INDIA DAILY

May 8, 2017 India 5-May 1-day 1-mo 3-mo Sensex 29,859 (0.9) 0.5 5.5 Nifty 9,285 (0.8) 0.9 5.9 Contents Global/Regional indices Dow Jones 21,007 0.3 1.7 4.8 Special Reports Nasdaq Composite 6,101 0.4 3.8 7.4 Strategy FTSE 7,297 0.7 (0.7) 1.5 Strategy: Can we get back to FY2018 earnings please? Nikkei 19,779 1.7 4.2 4.6 Hang Seng 24,476 (0.8) 0.9 4.2

Daily Alerts KOSPI 2,253 0.5 4.3 8.7 Results Value traded – India Eicher Motors: Robust growth continues Cash (NSE+BSE) 333 307 328 Derivatives (NSE) 4,013 2,552 2,711

Avenue Supermarts: 4Q - solid revenue growth, but margins normalize Deri. open interest 2,977 2,669 2,810 Tata Communications: In the value zone, again

Apollo Tyres: Look beyond the quarter Forex/money market

Change, basis points L&T Infotech: Impressive execution 5-May 1-day 1-mo 3-mo Orient Cement: Stellar volume growth Rs/US$ 64.3 (6) (34) (272) Results, Change in Reco 10yr govt bond, % 7.3 - 10 45 Net investment (US$ mn)

L&T Finance Holdings: On track 4-May MTD CYTD IIFL Holdings: Strong tailwinds, mind the valuations FIIs (22) 386 2,903 MFs 40 1,061 6,951 Change in Reco Top movers

Lupin: Looking beyond metformin Change, %

Best performers 5-May 1-day 1-mo 3-mo PVR: GST upside priced in RECL IN Equity 212.8 0.5 15.7 48.6

Sector alerts FB IN Equity 116.4 3.4 32.5 39.6 Banks: Adds clarity and urgency BOI IN Equity 183.6 (4.5) 30.1 38.4 RCAPT IN Equity 652.3 (2.9) 7.6 34.6 Cement: Holding on CBK IN Equity 394.6 1.6 29.4 30.9 Metals & Mining: India steel - near term weakness; trade measures to come Worst performers to the rescue IDEA IN Equity 82.0 (1.6) (6.4) (25.1)

TTMT/A IN Equity 259.0 (3.0) (8.9) (19.3) Technology: CTSH - steady quarter, steps up focus on operational efficiency TTMT IN Equity 419.6 (3.9) (10.4) (18.2)

UT IN Equity 5.6 (0.9) (2.6) (17.2)

UNSP IN Equity 1898.7 (1.4) (6.2) (16.3)

For Private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES’ RATING SYSTEM AND OTHER DISCLOSURES. REFER TO THE END OF THIS MATERIAL. INDIA Strategy Portfolio MAY 08, 2017 NEW RELEASE BSE-30: 29,859

Can we get back to FY2018 earnings please? 4QFY17 results suggest stabilization in underlying parameters (volumes and realizations) in certain sectors but risks of earnings downgrades to our FY2018 estimates have resurfaced in others from domestic (higher provisions in the banking sector, stronger INR and higher interest rates) and global (lower commodity prices) factors. The Street has already moved to FY2019 (and even FY2020 in some cases) earnings but FY2018 earnings are looking rather shaky.

4QFY17 results: Some improvement in underlying trends but no major positive surprise QUICK NUMBERS

Underlying volume and realization data for the companies that have reported so far suggest  We model 15% some stabilization in volumes post the ‘demonetization’ quarter of 3QFY17 (see Exhibits 1-3). growth in FY2018 However, we have not seen any meaningful changes to our underlying volume and realization net profits of the assumptions based on 4QFY17 results and recent economic data. 4QFY17 EBITDA of large-cap. Nifty-50 Index companies show a modest ‘beat’ so far but this is entirely due to RIL; some have missed significantly (see Exhibit 4). 4QFY17 net profits show large ‘beats’ or ‘misses’ for the financials  47% of incremental depending on the extent of loan-loss provisioning (see Exhibit 5) and may be less relevant. profits of Nifty-50 Index for FY2018 Risks to FY2018 earnings estimates have increased comes from PSU We note that the risks of earnings downgrades have increased from (1) higher-than-estimated banks, metals and loan-loss provisions in the banking sector, (2) weaker-than-expected commodity prices (metals, oil & gas stocks oil & gas) and (3) stronger-than-expected exchange rate (IT, metals, oil & gas, pharmaceuticals). In fact, some of these sectors contribute to a large share of incremental profits for FY2018-19E  Nifty-50 Index (see Exhibit 6). Thus, any disappointment in earnings in the aforementioned sectors will lead to trading at 18.6X significant earnings downgrades for the overall market. Also, we would watch for higher FY2018E ‘EPS’ interest rates although we do not assume any change to policy rates through FY2018.

Government action may boost sentiment for certain sectors

Any government-backed plan to resolve the problem of stressed assets in the Indian banking system or resolutions by the banks will improve the sentiment for and multiples of the so-called corporate banks. Their large weightage in indices will support the market and also, may lead to some rotation among sectors as investors have been generally negative on corporate banks. The government recently passed an ordinance that will empower the RBI to “specify one or more authorities or committees with such members as the Reserve Bank may appoint or approve for appointment to advise banking companies on resolution of stressed assets.”

Sanjeev Prasad Valuations versus liquidity

We find valuations of most sectors and stocks quite expensive even on FY2019E estimates even with our assumptions of strong recovery in volumes and profitability across sectors. We model Sunita Baldawa the net profits of the Nifty-50 Index to grow 15% and 17% for FY2018 and FY2019 but note the aforementioned risks to earnings. Top-down valuations look expensive (see Exhibits 7-8) Anindya Bhowmik even though they are largely irrelevant given the wide dispersion in valuations across sectors and large share of net profits of ‘low P/E’ sectors (see Exhibit 9). Lastly, we do not see any reason for value of stocks to change just because institutional investors may have more funds to invest. That may change the price of stocks (if investors feel more bullish), not their value.

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

Changes to Model Portfolio

We increase weight on GAIL (100 bps to 400 bps) and NTPC (100 bps to 300 bps) and remove TPWR (200 bps earlier) from our recommended large-cap. Model Portfolio (see Exhibit 10). Our ‘punt’ on TPWR has not played out with the Indian Supreme Court ruling against the orders of the Central Electricity Regulatory Commission (CERC) and the Appellate Tribunal for Electricity (APTEL) to award compensator tariffs for TPWR’s imported coal-based Mundra power plant.

We also remove AXSB (200 bps earlier) from the portfolio and allocate the same to HDFC (800 bps) and HDFCB (900 bps). We struggle with the valuations of other banks and NBFCs in the context of their business models and are happy just parking some money into stocks that will hold up better in the event of a market correction.

We expect AXSB’s NPLs (5% as of FY2017) to rise further as we don’t see any potential resolution for its power assets. 60% of AXSB’s internal ‘watch-list’ comprises power assets now and AXSB’s power assets in the ‘watch-list’ account for 29% of the bank’s power sector exposure. We note that only 3.2% of AXSB’s power sector exposure is recognized as NPLs.

Lastly, AXSB trades at 2.0X FY2019E ABVPS (₹255), which is at a significant premium to ICICIBC’s valuation. We note that 70% of AXSB’s ‘watch-list’ (as of March 31, 2016) has slipped into NPLs in FY2017 (see Exhibit 11), which is quite discomforting. In the case of ICICIBC, the corresponding figure is lower at 45%.

Exhibit 1: Modest improvement visible in monthly sales of major auto products Monthly sales of major auto products, March fiscal year-ends, 2010-17 (%)

2-W 3-W Domestic car UVs Tractors 80

60

40

20

0

(20)

(40)

Jun-12 Jun-15 Jun-13 Jun-14 Jun-16

Sep-13 Sep-16 Sep-12 Sep-14 Sep-15

Dec-14 Dec-15 Dec-12 Dec-13 Dec-16

Mar-13 Mar-14 Mar-17 Mar-15 Mar-16 Mar-12

Source: SIAM, Kotak Institutional Equities

KOTAK INSTITUTIONAL EQUITIES RESEARCH 3 India Strategy

Exhibit 2: Volume growth is stabilizing post the effects of demonetization in 3QFY17 Volume growth of consumer companies, 4QFY15-4QFY17 (%, yoy)

4QFY15 1QFY16 2QFY16 3QFY16 4QFY16 1QFY17 2QFY17 3QFY17 4QFY17 Staples Bajaj Corp. - Almond Drop Hair Oil 23.9 10.6 6.3 1.0 (4.3) 2.2 1.6 (4.2) (7.1) Britannia Industries - Domestic 8.0 10.0 12.0 11.0 10.0 8.0 7.0 — Colgate - Overall 5.0 3.0 3.0 1.0 6.0 6.0 4.0 (11.0) Colgate - Toothpaste 5.0 3.0 3.0 1.0 3.0 5.0 NA NA Dabur - Domestic 8.1 8.1 5.0 (2.5) 7.0 4.1 4.5 (5.0) 2.4 GSK Consumer — — (1.5) — — — (3.0) (15.0) GCPL - Soaps 7.0 10.0 5.0 6.0 11.0 11.0 (5.0) (8.0) HUL (FMCG business) 6.0 6.0 7.0 6.0 4.0 4.0 (1.0) (4.0) Marico - Domestic 3.0 6.0 5.5 10.5 8.4 8.0 3.4 (4.0) 10.0 Marico - Parachute 5.0 8.0 11.0 4.0 6.0 7.0 (6.0) (1.0) 15.0 Marico - Saffola (1.0) 4.0 4.0 17.0 13.0 11.0 8.0 6.0 6.0 Marico - Value-added hair oils 5.0 14.0 8.0 21.0 11.0 9.0 11.0 (12.0) 10.0 Discretionary Asian Paints 4.0 10.0 7.0 16.5 14.0 12.0 12.0 3.0 ITC - Cigarettes (13.0) (17.0) (17.0) (4.0) — 3.0 4.0 (2.0) Jubilant Foodworks - SSG 6.6 4.6 3.2 2.0 2.9 (3.2) 4.2 (3.3) Pidilite - Domestic consumer business 5.5 5.0 3.0 11.0 13.0 8.0 7.8 — Titan - Jewelry (11.0) (10.0) (10.0) 28.0 15.0 6.0 (32.0) 4.0

Source: Companies, Kotak Institutional Equities

Exhibit 3: Loan growth is yet to recover post demonetization Yoy growth in advances, March fiscal year-ends, 2012-17 (%)

2012 2013 2014 2015 2016 2017 30

25

20

15

10

5

0

Jul

Jan

Jun

Oct Feb

Apr Sep

Dec

Nov

Mar Aug May

Source: RBI, Kotak Institutional Equities

4 KOTAK INSTITUTIONAL EQUITIES RESEARCH Strategy India

Exhibit 4: EBITDA of companies above Rs100 bn market cap. that have reported 4QFY17 results is 0.5% above estimates Company-wise EBITDA analysis (Rs mn)

EBITDA (Rs mn) Change (%) Company Mar-16 Dec-16 Mar-17A Mar-17E A/E yoy qoq Exide Industries 2,663 2,271 2,618 2,909 (10.0) (1.7) 15.3 Maruti Suzuki 23,293 24,881 25,607 25,951 (1.3) 9.9 2.9 TVS Motor 1,999 2,185 1,615 1,752 (7.8) (19.2) (26.1) ACC 3,696 1,915 3,418 3,553 (3.8) (7.5) 78.4 Ambuja Cements 4,235 2,947 3,651 3,607 1.2 (13.8) 23.9 UltraTech Cement 12,850 10,445 12,782 12,733 0.4 (0.5) 22.4 Dabur India 4,152 3,339 4,119 4,158 (0.9) (0.8) 23.4 Marico 2,145 2,724 2,525 2,118 19.2 17.7 (7.3) Reliance Industries 103,410 106,040 112,810 107,948 4.5 9.1 6.4 Hindustan Zinc 13,081 27,834 37,480 35,338 6.1 186.5 34.7 UPL 8,809 7,503 11,261 11,814 (4.7) 27.8 50.1 Biocon 1,850 2,610 1,814 2,813 (35.5) (1.9) (30.5) Godrej Properties 499 1,207 664 680 (2.4) 33.2 (45.0) Oberoi Realty 1,032 1,262 1,515 1,459 3.8 46.8 20.0 Infosys 46,390 47,670 46,580 46,749 (0.4) 0.4 (2.3) TCS 79,068 82,290 81,330 84,011 (3.2) 2.9 (1.2) Wipro 29,141 28,694 28,925 28,517 1.4 (0.7) 0.8 Reliance Power 12,401 11,546 10,656 11,409 (6.6) (14.1) (7.7) BSE-30 281,302 289,575 295,252 293,178 0.7 5.0 2.0 Nifty-50 302,083 304,882 315,102 313,071 0.6 4.3 3.4 Large cap. companies 350,713 367,363 389,369 387,521 0.5 11.0 6.0

Source: Companies, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 5 India Strategy

Exhibit 5: PAT of companies above Rs100 bn market cap. that have reported 4QFY17 results is 3% above estimates Company-wise adjusted PAT analysis (Rs mn)

Adjusted profits (Rs mn) Change (%) Company Mar-16 Dec-16 Mar-17A Mar-17E A/E yoy qoq Exide Industries 1,752 1,515 1,648 1,745 (5.6) (6.0) 8.8 Maruti Suzuki 14,762 17,445 17,090 18,156 (5.9) 15.8 (2.0) TVS Motor 1,360 1,327 1,268 939 35.0 (6.8) (4.4) Axis Bank 21,543 5,796 12,251 7,194 70.3 (43.1) 111.4 Federal Bank 103 2,057 2,566 2,209 16.2 2,400.9 24.8 HDFC Bank 33,742 38,653 39,901 39,144 1.9 18.3 3.2 ICICI Bank 7,018 24,418 20,246 17,710 14.3 188.5 (17.1) IndusInd Bank 6,204 7,506 7,516 7,813 (3.8) 21.2 0.1 LIC Housing Finance 4,480 4,993 5,292 5,338 (0.9) 18.1 6.0 Mahindra & Mahindra Financial 3,702 (156) 2,341 4,345 (46.1) (36.8) 1,596.9 Shriram Transport 1,439 3,460 1,496 2,989 (50.0) 3.9 (56.8) YES Bank 7,021 8,826 9,141 7,410 23.4 30.2 3.6 ACC 2,322 911 2,115 2,109 0.3 (8.9) 132.2 Ambuja Cements 2,827 1,759 2,465 2,124 16.1 (12.8) 40.2 UltraTech Cement 6,814 5,634 7,020 7,016 0.1 3.0 24.6 Dabur India 3,315 2,938 3,331 3,489 (4.5) 0.5 13.4 Marico 1,340 1,889 1,687 1,537 9.8 25.9 (10.7) Reliance Industries 72,270 80,220 81,510 80,310 1.5 12.8 1.6 Hindustan Zinc 21,495 23,199 30,570 29,142 4.9 42.2 31.8 UPL 2,481 4,573 7,402 6,651 11.3 198.3 61.8 Biocon 740 1,710 1,275 1,692 (24.6) 72.3 (25.4) Godrej Properties 180 771 626 658 (4.9) 247.3 (18.8) Oberoi Realty 646 849 1,018 988 3.1 57.7 19.9 Infosys 35,970 37,080 36,280 35,571 2.0 0.9 (2.2) TCS 63,412 67,780 66,080 66,222 (0.2) 4.2 (2.5) Wipro 22,351 21,094 22,609 21,000 7.7 1.2 7.2 Reliance Power 3,202 2,757 2,159 2,775 (22.2) (32.6) (21.7) BSE-30 271,068 292,486 295,967 285,308 3.7 9.2 1.2 Nifty-50 296,256 317,123 324,225 311,779 4.0 9.4 2.2 Large cap. companies 342,490 369,003 386,902 376,274 2.8 13.0 4.9

Source: Companies, Kotak Institutional Equities estimates

Exhibit 6: Banking, energy and metals & mining sectors to drive incremental profits in FY2017-19E Break-up of net profits of the Nifty-50 Index across sectors, March fiscal year-ends, 2014-19E

Incremental profits Net profits (Rs bn) Contribution (%) 2017E 2018E 2019E 2014 2015 2016 2017E 2018E 2019E 2015 2016 2017E 2018E 2019E (Rs bn) (%) (Rs bn) (%) (Rs bn) (%) Automobiles 282 286 311 270 374 458 11 11 8 10 10 (41) (10) 104 21 84 13 Tata Motors 150 142 131 55 124 169 5 5 2 3 4 (76) (19) 69 14 45 7 Banking 509 601 525 616 798 1,009 22 19 19 21 23 91 22 182 37 211 33 PSU banks 154 165 46 123 230 292 6 2 4 6 7 77 19 107 22 62 10 Private banks 354 436 480 494 569 718 16 17 15 15 16 14 3 75 15 149 23 Cement 61 59 65 78 98 125 2 2 2 3 3 13 3 20 4 27 4 Consumers 134 148 153 162 184 210 5 5 5 5 5 10 2 22 4 26 4 Energy 602 542 639 843 877 977 20 23 26 24 22 204 50 34 7 100 16 IOCL 35 42 95 204 188 201 2 3 6 5 5 109 27 (16) (3) 13 2 ONGC 266 189 173 212 248 278 7 6 7 7 6 38 9 36 7 30 5 Reliance Industries 220 227 274 314 324 370 8 10 10 9 8 40 10 9 2 46 7 Industrials 45 33 47 53 72 90 1 2 2 2 2 6 1 19 4 18 3 Infrastructure 17 12 29 38 26 31 0 1 1 1 1 9 2 (11) (2) 4 1 Media 9 8 9 12 15 18 0 0 0 0 0 3 1 3 1 3 0 Metals & Mining 213 158 126 147 241 271 6 4 5 6 6 21 5 94 19 30 5 Coal India 151 137 143 113 159 177 5 5 3 4 4 (31) (7) 46 9 18 3 Pharmaceuticals 123 122 133 158 169 204 5 5 5 5 5 25 6 12 2 34 5 Technology 468 505 553 603 605 657 19 20 19 16 15 51 12 2 0 51 8 Telecom 42 80 63 59 45 70 3 2 2 1 2 (4) (1) (14) (3) 25 4 Utilities 156 149 170 194 223 250 6 6 6 6 6 24 6 29 6 27 4 Nifty-50 Index 2,663 2,705 2,823 3,234 3,729 4,371 100 100 100 100 100 411 100 495 100 642 100 Nifty-50 change (%) 7.9 1.6 4.4 14.5 15.3 17.2 Nifty-50 ex-energy change (%) 8.6 3.5 1.0 9.5 19.3 19.0 Nifty-50 EPS (FF) 410 398 384 429 500 596

Source: Kotak Institutional Equities estimates

6 KOTAK INSTITUTIONAL EQUITIES RESEARCH Strategy India

Exhibit 7: We expect earnings of the Nifty-50 Index to grow 15% in FY2018 and 17% in FY2019 Valuation summary of Nifty-50 sectors (full-float basis), March fiscal year-ends, 2017E-19E

Mcap. Adj. mcap. Earnings growth (%) PER (X) EV/EBITDA (X) Price/BV (X) Div. yield (%) RoE (%) (US$ bn) (US$ bn) 2017E 2018E 2019E 2017E 2018E 2019E 2017E 2018E 2019E 2017E 2018E 2019E 2017E 2018E 2019E 2017E 2018E 2019E Automobiles 110.3 58.4 (13.2) 38.4 22.5 26.3 19.0 15.5 11.9 9.3 7.6 3.8 3.3 2.9 1.0 1.0 1.2 14.6 17.5 18.4 Banking 246.8 184.7 17.4 29.5 26.4 25.4 19.6 15.5 — — — 2.6 2.4 2.1 1.0 1.1 1.3 10.2 12.0 13.5 Cement 39.5 18.0 19.9 25.5 27.5 32.4 25.9 20.3 15.4 12.3 9.6 3.1 2.9 2.6 0.6 0.6 0.6 9.7 11.0 12.6 Consumers 101.4 55.2 6.2 13.4 14.1 40.2 35.5 31.1 26.8 23.5 20.4 13.5 12.6 11.9 1.7 1.9 2.3 33.6 35.6 38.3 Energy 163.5 59.1 31.9 4.0 11.4 12.5 12.0 10.8 8.2 7.2 5.9 1.7 1.6 1.4 2.3 2.4 2.6 13.8 13.1 13.4 Industrials 25.0 22.0 12.0 36.2 24.7 30.4 22.3 17.9 23.0 18.6 15.5 4.0 3.7 3.3 1.4 1.8 2.2 13.2 16.4 18.5 Infrastructure 11.1 4.3 30.9 (29.5) 15.3 19.0 27.0 23.4 16.4 16.1 14.5 4.3 3.8 3.4 0.5 0.6 0.8 22.6 14.1 14.5 Media 7.5 4.3 32.9 24.2 21.2 40.5 32.6 26.9 22.9 19.7 16.4 5.1 4.7 4.3 0.5 0.7 0.8 12.7 14.5 15.9 Metals & Mining 39.9 14.2 16.4 64.3 12.6 17.5 10.7 9.5 8.7 6.9 6.2 2.6 2.4 2.1 5.2 4.7 5.2 14.9 22.2 22.6 Pharmaceuticals 51.2 27.2 18.4 7.4 20.2 20.9 19.5 16.2 12.8 11.3 9.1 3.8 3.3 2.8 0.8 0.8 1.0 18.2 16.7 17.2 Technology 147.1 63.8 9.1 0.4 8.5 15.7 15.6 14.4 10.8 10.4 9.3 3.7 3.8 3.4 2.3 3.0 3.6 23.4 24.1 23.7 Telecom 31.9 10.1 (5.9) (24.1) 56.7 35.0 46.1 29.4 7.6 8.0 6.9 2.4 2.4 2.4 1.4 1.2 1.8 7.0 5.3 8.1 Utilities 40.9 15.7 14.3 14.7 12.2 13.6 11.9 10.6 10.6 9.1 7.9 1.7 1.5 1.4 1.8 2.2 2.4 12.1 12.7 12.9 Nifty-50 Index 1,016 537 14.5 15.3 17.2 20.2 17.5 14.9 11.1 9.7 8.3 2.9 2.6 2.4 1.7 1.8 2.1 14.2 15.0 15.9 Nifty-50 Index (ex-energy) 853 478 9.5 19.3 19.0 22.9 19.2 16.1 12.3 10.8 9.3 3.3 3.0 2.7 1.5 1.7 2.0 14.3 15.7 16.8

Notes: (a) We have used consensus numbers for Bosch, Indiabulls Housing Finance and Kotak Mahindra Bank.

Source: Kotak Institutional Equities estimates

Exhibit 8: The Nifty-50 Index trades at 18.6X FY2018E 'EPS' and 15.6X FY2019E 'EPS' (free-float basis) Valuation summary of Nifty-50 sectors (free-float basis), March fiscal year-ends, 2017E-19E

Mcap. Adj. mcap. Adjusted net profits (Rs bn) Adjusted P/E (X) (Rs bn) (Rs bn) 2017E 2018E 2019E 2017E 2018E 2019E Automobiles 7,103 3,756 149 211 260 25.3 17.8 14.5 Banking 15,664 11,888 466 566 718 25.5 21.0 16.6 Cement 2,545 1,156 41 50 63 28.4 23.1 18.4 Consumers 6,530 3,554 94 106 121 37.9 33.4 29.4 Energy 10,522 3,802 291 302 339 13.0 12.6 11.2 Industrials 1,610 1,417 47 64 79 30.4 22.3 17.9 Infrastructure 714 279 15 10 12 19.0 27.0 23.4 Media 486 277 7 8 10 40.5 32.6 26.9 Metals & Mining 2,567 912 45 88 100 20.1 10.4 9.1 Pharmaceuticals 3,295 1,753 81 89 108 21.6 19.8 16.2 Technology 9,462 4,105 270 270 294 15.2 15.2 14.0 Telecom 2,073 649 18 13 22 35.7 48.6 30.0 Utilities 2,644 1,011 74 82 94 13.6 12.3 10.8 Nifty Index 65,213 34,559 1,598 1,861 2,220 21.6 18.6 15.6 Nifty-50 Index (ex-energy) 54,691 30,757 1,306 1,558 1,880 23.5 19.7 16.4

Source: Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 7 India Strategy

Exhibit 9: High P/E sectors account for a relatively low share of profits Sector-wise P/E and profit share in overall profits for the Nifty-50 Index, FY2018 basis (sorted on high PE basis)

P/E (X) Profit share in overall Nifty-50 profits (%) 40

30

20

10

0

Media

Energy

Utilities

Cement

Banking

Telecom

Industrials

Consumers

Technology

Automobiles

energy)

Infrastructure

Nifty-50 Index

Pharmaceuticals Metals& Mining

Nifty-50 Index (ex-

Source: Kotak Institutional Equities estimates

Exhibit 10: A few bottom-up ideas KIE large-cap. Model Portfolio

Price (Rs) Target price KIE weight Price (Rs) Target price KIE weight Company 05-May-17 (Rs) Rating (%) 05-May-17 (Rs) Rating (%) Automobiles Reliance Industries 1,328 1,420 ADD 7.0 Mahindra & Mahindra 1,321 1,400 ADD 2.0 Energy 17.0 Maruti Suzuki 6,654 6,600 ADD 3.0 Metals & Mining Tata Motors 420 540 BUY 5.0 JSW Steel 190 225 ADD 2.0 Automobiles 10.0 Vedanta 224 290 ADD 2.0 PSU Banking Tata Steel 434 515 ADD 2.0 State Bank of India 296 360 BUY 8.0 Metals & Mining 6.0 PSU Banking 8.0 Others Pvt. Banking/Financing InterGlobe Aviation 1,116 1,060 ADD 2.0 HDFC 1,547 1,675 ADD 8.0 Others 2.0 HDFC Bank 1,532 1,450 REDUCE 9.0 Pharmaceuticals ICICI Bank 299 350 BUY 10.0 Aurobindo Pharma 590 770 ADD 2.0 LIC Housing Finance 721 750 ADD 2.0 Cipla 549 650 BUY 4.0 Pvt. Banking/Financing 29.0 Pharmaceuticals 6.0 Consumers Technology Colgate-Palmolive (India) 1,013 1,100 BUY 2.0 Infosys 932 1,015 ADD 7.0 ITC 277 280 ADD 4.0 Tech Mahindra 413 510 BUY 2.0 Consumers 6.0 Technology 9.0 Energy Utilities GAIL (India) 419 425 ADD 4.0 NTPC 160 185 BUY 3.0 IOCL 433 470 BUY 4.0 Power Grid 209 230 BUY 4.0 Petronet LNG 431 425 ADD 2.0 Utilities 7.0 BSE-30 100.0

Source: Kotak Institutional Equities estimates

8 KOTAK INSTITUTIONAL EQUITIES RESEARCH Strategy India

Exhibit 11: Large portion of 'watch-list' has slipped into NPLs for Axis Bank and ICICI Bank Movement in 'watch-list' of Axis Bank & ICICI Bank, March fiscal year-end, 2017

Axis Bank Opening balance at FY2016 226 Net change in exposure 10 Exit out of watch-list (1) Addition to watch-list 20 Slippage into NPL (161) Closing balance at FY2017 94

ICICI Bank Opening balance at FY2016 441 Net change in exposure (48) Upgrades to 'investment grade' (9) Downgrades to below 'investment grade' 6 Slippage into NPL (200) Closing balance at FY2017 190

Source: Companies, Kotak Institutional Equities

KOTAK INSTITUTIONAL EQUITIES RESEARCH 9 SELL Eicher Motors (EIM) Automobiles MAY 08, 2017 RESULT Coverage view: Cautious

Robust growth continues. Eicher reported another solid quarter with 34% yoy Price (`): 25,833 growth in consolidated net profit led by strong volume growth in the Royal Enfield Target price (`): 19,700 business. VECV business profitability improved on a sequential basis. Waiting period on BSE-30: 29,859 RE models is reducing with increase in capacity and we sense order intake is not significantly higher than production, which implies RE volume growth could slow down in 2HFY18. Maintain SELL rating with revised target price of ₹19,700 (from ₹19,000) as we roll over to March 2019E.

Company data and valuation summary Eicher Motors Stock data Forecasts/Valuations 2017 2018E 2019E 52-week range (Rs) (high,low) 26,748-18,000 EPS (Rs) 575.9 736.8 840.7 Market Cap. (Rs bn) 702.9 EPS growth (%) 22.4 27.9 14.1 Shareholding pattern (%) P/E (X) 44.9 35.1 30.7 Promoters 50.6 Sales (Rs bn) 70.4 86.7 100.5 FIIs 32.5 Net profits (Rs bn) 15.6 20.0 22.8 MFs 3.7 EBITDA (Rs bn) 22.1 28.3 32.6 Price performance (%) 1M 3M 12M EV/EBITDA (X) 30.5 23.2 19.6 Absolute 0.3 10.5 31.2 ROE (%) 41.3 40.6 34.0 Rel. to BSE-30 0.7 4.5 11.0 Div. Yield (%) 0.1 0.1 0.1

Results below our expectations led by higher other expenses

The company reported standalone net profit of ₹4.16 bn (+9% yoy), which was 5% below our estimates led by sharp decline in other income on a yoy basis. Revenues increased by 22% yoy led by 20% yoy volume growth. Net realizations increased by 1.2% yoy led by price increases; product mix has not changed much over the year. The company reported EBITDA of `5.9 bn (+29% yoy) and EBITDA margin came in at 31.6% (up 180 bps yoy). EBITDA margin was slightly lower than our estimate of 31.9% due to higher-than-expected other expenses. Gross margin increased by 180 bps yoy led by price increase and sourcing benefits due to increase in scale of operations. Other expenses increased by 18% yoy while staff expenses increased by 37% yoy as they invest in people for upgrading product technology and also hire expat talent for export business. The company has increased its guidance of production target for RE to 825,000 in FY2018 versus 775,000 earlier but indicated waiting period of Classic 350 has come down to two months versus three months earlier. We highlight the company sold 666,490 units of RE bikes in FY2017 while its production target was 675,000 units.

Subsidiary performance (VECV + Polaris JV + other subs) improves in 4QFY17

The company has not shared detailed quarterly financials of VECV business. Eicher’s share of net profit from VECV and other subsidiaries was ₹528 mn (+61% yoy). VECV revenues increased by 25% yoy in 4QFY17 despite 11% yoy volume growth and EBITDA margin expanded to 8.2% in 4QFY17 versus 4.5% in 4QFY16.

Increase FY2018-19 standalone EPS estimates by 2-5%; maintain SELL on expensive valuations Hitesh Goel For the Royal Enfield business, we have increased our FY2018-19E standalone EPS estimates by 2-5%, which is led by (1) 2-4% increase in volume estimates and (2) 20-70 bps increase in Nishit Jalan EBITDA margin estimates. Overall, we have kept our FY2018-19E consolidated EPS estimates unchanged due to lower VECV earnings. We maintain our SELL rating on the stock with a revised target price of ₹19,700 (from ₹19,000); change in TP is led by (1) upward revision in earnings estimates of Royal Enfield and (2) rollover to March 2019E EPS.

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

Exhibit 1: Standalone 4QFY17 results were below our estimates Eicher Motors interim results, March fiscal year-ends (₹ mn)

(% chg.) 4QFY17 4QFY17E 4QFY16 3QFY17 4QFY17E 4QFY16 3QFY17 FY2017 FY2016 (% chg.) FY2018E Volumes (units) 178,228 178,228 148,186 173,838 — 20.3 2.5 666,490 508,154 31.2 799,788 Net realizations (Rs/unit) 105,084 107,236 103,888 105,105 (2.0) 1.2 (0.0) 105,142 102,420 2.7 108,045 Net sales 18,729 19,112 15,395 18,271 (2.0) 21.7 2.5 70,076 52,045 34.6 86,413 Other operating income 115 80 55 65 44.0 111.0 78.1 304 204 250 Total sales 18,844 19,192 15,449 18,336 (1.8) 22.0 2.8 70,380 52,249 34.7 86,663 Cost of materials consumed (9,644) (10,172) (8,295) (9,477) (5.2) 16.3 1.8 (37,211) (29,239) (44,924) Changes in inventories (264) — (124) (213) 145 281 Employee benefit expenses (1,014) (1,040) (742) (1,015) (2.5) 36.7 (0.2) (3,851) (2,888) (4,744) Other expenses (2,012) (1,892) (1,709) (1,802) 6.3 17.7 11.7 (7,403) (5,801) (8,714) Total expenses (12,934) (13,104) (10,869) (12,508) (1.3) 19.0 3.4 (48,319) (37,648) (58,382) EBITDA 5,910 6,088 4,580 5,828 (2.9) 29.0 1.4 22,060 14,602 51.1 28,281 Other income 550 600 1,099 590 (8.3) (49.9) (6.7) 2,273 2,126 2,982 Interest costs (7) (5) (6) (7) (28) (16) — Depreciation (430) (360) (374) (355) 19.4 14.8 21.1 (1,536) (1,182) (2,051) Profit before tax 6,024 6,323 5,299 6,056 (4.7) 13.7 (0.5) 22,770 15,530 46.6 29,212 Tax expense (1,868) (1,960) (1,489) (1,904) (4.7) 25.4 (1.9) (7,129) (4,639) (9,202) Profit after tax 4,157 4,363 3,809 4,152 (4.7) 9.1 0.1 15,641 10,890 43.6 20,011 EPS 153.0 160.6 140.3 152.9 (4.7) 9.1 0.1 575.9 401.0 43.6 736.8 Ratios (%) Raw material as % of sales 52.9 53.2 54.7 53.0 (1.8) 52.9 55.6 52.0 Staff costs as % of sales 5.4 5.4 4.8 5.6 5.5 5.5 5.5 Other expenses as % of sales 10.7 9.9 11.1 9.9 10.6 11.1 10.1 EBITDA margin (%) 31.6 31.9 29.8 31.9 1.8 31.5 28.1 32.7 No. of shares 27.2 27.2 27.2 27.2 27.2 27.2 27.2 Tax rate (%) 31.0 31.0 28.1 31.4 31.3 29.9 31.5

Source: Company, Kotak Institutional Equities estimates

Strong growth in Royal Enfield continues

The company reported standalone net profit of ₹4.16 bn (+9% yoy), which is 5% below our estimates led by sharp decline in other income on a yoy basis. Revenues increased by 22% yoy led by 20% yoy volume growth. Net realizations increased by 1.2% yoy led by price increases; product mix has not changed much over the year. The company reported EBITDA of `5.9 bn (+29% yoy) and EBITDA margin came in at 31.6% (up 180 bps yoy). EBITDA margin was slightly lower than our estimate of 31.9% due to higher-than-expected other expenses. Gross margin increased by 180 bps yoy led by price increase and sourcing benefits due to increase in scale of operations. Other expenses increased by 18% yoy while staff expenses increased by 37% yoy as they invest in people for upgrading product technology and also hire expat talent for export business.

Other key highlights

Royal Enfield

 Order inflow remains higher than production volumes. There is around two-month waiting period for Classic models, which has come down from three months earlier. We sense order intake is not very higher than current production levels, which implies that once third plant capacity comes in, waiting periods on Classic 350 model will completely vanish.

 The company continues to expand dealer network; there are 675 by end of March 2017 versus 640 dealerships as of December 2016. Company will add another 150 dealers in next two years.

 Company also indicated that sales in Top 20 cities have increased by 15% yoy in FY2017, which forms 45% of company’s sales.

KOTAK INSTITUTIONAL EQUITIES RESEARCH 11 Automobiles Eicher Motors

 Company guided that third plant in Chennai will get operational by August 2017, which will eventually increase production capacity to 825,000 units in FY2018 and 900,000 units in FY2019. Company has not taken a decision to increase investments in second phase of the third plant in Chennai, which can increase capacity to 1.2 mn units as yet.

 Company is going slow on export business and plans to focus on Thailand, Colombia, Indonesia and Brazil apart from Europe and US.

Other businesses

 The company has not shared detailed quarterly financials of VECV business. Eicher’s share of net profit from VECV and other subsidiaries was ₹528 mn (+61% yoy). We note that apart from VECV India, this include some losses in subsidiaries of jointly controlled entities such as VECV Lanka, VECV South Africa, EES Beijing, EES USA, etc.

 VECV revenues increased by 25% yoy in 4QFY17 despite 11% yoy volume growth and EBITDA margin expanded to 8.2% in 4QFY17 versus 4.5% in 4QFY16. PAT in VECV business increased to `1.16 bn in 4QFY17 versus `60 mn in 4QFY16.

 Medium-duty engine sales volumes for the quarter were 7,217 units; up 21% yoy.

Exhibit 2: RE volumes continue to grow at a brisk pace helped by demand and order backlog Quarterly trend of RE volumes, March fiscal year-ends, 1QCY12-3QCY16 ('000 units, %)

Sales volumes [LHS] Yoy change [RHS] ('000 units) (%) 200 100 180 160 80 140 120 100 60 80 60 40 40 20

0 20

1QCY12 4QCY12 2QCY13 1QCY14 3QCY14 4QCY14 2QCY15 4QCY15 1QCY16 3QCY16 3QCY12 1QCY13 3QCY13 4QCY13 2QCY14 1QCY15 3QCY15 2QCY16 4QCY16 1QCY17 2QCY12

Source: SIAM, Kotak Institutional Equities estimates

12 KOTAK INSTITUTIONAL EQUITIES RESEARCH Eicher Motors Automobiles

Exhibit 3: Consolidated 4QFY17 net profit was marginally below estimates at EBITDA level Eicher Motors consolidated interim results, March fiscal year-ends (₹ mn)

(% chg.) 4QFY17 4QFY17E 4QFY16 3QFY17 4QFY17E 4QFY16 3QFY17 FY2017 FY2016 (% chg.) FY2018E Net sales 18,765 15,267 18,283 22.9 2.6 70,030 51,918 34.9 Other operating income 115 55 65 111.0 78.1 304 204 Total sales 18,881 19,192 15,322 18,348 (1.6) 23.2 2.9 70,334 52,122 34.9 86,663 Cost of materials consumed (9,325) (8,094) (9,208) 15.2 1.3 (36,157) (28,617) Purchase of stock-in-trade (310) (246) (273) (1,084) (667) Changes in inventories (290) 9 (210) 196 413 Employee benefit expenses (1,060) (775) (1,058) 36.8 0.2 (4,024) (2,968) Other expenses (2,048) (1,748) (1,829) 17.2 12.0 (7,524) (5,873) Total expenses (13,033) (10,854) (12,577) 20.1 3.6 (48,592) (37,712) EBITDA 5,848 6,020 4,468 5,770 (2.9) 30.9 1.3 21,742 14,410 50.9 28,281 Other income 551 453 590 21.6 (6.7) 2,273 1,480 Interest costs (11) (6) (10) 91.2 13.5 (36) (16) Depreciation (432) (373) (356) 15.9 21.4 (1,540) (1,180) Profit before tax 5,956 6,250 4,543 5,995 31.1 (0.7) 22,439 14,694 52.7 29,212 Tax expense (1,890) (1,440) (2,000) 31.2 (5.5) (7,203) (4,590) Share of profit/(loss) of joint ventures 528 180 328 187 193.6 61.0 182.4 1,435 1,333 7.7 — Minority interest — — — — — Profit after tax 4,594 4,430 3,431 4,182 3.7 33.9 9.9 16,671 11,436 45.8 21,443 EPS 169.2 163.1 126.3 154.0 613.8 421.1 45.8 789.5 Ratios (%) Raw material as % of sales 52.6 54.4 52.8 52.7 55.4 Staff costs as % of sales 5.6 5.1 5.8 5.7 5.7 Other expenses as % of sales 10.8 11.4 10.0 10.7 11.3 EBITDA margin (%) 31.0 31.4 29.2 31.4 30.9 27.6 32.6 No. of shares 27.2 27.2 27.2 27.2 27.2 27.2 27.2 Tax rate (%) 31.7 31.7 33.4 32.1 31.2

Source: Company, Kotak Institutional Equities estimates

Exhibit 4: We increase our FY2018-19E standalone earnings estimates by 2-5% Earnings revision table, March fiscal year-ends, 2018-19E (₹ mn)

New estimates Old estimates % change 2018E 2019E 2018E 2019E 2018E 2019E Standalone Volumes (units) 799,788 903,760 770,500 886,075 3.8 2.0 Net sales 86,663 100,543 83,736 98,740 3.5 1.8 EBITDA 28,281 32,609 26,719 31,772 5.8 2.6 EBITDA margin (%) 32.6 32.4 31.9 32.2 Adjusted net profit 20,011 22,833 19,035 22,432 5.1 1.8 EPS 737 841 701 826 5.1 1.8 Consolidated Net sales 86,663 100,543 83,736 98,740 3.5 1.8 EBITDA 28,281 32,609 26,719 31,772 5.8 2.6 EBITDA margin (%) 32.6 32.4 31.9 32.2 Adjusted net profit 21,443 24,810 21,105 24,959 1.6 (0.6) EPS 789 913 777 919 1.6 (0.6)

Source: Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 13 Automobiles Eicher Motors

Exhibit 5:We expect RE volume growth to remain strong in FY2018E; expect 15% volume CAGR over FY2017-20E Eicher Motors volume assumptions, March fiscal year-ends from FY2016, 2010-20E (units)

2010 2011 2012 2013 2014 2016 2017 2018E 2019E 2020E Sales volumes (units) Standalone Two-wheelers 52,576 74,626 113,432 178,121 302,611 601,000 666,490 799,788 903,760 1,012,212 VECV Domestic 5-7.5 ton 4,904 6,387 5,372 5,242 5,389 8,337 8,525 8,951 10,025 11,228 7.5-12 ton 24,389 29,919 28,057 20,768 17,490 26,981 22,395 23,515 26,337 29,497 >12 ton 1,483 2,575 3,814 2,907 3,056 5,683 6,216 6,838 7,863 9,043 Buses 4,765 6,494 8,520 8,333 8,123 13,038 12,270 13,497 14,847 16,628 Exports Cargo 2,073 2,340 1,671 2,382 4,460 5,060 5,535 6,199 6,943 7,776 Buses 643 424 679 799 1,364 2,452 2,030 2,274 2,546 2,852 Volvo trucks Volvo trucks domestic 1,094 705 569 701 891 1,499 1,300 1,560 1,872 2,246 Total 39,351 48,844 48,682 41,132 40,773 63,050 58,271 62,833 70,433 79,271 Yoy change (%) Standalone Two-wheelers 1.2 41.9 52.0 57.0 69.9 98.6 10.9 20.0 13.0 12.0 VECV Domestic 5-7.5 ton 59.3 30.2 (15.9) (2.4) 2.8 54.7 2.3 5.0 12.0 12.0 7.5-12 ton 66.7 22.7 (6.2) (26.0) (15.8) 54.3 (17.0) 5.0 12.0 12.0 >12 ton 148.0 73.6 48.1 (23.8) 5.1 86.0 9.4 10.0 15.0 15.0 Buses 45.1 36.3 31.2 (2.2) (2.5) 60.5 (5.9) 10.0 10.0 12.0 Exports Cargo 1.8 12.9 (28.6) 42.5 87.2 13.5 9.4 12.0 12.0 12.0 Buses 2.4 (34.1) 60.1 17.7 70.7 79.8 (17.2) 12.0 12.0 12.0 Volvo trucks Volvo trucks domestic 21.6 (35.6) (19.3) 23.2 27.1 68.2 (13.3) 20.0 20.0 20.0 Total 56.4 24.1 (0.3) (15.5) (0.9) 54.6 (7.6) 7.8 12.1 12.5

Notes: (a) FY2016 is a 15 month period as company has changed its reporting to financial year

Source: Kotak Institutional Equities estimates

Exhibit 6: We value Eicher Motors at ₹19,700 based on SoTP methodology Sum-of-the-parts valuation table for Eicher Motors (₹ mn)

Multiple March 2019 EPS Equity value (X) (Rs/share) (Rs/share) Standalone Equity value per share 22 841 18,495 Eicher stake in VECV Equity value per share 16 134 2,140 Eicher stake in VECV (%) 54.4 Eicher equity value in VECV 1,164 Equity value 19,659 Target price 19,700

Source: Kotak Institutional Equities estimates

14 KOTAK INSTITUTIONAL EQUITIES RESEARCH Eicher Motors Automobiles

Exhibit 7: We estimate standalone earnings to grow at 20% CAGR over FY2017-20E Eicher Motors standalone financial summary, March fiscal year-ends from FY2016, 2010-20E (₹ mn)

2011 2012 2013 2014 2016 2017 2018E 2019E 2020E Profit model (Rs mn) Net sales 6,665 10,493 17,025 30,312 61,880 70,380 86,663 100,543 115,764 EBITDA 765 1,454 3,137 7,336 17,305 22,060 28,281 32,609 37,952 Other income 804 458 801 1,163 1,782 2,273 2,982 3,289 4,306 Interest (20) (3) (3) (17) (14) (28) — — — Depreciaton (130) (172) (304) (502) (1,377) (1,536) (2,051) (2,565) (2,880) Profit before tax 1,418 1,738 3,632 7,980 17,696 22,770 29,212 33,333 39,379 Current tax (178) (293) (782) (2,317) (5,247) (7,129) (9,202) (10,500) (12,404) Deferred tax 6 3 (64) (74) (150) — — — — Net profit 1,246 1,448 2,786 5,589 12,299 15,641 20,011 22,833 26,974 Adjusted net profit 1,246 1,448 2,786 5,589 12,299 15,641 20,011 22,833 26,974 Adjusted Diluted EPS (Rs) 46.1 53.6 103.0 206.2 452.8 575.9 736.8 840.7 993.2 Balance sheet (Rs mn) Equity 270 270 270 271 272 272 272 272 272 Reserves and Surplus 5,131 6,021 7,943 12,066 23,093 40,811 57,326 76,346 99,190 Deferred tax liability 39 63 126 201 408 792 792 792 792 Total borrowings 171 206 40 — 226 — — — — Current liabilities 2,209 3,683 6,452 9,752 12,241 13,344 14,799 16,163 17,650 Total liabilities 7,819 10,242 14,832 22,289 36,239 55,218 73,189 93,573 117,904 Net fixed assets 1,276 1,980 3,132 5,599 9,597 13,862 16,811 18,246 16,866 Investments 5,180 6,494 8,564 11,886 20,691 35,417 45,547 62,547 82,547 Cash 87 35 187 431 312 128 3,597 4,332 8,770 Other current assets 1,276 1,671 2,879 4,297 5,563 5,735 7,157 8,371 9,643 Miscellaneous expenditure — 62 71 77 77 77 77 77 77 Total assets 7,819 10,242 14,832 22,289 36,239 55,218 73,189 93,573 117,904 Free cash flow (Rs mn) Operating cash flow excl. working capital 572 1,127 2,378 5,131 12,185 14,931 19,079 22,109 25,548 Working capital changes 272 775 1,311 1,729 2,463 935 34 150 215 Capital expenditure (651) (1,073) (1,388) (3,699) (4,987) (5,801) (5,000) (4,000) (1,500) Free cash flow 192 830 2,301 3,161 9,660 10,065 14,113 18,259 24,263 Ratios EBITDA margin (%) 11.5 13.9 18.4 24.2 28.0 31.3 32.6 32.4 32.8 Debt/equity (X) — — — — — — — — — Net debt/equity (X) 0.0 0.0 (0.0) (0.0) (0.0) (0.0) (0.1) (0.1) (0.1) RoAE (%) 24.8 24.6 37.9 53.5 67.7 47.7 39.9 33.6 30.4 Book value/share (X) 200 231 301 452 857 1,510 2,118 2,818 3,659

Notes: (a) FY2016 is a 15-month period as company has changed its reporting to financial year

Source: Company, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 15 Automobiles Eicher Motors

Exhibit 8: We estimate consolidated earnings to grow at 21% CAGR over FY2017-20E Eicher Motors consolidated financial summary, March fiscal year-ends from FY2016, 2010-20E (₹ mn)

2011 2012 2013 2014 2016 2017 2018E 2019E 2020E Profit model (Rs mn) Net sales 56,775 63,899 68,098 87,383 156,887 70,334 86,663 100,543 115,764 EBITDA 5,551 5,490 7,132 11,148 24,472 21,742 28,281 32,609 37,952 Other income 1,768 1,366 953 1,074 1,120 2,273 2,982 3,289 4,306 Interest (77) (38) (79) (98) (90) (36) — — — Depreciaton (640) (822) (1,300) (2,198) (4,517) (1,540) (2,051) (2,565) (2,880) Profit before tax 6,602 5,997 6,706 9,926 20,985 22,439 29,212 33,333 39,379 Tax (1,628) (1,249) (1,452) (2,909) (6,466) (7,203) (9,202) (10,500) (12,404) Minority Interest (1,886) (1,506) (1,314) (864) (1,741) — — — — Share of profit/(loss) of joint ventures — — — — Net profit 3,088 3,243 3,939 6,153 12,779 15,236 20,011 22,833 26,974 Adjusted net profit 3,088 3,243 3,939 6,153 12,779 16,671 21,443 24,810 29,830 Adjusted Diluted EPS (Rs) 114.4 120.1 145.7 227.1 470.5 613.8 789.5 913.5 1,098.3 Balance sheet (Rs mn) Equity 270 270 270 271 272 272 272 272 272 Reserves and Surplus 14,661 17,279 20,284 24,888 34,371 40,811 57,326 76,346 99,190 Deferred tax liability 645 1,232 1,805 2,394 3,382 792 792 792 792 Minority Interest 8,377 9,485 10,397 10,851 11,569 — — — — Total borrowings 504 389 839 584 859 — — — — Current liabilities 13,343 16,060 19,771 25,089 34,336 13,344 14,799 16,163 17,650 Total liabilities 37,799 44,715 53,366 64,076 84,788 55,218 73,189 93,573 117,904 Net fixed assets 8,991 14,962 21,197 27,281 33,136 13,862 16,811 18,246 16,866 Investments 5,126 6,385 8,255 10,777 16,383 35,417 45,547 62,547 82,547 Cash 11,973 8,035 6,826 4,806 5,914 128 3,597 4,332 8,770 Other current assets 11,528 15,271 17,018 21,135 29,355 5,735 7,157 8,371 9,643 Miscellaneous expenditure 182 62 71 77 — 77 77 77 77 Total assets 37,799 44,715 53,366 64,076 84,788 55,218 73,189 93,573 117,904 Free cash flow (Rs mn) Operating cash flow excl. working capital 4,273 4,436 5,684 8,457 18,257 14,931 19,079 22,109 25,548 Working capital changes (238) 389 1,490 2,018 4,560 935 34 150 215 Capital expenditure (4,173) (7,820) (7,054) (9,682) (10,622) (5,801) (5,000) (4,000) (1,500) Free cash flow (ex financing) (138) (2,995) 120 793 12,195 10,065 14,113 18,259 24,263 Ratios EBITDA margin (%) 9.8 8.6 10.5 12.8 15.6 30.9 32.6 32.4 32.8 Debt/equity (X) — — — — — — — — — Net debt/equity (X) (1.1) (0.7) (0.6) (0.5) (0.6) (0.0) (0.1) (0.1) (0.1) RoAE (%) 21.9 18.9 19.2 24.7 39.0 50.8 42.8 36.5 33.6 Book value (Rs per share) 546 648 758 926 1,276 1,510 2,118 2,818 3,659

Notes: (a) FY2016 is a 15-month period as company has changed its reporting to financial year. (b) FY2010-16 financials are as per Indian GAAP, while FY2017-19E financials are in accordance with Ind-AS. (c) VECV financials are accounted under equity method of accounting under Ind-AS as compared to line by line consolidation method under Indian GAAP.

