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July 1, 2020 India 30-Jun 1-day 1-mo 3-mo Sensex 34,916 (0.1) 4.8 23.5 Nifty 10,302 (0.1) 4.8 24.8 Contents Global/Regional indices Dow Jones 25,813 0.8 1.3 23.3 Special Reports Nasdaq Composite 10,059 1.9 5.3 36.7 Strategy FTSE 6,170 (0.9) 0.1 13.1 Nikkei 22,300 0.1 1.1 23.4 Strategy: KIE's concentrated sentiment portfolio outperforms again Hang Seng 24,427 0.5 2.9 5.8 Daily Alerts KOSPI 2,130 1.0 3.1 26.4 Value traded – India Results Cash (NSE+BSE) 521 664 583 Derivatives (NSE) 10,901 7,749 4,610 ONGC: Recurring disappointment Deri. open interest 2,969 2,133 1,681 Petronet LNG: In-line performance; intact thesis

Tata Steel: Strong quarter but leverage stalls growth plans Forex/money market Company alerts Change, basis points 30-Jun 1-day 1-mo 3-mo

ICICI : Still comfortable Rs/US$ 75.5 (2) 2 (104)

10yr govt bond, % 6.3 - - (34) Jindal Steel and Power: JSP agrees to sell stake in Oman business–but will it go through? Net investment (US$ mn) 29-Jun MTD CYTD

Sector alerts FIIs (14) - (2,184) IT Services: June 2020 quarter preview: new strategies support new normal MFs 95 - 4,861 Top movers

Economy alerts Change, %

Best performers 30-Jun 1-day 1-mo 3-mo Economy: BOP: External matrix to remain firm in FY2021 GNP IN Equity 450 (3.7) 22.1 120.9

Economy: Fiscal situation in flux IHFL IN Equity 207 (4.4) 61.9 108.5

ARBP IN Equity 772 (2.2) 6.3 96.7

MM IN Equity 511 0.6 10.8 87.2

BHEL IN Equity 36 (0.1) 27.5 72.5

Worst performers

BOB IN Equity 49 (1.3) 14.5 (5.2)

COAL IN Equity 133 (1.5) (10.6) (4.7)

SBIN IN Equity 178 (0.4) 4.9 (4.3)

HUVR IN Equity 2,180 (0.1) 3.4 0.0

SIEM IN Equity 1,097 (0.2) (2.6) 1.1

[email protected] Contact: +91 22 6218 6427

For Private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES’ RATING SYSTEM AND OTHER DISCLOSURES. REFER TO THE END OF THIS MATERIAL. INDIA Strategy AlphaBet JULY 01, 2020 UPDATE BSE-30: 34,916

KIE’s concentrated sentiment portfolio outperforms again. KIE’s concentrated sentiment portfolio outperformed the index for a fourth consecutive month. Year-to-date, the concentrated sentiment portfolio has outperformed the index by 38%. The concentrated All-Season portfolio also outperformed the index marginally. Low-volatility and momentum factors underperformed the benchmark. Dr Reddy’s Laboratories and are new additions to July concentrated All-Season portfolio, replacing Power Grid and HDFC Bank.

QUICK NUMBERS

 Fourth consecutive Sentiment the only single factor to outperform in June month of outperformance for The sentiment portfolio outperformed the index for the fourth consecutive month. The other KIE concentrated single-factor portfolios underperformed the index. All single-factor portfolios, except sentiment portfolio momentum, have outperformed the benchmark YTD (Exhibit 1). We show that the underperformance of low-volatility and momentum factors is not unprecedented during  Concentrated recovery rallies after a large market drawdown event (Exhibits 2- 5). sentiment portfolio Muted performance for the All-Season portfolio has outperformed the index by 38% Even with most of the concentrated single-factor portfolios underperforming the benchmark, YTD the concentrated multi-factor All-Season portfolios outperformed the index marginally. The concentrated All-Season portfolio beat the benchmark by 0.9% while the broad All-Season  Concentrated All- portfolio underperformed by 2.7% (Exhibit 1). Year-to-date, the concentrated All-Season Season portfolio has portfolio has outperformed Nifty by 9.2% while the broad All-Season portfolio has outperformed the outperformed the benchmark by 2.2%. index by 9% YTD

Stocks with poor factor scores beat the benchmark

We also track an anti-factor portfolio, which consists of stocks with the worst multi-factor scores. During June 2020, the concentrated anti-factor portfolio outperformed the benchmark by 3.6% (Exhibit 1). YTD, the concentrated anti-factor portfolio’s performance is (-)20.7%, trailing the benchmark returns by 5.9%.

July 2020 changes to concentrated All-Season portfolio

July 2020 concentrated All-Season portfolio consists of (HUVR), Tech Mahindra (TECHM), (BRIT), Dr Reddy’s Laboratories (DRRD) and (INFO). DRRD and TECHM replace HDFC Bank (HDFCB) and Power Grid Corporation (PWGR). We show the scores of these stocks and their position within the universe in Exhibits 6-9. The anti-factor portfolio, which contains the stocks with the worst factor scores, has (TTMT), IndusInd Bank (IIB), (EIM), Mahindra & Mahindra (MM) and (AXSB). AlphaBet recommendations can differ from KIE analyst recommendations. Anurag Singh

[email protected] Contact: +91 22 6218 6427

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

PERFORMANCE UPDATE: SENTIMENT FACTOR CONTINUES TO OUTPERFORM

The AlphaBet sentiment portfolio outperformed the benchmark index for a fourth consecutive month. Other factors (momentum, low volatility and fundamental) underperformed Nifty Index in June 2020. The multi-factor portfolio, concentrated All- Season portfolio, also had higher returns than the benchmark in June. It has outperformed the benchmark by 9% YTD (Exhibit 1).

Exhibit 1: Sentiment factor’s good run continues Performance of single-factor and All-Season portfolios in June 2020

June 2020 returns (%) YTD returns (%) Active June returns (%) Active YTD returns (%) Nifty Index 7.6 (14.8) NA NA Concentrated All-season 8.5 (5.6) 0.9 9.2 Broad All-Season 4.8 (12.6) (2.7) 2.2 Concentrated fundamental 6.2 (3.0) (1.4) 11.8 Broad fundamental 6.0 (8.4) (1.6) 6.4 Concentrated low volatility 4.2 (11.1) (3.4) 3.7 Broad low volatility 3.3 (7.9) (4.3) 6.9 Concentrated momentum 1.4 (26.8) (6.2) (12.0) Broad momentum 4.1 (21.9) (3.5) (7.1) Concentrated sentiment 10.5 22.7 2.9 37.5 Broad sentiment 5.3 (10.0) (2.3) 4.8 Concentrated anti-factor 11.2 (20.7) 3.6 (5.9) Broad anti-factor 5.5 (6.7) (2.0) 8.1

Source: Bloomberg, Kotak Institutional Equities

The anti-factor portfolio, which selects stocks with the worst sentiment, volatility, momentum and fundamental scores, also outperformed the index once again. We show that during recovery rallies after a large drawdown, low-volatility and momentum factors underperform. On the other hand, stocks with low momentum scores and higher volatility outperform during recoveries. Thus, the outperformance of the anti-factor portfolio during the current recovery is not unexpected. However, over the full peak-to-peak (peak, followed by drawdown and recovery) cycle, the performance of anti-factor portfolio is extremely poor, while holding a portfolio of stocks with good momentum, sentiment, volatility and fundamental scores has been a winning proposition for investors. In Exhibit 2, we show the performance of AlphaBet suite during the period December 2007- September 2009. Before the Great Financial Crisis of 2008, Nifty reached its peak around December 2007. It had a drawdown of close to 60% in 2008. The first phase of recovery rally started in March 2009. In the March 2009-September 2009 period, Nifty index rose by close to 70%.

During the recovery, the anti-factor portfolio outperformed the benchmark and more than doubled in six months. On the other hand, while low-volatility and momentum portfolios also rose, they underperformed the index. The only single-factor which outperformed the index during the recovery rally was the sentiment factor. The multi-factor concentrated All- Season portfolio also outperformed the index minutely during the recovery (Exhibit 3).

Nifty returned (-)49% during the crash (we take the period from December 2007 to March 2009 as the crash period). Even as Nifty almost halved in this period, the performance of the anti-factor portfolio was even worse as it returned (-)65%. Thus, even after returning more than 100% during the recovery rally, the full period return for the anti-factor portfolio was (-)29%, compared to (-)13% for Nifty index. On the other hand, the multi-factor All-Season portfolio was essentially flat during the crash and ended the full period up 57%, outperforming the index by 70%. Fundamental, low-volatility and sentiment factors also outperformed the index during the crash and in the full period (Exhibit 4).

Thus, while the returns of anti-factor portfolio may look attractive during any recovery rally, over the full market cycle, the anti-factor portfolio underperforms the benchmark by a significant margin.

KOTAK INSTITUTIONAL EQUITIES RESEARCH 3 India Strategy

Exhibit 2: A breakdown of factor portfolio returns during market crash and recovery rally Performance of Nifty index and AlphaBet concentrated portfolios between December 2007 and September 2009

Mar 2009 - Sep 2009 Dec 2007 - Mar 2009 Total period (Dec 2007 - Sep 2009) Active returns Nifty 69.5% (48.6%) (12.8%) Concentrated momentum 41.6% (50.4%) (29.8%) (17.0%) Concentrated fundamental 57.2% (14.0%) 35.1% 47.9% Concentrated low-volatility 37.4% (28.1%) (1.2%) 11.5% Concentrated sentiment 84.9% (33.2%) 23.5% 36.3% Concentrated multi-factor 54.0% 2.0% 57.2% 69.9% Concentrated anti-factor 103.6% (65.0%) (28.8%) (16.0%)

Source: Bloomberg, Kotak Institutional Equities

Exhibit 3: The anti-factor portfolio outperformed during the recovery rally… Relative performance of AlphaBet concentrated portfolios, with respect to Nifty index, in the recovery rally of March 2009-September 2009

Anti-factor Fundamental Momentum Multi-factor Sentiment Low volatility

1.5

1.4

1.3

1.2

1.1

1.0

0.9

0.8 3/31/2009 4/30/2009 5/31/2009 6/30/2009 7/31/2009 8/31/2009 9/30/2009

Source: Bloomberg, Kotak Institutional Equities

4 KOTAK INSTITUTIONAL EQUITIES RESEARCH Strategy India

Exhibit 4: …but, it had underperformed a lot during the crash Relative performance of AlphaBet concentrated portfolios, with respect to Nifty index, in the market crash of December 2007-March 2009

Anti-factor Fundamental Momentum Multi-factor Sentiment Low volatility

2.1 1.9 1.7 1.5 1.3 1.1 0.9 0.7 0.5 Jul-08 Jan-08 Jan-09 Jun-08 Oct-08 Feb-08 Feb-09 Apr-08 Sep-08 Dec-07 Dec-08 Nov-08 Mar-08 Mar-09 Aug-08 May-08

Source: Bloomberg, Kotak Institutional Equities

KOTAK INSTITUTIONAL EQUITIES RESEARCH 5 India Strategy

JULY 2020 PORTFOLIOS

The stocks selected in the concentrated All-Season portfolio for the July 2020 portfolio are Britannia Industries (BRIT), Hindustan Unilever (HUVR), Dr Reddy’s Laboratories (DRRD), Infosys (INFO) and Tech Mahindra (TECHM). Dr Reddy’s Laboratories and Tech Mahindra are the new entrants to the portfolio, replacing Power Grid Corporation and HDFC Bank.

Exhibit 5 shows the top half of the Nifty50 Index, as sorted by the combined factor score. The tickers in red (top five) are a part of the concentrated All-Season portfolio.

Exhibit 5: DRRD and TECHM are the new additions to KIE concentrated All-Season portfolio Top half of Nifty50 Index, as sorted by combined factor score; stock names in red are part of the July 2020 concentrated All-Season portfolio

BBG Ticker Stock name Sentiment Fundamental Momentum Low volatility Multi-factor BRIT IN EQUITY Britannia Industries Ltd 1.4 0.3 1.1 1.0 1.0 HUVR IN EQUITY Hindustan Unilever Ltd 0.2 1.1 0.9 1.7 1.0 DRRD IN EQUITY Dr Reddy's Laboratories Ltd 0.0 (0.1) 2.1 0.7 0.7 INFO IN EQUITY Infosys Ltd (0.1) 0.8 0.3 1.1 0.5 TECHM IN EQUITY Tech Mahindra Ltd 0.7 0.5 (0.1) 0.9 0.5 HCLT IN EQUITY HCL Technologies Ltd 0.2 0.3 0.7 0.8 0.5 IN EQUITY Cipla Ltd/India 0.4 (0.0) 1.2 0.4 0.5 ITC IN EQUITY ITC Ltd 0.1 1.0 0.1 0.6 0.5 HDFCB IN EQUITY HDFC Bank Ltd 0.2 0.8 (0.2) 1.0 0.4 TCS IN EQUITY Tata Consultancy Services Ltd 0.5 0.6 0.2 0.4 0.4 COAL IN EQUITY Ltd 0.6 1.3 (0.3) (0.0) 0.4 PWGR IN EQUITY Power Grid Corp of India Ltd 0.2 0.3 (0.3) 1.2 0.4 BJAUT IN EQUITY Ltd 0.2 0.3 0.4 0.4 0.3 RIL IN EQUITY Ltd 0.6 (0.2) 0.5 0.3 0.3 BHARTI IN EQUITY Ltd 0.2 (1.6) 2.0 0.4 0.2 SUNP IN EQUITY Sun Pharmaceutical Industries Ltd 0.3 (0.6) 1.1 0.0 0.2 APNT IN EQUITY Ltd (2.3) 0.4 1.2 1.4 0.2 UTCEM IN EQUITY UltraTech Cement Ltd (0.1) (0.1) 0.4 0.4 0.2 NTPC IN EQUITY NTPC Ltd 0.2 (0.3) 0.0 0.6 0.1 LT IN EQUITY Larsen & Toubro Ltd 0.1 0.5 (0.3) 0.1 0.1 HDFC IN EQUITY Housing Development Finance Corp Ltd (0.5) (0.1) (0.1) 0.8 0.0 ADSEZ IN EQUITY Adani Ports & Special Economic Zone Ltd 0.6 (0.9) 0.0 0.1 (0.0) ICICIBC IN EQUITY ICICI Bank Ltd 0.2 (0.4) (0.0) 0.1 (0.0) WPRO IN EQUITY Ltd 0.4 0.2 (0.1) (0.8) (0.1) MSIL IN EQUITY India Ltd (0.4) (0.1) 0.3 (0.0) (0.1)

Source: Bloomberg, Kotak Institutional Equities

Exhibit 6 shows the volatility metrics of the five stocks, alongside the bar chart of the same for the benchmark. The chart demarcates the four quartiles (color coded) for the three metrics included in our volatility factor – price volatility, downside deviation and max drawdown. We also show the relative position of our All-Season portfolio picks and which quartile they fall into. We truncate the metrics by clipping the edges at both ends. That is, to reduce the effect of outliers, we cap the metrics at 90th and 10th percentile, respectively.

We also show similar metrics for momentum, fundamental and sentiment scores (see Exhibits 7-9).

6 KOTAK INSTITUTIONAL EQUITIES RESEARCH Strategy India

Exhibit 6: All stocks in conc. All-Season portfolio have reasonably good low-volatility characteristics Concentrated All-Season portfolio, relative to benchmark, on volatility metrics

Source: Bloomberg, Kotak Institutional Equities

Exhibit 7: DRRD has a very high momentum score, reflecting its higher long-term (12-month) returns Concentrated All-Season portfolio, relative to benchmark, on momentum metrics

Source: Bloomberg, Kotak Institutional Equities

KOTAK INSTITUTIONAL EQUITIES RESEARCH 7 India Strategy

Exhibit 8: INFO has decent operating performance, high stability and not-very-expensive valuation Concentrated All-Season portfolio, relative to benchmark, on fundamental metrics

Source: Bloomberg, Kotak Institutional Equities

Exhibit 9: BRIT continues to have good sentiment revision; TECHM also has a high sentiment score Concentrated All-Season portfolio, relative to benchmark, on sentiment metrics

Source: Bloomberg, Kotak Institutional Equities

We also show the portfolio for the broad and concentrated All-Season portfolio, along with the different single-factor portfolios in Exhibits 10-19.

8 KOTAK INSTITUTIONAL EQUITIES RESEARCH Strategy India

Exhibit 10: DRRD and TECHM are new entrants to the concentrated All-Season portfolio The concentrated All-Season portfolio, as of June 30, 2020

Stock name Portfolio Weight KIE analyst recommendation Hindustan Unilever Ltd 30.0% ADD Tech Mahindra Ltd 25.6% BUY Britannia Industries Ltd 16.2% REDUCE Dr Reddy's Laboratories Ltd 14.7% SELL Infosys Ltd 13.5% BUY

Source: Bloomberg, Kotak Institutional Equities

Exhibit 11: More sector diversity in the broad All-Season portfolio The broad All-Season portfolio, as of June 30, 2020

Stock name Portfolio Weight KIE analyst recommendation Hindustan Unilever Ltd 14.1% ADD Asian Paints Ltd 12.1% REDUCE Tech Mahindra Ltd 10.3% BUY Power Grid Corp of India Ltd 9.5% BUY Cipla Ltd/India 6.8% BUY Britannia Industries Ltd 6.6% REDUCE Dr Reddy's Laboratories Ltd 5.9% SELL Housing Development Finance Corp Ltd 5.7% NR ITC Ltd 5.6% BUY Infosys Ltd 5.5% BUY HCL Technologies Ltd 4.7% ADD Hero MotoCorp Ltd 3.8% ADD Tata Consultancy Services Ltd 3.4% REDUCE Bajaj Auto Ltd 3.2% BUY Coal India Ltd 2.9% BUY

Source: Bloomberg, Kotak Institutional Equities

Exhibit 12: Two pharma stocks in the momentum portfolio, reflecting strong sector performance The concentrated momentum portfolio, as of June 30, 2020

Stock name Portfolio Weight KIE analyst recommendation Asian Paints Ltd 30.0% REDUCE Nestle India Ltd 25.6% REDUCE Cipla Ltd/India 17.5% BUY Dr Reddy's Laboratories Ltd 15.4% SELL Bharti Airtel Ltd 11.5% BUY

Source: Bloomberg, Kotak Institutional Equities

KOTAK INSTITUTIONAL EQUITIES RESEARCH 9 India Strategy

Exhibit 13: Consumer and pharma focus in the broad momentum portfolio The broad momentum portfolio, as of June 30, 2020

Stock name Portfolio Weight KIE analyst recommendation Hindustan Unilever Ltd 15.2% ADD Asian Paints Ltd 13.0% REDUCE Nestle India Ltd 10.7% REDUCE UltraTech Cement Ltd 7.5% BUY Cipla Ltd/India 7.3% BUY Britannia Industries Ltd 7.1% REDUCE Dr Reddy's Laboratories Ltd 6.4% SELL Infosys Ltd 5.9% BUY HCL Technologies Ltd 5.1% ADD Bharti Airtel Ltd 4.8% BUY Reliance Industries Ltd 4.6% BUY Tata Consultancy Services Ltd 3.7% REDUCE Sun Pharmaceutical Industries Ltd 3.1% ADD Bharti Infratel Ltd 2.9% BUY ICICI Bank Ltd 2.6% BUY

Source: Bloomberg, Kotak Institutional Equities

Exhibit 14: No change in composition of conc. low-volatility portfolio for second consecutive month The concentrated low volatility portfolio, as of June 30, 2020

Stock name Portfolio Weight KIE analyst recommendation Hindustan Unilever Ltd 27.7% ADD Asian Paints Ltd 23.7% REDUCE Nestle India Ltd 19.3% REDUCE Power Grid Corp of India Ltd 18.6% BUY Infosys Ltd 10.7% BUY

Source: Bloomberg, Kotak Institutional Equities

Exhibit 15: The broad low-volatility portfolio is well-diversified across sectors The broad low volatility portfolio, as of June 30, 2020

Stock name Portfolio Weight KIE analyst recommendation Hindustan Unilever Ltd 12.8% ADD Asian Paints Ltd 11.0% REDUCE Tech Mahindra Ltd 9.4% BUY Nestle India Ltd 9.0% REDUCE Power Grid Corp of India Ltd 8.6% BUY Cipla Ltd/India 6.2% BUY Britannia Industries Ltd 6.0% REDUCE Dr Reddy's Laboratories Ltd 5.4% SELL Housing Development Finance Corp Ltd 5.1% NR ITC Ltd 5.1% BUY Infosys Ltd 5.0% BUY HDFC Bank Ltd 4.9% BUY NTPC Ltd 4.3% BUY HCL Technologies Ltd 4.3% ADD Bajaj Auto Ltd 2.9% BUY

Source: Bloomberg, Kotak Institutional Equities

10 KOTAK INSTITUTIONAL EQUITIES RESEARCH Strategy India

Exhibit 16: Three changes to the concentrated sentiment portfolio The concentrated sentiment portfolio, as of June 30, 2020

Stock name Portfolio Weight KIE analyst recommendation Britannia Industries Ltd 30.0% REDUCE Tech Mahindra Ltd 30.0% BUY Vedanta Ltd 20.0% BUY Ltd 10.8% BUY Ltd 9.3% BUY

Source: Bloomberg, Kotak Institutional Equities

Exhibit 17: Diversified sector exposure in the broad sentiment portfolio The broad sentiment portfolio, as of June 30, 2020

Stock name Portfolio Weight KIE analyst recommendation Tech Mahindra Ltd 18.8% BUY Nestle India Ltd 18.0% REDUCE Britannia Industries Ltd 12.0% REDUCE Reliance Industries Ltd 7.8% BUY Adani Ports & Special Economic Zone Ltd 5.9% BUY Indian Oil Corp Ltd 5.4% BUY Vedanta Ltd 5.4% BUY Sun Pharmaceutical Industries Ltd 5.3% ADD Coal India Ltd 5.2% BUY Bharti Infratel Ltd 4.9% BUY Corp Ltd 3.1% BUY Hindalco Industries Ltd 2.9% BUY Bajaj Finserv Ltd 2.5% BUY UPL Ltd 1.7% SELL IndusInd Bank Ltd 1.4% ADD

Source: Bloomberg, Kotak Institutional Equities

Exhibit 18: ITC replaces HDFCB in the concentrated fundamental portfolio The concentrated fundamental portfolio, as of June 30, 2020 Stock name Portfolio Weight KIE analyst recommendation Hindustan Unilever Ltd 30.0% ADD ITC Ltd 22.7% BUY Infosys Ltd 22.0% BUY Tata Consultancy Services Ltd 13.7% REDUCE Coal India Ltd 11.6% BUY

Source: Bloomberg, Kotak Institutional Equities

KOTAK INSTITUTIONAL EQUITIES RESEARCH 11 India Strategy

Exhibit 19: A well-diversified broad fundamental portfolio in terms of sector exposure The broad sentiment portfolio, as of June 30, 2020

Stock name Portfolio Weight KIE analyst recommendation Hindustan Unilever Ltd 15.5% ADD Asian Paints Ltd 13.3% REDUCE Tech Mahindra Ltd 11.4% BUY Power Grid Corp of India Ltd 10.5% BUY Britannia Industries Ltd 7.2% REDUCE ITC Ltd 6.2% BUY Infosys Ltd 6.0% BUY HCL Technologies Ltd 5.2% ADD Reliance Industries Ltd 4.7% BUY Hero MotoCorp Ltd 4.1% ADD Tata Consultancy Services Ltd 3.8% REDUCE Bajaj Auto Ltd 3.6% BUY Larsen & Toubro Ltd 3.3% BUY Coal India Ltd 3.2% BUY Oil & Natural Gas Corp Ltd 2.1% SELL

Source: Bloomberg, Kotak Institutional Equities

12 KOTAK INSTITUTIONAL EQUITIES RESEARCH SELL ONGC (ONGC) Oil, Gas & Consumable Fuels JULY 01, 2020 RESULT Sector view: Attractive

Recurring disappointment. ONGC’s 4QFY20 performance was below expectations CMP (`): 81 led by lower oil and gas sales volumes and a sharp jump in operating costs and DD&A Fair Value (`): 60 expenses. Reiterate SELL rating on the stock with FV of Rs60 given (1) expected sharp BSE-30: 34,916 decline in domestic gas prices, (2) recurring disappointment on volumes (3) elevated operating/ capex costs and (4) policy apathy amid weak oil cycle. Our reverse valuation exercise suggests the stock is already discounting crude price recovering to ~US$48/bbl.

ONGC Stock data Forecasts/valuations 2020 2021E 2022E 52-week range (Rs) (high,low) 170-50 EPS (Rs) 13.5 3.8 7.2 Mcap (bn) (Rs/US$) 1,024/13.6 EPS growth (%) (42.9) (71.7) 89.6 ADTV-3M (mn) (Rs/US$) 2,108/28 P/E (X) 6.0 21.4 11.3 Shareholding pattern (%) P/B (X) 0.4 0.4 0.4 Promoters 60.4 EV/EBITDA (X) 2.8 4.7 3.8 FIIs 7.6 RoE (%) 7.3 2.1 3.8 MFs/BFIs 7/11 Div. yield (%) 6.1 2.3 3.7 Price performance (%) 1M 3M 12M Sales (Rs bn) 1,782 1,491 1,696 Absolute (2) 19 (52) EBITDA (Rs bn) 630 372 452 Rel. to BSE-30 (9) 1 (45) Net profits (Rs bn) 169 48 91

Lower-than-expected volumes, higher costs and lower other income mars 4QFY20 performance

ONGC’s EBITDA declined 30% qoq to Rs85.9 bn in 4QFY20 as lower-than-expected 4% qoq rise in crude sales volumes was more than offset by (1) 18% qoq decline in crude realization to US$49/bbl, (2) 3% qoq decline in gas and VAP volumes and (3) sharp jump in operating costs. PBT declined 75% qoq to Rs10.1 bn, including impairment of Rs15.7 bn. ONGC reported net loss of Rs31 bn, further impacted by an additional impairment charge of Rs49 bn attributed to the implication on business environment due to Covid-19. Consolidated net loss was higher at Rs61.9 bn, including OVL’s net loss of Rs20.7 bn, MRPL’s net loss of Rs16 bn and modest profits from HPCL. Cash capex increased to Rs336 bn in FY2020 from Rs264 bn in FY2019.

FY2020 marred by lower volumes, oil prices, other income and higher DD&A costs

In FY2020, ONGC’s EBITDA declined 17% yoy to Rs492.9 bn reflecting (1) 5% decline in oil and gas sales volumes and (2) 14% decline in crude realization, which was partly offset by 8% increase in domestic gas price. Adjusted net income declined 38% yoy to Rs166.8 bn (EPS of Rs13.3) impacted by (1) a sharp increase in depreciation costs and impairment and (2) decline in other income. Reported standalone net income was lower at Rs134.4 bn including additional impairment charge. Reported consolidated net income was lower at Rs109.1 bn (EPS of Rs8.7), as net income of Rs4.5 bn from OVL and Rs26.4 bn from HPCL, which was offset by net loss of Rs27.1 bn from MRPL and negative contribution from other subsidiaries/JVs during FY2020. Consolidated cash capex increased to Rs550 bn in FY2020 from Rs428 bn in FY2019.

Revise EPS estimates; retain SELL as stock discounting ~US$48/bbl of crude price Tarun Lakhotia We revise our consolidated EPS estimates to Rs3.6 in FY2021 and Rs7 in FY2022 from Rs0.1 and Rs7.1 respectively factoring in (1) higher Dated Brent crude price assumption of US$40/bbl in FY2021 from US$35/bbl earlier, (2) revised exchange rate forecasts, (3) lower oil and gas Hemang Khanna sales volumes and (4) other minor changes. We retain our SELL rating on the stock with an unchanged fair value of Rs60, based on 11X P/E multiple to FY2022E EPS plus the value of investments and write-off of acquisition cost for Area 1 block in Mozambique. Our reverse valuation suggests that the stock is already discounting crude price recovering to ~US$48/bbl.

[email protected] Contact: +91 22 6218 6427

For Private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES’ RATING SYSTEM AND OTHER DISCLOSURES, REFER TO THE END OF THIS MATERIAL. Oil, Gas & Consumable Fuels ONGC

Exhibit 1: ONGC’s interim results, March fiscal year-ends (Rs mn)

(% chg.) yoy 4QFY20 4QFY20E 4QFY19 3QFY20 4QFY20E 4QFY19 3QFY20 FY2020 FY2019 (% chg.) FY2021E Net sales 214,562 209,522 267,585 237,101 2.4 (19.8) (9.5) 962,136 1,096,546 (12.3) 659,689 Total expenditure (128,683) (117,499) (143,874) (114,118) 9.5 (10.6) 12.8 (469,267) (501,919) (6.5) (369,660) Increase/(decrease) in stock in trade (4,678) — (302) 2,047 (2,470) 1,663 — Raw materials (a) (5,882) (5,699) (6,268) (6,681) 3.2 (6.2) (12.0) (25,881) (22,238) 16.4 (19,652) Staff expenditure (6,115) (6,473) (7,828) (6,674) (5.5) (21.9) (8.4) (25,203) (27,061) (6.9) (27,094) Statutory levies (48,070) (45,234) (71,879) (56,671) 6.3 (33.1) (15.2) (225,708) (265,004) (14.8) (151,503) Other expenditure (63,938) (60,093) (57,597) (46,139) 6.4 11.0 38.6 (190,004) (189,278) 0.4 (171,411) EBITDA 85,879 92,023 123,710 122,983 (6.7) (30.6) (30.2) 492,869 594,627 (17.1) 290,030 Other income 13,256 23,673 22,503 14,025 (44.0) (41.1) (5.5) 61,050 75,190 (18.8) 59,324 Interest (8,695) (7,196) (5,337) (6,264) 20.8 62.9 38.8 (28,237) (24,921) 13.3 (26,260) DD&A (80,370) (68,539) (85,084) (70,759) 17.3 (5.5) 13.6 (273,005) (245,355) 11.3 (246,048) Depletion (25,396) (35,677) (33,000) (44,482) (28.8) (23.0) (42.9) (134,159) (130,166) 3.1 (145,189) Depreciation (8,920) (8,854) (4,080) (8,910) 0.7 118.6 0.1 (35,150) (15,690) 124.0 (34,609) Dry wells written off (26,434) (16,424) (26,788) (14,846) 60.9 (1.3) 78.1 (69,958) (69,055) 1.3 (47,500) Survey expenses (3,950) (7,585) (9,465) (2,331) (47.9) (58.3) 69.5 (16,879) (18,514) (8.8) (18,750) Impairment loss and others (15,670) 0 (11,750) (190) (16,860) (11,930) 0 Pretax profits 10,070 39,962 55,793 59,986 (74.8) (82.0) (83.2) 252,677 399,540 (36.8) 77,044 Extraordinary/prior-period adjustment (48,991) ——— (48,991) — — Current tax (8,478) (12,310) (12,190) (12,109) (70,487) (111,420) (13,583) Deferred tax 16,415 1,576 (3,157) (6,360) 1,246 (20,962) (3,852) Net income (30,983) 29,228 40,446 41,516 (206.0) (176.6) (174.6) 134,445 267,158 (49.7) 59,609 Adjusted net income 8,017 29,228 40,446 41,516 (72.6) (80.2) (80.7) 166,782 267,158 (37.6) 59,609 Adjusted EPS (Rs) 0.6 2.3 3.2 3.3 (72.6) (80.2) (80.7) 13.3 21.2 (37.6) 4.7 Tax rate (%) 20.4 26.9 27.5 30.8 34.0 33.1 22.6

Volume data Subsidy loss — ——— —— — Crude production ex JVs ('000 tons) 5,240 5,134 5,135 2.1 2.0 20,628 21,042 (2.0) Crude production - JVs ('000 tons) 579 766 687 (24.4) (15.7) 2,725 3,188 (14.5) Gas production ex JVs (mcm) 5,828 6,258 5,847 (6.9) (0.3) 23,748 24,674 (3.8) Gas production - JVs (mcm) 211 299 326 (29.4) (35.3) 1,149 1,135 1.2 Crude production ('000 tons) 5,819 5,900 5,822 (1.4) (0.1) 23,353 24,230 (3.6) Gas production (mcm) 6,039 6,557 6,173 (7.9) (2.2) 24,897 25,809 (3.5) Crude sales ex JVs ('000 tons) 4,693 4,781 4,581 4,391 (1.8) 2.4 6.9 17,977 18,523 (2.9) 17,977 Crude sales - JVs ('000 tons) 741 847 1,279 825 (12.5) (42.1) (10.2) 3,360 3,979 (15.6) 4,060 Gas sales ex JVs (mcm) 4,517 4,725 4,964 4,574 (4.4) (9.0) (1.2) 18,528 19,597 (5.5) 18,529 Gas sales - JVs (mcm) 146 235 253 251 (38.0) (42.3) (41.8) 874 885 (1.2) 1,207 Crude sales ('000 tons) 5,434 5,628 5,860 5,216 (3.4) (7.3) 4.2 21,337 22,502 (5.2) 22,037 Gas sales (mcm) 4,663 4,960 5,217 4,825 (6.0) (10.6) (3.4) 19,402 20,482 (5.3) 19,736 LPG (000 tons) 260 261 264 260 1,011 1,109 1,036 Naphtha/NGL (000 tons) 274 265 257 284 1,176 1,154 1,177 C2/C3/C4 (000 tons) 304 322 324 314 1,224 1,194 1,250 SKO (000 tons) 5 22 22 10 55 72 55 Others (000 tons) 23 21 17 22 92 72 92 Total VAP sales ('000 tons) 866 891 884 890 (2.8) (2.0) (2.7) 3,558 3,601 (1.2) 3,610

Pricing data Gross crude price realization (US$/bbl) 49.0 50.9 61.9 59.7 (3.6) (20.9) (17.9) 58.6 68.2 (14.0) 37.8 Domestic gas price (US$/mn BTU) 3.6 3.6 3.7 3.6 0.0 (3.8) 0.0 3.8 3.6 7.8 2.3

Notes: (a) Represents consumption of stores & spares.

