Morning Insight

FEBRUARY 6, 2020

% Chg News Highlights 5-Feb 1 Day 1 M th 3 M ths Indian Indices  In order to protect interest of depositors, the Union Cabinet approved SENSEX Index 41,143 0.9 (0.8) 2.2 amendment to Banking Regulation Act to strengthen cooperative banks NIFTY Index 12,089 0.9 (1.1) 1.4 and avoid PMC Bank like crisis. The proposed law seeks to enforce NSEBANK Index 31,002 1.0 (3.3) 2.6 banking regulation guidelines of the RBI in cooperative banks, while NIFTY 500 Index 9,951 1.0 0.1 2.7 administrative issues will still be guided by Registrar of Cooperative. CNXMcap Index 18,116 1.1 4.8 8.6 (ET) BSESMCAP Index 14,654 0.7 4.8 8.4 World Indices  Unemployment rate in the country as per a new survey was 6.1 per cent Dow Jones 29,291 1.7 2.0 6.5 in 2017-18, the government informed Rajya Sabha. (ET) Nasdaq 9,509 0.4 4.8 13.1 FTSE 7,482 0.6 (1.2) 1.2  The services sector began the year with a bang as new orders in January NIKKEI 23,320 1.0 2.6 2.1 rose at the fastest pace in seven years, dwarfing December’s five-month Hangseng 26,787 0.4 (3.6) (1.8) high growth. The widely tracked Nikkei India Services Purchasing Shanghai 2,818 1.3 (8.2) (5.0) Managers Index (PMI) stood at 55.5 in January, up from 53.3 in December. (BS) Value traded (Rs cr) 5-Feb % Chg Day Cash BSE 3,374 10.2  The government aims to complete merger of three state-owned general Cash NSE 44,669 3.3 insurance companies -- National Insurance Co Ltd, United India Derivatives 1,960,374 19.0 Insurance Co Ltd, and Oriental Insurance Co Ltd -- by the end of March, Net inflows (Rs cr) 4-Feb MTD YTD Finance Secretary Rajiv Kumar said. (BS) FII 923 2,774 12,493  Avenue Supermarkets which owns and operates popular supermarket Mutual Fund 586 586 (2,102) chain DMart, launched a qualified institutional placement (QIP) offering Nifty Gainers & Losers P rice Chg V ol to raise up to Rs 40.98 bn. Funds will be used to expand the company's 5-Feb (Rs) (%) (mn) store network, invest in supply chain and also to repay loans. (Mint) Gainers Tata Motors 184 10.9 93.0  Russia's largest oil producer Rosneft is keen to bid for acquisition of Yes Bank 38 7.6 281.1 Bharat Petroleum Corp Ltd (BPCL), sources said after the Russian firm's Tata Steel 475 5.1 16.1 CEO Igor Sechin met Oil Minister Dharmendra Pradhan. (ET) Losers Zee Entertainment 227 (7) 53  IOC signed a contract with Russia's Rosneft Oil Company to import 2 Hero MotoCorp 2,373 (4) 2 million tonnes of crude oil per annum from the nation. The agreement Dr Reddy's 3,133 (3.4) 1.0 was signed during India-Russia delegation-level talks. According to an ANI report, the two countries reviewed investments between India's Advances / Declines (BSE) 5-Feb A B T T otal % total state-owned n oil and gas companies and Rosneft. (Mint) Advances 314 503 59 876 100  Lupin has received approval of the US Food and Drug Administration for Declines 153 437 73 663 76 its Leflunomide tablets - a generic equivalent of Arava tablets Unchanged 4 24 15 43 5 SanofiAventis. The medicine will be manufactured at the company's Commodity % Chg Pithampur (Unit 1) facility. (Mint) 5-Feb 1 Day 1 M th 3 M ths Crude (US$/BBL) 56.0 1.2 (18.8) (9.4)  HAL signed a memorandum of understanding (MoU) with Bengaluru- Gold (US$/OZ) 1,556.0 0.2 (0.7) 4.3 based Dynamatic Technologies Ltd (DTL) and Israel Aerospace Silver (US$/OZ) 17.6 0.1 (2.8) 0.0 Industries Ltd (IAI) at Defence Expo 2020. The MoU will enable manufacturing and selling of drones, according to an IANS report. (Mint) Debt / Forex Market 5-Feb 1 Day 1 M th 3 M ths 10 yr G-Sec yield % 6.5 6.5 6.5 6.5  Coal India is keen to tap non-power consumers to feed its incremental Re/US$ 71.2 71.3 71.9 70.7 production post the monsoon season. According to a PTI report, the miner is looking to ramp up production to meet its targets for the current Nifty fiscal at a time when economic slowdown has hit demand. (Mint) 12,800 12,300  Yes Bank has picked Cantor Fitzgerald, IDFC Securities and Ambit to 11,800 help the lender raise as much as $2 billion for bolstering capital buffers, 11,300 people with knowledge of the matter said. (BS) 10,800 What’s Inside 10,300 Feb-19 May-19 Aug-19 Nov-19 Feb-20  Result Update: Praj Industries Ltd, MRPL, Welspun Corp, Engineers India Ltd & NIIT Ltd Source: Bloomberg Source: ET = Economic Times, BS = Business Standard, FE = Financial Express, IE = Indian Express, BL = Business Line, BQ = BloombergQuint, ToI: Times of India, BSE = Bombay Stock Exchange, MC = Moneycontrol

Kotak Securities Limited has two independent equity research groups: Institutional Equities and Private Client Group. This report has been prepared by the Private Client Group. FEBRUARY 6, 2020

Result Update PRAJ INDUSTRIES LTD

Stock Details PRICE RS.107 TARGET RS.113 ADD Market cap (Rs mn) : 19543 52-wk Hi/Lo (Rs) : 168 / 93 Praj’s numbers missed our profit estimates due to sub par revenue growth Face Value (Rs) : 2 even as EBITDA margins were in line with estimates. More importantly, the 3M Avg. daily vol (Nos) : 1,415,981 order intake also slowed down after strong spurt in Q2FY20. Shares o/s (mn) : 183 Source: Bloomberg Key Highlights Financial Summary  Consolidated revenue for Q3FY20 stood at Rs 3.0 bn (down 9% on y-o-y Y/E Mar (Rs mn) FY20E FY21E FY22E basis) due to slowdown in order intake in 9MFY20 and liquidity constraints Revenue 12,457 14,310 15,664 faced by the industry. Growth (%) 9.2 14.9 9.5  EBITDA 883 1,084 1,262 Order intake declined by 22% y-o-y to Rs 3.3 bn, which the management EBITDA margin (%) 7.1 7.6 8.1 attributed partly to 1) delay in receiving 1G orders as investors/sugar mills PAT 802 859 1,000 continued to grapple with the environmentall clearances needed for setting EPS 4.4 4.7 5.5 up projects and 2) slowdown in 1G orders from Europe as the region is now EPS Growth (%) 17.8 7.1 16.3 transitioning towards 2G ethanol and that has led to some delay in order BV (Rs/share) 42.2 43.4 45.4 finsalisation. Dividend/share (Rs) 2.5 3.0 3.0 ROE (%) 10.6 11.0 12.3  The cabinet declared that no separate environmental clearance is required ROCE (%) 7.4 8.4 9.3 for sugar mills to produce additional ethanol from B-heavy molasses as it P/E (x) 24.4 22.8 19.6 does not contribute to the pollution load. This is positive move for EV/EBITDA (x) 18.0 14.6 12.3 development of 1G ethanol plants in India. P/BV (x) 2.5 2.5 2.4 Source: Company, Kotak Securities - PCG  A key positive development in this area is that the OMCs have now fixed the price of procurement of CBG for the next five years (till 2025) and for the Shareholding Pattern (%) subsequent five years, this price will be the minimum procurement price. (%) Dec-19 Sep-19 Jun-19 Promoters 33.0 33.0 33.1 Valuation and Outlook FII 12.9 13.5 13.8 The praj stock is trading at 22.8x and 19.6x on FY21E and FY22E earnings DII 15.9 16.9 19.1 respectively. We value the stock at 20x FY22E (10% discount to average PE) and Others 38.0 36.6 34.0 arrive at a price target of Rs 113 (Rs 115 earlier), which provides upside of 5% Source: Bloomberg, BSE from current levels. We maintain “ADD” rating on the stock given modest upside. Price Performance (%) Quarterly performance (%) 1M 3M 6M Praj Industries (4.0) (1.3) 3.2 (Rs mn) Q3FY20 Q3FY19 YoY (%) Q2FY20 QoQ (%) Nifty (1.1) 1.4 11.3 Net Sales 3003 3303 -9.1 2941 2.1 Source: Bloomberg Raw material cost 1598 1828 -12.6 1642 -2.7 Staff costs 447 402 11.2 435 2.7 Price chart (Rs) Other expenditure 722 835 -13.5 704 2.6 165 Forex loss/(gain) -14 -40 -65.3 -6 119.0 Total Expenditure 2754 3024 -9.0 2775 -0.8 140 PBIDT 250 279 -10.3 167 49.8 115 Depreciation 57 56 1.1 57 -0.3 Other Income 58 74 -21.7 70 -17.0 90 EBIT 251 296 -15.4 180 39.8 Feb-19 Jun-19 Oct-19 Feb-20 Interest 8 2 216.7 8 0.0 Source: Bloomberg PBT 243 294 -17.2 172 41.5

Tax 37 70 -47.5 11 245.3

PAT 207 224 -7.8 161 28.1

EPS Rs 1.1 1.2 0.9 PBDIT (%) 8.3 8.4 5.7 Raw matl cost to sales (%) 53.2 55.3 55.8 Staff cost to sales (%) 14.9 12.2 14.8 Sanjeev Zarbade [email protected] Other expenditure to sales (%) 24.1 25.3 23.9 +91 22 6218 6424 Tax rate (%) 15.0 23.7 6.2 Source: Company

Kotak Securities – Private Client Group Please see the Disclosure/Disclaimer on the last page For Private Circulation 2 FEBRUARY 6, 2020

Result Highlights  Consolidated revenue for Q3FY20 stood at Rs 3.0 bn (down 9% on y-o-y basis) due to slowdown in order intake in 9MFY20 and liquidity constraints faced by the industry.  However, gross margins for the quarter expanded to 46.8% vs 44.7% in the corresponding quarter of the previous fiscal due to a change in revenue mix.  Employee costs rose modestly to Rs 447 mn vs Rs 402 mn on a y-o-y basis. Growth in employee costs is expected to remain modest due to reduction in headcount from 901 nos in FY17 to 885 in FY19.  Despite good gross margins, EBITDA margins contracted on a y-o-y basis due to negative operating leverage as a result of decline in revenues.  Tax rate for the quarter stood at 15% vs 23.7% on a y-o-y basis.  For the quarter, PAT stood at Rs 207 mn vs Rs 224 mn in the corresponding quarter of the previous fiscal.