Source: Company, Kotak Institutional Equities estimates

16 KOTAK INSTITUTIONAL EQUITIES RESEARCH SELL Avenue Supermarts (DMART) Others MAY 08, 2017 RESULT Coverage view:

4Q – solid revenue growth, but margins normalize. Avenue Supermarts (Dmart) Price (`): 809 reported strong 4QFY17 revenue growth of 41% yoy, led by likely sustained SSSG Target price (`): 580 performance as well as new store additions. EBITDA margins at 6.7% normalized BSE-30: 29,859 sharply from 8.6% reported for 9MFY17 due to seasonal revenue mix variation in 4Q, but were flat on a yoy basis. The stock at CMP is trading at 49X FY2019E P/E, expensive in our view. Retain SELL with an unchanged DCF-based target price of ₹580.

Company data and valuation summary Avenue Supermarts Stock data Forecasts/Valuations 2017 2018E 2019E 52-week range (Rs) (high,low) 814-558 EPS (Rs) 8.5 13.0 16.4 Market Cap. (Rs bn) 504.7 EPS growth (%) 49.1 52.4 26.8 Shareholding pattern (%) P/E (X) 95.1 62.4 49.2 Promoters 82.2 Sales (Rs bn) 119.0 154.0 193.8 FIIs 4.3 Net profits (Rs bn) 4.8 8.1 10.3 MFs 3.1 EBITDA (Rs bn) 9.8 13.3 16.9 Price performance (%) 1M 3M 12M EV/EBITDA (X) 50.6 37.3 29.1 Absolute 27.9 0.0 0.0 ROE (%) 17.9 19.0 19.9 Rel. to BSE-30 28.4 0.0 0.0 Div. Yield (%) 0.0 0.0 0.0

4Q – strong revenue momentum in a seasonally low-margin quarter

Dmart’s 4QFY17 revenues increased by a solid 41% yoy, led by likely strong SSSG as well as contribution from the 14 new stores opened during the quarter. 4QFY17 gross margin normalized to 14.2% from 15.1% in 3QFY17 and 15.6% in 9MFY17, due to a sharp seasonal increase in the proportion of food/groceries in overall revenue, which provides lower gross margins than the other categories. This coupled with commencement of operations of new stores was the key reason for the sequential decline in margins from 8.6% in 3QFY17 to 6.7% in 4QFY17, though margins were flat on a yoy basis.

Strong revenue growth and margin expansion drive 52% FY2017 net profit growth

Dmart reported a strong 52% increase in net profits led by strong revenue growth and 40 bps EBITDA margin expansion. Revenue growth was boosted by a strong 21.2% SSSG, as well as the addition of 21 new stores; it can also be explained by the 28% increase in bills generated and 8% increase in the average bill size. Margin expansion was driven by 30 bps improvement in gross margin and the remainder from operating leverage. On a consolidated basis, Dmart had net cash of ₹7.6 bn as of March 2017.

Slowly, but steadily, progressing towards a pan-India presence

Dmart added 21 new stores in FY2017, similar to the additions in FY2016. Interestingly, six of these were opened in Rajasthan, NCR, Daman and Tamil Nadu, where Dmart did not have presence earlier. We believe the company is looking for new clusters where it could add new stores in the future, and will continue to test waters in new areas. Maharashtra and Gujarat accounted for a lion’s share of 89 of the total 131 stores.

Expensive valuations warrant a SELL Garima Mishra The Dmart stock has had a stellar run post the IPO, and is now trading at 49X FY2019E P/E, expensive in our view. While we remain sanguine on the company’s growth prospects as well as the profitable business model, we believe current valuations are pricing in all positives. We retain SELL rating with an unchanged target price of ₹580.

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

Exhibit 1: Standalone quarterly financials of Avenue Supermarts Standalone quarterly financials of Avenue Supermarts, March fiscal year-ends (Rs mn)

Change (%) Yoy growth 4QFY17 4QFY16 3QFY17 yoy qoq FY2017 FY2016 (%) Net revenues 31,106 22,127 33,394 40.6 (6.8) 118,811 85,752 38.6 Purchase of stock-in-trade (27,722) (19,938) (27,711) 39.0 0.0 (103,690) (74,442) 39.3 Changes in inventory of stock in trade 1,025 944 (647) 8.5 (258.4) 2,730 1,303 109.5 Employee expenses (542) (385) (504) 40.9 7.5 (1,895) (1,462) Other operational costs (1,790) (1,273) (1,649) 40.7 8.6 (6,320) (4,584) Total Expenses (29,029) (20,651) (30,511) 40.6 (4.9) (109,175) (79,185) 37.9 EBITDA 2,077 1,476 2,883 40.7 (27.9) 9,636 6,566 46.8 Finance costs (308) (252) (310) 21.9 (0.9) (1,218) (912) 33.5 Depreciation and amortization expense (354) (277) (314) 27.5 12.7 (1,260) (971) 29.8 Other income 99 70 85 41.7 16.0 313 201 56.1 PBT 1,515 1,016 2,344 49.1 (35.4) 7,471 4,884 53.0 Tax expense (548) (361) (825) 52.0 (33.6) (2,645) (1,704) 55.2 Net profit 967 656 1,519 47.4 (36.4) 4,826 3,179 51.8 Operational metrics Period-ending retail trading area (mn sq. ft) 4.1 3.3 3.6 4.1 3.3 22.9 Revenue per sq. ft (Rs) 30,348 26,541 37,416 31,120 28,136 10.6 Store count (#) 131 110 117 19.1 12.0 131 110 19.1 SSSG (%) 21.2 21.5 Total number of bill cuts (mn) 109 85 28.1 Average bill size (Rs) 1,095 1,012 8.2 Costs as proportion of revenue (%) COGS 85.8 85.8 84.9 85.0 85.3 Employee expense 1.7 1.7 1.5 1.6 1.7 Other operational cost 5.8 5.8 4.9 5.3 5.3 Other ratios (%) Gross margin 14.2 14.2 15.1 15.0 14.7 EBITDA margin 6.7 6.7 8.6 8.1 7.7 PAT margin 3.1 3.0 4.5 4.1 3.7 Tax rate 36.2 35.5 35.2 35.4 34.9

Source: Company, Kotak Institutional Equities

18 KOTAK INSTITUTIONAL EQUITIES RESEARCH Avenue Supermarts Others

Exhibit 2: SSSG at 21.2% was in line with FY2016 Exhibit 3: Strong SSSG has steadily boosted revenue throughput SSSG trend of Dmart, March fiscal year-ends, 2012-17 (%) Revenue per sq. ft trend of Dmart, March fiscal year-ends, 2012-17 xxxxxxxxxx (Rs 000/sq. ft)

SSSG (%) Revenue per sq. ft (Rs 000) (%) (Rs 000) 35 35 31 32 30 28 30 26 25 23 26 25 22 20 21 21 20 20 20 15 15

15 10

10 5 2012 2013 2014 2015 2016 2017 2012 2013 2014 2015 2016 2017

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

Exhibit 4: Dmart added 21 new stores in FY2017 Year-ending store count of Dmart, March fiscal year-ends, 2012-17

Store count (#)

150 131 130 110 110 89 90 75 70 62 55 50

30

10 2012 2013 2014 2015 2016 2017

Source: Company, Kotak Institutional Equities

xx

KOTAK INSTITUTIONAL EQUITIES RESEARCH 19 Others Avenue Supermarts

Exhibit 5: Dmart is steadily adding stores in new states Geographic spread of Dmart's stores (#)

31-Mar-12 31-Mar-16 31-Mar-17 Maharashtra 34 58 60 Gujarat 14 26 29 AP & Telangana 4 16 21 Karnataka 3 6 10 MP & Chattisgarh — 4 5 Rajasthan — — 3 NCR — — 1 Daman — — 1 Tamil Nadu — — 1

Total 55 110 131

Source: Company, Kotak Institutional Equities

Exhibit 6: Changes in estimates for Dmart (consolidated), March fiscal year-ends, 2018-20E

New estimates Old estimates % revision 2018E 2019E 2020E 2018E 2019E 2020E 2018E 2019E 2020E Total Revenue (Rs mn) 154,022 193,788 237,703 149,712 189,054 232,582 2.9 2.5 2.2 Revenue growth (%) 29 26 23 29 26 23 EBITDA (Rs mn) 13,255 16,889 20,875 13,391 17,153 21,289 (1) (2) (2) EBITDA margin (%) 8.6 8.7 8.8 8.9 9.1 9.2 Net Profit (Rs mn) 8,086 10,253 12,700 8,193 10,084 12,544 (1.3) 1.7 1.2 EPS (Rs) 13.0 16.4 20.4 13.1 16.2 20.1 (1.3) 1.7 1.2 EPS growth (%) 52 27 24 45 23 24

Source: Kotak Institutional Equities estimates

20 KOTAK INSTITUTIONAL EQUITIES RESEARCH Avenue Supermarts Others

Exhibit 7: March 2019 DCF valuation of Dmart, March fiscal year-ends, 2018-40E

2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027E 2028E 2029E 2030E 2035E 2040E Net Sales 154,022 193,788 237,703 288,818 346,036 407,883 473,777 542,938 613,489 690,039 773,310 863,030 957,604 1,479,813 1,988,713 Yoy growth (%) 29 26 23 22 20 18 16 15 13 12 12 12 11 8 5 EBIT 11,667 14,913 18,454 22,145 26,002 30,124 34,389 38,684 43,711 49,165 55,098 61,491 68,229 104,992 141,099 EBIT margin (%) 7.6 7.7 7.8 7.7 7.5 7.4 7.3 7.1 7.1 7.1 7.1 7.1 7.1 7.1 7.1 EBIT*(1-tax rate) 7,583 9,693 11,995 14,394 16,902 19,581 22,353 25,145 28,412 31,957 35,814 39,969 44,349 68,245 91,714 Depreciation/Amortisation 1,588 1,976 2,421 2,973 3,608 4,285 5,007 5,777 6,595 7,463 8,383 9,358 10,391 12,109 13,733 (Inc.)/Dec. in working capital (547) (867) (958) (1,115) (1,248) (1,349) (1,437) (1,509) (1,539) (1,670) (1,816) (1,957) (2,063) (2,353) (2,045) Capital expenditure (8,245) (8,795) (10,751) (13,499) (14,398) (15,352) (16,366) (17,443) (18,512) (19,613) (20,790) (22,034) (23,348) (6,379) (7,949) Free cash flows 380 2,008 2,707 2,753 4,864 7,165 9,557 11,970 14,957 18,138 21,590 25,335 29,329 71,622 95,453 Years discounted — — 1 2 3 4 5 6 7 8 9 10 11 16 21 Discount factor 1.00 0.90 0.81 0.73 0.66 0.59 0.53 0.48 0.43 0.39 0.35 0.32 0.19 0.11 Discounted cash flow — 2,008 2,438 2,234 3,556 4,720 5,671 6,400 7,204 7,871 8,440 8,923 9,305 13,486 10,666

Risk free rate (%) 6.0 Risk premium (%) 5.0 Beta (X) 1.0 WACC (%) Cost of equity (%) 11.0 580 10.0 10.5 11.0 11.5 12.0 WACC (%) 11.0 4.0 673 599 538 485 440 Terminal growth rate (%) 5.0 Terminal 4.5 705 624 557 501 452 Sum of free cash flow (Rs mn) 199,381 growth 5.0 744 654 580 518 467 Terminal value (Rs mn) 186,658 rate (%) 5.5 792 690 607 539 483 Enterprise value (Rs mn) 386,039 6.0 851 733 640 564 502 Investments (Rs mn) — Net debt (Rs mn) (11,998) Equity value (Rs mn) 398,037 No. of shares (mn) 687 Equity value per share (Rs) 580

Number of new stores set-up (#) 25 25 25 35 35 35 35 35 35 35 35 35 35 — — Cumulative number of stores (#) 156 181 206 241 276 311 346 381 416 451 486 521 556 556 556

Source: Kotak Institutional Equities

Exhibit 8: Key assumptions for Dmart, March fiscal year-ends, 2012-20E

2012 2013 2014 2015 2016 2017E 2018E 2019E 2020E Revenue Net revenues (Rs mn) 22,086 33,409 46,865 64,394 85,838 118,977 154,022 193,788 237,703 Yoy growth (%) 51 40 37 33 39 29 26 23 SSSG (%) 20 32 26 22 21 21 20 18 17 Revenue per sq. ft (Rs) 15,324 20,116 23,419 26,388 28,136 31,925 34,810 37,858 40,445

Margins Gross margin (%) 14.7 14.5 15.0 14.8 14.9 15.3 15.3 15.4 15.5 EBITDA margin (%) 6.2 6.4 7.3 7.1 7.7 8.2 8.6 8.7 8.8

Capital expenditure Period-ending store count (#) 55 62 75 89 110 131 156 181 206 New store additions (#) 10 7 13 14 21 21 25 25 25 Retail trading area (mn sq. ft) 1.6 1.8 2.1 2.7 3.3 4.1 4.7 5.5 6.2 Capital expenditure (Rs mn) 2,086 1,863 2,999 4,333 6,580 7,070 8,245 8,795 10,751

Working capital Inventory days (#) 32 30 29 31 29 29 29 29 29 Debtor + loans and advances days (#) 10 10 8 8 0 1 1 1 1

Creditor days (#) 19 16 14 11 21 25 25 25 25

Source: Company, Kotak Institutional Equities

x

KOTAK INSTITUTIONAL EQUITIES RESEARCH 21 Others Avenue Supermarts

Exhibit 9: Consolidated income statement, balance sheet and cash flow, March fiscal year-ends, 2012-20E (Rs mn)

2012 2013 2014 2015 2016 2017E 2018E 2019E 2020E Income statement Net revenues 22,086 33,409 46,865 64,394 85,838 118,977 154,022 193,788 237,703 Gross profit 3,246 4,834 7,021 9,522 12,802 18,167 23,518 29,783 36,770 EBITDA 1,380 2,150 3,418 4,590 6,636 9,812 13,255 16,889 20,875 Depreciation (375) (458) (570) (815) (984) (1,278) (1,588) (1,976) (2,421) EBIT 1,006 1,692 2,848 3,775 5,652 8,534 11,667 14,913 18,454 Other income 139 143 158 183 179 286 1,250 1,034 1,236 Financial charges (260) (426) (557) (724) (913) (1,220) (80) (57) (35) Pre-tax profit 884 1,409 2,449 3,233 4,918 7,600 12,837 15,889 19,654 Taxation (282) (472) (835) (1,109) (1,715) (2,683) (4,493) (5,561) (6,879) Net income 602 937 1,614 2,124 3,203 4,917 8,344 10,328 12,775 Prior period items (7) 2 (0) (5) — — — — — Minority interest & associate profits — — — (0) (1) (129) (258) (75) (75) Reported net income 594 939 1,614 2,119 3,202 4,788 8,086 10,253 12,700 Year-ending number of shares - diluted (mn) 506 538 546 547 562 563 624 624 624 EPS (Rs) 1.2 1.7 3.0 3.9 5.7 8.5 13.0 16.4 20.4 Balance sheet Shareholders' funds 6,811 7,890 9,550 11,989 15,204 38,418 46,504 56,757 69,457 Minority interest 3 3 0 1 1 1 1 1 1 Total debt 3,807 5,261 6,408 9,043 10,370 11,198 888 388 388 Deferred tax liability 131 203 267 305 399 505 505 505 505 Total shareholders' funds + liabilities 10,752 13,356 16,226 21,337 25,974 50,122 47,899 57,652 70,352 Net fixed assets 8,640 10,428 12,605 16,262 21,752 27,033 33,689 40,508 48,838 Investments 227 160 155 152 293 531 531 531 531 Cash balances 479 616 554 380 351 18,843 10,319 12,386 15,799 Net current assets excluding cash 1,406 2,153 2,911 4,542 2,648 2,812 3,359 4,227 5,185 Total assets 10,752 13,356 16,226 21,337 25,974 50,122 47,899 57,652 70,352 Key ratios (%) Revenue growth NA 51.3 40.3 37.4 33.3 38.6 29.5 25.8 22.7 EBITDA growth NA 55.8 59.0 34.3 44.6 47.9 35.1 27.4 23.6 EPS growth NA 48.5 69.4 31.1 47.2 49.1 52.4 26.8 23.9 Gross margin 14.7 14.5 15.0 14.8 14.9 15.3 15.3 15.4 15.5 EBITDA margin 6.2 6.4 7.3 7.1 7.7 8.2 8.6 8.7 8.8 Tax rate 31.9 33.5 34.1 34.3 34.9 35.0 35.0 35.0 35.0 Debt/equity (X) 0.6 0.7 0.7 0.8 0.7 0.3 0.0 0.0 0.0 RoE 13 19 20 24 18 19 20 20 RoCE 10 13 14 16 15 17 20 20 Cash flow Operating profit before working capital changes 1,236 1,821 2,741 3,663 5,101 7,286 9,754 12,287 15,156 Change in working capital/ other adjustments (510) (746) (759) (1,631) 1,894 (164) (547) (867) (958) Capital expenditure (1,833) (2,246) (2,747) (4,473) (6,474) (6,559) (8,245) (8,795) (10,751) Free cash flow (1,106) (1,171) (765) (2,440) 520 563 962 2,625 3,447

Source: Company, Kotak Institutional Equities estimates

22 KOTAK INSTITUTIONAL EQUITIES RESEARCH ADD Tata Communications (TCOM) Telecom MAY 08, 2017 RESULT Coverage view: Cautious

In the value zone, again. Sharp correction in the stock post the 4QFY17 earnings Price (`): 641 print has brought the stock back to the value zone, in our view. We introduce our post- Target price (`): 730 transactions forecasts and a clean sum-of-the-parts valuation. Our revised SoTP-based BSE-30: 29,859 fair value for the stock is ₹730/share (₹670 earlier); we value – (1) surplus land at ₹215/share, 50% discount to gross NAV, (2) voice business at 3X and data business at 6.75X FY2019E EBITDA, and (3) 26% stake in DC business at recent transaction value. Reiterate ADD. Business remains on firm footing, in our view.

Company data and valuation summary Tata Communications Stock data Forecasts/Valuations 2017 2018E 2019E 52-week range (Rs) (high,low) 784-418 EPS (Rs) 10.5 16.6 22.9 Market Cap. (Rs bn) 182.8 EPS growth (%) 540.1 57.9 38.1 Shareholding pattern (%) P/E (X) 61.1 38.7 28.0 Promoters 75.0 Sales (Rs bn) 176.2 176.7 185.9 FIIs 11.1 Net profits (Rs bn) 3.0 4.7 6.5 MFs 4.2 EBITDA (Rs bn) 24.1 26.5 29.5 Price performance (%) 1M 3M 12M EV/EBITDA (X) 10.7 9.6 8.4 Absolute (11.9) (14.4) 51.2 ROE (%) 51.0 26.0 27.6 Rel. to BSE-30 (11.5) (19.0) 27.9 Div. Yield (%) 1.0 1.0 1.0

Model revision: we forecast adjusted (for DC rental income) EBITDA of ₹31.5 bn for FY2019E

We have incorporated the impact of the three recently consummated transactions (sale of Neotel stake and 74% stake sale in India and Singapore data centers) in our model. Exhibit 1 summarizes the revised financial forecasts and key assumptions. We are now looking at an adjusted EBITDA (voice and data combined, including DC rental income reported as part of other income in financials) of ₹28.5 bn and ₹31.5 bn for FY2018E and FY2019E, respectively. We discuss key assumptions driving our model below:

 Voice business – we expect the trend of secular decline in voice revenues and EBITDA to continue and forecast voice segment EBITDA of ₹3 bn in FY2019E versus ₹4.3 bn in FY2017E. This is slightly lower than management’s outlook of US$45-50 mn sustainable simple FCF for the segment (this guidance would equate to US$50-55 mn EBITDA).

 Data business – we build in an EBITDA of ₹23.1 bn for FY2018E and ₹26.5 bn for FY2019E; adjusted EBITDA would be ₹25.1 bn and ₹28.5 bn, respectively. We expect weakness in the India ATM business to sustain for another 2-3 quarters and bake in a slower margin expansion trajectory than guided by the management. We build in high single digit (8-9%) growth in data segment revenues in US$ terms for the next couple of years; this roughly implies low single digit growth in traditional services and 20-25% growth in growth services.

 Balance sheet – our capex assumptions for FY2018E and FY2019E stand at US$267 mn and US$273 mn, respectively, marginally ahead of management’s guidance of US$250 mn. We estimate net debt to be ₹64.4 bn at end-FY2019E from end-FY2017 levels of ₹74.6 bn. We expect consolidated pre-tax RoCE to move up to the 15% mark by FY2020E.

Rohit Chordia SoTP-based fair value target of ₹730/share; remains a solid compounding story. ADD

Exhibit 2 depicts our SoTP valuation for the company. We believe we have been reasonably conservative in our valuation. As highlighted earlier, we value data business at 6.75X EV/EBITDA, voice at 3X and ascribe a 50% discount to gross NAV of surplus land. Our fair value target of ₹730/share implies a 14% upside. Reiterate ADD.

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

Quick recap of clean-slate financials for 4QFY17 and FY2017

TCOM’s 4QFY17 reported earnings print was full of one-offs and still had part quarter consolidation of the sold Singapore DC and Neotel businesses. We present a filtered noise- free, clean-slate 4QFY17 and FY2017 view of the business post completed DC and Neotel sale transactions below (Exhibit 4 captures these details):

 Consolidated revenues – consolidated clean reported revenues for 4QFY17 and FY2017 stood at ₹42.9 bn and ₹174.9 bn, respectively. We make the following adjustments to arrive at adjusted revenues – (1) rental income and professional fee earned from sold DC business; accounting-wise, these are reported as non-operating other income; however, we view these as operating, (2) prior-period revenue impact of adverse ruling on access facilitation charges, and (3) demonetization impact on the company’s payment solutions business; this impact may continue for a couple of more quarters, per the company and to that extent, is not exactly non-recurring. Adjusted for these three items, revenues for 4QFY17 and FY2017 stood at ₹43.9 bn and ₹177 bn, respectively.

 Consolidated EBITDA – consolidated clean reported EBITDA for 4QFY17 and FY2017 stood at ₹5 bn and ₹23.4 bn, respectively. We make the following adjustments to arrive at adjusted EBITDA – (1) rental income and professional fee earned from sold DC business; accounting-wise, these are reported as non-operating other income; however, we view these as operating, (2) prior-period EBITDA impact of adverse ruling on access facilitation charges, (3) demonetization impact on the company’s payment solutions business; this impact may continue for a couple of more quarters, per the company and to that extent, is not exactly non-recurring and (4) US$17 mn one-off costs in 4QFY17. Adjusted for these four items, EBITDA for 4QFY17 and FY2017 stood at ₹7 bn and ₹27.1 bn, respectively. Adjusted EBITDA margin for 4QFY17 was 15.9% while that for FY2017 was 15.3%.

 Data segment – on an adjusted basis, data segment accounted for roughly 66% of gross revenues and 84% of EBITDA in 4QFY17; we do note that voice segment had a stronger-than-normal EBITDA delivery in 4QFY17 and we expect data segment EBITDA contribution to be closer to 90% going forward. Adjusted revenues, EBITDA and margin for this segment for FY2017 stood at ₹109.8 bn, ₹22.8 bn and 20.7%, respectively; adjusted EBITDA for 4QFY17 was ₹5.9 bn. Management reiterated its outlook of consistent double-digit topline growth and a move towards 30% EBITDA margin mark in the medium term, while refusing to entertain questions on what medium term means.

 Voice segment – 34% of revenues and 16% of EBITDA in 4QFY17. FY2017 gross revenues and EBITDA stood at ₹67.2 bn and ₹4.3 bn, respectively. Simple FCF was ₹4 bn. Management’s guidance indicated likely sustained decline in this business. Sustainable FCF guidance has now come down to US$45-50 mn per annum (from US$100 mn or thereabouts not too far back). The only positive here is that the voice segment is now a reasonably small part of the overall business and hence not as material a drag as it has historically been.

 Net debt, RoCE – net debt, clean-slate basis, post net inflows from and net debt reduction pertaining to the DC and Neotel sale transactions, stands at ₹74.6 bn. Net debt to quarter annualized adjusted EBITDA stands at 2.7X, the best it has been in years. Clean-slate RoCE on EOP capital employed was 9.3% for FY2017; we expect this to inch up towards the mid-teens over the next few years unless the company overshoots on its reiterated capex guidance of US$250 mn per annum.

24 KOTAK INSTITUTIONAL EQUITIES RESEARCH Tata Communications Telecom

Exhibit 1: TCOM – forecasts and underlying assumptions, March fiscal year-ends, 2017-21E

Rs bn 2017 2018E 2019E 2020E 2021E Key financials P&L Consolidated revenues 176.2 176.7 185.9 190.0 194.0 Consolidated EBITDA 24.1 26.5 29.5 31.9 34.4 Adjusted EBITDA 24.9 28.5 31.5 33.9 36.4 EBITDA margin (%) 13.7 15.0 15.9 16.8 17.7 Adjusted EBITDA margin (%) 14.1 16.0 16.8 17.7 18.6 EBIT 5.4 7.4 9.9 11.9 14.0 Adjusted EBIT 6.2 9.4 11.9 13.9 16.0 Recurring PAT 3.0 4.7 6.5 8.2 10.1 EPS (Rs/share) 10.5 16.6 22.9 28.8 35.6 Balance sheet Shareholders' equity 16.1 20.7 27.0 34.9 44.7 Gross debt 101.5 98.5 95.5 92.5 89.5 Other liabilities 93.4 94.1 97.1 97.5 97.7 Total equity and liabilities 211.0 213.3 219.6 224.9 232.0 Net fixed assets 116.8 115.3 114.3 113.3 112.3 Current assets 32.4 36.1 39.2 41.4 43.6 Strategic investments 16.3 16.3 16.3 16.3 16.3 Cash and equivalents 26.9 26.9 31.1 35.3 41.2 Other assets 18.6 18.6 18.6 18.6 18.6 Total assets 211.0 213.3 219.6 224.9 232.0 Net debt 74.6 71.6 64.4 57.2 48.3 ROCE (%) 5.9 9.4 12.6 15.1 17.6 Adjusted ROCE (%) 6.9 12.0 15.1 17.6 20.1 Capex (US$ mn) 244 267 273 279 285

Key assumptions Voice segment Revenues 67.6 57.3 53.1 48.0 43.4 EBITDA 4.3 3.4 3.0 2.5 2.2 EBITDA margin (%) 6.3 6.0 5.6 5.3 5.0 Data segment Revenues 108.7 119.5 132.7 142.0 150.5 EBITDA 19.8 23.1 26.5 29.4 32.2 EBITDA margin (%) 18.2 19.3 20.0 20.7 21.4 Adjusted EBITDA 20.6 25.1 28.5 31.4 34.2 Adjusted EBITDA margin (%) 18.8 20.6 21.2 21.8 22.4

Notes: (a) Financials for FY2017 reflect those of continuing operations only.

Source: Company, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 25 Telecom Tata Communications

Exhibit 2: Our sum-of-the-parts target price for TCOM is Rs730/share

Comments Voice business Mar-2019E EBITDA (Rs bn) 3.0 EV/EBITDA (x) 3.00 Enterprise value (Rs bn) 9 Data business Mar-2019E EBITDA (including rental income from DC) (Rs bn) 28.5 EV/EBITDA (x) 6.75 Enterprise value (Rs bn) 192 Others Surplus real estate (Rs bn) 61 50% of estimated market value of surplus land Investment in TATA Teleservices (TTSL) (Rs bn) — Not ascribing any value to this stake Value of 26% stake in DC business sold to STT (Rs bn) 10 Total EV ex-transactions (Rs bn) 273 Consolidated net debt (post-transactions, Rs bn) 64 Net equity value (Rs bn) 208 Equity value per share (Rs/share) 730

Source: Kotak Institutional Equities estimates

Exhibit 3: Derivation of value of surplus land held by TCOM

Estimated value Location Acres (000 sq ft) (Rs/sq ft) (Rs mn) Delhi—Greater Kailash 70 3,049 32,000 97,575 Delhi—Chattarpur 58 2,526 3,000 7,579 Pune—Dighi 524 22,826 500 11,413 Kolkata—Halisahar 35 1,533 500 766 Chennai—Padinallur 86 3,744 1,250 4,679 Total 773 33,678 122,013 Net value per TCOM share (Rs/share) 428 Value added to our target price—50% 214

Source: Kotak Institutional Equities estimates

26 KOTAK INSTITUTIONAL EQUITIES RESEARCH Tata Communications Telecom

Exhibit 4: TCOM – clean-slate view post DC and Neotel sale

Rs bn 4QFY17 FY2017 Overall Ex-DC, ex-Neotel revenues 42.9 174.9 Adjustments: Add: Rental income from DC (a) 0.5 0.8 Non-recurring access facilitation impact 0.1 0.6 Demonetization impact (b) 0.4 0.7 Adjusted revenues 43.9 177.0 Ex-DC, ex-Neotel EBITDA 5.0 23.4 Reported EBITDA margin (%) 11.7 13.4 Add: Rental income from DC (a) 0.5 0.8 One-off costs 1.1 1.1 Non-recurring access facilitation impact 0.1 1.3 Demonetization impact (b) 0.2 0.4 Adjusted EBITDA 7.0 27.1 Adjusted EBITDA margin (%) 15.9 15.3

Data segment Ex-DC, ex-neotel revenues 27.8 107.7 Adjusted revenues 28.8 109.8 Reported EBITDA 3.9 19.1 Reported EBITDA margin (%) 14.1 17.7 Adjusted EBITDA 5.9 22.8 Adjusted EBITDA margin (%) 20.4 20.7 % of revenues from data (adjusted) 65.6 62.0 % of EBITDA from data (adjusted) 84.2 84.1

Voice segment Revenues 15.0 67.2 EBITDA 1.1 4.3 EBITDA margin (%) 7.3 6.4 % of revenues from voice (adjusted) 34.2 38.0 % of EBITDA from voice (adjusted) 15.8 15.9

Other key financial metrics Net debt 74.6 74.6 Overall adjused EBIT 2.3 8.4 Capital employed (EOP) 90.6 90.6 Adjusted ROCE (%) (c) 10.1 9.3

Notes: (a) Included as part of other income in reported financials (b) Demonetization impact on payments (TCPSL) business (c) Adjusted ROCE for 4QFY17 on quarter-annualized EBIT

Source: Company, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 27 BUY Apollo Tyres (APTY) Automobiles MAY 08, 2017 RESULT Coverage view: Cautious

Look beyond the quarter. Apollo reported 26% yoy decline in consolidated EBITDA in Price (`): 246 4QFY17 (17% below estimates) as steep increase in RM prices impacted profitability in Target price (`): 290 both India and Europe businesses. We expect profitability to improve significantly in BSE-30: 29,859 2HFY18 due to (1) price increases taken by the company and (2) recent fall in both natural and synthetic rubber prices. This, coupled with strong volume growth outlook, will drive 17%/13% EBITDA/EPS CAGR over FY2017-20E. Valuations are not demanding at 9.3X FY2019E EPS; maintain BUY with revised TP of `290 (from `250).

Company data and valuation summary Apollo Tyres Stock data Forecasts/Valuations 2017 2018E 2019E 52-week range (Rs) (high,low) 254-139 EPS (Rs) 21.6 19.3 26.4 Market Cap. (Rs bn) 125.2 EPS growth (%) 4.1 (10.8) 37.0 Shareholding pattern (%) P/E (X) 11.4 12.8 9.3 Promoters 44.1 Sales (Rs bn) 131.8 152.0 177.3 FIIs 32.9 Net profits (Rs bn) 11.0 9.8 13.4 MFs 6.5 EBITDA (Rs bn) 18.5 19.8 26.0 Price performance (%) 1M 3M 12M EV/EBITDA (X) 6.4 6.2 4.8 Absolute 16.0 34.2 58.2 ROE (%) 15.8 12.8 15.5 Rel. to BSE-30 16.5 26.9 33.9 Div. Yield (%) 1.2 1.2 1.2

4QFY17 results impacted by steep increase in RM prices; double-digit revenue growth positive

Apollo reported consolidated 4QFY17 EBITDA of `3.7 bn (down 26% yoy) which was 17% below our estimates due to lower-than-expected gross margin in both India and Europe businesses. Consolidated revenues grew by 10.3% yoy (KIE 8.5%) led largely by (1) 16% revenue growth in the Europe business due to 19% yoy growth in Vredestein and (2) 9% yoy revenue growth in India business led by strong growth in PCR volumes and 3% higher ASPs. Consolidated EBITDA margin came in at 11.1% (down 540 bps yoy and 330 bps qoq) which was 260 bps below our estimates. Standalone EBITDA margin declined by 300 bps qoq to 11.6% (KIE 13%) due to 510 bps sequential decline in gross margin. EBIT margin of Europe business was 3.8% (up 80 bps yoy, but down 650 bps qoq) which was significantly below our estimate of 10% largely due to weaker profitability in the Vredestein business (EBITDA margin down 540 bps qoq) as the company was not able to take price increase to pass on RM cost impact. The company reported net profit of `2.3 bn (down 16% yoy) which was 3% below our estimates; lower miss at PAT level was due to lower tax rate (11.7% in 4QFY17 versus estimate of 26%). Profitability to recover strongly in 2HFY18; revenue growth visibility improves post expansion

We expect standalone EBITDA margin to improve to 14% in 2HFY18 (after a slight dip in 1QFY18) due to (1) 3% price increase in April 2017 and (2) post recent correction, natural and synthetic rubber prices are closer to average procurement cost of the company in 4QFY17. Increase in prices of winter tyres will drive improvement in profitability of Vredestein in 2HFY18. We expect Apollo to deliver 15% revenue CAGR over FY2017-20E driven by (1) 13% volume

CAGR in India due to market share gains in PCR and pick-up in TBR volumes and (2) double- Nishit Jalan digit growth in Vredestein as company explores newer growth opportunities post start of the Hungary plant. Lower our FY2018E earnings estimates; maintain BUY with revised TP of `290 (from `250) Hitesh Goel

We cut our FY2018E consolidated EPS by 12% due to lower profitability assumptions in both India and Europe businesses. We lower our FY2019E EPS by only 3% as we expect profitability to improve in 2HFY18. Valuations are not demanding at 9.3X FY2019EPS and we maintain our BUY rating with revised target price of `290 (from `250) due to (1) roll over to March 2019 and (2) increase in target P/E multiple to 11X from 10X earlier.

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

Key takeaways from the conference call

 Market share gain in PCR drives volume growth in domestic business: Tonnage volumes in India business grew by 6% yoy in 4QFY17 led by (1) 20% yoy growth in passenger vehicle radial tyres (PCR) and (2) 3-4% yoy growth in truck and bus segment. We note that for FY2017, Apollo’s PCR tyre volumes increased by 20% yoy (industry growth would be 9-10%) which is driven by market share gains in the OEM segment. The company has won orders for Maruti’s recent new models (Baleno and Brezza); these will likely drive strong growth in replacement segment in the future as well.

 New TBR plant will drive double-digit growth in MHCV revenues over FY2017-19E: The company has commissioned its new truck bus radial tyre (TBR) facility which has a production capacity of 6,000 TBRs per day. The company has set itself an ambitious target of utilizing 90% of the capacity by FY2019E. We are building in 25% and 40% utilization in FY2018E and FY2019E respectively. This could drive double-digit revenue growth in MHCV segment for the company over FY2017-19E (even after assuming flat TBB revenues). The management highlighted that Chinese TBR imports have come down by almost 50% from peak levels over the last two months.

 Price increase in India business: The company has taken 6% price increase over the past four months; 3% was taken over 4QFY17 and the remaining 3% was taken in April 2017.

 RM cost will inch up further in 1QFY18; will come off in subsequent quarter: Average price of raw materials increased by 12% qoq in 3QFY17 and will likely increase by 10% further in 4QFY17 due to steep increase in prices of both natural and synthetic rubber (50% of RM cost). Natural rubber and synthetic rubber prices for the company was `155/kg in 4QFY17 (up 15-29% qoq); this includes freight and other charges of `10- 12/kg. We note that both natural and synthetic rubber prices have come down quite significantly over the past two months (refer to Exhibit 6-7). Current natural and synthetic rubber prices are closer to average procurement cost of the company in 4QFY17. Thus, although RM cost will inch up on qoq basis in 1QFY18, it will come down further over subsequent quarters. This, coupled with price increases, will lead to improvement in EBITDA margin of India business back to around 14% levels by 3QFY17.

 Strong revenue growth in the European business but weaker profitability: Vredestein business revenues grew by 19% yoy to EUR118 mn in 4QFY17. The growth is led by industry growth as well as market share gains as most of the company-specific issues (such as ERP implementation) are resolved now. EBITDA margin was 10.6% (16% in 3QFY17) due to higher RM costs and lack of price increases. The company, along with competitors, has announced 8% price increase for winter tyres which should help improve profitability in 2HFY18. For FY2017, Vredestein revenues are up 8% yoy to EUR456 mn. The company has commissioned a new Hungary plant in April 2017; in a phased manner, company’s PCR capacity will almost double to 12 mn tyres by FY2019E. We expect Vredestein to deliver 15% volume CAGR over FY2017-20E led by market share gains in the replacement segment and new growth opportunities such as (1) increased supplies to OEMs (already won new orders from VW and Mercedes, as per media reports) and (2) exports of winter tyres to USA and Canada which was not a focus area till now due to capacity constraints. Revenue of Reifencom business was EUR237 mn and EBITDA margin was -5% (EUR60 mn and 3-5% EBITDA margin in 3QFY17).

 Capex and net debt levels: The company in guiding towards capex of `25 bn in FY2018E; of which `13 bn will be incurred in the India business (completion of Chennai TBR plant) and `12 bn in Europe towards the Hungary plant. Standalone net debt is around `12.5 bn while consolidated net debt is `27 bn. We are building in capex of `13 bn in FY2019E as the company will need to expand PCR capacity as current utilization is around 85%. Land acquisition is under process in Andhra Pradesh (200 acres) which will

KOTAK INSTITUTIONAL EQUITIES RESEARCH 29 Automobiles Apollo Tyres

likely be complete over the next six months post which the company will announce further capacity expansion plans.

 FY2017 revenue mix of the standalone business was: MHCVs: 60 (radial: bias tyre mix is 50:50), PCR: 20%, LCV: 9%; Farm: 9% and the remaining 2% from other segments.

 In the two-wheeler segment, volume ramp-up has got impacted by slowdown in two- wheeler industry post demonetization. For FY2017, monthly volume run-rate for the company was 100,000 tyres per month which the company plans to double in FY2018E.

