INDIA DAILY

January 31, 2020 India 30-Jan 1-day 1-mo 3-mo Sensex 40,914 (0.7) (0.8) 2.0 Nifty 12,036 (0.8) (1.1) 1.3 Contents Global/Regional indices Dow Jones 28,859 0.4 1.1 6.7 Daily Alerts Nasdaq Composite 9,299 0.3 3.6 12.1 Results FTSE 7,382 (1.4) (2.1) 1.8 Dabur India: Healthy print in context of the challenging demand backdrop Nikkei 23,355 1.6 (1.3) 1.9 Hang Seng 26,536 0.3 (5.9) (1.4)

Pidilite Industries: RM tailwinds drive earnings growth KOSPI 2,154 0.3 (2.0) 3.4 Value traded – India Tata Motors: Cost saving efforts in JLR to continue Cash (NSE+BSE) 401 379 134 14,00 Derivatives (NSE) 31,256 10,860 Colgate-Palmolive (India): Another subdued print 1 Deri. open interest 4,324 3,216 3,544 Bharat Electronics: Another quarter of miss in execution

Equitas Holdings: A better performance Forex/money market

Change, basis points Results, Change in Reco 30-Jan 1-day 1-mo 3-mo

Bajaj Finserv: General muted; steady progress in life Rs/US$ 71.4 14 9 51

10yr govt bond, % 7.0 (1) (1) (1) Bajaj Auto: Better-placed than other two-wheeler stocks for FY2021E Net investment (US$ mn) Company alerts 29-Jan MTD CYTD FIIs (203) 1,897 1,897 Aurobindo Pharma: Unit-VII receives an OAI MFs 106 108 108

Top movers – 3mo basis Sector alerts Change, %

Consumer Staples: Month in review - Dec 2019 Best performers 30-Jan 1-day 1-mo 3-mo

IHFL IN Equity 308 (2.3) (1.7) 49.0

BHARTI IN Equity 490 (0.1) 7.5 30.9

BHIN IN Equity 246 0.4 (2.5) 29.8

TTCH IN Equity 758 0.0 13.6 20.9

TGBL IN Equity 382 (0.5) 18.7 20.4

Worst performers

YES IN Equity 39 (5.2) (16.8) (44.5)

HPCL IN Equity 240 (2.3) (9.2) (26.2)

BHEL IN Equity 44 (1.1) 1.4 (22.1)

IOCL IN Equity 117 (1.0) (6.7) (20.2)

ONGC IN Equity 116 (1.7) (10.2) (18.4)

[email protected] Contact: +91 22 6218 6427

For Private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES’ RATING SYSTEM AND OTHER DISCLOSURES. REFER TO THE END OF THIS MATERIAL. REDUCE Dabur India (DABUR) Consumer Staples JANUARY 30, 2020 RESULT Sector view: Cautious

Healthy print in context of the challenging demand backdrop. Dabur’s 3QFY20 CMP (`): 479 earnings print was broadly in line with our expectations. Domestic FMCG volume and Fair Value (`): 440 value growth prints of 5.6% each were healthy in context of (1) further deceleration in BSE-30: 40,914 industry demand, and (2) a high base. We like Dabur’s aggression, clarity of thought and in-market execution under the new CEO. Rich valuations keep us from turning positive on the stock. REDUCE stays with a revised fair value of Rs440 (from Rs425).

Dabur India Stock data Forecasts/valuations 2020E 2021E 2022E 52-week range (Rs) (high,low) 506-357 EPS (Rs) 9.5 11.0 12.0 Mcap (bn) (Rs/US$) 846/11.9 EPS growth (%) 16.8 15.5 9.7 ADTV-3M (mn) (Rs/US$) 840/12 P/E (X) 50.4 43.7 39.8 Shareholding pattern (%) P/B (X) 13.2 11.8 10.7 Promoters 67.9 EV/EBITDA (X) 41.8 36.4 31.6 FIIs 17.6 RoE (%) 27.8 28.5 28.1 MFs/BFIs 3.5/4.3 Div. yield (%) 0.9 1.1 1.4 Price performance (%) 1M 3M 12M Sales (Rs bn) 92 103 115 Absolute 3 4 11 EBITDA (Rs bn) 20 23 26 Rel. to BSE-30 5 2 (3) Net profits (Rs bn) 17 19 21

3QFY20 – navigates the choppy waters well but no Real cheer

Dabur’s 3QFY20 earnings print was largely in line with our expectations with better-than-expected performance in the international business making up for some disappointment in the India business. India business volume and value growth of 5.6% yoy was impressive in the challenging demand backdrop but also reflective of what the most aggressive player with the most favorable (naturals) tailwinds can achieve in the current market context.

Consolidated headline financials – revenues up 7% yoy to Rs23.5 bn, broadly in line with our estimates. Gross margin print of 50.1% (+79 bps yoy) was also in line. EBITDA of Rs4.9 bn (+11% yoy) came in 4% below estimate but largely on account of higher-than-expected adspends – a high-quality miss. EBITDA margins stood at 20.9%, +69 bps yoy and 71 bps below our estimate. PBT grew 9% yoy to Rs5 bn, 5% below while recurring PAT stood at Rs4.14 bn (+13% yoy), 4% below. ETR of 17.4% was down 270 bps yoy. For 9MFY20, revenues, EBITDA and recurring PAT grew 7%, 12% and 15%, respectively; 9M EPS: Rs7/share.

Standalone headline financials – revenues up 5% yoy to Rs17.5 bn, 2% below estimate. Volume growth of 5.6% was broadly in line with our estimate of 6%. Gross margins expanded 69 bps yoy to 48.8% on the back of benign RM inflation. EBITDA grew 7% yoy to Rs3.9 bn, 4% below estimate; EBITDA margins stood at 22.4%, +43 bps yoy. Foods business (primarily juices) had another weak quarter (-1.7%) while hair oils (+0.4% yoy), home care (+2.5% yoy) and skin care (-0.3%) segments saw subdued prints as well. Health Supplements (+12% yoy), digestives (+16%) and oral care (+8.5%) reported strong growth. Rohit Chordia

Trim estimates; retain REDUCE Jaykumar Doshi Dabur offered weak short-term prognosis on industry demand environment while maintaining that its aggressive market share gain interventions should keep the company growing significantly ahead of the market. This may still translate into subdued absolute growth in 4QFY20, in our Aniket Sethi view. We continue to bake in revenue acceleration in FY2021E (12% consolidated revenue growth versus 8% in FY2020E) and there may be downside risks to our estimates should demand stay weak. Our EPS forecasts are broadly unchanged as we tweak our revenue, margin and ETR assumptions marginally. We like the new-found aggression as well as execution. REDUCE rating (maintained) reflects discomfort on rich valuations.

[email protected] Contact: +91 22 6218 6427

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

Conference call takeaways

 Growth outlook. FMCG demand decelerated during the quarter. Weak demand was further exacerbated by liquidity crunch. The management does not see green shoots in any category at this juncture. Despite weak demand environment, Dabur continues to invest in key brands and distribution expansion.

 Selectively extending credit. Dabur is selectively extending credit to some distributors who are facing liquidity challenges.

 Rural growth trending ahead of urban. Rural continues to perform well for Dabur, growing much ahead of urban. The management highlighted that urban growth continues to decelerate. Dabur’s rural reach is now 51,511 villages, up 17% yoy and rural contributes 45-46% to the business.

 Other highlights. (1) E-commerce posted a strong growth of 93% taking its contribution to 2.9%, and (2) modern trade grew 10% led by infrastructure investments.

Category-wise performance

 Hair care (22% of domestic sales). (1) Hair oils segment grew 0.4% yoy; entire category witnessed sharp slowdown. Per management, the category is somewhat discretionary in nature and hence consumers are delaying purchase or consuming less. Sarson Amla and Brahmi Amla recorded double-digit growth. Dabur gained ~50 bps market share in the hair oil category. The management sees a lot of opportunity to grow in hair oil, especially in coconut oil where Dabur is a small marginal player. The company wants to regain market share lost in the past few years. The company is also looking to launch a few brands at both the top and bottom end of the market, and (2) shampoo and post wash segment growth decelerated to 5.1% yoy; Vatika shampoo bottle portfolio is doing well.

 Oral care (18% of domestic sales). Oral care segment grew 8.5% yoy led by (1) 9.5% growth of Dabur Red toothpaste aided by market share gains, and (2) Babool growth recovered to 5% yoy. The company is refocusing on tooth powder segment and targets to bridge the gap with the market leader. Lal Dant Manjan witnessed strong growth of 10.4%. The management highlighted that they have superior margin in the segment.

 OTC & Ethicals (9% of domestic sales). OTC category grew 5.5% yoy led by Honitus and Ethicals portfolio (+2.7% off a high base of 17.4%). Dabur has a strong pipeline of products in this segment. The company seeks to make Dabur a ‘one-stop’ shop for Ayurvedic products. They are also expanding their distribution reach with plans to enhance presence in the Allopathy chemist channels.

 Health supplements (17% of domestic sales) posted 12.2% yoy growth aided by double-digit growth in Chyawanprash. Management said that the competitive intensity in the segment is benign and it has gained market share by 315 bps yoy to about 64%. Dabur has expanded distribution of the sugar-free variant of Chyawanprash. The company has also planned several initiatives for its Glucose-D product. A few new launches in this segment are also planned.

 Home care (8% of domestic sales). Home care category posted growth of 2.5% yoy (on a high base) driven by strong growth in Odomos. Odonil aersols reported strong growth.

 Skin care (5% of domestic sales) posted a 0.3% yoy decline due to high base of last year and consumption slowdown.

KOTAK INSTITUTIONAL EQUITIES RESEARCH 3 Consumer Staples Dabur India

 Foods (16% of domestic sales). This segment reported 1.7% decline in sales, following a 5% decline in the previous quarter. Category volumes declined 11.6% yoy in 3Q due to down-trading amid consumption slowdown. Per management, a broad section of the consumers do not distinguish between juices and nectars. Real’s market share has increased to peak level of 62.4% (up 530bps yoy). Real Activ grew 17% on the back of strong growth in Activ Coconut Water. The company continued to do well in the culinary business (Hommade brand). Dabur has several planned initiatives in the segment including launch of low priced coconut water.

 International business (28% of consolidated sales). International business posted 12% growth on c/c basis: (1) MENA reported robust growth of 10.1%, (2) Nepal bounced back with 20.6% growth, (3) Namaste reported 9.8% yoy growth with strong performance in the international business, and (4) Turkey (Hobi) reported strong 32.2% growth in constant currency. Management expects better prospects for the Bangladesh business.

4 KOTAK INSTITUTIONAL EQUITIES RESEARCH Dabur India Consumer Staples

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

(% chg.) 3QFY20 3QFY20E 3QFY19 2QFY20 KIE Est yoy qoq 9MFY20 9MFY19 (% chg.) Revenues 23,530 23,615 21,992 22,120 (0) 7 6 68,382 64,049 7 Material cost (incl excise) (11,745) (11,779) (11,153) (10,885) (0) 5 8 (34,106) (32,397) 5 Gross profit 11,785 11,836 10,839 11,235 (0) 9 5 34,276 31,652 8 Gross margin (%) 50.1 50.1 49.3 50.8 -4 bps 79 bps -71 bps 50.1 49.4 70 bps Employee cost (2,448) (2,484) (2,376) (2,415) (1) 3 1 (7,177) (6,960) 3 Advertising and promotion (2,035) (1,856) (1,781) (1,442) 10 14 41 (5,498) (5,106) 8 Other expenditure (2,374) (2,382) (2,229) (2,482) (0) 7 (4) (7,201) (6,762) 6 Total expenditure (18,601) (18,501) (17,538) (17,224) 1 6 8 (53,981) (51,225) 5 EBITDA 4,929 5,114 4,454 4,895 (4) 11 1 14,401 12,823 12 OPM (%) 20.9 21.7 20.3 22.1 -71 bps 69 bps -119 bps 21.1 20.0 103 bps Other income 745 860 753 818 (13) (1) (9) 2,295 2,301 (0) Interest (105) (150) (167) (152) (30) (37) (31) (410) (472) (13) Depreciation (544) (555) (449) (545) (2) 21 (0) (1,616) (1,307) 24 Pretax profits 5,025 5,269 4,591 5,016 (5) 9 0 14,670 13,346 10 Tax (875) (964) (924) (662) (9) (5) 32 (2,371) (2,608) (9) Minority Interest (13) (10) (6) (5) 32 106 187 (22) (19) 16 Recurring PAT (after MI) 4,137 4,294 3,661 4,350 (4) 13 (5) 12,278 10,719 15 Extraordinary items (160) — — (320) (640) — Net profit (reported) 3,977 4,294 3,661 4,030 (7) 9 (1) 11,638 10,719 9 Recurring EPS (Rs) 2.3 2.4 2.1 2.5 (4) 13 (5) 7.0 6.1 15 Income tax rate (%) 17.4 18.3 20.1 13.2 -90 bps -272 bps 421 bps 16.2 19.5 -339 bps Costs as a % of sales Material cost 49.9 49.9 50.7 49.2 3 bps -80 bps 70 bps 49.9 50.6 -71 bps Employee cost 10.4 10.5 10.8 10.9 -12 bps -41 bps -52 bps 10.5 10.9 -38 bps Advertising and promotion 8.6 7.9 8.1 6.5 78 bps 54 bps 212 bps 8.0 8.0 6 bps Other expenditure 10.1 10.1 10.1 11.2 0 bps -5 bps -114 bps 10.5 10.6 -3 bps

Segment results of Dabur Revenues Consumer care 20,614 19,116 18,847 8 9 57,906 53,443 8 Foods 2,289 2,266 2,671 1 (14) 8,623 8,795 (2) Retail 346 342 292 1 19 962 929 3 Others 217 214 246 1 (12) 699 679 3 Total segment revenue 23,465 21,938 22,056 7 6 68,190 63,846 7 Segment PBIT Consumer care 5,001 4,647 5,008 8 (0) 14,345 12,962 11 Foods 253 296 366 (15) (31) 1,163 1,301 (11) Retail (2) 13 (2) (111) (6) 4 32 (89) Others 18 17 17 3 6 51 60 (14) Total segment EBIT 5,270 4,973 5,389 6 (2) 15,562 14,354 8 Segment PBIT margins, % Consumer care 24 24 27 -5 bps -232 bps 25 24 51 bps Foods 11 13 14 -204 bps -265 bps 13 15 -132 bps Retail (0) 4 (1) -432 bps 11 bps 0 3 -308 bps Others 8 8 7 18 bps 137 bps 7 9 -142 bps

Source: Company, Kotak Institutional Equities

KOTAK INSTITUTIONAL EQUITIES RESEARCH 5 Consumer Staples Dabur India

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

(% chg.) 3QFY20 3QFY20E 3QFY19 2QFY20 KIE Est yoy qoq 9MFY20 9MFY19 (% chg.) Revenues 17,482 17,893 16,645 16,122 (2) 5 8 49,887 46,748 7 Material cost (incl excise) (8,951) (9,233) (8,639) (8,220) (3) 4 9 (25,681) (24,370) 5 Gross profit 8,530 8,660 8,006 7,902 (1) 7 8 24,205 22,378 8 Gross margin (%) 48.8 48.4 48.1 49.0 39 bps 69 bps -22 bps 48.5 47.9 65 bps Employee cost (1,497) (1,560) (1,479) (1,509) (4) 1 (1) (4,447) (4,291) 4 Advertising and promotion (1,663) (1,514) (1,470) (1,121) 10 13 48 (4,451) (4,138) 8 Other expenditure (1,455) (1,515) (1,402) (1,524) (4) 4 (4) (4,481) (4,213) 6 Total expenditure (13,566) (13,821) (12,989) (12,374) (2) 4 10 (39,060) (37,013) 6 EBITDA 3,915 4,072 3,656 3,748 (4) 7 4 10,827 9,735 11 OPM (%) 22.4 22.8 22.0 23.3 -37 bps 43 bps -86 bps 21.7 20.8 87 bps Other income 673 790 674 751 (15) (0) (10) 2,099 2,117 (1) Interest (47) (65) (96) (58) (28) (51) (20) (166) (235) (29) Depreciation (327) (335) (280) (328) (3) 17 (1) (968) (802) 21 Pretax profits 4,215 4,462 3,954 4,113 (6) 7 2 11,791 10,815 9 Tax (755) (803) (832) (538) (6) (9) 40 (2,018) (2,316) (13) PAT 3,460 3,659 3,121 3,575 (5) 11 (3) 9,774 8,500 15 Extraordinary items (160) — — (320) (640) — Net profit (reported) 3,300 3,659 3,121 3,255 (10) 6 1 9,134 8,500 7 Recurring EPS (Rs) 2.0 2.1 1.8 2.0 (5) 11 (3) 5.5 4.8 15 Income tax rate (%) 17.9 18.0 21.1 13.1 -9 bps -314 bps 484 bps 17.1 21.4 Costs as a % of sales Material cost 51.2 51.6 51.9 51.0 -40 bps -70 bps 21 bps 51.5 52.1 -66 bps Employee cost 8.6 8.7 8.9 9.4 -16 bps -33 bps -80 bps 8.9 9.2 -27 bps Advertising and promotion 9.5 8.5 8.8 7.0 105 bps 68 bps 255 bps 8.9 8.9 6 bps Other expenditure 8.3 8.5 8.4 9.5 -15 bps -11 bps -113 bps 9.0 9.0 -4 bps Segment results of Dabur Revenues Consumer care 15,162 14,292 13,439 6 13 41,496 38,248 8 Foods 2,057 2,094 2,392 (2) (14) 7,557 7,677 (2) Others 216 214 245 1 (12) 698 679 3 Total segment revenue 17,436 16,600 16,076 5 8 49,750 46,603 7 Segment EBIT Consumer care 4,122 3,982 4,062 3 1 11,436 10,539 9 Foods 242 254 298 (5) (19) 904 921 (2) Others 18 17 17 4 7 52 60 (13) Total segment EBIT 4,381 4,253 4,377 3 0 12,391 11,520 8 Segment EBIT margins, % Consumer care 27 28 30 -69 bps -305 bps 28 28 0 bps Foods 12 12 12 -38 bps -71 bps 12 12 -5 bps Others 8 8 7 26 bps 144 bps 7 9 -139 bps

Source: Company, Kotak Institutional Equities

Exhibit 3: Key changes to earnings model (consolidated), as per Ind-AS - Dabur India, March fiscal-year ends, 2020-22E

Revised Earlier Change (%) 2020E 2021E 20222E 2020E 2021E 2022E 2020E 2021E 2022E Net revenues (Rs mn) 92,323 103,118 114,916 92,421 103,428 115,483 (0.1) (0.3) (0.5) Revenue growth (%) 8.2 11.7 11.4 8.3 11.9 11.7 EBITDA (Rs mn) 19,940 22,677 25,937 20,113 22,802 26,131 (0.9) (0.6) (0.7) EBIT (Rs mn) 17,768 20,335 23,422 17,925 20,440 23,590 (0.9) (0.5) (0.7) EBITDA margin (%) 21.6 22.0 22.6 21.8 22.0 22.6 Net profit (pre-exceptionals, Rs mn) 16,772 19,367 21,251 17,049 19,458 21,384 (1.6) (0.5) (0.6) EPS (Rs/share) 9.5 11.0 12.0 9.7 11.0 12.1 (1.6) (0.5) (0.6) Effective tax rate (%) 17.1 17.1 20.9 17.1 17.2 21.0

Source: Company, Kotak Institutional Equities estimates

6 KOTAK INSTITUTIONAL EQUITIES RESEARCH Dabur India Consumer Staples

Exhibit 4: Volumes rose 5.6% yoy Dabur’s domestic volume growth trends (%)

25 21.0 20

15 13.0 12.4 8.1 10 7.0 7.2 7.7 9.6 5.6 4.1 4.5 4.2 4.8 5 2.4

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

(10)

3QFY16

4QFY16

1QFY17

2QFY17

3QFY17

4QFY17

1QFY18

2QFY18

3QFY18

4QFY18

1QFY19

2QFY19

3QFY19

4QFY19

1QFY20 2QFY20 3QFY20

Source: Company, Kotak Institutional Equities

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

1QFY17 2QFY17 3QFY17 4QFY17 1QFY18 2QFY18 3QFY18 4QFY18 1QFY19 2QFY19 3QFY19 4QFY19 1QFY20 2QFY20 3QFY20 Healthcare 11.2 17.8 11.1 10.7 Health Supplements 0.0 (10.0) (14.0) 5.0 (7.0) 3.0 19.5 14.0 27.5 12.3 13.8 10.2 19.6 14.4 12.2 Digestives (1.0) 5.0 (10.0) (5.0) 4.0 11.7 19.3 7.2 21.6 10.8 22.5 11.9 18.2 10.2 15.9 OTC & Ethicals (1.0) 3.0 (11.0) (4.0) (6.6) 2.5 8.7 9.1 18.4 8.1 17.6 12.8 NA NA NA OTC 16.6 13.1 4.2 5.5 Ethicals 9.7 15.9 7.2 2.7 Home & Personal Care (HPC) 6.8 11.7 4.3 3.5 Hair Care (2.0) (4.5) (20.0) (4.0) (11.0) 0.5 22.6 12.2 20.5 16.8 24.0 NA NA NA NA Shampoos/Post-wash 3.3 10.9 12.0 5.1 Hair Oils 2.5 12.1 2.6 0.4 Oral Care 11.6 0.0 (5.0) 9.0 1.5 22.8 23.0 11.0 17.3 3.9 10.0 8.2 11.4 4.4 8.5 Skin Care (1.0) 7.0 (11.0) 0.0 4.0 15.8 14.5 8.5 27.1 11.9 19.3 11.2 10.9 1.0 (0.3) Home Care 2.0 20.0 (5.0) (6.5) 6.2 10.1 36.0 0.0 17.4 10.9 8.9 16.2 12.1 7.0 2.5 Foods 4.3 15.2 52.0 10.0 (8.3) 11.7 0.0 2.0 26.8 1.5 11.1 (5.9) 1.5 (5.0) (1.7)

