INDIA DAILY

August 2, 2018 India 1-Aug 1-day 1-mo 3-mo Sensex 37,522 (0.2) 6.4 6.7 Nifty 11,346 (0.1) 6.5 5.9 Contents Global/Regional indices Dow Jones 25,334 (0.3) 4.2 5.9 Daily Alerts Nasdaq Composite 7,707 0.5 1.8 8.5 Results FTSE 7,653 (1.2) 1.4 1.5 Nikkei 22,724 (0.1) 4.2 1.1 Dabur India: Decisively positive management outlook but priced in Hang Seng 28,341 (0.8) (2.1) (7.8)

Exide Industries: Revenue growth surprises positively KOSPI 2,306 (0.1) 1.5 (8.0) IIFL Holdings: Wealth and NBFC strong; broking yields down Value traded – India Cash (NSE+BSE) 370 337 331 Astral Poly Technik: Results miss expectations; valuations remain expensive Derivatives (NSE) 9,153 4,366 4,400 Orient Cement: A good quarter Deri. open interest 3,653 3,022 3,569

Results, Change in Reco Forex/money market Castrol India: Not worth the wait Change, basis points Company alerts 1-Aug 1-day 1-mo 3-mo Rs/US$ 68.3 4 (33) 154 NTPC: Emphasizing efficient growth 10yr govt bond, % 8.1 - (7) 13 Tata Steel: Management meeting notes Net investment (US$ mn) 31-Jul MTD CYTD

Sector alerts FIIs 132 - (414) Automobiles: Auto demand remains healthy MFs (29) - 11,353 Top movers

Economy alerts Change, % Economy: GST: Revenues far from satisfactory Best performers 1-Aug 1-day 1-mo 3-mo RIL IN Equity 1,192 0.5 24.1 22.6

Economy: RBI: Signaling a brief pause SBIN IN Equity 295 0.5 14.0 22.4

GCPL IN Equity 1,320 0.2 6.8 17.9

HUVR IN Equity 1,734 0.2 5.5 17.8

DABUR IN Equity 432 2.5 14.1 17.8

Worst performers

HDIL IN Equity 24 (1.2) 18.7 (28.4)

UT IN Equity 4 (1.2) 1.2 (27.0)

AL IN Equity 119 5.4 (6.6) (26.4)

JPA IN Equity 15 0.7 (4.5) (24.4)

TTMT/A IN Equity 144 (0.2) (9.5) (24.1)

For Private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES’ RATING SYSTEM AND OTHER DISCLOSURES. REFER TO THE END OF THIS MATERIAL. REDUCE Dabur India (DABUR) Consumer Products AUGUST 02, 2018 RESULT Coverage view: Cautious

Decisively positive management outlook but priced in. Better-than-expected Price (`): 432 volume growth print for 1QFY19 and the management’s decisively positive volume Target price (`): 390 outlook drive a 1-4% increase in our already-bullish FY2019-21E EPS forecasts for BSE-30: 37,522 Dabur. Risk to consensus EPS estimates is on the downside in our view. Dabur now trades at a modest premium to HUVR on an EV/EBITDA basis, unsustainable and unjustifiable. Lofty valuations leave little room for disappointment in our view. Reiterate REDUCE with a revised fair value target of `390/share (from `350).

Company data and valuation summary Dabur India Stock data Forecasts/Valuations 2018 2019E 2020E 52-week range (Rs) (high,low) 439-293 EPS (Rs) 7.8 9.1 10.3 Market Cap. (Rs bn) 763.5 EPS growth (%) 7.2 17.3 12.9 Shareholding pattern (%) P/E (X) 55.6 47.4 42.0 Promoters 68.1 Sales (Rs bn) 77.5 88.5 100.2 FIIs 17.2 Net profits (Rs bn) 13.7 16.1 18.1 MFs 4.3 EBITDA (Rs bn) 16.2 19.2 22.1 Price performance (%) 1M 3M 12M EV/EBITDA (X) 47.2 39.7 34.3 Absolute 11.9 18.6 45.2 ROE (%) 25.9 28.1 29.6 Rel. to BSE-30 5.6 11.1 26.0 Div. Yield (%) 1.7 0.9 1.0

1QFY19 earnings print – healthy headline comps but 2-year CAGRs just about fine

Dabur reported consolidated revenue, EBITDA and PAT growth of 16%, 25% and 20%, respectively off a low base. Revenues were in line with our estimate while EBITDA and PAT missed our forecast by 11% each. Two-year CAGR stood at 3.2% on revenues, 5.1% on EBITDA and 6% on recurring PAT. Two-year CAGR comps are important to filter out the noise in yoy comps created by the low pre-GST 1QFY18 base.

Standalone performance was healthier with net revenues up 19% yoy (just under 24% like-on- like), EBITDA up 35% and recurring PAT up 29%. Standalone revenue growth was volume-led with a strong 21% domestic FMCG volume growth print, higher than our expected 15%. Two- year CAGR on revenues was 6.5% (8-8.5% like-on-like), 7.3% on EBITDA and 7.8% on recurring PAT. Decent numbers but not blockbuster by any means.

Aggregate subsidiary performance improved from recent soft trends but remained much weaker than standalone performance. Aggregate revenues, EBITDA and PAT for subsidiaries grew 9% yoy (-3.6% 2-year CAGR), 9% yoy (+1.2% 2-year CAGR) and 4% yoy (+2.2% 2-year CAGR), respectively.

Domestic FMCG segments – good growth across the board

Strong yoy growth in domestic FMCG business was broad-based with all categories growing in Rohit Chordia the 17-28% yoy band. Foods (+27%; led by Real), skin care (+27%; led by Gulabari and Fem), health supplements (+28%; led by honey and Chyawanprash), digestives (+22%; led by Jaykumar Doshi Hajmola tablets), and hair care (+20.5%; led by CNO and shampoos) led growth. Oral care growth at 17.3% yoy was healthy as well even as the low-price-brand Babool dragged performance a tad. On a 2-year CAGR basis, digestives, skin, and home care were the Aniket Sethi categories that saw double-digit growth.

The narrative is in the numbers and multiples are rich. REDUCE

We questioned ourselves hard (to see if we are missing the narrative), we struggled (to raise estimates materially) and we gave up (on the temptation to be creative). Remain cautious.

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

Exhibit 1: Interim consolidated results of Dabur (as per Ind-AS), March fiscal year-ends (Rs mn)

(% chg.) 1QFY19 1QFY19E 1QFY18 4QFY18 KIE Est yoy qoq 1QFY17 2-Yr CAGR (%) Revenues 20,752 20,909 17,845 20,236 (1) 16 3 19,477 3.2 Material cost (incl excise) (10,486) (10,437) (9,145) (10,024) 0 15 5 (9,613) Gross profit 10,472 10,472 8,700 10,212 0 20 3 9,864 3.0 Gross margin (%) 50.5 50.1 48.8 50.5 37 bps 171 bps -1 bps 50.6 Employee cost (2,241) (2,102) (2,035) (1,807) 7 10 24 (2,115) 2.9 Advertising and promotion (1,990) (1,714) (1,500) (1,256) 16 33 58 (1,965) 0.6 Other expenditure (2,229) (2,392) (2,131) (2,390) (7) 5 (7) (2,340) (2.4) Total expenditure (16,946) (16,645) (14,812) (15,477) 2 14 9 (16,034) 2.8 EBITDA 3,806 4,264 3,034 4,758 (11) 25 (20) 3,443 5.1 OPM (%) 18.3 20.4 17.0 23.5 -206 bps 134 bps -518 bps 17.7 Other operating income 55 55 55 94 0 (1) (41) 45 Other income 737 825 813 732 (11) (9) 1 610 Interest (149) (125) (133) (132) 19 12 12 (118) Depreciation (427) (450) (391) (426) (5) 9 0 (343) Pretax profits 4,022 4,569 3,378 5,026 (12) 19 (20) 3,637 5.2 Tax (724) (872) (638) (1,052) (17) 13 (31) (701) Minority Interest (6) (10) (3) (12) (44) 107 (52) (8) Recurring PAT (after MI) 3,292 3,687 2,737 3,962 (11) 20 (17) 2,928 6.0 Extraordinary items — — (96) — — Net profit (reported) 3,292 3,687 2,641 3,962 (11) 25 (17) 2,928 6.0 EPS (Rs) 1.9 2.1 1.6 2.2 (11) 20 (17) 1.7 5.7 Income tax rate (%) 18.0 19.1 18.9 20.9 -109 bps -90 bps -294 bps 19.3 Costs as a % of sales Material cost 50.5 49.9 51.2 49.5 61 bps -72 bps 99 bps 49.4 Employee cost 10.8 10.1 11.4 8.9 74 bps -61 bps 186 bps 10.9 Advertising and promotion 9.6 8.2 8.4 6.2 139 bps 118 bps 338 bps 10.1 Other expenditure 10.7 11.4 11.9 11.8 -70 bps -121 bps -107 bps 12.0

Segment results of Dabur Revenues Consumer care 16,561 14,251 16,774 16 (1) Foods 3,635 3,108 2,934 17 24 Retail 304 278 279 9 9 Others 230 208 248 10 (8) Total segment revenue 20,729 17,845 20,236 16 2 Segment PBIT Consumer care 3,789 3,202 4,287 18 (12) Foods 519 325 554 60 (6) Retail 13 5 4 166 198 Others 20 (15) 17 (234) 14 Total segment EBIT 4,341 3,517 4,862 23 (11) Segment PBIT margins, % Consumer care 22.9 22.5 25.6 41 bps -268 bps Foods 14.3 10.5 18.9 382 bps -459 bps Retail 4.1 1.7 1.5 242 bps 261 bps Others 8.5 (7.0) 6.9 1552 bps 161 bps Capital employed Consumer care 22,529 21,441 21,566 5 4 Foods 3,231 4,577 3,559 (29) (9) Retail 296 271 289 10 3 Others 287 311 278 (8) 3 Unallocated corporate 34,416 22,122 27,857 56 24 Total capital employed 60,759 48,722 53,548 25 13

Source: Company, Kotak Institutional Equities

KOTAK INSTITUTIONAL EQUITIES RESEARCH 3 Consumer Products Dabur India

Exhibit 2: Interim standalone results of Dabur (as per Ind-AS), March fiscal year-ends (Rs mn)

(% chg.) 1QFY19 1QFY19E 1QFY18 4QFY18 KIE Est yoy qoq 1QFY17 2-Yr CAGR (%) Revenues 14,701 14,160 12,313 15,034 4 19 (2) 12,968 6.5 Material cost (incl excise) (7,825) (7,434) (6,735) (7,742) 5 16 1 (6,907) Gross profit 6,876 6,726 5,578 7,293 2 23 (6) 6,061 6.5 Gross margin (%) 46.8 47.5 45.3 48.5 -73 bps 147 bps -174 bps 46.7 Employee cost (1,380) (1,150) (1,192) (1,018) 20 16 36 (1,131) Advertising and promotion (1,556) (1,353) (1,187) (817) 15 31 90 (1,236) Other expenditure (1,405) (1,500) (1,327) (1,414) (6) 6 (1) (1,491) Total expenditure (12,166) (11,437) (10,441) (10,991) 6 17 11 (10,765) 6.3 EBITDA 2,535 2,723 1,872 4,043 (7) 35 (37) 2,203 7.3 OPM (%) 17.2 19.2 15.2 26.9 -199 bps 204 bps -966 bps 17.0 Other operating income 30 30 25 62 0 22 (52) 28 Other income 686 750 756 708 (9) (9) (3) 547 Interest (59) (40) (58) (59) 46 1 (1) (24) Depreciation (260) (270) (245) (263) (4) 6 (1) (174) Pretax profits 2,932 3,193 2,349 4,491 (8) 25 (35) 2,579 6.6 Tax (626) (734) (557) (956) (15) 12 (34) (595) PAT 2,306 2,459 1,792 3,536 (6) 29 (35) 1,984 7.8 Extraordinary items — — (96) — — Net profit (reported) 2,306 2,459 1,696 3,536 (6) 36 (35) 1,984 7.8 EPS (Rs) 1.3 1.4 1.0 2.0 (6) 29 (35) 1.1 7.7 Income tax rate (%) 21.4 23.0 23.7 21.3 -164 bps -236 bps 8 bps 23.1 Costs as a % of sales Material cost 53.2 52.5 54.7 51.5 72 bps -148 bps 173 bps 53.3 Employee cost 9.4 8.1 9.7 6.8 126 bps -30 bps 261 bps 8.7 Advertising and promotion 10.6 9.6 9.6 5.4 102 bps 94 bps 515 bps 9.5 Other expenditure 9.6 10.6 10.8 9.4 -104 bps -122 bps 15 bps 11.5 Segment results of Dabur Revenues Consumer care 11,384 9,533 12,249 19 (7) Foods 3,065 2,573 2,536 19 21 Others 230 208 248 10 (8) Total segment revenue 14,678 12,313 15,034 19 (2) Segment EBIT Consumer care 2,825 2,304 3,831 23 (26) Foods 294 108 381 172 (23) Others 20 (15) 17 (234) 14 Total segment EBIT 3,138 2,398 4,229 31 (26) Segment EBIT margins, % Consumer care 24.8 24.2 31.3 64 bps -646 bps Foods 9.6 4.2 15.0 537 bps -546 bps Others 8.5 (7.0) 6.9 1552 bps 161 bps Capital employed Consumer care 8,850 10,543 9,184 (16) (4) Foods (116) 2,283 415 (105) (128) Others 172 204 163 (16) 5 Unallocated corporate 35,610 23,549 29,208 51 22 Total capital employed 44,516 36,579 38,969 22 14

Source: Company, Kotak Institutional Equities

4 KOTAK INSTITUTIONAL EQUITIES RESEARCH Dabur India Consumer Products

Exhibit 3: Key changes to earnings model (consolidated), as per Ind-AS - Dabur India, March fiscal-year ends, 2019-21E

Revised Earlier Change (%) 2019E 2020E 2021E 2019E 2020E 2021E 2019E 2020E 2021E Net revenues (Rs mn) 87,211 98,766 111,585 88,122 98,578 109,768 (1.0) 0.2 1.7 EBITDA (Rs mn) 17,952 20,606 23,555 18,453 20,851 23,455 (2.7) (1.2) 0.4 EBIT (Rs mn) 16,181 18,691 21,470 16,739 19,006 21,474 (3.3) (1.7) (0.0) EBITDA margin (%) 20.6 20.9 21.1 20.9 21.2 21.4 Net profit (pre-exceptionals, Rs mn) 16,056 18,132 20,596 15,895 17,751 19,851 1.0 2.1 3.8 EPS (Rs/share) 9.1 10.3 11.7 9.0 10.1 11.3 1.0 2.1 3.8 Effective tax rate (%) 19.8 20.8 21.7 20.4 21.0 21.8

Source: Company, Kotak Institutional Equities estimates

Key category-wise highlights

 Hair care (23% of domestic sales). Within hair care business – (1) hair oils category posted 18.8% yoy growth on the back of strong growth in Anmol Coconut Oil, Amla Hair Oil, Brahmi Amla Hair Oil and Dabur Almond Hair Oil; management highlighted that they have gained market share in hair oil (+70 bps). They now plan to accelerate spends on Dabur Amla and gain back the lost market share and (2) shampoos posted strong 31.3% yoy growth driven by focused marketing initiatives. Management highlighted that the growth was driven by expansion of rural distribution. They are currently looking to premiumize their portfolio for the urban consumer. They believe that the growth potential is enormous given that a lot of other herbal brands are currently suffering in this segment.

 Oral care (17% of domestic sales). Oral care posted strong growth of 17% yoy with toothpaste registering a 16.8% yoy growth. Management highlighted that the Red franchise grew at 30%+ and the company continues to gain market share. Its recent offering Red Gel is also doing reasonably well. However, its discount brand – Babool – is seeing high competitive pressures, particularly in the `10 price point. They have chalked out some plans for Babool as well and expect a revival in the next couple of quarters. Performance of Toothpowder was also robust – growing 21.6% yoy.

 OTC & Ethicals (7% of domestic sales). OTC & Ethicals category grew by 13.3% yoy led by good growth in Honitus, Madhuvaani, Lal Tail and Mahabhringraj Hair Oil.

 Health supplements (12% of domestic sales) posted 27.5% yoy growth aided by strong growth in both Chyawanprash and Honey. Management highlighted that its market share is back to its highest level in both value and volume. They continue to benefit from the strong brand franchise in the category and expect strong growth to continue.

 Home care (7% of domestic sales). Home care category posted strong growth of 17.4% yoy. Management attributed this to strong performance of Odonil and Sanifresh.

 Skin care (5% of domestic sales) posted 27.1% yoy growth aided by strong growth in Gulabari, Fem bleaches and facial kits.

KOTAK INSTITUTIONAL EQUITIES RESEARCH 5 Consumer Products Dabur India

 Foods (22% of domestic sales). Beverages (bulk of the food business) grew 26.8% on the back of double-digit growth in Real and Active. Culinary business – which forms ~10% of overall foods revenues – grew 10.2% yoy led by strong growth in Hommade Coconut Milk and Nature’s Best. In juices, company has launched three new variants – Masala Guava, Masala Pomegranate and Alphonso Mango. Despite facing high competitive pressures in the recent times, company has taken several efforts including higher media spends as well as tactical promotions. NPDs contributed 3.8% growth in the segment for Dabur. One of its new launches Activ Coconut water has also registered good offtake. Company believes that they are well placed to capture trend of increasing awareness of high sugar content in several fruit-based drinks in the market. Dabur has also been able to enhance its margin profile in the segment on the back of lower import prices of fruit pulp and increasing production from Pantnagar plant leading to freight savings.

 International business (30% of consolidated sales). International business posted a strong 10.5% c/c growth. Among the international markets – (1) GCC markets performed well delivering 17% c/c growth led by Saudi Arabia (up 54% yoy), (2) Egypt posted strong 31% yoy growth, (3) US business of Namaste reported 1% yoy growth in c/c revenues reversing the decline trend seen in recent years. Management sounded bullish on Namaste business in the US on profitability and in sub-Saharan Africa on growth. They have put a new team in place for the same and have also made subtle changes to the business model. Management is positive about the strong potential of the naturals portfolio and believe that the top-line growth should accelerate to 5-10% along with strong margins expansion – already seen in 1QFY19.

Other takeaways from earnings concall

 Volume growth outlook. Management expects double-digit volume growth for the full year (FY2019E) given the pickup in underlying consumption trends and weakening of several headwinds.

 Margins. Management expects scope for expansion in gross margins to be limited given inflationary pressures in the broader RM basket. Focus remains on driving accelerate volume growth and let operating leverage take care of margin expansion. The company also indicated that it intends to keep media spending high for the rest of the fiscal.

Exhibit 4: Volumes rose 21% yoy - 2-year CAGR at ~7.5% Dabur’s domestic volume growth trends (%)

25 21.0 20

15 13.0 8.7 8.1 8.1 10 7.4 7.0 7.2 5.0 4.1 4.5 7.7 5 2.4

- (2.5) (5.2) (4.4) (5)

(10)

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

Source: Company, Kotak Institutional Equities

6 KOTAK INSTITUTIONAL EQUITIES RESEARCH Dabur India Consumer Products

Exhibit 5: Category growth trends for Dabur Growth rate, yoy (%)

1QFY17 2QFY17 3QFY17 4QFY17 1QFY18 2QFY18 3QFY18 4QFY18 1QFY19 2Yr-CAGR - 1QFY19 Hair Care (2.0) (4.5) (20.0) (4.0) (11.0) 0.5 22.6 12.2 20.5 3.6 Health Supplements 0.0 (10.0) (14.0) 5.0 (7.0) 3.0 19.5 14.0 27.5 8.9 Oral Care 11.6 0.0 (5.0) 9.0 1.5 22.8 23.0 11.0 17.3 9.1 Digestives (1.0) 5.0 (10.0) (5.0) 4.0 11.7 19.3 7.2 21.6 12.5 Skin Care (1.0) 7.0 (11.0) 0.0 4.0 15.8 14.5 8.5 27.1 15.0 Home Care 2.0 20.0 (5.0) (6.5) 6.2 10.1 36.0 0.0 17.4 11.7 OTC & Ethicals (1.0) 3.0 (11.0) (4.0) (6.6) 2.5 8.7 9.1 18.4 5.1 Foods 4.3 15.2 52.0 10.0 (8.3) 11.7 0.0 2.0 26.8 7.8

Notes: (1) Growth numbers for 3QFY18 are like-for-like, adjusted for GST.

Source: Company, Kotak Institutional Equities

Exhibit 6: Key revenue assumptions for Dabur, March fiscal year-ends, 2017-21E (Rs mn)

2017 2018 2019E 2020E 2021E Gross revenue breakup (Rs mn) Domestic Business 51,997 53,884 61,949 70,857 80,803 Consumer Care 40,382 43,183 49,086 55,732 63,088 Hair Care 10,858 11,050 12,100 13,431 14,834 Oral Care 7,953 9,147 10,793 12,736 14,971 Health Supplements 8,448 9,061 10,239 11,468 12,810 Digestives 2,782 2,962 3,347 3,715 4,113 Skin Care 2,645 2,773 3,189 3,699 4,276 Home Care 3,277 3,544 4,075 4,646 5,280 OTC & Ethicals 4,418 4,647 5,344 6,038 6,804 Foods 10,084 9,553 11,559 13,755 16,277 Misc 1,531 1,148 1,304 1,369 1,438 IBD 24,804 22,919 25,262 27,910 30,782 Total Gross revenue 76,801 76,803 87,211 98,766 111,585 yoy growth (%) Domestic Business (0.1) 3.6 15.0 14.4 14.0 Consumer Care (3.1) 6.9 13.7 13.5 13.2 Hair Care (6.7) 1.8 9.5 11.0 10.5 Oral Care 6.5 15.0 18.0 18.0 17.6 Health Supplements (3.6) 7.3 13.0 12.0 11.7 Digestives (12.3) 6.5 13.0 11.0 10.7 Skin Care 4.3 4.8 15.0 16.0 15.6 Home Care 3.6 8.1 15.0 14.0 13.7 OTC & Ethicals (10.5) 5.2 15.0 13.0 12.7 Foods 12.4 (5.3) 21.0 19.0 18.3 Misc 7.9 (25.0) 13.6 5.0 5.0 IBD (6.2) (7.6) 10.2 10.5 10.3 Total Gross revenue (2.2) 0.0 13.6 13.2 13.0 % of total gross revenue Domestic Business 68 70 71 72 72 Consumer Care 53 56 56 56 57 Hair Care 14 14 14 14 13 Oral Care 10 12 12 13 13 Health Supplements 11 12 12 12 11 Digestives 4 4 4 4 4 Skin Care 3 4 4 4 4 Home Care 4 5 5 5 5 OTC & Ethicals 6 6 6 6 6 Foods 13 12 13 14 15 Misc 2 1 1 1 1 IBD 32 30 29 28 28

Source: Company, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 7 Consumer Products Dabur India

Exhibit 7: Dabur: Consolidated profit model, balance sheet, cash flow model, March fiscal year-ends, 2016-2021E (Rs mn)

2016 2017 2018 2019E 2020E 2021E Profit model (Rs mn) Net revenues 78,507 76,801 76,803 87,211 98,766 111,585 EBITDA 15,002 14,876 15,494 17,952 20,606 23,555 Other income 2,353 3,197 3,732 4,480 4,877 5,477 Interest expense (485) (540) (531) (606) (624) (594) Depreciation (1,332) (1,429) (1,622) (1,770) (1,915) (2,085) Pretax profits 15,538 16,104 17,074 20,055 22,944 26,353 Tax (2,999) (3,303) (3,354) (3,965) (4,775) (5,716) Minority Interest (28) (31) (31) (34) (38) (41) Net Income 12,512 12,769 13,689 16,056 18,132 20,596 Extraordinary items — — (145) — — — Reported Net Income 12,512 12,769 13,544 16,056 18,132 20,596 Earnings per share (Rs) 7.1 7.2 7.8 9.1 10.3 11.7 Balance sheet (Rs mn) Total shareholder's equity 41,706 48,474 57,065 57,034 65,625 74,560 Total borrowings 8,102 9,786 9,375 10,788 10,288 9,788 Deferred tax liability 882 1,080 1,091 1,091 1,091 1,091 Minority Interest 217 248 265 300 337 379 Total liabilities and equity 50,907 59,588 67,796 69,213 77,341 85,818 Net fixed assets incl CWIP 17,728 20,005 20,696 21,032 21,869 22,754 Investments 26,301 32,402 38,052 38,052 38,052 38,052 Cash 2,198 3,048 3,061 3,564 10,251 17,212 Net current assets 4,680 4,134 5,987 6,565 7,170 7,800 Total assets 50,907 59,588 67,796 69,213 77,341 85,818 Free cash flow (Rs mn) Operating cash flow (excl working capital) 12,486 11,397 13,465 15,985 18,055 20,312 Working capital (752) 872 (2,575) (578) (605) (630) Capital expenditure (1,892) (4,858) (2,003) (2,106) (2,752) (2,970) Free cash flow 9,843 7,411 8,887 13,300 14,699 16,712 Key ratios (%) Sales growth 0.6 (2.2) 0.0 13.6 13.2 13.0 EBITDA growth 15.8 (0.8) 4.2 15.9 14.8 14.3 EPS growth 17.2 1.9 7.2 17.3 12.9 13.6 EBITDA margin 19.1 19.4 20.2 20.6 20.9 21.1 Gross margin 51.0 50.0 49.9 50.0 50.1 50.2 A&SP % of sales 9.8 8.4 7.9 8.5 8.4 8.4

Source: Company, Kotak Institutional Equities estimates

8 KOTAK INSTITUTIONAL EQUITIES RESEARCH SELL Exide Industries (EXID) Automobiles AUGUST 02, 2018 RESULT Coverage view: Neutral

Revenue growth surprises positively. Exide reported strong 1QFY19 results with 21% Price (`): 270 yoy EBITDA growth, which was 4% above our estimates. Revenues increased by 32% yoy Target price (`): 235 led by (1) strong double-digit volume growth in the auto segment, (2) benefit of price BSE-30: 37,522 hikes, (3) market share gains in the telecom segment and (4) increased presence in newer segments such as e-rickshaw and solar. Exide’s execution has definitely improved over the past few quarters but valuations are expensive given concerns over long-term sustainability of growth in key industrial segments (35% of revenues). SELL stays.

Company data and valuation summary Exide Industries Stock data Forecasts/Valuations 2018 2019E 2020E 52-week range (Rs) (high,low) 283-192 EPS (Rs) 8.2 10.3 11.4 Market Cap. (Rs bn) 229.8 EPS growth (%) 0.6 25.3 11.0 Shareholding pattern (%) P/E (X) 32.9 26.3 23.7 Promoters 46.0 Sales (Rs bn) 91.9 105.2 115.8 FIIs 13.7 Net profits (Rs bn) 7.0 8.7 9.7 MFs 14.3 EBITDA (Rs bn) 12.4 15.3 17.0 Price performance (%) 1M 3M 12M EV/EBITDA (X) 18.5 15.0 13.4 Absolute 4.7 8.9 20.8 ROE (%) 13.5 15.4 15.5 Rel. to BSE-30 (1.2) 2.0 4.9 Div. Yield (%) 0.9 1.1 1.3

1QFY19 EBITDA 4% above estimates

Exide reported 1QFY19 EBITDA of `3.9 bn (+21% yoy), which was 4% above our estimates. However, net profit grew by only 11% yoy to `2.1 bn (5% below our estimates) due to lower other income, higher depreciation expenses and tax rate. We note that capex intensity has gone up significantly over the past two years due to need to modernize existing plants (will likely remain higher in FY2019-20E as well), which has led to negative FCF over FY2016-18.

 Revenues increased by 32% yoy to `27.7 bn (KIE: 20%); growth was strong even on two- year basis (+17% CAGR). Revenue growth was possibly driven by (1) 24-26% yoy growth in the auto segment due to strong growth in industry production, double-digit volume growth in replacement segment on low base and benefit of price increases and (2) 40% revenue growth in the industrial segment aided by market share gains in the telecom segment (leading to additional 13-15% of growth) at the expense of profitability, increased presence in e-rickshaw segment and healthy double digit in core industrial segments (inverter and UPS).

 EBITDA margin came in at 14.1% (down 130 bps yoy), which was 80 bps below our estimates due to lower-than expected gross margin. Gross margin declined by 120 bps qoq despite 3.7% sequential reduction in LME lead prices, which was surprising. We expect some improvement going ahead given further decline in lead prices over the past two to three months (refer to Exhibit 3 below). Employee cost and other expenses grew by 13-21% yoy leading to operating leverage benefit. Nishit Jalan Fine-tune earnings estimates; maintain SELL, revise TP to `235

We have increased our FY2019-21E earnings estimates by 1-2% on slightly higher revenue and Hitesh Goel EBITDA margin assumptions as we factor in recent weakness in lead prices. We maintain our SELL rating on the stock; we believe that current valuation multiples don’t factor in structural issues in major industrial segments such as home and commercial UPS (accounts for more than 35% of company’s overall revenues) due to improving power situation in India. SoTP-based TP revised to `235 (from `225), value the core business at 17X FY2020E EPS (from 16X earlier).

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

Exhibit 1: 1QFY19 EBITDA was 4% above our estimates on stronger revenue growth; PAT was 5% below our estimates Interim results, March fiscal year-ends (₹ mn)

change (%) 1QFY19 1QFY19E 1QFY18 4QFY18 1QFY19E 1QFY18 4QFY18 FY2019E FY2018 Yoy (%) Net sales 27,725 25,156 21,029 24,594 10.2 31.8 12.7 105,155 91,863 14.5 Raw materials (18,419) (16,075) (13,232) (16,032) 14.6 39.2 14.9 (68,864) (60,104) 14.6 Staff costs (1,620) (1,599) (1,430) (1,538) 1.3 13.2 5.3 (6,569) (5,972) 10.0 Other expenses (3,777) (3,729) (3,124) (3,644) 1.3 20.9 3.6 (14,401) (13,380) 7.6 Total expenses (23,815) (21,403) (17,786) (21,214) 11.3 33.9 12.3 (89,834) (79,456) 13.1 EBITDA 3,909 3,753 3,243 3,380 4.1 20.6 15.6 15,321 12,408 23.5 Depreciation (719) (680) (563) (674) 5.7 27.7 6.6 (2,916) (2,459) EBIT 3,190 3,073 2,680 2,706 3.8 19.1 17.9 12,405 9,948 24.7 Other income 42 170 132 203 (75.3) (68.2) (79.3) 500 584 Interest expense (11) (5) (16) (6) (50) (52) Profit before tax 3,221 3,238 2,796 2,903 (0.5) 15.2 11.0 12,855 10,480 22.7 Tax expense (1,122) (1,020) (906) (1,007) 10.0 23.8 11.4 (4,114) (3,378) Exceptional expenses — — — - (418) Profit after tax 2,099 2,218 1,890 1,896 (5.4) 11.1 10.7 8,742 6,683 30.8 Adjusted net profit 2,099 2,218 1,890 1,896 (5.4) 11.1 10.7 8,742 6,976 25.3 No. of shares 850 850 850 850 850 850 EPS (Rs/share) 2.5 2.6 2.2 2.2 (5.4) 11.1 10.7 10.3 8.2 25.3 Tax rate (%) 34.8 31.5 32.4 34.7 32.0 32.2 As % of net revenues Raw material 66.4 63.9 62.9 65.2 65.5 65.4 Staff costs 5.8 6.4 6.8 6.3 6.2 6.5 Other expenses 13.6 14.8 14.9 14.8 13.7 14.6 EBITDA margin 14.1 14.9 15.4 13.7 14.6 13.5 EBIT margin 11.5 12.2 12.7 11.0 11.8 10.8

Source: Company, Kotak Institutional Equities estimates

Exhibit 2: Exide has outperformed Amara Raja on revenue growth over the past three quarters Comparison of revenue growth, gross margin and EBITDA margin of Amara Raja and Exide, March fiscal year-ends, 1QFY16-1QFY19 (%)

1QFY16 2QFY16 3QFY16 4QFY16 1QFY17 2QFY17 3QFY17 4QFY17 1QFY18 2QFY18 3QFY18 4QFY18 1QFY19 Amara Raja Revenue growth (%) 9.9 8.0 14.4 7.3 16.8 15.8 9.5 17.4 13.4 7.1 17.1 17.6 NA Gross margin (%) 35.1 35.6 38.2 37.7 33.8 36.1 35.0 32.0 30.0 34.0 33.1 31.3 NA EBITDA margin (%) 17.7 17.4 19.0 16.8 17.2 17.2 15.4 13.7 12.9 16.7 15.6 13.3 NA Exide Revenue growth (%) (5.3) (1.0) (1.4) 7.2 11.1 10.3 11.6 11.6 4.6 22.4 32.7 24.5 31.8 Gross margin (%) 35.8 37.8 40.3 39.2 37.6 38.8 39.5 37.4 37.1 32.6 34.5 34.8 33.6 EBITDA margin (%) 14.7 14.6 15.6 15.0 15.7 15.0 13.3 13.3 15.4 12.6 12.4 13.7 14.1

Source: Companies, Kotak Institutional Equities

10 KOTAK INSTITUTIONAL EQUITIES RESEARCH Exide Industries Automobiles

Exhibit 3: LME lead prices have come off over the past 3-4 months Quarterly LME lead prices (assuming 1.5 quarter lag), March fiscal-year ends, 1QFY14-1QFY19

LME lead LME lead Qoq increase (US$/ton) USD:INR rate (Rs/ton) (%) 1QFY14 2,113 54.4 114,899 2QFY14 2,084 58.9 122,738 6.8 3QFY14 2,119 63.0 133,505 8.8 4QFY14 2,120 62.1 131,660 (1.4) 1QFY15 2,083 60.7 126,487 (3.9) 2QFY15 2,158 59.9 129,282 2.2 3QFY15 2,092 61.1 127,837 (1.1) 4QFY15 1,902 62.3 118,562 (7.3) 1QFY16 1,901 62.7 119,247 0.6 2QFY16 1,806 63.8 115,228 (3.4) 3QFY16 1,690 65.7 111,084 (3.6) 4QFY16 1,687 67.0 113,049 1.8 1QFY17 1,758 67.0 117,759 4.2 2QFY17 1,762 67.1 118,276 0.4 3QFY17 1,984 66.8 132,542 12.1 4QFY17 2,244 67.9 152,368 15.0 1QFY18 2,243 65.3 146,468 (3.9) 2QFY18 2,200 64.4 141,680 (3.3) 3QFY18 2,428 64.7 157,092 10.9 4QFY18 2,539 64.1 162,750 3.6 1QFY19 2,388 65.6 156,653 (3.7) July 2018 average 2,210 68.7 151,827 (3.1)