Exhibit 1: 4QFY17 consolidated results was below expectations due to lower profitability in both Europe and India business Interim results of Apollo Tyres, consolidated, March fiscal year-ends (` mn)

(% chg.) 4QFY17 4QFY17E 4QFY16 3QFY17 4QFY17E 4QFY16 3QFY17 FY2017 FY2016 (% chg.) FY2018E Total Income 33,256 32,726 30,149 34,579 1.6 10.3 (3.8) 131,800 118,486 11.2 151,955 Total Expenditure (29,557) (25,186) (29,585) 17.4 (0.1) (113,336) (98,511) (132,134) Raw materials (18,691) (14,788) (18,108) 26.4 3.2 (68,901) (59,548) (82,640) Employee expense (4,120) (4,272) (4,506) (3.6) (8.6) (17,421) (15,708) (19,163) Other expenditure (6,746) (6,126) (6,971) 10.1 (3.2) (27,015) (23,255) (30,331) EBITDA 3,699 4,482 4,963 4,993 (17.5) (25.5) (25.9) 18,464 19,975 (7.6) 19,821 Depreciation (1,366) (1,300) (1,209) (1,135) 5.1 13.0 20.4 (4,618) (4,268) (6,189) Interest (248) (360) (241) (283) (31.1) 3.1 (12.5) (1,029) (926) (1,515) Other income 500 370 204 373 35.1 144.4 33.9 1,541 680 1,314 PBT 2,585 3,192 3,718 3,949 (19.0) (30.5) (34.5) 14,359 15,461 (7.1) 13,432 Share of profit from associates 0 (1) (15) (1) (3) (32) Exceptional income/(loss) 0 0 0 0 0 478 Tax expenses (303) (830) (983) (991) (63.5) (69.2) (69.4) (3,365) (4,677) (3,627) PAT 2,282 2,361 2,721 2,957 (16.1) (22.8) 10,990 11,230 (2.1) 9,805 Adjusted PAT 2,282 2,361 2,721 2,957 (3.3) (16.1) (22.8) 10,990 10,896 0.9 9,805 Adjusted EPS (Rs) 4.5 4.6 5.3 5.8 (3.3) (16.1) (22.8) 21.6 21.4 19.3 Ratios (%) Gross margin 43.8 50.9 47.6 47.7 49.7 45.6 Employee cost as % of sales 12.4 14.2 13.0 13.2 13.3 12.6 Other expenditure as % of sales 20.3 20.3 20.2 20.5 19.6 20.0 EBITDA (%) 11.1 13.7 16.5 14.4 14.0 16.9 13.0 Effective tax rate 11.7 26.0 26.4 25.1 23.4 30.3 27.0

Source: Company, Kotak Institutional Equities estimates

Exhibit 2: 4QFY17 standalone EBITDA was 10% below estimates on lower-than-expected gross margin Interim results of Apollo Tyres, standalone, March fiscal year-ends (` mn)

(% chg.) 4QFY17 4QFY17E 4QFY16 3QFY17 4QFY17E 4QFY16 3QFY17 FY2017 FY2016 (% chg.) FY2018E Total Income 23,838 23,572 21,804 22,010 1.1 9.3 8.3 89,338 87,572 2.0 106,319 Total Expenditure (21,070) (20,511) (17,825) (18,786) 2.7 18.2 12.2 (76,065) (71,912) (92,510) Raw materials (15,100) (14,261) (11,927) (12,801) 5.9 26.6 18.0 (52,160) (49,922) (66,006) Employee expense (1,406) (1,550) (1,447) (1,451) (9.3) (2.9) (3.1) (5,907) (5,659) (6,498) Other expenditure (4,564) (4,700) (4,451) (4,534) (2.9) 2.5 0.7 (17,997) (16,331) (20,006) EBITDA 2,768 3,061 3,979 3,224 (9.6) (30.4) (14.1) 13,273 15,660 (15.2) 13,808 Depreciation (931) (800) (682) (676) 16.4 36.6 37.8 (2,882) (2,651) (3,920) Interest (213) (290) (239) (232) (26.5) (10.8) (8.1) (888) (901) (1,065) Other income 469 230 226 235 103.8 107.3 99.5 1,353 2,038 1,083 PBT 2,093 2,201 3,285 2,551 (4.9) (36.3) (18.0) 10,856 14,145 (23.3) 9,906 Exceptional items — — — — — — — Tax expense (330) (638) (1,019) (697) (48.3) (67.6) (52.6) (2,829) (4,124) (2,774) PAT 1,763 1,563 2,266 1,855 12.8 (22.2) (4.9) 8,028 10,021 (19.9) 7,132 EPS 3.5 3.1 4.5 3.6 12.8 (22.2) (4.9) 15.8 19.7 (19.9) 14.0 Ratios (%) RM as % of sales 63.3 60.5 54.7 58.2 58.4 57.0 62.1 Employee cost as % of sales 5.9 6.6 6.6 6.6 6.6 6.5 6.1 Other expenditure as % of sales 19.1 19.9 20.4 20.6 20.1 18.6 18.8 EBITDA (%) 11.6 13.0 18.3 14.6 14.9 17.9 13.0 Effective tax rate 15.8 29.0 31.0 27.3 26.1 29.2 28.0

Source: Company, Kotak Institutional Equities estimates

30 KOTAK INSTITUTIONAL EQUITIES RESEARCH Apollo Tyres Automobiles

Exhibit 3: Standalone volumes grew by 6% yoy in 3QFY17 while realizations were up 3% yoy Trend in operating parameters for the standalone business, Apollo Tyres, March fiscal year-ends

1QFY15 2QFY15 3QFY15 1QFY16 2QFY16 3QFY16 4QFY16 1QFY17 2QFY17 3QFY17 4QFY17 Yoy (%) Qoq (%) Tonnage (tons) 103,688 101,074 108,053 105,261 107,835 108,149 115,617 118,945 105,679 115,000 122,554 6.0 6.6 Net sales per kg (Rs) 217.0 209.9 209.1 203.7 210.0 199.5 188.6 191.1 196.4 191.4 194.5 3.1 1.6 RM per kg (Rs) 136.7 133.1 126.4 116.0 124.0 114.7 103.2 104.9 111.5 111.3 123.2 19.4 10.7 GM per kg (Rs) 80.3 76.8 82.7 87.7 86.0 84.8 85.4 86.2 84.9 80.1 71.3 (16.5) (10.9)

Source: Company, Kotak Institutional Equities

Exhibit 4: Europe business performance was weak due to lower profitability led by higher RM cost and seasonality in Reifencom business Interim segmental results of Apollo Tyres, consolidated, March fiscal year-ends (` mn)

1QFY15 2QFY15 3QFY15 4QFY15 1QFY16 2QFY16 3QFY16 4QFY16 1QFY17 2QFY17 3QFY17 4QFY17 Change (%) Segment revenues Yoy Qoq Asia Pacific 23,282 22,651 21,386 22,664 24,311 23,112 22,004 22,109 23,082 21,390 22,476 24,274 10 8 Europe and America 8,759 9,957 8,916 8,849 7,369 7,630 8,177 8,562 10,577 9,942 12,619 9,915 16 (21) Others 2,634 3,186 1,906 1,410 301 2,327 2,132 1,756 2,962 3,678 3,151 4,850 176 54 Less: intersegment (1,989) (2,164) (1,616) (1,325) (995) (2,934) (2,736) (2,277) (3,505) (4,161) (3,667) (5,782) 154 58 Total revenues 32,687 33,630 30,591 31,597 30,985 30,136 29,577 30,149 33,116 30,849 34,579 33,256 10 (4) Segment EBIT Asia Pacific 2,491 2,742 2,801 3,028 3,546 3,386 3,081 3,549 3,608 3,073 2,793 2,300 (35) (18) Europe and America 1,045 1,359 1,518 953 803 431 936 253 914 453 1,299 376 49 (71) Others 66 0 (240) 71 (22) 73 59 124 66 116 113 167 35 48 Less: Interest expense (530) (496) (455) (348) (260) (256) (210) (241) (269) (228) (283) (248) Other unallocable expenses (29) (41) 5 157 (12) 64 51 33 10 73 27 (9) PBT (after exceptional expenses) 3,044 3,564 3,630 3,861 4,055 3,698 3,917 3,718 4,328 3,487 3,949 2,585 (30) (35) EBIT (%) Asia Pacific 10.7 12.1 13.1 13.4 14.6 14.7 14.0 16.1 15.6 14.4 12.4 9.5 Europe and America 11.9 13.6 17.0 10.8 10.9 5.6 11.4 3.0 8.6 4.6 10.3 3.8 Others 2.5 0.0 (12.6) 5.0 (7.3) 3.1 2.8 7.1 2.2 3.2 3.6 3.4

Source: Company, Kotak Institutional Equities

Exhibit 5: We cut our FY2017-18E consolidated EPS estimates by 3-12% on lower EBITDA margin assumptions Earnings revision table, Apollo Tyres, March fiscal year-ends, 2018-19E (` mn, %)

New estimates Old estimates Change (%) 2018E 2019E 2018E 2019E 2018E 2019E Standalone Net sales 106,319 122,321 103,324 119,766 2.9 2.1 EBITDA 13,808 17,878 15,040 18,007 (8.2) (0.7) EBITDA margin (%) 13.0 14.6 14.6 15.0 Net profit 7,132 9,840 8,135 9,935 (12.3) (1.0) EPS (Rs) 14.0 19.3 16.0 19.5 (12.3) (1.0) Consolidated Net sales 151,955 177,280 149,931 170,100 1.3 4.2 EBITDA 19,821 25,951 21,838 26,107 (9.2) (0.6) EBITDA margin (%) 13.0 14.6 14.6 15.3 Net profit 9,805 13,435 11,204 13,854 (12.5) (3.0) EPS (Rs) 19.3 26.4 22.0 27.2 (12.5) (3.0)

Source: Company, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 31 Automobiles Apollo Tyres

Exhibit 6: Domestic rubber prices have cooled off from recent Exhibit 7: Synthetic rubber prices have come down sharply over highs the last three months Kottayam natural rubber RSS4 prices, 2013-17 (` per kg) NNS Synthetic rubber prices, Korea, 2013-17 (` per kg)

Kottayam natural rubber RSS4 prices (Rs/kg) NNS Synthetic rubber Korea 1502 price Rs kg 220 240 200 220 180 200 180 160 160 140 140 120 120 100 100 80 80

60 60

Jul-14 Jul-15 Jul-16 Jul-14 Jul-15 Jul-16 Jul-13 Jul-13

Jan-13 Jan-14 Jan-16 Jan-17 Jan-13 Jan-14 Jan-16 Jan-17 Jan-15 Jan-15

Oct-14 Oct-15 Oct-16 Oct-14 Oct-15 Oct-16 Oct-13 Oct-13

Apr-14 Apr-15 Apr-16 Apr-14 Apr-15 Apr-16 Apr-13 Apr-17 Apr-13 Apr-17

Source: Bloomberg, Kotak Institutional Equities Source: Bloomberg, Kotak Institutional Equities

Exhibit 8: We expect strong double-digit revenue CAGR in both India and Vredestein business Key assumptions of standalone and European businesses, March fiscal year-ends, 2012-19E

2012 2013 2014 2015 2016 2017 2018E 2019E 2020E Standalone business Volumes (MT) 390,382 397,844 403,234 421,331 436,862 465,546 521,412 594,409 665,738 Yoy growth (%) 29 2 1 4 4 7 12 14 12 Sales (Rs mn) 81,579 85,075 87,117 89,378 87,572 89,338 106,319 122,321 136,942 Yoy growth (%) 49 4 2 3 (2) 2 19 15 12 EBITDA (Rs mn) 6,663 8,982 10,989 13,155 15,660 13,273 13,808 17,878 19,914 Yoy growth (%) 25 35 22 20 19 (15) 4 29 11 EBITDA margin (%) 8.2 10.6 12.6 14.7 17.9 14.9 13.0 14.6 14.5 EBITDA (Rs per kg) 17.1 22.6 27.3 31.2 35.8 28.5 26.5 30.1 29.9 Europe Sales (Euro mn) 427 426 459 462 424 456 543 646 743 Yoy growth (%) 16 (0) 8 1 (8) 8 19 19 15 EBITDA (Euro mn) 72 75 83 79 52 52 65 90 111 Yoy growth (%) 14 5 10 (4) (34) 0 24 39 23 EBITDA (%) 16.8 17.7 18.0 17.1 12.3 11.5 12.0 14.0 15.0

Source: Company, Kotak Institutional Equities

32 KOTAK INSTITUTIONAL EQUITIES RESEARCH Apollo Tyres Automobiles

Exhibit 9: We expect Apollo Tyres to deliver EBITDA/EPS CAGR of 17%/13% over FY2017-20E Apollo Tyres consolidated financial, March fiscal year-ends, 2012-20E (` mn)

2012 2013 2014 2015 2016 2017 2018E 2019E 2020E Profit model (Rs mn) Net sales 121,533 127,946 134,120 127,852 118,486 131,800 151,955 177,280 198,849 EBITDA 11,661 14,567 18,755 19,306 19,975 18,464 19,821 25,951 29,606 Other income 326 944 978 538 648 1,538 1,314 1,379 1,421 Interest (2,873) (3,128) (2,838) (1,828) (926) (1,029) (1,515) (1,478) (1,218) Depreciation (3,256) (3,966) (4,109) (3,883) (4,268) (4,618) (6,189) (7,193) (7,859) Profit before tax 5,858 8,418 12,787 14,133 15,430 14,355 13,432 18,660 21,950 Tax expense (1,444) (2,448) (2,269) (3,532) (4,677) (3,365) (3,627) (5,225) (6,146) Exceptional items 294 169 468 825 478 — — — — PAT 4,709 6,138 10,986 11,426 11,230 10,990 9,805 13,435 15,804 Adjusted PAT 4,503 6,020 10,659 10,848 10,896 10,990 9,805 13,435 15,804 Reported EPS (Rs) 9.3 12.1 21.6 22.4 22.1 21.6 19.3 26.4 31.0 Adjusted EPS (Rs) 8.8 11.8 20.9 21.3 21.4 21.6 19.3 26.4 31.0 Balance sheet (Rs mn) Equity 28,335 34,009 45,746 50,423 61,822 72,900 80,872 92,474 106,446 Total borrowings 28,676 26,459 16,082 11,062 13,497 34,445 39,445 34,445 26,445 Deferred tax liability 4,025 4,928 5,241 4,912 5,556 7,661 7,661 7,661 7,661 Current liabilities 22,883 19,860 23,262 19,457 29,765 37,999 39,542 43,011 45,966 Total liabilites 83,920 85,255 90,332 85,854 110,640 153,006 167,521 177,592 186,518 Net fixed assets 43,544 44,892 45,015 44,867 55,254 89,105 107,917 113,723 115,865 Goodwill 1,338 1,436 1,376 1,165 4,711 6,961 6,961 6,961 6,961 Investments 158 546 637 470 42 17 17 17 17 Cash 1,730 3,348 6,541 6,946 7,158 7,314 1,579 917 3,749 Other current assets 37,150 35,033 36,770 32,406 45,720 49,609 51,047 55,973 59,927 Total assets 83,920 85,254 90,339 85,854 112,885 153,006 167,521 177,592 186,518 Cash flow (Rs mn) Operating cash flow 8,511 11,176 12,271 14,389 14,882 14,073 14,680 19,248 22,242 Working capital changes (3,100) (1,480) 1,302 (2,286) (2,927) 4,267 105 (1,457) (999) Capital expenditure (8,117) (6,037) (1,265) (6,981) (19,880) (38,587) (25,000) (13,000) (10,000) Free cash flow (2,706) 3,659 12,309 5,122 (7,925) (20,248) (10,216) 4,791 11,243 Ratios EBITDA margin (%) 9.6 11.4 14.0 15.1 16.9 14.0 13.0 14.6 14.9 Net debt/equity (X) 0.95 0.68 0.21 0.08 0.10 0.37 0.47 0.36 0.21 Book value (Rs/share) 55.7 66.8 89.9 99.1 121.5 143.2 158.9 181.7 209.1 RoAE (%) 18.0 19.7 27.6 23.8 17.8 15.0 11.9 15.5 15.9 RoACE (%) 12.4 13.4 21.4 21.1 17.5 12.4 9.1 11.0 12.3

Source: Company, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 33 BUY L&T Infotech (LTI) Technology MAY 08, 2017 RESULT Coverage view: Cautious

Impressive execution. LTI reported strong 2.4% c/c growth, 90 bps EBITDA margin Price (`): 709 expansion and improved cash generation. We like the nice balance of growth and Target price (`): 800 margins, pretty neat in view of weak demand and adverse currency environment. We BSE-30: 29,859 expect LTI to deliver above-industry growth at relatively steady margin in FY2018-19E. We value LTI at 12X FY2019E earnings. BUY this high potential mid-tier company.

Company data and valuation summary L&T Infotech Stock data Forecasts/Valuations 2017 2018E 2019E 52-week range (Rs) (high,low) 745-595 EPS (Rs) 55.8 59.7 65.2 Market Cap. (Rs bn) 125.1 EPS growth (%) 13.3 7.0 9.2 Shareholding pattern (%) P/E (X) 13.1 12.3 11.3 Promoters 84.6 Sales (Rs bn) 65.0 71.8 80.1 FIIs 3.5 Net profits (Rs bn) 9.7 10.4 11.4 MFs 0.7 EBITDA (Rs bn) 12.3 13.5 15.2 Price performance (%) 1M 3M 12M EV/EBITDA (X) 9.1 8.0 6.8 Absolute 2.1 6.5 0.0 ROE (%) 37.6 30.5 28.7 Rel. to BSE-30 2.5 0.7 0.0 Div. Yield (%) 1.2 3.3 3.8

4QFY17— well-rounded growth with improved margins and cash flow metrics

LTI reported strong 2.4% qoq and 10.2% yoy growth in c/c terms. Revenues grew 3.7% qoq to US$254 mn. Growth was broad-based with most verticals, services and geos contributing well—BFS (6.8% qoq), Insurance (3.2%), CPG retail and pharma (5%) and Hi-tech (5.6%), North America (4%), Europe (2.5%), ADM (3.7%), ES (5.1%), IMS (3.7%) and Testing (4.8%). EBIT margin before Fx gain improved 120 bps qoq to 16.5% (KIE 15.9%) led by (1) 150 bps expansion in gross margin driven by more working days and modest reversal of provision pertaining to leave encashment on annual actuarial valuation, and (2) reduction in pass-through costs that impacted margin in the previous quarter, (3) partly offset by higher sub con expenses and rupee appreciation. Net profit of ₹2.5 bn (11% yoy) was 15% ahead of our estimate on lower depreciation (down 14% qoq) and higher-than-estimated fx gain at ₹499 mn. FCF for the year improved 75% led by solid improvement in working capital management.

Building on a strong foundation

LTI has the foundation necessary for scale—(1) strong account management capabilities, (2) well-diversified and solid presence in scale verticals of banking, insurance and manufacturing, and (3) excellent client base. The new management has instituted changes to build on these attributes—(1) creation of large deals team, (2) effective marketing, (3) focus to drive digital and analytics in key accounts, and (4) investments in digital and automation. The result of these efforts is visible in nice and balanced growth across verticals, across top to top- 20 accounts and healthy deal wins/pipeline. We note that LTI management has expressed optimism on sustaining above-industry revenue growth in FY2018.

Steady outlook, inexpensive valuations Kawaljeet Saluja

We expect LTI to grow above industry over the next couple of years led by—(1) share gains in existing clients and large deal wins, (2) digital services that are growing at a robust 20%+ and Jaykumar Doshi (3) gains from changes in front-end (sales) implemented by the CEO. LTI is well-placed to broadly maintain margins on the back of robust growth and traditional levers such as SG&A efficiency, utilization and role ratios. We incorporate 4Q results, revise currency assumption to ₹66-67/US$ (from ₹68) for FY2018-19 and broadly maintain estimates. We value LTI at 12X FY2019E earnings (risk of adverse H-1B regulation is partly captured through lower multiple).

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

A roundup of FY2017

LTI delivered 9.3% growth to US$970 mn in FY2017. In c/c terms, revenue grew 10.2% yoy. Growth was driven by BFS (8.5%) and insurance (12.2%) verticals. North America grew 8.9%, Europe 14.8% and India 29.8%. On services front, IMS grew 24.4% and AIM, enterprise integration and mobility grew 35%. Top account, top-5, top-10 and top-20 accounts grew 6.6%, 9.9%, 7.6% and 8.7%. EBIT margin expanded 160 bps to 16.2% led by 400 bps improvement in utilization including trainees to 78% and operational efficiencies. Net profit grew 16% yoy to ₹9.3 bn. Dividend paid out during the year was ₹16.55/share, 35% payout ratio.

Solid improvement in cash generation

LTI’s operating cash flow increased 60% yoy to ₹13.7 bn in FY2017. The strong growth was driven by improvement in working capital cycle. DSO days including unbilled revenues dropped to 92 days from 96 days. Free cash flow at ₹13.1 bn increased to 135% of net profit from 90%.

Key conference call highlights

 Demand outlook. LTI management expects robust growth across key verticals based on deal wins and deal pipeline. The management indicated that it continues to see healthy demand across verticals (especially BFSI) with the exception of energy & process vertical. While the management did not call deal win TCVs in the quarter, it expressed optimism on continuation of growth trajectory and above industry growth in FY2018. Large deals won in 3QFY17 would start contributing to growth from 2QFY18.

 March to June quarter seasonality. Sequential growth in the June quarter has been weak over the past 2-3 years due to high pass-through element in the March quarter. The management indicated that the pass-through element in Mar 2017 quarter was relatively smaller and it does not expect any weakness in revenue growth in Jun 2017 akin previous years.

 Margin guidance. LTI has maintained its net profit margin band of 14-15%.

 Other income was impacted by loss on restatement/revaluation of overseas bank balance. Other income yield during the year was modest due to back-ended nature of cash generation and about ₹3 bn cash balance in overseas market.

 M&A strategy. LTI is scouting acquisition in five focus areas—IoT, Analytics, Digital automation and Cloud companies in US or Europe markets. CEO spends about 30% of his bandwidth looking at assets. It indicates serious focus on acquisition.

 The two service lines that are doing exceptionally well for LTI are analytics and Cloud based infrastructure transformation

 Wage hike will be rolled out from July 1 as always. At a broad level, wage hike would be 2% for onsite employees and 6-7% for offshore.

KOTAK INSTITUTIONAL EQUITIES RESEARCH 35 Technology L&T Infotech

Exhibit 1: LTI: Consolidated quarterly results as per Ind-AS, March fiscal year-ends (Rs mn)

Change (%) % chg. 4QFY17 4QFY17E 3QFY17 4QFY16 4QFY16 3QFY17 4QFY17E FY2017 FY2016 yoy Revenue (US$ mn) 254 248 245 230 10.6 3.7 2.5 970 887 9.3 Revenues 16,772 16,580 16,667 15,579 7.7 0.6 1.2 65,009 58,464 11.2 Employee costs (9,454) (9,700) (9,647) (9,098) 3.9 (2.0) (2.5) (37,758) (35,266) 7.1 Gross profit 7,318 6,881 7,020 6,481 12.9 4.2 6.4 27,251 23,198 17.5 Other operating expenses (4,130) (3,759) (4,002) (3,665) 12.7 3.2 9.9 (14,949) (12,950) 15.4 EBITDA 3,188 3,121 3,018 2,816 13.2 5.6 2.1 12,302 10,248 20.0 Depreciation (416) (483) (469) (432) (3.7) (11.3) (13.9) (1,779) (1,740) 2.2 EBIT 2,772 2,638 2,549 2,384 16 9 5 10,523 8,508 24 Other Income 18 74 95 179 222 208 Forex gains/(loss) 499 176 514 361 38 (3) 183 1,645 1,689 (3) Finance costs (14) (3) (11) (13) (32) (58) Profit Before Tax 3,275 2,886 3,147 2,911 12.5 4.1 13.5 12,358 10,347 19.4 Provision for Tax (730) (666) (667) (629) 16.1 9.4 9.6 (2,649) (1,982) 33.7 Net Profit 2,545 2,219 2,480 2,282 11.5 2.6 14.7 9,709 8,365 16.1 Minority Interest (1) — — 1 (2) (2) Net Profit- Reported 2,544 2,219 2,480 2,283 11.4 2.6 14.6 9,707 8,363 16.1

Recurring EPS (Rs/share) 14.6 12.7 14.2 13.4 8.9 2.5 14.8 55.8 49.3 13.2 Weighted average share count (mn) 174.2 174.5 174.2 170.2 174.0 169.6

As % of revenues Gross margin 43.6 41.5 42.1 41.6 41.9 39.7 EBITDA margin (post forex gains/losses) 22.0 19.9 21.2 20.4 21.5 20.4 EBITDA margin (ex forex gains/losses) 19.0 18.8 18.1 18.1 18.9 17.5 EBIT margin (post forex gains/losses) 19.5 17.0 18.4 17.6 18.7 17.4 EBIT margin (ex forex gains/losses) 16.5 15.9 15.3 15.3 16.2 14.6 Net profit margin (%) 15.2 13.4 14.9 14.7 14.9 14.3 Effective tax rate (%) 22.3 23.1 21.2 21.6 21.4 19.2

Source: Company, Kotak Institutional Equities estimates

Exhibit 2: Key changes to estimates, March fiscal year-ends, 2018-19E (Rs mn)

New Old Change (%) 2018E 2019E 2018E 2019E 2018E 2019E Revenues 71,772 80,095 72,169 80,301 (0.6) (0.3) EBITDA (before forex gains/(loss)) 13,454 15,178 14,114 15,833 (4.7) (4.1) EBIT (before forex gains/(loss)) 11,610 13,268 12,068 13,644 (3.8) (2.8) Net profit 10,414 11,368 10,397 11,497 0.2 (1.1) EPS (Rs/ share) 59.7 65.2 59.6 65.9 0.2 (1.1)

Revenues (US$ mn) 1,084 1,195 1,061 1,181 2.1 1.2 US$ revenue growth (%) 11.7 10.3 10.1 11.3 EBITDA margin (before forex gains/(loss)) (%) 18.7 19.0 19.6 19.7 -81 bps -77 bps EBIT margin (before forex gains/(loss)) (%) 16.2 16.6 16.7 17.0 -54 bps -43 bps Net profit margin (%) 14.5 14.2 14.4 14.3 Forex gains/(loss) 1,195 699 955 797 25.1 (12.3) Exchange rate (Rs/US$) 66.2 67.0 68.0 68.0

Source: Company, Kotak Institutional Equities estimates

36 KOTAK INSTITUTIONAL EQUITIES RESEARCH L&T Infotech Technology

Exhibit 3: Revenue growth across geographies, verticals and service lines (Mar 2017)

Growth (%) Contribution to Mar-17 qoq yoy revenues (%) Total revenues 254.1 3.7 10.6 100 Geographical split of revenues North America 174.3 4.0 11.2 68.6 Europe 46.0 2.5 12.6 18.1 Asia Pacific 5.3 3.7 41.4 2.1 India 19.1 (2.8) 7.0 7.5 RoW 9.1 16.6 (12.8) 3.6 Vertical split of revenues Banking and financial services 68.6 6.8 20.0 27.0 Insurance 52.6 3.2 7.8 20.7 Energy and process 29.5 0.2 5.4 11.6 CPG retail and pharma 20.6 5.0 22.7 8.1 High-Tech, Media & Entertainment 27.7 5.6 6.1 10.9 Auto Aero & Others 55.1 0.4 4.4 21.7 Service line split of revenues ADM 97.6 3.7 5.7 38.4 Enterprise solutions 57.4 5.1 6.2 22.6 IMS 29.0 3.7 4.8 11.4 Testing 23.1 4.8 9.7 9.1 AIM, enterprise integration, mobility 36.8 0.2 46.8 14.5 Platform based solutions 9.9 1.1 3.9 3.9 Revenue metrics Top client 39.4 6.4 27.5 15.5 Top 5 clients 97.8 4.2 14.9 38.5 Top 10 clients 134.9 5.7 12.2 53.1 Top 20 clients 172.8 3.2 9.0 68.0

Source: Company, Kotak Institutional Equities

KOTAK INSTITUTIONAL EQUITIES RESEARCH 37 Technology L&T Infotech

Exhibit 4: LTI: key operational metrics

Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Revenues (US$ mn) 209 224 225 230 231 240 245 254 qoq grow th (%) 7.3 0.4 2.1 0.6 3.7 2.3 3.7 Revenues (Rs mn) 13,332 14,683 14,870 15,579 15,550 16,020 16,667 16,772 Exchange rate 63.9 65.6 66.1 67.8 67.3 66.8 68.0 66.0 Revenue by verticals (%) Banking and financial services 26.6 26.7 27.3 24.9 25.3 26.1 26.2 27.0 Insurance 21.0 20.3 20.2 21.2 22.1 21.4 20.8 20.7 Energy and process 13.7 13.0 12.1 12.2 11.9 11.5 12.0 11.6 CPG retail and pharma 8.8 8.6 9.1 7.3 7.8 7.8 8.0 8.1 High-Tech, Media & Entertainment 12.0 11.5 10.7 11.4 11.5 11.3 10.7 10.9 Auto Aero & Others 17.8 19.9 20.7 23.0 21.3 21.9 22.4 21.7 Revenue by service lines (%) - new classification ADM 43.4 42.6 41.3 40.2 40.0 40.0 38.4 38.4 Enterprise solutions 23.9 24.9 23.7 23.5 23.8 22.6 22.3 22.6 IMS 8.0 8.3 10.0 12.0 10.6 10.4 11.4 11.4 Testing 10.3 9.9 9.8 9.2 9.9 9.5 9.0 9.1 AIM, enterprise integration, mobility 10.6 11.1 11.6 10.9 11.7 13.5 15.0 14.5 Platform based solutions 3.8 3.2 3.5 4.2 4.0 4.0 4.0 3.9 Revenue by geographies (%) - new classification North America 71.0 69.5 67.8 68.2 69.4 68.9 68.4 68.6 Europe 17.3 17.3 16.9 17.8 18.0 18.4 18.3 18.1 Asia Pacific 2.5 3.1 1.9 1.6 1.8 2.8 2.1 2.1 India 3.2 4.7 7.0 7.8 5.7 5.9 8.0 7.5 RoW 6.0 5.3 6.3 4.6 5.1 4.0 3.2 3.6 Onsite-Offshore mix (%) Onsite 24.9 24.1 23.6 23.9 24.7 24.2 24.3 24.0 Offshore 75.1 75.9 76.4 76.1 75.3 75.8 75.7 76.0 Revenue mix (%) Onsite 48.9 48.3 48.6 47.6 48.1 48.8 47.7 48.7 Offshore 51.1 51.7 51.4 52.4 51.9 51.2 52.3 51.3 Billed person months Onsite 9,710 9,750 9,937 9,987 10,312 10,160 10,608 10,796 Offshore 29,354 30,739 32,354 31,832 31,382 31,774 33,031 34,115 Total 39,064 40,489 42,291 41,819 41,694 41,934 43,639 44,911 Utilization (%) Including trainees 73.8 72.8 74.0 75.9 77.4 78.7 78.1 78.3 Excluding trainees 75.2 75.5 76.5 77.1 78.0 80.6 80.5 79.3 Client metrics Clients billed 235 251 250 258 259 259 264 261 Clients added 19 20 12 22 12 16 14 15 Revenue concentration (%) Top 1 client 15.0 15.3 15.7 13.5 13.3 14.0 15.1 15.5 Top 5 clients 37.7 37.6 37.6 37.1 36.7 37.1 38.3 38.5 Top 10 clients 52.3 52.5 54.6 52.4 51.3 51.8 52.1 53.1 Top 20 clients 68.0 67.6 68.5 69.0 67.7 67.6 68.3 68.0 Client size (ttm) > US$1 mn 84 85 86 85 89 91 95 96 > US$5 mn 33 32 32 35 35 34 35 35 > US$10 mn 20 19 17 17 19 20 22 23 > US$20 mn 9 8 9 10 10 10 10 11 > US$50 mn 3 3 3 3 3 4 4 4 >US$100 mn 1 1 1 1 1 1 1 1 Employee metrics Total employees (consolidated) 20,331 21,171 21,073 20,072 19,292 19,751 20,605 21,203 Development 18,881 19,653 19,669 18,705 17,959 18,428 19,234 19,627 Sales and support 1,450 1,518 1,404 1,367 1,333 1,323 1,371 1,396 Attrition (%) 20.1 19.7 18.5 18.4 19.5 18.5 18.1 16.9

Source: Company, Kotak Institutional Equities

38 KOTAK INSTITUTIONAL EQUITIES RESEARCH L&T Infotech Technology

Exhibit 5: Condensed consolidated financials for LTIT, March fiscal year-ends, 2013-20E (Rs mn)

2013 2014 2015 2016 2017 2018E 2019E 2020E Profit model Revenues 38,514 49,205 49,780 58,464 65,009 71,772 80,095 89,065 EBITDA 8,705 11,473 10,045 10,248 12,302 13,454 15,178 16,901 Depreciation and amortization (1,232) (1,300) (1,579) (1,740) (1,779) (1,844) (1,910) (2,134) EBIT 7,473 10,173 8,465 8,508 10,523 11,610 13,268 14,767 Other income 306 52 100 199 222 649 814 931 Forex gains/(loss) (85) (885) 815 1,698 1,645 1,195 699 699 Interest expense (208) (305) (104) (58) (32) (12) (12) (12) Pretax profits 7,486 9,035 9,276 10,347 12,358 13,442 14,769 15,686 Tax (1,870) (2,072) (1,668) (1,982) (2,649) (3,024) (3,397) (3,908) Extraordinaries (net of tax) — 2,397 79 — — — — — Net profit - Reported 5,737 9,283 7,692 8,363 9,707 10,414 11,368 11,774 Adjusted profit from continuing ops 5,221 6,522 7,604 8,363 9,707 10,414 11,368 12,372 Adj diluted EPS (Rs) 31.0 38.7 45.1 49.3 55.8 59.7 65.2 70.9 Weighted avg fully diluted shares (mn) 168.5 168.5 168.5 169.8 174.0 174.5 174.5 174.5 Balance sheet Total equity 13,388 16,103 20,263 20,227 31,443 36,816 42,303 47,954 Borrowings 2,336 1,100 2,175 545 — — — — Long term liabilities 1,558 1,274 880 2,581 456 456 456 456 Current liabilities 6,372 8,527 7,258 11,212 12,437 12,786 14,240 15,792 Total liabilities and equity 23,656 27,006 30,581 34,570 44,344 50,070 57,015 64,221 Tangible fixed assets 2,450 2,795 2,750 2,792 2,578 2,764 3,064 3,897 Goodw ill and Intangibles 4,541 3,693 4,085 3,583 2,841 2,098 1,494 905 Other non-current assets 1,991 2,537 2,450 4,252 5,625 5,875 6,125 6,375 Cash and cash equivalents 1,680 3,277 3,045 2,463 13,201 17,214 21,385 25,031 Other current assets 11,570 14,138 18,000 21,285 20,086 22,105 24,933 28,001 Total assets 23,656 27,006 30,581 34,570 44,344 50,069 57,015 64,221 Cash flow Operating cash flow , excl. w -capital 6,896 7,686 7,345 9,569 11,075 11,624 12,481 13,591 Working capital changes (819) (1,408) (922) (936) 2,643 (1,920) (1,624) (1,766) Capital expenditure (2,479) (950) (1,132) (1,141) (684) (1,286) (1,606) (2,377) Acquisitions — — (807) — (70) — — — Proceeds from sale of PES Business(net) — 3,800 94 — — — — — Other income (net) (68) (27) (33) (33) 221 637 802 1,850 Free cash flow (includes other income) 3,530 9,101 4,544 7,460 13,185 9,055 10,052 11,298 Key ratios/metrics EBITDA margin before forex gains/loss (%) 22.6 23.3 20.2 17.5 18.9 18.7 19.0 19.0 EBIT margin before forex gains/loss (%) 19.4 20.7 17.0 14.6 16.2 16.2 16.6 16.6 NPM (excluding extraordinaries) (%) 14.9 14.0 15.3 14.3 14.9 14.5 14.2 13.9 US$ revenues from continuing ops 630 747 810 887 970 1,084 1,195 1,329 US$ revenue growth (%) 7.5 18.5 8.5 9.5 9.3 11.7 10.3 11.2 Net cash and cash equivalents (656) 2,177 869 1,918 13,201 17,214 21,385 25,031 Effective tax rate (%) 25.0 22.9 18.0 19.2 21.4 22.5 23.0 24.0 RoAE (%) 46.9 46.7 41.9 41.3 37.6 30.5 28.7 27.4 RoACE (%) 45.0 56.9 40.5 36.5 38.1 33.6 33.1 32.4

Source: Company, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 39 ADD Orient Cement (ORCMNT) Cement MAY 08, 2017 RESULT Coverage view: Cautious

Stellar volume growth. Orient Cement reported much improved earnings supported Price (`): 167 by a 25% yoy growth in volume sales for 4QFY17, taking the capacity utilization for the Target price (`): 180 quarter to 87%. Sharp improvement in cement prices in Orient’s key markets of BSE-30: 29,859 Maharashtra (+`48/bag) and Andhra Pradesh/Telangana (+`55/bag) will further help improve EBITDA/ton from `436/ton reported in 4QFY17. Valuations are less demanding at 7X EV/EBITDA and US$80/ton on FY2019E earnings; maintain ADD rating with revised target price of `180/share (from `165/share).

Company data and valuation summary Orient Cement Stock data Forecasts/Valuations 2017 2018E 2019E 52-week range (Rs) (high,low) 232-115 EPS (Rs) (1.6) 10.6 14.3 Market Cap. (Rs bn) 34.2 EPS growth (%) (151.6) 774.4 35.6 Shareholding pattern (%) P/E (X) (106.5) 15.8 11.6 Promoters 37.5 Sales (Rs bn) 18.8 23.7 26.6 FIIs 7.8 Net profits (Rs bn) (0.3) 2.2 2.9 MFs 22.8 EBITDA (Rs bn) 1.8 5.1 5.8 Price performance (%) 1M 3M 12M EV/EBITDA (X) 26.0 8.8 7.1 Absolute 14.6 17.1 12.4 ROE (%) (3.2) 20.2 22.8 Rel. to BSE-30 15.0 10.7 (4.9) Div. Yield (%) 0.3 1.0 1.0

Strong volume growth coupled with contained cost inflation aid earnings outperformance

Orient Cement reported 27% yoy growth in EBITDA at `755 mn compared to our estimate of `514 mn. The bost in earnings was aided by strong 25% yoy growth in cement volumes at 1.73 mn tons in the quarter (87% utilization) compared to our modest estimate of 8% yoy. Sequential drop in realizations (-5% qoq) was on estimated lines, though an 8% qoq drop in production cost helped improve profitability of `436/ton compared to our estimate of `347/ton. Orient ended full year FY2017 with some respectable numbers with net loss curtailed at `321 mn, after a poor start to the year (losses for 9MFY17 stood at `487 mn) as 1% yoy improvement in EBITDA at `1.8 bn was insufficient to off-set interest and depreciation cost on expanded capacity of 8 mtpa. We remain hopeful of a better FY2018 aided by (1) improved capacity utilization, and (2) `550/ton improvement in realizations aided by `48-55/bag increase in cement prices seen in key markets during the past two months.

Sharp price increase of `48-55/bag in key markets of Maharashtra and Andhra Pradesh Cement prices in Orient’s key markets of Maharashtra and Andhra Pradesh/ Telangana have improved by `48/bag and `55/bag respectively since March 2017. We highlight that West (47%) and South (40%) account for the bulk of Orient Cement’s sales with Maharashtra and Andhra Pradesh/ Telangana accounting for most of it. We highlight that cement prices in Maharashtra dropped substantially in the two years up to March 2017, and the sharp price rise in the past two months restores the pricing gap between Maharashtra and neighboring states. Our current assumptions factor in improvement in realizations for Orient of `550/ton, still lower Murtuza Arsiwalla than `670/ton based on current price trends.

Maintain ADD rating with revised target price of `180/share (`165/share earlier) Abhishek Poddar In our coverage universe Orient Cement is the biggest beneficiary of the current round of price increases, even as the company has been at the receiving end of weak realizations in its key markets for the last two years. Valuations are inexpensive relative to peers—7X EV/EBITDA and US$80/ton on FY2019E earnings. Accordingly we maintain our ADD rating with a revised TP of `180/share (from `165/share previously).

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

Exhibit 1: Orient's EBITDA outperformance was led by strong volume growth aided by contained cost inflation Quarterly results for Orient Cement, March fiscal year-ends, 2016-2017E (Rs mn)

Change (%) 4QFY17 4QFY17E 4QFY16 3QFY17 4QFY17E 4QFY16 3QFY17 2017 2016 (% chg) 2018E Net sales 5,967 5,105 4,473 4,547 17 33 31 18,751 15,018 25 23,729 Raw materials (815) (725) (688) (753) (2,737) (2,088) (2,946) Employee costs (311) (308) (250) (309) (1,213) (904) (1,387) Power costs (1,586) (1,407) (1,105) (1,164) (5,264) (3,984) (5,867) Freight costs (1,537) (1,355) (911) (1,140) (4,499) (3,188) (4,994) Other costs (963) (796) (922) (744) (3,257) (3,093) (3,455) EBITDA 755 514 597 437 47 27 73 1,781 1,760 1 5,080 EBITDA (%) 12.7 10.1 13.3 9.6 9.5 11.7 21.4 Other income 39 49 50 46 123 149 250 Interest (341) (361) (260) (358) (1,353) (544) (1,223) Depreciation (306) (310) (280) (307) (1,215) (763) (1,221) PBT 148 (108) 107 (181) (665) 602 2,886 Tax 17 37 87 64 344 20 (722) PAT 165 (71) 194 (117) (332) (15) (241) (321) 622 (152) 2,165 Extraordinaries — — — — — — — Reported PAT 165 (71) 194 (117) (321) 622 2,165 EPS (Rs/share) 0.8 (0.3) 0.9 (0.6) (1.6) 3.0 10.6

Sales (mn tons) 1.73 1.48 1.39 1.25 17 25 38 5.6 4.4 26 6.0 Realization (Rs/ton) 3,443 3,447 3,227 3,632 (0) 7 (5) 3,377 3,399 (1) 3,927 Cost (Rs/ton) (3,007) (3,100) (2,797) (3,283) (3) 8 (8) (3,057) (3,000) 2 (3,087) Raw materials (470) (489) (496) (601) (493) (473) (488) Employee costs (180) (208) (180) (247) (218) (205) (230) Power & fuel costs (915) (950) (797) (929) (948) (902) (971) Freight costs (887) (915) (657) (911) (810) (722) (827) Other costs (556) (537) (666) (595) (587) (700) (572) Profitability (Rs/ton) 436 347 431 349 26 1 25 321 398 (19) 841 Tax rate (%) (12) 34 (81) 35 52 (3) 25

Source: Company, Kotak Institutional Equities estimates

Changes in our estimates

Exhibit 3 highlights key changes in our estimates. We raise our realization assumption by 2% for FY2018-19E on firm price trends in the company’s key markets resulting in 6-7% increase in our EBITDA estimates. We estimate EBITDA to increase to `5.1 bn, `5.8 bn and `7.3 bn for FY2018E, FY2019E and FY2020E (from `1.8 bn in FY2017) led by large price increases after weakness shown in the past 2 years.

However, our EPS estimate is cut by 2-5% due to changes in depreciation & interest assumptions. We estimate EPS of `10.6, `14.3 and `21.1 for FY2018E, FY2019E and FY2020E. Our target price of `180/share is based on 8X FY2019E EBITDA.

Exhibit 2: Cement prices have increased by Rs30-45/bag qoq in Orient's key markets in 1QFY18 Quarterly retail cement price trend in Orient's key markets (Rs/bag)

1QFY16 2QFY16 3QFY16 4QFY16 1QFY17 2QFY17 3QFY17 4QFY17 1QFY18E Jan-17 Feb-17 Mar-17 Apr-17 May-17 Maharashtra 297 298 271 275 291 287 324 308 343 298 313 312 327 360 Andhra Pradesh 350 336 334 292 269 317 331 313 358 308 330 300 360 355 Karnataka 393 387 370 378 377 367 380 375 405 380 375 370 410 400 Change qoq (Rs/bag) Maharashtra (29) 1 (27) 4 16 (3) 37 (17) 36 (23) 15 (2) 15 33 Andhra Pradesh (3) (14) (2) (43) (23) 48 14 (18) 45 (15) 23 (30) 60 (5) Karnataka 7 (7) (17) 8 (2) (10) 13 (5) 30 - (5) (5) 40 (10)

Source: Industry, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 41 Cement Orient Cement

Key highlights of the 4QFY17 results

 Volumes—stellar 4Q volumes help finish year with 26% volume growth. Orient’s volumes increased 25% yoy to 1.73 mn tons (+38% qoq). The plant utilization was 87% for the quarter and 69% for the full year (FY2017). Note that large improvement in volumes is likely led by improved utilization from Chittapur operations (new plant in south region of 3 mtpa) which operated at 56% utilization in 3QFY17.

 Sales mix—west and south remain dominant markets. The company sold 47% in the west markets (mainly in Maharashtra), 40% in south (large share of AP/Telangana) and 13% in other regions. The overall lead distance increased to 278 kms in 4QFY17 from 268 kms in 4QFY16. The company’s sales of PPC cement is 76% for old plant operations and 44% for new plant operations (50% in 3QFY17).

Realizations declined sequentially, but are expect to improve here on. Orient’s realizations declined by 5% qoq to `3,443/ton (+7% yoy) in 4QFY17 due to weak prices in the company’s key markets in the quarter—per our channel checks, cement prices corrected by (1) `17/bag in Maharashtra, and (2) `18/bag in AP/Telangana in 4QFY17. We highlight that Orient’s realization was among the weakest of all companies in our coverage universe due to lower retail prices in the company’s key markets.

For the full year, company’s realization was down by 1% to `3,380/ton resulting in a 19% yoy decline in EBITDA/ton. Prices in these markets have since increased by `48- 55/bag and will aid FY2018E earnings (Exhibit 2).

 Costs—lower costs aided quarter’s earnings. Orient’s total cost (per ton) declined 8% qoq to `3,007/ton (-`275/ton) as the company contained cost inflation and benefitted from operating leverage on higher volumes. Power & fuel costs (per ton) and freight costs declined by 2% and 3% respectively. The pet-coke usage was 35% (44% in 3QFY17) in Devapur plant and 81% (63% in 3QFY17) in Chittapur plant.