EBITDA margin (%)

16.0 14.0 12.0 10.0 8.0 6.0 4.0 2.0

-

Q1FY17 Q3FY17 Q1FY18 Q3FY18 Q1FY14 Q2FY14 Q3FY14 Q4FY14 Q1FY15 Q2FY15 Q3FY15 Q4FY15 Q1FY16 Q2FY16 Q3FY16 Q4FY16 Q2FY17 Q4FY17 Q2FY18 Q4FY18 Q1FY19 Q2FY19 Q3FY19 Q4FY19 Q1FY20 Q2FY20 Q3FY20

Source: Company and Kotak Securities – Private Client Group

Order intake slackened in Q3FY20  Order intake declined by 22% y-o-y to Rs 3.3 bn, which the management attributed partly to 1) delay in receiving 1G orders as investors/sugar mills continued to grapple with the environmentall clearances needed for setting up projects and 2) slowdown in 1G orders from Europe as the region is now transitioning towards 2G ethanol and that has led to some delay in order finsalisation.  Order intake mainly composes of Bioenergy (67% - mainly ethanol), Engineering business (19% - includes engineering products, breweries and water and waste water treatment) and HiPurity systems (14%- subsidiary of the company). Around 16% of orders came from overseas markets.  By and large, the management was optimistic on emerging scenario (sugar sector bailout package, 2G ethanol orders, Bio CNG opportunity etc).  Praj has so far won two critical plant packages (BPCL and IOC) for 2G integrated bioethanol projects out of the four 2G ethanol projects for which it is the technology provider. The remaining two (MRPL and HPCL) projects are in design stages and orders for the same should get placed in the coming months. The quantum of these orders would be around Rs 1.7-1.8 bn.

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 Order book stands at Rs 11.6 bn, which is up 17% on a y-o-y basis. A notable thing is that this is the highest order book since last several years.

Order book (Rs mn)

12000

11000

10000

9000

8000

7000

6000

Source: Company and Kotak Securities – Private Client Group

Order intake (Rs mn)

6000

5000

4000

3000

2000

1000

0

Q1FY15 Q2FY15 Q3FY15 Q4FY15 Q1FY16 Q2FY16 Q3FY16 Q4FY16 Q1FY17 Q2FY17 Q3FY17 Q4FY17 Q1FY18 Q2FY18 Q3FY18 Q4FY18 Q1FY19 Q2FY19 Q3FY19 Q4FY19 Q1FY20 Q2FY20 Q3FY20

Source: Company and Kotak Securities – Private Client Group

Industry developments  The ethanol blending rate has reached a level of 5.9% in FY19 year as against 4.22% in FY18. In all, 1.97 bn liters of ethanol was procured by the OMCs in FY19, out of which 0.3 bn liters was produced through B Heavy/Sugarcane juice.  In FY20, OMCs have floated tender for supply of 5.11 bn liters of ethanol supply. However, they received supply of only 1.56 bn liters. The huge gap in demand and supply was due to lower cane supply following erratic monsoons and flooding in Maharashtra and Karnataka. Now OMCs have floated a second tender of 2.53 bn liters of ethanol for supply between the period of 1st Feb. – 30th Nov. 2020 to support the ethanol-blending program. (Source: Company presentation)  Progressive National Biofuels Policy 2018 has stated objective of reaching 20% ethanol-blending by the year 2030. To put it in perspective, 20% blending by 2022 would lead to requirement of 8.8 bn liters of ethanol, which is 4.5x current level of fuel ethanol production. (Source: Company presentation)

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 While there is sustained interest in setting up ethanol units among developers, as reflected by the 270 applications that the government has received for its interest subvention policy, however procedural delays and availability of finances is resulting in longer turnaround times for project finalisation.  The cabinet declared that no separate environmental clearance is required for sugar mills to produce additional ethanol from B-heavy molasses as it does not contribute to the pollution load. (Source: Company presentation)  The Association of sugar mills in Maharashtra is now seeking permission from the state government to divert minimum 25% of sugarcane to produce ethanol instead of sugar. (Source: Company presentation)  OMCs, under the Sustainable Alternative Towards Affordable Transportation (SATAT) scheme, till December 2019 have issued over 500 letters of intent (LoIs) to private developers to set up compressed biogas plants across the country. OMCs have also extended the last date for expression of interest (EoI) to March 2020. (Source: Company presentation)  The government has also categorized CBG plants under “White category” and will not require any consent from pollution control boards for their operations. (Source: Company presentation)

Fuel Ethanol Supply bn liters

2.5

2

1.5

1

0.5

0 FY14 FY15 FY16 FY17 FY18 FY19

Source: NSI, ISMA

Conference call highlights  The Government is implementing steps to widen and diversify the Bio- Energy landscape. In sync with this, the Government envisages setting up of 5000 Compressed Bio-Gas (CBG) plants nationwide in a phased manner with 250 plants by year 2020, 1000 plants by 2022, and 5000 plants by 2025. These plants are expected to produce 15 million tons of CBG per annum, which is about 40% of the current CNG consumption of 44 million tons. CBG is a complementary renewable transportation fuel converted from Agriculture residue, press mud, cattle dung, and municipal solid waste. This bio-gas will then be compressed and distributed as an alternative to vehicular CNG.  In reference to this, Praj had announced the ground-breaking of its first of its kind integrated demo plant of CBG. The company unveiled its roadmap for commercialization of CBG technology and reaffirmed its readiness by way of required infrastructure to execute multiple CBG plants with advanced technology and designs. This can be a large opportunity in the long term if there is the requisite intent from the government. The government’s plan is to set up 5000 CBG plants across the country by 2025.

Kotak Securities – Private Client Group Please see the Disclosure/Disclaimer on the last page For Private Circulation 5 FEBRUARY 6, 2020

 The company has also signed two agreements with the different entities for setting up CBG plants in India.  The management indicated that there are discussions going on for setting up commercial size CBG plants of investment size anywhere between Rs 500-700 mn and Praj’s share could be between 50-60%.  A key positive development in this area is that the OMCs have now fixed the price of procurement of CBG for the next five years (till 2025) and for the subsequent five years, this price will be the minimum procurement price.  Expected tax rate to remain between 15-17% in FY20E. For the next fiscal, the company will study the tax implications on MAT credit/SEZ/R&D benefits before transitioning to the new lower tax regime.  Cash and Cash equivalent stood at Rs 3.0 bn at the end of 9MFY20, which is 15% of the market cap of the company.

Earnings Revision We have made changes to earnings on account of revised effective tax rate guidance by the company in for FY20E.

Earnings estimates FY20E FY21E (Rs mn) Earlier Revised Earlier Revised Revenue 13253 12457 14964 14310 EBITDA (%) 7.2 7.1 8.1 7.6 EPS 4.8 4.4 5.2 4.7 % change -8.5% -9.5% Source: Company and Kotak Securities – Private Client Group

EPS (Rs per share)

8.0 7.0 6.0 5.0 4.0 3.0 2.0 1.0 0.0 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20EFY21E

Source: Company and Kotak Securities – Private Client Group

Rating and Target Price The praj stock is trading at 22.8x and 19.6x on FY21E and FY22E earnings respectively. We value the stock at 20x FY22E (10% discount to average PE) and arrive at a price target of Rs 113 (Rs 115 earlier), which provides upside of 5% from current levels. We maintain “ADD” rating on the stock given modest upside.

Kotak Securities – Private Client Group Please see the Disclosure/Disclaimer on the last page For Private Circulation 6 FEBRUARY 6, 2020

Forward PE trend for Praj Industries

45.00 forward PE (x) Average PE 40.00 35.00 30.00 25.00 20.00 15.00 10.00 5.00

0.00

Jul-10 Jul-15

Apr-09 Oct-11 Apr-14 Oct-16 Apr-19

Jan-13 Jun-13 Jan-18 Jun-18

Feb-20 Feb-10 Mar-12 Feb-15 Mar-17

Sep-09 Dec-10 Aug-12 Nov-13 Sep-14 Dec-15 Aug-17 Nov-18 Sep-19

May-11 May-16

Source: Company and Kotak Securities – Private Client Group

Company Background Praj was incorporated in November 1985 as Praj Counseltech Pvt Ltd. It was promoted by a technocrat team comprising Mr. Pramod Chaudhari and associates. Praj is in the business of process design, engineering, fabrication, and commissioning of bio-fuels plants, brewery plants, waste water treatment plants, bio-consumables and process equipment and systems. While significant revenue comes from sale of ethanol process technology, plants, and equipment; and brewery plant and equipment, Praj is building a sizeable portfolio of business from water and wastewater treatment systems, high-purity systems, and critical process equipment.

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Financials: Consolidated

Profit and Loss Statement (Rs mn) Balance sheet (Rs mn) (Year-end Mar) FY19 FY20E FY21E FY22E (Year-end Mar) FY19 FY20E FY21E FY22E Revenues 11,410 12,457 14,310 15,664 Cash and cash equivalents 876 1,207 1,334 1,598 % change YoY 23.6 9.2 14.9 9.5 Accounts receivable 3,052 3,353 3,653 3,653 EBITDA 789 883 1,084 1,262 Inventories 1,264 1,365 1,568 1,717 % change YoY 53.1 11.9 22.7 16.5 Loans and Adv & Others 1,715 1,962 2,200 2,464 Other Income 323.0 301.0 330.2 347.8 Current assets 6,907 7,887 8,755 9,431 Depreciation 229.5 228.0 256.5 265.5 Misc Assets 939 939 939 939 EBIT 883 956 1,157 1,345 % change YoY 103.7 17.1 26.2 20.6 LT investments 2,398 2,398 2,398 2,398 Net interest 7.6 10.0 10.0 10.0 Net fixed assets 2,128 2,050 1,943 1,828 Profit before tax 875.0 946.4 1,147.2 1,334.7 Def tax assets 93 94 94 94 % change YoY 64.9 8.2 21.2 16.3 Total assets 12,466 13,368 14,130 14,690 Tax 193.4 144.1 287.9 335.0 as % of PBT 22.1 15.2 25.1 25.1 Current liabilities 4,729 5,297 5,821 6,022 Profit after tax 681.6 802.3 859.2 999.7 Provisions 284 350 370 370 Minority interest -0.4 0.0 0.0 0.0 Share of profit of associates 0.0 0.0 0.0 0.0 LT debt - - - - Net income 681.2 802.3 859.2 999.7 Min. int 7 7 7 7 % change YoY 72.3 17.8 7.1 16.3 Equity 365 365 365 365 Shares outstanding (m) 182.7 182.7 182.7 182.7 Reserves 7,081 7,350 7,568 7,926 EPS (reported) (Rs) 3.7 4.4 4.7 5.5 Total liabilities 12,466 13,369 14,130 14,691 CEPS (Rs) 5.0 5.6 6.1 6.9 DPS (Rs) 2.1 2.5 3.0 3.0 BVPS (Rs) 41 42 43 45 Source: Company, Kotak Securities – Private Client Group Source: Company, Kotak Securities – Private Client Group

Cash flow Statement (Rs mn) Ratio Analysis (Year-end Mar) FY19 FY20E FY21E FY22E (Year-end Mar) FY19 FY20E FY21E FY22E PBDIT 789 883 1,084 1,262 EBITDA margin (%) 6.9 7.1 7.6 8.1 Direct tax paid -206 -144 -288 -335 EBIT margin (%) 7.7 7.7 8.1 8.6 Adjustments -457 0 0 0 Net profit margin (%) 6.0 6.4 6.0 6.4 Cash flow from operations 126 739 796 927 Net Change in Working Capital 231 -15 -198 -210 Receivables (days) 97.6 98.2 93.2 85.1 Net Cash from Operations 356 724 598 717 Inventory (days) 40.4 40.0 40.0 40.0 Capital Expenditure -118 -150 -150 -150 Sales/gross assets(x) 2.8 2.9 3.2 3.4 Cash from investing 40 301 330 348 Interest coverage (x) 103.8 88.3 108.4 126.2 Net Cash from Investing -78 151 180 198 Interest paid -8 -10 -10 -10 Debt/equity ratio(x) - - - - Issue of Shares/ESOPS/(buyback)89 0 0 0 Dividends Paid -463 -534 -641 -641 ROE (%) 9.3 10.6 11.0 12.3 Debt Raised -60 0 0 0 ROCE (%) 7.4 7.4 8.4 9.3 Net cash from financing -442 -544 -651 -651 Net change in cash -163 331 127 264 EV/ Sales (x) 1.4 1.3 1.1 1.0 Free cash flow 238 574 448 567 EV/EBITDA (x) 20.6 18.0 14.6 12.3 cash at end 632 963 1,090 1,354 Price to earnings (x) 28.7 24.4 22.8 19.6 Deposits over 3 months 244 244 244 244 Price to book value (x) 2.6 2.5 2.5 2.4 Effect of exch rate 27 0 0 0 Source: Company, Kotak Securities – Private Client Group cash as in balance sheet 876 1,207 1,334 1,598 Source: Company, Kotak Securities – Private Client Group