Source: Bloomberg, Kotak Institutional Equities

Exhibit 4: We expect 11% CAGR in automotive volumes over FY2018-21E Automotive sales volume breakdown of Exide Industries by segments, March fiscal year-ends, 2011-21E (mn units, %)

2011 2012 2013 2014 2015 2016 2017 2018 2019E 2020E 2021E Four-wheeler volumes (mn units) OEM 3.8 4.0 3.9 3.8 3.8 3.8 3.9 4.2 4.7 5.2 5.9 Yoy change (%) 22.6 5.3 (2.0) (4.0) 0.7 (0.3) 2.4 8.0 12.0 10.0 10.0 Replacement 3.8 3.7 4.3 4.5 5.2 5.7 6.2 6.7 7.4 8.1 8.8 Yoy change (%) 7.7 (1.3) 15.9 5.0 15.0 10.0 9.0 8.0 10.0 9.0 9.0 Total four-wheeler volumes 7.6 7.7 8.2 8.3 9.0 9.5 10.1 10.9 12.1 13.3 14.7 Yoy change (%) 14.7 2.0 6.6 0.7 8.5 5.7 6.4 8.0 10.8 10.2 10.2 Replacement/OEM mix (X) 1.0 0.9 1.1 1.2 1.4 1.5 1.6 1.6 1.6 1.5 1.5 Two-wheeler volumes (mn units) OEM 7.2 10.1 11.4 12.2 13.2 13.6 14.3 15.4 16.8 18.0 19.2 Yoy change (%) 30.9 39.4 13.5 7.0 8.0 3.0 5.0 8.0 9.0 7.0 7.0 Replacement 3.0 3.7 5.0 5.2 6.2 7.1 8.2 9.6 11.4 13.1 15.0 Yoy change (%) (7.3) 23.6 35.2 5.0 19.7 14.0 15.0 18.0 18.0 15.0 15.0 Total two-wheeler volumes 10.9 13.7 16.4 17.4 19.4 20.7 22.4 25.0 28.1 31.0 34.2 Yoy change (%) 25.3 25.8 19.3 6.4 11.5 6.5 8.4 11.6 12.5 10.2 10.4 Replacement/OEM mix (X) 0.4 0.4 0.4 0.4 0.5 0.5 0.6 0.6 0.7 0.7 0.8 Automotive volumes (mn units) Total OEM volumes 11.0 14.1 15.3 16.0 17.0 17.4 18.1 19.6 21.5 23.2 25.1 Total replacement volumes 6.7 7.4 9.3 9.7 11.4 12.8 14.4 16.4 18.8 21.1 23.8 Total auto volumes 18.5 21.4 24.6 25.7 28.4 30.2 32.5 35.9 40.2 44.3 48.9 Yoy change (%) 20.7 16.0 14.7 4.5 10.5 6.3 7.8 10.5 11.9 10.2 10.3

Source: Company, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 11 Automobiles Exide Industries

Exhibit 5: The company has gained presence in the telecom segment in FY2018E Revenue breakdown of Exide Industries by segments, March fiscal year-ends, 2014-21E (` mn, %)

2014 2015 2016 2017 2018 2019E 2020E 2021E Revenue (Rs mn) Four-wheeler OEM 6,538 6,978 6,612 7,040 8,363 9,554 10,701 11,985 Four-wheeler replacement 15,157 17,207 18,928 21,456 25,490 29,441 32,091 34,979 Two-wheeler OEM 5,513 5,629 5,508 6,014 7,145 7,944 8,500 9,095 Two-wheeler replacement 3,242 3,688 4,204 5,028 6,527 7,856 9,034 10,389 Auto revenue 30,450 33,501 35,251 39,539 47,525 54,795 60,325 66,448 Inverter battery 17,632 21,933 20,377 21,997 23,584 25,942 27,499 29,149 Inverter 960 1,122 962 1,077 1,185 1,303 1,434 1,577 UPS 8,855 8,588 8,588 9,103 10,469 12,039 13,483 15,101 Telecom 584 705 705 846 4,500 5,400 5,940 6,534 Submarine and others (such as E-rickshaw) 432 432 432 600 1,100 1,650 2,475 3,713 Exports 730 2,461 2,324 2,672 3,501 4,026 4,630 5,324 Industrial revenue 29,192 35,241 33,387 36,296 44,338 50,360 55,461 61,398 Total revenues 59,642 68,742 68,537 75,835 91,863 105,155 115,786 127,846 Revenue breakup (%) Four-wheeler OEM 11.0 10.2 9.6 9.3 9.1 9.1 9.2 9.4 Four-wheeler replacement 25.4 25.0 27.6 28.3 27.7 28.0 27.7 27.4 Two-wheeler OEM 9.2 8.2 8.0 7.9 7.8 7.6 7.3 7.1 Two-wheeler replacement 5.4 5.4 6.1 6.6 7.1 7.5 7.8 8.1 Auto revenue 51.1 48.7 51.4 52.1 51.7 52.1 52.1 52.0 Inverter battery 29.6 31.9 29.7 29.0 25.7 24.7 23.7 22.8 Inverter 1.6 1.6 1.4 1.4 1.3 1.2 1.2 1.2 UPS 14.8 12.5 12.5 12.0 11.4 11.4 11.6 11.8 Telecom 1.0 1.0 1.0 1.1 4.9 5.1 5.1 5.1 Submarine and others (such as E-rickshaw) 0.7 0.6 0.6 0.8 1.2 1.6 2.1 2.9 Exports 1.2 3.6 3.4 3.5 3.8 3.8 4.0 4.2 Industrial revenue 48.9 51.3 48.7 47.9 48.3 47.9 47.9 48.0 Total 100.0 100.0 100.1 100.0 100.0 100.0 100.0 100.0

Source: Company, Kotak Institutional Equities estimates

Exhibit 6: We have fine-tuned our FY2019-21E earnings estimates Earnings revision table, March fiscal year-ends, 2019-20 (` mn, %)

New estimates Old estimates % change 2019E 2020E 2021E 2019E 2020E 2021E 2019E 2020E 2021E Net sales 105,155 115,786 127,846 102,594 113,009 124,832 2.5 2.5 2.4 EBITDA 15,321 17,036 18,880 14,777 16,448 18,244 3.7 3.6 3.5 Margin (%) 14.6 14.7 14.8 14.4 14.6 14.6 Net Profit 8,742 9,707 10,831 8,631 9,573 10,606 1.3 1.4 2.1 Standalone EPS 10.3 11.4 12.7 10.2 11.3 12.5 1.3 1.4 2.1

Source: Kotak Institutional Equities estimates

Life insurance business adds `42/share to our target price

We value Exide Life Insurance at `42/share (`45/share earlier), i.e. 1.4X FY2018E (refer to Exhibit 8 for SoTP valuation). Exide Life reported EV of `20.4 bn in September 2018 with only 5% yoy growth. We are building in 9% EV CAGR between March 2018 and March 2020 in our forecasts. We note that a detailed EV walk (contribution of investment and economic assumption changes in EV growth) constrains our ability to value the business.

12 KOTAK INSTITUTIONAL EQUITIES RESEARCH Exide Industries Automobiles

Exhibit 7: We value Exide Industries at `235/share SoTP of Exide Industries (`)

EPS Multiple Value per share (Rs) (X) (Rs) Comments March 2020E EPS 11.4 17 194 We build in 9% CAGR in Embedded Value (EV) over ING Vysya (100% stake value) 42 FY2018-20E and assign 1.4X multiple to March 2020E EV SOTP based value 236 Price target 235

Source: Kotak Institutional Equities estimates

Exhibit 8: Exide Life insurance adds `42/share to our target price EV and RoEV, March fiscal year-ends, 2HFY16-2HFY20E

2HFY16 1HFY17 2HFY17 1HFY18 2HFY18 1HFY19E 2HFY19E 1HFY20E 2HFY20E Embedded Value (Rs bn) 18.6 19.4 20.5 20.4 21.4 21.8 23.3 23.8 25.5 RoEV (%) 10 4 9 9 Multiple to EV (X) 1.4 Valuation (Rs bn) 36 Value per share of Exide (Rs/share) 41.9

Source: Kotak Institutional Equities estimates

Exhibit 9: APE of Exide Life Insurance grew by only 2% yoy in FY2018 as against industry growth of 16% yoy Adjusted premium equivalent of life insurance players, March fiscal year-ends, 2011-2018 (Rs bn)

APE (Rs bn) YoY (%) Market share (%) 2011 2012 2013 2014 2015 2016 2017 2018 2012 2013 2014 2015 2016 2017 2018 2012 2013 2014 2015 2016 2017 2018 Bajaj Allianz Life 20 14 14 11 9 9 12 17 (29) (2) (17) (18) (2) 34 34 3 3 2 2 2 2 2 Birla Sunlife 16 12 11 9 9 8 11 12 (24) (11) (17) (7) (3) 30 11 2 2 2 2 2 2 2 DHFL Pramerica 0.7 0.9 1.3 1.1 1.8 2.0 2.5 4.0 35 43 (17) 63 11 21 62 0 0 0 0 0 0 1 Exide 6.4 6.1 5.2 5.0 4.4 4.9 6.2 6.3 (5) (15) (3) (12) 10 27 2 1 1 1 1 1 1 1 HDFC Life 30 28 32 25 32 36 41 53 (7) 16 (22) 26 14 13 29 5 6 5 7 7 6 7 ICICI Prudential Life 39 30 34 33 46 51 65 75 (23) 14 (5) 41 10 27 15 6 7 6 10 10 10 10 Max Life 17 15 15 18 20 21 27 32 (12) 0 17 10 8 26 21 3 3 3 4 4 4 4 Reliance Life 20 11 10 12 13 10 7 7 (44) (12) 19 8 (26) (24) 2 2 2 2 3 2 1 1 SBI Life 33 24 26 30 33 45 63 80 (27) 8 14 10 36 40 27 5 5 6 7 9 10 11 Private players 239 186 189 182 211 242 306 373 (22) 2 (3) 16 15 26 22 35 37 36 45 47 49 51 Private (ex. SBI, ICICI) 167 131 128 119 132 146 178 218 (21) (3) (7) 10 11 21 23 25 25 23 28 28 28 30 LIC 308 343 326 331 253 279 324 360 12 (5) 1 (23) 10 16 11 65 63 64 55 53 51 49 Total industry 547 529 515 513 464 521 630 733 (3) (3) (0) (9) 12 21 16

Source: Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 13 Automobiles Exide Industries

Exhibit 10: We expect EPS to grow at 16% CAGR during FY2018-21E Financial summary of Exide Industries, March fiscal year-ends, 2011-21E (` mn)

2011 2012 2013 2014 2015 2016 2017 2018 2019E 2020E 2021E Profit model (Rs mn) Net sales 45,536 51,070 60,714 59,642 68,742 68,537 75,835 91,863 105,155 115,786 127,846 EBITDA 8,633 6,839 7,841 8,145 9,077 10,161 10,825 12,408 15,321 17,036 18,880 Other income 1,038 668 753 353 320 517 1,039 584 500 565 742 Interest (57) (48) (36) (12) (17) (17) (43) (52) (50) (40) (40) Depreciation (835) (1,007) (1,135) (1,256) (1,395) (1,579) (2,063) (2,459) (2,916) (3,286) (3,653) Profit before tax 8,780 6,452 7,423 7,231 7,985 9,082 9,757 10,480 12,855 14,275 15,928 Tax expense (2,740) (1,840) (2,195) (2,360) (2,526) (2,837) (2,821) (3,378) (4,114) (4,568) (5,097) Adjusted net profit 6,180 4,612 5,228 4,871 5,459 6,245 6,936 6,976 8,742 9,707 10,831 Adjusted earnings per share (Rs) 7.3 5.4 6.2 5.7 6.4 7.3 8.2 8.2 10.3 11.4 12.7 Balance sheet (Rs mn) Equity 27,425 30,573 34,236 37,315 40,546 45,114 49,636 53,893 59,575 65,712 72,463 Total borrowings 22 — — — — 1,025 1,702 — — — — Deferred Tax Liability 675 825 977 1,051 1,259 1,270 1,552 1,405 1,405 1,405 1,405 Current liabilities 7,964 9,546 10,271 11,201 12,046 13,975 14,866 18,671 20,148 22,175 24,446 Total liabilities 36,085 40,944 45,484 49,566 53,851 61,384 67,756 73,969 81,128 89,292 98,313 Net fixed assets 9,018 9,932 10,532 10,490 11,728 14,512 16,874 21,918 25,002 27,716 30,063 Investments 13,780 15,546 16,401 19,670 18,957 26,978 26,739 19,690 19,690 19,690 19,690 Cash 148 577 748 1,200 298 738 196 872 571 2,417 4,951 Other current assets 13,140 14,889 17,803 18,207 22,868 19,155 23,947 31,489 35,865 39,469 43,609 Total assets 36,085 40,944 45,484 49,566 53,851 61,384 67,756 73,969 81,128 89,292 98,313 Free cash flow (Rs mn) Operating cash flow 6,959 5,769 6,514 6,201 7,062 7,615 8,150 8,732 11,658 12,993 14,484 Working capital changes (2,015) (168) (2,188) 526 (3,804) 5,783 (3,840) (3,563) (2,899) (1,577) (1,870) Capital expenditure (2,708) (1,921) (1,735) (1,214) (2,633) (3,948) (4,158) (7,714) (6,000) (6,000) (6,000) Free cash flow 2,237 3,680 2,591 5,513 626 9,450 152 (2,545) 2,759 5,416 6,615 Ratios Gross margin (%) 39.7 34.9 35.7 36.5 36.0 38.1 37.8 34.6 34.5 34.6 34.4 EBITDA margin (%) 19.0 13.4 12.9 13.7 13.2 14.8 14.3 13.5 14.6 14.7 14.8 PAT margin (%) 13.6 9.0 8.6 8.2 7.9 9.1 9.1 7.6 8.3 8.4 8.5 Book Value (Rs/share) 32.3 36.0 40.3 43.9 47.7 53.1 58.4 63.4 70.1 77.3 85.3 RoAE (%) 24.9 15.9 16.1 13.6 14.0 14.6 14.6 13.5 15.4 15.5 15.7

Source: Company, Kotak Institutional Equities estimates

14 KOTAK INSTITUTIONAL EQUITIES RESEARCH SELL IIFL Holdings (IIFL) NBFCs AUGUST 02, 2018 RESULT Coverage view: Neutral

Wealth and NBFC strong; broking yields down. IIFL Holdings reported 36% growth Price (`): 684 in PAT before minority interest (Ind-AS) at `3.45 bn. Capital market-related income Target price (`): 625 (broking) business was subdued at 2% yoy growth. IIFL Finance reported 30% growth BSE-30: 37,522 in IGAAP PAT on the back of 44% loan growth. 25% growth in wealth assets has driven 25% earnings growth for the wealth management business. We revise estimates; retain SELL with TP of `625 (unchanged).

Company data and valuation summary India Infoline Stock data Forecasts/Valuations 2018 2019E 2020E 52-week range (Rs) (high,low) 874-532 EPS (Rs) 28.6 37.6 44.6 Market Cap. (Rs bn) 218.4 EPS growth (%) 32.4 31.5 18.6 QUICK NUMBERS Shareholding pattern (%) P/E (X) 24.0 18.2 15.4 Promoters 29.0 NII (Rs bn) 21.9 30.7 36.8  Consolidated PAT FIIs 23.0 Net profits (Rs bn) 9.1 12.0 14.2 MFs 2.5 BVPS 158.8 210.4 243.8 up 36% yoy in Price performance (%) 1M 3M 12M P/B (X) 4.3 3.3 2.8 1QFY19 Absolute 2.1 (10.9) 16.6 ROE (%) 19.0 20.5 20.0 Rel. to BSE-30 (3.6) (16.5) 1.2 Div. Yield (%) 0.9 1.2 1.4  AUM increased 31% yoy in 1QFY19 for Wealth most attractive post demerger IIFL Finance

 Post the demerger of IIFL Holdings, we believe that IIFL Wealth will emerge as the most  Wealth AUM up attractive stock given its strong franchise in a niche segment, increasing and innovative 25% yoy in 1QFY19 bouquet of products, investments in business by consistently adding new RMs and buoyancy in financial savings in general. High growth and improving operating and financial leverage will drive earnings even as agency realizations trend down over time. We expect IIFL Wealth to deliver 28% earnings CAGR during FY2018-21E and 20% RoE on the back of 25% CAGR in AUMs. At our target price, the business will trade at 20X PER and 3.5X book FY2020E.

 We expect IIFL Finance to deliver 16-17% medium-term RoE on the back of 25% loan book CAGR, translating into 20% CAGR in earnings. It delivered 31% earnings growth in FY2018 (30% IGAAP PAT growth in 1QFY19) on the back of about 40% loan book growth translating into 2.2% RoA and 15% RoE in FY2018. While multiple growth drivers help maintain momentum, absence of identifiable niche will likely put pressure on valuation multiples.

 The capital market-linked business is relatively small and exposed to the volatility in capital markets. Falling commission yields and questionable prospects of a standalone broking business will put pressure on its valuations.

Mixed trends in various businesses; await better entry point; SELL Nischint Chawathe

We are revising up our earnings estimates by 8-10% on the back of higher income in the wealth business and align the NBFC with the new accounting norms. We expect the company M B Mahesh CFA to deliver 22% medium-term RoE and 22% EPS CAGR during FY2018-21E. A strong and growing franchise of the wealth business drives its valuations while concerns on long-term prospects of the broking business will put pressure on the broking business multiples; high loan Dipanjan Ghosh book growth will support near-term valuations of IIFL Finance even as long-term concerns on its differentiators remain. We retain our March 2020E-based TP for IIFL Holdings at `625 to reflect (1) 2.1X book to IIFL Finance (down from 2.25X), (2) 20X earnings for the wealth business (51% Shrey Singh stake post recent capital issuance) and (3) 10X earnings for the broking business (down from 12X).

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

Exhibit 1: IFL Holdings – quarterly financial statements March fiscal year-ends, 1QFY18-1QFY19 (` mn)

Ind-AS IGAAP Ind-AS IGAAP Ind-AS IGAAP Ind-AS (% chg.) 1QFY19 1QFY19E 1QFY18 4QFY18 1QFY19E 1QFY18 4QFY18 2019E 2018 (% chg.) 2020E (% chg.) Quarterly financials Total income 18,064 17,385 14,346 17,636 4 26 2 84,181 64,591 30 104,864 62 Broking and related income 2,078 2,098 2,045 1,886 (1) 2 10 7,132 7,197 (1) 8,286 15 Equity brokerage 2,048 1,914 2,015 1,856 7 2 10 6,784 6,417 6 7,928 24 Distribution/wealth 2,453 2,365 1,923 2,741 4 28 (11) 10,235 9,533 7 12,136 27 Financing income 12,978 12,861 9,994 13,298 1 30 (2) 66,654 47,861 39 84,282 76 Other income 555 61 384 (290) 803 44 NM 160 (0) NM 160 NM Operating expenses 5,155 6,282 4,379 6,229 (18) 18 (17) 25,354 21,290 19 29,970 41 Direct expenses 301 2,151 644 771 (86) (53) (61) 6,052 5,764 5 7,687 33 Employees expenses 3,107 3,130 2,206 3,099 (1) 41 0 12,199 10,608 15 13,663 29 Administration expneses 1,747 1,000 1,529 2,359 75 14 (26) 7,102 4,918 44 8,620 75 EBDITA 12,908 11,103 9,967 11,407 16 30 13 58,827 43,301 36 74,893 73 Depreciation 195 113 150 191 72 30 2 738 671 10 812 21 EBITA 12,714 10,990 9,817 11,216 16 30 13 58,089 42,630 36 74,081 74 Interest 7,573 6,280 6,052 6,730 21 25 13 35,933 25,954 38 47,470 83 PBT 5,141 4,710 3,766 4,486 9 37 15 22,156 16,676 33 26,611 60 Taxation 1,681 1,492 1,221 1,306 13 38 29 6,647 5,056 31 7,983 58 PAT bef. minority interest 3,446 3,224 2,528 3,180 7 36 8 15,509 11,620 33 18,628 60 Minority interest 783 626 552 697 25 42 12 3,524 2,508 40 4,407 76 PAT 2,663 2,598 1,976 2,483 3 35 7 11,985 9,112 32 14,221 56 Tax rate (%) 32.7 31.7 32.4 29.1 102 bps 28 bps 359 bps 30.0 30.3 -32 bps 30.0 -32 bps Average daily volumes and market share IIFL - F&O (Rs bn) 155 100 159 55 (3) Market - F&O (Rs bn) 8,373 5,367 8,249 56 1 Market share - F&O (%) 1.8 1.9 1.9 -1 bps -8 bps IIFL - cash (Rs bn) 12.1 11.1 15.6 9 (22) Market - cash (Rs bn) 336 295 386 14 (13) Market share - cash (%) 3.6 3.8 4.0 -17 bps -44 bps Overall margins (%) 2.0 2.9 1.7 -95 bps 27 bps Loan under management (Rs bn) 392.6 276.2 378.4 42 4 Segmental results (Rs mn) PBT 5,127 3,749 4,486 37 14 10,113 8,392 (17) 11,959 42 Broking and related income 704 634 365 11 93 Finance 3,419 2,385 3,312 43 3 Distribution and marketing 899 710 804 27 12

Source: Company, Kotak Institutional Equities estimates

Exhibit 2: IIFL Holdings: NBFC and Wealth drive value SoTP-based valuation, March fiscal year-end, March 2020E

Valuation (Rs mn) (Rs/ share) Comments Broking 23,200 73 10X PER NBFC (85% stake) 107,256 336 2.1X PBR Wealth management (51% stake) 67,081 210 20X PER Total 197,538 619

Source: Company, Kotak Institutional Equities estimates

16 KOTAK INSTITUTIONAL EQUITIES RESEARCH IIFL Holdings NBFCs

Exhibit 3: Reconciliation of profits under Ind-AS and IGAAP

Particulars 1QFY18 1QFY19 Remarks Net profit after tax as per IGAAP 2,519 2,971 Add/(less) Fair valuation of investments 264 28 MTM gain on investments. Effective interest rate on financial assets 51 (23) Amortisation of upfront fees, acquisition cost. Effective interest rate on financial liabilities (22) (2) Amortisation of cost incurred on borrowings. Expected credit loss (336) 441 Release in Q1FY19 is due to resolution of old cases. Interest strip amortization 14 358 Recognition of interest spread on NPV basis for large loan sell down in 1QFY19. Reclassification of actuarial gains/losses on employment benefits 11 (46) Gain/(loss) on actuarial valuation of retiral benefits to employees. Incremental cost on fair valuation of ESOP (23) NA Others (33) (19) Includes goodwill, interest expense on preference shares, ESOP compensation etc. Deferred tax impact on above adjustments 20 (263) Net profit after tax as per Ind-AS 2,527 3,445 Other comprehensive income (net of tax) (7) 32 Gain/(loss) on actuarial valuation of retiral benefits to employees. Total comprehensive income as per Ind-AS 2,520 3,477

Source: Company

IIFL Wealth: Agency income strong; pressure on lending business

 PBT growth of 21% yoy. IIFL Wealth delivered 21% PBT growth in 1QFY19 on the back of 34% growth in agency income and 25% growth in wealth AUMs under Ind-AS. 27% yoy decline in NII and higher cost-to-income ratio (35% versus 33% in 1QFY19) partially offset high growth in agency income.

 Fee income growth of 34% yoy; yields inch up in 1QFY19; may moderate over time. Agency fee income growth was 34% yoy on the back of 25% growth in AUMs and marginal improvement in agency yield to 70 bps from 69 bps yoy. We expect agency realizations to moderate to 64 bps by FY2020E from 71 bps in FY2018 as margins across financial distribution businesses reduce over time.

 Net new money down in 1QFY19. Net new money (NNM) in 1QFY19 was down 54% yoy. The company had large issuance last year. Slowdown in overseas mobilization due to change in regulations for NRIs to invest through the AIF route and general slowdown in market were the key reasons for low inflows in 1QFY19. The company is awaiting regulatory clarity on the new policy for NRI investments in AIF; we hence believe that AIF mobilizations will remain subdued in the near term.

 AUM growth of 25%; we expect 22% CAGR during FY2018-21E. IIFL reported 25% growth in AUMs to `1.4 tn during the quarter. Post regrouping of some of its mutual funds (direct) assets with mutual funds distribution assets, this segment was up 30% yoy (on like to like basis). Discretionary assets were up 53% in line with its policy to shift focus to this segment. Offshore discretionary assets were down qoq and will likely remain muted in the near term as discussed above.

 Pressure in NBFC over the medium term. Wealth NBFC loan book grew 56% yoy but down 16% qoq to `56 bn. NII from this business was down 27% yoy. According to the management, the company had booked one-off income of `150 mn in 1QFY18 leading to a high base; excluding the one-off, NII decline would be about 6%. Rise in borrowing rates and competition on the asset side has put pressure on NIM, prompting the company to go slow in the current quarter. In terms of pricing, the company targets RoE of 18- 20%, including agency and NBFC income. It has maintained its guidance that lending book would be 5-6% of total wealth AUM from 4% currently; we forecast wealth NBFC loan book at 4.75-5.1% of AUMs with pressure on calculated spreads continuing at 1.8- 2% from 3% in FY2018.

KOTAK INSTITUTIONAL EQUITIES RESEARCH 17 NBFCs IIFL Holdings

 Growth capital of `7.4 bn; leverage of 3-4X over the medium term. IIFL Wealth has raised capital of `7.45 bn in 1QFY19 to support growth in its NBFC and seed investments in various funds (currently at `3 bn; total investments of `10 bn in 4QFY18). This transaction values the business at `146 bn. On a post-money basis, we forecast its leverage (asset/equity) at 3.0-3.9X and RoE of 19-21%.

 Expense growth remains high in 1QFY19; we expect operating leverage to play out. Operating costs increased 22% yoy, compared with ~25% growth in 1QFY19; cost to income ratio (as a consequence of low NII) inched up to 49% from 47% in 1QFY18. Staff expense grew 26% yoy. The company continues to add relationship managers (RM) – number of RMs increased to 348 from 330 in 4QFY18, 226 at FY2017 and 195 at FY2016; total employees including the investment team are about 700. Agency fees/RM was `6.8 mn in 1QFY18, up from `6.37 mn in 4QFY18 but marginally lower than `7 mn in 1QFY18. Non-staff expense growth was 11% yoy, driving some operating leverage. We continue to build in improvement in cost-to-income ratio to 44% from 52% in FY2018 as balance sheet growth and RM productivity matures – this is key sensitivity to earnings as agency realizations reduce over time.

Exhibit 4: IIFL Wealth – AUA up 25% yoy Quarterly P&L summary, March fiscal year-end, 1QFY17-1QFY19 (` mn)

IGAAP IGAAP IGAAP IGAAP Ind-AS IGAAP IGAAP IGAAP Ind-AS 1QFY17 2QFY17 3QFY17 4QFY17 1QFY18 2QFY18 3QFY18 4QFY18 1QFY19 YoY (%) QoQ (%) Income statement Income from operations 1,721 2,435 2,668 3,454 3,494 4,034 4,552 4,300 4,119 18 (4) Agency 1,266 1,292 1,270 1,748 1,781 2,105 2,025 2,103 2,388 34 14 Interest income 455 1,143 1,398 1,706 1,713 1,929 2,527 2,197 1,731 1 (21) Other income - - 157 ------Total income 1,721 2,435 2,825 3,454 3,494 4,034 4,552 4,300 4,119 18 (4) Total expenses 810 925 1,195 1,219 1,168 1,409 1,499 1,580 1,424 22 (10) Employee expenses 542 641 698 789 823 968 1,056 1,094 1,041 26 (5) Other expenses 268 284 497 430 345 441 443 486 383 11 (21) EBITDA 911 1,510 1,630 2,235 2,326 2,625 3,053 2,720 2,695 16 (1) Interest 115 653 674 1,090 1,027 1,422 1,724 1,431 1,228 20 (14) Provisions 53 25 21 26 47 23 41 38 (44) (194) (216) PBT 743 832 935 1,119 1,252 1,180 1,288 1,251 1,511 21 21 Tax 216 260 283 366 378 225 287 219 415 10 89 PAT before minority interest 527 572 652 753 874 955 1,001 1,032 1,096 25 6

Assets under advice (Rs bn) 654 764 812 949 1,126 1,175 1,282 1,318 1,409 25 7 Cost-income ratio (%) 47 38 45 35 33 35 33 37 35 114 bps -217 bps PAT margin (%) 33 32 30 32 35 37 35 36 38 248 bps 194 bps No. of RMs 211 176 220 226 253 283 317 330 348 38 5

Source: Company, Kotak Institutional Equities

Exhibit 5: IIFL Wealth earned net commission of 70 bps in 1QFY19 Wealth assets and commission yields, March fiscal-year ends, 1QFY17-1QFY19

IGAAP IGAAP IGAAP IGAAP Ind-AS IGAAP IGAAP IGAAP Ind-AS 1QFY17 2QFY17 3QFY17 4QFY17 1QFY18 2QFY18 3QFY18 4QFY18 1QFY19 Wealth assets (Rs bn) 654 764 812 949 1,126 1,175 1,282 1,318 1,409 (% of total) Distribution 69 67 65 68 78 68 63 65 81 AMC/Discretionary 10 10 11 10 9 9 11 10 11 Advisory 3 8 11 11 2 13 16 17 3 Discretionary (offshore) 18 16 13 11 11 10 10 8 5 Retention yield ex-FPI assets- KS (%) Net commission/fees 0.79 0.73 0.64 0.79 0.69 0.73 0.66 0.65 0.70 Including fund based activities 0.25 1.01 1.01 1.07 0.95 0.91 0.92 0.88 0.85

Source: Company, Kotak Institutional Equities

18 KOTAK INSTITUTIONAL EQUITIES RESEARCH IIFL Holdings NBFCs

Exhibit 6: IIFL Wealth Management – key ratios and growth rates March fiscal year-ends, 2017-2021E (%)

IGAAP IGAAP Ind-AS Ind-AS Ind-AS 2017 2018 2019E 2020E 2021E YoY (%) Agency income (1) 44 28 19 17 Total income 83 59 21 18 16 PBT 60 37 35 28 23 PAT 48 54 34 28 23 AUA 53 39 25 23 19 Investments 96 (44) 10 10 10 Loan book 85 25 15 15 Key ratios (%) Agency income/AAUA 0.7 0.7 0.7 0.7 0.6 Agency and capital income/AAUA 1.0 0.9 0.9 0.9 0.9 Cost-income ratio 40.4 34.5 31.4 31.5 31.5 PBT margin 45.9 46.1 51.2 53.0 54.6 PAT margin 24.0 23.6 26.0 28.1 29.9 Yield on loans/investments 14.2 12.5 11.0 11.0 11.0 Cost of funds 9.2 9.0 9.2 9.2 9.0 Spread 5.0 3.5 1.8 1.8 2.0 NIM 5.2 3.5 2.9 3.5 3.9 RoA 6.1 4.9 5.2 5.8 6.3 RoE 18.2 22.6 20.4 18.9 19.2

Source: Company, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 19 NBFCs IIFL Holdings

Exhibit 7: IIFL Wealth management – income statement and balance sheet March fiscal year-ends, 2017-2021E (` mn) IGAAP IGAAP Ind-AS Ind-AS Ind-AS 2017 2018 2019E 2020E 2021E AUA break-up (Rs bn) Total 949 1,318 1,649 2,029 2,414 Distribution 645 856 1,310 1,612 1,902 AMC/Discretionary 95 132 198 253 316 Advisory 104 224 67 97 136 Discretionary (offshore) 104 105 74 66 60

Income statement (Rs mn) Income from operations 10,278 16,334 19,770 23,408 27,112 Agency 5,576 8,014 10,235 12,136 14,217 Interest income 4,702 8,320 9,536 11,272 12,895 Other income 157 — — — — Total income 10,435 16,334 19,770 23,408 27,112 Total expenses 4,149 5,641 6,202 7,367 8,528 Employee expenses 2,670 3,926 4,230 5,000 5,688 Other expenses 1,479 1,715 1,972 2,367 2,840 EBITDA 6,286 10,693 13,568 16,042 18,584 Interest 2,532 5,585 6,717 7,308 7,834 Provisions 125 149 168 193 222 PBT 3,629 4,959 6,684 8,541 10,529 Tax 1,125 1,107 1,537 1,964 2,422 PAT 2,504 3,852 5,146 6,577 8,107

Balance sheet (Rs mn) Fixed assets 565 806 1,048 1,257 1,446 Investments 19,343 10,761 11,837 13,021 14,323 Net Loans 36,166 67,011 83,764 96,328 110,778 Net Current Assets 12,969 10,594 10,594 10,594 10,594 Total assets 69,043 89,172 107,243 121,200 137,140

Share capital 156 160 169 169 169 Reserves and Surplus 15,086 18,736 31,330 37,907 46,015 Net worth 15,242 18,896 31,499 38,076 46,183 Minority Interest — — — — — Borrowings 53,801 70,276 75,743 83,124 90,957 Total liabilities and net worth 69,043 89,172 107,243 121,200 137,140

Source: Company, Kotak Institutional Equities estimates

20 KOTAK INSTITUTIONAL EQUITIES RESEARCH IIFL Holdings NBFCs

IIFL Finance: Strong growth in AUM at 44% yoy

 AUM growth maintains momentum. IIFL Finance reported AUM of `337 bn, up 44% yoy and 8% qoq. Excluding the capital market loans, AUM growth was marginally higher at 46% yoy in 1QFY19. Growth is driven by MFI, MSME and CV loans; up 2.9X, 1.4X and 45% yoy, respectively. CV loans have grown at a steep pace in the past few quarters on the back of rapid rise CV sales – we believe that growth in this segment will moderate in the near term. Gold loans which revived momentum in 4QFY18 increased at a sharp pace (up 60% yoy) – we are not sure if this growth will sustain. Home loans and construction finance loans witnessed robust growth at 57% and 37% yoy in 1QFY19. LAP and capital market loan book continued to remain muted at 4% and 10% yoy, respectively.