Exhibit 3: Orient Cement, changes in estimates, March fiscal year ends, FY2018-19E

Revised estimate Old estimate Change (%) 2018E 2019E 2018E 2019E 2018E 2019E Volume and realizations (mn tons, Rs/ton) Cement sales (mn tons) 6.0 6.5 6.0 6.5 — — Realization (Rs/ton) 3,927 4,107 3,860 4,040 2 2 EBITDA (Rs/ton) 841 903 787 848 7 6 Earnings estimates (Rs mn) Revenues 23,729 26,554 23,322 26,118 2 2 EBITDA 5,080 5,836 4,755 5,480 7 6 PAT 2,165 2,935 2,220 3,088 (2) (5) EPS 10.6 14.3 10.8 15.1 (2) (5)

Source: Kotak Institutional Equities estimates

42 KOTAK INSTITUTIONAL EQUITIES RESEARCH Orient Cement Cement

Exhibit 4: Orient Cement, Assumptions, March fiscal year ends, 2015-2020E (Rs mn)

2015 2016 2017 2018E 2019E 2020E CAGR (%) Capacity (mn tons) 5.0 8.0 8.0 8.0 8.0 8.0 0 Utilization (%) 81 68 69 76 81 87 Volumes (mn tons) 4.1 4.4 5.6 6.0 6.5 7.0 8 Growth (%) (3) 9 26 9 7 8 Realization (Rs/ton) 3,771 3,399 3,377 3,927 4,107 4,307 8 Growth (%) 10.9 (9.9) (0.6) 16.3 4.6 4.9 EBITDA (Rs/ton) 725 398 321 841 903 1,043 48 Growth (%) 47.6 (45.0) (19.5) 162.1 7.4 15.5 Revenues (Rs mn) 15,353 15,018 18,751 23,729 26,554 30,075 17 EBITDA (Rs mn) 2,950 1,760 1,781 5,080 5,836 7,280 60 PAT (Rs mn) 1,948 622 (321) 2,165 2,935 4,328 NM Net debt (Rs mn) 10,630 12,520 12,059 10,474 7,477 3,008 NM

Source: Company, Kotak Institutional Equities estimates

Exhibit 5: Orient Cement, Valuation details, March 2019E financials

EBITDA Multiple EV (Rs mn) (X) (Rs mn) (Rs/share) Valuation EBITDA (Rs mn) 5,836 8 44,355 217 Net debt (Rs mn) (7,477) (37) Equity value (Rs mn) 36,878 180 Target price (Rs/share) 180

Source: Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 43 Cement Orient Cement

Exhibit 6: Orient Cement, Financial summary, March fiscal year-ends, 2015-20E, (Rs mn)

2015 2016 2017 2018E 2019E 2020E Profit model (Rs mn) Net sales 15,353 15,018 18,751 23,729 26,554 30,075 EBITDA 2,950 1,760 1,781 5,080 5,836 7,280 Other income 176 149 123 250 289 419 Interest (141) (544) (1,353) (1,223) (959) (643) Depreciation (473) (763) (1,215) (1,221) (1,253) (1,285) Pretax profits 2,512 602 (665) 2,886 3,913 5,771 Tax (564) 20 344 (722) (978) (1,443) Net profits 1,948 622 (321) 2,165 2,935 4,328 Adjusted Net Profit 1,948 622 (321) 2,165 2,935 4,328 Earnings per share (Rs) 9.5 3.0 (1.6) 10.6 14.3 21.1 Balance sheet (Rs mn) Equity 205 205 205 205 205 205 Reserves and surplus 9,551 9,958 9,667 11,400 13,904 17,800 Borrowings 11,057 12,898 12,885 11,819 9,253 6,187 Deferred tax liability 1,250 1,228 750 894 1,090 1,378 Currrent liabilities 3,594 4,345 5,337 5,605 5,865 6,182 Total liabilities and equity 25,657 28,634 28,843 29,923 30,315 31,753 Net fixed assets 7,981 21,497 22,956 22,535 22,082 21,597 Capital work in progress 13,194 2,392 981 981 981 981 Cash 427 378 825 1,345 1,776 3,179 Current assets 4,055 4,367 4,080 5,062 5,477 5,996 Total assets 25,657 28,634 28,843 29,923 30,316 31,753 Free cash flow (Rs mn) Operating cash flow, excl. working capital 2,429 1,228 569 3,530 4,384 5,902 Working capital (1,005) 824 1,279 (714) (155) (201) Capital expenditure (9,222) (3,697) (1,264) (800) (800) (800) Free cash flow (7,798) (1,645) 584 2,016 3,429 4,901 Ratios Net debt/equity (X) 1.1 1.2 1.2 0.9 0.5 0.2 Book value per share 48 50 48 57 69 88 Net debt/EBITDA (X) 3.6 7.1 6.8 2.1 1.3 0.4 RoAE (%) 21.6 6.2 (3.2) 20.2 22.8 27.0 RoACE (%) 11.9 4.7 1.2 12.5 14.7 18.9 CRoCI (%) 18.4 9.7 5.4 14.9 16.4 19.6

Source: Company, Kotak Institutional Equities estimates

44 KOTAK INSTITUTIONAL EQUITIES RESEARCH ADD L&T Finance Holdings (LTFH) NBFCs MAY 08, 2017 RESULT, CHANGE IN RECO. Coverage view: Neutral

On track. LTFH’s lending businesses delivered PAT of `3 bn, up 33% yoy on the back Price (`): 133 of 21% loan growth and strong expense controls (opex at 1% of loans; 1.5% in Target price (`): 145 4QFY16). NIM compressed yoy and credit cost, in line with expectations, was high. Its BSE-30: 29,859 business plan seems to be on track despite challenges of demonetization, stress in microfinance, supported by tailwinds in renewables and mortgages. We retain positive stance; revise rating to ADD from BUY post recent rally; TP up to `145 from `130.

Company data and valuation summary L&T Finance Holdings Stock data Forecasts/Valuations 2017 2018E 2019E 52-week range (Rs) (high,low) 140-70 EPS (Rs) 5.5 6.5 8.9 Market Cap. (Rs bn) 234.3 EPS growth (%) 13.0 18.4 36.7 QUICK NUMBERS Shareholding pattern (%) P/E (X) 24.3 20.5 15.0 Promoters 66.7 NII (Rs bn) 37.1 35.1 40.3  PAT up 33% yoy FIIs 10.1 Net profits (Rs bn) 10.4 12.3 16.9 MFs 3.0 BVPS 42.4 46.7 53.2 Price performance (%) 1M 3M 12M P/B (X) 3.1 2.9 2.5  Loan book(focused Absolute 7.7 27.5 82.3 ROE (%) 13.7 14.6 17.8 business loans) of Rel. to BSE-30 8.1 20.6 54.2 Div. Yield (%) 0.6 1.4 1.6 `639 bn, up 20% yoy Key highlights of 4QFY17 performance  Opex ratio down LTFH reported better than expected performance in 4QFY17. 50bps yoy to 1% of  Key positives surprises: sharp recovery in rural India, shifting model in housing to higher-yield loans loans, higher-than-expected fee income in wholesale business and better-than-expected expense management.

 Some regrets. The sale of stress loans (a drag on its financials) was lower than expected; this will put pressure on its earnings in FY2018E as well. Stress in MFI business in Maharashtra; the company made large provisions in the MFI book.

Execution remains crucial; a few buffers to fall back upon

As highlighted in the past, the company has made a strong business plan, but its ability to sail though adversities are crucial; something that the management was able to demonstrate in a fair manner in FY2017. This, of course, remains the key monitorable. Low hanging fruits include available tax benefits (discussed later in the note), option to sell asset management business (though the management highlighted that they did not intend to divest it in the near-term) and selling down defocused business (at a discount) which will reduce the drag on the balance sheet.

Tweak estimates, positive stance supported by tailwinds

 Revising up estimates. We are tweaking up our forecasts (PBT before provisions up 2-5%) Nischint Chawathe largely to build-in faster than expected loan growth. We had earlier assumed 50% stake sale in the mutual fund business in FY2018E; we are now reversing the same, based on management’s latest stance. M B Mahesh CFA

 TP of `145. We are revising our price target to `145 from `130 earlier. Retain ADD rating. The performance of its business is on track; current valuations are not undemanding and Abhijeet Sakhare leave limited room for error. However, improving business and profitability trajectory of the company, progress on developing competencies in various businesses, focus on RoE and low hanging fruits (as discussed above) provide comfort.

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

Exhibit1: Strong performance of focused business PAT, net worth and RoE across business segments, March fiscal year-ends, 4QFY16-4QFY17

PAT (Rs mn) Net worth (Rs bn) RoE (%) 4QFY16 3QFY17 4QFY17 YoY (%) 4QFY16 3QFY17 4QFY17 4QFY16 3QFY17 4QFY17 Rural 630 740 730 16 12 14 13 21.7 22.1 21.0 Housing 510 880 870 71 10 12 14 21.2 29.9 27.1 Wholesale 1,340 1,280 1,790 34 45 51 53 12.1 10.3 13.7 Focus business 2,470 2,900 3,390 37 67 76 80 15.1 15.5 17.2 De-focussed business (200) (320) (370) 85 7 4 3 (11.6) (26.0) (38.7) Lending businesses 2,270 2,580 3,020 33 74 81 83 12.9 Other businesses 90 130 150 67 10 11 8 LTFH consolidated 2,370 2,710 3,170 34 84 91 91 11.0 12.0 13.9 Less pref. div. / pref. capital 470 280 320 (32) 12 12 12 LTFH consol. (to shareholders) 1,900 2,430 2,850 50 71 77 78 10.8 12.8 14.7

Source: Company, Kotak Institutional Equities

Exhibit 2: We value LTFH at `145 per share SOTP based valuation, March fiscal year-ends, 2018-20E (Rs mn)

2018E 2019E 2020E Net worth of lending business 95,390 104,934 115,654 Valuation multiple (X) 2.4 2.4 2.4 Valuation (Rs mn) 232,751 256,038 282,195 Others 7,760 18,400 21,160 Value of MF 16,000 18,400 21,160 Preference shares (8,240) Fair value of LTFH 240,511 274,438 303,355 Per share (Rs) 127 145 160 Sensitivity to PBR — — — 1.5X PBR 80 93 103 2.5X PBR 130 148 164 3X PBR 155 176 194

Notes: (a) Bain will invest Rs3.5 bn in FY2018. (b) We value the MF at Rs16 bn i.e. 5% of AUMs and 15% yoy AUM growth.

Source: Company, Kotak Institutional Equities

Some anecdotes on the evolving business model of LTFH

LTFH has been cognizant of the fact that unlike traditional NBFCs they do not have competencies in housing and rural verticals. The company believes in the strength of the multi-product model which, if managed smartly, can support stability of earnings over time.

 It has used IT extensively in its rural business, for example: the entire microfinance business has been cashless for the past three quarters; the company has reduced turnaround time in 2wheeler loans to 10 minutes.

 There is strong focus on risk-managed growth with the help of analytics in case of tractors. Loan underwriting builds the risk of a few cycles going wrong – the company employs region-specific and OEM-specific analytics. LTFH is also moving towards a parameterized, algorithm-based underwriting in tractors; the same has been implemented in 2W.

 Its focus on profitability is visible in the housing business in which it is focusing on the self-employed. In the light of low profitability of salaried home loan segments, it has restricted its origination to in house channels/develop tie-ups etc. The management highlighted that almost all its developer loan disbursements use some linkages of L&T.

46 KOTAK INSTITUTIONAL EQUITIES RESEARCH L&T Finance Holdings NBFCs

Exhibit 3: RoE will move to 17-18% by FY2020 DU Pont analysis, March fiscal year-end, 2017-20E

2017 2018E 2019E 2020E Du Pont analysis (% of average assets) Net interest income 4.9 4.8 4.6 4.6 Other income 0.8 0.8 0.5 0.5 Total income 5.6 5.6 5.1 5.1 Credit costs 1.8 1.6 1.1 1.1 Operating expneses 1.1 1.2 1.2 1.2 PBT post extraordinaries 2.7 2.9 2.8 2.8 1-tax rate 67 68 70 70 RoA 1.8 2.0 2.0 1.9 Average assets / average equity (X) 8.5 8.5 8.7 9.3 RoE 15.3 16.9 17.2 17.9 RoE (including discontinued businesses) 13.5 14.7 17.4 17.9

Source: Company, Kotak Institutional Equities estimates

Exhibit 4: High growth in housing finance, wholesale business will slowdown Loan book composition, March fiscal year-end, 2016-20E

2016 2017 2018E 2019E 2020E Loan book composition Wholesale 344,450 414,030 476,585 524,046 570,663 Housing loans 98,110 125,340 170,585 226,102 301,283 Rural 86,440 100,410 119,425 144,753 175,607 Total 529,000 639,780 766,595 894,901 1,047,553 (% of total) Wholesale 65 65 62 59 54 Housing loans 19 20 22 25 29 Rural 16 16 16 16 17 Total 100 100 100 100 100 YoY (%) Wholesale — 20 15 10 9 Housing loans — 28 36 33 33 Rural — 16 19 21 21 Total — 21 20 17 17

Source: Company, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 47 NBFCs L&T Finance Holdings

Exhibit 5: De-focused business to drag profitability until FY2018 Key financial statements of LTFH, March fiscal year-end, 2016-20E

2016 2017 2018E 2019E 2020E Income statement (Rs mn) Interest income 62,480 72,730 87,022 101,035 118,438 Interest costs 36,440 42,500 51,512 60,440 71,509 Net interest income 26,040 30,230 35,510 40,594 46,929 Other income 2,600 4,750 6,265 4,346 5,308 Net total income 28,640 34,980 41,774 44,940 52,237 Provisioning expenses 8,760 11,390 11,549 10,023 11,654 Net income (post provisions) 19,880 23,590 30,225 34,917 40,583 Operating expenses 7,210 6,750 8,557 10,120 12,299 PBT before extraordinaties 12,670 16,840 21,668 24,797 28,284 Extraordinary income — — — — — PBT post extraordinaries 12,670 16,840 21,668 24,797 28,284 Tax 3,830 5,610 6,826 7,521 8,584 PAT (continuing operations) 8,840 11,230 14,842 17,276 19,699 PAT of defocus business (700) (1,421) (1,950) — — PAT for all lending business 8,140 9,809 12,892 17,276 19,699 Dividend — 2,943 3,868 5,183 5,910 Dividend tax — 497 654 876 999 Balance sheet (Rs mn) - continuiung ops Assets Gross loans 529,000 639,780 766,595 894,901 1,047,553 Net other assets 38,930 37,650 40,920 47,601 55,513 Total assets 567,930 677,430 807,515 942,502 1,103,066 Liabilities Borrowings 467,510 573,590 712,125 837,568 987,413 Other liabilities 33,680 23,740 — — — Total liabilities 501,190 597,330 712,125 837,568 987,413 Shareholders funds 66,740 80,100 95,390 104,934 115,654

Source: Company, Kotak Institutional Equities estimates

DTL will be used to create extra provisions

To simplify its group structure, LTFH merged two of its group companies (L&T Finance and L&T Fincorp with Family Credit) – all are its 100% subsidiaries. These companies were valued at premium to book value for the merger, translating into goodwill of `30 bn at Family Credit. Since this company is a 100% subsidiary of LTFH, this goodwill will not affect its consolidated financials. However, amortization of goodwill will be considered as tax deductible expenditure for Family Credit. LTFH will hence claim this deduction through Family Credit over FY2017-21E at `2.26 bn/year. The company will use this to make extra provisions over the next 2-3 years. We model LTFH’s rural, housing and wholesale separately (based on disclosures in their presentation) and consolidate the same. We do not find any impact of this on the financials of the individual verticals (considered in our SOTP) even as the consolidated tax rate will be lower.

Rural: High growth and RoE

 ~22% RoE and ~3% RoA. Rural finance vertical delivered impressive return ratio in FY2017 of 22% RoA and 3% RoE. This is driven by a rich loan mix of MFI, 2W and tractor finance leading to ~11% NIMs, enough to absorb ~3% credit costs and 4% cost ratio. Fairly even mix across the three segments has helped limit the impact of demonetization on the MFI business. Strong focus on collections and focused growth approach has led to ~200 bps decline in GNPL qoq to 7.7%.

 Microfinance. MFI growth slowed in 4QFY17 compared to 9MFY17, with disbursements declining 10% yoy (up qoq however). AUM grew 59% yoy to `36 bn. LTFH slowed down in Maharashtra, given severe stress in some pockets. It has provided 10% provision even on 1 day overdue loans and 25% provision on overdue Maharashtra loans; 50% of this was above the line and balance adjusted with DTL. The management indicated that collection trends improved from March onwards, with 44% of overdue customers making partial payments. LTFH has moved to 100% cashless and Aadhar-based disbursements.

48 KOTAK INSTITUTIONAL EQUITIES RESEARCH L&T Finance Holdings NBFCs

 We project loan growth of about 20% CAGR over FY2018-20E for LTFH’s microfinance business. The share of this business will likely increase to about 35% of loans by FY2020E from 26% in FY2016.

 Two-wheelers – market share gains. 2W business continued stable growth trends with AUM growth of 20% yoy and disbursement growth of 22% qoq. The impact of demonetization was likely only marginal. LTFH has likely improved market share in the segment.

 We expect the loan growth in 2W of around ~15% and contribute to 18% of the total loan book in this segment. LTFH has realigned the 2W business by using technology which has cut down the turn-around-time to 5 minutes from a few hours earlier for the majority of the new sales.

 LTFH has also tweaked the collection model to in-house collection (using call centers) instead of depending on agency channels. This has helped in both reducing operating costs as well as improving collection efficiency. Two-wheeler is a low ticket business with high risk for the banking sector in the past. We would hence be guarded about this segment; low share of this book provides some comfort.

 Tractors – market leader in the segment. Farm equipment (tractor) AUM declined 6% yoy but disbursements grew strongly by 60% qoq. LTFH’s market share has gone up from 4.8% (2QFY17) to 8.6% (3QFY17) and targets reaching double-digits over the next one year.

 We expect ~20% AUM growth in the farm equipment segment driven by rural recovery and market share gains across the geography.

Exhibit 6: Rural segment has ~21% RoE as of 4QFY17 Quarterly summary, March fiscal year-ends, 1QFY16-4QFY17

1QFY16 2QFY16 3QFY16 4QFY16 1QFY17 2QFY17 3QFY17 4QFY17 YoY (%) Financials summary (Rs mn) Net interest income 2210 2,400 2,460 2720 2720 2,780 3,040 2,870 6 Fee and othe income 150 90 240 220 130 210 170 340 55 Credit losses/provisions 710 510 1,090 1,040 910 890 1,210 1,240 19 Operating expenses 980 1,050 930 950 920 960 900 820 (14) PBT 670 930 680 950 1,020 1,140 1,100 1,150 21 PAT 450 580 450 630 670 760 740 730 16

Gross loans 74,860 78,970 81,970 86,440 85,860 92,230 95,650 100,410 16 Networth 11,200 11,760 11,140 11,920 12,340 13,120 13,500 13,310 12

Reported ratios (%) Yield 20.1 20.3 20.0 20.6 20.3 19.9 20.4 19.0 Cost of Funds 9.3 9.2 9.1 9.1 8.9 8.5 8.6 8.4 Net Interest Margin 12.2 12.5 12.3 12.9 12.6 12.5 13.0 11.7 Fee Income 0.8 0.5 1.2 1.0 0.6 1.0 0.7 1.4 Operating Expenses 5.4 5.5 4.6 4.5 4.3 4.3 3.8 3.3 Credit Cost 4.0 2.7 5.4 4.9 4.2 4.0 5.2 5.1 Return on Assets 2.3 2.9 2.1 2.8 2.9 3.2 3.0 2.8 Return on Equity 16.5 20.3 15.7 21.7 22.0 23.8 22.1 21.0 GNPL (%) 6.2 7.5 8.2 8.4 9.6 8.4 9.7 7.7 NNPL (%) 5.1 6.6 7.4 7.0 7.4 6.4 7.4 5.5

Source: Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 49 NBFCs L&T Finance Holdings

Exhibit 7: RoA of rural business at ~3% Key ratios, March fiscal year-end, 2016-20E

2016 2017 2018E 2019E 2020E Growth in key parameters (%) Profit and loss statement - yoy (%) Interest income 15 18 16 20 Interest costs 12 20 16 22 Net interest income 17 17 17 19 Other income 5 20 20 20 Net total income 17 18 17 19 Provisioning expenses (8) 10 7 21 Net income (post provisions) 32 21 21 18 Operating expenses (5) 35 20 25 PAT 38 24 21 12 Balance sheet - yoy (%) Loans 16 19 21 21 Total assets 14 19 21 21 Borrowings 24 18 22 22 Total liabilities 24 18 22 22 Shareholders funds 12 27 16 14 Key ratios (%) Interest yield 20.3 19.8 19.6 19.0 18.8 Interest cost 9.2 8.5 8.3 8.0 8.0 Spreads 11.1 11.3 11.4 11.0 10.8 NIMs 12.5 12.2 12.2 11.8 11.6 Cost-income ratio 37.2 29.3 33.6 34.5 36.4 Cost to assets (%) 4.3 3.7 4.0 4.2 4.4 Tax rate 21.9 43.2 36.0 36.0 36.0 Debt/ equity (X) 6.1 6.8 6.3 6.7 7.1 Credit costs(%) 4.3 3.8 3.6 3.2 3.2 Du Pont analysis (% of average assets) Net interest income 11.7 11.7 11.4 11.1 Other income 0.9 0.9 0.9 0.9 Total income 12.5 12.7 12.3 12.0 Credit costs 3.7 3.5 3.1 3.1 Operating expneses 3.7 4.3 4.2 4.4 PBT post extraordinaries 5.2 4.9 5.0 4.6 1-tax rate 56.8 64.0 64.0 64.0 RoA 2.5 3.0 3.2 3.2 2.9 Average assets / average equity (X) 7.8 7.5 7.5 7.9 RoE 18.6 22.9 23.8 23.8 23.2

Source: Company, Kotak Institutional Equities estimates

Exhibit 8: High growth in the rural finance business Loan book break-up, March fiscal year-end, 2016-20E

2016 2017 2018E 2019E 2020E Loan book (Rs mn) Microfinance 22,340 35,510 42,612 53,265 66,581 2W finance 17,610 21,100 24,265 27,905 32,090 Farm equipment 46,490 43,790 52,548 63,583 76,936 Total 86,440 100,400 119,425 144,753 175,607 YoY growth (%) Microfinance — 59 20 25 25 2W finance — 20 15 15 15 Farm equipment — (6) 20 21 21 Total — 16 19 21 21

Source: Company, Kotak Institutional Equities estimates

50 KOTAK INSTITUTIONAL EQUITIES RESEARCH L&T Finance Holdings NBFCs

Exhibit 9: Expect ~30% earnings CAGR in the rural finance business Key financial statements, March fiscal year-end, 2016-20E

2016 2017 2018E 2019E 2020E Income statement (Rs mn) Interest income 15,890 18,230 21,544 25,097 30,114 Interest costs 6,110 6,820 8,157 9,499 11,609 Net interest income 9,780 11,410 13,387 15,598 18,505 Other income 700 860 1,032 1,238 1,486 Net total income 10,490 12,270 14,419 16,837 19,991 Provisioning expenses 3,900 3,590 3,957 4,227 5,126 Net income (post provisions) 6,590 8,680 10,462 12,610 14,865 Operating expenses 3,900 3,590 4,847 5,816 7,270 PBT before extraordinaties 2,690 5,090 5,615 6,794 7,595 PBT post extraordinaries 2,690 5,090 5,615 6,794 7,595 Tax 590 2,200 2,022 2,446 2,734 PAT 2,100 2,890 3,594 4,348 4,861 Balance sheet (Rs mn) Assets Gross loans 86,440 100,410 119,425 144,753 175,607 Total assets 91,520 104,120 123,838 150,101 182,096 Liabilities Borrowings 73,290 90,810 106,934 130,531 159,700 Total liabilities 73,290 90,810 106,934 130,531 159,700 Shareholders funds 11,920 13,310 16,904 19,570 22,396

Source: Company, Kotak Institutional Equities estimates

Housing finance: strong performance driven by wholesale

 28% yoy AUM growth. Housing segment AUM grew 28% yoy driven by 21% yoy growth in home loan/LAP and 40% yoy growth in construction finance. The Home loan/LAP segment disbursement declined ~33% as LTFH is tweaking the model to originate the salaried business (explained below).

 Strong earnings growth. PAT growth was strong at 71% yoy to `870 mn, led by NII growth as well as strong fee income growth due to strong disbursements in the construction finance segment. Credit cost increased qoq but remained low at ~80 bps despite `160 mn voluntary provision in the quarter. Declining cost of funds (8.1%, 30 bps qoq and 60 bps yoy decline) and improving mix drove NIM improvement to 5.7% (up 50 bps qoq and 100 bps yoy).

 Transition towards higher margin segments in retail segments. To boost the profitability of the housing finance business, the company is shifting focus towards higher margin, relatively less competitive self-employed segment for home loans and LAP. In the lower margin salaried segment, it is shifting away from DSA sourcing (again to reduce expenses) that will lead to lower costs once the processes are streamlined and turn- around-times are improved.

 Loans to developers, aided by relationships of L&T. LTFH has a focus on building a real estate lending book aimed at category A and B developers and post receipt of project approvals. This will be supported by L&T. The share of developer disbursements in total housing disbursements has increased to ~50% from ~35% a year earlier.

 Expect 20% RoE by FY2020. We expect RoE to improve to ~20% by FY2020E from ~15% levels in FY2016, on the back of ~35% loan CAGR and marginal NIM decline (we remain relatively conservative on margins despite the shift to higher-yield business), resulting in ~30% NII growth and similar PAT growth. LTFH plans to ride piggyback on projects constructed by L&T to reduce risk and enhance customer sourcing.

KOTAK INSTITUTIONAL EQUITIES RESEARCH 51 NBFCs L&T Finance Holdings

Exhibit 10: Strong overall performance in the housing finance segment Quarterly summary, March fiscal year-ends, 1QFY16-4QFY17

1QFY16 2QFY16 3QFY16 4QFY16 1QFY17 2QFY17 3QFY17 4QFY17 YoY (%) Financials summary (Rs mn) Net interest income 610 790 880 1,100 1,100 1,250 1,480 1,700 55 Fee and othe income 120 50 140 150 100 180 360 260 73 Credit losses/provisions 110 50 130 (40) 150 110 180 240 Operating expenses 350 360 370 470 460 380 350 380 (19) PBT 270 430 520 820 590 940 1,310 1,340 63 PAT 160 280 320 510 390 610 880 870 71

Gross loans 67,810 75,290 86,580 98,110 104,080 113,810 115,650 125,340 28 Networth 6,920 7,770 9,250 9,910 10,580 11,630 12,030 13,620 37

Reported ratios (%) Yield 11.8 12.5 12.2 12.5 12.1 12.3 12.6 12.8 Cost of Funds 9.1 9.2 8.9 8.7 8.7 8.6 8.4 8.1 Net Interest Margin 3.9 4.4 4.4 4.7 4.3 4.6 5.2 5.7 Fee Income 0.8 0.3 0.7 0.6 0.4 0.7 1.3 0.9 Operating Expenses 2.3 2.0 1.8 2.1 1.8 1.4 1.2 1.3 Credit Cost 0.7 0.3 0.6 (0.2) 0.6 0.4 0.6 0.8 Return on Assets 1.0 1.5 1.5 2.1 1.4 2.1 2.9 2.8 Return on Equity 9.7 15.5 15.2 21.2 15.0 21.9 29.9 27.1 GNPL (%) 0.8 0.5 0.7 0.5 0.9 0.8 0.8 0.6 NNPL (%) 0.2 0.7 0.4 0.2 0.3 0.5 0.4 0.3

Source: Company, Kotak Institutional Equities

52 KOTAK INSTITUTIONAL EQUITIES RESEARCH L&T Finance Holdings NBFCs

Exhibit 11: Housing finance – key ratios and growth rates Key ratios, March fiscal year-end, 2016-20E

2016 2017 2018E 2019E 2020E Growth in key parameters (%) Profit and loss statement - yoy (%) Interest income 47 27 33 32 Interest costs 38 30 37 37 Net interest income 64 23 27 22 Other income 85 10 10 10 Fees — — — — Net total income 68 21 25 21 Provisioning expenses 172 (13) 34 33 Net income (post provisions) 60 25 24 20 Operating expenses — 30 25 25 PAT 116 24 23 18 Balance sheet - yoy (%) Loans — 28 36 33 33 Total assets — 25 36 33 33 Borrowings — 26 43 35 36 Total liabilities — 26 43 35 36 Shareholders funds — 37 55 11 11 Key ratios (%) Interest yield 12.2 12.4 11.9 11.8 11.7 Interest cost 8.9 8.1 8.0 7.9 8.0 Spreads 3.3 4.3 3.9 3.9 3.7 NIMs 4.4 5.0 4.6 4.4 4.0 Cost-income ratio 40 24 26 26 27 Cost to assets (%) 1.8 1.3 1.3 1.2 1.1 Tax rate 37.7 34.0 34.0 34.0 34.0 Tax rate (DTL) — — — — — Debt/ equity (X) 8.9 8.2 7.5 9.2 11.2 Credit costs(%) 0.3 0.5 0.4 0.4 0.4 Du Pont analysis (% of average assets) Net interest income — 4.6 4.4 4.1 3.8 Other income — 0.8 0.6 0.5 0.4 Total income — 5.4 5.0 4.6 4.2 Credit costs — 0.6 0.4 0.4 0.4 Operating expneses — 1.3 1.3 1.2 1.1 Extraordinaties — — — — — PBT post extraordinaries — 3.5 3.3 3.1 2.7 1-tax rate — 66.0 66.0 66.0 66.0 RoA 1.6 2.3 2.2 2.0 1.8 Average assets / average equity (X) 10.7 10.1 9.0 9.4 11.3 RoE 15.8 23.5 19.6 18.9 20.1

Source: Company, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 53 NBFCs L&T Finance Holdings

Exhibit 12: High growth in home loans Loan book break-up, March fiscal year-end, 2016-20E

2016 2017 2018E 2019E 2020E Loan book (Rs mn) Home loans / LAP 63,130 76,430 107,002 149,803 209,724 Real estate finance 34,980 48,910 63,583 76,300 91,560 Total 98,110 125,340 170,585 226,102 301,283 YoY growth (%) Home loans / LAP 21 40 40 40 Real estate finance 40 30 20 20 Total 28 36 33 33

Source: Company, Kotak Institutional Equities estimates

Exhibit 13: Expect ~40% earnings CAGR in the housing finance business Key financials, March fiscal year-end, 2016-20E

2016 2017 2018E 2019E 2020E Income statement (Rs mn) Interest income 9,420 13,860 17,608 23,405 30,852 Interest costs 6,040 8,320 10,797 14,768 20,273 Net interest income 3,380 5,540 6,811 8,637 10,579 Other income 460 900 990 1,089 1,198 Net total income 3,840 6,440 7,801 9,726 11,777 Provisioning expenses 250 680 592 793 1,055 Net income (post provisions) 3,590 5,760 7,209 8,933 10,722 Operating expenses 1,550 1,570 2,041 2,551 3,189 PBT before extraordinaties 2,040 4,190 5,168 6,381 7,533 PBT post extraordinaries 2,040 4,190 5,168 6,381 7,533 Tax 770 1,450 1,757 2,170 2,561 PAT 1,270 2,740 3,411 4,212 4,972 Balance sheet (Rs mn) Assets Loans 98,110 125,340 170,585 226,102 301,283 Total assets 106,150 132,200 179,921 238,477 317,773

Liabilities Borrowings 88,290 111,140 158,775 215,090 291,741 Total liabilities 88,290 111,140 158,775 215,090 291,741 Shareholders funds 9,910 13,620 21,147 23,387 26,032

Source: Company, Kotak Institutional Equities estimates

54 KOTAK INSTITUTIONAL EQUITIES RESEARCH L&T Finance Holdings NBFCs

Wholesale business: Playing to strengths

 Strong loan and fee growth. Wholesale segment loans grew 20% yoy, with disbursement growth of ~2X yoy. Growth is driven by infrastructure lending as well as structured finance transactions. Fee income growth was strong at 2X yoy, with a large part of it driven by origination and sell-down of project finance loans.

 Large fee income in wholesale business is a bit of a concern. LTFH earned fee income of `1.5 bn in the wholesale business, one of its key earnings driver in 4QFY17. This included `1 bn as syndication/loan related-fees. The company earns fees of 0.2-0.6% on all loan approvals, most of it from renewables (LTFH has been the first lender in this segment); the management highlighted that the company has about 15% market share (loan approval or syndication) in solar projects finance and about 25-30% in wind power. It has been active in financing road projects as well. We find fee income from wholesale business a bit large and are unclear about the risks assumed on these exposures.

 Elevated provisions continue to impact performance. The wholesale segment reported PAT of `1.8 bn, up 33% yoy, even as elevated credit costs (2.2%) continued. Strong AUM growth of 20% yoy was driven by growth in infrastructure (renewables, roads, power transmission) and structured finance (IPO funding).

 High provisions to continue. LTFH has reported high stress in the wholesale business. The segments of stress are EPC contractors and select power projects. The company is in the process of cleaning up its book. 4QFY17 credit costs were high at 2.2% and are expected to remain around 1.5-1% for the next few quarters. The company intends to increase the provision coverage on the 9.8% gross impaired assets from 27% currently to around 40%.

 Expect 14-15% RoE by FY2020E, driven by lower credit cost. We model improvement in RoE to ~15% from ~11% in FY2016 on the back of credit costs declining to below 1% in FY2019-20E from ~2% in FY2017E. Overall loan growth is expected to be moderate at ~10% but the share of IDF will likely improve to 25% by FY2020E from 7% in FY2016. We expect stable operating cost of 0.4% of assets and cost-income ratio of 10-12%. We have not fully captured the low tax benefits of IDF in our forecasts - this can provide an upside.

KOTAK INSTITUTIONAL EQUITIES RESEARCH 55 NBFCs L&T Finance Holdings

Exhibit 14: Earnings declined in the wholesale segment due to high credit costs Quarterly summary, March fiscal year-ends, 1QFY16-4QFY17

1QFY16 2QFY16 3QFY16 4QFY16 1QFY17 2QFY17 3QFY17 4QFY17 YoY (%) Financials summary (Rs mn) Net interest income 2920 3280 3340 3,250 3,300 3,560 3,250 3,160 (3) Fee and othe income 280 350 410 500 360 430 730 1,480 196 Credit losses/provisions 850 1,120 1,140 1,510 1,380 1,880 1,710 2,150 42 Operating expenses 390 420 470 470 430 430 430 290 (38) PBT 1,960 2,090 2,140 1,770 1,850 1,680 1,840 2,200 24 PAT 1,320 1,390 1,410 1,350 1,320 1,210 1,280 1,790 33

Gross loans 289,890 304,670 336,560 344,450 343,360 364,780 376,600 414,030 20 Networth 41,070 41,710 43,990 44,910 46,310 48,280 50,770 53,170 18

Reported ratios (%) Yield 12.3 12.2 11.5 11.6 11.7 11.6 10.9 10.2 Cost of Funds 9.1 8.7 8.3 8.9 8.8 8.7 8.6 7.9 Net Interest Margin 4.1 4.3 4.1 3.7 3.7 4.0 3.5 3.2 Fee Income 0.2 0.3 0.4 0.4 0.3 0.3 0.8 1.5 Operating Expenses 0.6 0.6 0.6 0.6 0.5 0.5 0.5 0.3 Credit Cost 1.2 1.5 1.4 1.8 1.6 2.1 2.0 2.2 Return on Assets 1.7 1.7 1.6 1.5 1.4 1.3 1.3 1.3 Return on Equity 13.1 13.3 13.2 12.1 11.4 10.2 10.3 13.7 Gross impaired assets (%) 10.8 9.5 8.6 9.4 8.7 9.6 9.2 9.8 Net impaired assets (%) 9.0 7.7 6.9 7.6 6.8 7.4 7.1 7.2

Source: Company, Kotak Institutional Equities

56 KOTAK INSTITUTIONAL EQUITIES RESEARCH L&T Finance Holdings NBFCs

Exhibit 15: Wholesale finance RoE to reach 13% by FY2020 Key ratios, March fiscal year-end, 2016-20E

2016 2017 2018E 2019E 2020E Growth in key parameters (%) Profit and loss statement - yoy (%) Interest income 9 18 10 9 Interest costs 13 19 11 10 Net interest income 3 15 7 9 Other income 20 (25) (10) 30 Net total income 14 20 (6) 11 Provisioning expenses 54 (2) (29) 9 Net income (post provisions) (6) 37 7 12 Operating expenses — 5 5 5 PBT before extraordinaties (5) 44 7 13 PBT post extraordinaries — — — — Tax (21) 55 (5) 13 PAT 2 40 11 13 Balance sheet - yoy (%) Loans 20 15 10 9 Total assets 19 14 10 9 Borrowings 21 20 10 9 Deferred tax liability — — — — Total liabilities 21 20 10 9 Share capital — — — — Key ratios (%) Interest yield 11.9 11.2 10.8 10.5 10.5 Interest cost 8.7 8.2 8.0 7.7 7.7 Spreads 3.1 3.0 2.8 2.8 2.8 NIMs 4.0 3.5 3.4 3.3 3.3 Cost-income ratio 12.3 9.8 8.5 9.5 9.0 Cost to assets (%) 0.5 0.4 0.4 0.3 0.3 Tax rate 31.1 28.0 28.0 25.0 25.0 Debt/ equity (X) 6.8 7.0 7.8 7.9 8.0 Credit costs(%) 1.5 1.9 1.6 1.0 1.0 Du Pont analysis (% of average assets) Net interest income — 3.3 3.2 3.1 3.1 Other income — 0.7 0.9 0.4 0.5 Total income — 4.0 4.1 3.5 3.5 Credit costs — 1.8 1.5 0.9 0.9 Operating expneses — 0.4 0.4 0.3 0.3 PBT post extraordinaries — 1.9 2.3 2.2 2.3 1-tax rate — 72.0 72.0 75.0 75.0 RoA 1.6 1.3 1.7 1.6 1.7 Average assets / average equity (X) 8.2 8.3 8.6 8.9 9.0 RoE 12.9 11.1 14.2 14.6 15.3

Source: Company, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 57 NBFCs L&T Finance Holdings

Exhibit 16: Share of IDF will increase in the wholesale business Loan book break-up, March fiscal year-end, 2016-20E

2016 2017 2018E 2019E 2020E Infrastructure finance 271,790 328,840 378,166 415,983 449,261 IDF 25,000 60,000 100,000 115,000 130,000 Others 246,790 268,840 278,166 300,983 319,261 Structured finance 49,790 63,970 76,764 85,976 98,872 Supply chain finance 22,870 21,230 21,655 22,088 22,529 Total 344,450 414,040 476,585 524,046 570,663 YoY growth (%) Infrastructure finance — 21 15 10 8 Structured finance — 140 20 12 15 Supply chain finance — 9 2 2 2 Total — 28 15 10 9

Source: Company, Kotak Institutional Equities estimates

Exhibit 17: Expect ~10% earnings CAGR in the wholesale finance business Key financials, March fiscal year-end, 2016-20E 2016 2017 2018E 2019E 2020E Income statement (Rs mn) Interest income 37,170 40,640 47,871 52,533 57,472 Interest costs 24,290 27,360 32,559 36,174 39,626 Net interest income 12,880 13,280 15,312 16,359 17,846 Other income 1,440 2,990 4,243 2,018 2,624 Net total income 14,320 16,270 19,554 18,377 20,470 Provisioning expenses 4,610 7,120 7,000 5,003 5,474 Net income (post provisions) 9,710 9,150 12,554 13,374 14,996 Operating expenses 1,760 1,590 1,670 1,753 1,841 PBT before extraordinaties 7,950 7,560 10,885 11,621 13,155 PBT post extraordinaries 7,950 7,560 10,885 11,621 13,155 Tax 2,470 1,960 3,048 2,905 3,289 PAT 5,480 5,600 7,837 8,716 9,867 Balance sheet (Rs mn) Assets Loans 344,450 414,030 476,585 524,046 570,663 Total assets 370,260 441,110 503,756 553,923 603,198

Liabilities Borrowings 305,930 371,640 446,417 491,947 535,973 Total liabilities 305,930 371,640 446,417 491,947 535,973 Shareholders funds 44,910 53,170 57,339 61,976 67,225

Source: Company, Kotak Institutional Equities estimates

58 KOTAK INSTITUTIONAL EQUITIES RESEARCH L&T Finance Holdings NBFCs

Exhibit 18: Change in estimates of lending business March fiscal year-ends, 2017-19E (Rs mn)

New estimates Old estimates % Change 2018E 2019E 2018E 2019E 2018E 2019E Net interest income 35,510 40,594 33,584 39,214 5 3 Loan book (Rs bn) 766,595 894,901 717,408 845,613 7 6 NPL provisions 11,549 10,023 11,480 9,416 1 6 Other income 6,265 4,346 6,318 4,338 (1) 0 Operating expenses 8,557 10,120 8,681 10,105 (1) 0 PBT 21,668 24,797 19,741 24,031 8 2 Tax 6,826 7,521 6,085 7,109 11 4 PAT 14,842 17,276 13,656 16,922 7 1 PAT of defocus buiness (1,950) - - - 0 0 PBT + provisions 33,217 34,820 31,221 33,447 6 3

Source: Company, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 59 NBFCs L&T Finance Holdings

Exhibit 19: L&T Finance Holdings - key ratios and growth rates March fiscal year-ends, 2015-2020E (%)

2015 2016 2017 2018E 2019E 2020E Growth in key parameters (%) Profit and loss statement - yoy (%) Interest income 22.6 17.6 14.4 6.7 13.5 17.2 Interest costs 16.1 15.6 12.2 16.5 12.7 18.5 Net interest income 32.6 20.4 17.3 (5.5) 14.7 15.4 Other income (22.1) 28.8 27.4 260.1 (17.6) 22.2 Net total income 28.0 20.8 17.9 10.1 8.5 16.4 Provisioning expenses 55.3 18.0 103.6 (14.8) (26.0) 16.3 Net income (post provisions) 21.3 21.7 (8.2) 26.9 24.1 16.4 PBT post extraordinaries 42.4 6.6 (13.9) 67.1 34.9 14.2 Tax 40.9 23.1 (90.9) 1,459.1 31.1 13.6 PAT 43.0 0.4 22.1 18.4 36.7 14.4 Balance sheet - yoy (%) Loans 18.3 22.5 11.1 24.9 15.0 17.1 Investments (3.0) 34.5 68.7 (30.0) 22.7 34.2 Fixed assets 1.2 (3.1) (11.1) 15.0 15.0 15.0 Other current assets 60.8 (6.4) (21.4) 5.0 5.0 5.0 Total assets 18.1 20.9 12.6 18.7 14.9 17.5 Borrowings 17.4 22.6 15.9 19.1 17.6 17.9 Total liabilities 15.7 23.0 13.2 20.6 16.3 17.9 Shareholders funds 9.4 12.9 11.6 10.3 13.8 14.5

Key ratios (%) Interest yield 14.7 14.3 14.1 12.7 12.1 12.2 Interest cost 9.2 8.8 8.3 8.2 7.8 7.9 Spreads 5.5 5.5 5.8 4.5 4.2 4.3 NIMs 6.2 6.2 6.3 5.0 4.8 4.8 Operating costs/ net income (pre provisions) 38.9 39.2 32.4 25.7 25.6 26.8 Tax rate 27.6 31.8 3.4 31.5 30.6 30.5 Debt/ equity (X) 6.6 7.2 7.4 8.0 8.3 8.6 Credit costs(%) 1.6 1.5 2.7 1.9 1.2 1.2 Du Pont analysis (% of average assets) Net interest income 5.4 5.4 5.5 4.5 4.4 4.4 Other income 0.3 0.3 0.3 1.1 0.8 0.8 Credit costs 1.4 1.3 2.3 1.7 1.1 1.1 Operating expneses 2.2 2.3 1.9 1.4 1.3 1.4 PBT post extraordinaries 2.4 2.2 1.6 2.3 2.7 2.6 1-tax rate 0.7 0.7 1.0 0.7 0.7 0.7 RoA 1.7 1.5 1.5 1.6 1.8 1.8 Average assets / average equity (X) 8.0 8.6 8.9 9.3 9.7 9.9 RoE 13.9 12.6 13.7 14.6 17.8 17.9

Source: Company, Kotak Institutional Equities estimates

60 KOTAK INSTITUTIONAL EQUITIES RESEARCH L&T Finance Holdings NBFCs

Exhibit 20: L&T Finance Holdings - key financials March fiscal year-ends, 2015-2020E (` mn)

2015 2016 2017 2018E 2019E 2020E Income statement (Rs mn) Interest income 61,962 72,888 83,406 89,022 101,035 118,438 Interest costs 35,678 41,241 46,270 53,925 60,778 71,996 Net interest income 26,284 31,647 37,136 35,097 40,257 46,442 Other income 1,412 1,819 2,317 8,344 6,875 8,404 Net total income 27,697 33,466 39,453 43,441 47,132 54,846 Provisioning expenses 6,617 7,810 15,899 13,549 10,023 11,654 Net income (post provisions) 21,080 25,655 23,554 29,892 37,109 43,192 Operating expenses 10,771 13,129 12,765 11,166 12,089 14,722 Staff expenses 3,523 4,877 4,935 — — — Other operating expenses 6,293 7,424 7,157 — — — Depreciation expenses 955 828 673 — — — PBT before extraordinaties 10,309 12,527 10,789 18,726 25,020 28,470 PBT post extraordinaries 11,748 12,527 10,789 18,023 24,317 27,767 Tax 3,241 3,990 364 5,681 7,451 8,465 PAT 8,507 8,537 10,425 12,342 16,866 19,302 Minority interest — — — — — — PAT for appropriation 8,507 8,537 10,425 12,342 16,866 19,302 Dividend 1,289 1,403 1,500 3,500 4,000 4,000 Dividend tax 218 237 254 592 676 676 Payout ratio (%) 15 16 14 28 24 21 No of shares (mn) 1,718 1,754 1,895 1,895 1,895 1,895 EPS (Rs) 5 5 6 7 9 10 BVPS (Rs) 37 41 42 47 53 61

Balance sheet (Rs mn) Loans 457,631 560,654 623,145 778,305 894,901 1,047,553 Investments 26,492 35,633 60,115 42,087 51,662 69,319 Fixed assets 7,185 6,962 6,189 2,689 2,823 2,964 Current assets 29,724 27,826 21,872 22,965 24,114 25,319 Total assets 527,421 637,463 717,710 852,116 979,266 1,150,634

Liabilities Borrowings 420,906 516,156 598,111 712,125 837,568 987,413 Deferred tax liability (2,897) (3,993) (7,426) (7,426) (7,426) (7,426) Current liabilities and provisions 31,034 40,211 34,767 39,982 45,979 52,876 Total liabilities 449,043 552,375 625,451 754,106 877,307 1,034,048 Share capital 17,184 17,538 18,951 18,951 18,951 18,951 Reserves and surplus 46,561 54,418 61,382 69,632 81,822 96,448 Minority interest 1,003 1,003 1,186 1,186 1,186 1,186 Shareholders funds 63,745 71,956 80,333 88,584 100,774 115,400

Source: Company, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 61 REDUCE IIFL Holdings (IIFL) NBFCs MAY 08, 2017 RESULT, CHANGE IN RECO. Coverage view: Neutral

Strong tailwinds, mind the valuations. IIFL’s wealth and broking businesses will Price (`): 491 continue to benefit from capital market buoyancy while the NBFC is on track for Target price (`): 450 moderate profitability improvements. Even as growth in capital markets is catching BSE-30: 29,859 investors’ excitement, unlike previous cycle, the share of capital market businesses is now restricted to 40-45% of its value, thus capping stock appreciation. We revise rating to REDUCE from ADD even as we raise TP to ₹450 from ₹350.

