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1 EQUITY OUTLOOK

Earnings visibility: moment of truth approaches

The Nifty had been resilient with a 3% correction in May 2020 followed by a 6% bounce in June 2020 (as on 08 June 2020). A clear direction will emerge, we think, only when there is greater visibility on the damage to the economy from the COVD-19 crisis. The next 2-3 months are likely to be critical in assessing this damage. As the lockdown lifts, we will get a better sense of how aggregate demand recovers and what the structural damage to the financial system, labour markets and the SME sector is. Our base case assumption is of a slow recovery through FY21 and possible normalisation in FY22.

Key macro trends The large part of the lockdown stress is likely to be absorbed in Q1FY21. We believe that we will have to look at the quarterly progression of growth and earnings, rather than the aggregate for the year, as Q1 would be an aberration that would distort the numbers. The key factors we would watch out for are:

• The resilience of the financial system. RBI’s early action helped avoid the worst outcomes, but we expect a sharp spike in non-performing loans(NPLs) to hurt capital and impact growth capacity in the sector. In our blog earlier this month (Lending Financials - Medium- Term Challenges) we see financial sector stress as a hindrance to the recovery.

• The humanitarian crisis hitting migrant workers may leave a lasting damage. The reverse migration could be temporary, and workers may start to come back once economy recovers. There is a risk, however, that labour mobility becomes structurally sticky, which would create supply-side bottlenecks and hinder the recovery. It is too early to call but will be a key factor in the recovery.

• The lockdown has left the SME, including the goods transport sector, with deep balance sheet problems. The government’s Rs 3 trillion sovereign-guaranteed finance package could alleviate the pain, if successful. The worry is that many SMEs may not actually recover from the stress. This would have a negative impact on supply-side capacity, aggregate demand and blue-collar employment.

• The government has already announced a package, which was long on structural reform but lacked short-term stimuli. We would watch to see if there are further actions from the government, once the pain points become more visible as the lockdown gets lifted.

2 EQUITY OUTLOOK

• The agriculture sector is expected to be a bright spot in FY21. The sector was anyway on an upswing from the strong winter crop of FY20. This is now complemented by far-reaching reform by the government on simplifying agricultural markets, which should cut the intermediation costs and arrest the structural multi-decade decline in farm profitability. This could have far-reaching implications for rural consumption and could throw up a fresh set of opportunities for companies with capabilities in this sector.

Portfolio positioning The macro uncertainty and lack of earnings visibility continue to drive our cautious stance on portfolio positioning. We are adding, selectively to the portfolio, in companies with strong balance sheets, market leadership and opportunities in the new macro scenario. Our stock selection is generally driven by two underlying strategies: a) “buy on visibility”- we are waiting till we are convinced on the fundamentals and are unafraid to pay the premium that this strategy entails b) We are not emphasizing the rear-view mirror – our belief is that many earnings growth and multiples may structurally change for many sectors.

We may continue to hold cash for some time till risks in the system are more compressed.

Seshadri Sen Source : Head of Research Alchemy Research Alchemy Capital Management Pvt. Ltd Bloomberg

3 MARKET INSIGHTS

Alchemy view on Market trends, analysis, and way forward; with additional inputs from industry experts about the different aspects to superlative asset management.

1. Blogs – May & June 2020 • Lending Financials - Medium-Term Challenges Read More

• Economic Package – Impact on Markets Read More

2. Interview – May 2020* • Where do markets head after the push for an economy booster? Mr. Hiren Ved to ET Now

*Hyperlinks to other websites made available here are to be accessed at the sole risk of the user; the content, accuracy, opinions expressed, and other links provided by these resources are not investigated, verified, monitored, or endorsed by Alchemy. 4 Q4FY20 Performance of Portfolio Companies

The following table summarizes the performance of portfolio companies , which have declared results so far of Q4FY20 :