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

Source: Company, Kotak Institutional Equities

KOTAK INSTITUTIONAL EQUITIES RESEARCH 7 Consumer Staples Dabur India

Exhibit 6: Key revenue assumptions for Dabur, March fiscal year-ends, 2017-22E (Rs mn)

2017 2018 2019 2020E 2021E 2022E Gross revenue breakup (Rs mn) Domestic Business 51,997 54,313 60,894 66,121 74,347 83,323 Consumer Care 40,494 43,712 49,684 54,920 62,077 69,909 Hair Care 10,888 11,185 12,935 13,841 15,363 17,011 Oral Care 7,975 9,254 10,094 11,053 12,379 13,740 Health Supplements 8,472 9,182 10,490 12,221 14,177 16,388 Digestives 2,789 2,998 3,526 4,125 4,744 5,437 Skin Care 2,653 2,807 3,218 3,379 3,818 4,277 Home Care 3,286 3,581 4,065 4,410 4,939 5,532 OTC & Ethicals 4,431 4,705 5,356 5,892 6,657 7,523 Foods 10,112 9,661 10,270 10,168 11,184 12,275 Misc 1,390 940 940 1,033 1,085 1,139 IBD 25,018 23,170 24,441 26,202 28,771 31,594 Total Gross revenue 77,014 77,483 85,335 92,323 103,118 114,916 yoy growth (%) Domestic Business (0.1) 4.5 12.1 8.6 12.4 12.1 Consumer Care (3.1) 7.9 13.7 10.5 13.0 12.6 Hair Care (6.7) 2.7 15.6 7.0 11.0 10.7 Oral Care 6.5 16.0 9.1 9.5 12.0 11.0 Health Supplements (3.5) 8.4 14.2 16.5 16.0 15.6 Digestives (12.2) 7.5 17.6 17.0 15.0 14.6 Skin Care 4.3 5.8 14.7 5.0 13.0 12.0 Home Care 3.7 9.0 13.5 8.5 12.0 12.0 OTC & Ethicals (10.5) 6.2 13.8 10.0 13.0 13.0 Foods 12.5 (4.5) 6.3 (1.0) 10.0 9.7 Misc 6.8 (32.3) - 9.9 5.0 5.0 IBD (6.0) (7.4) 5.5 7.2 9.8 9.8 Total Gross revenue (2.1) 0.6 10.1 8.2 11.7 11.4 % of total gross revenue Domestic Business 68 70 71 72 72 73 Consumer Care 53 56 58 59 60 61 Hair Care 14 14 15 15 15 15 Oral Care 10 12 12 12 12 12 Health Supplements 11 12 12 13 14 14 Digestives 4 4 4 4 5 5 Skin Care 3 4 4 4 4 4 Home Care 4 5 5 5 5 5 OTC & Ethicals 6 6 6 6 6 7 Foods 13 12 12 11 11 11 Misc 2 1 1 1 1 1 IBD 32 30 29 28 28 27

Source: Company, Kotak Institutional Equities estimates

8 KOTAK INSTITUTIONAL EQUITIES RESEARCH Dabur India Consumer Staples

Exhibit 7: Dabur: consolidated profit model, balance sheet, cash flow model, March fiscal year-ends, 2017-22E (Rs mn)

2017 2018 2019 2020E 2021E 2022E Profit model (Rs mn) Net revenues 77,014 77,483 85,331 92,323 103,118 114,916 EBITDA 15,089 16,174 17,396 19,940 22,677 25,937 Other income 2,984 3,052 2,962 3,055 3,603 3,993 Interest expense (540) (531) (596) (560) (520) (489) Depreciation (1,429) (1,622) (1,769) (2,172) (2,341) (2,514) Pretax profits 16,104 17,074 17,993 20,264 23,418 26,926 Tax (3,303) (3,354) (3,599) (3,460) (4,015) (5,636) Minority Interest (31) (31) (30) (33) (36) (39) Net Income 12,769 13,689 14,364 16,772 19,367 21,251 Extraordinary items — (145) 59 (480) — — Reported Net Income 12,769 13,544 14,423 16,292 19,367 21,251 Earnings per share (Rs) 7.2 7.8 8.1 9.5 11.0 12.0 Balance sheet (Rs mn) Total shareholder's equity 48,474 57,065 56,317 64,235 71,910 79,342 Total borrowings 9,786 9,375 5,743 5,243 4,482 4,232 Deferred tax liability 1,080 1,091 231 231 231 231 Minority Interest 248 265 314 346 382 422 Total liabilities and equity 59,588 67,796 62,605 70,056 77,006 84,228 Net fixed assets incl CWIP 20,005 20,696 20,328 20,655 20,803 20,936 Investments 32,402 38,052 33,588 33,588 33,588 33,588 Cash 3,048 3,061 3,282 10,906 17,369 24,120 Net current assets 4,134 5,987 5,408 4,907 5,246 5,584 Total assets 59,588 67,796 62,605 70,056 77,006 84,228 Free cash flow (Rs mn) Operating cash flow (excl working capital) 11,397 13,465 14,467 18,329 19,401 21,088 Working capital 872 (2,575) 579 500 (339) (338) Capital expenditure (4,858) (2,003) (1,401) (2,499) (2,489) (2,648) Free cash flow 7,411 8,887 13,646 16,331 16,573 18,103 Key ratios (%) Sales growth (2.1) 0.6 10.1 8.2 11.7 11.4 EBITDA growth (0.6) 7.2 7.6 14.6 13.7 14.4 EPS growth 1.9 7.2 4.6 16.8 15.5 9.7 EBITDA margin 19.6 20.9 20.4 21.6 22.0 22.6 Gross margin 50.1 50.4 49.5 50.1 50.3 50.5 A&SP % of sales 8.4 7.8 7.1 7.1 7.1 7.0

Source: Company, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 9 REDUCE Pidilite Industries (PIDI) Speciality Chemicals JANUARY 31, 2020 RESULT Sector view: Neutral

RM tailwinds drive earnings growth. Pidilite reported solid 36% EBITDA growth and CMP (`): 1,521 margin expansion led by benign RM costs which more than compensated for subdued Fair Value (`): 1,425 top-line growth. Pidilite’s steady investments in distribution, end-market development BSE-30: 40,914 and product portfolio expansion would gear it for strong growth on revival in the economy. The story remains promising but valuations are a tad expensive. We tweak earnings, rollover and revise FV to Rs1,425 (from Rs1,280). REDUCE.

Pidilite Industries Stock data Forecasts/valuations 2020E 2021E 2022E 52-week range (Rs) (high,low) 1,545-1,046 EPS (Rs) 24.8 28.3 33.2 Mcap (bn) (Rs/US$) 773/10.9 EPS growth (%) 40.1 14.0 17.2 ADTV-3M (mn) (Rs/US$) 901/13 P/E (X) 61.2 53.7 45.8 Shareholding pattern (%) P/B (X) 15.7 13.4 11.4 Promoters 69.7 EV/EBITDA (X) 45.2 39.4 33.8 FIIs 11.1 RoE (%) 27.9 26.9 26.9 MFs/BFIs 4.5/4 Div. yield (%) 0.5 0.6 0.8 Price performance (%) 1M 3M 12M Sales (Rs bn) 75 83 95 Absolute 8 11 37 EBITDA (Rs bn) 17 19 22 Rel. to BSE-30 10 9 19 Net profits (Rs bn) 13 14 17

3QFY20— Top-line growth muted, RM tailwind drives strong EBITDA growth

PIDI reported revenue, EBITDA and PBT growth of 4% (KIE 7%), 36% (KIE 30%) and 36% (KIE 32%) yoy, respectively. The core business (domestic CBP) revenues grew 3.4% yoy led by 2% yoy volume growth (KIE 5.5%), an improvement from 1% decline in 2Q but still subdued. Industrial products segment grew 9% (13% volume/mix, -4% pricing) led by higher pigment exports owing to production cuts in China. Gross margin was up 655/40 bps on yoy/qoq to 53.8% (KIE 53.2%). EBITDA margin was up 530 bps yoy to 24% (KIE 22.5%) partly aided by normalization of A&P spends. PBT grew 36% yoy. Recurring PAT grew 53% yoy aided by ETR reduction and DTA re-measurement. Pidilite invested Rs490 mn for ~5% stake in HomeLane, a home décor and furnishings startup.

International subsidiaries grew 10% in c/c terms led by healthy growth in North America, Bangladesh, Sri Lanka and LATAM. Domestic subsidiaries reported 3% decline as weakness in new construction, auto and general industrial segment led to 4% decline in NINA Percept (waterproofing subsidiaries) and 16% decline in CIPY PU (floor adhesives).

Well placed on margins; visibility on growth revival is low but low base should help starting 4Q

Pidilite’s GM is near peak levels seen in CY2016 even as crude price in INR terms is 33% higher (VAM price is at similar levels) thanks to steady premiumization, strong pricing power and weak competition. With crude and VAM price environment remaining benign, Pidilite is well placed on gross margin front. The company has also made significant investments in people and Rohit Chordia distribution expansion; it would drive higher growth or offer operating leverage gains in the medium term. Even as the underlying demand environment remains challenging and there is no visibility of pickup in growth, low base should help starting 4QFY20. Jaykumar Doshi

We increase earnings estimates marginally; rollover and revise FV to Rs1,425 (from Rs1,280) Aniket Sethi We moderate our near-term growth forecast and increase margin assumptions. Net result— 0- 3% increase in FY2020-22E earnings. We rollover to March 2021, tweak our long-term growth and profitability assumptions and revise our DCF-based fair value to Rs1,425 (from Rs1,280). We like PIDI for its dominant positioning in a high-growth segment, and track record of expanding product portfolio and developing end-markets. Maintain REDUCE as we await better entry price.

[email protected] Contact: +91 22 6218 6427

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

Conference call takeaways

 Demand environment. The management indicated that the demand environment is challenging and it doesn’t expect any material improvement in 4QFY20E. For Pidilite, smaller towns (rural) are growing faster than larger towns/metros (urban). Per our checks, (1) almost entire growth in the core consumer & bazaar products (CBP) segment is driven by rural thanks to solid expansion of distribution footprint, and (2) urban market is likely declining or at best flat due to a weak macro.

 RM tailwinds, pricing and profitability outlook. VAM spot price continues to be in US$850-900/MT range. The management indicated that it does not see any procurement or price inflation risks led by ‘Coronavirus’ issue in China. Rest of the RM basket (monomers and other crude-derivatives) is also tracking favorably. Given this, we expect the robust gross margin to hold. Pidilite management indicated that it has selectively reduced product prices in FY2020E to partially pass on RM savings. It doesn’t intend any major price cut as it doesn’t feel price cuts would drive volumes in the current environment.

 Investment in HomeLane. Pidilite invested Rs490 mn in Homevista Décor and furnishings (HomeLane) for 5%+ stake in the company. HomeLane is a fast growing home interiors and furniture company backed with tech-stack and a presence in 7 cities and 16 experience centres. Pidilite management intends to engage closely with HomeLane such that it mutually benefits both. Per management, pre-money valuation was around US$100 mn. We note that Accel partners, Sequoia capital and JSW ventures are other investors in HomeLane.

 Focus stays on premiumization. Per management, premium adhesives account for about 65% of the adhesives market whereas economy products and unorganized sector account for the balance 35%. Pidilite has the dominant market share in the premium adhesives segment. The company does have some products in the economy adhesives category but its market share is low in that segment. The management indicated that it is primarily focused on upgrading consumers from economy to premium adhesives space. We note that paint companies stepped up focus on economy products following GST rate cut and have benefited in terms of market share gains from unorganized players.

 Other highlights. (1) A&P spends normalized in 3QFY20 in line with the guidance. The management did not disclose actual A&P spends in 3Q but indicated that A&P as a percentage of sales moderated from 4.8% in 2QFY20 and it was tracking in line with full year guidance of 3.5-4%

KOTAK INSTITUTIONAL EQUITIES RESEARCH 11 Speciality Chemicals Pidilite Industries

Exhibit. 2: Interim consolidated results of Pidilite Industries, March fiscal year-ends (Rs mn)

% chg. 3QFY20 3QFY20E 3QFY19 2QFY20 KIE Est yoy qoq 9MFY20 9MFY19 % chg. FY2020E FY2019 % chg. Net operating revenue 19,266 19,795 18,483 18,066 (3) 4 7 57,500 54,398 6 75,197 70,787 6 Material cost (8,903) (9,272) (9,752) (8,422) (4) (9) 6 (27,130) (27,717) (2) (35,311) (35,866) (2) Gross profit 10,363 10,523 8,731 9,644 (2) 19 7 30,370 26,681 14 39,886 34,922 14 Gross margin (%) 53.8 53.2 47.2 53.4 62 bps 654 bps 40 bps 52.8 49.0 377 bps 53.0 49.3 370 bps Employee cost (2,361) (2,378) (2,087) (2,345) (1) 13 1 (7,142) (6,195) 15 (9,501) (8,367) 14 Other expenditure (3,371) (3,698) (3,232) (3,617) (9) 4 (7) (10,477) (9,609) 9 (13,745) (12,891) 7 Total expenditure (14,634) (15,348) (15,072) (14,383) (5) (3) 2 (44,748) (43,522) 3 (58,557) (57,123) 3 EBITDA 4,632 4,447 3,412 3,682 4 36 26 12,751 10,877 17 16,640 13,664 22 EBITDA margin (%) 24.0 22.5 18.5 20.4 157 bps 558 bps 365 bps 22.2 20.0 218 bps 22.1 19.3 282 bps Other income 398 410 307 558 (3) 30 (29) 1,355 904 50 1,874 1,466 28 Interest (82) (55) (62) (83) 49 32 (1) (238) (195) 22 (246) (261) (6) Depreciation (419) (405) (321) (402) 3 30 4 (1,198) (938) 28 (1,603) (1,327) 21 Pretax profits 4,530 4,397 3,335 3,755 3 36 21 12,670 10,648 19 16,666 13,543 23 Tax (1,084) (1,110) (1,110) (540) (2) (2) 101 (3,069) (3,701) (17) (4,036) (4,661) (13) Share of Profit/ (Loss) of associates 16 8 15 11 98 7 49 29 12 136 30 27 10 Minority Interest (43) (8) (1) (8) 441 4,711 428 (67) (18) 280 (38) (35) 10 Recurring PAT 3,418 3,287 2,239 3,217 4 53 6 9,564 6,942 38 12,622 8,874 42 Extraordinary items - - (44) 25 25 (44) - 375 Net profit (reported) 3,418 3,287 2,195 3,242 4 56 5 9,589 6,898 39 12,622 9,249 36 Recurring EPS 6.7 6.5 4.4 6.3 4 53 6 18.8 13.7 38 24.8 17.5 42 Income tax rate (%) 23.9 25.2 33.3 14.4 -131 bps -936 bps 955 bps 24.2 34.8 -1054 bps 24.2 34.4 -1021 bps Costs as a % of net operating revenues Material cost 46.2 46.8 52.8 46.6 -63 bps -655 bps -41 bps 47.2 51.0 -378 bps 47.0 50.7 -371 bps Employee cost 12.3 12.0 11.3 13.0 23 bps 95 bps -73 bps 12.4 11.4 103 bps 12.6 11.8 81 bps Other expenditure 17.5 18.7 17.5 20.0 -119 bps 0 bps -253 bps 18.2 17.7 55 bps 18.3 18.2 6 bps

Segment results Revenues Consumer & Bazaar products 16,472 15,974 15,350 3 7 47,060 60,705 Industrial products 2,865 2,618 2,899 9 (1) 7,733 10,656 Others 216 183 152 18 42 519 661 Less: intersegment (287) (291) (335) (1) (14) (914) (1,234) Total segment revenue 19,266 18,483 18,066 4 7 54,398 70,787 Segment PBIT Consumer & Bazaar products 4,703 3,628 3,889 30 21 11,303 14,313 Industrial products 473 309 525 53 (10) 1,109 1,541 Others 3 (20) (27) (112) (109) (71) (90) Total segment EBIT 5,179 3,917 4,386 32 18 12,341 15,764 Segment PBIT margins (%) Consumer & Bazaar products 28.6 22.7 25.3 583 bps 322 bps 24 24 Industrial products 16.5 11.8 18.1 468 bps -162 bps 14 14 Others 1.2 (11.1) (18.0) NM 1911 bps (14) (14) Capital employed Consumer & Bazaar products 23,204 20,820 20,877 11 11 12,002 20,991 Industrial products 3,836 3,397 3,541 13 8 2,474 3,680 Others 690 459 702 50 (2) 394 627 Unallocated corporate 21,631 16,488 20,742 31 4 7,837 18,255 Total capital employed 49,362 41,164 45,862 20 8 22,706 43,552

Source: Company, Kotak Institutional Equities

12 KOTAK INSTITUTIONAL EQUITIES RESEARCH Pidilite Industries Speciality Chemicals

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

(% change) 3QFY20 3QFY20E 3QFY19 2QFY20 KIE Est yoy qoq 9MFY20 9MFY19 (% chg.) FY2020E FY2019 (% chg.) Net operating revenue 16,634 17,106 15,897 15,717 (3) 5 6 50,142 47,160 6 65,125 60,947 7 Material cost (7,658) (7,954) (8,312) (7,277) (4) (8) 5 (23,551) (23,924) (2) (30,446) (30,644) (1) Gross profit 8,976 9,152 7,585 8,441 (2) 18 6 26,591 23,236 14 34,679 30,302 14 Gross margin (%) 54.0 53.5 47.7 53.7 46 bps 624 bps 25 bps 53.0 49.3 376 bps 53.3 49.7 353 bps Employee cost (1,873) (1,893) (1,646) (1,866) (1) 14 0 (5,726) (4,927) 16 (7,587) (6,635) 14 Other expenditure (2,809) (3,081) (2,679) (3,065) (9) 5 (8) (8,882) (8,008) 11 (11,592) (10,748) 8 Total expenditure (12,340) (12,929) (12,638) (12,207) (5) (2) 1 (38,158) (36,860) 4 (49,625) (48,028) 3 EBITDA 4,294 4,177 3,259 3,510 3 32 22 11,984 10,300 16 15,500 12,919 20 EBITDA margin (%) 25.8 24.4 20.5 22.3 139 bps 531 bps 348 bps 23.9 21.8 205 bps 23.8 21.2 260 bps Other income 391 450 309 572 (13) 26 (32) 1,353 1,390 (3) 1,845 1,915 (4) Interest (34) (30) (16) (30) 13 109 13 (91) (53) 72 (123) (71) 72 Depreciation (318) (305) (234) (303) 4 36 5 (901) (700) 29 (1,216) (998) 22 Pretax profits 4,334 4,292 3,318 3,749 1 31 16 12,345 10,937 13 16,006 13,765 16 Tax (1,030) (1,082) (1,071) (520) (5) (4) 98 (2,936) (3,574) (18) (3,858) (4,499) (14) Recurring PAT 3,304 3,210 2,247 3,230 3 47 2 9,409 7,362 28 12,149 9,266 31 Extraordinary items - - - 17 17 - - 529 Net profit (reported) 3,304 3,210 2,247 3,247 3 47 2 9,426 7,362 28 12,149 9,794 24 Recurring PAT post MI 3,304 3,210 2,247 3,230 3 47 2 9,409 7,362 28 12,149 9,266 31 Recurring EPS 6.5 6.3 4.4 6.4 3 47 2 18.5 14.5 28 23.9 18.2 31 Income tax rate (%) 23.8 25.2 32.3 13.8 -144 bps -852 bps 996 bps 23.8 32.7 -894 bps 24.1 31.5 -738 bps Costs as a % of net operating revenue Material cost 46.0 46.5 52.3 46.3 -47 bps -625 bps -26 bps 47.0 50.7 -377 bps 46.8 50.3 -354 bps Employee cost 11.3 11.1 10.4 11.9 19 bps 90 bps -61 bps 11.4 10.4 97 bps 11.7 10.9 76 bps Other expenditure 16.9 18.0 16.9 19.5 -113 bps 3 bps -262 bps 17.7 17.0 73 bps 17.8 17.6 16 bps

Segment results Revenues Consumer & Bazaar products 13,841 14,325 13,388 13,001 (3) 3 6 41,829 39,822 5 53,831 50,864 6 Industrial products 2,865 2,880 2,618 2,899 (1) 9 (1) 8,699 7,733 12 11,903 10,656 12 Others 216 210 183 152 3 18 42 593 519 14 742 661 12 Less: intersegment (287) (309) (291) (335) (7) (1) (14) (978) (914) 7 (1,351) (1,234) 10 Total segment revenue 16,634 17,106 15,897 15,717 (3) 5 6 50,142 47,160 6 65,125 60,947 7 Segment PBIT Consumer & Bazaar products 4,523 - 3,607 3,848 25 18 12,863 11,570 11 14,501 Industrial products 473 - 309 525 53 (10) 1,451 1,109 31 1,541 Others 3 - (20) (27) (112) (109) (38) (71) (46) (90) Total segment EBIT 4,998 - 3,897 4,346 28 15 14,275 12,608 13 15,952 Segment PBIT margins (%) Consumer & Bazaar products 32.7 - 26.9 29.6 573 bps 308 bps 30.8 29.1 169 bps 28.5 Industrial products 16.5 - 11.8 18.1 468 bps -162 bps 16.7 14.3 233 bps 14.5 Others 1.2 - (11.1) (18.0) NM 1911 bps (6.5) (13.7) 719 bps (13.6) Capital employed Consumer & Bazaar products 13,422 - 12,128 11,843 11 13 13,422 12,128 12,149 Industrial products 3,836 - 3,397 3,541 13 8 3,836 3,397 3,680 Others 690 - 459 702 50 (2) 690 459 627 Unallocated corporate 29,412 - 23,386 27,955 26 5 29,412 23,386 25,412 Total capital employed 47,360 - 39,371 44,040 20 8 47,360 39,371 41,867

