Hi

Happy Diwali

2020 will go down in the history as one of the most turbulent years which saw +50mn COVID-19 infections worldwide and unprecedented scale of economic damage and stimulus announced by various countries globally. Markets have seen nervous times before a recovery and unlock started to materialize. Indian recovery has been led by sharp upsurge in rural demand as benefits of higher crop prices as normal monsoons benefit 60% of population. We remain positive and believe that the current uptick could be the start of next multi- year cycle.

Our Picks of 2018 have given 29.5% returns in the past 2 years while last year’s picks have given 12% return in a volatile environment while our Model portfolio has given ~25% return with 8% NIFTY outperformance. We believe that current uncertainty is a passing phase and return to normalcy will result in several beaten down segments bouncing back strongly from FY22. We continue to favor companies with strong balance sheet and sustainable business moats in the long term.

Large Cap Picks

Hindustan Unilever, ICICI Bank, , Ultratech Cement and Dr. Reddy’s Labs

Mid Cap Picks

Ashok Leyland, , Inox Leisure and Crompton Consumer

2018 Performance

Company Name 1-Nov-18 10-Nov-20 % Chng. NIFTY 50 10,380 12,556 21.0% Nifty Midcap 100 17,339 18,008 3.9%

Britannia Industries Ltd. 2,793 3,508 25.6% Ltd. 359 409 14.0% Heidelberg Cement Ltd. 144 188 30.9% ICICI Bank Ltd. 353 484 36.9% Kansai Nerolac Paints Ltd. 378 525 38.8% India Ltd. 6,710 6,793 1.2% Ltd. 827 1,312 58.7% Petronet LNG Ltd. 225 239 6.1% Ltd. 853 1,305 53.1%

2019 Performance

Company Name 22-Oct-19 10-Nov-20 % Chng. NIFTY 50 11,588 12,556 8.4% Nifty Midcap 100 16,227 18,008 11.0%

Ashok Leyland Ltd. 76 91 19.7% Ltd. 3,247 3,508 8.1% Cholamandalam Investment & Finance Company Ltd. 294 313 6.2% ICICI Bank Ltd. 451 484 7.2% Larsen & Toubro Infotech Ltd. 1,609 3,024 87.9% Ltd. 1,672 1,358 -18.8% UPL Ltd. 597 433 -27.%

Model Portfolio Performance

Model Portfolio Return Nifty Returns Out Performance Since Nov'18 25.26% 17.36% 7.90% Since Last Report - Oct '20 6.47% 8.14% -1.67%

Large Cap Picks

Hindustan Unilever (HUVR IN) | CMP: Rs2,137 | TP: Rs2,502 | Mcap: Rs46,151bn HUL remains one of the best plays on HPC and foods segment given strong growth and margin outlook, high FCF conversion (5-year average of >90%), 95% dividend payout and 18.2% PAT CAGR over FY1-23. We expect strong growth in coming couple of years led by 1) gradual recovery in personal care post Covid 2) market share gains in Laundry and Personal wash due to aggressive pricing and 3) Distribution and integration benefits from Glaxo Acquisition. We remain structurally positive on HUL given its strategy around emerging categories, increasing distribution, WIMI, digital market and strength in Supply chain. We estimate HUL to post EBIDTA CAGR of 15.9% over FY20-23 led by 200bps margin expansion. BUY with a DCF based target price of Rs2502.

ICICI Bank (ICICIBC IN) | CMP: Rs484 | TP: Rs520 | Mcap: Rs31,324bn ICICI Bank has emerged as one of the preferred private banking franchise with a strong CASA (40%), tech led domination, market share gains in key retail products (65% of loans), calibrated strategy in corporate lending with little legacy NPAs and +200bps of COVID provisions. ICICI Bank is on track to achieve strong return ratios of 12-15% by FY23/FY24 led by lower provisioning and strengthening core income. We maintain a strong conviction BUY with TP of Rs520 and value the bank at 1.8x Sep FY22 core ABV arriving at SOTP of Rs402 for the bank and Rs118 for subsidiaries.

Infosys (INFO IN) | CMP: Rs1,091 | TP: Rs1,436 | Mcap: Rs46,455bn Infosys stays our top pick in the sector as it benefits from near term margin defence and long term growth acceleration from DX/cloud/AI mega trends. Fastest growth large cap in our coverage universe, higher tailwinds to margins from work from home/anywhere & overall strong portfolio. Its industry leading performance reiterates deep client relationships, high quality execution and recovering competitiveness should drive quality earnings growth that deserves to be re-rated.