Sales (Rs Mn) EBITDA (Rs Mn) PAT (Rs Mn) Stock Q4FY20 Q4FY19 % chg Q4FY20 Q4FY19 % chg Q4FY20 Q4FY19 % chg Avenue Supermarts Ltd 61,935 50,334 23% 4,177 3,765 11% 2,869 2,029 41% 3M Ltd 6,732 7,428 -9% 763 1,027 -26% 601 603 0% Ltd 107,932 92,319 17% -13,878 15,051 - Ltd 68,159 74,205 -8% 12,528 12,270 2% 13,103 13,056 0% Ltd 46,834 33,953 38% 9,481 11,761 -19% Ltd 132,943 129,941 2% 1,933 8,378 -77% Bayer Crop Science Ltd 4,587 2,522 82% 582 -926 - 315 -571 - Ltd 237,223 206,022 15% 102,021 66,317 54% -4,710 -19,148 -75% Delta Corp Ltd 1,809 2,043 -11% 477 879 -46% 290 567 -49% Divi'S Laboratories Ltd 13,897 12,671 10% 4,445 4,650 -4% 3,145 3,262 -4% Dr. Reddy Laboratories Ltd 44,319 40,166 10% 6,610 5,345 24% 7,650 4,344 76% Ltd 21,538 24,526 -12% 4,765 5,779 -18% 3,033 3,959 -23% HDFC Bank Ltd 212,366 179,607 18% 69,277 58,851 18% Ltd 90,110 99,450 -9% 20,650 23,210 -11% 15,190 15,380 -1% ICICI Bank Ltd 131,818 112,411 17% 12,213 9,691 26% ICICI Lombard General Insurance Ltd 28,508 25,439 12% 2,822 2,277 24% ICICI Prudential Life Insurance Ltd 104,751 100,563 4% 1,795 2,614 -31% Ltd 50,487 43,179 17% 12,662 14,075 -10% L&T Technology Services Ltd 14,466 13,431 8% 2,683 2,492 8% 2,048 1,915 7% Multi Commodity Exchange Of India Ltd 1,053 791 33% 407 252 62% 655 610 7% Nestle India Ltd 33,058 29,824 11% 8,006 7,645 5% 5,254 4,627 14% Syngene International Ltd 6,073 5,339 14% 2,041 1,600 28% 1,202 1,001 20% Tata Consultancy Services Ltd 399,460 380,100 5% 109,760 100,730 9% 80,490 81,260 -1% Ltd 24,050 17,755 35% 3,084 1,743 77% 1,349 1,022 32% Tata Elxsi Ltd 4,389 4,051 8% 1,086 985 10% 821 713 15% Ltd 47,115 48,888 -4% 6,124 4,945 24% 3,431 3,483 -1% Ltd 7,228 6,687 8% 929 338 175% 26 160 -84% Ltd 19,938 22,500 -11% 2,714 2,836 -4% 1,260 1,308 -4% Ltd 16,764 13,591 23% 2,712 2,184 24% 549 395 39% V-Mart Retail Ltd 3,327 3,445 -3% 278 178 56% -84 -9 -833%

Source-Alchemy Research 5 ENTRY / EXIT RATIONALE

NEW STOCK ENTRIES IN MAY 2020

Bharti Airtel Ltd

• Telecom sector in India has seen consolidation in last 10 years and currently is three player market with top 2 players being and Airtel. • Top telecom players are now well positioned to shift gears in next 3- 5years which will be due to 1) Increase in ARPU 2) Low competitive intensity 3) Digitalisation & 4) Strong spectrum footprint • India's mobile revenues/GDP ratio is among the lowest as compared to countries with similar per capita GDP, implying scope for rise in ARPUs. This is expected to rise from the 0.7% levels in FY20 to at least 1% by FY25, closer to Philippines. This in turn should drive a doubling of sector revenues from an estimated US$19bn in FY20 to US$38bn in FY25E. • Telecom sector in India is Covid-19 resilient, despite customer behaviour impacted by lower disposable income and Covid-19 led restrictions. • We expect Bharti Airtel to benefit from the revival in industry revenues due to decent market share in India, robust balance sheet and strong execution • The company is expected to generate US$6bn free cash flows over next 3 years which should deleverage the balance sheet. • Premium valuations should sustain given the structural change in the industry and lower spectrum prices to drive ROCEs in the longer term. Factoring this, we are positive on Bharti Airtel and have added in our portfolio. • The key risks for Bharti Airtel are an adverse AGR ruling from the Supreme Court, delays in tariff increases due to competitive pressures, sharp increase in capex or a large acquisition.