 Ind-AS earnings growth at 66% yoy. Strong growth in earnings was led by robust NII growth at 50% yoy and drop in provisions by 41% yoy. NII growth was driven by up- front recognition of income on assigned loans worth `358 mn in 1QFY19 compared to `14 mn in 1QFY18 – adjusting for this, NII growth would be 40% yoy. Credit cost witnessed 41% yoy drop to 0.4% (down 60 bps yoy) on the back of improved asset quality across most segments. Other income growth was robust at 31% yoy. There was marginal drag on the cost side with operating expenses recording 56% yoy growth in 1QFY19. Investment in infrastructure and focus on increasing penetration are driving spike in operating expenses.

 Focus on affordable housing drive home loans. Home loans growth was robust at 57% yoy in 1QFY19; a trend observed over the past three quarters. IIFL is positioned at the lower end of the ticket size with average ticket size of `2.1 mn (down from `2.6 mn in FY2017). The company continues to focus on the salaried segment. IIFL has recently increased lending towards affordable housing segment. These loans accounted for 21% of home loan disbursements in 1FY19 and AUM stood at 13% of home loan book. Under the PMJDY scheme, the company has extended subsidies to ~14,000 customers with total disbursals accounting to ~`3.2 bn. Going ahead, increase in penetration to smaller cities and tier-II towns will drive volume growth in this space. The number of home loan, gold and microfinance business branches increased to 1,547 in 1QFY19.

 MSME and micro-finance loans continue to ramp up. MFI loans increased by 2.9X yoy on a low base to `11 bn in 1QFY19. MSME loans increased 1.4X yoy to `25.3 bn by 1QFY19. With gradual stabilization of the economy post demonetization and increased penetration of IIFL’s branches, this segment has seen strong growth since 2HFY18. In the MSME space, the company if focusing on lower ticket size segments (`0.4-0.5 mn) where yields are high.

 CV loans gain traction. CV loan market has seen strong upsurge in demand in the past few quarters driven by pickup in infrastructure and e-commerce activities. AUM growth picked pace in 1QFY19 at 45% yoy; up 46% and 34% yoy in 4QFY18 and 3QFY18. We expect some moderation in this segment in the near term.

 Going slow on LAP. LAP growth was muted at 4% yoy and flat qoq. Target segment is smaller-ticket LAP in the range of `6-7 mn largely spread across the country with average portfolio yield of ~12-13%. The company is gradually de-focusing this book owing to asset quality pressure faced in FY2018 post demonetization – net NPL increased to 1.9% by 2QFY18 from 0.9% in 4QFY17. Notably, many NBFCs that went slow in this segment post demonetization are slowly scaling up again but IIFL maintains a cautious stance.

KOTAK INSTITUTIONAL EQUITIES RESEARCH 21 NBFCs IIFL Holdings

 Asset quality stable yoy; up 30 bps qoq to 2%. GNPL ratio was flat yoy at 2% (up 30 bps qoq). NNPL increased in CV, MSME and home loan segments qoq in 1QFY19. The company moved to ECL-based provisioning norms starting 1QFY19. The coverage on stage-3 loans stands at 57%. We provision coverage ratio on stage 1 and 2 loans at 1.4% from 0.4% earlier.

 AUM growth to remain strong going ahead. We project ~25% AUM CAGR over FY2018-21E driven by CV, MSME/ MFI and gold loans. The share of unsecured loans, currently at ~90% of AUM is expected to increase at a sharp pace.

 Focus on high-yield loans augurs well for NIM. IIFL Finance reported strong NII growth in 1QFY19 due to recognition of `358 mn of up-front income on assigned loans (as per Ind-AS accounting). We have however not factored any one-off gains going ahead. It would be inaccurate to compare FY2019E and FY2018 due to migration to Ind- AS. Despite building in rise in funding costs, we expect yields and spreads to expand in FY2020-21E due to increasing shift to high-yielding retail products like MSME/MFI loans. Recent rise in home loan rates (20-30 bps) will also provide a boost.

22 KOTAK INSTITUTIONAL EQUITIES RESEARCH IIFL Holdings NBFCs

Exhibit 8: IIFL Finance - quarterly data March fiscal year-ends, 1QFY18-1QFY19 (` mn)

Ind-AS IGAAP IGAAP IGAAP Ind-AS 1QFY18 2QFY18 3QFY18 4QFY18 1QFY19 YoY (%) QoQ (%) Income statement (Rs mn) Interest income 8,281 8,861 9,186 9,634 11,247 36 17 Interest expenses 4,850 4,848 5,087 5,159 6,103 26 18 Net interest income 3,431 4,013 4,099 4,475 5,144 50 15 Other income 523 653 887 738 683 31 (7) Provisions 583 958 898 563 345 (41) (39) Operating expenses 1,587 1,671 1,898 2,254 2,481 56 10 PBT 1,784 2,037 2,190 2,396 3,001 68 25 Tax 612 715 734 794 1,052 72 32 PAT 1,172 1,322 1,456 1,602 1,949 66 22 Outstanding loan book (Rs bn) 204 230 236 276 284 39 3 Loans outside balance sheet (Rs bn) 29 30 37 35 53 79 50 Loans under management (Rs bn) 233 260 273 311 337 44 8 Home Loans 60 67 75 86 93 57 9 Loans Against Property 55 55 56 57 57 4 (0) Construction & Real Estate 35 35 38 43 48 37 11 Gold 28 31 34 40 45 60 11 Commercial Vehicle 30 32 36 41 43 45 6 Capital Market 12 22 10 11 14 10 27 Micro-finance 3 4 6 8 11 291 32 MSME & Others 11 15 19 25 25 139 2 Key ratios (%) NIM - KS Estimate 6.9 7.4 7.0 7.0 7.4 CAR 20.6 18.4 18.2 16.2 19.0 Asset quality Gross NPL (%) 2.0 2.0 2.1 1.7 2.0 Net NPL (%) 0.8 1.1 1.2 0.8 0.9

Source: Company, Kotak Institutional Equities

Exhibit 9: Share of terms loans continues to trend down Borrowings mix, March fiscal year-ends, 2012-1QFY19 (%)

Term loan NCD CP 100

23 19 18 21 29 34 34 80 41

34 34 60 20 33 39 20 28 29 40

51 46 45 47 48 20 40 38 30

0 2012 2013 2014 2015 2016 2017 2018 1QFY19

Source: Company, Kotak Institutional Equities

KOTAK INSTITUTIONAL EQUITIES RESEARCH 23 NBFCs IIFL Holdings

Exhibit 10: Key highlights of various products Product portfolio break-up, March fiscal year-ends, 1QFY19

Average Portfolio share Net NPL Yield ticket LTV (%) (%) (%) (Rs mn) (%) Home loan 28 0.6 9.8 2.1 69 Loan against property 17 0.6 12.3 6.9 49 Construction finance 14 0.8 14.9 11.1 48 Commercial vehicle finance 13 3.0 15.7 1.4 75 Gold loan 13 - 20.1 0.1 69 Capital market finance 4 - 11.2 6.4 42 MSME loan 8 2.4 23.2 0.7 55 Microfinance 3 - 25.1 Total 100 0.9 14.5

Source: Company, Kotak Institutional Equities

Exhibit 11: Mixed trends in NPLs Product-wise net NPL ratios, March fiscal year-ends, 1QFY18-1QFY19 (%)

IGAAP IGAAP IGAAP IGAAP Ind-AS 1QFY18 2QFY18 3QFY18 4QFY18 1QFY19 Home loan 0.3 0.3 0.3 0.3 0.6 Loan against property 1.1 1.9 1.7 1.0 0.6 Construction finance 0.2 1.4 2.3 1.4 0.8 Commercial vehicle finance 4.2 3.2 2.3 1.5 3.0 Gold loan 0.2 0.2 0.2 0.1 - Capital market finance - - - - - MSME loan 2.3 1.2 1.3 1.4 2.4 Microfinance - 0.5 - - - Total 0.9 1.1 1.2 0.8 0.9

Source: Company, Kotak Institutional Equities

24 KOTAK INSTITUTIONAL EQUITIES RESEARCH IIFL Holdings NBFCs

Exhibit 12: IIFL Finance – key ratios, growth rates and financial statements March fiscal year-ends, 2016-2021E IGAAP IGAAP IGAAP Ind-AS Ind-AS Ind-AS 2016 2017 2018 2019E 2020E 2021E Key ratios (%) Interest yield (%) 16.0 16.2 15.3 14.8 15.1 15.1 Interest cost (%) 11.5 10.7 9.1 9.4 9.3 9.3 Spread (%) 4.5 5.5 6.2 5.4 5.8 5.8 NIM (%) 6.1 6.6 7.0 7.0 6.6 6.5 Loan growth (%) 21.2 8.5 43.2 49.7 22.3 20.8 Income on investments (%) 2.0 2.0 2.0 2.0 2.0 2.0 Opex/ loans (%) 3.0 3.0 3.2 3.7 3.5 3.5 Credit cost/ loans (%) 0.7 1.0 1.3 1.3 1.2 1.2 PAT / average loans (%) 2.1 2.3 2.4 1.8 1.7 1.7 Du Pont Analysis (% of total assets) NII/ assets 5.9 6.1 6.4 6.7 6.4 6.4 Other income/ assets 0.8 0.8 1.0 0.8 0.7 0.7 Provisions/ assets 0.6 0.9 1.2 1.2 1.1 1.2 Opex/ assets 2.9 2.8 2.9 3.5 3.4 3.4 PBT/ assets 3.1 3.3 3.3 2.8 2.5 2.5 (1-tax rate) 0.7 0.7 0.7 0.7 0.7 0.7 PAT/ assets 2.0 2.1 2.2 1.9 1.7 1.6 Average assets/ average equity (X) 8.2 7.1 6.9 8.6 10.1 10.8 PAT/ average equity 16.6 15.1 15.0 16.0 16.8 17.7 Profit and loss statement (Rs mn) Interest income 25,947 30,064 35,952 53,641 69,395 84,466 Interest expenses 16,091 17,875 19,637 29,516 39,278 47,949 Net interest income 9,856 12,189 16,315 24,124 30,117 36,517 Other income 1,377 1,587 2,618 2,886 3,355 3,917 Other interest income 120 169 598 718 862 1,034 Provisions 1,087 1,760 3,130 4,311 5,424 6,701 Operating expenses 4,937 5,525 7,411 12,587 16,089 19,545 Employee expenses 2,690 3,010 4,038 6,858 8,766 10,649 Other opex 1,987 2,255 3,024 5,136 6,565 7,976 Depreciation 260 260 349 592 757 920 PBT 5,209 6,491 8,392 10,113 11,959 14,188 Tax 1,822 2,260 2,849 3,433 4,060 4,817 PAT 3,387 4,231 5,543 6,679 7,899 9,372 Balance sheet (Rs mn) Fixed assets 655 1,241 919 1,149 1,436 1,795 Investments 2,475 14,365 10,898 7,629 7,629 7,629 Loan book 177,695 192,798 276,155 413,540 505,820 611,035 Total assets 179,358 218,934 290,943 426,181 519,677 626,272 Borrowings 153,127 181,044 249,059 378,949 465,731 565,432 Total liabilities 157,967 184,235 251,657 382,197 469,790 570,506 Networth 21,391 34,699 39,286 43,984 49,886 55,767

Source: Company, Kotak Institutional Equities estimates

Broking yields compress

Equity broking revenues grew 2% yoy compared to 9% yoy growth in cash equities ADV and 55% yoy growth in derivatives ADV for IIFL largely due to drop in commission yields (1.7 bps from 2.5 bps in 1QFY18); this is in line with trends in previous quarters. Share in the cash market dropped 30 bps qoq to 3.7% (NSE) and 10 bps qoq to 1.9% in derivatives.

KOTAK INSTITUTIONAL EQUITIES RESEARCH 25 NBFCs IIFL Holdings

Exhibit 13: Cash equity market volume increased 13% yoy in 1QFY19 Average daily volumes on BSE and NSE, March fiscal year-ends, 2008-1QFY19 (` bn) Volumes in cash market BSE NSE Total YoY F&O- NSE YoY Total vol. YoY Period (Rs bn) (Rs bn) (Rs bn) (%) (Rs bn) (%) (Rs bn) (%) 2008 62 144 205 78 530 77 735 77 2009 45 113 158 (23) 453 (15) 611 (17) 2010 56 168 224 41 717 58 941 54 2011 44 141 184 (18) 1,148 60 1,332 42 2012 26 113 139 (25) 1,269 11 1,408 6 2013 32 127 158 (15) 1,306 56 1,465 43 2014 21 112 133 2 1,530 21 1,663 19 2015 36 181 217 63 2,327 52 2,544 53 1QFY16 26 177 203 (10) 2,700 45 2,903 39 2QFY16 28 177 205 (5) 2,602 9 2,807 8 3QFY16 27 163 189 (4) 2,236 (5) 2,425 (5) 4QFY16 28 173 201 (12) 3,012 12 3,212 10 1QFY17 26 174 200 (2) 2,983 10 3,183 10 2QFY17 34 216 249 21 3,762 45 4,011 43 3QFY17 29 195 224 18 4,036 80 4,259 76 4QFY17 65 232 298 48 4,469 48 4,767 48 1QFY18 41 254 295 48 5,367 80 5,662 78 2QFY18 38 270 308 23 6,259 66 6,567 64 3QFY18 46 312 358 60 6,806 69 7,164 68 4QFY18 45 342 386 30 8,249 85 8,635 81 1QFY19 33 301 334 13 8,362 56 8,696 54

Source: BSE, NSE, Kotak Institutional Equities

Exhibit 14: Equity market volumes were muted in 1QFY19 Volumes on BSE and NSE, March fiscal year-ends, 1996-1QFY19 (` bn) Volumes (CM) (LHS) Volumes (F&O) (LHS) Volume growth (CM) (RHS) Volume growth (F&O) (RHS) 9,000 600

7,200 450

5,400 300

3,600 150

1,800 -

- (150)

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

1QFY17

2QFY17

3QFY17

4QFY17

1QFY18

2QFY18

3QFY18

4QFY18 1QFY19

Source: BSE, NSE, Kotak Institutional Equities

26 KOTAK INSTITUTIONAL EQUITIES RESEARCH IIFL Holdings NBFCs

Exhibit 15: IIFL Holdings is currently trading at 19.4X one-year forward EPS IIFL Holdings - Rolling PER, July 2012-July 2018 (X) 25

20

15

10

5

-

Jul-12

Jul-13

Jul-14

Jul-15

Jul-16

Jul-17

Jul-18

Jan-13

Jan-14

Jan-15

Jan-16

Jan-17 Jan-18

Source: Company, Bloomberg, Kotak Institutional Equities estimates

Exhibit 16: IIFL Holdings – summary of estimate changes March fiscal year-end, 2019E-2021E (` mn)

Ind-AS IGAAP New estimates Old estimates New vs old (%) 2019E 2020E 2021E 2019E 2020E 2021E 2019E 2020E 2021E Income (inclduing NII) 48,248 57,394 67,345 44,194 50,657 57,408 9 13 17 Broking and related income 7,132 8,286 9,637 7,885 9,164 10,660 (10) (10) (10) Insurance and wealth management 10,235 12,136 14,217 10,582 11,853 13,433 (3) 2 6 Net interest income 30,721 36,812 43,331 25,566 29,480 33,156 20 25 31 Other income 160 160 160 160 160 160 - - - Operating expenses 26,092 30,782 36,097 24,566 26,859 29,610 6 15 22 Brokerage/ direct expenses 6,052 7,687 9,762 6,052 6,355 6,673 - 21 46 Employee expenses 12,199 13,663 15,029 12,199 13,663 15,029 - - - Others expenses 7,840 9,432 11,305 6,314 6,841 7,908 24 38 43 PBT 22,156 26,611 31,248 19,628 23,798 27,798 13 12 12 Tax 6,647 7,983 9,374 5,888 7,139 8,339 13 12 12 PAT 15,509 18,628 21,874 13,740 16,658 19,459 13 12 12 Minority interest 3,524 4,407 5,378 3,052 3,683 4,353 15 20 24 PAT (after minority interest) 11,985 14,221 16,495 10,688 12,976 15,106 12 10 9 EPS (Rs/ share) 37.6 44.6 51.7 33.5 40.7 47.4 12 10 9 Loan book (Rs bn) 402 493 597 PBT/ total income (%) 46 46 46 44 47 48 Cost/ income (%) 54 54 54 56 53 52

Source: Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 27 NBFCs IIFL Holdings

Exhibit 17: IIFL Holdings – key ratios and growth rates March fiscal year-ends, 2016-2021E (%)

IGAAP IGAAP IGAAP Ind-AS Ind-AS Ind-AS 2016 2017 2018 2019E 2020E 2021E Key parameters Volume in equity markets (Rs bn) 697,301 1,003,893 1,722,217 1,980,549 2,277,632 2,619,277 IIFL's volumes (Rs bn) 16,818 22,066 34,645 40,071 47,014 55,164 Per day (Rs bn) 74 96 163 189 223 262 Market share (%) 2.4 2.2 2.0 2.0 2.1 2.1 Commission yield (bps) 2.37 2.27 1.85 1.69 1.69 1.68 Key ratios Yield on loans (%) 16.0 16.2 15.3 14.8 15.1 15.1 Cost of borrowings (%) 11.0 10.4 9.1 9.1 9.4 9.6 Spread (%) 5.0 5.8 6.3 5.7 5.7 5.5 Total operating costs/ total income (%) 58.0 48.1 46.6 41.7 40.9 40.5 PBT margins (%) 20.5 24.9 25.8 26.3 25.4 24.9 YoY growth (%) Total revenues 12 20 31 30 25 20 Brokerage commission (5) 26 28 6 17 17 Operating costs 5 (3) 32 12 17 16 EBIT 17 32 28 36 28 21 Interest and finance charges 17 25 24 38 32 22 Profit before tax 16 46 36 33 20 17 Net profit 14 34 33 32 19 16 Dividend 41 8 34 32 19 16 EPS 12 34 32 32 19 16 Growth in balance sheet line items Total assets 18 31 32 38 19 20 Shareholders equity 14 50 16 32 16 16 Contribution to total revenues(%) Commission on equity broking 9.7 10.2 9.9 8.1 7.6 7.4 Brokerage in commodities 0.1 0.1 0.1 0.1 0.1 0.1 Fees earned on distribution (MF) 0.3 0.2 0.1 0.0 0.0 0.0 Life insurance commissions 1.5 1.1 1.7 0.0 0.0 0.0 Other mortgage and loan distribution 13.7 12.7 12.4 12.2 11.6 11.3 Interest earned on margin trading/ finance income 72.5 73.7 74.1 79.2 80.4 80.9 Merchant banking income 0.5 1.0 1.1 0.4 0.3 0.2 Media and other income 1.3 0.7 0.6 0.0 0.0 0.0 Du pont analysis (% of average assets) Net brokerage revenue 0.2 0.5 0.2 0.2 0.1 (0.1) Income from distribution 3.0 2.6 2.6 2.2 2.0 2.0 Other income 14.5 14.1 14.1 14.3 14.2 14.3 Operating costs 13.7 12.6 12.1 11.9 11.8 11.8 (1-tax rate) 65.8 67.2 69.7 70.0 70.0 70.0 RoA (%) 2.6 3.1 3.3 3.3 3.1 3.1 Average assets/ average equity (X) 6.1 5.4 5.7 6.2 6.4 6.5 RoE (%) 16.0 16.9 19.0 20.5 20.0 20.0

Source: Company, Kotak Institutional Equities estimates

28 KOTAK INSTITUTIONAL EQUITIES RESEARCH IIFL Holdings NBFCs

Exhibit 18: IIFL Holdings – income statement and balance sheet March fiscal year-ends, 2016-2021E (` mn)

IGAAP IGAAP IGAAP Ind-AS Ind-AS Ind-AS 2016 2017 2018 2019E 2020E 2021E Consolidated income statement Total revenues 41,016 49,248 64,591 84,181 104,864 125,425 Commission on equity broking 3,987 5,013 6,417 6,784 7,928 9,267 Brokerage in commodities 60 40 40 48 58 69 Fees earned on distribution (MF) 140 120 40 - - - Life insurance commissions 613 564 1,095 - - - Wealth management/ distribution 5,610 6,264 8,037 10,235 12,136 14,217 Interest income 29,754 36,294 47,861 66,654 84,282 101,411 Media income 526 330 402 - - - Merchant banking income 210 500 700 300 300 300 Other income 116 124 (0) 160 160 160 Operating costs 14,045 13,627 18,013 20,101 23,483 27,260 Brokerage/ direct expenses 3,583 3,603 5,764 6,052 7,687 9,762 Business promotion and marketing 284 299 388 446 562 709 Staff expenses 7,045 7,840 10,608 12,199 13,663 15,029 Administrative expenses 3,133 1,885 1,253 1,403 1,571 1,760 Provisions 1,087 1,896 3,277 5,253 6,487 7,944 EBITDA 25,884 33,725 43,301 58,827 74,893 90,221 Depreciation/Amortization 661 540 671 738 812 893 EBIT 25,223 33,185 42,630 58,089 74,081 89,328 Interest and finance charges 16,800 20,922 25,954 35,933 47,470 58,080 Profit before tax 8,423 12,263 16,676 22,156 26,611 31,248 Taxation 2,878 4,018 5,056 6,647 7,983 9,374 Net profit 5,545 8,222 11,620 15,509 18,628 21,874 Minority interest in loss/profit 433 1,361 2,508 3,524 4,407 5,378 Net profit for appropriation 5,112 6,861 9,112 11,985 14,221 16,495 Dividend 1,345 1,449 1,945 2,563 3,041 3,528 Adjusted number of shares 317 318 319 319 319 319 EPS (Rs) 16.1 21.6 28.6 37.6 44.6 51.7 EPS -fully diluted (Rs) 14.8 19.8 26.2 34.5 40.9 47.5 DPS (Rs) 4.3 4.6 6.1 8.0 9.5 11.1 DPS -fully diluted (Rs) 3.9 4.2 5.6 7.4 8.8 10.2 Dividend payout ratio(%) 25 25 25 25 25 25 BVPS (Rs) 92.2 137.8 158.8 210.4 243.8 282.6 BVPS -fully diluted (Rs) 84.7 126.6 145.9 193.2 223.9 259.6 Consoidated balance sheet (Rs mn) Goodwill (on consolidation) 578 637 — — — — Net owned assets 4,805 6,766 7,899 3,648 4,087 4,643 Current Assets 25,607 27,446 21,815 18,787 14,693 17,754 Cash and bank balance 16,288 17,195 10,540 6,384 1,050 2,747 Loans and advances 177,695 228,962 343,167 497,304 602,148 721,813 Total assets 228,765 299,672 395,398 545,634 650,707 778,457

Borrowings 159,476 243,304 329,734 460,000 550,000 660,000 Current liabilities & prov. 28,332 — — — — — Total liabilities 187,808 243,304 329,734 460,000 550,000 660,000 Shareholders equity 29,200 43,816 50,661 67,107 77,773 90,144 Paid-up capital 633 636 638 638 638 638 Reserves and surplus 28,566 43,180 50,023 66,469 77,135 89,506

Source: Company, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 29 SELL Astral Poly Technik (ASTRA) Others AUGUST 02, 2018 RESULT Coverage view: Results miss expectations; valuations remain expensive. Astral reported EBITDA 8% below expectations, driven by modest 8% two-year CAGR in pipes volume and sharper- Price (`): 1,097 than-expected moderation in adhesives margins. We reiterate SELL with a revised TP of Target price (`): 640 `640 (`625 previously), as valuations remain expensive at 45X FY2020E EPS, higher BSE-30: 37,522 than branded players in adhesives/paints/consumer sectors, while ignoring that ~70% of Astral’s profits comes from relatively low-margin and low-return pipes business.

Company data and valuation summary Astra Poly Technik Stock data Forecasts/Valuations 2018 2019E 2020E 52-week range (Rs) (high,low) 1,169-606 EPS (Rs) 14.7 19.1 24.6 Market Cap. (Rs bn) 131.4 EPS growth (%) 20.8 30.2 28.8 Shareholding pattern (%) P/E (X) 74.8 57.5 44.6 Promoters 58.5 Sales (Rs bn) 21.1 27.8 32.9 FIIs 19.9 Net profits (Rs bn) 1.8 2.3 3.0 MFs 6.4 EBITDA (Rs bn) 3.2 4.3 5.4 Price performance (%) 1M 3M 12M EV/EBITDA (X) 42.0 30.9 24.6 Absolute 8.9 15.5 76.3 ROE (%) 18.8 19.8 20.5 Rel. to BSE-30 2.8 8.2 53.0 Div. Yield (%) 0.1 0.1 0.1 Volume growth slows down in pipes business, although margins remain healthy Astral’s consolidated revenues were 9% below our expectations at `4.77 bn, driven by lower- than-expected growth in the pipes business. Reported EBITDA and net income were 8% below our estimates at `779 mn and `376 mn (EPS of `3.1), respectively led by sharper-than-expected sequential moderation in margins for adhesives business.  15% growth in pipes volumes; 2-year CAGR of 8%. Pipes revenues grew by 15% yoy reflecting similar increase in volumes to 22.5 ktons from a low base of 1QFY18, which was impacted due to channel destocking before GST. Standalone pipes business EBITDA increased by 49% yoy to `577 mn and net income jumped 43% yoy to `247 mn.  25% growth in adhesives revenues. Adhesives revenues grew by 25% yoy to `1.4 bn in 1QFY19 indicating pickup in volumes. Adhesive margins expanded by 480 bps yoy to 14.4%, a tad lower than our expectations. Management optimistic on new projects and acquisition of Rex Gehlot and Hosur on track and should start delivering in FY2019. Gehlot plant is operational and started ramping up on new product lines. Hosur warehouse is already operational and facility should be commissioned soon. The company expects to gain significant logistics cost savings from these new units. Plumbing market remains strong despite industry headwinds. The company expects the plumbing volumes to keep growing at 15% over the medium term backed by replacement market, gaining market share and better competitiveness of CPVC products. According to the management, new construction activity remains weak and keeps a cap on market growth rate. Optimistic on acquisition on Rex. The management was optimistic on acquisition of Rex Polyextrusion, which will add portfolio of corrugated pipes business. Astral acquired 51% stake in Rex for `752 mn cash and the remaining 49% in a share swap deal. Astral acquired Rex at an Tarun Lakhotia attractive valuation of 1X EV/sales where the company reported `1.69 bn revenue and `273 mn EBITDA in FY2018.

Retain SELL with a revised TP of `640 Akshay Bhor We revise our EPS estimates to `19.1 (+1.7%) in FY2019 and `24.6 (+6.5%) in FY2020, as we factor in (1) strong pipe volume growth from Rex acquisition and 15% volume CAGR in the plumbing pipes business, (2) 110 bps margin expansion in the next three years led by adhesives business and (3) other minor changes. Our target price stands at `640, based on 22X P/E multiple for pipes profits and 40X multiple for adhesives profits on March 2020 estimates.

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

Exhibit 1: Consolidated quarterly results (Rs mn)

(% chg.) yoy 1QFY19 1QFY19E 1QFY18 4QFY18 1QFY19E 1QFY18 4QFY18 FY2019E FY2018 (% chg.) FY2019E Net sales 4,770 5,218 4,046 6,388 (8.6) 17.9 (25.3) 27,768 20,729 34.0 27,768 Total expenditure (3,991) (4,367) (3,561) (5,205) (8.6) 12.1 (23.3) (23,462) (17,561) 33.6 (23,462) Raw materials (2,947) (3,335) (2,616) (4,149) (11.7) 12.6 (29.0) (17,689) (13,380) 32.2 (17,689) Purchases of stock (48) 0 (52) (45) (8.2) 7.1 (634) (454) 39.8 (634) Employee expenses (305) (298) (249) (292) 2.3 22.8 4.4 (1,225) (1,065) 15.0 (1,225) Other expenses (691) (733) (644) (719) (5.7) 7.3 (3.9) (3,914) (2,663) 47.0 (3,914) EBITDA 779 851 485 1,183 (8.4) 60.7 (34.2) 4,306 3,168 35.9 4,306 Other income 39 25 28 23 142 127 142 Interest (39) (42) (40) (42) (6.9) (3.2) (6.9) (188) (166) 13.8 (188) Depreciation (161) (162) (136) (152) (0.9) 17.8 5.7 (736) (571) 28.8 (736) Exchange fluctuation loss (78) (75) (9) (49) (50) (50) (50) Pre-tax profits 541 597 328 963 (9.4) 65.0 (43.9) 3,474 2,508 38.5 3,474 Income tax (157) (179) (74) (300) (1,077) (725) (1,077) Net profits 384 418 254 664 (8.1) 51.1 (42.1) 2,397 1,783 34.4 2,397 Share of loss from JVs 8 8 6 10 97 27 97 Net profits after minority 376 410 248 653 (8.2) 51.5 (42.4) 2,300 1,757 30.9 2,300 EPS (Rs) 3.1 3.4 2.1 5.5 (8.2) 51.5 (42.4) 19.2 14.7 30.9 19.2 Other comprehensive income (12) 0 16 0 68 Total comprehensive income 364 249 669 2,300 1,825 Effective tax rate (%) 29.0 30.0 22.5 31.1 31.0 28.9 31.0 Operational details Gross margins (%) 37.2 36.1 34.0 34.4 34.0 33.3 34.0 EBITDA margin (%) 16.3 16.3 12.0 18.5 15.5 15.3 15.5

Segment details Segment revenue Plastic 3,299 3,113 4,865 NA (32.2) 21,511 15,727 36.8 21,511 Adhesives 1,472 1,289 1,641 NA (10.3) 6,257 5,662 10.5 6,257 Less: excise duty — 329 — — 329 Net sales 4,770 4,073 6,506 17.1 (26.7) 27,768 21,060 31.9 27,768 Segment EBIT Plastic 389 246 647 58.2 (40.0) 1,669 Adhesives 247 109 390 125.7 (36.8) 955 Total 635 355 1,038 79.0 (38.8) 2,624 Segment EBIT (%) Plastic 11.8 7.9 13.3 49.3 (11.5) 10.6 Adhesives 16.8 8.5 23.8 97.8 (29.6) 16.9 Total 13.3 8.7 15.9 52.8 (16.5) 12.5 Pipes sales volume (tons) 22,476 19,539 31,618 15.0 (28.9) 129,590 103,991 24.6 Capital employed Plastic 7,472 6,794 7,373 7,373 Adhesives 5,350 4,479 5,097 5,097 Unallocated (2,136) (2,431) (543) (543) Total 10,687 8,842 11,927 11,927

Source: Company, Kotak Institutional Equities estimates

Exhibit 2: Robust performance of adhesives and sealants business during 4QFY18 Financial performance of adhesives and sealants business, March fiscal year-ends, 2014-18 (Rs mn)

FY2014 FY2015 FY2016 FY2017 1QFY18 2QFY18 3QFY18 4QFY18 FY2018 1QFY19 Sales 3,283 3,847 4,103 4,545 1,134 1,273 1,338 1,562 5,319 1,413 EBITDA 247 350 420 586 109 186 200 320 816 204 EBITDA margin (%) 7.5 9.1 10.2 12.9 9.6 14.6 14.9 20.5 15.3 14.4

Source: Company, Kotak Institutional Equities

KOTAK INSTITUTIONAL EQUITIES RESEARCH 31 Others Astral Poly Technik

Exhibit 3: We expect Astral's EBITDA to grow at 25% CAGR over the next three years Segment-wise revenues and profitability, March fiscal year-ends, 2016-21E (Rs mn)

2016 2017 2018 2019E 2020E 2021E Revenues Pipes and fittings 13,180 14,748 16,097 21,949 26,132 29,922 Adhesives and sealants 3,940 4,545 5,319 6,257 7,322 8,485 Others/adjustments (342) (404) (356) (438) (513) (594) Consolidated revenues 16,778 18,888 21,060 27,768 32,942 37,814 EBITDA Pipes and fittings 1,658 2,070 2,366 3,292 4,113 4,740 Adhesives and sealants 421 586 816 1,032 1,262 1,496 Others/adjustments (3) (18) (14) (17) (20) (24) Consolidated EBITDA 2,076 2,638 3,168 4,306 5,355 6,211

Source: Company, Kotak Institutional Equities estimates

Exhibit 4: 12-month forward P/E for Astral (X)

(X) 70 12-month forward P/E for Astral (X) 60

50

40

30

20

10

-

Oct-07

Oct-08

Oct-09

Oct-10

Oct-11

Oct-12

Oct-13

Oct-14

Oct-15

Oct-16

Oct-17

Apr-07

Apr-08

Apr-09

Apr-10

Apr-11

Apr-12

Apr-13

Apr-14

Apr-15

Apr-16

Apr-17 Apr-18

Source: Bloomberg, Kotak Institutional Equities estimates

32 KOTAK INSTITUTIONAL EQUITIES RESEARCH Astral Poly Technik Others

Exhibit 5: Astral’s valuation is expensive at 44.6X FY2020E EPS, when compared to peers in consumers and building products Comparable valuation for building products companies, March fiscal year-ends, 2018-20E

Price Market cap. P/E (X) EPS growth (%) (Rs) (Rs bn) 2018 2019E 2020E 2018 2019E 2020E Astral 1,097 131 74.8 57.5 44.6 20.8 30.2 28.8 Adhesives/consumer electricals/paints Asian Paints 1,437 763 55.6 47.9 42.9 7.2 16.1 11.7 Pidilite Industries 1,130 275 39.2 34.6 30.9 6.6 13.3 11.9 Havells India 631 899 61.8 52.0 45.8 11.5 18.8 13.7 Kansai Nerolac 476 257 47.5 41.8 35.3 13.1 13.3 18.6 Berger Paints 319 310 65.6 56.0 46.4 8.4 17.8 20.4 Crompton Greaves Consumer 243 184 95.9 55.2 40.2 191.7 73.6 37.5 Median 58.7 50.0 41.5 10.0 17.0 16.1 Mean 60.9 47.9 40.2 39.8 25.5 19.0 Building products Supreme Industries 1,201 153 38.4 30.1 25.2 (5.1) 28.1 18.0 Finolex Industries 577 72 25.0 20.2 16.9 (17.9) 24.4 20.0 Century Plyboards 244 54 30.8 24.9 19.0 2.2 24.1 31.4 Cera Sanitaryware 2,766 36 34.3 28.3 22.8 (2.1) 22.1 24.1 Greenply 211 26 18.6 20.5 17.4 5.6 (9.0) 18.0 HSIL 327 24 26.1 23.1 15.5 (15.7) 12.2 49.3 Median 28.4 24.0 18.2 (3.6) 23.1 22.0 Mean 28.9 24.5 19.5 (5.5) 17.0 26.8

Source: Bloomberg, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 33 Others Astral Poly Technik

Exhibit 6: Consolidated profit model, balance sheet, cash flow, March fiscal year-ends, 2014-21E (Rs mn)

2014 2015 2016 2017 2018E 2019E 2020E 2021E Profit model (Rs mn) Net sales 10,796 14,294 16,778 18,888 21,060 27,768 32,942 37,814 EBITDA 1,551 1,678 2,076 2,638 3,168 4,306 5,355 6,211 Other income 24 36 23 91 127 142 157 172 Finance charges (311) (255) (302) (184) (216) (239) (209) (141) Depreciation (219) (364) (418) (502) (571) (736) (873) (949) Pre-tax profits 1,045 1,095 1,379 2,043 2,508 3,474 4,429 5,292 Income tax (252) (313) (296) (562) (725) (1,077) (1,440) (1,826) Minority interest (4) (23) (65) (25) (27) (97) (27) (27) Net profits 789 759 1,018 1,457 1,757 2,300 2,963 3,440 Earnings per share (Rs) 7.0 6.4 8.5 12.1 14.7 19.1 24.6 28.5

Balance sheet (Rs mn) Total equity 3,160 6,353 7,216 8,591 10,318 13,308 16,132 19,405 Deferred tax liability 118 177 241 344 331 331 331 331 Total borrowings 1,420 2,026 1,306 1,569 2,159 2,274 1,474 674 Other liabilities 2,245 3,097 4,274 4,112 3,944 5,077 5,905 6,706 Total liabilities and equity 6,944 11,653 13,038 14,616 16,751 20,989 23,841 27,115 Cash 10 115 499 166 437 643 1,409 2,741 Current assets 3,959 5,701 5,961 6,809 7,158 8,651 10,110 11,501 Total fixed assets 2,975 3,693 4,440 5,320 6,809 9,348 9,975 10,526 Goodwill — 2,144 2,137 2,321 2,347 2,347 2,347 2,347 Total assets 6,944 11,653 13,038 14,616 16,751 20,989 23,841 27,115

Free cash flow (Rs mn) Operating cash flow, excl. working capital 1,028 1,222 1,525 2,018 2,447 2,991 3,706 4,244 Working capital (665) (306) 428 (1,064) 161 (360) (631) (591) Capital expenditure (920) (854) (1,355) (1,602) (1,839) (2,552) (1,500) (1,500) Investments 9 (2,588) (688) 9 (21) — — — Free cash flow (548) (2,527) (90) (639) 748 79 1,575 2,153

Ratios (%) Gross margins 28.4 26.6 28.4 31.0 34.3 34.0 34.4 34.5 EBITDA margins 14.4 11.7 12.4 14.0 15.0 15.5 16.3 16.4 Debt/equity 43.4 31.8 17.8 17.8 20.5 17.0 9.1 3.5 Net debt/equity 43.1 30.0 11.0 15.9 16.4 12.2 0.4 (10.6) RoAE 27.4 15.8 14.8 18.0 18.2 19.2 20.0 19.3 Adjusted RoACE 25.3 14.3 15.6 16.7 16.3 17.8 19.0 20.2

Source: Company, Kotak Institutional Equities estimates

34 KOTAK INSTITUTIONAL EQUITIES RESEARCH ADD Orient Cement (ORCMNT) Cement AUGUST 02, 2018 RESULT Coverage view: Cautious

A good quarter. Orient’s earnings were higher than our estimate aided by volume Price (`): 120 growth of 15% yoy and improved realizations—the company reported EBITDA of Rs854 Target price (`): 145 mn (-27% yoy, +15% qoq). Cement prices in the company’s key markets in BSE-30: 37,522 Maharashtra have increased by Rs20/bag over the last six months—low prices in this and adjoining regions had led to weak earnings performance over the last three years. Valuations are inexpensive at 8X/6X FY2019-2020E EBITDA. Maintain ADD and revise TP to Rs145 (from Rs165 earlier).