Source: Company, Kotak Institutional Equities estimates

14 KOTAK INSTITUTIONAL EQUITIES RESEARCH ONGC Oil, Gas & Consumable Fuels

Exhibit 2: ONGC’s own crude production has moderated in recent months Daily crude production volumes from ONGC's fields, April 2012 onwards (ktoe/d)

(ktoe/d) Crude oil production 70

60

50

40

30

20

10

0 Jun-12 Jun-13 Jun-14 Jun-15 Jun-16 Jun-17 Jun-18 Jun-19 Oct-12 Feb-13 Oct-13 Feb-14 Oct-14 Feb-15 Oct-15 Feb-16 Oct-16 Feb-17 Oct-17 Feb-18 Oct-18 Feb-19 Oct-19 Feb-20 Apr-12 Apr-13 Apr-14 Apr-15 Apr-16 Apr-17 Apr-18 Apr-19 Apr-20 Dec-12 Dec-13 Dec-14 Dec-15 Dec-16 Dec-17 Dec-18 Dec-19 Aug-12 Aug-13 Aug-14 Aug-15 Aug-16 Aug-17 Aug-18 Aug-19

Source: MoPNG, Kotak Institutional Equities

Exhibit 3: ONGC’s own gas production has moderated in the recent months Daily gas production volumes from ONGC's fields, April 2012 onwards (mcm/d)

(mcm/d) Natural gas production 80

70

60

50

40

30

20

10

0 Jun-12 Jun-13 Jun-14 Jun-15 Jun-16 Jun-17 Jun-18 Jun-19 Oct-12 Oct-13 Oct-14 Oct-15 Oct-16 Oct-17 Oct-18 Oct-19 Feb-13 Feb-14 Feb-15 Feb-16 Feb-17 Feb-18 Feb-19 Feb-20 Apr-12 Apr-13 Apr-14 Apr-15 Apr-16 Apr-17 Apr-18 Apr-19 Apr-20 Dec-12 Dec-13 Dec-14 Dec-15 Dec-16 Dec-17 Dec-18 Dec-19 Aug-12 Aug-13 Aug-14 Aug-15 Aug-16 Aug-17 Aug-18 Aug-19

Source: MoPNG, Kotak Institutional Equities

KOTAK INSTITUTIONAL EQUITIES RESEARCH 15 Oil, Gas & Consumable Fuels ONGC

Exhibit 4: OVL’s volumes declined modestly qoq Production volumes of OVL, March fiscal year-ends, 2018-20

FY2018 1QFY19 2QFY19 3QFY19 4QFY19 FY2019 1QFY20 2QFY20 3QFY20 4QFY20 Crude oil (mn tons) Vietnam, Block 06.1 0.022 0.005 0.005 0.030 — 0.016 0.003 0.003 0.003 0.002 Sudan, GNOP 0.282 0.066 0.068 0.063 0.060 0.257 0.058 0.039 —— Sudan, Block 5A —— 0.008 0.045 0.078 0.131 0.106 0.144 0.165 0.147 Russia, Sakhalin-1 1.856 0.528 0.624 0.663 0.674 2.489 0.639 0.640 0.640 0.636 Columbia, MECL 0.514 0.139 0.135 0.106 0.178 0.558 0.166 0.168 0.165 0.173 Venezuela, Sancristobal 0.348 0.070 0.067 0.065 0.055 0.257 0.050 0.043 0.031 0.023 Venezuela, Carabobo 0.154 0.031 0.029 0.030 0.024 0.114 0.025 0.020 0.022 0.019 ACG fields 0.762 0.168 0.165 0.163 0.160 0.656 0.145 0.154 0.147 0.149 Imperial Energy 0.257 0.055 0.054 0.050 0.048 0.207 0.054 0.050 0.047 0.045 Russia, Vankor 4.444 1.055 1.060 1.049 0.976 4.140 0.935 0.894 0.853 0.810 Brazil, BC-10 0.663 0.133 0.106 0.138 0.138 0.515 0.118 0.134 0.145 0.145 Lower Zakum,UAE 0.051 0.176 0.190 0.205 0.186 0.757 0.190 0.197 0.211 0.202 Total crude oil 9.302 2.426 2.511 2.607 2.577 10.097 2.489 2.486 2.429 2.351 Natural gas (bcm) Vietnam, Block 06.1 1.403 0.368 0.333 0.376 0.473 1.550 0.501 0.492 0.437 0.418 Russia, Sakhalin-1 0.594 0.129 0.116 0.182 0.195 0.622 0.131 0.110 0.182 0.194 Brazil, BC-10 0.04 0.008 0.007 0.009 0.009 0.033 0.008 0.008 0.009 0.010 A1 & A3 Myanmar 0.828 0.206 0.063 0.177 0.251 0.697 0.263 0.263 0.277 0.253 Russia, Vankor 1.747 0.425 0.430 0.405 0.400 1.660 0.392 0.367 0.372 0.358 ACG, MECL, IEC & PIVSA 0.198 0.043 0.045 0.045 0.041 0.174 0.045 0.047 0.044 0.045 Total natural gas 4.811 1.179 0.994 1.194 1.369 4.736 1.340 1.287 1.321 1.278

Source: Company, Kotak Institutional Equities

Exhibit 5: We expect sharp decline in domestic gas prices in the upcoming revisions Domestic gas price, 2HFY15 onwards (US$/mn BTU)

(US$/mn BTU) India domestic gas price (NCV) 6 5.6 5.2 5 4.2 4.1 4 3.7 3.6 3.4 3.2 3.4 2.8 2.8 3 2.7 2.0 2 1.7

1

0 2HFY15 1HFY16 2HFY16 1HFY17 2HFY17 1HFY18 2HFY18 1HFY19 2HFY19 1HFY20 2HFY20 1HFY21 2HFY21E 1HFY22E

Source: PPAC, Bloomberg, Kotak Institutional Equities estimates

16 KOTAK INSTITUTIONAL EQUITIES RESEARCH ONGC Oil, Gas & Consumable Fuels

Exhibit 6: We assume lower oil and gas realizations, and modest recovery in production volumes Key assumptions, March fiscal year-ends, 2016-23E

2016 2017 2018 2019 2020E 2021E 2022E 2023E Macro assumptions Exchange rate (Rs/US$) 65.5 67.1 64.5 69.9 70.8 75.5 76.0 77.0 Subsidy loss (Rs bn) 11 — — — — — — — Import tariff on crude oil (%) — — — — — — — — Pricing and volumes assumptions Crude price Crude price, Dated Brent (US$/bbl) 47.5 49.0 57.6 70.2 60.9 40.0 45.0 50.0 Gross realized crude price, India (US$/bbl) 48.3 50.3 57.3 70.2 60.8 39.1 44.3 49.5 Net realized crude price, India (US$/bbl) 47.1 50.3 57.3 70.2 60.8 39.1 44.3 49.5 Natural gas price Natural gas price, India (Rs/cu m) 12.2 8.2 7.6 9.9 10.5 7.0 6.0 7.6 Natural gas price, India (US$/mn BTU) 4.7 3.1 3.0 3.6 3.8 2.3 2.0 2.5 Sales volumes—Domestic fields Crude oil - own fields (mn tons) 19.8 19.8 19.7 18.5 18.0 18.0 18.6 18.6 Crude oil - JV (mn tons) 4.3 4.0 3.9 4.0 4.3 4.1 4.6 5.0 Natural gas - own fields (bcm) 16.1 17.0 18.6 19.6 18.5 18.5 22.2 22.2 Natural gas - JV (bcm) 1.0 0.9 0.9 0.9 0.9 1.2 1.3 1.3 Sales volumes—Overseas fields Crude oil (mn tons) 5.5 8.4 9.4 10.1 9.8 10.0 9.7 9.6 Natural gas (bcm) 3.4 4.4 4.8 4.7 5.2 4.9 4.8 4.8 Total sales Crude oil (mn tons) 29.7 32.3 33.0 32.6 32.0 32.0 32.8 33.2 Natural gas (bcm) 20.5 22.3 24.3 25.2 24.6 24.7 28.3 28.2 Total sales (mn toe) 48.1 52.4 54.9 55.3 54.2 54.2 58.3 58.6 Total sales (mn boe) 351 382 401 404 396 396 426 428 Crude oil (%) 62 62 60 59 59 59 56 57 Natural gas (%) 38 38 40 41 41 41 44 43

Source: Company, Kotak Institutional Equities estimates

Exhibit 7: ONGC's earnings are highly sensitive to oil and gas prices and exchange rate assumptions EPS sensitivity of ONGC to crude, gas price and exchange rate, March fiscal year-ends, 2021-22E

2021E 2022E Downside Base case Upside Downside Base case Upside Exchange rate Exchange rate (Rs/US$) 74.5 75.5 76.5 75.0 76.0 77.0 Net profits (Rs mn) 38,182 44,758 51,334 80,746 88,210 95,675 Earnings per share (Rs) 3.0 3.6 4.1 6.4 7.0 7.6 % upside/(downside) (14.7) 14.7 (8.5) 8.5 Average crude realization Net crude realization (US$/bbl) 38.1 39.1 40.1 43.3 44.3 45.3 Net profits (Rs mn) 34,381 44,758 55,135 77,654 88,210 98,767 Earnings per share (Rs) 2.7 3.6 4.4 6.2 7.0 7.9 % upside/(downside) (23.2) 23.2 (12.0) 12.0 Natural gas prices Natural gas price (US$/mn BTU) 1.8 2.3 2.8 1.5 2.0 2.5 Net profits (Rs mn) 29,962 44,758 59,554 72,143 88,210 104,278 Earnings per share (Rs) 2.4 3.6 4.7 5.7 7.0 8.3 % upside/(downside) (33.1) 33.1 (18.2) 18.2

Source: Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 17 Oil, Gas & Consumable Fuels ONGC

Exhibit 8: We compute fair value of ONGC at Rs60/share Fair value of ONGC, March 2022E (Rs/share)

March 2022E consolidated EPS 7.0 Less: income from investments valued separately 0.5 March 2022E EPS (adjusted) 6.6 P/E (X) 11 Valuation of operating business 72 Write-off of acquisition cost for Mozambique block (24) Valuation of investments 12 IOCL 7 PLNG 3 GAIL 2 Fair value 60

Source: Kotak Institutional Equities estimates

Exhibit 9: Combined financials of ONGC, OVL and MRPL, March fiscal year-ends, 2016-23E (Rs mn)

2016 2017 2018 2019 2020E 2021E 2022E 2023E Profit model (Rs mn) Net sales 1,295,756 1,394,116 1,557,541 2,053,357 1,781,934 1,491,332 1,695,764 1,861,423 EBITDA 472,852 539,958 573,182 760,518 630,337 371,524 451,870 564,156 Other income 82,532 60,913 84,521 81,363 68,371 66,829 78,164 79,450 Finance cost (31,505) (28,659) (41,559) (46,951) (57,420) (56,664) (58,591) (58,963) Depreciation, depletion and amortization (230,932) (236,807) (285,510) (321,142) (351,256) (326,511) (351,688) (372,377) Pretax profits 292,947 335,405 330,635 473,787 290,032 55,177 119,755 212,266 Current tax (68,608) (69,177) (69,194) (148,499) (102,644) (6,320) (24,032) (45,778) Deferred tax (16,258) (37,264) (32,418) (22,093) 13,724 (3,279) (6,131) (10,195) Net profits 151,355 222,987 231,504 287,287 111,963 45,577 89,592 156,292 Adjusted net profits after minority interests 174,218 216,692 223,468 296,326 169,335 47,934 90,889 156,847 Adjusted EPS (Rs) 13.6 16.9 17.4 23.6 13.5 3.8 7.2 12.5

Balance sheet (Rs mn) Equity 2,019,567 2,261,254 2,290,529 2,402,550 2,312,294 2,339,976 2,430,729 2,525,563 Deferred tax liability 208,099 238,457 283,946 297,288 269,869 273,149 279,280 289,475 Liability for abandonment cost 235,593 235,206 259,746 276,394 276,394 276,394 276,394 276,394 Borrowings 392,148 568,924 818,939 808,261 731,882 798,469 810,969 821,969 Other liabilities 550,109 414,469 445,286 471,397 606,300 637,642 655,970 669,536 Total liabilities and equity 3,405,517 3,718,311 4,098,446 4,255,890 4,196,739 4,325,630 4,453,342 4,582,937 Cash and equivalent 250,199 130,554 32,430 16,974 4,073 93,343 125,417 212,312 Current assets 620,530 628,481 699,369 816,509 908,874 899,311 928,756 952,906 Fixed and intangible assets 2,062,589 2,331,733 2,490,533 2,552,212 2,511,711 2,554,946 2,581,625 2,600,175 Goodwill 167,378 167,378 98,753 100,946 121,915 127,864 167,378 167,378 Investments 301,401 444,588 760,477 753,514 631,549 631,549 631,549 631,549 Deferred expenditure 3,420 15,577 16,884 15,735 18,617 18,617 18,617 18,617 Total assets 3,405,517 3,718,311 4,098,446 4,255,890 4,196,739 4,325,630 4,453,342 4,582,937

Free cash flow (Rs mn) Operating cash flow, excl. working capital 358,988 386,698 453,380 549,020 466,780 223,769 274,684 352,375 Working capital changes 145,704 (30,051) (3,459) (104,149) 151,459 40,905 (11,117) (10,584) Capital expenditure (313,908) (466,654) (400,224) (330,171) (407,943) (284,976) (283,804) (283,888) Investments (668) (104,608) (59) (1,530) (2,550) — — — Other income 39,917 45,828 62,980 49,828 42,148 66,829 78,164 79,450 Free cash flow 230,033 (168,788) 112,617 162,998 249,894 46,527 57,926 137,353

Ratios (%) Debt/equity 19.4 25.2 35.8 33.6 31.7 34.1 33.4 32.5 Net debt/equity 7.0 19.4 34.3 32.9 31.5 30.1 28.2 24.1 RoAE 7.0 9.1 9.0 11.0 4.6 1.9 3.4 5.7 RoACE 8.7 9.5 9.3 11.2 6.6 3.2 4.5 6.6

Key assumptions Exchange rate (Rs/US$) 65.5 67.1 64.5 69.9 70.8 75.5 76.0 77.0 Net realized crude price, India (US$/bbl) 47.1 50.3 57.3 70.2 60.8 39.1 44.3 49.5 Natural gas price, India (US$/mn BTU) 4.7 3.1 3.0 3.6 3.8 2.3 2.0 2.5 Subsidy loss (Rs bn) 11 — — — — — — —

Source: Company, Kotak Institutional Equities estimates

18 KOTAK INSTITUTIONAL EQUITIES RESEARCH ONGC Oil, Gas & Consumable Fuels

Exhibit 10: Consolidated financials of ONGC, March fiscal year-ends, 2016-23E (Rs mn)

2016 2017 2018 2019 2020 2021E 2022E 2023E Profit model (Rs mn) Net sales 1,240,742 1,257,846 3,227,058 4,213,853 4,250,014 2,797,131 3,454,460 4,056,682 EBITDA 459,811 473,917 659,369 854,946 611,687 431,398 527,603 651,187 Other income 81,448 79,153 74,681 81,488 85,316 70,722 81,332 81,855 Finance cost (37,656) (29,534) (49,990) (58,367) (69,998) (71,153) (76,093) (79,648) Depreciation, depletion and amortization (232,305) (229,747) (321,597) (348,767) (356,583) (363,632) (396,658) (420,269) Pretax profits 271,298 293,789 362,462 529,299 270,422 67,335 136,184 233,125 Extraordinary items (77,714) 11,372 6,466 (15,529) (90,285) — — — Effective tax (71,226) (101,079) (135,380) (209,183) (75,080) (23,090) (45,015) (72,238) Net profits 122,358 204,082 233,548 304,587 105,057 44,245 91,168 160,887 Share of associates/minority interest 6,394 897 (12,489) 363 10,544 512 (2,958) (5,683) Adjusted net profits after minority 177,872 197,374 216,966 314,156 168,256 44,758 88,210 155,204 Adjusted EPS (Rs) 13.9 15.4 16.9 25.0 13.4 3.6 7.0 12.3

Balance sheet (Rs mn) Equity 1,978,136 2,211,895 2,040,189 2,181,408 2,069,677 2,090,591 2,140,449 2,234,195 Minority interest 26,518 41,243 156,060 181,062 178,128 177,616 180,573 186,256 Deferred tax liability 281,028 311,020 415,059 473,668 461,382 468,143 478,103 492,511 Borrowings 445,477 556,819 1,012,461 1,021,064 1,036,579 1,140,666 1,209,166 1,250,166 Other liabilities 694,697 581,079 978,580 1,099,819 1,293,215 1,312,524 1,399,476 1,480,286 Total liabilities and equity 3,425,856 3,702,056 4,602,349 4,957,021 5,038,981 5,189,540 5,407,769 5,643,415 Cash and equivalent 246,890 130,136 50,628 51,034 57,041 142,494 171,139 255,238 Fixed and intangible assets 1,509,467 1,599,858 2,118,473 2,187,779 2,149,357 2,457,996 2,622,604 2,613,205 Capital WIP 576,685 571,693 615,119 690,564 838,324 663,340 567,839 616,299 Other assets 758,946 788,772 1,144,705 1,358,453 1,487,668 1,392,368 1,486,096 1,571,832 Investments 333,869 611,597 673,425 669,190 506,592 533,342 560,092 586,842 Total assets 3,425,856 3,702,056 4,602,349 4,957,021 5,038,981 5,189,540 5,407,769 5,643,415

Free cash flow (Rs mn) Operating cash flow, excl. working capital 367,075 368,225 536,135 672,518 537,784 343,916 416,455 513,709 Working capital 71,864 (23,127) 2,543 (99,639) 133,674 114,609 (6,775) (4,927) Capital expenditure (403,920) (304,106) (339,781) (445,542) (595,722) (497,287) (465,765) (459,330) Free cash flow 35,019 40,992 198,897 127,337 75,736 (38,763) (56,085) 49,452 Other income 35,579 40,921 70,633 112,837 68,293 70,722 81,332 81,855

Ratios (%) Debt/equity 22.8 25.7 53.7 51.0 54.8 59.6 61.7 61.0 Net debt/equity 10.2 19.7 51.0 48.5 51.8 52.2 53.0 48.6 RoAE 9.0 9.4 10.2 14.9 7.9 2.2 4.2 7.1 RoACE 7.2 7.4 7.7 9.3 5.2 2.4 3.6 5.3

Key assumptions Exchange rate (Rs/US$) 65.5 67.1 64.5 69.9 70.8 75.5 76.0 77.0 Net realized crude price, India (US$/bbl) 47.1 50.3 57.3 70.2 60.8 39.1 44.3 49.5 Natural gas price, India (US$/mn BTU) 4.7 3.1 3.0 3.6 3.8 2.3 2.0 2.5 Subsidy loss (Rs bn) 11 — — — — — — —

Source: Company, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 19 BUY Petronet LNG (PLNG) Gas Utilities JULY 01, 2020 RESULT Sector view: Attractive In-line performance; intact thesis. PLNG’s adjusted numbers in 4QFY20 were broadly CMP (`): 258 in line with our expectations; reported results were impacted by one-offs. We retain our constructive stance seeking comfort from rising dividend payout, prudence on capital Fair Value (`): 300 allocation, limited risks to volumes and tariffs and attractive valuations. We reiterate BSE-30: 34,916 BUY with an unchanged FV of Rs300, expecting the company to deliver healthy 12% CAGR in earnings over the next 3-4 years driven by higher volumes and tariffs. Petronet LNG Stock data Forecasts/valuations 2020 2021E 2022E 52-week range (Rs) (high,low) 293-170 EPS (Rs) 17.6 18.7 22.2 Mcap (bn) (Rs/US$) 388/5.2 EPS growth (%) 17.3 6.2 18.5 ADTV-3M (mn) (Rs/US$) 782/10 P/E (X) 14.6 13.8 11.6 Shareholding pattern (%) P/B (X) 3.5 3.3 3.2 Promoters 50.0 EV/EBITDA (X) 8.1 7.8 6.7 FIIs 29.3 RoE (%) 25.2 24.9 27.9 MFs/BFIs 7.8/0.1 Div. yield (%) 4.8 5.5 7.0 Price performance (%) 1M 3M 12M Sales (Rs bn) 355 285 332 Absolute 2 29 7 EBITDA (Rs bn) 44 44 51 Rel. to BSE-30 (5) 9 21 Net profits (Rs bn) 26 28 33

Broadly in-line operating performance in 4QFY20; reported numbers impacted by one-offs PLNG’s adjusted EBITDA was a modest 2% below our estimate at Rs10.1 bn, as marginally higher volumes at 219 tn BTUs were offset by modestly higher expenses. Utilization at Dahej terminal expectedly moderated to 93% due to lower off-take amid nationwide lockdown during end-March. Adjusted PBT, excluding Rs2.38 bn of impact from lease accounting under Ind-AS 116, increased 32% yoy to Rs10.3 bn, reflecting 7% growth in volumes and higher blended margins. PBT, including Ind-AS 116 impact, was up only 2% yoy at Rs8 bn. Adjusted net income increased 12% yoy to Rs5.9 bn (EPS of Rs3.9), aided by lower tax at 26%. Reported net income of Rs3.6 bn included exceptional items—(1) Rs1 bn contribution to PM CARES fund, (2) Rs1.8 bn of non-cash forex-related provision pertaining to lease costs, recoverable in future years and (3) Rs310 mn of inventory markdown amid lower spot LNG prices. 20% increase in PBT, excluding Ind-AS 116 impact, in FY2020 led by higher volumes and tariffs In FY2020, PLNG’s PBT, excluding Rs5 bn of impact from Ind-AS 116, increased 20% to Rs40.4 bn led by 10% higher volumes at 18.1 mn tons and 10% rise in gross margins despite including provisional ~20% cut in Kochi tariffs to Rs79/mn BTU; it remains unchanged in FY2021 pending finalization with the off-takers. Adjusted net income, including Ind-AS 116 impact, increased 17% to Rs26.5 bn (EPS of Rs17.6), boosted by reduction in effective tax rate to 25.4%. Higher dividend payout is encouraging; management allays concerns on tariffs PLNG increased its dividend payout to Rs12.5 (71%) in FY2020 from Rs10 in FY2019, given surplus cash flows amid lack of progress on key projects. The management allayed concerns on tariffs—(1) proposed tariffs at Kochi will yield threshold IRR on Rs33 bn of carrying value of terminal assuming ramp-up in volumes to 30-35% over the next few years; any further reduction is unlikely as it may lead to impairment and (2) no material risks to tariffs or volumes at Dahej given its contractual terms and higher tariffs sought by new terminals like Mundra. Tarun Lakhotia Retain BUY given robust earnings growth, inexpensive valuation and high FCF yield We fine-tune our EPS estimates to Rs18.7 (+5%) in FY2021 and Rs22.2 (-1%) in FY2022 Hemang Khanna factoring in (1) modestly higher volumes in FY2021, (2) flat regasification tariff for Kochi in FY2021 and 5% escalation thereafter and (3) other minor changes. We reiterate BUY with DCF- based FV of Rs300 noting (1) healthy ~12% CAGR in earnings over the next 3-4 years, (2) reasonable valuation at 11.6X FY2022E EPS and (3) high FCF/dividend yield of 6-8% pending final decisions on large investment proposals, which may unlikely be approved soon given PLNG’s strategy of seeking long-term commitments along with 16% IRR threshold. [email protected] Contact: +91 22 6218 6427

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

Operational highlights and key takeaways from the conference call

 Utilization at Dahej moderates to 93%, while at Kochi rises to 20%. LNG off-take from Dahej terminal declined to 206 tn BTUs in 4QFY20 from 222 tn BTUs in previous quarter, with average utilization moderating to 93% impacted by lower off-take amid lockdown during end-March. Kochi terminal supplied 13 tn BTUs of LNG, with utilization rising modestly to 20%. In FY2020, overall volumes grew 10% yoy to 18.1 mn tons, with off-take at Dahej terminal rising 8% to 885 tn BTUs and utilization averaging at healthy 103% on expanded capacity; off-take at Kochi terminal increased to 43 tn BTUs, with utilization rising to 17% from 10% in FY2019.

 Kochi-Mangalore pipeline expected to be commissioned by end-July 2020. PLNG management indicated that Kochi-Mangalore pipeline is expected to be commissioned by end-July 2020, also confirmed by GAIL. The utilization of terminal is expected to increase to 30-35% from 20% currently, driven by incremental off-take from FACT, MRPL, OMPL, MCF and other customers in the region.

 Force majeure discussions on 5-6% of annual contracted volumes. PLNG has initiated force majeure for eight cargoes from RasGas (~6% of annual commitment) and one cargo from Gorgon (~5% of annual commitment). The suppliers have not accepted the force majeure yet; however, the management remains confident of it being approved as a scenario for pandemic is included in the contractual terms.

 Roadmap for LNG dispensing infrastructure. PLNG has laid out a medium-term roadmap to facilitate setting up of LNG retail outlets (ROs) along the major highways across the country in partnerships with OMCs/CGD entities in three phases. In the first phase, PLNG will carry out a pilot project to set up 50 LNG stations across five major highways along the western and southern corridors. In the second phase, PLNG will facilitate setting up additional 250 LNG ROs across major highways along the Golden Quadrilateral, North-South and East-West corridors. In the third phase, PLNG will facilitate setting up 700 more LNG ROs covering a total length of 35,000 km.

 No material progress on overseas projects. The management indicated that the non- binding MoU with Tellurian has expired on May 31; however, the Board has not taken a final decision on the project yet. There has been no material progress on the proposed LNG regasification projects in both Bangladesh and Sri Lanka.

KOTAK INSTITUTIONAL EQUITIES RESEARCH 21 Gas Utilities Petronet LNG

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

(% chg.) yoy 4QFY20 4QFY20E 4QFY19 3QFY20 4QFY20E 4QFY19 3QFY20 FY2020 FY2019 (% chg.) FY2021E Net sales 85,672 81,299 83,832 89,102 5.4 2.2 (3.9) 354,520 383,954 (7.7) 284,719 Total expenditure (75,606) (71,010) (75,680) (78,027) 6.5 (0.1) (3.1) (311,005) (348,930) (10.9) (240,338) Raw material (74,050) (69,432) (74,197) (76,189) 6.7 (0.2) (2.8) (304,520) (342,980) (11.2) (233,227) Staff cost (289) (302) (250) (407) (4.2) 15.8 (29.0) (1,258) (959) 31.2 (1,396) Other expenditure (1,268) (1,276) (1,233) (1,431) (0.7) 2.8 (11.4) (5,228) (4,992) 4.7 (5,716) EBITDA 10,065 10,289 8,152 11,076 (2.2) 23.5 (9.1) 43,515 35,025 24.2 44,381 Other income 865 904 914 842 (4.3) (5.4) 2.8 3,726 3,903 (4.5) 4,528 Interest (1,035) (822) (225) (940) 25.9 359.7 10.1 (4,032) (989) 307.6 (3,023) Depreciation (1,942) (1,990) (1,016) (1,960) (2.4) 91.2 (0.9) (7,761) (4,112) 88.7 (8,000) Profit before tax 7,953 8,380 7,825 9,017 (5.1) 1.6 (11.8) 35,447 33,826 4.8 37,885 Profit before tax, excluding Ind-AS 116 10,333 10,580 7,825 9,750 (2.3) 32.0 6.0 40,447 33,826 19.6 41,285 Extraordinary items (3,090) (1,650) (1,280) — (581) (1,490) — Current tax (1,650) (1,601) (2,158) (2,150) (8,600) (7,895) (10,020) Deferred tax 378 (107) 14 (115) 710 (2,887) 222 Profit after tax 3,590 5,023 4,402 6,752 (28.5) (18.4) (46.8) 26,976 21,554 25.2 28,087 Adjusted profit after tax 5,872 6,254 5,263 6,752 (6.1) 11.6 (13.0) 26,456 22,547 17.3 27,897 Adjusted EPS (Rs) 3.9 4.2 3.5 4.5 17.6 15.0 18.6 Tax rate (%) 26.2 25.4 32.7 25.1 25.4 33.3 26.4

Volumes (tn BTUs) Overall 219 218 205 233 0.3 6.8 (6.0) 928 844 9.9 903 Dahej utilization (%) 93 93 104 100 103 107 98 Kochi utilization (%) 20 17 11 17 17 10 22 Dahej 206 207 198 222 (0.7) 4.0 (7.2) 885 820 7.9 846 Contracted 95 105 100 102 (9.1) (5.0) (6.9) 406 437 406 Spot 6 1 7 9 341.2 (14.3) (33.3) 25 23 10 Tolling 105 101 91 111 3.5 15.4 (5.4) 454 360 430 Kochi 13 11 7 11 18.7 83.1 18.2 43 24 76.7 57 Contracted 11 8 7 9 32.2 57.1 22.2 32 24 44 Spot 2 3 0 2 7 0 8 Tolling — ——— 4 — 5 Tariffs (Rs/mn BTU) Blended tariffs (gross margins) 53.1 54.4 47.0 55.4 (2.4) 13.0 (4.2) 53.9 48.5 11.0 57.0 Dahej re-gasification tariffs 51.7 51.7 49.3 49.3 49.9 47.5 52.4 Kochi re-gasification tariffs 79.6 79.6 99.6 79.6 79.6 99.6 79.1

Source: Company, Kotak Institutional Equities estimates

22 KOTAK INSTITUTIONAL EQUITIES RESEARCH Petronet LNG Gas Utilities

Exhibit 2: PLNG’s LNG retail outlet rollout plan

Source: Company

Exhibit 3: LNG supply has increased to 85 mcm/d in FY2020 from 77 mcm/d in FY2019 Sector-wise consumption of imported LNG, March fiscal year-ends, 2014-20 (mcm/d)

(mcm/d) Fertilizers Power CGD Industrial/others 90

80

70 36 60 35 34 34 50 28 13 40 25 11 26 11 30 16 18 8 10 15 6 8 7 7 8 7 20 8 8 6 9 3 7 2 24 26 10 7 5 18 21 21 13 15 8 8 9 - FY2011 FY2012 FY2013 FY2014 FY2015 FY2016 FY2017 FY2018 FY2019 FY2020

Source: PPAC, Kotak Institutional Equities

KOTAK INSTITUTIONAL EQUITIES RESEARCH 23 Gas Utilities Petronet LNG

Exhibit 4: PLNG stock is trading at 13X forward EPS 12-month forward P/E valuation of PLNG, April 2013 onwards (X)

(X) 20

18

16

14

12

10

8

Oct-13

Oct-14

Oct-15

Oct-16

Oct-17

Oct-18

Oct-19

Apr-13

Apr-14

Apr-15

Apr-16

Apr-17

Apr-18 Apr-19 Apr-20

Source: Kotak Institutional Equities estimates

Exhibit 5: We expect gradual ramp-up in volumes driven by increase in utilization of Kochi post commissioning of pipeline Key assumptions for Petronet LNG, March fiscal year-ends, 2016-23E

2016 2017 2018 2019 2020 2021E 2022E 2023E Volume assumptions (mn tons) Contract LNG volumes 5.4 8.3 9.5 9.1 8.5 8.8 8.8 8.8 Spot LNG volumes 1.8 1.0 0.5 0.5 0.6 0.4 0.9 1.4 Tolling volumes 4.2 5.1 6.6 7.1 9.0 8.6 9.6 10.0 Total volumes 11.4 14.3 16.6 16.6 18.1 17.7 19.3 20.2 Dahej 11.1 14.0 16.0 16.1 17.2 16.6 17.8 18.1 Kochi 0.3 0.3 0.6 0.5 0.8 1.1 1.5 2.1 Total volumes 11.4 14.3 16.6 16.6 18.1 17.7 19.3 20.2 Price assumptions (US$/mn BTU) LNG purchase price (FOB) 9.4 6.0 7.3 9.5 8.7 6.2 6.8 6.9 Landed cost (incl. import tariff) 10.3 6.7 8.0 10.1 9.3 6.7 7.3 7.5 Re-gasification charges for Dahej 0.63 0.64 0.70 0.68 0.70 0.69 0.72 0.75 Re-gasification charges for Dahej (Rs/mn BTU) 41.0 43.1 45.2 47.5 49.9 52.4 55.0 57.7 Tolling contract charges for Dahej 0.61 0.66 0.64 0.66 0.65 0.68 0.70 Tolling contract charges for Dahej (Rs/mn BTU) 41.0 42.5 44.7 46.9 49.2 51.7 54.3 Re-gasification charges for Kochi 1.06 1.08 1.47 1.42 1.12 1.05 1.09 1.13 Re-gasification charges for Kochi (Rs/mn BTU) 69.2 72.7 94.8 99.6 79.1 79.1 83.1 87.3 Blended sales price 10.9 7.4 8.8 10.8 10.1 7.4 8.1 8.3 Other assumptions Exchange rate (Rs/US$) 65.5 67.1 64.5 69.9 70.8 75.5 76.0 77.0

Source: Company, Kotak Institutional Equities estimates

24 KOTAK INSTITUTIONAL EQUITIES RESEARCH Petronet LNG Gas Utilities

Exhibit 6: We value PLNG stock at Rs300 using DCF methodology Calculation of equity value using discounted cash flow analysis (Rs mn)

2021E 2022E 2023E 2024E 2025E 2026E 2027E 2028E 2029E 2030E Volumes (mn tons) Dahej 16.6 17.8 18.1 18.5 18.9 19.3 19.6 19.9 20.2 20.5 Kochi 1.1 1.5 2.1 2.2 2.3 2.5 2.7 2.8 2.9 3.0 Total 17.7 19.3 20.2 20.8 21.3 21.8 22.3 22.7 23.1 23.5 DCF valuation EBITDA 44,381 51,081 56,414 59,506 64,081 68,974 73,026 78,118 83,530 89,282 Adjusted tax expense (9,622) (11,464) (12,697) (13,325) (14,394) (15,609) (16,605) (17,862) (19,199) (20,620) Change in working capital (1,562) (3,567) (3,267) (3,161) (3,344) (3,465) (3,614) (3,746) (3,925) (4,113) Operating cash flow 33,196 36,051 40,450 43,020 46,343 49,900 52,807 56,510 60,406 64,549 Capital expenditure (3,997) (8,007) (10,497) (6,835) (2,581) (2,633) (2,686) (2,739) (2,794) (2,850) Free cash flow 29,199 28,044 29,953 36,185 43,762 47,267 50,121 53,770 57,612 61,699 Discounted cash flow-now 26,728 22,818 21,664 23,256 25,000 24,002 22,624 21,567 20,541 19,554 Discounted cash flow-1 year forward 25,670 24,372 26,171 28,125 27,003 25,452 24,271 23,108 21,998 Discounted cash flow-2 year forward 27,418 29,443 31,651 30,378 28,633 27,305 26,005 24,748