Company data and valuation summary India Infoline Stock data Forecasts/Valuations 2017 2018E 2019E 52-week range (Rs) (high,low) 525-196 EPS (Rs) 21.6 25.6 29.6 Market Cap. (Rs bn) 156.2 EPS growth (%) 33.6 18.6 15.5 QUICK NUMBERS Shareholding pattern (%) P/E (X) 22.8 19.2 16.6 Promoters 29.1 NII (Rs bn) 15.4 16.3 19.0  Consolidated PAT FIIs 26.3 Net profits (Rs bn) 6.9 8.1 9.4 MFs 2.0 BVPS 137.8 157.3 179.8 (after minority) Price performance (%) 1M 3M 12M P/B (X) 3.6 3.1 2.7 grew 37% yoy Absolute 14.0 54.7 132.3 ROE (%) 22.6 21.0 21.5 Rel. to BSE-30 14.5 46.3 96.6 Div. Yield (%) 0.9 1.1 1.2  IIFL Finance loan book up 25% yoy Broking business weak; wealth management strong  IIFL Wealth AUM up IIFL Holdings reported PAT at ₹1.87 bn, up 37% yoy. While wealth management was strong ~50% yoy and NBFC’s performance was stable, the broking business surprised negatively. Broking and capital market-related income was down 9% yoy and down 7% qoq even as volumes were up; the decline in income was likely due to lower yields and weakness in investment banking. Wealth management reported 40% growth in non-interest (franchise) income. NBFC loan book was up 14% yoy to ₹223 bn; excluding capital-market loans (a segment which it is running down), growth was higher at 25% yoy. The large (17%) outperformance on PAT was primarily on account of lower-than-expected tax rates, better cost-to-income ratio; IIFL’s net operating income was just 2% above estimates.

SoTP-based target price of ₹450; downgrade to REDUCE

IIFL Holdings and other brokerages traded at rich (about 20-30X earnings) multiples in FY2008 on expectations of high growth in brokerage fee income. Investors have argued that at current valuations (17X FY2019E EPS), IIFL’s stock is cheap. We would, however, discourage such a comparison and stick to our SoTP-based valuation methodology.

Broking/investment banking businesses had driven most value during FY2007-09. However, the business composition has changed significantly since then with large (55-60%) contribution of its NBFC business. Even in the wealth management business, the contribution of the wealth NBFC is growing. As such, it would be inaccurate to compare IIFL on PE basis with its historic Nischint Chawathe peaks or other brokerage firms.

We value IIFL Holdings at ₹450/share on out SoTP-based methodology; at our TP the stock will M B Mahesh CFA trade at 2.5X FY2018E book.

We value wealth and broking businesses at 20X PER, up from 15X earlier considering high growth in financial market inflows. This is the key driver of 5-7% increase in our pre-minority Abhijeet Sakhare earnings estimates.

We value the NBFC at 2X PBR FY2019E (1.8X PBR FY2019E earlier); the business will likely generate 25% earnings CAGR and 15-16% medium-term RoE on the back of its growing focus on mortgages/LAP even as it maintains a multiproduct-NBFC model.

Key risks: (1) Capital-market-linked businesses are fairly volatile and hence upside/downside to earnings can be high, and (2) the NBFC business is yet to mature in its mortgage business.

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

Exhibit 1: IIFL Holdings – quarterly financial statements March fiscal year-ends, 4QFY16-4QFY17 (` mn)

Act vs KIE Profit and loss statement (consol.) 4QFY16 1QFY17 2QFY17 3QFY17 4QFY17 YoY (%) 4QFY17E (%) Total income 10,996 10,306 12,161 12,737 14,044 28 11,276 25 Income from operations 10,966 10,266 12,142 12,705 14,009 28 11,246 25 Find based activities 7,488 7,577 9,088 9,438 10,190 36 7,453 37 Financial products distribution (1) 1,853 1,534 1,652 1,662 2,309 25 2,007 15 Capital market activities 1,626 1,156 1,402 1,605 1,510 (7) 1,785 (15) Other income 30 39 19 31 35 18 31 15 Interest 4,506 4,539 5,493 5,279 5,611 25 2,975 89 NII from operations 2,982 3,038 3,595 4,159 4,580 54 4,479 2 Operating expenses 3,938 3,285 3,563 4,039 4,658 18 4,865 (4) Direct expenses 987 719 795 953 1,314 33 938 40 Employees expenses 1,934 1,791 1,815 1,974 2,275 18 2,311 (2) Administration expneses 1,018 775 954 1,112 1,068 5 1,616 (34) Depreciation 163 135 131 129 144 (12) 150 (4) EBITA 6,895 6,885 8,467 8,568 9,243 34 6,261 48 PBT 2,389 2,346 2,973 3,290 3,633 52 3,286 11 Taxation 894 765 902 1,067 1,286 44 1,312 (2) PAT bef. minority interest 1,496 1,582 2,072 2,223 2,347 57 1,975 19 Minority interest 132 206 241 432 482 264 380 27 PAT 1,363 1,375 1,831 1,791 1,865 37 1,595 17 PBT 2,391 2,346 2,973 3,290 3,633 52 Equity broking 369 111 236 345 433 17 Finance and investment 1,554 1,599 1,946 2,304 2,480 60 Distribution and marketing 471 628 791 632 723 53 IIFL Finance (NBFC) Net interest income 2,612 2,657 2,951 3,126 3,455 32 Other income 463 241 378 381 586 27 Provisions 259 292 416 433 618 139 Operating expenses 1,343 1,238 1,352 1,364 1,571 17 PAT 950 890 1,020 1,117 1,205 27 Key ratios (%) NIM 6.2 6.1 6.3 6.4 6.8 GNPL 1.4 2.0 1.9 1.8 1.8 AUM break-up (Rs mn) 195,140 — — 210,890 222,810 14 Home Loans 27,290 — — 46,460 53,360 96 Loans Against Property 49,900 — — 53,110 56,270 13 Construction & Real Estate 28,110 — — 29,820 30,670 9 Gold 29,140 — — 29,860 29,100 (0) Commercial Vehicle 22,820 — — 27,900 29,740 30 Capital Market 25,980 — — 14,320 11,040 (58) Micro-finance — — — — 2,390 MSME & Others 11,900 — — 9,420 10,240 (14) IIFL Wealth (Wealth management + NBFC) Total income 1,751 1,775 2,547 2,825 3,681 110 Operating expenses 1,117 907 1,053 1,195 1,469 32 Interest expense 37 109 643 674 1,059 PAT before minority interest 461 527 572 652 754 64 AUM break-up (Rs bn) 794 858 1,004 1,070 1,201 51 Advisory 16 — — 86 108 Custody 119 120 130 139 132 Distribution 469 — — 588 721 Investment manager 191 — — 225 204 NBFC assets 1 — — 32 36 Key metrics No. of RMs (#) 195 211 220 220 226 16 Calculated blended yield (%) — — 0.95 0.95 1.05

Note: (a) Financial products distribution includes Insurance Distribution and Wealth Management divisions.

Source: Company, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 63 NBFCs IIFL Holdings

IIFL Wealth: Strong performance continues

 Strong agency business performance. IIFL Wealth reported PAT of `754 mn, up 64% yoy. Reported income from distribution (largely wealth, insurance distribution and some prop positions) was up ~40% yoy to ₹2.3 bn. We estimate wealth management agency income at ₹2.4 bn, i.e. up 40% yoy; as such there was a likely loss in its prop position.

 AUM growth of ~51% yoy and 12% qoq. AUM growth has shown consistent growth, `1.2 tn in 4QFY17 from `1.1 tn in 3QFY17 and `795 bn in 4QFY16; the company has partnership with 7,000 families. Large share of AUM comes from investment distribution and investment management. Overall blended yield on AUM (ex-custody) is around 99 bps for FY2017 compared to 89 bps in FY2016.

 Investing for growth. Operating costs increased 32% yoy, with 27% yoy increase in staff costs. Company continues to add staff – number of bankers increased to 226 from 195 at FY2016 and 139 at FY2015. Non-staff expense growth was sharper at 37% yoy and ~40% qoq – we need greater clarity on this.

 IIFL Wealth Finance. IIFL Wealth Finance is 100% subsidiary of IIFL Wealth. Wealth Finance’s target segments are loan against shares/property to HNIs, already served by the IIFL Wealth network. Loan book stands at `36 bn (+22% qoq) with yield of ~11-12%. There will be volatility in quarterly performance due to market volatility and IPO pipeline.

Exhibit 2: IIFL Wealth – revenues supported by NBFC business within IIFL Wealth Quarterly P&L summary, March fiscal year-end, 1QFY15-4QFY17 (Rs mn)

1QFY15 2QFY15 3QFY15 4QFY15 1QFY16 2QFY16 3QFY16 4QFY16 1QFY17 2QFY17 3QFY17 4QFY17 YoY (%) Income statement Income from operations 728 1,043 1,195 1,558 1,021 1,379 1,468 1,741 1,743 2,496 2,668 3,496 101 Agency 731 1,060 1,190 1,544 1,021 1,379 1,468 1,741 1,353 1,450 1,450 2,440 40 Interest income — — — — — — — — 390 1,046 1,218 1,056 — Other income 4 17 13 16 37 123 130 10 32 51 157 185 1,750 Total income 732 1,060 1,208 1,574 1,058 1,502 1,598 1,751 1,775 2,547 2,825 3,681 110 Total expenses 524 620 666 1,010 447 860 980 1,117 907 1,053 1,195 1,469 32 Employee expenses 270 301 302 402 273 455 448 595 540 641 698 755 27 Other expenses 254 319 364 608 174 405 532 522 367 412 497 714 37 EBITDA 208 440 542 564 611 642 618 634 868 1,494 1,630 2,212 249 Interest 5 26 33 34 59 69 43 37 109 643 674 1,059 2,762 Depreciation 2 2 3 6 7 8 8 11 16 19 21 33 200 PBT 201 412 506 524 545 565 567 586 743 832 935 1,120 91 Tax 58 146 161 161 173 154 118 125 216 260 283 366 193 PAT before minority interest 143 266 343 363 372 411 449 461 527 572 652 754 64

Assets under advice (Rs bn) 660 740 675 709 755 776 867 794 858 1,004 1,070 1,201 51 Cost-income ratio (%) 72 59 56 65 44 62 67 64 52 42 45 42 PAT margin (%) 20 25 28 23 35 27 28 26 30 22 23 20

Source: Company, Kotak Institutional Equities

Exhibit 3: IIFL Wealth – distribution assets comprise 55% of total assets under custody Break-up IIFL Wealth assets, March fiscal year-ends, 2014-17 (%)

2014 2015 2016 2017 Wealth assets (Rs bn) 575 703 795 1,201 (% of total) Advisory 0 1 2 9 Custody 35 16 15 11 Distribution 44 55 59 60 Investment manager 20 27 24 17 NBFC assets 0 0 0 3 Blended yield ex-custody (bps) 78 94 89 99 Notes: (a) Blended yield is calculated as total income-interest expenses/average assets excluding custody.

Source: Company, Kotak Institutional Equities

64 KOTAK INSTITUTIONAL EQUITIES RESEARCH IIFL Holdings NBFCs

Exhibit 4: Wealth management – summary financials March fiscal year-end, 2014-17 (Rs mn)

Income statement 2014 2015 2016 2017 YoY (%) Income from operations 2,411 4,524 5,609 10,403 85 MF commissions 1,356 3,036 1,712 NA Others 1,055 1,488 3,897 NA Other income 10 50 300 425 42 Total expenses 1,619 2,820 3,404 4,624 36 Employee expenses 810 1,275 1,771 2,634 49 Other expenses 809 1,545 1,633 1,990 22 EBITDA 802 1,754 2,505 6,204 148 Interest 53 98 208 2,485 1,095 Depreciation 9 13 34 89 162 PBT 740 1,643 2,263 3,630 60 Tax 232 526 570 1,125 97 PAT before minority interest 508 1,115 1,693 2,505 48

Average assets under advice (Rs bn) 510 696 798 1,033 29 Realisations (bps) 0.47 0.65 0.70 1.01 PBT margin (%) 30.7 36.3 40.3 34.9

Source: Company, AMFI, Kotak Institutional Equities

Exhibit 5: IIFL's market share in MF commissions declined in FY2016 Income from mutual fund distribution, March fiscal year-ends, 2013-16 (Rs mn)

2013 2014 2015 2016 YoY (%) IIFL group 753 1,356 3,036 1,712 (44) Industry 23,886 26,027 47,293 36,476 (23) Market share 3.2 5.2 6.4 4.7

Source: AMFI, Kotak Institutional Equities

IIFL Finance: Strong all-round performance

 ~2.5% RoA in the medium-term. We project ~20% AUM CAGR over FY2018-20E, adjusted for transfer of capital market book to wealth subsidiary, supported by `100 bn impact of equity infusion in FY2017. IIFL’s weighted average cost of funds declined ~50 bps qoq; management highlighted that this was on back of attractive rates on bank loans after the MCLR cut in January. As cost of fund declines, IIFL will further shift focus to lower yielding retail home loans. Over the medium-to-long term NIM will trend down due to decline in loan yields due to greater competition.

 Cost reduction offers maximum delta to improve RoAs. The current business mix has resulted in cost-asset ratio of 2.8% and shift towards greater share of retail will lead to cost savings that will offset decline in NIM. We expect cost-assets ratio to decline to 1.9-1.7% by FY2019-20E from 2.8% in FY2017.

 25% adjusted AUM growth in 4QFY17. IIFL Finance reported AUM of `223 bn, up ~14% yoy and 25% yoy after excluding the capital market loan shifted to IIFL Wealth. Growth is driven by retail home loans and CVs.

 Retail mortgages will be mainstay of growth. Retail home loan being the focus area going forward, grew by 96% yoy and 15% qoq. LAP grew slower at 13% yoy and 6% qoq. Target segment is small ticket home loans in the range of `2-2.5 mn, largely spread across the country with yield of ~10%. Around 70% of the loans are to salaried customers. LAP comprises half of the retail mortgages with ticket size of `10 mn and 14% yields. We expect 25% loan CAGR over FY2017-19, leading to ~60% share of total loans.

KOTAK INSTITUTIONAL EQUITIES RESEARCH 65 NBFCs IIFL Holdings

 Stable GNPLs. Total gross NPL was stable qoq at 1.8% and net NPL at 0.6%. Portfolio quality has remained stable with bulk of the pain in the CV and MSME loans. IIFL Finance follows 120 dpd NPL recognition policy.

Exhibit 6: IIFL Finance - quarterly data March fiscal year-ends, 4QFY16-4QFY17 (` mn)

4QFY16 1QFY17 2QFY17 3QFY17 4QFY17 YoY (%) Income statement (Rs mn) Interest income 6,943 6,951 7,608 7,592 7,913 14 Interest expenses 4,331 4,294 4,657 4,466 4,458 3 Net interest income 2,612 2,657 2,951 3,126 3,455 32 Other income 463 241 378 381 586 27 Provisions 259 292 416 433 618 139 Operating expenses 1,343 1,238 1,352 1,364 1,571 17 PBT 1,473 1,368 1,561 1,710 1,852 26 Tax 523 478 541 593 647 24 PAT 950 890 1,020 1,117 1,205 27

Outstanding loan book (Rs bn) 178 169 185 189 193 8 Loans outside balance sheet (Rs bn) 17 17 20 21 (193) (1,205) Loans under management (Rs bn) 195 186 205 211 — (100) Home Loans 27 46 53 96 Loans Against Property 50 53 56 13 Construction & Real Estate 28 30 31 9 Gold 29 30 29 (0) Commercial Vehicle 23 28 30 30 Capital Market 26 14 11 (58) Micro-finance — — 2 — MSME & Others 12 9 10 (14) Key ratios (%) NIM - KS Estimate 6.0 6.1 6.7 6.7 7.2 CAR 17.7 17.8 19.7 20.5 18.1

Asset quality Gross NPL (%) 1.4 2.0 1.9 1.8 1.8 Net NPL (%) 0.5 0.9 0.8 0.7 0.6

Source: Company, Kotak Institutional Equities

Exhibit 7: Performance metrics of IIFL Finance Product portfolio break-up, 4QFY17

Average Portfolio share Net NPL Yield ticket LTV (%) (%) (%) (Rs mn) (%) Home loan 24 0.28 10.0 2.60 68 Loan against property 25 0.87 12.4 8.12 48 Construction finance 14 0.06 17.2 84.78 35 Gold loan 13 0.00 22.2 0.05 64 Capital market finance 5 0.00 11.7 5.60 68 Commercial vehicle finance 13 1.91 16.8 0.80 75 MSME loan 5 1.67 14.2 3.80 54 Microfinance 1 0.00 24.6 0.00 — Total 100 0.58 14.5 — —

Source: Company, Kotak Institutional Equities

66 KOTAK INSTITUTIONAL EQUITIES RESEARCH IIFL Holdings NBFCs

Capital market segment revenues decline 7% yoy

Overall capital market revenues (broking and investment banking) revenues declined 7% yoy presumably due to impact of weaker IB income and decline in margins. Equity market volume growth was strong at ~50% yoy, with average daily turnover at IIFL in the cash segment up 22% yoy to ₹11 bn in 4QFY17. F&O volumes were up 48% yoy to ADV of ₹92 bn. Calculated commission yield declined to 2.1 bps from 2.7 bps in 3QFY17.

Exhibit 8: Cash equity market volume increased 18% yoy in 3QFY17 Average daily volumes on BSE and NSE, March fiscal year-ends, 2008-4QFY17 (` bn)

Volumes in cash market BSE NSE Total YoY F&O- NSE YoY Total vol. YoY Period (Rs bn) (Rs bn) (Rs bn) (%) (Rs bn) (%) (Rs bn) (%) 2008 62 144 205 78 530 77 735 77 2009 45 113 158 (23) 453 (15) 611 (17) 2010 56 168 224 41 717 58 941 54 2011 44 141 184 (18) 1,148 60 1,332 42 2012 26 113 139 (25) 1,269 11 1,408 6 2013 32 127 158 (15) 1,306 56 1,465 43 2014 21 112 133 2 1,530 21 1,663 19 2015 36 181 217 63 2,327 52 2,544 53 1QFY16 26 177 203 (10) 2,700 45 2,903 39 2QFY16 28 177 205 (5) 2,602 9 2,807 8 3QFY16 27 163 189 (4) 2,236 (5) 2,425 (5) 4QFY16 28 173 201 (12) 3,012 12 3,212 10 1QFY17 26 174 200 (2) 2,983 10 3,183 10 2QFY17 34 216 249 21 3,762 45 4,011 43 3QFY17 29 195 224 18 4,036 80 4,259 76 4QFY17 65 232 298 48 4,469 48 4,767 48

Source: BSE, NSE, Kotak Institutional Equities

Exhibit 9: Equity market volumes have been volatile over last 2 decades Volumes on BSE and NSE, March fiscal year-ends, 1996-4QFY17 (` bn)

Volumes (CM) (LHS) Volumes (F&O) (LHS) Volume growth (CM) (RHS) Volume growth (F&O) (RHS) 5,280 500

4,400 400

3,520 300

2,640 200

1,760 100

880 -

- (100)

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

1QFY17 2QFY17 3QFY17 4QFY17

Source: BSE, NSE, Kotak Institutional Equities

KOTAK INSTITUTIONAL EQUITIES RESEARCH 67 NBFCs IIFL Holdings

Exhibit 10: IIFL Holdings: NBFC drives highest value SOTP-based valuation, March fiscal year-ends, March 2019E

Valuation (Rs mn) (Rs/ share) Comments NBFC (85% stake) 80,138 252 2X PBR FY2019E Broking 12,170 38 20X PER FY2019E Wealth management (53% stake) 47,956 151 20X PER FY2019E Total 140,926 443

Source: Company, Kotak Institutional Equities estimates

Exhibit 11: IIFL Holdings is currently trading at 19X one-year forward EPS IIFL Holdings - Rolling PER (X)

25

20

15

10

5

-

Jan-12 Jan-13 Jan-14 Jan-15 Jan-11 Jan-16 Jan-17

Sep-12 Sep-13 Sep-14 Sep-15 Sep-11 Sep-16

May-12 May-13 May-14 May-15 May-11 May-16 May-17

Source: Company, Bloomberg, Kotak Institutional Equities estimates

Exhibit 12: IIFL Holdings – summary of estimate changes March fiscal year-end, 2018-19E (Rs mn)

New estimates Old estimates New vs Old (%) 2018E 2019E 2018E 2019E 2018E 2019E Income (inclduing NII) 31,908 37,699 31,744 37,866 1 (0) Broking and related income 6,351 7,244 6,018 6,892 6 5 Insurance and wealth management 9,106 11,277 8,504 10,546 7 7 Net interest income 16,311 19,018 17,082 20,268 (5) (6) Other income 140 160 140 160 — — Operating expenses 17,007 20,231 17,776 21,265 (4) (5) Brokerage/ direct expenses 3,783 4,539 3,386 4,063 12 12 Employee expenses 8,860 10,631 9,074 10,889 (2) (2) Others expenses 4,364 5,060 5,316 6,314 (18) (20) PBT 14,901 17,469 13,969 16,601 7 5 Tax 5,066 5,939 4,749 5,644 7 5 PAT 9,835 11,529 9,219 10,956 7 5 Minority interest 1,695 2,125 1,393 1,707 PAT (after minority interest) 8,139 9,404 7,826 9,250 4 2 EPS (Rs/ share) 25.6 29.6 24.7 29.2 4 1

Loan book (Rs bn) 224 261 239 285 (6.5) (8.6) PBT/ total income (%) 47 46 43 42 Cost/ income (%) 53 54 57 58

Source: Kotak Institutional Equities estimates

68 KOTAK INSTITUTIONAL EQUITIES RESEARCH IIFL Holdings NBFCs

Exhibit 13: IIFL Finance – key ratios, growth rates and financial statements March fiscal year-ends, 2015-20E 2015 2016 2017 2018E 2019E 2020E Key ratios (%) Interest yield (%) 18.1 16.6 16.1 14.6 14.1 13.8 Interest cost (%) 12.3 11.5 10.7 9.6 9.4 9.2 Spread (%) 5.8 5.1 5.4 5.0 4.7 4.6 NIM (%) 7.6 6.1 6.6 5.9 5.8 5.7 Loan growth (%) 34.7 21.2 8.5 16.1 16.4 19.0 Income on investments (%) 2.0 2.0 2.0 2.0 2.0 2.0 Opex/ loans (%) 4.5 3.0 2.8 2.5 2.1 1.8 Credit cost/ loans (%) 0.8 0.7 0.9 0.7 0.7 0.6 PAT / average loans (%) 2.4 2.1 2.3 2.5 2.7 2.9 Du Pont Analysis (% of total assets) NII/ assets 7.1 5.9 6.1 5.3 5.3 5.2 Other income/ assets 1.1 0.8 0.8 1.1 1.1 1.1 Provisions/ assets 0.8 0.6 0.9 0.6 0.6 0.6 Opex/ assets 4.1 2.9 2.8 2.3 1.9 1.7 PBT/ assets 3.3 3.1 3.3 3.5 3.9 4.1 (1-tax rate) 0.7 0.7 0.7 0.7 0.7 0.7 PAT/ assets 2.2 2.0 2.1 2.3 2.5 2.7 Average assets/ average equity (X) 7.7 8.2 7.1 6.2 6.1 6.1 PAT/ average equity 16.8 16.6 15.1 14.1 15.3 16.3

Profit and loss statement (Rs mn) Interest income 23,623 25,947 30,064 30,514 34,120 39,356 Interest expenses 13,856 16,091 17,875 18,205 20,148 23,213 Net interest income 9,767 9,856 12,189 12,309 13,972 16,143 Other income 1,515 1,377 1,587 2,436 2,973 3,370 Other interest income 570 120 169 882 1,367 1,709 Provisions 1,049 1,087 1,760 1,458 1,695 1,711 Operating expenses 5,718 4,937 5,525 5,207 5,085 5,134 Employee expenses 1,918 2,690 3,010 2,837 2,771 2,798 Other opex 3,450 1,987 2,255 2,125 2,075 2,095 Depreciation 350 260 260 245 239 242 PBT 4,515 5,209 6,491 8,079 10,166 12,667 Tax 1,503 1,822 2,260 2,813 3,539 4,410 PAT 3,012 3,387 4,231 5,266 6,626 8,257 Balance sheet (Rs mn) Fixed assets 1,800 655 1,241 1,551 1,939 2,424 Investments 3,000 2,475 14,365 3,000 3,000 3,000 Loan book 146,670 177,695 192,798 223,790 260,510 309,970 Total assets 155,700 179,358 218,934 242,180 282,026 335,256 Borrowings 127,541 153,127 181,044 198,226 230,448 274,175 Total liabilities 136,244 157,967 184,235 202,214 235,434 280,407

Networth 19,456 21,391 34,699 39,965 46,592 54,848

Source: Company, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 69 NBFCs IIFL Holdings

Exhibit 14: IIFL Holdings – key ratios and growth rates March fiscal year-ends, 2015-20E (%)

2015 2016 2017E 2018E 2019E 2020E Key parameters Volume in equity markets (Rs bn) 607,904 697,301 1,003,893 1,204,672 1,385,372 1,593,178 IIFL's volumes (Rs bn) 17,750 16,818 22,066 26,448 30,442 35,041 Per day (Rs bn) 77 74 96 115 133 153 Market share (%) 2.9 2.4 2.2 2.2 2.2 2.2 Commission yield (bps) 2.36 2.37 2.27 2.29 2.28 2.27 Key ratios Yield on loans (%) 18.1 16.6 16.1 14.6 14.1 13.8 Cost of borrowings (%) 11.4 11.0 11.0 10.0 10.0 10.0 Spread (%) 6.7 5.6 5.1 4.6 4.1 3.8 Total operating costs/ total income (%) 60.2 58.0 48.1 46.5 46.7 47.1 PBT margins (%) 19.7 20.5 24.9 27.9 28.7 29.7 YoY growth (%) Total revenues 29 12 20 8 14 15 Brokerage commission 53 (5) 26 21 15 15 Life insurance distribution fees (30) (9) (58) 8 6 8 Media income 29 (16) (63) 55 10 10 Operating costs 20 5 (3) 9 19 19 EBIT 37 17 32 10 12 14 Interest and finance charges 24 17 25 3 8 10 Profit before tax 73 16 46 22 17 19 Net profit 61 14 34 19 16 20 Dividend 6 41 5 19 16 15 EPS 54 12 34 19 16 20 Growth in balance sheet line items Total assets 33 18 48 1 18 4 Shareholders equity 17 14 50 14 14 15 Contribution to total revenues(%) Commission on equity broking 11.4 9.7 10.2 11.3 11.4 11.4 Brokerage in commodities 0.2 0.1 0.1 0.1 0.1 0.1 Fees earned on distribution (MF) 0.5 0.3 0.2 0.3 0.3 0.3 Life insurance commissions 1.8 1.5 0.5 0.5 0.5 0.5 Other mortgage and loan distribution 12.3 13.7 13.6 15.7 17.2 18.7 Interest earned on margin trading/ finance income 71.5 72.5 73.7 70.8 69.3 67.9 Merchant banking income 0.1 0.5 1.0 0.5 0.4 0.4 Media and other income 1.7 1.3 0.4 0.6 0.5 0.5 Du pont analysis (% of average assets) Net brokerage revenue 0.2 0.2 0.5 0.7 0.7 0.6 Income from distribution 3.2 3.0 2.5 2.6 2.9 3.3 Other income 15.9 14.5 13.1 11.3 11.6 11.8 Operating costs 15.0 13.7 11.8 10.2 10.5 10.6 (1-tax rate) 65.8 65.8 67.2 66.0 66.0 66.0 RoA (%) 2.8 2.6 2.9 2.9 3.1 3.3 Average assets/ average equity (X) 7.1 7.7 7.8 7.2 6.9 6.7 RoE (%) 20.1 20.2 22.6 21.0 21.5 22.3

Source: Company, Kotak Institutional Equities estimates

70 KOTAK INSTITUTIONAL EQUITIES RESEARCH IIFL Holdings NBFCs

Exhibit 15: IIFL Holdings – income statement and balance sheet March fiscal year-ends, 2015-20E (` mn) 2015 2016 2017E 2018E 2019E 2020E Consolidated income statement Total revenues 36,661 41,016 49,248 53,411 60,949 69,945 Commission on equity broking 4,184 3,987 5,013 6,053 6,936 7,957 Brokerage in commodities 90 60 40 48 58 69 Fees earned on distribution (MF) 190 140 120 144 173 207 Life insurance commissions 677 613 258 279 297 321 Wealth management/ distribution 4,525 5,610 6,704 8,379 10,474 13,093 Interest income 26,223 29,754 36,294 37,814 42,268 47,521 Media income 626 526 196 303 334 367 Merchant banking income 20 210 500 250 250 250 Other income 126 116 124 140 160 160 Operating costs 13,438 14,045 13,627 14,841 17,621 20,938 Brokerage/ direct expenses 3,953 3,583 3,603 3,783 4,539 5,447 Business promotion and marketing 247 284 299 313 376 451 Staff expenses 6,048 7,045 7,840 8,860 10,631 12,758 Administrative expenses 3,190 3,133 1,885 1,885 2,074 2,281 Provisions 1,055 1,087 1,896 1,572 1,957 2,003 EBITDA 22,168 25,884 33,725 36,998 41,372 47,005 Depreciation/Amortization 591 661 540 594 653 718 EBIT 21,577 25,223 33,185 36,405 40,719 46,286 Interest and finance charges 14,337 16,800 20,922 21,504 23,250 25,500 Profit before tax 7,240 8,423 12,263 14,901 17,469 20,786 Taxation 2,474 2,878 4,018 5,066 5,939 7,067 Net profit 4,766 5,545 8,222 9,835 11,529 13,719 Minority interest in loss/profit 290 433 1,361 1,695 2,125 2,480 Net profit for appropriation 4,476 5,112 6,861 8,139 9,404 11,239 Dividend 957 1,345 1,409 1,671 1,931 2,211 Adjusted number of shares 310 317 318 318 318 318 EPS (Rs) 14.4 16.1 21.6 25.6 29.6 35.4 EPS -fully diluted (Rs) 13.2 14.8 19.8 23.5 27.2 32.5 DPS (Rs) 3.1 4.3 4.4 5.3 6.1 7.0 DPS -fully diluted (Rs) 2.8 3.9 4.1 4.8 5.6 6.4 Dividend payout ratio(%) 25 24 24 24 24 23 BVPS (Rs) 82.5 92.2 137.8 157.3 179.8 207.0 BVPS -fully diluted (Rs) 75.6 84.7 126.6 144.4 165.1 190.1 Consoidated balance sheet (Rs mn) Goodwill (on consolidation) 383 578 637 — — — Net owned assets 4,716 4,805 3,158 3,414 3,611 3,743 Current Assets 32,629 25,607 99,508 81,430 95,303 51,067 Cash and bank balance 18,287 16,288 38,461 14,278 21,436 (30,187) Loans and advances 146,670 177,695 192,798 256,290 302,760 364,895 Total assets 193,661 228,765 337,627 341,133 401,674 419,704

Borrowings 146,393 159,476 220,074 210,000 255,000 255,000 Current liabilities & prov. 19,048 28,332 61,185 66,884 73,153 80,049 Total liabilities 165,441 187,808 281,259 276,884 328,153 335,049 Shareholders equity 25,576 29,200 43,816 50,002 57,149 65,803 Paid-up capital 620 633 636 636 636 636 Reserves and surplus 24,956 28,566 43,180 49,366 56,513 65,167

Source: Company, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 71 ADD Lupin (LPC) Pharmaceuticals MAY 08, 2017 CHANGE IN RECO. Coverage view: Cautious

Looking beyond metformin. LPC’s share price has corrected by 14% in the past Price (`): 1,251 month on fears of a rapid decline in Fortamet and Glumetza, though this is hardly Target price (`): 1,350 surprising as both products were anyway expected to be finite opportunities. However, BSE-30: 29,859 LPC has been smartly allocating the profit windfall from these products to advance critical filings, starting with ProAir in Dec’16, and including recent initiation of pivotal trial for Spiriva, with Advair too expected to follow suit in 1QFY18. Valuations are now more reasonable at 17X FY2019 EPS. Upgrade to ADD with a target price of `1,350/share.

Company data and valuation summary Lupin Stock data Forecasts/Valuations 2017 2018E 2019E 52-week range (Rs) (high,low) 1,750-1,248 EPS (Rs) 61.9 66.1 75.0 Market Cap. (Rs bn) 564.8 EPS growth (%) 22.7 6.8 13.5 Shareholding pattern (%) P/E (X) 20.2 18.9 16.7 Promoters 46.7 Sales (Rs bn) 178.1 197.7 226.4 FIIs 33.3 Net profits (Rs bn) 27.9 29.8 33.8 MFs 5.0 EBITDA (Rs bn) 47.0 50.7 57.4 Price performance (%) 1M 3M 12M EV/EBITDA (X) 12.8 11.5 9.8 Absolute (14.1) (16.2) (22.0) ROE (%) 22.8 20.3 19.5 Rel. to BSE-30 (13.7) (20.7) (34.0) Div. Yield (%) 0.7 0.8 0.9

Metformin erosion worries lead to a sell-off Recent unit sales data suggesting a decline in Fortamet and Glumetza volumes has raised worries of a rapid decline in LPC’s sales of the two products, which combined represent ~35% of LPC’s FY2017 EPS. Fortamet volume erosion has been sharper given the impact from formulary exclusions beginning this year; Glumetza volumes have been on a steady decline since CY2015. We have been cautious on extrapolating the gross to net pricing for both the products, but the ex-manufacturer pricing has been on a decline for both the products, with the most recent catalyst being Valeant’s AG launch for Glumetza, which we believe is priced at a sharp 25-30% discount. Fortamet and Glumetza are critical for near-term earnings, but these were always expected to be finite opportunities. Look beyond metformin – ProAir filed, Spiriva in clinics, and Advair to follow Earnings hit from metformin franchise is a given, but from a more fundamental viewpoint, we credit the management for allocating the profit windfall to advance critical R&D projects. Indeed, over the past year, LPC has significantly moved up the curve on filing quality, particularly in the inhalation space, where it filed ProAir, its first pMDI inhaler in Dec’16 (see pg. 3 for details). LPC has now also initiated a pivotal clinical endpoint trial for Spiriva Handi-haler (US$1.9 bn US sales). The route to approval is tricky and a potential launch is still far away, but our checks suggest that LPC is the first company globally to have advanced to clinics for the product. We expect LPC to initiate clinical endpoint trial for Advair DPI in 1QFY18, and expect its Enbrel biosimilar to be filed in Japan and the EU in CY2017. Valuations reasonable – upgrade to ADD Chirag Talati, CFA We expect the metformin franchise to continue to deteriorate, driven by the impact of formulary exclusions as well as competitive pressures, though, this is hardly a surprise. We Kumar Gaurav expect combined contribution from the two products to decline to ~15% of earnings by FY2019, which we believe is manageable. We cut our FY2018/19 estimates by ~9% and 11% respectively to factor in a stronger currency as well as a more aggressive price erosion environment. Following the recent correction, LPC is trading at 19X FY2018 and 16.7X FY2019 EPS. Upgrade to ADD with a revised a target price of `1,350 (~18X FY2019 EPS) versus `1,600 earlier (21X FY2019 EPS).

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

Metformin fears

Recent unit sales data suggesting the decline in Fortamet and Glumetza volumes has raised worries of a rapid decline in LPC’s sales of the two products. Fortamet volume erosion has been sharper than expected given the formulary exclusions this year, but Glumetza volumes have anyway been on a steady decline since CY2015 when Valeant implemented a price increase, with volumes declining by 40% from the peak by the time LPC launched its authorized generic in Feb’16. We have been cautious on extrapolating the gross to net pricing for both the products, given our view on the rebating for the two products. However, we do note that ex-manufacturer pricing has been on a downward trend for both the products, with the most recent catalyst being Valeant’s authorized generic launch for Glumetza, which we believe is priced at a sharp 25-30% discount. Even on current pricing, we note that both Fortamet and Glumetza are still priced at a significant premium to Glucophage XR generics, with hardly any clinical differentiation to justify the price differential. We expect the pricing to continue to deteriorate given potential competitive pressures (Sun and Teva in Glumetza and Nostrum in Fortamet) as well as therapeutic shifts.

Exhibit 1: Fortamet and Glumetza generics still at substantial premium to Glucophage XR generics Net manufacturer realization per pill (US$)

18 16.00 16 14 12 10 8.20 8 6 4 2.95 1.65 2 0.07 0.05 0 Glumetza Glumetza Fortamet ER Fortamet ER Glucophage XR Glucophage XR 1000mg 500mg 1000mg 500mg 750mg 500mg

Source: Industry data, Kotak Institutional Equities

KOTAK INSTITUTIONAL EQUITIES RESEARCH 73 Pharmaceuticals Lupin

ProAir filing signals entry into pMDIs, Spiriva moves to clinics

LPC has filed ProAir, its first pMDI inhalation product in the US. The filing by LPC is only the second disclosed filing for the product after Perrigo, and even after allowing time for litigation and a 30-month stay, we believe its launch is likely in 1QFY20. ProAir had CY2015 sales of US$540 mn, with the three albuterol brands combined accounting for over US$1 bn in sales in the US. As per Perrigo’s settlement with Teva, its launch was triggered in Dec'16, though it has not received an approval so far, with Teva recently guiding to an earliest generic launch in 3QCY17. We expect the product to be a 4-6 player market over time, and expect LPC to be in the second wave after Perrigo’s impending launch. Inhalers present one of the most complex dosage forms among generic drugs. Within inhalation, the regulatory route to the market for pMDIs is relatively easier compared to DPIs, (single flow rate, homogenous manufacturing lines), with albuterol having a predictable regulatory route given the guidelines (requires a PD trial with bronchodilation endpoint, PK study, and invitro data). However, the challenge for pMDIs is to navigate IP due to various formulation patents for pMDI products even though the two key propellant patents (HFA-134a for albuterol and HFA-227 for Advair) have expired. ProAir HFA has four patents covering the device, valves, but importantly also the suspension aerosol formulation expiring in Sept’23 and the success of generics will lie in developing a Q1/Q2 non-infringing formulation. Moreover, pMDI products are inherently difficult to scale up with the three albuterol brands accounting for 67 mn devices. Of this, ProAir accounts for ~35 mn units, though we expect ProAir generics to gain market share from the other two brands (Ventolin and Proventil) and believe the addressable market size will be substantially large.

LPC recently initiated a pharmacodynamics (PD) endpoint trial for Spiriva Handi-haler generic, making it the first DPI product for LPC to move to pivotal clinical endpoint stage, ahead of Advair Diskus, and also making LPC potentially the first company globally to have an advanced Spiriva generic program. The FDA is yet to publish bio-equivalence guidance for Spiriva, but we believe the guidance is likely to be a mix of the published guidance for ipratropium HFA, where the FDA requires a PK trial and a PD with clinical endpoint as the pivotal BE trial, and Advair Diskus, where the FDA has asked for a device handling component and device robustness studies apart from in vitro data that is likely to be standard across generic DPI’s. Our preliminary reading of LPC’s trial design for Spiriva suggests that it can potentially serve as a pivotal trial for an ANDA filing, though, we acknowledge that we are yet not aware of the status of critical components such as in vitro data, PK trial, as well as the quality of manufacturing and stability data, all of which are likely to be critical from an approval standpoint.. Spiriva Handi-haler has a much more complex IP scenario compared to Advair Diskus, as several device patents stretch until CY2030, though these can be bypassed. However, Spiriva also has an API polymorph patent expiring in Mar’22 that is tough to bypass, given the FDA’s cautious view on inhalation products. That said, even assuming market formation in CY2022, we believe a filing in CY2018 can potentially position LPC for a launch in the first wave.

74 KOTAK INSTITUTIONAL EQUITIES RESEARCH Lupin Pharmaceuticals

Exhibit 2: US pipeline set to see meaningful launches over FY2018-20 time period Y-Axis: brand sales (US$ mn), X-Axis: Year of launch (March fiscal year-end, 2017-20)

FY2017 FY2018 FY2019 ≥FY2020

>US$1 bn Gleevec tabs Lyrica Advair Diskus Spiriva Restasis Lialda Truvada Atripla

US$500 mn - US$1 bn Hydrocodone/APAP Ranexa Androgel 1.62% Renvela tabs Xyrem Namenda XR

US$250 - US$500 mn Minastrin 24 fe Wellbutrin XL Axiron ProAir HFA Pristiq Vigamox Welchol tabs TobraDex Nuvigil Detrol LA Viread CiproDex Tracleer

US$100 - US$250 mn Paxil CR Tamiflu susp. Diastat Acudial Tykerb Epzicom Suprep Renvela susp. Ravicti Potassium Cl ER Tobi solution Renagel Morphine ER Coreg CR Prevacid ODT Uceris Hydrocortisone oint./cream Vimovo Lexiva Diclofenac 3%

US$25 mn revenues in first 12 months of launch Medium US$10 - 25 mn revenues in first 12 months of launch Low < US$10 mn revenues in first 12 months of launch

Source: Kotak Institutional Equities estimates

Exhibit 3: ANDA filing rate to pick up materially in FY2018 Number of ANDAs

1QFY14 2QFY14 3QFY14 4QFY14 1QFY15 2QFY15 3QFY15 4QFY15 1QFY16 2QFY16 3QFY16 4QFY16 1QFY17 2QFY17 3QFY17 Approvals ANDA approvals - during the period 8 6 5 3 4 2 3 3 6 7 9 6 7 9 11 Cumulative ANDA approvals 86 92 96 99 103 105 108 111 117 124 133 180 187 196 207 Filings ANDA filed - during the period 1 7 3 6 8 0 3 7 5 5 5 17 2 4 6 Cumulative ANDAs files 177 183 186 192 200 200 203 210 215 220 225 343 336 338 344 Pending ANDA - pending approval 91 91 90 93 97 95 95 99 98 96 92 163 149 142 137

Source: Company

KOTAK INSTITUTIONAL EQUITIES RESEARCH 75 Pharmaceuticals Lupin

Exhibit 4: US sales set to benefit from launches and Gavis acquisition March fiscal year-ends, 2013-19E (US$ mn)

2013 2014 2015 2016E 2017E 2018E 2019E Branded business 102 87 95 59 51 40 44 Limited competition/P-IV's/STFs 177 350 469 467 648 548 657 Gavis acquisition 0 0 0 0 132 260 302 LPC Base business 398 398 421 403 459 491 523 Total Sales 677 836 985 929 1,290 1,338 1,527 Growth % 28 23 18 -6 39 4 14 Branded as a % of sales 15 10 10 6 4 3 3 Limited competition as % of sales 26 42 48 50 50 41 43 Base business as % of sales 59 48 43 43 36 37 34

Source: Company, Kotak Institutional Equities estimates

Valuations reasonable; upgrade to ADD

We cut our FY2018 and FY2019 revenue by 3.3% and 4.5% respectively, while the impact on EPS is larger at 9.2% and 11% respectively. The sharp EPS cut is partly driven by stronger INR, as we change our USD/INR assumptions for FY2018 (~4% EPS impact) and FY2019 (~3% EPS impact), in-line with KIE economist’s view. However, a bigger concern remains the pricing environment in the US, where we have had a negative view for the past two years, one, which we continue to hold even now. However, following the recent sharp correction, LPC shares are now trading at 19X FY2017 EPS and 17X FY2019 EPS. We cut our target price to `1,350/share (18X FY2019 P/E) as against `1,600 earlier (21X FY2019 P/E), as we take into account the recent multiple correction in the sector.

