 53.2 53.4 53.4 53.5 54 53.1 53.0 52.3 52.1 51.8 51.6 51.5 51.4 52 50.5 50.3 50 49.1 47.2 48 46.8 49.4
46 44.1 44.2 44
42
3QFY15 4QFY15 4QFY16 4QFY17 1QFY18 1QFY19 1QFY20 2QFY20 2QFY15 1QFY16 2QFY16 3QFY16 1QFY17 2QFY17 3QFY17 2QFY18 3QFY18 4QFY18 2QFY19 3QFY19 4QFY19 3QFY20 4QFY20 1QFY21
Source: Company, Kotak Institutional Equities
16 KOTAK INSTITUTIONAL EQUITIES RESEARCH Pidilite Industries Speciality Chemicals
Exhibit 8: C&B revenues declined 55% yoy Exhibit 9: B2B/IP segment revenues declined 59% yoy
30 21 23 23 35 16 17 21 20 13 15 25 16 18 13 12 11 13 15 14 14 10 8 7 9 10 12 12 9 6 15 7 6 7 10 1 3 3 4 6 - - - - (2) (1) 1 1 0 - (6) 5 (4) (3) - (9) (5) (10) (15) (20) (25) (30) (35) (40) (45) (55) (59) (50) (55)
(60) (65)
2QFY15 4QFY15 1QFY16 3QFY16 1QFY17 2QFY17 4QFY17 1QFY18 3QFY18 1QFY19 2QFY19 4QFY19 2QFY20 3QFY20 1QFY21 1QFY15 3QFY15 2QFY16 4QFY16 3QFY17 2QFY18 4QFY18 3QFY19 1QFY20 4QFY20
2QFY15 4QFY15 1QFY16 3QFY16 4QFY16 2QFY17 3QFY17 1QFY18 3QFY18 4QFY18 2QFY19 3QFY19 1QFY20 3QFY20 4QFY20 1QFY15 3QFY15 2QFY16 1QFY17 4QFY17 2QFY18 1QFY19 4QFY19 2QFY20 1QFY21
Source: Company, Kotak Institutional Equities Source: Company, Kotak Institutional Equities
Exhibit 10: India C&B volume/mix declined 59% yoy Consumer Bazaar Products volume + mix growth trends, yoy (%)
23 30 20 15 12 14 13 13 20 9 11 8 8 8 6 6 5 3 4 10 - 2 (2) (1) (3) - (10) (20) (30) (40) (50) (59) (60)
(70)
3QFY15 4QFY15 1QFY16 2QFY16 3QFY16 4QFY16 1QFY17 2QFY17 3QFY17 4QFY17 1QFY18 2QFY18 3QFY18 4QFY18 1QFY19 2QFY19 3QFY19 4QFY19 1QFY20 2QFY20 3QFY20 4QFY20 1QFY21
Source: Bloomberg, Kotak Institutional Equities
KOTAK INSTITUTIONAL EQUITIES RESEARCH 17 Speciality Chemicals Pidilite Industries
Exhibit 11: Pidilite Industries: Key assumptions, March fiscal year-ends, 2016-23E (` mn)
2016 2017 2018 2019 2020 2021E 2022E 2023E Key assumptions Standalone revenue growth (%) 8.1 2.8 10.1 13.8 3.9 (13.2) 33.0 12.5 - Consumer and Bazaar growth (%) 9.2 2.8 10.4 14.7 3.8 (13.3) 32.8 12.5 - B2B segment growth (%) 1.1 0.8 9.8 9.6 5.2 (13.6) 35.0 12.7 Subsidiaries' revenue growth (%) 41.3 19.2 (3.6) 35.9 (2.2) (17.7) 39.3 15.0 Consolidated revenue growth (%) 10.7 4.8 8.2 16.5 3.1 (13.8) 33.8 12.9 Gross margin (%) 51.8 53.0 52.5 49.3 53.4 55.1 54.5 54.5 EBITDA margin (%) 21.9 22.4 22.1 19.3 21.6 21.1 23.6 24.1 A&P spends as % of sales 3.6 3.4 3.5 3.2 3.5 3.5 3.6 3.7 Employee costs as % of sales 10.7 11.5 11.7 11.8 12.7 14.4 12.3 11.8 Other costs as % of sales 15.6 15.6 15.2 14.9 15.5 16.1 15.0 14.9
Source: Company, Kotak Institutional Equities estimates
18 KOTAK INSTITUTIONAL EQUITIES RESEARCH Pidilite Industries Speciality Chemicals
Exhibit 12: Pidilite Industries: consolidated profit & loss, balance sheet and cash flow statement, March fiscal year-ends, 2016-23E (` mn)
2016 2017 2018 2019 2020 2021E 2022E 2023E Profit model Net sales 53,612 56,168 60,784 70,787 72,947 61,969 83,232 93,944 Other operating income 0 0 0 0 0 0 0 0 Net operating revenues 53,612 56,168 60,784 70,787 72,947 61,969 83,232 93,944 EBITDA 11,735 12,598 13,412 13,682 15,762 13,039 19,544 22,513 Other income 778 1,123 1,484 1,466 1,494 1,608 2,038 2,663 Interest (133) (139) (155) (261) (336) (374) (342) (341) Depreciation (1,005) (1,151) (1,199) (1,327) (1,699) (1,986) (2,134) (2,248) Pretax profits 11,376 12,430 13,542 13,560 15,221 12,287 19,105 22,587 Tax (3,335) (3,851) (4,392) (4,661) (3,477) (3,090) (4,865) (5,742) Less: Minority interest (44) (32) (37) (35) (56) (48) (53) (58) Add: Share of profit in associate 32 53 46 27 30 33 37 40 Recurring PAT 8,028 8,600 9,159 8,892 11,718 9,182 14,224 16,828 Extraordinary items - - 465 375.20 (551.90) - - - Reported net profit 8,028 8,600 9,624 9,267 11,166 9,182 14,224 16,828 Recurring earnings per share (Rs) 15.7 16.8 18.0 17.5 23.1 18.1 28.0 33.1 Balance sheet Total equity 26,380 34,709 35,740 41,481 44,556 49,826 58,003 67,568 Total borrowings 800 975 1,226 1,111 1,691 1,440 1,440 1,440 Deferred tax liabilities (net) 753 877 1,048 1,094 823 823 823 823 Minority interest 434 1,273 1,751 2,072 2,157 2,109 2,056 1,998 Total liabilities and equity 28,367 37,835 39,765 45,757 49,227 54,197 62,322 71,829 Net fixed assets (Incl CWIP) 12,955 14,230 15,699 16,897 19,190 19,960 20,314 20,592 Investments 7,055 14,431 12,459 15,477 11,862 11,862 11,862 11,862 Cash 1,318 999 1,636 1,904 7,033 10,177 18,208 26,158 Net current assets (excl cash) 7,039 8,175 9,970 11,478 11,142 12,199 11,938 13,217 Total assets 28,367 37,835 39,765 45,757 49,227 54,197 62,322 71,829 Free cash flow Operating cash flow (excl w-cap) 9,015 9,336 9,738 10,239 12,230 9,949 14,679 16,771 Working capital (375) (1,399) (1,774) (1,791) 565 (1,057) 261 (1,279) Capital expenditure (1,997) (2,301) (2,724) (2,431) (4,439) (2,755) (2,488) (2,526) Free cash flow 6,643 5,636 5,240 6,017 8,356 6,136 12,452 12,966 Key assumptions, growth (%) Net operating revenue growth 10.7 4.8 8.2 16.5 3.1 (15.0) 34.3 12.9 EBITDA growth 52.3 7.4 6.5 2.0 15.2 (17.3) 49.9 15.2 EPS growth 55.1 7.1 7.5 (3.0) 31.8 (21.6) 54.9 18.3 EBITDA margin (%) 21.9 22.4 22.1 19.3 21.6 21.0 23.5 24.0 Gross margin (%) 51.8 53.0 52.5 49.3 53.4 55.1 54.5 54.5 A&SP (% of sales) 3.6 3.4 3.5 3.2 3.5 3.5 3.6 3.7 Tax rate (% of PBT) 29.3 31.0 32.4 34.4 22.8 25.1 25.5 25.4 Ratios (%) ROE (%) 32.8 28.1 26.0 23.0 27.3 19.5 26.4 26.8 ROCE (%) 40.6 34.1 30.7 28.0 28.8 20.8 29.2 29.5
Source: Company, Kotak Institutional Equities estimates
KOTAK INSTITUTIONAL EQUITIES RESEARCH 19 BUY Cipla (CIPLA) Pharmaceuticals AUGUST 09, 2020 RESULT Sector view: Attractive Blow-out quarter. Cipla's 1QFY21 performance was strong with revenues largely in CMP (`): 729 line with estimates and EBITDA/PAT exceeding our estimates by 37%/47%, driven by Fair Value (`): 840 a better product mix, including benefits of a strong ramp in albuterol, as well as lower BSE-30: 38,041 cost. We see this performance sustaining over the coming quarters, and see increased visibility over medium-term earnings, given signs of improving execution in India, as well as a strong US respiratory build-out, driving operating leverage. We raise our FY2021-23 estimates by 3-6%, and revise fair value to Rs840 (from Rs650). BUY.
Cipla Stock data Forecasts/valuations 2020 2021E 2022E 52-week range (Rs) (high,low) 740-354 EPS (Rs) 19.2 28.2 32.9 Mcap (bn) (Rs/US$) 588/7.9 EPS growth (%) 1.1 47.3 16.5 ADTV-3M (mn) (Rs/US$) 5,059/67 P/E (X) 38.0 25.8 22.1 Shareholding pattern (%) P/B (X) 3.7 3.3 2.9 Promoters 36.7 EV/EBITDA (X) 18.5 14.3 12.3 FIIs 18.0 RoE (%) 9.9 12.7 13.3 MFs/BFIs 17/5.6 Div. yield (%) 1.1 0.7 0.9 Price performance (%) 1M 3M 12M Sales (Rs bn) 171 183 199 Absolute 14 24 41 EBITDA (Rs bn) 32 41 46 Rel. to BSE-30 10 2 36 Net profits (Rs bn) 15 23 27
Strong performance sets the stage for FY2021 Cipla’s prescription business had the third successive quarter of market leading performance, growing at 9% yoy in 4QFY20 (2QFY20: 13% yoy, 3QFY20: 14% yoy and 4QFY20: 12% yoy), with limited benefit of 4QFY20 spill-over and Covid-19 related sales. Trade generics grew 46% yoy, albeit on a low base, while the consumer business moved to Rs1 bn quarterly run-rate (Rs2 bn in FY2020). US, at US$135 mn, grew US$18 mn qoq, in line with our estimate, benefitting from a stable base, and more importantly, the strong ramp in albuterol, which has now reached 65% share of the ProVentil market, and 6% of the overall albuterol market, with pricing largely stable, and share gains likely to continue through FY2020. South Africa (+4% yoy; +21% vs KIE) and RoW (+13% yoy; +14% vs KIE) too grew strongly. Gross margins moved up 200bps qoq (+90bps vs KIE). Lower R&D post completion of Advair trials, and lower promotional costs led to EBITDA margins moving to 24% in the quarter, with EBITDA exceeding our estimates by 37%, with the management guiding to sustainable Rs5 bn annualized cost savings, from lower R&D post Advair filing and SG&A efficiencies. Consequently, PAT was 47% higher than estimates. Setting up for FY2021-24 With the restructuring of domestic distribution now largely behind and the company making a strong push to correct the imbalances in the portfolio, we believe the domestic business should grow in line or slightly higher than the market over the next few years, with continued margin expansion from productivity gains. With albuterol now on a strong footing in the US, and rapid progress on the inhalation portfolio, we expect the US to move towards the key US$1 bn number by FY2025, assuming an Advair launch in 2HFY23, and Symbicort launch in FY2024. We also expect reduced capital intensity for the US from FY2021, as (1) R&D has now peaked post completion of Advair trials in FY2020, (2) capex will likely taper given the focus on utilizing Chirag Talati, CFA existing facilities, (3) and re-prioritization of specialty strategy towards respiratory (e.g. Pulmatrix) and hospital (e.g. IV tramadol) will help restrict specialty investments at 1% of sales. Kumar Gaurav BUY with revised fair value of Rs840/share 1QFY20 sets the stage for medium-term growth with strong visibility on FY2021/22 from albuterol, as well as emerging visibility on FY2023/24 from incremental respiratory launches, including Advair. All these position the company for a strong medium-term performance, with improved FCF and return ratios. We raise FY2021-23E EPS by 3-6%, and our fair value to
Rs840/share (from Rs650/share), as we roll-over to June’22, and raise multiple to 23X (vs 20X). [email protected] Contact: +91 22 6218 6427
For Private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES’ RATING SYSTEM AND OTHER DISCLOSURES, REFER TO THE END OF THIS MATERIAL. Cipla Pharmaceuticals
Exhibit 1: Cipla interim results March fiscal year-ends (Rs mn)
(% chg.) 1QFY21 1QFY21E 1QFY20 4QFY20 1QFY21E 1QFY20 4QFY20 FY2020 FY2020 (% chg.) FY2021E Sales 43,462 44,372 39,890 43,762 (2.1) 9.0 (0.7) 171,320 163,624 4.7 182,783 Raw material (15,895) (16,640) (11,963) (16,889) (4.5) 32.9 (5.9) (59,860) (57,845) 3.5 (61,378) Staff cost (7,719) (7,800) (7,561) (7,637) (1.0) 2.1 1.1 (30,270) (28,565) 6.0 (31,481) R&D costs (2,000) (2,750) (2,610) (3,110) (27.3) (23.4) (35.7) (11,750) (12,108) (3.0) (10,659) Other expenditure (7,361) (9,500) (8,709) (9,790) (22.5) (15.5) (24.8) (37,326) (34,133) 9.4 (38,072) EBITDA 10,487 7,683 9,046 6,335 36.5 15.9 65.5 32,114 30,973 3.7 41,193 Depreciation (2,690) (2,750) (2,680) (3,458) (2.2) 0.4 (22.2) (11,747) (13,263) (11,983) Interest (460) (520) (521) (530) (11.5) (11.7) (13.2) (1,974) (1,684) (1,358) Other income / exceptionals 655 800 784 932 (18.2) (16.5) (29.8) 3,442 4,766 3,000 Pretax profits 7,992 5,213 6,629 3,279 53.3 20.6 143.7 21,836 20,791 5.0 30,852 Tax (2,278) (1,251) (1,922) (856) (6,312) (5,695) (8,022) Minority interest/associates 65 (30) 75 (36) 5 181 (50) Net income 5,779 3,932 4,782 2,387 47.0 20.9 142.1 15,529 15,277 1.6 22,781 EPS (Rs) 7.2 4.9 6.0 3.0 47.0 20.9 142.1 19.4 19.1 1.6 28.5 Tax rate (%) 28.5 24.0 29.0 26.1 28.9 27.4 26.0 Segment wise sales (Rs mn) Domestic (reported) 16,080 18,250 13,550 17,390 (11.9) 18.7 (7.5) 66,625 62,720 6.2 73,180 Exports 26,650 25,372 24,720 25,236 5.0 7.8 5.6 98,899 95,311 3.8 106,604 - US 10,210 10,350 11,190 8,378 (1.4) (8.8) 21.9 38,221 34,540 10.7 47,796 - South Africa 5,480 4,522 5,320 5,285 21.2 3.0 3.7 22,005 20,927 5.2 17,993 - Africa and GA 2,150 2,500 1,590 2,840 (14.0) 35.2 (24.3) 8,205 9,342 (12.2) 8,205 - Europe 2,400 2,000 2,010 2,272 20.0 19.4 5.6 8,325 6,299 32.2 9,783 - RoW 4,570 4,000 2,790 4,047 14.3 63.8 12.9 14,803 17,213 (14.0) 14,578 - Export API 1,840 2,000 1,820 2,414 (8.0) 1.1 (23.8) 7,340 6,990 5.0 8,249 Total 42,730 43,622 38,270 42,626 (2.0) 11.7 0.2 165,524 158,031 4.7 179,783 Other operating income 732 750 1,620 1,136 (2.5) (54.8) (35.6) 5,796 5,593 3.6 3,000 Net sales 43,462 44,372 39,890 43,762 (2.1) 9.0 (0.7) 171,320 163,624 4.7 182,783 Margins (%) Gross margin 63.4 62.5 70.0 61.4 65.1 64.6 66.4 Staff cost to sales 17.8 17.6 19.0 17.5 17.7 17.5 17.2 R&D as % of sales 4.6 6.2 6.5 7.1 6.9 7.4 5.8 Other expenditure to sales 16.9 21.4 21.8 22.4 21.8 20.9 20.8 EBITDA margin (adjusted) 24.1 17.3 22.7 14.5 18.7 19.7 22.5
Source: Company, Kotak Institutional Equities
Exhibit 2: Goa OAI unlikely to impact financials
Business Last US revenue Unit name Operations inspected Status contribution (%) Key pending products Comments ~20% of US sales, Largest facility with 12 different units and having though <10% single- No critical near-term capabilities across dosage forms such as orals, Goa Formulations Sep-19 WL source dependency filings from the facility injectables, opthal and inhalers Similar to Goa, with multiple units across all key ProVentil, Advair (yet to dosage forms such as orals, injectables, Indore Formulations May-19 NAI 10-15 be filed) ophthalmics as well as pMDI's and DPI's Hauppage, New York Formulations May-18 VAI 30-35 Was acquired through Invagen. Orals facility Central Islip, New York Formulations Dec-18 VAI <10 Was acquired through Invagen. Orals facility Patalganga Formulations, API Nov-19 VAI <10 Oral solids facility Kurkumbh Formulations, API Mar-19 VAI <10 Oral solids and high potency products Virgonagar, Bangalore API Jul-19 VAI NA Bangalore API Jan-20 VAI NA
Source: Company, Kotak Institutional Equities estimates
KOTAK INSTITUTIONAL EQUITIES RESEARCH 21 Pharmaceuticals Cipla
Re-iterating albuterol opportunity
In April 2020, the US FDA granted an approval to Cipla’s ANDA for generic ProVentil (albuterol pMDI inhaler). This is the first inhalation product approval for Cipla and presents a meaningful opportunity for Cipla, in our view.
72 mn device market. Albuterol has three brands in the US with combined accounting for over 72 mn devices (65 mn on MAT basis pre-Covid outbreak), and >US$1 bn in sales at ex-mfr. prices. ProVentil is the smallest of the three with annual volumes of <5 mn (including AG, with Cipla now at 65% market share), though, >50% of prescription for albuterol are already written using a generic name, and we believe a switch from other brands is likely, given Cipla’s ability to compete in the larger market with its 10 mn device capacities, albeit at lower prices compared to a directly substitutable ANDA for ProAir or Ventolin. ProAir and its AG had sales of ~US$400 mn in CY2019 with ~32 mn devices sold, and Ventolin and its AG had sales of ~US$500 mn with ~35 mn devices sold in CY2019. 2QCY20 numbers indicate a stable market with Perrigo sales at US$73 mn, ProAir brand sales at US$66 mn, and Ventolin brand sales at US$72 mn.
Expect Lupin to receive an approval in Aug/Sept 2020. Perrigo was the first to file for ProAir generic, and launched in partnership with Catalent (CDMO) in Feb 2020. LPC filed its ANDA for ProAir in Dec 2017, and we expect approval for LPC also to follow in Aug/Sept 2020, with Lupin indicating that it has now started manufacturing its generic, and is in process of shipping initial batches for a full launch in Sept 2020. While all the three brands of albuterol launched authorized generics, the AGs are priced on par or only at a slight premium to the brands (given lower rebates).
US$100-150 mn opportunity for Cipla. Given the significant volumes in the market, we believe only Cipla, GSK and Teva have the capacities to supply more than 15 mn devices each, and given the current scenario, we believe Cipla has launched only at a modest discount, implying US$100-150 mn opportunity in FY2021/22, depending on manufacturing scale-up.
Exhibit 3: Albuterol pricing dynamics in the US
CY2016 CY2017 CY2018 CY2019 1QCY18 2QCY18 3QCY18 4QCY18 1QCY19 2QCY19 3QCY19 4QCY19 1QCY20 2QCY20 Volumes (Units mn) ProAir brand 32.1 28.9 29.1 18.3 7.9 6.7 6.6 7.5 5.5 4.1 4.2 4.5 4.4 2.3 ProVentil brand 4.7 3.9 3.2 1.2 0.9 0.8 0.7 0.7 0.6 0.2 0.2 0.3 0.3 0.3 Ventolin brand + AG 27.2 30.2 31.8 37.4 8.3 7.6 8.6 7.4 9.0 9.5 9.3 9.6 8.2 6.8 ProAir AG - - - 13.5 3.4 3.7 2.9 3.4 3.8 2.9 ProAir generic (PRGO) - - - - 1.8 3.9 ProVentil AG - - - 1.6 0.3 0.5 0.8 1.1 0.7 ProVentil generic (CIPLA) 0.4 Sales (US$ mn) ProAir brand 565 501 397 287 130 115 107 45 59 65 71 80 59 66 ProVentil brand 90 70 50 Ventolin brand1 570 490 470 698 113 106 108 141 190 181 168 160 188 72 ProAir AG ProAir generic (PRGO) - - - - 45 73 ProVentil AG ProVentil generic (CIPLA) Net realization / device (US$) ProAir brand 17.6 17.4 13.7 15.7 16.4 17.1 16.1 6.0 10.7 15.7 16.9 17.8 13.6 29.2 ProVentil brand 19.0 18.0 15.7 Ventolin brand1 20.9 16.2 14.8 18.7 13.6 14.0 12.6 19.0 21.1 19.1 18.1 16.7 22.8 10.6 ProAir AG ProAir generic (PRGO) 25.0 18.6 ProVentil AG ProVentil generic (CIPLA)
Source: Kotak Institutional Equities estimates
22 KOTAK INSTITUTIONAL EQUITIES RESEARCH Cipla Pharmaceuticals
First-wave opportunities now on the horizon
Cipla has been working on six inhalation products, with launches planned between FY2021 and FY2025. Of the six, one is now approved (ProVentil), another filed (we suspect QVar or Spiriva), one other partnered product in clinics (we believe Symbicort), and other products are in development stages.
Advair ANDA awaiting approval. Earlier in April 2020, Cipla announced the successful completion of its 1,400 patient, clinical endpoint trial for generic Advair Diskus, which was followed by ANDA filing in May 2020. Advair Diskus is the most anticipated generic in Cipla’s inhalation pipeline, and the completion of the clinical trial now paves the way for a filing in 1QFY21. Currently, MYL is the sole generic in the market, along with Prasco as the AG. We expect an imminent approval for Hikma/Vectura, positioning Cipla as potentially the third generic in the market with an approval and launch in FY2023 (2-3 year approval cycle), and given the status of development for other companies, we do not expect incremental competition until CY2025. Based on our estimates, the market size for Advair (including generics and AG) is ~US$1 bn, with volumes now steady at ~12 mn devices, following the 40% decline in volumes from CY2015-18, given the shift to Ellipta franchise (GSK’s once-daily ICS/LABA, LABA/LAMA and ICS/LABA/LAMA follow-ons), as well as share loss to Symbicort. Assuming Cipla is able to scale up its manufacturing to 2 mn devices (MYL currently at 3 mn capacity, and Hikma with 4 mn devices), we expect >US$100 mn sales from the product in the first full year of launch.
Second inhalation product now filed. Cipla has filed its second inhalation product in the US, and guided to the product being a P-IV filing, which we believe narrows down the possibilities to Spiriva, Symbicort or QVar, these being sizeable opportunities in the first wave of launches.
Partnered asset in clinics. Cipla announced that one other inhalation product, which is a partnered asset, progressed to pivotal endpoint trials in FY2020. While the management has not yet confirmed the product, we believe it is likely to be Symbicort or Spiriva, both of which are likely to be FY2023/24 launches.
Exhibit 4: Cipla nearing commercialization for first-wave of inhalation products
Monotherapy/ Characteristics of innovator device Key patent Development Earliest launch Device Company Brand name Generic combination Type of device # of doses Type of dosing expiry status for Cipla (CY) First-wave products HFA Merck Proventil Albuterol Monotherapy pMDI 60 pMDI Expired Filed Launched Diskus GSK Advair Fluticasone+salmeterol Combination DPI 60 Individual foil-sealed doses Expired Filing 2022 HFA Merck Dulera Mometasone+formoterol Combination DPI 60 pMDI Expired PK 2023 Diskus GSK Flovent Fluticasone Monotherapy DPI 60 Individual foil-sealed doses Expired Pivotal 2023 HFA Teva Qvar Beclomethasone Monotherapy pMDI 30 pMDI Expired Pivotal 2023 HFA Astra Zeneca Symbicort Budesonide+formoterol Combination DPI 60 pMDI 2023 Pivotal 2024 Handihaler Boehringer Spiriva Tiotropium Monotherapy DPI 1 Unit dose (capsules) 2023 Pivotal 2024 Twisthaler Merck Asmanex Mometasone Monotherapy DPI 60 Unit dose (capsules) Expired Not in focus N/A Flexhaler Astra Zeneca Pulmicort Budesonide Monotherapy DPI 60 Reservoir Expired Not in focus N/A Diskus GSK Serevent Salmeterol Monotherapy DPI 60 Individual foil-sealed doses Expired Not in focus N/A HFA Teva ProAir Albuterol Monotherapy pMDI 60 pMDI Expired Not in focus N/A HFA GSK Flovent Fluticasone Monotherapy pMDI 60 pMDI 2023 Not in focus N/A HFA GSK Ventolin Albuterol Monotherapy pMDI 60 pMDI 2023 Not in focus N/A Second-wave products Ellipta GSK Breo Tiotropium Combination DPI 30 Individual foil-sealed doses 2026 Development 2026 Ellipta GSK Incruse Tiotropium Combination DPI 30 Individual foil-sealed doses 2026 Development 2026 Ellipta GSK Anoro Tiotropium Combination DPI 30 Individual foil-sealed doses 2026 Development 2026 Ellipta GSK Trelegy Tiotropium Combination DPI 30 Individual foil-sealed doses 2026 Development 2026 Respimat Boehringer Spiriva Tiotropium Monotherapy Soft-mist 60 Soft-mist 2030 Not in focus N/A Respimat Boehringer Combivent Ipratropium+albuterol Combination Soft-mist 60 pMDI 2030 Not in focus N/A Respimat Boehringer Stiolto Olodaterol Monotherapy Soft-mist 30 Soft-mist 2030 Not in focus N/A Respimat Boehringer Striverdi Olodaterol+tiotropium Combination Soft-mist 30 pMDI 2030 Not in focus N/A
Source: Company, Kotak Institutional Equities estimates
KOTAK INSTITUTIONAL EQUITIES RESEARCH 23 Pharmaceuticals Cipla
Exhibit 5: DPI’s require different device platforms – no device fits all
Characteristics of device Device Company Drug # of doses Type of dosing Ease of copying device Cost per device Label instructions (steps involved) Diskus GSK Advair, Flovent 60 Individual foil-sealed doses Medium to High Low Open, click, inhale, close Turbuhaler Astra Zeneca Pulmicort 60 Reservoir Low Low Open, twist, inhale, close Pressair Forest/Almirall Tudorza 60 Reservoir High Medium Open, press, inhale, close Aerolizer Novartis Foradil 1 Unit dose (capsules) Low Low Open, insert capsule, twist, inhale, close Neohaler Novartis Arcapta, Seebri, Ultribro 1 Unit dose (capsules) Low Low Open, insert capsule, twist, inhale, close Handihaler Boehringer Ingelheim Atrovent, Combivent, Spiriva 1 Unit dose (capsules) Low Low Open, insert capsule, twist, inhale, close Podhaler Novartis Tobi 1 Unit dose (capsules) Medium to High Medium Open, insert capsule, twist, inhale, close Ellipta GSK Anoro, Breo 30 Individual foil-sealed doses High Medium Open, click, inhale, close Respimat Boehringer Ingelheim Combivent, Spiriva 30 Soft-mist inhaler Very High High Open, twist, click and inhale, close
Source: Company, Kotak Institutional Equities estimates
Exhibit 6: No company has so far been successful in scaling more than one platform
Characteristics of device Regulatory Device Company Drug # of doses Type of dosing pathway Status J-haler Vectura Advair, Flovent 60 Individual foil-sealed doses ANDA Advair, Flovent filed. Serevent to be filed Inhub Mylan Advair, Flovent 60 Individual foil-sealed doses ANDA Advair approved. Flovent filed Solis Sandoz/Oriel Advair, Flovent 60 Individual foil-sealed doses ANDA Discontinued following US FDA queries on Advair PK Discair Neutec Advair, Flovent 60 Individual foil-sealed doses ANDA Advair in development Multi-haler Cipla Advair, Flovent 60 Individual foil-sealed doses ANDA Advair in pre-filing stage Teva DPI Teva Advair, Flovent 60 Individual foil-sealed doses ANDA Advair in development UDDPI Vectura Spiriva 1 Unit-dose with capsules ANDA Spiriva in development Rotahaler Cipla Spiriva 1 Unit-dose with capsules ANDA Spiriva in development UDDPI Lupin Spiriva 1 Unit-dose with capsules ANDA Spiriva filed
Source: Company, Kotak Institutional Equities estimates
24 KOTAK INSTITUTIONAL EQUITIES RESEARCH Cipla Pharmaceuticals
Exhibit 7: Cipla - revenues by segments March fiscal year-ends, 2015-23E (Rs mn)
2015 2016 2017 2018 2019 2020 2021E 2022E 2023E Net revenues 113,454 136,098 146,302 152,193 163,624 171,320 182,783 198,863 223,798 Domestic sales 46,830 50,220 55,300 58,710 62,720 66,625 73,180 80,686 89,148 Export formulations 53,757 76,890 81,550 82,414 88,321 91,559 98,355 106,350 122,205 South Africa 15,883 15,690 18,270 20,465 20,927 22,005 17,993 20,400 20,654 Africa and global access 12,863 14,792 14,053 13,025 9,342 8,205 8,205 8,779 9,394 RoW 11,592 19,298 17,557 16,838 17,213 14,803 14,578 16,327 18,287 US 9,069 21,050 26,240 25,890 34,540 38,221 47,796 51,216 64,360 Europe 4,351 6,060 5,430 6,197 6,299 8,325 9,783 9,627 9,511 Bulk exports 7,006 7,380 5,270 6,249 6,990 7,340 8,249 8,827 9,444 Others 5,861 1,608 4,182 4,819 5,593 5,796 3,000 3,000 3,000 Growth % Domestic sales 18 7 10 6 7 6 10 10 10 Export formulations 12 43 6 1 7 4 7 8 15 South Africa 20 (1) 16 12 2 5 (18) 13 1 Africa and global access 15 15 (5) (7) (28) (12) 0 7 7 RoW 9 66 (9) (4) 2 (14) (2) 12 12 US 22 132 25 (1) 33 11 25 7 26 Europe (23) 39 (10) 14 2 32 18 (2) (1) Bulk exports (16) 5 (29) 19 12 5 12 7 7 % of sales Domestic sales 41 37 38 39 38 39 40 41 40 Export formulations 47 56 56 54 54 53 54 53 55 South Africa 14 12 12 13 13 13 10 10 9 Africa and global access 11 11 10 9 6 5 4 4 4 RoW 10 14 12 11 11 9 8 8 8 US 8 15 18 17 21 22 26 26 29 Europe 4 4 4 4 4 5 5 5 4 Bulk exports 6 5 4 4 4 4 5 4 4 Others 5 1 3 3 3 3 2 2 1
Source: Company, Kotak Institutional Equities
KOTAK INSTITUTIONAL EQUITIES RESEARCH 25 Pharmaceuticals Cipla
Exhibit 8: Cipla profit and loss, balance sheet, cash model March fiscal year-ends, 2015-23E (Rs mn)
2015 2016 2017 2018 2019 2020 2021E 2022E 2023E Net revenues 113,454 136,098 146,302 152,193 163,624 171,320 182,783 198,863 223,798 Gross Profit 71,557 85,199 93,131 97,808 105,779 111,460 121,406 132,150 151,897 Staff costs (19,737) (24,340) (26,338) (26,901) (28,565) (30,270) (31,481) (33,685) (36,042) R&D expenses (7,034) (8,846) (10,741) (10,415) (12,108) (11,750) (10,659) (11,190) (11,940) Other expenses (23,170) (27,257) (31,294) (32,229) (34,133) (37,326) (38,072) (41,308) (44,200) EBITDA 21,617 24,755 24,758 28,264 30,973 32,114 41,193 45,967 59,715 Depreciation & amortisation (5,047) (7,159) (13,229) (13,228) (13,263) (11,747) (11,983) (13,998) (14,658) EBIT 16,570 17,596 11,529 15,036 17,710 20,367 29,211 31,969 45,057 Net Interest (1,683) (2,062) (1,594) (1,142) (1,684) (1,974) (1,358) (496) 315 Other income 1,403 2,170 2,287 2,774 4,766 3,442 3,000 3,502 3,592 Profit before tax 16,290 17,704 12,222 16,667 20,791 21,777 30,852 34,975 48,964 Tax & Deferred Tax (4,000) (3,779) (1,798) (2,501) (5,695) (6,312) (8,022) (8,394) (12,241) Net Income 11,808 13,504 10,064 14,105 15,277 15,470 22,781 26,531 36,673 EPS (Rs) 14.7 16.8 12.5 17.5 19.0 19.2 28.2 32.9 45.5 Balance sheet Equity 109,820 120,149 129,637 145,816 153,443 160,573 178,797 200,022 229,361 Total borrowings 17,018 51,991 41,126 40,980 43,162 28,164 21,664 15,164 8,664 Other liabilities 30,338 41,419 38,938 41,809 43,028 47,889 49,063 51,131 53,080 Total liabilities 157,175 213,558 209,701 228,606 239,633 236,626 249,525 266,317 291,105 Net fixed assets 81,261 125,052 121,471 120,465 115,387 119,564 125,481 117,483 108,825 Investments 7,156 9,483 9,922 11,160 13,160 18,960 18,960 18,960 18,960 Cash 9,543 14,532 14,477 20,678 27,446 20,204 21,750 38,836 62,630 Other current assets 66,372 73,974 73,752 87,463 96,800 96,858 102,293 109,998 119,651 Total assets 157,175 213,558 209,701 228,606 239,633 236,626 249,525 266,317 291,105 Cashflow statement Operating profit before working capital 22,843 27,258 26,019 29,681 33,479 37,437 42,785 48,923 63,572 Tax paid (3,923) (5,077) (4,503) (7,220) (5,932) (8,483) (8,022) (8,394) (12,241) Change in working capital (7,186) (4,242) 2,307 (7,833) (10,635) 1,730 (4,262) (5,637) (7,703) Capital expenditure (6,262) (10,769) (11,360) (8,162) (3,601) (5,728) (6,000) (6,000) (6,000) Free cash flow 5,472 7,170 12,464 6,466 13,311 24,956 24,502 28,892 37,628 Margins and ratios Gross profit margin (%) 63.1 62.6 63.7 64.3 64.6 65.1 66.4 66.5 67.9 EBITDA margin (%) 19.1 18.2 16.9 18.6 18.9 18.7 22.5 23.1 26.7 Tax rate (%) 14.4 13.0 8.4 11.0 12.7 12.7 16.9 17.6 21.9 RoAE (%) 11.2 11.7 8.1 10.2 10.2 9.9 13.4 14.0 17.1
RoACE (%) 11.1 10.1 6.3 7.8 7.7 8.6 12.4 13.7 19.2
Source: Company, Kotak Institutional Equities
26 KOTAK INSTITUTIONAL EQUITIES RESEARCH ADD Lupin (LPC) Pharmaceuticals AUGUST 10, 2020 RESULT Sector view: Attractive US disappoints. LPC’s 1QFY20 revenues were mixed, with an extremely weak quarter CMP (`): 880 in the US, impacted by a broad range of factors, though, an imminent approval for Fair Value (`): 900 ProAir (Sept 2020), should drive solid improvement from 2HFY21. Even as EBITDA was BSE-30: 38,041 impacted by higher staff costs and freight, LPC guided to cost savings from 2QFY21. We see potential for improved earnings visibility over the medium-term, given increasing focus on costs, superior execution in India, US respiratory and biosimilars build-out, as well as potential US FDA clearances for key facilities. ADD.
Lupin Stock data Forecasts/valuations 2020 2021E 2022E 52-week range (Rs) (high,low) 956-505 EPS (Rs) 21.7 28.3 43.6 Mcap (bn) (Rs/US$) 399/5.4 EPS growth (%) 3.6 30.3 53.8 ADTV-3M (mn) (Rs/US$) 2,673/36 P/E (X) 40.5 31.1 20.2 Shareholding pattern (%) P/B (X) 3.1 2.9 2.6 Promoters 46.9 EV/EBITDA (X) 15.7 13.4 9.4 FIIs 22.7 RoE (%) 7.4 9.3 12.8 MFs/BFIs 10.2/6 Div. yield (%) 0.7 0.5 0.7 Price performance (%) 1M 3M 12M Sales (Rs bn) 154 161 183 Absolute 1 8 13 EBITDA (Rs bn) 24 27 37 Rel. to BSE-30 (3) (11) 9 Net profits (Rs bn) 10 13 20
In-line revenues; gross margins drive an EBITDA miss LPC had a mixed quarter on revenues, as extremely weak performance in the US (-US$60 mn qoq, -US$33 mn vs KIE) erased a stronger print in all other geographies. Domestic performance at 2% yoy decline was in line with our estimates. EU was 3% lower than estimates, while RoW and API were ~12% ahead of our estimates each. As per the management, the US performance was impacted by unwinding of stocks in the channel during the quarter, lower seasonality for the anti-infectives portfolio, loss of metformin sales, as well as impact of metformin recalls. A large element of the 1QFY21 impact should be reversed in 2Q/3Q, as metformin supplies commence in Sept 2020, with levothyroxine continuing to ramp well (12% market share, and stable pricing for LPC), anti-infectives likely to bounce back in 2HFY21 given seasonality. Gross margins at ~63% were largely in line with estimates, while lower promotional expenses in the quarter on account of lock-downs in the domestic market, led to EBITDA margins at 13.8% (+110 bps vs KIE), with EBITDA 5% higher than estimates, despite Rs1 bn impact from higher employee spends and freight charges given the pandemic, though, the management guided towards sustained reduction in employee spends from 2QFY20, while also indicating to some element of permanent savings from lower promotional spends. Higher tax rate at 60% led to PAT missing our estimate by 43%. Pivotal year for inhalation portfolio in the US; Neulasta biosimilar filing set for FY2021 Post the 1QFY21 performance in the US, albuterol approval now becomes all the more critical for LPC to return back to >US$200 mn quarterly run-rate in 2HFY21. We expect FY2021 to be a pivotal year for LPC’s inhalation efforts, given the importance of ProAir launch, but we also expect progress in all other key assets, including Fostair (EU launch), Spiriva (tentative approval, as well as litigation clarity), Dulera (first cycle review). LPC has also now completed its clinical Chirag Talati, CFA package for Neulasta, with a filing expected in 2HFY21, and potentially an approval in FY2022, while biosimilar Enbrel is on track for launch in Germany in 2QFY21, and in other EU countries Kumar Gaurav thereafter. We expect Solosec to face headwinds in 1HFY20 given Covid-19 impact, though the company is looking at alternate cost structures in order to bring down the Solosec burn by 40- 50% (currently US$50-60 mn) through cost reduction initiatives. The management also indicated its preparedness to invite the US FDA for inspections at Somerset in 2QFY21, and Goa and Indore in 2HFY21 (potential virtual audits).
ADD with fair value of Rs900/share [email protected] Contact: +91 22 6218 6427 LPC trades at 9X FY2022E EV/EBITDA and 19X FY2022E P/E. We trim our FY2021E EPS by ~10%, FY2022E EPS by ~5% and FY2023E EPS by ~2%. ADD.
For Private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES’ RATING SYSTEM AND OTHER DISCLOSURES, REFER TO THE END OF THIS MATERIAL. Pharmaceuticals Lupin
Exhibit 1: Lupin – interim results Lupin interim results, March fiscal year-end (Rs mn)
(% chg.) 1QFY21 1QFY21E 1QFY20 4QFY20 1QFY21E 1QFY20 4QFY20 FY2020 FY2019 (% chg.) FY2021E Total revenues 35,279 36,767 38,775 38,457 (4.0) (9.0) (8.3) 153,748 167,182 (8.0) 161,067 Gross profit 22,400 23,163 25,551 24,407 (3.3) (12.3) (8.2) 99,442 108,724 (8.5) 103,887 Employee expenses (7,936) (7,512) (7,224) (7,635) 5.6 9.9 3.9 (29,868) (31,513) (5.2) (30,764) R&D expenses (3,575) (3,450) (3,786) (3,442) 3.6 (5.6) 3.9 (16,330) (15,731) 3.8 (15,540) Other expenses (6,008) (7,534) (6,976) (8,077) (20.3) (13.9) (25.6) (29,695) (32,658) (9.1) (30,883) EBITDA 4,881 4,667 7,566 5,253 4.6 (35.5) (7.1) 23,549 28,822 (18.3) 26,700 Other income 433 800 722 2,086 4,837 3,640 3,500 Exceptionals — — — 831 (7,521) (3,400) — Interest (443) (600) (856) (1,074) (3,629) (3,078) (1,286) Depreciation (2,146) (2,200) (3,171) (2,142) (9,703) (10,850) (9,666) Pretax profits 2,725 2,667 4,261 4,954 2.2 (36.0) (45.0) 7,533 15,134 (50.2) 19,248 Pretax profits (adjusted) 2,725 2,667 4,261 4,123 2.2 (36.0) (33.9) 15,054 18,534 (18.8) 19,248 Tax (1,643) (800) (2,280) (1,051) (11,571) (9,017) (6,544) Minority interest (13) 13 13 (7) 43 (71) 43 Net income - reported 1,069 1,880 1,994 3,896 (43.1) NM NM (3,995) 6,046 NM 12,747 Net income - adjusted 1,069 1,880 1,994 3,065 (43.1) (46.4) (65.1) 9,785 9,446 3.6 12,747 Reported EPS (Rs) 2.4 4.2 4.4 8.7 (43.1) NM NM (8.9) 13.4 NM 28.3 Adjusted EPS (Rs) 2.4 4.2 4.4 6.8 (43.1) (46.4) (65.1) 21.7 21.0 3.6 28.3 Tax rate (%) 60 30.0 53.5 21.2 Segment wise sales Domestic formulation 12,854 12,815 13,077 11,921 0.3 (1.7) 7.8 51,385 46,382 10.8 55,264 North America 12,160 14,250 15,412 15,791 (14.7) (21.1) (23.0) 58,212 55,924 4.1 62,100 Japan — — 5,899 NM — 21,790 (100.0) — Rest of Europe 1,505 1,558 1,416 1,780 (3.4) 6.2 (15.5) 6,453 6,171 4.6 7,321 RoW 2,926 2,613 3,211 3,780 12.0 (8.9) (22.6) 13,168 12,202 7.9 13,403 API 4,090 3,663 3,489 3,286 11.6 17.2 24.5 12,999 13,464 (3.5) 14,559 Total 33,535 34,899 42,504 36,558 (3.9) (21.1) (8.3) 142,217 155,933 (8.8) 152,647 % margin Gross margin 63.5 63.0 65.9 63.5 64.7 65.0 64.5 Staff cost 22.5 20.4 18.6 19.9 19.4 18.8 19.1 R&D expenses 10.1 9.4 9.8 9.0 10.6 9.4 9.6 Other expenditure 17.0 20.5 18.0 21.0 19.3 19.5 19.2 EBITDA adjusted 13.8 12.7 19.5 13.7 15.3 17.2 16.6
Source: Company, Kotak Institutional Equities estimates
Exhibit 2: Changes to estimates March fiscal year-ends, 2021-23, (Rs mn)
New estimates Old Estimates Changes % 2021E 2022E 2023E 2021E 2022E 2023E 2021E 2022E 2023E Sales 161,067 183,295 195,037 168,468 190,099 201,274 (4.4) (3.6) (3.1) Gross profits 103,887 119,601 127,780 108,741 124,408 132,340 (4.5) (3.9) (3.4) EBITDA 26,700 37,235 42,888 29,468 39,194 44,456 (9.4) (5.0) (3.5) Adjusted PAT 12,747 19,610 23,473 14,304 20,620 23,879 (10.9) (4.9) (1.7) EPS (Rs) 28.3 43.6 52.2 31.8 45.8 53.1 (10.9) (4.9) (1.7)
Source: Kotak Institutional Equities estimates
28 KOTAK INSTITUTIONAL EQUITIES RESEARCH Lupin Pharmaceuticals
Exhibit 3: LPC expects to invite the US FDA for a re-inspection of Goa in 1QCY21
Last Revenue Key pending Unit name Business Operations inspected Status contribution (%) products Comments New facility, incremental filings for oral and Unit 1 Nagpur Formulations Jan-20 EIR 0-2 Injectables, orals injectables happening from this unit Unit 1 Indore API, Formulations Jul-19 EIR 10-15 Hormones (incl. levothyroxine), high potent products Unit 2, Indore Formulations Jan-19 WL 8-10 Oral solids and ophthal Unit 3 Indore Formulations Oct-18 EIR 4-5 Proair, Spiriva Derma and inhalation Goa Formulations May-19 WL 30-35 Oral solids Aurangabad Formulations May-19 EIR 5-8 Oral solids Somerset Formulations Dec-18 WL 10-15 Oral, derma and controlled substance Unit 1 Mandideep API, Formulations Dec-18 WL Cephlosporins, no incremental filings Unit 2 Mandideep API Dec-18 EIR Cephlosporins API plant Tarapur API Sep-19 WL Vizag API Dec-18 EIR API facility
Source: Kotak Institutional Equities estimates
Exhibit 4: Levothyroxine and ProAir key to US sales for FY2021/22 March fiscal year-ends, 2017-25E (US$ mn)
2017 2018 2019 2020 2021E 2022E 2023E 2024E 2025E Key product sales (US$ mn) Fortamet + Glumetza 426 135 70 42 20 17 18 19 19 OC basket 129 135 60 61 58 56 56 51 56 Gavis basket 100 133 91 86 81 117 95 90 88 Lisinopril family 46 40 60 75 70 71 73 74 76 Cephs family 83 78 71 80 68 60 60 60 61 Key new launches (US$ mn) Solosec — — 9 17 15 28 45 63 82 Levothyroxine 26 55 68 62 63 64 ProAir — 48 83 72 75 78 Spiriva — — — — 153 125 Base business & other launches 412 400 467 501 628 601 Product concentration Top-5 products 502 287 202 205 233 291 251 427 425 Top products (ex-Solosec) 502 287 193 188 218 263 206 365 342 Total sales 1,197 898 778 800 814 968 981 1,276 1,250 % of sales Top-5 products 42 32 26 26 29 30 26 34 34 Top products (ex-Solosec) 42 32 25 23 27 27 21 29 27
Source: Company
KOTAK INSTITUTIONAL EQUITIES RESEARCH 29 Pharmaceuticals Lupin
Exhibit 5: Lupin – Segmental revenues March fiscal year-ends, 2015-2023E (Rs mn)
2015 2016 2017 2018 2019 2020 2021E 2022E 2023E Domestic formulations 29,679 33,916 37,986 41,253 46,382 51,385 55,264 61,348 67,433 Export formulations 86,991 90,985 121,687 103,415 103,848 85,417 88,844 104,161 108,953 US 56,953 59,376 82,626 58,939 55,924 58,212 62,100 73,860 75,234 - Branded 4,980 2,941 6,439 4,645 1,613 1,992 1,813 2,722 3,843 - Generics 52,391 55,514 76,276 54,274 52,486 54,788 58,437 68,918 68,726 Japan 13,239 13,646 17,740 20,764 21,790 — — — — Europe 3,262 4,278 5,472 5,937 6,171 6,453 7,321 8,423 9,466 South Africa 4,218 3,956 4,644 5,314 5,735 5,910 5,274 5,907 6,498 LatAm 2,254 3,507 4,519 5,790 5,658 6,143 6,020 6,622 7,284 RoW 7,065 6,222 6,686 6,671 6,467 7,258 8,129 9,348 10,470 Others — — — — 2,103 1,441 — — — API 11,941 12,074 11,833 10,901 13,464 12,999 14,559 15,287 16,051 Other operating income 1,702 5,069 3,745 2,443 3,488 2,320 2,400 2,500 2,600 Total 127,699 142,085 174,943 158,042 167,182 153,748 161,067 183,295 195,037 % yoy growth Domestic formulations 20 14 12 9 12 11 8 11 10 Export formulations 13 5 34 (15) 0 (18) 4 17 5 US 17 4 39 (29) (5) 4 7 19 2 - Branded 2 (41) 119 (28) (65) 24 (9) 50 41 - Generics 19 6 37 (29) (3) 4 7 18 (0) Japan 2 3 30 17 5 (100) NM NM NM Europe 5 31 28 8 4 5 13 15 12 South Africa 11 (6) 17 14 8 3 (11) 12 10 RoW 12 (12) 7 (0) (3) 12 12 15 12 Others (100) (31) (100) API 7 1 (2) (8) 24 (3) 12 5 5 Other operating income (15) 198 (26) (35) 43 (33) 3 4 4 Total 13.1 11.3 23.1 (9.7) 5.8 (8.0) 4.8 13.8 6.4 % of sales Domestic formulations 23 24 22 26 28 33 34 33 35 Export formulations 68 64 70 65 62 56 55 57 56 US 45 42 47 37 33 38 39 40 39 - Branded 4 2 4 3 1 1 1 1 2 - Generics 41 39 44 34 31 36 36 38 35 Japan 10 10 10 13 13 — — — — Europe 3 3 3 4 4 4 5 5 5 South Africa 3 3 3 3 3 4 3 3 3 RoW 6 4 4 4 4 5 5 5 5 Others — — — — 1 1 — — — API 9 8 7 7 8 8 9 8 8 Other operating income 1 4 2 2 2 2 1 1 1
Source: Kotak Institutional Equities, Company
30 KOTAK INSTITUTIONAL EQUITIES RESEARCH Lupin Pharmaceuticals
Exhibit 6: Lupin - Profit and loss, balance sheet and cash model March fiscal year-ends, 2015-2023E (Rs mn)
2015 2016 2017 2018 2019 2020 2021E 2022E 2023E Net revenues 127,699 142,085 174,943 158,042 167,182 153,748 161,067 183,295 195,037 Gross profit 86,129 98,991 124,929 105,298 108,724 99,442 103,887 119,601 127,780 Staff costs (17,473) (21,077) (28,495) (28,647) (31,513) (29,868) (30,764) (32,610) (34,240) R&D expenses (10,998) (16,038) (23,101) (18,510) (15,731) (16,330) (15,540) (17,020) (16,280) Other expenses (21,463) (24,341) (28,401) (26,665) (32,658) (29,695) (30,883) (32,736) (34,373) EBITDA 36,195 37,535 44,932 31,475 28,822 23,549 26,700 37,235 42,888 Depreciation & amortisation (4,347) (4,635) (9,122) (10,859) (10,850) (9,703) (9,666) (10,192) (10,216) EBIT 31,848 32,900 35,810 20,616 17,972 13,846 17,034 27,044 32,671 Net interest (98) (446) (1,525) (2,044) (3,078) (3,629) (1,286) (897) (672) Other income 2,397 1,877 1,147 (13,105) 240 (2,684) 3,500 3,500 3,500 Profit before tax 34,147 34,330 35,432 5,468 15,134 7,533 19,248 29,647 35,499 Tax & deferred Tax (9,704) (11,536) (9,785) (2,885) (9,017) (11,571) (6,544) (10,080) (12,070) Less: minority interest (412) (88) (72) (71) (71) 43 43 43 43 Net Income reported 24,031 22,707 25,575 2,513 6,046 (3,995) 12,747 19,610 23,473 Net Income adjusted 24,031 22,707 25,575 17,156 9,446 9,785 12,747 19,610 23,473 EPS reported (Rs) 53.4 50.5 56.8 5.6 13.4 (8.9) 28.3 43.6 52.2 EPS adjusted (Rs) 53.4 50.5 56.8 38.1 21.0 21.7 28.3 43.6 52.2 Balance sheet Equity 88,982 110,165 135,321 136,171 137,891 125,812 136,646 153,315 173,266 Total borrowings 4,710 71,193 79,521 68,763 82,219 42,860 19,928 14,928 12,928 Other liabilities 37,686 43,020 51,231 58,120 59,384 81,167 81,960 85,273 87,913 Total liabilities 42,396 114,213 130,752 126,882 141,603 124,027 101,887 100,201 100,840 Total liabilities and equity 131,377 224,378 266,073 263,054 279,494 249,839 238,534 253,516 274,107 Net fixed assets 49,442 116,677 131,660 129,602 127,264 88,777 84,111 78,919 73,703 Investments 3,612 10,564 14,884 11,357 13,694 6,624 6,624 6,624 6,624 Cash 21,372 8,379 28,123 16,429 30,971 47,926 40,594 49,229 68,868 Other current assets 56,951 89,411 91,406 105,667 107,565 106,512 107,205 118,743 124,912 Total assets 131,377 225,031 266,073 263,054 279,494 249,839 238,534 253,516 274,107 Cashflow statement Operating profit before working capital 28,280 27,847 36,089 27,706 21,662 24,280 23,068 30,810 34,896 Tax paid (9,436) (11,662) (11,490) (5,584) (9,394) (5,112) (6,544) (10,080) (12,070) Change in working capital (949) (31,537) 5,059 (10,194) (5,002) (9,592) (555) (9,233) (4,737) Capital expenditure (8,712) (11,750) (26,368) (15,534) (9,854) (6,731) (5,000) (5,000) (5,000) Free cash flow 18,619 (15,440) 14,780 1,978 6,806 7,957 17,513 16,577 25,159 Margins and ratios Gross profit margin (%) 67.4 69.7 71.4 66.6 65.0 64.7 64.5 65.3 65.5 EBITDA margin (%) 28.3 26.4 25.7 19.9 17.2 15.3 16.6 20.3 22.0 Tax rate (%) 31.2 32.2 29.1 29.6 59.6 153.6 34.1 34.1 34.1 RoAE (%) 30.2 22.8 20.8 1.9 4.4 (3.0) 9.7 13.5 14.4 RoACE (%) 32.1 17.4 14.5 9.5 3.8 (4.8) 8.9 14.4 17.4
Source: Kotak Institutional Equities, Company
KOTAK INSTITUTIONAL EQUITIES RESEARCH 31 BUY HPCL (HPCL) Oil, Gas & Consumable Fuels AUGUST 09, 2020 RESULT Sector view: Attractive
Robust results. HPCL’s normalized results were well ahead of our estimates in 1QFY21 CMP (`): 214 reflecting higher-than-expected margins for the marketing segment, which was offset Fair Value (`): 260 by weaker underlying refining margins. We expect downstream PSUs to retain BSE-30: 38,041 marketing margins on auto fuels at elevated levels in order to offset the ongoing weakness in refining and/or volatility in crude prices. We reiterate BUY on HPCL with an unchanged fair value of Rs260, noting attractive valuations at 7.3X FY2022E EPS.