Now +1-year +2-years Discount rate (%) 12.5% 12.5% 12.5% Total PV of free cash flow 227,754 245,724 267,133 Terminal value assumption Growth in perpetuity 0.0% 0.0% 0.0% Sensitivity of 12-month fair value to WACC and perpetual growth FCF in 2029E 61,699 61,699 61,699 Perpetual growth (%) Exit FCF multiple (X) 8.0 8.0 8.0 301 -2.0% -1.0% 0.0% 1.0% 2.0% Exit EV/EBITDA multiple (X) 5.5 5.5 5.5 11.5% 307 317 328 341 357 Terminal value 493,594 493,594 493,594 12.0% 296 304 314 326 340 PV of terminal value 156,429 156,429 156,429 12.5% 285 292 301 311 324 Total company value 384,183 402,153 423,562 13.0% 274 281 289 298 309 WACC WACC (%) 13.5% 265 271 278 286 296 Net debt (1,458) (14,090) (20,343) Equity value 385,641 416,243 443,905 Shares outstanding (mn) 1,500 1,500 1,500 Equity value of regasification business (Rs) 257 277 296 Equity value of 26% stake in Dahej Port (Rs) 8 9 11 Fair value of PLNG, including dividends (Rs) 265 301 339

Source: Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 25 Gas Utilities Petronet LNG

Exhibit 7: Profit model, balance sheet, cash model, March fiscal year-ends, 2016-23E (Rs mn)

2016 2017 2018 2019 2020E 2021E 2022E 2023E Profit model (Rs mn) Net sales 271,334 246,160 305,986 383,954 354,520 284,719 332,133 361,970 EBITDA 15,863 26,823 33,194 34,425 43,515 44,381 51,081 56,414 Other income 1,733 2,566 3,174 4,503 3,726 4,528 4,703 4,540 Interest (2,388) (2,097) (1,630) (989) (4,032) (3,023) (2,669) (2,327) Depreciation (3,216) (3,691) (4,117) (4,112) (7,761) (8,000) (8,040) (8,386) Pretax profits 11,992 23,602 30,621 33,826 35,447 37,885 45,075 50,241 Extraordinary items 724 — (70) (1,490) (581) ——— Current tax (1,904) (5,129) (6,593) (7,895) (8,600) (10,020) (12,005) (13,282) Deferred tax (955) (1,416) (3,180) (2,887) 710 222 217 211 Adjusted net profits 9,133 17,057 20,826 22,547 26,456 28,087 33,287 37,170 Earnings per share (Rs) 6.1 11.4 13.9 15.0 17.6 18.7 22.2 24.8

Balance sheet (Rs mn) Total equity 66,140 80,939 97,205 100,661 109,530 116,306 122,673 127,923 Deferred taxation liability 5,886 7,302 10,482 13,360 8,883 8,661 8,444 8,233 Total borrowings 40,146 36,038 27,367 18,195 10,802 9,591 7,879 6,946 Currrent liabilities 12,090 14,013 21,484 18,632 57,775 55,163 56,690 57,605 Total liabilities and equity 124,261 138,291 156,537 150,848 186,990 189,721 195,686 200,708 Cash and equivalents 21,829 3,273 8,625 29,603 44,320 52,104 53,008 51,736 Current assets 17,922 20,951 24,191 31,220 62,165 61,116 66,210 70,393 Total fixed assets 83,610 84,716 82,499 80,133 77,014 73,011 72,978 75,089 Investments 900 29,351 41,222 9,893 3,491 3,491 3,491 3,491 Total assets 124,261 138,291 156,537 150,848 186,990 189,721 195,686 200,708

Free cash flow (Rs mn) Operating cash flow, excl. working capital 12,015 21,851 25,228 25,175 26,209 31,337 36,407 40,805 Working capital 19,340 (3,273) 2,947 (4,907) (1,843) (1,562) (3,567) (3,267) Capital expenditure (9,714) (5,442) (1,753) (1,628) (408) (3,997) (8,007) (10,497) Free cash flow 21,641 13,137 26,422 18,640 23,958 25,778 24,832 27,041 Investments 993 (26,444) (11,027) 867 7,294 ——— Other income 245 199 3 1 2,524 4,528 4,703 4,540

Ratios (%) Debt/equity 56 41 25 16 9 8 6 5 Net debt/equity 25 37 17 (10) (28) (34) (34) (33) RoAE 14.5 21.3 21.2 19.4 23.2 23.1 26.0 27.8 RoACE 11.9 20.3 22.7 23.5 31.3 34.3 42.8 45.9 Adjusted CROCI 16.7 20.8 25.5 23.3 33.1 32.8 35.8 33.9

Source: Company, Kotak Institutional Equities estimates

26 KOTAK INSTITUTIONAL EQUITIES RESEARCH BUY (TATA) Metals & Mining JULY 01, 2020 RESULT Sector view: Attractive

Strong quarter but leverage stalls growth plans. Tata’s 4QFY20 EBITDA was higher CMP (`): 327 than expected mainly led by a positive EBITDA in Europe. Weak demand and prices Fair Value (`): 400 would keep margins under pressure in 1HFY21E. High leverage has forced Tata to delay BSE-30: 34,916 growth capex but would restrict further increase in debt. We have cut our EBITDA estimate by 2% for FY2021 and our fair value to Rs400 (from Rs430). Stock a 0.5X P/B is pricing all concerns and ignoring the recovery potential in FY2022E. Maintain BUY. tTata Steel Stock data Forecasts/valuations 2020 2021E 2022E 52-week range (Rs) (high,low) 515-251 EPS (Rs) 35.2 (20.8) 63.3 Mcap (bn) (Rs/US$) 371/5 EPS growth (%) (61.0) (159.1) 404.3 ADTV-3M (mn) (Rs/US$) 4,587/61 P/E (X) 9.3 (15.7) 5.2 Shareholding pattern (%) P/B (X) 0.5 0.5 0.5 Promoters 34.4 EV/EBITDA (X) 8.0 9.7 5.1 FIIs 13.5 RoE (%) 5.9 (3.4) 10.4 MFs/BFIs 14.4/15.4 Div. yield (%) 3.1 2.1 3.5 Price performance (%) 1M 3M 12M Sales (Rs bn) 1,398 1,217 1,551 Absolute 11 21 (35) EBITDA (Rs bn) 175 138 246 Rel. to BSE-30 3 2 (27) Net profits (Rs bn) 40 (24) 74

4QFY20—EBITDA beat led by strong performance in Europe Tata’s standalone 4QFY20 EBITDA of Rs36.5 bn (-26% yoy, +10% qoq), was 2% higher than our estimate (KIE: Rs35.9 bn) led by higher realizations partly offset by lower volumes. Europe EBITDA of US$9 mn or margin of US$4/ton was higher than our estimate of an EBITDA loss.  India – Strong prices offset volume loss due to Covid-19. Standalone volumes declined 19% yoy to 2.91 mn tons (-15% qoq) due to a nation-wide lockdown in the last week of March. Realization at Rs48,786/ton increased 10% qoq led by front ended price increases during the quarter. EBITDA increased 30% qoq to Rs12,526/ton (-9% yoy). Tata BSL’s EBITDA increased 178% qoq to Rs7.8 bn (or Rs7,908/ton) led by 9% qoq higher realizations. Tata reported volume of 16.5 mn tons (+1% yoy) and EBITDA of Rs10,467/ton for India in FY2020. We estimate -5%/13% yoy volumes and -13%/+33% EBITDA/ton in FY2021/22.  Europe – turns EBITDA positive. EBITDA/ton recovered to US$4/ton from a loss of US$57/ton in 3QFY20 led by stronger spreads and lagged impact of lower raw material prices. Management continues to work on its cost reduction program and expects benefits to be visible from 2HFY21E and FY2022E. It is currently in discussions with regulators in UK and the EU for government support. Europe reported EBITDA loss of US$94 mn (-US$10/ton) in FY2020 and we forecast a US$188 mn loss (-US$24/ton) in FY2021E given weak market dynamics and high operating leverage.

Domestic demand recovery in 2HFY21 is crucial Tata has exported ~50% of its domestic volume in 1QFY21 against ~14% in FY2020. With delayed recovery in domestic demand, reliance of exports would remain high in 1HFY21E. Exports earn Rs4,000-5,000/ton lower realization or margins due to benefit of import duty in Sumangal Nevatia domestic prices. We expect exports to reduce to normal levels from 2HFY21E however a slower recovery in domestic demand would imply further downside risk to earnings. Prayatn Mahajan Maintain BUY, revise fair value to Rs400 (Rs420 earlier) We cut EBITDA by 2%/0% for FY2021/22E mainly led by lower volumes and margins in India operations and revise fair value to Rs400 (from Rs430). With lower growth capex, Tata’s net debt peaked in FY2020 at Rs1,048 bn but weak earnings would increase net debt/EBITDA from 6X in FY2020 to 7.5X in FY2021E. Current valuation at 0.5X P/B FY2021/22E is close to historic trough and offers attractive risk-reward. [email protected] Contact: +91 22 6218 6427 .

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

Exhibit 1: Interim results of Tata Steel (consolidated), March fiscal year-ends (Rs mn)

(% chg.) 4QFY20 4QFY20E 4QFY19 3QFY20 KIE yoy qoq FY2020 FY2019 (% chg.) FY2021E Net sales 337,700 338,786 424,239 355,204 (0) (20) (5) 1,398,167 1,576,690 (11) 1,217,448 Expenditure (291,231) (309,088) (354,106) (330,667) (6) (18) (12) (1,223,536) (1,282,857) (5) (1,079,212) Consumption of raw materials (132,957) (137,423) (157,438) (137,537) (580,400) (608,771) (458,185) (Increase)/ decrease in stock 15,405 (17,729) (20,311) (33,561) (187) (176) (146) 5,652 967 485 — Staff Cost (47,350) (40,597) (46,510) (44,444) 17 2 7 (185,336) (187,589) (1) (179,487) Other Expenditure (126,329) (113,340) (129,847) (115,125) 11 (3) 10 (463,453) (487,464) (5) (441,539) EBITDA 46,469 29,698 70,133 24,537 56 (34) 89 174,631 293,833 (41) 138,236 Other income 13,159 909 4,899 929 1,348 169 1,316 18,435 14,206 30 14,437 Interest (19,251) (19,420) (19,378) (19,306) (1) (1) (0) (75,335) (76,601) (2) (82,101) Depreciation (22,241) (20,291) (18,805) (20,187) 10 18 10 (84,407) (73,418) 15 (86,820) Pretax profits 18,136 (9,105) 36,849 (14,026) (299) (51) (229) 33,324 158,020 (79) (16,248) Extraordinaries (34,059) — 5,115 8,374 (13,191) (1,210) — Deferred tax 8,858 (622) (6,834) (4,247) (20,845) (67,281) (13,318) Current tax (6,225) — (12,157) (1,963) 22,199 97 22,762 — Net income (13,290) (9,727) 22,973 (11,863) 37 (158) 12 21,487 89,626 (76) (29,566) Minority interest — — 775 1,367 3,829 10,962 3,829 Share of profit from associates 928 — 562 205 1,880 2,247 1,880 PAT after minority interest (12,362) (9,727) 24,309 (10,291) 27 (151) 20 27,196 102,834 (74) (23,857) Adjusted PAT 21,697 (9,727) 19,194 (18,665) (323) 13 (216) 40,386 93,082 (57) (23,857) Adjusted EPS (Rs) 18.9 (8.5) 16.7 (16.3) 35.2 81.2 (20.8) Ratios EBITDA margin (%) 13.8 8.8 16.5 6.9 12.5 18.6 11.4 ETR (%) 14.5 6.8 (51.5) 44.3 (4.1) 42.5 82.0

Source: Company, Kotak Institutional Equities estimates

Exhibit 2: Interim results of Tata Steel (standalone), March fiscal year-ends (Rs mn)

(% chg.) 4QFY20 4QFY20E 4QFY19 3QFY20 KIE yoy qoq FY2020 FY2019 (%chg) FY2021E Net sales 142,114 153,653 191,296 152,620 (8) (26) (7) 604,360 706,109 (14) 520,314 Expenditure (105,628) (117,774) (141,841) (119,552) (10) (26) (12) (455,744) (500,479) (9) (397,660) Consumption of raw materials (43,377) (55,864) (55,343) (42,097) (22) (22) 3 (189,701) (216,481) (142,477) Stock adjustment 9,801 — (11,703) (13,258) 5,644 5,543 — Employee costs (13,708) (12,166) (11,587) (11,855) 13 18 16 (50,366) (51,311) (48,599) Other Expenditure (58,343) (49,744) (63,208) (52,343) 17 (8) 11 (193,917) (210,006) (180,550) EBITDA 36,487 35,879 49,455 33,068 2 (26) 10 148,616 205,630 (28) 122,654 Other income 714 515 5,380 515 39 (87) 39 4,041 24,051 3,641 Interest (8,040) (7,839) (6,543) (7,839) 3 23 3 (30,310) (28,236) (34,014) Depreciation (10,023) (9,799) (9,529) (9,799) 2 5 2 (39,201) (38,030) (39,727) Pretax profits 19,138 18,757 38,762 15,945 2 (51) 20 83,146 163,415 (49) 52,554 Extraordinaries (20,095) — (110) 8,202 18,135 7,294 (1,142) — Tax (3,411) (4,802) (13,741) (6,109) (29) (75) (44) (23,002) (56,941) (13,139) Net income (4,368) 13,955 24,911 18,038 (131) (118) (124) 67,438 105,333 (36) 39,416 Adjusted net income (4,368) 13,955 24,911 18,038 (131) (118) (124) 67,438 105,333 39,416 EPS (Rs) 13.7 12.2 21.8 8.6 51.5 88.0 32.7 Ratios EBITDA margin (%) 25.7 23.4 25.9 21.7 24.6 29.1 23.6 ETR (%) (356.5) 25.6 35.6 25.3 25.4 35.1 25.0 Per ton analysis (Rs/ton) Realisations 48,786 47,165 53,434 44,522 3 (9) 10 49,051 55,643 (12) 44,452 EBITDA 12,526 11,013 13,814 9,646 14 (9) 30 12,062 16,204 (26) 10,479 Steel sales (mn tons) 2.91 3.26 3.58 3.43 (11) (19) (15) 12.32 12.69 (3) 11.70 Cost 36,261 36,151 39,620 34,875 0 (8) 4 36,989 39,439 (6) 33,974

Source: Company, Kotak Institutional Equities estimates

28 KOTAK INSTITUTIONAL EQUITIES RESEARCH Tata Steel Metals & Mining

Changes in our estimate

Exhibit 10 highlights key changes in our estimate.

We cut our FY2021/22E EBITDA by 2%/0%led by

 Cut in domestic volumes by 3%/4% factoring demand disruption due to Covid-19

 Lower blended realizations in India due to higher exports in FY2021/22E

Partly offset by revised US$/INR forecasts for FY2021/22E at Rs75.5/76 from Rs73.8/74 earlier

We revise our fair value to Rs400 (from Rs430) due to lower earnings at 6X EV/EBITDA March 2022E.

Other result and conference call highlights

 Demand outlook. Steel demand is recovering gradually with phased relaxations in mobility restrictions aided by normal monsoon and pent-up demand. In Europe, steel demand had been adversely affected; while automotive sector continues to struggle, demand from packaging is strong. Volumes got severely impacted due to lockdown in the last week of March which is usually the peak demand period for the company. Sales were next to nil in April, while they picked up in May and June and the company currently is operating at 70% CU and expects to ramp up as demand picks up.

 Price guidance. For 1QFY21, domestic NSR’s have gone down by Rs500/ton, however due to mix variance as a result of higher exports in 1QFY21E, NSR is expected to decline by Rs4,000-Rs5,000/ton.

 Volumes to remain flat, exports to offset domestic weakness. The company guided for flat volumes in FY2021 despite COVID 19 through sale of inventory. TATA exported ~50% of its volumes in 1QFY21E to offset weakness in the domestic markets. It expects exports to remain high (~30% in 2QFY21E) and gradually ramp down as domestic market recovers in 2HFY21E. Exports formed 14% of the volumes in FY2020.

 Inventory Levels. The company continues to carry high level of inventories in June similar to levels at the end of FY2020.

 Increase in gross debt. TATA raised additional funds of Rs.49 bn to build a contingency buffer due to Covid-19, and expects to repay it as and when the situation normalizes.

 Cost guidance. The management expects coking coal cost to be lower sequentially and generally has a 3-4 months lag in iron ore cost consumption for its European operations.

 Auto contracts renewal. Majority of the company’s automotive price contract renegotiations were still going on as discussions got delayed due to COVID-19. Prices were reset to lower levels in the previous period (2HFY20) and current prices suggest an increase in auto-contract prices for 1HFY21E. However, given the impact of COVID-19 on the auto sector, the company is expected to share some pain in the supply chain.

 Fund Raise. The company denied any plans of a further equity raise in the near term. It has comfortable liquidity at Rs115 bn and has long term debt maturities of less than US$250 mn each for the next two years.

KOTAK INSTITUTIONAL EQUITIES RESEARCH 29 Metals & Mining Tata Steel

 Growth capex deferred. Given the uncertain business environment, capex is being curtailed sharply and restricted to safety and sustenance projects. The capex plans will be revisited in 2HFY21E or when business conditions normalize. The company guided that it shall prioritize commissioning of the pellet plant, CRM mill complex and take up further capex for KPO2 expansion as per market conditions. Total capex guidance stands at Rs50 bn for FY2021E at the consolidated level with ~50:50 split between India: Europe.

 Bhushan Steel’s merger. Court proceedings got impacted by COVID-19. The company remains hopeful of completing the merger in FY2021.

 Net debt remained stable qoq. Tata Steel’s consolidated net-debt increased marginally to Rs1,048 bn in March 2020 from Rs1,046 bn in December 2019 (see Exhibit 7).

 Europe Business:

. EBITDA/ton declined to US$4 (US$66/ton in 4QFY19, EBITDA loss of US$57/ton in 3QFY20).

. Carbon credit cost in FY2020 stood at 40 mn pounds whereas, it expects no requirement of purchasing carbon credits in FY2021E due to lower volumes.

. Transformation program is expected to result in savings of 600 mn pounds over the next couple of years

. TSE is engaged with governments across different territories to seek support in terms of loans/grants, reimbursement of manpower cost against furlough scheme and deferment of taxes.

Exhibit 3: Interim results of Tata Steel International operations, 4QFY18 - 4QFY20 (Rs mn)

4QFY18 1QFY19 2QFY19 3QFY19 4QFY19 1QFY20 2QFY20 3QFY20 4QFY20 International operations Revenues 174,241 190,886 256,421 216,800 232,943 198,558 197,080 202,584 195,585 EBITDA 15,900 12,808 29,234 21,664 20,678 14,201 3,413 (8,531) 9,982 - Tata Steel Europe Revenues 162,079 164,290 159,290 158,500 165,680 144,950 140,350 138,210 135,876 EBITDA 11,542 16,660 11,110 9,470 11,960 620 1,650 (9,560) 650 - Others Revenues 12,162 26,596 97,131 58,300 67,263 53,608 56,730 64,374 59,709 EBITDA 4,358 (3,852) 18,124 12,194 8,718 13,581 1,763 1,029 9,332

Source: Company, Kotak Institutional Equities estimates

Exhibit 4: Tata Steel Europe EBITDA/ton quarterly trend, 4QFY18 - 4QFY20

4QFY18 1QFY19 2QFY19 3QFY19 4QFY19 1QFY20 2QFY20 3QFY20 4QFY20 yoy qoq FY2020 FY2019 % yoy Tata Steel Europe Deliveries (mn tons) 2.55 2.45 2.27 2.35 2.57 2.26 2.29 2.35 2.39 -7% 2% 9.29 9.64 -4% Turnover (US$ mn) 2,518 2,451 2,273 2,199 2,352 2,037 1,972 1,941 1,871 -20% -4% 7,821 9,274 -16% Adjusted EBITDA (US$ mn) 179 249 159 131 170 9 23 (134) 9 -95% -107% (93) 708 -113% Adjusted EBITDA/ton (US$) 70 101 70 56 66 4 10 (57) 4 -94% -107% (39) 293 -113% Tata Steel Europe (Rs mn) Revenues 162,079 164,290 159,290 158,500 165,680 144,950 140,350 138,210 135,876 -18% -2% 559,386 647,760 -14% EBITDA 11,542 16,660 11,110 9,470 11,960 620 1,650 (9,560) 650 -95% -107% (6,640) 49,200 -113%

Source: Company, Kotak Institutional Equities estimates

30 KOTAK INSTITUTIONAL EQUITIES RESEARCH Tata Steel Metals & Mining

Exhibit 5: Tata Steel Standalone, Quarterly analysis of cost-structure and profitability, 4QFY18 -4QFY20 (Rs/ton)

3QFY18 4QFY18 1QFY19 2QFY19 3QFY19 4QFY19 1QFY20 2QFY20 3QFY20 4QFY20 Tata Steel India (Rs/ton) Realization (Rs/ ton) 47,260 53,732 55,237 56,296 57,824 53,434 53,460 50,071 44,522 48,786 Raw material cost 14,336 14,233 14,454 16,340 16,500 18,728 15,707 16,110 16,148 11,527 Employee cost 3,475 4,652 4,316 4,332 4,421 3,236 4,493 4,303 3,458 4,706 Other expenditure 15,425 18,976 19,390 16,769 21,586 17,656 20,685 18,671 15,269 20,028 Total Cost 33,235 37,860 38,160 37,440 42,507 39,620 40,885 39,084 34,875 36,261 EBITDA/ ton (Rs/ ton) 14,025 15,872 17,077 18,856 15,318 13,814 12,574 10,987 9,646 12,526 Tata Steel (Consolidated) (US$/ton) Realization (US$/ ton) 730 835 824 803 802 758 768 712 625 672 Raw material cost 221 221 216 233 229 266 226 229 227 159 Employee cost 54 72 64 62 61 46 65 61 49 65 Other expenditure 238 295 289 239 299 250 297 266 214 276 EBITDA/ ton 217 247 255 269 212 196 181 156 135 172

Source: Company, Kotak Institutional Equities estimates

Exhibit 6: Tata Steel's net debt remained stable qoq at Rs1,048 bn in 4QFY20 Tata steel group quarterly net debt trend, 4QFY15 - 4QFY20 (Rs bn)

Net debt (Rs bn) 1,150

1,050

950

850

750

650

550 4QFY15 1QFY16 2QFY16 3QFY16 4QFY16 1QFY17 2QFY17 3QFY17 4QFY17 1QFY18 2QFY18 3QFY18 4QFY18 1QFY19 2QFY19 3QFY19 4QFY19 1QFY20 2QFY20 3QFY20 4QFY20

Source: Company, Kotak Institutional Equities estimates

Exhibit 7: Tata Steel BSL EBITDA/ton quarterly trend, 4QFY19 - 4QFY20

4QFY19 1QFY20 2QFY20 3QFY20 4QFY20 %yoy %qoq Tata Steel BSL Revenues 51,364 43,327 45,546 50,381 42,737 (17) (15) EBITDA 7,860 7,740 4,791 2,840 7,750 (1) 173 Volumes 1.1 0.9 1.0 1.3 0.98 (14) (22) EBITDA/Ton 6,895 9,000 4,598 2,254 7,908 15 251 Cost/Ton 38,161 41,380 39,112 37,731 35,701 (6) (5) Realization/Ton 45,056 50,381 43,710 39,985 43,609 (3) 9

Source: Company, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 31 Metals & Mining Tata Steel

Exhibit 8: Leverage ratios will improve with recovery in EBITDA aided by capacity ramp ups and increasing cost efficiencies Tata Steel consolidated leverage details, March fiscal year ends (Rs mn), FY2017-23E (X)

2017 2018 2019 2020 2021E 2022E 2023E Existing EBITDA (Rs mn) 170,078 214,332 293,833 174,631 138,236 245,961 255,122 Net debt (Rs mn) 744,767 715,753 972,070 1,047,790 1,040,902 998,379 985,198 Net debt/ EBITDA (X) 4.4 3.3 3.3 6.0 7.5 4.1 3.9

Source: Company, Kotak Institutional Equities estimates

Exhibit 9: Tata Steel, changes in estimates, March fiscal year ends, FY2021-2023E

Revised estimates Old estimates Change (%) 2021E 2022E 2023E 2021E 2022E 2021E 2022E Earnings (consolidated) Units Net sales Rs mn 1,217,448 1,550,558 1,603,769 1,307,152 1,643,298 (7) (6) EBITDA Rs mn 138,236 245,961 255,122 141,449 246,070 (2) (0) Adj. PAT Rs mn (23,857) 73,850 86,161 7,359 87,424 (424) (16) EPS Rs/share (20.8) 63.3 73.9 6.0 71.4 (446) (11) Volumes India (Standalone + Bhushan) mn tons 15.7 17.7 18.1 16.2 18.4 (3) (4) Europe mn tons 7.9 9.6 9.6 7.9 9.6 — — Prices HRC prices - China US$/ton 450 490 495 450 490 — — INR Rs/US$ 75.5 76.0 76.0 73.8 74.0 2 3 Tata Steel India (incl. Bhushan) Net sales Rs mn 691,363 885,322 934,891 777,823 970,738 (11) (9) EBITDA Rs mn 143,473 214,003 220,884 157,590 222,234 (9) (4) EBITDA/ton Rs/ton 9,136 12,107 12,186 9,734 12,052 (6) 0 Tata Steel Europe Net sales US$ mn 6,274 8,063 8,111 6,525 8,456 (4) (5) EBITDA US$ mn (188) 303 333 (244) 309 (23) (2) EBITDA/ton US$/ton (24) 32 35 (31) 32 (23) (2)

Net Debt Rs bn 1,041 998 985 975 1,000 7 (0)

Source: Kotak Institutional Equities estimates

Exhibit 10: Tata Steel, valuation, March fiscal year-ends, March 2022E basis

EBITDA Multiple Enterprise value Net Debt Equity Value Equity Value (Rs mn) (X) (Rs mn) (Rs mn) (Rs mn) (Rs/share) India 214,003 6 1,305,420 818,379 487,041 425 Europe 23,011 4 92,045 180,000 (87,955) (77) Total Enterprise Value 237,015 6 1,397,465 998,379 399,086 349 Add: 50% of KPO Phase II CWIP 40,000 35 Add: Value of investments 2,351 2 South East Asia 15,750 14 Arrived market capitalization 457,187 400 Fair Value (Rs) 400

Source: Kotak Institutional Equities estimates

32 KOTAK INSTITUTIONAL EQUITIES RESEARCH Tata Steel Metals & Mining

Exhibit 11: Tata Steel (consolidated), Profit model, balance sheet and cash flow model, March fiscal year-ends, 2017-2023E (Rs mn)

2017 2018 2019 2020 2021E 2022E 2023E Profit model (Rs mn) Net sales 1,122,994 1,227,937 1,576,690 1,398,167 1,217,448 1,550,558 1,603,769 EBITDA 170,078 214,332 293,833 174,631 138,236 245,961 255,122 Other income 5,275 8,811 14,206 18,435 14,437 15,077 15,219 Interest (50,722) (54,547) (76,601) (75,335) (82,101) (77,705) (70,955) Depreciation (56,729) (57,417) (73,418) (84,407) (86,820) (86,034) (87,099) Profit before tax 67,902 111,179 158,020 33,324 (16,248) 97,299 112,287 Extraordinaries (43,242) 95,991 (1,210) (13,191) — — — Taxes (27,780) (33,905) (67,184) 1,354 (13,318) (29,157) (31,834) Profit after tax (3,120) 173,265 89,626 21,487 (29,566) 68,141 80,452 Minority interest (722) (43,085) 10,962 3,829 3,829 3,829 3,829 Share in profit/(loss) of associates 77 2,391 2,247 1,880 1,880 1,880 1,880 Reported net income (3,766) 132,571 102,834 27,196 (23,857) 73,850 86,161 Adjusted net income 40,200 79,665 103,530 40,386 (23,857) 73,850 86,161 Fully diluted EPS (Rs) 41 70 90 35 (21) 63 74 Balance sheet (Rs mn) Equity 355,443 585,956 666,501 713,013 681,284 742,099 813,935 Deferred tax liability 100,301 105,699 124,599 92,614 92,614 92,614 92,614 Total Borrowings 850,709 944,221 1,030,733 1,162,656 1,162,656 1,122,656 1,082,656 Current liabilities 410,863 406,416 431,807 460,104 420,165 505,739 506,906 Minority interest 16,017 9,365 23,645 25,866 22,037 18,208 14,379 Other Non Current Liabilities — 45,922 58,540 49,942 49,942 49,942 49,942 Total liabilities 1,733,332 2,097,579 2,335,824 2,504,195 2,428,698 2,531,259 2,560,432 Net fixed assets 885,118 903,228 1,184,510 1,195,040 1,159,433 1,124,785 1,089,072 Capital work in progress 157,841 166,144 186,412 194,968 194,968 234,968 309,968 Goodwill 34,947 57,821 59,909 64,969 64,981 64,981 64,981 Investments 125,367 178,995 57,382 62,852 66,412 68,291 70,171 Deferred tax assets 8,859 10,358 8,090 12,703 12,703 12,703 12,703 Cash 49,211 79,379 33,414 80,547 87,435 89,958 63,140 Other current assets 471,989 449,279 489,825 472,461 422,112 514,918 529,743 Total assets 1,733,332 2,097,579 2,335,824 2,504,195 2,428,698 2,531,259 2,560,432 Net Debt 744,767 715,753 972,070 1,047,790 1,040,902 998,379 985,198 Free cash flow (Rs mn) Operating cash flow excl. working capital 112,319 125,190 159,173 88,585 57,253 154,175 167,551 Working capital changes (48,907) (92,755) 25,905 41,962 10,410 (7,232) (13,658) Capital expenditure (74,269) (72,995) (86,243) (100,123) (51,213) (91,386) (126,386) Free cash flow (10,858) (40,560) 98,835 30,424 16,451 55,557 27,507 Ratios P/E (X) 7.9 4.7 3.6 9.3 (15.7) 5.2 4.4 EV/EBITDA (X) - ex investments 6.1 5.0 4.5 8.0 10.0 5.5 5.2 P/B (X) 0.9 0.6 0.6 0.5 0.5 0.5 0.5 FCF Yield (%) (3.4) (10.8) 26.4 8.1 4.4 14.6 7.2 Net debt/EBITDA (X) 4.4 3.3 3.3 6.0 7.5 4.1 3.9 RoAE (%) 10.4 16.9 16.5 5.9 (3.4) 10.4 11.1 RoACE (%) 7.2 8.9 10.7 4.7 3.2 7.3 7.3

Source: Company, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 33 BUY ICICI Bank (ICICIBC) JUNE 30, 2020 UPDATE Sector view: Attractive

Still comfortable. Key highlights from our interaction with Anup Bagchi, Executive CMP (`): 351 Director, ICICI Bank – (1) there is improvement in business conditions but still cautious Fair Value (`): 470 until normalized business levels are reached and (2) the capital position is comfortable BSE-30: 34,916 as of now but would keep looking for opportunities to build a strong capital buffer. Earnings, in our view, are likely to be volatile but we see ICICI Bank as well-positioned to handle the crisis. Maintain BUY rating (Fair Value unchanged).

ICICI Bank Stock data Forecasts/valuations 2020 2021E 2022E 52-week range (Rs) (high,low) 552-268 EPS (Rs) 12.3 24.5 28.4 Mcap (bn) (Rs/US$) 2,276/30.2 EPS growth (%) 134.9 100.2 15.7 ADTV-3M (mn) (Rs/US$) 17,305/229 P/E (X) 28.7 14.3 12.4 Shareholding pattern (%) P/B (X) 2.1 1.9 1.7 Promoters 0.0 BVPS (Rs) 165.2 185.9 207.2 FIIs 54.9 RoE (%) 7.1 13.0 13.5 MFs/BFIs 22.4/11.9 Div. yield (%) 0.0 1.4 1.6 Price performance (%) 1M 3M 12M NII (Rs bn) 333 375 404 Absolute 6 9 (20) PPOP (Rs bn) 281 333 334 Rel. to BSE-30 (2) (8) (9) Net profits (Rs bn) 79 159 184

Early stages of recovery and carefully evaluating opportunities on various operational fronts Key takeaways from our meeting: (1) Capital. Any decision to raise fresh equity has not been taken and the bank’s neutral stance is that they would always prefer a strong capital buffer at all times to handle any tail risk. Recent transactions on insurance stake-sale in 1QFY21 should be seen in that direction. (2) Retail loan book. (a) Moratorium levels are likely to come down in the second phase as the bank has been a lot more selective in giving the same and (b) the collections have started to improve but are more of a reflection of the opening of the lockdown. The bank is yet to reach normalized levels to understand the credit costs or assess the early impact of the Covid. (3) Disbursements are gaining steady traction but still well below pre-Covid levels and the bank is a lot more focused on its internal customers where the opportunity to cross-sell is high. (4) Strong flow in deposits and slow disbursements imply that NIM could be under pressure in the medium term. (5) Focus is on each line of operating expenses and looking to extract more gains that can potentially offset the weak revenue growth for FY2021E.

Well-positioned and likely to emerge closer to the best-in-class in this leg of the cycle Based on our interaction with various experts and channel checks, we believe that the bank is well-positioned to handle this slowdown. With a strong liability franchise, lower focus on market share and greater focus to build a credible retail loan book, we have comfort that the M B Mahesh, CFA bank’s credit costs in this leg of the cycle should be closer to the best-in-class players even after adjusting for differences in the composition of loans. 2HFY20 slippages on the corporate Nischint Chawathe portfolio have emerged as an area of discussion with investors but we would note that these defaults are not large though identified with a specific name and sector. They still have led to Dipanjan Ghosh slippages that are closer to the leading players in the industry.

Maintain BUY: A wait-and-watch period ahead Ashlesh Sonje We maintain BUY rating with an unchanged fair value at Rs470. We value the bank at 1.8X book and 13X March 2022E EPS for RoEs at 13-14% levels. We have incorporated the stake- sale in our fair value. The management is guiding investors to focus on operating profits leading to better underwriting. The bank is better-placed as compared to its peers, driving our positive view, but the near-term performance is largely contingent on the recovery path for the sector in a post-Covid environment. [email protected] Contact: +91 22 6218 6427

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

Key takeaways from our discussions

 Capital raise. The management avoided providing a specific insight to the news article that suggested a possible capital infusion of US$3 bn by the bank. The bank was of the opinion that they would update investors as and when they have made any decision on the same. From our perspective, based on discussion on this topic, we believe that it was fair to assume that the bank was comfortable having a strong capital buffer. We discussed the merits and demerits of the capital issue given that the bank had a strong capital buffer already in place and was looking at a subdued growth for FY2021. Management directed our attention to withstand possible tail risks emerging out of Covid, possible revival in growth and/or ensuring a stable franchise to depositors as key reasons to anchor expectations towards a strong best-in-class capital buffer. The focus would be on better quality of loans as the bank has strengthened risk filters to lower the incidence of default if the situation were to elongate or worsen, which implied negligible capital consumption. Further, our discussion and feedback suggested that the impairment cycle should be lower for the bank relative to most players in the market, which suggests that the capital consumption could be lower than anticipated.