Exhibit 5: We cut our FY2018-19E EPS by ~9% March fiscal year-ends, 2018-19E, (` mn)

New estimates Old Estimates Changes % 2018E 2019E 2018E 2019E 2018E 2019E Sales 197,689 226,415 204,516 237,194 (3.3) (4.5) Gross profits 136,536 152,838 144,113 162,857 (5.3) (6.2) EBITDA 50,708 57,409 53,609 62,066 (5.4) (7.5) PBT 40,821 46,003 43,722 50,660 (6.6) (9.2) Tax (11,022) (12,191) (11,085) (12,999) (0.6) (6.2) PAT 29,759 33,772 32,752 37,956 (9.1) (11.0) EPS (Rs) 66.1 75.0 72.8 84.3 (9.2) (11.0)

Source: Kotak Institutional Equities estimates

76 KOTAK INSTITUTIONAL EQUITIES RESEARCH Lupin Pharmaceuticals

Exhibit 6: US generics to drive revenue growth in FY2016-18 period Segment-wise revenues, March fiscal year-ends, 2012-19E, (` mn)

2012 2013 2014 2015 2016 2017E 2018E 2019E Domestic formulations 19,101 23,643 24,796 29,679 33,916 37,986 43,304 49,367 Export formulations 42,514 59,992 75,077 84,737 91,036 123,732 136,606 159,247 US 25,303 36,210 48,871 56,953 59,376 85,455 87,625 102,615 - Branded 6,805 5,167 4,887 4,969 2,941 5,255 5,898 7,456 - Generics 17,498 31,043 43,984 52,391 55,484 80,201 81,727 95,159 Japan 8,607 13,040 12,954 13,239 13,646 17,740 24,148 26,563 Europe 1,976 2,357 3,119 3,262 4,278 5,433 6,248 7,185 South Africa 2,554 3,210 3,800 4,218 4,007 4,207 4,965 5,858 Others 3,607 5,175 6,333 7,065 9,729 10,896 13,621 17,026 API 8,491 9,498 11,178 11,941 12,074 11,833 12,779 13,801 Total 71,106 93,633 111,551 126,357 137,026 173,551 192,689 222,415 % yoy growth Domestic formulations 23 24 5 20 14 12 14 14 Export formulations 29 41 25 13 7 36 10 17 US 22 43 35 17 4 44 3 17 - Branded 9 (24) (5) 2 (41) 79 12 26 - Generics 20 77 42 19 6 45 2 16 Japan 39 52 (1) 2 3 30 36 10 Europe 9 19 32 5 31 27 15 15 South Africa 45 26 18 11 (5) 5 18 18 Others 50 43 22 12 38 12 25 25 API (1) 12 18 7 1 (2) 8 8 Total 23.3 31.7 19.1 13.3 8.4 26.7 11.0 15.4 % of sales Domestic formulations 27 25 22 23 25 22 22 22 Export formulations 60 64 67 67 66 71 71 72 US 36 39 44 45 43 49 45 46 - Branded 10 6 4 4 2 3 3 3 - Generics 25 33 39 41 40 46 42 43 Japan 12 14 12 10 10 10 13 12 Europe 3 3 3 3 3 3 3 3 South Africa 4 3 3 3 3 2 3 3 Others 5 6 6 6 7 6 7 8 API 12 10 10 9 9 7 7 6

Source: Company, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 77 Pharmaceuticals Lupin

Exhibit 7: Lupin - Profit and loss, balance sheet and cash model March fiscal year-ends, 2012-2019E (` mn)

2012 2013 2014 2015 2016 2017E 2018E 2019E Net revenues 70,829 96,413 112,866 127,699 142,085 178,051 197,689 226,415 Gross profit 44,790 60,933 74,693 86,129 98,991 126,205 136,536 152,838 Staff costs (9,695) (12,488) (14,646) (17,473) (21,077) (28,768) (32,084) (36,096) R&D expenses (5,228) (7,098) (9,294) (10,998) (16,038) (22,256) (23,170) (24,480) Other expenses (15,419) (18,647) (20,724) (21,463) (24,341) (28,224) (30,574) (34,853) EBITDA 14,447 22,700 30,029 36,195 37,535 46,956 50,708 57,409 Depreciation & amortisation (2,275) (3,322) (2,610) (4,347) (4,635) (8,877) (10,388) (12,033) EBIT 12,172 19,378 27,419 31,848 32,900 38,079 40,320 45,376 Net interest (355) (411) (266) (98) (446) (1,374) (998) (872) Other income 144 279 1,165 2,397 1,877 2,583 1,500 1,500 Profit before tax 11,961 19,246 28,318 34,147 34,330 39,288 40,821 46,003 Tax & deferred Tax (3,086) (5,842) (9,622) (9,704) (11,536) (11,393) (11,022) (12,191) Less: minority interest (199) (262) (331) (412) (88) (40) (40) (40) Net Income (adjusted) 8,676 13,142 18,365 24,031 22,707 27,854 29,759 33,772 EPS adjusted (Rs) 19.5 29.4 40.8 53.4 50.5 61.9 66.1 75.0 Balance sheet Equity 40,852 52,636 69,985 88,982 110,165 133,841 159,136 187,843 Total borrowings 14,809 6,030 5,533 4,710 71,193 63,193 55,193 41,193 Other liabilities 23,680 30,472 26,542 37,686 43,020 49,144 54,163 60,994 Total liabilities 38,488 36,502 32,075 42,396 114,213 112,337 109,356 102,187 Total liabilities and equity 79,340 89,138 102,060 131,377 224,378 246,178 268,492 290,030 Net fixed assets 33,814 33,109 36,597 49,442 116,023 135,197 136,808 130,775 Investments 2,555 4,599 4,459 3,612 10,564 10,564 10,564 10,564 Cash 4,025 4,349 9,739 21,372 8,379 9,215 21,549 34,055 Other current assets 38,947 47,082 51,265 56,951 89,411 91,202 99,571 114,636 Total assets 79,340 89,138 102,060 131,377 224,378 246,178 268,492 290,030 Cashflow statement Operating profit before working capital 14,546 23,443 32,422 37,716 39,509 48,124 51,170 57,996 Tax paid (3,139) (5,439) (7,719) (9,436) (11,662) (10,254) (9,920) (10,972) Change in working capital (5,816) (5,494) (4,663) (949) (31,537) 3,194 (4,452) (9,453) Capital expenditure (5,099) (5,511) (5,286) (8,712) (11,750) (18,000) (12,000) (6,000) Free cash flow 493 6,999 14,753 18,619 (15,440) 23,064 24,798 31,572 Margins and ratios Gross profit margin (%) 63.2 63.2 66.2 67.4 69.7 70.9 69.1 67.5 EBITDA margin (%) 20.4 23.5 26.6 28.3 26.4 26.4 25.7 25.4 Tax rate (%) 25.8 30.4 34.0 28.4 33.6 29.0 27.0 26.5 RoAE (%) 23.4 28.1 30.0 30.2 22.8 22.8 20.3 19.5 RoACE (%) 25.1 32.8 36.2 33.9 19.3 20.1 19.2 19.9

Source: Kotak Institutional Equities, Company

78 KOTAK INSTITUTIONAL EQUITIES RESEARCH REDUCE PVR (PVRL) Media MAY 08, 2017 CHANGE IN RECO. Coverage view: Attractive

GST upside priced in. We believe PVR stock is pricing in 300 bps margin expansion Price (`): 1,522 (17% EBITDA upside) from GST and associated re-rating. Further upside is contingent Target price (`): 1,450 on GST rate of 18%/12% on ticket/F&B sales (low probability scenario) as against BSE-30: 29,859 30%/10% at present. We continue to like PVR story but risk reward is not favorable. Downgrade to REDUCE from ADD with TP of `1,450 (`1,350 earlier) valuing PVR at 12.5X FY2019E EV/EBITDA (from 11.5 X) and adding `200/share (unchanged) to factor in the potential upside from GST.

Company data and valuation summary PVR Stock data Forecasts/Valuations 2017 2018E 2019E 52-week range (Rs) (high,low) 1,655-820 EPS (Rs) 22.4 33.9 43.2 Market Cap. (Rs bn) 71.1 EPS growth (%) (17.0) 51.4 27.3 Shareholding pattern (%) P/E (X) 67.9 44.9 35.2 Promoters 25.2 Sales (Rs bn) 21.6 25.5 29.3 FIIs 31.0 Net profits (Rs bn) 1.0 1.6 2.0 MFs 12.6 EBITDA (Rs bn) 3.6 4.5 5.3 Price performance (%) 1M 3M 12M EV/EBITDA (X) 21.9 17.3 14.6 Absolute 0.1 17.3 82.0 ROE (%) 11.4 15.4 17.0 Rel. to BSE-30 0.5 10.9 54.0 Div. Yield (%) 0.1 0.2 0.3

GST can drive 300-350 bps margin expansion in FY2019E

We believe GST implementation can lead to 300-350 expansion in EBITDA margin and 15-20% EBITDA upgrade in FY2019E—(1) there is no set off available between service tax on input costs and e-tax/ VAT on sales at present. Availability of set off under GST will likely reduce PVR’s tax burden by about `1.1 bn in FY2019 (20% EBITDA upside), (2) Lower GST rate, say 18%/12% on tickets/F&B (versus 30%/10% at present) can offer more upside, (3) It is not clear if there will be grandfathering clause allowing continuation of e-tax exemptions on existing and/or new screens (wherever applicable). If not, it can hurt margin by 50-75 bps. We believe that PVR will benefit from #1 and will pass on the benefit from #2 (if any) to consumers. The latter can boost occupancy and volumes aiding profitability in the medium term. Business outlook—key metrics and content trends tracking well; screen additions slipping

PVR’s key metrics are tracking well. Average ticket price, F&B spends per head and ad revenue grew at CAGR of 5%, 10% and 16% over FY2015-17E on organic basis. We expect modest moderation in growth rate over FY2017-20E led by (1) change in mix on expansion in tier-III towns, (2) price regulation in Karnataka. Content trends are encouraging—Hollywood and regional movies are gaining traction, reducing dependency on Bollywood. We expect filmmakers to step up focus on making ‘pan-India’ films following the remarkable success of Bahubali 2. Screen growth is tad disappointing with organic net addition of 121 screens over the past three years (guidance of 60 screens/ year). Delay in mall development is a key bottleneck. We continue to like the story but risk reward is not appealing; downgrade to REDUCE

We like PVR for its presence at premium locations and branding, leadership in organic growth, monetization of footfalls (F&B/ad revenues) and profitability. That said, valuations are rich and unlikely to offer absolute return over the next 6-12 months. We value PVR at 12.5X FY2019E Jaykumar Doshi EV/EBITDA (versus 11.5X earlier); we raise the multiple as potential improvement in FCF generation and return ratios on EBITDA gains from GST deserve re-rating. There is upside risk to our fair value if the GST rate on ticket/F&B sales is set at 18/12% whereas stringent enforcement anti-profiteering clause poses downside risk. We have not built GST in estimates but our TP of `1,450 largely factors potential upside from 250-300 bps margin expansion.

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

More on GST—understanding the unknowns and risks

 GST rate. The GST council has finalized four tax rate slabs of 5%, 12%, 18% and 28% with lower rates for essential items and the highest rate for luxury and demerit goods. The fitment of various goods and services is likely to be discussed/ finalized around 18- 19th May. At a broad level, the government has stated that items will be categorized in the tax slab closest to the present total tax incidence. By this logic, GST rate on multiplex ticket sales could be 28% versus tax incidence of 30% (blended e-tax) and GST on F&B sales could be 12% versus average VAT of about 10%. The counter argument is that 28% tax rate is for luxury goods and tax slabs for movie tickets could be set at 18%.

 In our view, if GST rate on movie ticket is set at 18%, multiplexes may pass on part/bulk of the benefit to consumer to boost volumes. It will be positive but it is difficult to calculate upside in this scenario.

 State government retains right to impose additional tax. As per a media interview of Dr Hasmukh Adhia (Revenue secretary, Ministry of Finance), the state government has rights to enact a law in which some kind of local entertainment tax is levied and entire proceeds go to local bodies (municipal corporations). Such a tax will be over and above GST and can increase overall tax incidence. This can be a risk in medium term especially if any state loses out on entertainment tax after GST.

Excerpts from March 30, 2017 CNBC TV interview of Dr Hasmukh Adhia

Question: I have two questions – one is regarding entertainment tax. The entertainment tax is supposed to be subsumed in the GST. Now I understand that Maharashtra is going to enact some amendment in the state law authorising the local governments like municipal corporations to levy localised entertainment tax. Will that not be defeating the purpose? If Maharashtra is doing that, it would be happening in every state sooner or later. Is there any solution to that having a uniform procedure across? Second, whether the check post and the weigh bill regime will go under GST?

Response: To the first question, the constitutional amendment has removed the entry of entertainment from the state list except that the entertainment tax can be levied by the state government for the benefit of local bodies. The entire income has to go to the local body, then state government is well within its right to enact a law in which some kind of entertainment tax is levied but the entire proceeds go to the local body. So, that is something which is possible now under the constitutional amendment.

Question: Do you see other states following?

Response: The question is that as far as the main entertainment tax is concerned it will be part of GST. So, we will be having some GST rate of service, it is a service now, so it will be covered under service under GST. In addition to that if some states think that their entertainment sector can survive with some additional burden of tax, what is wrong in that? Let them do so. If state government thinks their consumers won’t be affected, the producers won’t be affected, movies will be seen by people even if you increase the tax rate, then we have no problem. It is for the state government to decide.

When the constitutional entry is there we cannot deny them the right to put that extra. However there will be common tax also, in addition to the common tax if they want to levy something which the industry can bear, for entertainment we have to allow

 E-tax exemptions. Several states offer partial or complete exemption on entertainment tax on new screens for a period of 1-5 years. This policy attracts investments by multiplex players and reduces payback period for new properties. At present, 14% of PVR’s screens are operating under entertainment tax exemption. It is not clear if these benefits will continue as per grandfathering principle. More importantly, multiplex players would have committed capital to several investments assuming certain e-tax exemption. As of now, it is not clear if e-tax exemptions will continue. If it does not, PVR’s profitability can be impacted by 50-75 bps.

80 KOTAK INSTITUTIONAL EQUITIES RESEARCH PVR Media

Karnataka government regulation—we believe multiplex industry should challenge it in the court

The Karnataka state government recently capped movie ticket prices at `200 (excluding entertainment tax). Gold class seats (premium recliner/sofa seats) up to 10% of total seating capacity have been exempted and there is no price cap on IMAX and 4DX screens. We note that PVR’s average ticket price (gross ATP) in the state of Karnataka is about `220. As per the cap, ticket can be priced up to `260 (gross) including 30% e-tax. In our view, PVR will be able to largely protect its ATP by raising weekday prices to compensate for price cuts on weekend prime-time shows.

PVR has about 73 screens in Karnataka accounting for 13% of total screen count and about 15% of revenues. Bangalore is PVR’s third largest market after Mumbai and Delhi and the company has several under-construction properties that will be launched over the next 3-4 years (12 screen openings in FY2018). The above regulation may not hurt in the near term but it will be difficult take regular price increase as there is no provision for inflation adjusted increase in price caps. It could be fairly tedious and difficult to get government to raise price caps every year in line with inflation. We note that ticket prices have been capped in Tamil Nadu at `120 for several years and there has been no inflation adjusted upward revision so far. We believe multiplex industry should challenge any form of state imposed price regulation in the court. Such regulations can lead to de-rating of the multiplex stocks.

Bahubali 2—beginning of a new trend?

Bahubali 2 is expected to surpass most box office records. Net Box office collection (NBOC) of first 9 days at `2.9 bn for Hindi version and a similar/higher NBOC in regional languages makes it India’s highest grossing movie ever. What is even more encouraging is that its Hindi version box office collection is tracking 20% higher than the biggest Bollywood movie ‘Dangal’, a tall achievement for a regional movie with a star cast that until now was not well known in the Hindi speaking markets. This success will encourage filmmakers to focus on storyline and movies that connect across India (‘pan-India’ movies). Robot 2 is up next with a similar strategy. We note select producers were already focusing on this; the success of Bahubali 2 may enhance the trend, a good thing for multiplexes.

Key statistics

 Bahubali 2 was launched across more than 6,500 screens in India as compared to about 4,300-4,500 screens in case of recent Bollywood blockbusters (Sultan and Dangal) and 4,000 screens in case of Bahubali 1

 Bahubali 2’s (Hindi version) net box office collection is likely to exceed `4 bn, almost 4X that collected by Bahubali 1 (Hindi version). So far, it is tracking 20% ahead of Bollywood’s biggest grosser ‘Dangal’.

 Bahubali 2’s aggregate net box office collection (Hindi + regional) is expected to surpass `7 bn (versus `3.25 bn of Bahubali 1). Worldwide net box office collection is expected to cross `10 bn

Our thoughts on valuation and re-rating

PVR traded at 10-11X EV/EBITDA prior to built-up of GST gains in the expectations. Robust growth story and premium position were partly offset by low return ratios and negative cash generation. If we assume 300-400 bps expansion in EBITDA margin to 21-22% in FY2019E on implementation of GST, it would translate into 50%+ increase in FCF generation in FY2019 and about 500 bps expansion in return ratios (RoAE and RoACE). Such improvement warrants some re-rating; we acknowledge and increase target EV/EBITDA multiple to 12.5X from 11.5X.

KOTAK INSTITUTIONAL EQUITIES RESEARCH 81 Media PVR

Exhibit 1: Impact of implementation of GST on PVR's financials

Without GST rate at 28%/12% GST on ticket/F&B sales EBITDA FY2019E FY2019E gain/(loss) Comments Impact of GST on ticket sales Gross ticket sales (Rs mn) 19,171 19,171 Entertainment tax varies from state to state. Overall, it was 30% on Entertainment tax (Rs mn) 4,424 4,194 net ticket sales in 9MFY17. E-tax will be subsumed under GST. Entertainment tax (on net) (%) 30.0 28.0 Net ticket sales (Rs mn) 14,747 14,977 230

Film hire costs (Rs mn) 6,194 6,290 97 Film hire costs (%) 42.0 42.0 Gross profit on ticket sales (Rs mn) 8,553 8,687 134

Impact of GST on F&B revenues Gross F&B Sales (Rs mn) 9,619 9,619 At present, PVR pays VAT of about 10% on F&B sales. Tax outgo VAT (Rs mn) 874 1,031 could increase marginally if GST rate of 12% (closest GST rate slab) is VAT (on net) (%) 10.0 12.0 finalized for F&B sales. Net F&B sales (Rs mn) 8,744 8,588 (156)

F&B consumption (COGS) (Rs mn) 2,077 2,077 F&B consumption (COGS) (%) 23.8 24.2 Gross profit on F&B sales (Rs mn) 6,668 6,512 (156)

GST on input costs available for set off PVR pays service tax on rent and other operating costs such as common area maintenance, house keeping and security services but it Net service tax payable on Rent (Rs mn) 600 can not claim set off against VAT/e-tax. Under GST, it will be able to claim set off for GST paid on input cost against GST on ticket sales Net service tax payable on CAM and other and F&B, resulting in tax savings. We assumed net tax savings of operataing expenses (Rs mn) 500 Rs1.1 bn. GST on input costs available for set off 1,100 1,100

Net Impact of GST on PVR's financials Revenues (Rs mn) 29,307 29,381 GST rate of 28/12% on ticket/F&B sales can lead to about 360 bps EBITDA (Rs mn) 5,280 6,357 1,077 expansion in EBITDA margin, about 20% upgrade in EBITDA estimate EBITDA margin (%) 18.0 21.6 362 bps and about 35%+ upgrade in earnings EBITDA upside (%) 20%

Net profit (Rs mn) 2,018 2,740 722 EPS (Rs/share) 43.2 58.7 15.5 EPS upside (%) 36%

Notes: (a) Above working is based on FY2019E estimates

Source: Company, Kotak Institutional Equities estimates

82 KOTAK INSTITUTIONAL EQUITIES RESEARCH PVR Media

Exhibit 2: PVR: GST implementation can drive 17-22% EBITDA upgrade and 30-40% EPS upgrade at 300-400 bps margin expansion GST scenario analysis: Estimating upside in EBITDA, EPS, FCF and return ratios on 200-500 bps margin expansion

FY2019E FY2019E (post GST) (excl GST) 4 scenarios of 200-500 bps margin expansion Margin expansion (bps) 0 200 300 400 500 Financials Revenues 29,307 29,307 29,307 29,307 29,307 EBITDA 5,280 5,866 6,159 6,452 6,745 EBIT 3,508 4,094 4,387 4,680 4,973 PAT 2,018 2,410 2,607 2,803 3,000 EPS 43.2 51.6 55.8 60.0 64.2

EBITDA margin (%) 18.0 20.0 21.0 22.0 23.0

FCF 1,310 1,664 1,840 2,017 2,194

Key ratios FCF / PAT (%) 65 69 71 72 73 RoAE (%) 17 20 22 24 25 RoACE (%) 13 15 16 17 18

Valuations at CMP of Rs1,520 EV/EBITDA (X) 14.8 13.3 12.7 12.1 11.6 PE (X) 35.2 29.5 27.3 25.3 23.7

Source: Company, Kotak Institutional Equities estimates

Exhibit 3: Revised earnings estimates of PVR, FY2017E-19E (Rs mn)

Revised Previous Change (%) 2017E 2018E 2019E 2017E 2018E 2019E 2017E 2018E 2019E Ticket sales (net) 11,195 13,105 14,747 11,262 13,272 15,293 (0.6) (1.3) (3.6) F&B sales 5,892 7,288 8,744 6,035 7,431 9,053 (2.4) (1.9) (3.4) Ad revenues 2,545 2,979 3,365 2,583 3,081 3,550 (1.5) (3.3) (5.2) Other operating income 1,921 2,172 2,450 1,993 2,229 2,499 (3.6) (2.6) (2.0) Total revenues 21,552 25,544 29,307 21,872 26,013 30,395 (1.5) (1.8) (3.6) Film hire charges (4,590) (5,439) (6,194) (4,640) (5,561) (6,515) (1.1) (2.2) (4.9) F&B consumption (1,393) (1,731) (2,077) (1,448) (1,765) (2,150) (3.8) (1.9) (3.4) Employee costs (2,226) (2,627) (3,039) (2,274) (2,676) (3,097) (2.1) (1.8) (1.9) Rent (3,835) (4,465) (5,138) (3,805) (4,519) (5,272) 0.8 (1.2) (2.6) Other operating costs (5,919) (6,754) (7,580) (5,987) (6,901) (7,863) (1.1) (2.1) (3.6) Total operating costs (17,963) (21,015) (24,027) (18,155) (21,422) (24,897) (1.1) (1.9) (3.5) EBITDA 3,589 4,529 5,280 3,718 4,590 5,498 (3.5) (1.3) (4.0) PAT 1,020 1,585 2,018 1,131 1,601 2,129 (9.8) (1.0) (5.2) EPS (Rs/share) 21.9 33.9 43.2 24.2 34.3 45.6 (9.8) (1.0) (5.2)

Key assumptions EBITDA margin (%) 16.7 17.7 18.0 17.0 17.6 18.1 Screen additions (#) 58 65 55 73 65 60 Footfalls (mn) 75 83 90 75 84 92 (0.6) (1.0) (2.5) ATP gross (Rs) 197 208 218 197 206 217 — 1.0 0.5 SPH gross (Rs) 79 89 98 81 90 99 (1.8) (0.9) (0.9) Ad revenue growth (%) 19 17 13 20 19 15 Occupancy (%) 33.5 33.3 32.8 33.2 32.8 32.8

Source: Company, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 83 Media PVR

Exhibit 4: Condensed consolidated financials for PVR, March fiscal year-ends (Rs mn), 2012-2020E

2012 2013 2014 2015 2016 2017E 2018E 2019E 2020E Profit model Revenues 5,177 8,064 13,475 14,813 18,688 21,552 25,544 29,307 33,596 EBITDA 761 1,169 2,117 2,044 3,306 3,589 4,529 5,280 6,062 Other income 123 91 113 46 283 155 150 175 200 Depreciation (365) (560) (944) (1,168) (1,252) (1,378) (1,566) (1,772) (1,969) Interest expense (185) (368) (795) (783) (839) (784) (700) (619) (500) Pretax profits 310 319 523 118 1,432 1,557 2,413 3,064 3,793 Tax (57) 124 (19) (8) (232) (522) (808) (1,027) (1,271) PAT before minority interest 253 443 504 110 1,200 1,035 1,605 2,038 2,523 Minority interest 1 2 57 11 (5) (15) (20) (20) (20) PAT 254 445 561 121 1,194 1,020 1,585 2,018 2,503 Diluted EPS (Rs) 9.5 14.9 13.7 2.9 25.6 21.9 33.9 43.2 53.6 Balance sheet Total equity 2,791 6,427 3,993 4,092 8,695 9,592 10,986 12,762 14,963 Deferred taxation liability 106 (10) 4 11 93 93 93 93 93 Total borrowings 2,035 6,566 6,134 7,470 6,623 7,623 7,123 6,623 6,123 Minority interest 139 854 771 383 401 416 436 456 476 Current liabilities 986 1,939 2,600 2,309 3,276 3,827 4,477 5,118 5,865 Total liabilities and equity 6,126 15,852 13,533 14,288 19,108 21,571 23,135 25,072 27,540 Cash and cash equivalents 211 732 495 261 2,674 62 104 672 1,700 Other current assets 2,038 3,229 3,763 4,605 5,763 6,290 7,172 8,018 8,967 Tangible fixed assets 2,621 5,710 6,990 7,523 8,824 9,471 10,291 10,843 11,366 Goodwill and Intangibles 374 4,712 1,466 1,273 1,262 5,162 4,982 4,952 4,922 CWIP 876 1,453 806 611 570 570 570 570 570 Total assets 6,126 15,852 13,533 14,288 19,108 21,571 23,135 25,072 27,540 Cash flow Operating cash flow, excl. w-capital 679 1,429 2,003 2,170 3,169 3,042 3,721 4,253 4,791 Working capital changes (193) (239) 128 (617) 204 23 (233) (204) (201) Capital expenditure (1,160) (7,704) (1,273) (2,064) (2,334) (5,925) (2,205) (2,295) (2,461) Other income (90) 47 76 22 43 155 150 175 200 Interest expense (net) (207) (430) (812) (827) (797) (784) (700) (619) (500) Free cash flow (971) (6,896) 123 (1,317) 284 (3,488) 732 1,310 1,829 Key ratios and assumptions Footfalls (mn) 24.7 37.2 59.9 59.1 69.6 75.1 82.9 89.6 96.9 Average ticket price (ATP) (Rs) 156 163 168 177 188 197 208 218 228 Screens (#) 166 360 421 464 516 574 639 694 749 EBITDA margin (%) 14.7 14.5 15.7 13.8 17.7 16.7 17.7 18.0 18.0 Net debt 1,824 5,835 5,638 7,209 3,949 7,561 7,019 5,951 4,423 RoAE (%) 8.2 9.7 10.8 3.0 18.7 11.2 15.4 17.0 18.1 RoACE (%) 7.0 10.0 10.3 7.8 14.4 9.9 11.2 12.7 14.3

Notes: (a) GST is not built in our estimates.

Source: Company, Kotak Institutional Equities estimates

84 KOTAK INSTITUTIONAL EQUITIES RESEARCH ATTRACTIVE Banks India MAY 08, 2017 UPDATE BSE-30: 29,859

Adds clarity and urgency. RBI and the government made a few changes to resolve the chronic NPL problem plaguing the sector. The government notified an amendment to the Banking Regulation Act which aims to provide more clarity to the RBI on the issue. RBI in turn has marginally diluted the JLF scheme to accelerate the pace of resolution under JLF/CAP voicing urgency to adhere to timelines. Directionally positive but bottlenecks are getting created in unknown areas in most resolution schemes making it harder to understand the near term impact.

Reaffirming the power of RBI through a gazette notification QUICK NUMBERS The government, through an ordinance, modified the Banking Regulation Act to give the RBI greater powers to address NPLs. This includes (1) power to direct banks to initiate insolvency  A few changes proceedings in case of default under the insolvency code (2) specific instructions to banks for made to Banking resolution of stressed loans (3) appointment of authorities to advice banks on resolution issues. Regulation Act giving more powers Moving proceedings of default through the insolvency code is positive as it aims for resolution in 180 days but we are not sure if the law has suitably addressed all stakeholder concerns as an to the RBI act would take two to three years to stabilize as case rulings strengthen the interpretation of  RBI directs banks to the act. On the other hand, we could look to see RBI appoint oversight committees (OC) directly take JLF meetings rather than under the IBA umbrella that can accelerate decision making on NPLs. seriously. Makes RBI modifies the earlier JLF scheme to aid faster decisions changes to aid faster decisions Key changes made by RBI under the framework for revitalizing distressed assets: (1) decision is binding on all banks if approved by 60% by value of loans (75% earlier) and 50% by number  Positive for all of creditors (60% earlier) (2) decisions taken in the JLF will be unconditional/unambiguous (3) corporate portfolio executives representing individual banks in meetings should have requisite approval to take dominated banks decisions. Decisions taken will have implicit power of comfort from the board of these banks. (4) Monetary penalties will be levied if the above is not adhered to.

Is this the silver bullet that one was waiting for?

One of the challenges that we have faced is inordinate delays in resolution caused by factors such as lack of confidence to take a haircut on bad loans or inability to take decisions without clearly defined guidelines etc. Hence, persistent negative outcomes post every scheme launched aimed at resolving bad loans is taking away any optimism that we need to have reading into the changes effected in the previous week. However, we remain optimistic as we are now entering a timeframe where failure to resolve would accelerate provisioning requirements, which could result in banks reporting weak results in FY2018. M B Mahesh CFA However, RBI has not come out with any new guidelines but has strengthened its voice to its previous guideline. It does appear that RBI is giving comfort that the existing guidelines are sufficient to handle the NPL situation on the ground. We are favorably inclined to the decision Nischint Chawathe made today, especially which forces banks to send an executive with requisite powers to JLF meetings. Abhijeet Sakhare Positive for corporate banks; first resolutions made by banks to boost confidence

We read the guidelines as another attempt to resolve NPLs declared so far. This may not be the end but directionally it is giving comfort on the seriousness accorded to resolve the issue. In general, this is positive for most PSU banks and ICICI Bank/Axis Bank amongst private banks.

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

Exhibit 1: Large borrowers comprise nearly 90% of total gross NPL Share of large borrowers in GNPL and flow of GNPL in1HFY17

Source: RBI, Kotak Institutional Equities

Exhibit 2: Few sectors which has chunky loans like infrastructure has seen a sharp rise in NPLs Break-up of loans across sectors, March fiscal year-ends, 2009-2QFY17 (%)

2009 2010 2011 2012 2013 2014 2015 2016 2QFY17 InfrastructureShare in loans 10.2 12.3 14.0 14.4 14.7 14.8 15.2 14.5 13.1 Gross NPL ratio 3.0 Standard restructured loans 17.6 Stressed loan portfolio 20.6 32.8 35.0 Power Share in loans 4.7 6.1 7.1 7.6 8.4 8.6 9.1 8.7 7.7 Gross NPL ratio 1.6 Standard restructured loans 17.8 Stressed loan portfolio 19.4 Iron and steelShare in loans 4.9 5.3 5.7 6.0 6.3 6.4 6.3 6.3 6.0 Gross NPL ratio 6.7 Standard restructured loans 15.4 Stressed loan portfolio 22.1 34.4 42.9 Textiles Share in loans 3.9 3.9 3.9 3.6 3.7 3.6 3.3 3.1 2.8 Gross NPL ratio 9.9 16.4 Standard restructured loans 13.2 4.9 Stressed loan portfolio 23.1 21.3 23.7 ConstructionShare in loans 1.5 1.4 1.2 1.1 1.1 1.1 1.2 1.1 1.0 Gross NPL ratio Standard restructured loans Stressed loan portfolio 27.1 27.9

Source: RBI, Kotak Institutional Equities

86 KOTAK INSTITUTIONAL EQUITIES RESEARCH Banks India

Exhibit 3: NPLs have been trending upwards over the past few years Gross and net NPLs and restructured loans, March fiscal year-ends, 1998-1HFY17 (%)

Gross NPL Ratio Net NPL Ratio Restructured loans 15.0 12.7 11.4 12.0 10.4 8.8 9.1 9.0 7.5 6.8 7.2 6.2 6.5 5.5 5.8 5.5 6.0 4.4 4.9 4.6 4.4 3.5 3.8 4.0 2.9 3.1 3.2 3.2 2.6 2.3 2.3 2.4 2.5 2.5 3.0 2.2 1.7 2.1 1.2 1.0 1.0 1.1 1.1 1.1 1.4

-

2000 2001 2002 2005 2006 2007 2008 2009 2012 2013 2014 2015 2016 2003 2004 2010 2011 1HFY17

Source: RBI, Kotak Institutional Equities

KOTAK INSTITUTIONAL EQUITIES RESEARCH 87 CAUTIOUS Cement India MAY 08, 2017 UPDATE BSE-30: 29,859

Holding on. All-India cement prices largely held on to the price increases taken in April 2017 (+`26/bag mom) maintaining `349/bag (+`2/bag in May 2017)—prices increased more strongly in West (+`26/bag mom) led by Maharashtra. Increase in pet-coke costs will take some sheen off price increases, though cost inflation will be partially offset by appreciating domestic currency. Orient Cement among companies under coverage benefits most from price increases over the past month.

All-India cement prices increase by `2/bag in May 2017; hold on to gains from April 2017 All India cement prices increased by `2/bag mom to `349/bag in May 2017 as prices increased in the West and East regions. Price increases were strongest in the West (+`26/bag mom) followed by East (+`8/bag mom) even as North saw some moderation (-`8/bag mom). Price increases in the West were led by increase of `30-35/bag mom in the Maharashtra region.  North and Central: Cement prices in North and Central regions decreased by `8/bag mom each and stand at `327-330/bag currently. Higher price decreases were seen in Uttar Pradesh (-`25-35/bag mom) and Punjab (-`10-25/bag mom) while prices in Delhi, Rajasthan and Himachal Pradesh decreased by `10-15/bag mom.  West: Cement prices in the West improved by `26/bag mom and stand at `333/bag currently (`307/bag in 4QFY17). In Maharashtra, cement prices increased by as much as `30- 35/bag mom. Cement prices in cities like Mumbai and Nagpur stand at all-time highs of `375/ bag and ` 355/bag respectively in May 2017.  South. Cement prices in South have declined marginally by `1/bag mom - average prices now stand at `380/bag (highest amongst all regions). The decline in prices was led by AP/Telangana and Tamilnadu (`10/bag mom) each. However, prices in Kerala showed an upward trend with an increase of `40/bag mom taking retail prices to `420/bag in May 2017.  East. Cement prices in the East improved by `8/bag mom in May 2017, aided by price increases in Odisha (`50/bag mom). Prices in Odisha are at `360/bag in May 2017, amongst the highest levels in the past few years.

Reported volumes at disconnect with aggregate industry data; cost inflation continues Industry volumes as per DIPP declined 6% yoy in March 2017 making for an aggregate decline of 11.6% yoy for 4QFY17. Industry data appears to be at a disconnect with modest volume growth reported by larger players for 4QFY17. Pet-coke prices have continued to increase in the month of April 2017 reaching US$94/ton from US$88/ton in March 2017 (Exhibit 3). The increase in pet-coke prices will partially be off-set by the appreciation of the rupee against the dollar as well as stabilization in prices of imported coal.

Price increase gives credibility to earnings forecasts, valuations already factoring the positives Murtuza Arsiwalla Our earnings estimates largely factor the price increase taken during the month of April 2017, though we will fine tune estimates for region specific price movements. The strong pricing Abhishek Poddar action across regions, gives early credibility to earnings forecast that have been susceptible to large downgrades in the past. Valuation multiples for companies such as Ultratech and Shree Cement already factor in positives of the current price increases while ignoring the earnings dilution on account of a large acquisition in the case of Ultratech. Orient Cement among our coverage universe benefits most from the price increases in the past two months, owing to the company’s large exposure in Maharashtra (47% of sales).

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

Exhibit 1: All-India cement prices increased by Rs2/bag mom during May 2017;regional disparities in price movement Monthly cement prices across regions in India, April 2016 – 2017 (Rs per 50 kg bag)

Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 Mar-17 Apr-17 May-17 North 306 303 307 319 318 309 305 305 300 294 305 313 335 327 Central 308 303 303 325 324 314 316 306 304 298 308 314 338 330 East 330 333 329 332 332 333 330 328 321 315 320 326 341 349 West 280 289 290 290 278 285 308 304 300 277 284 289 307 333 South 338 336 352 349 345 368 364 357 356 346 355 344 381 380 All India average 316 316 321 327 323 329 331 325 322 312 321 321 347 349 Change per bag (Rs, mom) North 9 (2) 4 12 (1) (9) (4) (0) (5) (5) 11 8 22 (9) Central 7 (5) 1 21 (0) (11) 3 (10) (2) (6) 10 6 25 (8) East — 2 (4) 3 1 1 (4) (2) (7) (6) 4 7 14 8 West 5 9 1 — (13) 7 24 (4) (4) (23) 7 5 18 25 South (6) (1) 16 (3) (4) 23 (4) (7) (1) (10) 9 (12) 37 (1) All India average 2 (0) 6 6 (4) 5 2 (5) (3) (10) 9 0 26 2 Change per bag (Rs, yoy) North 23 31 46 57 46 2 16 31 49 48 48 17 30 23 Central 16 22 27 48 20 8 28 27 41 37 35 13 31 27 East (12) (10) (16) (14) (18) (22) (22) (13) (8) (16) (11) (4) 10 16 West (9) 2 4 3 (8) (7) 26 27 45 15 11 14 27 44 South (26) (30) (18) (17) (20) 3 2 1 5 (4) 8 (0) 43 44 All India average (5) (1) 6 12 1 (1) 10 14 24 15 18 7 31 33

Source: Industry, Kotak Institutional Equities estimates

Exhibit 2: Cement prices increased by Rs27-37/bag qoq in 1QFY18 Quarterly trend in cement prices in India across geographies, 1QFY16 - 1QFY18E (Rs per 50 kg bag)

1QFY16 2QFY16 3QFY16 4QFY16 1QFY17 2QFY17 3QFY17 4QFY17 1QFY18E FY2016 FY2017 CY2015 CY2016 North 272 280 271 266 305 315 303 304 331 272 307 277 298 Central 283 296 277 278 304 321 309 307 334 283 310 288 303 East 344 351 341 331 331 333 326 321 345 341 327 345 330 West 287 288 271 270 286 284 304 283 320 279 289 290 286 South 367 365 357 347 342 354 359 348 380 359 351 363 351 All India average 318 322 310 305 318 326 326 318 348 314 322 319 319 Change per bag (Rs, qoq) North (13) 8 (9) (5) 39 10 (12) 1 27 Central (15) 12 (19) 1 26 16 (12) (2) 27 East (1) 7 (10) (10) (0) 2 (6) (6) 24 West (27) 1 (17) (2) 16 (2) 20 (21) 37 South 4 (1) (9) (10) (5) 12 5 (11) 32 All India average (8) 5 (12) (5) 13 9 (0) (8) 30 Change per bag (Rs, yoy) North (46) (12) (7) (19) 33 35 32 38 26 34 20 Central (46) (12) (18) (20) 21 25 32 28 30 27 15 East 7 5 0 (14) (13) (18) (14) (10) 14 (14) (15) West (32) (26) (35) (44) (1) (4) 32 14 34 10 (4) South 46 31 15 (15) (25) (11) 3 1 38 (8) (12) All India average (6) 2 (5) (21) (—) 4 16 13 30 8 (0)

Source: Industry, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 89 India Cement

Exhibit 3: Cost of cement companies will increase due to higher pet-coke prices US pet coke prices (CFR basis), 2015 - 2017 (US$/ton)

US Petcoke prices (US$/ton) (CFR)

110 100 94 88 88 88 84 86 90 80 80 76 77 78 76 75 76 78 80 72 71 70 65 60 54 48 48 50 50 46 45 45 39 40 30

20

Jul-15 Jul-16

Jan-16 Jan-17

Sep-16 Sep-15

Nov-15 Nov-16

Mar-16 Mar-17 Mar-15 May-16 May-15

Source: Industry, Kotak Institutional Equities estimates

Exhibit 4: Cement volumes declined by 6% yoy in March 2017 Monthly cement production volumes in India, 2015 - 2017 ('000 tons, %)

('000 tons) (%, yoy) (%, yoy 3MA)

28,000 20 15 24,000 10 5 20,000 0 -5 16,000 -10 -15

12,000 -20

Jun-15 Jun-16

Feb-16 Feb-17 Feb-15 Oct-15 Oct-16

Apr-15 Apr-16

Dec-15 Dec-16 Aug-16 Aug-15

Source: DIPP, Kotak Institutional Equities estimates

90 KOTAK INSTITUTIONAL EQUITIES RESEARCH Cement India

Exhibit 5: Imported coal costs have declined in last few months Coal prices at Richard Bay (US$/ton, Rs/ton)

Richard Bay (US$/ton) [LHS] INR (Rs/US$) [LHS] 125 Richard Bay (Rs/ton) [RHS] 8,000

7,000 95 6,000

5,000 65 4,000

35 3,000

Oct-12 Oct-16 Oct-11 Oct-13 Oct-14 Oct-15

Apr-12 Apr-13 Apr-14 Apr-15 Apr-16 Apr-17 Apr-11

Source: Bloomberg, Kotak Institutional Equities estimates

Exhibit 6: The retail diesel prices in India have increased marginally Average retail price of diesel in major cities in India (Rs/liter)

(Rs/litre) Average retail price of diesel in India

70.0 62.6 61.5 60.0 50.0 58.4 35.7 40.0 47.4 43.6 30.0 17.9 20.0 10.0

-

Apr-98 Apr-99 Apr-02 Apr-03 Apr-07 Apr-11 Apr-12 Apr-15 Apr-16 Apr-00 Apr-01 Apr-04 Apr-05 Apr-06 Apr-08 Apr-09 Apr-10 Apr-13 Apr-14 Apr-17

Source: Company, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 91 India Cement

Exhibit 7: The freight rates from railways were high in 2HFY17 due to peak season surcharge Lead distance of cement transportation by railways and average freight rates (km, Rs/ton km)

Distance (km, RHS) Freight (Rs/ton km, LHS)

2.00 570 560 1.90 550 1.80 540 530 1.70 520 1.60 510 500 1.50 490

1.40 480

Jun-15 Jun-16

Sep-15 Sep-16

Dec-16 Dec-15

Mar-15 Mar-17 Mar-16

Source: Indian Railways, Kotak Institutional Equities estimates

92 KOTAK INSTITUTIONAL EQUITIES RESEARCH ATTRACTIVE Metals & Mining India MAY 08, 2017 UPDATE BSE-30: 29,859

India steel—near term weakness; trade measures to come to the rescue. The 3- 13% fall in Indian steel stocks over the past month reflects expected near-term earnings weakness due to the fall in China steel prices/higher coking coal costs. Steel price fall is due to multitude of factors including end of restocking (seasonal factor) and increasing steel mill supplies amid higher margins. Save for near term weakness, we expect operating margins to stabilize in 2HFY18 on capacity closures in China and trade protection measures in India. Maintain ADD on TATA, JSTL and BUY on JSP. TPs unchanged.

Steel stock correct due to falling steel, iron-ore prices in China Indian steel stocks (TATA, JSTL and JSP) have corrected by 3-13% over past month amid falling steel, iron-ore prices in China and an appreciating Re/US$. The China steel prices (domestic) have corrected by 10% and export prices by 12% over the past month. The correction is led by loosening demand-supply fundamentals in China due to (1) end of restocking period in China followed by a destocking affecting apparent steel consumption, and (2) higher production by steel mills in response to better profitability in the past few months. Seasonality aside, China steel prices over medium-to-long term will be governed by (1) capacity cuts and restoration of demand-supply balance—healthy margins of the steel companies will depend upon the improvement in utilization rates or lessening of competitive intensity between steel firms. We discuss this in more detail in page 2.

Expect weaker near term earnings due to higher coal costs and a better 2HFY18 earnings Near term earnings for Indian steel companies can be weak on two accounts (1) high coking coal costs due to high priced carry over inventories, and (2) expected fall in Indian steel prices due to lower landed cost of Chinese imports and weak seasonal demand with the onset of monsoons. Trade protection measures in the near term will be ineffective due to higher coking coal costs—the companies may not be able to pass on the full impact of higher costs. We highlight that the structure of anti-dumping duties in essence entails a minimum fixed base price for steel import to India (if steel import prices falls below the base price for anti-dumping duty, such difference from the anti-dumping duty base price becomes the duty amount). As such, this duty structure does not protect earnings for India steel companies if raw-material costs, especially coking coal costs rise as is the recent case.

India steel names—volume growth story to play out well; consolidation favors large names We believe major steel companies will continue to report strong volume growth from expanded capacities—we expect (1) JSTL’s volumes to increase to 16 mn tons, 16.8 mn tons in FY2018E, FY2019E from 14.7 mn tons in FY2017E, (2) TATA’s volumes to increase to 11.9 mn tons, 12.2 mn tons in FY2018E, FY2019E from 10.9 mn tons in FY2017E, and (3) JSP’s volumes to increase to 4.8 mn tons, 6.4 mn tons in FY2018E, FY2019E from 3.5 mn tons in FY2017E. The large names are also gaining market share at the cost of smaller names whose weak financials/liquidity issues have impacted operations. Besides, fall in imports/rising exports aided 12% volume growth for Indian companies despite only 2.6% growth in demand in FY2017.

Abhishek Poddar We maintain ADD rating on Tata Steel, JSW Steel and Buy on Jindal Steel & Power Save for seasonal volatility and near term impact due to higher coal costs, we expect operating margins of Indian steelmakers to be aided by (1) trade protection measures, and (2) improving supply fundamentals in China led by closures. We maintain ADD rating on TATA (TP: `515), JSTL (TP: `225) and BUY on JSP (TP: `160). In JSP’s case, we believe the commissioning of 3 mtpa Blast furnace in May 2017 will aid strong earnings improvement over FY2018-19E.