Source: Company, Kotak Institutional Equities

Exhibit 3: Key changes to earnings model, Pidilite Industries

Revised Earlier Change (%) 2020E 2021E 2022E 2020E 2021E 2022E 2020E 2021E 2022E Revenues (Rs mn) 75,197 83,456 94,704 75,609 84,121 96,028 (0.5) (0.8) (1.4) Revenue growth (%) 6.2 11.0 13.5 6.8 11.3 14.2 EBITDA (Rs mn) 16,640 18,879 21,772 16,450 18,660 21,580 1.2 1.2 0.9 EBITDA (%) 22.1 22.6 23.0 21.8 22.2 22.5 PAT (Rs mn) 12,622 14,384 16,851 12,295 14,232 16,768 2.7 1.1 0.5 EPS (Rs/share) 24.8 28.3 33.2 24.2 28.0 33.0 2.7 1.1 0.5

Source: Company, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 13 Speciality Chemicals Pidilite Industries

Exhibit 4: Performance of international business (Rs mn)

3QFY20 3QFY19 % chg. Comments Revenues North America 260 214 21 Healthy growth due to favourable trends and growth of key customers South America 260 224 16 Bangladesh 303 256 18 Strong growth momentum; commissioned new facility Sri Lanka 142 109 30 Thailand 155 206 (25) Decline on a high base (one-time large project executed in thebase quarter) Egypt 88 65 35 UAE 283 270 5 Others 15 27 (44) Total 1,506 1,371 10 EBITDA North America 8 (17) (147) South America 10 9 Bangladesh 40 43 (7) EBITDA decline due to investment in additional manufacturing facility Sri Lanka 19 4 Thailand 16 20 (20) Egypt (4) (10) UAE (4) (19) Others 2 1 Total 87 31 181 EBITDA margin (%) North America 3.1 (7.9) 1102 bps South America 3.8 4.0 -18 bps Bangladesh 13.2 16.8 -360 bps Sri Lanka 13.4 3.7 971 bps Thailand 10.3 9.7 61 bps Egypt (4.5) (15.4) 1083 bps UAE (1.4) (7.0) 562 bps Total 5.8 2.3 351 bps

Source: Company, Kotak Institutional Equities

Exhibit 5: Performance of domestic subsidiaries (Rs mn)

3QFY20 3QFY19 % chg. Comments Revenues Nina Percept and CIPY performance improved compared to 1HFY20 but continue to operating in challenging market conditions due to economic slowdown in real Nina Percept 787 824 (4) estate, auto and engineering industry. ICA - Pidilite 473 438 8 Cipy Polyurethane 339 403 (16) Others 151 140 8 Total 1,750 1,805 (3.0) EBITDA Nina Percept 80 90 (11) ICA - Pidilite 78 12 550 Cipy Polyurethane 68 58 17 Others 7 10 (30) Total 233 170 37.1 EBITDA margin (%) Nina Percept 10.2 10.9 -76 bps ICA - Pidilite 16.5 2.7 1375 bps Margin improvement led by scaling up of local manufacturing Cipy Polyurethane 20.1 14.4 566 bps Margin improvement led by efficient sales mix and lower input cost Others 4.6 7.1 -251 bps Total 13.3 9.4 389 bps

Source: Company, Kotak Institutional Equities

14 KOTAK INSTITUTIONAL EQUITIES RESEARCH Pidilite Industries Speciality Chemicals

Exhibit 6: VAM spot price is in US$850-900 range

VAM prices (LHS, Rs/Mt) Growth (RHS, yoy %) 100,000 80

52 60 80,000 38 34 40 60,000 22 15 19 20 40,000 (6) (2) (4) (5) (12) (9) 0 (22) 20,000 (24) (28) (20)

0 (40)

1QFY16

2QFY16

3QFY16

4QFY16

1QFY17

2QFY17

3QFY17

4QFY17

1QFY18

2QFY18

3QFY18

4QFY18

1QFY19

2QFY19

3QFY19

4QFY19

1QFY20

2QFY20 3QFY20

Source: Bloomberg, Kotak Institutional Equities

Exhibit 7: We expect Pidilite’s gross margins to remain robust in view of RM prices Trends in RM prices Pidilite’s standalone gross margin

VAM prices (LHS, Rs/Mt) Crude price- Brent (LHS, Rs per 10 Barrels) PIDI's standalone GM (RHS, %) 90,000.0 57.0

80,000.0 55.0

70,000.0 53.0

60,000.0 51.0

50,000.0 49.0

40,000.0 47.0

30,000.0 45.0

20,000.0 43.0

2QFY13 3QFY13 4QFY13 1QFY14 2QFY14 3QFY14 4QFY14 1QFY15 2QFY15 3QFY15 4QFY15 1QFY16 2QFY16 3QFY16 4QFY16 1QFY17 2QFY17 3QFY17 4QFY17 1QFY18 2QFY18 3QFY18 4QFY18 1QFY19 2QFY19 3QFY19 4QFY19 1QFY20 2QFY20 3QFY20 1QFY13

Source: Bloomberg, Kotak Institutional Equities

KOTAK INSTITUTIONAL EQUITIES RESEARCH 15 Speciality Chemicals Pidilite Industries

Exhibit 8: Consolidated gross margins improved 655/60 bps yoy/qoq to 53.8%

56 55.2 53.8 53.5 53.4 53.4 54 53.2 53.1 53.0 52.3 51.8 52.1 51.6 51.5 51.4 52 50.5 50.3 50 49.1

49.447.2 48 46.8

46 44.1 44.2 44

42

2QFY15

3QFY15

4QFY15

1QFY16

2QFY16

3QFY16

4QFY16

1QFY17

2QFY17

3QFY17

4QFY17

1QFY18

2QFY18

3QFY18

4QFY18

1QFY19

2QFY19

3QFY19

4QFY19

1QFY20

2QFY20 3QFY20

Source: Company, Kotak Institutional Equities

Exhibit 9: CBP revenues grew 3.4% yoy Exhibit 10: Industrial products revenues grew 9% yoy

25 23 23 35 21 30 20 17 16 25 21 15 18 13 20 16 15 15 13 12 14 14 11 13 12 12 10 15 10 9 9 7 7 10 8 7 10 6 6 6 3 4 5 1 1 0 - 5 3 1 - (4) - - - - (1) (5) (9) - (2) (10)

(5) (15)

1QFY15

2QFY15

3QFY15

4QFY15

1QFY16

2QFY16

3QFY16

4QFY16

1QFY17

2QFY17

3QFY17

4QFY17

1QFY18

2QFY18

3QFY18

4QFY18

1QFY19

2QFY19

3QFY19

4QFY19

1QFY20

2QFY20

3QFY20

1QFY15

2QFY15

3QFY15

4QFY15

1QFY16

2QFY16

3QFY16

4QFY16

1QFY17

2QFY17

3QFY17

4QFY17

1QFY18

2QFY18

3QFY18

4QFY18

1QFY19

2QFY19

3QFY19

4QFY19

1QFY20

2QFY20 3QFY20

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

16 KOTAK INSTITUTIONAL EQUITIES RESEARCH Pidilite Industries Speciality Chemicals

Exhibit 11: India CBP volume/mix growth stood at 2% yoy Consumer Bazaar Products volume + mix growth trends, yoy (%)

25 23 20 20 15 14 13 13 15 12 11 9 10 8 8 8 6 6 5 4 3 5 2 - (2) (1) -

(5)

3QFY15

4QFY15

1QFY16

2QFY16

3QFY16

4QFY16

1QFY17

2QFY17

3QFY17

4QFY17

1QFY18

2QFY18

3QFY18

4QFY18

1QFY19

2QFY19

3QFY19

4QFY19

1QFY20 2QFY20 3QFY20

Source: Bloomberg, Kotak Institutional Equities

KOTAK INSTITUTIONAL EQUITIES RESEARCH 17 Speciality Chemicals Pidilite Industries

Exhibit 12: Pidilite Industries: consolidated profit & loss, balance sheet and cash flow statement, March fiscal year-ends, 2014-22E (` mn)

2014 2015 2016 2017 2018 2019 2020E 2021E 2022E Profit model Net sales 42,606 48,204 53,612 56,168 60,784 70,787 75,197 83,456 94,704 Other operating income 226 237 0 0 0 0 0 0 0 Net operating revenues 42,832 48,441 53,612 56,168 60,784 70,787 75,197 83,456 94,704 EBITDA 6,715 7,708 11,735 12,598 13,412 13,682 16,640 18,879 21,772 Other income 449 455 778 1,123 1,484 1,466 1,874 2,318 2,869 Interest (163) (156) (133) (139) (155) (261) (246) (235) (234) Depreciation (812) (1,178) (1,005) (1,151) (1,199) (1,327) (1,603) (1,699) (1,837) Pretax profits 6,188 6,828 11,376 12,430 13,542 13,560 16,666 19,263 22,571 Tax (1,653) (1,694) (3,335) (3,851) (4,392) (4,661) (4,036) (4,870) (5,710) Less: Minority interest (3) (10) (44) (32) (37) (35) (38) (42) (46) Add: Share of profit in associate 30 50 32 53 46 27 30 33 36 Recurring PAT 4,563 5,175 8,028 8,600 9,159 8,892 12,622 14,384 16,851 Extraordinary items (65) (49) - - 465 375.20 - - - Reported net profit 4,498 5,126 8,028 8,600 9,624 9,267 12,622 14,384 16,851 Recurring earnings per share (Rs) 8.9 10.1 15.7 16.8 18.0 17.5 24.8 28.3 33.2 Balance sheet Total equity 19,526 22,706 26,380 34,709 35,740 41,481 49,105 57,732 67,608 Total borrowings 459 584 800 975 1,226 1,111 1,025 1,025 1,025 Deferred tax liabilities (net) 537 566 753 877 1,048 1,094 1,094 1,094 1,094 Minority interest 42 51 434 1,273 1,751 2,072 2,033 1,991 1,945 Total liabilities and equity 20,565 23,907 28,367 37,835 39,765 45,757 53,258 61,842 71,672 Net fixed assets (Incl CWIP) 11,872 14,403 12,955 14,230 15,699 16,897 15,489 15,446 16,080 Investments 2,603 3,699 7,055 14,431 12,459 15,477 15,477 15,477 15,477 Cash 1,772 760 1,318 999 1,636 1,904 10,356 17,901 25,602 Net current assets (excl cash) 4,318 5,045 7,039 8,175 9,970 11,478 11,936 13,018 14,513 Total assets 20,565 23,907 28,367 37,835 39,765 45,757 53,258 61,842 71,672 Free cash flow Operating cash flow (excl working capital) 5,452 6,113 9,015 9,336 9,738 10,239 12,605 14,009 16,062 Working capital (1,514) (593) (375) (1,399) (1,774) (1,791) (457) (1,082) (1,495) Capital expenditure (1,894) (4,091) (1,997) (2,301) (2,724) (2,431) (195) (1,656) (2,470) Free cash flow 2,045 1,429 6,643 5,636 5,240 6,017 11,952 11,271 12,097 Key assumptions, growth (%) Net operating revenue growth 16.5 13.1 10.7 4.8 8.2 16.5 6.2 11.0 13.5 EBITDA growth 13.2 14.8 52.3 7.4 6.5 2.0 21.6 13.5 15.3 EPS growth 8.1 13.4 55.1 7.1 7.5 (3.0) 42.0 14.0 17.2 EBITDA margin (%) 15.7 15.9 21.9 22.4 22.1 19.3 22.1 22.6 23.0 Gross margin (%) 44.9 44.9 51.8 53.0 52.5 49.3 53.0 52.8 52.5 A&SP (% of sales) 4.3 4.0 3.6 3.4 3.5 3.2 3.4 3.3 3.0 Tax rate (% of PBT) 26.7 24.8 29.3 31.0 32.4 34.4 24.2 25.3 25.3 Ratios (%) ROE (%) 25.2 24.3 32.8 28.1 26.0 23.0 27.9 26.9 26.9 ROCE (%) 30.1 29.0 40.6 34.1 30.7 28.0 29.6 29.1 29.1

Source: Company, Kotak Institutional Equities estimates

18 KOTAK INSTITUTIONAL EQUITIES RESEARCH BUY Tata Motors (TTMT) Automobiles & Components JANUARY 31, 2020 RESULT Sector view: Neutral

Cost saving efforts in JLR to continue. Tata Motors reported consolidated adjusted CMP (`): 186 net EBITDA of Rs71.6 bn in 3QFY20 led by sharp improvement in JLR’s operational Fair Value (`): 215 performance. JLR EBIT margin expanded by 580 bps yoy led by a favorable product mix, BSE-30: 40,914 cost savings from Project Charge and favorable FX movement. Standalone business performance was weaker-than-expectations due to steep volume decline in CV segment resulting in negative operating leverage. We expect JLR to continue its momentum going forward. We maintain BUY rating and revise FV to Rs215 (from Rs200 earlier).

Tata Motors Stock data Forecasts/valuations 2020E 2021E 2022E 52-week range (Rs) (high,low) 239-106 EPS (Rs) (3.4) 7.7 18.1 Mcap (bn) (Rs/US$) 633/8.6 EPS growth (%) 36.3 325.1 134.5 ADTV-3M (mn) (Rs/US$) 7,072/99 P/E (X) (54.2) 24.1 10.3 Shareholding pattern (%) P/B (X) 1.1 1.0 0.9 Promoters 38.4 EV/EBITDA (X) 4.7 3.6 3.0 FIIs 30.1 RoE (%) (2.0) 4.5 9.7 MFs/BFIs 8.1/7.5 Div. yield (%) 0.0 0.0 0.0 Price performance (%) 1M 3M 12M Sales (Rs bn) 2,770 2,981 3,155 Absolute 1 8 7 EBITDA (Rs bn) 263 340 403 Rel. to BSE-30 3 6 (7) Net profits (Rs bn) (12) 30 69

JLR business disappointed on EBITDA front in 3QFY20

JLR reported EBITDA of GBP688 mn (up 51% yoy) in 3QFY20, which was 22% below our estimate of GBP877 mn primarily due to (1) lower net realizations and (2) weaker-than- expected gross margins and (3) higher-than-expected employee costs. Reported EBITDA margin was 10.8% in 3QFY20 (up 340 bps yoy) as compared to our estimate of 13.4%. ASPs declined by 2% qoq due to unfavorable currency movements (GBP appreciation versus USD by 4.5% qoq), despite having a favorable model mix (higher LR mix) and favorable geographical mix (higher China mix) in 3QFY20. EBIT margin in JLR UK business in 3QFY20 improved by 580 bps yoy led primarily by (1) 180 bps due to reduction in warranty and material costs, (2) 330 bps due to lower D&A and admin expense, (3) 110 bps due to revaluation gains as a result of GBP appreciation partly offset by higher VME expense and loss in JV (40 bps impact). The company saved GBP154 mn in 3QFY20 led by lower warranty and manufacturing overheads and lower D&A expense. The company has launched project Charge+ in order to further save GBP1.1 bn over FY2021E by focusing on material cost reduction, leveraging profitable portfolios and lowering warrant costs.

Standalone entity disappoints due to decline in volumes and weaker product mix in 3QFY20

Standalone business reported an EBITDA loss of Rs526 mn (KIE: profit of Rs910 mn) in 3QFY20 due to (1) lower wholesale volumes due to inventory correction, (2) adverse product mix as M&HCV volumes fell by 43% yoy and (3) 130 bps yoy decline in gross margin (KIE: 110 bps yoy decline), (4) one-time negative impact of Rs2.4 bn for prior year indirect tax settlement. Hitesh Goel Adjusted net loss at Rs10.5 bn (KIE: loss of Rs8.1 bn), which was substantially below our estimates due to a miss at EBITDA level and higher depreciation expense.

We have fine-tuned our FY2021-22E consolidated EBITDA estimates; Retain BUY Rishi Vora

We have fine-tuned our FY2021-22E consolidated EBITDA estimates to factor in (1) 20-70 bps improvement in JLR EBITDA margin assumptions, (2) 2% cut in JLR volume assumptions, (3) 4% cut in net realizations and 30-60 bps cut in EBITDA margin estimates in the standalone operations. Maintain BUY with revised SOTP-based fair value of Rs215 (versus Rs200 earlier).

[email protected] Contact: +91 22 6218 6427

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

Key highlights of JLR’s performance in 3QFY20

 JLR reported EBITDA of GBP688 mn (+51% yoy) in 3QFY20, which was 22% below our estimate of GBP877 mn primarily due to (1) lower net realizations and (2) weaker-than- expected gross margins and (3) higher-than-expected employee costs. Reported EBITDA margin was 10.8% in 3QFY20 (up 340 bps yoy) as compared to our estimate of 13.4%. ASPs declined by 2% qoq due to unfavorable currency movements (GBP appreciation versus USD by 4.5% qoq), despite having a favorable model mix (higher Land Rover mix) and favorable geographical mix (higher China mix) in 3QFY20. Realized hedge losses came in at GBP127 mn versus our estimates of GBP150 mn in 3QFY20.

 EBIT margin in JLR UK business in 3QFY20 improved by 580 bps yoy led primarily by (1) 180 bps due to reduction in warranty and material costs, (2) 330 bps due to lower D&A and admin expense, (3) 110 bps due to revaluation gains as a result of GBP appreciation partly offset by higher VME expense and loss in China JV (40 bps impact). The company saved GBP154 mn in 3QFY20 led by lower warranty and manufacturing overheads and lower D&A expense.

 Share of loss from JLR China JV was GBP25 mn in 3QFY20 versus loss of GBP16 mn in 3QFY19. This was despite 3% yoy increase in China JV wholesale volumes. The company indicated that China JV losses were due to higher incentives to clear of old inventory of stock due to change in emission norms in July 2019 and adverse commodity prices. China JV reported EBITDA loss of GBP1 mn in 3QFY20 versus EBITDA profit of GBP6 mn in 3QFY19.

 JLR’s overall wholesale volumes increased by 3% yoy to 145,384 units in 3QFY20. In the UK P&L, (1) Jaguar brand volumes were down 18% yoy due to a steep decline in volumes for most of its existing models and (2) Land Rover volumes increased by 7% yoy due to 25-28% yoy increase in RR Evoque and Discovery volumes; however RR Sport volumes declined by 8% yoy in 3QFY20.

 On the geographical front, China wholesale volumes (excluding China JV) increased by 35% yoy in 3QFY20 partly due to a lower base. North America volumes grew by 10% yoy in 3QFY20. Europe and UK volumes declined by 7-16% yoy and rest of the world volumes were flattish yoy in 3QFY20.

 The company has launched new Evoque – the model has been rolled out in March 2019 in UK & Europe, in April 2019 in America and rest of the world markets and was launched in China in August 2019. New Range Rover Evoque continues to do well in terms of sales volumes in 3QFY20. Further, the company will launch refreshed Discovery Sport in China by February 2020. Also, customer orders for the new Defender model have exceeded the company’s expectations.

 Depreciation expenses declined to GBP453 mn in 3QFY20 from GBP598 mn last year due to lower depreciation on assets written-off in 3QFY19. Current portion of hedge book was GBP160 mn in 3QFY20 versus GBP496 mn in 2QFY20.

 On company’s target to improve cash-flows by GBP2.5 bn – the company saved GBP2.9 bn under project Charge of which (1) the company has achieved savings of GBP1.5 bn in reduction in investments; (2) GBP0.7 bn through reduction in working capital and (3) the company saved another GBP0.7 bn driven by a cut in overhead costs.

 JLR launches project Charge+: The company has launched project Charge+ with an aim of saving of further GBP1.1 bn by FY2021E out of which GBP0.4 bn will be saved in 4QFY20 and remaining GBP0.7 bn in FY2021E. Under project Charge+, the company will focus on lowering warranty costs, minimizing overhead cost base and improve current portfolio returns by reducing material cost. The company will focus on improving

20 KOTAK INSTITUTIONAL EQUITIES RESEARCH Tata Motors Automobiles & Components

profitability by leveraging most profitable vehicles, optimizing market performance and maintaining inventory discipline. The company highlighted that JLR’s material cost is 10% higher than the benchmark; under project Charge+, the company will look into 34 component categories such as suspension systems, safety systems, seats, commodity groups etc. in order to bring down the cost.

 JLR reported a negative FCF of GBP144 mn in 3QFY20 led by deterioration in working capital (GBP62 mn) and higher investments (GBP892 mn). FCF improved on yoy basis due to lower investment spending, lower inventory and improvement in profitability in 3QFY20.

 The company expects China volumes to get impacted due to the outbreak of Coronavirus, which could hamper economic activity. For FY2020-21E, the company has guided for (1) retail sales growth ahead of growth in luxury vehicle industry (KIE: flat yoy growth in FY2020E and 8% yoy growth in FY2021E in JLR’s wholesale volumes), (2) EBIT margin guidance of 3-4% (KIE: 1.5% in FY2020E and 3.6% in FY2021E) and (3) negative to improving FCF over the next two years. The company expects EBIT margin to improve to 4-6% in FY2022-23 and 7-9% thereafter.