 Retail business.

. Asset quality.

a) Second moratorium likely to be lower than the first. The bank has taken a different approach for the second moratorium as compared to the first one. The bank was not providing a default moratorium and has extended it on a month-on- month basis looking at individual situations. In this backdrop, it would be a reasonable assumption to assume that the second moratorium will be lower than the first one.

b) Collections have improved with June showing better than trends established in the previous few months. However, this is more of a reflection of the economy gradually opening up, borrowers having greater confidence on their ability to respond to the Covid crisis. The salaried segment, where the bank has a significantly large exposure to, has not seen major job losses, which is a positive development. The bank highlighted that the borrowers are quite careful in ensuring that the credit scores are not affected and generally averse to credit defaults. There is a lot of evidence of credit-worthy borrowers looking to raise cash by reducing their savings pool by selling of liquid investments or leveraging it (loans-against-shares, mutual fund or encashing part of PPF wherever possible). We were broadly of the same view that the retail credit cycle, especially in housing, should hold up quite well and better than most asset classes. Unsecured loans are mostly towards better rated companies and/or mostly driven by internal customers. There is a fair amount of analytics already established with these borrowers, which gives comfort that the cycle would be better than the previous retail credit cycle.

c) We discussed possible new products such as home equity loans and their ability to potentially reduce the stress for borrowers with cash-flow mismatches. The management highlighted that the products are available but off-take has not been too encouraging for various factors including the nature of customer behavior where the borrowers prefer to pay down debt at the earliest.

KOTAK INSTITUTIONAL EQUITIES RESEARCH 35 Banks ICICI Bank

 Loan growth. The management felt that it was too early to discuss loan growth. Bureaus have started seeing an increase in enquiry across markets but these are some function of (a) tightening of credit filters by various lenders to borrowers whose loans were already sanctioned but not disbursed or were in the process of getting sanctioned, (b) pending transactions were disbursements had halted due to lockdown is now getting completed, (c) demand from certain segment of customers, which are risky have increased but most lenders would be less inclined to lend at this stage. The management indicated that the bank would prefer to engage with borrowers on the secured product space at lower yields rather than a risky customer segment, which currently offers higher yields and (d) given the current environment where most lenders have taken a more cautious approach to lender, there are a handful of players who are open to business. Hence, there is little need to take risk at this point. The bank has expanded its credit offerings to its existing customer base through analytics and is seeing a bigger opportunity to cross-sell within its customer segment rather than outside.

 Margin outlook. We discussed the negative outlook on NIM but it appears to be mostly stemming from the excess liquidity that the balance sheet is currently carrying. We were of the opinion that a low competition in most asset classes implies the spreads to be better as pass-through of rates is likely to happen over time. Further, spreads may have expanded to reflect the increased risk across products.

 Operating expenses. The bank is looking at each line item quite carefully. The bank is systematically bringing down large format branches to normal format branches. The ability to negotiate rentals is better in this environment while the higher origination through internal channels and negotiation with external partners is likely to result in slowdown in operating costs. The bank is monitoring the operating profits quite closely.

Exhibit 1: ICICI Bank trading at 1.5X one-year forward (adj.) P/B Exhibit 2: ICICI Bank trades in line with peers Rolling PBR, March fiscal year-ends, June 2012- 2020 (X) ICICI Bank trading premium to private banks, June 2012- 2020 (X)

Rolling PBR (X) (LHS) Rolling PER (X) (RHS) 1.1 3.5 60

2.8 48 1.0

2.1 36 0.9

1.4 24 0.8

0.7 12 0.7

0.0 0 0.6 Jun-12 Jun-13 Jun-14 Jun-15 Jun-16 Jun-17 Jun-18 Jun-19 Jun-20 Jun-12 Jun-13 Jun-14 Jun-15 Jun-16 Jun-17 Jun-18 Jun-19 Jun-20

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

36 KOTAK INSTITUTIONAL EQUITIES RESEARCH ICICI Bank Banks

Exhibit 3: Growth to slow down reflecting the weak macro Exhibit 4: RoEs normalization in the horizon Revenue and earnings growth, March fiscal year-ends, 2011-22E (%) RoE (core), March fiscal year-ends, 2011-22E (%)

Earnings (LHS) Revenue (RHS) 17.5 400 24 14.0 300 18

10.5 200 12 15 15 7.0 15 14 100 6 13 13 12 11 10 3.5 7 0 0 6 2

-100 (6) 0.0

2011

2012

2013

2014

2015

2016

2017

2018

2019

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020E

2021E

2022E

2020E 2021E 2022E

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

Exhibit 5: NIM to be stable in the short term Exhibit 6: NII growth to slow down Net interest margin, March fiscal year-ends, 2008-22E (%) NII growth, March fiscal year-ends, 4QFY16-4QFY20 (%)

NIM (LHS) NII growth (RHS) 40 3.5 40

27 29 30 27 26 3.1 30 24 19 23 21 19 17 17 20 2.7 15 16 20 12 13 10 10 11 11 8 9 9 8 10 6 6 2.3 6 10 2 1 0 1 (2) 1.9 (3) - -

2.0 2.1 2.2 2.3 2.4 2.7 2.9 3.1 3.1 3.0 2.9 3.0 3.2 3.3 3.3

1.5 (10) (10)

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020E

2021E

2022E

4QFY16 2QFY17 4QFY17 2QFY18 4QFY18 2QFY19 2QFY20 4QFY20 4QFY19

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

KOTAK INSTITUTIONAL EQUITIES RESEARCH 37 Banks ICICI Bank

Exhibit 7: ICICI Bank – change in estimates March fiscal year-ends, 2021E-23E (Rs mn)

New estimates Old estimates (% change) 2021E 2021E 2021E 2021E 2022E 2021E 2022E Net interest income 375,079 403,779 447,308 375,176 403,975 (0) (0) Spread 3.3 3.3 3.4 3.3 3.3 0 bps 0 bps NIM (%) 3.6 3.6 3.6 3.6 3.6 0 bps 0 bps Customer assets (Rs bn) 7,523 8,254 9,153 7,523 8,254 (0) (0) Loan loss provisions 119,874 86,623 96,072 86,576 86,623 38 0 Other income 192,100 188,854 217,814 164,100 188,854 17 0 Fee income 113,503 131,327 152,082 113,503 131,327 0 0 Treasury income 40,000 12,000 12,000 12,000 12,000 233 0 Operating expenses 233,895 259,042 286,256 233,895 259,042 (0) 0 Employee expenses 91,927 101,532 111,599 91,927 101,532 0 0 PBT 213,409 246,968 282,794 218,805 247,165 (2) (0) Tax 54,633 63,224 72,395 56,014 63,274 (2) (0) Net profit 158,777 183,744 210,398 162,791 183,890 (2) (0) PBT-treasury+provisions 293,284 321,591 366,866 293,381 321,788 (0) (0)

Source: Company, Kotak Institutional Equities estimates

Exhibit 8: ICICI Bank SoTP (FY2022) valuation

ICICI share (%) FY2022 (Rs) Valuation methodology Value of ICICI standalone 100.0 360 Based on residual growth model Subsidiaries ICICI Financial Services 87 ICICI Prudential Life 51.9 48 3X Embedded Value and 18X EVOP General insurance 51.9 24 4X FY2022 PBR Mutual funds 51.0 15 5.5% of AUMs Other subsidiaries/associates ICICI Securities 79.2 10 15X FY2022 PER ICICI Securities Primary Dealer 100.0 2 1X FY2022 PBR ICICI Homes 100.0 4 1.5X FY2022 PBR ICICI Bank UK 100.0 3 0.6XFY2022 PBR ICICI Bank Canada 100.0 3 0.6XFY2022 PBR Venture capital/MF 100.0 2 10% of AUM of US$2 bn Value of subsidiaries 111 ` Value of company 471

Source: Company, Kotak Institutional Equities

38 KOTAK INSTITUTIONAL EQUITIES RESEARCH ICICI Bank Banks

Exhibit 9: ICICI Bank – forecasts and valuation March fiscal year-ends, 2013-22E

P/E ABVPS P/B PAT EPS P/E BVPS P/B RoE Core RoE (standalone) (standalone) (standalone) (Rs bn) (Rs) (X) (Rs) (X) (%) (%) (X) (Rs) (X) 2013 83 13.1 26.1 105 3.3 13.1 14.7 20 83 2.8 2014 98 15.4 22.2 115 3.0 14.0 14.9 17.3 92 2.5 2015 113 17.7 19.4 126 2.7 14.7 15.0 15.2 101 2.3 2016 97 15.1 22.7 139 2.5 11.4 11.1 18.2 104 2.2 2017 98 15.3 22.4 156 2.2 10.9 10.0 17.7 108 2.2 2018 68 10.5 32.5 164 2.1 8.3 6.0 26.8 113 2.0 2019 34 5.2 65.8 168 2.0 3.4 2.4 65.4 134 1.7 2020E 79 12.3 28.0 180 1.9 7.1 6.9 21.2 150 1.5 2021E 159 24.5 14.0 199 1.7 13.0 13.2 10.1 171 1.4 2022E 184 28.4 12.1 220 1.6 13.5 13.7 8.7 192 1.2

Source: Company, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 39 Banks ICICI Bank

Exhibit 10: ICICI Bank income statement and balance sheet March fiscal year-ends, 2017-23E (Rs mn)

2017 2018 2019 2020E 2021E 2022E 2023E Growth rates (%) Net loan growth 6.7 10.4 14.5 10.0 6.4 10.3 11.5 Customer assets growth 6.5 12.4 12.7 12.1 6.2 9.7 10.9 Corporate loans (0.9) (0.8) 2.9 7.9 2.3 8.4 8.7 Total retail loans 14.5 20.5 23.1 15.1 5.3 11.3 13.0 Deposits growth 16.3 14.5 16.4 14.1 8.9 9.6 9.2 Borrowings growth (26.5) 38.9 (2.8) (4.9) 20.7 16.0 20.5 Net interest income 2.4 5.9 17.3 23.1 12.7 7.7 10.8 Loan loss provisions 29.1 1.2 17.5 (17.7) (14.7) (27.7) 10.9 Non-interest income 27.3 (10.7) (16.7) 13.3 16.8 (1.7) 15.3 Net fee income 7.7 9.4 16.4 14.4 (3.0) 15.7 15.8 Net capital gains 127.2 (26.9) (79.4) (0.6) 209.4 (70.0) - Total income 12.8 (1.9) 2.7 19.7 14.1 4.5 12.2 Operating expenses 16.3 6.4 15.2 19.5 8.2 10.8 10.5 Employee expenses 14.6 3.1 15.1 21.5 11.1 10.4 9.9 DMA 18.6 17.7 22.5 10.5 19.7 19.7 19.7 Asset management measures (%) Yield on average earning assets 8.4 7.7 7.8 8.1 7.9 7.8 7.8 Interest on advances 8.8 8.4 8.7 9.3 9.2 9.0 9.0 Interest on investments 7.6 6.8 6.6 6.7 6.7 6.8 6.9 Average cost of funds 5.4 4.7 4.7 4.7 4.6 4.5 4.5 Interest on deposits 5.0 4.5 4.4 4.6 4.3 4.2 4.1 Other interest 6.4 5.6 5.7 5.1 5.7 5.8 5.9 Difference 3.0 3.0 3.2 3.3 3.3 3.3 3.4 Net interest income/earning assets 3.4 3.2 3.3 3.6 3.6 3.6 3.6 New provisions/average net loans 3.2 3.0 3.1 2.3 1.8 1.2 1.2 Loans-to-deposit ratio 75.2 69.5 71.2 69.1 68.1 67.8 67.8 Share of deposits Current 15.3 15.9 14.7 13.7 14.6 14.9 15.2 Fixed 49.6 48.3 50.4 53.3 48.8 46.7 44.6 Savings 35.1 35.8 34.9 33.0 36.6 38.4 40.2 Tax rate 13.1 8.8 11.0 23.6 25.6 25.6 25.6 Dividend payout ratio 29.7 21.5 28.7 - 20.0 20.0 20.0 Asset quality metrics (%) Gross NPL 8.5 9.5 7.0 5.8 5.4 5.3 5.2 Net NPL 5.4 5.4 2.3 1.5 1.2 1.2 1.2 Slippages 7.7 6.2 2.1 2.5 2.5 2.5 2.5 Provision coverage (ex write-off) 35.8 42.6 67.3 73.7 77.9 77.8 77.5 RoA composition - % of average assets Net interest income 3.0 2.9 3.0 3.2 3.3 3.3 3.3 Loan loss provisions 2.0 1.8 1.9 1.4 1.1 0.7 0.7 Net other income 2.7 2.2 1.6 1.6 1.7 1.5 1.6 Operating expenses 2.1 2.1 2.2 2.1 2.1 2.1 2.1 (1- tax rate) 86.9 91.2 89.0 56.5 74.4 74.4 74.4 RoA 1.4 1.1 0.4 0.8 1.4 1.5 1.5 Average assets/average equity 7.7 7.8 8.6 9.2 9.3 9.1 9.0 RoE 10.9 8.3 3.4 7.1 13.0 13.5 14.0

Source: Company, Kotak Institutional Equities estimates

40 KOTAK INSTITUTIONAL EQUITIES RESEARCH ICICI Bank Banks

Exhibit 11: ICICI Bank, growth rates, key ratios and Du Pont analysis March fiscal year-ends, 2017-23E (%)

2017 2018 2019 2020E 2021E 2022E 2023E Total interest income 541,563 549,659 634,012 747,983 819,929 882,798 977,391 Interest on advances 396,034 408,662 479,426 575,511 611,945 653,139 721,187 Interest on investments 113,771 115,682 127,969 146,732 166,667 182,989 203,245 Total interest expense 324,190 319,400 363,864 415,313 444,850 479,019 530,083 Deposits from customers 228,717 234,288 265,247 329,779 342,959 356,063 382,669 Net interest income 217,373 230,258 270,148 332,671 375,079 403,779 447,308 Loan loss provisions 143,470 145,216 170,670 140,532 119,874 86,623 96,072 Net interest income (after prov.) 73,903 85,042 99,478 192,138 255,204 317,156 351,236 Other income 195,045 174,196 145,122 164,486 192,100 188,854 217,814 Net fee income 80,349 87,894 102,319 117,011 113,503 131,327 152,082 Net capital gains 86,232 63,059 13,007 12,930 40,000 12,000 12,000 Miscellaneous income 721 834 918 5,023 4,018 5,023 6,278 Operating expenses 147,551 157,039 180,891 216,144 233,895 259,042 286,256 Employee expense 57,337 59,140 68,082 82,712 91,927 101,532 111,599 DMA 11,078 13,036 15,971 17,641 21,117 25,281 30,270 Pre-tax income 112,787 74,346 37,769 140,480 213,409 246,968 282,794 Tax provisions 14,775 6,570 4,140 61,172 54,633 63,224 72,395 Net profit 98,012 67,776 33,629 79,308 158,777 183,744 210,398 % growth 0.8 (30.8) (50.4) 135.8 100.2 15.7 14.5 PBT+provision-treasury gains 172,545 165,583 217,812 268,083 293,284 321,591 366,866 % growth (14.0) (4.0) 31.5 23.1 9.4 9.7 14.1 Balance sheet (Rs mn) Cash and bank balance 469,000 625,036 700,095 1,191,557 1,299,465 1,431,987 1,579,376 Cash 71,939 80,448 87,039 352,840 384,324 421,049 459,631 Balance with RBI 245,085 250,576 291,541 418,364 452,752 502,311 560,254 Balance with banks 3,801 4,849 7,693 8,463 9,309 10,240 11,264 Outside India 148,175 289,163 313,821 411,891 453,080 498,388 548,227 Net value of investments 1,615,065 2,029,942 2,077,327 2,495,315 2,672,513 2,913,413 3,193,017 Investments in India 1,541,700 1,962,100 2,013,776 2,432,501 2,610,421 2,852,028 3,132,325 Govt. and other securities 1,104,084 1,391,853 1,479,231 1,721,427 1,874,201 2,088,908 2,340,388 Shares 27,419 23,781 18,840 18,840 18,840 18,840 18,840 Subsidiaries 62,405 61,489 61,202 61,202 61,202 61,202 61,202 Debentures and bonds 100,750 153,889 142,328 156,561 172,217 189,439 208,383 Net loans and advances 4,642,321 5,123,953 5,866,466 6,452,900 6,866,443 7,570,761 8,441,245 Corporate loans 2,201,941 2,184,003 2,247,106 2,424,118 2,479,721 2,688,079 2,921,775 Total retail loans 2,440,380 2,939,950 3,619,360 4,165,935 4,386,722 4,882,681 5,519,470 Fixed assets 78,052 79,035 79,314 75,219 68,680 61,227 52,909 Net leased assets 2,415 2,415 2,415 880 748 636 541 Net owned assets 75,637 76,620 76,900 74,339 67,932 60,592 52,368 Other assets 625,345 796,303 897,836 768,660 845,526 930,079 1,023,087 Total assets 7,429,784 8,654,268 9,621,038 10,983,652 11,752,627 12,907,467 14,289,634

Deposits 4,900,391 5,609,752 6,529,197 7,709,690 8,115,547 8,891,047 9,705,774 Borrowings and bills payable 1,269,105 1,762,688 1,713,036 1,628,968 1,966,450 2,281,829 2,749,534 Preference capital 3,500 3,500 3,500 3,500 3,500 3,500 3,500 Other liabilities 260,778 230,239 295,171 479,950 383,960 307,168 245,734 Total liabilities 6,430,274 7,602,679 8,537,404 9,818,607 10,465,956 11,480,045 12,701,042 Paid-up capital 11,651 12,858 12,895 12,948 12,948 12,948 12,948 Reserves & surplus 987,860 1,038,731 1,070,739 1,152,097 1,273,723 1,414,474 1,575,644 Total shareholders' equity 999,511 1,051,589 1,083,634 1,165,044 1,286,670 1,427,422 1,588,591

Source: Company, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 41 BUY Jindal Steel and Power (JSP) Metals & Mining JULY 01, 2020 UPDATE Sector view: Attractive

JSP agrees to sell stake in Oman business–but will it go through? JSP has entered CMP (`): 162 into a binding offer with Templar Investments, a promoter group entity to divest its Fair Value (`): 200 entire stake in Oman steel business for an EV of US$1.1 bn. It has failed to conclude BSE-30: 34,916 divestment transactions in the past with related parties but appears confident of completing this transaction within a month. If the deal concludes it would add Rs27/share or 14% to our SOTP of Rs200. More importantly, it would address debt repayment concerns and could re-rate the stock further. Maintain BUY with FV of Rs200.

Jindal Steel and Power Stock data Forecasts/valuations 2020 2021E 2022E 52-week range (Rs) (high,low) 202-62 EPS (Rs) (7.7) (9.0) 14.6 Mcap (bn) (Rs/US$) 165/2.2 EPS growth (%) (343.3) (18.2) 261.7 ADTV-3M (mn) (Rs/US$) 2,562/34 P/E (X) (21.1) (17.9) 11.0 Shareholding pattern (%) P/B (X) 0.5 0.5 0.5 Promoters 60.5 EV/EBITDA (X) 6.7 7.8 5.2 FIIs 13.4 RoE (%) (2.4) (2.9) 4.7 MFs/BFIs 7/4.9 Div. yield (%) 0.0 0.0 0.0 Price performance (%) 1M 3M 12M Sales (Rs bn) 369 349 433 Absolute 33 96 14 EBITDA (Rs bn) 79 65 89 Rel. to BSE-30 23 66 28 Net profits (Rs bn) (8) (9) 15

Oman divestment would increase our SOTP by 14% or Rs27/share

JSP has accepted a binding offer from Templar Investments to divest its entire stake in its Oman asset for an EV of US$1.1 bn or Rs81 bn. The Oman steel business consists of a 2.4 mtpa crude steel capacity, 1.8 mtpa DRI plant and 1.4 mtpa bar mill. The transaction after repayment of US$200 mn inter-company advances would fetch US$880 mn (Rs66 bn) or 6.6X EV/EBITDA based on FY2020 EBITDA. We estimate lower EBITDA at Oman in FY2022E due to weak demand and value the business at 5.5X EV/EBITDA or Rs38 bn (Rs37/share) in our SOTP. The deal would add Rs28 bn or Rs27/share (+14%) to our fair value.

Past divestment deals have failed to conclude but company confident of swift closure

Templar Investment is an O.P. Jindal group company with ownership in JSP along with other listed Jindal group companies (Jindal Saw, JSW etc.). In the past, JSP has failed to conclude divestment deals such as 1) divestment of 1GW power plant to related company - JSW Energy, initiated in 2016 and called-off in 2019, 2) entered into a MOU to divest Botswana coal assets in April 2019 but yet not concluded. As the Oman divestment involves a group entity and with limited information on funding arrangements, we await for deal closure to factor it in our estimates. JSP is confident of closing the deal within July 2020 as per the press release.

The divestment would address concerns on lumpy repayments

JSP is burdened with Rs61 bn of debt repayment obligations in FY2021E with ~Rs40 bn at international entity and Rs21 bn at India entity. With cash-generation only at India entity, cash fungibility is also a challenge. If the Oman divestment concludes, it would reduce JSP’s Sumangal Nevatia international debt by 46% to Rs78 bn and address all its repayment obligations. Prayatn Mahajan Investment thesis based on deleveraging with strong FCF, divestments would add upside

Our investment thesis on JSP is based on 1) high growth visibility due to under-utilized assets (70% utilization in steel and 32% in power in FY2020) and 2) deleveraging with strong FCF generation. With limited capex spends, we estimate FCF yield of 13%/25% in FY2021/22E and net debt/EBITDA to reduce to 3.3X by FY2022E from 4.6X in FY2020. We see room for upside despite the recent rally given attractive valuations at 5.2X EV/EBITDA and 0.5X P/B FY2022E. [email protected] Contact: +91 22 6218 6427

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

Exhibit 1: JSP has decided to divest its entire stake in Oman steel business at an EV of US$1.1 bn

Oman deal US$ mn EV 1,080 Debt transfer 830 Repayment of inter-company loan 200 Net Cash inflow for JSPL 50

Source: Company, Kotak Institutional Equities estimates

Exhibit 2: JSP’s debt is expected to reduce by 18% to Rs303 bn post Oman divestment Entity wise gross debt break-up for JSP as on FY2020, (Rs bn)

Pro-forma Current (post Oman divestment) % change Standalone 153 153 — JPL 72 72 — International 144 78 (46) Gross Debt 369 303 (18)

Source: Company, Kotak Institutional Equities estimates

Exhibit 3: JSP has Rs61 bn of scheduled repayments in FY2021E Entity–wise debt repayment schedule for JSP , FY2021E, Rs mn

Repayments FY2021E 1QFY21E 2QFY21E 3QFY21E 4QFY21E Standalone 16,000 4,000 4,000 4,000 4,000 Power 6,000 1,500 1,500 1,500 1,500 International 39,000 1,500 16,500 1,500 19,500 Total 61,000 7,000 22,000 7,000 25,000

Source: Company, Kotak Institutional Equities estimates

Exhibit 4: JSP‘s net debt is expected to decline with sale of Oman assets Proforma net debt, leverage calculation for JSP, FY2017-FY2023E, (Rs bn, X)

2017 2018 2019 2020 2021E 2022E 2023E Current Consolidated EBITDA (Rs bn) 47 62 84 79 65 89 87 Net debt (Rs mn) 453 433 389 359 338 297 250 Net debt/EBITDA (X) 9.7 7.0 4.6 4.6 5.2 3.3 2.9 Oman- EBITDA (Rs bn) 4 7 11 Debt Reduction 66 66 66 Proforma Consolidated EBITDA (Rs bn) 61 82 76 Net debt (Rs mn) 272 231 184 Net debt/EBITDA (X) 4.5 2.8 2.4

Source: Company, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 43 Metals & Mining Jindal Steel and Power

Exhibit 5: Oman steel EBITDA increased 93% qoq to US$64 mn (+82% yoy) led by higher prices Production and EBITDA performance of Oman steel plant, 4QFY18 - 4QFY20 (US$ mn)

(% chg.) 4QFY18 1QFY19 2QFY19 3QFY19 4QFY19 1QFY20 2QFY20 3QFY20 4QFY20 yoy qoq FY2020 FY2019 % yoy Oman Steel sales volume (mn tons) 0.46 0.43 0.38 0.46 0.45 0.39 0.41 0.57 0.57 27 — 1.88 1.71 10 EBITDA (US$ mn) 71 68 46 32 35 26 16 33 64 82 93 138 181 (24) EBITDA (US$/ton) 154 158 121 70 78 67 39 58 112 44 93 73 106 (31) EBITDA (Rs mn) 4,596 4,556 3,225 2,305 2,466 1,807 1,162 2,348 4,657 89 98 10,350 13,032 (21)

Source: Company, Kotak Institutional Equities estimates

Exhibit 6: JSP aims to repay Rs100 bn in the next 2 years JSP's debt repayments, March fiscal year-ends, FY2021 - 2023E, (Rs bn)

200 Debt Repayments 183 180

160

140

120

100

80 61 57 60

40

20

0 2021E 2022E 2023E and after

Source: Kotak Institutional Equities estimates

Exhibit 7: JSP to generate strong FCF of Rs36 bn over FY2021-23E Exhibit 8: JSP to generate average 22% FCF yield, 2021-23E JSP Free Cash Flow, FY2015-23E (Rs bn) JSP Free Cash Flow Yield, FY2015-23E (Rs bn)

FCF (Rs bn) FCF Yield (%) 60 40 47 29 39 41 24 25 40 33 21 20 13 21 9 20 14 2 - - 2015 2016 2017 2018 2019

(20) 2015 2016 2017 2018 2019 (20) FY2020 FY2021E FY2022E FY2023E FY2020 FY2021E FY2022E FY2023E (26) (40) (32) (40)

(60) (46) (60) (80) (75)

(100) (80) (74)

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

44 KOTAK INSTITUTIONAL EQUITIES RESEARCH Jindal Steel and Power Metals & Mining

Exhibit 9: Jindal Steel and Power, Key assumptions, March fiscal year ends, 2017-2023E (Rs mn)

2017 2018 2019 2020 2021E 2022E 2023E Standalone (steel business) Capacity (mn tons) 4.8 8.6 8.6 8.6 8.6 8.6 8.6 Total steel sales (mn tons) 3.1 3.8 5.1 6.1 5.5 7.0 7.5 Utilization 66% 44% 60% 70% 64% 82% 87% Realization (Rs/ton) 46,034 46,953 54,133 43,279 45,801 45,738 44,475 Costs (Rs/ton) 36,928 36,387 42,479 33,746 36,241 35,533 35,799 Steel EBITDA (Rs/ton) 9,106 10,567 11,654 9,533 9,561 10,205 8,675 Jindal Power Capacity (MW) 2,800 3,400 3,400 3,400 3,400 3,400 3,400 Units generated (mn units) 8,538 10,905 10,396 9,583 8,970 11,349 12,144 PLF (%) 37 39 35 32 32 41 44 Realisation (Rs/units) 3.7 3.8 3.7 3.9 3.7 3.7 3.7 Cost (Rs/units) 2.4 2.5 2.6 2.6 2.6 2.6 2.6 EBITDA (Rs/units) 1.2 1.3 1.1 1.3 1.1 1.1 1.1 Shadeed Volumes (mn tons) 1.3 1.7 1.7 1.9 1.4 1.6 1.9 EBITDA ($/ton) 75 132 106 73 39 58 80 EBITDA (Rs mn) Standalone 28,581 39,731 59,670 57,773 52,837 71,608 64,653 Jindal Power 10,486 14,399 11,552 12,490 9,704 12,278 13,138 Shadeed 6,720 14,234 12,618 9,784 4,008 6,921 11,230 Others 793 (6,817) 216 (1,509) (1,525) (1,527) (1,530) Consolidated EBITDA 46,580 61,547 84,056 78,539 65,025 89,279 87,490

Source: Company, Kotak Institutional Equities estimates

Exhibit 10: Jindal Steel and Power, SOTP-based valuation, March 2022E basis (Rs bn)

(Rs bn) (Rs/share) Steel business Steel business EBITDA 59 Assigned multiple (X) 6.0 Steel business enterprise value (Includes captive power) 355 348 Less: Debt of steel business (170) (167) Steel business equity value (A) 185 181 Power business Equity value of Tamnar I and Tamnar II 96 94 Power business equity value (B) 96 94 International subsidiaries EBITDA (Shadeed) 7 — Assigned multiple (X) 5.5 — Enterprise value (Rs mn) 38 37 Less: Debt of international subsidiaries (115) (113) International business equity value (B) (77) (76) Target price (A+B+C) (Rs/share) 204 200

Source: Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 45 Metals & Mining Jindal Steel and Power

Exhibit 11: Jindal Steel & Power, Profit model, balance sheet and cash flow model, March fiscal year-ends, 2017-2023E (Rs mn)

2017 2018 2019 2020 2021E 2022E 2023E Profit model (Rs mn) Net sales 216,555 276,583 393,721 369,175 348,955 432,912 457,124 EBITDA 46,580 61,547 84,056 78,539 65,025 89,279 87,490 Other income 100 3,174 157 262 856 (116) (116) Interest (33,896) (38,657) (42,642) (41,493) (37,798) (32,739) (27,687) Depreciation (39,490) (38,830) (54,804) (41,604) (40,699) (39,922) (38,793) Profit before tax (30,429) (18,641) (28,017) 2,456 (12,616) 16,503 20,895 Taxes 5,027 2,398 3,902 (6,453) 2,523 (3,301) (4,179) Net profit (25,402) (16,242) (24,115) (3,997) (10,093) 13,202 16,716 Adjusted PAT (19,090) (8,218) (1,669) (7,804) (9,305) 14,087 17,698 Earnings per share (Rs) (20.9) (8.5) (1.7) (7.7) (9.1) 13.8 17.4 Balance sheet (Rs mn) Equity 300,505 303,846 320,846 321,371 312,066 326,154 343,852 Total Borrowings 458,505 439,402 395,074 368,709 375,087 338,378 301,586 Total liabilities 905,979 892,304 890,008 897,419 879,631 872,221 862,281 Net fixed assets 750,813 728,353 730,335 718,973 686,595 653,857 622,065 Investments 3,680 1,458 1,502 1,430 1,430 1,430 1,430 Cash 5,140 4,784 4,234 9,519 36,727 41,215 51,632 Total assets 905,979 892,304 890,009 897,419 879,631 872,221 862,281 Net Debt 453,365 434,618 390,840 359,190 338,359 297,163 249,954 Free cash flow (Rs mn) Operating cash flow excl. working capital 4,647 20,146 40,067 40,084 28,123 56,464 59,727 Working capital changes 22,456 10,252 4,503 15,127 1,029 (8,084) (5,518) Capital expenditure (24,975) (16,217) (11,897) (16,307) (8,321) (7,184) (7,000) Free cash flow 2,128 14,181 32,673 38,903 20,831 41,196 47,209 Ratios EV/EBITDA 12.9 9.6 6.5 6.7 7.7 5.2 4.7 P/E (7.7) (19.0) (93.6) (21.1) (17.7) 11.7 9.3 P/B 0.5 0.5 0.5 0.5 0.5 0.5 0.5 FCF Yield (26.2) 9.1 20.9 23.6 12.6 25.0 28.7 Book Value 328 314 332 315 306 320 337 Net Debt/EBITDA 9.7 7.1 4.6 4.6 5.2 3.3 2.9 RoAE (%) (7.4) (4.8) (5.4) (0.3) (3.0) 4.5 5.4 RoACE (%) 0.1 1.7 1.9 4.1 2.5 5.6 5.8

Source: Company, Kotak Institutional Equities estimates

46 KOTAK INSTITUTIONAL EQUITIES RESEARCH CAUTIOUS IT Services India JULY 01, 2020 UPDATE BSE-30: 34,916

June 2020 quarter preview: new strategies support new normal. We expect sequential revenue decline of 5-9% due to supply side factors and demand compression. EBIT margin decline can be contained with a revenue decline of up to 5% but can be sharp in case of higher revenue decline. Our view on key metrics (1) pricing—will decline but be contained, (2) order wins—a few closures but down; pipeline to remain strong, and (3) headcount—expect decline across the board and increase in involuntary attrition. Infosys and LTI could outperform peers, while HCLT and Tech Mahindra will underperform. Infosys is our top pick in the sector. HCLT/ TechM are inexpensive. LTI is a good long-term play.

Revenue decline of 5-9% qoq and 3-7% yoy

We expect sequential revenue decline of 5-9%. Expect sequential cross-currency headwind of 20-70 bps largely from INR/USD movements. Infosys and TCS will likely report sequential decline of 5.1% and 5.4% respectively and perform relatively better than peers. LTI will likely end up being the best performer with qoq revenue decline of 4.5% in c/c and yoy growth of 10.3%. HCLT, Wipro and Tech Mahindra will report 8-9% sequential decline on organic c/c basis. Impact on revenues for the quarter will be a function of both—demand pullback and supply side impact. Companies overcame supply side challenges by end of May 2020.

Demand pullback severe in directly impacted segments; BFSI and telecom stable

Directly impacted segments of travel, transportation, hospitality, retail (department stores and apparels) pulled back spending with magnitude of cut varying from 20-40%. The impact of these cuts will be visible through the course of June and September quarters. Expect sharp revenue decline also in the oil and gas segment. We expect moderate revenue decline in banking and stable revenues in insurance and telecom verticals.

EBIT margin decline—function of revenue decline and variable compensation

Tailwinds for the quarter are—(1) 60-100 bps from ~4% depreciation of INR against USD net off cross-currency headwinds, (2) lower travel costs of ~150 bps, and (3) lower administrative expenses. These will be offset by—(1) rebates, discounts and realization decline of ~2-3% creating margin headwind of close to 140-200 bps, (2) lower utilization rate—this is directly linked to the quantum of revenue decline. An 8% decline in revenues can lead to 3-4% hit on utilization and 120-150 bps impact on margin (assuming relatively lower hit to onsite utilization) and (3) operating leverage hit due to revenue decline. Headwinds are higher than tailwinds before decision on variable compensation. Companies have anywhere between 3-4% of revenues tied to variable compensation; the extent of flex on this will determine margins. We expect 30-60 bps EBIT margin decline for Infosys and TCS, stable for and LTI. Tech Mahindra and HCLT will report sharp 150-200 bps qoq decline in EBIT margin. Kawaljeet Saluja Infosys our top pick, Tech Mahindra/HCLT trade at inexpensive valuations

While we expect a weak FY2021, we believe that FY2022E revenue growth will be as high as Sathishkumar S double digits on the back of spending on core transformation programs, vendor consolidation again for offshore pure plays and pickup in IT spending. We expect TCS and Infosys to capitalize on this growth opportunity. Infosys is our top pick in the sector. We would wait for a better entry point for TCS. Even as we expect HCLT to report weak near-term financials, we believe that its IT services portfolio of business has a long runway for growth. Tech Mahindra is inexpensive. LTI is a solid compounding play in the mid-tier category. [email protected] Contact: +91 22 6218 6427

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

Key variables to watch out for and our view on them

We expect investor focus on the following variables:

 Pricing. While clients in a few verticals have pushed through for rebates and discounts, structured cost take-out decisions have started only towards the end of the quarter. Clients in the directly impacted verticals have pulled back discretionary spending and asked for rebates for run-the-business services. Pricing has been relatively stable in financial services. We do expect cost take-out decisions to be taken that will impact pricing in September and December quarters. We expect overall realization decline to be contained to 5% in FY2021W, a level at which we expect companies to keep margins broadly stable or restrict decline to 50-100 bps.