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Result Update MRPL

Stock Details PRICE RS.43 TARGET RS.46 ADD Market cap (Rs mn) : 74836 52-wk Hi/Lo (Rs) : 76 / 40 MRPL has reported a revenue of Rs.164. bn, higher by 9% qoq (v/s our Face Value (Rs) : 10 estimate of Rs.154 bn) in Q3FY20. It has reported a GRM of US$4.1/bbl in 3M Avg. daily vol (Nos) : 847,432 Q3FY20 (v/s our expectation of US$3.9/bbl) as against US$3.7/bbl in Shares o/s (mn) : 1753 Q2FY20 and US$4.4/bbl in Q3FY19. Interestingly, despite weak Singapore Source: Bloomberg GRMs it has reported better margins. However, due to higher raw material Financial Summary cost, higher other expenses and lower forex gains operating performance Y/E Mar (Rs mn) FY20E FY21E FY22E got impacted. Revenue 508,142 582,012 597,645 Growth (%) (19.7) 14.5 2.7 Key Highlights EBITDA (5,039) 35,365 44,007 EBITDA margin (%) (1.0) 6.1 7.4  The company has indicated earlier that it will raise ~Rs.30 bn through issue PAT -16,409 9,050 16,004 of non-convertible debentures (NCDs)/ Bonds. EPS -9.4 5.2 9.1 EPS Growth (%) NM NM 77  MRPL’s gross revenue increased 9% qoq to Rs.164 bn (-20% yoy) led by BV (Rs/share) 45 51 60 higher crude throughput, better GRMs and weaker rupee against dollar. Dividend/share (Rs) - -  The company has reported crude throughput of 4.1 mmt, +11% qoq but -6% ROE (%) NM 10.8 16.5 ROCE (%) NM 9.2 11.6 yoy resulting in higher capacity utilization of 109.3%. P/E (x) NM 8.3 4.7  MRPL booked lower forex gain of Rs.196 mn in Q3FY20 (due to currency EV/EBITDA (x) NM 6.5 4.9 fluctuations) as against forex loss of Rs.2240 mn in Q2FY20. P/BV (x) 0.9 0.8 0.7 Source: Company, Kotak Securities - PCG  New tax provision: Section 115BAA in the Income Tax Act, 1961 which provides domestic companies a non-reversible option to pay corporate tax Shareholding Pattern (%) at reduced rates effective April 01, 2019 subject to certain conditions. MRPL (%) Dec-19 Sep-19 Jun-19 is in the process of evaluating this option. Promoters 88.6 88.6 88.6 FII 1.5 1.7 1.7 Quarterly performance table DII 3.6 3.2 3.2 Others 6.4 6.5 6.5 Particulars (Rs Mn) Q3FY20 Q3FY19 Q2FY20 YoY (%) QoQ (%) Source: Bloomberg, BSE Revenue 164,177 204,328 150,290 (20) 9 Incr/(Decr) in stock 1,928 (9,586) (3,427) Price Performance (%) Total Expenditure 163,915 191,334 153,323 (14) 7 (%) 1M 3M 6M EBIDTA 2,189 3,408 (6,460) (36) NM MRPL (2.8) (15.3) (16.1) Depreciation 2,708 2,523 2,771 7.3 (2.3) Nifty (1.1) 1.4 11.3 EBIT (518) 885 (9,232) Source: Bloomberg Other income 574 617 349 (7) 65 Price chart (Rs) Interest-net 3,092 2,265 3,867 37 (20) 80 PBT (3,036) (762) (12,750) NM NM Extra ordinary Exp/(Inc) 103 70 Tax (732) (70) (2,642) 952 (72) 60 PAT before MI and JV (2,304) (795) (10,108) 50 Less/Add: MI + JV profit (796) 302 (1,466) 40 PAT (1,508) (1,097) (8,642) Feb-19 Jun-19 Oct-19 Feb-20 EPS (Rs) (0.86) (0.63) (4.93) Source: Bloomberg Source: Company.

Valuation & outlook

Due to global fuel oil demand-supply mismatch, international refining margins are under pressure. We believe in the short-term the trend will continue due to virus issue impacting global fuel consumption. We are introducing FY22 Sumit Pokharna earnings and valuing the stock accordingly. We now expect MRPL to report an [email protected] EPS of Rs.5.2 in FY21E (earlier Rs.9.3) and an EPS of Rs.9.1 in FY22E. At current +91 22 6218 6438 price, the stock is trading at 4.7x P/E, 4.9x EV/EBIDTA and 0.7x P/B multiples on FY22E earnings. Due to multiple headwinds, we believe the performance will

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remain under pressure. Hence, we recommend ADD (earlier REDUCE) on the stock with a revised price target of Rs.46/share (earlier Rs.52/share) due to ongoing global issues. We have valued MRPL based on EV/EBIDTA multiple of 5x FY22E, which is at a significant discount to its peers considering its size, NCI, and limited retail distribution.

Key Developments  Currently, MRPL is using higher sewage water. It is setting up a desalination plant and the same is scheduled to commence by Sept’20 to use sea water. We believe this will provide plant stability and avoid shut-downs.  MRPL will be commissioning gasoline treating units to maximize production of Euro-VI compliant petrol. India has set a target for a country- wide roll out of Euro VI compliant fuels from April 2020. We expect some margin improvement with Euro VI compliant fuel.  The company continues its foray into direct marketing by going for more retail outlets to expand its operation. Currently, responses for 139 locations for setting-up of retail outlets received for states of Karnataka and Kerala.

Quarterly result analysis – Q3FY20  Revenue growth: MRPL’s gross revenue increased by 9% qoq to Rs.164 bn (-20% yoy) led by higher crude throughput and weaker rupee against dollar. Average realization stood flat sequentially at US$ 77/bbl, (-8% yoy) due to stable international product prices.  Crude throughput: The company has reported crude throughput of 4.1 mmt, +11% qoq but -6% yoy resulting in higher capacity utilization of 109.3%. We expect utilization levels to improve further once the desalination plant commence.

MRPL’s crude throughput (mn mt) and capacity utilization (%)

Crude throughput-MMT (RHS) Capacity Utilisation % (LHS) 140.0 5.5

120.0 5.0 4.5 100.0 4.0 80.0 3.5 60.0 3.0

40.0 2.5

20.0 2.0 Dec-17 Mar-18 Jun-18 Sep-18 Dec-18 Mar-19 Jun-19 Sep-19 Dec-19

Source: Company

 Refining margins: MRPL has reported a GRM of US$4.1/bbl in Q3FY20 (v/s our expectation of US$3.9/bbl) as against US$3.7/bbl in Q2FY20 and US$4.4/bbl in Q3FY19. Interestingly, despite weak Singapore GRMs it has reported better margins. Given global headwinds, it will be difficult for the company to improve GMRs significantly.

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MRPL’s GRMs v/s Benchmark Singapore GRMs (US$/bbl)

11.0 GRM reported Singapore GRMs 9.0 7.87 8.28 7.0 6.00 5.90 5.0 5.40 5.40 6.10 4.41 4.294.00 3.0 2.90 3.19

1.0 $/bbls 1.10 (0.43) (0.68) (1.0) (0.64)

(3.0) Mar-18 Jun-18 Sep-18 Dec-18 Mar-19 Jun-19 Sep-19 Dec-19

Source: Company. Note: MRPL’s reported GRMs includes inventory gain/loss.

 Forex gain: MRPL booked lower forex gain of Rs.196 mn in Q3FY20 (due to currency fluctuations) as against forex loss of Rs.2240 mn in Q2FY20.

Forex Loss/ (Gain) volatility impact earnings (Rs. Mn)

3,000 2,240 2,000 1,000 0 (1,000) (262) (196) (2,000) (1105) (3,000) (4,000) (3,849) (5,000) Dec-18 Mar-19 Jun-19 Sep-19 Dec-19 Source: Company

 PAT: In Q3FY20, MRPL has reported dismal performance but the losses are lowered.  Due to higher raw material cost, higher other expenses and lower forex gains Q3FY20 performance got impacted.  In Q2FY20, the company reported negative GRMs due to shut down of operations as the refinery got impacted by a minor landslide (intensified monsoon in Dakshina).

Quarterly earnings volatility continues (Rs. Mn)

12,000 9,699

8,000 5,421 3,620 3,189 4,000

0 (812) (795) (4,000) (2,304)

(8,000) (5,495)

(12,000) (10,108) Dec-17 Mar-18 Jun-18 Sep-18 Dec-18 Mar-19 Jun-19 Sep-19 Dec-19 Source: Company

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1-Year Forward P/BV chart

3.00 P/BV (x) Avg. P/BV (x) 2.50

2.00

1.50

1.00

0.50

0.00

Jul-14 Jul-15 Jul-16 Jul-17 Jul-18 Jul-19

Apr-14 Oct-14 Apr-15 Oct-15 Apr-16 Oct-16 Apr-17 Oct-17 Apr-18 Oct-18 Apr-19 Oct-19

Jan-16 Jan-17 Jan-18 Jan-19 Jan-20 Jan-15 Source: Kotak securities – Private client group; capitaline

Key Risk and Concerns:  Wide fluctuations in crude, forex and product prices can impact the margins.  If global supply exceeds demand then margins can be under pressure.  Any delay in executing the project can significantly impact the valuations.

Company Background Mangalore Refinery and Petrochemicals Ltd. (Mini-Ratna status) is a pure play crude oil refiner with strong promoter backing of ONGC (India's biggest government owned exploration Company). MRPL has transformed itself into a large and complex refinery with phase-III capacity expansion and has emerged into a much stronger player in the industry. Source: Company.