Company data and valuation summary Orient Cement Stock data Forecasts/Valuations 2018 2019E 2020E 52-week range (Rs) (high,low) 184-105 EPS (Rs) 2.2 6.8 10.7 Market Cap. (Rs bn) 24.5 EPS growth (%) 237.8 212.9 58.7 Shareholding pattern (%) P/E (X) 55.4 17.7 11.2 Promoters 37.4 Sales (Rs bn) 22.2 25.6 28.5 FIIs 6.9 Net profits (Rs bn) 0.4 1.4 2.2 MFs 22.3 EBITDA (Rs bn) 3.1 4.2 5.1 Price performance (%) 1M 3M 12M EV/EBITDA (X) 12.1 8.2 6.3 Absolute 8.8 (15.7) (22.1) ROE (%) 4.4 12.9 18.2 Rel. to BSE-30 2.7 (21.0) (32.4) Div. Yield (%) 0.6 1.3 1.7

Strong volume growth of 15% yoy aided a good quarter Orient Cement’s earnings were higher than our estimates— the company reported revenues of Rs6.4 bn (+13% yoy, +3% qoq), EBITDA of Rs854 mn (-27% yoy, +15% qoq) and net-income of Rs160 mn (-59% yoy), against our estimate of Rs5.6 bn, Rs581 mn and Rs11 mn, respectively. Earnings were aided by volume growth of 15% yoy to 1.6 m tons as the company operated at 80% capacity utilization. Reported realization improved 8% qoq to Rs3,990/ton (-2% yoy)—realizations appear optically higher due to higher sales on FoR basis (positive impact on realization of Rs85/ton yoy). We highlight that cement prices in the company’s key markets in Maharashtra, Karnataka and adjoining states were up 0 to 6% qoq (Exhibit 2). Orient’s EBITDA/ton improved 20% qoq to Rs533 (-36% yoy) led by higher realization. Cost/ton increased to Rs3,460 (+7% yoy, +6% yoy) due to (1) increase in fuel costs to Rs1,080/ton (+12% yoy), and (2) higher freight costs of Rs1,130/ton (+16% yoy). The increase in freight cost reflects higher diesel costs (+Rs71/ton) and FoR mix change (+Rs85/ton). Cement prices in Maharashtra have improved after a weak 2HFY18 Orient has high concentration of sales in the West (mostly Maharashtra) and South where cement prices were weak in 2HFY18. The company’s FY2018 sales were 46% in West markets, 39% in South and 15% in other regions—the sales are mostly in the states of Maharashtra, Telangana, Karnataka and Andhra Pradesh, and nearby its plants as the company continues to have the lowest lead distance among peers of less than 300 kms. Abhishek Poddar Prices in Maharashtra recovered over January to June 2018 by close to Rs20/bag; similarly prices in AP/Telangana increased by Rs10/bag to Rs315-320/bag over this period. Orient reported very weak EBITDA/ton in FY2016-2017 and 2HFY18 due to low prices in the West—we expect price Murtuza Arsiwalla improvement in these markets to continue to aid earnings. We maintain ADD rating and revise TP to Rs145 (Rs165 earlier) Samrat Verma Orient’s valuations are less demanding relative to peers, even as continued earnings disappointment for the sector has weighed on stock performance. The company is cost efficient and running at 80% plant utilization but weak pricing in key markets has resulted in it reporting EBITDA/ton in the lowest quartile among Indian cement names—we expect an improvement here. The stock trades at 8X/6X FY2019/2020E EV/EBITDA and EV/ton of US$76 on FY2019E financials. We maintain ADD rating and revise target price to Rs145 (Rs165 earlier).

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

Exhibit 1: Orient reported 15% yoy increase in volumes in 1QFY19; EBITDA/ton improved 20% qoq on better-than-expected realizations Quarterly results for Orient Cement, March fiscal year-ends, 2017-2019E (Rs mn)

Change (%) 1QFY19 1QFY19E 1QFY18 4QFY18 KIE yoy qoq FY2019E FY2018 (% chg) Net sales 6,399 5,608 5,682 6,197 14 13 3 25,601 22,223 15 Raw materials (661) (697) (618) (790) (3,051) (2,615) Employee costs (400) (360) (350) (343) (1,523) (1,385) Power costs (1,778) (1,522) (1,376) (1,692) (6,474) (5,807) Freight costs (1,867) (1,564) (1,393) (1,769) (6,601) (5,937) Other costs (839) (883) (777) (857) (3,709) (3,427) EBITDA 854 581 1,169 746 47 (27) 15 4,244 3,052 39 EBITDA (%) 13.3 10.4 20.6 12.0 16.6 13.7 Other income 33 34 63 34 166 202 Interest (294) (285) (333) (284) (1,165) (1,292) Depreciation (324) (315) (310) (314) (1,297) (1,262) PBT 269 15 589 182 1,949 700 Tax (109) (5) (199) (54) (565) (258) PAT 160 11 389 128 NM (59) 25 1,384 442 213 Extraordinaries — — — — — — Reported PAT 160 11 389 128 1,384 442 EPS (Rs/share) 0.8 0.1 1.9 0.6 NM (59) 25 6.8 2.2 213 Sales (mn tons) 1.60 1.47 1.40 1.68 9 15 (4) 6.3 5.7 9 Realization (Rs/ton) 3,992 3,821 4,065 3,696 4 (2) 8 4,088 3,868 6 Cost (Rs/ton) (3,459) (3,425) (3,229) (3,251) 1 7 6 (3,410) (3,337) 2 Raw materials (412) (475) (442) (471) (487) (455) Employee costs (249) (245) (250) (204) (243) (241) Power & fuel costs (1,109) (1,037) (984) (1,009) (1,034) (1,011) Freight costs (1,165) (1,066) (996) (1,055) (1,054) (1,033) Other costs (523) (601) (556) (511) (592) (596) Profitability (Rs/ton) 533 396 836 445 35 (36) 20 678 531 28 Tax rate (%) 41 30 34 30 29 37

Source: Company, Kotak Institutional Equities estimates

Changes in our estimates

Exhibit 4 highlights key changes in our estimates.

We cut our realization assumption by 1-2% resulting in 3-9% cut in our EBITDA/ton estimate to Rs680, Rs760 and Rs835 for FY2019E, FY2020E and FY2021E. Our EBITDA estimate is cut by 3-5% to Rs4.2 bn, Rs5.1 bn and Rs6 bn for FY2019E, FY2020E and FY2021E.

As a result of lower EBITDA, our EPS estimate is cut by 4-14%. We estimate EPS of Rs6.8, Rs10.7 and Rs15.2 for FY2019E, FY2020E and FY2021E. Our target price is revised to Rs145/share (Rs165/share earlier) based on 7X FY2020E EBITDA.

Key highlights of the 1QFY19 results

 Realization improves by 8% qoq. Orient’s realization improved by 8% qoq to Rs3,990/ton (-2% yoy) led by (1) higher prices in the company’s key markets (Exhibit 2), and (2) as well as the impact of higher FoR sales (+Rs85/ton yoy). Higher FoR sales has also pushed up the company’s freight costs.

 Volumes increase by 15% yoy. The company’s volumes increased by 15% yoy to 1.6 mn tons (1.68 mn tons in 4QFY18) as it operated its plants at 80% utilization for the quarter. The sales mix was largely unchanged with 66% in PPC---as per the company, this has remained steady despite growth in demand from the non-trade/OPC segment.

 Increase in fuel costs. The company’s fuel costs increased to Rs1,077/ton (Rs964/ton in 1QFY18) due to an increase in pet-coke prices. The company also highlighted challenges around availability of domestic coal which impacted these costs. The company expects domestic coal availability to improve.

36 KOTAK INSTITUTIONAL EQUITIES RESEARCH Orient Cement Cement

Exhibit 2: Higher prices in company’s key markets aided realizations in 1QFY19 Quarterly retail cement price trend in Orient's key markets (Rs/bag)

1QFY17 2QFY17 3QFY17 4QFY17 1QFY18 2QFY18 3QFY18 4QFY18 1QFY19 2QFY19E Maharashtra 291 287 324 308 347 322 307 309 326 327 Andhra Pradesh 269 317 331 313 348 332 302 303 320 313 Karnataka 377 367 380 375 403 375 363 360 357 340 Change qoq (Rs/bag) Maharashtra 16 (3) 37 (17) 39 (24) (15) 2 17 0 Andhra Pradesh (23) 48 14 (18) 36 (17) (30) 1 18 (8) Karnataka (2) (10) 13 (5) 28 (28) (12) (3) (3) (17)

Source: Industry, Kotak Institutional Equities estimates

Exhibit 3: Orient's realizations have been fairly volatile over the last few quarters affecting profitability Quarterly realizations and EBITDA/ton for Orient Cement, 1QFY17-1QFY19 (Rs/ton)

Realization (Rs/ton) Minimum Maximum EBITDA (Rs/ton) Minimum Maximum 4,200 1,000 4,000 800 3,800 600 3,600 400 3,400

3,200 200

3,000 -

1QFY17

2QFY17

3QFY17

4QFY17

1QFY18

2QFY18

3QFY18

4QFY18

1QFY19

1QFY17

2QFY17

3QFY17

4QFY17

1QFY18

2QFY18

3QFY18 4QFY18 1QFY19

Source: Quarterly realizations and EBITDA/ton for Orient Cement, 1QFY17-1QFY19 (Rs/ton)

Exhibit 4: Orient Cement, changes in estimates, March fiscal year ends, FY2019-2021E

Revised estimate Previous estimate Change (%) 2019E 2020E 2021E 2019E 2020E 2021E 2019E 2020E 2021E Volume and realizations (mn tons, Rs/ton) Cement sales (mn tons) 6.3 6.7 7.2 6.3 6.7 7.2 0 0 0 Realization (Rs/ton) 4,088 4,250 4,400 4,125 4,325 4,425 (1) (2) (1) EBITDA (Rs/ton) 678 761 834 715 836 859 (5) (9) (3) Earnings estimates (Rs mn) Revenues 25,601 28,479 31,843 25,835 28,984 32,027 (1) (2) (1) EBITDA 4,244 5,099 6,034 4,478 5,604 6,217 (5) (9) (3) PAT 1,384 2,196 3,103 1,551 2,556 3,234 (11) (14) (4) EPS 6.8 10.7 15.2 7.6 12.5 15.8 (11) (14) (4)

Source: Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 37 Cement Orient Cement

Exhibit 5: Orient Cement, Assumptions, March fiscal year ends, 2016-2021E (Rs mn)

2016 2017 2018 2019E 2020E 2021E CAGR (%) Capacity (mn tons) 8.0 8.0 8.0 8.0 8.0 8.0 0 Utilization (%) 68 69 72 78 84 90 Volumes (mn tons) 4.4 5.6 5.7 6.3 6.7 7.2 8 Growth (%) 9 26 3 9 7 8 Realization (Rs/ton) 3,399 3,377 3,868 4,088 4,250 4,400 4 Growth (%) (9.9) (0.6) 14.5 5.7 4.0 3.5 EBITDA (Rs/ton) 398 321 531 678 761 834 16 Growth (%) (45.0) (19.5) 65.6 27.6 12.3 9.6 Revenues (Rs mn) 15,018 18,751 22,223 25,601 28,479 31,843 13 EBITDA (Rs mn) 1,760 1,781 3,052 4,244 5,099 6,034 26 PAT (Rs mn) 622 (321) 442 1,384 2,196 3,103 91 Net debt (Rs mn) 12,520 12,059 12,297 10,096 7,547 4,241 (30)

Source: Company, Kotak Institutional Equities estimates

Exhibit 6: Our fair value of Rs145/share is based on 7X FY2020E EBITDA Orient Cement, Valuation details, March 2020E financials

EBITDA Multiple EV (Rs mn) (X) (Rs mn) (Rs/share) Valuation EBITDA (Rs mn) 5,099 7 37,174 182 Net debt (Rs mn) (7,547) (37) Equity value (Rs mn) 29,626 145 Target price (Rs/share) 145

Source: Kotak Institutional Equities estimates

38 KOTAK INSTITUTIONAL EQUITIES RESEARCH Orient Cement Cement

Exhibit 7: Orient Cement, Financial summary, March fiscal year-ends, 2016-2021E, (Rs mn)

2016 2017 2018 2019E 2020E 2021E Profit model (Rs mn) Net sales 15,018 18,751 22,223 25,601 28,479 31,843 EBITDA 1,760 1,781 3,052 4,244 5,099 6,034 Other income 149 123 202 166 179 248 Interest (544) (1,353) (1,292) (1,165) (848) (532) Depreciation (763) (1,215) (1,262) (1,297) (1,338) (1,379) Pretax profits 602 (665) 700 1,949 3,093 4,371 Tax 20 344 (258) (565) (897) (1,268) Net profits 622 (321) 442 1,384 2,196 3,103 Adjusted Net Profit 622 (321) 442 1,384 2,196 3,103 Earnings per share (Rs) 3.0 (1.6) 2.2 6.8 10.7 15.2 Balance sheet (Rs mn) Equity 205 205 205 205 205 205 Reserves and surplus 9,958 9,667 10,016 11,030 12,733 15,343 Borrowings 12,898 12,885 12,628 10,253 7,187 4,120 Deferred tax liability 1,228 750 854 1,030 1,308 1,701 Currrent liabilities 4,345 5,337 5,705 5,967 6,550 6,887 Total liabilities and equity 28,634 28,843 29,410 28,484 27,983 28,257 Net fixed assets 21,497 22,956 22,507 22,398 22,060 21,682 Capital work in progress 2,392 981 1,582 981 981 981 Cash 378 825 331 157 (361) (121) Current assets 4,367 4,080 4,988 4,949 5,302 5,716 Total assets 28,634 28,843 29,409 28,485 27,983 28,257 Free cash flow (Rs mn) Operating cash flow, excl. working capital 1,228 569 1,901 2,856 3,812 4,875 Working capital 824 1,279 (540) 301 230 (76) Capital expenditure (3,697) (1,264) (1,413) (587) (1,000) (1,000) Free cash flow (1,645) 584 (53) 2,571 3,042 3,799 Ratios Net debt/equity (X) 1.2 1.2 1.2 0.9 0.6 0.3 Book value per share 50 48 50 55 63 76 Net debt/EBITDA (X) 7.1 6.8 4.0 2.4 1.5 0.7 RoAE (%) 6.2 (3.2) 4.4 12.9 18.2 21.8 RoACE (%) 4.7 1.2 5.0 9.4 12.8 16.6 CRoCI (%) 9.7 5.4 8.3 12.3 14.2 16.1

Source: Company, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 39 SELL Castrol India (CSTRL) Energy AUGUST 02, 2018 RESULT, CHANGE IN RECO. Coverage view: Attractive

Not worth the wait. Castrol’s results were disappointing led by muted two-year CAGR Price (`): 168 of 0.4% in volumes and sharp qoq decline in margins. We expect near-term recovery in Target price (`): 155 margins and pickup in volume growth post 2HCY18. However, our optimism on future BSE-30: 37,522 growth reduces given the company’s evident inability to manage volume/margin equation in their attempts to gain volume market share amid a challenging business environment. We cut EPS by 9-10% and downgrade the stock to SELL from ADD with a revised TP of `155 (`215 earlier). A lower base oil price is a key risk to our stance. Company data and valuation summary Castrol India Stock data Forecasts/Valuations 2018 2019E 2020E 52-week range (Rs) (high,low) 214-154 EPS (Rs) 6.9 7.1 7.8 Market Cap. (Rs bn) 165.6 EPS growth (%) 3.3 2.9 10.1 Shareholding pattern (%) P/E (X) 24.4 23.7 21.5 Promoters 51.0 Sales (Rs bn) 35.8 38.6 42.0 FIIs 10.7 Net profits (Rs bn) 6.8 7.0 7.7 MFs 5.5 EBITDA (Rs bn) 10.3 10.5 11.6 Price performance (%) 1M 3M 12M EV/EBITDA (X) 15.3 14.9 13.4 Absolute 2.4 (14.0) (16.2) ROE (%) 67.9 67.1 71.5 Rel. to BSE-30 (3.3) (19.4) (27.2) Div. Yield (%) 2.8 3.3 3.7 Modest 0.4% two-year CAGR in volumes; sharp 480 bps qoq decline in margins Castrol’s EBITDA was 13% below our estimate at `2.5 bn, driven by sharp decline in margins to 24.7%, lowest in past 12 quarters excluding pre-GST quarter of 2QCY17. Reported net income was 14% below our estimate at `1.64 bn. The company has reported 11% yoy increase in EBITDA to `5.26 bn and 9% yoy increase in EPS to `3.5 in 1HCY18 led by 7% growth in volumes from a low base and stable margins at 27%. We expect 2HCY18 to be challenging given higher base of volumes during 2HCY17 due to post-GST restocking and elevated raw material costs.  Modest 0.4% 2-year CAGR in volumes. Castrol’s volumes grew 12% yoy to 57 mn liters from a low base of 2QCY17, which was impacted by pre-GST destocking; 2-year CAGR in volumes was negligible 0.4%. The management indicated that personal mobility and CVO segments have grown at double-digits in 1HCY18, while industrial segment declined sharply.  Margins slump to 24.7%. Castrol’s realizations declined 1% qoq to `178.5/liter despite 3- 4% price hikes undertaken in February, reflecting deterioration in mix due to higher growth in CVO volumes as compared to personal mobility. Unit raw material cost jumped 9% qoq to `90.8/liter. Gross margins declined ~450 bps qoq to 49.1% and EBITDA margins declined ~480 bps qoq to 24.7%. The company has raised prices further by 3-4% in July. Cut CY2018-20E EPS by 9-10% factoring in slower growth in volumes and lower margins In the conference call, Castrol management remained upbeat on strong yoy growth from a pre- GST impacted quarter and their persisting focus on volume growth, without providing any comfort on their strategy to manage volume/margins equation. We cut CY2018-20E EPS by 9-10%, factoring in (1) slower 3-4% growth in volumes given continued disappointment, (2) lower EBITDA margins of 27-28% to reflect higher base oil prices and a weaker rupee and (3) other changes. Downgrade to SELL with revised target price of `155 Tarun Lakhotia We downgrade the stock to SELL from ADD rating reducing target price to `155 from `215, valuing the company at 20X CY2019E EPS instead of 25X ascribed earlier, given (1) uninspiring Akshay Bhor performance on volumes/margins combination and (2) our expectations of a muted growth in earnings going forward. Castrol’s earnings growth remains cyclical and has shown evident signs of moderation amid rising crude/base oil prices post the two-year CAGR of 18% in CY2014-16 led by step-jump in margins during a sharp fall in raw material cost; we expect EPS to grow at 7.5% CAGR in CY2017-20E amid elevated crude/base oil prices. A sharp fall in crude/base oil prices may drive earnings upgrade and is a key risk to our negative stance on the stock.

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

Exhibit 1: Interim results of Castrol, calendar year-ends (Rs mn)

(% chg.) yoy 2QCY18 2QCY18E 2QCY17 1QCY18 2QCY18E 2QCY17 1QCY18 1HCY18 1HCY17 (% chg.) CY2018E Net sales 10,172 10,281 8,704 9,271 (1.1) 16.9 9.7 19,443 17,526 10.9 38,562 Raw materials 5,173 4,952 4,294 4,294 4.5 20.5 20.5 9,467 8,336 13.6 18,822 Employees 525 513 489 469 2.2 7.4 11.9 994 987 0.7 2,035 Others 1,957 1,917 1,826 1,765 2.1 7.2 10.9 3,722 3,475 7.1 7,183 Total expenditure 7,655 7,383 6,609 6,528 3.7 15.8 17.3 14,183 12,798 10.8 28,040 EBITDA 2,517 2,898 2,095 2,743 (13.1) 20.1 (8.2) 5,260 4,728 11.3 10,521 Other income 173 185 155 228 (6.5) 11.6 (24.1) 401 340 17.9 713 Interest 3 7 1 7 10 4 16 Depreciation 132 140 118 143 (6.0) 11.9 (7.7) 275 241 14.1 523 Pre-tax profits 2,555 2,936 2,131 2,821 (13.0) 19.9 (9.4) 5,376 4,823 11.5 10,695 Extraordinaries — — — — — — — Current tax 932 1,027 733 1,020 (9.3) 27.1 (8.6) 1,952 1,650 18.3 3,796 Deferred tax (19) — 19 (17) (36) 4 (95) Net income 1,642 1,908 1,379 1,818 (13.9) 19.1 (9.7) 3,460 3,169 9.2 6,994 Adjusted net income 1,642 1,908 1,379 1,818 (13.9) 19.1 (9.7) 3,460 3,169 9.2 6,994 Effective tax rate (%) 35.7 35.0 35.3 35.6 35.6 34.3 34.6 Adjusted EPS (Rs) 1.7 1.9 1.4 1.8 (13.9) 19.1 (9.7) 3.5 3.2 9.2 7.1

Other details Sales volumes (mn liters) 57.0 56.0 50.9 51.5 1.8 12.0 10.7 108.5 101.1 7.3 210.2 Gross realization (Rs/liter) 178.5 183.6 171.0 180.0 (2.8) 4.4 (0.9) 179.2 173.4 3.4 183.5 Raw material (Rs/liter) 90.8 88.4 84.4 83.4 2.6 7.6 8.8 87.3 82.5 5.8 89.6 Contribution (Rs/liter) 87.7 95.2 86.6 96.6 (7.8) 1.2 (9.2) 91.9 90.9 1.1 93.9 EBITDA (Rs/liter) 44.2 51.8 41.2 53.3 (14.7) 7.3 (17.1) 48.5 46.8 3.7 50.1 Gross margin (%) 49.1 51.8 50.7 53.7 (269)bps (152)bps (454)bps 51.3 52.4 (113)bps 51.2 EBITDA margins (%) 24.7 28.2 24.1 29.6 (344)bps 68 bps (484)bps 27.1 27.0 8 bps 27.3

Source: Company, Kotak Institutional Equities estimates

Exhibit 2: Two-year CAGR of volumes at negligible 0.4% in 2QCY18 Quarterly volumes, calendar year-ends, 2008-18YTD (mn liters)

1Q 2Q 3Q 4Q Sales volumes (mn liters) 2008 54.3 63.9 50.6 46.0 2009 45.2 56.0 50.7 53.7 2010 54.6 60.2 50.4 53.8 2011 55.9 54.1 46.0 51.8 2012 52.6 56.7 46.1 48.5 2013 50.1 54.1 44.8 47.8 2014 48.8 53.3 45.6 48.2 2015 46.0 53.7 45.3 46.1 2016 50.1 56.5 45.7 47.0 2017 50.2 50.9 49.1 54.4 2018 51.5 57.0 Growth (% yoy) 2008 5.6 2.7 1.2 (17.3) 2009 (16.8) (12.4) 0.2 16.7 2010 20.8 7.5 (0.6) 0.2 2011 2.4 (10.1) (8.7) (3.7) 2012 (5.9) 4.8 0.2 (6.4) 2013 (4.8) (4.6) (2.8) (1.4) 2014 (2.6) (1.5) 1.8 0.8 2015 (5.7) 0.7 (0.6) (4.4) 2016 9.0 5.3 0.8 2.0 2017 0.1 (9.9) 7.4 15.7 2018 2.6 12.0

Source: Company, Kotak Institutional Equities

KOTAK INSTITUTIONAL EQUITIES RESEARCH 41 Energy Castrol India

Exhibit 3: Base oil prices have increased in the recent months Singapore base oil price (US$/ton)

(US$/ton) 1,400 Bright Stock SN 500

1,200

1,000

800

600

400

200

-

Jul-15

Jul-16

Jul-17

Jul-18

Jan-15

Jan-16

Jan-17

Jan-18

Sep-15

Sep-16

Sep-17

Nov-15

Nov-16

Nov-17

Mar-15

Mar-16

Mar-17

Mar-18

May-15

May-16 May-17 May-18

Source: ICIS, Kotak Institutional Equities

Exhibit 4: We expect 3-4% growth in volumes and 27-28% EBITDA margins going forward Key assumptions, calendar year-ends, 2012-20E

2012 2013 2014 2015 2016 2017 2018E 2019E 2020E Macro assumptions Exchange rate (Rs/US$) 53.2 58.0 61.0 64.1 67.2 65.1 67.5 69.5 70.5 Global base oil (US$/ton) 1,152 1,032 1,029 705 565 667 747 737 722 Domestic base oil (Rs/liter) 64.5 62.9 66.0 47.5 39.9 45.6 53.0 53.8 53.5 Change (%) 4.3 (2.4) 4.8 (28.0) (15.9) 17.9 12.0 (1.3) (2.0) Realization (Rs/liter) Gross realization [A] 153.1 161.5 173.1 172.6 169.0 175.2 183.5 192.0 198.5 Change (%) 7.1 5.5 7.2 (0.3) (2.1) 3.7 4.7 4.7 3.4 Raw material cost [B] 89.6 93.0 98.1 82.6 77.6 81.7 89.6 92.5 94.3 Change (%) 9.5 3.8 5.5 (15.9) (6.1) 5.3 9.6 3.3 1.9 Gross contribution [A] - [B] 63.4 68.6 75.0 90.0 91.5 93.5 93.9 99.5 104.2 Gross margins (%) 41.5 42.4 43.3 52.2 54.1 53.4 51.2 51.8 52.5 EBITDA 30.5 34.9 36.6 46.8 50.1 50.5 50.1 53.1 56.4 EBITDA margin (%) 19.9 21.6 21.1 27.1 29.7 28.8 27.3 27.7 28.4 Volume (Kilo liters) Non-automotive grades 27,487 26,718 27,974 26,015 27,706 27,249 25,887 26,405 26,933 Automotive grades 170,069 163,947 161,816 159,065 165,427 171,052 177,894 185,899 193,335 Traded items 6,345 6,155 6,140 6,035 6,277 6,277 6,402 6,658 6,924 Total 203,902 196,820 195,929 191,115 199,410 204,578 210,183 218,962 227,192 Growth (%) (2.3) (3.5) (0.5) (2.5) 4.3 2.6 2.7 4.2 3.8

Source: Company, Kotak Institutional Equities estimates

42 KOTAK INSTITUTIONAL EQUITIES RESEARCH Castrol India Energy

Exhibit 5: Castrol has high leverage to exchange rate and raw material prices Sensitivity of Castrol's earnings to key variables

CY2019E CY2019E Downside Base case Upside Downside Base case Upside Exchange rate Exchange rate (Rs/US$) 71 70 69 72 71 70 Net profits (Rs mn) 7,612 7,702 7,793 8,355 8,446 8,538 EPS (Rs) 7.7 7.8 7.9 8.4 8.5 8.6 % upside/(downside) (1.2) 1.2 (1.1) 1.1

Raw material price Raw material price (US$/ton) 762 737 712 747 722 697 Net profits (Rs mn) 7,489 7,702 7,915 8,222 8,446 8,671 EPS (Rs) 7.6 7.8 8.0 8.3 8.5 8.8 % upside/(downside) (2.8) 2.8 (2.7) 2.7

Source: Company, Kotak Institutional Equities estimates

Exhibit 6: Castrol stock is trading at 22X forward EPS 12-month forward P/E for Castrol India (X)

50 CSTRL 12-month forward P/E 45

40

35

30

25

20

15

10

5

-

Jul-10

Jul-11

Jul-12

Jul-13

Jul-14

Jul-15

Jul-16

Jul-17

Jul-18

Jan-10

Jan-11

Jan-12

Jan-13

Jan-14

Jan-15

Jan-16

Jan-17 Jan-18

Source: Bloomberg, Company, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 43 Energy Castrol India

Exhibit 7: Profit model, balance sheet, cash model, calendar year-ends, 2012-20E (Rs mn)

2012 2013 2014 2015 2016 2017 2018E 2019E 2020E Profit model (Rs mn) Net sales 31,209 31,796 33,923 32,980 33,703 35,843 38,562 42,047 45,096 EBITDA 6,226 6,875 7,167 8,949 9,994 10,331 10,521 11,634 12,812 Other income 722 836 481 646 681 651 713 749 775 Interest (18) (17) (24) (8) (15) (12) (16) (20) (24) Depreciation (266) (305) (361) (390) (450) (455) (523) (585) (646) Pretax profits 6,663 7,390 7,263 9,197 10,210 10,515 10,695 11,779 12,917 Extraordinaries — 228 — 313 193 186 — — — Current tax (2,278) (2,411) (2,606) (3,238) (3,880) (3,651) (3,796) (4,184) (4,591) Deferred tax 89 (121) 89 (119) 181 (131) 95 107 121 Adjusted net profits 4,474 4,933 4,746 5,950 6,579 6,798 6,994 7,702 8,446 Earnings per share (Rs) 4.5 5.0 4.8 6.0 6.7 6.9 7.1 7.8 8.5

Balance sheet (Rs mn) Total equity 6,492 7,514 4,968 5,756 9,815 10,202 10,647 10,909 11,320 Deferred taxation liability (651) (530) (618) (499) (672) 188 93 (15) (136) Total borrowings — — — — — — — — — Currrent liabilities 8,303 8,636 9,951 10,860 9,740 9,380 11,261 11,859 12,330 Total liabilities and equity 14,145 15,621 14,300 16,117 18,883 19,770 22,001 22,754 23,515 Cash 5,746 5,942 4,315 6,965 8,219 7,842 9,158 9,433 9,870 Current assets 6,828 7,925 8,108 7,300 8,822 9,965 10,979 11,615 12,161 Total fixed assets 1,571 1,753 1,877 1,853 1,842 1,962 1,864 1,705 1,483 Investments — — — — — — — — — Total assets 14,145 15,621 14,300 16,117 18,883 19,770 22,002 22,753 23,515

Free cash flow (Rs mn) Operating cash flow, excl. working capital 4,428 4,704 4,873 6,262 6,372 6,727 6,709 7,431 8,197 Working capital 223 (756) 580 1,128 252 (645) 867 (39) (74) Capital expenditure (348) (260) (504) (370) (358) (563) (425) (425) (425) Free cash flow 4,303 3,688 4,950 7,020 6,266 5,519 7,151 6,967 7,698 Investments — — — — (492) 1,633 — — — Other income 356 559 366 392 520 444 713 749 775

Ratios (%) RoAE 79.0 79.3 83.7 128.1 93.1 70.8 66.2 71.2 76.5 RoACE 79.3 77.1 84.0 124.0 91.5 69.7 66.3 71.3 76.7

Assumptions Volume (mn liters) 203.9 196.8 195.9 191.1 199.4 204.6 210.2 219.0 227.2 Gross realization (Rs/liter) 153.1 161.5 173.1 172.6 169.0 175.2 183.5 192.0 198.5 Gross contribution (Rs/liter) 63.4 68.6 75.0 90.0 91.5 93.5 93.9 99.5 104.2 EBITDA margins (%) 19.9 21.6 21.1 27.1 29.7 28.8 27.3 27.7 28.4

Source: Company, Kotak Institutional Equities estimates

44 KOTAK INSTITUTIONAL EQUITIES RESEARCH BUY NTPC (NTPC) Utilities AUGUST 02, 2018 UPDATE Coverage view: Attractive

Emphasizing efficient growth. NTPC’s annual analyst meet emphasized delivering Price (`): 155 low-cost power that could hold NTPC in good stead under a potential ‘National Merit Target price (`): 190 Order’ system and drive sustainable growth for the company. Discussions also focused on BSE-30: 37,522 (1) settling the GCV-related fuel issues, (2) under-recovery of fixed cost and (3) organic as well as inorganic growth opportunities. Maintain BUY rating with target price of `190/share.