 Headcount, utilization and attrition. Attrition may not be backfilled leading to decline in headcount across companies. We also expect increase in involuntary attrition as it is common for companies to tighten performance management criteria during challenging times. Companies may also use the downturn to correct the bulge in the pyramid at the middle. Finally we expect decline in attrition rates materially.

 Deals closures and wins. Companies that report net-new deals or large deals will report a significant decline due to delay in decision making even as the overall deal pipeline remains healthy. Decisions that were advanced and required completion of only legal and contracting phase were completed. Decisions on some of the smaller deals picked pace in June 2020. However this will not prevent a decline in overall deal TCV.

 DSO days—expect increase of 2-4 days. We expect increase in receivables collections cycle as client in the directly impacted verticals have asked for longer payment terms. The increase will however be marginal.

 Midcap vulnerability to vendor consolidation decisions is exaggerated. We disagree with the bucketing of all mid-tier companies into a common pool of risk to vendor consolidation. Instead emphasis should be on—(1) composition of revenues; high contribution from core operations are stickier, (2) exposure to multiple technologies and client business segments increases stickiness and (3) delivery efficiencies to take out costs expected by clients without largely sacrificing profitability. We find LTI and to have the most resilient portfolios.

 Vendor consolidation decisions—legacy vendors at risk. We believe discussions on these will pick pace in the next three months and will be a part of comprehensive decisions on core transformation and cost take out decisions. Legacy US and European vendors that are not competitive and small contractors are vulnerable.

 Captives—not many available in financial services. While there is excitement among IT services companies to explore buying of client captive centers, we understand many are not available in the most sought after financial services vertical. Unlike GFC, banking clients are better capitalized today.

 Visa suspension—limited impact in the near-term. The US President signed a proclamation suspending entry into the US for nonimmigrant visa holders such as H-1B and L till the end of the current calendar year. The suspension is not applicable to valid visa holders as of the date of proclamation. This may impact IT companies especially since the process of awarding new H-1B visas starts in October; however the impact will be contained (1) due to aggressive localization in the past few years and (2) as potential decline in revenues in the current fiscal year will reduce demand for visa workers. Further increased use of offshore resources is common during recessions. Wipro and HCLT have the highest rate of localization followed by Infosys.

48 KOTAK INSTITUTIONAL EQUITIES RESEARCH IT Services India

Comments on individual companies

 TCS. We forecast constant currency revenue decline of 5.4% and cross-currency headwind of 60 bps. Sharp pullback in spending among directly impacted verticals of travel, transportation, retail (apparel and department stores) and autos will lead to revenue decline. We expect relatively stable performance in the financial services vertical. Ramp up of large deals will limit the impact on overall revenues. On profitability, we expect EBIT margin decline of 50 bps qoq and 40 bps increase yoy. EBIT margin headwinds are from lower utilization rate, moderate pricing pressure and operating leverage hit offset by Rupee depreciation, lower travel expenses and lower variable compensation payout. Net profit will decline on yoy comparison due to 50% decline in other income. Other income decline is on account of lower cash balance following impressive payout in the previous year and lower treasury yield. TCV of bookings reached a record high ever since they started this disclosure. Overall bookings will decline from US$8.9 bn reported in 4QFY20 and may decline marginally on yoy comparison. Overall TCV may be helped by large US$1.5 bn+ expanded deal from the Phoenix Group. Payout ratio (100% of net profit in FY2020) is impressive. We expect TCS to continue a similar payout ratio. We expect investor focus on -- (1) demand trend across verticals especially in the critical and underperforming banking vertical, (2) magnitude of rebates, discounts and cost take-outs requested by clients and its overall impact on realizations, (3) order pipeline and timelines by which decision making will normalize, (4) levers to defend margins, (5) longer term impact from changes in delivery model, contractual structures, composition of IT spending to name a few, (6) DSO days noting that clients have requested for longer credit cycle, and (7) the company's view on potential long term acceleration in IT services spending.

 Infosys. We expect revenue decline of 5.1% in c/c and cross-currency headwind of 20 bps. Simplus acquisition will contribute US$14 mn to quarterly revenues. We expect revenue decline to be sharp in retail, moderate in banking and stable in communications. EBIT margin will decline on sequential basis but lesser than peers. We forecast 40 bps qoq decline and 30bps yoy increase in EBIT margin. 4QFY20 margin was impacted to the extent of 90 bps due to higher bad debt provision and visa costs.1QFY21 margin decline will be restricted due to cost take-out plan instituted at the beginning of the year, leverage of investments in FY2019-20 and relatively lower revenue decline. However despite 6.5% EBIT growth yoy, net profit growth stands at negligible 1.4% due to-- (1) higher tax rate and (2) decline in other income from lower treasury yields. Infosys had deferred annual guidance in 4QFY20. Infosys may not resume annual guidance due to potential risks from second wave of lockdowns. Nonetheless we expect Infosys to reassure investors on organizational readiness to capitalize on growth opportunity at relatively stable medium-term margins. Infosys has been announcing TCV of large deal wins at an average of US$2 bn per quarter. We expect deal wins to decline materially. Note that deal pipeline is at a new high. We expect investors to increase focus on capital allocation. The company disappointed investors by reducing payout to 55% of FCF in FY2020. Investors would hope for an increase in payout ratio in FY2021. We expect investor focus on-- (1) the nature of external environment or decision making required for the company to resume guidance in case it does not do so in the current quarter, (2) measures to defend operating margins, (3) pricing pressure, (4) involuntary attrition-- newspaper reports indicate that Infosys has reduced headcount at the mid and senior levels to correct the bulge in the pyramid, (5) order pipeline and timelines by which decision making will normalize, (6) longer term implications from changes in delivery model, contractual structures, composition of IT spending to name a few, (7) DSO days noting that clients have requested for longer credit cycle, and (8) the company's view on potential long-term acceleration in IT services spending.

KOTAK INSTITUTIONAL EQUITIES RESEARCH 49 India IT Services

 Wipro. We forecast sequential revenue decline of 7.6% in c/c and cross-currency headwind of 50 bps. Revenue decline will be broad-based and particularly high in the consumer vertical and include impact of both demand and supply side factors. Particularly we expect sharp revenue contraction of 10% qoq in the BPO service offering. Note that approvals to transition to WFH took longer in BPO services compared to IT services. We forecast EBIT margin decline of 70 bps qoq and 140 bps yoy. EBIT margin headwinds are from lower utilization rate, moderate pricing pressure and operating leverage hit offset by Rupee depreciation, lower travel expenses and lower variable compensation. We note that utilization hit will be higher for Wipro due to the sharp revenue decline. Wipro’s capital allocation decision will be closely watched. The company’s payout policy is close to 50% of net profit expected largely through buyback of shares. Wipro completed its last buyback in mid-September 2019. Regulations require a cooling off period of 12-months before the next buyback announcement. Investors will seek reassurance on continuation of buyback plan in the future. On guidance we expect Wipro to guide for 1-4% qoq revenue decline for September 2020 quarter in case it chooses to guide. FCF/ net income at 37% in 4QFY20 was low on account of the company's decision to pay salaries to employees at the end of month as compared to its usual practice of the first date of the following month. 1QFY21 will see a return to normal trend resulting in stronger FCF generation. However we do expect increase in DSO days due to customer demand for a longer credit period. We expect investor focus on-- (1) order pipeline and indication on return to normalcy on pace of decision making, (2) magnitude of pricing pressure, (3) levers to defend operating margin, (4) magnitude of cut in variable compensation, (5) path to achieving industry matching performance, and (6) changes that one could expect under the new CEO.

 HCLT. We expect sharp sequential revenue decline of 7.8% and cross-currency headwind of 20 bps. We forecast sequential revenue decline of 11.8% in c/c in ERD, 6.3% in IT services and 11.1% in products. On yoy comparison products business will grow 60% largely on account of acquisition of select products of IBM. We forecast sharp revenue decline on account of-- (1) cancellation of projects and rationalization of product lines in asset heavy industries in ERD, (2) supply side impact in ERD and BPO that were resolved only end of May 2020, (3) high base of March 2019 and June 2019 quarters due to ramp up of mega deals. Anniversary of these deals and entry into second year is accompanied by lower revenues and (4) Covid impact on deal closures. Sharp revenue decline will filter through to margins. We expect 210 bps qoq margin contraction due to-- (1) lower revenues or operating leverage hit, (2) possible additional impact from supply side challenges, (3) lower new license revenues in products business and (4) additional headwinds from lower pricing and utilization. Levers such as lower travel cost, variable compensation and Rupee depreciation will not be enough to offset these headwinds. Note that 1QFY20 EBIT margin was impacted by aggressive investments to on-board IBM select products’ acquisition. We note that aggressive product acquisition strategy continues with two announcements-- (1) acquisition of SON technology of Cisco for US$50 mn which will close by January 2021 and (2) a small IP deal with Temenos. Capital allocation will be an area of focus. HCLT has disappointed with a non-committed payout policy. Increase in payout ratio can aid valuations. On guidance, we do not expect the company to resume annual guidance. However the company may retain its earlier commentary of stabilization in September quarter and growth in 2HFY21. We expect investor focus on-- (1) the nature of external environment or decision making required for the company to resume guidance in case it does not do so in the current quarter, (2) outlook on products business-- the Street does not share management's optimism on its resilience , (3) pricing pressure, (4) order pipeline and timelines by which decision making will normalize-- HCLT has a higher reliance on large deals for growth, (5) DSO days noting that clients have requested for a longer credit cycle, and (6) whether the company will continue its aggressive acquisition strategy.

50 KOTAK INSTITUTIONAL EQUITIES RESEARCH IT Services India

 Tech Mahindra. Tech Mahindra will likely report a terrible quarter with sequential revenue decline of 8.1% in c/c. Two acquisitions will contribute ~US$12 mn to quarterly revenues-- (1) Cerium Systems and (2) Zen3 Infosolutions. Revenue decline in organic basis will be sharper at 9.1%. A few factors will contribute to revenue contraction on sequential basis-- (1) supply and demand side challenges in BPO. We expect BPO business to decline 13.5% qoq and 15.4% yoy to US$97 mn, (2) rationalization of low margin contracts, (3) seasonal dip in Comviva revenues, (4) revenue decline from acquired entities which largely address the discretionary spending buckets and (5) decline in network management business. Revenue decline will likely be balanced across enterprise and communications segments. Sharp revenue decline will have consequent margin impact. We forecast margin decline of 160 bps qoq, low base of 4QFY20 notwithstanding. Note that 4QFY20 margins were impacted to the extent of 100 bps from one-off costs and higher bad debt provisioning. Margin decline will largely be on account of revenue decline that impacts utilization and has hit from operating leverage. In addition we expect additional costs from exit from unprofitable contracts and restructuring charges of portfolio companies. Net profit decline will be sharper due to negligible Fx gains as compared to gains reported in the prior periods. Tech Mahindra has reported strong deal wins in recent quarters. We expect net-new TCV to range from US$200-250 mn, down from US$500 mn reported in 4QFY20. We believe that clients have started taking decisions on mid-tier deals. Capital allocation policy will be an area of focus. The company reduced payout in FY2020. Acquisition will receive high focus noting its poor past track record. We expect investor focus on-- (1) measures taken by the company to improve operating margins and sustainable operating band, (2) enabling factors required to bring consistency to performance, (3) whether the company will continue to acquire given its poor track record, (4) BPO-- the future of contact centre business, a dominant revenue stream within BPO and measures taken to increase non-voice revenues, (5) market conditions required for revival in growth, (6) the future of acquired entities and (7) hedge book, rates and gains/ (losses) for FY2021.

Exhibit 1: Sequential currency movement in Jun 2020 quarter

INR/USD USD/GBP USD/EUR USD/AUD JPY/USD Mar-20 72.7 1.27 1.10 0.65 109.8 Jun-20 75.8 1.24 1.10 0.67 107.3 Appr/ (Depr) (%) (4.1) (2.7) 0.4 2.3 2.3

Appreciation of the Rupee against other currencies INR/USD INR/GBP INR/EUR INR/AUD JPY/INR Mar-20 72.7 92.3 80.0 47.2 1.5 Jun-20 75.8 93.7 83.7 50.4 1.4 Appr/ (Depr) (%) (4.1) (1.5) (4.5) (6.3) (6.7)

Source: Bloomberg, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 51 India IT Services

Exhibit 2: Yoy currency movement in Jun 2020 quarter

INR/USD USD/GBP USD/EUR USD/AUD JPY/USD Jun-19 69.7 1.28 1.12 0.70 109.5 Jun-20 75.8 1.24 1.10 0.67 107.3 Appr/ (Depr) (%) (8.1) (3.4) (1.4) (5.0) 2.0

Appreciation of the Rupee against other currencies INR/USD INR/GBP INR/EUR INR/AUD JPY/INR Jun-19 69.7 89.2 78.0 48.8 1.6 Jun-20 75.8 93.7 83.7 50.4 1.4 Appr/ (Depr) (%) (8.1) (4.9) (6.8) (3.3) (11.0)

Source: Bloomberg, Kotak Institutional Equities estimates

Exhibit 3: Cross-currency movements provide 20-70 bps headwind qoq and 40-160 bps headwind yoy for Jun-20E

Currency-wise revenue mix (a) Impact in bps on Impact in bps on US Europe Rest of the world US$ revenue US$ revenue USD GBP EUR AUD Others growth (qoq ) growth (yoy ) TCS 53 14 11 22 (61) (158) Infosys 68 5 13 6 9 (23) (78) Wipro 62 10 8 4 16 (55) (138) HCL Tech 63 13 16 8 (20) (107) Tech M 51 12 9 4 25 (67) (160) L&T Infotech 69 15 16 (42) (96) Mindtree 77 15 8 (34) (70) Hexaware 74 18 8 (21) (43) Mphasis 77 12 11 (35) (70)

Notes: (a) As per disclosures for Infosys, TCS, Wipro, HCLT and Tech M; assumed to be in line with geographic mix for other companies.

Source: Companies ,Bloomberg, Kotak Institutional Equities estimates

52 KOTAK INSTITUTIONAL EQUITIES RESEARCH IT Services India

Exhibit 4: Results preview for the quarter ending Jun 2020 (Rs mn)

Financials Jun-19 Mar-20 Jun-20E qoq (%) yoy (%) Comments/what to look for TCS (July 9, 2020) Revenues (US$ mn) 5,485 5,444 5,119 (6.0) (6.7) We forecast constant currency revenue decline of 5.4% and cross-currency headwind of 60 bps. Revenue decline will be on account of sharp pullback in spending among directly impacted verticals of travel, transportation, retail (apparel and department stores) and autos. We expect relatively stable performance in the financial services vertical. Ramp up of large deals will limit the impact on overall revenues. Revenue growth (c/c qoq, %) 2.3 (1.2) (5.4) We expect EBIT margin decline of 50 bps qoq and 40 bps increase yoy. EBIT margin headwinds are from lower utilization rate, moderate pricing pressure and operating leverage hit offset by Rupee depreciation, lower travel expenses and lower variable compensation payout. Revenue growth (c/c yoy, %) 10.6 3.0 (5.1) Net profit will decline on yoy comparison due to 50% decline in other income. Other income decline is on account of lower cash balance following impressive payout in the previous year and lower treasury yield. Organic revenue growth (c/c qoq, %) 2.3 (1.2) (5.4) Overall bookings will decline from US$8.9 bn reported in 4QFY20 and may decline marginally on yoy comparison. Overall TCV may be helped by large US$1.5 bn+ expanded deal from the Phoenix Group. Organic revenue growth (c/c yoy, %) 10.6 3.0 (5.1) TCS has maintained impressive payout ratio (100% of net profit in FY2020) which we expect to continue. Revenues 381,720 399,460 388,046 (2.9) 1.7 Expect investor focus on -- (1) demand trend across verticals especially in the critical and underperforming banking vertical, (2) magnitude of rebates, discounts and cost take-outs requested by clients and its overall impact on realizations, (3) order pipeline and timelines by which decision making will normalize, (4) levers to defend margins, (5) longer term impact from changes in delivery model, contractual structures, composition of IT spending to name a few, (6) DSO days noting that clients have requested for longer credit cycle, and (7) company's view on potential long term acceleration in IT services spending.

EBIT 92,200 100,250 95,377 (4.9) 3.4 Adjusted net profit 81,310 80,490 78,175 (2.9) (3.9) EBIT margin (%) 24.2 25.1 24.6 (52) bps 42 bps Wipro (July 14, 2020) Total revenues 148,718 158,498 147,196 (7.1) (1.0) We forecast sequential revenue decline of 7.6% in c/c and cross-currency headwind of 50 bps. Revenue decline will be broad-based and particularly high in the consumer vertical. Revenue decline will be on account of demand and supply side factors. Global IT revenues (US$ mn) 2,039 2,074 1,905 (8.1) (6.5) We expect sharp revenue contraction of 10% qoq in the BPO service offering. Note that approvals to transition to WFH took longer in BPO services compared to IT services. Global IT services revenue growth (c/c qoq, %) (0.7) 0.4 (7.6) We forecast EBIT margin decline of 70 bps qoq and 140 bps yoy. EBIT margin headwinds are from lower utilization rate, moderate pricing pressure and operating leverage hit offset by Rupee depreciation, lower travel expenses and lower variable compensation. We note that utilization hit will be higher for Wipro due to sharp revenue decline. Global IT services revenue growth (c/c yoy, %) 5.9 2.6 (5.2) While it is too early to expect Mr Thierry Delaporte's view on the changes required to Wipro's business model, his views on the future of IT services, changes required to operating model and longer-term industry trends will be sought after

Global IT services organic revenue growth (c/c (0.7) 0.4 (7.6) Wipro's payout policy is close to 50% of net profit expected largely through buyback of shares. Wipro qoq, %) completed its last buyback in mid-September 2019. Regulations require a cooling off period of 12-months before the next buyback announcement. Investors will seek reassurance on continuation of buyback plan in future. Global IT services organic revenue growth (c/c yoy, 5.8 2.3 (6.3) We expect Wipro to guide for 1-4% qoq revenue decline for September 2020 quarter in case it chooses to %) guide. Global IT revenues 143,514 152,960 142,515 (6.8) (0.7) FCF/ net income at 37% in 4QFY20 was low on account of company's decision to pay salaries to employees at the end of month as compared to its usual practice of the first date of the following month. 1QFY21 will see a return to normal trend resulting in stronger FCF generation. However we do expect increase in DSO days due to customer demand for longer credit period. EBIT 25,373 26,389 23,625 (10.5) (6.9) Expect investor focus on-- (1) order pipeline and indication on return to normalcy on pace of decision making, (2) magnitude of pricing pressure, (3) levers to defend operating margin, (4) magnitude of cut in variable compensation, (5) path to achieving industry matching performance, and (6) changes to one could expect under the new CEO.

Adj. net profit 23,874 23,260 22,084 (5.1) (7.5) Total EBIT margin (%) 17.1 16.6 16.0 (60) bps (101) bps IT Services - EBIT margin (%) 18.0 17.3 16.6 (73) bps (138) bps Infosys (July 15, 2020) Revenues (US$ mn) 3,131 3,197 3,025 (5.4) (3.4) We expect revenue decline of 5.1% in c/c and cross-currency headwind of 20 bps. Simplus acquisition will contribute US$14 mn to quarterly revenues. We expect revenue decline to be sharp in retail, moderate in banking and stable in communications. Revenue growth (c/c qoq, %) 2.8 (0.8) (5.1) We forecast 40 bps qoq decline and 30bps yoy increase in EBIT margin. 4QFY20 margin was impacted to the extent of 90 bps due to higher bad debt provision and visa costs.1QFY21 margin decline will be restricted due to cost take-out plan instituted at the beginning of the year and leverage of investments in FY2019-20. Relatively lower revenue decline also helps. Revenue growth (c/c yoy, %) 12.4 6.4 (2.6) Despite 6.5% EBIT growth yoy, net profit growth stands at negligible 1.4% due to-- (1) higher tax rate and (2) decline in other income from lower treasury yields. Organic revenue growth (c/c qoq, %) 2.5 (0.9) (5.6) Infosys may not resume annual guidance due to potential risks from second wave of lockdowns. Nonetheless we expect Infosys to reassure investors on organizational readiness to capitalize on growth opportunity at relatively stable medium-term margins.

Organic revenue growth (c/c yoy, %) 11.6 5.2 (3.4) Infosys has announced TCV of large deal wins at an average of US$2 bn per quarter. We expect deal wins to decline materially. Deal pipeline is at a new high though. Revenues 218,030 232,670 229,323 (1.4) 5.2 Expect investor focus on capital allocation. The company disappointed investors by reducing payout to 55% of FCF in FY2020. Investors would hope for an increase in FY2021. EBIT 44,710 49,270 47,619 (3.4) 6.5 Expect investor focus on-- (1) the nature of external environment or decision making required for company to resume guidance in case it does not do so in the current quarter, (2) measures to defend operating margins, (3) pricing pressure, (4) involuntary attrition-- newspaper reports indicate that Infosys has reduced headcount at the mid and senior levels to correct the bulge in the pyramid, (5) order pipeline and timelines by which decision making will normalize, (6) longer term implications from changes in delivery model, contractual structures, composition of IT spending to name a few, (7) DSO days noting that clients have requested for longer credit cycle, and (8) company's view on potential long term acceleration in IT services spending.

Adjusted net profit 38,020 43,350 38,559 (11.1) 1.4 EBIT margin (%) 20.5 21.2 20.8 (41) bps 26 bps

Source: Companies, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 53 India IT Services

Exhibit 4: Results preview for the quarter ending Jun 2020 (Rs mn)

Financials Jun-19 Mar-20 Jun-20E qoq (%) yoy (%) Comments/what to look for HCL Technologies (July 2020) Revenues (US$ mn) 2,364 2,543 2,339 (8.0) (1.0) We expect sharp sequential revenue decline of 7.8% and cross-currency headwind of 20 bps. We forecast sequential revenue decline of 11.8% in c/c in ERD, 6.3% in IT Services and 11.1% in Products. On yoy comparison products business will grow 60% largely on account of acquisition of select products of IBM.

Revenue growth (c/c qoq, %) (0.7) 0.8 (7.8) Sharp revenue decline is on account of-- (1) cancellation of projects and rationalization of product lines in asset heavy industries in ERD, (2) supply side impact in ERD and BPO that were resolved only end of May 2020, (3) high base of March 2019 and June 2019 quarters due to ramp up of mega deals. Anniversary of these deals and entry into second year is accompanied by lower revenues and (4) Covid impact on deal closures. Revenue growth (c/c yoy, %) 17.0 13.5 0.0 Sharp revenue decline will filter through to margins. We expect 210 bps qoq contraction due to-- (1) lower revenues or operating leverage hit, (2) supply side challenges may have an additional impact, (3) lower new license revenues in products business and (4) additional headwinds from lower pricing and utilization. Levers such as lower travel cost, variable compensation and Rupee depreciation will not be enough to offset these headwinds. 1QFY20 EBIT margin was impacted by aggressive investments to on-board IBM select product acquisition. Organic revenue growth (c/c qoq, %) (1.2) 0.8 (7.8) Aggressive product acquisition strategy continues with two announcements-- (1) acquisition of SON technology of Cisco for US$50 mn which will close by January 2021 and (2) a small IP deal with Temenos. Organic revenue growth (c/c yoy, %) 13.5 5.9 (6.8) Capital allocation will be an area of focus. HCLT has disappointed with non-committed payout policy. Increase in payout ratio can aid valuations. Revenues 164,250 185,900 177,308 (4.6) 8.0 We do not expect the company to resume annual guidance. However the company may retain its earlier commentary of stabilization in September quarter and growth in 2HFY21. EBIT 28,063 38,801 33,254 (14.3) 18.5 Expect investor focus on-- (1) the nature of external environment or decision making required for the company to resume guidance in case it does not do so in the current quarter, (2) outlook on products business-- the Street does not share management's optimism on its resilience , (3) pricing pressure, (4) order pipeline and timelines by which decision making will normalize-- HCLT has a higher reliance on large deals for growth, (5) DSO days noting that clients have requested for longer credit cycle, and (6) will the company continue its aggressive acquisition strategy.

Adjusted net profit 22,215 31,532 26,840 (14.9) 20.8 EBIT margin (%) 17.1 20.9 18.8 (212) bps 167 bps Tech Mahindra (July 31, 2020) Revenues (US$ mn) 1,247 1,295 1,181 (8.8) (5.3) Tech Mahindra will report a terrible quarter with sequential revenue decline of 8.1% in c/c. Two acquisitions will contribute ~US$12 mn to quarterly revenues-- (1) Cerium Systems and (2) Zen3 Infosolutions. Revenue decline in organic basis will be sharper at 9.1%. Revenue growth (c/c qoq, %) (1.0) (3.3) (8.1) A few factors will contribute to revenue contraction on sequential basis-- (1) supply and demand side challenges in BPO. We expect BPO business to decline 13.5% qoq and 15.4% yoy to US$97 mn, (2) rationalization of low margin contracts, (3) seasonal dip in Comviva revenues, (4) revenue decline from acquired entities which largely address the discretionary spending buckets and (5) decline in network management business. Revenue decline will be balanced across enterprise and communications segments.

Revenue growth (c/c yoy, %) 3.9 4.1 (3.7) Sharp revenue decline will lead to margin decline of 160 bps qoq, low base of 4QFY20 notwithstanding. Note that 4QFY20 margins were impacted to the extent of 100 bps from one-off costs and higher bad debt provisioning. Margin decline will largely be on account of revenue decline that impacts utilization and has hit from operating leverage. In addition we expect additional costs from exit from unprofitable contracts and restructuring charges of portfolio companies. Organic revenue growth (c/c qoq, %) (1.2) (4.0) (9.1) Net profit decline will be sharper due to negligible Fx gains as compared to gains reported in the prior periods. Organic revenue growth (c/c yoy, %) 3.3 1.8 (6.4) We expect net-new TCV to range from US$200-250 mn, down from US$500 mn reported in 4QFY20. We believe that clients have started taking decisions on mid-tier deals. Revenues 86,530 94,902 89,487 (5.7) 3.4 Capital allocation policy will be an area of focus. The company reduced payout in FY2020. Acquisition will receive high focus noting poor past track record. EBIT 9,928 9,496 7,545 (20.5) (24.0) Expect investor focus on-- (1) measures taken by the company to improve operating margins and sustainable operating band, (2) enabling factors required to bring consistency to performance, (3) will the company continue to acquire given its poor track record, (4) BPO-- the future of contact centre business, a dominant revenue stream within BPO and measures taken to increase non-voice revenues, (5) market conditions required for revival in growth, (6) the future of acquired entities and (7) hedge book, rates and gains/ (losses) for FY2021.

Adjusted net profit 9,593 10,214 6,439 (37.0) (32.9) EBIT margin (%) 11.5 10.0 8.4 (158) bps (304) bps L&T Infotech (July 15, 2020) Revenues (US$ mn) 357 410 390 (4.9) 9.3 LTI will outperform peers with strong 10.3% constant currency growth in revenues on yoy comparison. Revenue decline on sequential basis will be modest 4.5% in c/c largely on account of pullback of spending in select verticals such as oil and gas and decline in pass-through revenues Revenue growth (c/c qoq, %) 1.0 3.9 (4.5) Adjusting for contribution to PM-CARES, EBIT margin stood at 17% in 4QFY20. We expect stable margins with impact from utilization decline and lower revenues offset by -- (1) lower contribution from pass-through revenues, (2) lower G&A and travel costs and (3) Rupee depreciation Revenue growth (c/c yoy, %) 12.9 15.9 10.3 Lower Fx gains will impact net profit margins. We do not forecast any Fx gains for the quarter, down from Rs398 mn reported in 4QFY20 and Rs680 mn in 1QFY20. We forecast net profit margin of 13.2% for the quarter, lower than historical guidance of 14-15% Organic revenue growth (c/c qoq, %) 0.4 3.8 (4.5) LTI has announced a large deal every quarter though this quarter could be an exception due to Covid Organic revenue growth (c/c yoy, %) 11.9 15.3 9.9 Expectinduced investor delay in focus-- decision (1) makingimpact of visa suspension noting a higher reliance on it compared to peers, (2) outcome of ICE raids, (3) measures taken to ensure balance growth between large deals and surround services, critical for profitable growth and (4) large deal pipeline and closures noting that LTI has greater reliance on it for growth Revenues 24,849 30,119 29,543 (1.9) 18.9 EBIT (excl. forex gains) 3,968 5,033 4,999 (0.7) 26.0 Adjusted net profit 3,558 4,275 3,901 (8.7) 9.7 EBIT margin (%) 16.0 16.7 16.9 21 bps 95 bps

Source: Companies, Kotak Institutional Equities estimates

54 KOTAK INSTITUTIONAL EQUITIES RESEARCH IT Services India

Exhibit 4: Results preview for the quarter ending Jun 2020 (Rs mn) (contd)

Financials Jun-19 Mar-20 Jun-20E qoq (%) yoy (%) Comments/what to look for Mindtree (July 14, 2020) Revenues (US$ mn) 264.2 278.4 257.8 (7.4) (2.4) We expect sequential constant currency decline of 7.1% with a cross currency headwind of 30 bps. We forecast revenue growth in CMT vertical and Microsoft, the top client. TTH accounts for _% of revenues and will be severe;y impacted due to demand contraction. We forecast sharp 15-20% revenue decline in TTH due to ramp downs, rebates and price discounts. Retail and CPG will be less impacted due to deal ramp ups in CPG. Revenue growth (c/c qoq, %) 1.1 1.2 (7.1) We expect flat margins sequentially and yoy increase of 740 bps. Note that 4QFY20 margins had one-time 100 bps impact from contribution to PM CARES fund. 1QFY19 margins had one-time impact of 260 bps from special bonus to employees. Mindtree has deferred usual wage hike in the quarter. Revenue growth (c/c yoy, %) 10.2 6.3 (1.7) We believe reasonable TCV of deal wins helped by large deal win(s). We expect healthy deal pipeline led by CMT and CPG verticals. Strong momentum in top client and good execution on large deal win ramp ups drive outlook of sequential growth in 2QFY20 despite muted outlook for TTH Organic revenue growth (c/c qoq, %) 1.1 1.2 (7.1) DSO impact is likely to be marginal. Organic revenue growth (c/c yoy, %) 10.2 6.3 (1.7) The company is making progress on focus shift to more managed services and mining of strategic accounts. Focus on improving margins has yielded good results. Reduction in subcontractor usage, focus on reskilling as opposed to lateral hiring for key skills, lower variable compensation, wage hike deferrals, cost rationalisation in small accounts are levers that Mindtree can flex to protect margin profile. Revenues 18,342 20,505 19,538 (4.7) 6.5 We expect investors to focus on (1) outlook for TTH vertical and redeployment of bench, (2) deal TCV, (3) progress in mining top accounts, (4) growth outlook for top client, (5) marquee external hires in recent months, (6) growth in digital revenues and Interactive practice and (7) timeline for eventual merger with LTI

EBIT 1,172 2,833 2,695 (4.9) 130.0 Adjusted net profit 927 2,062 2,081 0.9 124.5 EBIT margin (%) 6.4 13.8 13.8 (2) bps 741 bps Hexaware Technologies (Date not available) Revenues (US$ mn) 188.5 210.6 191.8 (8.9) 1.8 We expect qoq revenue decline of 8.7% in constant currency with cross currency headwind of 20 bps. Relatively high sequential revenue decline is due to higher exposure to travel vertical and higher impact on education and fitness sub-segments. Revenues in travel vertical can decline by 15%. Manufacturing vertical will also be heavily impacted. BFS and profeessional services will perform relatively better Revenue growth (c/c qoq, %) 5.0 (1.7) (8.7) Lower utilisation and realization decline will lead to margin contraction offset by Rupee depreciation and cost mitigation actions. Expect 100 bps sequential margin decline and 250 bps yoy decline. Revenue growth (c/c yoy, %) 13.0 17.0 2.2 BFS business can recover faster than other segments. Increase in mortgage refinancing activity in the US will provide impetus totwo large clients in mortgage segment. Organic revenue growth (c/c qoq, %) 5.0 (1.7) (8.7) We expect weak NN deal wins. Hexaware had indicated strong pickup in deal wins in January and February due to higher focus but NN deal activity came to a standstill in March. Mobiquity business and cross-sell of Mobiquity services to Hexaware can be affected to due to short term pressure on CX spending. Organic revenue growth (c/c yoy, %) 13.0 5.3 (8.9) We expect hedge loss of Rs70 mn after strong hedge gains of Rs434 mn in the previous quarter leading to sharp 35.2% sequential decline in net profit Revenues 13,083 15,418 14,540 (5.7) 11.1 Board has approved delisting proposal by Barings. Stock price will be governed by beliefs on potential transaction price EBIT 1,742 1,818 1,570 (13.7) (9.9) We expect investors to focus on— (1) guidance and assumptions embedded in it if company chooses to provide, (2) outlook for highly impacted verticals, (3) updated outlook for segments such as IMS and healthcare where management was confident of V-shaped recovery, (4) management's view on delisting process, (5) TCV of net new deal wins, (6) resolution of supply side issues in BPO, (7) magnitude of pricing pressure and (8) DSO.