Bayer Cropscience Ltd (Bayer)

• Bayer Crop Science is among the market leaders in India's agrochemical industry with an estimated double- digit market share of 12-14%. It also distributes agricultural seeds produced by sister company – Bayer Bioscience. It has recently acquired Monsanto India. • Bayer differentiates itself around several areas – Established brands and rich product portfolio across the complete value chain of seeds and agrochemicals, strong and wide distribution network with a sales force of 4000+, and steady new product launches that come from its parent's R&D. • Bayer AG & Monsanto have a rich global product portfolio with patents in health, seeds, and crop sciences. Bayer is gradually introducing some of these products in India. • Bayer’s senior management team underwent significant overhaul in FY19 post which company has taken several proactive steps which have started to show results from last few quarters in the form of better margins and cash collection metrics. • Covid-19 impact is limited for the rural economy and the farm sector and this is reflected in its Q4FY20 financial performance as well as recent channel checks on sales of various agri-inputs. • We expect earnings to grow at a healthy CAGR in next few years due to new product launches, and synergy benefits arising from the merger. 6 ENTRY / EXIT RATIONALE

• The key risks for Bayer Crop Science include 1) adverse impact on demand for key agrochemicals either due to poor conditions for agriculture (poor monsoon, low water reservoir levels) or higher preference for low priced generics, 2) disruption in supply of key raw materials from China and 3) conversion of draft proposal to ban 27 pesticides into a final order.

Dr. Reddy’s Laboratories Ltd (DRRD)

• We believe Dr Reddy’s Laboratories is well placed amongst the pharma players in India as its new management focus is on : 1. De-risking US generics by seeking partners in high-risk areas like bio generics and branded generics 2. Leveraging its strengths in API for cost competitiveness & as an independent revenue driver 3. Optimising its extensive portfolio across multiple markets, including leveraging its USFDA-approved portfolio for new markets 4. leveraging its significant past investments in the injectables space to access key global markets. DRRD has a strong product pipeline and filings gives a visibility of steady revenue for next 3 years. • DRRD is expected to post steady 3 Year earnings CAGR with double digit growth in core domestic market and US market • We believe that DRRD will continue to drive productivity improvements and focus on core therapeutic areas and extensions for its big brands • In the medium-to-long term, it will focus on ramping up biosimilars, through internal and partnered assets, and building differentiated products in relevant therapies, accompanied by a further increase of its base business. • Strong balance sheet and cash flow generation with moderation seen in capex requirement gives us visibility of improving return ratios. Hence, we added Dr. Reddy’s Laboratories to our portfolio. • The key risks for DRRD are escalation of regulatory issues by USFDA, steeper competition from generic players in domestic market and currency risk.

Tata Consumer Products Ltd (TCPL)

Tata Consumer Products is coming out of a difficult multi-year phase where it lost market share in its core tea businesses and its overseas acquisitions have been struggling for various reasons. As a result, it has lagged many of its consumer peers in growth and profitability. We see the tide turning in their favor for a number of reasons a) Their market share in the tea business has stabilized b) The merger with ’ consumer business is a strong opportunity to improve its market presence, with strong adjacency between the tea and salt categories c) They have taken strategic interventions in the overseas businesses to improve profitability.

7 ENTRY / EXIT RATIONALE

• Moreover, the company announced a change in senior management with the appointment of Mr Sunil D’Souza from Whirlpool in April. We see the potential for improved earnings momentum and stronger profitability driving a re-rating and narrowing TCPL’s valuation discount to consumer peers.