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Financials: Consolidated

Profit and Loss Statement (Rs mn) Balance sheet (Rs mn) (Year-end Mar) FY19 FY20E FY21E FY22E (Year-end Mar) FY19 FY20E FY21E FY22E Revenues 632,411 508,142 582,012 597,645 Cash and cash equivalents 4,896 1,540 1,498 1,517 % change YoY 29.0 (19.7) 14.5 2.7 Accounts receivable 23,739 25,059 27,107 27,836 EBITDA 24,131 (5,039) 35,365 44,007 Inventories 63,087 48,726 55,809 55,671 % change YoY (47.9) (120.9) (801.8) 24.4 Loans and Adv & Others 25,676 25,870 25,981 26,004 Other Income 3,445 1,985 1,850 1,900 Current assets 117,399 101,195 110,395 111,027 Depreciation 10,475 10,860 11,361 11,617 Misc exp. 0 0 0 0 EBIT 17,101 (13,914) 25,854 34,290 LT investments 366 366 366 366 % change YoY (54.8) (181.4) (285.8) 32.6 Net fixed assets 209,899 211,399 212,399 213,399 Net interest 10,587 12,285 13,539 12,366 Total assets 327,663 312,959 323,159 324,791 Profit before tax 6,514 (26,199) 12,315 21,924 % change YoY (77.3) (502.2) NM 78.0 Payables 46,932 37,433 38,562 39,033 Tax 3,001 (6,288) 3,153 5,919 Others 49,098 24,481 36,796 37,784 Profit after tax 3,513 (19,911) 9,162 16,004 Current liabilities 96,030 61,914 75,358 76,817 Minority interest 112 (3,502) 112 - Provisions 806 643 737 757 Share of profit of associates - - - - Net income 3,400 (16,409) 9,050 16,004 LT debt 122,384 168,374 155,923 140,279 % change YoY (82.9) (582.6) NM NM Min. int and def tax liabilities 8,985 2,482 2,433 2,226 Shares outstanding (m) 1,753 1,753 1,753 1,753 Equity 17,527 17,527 17,527 17,527 EPS (reported) (Rs) 1.9 (9.4) 5.2 9.1 Reserves 81,931 62,020 71,182 87,187 CEPS (Rs) 8.0 (5.2) 11.7 15.8 Total liabilities 327,663 312,959 323,159 324,791 DPS (Rs) 1.0 - - - BVPS (Rs) 57 45 51 60 Source: Company, Kotak Securities – Private Client Group Source: Company, Kotak Securities – Private Client Group

Cash flow Statement (Rs mn) Ratio Analysis (Year-end Mar) FY19 FY20E FY21E FY22E (Year-end Mar) FY19 FY20E FY21E FY22E EBIT 17,101 (13,914) 25,854 34,290 EBITDA margin (%) 3.8 (1.0) 6.1 7.4 Depreciation 10,475 10,860 11,361 11,617 EBIT margin (%) 2.7 (2.7) 4.4 5.7 Change in working capital (16,030) (24,934) 4,246 659 Net profit margin (%) 0.5 (3.2) 1.6 2.7 Chgs in other net current assets - - - - Operating cash flow 11,546 (27,988) 41,461 46,566 Receivables (days) 14 18 17 17 Interest (10,587) (12,285) (13,539) (12,366) Inventory (days) 36 35 35 34 Tax (3,001) 6,288 (3,153) (5,919) Sales/gross assets(x) 2.9 2.1 2.4 2.4 Cash flow from operations (2,042) (33,985) 24,769 28,280 Interest coverage (x) 1.3 (1.3) 2.6 3.6 Capex (11,463) (12,360) (12,361) (12,617) (Inc)/dec in investments 19 - - - Debt/equity ratio(x) 1.2 1.8 1.8 1.3 Cash flow from investments (11,444) (12,360) (12,361) (12,617) Others 1,391 (892) - - ROE (%) 3.6 (18.3) 10.8 16.5 Increase/(decrease) in debt 14,981 45,990 (12,451) (15,644) ROCE (%) 6.4 (1.7) 9.2 11.6 Proceeds from share premium - - - - Dividends (6,319) (2,109) - - EV/ Sales 0.3 0.5 0.4 0.4 Cash flow from financing 10,053 42,989 (12,451) (15,644) EV/EBITDA 8.0 (48.1) 6.5 4.9 Opening cash 8,330 4,896 1,540 1,498 Price to earnings (P/E) 22.2 NM 8.3 4.7 Closing cash 4,896 1,540 1,498 1,517 Price to book value (P/B) 0.8 0.9 0.8 0.7 Source: Company, Kotak Securities – Private Client Group Source: Company, Kotak Securities – Private Client Group

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Result Update WELSPUN CORP LTD

Stock Details PRICE RS.191 TARGET RS.234 BUY Market cap (Rs mn) : 49970 52-wk Hi/Lo (Rs) : 195 / 87 Welspun Corp (WCL) Q3FY20 reported numbers came in above estimates Face Value (Rs) : 5 backed by stronger than expected performance from India operations in 3M Avg. daily vol : 1,559,102 terms of volume and EBITDA. The U.S operations continued with its strong Shares o/s (m) : 261 performance and reported EBITDA of US$260/tonne. EBITDA during the Source: Bloomberg quarter grew 92.6%/25.7% YoY/QoQ to Rs3.66 bn. In addition, to the strong Financial Summary operating performance, the strong performance from Saudi Arabia Y/E Mar (Rs mn) FY20E FY21E FY22E operations also supported PAT growth. WCL reported PAT of Rs2.27 bn. Revenue 96,183 97,923 98,358 Growth (%) 7.4 1.8 0.4 Key Highlights: EBITDA 12,272 12,610 12,576  Revenue during the quarter grew 20.2%/27.6% YoY/QoQ to Rs28.87 bn, EBITDA margin (%) 12.8 12.9 12.8 PAT 6,697 7,875 7,960 supported by higher sales volume at India operations. Sales volume in the EPS 25.7 30.2 30.5 U.S continued to remain strong in the range of 104-106 kt. Pipes sales EPS Growth (%) NM 17.6 1.1 volume during the quarter stood at 428kt (including 114Kt of Saudi Arabia BV (Rs/share) 118 143 169 plant). Dividend/share (Rs) 12.0 5.0 5.0  WCL reported EBITDA of Rs3.67 bn, up 92.6%/25.7% YoY/QoQ backed by an ROE (%) 23.3 21.1 18.1 ROCE (%) 22.7 20.5 18.2 improvement in India operations, which reported EBITDA/t of US$120/tonne P/E (x) 7.4 6.3 6.3 as against US$85/tonne in 2QFY20. In addition, strong performance from EV/EBITDA (x) 3.9 3.2 2.5 the U.S operations also supported EBITDA. P/BV (x) 1.6 1.3 1.1  Saudi Arabia operations continue to report better performance, backed by Source: Company, Kotak Securities - PCG execution of high margin orders. The operation reported EBITDA of US$20 Shareholding Pattern (%) mn. In 9MFY20, operations reported EBITDA/t of US$160 as against the (%) Dec-19 Sep-19 Jun-19 guidance of US$100. The management expected the performance to remain Promoters 49.0 49.0 48.7 strong in the coming quarters as well. FII 8.0 6.5 6.2  Order book at the end of 3QFY20 stands at 1.31MT (Rs 108 bn), to be DII 9.8 9.0 8.7 executed over the next 15-18 months, provides revenue visibility. The Others 33.0 35.5 36.2 company declared interim dividend of Rs10. Source: Bloomberg, BSE Quarterly Table Price Performance (%) Q3FY20 Q3FY19 % YoY Q2FY20 % QoQ (%) 1M 3M 6M Welspun Corp 29.0 39.8 67.1 Net Sales 28,878 24,030 20.2 22,630 27.6 Nifty (1.1) 1.4 11.3 Raw Materials 19,764 17,297 14,430 % of sales 68.4 72.0 63.8 Source: Bloomberg Employee 1,561 1,494 1,595 Price chart (Rs) % of sales 5.4 6.2 7.0 200 Other Expenses 3,888 3,336 3,688 % of sales 13.5 13.9 16.3 170 Total Expenses 25,213 22,127 19,712 140 EBITDA 3,666 1,903 92.6 2,917 25.7 EBITDA Margin 12.7 7.9 12.9 110 Depreciation 591 654 610 80 EBIT 3,075 1,250 2,307 Feb-19 Jun-19 Oct-19 Feb-20 Interest 344 418 341 Source: Bloomberg Other Income 189 400 389 Extraordinary Items 0 0 0 EBT 2,920 1,232 2,355 Tax 957 447 1,147 PAT 1,963 785 1,208 Share of JV 416 -236 580 Reported PAT 2,379 549 333.0 1,789 33.0 Jatin Damania Discountined Operations -107 -271 -178 Profit after discontinued op. 2,272 279 714.7 1,611 41.1 [email protected] EPS 8.6 1.1 6.1 +91 22 6218 6440 Source: Company, Kotak Securities – Private Client Group

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Retain BUY Given its strong manufacturing and execution capabilities, strong order backlog coupled with robust bids in the pipeline and future potential, we believe, WCL is better placed compared to its peers, to take advantage of renewed pipe demand globally and in the domestic market. Going ahead, a large part of operational profit is expected to come from the U.S. In addition, improvement in India operations and improvement in performance at Saudi Arabia operations should support earnings. Factoring 9MFY20 performance, we have revised our estimates higher to Rs25.7 (earlier Rs17.5) and Rs30.2 (earlier Rs18.5) for FY20E and FY21E, respectively and we introduce FY22E with an EPS estimates of Rs30.5. At CMP, the stock is trading at 4.0x/3.2x/2.5x FY20E/FY21E/FY22E EV/EBITDA and is at a discount to its historical multiple of its last seven years average. We continue to maintain our positive view on the stock and reiterate BUY, with a revised target price of Rs234 (earlier 171). Improvement in India operations and continuity of strong operations at the U.S supported operating performance: The revenue during the quarter grew 20.2%/27.6% YoY/QoQ to Rs28.88 bn, supported by higher volume. Volume during the quarter stood at 428kt, up ~26% and ~27% YoY and QoQ, respectively. The growth in volume was supported by higher volume from India operations (207kt) and US (106kt). In addition to the strong US operations, sequential improvement in India operations has helped the company to report EBITDA of Rs3.67 bn, with an EBITDA margin of 12.7%. The sequential improvement in volume in India operations was supported by execution of export order, which was lying as inventory in 2QFY20. We expect volume to remain strong in Q4FY20, as the company still has an inventory to the tune of 35kt, which is in transit (export order for North America customer).

Reconciliation of operating EBITDA 3QFY20 2QFY20 1QFY20 9MFY20 9MFY19 Reported EBITDA 3,855 3,306 2,416 9,576 6,664 Less: Treasury Income -143 -153 -191 -487 -736 Gain on sale/fair valn. Of investments -138 Add: Fair val, on IL&FS bonds incl. its SPVs MTM loss/Fair valn. Of other bonds 0 17 360 377 389 Other Provisions 130 Operating EBITDA 3,712 3,170 2,585 9,466 6,310 Source: Company, Kotak Securities – Private Client Group

Revenue visibility – backed by global presence At the end of 3QFY20, order book stands at 1.31MT (US$1.5 bn), to be executed over the next 15-18 months. During the quarter the company booked ~376kt of the fresh orders. Given the strong order book, we expect the company to report revenue of ~Rs98 bn each in FY21E and FY22E, respectively. Going ahead, the management highlighted, the surge in US shale production, increasing number of water transportation projects and expansion of the gas grids in both India and Saudi Arabia should be the key growth triggers. As per the management, the current bid book stands at 2.5MT.

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Order book by region (‘000 T)

RoW America Saudi Arabia

788 952 650 +500 625 322 248 410 ~200 498 521 193 303 300 539 147 343 666 +600 329 402 256 352 380 169 160 79 FY14 FY15 FY16 FY17 FY18 FY19 1QFY20 2QFY20 3QFY20

Source: Company, Kotak Securities – Private Client Group

The company has been a key beneficiary in the U.S. from increased demand of spiral pipes, backed by an increase in shale gas production and curb in imports, thereby supporting higher volumes. U.S order book stands at ~300KT, to be executed over the next three quarters.