Adjusted net profit 1,512 1,749 1,133 (35.2) (25.0) EBIT margin (%) 13.3 11.8 10.8 (100) bps (252) bps Mphasis (July 23, 2020) Revenues (US$ mn) 297 320 304 (5.0) 2.3 We expect sequential constant currency revenue decline of 4.7% with a cross currency headwind of 30 bps. Large exposure to BFSI, a relatively less impacted vertical will help limit revenue decline. We expect sharp revenue decline in DXC/HP business. Direct Core will be relatively stable helped by strategic accounts and low exposure (<1%) to airlines. Nevertheless expect transportation to decline higher than other verticals. Revenue growth (c/c qoq, %) 2.0 0.6 (4.7) EBIT will likely decline 90 bps on qoq and 5 bps on yoy basis. Revenue growth (c/c yoy, %) 11.5 9.7 3.0 We have assumed resilient performance in Digital Risk helped by pick up in volumes in mortgage loan Organic revenue growth (c/c qoq, %) 2.0 0.6 (4.7) Acquisitionorigination andof new refinancing clients can slowdown. We forecast lower deal win TCV due to lesser conversions although pipeline can remain healthy. Organic revenue growth (c/c yoy, %) 11.5 9.7 3.0 4QFY20 had low tax rate of 14.9% due to one-time true up. Normalization of tax rate in 1QFY21 will lead to 21.2% decline in net profit despite lower decline at EBIT level. Revenues 20,626 23,462 23,031 (1.8) 11.7 We expect investors to focus on— (1) FY2021 revenue growth outlook for DXC/HP channel and remaining MRC, (2) TCV of deal wins in Direct International segment, (3) update on supply side constraints in delivery and ramp up, (4) scaling up accounts in Blackstone portfolio and new clients channel, (5) top clients' growth outlook, discussions with clients on pricing and payment terms, (6) levers available to offset margin headwinds and (7) outlook for fast growing Europe geo EBIT 3,193 3,831 3,553 (7.3) 11.3 Adjusted net profit 2,647 3,532 2,785 (21.2) 5.2 EBIT margin (%) 15.5 16.3 15.4 (90)bps (5)bps

Notes: (a) Result dates are yet to be announced for some companies. (b) KIE estimates used for organic c/c and c/c revenue growth in cases where company disclosure is not available

Source: Companies, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 55 India IT Services

Exhibit 5: Vertical-wise revenue mix (%), Mar-20 quarter Exhibit 5: Vertical-wise revenue mix (%), Mar-20 quarter

Mar-20 quarter Growth (%) Mar-20 quarter Growth (%) Revenue % of revenues qoq yoy Revenue % of revenues qoq yoy TCS HCLT BFSI 1,617 28.9 (4.8) (3.0) Financial services 537 21.1 (2.3) NA Retail & CPG 838 15.0 (1.3) 2.9 Manufacturing (new classification) 526 20.7 (1.0) NA Communication & Media 392 7.0 0.2 6.8 Technology&Services 412 16.2 7.3 NA Manufacturing 550 9.8 (1.6) 6.1 Retail & CPG 259 10.2 (1.0) NA Telecom, media, publishing, entertainment 211 8.3 (7.8) NA Life sciences & healthcare 479 8.6 3.3 15.3 Life sciences 318 12.5 2.5 NA Technology & Services 474 8.5 0.9 2.0 Energy-utilities-public sector 282 11.1 1.8 NA Regional markets and others 1,094 19.6 (5.4) (4.8) Total 2,546 100.0 - 11.7 Total 5,586 100.0 (2.5) 0.9 Mindtree Infosys Hi-Tech & Media Services 120 43.1 5.1 15.6 Financial Services 1,001 31.3 (2.0) 3.5 BFSI 57 20.4 (3.1) (0.7) Retail 496 15.5 (0.1) 1.8 Retail, CPG & Manufacturing 57 20.3 (0.3) (2.7) Communications 416 13.0 (1.4) 0.6 Travel & Hospitality 45 16.2 (1.3) 5.1 Energy, Utilities, Resources and Servcies 412 12.9 (0.6) 6.1 Total 278 100.0 1.2 6.3 Manufacturing 323 10.1 (3.3) 5.5 Hexaware Hi Tech 253 7.9 2.5 7.2 Banking and Financial services 78 36.8 1.9 5.5 Life Sciences 205 6.4 (5.8) 11.4 Travel & Transportation 21 9.9 (5.5) 21.9 Others 93 2.9 2.1 16.5 Healthcare & Insurance 42 20.1 (5.9) 28.5 Total 3,197 100.0 (1.4) 4.5 Mfg, consumer & others 37 17.5 (5.5) 19.0 Wipro Professional services 33 15.7 2.9 28.5 Communications 114 5.5 (3.6) (2.8) Total 211 100.0 (1.7) 17.0 Consumer 348 16.8 (1.4) 4.3 Mphasis Energy, Natural Resources & Utilities 265 12.8 (2.1) 0.2 Banking and Capital market 146 45.7 1.0 12.9 Finance Solutions 630 30.4 (2.3) (3.4) Insurance 36 11.4 2.1 4.5 Healthcare, Life Sciences & Services 280 13.5 1.9 2.9 IT, communication & Entertainment 48 15.0 (3.7) (4.4) Emerging industries 89 27.9 1.9 15.7 Manufacturing 170 8.2 (2.0) 2.5 Total 320 100.0 0.6 9.7 Technology 265 12.8 2.7 2.4 L&T Infotech Total 2,074 100.0 (1.0) 0.4 Banking and financial services 113 27.6 3.2 15.4 Tech Mahindra Insurance 69 16.8 (1.4) 9.3 Telecom 528 40.8 (8.4) (2.4) Manufacturing 74 18.0 6.9 25.6 Manufacturing 229 17.7 (2.1) (10.5) Energy & utilities 47 11.4 4.8 20.1 Tech, Media & Entertainment 96 7.4 (6.8) 0.8 CPG retail and pharma 46 11.2 3.9 22.4 BFSI 198 15.3 10.9 19.3 High-Tech, Media & Entertainment 45 11.0 5.9 2.8 Retail, transport, logistics 95 7.3 (3.0) 16.5 Others 16 4.0 12.4 18.8 Others 149 11.5 (9.8) 15.2 Total 410 100.0 3.9 15.9 Total 1,295 100.0 (4.3) 2.1 Source: Companies, Kotak Institutional Equities Source: Companies, Kotak Institutional Equities

56 KOTAK INSTITUTIONAL EQUITIES RESEARCH IT Services India

Exhibit 6: Geo-wise revenue mix (%), Mar-20 quarter Exhibit 6: Geo-wise revenue mix (%), Mar-20 quarter

Mar-20 quarter Growth (%) Mar-20 quarter Growth (%) Revenues % of revenues qoq yoy Revenues % of revenues qoq yoy TCS Mindtree North America 2,738 50.3 (2.2) 0.1 North America 214 76.8 4.1 10.8 Latin America 98 1.8 (7.7) (9.2) Europe 43 15.3 (9.0) (11.9) UK 871 16.0 (1.9) 1.5 India 11 3.9 (1.4) 10.7 Continental Europe 827 15.2 (0.6) 8.7 Rest of the world 11 4.0 (8.0)1.9 India 299 5.5 (6.0) (4.3) Total 278100.0 1.2 6.3 Asia Pacific 506 9.3 (2.5) (1.3) Hexaware MEA 103 1.9 (15.8) (4.2) Americas 156 74.2 (2.0) 14.1 Total 5,444 100.0 (2.5) 0.9 Europe 37 17.8 (0.0) 65.3 Infosys Asia Pacific 17 8.0 (2.9) (17.2) North America 1,969 61.6 (0.9) 5.2 Total 211100.0 (1.7) 17.0 Europe 780 24.4 (1.4) 6.2 Mphasis India 83 2.6 (8.5) 18.1 Americas 244 76.3 (1.0) 7.8 Rest of the world 364 11.4 (2.3) (4.7) EMEA 3912.3 7.6 18.2 Total 3,197 100.0 (1.4) 4.5 India 16 5.0 (0.6)6.4 Wipro ROW 20 6.4 9.3 20.4 US 1,226 59.1 (1.2) 2.3 Total 320100.0 0.6 9.7 Europe 500 24.1 0.7 (2.2) L&T Infotech RoW 348 16.8 (2.8) (2.6) North America282 68.9 3.0 20.2 Total 2,074 100.0 (1.0) 0.4 Europe 62 15.1 0.6 6.7 Tech M India 32 7.8 6.7 10.2 North America 618 47.7 (5.7) 5.0 RoW 33 8.1 13.8 3.1 Europe 343 26.5 (6.1) (5.4) Total 410100.0 3.9 15.9 Rest of the world 334 25.8 0.4 5.8 Total 1,295 100.0 (4.3) 2.1 Source: Companies, Kotak Institutional Equities HCLT US 1,613 63.5 1.0 NA Europe 730 28.7 (1.7) NA ROW 198 7.8 (2.5) NA Total 2,541 100.0 - 11.7

Source: Companies, Kotak Institutional Equities

KOTAK INSTITUTIONAL EQUITIES RESEARCH 57 India IT Services

Exhibit 7: Service-line wise revenue mix (%), Mar-20 quarter Exhibit 7: Service-line wise revenue mix (%), Mar-20 quarter

Mar-20 quarter Growth (%) Mar-20 quarter Growth (%) Revenues % of revenues qoq yoy Revenues % of revenues qoq yoy Infosys Mindtree Services 2,997 93.7 (1.7) 3.5 Digital 107 38.5 2.0 10.6 Products & platforms 200 6.3 3.0 21.3 Interactive 62 22.3 1.2 5.3 Digital 1,340 41.9 1.7 29.5 Data science and engineering 35 12.4 3.7 20.9 Core 1,857 58.1 (3.6) (8.3) Cloud Services 11 3.8 6.8 30.3 Others 0 0.0 (100.0) (100.0) Total 3,197 100 (1.4) 4.5 Test Engineering 51 18.2 4.0 5.1 Wipro Package Solutions 17 6.0 (6.6) (20.3) Cloud and infrastructure services 535 25.8 (1.2) 2.1 Infrastructure management & Tech support 72 25.8 4.8 17.2 Data, Analytics and AI 149 7.2 (0.9) (0.9) ADM 32 11.5 (8.4) (7.4) Digital operations and Platforms 303 14.6 (5.7) (2.2) Total 278 100 1.2 6.3 Industrial & Engineering services 160 7.7 1.3 2.2 Hexaware Modern application Services 927 44.7 0.3 0.1 ADM 90 49.1 3.4 44.1 Total 2,074 100 (1.0) 0.4 EAS 17 9.6 (11.3) 2.2 HCLT Testing / QATS 33 18.4 0.2 6.3 IT and Business Services 1,796 70.6 0.6 4.0 Business intelligence & analytics 24 13.2 5.7 1.8 Engineering and R&D Services 415 16.3 (2.4) 9.6 BPO 18 9.8 (0.6) 30.9 Products & Platforms 333 13.1 - 92.5 Total 182 100 (1.7) 17.0 Total 2,543 100 - 11.7 Mphasis Tech Mahindra Application maintenance & other services 99 31.1 9.5 1.8 IT services 1,182 91.3 (3.1) 2.3 Application development 105 32.9 3.0 14.9 BPO 112 8.7 (15.6) 0.3 Customer Service 2 0.7 (44.3) (36.8) Total 1,295 100 (4.3) 2.1 Service / Technical Help Desk 18 5.5 (30.1) (15.3) L&T Infotech Transaction Processing Service 25 7.9 2.2 38.6 ADM and testing 142 34.7 0.7 5.8 Infrastructure Management Services 40 12.4 (4.2) 6.7 Enterprise solutions 123 30.0 8.6 19.0 Knowledge Processes 30 9.4 3.5 34.2 License Income 1 0.2 (33.3) (11.6) IMS 52 12.6 13.9 32.7 Total 320 100 0.6 9.7 Analytics, AI and Cognitive 48 11.6 (5.8) 25.6 Enterprise integration and mobility 36 8.7 6.4 26.0 Platform based solutions 10 2.5 (3.8) (9.5) Source: Companies, Kotak Institutional Equities Total 410 100 3.9 15.9

Source: Companies, Kotak Institutional Equities

Exhibit 8: Kotak Institutional Equities: valuation summary of key Indian technology companies

30-Jun-20 Mkt cap. EPS (Rs) P/E (X) EV/EBITDA (X) RoE (%) Company Price (Rs) Rating (Rs m) (US$ m) 2020E 2021E 2022E 2020E 2021E 2022E 2020E 2021E 2022E 2020E 2021E 2022E HCL Technologies 557 ADD 1,511,104 19,990 40.8 38.5 43.8 13.7 14.5 12.7 8.5 8.4 7.2 24.3 19.5 19.0 Hexaware Technologies 333 REDUCE 99,542 1,317 21.2 18.8 21.1 15.7 17.7 15.8 11.4 11.3 9.7 24.9 19.2 19.2 Infosys 736 BUY 3,134,312 41,462 38.9 37.5 42.2 18.9 19.6 17.5 13.2 12.8 11.3 25.5 23.5 24.6 L&T Infotech 1,958 ADD 341,032 4,511 86.6 83.5 101.0 22.6 23.5 19.4 16.0 15.5 13.5 29.5 25.3 26.4 Mindtree 926 REDUCE 152,338 2,015 38.3 46.9 55.3 24.2 19.7 16.7 12.7 11.0 9.3 19.5 22.7 23.0 Mphasis 879 REDUCE 163,929 2,169 63.5 56.2 62.2 13.8 15.6 14.1 9.2 9.8 8.6 21.4 17.4 17.9 TCS 2,082 REDUCE 7,813,028 103,355 86.2 82.6 92.0 24.2 25.2 22.6 17.5 18.0 16.1 36.4 34.7 36.0 Tech Mahindra 543 BUY 473,343 6,262 45.9 35.4 48.0 11.9 15.3 11.3 7.2 7.5 5.7 19.2 13.8 17.2 Wipro 220 REDUCE 1,255,177 16,604 16.6 15.8 17.1 13.2 13.9 12.9 8.0 8.0 7.1 17.3 15.1 14.9

KIE universe 106,422,861 1,407,894 27.3 26.6 17.7 12.2 12.6 9.5 9.1 8.7 12.0

Target O/S shares EPS CAGR (%) EPS growth (%) Net Profit (Rs mn) EBITDA (Rs mn) Sales (Rs mn) Company Price (Rs) (mn) 2020-22E 2020E 2021E 2022E 2020E 2021E 2022E 2020E 2021E 2022E 2020E 2021E 2022E HCL Technologies 625 2,716 3.6 11.4 (5.6) 13.7 110,521 104,578 119,037 166,792 165,106 181,402 706,780 712,577 779,237 Hexaware Technologies 260 302 (0.2) 9.9 (11.2) 12.2 6,410 5,690 6,384 8,609 9,111 10,358 55,825 59,173 65,330 Infosys 775 4,259 4.1 10.0 (3.6) 12.3 165,950 159,840 179,546 222,680 226,031 252,248 907,910 924,158 1,022,226 L&T Infotech 1,850 176 8.0 0.2 (3.6) 21.0 15,201 14,692 17,773 20,292 20,690 23,141 108,786 113,115 129,742 Mindtree 760 165 20.1 (16.4) 22.5 17.8 6,309 7,728 9,106 10,898 12,109 13,768 77,643 77,648 85,839 Mphasis 750 187 (1.1) 13.2 (11.5) 10.6 11,849 10,486 11,593 16,505 15,292 16,761 88,436 87,715 94,845 TCS 1,705 3,752 3.3 3.8 (4.2) 11.3 323,400 309,946 345,062 421,100 406,663 451,654 1,569,490 1,552,855 1,707,702 Tech Mahindra 630 880 2.3 (3.9) (22.8) 35.6 40,330 31,144 42,248 57,261 51,660 64,224 368,677 362,893 398,066 Wipro 195 5,703 1.4 11.1 (5.0) 8.3 97,218 90,017 97,471 126,592 117,084 124,208 614,545 596,916 621,621

KIE universe (14.6) 2.7 50.2 3,901,692 4,007,260 6,019,795 7,965,265 7,630,346 9,899,644 58,628,873 52,673,543 63,776,940

Notes: (a) Hexaware Technologies is December year-ending.

Source: Companies, Kotak Institutional Equities estimates

58 KOTAK INSTITUTIONAL EQUITIES RESEARCH INDIA Economy External Sector JUNE 30, 2020 UPDATE BSE-30: 34,916

BOP: External matrix to remain firm in FY2021. FY2020 BOP came in at a huge surplus due to a lower CAD and higher capital account balance. Current account moved into surplus in 4QFY20 and the trend is likely to persist through most of FY2021 due to a sharp moderation in trade balance. Even though the capital account may moderate due to the volatile FPI flows, we expect FY2021 BOP to stay hugely in surplus at US$57.8 bn. We expect USD-INR to range within 74-77.5 over the rest of FY2021.

4QFY20 current account balance registers a surplus of 0.1% of GDP

Current account in 4QFY20 registered a surplus of US$0.6 bn (0.1% of GDP) as against a deficit QUICK NUMBERS of US$2.6 bn in 3QFY20 (0.4% of GDP) (Exhibit 1). This was due to a lower trade deficit of US$35 bn (US$36 bn in 3QFY20) on the back of lower import bill of US$112 bn, even though  4QFY20 current exports moderated to US$77 bn. Within imports, while oil imports rose to US$34 bn, non-oil account registers a imports softened to US$78 bn. Meanwhile, net invisible receipts improved to US$36 bn (US$33 surplus of 0.1% of bn in 3QFY20) given the lower reduction in net income. Services exports and transfers remained GDP (US$0.6 bn) broadly stable at US$22 bn and US$18 bn, respectively.  4QFY20 BOP surplus Risk-off leads to a sharp reversal in capital flows in 4QFY20 at US$18.8 bn The capital account balance moderated sharply to US$17 bn (US$24 bn in 3QFY20) due to  FY2020 CAD/GDP at capital outflows prompted by the risk-off sentiments induced by the pandemic. Foreign 0.9%; BOP surplus investment moderated to (-)US$2 bn (US$18 bn in 3QFY20) led by net FPI inflows of (-)US$14 at US$59.5 bn bn, even as FDI flows improved to US$12 bn (US$10 bn in 3QFY20). FPI outflows were visible across both equity ((-)US$5 bn) and the debt markets ((-)US$9 bn). Tighter domestic funding led  FY2021E BOP to higher ECB flows of US$10 bn (US$3 bn in 3QFY20). Providing cushion to the capital surplus at US$57.8 account balance, net inflows under ‘other capital’ surged during 4QFY20 reflecting ‘FPIs’ bn outstanding balances with custodian banks and pending issuance of shares by FDI companies’. Overall, BOP surplus in 4QFY20 stood at US$18.8 bn (US$21.6 bn in 3QFY20).

FY2020 BOP posts the highest surplus in 12 years

FY2020 CAD moderated to US$24.7 bn (0.9% of GDP) as against US$57.3 bn (2.1% of GDP) in FY2019, primarily due to a lower trade deficit of US$158 bn (US$180 bn in FY2019). Net invisible receipts also improved to US$133 bn (US$123 bn in FY2019) on the back of higher net software exports of US$85 bn and transfers of US$75 bn. Capital account balance shored up to US$83 bn (US$54 bn in FY2019) on the back of higher FDI flows of US$43 bn (US$31 bn in FY2019) and ECB flows of US$23 bn (US$10 bn in FY2019). FPI flows remained muted at US$1 bn. Overall BoP was hugely in surplus at US$59.5 bn in FY2020 as against a deficit of (-)US$3.3 bn in FY2019. Upasna Bhardwaj

Expect FY2021 BoP surplus to remain robust Suvodeep Rakshit As we highlighted in our June 15 report: Trade data highlights weak domestic demand, we expect the slowdown in import growth to be steeper than export growth. With oil prices likely Avijit Puri to remain in check (expect FY2021 average of US$35/bbl), we expect FY2021 current account to register a surplus of 0.6% of GDP. Meanwhile, the capital account is likely to moderate owing to the volatile FPI flows. Overall, we expect FY2021E BOP surplus to be robust at US$57.8 bn (Exhibit 2). We continue to see USD-INR in the range of 74-77.5 through the rest of FY2021, helped by abundant global liquidity and strong external vulnerability matrix. We, however, believe that the RBI may intervene aggressively to avoid any sharp INR appreciation.

[email protected] Contact: +91 22 6218 6427

For Private Circulation Only. India Economy

Exhibit 1: Current account registers a surplus of 0.1% of GDP in 4QFY20 India's quarterly balance of payments, March fiscal year-ends, 4QFY19-4QFY20 (US$ bn)

4QFY19 1QFY20 2QFY20 3QFY20 4QFY20 Current account (4.6) (15.0) (7.6) (2.6) 0.6 GDP 703 707 699 726 735 CAD/GDP (%) (0.7) (2.1) (1.1) (0.4) 0.1 Trade balance (35.2) (46.8) (39.6) (36.0) (35.0) Trade balance/GDP (%) (5.0) (6.6) (5.7) (5.0) (4.8) - Exports 87 83 80 81 77 - oil exports 10 11 10 11 9 - non-oil exports 77 71 70 70 67 - Imports 123 129 120 117 112 - oil imports 32 35 30 31 34 - non-oil imports 90 94 90 86 78 - gold imports 8 11 4 7 5 Invisibles (net) 31 32 32 33 36 - Services 21 20 21 22 22 o/w Software 20 21 21 21 21 o/w Non-software 1 (1) (0) 0 1 - Transfers 16 18 20 19 18 - Income (net) (7) (6) (9) (7) (5) Capital account 19 29 14 24 17 % of GDP 2.7 4.0 1.9 3.3 2.4 Foreign investment 16 19 10 18 (2) -FDI 6 14 7 10 12 -FPI 9 5 2 8 (14) - Equities 6 3 (3) 6 (5) - Debt 3 2 5 2 (9) Banking capital (8) 3 (2) (2) (5) - NRI deposits 3 3 2 1 3 Short-term credit 1 2 (1) (1) (1) ECBs 8 6 3 3 10 External assistance 1 1 0 1 1 Other capital account items 1 (3) 3 5 14 E&O (0) 0 (1) 1 1 Overall balance 14.2 14.0 5.1 21.6 18.8 memo items: Average exchange rate (US$/Rs) 70.5 69.5 70.4 71.2 72.5 Average Brent price (US$/bbl) 63.3 68.3 61.8 62.7 50.7

Source: Reserve , Kotak Economics Research

60 KOTAK ECONOMIC RESEARCH Economy India

Exhibit 2: FY2021E BOP to stay hugely in surplus at US$57.8 bn India's balance of payments, March fiscal year-ends, 2016-21E (US$ bn)

2021E 2016 2017 2018 2019 2020 Oil@30/bbl Oil@35/bbl Oil@40/bbl Current account (22.2) (14.4) (48.7) (57.3) (24.7) 17.4 15.8 14.3 GDP 2,104 2,290 2,653 2,715 2,868 2,619 2,619 2,619 CAD/GDP (%) (1.1) (0.6) (1.8) (2.1) (0.9) 0.7 0.6 0.5 Trade balance (130) (112) (160) (180) (158) (80) (86) (93) Trade balance/GDP (%) (6.2) (4.9) (6.0) (6.6) (5.5) (3.0) (3.3) (3.5) - Exports 266 280 309 337 320 271 274 276 - oil exports 31 32 37 46 42 29 32 34 - non-oil exports 236 249 272 291 278 242 242 242 - Imports 396 393 469 518 478 351 360 369 - oil imports 83 87 109 141 130 60 69 78 - non-oil imports 313 306 360 377 348 291 291 291 - gold imports 32 28 34 33 28 27 27 27 Invisibles (net) 108 98 111 123 133 97 102 107 - Services 70 68 78 82 85 78 78 78 - software 71 71 72 78 85 78 78 78 - non-software (1.8) (2.4) 5.4 4.3 0.3 0.0 0.0 0.0 - Transfers 63 56 62 70 75 50 55 60 - Income (net) (24) (26) (29) (29) (27) (31) (31) (31) Capital account 41 36 91 54 83 38 42 45 Percentage of GDP 2.0 1.6 3.4 2.0 2.9 1.5 1.6 1.7 Foreign investment 32 43 52 30 44 30 34 37 - FDI 36 36 30 31 43 42 42 42 - FPI (4) 8 22 (1) 1 (12) (8) (5) - Equities (4) 8 2 3 0 (5) (3) (2) - Debt (0) (1) 21 (4) 1 (7) (5) (3) Banking capital 11 (17) 16 7 (5) (5) (5) (5) - NRI deposits 16 (12) 10 10 9 5 5 5 Short-term credit (2) 6 14 2 (1) 0 0 0 ECBs (5) (6) (0) 10 23 10 10 10 External assistance 2 2 3 3 4 2 2 2 Other capital account items 3 8 6 1 18 1 1 1 E&O (1) (0) 1 (0) 1 — — — Overall balance 17.9 21.6 43.6 (3.3) 59.5 55.4 57.8 59.3 Memo items Average USD/INR 65.4 67.2 64.5 69.9 70.9 75.5 75.5 75.5 Average Brent (US$/bbl) 47.5 49.0 57.6 70.0 60.9 30.0 35.0 40.0

Source: RBI, Kotak Economics Research estimates

KOTAK ECONOMIC RESEARCH 61 INDIA Economy Public Finance JUNE 30, 2020 UPDATE BSE-30: 34,916

Fiscal situation in flux. Monthly tax collections remained muted in May. The impact of the lockdown easing will reflect more in June data. The government has been calibrating its spending with flat revenue expenditure growth. The additional rice/wheat supply cost for five months (Rs900 bn) remains well within our additional spending estimates (till now 1.4% of GDP). We retain our FY2021E GFD/GDP at 7.2% based on expenditure cuts of 1.4% of GDP and Covid-related spends of another 0.6% of GDP.

Revenue receipts remain weak

Monthly fiscal data for May depicted the adverse impact the nationwide lockdown has had on QUICK NUMBERS the government finances. Gross tax collections up to 2MFY21 have fallen by (-)41% with direct taxes and indirect taxes witnessing a contraction of (-)14% and (-)52%, respectively (Exhibit 1).  Gross tax collections Even as income tax collections have fallen by (-)41%, corporate tax collections growth has been up to 2MFY21 grew high most likely due to lower refunds. Among the indirect taxes, collections on GST have fallen by (-)41% by (-) 51%, customs duty by (-)66% and excise duty by (-)37%. GST collections registered a sequential improvement of 108% mom. Excise collection also saw a sequential uptick due to  Direct taxes fell by higher excise duty on petrol and diesel (since May 5). (-)14%; indirect taxes by (-)52% Government calibrating spending  Expenditure growth Meanwhile, the government has been trying to keep the spending in check in the absence of muted so far any major tax inflows. Expenditure in 2MFY21 has been kept in check over last year with revenue expenditure growth at (-)2% while capital expenditure growth has been high at 16%  Retain FY2021E (mostly through roads) (Exhibit 2). The main areas for spending growth in 2MFY21 has been GFD/GDP at 7.2% agriculture (74%), health (39%), roads (39X; last year spend was near zero), rural development (2.3X), and transfer to states (2X). Sharp decline in spends was seen in defense ((-)35%) and subsidies as expected: food subsidy ((-)53%) and petroleum subsidy ((-)45%). 2MFY21 fiscal deficit was at 58.6% of FY2021BE as against 52% for the same period last year.

We retain FY2021E GFD/GDP at 7.2%

With the gradual lifting of the lockdown, the government has been undertaking incremental measures to support the economy. The recently announced PM Garib Kalyan Rojgar Yojana is expected to cost Rs500 bn though it is likely to be more of front-loading of budgeted expenditure. The government also announced the extension of the PM Garib Kalyan Anna Yojana (continuation of 5kg rice/wheat per month for 800 mn people for another five months: additional cost of Rs900 bn). However, it is not sure whether this would be a part of the fiscal (either additional spend or expenditure restructuring) or transferred as a burden to FCI.

Even if the extension of the food program translates into additional spending, it does not alter Suvodeep Rakshit our fiscal estimates since we had penciled in a spend of Rs2 tn in addition to the potential fiscal cost of Rs2 tn announced earlier in PMGKY and in the five traches of the economic package. Upasna Bhardwaj We continue to factor in a shortfall of Rs5 tn in FY2021E in overall receipts, Covid-related expenditure of Rs4 tn (Rs2.7-3.2 tn till now), and expenditure savings of Rs2.7 tn (Exhibit 3). We Avijit Puri retain FY2021E GFD/GDP estimate at 7.2% (Exhibit 4). Even as bond markets remain supported by rate cuts and expectations of OMO purchases/debt monetization, we await clarity about the RBI’s stance. Further clarity on any additional borrowing (and any changes to mode of borrowing such as monetization etc.) will likely be available closer to 2HFY21 when the government has better clarity on tax collections.

[email protected] Contact: +91 22 6218 6427

For Private Circulation Only. Economy India

Exhibit 1: Tax collections growth remains weak though some improvement from April levels Monthly tax receipts of the Indian government, March fiscal year-ends (Rs bn)

Chg. (%) FYTD (Apr-May) Chg. (%) Date May-20 May-19 Apr-20 yoy mom 2021 2020 yoy Gross tax revenues 586 934 676 (37) (13) 1,261 2,146 (41) Direct taxes 74 109 469 (32) (84) 543 635 (14) Corporation tax (25) (113) 195 (77) (113) 170 11 1,408 Income tax 87 208 270 (58) (68) 357 606 (41) Other taxes 12 13 5 (10) 158 16 18 (13) Indirect taxes 511 824 206 (38) 148 716 1,507 (52) Customs duty 56 151 39 (63) 43 96 282 (66) Excise duty 109 174 1 (38) 13,495 110 173 (37) Service tax (1) 3 (1) (120) (39) (2) 5 (132) GST 346 495 167 (30) 108 513 1,046 (51) CGST 190 346 59 (45) 220 249 814 (69) IGST 96 72 97 34 (1) 194 66 192 Compensation cess 60 77 10 (22) 508 70 166 (58) Net tax revenues 124 437 214 (72) (42) 339 1,153 (71) Non-tax revenues 50 51 58 (2) (13) 108 284 (62) Non-debt capital receipts 5 4 4 27 28 8 31 (73)

Source: CEIC, Kotak Economics Research

Exhibit 2: Expenditure growth kept in check Monthly fiscal aggregates of the Indian government, March fiscal year-ends (Rs bn)

Chg. (%) FYTD (Apr-May) Chg. (%) Date May-20 May-19 Apr-20 yoy mom 2021 2020 yoy Total receipts 180 492 275 (64) (35) 455 1,468 (69) Total expenditure 2,048 2,583 3,071 (21) (33) 5,118 5,130 (0) Revenue expenditure 1,779 2,412 2,788 (26) (36) 4,566 4,653 (2) Capital expenditure 269 171 283 57 (5) 552 477 16 Fiscal deficit 1,868 2,091 2,795 (11) (33) 4,663 3,662 27 Revenue deficit 1,604 1,924 2,516 (17) (36) 4,120 3,215 28 Primary deficit 1,353 1,539 2,528 (12) (46) 3,881 2,914 33

Source: CEIC, Kotak Economics Research

Exhibit 3: Expenditure cuts will be required to maintain FY2021E GFD/GDP around 7% Break-up of GFD/GDP gains and losses, March fiscal year-ends (%)

FY2020BE GFD/GDP 3.5 Gross tax revenue loss/GDP 2.5 Net tax revenue loss/GDP 1.4 Non-tax and divestments loss/GDP 1.1 Total receipts loss/GDP 2.5 Revised GFD/GDP due to receipts loss 6.1 Expenditure cuts/GDP (1.4) Revised GFD/GDP with expenditure cuts 4.7 Expenditure stimulus/GDP 2.0 Revised GFD/GDP with stimulus 6.7 Effect of lower nominal GDP base 0.5 FY2021E GFD/GDP 7.2

Source: Kotak Economics Research estimates

KOTAK ECONOMIC RESEARCH 63 India Economy

Exhibit 4: We pencil in FY2021E GFD/GDP at 7.2% Major central government budgetary items, March fiscal year-ends, 2018-21E (Rs bn)