HPCL Stock data Forecasts/valuations 2020 2021E 2022E 52-week range (Rs) (high,low) 329-150 EPS (Rs) 7.1 33.7 29.3 Mcap (bn) (Rs/US$) 326/4.4 EPS growth (%) (82.0) 371.9 (13.2) ADTV-3M (mn) (Rs/US$) 1,778/24 P/E (X) 29.9 6.3 7.3 Shareholding pattern (%) P/B (X) 1.1 1.0 1.0 Promoters 51.1 EV/EBITDA (X) 18.3 7.3 7.5 FIIs 17.7 RoE (%) 3.8 17.0 13.7 MFs/BFIs 15/6.5 Div. yield (%) 4.6 7.9 6.9 Price performance (%) 1M 3M 12M Sales (Rs bn) 2,688 1,862 2,265 Absolute 1 6 (13) EBITDA (Rs bn) 41 104 105 Rel. to BSE-30 (2) (12) (16) Net profits (Rs bn) 11 51 45
Higher normalized EBITDA as weak refining is offset by strong underlying marketing margins
HPCL’s normalized EBITDA, adjusted for inventory/forex movement, was well above our estimate at Rs36.7 bn in 1QFY21, reflecting higher realized marketing margins, which was partly offset by lower refining margins. Volumes were expectedly weak across refining and marketing segments. Inventory-adjusted refining margins declined sharply to –US0.9/bbl at a discount to benchmark margins; inventory-adjusted marketing margins jumped 73% qoq to Rs9,646/ton, reflecting sharp 80% sequential increase in auto fuel marketing margins. Reported EBITDA at Rs43.5 bn, included cumulative adventitious gains of Rs6.3 bn and modest forex gain of Rs0.5 bn. The company reported net income of Rs28.1 bn (EPS of Rs18.5) in 1QFY21 versus modest profits of Rs268 mn in 4QFY20 reflecting sharp improvement in marketing margins. Delays in refinery expansion projects to complete by end-CY2021; gross debt moderates
In the 1QFY21 conference call, the management indicated—(1) demand for diesel was at 83% of normal volumes and gasoline at 89% of normal volumes in July 2020, (2) HPCL’s crude inventories are at 1.28 mn tons and product inventories at 3 mn tons currently; closing crude oil inventories were valued at US$40/bbl as of end-1QFY21, (4) gross debt moderated to Rs360 bn as of end-June 2020 and Rs310 bn as of end-July 2020 from Rs430 bn a quarter ago; subsidy receivables were at Rs63 bn, (5) capex guidance remains unchanged at Rs115 bn for FY2021 of which Rs18.5 bn has been incurred in 1QFY21 and (6) expansion projects for Mumbai refinery to 9.5 mn tons from 7.5 mn tons and Vizag refinery expansion to 15 mn tons from 8.33 mn tons are expected to commission by end-CY2021 given delays in construction activities due to Covid-10; Barmer refinery with a capacity of 9 mn ton is expected to complete in CY2023. Raise FY2021-23 EPS estimates to factor in higher margins; retain BUY with fair value of Rs260 Tarun Lakhotia We raise our FY2021E EPS by 41% and FY2022-23E EPS by 10% factoring in (1) higher auto fuel marketing margins, (2) lower underlying refining margins for FY2021 and (3) other minor Hemang Khanna changes. Our FV remains unchanged at Rs260, as we reduce the valuation multiple to 6.5X FY2022E EBITDA given higher underlying overall margins assumptions. We retain our BUY rating on the stock noting attractive valuations at 7.3X FY2022E EPS and healthy dividend yield of 7%. We expect downstream PSUs to benefit from (1) elevated marketing margins on auto fuels, which may offset ongoing weakness in refining, (2) gradual recovery in domestic petroleum demand, (3) potential turnaround in global refining cycle from below-trough levels currently and (4) lower fuel and loss in a weaker crude price environment. [email protected] Contact: +91 22 6218 6427
For Private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES’ RATING SYSTEM AND OTHER DISCLOSURES, REFER TO THE END OF THIS MATERIAL. HPCL Oil, Gas & Consumable Fuels
Key highlights of 1QFY21 performance
Sharp decline in normalized refining margins to –US$0.9/bbl. Inventory-adjusted refining contribution declined to –Rs1.9 bn in 1QFY21 from Rs22.9 bn in 4QFY20, led by US$10.2/bbl sequential decline in normalized margins to -US$0.9/bbl and 13% qoq decline in crude throughput to 4 mn tons due to a sharp decline in demand for petroleum products amid the nationwide lockdown. Underlying margins were below our assumption at a discount of US$1.6/bbl to Kotak India benchmark margins. Reported refining margin were at breakeven levels including adventitious gains of US$0.9/bbl (Rs2 bn).
Marketing margins increased 73% qoq to Rs9,646/ton. Inventory-adjusted implied marketing contribution jumped to Rs73.5 bn in 1QFY21 from Rs53.5 bn in 4QFY20, as a sharp 13% qoq decline in volumes was offset by 73% qoq jump in realized marketing margins to Rs9,646/ton. Reported marketing contribution included adventitious gains of Rs4.3 bn.
26% decline in domestic volumes; 35% decline in auto fuels. HPCL’s domestic volumes declined 26% yoy to 7.2 mn tons; exports increased to 0.4 mn tons from 0.3 mn tons in 4QFY20. HPCL’s auto fuel sales volumes declined—(1) 34% yoy for diesel and (2) 37% yoy for gasoline, both impacted by the nationwide lockdown.
Exhibit 1: Interim results of HPCL, March fiscal year-ends (Rs mn)
(% chg.) yoy 1QFY21 1QFY21E 1QFY20 4QFY20 1QFY21E 1QFY20 4QFY20 FY2021E FY2020 (% chg.) Net sales 377,209 401,196 709,889 661,549 (6.0) (46.9) (43.0) 1,862,132 2,687,664 (30.7) Increase/(decrease) in stock (2,303) — 749 6,862 — 4,185 Raw materials (68,013) (84,972) (145,702) (147,762) (20.0) (53.3) (54.0) (373,410) (597,507) (37.5) Product purchase (228,980) (237,996) (511,618) (475,398) (3.8) (55.2) (51.8) (1,218,945) (1,872,339) (34.9) Staff cost (8,643) (8,882) (8,125) (8,382) (2.7) 6.4 3.1 (34,330) (31,935) 7.5 Other expenditure (25,733) (34,742) (28,754) (43,936) (25.9) (10.5) (41.4) (131,290) (138,834) (5.4) Total expenditure (333,672) (366,593) (693,450) (668,615) (9.0) (51.9) (50.1) (1,757,975) (2,636,430) (33.3) EBITDA 43,536 34,604 16,439 (7,066) 25.8 164.8 NA 104,157 51,235 103.3 Other income 5,626 4,179 6,165 4,241 34.6 (8.7) 32.7 17,207 18,382 (6.4) Interest (3,217) (2,922) (2,063) (3,374) 10.1 55.9 (4.7) (14,190) (10,817) 31.2 Depreciation (8,661) (8,180) (8,151) (8,114) 5.9 6.3 6.7 (37,121) (33,044) 12.3 Pretax profits 37,284 27,681 12,390 (14,313) 34.7 200.9 NA 70,054 25,755 172.0 Extraordinaries — — — 5,452 — 5,452 Current tax (8,359) (6,050) (3,363) 10,303 (15,174) (1,670) Deferred tax (787) (870) (918) (1,174) (3,481) (3,165) Net income 28,138 20,761 8,109 268 35.5 247.0 10,399.4 51,399 26,373 94.9 Adjusted net income 28,138 20,761 8,109 (8,945) 35.5 247.0 NA 51,399 17,838 188.1 Adjusted EPS (Rs) 18.5 13.6 5.3 (5.9) 33.7 11.7 Tax rate (%) 24.5 25.0 34.6 37.5 26.6 30.7
Other details Crude throughput (mn tons) 4.0 3.8 3.9 4.5 3.9 1.3 (12.6) 15.7 17.2 (8.5) Domestic sales volume (mn tons) 7.2 7.2 9.8 9.3 0.6 (26.3) (21.7) 34.5 37.8 (8.6) Export sales volume (mn tons) 0.4 0.3 0.3 0.3 1.9 1.9 Pipeline throughput (mn tons) 3.5 5.2 5.3 5.7 (31.9) (33.7) (38.1) 21.7 21.2 2.1 Reported refining margin (US$/bbl) 0.04 4.8 0.8 (1.2) 1.5 1.0 Normalized refining margin (US$/bbl) (0.9) 1.1 3.3 9.4 (176.8) (126.1) NM 1.5 4.3 (64.5) Implied marketing margin (Rs/ton) 9,646 8,521 5,156 5,587 13.2 87.1 72.7 6,835 5,445 25.5 Adventitious gains/(loss) on refining 2,010 7,752 (5,160) (25,840) — (29,600) Adventitious gain/(loss) on marketing 4,320 4,587 (200) (15,290) 7,758 (12,930) Net over-recovery/(under-recovery) — — — — — — Exchange gain/(loss) 490 — 1,937 (9,749) 490 (8,735)
Source: Company, Kotak Institutional Equities estimates
KOTAK INSTITUTIONAL EQUITIES RESEARCH 33 Oil, Gas & Consumable Fuels HPCL
Exhibit 2: Normalized results were above expectations led by higher realized marketing margins, which were partly offset by weak refining margins Calculation of normalized profitability
1QFY19 2QFY19 3QFY19 4QFY19 1QFY20 2QFY20 3QFY20 4QFY20 1QFY21 1QFY21E Gross contribution 75.4 65.8 38.5 93.2 53.3 62.4 61.4 45.3 77.9 78.2 Operating expenses (43.5) (44.6) (28.8) (41.5) (36.9) (39.2) (42.7) (52.3) (34.4) (43.6) Reported EBITDA 31.9 21.2 9.6 51.7 16.4 23.2 18.7 (7.1) 43.5 34.6 Add: net under-recovery — — — — — — — — — — Add: forex-related loss/(gain) 5.4 8.9 (6.0) (2.5) (1.9) 1.2 (0.3) 9.7 (0.5) 0.0 Add: inventory/adventitious loss/(gain) (19.1) (12.8) 34.7 (9.2) 5.4 (0.5) (3.4) 31.1 (6.3) (12.3) Normalized EBITDA 18.2 17.3 38.3 40.0 19.9 23.9 14.9 33.8 36.7 22.3 Other income 3.1 4.1 3.9 5.2 4.2 4.0 4.0 4.2 5.6 4.2 Interest expense 1.9 2.0 1.5 1.9 2.1 2.9 2.5 3.4 3.2 2.9 Depreciation 7.1 7.4 7.4 8.3 8.2 8.1 8.7 8.1 8.7 8.2 Normalized PBT 12.3 12.1 33.4 35.1 13.9 16.9 7.8 26.5 30.5 15.3 Normalized refining margins (US$/bbl) 3.7 2.7 10.0 2.1 3.3 2.5 1.5 9.4 (0.9) 1.1 Blended marketing margins (Rs/ton) 4,960 5,093 5,016 7,795 5,156 5,944 5,180 5,587 9,646 8,521
Source: Company, Kotak Institutional Equities estimates
Exhibit 3: Normalized refining margins declined sharply to -US$0.9/bbl; marketing margins increased 73% qoq, higher than our expectation Calculation of segment-wise profitability
1QFY19 2QFY19 3QFY19 4QFY19 1QFY20 2QFY20 3QFY20 4QFY20 1QFY21 1QFY21E Segment-wise contribution Gross contribution 75.4 65.8 38.5 93.2 53.3 62.4 61.4 45.3 77.9 78.2 Add: net under-recovery — — — — — — — — — — Add: one-off provision/charges — — — — — — — — — — Add: adventitious loss/(gain) (19.1) (12.8) 34.7 (9.2) 5.4 (0.5) (3.4) 31.1 (6.3) (12.3) Normalized gross contribution 56.3 53.0 73.1 84.0 58.7 61.8 58.0 76.4 71.6 65.9 Refining segment 8.1 6.5 24.3 5.2 6.7 6.0 3.2 22.9 (1.9) 2.4 Marketing and other segments 48.2 46.6 48.9 78.8 52.0 55.9 54.8 53.5 73.5 63.5 Blended marketing margins (Rs/ton) 4,960 5,093 5,016 7,795 5,156 5,944 5,180 5,587 9,646 8,521 Reported refining margins (US$/bbl) 7.2 4.8 3.7 4.5 0.8 2.8 1.8 (1.2) 0.04 4.8 Normalized refining margins (US$/bbl) 3.7 2.7 10.0 2.1 3.3 2.5 1.5 9.4 (0.9) 1.1 Crude throughput (mn tons) 4.5 4.8 4.6 4.6 3.9 4.6 4.2 4.5 4.0 3.8 Domestic sales (mn tons) 9.6 8.8 9.4 10.0 9.8 9.0 9.8 9.3 7.2 7.2 Export sales (mn tons) 0.1 0.3 0.3 0.1 0.3 0.5 0.8 0.3 0.4 0.3 Exchange rate (Rs/US$) 67.0 70.1 72.1 72.1 69.5 70.4 71.2 72.5 75.9 75.9
Source: Company, Kotak Institutional Equities estimates
34 KOTAK INSTITUTIONAL EQUITIES RESEARCH HPCL Oil, Gas & Consumable Fuels
Exhibit 4: HPCL's adjusted refining margins were at a discount to Kotak India refining margins Refining margin performance, 1QFY17 onwards (US$/bbl)
(US$/bbl) HPCL's inventory-adjusted margins Kotak India margin 12 10.0 10 9.4 8.5 8.7 8.3 7.9 8 7.4 7.2 7.1 6.7 6.6 6.6 6.8 6.8 6.1 6.4 6.1 5.6 5.7 6 5.2 4.2 4.1 4.0 4.2 3.6 3.9 3.7 4 3.3 2.7 2.5 2.1 1.5 2 0.8
0
(2) (0.9)
1QFY17 3QFY17 1QFY18 3QFY18 1QFY19 3QFY19 2QFY20 4QFY20 4QFY17 2QFY18 4QFY18 2QFY19 4QFY19 1QFY20 3QFY20 1QFY21 2QFY17
Source: Company, Kotak Institutional Equities estimates
Exhibit 5: HPCL's auto fuels volumes declined at a pace higher than domestic consumption Growth in auto fuels volumes across industry, 1QFY18 onwards
(%) BPCL HPCL IOCL Consumption 20
10
0
(10)
(20)
(30)
(40) 1QFY18 2QFY18 3QFY18 4QFY18 1QFY19 2QFY19 3QFY19 4QFY19 1QFY20 2QFY20 3QFY20 4QFY20 1QFY21
Source: Companies, PPAC, Kotak Institutional Equities
KOTAK INSTITUTIONAL EQUITIES RESEARCH 35 Oil, Gas & Consumable Fuels HPCL
Exhibit 6: Kotak India margins have moderated from recent highs Singapore complex refining margins, January 2018 onwards (US$/bbl)
(US$/bbl) Kotak India refining margin 12 10 8 6 4 2 0 (2)
(4)
7-Jul-19 1-Jul-20
1-Jan-18
7-Jun-20
8-Feb-20
7-Apr-18 2-Apr-19
3-Dec-18
9-Nov-18 4-Nov-19
12-Jul-18 31-Jul-19 25-Jul-20
9-Mar-19 3-Mar-20
5-Aug-18
1-May-18
25-Jan-18 20-Jan-19 15-Jan-20
18-Jun-18 13-Jun-19
16-Oct-18 11-Oct-19
18-Feb-18 13-Feb-19
22-Sep-18 26-Apr-19 17-Sep-19 20-Apr-20
27-Dec-18 22-Dec-19
28-Nov-19
14-Mar-18 27-Mar-20
29-Aug-18 24-Aug-19
20-May-19 14-May-20 25-May-18
Source: Kotak Institutional Equities estimates
Exhibit 7: Marketing margins on auto fuels remain above normative levels Gross margins on diesel and gasoline, January 2018 onwards (Rs/liter)
(Rs/liter) Gross marketing margin on diesel Gross marketing margin on gasoline 20 18 16 14.1 14 12 10 8.3 17.57.5 8 6.5 5.9 5.0 6 4.5 4.6 4.5 4.4 4.3 4.1 3.8 3.6 3.7 3.5 3.7 4.1 2.9 3.0 3.2 3.5 3.2 3.4 3.0 9.3 4 2.5 2.6 2.2 7.9 2.0 2.0 5.7 6.6 0.8 1.3 5.0 4.2 2 2.6 2.6 3.7 3.4 2.1 1.4 1.8 2.7 0.8 2.6 2.5 0.2 2.7 3.5 2.3 2.6 0.3 1.8 1.6 2.2 3.4 3.6 3.9 3.9 0
(2) (0.0)
Jul-18 Jul-19 Jul-20
Jan-20 Jan-18 Jan-19
Jun-18 Jun-19 Jun-20
Oct-18 Oct-19
Feb-20 Feb-18 Feb-19
Sep-18 Apr-19 Apr-20 Apr-18 Sep-19
Dec-18 Dec-19
Nov-18 Nov-19
Mar-19 Mar-20 Mar-18
Aug-18 Aug-19 Aug-20
May-18 May-19 May-20
Source: Kotak Institutional Equities estimates
36 KOTAK INSTITUTIONAL EQUITIES RESEARCH HPCL Oil, Gas & Consumable Fuels
Exhibit 8: Key assumptions of HPCL, March fiscal year-ends, 2016-23E (Rs mn)
2016 2017 2018 2019 2020 2021E 2022E 2023E Refining assumptions Exchange rate (Rs/US$) 65.4 67.1 64.5 69.9 70.8 75.5 76.0 77.0 Effective tariff protection (%) 2.6 2.6 2.7 2.8 2.9 2.9 2.9 2.9 Crude throughput (mn tons) 17.2 17.8 18.3 18.4 17.2 15.7 21.3 24.0 Net refining margin (US$/bbl) 6.7 6.2 7.4 5.0 1.0 1.5 3.6 4.0 Refining EBITDA (Rs bn) 41.0 39.5 48.7 22.5 (18.1) (8.4) 10.6 15.5 Marketing assumptions Sales volume (mn tons) 34.0 35.2 38.2 39.9 39.6 36.8 41.6 43.2 Marketing margin on auto fuels (Rs/liter) 1.9 1.8 1.8 2.8 2.7 3.8 2.8 2.8 Subsidy under-recoveries (Rs bn) (0.1) — — — — — — — Implied marketing EBITDA (Rs bn) 38.4 66.3 58.0 91.9 59.4 112.5 94.8 101.2 Adventitious gains/(loss) (12.3) 23.0 2.7 6.3 (12.9) 7.8 — —
Source: Company, Kotak Institutional Equities estimates
Exhibit 9: Earnings sensitivity of HPCL to refining margins and marketing margins (Rs mn)
Fiscal 2021E Fiscal 2022E Downside Base Case Upside Downside Base Case Upside Refining margins Refining margins (US$/bbl) 0.5 1.5 2.5 2.6 3.6 4.6 Net profits (Rs mn) 44,954 51,399 57,845 35,838 44,606 53,374 EPS (Rs) 29.5 33.7 38.0 23.5 29.3 35.0 % upside/(downside) (12.5) 12.5 (19.7) 19.7
Marketing margins Auto fuels margins (Rs/liter) 3.3 3.8 4.3 2.3 2.8 3.3 Net profits (Rs mn) 40,980 51,399 61,818 32,497 44,606 56,715 EPS (Rs) 26.9 33.7 40.6 21.3 29.3 37.2 % upside/(downside) (20.3) 20.3 (27.1) 27.1
Source: Kotak Institutional Equities estimates
Exhibit 10: We compute fair value of Rs260 for HPCL Fair valuation of HPCL (Rs/share)
EV/EBITDA based valuation Refining and marketing business (Rs bn) March 2022E standalone EBITDA 105 EV/EBITDA (X) 6.5 EV of refining and marketing business (Rs bn) 685 EV of refining and marketing business (Rs) (A) 449 Investments (Rs bn) HMEL 71 MRPL 12 Oil India 1 Value of investments (Rs bn) 84 Value of investments (Rs) (B) 55 Net debt (Rs bn) 373 Net debt (Rs) (C) 244 Total equity value (A) + (B) - (C) 260
Source: Kotak Institutional Equities estimates
KOTAK INSTITUTIONAL EQUITIES RESEARCH 37 Oil, Gas & Consumable Fuels HPCL
Exhibit 11: Profit model, balance sheet, cash model of HPCL, March fiscal year-ends, 2016-23E (Rs mn)
2016 2017 2018 2019 2020 2021E 2022E 2023E Profit model (Rs mn) Net sales 1,777,006 1,870,237 2,193,326 2,751,974 2,687,664 1,862,132 2,265,218 2,373,329 EBITDA 79,393 110,990 106,719 114,420 41,205 104,157 105,352 116,735 Other income 11,442 15,147 18,495 16,352 18,382 17,207 17,240 17,512 Interest (6,536) (5,357) (5,667) (7,259) (10,817) (14,190) (16,699) (19,379) Depreciation (26,532) (25,353) (27,528) (30,126) (33,044) (37,121) (44,971) (47,892) Pretax profits 57,766 95,428 92,019 93,387 15,726 70,054 60,922 66,977 Extraordinary items — (5,219) — — — — — — Current tax (14,336) (22,362) (25,710) (27,277) (1,670) (15,174) (12,486) (13,666) Deferred tax (7,373) (6,283) (2,739) (5,620) (3,165) (3,481) (3,830) (4,212) Prior-period adjustment 1,204 525 — — 15,481 — — — Adjusted net profits 37,262 65,650 63,571 60,491 10,891 51,399 44,606 49,099 Earnings per share (Rs) 24.4 43.1 41.7 39.7 7.1 33.7 29.3 32.2
Balance sheet (Rs mn) Total equity 179,698 203,474 239,482 281,748 289,624 315,323 337,626 362,175 Deferred tax liability 49,194 58,956 65,692 71,648 54,915 58,397 62,226 66,439 Total borrowings 211,675 212,497 209,909 272,397 430,210 439,210 470,210 471,710 Currrent liabilities 255,227 309,712 352,989 411,716 365,359 366,626 424,164 451,644 Total liabilities and equity 695,793 784,639 868,072 1,037,509 1,140,108 1,179,556 1,294,227 1,351,968 Cash 238 337 11,941 956 1,132 1,346 1,377 1,761 Current assets 240,166 295,693 325,509 413,614 359,521 281,584 327,047 337,143 Total fixed assets 349,603 379,424 419,571 504,752 654,341 744,761 787,188 807,699 Investments 105,786 109,186 111,051 118,186 125,115 151,865 178,615 205,365 Total assets 695,793 784,639 868,072 1,037,509 1,140,108 1,179,556 1,294,227 1,351,968
Free cash flow (Rs mn) Operating cash flow, excl. working capital 75,478 88,488 95,781 117,169 33,620 69,613 73,291 82,788 Working capital changes (14,397) 6,120 9,817 (24,776) 8,607 79,204 12,075 17,383 Capital expenditure (47,100) (58,890) (66,901) (112,571) (137,847) (122,360) (84,523) (67,500) Investments 1,484 1,368 (14,170) (8,231) (9,319) (26,750) (26,750) (26,750) Other income 4,715 4,473 7,159 6,125 5,509 17,207 17,240 17,512 Free cash flow 20,180 41,560 31,686 (22,285) (99,430) 16,914 (8,667) 23,434
Ratios (%) Debt/equity 92.5 81.0 68.8 77.1 124.9 117.5 117.6 110.1 Net debt/equity 92.4 80.8 64.9 76.8 124.5 117.2 117.3 109.6 RoAE 17.3 25.3 22.4 18.4 7.6 14.3 11.5 11.9 RoACE 9.5 15.0 13.6 11.4 0.6 7.8 6.8 7.2
Key assumptions Crude throughput (mn tons) 17.2 17.8 18.3 18.4 17.2 15.7 21.3 24.0 Effective tariff protection (%) 2.6 2.6 2.7 2.8 2.9 2.9 2.9 2.9 Net refining margin (US$/bbl) 6.7 6.2 7.4 5.0 1.0 1.5 3.6 4.0 Sales volume (mn tons) 34.0 35.2 38.2 39.9 39.6 36.8 41.6 43.2 Marketing margin on auto fuels (Rs/liter) 1.9 1.8 1.8 2.8 2.7 3.8 2.8 2.8 Subsidy under-recoveries (Rs mn) (78) — — — — — — — Adventitious gain/(loss) (Rs mn) (12,300) 23,000 2,720 6,250 (12,930) 7,758 — —
Source: Company, Kotak Institutional Equities estimates
38 KOTAK INSTITUTIONAL EQUITIES RESEARCH RS Vodafone Idea (IDEA) Telecommunication Services AUGUST 09, 2020 RESULT Sector view: Attractive
Beyond AGR woes. Sharp and quick deterioration in VIL’s operational performance has CMP (`): 9 gone rather unnoticed amid all the attention on the developments in the AGR case. Fair Value (`): - Regaining competitiveness wouldn’t be easy even as the company intends to redouble BSE-30: 38,041 its efforts in doing so once the AGR hump is crossed. Massive balance sheet repair would be needed again, in our view. Even this may not guarantee improved competitiveness by itself. Our RS (rating suspended stance) stays pending the final outcome of the AGR case.
Vodafone Idea Stock data Forecasts/valuations 2020 2021E 2022E 52-week range (Rs) (high,low) 13-2 EPS (Rs) (12.4) (7.3) (6.3) Mcap (bn) (Rs/US$) 254/3.4 EPS growth (%) 24.7 41.0 13.4 ADTV-3M (mn) (Rs/US$) 6,553/87 P/E (X) (0.7) (1.2) (1.4) Shareholding pattern (%) P/B (X) 4.2 (1.1) (0.6) Promoters 72.1 EV/EBITDA (X) 8.1 10.0 8.0 FIIs 8.8 RoE (%) (108.3) 251.4 57.2 MFs/BFIs 4.6/1.5 Div. yield (%) 0.0 0.0 0.0 Price performance (%) 1M 3M 12M Sales (Rs bn) 450 452 507 Absolute (8) 113 65 EBITDA (Rs bn) 148 171 223 Rel. to BSE-30 (11) 76 59 Net profits (Rs bn) (355) (210) (182)
1QFY21 earnings print – revenues crater
Net operating revenues declined 9.3% qoq and 5.4% yoy to Rs106.6 bn, 2.7% below our estimate. We note that Jio reported double-digit sequential growth while Bharti’s revenues were flattish qoq. ARPU for the quarter stood at Rs114, down 6% qoq and 2.3% below our estimate. Weak print was due to (1) Covid impact in a couple of customer segments and (2) weakening subs mix. Ind-AS-116 EBITDA stood at Rs41 bn reported (including roughly Rs3 bn of one-off cost reversals in network opex and LF/SUC). On an ex-Ind-AS-116 basis, EBITDA stood at Rs15.4 bn (Rs61.6 bn annualised).
Reported net loss stood at Rs255 bn. The company took a fresh provision of Rs194.4 bn towards AGR dues, taking total provisions made till date to Rs654.4 bn. 1Q capex stood at Rs6 bn. Gross debt stood at Rs1.19 tn with end-June gross cash balance at Rs34.5 bn.
Fine tunes selective focus strategy again
VIL is increasing its focus on top-16 circles (87/94% of revenues for VIL/industry) and the entire operations will be managed by 10 cluster-based teams with key common functions managed at the central level. VIL is targeting fresh opex cost savings of Rs40 bn over the next 18 months. This is in addition to the merger-related synergies of Rs84 bn they have already realized.
We believe that the strategy of not investing in less-priority circles is a risky one when competing against two strong, high-quality pan-India competitors. If not executed well, this could accelerate the downward spiral (accelerated subscriber loss) for VIL. Competition is stiff at Rohit Chordia both the premium-end (mainly from Bharti) and the low-end (from Jio). The fight will only get intense from here even if there is an industry-wide price increase. Aniket Sethi
Deteriorating fundamentals make balance sheet repair difficult
Management, for the first time in a public forum, spoke about the need for quick balance sheet repair. Crossing the AGR hump would be a big step, for sure, but only into bigger challenges. VIL is staring at an extremely tough scenario in FY2023E once the moratorium on deferred spectrum pay-outs is lifted. Case for survival is weak without sharp ARPU increase by then. [email protected] Contact: +91 22 6218 6427
For Private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES’ RATING SYSTEM AND OTHER DISCLOSURES, REFER TO THE END OF THIS MATERIAL. Telecommunication Services Vodafone Idea
EBITDA estimates see sharp cuts despite us baking in the indicated fresh cost savings
We build further weakness in VIL’s revenue print leading to a 10-14% cut in FY2021-23E revenues. Indicated cost control measures offset this impact partly, leading to 7-10% cut in EBITDA. We are still dealing in extremes as far as a call on VIL is concerned. To be positive, one needs to assume a lot of things going right for the company. Our rating for the stock stays suspended pending the AGR case outcome.
Other key result highlights
ARPU for the quarter stood at Rs114, down 6% qoq and 2.3% below our estimate. We note that the company’s ARPU for 1QFY21 is only about Rs5 higher than 3QFY20 levels. The company’s quarter-average subs base has fallen by 22 mn since (nearly 7%). Given that a bulk of this decline is at the lower end (ex-4G subs base has fallen 27 mn or 13%) and that we have seen one round of substantial price hikes, the modest sub-5% increase in ARPU is baffling. This either reflects deteriorating quality of 4G subs base or down- trading within this segment – worrying sign, either way.
EOP subs base stood at 279.8 mn, a decline of 11.3 mn subs qoq.
Voice traffic on the network declined 6% qoq and 14% yoy to 579 bn min.
Data volumes grew 11% qoq and 40% yoy to 4.5 bn GB. Sequential growth is broadly in line with peers.
Number of sites on the network went down by nearly 4,400 qoq to 181,229 EOP. Site count is now roughly 8% below Bharti’s and 30% below Jio (estimate).
4G subs base declined 1 mn qoq to 104.6 mn (EOP count). Data usage per data sub grew around 13% qoq to just under 11 GB/month.
Other call takeaways
VIL continues to work on its five-pillar strategy. The five pillars are (1) focused network investments in 16 circles, (2) market initiatives to drive ARPU increase, (3) focus on enterprise and business segments, (4) drive content partnerships and digital revenue streams, and (5) cost optimization.
Cost saving initiatives. VIL targets Rs40 bn of annualized opex savings in the next 18 months. They are now focusing on top-16 circles and 10 cluster-based teams; a lot of common functions will also be managed centrally to drive efficiencies. VIL has also improved its digital service capabilities to drive cost savings.
Network capabilities. In the focus circles where VIL has completed network integration, the company has been able to significantly enhance its capacity on the back of (1) spectrum re-farming, and (2) implementation of technologies like massive MIMOs (largest deployment has been done by VIL). VIL has also undertaken the largest edge-cloud deployment in the country and is also implementing several 5G-ready technologies like open RAN.
Required ARPU. Industry needs ARPU of Rs230-250 to be able to generate reasonable return on capital. The need for tariff improvement has also been acknowledged by the sector regulator who is the middle of a consultation process on floor tariffs.
40 KOTAK INSTITUTIONAL EQUITIES RESEARCH Vodafone Idea Telecommunication Services
Exhibit 1: Key changes to VIL model, FY2021-23E, March fiscal year-ends, Rs bn
Revised estimates Old estimates Change (%) FY2021E FY2022E FY2023E FY2021E FY2022E FY2023E FY2021E FY2022E FY2023E Revenues 452 507 528 501 590 614 (10) (14) (14) EBITDA 171 223 299 185 247 322 (8) (10) (7) EBIT (73) (14) 60 (64) (3) 69 PAT (210) (182) (114) (214) (158) (93) Recurring EPS (Rs/share) (7.3) (6.3) (4.0) (7.5) (5.5) (3.2)
Subs (mn) 268 256 250 271 261 259 (1) (2) (4) ARPU (Rs/sub/month) - total 124 149 161 137 172 183 (10) (13) (12)
ARPU (Rs/sub/month) - ex-IC 110 135 160 123 158 183 (10) (14) (12)
Source: Kotak Institutional Equities estimates
Exhibit 2: Interim consolidated results of Vodafone Idea, March fiscal year-ends (Rs mn)
(% chg.) 1QFY21 1QFY21E 1QFY20 4QFY20 KIE est. yoy qoq FY2021E FY2020 (% chg.) Revenues 106,593 109,574 112,699 117,542 (2.7) (5.4) (9.3) 451,530 449,575 0.4
Co s ts Interconnection costs (15,026) (13,198) (16,100) 13.9 (6.7) (60,919) (59,976) 1.6 License fee and spectrum charges (10,017) (11,910) (13,394) (15.9) (25.2) (46,799) (48,482) (3.5) Network operating costs (24,110) (29,986) (25,872) (19.6) (6.8) (101,523) (109,916) (7.6) Employee costs (5,718) (5,843) (3,210) (2.1) 78.1 (22,968) (21,643) 6.1 SG&A expenses (10,738) (15,262) (15,165) (29.6) (29.2) (48,627) (61,581) (21.0) Costs (65,609) (74,348) (76,199) (73,741) (11.8) (13.9) (11.0) (280,836) (301,598) (6.9) EBITDA 40,984 35,227 36,500 43,801 16.3 12.3 (6.4) 170,695 147,977 15.4 EBITDA margin (%) 38.4 32.1 32.4 37.3 37.8 32.9 D&A (59,757) (61,138) (61,308) (60,388) (2.3) (2.5) (1.0) (243,528) (243,564) EBIT (18,773) (25,911) (24,808) (16,587) (72,833) (95,587) Net interest income/(expense) (37,486) (39,974) (34,441) (40,108) (137,749) (142,379) PBT (56,259) (65,885) (59,249) (56,695) (210,583) (237,966) Taxes 2 23,060 17,999 991 — (120,811) MI and share of associates 889 — 581 678 889 3,553 PAT (55,368) (42,825) (40,669) (55,026) NM NM NM (209,694) (355,224) Extraordinaries (199,232) — (8,070) (61,409) (76,732) (383,557) Reported net income (254,600) (42,825) (48,739) (116,435) NM NM (286,426) (738,781)
Subscriber Base (EoP) (mn) 280 280 320 291 (0.1) (12.6) (3.9) 268 291 (8.0) Blended ARPU (Rs/month) 114 117 108 121 (2.3) 5.6 (5.8) 124 111 11.7 Average MoU (min) 678 744 690 688 (8.8) (1.7) (1.5) 724 729 (0.8) Total Minutes of Use (mn) 578,548 637,233 676,259 615,684 (9.2) (14.4) (6.0) 2,325,177 2,546,920 (8.7) Data Volume (Petabyte) 4,523 4,586 3,222 4,090 (1.4) 40.4 10.6
Source: Company, Kotak Institutional Equities
KOTAK INSTITUTIONAL EQUITIES RESEARCH 41 Telecommunication Services Vodafone Idea
Exhibit 3: Vodafone Idea, key performance indicators, March fiscal year-ends
3QFY19 4QFY19 1QFY20 2QFY20 3QFY20 4QFY20 1QFY21 Subs criber Base (EoP) (mn) 387.2 334.1 320 311.1 304 291.1 279.8 VLR Subs cribers (EoP) (mn) 390.8 368.3 322.4 303.4 297.6 293.7 273 Net VLR Subs criber addi tion (mn) (12.0) (22.5) (45.9) (19.0) (5.8) (3.9) (20.7) Pre-paid Subs (% of EoP subs cribers ) 93.9% 93.1% 92.8% 92.7% 92.4% 92.1% 92.3% Blended ARPU (Rs/month) 89 104 108 107 109 121 114 Average MoU (min) 580 662 690 669 674 688 678 Blended churn (%) 5 7.2 3.7 3.5 3.3 3.3 2.0 2G Coverage - No. of census towns (#) 7,955 7,938 7,986 7,986 7,986 7,986 7,986 2G Coverage - No. of villages (#) 472,381 462,593 479,187 479,187 479,187 479,187 479,187 Broadband Coverage - No. of census towns (#) 7,573 7,570 7,580 7,580 7,580 7,580 7,580 Broadband Coverage - No. of villages (#) 263,915 265,464 277,600 306,549 310,926 317,600 319,501 Total Unique Towers (EoP) (#) 198,171 192,580 189,547 187,357 186,011 185,544 181,229 Total Unique Broadband Towers (EoP) (#) 157,683 155,632 157,278 158,153 160,097 162,380 162,551 Total Broadband sites (3G+4G) (#) 376,816 371,922 392,747 405,346 417,361 436,006 446,131 Total Minutes of Use (mn) 712,283 702,749 676,259 630,688 624,289 615,549 578,548 Total Data Volume (2G+3G+4G) (bn MB) 2,705 2,947 3,222 3,492 3,790 4,090 4,523 Total Data Suscribers (2G+3G+4G) (mn) 146.3 146.3 143 140 142 140 136 Data Usage by Data Subs criber (2G+3G+4G) (MB) 6,324 6,716 7,417 8,209 8,951 9,686 10,956 Broadband Subs cribers (3G+4G) (mn) 107.9 110.2 110.5 112.2 118.4 117.4 116.4 4G subs 75.3 80.7 84.8 95.9 104.2 105.6 104.6
Source: Company, Kotak Institutional Equities
Exhibit 4: VIL key wireless revenue assumptions, March fiscal year-ends (Rs mn)
FY2019 FY2020 FY2021E FY2022E FY2023E FY2024E Key wireless revenue assumptions Wireless Revenues (Rs mn) 333,807 415,835 415,112 468,921 488,604 540,675 % yoy NM (0) 13 4 11 EOP subs (mn) 334 291 268 256 250 248 chg. (mn) (43) (23) (12) (6) (2) ARPU (Rs/month) 111 124 149 161 181 % yoy 12 21 8 12 Ex-IC ARPU (Rs/month) 96 110 135 160 180
Note: Merger was effective August 31, 2018.
Source: Company, Kotak Institutional Equities
42 KOTAK INSTITUTIONAL EQUITIES RESEARCH Vodafone Idea Telecommunication Services
Exhibit 5: VIL summary financials, March fiscal year-ends (Rs mn)
Rs mn FY2019 FY2020 FY2021E FY2022E FY2023E FY2024E Profit and loss statement Revenues 370,925 449,575 451,530 507,160 528,372 581,637 Total costs (332,495) (301,598) (280,836) (283,863) (229,277) (244,267) Total costs ex-IC, ex-LF/SUC (251,474) (193,140) (173,118) (166,799) (164,268) (172,824) EBITDA 38,430 147,977 170,695 223,297 299,095 337,370 D&A (145,356) (243,564) (243,528) (237,430) (239,569) (244,245) EBIT (106,926) (95,587) (72,833) (14,133) 59,526 93,125 Net finance costs (87,317) (142,379) (137,749) (167,520) (173,924) (175,713) PBT (194,243) (237,966) (210,583) (181,654) (114,399) (82,588) Provision for taxes 48,950 (120,811) 0 0 0 0 PAT before MI/associates (145,293) (358,777) (210,583) (181,654) (114,399) (82,588) MI + Associates 1,969 3,553 889 — — — Recurring PAT (143,324) (355,224) (209,694) (181,654) (114,399) (82,588) EO items (23,124) (383,557) (76,732) — — — Reported PAT (166,448) (738,781) (286,426) (181,654) (114,399) (82,588) # of shares (mn) 8,736 28,735 28,735 28,735 28,735 28,735 EPS (Rs/share) (16.4) (12.4) (7.3) (6.3) (4.0) (2.9) Condensed balance sheet Net fixed assets 1,801,588 1,868,780 1,755,722 1,679,493 1,627,622 1,557,348 Other LT assets 311,595 233,555 150,967 155,848 150,711 157,167 Current assets ex-cash 182,945 166,861 198,283 195,494 196,474 203,489 Total assets 2,296,128 2,269,196 2,104,972 2,030,835 1,974,807 1,918,005 Shareholders' equity 596,348 59,799 (226,627) (408,280) (522,679) (605,267) Net debt 1,183,883 1,125,200 1,629,783 1,720,621 1,757,868 1,756,392 Other LT liabilities (25,620) 126,407 121,824 140,986 148,739 160,215 Current liabilities 541,517 957,790 579,992 577,508 590,879 606,665 Total equity and liabilities 2,296,128 2,269,196 2,104,972 2,030,835 1,974,807 1,918,005 Condensed CF statement Operating cash flow 95,577 73,275 (449,753) 142,883 224,376 246,161 Capex (44,000) (101,300) (50,000) (90,000) (120,000) (108,000) FCF 51,577 (28,025) (499,753) 52,883 104,376 138,161 Change in borrowings 15,580 (104,555) 440,000 1,000 35,000 0 Net finance costs (53,962) (142,379) (47,749) (68,520) (173,924) (175,713) Proceeds from sale of assets 0 0 122,500 — — —
Source: Company, Kotak Institutional Equities
KOTAK INSTITUTIONAL EQUITIES RESEARCH 43 REDUCE Canara Bank (CBK) Banks AUGUST 09, 2020 RESULT Sector view: Attractive
Headwinds persist. Post the merger with Syndicate Bank, we re-instate coverage on CMP (`): 102 Canara Bank with REDUCE rating and Fair Value of Rs90. The bank continues to face Fair Value (`): 90 headwinds on credit cost front given provisions for Covid-related stress and room to BSE-30: 38,041 further improve NPL coverage apart from merger relate challenges. CET-1 has dropped to 8.2% following merger-related provisions leading to net NPL at 4% and 58% coverage. We prefer SBI and BOB among PSU banks as these offer better risk-reward given their stronger positioning.