We are assigning 27X multiple (11% discount to TCS multiple) to Infy as we believe higher multiple is justified due to following factors 1) Strong revenue acceleration 2) Best in class metrics along with broad based recovery 3) Excellent supply chain mechanism 4) Strong dividend payouts & 5) All time high deal wins. Infy is currently trading at 21.3X/19.5X FY22/23 earnings of INR 51/55.6 on FY22/23E respectively with revenues & EPS CAGR of 11% & 10% for FY21-23E respectively.

Ultratech Cement (UTCEM IN) | CMP: Rs4,720 | TP: Rs5,400 | Mcap: Rs13,622bn Ultratech Cement (UTCEM): Led by its dominant size (23% market share) with capacity of 114.8mtpa and highly efficient operations, we believe that UTCEM stands out as the best candidate to play recovery in the sector. Upcoming 9mnt capacity would further drive the earnings growth. High share of trade volumes (70% in Q2FY21) and successful integration of acquired assets (Century cement, JP associate and Binani cement) would provide sustainability to UTCEM’s margins. We have BUY rating with TP of Rs5,400, EV/EBITDA of 15x FY22e.

Dr. Reddy’s Laboratories (DRRD IN) | CMP: Rs4,699 | TP: Rs5,964 | Mcap: Rs7,809bn DRRD fortune turned around after Erez Israeli (CEO from CY-19) laid down the roadmap for transformation of the organization by ensuring clear strategic focus, effective cost management for sustainable growth. DRRD is one of the few companies whose all plants stands cleared by USFDA and have a strong product pipeline with high value and limited competition products like gCopaxone, gNuvaring, gVascepa, gKuvan and gRevlimid. Its domestic formulations is also expected to outperform the IPM by 400- 500bps once COVID concern fade while emerging markets would also spur growth with new launches. DRRD had been delivering EBITDAM 20%+ even before lockdown on a consistent basis. With better cost control than peers and strong product pipeline for US and EM, we estimate EPS CAGR of 15% over FY20- 23E and value DRRD at Rs5964 (24xFY23 PE and Rs262/share for gRevlimid (using NPV method).

Mid-Cap Picks

Ashok Leyland (AL IN) | CMP: Rs91 | TP: Rs100 | Mcap: Rs2,673bn We expect AL to be beneficiary of CV upcycle with key demand drivers are shaping up such as 1) increased fleet utilizations driving inquiries from large fleet operators, 2) improving financing situations with increased collection efficiencies and 3) normalization in economic activity across key end user industries. We believe company’s focus on new launches should result in market share gains while tight cost saving should partially offset negative operating leverage in 2HFY21. We recommend BUY with price target of Rs100 (FY23 12x EV/EBITDA and Rs16 to NBFC).

Emami (HMN IN) | CMP: Rs379 | TP: Rs450 | Mcap: Rs1,716bn We believe Emami is in a sweet spot given 1) highest rural salience at 55% of sales 2) early onset of winter and low base for winter portfolio and Pain Balms in 2H 3) benign input costs and Ad rates 4) capability building in sales/ E-com. We expect strong rural demand and favourable seasonal climate after several years to accelerate growth. Although promoter pledge at 40% remains a concern, indications of 40-50% dividend payout and net cash of Rs2.5bn in balance sheet will provide support. We estimate 9.3% CAGR in sales and 17.7% in PAT over FY20-23. BUY with target price of Rs450 (26xSept22 EPS).

Inox Leisure (INOL IN) | CMP: Rs273 | TP: Rs322 | Mcap: Rs280bn We remain positive on Inox given strong content slate, improved visibility on multiplex re-opening of various states, and encouraging signs on F&B/ATP trends post-COVID. Inox has managed costs well and has sufficient liquidity which bodes well in-case the footfalls recovery takes longer than expected. We expect sales/Ind-AS PAT CAGR of 8.5%/20.3% over FY20-23E. The stock trades at EV/EBITDA multiple of 9.0x/6.9x our FY22/FY23 estimates. We have a BUY on the stock with TP of Rs322.

CG Cons. Electricals (CROMPTON IN) | CMP: Rs297 | TP: Rs346 | Mcap: Rs1,865bn Crompton remains our preferred pick in the consumer electrical space given 1) Steady growth potential with low discretionary products (fans, lighting, mixer grinder, pumps) 2) market share gains led by Innovation and brand building and 3) calibrated plan to scale up new segments (Geysers, Air Coolers & mixers-grinders). We estimate 15.7% PAT CAGR over FY20-23 and expect steady re-rating given 29% ROE, 50% dividend payout and Rs11bn net cash by FY23. We assign a target price of Rs346 @ 32xFY23 EPS.