Change (%) 2019/ 2020RE/ 2020P/ 2021BE/ 2021E/ 2018 2019 2020RE 2020P 2021BE 2021E 2018 2019 2019 2020P 2020P Receipts 1. Revenue receipts (2d + 3) 14,352 15,529 18,501 16,821 20,209 16,629 8 19 8 20 (1) 2. Gross tax revenues (a + b ) 19,190 20,805 21,634 20,099 24,230 19,211 8 4 (3) 21 (4) 2.a. Direct taxes 10,068 11,431 11,769 10,536 13,265 10,246 14 3 (8) 26 (3) 2.a.1. Corporation tax 5,712 6,636 6,105 5,569 6,810 5,346 16 (8) (16) 22 (4) 2.a.2. Income tax 4,308 4,730 5,595 4,898 6,380 4,825 10 18 4 30 (2) 2.a.3. Other taxes 48 66 69 69 75 75 37 5 5 9 9 2.b. Indirect taxes 9,122 9,373 9,865 9,563 10,965 8,965 3 5 2 15 (6) 2.b.1. Goods and Services Tax 4,426 5,816 6,123 6,015 6,905 3,900 31 5 3 15 (35) 2.b.1.1. CGST 2,033 4,575 5,140 4,967 5,800 3,300 125 12 9 17 (34) 2.b.1.2. IGST 1,767 289 — 92 —— (84) 2.b.1.3. Compensation cess 626 951 983 956 1,105 600 52 3 0 16 (37) 2.b.2. Customs duty 1,290 1,178 1,250 1,092 1,380 944 (9) 6 (7) 26 (14) 2.b.2.1. Basic duties 808 1,048 1,104 946 1,240 804 30 5 (10) 31 (15) 2.b.2.2. Others 483 130 146 146 140 140 (73) 12 12 (4) (4) 2.b.3. Excise duty 2,594 2,310 2,480 2,396 2,670 4,121 (11) 7 4 11 72 2.b.4. Service tax 812 69 12 60 10 — (92) (83) (12) (83) 2.c Transfers to states, UTs, etc. 6,765 7,633 6,588 6,540 7,871 5,683 13 (14) (14) 20 (13) 2.d Net tax revenues 12,425 13,172 15,046 13,559 16,359 13,528 6 14 3 21 (0) 3. Non-tax revenues 1,927 2,357 3,455 3,262 3,850 3,101 22 47 38 18 (5) 3.a. RBI's transfer of surplus 407 680 1,476 1,476 600 850 67 117 117 (59) (42) 3.a. Telecommunications 321 408 590 590 1,330 875 27 45 45 126 48 4. Non-debt capital receipts (a + b) 1,157 1,128 816 686 2,250 850 (3) (28) (39) 228 24 4.a Recovery of loans 156 181 166 183 150 150 15 (8) 1 (18) (18) 4.b Other receipts (disinvestments) 1,000 947 650 503 2,100 700 (5) (31) (47) 317 39 5. Total receipts (1 + 4) 15,509 16,657 19,317 17,507 22,459 17,479 7 16 5 28 (0) Expenditure 6. Revenue expenditure 18,788 20,074 23,496 23,496 26,301 28,633 7 17 17 12 22 6.a. Interest payments 5,290 5,826 6,251 6,110 7,082 7,082 10 7 5 16 16 6.b. Subsidies 1,912 1,968 2,273 2,232 2,278 1,869 3 15 13 2 (16) 6.b.1. Food 1,003 1,013 1,087 1,087 1,156 1,156 1 7 7 6 6 6.b.2. Fertilizer 664 706 800 811 713 713 6 13 15 (12) (12) 6.b.3. Oil 245 248 386 334 409 0 2 55 34 23 (100) 6.c. Pay, allowances and pensions 4,464 4,957 5,447 4,997 5,877 5,627 11 10 1 18 13 6.c.1.a. Pay and allowances 3,007 3,291 3,606 3,306 3,770 3,520 9 10 0 14 6 6.c.1.b. Pensions 1,457 1,666 1,841 1,691 2,107 2,107 14 11 2 25 25 6.d. Agriculture and farmers' welfare 374 461 1,019 942 1,343 1,496 23 121 105 43 59 6.e. Education 800 781 927 873 972 822 (2) 19 12 11 (6) 6.f. Health and family welfare 483 506 608 607 639 869 5 20 20 5 43 6.g. Rural development 1,086 1,118 1,226 1,221 1,200 1,700 3 10 9 (2) 39 6.h. Others 4,381 4,457 5,746 6,513 6,909 9,167 2 29 46 6 41 7. Capital expenditure 2,631 3,077 3,489 3,367 4,121 3,001 17 13 9 22 (11) 7. a. Defence 954 998 1,154 1,161 1,186 786 5 16 16 2 (32) 7. b. Railways 434 528 678 678 700 350 22 28 28 3 (48) 7. c. Roads and Highways 508 676 722 673 820 920 33 7 (1) 22 37 7. d. Housing and urban affairs 153 158 192 193 211 311 3 22 22 10 61 7. e. Others 582 717 743 663 1,204 634 23 4 (7) 82 (4) 8. Total expenditure (6 + 7) 21,420 23,151 26,986 26,864 30,422 31,634 8 17 16 13 18 Deficit Primary deficit (PD) 621 668 1,417 3,246 881 7,073 7 112 386 (73) 118 Revenue deficit (RD) 4,436 4,545 4,995 6,675 6,092 12,004 2 10 47 (9) 80 Gross fiscal deficit (GFD) 5,911 6,494 7,668 9,356 7,963 14,155 10 18 44 (15) 51 Gross borrowings (dated securities) 5,891 5,715 7,100 7,059 7,800 11,942 (3) 24 24 11 69 Net market borrowing 4,518 4,233 4,740 4,698 5,449 9,669 (6) 12 11 16 106 Net market borrowing (adjusted for buyback) 4,103 4,233 4,740 4,698 5,149 9,669 3 12 11 10 106 Short-term borrowing (T-bills) 449 69 250 1,560 250 1,800 Nominal GDP at market prices 170,983 189,712 204,422 203,398 224,894 197,703 11.0 7.8 7.2 10.6 (2.8) PD/GDP (%) 0.4 0.4 0.7 1.6 0.4 3.6 RD/GDP (%) 2.6 2.4 2.4 3.3 2.7 6.1 GFD/GDP (%) 3.5 3.4 3.8 4.6 3.5 7.2

Source: Union Budget documents, CGA, Kotak Economics Research estimates

64 KOTAK ECONOMIC RESEARCH Kotak Institutional Equities: Valuation summary of KIE Universe stocks 65 Fair O/S ADVT

Price (Rs) Value Upside Mkt cap. shares EPS (Rs) EPS growth (%) P/E (X) EV/EBITDA (X) P/B (X) RoE (%) Dividend yield (%) 3mo Company Rating 30-Jun-20 (Rs) (%) (Rs bn) (US$ bn) (mn) 2020 2021E 2022E 2020 2021E 2022E 2020 2021E 2022E 2020 2021E 2022E 2020 2021E 2022E 2020 2021E 2022E 2020 2021E 2022E (US$ mn) Automobiles & Components Amara Raja Batteries REDUCE 650 620 (5) 111 1.5 171 39 33 41 36.7 (14.8) 25.4 17 19.7 15.7 10.1 10.4 8.4 3.0 2.7 2.4 18.9 14.6 16.3 1.7 1.3 1.6 11.3 BUY 108 110 2 62 0.8 638 8.3 2.3 8.7 (41.9) (72.0) 273.3 13.0 46.4 12.4 6.3 6.5 4.7 0.6 0.6 0.6 4.8 1.4 4.9 2.8 1.2 2.5 12.5 BUY 47 65 38 138 1.8 2,936 1.2 (0.6) 2.2 (82.4) (150.8) 447.8 38.3 NM 21.7 13.2 23.1 9.1 1.9 1.9 1.8 4.6 NM 8.6 7.4 0.0 1.4 29 Bajaj Auto BUY 2,826 3,000 6 818 11 289 176 158 190 15.0 (10.1) 20.0 16.0 17.8 14.9 12.9 13.7 10.8 4.1 3.8 3.4 24 22 24 4.3 3.4 4.0 33 SELL 1,261 1,100 (13) 244 3.2 193 50 50 58 25.2 0.6 16.3 25.4 25.2 21.7 17.2 14.4 12.2 4.9 4.4 3.9 19.9 18.3 19.1 1.6 1.7 1.9 11.4 SELL 319 285 (11) 149 2.0 466 8 0 11 (66.2) (94.5) 2,559.2 42.6 769.7 28.9 16.3 31.4 14.4 2.8 2.8 2.6 6.6 0.4 9.5 0.6 0.0 0.9 14.8 CEAT BUY 914 940 3 37 0.5 40 63 60 78 1.9 (4.6) 30.7 14.6 15.3 11.7 7.7 7.8 6.8 1.3 1.2 1.1 8.9 8.0 9.8 1.3 1.3 1.3 2.2 Eicher Motors ADD 18,334 17,500 (5) 501 6.6 27 671 563 792 (17.7) (16.1) 40.6 27.3 32.5 23.1 20.0 23.8 16.7 6.0 5.3 4.5 24 17.3 21 0.2 —— 57 Endurance Technologies REDUCE 871 820 (6) 122 1.6 141 40 29 46 11.1 (28.4) 59.2 22 30.2 19.0 10.7 12.3 8.6 4.1 3.7 3.2 18.8 12.1 16.6 0.6 0.5 0.9 2.8 Escorts BUY 1,040 1,000 (4) 92 1.7 101 55 51 65 0.4 (5.9) 27.1 19.0 20.2 15.9 13.2 12.2 9.2 2.7 2.1 1.9 14.0 10.5 12.0 0.2 0.7 0.9 39 SELL 148 150 1 126 1.7 850 10.0 7.5 9.1 10.3 (24.3) 20.2 14.9 19.6 16.3 9.1 10.6 9.1 2.0 1.9 1.8 13.8 9.9 11.2 2.8 2.4 2.4 7.4 Hero Motocorp ADD 2,547 2,500 (2) 509 6.7 200 159 123 168 (6.1) (22.8) 36.6 16.0 20.7 15.2 10.7 12.7 8.9 3.6 3.4 3.1 24 16.8 21 3.8 3.1 4.0 59 Mahindra CIE Automotive BUY 118 100 (15) 45 0.6 378 9.4 5.9 9.6 (34.9) (37.7) 63.3 12.4 20.0 12.2 5.9 8.0 5.5 1.0 0.9 0.9 8.0 4.7 7.2 ——— 0.4 Mahindra & Mahindra BUY 511 640 25 635 8.4 1,138 24 31 42 (50.0) 32.1 33.4 21.5 16.2 12.2 9.8 10.1 7.4 1.7 1.6 1.4 7.8 9.9 12.1 0.5 1.2 1.6 45 Maruti Suzuki SELL 5,839 4,300 (26) 1,764 23.3 302 187 133 226 (24.7) (28.8) 69.8 31 44 26 19.2 21.9 12.9 3.6 3.5 3.1 11.9 8.1 12.7 1.0 0.8 1.0 136 ADD 95 110 16 299 4.0 3,158 3.7 1.9 6.0 (27.5) (47.6) 211.3 25.5 48.8 15.7 7.1 8.8 4.6 2.7 2.6 2.2 10.5 5.4 15.2 1.6 1.4 1.8 30 MRF SELL 67,275 55,000 (18) 285 3.8 4 3,355 2,185 2,861 25.8 (34.9) 30.9 20 30.8 23.5 11.7 11.8 9.4 2.3 2.2 2.0 12.3 7.3 8.9 0.1 0.1 0.1 9.9 Schaeffler India SELL 3,580 3,200 (11) 112 1.5 31 118 105 140 (18.3) (10.5) 33.3 30 34 26 16.3 17.3 13.4 3.8 3.4 3.0 13.0 10.6 12.6 ——— 0.5 SKF ADD 1,664 1,550 (7) 82 1.1 49 58 52 65 (10.7) (10.8) 25.6 28 32 25 21.8 24.6 18.9 4.3 5.4 4.6 15.2 16.9 18.2 0.7 6.5 0.7 1.1 Tata Motors SELL 98 90 (8) 353 4.3 3,829 (20.7) (44.6) (5.1) (284.1) (115.3) 88.5 NM NM NM 5.9 12.5 4.6 0.6 0.8 0.8 NM NM NM ——— 93 Timken SELL 940 825 (12) 71 0.9 75 31 32 39 57.4 3.8 20.9 30 29 24 19.1 16.7 13.6 4.5 3.9 3.4 16.1 14.4 15.1 0.1 0.1 0.1 0.6 TVS Motor SELL 378 220 (42) 180 2.4 475 13.0 9.1 15.0 (7.9) (30.1) 65.6 29 42 25 14.5 16.5 12.0 5.0 4.7 4.1 17.7 11.6 17.5 0.9 1.0 1.0 17.0 Varroc Engineering BUY 182 360 98 25 0.3 135 0 (22) 17 (99.4) (11,685.4) 180.1 978.3 NM 10.5 5.4 8.0 3.9 0.8 0.9 0.9 0.1 NM 8.2 ——— 0.8 Automobiles & Components Neutral 6,758 89.5 (39.2) (74.9) 524.6 33.1 131.7 21.1 10.5 13.7 7.9 2.4 2.4 2.3 7.4 1.8 10.7 1.6 1.3 1.6 613 Banks AU Small Finance Bank SELL 544 515 (5) 167 2.2 304 22.2 16.3 23.5 69.9 (26.4) 44.0 24 33 23 ——— 3.9 3.6 3.1 17.9 10.7 13.7 ——— 6.2 Axis Bank BUY 407 600 48 1,148 15.2 2,822 5.8 36 42 (68.3) 523.2 16.3 71 11.3 9.7 ——— 1.5 1.4 1.3 2.1 11.4 12.0 0.0 1.3 1.5 242 ADD 319 270 (15) 514 6.8 1,610 18.1 18.4 19.3 10.9 1.6 4.7 17.6 17.3 16.5 ——— 3.4 2.9 2.4 22.1 17.8 15.8 ——— 58 ADD 49 65 34 225 3.0 4,627 1.2 8.2 18 (27.8) 597.5 119.9 41 5.9 2.7 ——— 0.4 0.4 0.4 0.6 5.6 11.4 0.0 3.4 7.5 25 ADD 121 160 32 89 1.2 737 6.5 5.5 9.8 (30.5) (14.9) 79.0 19 22.1 12.3 ——— 1.9 1.8 1.6 9.4 7.4 12.3 0.9 0.8 1.4 3.6 DCB Bank BUY 76 150 98 23 0.3 310 10.9 10.7 11.6 3.6 (1.9) 9.0 7.0 7.1 6.5 ——— 0.8 0.7 0.6 11.2 10.0 9.9 — 1.4 1.5 3.4 Equitas Holdings BUY 50 100 102 17 0.2 342 6.1 6.0 9.7 (4.3) (1.1) 61.6 8.2 8.3 5.1 ——— 0.6 0.6 0.5 7.8 7.1 10.5 ——— 12.4 BUY 51 80 57 102 1.3 1,993 7.7 6.1 6.9 23.6 (21.1) 13.0 6.6 8.4 7.4 ——— 0.8 0.7 0.7 10.9 8.1 8.6 — 2.7 3.0 22 HDFC Bank BUY 1,066 1,050 (1) 5,851 77.4 5,483 48 48 52 23.7 0.1 8.4 22 22 21 ——— 3.5 3.1 2.8 16.4 14.5 14.1 — 0.9 0.9 275 ICICI Bank BUY 351 470 34 2,276 30.1 6,474 12.3 25 28 134.9 100.2 15.7 29 14.3 12.4 ——— 2.1 1.9 1.7 7.1 13.0 13.5 — 1.4 1.6 229 India Daily Summary Daily Summary India IndusInd Bank ADD 475 600 26 329 4.4 694 64 27 73 16.3 (57.1) 167.0 7 17.4 6.5 ——— 1.0 1.0 0.9 14.9 5.4 13.3 — 0.9 2.3 196 Karur Vysya Bank BUY 34 65 93 27 0.4 799 2.9 5 7 11.5 54.8 50.2 11 7.4 4.9 ——— 0.5 0.5 0.4 3.6 5.4 7.8 0.0 3.5 5.3 0.7 NR 35 —— 327 4.3 9,652 0 2 6 102.3 212.6 283.8 70 22.3 5.8 ——— 0.6 0.6 0.6 0.7 2.1 6.8 ——— 17.3 RBL Bank BUY 174 270 56 88 1.2 509 9.9 11 20 (51.1) 8.2 84.0 17 16.1 8.8 ——— 0.9 0.9 0.8 5.6 5.1 8.8 — 0.8 1.5 84 BUY 178 340 91 1,592 21.1 8,925 16 25 30 1,580.3 51.6 22.7 11 7.3 5.9 ——— 1.0 0.8 0.7 6.4 9.0 10.1 — 0.1 0.1 177 Ujjivan Financial Services BUY 220 490 122 27 0.4 121 26.9 34 44 117.0 24.9 31.6 8 6.6 5.0 ——— 1.2 1.1 0.9 15.7 17.0 19.3 1.4 1.9 2.7 16.4 Ujjivan Small Finance Bank BUY 30 37 24 52 0.7 1,728 2 2 2 38.5 (5.6) (1.9) 16 16.5 16.8 ——— 1.7 1.7 1.6 14.0 10.0 9.2 1.3 1.2 1.2 0.0 Union Bank RS 32 —— 204 2.7 9,414 (8) (2) 2 49.4 77.9 187.9 NM NM 19.4 ——— 0.5 0.7 0.7 NM NM 2.6 — (0.9) 0.8 2.5 KOTAK INSTITUTIONAL EQUITIES EQUITIES INSTITUTIONAL KOTAK Banks Attractive 13,524 178.9 43.1 97.3 43.4 32 16.5 11.5 1.4 1.3 1.2 4.4 7.7 10.1 0.0 0.8 1.1 1,404

Source: Company, Bloomberg, Kotak Institutional Equities estimates -

July 1, 1, July 2020 RESEARCH

KOTAK ECONOMIC RESEARCH 65

Kotak Institutional Equities: Valuation summary of KIE Universe stocks India Fair O/S ADVT Price (Rs) Value Upside Mkt cap. shares EPS (Rs) EPS growth (%) P/E (X) EV/EBITDA (X) P/B (X) RoE (%) Dividend yield (%) 3mo

KOTAK INSTITUTIONAL EQUITIES RESEARCH EQUITIES INSTITUTIONAL KOTAK Company Rating 30-Jun-20 (Rs) (%) (Rs bn) (US$ bn) (mn) 2020 2021E 2022E 2020 2021E 2022E 2020 2021E 2022E 2020 2021E 2022E 2020 2021E 2022E 2020 2021E 2022E 2020 2021E 2022E (US$ mn)

Building Products

Astral Poly Technik SELL 955 765 (20) 144 1.9 151 16.4 18 25 25.6 11.7 37.7 58 52 38 32.5 28.7 21.4 9.6 8.2 6.9 17.8 17.0 19.8 0.1 0.2 0.3 1.8 DailySummary Building Products Cautious 144 1.9 26.6 11.7 37.7 58 52 38 32.5 28.7 21.4 9.6 8.2 6.8 16.5 15.8 18.2 0.1 0.2 0.3 1.8 Capital goods ABB SELL 944 795 (16) 200 2.6 212 18 14 21 46.3 (19.1) 46.5 54 66 45 34.6 42.6 27.9 5.7 5.5 5.1 9.9 8.4 11.6 0.6 0.7 0.8 2.3 Ashoka Buildcon BUY 62 130 111 17 0.2 281 13.8 8.5 11.5 16.2 (38.0) 34.7 4.5 7.2 5.4 3.1 4.8 3.6 0.7 0.6 0.6 16.1 8.9 11.1 0.0 2.2 3.0 1.1 BUY 89 113 27 216 2.9 2,437 6.2 7.5 7.0 (20.2) 20.9 (6.9) 14.4 11.9 12.8 8.5 7.4 7.0 2.2 2.0 1.9 15.7 17.6 15.2 3.1 3.7 3.4 16.1 BHEL REDUCE 36 28 (20) 124 1.6 3,482 -4.2 -1.5 2.5 (221.0) 64.0 263.0 NM NM 14.4 (47.3) (284.6) 5.7 0.4 0.4 0.4 NM NM 3.0 (5.8) (1.9) 2.8 28 Carborundum Universal ADD 279 285 2 53 0.7 189 14.4 13.7 15.9 9.9 (4.7) 16.0 19.4 20 17.5 12.7 11.8 9.8 2.8 2.6 2.3 15.2 13.3 13.9 1.0 0.9 1.1 0.4 Cochin Shipyard BUY 300 550 83 40 0.5 132 48 39 47 32.5 (19.7) 19.7 6.2 7.7 6.4 2.7 3.3 3.3 1.1 1.0 0.9 18.1 13.2 14.4 5.0 3.9 4.3 1.8 India BUY 392 460 17 109 1.4 277 26 16 24 (3.2) (35.4) 48.7 15.4 24 16.0 17.3 28.7 16.4 2.6 2.5 2.4 17.0 10.8 15.5 3.6 2.3 3.4 9.3 Dilip Buildcon BUY 273 495 81 37 0.5 137 30 27 45 (45.3) (10.8) 64.8 9.0 10.1 6.1 4.4 4.9 3.0 1.0 0.9 0.8 12.2 9.8 14.2 0.2 0.2 0.3 1.2

IRB Infrastructure BUY 89 150 69 31 0.4 351 21 15 11 (15.2) (27.9) (22.9) 4.3 6.0 7.8 3.2 6.0 5.6 0.5 0.4 0.4 11.1 7.6 5.6 5.6 4.3 2.8 2.4 -

Kalpataru Power Transmission BUY 217 470 117 34 0.4 153 25 25 39 (16.4) 0.1 53.3 8.5 8.5 5.6 3.9 3.8 3.2 1.0 0.9 0.8 12.0 11.1 15.2 1.5 1.5 2.1 1.6 July 1, 1, 2020 July KEC International BUY 271 342 26 70 0.9 257 22.0 25 31 16.3 13.4 24.4 12.3 10.8 8.7 7.2 6.6 5.4 2.5 2.1 1.7 22 21 22 1.3 1.0 1.2 1.6 L&T BUY 944 1,200 27 1,325 17.5 1,403 63 40 69 3.3 (37.1) 73.8 14.9 24 13.6 15.8 17.9 13.1 2.3 2.0 1.8 15.8 8.9 13.7 1.9 1.6 2.3 75 Sadbhav Engineering BUY 45 137 203 8 0.1 172 7.2 11.7 13.6 (33.4) 61.1 16.3 6.2 3.9 3.3 4.8 2.7 2.3 0.4 0.3 0.3 5.9 9.0 9.6 — — — 0.3

Siemens SELL 1,097 1,000 (9) 391 5.2 356 26 33 38 (14.9) 28.2 14.7 42 33 29 27.9 21.6 19.0 4.0 3.7 3.4 9.9 11.8 12.5 0.7 0.8 1.0 68 Thermax BUY 755 820 9 90 1.2 113 19 15 31 (48.8) (22.5) 109.8 40 52 25 21.5 33.6 17.4 21.5 33.6 17.4 7.0 5.4 10.7 0.9 0.7 1.2 1.2 Capital goods Neutral 2,743 36.3 (18.6) (17.3) 56.6 18.7 23 14.4 1.9 1.7 1.6 10.2 7.7 11.1 1.4 1.4 2.1 1,404 Commercial & Professional Services SIS REDUCE 380 405 6 56 0.7 149 15 16 20 5.0 3.8 25.7 25 24 19.3 11.6 11.7 10.2 4.1 3.5 3.0 17.1 15.6 16.8 1.0 0.2 0.3 0.3

TeamLease Services ADD 1,678 1,875 12 29 0.4 17 20 50 68 (64.3) 143.7 36.4 82 34 25 30.0 24.5 18.6 5.0 4.4 3.7 6.3 13.9 16.2 — — — 0.5 Commercial & Professional Services Cautious 84 1.1 (16.7) 22.6 28.6 32 26 21 14.4 14.0 11.8 4.3 3.7 3.2 13.3 14.1 15.4 0.7 0.1 0.2 0.8 Commodity Chemicals Asian Paints REDUCE 1,687 1,700 1 1,619 21.4 959 27.2 19.1 36.2 20.7 (29.9) 90.0 62 89 47 38.7 50.5 30.0 16.0 14.6 12.6 27 17.2 29 0.7 0.5 1.0 66 SELL 494 410 (17) 480 6.3 971 6.8 5.8 9.2 32.2 (15.1) 60.2 73 86 54 45.3 50.0 33.7 18.0 15.7 13.4 26 19.6 27 0.4 0.3 0.6 10.9 Kansai Nerolac BUY 446 450 1 241 3.2 539 9.9 5.7 12.5 14.6 (42.6) 120.1 45 78 36 30.2 46.9 23.5 6.4 6.2 5.6 14.8 8.0 16.5 0.7 0.7 1.0 1.7 ADD 310 320 3 79 1.0 255 31.7 31.0 37.5 (26.2) (2.1) 21.0 9.8 10.0 8.3 4.7 4.6 3.9 0.6 0.6 0.6 6.4 6.0 7.0 3.5 3.5 4.2 7.8 Commodity Chemicals Neutral 2,418 32.0 9.2 (24.4) 72.2 52 69 40 30.4 36.5 23.9 8.2 7.7 6.9 15.6 11.1 17.2 0.8 0.6 1.1 87 Construction Materials ACC BUY 1,332 1,400 5 250 3.3 188 72.3 52.3 72.7 35.8 (27.7) 39.2 18.4 25 18.3 8.5 11.0 8.1 2.2 2.1 2.0 12.3 8.3 11.1 1.1 2.0 2.7 24 BUY 194 190 (2) 384 5.1 1,986 10.6 7.5 10.7 49.1 (29.5) 43.3 18.3 26 18.1 6.3 8.5 5.9 1.6 1.5 1.4 9.0 6.0 8.1 0.8 0.8 0.8 12.8 Dalmia Bharat BUY 673 935 39 126 1.7 192 14.0 2.0 19.2 (12.1) (85.4) 844.0 48 331 35 6.8 7.2 5.4 1.2 1.2 1.2 2.5 0.4 3.4 — — — 2.5 ADD 620 735 19 408 5.4 657 52.6 40.6 71.6 (21.1) (22.9) 76.5 11.8 15.3 8.7 7.5 8.2 5.3 0.7 0.7 0.6 6.0 4.6 7.6 0.6 0.2 0.5 19.5 J K Cement BUY 1,366 1,450 6 106 1.4 77 64.2 51.8 92.2 83.6 (19.4) 78.1 21 26 14.8 10.5 10.8 7.6 3.5 3.2 2.6 17.3 12.5 19.4 0.5 0.7 0.7 1.5 JK Lakshmi Cement BUY 253 275 9 30 0.4 118 23.5 10.7 23.3 478.2 (54.5) 118.0 10.8 24 10.8 5.0 6.6 4.5 1.8 1.7 1.5 17.4 7.2 14.3 1.0 0.6 1.4 1.4 Orient Cement BUY 71 55 (23) 15 0.2 205 4.2 2.5 5.4 82.1 (41.2) 117.3 16.9 29 13.2 6.8 7.9 5.9 1.3 1.3 1.2 8.0 4.5 9.5 1.1 2.8 2.8 0.9 REDUCE 23,051 15,500 (33) 832 11.0 36 435.2 355.3 633.7 34.6 (18.3) 78.3 53 65 36 22.4 25.6 17.6 6.4 6.0 5.3 13.9 9.6 15.5 0.5 0.5 0.5 17.9 UltraTech Cement BUY 3,894 4,000 3 1,124 14.9 289 132.9 115.8 202.7 45.2 (12.8) 75.0 29 34 19.2 13.9 14.5 9.5 2.9 2.7 2.4 10.5 8.2 13.1 0.3 0.4 0.5 33 Construction Materials Cautious 3,274 43.3 21.1 (22.9) 71.6 24 32 18.4 10.5 11.8 8.0 2.0 1.9 1.8 8.4 6.1 9.6 0.5 0.6 0.7 113

Source: Company, Bloomberg, Kotak Institutional Equities estimates

66 KOTAK ECONOMIC RESEARCH

66

Kotak Institutional Equities: Valuation summary of KIE Universe stocks

67 Fair O/S ADVT Price (Rs) Value Upside Mkt cap. shares EPS (Rs) EPS growth (%) P/E (X) EV/EBITDA (X) P/B (X) RoE (%) Dividend yield (%) 3mo

Company Rating 30-Jun-20 (Rs) (%) (Rs bn) (US$ bn) (mn) 2020 2021E 2022E 2020 2021E 2022E 2020 2021E 2022E 2020 2021E 2022E 2020 2021E 2022E 2020 2021E 2022E 2020 2021E 2022E (US$ mn) Consumer Durables & Apparel Crompton Greaves Consumer SELL 239 185 (22) 150 2.0 627 7.9 5.7 7.9 33.1 (28.2) 38.5 30 42 30 25 32 23 10.2 8.1 6.8 39 21 24 0.0 0.0 1.0 2.8 India SELL 580 475 (18) 363 4.8 626 11.8 8.7 13.8 (6.6) (26.1) 58.5 49 67 42 34 43 28 8.4 7.8 7.1 17.3 12.2 17.7 1.8 0.5 0.8 19.4 REDUCE 19,915 16,000 (20) 222 2.9 11 308 277 397 (12.9) (10.0) 43.5 65 72 50 42 45 33 27.1 23.4 19.1 43 35 42 0.8 0.8 1.1 11.0 Polycab ADD 789 725 (8) 118 1.6 149 52 40 51 53.2 (21.7) 27.0 15.3 19.6 15.4 10 13 10 3.1 2.7 2.3 23 14.6 16.2 0.7 0.5 0.6 2.7 TCNS Clothing Co. REDUCE 340 380 12 21 0.3 66 11 4 15 (47.7) (64.3) 302.6 32 88 22 12 16 8.5 3.4 3.1 2.6 10.9 3.6 12.8 — — — 0.2 Vardhman Textiles ADD 652 800 23 38 0.5 57 85 65 101 (34.1) (23.4) 54.4 7.7 10.0 6.5 5.8 6.3 4.2 0.6 0.6 0.5 8.3 6.0 8.7 2.7 1.9 3.1 0.2 SELL 546 440 (19) 181 2.4 331 16.2 10.3 17.8 3.4 (36.5) 73.0 34 53 31 27 51 25 4.2 4.0 3.7 12.8 7.7 12.5 0.7 0.5 0.8 20 Whirlpool SELL 2,075 1,580 (24) 263 3.5 127 38 26 47 17.0 (32.0) 82.8 55 81 44 37 54 31 10.3 9.6 8.6 20 12.2 20 0.2 0.4 0.9 1.9 Consumer Durables & Apparel Cautious 1,355 17.9 2.3 (26.6) 35 47 31 23 30 20 5.7 5.2 16.3 11.0 15.1 0.9 0.5 58 Consumer Staples Bajaj Consumer Care ADD 146 170 16 22 0.3 148 12.5 12.1 12.7 (16.6) (3.6) 5.0 11.7 12.1 11.5 8.4 8.8 8.2 3.3 3.0 2.8 33 26 25 1.4 5.5 5.5 1.1 Britannia Industries REDUCE 3,604 3,300 (8) 867 11.5 240 59 77 83 22.1 30.3 8.2 61 47 43 47 35 33 19.7 16.5 13.2 32 38 34 1.0 0.8 0.9 43 Colgate-Palmolive (India) ADD 1,407 1,450 3 383 5.1 272 28 30 36 5.9 7.4 19.7 50 46 39 31.5 29.5 25.2 24.0 23.9 22.6 51 52 60 2.0 2.1 2.5 21 India REDUCE 466 400 (14) 823 10.9 1,767 8.6 9.3 10.6 6.1 7.6 13.9 54 50 44 45 41 34 12.5 11.5 10.6 25 24 25 0.6 1.3 1.5 24 BUY 691 615 (11) 706 9.3 1,022 13.8 14.8 18.6 (4.8) 7.7 25.2 50 47 37 34 31 26 8.9 8.0 7.2 18.6 18.1 20 0.9 1.1 1.4 17.2 Hindustan Unilever ADD 2,180 2,300 6 5,118 67.7 2,343 31 35 44 10.9 12.8 25.8 70 62 49 53 43 35 58.6 11.8 11.2 86 32 23 1.1 1.5 1.8 240 ITC BUY 195 255 31 2,393 31.7 12,308 11.6 10.7 12.4 14.4 (7.2) 15.5 16.8 18.1 15.7 11.6 12.7 10.9 3.7 3.6 3.5 21 19.4 22 5.2 4.7 5.5 80 Jyothy Laboratories ADD 118 135 15 43 0.6 367 4.7 5.2 5.7 (15.5) 11.0 8.2 25 22 21 18.2 15.0 14.0 3.5 3.3 3.2 13.6 15.3 15.7 2.6 3.0 3.4 0.8 BUY 352 350 (1) 454 6.0 1,290 8.1 8.2 9.4 12.4 1.5 13.7 43 43 38 31 30 26 15.0 14.3 13.5 35 34 37 1.8 2.0 2.3 16.2 Nestle India REDUCE 17,174 16,000 (7) 1,656 21.9 96 204 241 282 22.6 17.9 17.3 84 71 61 58 48 42 85.7 70.0 57.9 70 108 104 2.0 1.1 1.3 40 ADD 387 400 3 355 4.7 922 8.0 8.2 10.9 13.9 2.9 33.2 49 47 35 26 24 21 2.6 2.5 2.4 6.9 5.4 6.9 0.7 0.9 1.1 25 United Breweries ADD 1,038 1,180 14 274 3.6 264 16.2 2.5 21.8 (24.0) (84.4) 760.7 64 410 48 31 67 25 7.8 7.8 6.8 12.8 1.9 15.2 0.2 0.1 0.6 10.9 ADD 592 620 5 430 5.7 727 11.5 9.3 14.8 21.7 (19.4) 59.9 52 64 40 29 35 25 10.7 9.2 7.5 23 15.5 21 — — — 37 BUY 681 800 17 197 2.6 289 16.2 14.4 29.1 51.9 (11.3) 102.1 42 47 23 16 16 11 5.9 5.2 4.3 17.6 11.7 20 0.1 0.2 0.3 3.0 Consumer Staples Cautious 13,721 181.5 13.0 3.2 22.1 43 42 34 30 29 24 11.1 8.3 7.8 26 19.9 23 1.8 1.9 2.2 561 Diversified Financials BUY 2,831 2,600 (8) 1,703 22.5 600 104 66 126 50 (37) 92 27 43 23 — — — 5.3 4.7 4.0 20 11.5 19.3 0.4 0.2 0.4 373 Bajaj Finserv BUY 5,845 7,000 20 930 12.3 159 212 238 392 5 12 65 28 25 14.9 — — — 3.0 2.7 2.4 12.2 11.6 16.9 0.2 0.2 0.2 87 Cholamandalam BUY 189 265 40 155 2.1 820 12.8 12.1 18.7 (15) (5.8) 54.3 14.8 15.7 10.2 — — — 2.0 1.9 1.6 14.7 11.5 15.7 0.9 0.7 1.1 34 IIFL Wealth ADD 1,022 1,200 17 89 1.2 88 23.8 37.0 53.7 (47) 55.8 45.1 43 28 19.0 — — — 3.0 2.9 2.8 7.0 10.7 15.1 1.0 2.4 3.4 0.2 L&T Finance Holdings ADD 66 85 29 132 1.7 2,005 8 5 9 (24.1) (38) 72.6 7.8 12.5 7.2 — — — 0.9 0.9 0.8 14.7 7.0 11.3 2.9 2.2 2.5 16.6 LIC Housing Finance ADD 265 350 32 134 1.8 505 47.6 36.2 66.6 4 (24.0) 84.1 5.6 7.3 4.0 — — — 0.9 0.9 0.7 13.9 9.6 16.0 3.0 2.3 4.2 25 ADD 1,086 1,025 (6) 436 5.8 401 75 69 85 52.3 (7) 22.8 14.5 15.6 12.7 — — — 3.8 3.2 2.7 28 22 23 1.4 1.3 1.6 36 Shriram City Union Finance BUY 671 1,250 86 44 0.6 66 152 84 158 1.2 (44) 87.1 4.4 8.0 4.3 — — — 0.7 0.6 0.5 14.7 7.5 12.8 0.9 1.6 3.5 0.5 Shriram Transport BUY 690 1,050 52 156 2.1 227 110.3 81.7 119.0 (2) (25.9) 45.6 6.3 8.4 5.8 — — — 0.9 0.9 0.8 14.8 9.9 13.0 0.7 1.8 2.6 59 Diversified Financials Neutral 6,962 92.1 32.3 (25.9) 43.9 17.0 23 16.0 2.6 2.5 2.3 15.1 11.1 14.2 0.9 1.0 1.2 838

Daily Summary India

Source: Company, Bloomberg, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES EQUITIES INSTITUTIONAL KOTAK

-

July 1, 1, 2020 July

RESEARCH

KOTAK ECONOMIC RESEARCH 67

Kotak Institutional Equities: Valuation summary of KIE Universe stocks India Fair O/S ADVT Price (Rs) Value Upside Mkt cap. shares EPS (Rs) EPS growth (%) P/E (X) EV/EBITDA (X) P/B (X) RoE (%) Dividend yield (%) 3mo