Exhibit 1: 3QFY20 JLR’s EBITDA was 22% below our estimates due to lower-than-expected GM and miss at revenue front JLR interim financial results (including China JV income), March fiscal year-ends (GBP mn)

(% chg.) 3QFY20 3QFY20E 3QFY19 2QFY20 3QFY20E 3QFY19 2QFY20 9MFY20 9MFY19 Yoy (%) FY2020E FY2019 Yoy (%) Volumes (units) 129,947 129,947 130,016 121,124 (0.1) 7.3 355,261 356,421 (0.3) 500,002 507,876 (1.6) Average realization 49,235 50,380 47,863 50,246 (2.3) 2.9 (2.0) 49,423 47,921 3.1 48,361 47,677 1.4 Net sales 6,398 6,547 6,223 6,086 (2.3) 2.8 5.1 17,558 17,080 2.8 24,180 24,214 (0.1) Of which hedge book gain/(loss) (127) (150) (168) (156) (432) (545) (562) (870) Total expenditure (5,710) (5,669) (5,767) (5,246) 0.7 (1.0) 8.8 (15,817) (15,795) (21,647) (22,481) Raw materials (4,141) (4,125) (4,056) (3,720) 0.4 2.1 11.3 (11,142) (10,981) (15,596) (15,670) Staff cost (655) (630) (721) (631) 4.0 (9.2) 3.8 (1,942) (2,158) (2,591) (2,820) Other expenditure (877) (914) (959) (799) (4.1) (8.6) 9.8 (2,566) (2,560) (3,460) (3,991) Forex losses (revaluation of WC) (37) — (31) (96) (167) (96) — — EBITDA 688 877 456 840 (21.6) 50.9 (18.1) 1,741 1,285 35.5 2,533 1,733 46.2 Associate Income (China JV) (25) (40) (16) (41) (37.5) 56.3 (39.0) (94) 17 (125) 7 Interest (33) (40) (21) (39) (17.5) 57.1 (15.4) (107) (47) (140) (76) Depreciation (453) (510) (598) (504) (11.2) (24.2) (10.1) (1,420) (1,699) (2,050) (2,164) Pretax profits 177 287 (179) 256 (38.4) (198.9) (30.9) 120 (444) 218 (501) Tax expense 54 (72) 266 (56) (9) 309 (80) 308 Unrealized FX gains/(losses) 141 — (3,216) (100) (41) (3,305) (150) (3,330) Reported profit after tax 372 216 (3,129) 100 72.5 70 (3,440) (12) (3,523) JLR wholesale volume mix (units) Jaguar 30,800 37,558 32,194 (18.0) (4.3) 95,411 108,529 (12.1) 133,000 153,753 (13.5) Land Rover 99,147 92,458 88,930 7.2 11.5 259,850 247,892 4.8 367,002 354,123 3.6 China JV 15,437 11,536 13,365 33.8 15.5 43,162 47,343 (8.8) 67,759 57,428 18.0 Total volumes (including China JV) 145,384 141,552 134,489 2.7 8.1 398,423 403,764 (1.3) 567,761 565,304 0.4 Product Mix (%) Jaguar 21.2 26.5 23.9 23.9 26.9 23.4 27.2 Land Rover 68.2 65.3 66.1 65.2 61.4 64.6 62.6 China JV 10.6 8.1 9.9 10.8 11.7 11.9 10.2 Geographical Mix - Wholesale Volumes (units) China (Only JLR P&L, excludes China JV volumes) 12,300 9,136 10,445 34.6 17.8 32,546 29,998 8.5 50,000 40,168 24.5 Europe 29,440 35,004 26,878 (15.9) 9.5 81,675 86,521 (5.6) 112,500 124,248 (9.5) North America 43,450 39,398 33,189 10.3 30.9 102,616 95,222 7.8 146,561 133,237 10.0 United Kingdom 23,440 25,312 28,866 (7.4) (18.8) 77,585 78,943 (1.7) 105,000 118,734 (11.6) Rest of World 21,317 21,166 21,746 0.7 (2.0) 60,839 65,737 (7.5) 85,941 91,491 (6.1) Modelwise wholesale volumes (units) XE 2,400 4,875 3,287 (50.8) (27.0) 8,856 13,920 (36.4) 11,000 19,418 (43.4) XF 1,400 2,558 1,430 (45.3) (2.1) 5,387 9,790 (45.0) 8,000 14,522 (44.9) XJ 400 1,168 397 (65.8) 0.8 2,384 3,216 (25.9) 3,000 4,204 (28.6) XK — — — — — — — — — E-Pace 9,500 10,098 9,588 (5.9) (0.9) 27,706 30,396 (8.8) 50,000 47,024 6.3 F-Pace 12,200 11,739 12,941 3.9 (5.7) 34,493 38,270 (9.9) 45,000 50,885 (11.6) I-Pace 3,500 5,408 3,390 12,085 7,355 64.3 10,000 10,000 — Others (incl. F Type) 1,400 1,712 1,161 (18.2) 20.6 4,500 5,582 (19.4) 6,000 7,700 (22.1) Jaguar 30,800 37,558 32,194 (18.0) (4.3) 95,411 108,529 (12.1) 133,000 153,753 (13.5) Defender — 3 1 2 4 2 4 (50.0) Discovery 10,200 7,967 7,244 28.0 40.8 25,396 26,634 (4.6) 35,000 37,635 (7.0) Freelander/Discovery Sport 16,200 15,432 13,871 5.0 16.8 40,528 40,976 (1.1) 56,000 58,363 (4.0) Range Rover 14,700 14,783 13,754 (0.6) 6.9 38,474 39,844 (3.4) 55,000 57,051 (3.6) Range Rover Evoque 22,700 18,189 20,552 24.8 10.5 59,571 42,384 40.6 83,000 57,697 43.9 Range Rover Velar 14,747 13,775 14,196 7.1 3.9 39,939 40,749 (2.0) 58,000 60,766 (4.6) Range Rover Sport 20,600 22,309 19,312 (7.7) 6.7 55,940 57,301 (2.4) 80,000 82,600 (3.1) Land Rover 99,147 92,458 88,930 7.2 11.5 259,850 247,892 4.8 367,002 354,116 3.6 Currency Movement (average) GBPUSD 1.32 1.27 1.23 3.3 6.7 GBPEUR 1.17 1.14 1.11 2.9 5.5 GBPCNY 9.14 8.76 8.65 4.4 5.7 Ratios (%) EBITDA margin (%) 10.8 13.4 7.3 13.8 9.9 7.5 10.5 7.2 EBIT margin - including China JV profit (%) 3.3 5.0 (2.5) 4.8 1.3 (2.3) 1.5 (1.8) Raw material exp to sales 64.7 63.0 65.2 61.1 63.5 64.3 64.5 64.7 Staff cost to sales 10.2 9.6 11.6 10.4 11.1 12.6 10.7 11.6 Other expenses to sales 14.3 14.0 15.9 14.7 15.6 15.6 14.3 16.5 Tax rate (%) (30.5) 25.0 148.6 21.9 7.5 69.6 36.6 61.5

Source: Company, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 21 Automobiles & Components Tata Motors

Exhibit 2: Favorable mix, lower operating costs, lower D&A expense and favorable FX positively impacted margins on yoy basis in 3QFY20 JLR yearly PBT walk, March fiscal year-ends, 2019-20 (GBP mn))

Source: Company, Kotak Institutional Equities

Exhibit 3: Higher VME, adverse commodity prices and higher overhead costs negatively impacted margins on qoq basis in 3QFY20 JLR quarterly PBT walk, March fiscal year-ends, 2020 (GBP mn)

Source: Company, Kotak Institutional Equities

22 KOTAK INSTITUTIONAL EQUITIES RESEARCH Tata Motors Automobiles & Components

Exhibit 4: JLR generated negative FCF of GBP144 mn in 3QFY20 JLR working capital and free cash flow, March fiscal year-ends, 2019-20 (GBP mn)

Source: Company, Kotak Institutional Equities

Exhibit 5: JLR has liquidity of GBP5.8 bn at the end of December 2019 Break-up of JLR debt maturity profile, Calendar year-ends, 2019-27 (GBP mn)

Source: TP flash report, Company, Kotak Institutional Equities

KOTAK INSTITUTIONAL EQUITIES RESEARCH 23 Automobiles & Components Tata Motors

Exhibit 6: JLR is planning to meet future emission regulations by electrification, light weighting and engine rightsizing JLR CO2 emissions strategy, calendar year-ends, 2017-21

Source: Company, Kotak Institutional Equities

Exhibit 7: JLR achieved GBP2.9 mn under project charge led by reduction in investments, working capital savings and overhead savings JLR project charge target guidance, March fiscal year-ends, 2019-20 (GBP mn)

Source: Company, Kotak Institutional Equities

24 KOTAK INSTITUTIONAL EQUITIES RESEARCH Tata Motors Automobiles & Components

Exhibit 8: JLR has introduced project Charge+ with a focus to save additional GBP1.1 bn till FY2021E JLR project Charge+ target guidance, March fiscal year-ends, 2020-21 (GBP mn)

Source: Company, Kotak Institutional Equities

Exhibit 9: JLR will focus on material cost, leveraging profitable portfolios and lowering warrant costs to achieve target of project Charge+ JLR project Charge+ strategy, March fiscal year-ends, 2020-21 (GBP mn)

Source: Company, Kotak Institutional Equities

KOTAK INSTITUTIONAL EQUITIES RESEARCH 25 Automobiles & Components Tata Motors

Exhibit 10: JLR will systematically review 34 component categories to lower material costs JLR project Charge+ strategy for material cost reduction, March fiscal year-ends, 2020-21 (GBP mn)

Source: Company, Kotak Institutional Equities

Exhibit 11: JLR targets EBIT margin of 3-4% in FY2020-21, 4-6% in FY2022-23 and 7-9% beyond FY2023 JLR financial guidance, March fiscal year-ends, 2020-23 (GBP mn, %)

Source: Company, Kotak Institutional Equities

26 KOTAK INSTITUTIONAL EQUITIES RESEARCH Tata Motors Automobiles & Components

Exhibit 12: GBP appreciated by ~7% qoq against USD in 3QFY20 Average quarterly currency movement, March fiscal year-ends, 3QFY16-3QFY20

3QFY16 4QFY16 1QFY17 2QFY17 3QFY17 4QFY17 1QFY18 2QFY18 3QFY18 4QFY18 1QFY19 2QFY19 3QFY19 4QFY19 1QFY20 2QFY20 3QFY20 GBP-USD Average 1.52 1.43 1.44 1.31 1.24 1.24 1.28 1.31 1.33 1.39 1.36 1.33 1.29 1.30 1.29 1.23 1.32 Period-end 1.47 1.44 1.33 1.30 1.24 1.25 1.30 1.35 1.35 1.40 1.32 1.30 1.28 1.32 1.27 1.23 1.33 EUR-USD Average 1.10 1.10 1.13 1.12 1.08 1.07 1.10 1.18 1.18 1.23 1.19 1.16 1.14 1.14 1.12 1.11 1.17 Period-end 1.09 1.14 1.11 1.12 1.05 1.07 1.14 1.18 1.20 1.23 1.17 1.16 1.15 1.13 1.14 1.09 1.12 GBP-CNY Average 9.7 9.4 9.4 8.8 8.5 8.5 8.8 8.7 8.8 8.8 8.7 8.9 8.9 8.8 8.8 8.6 9.1 Period-end 9.6 9.3 8.8 8.7 8.6 8.6 8.8 8.9 8.8 8.8 8.7 9.0 8.8 8.9 8.7 8.8 9.2 GBP-RUB Average 100.3 107.1 94.4 84.9 78.2 72.7 73.1 77.1 77.6 79.1 84.4 85.4 85.8 85.9 83.0 79.6 82.0 Period-end 106.3 96.1 85.5 82.3 75.6 70.1 77.1 77.5 77.9 80.1 82.9 85.9 88.7 85.0 80.2 79.8 82.3

Source: Bloomberg, Kotak Institutional Equities

Exhibit 13: JLR expensed ~23% of R&D in P&L in 3QFY20; overall capex was GBP892 mn in 3QFY20 Break-up of JLR R&D and capex spend, March fiscal year-ends, 3QFY17-3QFY20 (GBP mn)

3QFY17 4QFY17 1QFY18 2QFY18 3QFY18 4QFY18 1QFY19 2QFY19 3QFY19 4QFY19 1QFY20 2QFY20 3QFY20 R&D expense Capitalized 379 354 355 410 402 443 426 418 391 404 339 353 344 Expensed 96 99 94 83 93 136 99 113 113 96 83 114 104 Total R&D expense 475 453 449 493 495 579 525 531 504 500 422 467 448 Investment in tangible and other intangible assets 451 583 546 540 575 509 541 464 516 500 373 374 444 Total product and other investment 926 1,036 995 1,033 1,070 1,088 1,066 995 1,020 1,000 795 841 892 R&D capitalized as % of total R&D 79.8 78.1 79.1 83.2 81.2 76.5 81.1 78.7 77.6 80.8 80.3 75.6 76.8

Source: Company, Kotak Institutional Equities

Exhibit 14: We expect JLR volumes to increase by 3% CAGR over FY2019-22E Geography-wise volume mix (including China JV), March fiscal year-ends, 2014-22E (units, %)

2014 2015 2016 2017 2018 2019 2020E 2021E 2022E Geography N.A 71,000 79,000 108,900 132,000 136,447 133,237 146,561 156,820 161,525 UK 76,000 88,100 111,100 115,000 114,074 118,734 105,000 107,100 108,171 Europe (excl Russia and UK) 70,000 89,700 124,200 137,000 126,313 119,248 110,000 117,700 121,231 Russia 13,000 10,400 6,000 6,000 6,000 5,000 2,500 2,500 2,500 China 104,000 119,300 98,651 125,004 153,825 97,596 117,759 126,002 132,302 Asia Pac (excl China) 23,000 27,100 29,810 32,791 34,431 34,431 27,544 30,299 31,208 Rest of World 73,000 56,900 65,376 53,009 62,420 57,060 58,397 70,626 66,618 Total Volumes 430,000 470,500 544,037 600,804 633,510 565,306 567,761 611,047 623,554 Yoy growth (%) 15.6 9.4 15.6 10.4 5.4 (10.8) 0.4 7.6 2.0 Geographical mix (%) N.A 16.5 16.8 20.0 22.0 21.5 23.6 25.8 25.7 25.9 UK 17.7 18.7 20.4 19.1 18.0 21.0 18.5 17.5 17.3 Europe (excl Russia and UK) 16.3 19.1 22.8 22.8 19.9 21.1 19.4 19.3 19.4 Russia 3.0 2.2 1.1 1.0 0.9 0.9 0.4 0.4 0.4 China 24.2 25.4 18.1 20.8 24.3 17.3 20.7 20.6 21.2 Asia Pac (excl China) 5.3 5.8 5.5 5.5 5.4 6.1 4.9 5.0 5.0 Rest of World 17.0 12.1 12.0 8.8 9.9 10.1 10.3 11.6 10.7 Total Volumes 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0

Note: Volumes from CJLR JV has been included in China volumes

Source: Company, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 27 Automobiles & Components Tata Motors

Exhibit 15: Success of Evoque, Defender, E-Pace and I-Pace models key to achieve improved volume performance over FY2019-22E JLR model-wise volume mix assumptions (including China JV), March fiscal year-ends, 2014-22E (units, %)

2014 2015 2016 2017 2018 2019 2020E 2021E 2022E Model XF 47,000 45,900 36,200 35,054 41,654 24,469 17,947 18,444 18,967 XJ 19,000 16,300 12,200 10,100 9,000 4,204 3,000 3,000 3,000 XK 3,000 2,100 100 — — — — — — F type 10,000 12,200 12,600 10,900 9,200 7,700 6,000 6,000 6,000 Small Jaguar — — 39,200 46,700 32,108 30,657 22,801 23,391 24,011 F Pace — — 1,806 76,000 69,500 50,885 45,000 45,000 45,000 I-Pace/E-Pace — — — — 14,800 59,533 63,011 63,161 63,319 Jaguar 79,000 76,500 102,106 178,754 176,262 177,448 157,759 158,997 160,297 Defender 17,000 20,000 20,200 600 — 4 2— 20,000 30,000 Discovery 44,000 50,600 53,700 37,600 52,000 37,635 35,000 35,000 35,000 Freelander 57,000 38,700 — — — 7 — — — Discovery Sport — 13,600 97,800 124,873 118,173 84,416 79,000 80,150 81,358 Range Rover 46,000 61,400 60,100 56,300 54,900 57,051 55,000 57,750 57,750 RRSport 66,000 85,800 90,300 87,500 76,600 82,600 80,000 84,000 84,000 Evoque 121,000 123,900 119,831 115,177 96,277 65,377 103,000 117,150 117,150 Range Rover Velar — — — — 59,200 60,766 58,000 58,000 58,000 Land Rover 351,000 394,000 441,931 422,050 457,150 387,856 410,002 452,050 463,258 Total Volumes 430,000 470,500 544,037 600,804 633,412 565,304 567,761 611,047 623,554 Model mix (%) XF 10.9 9.8 6.7 5.8 6.6 4.3 3.2 3.0 3.0 XJ 4.4 3.5 2.2 1.7 1.4 0.7 0.5 0.5 0.5 XK 0.7 — — — — — — — — F type 2.3 2.6 2.3 1.8 1.5 1.4 1.1 1.0 1.0 Small Jaguar — — 7.2 7.8 5.1 5.4 4.0 3.8 3.9 F Pace — — 0.3 12.6 11.0 9.0 7.9 7.4 7.2 I-Pace/E-Pace — — — — 2.3 10.5 11.1 10.3 10.2 Defender 4.0 4.3 3.7 — — — — 3.3 4.8 Discovery 10.2 10.8 9.9 6.3 8.2 6.7 6.2 5.7 5.6 Freelander 13.3 8.2 — — — — — — — Discovery Sport — 2.9 18.0 20.8 18.7 14.9 13.9 13.1 13.0 Range Rover 10.7 13.0 11.0 9.4 8.7 10.1 9.7 9.5 9.3 RRSport 15.3 18.2 16.6 14.6 12.1 14.6 14.1 13.7 13.5 Evoque 28.1 26.3 22.0 19.2 15.2 11.6 18.1 19.2 18.8 Velar — — — — 9.3 10.7 10.2 9.5 9.3 Total Volumes 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0

Note: Volumes from CJLR JV has been included in China volumes

Source: Company, Kotak Institutional Equities estimates

Weak standalone business performance due to weaker product mix

 Standalone business reported an EBITDA loss of Rs526 mn (KIE: profit of Rs910 mn) in 3QFY20 due to (1) lower wholesale volumes due to inventory correction, (2) adverse product mix as M&HCV volumes fell by 43% yoy, (3) 130 bps yoy decline in gross margin (KIE: 110 bps yoy decline), (4) low freight availability for the cargo operators and (5) one- time negative impact of Rs2.4 bn for prior year indirect tax settlement. Gross margin improved on a qoq basis due to lower commodity cost. Adjusted net loss at Rs10.5 bn (KIE: loss of Rs8.1 bn), which was substantially below our estimates due to a miss at EBITDA level and higher depreciation expense.

 Domestic retail CV volumes were down 13% yoy (wholesale CV volumes (including exports) were down by 24% yoy) in 3QFY20. The company reduced system inventory by 20,000 units on a qoq basis and dealer stock level is lowest since March 2011.

 Domestic retail PV volumes declined by 23% yoy in 3QFY20 versus 26% yoy decline in wholesale PV volumes (including exports) in 3QFY20. The company reduced system inventory by 19,000 units on a qoq basis and dealer stock levels stood at 18 days in 3QFY20.

 Revenues were down 33% yoy in 3QFY20 led by (1) 25% yoy decline in volumes and (2) 11% yoy decline in ASPs due to a weaker product mix. CV segment revenues declined by 38% yoy led by (1) 24% yoy decline in CV volumes and (2) 18% yoy decline in ASPs due

28 KOTAK INSTITUTIONAL EQUITIES RESEARCH Tata Motors Automobiles & Components

to a weaker product mix. Volumes got impacted by inventory correction, higher axle loads, liquidity stress and low freight availability for cargo operators. The company has gained market share in MHCV segment (+250 bps as compared to FY2019 levels) and ILCV segment (+200 bps yoy as compared to FY2019 levels) in 9MFY20. PV revenues declined by 19% yoy in 3QFY20 largely led by 27% yoy decline in PV volumes, which was partially offset by improvement in product mix (higher share of UV segment) in 3QFY20. In 9MFY20, the company lost market share by 110-190 bps from FY2019 market share levels in both passenger car and UV segment.

 EBITDA margin came in at negative 0.5% in 3QFY20 (versus 8.1% in 3QFY19 and negative 3.8% in 2QFY20), which was below our estimates of 0.7%. In terms of segments, EBIT margin in CV segment declined by 1,060 bps yoy to negative 2.3% due to a weaker product mix (higher mix of LCV segment and lower tonnage in MHCV), higher VME cost and negative operating leverage. In the PV segment, EBIT margin was negative 19.8% in 3QFY20 versus negative 8% in 3QFY19 – steep decline due to challenging demand environment and inventory correction. EBITDA margin in PV segment came in at negative 3.6% yoy in 3QFY20 versus 0.9% in 3QFY19 due to stock correction and negative operating leverage.

 The company incurred capex of Rs13.2 bn in 3QFY20 – out of which Rs6.7 bn was incurred to ensure transition towards BS-VI norms and other capital investments. R&D investments were Rs6.49 bn in 3QFY20. The company generated FCF of Rs24.0 bn led by improvement in working capital cycle in 3QFY20. The company will incur capex of Rs45 bn in FY2020E.

 The company has launched three fully refreshed BS-VI passenger cars – Tiago, Tigor and Nexon along with the Altroz. For CVs, the company will introduced more than 230 variants of BS-VI compliant vehicles at Auto Expo 2020.

 In the electric mobility space, the company has two models – Tigor EV+ and Nexon EV. The company has 43% market share in electric mobility space as on 9MFY20. The company along with Tata Power has installed 80+ charges in five cities and has localized battery packing for EVs. The company will continue to work on reduction of direct material cost in order to improve profitability.