• Key risks for Tata Consumer Products are steep rise in competitive pressure, higher input prices, delays or failure of new launches, slowdown in urban or rural economy, adverse climatic conditions and aggressive acquisitions/tie-ups.

EXITS IN MAY 2020

Godrej Consumer Products Ltd (GCPL)

• With structural top-line growth outlook appearing hazy in both domestic and international businesses, there is no indication of any material improvement in the pace of earnings growth which has almost halved in the past five years ending FY20 where earnings growth has been a measly 9.8% CAGR on an even more modest 3.7% CAGR sales growth. • In addition to the sustained weak earnings growth, GCPL’s RoE of less than 20% is also far lower than peers. • GCPL’s International business in Africa and US which sell ethnic hair care products would be likely affected badly due to lockdowns imposed by African countries as well as titration of consumption (down-trading, using dry hair care products for longer before changing etc. • GCPL’s 20-30% of total portfolio has material salon salience which we believe will take time to recover to pre-covid levels. Hence, we exited the stock.

TCNS Clothing Ltd

• TCNS Clothing is the owner of women wear brands like W, Wishful, and Aurelia. While the company’s brands have a strong positioning in various segments and have grown at a healthy pace in the past across different channels, demand has come down in recent quarters due to – economic slowdown, down-trading by consumers in light of premium pricing by TCNS Clothing, increasing competitive intensity from lower priced private labels of apparel retailers and online players. • Covid-related shutdowns and resultant loss of revenues significantly impacts the growth momentum in next few quarters and drive significant negative operating leverage resulting in sharp earnings de-growth as well as risk of inventory write-down and provisioning. • While its net cash balance sheet and various efforts to cut costs will help it tide through the challenging phase, earnings growth will take a serious hit in coming years. Thus, we decided to exit the stock for better opportunities.

8 PMS PRODUCT PERFORMANCE Alchemy High Growth Select Stock (AHGSS)

Investment Objective*: The objective is to generate long term returns by investing in equities and equity related instruments, across market capitalizations, with a mid cap bias. Fund Manager: Mr. Hiren Ved joined Alchemy in 1999, spearheading the firm’s asset management business. With over two decades of experience in equity markets, he has carved a niche in “Bottom-up” research and stock picking with extensive coverage of companies across various sectors. A certified cost accountant, he has over 25 years experience in the Indian equity markets. He is a Co-Founder and Chief Investment Officer at Alchemy.

Strategy *at a glance: Category: Equity Concentrated Fund Style: Multi-cap Growth Type: Open Ended Launch Date: 19th Dec 2008 Benchmark: S&P BSE 500 Min investment: Rs. 3 Crores

Portfolio Action:

During the month of May 2020 , the portfolio added Bharti Airtel Ltd, Bayer Cropscience Ltd, Tata Consumer Products Ltd and Dr Redyy’s Laboratories Ltd. The portfolio exited from Godrej Consumer Products Ltd and TCNS Clothing Ltd

* The product’s objective and strategy are merely a target and there are no assurance that it would be achieved. 9 * Please read the Disclosure Document/ Client Agreement for complete details of the terms of the strategy. PMS PRODUCT PERFORMANCE Alchemy High Growth Select Stock (AHGSS)

100 AHGSS (Daily NAV) 80 S&P BSE 500 (Recalibrated to value of 10 since inception) 60 17.1% 40

20 11.1%

0

Jan-19 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Jan-20

Sep-18 Sep-09 Sep-10 Sep-11 Sep-12 Sep-13 Sep-14 Sep-15 Sep-16 Sep-17 Sep-19

May-13 May-17 May-09 May-10 May-11 May-12 May-14 May-15 May-16 May-18 May-19 May-20

Returns shown in above graph are CAGR .