Canara Bank Stock data Forecasts/valuations 2020 2021E 2022E 52-week range (Rs) (high,low) 239-74 EPS (Rs) (21.7) (5.0) 7.5 QUICK NUMBERS Mcap (bn) (Rs/US$) 149/2 EPS growth (%) (571.1) 76.9 249.7 ADTV-3M (mn) (Rs/US$) 1,688/23 P/E (X) (4.7) (20.3) 13.6 NII growth at ~20% Shareholding pattern (%) P/B (X) 0.5 0.5 0.5 Promoters 78.5 BVPS (Rs) 204.7 226.3 221.9 yoy and PPOP FIIs 3.3 RoE (%) (5.9) (1.4) 2.1 growth of ~32% MFs/BFIs 4/7.1 Div. yield (%) 0.0 0.0 0.0 Price performance (%) 1M 3M 12M NII (Rs bn) 131 215 225 yoy Absolute (2) 25 (55) PPOP (Rs bn) 92 147 159 Rel. to BSE-30 (6) 4 (56) Net profits (Rs bn) (22) (7) 11 Gross NPL at 8.8% and net NPL at 4%
Strong earnings supported by operating performance and lower tax rate REDUCE with Fair In its first result post the merger with Syndicate Bank, Canara Bank reported a net profit Value of Rs90 compared to a loss in 4QFY20/1QFY21 for the combined bank. Operating profit grew 32% yoy on 21% NII growth and 11% non-interest income growth. While loan growth was stable qoq, cost of funds declined ~50bps, driving NII growth. Operating expense growth was controlled at 7% yoy and declined ~20% qoq possibly driven by harmonizing of assumption before the merger. Deposits growth was muted at 5% yoy, with CASA ratio stable at ~34% and including retail term deposits at ~75%. Tax rate for the quarter was low at 12%.
NPL ratios lowest since 2015; moratorium book at ~23%
GNPL of 8.8% (-60bps qoq) and NNPL of 4% (-40bps qoq) were lowest since FY15 with and NPL coverage improving to 58% (+150bos qoq). Slippages expectedly were low at 1.1% with write-offs similar to the past quarter at ~2%. Moratorium book stood at ~23%, compared to the last reported pre-merger figure of 19%. Retail moratorium seemed high at 30% despite Abhijeet Sakhare ~50% share of home loans and primarily to salaried customers. In our view the bank still has a few headwinds over the near to medium-term: (1) improving NPL coverage closer to SBI/BOB i.e. ~70% levels which will entail further provisions, (2) the bank has not been making material M B Mahesh, CFA Covid-related provisions to absorb impact post August, (3) relatively high share of loans rated BBB or below (~35% of corporate loans). Nischint Chawathe Reinstate coverage with REDUCE; prefer SBI and BOB among PSU banks Ashlesh Sonje We reinstate coverage with REDUCE rating and Fair Value of Rs90, valuing the bank at 0.4X and 5X June 2022E EPS for RoEs that will remain sub-10% over the medium-term. While the Dipanjan Ghosh absolute valuations appear undemanding, we prefer to own SBI and BOB among PSU banks given (1) stronger positioning to absorb Covid-related stress; (2) no merger related overhang; (3) a higher share of low cost deposits. Canara Bank’s low CET-1 of 8.2% in the context of high share of moratorium does increase the need for capital buffers which increases the risk of dilution at current valuations. Key risk to our call is better than expected economic recovery along with stronger NPL recoveries. [email protected] Contact: +91 22 6218 6427
For Private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES’ RATING SYSTEM AND OTHER DISCLOSURES, REFER TO THE END OF THIS MATERIAL. Canara Bank Banks
Exhibit 1: Canara Bank quarterly results March fiscal year-ends, 1QFY20-1QFY21 (Rs mn)
(% chg.) 1QFY21 1QFY21E 1QFY20 4QFY20 1QFY21E 1QFY20 4QFY20 2021E 2020 (% chg.) 2022E (merged) (merged) (merged) (merged) (merged) (merged) Interest income 180,358 174,708 177,460 176,070 3 2 2 686,375 489,350 40 733,326 Interest on advances 131,177 126,290 130,920 126,610 4 0 4 499,973 360,759 39 509,455 Income from investments 42,719 43,143 41,950 42,480 (1) 2 1 162,565 113,359 43 195,918 Others 6,463 5,275 4,590 6,980 23 41 (7) 23,837 15,232 56 27,952 Interest expense 119,403 123,186 127,130 125,210 (3) (6) (5) 471,361 358,111 32 508,784 Net interest income 60,956 51,522 50,330 50,860 18 21 20 215,015 131,239 64 224,541 Non-int.income 26,501 29,588 23,980 30,270 (10) 11 (12) 116,863 78,132 50 130,607 Sale of investments 6,370 5,400 2,700 3,360 18 136 90 16,000 7,580 111 17,000 Fee income 2,430 3,624 2,480 2,800 (33) (2) (13) 15,226 8,230 85 16,748 Recoveries 2,590 4,155 4,790 8,620 (38) (46) (70) 16,000 14,700 9 18,000 Other income excl treasury 20,131 24,188 21,280 26,910 (17) (5) (25) 100,863 70,552 43 113,607 Total income 87,457 81,110 74,310 81,130 8 18 8 331,877 209,371 59 355,148 Op. expenses 44,602 46,266 41,800 57,020 (4) 7 (22) 182,719 115,772 58 193,623 Employee cost 30,374 27,653 27,000 38,290 10 12 (21) 120,626 68,525 76 129,190 Other cost 14,228 18,613 14,800 18,730 (24) (4) (24) 62,093 47,247 31 64,433 Profit pre provisions 42,855 34,843 32,510 24,110 23 32 78 149,159 93,598 59 161,525 Provisions and cont. 38,263 39,266 38,680 88,960 (3) (1) (57) 160,128 111,154 44 145,100 NPL provisions 35,500 39,002 43,680 79,390 (9) (19) (55) 155,128 106,550 46 140,100 PBT 4,591 (4,423) (6,170) (64,850) NM NM NM (10,969) (17,556) (38) 16,425 Tax 529 1,210 330 830 (56) 60 (36) (3,675) 4,802 (177) 5,502 Net profit 4,062 (5,633) (6,500) (65,680) NM NM NM (7,295) (22,357) (67) 10,922 Tax rate (%) 12 NM NM NM NM NM 34 PBT-gains+ prov - ex ordry 20,150 17,541 17,320 (680) 15 16 NM 155,128 106,550 46 140,100
Key balance sheet items (Rs bn) Deposits 9,096 9,152 8,699 9,066 (1) 5 0 9,305 6,254 49 9,673 CA 408 314 403 30 1 412 265 56 429 SA 2,535 2,224 2,500 14 1 2,572 1,697 52 2,645 CASA ratio (%) 32.4 29.2 32.0 319 bps 33 bps 32.1 31.4 70 bps 31.8 Term deposits 6,152 6,162 6,163 (0) (0) 6,320 4,291 47 6,600 Advances 6,172 6,343 6,003 6,165 (3) 3 0 6,245 4,322 44 6,492 Total retail loans 1,076 1,065 1,132 1 (5) Agriculture advances 1,341 1,272 1,329 5 1 SME 1,053 1,144 1,057 (8) (0) Industrial loans 2,702 2,820 2,995 (4) (10) Investments 2,509 2,586 2,280 2,512 (3) 10 (0) 2,897 1,762 64 2,865 Key calculated ratios (%) Yield on advances 8.5 8.2 851 bps 30 bps 8.1 8.4 -33 bps 8.0 Yield on investment 6.8 6.7 681 bps 9 bps 6.1 7.0 -91 bps 6.8 Yield on earning assets 7.3 7.2 733 bps 17 bps 6.1 7.0 -91 bps 6.8 Cost of deposits 5.3 5.5 526 bps -25 bps 4.7 5.3 -67 bps 4.9 Cost fo funds 4.9 5.2 494 bps -24 bps 4.8 5.5 -68 bps 5.0 NIM 2.9 2.4 287 bps 42 bps 2.1 2.0 16 bps 2.2 Cost to income 51.0 70.3 5100 bps -1928 55.1 55.3 -24 bps 54.5 Cost to average assets 2.0 2.2 202 bps -16 bps 2.0 1.6 39 bps 1.8 Credit cost 2.3 5.8 230 bps -347 bps 2.5 2.5 2 bps 2.2 Asset quality details Gross NPLs (Rs bn) 575 648 611 (11) (6) 576 370 55 555 Gross NPL ratio (%) 8.8 10.3 9.4 -147 bps -58 bps 8.5 8.2 33 bps 7.8 Net NPLs (Rs bn) 244 352 268 (31) (9) 177 183 (3) 235 Net NPL ratio (%) 4.0 5.9 4.3 -192 bps -39 bps 2.8 4.2 -139 bps 3.6 Provision Coverage (%) 57.7 45.6 56.2 1204 bps 143 bps 69.3 50.7 1857 bps 57.6 Slippages (Rs bn) 17 60 53 (72) (68) 154 139 11 187 Slippage (%) 1.1 3.9 3.4 -282 bps -233 bps 2.5 3.3 -75 bps 2.8 Capital adequacy details (%) CAR 12.8 12.3 13.0 46 bps -26 bps CET-1 8.2 8.4 8.5 Tier I 9.3 9.5 9.6 -22 bps -34 bps
Source: Company, Kotak Institutional Equities
KOTAK INSTITUTIONAL EQUITIES RESEARCH 45 Banks Canara Bank
Exhibit 2:1PSU banks peer comparison March fiscal year-end, 4QFY20-1QFY21
SBI BOB Canara Bank PNB Union Bank 1QFY21 4QFY20 1QFY21 4QFY20 4QFY20 CET-1 (%) 10.1 9.4 8.2 9.2 8.6 NIM (%) 3.2 2.7 2.8 2.4 2.2 CASA ratio (%) 47.2 39.1 33.8 41.3 35.6 NNPL (%) 1.9 3.1 4.0 5.5 5.2 PCR (%) 67.1 68.9 57.7 64.0 67.8 Net NPL/NW (X) 0.18 0.30 0.46 0.44 0.52 Adj. P/B - FY22E (X) 0.3 0.4 0.5 0.6 0.7
Source: Company, Kotak Institutional Equities
Exhibit 3:Canara Bank has a high share of moratorium book
Total outstanding Availed amount % of total Agriculture 1,199 290 24 Retail 951 288 30 MSME 784 237 30 Corporate 2,300 385 17 Others 166 23 14 Total 5,399 1,224 23
Source: Company, Kotak Institutional Equities
Exhibit 4: Slippages decreased to 1% in 1QFY2 March fiscal year-ends, 2012-1QFY21 (Rs bn)
(merged) 2012 2013 2014 2015 2016 2017 2018 2019 1QFY20 2QFY20 3QFY20 4QFY20 1QFY21 Total gross NPL (Rs bn) 40 63 76 130 316 342 475 392 394 387 366 370 575 Gross NPL (%) 1.7 2.6 2.5 3.9 9.4 9.6 11.8 8.8 8.8 8.7 8.4 8.2 8.8 Slippages (%) 2.1 2.0 3.0 3.6 17.6 3.7 7.2 4.5 3.4 2.4 4.5 3.7 1.1 Write-off (%) 1.3 0.7 0.6 (0.5) 2.5 3.0 2.4 4.2 1.8 1.2 2.0 2.0 2.1 LLP (%) 0.9 1.0 1.0 1.2 7.4 3.1 4.2 3.7 2.1 2.1 1.1 4.6 2.3 Net NPL 34 53 60 87 208 216 285 230 231 221 213 183 244 Net NPL (%) 1.5 2.2 2.0 2.7 6.4 6.3 7.5 5.4 5.4 5.2 5.1 4.2 4.0 Coverage (%, without w/o) 16.0 15.7 21.2 33.0 34.2 36.7 39.9 41.5 41.2 42.9 41.8 50.7 57.7 Coverage (%, w/o) 67.6 61.4 60.1 57.3 50.1 55.6 58.1 68.1 68.6 70.1 71.0 75.9 79.0
Source: Company, Kotak Institutional Equities
Exhibit 5: Share of retail loans stands at ~17% in 1QFY21 Loan book break-up, March fiscal year-ends, 2010-1QFY21 (%)
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 1QFY21 Loan mix (%) Retail 14.1 11.9 10.7 9.5 11.1 12.8 16.7 17.2 15.5 17.4 18.5 17.4 Agriculture 14.8 12.4 13.7 16.8 16.2 17.8 20.7 21.7 21.6 21.2 22.2 21.7 SME 18.4 17.7 15.0 15.3 16.6 18.4 20.5 21.7 21.5 19.9 18.2 17.1 Corporate 52.7 58.0 58.7 58.3 56.0 51.0 42.1 39.4 41.4 41.5 41.1 43.8 Infrastructure 19.3 16.3 17.4 20.0 19.2 19.6 16.7 14.7 13.8 13.3 13.0 12.9 NBFCs — — 10.6 9.7 8.7 7.3 6.6 7.5 9.9 12.4 12.5 15.1 HFCs — — 3.4 2.9 2.7 2.2 1.9 2.9 3.5 5.1 4.6 5.8
Source: Company, Kotak Institutional Equities
46 KOTAK INSTITUTIONAL EQUITIES RESEARCH Canara Bank Banks
Exhibit 6: Sharp moderation in loan growth Exhibit 7: CD ratio stays low at <70% Loans/deposit growth, March fiscal year-ends, 1QFY17-1QFY21 (%) CD ratio, March fiscal year-ends, 1QFY17-1QFY21 (%)
Loan growth Deposit growth 75 20
72 15
10 69
5 66
- 63
(5) 60
3QFY17 4QFY17 1QFY18 2QFY18 3QFY18 4QFY18 1QFY19 1QFY17 2QFY17
1QFY17 3QFY17 1QFY18 2QFY18 4QFY18 1QFY19 2QFY17 4QFY17 3QFY18
4QFY19 1QFY20 2QFY20 3QFY20 4QFY20 1QFY21 2QFY19 3QFY19
3QFY19 4QFY19 1QFY20 2QFY20 4QFY20 1QFY21 3QFY20 2QFY19
Source: Company, Kotak Institutional Equities Source: Company, Kotak Institutional Equities
Exhibit 8: CASA ratio at 32% as of 1QFY21 Exhibit 9: Branch network of ~11,400 CASA, March fiscal year-ends, 2010-1QFY21 (%) Branches and growth, March fiscal year-ends, 2010-1QFY21
(%) Current deposits Saving deposits (#) Branches (LHS) Growth (%) (RHS) 35 11,000 27.5 30
28 8,800 24 19.5
21 6,600 18 21 20 26 27 27 28 10.5 14 20 20 20 20 22 25 4,400 12
7 2,200 3.6 4.0 6 2.9 2.0 1.8 7.8 8.3 0.3 4.5 4.2 4.2 4.2 4.1 4.6 4.8 4.2 4.5
0 1.9 0 0
2010 2011 2015 2016 2017 2018 2019 2012 2013 2014 2020
2012 2013 2014 2015 2016 2017 2018 2019 2020 1QFY21 1QFY21
Source: Company, Kotak Institutional Equities Source: Company, Kotak Institutional Equities
KOTAK INSTITUTIONAL EQUITIES RESEARCH 47 Banks Canara Bank
Exhibit 10: Canara Bank is trading at 0.5X one year forward Exhibit 11: Canara Bank is trading at discount to peers book Valuation of Canara Bank against peer banks, July 2012- July 2020 (X) One-year rolling forward PER and PBR, Aug 2010- Aug 2020 (X)
1.8 Rolling PBR (X) 2.5 1.5 2.0 1.3 1.5 1.0 1.0 0.8 0.5 0.5
0.0
Jul-12 Jul-14 Jul-16 Jul-17 Jul-18 Jul-19 Jul-20 Jul-13 Jul-15
Aug-11 Aug-12 Aug-14 Aug-15 Aug-16 Aug-18 Aug-19 Aug-13 Aug-17 Aug-20 Aug-10 Source: Company, Bloomberg, Kotak Institutional Equities Source: Company, Bloomberg, Kotak Institutional Equities
Exhibit 12: Summary of estimate changes March fiscal year-end, 2021E-2023E (Rs mn)
New estimates Old estimates (% change) 2021E 2022E 2023E 2021E 2022E 2023E 2021E 2022E 2023E Net interest income 215,015 224,541 249,915 211,792 227,422 261,769 1.5 (1.3) (4.5) Loan growth (%) 4 7 4 7 0 bps 6 bps 8 bps NIM (%) 2.1 2.2 2.3 2.6 2.3 2.5 -45 bps -13 bps -19 bps Loan loss provisions 155,128 140,100 134,370 138,433 137,700 145,207 12.1 1.7 (7.5) Other income 116,863 130,607 132,831 117,063 132,807 122,831 (0.2) (1.7) 8.1 Treasury income 16,000 17,000 15,000 16,200 19,200 15,000 (1.2) (11.5) - Operating expenses 182,719 193,623 199,932 183,077 193,446 199,160 (0.2) 0.1 0.4 Employee expenses 120,626 129,190 138,363 107,116 114,721 122,866 12.6 12.6 12.6 PBT (10,969) 16,425 47,443 2,345 24,083 39,714 NM (31.8) 19.5 Net profit (7,295) 10,922 31,550 1,559 16,256 26,807 NM (32.8) 17.7 PBT-treasury (26,969) (575) 32,443 (13,855) 4,883 24,714 94.7 NM 31.3 PBT-treasury + loan loss provisions 128,159 139,525 166,813 124,578 142,583 169,921 2.9 (2.1) (1.8)
Source: Kotak Institutional Equities
48 KOTAK INSTITUTIONAL EQUITIES RESEARCH Canara Bank Banks
Exhibit 13: Canara Bank growth rates and key ratios March fiscal year-ends, 2018-2023E (%)
2018 2019 2020 2021E 2022E 2023E Growth rates (%) Net loan 11.6 12.1 1.0 44.5 4.0 7.0 Customer assets 11.9 12.0 1.0 44.5 3.9 6.8 Investments excld. CPs and debentures (5.6) 6.1 16.3 65.6 (1.2) 8.0 Total Asset 5.7 12.6 4.2 49.7 3.7 6.5 Deposits 6.0 14.2 4.4 48.8 4.0 7.0 Net interest income 23.2 19.0 (9.4) 63.8 4.4 11.3 Loan loss provisions 100.6 (11.8) (15.1) 45.6 (9.7) (4.1) Total other income (8.1) (5.3) 18.8 49.6 11.8 1.7 Net fee income 0.7 (2.4) 12.0 85.0 10.0 10.0 Operating expenses 12.3 9.5 10.7 57.8 6.0 3.3 Employee expenses 10.8 4.2 20.7 76.0 7.1 7.1
Key ratios (%) Yield on average earning assets 7.4 7.7 7.4 6.9 7.1 7.1 Yield on average loans 8.0 8.5 8.4 8.1 8.0 7.9 Yield on average investments 7.2 7.5 7.0 6.1 6.8 6.8 Average cost of funds 5.3 5.4 5.5 4.8 5.0 4.8 Interest on deposits 5.3 5.4 5.3 4.7 4.9 4.8 Difference 2.1 2.3 2.0 2.1 2.1 2.3 Net interest income/earning assets 2.2 2.4 2.0 2.1 2.2 2.3 New provisions/average net loans 3.9 3.1 2.5 2.5 2.2 2.0 Interest income/total income 63.7 68.8 62.7 64.8 63.2 65.3 Other income / total income 36.3 31.2 37.3 35.2 36.8 34.7 Operating expenses/total income 50.0 49.7 55.3 55.1 54.5 52.2 Operating expenses/assets 1.6 1.6 1.6 1.7 1.8 1.7 Operating profit /AWF (1.5) (0.6) (0.4) (0.3) (0.0) 0.3 Tax rate 35.6 114.9 (27.4) 33.5 33.5 33.5 Share of deposits Current 4.8 3.9 4.2 4.4 4.4 4.4 Fixed 68.2 70.8 68.6 67.9 68.2 68.5 Savings 27.1 25.3 27.1 27.6 27.3 27.0 Loans-to-deposit ratio 72.7 71.4 69.1 67.1 67.1 67.1 Equity/assets (EoY) 5.8 5.2 5.4 4.8 4.7 4.7 Asset quality trends Gross NPL 11.8 8.5 8.2 8.5 7.8 6.7 Net NPL 7.5 5.4 4.2 2.8 3.6 3.6 Slippages 7.2 4.1 3.5 2.5 3.0 3.0 Provision coverage 39.9 41.5 50.7 69.3 57.6 52.0 Dupont analysis (%) Net interest income 2.0 2.2 1.9 2.0 2.0 2.2 Loan loss provisions 2.4 1.9 1.5 1.5 1.3 1.2 Net other income 1.2 1.0 1.1 1.1 1.2 1.1 Operating expenses 1.6 1.6 1.7 1.7 1.8 1.7 (1- tax rate) 64.4 (14.9) 127.4 66.5 66.5 66.5 ROA (0.7) 0.1 (0.3) (0.1) 0.1 0.3 Average assets/average equity 17.3 18.3 18.8 20.5 20.9 21.2 ROE (12.2) 1.0 (5.9) (1.4) 2.1 5.8
Source: Company, Kotak Institutional Equities estimates
KOTAK INSTITUTIONAL EQUITIES RESEARCH 49 Banks Canara Bank
Exhibit 14: Canara Bank P&L and balance sheet March fiscal year-ends, 2018-2023E (Rs mn)
2018 2019 2020 2021E 2022E 2023E Income statement Total interest income 412,521 468,103 489,350 686,375 733,326 765,177 Total interest expense 290,888 323,322 358,111 471,361 508,784 515,263 Net interest income 121,633 144,781 131,239 215,015 224,541 249,915 Loan loss provisions 142,380 125,530 106,550 155,128 140,100 134,370 Net interest income (after prov.) (20,747) 19,250 24,689 59,887 84,441 115,545 Other income 69,429 65,750 78,132 116,863 130,607 132,831 Net fee income 11,998 11,715 8,230 15,226 16,748 18,423 Net capital gains 19,184 11,687 7,580 16,000 17,000 15,000 Net exchange gains 5,379 6,326 11,150 12,600 13,229 13,891 Operating expenses 95,579 104,622 115,772 182,719 193,623 199,932 Employee expenses 54,441 56,751 68,525 120,626 129,190 138,363 Depreciation on investments 18,918 3,696 2,000 2,500 2,500 - Other Provisions (207) (43) 2,604 2,500 2,500 1,000 Pretax income (65,609) (23,275) (17,556) (10,969) 16,425 47,443 Tax provisions (23,386) (26,744) 4,802 (3,675) 5,502 15,894 Net Profit (42,222) 3,470 (22,357) (7,295) 10,922 31,550 % growth (476.3) (108.2) (744.4) (67.4) (249.7) 188.9 Operating profit 57,588 90,569 81,414 128,159 139,525 166,813 % growth (0.0) 57.3 (10.1) 57.4 8.9 19.6
Balance sheet Cash and bank balance 499,123 661,527 682,715 1,057,243 1,178,929 1,161,052 Cash 26,492 32,037 33,639 53,524 55,933 58,450 Balance with RBI 194,509 267,153 278,891 271,945 386,929 362,198 Net value of investments 1,440,537 1,529,853 1,762,449 2,897,483 2,864,816 3,081,292 Govt. and other securities 1,276,122 1,353,763 1,586,374 2,665,416 2,632,749 2,849,225 Shares 25,404 18,372 18,372 20,797 20,797 20,797 Debentures and bonds 91,767 99,190 99,190 143,330 143,330 143,330 Net loans and advances 3,817,030 4,277,273 4,321,752 6,244,502 6,491,880 6,945,087 Fixed assets 83,186 84,102 82,763 105,141 100,234 100,523 Other assets 328,985 394,912 389,069 530,689 599,679 677,637 Total assets 6,168,861 6,947,667 7,238,748 10,835,058 11,235,538 11,965,591
Deposits 5,247,719 5,990,333 6,253,512 9,304,608 9,673,213 10,348,513 Borrowings and bills payable 401,038 426,027 443,721 709,668 731,952 756,466 Other liabilities 164,056 169,535 148,585 297,169 297,169 297,169 Total liabilities 5,812,813 6,585,895 6,845,818 10,311,444 10,702,335 11,402,148 Paid-up capital 7,332 7,532 10,302 14,535 14,535 14,535 Reserves & surplus 348,716 354,240 382,627 509,079 518,669 548,908 Total shareholders' equity 356,048 361,772 392,930 523,614 533,204 563,443
Source: Company, Kotak Institutional Equities estimates
50 KOTAK INSTITUTIONAL EQUITIES RESEARCH BUY Dalmia Bharat (DALBHARA) Construction Materials AUGUST 07, 2020 RESULT Stellar performance in a tough quarter. Dalmia’s 1QFY21 EBITDA was much ahead Sector view: Attractive of our estimates led by a strong all-round performance – better volumes, higher CMP (`): 764 realizations and lower costs. EBITDA/ton at a record Rs1,678/ton (+15% yoy), although unsustainable, is impressive in a pandemic-hit quarter and ahead of peers. Expansion Fair Value (`): 1,075 projects are delayed by 3-6 months but the company is on track to reach 37 mtpa BSE-30: 38,041 capacity by FY2022E. Strong FCF helps deleverage despite growth capex. We increase earnings and revise Fair Value to Rs1,075/share (from Rs1,000). Maintain BUY rating.
Dalmia Bharat Stock data Forecasts/valuations 2020 2021E 2022E 52-week range (Rs) (high,low) 1,071-403 EPS (Rs) 14.0 17.9 36.9 Mcap (bn) (Rs/US$) 143/2 EPS growth (%) (12.1) 28.0 106.9 ADTV-3M (mn) (Rs/US$) 172/2 P/E (X) 54.7 42.8 20.7 Shareholding pattern (%) P/B (X) 1.4 1.4 1.3 Promoters 54.3 EV/EBITDA (X) 7.6 7.4 5.6 FIIs 15.3 RoE (%) 2.5 3.2 6.3 MFs/BFIs 3.3/1.7 Div. yield (%) 0.3 0.3 0.3 Price performance (%) 1M 3M 12M Sales (Rs bn) 97 90 110 Absolute 6 50 (24) EBITDA (Rs bn) 21 21 26 Rel. to BSE-30 2 24 (27) Net profits (Rs bn) 3 3 7
1QFY21 earnings—record margins on higher prices and cost optimizations Dalmia reported revenues of Rs19.8 bn (-22% yoy, -20% qoq), EBITDA of Rs6.1 bn (-8% yoy, +21% qoq) and adjusted net income of Rs1.9 bn (+29% yoy, +631% qoq), against our estimate of Rs17.3 bn, Rs3.4 bn and PAT loss of Rs591 mn, respectively. Volumes declined by just 20% yoy to 3.7 mn tons, better than our estimate mainly due to strong demand in East. Blended realization increased sequentially to Rs5,390/ton (-3% yoy, +12% qoq) driven by price hikes and higher trade sales. Costs declined to Rs3,716/ton (-10% yoy, -3% qoq) mainly on account of lower power costs and increased use of captive clinker from the new clinker line. EBITDA/ton hit record high at Rs1,678/ton (+15% yoy, +71% qoq) led by a combination of higher realizations and lower costs. Depreciation and interest costs have reduced and the company has guided that 1QFY21 run-rate is sustainable.
On track to reach 37 mtpa capacity by FY2022E The ongoing inorganic and organic expansion projects are progressing to complete by FY2022E, albeit with some delay, and would increase the total capacity to 37 mtpa. The company expects the (1) Murli acquisition to complete in 2QFY21 and production to take 3-4 quarters to start, (2) 3 mtpa clinker line in East to commission in 2QFY21-end, (3) 3 mtpa grinding units (GU) in Jharkhand/West Bengal to commission by December 2020, (4) Odisha 2.25 mtpa GU to complete by March 2021 and (5) Bihar 2.25 mtpa GU to commission in 2HFY22.
Deleveraging continues despite growth; maintain BUY with a revise Fair Value of Rs1,075/share
Strong FCF despite growth capex helps reduce net debt/EBITDA from 1.3X in FY2020 to 0.7X by FY2022E. Demand in East has been outperforming other regions. With upcoming elections in key states and support from the rural segment, we expect demand in East to remain strong. Sumangal Nevatia Favorable demand outlook along with recent consolidation in the East makes it an attractive region. In the absence of a sizeable pure East play, we see Dalmia Bharat as an attractive proxy Prayatn Mahajan with 60% of capacity and ~70% of sales in the East.
We increase our EBITDA estimate by 8%/6%/6% for FY2021/22/23E led by higher realizations and lower costs. Our Fair Value increases to Rs1,075/share (from Rs1,000 earlier) at an unchanged 8X EV/EBITDA June 2022E. With a strong growth pipeline and attractive valuations (6.2X EV/EBITDA or US$66/ton FY2022E), we maintain BUY rating. [email protected] Contact: +91 22 6218 6427
For Private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES’ RATING SYSTEM AND OTHER DISCLOSURES, REFER TO THE END OF THIS MATERIAL. Construction Materials Dalmia Bharat
Exhibit 1: Dalmia's EBITDA was above our estimate due to higher prices (+12% qoq) and lower costs (-3% qoq) Quarterly results for Dalmia Bharat, March fiscal year-ends, 2019-21E (Rs mn)
1QFY21 Change (%) 1QFY21 E 1QFY20 4QFY20 KIE yoy qoq FY2020 FY2019 (% chg) FY2021E Net sales 19,740 17,296 25,370 24,830 14 (22) (20) 96,740 94,840 2 89,929 Raw materials (2,920) (3,406) (4,020) (5,270) (14) (27) (45) (17,210) (19,320) (11) (15,137) Change in Stock (590) (110) (210) 110 (250) 1,470 (117) — Employee costs (1,740) (1,640) (1,730) (1,640) 6 1 6 (6,750) (6,480) 4 (6,750) Power and Fuel (2,550) (2,471) (4,640) (3,860) 3 (45) (34) (17,380) (17,560) (1) (14,825) Freight and handling (3,490) (3,253) (4,610) (5,080) 7 (24) (31) (18,950) (18,290) 4 (17,434) Other expenses (2,310) (2,975) (3,500) (4,010) (22) (34) (42) (15,140) (15,240) (1) (14,768) EBITDA 6,140 3,441 6,660 5,080 78 (8) 21 21,060 19,420 8 21,016 EBITDA (%) 31.1 19.9 26.3 20.5 56 18 52 21.8 20.5 23.4 Other income 550 560 440 560 (2) 25 (2) 2,170 2,440 (11) 2,000 Interest cost (850) (1,040) (1,190) (1,040) (18) (29) (18) (4,150) (5,510) (25) (3,752) Depreciation (3,010) (3,750) (3,420) (3,750) (20) (12) (20) (15,280) (12,960) 18 (14,505) PBT 2,830 (789) 2,490 850 (459) 14 233 3,800 3,390 12 4,759 Current tax (590) 197 (690) (270) (399) (14) 119 (980) 70 (1,500) (1,190) Deferred tax (480) — (330) 110 — — — Profit before Exceptional items 1,760 (591) 1,470 690 (398) 20 155 2,820 3,460 (18) 3,569 Exceptional items 120 — 50 (450) (440) 30 — Reported PAT 1,880 (591) 1,520 240 (418) 24 683 2,380 3,490 (32) 3,569 Minority interest (20) — 50 (20) 140 410 140 Net profit after minority 1,900 (591) 1,470 260 (421) 29 631 2,240 3,080 (27) 3,430 Adjusted EPS 9.9 (3.1) 7.7 1.4 11.7 16.0 17.9 Effective tax rate (%) 38 25 41 19 26 (2) 25 Operational parameters Consolidated Sales (mn tons) 3.7 3.4 4.6 5.2 7 (20) (29) 19.3 18.7 3 17.7 Blended realization (Rs/ton) 5,393 5,068 5,576 4,803 6 (3) 12 5,015 5,077 (1) 5,067 Cost of production (3,716) (4,060) (4,112) (3,820) (8) (10) (3) (3,923) (4,037) (3) (3,883) Raw materials (959) (1,030) (930) (998) (7) 3 (4) (905) (956) (5) (853) Employee (475) (481) (380) (317) (1) 25 50 (350) (347) 1 (380) Power and Fuel (697) (724) (1,020) (747) (4) (32) (7) (901) (940) (4) (835) Freight and handling (954) (953) (1,013) (983) 0 (6) (3) (982) (979) 0 (982) Other expenses (631) (872) (769) (776) (28) (18) (19) (785) (816) (4) (832) Blended EBITDA/ton (Rs) 1,678 1,008 1,464 983 66 15 71 1,092 1,040 5 1,184
Source: Company, Kotak Institutional Equities estimates
Changes in our estimates
Exhibit 4 highlights key changes in our estimates.
We increase our EBITDA estimates by 8%/6%/6% for FY2021/22/23E led by
. Increase in realizations by 1% for FY2021/22/23E factoring the recent price trends.
. Cut in costs by 1% for FY2021/22/23E factoring lower costs led by overhead cost reduction and lower fuel costs.
. Our EPS increases sharply as we reduce our depreciation and interest cost estimates as per 1QFY21 run-rate and company guidance.
We increase our Fair Value to Rs1,075 (from Rs1,000/share) at an unchanged 8X EV/EBITDA June 2022E.
52 KOTAK INSTITUTIONAL EQUITIES RESEARCH Dalmia Bharat Construction Materials
Other highlights, key takeaways from the earnings call
Demand outlook. Demand improved mom in May-June 2020, however demand has started to moderate in both East and South markets from July 2020 due to seasonal weakness and easing of pent-up demand. While rural demand continues to offset weakness in urban demand, management remains uncertain on demand going forward as the spread of Covid-19 is increasing in their key markets, resulting in sudden lockdowns and other operational issues.
Demand in South declined by more than 20-25% while demand in East declined 0-5% yoy in July 2020. The company expects 12-15% yoy decline in demand for the industry in FY2021 followed by an 8-10% growth in FY2022.
Price guidance. Sharp price hikes taken in May 2020 have started to moderate in both East and South markets on a mom basis. Prices in July 202 are down by Rs6-8/bag in South markets and by Rs10-12/bag in East from 1QFY21 average prices.
Costs guidance. The company does not expect much more variable cost savings going forward as prices of pet coke have started increasing. Other overhead expenses are also likely to increase with increase in volumes and reversal of a few deferred expenses. The company aims to be in the top 3 lowest cost cement producers in the country. The new clinker line in Odisha has eliminated external purchase of clinker and would aid in cost reduction.
Expansion projects
. The 3.1 mnt clinker plant at Rajgangpur has commenced trial run and expects to start commercial production in 2QFY21-end.
. The 3.5 mtpa grinding capacity (Jharkhand 1 mtpa and West Bengal 2.5 mtpa) should commission in December 2020. The Odisha grinding units is expected to commission by March 2021 whereas the Bihar grinding units is expected to commission in 2HFY22E with 70-80% of land acquisition being completed.
. Kalyanpur cement plant upgradation program is likely to get completed by December 2020, which will increase the capacity of the plant to 1.1 mn tons. Upgradation is also likely to reduce the cost further from Rs2,100/ton currently (Rs2,900/ton initially).
. Murli Cement – the company expects the transaction to complete in 2QFY21. The company would pay Rs4 bn for acquisition and another Rs3.5 bn towards capex over the next 12 months to start the plant.
Fiscal incentives. The Incentives accrued during the quarter were Rs170 mn. It has received Rs90 mn as cash incentives in 1QFY21. The receivables of incentives as of 1QFY21 are Rs7.16 bn.
Volume mix. Trade sales increased to 75% in 1QFY21 from 60% in 4QFY20 due to negligible demand from infrastructure projects. The company expects trade sales to moderate as cement volumes pick up with increased government spending. 18% of the trade sales were premium cement. Further, 85% of cement volumes were blended cement during the quarter versus 75-78% range normally due to higher trade sales.
Capex guidance. The company shall pay Rs4 bn for Murli acquisition in September 2020 post receiving the official documentation for the acquisition. The management has given a capex guidance of Rs8 bn primarily towards the completion of the East expansion.
KOTAK INSTITUTIONAL EQUITIES RESEARCH 53 Construction Materials Dalmia Bharat
Update on misappropriation of certain mutual funds. No final order has yet been passed by SEBI in the complaint lodged by DCBL against DP and others in respect of fraudulent transfer of Securities from its demat accounts. After filing of charge sheet, DCBL has filed an application before the Jurisdictional Court for release of mutual fund units and the same is currently pending. DCBL continues to value these securities at the fair market value existing on the reporting date. DCBL is fully confident of recovering its securities based on the legal opinion obtained in the matter. The company is confident of recovering the units already frozen in FY2021.
Share buyback. 6.16 mn shares have been bought back from the open market to date for Rs3.3 bn. Total amount earmarked for buyback is Rs5 bn up to a maximum price of Rs700/share.
Net debt. Net debt reduced to Rs20 bn as of June 2020 versus Rs28 bn as of March 2020 led by internal accruals and MTM gain of investment in IEX. There was a gross debt repayment of Rs5.08 bn during the quarter and leverage declined to 1.02X in 1QFY21 from 1.6X in 1QFY20. Further, its long-term issuer rating was upgraded to ‘AA+’ by Crisil. The same was reflected in lower interest costs with 50 bps yoy reduction in cost of borrowing.
Exhibit 2: Dalmia's costs declined 3% qoq and EBITDA/ton increased 71% qoq Quarterly cement cost/ton and EBITDA/ton of Dalmia Bharat, 1QFY16-1QFY21 (Rs/ton)
Costs (Rs/ton) EBITDA (Rs/ton) 6,000
5,500
5,000
942 1,464
4,500 1,160
1,678
1,095
1,165
850 850
1,087
986 986
1,063
1,095
1,395
1,212 1,212
983
896 896
1,141 1,141
1,130
1,142 1,142 1,209
4,000 1,212 1,320
3,500
4,283
4,112 4,112
4,091
3,991
3,979
3,942
3,940
3,937
3,923
3,903
3,845
3,832 3,820
3,000 3,803
3,780
3,765
3,716
3,703
3,638
3,590 3,375
2,500
2QFY16 3QFY16 4QFY16 1QFY17 3QFY17 4QFY17 1QFY18 2QFY18 4QFY18 1QFY19 2QFY19 3QFY19 2QFY20 3QFY20 4QFY20 2QFY17 3QFY18 4QFY19 1QFY20 1QFY21 1QFY16
Source: Company, Kotak Institutional Equities estimates
54 KOTAK INSTITUTIONAL EQUITIES RESEARCH Dalmia Bharat Construction Materials
Exhibit 3: Dalmia’s leverage improved from 1.6X in 1QFY20 to 1X in 1QFY21 on strong operational cash flows Net debt and leverage details for Dalmia Bharat, 1QFY19-1QFY21 (Rs bn, X)
Net Debt (Rs bn) Leverge (X) 45 2.5
40
35 2.0 2.0 1.9 30 1.7 1.6 1.6 1.6 1.5 25 1.3 1.3 20 1.02 1.0 15
10 0.5 5
0 0.0 1QFY19 2QFY19 3QFY19 4QFY19 1QFY20 2QFY20 3QFY20 4QFY20 1QFY21
Source: Kotak Institutional Equities estimates
Exhibit 4: We expect Dalmia’s leverage to improve from 1.3X to 0.7X by FY2022 on strong operational cash flows Net debt and leverage details for Dalmia Bharat, FY2016-23E (Rs bn, X)
Net Debt (Rs bn) Leverge (X) 70.0 4.5 4.1 60.0 4.0 3.5 50.0 3.0 2.7 40.0 2.5 30.0 2.0 1.7 1.6 1.5 20.0 1.3 1.1 1.0 10.0 0.7 0.5 0.0 0.0 2016 2017 2018 2019 2020 2021E 2022E 2023E-0.1 -10.0 -0.5
Source: Kotak Institutional Equities estimates
KOTAK INSTITUTIONAL EQUITIES RESEARCH 55 Construction Materials Dalmia Bharat
Exhibit 5: Dalmia’s 8 mtpa expansion projects remain on track for completion by 2HFY22 Cement and clinker capacity details for Dalmia Bharat, FY2019-23E (mtpa) Region FY19 FY20 FY21E FY22E FY23E Cement (mn tons) East 13.3 14.4 17.5 17.5 22.2 South 12.1 12.1 12.1 12.1 12.1 West — — — 3.0 3.0 Total Cement 25.4 26.5 29.6 32.6 37.3 Clinker (mn tons) East 5.8 5.8 8.6 8.6 8.6 South 7.8 7.8 7.8 7.8 7.8 West — — — 1.7 1.7 Total Clinker 13.6 13.6 16.4 18.1 18.1 Cement (% mix) East 52 54 59 54 60 South 48 46 41 37 32 West — — — 9 8 Total Cement 100 100 100 100 100 Clinker (% mix) East 43 43 52 48 48 South 57 57 48 43 43 West — — — 9 9 Total Clinker 100 100 100 100 100
Source: Kotak Institutional Equities estimates
Exhibit 6: All-India prices remain stable in July 2020 despite weakening of demand Monthly cement prices across regions in India, July 2019-20 (Rs per 50 kg bag)
Jul-19 Aug-19 Sep-19 Oct-19 Nov-19 Dec-19 Jan-20 Feb-20 Mar-20 Apr-20 May-20 Jun-20 Jul-20 North 356 348 345 346 347 343 354 359 358 358 375 369 363 Central 364 357 354 352 345 339 350 355 357 357 369 359 359 East 358 349 345 339 337 331 342 344 341 341 352 345 341 West 336 329 324 319 318 308 318 331 331 331 357 353 353 South 355 349 347 343 339 333 340 360 351 351 419 395 390 All India average 354 347 344 340 338 331 341 352 349 349 382 369 366 Change per bag (%, mom) North (1) (2) (1) 0 0 (1) 3 2 (0) — 5 (2) (2) Central (1) (2) (1) (1) (2) (2) 3 1 1 — 3 (3) 0 East (2) (2) (1) (2) (1) (2) 4 0 (1) — 3 (2) (1) West (2) (2) (2) (1) (0) (3) 3 4 0 — 8 (1) 0 South (3) (2) (1) (1) (1) (2) 2 6 (2) — 19 (6) (1) All India average -2 -2 -1 -1 -1 -2 3 3 -1 0 10 -3 -1 Change per bag (%, yoy) North 8.0 3.8 10.5 12.9 17.3 20.3 19.0 16.8 17.0 4.4 3.3 3.1 2.0 Central 8.6 4.9 11.0 11.2 11.4 15.1 13.8 4.7 8.8 -1.4 -0.6 -2.4 -1.3 East 8.1 5.4 1.2 0.5 -2.3 -4.1 -1.5 5.7 3.0 -4.5 -5.3 -5.5 -4.6 West 4.5 1.2 3.2 0.4 1.9 -0.7 -0.6 4.7 5.2 -2.7 0.4 2.3 5.1 South 25.4 19.2 5.7 0.9 0.3 0.5 1.9 1.0 -3.8 -7.7 12.5 8.3 9.7 All India average 13 8 6 5 5 5 6 5 4 -3 4 2 3
Source: Kotak Institutional Equities estimates
56 KOTAK INSTITUTIONAL EQUITIES RESEARCH Dalmia Bharat Construction Materials
Exhibit 7: Dalmia Bharat, changes in estimates, March fiscal year-ends, 2021-23E
Revised estimate Previous estimate Change (%) 2021E 2022E 2023E 2021E 2022E 2023E 2021E 2022E 2023E Consolidated estimates (Rs mn) Cement sales (mn tons) 17.7 21.3 24.5 17.7 21.3 24.5 0 0 0 Realization (Rs/ton) 5,067 5,171 5,304 5,021 5,145 5,277 1 1 1 Costs (Rs/ton) 3,883 3,928 4,015 3,924 3,972 4,059 (1) (1) (1) EBITDA (Rs/ton) 1,184 1,243 1,289 1,097 1,173 1,218 8 6 6 Revenues (Rs mn) 89,929 110,124 129,907 89,101 109,570 129,244 1 1 1 EBITDA (Rs mn) 21,016 26,466 31,568 19,459 24,987 29,833 8 6 6 PAT (Rs mn) 3,430 7,094 10,922 391 3,689 6,977 778 92 57 EPS (Rs) 17.9 36.9 56.9 2.0 19.2 36.3 778 92 57
Source: Company, Kotak Institutional Equities estimates
Exhibit 8: We expect Dalmia Bharat's volume to grow at the rate of 8% over FY2021E-23E Dalmia Bharat, assumptions, March fiscal year-ends, 2018-23E (Rs mn)
% yoy 2018 2019 2020 2021E 2022E 2023E 2019 2020 2021E 2022E 2023E Consolidated financials Revenue (Rs mn) 85,800 94,840 96,740 89,929 110,124 129,907 11 2 (7) 22 18 EBITDA (Rs mn) 20,360 19,420 21,060 21,016 26,466 31,568 (5) 8 (0) 26 19 PAT (Rs mn) 2,650 3,050 2,680 3,430 7,094 10,922 15 (12) 28 107 54 Net debt (Rs mn) 35,040 30,940 28,250 23,915 17,555 (2,637) (12) (9) (15) (27) (115) Operational details Capacity (mn tons) 26.0 26.5 26.5 29.5 33.5 37.3 2 — 11 14 11 Volumes (mn tons) 17.0 18.7 19.3 17.7 21.3 24.5 10 3 (8) 20 15 Utilisation (%) 65% 70% 73% 60% 64% 66% 8 3 (17) 6 3 Realization (Rs/ton) 5,059 5,077 5,015 5,067 5,171 5,304 0 (1) 1 2 3 Costs (Rs/ton) 3,858 4,037 3,923 3,883 3,928 4,015 5 (3) (1) 1 2 EBITDA (Rs/ton) 1,200 1,040 1,092 1,184 1,243 1,289 (13) 5 8 5 4
Source: Company, Kotak Institutional Equities estimates
Exhibit 9: Our Fair Value of Rs1,075/share is based on 8X EV/EBITDA June 2022E Dalmia Bharat, valuation details, June 2022E financials
Multiple EV Rs mn (X) Rs mn Rs/share Valuation EBITDA (Rs mn) 27,741 8 222,485 1,158 Net Debt (Rs mn) (16,107) (84)
Equity value (Rs mn) 206,379 1,075 Fair Value (Rs/share) 1,075
Source: Company, Kotak Institutional Equities estimates
KOTAK INSTITUTIONAL EQUITIES RESEARCH 57 Construction Materials Dalmia Bharat
Exhibit 10: Dalmia Bharat, financial summary (consolidated), March fiscal year-ends, 2017-23E (Rs mn)
2017 2018 2019 2020 2021E 2022E 2023E Profit model (Rs mn) Net sales 74,044 85,800 94,840 96,740 89,929 110,124 129,907 EBITDA 19,019 20,360 19,420 21,060 21,016 26,466 31,568 Other income 2,988 2,740 2,440 2,170 2,000 2,000 2,000 Interest (8,900) (7,080) (5,510) (4,150) (3,752) (3,362) (2,841) Depreciation (6,027) (12,130) (12,960) (15,280) (14,505) (15,410) (15,884) Pretax profits 7,080 3,890 3,390 3,800 4,759 9,693 14,843 Tax (2,762) (1,250) 70 (980) (1,190) (2,423) (3,711) Less: Minority Interest 870 (10) 410 140 140 176 210 Net profits 3,448 2,650 3,050 2,680 3,430 7,094 10,922 Extraordinary items 0 270 30 (440) 0 0 0 Earnings per share (Rs) 38.8 13.8 15.9 14.0 17.9 36.9 56.9 Balance sheet (Rs mn) Equity 178 — 390 390 390 390 390 Reserves and surplus 49,471 103,350 106,000 105,220 108,265 114,975 125,514 Borrowings 80,490 72,660 58,780 59,660 55,660 47,660 39,660 Deferred tax liability 15,764 13,930 12,790 12,770 12,770 12,770 12,770 Minority Interest 6,129 (300) 110 250 390 566 775 Currrent liabilities 27,746 23,700 27,310 27,820 26,158 31,086 35,915 Total liabilities and equity 179,778 213,340 205,380 206,110 203,633 207,448 215,024 Gross block 131,259 109,470 115,700 119,560 140,560 155,560 162,560 Net fixed assets 94,814 91,250 90,860 84,190 95,436 99,775 95,641 Capital work in progress 1,325 1,730 5,200 17,020 9,520 6,020 4,020 Cash 1,750 3,540 4,690 4,030 4,365 2,725 14,917 Current assets 27,508 24,280 26,200 25,680 23,872 33,237 39,506 Investments 27,434 35,050 24,240 28,160 28,160 28,160 28,160 Goodwill 26,947 49,120 44,870 41,740 36,990 32,240 27,490 Other Long Term Assets — 8,370 9,320 5,290 5,290 5,290 5,290 Total assets 179,778 213,340 205,380 206,110 203,633 207,448 215,024 Net Debt 52,233 35,040 30,940 28,250 23,915 17,555 (2,637) Free cash flow (Rs mn) Operating cash flow, excl. working capital 11,067 13,360 15,400 16,710 18,074 22,680 27,016 Working capital (2,163) (3,590) (1,630) 2,740 146 (4,436) (1,441) Capital expenditure (3,366) (3,930) (9,260) (13,450) (13,500) (11,500) (5,000) Free cash flow 5,538 5,840 4,510 6,000 4,719 6,744 20,576 Ratios EV/EBITDA 6.3 8.9 9.1 8.3 8.1 6.2 4.6 P/E 25.0 50.2 47.6 65.5 42.8 20.7 13.4 P/B 1.4 1.4 1.4 1.4 1.4 1.3 1.2 EV/Ton ($/ton) 156 108 96 93 80 66 52 EBITDA margin (%) 25.7 23.7 20.5 21.8 23.4 24.0 24.3 PAT margin (%) 4.7 3.1 3.2 2.8 3.8 6.4 8.4 Net debt/equity (X) 1.1 0.3 0.3 0.3 0.2 0.2 (0.0) Book value per share (Rs) 559 538 554 550 566 601 656 Net debt/EBITDA (X) 2.7 1.7 1.6 1.3 1.1 0.7 (0.1) RoAE (%) 7.8 3.5 2.9 2.5 3.2 6.3 9.1 RoACE (%) 8.1 4.3 3.0 2.8 3.0 5.1 7.2 CRoCI (%) 11.6 14.6 17.0 16.4 14.7 15.6 16.6
Source: Company, Kotak Institutional Equities estimates
58 KOTAK INSTITUTIONAL EQUITIES RESEARCH REDUCE Amara Raja Batteries (AMRJ) Automobiles & Components AUGUST 07, 2020 RESULT Sector view: Cautious
Impressive quarter. AMRJ reported 1QFY21 EBITDA of Rs1.5 bn, significantly above CMP (`): 718 our estimates due to better-than-expected revenue growth aided by sharp recovery in Fair Value (`): 700 automotive replacement and select industrial segments (UPS and telecom segments) BSE-30: 38,041 during the latter half of 1QFY21. At CMP, we believe the stock price has completely priced in benefits of (1) a higher replacement mix, (2) market share gains in the replacement segment and (3) RM tailwinds. With low investments in R&D and limited expertise in lithium-ion technology, we believe multiple re-rating is unlikely. Maintain REDUCE on fair valuations. FV revised to Rs700 (from Rs620 earlier).