Company data and valuation summary NTPC Stock data Forecasts/Valuations 2018 2019E 2020E 52-week range (Rs) (high,low) 188-149 EPS (Rs) 11.4 14.9 15.6 Market Cap. (Rs bn) 1,280.9 EPS growth (%) (7.6) 30.9 4.4 Shareholding pattern (%) P/E (X) 13.6 10.4 10.0 Promoters 62.3 Sales (Rs bn) 834.5 1,011.6 1,121.5 FIIs 11.5 Net profits (Rs bn) 93.9 122.9 128.3 MFs 8.7 EBITDA (Rs bn) 216.7 277.1 304.3 Price performance (%) 1M 3M 12M EV/EBITDA (X) 11.0 8.6 7.9 Absolute (2.7) (9.8) (6.0) ROE (%) 9.5 11.6 11.3 Rel. to BSE-30 (8.1) (15.4) (18.4) Div. Yield (%) 3.6 2.9 3.0

Emphasis on delivery of low-cost power as a tool to address under-recoveries and drive growth

 NTPC remains committed to growth and has 21 GW of capacity currently under construction (14 GW at standalone level). NTPC highlighted that they will likely commercialize 5 GW/annum over the next two years, though may slow down to coal-based capacity addition of 2 GW/annum thereafter. However, the company remains committed to supplementing capacity addition with increased emphasis on renewable assets. NTPC expects to increase regulated equity from `509 bn as of March 2018 to `850 bn by FY2022 (14% CAGR).

 NTPC clarified that there is no official communication received by them from the government or NHPC regarding potential acquisition of the latter. Management highlighted that they did consider acquisition of the government’s stake in SJVN. NTPC has already concluded purchase of minority stake of Bihar government in the JV assets, while pursuing acquisitions of Barauni and Chabbra from the respective state governments.

 NTPC stated that they have to be very careful while evaluating acquisition of stressed power assets due to absence of PPAs or non-remunerative PPAs. The company is happy for states or banks to acquire the assets that NTPC will run on their behalf for a fee. NTPC highlighted that of the 24 GW of stressed power assets, half of them are of inferior quality while the other half are good assets with bad PPAs.

 NTPC highlighted that they had `14.8 bn of under-recovery on capacity charge in FY2018 due to low plant availability in the absence of fuel availability. Management attributed the low PAF to (1) unanticipated spurt in demand and (2) poor domestic fuel supplies. Murtuza Arsiwalla Management highlighted that introduction of a ‘National Merit Order’ dispatch system could help address concerns of coal, as only low-cost projects (typically pit-head) would be fully

absorbed before necessitating the transport of coal to distant plants. NTPC highlighted that Samrat Verma their total tariff of `3.23 with a fuel cost of `1.95/kwh is among the most competitive and largely unchanged over the past five years.

 NTPC acknowledged that loss of GCV between ‘as received’ and ‘as fired’ cost them as much as `10 bn/annum. However, representation from CEA as well as acknowledgment of loss of GCV in the CERC consultation paper makes the management confident that the issue of fuel cost under-recovery will be addressed in due course.

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

 NTPC also represented that they are going ahead with implementation of pollution control equipment, so as to be compliant with the new environmental norms by FY2022. NTPC believes that only 2.4 GW of capacities will have to be de-commissioned, while the remaining will install the requisite pollution control equipment at a cost of `4-5 mn/MW. CERC has already acknowledged the incremental investment under the change of law clause of the PPA, and accordingly investment in pollution control equipment will further aid build-up of regulated equity, though will make the cost of power dearer by `0.3/kwh.

Maintain BUY rating and target price of `190/share

At 10X P/E and 1X P/B, NTPC trades at reasonable valuations, with a strong growth pipeline that will likely help the company near-double its asset base over the next 4-5 years. Regulatory review does pose a risk to earnings, though better capital allocation through increased acquisitions could help improve return profile. Maintain BUY rating with target price of `190/share.

Exhibit 1: Reported PAT for 1Q2019 missed estimates on account of a substantial drop in other income Interim results for NTPC (Standalone), March fiscal year-ends (Rs bn)

(% Chg.) 1QFY19 1QFY19E 1QFY18 4QFY18 KIE yoy qoq FY2018 FY2017 (% Chg.) FY2019E Net sales 227 220 199 231 3.3 14.2 (1.7) 835 783 6.6 1,012 Operating costs Cost of fuel (138) (130) (121) (131) 6.4 14.3 5.4 (496) (476) (618) Personnel costs (12) (14) (11) (14) (9.9) 15.9 (9.2) (45) (36) (46) Other expenses (17) (18) (17) (27) (3.3) 1.0 (37.3) (77) (59) (71) Total expenses (167) (161) (148) (172) 4.0 12.9 (2.6) (618) (570) (734) EBITDA 60 59 50 59 1.4 18.1 0.8 217 213 1.8 277 EBITDA margin (%) 26.2 26.7 25.4 25.6 26.0 27.2 27.4 Other income 3 9 9 8 23 14 23 Interest & finance charges (12) (11) (9) (11) (40) (36) (51) Depreciation (19) (20) (16) (19) (71) (59) (86) PBT 32 37 35 37 (13.4) (8.5) (14.0) 129 132 (2.1) 163 Provision for tax (net) (6) (9) (8) (12) (35) (30) (40) Net profit 26 27 26 25 (5.8) (1.1) 2.0 94 102 (7.6) 123 Extraordinary — — — 4 10 1 — EPS 3.1 3.3 3.2 3.1 11 12 15 EBITDA margin (%) 26.2 26.7 25.4 25.6 26.0 27.2 27.4 Tax rate (%) 18.4 25.0 24.4 31.2 27.2 22.8 24.7

Source: Company, Kotak Institutional Equities

Exhibit 2: PAF of coal plants remained low at 86% and would have resulted in some under-recovery of capacity charge Operational performance of NTPC, March fiscal year-ends

(% Chg.) 1QFY19 1QFY18 4QFY18 yoy qoq FY2018 FY2017 (% Chg.) Generation (BU) 69.2 64.4 68.6 7.5 1.0 265.8 250.3 6.2 Commercial generation (BU) 69.1 64.1 68.5 7.8 0.9 265.0 250.1 6.0 Energy Sent Out (BU) 64.6 59.8 64.2 7.9 0.5 247.9 233.6 6.1 Coal (mn tons) Domestic (mn tons) 43.1 38.3 45.8 12.3 (5.9) 168.2 159.4 5.6 Imported (mn tons) 0.1 0.1 0.1 (35.7) (10.0) 0.3 1.0 (68.9) (Chg. bps) Availability (%) Coal 85.9 89.0 86.6 (306.0) (73.0) 86.0 91.6 (560.0) Gas 83.9 88.2 96.9 (434.0) (1,300.0) 92.6 93.5 (89.0) Hydro 103.8 103.6 93.8 16.0 1,001.0 99.9 106.4 (652.0) PLF (%) Coal 78.0 79.1 79.0 (107.0) (105.0) 77.9 78.6 (69.0) Gas 23.1 24.4 20.2 (129.0) 289.0 25.1 24.4 63.0 Hydro 38.9 65.2 13.1 (2,626.0) 2,582.0 47.3 46.0 126.0 AuX (%) 6.6 6.7 6.3 (11.6) 34.8 6.5 6.6 (13.3)

Source: Company, Kotak Institutional Equities

46 KOTAK INSTITUTIONAL EQUITIES RESEARCH NTPC Utilities

Exhibit 3: Adjusted PAT for 1QFY19 saw a marked improvement from 4QFY18 Adjustments to reported earnings of NTPC, March fiscal year-ends (Rs bn)

1QFY17 2QFY17 3QFY17 4QFY17 2017 1QFY18 2QFY18 3QFY18 4QFY18 2018 1QFY19 Reported PAT 23,695 24,960 24,687 29,699 93,853 26,182 24,386 23,608 29,256 103,432 25,881 Other income (Post-tax) (2,274) (2,741) (2,667) (6,658) (11,237) (7,127) (3,317) (2,033) (6,538) (18,466) (2,372) Prior period sales (Post-tax) 281 (1,064) (2,992) (4,192) (7,967) (352) 538 (95) (143) (52) 684 Income tax recoverable — — — — — — — 1,056 1,047 2,103 — Deferred tax (123) (123) (123) (91) (460) (175) (175) (175) (145) (670) (209) Tax for prior periods — — (1,076) 968 (108) — — (5,630) (3,883) (9,513) (1,059) Wage provisions — — — 2,082 2,082 475 2,765 3,575 729 7,544 630 Adjusted PAT 21,579 21,031 17,829 21,808 76,163 19,003 24,196 20,306 20,324 84,380 23,556 RoE (%) 21 20 17 21 18 17 22 16 16 18 19

Source: Company, Kotak Institutional Equities

Exhibit 4: No new capacity was commercialized in 1QFY19 Details of installed and commercial capacity, March fiscal year-ends (MW)

Change (%) Change (GW) 1QFY19 1QFY18 4QFY18 yoy qoq yoy qoq Commercial capacity Standalone 44,500 40,522 44,500 9.8 — 4.0 — Others 6,891 6,771 6,891 1.8 — 0.1 — Consolidated 51,391 47,293 51,391 8.7 — 4.1 — Installed capacity Standalone 46,100 44,419 46,100 3.8 — 1.7 — Others 7,551 7,216 6,551 4.6 15.3 0.3 1.0 Consolidated 53,651 51,635 52,651 3.9 1.9 2.0 1.0

Source: Company, Kotak Institutional Equities

Exhibit 5: Current CWIP is 38% of regulated equity, that will propel growth up to FY2019 Composition of book value of NTPC, March fiscal year-ends, 2015-2021E (Rs/share)

Regulated equity CWIP Subsidiaries / JVs Cash and equivalents Others 180

160 3

140 3 31 4 25 120 22 11 23 20 11 23 100 18 5 11 7 4 23 6 10 11 80 18 10 26 24 9 29 60 24 21 95 40 82 62 70 50 53 20 45

0 2015 2016 2017 2018 2019E 2020E 2021E

Source: Company, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 47 Utilities NTPC

Exhibit 6: Key assumptions behind NTPC estimates, March fiscal year-ends, 2015-21E

2015 2016 2017 2018 2019E 2020E 2021E Assumptions Capacity addition (MW) 660 1,960 910 3,845 3,239 4,159 4,824 Commercial capacity (MW) 37,032 38,992 39,902 43,747 46,986 51,145 55,969 Regulated equity (Rs mn) 369,163 414,204 440,489 509,207 578,520 673,616 779,284 PLF-Coal (%) 80 79 79 80 85 85 85 PLF-Gas (%) 33 25 24 24 24 24 24 Average tariff (Rs/kwh) 3.11 2.92 3.27 3.38 3.78 3.57 3.73 Average fuel cost (Rs/kwh) 2.05 1.83 1.93 1.86 1.97 2.04 2.11

Source: Company, Kotak Institutional Equities estimates

Exhibit 7:NTPC: Profit model, balance sheet, cash model, 2015-21E, March fiscal year-ends (Rs mn)

2016 2017 2018 2019E 2020E 2021E Profit model (Rs mn) Net sales 705,068 782,734 834,528 1,011,567 1,121,510 1,279,435 EBITDA 175,130 212,843 216,674 277,077 304,336 352,936 Other income 12,014 14,046 23,083 22,681 22,806 29,336 Interest (32,304) (35,972) (39,843) (50,517) (59,806) (71,552) Depreciation (54,253) (59,208) (70,989) (85,972) (95,601) (110,355) Pretax profits 100,587 131,709 128,925 163,269 171,734 200,364 Tax (39,629) (30,027) (35,006) (40,372) (43,479) (50,925) Net profits 60,958 101,681 93,919 122,897 128,255 149,439 Extraordinary items 41,471 (7,828) 9,513 — — — Earnings per share (Rs) 7.4 12.3 11.4 14.9 15.6 18.1 Balance sheet (Rs mn) Total equity 887,820 962,312 1,017,778 1,097,538 1,180,775 1,277,761 Deferred taxation liability 30,974 36,060 44,945 55,075 68,327 83,320 Total borrowings 930,979 1,003,398 1,151,979 1,281,581 1,341,582 1,333,105 Currrent liabilities 296,405 359,177 387,233 374,341 384,636 401,785 Total liabilities and equity 2,146,178 2,360,948 2,601,936 2,808,534 2,975,322 3,095,971 Cash 44,064 29,305 39,784 184,692 203,897 259,338 Current assets 438,563 441,191 473,323 486,386 507,281 537,304 Total fixed assets 1,580,635 1,800,928 1,988,354 2,050,407 2,177,096 2,212,280 Investments 82,917 89,524 100,475 87,049 87,049 87,049 Total assets 2,146,178 2,360,948 2,601,936 2,808,534 2,975,322 3,095,971 Free cash flow (Rs mn) Operating cash flow, excl. NWC 156,682 153,061 174,421 208,869 223,856 259,794 Working capital (14,434) 60,144 (4,075) (25,956) (10,599) (12,875) Capital expenditure (283,020) (279,502) (258,415) (148,025) (222,289) (145,539) Investments 7,405 (6,607) (10,951) 13,426 — — Free cash flow (133,367) (72,904) (99,020) 48,314 (9,032) 101,380 Key ratios Net debt/equity (%) 100 101 109 100 96 84 RoE (%) 7.2 11.0 9.5 11.6 11.3 12.2 RoCE (%) 4.5 6.7 5.8 6.9 6.9 7.7 Book value per share (Rs) 111 121 129 140 151 165

Source: Company, Kotak Institutional Equities estimates

48 KOTAK INSTITUTIONAL EQUITIES RESEARCH ADD Tata Steel (TATA) Metals & Mining AUGUST 02, 2018 UPDATE Coverage view: Attractive

Management meeting notes. Takeaways from our meeting with Tata Steel Price (`): 556 management: (1) the company expects the European JV to close by this year as it will Target price (`): 700 apply for antitrust approval by September 2018, (2) large captive iron-ore mine reserves BSE-30: 37,522 will continue to aid new capacities, subject to regulatory approvals; it has 3-4 mtpa excess ore, which it may be able to use for new assets and (3) the acquisition strategy for stressed assets located in the eastern region reflects potential fits with existing operations, as TATA also eyes Bhushan Power & Steel given its long product portfolio.

Company data and valuation summary Tata Steel Stock data Forecasts/Valuations 2018 2019E 2020E 52-week range (Rs) (high,low) 748-493 EPS (Rs) 67.3 69.4 82.2 Market Cap. (Rs bn) 635.5 EPS growth (%) 62.6 3.1 18.4 Shareholding pattern (%) P/E (X) 8.3 8.0 6.8 Promoters 33.2 Sales (Rs bn) 1,317.0 1,542.4 1,017.6 FIIs 19.6 Net profits (Rs bn) 81.1 83.6 99.0 MFs 13.7 EBITDA (Rs bn) 218.9 267.9 225.5 Price performance (%) 1M 3M 12M EV/EBITDA (X) 6.2 6.1 6.2 Absolute (2.1) (6.6) 3.0 ROE (%) 17.2 13.1 13.9 Rel. to BSE-30 (7.6) (12.5) (10.5) Div. Yield (%) 1.7 1.8 1.8

Key takeaways from meeting with senior management of Tata Steel We highlight the following key takeaways:

 European JV—expects approval this year, likely to have strong earnings profile. Antitrust approval from the European Commission (EC) remains a key step towards closing of the TATA-ThyssenKrupp (TK) joint venture. TATA & TK will be filing the application with EC by September 2018—the approval or remedy has to be notified within 45 days. TATA expects to close the JV between December 2018 and March 2019.  The management expects a strong earnings profile for the JV, which can earn EBITDA of close to EUR2 to 2.2 bn aided by cost synergies of EUR400-500 mn, which can accrue within 2-2.5 years. The JV will be profitable and have strong cash flows assuming capex of close to EUR800 mn and interest payment on outstanding debt of EUR2.5 bn. By size, this JV will be the second-largest steelmaker in Europe.

 Iron-ore benefit for the new capacities, acquired assets. TATA has iron-ore of close to 3- 4 mtpa in excess of its current requirement, which it may be able to use for Bhushan Steel, subject to regulatory approvals. Over the longer term, the management stated that at its existing mines, it has large iron-ore reserves, which can be used for new capacities including KPO-II project. The company will continue to work towards obtaining regulatory approvals for the added mine capacity based on incremental requirements.

 Strategic fit of acquired assets and potential acquisitions. The management highlighted a few key points in their acquisition strategy for stressed assets. . Going east. The location in the eastern region of Bhushan Steel and Bhushan Power & Steel were good fits with the company’s existing operations, including potential to use captive iron-ore. The company did not bid for Essar Steel in western India. Abhishek Poddar . Bhushan Power & Steel (BPSL). The company’s recent acquisition of Bhushan Steel as well as Greenfield expansion at Kalinganagar, Odisha have all been in the flat product segment. These capacity additions will result in close to 20 mtpa of TATA’s India capacity concentrated in the flat product segment and only 3 mtpa in the longs. The company believes the long products business can do very well in India from pickup in infrastructure demand and as there are limited new supplies. BPSL’s product portfolio includes close to 1 mtpa of long products, which complements well with TATA’s existing product portfolio.

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

BPSL at present is operating at close to 1.5 mtpa volumes and with incremental capex, it can reach full potential of 3 mtpa steelmaking capacity.

. Bhushan Steel. The plant is operating at close to 3.5 mtpa levels and will not require much investment to reach 5 mtpa operating level. These assets have potential to deliver EBITDA/ton comparable to other large steel converters in India. The availability of iron-ore from TATA’s mines can further improve profitability for the group from these assets. While these assets may carry tax losses, tax efficiencies can only accrue on merger with TATA. The management highlighted TATA India operations will also be in MAT, so benefit will likely through higher MAT credits for future offsets.

 Capex at KPO II—much efficient if we segregate spends on downstream facilities. TATA highlighted that KPO II is extremely efficient in terms of capital cost—while the total capex is planned at `235 bn for the 5 mtpa complex, it includes cost for downstream facility including a cold-rolling mill as well. The capital cost at only the Hot Strip Mill level (until HRC stage) will work out to close to `160 bn or US$470-480/ton. This is possible as a lot of enabling capex was done in phase 1 (we believe it refers to civil works as well as other infrastructure including railway sidings etc.).

 Internal improvement projects will continue to drive cost efficiencies. The management highlighted many of the internal improvement projects will continue to drive cost efficiencies. The company has successfully managed a decline in the coke rate by more than 100 kgs over the past few years. There are other internal projects such as Project Marvel, which enables usage of advanced analytics in areas such as mining etc.

 The earnings are also aided by consistent improvement in product mix with rising share of automotive products to 20% of sales, higher downstream color-coated products as well as increase in branded products and retail solutions to 30% of the sales.

 Leverage and the steel cycle. TATA expects to de-lever on steady state volumes with the stabilization of the new capacities. The China steel markets are in much better state now with exports not exceeding monthly rate of 6 to 7 mn tons.

 The closure of induction furnaces in China (150 mtpa capacity) has led to creation of more demand for the mainstream steelmakers—the reported demand has increased by 13% in CY2017 and 8% in CY2018 YTD mainly due to this. It is possible that even in India, close to 8 to 10 mtpa of such demand-supply go unreported. The increase in Chinese environmental monitoring for Blue-skies has led to significant disruption in the China steel supply chain as many of the steel companies are asked to shift to coast from hinterland.

 Also, the new capacity set-up in China are through the EAF route only, which they want to increase from 5% at present to 30 to 40% due to lower carbon emissions but the cost is US$70 to 80/ton higher. The increasing environmental compliance costs have already added US$20 to 40/ton to the cost of steel companies in China.

50 KOTAK INSTITUTIONAL EQUITIES RESEARCH Tata Steel Metals & Mining

Exhibit 1: Thyssenkrupp & Tata Steel financials indicate pro-forma EBITDA of EUR1.7 bn for FY2018E Pro-forma and historical financials of European steel business of Tata Steel and ThyssenKrupp, (EUR mn)

June year ending March (€ mn) 2014 2015 2016 2017 2018 FY2018 ThyssenKrupp Steel Europe JV : Pro-forma Revenues 8,857 8,697 7,633 8,915 9,204 16,732 EBITDA 620 899 715 957 1,199 1,701 Depreciation 413 409 401 410 413 631 EBIT 216 492 315 547 786 1,071 Capital expenditures 404 457 393 566 NA 980 Shipments (mn tons) 11.4 11.7 11.2 11.4 11.3 21.3 EBITDA/ton 54 77 64 84 106 80

March year ending (€ mn) 2014 2015 2016 2017 2018 Tata Steel Europe Revenues 10,144 10,015 7,456 7,067 7,528 EBITDA 283 366 (212) 642 502 Depreciation 491 463 332 231 218 EBIT (207) (97) (543) 411 285 Capital expenditures 398 392 421 441 413 Shipments (mn tons) 13.9 13.7 11.0 9.9 10.0 EBITDA/ton 20 27 (19) 65 50

Source: Company, Kotak Institutional Equities estimates

Exhibit 2: We estimate JV's net-income at ~US$700 mn in FY2020E assuming 50% accrual of synergies Earnings forecast for ThyssenKrupp-Tata Steel BV Joint venture, March fiscal year-ends (EUR mn, US$ mn)

March year ending 2018 2019E 2020E 2021E (€ mn) JV-- ThyssenKrupp Tata Steel B V Revenues 16,732 17,104 17,123 17,162 EBITDA 1,701 1,667 1,685 1,684 Assumed synergy benefits — — 200 280 Adjusted EBITDA 1,701 1,667 1,885 1,964 Depreciation 628 634 636 638 EBIT 1,074 1,033 1,249 1,326 Interest cost 230 229 230 225 Profit before tax 844 804 1,019 1,101 Tax 236 225 285 308 Profit after tax 607 579 734 793 Shipments (mn tons) 21.3 21.7 21.7 21.7 EBITDA/ton 80 77 87 91 Debt, pension liabilities 6,500 6,487 6,505 6,416 (US$ mn) JV-- ThyssenKrupp Tata Steel B V Revenues 19,590 19,669 19,692 19,736 EBITDA 1,992 1,917 2,168 2,259 PAT 711 666 844 912 Share of profit: Tata Steel — — 422 456 EBITDA/ton 93 89 100 104 Debt, pension liabilities 7,610 7,460 7,481 7,378

Source: Company, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 51 Metals & Mining Tata Steel

Exhibit 3: Tata Steel's leverage ratio will improve in FY2020E led by transfer of EUR2.5 bn debt to JV Tata Steel consolidated leverage details, March fiscal year ends (Rs mn), FY2016-21E (X)

2016 2017 2018 2019E 2020E 2021E Existing EBITDA (Rs mn) 79,683 170,078 218,905 267,893 225,501 232,394 Net debt (Rs mn) 731,855 744,767 714,900 1,003,919 769,875 736,428 Net debt/ EBITDA (X) 9.2 4.4 3.3 3.7 3.4 3.2

Source: Company, Kotak Institutional Equities estimates

Exhibit 4: Tata Steel, key assumptions, March fiscal-year ends, 2016-21E (Rs mn)

2016 2017 2018 2019E 2020E 2021E Tata Steel (India) Average HRC Price (US$/ton) 307 435 540 540 500 500 Crude Steel capacity (mn tons) 9.7 12.7 12.7 12.7 12.9 13.1 Volume (mn tons) 9.5 11.0 12.2 12.5 12.8 13.1 EBITDA margin (%) 19.9 24.7 26.7 29.1 27.0 26.8 EBITDA/ton (Rs/ton) 7,976 10,823 12,987 14,490 13,106 13,109 Europe Average HRC Price (US$/ton) 751 781 882 880 — — Premium over HRC Price (US$/ton) 352 267 263 261 — — Crude Steel capacity (mn tons) 12.1 12.1 12.1 12.1 — — Volume (mn tons) 11.0 9.9 10.0 10.1 — — EBITDA margin (%) (2.8) 9.1 6.7 8.9 — — EBITDA/ton (US$/ton) (21) 71 59 78 — — Bhushan Steel Volume (mn tons) 2.9 3.3 3.6 4.0 5.0 5.2 EBITDA margin (%) 17.5 21.3 13.0 17.1 21.7 21.5 EBITDA/ton (Rs/ton) 7,181 8,855 6,200 7,985 10,104 10,180 JV : ThyssenKrupp Tata Steel Volumes (mn tons) — — — — 21.7 21.7 Net sales (US$ mn) — — — — 19,692 19,736 EBITDA (US$ mn) — — — — 2,168 2,259 EBITDA/ton (US$) — — — — 100 104 PAT (US$ mn) — — — — 844 912 Tata Steel: share of profit (US$ mn) — — — — 422 456

Source: Company, Kotak Institutional Equities estimates

Exhibit 5: Tata Steel, valuation, March fiscal year-ends, March 2020E basis (Rs mn)

EBITDA Multiple Enterprise value EV (Rs mn) (X) (Rs mn) (Rs/share) FY2020E EBITDA 223,661 6.5 1,442,613 1,198 Total Enterprise Value 223,661 1,442,613 1,198 Consolidated net-debt 769,875 Total borrowings 769,875 639 Arrived market capitalization 672,738 559 Add: Value of investments 4,028 3 Add: Equity value in European JV 169,127 140 Arrived market capitalization 845,893 702 Target price (Rs) 700

Source: Kotak Institutional Equities estimates

52 KOTAK INSTITUTIONAL EQUITIES RESEARCH Tata Steel Metals & Mining

Exhibit 6: Tata Steel (consolidated), profit model, balance sheet and cash flow model, March fiscal year-ends, 2016-21E (Rs mn)

2016 2017 2018 2019E 2020E 2021E Profit model (Rs mn) Net sales 1,019,647 1,122,994 1,317,003 1,542,394 1,017,648 1,053,717 EBITDA 79,683 170,078 218,905 267,893 225,501 232,394 Other income 4,122 5,275 9,095 11,522 11,570 14,223 Interest (42,214) (50,722) (55,018) (78,638) (70,530) (66,905) Depreciation (53,064) (56,729) (59,617) (75,681) (62,465) (63,751) Profit before tax (11,472) 67,902 113,365 125,096 104,076 115,961 Extraordinaries 39,904 (43,242) 95,991 — — — Taxes (6,900) (27,780) (34,054) (42,533) (33,304) (37,108) Profit after tax 21,532 (3,120) 175,303 82,564 70,772 78,854 Minority interest 1,143 (722) (43,285) (500) (500) (500) Share in profit/(loss) of associates (1,104) 77 1,741 1,500 28,688 31,453 Reported net income 21,571 (3,766) 133,759 83,564 98,960 109,807 Adjusted net income (19,480) 40,200 81,052 83,564 98,960 109,807 Fully diluted EPS (Rs) (20.1) 41.4 67.3 69.4 82.2 91.2 Balance sheet (Rs mn) Equity 414,576 355,443 585,956 691,464 730,433 825,744 Deferred tax liability 87,934 91,442 95,341 129,096 124,781 121,398 Total Borrowings 840,354 850,709 937,783 1,269,783 1,024,283 994,283 Current liabilities 418,167 410,863 458,776 608,609 438,724 449,166 Minority interest 7,809 16,017 9,365 9,865 10,365 10,865 Total liabilities 1,768,840 1,724,475 2,087,222 2,708,817 2,328,587 2,401,456 Net fixed assets 681,322 885,118 921,079 1,346,166 1,117,133 1,087,745 Capital work in progress 359,961 157,841 166,144 230,076 278,007 348,475 Goodwill 40,676 34,947 40,995 40,995 — — Investments 108,227 125,367 178,995 184,194 199,866 217,050 Cash 61,863 49,211 79,379 122,359 110,903 114,350 Other current assets 516,791 471,989 700,631 785,027 622,677 633,836 Total assets 1,768,840 1,724,475 2,087,222 2,708,817 2,328,586 2,401,455 Free cash flow (Rs mn) Operating cash flow excl. working capital 473 112,319 52,124 156,261 141,937 153,491 Working capital changes 61,656 (48,907) 11,606 20,623 (7,534) (718) Capital expenditure (99,328) (74,269) (74,000) (106,432) (81,362) (104,831) Free cash flow (37,199) (10,858) (10,270) 70,452 53,040 47,943 Ratios EBITDA margin (%) 7.8 15.1 16.6 17.4 22.2 22.1 EBIT margin (%) 2.6 10.1 12.1 12.5 16.0 16.0 Debt/equity (X) 2.0 2.4 1.6 1.8 1.4 1.2 Net debt/equity (X) 1.8 2.1 1.2 1.5 1.1 0.9 Net debt/EBITDA (X) 9.2 4.4 3.3 3.7 3.4 3.2 P/B (X) 1.3 1.5 1.2 1.0 0.9 0.8 RoAE (%) (5.4) 10.4 17.2 13.1 13.9 14.1 RoACE (%) 2.4 7.1 8.3 7.9 6.3 6.7 Net debt 731,855 744,767 714,900 1,003,919 769,875 736,428

Source: Company, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 53 NEUTRAL Automobiles India AUGUST 02, 2018 UPDATE BSE-30: 37,522

Auto demand remains healthy. The domestic automotive industry continues to be on a strong footing as July 2018 was another strong month for the industry with robust volume growth across segments except the passenger vehicle segment. While demand is relatively broad-based across markets, rural India appears to be doing particularly well, which is reflected in strong growth in the two-wheeler and tractor industry. All major OEMs have reported strong double-digit yoy volume growth in July 2018 except Maruti and Eicher Motors.

Passenger vehicle industry volume growth muted due to high base effect

Maruti’s overall volumes declined by 1% yoy to 164,369 units due to high base effect led by (1) flat yoy growth in domestic volumes and (2) 10% yoy decline in exports. In the domestic market, volume growth was driven by (1) launch of new Swift and (2) continued strong demand for Dzire, Baleno and Brezza models. Entry-segment volumes declined by only 11%. In terms of other OEMs, Hyundai’s domestic volumes increased by 1.1% yoy. Tata Motors’ passenger vehicle segment volumes grew by 14% yoy led by the success of new launches – Nexon and Tiago (volumes were impacted by transport operator strike).

M&M’s overall volumes grew 15% yoy in July 2018

Mahindra reported 15% yoy overall volume growth led by (1) 13% yoy growth in the auto segment aided by 28% yoy growth in LCV/pickup volumes and 47% yoy growth in three- wheeler volumes and (2) 20% yoy growth in tractor volumes. The underlying demand in the tractor segment remains strong. In the recent earnings concall, Escorts raised domestic tractor industry volume growth outlook to 12-15% yoy in FY2019 (versus 9-11% earlier).

Strong growth in MHCV industry albeit partly due to low base of last year

We reckon that domestic MHCV industry volumes grew by around 25% yoy in July 2018 despite CV industry outlook impacted by new axle load norms. Our channel checks suggest near-term volume growth of heavy trucks will get impacted due to the new norms but growth should normalize once clarity on this subject emerges. In terms of OEMs, (1) Tata reported 25% yoy growth in domestic CV volumes led by strong growth in both MHCV and LCV segments, (2) Ashok Leyland reported 22% yoy growth in overall MHCV volumes and (3) VECV’s domestic MHCV volumes increased by 33% yoy in July 2018.

Strong double-digit growth in two-wheeler industry volumes in July 2018

In the two-wheeler segment, Hero reported 9% yoy volume growth in July 2018 driven by positive consumer sentiment and good monsoon, as per the company. Bajaj Auto’s overall volumes increased by 30% yoy (volumes were down 7% yoy in July 2017) led by (1) 22% yoy growth in domestic motorcycle volumes, (2) 67% yoy growth in domestic three-wheeler Hitesh Goel volumes and (3) 34% yoy growth in exports. TVS reported 18% yoy volume growth. In terms of segments, scooter and bike volumes grew by 29% and 11% yoy, respectively while moped volumes were up 10% yoy. Eicher reported 5% yoy volume growth to 69,063 units, which was Nishit Jalan below our estimate of 75,000 units due to transport operators’ strike.