KOTAK INSTITUTIONAL EQUITIES RESEARCH 29 Automobiles & Components Tata Motors

Exhibit 16: The company incurred EBITDA loss of Rs526 mn due to steep volume decline, adverse mix and higher VME expense Tata Motors standalone interim financial results, March fiscal year-ends (Rs mn)

(% chg.) 3QFY20 3QFY20E 3QFY19 2QFY20 3QFY20E 3QFY19 2QFY20 9MFY20 9MFY19 Yoy (%) FY2020E FY2019 Yoy (%) Volumes (units) 129,381 129,381 171,777 105,031 (24.7) 23.2 371,957 538,926 (31.0) 521,780 731,941 (28.7) Net realization (Rs) 838,060 952,146 943,530 952,146 (12.0) (11.2) (12.0) 919,335 939,672 (2.2) 930,193 945,469 (1.6) Net sales 108,429 123,190 162,077 100,005 (12.0) (33.1) 8.4 341,953 506,414 (32.5) 485,357 692,028 (29.9) Total expenditure (108,955) (122,280) (148,984) (103,758) (10.9) (26.9) 5.0 (338,848) (465,980) (27.3) (476,390) (640,480) (25.6) Raw materials (80,417) (91,160) (118,204) (74,797) (11.8) (32.0) 7.5 (251,154) (368,067) (31.8) (359,334) (506,158) (29.0) Staff cost (10,183) (11,000) (10,601) (10,671) (7.4) (3.9) (4.6) (32,347) (31,384) 3.1 (44,217) (42,731) 3.5 Other expenditure (18,355) (20,119) (20,179) (18,290) (8.8) (9.0) 0.4 (55,347) (66,528) (16.8) (72,839) (91,591) (20.5) EBITDA (526) 910 13,093 (3,753) 3,105 40,434 (92.3) 8,967 51,548 (82.6) Other income 3,515 3,614 2,694 3,614 11,141 21,349 (47.8) 15,478 25,547 (39.4) Interest (4,785) (5,000) (4,681) (4,979) (14,160) (14,044) 0.8 (18,260) (17,936) 1.8 Depreciation (8,535) (7,607) (7,668) (7,607) (23,912) (22,260) 7.4 (31,923) (30,986) 3.0 Profit before tax before exceptional (10,331) (8,082) 3,438 (12,725) (23,825) 25,478 (25,739) 28,172 Extraordinary gain/(loss) 93 — 1,751 25 410 (4,144) 410 (4,183) Pretax profits (10,239) (8,082) 5,189 (12,700) (23,415) 21,334 (25,329) 23,989 Tax expense (157) — 987 (120) (771) (2,190) 771 (3,783) Profit after tax (10,395) (8,082) 6,176 (12,820) (24,186) 19,144 (226.3) (24,558) 20,206 (221.5) Adjusted PAT (10,464) (8,082) 4,863 (12,838) (24,493) 22,252 (210.1) (24,865) 23,343 (206.5) Adjusted EPS (Rs) (2.9) (2.2) 1.4 (3.8) (6.8) 6.6 (6.9) 6.9 Segmental volume breakdown (units) MHCV 30,515 53,211 27,748 (42.7) 10.0 97,366 165,636 (41.2) 163,304 224,940 (27.4) LCV 62,157 68,574 50,854 (9.4) 22.2 174,265 215,548 (19.2) 221,587 294,837 (24.8) Passenger cars 19,764 31,256 14,590 (36.8) 35.5 52,267 101,645 (48.6) 80,314 132,069 (39.2) Utility vehicles 16,945 18,736 11,839 (9.6) 43.1 48,059 56,097 (14.3) 56,575 80,095 (29.4) Product Mix (%) MHCV 23.6 31.0 26.4 26.2 30.7 31.3 30.7 LCV 48.0 39.9 48.4 46.9 40.0 42.5 40.3 Passenger cars 15.3 18.2 13.9 14.1 18.9 15.4 18.0 Utility vehicles 13.1 10.9 11.3 12.9 10.4 10.8 10.9 Ratios (%) Raw material cost as % of net sales 74.2 74.0 72.9 74.8 73.4 72.7 74.0 73.1 Staff cost as % of net sales 9.4 8.9 6.5 10.7 9.5 6.2 9.1 6.2 Other expenses as % of net sales 16.9 16.3 12.4 18.3 16.2 13.1 15.0 13.2 EBITDA margin (%) (0.5) 0.7 8.1 (3.8) 0.9 8.0 1.8 7.4 EBIT margin (%) (8.4) (5.4) 3.3 (11.4) (6.1) 3.6 (4.7) 3.0 Tax rate (%) (1.5) — (19.0) (0.9) (3.3) 10.3 3.0 15.8 Diluted no. of shares 3,598 3,598 3,396 3,396 3,598 3,396 3,598 3,396 Segmental revenues Commercial vehicles 79,218 127,088 77,858 (37.7) 1.7 259,172 395,405 540,365 Passenger vehicles 27,976 34,703 21,865 (19.4) 27.9 80,799 110,094 150,523 Corporate/Unallocable 1,236 286 282 332.0 338.7 1,982 915 1,139 Total segment revenue 108,429 162,077 100,005 (33.1) 8.4 341,953 506,414 692,028 Eliminations — — — — — — Overall revenues 108,429 162,077 100,005 233,524 344,337 692,028 Segment results Commercial vehicles (1,993) 10,830 (642) (118.4) 210.6 2,185 34,111 44,235 Passenger vehicles (5,580) (3,279) (8,466) 70.2 (34.1) (17,150) (9,148) (13,961) Corporate/Unallocable 133 (765) (879) (117.4) (115.1) (1,466) (2,093) (3,499) Total segment result (7,440) 6,785 (9,986) (209.7) (25.5) (16,431) 22,870 26,775 Eliminations — — — — — — Segment EBIT (7,440) 6,785 (9,986) (8,991) 16,085 26,775 Segment margin Commercial vehicles (2.5) 8.5 (0.8) 0.8 8.6 8.2 Passenger vehicles (19.9) (9.5) (38.7) (21.2) (8.3) (9.3) Corporate/Unallocable as % of revenues 0.1 (0.5) (0.9) (0.4) (0.4) (0.5) Overall margin (6.9) 4.2 (10.0) (3.9) 4.7 3.9 Segmental ASPs (Rs) Commercial vehicles 854,816 1,043,546 990,536 (18.1) (13.7) 954,134 1,037,307 1,039,610 Passenger vehicles 762,105 694,161 827,315 9.8 (7.9) 805,366 697,937 709,465

Source: Company, Kotak Institutional Equities estimates

30 KOTAK INSTITUTIONAL EQUITIES RESEARCH Tata Motors Automobiles & Components

Exhibit 17: Lower volumes and negative operating leverage impacted EBIT margin in 2QFY20 Yearly PBT walk of the standalone business, March fiscal year-ends, 2019-20 (Rs crore)

Source: Company, Kotak Institutional Equities

Exhibit 18: Higher volumes and favorable FX partly offset by weaker product mix resulted in improvement in EBIT margin on a qoq basis Quarterly PBT walk of the standalone business, March fiscal year-ends, 2020 (Rs crore)

Source: Company, Kotak Institutional Equities

KOTAK INSTITUTIONAL EQUITIES RESEARCH 31 Automobiles & Components Tata Motors

Exhibit 19: Standalone business generated FCF of Rs24 bn in 3QFY20 due to improvement in working capital cycle TTML's standalone cash-flow summary statement, March fiscal year-end, 2019-20 (Rs crore)

Source: Company, Kotak Institutional Equities

Exhibit 20: Tata Motors standalone invested Rs13 bn during 3QYF20 led by Rs6.7 bn investment for capital and BS-VI related investments Tata Motors standalone R&D and capex spend, March fiscal year-ends, 2019-2020 (Rs crore)

Source: Company, Kotak Institutional Equities

32 KOTAK INSTITUTIONAL EQUITIES RESEARCH Tata Motors Automobiles & Components

Exhibit 21: PV segment EBITDA margin came in at -3.6% (versus 0.9% in 3QFY19) and CV EBITDA margin came in 2.2% in 3QFY20 Segmental revenue, EBITDA and EBIT of standalone business, March fiscal year-ends, 1QFY18-3QFY20 (Rs mn)

1QFY18 2QFY18 3QFY18 4QFY18 1QFY19 2QFY19 3QFY19 4QFY19 1QFY20 2QFY20 3QFY20 Commercial vehicle segment Revenue 79,750 102,450 122,970 149,710 128,923 139,393 127,088 144,961 102,097 77,858 79,218 EBITDA 4,360 13,216 14,850 17,160 15,110 15,891 14,742 13,661 8,780 2,959 1,743 EBITDA margin (%) 5.5 12.9 12.1 11.5 11.7 11.4 11.6 9.4 8.6 3.8 2.2 EBIT 1,140 9,490 10,940 13,324 11,460 12,110 10,548 10,192 4,799 (389) (1,822) EBIT margin (%) 1.4 9.3 8.9 8.9 8.9 8.7 8.3 7.0 4.7 (0.5) (2.3) Passenger vehicle segment Revenue 23,420 30,420 37,330 47,656 37,599 37,790 34,703 40,429 30,958 21,865 27,976 EBITDA (4,610) (4,198) (1,792) (4,610) (250) 76 312 13 371 (4,679) (1,007) EBITDA margin (%) (19.7) (13.8) (4.8) (9.7) (0.7) 0.2 0.9 0.0 1.2 (21.4) (3.6) EBIT (7,930) (7,790) (5,525) (8,770) (3,300) (3,280) (2,776) (4,614) (3,065) (8,484) (5,539) EBIT margin (%) (33.9) (25.6) (14.8) (18.4) (8.8) (8.7) (8.0) (11.4) (9.9) (38.8) (19.8)

Source: Company, Kotak Institutional Equities estimates

Consolidated EBITDA was 14% below our estimates due to weaker performance in both JLR and standalone entity

The company reported consolidated EBITDA of Rs72 bn (+21% yoy), which was 14% below our estimates due to miss in EBITDA in JLR and standalone business. Revenues declined by 7% yoy in 3QFY20 due to 33% yoy decline in standalone revenues, which was partially offset by 3% yoy increase in JLR revenues. Reported net profit came in at Rs17.4 bn, which was substantially above our estimates despite miss at EBITDA level because of deferred tax credit of Rs11.5 bn in 3QFY20.

Total debt at JLR stood at GBP6.1 bn as on December 31, 2019. Total borrowings in the standalone entity stood at Rs266.1 bn as on December 31, 2019. Net consolidated automotive debt was Rs453.8 bn as of December 2019 (Rs283.9 bn as of March 2019), down from Rs500.7 bn as of September 2019.

Net NPA rises for Tata Motors Finance in 9MFY20

Disbursals for Tata Motors Finance were down due to poor demand scenario. Disbursals slowed down by 28% to Rs111.9 bn primarily due to slowdown in demand for long haul trucks. PAT stood at Rs130 mn in 9MFY20 versus Rs570 mn in 9MFY19. Gross NPA rose to 5.3% in 9MFY20 from 3.3% in 9MFY19 and net NPA rose to 3.9% in 9MFY20 from 1.9% in 9MFY19.

Exhibit 22: Consolidated EBITDA was 14% below our estimates due to miss at EBITDA level in JLR business Tata Motors consolidated interim financial results, March fiscal year-ends (Rs mn)

(% chg.) 3QFY20 3QFY20E 3QFY19 2QFY20 3QFY20E 3QFY19 2QFY20 9MFY20 9MFY19 Yoy (%) FY2020E FY2019 Yoy (%) Net sales 716,761 749,275 769,159 654,320 (4.3) (6.8) 9.5 1,985,750 2,155,161 (7.9) 2,769,501 3,019,384 (8.3) Raw materials (464,184) (478,361) (501,895) (401,275) (7.5) 15.7 (1,263,214) (1,391,751) (1,758,124) (1,963,212) Staff costs (77,373) (73,000) (85,090) (72,830) (9.1) 6.2 (227,399) (252,445) (312,225) (324,402) Other expenses (103,239) (114,040) (122,619) (108,609) (15.8) (4.9) (321,613) (335,458) (435,915) (468,031) Total expenses (644,795) (665,401) (709,603) (582,715) (9.1) 10.7 (1,812,225) (1,979,654) (2,506,264) (2,755,645) EBITDA 71,965 83,874 59,557 71,605 (14.2) 20.8 0.5 173,525 175,507 (1.1) 263,238 263,739 (0.2) Other income 9,001 6,726 6,668 6,726 35.0 33.8 24,087 21,020 30,000 29,653 Interest expense (17,436) (18,354) (15,685) (18,354) 11.2 (5.0) (52,905) (41,706) (66,383) (60,949) Depreciation (51,993) (52,996) (64,393) (52,996) (19.3) (1.9) (156,106) (182,376) (215,323) (228,452) Extraordinary gain/(loss) 1,961 — (278,431) (769) (1,271) (298,806) — (305,575) Profit before tax 13,499 19,251 (292,284) 6,212 (29.9) (12,670) (326,361) 11,532 (301,584) Tax expense 6,046 (5,005) 24,052 (4,455) (369) 25,489 (11,888) 18,258 Minority interest/associates (2,162) (3,923) (1,693) (3,923) (8,726) 1,435 (12,008) (4,229) Profit after tax 17,383 10,322 (269,925) (2,165) 68.4 (21,766) (299,437) (12,364) (287,555) Adjusted profit after tax 15,912 10,322 (19,337) (1,589) (20,813) (34,587) (12,364) (41,498) Adjusted EPS (Rs) 4.4 2.9 (5.7) (0.5) (5.8) (10.2) (3.4) (12.2) Ratios (%) Raw material as % of sales 64.8 63.8 65.3 61.3 63.6 64.6 63.5 65.0 Staff costs as % of sales 10.8 9.7 11.1 11.1 11.5 11.7 11.3 10.7 Other expenses as % of sales 14.4 15.2 15.9 16.6 16.2 15.6 15.7 15.5 EBITDA margin (%) 10.0 11.2 7.7 10.9 8.7 8.1 9.5 8.7 Tax rate (%) (44.8) 26.0 8.2 71.7 (2.9) 7.8 103.1 6.1 Diluted no. of shares 3,598 3,598 3,396 3,396 3,598 3,396 3,598 3,396

Source: Company, Kotak Institutional Equities estimate

KOTAK INSTITUTIONAL EQUITIES RESEARCH 33 Automobiles & Components Tata Motors

Exhibit 23: JLR’s total debt stood at GBP6.1 bn in 3QFY20; standalone entity total borrowings stood at Rs266.1 bn in 3QFY20 TTML's consolidated debt maturity profile, March fiscal year-end, 2019-2020 (GBP bn, Rs crore)

Source: Company, Kotak Institutional Equities

Exhibit 24: We expect EBITDA margin to remain 3-8% in China JV venture between FY2021-22E Summary projected financials of JLR China JV venture, March fiscal year-ends, 2016-22E (GBP mn)

2016 2017 2018 2019 2020E 2021E 2022E Sales volumes (units) Discovery Sport 8,000 38,873 43,673 26,053 23,000 24,150 25,358 Evoque 26,751 17,677 18,777 7,680 20,000 30,000 30,000 Jaguar XF — 9,454 21,854 9,947 9,947 10,444 10,967 Jaguar XE — — 3,908 11,239 11,801 12,391 13,011 E-Pace — — — 2,509 3,011 3,161 3,319 Total sales volumes 34,751 66,004 88,212 57,428 67,759 80,147 82,654 Net sales 1,106 2,163 2,773 1,697 1,502 1,865 1,943 Raw material cost (675) (1,298) (1,608) (1,154) (1,352) (1,492) (1,457) Staff cost (50) (73) (98) (108) (108) (111) (114) Royalty (55) (108) (139) (110) (99) (124) (130) Other expenses (98) (161) (54) (94) (85) (89) (93) Total expenses (878) (1,640) (1,899) (1,466) (1,643) (1,816) (1,795) EBITDA 228 523 874 231 (142) 49 147 Interest expense (2) (3) (96) (6) (25) (20) (15) Depreciation expense (58) (105) (139) (206) (206) (216) (226) Profit before tax 168 415 640 19 (373) (187) (94) Tax (44) (103) (136) (6) 123 62 31 Profit after tax 124 312 504 13 (250) (125) (63) Ratios Raw material cost as % of net sales 61.0 60.0 58.0 68.0 90.0 80.0 75.0 Staff cost as % of net sales 4.5 3.4 3.5 6.4 7.2 6.0 5.9 Royalty cost as % of net sales 5.0 5.0 5.0 6.5 6.6 6.7 6.7 Other expenses cost as % of net sales 8.9 7.4 1.9 5.6 5.6 4.8 4.8 EBITDA margin (%) 20.6 24.2 31.5 13.6 (9.4) 2.6 7.6

Source: Company, Kotak Institutional Equities estimates

34 KOTAK INSTITUTIONAL EQUITIES RESEARCH Tata Motors Automobiles & Components

Exhibit 25: We expect standalone volumes to decline at 8% CAGR over FY2019-22E Tata Motors standalone volume assumptions, March fiscal year-ends, 2011-22E (units)

2011 2012 2013 2014 2015 2016 2017 2018 2019 2020E 2021E 2022E M&HCVs 209,522 221,298 152,505 122,498 142,737 176,493 175,262 190,367 224,940 163,304 159,084 188,007 M&HCVs-domestic 192,127 207,014 143,381 110,225 127,011 156,961 148,901 168,013 195,712 136,998 130,148 156,178 M&HCVs-exports 17,395 14,284 9,124 12,273 15,726 19,532 26,361 22,354 29,228 26,305 28,936 31,829 LCVs 287,463 363,756 428,643 298,799 221,818 205,231 209,767 259,066 294,837 221,587 199,429 228,753 LCVs-domestic 77,558 95,791 113,520 85,140 59,598 59,078 54,488 103,410 124,602 97,190 87,471 100,591 Ace 177,096 227,179 280,242 183,059 131,533 111,981 121,821 127,912 148,378 111,283 100,155 115,178 LCVs-exports 32,809 40,786 34,881 30,600 30,687 34,172 33,458 27,744 21,857 13,114 11,803 12,983 UVs 43,063 56,464 48,617 32,400 25,617 19,364 20,197 53,071 80,095 56,575 59,404 68,315 UVs-domestic 42,297 55,744 47,454 31,268 24,609 18,621 18,757 51,891 78,756 55,129 57,886 66,569 UVs-exports 766 720 1,163 1,132 1,008 743 1,440 1,180 1,339 1,446 1,518 1,746 Passenger vehicles 263,274 265,254 180,355 112,894 111,982 111,072 137,096 136,548 132,069 80,314 84,230 94,047 Passenger vehicles-domestic 185,767 183,439 120,845 85,648 92,569 86,796 126,908 133,430 129,387 77,632 81,514 91,295 Passenger vehicles-exports 7,075 7,288 5,663 5,707 2,512 3,264 2,597 1,118 682 682 716 752 Small car 70,432 74,527 53,847 21,539 16,901 21,012 7,591 2,000 2,000 2,000 2,000 2,000 Total domestic sales 745,277 843,694 759,289 516,879 452,221 454,449 478,466 586,656 678,835 480,233 459,174 531,812 Total export sales 58,045 63,078 50,831 49,712 49,933 57,711 63,856 52,396 53,106 41,548 42,973 47,310 Total vehicle sales 803,322 906,772 810,120 566,591 502,154 512,160 542,322 639,052 731,941 521,780 502,147 579,122 Volume growth (yoy %) M&HCVs 24.8 5.6 (31.1) (19.7) 16.5 23.6 (0.7) 8.6 18.2 (27.4) (2.6) 18.2 M&HCVs-domestic 23.8 7.7 (30.7) (23.1) 15.2 23.6 (5.1) 12.8 16.5 (30.0) (5.0) 20.0 M&HCVs-exports 37.1 (17.9) (36.1) 34.5 28.1 24.2 35.0 (15.2) 30.8 (10.0) 10.0 10.0 LCVs 23.0 26.5 17.8 (30.3) (25.8) (7.5) 2.2 23.5 13.8 (24.8) (10.0) 14.7 LCVs-domestic (10.1) 23.5 18.5 (25.0) (30.0) (0.9) (7.8) 89.8 20.5 (22.0) (10.0) 15.0 Ace 34.0 28.3 23.4 (34.7) (28.1) (14.9) 8.8 5.0 16.0 (25.0) (10.0) 15.0 LCVs-exports 115.6 24.3 (14.5) (12.3) 0.3 11.4 (2.1) (17.1) (21.2) (40.0) (10.0) 10.0 UVs 26.2 31.1 (13.9) (33.4) (20.9) (24.4) 4.3 162.8 50.9 (29.4) 5.0 15.0 UVs-domestic 26.1 31.8 (14.9) (34.1) (21.3) (24.3) 0.7 176.6 51.8 (30.0) 5.0 15.0 UVs-exports 29.2 (6.0) 61.5 (2.7) (11.0) (26.3) 93.8 (18.1) 13.5 8.0 5.0 15.0 Passenger vehicles 27.2 0.8 (32.0) (37.4) (0.8) (0.8) 23.4 (0.4) (3.3) (39.2) 4.9 11.7 Passenger vehicles-domestic 8.6 (1.3) (34.1) (29.1) 8.1 (6.2) 46.2 5.1 (3.0) (40.0) 5.0 12.0 Passenger vehicles-exports 25.5 3.0 (22.3) 0.8 (56.0) 29.9 (20.4) (57.0) (39.0) — 5.0 5.0 Small car 132.1 5.8 (27.7) (60.0) (21.5) 24.3 (63.9) (73.7) — — — — Total domestic sales 22.5 13.2 (10.0) (31.9) (12.5) 0.5 5.3 22.6 15.7 (29.3) (4.4) 15.8 Total export sales 70.0 8.7 (19.4) (2.2) 0.4 15.6 10.6 (17.9) 1.4 (21.8) 3.4 10.1 Total vehicle sales 25.0 12.9 (10.7) (30.1) (11.4) 2.0 5.9 17.8 14.5 (28.7) (3.8) 15.3