Amara Raja Batteries Stock data Forecasts/valuations 2020 2021E 2022E 52-week range (Rs) (high,low) 814-349 EPS (Rs) 38.7 34.5 43.9 Mcap (bn) (Rs/US$) 123/1.7 EPS growth (%) 36.7 (10.9) 27.3 ADTV-3M (mn) (Rs/US$) 905/12 P/E (X) 18.6 20.8 16.4 Shareholding pattern (%) P/B (X) 3.4 3.0 2.6 Promoters 28.1 EV/EBITDA (X) 11.1 11.1 9.0 FIIs 20.9 RoE (%) 18.9 15.2 17.1 MFs/BFIs 8.3/2.9 Div. yield (%) 1.5 1.2 1.5 Price performance (%) 1M 3M 12M Sales (Rs bn) 68 66 76 Absolute 1 29 11 EBITDA (Rs bn) 11 11 13 Rel. to BSE-30 (2) 7 7 Net profits (Rs bn) 7 6 7
1QFY21 EBITDA way above our estimates due to lower-than-expected revenue decline
Amara Raja reported 1QFY21 EBITDA of Rs1.5 bn (-45% yoy), significantly above our estimates due to outperformance in revenues. Revenue declined by 37% yoy (KIE: -60%), led by (1) 60-80% yoy decline in automotive OEM segment, (2) sharp decline in exports segment, (3) 20-30% yoy decline in automotive replacement segment led by sharp recovery in June and (4) 30-35% yoy decline in telecom and UPS segments; however, these segments witnessed sharp demand ramp-up during the latter half of 1QFY21.
EBITDA margin came in at 13.2% (-220 bps yoy and -220 bps qoq), which was 450 bps above our estimate of 8.7% due to (1) lower-than-expected revenue decline and (2) cost-cutting initiatives. Sequential decline in EBITDA margin can be attributed to negative operating leverage, partly offset by a richer product mix (higher mix of replacement segment) and cost-cutting initiatives taken up by the company. Gross margin deteriorated by 280 bps sequentially led by reversal of finished goods inventory, partly offset by a richer product mix (higher mix of replacement segment). Other expense declined by 29% yoy in 1QFY21, which is impressive given revenue decline of 37%. Net profit came in at Rs627 mn (-56% yoy), significantly above our estimates due to outperformance at EBITDA level.
Increase FY2021-23E EPS estimates by 5-6%; maintain REDUCE with revised FV of Rs700
We have increased our FY2021-23E EPS estimates by 5-6% led by 4-5% increase in our revenue Hitesh Goel growth assumptions due to a stronger recovery in the automotive replacement segment and select industrial segments (UPS and telecom). Overall, we expect revenue decline to remain muted in FY2021 due to higher mix of the replacement segment. Also, we expect EBITDA Rishi Vora margin to remain around ~16-17% led by (1) improvement in mix (higher mix of the replacement segment) and (2) benefit from the recent decline in lead prices in FY2021E. We are not building in sharp expansion in EBITDA margin from FY2022E onwards despite operating leverage benefits as the mix would turn inferior (higher mix of automotive OEM and industrial segments). Maintain REDUCE on fair valuations. FV revised to Rs700 (from Rs620 earlier), valuing the company at 15X September 2022E EPS (from 15X March 2022E EPS earlier). [email protected] Contact: +91 22 6218 6427
For Private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES’ RATING SYSTEM AND OTHER DISCLOSURES, REFER TO THE END OF THIS MATERIAL. Automobiles & Components Amara Raja Batteries
Exhibit 1: 1QFY21 EBITDA was significantly above our estimates due to better-than-expected revenue growth Amara Raja interim results, March fiscal year-ends (Rs mn)
(% chg.) 1QFY21 1QFY21E 1QFY20 4QFY20 1QFY21E 1QFY20 4QFY20 FY2021E FY2020 Yoy (%) FY2022E FY2021E Yoy (%) Net sales 11,510 7,260 18,150 15,814 58.5 (36.6) (27.2) 66,377 68,395 (3.0) 76,216 66,377 14.8 Raw materials (7,655) (4,574) (12,262) (10,069) 67.4 (37.6) (24.0) (43,048) (44,471) (3.2) (49,453) (43,048) Staff costs (840) (749) (985) (937) 12.0 (14.8) (10.4) (4,237) (3,852) 10.0 (4,491) (4,237) Other expenses (1,492) (1,307) (2,110) (2,377) 14.1 (29.3) (37.2) (8,499) (9,086) (6.5) (9,421) (8,499) Total expenses (9,986) (6,630) (15,358) (13,382) 50.6 (35.0) (25.4) (55,785) (57,409) (2.8) (63,365) (55,785) EBITDA 1,524 630 2,792 2,432 142.1 (45.4) (37.3) 10,592 10,986 (3.6) 12,851 10,592 21.3 Depreciation (748) (760) (733) (760) (1.5) 2.1 (1.5) (3,141) (3,007) 4.4 (3,561) (3,141) EBIT 776 (130) 2,059 1,672 (62.3) (53.6) 7,452 7,978 (6.6) 9,291 7,452 24.7 Other income 88 50 102 141 75.8 (14.1) (37.7) 579 551 837 579 Interest expense (27) (30) (29) (30) (120) (122) (60) (120) Profit before tax 837 (110) 2,132 1,783 (60.8) (53.1) 7,911 8,407 (5.9) 10,068 7,911 27.3 Tax expense (210) — (723) (416) (71.0) (49.6) (2,025) (1,799) (2,577) (2,025) Profit after tax 627 (110) 1,409 1,367 (55.5) (54.1) 5,885 6,608 (10.9) 7,490 5,885 27.3 EPS (Rs) 3.7 (0.6) 8.2 8.0 (55.5) (54.1) 34.5 38.7 (10.9) 43.9 34.5 27.3 As % of net revenues Raw material cost as % of net sales 66.5 63.0 67.6 63.7 64.9 65.0 64.9 64.9 Staff cost as % of net sales 7.3 10.3 5.4 5.9 6.4 5.6 5.9 6.4 Other expenses as % of net sales 13.0 18.0 11.6 15.0 12.8 13.3 12.4 12.8 No. of shares 170.8 170.8 170.8 170.8 170.8 170.8 170.8 170.8 Tax rate (%) 25.1 — 33.9 23.4 25.6 21.4 25.6 25.6 EBITDA margin (%) 13.2 8.7 15.4 15.4 16.0 16.1 16.9 16.0 EBIT margin (%) 6.7 (1.8) 11.3 10.6 11.2 11.7 12.2 11.2
Source: Company, Kotak Institutional Equities estimates
Exhibit 2: Lower RM cost continues to support gross margin for both the companies Revenue growth, gross and EBITDA margin comparison of Amara Raja and Exide, March fiscal year-ends, 1QFY18-1QFY21 (%)
1QFY18 2QFY18 3QFY18 4QFY18 1QFY19 2QFY19 3QFY19 4QFY19 1QFY20 2QFY20 3QFY20 4QFY20 1QFY21 Amara Raja Revenue growth (%) 13.4 7.1 17.1 17.6 18.8 22.8 9.1 (0.9) 2.0 (3.3) 3.1 0.9 (36.6) Gross margin (%) 30.0 34.0 33.1 31.3 28.5 30.9 32.8 34.8 32.4 35.9 35.5 36.3 33.5 EBITDA margin (%) 12.9 16.7 15.6 13.3 12.4 13.5 14.9 15.5 15.4 17.2 16.2 15.4 13.2 Exide Revenue growth (%) 4.6 22.4 32.7 24.5 31.8 15.4 9.7 5.7 0.2 (4.0) (3.4) (20.9) (44.3) Gross margin (%) 37.1 32.6 34.5 34.8 33.6 33.1 35.1 35.1 35.5 36.2 36.2 38.2 31.2 EBITDA margin (%) 15.4 12.6 12.4 13.7 14.1 12.2 12.5 14.4 14.7 14.1 13.3 13.1 9.6
Source: Company, Kotak Institutional Equities
60 KOTAK INSTITUTIONAL EQUITIES RESEARCH Amara Raja Batteries Automobiles & Components
Exhibit 3: LME lead price has declined by 4% qoq in 1QFY21 Quarterly LME lead prices (assuming 1.5 quarter lag), March fiscal-year ends, 1QFY14-1QFY21
LME lead (US$/ton) USD:INR rate LME lead (Rs/ton) Qoq increase (%) 1QFY14 2,113 54.4 114,899 2QFY14 2,084 58.9 122,738 6.8 3QFY14 2,119 63.0 133,505 8.8 4QFY14 2,120 62.1 131,660 (1.4) 1QFY15 2,083 60.7 126,487 (3.9) 2QFY15 2,158 59.9 129,282 2.2 3QFY15 2,092 61.1 127,837 (1.1) 4QFY15 1,902 62.3 118,562 (7.3) 1QFY16 1,901 62.7 119,247 0.6 2QFY16 1,806 63.8 115,228 (3.4) 3QFY16 1,690 65.7 111,084 (3.6) 4QFY16 1,687 67.0 113,049 1.8 1QFY17 1,758 67.0 117,759 4.2 2QFY17 1,762 67.1 118,276 0.4 3QFY17 1,984 66.8 132,542 12.1 4QFY17 2,244 67.9 152,368 15.0 1QFY18 2,243 65.3 146,468 (3.9) 2QFY18 2,200 64.4 141,680 (3.3) 3QFY18 2,428 64.7 157,092 10.9 4QFY18 2,539 64.1 162,750 3.6 1QFY19 2,388 65.6 156,653 (3.7) 2QFY19 2,232 69.0 154,008 (1.7) 3QFY19 1,999 72.4 144,728 (6.0) 4QFY19 2,049 70.5 144,352 (0.3) 1QFY20 1,882 69.5 130,874 (9.3) 2QFY20 2,033 70.4 143,141 9.4 3QFY20 2,038 71.2 145,167 1.4 4QFY20 1,834 72.4 132,782 (8.5) 1QFY21 1,676 75.8 127,041 (4.3) July average 1,834 74.9 137,385
Source: Bloomberg, Kotak Institutional Equities
Exhibit 4: We have increased our FY2021-23E EPS estimates by 5-6% on higher revenue growth assumptions Earnings revision table, March fiscal year-ends, 2021-23E (Rs mn, %)
New estimates Old estimates % change 2021E 2022E 2023E 2021E 2022E 2023E 2021E 2022E 2023E Amara Raja Net sales 66,377 76,216 84,738 63,641 72,896 81,251 4.3 4.6 4.3 EBITDA 10,592 12,851 14,304 10,190 12,241 13,627 4.0 5.0 5.0 Margin (%) 16.0 16.9 16.9 16.0 16.8 16.8 Net Profit 5,885 7,490 8,455 5,623 7,082 8,005 4.7 5.8 5.6 EPS (Rs/share) 34.5 43.9 49.5 32.9 41.5 46.9 4.7 5.8 5.6
Source: Company, Kotak Institutional Equities estimates
KOTAK INSTITUTIONAL EQUITIES RESEARCH 61 Automobiles & Components Amara Raja Batteries
Exhibit 5: We expect automotive revenues to grow by 7% CAGR over FY2020-23E aided by growth in automotive replacement segment Revenue breakdown, March fiscal year-ends, 2011-23E (Rs mn)
2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021E 2022E 2023E Volume sold (mn units) Four-wheeler OEM 1 2 2 2 2 2 2 2 2 2 2 2 2 Yoy chg (%) 50.0 17.8 2.0 (2.0) 7.0 13.0 12.0 10.0 1.0 (22.0) (15.0) 20.0 12.0 Four-wheeler replacement 2 3 3 4 4 5 6 6 7 8 8 9 9 Yoy chg (%) 25.0 20.0 20.0 15.0 15.0 15.0 12.0 10.0 12.0 10.0 2.0 10.0 8.0 Total four-wheeler volumes 3.6 4.3 4.9 5.3 6.0 6.9 7.7 8.5 9.2 9.4 9.3 10.4 11.3 Yoy chg (%) 33.0 19.2 13.6 9.6 12.7 14.5 12.0 10.0 9.1 2.1 (1.2) 11.6 8.7 Two-wheeler OEM — — — 1 2 2 2 3 3 3 2 3 3 Two-wheeler replacement 2 2 3 4 5 6 7 8 10 11 12 13 14 Yoy chg (%) 28.6 11.1 37.0 30.0 36.0 20.0 20.0 15.0 20.0 18.0 2.0 12.0 10.0 Total two-wheeler volumes 2 2 3 4 7 8 9 11 13 14 14 16 18 Yoy chg (%) 28.6 11.1 37.0 62.8 46.7 21.3 17.9 17.5 16.2 10.4 (0.3) 13.4 10.4 Total automotive volumes 5 6 8 10 13 15 17 19 22 24 23 26 29 Yoy chg (%) 31.5 16.5 21.1 28.8 28.2 18.0 15.1 14.1 13.1 6.9 (0.7) 12.7 9.7 Revenue break-up (Rs mn) Four-wheeler OEM 2,378 2,942 3,151 3,304 3,924 4,301 4,962 5,398 5,394 3,997 3,329 3,995 4,475 Four-wheeler replacement 6,900 8,528 11,053 13,346 15,348 16,768 19,156 20,355 22,777 25,055 25,556 28,111 30,360 Total four-wheeler 9,278 11,470 14,203 16,650 19,272 21,069 24,117 25,752 28,171 29,051 28,885 32,106 34,835 Two-wheeler OEM — — — 489 1,026 1,244 1,435 1,774 1,860 1,537 1,356 1,627 1,823 Two-wheeler replacement 1,080 1,260 1,813 2,710 3,796 4,418 5,514 6,271 7,519 8,872 9,050 10,136 11,149 Total two-wheeler 1,080 1,260 1,813 3,199 4,822 5,662 6,949 8,045 9,379 10,410 10,406 11,763 12,972 Automotive 10,358 12,730 16,016 19,849 24,094 26,731 31,066 33,798 37,550 39,461 39,291 43,869 47,806 Yoy chg (%) 31.0 22.9 25.8 23.9 21.4 10.9 16.2 8.8 11.1 5.1 (0.4) 11.7 9.0
Source: Company, Kotak Institutional Equities estimates
Exhibit 6: Amara Raja plans to expand automotive and tubular battery capacities in FY2021E Capacity across different segments, March fiscal year-ends, 2011-23E (mn units)
2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021E 2022E 2023E Capacity (mn units) Four-wheeler 4.2 5.6 5.6 6.0 6.0 8.3 8.3 10.5 10.5 12.0 12.0 12.0 12.0 Two-wheeler 3.6 4.8 4.8 4.8 8.4 11.0 11.0 14.0 14.0 17.0 19.0 19.0 19.0 Medium VLRA 1.8 1.8 1.8 3.0 3.0 3.0 3.0 3.0 3.0 3.0 3.0 3.0 3.0 Large VLRA (mn amp hr) 900 900 900 1,300 1,300 1,300 1,300 1,300 1,300 1,300 1,300 1,300 1,300 Tubular batteries (home UPS) 1.0 1.1 1.3 1.3 1.7 1.7 1.7 Volume sold (mn units) Four-wheeler OEM 1.3 1.5 1.6 1.5 1.6 1.8 2.1 2.3 2.3 1.8 1.5 1.8 2.0 Four-wheeler replacement 2.3 2.8 3.3 3.8 4.4 5.0 5.6 6.2 7.0 7.6 7.8 8.6 9.3 Total four-wheeler volumes 3.6 4.3 4.9 5.3 6.0 6.9 7.7 8.5 9.2 9.4 9.3 10.4 11.3 Two-wheeler OEM — — — 0.9 1.7 2.1 2.4 3.0 3.2 2.7 2.5 3.0 3.3 Two-wheeler replacement 1.8 2.0 2.7 3.6 4.8 5.8 7.0 8.0 9.6 11.4 11.6 13.0 14.3 Total two-wheeler volumes 1.8 2.0 2.7 4.5 6.5 7.9 9.4 11.0 12.8 14.1 14.1 15.9 17.6 Capacity utilization (%) Four-wheeler 85.5 76.4 86.8 88.8 100.1 83.3 93.3 80.7 88.0 78.6 77.6 86.6 94.2 Two-wheeler 50.0 41.7 57.1 93.0 77.9 72.2 85.1 78.6 91.3 83.0 74.0 83.9 92.6
Source: Company, Kotak Institutional Equities estimates
62 KOTAK INSTITUTIONAL EQUITIES RESEARCH Amara Raja Batteries Automobiles & Components
Exhibit 7: We expect the company to deliver 9% EPS CAGR over FY2020-23E Profit model, balance sheet and cash flow statement, March fiscal year-ends, 2012-23E(Rs mn)
2012 2013 2014 2015 2016 2017 2018 2019 2020 2021E 2022E 2023E Profit model (Rs mn) Net sales 23,645 29,614 34,367 42,113 46,178 53,172 60,592 67,931 68,395 66,377 76,216 84,738 EBITDA 3,396 4,515 5,603 7,018 8,230 8,499 8,832 9,518 10,986 10,592 12,851 14,304 Other income 280 466 455 423 459 492 664 468 551 579 837 1,093 Interest (24) (10) (7) (2) (55) (55) (51) (70) (122) (120) (60) — Depreciation (465) (661) (646) (1,340) (1,407) (1,912) (2,303) (2,612) (3,007) (3,141) (3,561) (4,033) Profit before tax 3,186 4,310 5,406 6,099 7,226 7,025 7,142 7,304 8,407 7,911 10,068 11,364 Tax expense (1,036) (1,351) (1,692) (1,990) (2,310) (2,237) (2,429) (2,469) (1,799) (2,025) (2,577) (2,909) Adjusted net profit 2,151 2,867 3,674 4,109 4,916 4,785 4,713 4,835 6,608 5,885 7,490 8,455 Earnings per share (Rs) 12.6 16.8 21.5 24.1 28.8 28.0 27.6 28.3 38.7 34.5 43.9 49.5 Balance sheet (Rs mn) Equity 8,235 10,598 13,627 16,996 21,159 25,931 29,374 33,353 36,556 40,970 46,588 52,929 Total borrowings 855 881 857 759 741 725 635 584 343 343 343 343 Deferred tax liability 220 195 301 368 538 815 878 959 441 441 441 441 Current liabilities 4,206 6,030 6,609 5,757 7,070 8,375 10,798 10,063 12,665 12,881 12,781 13,481 Total liabilities 13,515 17,705 21,394 23,881 29,508 35,846 41,686 44,959 50,006 54,636 60,153 67,195 Net fixed assets 3,861 4,618 7,679 10,304 14,749 17,324 19,296 21,275 24,778 25,137 26,077 26,544 Investments 161 161 161 161 200 1,467 351 205 1,562 1,562 1,762 1,962 Cash 2,292 4,108 2,946 2,222 1,503 1,709 1,113 718 845 4,934 7,832 11,996 Other current assets 7,202 8,818 10,609 11,194 13,057 15,346 20,925 22,762 22,822 23,004 24,483 26,693 Total assets 13,515 17,705 21,394 23,881 29,508 35,846 41,686 44,959 50,006 54,636 60,153 67,195 Free cash flow (Rs mn) Operating cash flow excl. working cap. changes 2,865 3,448 4,103 5,358 6,279 6,666 6,666 7,257 8,877 8,567 10,274 11,395 Working capital change 120 (94) (1,315) (1,475) (732) (1,137) (3,450) (1,843) 2,892 34 (1,580) (1,510) Capital expenditure (809) (1,463) (3,731) (3,985) (4,904) (4,305) (3,853) (5,282) (6,999) (3,500) (4,500) (4,500) Free cash flow 2,176 1,892 (943) (102) 643 1,224 (637) 131 4,770 5,101 4,194 5,385 Ratios Gross margin (%) 32.0 32.6 33.6 34.1 37.0 34.4 32.1 31.6 35.0 35.1 35.1 34.9 EBITDA margin (%) 14.4 15.2 16.3 16.7 17.8 16.0 14.6 14.0 16.1 16.0 16.9 16.9 PAT margin (%) 9.1 9.7 10.7 9.8 10.6 9.0 7.8 7.1 9.7 8.9 9.8 10.0 Book value (Rs/share) 48.2 62.0 79.8 99.5 123.9 151.8 172.0 195.3 214.0 239.9 272.7 309.9 RoAE (%) 29.3 30.4 30.3 26.8 25.8 20.3 17.0 15.4 18.9 15.2 17.1 17.0 RoACE (%) 26.5 28.8 28.6 26.0 25.1 19.9 17.3 15.7 16.5 14.2 15.9 15.7
Source: Company, Kotak Institutional Equities estimates
KOTAK INSTITUTIONAL EQUITIES RESEARCH 63 BUY JK Lakshmi Cement (JKLC) Construction Materials AUGUST 08, 2020 RESULT Sector view: Attractive
In-line quarter. JKLC’s 1QFY21 EBITDA was in line with our estimates with higher-than- CMP (`): 287 expected volumes offset by muted prices. Brownfield expansion details are awaited and Fair Value (`): 340 the company has guided to announce expansion plans in 2HFY21E. Strong margins in BSE-30: 38,041 North continue to offset weak margins in East. Delayed growth capex helps deleverage from net debt/EBITDA of 1.9X in FY2020 to 1.6X by FY2022E. We increase our earnings estimates on higher volumes and revise Fair Value to Rs340 (from Rs330). Maintain BUY.
JK Lakshmi Cement Stock data Forecasts/valuations 2020 2021E 2022E 52-week range (Rs) (high,low) 388-180 EPS (Rs) 23.5 16.0 27.4 Mcap (bn) (Rs/US$) 34/0.5 EPS growth (%) 478.7 (32.0) 71.4 ADTV-3M (mn) (Rs/US$) 124/2 P/E (X) 12.2 17.9 10.5 Shareholding pattern (%) P/B (X) 2.0 1.8 1.6 Promoters 46.2 EV/EBITDA (X) 5.5 6.4 5.0 FIIs 10.6 RoE (%) 17.4 10.6 16.2 MFs/BFIs 16.1/5.2 Div. yield (%) 0.9 0.8 1.4 Price performance (%) 1M 3M 12M Sales (Rs bn) 44 38 45 Absolute 1 47 (14) EBITDA (Rs bn) 8 7 8 Rel. to BSE-30 (2) 21 (17) Net profits (Rs bn) 3 2 3
1QFY21—in-line results with higher-than-expected volumes and muted realizations JK Lakshmi Cement’s 1QFY21 EBITDA was in line with our estimates with higher-than-expected volumes (-18% yoy, KIE: -25% yoy) offset by muted realizations—the company reported revenues of Rs8.3 bn (-21% yoy, -22% qoq), EBITDA of Rs1.43 bn (-16% yoy, -29% qoq) and net income of Rs444 mn (+13% yoy, -56% qoq), against our estimate of Rs7.8 bn, Rs1.4 bn and Rs475 mn, respectively. Cement volumes declined by 18% yoy to 1.9 mn tons due to extension of the lockdown in key markets. EBITDA/ton declined 9% qoq to Rs750/ton (+3% yoy) on (1) muted realizations at Rs4,320/ton (-3% yoy, flat qoq) due to higher clinker sales and (2) increase in costs to Rs3,658/ton (-5% yoy, +2% qoq) on lower volumes. The company’s subsidiary, Udaipur Cement Works reported an EBITDA of Rs290 mn (-25% yoy, -12% qoq) and net profit of Rs56 mn (net loss of Rs25 mn in 4QFY20).
Expansion plans to be announced in 2HFY21 and to provide much-needed growth visibility
The company plans to announce a brownfield expansion project in 2HFY21E (clinker capacity by 1.5-2 mtpa and grinding capacity of 2.5- 3 mtpa) for a planned capex of Rs12-14 bn. The company has enough limestone reserves for the expansion and requisite regulatory approvals. The project is likely to be in North and should complete within two years of announcement. Commissioning of the WHRS plant in FY2022E should help reduce power cost reduction whereas completion of consulting project should aid in cost reduction.
Revise Fair Value to Rs340 (Rs330 earlier) and maintain BUY
We have increased our FY2021/22E EBITDA by 16%/9% mainly led by higher volumes and recent price trends. We forecast net debt to reduce from Rs15 bn in FY2020 to Rs13 bn by Sumangal Nevatia FY2022E and net debt/EBITDA to reduce from 1.9X in FY2020E to 1.6X in FY2022E. JKLC is trading at 5.6X EV/EBITDA and US$45 EV/ton FY2022E, a discount to our fair multiple of 6X Prayatn Mahajan EV/EBITDA and its historic mean. Maintain BUY with a revised Fair Value of Rs340/share (from Rs330/share earlier).
[email protected] Contact: +91 22 6218 6427
For Private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES’ RATING SYSTEM AND OTHER DISCLOSURES, REFER TO THE END OF THIS MATERIAL. JK Lakshmi Cement Construction Materials
Exhibit 1: JK Lakshmi's EBITDA/ton declined on lower volumes and muted realizations Quarterly results for JK Lakshmi Cement (standalone), March fiscal year-ends, 2019-21E (Rs mn)
Change (%) 1QFY21 1QFY21E 1QFY20 4QFY20 KIE yoy qoq FY2020 FY2019 (% chg) FY2021E Net sales 8,252 7,790 10,419 10,612 6 (21) (22) 40,435 38,823 4 35,943 Total Costs (6,818) (6,391) (8,721) (8,592) 7 (22) (21) (33,711) (34,674) (30,207) Raw materials (1,453) (1,667) (2,751) (2,372) (13) (47) (39) (9,234) (8,848) (7,866) Change in stock (683) (5) 384 11 720 (840) — Employee costs (808) (695) (773) (760) 16 5 6 (3,120) (2,598) (3,120) Power and Fuel (1,315) (1,401) (2,233) (2,005) (6) (41) (34) (8,439) (9,198) (6,832) Freight and handling (1,658) (1,526) (2,130) (2,140) 9 (22) (23) (8,176) (9,533) (7,123) Other expenses (901) (1,096) (1,218) (1,326) (18) (26) (32) (5,464) (3,656) (5,267) EBITDA 1,433 1,398 1,698 2,020 3 (16) (29) 6,724 4,150 62 5,735 EBITDA (%) 17.4 17.9 16.3 19.0 16.6 10.7 16.0 Other income 82 225 59 225 (64) 38 (64) 501 563 471 Interest cost (378) (425) (399) (425) (11) (5) (11) (1,644) (1,874) (1,476) Depreciation (484) (510) (453) (510) (5) 7 (5) (1,884) (1,794) (1,999) PBT 653 689 905 1,311 (5) (28) (50) 3,697 1,044 2,732 Current tax (122) (214) (138) (248) (43) (12) (51) (631) (272) (820) Deferred tax (87) — (71) (75) (430) 23 — Adjusted PAT 444 475 696 988 (6) (36) (55) 2,636 795 231 1,912 Exceptional items — — (302) 19 (283) — — Reported PAT 444 475 394 1,008 (6) 13 (56) 2,352 795 1,912 Adjusted EPS (Rs) 3.8 4.0 5.9 8.4 22.4 6.8 16.3 Sales (mn tons) 1.9 1.7 2.3 2.5 9 (18) (22) 9.2 9.7 (5) 8.1 Realization (Rs/ton) 4,319 4,458 4,472 4,331 (3) (3) (0) 4,409 4,020 10 4,454 Cost (Rs/ton) 3,569 3,658 3,743 3,507 (2) (5) 2 3,676 3,590 2 3,743 Raw materials 1,118 957 1,016 964 17 10 16 928 1,003 (7) 975 Employee costs 423 398 332 310 6 28 36 340 269 26 387 Power & fuel costs 688 802 958 818 (14) (28) (16) 920 952 (3) 847 Freight costs 868 874 914 874 (1) (5) (1) 892 987 (10) 883 Other costs 472 627 523 541 (25) (10) (13) 596 379 57 653 Profitability (Rs/ton) 750 800 729 825 (6) 3 (9) 733 430 71 711 Tax rate (%) 18.6 31.1 15.2 18.9 17.1 26.1 30.0
Source: Company, Kotak Institutional Equities estimates
Changes in our estimates
Exhibit 5 highlights key changes in our estimates.
We have increased our FY2021/22/23E EBITDA by 16%/9%/10% as we
Increase volumes by 4%/1%/1% for FY2021/22/23E factoring the 1QFY21 performance.
Increase our realizations by 1% for FY2021/22/23E factoring the recent price trends.
Our Fair Value is revised to Rs340 (earlier Rs330) due to higher earnings at an unchanged 6X EV/EBITDA on June 2022E financials.
KOTAK INSTITUTIONAL EQUITIES RESEARCH 65 Construction Materials JK Lakshmi Cement
Other highlights, key takeaways from the earnings call
Demand outlook. Demand improved mom in May-July 2020, with July volumes being higher on a yoy basis. However, demand has started to moderate in both East and North markets from August 2020 due to seasonal weakness and easing of pent-up demand. Even as rural demand continues to offset weakness in urban demand, management remains uncertain on demand trajectory going forward. Spread of Covid-19 is increasing in their key markets resulting in sudden lockdowns and other operational issues, especially in East India. The company did not give any volume guidance given the uncertainty due to Covid-19.
Price guidance. Prices in key markets remained stable qoq in 1QFY21. Marginal price hikes taken in May 2020 have started to moderate in both East and North markets on a mom basis. In July, blended prices were down by Rs8-10/bag in North and East markets from 1QFY21 average prices.
Cost guidance. The company does not expect much more variable cost savings going forward as prices of pet coke have started increasing. Fixed costs are likely to reduce in FY2021 as the ongoing consulting project with BCG has concluded. 1QFY21 pet coke costs stood at Rs6,700/ton vs Rs7,500/ton in 4QFY20.
Volume mix. Trade sales increased marginally to 61% in 1QFY21 from 59% in 4QFY20. This is in sharp contrast to its peers as most companies reported significant increase in trade sales. The company expects trade sales to moderate as cement volumes pick up with increased government spending. Further, 78% of cement volumes were blended cement, higher than earlier year, due to higher trade sales.
Expansion projects to be announced in 2HFY21. Due to Covid-19, the company had put on hold its expansion plans. The company now plans to announce a brownfield expansion in North India consisting of 1.5-2 mtpa clinker capacity and 2.5-3 mtpa grinding capacity for a planned capex of Rs12-14 bn. The company has the necessary land for the same and aims to commission the plant in two years.
Capex guidance. The company’s capex expenditure for FY2021 on a consolidated basis remains limited to Rs2 bn primarily for debottlenecking at UCWL (Rs0.5 bn), a WHRS plant at Sirohi (Rs1.2 bn) and the balance towards maintenance capex. WHRS expansion has been delayed by three months to 2QFY22 due to non-availability of migrant labor at site.
Cuttack GU ramp-up remains slow. Northern markets were performing better than the East markets due to faster spread of Covid-19 in East. As a result, ramp-up at Cuttack GU has been poor given the operational issues led by irregular lockdowns in the region.
Debottlenecking at UCWL to be completed in FY2021. The company shall continue its plans to increase the grinding capacity at UCWL by 0.6 mtpa to 2.2 mtpa at a capex of Rs0.6 bn. Clinker capacity would be debottled by 0.3 mtpa to support this expansion. The planned capex for this shall be Rs0.5 bn.
Deleveraging. The company’s consolidated gross debt stood at Rs20 bn (Rs15 bn at JKLC and Rs5 bn at UCWL) as of June FY2020. The company has cash reserves of Rs7 bn. Consolidated net debt reduced to Rs13 bn as of 1QFY21 from Rs15 bn in 4QFY20. Leverage for the company reduced from 3.9X in FY2019 to 1.8X in FY2020. The company has repayment of Rs4 bn in the next two years.
66 KOTAK INSTITUTIONAL EQUITIES RESEARCH JK Lakshmi Cement Construction Materials
Higher clinker sales and lower other revenues. The company sold higher volumes of clinker during the quarter, which impacted blended realization. Clinker sold was 0.3 mn tons in 1QFY21 vs 0.1 mn tons in 4QFY20. Moreover, its other business revenues declined sharply due to late restarts and muted demand impacted by Covid-19.
ICD to group companies. The company highlighted that it would reinvest the receipt of Rs400-500 mn, given to group entities as ICD. Management highlighted its strategy to keep sufficient cash on books to fund the equity in upcoming expansion projects. Moreover, the cost of debt at 8.3% was lower than the blended yield of 9.5% on treasury.
Exhibit 2: Udaipur Cement Works reported 25% yoy decline in EBITDA on lower volumes Quarterly results for Udaipur Cement Works (subsidiary), March fiscal year-ends, 2019-20 (Rs mn)
Change (%) 1QFY21 1QFY20 4QFY20 yoy qoq FY2020 FY2019 (% chg) Net sales 1,381 2,017 1,585 (32) (13) 6,858 5,793 18 Raw materials (525) (941) (625) (2,943) (2,024) Employee costs (86) (85) (66) (308) (301) Power costs (285) (386) (308) (1,417) (1,676) Freight costs (75) (116) (82) (370) (941) Other costs (121) (104) (176) (571) (452) EBITDA 290 386 328 (25) (12) 1,250 399 213 EBITDA (%) 21.0 19.1 20.7 18.2 6.9 Other income 3 1 2 11 12 Interest (148) (165) (152) (650) (685) Depreciation (83) (84) (84) (338) (339) PBT 61 138 93 273 (614) Tax (5) — (118) (118) 169 PAT 56 138 (25) (59) (329) 155 (444) (135) Extraordinaries — — — — 37 Reported PAT 56 138 (25) 155 (407) (138)
Source: Company, Kotak Institutional Equities estimates
Exhibit 3: JK Lakshmi’s EBITDA/ton declined 9% qoq to Rs750/ton on muted realizations Quarterly cost/ton and EBITDA/ton of JK Lakshmi Cement, 1QFY17- 1QFY21 (Rs/ton)
Cost (Rs/ton) EBITDA (Rs/ton)
4,500 722 722
4,000 729
652
750
825
505
427
410
455
431
446 446
448 448 527 527
3,500 545
452
317 317 557 557
3,000
3,820
3,743
3,661
3,632
3,627
3,604
3,572 3,572
3,572 3,572
3,569
3,542
3,530
3,507
3,417
3,271 3,271 3,257 3,257
2,500 3,214 3,127 3,127
2,000
2QFY17 4QFY17 2QFY18 4QFY18 2QFY19 4QFY19 1QFY20 3QFY20 1QFY21 3QFY17 1QFY18 3QFY18 1QFY19 3QFY19 2QFY20 4QFY20 1QFY17
Source: Company, Kotak Institutional Equities estimates
KOTAK INSTITUTIONAL EQUITIES RESEARCH 67 Construction Materials JK Lakshmi Cement
Exhibit 4: JK Lakshmi's volumes declined 18% yoy in 1QFY21 due to Covid-19 Quarterly volumes of JK Lakshmi Cement, 1QFY17- 1QFY21 (Rs/ton)
3.5 Volumes (mn tons) (LHS) Growth yoy (%) (RHS) 40%
3.0 30%
2.5 20%
2.0 10%
1.5 0%
1.0 -18% -10%
0.5 -20%
- -30%
1QFY17 1QFY18 2QFY18 3QFY18 3QFY19 4QFY19 1QFY20 1QFY21 3QFY17 4QFY17 4QFY18 1QFY19 2QFY19 2QFY20 3QFY20 4QFY20 2QFY17
Source: Company, Kotak Institutional Equities estimates
Exhibit 5: JK Lakshmi Cement, changes in estimates, March fiscal year-ends, 2021-23E
Revised estimate Previous estimate Change (%) 2021E 2022E 2023E 2021E 2022E 2023E 2021E 2022E 2023E Volume and realizations (mn tons, Rs/ton) Cement sales - standalone (mn tons) 8.1 9.0 9.8 7.8 9.0 9.7 4 1 1 Cement sales - Udaipur Cement (mn tons) 1.2 1.5 1.8 1.2 1.5 1.8 0 0 0 Realization (Rs/ton) 4,450 4,583 4,698 4,405 4,537 4,650 1 1 1 Cost (Rs/ton) 3,739 3,813 3,912 3,785 3,838 3,949 (1) (1) (1) EBITDA (Rs/ton) 711 770 786 620 699 702 15 10 12 Earnings estimates (Consolidated) (Rs mn) Revenues 37,832 45,153 51,143 36,265 44,406 50,315 4 2 2 EBITDA 6,713 8,377 9,499 5,812 7,679 8,620 16 9 10 PAT 1,880 3,223 4,144 1,259 2,744 3,539 49 17 17 EPS 16.0 27.4 35.2 10.7 23.3 30.1 49 17 17
Source: Company, Kotak Institutional Equities estimates
Exhibit 6: JK Lakshmi Cement, assumptions, March fiscal year-ends, 2018-23E (mn tons, Rs mn)
Change % yoy 2018 2019 2020 2021E 2022E 2023E 2019 2020 2021E 2022E 2023E Standalone capacity (mn tons) 10.9 10.9 11.7 11.7 11.7 11.7 — 7 — — — Udaipur cement capacity (mn tons) 1.4 1.4 1.6 1.6 2.2 2.2 — 14 — 38 — Total capacity ( mn tons) 12.3 12.3 13.3 13.3 13.9 13.9 — 8 — 5 — Utilization (%) 78 89 78 69 77 83 Standalone volumes (mn tons) 8.5 9.7 9.2 8.1 9.0 9.8 13 (5) (12) 12 8 Udaipur cement volumes (mn tons) 0.9 1.3 1.5 1.2 1.5 1.8 40 12 (20) 30 20 Total volumes ( mn tons) 9.5 11.0 10.6 9.2 10.6 11.6 16 (3) (13) 14 10 Standalone realization (Rs/ton) 4,000 4,015 4,406 4,450 4,583 4,698 0 10 1 3 2 EBITDA (Rs/ton) 483 430 733 711 770 786 (11) 71 (3) 8 2 Growth (%) (1.2) (11.0) 70.6 (3.1) 8.4 2.0 Revenues (Rs mn) 37,484 43,163 43,641 37,832 45,153 51,143 15 1 (13) 19 13 EBITDA (Rs mn) 4,318 4,536 7,980 6,713 8,377 9,499 5 76 (16) 25 13 PAT (Rs mn) 667 478 2,764 1,880 3,223 4,144 (28) 479 (32) 71 29 Net debt (Rs mn) 20,710 17,488 15,108 14,099 13,018 11,055 (16) (14) (7) (8) (15)
Source: Company, Kotak Institutional Equities estimates
68 KOTAK INSTITUTIONAL EQUITIES RESEARCH JK Lakshmi Cement Construction Materials
Exhibit 7: Our Fair Value increases to Rs340/share (Rs330 earlier) based on 6X June FY2022E EBITDA JK Lakshmi Cement, valuation details, June 2022E fiscal year-ends
EBITDA Multiple EV Net Debt Equity Value Rs mn (X) Rs mn Rs mn Rs mn Rs/share Valuation Standalone EBITDA (Rs mn) 7,139 6 42,832 7,612 35,220 299 Udaipur Cement Works (Rs mn) 1,512 6 9,072 3,706 4,776 41 Equity value (Rs mn) 50,906 10,910 10,910 340 TP (Rs/share) 340
Source: Company, Kotak Institutional Equities estimates
Exhibit 8: JK Lakshmi Cement, financial summary (consolidated), March fiscal year-ends, 2017-23E (Rs mn)
2017 2018 2019 2020 2021E 2022E 2023E Profit model (Rs mn) Net sales 29,216 37,484 43,163 43,641 37,832 45,153 51,143 EBITDA 3,697 4,318 4,536 7,980 6,713 8,377 9,499 Other income 1,251 690 554 460 430 490 490 Interest (2,444) (2,637) (2,528) (2,250) (2,090) (1,815) (1,540) Depreciation (1,750) (2,073) (2,110) (2,198) (2,332) (2,394) (2,456) Pretax profits 755 298 452 3,992 2,720 4,659 5,993 Tax 78 249 (80) (1,179) (811) (1,371) (1,751) Net profit before minority 833 547 372 2,813 1,909 3,287 4,242 Less: Minority interest 15 (120) (106) 49 29 65 98 Add: Profit of associates (0) (0) (0) (0) — — — Net profit after minority 818 667 478 2,764 1,880 3,223 4,144 Extraordinary items 40 (4) 35 (284) — — — Reported PAT 858 662 512 2,480 1,880 3,223 4,144 Adjusted Earnings per share (Rs) 6.9 5.7 4.1 23.5 16.0 27.4 35.2 Balance sheet (Rs mn) Equity 589 589 589 589 589 589 589 Reserves and surplus 13,421 13,847 14,257 16,281 17,908 20,712 24,332 Borrowings 24,825 25,465 21,348 19,871 17,371 14,871 9,871 Currrent liabilities 12,860 8,100 10,849 10,791 6,600 7,287 7,887 Total liabilities and equity 51,827 51,011 50,656 51,628 46,593 47,649 46,967 Net fixed assets 34,853 35,568 33,786 34,970 34,138 32,944 31,688 Capital work in progress 3,071 2,283 4,166 1,662 2,519 5,769 9,019 Cash 102 125 194 328 1,511 92 (2,945) Current assets 7,871 6,023 6,240 7,794 4,227 4,646 5,006 Investments 5,224 4,728 3,774 4,577 1,902 1,902 1,902 Total assets 51,827 51,011 50,656 51,628 46,593 47,649 46,967 Net Debt 19,586 20,710 17,488 15,108 14,099 13,018 11,055 Free cash flow (Rs mn) Operating cash flow, excl. working capital 2,519 1,503 1,943 4,552 4,271 5,746 6,796 Working capital 3,587 749 3,018 (491) (623) 268 239 Capital expenditure (4,918) (1,738) (2,089) (986) (2,357) (4,450) (4,450) Free cash flow 1,189 514 2,872 3,075 1,290 1,564 2,585 Ratios EV/Ton (US$/ton) 75 69 60 52 50 45 44 EV/EBITDA 14 13 11 6.1 7.1 5.6 4.7 P/E 39 51 66 14 18 10 8 P/B 2.4 2.3 2.3 2.0 1.8 1.6 1.4 FCF Yield 3.5 1.5 8.5 9.1 3.8 4.6 7.7 Net debt/equity (X) 1.4 1.4 1.2 0.9 0.8 0.6 0.4 Book value per share (Rs) 119 123 126 143 157 181 212 Net debt/EBITDA (X) 5.3 4.8 3.9 1.9 2.1 1.6 1.2 RoAE (%) 6 5 3 17 11 16 18 RoACE (%) 6 12 6 13 9 12 15 CRoCI (%) 8 10 6 15 13 15 17
Source: Company, Kotak Institutional Equities estimates
KOTAK INSTITUTIONAL EQUITIES RESEARCH 69 BUY DCB Bank (DCBB) Banks AUGUST 09, 2020 RESULT Sector view: Attractive
Net NPL at 1 below 1. DCB Bank reported flattish earnings print despite operating CMP (`): 83 profits growing 15% yoy as the bank made higher provisions for its loan book. Net NPL Fair Value (`): 150 is at 1bps below 1% and coverage ratio healthy at 75%. While we believe that DCB BSE-30: 38,041 Bank should come out better in this cycle on a relative basis given its cautious approach to growth and underwriting, we understand that this journey to build this confidence would take more than a few quarters. Maintain BUY with FV at Rs150 (unchanged).
DCB Bank Stock data Forecasts/valuations 2020 2021E 2022E 52-week range (Rs) (high,low) 218-58 EPS (Rs) 10.9 9.3 10.3 Mcap (bn) (Rs/US$) 26/0.4 EPS growth (%) 3.6 (14.7) 10.4 ADTV-3M (mn) (Rs/US$) 273/4 P/E (X) 7.6 9.0 8.1 QUICK NUMBERS Shareholding pattern (%) P/B (X) 0.9 0.8 0.8 Promoters 14.9 BVPS (Rs) 96.5 103.7 110.2 NII up 1% yoy; PAT FIIs 22.8 RoE (%) 11.2 8.7 8.9 MFs/BFIs 26.9/1.4 Div. yield (%) 0.0 1.1 1.2 down ~2% yoy in Price performance (%) 1M 3M 12M NII (Rs bn) 13 13 14 1QFY21 Absolute (5) 21 (56) PPOP (Rs bn) 8 7 8 Rel. to BSE-30 (8) 0 (58) Net profits (Rs bn) 3 3 3 GNPL ratio flat qoq at 2.4%; NNPL ratio High provisions for Covid impact earnings; operating profits grew 15% yoy down 20 bps qoq to 1.1% DCB Bank reported flat earnings yoy led by ~100% yoy growth in provisions. Revenue growth was flat yoy while tight cost control resulted in 15% yoy growth in operating profits. There was Maintain BUY with not much to see on headline asset quality with gross NPLs flat qoq as slippages were negligible FV of Rs150 given that a large share of the book is under moratorium. Net NPLs declined ~15bps qoq to (unchanged) 1%. The bank reported ~25% of loans in moratorium, 2% of loans restructured. The bank has indicated that it would look to use the credit guarantee program in the near term as well.