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

Exhibit 1: Maruti Suzuki reported 0.6% yoy decline in volumes in July 2018 due to high base effect Maruti Suzuki monthly sales volume, March fiscal year-ends (units)

YTD Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17 Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18 Jul-18 2018 2019 Sales volume (units) M800, Alto, A-Star, Wagon R 42,310 35,428 38,479 32,490 38,204 32,146 33,316 33,789 37,511 37,794 37,864 29,381 37,710 145,820 142,749 Swift, Baleno, Ritz, Celerio, Dzire 63,116 74,012 72,804 62,480 65,447 53,336 67,868 65,213 68,885 83,834 77,263 71,570 74,373 218,430 307,040 Gypsy, Ertiga, S-Cross, Brezza 25,781 21,442 19,900 23,382 23,072 19,276 20,693 20,324 22,764 20,804 25,629 19,321 24,505 82,906 90,259 Omni and Eeco 15,714 13,931 13,735 12,669 13,565 11,420 12,250 12,425 13,689 15,886 16,717 12,185 15,791 51,453 60,579 Ciaz 6,377 6,457 5,603 4,107 4,009 2,382 5,062 4,897 4,321 5,116 4,024 1,579 48 22,075 10,767 Light commercial vehicle 703 730 879 872 1,003 726 1,411 1,252 1,412 1,544 1,703 1,626 1,723 1,748 6,596 Total domestic 154,001 152,000 151,400 136,000 145,300 119,286 140,600 137,900 148,582 164,978 163,200 135,662 154,150 522,432 617,990 Exports 11,345 11,701 11,671 10,446 9,300 10,780 10,751 11,924 12,016 8,008 9,312 9,319 10,219 37,485 36,858 Total volumes 165,346 163,701 163,071 146,446 154,600 130,066 151,351 149,824 160,598 172,986 172,512 144,981 164,369 559,917 654,848 Yoy change (%) M800, Alto, A-Star, Wagonr 20.7 (0.2) (13.3) (4.2) (1.8) 2.0 (12.2) 2.1 21.1 (2.8) (3.1) 15.1 (10.9) (2.1) Swift, Baleno, Ritz, Celerio, Dzire 18.1 52.4 34.1 18.8 24.8 16.3 15.4 31.5 11.3 31.8 50.8 76.7 17.8 40.6 Gypsy, Ertiga, S-Cross, Brezza 48.3 27.6 8.0 29.8 34.0 19.9 26.8 13.8 24.3 0.8 13.4 39.2 (4.9) 8.9 Omni and Eeco 6.6 8.6 0.9 (0.9) 10.8 23.8 (13.6) (12.5) 17.7 14.0 32.7 32.3 0.5 17.7 Ciaz 23.5 3.9 (14.4) (35.4) (26.2) (35.8) (22.5) (16.8) (12.1) (27.2) (14.8) (60.0) (99.2) (51.2) Total domestic 22.4 26.7 10.3 9.9 15.0 12.1 5.0 14.2 16.1 14.2 24.9 45.5 0.1 18.3 Exports 0.1 (4.7) (1.3) 4.2 0.8 (6.2) 2.8 24.9 2.1 19.1 48.1 (29.0) (9.9) (1.7) Total volumes 20.6 23.8 9.3 9.5 14.1 10.3 4.8 15.0 14.9 14.4 26.0 36.3 (0.6) 17.0

Source: Company, Kotak Institutional Equities estimates

Exhibit 2: Mahindra & Mahindra: Overall volumes increased by 15% yoy in July 2018 Mahindra & Mahindra monthly sales volume, March fiscal year-ends (units)

YTD Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17 Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18 Jul-18 2018 2019 Sales volume (units) Passenger UVs (incl. Verito) 20,962 19,325 25,327 23,903 16,030 15,543 23,686 22,389 26,555 21,927 20,715 18,137 19,781 76,813 80,560 Commercial Vehicles 15,023 16,303 19,201 19,284 15,554 17,542 21,002 20,946 25,496 18,963 18,748 19,229 19,284 61,469 76,224 3-wheelers 3,777 3,906 5,928 6,126 4,455 3,894 4,744 5,138 6,602 4,327 4,355 4,323 5,540 13,832 18,545 Exports (Auto sector) 1,983 2,582 3,207 2,343 2,531 2,221 2,626 2,654 3,424 2,880 3,031 3,466 2,594 6,659 11,971 Auto division 41,745 42,116 53,663 51,656 38,570 39,200 52,058 51,127 62,077 48,097 46,849 45,155 47,199 158,773 187,300 Tractors (Dom + Exp) 18,832 16,516 45,563 40,262 22,754 18,288 21,875 20,483 28,277 30,925 29,330 40,529 22,679 103,515 123,463 Total 60,577 58,632 99,226 91,918 61,324 57,488 73,933 71,610 90,354 79,022 76,179 85,684 69,878 262,288 310,763 Yoy change (%) Passenger Uvs (incl. Verito) 20.8 5.9 23.3 (3.4) 17.6 (6.9) 17.9 8.7 4.7 13.1 2.1 12.2 (5.6) 4.9 Commercial vehicles 14.1 16.5 19.4 6.8 22.3 23.9 51.2 27.9 11.3 25.9 15.3 27.1 28.4 24.0 3-wheelers (21.0) (17.0) 0.0 3.3 12.7 12.6 55.2 50.0 30.4 25.9 7.3 68.9 46.7 34.1 Exports (Auto sector) (52.3) (29.2) (10.5) (28.5) (9.5) 8.2 16.1 15.4 26.4 88.5 134.4 86.8 30.8 79.8 Auto division 5.8 3.8 16.3 (0.7) 16.5 7.8 32.5 19.7 10.8 22.0 11.8 26.4 13.1 18.0 Tractors (Dom + Exp) 7.3 22.0 49.1 (10.9) 31.8 30.2 37.5 36.5 46.2 18.3 14.6 23.1 20.4 19.3 Total 6.3 8.3 29.4 (5.4) 21.8 14.0 33.9 24.1 19.9 20.5 12.9 24.8 15.4 18.5

Source: Company, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 55 India Automobiles

Exhibit 3: Tata Motors reported 23% yoy volume growth in July 2018; domestic MHCV truck volumes increased by 25% yoy Tata Motors monthly sales volume, March fiscal year-ends (units)

YTD Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17 Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18 Jul-18 2018 2019 Sales volume (units) MHCVs 12,796 14,977 17,007 15,508 17,621 21,851 18,431 20,706 24,321 18,271 17,565 17,456 LCVs 18,337 19,573 23,559 21,085 22,386 24,640 25,855 24,970 31,296 20,915 22,861 26,147 Total CVs 31,133 34,550 40,566 36,593 40,007 46,491 44,286 45,676 55,617 39,186 40,426 43,603 39,617 105,653 162,832 UVs 2,837 2,883 5,218 5,201 5,676 6,177 6,854 6,393 7,908 6,659 6,043 6,044 Cars 12,246 11,555 12,333 11,403 11,708 8,252 13,484 11,692 12,628 10,676 11,525 12,372 Total PVs 15,083 14,438 17,551 16,604 17,384 14,429 20,338 18,085 20,536 17,335 17,568 18,416 17,250 50,254 70,569 Total sales 46,216 48,988 58,117 53,197 57,391 60,920 64,624 63,761 76,153 56,521 57,994 62,019 56,867 155,907 233,401 Yoy change (%) MHCVs 2.7 22.6 15.9 (0.8) 53.2 57.6 11.7 19.1 20.1 208.9 70.8 59.4 LCVs 8.9 15.1 24.0 3.2 56.3 54.6 55.1 40.6 47.9 72.4 33.4 44.4 Total CVs 6.3 18.3 20.5 1.5 54.9 56.0 33.5 30.0 34.3 117.1 47.4 50.1 27.3 54.1 UVs 93.7 51.3 206.9 159.5 335.9 371.5 179.2 174.3 223.3 309.3 447.4 406.6 Cars (1.2) (3.2) (7.1) (22.7) (0.5) (16.0) 25.7 15.8 (5.1) (5.5) 17.1 22.4 Total PVs 8.8 4.3 17.2 (0.9) 33.0 29.5 54.3 45.5 30.4 34.1 60.5 62.9 14.4 40.4 Total sales 7.1 13.8 19.5 0.7 47.5 48.8 39.4 34.0 33.3 82.5 51.2 53.7 23.0 49.7

Source: Company, Kotak Institutional Equities estimates

Exhibit 4: Ashok Leyland reported 27% yoy volume growth in July 2018; MHCV volumes up 22% yoy Ashok Leyland monthly sales volume, March fiscal year-ends (units)

YTD Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17 Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18 Jul-18 2018 2019 Sales volume (units) LCV 2,955 3,067 3,566 3,804 3,819 3,303 4,458 4,455 5,396 3,709 3,238 4,534 4,203 11,573 15,684 MHCV 9,026 10,567 11,802 9,107 10,641 15,950 13,643 13,726 17,057 8,968 10,421 11,257 10,996 28,940 41,642 Total CVs 11,981 13,634 15,370 12,911 14,460 19,253 18,101 18,181 22,453 12,677 13,659 15,791 15,199 40,513 57,326 Yoy change (%) LCV 27.9 13.8 15.3 28.6 44.3 69.5 58.3 62.7 57.6 45.0 10.4 44.9 42.2 35.5 MHCV 10.3 28.9 31.7 (4.8) 53.6 81.6 13.2 21.2 11.8 97.9 69.8 21.8 21.8 43.9 Total CVs 14.2 25.1 27.5 3.0 51.0 79.4 21.7 29.2 20.2 78.8 50.6 27.6 26.9 41.5

Source: Company, Kotak Institutional Equities estimates

Exhibit 5: VECV reported 37% yoy volume growth in July 2018; domestic MHCV volumes increased by 33% yoy VECV monthly sales volume, March fiscal year-ends (units)

YTD Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17 Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18 Jul-18 2018 2019 Domestic sales LCV 1,144 976 1,252 1,228 1,018 1,410 1,664 1,499 2,193 1,124 1,864 1,857 1,731 MHCV 2,570 2,842 3,832 3,235 3,044 3,635 4,346 4,284 5,787 2,265 3,404 3,639 3,427 Total 3,714 3,818 5,084 4,463 4,062 5,045 6,010 5,783 7,980 3,389 5,268 5,496 5,158 13,627 19,311 Export sales LCV 234 247 162 166 65 111 154 329 404 168 115 233 223 MHCV 368 456 688 537 600 799 548 684 861 382 491 586 535 Total 602 703 850 703 665 910 702 1,013 1,265 550 606 819 758 2,190 2,733 Total sales 4,316 4,521 5,934 5,166 4,727 5,955 6,712 6,796 9,245 3,939 5,874 6,315 5,916 15,817 22,044 Yoy change (%) LCV 4.1 (9.3) 10.4 9.5 59.8 65.1 59.8 9.9 20.1 (8.6) 9.1 56.6 51.3 MHCV 0.2 19.7 27.1 18.4 71.9 50.5 57.7 23.7 26.2 68.0 51.6 65.7 33.3 Total domestic 1.4 10.7 22.6 15.8 68.7 54.3 58.3 19.8 24.5 31.5 33.3 62.5 38.9 41.7 Export sales LCV (22.0) 22.9 (7.4) (19.8) (75.0) 63.2 (29.4) 213.3 101.0 0.0 (19.6) 26.6 (4.7) MHCV 4.8 1.6 67.4 38.4 50.4 26.4 26.0 53.4 80.5 15.4 10.8 83.7 45.4 Total exports (7.5) 8.2 45.1 18.2 0.9 30.0 7.5 83.8 86.6 10.2 3.4 62.8 25.9 24.8 Total sales 0.0 10.3 25.3 16.1 54.1 50.0 50.9 26.3 30.4 28.0 29.4 62.5 37.1 39.4

Source: Company, Kotak Institutional Equities estimates

56 KOTAK INSTITUTIONAL EQUITIES RESEARCH Automobiles India

Exhibit 6: Escorts reported 4% yoy volume growth in July 2018 Escorts monthly sales volume, March fiscal year-ends (units)

YTD Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17 Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18 Jul-18 2018 2019 Sales volume (units) Escorts 5,430 4,575 10,353 10,205 5,119 3,606 5,316 6,462 11,790 6,186 8,325 9,983 5,626 22,991 30,120 Domestic 5,275 4,398 10,144 10,001 4,941 3,476 5,160 6,295 11,557 6,094 8,087 9,758 5,483 22,474 29,422 Exports 155 177 209 204 178 130 156 167 233 92 238 225 143 517 698 Yoy change (%) Escorts 34.5 22.9 34.0 13.8 6.5 13.1 45.6 52.2 66.5 26.3 20.9 72.8 3.6 31.0 Domestic 33.4 19.9 32.4 12.9 5.2 14.2 47.1 53.4 64.8 28.0 19.5 72.1 3.9 30.9 Exports 86.7 221.8 242.6 83.8 64.8 (9.7) 7.6 16.8 258.5 (33.8) 105.2 110.3 (7.7) 35.0

Source: Company, Kotak Institutional Equities estimates

Exhibit 7: Bajaj reported 30% yoy volume growth in July 2018; strong growth across segments Bajaj monthly sales volume, March fiscal year-ends (units)

YTD Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17 Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18 Jul-18 2018 2019 Domestic motorcycles 164,915 171,664 247,418 211,553 141,948 112,930 163,111 175,489 158,987 200,742 192,543 200,949 201,433 591,477 795,667 Export motorcycles 100,267 112,197 122,260 114,225 122,022 115,832 125,825 122,025 110,952 148,875 150,052 136,803 131,247 449,419 566,977 Total motorcycles 265,182 283,861 369,678 325,778 263,970 228,762 288,936 297,514 269,939 349,617 342,595 337,752 332,680 1,040,896 1,362,644 Domestic three-wheelers 21,582 28,995 34,361 35,657 37,887 36,579 39,082 38,534 44,613 28,722 32,082 33,627 36,078 73,929 130,509 Exports three-wheelers 20,963 22,175 24,713 21,029 24,601 27,206 25,129 21,835 19,796 36,829 32,367 33,050 31,585 81,336 133,831 Total three-wheelers 42,545 51,170 59,074 56,686 62,488 63,785 64,211 60,369 64,409 65,551 64,449 66,677 67,663 155,265 264,340 Total sales 307,727 335,031 428,752 382,464 326,458 292,547 353,147 357,883 334,348 415,168 407,044 404,429 400,343 1,196,161 1,626,984 Yoy change (%) Domestic motorcycles (5.4) (1.7) 7.3 (0.7) 1.6 5.9 36.1 23.2 5.0 24.0 23.0 85.9 22.1 34.5 Exports motorcycles (9.8) 6.7 20.5 20.4 24.5 19.9 36.7 18.9 19.6 12.8 24.4 41.7 30.9 26.2 Total motorcycles (7.1) 1.4 11.4 5.8 11.0 12.5 36.4 21.4 10.5 18.9 23.6 65.0 25.5 30.9 Domestic three-wheelers (8.9) 13.3 37.0 38.3 156.7 180.1 154.0 129.1 150.2 80.0 83.1 78.2 67.2 76.5 Exports three-wheelers 1.7 11.8 25.5 (6.5) 41.1 197.1 70.9 86.1 95.4 85.0 69.3 54.8 50.7 64.5 Total three-wheelers (4.0) 12.6 31.9 17.4 94.1 187.1 113.4 111.4 130.3 82.8 75.9 65.8 59.0 70.3 Total sales (6.7) 3.0 13.8 7.4 20.9 29.7 46.0 30.8 22.8 25.9 29.7 65.2 30.1 36.0

Source: Company, Kotak Institutional Equities estimates

Exhibit 8: Hero reported 9% yoy volume growth in July 2018 Hero MotoCorp monthly sales volume, March fiscal year-ends (units)

YTD Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17 Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18 Jul-18 2018 2019 Total sales 623,269 678,797 720,739 631,105 605,270 472,731 641,501 629,597 730,473 694,022 706,365 704,562 679,862 2,472,644 2,784,811 Yoy change (%) 17.1 10.1 6.8 (4.8) 26.1 43.2 31.7 20.0 19.8 17.4 11.4 12.9 9.1 12.6

Source: Company, Kotak Institutional Equities estimates

Exhibit 9: Royal Enfield reported 5% yoy volume growth in July 2018 due to transport operator strike Royal Enfield monthly sales volume, March fiscal year-ends (units)

YTD Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17 Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18 Jul-18 2018 2019 Sales volume (units) Royal Enfield 65,761 67,977 70,431 69,492 70,126 66,968 77,878 73,077 76,087 76,187 74,697 74,477 69,063 249,759 294,424 Domestic 64,459 66,872 69,393 68,014 67,776 65,367 76,205 71,327 74,209 74,627 72,510 72,588 67,001 243,341 286,726 Exports 1,302 1,105 1,038 1,478 2,350 1,601 1,673 1,750 1,878 1,560 2,187 1,889 2,062 6,418 7,698 Yoy change (%) Royal Enfield 23.2 22.0 21.8 17.5 22.4 16.7 30.5 25.0 26.6 26.7 23.1 17.9 5.0 17.9 Domestic 23.7 22.2 21.8 16.5 21.4 16.1 31.1 25.7 26.7 27.4 23.6 17.7 3.9 17.8 Exports 4.2 12.1 17.4 97.6 59.9 48.0 8.4 2.8 20.1 (1.1) 6.7 26.9 58.4 19.9

Source: Company, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 57 India Automobiles

Exhibit 10: TVS Motor’s volumes increased by 18% yoy in July 2018 TVS Motors monthly sales volume, March fiscal year-ends (units)

YTD Aug-March Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17 Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18 Jul-18 2018 2019 Sales volume (units) Motorcycles 109,427 111,927 143,923 125,409 93,202 95,281 98,649 113,296 134,412 131,704 126,711 128,825 121,434 439,477 508,674 Scooters 92,378 114,354 121,601 106,910 78,397 83,640 85,521 93,573 100,972 89,245 95,879 102,763 118,996 349,950 406,883 Mopeds 61,531 82,865 85,330 76,045 71,724 68,709 78,825 74,073 80,381 72,469 75,545 69,613 67,426 258,980 285,053 Three-wheelers 7,835 8,417 8,996 9,047 8,642 9,279 8,806 9,731 10,894 11,377 11,730 12,413 13,323 24,872 48,843 Total sales 271,171 317,563 359,850 317,411 251,965 256,909 271,801 290,673 326,659 304,795 309,865 313,614 321,179 1,073,279 1,249,453 Yoy change (%) Total motorcycles 15.1 (2.0) 17.2 3.2 37.3 63.7 63.7 92.0 40.5 31.8 7.4 14.9 11.0 15.7 Scooters 35.8 49.3 43.3 15.7 7.2 50.6 22.1 35.6 20.0 9.6 11.9 13.6 28.8 16.3 Mopeds (20.0) 7.8 6.9 (15.4) (8.1) 4.4 9.7 (5.3) 13.0 21.4 5.3 5.4 9.6 10.1 Total three-wheelers (1.6) 26.9 54.9 88.3 46.9 72.1 81.6 86.3 103.2 114.5 78.2 140.9 70.0 96.4 Total sales 9.3 15.8 22.7 2.8 12.0 38.9 31.3 37.5 27.4 23.7 9.9 14.5 18.4 16.4

Source: Company, Kotak Institutional Equities estimates

Exhibit 11: Residual volume growth run rate remains muted for auto companies as per our estimates Summary table of OEM volumes

Residual volume Residual monthly run rate (Yoy OEM Jul-18 Yoy chg (%) Mom chg (%) YTDFY18 Yoy chg (%) volume run rate growth) Ashok Leyland 15,199 26.9 (3.7) 57,326 41.5 17,648 5.2 Bajaj Auto 400,343 30.1 (1.0) 1,626,984 36.0 380,199 8.2 Eicher Motor (RE) 69,063 5.0 (7.3) 294,424 17.9 81,089 13.7 Eicher Motor (VECV) 5,916 37.1 (6.3) 22,044 39.4 6,223 1.5 Escorts 5,626 3.6 (43.6) 30,120 31.0 7,879 9.8 Hero Motocorp 679,862 9.1 (3.5) 2,784,811 12.6 700,705 9.6 Maruti Suzuki 164,369 (0.6) 13.4 654,848 17.0 172,222 13.0 Mahindra and Mahindra 69,878 15.4 (18.4) 310,763 18.5 83,691 10.8 Tata Motors (standalone) 56,867 23.0 (8.3) 233,401 49.7 62,069 2.7 TVS Motors 321,179 18.4 2.4 1,249,453 16.4 328,445 9.8

Source: Kotak Institutional Equities estimates, Company

58 KOTAK INSTITUTIONAL EQUITIES RESEARCH INDIA Economy Public Finance AUGUST 02, 2018 UPDATE BSE-30: 37,522

GST: Revenues far from satisfactory. Even as the monthly GST collections have been closer to comfort, the actual revenues (accounting for refunds) are far from satisfactory. Combining the CGA releases (cash-accounting based) and monthly PIB releases, the current run-rate until now is around `920 bn, implying a required run-rate of `1.1 tn for the rest of FY2019. It will be difficult for the government to meet the FY2019BE GFD/GDP of 3.3% in the absence of expenditure adjustments, higher-than-budgeted non-GST revenues, and tweaks in IGST settlements. We maintain our FY2019 GFD/GDP estimate at 3.5% with risk of higher borrowings in 2HFY19.

QUICK NUMBERS Not much upside visible from intra-state e-way bill

Based on the monthly PIB release, total GST collections stood at `965 bn in June compared to  June GST collections `956 bn in May. CGST collection amounted to `159 bn (May: `160 bn), SGST stood at `223 bn at `965 bn (`220 bn), IGST at `500 bn (`495 bn), and compensation cess was at `84 bn (`81 bn) (Exhibit 1). We had noted in our last GST report (GST: Higher compliance, not-so-higher revenues, July  4MFY19 run-rate at 2) that CGST and SGST collections for the months of June/July would provide a better sense if `920 bn; required intra-state e-way bill led to better compliance. However, the CGST/SGST revenues do not rate at `1.1 tn for indicate much compliance improvement due to intra-state e-way bill. We had also noted that rest of FY2019 the positive effect of inter-state e-way bill was visible in the IGST collections increase.  Maintain our Current run-rate strongly indicates revenue shortfall in FY2019 GFD/GDP estimate at 3.5% Combining the CGA accounts (collections for Mar-May) and PIB release for collections for June imply a run-rate of `920 bn for 4MFY19 (the difference between PIB releases and CGA-derived numbers can be attributed to refunds from IGST and CGST). This is lower than the required run rate of `1.04 tn as per central and states’ budget estimates (required rate of `1.1 tn for rest of FY2019). As of now, run-rate of `593 bn for center’s GST collection (CGST+IGST) is required for the rest of FY2019 to meet the union budget estimate of `6.5 tn. For 4MFY19, the current run- rate is at around `450 bn (Exhibit 2). The SGST run-rate is further lower at `389 bn against a required run-rate of `440 bn for the rest of FY2019. Even if we build in an optimistic 8-10% qoq growth in the overall run-rate, there is likely to be a shortfall of around `300 bn (translates to around 15 bps slippage in GFD/GDP). If current run-rate is maintained, the shortfall could be around `1 tn (40 bps in GFD/GDP) assuming no IGST/cess or revenue/expenditure adjustments.

Lower IGST transfer to states and higher compensation cess to bridge center’s GST gap?

In a scenario where union GST revenues (CGST+IGST) are short of budget estimates, it will be interesting to see how the IGST transfers are treated in FY2019. If a repeat of FY2018 is on the cards, we could possibly see lower IGST transfer to states, balanced out by higher compensation cess transfers to keep revenues balanced for the states. We note that the center cannot transfer the cess collections to the Consolidated Fund of India for its own use. However, the unallocated IGST has been used as part of the center’s revenues in FY2018. We note that the center had Suvodeep Rakshit released around `411 bn to the states through compensation cess. With around `210 bn of FY2018 compensation cess collections in the Public Account of India, it would be interesting to see how the government offsets in case of any lower settlement to states from IGST. Upasna Bhardwaj

For Private Circulation Only. India Economy

Exhibit 1: CGST and SGST stable in June; IGST maintains buoyancy seen in April Breakup of monthly GST collection (Rs bn)

Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17 Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18 CGST 151 148 145 157 136 145 145 157 187 159 160 159 SGST 230 216 219 230 193 205 204 214 257 217 220 223 IGST 481 486 505 448 428 453 447 445 505 491 495 500 IGST (imports) 213 238 247 223 218 231 229 232 212 244 245 249 Compensation cess 73 80 82 79 81 86 85 77 86 73 81 84 Total GST 936 930 951 913 837 889 880 893 1,035 940 956 965 Total filings (mn) 5.9 5.9 5.7 5.0 5.3 5.6 5.8 6.0 6.0 6.2 6.5 6.6

Source: PIB, Kotak Economics Research estimates

Exhibit 2: CGST and SGST run-rates significantly behind their budgeted run-rates Summary of GST collections, March fiscal year-ends (Rs bn)

Mar-18 Apr-18 May-18 Jun-18 Monthly collections (PIB press releases) Center 325 288 316 409 Center GST (CGST) 187 159 160 159 Centre's share of IGST (C-IGST) 138 129 157 250 States 403 340 367 473 States' GST (SGST) 257 217 220 223 States' share of IGST (S-IGST) 146 123 147 250 Unallocated IGST 222 239 192 (0) Compensation cess 86 73 81 84 Total 1,035 940 956 965 FYTD collections (incl. CGA adjustments for CGST, SGST, IGST) Centre 521 971 1,383 1,797 - CGST 321 602 911 1,313 - Unallocated IGST 200 369 471 484 State 399 732 1,092 1,558 Compensation cess 85 157 237 321 Total 1,004 1,860 2,712 3,675 FY2019BE Centre 6,539 - Unallocated IGST 500 State 5,078 Compensation cess 900 Total 12,517 FY2019E required run rate Centre 545 - Unallocated IGST 42 State 423 Compensation cess 75 Total 1,043 FYTD run rate Centre 521 486 461 449 - Unallocated IGST 200 185 157 121 State 399 366 364 389 Compensation cess 85 79 79 80 Total 1,004 930 904 919

Notes: (a) Monthly collections are inclusive of monthly IGST transfers. (b) FYTD collections for Jun-18 is based on our estimates of refunds and IGST settlements.

Source: PIB, CGA, Kotak Economics Research estimates

60 KOTAK ECONOMIC RESEARCH INDIA Economy Monetary Policy AUGUST 02, 2018 UPDATE BSE-30: 37,522

RBI: Signaling a brief pause. RBI MPC’s decision to hike repo rate by 25 bps while retaining the neutral stance reiterates our view of a shallow rate-hike cycle amid increasing uncertainties. We expect the MPC to maintain a status quo through the rest of FY2019 while assessing the impact of the cumulative 50 bps of repo rate hikes. However, it remains crucial to watch how the RBI’s inflation estimates pan through 1QFY20. The materialization of risks and the persistence of inflation above 5% (100 bps higher than RBI’s 4% target) could be suggestive of further rate hike after a brief pause.

RBI MPC delivers second rate hike in a row QUICK NUMBERS The RBI MPC expectedly hiked repo rate by 25 bps to 6.5% and retained the neutral stance.  Repo rate hiked by Five members voted for the hike while one member (Dr Dholakia) voted for a pause. The 25 bps at 6.5% decision to hike rate by another 25 bps in a row stems from the inflation trajectory expected to sustain above RBI’s target of 4% for a prolonged period, with upside risks rising from the  2QFY19 inflation closure of the output gap. Significant increase in the recent RBI inflation expectations surveys estimates lowered also lent support to the hike (Exhibit 1). to 4.6% and Uncertainties around inflation prompt MPC to retain neutral stance 2HFY19 revised up to 4.8% Even as the tone of the policy shifted to more balanced, the RBI continued to highlight some of the uncertainties to the inflation trajectory. The MPC noted risks to inflation emanating from (1)  We expect a pause volatile crude oil prices, (2) volatility in global financial markets, (3) increase in households’ in policy rates in inflation expectations, (4) hardening of input prices for manufacturing companies in 2QFY19, rest of FY2019 (5) uneven spatial distribution, (6) adverse implications from fiscal slippage, (7) uncertainty around the price support mechanism of MSP and the consequent pass through, and (8) staggered impact of HRA increases by states and its second round impact. Thus, the RBI revised up its 2HFY19 inflation forecast marginally by 10 bps to 4.8% and projects 5% in 1QFY20, with risks evenly balanced. We expect inflation to range 4.3-4.8% in 2HFY19, averaging around 4.6% for FY2019 (Exhibit 2).

MPC retains its optimism on growth

The MPC noted that domestic economic activity momentum has sustained and output gap has virtually closed. The MPC retained its GDP forecast of 7.4% in FY2019, with optimism arising from (1) robust rural demand on the back of sharp increase in MSPs and normal monsoons, (2) robust corporate earnings, and (3) firm investment activity. The MPC, however, acknowledged the risks to growth rising from trade tensions. We expect FY2019 GDP growth at 7.3%.

RBI to pause for now

We expect RBI to remain on hold through rest of FY2019 as moderation in the growth momentum in 2HFY19 on the back of tighter financial conditions and adverse global growth Upasna Bhardwaj will begin to drag core inflation lower even as high input prices are passed through. Additionally, stable crude oil prices and partial pass-through of MSP on inflation (25-30 bps) seem less of a concern in FY2019. While, we remain cautious on food inflation given the Suvodeep Rakshit suboptimal monsoon and sowing pattern, the improvement in reservoir levels should keep a lid on food prices. While the growth-inflation dynamics and the assessment of monetary policy transmission may keep the MPC on hold through rest of FY2019, we remain watchful on how RBI’s inflation trajectory estimates pan out through 1QFY20. The materialization of risks and the persistence of inflation above 5% (100 bps higher than RBI’s 4% target) could be suggestive of further rate hike after a brief pause.

For Private Circulation Only. India Economy

Exhibit 1: Inflation expectations edged up in the latest quarter RBI's inflation expectation survey based on mean for one year-ahead (%)

Inflation expectations: One year ahead 16 13 13 13 14 14 13 14 14 13 13 13 13 13 13 13 13 12 13 12 12 12 12 11 11 11 11 10 9 10 10 9 10 10 9 9 9 9 9 8 6 4 2

0

Jun-10

Jun-11

Jun-12

Jun-13

Jun-14

Jun-15

Jun-16

Jun-17

Jun-18

Sep-10

Sep-11

Sep-12

Sep-13

Sep-14

Sep-15

Sep-16

Sep-17

Dec-09

Dec-10

Dec-11

Dec-12

Dec-13

Dec-14

Dec-15

Dec-16

Dec-17

Mar-10

Mar-11

Mar-12

Mar-13

Mar-14

Mar-15

Mar-16

Mar-17 Mar-18

Source: CEIC, RBI, Kotak Economics Research

Exhibit 2: Upside risks to inflation from crude price, INR weakness, and higher-than-usual MSP hikes Headline and core CPI inflation (%)

CPI inflation Core CPI inflation 10

8

6 Mar-19: 5.1

4 Mar-19: 4.8

2

0

Jul-14

Jul-15

Jul-16

Jul-17

Jul-18

Jan-14

Jan-15

Jan-16

Jan-17

Jan-18

Jan-19

Oct-14

Oct-15

Oct-16

Oct-17

Oct-18

Apr-14

Apr-15

Apr-16

Apr-17 Apr-18

Source: CEIC, Kotak Economics Research estimates

62 KOTAK ECONOMIC RESEARCH June 2018: Results calendar

63 Mon Tue Wed Thu Fri Sat Sun

30-Jul 31-Jul 1-Aug 2-Aug 3-Aug 4-Aug 5-Aug Avenue Supermarts Ajanta Pharma Aditya Birla Fashion Godrej Properties Berger Paints Divi's Laboratories P I Industries Axis Bank Astral Poly Technik Apollo Tyres Indiabulls Housing Carborundum Universal Central Bank of India Bank of India Emami JK Lakshmi Cement CG Pow er and Industrial Century Textile Bharat Electronics Exide Industries Mahindra Logistics KEC International Escorts Castrol India Gatew ay Distriparks Manpasand Beverages Laurus Labs GIC Dabur India Orient Cement Marico SAIL Godrej Consumer Products IIFL Holdings Pidilite Industries Narayana Hrudayalaya Titan Company GSPL Jagran Prakashan Reliance Infrastructure ONGC HDFC Mahanagar Gas Tata Global Beverages The Ramco Cement Idea Pow er Grid Torrent Pow er Torrent Pharmaceuticals 6-Aug 7-Aug 8-Aug 9-Aug 10-Aug 11-Aug 12-Aug Adani Port and SEZ Adani Transmission BPCL 3M India Alkem Laboratories Amara Raja Batteries Adani Pow er AU Small Finance Cipla AIA Engineering Apollo Hospitals Coal India Arvind Edelw eiss Financial Services City Union Bank Aurobindo Pharma Bosch India Cements Britannia Industries GlaxoSmithkline Consumer HPCL Bharat Forge Dhanuka Agritech IOCL Gatew ay Distriparks Kalpataru Pow er Transmission Indian Bank Coffee Day Enterprises Dr Lal Pathlabs MRPL Max Financial Services Mahindra & Mahindra Lupin Cummins India Endurance Technologies NBCC Punjab National Bank Motherson Sumi Systems Natco Pharma Eicher Motors GAIL (India) Ujjivan Financial Services Mphasis National Aluminium Co. Engineers India Glenmark Pharmaceuticals Sobha NMDC Godrej Agrovet Hindalco Industries SRF PNB Housing Finance Gujarat Pipavav Port Indraprastha Gas TVS Motor Siemens HCG NHPC Thermax Jindal Steel and Pow er PC Jew eller Kaveri Seed State Bank of India MRF Sun TV Netw ork Page Industries Timken S H Kelkar and Company Union Bank Tata Communications United Brew eries Varun Beverages Voltas Whirlpool 13-Aug 14-Aug 15-Aug 16-Aug 17-Aug 18-Aug 19-Aug Cadila Healthcare Grasim Industries Dew an Housing Finance Rajesh Exports Daily Summary India Godrej Industries Sun Pharmaceuticals Tata Chemicals 20-Aug 21-Aug 22-Aug 23-Aug 24-Aug 25-Aug 26-Aug P&G Hygiene Gillette India

Source: NSE, Kotak Institutional Equities KOTAK INSTITUTIONAL EQUITIES RESEARCH EQUITIES INSTITUTIONAL KOTAK -