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

End of restocking—steel demand in China likely to taper off over few months

China steel demand improved in the past three quarters (after 8 previous quarters of decline) led by large restocking of inventories at steel mills/distribution channels including traders (Exhibit 1 & 2). The restocking in China was also due to the fact that (1) steel prices started to increase in mid-CY2016 after falling for good two years as (1) government narratives indicated strong supply cuts, and (2) very low inventory levels across channels and expected build up before the holidays. The rise in prices led to better demand in each succeeding month as what turns out to be a profitable trade for the traders. Also note that there was large destocking between till 2016 due to falling steel prices (otherwise traders would have made large losses if they kept high inventories amid sliding prices). The destocking phase in China steel inventories is typically between May and November and stocks are already falling. This will put pressure on steel demand over the next few months.

Exhibit 1: The restocking of inventories aided steel demand in China over last few months China distributor stocks of key steel products, December year ends, 2010-17 (mn tonnes)

25 HR Coil CR Coil Rebar Medium plate Wire rod Steel prices (US$/ton) 800

20 700

15 600

500 10 400 5 300

0 200

Oct-10 Oct-11 Oct-12 Oct-14 Oct-16 Oct-13 Oct-15

Apr-11 Apr-13 Apr-15 Apr-16 Apr-10 Apr-12 Apr-14 Apr-17

Source: Bloomberg, Kotak Institutional Equities estimates

Exhibit 2: Steel demand in China increased in last 3 quarters after a decline over previous 8 quarters aided by restocking demand Finished steel consumption data in different regions ('000 tons)

1Q2014 2Q2014 3Q2014 4Q2014 1Q2015 2Q2015 3Q2015 4Q2015 1Q2016 2Q2016 3Q2016 4Q2016 1Q2017 North America 30 32 32 31 30 30 29 27 29 30 29 27 29 Germany 8 9 8 7 9 9 9 8 9 10 9 9 9 France 4 4 3 3 3 3 3 3 3 3 3 3 3 Italy 6 6 5 5 6 7 6 6 7 6 6 6 6 Other Europe 21 22 22 22 22 23 22 22 22 23 22 23 22 Europe 43 45 42 42 45 48 45 44 44 46 44 46 45 Japan 19 19 19 18 18 17 17 17 17 16 17 18 17 China 190 204 202 194 182 199 185 183 171 195 193 192 180 South Korea 17 17 17 17 16 17 17 17 16 17 18 17 17 Taiwan 5 5 6 6 5 5 6 5 5 6 5 6 5 Asia 245 260 257 250 236 253 240 238 226 251 250 247 235 CIS 13 14 14 13 12 12 14 12 11 12 12 12 11 Brazil 6 6 6 5 6 6 4 4 4 4 5 4 5 Rest of world 46 47 45 50 52 52 51 50 53 53 52 52 55 Total world 382 404 396 391 381 401 383 375 367 397 392 389 379 Growth yoy (%) Europe 8 3 3 (2) 4 8 6 5 (1) (3) (1) 6 1 Japan 9 4 1 (6) (8) (12) (10) (6) (5) (2) 1 5 1 CIS (3) 5 (3) (3) (3) (14) (1) (10) (11) (2) (14) 0 4 Brazil 2 (7) (9) (20) (5) (11) (27) (17) (26) (20) 5 0 7 World ex-China 4 5 4 4 4 1 2 (2) (2) 0 (0) 3 2 China 3 2 (2) (3) (4) (3) (8) (6) (6) (2) 4 5 5 World 4 3 1 1 (0) (1) (3) (4) (4) (1) 2 4 3

Source: CRU, Kotak Institutional Equities estimates

94 KOTAK INSTITUTIONAL EQUITIES RESEARCH Metals & Mining India

Steel exports from China are falling rapidly

Chinese steel exports started falling from August 2016 and the fall has been steeper in recent months due to growing protectionism by many countries. China exported 102 mn tons of steel in FY2017 (114.5 mn tons in FY2016) and this could fall to 75-80 mn tons in FY2018E. The ~20-25% decline in exports in FY2018E can impact steel production by ~2% in China.

Exhibit 3: China's steel exports declined >25%yoy in last few months Monthly steel exports from China, March 2010- 2017 (mn tons)

12

10

8

6

4

2

0

Sep-11 Sep-13 Sep-14 Sep-15 Sep-16 Sep-10 Sep-12

Mar-10 Mar-11 Mar-13 Mar-15 Mar-17 Mar-12 Mar-14 Mar-16

Source: Bloomberg, Kotak Institutional Equities estimates

China capacity versus demand—utilization to improve from closures

Total steel capacity in China in CY2016 was about 1,130 mtpa (per OECD estimates) against which steel production was 822 mn tons (73% utilization); demand (crude equivalent) was 704 mn tons while China exported the rest. Steel demand is likely to be flat in China in CY2017 (per WSA estimates) and exports will fall-- this essentially means production will decline by 4% in CY2017E. Capacity cuts announced earlier in the year for IF have capacity of ~100 mtpa and will likely aid in improving capacity utilization to ~75% in China. Detailed government inspection to ensure the exit of IF capacity together with stricter measures will curb output.

We also highlight continuous on temporary supply tightening measures in China such as Belt and Road Summit (in May 2017) that will provide another round of production control in Tianjin and Hebei.

KOTAK INSTITUTIONAL EQUITIES RESEARCH 95 India Metals & Mining

Exhibit 4: China's steel capacity utilization can improve to ~75% led by closures of capacity later this year Steel capacity, production, demand and exports data from China, World ex-China, December year-ends, 2006-17E (mn tons)

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017E Capacity (mtpa) China steel capacity 488 589 630 718 800 863 960 1,106 1,140 1,140 1,130 1,050 World ex-China capacity 963 990 1,043 1,053 1,093 1,125 1,142 1,167 1,182 1,231 1,277 1,280 World steel capacity 1,452 1,579 1,673 1,771 1,893 1,988 2,102 2,273 2,322 2,371 2,407 2,330 China demand-supply (mn tons) Crude steel production 421 490 512 577 639 702 731 822 823 804 822 787 Utilization (%) 86 83 81 80 80 81 76 74 72 71 73 75 China demand -crude equivalent 393 436 465 574 612 668 688 766 740 700 704 707 China demand -finished steel 378 418 447 551 588 641 660 735 711 672 675 679 Growth yoy (%) - 11 7 23 7 9 3 11 (3) (5) 0 0 Exports 52 66 56 24 41 48 55 62 93 112 106 80 Exports as % of world ex-China demand 7 8 7 4 6 6 7 8 11 13 13 9 World ex-China demand-supply (mn tons) Crude steel production 829 858 831 662 794 836 829 828 846 816 797 845 Utilization (%) 86 87 80 63 73 74 73 71 72 66 62 66 World ex-China demand -crude equivalent 853 895 872 659 798 855 866 886 928 917 911 929 World ex-China demand -finished steel 767 806 781 599 722 774 783 800 834 828 826 842 Growth yoy (%) - 5 (3) (23) 21 7 1 2 4 (1) (0) 2 World (mn tons) Crude steel production 1,250 1,348 1,343 1,239 1,433 1,538 1,560 1,650 1,669 1,620 1,619 1,632 Utilization (%) 86 85 80 70 76 77 74 73 72 68 67 70 World demand -crude equivalent 1,246 1,331 1,337 1,233 1,410 1,523 1,554 1,652 1,668 1,617 1,615 1,637 World demand -finished steel 1,145 1,224 1,228 1,150 1,310 1,415 1,443 1,535 1,545 1,500 1,501 1,521 Growth yoy (%) - 7 0 (6) 14 8 2 6 1 (3) 0 1

Source: OECD, WSA, CRU, , Kotak Institutional Equities estimates

Exhibit 5: Domestic HRC prices are at premium to import costs; expect India prices to decline Comparison of domestic HRC steel prices and CIF prices from China, Calendar year-ends, 2014-17 (Rs/ton)

HRC domestic prices - Mumbai (Rs/ton)

44,000 HRC Import India prices - China (Rs/ton) 40,000 36,000 32,000 28,000 24,000 20,000

16,000

Feb-15 Feb-16 Feb-17

Nov-14 Nov-15 Nov-16

Aug-15 Aug-16 Aug-14

May-14 May-15 May-17 May-16

Source: CRU, Bloomberg, Kotak Institutional Equities estimates

96 KOTAK INSTITUTIONAL EQUITIES RESEARCH Metals & Mining India

Exhibit 6: Steel spreads had recovered strongly in last few months but have corrected recently China steel prices and steel spreads, May 2010- 2017 (US$/ton)

HRC export prices (CIS) (US$/ton) Spread (US$/ton) - [RHS] 800 500

700 400 600 300 500 200 400

300 100

200 -

Nov-10 Nov-12 Nov-13 Nov-14 Nov-15 Nov-11 Nov-16

May-10 May-11 May-12 May-16 May-17 May-13 May-14 May-15

Source: Bloomberg, Kotak Institutional Equities estimates

Exhibit 7: We estimate strong improvement in volumes, steady operating margins for steel names Earnings estimate of steel companies, March fiscal year-ends, (mn tons, Rs bn, Rs)

2015 2016 2017E 2018E 2019E Tata Steel India steel volumes (mn tons) 8.8 9.5 10.9 11.9 12.2 EBITDA/ton 11,439 7,557 9,925 11,272 11,337 Consolidated EBITDA (Rs bn) 125 76 140 181 189 PAT (adjusted) (Rs bn) 0 (23) 10 50 59 EPS (Rs) 0.0 (23.4) 10.3 51.7 60.7 JSW Steel India steel volumes (mn tons) 12.0 12.1 14.9 16.0 16.8 EBITDA/ton 7,372 4,718 7,926 8,255 8,235 Consolidated EBITDA (Rs bn) 94 61 124 138 145 PAT (adjusted) (Rs bn) 18 (3) 35 47 53 EPS (Rs) 7.6 (1.1) 14.6 19.5 22.1 Jindal Steel & Power India steel volumes (mn tons) 2.8 3.3 3.5 4.8 6.4 EBITDA/ton 13,237 6,649 8,251 8,634 8,706 Consolidated EBITDA (Rs bn) 55 31 45 65 82 PAT (adjusted) (Rs bn) 6 (17) (20) (6) 6 EPS (Rs) 6.9 (18.2) (21.9) (6.6) 6.7

Source: Companies, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 97 CAUTIOUS c Technology India MAY 08, 2017 UPDATE BSE-30: 29,859

CTSH—steady quarter, steps up focus on operational efficiency. CTSH reported 2.4% growth to US$3,546 mn, close to the upper end of its guidance. It has guided 2.4-3.8% revenue growth in 2Q and maintained 8-10% growth guidance for CY2017. Implied growth outlook for 2H is soft; we believe CTSH could be conservative as the optimism in sentiments in the US BFS industry has not translated into projects as yet. Increased focus on operational efficiency, local hiring and improved capital return/ allocation at CTSH (and Indian IT industry) is comforting.

CTSH 1QCY17—steady growth, a tad soft on margins

CTSH reported 2.4% qoq revenue growth to US$3,546 mn, at the top end of the guidance range 1.4-2.5%. Growth was driven by products and resources vertical (7.1%) and TMT (3.6%) while BFSI grew 1,6% and healthcare declined 0.2%. Non-US geos powered growth in the quarter. Non GAAP operating margin at 18.9% was down 10 bps sequentially and 120 bps on yoy comparison. Gross margin decline of 180 bps qoq could be due to ramp up or large deals in product and resources vertical; it was offset by 170 bps reduction in SG&A. The management has guided for margin of at least 19.4% in 2QCY17 and 19.5% for the full year as benefits of realignment program begin to accrue.

Intense focus on operational efficiency, capital allocation and reducing visa dependency

CTSH has kick started initiatives to improve operational efficiency. As a part of realignment program it is (1) accelerating shift to high value digital transformation work and reassessing less profitable opportunities, (2) targeting improvement in utilization, pyramid structure optimization and better talent supply chain management, (3) simplifying business unit overhead structure and optimizing corporate function spends by driving vendor consolidation and relooking at real estate costs. The company has initiated voluntary separation program. Head count addition of 1,000 in a quarter was the second lowest in the past seven years. CTSH is focused on improving Non GAAP operating margin to 22% (+250 bps) by CY2019. We note that the board has linked management compensation to a balance of growth and profitability.

Quarterly dividend of US$0.15/share in line with its capital return policy articulated at the beginning of the year.

CTSH management emphasized on local hiring. It filed 50% fewer visa applications this year as compared to the last year. The management indicated that increased local hiring would not have any material impact on cost structure; on a like-to-like basis in terms of skills and experience, the cost of US locals is not significantly different from that of H-1B employees

Read through for Indian IT—pick up in BFS holds the key

CTSH’s 2Q guidance implies modest CQGR of 1.1-2.3% over 3Q-4QCY17 to achieve full year guidance of 8-10% growth. We believe the CTSH’s full year guidance could be conservative as positive sentiments in US financials services have not triggered any increase in IT spends as yet. Kawaljeet Saluja Clients of Indian IT await concrete steps by the new administration in US. CTSH management indicated steady demand in BFSI. Headwinds/uncertainty in the US healthcare market is partly offset by pent up demand following the completion of M&A activity in a few large clients. Jaykumar Doshi

We believe that the drag from legacy business continues at a pace higher than new digital business. Stocks are inexpensive but require the catalyst of financial services pick up, acceleration in digital deals or Rupee depreciation. Companies have stepped up payout ratios presenting downside protection to stocks. Infosys and L&T Infotech continue to be our top picks in Tier 1 and mid-tier categories.

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

Exhibit 1: Cognizant interim results, December fiscal year-ends, US$ mn

Change (%) 1QCY16 4QCY16 1QCY17 qoq yoy Revenues 3,202 3,462 3,546 2.4 10.7 Cost of revenues (1,915) (2,078) (2,194) 5.6 14.5 SG&A expenses (646) (730) (686) (6.0) 6.2 EBITDA 640 654 666 1.8 4.0 Depreciation and amortization (86) (93) (96) 3.2 11.1 EBIT 554 561 570 1.6 2.9 Other income 35 (1) 79 (8,000) 129 PBT 589 560 649 15.9 10.3 Provision for taxes (148) (144) (92) (36.1) (37.8) PAT 441 416 557 33.9 26.4 Margins (%) EBITDA 20.0 18.9 18.8 EBIT 17.3 16.2 16.1 Net income 13.8 12.0 15.7

Tax rate (%) 25.1 25.7 14.2

Source: Company, Kotak Institutional Equities

Exhibit 2: CTSH: Revenues by industry verticals and geographies

Mar-17 quarter Growth (%) Revenue % of revenues qoq yoy Verticals Financial Services 1,376.0 38.8 1.6 7.0 Healthcare 1,003.0 28.3 (0.2) 9.7 Products and Resources 737.0 20.8 7.1 16.4 Comm, Media and Tech (TMT) 430.0 12.1 3.6 16.5 Total 3,546.0 100.0 2.4 10.7 Geographies North America 2,761 77.9 1.7 10.6 Europe 559 15.8 4.5 6.5 Rest of the world 226 6.4 6.6 25.6 Total 3,546 100.0 2.4 10.7

Source: Company, Kotak Institutional Equities

KOTAK INSTITUTIONAL EQUITIES RESEARCH 99 India Technology

Exhibit 3: Revenue growth guidance versus actuals

Guidance Actual Revenues Revenues Quarter (US$ mn) Growth (%) (US$ mn) Growth (%) Beat/(Miss) 1QCY06 275 7.0 286 11.1 4.1 2QCY06 317 11.0 337 18.0 6.9 3QCY06 363 7.8 378 12.1 4.3 4QCY06 405 7.3 424 12.4 5.1 1QCY07 448 5.6 460 8.5 2.9 2QCY07 500 8.6 517 12.2 3.6 3QCY07 550 6.5 559 8.2 1.7 4QCY07 590 5.6 600 7.4 1.8 1QCY08 640 6.7 643 7.2 0.5 2QCY08 680 5.7 685 6.6 0.8 3QCY08 723 5.5 735 7.2 1.7 4QCY08 747 1.6 753 2.5 0.9 1QCY09 735 (2.4) 746 (0.9) 1.4 2QCY09 760 1.9 777 4.1 2.2 3QCY09 800 3.0 854 9.9 6.9 4QCY09 880 3.1 903 5.8 2.7 1QCY10 935 3.6 960 6.3 2.7 2QCY10 1,015 5.8 1,105 15.2 9.4 3QCY10 1,175 6.3 1,217 10.1 3.8 4QCY10 1,270 4.4 1,311 7.7 3.3 1QCY11 1,360 3.8 1,371 4.6 0.9 2QCY11 1,450 5.7 1,485 8.3 2.6 3QCY11 1,570 5.7 1,601 7.8 2.1 4QCY11 1,660 3.7 1,664 3.9 0.2 1QCY12 1,700 2.2 1,711 2.9 0.7 2QCY12 1,790 4.6 1,795 4.9 0.3 3QCY12 1,875 4.4 1,892 5.4 0.9 4QCY12 1,940 2.6 1,948 3.0 0.4 1QCY13 2,000 2.7 2,021 3.7 1.1 2QCY13 2,130 5.4 2,161 7.0 1.5 3QCY13 2,250 4.1 2,306 6.7 2.6 4QCY13 2,352 2.0 2,355 2.2 0.1 1QCY14 2,420 2.7 2,422 2.8 0.1 2QCY14 2,500-2,530 3.2-4.4 2,517 3.9 0.1 3QCY14 2,550-2,580 1.3-2.5 2,581 2.5 0.6 4QCY14 2,610-2,640 1.1-2.2 2,742 6.2 1.5 1QCY15 2,880 5.0 2,911 6.2 1.1 2QCY15 3,010 3.4 3,085 6.0 2.6 3QCY15 3,140 1.8 3,187 3.3 1.5 4QCY15 3,230 1.3 3,233 1.4 0.1 1QCY16 3,180-3,240 (1.6)-0.2 3,202 (0.9) (0.2) 2QCY16 3,340-3,400 4.3-6.2 3,370 5.2 - 3QCY16 3,430-3,470 1.8-3 3,453 2.5 0.1 4QCY16 3,450-3,510 0-1.7 3,462 0.3 (0.6) 1QCY17 3,510-3,550 1.4-2.5 3,546 2.4 0.6 2QCY17 3,630-3,680 2.4-3.8

Source: Company, Kotak Institutional Equities

100 KOTAK INSTITUTIONAL EQUITIES RESEARCH Technology India

Exhibit 4: Kotak Institutional Equities: valuation summary of key Indian technology companies

05-May-17 Mkt cap. EPS (Rs) P/E (X) EV/EBITDA (X) RoE (%) Company Price (Rs) Rating (Rs m) (US$ m) 2017E 2018E 2019E 2017E 2018E 2019E 2017E 2018E 2019E 2017E 2018E 2019E HCL Technologies 828 REDUCE 1,169,357 18,349 57.5 61.4 64.6 14.4 13.5 12.8 10.3 9.2 8.5 27.3 25.4 25.4 Hexaware Technologies 239 ADD 72,699 1,124 13.7 14.5 16.5 17.5 16.5 14.5 11.8 10.5 9.0 26.5 24.8 24.8 Infosys 932 ADD 2,129,036 33,240 62.8 63.7 70.4 14.8 14.6 13.2 10.3 10.5 9.2 22.6 21.3 21.3 L&T Infotech 733 BUY 124,497 1,943 54.5 59.6 65.9 13.4 12.3 11.1 9.7 8.3 7.3 42.4 38.3 38.3 Mindtree 496 REDUCE 83,414 1,295 26.4 30.8 36.0 18.8 16.1 13.8 10.6 8.8 7.3 17.9 18.8 18.8 Mphasis 561 SELL 117,969 1,835 39.5 40.8 41.1 14.2 13.7 13.7 9.1 9.4 9.1 12.9 12.6 12.6 TCS 2,320 REDUCE 4,571,229 71,018 133.4 136.8 149.3 17.4 17.0 15.5 12.7 12.2 10.9 32.6 31.3 31.3 Tech Mahindra 413 BUY 360,053 5,594 34.0 38.2 43.4 12.1 10.8 9.5 7.4 6.0 4.9 19.5 19.1 19.1 Wipro 499 REDUCE 1,231,848 18,867 35.0 34.9 37.2 14.3 14.3 13.4 8.4 8.4 7.5 17.2 15.4 15.4 Technology 9,860,104 153,264 15.7 15.6 14.3 10.8 10.4 9.3 23.2 23.9 23.9

KIE universe 91,020,702 1,419,732 21.1 17.9 15.2 11.7 10.2 8.7 13.1 14.2 14.2

Target O/S shares EPS CAGR (%) EPS growth (%) Net Profit (Rs mn) EBITDA (Rs mn) Sales (Rs mn) Company Price (Rs) (mn) 2017-19E 2017E 2018E 2019E 2017E 2018E 2019E 2017E 2018E 2019E 2017E 2018E 2019E HCL Technologies 840 1,413 6.0 10.5 6.8 5.3 82,148 87,853 92,599 103,371 112,924 119,899 471,142 535,404 585,478 Hexaware Technologies 230 304 9.7 5.9 6.1 13.3 4,170 4,425 5,015 5,746 6,319 7,254 35,348 38,912 44,125 Infosys 1,015 2,286 5.9 6.4 1.4 10.6 143,530 139,791 152,578 186,050 191,536 212,895 684,850 727,400 809,423 L&T Infotech 800 170 9.9 10.7 9.3 10.6 9,514 10,397 11,497 12,403 14,114 15,833 65,127 72,169 80,301 Mindtree 460 168 16.8 (26.3) 16.4 17.2 4,442 5,173 6,060 7,181 8,199 9,460 52,364 56,442 63,255 Mphasis 450 210 1.9 14.8 3.3 0.6 8,312 7,875 7,923 9,735 10,304 10,455 61,452 65,843 70,147 TCS 2,405 1,970 5.8 8.6 2.5 9.1 262,890 261,867 285,757 323,110 345,361 381,968 1,179,660 1,255,338 1,391,563 Tech Mahindra 510 872 13.0 (4.8) 12.2 13.7 29,683 33,313 37,875 44,635 52,399 59,912 293,606 321,120 352,471 Wipro 455 2,467 3.2 (3.0) (0.2) 6.6 84,893 82,651 88,109 119,123 115,176 121,841 558,261 551,915 586,673 Technology 0.6 0.6 8.5 629,582 633,345 687,412 811,356 856,332 939,516 3,401,810 3,624,540 3,983,436

KIE universe 19.3 17.5 17.8

Notes: (a) HCL Technologies adjusted for shift to March fiscal year-end. FY2016 financials and ratios are based on TTM March 2016. (b) Hexaware Technologies is December year-ending.

Source: Company, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 101 India Daily Summary - May 8, 2017 Sun 28-May 14-May 21-May 4-Jun Sat 27-May 13-May 20-May Healthcare Cadila 3-Jun Central Bank Central Bank K & J Cements K J Bank Karnataka Fri 26-May 12-May 19-May Sumi Motherson Commu. Ortel Pow erCo. Tata Mahindra Tech Piramal Enterprises Piramal Co. & Kelkar H S Company Titan Pow er Kalpataru 2-Jun Aditya Bir. Fas. AdityaBir. Textiles Century Pathlabs Lal Dr Labs Reddy's Dr Bank Oriental Pharma Glaxosmit Thu VysyaKarur Bank Inds. Pidilite 25-May 11-May 18-May Holdings Bajaj India Cummins Havells India Havells Technologies HCL Fincorp Magma Auto Bajaj Bosch Inds. Britannia Guj.St.Petronet L C O I MphasiS India Timken 1-Jun ArvindLtd AsianPaints L H C GlaxoSmith Pharma Glenmark Port Pipavav Guj Nuvo AdityaBirla

India Daily Summary - May 8, 2017 Wed Cement Lakshmi JK Brew eries United Enter CoffeeDay 24-May Batteries Raja Amara AshokLeyland 10-May 17-May Unilever Hind. Steel JSW Zee Entertainmen Zee Finserv Bajaj Lupin 31-May Dalmia Bharat Dalmia Cellular Idea Siemens Textile Vardhman Finance Bajaj

es Tue Cement Shree 23-May 9-May 16-May Natl.Bank Punjab Sobha P I Indstries I P 30-May Bharti Airtel Bharti Univarsal Carborundum Consumer Godrej Aviat Motocorp Hero Interglobe LNG Petronet Inds Grasim Electron Bharat M & M Thermax Spirits United Mon Vedanta 22-May 8-May 15-May Ind.Bank South Colgate-Palmolive 29-May Info Edg. (India) Edg. Info AB B Infratel Bharti Bank Canara (I) Bank Union India Bata L E H B Source: NSE, Kotak Institutional Equiti Institutional Kotak NSE, Source: March March 2017: Results calendar

KOTAK INSTITUTIONAL EQUITIES RESEARCH 102 India Daily Summary - May 8, 2017 1.4 1.4 3.3 3.3 3.7 3.7 4.2 4.2 7.9 7.9 0.2 0.2 0.7 0.7 0.4 0.7 0.7 0.4 1.0 1.0 2.5 2.5 8.4 8.4 8.1 8.1 7.8 7.8 7.0 7.0 9.4 9.4 1.5 1.5 6.6 6.6 5.0 5.0 5.8 5.8 13.3 12.7 21.7 21.7 11.3 32.2 12.7 11.2 17.1 14.6

14.8

53.7 10.1

14.9 17.0 81.3

28.7 19.3 72.0 12.5

15.3 14.5 19.3 12.0 16.6 26.8 52.9 75.6 85.1 26.8 51.6 63.6 25.6 65.8

289.0 569.5 569.5 (US$mn)

ADVT-3mo

18.4 12.0 15.7 21.1 15.5 21.6 28.9 21.8 20.9 34.0 14.6 17.7 36.7 15.7 22.1 20.4 15.7 22.6 23.4 16.8 22.6 27.7 20.4 13.2 11.4 11.5 8.9 15.2 12.2 7.6 11.6 17.9 13.0 7.9 16.1 11.2 15.1 11.5 15.2 11.5 10.6 12.1 14.8 18.3 20.9 19.0 19.5 25.7 21.5 17.8 19.9 14.0 10.0 17.7 13.3 10.6 15.6 13.9 RoE(%) 3.2 7.9 6.6 10.2 15.1 17.4 10.3 15.8 21.9 12.8 21.6 29.0 22.3 19.6 40.6 14.8 16.0 39.2 15.5 21.2 19.1 13.3 20.9 22.9 16.2 22.5 27.2 20.2 9.7 10.1 7.1 8.7 15.1 10.0 7.3 11.2 18.0 9.1 6.7 15.8 8.5 12.7 9.3 12.7 9.9 3.1 8.1 14.4 18.2 19.0 18.7 20.0 26.6 21.0 14.6 19.2 11.7 10.5 17.4 13.2 13.1 14.9 12.5 15.1 7.4 17.7 21.9 15.8 21.7 29.5 23.8 17.2 41.3 14.6 14.2 40.4 15.4 21.9 18.8 18.1 26.5 15.4 18.2 25.2 20.0 6.8 4.4 (1.5) 14.4 9.8 17.9 10.3 7.2 15.5 (22.6) 11.1 3.0 12.2 6.5 14.0 2.4 18.6 16.5 18.0 20.4 28.3 22.6 13.7 19.1 6.4 10.9 18.9 17.7 22.3 11.6 11.7 1.2 1.3 1.5 0.9 1.2 2.1 2.5 0.5 0.9 0.1 1.2 1.2 3.2 1.5 1.2 0.6 1.1 1.2 1.2 0.7 1.0 0.2 1.1 2.2 3.8 1.0 1.2 1.0 2.5 1.1 0.6 3.5 3.0 2.7 0.6 1.1 0.5 2.2 0.9 0.3 0.8 1.5 1.6 1.2 1.6 1.1 1.8 0.5 2.9 4.2 2.0 0.8 1.2

——— ——— ——— ——— ——— 0.5 Dividendyield (%) 1.0 1.0 1.3 0.8 1.2 1.9 2.2 0.4 0.7 0.1 1.2 0.6 2.9 1.4 1.0 0.5 0.3 1.1 1.0 0.6 0.9 0.2 0.7 1.8 2.2 0.9 1.0 0.9 1.6 0.9 0.5 2.4 2.3 2.0 0.5 1.0 0.1 1.4 0.8 0.3 0.6 1.3 1.5 1.1 1.4 0.9 1.4 0.5 2.6 3.8 2.2 0.7 0.9 1.0 0.8 1.3 0.7 1.2 1.6 1.9 0.4 0.5 0.1 1.0 0.3 2.6 1.2 1.1 0.5 0.2 0.9 0.9 0.5 0.5 0.2 1.0 0.7 (0.4) 0.8

0.8 0.7 1.7 1.2 0.4 (6.8) 1.8 0.6 0.3 0.9 0.4 0.4 0.8 0.3

0.5 1.2 1.4 0.9 0.6 0.9 0.7 2.2 3.4 3.4 0.5 1.0 2.9 1.5 2.6 4.3 1.4 2.8 4.3 2.8 4.8 9.2 3.4 4.3 5.3 2.4 4.1 2.5 5.8 5.2 4.0 4.0 7.4 1.2 6.1 2.0 1.2 1.0 1.0 2.4 2.1 2.0 2.2 3.4 1.8 1.3 3.3 0.8 1.3 1.2 4.2 1.3 2.1 0.8 2.7 3.6 3.0 3.1 4.2 7.6 2.7 2.5 2.1 2.7 2.0 1.1 1.4 2.3 1.7 Price/BV (X) Price/BV 4.1 2.4 1.7 3.1 2.4 4.4 2.2 4.2 1.2 2.4 2.4 1.4 3.4 1.9 4.7 4.3 3.1 3.1 1.1 2.1 3.3 1.6 1.6 2.6 2.5 1.5 1.6 1.6 4.9 9.4 3.6 3.0 2.5 1.5 2.9 5.0 5.8 3.4 1.7 2.9 5.1 1.5 3.3 5.0 3.5 5.6 12.2 3.8 4.8 6.2 2.7 4.8 3.0 6.7 6.1 4.5 4.9 8.9 1.4 7.4 2.3 1.4 1.3 1.2 2.8 2.4 2.2 2.4 3.9 2.0 1.4 3.7 1.0 1.4 1.6 4.6 1.5 2.4 1.2 3.0 4.2 3.7 3.7 5.2 8.5 3.1 2.9 2.5 2.9 2.2 1.2 1.5 2.6 1.9 3.9 1.7 3.7 4.2 7.2 3.5 7.1 1.6

6.0 5.8

6.4 17.1 5.5

3.0 5.6 8.1 5.0 5.9 10.5 8.9 7.9 13.0 4.8 8.1 10.9 8.3 13.3 19.6 15.2 15.7 9.9 10.9 11.5 7.1 16.3 9.5 16.5 10.9 17.4 3.5 20.1 EV/EBITDA (X) EV/EBITDA ——— ——— ——— ——— ——— ——— —————— ——— ——— ——— ——— —————— ——— ——— ——— ——— ——— ——— ——— ——— —————— ——— ——— ——— ——— ——— ——— ——— ——— ——— ——— ——— 9.5 14.7 6.2 9.2 13.2 10.2 16.0 23.2 16.8 19.5 11.0 12.5 14.2 8.5 20.5 11.2 19.3 12.8 20.6 4.4 24.7 12.0

17.0 6.4 10.3 15.7 12.6 19.8 30.5 18.8 24.7 12.7 14.0 17.1 10.0 28.8 13.3 22.6 17.0 28.3 5.8 30.1

15.9 12.8 16.3 22.2 9.3 14.1 15.9 14.3 24.5 30.7 24.7 25.9 15.6 16.2 20.0 13.2 27.6 24.0 25.2 19.5 29.2 8.4 32.7 14.3 9.0 5.3 6.5 15.9 17.8 28.9 16.9 19.8 12.1 17.4 21.1 5.9 8.3 7.4 27.1 9.4 20.6 4.4 18.8 21.1 15.7 16.3 24.0 31.2 16.6 15.0 12.9 18.4 85.3 11.9 6.4 10.9 15.0 12.0 PER (X) PER 6.3 6.3 9.6 5.9 7.1 (3.0) 11.4 12.8 21.2 18.5 26.0 21.1 7.3 21.3 18.1 27.3 24.1 24.1 19.1 17.7 18.5 8.5 47.2 36.2 22.1 21.9 25.1 23.7 31.2 19.5 27.4 24.3 20.5 18.6 29.7 18.4 19.7 44.9 20.7 27.8 20.1 48.1 34.6 33.9 34.5 48.3 32.8 27.0 21.6 29.4 13.6 33.0 21.5 37.6 22.8 17.0 13.8 25.7 17.8 39.8 40.8 45.9 25.8 19.5 26.9 38.5 20.0 25.9 30.6 16.6 46.5 18.6 25.2 16.1 17.0 30.4 35.1 26.7 32.1 17.0 18.4 24.2 16.9 35.1 28.5 29.1 23.6 35.4 11.5 39.8 21.4 11.1 32.0 22.6 22.0 24.6 10.9 9.9 12.1 73.7 7.3 24.7 21.2 33.5 19.2 15.7 23.8 86.6 13.4 17.8 15.0 (46.7)

9.2

29.6 19.3 35.2 87.9 11.3 34.7 37.0 36.7 23.0 72.8 43.5 64.1 10.7

0.0 0.0 13.7 4.8 4.8 7.5 8.4 8.4 21.8 1.5 1.5 1.5 2.9 2.9 12.8 0.9 0.9 16.3 52.3 (1.5) 26.0 14.3 12.4 21.3 22.6 51.3 29.8 13.5 14.6 16.1 24.4 14.1 8.0 23.9 8.9 13.6 14.9 20.9 19.1 28.1 27.2 18.9 15.5 21.4 14.2 35.5 12.6 19.2 14.1 19.2 17.0 30.6 27.8 23.8 17.4 21.6 19.8 14.2 18.4 36.7 19.0 24.3 15.6 29.8 46.0 53.6 20.0 30.5 76.9 18.6 95.7 19.3 21.1 20.7 49.6 11.0 33.4 258.3 34.9 15.5 29.4 143.1 232.3

135.3

(11.4)

EPSgrowth(%) 4.1 4.1 (10.8) 1.1 1.1 30.7 2.3 2.3 13.3 1.2 1.2 (3.9) 7.2 7.2 78.7 2.6 2.6 18.1 7.8 7.8 14.8 9.2 9.2 37.0 5.3 5.3 17.7 4.8 4.8 13.9 5.1 5.1 44.2 6.7 6.7 18.7 (1.2) (1.2) (72.9) (3.3) (3.3) (1.5) (1.5) 27.4 (0.1) (0.1) 16.2 (9.0) (9.0) 33.6 (6.9) (6.9) 24.8 22.4 22.4 27.9 11.1 11.1 10.7 11.4 11.4 13.7 13.3 13.3 21.4 74.4 74.4 26.3 64.0 64.0 13.5 13.5 29.3 29.3 29.3 29.3 10.3 10.3 34.6 34.6 21.9 21.9 94.7 94.7 606.6 16.7 16.7 24.8 24.8 32.0 32.0 17.6 17.6 33.6 33.6 13.0 13.0 39.7 39.7 19.4 19.4 (16.6) 19.4 19.4 (35.0) 19.0 18.0 18.8 20.8 26.9 16.5 62.8

(32.8) (63.4) (11.6) (40.5) (58.0) 124.6 (55.5)

256.4

126.2 129.8 136.0

190.6

(421.1)

149.7

39.4 26.4 5.9 181.5 106.2 44.9 840.7 9.8 184.7 81.6 332.0 8.4 16.5 26.3 16.8 64.7 11.8 49.9 180.2 35.3 20.8 34.4 60.4 10.5 10.7 5.5 6.9 77.2 24.6 3.7 66.9 14.0 14.1 23.7 20.7 31.4 16.8 42.1 85.6 209.2 50.2 67.0 64.4 12.6 29.6 8.9 55.8 17.9 7.2 32.9 25.5 19.6 144.6 83.1 EPS(Rs) 4.2 7.2 7.1 4.5 7.0 4.8 3.0 5.3 5.5 11.4 13.7 11.1 16.2 15.4 27.6 34.0 16.8 49.6 56.8 2017E 2018E 2019E 2017E 2018E 2019E 2017E 2018E 2019E 2017E 2018E 2019E 2017E 2018E 2019E 2017E 2018E 2019E 2017E 2018E 2019E 34.7 19.3 5.2 156.3 89.1 36.1 9.0 149.1 198.6 216.2 71.8 274.6 6.6 13.8 20.7 13.9 56.0 9.7 36.5 148.4 23.6 16.9 19.9 54.3 9.2 7.9 5.0 6.1 67.7 16.2 3.0 57.2 9.7 10.8 17.6 15.5 24.6 4.7 25.7 73.6 178.2 37.2 55.9 56.4 11.7 25.6 6.5 45.9 13.9 7.1 29.2 23.0 22.1 121.5 66.9 — — 27 17 97 53 19 68 66 171 237 421 127 317 223 475 270 325 485 687 509 850 569 598 595 609 505 565 O/S shares 29.4 21.6 136.1 77.0 27.6 575.9 575.9 736.8 117.0 8.2 174.7 63.9 238.9 5.5 15.1 10.7 48.2 6.7 122.2

(3.9) 18.7 7.8 7.0

47.9 (27.5) 8.7

11.9

17.3

72.9 144.0 21.0 46.0

21.6

42.3

7.0 28.3

84.2 56.3 470 131 912 284 642 101 360 209 766 839 667

Mkt cap. Mkt 43,174 79,431 1,234 30,221 (Rsmn) (US$mn) (mn) 23,150 49,293 54,328 71,930 1,108 35,012 39,909 85,959 1,335 99,868 1,559 214,237 3,661 543 236,777 3,678 2,846 146,742 2,280 432,779 6,707 2,310 342,934 5,774 1,964 182,222 3,271 234,301 3,640 1,754 187,323 2,910 149,461 2,322 702,933 10,921 554,272 8,611 1,323 233,790 3,632 837,776 13,086 128,276 1,993 363,812 5,652 420,263 6,529 1,975 142,769 2,218 227,087 3,528 125,169 1,945 255,841 3,975 674,286 10,475 200 111,909 1,739 220,618 3,427 700,823 10,888 159 170,526 2,649 156 156,475 2,431 399 429,409 6,671 2,640 835,591 12,981 289 205,063 3,186 820,618 12,749 150,054 3,008 817 676,507 11,413 108,957 1,693 562,584 8,740 156,185 2,426 165,038 2,564 267 200,085 3,118 1,719 8,765,739 136,182 6,482,979 100,717 1,343,208 20,868 3,396 1,202,138 18,782 2,383 1,746,320 27,020 5,849 2,297,783 37,294 7,763 2,457,428 38,178 1,580 3,873,693 61,054 2,528 2,010,086 31,228 302 12,849,642 205,336 3.4 4.1 3.1 8.2 5.4 6.7 7.9 9.4 8.3 4.6 8.7 4.0 9.3 4.9 5.6 6.0 6.5 (5.2) (5.1) (7.6) (8.7) (5.4) (8.4) (0.4) (7.8) (0.8) (6.6) (0.5) (6.8) (9.9) 17.2 17.9 28.7 21.6 18.8 18.5 10.0 (23.7) (17.1) (41.1) (21.4) (21.1) (12.6) (14.9) (24.0) (11.0) (10.2) (17.0) (37.6) (11.6) (25.1) (15.2) (15.4) (14.5) (15.6)

70 90 90 210 175 310 120 110 145 410 410 145 765 290 935 200 105 300 670 290 540 525 155 150 190 190 350 350 360 165 670 450 750 260 675 390 150 180 3,200 1,400 1,450 1,450 1,450 3,300 1,200 1,675 3,050 1,600 5,100 6,100 1,500 1,850 1,050 price Upside 6,600 Target 19,700 19,700

83 82 65

241 111 133 721 213 246

492 725 492 230 420 187 187 184 184 167 167 191 191 116 118 175 346 187 187 392 392 491 491

329 617 617 392 392 163 163

875 875 395 395 395 395 160 160 299 299 561 296 296 790 790 505

3,377 3,377 1,321 1,321 1,532 4,404 1,547 1,518 1,518 4,780 4,780 1,630 1,630 1,408 1,408 1,091 1,091 2,165 2,165 1,001 1,001 2,888 1,099 6,654 1,609

5,900

25,833

Price (Rs) Price

SELL BUY SELL SELL SELL SELL SELL BUY BUY BUY BUY BUY SELL BUY SELL SELL SELL SELL ADD ADD ADD ADD ADD ADD ADD ADD ADD ADD ADD ADD ADD ADD ADD ADD ADD ADD ADD ADD ADD Rating 5-May-17 (Rs) (%) REDUCE REDUCE REDUCE REDUCE REDUCE REDUCE REDUCE REDUCE REDUCE REDUCE REDUCE REDUCE REDUCE REDUCE REDUCE Cautious Attractive Neutral Company Automobiles AmaraRaja Batteries ApolloTyres AshokLeyland Auto Bajaj BalkrishnaIndustries BharatForge EicherMotors ExideIndustries Bearings FAG HeroMotocorp Mahindra& Mahindra MarutiSuzuki MindaCorp. MothersonSystems Sumi Timken TVSMotor SKF SuprajitEngineering TataMotors India WABCO Automobiles Banks BankAxis Bankof Baroda Bankof India CanaraBank City Union City Bank DCBBank EquitasHoldings FederalBank HDFCBank ICICI Bank ICICI IDFC Bank IDFC IndusIndBank J&KBank KarurVysya Bank PunjabNational Bank RBL Bank RBL StateBank of India UjjivanFinancial Services UnionBank YESBank Banks NBFCs Finserv Bajaj BharatFinancial Inclusion Cholamandalam HDFC ICICI Prudential ICICI Life IIFL Holdings IIFL L&TFinance Holdings LIC Housing LIC Finance Mahindra& Mahindra Financial SELL MaxFinancial Services MuthootFinance PFC RuralElectrification Corp. ShriramUnion City Finance ShriramTransport NBFCs Source: Company, Bloomberg, Kotak Institutional Equities estimates Equities Kotak Institutional Bloomberg, Company, Source: Kotak Institutional Equities: Valuation summary of KIE Universe stocksValuation of KIEKotak Universe summary Equities: Institutional

103 KOTAK INSTITUTIONAL EQUITIES RESEARCH

Kotak Institutional Equities: Valuation summary of KIE Universe stocks India Daily Summary Daily Summary India Target O/S Price (Rs) price Upside Mkt cap. shares EPS (Rs) EPS growth (%) PER (X) EV/EBITDA (X) Price/BV (X) Dividend yield (%) RoE (%) ADVT-3mo Company Rating 5-May-17 (Rs) (%) (Rs mn) (US$ mn) (mn) 2017E 2018E 2019E 2017E 2018E 2019E 2017E 2018E 2019E 2017E 2018E 2019E 2017E 2018E 2019E 2017E 2018E 2019E 2017E 2018E 2019E (US$ mn) KOTAK INSTITUTIONAL EQUITIES RESEARCH EQUITIES INSTITUTIONAL KOTAK Cement ACC SELL 1,660 1,375 (17.2) 311,755 4,843 188 34.3 48.1 72.8 (13.3) 40.2 51.3 48.4 34.5 22.8 24.6 19.7 13.6 3.6 3.4 3.1 1.0 1.0 1.0 7.5 10.1 14.1 9.2 Ambuja Cements REDUCE 247 230 (6.7) 489,561 7,606 1,552 5.8 7.7 11.3 4.2 33.7 45.7 42.5 31.8 21.8 15.5 12.3 8.7 2.5 2.4 2.3 1.4 1.4 1.4 7.6 7.8 10.8 9.0 Dalmia Bharat ADD 2,267 2,220 (2.1) 201,672 3,133 89 29.0 84.0 121.6 35.0 189.4 44.8 78.1 27.0 18.6 14.4 10.7 8.6 4.9 4.2 3.4 0.1 0.1 0.1 6.5 16.7 20.2 10.0 Grasim Industries ADD 1,192 1,225 2.8 556,546 8,646 467 73.0 84.2 98.8 32.8 15.4 17.4 16.3 14.2 12.1 8.3 6.5 5.0 1.9 1.7 1.5 0.4 0.4 0.4 12.4 12.7 13.2 30.7 India Cements SELL 208 120 (42.2) 63,801 991 307 6.2 8.8 11.2 35.1 42.5 27.1 NM 23.5 18.5 11.3 9.8 8.5 1.7 1.6 1.5 1.0 1.0 1.0 5.1 7.0 8.4 15.8 J K Cement ADD 999 970 (2.9) 69,837 1,085 70 28.7 66.1 87.1 236.0 130.4 31.8 34.8 15.1 11.5 14.3 9.5 7.8 3.9 3.1 2.5 0.4 0.4 0.4 11.7 23.0 24.3 0.7 JK Lakshmi Cement ADD 487 490 0.6 57,329 891 118 6.4 25.8 39.8 224.4 302.3 54.3 76.0 18.9 12.2 18.8 9.5 7.2 4.1 3.4 2.7 0.4 0.4 0.4 5.5 19.8 24.8 1.1 Orient Cement ADD 167 180 7.8 34,193 531 205 (1.6) 10.6 14.3 (151.6) 774.4 35.6 (106.5) 15.8 11.6 26.0 8.8 7.1 3.5 2.9 2.4 0.3 1.0 1.0 (3.2) 20.2 22.8 1.2