Discussions on the bank are led by macro conditions rather than the bank itself
While we have seen a bounce back in stock price from its lows in May, the price is quite far from its peak levels. The stock is still trading below book with investor concerns primarily emerging from the bank’s loan mix. In our view, DCB Bank’s less-aggressive growth strategy during the good years (2010-20) for banks which had no corporate pain, focus on building its granular business (deposits and loans) are likely to emerge as its key winning factors. The bank has survived a liability fear, especially post IL&FS. The bank has so far demonstrated that its slippages have been lower than City Union Bank or RBL Bank since 2015. Yet, these developments largely go unnoticed. What also largely gets unnoticed is the bank’s retail deposit mix, share of M B Mahesh, CFA top 20 accounts has declined in the loan book to 5% in 1QFY21 from a peak of 22% in FY2010 while in deposits it has declined to 8% from a peak of ~21% in FY2010. There is, at Nischint Chawathe the back of the mind of each investor, that the history (2000-2010) in its underwriting has been far from inspiring and its historically weak return ratios add another layer of challenge to be Abhijeet Sakhare positive in these periods. It is unlikely that DCB Bank would come out unscathed from this crisis. We are not building this argument in our narrative either. We are building a relative argument, as compared to its peers DCB Bank should come out of the crisis quite early. We acknowledge Ashlesh Sonje there are near term challenges to build this hypothesis given regulatory dispensations. Dipanjan Ghosh Maintain BUY in a challenging period with impact visible from 3QFY21
We maintain our BUY rating on DCB Bank with an unchanged fair value of Rs150 valuing the bank at 1.3X book and 13X June 2022E EPS for RoEs moving closer to 10% in the medium term. We cut earnings to reflect slower loan growth and higher provisions as we are still in the very early stages of assessing the impact of the current crisis. [email protected] Contact: +91 22 6218 6427
For Private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES’ RATING SYSTEM AND OTHER DISCLOSURES, REFER TO THE END OF THIS MATERIAL. DCB Bank Banks
Exhibit 1: DCB bank – Quarterly performance March fiscal year-ends, 1QFY20-1QFY21 (Rs mn)
(% chg.) 1QFY21 1QFY21E 1QFY20 4QFY20 1QFY21E 1QFY20 4QFY20 2021E 2020 (% chg.) 2022E Interest Earned 8,731 8,839 8,577 9,019 (1.2) 1.8 (3.2) 34,516 35,366 (2.4) 35,496 Interest on Advances 6,997 7,118 6,863 7,230 (1.7) 2.0 (3.2) 27,652 28,432 (2.7) 27,729 Interest on Investment 1,464 1,509 1,537 1,586 (2.9) (4.7) (7.7) 5,827 6,228 (6.4) 6,485 Others 270 213 177 202 26.8 52.5 33.2 1,037 707 46.8 1,281 Interest expense 5,664 5,720 5,530 5,782 (1.0) 2.4 (2.0) 21,862 22,717 (3.8) 21,713 Net interest income 3,067 3,120 3,048 3,237 (1.7) 0.6 (5.2) 12,655 12,649 0.0 13,783 Other Income 776 1,035 868 1,099 (25.1) (10.6) (29.4) 3,514 3,911 (10.1) 4,315 Commission & exchange 269 551 546 664 (51.2) (50.7) (59.5) 2,050 2,413 (15.0) 2,460 Total Income 3,843 4,154 3,915 4,336 (7.5) (1.8) (11.4) 16,169 16,560 (2.4) 18,098 Operating Expenses 1,932 2,262 2,250 2,215 (14.6) (14.1) (12.8) 8,846 9,030 (2.0) 9,819 Staff costs 1,087 1,174 1,162 1,124 (7.4) (6.5) (3.3) 4,608 4,588 0.4 5,142 Other operating expenses 845 1,089 1,088 1,091 (22.4) (22.3) (22.6) 4,237 4,441 (4.6) 4,677 Pre-provisioning profit 1,911 1,892 1,665 2,121 1.0 14.8 (9.9) 7,323 7,531 (2.8) 8,278 Provisions 837 812 406 1,182 3.1 105.9 (29.2) 3,447 2,612 32.0 3,998 Profit before tax 1,074 1,080 1,259 938 (0.6) (14.7) 14.5 3,876 4,919 (21.2) 4,280 Provision for Taxes 281 277 448 251 1.5 (37.4) 11.9 992 1,540 (35.6) 1,096 Net Profit 794 804 811 688 (1.3) (2.1) 15.4 2,884 3,379 (14.7) 3,184 Tax rate (%) 26 26 36 27 2.1 (26.6) (2.2) 25.6 31.3 (18.2) 26 PBT - net treasury income 805 529 713 274 52.2 12.9 193.5 3,183 2,506 27.0 3,438 CAR (%) 17.9 16.1 17.8 185 bps 16 bps Tier-I (%) 13.9 12.5 13.9 141 bps 2 bps Key balance sheet items (Rs bn) Total deposits 294 307 288 304 (4.0) 2.2 (3.1) 305 0 100,186 333 CASA ratio (%) 21.9 24.5 21.5 -260 bps 47 bps 22.7 21.5 119 bps 23.3 Loans 251 251 240 253 (0.1) 4.2 (1.1) 252 0 99,141 275 Corporate banking 30 31 30 (3.8) (1.1) 30 SME+MSME 28 29 28 (4.5) (1.1) 28 Mortgages 105 96 106 9.4 (1.1) 106 CV/CE/STVL 23 24 25 (6.2) (11.0) 25 Agriculture 53 48 53 9.4 (1.1) 53 Others 13 12 10 4.2 23.6 10 Investment 77 77 80 77 (0.3) (3.4) (0.2) 88 77 14 102 Asset quality GNPL (Rs mn) 6,218 4,764 6,315 30.5 (1.5) 9,168 6,315 45 10,539 GNPL (%) 2.4 2.0 2.5 48 bps -2 bps 3.6 2.5 118 bps 3.8 NNPL (Rs mn) 2,485 1,958 2,935 26.9 (15.3) 3,398 2,935 16 4,631 NNPL (%) 1.0 0.8 1.2 18 bps -17 bps 1.4 1.2 19 bps 1.7 PCR- KS (%) 60.0 58.9 53.5 114 bps 651 bps 63 54 942 bps 56 Slippages (Rs mn) 52 1,454 1,498 (96.4) (96.5) 8,989 6,668 35 9,041 Slippages (%) 0.1 2.5 2.4 -239 bps -227 bps 3.5 2.8 67 bps 3.5 Key calculated ratios (%) Yield on advances 11.1 11.5 11.4 -43 bps -28 bps 11.0 11.6 -67 bps 10.5 Yield on investment 7.6 7.8 8.0 -19 bps -42 bps 7.0 8.0 -95 bps 6.8 Cost of funds 6.7 7.1 6.9 -32 bps -17 bps 6.4 - 635 bps 6.0 NIM 3.4 3.5 3.5 -17 bps -19 bps 3.4 3.6 -16 bps 3.5 CD ratio 85.1 83.5 83.5 162 bps 168 bps 82.6 83.5 -87 bps 82.6 Cost to income 50.3 57.5 51.1 -720 bps -82 bps 54.7 54.5 18 bps 54.3 RoA 0.8 0.9 0.7 -7 bps 11 bps 0.7 0.9 -17 bps 0.8 RoE 9.2 10.3 8.1 -116 bps 105 bps 8.7 10.3 -163 bps 8.9 Other key business parameters (#) Branches 341 334 336 2.1 1.5 351 336 4 366
Source: Company, Kotak Institutional Equities estimates
KOTAK INSTITUTIONAL EQUITIES RESEARCH 71 Banks DCB Bank
Exhibit 2: NII growth at 1% yoy Exhibit 3: LAP grew ~500 bps faster than overall loan growth for Growth in revenues and NII, March fiscal year-ends, 1QFY18-1QFY21 second straight quarter (%) Growth in overall loans and LAP, March fiscal year-ends, 1QFY18- 1QFY21 (%) Revenue growth NII growth 40 Loan growth LAP growth 34 35 32 24 23 28 24 19 19 22 17 22 21 20 13 15 21 19 16 12 18 17 10 16 8 15 7 13 14 13 8 14 32 30 20 20 17 14 17 14 12 11 10 8 1 9 0 7 -2 -8 22 20 27 29 31 27 23 16 13 12 11 8 4
0
1QFY18 2QFY18 3QFY18 2QFY19 3QFY19 4QFY19 1QFY20 2QFY20 1QFY21 4QFY18 1QFY19 3QFY20 4QFY20
2QFY18 3QFY18 4QFY18 1QFY19 3QFY19 4QFY19 1QFY20 2QFY20 4QFY20 1QFY21 2QFY19 3QFY20 1QFY18 Source: Companies, Kotak Institutional Equities Source: Companies, Kotak Institutional Equities
Asset quality improves on the back of regulatory forbearance
Headline ratios. Gross NPA was flat qoq at ~2.4%, while net NPA declined meaningfully (down ~20 bps qoq) to 0.8%. Provision coverage ratio (excluding technical write-offs improved) ~650 bps qoq to ~60%. Asset quality was supported primarily by negligible fresh slippages due to the asset classification standstill on loans under moratorium. Segmentally, NPL ratio worsened significantly in the vehicle loans portfolio to ~5% (from 4.6% in 4QFY20).
Moratorium and collections. The bank has reported that ~26% of its portfolio (by value) is under moratorium (defined as an account that made no payments in the four months from April to July 2020). This is lower than the level of ~60% that the bank reported for April 2020. Further, the overdue portfolio under moratorium has decreased sharply to Rs4.75 bn (~1.9% of net advances) as on July 31, 2020, from ~Rs19.08 bn (~7.5% of net advances) as on March 31, 2020). This gives us comfort on the progress in collections and recoveries by the bank.
Slippages. Slippages were at <0.1% of loans (annualized) in 1QFY21 (~2.4% in 4QFY20 and ~2.5% in 1QFY20). This was mainly on account of the asset classification standstill on loans under moratorium. We are building in higher slippages of ~3.5% for FY2021- 23E.
Recoveries. Recoveries/ upgrades were lower at Rs116 mn in 1QFY21 (against a normal quarterly level of Rs600-700 mn) as lockdowns impacted collections. The bank has made an additional provision of Rs220 mn for this delay in recoveries.
Provision. The bank has made Covid-related provisions of Rs630 mn and Rs320 mn respectively in 4QFY20 and 1QFY21. These provisions are in excess of the norms prescribed by RBI under the ‘Covid-19 Regulatory Package’.
72 KOTAK INSTITUTIONAL EQUITIES RESEARCH DCB Bank Banks
Exhibit 4: Steady deterioration in the vehicle loans portfolio Segment-wise NPLs, March fiscal year-ends, 2011-2020, 1QFY21 (%) 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 1QFY21 Vehicle loans 22.3 2.1 3.3 1.8 3.2 2.5 2.0 4.6 5.0 Corporate loans 5.3 5.3 3.0 0.7 3.8 4.4 3.4 2.4 2.0 1.7 1.7 SME loans 1.1 1.0 3.9 6.5 2.1 1.6 1.7 1.3 1.5 2.6 2.6 Mortgage 1.3 0.7 0.8 0.8 0.8 0.8 1.1 1.7 1.7 2.1 2.2 Gross NPLs 5.9 4.4 3.2 1.7 1.8 1.5 1.6 1.8 1.8 2.5 2.4 Net NPLs 1.0 0.6 0.7 0.9 1.0 0.8 0.8 0.7 0.7 1.2 1.0 Provision coverage ratio (PCR) 84.4 87.5 77.6 46.5 43.2 50.6 51.1 60.2 65.1 53.5 60.0 PCR (incl. technical write-offs) - 91.2 85.7 80.5 74.7 77.6 73.8 75.7 78.8 78.8 75.2
Source: Company, Kotak Institutional Equities
Exhibit 5: Collection trends on CV portfolio were far from normal even in July 2020 Trends in collection efficiency across key business segments, January 2020 - July 2020 (%) Jan-20 Feb-20 Mar-20 Apr-20 Jun-20 Jul-20 125
97.5 98.5 100 90.6 93.2 92.1 81.3
75 67.3 59.4 56.9 51.6 50 39.3 30.1
25
97.7 58.8 98.0 63.8 89.4 37.4 0 Business loans (LAP) Home loans CV portfolio
Source: Company, Kotak Institutional Equities
Exhibit 6: ~48% of the CV portfolio is under moratorium Proportion of portfolio (by value) that made no payments (%) No payments over period from March to July 2020 April to July 2020 Business loans (LAP) 7.0 29.1 Home loans 4.4 21.2 CV portfolio 15.9 48.2 MFI BC loans 2.5 21.6
Notes: (1) Further, 97% and 91% of the MSME accounts (by number) saw some credit churn during the periods March-July 2020 and April-July 2020 respectively.
Source: Company, Kotak Institutional Equities
KOTAK INSTITUTIONAL EQUITIES RESEARCH 73 Banks DCB Bank
Exhibit 7: Expect gross NPLs to increase to ~3.7% over medium- Exhibit 8: ~3.5% normalized slippages over FY2021-23E term Slippages and credit costs, March fiscal year-ends, 2012-2023E (%) Gross and net NPLs, March fiscal year-ends, 2012-2023E (%) Slippages Credit costs 5 Gross NPL (LHS) Net NPL (LHS) 4.0 4.4 3.5 3.5 3.5 3.2 4 3.7 2.8 3.5 3.5 3.2 2.2 2.4 2.1 2.1 2.0 3 2.0 2.5 1.5 1.4 1.5 1.8 1.8 1.6 1.4 1.4 2 1.7 1.8 1.7 1.1 1.5 1.6 0.9 1.5 0.8 1.4 0.7 0.6 0.7 0.6 0.8 0.6 0.5 0.9 1.0 1.2 0.3 0.7 0.8 0.8 0.7 1 0.6 0.7 0.0
0
2013 2014 2015 2016 2019 2020 2012 2017 2018
2021E 2022E 2023E
20… 20…
20…
2014 2015 2016 2017 2018 2019 2020 2013 2012 Source: Company, Kotak Institutional Equities estimates Source: Company, Kotak Institutional Equities estimates
Loan growth decelerates further; outlook negative
Loan growth has decelerated further to ~4% yoy in 1QFY21 as business across segments was weak and disbursements were also impacted due to Covid-related lockdowns. Loan growth has constantly declined every quarter from ~25-30% over 3QFY18-3QFY19. We would not take this too negatively as the bank has likely entered into the slowdown with a more cautious view on the market.
Within segments, while all segments declined sequentially, the contraction was more severe in the CV/CE book (down ~10% qoq) while other segments declined close to 1% qoq. The loan book is skewed towards small business segments with mortgages (largely LAP) at 42% of loans, SME/MSME loans at 11% and CV/CE loans at 9%.
Utilization of credit guarantee scheme (ECLGS) has been very muted with disbursements of Growth revival post Covid looks challenging given the loan mix which is tilted towards small business/SME segments which have taken the maximum brunt from the slowdown. We take a fairly cautious view on growth with nearly flat loan growth in FY21E followed by 10-15% growth over the following years. Exhibit 9: DCB maintains strong share of retail loans at 56% Break-up of loans, March fiscal year-ends, 2011-2020, 1QFY21 (%) 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 1QFY21 Corporate banking 26.0 22.6 23.8 25.7 23.0 15.0 16.0 17.0 13.0 12.0 12.0 SME and MSME 24.0 27.2 22.6 16.6 12.6 12.0 12.0 12.0 12.0 11.0 11.0 Retail 30.0 35.1 42.0 43.5 49.0 56.0 54.0 53.0 55.0 56.0 56.0 Mortgage loans 25.0 29.4 36.4 38.4 42.6 43.0 43.0 40.0 40.0 42.0 42.0 Vehicle loans 2.0 2.1 1.7 2.1 2.5 4.0 4.0 6.0 10.0 10.0 9.0 Others 2.8 3.7 3.9 3.0 3.9 9.0 7.0 7.0 5.0 4.0 5.0 Agriculture 20.0 15.2 11.6 14.2 15.4 17.0 18.0 18.0 20.0 21.0 21.0 Source: Company, Kotak Institutional Equities 74 KOTAK INSTITUTIONAL EQUITIES RESEARCH DCB Bank Banks Stable deposit profile While the headline growth in deposits was muted at 2% yoy (3% decline qoq), retail term deposits grew ~10% qoq and ~20% yoy while the CASA ratio was stable at ~22%. The bank remains more focused on gathering granular retail term deposits – as a result the share of top 20 deposits stood at ~8% at July. Further, interbank deposits declined 15% qoq and the bank had zero share of CD deposits. With CD ratio at ~80-85% the bank can calibrate deposit growth in line with outlook on loan growth. Consequently, there is scope to cut deposit rate further – current cost of deposits are at a substantial premium to peers – 6.7% which has stayed flat over the last one year compared to meaningful declines for other banks. The bank pays 3.25% on basic SA account and 6.5% on 1-year fixed deposits. Exhibit 10: CASA ratio up ~40 bps qoq; wholesale deposits decline sharply as the bank reiterates focus on granularity Break-up of retail deposits, March fiscal year-ends, 2010-2020, 1QFY21 (%) 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 1QFY21 Current 16.2 15.8 13.2 10.8 9.3 8.3 7.9 8.0 7.6 6.5 6.3 Savings 19.2 19.4 18.9 16.4 15.7 15.1 15.5 16.4 16.7 17.5 16.2 CASA 35.4 35.2 32.1 27.2 25.0 23.4 23.4 24.3 24.3 24.0 21.5 21.9 Term deposits 64.6 64.8 67.9 72.8 75.0 76.6 76.6 75.7 75.7 76.1 78.5 78.1 NRI deposits 4.9 6.2 8.0 9.0 8.0 7.0 6.2 6.2 6.4 6.6 Retail deposits 81.5 81.2 84.4 77.4 77.0 80.0 80.7 77.0 74.0 79.6 80.9 87.9 Wholesale deposits 18.5 18.8 15.6 22.6 23.0 20.0 19.3 23.0 26.0 20.4 19.1 12.1 Source: Company, Kotak Institutional Equities KOTAK INSTITUTIONAL EQUITIES RESEARCH 75 Banks DCB Bank Cost ratios lower driven by lower business; cost reduction initiatives in the pipeline Cost-to-income ratio was down ~720 bps yoy at ~50% (down ~80 bps qoq) in 1QFY20 driven by a 14% yoy decline in operating expenses. The bank saw a decline of ~4% qoq in total employee headcount (down to 6,550 in 1QFY21 from 6,845 in 4QFY20) resulting in a ~3% qoq decline in staff costs (down ~7% yoy). The bank has indicated that it is prudently replacing exiting employees. At the same time, the company has gone slow with branch expansion (2% yoy increase to 341 in 1QFY21) as compared to more aggressive expansion seen over FY2017-18. In the future, the bank expects to reduce its cost-to-assets ratio below 2.15-2.20% (2.43% in FY2020 and 2.58% in FY2019) through ~350 digital initiatives – expected to be implemented by 2QFY22. We expect operating expenses growth to revive to 11-14% levels in FY2022-23E, while cost- to-income ratio is expected to be stable at ~54% till FY2023E. Exhibit 11: Expect cost-income ratio to be flattish Exhibit 12: We expect operating expenses to be broadly stable Cost-income ratio, March fiscal year-ends, 2012-2023E (%) Operating expenses to assets, March fiscal year-ends, 2012-2023E (%) 80 4.0 75 3.1 72 69 3.2 2.9 2.9 2.8 2.7 2.8 2.6 2.6 2.4 2.4 63 2.3 2.4 64 60 60 2.4 59 58 57 56 55 55 54 56 1.6 48 0.8 40 0.0 2013 2014 2015 2016 2017 2020 2012 2018 2019 2013 2014 2015 2016 2018 2019 2012 2017 2020 2021E 2022E 2023E 2021E 2022E 2023E Source: Company, Kotak Institutional Equities estimates Source: Company, Kotak Institutional Equities estimates Margins decline driven by sharper drop in yields Net interest margin (reported) narrowed ~20 bps qoq to ~3.4%. Yield on advances (reported) was down 20 bps qoq at 11.1%, while cost of funds declined ~40 bps qoq to end at 6.7%. Management indicated that NIM was also affected by the excess liquidity that the bank built on its balance sheet since March as a prudent measure. However, as this excess liquidity is unwound gradually, its overhang on NIM will decline. The management has reiterated focus on increasing the share of retail deposits, especially retail term deposits, and improving the granularity of deposits. We expect NIMs (calculated) to stay around 3.4-3.5% over FY2021-23E (from 3.6% in FY2020) driven by a reduction in cost of funds driven by a similar decline in both yield on advances and cost of funds. Yields could be under pressure as a result of shift in loan mix towards more retail assets like home loans and vehicle loans where competition from other banks and NBFCs is relatively high. However, focus on building retail deposit franchise will help cushion margins in the medium term as retail deposit costs tend to be relatively inelastic in comparison to loan yields. 76 KOTAK INSTITUTIONAL EQUITIES RESEARCH DCB Bank Banks Exhibit 13: NIM stable at ~3.5% in FY2020 Calculated YoA, CoF and NIM, March fiscal year-ends, 1QFY18-1QFY21 (%) Yield on advances (LHS) Cost of deposits (LHS) NIM (RHS) 15 5 4.2 4.1 4.0 3.8 3.7 3.7 12 3.7 3.6 3.5 3.6 3.6 3.5 4 3.4 9 3 6 2 7.1 7.2 7.5 7.7 7.8 7.8 7.7 7.6 3 6.9 6.8 6.9 6.8 7.0 1 11.2 11.1 11.0 10.8 10.9 10.9 11.2 11.4 11.5 11.6 11.6 11.4 11.1 0 0 1QFY18 1QFY20 2QFY20 3QFY20 4QFY20 1QFY21 3QFY18 4QFY18 1QFY19 2QFY19 3QFY19 4QFY19 2QFY18 Source: Company, Kotak Institutional Equities Other highlights for the quarter: Muted non-interest income. Non-interest income declined ~11% yoy on the back of ~51% yoy decline in fee income. The bank expects fee income to decline by 30-35% in FY2021E due to lower business volumes and Covid-induced disruptions. At the same time, treasury income was up ~140% yoy. We forecast non-interest income to decline ~10% yoy in FY2021E before reviving to healthy growth levels in FY2022-23E. Capital. Capital adequacy ratio stood at a comfortable level of 17.91% (excluding the profit earned in 1QFY21) with Tier-1 at 13.92%. While the bank has secured an enabling resolution from shareholders to raise Rs5 bn in equity, the management indicated that it does not see the need to raise capital as of now. Growth in RWA at <1% yoy was much lower than advances growth of >4% yoy in 1QFY21. Exhibit 14: DCB trades at 0.7X one-year forward book Exhibit 15: DCB bank is trading at significant discount to peers One-year rolling forward PBR (adjusted), August 2011 – August 2020 DCB trading at premium to private banks, August 2011 – August (X) 2020 (X) 2.5 1.0 2.0 0.8 1.5 0.6 1.0 0.4 0.5 0.2 0.0 0.0 Aug-11 Aug-15 Aug-16 Aug-17 Aug-18 Aug-19 Aug-20 Aug-12 Aug-13 Aug-14 Aug-11 Aug-12 Aug-13 Aug-14 Aug-16 Aug-17 Aug-18 Aug-19 Aug-20 Aug-15 Source: Company, Bloomberg, Kotak Institutional Equities estimates Source: Company, Bloomberg, Kotak Institutional Equities estimates KOTAK INSTITUTIONAL EQUITIES RESEARCH 77 Banks DCB Bank Exhibit 16: DCB bank - change in estimates March fiscal year-ends, 2021E-2023E (Rs mn) New estimates Old estimates % change 2021E 2022E 2023E 2021E 2022E 2023E 2021E 2022E 2023E Net loan growth (%) (1) 9 15 6 12 17 -627 bps -299 bps -281 bps Loans (Rs bn) 252 275 315 267 301 353 (5.9) (8.4) (10.6) Total income 16,169 18,098 20,233 17,606 19,793 22,755 (8.2) (8.6) (11.1) Net interest income 12,655 13,783 15,429 13,345 14,899 17,092 (5.2) (7.5) (9.7) NIM (%) 3.4 3.5 3.5 3.6 3.7 4 -16 bps -19 bps -21 bps Other income 3,514 4,315 4,804 4,261 4,895 5,663 (17.5) (11.8) (15.2) Fee income 2,050 2,460 2,756 2,542 2,847 3,188 (19.3) (13.6) (13.6) Treasury income 703 853 903 636 886 1,136 10.4 (3.8) (20.6) Operating expenses 8,846 9,819 11,238 9,512 10,658 12,368 (7.0) (7.9) (9.1) Employee expenses 4,608 5,142 6,010 5,028 5,610 6,557 (8.3) (8.3) (8.3) Other cost 4,237 4,677 5,228 4,485 5,048 5,811 (5.5) (7.3) (10.0) Loan loss provisions 3,409 3,952 2,658 3,386 3,977 2,941 0.7 (0.6) (9.6) PBT 3,876 4,280 6,283 4,456 4,856 7,085 (13.0) (11.9) (11.3) Tax 992 1,096 1,609 1,141 1,243 1,814 (13.0) (11.9) (11.3) Net profit 2,884 3,184 4,675 3,315 3,613 5,271 (13.0) (11.9) (11.3) % growth yoy (15) 10 47 (2) 9 46 -1276 bps 144 bps 90 bps PBT-treasury+provisions 6,621 7,425 8,091 7,457 8,248 9,249 (11.2) (10.0) (12.5) Source: Company, Kotak Institutional Equities estimates 78 KOTAK INSTITUTIONAL EQUITIES RESEARCH DCB Bank Banks Exhibit 17: DCB bank - key financial ratios and growth rates March fiscal year-ends, 2017-2023E (%) 2017 2018 2019 2020E 2021E 2022E 2023E Growth rates (%) Net loan 22.4 28.6 15.9 7.5 (0.8) 9.5 14.5 Total Asset 25.8 25.7 18.4 7.6 2.5 9.9 14.2 Deposits 29.2 24.5 18.4 6.8 0.3 9.5 14.5 Net interest income 28.7 24.9 15.5 10.1 0.0 8.9 11.9 Loan loss provisions 42.8 23.7 2.7 89.0 31.0 15.9 (32.7) Total other income 13.2 24.4 12.9 11.7 (10.1) 22.8 11.3 Net fee income 17.9 31.4 10.2 0.5 (15.0) 20.0 12.0 Net capital gains 7.4 (0.1) (14.9) 68.9 7.7 21.3 5.9 Net exchange gains (28.5) 34.1 55.3 (11.0) (10.0) 20.0 31.0 Operating expenses 28.0 24.3 9.2 5.9 (2.0) 11.0 14.4 Employee expenses 25.7 23.8 13.8 5.7 0.4 11.6 16.9 Key ratios (%) Yield on average earning assets 10.1 9.3 9.6 10.0 9.3 9.0 8.7 Yield on average loans 11.5 10.7 11.2 11.6 11.0 10.5 10.2 Yield on average investments 7.8 7.0 7.6 8.0 7.0 6.8 6.6 Average cost of funds 6.8 6.0 6.5 6.9 6.4 6.0 5.7 Interest on deposits 6.9 6.0 6.5 6.9 6.4 6.0 5.7 Spread 3.3 3.4 3.1 3.1 2.9 3.0 3.0 Net interest income/earning assets 3.9 3.8 3.6 3.6 3.4 3.5 3.5 Spreads on lending business 4.7 4.8 4.7 4.7 4.6 4.6 4.5 New provisions/average net loans 0.8 0.7 0.6 1.1 1.4 1.5 0.9 NII/total income 76.2 76.2 76.6 76.4 78.3 76.2 76.3 Other income / total income 23.8 23.8 23.4 23.6 21.7 23.8 23.7 Fee income to total income 15.8 16.7 16.0 14.6 12.7 13.6 13.6 Fee income to advances 1.2 1.2 1.1 1.0 0.8 0.9 0.9 Fees income to PBT 54.0 56.4 47.4 49.0 52.9 57.5 43.9 Exchange income to PBT 3.4 3.6 4.3 3.9 4.5 4.8 4.3 Operating expenses/total income 60.0 59.8 56.9 54.5 54.7 54.3 55.5 Operating expenses/assets 2.9 2.9 2.6 2.4 2.3 2.4 2.4 Tax rate 34.9 36.5 35.8 31.3 25.6 25.6 25.6 CASA ratio 24.3 24.3 23.9 21.5 22.7 23.3 23.9 Loans-to-deposit ratio 82.0 84.7 82.9 83.5 82.6 82.6 82.6 Equity/assets (EoY) 9.2 9.3 8.7 8.9 9.3 9.1 8.8 Loan impairment ratios (%) Gross NPL 1.6 1.8 1.8 2.5 3.5 3.7 3.5 Net NPL 0.8 0.7 0.7 1.2 1.4 1.7 1.5 Slippages 2.0 2.2 2.0 2.8 3.5 3.5 3.5 PCR 51.1 60.2 65.0 53.5 62.9 56.1 59.0 Dupont analysis (%) Net interest income 3.7 3.7 3.5 3.4 3.2 3.3 3.3 Loan loss provisions 0.5 0.5 0.4 0.7 0.9 1.0 0.6 Net other income 1.2 1.1 1.1 1.1 0.9 1.0 1.0 Operating expenses 2.9 2.9 2.6 2.4 2.3 2.4 2.4 (1- tax rate) 65.1 63.5 64.2 68.7 74.4 74.4 74.4 ROA 0.9 0.9 1.0 0.9 0.7 0.8 1.0 Average assets/average equity 11.7 12.0 12.2 12.3 11.8 11.6 11.8 ROE 10.8 10.9 12.0 11.2 8.7 8.9 11.9 Source: Company, Kotak Institutional Equities estimates KOTAK INSTITUTIONAL EQUITIES RESEARCH 79 Banks DCB Bank Exhibit 18: DCB bank – income statement and balance sheet March fiscal year-ends, 2017-2023E (Rs mn) 2017 2018 2019 2020E 2021E 2022E 2023E Income statement Total interest income 20,761 24,130 30,415 35,366 34,516 35,496 38,694 Loans 16,479 19,403 24,479 28,432 27,652 27,729 29,999 Investments 3,935 4,208 5,354 6,228 5,827 6,485 7,346 Cash and deposits 347 519 582 707 1,037 1,281 1,349 Total interest expense 12,791 14,176 18,922 22,717 21,862 21,713 23,265 Net interest income 7,971 9,954 11,493 12,649 12,655 13,783 15,429 Loan loss provisions 1,084 1,340 1,377 2,602 3,409 3,952 2,658 Net interest income (after prov.) 6,887 8,614 10,116 10,047 9,246 9,831 12,770 Other income 2,495 3,103 3,502 3,911 3,514 4,315 4,804 Net fee income 1,657 2,176 2,399 2,412 2,050 2,460 2,756 Net capital gains 454 454 386 653 703 853 903 Net exchange gains 104 139 216 192 173 207 272 Operating expenses 6,283 7,807 8,529 9,029 8,846 9,819 11,238 Employee expenses 3,080 3,812 4,340 4,588 4,608 5,142 6,010 Other provisions 33 (13) 2 24 29 34 41 Pretax income 3,067 3,862 5,065 4,919 3,876 4,280 6,283 Tax provisions 1,070 1,408 1,812 1,540 992 1,096 1,609 Net profit 1,997 2,453 3,254 3,379 2,884 3,184 4,675 % growth 3 23 33 4 (15) 10 47 PBT - Treasury + Provisions 3,728 4,796 6,080 6,878 6,621 7,426 8,092 % growth 22 29 27 13 (4) 12 9 Balance sheet Cash and bank balance 11,925 23,720 27,934 35,459 36,147 37,781 40,193 Net value of investments 58,179 62,190 78,441 77,415 88,383 101,649 120,253 Net loans and advances 158,176 203,367 235,680 253,453 251,529 275,392 315,347 Fixed assets 4,886 4,940 5,260 5,459 4,869 4,698 4,503 Other assets 7,298 8,004 10,604 13,266 13,929 14,626 15,357 Total assets 240,464 302,221 357,918 385,051 394,858 434,146 495,652 Deposits 192,892 240,069 284,351 303,699 304,567 333,462 381,841 Borrowings and bills payable 17,624 25,447 32,667 37,158 42,601 49,132 56,970 Other liabilities 7,899 8,627 9,744 9,972 10,969 12,066 13,273 Total liabilities 218,415 274,143 326,762 350,830 358,138 394,661 452,084 Paid-up capital 2,854 3,081 3,095 3,104 3,104 3,104 3,104 Reserves & surplus 19,195 24,997 28,061 31,117 33,616 36,382 40,464 Total shareholders' equity 22,049 28,078 31,156 34,222 36,720 39,486 43,568 Source: Company, Kotak Institutional Equities estimates 80 KOTAK INSTITUTIONAL EQUITIES RESEARCH BUY Hindustan Zinc (HZ) Metals & Mining AUGUST 09, 2020 UPDATE Sector view: Attractive A fast growing silver behemoth. HZ’s silver volumes have grown nine times faster than zinc-lead in the past decade. This should continue in the medium term given CMP (`): 253 higher grades and new recovery enhancement projects. HZ, a monopoly silver producer Fair Value (`): 290 in India, is the sixth largest producer in the world. Silver, with a dual characteristic of BSE-30: 38,041 industrial-precious metal, should remain the best performing metal in the current reflation backdrop. We revise earnings factoring the recent price buoyancy and increase Fair Value to Rs290 (from Rs225) with a revised SOTP based valuation. Maintain BUY. Hindustan Zinc Stock data Forecasts/valuations 2020 2021E 2022E 52-week range (Rs) (high,low) 258-116 EPS (Rs) 16.1 15.3 20.1 Mcap (bn) (Rs/US$) 1,069/14.3 EPS growth (%) (14.5) (5.0) 31.5 ADTV-3M (mn) (Rs/US$) 340/5 P/E (X) 15.7 16.5 12.6 QUICK NUMBERS Shareholding pattern (%) P/B (X) 2.7 3.2 3.2 Promoters 64.9 EV/EBITDA (X) 9.6 9.4 7.2 th FIIs 1.0 RoE (%) 18.4 17.5 25.5 HZ is the world’s 6 MFs/BFIs 0.5/2.2 Div. yield (%) 6.5 6.0 8.0 largest silver Price performance (%) 1M 3M 12M Sales (Rs bn) 186 201 245 producer in 2019 Absolute 29 43 21 EBITDA (Rs bn) 88 98 129 Rel. to BSE-30 24 19 17 Net profits (Rs bn) 68 65 85 Silver forms 30% of Silver: Stars aligned for both attributes – as an industrial and a precious metal HZ’s EBITDA Silver prices correlate strongly with that of gold given its precious metal trait and current macro HZ- attractive equity set-up is a favorable- safe heaven amidst uncertainty, low interest rates and a weak USD. It for growth, outperforms gold during accelerating global growth given its industrial usage. Opening of global economies post lockdowns implies strong sequential demand recovery. The combined dividend yield and impact of global monetary and fiscal policy response to the pandemic makes silver an attractive re-rating reflation proxy. Silver is up 51% YTD FY2021 and price strength could sustain in the current macro backdrop. Silver’s prominence is growing at a fast-pace in HZ HZ’s silver volumes have grown at 15% CAGR in the past decade versus zinc-lead volumes at 2% CAGR. Growing contribution of Sindesar Khurd mine in ore production (from 6% to 34% in the past decade) has been a game changer. Silver would contribute ~30% to HZ’s FY2021 EBITDA. Currently, HZ recovers silver only from lead concentrate whereas zinc concentrates and tailings, currently not processed, could add 150 tons of silver annually. It would commission its first fumer project in 2QFY21 to recover ~32-35 tons silver annually and plans to add two more such plants. It plans to reach 1,000 tons production in 2-3 years (586 tons in FY2020). Further, the Galena zone in RA mine, currently under exploration, could significantly add to the current design plan. Zinc price strength reflects strong fundamentals, expansion projects to drive volume growth Zinc price is up 30% from March 2020 lows led by (1) stronger than expected demand recovery in China, (2) mine supply disruptions in the Americas, (3) a rise in cancelled LME warrants in addition to (4) buoyant sentiments and higher liquidity. We forecast US$2,150/ton for FY2021/22E against spot at US$2,400/ton. HZ’s mined metal capacity would increase from 1 Sumangal Nevatia mtpa to 1.2 mtpa in FY2021E. We estimate metal volumes to see 8% CAGR over FY2020-23E. Prayatn Mahajan Fair Value revised to Rs290 on revised SOTP base valuation, maintain BUY We revise HZ EPS by 29%/24%/22% for FY2021/22/23E factoring higher commodity prices but still below spot. Silver’s growing significance and strong growth prospects warrant a premium to base metal valuation, closer to global precious metal peers. We revise HZ’s Fair Value to Rs290 (from Rs225) on a revised EV/EBITDA based SOTP valuation (7X zinc-lead, 10X silver from 7X consol earlier). At spot prices, Fair Value would increase to Rs340. Maintain BUY. [email protected] Contact: +91 22 6218 6427 For Private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES’ RATING SYSTEM AND OTHER DISCLOSURES, REFER TO THE END OF THIS MATERIAL. Metals & Mining Hindustan Zinc Exhibit 1: Silver and gold prices have moved up by 47% and 14% respectively in the past two months Spot prices of Silver and Gold, August 1960-2020 (US$/oz) Gold Prices (US$/oz) [LHS] Silver Prices (US$/oz) [RHS] 2,500 60 50 2,000 40 1,500 30 1,000 20 500 10 - - Aug-60 Aug-63 Aug-66 Aug-72 Aug-75 Aug-78 Aug-84 Aug-87 Aug-90 Aug-96 Aug-99 Aug-02 Aug-08 Aug-11 Aug-14 Aug-20 Aug-81 Aug-93 Aug-05 Aug-17 Aug-69 Source: Company, Kotak Institutional Equities estimates Exhibit 2: Silver outperformance to gold correlates strongly with global industrial growth due to its industrial use Gold-Silver ratio and global growth rates, August 1960-2020 (% yoy 6 mma) Gold/Silver Ratio Global Industrial production (% yoy, 6 mma) [RHS] 30 35.00% 40 50 25.00% 60 15.00% 70 80 5.00% 90 -5.00% 100 -15.00% 110 120 -25.00% Jul-08 Jul-15 Jan-12 Jan-19 Jun-11 Jun-18 Oct-06 Feb-09 Oct-13 Feb-16 Apr-10 Sep-16 Apr-17 Sep-09 Dec-14 Dec-07 Nov-17 Nov-10 Mar-06 Mar-13 Mar-20 Aug-05 Aug-19 Aug-12 May-14 May-07 Source: Company, Kotak Institutional Equities estimates 82 KOTAK INSTITUTIONAL EQUITIES RESEARCH Hindustan Zinc Metals & Mining Exhibit 3: HZ was the sixth largest silver producer in the world in 2019 Top 20 silver producers in the world,CY2018-19 (mn ounces) Company CY2018 CY2019 % Fresnillo plc 58.1 51.8 -11% KGHM PolskaMeidz 38.7 45.6 18% Glencore plc 34.9 32 -8% Pan American 24.8 25.9 4% Polymetal Intl plc 25.3 21.6 -15% Hindustan Zinc Ltd 21.2 20.4 -4% Southern Copper 17.3 20.3 17% Buenaventura SAA 26.3 20.1 -24% Codelco 18.9 17.9 -5% Hochschild 19.7 16.8 -15% Newmont 2.8 15.9 468% Volcan Cia 17 15.6 -8% First Majestic Silver Corp 11.7 13.2 13% BHP 15.4 13.2 -14% Hecla Mining Company 10.4 12.6 21% South 32 13.4 12.3 -8% Boliden A.B 12.9 12 -7% Coeur Mining Inc 12.9 11.7 -9% Yamana Gold Inc 8 10.6 33% Industrias Penoles 11.7 10.6 -9% Total production by top 20 players 401.4 400.1 0% Source: Silver Institute, Company, Kotak Institutional Equities estimates Exhibit 4: North America and Europe account for a majority of the silver production in the world Top silver producing countries in the world,CY2018-19 (mn ounces) Country CY18 CY19 % Mexico 194.5 190.3 -2% Peru 146.5 135.4 -8% Chile 110 110.7 1% Austrailia 40.3 42.9 6% Russia 43.1 42.4 -2% Poland 40.9 40.4 -1% Chile 40 38.2 -4% Bolivia 38.3 37.2 -3% Argentina 30.9 34.8 13% United States 29.8 31.5 6% India 21.2 20.4 -4% Kazakhstan 19.5 16.7 -14% Sweden 15 14.4 -4% Canada 11.8 13.5 14% Morocco 7.4 8.1 9% Indonesia 10.6 7.7 -27% Uzbekistan 6 6.1 2% Papua 3 4.7 57% Domincan Republic 5.1 4.5 -12% Turkey 4.7 3.2 -32% Others 29.3 33.4 14% Total production 848 837 -1% Source: Company, Kotak Institutional Equities estimates KOTAK INSTITUTIONAL EQUITIES RESEARCH 83 Metals & Mining Hindustan Zinc Exhibit 5: Silver supply is expected to decline by 4% in CY2020 Global Silver supply and demand,CY2011-20 (mn ounces) Source: Silver Institute, Metals Focus, Kotak Institutional Equities estimates Exhibit 6: Industrial segment formed 48% of the silver demand Exhibit 7: Physical investment and ETF holdings are expected to in CY2019 increase in CY2020E Demand break up of Silver, CY2019 (%) Expected demand break up of Silver, CY2020E (%) ETF ETF 8% 11% Net Physical Investment 17% Net Physical Investment Industrial 20% 44% Industrial 48% Silverware 5% Silverware 5% Jewelery 19% Photograph Jewelery Photograph y 17% y 3% 3% Source: Kotak Institutional Equities estimates Source: Kotak Institutional Equities estimates 84 KOTAK INSTITUTIONAL EQUITIES RESEARCH Hindustan Zinc Metals & Mining Exhibit 8: Silver ETF holdings have increased sharply in the last six months Silver ETF holdings, Silver spot price, August 2005-20 (mn troy ounces, US$/oz) Silver ETF Holding (mn troy ounces) Silver Prices (US$/oz) [RHS] 1000 60 900 50 800 700 40 600 500 30 400 20 300 200 10 100 0 - Feb-07 Feb-08 Feb-09 Feb-14 Feb-15 Feb-17 Feb-06 Feb-10 Feb-11 Feb-12 