Source: Company, Kotak Institutional Equities estimates

Exhibit 26: We value Tata Motors at Rs215/share based on SOTP methodology Tata Motors SOTP valuation (Rs per share)

Multiple Value Value per share (X) (Rs mn) (Rs) Comments Standalone business (Rs mn) Standalone Book value 61 Based on March 2021 JLR JLR UK net profit 66,191 8.0 529,525 138 based on December 2021 EPS JLR China JV valuation 9 based on 6X December 2021 EV/EBITDA Total standalone + JLR 208 Value of Tata Motors Finance 6 1X P/BV on March 2021E SOTP-based value 214 Fair value 215

Source: Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 35 Automobiles & Components Tata Motors

Exhibit 27: We have fine-tuned our consolidated EBITDA estimates over FY2021-22E led by margin expansion assumptions in JLR Earnings revision table, March fiscal year-ends, FY2020-22E (Rs mn, GBP mn, %)

New estimates Old estimates % change 2020E 2021E 2022E 2020E 2021E 2022E 2020E 2021E 2022E Standalone (Rs mn) Volumes (units) 521,780 502,147 579,122 521,780 502,147 579,122 — — — Net sales 485,357 501,476 594,745 504,298 520,910 618,766 (3.8) (3.7) (3.9) EBITDA 8,967 9,828 33,045 10,705 11,826 37,891 (16.2) (16.9) (12.8) EBITDA margin (%) 1.8 2.0 5.6 2.1 2.3 6.1 Adjusted net profit (24,865) (29,814) (6,380) (21,233) (26,783) (430) JLR UK P&L (GBP mn) Volumes (units) 500,002 530,900 540,900 510,000 541,500 551,500 (2.0) (2.0) (1.9) Average realization 48,361 47,264 48,098 48,858 47,942 48,747 (1.0) (1.4) (1.3) Net sales 24,180 25,093 26,016 24,918 25,960 26,884 (3.0) (3.3) (3.2) Of which hedged forex losses (562) (313) (144) (650) (313) (144) EBITDA 2,533 3,170 3,525 2,765 3,224 3,474 (8.4) (1.7) 1.5 EBITDA margin (%) 10.5 12.6 13.6 11.1 12.4 12.9 Reported net profit 113 608 746 75 603 678 50.8 0.8 10.1 China JV (GBP mn) Volumes (units) 67,759 80,147 82,654 67,759 80,147 82,654 — — — Net sales 1,502 1,865 1,943 1,502 1,865 1,943 — — — EBITDA (142) 49 147 (142) 49 147 — — — EBITDA margin (%) (9.4) 2.6 7.6 (9.4) 2.6 7.6 Net profit (250) (125) (63) (250) (125) (63) Consolidated (Rs mn) Net sales 2,769,501 2,980,831 3,154,976 2,861,065 2,975,875 3,178,616 (3.2) 0.2 (0.7) EBITDA 263,238 340,165 402,967 288,884 339,763 396,100 (8.9) 0.1 1.7 EBITDA margin (%) 9.5 11.4 12.8 10.1 11.4 12.5 Adjusted net profit (12,364) 29,621 69,464 (28,392) 24,053 61,089 (56.5) 23.2 13.7 EPS (3.4) 7.7 18.1 (7.9) 6.3 16.0 (56.5) 23.2 13.7 GBPINR 88.0 93.0 93.0 88.0 89.0 90.0 — 4.5 3.3

Source: Company, Kotak Institutional Equities estimates

Exhibit 28: We build in EBIT margin of ~4% in JLR UK financials over FY2021-22E Jaguar Land Rover (ex-China JV) income statement, March fiscal year-ends, 2011-22E (GBP mn)

2011 2012 2013 2014 2015 2016 2017 2018 2019 2020E 2021E 2022E Volumes (000s) 244 314 372 430 467 509 535 545 508 500 531 541 Sales 9,871 13,512 15,784 19,386 22,106 22,286 24,339 25,786 24,214 24,180 25,093 26,016 Of which realzied forex losses — — — — 240 78 (1,320) (1,389) (870) (562) (313) (144) Realizations per vehicle 40,520 42,972 42,422 45,083 47,387 43,759 45,510 47,296 47,677 48,361 47,264 48,098 Cost of sales 8,286 11,373 13,254 15,910 18,129 18,821 21,143 22,880 22,060 21,222 21,483 22,051 Materials 6,178 8,733 9,904 11,904 13,347 13,562 15,071 16,328 15,670 15,596 15,859 16,390 Labor 789 1,011 1,333 1,654 1,977 2,321 2,490 2,722 2,820 2,591 2,591 2,604 Manufacturing costs and SG&A 1,319 1,629 2,017 2,352 2,805 2,938 3,582 3,830 3,570 3,035 3,033 3,057 D&A 396 466 622 875 1,051 1,418 1,656 2,075 2,164 2,050 2,200 2,350 Product dev 119 149 198 236 253 318 368 406 421 425 440 440 EBIT 1,069 1,524 1,710 2,365 2,673 1,729 1,172 425 (431) 483 970 1,175 EBITDA 1,465 1,989 2,331 3,240 3,724 3,147 2,828 2,500 1,733 2,533 3,170 3,525 Other income 36 38 71 153 143 128 379 420 205 — — — Interest 23 69 (3) 147 87 52 35 52 76 140 160 180 PBT 1,082 1,492 1,784 2,371 2,729 1,805 1,516 793 (302) 343 810 995 Tax 79 26 460 622 576 293 331 398 (308) 80 203 249 Forex gains/(losses) (33) (14) (108) 137 (216) (136) (102) 467 (3,330) (150) — — PAT 1,036 1,481 1,216 1,886 1,937 1,376 1,083 862 (3,324) 113 608 746 EBITDA margin (%) 14.8 14.7 14.8 16.7 16.8 14.1 11.6 9.7 7.2 10.5 12.6 13.6 EBIT margin - including China JV profit (%) 10.8 11.3 10.8 12.2 12.1 8.0 5.5 2.6 (1.8) 1.5 3.6 4.4

Source: Company, Kotak Institutional Equities estimates

36 KOTAK INSTITUTIONAL EQUITIES RESEARCH Tata Motors Automobiles & Components

Exhibit 29: We expect standalone EBTIDA margin to improve from FY2021E onwards Tata Motors standalone profit and loss, balance sheet and cash flow statement, March fiscal year-ends, 2012-22E (Rs mn)

2012 2013 2014 2015 2016 2017 2018 2019 2020E 2021E 2022E Profit model (Rs mn) Net sales 543,066 447,657 342,881 362,947 428,455 443,163 578,965 692,028 485,357 501,476 594,745 EBITDA 41,776 17,180 (9,112) (12,375) 29,466 13,577 23,907 51,548 8,967 9,828 33,045 Other income 2,104 17,046 18,669 18,814 14,023 9,811 24,925 25,547 15,478 10,597 10,716 Interest (8,550) (10,041) (13,375) (16,117) (15,920) (15,690) (17,444) (17,936) (18,260) (15,636) (13,192) Depreciaton (16,067) (18,176) (20,703) (26,032) (23,292) (30,371) (31,019) (30,986) (31,923) (34,603) (36,948) Profit before tax 19,263 6,008 (24,521) (35,710) 4,276 (22,674) 369 28,172 (25,739) (29,814) (6,380) Extra ordinary income/(expenses) 5,852 (8,642) 14,263 (4,038) (4,948) (859) (9,838) (4,183) 410 — — Tax expense — 6 13,603 (7,642) 73 (571) (926) (2,947) 771 — — Net profit 12,422 (1,354) 3,346 (47,390) (623) (24,296) (10,349) 20,206 (24,558) (29,814) (6,380) Adjusted net profit 16,519 (3,031) (27,276) (52,240) 3,088 (23,652) (2,970) 23,343 (24,865) (29,814) (6,380) Adjusted Diluted EPS (Rs) 4.9 (0.9) (8.0) (15.4) 0.9 (7.0) (0.9) 6.9 (6.9) (7.8) (1.7) Balance sheet (Rs mn) Equity 6,348 6,381 6,438 6,438 6,792 6,792 6,792 6,792 7,195 7,658 7,658 Reserves and Surplus 189,913 187,118 185,328 142,188 225,829 204,834 194,918 214,833 219,705 224,128 217,748 Deferred tax liability 21,054 19,639 431 — 714 1,476 1,546 2,059 2,059 2,059 2,059 Total borrowings 158,806 167,990 150,528 211,344 164,733 193,570 184,638 186,396 176,396 168,396 158,396 Current liabilities 169,073 142,871 154,619 139,462 168,692 182,111 204,229 199,016 174,014 179,333 197,817 Total liabilities 545,193 523,998 497,344 499,432 566,760 588,783 592,123 609,096 579,369 581,574 583,679 Net fixed assets 190,562 202,085 215,956 218,240 267,623 280,439 268,004 285,734 298,811 299,207 297,259 Investments 204,936 199,344 184,584 169,670 152,175 148,584 149,427 156,920 156,920 156,920 156,920 Cash 18,410 4,629 2,262 9,650 25,343 27,640 26,163 24,820 9,103 7,445 129 Other current assets 128,702 115,790 94,542 101,872 121,619 132,120 148,530 141,622 114,536 118,002 129,371 Miscellaneous expenditure 2,584 2,150 — — — — — — — — — Total assets 545,193 523,998 497,344 499,432 566,760 588,783 592,123 609,096 579,369 581,574 583,679 Free cash flow (Rs mn) Operating cash flow excl. working capital 39,671 17,557 (9,949) (6,972) 34,789 15,465 40,824 59,848 25,215 20,425 43,760 Working capital changes (3,135) 5,028 34,583 (15,171) (7,759) (931) 515 3,079 2,084 1,853 7,116 Capital expenditure (28,355) (25,884) (30,941) (30,548) (32,492) (34,965) (27,948) (47,532) (45,000) (35,000) (35,000) Free cash flow (6,642) (21,394) (23,805) (71,140) (26,321) (39,795) (7,593) (8,153) (35,960) (28,358) 2,684 Ratios Gross margin (%) 26.9 26.4 24.4 25.5 32.1 29.3 26.3 26.9 26.0 25.7 28.1 EBITDA margin (%) 7.7 3.8 (2.7) (3.4) 6.9 3.1 4.1 7.4 1.8 2.0 5.6 EBIT margin (%) 4.7 (0.2) (8.7) (10.6) 1.4 (3.8) (1.2) 3.0 (4.7) (4.9) (0.7) Debt/equity (X) 0.8 0.9 0.8 1.4 0.7 0.9 0.9 0.8 0.8 0.7 0.7 Net debt/equity (X) 0.7 0.8 0.8 1.4 0.6 0.8 0.8 0.7 0.7 0.7 0.7 RoAE (%) 8.3 (1.6) (14.2) (30.7) 1.6 (10.6) (1.4) 11.0 (11.1) (13.0) (2.8) Book value/share (X) 57.8 57.0 56.5 43.8 68.5 62.3 59.4 65.3 63.1 60.5 58.9

Source: Company, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 37 Automobiles & Components Tata Motors

Exhibit 30: We expect improvement in profitability over FY2020-22E led by improvement in JLR operations Tata Motors consolidated profit and loss, balance sheet and cash flow statement, March fiscal year-ends, 2012-22E (Rs mn)

2012 2013 2014 2015 2016 2017 2018 2019 2020E 2021E 2022E Profit model (Rs mn) Net sales 1,656,545 1,888,176 2,328,337 2,627,963 2,730,456 2,696,925 2,915,505 3,019,384 2,769,501 2,980,831 3,154,976 EBITDA 223,112 245,473 348,377 392,387 383,075 334,988 302,724 255,702 263,238 340,165 402,967 Other income 6,618 8,115 8,286 8,987 8,854 7,545 39,576 29,653 30,000 30,000 30,000 Interest (29,822) (35,533) (47,338) (48,615) (48,891) (42,380) (46,818) (57,586) (66,383) (69,569) (72,560) Depreciaton (56,254) (75,693) (110,782) (133,886) (167,108) (179,050) (215,536) (235,906) (215,323) (245,203) (261,498) Profit before tax 143,654 142,362 198,544 218,873 175,930 121,103 79,946 (8,137) 11,532 55,393 98,908 Extra ordinary income/(expenses) (8,315) (6,027) (9,854) (1,847) (24,271) (19,569) 22,123 (269,928) — — — Tax 400 (37,710) (47,648) (76,429) (40,652) (40,899) (33,938) (11,273) (11,888) (18,920) (25,511) Minority Interest + Associate income (574) 301 (1,132) (734) 4,786 13,908 21,758 1,075 (12,008) (6,851) (3,933) Net profit 135,165 98,926 139,910 139,863 115,793 74,544 89,889 (288,262) (12,364) 29,621 69,464 Adjusted net profit 143,480 104,953 149,764 141,710 140,064 94,112 67,766 (18,335) (12,364) 29,621 69,464 Adjusted EPS (Rs) 42.3 30.9 44.1 41.7 41.2 27.7 20.0 (5.4) (3.4) 7.7 18.1 Balance sheet (Rs mn) Equity 6,348 6,381 6,438 6,438 6,792 6,792 6,792 6,792 7,195 7,658 7,658 Reserves and Surplus 325,152 381,331 649,597 556,181 782,732 573,827 947,487 595,003 612,479 676,337 745,801 Deferred tax liability 21,651 20,195 15,723 13,432 44,748 11,740 61,258 14,910 14,910 14,910 14,910 Minority Interest 3,071 3,705 4,207 4,333 4,328 4,532 5,251 5,231 6,251 7,271 8,292 Total borrowings 471,490 535,914 606,423 736,104 733,413 786,040 889,505 911,239 894,519 876,845 901,485 Current liabilities 626,116 764,078 917,596 1,070,091 1,099,398 1,354,613 1,403,213 1,538,769 1,517,535 1,633,332 1,685,535 Total liabilities 1,453,826 1,711,603 2,199,983 2,386,580 2,671,412 2,737,543 3,313,505 3,071,945 3,052,890 3,216,354 3,363,681 Net fixed assets 562,125 694,836 973,754 1,124,226 1,323,909 1,289,696 1,613,309 1,423,705 1,550,381 1,643,358 1,701,439 Goodwill 40,937 41,024 49,788 46,970 7,598 6,733 1,165 7,479 7,479 7,479 7,479 Investments 89,177 90,577 106,867 12,405 45,340 52,968 61,490 68,324 68,324 68,324 68,324 Cash 182,381 211,127 297,118 462,120 496,934 511,190 492,777 415,872 300,538 294,018 311,644 Other current assets 574,691 662,701 748,986 717,389 797,630 876,956 1,144,765 1,156,567 1,126,168 1,203,176 1,274,796 Miscellaneous expenditure 4,514 11,339 23,471 23,471 — — — — — — — Total assets 1,453,826 1,711,603 2,199,983 2,386,580 2,671,412 2,737,543 3,313,505 3,071,945 3,052,890 3,216,354 3,363,681 Free cash flow (Rs mn) Operating cash flow excl. working capital 206,644 221,302 303,768 388,547 365,864 269,450 317,730 261,030 270,362 345,414 404,543 Working capital changes (22,801) (680) 57,744 (36,718) 13,132 32,542 (64,337) (72,123) 9,164 38,790 (19,417) Capital expenditure (138,756) (187,570) (269,252) (315,396) (314,442) (304,135) (350,486) (352,363) (342,000) (338,180) (319,580) Free cash flow (including finance business debt) 11,351 (13,508) 30,554 (26,637) 7,397 (55,506) (151,200) (233,506) (128,857) (23,546) (7,014) Ratios EBITDA margin (%) 13.5 13.0 15.0 14.9 14.0 12.4 10.4 8.5 9.5 11.4 12.8 Debt/equity (X) 1.4 1.4 0.9 1.3 0.9 1.4 0.9 1.5 1.4 1.3 1.2 Net debt/equity (X) 0.9 0.8 0.5 0.5 0.3 0.5 0.4 0.8 1.0 0.9 0.8 Book value (Rs per share) 84.2 98.8 171.6 144.9 230.3 169.0 280.7 175.0 170.2 176.7 194.8 ROAE (%) 54.8 29.2 28.7 23.3 20.7 13.7 8.8 (2.4) (2.0) 4.5 9.7

Source: Company, Kotak Institutional Equities estimates

38 KOTAK INSTITUTIONAL EQUITIES RESEARCH ADD Colgate-Palmolive (India) (CLGT) Consumer Staples JANUARY 30, 2020 RESULT Sector view: Cautious

Another subdued print. 3QFY20 was the 19th straight quarter of sub-10% topline CMP (`): 1,396 growth for Colgate. Simple-average yoy volume growth during this timeframe has been Fair Value (`): 1,600 2.8%. 3QFY20 volume growth print of 2.3% was even weaker. Notwithstanding the BSE-30: 40,914 weak demand backdrop, this was a weak print. The company’s efforts to regain its lost mojo haven’t resulted in improved volume growth trajectory yet. Relative rerating remains contingent on this. We keep the faith and retain ADD even as the Street may now prefer waiting for evidence. Fair value cut to Rs1,600/share (from Rs1,700).

Colgate-Palmolive (India) Stock data Forecasts/valuations 2020E 2021E 2022E 52-week range (Rs) (high,low) 1,643-1,096 EPS (Rs) 30.1 35.6 40.9 Mcap (bn) (Rs/US$) 380/5.4 EPS growth (%) 12.5 18.5 14.6 ADTV-3M (mn) (Rs/US$) 1,051/15 P/E (X) 46.4 39.2 34.2 Shareholding pattern (%) P/B (X) 25.8 25.4 24.9 Promoters 51.0 EV/EBITDA (X) 29.2 25.1 22.1 FIIs 15.5 RoE (%) 56.1 65.4 73.7 MFs/BFIs 5.7/5.6 Div. yield (%) 1.9 2.1 2.4 Price performance (%) 1M 3M 12M Sales (Rs bn) 47 52 58 Absolute (5) (9) 10 EBITDA (Rs bn) 13 15 17 Rel. to BSE-30 (3) (11) (4) Net profits (Rs bn) 8 10 11

3QFY20 – meets modest expectations but just about

CLGT reported a 4.1% yoy growth in net operating revenues to Rs11.5 bn, 1% above our expectations on the back of higher-than-expected other operating income. Gross margins surprised, rising 59 bps yoy to 65.7%. Selective price hikes and favorable RM environment cushioned the impact of continued aggression on promotions. Gross profits grew 5% yoy. EBITDA growth, however, was muted at 1%. EBITDA print came in at Rs3.16 bn, 4% below our estimate. EBITDA margins stood at 27.6%, down 106 bps, primarily on account of a sharp jump in adspends, +15% yoy to Rs1.43 bn (12.5% of sales).

It is encouraging to note that CLGT has continued its brand investment in a quarter where several of its peers pulled back sharply. Adspend effectiveness remains low, however. One of the key competitors, Dabur, reported 8.5% growth in its oral care business with its flagship brand Dabur Red growing by 9.5%. CLGT has stopped reporting market share metrics but we suspect the company may have just about maintained its toothpaste market share.

9MFY20 performance – revenues up 4% yoy, gross margins up 17 bps, EBITDA up a modest 1%, adspends up 15%, PBT down 3% and recurring PAT up 9%. Recurring EPS stood at Rs22/share.

Expands Palmolive portfolio further Rohit Chordia In the past few months, CLGT has expanded its body wash and hand wash portfolio by launching new variants under a new ‘Luminous Oils’ range. The company entered the shampoos category under this range during 3QFY20 (see Exhibit 4). This range has a naturals proposition and the Jaykumar Doshi company has launched two variants in the mid-price segment (Rs199 for 350 ml SKU). We note that the company has been reluctant on the Palmolive portfolio for the past many years. We wouldn’t see the new launches as a change in stance as yet. Aniket Sethi

Cut EPS forecasts by 6-7%; fair value revised down to Rs1,600/share. ADD stays

Lower revenue growth as well as margin assumptions drive a 6-7% cut in our FY2020-22E EPS forecasts. Fair value stands revised to Rs1,600/share (39X FY2022E EPS).