100% CALENDAR YEAR RETURNS 80%

60%

40%

20%

0%

-20%

-40% YTD 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 AHGSS 1.2% 55.6% 21.9% -12.8% 59.9% 3.7% 63.8% 16.5% 3.7% 46.4% -0.2% 4.2% -27.4% S&P BSE 500 -3.2% 90.2% 16.4% -27.4% 31.2% 3.3% 37.0% -0.8% 3.8% 35.9% -3.1% 7.8% -20.8% Returns shown in above graph are absolute returns.

Data as on 31 May 2020

* Inception Date : 19-Dec-2008

• Past performance is no assurance for future returns. • Returns presented are net of fees and expenses. • The above performance figures are aggregate of all clients; the investor’s actual portfolio may differ. 10 PMS PRODUCT PERFORMANCE Alchemy High Growth Select Stock (AHGSS)

GICS SECTOR ALLOCATION (%) † MARKET CAP ALLOCATION*

Consumer Staples 25.4% 16% Consumer Discretionary 17.4% 4% Financials 14.1% Health Care 11.1% Communication Services 5.4% 24% 56% Materials 3.9% Information Technology 3.8% Industrials 3.4% Large Cap Mid Cap Small Cap Cash & Equivalent

PERIODIC RETURNS # RATIO ANALYSIS

Alchemy High Benchmark Alchemy High Benchmark Period Growth Select S&P BSE 500 Parameter Growth Select Stock (Since Stock (Since Inception) Inception) 6 Months -27.5% -20.3% 1 Year -28.1% -20.0% Std. Dev. 16.5% 19.2% 2 Years -14.1% -8.3% 3 Years -3.1% -2.0% 5 Years 4.2% 2.4% Sharpe 0.7 0.3 7 Years 13.2% 7.6% 10 Years 15.0% 6.2% Beta 0.8 1.0 Since Inception^ 17.1% 11.1%

Data as on 31 May 2020 ^ Inception Date : 19-Dec-2008 * Market Cap as of Dec 31, 2019 from S&P BSE500 is considered which is Large cap->27279 Crs, Mid cap-2948 Crs to 27279 Crs, Small cap-<2948 Crs #Returns less than 1yr: Absolute, greater than 1yr: CAGR #Past performance is no assurance for future returns. Returns presented are net of fees and expenses. #The above performance figures are aggregate of all clients; the investor’s actual portfolio may differ. † Cash & cash equivalent :16% 11 Source : Bloomberg DISCLAIMER

General Risk factors

All investment products attract various kinds of risks. Please read the relevant Disclosure Document / Client Agreement carefully before investing.

General Disclaimers

The information and opinions contained in this report/ presentation have been obtained from sources believed to be reliable, but no representation or warranty, express or implied, is made that such information is accurate or complete.

Information and opinions contained in the report/ presentation are disseminated for the information of authorized recipients only, and are not to be relied upon as advisory or authoritative or taken in substitution for the exercise of due diligence and judgement by any recipient.

The information and opinions are not, and should not be construed as, an offer or solicitation to buy or sell any securities or make any investments.

Nothing contained herein, including past performance, shall constitute any representation or warranty as to future performance.

The client is solely responsible for consulting his/her/its own independent advisors as to the legal, tax, accounting and related matters concerning investments and nothing in this document or in any communication shall constitutes such advice.

The client is expected to understand the risk factors associated with investment & act on the information solely on his/her/its own risk. As a condition for providing this information, the client agrees that Alchemy Capital Management Pvt. Ltd., its Group or affiliates makes no representation and shall have no liability in any way arising to them or any other entity for any loss or damage, direct or indirect, arising from the use of this information.

This document and its contents are proprietary information of Alchemy Capital Management Pvt. Ltd and may not be reproduced or otherwise disseminated in whole or in part without the written consent.

Alchemy Capital Management Pvt. Ltd., B-4, Amerchand Mansion, 16 Madame Cama Road, 400 001. Ph: +91-22-66171700 CIN- U67120MH1999PTC119811, Email ID: [email protected] 12