Feb-13 Feb-16 Feb-18 Feb-19 Feb-20 Aug-07 Aug-08 Aug-09 Aug-14 Aug-15 Aug-16 Aug-17 Aug-06 Aug-10 Aug-11 Aug-12 Aug-13 Aug-18 Aug-19 Aug-20 Aug-05 Source: Company, Kotak Institutional Equities estimates Exhibit 9: HZ's silver volumes have grown at a CAGR of 15% whereas Zinc-Lead volumes grew at a mere 2% CAGR in the last 10 years Total mined metal volumes and Silver volumes, 2010- 2020 (000 tons) Mined Metal Volumes (000 tons) Silver (000 tons) 1000 900 800 700 600 500 400 300 200 100 0 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Source: Company, Kotak Institutional Equities estimates KOTAK INSTITUTIONAL EQUITIES RESEARCH 85 Metals & Mining Hindustan Zinc Exhibit 10: HZ's plans to ramp up production of silver to 1000 tons in the coming years HZ Silver production and expansion plans, FY2016-22E (tons) Production (tons) 1200 -Increased output from SKM -Zinc Smelters (0-100) 1000 1000 -Tailings (0-50) 800 713 632 594 600 422 452 400 200 0 FY2016 FY2017 FY2018 FY2019 FY2020 Target Source: Company, Kotak Institutional Equities estimates Exhibit 11: HZ's fumer project will enhance the metal recovery rate in Zinc, Lead and Silver Existing and enhanced metal recovery rates in Zinc, Lead and Silver (%) Exisitng Metal Recovery (%) Enhenced metal recovery with Fumer (%) 120 96.75 97.5 100 90 92.6 80 60 40 20 0 0 0 Zinc Lead Silver Source: Company, Kotak Institutional Equities estimates 86 KOTAK INSTITUTIONAL EQUITIES RESEARCH Hindustan Zinc Metals & Mining Exhibit 12: HZ's silver EBITDA share is likely to increase to 30%+ with the expansion projects HZ EBITDA mix from Zinc-Lead and Silver, FY2014-23E (%) Zinc & Lead (%) Silver (%) 120% 100% 12% 13% 13% 17% 15% 18% 21% 31% 29% 27% 80% 60% 40% 20% 0% 2014 2015 2016 2017 2018 2019 2020 2021E 2022E 2023E Source: Company, Kotak Institutional Equities estimates Exhibit 13: HZ's net-cash reserves declined 28% qoq to Rs155 bn (Rs36/share) due to dividend payment Cash reserves, cash reserves as a % of market cap for HZ, 1QFY16 - 1QFY21 (Rs bn, %) Cash reserves (Rs bn) Cash as a % of market Cap [RHS] 400 35 30 300 25 20 14.5 200 15 10 100 5 0 0 2QFY16 3QFY16 1QFY17 2QFY17 4QFY17 1QFY18 3QFY18 4QFY18 2QFY19 3QFY19 1QFY20 2QFY20 4QFY20 1QFY21 4QFY16 3QFY17 2QFY18 1QFY19 4QFY19 3QFY20 1QFY16 Source: Company, Kotak Institutional Equities estimates KOTAK INSTITUTIONAL EQUITIES RESEARCH 87 Metals & Mining Hindustan Zinc Exhibit 14: HZ's dividend yield remains high DPS and dividend yield (%) for Hindustan Zinc, FY2016-23E (Rs/share, %) DPS (Rs/Share) Dividend Yield (%) [RHS] 35 14.0 12.0 11.6 30 12.0 25 10.0 8.4 7.9 8.0 20 8.0 6.5 6.0 15 6.0 10 3.2 4.0 5 2.0 - - 2016 2017 2018 2019 2020 2021E 2022E 2023E Source: Company, Kotak Institutional Equities estimates Exhibit 15: Hindustan Zinc, changes in estimates, March fiscal year ends, FY2021-23E Revised estimate Previous estimate Change (%) 2021E 2022E 2023E 2021E 2022E 2023E 2021E 2022E 2023E Price (US$/ton) Zinc 2,150 2,150 2,200 1,950 1,950 2,000 10 10 10 Lead 1,828 1,828 1,870 1,697 1,755 1,800 8 4 4 Silver (US$/ozt) 23.0 22.0 21.0 17.5 17.0 17.0 31 29 24 Volumes (tons) Mined metal 928,317 1,088,796 1,150,713 928,317 1,088,796 1,150,713 — — — Zinc ingots 710,347 845,375 895,345 710,347 845,375 895,345 — — — Lead ingots 196,244 218,870 229,770 196,244 218,870 229,770 — — — Refined silver 645 817 849 645 817 849 — — — Earnings estimates (Rs mn) Revenues 200,682 244,536 260,994 179,496 220,217 237,423 12 11 10 EBITDA 97,644 128,824 137,872 79,008 107,299 117,034 24 20 18 PAT 64,621 84,969 89,949 50,271 68,395 73,904 29 24 22 EPS 15.3 20.1 21.3 11.9 16.2 17.5 29 24 22 Re/US$ rate 75.5 76.0 76.0 75.5 76.0 76.0 — — — Source: Company, Kotak Institutional Equities estimates 88 KOTAK INSTITUTIONAL EQUITIES RESEARCH Hindustan Zinc Metals & Mining Exhibit 16: Hindustan Zinc, Key assumptions, March fiscal-year ends, 2017-2023E (Rs mn) 2017 2018 2019 2020 2021E 2022E 2023E LME-assumptions (US$/ton) Zinc 2,365 3,057 2,743 2,402 2,150 2,150 2,200 Lead 2,000 2,379 2,121 1,952 1,828 1,828 1,870 Silver (US$/oz) 17.5 16.9 15.5 16.5 23.0 22.0 21.0 Rs/US$ rate 67.1 64.5 70.1 70.9 75.5 76.0 76.0 LME-assumptions (US$/ton) Mined metal production 906,000 947,000 936,000 917,022 928,317 1,088,796 1,150,713 Zinc 696,000 791,000 696,283 680,000 710,347 845,375 895,345 Lead 138,000 168,000 197,838 180,000 196,244 218,870 229,770 Silver 448 558 679 586 645 817 849 Zinc CoP (US$/ton) (ex royalty) 830 976 1,008 1,047 1,020 967 980 EBITDA (Rs bn) Zinc and Lead 85 107 88 70 67 92 101 Silver 12 16 19 18 30 37 37 Total EBITDA 97 123 107 88 98 129 138 Silver as % of total 13% 13% 18% 21% 31% 29% 27% Source: Company, Kotak Institutional Equities estimates Exhibit 17: HZ's EPS changes by 0.4%/1.2% for every 1% change in Exhibit 18: HZ's fair value changes by 0.3%/0.7% for 1% change Silver/Zinc prices in Silver/Zinc prices EPS sensitivity of HZ to zinc and silver prices, FY2022E (Rs/share) Fair value sensitivity of HZ to Zinc and Silver prices, March 2022E FY2022E EPS Zinc prices (US$/ton) Spot Fair value (Rs/share) Zinc prices (US$/ton) Spot 20.1 1,950 2,050 2,150 2,250 2,350 289.7 1,950 2,050 2,150 2,250 2,350 46.7 16.6 17.7 18.8 19.8 20.9 46.7 253 263 272 282 292 51.7 17.3 18.4 19.4 20.5 21.6 51.7 262 271 281 291 300 56.7 18.0 19.0 20.1 21.2 22.3 56.7 270 280 290 299 309 (Rsmn/ton) (Rsmn/ton) Silver Prices Silver Prices 66.7 19.3 20.4 21.5 22.5 23.6 Silver Prices 66.7 288 297 307 317 327 75.0 20.4 21.5 22.6 23.6 25 75.0 302 312 322 331 341 Source: Kotak Institutional Equities estimates Source: Kotak Institutional Equities estimates Exhibit 19: Valuation table for leading Silver companies Price Year Mkt Cap. EV/EBITDA (X) Revenue % (CY19) Company (local) Currency end (US$ bn) +1 year +2 year Silver Gold Copper Zinc -Lead Europe Fresnillo plc 1,294.0 Gbp Dec 12.4 12.9 9.9 37 56 - 8 KGHM PolskaMeidz 136.0 Pln Dec 7.3 6.6 5.6 12 3 66 18 Polymetal Intl plc 2,012.0 Gbp Dec 12.3 9.3 8.1 16 84 1 - America First Majestic Silver Corp 13.0 Usd Dec 2.7 28.7 13.3 58 39 3 Southern Copper 45.1 Usd Dec 34.8 13.8 11.6 19 81 - - Pan American 36.7 Usd Dec 7.7 13.5 8.3 58 42 - - Source: Company, Kotak Institutional Equities estimates KOTAK INSTITUTIONAL EQUITIES RESEARCH 89 Metals & Mining Hindustan Zinc Exhibit 20: We increase our fair value to Rs290 (Rs225 earlier) on March 2022 financials Hindustan Zinc, valuation details, March 2022E basis EBITDA Multiple Enterprise Value (Rs bn) (X) (Rs bn) (Rs/ share) Zinc and Lead 92 7.0 643 152 Silver 37 10.0 369 87 Total 129 7.9 1,013 241 Less: Net debt (dividend adjusted) (207) (49) Arrived market capitalization 1,220 290 Target price (Rs/share) 290 Source: Kotak Institutional Equities estimates Exhibit 21: Hindustan Zinc, Profit model, balance sheet and cash flow model, March fiscal year-ends, 2016-2023E (Rs mn) 2016 2017 2018 2019 2020 2021E 2022E 2023E Profit model (Rs mn) Net sales 141,810 172,730 220,820 211,180 185,610 200,682 244,536 260,994 EBITDA 66,521 97,392 122,700 106,700 88,470 97,644 128,824 137,872 Other income 27,630 24,740 17,160 17,820 19,340 13,197 10,754 10,693 Interest (170) (2,020) (2,460) (1,130) (1,120) (1,100) (1,100) (1,100) Depreciaiton (7,450) (18,112) (14,830) (18,830) (22,790) (25,818) (28,128) (30,648) Profit before tax 86,230 102,000 124,970 104,560 83,900 83,923 110,349 116,817 Taxes (4,480) (18,840) (32,210) (25,000) (15,850) (19,302) (25,380) (26,868) Reported Net profit 81,750 83,160 92,760 79,560 68,050 64,621 84,969 89,949 Adjusted Net profit 81,988 83,160 90,868 79,560 68,050 64,621 84,969 89,949 Adjusted Earnings per share (Rs) 19.4 19.7 21.5 18.8 16.1 15.3 20.1 21.3 Balance sheet (Rs mn) Equity 373,851 308,051 359,321 336,051 403,101 333,379 333,373 333,366 Current liabilities 158,099 130,819 60,050 52,060 48,020 44,296 46,734 47,649 Total liabilities 531,950 517,950 429,321 424,581 469,750 396,304 398,736 399,644 Net fixed assets 128,130 130,640 145,220 170,320 189,580 192,074 194,346 194,098 Investments 352,210 237,830 202,220 194,880 203,290 143,290 108,290 73,290 Cash 510 1,890 19,640 230 19,180 9,065 40,612 75,413 Other current assets 26,120 120,110 19,571 20,611 25,660 19,835 23,448 24,804 Deferred tax assets — — 20,590 19,290 13,820 13,820 13,820 13,820 Total assets 531,950 517,950 429,321 424,581 469,750 396,304 398,736 399,645 Net debt (352,720) (160,640) (221,860) (169,730) (216,360) (146,245) (142,792) (142,593) Free cash flow (Rs mn) Operating cash flow (excl. work cap.) 53,350 76,650 98,830 81,550 80,910 90,439 113,097 120,597 Working capital changes 16,320 1,980 5,170 6,710 (11,170) 2,101 (1,175) (441) Capital expenditure (15,500) (20,080) (27,230) (33,410) (36,180) (28,313) (30,400) (30,400) Free cash flow 54,170 58,550 76,770 54,850 33,560 64,228 81,522 89,756 Ratios EV/EBITDA 10.8 9.3 6.9 8.4 9.6 9.4 7.2 6.7 P/B 3.1 3.8 3.2 3.4 2.8 3.4 3.4 3.4 P/E 13.0 12.9 11.8 13.4 15.7 16.5 12.6 11.9 Dividend Yield (%) [RHS] 12.0 11.6 3.2 7.9 6.5 6.0 8.0 8.4 Net Debt/EBITDA (5.3) (1.6) (1.8) (1.6) (2.4) (1.5) (1.1) (1.0) Net debt/equity (X) (0.9) (0.5) (0.6) (0.5) (0.5) (0.4) (0.4) (0.4) RoAE (%) 20.9 26.4 30.0 24.3 19.4 18.5 27.0 28.5 RoACE (%) 111.8 87.3 59.4 56.1 39.9 37.6 48.7 51.0 Source: Company, Kotak Institutional Equities estimates 90 KOTAK INSTITUTIONAL EQUITIES RESEARCH SELL Container Corp. (CCRI) Transportation AUGUST 10, 2020 UPDATE Sector view: Attractive A rude shock and its implications. The variation in the assessment of land license fee CMP (`): 456 between CCRI and Indian Railways is a meaningful 25-30% of CCRI’s bottom line. Fair Value (`): 390 Decision on the final quantum would take time and thus defer the privatization process. BSE-30: 38,041 It also raises uncertainty for potential bidders to value CCRI closer to CMP, which attributes majority share to value beyond the next ten years. Taking a near-term call on business and long-term call on haulage rates is fraught with risk. We remain SELLers. Container Corp. Stock data Forecasts/valuations 2020 2021E 2022E 52-week range (Rs) (high,low) 666-263 EPS (Rs) 17.3 8.0 13.0 Mcap (bn) (Rs/US$) 278/3.8 EPS growth (%) 5.7 (53.6) 62.2 ADTV-3M (mn) (Rs/US$) 940/13 P/E (X) 26.4 56.9 35.1 Shareholding pattern (%) P/B (X) 2.8 2.7 2.6 Promoters 54.8 EV/EBITDA (X) 15.3 27.0 18.6 FIIs 26.8 RoE (%) 10.3 4.8 7.6 MFs/BFIs 8.6/4.8 Div. yield (%) 0.7 1.0 1.5 Price performance (%) 1M 3M 12M Sales (Rs bn) 65 54 69 Absolute 6 27 (6) EBITDA (Rs bn) 17 9 14 Rel. to BSE-30 2 5 (9) Net profits (Rs bn) 11 5 8 IR’s demand for LLF for two key terminals ~2X of CCRI assessment for all leased terminals As per CCRI’s 1QFY21 results release, Indian Railways (IR) has demanded ~Rs7.8 bn annual land license fee (LLF) for two key ICDs leased to CCRI. This is much ahead of the ~Rs4.7 bn of annual lease expense determined by Concor for all its terminals leased from IR. The variation is likely based on the calculation of the value of land, wherein CCRI may have likely used circle rates and IR may have gone for market rates. Another reason behind the divergence may relate to the Okhla terminal, which CCRI may give back to IR and thus may not have accounted for. Lack of clarity may defer privatization and makes valuation exercise for potential bidders tricky Privatization process may get deferred to FY2022 or beyond. Potential bidders for CCRI would need clarity on land license, which CCRI believes may take up to the end of this fiscal to come. Privatization of Concor can also potentially get deferred beyond FY2022 as private bidders may want to access (1) CCRI’s ability to retain business in the scenario of it ceding the Tughlakabad terminal (we discuss this ahead), (2) the initial benefits of DFC (gets commissioned over FY2022/23. Valuation exercise turns tricky. IR’s assessment of land license fee essentially takes out gross margin of CCRI’s key terminal in Tughlakabad or TKD (accounts for ~40-50% of CCRI’s EBITDA). This may make Concor reconsider holding on to the terminal and potentially shift traffic to its owned terminal in Dadri. This may lead to loss of TKD’s volumes to other peer ICDs. The other key variable for valuing Concor is the long-term stance of IR towards haulage rates. Note that CMP implies majority share of value of Concor beyond FY2030. DFC would have helped IR and rail container operators benefit from the modal shift of traffic much before such Aditya Mongia timeframe, thus incentivizing IR to limit returns of Concor and its peers through appropriate haulage rates. IR’s assessment of value of land of TKD and thus of land fee demanded does make Teena Virmani it difficult to take a call on their stance on haulage rates. IR’s assessment values ~44 hectares of land at TKD at ~Rs250 mn per hectare versus ~Rs110 mn per hectare as per circle rates. Retain SELL; see downside risk to Rs390 FV based on large 1Q miss CCRI’s large miss versus our and consensus estimates suggestive almost complete reversal of margin gains made in 4QFY20 and poses downside risks to our fair value of Rs390. [email protected] Contact: +91 22 6218 6427 For Private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES’ RATING SYSTEM AND OTHER DISCLOSURES, REFER TO THE END OF THIS MATERIAL. Transportation Container Corp. Exhibit 1: IR's assessment of land license fee would meaningfully alter PBT profile of Concor Comparison of land license fee and Concor's FY2020 PBT, March fiscal year-end, 2020-21E (Rs bn) 15 14.1 12 9 7.8 6 4.7 3 1.5 0 PBT Land license fee included Land license fee - Land license fee - IR's Concor's assessment for assessment for FY2021 FY2021 for two key terminals Source: Company, Kotak Institutional Equities Exhibit 2: Payout for buying ICD land would bring Concor's business returns closer to or lower than the range of peers Comparison of return on invested capital for container rail operators, March fiscal year, ends, 2019-20 pro- forma (%) RoIC (post tax) FY2019 FY2020 (Proforma - Concor's assessment) FY2020 (Proforma - IR's assessment) 20 18 16 12 12 11 10 8 4 0 Container Corporation Gateway Rail Freight Limited Hind Terminals Source: Companies, Kotak Institutional Equities estimates 92 KOTAK INSTITUTIONAL EQUITIES RESEARCH Container Corp. Transportation Exhibit 3: IR values land at TKD at ~Rs250/hectare versus Rs110/hectare implied by circle rates Comparative assessment of value of land at TKD as per circle rates versus IRs assessment Value for TKD (Rs bn) Circle rate for TKD locality (Rs/sqm) 56,640 Multiplication factor for industrial use (X) 2 Land value per hectare 1,133 Number of hectares of TKD ICD (hectares) 44 Value of land at circle rate for TKD 50 Value of land of TKD as per IR (a) 110 KIE estimate of contribution margin of TKD 8 Contribution margin / value of land (%) Return as per Concor 16 Return as per IR 7 Notes: (a) We assume 85% of the value of land for TKD and Okla terminal (as per IR's assessment) be related to TKD Source: Company, Government of NCT Delhi, , Kotak Institutional Equities Exhibit 4: IR has lost Rs2-3 bn per annum in revenues over the past fifteen years Loss of revenues for IR related to land license fee charged to Concor, March fiscal year-ends, 2005-07, 20 (Rs bn) Land license fee paid by Concor Land license fee based on 6% of value of land 5 4.5 4 3 2.4 2.2 2.0 2 1.5 1 0.4 0.4 0.4 0 2005 2006 2007 2020 Source: Company, CAG report, , Kotak Institutional Equities KOTAK INSTITUTIONAL EQUITIES RESEARCH 93 Transportation Container Corp. Exhibit 5: TKD terminal has several ICDS closer to Delhi versus Dadri Key ICDs near Tughlakabad (TKD) within NCR Hisar Chandigarh Dehradun (NH 24) Loni (WW) 175 Km DICT 10 Km Modinagar (~0.5 mn) 22 Km 44 Km (0.5 mn) 25 Km Ghaziabad 18 Km Shahdara Delhi 17 Km 18 Km 37 TKD (0.4 mn) Dadri (0.12) Garhi 25 Km 53 Km 8 Km Gurgaon (0.5 mn) Patli (Adani) Ballabgarh 40 5 Km ACTL 20 Rewari Bulandshahr Pali 8 Km Piyala, Faridabad 10 Km Kathuwas (0.15 mn) Alwar (1.5 mn) 37 Km 84 Km 175 Km Agra Jaipur Neemrana (NH 8) 178 Km Key locations Other ICDs Concor ICDs GRFL ICDs Notes: (a) Numbers in brackets indicate annual handling capacity in TEUs (b) Map is not according to scale Source: Industry reports, Kotak Institutional Equities Exhibit 6: Concor’s fair value is sensitive to terminal phase assumptions and is pricing in 24%+ terminal phase RoIC Sensitivity of fair value of Concor to terminal RoIC and WACC Split of value at CMP Value till 2030E - KIE estimate 36% One-year-forward fair Terminal phase RoIC (%) value (Rs/share) 22.0 24.0 26.0 28.0 30.0 Implied terminal 12.0 310 335 360 385 410 Value 11.5 333 360 387 415 442 64% WACC(%) 11.0 359 389 419 449 479 10.5 389 423 456 489 522 10.0 426 463 500 538 575 Source: Company, Kotak Institutional Equities estimates 94 KOTAK INSTITUTIONAL EQUITIES RESEARCH Container Corp. Transportation Exhibit 7: Concor reported almost a full reversal of gross margin and employee cost on a qoq basis Container Corporation -1QFY21 results, March fiscal year-ends (Rs mn) % change 1QFY21 1QFY21E 1QFY20 4QFY20 vs est. yoy qoq FY2021E FY2020 % change Net sales 11,891 12,703 16,389 15,686 (6) (27) (24) 54,415 64,738 (16) Staff cost (796) (806) (602) (1) 32 (3,217) (3,135) 3 Rail freight expenditure (6,523) (8,953) (8,120) (27) (20) (28,433) (34,984) (19) Other expenses (2,983) (2,598) (2,220) 15 34 (13,299) (9,870) 35 Total expenditure (10,301) (10,621) (12,357) (10,942) (3) (17) (6) (44,949) (47,989) (6) EBITDA 1,590 2,083 4,033 4,745 (24) (61) (66) 9,466 16,749 (43) Other Income 588 724 583 952 1 (38) 2,534 2,797 (9) Interest (85) (90) (112) (108) (25) (21) (361) (361) — Depreciation (1,260) (1,279) (1,253) (1,336) 1 (6) (5,116) (5,130) (0) PBT 833 1,438 3,250 4,253 (42) (74) (80) 6,524 14,056 (54) Tax (217) (362) (971) (1,102) (80) (1,644) (3,539) (54) Adjusted PAT 617 1,075 2,278 3,151 (43) (73) (80) 4,880 10,517 (54) Extraordinary items — — — (206) — (6,760) Reported PAT 617 1,075 2,278 2,945 (43) (73) (79) 4,880 3,758 30 EPS (Rs) 1.0 1.8 3.7 4.8 8.0 6.2 Key ratios (%) Rail freight expenses/sales 54.9 54.6 51.8 52.3 54.0 Other expenses/sales 25.1 15.8 14.1 24.4 15.2 Employee expenses/sales 6.7 4.9 3.8 5.9 4.8 EBITDA margins 13.4 16.4 24.6 30.2 17.4 25.9 PBT margin 7.0 11.3 19.8 27.1 12.0 21.7 Effective tax rate 26.0 25.2 29.9 25.9 25.2 25.2 PAT margin 5.2 8.5 13.9 18.8 9.0 5.8 Source: Company, Kotak Institutional Equities estimates KOTAK INSTITUTIONAL EQUITIES RESEARCH 95 Transportation Container Corp. Exhibit 8: Key financials of Container Corporation, March fiscal year-ends, 2012-23E (Rs mn) 2012 2013 2014 2015 2016 2017 2018 2019 2020E 2021E 2022E 2023E Income statement Net revenues 40,609 44,062 49,846 55,737 56,717 53,946 58,892 65,427 64,738 54,415 69,076 82,506 Total operating cost (30,372) (33,586) (38,827) (42,772) (45,834) (43,593) (46,843) (51,019) (47,989) (44,949) (55,267) (65,371) Terminal+service charges (27,762) (30,570) (35,128) (38,308) (41,984) (39,588) (41,712) (45,175) (42,386) (38,799) (45,674) (51,221) Employee cost (999) (1,072) (1,235) (1,579) (1,568) (1,869) (2,779) (3,368) (3,135) (3,217) (3,531) (3,872) Repairs & maintenance (425) (485) (504) (712) (806) (520) (493) (614) (608) (511) (649) (775) Other S, G & A (1,187) (1,459) (1,960) (2,173) (1,476) (1,616) (1,859) (1,862) (1,860) (2,422) (5,413) (9,502) EBIDTA 10,237 10,476 11,019 12,965 10,884 10,354 12,049 14,408 16,749 9,466 13,809 17,135 Other income 3,165 3,372 3,717 3,707 3,175 2,892 3,026 3,342 2,797 2,534 2,527 2,509 Depreciation (1,585) (1,727) (1,893) (3,727) (3,478) (3,518) (3,927) (4,246) (5,130) (5,116) (5,391) (5,639) Pre tax profits 11,818 12,121 12,843 12,946 10,580 9,691 11,148 13,497 14,056 6,524 10,584 13,645 Tax (3,039) (2,721) (2,995) (2,469) (2,746) (1,622) (2,372) (3,551) (3,539) (1,644) (2,667) (3,438) Adjusted PAT 8,779 9,400 9,848 10,477 7,833 8,069 8,776 9,946 10,517 4,880 7,917 10,206 Extraordinary items — — — (1) 1,675 512 1,615 2,208 (6,760) — — — Reported PAT 8,779 9,400 9,848 10,476 9,508 8,580 10,390 12,154 3,758 4,880 7,917 10,206 Volume handled ('000 TEUs) Exim 2,136 2,152 2,361 2,621 2,476 2,641 3,002 3,245 3,155 2,583 3,207 3,685 Domestic 468 434 507 489 448 460 530 585 593 441 496 543 Total volumes 2,604 2,586 2,869 3,111 2,924 3,101 3,532 3,830 3,748 3,023 3,703 4,228 Yoy growth (%) Volumes 1.6 (0.7) 10.9 8.4 (6.0) 6.1 13.9 8.4 (2.1) (19.3) 22.5 14.2 Sales 6.1 8.5 13.1 11.8 1.8 (4.9) 9.2 11.1 (1.1) (15.9) 26.9 19.4 EBITDA 2.2 2.3 5.2 17.7 (16.1) (4.9) 16.4 19.6 16.3 (43.5) 45.9 24.1 Net PAT (0.1) 7.1 4.8 6.4 (25.2) 3.0 8.8 13.3 5.7 (53.6) 62.2 28.9 Key ratios (%) EBITDA margin 25.2 23.8 22.1 23.3 19.2 19.2 20.5 22.0 25.9 17.4 20.0 20.8 Net PAT margin 21.6 21.3 19.8 18.8 13.8 15.0 14.9 15.2 16.2 9.0 11.5 12.4 Efffective tax rate 25.7 22.4 23.3 19.1 26.0 16.7 21.3 26.3 25.2 25.2 25.2 25.2 Adjusted EPS (Rs) 14.4 15.4 16.2 17.2 12.9 13.2 14.4 16.3 17.3 8.0 13.0 16.8 Reported EPS (Rs) 14.4 15.4 16.2 17.2 15.6 14.1 17.1 19.9 6.2 8.0 13.0 16.8 Source: Company, Kotak Institutional Equities estimates 96 KOTAK INSTITUTIONAL EQUITIES RESEARCH ATTRACTIVE Insurance India AUGUST 09, 2020 UPDATE BSE-30: 38,041 No mom improvement in July. Individual APE declined 7% yoy in July for private players; a decline similar to June. Lockdown related disruptions across channels, moderation in protection business post hike in rate hikes by most players, and weaker capital markets appetite are likely factors. Among major private players, Bajaj, HDFC Life and Tata AIA’s individual APE were up 29%, 12% and 18% yoy respectively while Max, SBI Life and ICICI Prudential Life declined 2%, 14% and 36% yoy respectively. Mixed trends across players Overall APE and individual APE were flat yoy in July. While private players witnessed 7% yoy QUICK NUMBERS decline in individual APE (similar mom); LIC was up 10% yoy (up 8% yoy in June). Strong growth in protection business has likely moderated from peak levels with individual non- Individual APE single sum assured to individual non-single premium ratio declining to 39X in July 2020 for down 7% yoy for private players (31X in July 2019); down from 45-81X in April-June 2020; this may be due to a private players rise in tariffs. Among other product classes, non-par and annuity likely held on well due to competitive rates offered by players (similar to TD of frontline banks). LIC’s strong growth was LIC’s individual APE likely driven by traction in endowment and annuity based products. up 10% yoy Traditional business likely strong for HDFC Life. HDFC Life reported 12% yoy decline in Individual sum individual APE in July 2020; individual sum assured was up 16% yoy. Growth in individual assured up 16% yoy business was likely driven by strong traction in the flagship traditional business. The IRR offered for private players by ‘HDFC Life Sanchay Plus’, its flagship non-par product is attractive relative to most other products and other financial substitutes (ex. term deposits). HDFC Life’s strategy to toggle between product classes has helped it to deliver better than industry. ULIPs drag ICICI Prudential Life. ICICI Prudential Life reported 36% yoy decline in individual APE in July 2020 translating to 45% yoy decline in 4MFY21. Individual sum assured was down 24% yoy. Weakness in capital markets driving lower ULIPs (18% yoy drop in average ticket size in individual non-single business in July 2020) continues to put pressure on growth. Additionally low focus on non-par segment continues to drag growth relative to peers. On considering overall (individual and group) adjusted APE including accrued but not received premium, its APE, was down 32% yoy (down 40% yoy in 4MFY21). SBI Life weak. SBI Life’s individual APE declined 14% yoy in July 2020. Overall APE was down 7% yoy due to strong 1.8X yoy growth in group business. Individual sum assured was flat yoy likely indicating further rise in share of protection business (a lower base compared to peers). High share of ULIPs however continues to put pressure on growth. The company pushed non- Nischint Chawathe par business in 1QFY21 but indicated that its product strategy will remain dynamic during the next nine months. M B Mahesh, CFA Protection likely strong for Max. Max Life’ individual APE was down 2% yoy. The company has fared better than most peers during the pandemic. Individual business sum assured was up Dipanjan Ghosh 61% yoy likely indicating strong uptick in protection business. Lower volumes through non-Axis banca channels however drag pace of growth. Abhijeet Sakhare Other players: Tata and Bajaj strong; Birla flat yoy. Among other major private players, Tata AIA and Bajaj Life reported strong 18% and 29% yoy growth in individual APE while Birla Ashlesh Sonje Sun Life was flat yoy. Individual business sum assured was up 10% yoy for Tata AIA while it jumped 2.1X yoy for Bajaj Life. While Tata AIA’s is likely attributed to strong business from a wide bouquet of endowment, annuity and while life plans, Bajaj Life’s individual APE growth is likely driven by strong uptick in the newly launched protection products (from January 2020). [email protected] Contact: +91 22 6218 6427 For Private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES’ RATING SYSTEM AND OTHER DISCLOSURES, REFER TO THE END OF THIS MATERIAL. India Insurance Exhibit 1: Individual APE down 7% yoy for private players; LIC up 10% yoy APE in individual and group business, March fiscal year-ends, July 2020, 4MFY21 (Rs mn) Jul-20 4MFY21 yoy yoy yoy yoy yoy yoy growth growth growth growth growth growth Individual (%) Group (%) Total (%) Individual (%) Group (%) Total (%) Aegon Religare 43 (31) 2 92 45 (28) 133 (44) 7 166 139 (43) Aviva 100 2 5 309 105 6 376 26 22 7 398 24 Bajaj Allianz 1,794 29 424 117 2,217 40 5,097 8 821 (5) 5,918 6 Bharti Axa 389 (23) 10 (53) 399 (24) 1,298 (25) 25 (69) 1,323 (27) Aditya Birla Sun Life 1,375 1 229 92 1,604 8 4,466 4 818 166 5,284 14 Canara HSBC 616 (15) 28 183 644 (12) 1,578 (32) 320 23 1,899 (26) Pramerica 95 (33) 3 (92) 98 (46) 381 (30) 13 (91) 393 (43) Edelweiss Tokio 272 15 2 (27) 273 14 847 19 5 (53) 852 18 Future Generali 190 (31) 8 (80) 198 (37) 741 (10) 18 (86) 760 (21) HDFC Life 5,860 12 1,041 55 6,901 17 16,576 (10) 2,120 (20) 18,695 (11) ICICI Prudential 3,807 (36) 298 24 4,104 (34) 10,364 (45) 886 (5) 11,250 (43) IDBI Federal 198 (30) 6 (38) 204 (31) 424 (47) 13 (67) 437 (48) India First 605 2 324 566 929 44 1,325 (26) 436 24 1,761 (18) Exide Life 399 (15) 3 (73) 402 (16) 1,168 (28) 10 (55) 1,178 (28) Max Life 3,400 (2) 26 (9) 3,426 (2) 9,608 (3) 66 (42) 9,674 (3) PNB MetLife 998 1 22 (36) 1,020 (0) 2,858 (15) 60 (49) 2,918 (17) Reliance Life 629 (3) 2 (48) 632 (3) 2,106 (22) 9 (53) 2,114 (22) SBI Life 7,199 (14) 981 179 8,180 (7) 17,653 (28) 2,703 65 20,356 (22) Shriram Life 331 4 4 (78) 335 (0) 1,004 (12) 11 (84) 1,016 (16) Star Union Daichi 395 25 36 548 431 34 937 (18) 71 168 1,008 (14) Tata AIA 2,228 18 9 (9) 2,236 18 7,608 17 30 (7) 7,638 17 Private players 32,078 (7) 3,585 74 35,663 (3) 90,060 (18) 8,796 1 98,856 (17) LIC 26,049 10 9,591 (14) 35,640 2 73,920 (5) 38,044 (19) 111,964 (10) Total Premium 58,127 (0) 13,175 (0) 71,303 (0) 163,981 (13) 46,840 (16) 210,821 (13) Source: IRDAI, LIC Council, Kotak Institutional Equities Exhibit 2: Individual sum assured up 16% yoy for private players; down 13% yoy for LIC Sum assured, March fiscal year-ends, July 2020, 4MFY21 (Rs mn) Jul-20 4MFY21 yoy yoy yoy yoy yoy yoy growth growth growth growth growth growth Individual (%) Group (%) Total (%) Individual (%) Group (%) Total (%) Aegon Religare 13,911 (7) 0 13,911 (7) 36,068 (32) 0 36,068 (32) Aviva 1,865 (35) 22 (221) 1,888 (34) 7,173 (21) 246 135 7,419 (19) Bajaj Allianz 63,995 214 41,726 (65) 105,721 (25) 332,846 368 102,165 (80) 435,011 (24) Bharti Axa 8,247 (31) 34,197 183 42,444 76 29,102 (37) 141,715 205 170,816 84 Birla Sunlife 38,621 (8) 7,250 (13) 45,871 (9) 131,636 (8) 13,084 (52) 144,720 (15) Canara HSBC OBC 25,675 97 4,131 (3) 29,806 72 80,351 88 10,669 (34) 91,020 54 DHFL Pramerica 766 (43) 1,539 (92) 2,305 (89) 2,337 (56) 9,766 (88) 12,103 (86) Edelweiss Life 7,823 (45) 538 (39) 8,360 (44) 54,951 (10) 1,774 (65) 56,725 (14) Future Generali 2,500 (57) 752 (88) 3,253 (73) 14,545 (13) (156) (101) 14,389 (59) HDFC Standard Life 209,804 16 147,475 (44) 357,279 (20) 735,192 17 345,333 (62) 1,080,524 (30) ICICI Prudential 176,366 (24) 58,655 (49) 235,021 (32) 645,650 (19) 143,404 (63) 789,054 (33) Fortis IDBI 2,825 (48) 2,832 (35) 5,657 (42) 6,203 (64) 6,203 (66) 12,406 (65) India First 9,769 0 72,613 0 82,381 0 63,931 201 281,672 (35) 345,603 (24) Exide Life 15,396 22 35 (70) 15,431 21 47,701 8 2,975 93 50,676 11 Max Life 232,006 61 15,632 27 247,638 58 732,307 45 25,912 (48) 758,220 37 PNB Metlife 59,645 98 45,361 (49) 105,006 (12) 239,777 147 223,238 (48) 463,014 (12) Reliance Life 10,735 9 (771) (29) 9,964 14 36,444 (8) (2,522) (1,759) 33,921 (15) SBI Life 112,342 (0) 39,556 (2) 151,898 (1) 254,986 (32) 97,964 (31) 352,950 (32) Shriram Life 7,619 (20) 5,406 (75) 13,025 (59) 21,606 (34) 11,466 (86) 33,073 (71) Star Union Daichi 5,520 64 4,448 111 9,967 83 14,264 (4) 10,403 39 24,667 11 Tata AIG 149,563 10 1,395 (64) 150,958 7 705,069 54 1,994 (83) 707,063 51 Private players 1,221,005 16 527,317 (42) 1,748,322 (11) 4,414,521 25 1,545,692 (56) 5,960,214 (15) LIC 367,355 (13) 280,980 2,804 648,335 50 913,126 (33) 467,815 933 1,380,941 (2) Total sum assured 1,588,360 8 808,297 (12) 2,396,656 0 5,327,647 9 2,013,507 (43) 7,341,154 (13) Source: IRDAI, LIC Council, Kotak Institutional Equities 98 KOTAK INSTITUTIONAL EQUITIES RESEARCH Insurance India Exhibit 3: 7% yoy decline in individual APE in July 2020 for private players; similar mom YoY growth in adjusted individual business premium, March fiscal year-ends, July 2019-July 2020 (%) Jul-19 Aug-19 Sep-19 Oct-19 Nov-19 Dec-19 Jan-20 Feb-20 Mar-20 Apr-20 May-20 Jun-20 Jul-20 4MFY20 4MFY21 Bajaj Allianz 39.9 28.0 24.6 35.5 53.6 4.2 20.7 23.6 (39.1) 0.3 (18.0) 13.6 28.9 23.3 8.2 Birla Sunlife 39.5 17.9 (8.9) (3.1) 62.8 (13.7) (3.3) (2.2) (38.3) (24.5) 10.3 15.6 0.5 32.6 3.6 Canara HSBC 27.5 2.9 20.1 11.2 38.5 48.9 13.7 (0.6) (45.5) (52.1) (53.7) (26.1) (14.7) 19.5 (32.0) HDFC Life 57.7 34.8 (19.7) (14.6) 43.2 46.2 11.5 29.0 (27.8) (28.6) (33.2) (3.1) 12.2 61.3 (10.1) ICICI Prudential Life (1.3) (10.1) (6.6) 17.9 19.6 7.9 (4.8) (14.7) (49.0) (55.1) (52.4) (43.5) (36.5) 0.3 (45.3) India First 33.4 14.5 56.2 10.2 64.1 63.9 0.1 42.6 (7.2) (69.5) (46.9) (9.9) 1.7 23.3 (25.8) Max Life 48.2 28.1 2.2 2.6 16.7 22.9 15.1 0.9 (35.9) (19.5) (19.5) 13.3 (2.0) 30.4 (3.0) Reliance Life 17.2 (18.9) (9.5) 0.7 (0.8) 7.3 1.3 4.2 (11.9) (65.1) (6.7) 8.2 (2.9) 18.9 (21.7) SBI Life 23.6 14.3 10.7 3.3 22.1 17.3 16.9 (4.9) (42.1) (73.0) (45.9) (5.0) (14.4) 30.6 (28.3) Star Union Daichi (24.6) 0.1 37.4 21.5 22.3 4.7 (2.1) (1.3) (55.7) (65.9) (34.5) (25.8) 25.3 9.1 (18.0) Tata AIA 39.7 12.7 27.8 21.8 50.3 22.7 30.7 47.8 (36.3) 37.0 3.3 18.0 18.2 61.9 17.5 Private sector 21.8 11.2 2.5 3.8 26.9 17.2 10.1 4.0 (39.8) (40.3) (32.1) (7.0) (7.1) 23.0 (18.1) LIC 10.4 17.7 (10.6) 6.2 103.9 12.8 98.5 (7.3) (64.5) (47.9) (3.1) 7.5 9.6 5.5 (4.8) Total 16.9 13.9 (2.8) 4.9 60.0 15.6 45.8 (0.6) (50.2) (43.7) (19.8) (1.4) (0.3) 15.1 (12.6) Source: IRDAI, LIC Council, Kotak Institutional Equities Exhibit 4: APE down 19% yoy in 1QFY21 Adjusted premium equivalent of life insurance players, March fiscal year-ends, 2013-2020, 1QFY21 APE (Rs bn) YoY (%) Market share (%) 2013 2014 2015 2016 2017 2018 2019 2020 1QFY21 2014 2015 2016 2017 2018 2019 2020 1QFY21 2014 2015 2016 2017 2018 2019 2020 1QFY21 Bajaj Allianz Life 14 11 9 9 12 17 21 22 4 (17) (18) (2) 34 37 22 9 (7) 2 2 2 2 2 3 3 3 Birla Sunlife 11 9 9 8 11 12 19 19 4 (17) (7) (3) 30 12 57 (1) 17 2 2 2 2 2 2 2 3 DHFL Pramerica 1 1 2 2 2 4 4 2 0 (17) 63 11 21 75 (10) (50) (42) 0 0 0 0 1 0 0 0 Exide 5 5 4 5 6 6 7 7 1 (3) (12) 10 27 2 7 1 (33) 1 1 1 1 1 1 1 1 HDFC Life 32 25 32 36 41 53 57 69 12 (22) 26 14 13 30 8 19 (22) 5 7 7 6 7 7 8 8 ICICI Prudential Life 34 33 46 51 65 75 73 71 7 (5) 41 10 27 16 (3) (3) (48) 6 10 10 10 10 9 8 5 Max Life 15 18 20 21 27 33 39 41 6 17 10 8 26 22 21 5 (4) 3 4 4 4 4 5 5 4 Reliance Life 10 12 13 10 7 7 9 9 1 19 8 (26) (24) 3 20 1 (28) 2 3 2 1 1 1 1 1 SBI Life 26 30 33 45 63 80 94 103 12 14 10 36 40 28 16 10 (30) 6 7 9 10 11 12 12 9 Private players 189 182 211 242 306 376 427 451 63 (3) 16 15 26 23 14 6 (23) 36 45 47 49 51 53 51 45 LIC 326 331 253 279 324 361 382 441 76 1 (23) 10 16 11 6 16 (15) 64 55 53 51 49 47 49 55 Total industry 515 513 464 521 630 737 809 892 140 (0) (9) 12 21 17 10 10 (19) Source: IRDA, LIC Council Exhibit 5: Individual business down 18% yoy for private players in 4MFY21 YoY growth in individual APE, March fiscal year-ends, 2015-2020, July 2019-July 2020 (%) 2015 2016 2017 2018 2019 2020 Jul-19 Aug-19 Sep-19 Oct-19 Nov-19 Dec-19 Jan-20 Feb-20 Mar-20 Apr-20 May-20 Jun-20 Jul-20 4MFY20 4MFY21 Bajaj Allianz (22.6) (7.5) 40.9 38.3 24.7 10.6 39.9 28.0 24.6 35.5 53.6 4.2 20.7 23.6 (39.1) 0.3 (18.0) 13.6 28.9 23.3 8.2 Aditya Birla Sun Life (11.8) (7.7) 35.3 14.9 59.9 0.5 39.5 17.9 (8.9) (3.1) 62.8 (13.7) (3.3) (2.2) (38.3) (24.5) 10.3 15.6 0.5 32.6 3.6 Canara HSBC 17.9 35.2 38.5 33.5 11.9 6.5 27.5 2.9 20.1 11.2 38.5 48.9 13.7 (0.6) (45.5) (52.1) (53.7) (26.1) (14.7) 19.5 (32.0) HDFC Life 25.0 12.3 9.1 30.8 5.4 19.0 57.7 34.8 (19.7) (14.6) 43.2 46.2 11.5 29.0 (27.8) (28.6) (33.2) (3.1) 12.2 61.3 (10.1) ICICI Prudential Life 41.3 8.1 29.0 16.4 (4.9) (6.4) (1.3) (10.1) (6.6) 17.9 19.6 7.9 (4.8) (14.7) (49.0) (55.1) (52.4) (43.5) (36.5) 