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For Private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES’ RATING SYSTEM AND OTHER DISCLOSURES, REFER TO THE END OF THIS MATERIAL. Consumer Staples Colgate-Palmolive (India)

Exhibit 1: Interim results of Colgate Palmolive India (as per Ind-AS), March fiscal year-end (Rs mn)

(% chg) 3QFY20 2QFY20E 3QFY19 2QFY20 KIE Est yoy qoq 9MFY20 9MFY19 % yoy Net sales 11,360 11,320 10,916 12,132 0 4 (6) 34,252 32,858 4 Other operating income 112 89 77 86 26 44 30 286 229 25 Net operating revenues 11,472 11,409 10,994 12,218 1 4 (6) 34,538 33,087 4 Material cost (3,931) (3,982) (3,833) (4,308) (1) 3 (9) (11,943) (11,498) 4 Gross profit 7,541 7,427 7,161 7,910 2 5 (5) 22,596 21,589 5 Gross margin (%) 65.7 65.1 65.1 64.7 63 bps 59 bps 98 bps 65.4 65.3 17 bps Total expenditure (4,380) (4,134) (4,016) (4,681) 6 9 (6) (13,208) (12,333) 7 Staff cost (770) (771) (711) (819) (0) 8 (6) (2,424) (2,224) 9 Advertising & sales promotion (1,434) (1,348) (1,260) (1,758) 6 14 (18) (4,705) (4,084) 15 Other expenditure (2,176) (2,015) (2,045) (2,104) 8 6 3 (6,078) (6,024) 1 EBITDA 3,161 3,293 3,145 3,230 (4) 1 (2) 9,388 9,256 1 OPM (%) 27.6 28.9 28.6 26.4 -132 bps -106 bps 111 bps 27.2 28.0 -80 bps Other income 58 90 79 86 (36) (27) (33) 296 257 15 Depreciation (515) (510) (406) (504) 1 27 2 (1,518) (1,198) 27 Pretax profits 2,674 2,848 2,818 2,788 (6) (5) (4) 8,090 8,315 (3) Tax (683) (718) (986) (497) (5) (31) 37 (2,118) (2,854) (26) Recurring net income 1,991 2,130 1,831 2,290 (7) 9 (13) 5,973 5,461 9 Extraordinaries — — 90 151 151 318 Reported profits 1,991 2,130 1,921 2,441 (7) 4 (18) 6,123 5,780 6 Income tax rate (%) 25.6 25.2 33.9 16.9 35 bps -838 bps 862 bps 25.7 33.1 -736 bps Recurring EPS (Rs/share) 7.3 7.8 6.7 8.4 (7) 9 (13) 22.0 20.1 9 Cost as a % of Net op revenues Material cost 34.3 34.9 34.9 35.3 -64 bps -60 bps -99 bps 34.6 34.7 -18 bps Staff cost 6.7 6.8 6.5 6.7 -5 bps 24 bps 1 bps 7.0 6.7 29 bps Advertising & sales promotion 12.5 11.8 11.5 14.4 68 bps 103 bps -190 bps 13.6 12.3 127 bps Other expenditure 19.0 17.7 18.6 17.2 130 bps 36 bps 174 bps 17.6 18.2 -61 bps

Source: Company, Kotak Institutional Equities

Exhibit 2: Key changes to estimates (as per Ind-AS), Colgate, March fiscal year-ends, 2020-22E

Revised Earlier Change (%) 2020E 2021E 2022E 2020E 2021E 2022E 2020E 2021E 2022E Net operating revenues (Rs mn) 46,786 52,117 58,414 47,356 53,553 60,122 (1.2) (2.7) (2.8) EBITDA (Rs mn) 12,808 14,867 16,862 13,363 15,631 17,752 (4.1) (4.9) (5.0) EBITDA margin (%) 27.4 28.5 28.9 28.2 29.2 29.5 Net income (Rs mn) 8,183 9,695 11,114 8,671 10,364 11,918 (5.6) (6.5) (6.7) Recurring EPS (Rs/share) 30.1 35.6 40.9 31.9 38.1 43.8 (5.6) (6.5) (6.7)

Source: Company, Kotak Institutional Equities estimates

40 KOTAK INSTITUTIONAL EQUITIES RESEARCH Colgate-Palmolive (India) Consumer Staples

Exhibit 3: Weak overall volume growth of 2.3% yoy Quarterly overall volume growth trend (%)

16 12 12 7 7 8 5 5 4 4 4 4 4 3 4 2 1 (1) - (3) (5) (4)

(8)

(12) (11)

(16)

Jun-16

Jun-17

Jun-18

Jun-19

Sep-16

Sep-17

Sep-18

Sep-19

Dec-15

Dec-16

Dec-17

Dec-18

Dec-19

Mar-16

Mar-17

Mar-18 Mar-19

Source: Company

Exhibit 4: CLGT has recently launched new personal wash products under Palmolive brand

Source: Company, Amazon.in

KOTAK INSTITUTIONAL EQUITIES RESEARCH 41 Consumer Staples Colgate-Palmolive (India)

Exhibit 5: Colgate: Profit model, balance sheet and cash flow (based on Ind-AS), March fiscal year-ends, 2016-22E (Rs mn)

Ind-AS 2016 2017 2018 2019 2020E 2021E 2022E Profit model Net sales 38,381 39,515 41,594 44,324 46,441 51,738 57,997 Other operating income 301 304 285 300 345 379 417 Net operating revenues 38,682 39,818 41,880 44,624 46,786 52,117 58,414 EBITDA 9,385 9,435 11,124 12,361 12,808 14,867 16,862 Other income 395 411 388 377 397 507 579 Interest — — — (25) (110) (110) (110) Depreciation (1,114) (1,332) (1,565) (1,592) (2,038) (2,252) (2,473) Pretax profits 8,666 8,514 9,947 11,121 11,058 13,013 14,859 Tax (2,541) (2,902) (3,480) (3,844) (2,875) (3,318) (3,744) PAT 6,125 5,613 6,467 7,277 8,183 9,695 11,114 Extraordinary items (313) 162 267 479 151 — — Reported Net profit 5,812 5,774 6,734 7,756 8,334 9,695 11,114 Earnings per share (Rs) 22.5 20.6 23.8 26.8 30.1 35.6 40.9 Balance sheet Total equity 10,310 12,738 15,246 14,468 14,725 14,926 15,237 Total borrowings — — — 777 777 777 777 Deferred tax liabilities (net) 97 275 355 309 309 309 309 Total liabilities and equity 10,407 13,013 15,601 15,553 15,811 16,012 16,323 Net fixed assets (Incl CWIP) 10,865 12,747 13,045 13,896 14,082 13,894 13,853 Investments 312 312 312 312 312 312 312 Cash 2,887 2,943 4,562 3,994 5,936 6,900 7,938 Net current assets (excl cash) (3,656) (2,989) (2,317) (2,647) (4,367) (4,944) (5,629) Total assets 10,407 13,013 15,601 15,553 15,962 16,163 16,473 Free cash flow Operating cash flow (excl working capital) 6,732 6,569 7,828 8,996 10,084 11,549 13,118 Working capital 156 311 (889) 330 1,720 576 685 Capital expenditure (2,713) (3,212) (2,087) (2,442) (2,224) (2,064) (2,431) Free cash flow 4,175 3,668 4,852 6,884 9,580 10,061 11,372 Key assumptions, growth (%) Net operating revenue growth (2.9) 2.9 5.2 6.6 4.8 11.4 12.1 EBITDA growth 14.1 0.5 17.9 11.1 3.6 16.1 13.4 EPS growth 9.6 (8.4) 15.2 12.5 12.5 18.5 14.6 EBITDA margin (%) 24.3 23.7 26.6 27.7 27.4 28.5 28.9 Gross margin (%) 61.8 62.9 64.4 65.1 65.2 65.4 65.5 A&SP (% of sales) 11.6 12.9 12.6 12.7 13.6 13.0 12.9 Tax rate (% of PBT) 29.3 34.1 35.0 34.6 26.0 25.5 25.2 Ratios (%) ROE (%) 68.0 48.7 46.2 49.0 56.1 65.4 73.7 ROCE (%) 87.3 67.9 65.7 68.2 65.0 71.8 79.9

Source: Company, Kotak Institutional Equities estimates

42 KOTAK INSTITUTIONAL EQUITIES RESEARCH BUY Bharat Electronics (BHE) Capital Goods JANUARY 31, 2020 RESULT Sector view: Neutral

Another quarter of miss in execution. Sharp miss in revenues was potentially driven CMP (`): 101 by select projects and reflected reduction in spending by MoD in 3QFY20. While such Fair Value (`): 113 deferral of revenues should boost top-line for BEL in 4Q, the weak realization seen in BSE-30: 40,914 3QFY20 may take longer to normalize. We reduce our fair value by 13% to Rs113 on a ~8% cut in estimates and 1X cut in multiple (on higher 13% cost of equity). We retain BUY on reasonable 14X valuations, recent boost to ordering visibility and steps taken by MoD towards private investment in defence (strategic partnership model).

Bharat Electronics Stock data Forecasts/valuations 2020E 2021E 2022E 52-week range (Rs) (high,low) 122-73 EPS (Rs) 6.2 7.5 7.0 Mcap (bn) (Rs/US$) 246/3.5 EPS growth (%) (20.2) 20.9 (6.9) ADTV-3M (mn) (Rs/US$) 952/13 P/E (X) 16.3 13.5 14.5 Shareholding pattern (%) P/B (X) 2.5 2.3 2.1 Promoters 55.9 EV/EBITDA (X) 9.8 8.5 8.1 FIIs 11.4 RoE (%) 15.7 17.6 15.2 MFs/BFIs 19.3/5.8 Div. yield (%) 2.7 3.3 3.0 Price performance (%) 1M 3M 12M Sales (Rs bn) 120 139 148 Absolute 1 (16) 2 EBITDA (Rs bn) 23 27 27 Rel. to BSE-30 2 (17) (11) Net profits (Rs bn) 15 18 17

Execution miss reflecting slowdown in capital spending by Ministry of Defence

BEL reported a miss in 3QFY20 results on the back of project-specific hurdles to execution, related negative operating leverage and weak realization from execution of projects with higher material content. While BEL expects deferral of revenues of 3QFY20 to get booked in 4QFY20, the wait for improvement in gross margin would take longer (would happen from 1QFY21). Execution hurdles highlighted by BEL include (1) obsolescence in input material, (2) modification in scope of work, (3) non readiness of sites for carrying out installation activity and (4) a lengthy process for customer clearance for dispatch etc. We also note a sharp qoq reduction in capital spending by Ministry of Defence (MOD), with Oct-Nov data suggesting ~Rs200 bn quantum for 3QFY20 versus Rs650 bn spent in 1HFY20.

Another quarter lacking large order inflows; recent DAC approvals boost visibility for FY2021/22

3QFY20 order inflows were modest at ~Rs12 bn, comprising of select service orders including (1) AMC for Akash Missile System and (2) repair facility for navy. A major order expected in 4QFY20 is related to the coastal surveillance system. Order backlog of ~Rs550 bn does provide comfort on business growth over the medium term. To such visibility, we note a large ~Rs40 bn boost in the form of a large procurement order for electronic warfare getting recently approved by Defence Acquisition Council in Jan 2020. DRDO would likely place this order with BEL in FY2021/22. We also note another order in infrared image search and track system (approved in May 2018), which should get awarded to BEL prior to the EW order.

Lower estimate by ~8% and reduce multiple to 16X, yielding revised fair value of Rs113 Aditya Mongia BEL reported a sharp 16% yoy decline in revenues and a meaningful reduction in gross margin, leading to a sharp 58/37% yoy/qoq decline in PAT. We reduce our estimates for FY2021/22 by Teena Virmani 7-9%. The latter is driven by reduction in average annual ordering of ~Rs165 bn over FY2020- 22 (3-4% cut in revenues) and 100 bps cut in margin estimates. We also cut our multiple by 1X to 16X on account of a higher cost of equity of 13% (from 12.5%). This leads to a 13% cut in fair value to Rs113. We retain BUY on inexpensive valuations of 14X two-year-forward EPS and prospects of strategic partnership model opening up a second set of customers in the private sector for BEL.

[email protected] Contact: +91 22 6218 6427

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

Exhibit 1: Sharp miss in execution, related negative operating leverage and weakness in gross margin mar results Quarterly consolidated financials of Bharat Electronics, March fiscal year-end, 3QFY20 (Rs mn)

% change 3QFY20 3QFY20E 3QFY19 2QFY20 vs est. yoy qoq 9MFY20 9MFY19 % change FY2020E FY2019 % change Net sales 22,710 30,754 27,165 27,427 (26) (16) (17) 71,153 82,000 (13) 119,541 120,846 (1) Total expenses (19,163) (24,518) (19,484) (21,980) (22) (2) (13) (58,677) (62,669) (6) (96,093) (92,225) 4 Stock 3,901 - (65) 389 5,034 1,531 229 1,793 1,322 36 Operating expenses (RM and others) (16,659) (16,300) (12,488) (14,989) 2 33 11 (42,956) (41,352) 4 (65,270) (60,799) 7 Employee cost (4,513) (5,296) (4,950) (5,073) (15) (9) (11) (14,828) (14,371) 3 (19,057) (18,791) 1 Other expenses (1,892) (2,922) (1,981) (2,308) (35) (5) (18) (5,927) (8,478) (30) (13,559) (13,957) (3) EBITDA 3,547 6,236 7,681 5,447 (43) (54) (35) 12,476 19,331 (35) 23,447 28,621 (18) Other income 332 184 176 150 80 88 121 736 408 81 961 1,695 (43) EBITDA (incl. other income) 3,879 6,420 7,857 5,598 (40) (51) (31) 13,212 19,738 (33) 24,408 30,316 (19) Depreciation (861) (880) (797) (857) (2) 8 1 (2,546) (2,229) 14 (3,844) (3,162) 22 EBIT 3,018 5,541 7,060 4,741 (46) (57) (36) 10,666 17,509 (39) 20,564 27,154 (24) Interest (1) (5) - (12) (80) (91) (17) (3) 511 (21) (122) (82) Profit before tax 3,017 5,535 7,060 4,729 (46) (57) (36) 10,650 17,506 (39) 20,543 27,032 (24) Tax expense (866) (1,417) (1,984) (1,334) (3,056) (4,919) (5,875) (7,759) Net profit 2,151 4,118 5,076 3,395 (48) (58) (37) 7,593 12,587 (40) 14,667 19,273 (24) Exceptional items ------Reported PAT 2,151 4,118 5,076 3,395 (48) (58) (37) 7,593 12,587 (40) 14,667 19,273 (24)

Key ratios (%) Operating expenses/ Sales 56.2 53.0 46.2 53.2 53.3 48.6 53.1 49.2 Employee exp./ Sales 19.9 17.2 18.2 18.5 20.8 17.5 15.9 15.5 Other exp./ Sales 8.3 9.5 7.3 8.4 8.3 10.3 11.3 11.5 EBITDA margin 15.6 20.3 28.3 19.9 17.5 23.6 19.6 23.7 PBT Margin 13.3 18.0 26.0 17.2 15.0 21.3 17.2 22.4 Tax rate 28.7 25.6 28.1 28.2 28.7 28.1 28.6 28.7 PAT Margin 9.5 13.4 18.7 12.4 10.7 15.3 12.3 15.9 EPS 0.9 1.7 2.1 1.4 3.1 5.2 6.0 7.9

Order details Order booking 12,600 22,000 72,057 (42.7) (82.5) 104,842 165,380 (36.6) 159,448 234,310 (31.9) Order backlog 549,590 484,020 561,780 13.5 (2.2) 549,590 484,020 13.5 557,887 517,980 7.7

Source: Company, Kotak Institutional Equities estimates

44 KOTAK INSTITUTIONAL EQUITIES RESEARCH Bharat Electronics Capital Goods

Exhibit 2: We note meaningful reduction in spending in 3QFY20 versus 1HFY20 Capital outlay on defence, March fiscal year-ends, 1Q14-Nov-2019 (Rs bn)

(Rs bn) 400 354 350 327 305 304 298 300 267 250 236235 240 250 226 207 203 207208 208 186 191 200 177 184 159 169162 158 139 150 120 107 100 50

0

1QFY14

2QFY14

3QFY14

4QFY14

1QFY15

2QFY15

3QFY15

4QFY15

1QFY16

2QFY16

3QFY16

4QFY16

1QFY17

2QFY17

3QFY17

4QFY17

1QFY18

2QFY18

3QFY18

4QFY18

1QFY19

2QFY19

3QFY19

4QFY19

1QFY20

2QFY20 Oct-Nov

(Rs bn) Capital outlay on defence services Budgeted target

1,200 1,034 949 1,000 905 792 819 814 786 262 800 679 705

600 393 949 400

200

-

2011

2012

2013

2014

2015

2016

2017

2018

2019 2020

Source: Ministry of Finance, Kotak Institutional Equities

KOTAK INSTITUTIONAL EQUITIES RESEARCH 45 Capital Goods Bharat Electronics

Exhibit 3: We lower execution and cut margin by 100 bps for FY2022-22 Change in estimates for Bharat Electronics (consolidated), March fiscal year-ends, 2018-22E (Rs mn)

New estimates Old estimates % change 2018 2019 2020E 2021E 2022E 2020E 2021E 2022E 2020E 2021E 2022E Income statement Net revenues 104,008 121,642 119,541 139,183 148,402 128,143 143,277 152,398 (7) (3) (3) Total operating expenses (83,656) (92,580) (96,093) (111,861) (121,504) (101,641) (113,674) (123,187) EBITDA 20,352 29,062 23,447 27,322 26,897 26,502 29,603 29,211 (12) (8) (8) Other income 1,957 730 961 1,186 1,119 736 628 1,045 Depreciation & amortization (2,717) (3,381) (3,844) (4,548) (5,745) (3,959) (4,488) (5,422) Interest expense (22) (128) (21) (5) (5) (21) (5) (5) PBT 19,570 26,283 20,543 23,955 22,266 23,257 25,738 24,828 Tax expense (5,498) (7,803) (5,875) (6,143) (5,710) (5,951) (6,600) (6,367) Recurring PAT 14,073 18,480 14,667 17,812 16,556 17,306 19,138 18,461 Share of profit in associates 238 386 386 386 386 386 386 386 Minority interest 7 (3) (3) (3) (3) (3) (3) (3) Reported PAT post minority & associates 14,317 18,864 15,051 18,196 16,940 17,690 19,522 18,845 Recurring EPS 5.9 7.7 6.2 7.5 7.0 7.3 8.0 7.7 (15) (7) (10) Growth (%) Revenue 20 17 (2) 16 7 5 12 6 EBITDA 14 43 (19) 17 (2) (9) 12 (1) PAT (6) 31 (21) 21 (7) (6) 11 (4) Ratios EBITDA margin (%) 19.6 23.9 19.6 19.6 18.1 20.7 20.7 19.2 (107) bps (103) bps (104) bps PBT margin (%) 18.8 21.6 17.2 17.2 15.0 18.1 18.0 16.3 (96) bps (75) bps (129) bps PAT margin (%) 13.5 15.2 12.3 12.8 11.2 13.5 13.4 12.1 (124) bps (56) bps (96) bps

Source: Company, Kotak Institutional Equities estimates

Exhibit 4: We arrive at a justified one-year forward P/E multiple of 16X for Bharat Electronics Justified P/E multiple for BEL (consolidated), March fiscal year-ends (x)

Inputs for growth and terminal phase Inputs for cash conversion Growth phase PAT CAGR (%) 12.0 PAT margin (%) 11.1 No. of years in initial growth phase (Growth_years) 10.0 Interest rate (%) 10.0 Terminal growth rate (Tg, %) 5.0 Marginal tax rate (%) 34.9 Cost of equity (COE, %) 13.0 Net FATR (X) 8.2 Steady state capital structure - debt mix (%) — Average asset life (years) 9.0 WACC (%) 13.0 Working capital as days of sales 111

Component of justified multiple calculation Formula Calculation One-year forward exit multiple on FCFE in terminal year 1 / (COE - Tg) 12.5 Terminal phase cash conversion ratio FCFE / PAT 0.81 One-year forward P/E multiple in terminal year 10.1 Discount factor for terminal year multiple to target year 1 / ((1+COE)^ growth years) 0.29 Bump up the multiple by the PAT jump over the growth 1 * ( (1 + growth CAGR) ^ 2.9 years (growth years-1)) * (1+Tg) Justified one-year forward P/E multiple for terminal 8.7 value component Value of growth period in terms of FCFE 8.6 FCFE multiple * cash Value of growth period in terms of P/E 6.9 conversion Justified one-year forward P/E multiple 16.0

Source: Company, Kotak Institutional Equities estimates

46 KOTAK INSTITUTIONAL EQUITIES RESEARCH Bharat Electronics Capital Goods

Exhibit 5: BEL margin to get cushion from largely stable employee cost; RM cost may rebound back Trend in employee cost and gross margin of BEL (consolidated), March fiscal year-ends, 2011-22E (%)

Employee cost as share of sales (%) Gross margin (%) 60

50

51.4 51.4

49.5 49.5

49.4 49.4 48.5

40 47.9

47.3 47.3

46.9 46.9

46.9 46.9

46.7

46.7 46.7

45.7 45.7

45.4

45.1 45.1

44.8

43.8

42.6 42.6

42.4 42.4

42.3 42.3 38.4 30 38.0

20

10

18.6

18.5

18.3

18.1

18.0

17.9 17.9

17.2 17.2

17.2 17.2

16.1

16.1 16.1

16.0 16.0

15.9

15.8

15.6 15.6

15.6 15.6

15.4 15.4

14.4 14.4

14.3 14.3

12.7 12.7 11.6 11.6

0

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020E 2021E 2022E

Source: Company, Kotak Institutional Equities estimates

Exhibit 6: We expect trade working capital to be stable in line with historical trends Components of trade working capital of BEL, March fiscal year-ends, 2011-30E (days of sales)

Net trade working capital (days of sales) Inventory (days of sales) Trade receivables (days of sales) Trade payables (days of raw material costs) 400 351 337 350 333 317 311 295 301 301 300 300 282 300 268 253 233 250 196 196 206 208 185 176 185 185 185 185 200 168 161 190 185 150 187 176 184 169 167 164 164 164 164 150 100 135 120 111 110 111 112 108 50 96 91 89 90 90 90 90

- 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020E 2021E 2022E 2030E

Source: Company, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 47 Capital Goods Bharat Electronics

Exhibit 7: Summary financials of Bharat Electronics (consolidated), March fiscal year-ends, 2017-30E (Rs mn)