Saudi Arabia JV: third consecutive quarters of positive PBT Management indicated that huge business potential exists in Saudi Arabia region and performance is expected to remain strong in the coming quarters as well. The Saudi Arabia order book currently stands at ~625kt, which gives visibility for the next four quarters. In addition, a large portion of these orders enjoys higher margin (compared to legacy order). Saudi Arabia operations reported EBITDA/T of US$160/tonne as against guidance of US$100/tonne. In 3QFY20, the operations reported PBT of US$ 14 mn and PAT of US$ 5 mn (Welspun Corp share). We expect the operations to continue to perform strong in the coming quarters as well and foresee the company to post Rs1.3 bn (Welspun corp share) of profit for FY20E.

Saudi Arabia Operations 1QFY19 2QFY19 3QFY19 4QFY19 1QFY20 2QFY20 3QFY20 Pipe Production ('000 t) 35 44 80 105 105 126 125 Sales ('000 t) 38 44 78 77 138 116 114 Operationg Performance EBITDA (US$ MN) -4 -4 -2 3 13 27 20 PBT (US$ MN) -7 -9 -6 -2 7 21 14 Source: Company, Kotak Securities – Private Client Group

Other Highlights  Plate & Coil Mill Division (PCMD) Divestment - Both parties have reiterated their commitment and have mutually decided to extend, the long stop date till 31st March 2020. Further, 50% of the advance as stipulated in the agreement has been received.  Work on Phase-2 of the Bhopal project (coating plant) is on track and is expected to be commissioned in FY20.  Management guided for strong performance from all the three operations in the coming quarters. Management expects, the US operations to deliver EBITDA/t of US$250-260/t in 2HFY20, Saudi Arabia Operations to deliver EBITDA/t of $150/tonne and India operation is expected to deliver EBITDA/t of $80-85/tonne.

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 The gross debt during the quarter reduced further by Rs10.87 bn. Net debt at the end of quarter stood at Rs1.72 bn.

One year forward EV/EBITDA (x)

12

9

6

3

-

Jul/18 Jul/19

Apr/12 Oct/17 Apr/18 Oct/18 Apr/19 Oct/19

Jan/18 Jan/19 Jan/20

Feb/15 Feb/16 Feb/17

Jun/12 Jun/13 Jun/14

Dec/12 Dec/13 Dec/14

Sep/12 Sep/13

Mar/13 Mar/14

Aug/14 Aug/15 Nov/15 Aug/16 Nov/16 Aug/17

May/15 May/16 May/17

Source: Capital line, Bloomberg, Company, Kotak Securities – Private Client Group

About the company Welspun Corp (WCL) is a leading global manufacturer of the large diameter pipes with an installed capacity of 2.4MT, offering a one stop solution for all line pipe related requirements with its wide product range of high grade line pipes and meeting stringent specifications. Its manufacturing facilities are located across USA, Saudi Arabia and India and it is a preferred vendor for major oil and gas companies, both overseas and locally. Over the last two decades, the company has demonstrated its strength and capability to execute key projects overseas, including the world’s deepest pipeline project in the Gulf of Mexico, LNG pipeline project in Peru and longest pipeline project from Canada to the US.

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Financials: Consolidated

Profit and Loss Statement (Rs mn) Balance sheet (Rs mn) (Year-end Mar) FY19 FY20E FY21E FY22E (Year-end Mar) FY19 FY20E FY21E FY22E Net sales 89,535 96,183 97,923 98,358 Cash & Bank balances 6,704 7,854 14,720 22,584 growth (%) 40.7 7.4 1.8 0.4 Other Current assets 38,986 41,581 42,243 42,948 Operating expenses 83,804 83,911 85,314 85,782 Investments 4,756 4,756 4,756 4,756 EBITDA 5,731 12,272 12,610 12,576 growth (%) -1.4 114.1 2.7 -0.3 Net fixed assets 16,143 14,355 12,548 10,073 Depreciation &amortisation 2,597 2,608 2,754 2,785 Asset held for sale 11,642 11,642 11,642 11,642 EBIT 3,133 9,664 9,856 9,791 Other non-current assets 740 740 740 740 Other income 1,346 1,105 1,125 1,125 Total assets 78,972 80,928 86,648 92,743 Interest paid 1,774 1,736 1,556 1,376 PBT 2,706 9,033 9,425 9,540 Current liabilities 35,990 38,375 38,525 38,964 Exceptional 0 0 0 0 Borrowings 12,878 9,643 8,643 7,643 Tax 1,223 3,162 2,451 2,480 Other non-current liabilities 2,178 2,178 2,178 2,178 Effective tax rate (%) 45.2 35.0 26.0 26.0 Total liabilities 51,046 50,197 49,347 48,785 Net profit 1,484 5,872 6,975 7,060 Minority interest /share of Ass. (885) 1,300 900 900 Share capital 1,326 1,304 1,304 1,304 Net profit 598 7,172 7,875 7,960 Reserves & surplus 26,650 29,478 36,048 42,704 Discontinued Operations (815) (475) 0 0 Shareholders' funds 27,976 30,782 37,352 44,008 Profit after Disc. Op. -216 6,697 7,875 7,960 Minority interest -51 (51) -51 -51 growth (%) -114.1 1,098.4 17.6 1.1 Total equity & liabilities 78,972 80,928 86,648 92,743 Source: Company, Kotak Securities – Private Client Group Source: Company, Kotak Securities – Private Client Group

Cash flow Statement (Rs mn) Ratio Analysis (Year-end Mar) FY19 FY20E FY21E FY22E (Year-end Mar) FY19 FY20E FY21E FY22E Pre-tax profit 2,706 9,033 9,425 9,540 Profitability and return ratios (%) Depreciation 2,597 2,608 2,754 2,785 EBITDAM 6.4 12.8 12.9 12.8 Chg in working capital (3,585) (209) (513) (266) EBITM 3.5 10.0 10.1 10.0 Total tax paid (834) (3,162) (2,451) (2,480) NPM 0.7 7.5 8.0 8.1 Other operating activities 6,305 1,715 1,556 1,376 RoE 2.1 23.3 21.1 18.1 Operating CF 7,190 9,986 10,771 10,954 RoCE 7.3 22.7 20.5 18.2

Capital expenditure (583) (820) (946) (310) Per share data (Rs) Chg in investments (2,783) 0 0 0 O/s shares 265.2 260.9 260.9 260.9 Other investing activities 690 0 0 0 EPS -0.8 25.7 30.2 30.5 Investing CF (2,677) (820) (946) (310) CEPS 12.0 37.5 40.7 41.2 BV 105.5 118.0 143.2 168.7 Equity raised/(repaid) 0 (588) 0 0 DPS 0.5 12.0 5.0 5.0 Debt raised/(repaid) (1,154) (3,235) (1,000) (1,000) Dividend (incl. tax) (160) (3,756) (1,304) (1,304) Valuation ratios (x) Other financing activities (2,777) (436) (656) (476) PE -234.0 7.4 6.3 6.3 Financing CF (4,091) (8,015) (2,960) (2,780) P/BV 1.8 1.6 1.3 1.1 EV/EBITDA 9.3 3.9 3.2 2.5 Net chg in cash & bank bal. 422 1,150 6,865 7,865 EV/Sales 0.6 0.5 0.4 0.3 Closing cash & bank bal 6,705 7,855 14,720 22,585 D/E (x) 0.5 0.5 0.3 0.2 Source: Company, Kotak Securities – Private Client Group Source: Company, Kotak Securities – Private Client Group

Kotak Securities – Private Client Group Please see the Disclosure/Disclaimer on the last page For Private Circulation 18 FEBRUARY 6, 2020

Result Update ENGINEERS INDIA LTD (EIL)

Stock Details PRICE RS.95 TARGET RS.123 BUY Market cap (Rs mn) : 59716 52-wk Hi/Lo (Rs) : 129 / 90 EIL reported strong growth in revenue aided by sharp increase in revenue Face Value (Rs) : 5 from Lumpsum turnkey projects. However, due to adverse revenue mix, 3M Avg. daily vol (Nos) : 970,941 EBITDA margins contracted by 680 bps. As a result, profits were lower than Shares o/s (mn) : 632 estimated. Source: Bloomberg

Financial Summary Key Highlights Y/E Mar (Rs mn) FY20E FY21E FY22E  The current order book stands at Rs 101 bn, providing revenue visibility of Revenue 31,092 32,765 29,062 41 months of sales. Growth (%) 27.2 5.4 -11.3 EBITDA 4,595 4,915 4,650  Management has guided for revenue growth of 5-7% for FY21E. EBITDA margin (%) 14.8 15.0 16.0 PAT 4,369 5,412 5,384  The management has guided for EBIT margin of 24-25% in consulting and EPS 6.9 8.6 8.5 4% in Lumpsum Turnkey projects. EPS Growth (%) 18.0 23.9 (0.5)  The company is targeting to secure orders worth Rs 18 bn in FY20. It has BV (Rs/share) 37.3 41.1 44.9 Dividend/share (Rs) 4.7 4.7 4.7 already won orders worth Rs 14.6 bn in 9MFY20. ROE (%) 18.9 21.9 19.8 ROCE (%) 18.8 18.8 16.1 Quarterly performance P/E (x) 13.7 11.0 11.1 Rs mn Q3FY20 Q3FY19 YoY (%) Q2FY20 QoQ (%) EV/EBITDA (x) 7.1 6.1 6.0 Income from Operations 8,906.1 5,770.0 54.4 7,237.3 23.1 P/BV (x) 2.5 2.3 2.1

Source: Company, Kotak Securities - PCG Construction Material 1,387.4 1281.6 8.3 1,149.3 20.7 Shareholding Pattern (%) as % of sales 15.6% 22.2% 15.9% (%) Dec-19 Sep-19 Jun-19 Sub-Contract Payments 3628.7 1018.1 256.4 2194.1 65.4 Promoters 51.5 52.0 52.0 as % of sales 40.7% 17.6% 30.3% FII 8.6 6.5 7.8 Gross profit 3890.0 3470.3 12.1 3893.9 -0.1 DII 23.3 26.5 24.8 Gross margin % 43.7% 60.1% 53.8% Others 16.5 15.0 15.3 Employee expenses 2123.8 1972.0 7.7 2069.4 2.6 Source: Bloomberg, BSE as % of sales 23.8% 34.2% 28.6% Other expenses 910.10 549.8 65.5 754.8 20.6 Price Performance (%) as % of sales 10.2% 9.5% 10.4% (%) 1M 3M 6M Total expenditure 8050.0 4821.5 67.0 6167.6 30.5 Engineers India (5.5) (18.0) 0.9 EBITDA 856.1 948.5 -9.7 1069.7 -20.0 Nifty (1.1) 1.4 11.3 Margin (%) 9.6% 16.4% 14.8% Source: Bloomberg Other income 657.0 518.6 26.7 655.3 0.3 Price chart (Rs) Depreciation 55.8 53.2 4.9 57.9 -3.6 130 EBIT 800.3 895.3 -10.6 1011.8 -20.9 Margin (%) 9.0 15.5 14.0 120 Net Interest 4.3 3.6 19.4 3.8 13.2 110 PBT 1453.0 1410.3 3.0 1663.3 -12.6 100 Reported PBT 1453.0 1410.3 3.0 1663.3 -12.6 90 Total tax 366.2 490.7 -25.4 985.6 -62.8 Feb-19 Jun-19 Oct-19 Feb-20 Reported PAT 1,087 920 18.2 678 60.4 Source: Bloomberg Adjusted PAT 1,087 920 18.2 678 60.4 EPS (Rs) 1.72 1.46 1.07 Employee expenses (%) 23.85 34.18 28.59

Other expenses (%) 10.22 9.53 10.43

Average tax rate (%) 25.2 34.8 59.3

Source: Company Sanjeev Zarbade [email protected]

91 22 6218 6424

Kotak Securities – Private Client Group Please see the Disclosure/Disclaimer on the last page For Private Circulation 19 FEBRUARY 6, 2020

Valuation and Outlook  We have revised EPS to Rs 6.9 (Rs 6.7 earlier) and Rs 8.6 (Rs 8.5 earlier) for FY20E and FY21E respectively.  EIL is trading at PE of 13.7x and 11.0x on FY20E and FY21E core earnings respectively, which is attractive in our view.  We value FY22 core earnings of Rs 5.1 per share (excluding other income adjusted for tax) at PER 14x and add back cash per share of Rs 50.4 per share in FY22.  Thus arriving at a target price of Rs 123 (Rs 130 earlier).