0.3 (45.3) India First 5.5 38.1 82.3 42.9 18.3 24.9 33.4 14.5 56.2 10.2 64.1 63.9 0.1 42.6 (7.2) (69.5) (46.9) (9.9) 1.7 23.3 (25.8) Max Life 10.2 8.0 25.5 21.8 20.7 5.2 48.2 28.1 2.2 2.6 16.7 22.9 15.1 0.9 (35.9) (19.5) (19.5) 13.3 (2.0) 30.4 (3.0) Reliance Life 7.3 (25.6) (22.8) 5.4 20.5 1.9 17.2 (18.9) (9.5) 0.7 (0.8) 7.3 1.3 4.2 (11.9) (65.1) (6.7) 8.2 (2.9) 18.9 (21.7) SBI Life 11.0 37.0 38.9 31.1 15.0 9.1 23.6 14.3 10.7 3.3 22.1 17.3 16.9 (4.9) (42.1) (73.0) (45.9) (5.0) (14.4) 30.6 (28.3) Star Union Daichi 18.6 (9.0) 64.4 (4.5) (1.9) (2.1) (24.6) 0.1 37.4 21.5 22.3 4.7 (2.1) (1.3) (55.7) (65.9) (34.5) (25.8) 25.3 9.1 (18.0) Tata AIA (4.0) 158.6 73.1 33.4 59.7 20.6 39.7 12.7 27.8 21.8 50.3 22.7 30.7 47.8 (36.3) 37.0 3.3 18.0 18.2 61.9 17.5 Private sector 15.8 14.0 26.6 24.3 12.5 4.8 21.8 11.2 2.5 3.8 26.9 17.2 10.1 4.0 (39.8) (40.3) (32.1) (7.0) (7.1) 23.0 (18.1) LIC (26.3) 2.9 14.7 13.4 4.5 8.3 10.4 17.7 (10.6) 6.2 103.9 12.8 98.5 (7.3) (64.5) (47.9) (3.1) 7.5 9.6 5.5 (4.8) Total (10.4) 8.3 20.7 19.3 9.0 6.2 16.9 13.9 (2.8) 4.9 60.0 15.6 45.8 (0.6) (50.2) (43.7) (19.8) (1.4) (0.3) 15.1 (12.6) Source: IRDAI, LIC Council, Kotak Institutional Equities KOTAK INSTITUTIONAL EQUITIES RESEARCH 99 India Insurance Exhibit 6: LIC has gained market share in individual business Trend in adjusted individual business market share, March fiscal year-ends, July 2019-July 2020 (%) Jul-19 Aug-19 Sep-19 Oct-19 Nov-19 Dec-19 Jan-20 Feb-20 Mar-20 Apr-20 May-20 Jun-20 Jul-20 4MFY20 4MFY21 Bajaj Allianz 2.4 2.5 2.7 3.2 2.3 2.4 1.9 3.1 3.9 4.0 2.8 3.0 3.1 2.5 3.1 Birla Sunlife 2.3 2.3 2.1 2.2 2.2 2.5 1.6 2.4 3.6 2.8 2.8 3.0 2.4 2.3 2.7 Canara HSBC 1.2 1.4 2.0 1.0 1.0 1.6 1.0 1.5 1.6 0.7 0.7 1.1 1.1 1.2 1.0 HDFC Life 9.0 7.8 7.3 7.2 5.6 8.4 6.0 8.8 10.1 10.5 8.9 10.8 10.1 9.8 10.1 ICICI Prudential 10.3 9.4 10.0 10.6 7.6 9.2 6.6 9.7 8.0 8.5 5.5 5.8 6.5 10.1 6.3 Max Life 6.0 5.5 6.3 4.4 3.8 5.7 4.4 6.9 9.2 5.8 4.6 6.7 5.8 5.3 5.9 Reliance Life 1.1 1.1 1.3 1.2 0.8 1.3 0.8 1.4 1.7 1.7 1.4 1.3 1.1 1.4 1.3 SBI Life 14.4 13.8 15.1 13.3 11.2 18.7 12.6 10.2 11.5 5.8 8.7 12.1 12.4 13.1 10.8 Tata AIA 3.2 3.0 3.8 3.3 2.8 4.2 2.8 5.0 5.5 7.4 4.6 4.6 3.8 3.5 4.6 Private sector 59.2 56.3 63.0 55.6 45.2 64.8 45.0 61.6 70.0 57.9 48.8 57.6 55.2 58.6 54.9 LIC 40.8 43.7 37.0 44.4 54.8 35.2 55.0 38.4 30.0 42.1 51.2 42.4 44.8 41.4 45.1 Source: IRDAI, LIC Council, Kotak Institutional Equities Exhibit 7: Protection has likely moderated from peak levels Individual non-single sum assured to individual non-single premium, March fiscal year-ends, 2019-2020, July 2019-July 2020 (X) 2019 2020 Jul-19 Aug-19 Sep-19 Oct-19 Nov-19 Dec-19 Jan-20 Feb-20 Mar-20 Jul-05 Apr-20 May-20 Jun-20 Jul-20 4MFY20 4MFY21 Bajaj Allianz 17 17 15 14 15 16 15 13 21 22 24 17 41 85 98 36 15 65 Aditya Birla Sun Life 30 29 31 29 35 28 27 24 26 30 27 29 35 30 28 28 33 30 HDFC Life 40 41 36 39 43 46 43 34 42 45 52 41 77 54 41 38 36 47 ICICI Prudential 33 41 39 40 37 32 36 36 42 46 54 41 93 75 63 48 42 64 Max Life 45 46 42 42 40 50 48 42 43 41 45 46 109 107 65 70 52 79 SBI Life 14 14 14 14 13 14 13 12 12 15 13 14 14 14 14 16 15 15 Tata AIA 57 81 74 84 86 89 71 65 77 107 92 81 172 102 67 67 72 93 Private players 29 32 31 31 31 32 30 27 31 37 38 32 81 61 45 39 33 50 LIC 21 22 19 20 20 20 26 24 25 19 19 22 6 10 16 16 19 13 Overall 26 28 26 27 27 27 28 26 28 31 33 28 50 35 33 29 27 34 Source: IRDAI, LIC Council, Kotak Institutional Equities Exhibit 8: Individual sum assured up 16% yoy in July 2020 YoY growth in individual sum assured, March fiscal year-ends, 2019-2020, July 2019-July 2020 (%) Jul-19 Aug-19 Sep-19 Oct-19 Nov-19 Dec-19 Jan-20 Feb-20 Mar-20 Apr-20 May-20 Jun-20 Jul-20 4MFY20 4MFY21 Bajaj Allianz 13.1 4.6 4.6 20.8 21.4 (18.0) 43.4 71.5 (6.2) 126.5 358.8 691.2 213.8 3.0 367.7 Aditya Birla Sun Life 21.9 (3.1) (0.3) (13.8) 43.2 (14.2) (5.7) (0.5) (38.2) (22.7) (7.1) (2.6) (8.4) 15.7 (8.5) Canara HSBC 29.1 12.4 33.1 7.9 27.8 32.2 22.2 (8.4) (25.5) 146.3 70.7 67.9 96.7 19.2 87.8 HDFC Life 27.7 22.3 4.0 6.7 49.0 35.2 28.1 37.4 7.7 31.9 (4.2) 31.0 15.5 21.0 17.4 ICICI Prudential Life 22.8 6.2 7.1 2.9 16.1 23.3 5.6 14.9 (15.5) (17.3) (31.0) (0.2) (24.5) 25.1 (18.8) India First 44.7 59.4 48.0 (32.6) 78.9 63.9 21.2 27.2 (16.5) 70.0 651.8 146.1 33.0 14.3 200.5 Max Life 13.0 (2.8) (6.2) (7.0) 30.3 24.6 21.7 4.0 (12.8) 12.6 35.5 61.5 60.8 15.2 45.4 Reliance Life 33.1 (11.6) (5.7) 2.8 (4.0) 6.9 (5.8) (1.1) (14.6) (52.4) 5.8 18.1 9.2 30.0 (8.1) SBI Life 9.7 4.9 2.0 2.3 20.4 18.5 16.0 (11.4) (52.5) (78.4) (56.3) (14.2) (0.4) 37.8 (32.1) Star Union Daichi (38.5) (8.7) 16.4 38.3 17.8 (12.4) (6.6) (6.0) (60.8) (76.3) (33.5) 2.8 64.5 4.1 (3.6) Tata AIA 65.3 62.9 101.0 62.1 79.9 34.1 73.8 154.1 24.7 197.8 41.4 27.1 9.5 88.5 54.2 Private sector 21.7 12.2 12.9 6.1 31.0 19.8 20.0 27.9 (14.7) 25.4 12.4 37.6 15.8 24.6 22.6 LIC 0.9 (10.9) 1.1 19.5 185.7 33.1 148.0 (12.8) (73.0) (81.2) (45.9) (10.4) (12.9) (1.0) (33.0) Total 15.0 4.5 9.4 10.1 79.4 23.7 61.5 14.9 (37.7) (4.3) (2.9) 24.6 7.6 16.4 7.4 Source: IRDAI, Kotak Institutional Equities 100 KOTAK INSTITUTIONAL EQUITIES RESEARCH Insurance India Exhibit 9: Mixed trends in ticket size Average policy size in individual non-single segment, July 2019-July 2020 (Rs) Jul-19 Jun-20 Jul-20 YoY (%) MoM (%) Aegon Religare 27,162 23,626 22,814 (16) (3) Aviva 61,631 50,377 57,670 (6) 14 Bajaj Allianz 59,368 33,932 51,395 (13) 51 Bharti Axa 25,178 40,941 44,707 78 9 Aditya Birla Sun Life 60,979 59,762 65,449 7 10 Canara HSBC Oriental 63,479 44,225 45,513 (28) 3 DHFL Pramerica 37,955 47,756 44,078 16 (8) HDFC Life 68,548 60,805 65,180 (5) 7 ICICI Prudential 88,736 58,974 72,817 (18) 23 IDBI Federal 61,949 55,335 67,087 8 21 IndiaFirst 40,554 35,718 42,298 4 18 Exide Life 30,619 34,037 34,204 12 0 Edelweiss Tokio 36,568 33,272 45,951 26 38 Max Life 67,398 58,823 60,003 (11) 2 Reliance 39,370 45,571 45,360 15 (0) SBI 62,461 56,088 53,904 (14) (4) Shriram 16,156 20,903 17,558 9 (16) Star Union 61,365 63,462 68,043 11 7 Tata AIA 55,409 64,933 64,542 16 (1) LIC 14,233 15,604 19,830 39 27 Source: IRDAI, LIC Council, Kotak Institutional Equities Exhibit 10: Ticket size has declined for private players in 4MFY21 Average policy-size in individual non-single segment, 2009-2020, 4MFY21 (Rs) 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 4MFY21 Bajaj Allianz 15,024 14,598 12,566 13,428 17,151 22,216 26,857 28,170 37,066 45,448 56,128 61,716 40,631 Exide 17,861 21,622 23,311 26,221 24,704 25,014 26,214 24,594 31,413 31,855 33,225 35,057 31,229 Reliance Life 13,796 13,713 10,704 10,330 12,951 19,145 25,145 24,544 25,380 33,636 38,891 43,677 40,747 SBI Life 33,625 30,880 37,099 25,266 27,315 27,499 28,103 34,098 47,109 54,929 58,977 63,293 54,654 Tata AIA 13,839 16,255 17,537 22,368 20,144 20,810 32,577 44,411 57,204 62,780 63,712 55,740 57,615 HDFC Life 24,941 37,201 46,297 43,584 39,559 34,811 43,839 38,211 42,345 45,244 49,774 66,213 57,523 ICICI Prudential 19,686 29,081 28,462 27,533 34,570 41,948 72,582 88,373 94,759 93,116 81,902 87,093 59,197 Aditya Birla Sun Life 19,941 13,722 16,348 13,849 18,468 20,062 25,480 23,700 30,445 42,518 59,852 65,309 60,850 Aviva 18,057 29,427 30,961 28,200 30,032 29,012 39,995 42,580 57,923 70,440 64,861 59,093 60,000 Max Life 13,198 16,546 20,869 25,973 29,564 32,999 38,909 44,569 51,057 55,836 58,749 66,634 52,396 Sahara Life 8,230 9,008 7,952 6,540 5,969 7,397 6,534 8,780 11,782 14,072 NA NA NA Shriram Life 16,928 21,982 18,767 12,897 12,700 13,627 13,727 13,815 18,820 17,382 16,617 16,755 19,513 Bharti Axa Life 14,229 24,840 20,868 19,952 22,030 29,960 40,491 40,464 39,017 40,695 36,973 30,751 42,943 Future Generali Life 12,903 13,308 10,859 15,566 13,673 16,842 34,786 42,945 44,659 19,704 52,925 56,435 49,099 IDBI Federal 29,239 35,271 28,082 25,994 21,763 24,845 29,066 30,856 36,158 40,836 45,328 62,455 59,604 Canara HSBC 82,635 62,624 62,372 66,162 49,016 54,072 53,981 57,487 67,193 78,115 70,658 64,492 39,028 Aegon Religare 12,910 32,576 28,402 25,374 22,015 26,883 36,630 28,475 22,807 24,278 24,236 31,686 24,869 Pramerica 12,102 18,645 19,021 13,525 13,134 16,897 25,838 27,324 28,332 37,979 41,575 39,923 58,400 Star Union Dai-ichi 29,220 29,529 30,483 19,333 18,608 27,033 39,855 41,301 50,424 50,941 59,081 71,746 65,526 Private Total 18,686 21,005 21,851 21,956 25,296 28,345 36,669 39,193 48,008 52,943 56,235 60,977 50,826 LIC 5,885 7,169 7,595 8,649 7,983 8,180 10,516 10,399 11,718 12,510 13,128 13,904 22,756 Grand Total 9,942 11,208 11,000 11,142 10,865 11,312 16,403 16,969 20,341 22,549 24,197 25,326 33,074 Source: IRDAI, LIC Council, Kotak Institutional Equities KOTAK INSTITUTIONAL EQUITIES RESEARCH 101 India Insurance Exhibit 11: Equity outflows of Rs20 bn in June 2020 Mutual fund inflows, monthly data, June 2018-June 2020 (Rs bn) Jun-18 Jul-18 Aug-18 Sep-18 Oct-18 Nov-18 Dec-18 Jan-19 Feb-19 Mar-19 Apr-19 May-19 Jun-19 Jul-19 Aug-19 Sep-19 Oct-19 Nov-19 Dec-19 Jan-20 Feb-20 Mar-20 Apr-20 May-20 Jun-20 Equity (Equity oriented+ELSS+70% of balanced) 107 97 102 117 130 86 66 55 44 95 20 27 58 91 86 46 44 (32) 32 72 96 96 44 35 (20) Liquid/ Money Market 521 (311) 1,711 (2,111) 553 1,361 1,489 586 (245) (513) 898 686 (1,524) 454 794 (1,407) 932 69 (712) 597 (438) (1,100) 688 619 (442) ETFs 83 (40) 17 24 28 16 109 7 52 105 (43) 26 56 126 (12) 14 67 30 128 22 183 67 12 24 47 Others (bal. fig; most debt) (246) (71) (84) (332) (356) (40) (55) 6 (52) 90 129 31 (187) 200 158 (171) 292 477 (67) 510 139 (1,190) (285) 30 488 Total 465 (326) 1,746 (2,302) 355 1,424 1,609 654 (201) (224) 1,005 770 (1,598) 871 1,025 (1,518) 1,335 544 (618) 1,201 (20) (2,127) 460 708 73 Notes: (1) Equity includes open and closed-ended equity oriented funds, ELSS and 70% of hybrid ex-arbitrage funds from April 2019 Source: AMFI, , Kotak Institutional Equities Exhibit 12: Sharp decline in MFI inflows Net MF flows (Equity + ELSS+70%balanced), March fiscal year-ends, June 2017-June 2020 (Rs bn) 300 265 246 256229 225 201 208198 182 150 134 136132 130 114 107 102117 86 97 95 96 96 86 91 72 66 58 75 5544 46 44 44 32 35 20 27 0 (20) (32) (75) Jul-17 Jul-18 Jul-19 Jan-18 Jan-20 Jan-19 Jun-19 Jun-17 Jun-18 Jun-20 Oct-17 Feb-18 Oct-19 Oct-18 Feb-19 Feb-20 Sep-19 Apr-20 Sep-17 Apr-18 Sep-18 Apr-19 Dec-18 Dec-19 Dec-17 Nov-17 Nov-18 Nov-19 Mar-19 Mar-18 Mar-20 Aug-18 Aug-17 Aug-19 May-18 May-20 May-19 Source: AMFI, Kotak Institutional Equities Exhibit 13: SIPs down 2.4% yoy/mom SIP inflows (monthly data), March fiscal year-ends, June 2017-June 2020 (Rs bn) 100 85 85 86 84 83 85 82 82 81 82 83 82 83 81 86 80 80 80 81 81 81 79 76 76 77 77 71 73 72 66 67 64 62 59 55 56 58 52 49 47 44 30 Jun-17 Jun-18 Jun-19 Jun-20 Oct-17 Oct-18 Oct-19 Feb-20 Feb-18 Feb-19 Apr-18 Apr-19 Apr-20 Dec-18 Dec-19 Dec-17 Aug-17 Aug-18 Aug-19 Source: AMFI, Kotak Institutional Equities 102 KOTAK INSTITUTIONAL EQUITIES RESEARCH Insurance India Exhibit 14: MF equity inflows muted in 1QFY21 Net MF flows (Equity + ELSS+70%balanced), March fiscal year-ends, 2006 – 2020, 1QFY21 (Rs bn) 3,000 2,313 2,250 1,500 1,167 956 790 878 635 750 510 375 282 41 17 4 60 - (122) (144) (107) (750) 2008 2012 2016 2020 2006 2007 2009 2010 2011 2013 2014 2015 2017 2018 2019 1QFY21 Source: AMFI, Kotak Institutional Equities Exhibit 15: Share of ULIPs dropped in FY2020 Contribution of various products to APE, March fiscal year-ends, 2012-2020 (% of total) 2012 2013 2014 2015 2016 2017 2018 2019 2020 Bajaj Allianz Life Unit linked policies 12 12 10 24 29 62 64 53 46 Participating policies 60 49 51 21 19 20 20 25 24 Non participating policies 28 39 38 54 52 18 17 22 30 Aditya Birla Sun Life Unit linked policies 59 43 45 35 48 33 36 35 NA Participating policies 0 2 14 16 13 22 18 20 NA Non participating policies 41 55 41 49 38 45 46 44 NA ICICI Prudential Life Unit linked policies 56 60 66 85 84 86 84 82 69 Participating policies 18 7 18 13 13 10 11 9 12 Non participating policies 26 33 15 2 3 5 5 9 19 HDFC Life Unit linked policies 57 62 49 60 55 49 53 47 25 Participating policies 40 34 34 20 27 31 25 11 16 Non participating policies 3 5 17 21 18 20 23 42 60 Max Life Unit linked policies 12 10 21 26 27 32 41 42 38 Participating policies 76 74 67 58 59 55 45 41 32 Non participating policies 12 16 12 15 14 14 14 16 30 SBI Life Unit linked policies 44 35 32 40 54 71 67 69 70 Participating policies 21 22 31 40 30 16 24 18 11 Non participating policies 35 43 37 19 16 12 9 13 19 Source: Company, Kotak Institutional Equities KOTAK INSTITUTIONAL EQUITIES RESEARCH 103 India Insurance Exhibit 16: Share of bancassurance dropped for most private players in FY2020 Channel-wise contribution to individual new business premium, March fiscal year-ends, 2012-2020 (% of total) 2012 2013 2014 2015 2016 2017 2018 2019 2020 Bajaj Life Agency 66 76 84 92 90 90 79 69 57 Bancassurance 10 7 8 1 2 2 5 6 13 Corporate agents 19 13 5 1 1 1 1 2 4 Others 5 4 3 7 7 7 14 23 26 Birla SL Agency 70 66 65 67 81 75 69 45 44 Bancassurance 14 17 20 19 9 9 19 47 50 Corporate agents 15 17 4 2 5 6 1 0 0 Others — — 12 12 5 10 11 8 6 HDFC Life Agency 20 16 16 16 13 15 13 14 13 Bancassurance 64 72 70 67 68 61 59 47 42 Corporate agents 11 7 7 2 3 4 5 5 4 Others 4 5 7 14 16 19 23 35 41 ICICI Prudential Life Agency 44 34 28 25 23 23 26 22 22 Bancassurance 38 45 54 58 57 57 53 55 50 Corporate agents 10 13 10 5 4 4 3 3 4 Others 7.5 7 8 13 16 16 19 20 25 Max Life Agency 37 35 31 29 28 25 24 23 22 Bancassurance 40 48 51 57 59 62 64 63 61 Corporate agents 13 10 9 6 4 3 3 2 2 Others 9 7 8 8 9 10 10 11 15 SBI Life Agency 52 53 50 46 38 34 31 30 29 Bancassurance 44 44 47 52 61 65 67 69 67 Corporate agents 1 1 1 1 0 0 1 1 2 Others 2 3 2 1 1 1 1 1 2 Source: Company, Kotak Institutional Equities 104 KOTAK INSTITUTIONAL EQUITIES RESEARCH Insurance India Exhibit 17: Agent productivity marginally declined in FY2020 Agency data, March fiscal year-ends, 2014-2020 YoY 2014 2015 2016 2017 2018 2019 2020 (%) Policies per agent (#) Bajaj Life 2.3 1.9 2.2 2.1 2.4 2.2 1.6 (27) Birla Sunlife 2.7 2.1 1.8 1.9 2.0 1.9 1.8 (5) Exide Life 3.9 3.4 3.1 2.0 1.9 1.9 1.8 (5) HDFC Standard Life 5.2 5.2 5.6 5.2 2.1 1.8 1.5 (17) ICICI Prudential Life 1.3 1.0 1.2 1.3 1.4 1.1 0.9 (16) Max Life 5.0 3.8 3.6 2.7 2.3 3.0 3.1 3 Reliance Nippon Life 3.4 2.9 2.1 1.3 1.2 1.9 1.7 (12) SBI Life 5.5 4.8 5.2 4.7 5.2 4.5 4.5 (1) TATA AIA 2.1 1.5 2.3 2.8 3.8 4.4 4.4 1 Total of the above 3.2 2.6 2.7 2.3 2.2 2.2 2.0 (9) LIC 26.7 16.3 17.7 17.7 18.0 17.6 17.3 (1) Average size of policy (Rs) Bajaj Life 26,904 35,054 34,525 50,760 63,830 77,246 90,623 17 Birla Sunlife 22,434 28,402 31,066 38,536 45,823 50,023 54,540 9 Exide Life 29,008 41,668 29,409 54,928 39,841 44,210 50,803 15 HDFC Standard Life 12,106 17,368 11,954 18,320 56,394 70,936 77,573 9 ICICI Prudential Life 52,947 81,958 88,554 101,274 106,448 98,458 101,927 4 Max Life 33,567 40,716 45,274 60,950 72,316 68,864 77,038 12 Reliance Nippon Life 20,102 24,672 23,619 24,679 34,919 42,991 50,314 17 SBI Life 28,366 36,987 40,690 49,492 49,919 54,240 56,528 4 TATA AIA 29,120 29,838 34,667 47,441 45,702 55,346 62,969 14 Total of the above 26,677 34,618 34,224 45,093 56,914 60,991 66,001 8 LIC 12,636 16,318 16,075 22,622 24,181 23,859 23,514 (1) Premium per agent (Rs) Bajaj Life 62,336 66,686 76,129 108,097 155,958 173,680 149,044 (14) Birla Sunlife 60,345 59,637 56,452 73,546 91,097 93,854 97,061 3 Exide Life 113,294 140,918 90,267 112,422 75,856 82,589 89,804 9 HDFC Standard Life 62,969 91,110 66,701 95,073 119,221 125,075 113,199 (9) ICICI Prudential Life 67,095 80,494 104,411 127,531 149,334 110,072 95,409 (13) Max Life 166,402 155,588 163,550 165,933 168,807 204,218 235,387 15 Reliance Nippon Life 68,342 71,279 49,900 32,686 43,452 83,575 86,490 3 SBI Life 156,478 177,082 213,417 234,501 257,937 246,427 255,087 4 TATA AIA 60,341 45,645 78,330 132,211 175,066 240,785 275,920 15 Total of the above 84,167 91,438 91,953 105,868 127,749 135,592 133,292 (2) LIC 337,096 266,440 284,819 399,628 434,128 419,981 407,864 (3) Notes: (1) We have considered individual premium only for the above calculation. Source: Company, IRDAI, Life Insurance Council, Kotak Institutional Equities Exhibit 18: Individual agent additions muted in 1QFY21 Gross individual agent addition, March fiscal year-ends, 2014-2020, 1QFY21 Gross individual agents added (#) YoY (%) 2014 2015 2016 2017 2018 2019 2020 1QFY21 2015 2016 2017 2018 2019 2020 1QFY21 Aegon 3,631 3,106 3,518 726 — — — — (14) 13 (79) NA NA NA NA Aviva 6,851 5,465 6,881 5,300 5,490 3,328 2,712 113 (20) 26 (23) 4 (39) (19) (81) Bajaj 22,356 20,552 30,075 20,752 22,277 22,459 21,600 485 (8) 46 (31) 7 1 (4) (92) Bharti Axa 10,704 10,564 11,791 11,583 16,586 23,678 20,646 1,628 (1) 12 (2) 43 43 (13) (70) Birla Sunlife 31,918 22,911 20,992 22,735 24,999 25,652 29,284 2,012 (28) (8) 8 10 3 14 (66) Canara HSBC NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA DHFL 2,328 1,255 2,467 3,607 5,052 3,078 2,319 54 (46) 97 46 40 (39) (25) (89) Edelweiss Tokio 3,930 3,939 5,102 6,137 10,498 12,818 14,048 165 0 30 20 71 22 10 (94) Exide 24,642 20,698 32,278 27,736 28,478 28,074 30,165 2,305 (16) 56 (14) 3 (1) 7 (62) Future Generali 8,316 3,930 4,852 4,100 3,421 2,539 2,671 90 (53) 23 (15) (17) (26) 5 (88) HDFC Life 22,469 21,476 17,911 17,289 24,037 28,568 35,931 1,221 (4) (17) (3) 39 19 26 (85) ICICI Pru 35,799 11,910 18,286 15,996 18,057 21,461 23,195 1,226 (67) 54 (13) 13 19 8 (74) IDBI Federal 4,432 4,945 4,477 4,243 4,439 5,002 2,135 65 12 (9) (5) 5 13 (57) (92) IndiaFirst 862 566 449 489 362 405 522 15 (34) (21) 9 (26) 12 29 (86) Max 22,826 21,524 26,171 26,096 25,497 30,362 31,305 1,461 (6) 22 (0) (2) 19 3 (76) Reliance Nippon 76,578 63,252 47,692 33,137 25,153 31,573 24,465 576 (17) (25) (31) (24) 26 (23) (86) SBI Life 40,639 35,571 43,498 44,637 52,258 59,553 51,664 6,896 (12) 22 3 17 14 (13) (36) Tata AIA 18,507 14,622 15,615 15,513 17,598 21,339 22,586 2,777 (21) 7 (1) 13 21 6 (41) Private 374,152 305,205 345,715 311,420 338,682 379,738 376,007 23,350 (18) 13 (10) 9 12 (1) (71) LIC 253,416 342,048 319,428 339,964 265,806 263,894 273,337 33,307 35 (7) 6 (22) (1) 4 (27) Total 626,802 647,253 665,143 651,384 604,488 643,632 649,344 56,657 3 3 (2) (7) 6 1 (55) Source: IRDAI, Life Insurance Council, Kotak Institutional Equities KOTAK INSTITUTIONAL EQUITIES RESEARCH 105 India Insurance Share of single premium at 54% for private players Share of single premium was high at 54% in July 2020 for private players. This was likely driven by higher share of single premium annuity or lumpsum payout products. Among major private players, share of single premium increased for most players. Exhibit 19: Share of single premium at 54% for private players Share of single premium to total premium, March fiscal year-ends, July 2019-July 2020 (%) Jul-19 Aug-19 Sep-19 Oct-19 Nov-19 Dec-19 Jan-20 Feb-20 Mar-20 Apr-20 May-20 Jun-20 Jul-20 4MFY20 4MFY21 Bajaj Allianz 52 57 68 57 67 49 58 57 58 70 42 34 67 60 58 Birla Sunlife 47 49 64 66 56 35 32 63 51 78 28 66 60 42 63 HDFC Life 61 63 67 63 73 54 61 66 70 72 53 59 71 65 65 ICICI Prudential 31 31 28 29 30 28 33 19 38 31 14 37 32 30 28 Max Life 22 23 26 31 29 27 24 25 29 34 31 30 29 27 30 Reliance Life 4 5 5 7 7 4 5 7 7 6 4 4 5 5 5 SBI Life 38 42 54 52 39 26 25 42 39 86 50 57 61 45 63 Private sector 40 40 46 46 45 33 37 38 45 63 39 46 54 45 51 LIC 54 85 76 79 59 69 60 73 86 65 68 89 81 57 81 Total 50 73 65 67 55 57 52 58 72 64 61 80 72 53 72 Source: IRDAI, LIC Council, Kotak Institutional Equities Sharp jump in group business market share to 27% in July 2020 for private players Private players’ market share in group business jumped to 27% in July 2020. Most players recorded increase in share of group business. Thus tends to volatile due to lumpy nature of contracts. Exhibit 20: LIC’s market share in group business declined mom/yoy Market share in group business, March fiscal year-ends, July 2019-July 2020 (%) Jul-19 Aug-19 Sep-19 Oct-19 Nov-19 Dec-19 Jan-20 Feb-20 Mar-20 Apr-20 May-20 Jun-20 Jul-20 4MFY20 4MFY21 Bajaj Allianz 1.5 2.0 2.8 2.2 2.6 1.5 3.2 2.5 2.0 5.6 0.8 0.4 3.2 1.6 1.8 Birla Sunlife 0.9 1.3 1.8 2.2 1.5 0.7 0.9 2.4 1.5 4.8 0.5 1.6 1.7 0.6 1.7 HDFC Life 5.1 6.3 5.6 5.2 6.5 3.9 7.5 7.1 7.0 9.1 2.1 2.4 7.9 4.8 4.5 ICICI Prudential 1.8 3.1 2.1 2.8 1.7 1.7 3.6 12.9 2.2 1.3 4.9 0.5 2.3 1.7 1.9 Max Life 0.2 0.3 0.3 0.3 0.2 0.3 0.6 0.5 0.3 0.3 0.1 0.1 0.2 0.2 0.1 Reliance Life 0.0 0.1 0.0 0.0 0.0 0.1 0.0 0.1 0.0 0.0 0.0 0.0 0.0 0.0 0.0 SBI Life 2.7 4.2 6.8 5.9 2.7 2.5 3.3 3.3 1.8 18.0 2.9 3.3 7.4 2.9 5.8 Private sector 16 22 24 23 20 14 25 33 18 42 15 10 27 16 19 LIC 84 78 76 77 80 86 75 67 82 58 85 90 73 84 81 Source: IRDAI, LIC Council, Kotak Institutional Equities 106 KOTAK INSTITUTIONAL EQUITIES RESEARCH June 2020: Results calendar 107 Mon Tue Wed Thu Fri Sat Sun 10-Aug 11-Aug 12-Aug 13-Aug 14-Aug 15-Aug 16-Aug Bank of Baroda Adani Port and SEZ Aarti Industries 3M India Berger Paints Cochin Shipyard AIA Engineering Ashok Leyland Aditya Birla Fashion Dilip Buildcon Equitas Holdings Ashoka Buildcon Aster DM Healthcare Balkrishna Industries Glenmark Pharmaceuticals Ipca Laboratories Bosch Aurobindo Pharma BPCL Hindalco Industries KEC International Metropolis Healthcare Bharat Forge City Union Bank IIFL Wealth Power Grid Motherson Sumi Systems Brigade Enterprises DB Corp. MRF Shree Cement Oracle Financial Services Cummins India Eicher Motors New India Assurance Titan Company Shriram City Union Finance Kalpataru Power Transmission Endurance Technologies NTPC Ujjivan Financial Services Titan Company Natco Pharma GAIL (India) Sun TV Network S H Kelkar and Company Godrej Industries United Breweries Tata Power Grasim Industries Varroc Engineering Thermax Hero Motocorp Voltas PFC Prestige Estates Projects Shriram Transport Tata Steel Timken Trent 17-Aug 18-Aug 19-Aug 20-Aug 21-Aug 22-Aug 23-Aug J K Cement Oil India Source: NSE, Kotak Institutional Equities India Daily Summary Daily Summary India KOTAK INSTITUTIONAL EQUITIES RESEARCH EQUITIES INSTITUTIONAL KOTAK - August 10, August2020 10, KOTAK INSTITUTIONAL EQUITIES RESEARCH 107 Kotak Institutional Equities: Valuation summary of KIE Universe stocks India Daily Summary Daily Summary India Fair O/S ADVT Price (Rs) Value Upside Mkt cap. shares EPS (Rs) EPS growth (%) P/E (X) EV/EBITDA (X) P/B (X) RoE (%) Dividend yield (%) 3mo KOTAK INSTITUTIONAL EQUITIES RESEARCH EQUITIES INSTITUTIONAL KOTAK Company Rating 7-Aug-20 (Rs) (%) (Rs bn) (US$ bn) (mn) 2020 2021E 2022E 2020 2021E 2022E 2020 2021E 2022E 2020 2021E 2022E 2020 2021E 2022E 2020 2021E 2022E 2020 2021E 2022E (US$ mn) Automobiles & Components Amara Raja Batteries REDUCE 718 700 (3) 123 1.6 171 39 34 44 36.7 (10.9) 27.3 19 20.8 16.4 11.1 11.1 9.0 3.4 3.0 2.6 18.9 15.2 17.1 1.5 1.2 1.5 12.1 Apollo Tyres BUY 124 140 13 71 0.9 638 8.3 2.9 9.9 (41.9) (64.7) 238.7 14.8 42.1 12.4 7.1 7.0 5.2 0.7 0.7 0.7 4.8 1.8 5.6 2.4 1.1 2.2 13.8 Ashok Leyland BUY 50 65 30 147 2.0 2,936 1.2 (0.6) 2.2 (82.4) (150.8) 447.8 40.8 NM 23.1 13.9 24.3 9.7 2.0 2.1 1.9 4.6 NM 8.6 7.0 0.0 1.3 29 Bajaj Auto BUY 3,002 3,400 13 869 12 289 176 159 194 15.0 (9.9) 22.0 17.0 18.9 15.5 13.9 14.6 11.3 4.4 4.0 3.6 24 22 24 4.0 3.2 3.9 37 Balkrishna Industries SELL 1,350 1,100 (19) 261 3.5 193 50 48 58 25.2 (3.4) 21.7 27.2 28.2 23.1 18.5 15.9 13.1 5.2 4.7 4.2 19.9 17.6 19.3 1.5 1.6 1.8 13.6 Bharat Forge SELL 408 285 (30) 190 2.5 466 8 0 11 (66.2) (94.5) 2,559.2 54.4 982.8 37.0 20.0 38.7 17.8 3.6 3.6 3.4 6.6 0.4 9.5 0.5 0.0 0.7 17.1 CEAT BUY 891 940 6 36 0.5 40 63 45 68 1.9 (28.8) 52.6 14.2 20.0 13.1 7.5 8.4 6.8 1.2 1.2 1.1 8.9 6.1 8.8 1.3 1.3 1.3 2.4 Eicher Motors REDUCE 21,807 17,500 (20) 595 7.9 27 671 573 799 (17.7) (14.7) 39.6 32.5 38.1 27.3 24.2 29.1 20.6 7.2 6.3 5.3 24 17.6 21 0.1 — — 67 Endurance Technologies REDUCE 958 820 (14) 135 1.8 141 40 29 46 11.1 (28.4) 59.2 24 33.3 20.9 11.8 13.6 9.5 4.5 4.0 3.5 18.8 12.1 16.6 0.6 0.5 0.8 1.7 Escorts BUY 1,124 1,300 16 100 2.0 101 55 55 74 0.4 1.4 34.2 20.6 20.3 15.1 14.3 11.6 8.3 2.9 2.3 2.0 14.0 11.2 13.4 0.2 0.7 1.0 40 Exide Industries REDUCE 162 155 (4) 138 1.8 850 10.0 7.7 9.0 10.3 (22.7) 16.6 16.2 21.0 18.0 10.0 11.1 9.7 2.2 2.1 1.9 13.8 10.1 11.1 2.5 2.2 2.2 8.4 Hero Motocorp REDUCE 2,706 2,600 (4) 541 7.2 200 159 131 172 (6.1) (18.0) 31.6 17.0 20.7 15.8 11.5 12.4 9.2 3.8 3.6 3.3 24 17.9 22 3.6 3.1 3.8 62 - Mahindra CIE Automotive SELL 109 95 (13) 41 0.6 378 9.4 1.6 7.5 (34.9) (83.0) 366.5 11.6 67.8 14.5 5.5 11.1 6.1 0.9 0.9 0.8 8.0 1.3 5.9 — — — 0.4 August2020 10, Mahindra & Mahindra BUY 600 725 21 746 9.9 1,138 24 30 42 (50.0) 26.3 40.8 25.2 20.0 14.2 11.6 12.4 9.2 2.0 1.8 1.6 7.8 9.5 12.1 0.4 0.5 1.1 52 Maruti Suzuki SELL 6,679 4,500 (33) 2,018 26.9 302 187 140 225 (24.7) (25.0) 60.2 36 48 30 22.6 28.2 16.9 4.2 3.9 3.6 11.9 8.5 12.6 0.9 0.7 0.8 131 Motherson Sumi Systems ADD 100 110 10 315 4.2 3,158 3.7 1.1 5.1 (27.5) (70.3) 359.1 26.9 90.6 19.7 7.4 9.3 4.9 2.8 2.8 2.4 10.5 3.1 13.2 1.5 1.3 1.7 26 MRF SELL 62,703 55,000 (12) 266 3.5 4 3,355 2,185 2,861 25.8 (34.9) 30.9 19 28.7 21.9 10.9 10.9 8.7 2.2 2.0 1.9 12.3 7.3 8.9 0.2 0.1 0.1 9.7 Schaeffler India SELL 3,544 3,150 (11) 111 1.5 31 118 83 128 (18.3) (29.7) 55.1 30 43 28 16.2 20.8 14.3 3.7 3.5 3.1 13.0 8.4 11.9 — — — 0.5 SKF REDUCE 1,459 1,550 6 72 1.0 49 58 43 58 (10.7) (26.2) 33.6 25 34 25 18.9 24.6 17.6 3.8 4.9 4.2 15.2 14.5 16.7 0.8 7.4 0.7 1.4 Tata Motors SELL 119 90 (24) 428 5.2 3,829 (20.7) (20.5) 4.7 (284.1) 1.0 123.0 NM NM 25.2 5.9 6.4 4.1 0.7 0.8 0.8 NM NM 3.0 — — — 102 Timken SELL 1,026 825 (20) 77 1.0 75 33 35 42 65.6 6.2 20.1 31 30 25 20.1 17.5 14.2 4.9 4.2 3.6 16.9 15.3 15.9 0.1 0.1 0.1 0.6 TVS Motor SELL 422 260 (38) 200 2.7 475 13.0 7.4 14.7 (7.9) (43.1) 98.4 32 57 29 16.1 20.7 13.9 5.5 5.3 4.7 17.7 9.5 17.3 0.8 0.7 0.9 15.7 Varroc Engineering BUY 230 360 57 31 0.4 135 0 (21) 18 (99.4) (11,519.9) 183.0 1,235.8 NM 13.0 6.8 10.0 4.8 1.0 1.1 1.1 0.1 NM 8.1 — — — 0.9 Automobiles & Components Cautious 7,510 100.3 (39.2) (31.4) 154.8 36.7 53.5 21.0 11.6 12.7 8.4 2.7 2.6 2.4 7.4 4.9 11.4 1.4 1.1 1.4 644 Banks AU Small Finance Bank SELL 710 590 (17) 217 2.9 304 22.2 19.3 23.0 69.8 (13.1) 19.4 32 37 31 — — — 5.1 4.7 4.1 17.9 12.6 13.2 — — — 8.0 Axis Bank BUY 433 600 38 1,223 16.3 2,822 5.8 35 41 (68.3) 509.3 17.8 75 12.3 10.5 — — — 1.5 1.4 1.3 2.1 11.1 11.9 0.0 1.2 1.4 225 Bandhan Bank REDUCE 308 330 7 495 6.6 1,610 18.1 20.7 20.7 10.9 14.3 (0.3) 16.9 14.8 14.9 — — — 3.3 2.8 2.4 22.1 19.8 16.5 — — — 98 Bank of Baroda ADD 48 65 34 223 3.0 4,627 1.2 8.2 18 (27.8) 597.5 119.9 41 5.9 2.7 — — — 0.4 0.4 0.4 0.6 5.6 11.4 0.0 3.4 7.5 27 Canara Bank REDUCE 102 90 (12) 148 2.0 1,454 (21.7) (5.0) 7.5 (571.1) 76.9 249.7 NM NM 13.6 — — — 0.5 0.5 0.5 NM NM 2.1 — — — 22 City Union Bank ADD 123 160 30 91 1.2 737 6.5 5.5 9.8 (30.5) (14.9) 79.0 19 22.4 12.5 — — — 1.9 1.8 1.6 9.4 7.4 12.3 0.9 0.8 1.4 3.9 DCB Bank BUY 83 150 80 26 0.3 310 10.9 9.3 10.3 3.6 (14.7) 10.4 7.6 9.0 8.1 — — — 0.9 0.8 0.8 11.2 8.7 8.9 — 1.1 1.2 3.7 Equitas Holdings BUY 51 100 96 17 0.2 342 6.1 6.0 9.7 (4.3) (1.1) 61.6 8.4 8.5 5.3 — — — 0.7 0.6 0.6 7.8 7.1 10.5 — — — 12.8 Federal Bank BUY 55 80 46 109 1.5 1,993 7.7 6.1 6.9 23.6 (21.2) 12.7 7.1 9.0 7.9 — — — 0.8 0.8 0.7 11.1 8.1 8.6 — 2.5 2.8 26 HDFC Bank ADD 1,044 1,200 15 5,740 76.5 5,483 48 49 54 23.7 2.9 10.3 22 21 19 — — — 3.4 3.0 2.7 16.4 14.9 14.6 — 0.9 1.0 265 ICICI Bank BUY 358 470 31 2,318 30.9 6,474 12.3 23 27 134.9 88.0 16.6 29 15.5 13.3 — — — 2.2 1.9 1.7 7.7 12.2 12.9 — 1.3 1.5 225 IndusInd Bank ADD 509 600 18 353 4.7 756 64 26 64 16.3 (59.2) 147.6 8 19.6 7.9 — — — 1.1 1.0 0.9 14.9 5.3 11.8 — 0.8 1.9 190 Karur Vysya Bank BUY 35 65 84 28 0.4 799 2.9 4 6 11.5 41.4 55.6 12 8.5 5.4 — — — 0.5 0.5 0.5 3.6 4.9 7.4 0.0 3.1 4.8 1.2 Punjab National Bank NR 33 — — 309 4.1 9,652 0 2 6 102.3 212.6 283.8 66 21.0 5.5 — — — 0.5 0.6 0.5 0.7 2.1 6.8 — — — 19.0 RBL Bank BUY 191 270 41 97 1.3 509 9.9 10 20 (51.1) 3.4 97.2 19 18.6 9.4 — — — 1.0 1.0 0.9 5.6 4.8 9.0 — 0.7 1.4 90 State Bank of India BUY 191 340 78 1,701 22.7 8,925 16 24 29 1,580.3 49.2 17.9 12 7.9 6.7 — — — 1.1 0.9 0.8 6.4 8.9 9.6 — 0.1 0.1 181 Ujjivan Financial Services BUY 240 490 104 29 0.4 121 26.9 34 44 117.0 24.9 31.6 9 7.2 5.4 — — — 1.3 1.2 1.0 15.7 17.0 19.3 1.3 1.7 2.5 19.5 Ujjivan Small Finance Bank ADD 36 39 8 63 0.8 1,728 2 2 2 34.2 (4.7) (2.9) 20 20.5 21.1 — — — 2.1 2.1 2.0 13.6 9.8 8.9 1.0 1.0 0.9 0.0 Union Bank RS 29 — — 188 2.5 9,414 (8) (2) 2 49.4 77.9 187.9 NM NM 17.9 — — — 0.4 0.7 0.7 NM NM 2.6 — (1.0) 0.8 2.4 Banks Attractive 13,731 183.0 43.1 94.3 43.3 33 17.0 11.8 1.5 1.3 1.2 4.4 7.5 9.9 0.1 0.8 1.1 1,443 Source: Company, Bloomberg, Kotak Institutional Equities estimates 108 108 KOTAK INSTITUTIONAL EQUITIES RESEARCH Kotak Institutional Equities: Valuation summary of KIE Universe stocks Fair O/S ADVT 109 Price (Rs) Value Upside Mkt cap. shares EPS (Rs) EPS growth (%) P/E (X) EV/EBITDA (X) P/B (X) RoE (%) Dividend yield (%) 3mo Company Rating 7-Aug-20 (Rs) (%) (Rs bn) (US$ bn) (mn) 2020 2021E 2022E 2020 2021E 2022E 2020 2021E 2022E 2020 2021E 2022E 2020 2021E 2022E 2020 2021E 2022E 2020 2021E 2022E (US$ mn) Building Products Astral Poly Technik SELL 1,049 765 (27) 158 2.1 151 16.4 18 25 25.6 11.3 37.9 64 57 42 35.7 31.3 23.5 10.5 9.1 7.7 17.8 17.0 20.0 0.1 0.2 0.4 2.3 Building Products Cautious 158 2.1 26.6 11.3 37.9 64 57 42 35.7 31.3 23.5 10.5 9.1 7.6 16.5 15.8 18.4 0.1 0.2 0.4 2.3 Capital goods ABB SELL 882 840 (5) 187 2.5 212 18 9 21 46.3 (50.0) 140.4 50 100 42 32.2 65.0 27.0 5.3 5.2 4.9 9.9 5.3 12.1 0.5 0.7 0.8 2.7 Ashoka Buildcon BUY 58 130 124 16 0.2 281 13.8 8.5 11.5 16.2 (38.0) 34.7 4.2 6.8 5.0 2.9 4.6 3.4 0.6 0.6 0.5 16.1 8.9 11.1 0.0 2.4 3.2 1.3 Bharat Electronics BUY 99 110 11 242 3.2 2,437 7.5 6.2 6.8 (3.3) (16.5) 8.6 13.3 15.9 14.6 8.2 9.6 8.5 2.4 2.2 2.0 18.9 14.5 14.5 2.8 2.4 2.6 21 BHEL REDUCE 35 28 (19) 123 1.6 3,482 -4.2 -1.5 2.5 (221.0) 64.0 263.0 NM NM 14.2 (46.7) (280.7) 5.6 0.4 0.4 0.4 NM NM 3.0 (5.8) (1.9) 2.8 36 Carborundum Universal ADD 244 285 17 46 0.6 189 14.4 12.1 15.2 9.9 (15.9) 26.0 16.9 20 16.0 11.0 11.1 8.8 2.5 2.3 2.1 15.2 11.8 13.7 1.6 1.4 1.7 1.0 Cochin Shipyard BUY 332 550 66 44 0.6 132 48 39 47 32.5 (19.7) 19.7 6.8 8.5 7.1 3.3 3.9 3.8 1.2 1.1 1.0 18.1 13.2 14.4 4.5 3.6 3.9 2.8 Cummins India BUY 419 460 10 116 1.5 277 26 16 24 (3.2) (35.4) 48.7 16.4 25 17.1 18.5 30.8 17.6 2.8 2.7 2.6 17.0 10.8 15.5 3.3 2.2 3.2 8.3 Dilip Buildcon BUY 339 495 46 46 0.6 137 30 27 45 (45.3) (10.8) 64.8 11.1 12.5 7.6 4.9 5.6 3.6 1.3 1.2 1.0 12.2 9.8 14.2 0.2 0.1 0.3 2.0 IRB Infrastructure BUY 123 150 22 43 0.6 351 21 15 11 (15.2) (27.9) (22.9) 6.0 8.3 10.7 3.6 6.5 6.1 0.6 0.6 0.6 11.1 7.6 5.6 4.1 3.1 2.0 4.9 Kalpataru Power Transmission BUY 229 470 105 35 0.5 153 25 25 39 (16.4) 0.1 53.3 9.0 9.0 5.9 4.0 4.0 3.3 1.0 1.0 0.8 12.0 11.1 15.2 1.4 1.4 2.0 1.7 KEC International BUY 276 342 24 71 0.9 257 22.0 25 31 16.3 13.4 24.4 12.5 11.1 8.9 7.3 6.7 5.4 2.5 2.1 1.8 22 21 22 1.2 1.0 1.2 1.4 L&T BUY 916 1,210 32 1,285 17.1 1,403 63 35 66 3.3 (44.9) 90.3 14.4 26 13.8 15.6 19.2 13.3 2.2 1.9 1.7 15.8 7.8 13.1 2.0 1.7 2.2 68 Sadbhav Engineering BUY 46 113 144 8 0.1 172 4.2 5.3 11.4 (61.4) 26.0 115.4 11.0 8.8 4.1 6.2 5.9 3.6 0.4 0.4 0.3 3.5 4.2 8.6 — — — 0.4 Siemens SELL 1,152 1,000 (13) 410 5.5 356 26 33 38 (14.9) 28.2 14.7 44 35 30 29.6 22.9 20.2 4.2 3.9 3.6 9.9 11.8 12.5 0.6 0.8 0.9 65 Thermax BUY 751 820 9 90 1.2 113 19 15 31 (48.8) (22.5) 109.8 40 51 24 21.4 33.4 17.3 21.4 33.4 17.3 7.0 5.4 10.7 0.9 0.7 1.2 0.8 Capital goods Attractive 2,762 36.8 (17.1) (27.1) 70.1 18.5 25 14.9 1.9 1.7 1.6 10.4 6.8 10.8 1.4 1.4 2.0 1,443 Commercial & Professional Services SIS BUY 363 395 9 53 0.7 149 15 14 19 5.0 (10.2) 36.2 24 27 19.6 11.1 12.0 10.1 3.9 3.4 2.9 17.1 13.6 16.1 1.0 0.2 0.3 0.5 TeamLease Services ADD 2,073 2,000 (4) 35 0.5 17 20 49 67 (64.3) 140.9 36.5 101 42 31 37.0 29.7 23.1 6.2 5.4 4.6 6.3 13.7 16.1 — — — 0.9 Commercial & Professional Services Attractive 89 1.2 (16.7) 10.1 36.3 34 31 23 15.1 15.5 12.8 4.5 4.0 3.4 13.3 12.8 15.0 0.6 0.1 0.2 1.4 Commodity Chemicals Asian Paints REDUCE 1,806 1,800 (0) 1,733 23.1 959 27.2 21.9 36.1 20.7 (19.4) 64.9 66 82 50 41.4 48.6 32.5 17.1 15.4 13.3 27 19.7 29 0.7 0.6 1.0 63 Berger Paints SELL 555 410 (26) 539 7.2 971 6.8 5.8 9.2 32.2 (15.1) 60.2 82 96 60 50.9 56.2 37.9 20.3 17.7 15.0 26 19.6 27 0.4 0.3 0.6 11.2 Kansai Nerolac ADD 459 485 6 248 3.3 539 9.9 8.1 12.6 14.6 (18.6) 55.3 46 57 37 31.1 35.6 24.0 6.5 6.1 5.6 14.8 11.2 16.0 0.7 0.7 1.0 1.6 Tata Chemicals ADD 301 330 10 77 1.0 255 31.7 23.1 35.2 (26.2) (27.0) 52.2 9.5 13.0 8.6 4.6 4.9 3.8 0.6 0.6 0.6 6.4 4.5 6.6 3.7 2.7 4.1 7.5 Commodity Chemicals Neutral 2,596 34.6 9.2 (20.0) 61.0 56 70 44 32.6 37.1 25.8 8.8 8.2 7.4 15.6 11.7 17.0 0.7 0.6 1.0 83 Construction Materials ACC BUY 1,397 1,550 11 262 3.5 188 72.3 61.4 79.5 35.8 (15.1) 29.5 19.3 23 17.6 9.0 10.1 7.8 2.3 2.2 2.0 12.3 9.8 12.0 1.0 2.2 2.8 23 Ambuja Cements BUY 220 235 7 436 5.8 1,986 10.6 9.5 12.4 49.1 (10.2) 31.0 21 23 17.7 7.5 8.1 5.9 1.8 1.7 1.6 9.0 7.6 9.2 0.7 0.7 0.7 13.5 Dalmia Bharat BUY 764 1,075 41 143 1.9 192 14.0 17.9 36.9 (12.1) 28.0 106.9 55 43 21 7.6 7.4 5.6 1.4 1.4 1.3 2.5 3.2 6.3 — — — 2.4 Grasim Industries ADD 637 735 15 419 5.6 657 52.6 40.6 71.6 (21.1) (22.9) 76.5 12.1 15.7 8.9 7.6 8.3 5.4 0.7 0.7 0.7 6.0 4.6 7.6 0.6 0.2 0.5 21 India Daily Summary Daily Summary India J K Cement ADD 1,600 1,525 (5) 124 1.6 77 64.2 51.8 92.2 83.6 (19.4) 78.1 25 31 17.4 12.0 12.4 8.7 4.1 3.7 3.1 17.3 12.5 19.4 0.5 0.6 0.6 1.7 JK Lakshmi Cement BUY 287 340 19 34 0.4 118 23.5 16.0 27.4 478.7 (32.0) 71.4 12.2 17.9 10.5 