August 2, 2018 August 2,

KOTAK ECONOMIC RESEARCH 63 Kotak Institutional Equities: Valuation summary of KIE Universe stocks India Daily Summary Daily Summary India Target O/S ADVT Price (Rs) price 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 1-Aug-18 (Rs) (%) (Rs bn) (US$ bn) (mn) 2018 2019E 2020E 2018 2019E 2020E 2018 2019E 2020E 2018 2019E 2020E 2018 2019E 2020E 2018 2019E 2020E 2018 2019E 2020E (US$ mn) Automobiles Amara Raja Batteries REDUCE 823 780 (5.2) 141 2.1 171 28 33 39 (1.6) 21.2 15.5 29.8 24.6 21.3 15.9 13.1 11.2 4.8 4.1 3.6 17.0 18.0 18.0 0.5 0.6 0.7 6.0 Apollo Tyres BUY 292 340 16.6 167 2.4 541 13 20 25 (38.0) 48.3 25.0 21.8 14.7 11.8 12.0 8.6 7.2 1.6 1.6 1.4 8.5 11.1 12.5 1.0 1.0 1.0 10.4 Ashok Leyland BUY 119 160 34.6 349 5.1 2,926 5.4 6.2 8.9 8.0 15.3 43.2 22.1 19.2 13.4 12.7 9.7 7.0 4.9 4.2 3.5 23.7 23.4 28.4 2.0 1.6 2.2 44.9 Bajaj Auto SELL 2,681 2,500 (6.7) 776 11.3 289 140 148 161 6.0 5.4 9.0 19.1 18.1 16.6 12.9 12.5 11.0 4.1 3.6 3.3 22.9 21.2 20.7 2.2 2.2 2.4 31.2 Balkrishna Industries REDUCE 1,190 1,260 5.9 230 3.4 193 37 50 63 4.8 34.8 25.0 31.8 23.6 18.9 16.9 13.0 10.3 5.6 4.7 3.8 19.0 21.6 22.2 0.4 0.5 0.5 8.2 Bharat Forge SELL 644 600 (6.9) 300 4.4 466 16 23 27 10.1 43.0 16.8 39.8 27.8 23.8 19.1 15.7 13.6 6.5 5.5 4.7 17.3 21.5 21.4 0.7 0.8 0.9 10.6 CEAT ADD 1,403 1,500 6.9 57 0.8 40 65 99 108 (29.5) 53.7 8.3 21.7 14.1 13.0 10.5 8.9 7.7 2.2 1.9 1.7 10.4 14.4 13.8 0.8 0.7 0.7 14.5 Eicher Motors SELL 27,299 26,000 (4.8) 744 10.9 27 792 995 1,200 29.3 25.5 20.6 34.4 27.4 22.7 24.8 19.9 16.2 13.8 10.0 7.4 46.4 42.3 37.5 0.1 0.1 0.1 18.9 Escorts BUY 904 1,200 32.7 77 1.6 89 39 59 71 71.3 52.3 19.9 23.3 15.3 12.8 13.3 9.3 7.6 3.2 2.7 2.3 13.5 17.6 18.0 0.4 1.0 1.2 16.9 Exide Industries SELL 270 235 (13.1) 230 3.4 850 8 10 11 0.6 25.3 11.0 32.9 26.3 23.7 18.5 15.0 13.3 4.3 3.9 3.5 13.5 15.4 15.5 0.9 1.1 1.3 8.5 Hero Motocorp SELL 3,280 3,000 (8.5) 655 9.6 200 185 183 204 9.5 (0.9) 11.4 17.7 17.9 16.0 10.9 10.7 9.4 5.6 5.0 4.4 33.8 29.3 29.1 2.6 2.8 3.1 22.6

Mahindra CIE Automotive ADD 255 290 13.7 97 1.4 378 10 14 16 107.0 45.0 12.7 26.6 18.3 16.3 13.0 9.2 8.1 2.6 2.3 2.0 10.4 13.2 13.1 ——— 3.2 -

Mahindra & Mahindra BUY 928 1,015 9.4 1,153 16.8 1,138 38 44 50 22.0 15.6 14.8 24.4 21.1 18.4 16.1 13.7 11.8 3.5 3.1 2.7 15.1 15.4 15.7 0.8 0.9 1.1 31.8 2018 August 2, Maruti Suzuki ADD 9,340 10,000 7.1 2,822 41.2 302 256 323 393 5.1 26.4 21.8 36.5 28.9 23.7 20.5 16.7 13.2 6.8 5.8 5.0 19.8 21.6 22.5 0.9 0.9 1.1 63.8 Motherson Sumi Systems SELL 315 265 (15.8) 662 9.7 2,105 8 11 14 6.1 37.7 21.7 38.5 27.9 23.0 14.4 11.1 9.2 6.7 5.7 4.9 19.0 22.1 22.9 0.7 0.9 1.0 13.8 MRF REDUCE 79,579 76,000 (4.5) 338 4.9 4 2,669 3,896 4,447 (23.9) 46.0 14.1 29.8 20.4 17.9 13.6 10.0 8.6 3.5 3.0 2.6 12.3 15.7 15.4 0.1 0.1 0.1 7.2

Schaeffler India BUY 5,293 6,000 13.4 88 1.3 17 143 156 199 22.0 9.0 27.3 37.0 33.9 26.6 21.7 20.6 15.7 5.2 4.6 4.1 15.0 14.5 16.4 0.3 0.6 0.8 0.6 SKF ADD 1,687 1,800 6.7 87 1.3 51 58 69 82 24.6 19.7 18.5 29.3 24.4 20.6 18.1 15.6 12.8 4.7 4.1 3.5 16.1 16.7 17.1 0.6 0.7 0.8 0.4 Tata Motors BUY 265 425 60.3 900 12.2 3,396 20 22 36 (28.0) 10.7 62.7 13.3 12.0 7.4 3.9 3.6 3.0 0.9 0.9 0.8 8.8 7.6 11.2 ——— 57.2 Timken SELL 754 660 (12.5) 51 0.7 68 14 19 25 (5.3) 42.3 27.5 55.7 39.2 30.7 31.1 21.7 17.3 7.3 6.2 5.2 13.9 17.1 18.5 0.1 0.1 0.1 0.3 TVS Motor SELL 512 410 (20.0) 243 3.6 475 14 18 22 18.7 26.8 21.8 36.7 29.0 23.8 22.5 16.9 14.1 8.5 7.1 6.0 25.1 26.7 27.3 0.6 1.0 1.3 11.9 WABCO India SELL 6,630 6,350 (4.2) 126 1.8 19 144 169 222 27.8 17.8 31.3 46.1 39.1 29.8 29.9 25.4 19.2 8.2 6.9 5.7 19.5 19.2 20.9 0.1 0.2 0.2 0.5 Automobiles Neutral 10,292 150 (0.9) 19.7 25.7 26.3 22.0 17.5 11.7 9.8 8.1 3.7 3.3 2.9 14.2 15.1 16.6 0.9 0.9 1.1 383.3

Banks Axis Bank ADD 545 600 10.1 1,400 20.4 2,567 1 18 40 (92.6) 1,577.6 122.3 507.5 30.3 13.6 ——— 2.6 2.3 2.0 0.5 7.1 14.1 0.9 0.5 1.1 55.8 Bank of Baroda NR 151 —— 399 5.8 2,652 (9) 21 26 (253.2) 323.7 26.4 (16.4) 7.3 5.8 ——— 1.6 1.3 1.0 (5.8) 12.7 14.0 ——— 33.4 Canara Bank ADD 285 300 5.3 209 3.1 733 (58) (5) 51 (406.6) 91.6 1,147.0 (4.9) (58.8) 5.6 ——— 1.8 1.7 1.0 (12.2) (1.0) 10.1 ——— 28.8 City Union Bank ADD 174 190 9.1 127 1.9 665 9 10 12 6.4 16.2 13.0 19.6 16.8 14.9 ——— 3.0 2.6 2.3 15.3 15.5 15.5 0.2 1.1 1.2 1.9 DCB Bank ADD 166 205 23.5 51 0.7 308 8 10 12 13.8 28.2 21.0 20.9 16.3 13.4 ——— 2.1 1.9 1.7 10.9 11.7 12.7 — 0.6 0.7 4.5 Equitas Holdings BUY 141 190 34.9 48 0.7 340 0.9 4.4 8.4 (80.3) 378.4 89.9 151.8 31.7 16.7 ——— 2.2 2.0 1.8 1.4 6.4 11.2 ——— 5.2 Federal Bank BUY 88 130 48.4 173 2.5 1,972 4.4 5.7 7.9 (9.3) 29.5 39.5 20.0 15.5 11.1 ——— 1.5 1.4 1.3 8.2 8.8 11.4 1.1 1.5 2.1 20.6 HDFC Bank REDUCE 2,159 2,000 (7.4) 5,622 82.1 2,595 67 77 93 18.7 14.1 21.1 32.0 28.1 23.2 ——— 5.4 4.1 3.6 17.9 16.5 16.2 0.6 0.7 0.8 85.1 ICICI Bank BUY 299 400 33.6 1,925 28.1 6,429 11 8 26 (31.1) (19.6) 209.1 28.4 35.3 11.4 ——— 2.3 2.0 1.7 6.6 5.1 14.5 0.5 0.6 1.8 92.1 IDFC Bank NR 40 —— 135 2.0 3,404 2.5 1.2 2.9 (16.0) (52.7) 146.7 15.7 33.1 13.4 ——— 0.9 0.9 0.8 5.7 2.6 6.3 1.3 0.6 1.5 9.3 IndusInd Bank REDUCE 2,001 1,900 (5.1) 1,202 17.6 600 60 71 87 25.3 17.5 23.6 33.3 28.3 22.9 ——— 5.2 4.2 3.7 17.1 17.6 16.8 — 0.4 0.5 31.4 J&K Bank BUY 57 100 75.3 32 0.5 557 4 7 11 111.6 82.4 63.8 15.7 8.6 5.2 ——— 0.7 0.7 0.6 3.4 5.9 9.1 — 2.3 3.8 0.4 Karur Vysya Bank ADD 107 110 2.9 78 1.1 727 5 3 13 (52.2) (32.3) 306.7 22.5 33.2 8.2 ——— 1.5 1.5 1.3 6.1 3.7 14.1 0.6 0.8 3.1 1.9 Punjab National Bank ADD 88 90 2.7 242 3.5 2,761 (44) (39) 9 (814.7) 13.4 124.1 (2.0) (2.3) 9.4 ——— 5.2 (4.0) (14.9) (32.4) (31.3) 8.2 — (9.5) 2.3 32.8 RBL Bank SELL 569 475 (16.5) 241 3.5 420 15 22 29 27.3 48.1 31.5 37.6 25.4 19.3 ——— 3.7 3.3 3.0 11.5 13.3 15.5 0.4 0.6 0.8 12.9 State Bank of India BUY 295 370 25.4 2,634 38.5 8,925 (7) 18 37 (155.8) NM 106.1 NM 16.4 7.9 ——— 2.3 1.8 1.3 (3.2) 7.1 13.2 — 0.1 0.1 80.1 Ujjivan Financial Services REDUCE 373 420 12.5 45 0.7 121 1 22 29 (96.5) 3,564.0 30.0 618.4 16.9 13.0 ——— 2.7 2.3 2.0 0.4 14.2 16.1 0.0 0.6 0.8 6.8 Union Bank ADD 88 130 48.1 103 1.5 1,169 (45) 1 24 (655.5) 101.4 3,896.2 (2.0) 143.4 3.6 ——— 1.5 1.3 0.8 (23.6) 0.3 11.8 — 0.1 4.2 9.7 YES Bank SELL 366 335 (8.4) 844 12.3 2,303 18 20 22 25.7 8.1 9.5 19.9 18.4 16.8 ——— 3.4 3.0 2.6 17.7 16.6 15.9 0.7 0.9 1.0 59.7 Banks Attractive 15,674 229 (101.3) 8,855.5 125.0 (2,510.4) 28.7 12.7 2.0 1.8 1.6 (0.1) 6.3 12.7 0.4 0.4 0.9 584.5

Source: Company, Bloomberg, Kotak Institutional Equities estimates

64 KOTAK ECONOMIC RESEARCH 64

Kotak Institutional Equities: Valuation summary of KIE Universe stocks

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

Company Rating 1-Aug-18 (Rs) (%) (Rs bn) (US$ bn) (mn) 2018 2019E 2020E 2018 2019E 2020E 2018 2019E 2020E 2018 2019E 2020E 2018 2019E 2020E 2018 2019E 2020E 2018 2019E 2020E (US$ mn) NBFCs Bajaj Finance SELL 2,723 2,000 (26.5) 1,573 23.0 575 43 68 90 29.2 56.6 31.9 62.7 40.1 30.4 — — — 9.9 8.2 6.6 19.7 22.4 24.0 0.1 0.2 0.3 55.7 Bajaj Finserv REDUCE 6,990 6,100 (12.7) 1,112 16.2 159 176 245 307 10.3 39.7 25.2 39.8 28.5 22.8 — — — 5.6 4.5 3.8 15.6 17.5 18.1 0.2 0.2 0.2 18.4 Bharat Financial Inclusion NA 1,213 — — 169 2.5 139 33 43 54 55.5 31.1 27.2 37.1 28.3 22.3 — — — 5.6 4.6 3.7 16.7 17.9 18.5 — — — 10.0 Cholamandalam REDUCE 1,462 1,500 2.6 229 3.3 156 62 90 110 35.5 44.8 22.1 23.5 16.2 13.3 — — — 4.7 3.8 3.1 20.6 24.5 24.3 0.4 0.7 0.9 7.7 HDFC ADD 1,970 2,075 5.3 3,330 48.6 1,676 75 56 67 52.1 (25.8) 19.0 26.1 35.2 29.6 — — — 5.2 4.5 4.1 23.9 13.8 14.5 1.0 1.1 1.3 71.9 HDFC Standard Life Insurance SELL 496 405 (18.3) 998 14.6 2,007 6 6 7 24.4 14.8 10.9 89.6 78.1 70.4 — — — 23.2 20.7 18.5 27.3 28.0 27.7 0.3 0.3 0.4 11.9 ICICI Lombard SELL 770 620 (19.5) 350 5.1 454 19 26 32 22.0 37.1 21.5 40.6 29.6 24.4 — — — 7.7 6.5 5.4 20.8 23.8 24.2 0.5 0.8 0.9 2.3 ICICI Prudential Life BUY 420 500 19.0 603 8.8 1,436 11 12 13 (3.7) 10.1 7.0 37.2 33.8 31.6 — — — 9.2 7.5 6.3 25.0 24.5 21.8 1.3 0.5 0.5 10.9 IIFL Holdings SELL 684 625 (8.7) 218 3.2 319 29 38 45 32.4 31.5 18.6 24.0 18.2 15.4 — — — 4.3 3.3 2.8 19.0 20.5 20.0 0.9 1.2 1.4 1.4 L&T Finance Holdings ADD 176 190 7.9 352 5.1 1,996 7 13 14 23.7 70.9 12.3 24.0 14.0 12.5 — — — 2.8 2.5 2.2 14.2 18.9 18.8 1.0 1.1 1.4 12.6 LIC Housing Finance BUY 521 610 17.2 263 3.8 505 44 50 58 3.2 13.8 17.5 11.9 10.5 8.9 — — — 2.0 1.7 1.4 14.5 14.3 14.4 1.3 1.5 1.7 12.2 Magma Fincorp BUY 148 200 35.3 40 0.6 237 10 12 15 1,014.5 24.6 25.8 15.2 12.2 9.7 — — — 1.5 1.5 1.3 10.2 12.9 14.1 0.5 1.2 1.5 1.6 Mahindra & Mahindra Financial REDUCE 506 500 (1.1) 312 4.6 614 15 23 28 105.0 58.4 23.2 34.8 22.0 17.9 — — — 3.6 3.2 2.9 11.3 14.3 15.8 0.8 1.3 1.5 10.8 Max Financial Services BUY 506 650 28.4 136 2.0 268 5 6 6 (20.4) 36.9 1.8 110.4 80.7 79.2 — — — — — — 6.5 8.3 8.0 — 0.4 0.4 4.6 Muthoot Finance ADD 401 480 19.8 160 2.3 400 43 38 40 45.6 (10.8) 4.0 9.3 10.4 10.0 — — — 2.1 1.8 1.6 24.1 18.4 16.9 2.5 2.2 2.3 4.8 PNB Housing Finance REDUCE 1,285 1,375 7.0 215 3.1 167 50 61 77 57.8 23.0 25.3 25.8 21.0 16.8 — — — 3.4 3.1 2.7 14.0 15.2 16.8 0.7 0.3 0.3 10.2 SBI Life Insurance ADD 695 785 12.9 695 10.2 1,000 12 15 18 20.8 26.0 22.9 60.3 47.8 38.9 — — — 10.8 9.1 7.6 19.4 20.6 21.3 0.3 0.3 0.4 4.1 Shriram City Union Finance ADD 1,918 2,250 17.3 127 1.8 66 101 141 174 19.6 40.4 22.7 19.0 13.6 11.0 — — — 2.4 2.2 1.9 12.5 15.8 16.9 0.9 0.9 1.1 0.6 Shriram Transport ADD 1,395 1,550 11.1 316 4.6 227 69 114 130 24.7 64.4 14.3 20.2 12.3 10.7 — — — 2.7 2.2 1.9 13.1 18.3 17.5 0.8 1.1 1.3 30.6 NBFCs Neutral 11,198 164 36.9 14.8 19.6 32.7 28.5 23.8 5.5 4.6 4.0 16.8 16.1 16.8 0.6 0.7 0.8 584.5 Cement ACC SELL 1,531 1,270 (17.1) 288 4.2 188 49 62 70 32.7 27.0 13.8 31.4 24.8 21.7 16.8 13.7 11.8 3.1 2.8 2.6 10.1 11.9 12.5 1.1 1.1 1.1 15.2 Ambuja Cements REDUCE 234 210 (10.1) 464 6.8 1,986 8 9 11 29.7 14.5 23.2 31.1 27.1 22.0 10.4 9.2 7.6 2.2 2.2 2.0 7.4 8.1 9.5 1.5 1.5 1.5 11.6 Dalmia Bharat ADD 2,663 2,900 8.9 237 3.5 89 60 98 128 55.4 62.6 30.3 44.1 27.1 20.8 13.6 10.4 8.5 3.9 3.4 2.9 9.7 13.4 15.2 0.1 0.1 0.1 5.2 Grasim Industries BUY 1,030 1,275 23.7 678 9.9 657 47 52 69 (30.1) 9.1 32.8 21.7 19.9 15.0 12.3 7.5 6.9 1.2 1.1 1.0 7.0 5.8 7.2 0.5 0.5 0.5 14.5 India Cements REDUCE 116 135 16.4 36 0.5 308 3 5 9 (42.5) 56.2 84.4 35.5 22.7 12.3 9.7 8.4 6.6 0.7 0.7 0.6 2.0 3.0 5.3 0.9 0.9 0.9 7.7 J K Cement ADD 770 890 15.6 54 0.8 70 43 45 79 59.3 3.7 75.4 17.8 17.2 9.8 9.8 10.2 8.4 2.7 2.4 2.0 16.2 15.0 22.3 1.0 1.0 1.0 0.7 JK Lakshmi Cement ADD 339 425 25.5 40 0.6 118 4 18 33 (35.7) 311.2 79.6 75.7 18.4 10.3 13.8 8.3 5.9 2.8 2.4 2.0 3.7 14.1 21.5 0.6 0.6 0.6 0.4 Orient Cement ADD 120 145 21.1 25 0.4 205 2 7 11 237.8 212.9 58.7 55.4 17.7 11.2 12.1 8.2 6.3 2.4 2.2 1.9 4.4 12.9 18.2 0.6 1.3 1.7 0.2 Shree Cement SELL 17,260 12,500 (27.6) 601 8.8 35 397 421 630 3.4 6.0 49.7 43.4 41.0 27.4 23.4 19.1 14.3 6.8 5.9 5.0 16.7 15.4 19.7 0.3 0.3 0.3 5.5 UltraTech Cement SELL 4,193 2,950 (29.6) 1,152 16.8 275 88 126 162 (7.8) 42.7 28.9 47.6 33.3 25.9 23.4 17.4 14.4 4.4 4.0 3.5 9.7 12.6 14.3 0.2 0.2 0.2 19.3

Cement Cautious 3,573 52 6.5 24.4 33.3 34.5 27.7 20.8 15.4 10.9 9.3 2.6 2.4 2.2 7.5 8.7 10.5 0.6 0.6 0.6 80.2 India Daily Summary Daily Summary India Source: Company, Bloomberg, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH EQUITIES INSTITUTIONAL KOTAK

-

August 2, 2018 August2,

KOTAK ECONOMIC RESEARCH 65

Kotak Institutional Equities: Valuation summary of KIE Universe stocks India Daily Summary Daily Summary India Target O/S ADVT Price (Rs) price 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 1-Aug-18 (Rs) (%) (Rs bn) (US$ bn) (mn) 2018 2019E 2020E 2018 2019E 2020E 2018 2019E 2020E 2018 2019E 2020E 2018 2019E 2020E 2018 2019E 2020E 2018 2019E 2020E (US$ mn) Consumer products Asian Paints REDUCE 1,437 1,325 (7.8) 1,379 20.1 959 21 27 33 2.9 32.1 20.3 70.0 53.0 44.1 42.8 33.2 27.5 16.4 14.3 12.5 24.6 28.8 30.3 0.6 0.8 1.0 21.7 Bajaj Corp. ADD 416 470 13.1 61 0.9 148 14 15 17 (9.4) 7.8 10.3 29.0 27.0 24.4 22.9 21.6 18.4 12.5 12.5 12.5 42.8 46.3 51.2 2.9 3.1 3.4 0.4 Britannia Industries ADD 6,490 6,000 (7.5) 779 11.4 120 84 104 126 13.5 24.4 21.5 77.6 62.4 51.3 51.3 40.3 33.2 22.9 18.1 14.7 32.9 32.4 31.6 0.4 0.5 0.7 9.9 Coffee Day Enterprises REDUCE 266 340 27.7 56 0.8 211 3 8 13 49.1 149.7 59.4 79.6 31.9 20.0 13.5 — — 2.4 2.2 2.0 3.1 7.2 10.4 — — — 1.0 Colgate-Palmolive (India) ADD 1,123 1,250 11.3 305 4.5 272 24 27 32 15.2 14.7 15.6 47.2 41.2 35.6 27.0 23.7 20.6 20.0 20.2 17.2 46.2 48.8 52.2 2.1 1.4 1.7 8.3 Dabur India REDUCE 432 390 (9.8) 763 11.2 1,762 8 9 10 7.2 17.3 12.9 55.6 47.4 42.0 47.2 39.7 34.3 13.3 13.4 11.6 25.9 28.1 29.6 1.7 0.9 1.0 12.3 GlaxoSmithKline Consumer ADD 6,532 6,750 3.3 275 4.0 42 166 189 211 6.6 13.3 11.9 39.2 34.6 30.9 27.0 23.2 20.0 7.9 7.2 6.6 21.2 21.7 22.2 1.1 1.4 1.6 2.1 Godrej Consumer Products SELL 1,320 1,100 (16.6) 899 13.1 681 21 25 29 11.5 18.8 13.7 61.8 52.0 45.8 43.8 36.9 32.1 14.4 12.2 10.6 25.2 25.4 24.8 0.5 0.6 0.7 9.8 Hindustan Unilever REDUCE 1,734 1,570 (9.5) 3,754 54.8 2,160 25 29 33 25.0 19.5 13.2 70.7 59.2 52.3 50.7 41.0 36.0 52.9 46.3 39.3 78.1 83.5 81.4 1.2 1.2 1.4 35.2 ITC ADD 302 330 9.4 3,685 53.8 12,275 9 10 11 7.8 8.2 12.3 33.8 31.3 27.8 22.2 20.2 17.8 7.2 6.8 6.4 19.4 20.4 22.2 1.7 1.9 2.2 48.6 Jubilant Foodworks BUY 1,396 1,650 18.2 184 2.7 132 15 25 35 191.7 73.6 37.5 95.9 55.2 40.2 41.0 27.6 20.8 19.0 13.7 10.4 21.7 28.9 29.5 0.1 0.1 0.2 40.2

Jyothy Laboratories ADD 223 240 7.6 81 1.2 364 4 6 7 (26.4) 27.6 16.7 50.6 39.7 34.0 31.1 26.5 22.5 7.1 6.1 5.3 14.4 16.6 16.8 0.2 0.4 0.7 1.6 -

Marico ADD 369 345 (6.4) 476 6.9 1,291 6 7 8 7.4 16.7 13.7 58.8 50.4 44.3 41.5 34.9 30.4 18.7 17.3 16.0 33.2 35.7 37.5 1.1 1.3 1.5 9.8 2018 August2, Nestle India ADD 10,837 9,500 (12.3) 1,045 15.3 96 127 168 191 21.1 32.5 13.4 85.3 64.4 56.8 47.0 36.6 32.2 30.5 28.1 25.8 36.6 45.5 47.3 0.8 1.1 1.2 8.3 Page Industries SELL 29,900 21,000 (29.8) 334 4.9 11 311 392 482 32.5 26.1 22.9 96.1 76.2 62.0 61.2 48.4 39.8 39.4 30.8 24.6 45.9 45.3 44.0 0.4 0.6 0.7 7.9 Pidilite Industries REDUCE 1,130 1,050 (7.1) 574 8.4 508 18 22 26 7.5 20.4 20.4 62.7 52.1 43.2 41.9 34.9 28.8 16.1 13.5 11.3 26.0 28.2 28.5 0.5 0.6 0.7 13.5

S H Kelkar and Company BUY 199 315 58.7 29 0.4 145 7 8 11 2.1 11.8 28.4 26.8 24.0 18.7 18.7 15.7 12.2 3.3 3.0 2.7 12.8 13.3 15.3 0.9 0.9 1.0 0.3 Tata Global Beverages REDUCE 236 285 20.9 149 2.2 631 7 10 11 20.7 29.4 19.1 32.1 24.8 20.8 16.8 14.1 12.1 2.1 2.0 1.9 7.0 8.3 9.4 1.1 1.3 1.5 13.1 Titan Company SELL 917 800 (12.8) 814 11.9 888 13 16 20 43.3 26.7 20.6 71.7 56.6 47.0 49.2 37.5 30.1 16.0 13.5 11.3 24.3 25.8 26.2 0.4 0.5 0.6 35.9 United Breweries SELL 1,117 1,000 (10.5) 295 4.3 264 15 19 24 71.6 29.7 23.4 74.8 57.7 46.8 33.0 27.4 23.7 11.0 9.4 8.0 15.7 17.6 18.6 0.2 0.3 0.3 10.5 United Spirits REDUCE 593 590 (0.5) 431 6.3 727 8 10 13 39.1 34.7 30.9 77.9 57.9 44.2 44.9 33.6 27.2 17.2 11.8 8.7 24.9 24.2 22.7 — — 0.3 18.8 Varun Beverages ADD 745 750 0.6 136 2.0 183 12 17 22 377.8 45.4 29.8 64.7 44.5 34.3 19.7 15.9 13.6 7.7 6.6 5.6 12.1 16.0 17.7 — — 0.1 1.7 Consumer products Cautious 16,519 241 14.6 18.2 15.7 54.5 46.1 39.9 35.6 29.7 25.5 13.3 12.0 10.7 24.5 26.1 26.9 1.0 1.1 1.3 314.6

Energy BPCL REDUCE 396 390 (1.5) 859 12.5 1,967 40 39 41 (1.5) (3.6) 5.3 9.8 10.2 9.7 8.0 7.5 6.9 2.3 2.0 1.8 24.8 21.1 20.0 5.3 3.9 4.1 31.8 Castrol India SELL 168 155 (7.5) 166 2.4 989 7 7 8 3.3 2.9 10.1 24.4 23.7 21.5 15.3 14.9 13.4 16.3 15.6 15.2 67.9 67.1 71.5 2.8 3.3 3.7 4.3 GAIL (India) BUY 375 410 9.2 846 12.4 2,255 20 25 27 21.8 23.2 8.3 18.4 14.9 13.8 11.5 9.5 8.8 2.1 1.9 1.8 11.7 13.5 13.5 1.9 2.3 2.4 22.5 GSPL SELL 198 175 (11.8) 112 1.6 564 12 11 11 34.5 (6.5) (0.5) 16.7 17.9 18.0 8.6 6.8 6.8 2.2 2.0 1.8 14.0 11.7 10.7 0.9 0.8 0.8 1.6 HPCL REDUCE 289 320 10.8 440 6.4 1,524 42 32 33 (3.2) (23.4) 3.4 6.9 9.0 8.7 6.0 7.8 7.9 1.8 1.7 1.5 28.7 19.3 18.2 5.9 4.5 4.7 29.4 Indraprastha Gas SELL 314 240 (23.5) 219 3.2 700 10 12 13 19.0 16.5 12.0 30.4 26.1 23.3 19.2 16.7 14.8 6.2 5.4 4.7 22.4 22.2 21.5 0.6 0.8 1.0 11.4 IOCL REDUCE 168 160 (4.8) 1,632 23.8 9,479 21 17 18 (24.8) (17.9) 7.4 8.2 10.0 9.3 4.8 5.5 5.1 1.4 1.3 1.3 18.5 14.0 14.0 6.8 4.0 4.3 25.5 Mahanagar Gas ADD 947 965 1.9 94 1.4 99 48 56 60 21.5 16.0 7.6 19.6 16.9 15.7 11.9 9.8 9.0 4.5 3.9 3.5 24.3 24.8 23.5 2.0 2.3 2.6 4.5 ONGC ADD 167 200 19.6 2,146 31.3 12,833 17 21 21 3.1 19.6 (1.3) 9.6 8.0 8.1 5.1 4.0 3.9 0.9 0.9 0.8 9.9 11.5 10.7 3.9 4.2 4.2 18.3 Oil India SELL 213 220 3.1 242 3.5 1,135 25 24 24 22.6 (1.3) (0.7) 8.6 8.8 8.8 6.7 6.1 6.0 0.9 0.8 0.8 9.8 9.7 9.2 4.8 5.1 5.1 3.1 Petronet LNG BUY 234 280 19.6 351 5.1 1,500 14 16 18 22.1 16.7 13.1 16.9 14.4 12.8 11.2 9.7 8.2 3.6 3.2 2.8 23.3 23.3 23.2 1.9 2.4 3.1 12.5 Reliance Industries SELL 1,192 985 (17.4) 7,056 103.1 5,922 59 69 78 16.9 17.6 12.4 20.2 17.2 15.3 14.7 11.7 10.0 2.4 2.1 1.9 11.6 12.2 12.1 0.5 0.5 0.6 119.8 Energy Attractive 14,163 207 1.0 6.6 6.8 13.7 12.9 12.1 8.9 7.9 7.2 1.8 1.7 1.5 13.3 12.9 12.6 2.4 2.1 2.2 284.7

Source: Company, Bloomberg, Kotak Institutional Equities estimates

66 KOTAK ECONOMIC RESEARCH

66

Kotak Institutional Equities: Valuation summary of KIE Universe stocks

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

Company Rating 1-Aug-18 (Rs) (%) (Rs bn) (US$ bn) (mn) 2018 2019E 2020E 2018 2019E 2020E 2018 2019E 2020E 2018 2019E 2020E 2018 2019E 2020E 2018 2019E 2020E 2018 2019E 2020E (US$ mn) Industrials ABB SELL 1,210 1,020 (15.7) 256 3.7 212 20 26 29 12.1 30.1 14.2 61.1 46.9 41.1 33.6 27.4 24.6 7.1 6.5 5.9 12.2 14.5 15.1 0.3 0.7 0.7 1.3 BHEL REDUCE 74 78 6.1 270 3.9 3,671 2.2 2.6 5.0 62.7 16.5 95.3 33.5 28.7 14.7 8.2 7.7 4.1 0.8 0.8 0.8 2.5 2.9 5.6 2.5 2.9 5.6 10.2 Carborundum Universal SELL 377 310 (17.8) 71 1.0 189 11 14 17 22.8 25.4 20.2 33.1 26.4 21.9 17.9 13.2 11.4 4.6 4.1 3.7 14.6 16.4 17.6 0.6 1.1 1.4 0.3 CG Power and Industrial BUY 63 65 2.8 40 0.6 627 0.8 3.1 4.3 (72.2) 275.7 40.5 77.5 20.6 14.7 11.3 8.5 7.0 1.5 1.6 1.5 1.5 7.3 10.4 — — — 7.4 Crompton Greaves Consumer SELL 243 215 (11.3) 152 2.2 627 5.2 6.2 7.5 13.3 19.5 20.7 46.9 39.3 32.5 28.8 24.4 20.7 19.3 13.4 10.3 49.5 40.4 35.8 0.6 0.8 1.0 2.8 Cummins India REDUCE 668 680 1.8 185 2.7 277 24 28 32 (7.8) 16.1 13.9 27.6 23.8 20.8 24.3 20.8 17.3 4.6 4.3 4.0 17.4 18.9 20.1 2.2 2.2 2.5 3.6 Havells India SELL 631 485 (23.1) 395 5.8 625 11 14 17 16.6 26.6 20.5 57.0 45.0 37.3 36.4 28.8 23.4 10.6 9.3 8.1 19.8 22.0 23.2 0.6 0.8 0.9 13.1 Kalpataru Power Transmission BUY 386 530 37.5 59 0.9 153 19 24 34 36.5 24.3 39.8 19.9 16.0 11.4 8.4 7.0 5.6 2.2 2.0 1.7 11.7 13.1 16.1 0.6 0.6 0.6 0.6 KEC International BUY 330 430 30.4 85 1.2 257 18 22 29 51.1 22.0 34.4 18.4 15.1 11.2 10.0 8.3 6.6 4.2 3.4 2.7 25.7 25.2 27.1 0.7 0.9 1.2 2.9 L&T BUY 1,298 1,600 23.3 1,819 26.6 1,401 52 63 70 22.4 21.7 10.9 25.1 20.6 18.6 20.7 16.4 15.8 3.6 3.3 3.0 15.0 16.8 16.8 1.2 1.8 1.9 44.5 Siemens SELL 1,004 975 (2.8) 357 5.2 356 24 30 37 22.5 23.0 23.2 41.5 33.7 27.4 23.5 18.8 15.1 4.4 4.1 3.8 10.9 12.6 14.5 1.0 1.2 1.5 3.5 Thermax REDUCE 1,199 1,065 (11.2) 143 2.1 113 21 30 42 (3.6) 44.2 42.8 58.2 40.3 28.2 35.4 25.2 18.0 5.0 4.6 4.1 8.8 11.8 15.3 0.5 0.7 0.8 0.7 Voltas SELL 569 525 (7.8) 188 2.8 331 17 19 22 12.6 8.3 15.6 32.9 30.4 26.3 27.4 23.3 19.3 4.8 4.3 3.9 15.9 15.0 15.5 0.7 0.8 0.9 14.0 Industrials Neutral 4,021 59 19.8 22.7 20.7 31.3 25.5 21.1 20.5 16.6 14.4 3.4 3.2 2.9 10.8 12.4 13.8 1.1 1.5 1.8 105.0 Infrastructure Adani Ports and SEZ BUY 399 470 17.8 826 12.1 2,071 20 20 23 6.1 (0.2) 14.7 19.9 19.9 17.4 14.0 13.6 12.0 3.9 3.4 2.9 21.5 18.1 17.9 0.5 0.6 0.8 24.4 Ashoka Buildcon BUY 146 210 43.7 41 0.6 282 8 8 9 34.6 0.5 5.2 17.4 17.3 16.4 14.0 11.9 10.5 2.1 1.8 1.7 13.0 11.4 10.7 0.7 1.1 0.8 0.7 Container Corp. SELL 662 635 (4.1) 323 4.7 487 18 21 25 7.1 17.4 20.9 37.5 32.0 26.4 24.9 19.7 15.6 3.4 3.2 2.9 9.4 10.3 11.6 2.6 1.3 1.6 8.5 Dilip Buildcon BUY 792 1,220 54.1 108 1.6 137 46 54 69 76.5 16.1 28.0 17.0 14.7 11.5 9.6 6.9 5.7 4.4 3.3 2.6 29.5 25.9 25.4 — — — 8.3 Gateway Distriparks BUY 177 250 41.2 19 0.3 109 8 8 9 12.1 (1.2) 17.5 23.1 23.4 19.9 22.1 10.8 9.1 1.9 3.7 3.3 8.2 10.8 17.6 4.0 — 1.7 0.8 Gujarat Pipavav Port BUY 113 170 50.5 55 0.8 483 4.1 5.9 7.2 (20.6) 43.7 22.5 27.5 19.1 15.6 13.4 11.1 8.8 2.7 2.7 2.6 9.8 14.0 16.8 3.0 4.3 5.2 0.8 IRB Infrastructure BUY 196 320 63.6 69 1.0 351 23 31 33 10.8 36.8 7.1 8.7 6.3 5.9 6.9 6.6 7.1 1.2 1.0 0.9 14.5 17.6 16.3 1.2 1.6 2.0 8.0 Mahindra Logistics BUY 582 540 (7.2) 41 0.6 71 10 14 18 16.2 42.8 31.2 59.3 41.5 31.6 34.2 22.9 17.4 9.9 8.2 6.8 18.2 21.6 23.5 — — — 0.8 Sadbhav Engineering BUY 273 440 61.1 47 0.7 172 13 18 18 17.4 38.4 2.2 21.2 15.3 15.0 14.8 11.8 9.2 2.5 2.2 1.9 12.5 15.2 13.7 — — — 0.9 Infrastructure Attractive 1,529 22 10.9 10.2 15.4 21.1 19.1 16.6 13.4 11.9 10.4 3.3 2.9 2.6 15.8 15.3 15.5 1.1 0.9 1.1 53.1 Internet Info Edge ADD 1,374 1,425 3.7 167 2.4 122 23 26 33 33.3 14.9 27.5 61.0 53.1 41.7 51.1 39.9 30.2 7.9 6.3 5.7 13.4 13.2 14.3 0.4 0.6 0.6 2.5 Just Dial ADD 559 610 9.1 38 0.6 67 21 26 30 21.7 23.0 15.0 26.3 21.4 18.6 15.5 11.9 9.7 3.8 3.3 2.9 15.2 16.7 16.6 — 0.5 0.5 51.1 Internet Cautious 205 3 28.0 17.6 23.0 49.2 41.8 34.0 38.4 30.3 23.8 6.6 5.4 4.8 13.5 12.9 14.2 0.3 0.6 0.6 53.5 Media DB Corp. REDUCE 237 270 13.9 44 0.6 184 18 20 23 (14.1) 14.9 12.3 13.5 11.7 10.4 7.1 6.3 5.6 2.6 2.4 2.3 19.9 20.7 22.3 5.5 7.1 8.9 0.6 DishTV ADD 66 90 37.0 121 1.8 1,925 (0.4) 1.8 3.4 (143.0) 514.6 88.2 NM 35.9 19.1 10.9 5.7 4.5 1.9 1.8 1.6 (2.3) 5.1 8.9 — — — 7.8 Jagran Prakashan REDUCE 123 168 36.8 38 0.6 311 10 12 14 (6.0) 21.7 15.3 12.3 10.1 8.8 5.5 4.9 4.2 1.9 1.9 1.8 14.8 18.1 20.9 2.4 4.1 7.3 0.5