Result Highlights

Revenue  Revenue grew 54.4% y-o-y to Rs 8.9 bn in Q3FY20 driven by 6.6% and 124% y-o-y growth in Consultancy and LTSK division respectively.  Within PMC division, domestic and overseas business accounted to revenues of Rs 2.7 bn and Rs 867 mn respectively.

Segment Revenue Rs mn Q3FY20 Q3FY19 % change Consultancy & Engineering projects (PMC) 3651 3425 6.6 Lumpsum Turnkey Projects 5255 2345 124 Source: Company

EBITDA Margins EBITDA margin contracted to 9.6% vis-à-vis 16.4% on a y-o-y basis due to 1) change in revenue mix in favour of EPC segment and 2) provisions made under doubtful debts and contractual obligations.

Segment Margins Rs mn Q3FY20 Q3FY19 Consultancy & Engineering projects (PMC) 27.4 29.7 Lumpsum Turnkey Projects 7.8 6.1 Source: Company

Employee costs  Employee costs rose 7.7% on a y-o-y basis. Employee costs is the main cost component in any Consulting order. At the end of FY19, EIL had 2768 employees, including 2339 professionally qualified employees (mainly engineers).  A positive development is that the employee head count has been on a decline from 3192 employees in FY15 to 2768 employees in FY19. As a result, employee productivity has been consistently rising.  The company is also going for temporary hiring of professionals depending upon the volume of EPC work to be executed.

Other income Other income stood at Rs 657 mn in the quarter against Rs 519 mn in Q3FY19, driven mainly by significant cash and equivalent of Rs 27.5 bn at the end of Q2FY20.

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Order intake and Order backlog  EIL’s order backlog stood at Rs 101 bn at the end of Q3FY20 (down 6% on on a y-o-y basis).  Currently, Consultancy order book amounts to Rs 46 bn (45% of total order book) and turnkey orders amounts to Rs 55.6 bn.  Order inflows remained at Rs 3.6 bn, entire orders won in Q3FY20 have been won in the consulting segment.

Order intake (Rs mn)

70000 Consultancy Turnkey

60000

50000

40000

30000

20000

10000

0 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20E FY21E

Source: Company, Kotak Securities - Private Client Group

Order book (Rs mn)

120000 Consultancy Turnkey

100000

80000

60000

40000

20000

0 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20E FY21E

Source: Company, Kotak Securities - Private Client Group

Market outlook The plethora of initiatives & policy reforms undertaken by the GoI such as Make In India, Bio-Fuels, Digital India, SMART City, AMRUT, Pradhanmantri Urja Ganga Yojana (Pipelines, CGD Networks, Fertilizer Plants), Sagarmala, Renewed focus on Infrastructure especially Ports & Airports, PCPIRs, Namami Gange, Affordable Housing, etc have propelled large inflow of FDIs into the country. The energy demand is likely to grow at a sustained rate owing to rapid urbanisation and industrialisation.

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As a second largest refiner in Asia, the Indian refinery industry has done exceedingly well in establishing itself as a major player globally. The hydrocarbon sector of the country has been energized with announcements of new Mega Projects. The refining capacity of the nation is envisaged to surge from the present 247.6 MMT to 490 MMT by 2040, to cater to its robust demand and also promote itself as an Export Hub. The vision of Gas Grid is steadily turning into a reality. Natural Gas is seen to increase its share to 20% by 2030 which could mean creation of more energy consumers driving the regional growth. The Company is optimistic that with planned capex expenditure of all the Oil & Gas majors in the hydrocarbon sector, the coming years would offer a number of opportunities across the value chain especially in the midstream and downstream segment with integrated refinery and petrochemical complexes as well as standalone petrochemical plants.

Indian Refining Capacity Outlook (mmtpa)

800 Planned Domestic Demand Domestic Demand + 25% exports 700

600

500

400

300

200

100

0 2020 2025 2030 2035 2040

Source: Company presentation

Capacity Vs Demand of major Petrochemicals (KTPA)

12000 Installed Capacity Demand 10000

8000

6000

4000

2000

0 PE PP PVC MEG SBR/PBR

Source: Company presentation

Conference call highlights  Management has guided for revenue growth of c. 20% for FY20.  Revenue from Barmer refinery will start contributing materially from FY21 onwards.  The management has guided for EBIT margin of 25-27% in consulting and 4%in LTSK projects (as compared to 5% earlier).

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 We note that the order pipeline remains strong, potentially arising from greenfield/brownfield expansion by leading refineries.  In order intake, the management expects to secure orders worth Rs 18 bn each in FY20E and FY21E respectively. It has won two orders in Q3FY20 in the pipeline sector.  The company claims to have won orders on competitive bidding from PSUs as well as private players.

Valuation and Recommendation  We have revised EPS to Rs 6.9 (Rs 6.7 earlier) and Rs 8.6 (Rs 8.5 earlier) for FY20E and FY21E respectively.  EIL is trading at PE of 13.7x and 11.0x on FY20E and FY21E core earnings respectively, which is attractive in our view.  We value FY22 core earnings of Rs 5.1 per share (excluding other income adjusted for tax) at PER 14x and add back cash per share of Rs 50.4 per share in FY22.  Thus arriving at a target price of Rs 123 (Rs 130 earlier).

Forward PE and Average forward PE for EIL

40.00 P/E Avg. P/E 35.00 30.00 25.00 20.00 15.00 10.00 5.00 0.00

Source: Kotak Securities – Private Client Group and Capitaline

About the company Engineers India Ltd (EIL) is a leading global engineering consultancy and EPC company. Established in 1965, EIL provides engineering consultancy and EPC services principally focused on the oil & gas and petrochemical industries. The Company has also diversified into sectors like infrastructure, water and waste management, solar & nuclear power and fertilizers to leverage its strong technical competencies and track record.

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Financials: Standalone

Profit and Loss Statement (Rs mn ) Balance sheet (Rs mn) (Year-end Mar) FY19 FY20E FY21E FY22E (Year-end Mar) FY19 FY20E FY21E FY22E Revenues 24,443 31,092 32,765 29,062 Cash and cash equivalents 26,611 26,904 29,625 31,882 % change yoy 36.7 27.2 5.4 (11.3) Accounts receivable 4,142 7,837 8,259 7,325 EBITDA 3,660 4,595 4,915 4,650 Other current assets 6,137 8,588 9,047 8,032 % change yoy (11.4) 25.5 7.0 (5.4) Depreciation 224 229 245 249 Current Assets 36,889 43,330 46,930 47,239 EBIT 3,437 4,366 4,670 4,401 Net fixed assets 2,496 2,407 2,312 2,214 % change yoy (11.7) 27.0 7.0 (5.8) Investments 3,477 3,477 3,477 3,477 Net Interest 12 15 15 15 Other non-current assets 3983 3953 3923 3893 Other Income 2251 2515 2620 2850 Total Assets 46,846 53,167 56,643 56,823 Earnings Before Tax 5,675 6,866 7,275 7,237 % change yoy (0.1) 21.0 6.0 (0.5) Tax 1,974 2,497 1,862 1,853 Debt - - - - as % of EBT 34.8 36.4 25.6 25.6 Equity & reserves 22,759 23,547 25,989 28,403 Extraordinary Income 0 0 0 0 Provisions 31 31 31 31 Recurring PAT 3,701 4,369 5,412 5,384 Other liabilities 54 54 54 54 % change yoy (2.1) 18.0 23.9 (0.5) Current Liabilities 24,001 29,535 30,569 28,335 EPS (Rs) 5.9 6.9 8.6 8.5 Total Liabilities 46,846 53,167 56,643 56,823 DPS (Rs) 4.7 4.7 4.7 4.7 CEPS 6.2 7.3 9.0 8.9 BVPS 36.0 37.3 41.1 44.9 Source: Company, Kotak Securities – Private Client Group Source: Company, Kotak Securities – Private Client Group

Cash flow Statement (Rs mn) Ratio Analysis (Year-end Mar) FY19 FY20E FY21E FY22E (Year-end Mar) FY19 FY20E FY21E FY22E EBITDA 3,660 4,595 4,915 4,650 EBITDA margin (%) 15.0 14.8 15.0 16.0 Direct tax paid -2,161 -2,497 -1,862 -1,853 EBIT margin (%) 14.1 14.0 14.3 15.1 Adjustments 464 - - - Net profit margin (%) 15.1 14.1 16.5 18.5 Cash flow from operations 1,963 2,098 3,052 2,797 Adjusted EPS growth (%) (2.1) 18.0 23.9 (0.5) Net Change in Working Capital 2,723 (613) 154 (286) Net Cash from Operations 4,687 1,485 3,206 2,511 Receivables (days) 61.8 92.0 92.0 92.0 Capital Expenditure (322) (140) (150) (150) Sales / Net Fixed Assets (x) 8.5 9.3 9.3 7.9 Cash from investing 1,251 2,515 2,620 2,850 Debt/ equity ratio (x) - - - - Net Cash from Investing 930 2375 2470 2700 Interest paid 12 15 15 15 Issue of Shares/(buyback) - - - - ROE (%) 16.3 18.9 21.9 19.8 Dividends Paid (3,605) (3,582) (2,970) (2,970) ROCE (%) 15.0 18.8 18.8 16.1 Other liabilities -138.9 0 0 0 Debt Raised 0 0 0 0 EV/ Sales (x) 1.4 1.1 0.9 1.0 Net cash from financing (3,732) (3,567) (2,955) (2,955) EV/EBITDA (x) 9.0 7.1 6.1 6.0 Net change in cash 1884 293 2721 2257 Free cash flow 4,365 1,345 3,056 2,361 Price to earnings (x) 16.1 13.7 11.0 11.1 Cash at beginning 246 2,130 2,423 5,144 Price to book value (x) 2.6 2.5 2.3 2.1 Other bank balances 24,481 24,481 24,481 24,481 Price to cash earnings (x) 15.2 13.0 10.6 10.6 Cash as in balance sheet 26,611 26,904 29,625 31,882 Source: Company, Kotak Securities – Private Client Group Source: Company, Kotak Securities – Private Client Group