5.5 6.4 5.0 2.0 1.8 1.6 17.4 10.6 16.2 0.9 0.8 1.4 1.7 Orient Cement ADD 71 75 6 15 0.2 205 4.2 3.7 6.3 82.1 (12.9) 72.1 16.8 19.2 11.2 6.9 6.6 5.4 1.3 1.3 1.2 8.0 6.6 10.8 1.1 2.8 2.8 0.9 Shree Cement SELL 21,910 16,000 (27) 791 10.5 36 435.2 382.0 651.5 34.6 (12.2) 70.5 50 57 34 21.5 23.2 16.2 6.1 5.7 5.0 13.9 10.3 15.8 0.5 0.5 0.5 18.7 UltraTech Cement BUY 4,004 4,600 15 1,156 15.4 289 132.9 133.7 219.9 45.2 0.6 64.4 30 30 18.2 14.2 13.6 9.3 3.0 2.7 2.4 10.5 9.4 13.9 0.3 0.4 0.5 33 Construction Materials Attractive 3,378 45.0 21.1 (11.2) 61.0 25 28 17.6 10.8 11.3 7.8 2.1 2.0 1.8 8.4 7.0 10.2 0.5 0.6 0.7 115 Source: Company, Bloomberg, Kotak Institutional Equities estimates KOTAK INSTITUTIONAL EQUITIES RESEARCH EQUITIES INSTITUTIONAL KOTAK - August 10, August2020 10, KOTAK INSTITUTIONAL EQUITIES RESEARCH 109 Kotak Institutional Equities: Valuation summary of KIE Universe stocks India Daily Summary Daily Summary India Fair O/S ADVT Price (Rs) Value Upside Mkt cap. shares EPS (Rs) EPS growth (%) P/E (X) EV/EBITDA (X) P/B (X) RoE (%) Dividend yield (%) 3mo Company Rating 7-Aug-20 (Rs) (%) (Rs bn) (US$ bn) (mn) 2020 2021E 2022E 2020 2021E 2022E 2020 2021E 2022E 2020 2021E 2022E 2020 2021E 2022E 2020 2021E 2022E 2020 2021E 2022E (US$ mn) KOTAK INSTITUTIONAL EQUITIES RESEARCH EQUITIES INSTITUTIONAL KOTAK Consumer Durables & Apparel Crompton Greaves Consumer SELL 261 210 (19) 164 2.2 627 7.9 6.9 8.8 33.1 (12.8) 27.1 33 38 30 28 28 22 11.1 8.5 7.0 39 26 26 0.8 0.0 1.0 2.9 Havells India SELL 610 490 (20) 382 5.1 626 11.8 8.7 13.8 (6.6) (26.1) 58.5 52 70 44 36 46 30 8.8 8.2 7.4 17.3 12.2 17.7 1.7 0.5 0.8 20 Page Industries REDUCE 19,012 16,000 (16) 212 2.8 11 308 277 397 (12.9) (10.0) 43.5 62 69 48 40 43 32 25.9 22.4 18.3 43 35 42 0.8 0.8 1.2 10.2 Polycab ADD 842 875 4 125 1.7 149 52 40 53 53.2 (21.5) 30.7 16.4 21 16.0 11 14 11 3.3 2.9 2.5 23 14.7 16.8 0.8 0.7 0.9 3.6 TCNS Clothing Co. REDUCE 342 380 11 21 0.3 66 11 4 15 (47.7) (64.3) 302.6 32 89 22 12 16 8.5 3.4 3.1 2.6 10.9 3.6 12.8 — — — 0.2 Vardhman Textiles ADD 682 720 6 39 0.5 57 85 25 90 (34.1) (70.8) 260.6 8.0 27 7.6 6.0 10.7 5.0 0.6 0.6 0.6 8.3 2.3 8.0 2.6 1.8 2.9 0.2 Voltas SELL 594 440 (26) 197 2.6 331 16.2 10.3 17.8 3.4 (36.5) 73.0 37 58 33 30 55 27 4.6 4.3 4.0 12.8 7.7 12.5 0.6 0.4 0.8 20 Whirlpool SELL 2,092 1,700 (19) 265 3.5 127 38 30 49 17.0 (21.3) 67.1 56 71 42 37 48 29 10.4 9.5 8.5 20 14.1 21 0.2 0.4 0.9 1.5 Consumer Durables & Apparel Cautious 1,405 18.7 2.3 (29.1) 36 51 31 24 33 21 5.9 5.4 16.3 10.6 15.4 1.0 0.5 59 Consumer Staples Bajaj Consumer Care ADD 182 200 10 27 0.4 148 12.5 12.8 13.1 (16.6) 2.1 2.7 14.6 14.3 13.9 11.0 10.9 10.5 4.1 3.6 3.2 33 27 24 1.1 3.3 4.4 2.8 Britannia Industries ADD 3,935 4,150 5 947 12.6 240 59 81 86 22.1 36.7 6.3 67 49 46 52 36 35 21.5 17.8 14.1 32 39 34 0.9 0.7 0.8 46 - Colgate-Palmolive (India) ADD 1,457 1,550 6 396 5.3 272 28 31 36 5.9 8.1 18.0 51 48 40 32.6 30.4 26.1 24.9 24.7 23.5 51 52 60 1.9 2.0 2.4 19.9 August 10, August2020 10, Dabur India REDUCE 512 415 (19) 905 12.1 1,767 8.6 9.5 11.0 6.1 10.2 15.3 59 54 47 50 44 37 13.7 12.6 11.5 25 24 26 0.6 1.2 1.4 24 Godrej Consumer Products ADD 689 750 9 705 9.4 1,022 13.8 15.4 18.5 (4.8) 11.8 20.3 50 45 37 34 30 26 8.9 7.8 7.1 18.6 18.6 19.9 0.9 1.1 1.4 16.0 Hindustan Unilever ADD 2,211 2,500 13 5,190 69.2 2,343 31 35 45 10.9 12.3 28.1 71 63 49 53 44 35 59.5 12.0 11.4 86 32 24 1.1 1.4 1.9 195 ITC BUY 196 260 33 2,412 32.1 12,308 11.6 10.5 12.3 14.4 (9.4) 17.9 17.0 18.7 15.9 11.7 13.4 11.2 3.8 3.7 3.6 21 18.9 22 5.2 4.6 5.4 78 Jyothy Laboratories ADD 142 160 13 52 0.7 367 4.7 5.5 6.0 (15.5) 17.5 9.1 30 26 23 21.8 17.6 16.2 4.2 4.0 3.8 13.6 16.1 16.6 2.1 2.5 2.8 1.5 Marico ADD 370 390 5 478 6.4 1,290 8.1 8.7 9.7 12.4 7.7 11.2 46 42 38 32 29 26 15.8 14.7 13.7 35 36 37 1.8 1.9 2.1 14.9 Nestle India REDUCE 16,789 16,000 (5) 1,619 21.6 96 204 227 270 22.6 10.9 19.1 82 74 62 57 49 43 83.8 65.8 52.7 70 100 94 2.0 1.0 1.2 40 Tata Consumer Products ADD 519 470 (9) 475 6.3 922 8.0 9.8 11.9 13.9 22.3 22.4 65 53 43 36 27 26 3.5 3.3 3.2 6.9 6.4 7.4 0.5 0.7 0.8 30 United Breweries ADD 966 1,180 22 255 3.4 264 16.2 2.5 21.8 (24.0) (84.4) 760.7 60 381 44 29 62 23 7.3 7.3 6.3 12.8 1.9 15.2 0.3 0.1 0.6 10.1 United Spirits ADD 587 620 6 426 5.7 727 11.5 8.6 14.0 21.7 (25.0) 62.8 51 68 42 29 36 26 10.6 9.4 7.6 23 14.6 20 — — — 35 Varun Beverages BUY 745 825 11 215 2.9 289 16.2 6.5 25.5 51.9 (60.0) 291.5 46 115 29 17 23 13 6.5 6.0 5.1 17.6 5.4 18.9 0.1 0.2 0.3 3.2 Consumer Staples Attractive 14,103 188.0 13.0 2.2 23.6 44 43 35 31 30 25 11.4 8.5 7.9 26 19.6 23 1.8 1.8 2.2 516 Diversified Financials Bajaj Finance REDUCE 3,464 2,800 (19) 2,087 27.8 600 104 74 131 49 (28) 77 33 47 26 — — — 6.4 5.7 4.8 20 13.0 19.8 0.3 0.2 0.4 465 Bajaj Finserv BUY 6,467 7,600 18 1,029 13.7 159 212 252 402 5 19 60 31 26 16.1 — — — 3.3 2.9 2.5 12.2 12.1 16.8 0.2 0.2 0.2 98 Cholamandalam BUY 209 300 44 171 2.3 820 12.8 13.9 20.2 (15) 8.5 45.0 16.3 15.0 10.3 — — — 2.2 2.1 1.7 14.7 13.1 16.7 0.8 0.7 1.1 38 IIFL Wealth ADD 1,059 1,200 13 92 1.2 88 23.8 37.0 53.7 (47) 55.8 45.1 45 29 19.7 — — — 3.1 3.0 2.9 7.0 10.7 15.1 0.9 2.3 3.3 0.3 L&T Finance Holdings ADD 63 90 42 127 1.7 2,005 8 5 9 (24.1) (44) 84.9 7.5 13.4 7.3 — — — 0.9 0.8 0.8 14.7 6.3 10.9 3.0 2.3 2.6 17.9 LIC Housing Finance ADD 260 350 35 131 1.7 505 47.6 36.2 66.6 4 (24.0) 84.1 5.5 7.2 3.9 — — — 0.8 0.9 0.7 13.9 9.6 16.0 3.1 2.3 4.3 24 Muthoot Finance ADD 1,217 1,025 (16) 488 6.5 401 75 69 85 52.3 (7) 22.8 16.2 17.5 14.3 — — — 4.2 3.6 3.0 28 22 23 1.2 1.1 1.4 51 Shriram City Union Finance BUY 664 1,250 88 44 0.6 66 152 84 158 1.2 (44) 87.1 4.4 7.9 4.2 — — — 0.6 0.6 0.5 14.7 7.5 12.8 0.9 1.6 3.6 0.6 Shriram Transport BUY 677 1,050 55 154 2.0 227 110.3 81.7 119.0 (2) (25.9) 45.6 6.1 8.3 5.7 — — — 0.9 0.8 0.7 14.8 9.9 13.0 0.7 1.8 2.6 55 Diversified Financials Attractive 7,577 101.0 32.3 (24.5) 42.0 18.5 25 17.3 2.8 2.8 2.4 15.1 11.2 14.2 0.9 0.9 1.1 951 Source: Company, Bloomberg, Kotak Institutional Equities estimates 110 110 KOTAK INSTITUTIONAL EQUITIES RESEARCH Kotak Institutional Equities: Valuation summary of KIE Universe stocks 111 Fair O/S ADVT Price (Rs) Value Upside Mkt cap. shares EPS (Rs) EPS growth (%) P/E (X) EV/EBITDA (X) P/B (X) RoE (%) Dividend yield (%) 3mo Company Rating 7-Aug-20 (Rs) (%) (Rs bn) (US$ bn) (mn) 2020 2021E 2022E 2020 2021E 2022E 2020 2021E 2022E 2020 2021E 2022E 2020 2021E 2022E 2020 2021E 2022E 2020 2021E 2022E (US$ mn) Electric Utilities CESC BUY 581 810 39 77 1.0 133 99 102 114 9 3.3 11.8 5.9 5.7 5.1 5.1 4.8 4.3 0.6 0.6 0.5 10.7 10.4 10.7 2.2 2.2 2.2 3.8 JSW Energy BUY 48 65 35 79 1.1 1,640 6.3 4.8 5.3 49 (25) 11.6 7.6 10.1 9.0 5.3 5.2 4.5 0.7 0.6 0.6 8.9 6.5 6.8 3— — — 1.7 NHPC ADD 20 26 27 205 2.7 10,045 2.8 3.0 3.2 10.7 6 8.7 7.3 6.9 6.3 7.4 8.0 7.2 0.7 0.6 0.6 9.2 9.3 9.7 7.2 8.5 9.2 1.4 NTPC BUY 86 140 63 849 11.3 9,895 11.1 13.2 15.4 (0.9) 18.7 16.8 7.7 6.5 5.6 9.6 7.5 5.9 0.7 0.7 0.6 10.0 11.1 11.9 3.7 4.6 5.4 21 Power Grid BUY 176 220 25 920 12.3 5,232 20.7 22 25 9 6.3 16.1 8.5 8.0 6.9 6.8 6.5 5.8 1.4 1.3 1.2 17.5 17.0 18.1 5.7 6.0 7.0 27 Tata Power BUY 50 55 11 134 1.8 2,705 4.4 4.9 6.5 110 11 31.8 11.2 10.0 7.6 7.4 6.5 5.9 0.7 0.7 0.6 6.9 7.1 8.7 — — — 22 Electric Utilities Attractive 2,265 30.2 8.2 9.8 16.1 8.0 7.3 6.3 0.9 0.8 0.8 11.2 11.4 12.3 4.5 5.0 5.8 77 Fertilizers & Agricultural Chemicals Bayer Cropscience SELL 6,138 3,400 (45) 276 3.7 45 129.3 134.2 149.9 64.7 3.8 11.7 47 46 41 37 33 29 10.7 9.0 7.7 24 21 20 0.4 0.4 0.5 2.7 Dhanuka Agritech SELL 782 650 (17) 37 0.5 48 29.7 37.0 40.8 25.7 24.4 10.4 26.3 21.2 19.2 21.0 15.8 14.0 5.3 4.4 3.8 21 23 21 3.1 1.2 1.6 1.6 Godrej Agrovet SELL 465 420 (10) 89 1.2 192 11.5 14.9 17.5 0.8 29.1 17 40 31 27 23 16 14 4.0 3.7 3.3 10.4 12.3 13.0 1.2 1.1 1.3 1.7 Rallis India SELL 304 265 (13) 59 0.8 195 9.0 11.3 14.8 7.4 25.0 30.9 33.5 26.8 20.5 22.9 18.0 14.1 4.2 3.7 3.3 13.1 14.7 17.0 0.8 0.9 1.0 4.2 UPL SELL 480 390 (19) 367 4.9 765 23.2 31.9 36.5 22.7 37.6 14.2 21 15.0 13.2 9.1 7.8 7.1 2.3 2.0 1.8 11.5 14.2 14.6 1.2 1.7 2.0 40 Fertilizers & Agricultural Chemicals Cautious 1,124 15.0 24.6 31.8 16.7 34 25 21.8 15.1 12.5 11.1 4.4 3.8 3.4 13.0 15.1 15.5 0.8 0.9 1.1 56 Gas Utilities GAIL (India) BUY 97 150 55 437 5.8 4,510 13.2 9.5 11.6 (5.5) (28.2) 22.2 7.4 10.2 8.4 5.6 7.4 6.0 1.0 0.9 0.9 13.5 9.4 10.9 6.6 4.1 5.2 22 GSPL SELL 208 200 (4) 117 1.6 564 17.2 13.2 11.8 21.9 (23.1) (10.6) 12.1 15.7 17.6 5.5 6.4 6.7 1.7 1.6 1.5 15.5 10.6 8.7 1.0 1.0 1.1 2.5 Indraprastha Gas SELL 388 380 (2) 272 3.6 700 16.7 16.0 20.8 38.6 (4.1) 29.8 23.3 24.3 18.7 16.4 17.0 13.1 5.4 4.6 4.0 25 20 23 0.7 0.7 1.1 26 Mahanagar Gas ADD 969 1,175 21 96 1.3 99 74.6 61.9 82.8 32.8 (17.1) 33.9 13.0 15.7 11.7 8.9 10.2 7.4 3.2 2.9 2.6 28 19.6 24 3.6 3.1 4.6 13.7 Petronet LNG BUY 245 300 23 367 4.9 1,500 17.6 18.7 22.2 17.3 6.2 18.5 13.9 13.1 11.0 7.7 7.3 6.3 3.3 3.2 3.0 25 25 28 5.1 5.8 7.3 12.9 Gas Utilities Attractive 1,288 17.2 6.8 (16.7) 20.2 11.2 13.5 11.2 7.3 8.4 7.0 1.8 1.7 1.6 16.5 12.8 14.3 4.2 3.5 4.5 77 Health Care Services Apollo Hospitals BUY 1,743 1,700 (2) 243 3.2 139 18.4 1 44 9 (97) 6,877 94.5 2,788.2 40.0 17.2 26.4 15.2 7.3 7.3 6.5 7.7 0.3 17.2 0.7 0.0 1.0 22 Dr Lal Pathlabs SELL 1,903 1,300 (32) 159 2.1 83 27.1 26.7 37.2 13.4 (1.4) 39.2 70.3 71.3 51.2 44.0 44.6 31.3 15.4 13.4 11.3 23 20 24 0.4 0.4 0.6 3.4 HCG BUY 129 140 9 11 0.2 143 (12.0) (8.7) (2.4) (258) 28 73 NM NM NM 10.5 9.5 5.3 3.0 1.9 2.0 NM NM NM — — — 0.7 Metropolis Healthcare SELL 1,656 1,300 (22) 84 1.1 51 30.0 28.9 40.1 25.3 (3.6) 39 55.2 57.3 41.3 35.1 34.2 25.6 16.0 13.6 11.2 32 26 30 0.5 0.5 0.7 3.7 Narayana Hrudayalaya BUY 304 345 13 62 0.8 204 5.8 -7.4 7.6 101.0 (228) 202 52.3 NM 40.1 16.0 57.4 13.5 5.5 6.3 5.5 10.7 NM 14.6 — — — 0.8 Health Care Services Attractive 623 8.3 3 (90) 1,701 66.0 674.5 37.4 17.0 23.5 13.7 6.4 6.0 5.4 9.7 0.9 14.4 0.4 0.2 0.6 31 Hotels & Restaurants Jubilant Foodworks ADD 1,872 1,750 (7) 247 3.3 133 24 9 30 (2) (62.3) 240 79.4 210.7 61.9 27.4 35.7 21.6 21.9 21.5 16.5 26 10.3 30 0.3 0.2 0.5 29 Lemon Tree Hotels BUY 24 38 60 19 0.3 790 -0.1 -0.9 0.6 (118) (655) 161 NM NM 43.0 14.0 28.8 11.1 2.3 2.5 2.4 NM NM 5.7 — 0.0 0.9 1.4 Hotels & Restaurants Attractive 266 3.5 (18) (85) 868 87.8 575.5 59.4 24.5 34.7 19.4 13.6 13.9 11.6 15.5 2.4 19.6 0.3 0.1 0.6 31 Insurance HDFC Life Insurance REDUCE 607 560 (8) 1,226 16.3 2,010 6.4 6.8 7.4 1.4 5.8 8.2 94 89 82 — — — 17.4 16.0 14.7 20 18.8 18.7 0.0 0.3 0.3 45 Daily Summary India ICICI Lombard SELL 1,356 950 (30) 616 8.2 454 26.3 31.9 35.8 14 21 12 52 43 38 — — — 10.0 8.3 7.1 21 21 20 0.3 0.2 0.5 17.6 ICICI Prudential Life BUY 470 500 6 675 9.0 1,436 7.4 8.5 9.6 (6) 14.4 13.2 63 55 49 — — — 9.0 7.9 7.0 14.8 15.2 15.2 0.1 0.3 0.3 16.5 Max Financial Services NR 536 - (100) 144 1.9 343 10.1 9.5 26.7 452 (6) 180 53 56 20 — — — — — — 12.7 13.5 38 — 0.2 1.2 11.1 SBI Life Insurance BUY 869 1,050 21 869 11.6 1,001 14.2 15.5 16.6 7.2 8.9 7.4 61 56 52 — — — 10.9 9.4 8.1 18.4 18.0 16.7 — 0.3 0.3 17.5 Insurance Attractive 3,530 47.1 8.4 12.8 21.3 67.3 59.6 49 11.4 10.0 8.2 17.0 16.7 16.7 0.0 0.2 0.2 107 Source: Company, Bloomberg, Kotak Institutional Equities estimates KOTAK INSTITUTIONAL EQUITIES RESEARCH EQUITIES INSTITUTIONAL KOTAK - August 10, August2020 10, KOTAK INSTITUTIONAL EQUITIES RESEARCH 111 Kotak Institutional Equities: Valuation summary of KIE Universe stocks India Daily Summary Daily Summary India Fair O/S ADVT Price (Rs) Value Upside Mkt cap. shares EPS (Rs) EPS growth (%) P/E (X) EV/EBITDA (X) P/B (X) RoE (%) Dividend yield (%) 3mo Company Rating 7-Aug-20 (Rs) (%) (Rs bn) (US$ bn) (mn) 2020 2021E 2022E 2020 2021E 2022E 2020 2021E 2022E 2020 2021E 2022E 2020 2021E 2022E 2020 2021E 2022E 2020 2021E 2022E (US$ mn) KOTAK INSTITUTIONAL EQUITIES RESEARCH EQUITIES INSTITUTIONAL KOTAK Internet Software & Services Info Edge SELL 3,313 2,185 (34) 406 5.4 122.3 26.9 19.8 36.7 4.2 (26.5) 85.4 123.1 167.5 90.4 97.5 146.5 72.6 16.7 15.5 13.7 13.8 9.6 16.1 0.2 0.1 0.3 18.1 Just Dial ADD 380 400 5 25 0.3 61.8 42.0 24.7 29.9 31.4 (41.1) 21.0 9.1 15.4 12.7 3.4 8.0 5.5 1.9 1.9 1.7 24 12.2 14.1 — — — 14.8 Internet Software & Services Cautious 431 5.7 15.2 (34.4) 60.5 71.6 109.2 68.0 59.5 98.2 56.5 11.6 11.2 9.9 16.2 10.3 14.5 0.2 0.1 0.3 33 IT Services HCL Technologies ADD 690 770 12 1,873 25.0 2,716 40.8 42.2 46.4 11.4 3.4 9.9 16.9 16.4 14.9 10.7 9.7 8.6 3.9 3.1 2.7 24 21 19.7 0.7 1.5 2.0 51 Hexaware Technologies REDUCE 393 375 (5) 118 1.6 302 21.2 23.3 24.6 9.9 9.7 5.8 18.6 16.9 16.0 13.6 11.2 9.9 4.3 3.7 3.2 25 23 22 2.2 2.0 2.5 5.5 Infosys BUY 951 1,110 17 4,050 54.0 4,259 38.9 40.5 45.2 10.0 4.0 11.7 24.4 23.5 21.0 17.4 15.6 13.9 6.2 5.7 5.2 25 25 26 1.8 2.7 3.2 142 L&T Infotech ADD 2,468 2,800 13 430 5.7 176 86.6 91.0 110.6 0 5.1 21.5 28.5 27.1 22.3 20.4 17.5 15.2 8.0 6.9 5.8 30 27 28 1.1 1.3 1.4 5.0 Mindtree REDUCE 1,152 980 (15) 190 2.5 165 38.3 54.9 62.5 (16) 43 14 30.1 21.0 18.4 16.7 12.5 10.9 6.0 5.1 4.3 19.5 26 25 2.6 1.4 1.6 16.5 Mphasis REDUCE 1,164 1,100 (6) 217 2.9 187 63.5 64.3 70.6 13 1.1 9.9 18.3 18.1 16.5 12.5 11.7 10.3 3.7 3.4 3.1 21 19.6 19.6 3.0 3.0 3.0 5.9 TCS REDUCE 2,295 2,320 1 8,613 114.8 3,752 86.2 83.6 94.1 4 (3.0) 12.5 26.6 27.4 24.4 19.4 19.3 17.4 10.0 9.3 8.6 36 35 37 2.9 2.9 3.3 115 Tech Mahindra BUY 662 845 28 577 7.7 880 45.9 40.8 51.3 (3.9) (11.0) 25.7 14.4 16.2 12.9 9.0 8.9 6.9 2.7 2.4 2.2 19.2 15.7 17.9 2.3 2.3 2.6 43 - Wipro ADD 277 285 3 1,585 21.1 5,703 16.6 17.0 18.2 11.1 2.4 7.1 16.7 16.3 15.2 10.6 9.8 8.9 2.9 2.5 2.3 17.3 16.2 15.7 0.5 0.7 3.1 42 IT Services Attractive 17,654 235.3 4.3 0.1 12.0 22.7 22.7 20.3 15.8 14.9 13.3 6.0 5.3 4.9 26 23 24 2.2 2.4 3.0 426 August2020 10, Media DB Corp. REDUCE 74 81 9 13 0.2 175 15.7 5.3 14.1 0.4 (66.5) 166.7 4.7 14.0 5.3 2.8 4.5 2.2 0.8 0.7 0.8 15.7 5.4 14.3 16.9 2.7 16.2 0.4 Jagran Prakashan REDUCE 38 37 (2) 11 0.1 281 7.0 3.9 7.3 (20.9) (44) NA 5.4 9.6 NA 1.6 2.0 NA 0.6 0.5 NA 10.3 5.7 10.3 11.9 5.3 13.2 0.4 PVR BUY 1,128 1,625 44 58 0.8 51 29.0 -32.7 59.3 (33) (213) 281 38.9 NM 19.0 11.8 34.9 7.9 2.6 3.3 2.9 8.5 NM 16.2 0.2 (0.3) 0.5 39 Sun TV Network REDUCE 394 435 10 155 2.1 394 35.5 34.9 39.7 (2) (1.6) 13.6 11.1 11.3 9.9 7.6 7.2 6.4 2.7 2.7 2.5 25 24 26 6.3 6.3 7.0 14.4 Zee Entertainment Enterprises REDUCE 150 145 (3) 144 1.9 960 11.1 11.2 15.2 (32.5) 0.0 36.7 13.5 13.5 9.8 8.1 7.9 5.9 1.5 1.5 1.4 11.7 11.2 14.5 2.3 3.7 3.7 61 Media Cautious 381 5.1 (17.7) (19.6) 52.4 12.3 15.3 10.1 7.3 8.3 5.8 1.8 1.8 1.7 14.8 11.8 16.9 4.4 4.2 5.2 115 Metals & Mining Hindalco Industries BUY 178 225 27 399 5.3 2,220 17.8 10.5 20.0 (28.2) (41.1) 91 10.0 17.0 8.9 5.5 6.9 5.1 0.7 0.7 0.6 6.8 3.9 7.1 0.6 0.6 0.6 35 Hindustan Zinc BUY 253 290 15 1,069 14.2 4,225 16.1 15.3 20.1 (14.5) (5.0) 31.5 15.7 16.5 12.6 9.6 9.4 7.2 2.7 3.2 3.2 18.4 17.5 25 6.5 6.0 8.0 4.9 Jindal Steel and Power BUY 199 270 35 203 2.7 1,020 (7.7) 8.6 19.0 (343) 213 120 NM 23.1 10.5 7.2 6.0 5.0 0.6 0.6 0.6 NM 2.7 5.7 — — — 36 JSW Steel ADD 240 260 8 581 7.7 2,402 10.1 7.0 22.1 (68.3) (31) 216.0 23.8 34.4 10.9 10.0 9.8 6.2 1.6 1.5 1.4 6.8 4.5 13.2 0.9 0.9 0.9 32 National Aluminium Co. SELL 35 24 (31) 65 0.9 1,866 0.7 (0.4) 1.4 (91) (154) 461.1 47.1 NM 24.1 8.6 15.8 7.3 0.7 0.7 0.6 1.4 NM 2.7 4.3 0.0 2.1 7.3 NMDC ADD 89 105 18 273 3.6 3,062 14.6 11.9 11.1 (0.7) (18.8) (7) 6.1 7.5 8.1 4.2 5.2 5.6 1.0 0.9 0.9 16.7 12.8 11.2 6.2 6.7 6.2 7.8 Tata Steel BUY 404 475 18 459 6.1 1,146 35.2 (12.2) 71.2 (61) (135) 684 11.5 NM 5.7 8.5 9.6 5.2 0.6 0.7 0.6 5.9 NM 11.5 2.5 2.0 3.1 68 Vedanta BUY 123 120 (2) 456 6.1 3,717 6.5 5.5 12.3 (57) (16) 125.0 18.8 22.4 10.0 4.9 6.4 4.8 0.8 0.9 0.9 4.2 3.8 8.7 3.2 9.9 6.9 42 Metals & Mining Attractive 3,506 46.7 (45.5) (33.8) 136.1 14.9 22.6 9.6 7.0 7.9 5.6 1.1 1.1 1.0 7.1 4.8 10.6 3.5 4.1 4.5 44 Source: Company, Bloomberg, Kotak Institutional Equities estimates 112 112 KOTAK INSTITUTIONAL EQUITIES RESEARCH Kotak Institutional Equities: Valuation summary of KIE Universe stocks Fair O/S ADVT 113 Price (Rs) Value Upside Mkt cap. shares EPS (Rs) EPS growth (%) P/E (X) EV/EBITDA (X) P/B (X) RoE (%) Dividend yield (%) 3mo Company Rating 7-Aug-20 (Rs) (%) (Rs bn) (US$ bn) (mn) 2020 2021E 2022E 2020 2021E 2022E 2020 2021E 2022E 2020 2021E 2022E 2020 2021E 2022E 2020 2021E 2022E 2020 2021E 2022E (US$ mn) Oil, Gas & Consumable Fuels BPCL BUY 420 440 5 911 12.1 1,967 11 26 33 (71.0) 144.2 28.4 39.9 16.3 12.7 22.1 11.6 9.7 2.5 2.3 2.1 5.9 14.7 17.4 3.9 3.1 3.9 59.6 Coal India BUY 130 215 66 800 10.7 6,163 27 20 20 (4) (24.7) (3.2) 4.8 6.4 6.6 3.7 5.6 5.2 2.5 2.5 2.5 57.0 38.9 37.6 11.6 15.4 15.4 20.0 HPCL BUY 214 260 22 325 4.3 1,524 7 34 29 (82.0) 371.9 (13.2) 29.9 6.3 7.3 18.3 7.3 7.5 1.1 1.0 1.0 3.8 17.0 13.7 4.6 7.9 6.9 23.7 IOCL BUY 86 110 27 813 10.8 9,181 (3.9) 9.6 12.9 (121.9) 343.8 34.3 NM 9.0 6.7 23.1 6.0 5.2 0.8 0.8 0.8 NM 9.2 11.6 4.9 5.0 6.7 28.2 Oil India SELL 95 70 (26) 103 1.4 1,084 21 3 6 (32) (85.6) 105.7 4.6 31.8 15.5 3.3 8.7 7.5 0.4 0.4 0.4 8.6 1.3 2.7 11.2 1.3 2.6 2.1 ONGC SELL 79 60 (24) 989 13.2 12,580 13 4 7 (43) (71.7) 89.6 5.8 20.6 10.9 2.7 4.6 3.7 0.4 0.4 0.4 7.3 2.1 3.8 6.4 2.4 3.9 22.6 Reliance Industries ADD 2,146 2,150 0 12,722 169.6 5,926 67 67 93 1.2 (0.1) 40.0 32.2 32.2 23.0 18.3 15.1 10.3 2.8 2.5 2.3 9.4 8.3 10.8 0.3 0.3 0.3 582.6 Oil, Gas & Consumable Fuels Attractive 16,663 222.1 (37.3) 1.7 36.4 22.2 21.9 16.0 11.6 10.5 7.9 1.9 1.7 1.6 8.4 8.0 9.7 1.7 1.7 1.9 738.8 Pharmaceuticals Aurobindo Pharma REDUCE 906 730 (19) 531 7.1 586 48 51 56 19.3 6 8.8 18.8 17.7 16.3 11.4 10.7 9.4 3.2 2.7 2.4 16.8 15.5 14.8 0.4 0.8 1.0 51.7 Biocon SELL 399 225 (44) 479 6.4 1,202 6.2 8.2 10.1 2 32 22.7 64 49 40 29.9 21.9 17.8 6.5 5.9 5.3 10.6 12.1 13.3 0.2 0.7 0.9 40.6 Cipla BUY 729 840 15 588 7.8 806 19.2 28 33 1.1 47 16 38 25.8 22.1 18.5 14.3 12.3 3.7 3.3 2.9 9.9 12.7 13.3 1.1 0.7 0.9 67.5 Dr Reddy's Laboratories SELL 4,574 3,400 (26) 760 10.1 166 130 155 201 30 19 29.7 35 29.5 22.7 18.5 16.1 12.6 4.9 4.3 3.7 13.9 14.6 16.3 0.5 0.5 0.7 67.0 Laurus Labs REDUCE 1,023 870 (15) 110 1.5 107 23.9 54.6 55 117.9 129 1 43 18.7 18.5 21.3 12.1 11.3 6.2 4.6 3.7 15.3 24.8 20.1 (0.4) — — 23.1 Lupin ADD 880 900 2 399 5.3 450 22 28 44 3.6 30 54 40 31 20.2 15.7 13.4 9.4 3.1 2.9 2.6 7.4 9.3 12.8 0.7 0.5 0.7 37.5 Sun Pharmaceuticals REDUCE 526 510 (3) 1,262 16.8 2,406 16.7 19.7 23 3.8 18 17 31 27 22.8 16.8 14.6 12.3 2.8 2.7 2.5 9.3 10.2 11.3 1.3 0.2 0.9 73.4 Torrent Pharmaceuticals REDUCE 2,941 2,450 (17) 498 6.6 169 57 72 89 22.6 25 24 51 41 33 24.2 20.6 17.6 10.3 8.9 7.5 20.1 21.7 22.8 1.4 0.8 1.0 31.3 Pharmaceuticals Attractive 4,626 61.7 12.5 23 21 34 28 23.0 17.7 15.0 12.4 3.8 3.5 3.1 11.2 12.7 13.6 0.8 0.5 0.8 392.1 Real Estate Brigade Enterprises BUY 139 235 69 28 0.4 204 6.4 7 15 (46) 6 114 21.7 20.4 9.5 10.3 9.5 4.9 1.2 1.2 1.1 5.9 6.0 12.0 1.8 1.8 1.8 0.7 DLF BUY 142 200 41 351 4.7 2,475 (2.4) 5.0 8.7 (140) 310 74 NM 28.4 16.3 34.0 39.3 22.8 1.0 1.0 1.0 NM 3.6 6.0 — 1.4 1.4 21.3 Embassy Office Parks REIT ADD 379 400 6 293 3.9 772 9.9 13.1 15.0 110 32 14 38 29 25 18.5 17.0 15.6 1.3 1.4 1.5 3.4 4.6 5.6 6.4 7.0 7.8 7.7 Godrej Properties SELL 888 690 (22) 224 3.0 252 10.7 11.9 15.4 (2.7) 11 29.4 83 75 58 69.1 83.8 145.0 4.7 4.4 4.1 7.4 6.0 7.3 — — — 6.7 Oberoi Realty ADD 369 450 22 134 1.8 364 19 22 28 (15.7) 14.1 29 19.4 17.0 13.2 14.3 13.5 11.4 1.6 1.4 1.3 8.3 8.8 10.3 0.5 0.5 0.5 1.8 Prestige Estates Projects ADD 225 275 22 90 1.2 401 10.9 6.6 10 25.1 (39) 54 21 34 22.0 7.1 7.7 6.5 1.6 1.6 1.5 8.7 4.9 7.2 0.7 0.7 0.7 2.5 Sobha BUY 222 415 87 21 0.3 95 30 36 45 (5) 21.5 24.1 7.5 6.2 5.0 4.6 4.1 3.7 0.9 0.8 0.7 12.1 13.4 14.8 3.1 3.1 3.1 1.0 Sunteck Realty BUY 234 300 28 34 0.5 140 7.1 8.8 18 (55.9) 23 105 33 26.5 12.9 24.7 20.8 11.6 1.1 1.1 1.0 3.5 4.2 8.1 0.4 0.4 0.4 2.3 Real Estate Attractive 1,175 15.7 (46.2) 103.7 44.9 57 28 19.3 16.6 16.3 13.0 1.4 1.4 1.3 2.5 5.0 7.0 1.8 2.4 2.6 44.0 Retailing Aditya Birla Fashion and Retail BUY 121 150 24 100 1.3 773 (2.1) (4.2) 2.7 (151.4) (96.4) 165.1 NM NM 44 10.3 13.4 8.0 8.6 12.2 9.6 NM NM 24.3 — — — 3.9 Avenue Supermarts SELL 2,138 1,480 (31) 1,385 18.5 648 21.0 20 39 45.1 (4.4) 92.8 102 107 55 64 70 37 12.1 11.2 9.3 15.8 11.1 18.4 — — — 21.4 Titan Company BUY 1,091 1,215 11 969 12.9 888 16.8 10 21 (0.2) (38.6) 102.8 65 106 52 39 58 33 14.5 13.2 11.2 23.4 13.1 23.3 0.4 0.3 0.5 54.0 Retailing Attractive 2,453 32.7 (2.8) (28.4) 141.8 93 130 54 42 54 30 13.0 12.0 10.0 14.0 9.2 18.7 0.1 0.1 0.2 79.3 Speciality Chemicals Daily Summary India Castrol India BUY 121 165 36 120 1.6 989 8.4 5.1 8.9 16.8 (39.5) 75.0 14.5 24.0 13.7 9.6 15.6 9.2 8.8 8.7 8.5 65.3 36.5 63.0 4.5 4.1 7.0 2.3 Pidilite Industries REDUCE 1,378 1,400 2 700 9.3 508 23.1 18 28 30.1 (20.4) 54.9 60 75 49 44 52 34 15.7 14.0 12.0 27.2 19.7 26.7 0.5 0.5 0.7 18.1 S H Kelkar and Company BUY 80 95 19 11 0.2 141 4.6 4.6 6.2 (24.3) (1.0) 35.8 17.2 17.4 12.8 8.9 8.6 6.7 1.4 1.3 1.2 7.8 7.6 9.8 2.5 1.3 2.2 2.0 SRF ADD 4,081 4,000 (2) 235 3.1 57 138 150 193 23.5 8.7 28.4 29.6 27.2 21.2 18.1 15.9 12.8 4.8 4.1 3.5 17.5 16.2 17.8 0.3 0.4 0.5 14.3 Speciality Chemicals Attractive 1,066 14.2 22.1 (17.4) 49.0 37 45 30.3 24.8 27.9 19.6 9.2 8.2 7.2 24.7 18.2 23.6 0.9 0.9 1.4 36.7 Source: Company, Bloomberg, Kotak Institutional Equities estimates KOTAK INSTITUTIONAL EQUITIES RESEARCH EQUITIES INSTITUTIONAL KOTAK - August 10, August2020 10, KOTAK INSTITUTIONAL EQUITIES RESEARCH 113 Kotak Institutional Equities: Valuation summary of KIE Universe stocks India Daily Summary Daily Summary India Fair O/S ADVT Price (Rs) Value Upside Mkt cap. shares EPS (Rs) EPS growth (%) P/E (X) EV/EBITDA (X) P/B (X) RoE (%) Dividend yield (%) 3mo Company Rating 7-Aug-20 (Rs) (%) (Rs bn) (US$ bn) (mn) 2020 2021E 2022E 2020 2021E 2022E 2020 2021E 2022E 2020 2021E 2022E 2020 2021E 2022E 2020 2021E 2022E 2020 2021E 2022E (US$ mn) KOTAK INSTITUTIONAL EQUITIES RESEARCH EQUITIES INSTITUTIONAL KOTAK Telecommunication Services Bharti Airtel BUY 561 710 27 3,059 40.8 5,456 (6.7) 4.8 13.8 NM NM NM NM 116.7 40.5 10.8 8.4 6.9 4.0 5.0 4.8 NM 3.8 12.1 0.4 1.1 1.1 175.7 Bharti Infratel ADD 193 215 12 356 4.7 1,850 16.5 16.3 17.5 25.7 (1.1) 7.4 11.7 11.8 11.0 4.9 4.6 4.4 2.6 2.6 2.6 21.7 22.2 23.7 5.6 8.3 8.8 31.4 Vodafone Idea RS 9 — — 254 3.4 28,735 (12.4) (7.3) (6.3) NM NM NM NM NM NM 8.1 10.0 8.0 4.3 -1.1 (0.6) NM 251 57 — — — 88 Tata Communications BUY 814 975 20 232 3.1 285 16.0 29.9 37.3 50.9 87.3 24.5 50.9 27.2 21.8 10.0 7.7 6.6 NM NM 58.4 NM NM NM 0.5 0.5 0.7 1.5 Telecommunication Services Attractive 3,902 52.0 NM 59.4 56.4 NM NM NM 9.4 8.3 6.9 4.1 7.7 10.4 NM NM NM 0.8 1.6 1.7 296.9 Transportation Adani Ports and SEZ BUY 327 390 19 664 8.8 2,032 26.9 18.7 21.9 34.7 (30.5) 16.9 12.1 17.5 14.9 11.7 12.6 10.8 2.6 2.3 2.0 21.8 14.0 14.5 3.9 1.0 1.0 18.3 Container Corp. SELL 456 390 (14) 278 3.7 609 17.3 8.0 13.0 5.7 (53.6) 62.2 26 57 35 15.3 27.0 18.6 2.8 2.7 2.6 10.3 4.8 7.6 0.7 1.0 1.5 12.5 Gateway Distriparks BUY 82 135 65 9 0.1 125 4.2 4.2 3.6 (37.5) 0.4 (15.1) 19.4 19.3 22.8 6.8 5.5 5.8 0.7 0.7 0.7 3.5 3.8 3.0 4.2 3.7 3.7 0.2 GMR Infrastructure BUY 21 26 23 128 1.7 7,147 (3.1) (1.8) (0.8) (25.4) 40.9 55.9 NM NM NM 16.2 18.8 16.9 (4.7) (7.6) (5.9) 106.6 55.8 25.2 — — — 4.1 Gujarat Pipavav Port BUY 76 111 46 37 0.5 483 6.0 4.5 5.8 42.2 (24.9) 27.3 12.5 16.7 13.1 6.8 7.2 6.2 1.8 1.8 1.8 14.2 10.6 13.5 7.4 5.6 7.1 0.8 InterGlobe Aviation SELL 939 900 (4) 361 4.8 383 (6.5) (200.9) 62.1 (258.9) (2,999.1) 130.9 NM NM 15.1 4.0 (6.3) 1.8 6.1 (52.1) 1.8 NM NM 477.2 — — — 39 Mahindra Logistics ADD 294 305 4 21 0.3 71 8.9 5.3 10.9 (29.0) (40.8) 106.4 33 56 27 13.6 16.8 11.2 3.9 3.7 3.3 12.2 6.7 12.9 — — — 0.3 - Transportation Attractive 1,497 20.0 17.6 (191.6) 269.0 31 NM 20.1 10.6 22.9 8.9 3.5 3.7 3.2 11.2 NM 16.1 2.1 0.8 0.9 75 August2020 10, KIE universe 115,759 1543.0 (14.2) 6.6 47.0 30 27.7 18.8 13.0 12.9 9.9 2.7 2.5 2.3 9.2 9.1 12.2 1.4 1.5 1.9 Notes: (a) We have used adjusted book values for banking companies. (b) 2020 means calendar year 2019, similarly for 2021 and 2022 for these particular companies. (c) Exchange rate (Rs/US$)= 75.03 Source: Company, Bloomberg, Kotak Institutional Equities estimates 114 114 KOTAK INSTITUTIONAL EQUITIES RESEARCH Disclosures of of the following trategic transaction As of June 30, 2020 n a merger or s any, noare longer in effect for this stock , if, fair value KOTAK INSTITUTIONAL EQUITIES RESEARCH , any, if for this stock,because is there notsufficient a fair valuefair . Percentage of companies covered by Kotak Institutional Equities, the specifiedwithin category. Percentage of companies each within category for which Kotak Institutional Equities and or its affiliates has provided investment banking services the previouswithin months.12 * The above categories are defined as follows: Buy = We expect this stock to deliver more returns than 15% over the next months;12 Add = We expect this stock to deliver returns 5-15% over the next months;12 Reduce = We expect this stock to deliver returns over -5-+5% the next months;12 Sell = We expect this stock to deliver less returns overthan -5% the next months.12 Our target prices are also on a horizon 12-month basis. These ratings are used illustratively to comply with applicable regulations. As of 30/06/2020 Kotak Institutional Equities Investment Research had investment ratings on 203 equity securities. luded r r display is not or applicable. months. . The previous investment and rating SELL 1.5% 19.2% fair valuefair term volatility in stock prices related to movements in the market.Hence, a particular Ratingmay not , if, any,have been suspended temporarily.Such suspension is in compliance with applicable regulation(s) - 0.5% 11.8% fair valuefair +5% returns over the next 12 months. - REDUCE month horizon basis. 5 - - 15% returns over the next 12 5% returns over the next months.12 The information is not available fo - - ake into account short ADD 23.6% 0.5% Kotak SecuritiesKotak has suspended coverage of this company. are also on12 a Kotak SecuritiesKotak Research has suspended the investment and rating The information is not meaningful and is therefore exc Kotak SecuritiesKotak does not cover this company. The investment and rating The coverage view represents each analyst’s fundamental overall outlook on the Sector.The coverage viewwill consist of one Attractive, Neutral, Cautious. BUY 4.4% 45.3% We expect this stock to deliver We this expect stock to deliver 5 We expect this to stock deliver < We expect this to stock deliver more than 15% returns over the next months.12 Fair Value estimates 0% 50% 40% 30% 20% 10% 70% 60% Source: Kotak Institutional Equities Kotak Institutional Equities Research coverage universe coverage Research Equities Institutional Kotak Distribution of ratings/investment banking relationships fundamental basis for determining an investment rating or and shouldnot be relied upon. = NA AvailableNot or Applicable.Not = NM Meaningful.Not NR = Rated.Not and/or Kotak Securities policies in circumstances when Securities Kotak or its affiliates is acting in an advisory capacity i involving this company and in certain other circumstances. CS = Coverage Suspended. = NC Covered.Not = RatingRS Suspended. Other definitions Other Coverage view. designations: ratings/identifiers Other REDUCE. SELL. Our Our Ratings System notdoes t strictly be in accordance with the Rating System all at times. Ratings other and definitions/identifiers ratings of Definitions BUY. ADD. 115 Disclosures Corporate Office Overseas Affiliates Kotak Securities Ltd. Kotak Mahindra (UK) Ltd Kotak Mahindra Inc 27 BKC, Plot No. C-27, “G Block” 8th Floor, Portsoken House 369 Lexington Avenue Bandra Kurla Complex, Bandra (E) 155-157 Minories 28th Floor, New York Mumbai 400 051, India London EC3N 1LS NY 10017, USA Tel: +91-22-43360000 Tel: +44-20-7977-6900 Tel:+1 212 600 8856 Copyright 2020 Kotak Institutional Equities (Kotak Securities Limited). All rights reserved. 1. Note that the research analysts contributing to this report may not be registered/qualified as research analysts with FINRA; and 2. Such research analysts may not be associated persons of Kotak Mahindra Inc and therefore, may not be subject to NASD Rule 2711 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account. 3. Any U.S. recipients of the research who wish to effect transactions in any security covered by the report should do so with or through Kotak Mahindra Inc and (ii) any transactions in the securities covered by the research by U.S. recipients must be effected only through Kotak Mahindra Inc at [email protected]. This report is distributed in Singapore by Kotak Mahindra (UK) Limited (Singapore Branch) to institutional investors, accredited investors or expert investors only as defined under the Securities and Futures Act. Recipients of this analysis / report are to contact Kotak Mahindra (UK) Limited (Singapore Branch) (16 Raffles Quay, #35-02/03, Hong Leong Building, Singapore 048581) in respect of any matters arising from, or in connection with, this analysis / report. Kotak Mahindra (UK) Limited (Singapore Branch) is regulated by the Monetary Authority of Singapore. Kotak Securities Limited and its affiliates are a full-service, integrated investment banking, investment management, brokerage and financing group. We along with our affiliates are leading underwriter of securities and participants in virtually all securities trading markets in India. We and our affiliates have investment banking and other business relationships with a significant percentage of the companies covered by our Investment Research Department. Our research professionals provide important input into our investment banking and other business selection processes. 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We offer our research services to primarily institutional investors and their employees, directors, fund managers, advisors who are registered with us Details of Associates are available on website i.e. www.kotak.com Research Analyst has served as an officer, director or employee of subject company(ies): No We or our associates may have received compensation from the subject company(ies) in the past 12 months. We or our associates have managed or co-managed public offering of securities for the subject company(ies) in the past 12 months. YES. Visit our website for more details We or our associates may have received compensation for investment banking or merchant banking or brokerage services from the subject company(ies) in the past 12 months. We or our associates may have received any compensation for products or services other than investment banking or merchant banking or brokerage services from the subject company(ies) in the past 12 months. We or our associates may have received compensation or other benefits from the subject company(ies) or third party in connection with the research report. Our associates may have financial interest in the subject company(ies). Research Analyst or his/her relative's financial interest in the subject company(ies): No Kotak Securities Limited has financial interest in the subject company(ies) at the end of the month immediately preceding the date of publication of Research Report: Mahindra & Mahindra, JK Lakshmi, Pidilite Industries, HPCL, Cipla, Lupin, Vodafone Idea, Container Corp. - YES Nature of Financial interest: Holding equity shares or derivatives of the subject company. Our associates may have actual/beneficial ownership of 1% or more securities of the subject company(ies) at the end of the month immediately preceding the date of publication of Research Report. Research Analyst or his/her relatives has actual/beneficial ownership of 1% or more securities of the subject company(ies) at the end of the month immediately preceding the date of publication of Research Report: No Kotak Securities Limited has actual/beneficial ownership of 1% or more securities of the subject company(ies) at the end of the month immediately preceding the date of publication of Research Report: No Subject company(ies) may have been client during twelve months preceding the date of distribution of the research report. A graph of daily closing prices of securities is available at https://www.moneycontrol.com/india/stockpricequote/ and http://economictimes.indiatimes.com/markets/stocks/stock-quotes. (Choose a company from the list on the browser and select the"three years" icon in the price chart). Kotak Securities Limited. Registered Office: 27 BKC, C 27, G Block, Bandra Kurla Complex, Bandra (E), Mumbai 400051. CIN: U99999MH1994PLC134051, Telephone No.: +22 43360000, Fax No.: +22 67132430. Website: www.kotak.com / www.kotaksecurities.com. Correspondence Address: Infinity IT Park, Bldg. No 21, Opp. Film City Road, A K Vaidya Marg, Malad (East), Mumbai 400097. Telephone No: 42856825. SEBI Registration No. INZ000200137(Member of NSE, BSE, MSE, MCX & NCDEX). Member Id: NSE-08081; BSE-673; MSE-1024; MCX-56285; NCDEX-1262. AMFI ARN 0164, PMS INP000000258 and Research Analyst INH000000586. NSDL/CDSL: IN-DP-NSDL-23-97. Compliance Officer Details: Mr. Manoj Agarwal. Call: 022 - 4285 8484, or Email: [email protected]. Investments in securities market are subject to market risks, read all the related documents carefully before investing. 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Level 4 : If you have not received a satisfactory response at Level 3 within 7 working days, you may also approach Managing Director / CEO (Mr. Jaideep Hansraj) at [email protected] or call on 91-(022) 4285 8301. 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.