KOTAK INSTITUTIONAL EQUITIES RESEARCH EQUITIES INSTITUTIONAL KOTAK Company Rating 30-Jun-20 (Rs) (%) (Rs bn) (US$ bn) (mn) 2020 2021E 2022E 2020 2021E 2022E 2020 2021E 2022E 2020 2021E 2022E 2020 2021E 2022E 2020 2021E 2022E 2020 2021E 2022E (US$ mn)

Electric Utilities

CESC BUY 622 810 30 82 1.1 133 99 102 114 9 3.3 11.8 6.3 6.1 5.5 5.3 4.9 4.4 0.7 0.6 0.6 10.7 10.4 10.7 2.0 2.0 2.1 5.8 DailySummary JSW Energy BUY 47 65 38 77 1.0 1,640 6.3 5.3 5.2 49 (17) (1.8) 7.4 8.9 9.1 4.7 4.4 3.8 0.7 0.6 0.6 8.9 7.2 6.6 — — — 1.6 NHPC ADD 20 27 35 201 2.7 10,045 3.4 3.4 3.7 34.3 2 6.8 5.9 5.8 5.4 5.5 5.9 5.4 0.6 0.6 0.6 10.8 10.5 10.6 8.5 7.7 8.3 1.6 NTPC BUY 96 140 46 948 12.5 9,895 11.1 13.2 15.4 (0.9) 18.7 16.8 8.6 7.3 6.2 10.0 7.9 6.2 0.8 0.8 0.7 10.0 11.1 11.9 3.3 4.1 4.8 23 Power Grid BUY 175 220 26 915 12.1 5,232 20.7 22 25 9 6.3 16.1 8.5 8.0 6.9 6.8 6.5 5.8 1.4 1.3 1.2 17.5 17.0 18.1 5.7 6.1 7.1 28 BUY 45 55 22 121 1.6 2,705 4.4 4.9 6.5 110 11 31.8 10.1 9.1 6.9 7.2 6.4 5.8 0.7 0.6 0.6 6.9 7.1 8.7 — — — 16.9 Electric Utilities Attractive 2,345 31.0 10.2 9.7 15.4 8.2 7.4 6.4 0.9 0.9 0.8 11.4 11.6 12.3 4.4 4.8 5.5 77 Fertilizers & Agricultural Chemicals Bayer Cropscience SELL 5,945 3,400 (43) 267 3.5 45 129.3 134.2 149.9 64.7 3.8 11.7 46 44 40 35 32 28 10.4 8.7 7.4 24 21 20 0.4 0.5 0.5 2.2 Dhanuka Agritech SELL 708 535 (24) 34 0.4 48 29.7 34.9 38.2 25.7 17.4 9.5 23.8 20.3 18.5 19.0 15.9 14.3 4.8 4.6 4.3 21 23 24 3.4 4.0 4.4 1.0 SELL 431 375 (13) 83 1.1 192 11.5 12.9 17.0 0.8 11.8 32 37 33 25 22 18 14 3.7 3.4 3.1 10.4 10.7 12.9 1.3 1.0 1.4 1.3

Rallis India ADD 273 230 (16) 53 0.7 195 9.0 10.6 14.2 7.4 17.1 33.7 30.1 25.7 19.2 20.6 17.6 13.5 3.8 3.4 3.0 13.1 13.9 16.5 0.9 1.0 1.1 2.8 -

UPL SELL 425 350 (18) 325 4.3 765 23.2 30.3 35.7 22.7 30.4 17.8 18 14.0 11.9 8.5 7.5 6.6 2.0 1.8 1.6 11.5 13.5 14.3 1.4 1.8 2.2 39 1, 2020 July Fertilizers & Agricultural Chemicals Attractive 969 12.8 26.7 22.5 18.8 28 23 19.5 13.3 11.7 10.1 3.7 3.3 3.0 13.2 14.4 15.2 0.9 1.1 1.4 50 Gas Utilities GAIL (India) BUY 102 150 47 461 6.1 4,510 13.2 9.5 11.6 (5.5) (28.2) 22.2 7.7 10.8 8.8 5.9 7.8 6.3 1.0 1.0 0.9 13.5 9.4 10.9 6.3 3.9 4.9 23

GSPL SELL 221 210 (5) 125 1.6 564 17.2 12.8 11.8 21.9 (25.7) (7.6) 12.9 17.3 18.7 6.0 7.2 7.4 1.9 1.7 1.6 15.5 10.2 8.7 0.9 0.9 1.1 2.1 SELL 442 380 (14) 310 4.1 700 16.7 16.0 20.8 38.6 (4.1) 29.8 26.5 27.7 21.3 18.9 19.6 15.1 6.1 5.3 4.5 25 20 23 0.6 0.6 0.9 25 ADD 1,052 1,185 13 104 1.4 99 74.6 61.9 82.8 32.8 (17.1) 33.9 14.1 17.0 12.7 9.7 11.2 8.1 3.5 3.2 2.8 28 19.6 24 3.3 2.9 4.2 12.7 Petronet LNG BUY 258 300 16 387 5.1 1,500 17.6 18.7 22.2 17.3 6.2 18.5 14.6 13.8 11.6 8.1 7.8 6.7 3.5 3.3 3.2 25 25 28 4.8 5.5 7.0 10.3

Gas Utilities Attractive 1,386 18.3 6.8 (16.9) 20.5 12.1 14.5 12.1 7.9 9.1 7.5 2.0 1.9 1.7 16.5 12.8 14.3 3.9 3.3 4.2 74

Health Care Services BUY 1,350 1,700 26 188 2.5 139 18.4 1 44 9 (97) 6,877 73.2 ##### 30.9 13.8 21.1 12.1 5.6 5.6 5.1 7.7 0.3 17.2 0.8 0.0 1.3 21 Dr Lal Pathlabs SELL 1,565 1,180 (25) 130 1.7 83 27.1 26.1 37.7 13.4 (3.5) 44.5 57.8 59.9 41.5 35.8 36.9 25.8 12.6 11.0 9.3 23 19.6 24 0.5 0.5 0.7 3.2 HCG BUY 123 140 14 11 0.1 143 (7.7) (6.4) (1.8) (128) 16 72 NM NM NM 9.7 8.2 5.5 2.2 1.9 1.9 NM NM NM — — — 0.8 Metropolis Healthcare SELL 1,359 1,240 (9) 69 0.9 51 29.2 28.9 40.0 22.0 (1.2) 39 46.5 47.1 33.9 28.6 27.8 20.5 13.0 11.1 9.2 31 26 30 0.6 0.6 0.9 7.2 Narayana Hrudayalaya BUY 268 360 34 55 0.7 204 5.8 -3.0 8.3 101.0 (152) 376 46.1 NM 32.4 14.2 29.6 11.6 4.8 5.1 4.4 10.7 NM 14.6 — — — 0.7 Health Care Services Attractive 515 6.8 6 (79) 707 52.7 245.5 30.4 14.3 19.1 11.4 5.2 4.9 4.4 10.0 2.0 14.5 0.5 0.2 0.8 33 Hotels & Restaurants Jubilant Foodworks ADD 1,727 1,750 1 228 3.0 133 24 9 30 (2) (62.3) 240 73.3 194.3 57.1 25.2 32.9 19.9 20.2 19.9 15.2 26 10.3 30 0.3 0.2 0.6 32 Lemon Tree Hotels BUY 24 38 59 19 0.2 790 -0.1 -0.9 0.6 (118) (655) 161 NM NM 43.1 14.0 28.8 11.1 2.3 2.5 2.4 NM NM 5.7 — 0.0 0.9 1.2 Hotels & Restaurants Attractive 247 3.3 (18) (85) 868 81.5 534.2 55.2 22.8 32.3 18.0 12.6 12.9 10.8 15.5 2.4 19.6 0.3 0.2 0.6 33 Insurance HDFC Life Insurance ADD 549 530 (3) 1,109 14.7 2,010 6.4 3.7 5.6 1.4 (42.4) 50.5 85.2 147.8 98 — — — 15.8 15.1 14.1 20 10.4 14.8 0.0 0.2 0.3 42 ICICI Lombard SELL 1,267 875 (31) 576 7.6 454 26.3 30.8 35.7 14 17 16 48.2 41.1 35 — — — 9.4 7.8 6.6 21 21 20 0.3 0.2 0.6 19.6 ICICI Prudential Life BUY 426 475 12 611 8.1 1,436 7.4 9.7 12.2 (6) 30.8 25.5 57.3 43.8 35 — — — 8.1 7.1 6.1 14.8 17.2 18.7 0.2 0.4 0.0 18.7 Max Financial Services ADD 542 550 1 146 1.9 343 10.1 10.3 28.1 452 2 173 53.6 52.5 19.3 — — — — — — 12.7 14.5 40 — 0.2 1.2 12.4 SBI Life Insurance BUY 807 1,000 24 807 10.7 1,001 14.2 14.9 15.6 7.2 4.9 4.5 56.7 54.1 52 — — — 10.1 8.7 7.7 18.4 17.3 15.8 — 0.3 0.3 16.6 Insurance Attractive 3,248 43.0 8.4 2.7 32.3 61.9 60.3 46 10.5 9.2 7.6 17.0 15.3 16.6 0.0 0.2 0.2 110

Source: Company, Bloomberg, Kotak Institutional Equities estimates

68 KOTAK ECONOMIC RESEARCH

68

Kotak Institutional Equities: Valuation summary of KIE Universe stocks

69 Fair O/S ADVT Price (Rs) Value Upside Mkt cap. shares EPS (Rs) EPS growth (%) P/E (X) EV/EBITDA (X) P/B (X) RoE (%) Dividend yield (%) 3mo

Company Rating 30-Jun-20 (Rs) (%) (Rs bn) (US$ bn) (mn) 2020 2021E 2022E 2020 2021E 2022E 2020 2021E 2022E 2020 2021E 2022E 2020 2021E 2022E 2020 2021E 2022E 2020 2021E 2022E (US$ mn) Internet Software & Services SELL 2,762 2,185 (21) 338 4.5 122.3 26.9 19.8 36.7 4.2 (26.5) 85.4 102.7 139.7 75.3 80.7 121.2 59.9 13.9 12.9 11.5 13.8 9.6 16.1 0.3 0.2 0.3 17.8 Just Dial BUY 402 420 5 26 0.3 61.8 42.0 24.3 33.0 31.4 (42.2) 35.9 9.6 16.6 12.2 4.0 9.3 5.4 2.0 2.1 1.8 24 12.2 16.1 ——— 17.7 Internet Software & Services Attractive 364 4.8 15.2 (34.9) 66.5 60.6 93.1 55.9 49.7 82.8 45.5 9.8 9.6 8.4 16.2 10.4 15.1 0.3 0.2 0.3 35 IT Services HCL Technologies ADD 557 625 12 1,511 20.0 2,716 40.8 38.5 43.8 11.4 (5.6) 13.7 13.7 14.5 12.7 8.5 8.4 7.2 3.1 2.6 2.3 24 19.5 19.0 0.9 1.8 2.5 38 Hexaware Technologies REDUCE 333 260 (22) 100 1.3 302 21.2 18.8 21.1 9.9 (11.2) 12.2 15.7 17.7 15.8 11.4 11.3 9.7 3.6 3.2 2.9 25 19.2 19.2 2.6 1.8 3.0 4.4 Infosys BUY 736 775 5 3,134 41.5 4,259 38.9 37.5 42.2 10.0 (3.6) 12.3 18.9 19.6 17.5 13.2 12.8 11.3 4.8 4.5 4.1 25 24 25 2.4 3.5 4.1 100 L&T Infotech ADD 1,958 1,850 (6) 341 4.5 176 86.6 83.5 101.0 0 (3.6) 21.0 22.6 23.5 19.4 16.0 15.5 13.5 6.4 5.6 4.8 30 25 26 1.4 1.6 1.8 3.1 Mindtree REDUCE 926 760 (18) 152 2.0 165 38.3 46.9 55.3 (16) 22 18 24.2 19.7 16.7 12.7 11.0 9.3 4.8 4.2 3.6 19.5 23 23 3.2 1.5 1.8 14.2 Mphasis REDUCE 879 750 (15) 164 2.2 187 63.5 56.2 62.2 13 (11.5) 10.6 13.8 15.6 14.1 9.2 9.8 8.6 2.8 2.6 2.4 21 17.4 17.9 4.0 4.0 4.0 2.9 TCS REDUCE 2,082 1,705 (18) 7,813 103.4 3,752 86.2 82.6 92.0 4 (4.2) 11.3 24.2 25.2 22.6 17.5 18.0 16.1 9.1 8.5 7.9 36 35 36 3.2 3.2 3.5 106 Tech Mahindra BUY 543 630 16 473 6.3 880 45.9 35.4 48.0 (3.9) (22.8) 35.6 11.9 15.3 11.3 7.2 7.5 5.7 2.2 2.0 1.9 19.2 13.8 17.2 2.8 2.8 3.1 36 Wipro REDUCE 220 195 (11) 1,255 16.6 5,703 16.6 15.8 17.1 11.1 (5.0) 8.3 13.2 13.9 12.9 8.0 8.0 7.1 2.3 2.0 1.9 17.3 15.1 14.9 0.7 0.9 3.9 22 IT Services Cautious 14,944 197.7 4.3 (5.5) 12.8 19.2 20.4 18.0 13.2 13.3 11.8 5.1 4.6 4.2 26 22 23 2.5 2.9 3.5 327 Media DB Corp. REDUCE 74 81 9 13 0.2 175 15.7 5.3 14.1 0.4 (66.5) 166.7 4.7 14.0 5.3 2.8 4.5 2.2 0.8 0.7 0.8 15.7 5.4 14.3 16.9 2.7 16.2 0.3 Jagran Prakashan REDUCE 40 35 (12) 11 0.1 281 7.0 3.3 7.0 (20.9) (52) NA 5.7 11.8 NA 1.7 2.2 NA 0.6 0.6 NA 10.3 4.9 9.9 11.4 5.1 12.6 0.3 PVR BUY 1,002 1,625 62 51 0.7 51 32.7 -32.7 59.3 (24) (200) 281 30.7 NM 16.9 9.7 31.7 7.2 2.7 3.0 2.6 10.7 NM 16.2 0.3 (0.3) 0.6 41 Sun TV Network REDUCE 403 435 8 159 2.1 394 35.5 34.9 39.7 (2) (1.6) 13.6 11.4 11.5 10.2 7.8 7.5 6.6 2.8 2.7 2.6 25 24 26 6.2 6.2 6.8 15.6 Zee Entertainment Enterprises REDUCE 171 145 (15) 164 2.2 960 17.9 13.1 16.2 8.6 (27.1) 24.4 9.5 13.1 10.5 6.4 8.0 6.2 1.7 1.6 1.5 18.5 12.6 14.6 2.6 3.2 3.2 57 Media Attractive 399 5.3 0.1 (29.5) 46.0 10.6 15.1 10.3 6.5 8.3 5.8 1.9 1.9 1.7 18.0 12.3 16.9 4.5 4.0 5.0 114 Metals & Mining Hindalco Industries BUY 146 225 54 328 4.3 2,220 17.8 10.5 20.0 (28.2) (41.1) 91 8.2 14.0 7.3 5.0 6.3 4.6 0.6 0.5 0.5 6.8 3.9 7.1 0.7 0.7 0.7 32 BUY 196 215 10 828 11.0 4,225 16.1 11.5 15.3 (14.5) (28.4) 32.7 12.2 17.0 12.8 6.9 8.8 6.7 2.1 2.5 2.5 18.4 13.2 19.4 8.4 5.9 7.8 2.7 Jindal Steel and Power BUY 162 200 24 165 2.2 1,020 (7.7) (9.0) 14.6 (343) (18) 262 NM NM 11.0 6.7 7.8 5.2 0.5 0.5 0.5 NM NM 4.7 ——— 34 JSW Steel ADD 189 180 (5) 458 6.1 2,402 10.1 (0.4) 14.8 (68.3) (104) 4,298.7 18.8 NM 12.8 8.9 11.3 6.8 1.2 1.3 1.2 6.8 NM 9.5 1.1 1.1 1.1 30 National Aluminium Co. SELL 32 24 (25) 60 0.8 1,866 0.7 (0.4) 1.4 (91) (154) 461.1 43.1 NM 22.1 7.5 13.7 6.6 0.6 0.6 0.6 1.4 NM 2.7 4.7 0.0 2.3 6.2 NMDC ADD 81 105 29 248 3.3 3,062 14.6 11.9 11.1 (0.7) (18.8) (7) 5.5 6.8 7.3 3.8 4.7 5.1 0.9 0.8 0.8 16.7 12.8 11.2 6.8 7.3 6.8 7.1 Tata Steel BUY 327 400 22 371 4.9 1,146 35.2 (20.8) 63.3 (61) (159) 404 9.3 NM 5.2 8.0 9.7 5.1 0.5 0.5 0.5 5.9 NM 10.4 3.1 2.1 3.5 61 Vedanta BUY 106 120 13 396 5.2 3,717 6.5 5.5 12.3 (57) (16) 125.0 16.3 19.4 8.6 4.6 6.0 4.5 0.7 0.8 0.7 4.2 3.8 8.7 3.7 11.5 8.0 44 Metals & Mining Attractive 2,853 37.7 (45.5) (60.0) 235.8 12.2 30.3 9.0 6.3 7.9 5.4 0.9 0.9 0.8 7.1 2.9 9.3 4.3 4.5 4.7 44

Source: Company, Bloomberg, Kotak Institutional Equities estimates India Daily Summary Daily Summary India KOTAK INSTITUTIONAL EQUITIES EQUITIES INSTITUTIONAL KOTAK -

July 1, 1, July 2020 RESEARCH

KOTAK ECONOMIC RESEARCH 69

Kotak Institutional Equities: Valuation summary of KIE Universe stocks India Fair O/S ADVT Price (Rs) Value Upside Mkt cap. shares EPS (Rs) EPS growth (%) P/E (X) EV/EBITDA (X) P/B (X) RoE (%) Dividend yield (%) 3mo

KOTAK INSTITUTIONAL EQUITIES RESEARCH EQUITIES INSTITUTIONAL KOTAK Company Rating 30-Jun-20 (Rs) (%) (Rs bn) (US$ bn) (mn) 2020 2021E 2022E 2020 2021E 2022E 2020 2021E 2022E 2020 2021E 2022E 2020 2021E 2022E 2020 2021E 2022E 2020 2021E 2022E (US$ mn)

Oil, Gas & Consumable Fuels

BPCL BUY 374 440 18 812 10.7 1,967 11 26 33 (71.0) 144.2 28.4 35.6 14.6 11.3 20.3 10.6 8.9 2.2 2.1 1.9 5.9 14.7 17.4 4.4 3.4 4.4 40.6 DailySummary Coal India BUY 133 215 62 819 10.8 6,163 27 20 20 (4) (24.7) (3.2) 4.9 6.5 6.7 3.8 5.7 5.4 2.5 2.5 2.5 57.0 38.9 37.6 11.3 15.1 15.1 20.4 HPCL BUY 217 260 20 330 4.4 1,524 7 24 27 (82.0) 235.0 10.7 30.3 9.1 8.2 18.4 9.2 8.2 1.1 1.1 1.0 3.8 12.2 12.7 4.5 5.5 6.1 21.6 IOCL BUY 85 130 52 803 10.6 9,181 (3.9) 9.8 13.2 (121.9) 349.6 34.4 NM 8.7 6.5 22.9 5.7 5.1 0.8 0.8 0.7 NM 9.4 11.9 5.0 5.2 7.0 21.5 SELL 94 70 (25) 102 1.3 1,084 21 3 6 (32) (85.6) 105.7 4.5 31.4 15.3 3.3 8.6 7.4 0.4 0.4 0.4 8.6 1.3 2.7 11.3 1.3 2.6 3.0 ONGC SELL 81 60 (26) 1,023 13.5 12,580 13 4 7 (43) (71.7) 89.6 6.0 21.4 11.3 2.8 4.7 3.8 0.4 0.4 0.4 7.3 2.1 3.8 6.1 2.3 3.7 27.9 Reliance Industries BUY 1,704 1,750 3 10,100 133.6 5,926 67 70 97 1.2 4.2 38.9 25.5 24.5 17.6 15.2 13.9 10.0 2.2 2.1 1.9 9.4 8.7 11.1 0.4 0.4 0.4 454.6 Oil, Gas & Consumable Fuels Attractive 13,989 185.1 (37.3) 2.3 32.9 18.7 18.2 13.7 10.1 10.0 7.7 1.6 1.5 1.4 8.4 8.1 10.0 2.1 2.0 2.2 589.6 Pharmaceuticals REDUCE 772 730 (5) 452 6.0 586 48 51 56 19.3 6 8.8 16.0 15.1 13.8 9.7 9.2 8.0 2.7 2.3 2.0 16.8 15.5 14.8 0.4 1.0 1.2 70.4 SELL 390 225 (42) 468 6.2 1,202 6.2 8.2 10.0 2 32 21.9 63 48 39 29.2 21.5 17.6 6.4 5.8 5.2 10.6 12.1 13.2 0.2 0.7 0.9 41.4

Cipla BUY 640 650 2 516 6.8 806 19.2 27 32 1.1 39 20 33 24.1 20.0 16.3 13.5 11.3 3.2 2.9 2.6 9.9 12.2 13.2 1.2 0.8 0.9 78.3 -

Dr Reddy's Laboratories SELL 3,941 3,100 (21) 655 8.7 166 176 147 188 76 (16) 27.5 22 26.8 21.0 12.9 14.9 11.5 4.2 3.7 3.3 13.9 13.9 15.5 0.6 0.6 0.8 66.7 1, 2020 July Laurus Labs ADD 519 540 4 56 0.7 107 23.9 34.7 38 117.9 45 10 22 15.0 13.7 11.7 9.3 7.9 3.1 2.6 2.2 15.3 17.3 16.0 (0.7) — — 13.4 Lupin ADD 912 900 (1) 413 5.5 450 22 32 46 3.6 46 44 42 29 19.9 16.3 12.7 9.3 3.3 3.0 2.6 7.4 10.4 13.3 0.7 0.5 0.8 47.6 Sun Pharmaceuticals ADD 473 480 1 1,135 15.0 2,406 16.7 19.2 24 3.8 15 25 28 25 19.7 14.9 12.9 10.5 2.5 2.3 2.1 9.3 9.4 11.2 1.5 0.8 1.0 89.9

Torrent Pharmaceuticals REDUCE 2,372 2,350 (1) 401 5.3 169 57 70 86 22.6 22 22 41 34 28 19.7 17.0 14.5 8.3 7.2 6.1 20.1 21.2 22.2 1.8 1.0 1.3 30.0 Pharmaceuticals Neutral 4,096 54.2 18.9 13 23 29 25 20.6 15.1 13.5 11.0 3.4 3.1 2.7 11.9 12.1 13.3 1.0 0.8 1.0 437.6 Real Estate Brigade Enterprises BUY 136 235 73 28 0.4 204 6.4 7 15 (46) 6 114 21.3 20.0 9.3 10.2 9.4 4.8 1.2 1.2 1.1 5.9 6.0 12.0 1.8 1.8 1.8 0.5 DLF BUY 148 200 35 366 4.8 2,475 (2.4) 5.0 8.7 (140) 310 74 NM 29.7 17.1 35.4 40.9 23.8 1.1 1.0 1.0 NM 3.6 6.0 — 1.4 1.4 21.3 Embassy Office Parks REIT ADD 343 400 17 264 3.5 772 9.9 12.3 14.1 110 24 15 35 28 24 16.9 15.8 14.5 1.2 1.3 1.4 3.4 4.4 5.4 7.1 7.7 8.7 8.7 Godrej Properties SELL 867 610 (30) 219 2.9 252 10.7 10.9 17.7 (2.7) 2 62.2 81 79 49 67.7 127.3 115.8 4.5 4.3 4.0 7.4 5.6 8.4 — — — 6.3 ADD 366 575 57 133 1.8 364 22 34 38 (4.0) 55.5 12 16.9 10.9 9.7 15.8 9.5 8.1 1.5 1.3 1.2 9.4 13.1 13.1 0.5 0.5 0.5 2.4 Prestige Estates Projects ADD 210 275 31 84 1.1 401 10.9 6.6 10 25.1 (39) 54 19 32 20.5 6.8 7.4 6.3 1.5 1.5 1.4 8.7 4.9 7.2 0.8 0.7 0.7 2.0 Sobha BUY 227 415 83 22 0.3 95 30 36 45 (5) 21.5 24.1 7.6 6.3 5.1 4.6 4.2 3.8 0.9 0.8 0.7 12.1 13.4 14.8 3.1 3.1 3.1 1.2 Sunteck Realty BUY 189 320 69 28 0.4 140 12.2 11.3 25 (24.6) (7) 118 15 16.7 7.6 13.4 14.6 5.8 0.9 0.8 0.8 5.9 5.2 10.5 0.5 0.5 0.5 1.3 Real Estate Neutral 1,143 15.1 (41.9) 105.5 42.5 51 25 17.5 16.3 15.3 11.9 1.4 1.4 1.3 2.7 5.4 7.4 1.9 2.5 2.7 43.7 Retailing Aditya Birla Fashion and Retail BUY 125 150 20 97 1.3 773 (2.1) (4.2) 2.7 (151.4) (96.4) 165.1 NM NM 46 10.1 13.1 7.9 8.9 12.7 9.9 NM NM 24.3 — — — 4.0 Avenue Supermarts SELL 2,317 1,480 (36) 1,501 19.9 648 21.0 22 39 45.1 5.8 74.1 110 104 60 69 69 40 13.1 12.0 10.0 15.8 12.2 18.2 — — — 14.1 BUY 950 1,215 28 843 11.2 888 16.8 10 21 (0.2) (38.6) 102.8 56 92 45 34 50 29 12.6 11.5 9.7 23.4 13.1 23.3 0.4 0.3 0.6 55.5 Retailing Cautious 2,441 32.3 (2.8) (23.2) 125.3 92 120 53 42 52 30 13.0 11.8 9.9 14.0 9.9 18.6 0.1 0.1 0.2 73.7 Speciality Chemicals BUY 126 165 31 124 1.6 989 8.4 6.0 8.9 16.8 (28.8) 48.8 15.0 21.1 14.2 10.0 14.1 9.5 9.1 8.8 8.4 65.3 42.4 60.8 4.4 4.4 6.6 2.3 REDUCE 1,372 1,325 (3) 697 9.2 508 23.1 17 28 30.1 (24.5) 60.9 59 79 49 43 55 35 15.6 14.1 12.1 27.2 18.8 26.6 0.5 0.5 0.7 18.7 S H Kelkar and Company BUY 63 95 50 9 0.1 141 4.6 4.6 6.2 (24.3) (1.0) 35.8 13.7 13.8 10.2 7.4 7.0 5.5 1.1 1.0 1.0 7.8 7.6 9.8 3.2 1.6 2.8 1.4 SRF ADD 3,606 3,800 5 207 2.7 57 138 151 197 23.5 9.2 30.9 26.1 23.9 18.3 16.3 14.0 11.1 4.2 3.6 3.1 17.5 16.3 18.2 0.4 0.4 0.5 13.7 Speciality Chemicals Neutral 1,038 13.7 22.1 (15.8) 46.5 36 43 29.5 24.1 26.8 19.1 9.0 8.0 7.0 24.7 18.6 23.6 1.0 0.9 1.4 36.1

Source: Company, Bloomberg, Kotak Institutional Equities estimates

70 KOTAK ECONOMIC RESEARCH

70

Kotak Institutional Equities: Valuation summary of KIE Universe stocks

71 Fair O/S ADVT Price (Rs) Value Upside Mkt cap. shares EPS (Rs) EPS growth (%) P/E (X) EV/EBITDA (X) P/B (X) RoE (%) Dividend yield (%) 3mo

Company Rating 30-Jun-20 (Rs) (%) (Rs bn) (US$ bn) (mn) 2020 2021E 2022E 2020 2021E 2022E 2020 2021E 2022E 2020 2021E 2022E 2020 2021E 2022E 2020 2021E 2022E 2020 2021E 2022E (US$ mn) Telecommunication Services Bharti Airtel BUY 560 690 23 3,053 40.4 5,456 (6.7) 5.7 14.5 NM NM NM NM 98.9 38.7 10.7 8.4 6.8 4.0 4.0 3.8 NM 4.0 10.0 0.4 1.1 1.1 181.9 Bharti Infratel BUY 222 185 (16) 410 5.4 1,850 16.5 16.5 17.7 25.7 0.2 6.9 13.4 13.4 12.5 5.6 5.4 5.1 3.0 3.0 3.0 21.7 22.5 23.9 4.9 7.2 7.7 29.7 RS 11 —— 305 4.0 28,736 (22.3) (4.0) (6.2) NM NM NM NM NM NM 22.0 10.7 9.8 1.3 2.6 (4.9) NM NM NM ——— 73 Tata Communications BUY 611 705 15 174 2.3 285 16.0 14.9 21.4 38.2 (6.6) 43.7 38.2 40.9 28.5 8.2 7.2 6.3 NM NM (35.9) NM NM NM 0.7 0.7 1.0 1.5 Telecommunication Services Cautious 3,942 52.1 NM 65.6 52.3 NM NM NM 11.3 8.5 7.2 3.5 3.9 4.5 NM NM NM 0.8 1.6 1.7 286.5 Transportation Adani Ports and SEZ BUY 344 390 13 699 9.2 2,032 26.9 18.7 21.9 34.7 (30.5) 16.9 12.8 18.4 15.7 12.2 13.1 11.2 2.7 2.4 2.2 21.8 14.0 14.5 3.7 1.0 0.9 19.0 Container Corp. SELL 418 400 (4) 255 3.4 609 17.3 8.0 13.0 5.7 (53.6) 62.2 24 52 32 13.9 24.6 16.9 2.5 2.5 2.4 10.3 4.8 7.6 0.8 1.0 1.7 10.9 Gateway Distriparks BUY 84 135 61 9 0.1 109 4.2 (0.4) 5.1 (37.5) (108.6) 1,491.1 19.8 NM 16.5 6.8 8.3 6.0 0.7 0.7 0.7 3.5 NM 4.1 3.6 3.6 3.6 0.2 GMR Infrastructure BUY 20 26 30 121 1.6 7,147 (3.1) (1.8) (0.8) (25.4) 40.9 55.9 NM NM NM 15.9 18.4 16.6 (4.5) (7.2) (5.6) 106.6 55.8 25.2 ——— 2.9 Gujarat Pipavav Port BUY 76 106 40 37 0.5 483 6.0 4.5 5.8 42.2 (25.1) 28.0 12.5 16.8 13.1 6.8 7.2 6.2 1.8 1.8 1.8 14.2 10.5 13.5 7.4 5.6 7.2 0.7 InterGlobe Aviation SELL 989 925 (6) 380 5.0 383 (6.5) (189.9) 66.4 (258.9) (2,828.8) 135.0 NM NM 14.9 4.5 (8.9) 2.1 6.5 (141.6) 2.1 NM NM 253.3 — —— 44 Mahindra Logistics ADD 275 275 0 20 0.3 71 8.9 5.9 10.3 (29.0) (34.2) 75.8 31 47 27 12.7 14.5 10.2 3.6 3.4 3.1 12.2 7.5 12.2 ——— 0.3 Transportation Attractive 1,520 20.1 17.6 (183.9) 288.8 32 NM 20.0 10.8 22.2 8.9 3.6 3.7 3.3 11.2 NM 16.3 2.0 0.8 0.9 78 KIE universe 106,423 1407.9 (14.0) 2.3 49.4 27 26.5 17.7 12.1 12.4 9.5 2.5 2.3 2.1 9.2 8.7 12.0 1.5 1.7 2.0

Notes: (a) We have used adjusted book values for banking companies. (b) 2020 means calendar year 2019, similarly for 2021 and 2022 for these particular companies. (c) Exchange rate (Rs/US$)= 75.59 Source: Company, Bloomberg, Kotak Institutional Equities estimates India Daily Summary Daily Summary India KOTAK INSTITUTIONAL EQUITIES EQUITIES INSTITUTIONAL KOTAK -

July 1, 1, July 2020 RESEARCH

KOTAK ECONOMIC RESEARCH 71 Disclosures of of the following trategic transaction As of March 31, 2020 n a merger or s any, noare longer in effect for this stock , if, fair value , any, if for this stock,because is there notsufficient a

fair valuefair

.

Percentage of companies covered by Kotak Institutional Equities, the specifiedwithin category. Percentage of companies each within category for which Kotak Institutional Equities and or its affiliates has provided investment banking services the previouswithin months.12 * The above categories are defined as follows: Buy = We expect this stock to deliver more returns than 15% over the next months;12 Add = We expect this stock to deliverreturns 5-15% over the next months;12 Reduce = We expect this stock to deliver returns over -5-+5% the next months;12 Sell = We expect this stock to deliver less returns overthan -5% the next months.12 Our target prices are also on a horizon 12-month basis. These ratings are used illustratively to comply with applicable regulations. As of 31/03/2020 Kotak Institutional Equities Investment Research had investment ratings on 204 equity securities. luded

r r display is not or applicable. months. . The previous investment and rating

SELL 1.5%

17.2% fair valuefair

term volatility in stock prices related to movements in the market.Hence, a particular Ratingmay not , if, any,have been suspended temporarily.Such suspension is in compliance with applicable regulation(s) - 0.0% 12.7% fair valuefair +5% returns over the next 12 months.

- REDUCE month horizon basis. 5 - - 15% returns over the next 12 5% returns over the next months.12 The information is not available fo - -

ake into account short ADD 23.0% 2.0% Kotak SecuritiesKotak has suspended coverage of this company.

are also on12 a Kotak SecuritiesKotak Research has suspended theinvestment and rating

The information is not meaningful and is therefore exc

Kotak SecuritiesKotak does not cover this company.

The investment and rating

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

Attractive, Neutral, Cautious. BUY 3.9% 47.1% We expect this stock to deliver

We this expect stock to deliver 5 We expect this to stock deliver < We expect this to stock deliver more than 15% returns over the next months.12

Fair Value estimates 0% 40% 30% 20% 10% 70% 60% 50% Source: Kotak Institutional Equities Kotak Institutional Equities Research coverage universe coverage Research Equities Institutional Kotak Distribution of ratings/investment banking relationships and shouldnot be relied upon. = NA AvailableNot or Applicable.Not = NM Meaningful.Not and/or and/or Kotak Securities policies in circumstances when Securities Kotak or its affiliates is acting in an advisory capacity i involving this company and in certain other circumstances. CS = Coverage Suspended. = NC Covered.Not = RatingRS Suspended. fundamental basis for determining an investment rating or Other definitions Other Coverage view. designations: ratings/identifiers Other NR = Rated.Not REDUCE. SELL. Our Our Ratings System notdoes t strictly be in accordance with the Rating System all at times. Ratings other and definitions/identifiers ratings of Definitions BUY. ADD. 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

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