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Result Update NIIT LTD

Stock Details PRICE RS.101 TARGET RS.121 BUY Market cap (Rs mn) : 14349 52-wk Hi/Lo (Rs) : 117 / 74 NIIT Ltd Q3FY20 revenue increased by 9.8% yoy and 4.7% qoq to Rs. 2.5 bn, Face Value (Rs) : 2 (lower than our estimate of Rs.2.6 bn) supported by CLG business which 3M Avg. daily vol (Nos) : 600,205 grew by 17% yoy and Schools business grew by 22%. However, Skills & Shares o/s (mn) : 142 Careers business de-grew by 11%. Go-forward business revenue grew by Source: Bloomberg 12% yoy in Q3FY20. We expect higher revenue growth rate from Go-forward Financial Summary business. Reported PAT stood at Rs.271 mn, higher 40% yoy (lower than our Y/E Mar (Rs mn) FY20E FY21E FY22E estimate). Revenue 9,691 10,942 12,663 Growth (%) 6.5 12.9 15.7 Going ahead, the company has a revenue visibility of US$265 mn in Q3FY20 EBITDA 954 1,159 1,353 as against US$ 250 mn in Q2FY20 in the CLG business. Investors focus will EBITDA margin (%) 9.8 10.6 10.7 remain on utilization of sale proceeds of its stake in NIIT Technologies. Net PAT 13,569 1,232 1,462 EPS 95.9 8.7 10.3 Cash and cash equivalents stood at ~Rs. 12.92 bn as on 31st Dec’19 EPS Growth (%) 1,758.4 NM 18.7 (including indemnity reserve). Adjusted EPS 7.85 8.70 10.33 EPS Growth (%) 52.2 10.8 18.7 Quarterly performance table Cash EPS 100.2 12.9 14.8 (Rs.mn) Q3FY20 Q3FY19 Q2FY20 YoY (%) QoQ (%) BV (Rs/share) 145.5 149.3 154.7 Income 2,476 2,255 2,365 9.8 4.7 Dividend/share (Rs) 7.5 5.0 5.0 ROE (%) 93.8 5.9 6.8 Expenditure 2,249 2,094 2,122 7 6 ROCE (%) 90.4 6.0 6.9 EBIDTA 233 162 245 44 (5) P/E (x) 1.1 11.6 9.8 Depreciation 178 95 137 88 30 EV/EBITDA (x) 8.9 6.6 5.3 EBIT 55 67 108 (18) (49) P/BV (x) 0.7 0.7 0.7 Other Income 300 16 408 1,757 (27) Source: Company, Kotak Securities - PCG Interest-net 26 49 54 (46) (51) Profit of an Associate 235 - Shareholding Pattern (%) PBT 328 270 462 22 (29) (%) Dec-19 Sep-19 Jun-19 Extra ordinary exp/(Inc) (13) 6 Promoters 34.4 31.5 31.7 Tax 48 59 (1,633) (18) (103) FII 17.3 14.7 16.9 MI + Others 9 30 (5) (70) (293) DII 15.0 18.9 11.8 Others 33.1 34.7 39.4 Adj. PAT 271 194 2,093 40 (87) EPS (Rs) 1.9 1.4 14.8 40 (87) Source: Bloomberg, BSE Q3FY20 Q3FY19 Q2FY20 YoY (bps) QoQ (bps) Price Performance (%) EBIDTA (%) 9.4 7.2 10.3 223 (92) (%) 1M 3M 6M EBIT (%) 2.2 3.0 4.6 (76) NM NIIT Ltd 8.0 4.1 7.7 Net Profit (%) 11.0 8.6 88.5 237 NM Nifty (1.1) 1.4 11.3 Source: Company, Kotak Securities – Private Client Research. Note: Depreciation includes impact of Source: Bloomberg INDAS 116 including new facilities for expansion and amortization of investments in project intangibles.

Price chart (Rs) Valuation & outlook 135 We are introducing FY22E earnings and valuing the stock accordingly. We 115 expect NIIT Ltd. to report an EPS of Rs.8.7 in FY21E (earlier Rs.8.4) and an EPS of Rs.10.3 in FY22E. We expect operating margin to improve going forward as 95 the company is planning to rationalize its businesses, invest in high margin and 75 high growth business opportunities We value the company using SOTP Feb-19 Jun-19 Oct-19 Feb-20 methodology, valuing the core business using EV/sales (School Learning Source: Bloomberg business) and EV/EBIDTA (Corporate Learning and Skills and Career business) multiple and net cash and cash equivalent of Rs.91/-, with a BUY recommendation and a revised target price of Rs.121 (earlier Rs.118).

Sumit Pokharna [email protected] +91 22 6218 6438

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Key Highlights

Geographical contribution:  In Q3FY20, US and Europe contributed 77% (v/s 72% in Q3FY19) to the total revenue and has grown by 17%.  India’s contribution stood lower at 15% in Q3FY20 as against 21% in Q3FY19 and has de-grown by 21%.  Finally, ROW (rest of the world) contributed 8% to the total revenue and has grown by 22%.

Corporate Learning Group (CLG)  In Q3FY20, CLG revenue grew by 17% yoy and 9% qoq to Rs. 1,895 mn (constant currency growth at 18% yoy) supported by customer additions and contracts extension.  The company added 2 MTS customers, renewed 2 contracts and expanded 2 contracts.  generating revenue.  highlighted that it has revenue visibility of US$265 mn.

Skills & Careers Group (SNC)  In Q3FY20, SNC revenue was down by 14% yoy and 7% qoq to Rs.544 mn. However, the company highlighted that the targeted initiatives Stackroute & TPaaS together grew at 11% yoy.  NIIT has made significant investment in Stackroute Sales & Marketing in Q3FY20.

BUY BACK Details  In Q3FY20, NIIT ltd. has concluded the buy-back of 26.8 mn equity shares at a price of Rs.125/- resulting in a cash outflow of Rs.3.35 bn.  With buy-back of shares, the paid-up equity share capital has reduced by Rs. 53.60 mn.  Further tax on Buyback and related expenses amounted to Rs. 738.11 mn and Rs. 40.48 mn, respectively.

Valuation & outlook We are introducing FY22E earnings and valuing the stock accordingly. We expect NIIT Ltd. to report an EPS of Rs.8.7 in FY21E (earlier Rs.8.4) and an EPS of Rs.10.3 in FY22E. We expect operating margin to improve going forward as the company is planning to rationalize its businesses, invest in high margin and high growth business opportunities We value the company using the SOTP methodology, valuing the core business using EV/sales (School Learning business) and EV/EBIDTA (Corporate Learning and Skills and Career business) multiple and net cash and cash equivalent of Rs.91/-, with a BUY recommendation and a revised target price of Rs.121 (earlier Rs.118).

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SOTP Valuation (Rs. Mn) Segment FY22E Data Metric Multiple Value of Business Corporate Learning Group 1,512 EV/EBIDTA 3 4,023 School Learning Group 257 EV/Sales 0.5 128 Skills and Career Group 14 EV/EBIDTA 2 28 Core business value 4179 Add: Cash and investment (30% discount) 12901 Less: Debt - Fair value 17080 No. of shares 142 Target Price (Rs/share) 121 CMP 101 Upside/(downside) (%) 20% Source: Company, Kotak Securities – Private Client Group

Company Background Established in 1981, NIIT Limited, a global leader in Skills and Talent Development, offers multi-disciplinary learning management and training delivery solutions to corporations, institutions, and individuals in over 40 countries. The company ranks among the world’s leading training companies owing to its vast, yet comprehensive array of talent development programs. (Source: Company)

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Financials: Consolidated

Profit and Loss Statement (Rs mn) Balance sheet (Rs mn) (Year-end Mar) FY19 FY20E FY21E FY22E (Year-end Mar) FY19 FY20E FY21E FY22E Revenues 9,101 9,691 10,942 12,663 Cash and cash equivalents 1,208 5,838 6,589 7,103 % change YoY 7.0 6.5 12.9 15.7 Accounts receivable 1,654 1,513 1,709 1,977 EBITDA 708 954 1,159 1,353 Inventories 55 65 73 85 % change YoY 4.2 34.8 21.4 16.8 Loans and Adv & Others 2,180 2,349 2,520 2,756 Other Income 998 14,143 1,100 1,250 Current assets 5,097 9,766 10,891 11,921 Depreciation 361 594 581 627 Misc exp. 0 0 0 0 EBIT 1,345 14,503 1,678 1,976 LT investments 6,754 11,827 11,327 11,327 % change YoY 30.4 978.2 -88.4 17.8 Net fixed assets 2,811 3,161 3,511 3,861 Net interest 203 160 20 10 Total assets 14,663 24,754 25,729 27,110 Profit before tax 1,142 14,343 1,658 1,966 % change YoY 36.3 1,155.5 -88.4 18.6 Payables 1,143 1,068 1,193 1,378 Tax 271 765 417 495 Others 2,763 2,133 2,407 2,786 as % of PBT 23.8 5.3 25.2 25.2 Current liabilities 3,906 3,201 3,601 4,163 Profit after tax 871 13,578 1,241 1,471 Provisions 254 254 287 332 Minority interest 8 9 9 9 Net income 864 13,569 1,232 1,462 LT debt 1,366 0 0 0 % change YoY 38.2 1,471.4 -90.9 18.7 Min. int and def tax liabilities 805 711 720 729 Shares outstanding (m) 142 142 142 142 Equity 335 283 283 283 EPS (reported) (Rs) 5.2 95.9 8.7 10.3 Reserves 7,997 20,305 20,838 21,602 CEPS (Rs) 7.4 100.2 12.9 14.8 Total liabilities 14,663 24,754 25,729 27,110 DPS (Rs) 5.0 7.5 5.0 5.0 BVPS (Rs) 50 145 149 155 Source: Company, Kotak Securities – Private Client Group Source: Company, Kotak Securities – Private Client Group

Cash flow Statement (Rs mn) Ratio Analysis (Year-end Mar) FY19 FY20E FY21E FY22E (Year-end Mar) FY19 FY20E FY21E FY22E EBIT 1,345 14,503 1,678 1,976 EBITDA margin (%) 7.8 9.8 10.6 10.7 Depreciation 361 594 581 627 EBIT margin (%) 14.8 149.7 15.3 15.6 Change in working capital (374) (720) 67 101 Net profit margin (%) 9.5 140.0 11.3 11.5 Chgs in other net current assets - - - - Operating cash flow 1,332 14,377 2,326 2,704 Receivables (days) 66 57 57 57 Interest (203) (160) (20) (10) Inventory (days) 2 2 2 2 Tax (271) (765) (417) (495) Sales/gross assets(x) 0.9 0.6 0.5 0.6 Cash flow from operations 858 13,453 1,888 2,199 Interest coverage (x) 1.7 2.2 28.9 72.6 Capex (702) (944) (931) (977) (Inc)/dec in investments (709) (5,072) 500 - Debt/equity ratio(x) 0.2 - - - Cash flow from investments (1,411) (6,017) (431) (977) Others 1,242 (155) - - ROE (%) 11.1 93.8 5.9 6.8 Increase/(decrease) in debt 231 (1,366) - - ROCE (%) 11.8 90.4 6.0 6.9 Proceeds from share premium - - - - Dividends (993) (1,285) (707) (708) EV/ Sales 1.6 0.9 0.7 0.6 Cash flow from financing 481 (2,806) (707) (708) EV/EBITDA 20.4 8.9 6.6 5.3 Opening cash 1,281 1,208 5,838 6,589 Price to earnings (P/E) 19.6 1.1 11.6 9.8 Closing cash 1,208 5,838 6,589 7,103 Price to book value (P/B) 2.0 0.7 0.7 0.7 Source: Company, Kotak Securities – Private Client Group Source: Company, Kotak Securities – Private Client Group

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RATING SCALE (PRIVATE CLIENT GROUP) Definitions of ratings BUY – We expect the stock to deliver more than 15% returns over the next 12 months ADD – We expect the stock to deliver 5% - 15% returns over the next 12 months REDUCE – We expect the stock to deliver -5% - +5% returns over the next 12 months SELL – We expect the stock to deliver < -5% returns over the next 12 months NR – Not Rated. Kotak Securities is not assigning any rating or price target to the stock. The report has been prepared for information purposes only. SUBSCRIBE – We advise investor to subscribe to the IPO. RS – Rating Suspended. Kotak Securities has suspended the investment rating and price target for this stock, either because there is not a sufficient fundamental basis for determining, or there are legal, regulatory or policy constraints around publishing, an investment rating or target. The previous investment rating and price target, if any, are no longer in effect for this stock and should not be relied upon. NA – Not Available or Not Applicable. The information is not available for display or is not applicable NM – Not Meaningful. The information is not meaningful and is therefore excluded. NOTE – Our target prices are with a 12-month perspective. Returns stated in the rating scale are our internal benchmark.