Shree Cement SELL 19,278 13,500 (30.0) 671,578 10,433 35 389.3 528.1 713.4 237.5 35.7 35.1 49.5 36.5 27.0 25.2 18.7 14.7 9.4 7.6 6.0 0.5 0.1 0.1 20.4 23.0 24.7 4.9 UltraTech Cement SELL 4,323 2,950 (31.8) 1,186,794 18,438 274 96.2 126.3 157.4 11.4 31.3 24.6 44.9 34.2 27.5 23.4 18.8 15.3 5.0 4.4 3.8 0.2 0.2 0.2 11.8 13.6 14.9 16.9 Cement Cautious 3,643,066 56,597 33.3 38.3 30.3 36.8 26.6 20.4 16.4 12.6 9.9 3.6 3.3 2.9 0.5 0.5 0.5 9.9 12.2 14.0 99.4 Consumer products Asian Paints REDUCE 1,147 900 (21.5) 1,100,008 17,089 959 19.8 22.3 26.4 5.8 12.5 18.5 57.9 51.5 43.4 36.0 31.8 26.9 16.9 14.6 12.7 0.7 0.9 1.0 31.3 30.4 31.3 15.7 Bajaj Corp. ADD 375 430 14.7 55,313 859 148 15.8 16.8 19.3 (0.5) 6.2 15.0 23.7 22.4 19.4 19.9 18.6 15.6 11.2 10.8 10.3 3.1 3.5 3.9 47.8 49.2 54.3 0.6 -

Britannia Industries ADD 3,529 3,550 0.6 423,525 6,580 120 75.0 92.5 113.2 7.9 23.2 22.5 47.0 38.2 31.2 32.3 26.0 21.0 18.3 14.2 11.0 0.7 0.9 1.0 44.2 41.9 39.8 8.4 May 8, 2017 Coffee Day Enterprises ADD 250 255 2.0 51,511 800 206 2.3 6.6 9.8 151.1 188.9 47.9 108.9 37.7 25.5 14.3 12.1 10.7 2.3 2.2 2.0 — — — 2.2 6.0 8.3 1.1 Colgate-Palmolive (India) BUY 1,013 1,100 8.6 275,508 4,280 272 21.6 26.4 31.8 2.0 21.9 20.5 46.8 38.4 31.9 27.6 22.6 18.9 21.8 17.7 14.5 1.1 1.3 1.6 51.6 50.9 50.1 7.5 Dabur India REDUCE 273 290 6.4 480,190 7,460 1,759 7.2 7.8 9.0 3.6 9.1 14.6 38.0 34.9 30.4 31.6 29.2 25.5 9.9 8.6 7.6 0.8 1.2 1.4 28.0 26.5 26.5 6.4

GlaxoSmithKline Consumer ADD 5,146 5,700 10.8 216,397 3,362 42 156.7 173.7 193.9 1.4 10.8 11.6 32.8 29.6 26.5 22.2 19.8 17.2 8.0 7.3 6.7 1.6 1.8 2.1 25.6 25.8 26.5 1.7 Godrej Consumer Products REDUCE 1,767 1,420 (19.7) 601,961 9,352 341 38.1 45.7 52.3 12.0 19.7 14.6 46.3 38.7 33.8 33.2 27.8 24.2 10.4 8.5 7.1 0.3 0.4 0.4 23.8 24.2 22.9 5.3 Hindustan Unilever REDUCE 954 860 (9.8) 2,064,573 32,075 2,164 19.3 22.0 25.4 0.6 14.3 15.3 49.5 43.3 37.6 34.0 29.5 25.3 33.0 32.5 32.2 1.8 1.9 2.2 66.5 75.5 85.9 18.7 ITC ADD 277 280 1.1 3,365,432 52,284 12,104 8.4 9.5 10.7 8.5 13.1 12.6 33.1 29.2 26.0 22.0 19.3 17.0 9.5 8.9 8.5 1.9 2.3 2.7 27.0 29.7 32.6 49.6 Jubilant Foodworks SELL 1,028 850 (17.3) 67,777 1,053 66 13.1 20.8 30.5 (17.9) 59.4 46.3 78.7 49.4 33.7 25.3 18.1 13.7 8.5 7.6 6.7 0.2 0.5 0.9 11.3 16.3 21.1 10.6 Jyothy Laboratories NR 377 — — 68,495 1,064 181 9.5 10.7 11.1 31.6 12.3 3.9 39.5 35.2 33.8 27.5 23.5 20.6 8.6 8.0 7.5 1.3 1.6 1.9 26.5 23.5 22.8 1.0

Manpasand Beverages REDUCE 688 685 (0.4) 39,365 612 50 13.0 19.7 27.2 28.9 51.6 38.0 52.8 34.9 25.3 24.6 17.9 12.0 3.4 3.1 2.8 0.2 0.3 0.4 8.4 9.3 11.7 0.7 Marico REDUCE 305 285 (6.6) 393,723 6,117 1,290 6.2 7.1 8.1 10.8 14.2 15.0 49.3 43.2 37.6 33.5 30.4 26.4 16.9 14.9 13.0 1.1 1.2 1.4 36.1 36.7 37.0 6.6 Nestle India SELL 6,726 5,700 (15.3) 648,535 10,075 96 99.3 124.4 149.6 7.1 25.3 20.3 67.7 54.1 45.0 34.9 30.6 26.0 21.5 20.1 18.8 0.9 1.3 1.6 32.8 38.4 43.2 3.6 Page Industries REDUCE 14,264 13,000 (8.9) 159,099 2,472 11 249.6 309.5 380.7 19.7 24.0 23.0 57.1 46.1 37.5 36.1 29.5 24.0 24.3 18.5 13.9 0.7 0.7 0.7 48.0 45.5 42.4 2.6 PC Jeweller REDUCE 429 390 (9.1) 76,859 1,194 179 21.5 23.7 27.2 (3.6) 10.1 14.8 19.9 18.1 15.8 10.2 8.4 7.3 2.7 2.3 2.1 0.9 1.1 1.3 14.8 14.2 13.8 3.6 Pidilite Industries ADD 740 730 (1.4) 379,488 5,896 513 16.7 19.1 22.2 13.2 14.6 16.1 44.4 38.7 33.4 29.1 25.3 21.4 11.4 9.6 8.2 0.7 0.8 0.9 28.0 26.9 26.5 5.1 S H Kelkar and Company SELL 311 270 (13.1) 44,955 698 145 7.5 9.0 10.3 41.5 20.2 14.3 41.5 34.5 30.2 25.1 21.8 18.9 5.4 4.9 4.5 0.7 0.9 1.0 13.6 14.9 15.5 1.6 Tata Global Beverages ADD 152 150 (1.5) 96,121 1,493 631 6.9 7.9 9.0 39.1 13.5 14.9 22.0 19.4 16.9 11.4 10.3 8.9 1.6 1.5 1.4 1.5 1.6 2.0 7.4 8.0 8.8 5.1 Titan Company REDUCE 491 390 (20.6) 436,081 6,775 888 10.0 12.1 14.0 28.3 20.9 15.5 49.0 40.5 35.1 32.9 27.4 23.2 10.8 9.2 8.0 0.7 0.8 0.9 23.6 24.6 24.4 11.0 United Breweries SELL 777 680 (12.5) 205,443 3,192 264 10.8 14.3 18.3 (4.4) 32.4 27.8 71.9 54.3 42.5 29.3 24.6 20.8 8.8 7.7 6.7 0.2 0.3 0.4 12.8 15.1 17.0 3.0 United Spirits ADD 1,899 2,400 26.4 275,934 4,287 145 30.8 47.4 66.4 154.9 54.1 40.1 61.7 40.0 28.6 27.4 21.6 16.6 11.8 7.8 5.5 — — — 21.7 23.5 22.7 15.8 Varun Beverages BUY 484 550 13.5 88,408 1,373 169 8.6 12.0 15.6 66.3 39.9 29.5 56.3 40.2 31.1 13.9 12.5 10.8 4.5 4.2 3.7 - - - 11.8 11.0 12.6 0.8 Consumer products Cautious 11,614,700 180,442 9.5 16.3 16.2 42.7 36.7 31.6 27.2 23.6 20.2 11.6 10.3 9.3 1.3 1.5 1.8 27.1 28.2 29.4 186.0 Energy BPCL SELL 725 675 (6.9) 1,048,111 16,283 1,446 51.9 50.7 55.4 1.0 (2.3) 9.3 14.0 14.3 13.1 10.3 9.0 8.2 3.5 3.1 2.7 4.1 2.1 2.3 26.5 23.0 21.8 27.6 Cairn India ADD 285 280 (1.9) 535,286 8,316 1,875 12.9 16.5 20.4 12.5 28.5 23.5 22.2 17.3 14.0 11.0 9.3 7.1 1.1 1.0 1.0 1.2 1.6 2.5 4.9 6.0 7.1 17.0 Castrol India ADD 436 470 7.9 215,456 3,347 495 13.5 14.7 15.9 12.3 8.4 8.5 32.2 29.7 27.4 20.6 19.6 17.9 36.2 35.5 34.8 2.5 2.8 3.0 114.1 120.6 128.4 5.8 GAIL (India) ADD 419 425 1.5 708,318 11,004 1,691 22.9 26.3 28.7 70.2 15.1 9.0 18.3 15.9 14.6 11.1 9.9 9.2 2.1 2.0 1.8 1.9 2.0 2.1 12.1 12.8 12.9 31.2 GSPL ADD 183 175 (4.3) 103,108 1,602 563 8.7 11.0 12.0 9.7 27.3 8.8 21.1 16.6 15.2 10.7 8.6 7.8 2.4 2.2 2.0 1.1 1.5 2.0 11.8 13.7 13.6 2.6 HPCL REDUCE 524 550 5.1 531,814 8,262 1,017 52.1 43.9 45.8 37.2 (15.7) 4.2 10.0 11.9 11.4 7.7 8.6 8.5 2.6 2.3 2.1 5.5 2.5 2.6 27.6 20.7 19.0 29.5 Indraprastha Gas SELL 1,029 970 (5.7) 144,004 2,237 140 45.6 51.0 55.9 37.7 11.8 9.5 22.5 20.2 18.4 13.6 12.1 11.0 5.2 4.6 4.1 1.2 1.5 1.9 24.6 24.1 23.5 9.8 IOCL BUY 433 470 8.5 2,103,092 32,673 4,856 41.9 38.6 41.4 114.8 (7.9) 7.1 10.3 11.2 10.5 6.5 6.8 6.4 2.5 2.3 2.1 4.2 4.1 4.4 26.0 21.7 21.1 29.5 Mahanagar Gas SELL 994 775 (22.0) 98,146 1,525 99 39.9 42.5 44.9 27.8 6.5 5.6 24.9 23.4 22.1 14.7 13.8 13.0 5.8 5.3 4.8 2.0 2.1 2.3 24.5 23.6 22.7 3.1 ONGC ADD 184 210 14.3 2,358,749 36,645 12,833 16.5 19.3 21.7 22.2 17.2 12.0 11.1 9.5 8.5 5.0 4.2 3.8 1.2 1.1 1.0 3.0 3.7 4.1 11.1 12.2 12.7 22.1 Oil India SELL 322 320 (0.7) 258,248 4,012 802 27.6 31.1 33.8 (5.0) 12.5 8.8 11.7 10.4 9.5 6.6 5.6 5.1 1.1 1.0 1.0 3.4 3.9 4.2 9.7 10.3 10.6 3.2 Petronet LNG ADD 431 425 (1.4) 323,363 5,024 750 21.2 25.5 27.8 88.9 20.3 8.9 20.3 16.9 15.5 13.0 10.5 9.2 4.3 3.7 3.2 1.2 1.6 2.1 22.9 23.4 22.1 14.5 Reliance Industries ADD 1,328 1,420 6.9 4,303,530 66,858 3,240 96.7 99.6 113.7 14.2 3.0 14.3 13.7 13.3 11.7 12.6 10.4 7.3 1.6 1.5 1.3 0.8 0.9 1.1 12.4 11.5 11.9 535.5 Energy Attractive 12,731,223 197,788 30.7 4.2 11.3 13.0 12.5 11.2 8.4 7.4 6.2 1.8 1.6 1.5 2.4 2.3 2.6 13.6 13.0 13.2 731.4 India Daily Summary Daily Summary India Source: Company, Bloomberg, Kotak Institutional Equities estimates

104

-

May 8, May 8, 2017

Kotak Institutional Equities: Valuation summary of KIE Universe stocks

105 Target O/S Price (Rs) price Upside Mkt cap. shares EPS (Rs) EPS growth (%) PER (X) EV/EBITDA (X) Price/BV (X) Dividend yield (%) RoE (%) ADVT-3mo Company Rating 5-May-17 (Rs) (%) (Rs mn) (US$ mn) (mn) 2017E 2018E 2019E 2017E 2018E 2019E 2017E 2018E 2019E 2017E 2018E 2019E 2017E 2018E 2019E 2017E 2018E 2019E 2017E 2018E 2019E (US$ mn)

Industrials ABB SELL 1,420 1,100 (22.5) 300,910 4,675 212 17.8 26.3 36.7 25.5 48.1 39.5 80.0 54.0 38.7 39.5 28.6 22.8 9.2 8.2 7.1 0.3 0.5 0.6 12.0 16.0 19.7 2.3 BHEL SELL 173 110 (36.3) 422,333 6,561 2,448 3.5 3.6 7.4 193.6 3.2 104.0 49.4 47.9 23.5 31.5 24.4 9.9 1.3 1.2 1.2 0.4 0.5 1.1 2.6 2.6 5.1 19.8 Carborundum Universal REDUCE 292 260 (11.0) 55,107 856 188 9.6 12.7 16.0 25.8 32.9 26.0 30.5 22.9 18.2 16.7 12.8 10.4 4.2 3.8 3.3 1.0 1.3 1.6 14.5 17.4 19.4 0.9 CG Power and Industrial REDUCE 78 65 (16.4) 48,730 757 627 2.9 3.5 5.1 26.1 19.0 46.8 26.4 22.2 15.1 12.8 9.8 6.7 1.1 1.1 1.0 0.7 0.8 1.3 4.0 4.8 6.8 3.9 Crompton Greaves Consumer SELL 229 205 (10.3) 143,274 2,226 627 4.5 5.5 6.6 17.4 21.3 19.9 50.4 41.6 34.7 30.5 25.9 22.0 31.1 19.8 13.5 0.4 0.7 0.9 82.5 58.2 46.4 4.3 Cummins India REDUCE 1,031 915 (11.3) 285,793 4,440 277 28.1 32.2 36.0 6.4 14.5 11.7 36.6 32.0 28.6 33.0 27.9 24.5 8.2 7.4 6.7 1.4 1.6 1.8 23.4 24.3 24.6 4.5 Havells India SELL 487 415 (14.7) 304,148 4,725 624 9.4 11.3 13.4 20.9 20.1 19.2 51.9 43.2 36.2 34.5 26.6 22.2 9.6 8.6 7.8 0.8 0.9 1.2 19.5 21.0 22.5 9.2 Kalpataru Power Transmission BUY 353 370 4.7 54,241 843 153 10.4 13.3 19.3 36.1 27.4 45.0 33.9 26.6 18.4 9.6 8.6 7.3 2.2 2.1 1.9 0.4 0.4 0.4 6.7 8.0 10.7 0.7 KEC International ADD 211 235 11.1 54,361 845 257 10.3 14.6 18.1 37.9 42.5 23.4 20.6 14.4 11.7 9.4 7.9 6.8 3.1 2.6 2.2 0.7 0.9 1.1 16.3 19.9 20.7 2.4 L&T BUY 1,725 1,870 8.4 1,609,753 25,009 930 57.0 77.7 96.9 12.0 36.2 24.7 30.3 22.2 17.8 23.0 18.6 15.5 4.0 3.6 3.3 1.4 1.8 2.2 13.7 17.2 19.5 38.6 Siemens SELL 1,353 940 (30.5) 481,920 7,487 356 24.3 30.2 37.3 42.8 24.2 23.6 55.7 44.9 36.3 34.1 27.6 22.2 7.0 6.6 6.1 0.9 1.1 1.4 12.8 15.0 17.4 5.0 Thermax REDUCE 1,015 850 (16.3) 120,938 1,879 119 25.8 30.5 36.7 11.5 18.4 20.2 39.4 33.3 27.7 27.6 22.2 19.2 4.7 4.2 3.8 0.5 0.6 0.7 12.4 13.4 14.5 1.1 Voltas REDUCE 418 360 (13.9) 138,326 2,149 331 13.3 14.8 17.0 27.1 11.3 15.2 31.5 28.3 24.6 26.5 22.4 18.5 5.1 4.5 4.0 0.8 0.9 1.0 17.2 17.0 17.3 10.8 Industrials Cautious 4,019,834 62,451 42.9 28.2 29.3 38.0 29.6 22.9 24.6 19.8 15.8 3.8 3.5 3.2 1.0 1.2 1.6 9.9 11.9 14.1 103.4 Infrastructure Adani Port and SEZ ADD 345 370 7.3 714,375 11,098 2,085 18.0 12.7 14.6 30.9 (29.5) 15.3 19.2 27.2 23.6 16.4 16.1 14.5 4.3 3.8 3.4 0.4 0.6 0.8 25.2 15.0 15.3 21.8 Ashoka Buildcon BUY 210 250 19.0 39,311 611 188 7.7 6.0 10.1 148.6 (23.0) 69.2 27.1 35.3 20.8 11.1 10.1 8.2 2.0 1.9 1.8 0.9 1.1 1.4 7.6 5.6 9.0 2.5 Container Corporation REDUCE 1,190 950 (20.2) 290,012 4,506 244 28.1 31.8 37.8 (13.1) 13.3 18.9 42.4 37.4 31.4 27.0 22.3 18.1 3.4 3.2 3.0 0.8 0.9 1.1 8.2 8.9 10.0 9.6 Gateway Distriparks BUY 251 290 15.6 27,274 424 109 8.9 10.5 14.3 (11.8) 18.2 35.4 28.2 23.8 17.6 12.1 9.4 7.0 2.1 2.0 1.8 1.1 1.3 1.7 7.6 8.6 10.9 0.7 Gujarat Pipavav Port BUY 156 170 9.1 75,344 1,171 483 5.3 6.0 7.8 53.3 13.3 30.9 29.6 26.1 19.9 17.2 14.1 11.8 3.9 3.8 3.7 2.6 2.9 3.8 13.2 14.7 18.9 1.3 IRB Infrastructure BUY 256 275 7.5 89,901 1,397 351 20.8 16.2 17.9 14.9 (21.8) 10.5 12.3 15.8 14.3 7.4 7.6 6.7 1.5 1.4 1.4 1.5 1.7 1.4 13.4 9.0 9.5 11.3 Sadbhav Engineering ADD 326 345 6.0 55,863 868 172 11.2 12.6 14.5 42.8 12.8 15.4 29.2 25.9 22.4 18.5 14.8 13.0 3.4 3.1 2.7 — — — 12.3 12.5 12.9 1.1 Infrastructure Attractive 1,292,080 20,073 23.0 (19.3) 18.1 22.1 27.4 23.2 14.5 13.6 11.9 3.4 3.1 2.9 0.7 0.9 1.1 15.4 11.4 12.4 48.4 Internet Info Edge ADD 842 960 14.0 102,070 1,586 121 18.2 19.7 24.5 55.1 8.7 24.3 46.4 42.7 34.3 39.7 29.0 22.5 5.3 4.9 4.4 0.5 0.6 0.7 11.9 11.9 13.6 1.2 Just Dial REDUCE 493 400 (18.9) 34,289 533 69 18.6 16.5 19.5 (9.1) (11.0) 17.9 26.6 29.9 25.3 22.2 17.8 14.2 4.4 3.9 3.4 0.4 0.3 0.4 17.7 13.7 14.3 22.5 Internet Attractive 136,359 2,118 23.0 1.4 22.2 39.1 38.6 31.6 33.7 25.5 20.0 5.0 4.6 4.1 0.5 0.5 0.6 12.9 11.9 13.1 23.6 Media DB Corp. REDUCE 376 380 1.2 69,022 1,073 184 21.2 24.3 29.2 31.3 14.7 19.8 17.7 15.4 12.9 9.9 8.5 7.0 4.6 4.2 3.8 2.9 3.7 4.5 27.4 28.4 30.8 6.6 DishTV BUY 97 105 8.6 103,044 1,601 1,066 1.5 2.4 3.6 (76.9) 62.8 48.8 NM 39.6 26.6 10.4 8.6 7.1 6.2 6.2 6.2 — — 1.0 9.6 15.6 23.2 10.7 Jagran Prakashan REDUCE 193 190 (1.6) 63,096 980 327 11.3 12.9 15.0 8.8 14.3 16.1 17.1 14.9 12.9 9.9 8.4 7.2 3.7 3.4 3.0 3.1 3.6 3.6 22.4 23.6 24.9 0.7 Ortel Communications BUY 109 185 70.5 3,295 51 30 (0.9) 1.9 7.6 (122.1) 316.0 308.8 (125.4) 58.1 14.2 9.3 7.3 5.5 2.4 2.3 2.0 — — — (1.9) 4.1 15.1 0.0 PVR REDUCE 1,522 1,450 (4.7) 71,072 1,105 47 22.4 33.9 43.2 (17.0) 51.4 27.3 67.9 44.9 35.2 21.9 17.3 14.6 7.4 6.5 5.6 0.1 0.2 0.3 11.4 15.4 17.0 4.7 Sun TV Network ADD 853 750 (12.0) 336,052 5,221 394 26.3 29.8 36.3 12.4 13.2 21.9 32.4 28.6 23.5 21.2 18.4 15.0 8.7 8.0 7.1 1.8 2.0 2.2 28.1 29.1 31.9 26.1 Zee Entertainment Enterprises BUY 506 540 6.8 485,604 7,544 960 12.5 15.5 18.8 32.9 24.2 21.2 40.5 32.6 26.9 22.9 19.7 16.4 5.1 4.7 4.3 0.5 0.7 0.8 15.3 15.1 16.7 12.6 Media Attractive 1,131,183 17,576 (1.0) 21.5 23.2 34.7 28.6 23.2 17.5 14.9 12.4 5.9 5.4 4.9 1.1 1.3 1.6 16.9 18.9 21.1 61.3 Metals & Mining Coal India ADD 279 320 14.9 1,728,763 26,857 6,316 18.1 25.5 28.5 (20.0) 40.7 11.7 15.4 10.9 9.8 9.7 7.1 6.4 5.7 5.2 4.8 7.1 6.4 7.2 33.5 50.0 51.0 24.7 Hindalco Industries REDUCE 186 180 (3.1) 416,806 6,475 2,065 10.7 14.3 15.7 294.3 34.2 9.8 17.4 13.0 11.8 7.5 7.0 6.5 1.0 0.9 0.8 0.5 0.5 0.5 5.9 7.2 7.4 42.0

Hindustan Zinc REDUCE 250 265 5.9 1,057,809 16,434 4,225 19.7 22.2 23.9 1.5 12.8 7.6 12.7 11.3 10.5 9.2 6.9 5.7 3.4 2.8 2.3 11.7 2.0 2.0 24.4 27.4 24.4 16.2 Daily Summary India Jindal Steel and Power BUY 108 160 48.0 98,914 1,537 915 (21.9) (6.6) 6.7 (20.3) 69.9 201.9 (4.9) (16.4) 16.1 12.8 8.8 6.7 0.3 0.3 0.3 — — — (7.5) (1.7) 1.7 35.6 JSW Steel ADD 190 225 18.5 458,788 7,128 2,417 14.6 19.5 22.1 1,487.5 33.5 13.4 13.0 9.7 8.6 7.2 6.2 5.6 2.1 1.7 1.5 0.5 0.5 0.5 16.2 19.4 18.4 17.1 National Aluminium Co. SELL 65 42 (35.8) 126,414 1,964 2,577 3.1 3.4 3.4 15.5 9.0 0.1 21.0 19.3 19.2 9.6 7.9 7.6 1.2 1.2 1.1 1.5 1.5 1.5 5.2 6.2 5.9 3.6 NMDC SELL 124 105 (15.6) 393,746 6,117 3,965 10.2 9.5 9.4 28.1 (6.8) (1.2) 12.2 13.1 13.3 8.5 8.6 8.7 1.7 1.6 1.6 4.8 4.8 4.8 12.1 12.7 12.2 7.9 Tata Steel ADD 434 515 18.8 421,119 6,542 971 10.3 51.7 60.7 144.1 400.6 17.4 42.0 8 7.1 8.7 6.5 5.9 1.7 1.4 1.2 1.8 1.8 1.8 3.7 18.5 18.6 43.7 Vedanta ADD 224 290 29.6 663,350 10,306 2,965 21.1 30.3 34.3 168.3 43.9 13.2 10.6 7.4 6.5 6.3 4.8 4.0 1.3 1.1 1.0 1.2 1.2 1.2 14.6 16.7 16.4 49.6 Metals & Mining Attractive 5,365,710 83,360 44.4 45.2 13.4 14.8 10.2 9.0 8.2 6.5 5.7 1.9 1.7 1.5 5.4 3.3 3.5 12.8 16.7 16.9 240.5 Pharmaceutical Apollo Hospitals REDUCE 1,265 1,300 2.7 176,056 2,735 139 20.6 30.9 38.7 (4.9) 49.6 25.4 61.3 41.0 32.7 25.5 20.7 17.8 4.8 4.4 4.1 0.4 0.6 0.8 8.1 11.3 13.0 10.4 KOTAK INSTITUTIONAL EQUITIES RESEARCH EQUITIES INSTITUTIONAL KOTAK Aurobindo Pharma ADD 590 770 30.6 345,495 5,367 584 41.8 46.3 51.5 23.3 10.6 11.2 14.1 12.7 11.5 10.2 8.8 7.7 3.7 2.9 2.4 0.3 0.4 0.5 29.6 25.5 22.8 25.4 Biocon SELL 1,037 605 (41.6) 207,320 3,221 200 30.6 24.5 27.8 53.1 (20.0) 13.8 33.9 42.4 37.2 22.0 19.1 15.3 4.3 4.0 3.7 1.0 0.8 0.9 13.3 9.8 10.3 12.9 Cipla BUY 549 650 18.5 441,354 6,857 805 19.1 27.3 35.6 13.7 43.2 30.3 28.8 20.1 15.4 17.0 12.3 9.6 3.3 3.0 2.6 0.7 1.0 1.4 12.2 15.6 17.9 13.6 Dr Lal Pathlabs SELL 958 1,000 4.4 79,598 1,237 83 19.6 23.6 27.8 23.0 20.6 17.9 49.0 40.6 34.4 30.5 24.5 20.6 12.5 10.0 8.0 0.3 0.4 0.4 28.5 27.3 25.8 3.4 Dr Reddy's Laboratories SELL 2,602 2,500 (3.9) 431,055 6,697 171 78.1 90.9 138.5 (43.9) 16.4 52.3 33.3 28.6 18.8 17.1 13.3 8.9 3.5 3.2 2.8 0.5 0.5 0.8 10.3 11.6 15.7 21.8 HCG BUY 255 270 6.1 21,818 339 85 2.3 2.5 4.5 1,502.4 7.8 79.9 109.0 101.1 56.2 24.8 19.5 15.0 3.9 3.8 3.5 — — — 3.6 3.8 6.5 1.4 Lupin ADD 1,251 1,350 8.0 564,770 8,774 450 61.9 66.1 75.0 22.7 6.8 13.5 20.2 18.9 16.7 12.8 11.5 9.8 4.2 3.5 3.0 0.7 0.8 0.9 22.8 20.3 19.5 24.4 Sun Pharmaceuticals REDUCE 630 660 4.7 1,511,996 23,490 2,406 31.1 30.1 34.9 40.8 (3.3) 15.8 20.2 20.9 18.1 11.9 11.5 9.5 4.0 3.4 2.9 1.0 1.0 1.1 21.5 17.4 17.3 38.3 -

Torrent Pharmaceuticals REDUCE 1,294 1,310 1.2 219,042 3,403 169 57.3 58.7 69.1 (44.0) 2.4 17.8 22.6 22.1 18.7 15.5 14.1 12.2 5.6 4.7 2.0 1.0 1.2 26.6 23.1 21.0 11.6 May 8, May 8, 2017 Pharmaceuticals Cautious 3,998,505 62,119 10.9 6.6 19.8 22.7 21.3 17.8 13.9 12.3 10.0 4.0 3.4 3.0 0.8 0.8 1.0 17.6 16.1 16.6 163.2

Source: Company, Bloomberg, Kotak Institutional Equities estimates

Kotak Institutional Equities: Valuation summary of KIE Universe stocks India Daily Summary Daily Summary India Target O/S Price (Rs) price Upside Mkt cap. shares EPS (Rs) EPS growth (%) PER (X) EV/EBITDA (X) Price/BV (X) Dividend yield (%) RoE (%) ADVT-3mo Company Rating 5-May-17 (Rs) (%) (Rs mn) (US$ mn) (mn) 2017E 2018E 2019E 2017E 2018E 2019E 2017E 2018E 2019E 2017E 2018E 2019E 2017E 2018E 2019E 2017E 2018E 2019E 2017E 2018E 2019E (US$ mn) KOTAK INSTITUTIONAL EQUITIES RESEARCH EQUITIES INSTITUTIONAL KOTAK Real Estate DLF ADD 186 160 (13.8) 331,148 5,145 1,784 3.7 1.6 1.9 18.7 (55.2) 14.2 50.8 113.3 99.2 17.4 18.3 18.0 1.1 1.1 1.1 1.1 1.1 1.1 2.2 1.0 1.1 26.9 Godrej Properties REDUCE 525 335 (36.2) 113,601 1,766 216 9.6 10.5 11.4 29.4 9.9 8.3 54.9 50.0 46.1 54.5 76.8 46.4 4.8 4.5 4.2 - 0.5 0.5 9.1 9.3 9.4 4.1 Oberoi Realty REDUCE 404 390 (3.6) 137,230 2,134 339 11.2 30.1 43.5 (11.1) 170.0 44.3 36.2 13.4 9.3 24.5 8.5 9.2 2.4 2.1 1.7 0.5 0.5 0.5 6.9 16.8 20.4 2.6 Prestige Estates Projects BUY 245 225 (8.1) 91,781 1,426 375 7.0 8.4 8.9 (24.8) 18.7 6.3 34.7 29.3 27.5 15.1 14.4 13.7 2.1 2.0 1.9 0.6 0.6 0.6 6.2 7.0 7.1 1.9 Sobha BUY 408 395 (3.2) 40,004 610 98 14.8 17.1 17.9 (5.2) 15.6 4.5 27.5 23.8 22.8 15.5 13.9 13.5 1.5 1.4 1.4 1.7 1.7 1.7 5.5 6.2 6.3 3.6 Sunteck Realty BUY 463 360 (22.3) 27,778 453 60 55.8 57.8 113.7 105.4 3.7 96.6 8.3 8.0 4.1 8.0 6.4 3.0 1.4 1.2 0.4 0.4 0.4 18.6 16.3 26.0 1.8 Real Estate Attractive 741,542 11,534 9.8 19.6 37.0 37.5 31.3 22.9 18.3 15.8 14.5 1.6 1.6 1.5 0.8 0.8 0.8 4.3 5.0 6.5 41.0 Technology

HCL Technologies REDUCE 828 840 1.5 1,169,357 18,349 1,413 57.5 61.4 64.6 46.4 6.8 5.3 14.4 13.5 12.8 10.3 9.2 8.5 3.6 3.2 2.9 3.0 3.5 4.0 27.3 25.4 24.0 19.9 Hexaware Technologies ADD 239 230 (3.9) 72,699 1,124 304 13.7 14.5 16.5 5.9 6.1 13.3 17.5 16.5 14.5 11.8 10.5 9.0 4.3 3.9 3.5 2.3 3.3 3.3 26.5 24.8 25.5 4.5 Infosys ADD 932 1,015 9.0 2,129,036 33,240 2,286 62.8 63.7 70.4 6.4 1.4 10.6 14.8 14.6 13.2 10.3 10.5 9.2 3.1 3.2 3.0 2.9 3.2 3.8 22.6 21.3 23.4 58.4 L&T Infotech BUY 733 800 9.1 124,497 1,943 170 55.8 59.7 65.2 13.3 7.0 9.2 13.1 12.3 11.3 9.1 8.0 6.8 4.1 3.5 3.0 1.2 3.3 3.8 37.6 30.5 28.7 0.8 Mindtree REDUCE 496 460 (7.2) 83,414 1,295 168 26.4 30.8 36.0 (26.3) 16.4 17.2 18.8 16.1 13.8 10.6 8.8 7.3 3.2 2.8 2.5 1.4 1.7 2.0 17.9 18.8 19.4 3.9

Mphasis SELL 561 450 (19.8) 117,969 1,835 210 39.5 40.8 41.1 14.8 3.3 0.6 14.2 13.7 13.7 9.1 9.4 9.1 1.8 1.8 1.7 3.6 3.6 3.6 12.9 12.6 13.1 1.4 -

TCS REDUCE 2,320 2,405 3.7 4,571,229 71,018 1,970 133.4 136.8 149.3 8.6 2.5 9.1 17.4 17.0 15.5 12.7 12.2 10.9 5.2 5.6 5.2 2.3 3.7 4.0 32.6 31.3 34.7 52.5 May 8, 2017 Tech Mahindra BUY 413 510 23.5 360,053 5,594 872 34.0 38.2 43.4 (4.8) 12.2 13.7 12.1 10.8 9.5 7.4 6.0 4.9 2.2 1.9 1.6 3.0 1.5 1.7 19.5 19.1 18.6 25.9 Wipro REDUCE 499 455 (8.9) 1,231,848 18,867 2,467 35.0 34.9 37.2 (3.0) (0.2) 6.6 14.3 14.3 13.4 8.4 8.4 7.5 2.3 2.1 1.9 0.4 1.0 2.4 17.2 15.4 15.2 14.8 Technology Cautious 9,860,104 153,264 8.9 0.6 8.5 15.7 15.6 14.3 10.8 10.4 9.3 3.6 3.7 3.4 2.3 3.0 3.5 23.2 23.8 23.5 182.2 Telecom Bharti Airtel BUY 345 375 8.8 1,378,104 21,410 3,997 8.1 3.9 9.5 (17.0) (51.3) 141.8 42.5 87.4 36.1 7.0 7.5 6.3 2.0 2.0 2.0 0.7 0.3 1.0 4.8 2.3 5.6 27.6 Bharti Infratel REDUCE 367 315 (14.1) 695,330 10,534 1,897 14.5 15.8 17.5 15.3 8.9 10.7 25.3 23.3 21.0 11.2 10.4 9.6 4.1 4.0 3.8 2.9 3.0 3.4 15.3 17.3 18.5 54.4 Tata Communications ADD 641 730 13.8 182,799 2,840 285 10.5 16.6 22.9 540.1 57.9 38.1 61.1 38.7 28.0 10.7 9.6 8.4 11.5 8.9 6.8 1.0 1.0 1.0 51.0 26.0 27.6 7.5 Telecom Cautious 2,551,474 39,377 (43.0) (76.1) 276.7 47.5 199.1 52.8 7.8 8.5 7.2 2.3 2.4 2.4 1.1 1.0 1.5 4.9 1.2 4.6 136.1 Utilities

Adani Power SELL 30 24 (19.9) 99,852 1,795 3,334 (2.0) 4.2 4.2 (233.7) 315.3 (0.2) (15.3) 7.1 7.1 8.6 6.2 5.9 1.5 1.2 1.0 — — — (9.3) 18.9 15.9 9.0 CESC SELL 942 785 (16.7) 124,918 1,941 133 53.7 75.6 96.8 92.1 40.8 28.2 17.6 12.5 9.7 8.5 7.8 6.9 1.3 1.2 1.1 1.1 1.2 1.3 7.8 10.3 12.1 10.2 JSW Energy ADD 64 67 4.0 105,698 1,642 1,640 3.8 6.6 6.9 (50.0) 72.6 5.2 17.0 9.8 9.4 6.4 5.6 5.1 1.0 1.0 0.9 3.1 3.1 3.1 6.6 10.0 9.9 7.5 NHPC ADD 32 32 1.6 348,726 5,418 11,071 2.9 3.4 3.6 21.6 17.6 6.7 10.9 9.3 8.7 9.9 7.5 6.5 1.1 1.0 1.0 5.1 6.0 6.4 10.0 11.3 11.6 3.5 NTPC BUY 160 185 15.8 1,316,800 20,457 8,245 12.1 15.3 16.5 5.4 26.0 8.2 13.2 10.4 9.7 11.2 9.4 7.8 1.4 1.3 1.2 2.3 2.9 3.1 10.9 12.7 12.6 13.5 Power Grid BUY 209 230 10.0 1,093,402 16,987 5,232 14.3 15.7 17.7 25.9 9.2 13.2 14.6 13.3 11.8 9.9 8.6 7.6 2.3 2.0 1.8 1.4 1.5 1.7 16.5 15.9 15.9 18.8 Reliance Power SELL 46 34 (26.4) 129,597 2,013 2,805 4.2 4.4 4.6 (14.3) 5.9 4.5 11.1 10.5 10.0 9.3 8.4 8.2 0.6 0.6 0.5 — — — 5.5 5.6 5.6 7.4 Tata Power REDUCE 83 80 (4.1) 233,512 3,505 2,800 6.8 5.3 7.4 24.2 (22.9) 39.8 12.2 15.9 11.3 10.7 10.3 10.5 1.5 1.4 1.2 1.4 1.4 1.4 12.3 8.9 11.5 7.1 Utilities Attractive 3,452,504 53,757 6.0 25.7 10.9 14.1 11.2 10.1 10.0 8.5 7.5 1.4 1.3 1.2 2.1 2.4 2.6 10.2 11.8 12.0 77.0 Others Astral Poly Technik SELL 547 360 (34.2) 65,530 1,018 120 10.2 13.0 16.1 21.0 28.2 23.2 53.8 42.0 34.1 27.6 22.2 18.2 7.8 6.7 5.6 0.1 0.1 0.1 15.0 17.1 17.9 3.3 Avenue Supermarts SELL 809 580 (28.3) 504,666 7,840 562 8.5 13.0 16.4 49.1 52.4 26.8 95.1 62.4 49.2 50.6 37.3 29.1 11.9 10.9 8.9 - - - 17.9 19.0 19.9 - Cera Sanitaryware REDUCE 3,011 2,140 (28.9) 39,161 608 13 74.2 89.0 104.4 15.6 20.0 17.3 40.6 33.8 28.9 24.1 20.1 17.2 7.7 6.3 5.2 0.3 0.3 0.3 20.7 20.5 19.8 0.4 Dhanuka Agritech ADD 876 900 2.7 43,817 681 50 26.1 30.8 37.8 24.8 18.1 22.7 33.6 28.4 23.2 23.9 19.8 15.9 7.5 6.2 5.1 0.8 1.0 1.2 24.5 23.9 24.3 0.4 Godrej Industries REDUCE 544 430 (21.0) 182,877 2,841 336 17.6 20.6 21.7 22.4 17.0 5.0 30.8 26.4 25.1 22.8 20.5 20.5 4.6 4.0 3.5 0.3 0.3 0.3 15.8 16.1 14.7 4.8 HSIL ADD 339 325 (4.1) 24,494 381 72 14.9 17.3 20.1 20.6 16.2 16.5 22.8 19.6 16.8 9.9 8.2 7.4 1.7 1.6 1.5 1.2 1.2 1.2 7.6 8.3 9.1 0.6 InterGlobe Aviation ADD 1,116 1,060 (5.1) 403,543 6,269 351 46.6 66.8 85.2 (17.9) 43.4 27.6 24.0 16.7 13.1 18.1 11.7 9.1 16.9 12.0 8.7 2.1 3.0 3.8 82.5 84.0 77.2 9.4 Kaveri Seed REDUCE 563 540 (4.1) 38,885 604 69 25.8 35.2 43.3 3.1 36.4 23.0 21.8 16.0 13.0 20.0 13.6 10.8 4.7 3.8 3.3 1.4 1.9 2.7 20.6 26.0 27.2 7.1 PI Industries ADD 848 960 13.2 116,632 1,812 136 30.7 34.4 40.6 32.5 12.2 18.1 27.7 24.6 20.9 22.1 18.3 15.1 7.6 6.0 4.9 0.5 0.5 0.6 31.0 27.3 25.8 1.5 Rallis India ADD 237 270 13.9 46,089 716 194 9.7 11.6 14.9 32.1 19.5 28.7 24.4 20.4 15.9 16.8 12.9 9.9 4.1 3.6 3.1 1.3 1.4 1.5 18.6 18.8 21.1 1.5 SRF BUY 1,757 1,910 8.7 100,902 1,568 57 84.2 95.7 113.1 14.4 13.6 18.2 20.9 18.4 15.5 12.3 10.7 9.3 3.3 2.8 2.5 0.6 0.7 0.8 16.8 16.6 17.0 6.2 Tata Chemicals ADD 636 630 (0.9) 161,936 2,516 255 31.6 45.7 49.5 3.1 44.7 8.3 20.1 13.9 12.9 9.9 7.9 6.9 2.4 1.8 1.7 1.6 1.6 1.6 12.3 14.9 13.6 5.8 TeamLease Services BUY 1,095 1,200 9.6 18,718 291 16 21.9 31.6 40.6 37.6 44.3 28.3 50.0 34.6 27.0 38.1 24.9 18.3 5.4 4.6 4.0 - - - 11.3 14.4 15.8 0.5 UPL ADD 808 860 6.4 410,393 6,376 429 35.7 43.0 53.6 12.2 20.5 24.7 22.7 18.8 15.1 13.5 11.4 9.5 5.0 4.1 3.4 0.7 0.9 1.1 23.8 23.9 24.6 20.0 Vardhman Textiles NR 1,322 NA - 75,806 1,178 63 109.5 116.8 125.3 18.3 6.6 7.3 12.1 11.3 10.5 6.6 6.3 5.6 1.8 1.6 1.4 1.2 1.5 1.5 16.1 14.8 14.2 0.7 Whirlpool REDUCE 1,187 1,000 (15.8) 150,610 2,340 127 25.2 30.9 38.0 28.8 22.6 22.8 47.1 38.4 31.2 28.5 23.7 19.6 10.2 8.4 7.0 - 0.5 0.6 24.2 24.0 24.5 1.6 Others 2,320,403 36,049 12.0 29.2 20.4 29.4 22.7 18.9 17.7 14.2 11.9 5.9 4.8 4.1 0.8 1.0 1.2 19.9 21.2 21.6 62.8 KIE universe 91,020,702 1,419,732 19.2 17.4 17.9 21.1 18.0 15.2 11.7 10.2 8.7 2.8 2.5 2.3 1.6 1.7 1.9 13.1 14.1 15.0 KIE universe (ex-energy) 78,289,478 1,221,944 16.1 21.3 19.6 23.5 19.3 16.2 12.8 11.0 9.5 3.0 2.8 2.5 1.5 1.6 1.8 13.0 14.5 15.5 India Daily Summary Daily Summary India Notes: (a) We have used adjusted book values for banking companies. (b) 2017 means calendar year 2016, similarly for 2018 and 2019 for these particular companies. (c) Exchange rate (Rs/US$)= 64.37 Source: Company, Bloomberg, Kotak Institutional Equities estimates

106

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May 8, May 8, 2017

Disclosures

a sufficient able regulation(s) of of the following Asof March 2017 31, KOTAK INSTITUTIONAL EQUITIES RESEARCH in an advisory capacity in a merger or strategic transaction

vestment and rating price target,if any, no longer are in effect for this stock Percentageof companies covered by Kotak Equities,Institutional within the specified category. Percentageof companies within each category whichfor Kotak Institutional Equities and or its affiliates has provided investment banking services within the previousmonths. 12 The * above categories are defined as expectfollows: this = Buy We stock to deliver more than 15% returns theover next months; 12 Add = expectWe this stock to deliver5-15% returns over the next months; 12 Reduce =expectWe this stock to deliver -5-+5% returns over the next months; 12 =Sell expectWe this stock to deliver lessthan -5% returns over the next months. 12 targetOur prices are also on a 12-month horizon Thesebasis. ratings are used illustratively to comply with applicableregulations. As of Kotak 31/3/2017 Institutional EquitiesInvestment Research had investment ratings 192equity securities. on

SELL 1.6%

17.2%

his company. basis. 2.1% +5% returns over the next 12 months. 28.1%

- REDUCE 5 - is not meaningful and is therefore excluded. 15% returns over the next 12 months. 5% returns over the next months.12 The information is not available for display is not or applicable. - -

month horizon -

ADD 33.3% 3.6% Kotak SecuritiesKotak has suspended coverage of this company. to to deliver 5

Kotak SecuritiesKotak Research has suspended the investment and rating price target, if any,for this stock,because there is not

The information

Kotak SecuritiesKotak does not cover t

The investment and rating target price, any, if have been suspended temporarily. Such suspension is in compliance with applic

The coverage view represents each analyst’s fundamental overall outlook on the Sector.The coverage viewwill consist of one

Attractive, Neutral, Cautious. BUY 1.6% 21.4% We expect this stock to deliver

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

= Rated.Not 0% 20% 10% 60% 50% 40% 30% 70% Source:Kotak Institutional Equities Kotak Institutional Equities Research Equities KotakInstitutional coverage universe Distributionof ratings/investment banking relationships NA = NA AvailableNot or Applicable.Not = NM Meaningful.Not involving this company and in certain other circumstances. CS = Coverage Suspended. = NC Covered.Not = RatingRS Suspended. fundamental basis for determining an investment rating or target. The previous in and shouldnot be relied upon. Coverage view. designations: ratings/identifiers Other NR and/or Kotak Securities policies in circumstances when Securities Kotak or its affiliates is acting ADD. REDUCE. SELL. Our target prices are also on a 12 definitions Other Ratings other and definitions/identifiers ratings of Definitions BUY.

107 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 2017 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. 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