PVR ADD 1,116 1,210 8.4 52 0.8 47 27 33 42 25.5 21.5 27.7 41.6 34.2 26.8 14.3 12.7 10.9 4.8 4.3 3.8 12.3 13.3 15.0 0.2 0.3 0.4 9.3 Daily Summary India Sun TV Network REDUCE 793 925 16.7 312 4.6 394 29 35 39 10.2 20.7 10.9 27.5 22.8 20.6 18.4 15.5 13.5 6.8 6.1 5.5 26.3 28.1 27.9 1.3 2.2 2.5 21.8 Zee Entertainment Enterprises ADD 525 600 14.3 504 7.4 960 15 17 20 7.8 11.3 17.0 34.9 31.4 26.8 22.7 19.5 16.5 6.7 5.9 5.2 20.3 19.9 20.6 0.5 0.9 1.0 18.3 Media Attractive 1,072 16 (1.5) 28.9 20.8 32.9 25.5 21.1 15.9 12.2 10.4 4.5 4.2 3.8 13.7 16.3 17.8 0.9 1.5 1.8 58.2 Source: Company, Bloomberg, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH EQUITIES INSTITUTIONAL KOTAK

-

August 2, 2018 August2,

KOTAK ECONOMIC RESEARCH 67

Kotak Institutional Equities: Valuation summary of KIE Universe stocks India Daily Summary Daily Summary India Target O/S ADVT Price (Rs) price 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 1-Aug-18 (Rs) (%) (Rs bn) (US$ bn) (mn) 2018 2019E 2020E 2018 2019E 2020E 2018 2019E 2020E 2018 2019E 2020E 2018 2019E 2020E 2018 2019E 2020E 2018 2019E 2020E (US$ mn) Metals & Mining Coal India ADD 271 326 20.5 1,680 24.5 6,207 11 27 28 (24.2) 138.2 3.0 23.9 10.0 9.8 17.8 6.4 6.1 6.9 6.4 6.6 26.7 66.1 66.4 6.1 7.4 9.2 13.8 Hindalco Industries BUY 208 305 46.6 467 6.8 2,229 22 27 31 155.4 23.9 13.6 9.5 7.7 6.8 6.2 5.2 4.5 0.8 0.8 0.7 9.7 10.5 10.7 0.6 0.6 0.6 34.5 Hindustan Zinc ADD 278 290 4.4 1,173 17.1 4,225 22 22 26 9.3 3.7 14.7 12.9 12.5 10.9 7.9 7.2 5.9 3.3 2.8 2.4 27.2 24.4 24.2 2.9 2.9 2.9 8.4 Jindal Steel and Power REDUCE 202 255 26.4 195 2.9 968 (8) 8 18 59.3 194.2 129.1 (23.8) 25.2 11.0 9.5 6.8 5.8 0.6 0.6 0.6 (2.7) 2.6 5.7 — — — 30.1 JSW Steel ADD 328 350 6.9 792 11.6 2,417 27 30 27 83.9 10.2 (8.7) 12.2 11.1 12.1 7.9 6.9 7.6 2.8 2.3 2.0 24.8 22.4 17.3 1.0 1.0 1.0 20.4 National Aluminium Co. ADD 62 85 37.0 120 1.8 1,933 4 7 7 12.7 63.0 11.1 15.0 9.2 8.3 6.1 4.1 3.7 1.1 1.1 1.1 7.7 12.4 13.6 9.2 8.9 8.9 9.5 NMDC REDUCE 107 125 17.0 338 4.9 3,164 12 10 10 43.3 (16.5) 3.6 9.1 10.9 10.5 5.0 6.7 6.4 1.4 1.3 1.3 15.8 12.5 12.4 5.1 5.1 5.1 3.6 Tata Steel ADD 556 700 25.9 636 9.3 1,205 67 69 82 62.6 3.1 18.4 8.3 8 6.8 6.2 6.1 6.2 1.1 1.0 0.9 17.2 13.1 13.9 1.7 1.8 1.8 70.0 Vedanta BUY 218 370 69.6 811 11.8 3,717 22 32 39 9.6 49.1 19.7 10.1 6.8 5.7 5.6 4.6 3.7 1.3 1.2 1.0 12.9 18.0 19.4 3.7 4.4 5.3 52.4 Metals & Mining Attractive 6,212 91 32.3 37.2 11.2 13.1 9.6 8.6 7.4 5.9 5.5 1.9 1.7 1.5 14.3 17.6 17.9 3.5 3.9 4.5 242.7 Pharmaceutical

Apollo Hospitals ADD 953 1,090 14.4 133 1.9 139 8 19 26 (46.9) 124.3 38.0 112.9 50.3 36.5 20.7 17.6 14.8 4.1 3.9 3.6 3.4 7.9 10.2 0.2 0.5 0.7 7.4 -

Aster DM Healthcare BUY 169 240 42.1 85 1.2 505 3 5 7 163.1 64.2 59.2 61.3 37.3 23.5 17.0 12.6 10.1 3.0 2.8 2.5 5.9 7.8 11.4 - - - 0.4 2018 August2, Aurobindo Pharma ADD 600 640 6.7 351 5.1 584 42 45 51 6.0 7.0 13.5 14.4 13.4 11.8 10.0 9.4 8.0 3.0 2.5 2.1 23.2 20.3 17.9 0.7 0.9 1.0 20.3 Biocon SELL 583 330 (43.4) 350 5.1 601 6 8 15 (39.2) 35.9 75.7 94.1 69.3 39.4 42.2 30.2 20.2 6.2 5.8 5.2 6.9 8.7 13.9 0.2 0.5 0.9 23.3 Cipla BUY 639 650 1.7 515 7.5 805 18 24 32 40.2 36.3 35.1 36.5 26.8 19.8 18.9 14.8 11.6 3.5 3.2 2.8 10.2 12.5 15.2 0.5 0.8 1.1 23.7

Dr Lal Pathlabs REDUCE 938 865 (7.7) 78 1.1 83 20 25 29 7.0 20.8 18.5 45.8 37.9 32.0 27.9 23.4 19.6 9.9 8.2 6.9 23.5 23.7 23.4 0.5 0.5 0.6 1.5 Dr Reddy's Laboratories REDUCE 2,176 2,150 (1.2) 361 5.3 166 59 89 118 (18.5) 50.2 32.8 36.8 24.5 18.5 17.1 12.4 8.8 2.9 2.6 2.3 7.8 11.1 12.6 1.1 0.6 0.8 35.3 HCG REDUCE 278 305 9.8 24 0.4 85 2 3 5 (40.0) 120.9 57.3 177.6 80.4 51.1 23.4 18.3 15.5 4.6 4.3 4.0 2.8 5.5 8.1 — — — 0.2 Laurus Labs ADD 458 540 17.8 49 0.7 106 16 22 34 (11.9) 37.3 54.4 28.9 21.1 13.6 14.1 11.5 8.5 3.3 2.8 2.3 11.9 14.4 18.8 — — — 0.4 Lupin REDUCE 844 800 (5.2) 382 5.6 450 38 36 48 (32.9) (5.1) 33.7 22.1 23.3 17.5 13.6 11.8 9.3 2.8 2.5 2.3 12.6 11.4 13.7 1.1 0.6 0.9 34.9 Narayana Hrudayalaya ADD 260 275 5.8 53 0.8 204 3 4 7 (38.1) 52.2 76.9 103.4 67.9 38.4 28.3 21.4 15.7 5.1 4.8 4.2 5.1 7.3 11.7 — — — 0.4 Sun Pharmaceuticals REDUCE 575 500 (13.0) 1,379 20.1 2,406 15 17 24 (47.5) 12.0 42.0 37.9 33.8 23.8 22.4 18.4 13.6 3.6 3.3 3.0 9.8 10.2 13.1 0.3 0.6 0.8 52.9

Torrent Pharmaceuticals NR 1,523 — — 258 3.8 169 40 46 62 (27.4) 16.0 33.3 38.0 32.8 24.6 21.2 15.1 12.5 5.6 4.9 4.3 15.1 15.0 17.4 1.0 0.7 0.9 5.1 Pharmaceuticals Neutral 4,018 59 (25.8) 18.0 34.9 33.7 28.6 21.2 18.5 15.0 11.6 3.6 3.3 2.9 10.7 11.4 13.7 0.6 0.6 0.8 206.0 Real Estate Brigade Enterprises BUY 197 340 72.9 27 0.4 136 11 9 9 (17.7) (15.1) (1.6) 17.8 20.9 21.3 10.9 11.1 10.9 1.2 1.1 1.1 7.6 5.5 5.2 1.3 1.3 1.3 0.2 DLF RS 193 — — 344 5.0 1,784 19.6 6.5 3.9 403.9 (66.9) (39.6) 9.8 29.8 49.3 29.2 12.7 12.5 1.0 1.0 0.9 11.7 3.2 1.9 1.0 1.0 1.0 16.4 Godrej Properties SELL 743 400 (46.2) 170 2.5 216 11.6 16.8 19.2 21.9 43.9 14.9 63.8 44.4 38.6 158.7 113.0 80.1 7.1 6.1 5.3 11.8 14.9 14.7 — — — 2.7 Oberoi Realty BUY 488 560 14.7 177 2.6 340 13 62 44 14.0 385.4 (28.0) 38.4 7.9 11.0 28.7 10.9 13.7 2.7 1.8 1.6 7.3 27.4 15.2 0.4 0.4 0.4 2.7 Prestige Estates Projects ADD 260 315 21.2 98 1.4 375 13 10 10 24.3 (24.2) 8.4 20.7 27.3 25.2 14.5 15.1 15.2 2.1 1.9 1.8 10.3 7.3 7.5 0.6 0.6 0.6 1.1 Sobha REDUCE 473 510 7.8 45 0.7 95 22 20 23 30.9 (7.5) 14.8 21.7 23.4 20.4 13.1 13.3 12.5 1.6 1.6 1.5 7.6 6.8 7.4 1.5 1.5 1.5 1.5 Sunteck Realty REDUCE 412 330 (19.8) 60 0.9 140 15 18 20 4.8 20.2 6.9 27.0 22.4 21.0 17.3 18.9 17.5 2.2 2.0 1.8 9.7 9.4 9.2 0.3 0.2 0.2 1.7 Real Estate Neutral 922 13 140.1 (12.6) (20.2) 17.6 20.2 25.3 24.5 14.9 15.3 1.6 1.5 1.4 9.3 7.5 5.7 0.7 0.6 0.6 26.2 Source: Company, Bloomberg, Kotak Institutional Equities estimates

68 KOTAK ECONOMIC RESEARCH

68

Kotak Institutional Equities: Valuation summary of KIE Universe stocks

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

Company Rating 1-Aug-18 (Rs) (%) (Rs bn) (US$ bn) (mn) 2018 2019E 2020E 2018 2019E 2020E 2018 2019E 2020E 2018 2019E 2020E 2018 2019E 2020E 2018 2019E 2020E 2018 2019E 2020E (US$ mn) Technology HCL Technologies REDUCE 979 1,025 4.7 1,363 19.9 1,409 62 70 74 5.3 12.8 5.0 15.7 13.9 13.3 11.1 9.1 8.3 3.8 3.1 2.7 24.8 24.2 21.8 0.8 0.8 3.2 35.1 Hexaware Technologies SELL 466 435 (6.7) 138 2.0 302 17 20 23 20.2 18.4 18.0 28.2 23.8 20.2 20.3 17.7 14.1 7.0 6.1 5.2 26.6 27.4 27.8 0.9 1.7 1.7 15.3 Infosys ADD 1,354 1,400 3.4 2,957 43.2 2,175 65 71 78 3.0 9.7 10.4 21.0 19.1 17.3 14.5 13.1 11.7 4.5 4.3 3.9 21.8 23.0 23.5 2.0 3.2 2.9 79.8 L&T Infotech ADD 1,810 2,000 10.5 313 4.6 175 64 83 94 13.9 30.5 13.0 28.5 21.8 19.3 25.1 16.7 14.1 8.2 6.6 5.4 31.8 33.5 30.7 0.9 1.3 1.4 4.3 Mindtree ADD 954 1,115 16.9 156 2.3 165 35 43 53 37.8 24.9 23.6 27.6 22.1 17.9 20.0 13.8 11.1 5.7 4.9 4.2 21.4 23.9 25.2 1.2 1.4 1.7 26.3 Mphasis SELL 1,207 760 (37.0) 233 3.4 193 44 52 56 14.4 18.3 8.2 27.5 23.3 21.5 20.0 16.2 14.5 4.3 3.9 3.5 14.6 17.4 17.1 1.7 1.7 1.7 11.5 TCS REDUCE 1,977 1,790 (9.4) 7,567 110.5 3,829 67 82 89 1.1 21.2 8.8 29.3 24.2 22.2 21.8 17.7 16.3 8.7 7.6 7.5 29.4 33.4 33.8 1.3 2.1 3.6 100.3 Tech Mahindra ADD 680 785 15.5 600 8.8 891 43 46 55 33.1 8.3 18.2 15.9 14.7 12.5 11.7 8.8 7.1 3.2 2.8 2.4 21.5 20.2 20.5 2.1 1.4 1.5 36.0 Wipro REDUCE 277 295 6.4 1,255 18.3 4,507 17 19 22 (3.1) 11.8 14.6 16.4 14.6 12.8 10.4 9.2 8.0 2.6 2.2 2.1 16.0 16.4 16.8 0.4 0.5 3.6 12.8 Technology Cautious 14,583 213 1.6 13.1 9.7 22.8 20.1 18.4 16.6 13.8 12.5 5.4 4.8 4.4 23.7 23.8 24.1 1.3 2.0 3.2 321.4 Telecom Bharti Airtel ADD 385 445 15.7 1,537 22.4 3,997 5 (6) (4) (42.9) (221.5) 28.8 81.2 (66.9) (94.0) 8.5 9.9 8.3 2.2 2.3 2.4 2.8 (3.4) (2.5) 1.4 0.3 (0.2) 31.6 Bharti Infratel REDUCE 293 285 (2.8) 542 7.9 1,850 14 13 12 (7.4) (4.8) (8.5) 21.3 22.4 24.5 7.7 8.3 8.8 3.2 3.3 3.4 15.7 14.6 13.7 4.9 3.6 3.3 13.0 IDEA REDUCE 54 45 (16.0) 233 3.4 4,359 (10) (17) (17) (656.8) (75.6) (2.4) (5.6) (3.2) (3.1) 12.2 35.0 29.6 0.9 1.1 1.6 (16.0) (29.7) (41.1) — — — 17.5 Tata Communications ADD 590 725 22.8 168 2.5 285 2 4 8 (84.3) 121.9 117.7 359 161.6 74.2 10.8 9.6 8.4 33.7 27.2 19.7 4.5 18.6 30.7 1.1 1.1 1.3 4.6 Telecom Cautious 2,481 36 (94.7) (2,354.7) 5.7 788.9 (35.0) (37.1) 9.0 11.1 9.7 2.2 2.4 2.6 0.3 (6.8) (7.0) 1.9 0.9 0.6 66.7 Utilities CESC BUY 936 1,180 26.0 124 1.8 133 87 115 128 67.1 31.7 11.6 10.7 8.2 7.3 7.7 5.7 5.1 0.8 0.8 0.7 7.9 10.0 10.4 1.3 1.4 1.4 6.0 JSW Energy REDUCE 66 70 6.8 108 1.6 1,640 3.1 5.1 6.5 (19.2) 65.9 26.8 21.4 12.9 10.2 6.8 5.6 4.6 1.0 0.9 0.8 4.7 7.2 8.5 - - - 1.8 NHPC ADD 24 30 27.4 242 3.5 10,260 2.4 3.1 3.2 (17.3) 26.9 1.8 9.6 7.6 7.5 9.0 7.1 6.9 0.8 0.8 0.7 8.5 10.4 10.2 5.9 7.4 7.5 2.1 NTPC BUY 155 190 22.3 1,281 18.7 8,245 11 15 16 (7.6) 30.9 4.4 13.6 10.4 10.0 11.0 8.6 7.9 1.3 1.2 1.1 9.5 11.6 11.3 3.6 2.9 3.0 14.2 Power Grid BUY 185 250 35.4 966 14.1 5,232 16 19 21 9.6 19.3 13.6 11.7 9.8 8.6 8.4 7.1 6.6 1.8 1.6 1.4 15.8 17.1 17.5 2.8 3.4 3.9 31.1 Reliance Power SELL 32 43 33.1 91 1.3 2,805 3.5 5.1 5.2 (16.4) 45.6 2.7 9.3 6.4 6.2 7.8 6.7 6.5 0.4 0.4 0.4 4.5 6.1 5.9 — — — 4.2 Tata Power BUY 73 90 23.1 198 2.9 2,705 5.3 6.0 7.0 (9.6) 12.7 15.6 13.7 12.1 10.5 10.3 10.7 10.2 1.3 1.2 1.1 10.7 10.1 10.6 — — — 5.4 Utilities Attractive 3,009 44 (2.4) 26.8 8.6 12.4 9.8 9.0 9.3 7.7 7.1 1.2 1.1 1.0 9.7 11.4 11.4 3.0 3.0 3.2 64.7 Source: Company, Bloomberg, Kotak Institutional Equities estimates

India Daily Summary Daily Summary India

KOTAK INSTITUTIONAL EQUITIES RESEARCH EQUITIES INSTITUTIONAL KOTAK

-

August 2, 2018 August2,

KOTAK ECONOMIC RESEARCH 69

Kotak Institutional Equities: Valuation summary of KIE Universe stocks India Daily Summary Daily Summary India Target O/S ADVT Price (Rs) price 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 1-Aug-18 (Rs) (%) (Rs bn) (US$ bn) (mn) 2018 2019E 2020E 2018 2019E 2020E 2018 2019E 2020E 2018 2019E 2020E 2018 2019E 2020E 2018 2019E 2020E 2018 2019E 2020E (US$ mn) Others Astral Poly Technik SELL 1,097 640 (41.7) 131 1.9 120 15 19 25 20.8 30.2 28.8 74.8 57.5 44.6 42.0 30.9 24.6 12.9 10.1 8.3 18.8 19.8 20.5 0.1 0.1 0.1 1.1 Avenue Supermarts SELL 1,668 860 (48.4) 1,041 15.2 624 13 16 20 47.9 28.6 26.4 132.7 103.2 81.6 77.8 59.5 46.7 22.4 18.4 15.0 18.5 19.6 20.3 — — — — Bayer Cropscience REDUCE 4,450 4,100 (7.9) 176 2.6 34 88 106 130 6.4 20.5 23.1 50.8 42.2 34.3 41.9 31.0 25.2 8.6 7.4 6.4 15.7 18.9 20.0 0.4 0.5 0.6 0.5 Dhanuka Agritech ADD 556 690 24.0 27 0.4 49 26 28 32 7.7 8.9 15.4 21.6 19.9 17.2 15.8 13.7 11.4 4.3 3.7 3.2 21.9 20.1 20.0 1.0 1.1 1.2 0.2 Godrej Agrovet ADD 631 650 3.0 121 1.8 189 12 16 20 6.9 39.8 24.6 54.8 39.2 31.5 28.2 21.7 17.6 7.1 6.1 5.2 14.7 16.9 17.9 0.3 0.4 0.5 1.5 Godrej Industries RS 645 — — 217 3.2 336 15 16 20 6.8 8.9 24.2 44.2 40.6 32.7 38.9 32.9 35.8 6.0 5.3 4.6 14.4 13.9 15.1 0.3 0.3 0.3 4.8 InterGlobe Aviation BUY 926 1,220 31.7 356 5.2 383 61 50 83 32.1 (17.9) 65.3 15.2 18.5 11.2 8.3 10.1 5.7 5.0 4.0 3.1 42.9 24.1 31.1 0.6 0.5 0.9 25.8 Kaveri Seed SELL 619 470 (24.0) 41 0.6 66 32 31 33 18.4 (3.7) 6.1 19.3 20.1 18.9 16.5 17.1 15.5 5.3 4.5 3.9 23.6 24.0 21.9 1.0 1.3 1.6 5.1 PI Industries BUY 810 900 11.1 112 1.6 138 27 33 41 (20.0) 25.0 23.2 30.5 24.4 19.8 22.5 17.7 14.1 5.8 4.8 4.0 20.7 21.7 22.1 0.4 0.5 0.6 1.4 Rallis India ADD 200 220 10.1 39 0.6 195 9 10 12 (1.5) 17.2 19.4 23.2 19.8 16.6 14.4 13.0 11.0 3.3 3.0 2.7 14.6 15.8 17.1 1.7 1.8 2.0 0.8 SIS REDUCE 1,059 1,130 6.7 78 1.1 73 22 33 40 43.3 48.5 21.1 47.2 31.8 26.2 25.4 19.9 16.7 7.5 6.3 5.2 20.1 21.8 21.7 0.2 0.3 0.3 0.8

SRF BUY 1,729 2,110 22.0 99 1.5 57 80 92 123 (10.4) 14.4 33.6 21.5 18.8 14.1 13.1 10.4 8.4 2.8 2.5 2.2 13.7 14.0 16.4 0.7 0.8 0.8 11.3

-

Tata Chemicals ADD 685 760 10.9 175 2.5 255 51 46 52 6.5 (11.2) 13.6 13.3 15.0 13.2 7.3 6.3 5.3 1.6 1.4 1.3 13.8 10.0 10.5 3.2 2.2 2.5 8.4 2018 August2, TeamLease Services SELL 2,709 1,785 (34.1) 46 0.7 17 43 58 75 28.0 34.2 29.0 62.8 46.8 36.3 65.4 47.5 36.1 10.5 8.6 6.9 18.2 20.1 21.1 — — — 1.7 UPL ADD 642 660 2.8 327 4.8 507 43 49 55 20.9 14.0 12.1 15.0 13.1 11.7 10.3 8.9 7.5 3.5 2.9 2.4 26.4 24.6 22.9 1.3 1.5 1.7 22.7 Vardhman Textiles ADD 1,214 1,400 15.3 70 1.0 56 103 130 140 (8.0) 26.4 7.4 11.8 9.3 8.7 9.9 7.4 6.6 1.4 1.3 1.1 12.7 14.3 13.8 1.2 1.6 2.5 1.0 Whirlpool SELL 1,743 1,240 (28.9) 221 3.2 127 28 37 45 13.0 33.9 22.5 63.1 47.1 38.4 37.6 29.0 23.4 12.3 10.2 8.5 21.4 23.7 24.1 0.2 0.4 0.5 1.1 Others 3,277 48 16.1 7.7 26.4 31.8 29.5 23.4 20.6 18.1 14.4 5.8 5.0 4.2 18.3 16.9 18.1 0.5 0.5 0.7 87.9 KIE universe 112,747 1,646 (6.1) 28.5 26.1 27.9 21.8 17.3 12.9 10.9 9.7 3.1 2.8 2.5 11.0 12.8 14.6 1.3 1.3 1.7 KIE universe (ex-energy) 98,584 1,440 (8.4) 36.0 31.3 32.8 24.1 18.4 14.3 12.0 10.5 3.4 3.1 2.8 10.4 12.7 15.1 1.1 1.2 1.6

Notes: (a) We have used adjusted book values for banking companies. (b) 2018 means calendar year 2017, similarly for 2019 and 2020 for these particular companies. (c) Exchange rate (Rs/US$)= 68.47 Source: Company, Bloomberg, Kotak Institutional Equities estimates

70 KOTAK ECONOMIC RESEARCH

70

Disclosures

a sufficient Asof June 30, 2018 n a merger or strategic transaction any, no longer are in effect for this stock KOTAK INSTITUTIONAL EQUITIES RESEARCH y. Such suspension is in compliance with applicable regulation(s)

Percentageof companies covered by Kotak Equities,Institutional within the specified category. Percentageof companies within each category whichfor Kotak Institutional Equities and or its affiliates has provided investment banking services within theprevious months. 12 The * above categories are defined as expectfollows: this = Buy We stock to deliver more than 15% returns theover next months; 12 Add = expectWe this stock to deliver 5-15% returns over the next months; 12 Reduce =expectWe this stock to deliver -5-+5% returns over the next months; 12 =Sell expectWe this stock to deliver less than -5% returns over the next months. 12 targetOur prices are also on a 12-month horizon Thesebasis. ratings are used illustratively to comply with applicableregulations. As of 31/03/2018 Kotak InstitutionalEquities Investment Research had investmentratings on 207 equity securities.

cluded.

fundamental outlook on the Sector.The coverage viewwill consist of one of the following

SELL 0.5% 21.9%

4.5% 25.4% +5% returns over the next 12 months. REDUCE

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

month horizon basis. -

certain other circumstances.

ADD 31.3% 5.0% Kotak SecuritiesKotak has suspended coverage of this company.

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

The information is not meaningful and is therefore ex

Kotak SecuritiesKotak does not cover this company.

The investment and rating target price, any, if have been suspended temporaril

The coverage view represents each analyst’s overall

Attractive, Neutral, Cautious. BUY nd other definitions/identifiers nd 2.0% 21.4% We expect this stock to deliver

We expect this 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

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

71 Disclosures

Corporate Office Overseas Affiliates Kotak Securities Ltd. Kotak Mahindra (UK) Ltd Kotak Mahindra Inc 27 BKC, Plot No. C-27, “G Block” 8th Floor, Portsoken House 369 Lexington Avenue Bandra Kurla Complex, Bandra (E) 155-157 Minories 28th Floor, New York Mumbai 400 051, India London EC3N 1LS NY 10017, USA Tel: +91-22-43360000 Tel: +44-20-7977-6900 Tel:+1 212 600 8856 Copyright 2018 Kotak Institutional Equities (Kotak Securities Limited). All rights reserved. 1. Note that the research analysts contributing to this report may not be registered/qualified as research analysts with FINRA; and 2. Such research analysts may not be associated persons of Kotak Mahindra Inc and therefore, may not be subject to NASD Rule 2711 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account. 3. 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 and (ii) any transactions in the securities covered by the research by U.S. recipients must be effected only through Kotak Mahindra Inc at [email protected]. This report is distributed in Singapore by Kotak Mahindra (UK) Limited (Singapore Branch) to institutional investors, accredited investors or expert investors only as defined under the Securities and Futures Act. Recipients of this analysis / report are to contact Kotak Mahindra (UK) Limited (Singapore Branch) (16 Raffles Quay, #35-02/03, Hong Leong Building, Singapore 048581) in respect of any matters arising from, or in connection with, this analysis / report. Kotak Mahindra (UK) Limited (Singapore Branch) is regulated by the Monetary Authority of Singapore. Kotak Securities Limited and its affiliates are a full-service, integrated investment banking, investment management, brokerage and financing group. We along with our affiliates are leading underwriter of securities and participants in virtually all securities trading markets in India. We and our affiliates have investment banking and other business relationships with a significant percentage of the companies covered by our Investment Research Department. Our research professionals provide important input into our investment banking and other business selection processes. Investors should assume that Kotak Securities Limited and/or its affiliates are seeking or will seek investment banking or other business from the company or companies that are the subject of this material and that the research professionals who were involved in preparing this material may participate in the solicitation of such business. Our research professionals are paid in part based on the profitability of Kotak Securities Limited, which include earnings from investment banking and other business. Kotak Securities Limited generally prohibits its analysts, persons reporting to analysts, and members of their households from maintaining a financial interest in the securities or derivatives of any companies that the analysts cover. Additionally, Kotak Securities Limited generally prohibits its analysts and persons reporting to analysts from serving as an officer, director, or advisory board member of any companies that the analysts cover. Our salespeople, traders, and other professionals may provide oral or written market commentary or trading strategies to our clients that reflect opinions that are contrary to the opinions expressed herein, and our proprietary trading and investing businesses may make investment decisions that are inconsistent with the recommendations expressed herein. Kotak Securities Limited has two independent equity research groups: Institutional Equities and Private Client Group. This report has been prepared by the Institutional Equities Research Group of Kotak Securities Limited. The views and opinions expressed in this document may or may not match or may be contrary with the views, estimates, rating, target price of the Private Client Group. In reviewing these materials, you should be aware that any or all of the foregoing, among other things, may give rise to real or potential conflicts of interest. Additionally, other important information regarding our relationships with the company or companies that are the subject of this material is provided herein. 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. We are not soliciting any action based on this material. It is for the general information of clients of Kotak Securities Limited. It does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual clients. Before acting on any advice or recommendation in this material, clients should consider whether it is suitable for their particular circumstances and, if necessary, seek professional advice. The price and value of the investments referred to in this material and the income from them may go down as well as up, and investors may realize losses on any investments. Past performance is not a guide for future performance, future returns are not guaranteed and a loss of original capital may occur. Kotak Securities Limited does not provide tax advise to its clients, and all investors are strongly advised to consult with their tax advisers regarding any potential investment. Certain transactions -including those involving futures, options, and other derivatives as well as non-investment-grade securities - give rise to substantial risk and are not suitable for all investors. The material is based on information that we consider reliable, but we do not represent that it is accurate or complete, and it should not be relied on as such. Opinions expressed are our current opinions as of the date appearing on this material only. We endeavor to update on a reasonable basis the information discussed in this material, but regulatory, compliance, or other reasons may prevent us from doing so. We and our affiliates, officers, directors, and employees, including persons involved in the preparation or issuance of this material, may from time to time have "long" or "short" positions in, act as principal in, and buy or sell the securities or derivatives thereof of companies mentioned herein. 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. Foreign currency denominated securities are subject to fluctuations in exchange rates that could have an adverse effect on the value or price of or income derived from the investment. In addition, investors in securities such as ADRs, the value of which are influenced by foreign currencies affectively assume currency risk. In addition options involve risks and are not suitable for all investors. Please ensure that you have read and understood the current derivatives risk disclosure document before entering into any derivative transactions. 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), MSEI a. 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). Kotak Securities Limited is 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 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 primarily institutional investors and their employees, directors, fund managers, advisors who are registered with us Details of Associates are available on our website i.e. www.kotak.com 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. YES 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: YES 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 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 www.nseindia.com 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: NSE INB/INF/INE 230808130, BSE INB 010808153/INF 011133230, MSE INE 260808130/INB 260808135/INF 260808135, AMFI ARN 0164, PMS INP000000258 and Research Analyst INH000000586. NSDL/CDSL: IN-DP-NSDL-23-97. Compliance Officer Details: Mr. Manoj Agarwal. Call: 022 - 4285 8484, or Email: [email protected]. Investments in securities market are subject to market risks, read all the related documents carefully before investing. 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 / 1800222299 and 18002099292 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 (Name: 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 CEO (Mr. Kamlesh Rao) at [email protected] or call on 91-(022) 4285 8301. First Cut notes published on this site are for information purposes only. They represent early notations and responses by analysts to recent events. Data in the notes may not have been verified by us and investors should not act upon any data or views in these notes. Most First Cut notes, but not necessarily all, will be followed by final research reports on the subject. There could be variance between the First cut note and the final research note on any subject, in which case the contents of the final research note would prevail. We accept no liability for the contents of the First Cut Notes. For further disclosure please view https://kie.kotak.com/kinsite/index.php