FUNDAMENTAL RESEARCH TEAM (PRIVATE CLIENT GROUP)

Rusmik Oza Arun Agarwal Amit Agarwal, CFA Krishna Nain Head of Research Auto & Auto Ancillary Transportation, Paints, FMCG M&A, Corporate actions [email protected] [email protected] [email protected] [email protected] +91 22 6218 6441 +91 22 6218 6443 +91 22 6218 6439 +91 22 6218 7907

Sanjeev Zarbade Jatin Damania Purvi Shah Priyesh Babariya Cap. Goods & Cons. Durables Metals & Mining, Midcap Pharmaceuticals Research Associate [email protected] [email protected] [email protected] [email protected] +91 22 6218 6424 +91 22 6218 6440 +91 22 6218 6432 +91 22 6218 6433

Sumit Pokharna Pankaj Kumar Deval Shah K. Kathirvelu Oil and Gas, Information Tech Midcap Research Associate Support Executive [email protected] [email protected] [email protected] [email protected] +91 22 6218 6438 +91 22 6218 6434 +91 22 6218 6425 +91 22 6218 6427

TECHNICAL RESEARCH TEAM (PRIVATE CLIENT GROUP)

Shrikant Chouhan Amol Athawale Siddhesh Jain [email protected] [email protected] Research Associate +91 22 6218 5408 +91 20 6620 3350 [email protected] +91 22 62185498

DERIVATIVES RESEARCH TEAM (PRIVATE CLIENT GROUP)

Sahaj Agrawal Malay Gandhi Prashanth Lalu Prasenjit Biswas, CMT, CFTe [email protected] [email protected] [email protected] [email protected] +91 79 6607 2231 +91 22 6218 6420 +91 22 6218 5497 +91 33 6615 6273

Kotak Securities – Private Client Group Please see the Disclosure/Disclaimer on the last page For Private Circulation 29 FEBRUARY 6, 2020

Disclosure/Disclaimer (Private Client Group) Kotak Securities Limited established in 1994, is a subsidiary of Kotak Mahindra Bank Limited. Kotak Securities is one of India's largest brokerage and distribution house. Kotak Securities Limited is a corporate trading and clearing member of BSE Limited (BSE), National Stock Exchange of India Limited (NSE), Metropolitan Stock Exchange of India Limited (MSE), National Commodity and Derivatives Exchange (NCDEX) and Multi Commodity Exchange (MCX). Our businesses include stock broking, services rendered in connection with distribution of primary market issues and financial products like mutual funds and fixed deposits, depository services and Portfolio Management. Kotak Securities Limited is also a depository participant with National Securities Depository Limited (NSDL) and Central Depository Services (India) Limited (CDSL). Kotak Securities Limited is also registered with Insurance Regulatory and Development Authority as Corporate Agent for Kotak Mahindra Old Mutual Life Insurance Limited and is also a Mutual Fund Advisor registered with Association of Mutual Funds in India (AMFI). We are registered as a Research Analyst under SEBI (Research Analyst) Regulations, 2014. We hereby declare that our activities were neither suspended nor we have defaulted with any stock exchange authority with whom we are registered in last five years. However SEBI, Exchanges and Depositories have conducted the routine inspection and based on their observations have issued advise/warning/deficiency letters/ or levied minor penalty on KSL for certain operational deviations. We have not been debarred from doing business by any Stock Exchange / SEBI or any other authorities; nor has our certificate of registration been cancelled by SEBI at any point of time. We offer our research services to clients as well as our prospects. 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We and our affiliates/associates, officers, directors, and employees, Research Analyst(including relatives) worldwide may: (a) from time to time, have long or short positions in, and buy or sell the securities thereof, of company (ies) mentioned herein or (b) be engaged in any other transaction involving such securities and earn brokerage or other compensation or act as a market maker in the financial instruments of the subject company/company (ies) discussed herein or act as advisor or lender / borrower to such company (ies) or have other potential/material conflict of interest with respect to any recommendation and related information and opinions at the time of publication of Research Report or at the time of public appearance. Kotak Securities Limited (KSL) may have proprietary long/short position in the above mentioned scrip(s) and therefore may be considered as interested. The views provided herein are general in nature and does not consider risk appetite or investment objective of particular investor; readers are requested to take independent professional advice before investing. This should not be construed as invitation or solicitation to do business with KSL. Kotak Securities Limited is also a Portfolio Manager. Portfolio Management Team (PMS) takes its investment decisions independent of the PCG research and accordingly PMS may have positions contrary to the PCG research recommendation. Kotak Securities Limited does not provide any promise or assurance of favourable view for a particular industry or sector or business group in any manner. The investor is requested to take into consideration all the risk factors including their financial condition, suitability to risk return profile and take professional advice before investing. The analyst for this report certifies that all of the views expressed in this report accurately reflect his or her personal views about the subject company or companies and its or their securities, and no part of his or her compensation was, is or will be, directly or indirectly related to specific recommendations or views expressed in this report. No part of this material may be duplicated in any form and/or redistributed without Kotak Securities' prior written consent. Details of Associates are available on www.kotak.com 1. “Note that the research analysts contributing to the research report may not be registered/qualified as research analysts with FINRA; and 2. Such research analysts may not be associated persons of Kotak Mahindra Inc and therefore, may not be subject to NASD Rule 2711 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account Any U.S. recipients of the research who wish to effect transactions in any security covered by the report should do so with or through Kotak Mahindra Inc. (Member FINRA/SIPC) and (ii) any transactions in the securities covered by the research by U.S. recipients must be effected only through Kotak Mahindra Inc. (Member FINRA/SIPC) at 369 Lexington Avenue 28th Floor NY NY 10017 USA (Tel:+1 212-600-8850). Kotak Securities Limited and its non US affiliates may, to the extent permissible under applicable laws, have acted on or used this research to the extent that it relates to non US issuers, prior to or immediately following its publication. This material should not be construed as an offer to sell or the solicitation of an offer to buy any security in any jurisdiction where such an offer or solicitation would be illegal. This research report and its respective contents do not constitute an offer or invitation to purchase or subscribe for any securities or solicitation of any investments or investment services. Accordingly, any brokerage and investment services including the products and services described are not available to or intended for Canadian persons or US persons.” Research Analyst has served as an officer, director or employee of subject company(ies): No We or our associates may have received compensation from the subject company(ies) in the past 12 months. We or our associates have managed or co-managed public offering of securities for the subject company(ies) in the past 12 months: No We or our associates may have received compensation for investment banking or merchant banking or brokerage services from the subject company(ies) in the past 12 months. We or our associates may have received any compensation for products or services other than investment banking or merchant banking or brokerage services from the subject company(ies) in the past 12 months. We or our associates may have received compensation or other benefits from the subject company(ies) or third party in connection with the research report. Our associates may have financial interest in the subject company(ies). Research Analyst or his/her relative's financial interest in the subject company(ies): No Kotak Securities Limited has financial interest in the subject company(ies) at the end of the month immediately preceding the date of publication of Research Report: No Nature of financial interest is holding of equity shares or derivatives of the subject company. Our associates may have actual/beneficial ownership of 1% or more securities of the subject company(ies) at the end of the month immediately preceding the date of publication of Research Report. Research Analyst or his/her relatives has actual/beneficial ownership of 1% or more securities of the subject company(ies) at the end of the month immediately preceding the date of publication of Research Report: No. Kotak Securities Limited has actual/beneficial ownership of 1% or more securities of the subject company(ies) at the end of the month immediately preceding the date of publication of Research Report: No

Kotak Securities – Private Client Group Please see the Disclosure/Disclaimer on the last page For Private Circulation 30 FEBRUARY 6, 2020

By referring to any particular sector, Kotak Securities Limited does not provide any promise or assurance of favourable view for a particular industry or sector or business group in any manner. The investor is requested to take into consideration all the risk factors including their financial condition, suitability to risk return profile and take professional advice before investing. Such representations are not indicative of future results. Subject company(ies) may have been client during twelve months preceding the date of distribution of the research report. "A graph of daily closing prices of securities is available at https://www.nseindia.com/ChartApp/install/charts/mainpage.jsp and http://economictimes.indiatimes.com/markets/stocks/stock-quotes. (Choose a company from the list on the browser and select the "three years" icon in the price chart)." Kotak Securities Limited. Registered Office: 27 BKC, C 27, G Block, Bandra Kurla Complex, Bandra (E), Mumbai 400051. CIN: U99999MH1994PLC134051, Telephone No.: +22 43360000, Fax No.: +22 67132430. Website: www.kotak.com/www.kotaksecurities.com. Correspondence Address: Infinity IT Park, Bldg. No 21, Opp. Film City Road, A K Vaidya Marg, Malad (East), Mumbai 400097. Telephone No: 42856825. SEBI Registration No: INZ000200137 (Member ID: NSE-08081; BSE-673; MSE-1024; MCX-56285; NCDEX-1262), AMFI ARN 0164, PMS INP000000258 and Research Analyst INH000000586. NSDL/CDSL: IN-DP-NSDL-23-97. Our research should not be considered as an advertisement or advice, professional or otherwise. The investor is requested to take into consideration all the risk factors including their financial condition, suitability to risk return profile and the like and take professional advice before investing. Investments in securities market are subject to market risks, read all the related documents carefully before investing. Derivatives are a sophisticated investment device. The investor is requested to take into consideration all the risk factors before actually trading in derivative contracts. Compliance Officer Details: Mr. Manoj Agarwal. Call: 022 - 4285 8484, or Email: [email protected]. In case you require any clarification or have any concern, kindly write to us at below email ids: Level 1: For Trading related queries, contact our customer service at '[email protected]' and for demat account related queries contact us at [email protected] or call us on: Toll free numbers 18002099191 / 1860 266 9191 Level 2: If you do not receive a satisfactory response at Level 1 within 3 working days, you may write to us at [email protected] or call us on 022-42858445 and if you feel you are still unheard, write to our customer service HOD at [email protected] or call us on 022-42858208. Level 3: If you still have not received a satisfactory response at Level 2 within 3 working days, you may contact our Compliance Officer (Mr. Manoj Agarwal) at [email protected] or call on 91- (022) 4285 8484. Level 4: If you have not received a satisfactory response at Level 3 within 7 working days, you may also approach Managing Director / CEO (Mr. Jaideep Hansraj) at [email protected] or call on 91-(022) 4285 8301.

Kotak Securities – Private Client Group Please see the Disclosure/Disclaimer on the last page For Private Circulation 31