2017 2018 2019 2020E 2021E 2022E 2023E 2024E 2025E 2030E Income statement Net revenues 86,683 104,008 121,642 119,541 139,183 148,402 152,973 163,983 181,504 394,083 Total operating expenses (68,814) (83,656) (92,580) (96,093) (111,861) (121,504) (126,150) (135,325) (149,845) (325,602) EBITDA 17,870 20,352 29,062 23,447 27,322 26,897 26,823 28,658 31,659 68,481 Other income 4,201 1,957 730 961 1,186 1,119 1,864 2,672 3,301 2,938 Depreciation & amortization (2,116) (2,717) (3,381) (3,844) (4,548) (5,745) (6,415) (6,126) (6,338) (12,815) Interest expense (129) (22) (128) (21) (5) (5) (5) (5) (5) (5) PBT 19,826 19,570 26,283 20,543 23,955 22,266 22,268 25,200 28,617 58,599 Tax expense (4,855) (5,498) (7,803) (5,875) (6,143) (5,710) (5,710) (6,462) (7,339) (15,027) Recurring PAT 14,970 14,073 18,480 14,667 17,812 16,556 16,558 18,738 21,279 43,572 Reported PAT 14,970 14,073 18,480 14,667 17,812 16,556 16,558 18,738 21,279 43,572 Share of profit in associates 263 238 386 386 386 386 386 386 386 386 Minority interest 2 7 (3) (3) (3) (3) (3) (3) (3) (3) Reported PAT post minority & associates 15,236 14,317 18,864 15,051 18,196 16,940 16,941 19,121 21,662 43,956 Recurring EPS 6.3 5.9 7.7 6.2 7.5 7.0 7.0 7.8 8.9 18.0 Balance sheet Shareholders' funds 77,358 80,157 92,115 99,210 107,788 115,774 123,761 132,775 142,987 221,374 Minority interest 137 130 133 136 138 141 144 147 149 163 Debt 636 804 333 — — — — — — — Deferred tax liabilities (5,290) (4,301) (4,720) (4,220) (3,720) (3,220) (2,720) (2,220) (1,720) (919) Total sources of funds 72,841 76,790 87,861 95,126 104,207 112,695 121,185 130,701 141,416 220,617 Net fixed assets 23,687 27,790 31,465 33,681 35,193 33,448 27,033 22,907 24,569 54,145 Net working capital (ex-cash) 5,971 31,215 37,032 35,764 44,061 41,488 42,539 45,311 49,309 119,644 Investments 4,911 9,375 9,645 10,032 10,418 10,804 11,191 11,577 11,964 13,896 Cash and bank balances and current investments 38,272 8,411 9,719 15,650 14,534 26,955 40,421 50,906 55,574 32,933 Total application of funds 72,841 76,790 87,861 95,126 104,207 112,695 121,185 130,701 141,416 220,617 Free cash flow Operating profit before wcap. changes 18,058 21,250 31,114 24,173 27,953 27,528 27,454 29,289 32,290 69,112 Change in working capital / other adjustments (11,460) (21,302) (7,935) 1,268 (8,298) 2,573 (1,051) (2,772) (3,999) (19,067) Direct tax paid (7,206) (6,814) (7,718) (5,375) (5,643) (5,210) (5,210) (5,962) (6,839) (15,027) Net cashflow from operating activites (607) (6,866) 15,461 20,066 14,012 24,891 21,193 20,555 21,453 35,017 Fixed assets (7,921) (8,056) (7,612) (6,060) (6,060) (4,000) — (2,000) (8,000) (26,000) Cash (used) / realised in investing activities 31,145 (64) (9,281) (5,827) (5,507) (3,514) 1,231 39 (5,332) (23,696) Free cash flow (CFO + net capex) (8,528) (14,922) 7,849 14,006 7,952 20,891 21,193 18,555 13,453 9,017 Ratios EBITDA margin (%) 20.6 19.6 23.9 19.6 19.6 18.1 17.5 17.5 17.4 17.4 PBT margin (%) 22.9 18.8 21.6 17.2 17.2 15.0 14.6 15.4 15.8 14.9 PAT margin (%) 17.3 13.5 15.2 12.3 12.8 11.2 10.8 11.4 11.7 11.1 Book value per share (Rs) 31.7 32.9 37.8 40.7 44.2 47.5 50.8 54.5 58.7 90.9 RoAE (%) 17.6 17.9 21.5 15.3 17.2 14.8 13.8 14.6 15.4 20.6 Post-tax RoACE (%) 18.7 18.8 22.6 16.0 17.9 15.3 14.2 14.9 15.6 20.7

Source: Company, Kotak Institutional Equities estimates

48 KOTAK INSTITUTIONAL EQUITIES RESEARCH BUY Equitas Holdings (EQUITAS) Banks JANUARY 30, 2020 RESULT Sector view: Attractive

A better performance. Equitas reported a strong quarter with earnings growth of CMP (`): 113 ~50% yoy on the back of 33% yoy growth in operating profits and 40% yoy decline in Fair Value (`): 160 taxes. AUM growth was strong at ~37% yoy while NIM expanded ~40 bps qoq. RoAs BSE-30: 40,914 have touched 2.1% while RoEs have moved to ~15%. With listing process of the SFB underway, the key headwind to valuation re-rating is behind. Valuations are inexpensive, and Equitas provides a less risky, more diversified loan portfolio. Maintain BUY rating with fair value at Rs160 (Rs170 earlier).

Equitas Holdings Stock data Forecasts/valuations 2020E 2021E 2022E 52-week range (Rs) (high,low) 144-83 EPS (Rs) 8.0 10.5 14.5 Mcap (bn) (Rs/US$) 39/0.6 EPS growth (%) 26.0 32.1 37.5 QUICK NUMBERS ADTV-3M (mn) (Rs/US$) 525/7 P/E (X) 14.2 10.8 7.8 Shareholding pattern (%) P/B (X) 1.4 1.2 1.1  NII up 23% yoy; PAT Promoters 0.0 BVPS (Rs) 83.1 92.3 104.9 up 51% yoy for FIIs 34.8 RoE (%) 9.9 11.2 13.6 MFs/BFIs 36.8/1.6 Div. yield (%) 0.0 0.0 0.0 Equitas SFB Price performance (%) 1M 3M 12M NII (Rs bn) 16 21 26 Absolute 6 20 (4) PPOP (Rs bn) 5 8 11  GNPL ratio flat qoq Rel. to BSE-30 7 17 (17) Net profits (Rs bn) 3 4 5 at 2.9%; NNPL ratio increased 10 bps A strong quarter led by healthy growth and better operating metrics qoq to 1.7% for Equitas reported ~50% yoy earnings growth led by 33% yoy growth in operating profits and Equitas SFB 40% yoy decline in provisions due to a lower tax rate. Revenue growth was solid at 22% yoy driven by strong growth in NII at 22% yoy. The bank reported a healthy AUM growth of 37%  Maintain BUY rating yoy but pressure on NIM is starting to ease for the bank led by a decline in cost of funds. Non- with FV at Rs160 interest income growth was strong at 21% yoy partly led by better contribution from PSLC (from Rs170 earlier) sales. The cost-income ratio showed an improvement of ~300 bps qoq on the back of lower non-staff costs. High employee additions drove 37% yoy rise in employee expenses. Credit cost declined 30 bps qoq to 1.2%; GNPL was flat qoq at 2.9% with slippages high at 3.8% but partly offset by higher recoveries and write-offs. Deposit growth at 33% yoy was slower compared to trends led by ~55% rise in TDs while CASA was modest at 9% (CASA ratio declined 170 bps qoq to 21%). The bank has relied a lot more on borrowings this quarter.

An improved performance with recovery in return ratios

Equitas has had a mixed performance since listing with a few strong quarters offsetting a few M B Mahesh, CFA weak ones, making it challenging to forecast the various variables as the bank has made adjustments to its business model. We would view this quarter as a healthy performance with RoA of 2.1% and RoEs touching 15%. There is a strong tailwind for revenue growth, especially Nischint Chawathe led by declining funding cost, which on the back of limited investments in liabilities should aid a solid operating profit growth for FY2021. Expenditure in business is primarily for growth as the bank has made changes on its approach to build a liability franchise. Asset quality has held up, Dipanjan Ghosh which should result in lower-than-previously expected credit costs. We expect the RoEs to move closer to 15% in the next few years. Venkat Madasu Retain BUY; key concerns on listing should be addressed by 4QFY20

We maintain our BUY rating with fair value at Rs160 (from Rs170 earlier). At our fair value, we Ashlesh Sonje value the stock at 1.9X book and ~19X EPS December 2021E book for RoEs moving closer to industry average by FY2022E. With the listing of the bank likely to be completed by 4QFY20, we expect the bank to re-rate as it would address most concerns of investors. Maintain BUY.

[email protected] Contact: +91 22 6218 6427

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

Exhibit 1: Equitas Holdings – quarterly results summary March fiscal year-ends, 3QFY19-3QFY20 (Rs mn)

(% change) 3QFY20 3QFY20E 3QFY19 2QFY20 3QFY20E 3QFY19 2QFY20 2020E 2019 (% chg.) 2021E Interest income 7,139 7,104 5,742 6,714 0 24 6 27,626 21,481 29 36,270 Interest expense 3,032 3,032 2,366 2,935 0 28 3 11,787 9,634 22 15,215 Net interest income 4,107 4,072 3,376 3,780 1 22 9 15,838 11,848 34 21,056 Other income 470 501 388 334 (6) 21 41 1,647 2,596 (37) 2,549 Total income 4,577 4,574 3,764 4,114 0 22 11 17,486 14,444 21 23,604 Operating expense 3,129 2,965 2,675 2,891 6 17 8 12,037 10,119 19 15,226 Staff cost 1,882 1,769 1,369 1,752 6 37 7 7,229 5,548 30 9,042 Other cost 1,247 1,196 1,306 1,139 4 (4) 9 4,808 4,571 5 6,185 Operating profit 1,447 1,608 1,089 1,223 (10) 33 18 5,449 4,325 26 8,378 Provision 469 453 244 349 4 92 35 1,485 1,006 48 3,539 Profit before tax 978 1,155 845 874 (15) 16 12 3,964 3,319 19 4,839 Tax expense 186 300 309 461 (38) (40) (60) 1,238 1,156 7 1,239 Profit after tax 793 855 535 413 (7) 48 92 2,726 2,164 26 3,600 Tax rate (%) 19 26 37 53 -703 bps -1765 bps -3381 bps 31 35 -359 bps 26 Cost-income ratio (%) 68 65 71 70 354 bps -270 bps -190 bps 69 70 -122 bps 65 AUM (Rs mn) 146,150 144,632 106,890 132,690 1 37 10 163,871 118,350 38 217,212 Microfinance 35,040 29,480 31,930 19 10 Vehicle loans 35,870 27,200 32,350 32 11 Small business loans 59,300 40,830 54,060 45 10 MSE 5,630 1,030 4,350 447 29 Corporate loans 7,600 3,850 6,930 97 10 Others 2,710 4,500 3,070 (40) (12) Disbursements (Rs mn) 30,800 22,630 24,080 36 28 Microfinance 10,220 7,840 7,020 30 46 Vehicle loans 8,110 6,030 6,380 34 27 Small business loans 9,360 7,670 7,010 22 34 MSE 1,510 580 1,590 160 (5) Corporate loans 1,390 250 1,920 456 (28) Others 210 260 160 (19) 31 Asset quality Gross NPL (Rs mn) 4,180 3,353 3,772 25 11 Gross NPL (%) 2.9 3.1 2.9 -28 bps 0 bps PCR (%) 43.5 44.2 43.8 -69 bps -26 bps Slippages (%) 3.8 3.0 3.5 83 bps 31 bps Credit cost (%) 1.2 1.4 1.0 1.5 -21 bps 23 bps -24 bps Calculated metrics (%) Yield on earning assets 15.7 (0.2) 15.9 15.6 1588 bps -24 bps 4 bps Yield on advances (on-book) 18.6 19.6 18.6 Cost of funds 8.0 (0.3) 8.2 8.2 823 bps -22 bps -27 bps NIM 8.9 0.2 9.0 8.6 871 bps -10 bps 32 bps Liabilities (Rs mn) Deposits 104,932 79,122 100,250 33 5 CASA 21,960 20,210 22,490 9 (2) TD 74,730 47,760 73,910 56 1 Borrowings 46,627 41,645 42,740 12 9 CASA ratio (%) 21 26 22 -462 bps -151 bps

Notes: (1) Ind-AS numbers for FY2020-21E.

Source: Company, Kotak Institutional Equities estimates

50 KOTAK INSTITUTIONAL EQUITIES RESEARCH Equitas Holdings Banks

Exhibit 2: Equitas SFB – quarterly results summary March fiscal year-ends, 3QFY19-3QFY20 (%)

(% change) 3QFY20 3QFY19 2QFY20 YoY QoQ Interest income 6,767 5,511 6,395 23 6 Interest income on loans 6,207 4,878 5,808 27 7 Other interest income 560 632 586 (11) (5) Interest expense 2,931 2,400 2,889 22 1 Net interest income 3,836 3,111 3,505 23 9 Other income 857 709 639 21 34 Total income 4,693 3,820 4,145 23 13 Operating expense 3,108 2,605 2,862 19 9 Staff cost 1,839 1,329 1,725 38 7 Other cost 1,270 1,276 1,137 (0) 12 Operating profit 1,584 1,215 1,282 30 24 Provision 405 245 454 65 (11) Profit before tax 1,180 970 829 22 42 Tax expense 239 348 353 (31) (32) Profit after tax 941 622 476 51 98 Tax rate (%) 20 36 43 -1562 bps -2237 bps Cost-income ratio (%) 66 68 69 -196 bps -282 bps

Source: Company, Kotak Institutional Equities

Headline asset quality stable despite elevated slippages

 GNPL ratio stable at 2.9%. Headline asset quality held up in 3QFY20 with GNPL ratio flat qoq at 2.9% while net NPL ratio increased by ~10 bps qoq to 1.7%. Slippages inched up further to ~3.8% of loans (up ~30 bps qoq/~80 bps yoy), although reductions were also high at ~2.6% of loans leading to stable GNPL ratio qoq. Reductions were mainly led by recoveries and upgrades (~1.9% of loans) although write-offs remained elevated at 0.7% of loans (up ~10 bps qoq/~50 bps yoy). On an absolute basis, GNPLs increased 11% qoq compared to 9% qoq AUM growth. Provision coverage ratio was flat qoq at 44%. Credit cost was lower qoq at 1.2% (up ~20 bps yoy).

 Segmentally, asset quality deteriorated marginally (in the past two quarters) in the MFI, vehicle finance and small business loan portfolios while MSE GNPLs were flat. Microfinance GNPLs stood at 1.0% as of 3QFY20 (~20 bps deterioration since 1QFY20); GNPLs in the vehicle finance portfolio remained high at ~4.5% (~10 bps increase since 1QFY20). In small business loans, GNPL ratio was at 3.0% (up ~20 bps since 2QFY20). MSE finance GNPL ratio was stable at ~1.1%. 60% of corporate exposure is rated ‘A and above’ while 33% is rated ‘BBB’.

 Building in higher GNPLs in the medium term. Given the nature of its loan portfolio, we are building higher gross NPLs at ~3% and net NPLs at 1.5% for FY2022E. We note that the customer segment currently targeted is primarily new-to-credit customers and the ability to understand the cash flows or strength of collateral offered is still in its early stages. The business is still yet to be tested against a strong slowdown in the economy.

KOTAK INSTITUTIONAL EQUITIES RESEARCH 51 Banks Equitas Holdings

Exhibit 3: Slippages remain elevated at 3.8% Exhibit 4: Marginally higher GNPLs in the medium term Gross NPL and net NPLs, March fiscal year-ends, 2QFY19-3QFY20 Gross NPL and net NPLs, March fiscal year-ends, 2015-22E

Gross NPL (LHS) Net NPL (LHS) Slippages (RHS) (%) Gross NPLs (LHS) Net NPLs (LHS) (%) 4.0 6.0 5.3 4.0 75 62.4 3.2 4.8 58.2 58.3 59.5 3.8 3.2 60 3.5 53.1 48.6 49.6 49.8 2.4 3.0 3.6 2.7 2.4 2.4 45 1.6 2.0 2.4 1.8 1.6 1.7 3.4 1.4 1.6 1.6 30 2.7 2.8 2.8 2.9 0.8 1.2 2.5 0.8 1.7 15 3.4 3.1 2.5 2.8 2.9 2.9 1.3 1.4 1.4 1.6 1.5 1.5 1.1 - - 0.8 0.9

- 0

2QFY19

3QFY19

4QFY19

1QFY20 2QFY20

3QFY20

2015

2016

2017

2018

2019

2020E 2021E 2022E Source: Company, Kotak Institutional Equities Source: Company, Kotak Institutional Equities

Strong loan growth across segments in 3QFY20

 AUM growth at 37%. Equitas SFB reported AUM growth of 37% yoy in 3QFY20 led by strong growth in small business loans and swift ramp-up in new product segments. Disbursements were up 28% qoq (up 36% yoy) led by strong qoq improvement in disbursements across product segments. Microfinance AUM was up 19% yoy led by a revival in disbursements in 3QFY20 (up ~45% qoq/~30% yoy). Vehicle finance loans increased ~32% yoy (11% qoq) as the company continues to expand the offering to new branches and forays into the new CV space. Growth in new CVs was ~80% yoy compared ~20% growth in used CVs. Small business loans, which is the largest product segment with a ~40% share, continued to grow at a robust pace (up ~45% yoy/~10% qoq). New products lines witnessed strong growth on a low base including MSE finance (up 5.5X yoy), corporate loans (up 2X yoy), housing loans (up 55% yoy) and agri loans (up ~55% yoy). Overall non-MFI portfolio was up 40% yoy with share in overall loan mix at 76% as of 3QFY20 (up ~300 bps yoy/flat qoq).

 ~30% AUM CAGR over FY2019-22E. We forecast 30% CAGR in AUM over FY2019- 2022E driven by recovery in the microfinance business, stable growth in vehicle business, rapid ramp-up in small business loans and newer segments. A diverse business line also opens up the opportunity for cross-sell of products.

52 KOTAK INSTITUTIONAL EQUITIES RESEARCH Equitas Holdings Banks

Exhibit 5: Gradual decline in the share of microfinance to ~24% Loan break-up, March fiscal year-ends, 3QFY18-3QFY20

3QFY18 4QFY18 1QFY19 2QFY19 3QFY19 4QFY19 1QFY20 2QFY20 3QFY20E YoY (%) AUM (Rs mn) Microfinance 24,700 22,880 24,310 27,030 29,550 30,700 31,240 31,930 35,040 18 Vehicle finance 21,620 22,520 23,810 24,680 27,200 29,350 30,270 32,350 35,870 31 Small business loans 21,220 29,340 32,920 37,390 34,240 47,030 50,110 54,060 59,300 45 MSE 3,420 4,110 5,260 590 5,210 5,250 2,800 4,350 5,630 637 Corporate loans 1,120 1,940 2,550 4,250 3,850 4,870 5,550 6,930 7,600 63 Others 190 1,600 410 5,670 274 1,150 3,410 3,070 2,710 (46) Total AUM 72,270 82,390 89,260 99,610 100,324 118,350 123,380 132,690 146,150 33 Share of total (%) Microfinance 34 28 27 27 29 26 25 24 24 -307 bps Vehicle finance 30 27 27 25 27 25 25 24 25 -40 bps Small business loans 29 36 37 38 34 40 41 41 41 321 bps MSE 5 5 6 1 5 4 2 3 4 269 bps Corporate loans 2 2 3 4 4 4 4 5 5 96 bps Others 0 2 0 6 0 1 3 2 2 -338 bps

Source: Company, Kotak Institutional Equities

Exhibit 6: ~30% AUM CAGR in FY2019-22E Loan break-up, March fiscal year-ends, 2012-22E (Rs bn)

Microfinance Vehicle finance Others 300

240

154 180 119

120 85 58 61 48 22 37 60 13 38 12 15 19 29 11 15 23 59 7 41 50 3 21 33 33 23 31

- 1

2012

2013

2014

2015

2016

2017

2018

2019E

2020E 2021E 2022E

Source: Company, Kotak Institutional Equities estimates

Weak quarter for deposits: CASA traction remains weak; TD growth moderates

Overall deposits for Equitas SFB stood at ~Rs105 tn as of 3QFY20, up 33% yoy/~5% qoq, a moderation from ~45-100% growth in the past few quarters. Sequentially, CASA deposits declined marginally (up ~9% qoq) while term deposits were flat (up 56% qoq). CDs more than doubled qoq, which led to ~5% qoq growth in overall deposits.

Savings deposits declined ~3% sequentially (up 15% yoy), while current account deposits increased marginally qoq (down ~15% yoy). CASA deposit book, which had grown at a robust pace of ~40% yoy in FY2019, has witnessed a marginal decline in 9MFY19. CASA ratio has declined for the third consecutive quarter and stands at ~21% as of 3QFY20 (down ~150 bps qoq).

However, growth in retail TDs, constituting ~30% of total deposits, was robust (up 18% qoq/150% yoy), CASA+retail TD constituted ~50% of the total deposits as of 3QFY20. We expect 35% CAGR in CASA and ~45% growth in TDs over FY2020-22E.

KOTAK INSTITUTIONAL EQUITIES RESEARCH 53 Banks Equitas Holdings

Exhibit 7: Share of CASA at 14% of total borrowings (down ~200 bps qoq) Break-up of borrowings, December 2019 (%)

Term Borrowing, Sub Debt, 1.4 2.4 CD, 5.2

CASA, 13.8

TD, 47.0

Refinance, 25.6

Source: Company, Kotak Institutional Equities

Exhibit 8: Muted growth in CASA deposits; robust growth in retail TDs at ~150% yoy Breakup of deposits, March fiscal year-ends, 3QFY18-3QFY20

YoY 3QFY18 4QFY18 1QFY19 2QFY19 3QFY19 4QFY19 1QFY20 2QFY20 3QFY20 (%) Break-up of deposits (Rs mn) CA 2,670 3,850 5,090 3,290 4,600 4,800 4,720 3,840 3,940 (14) SA 9,400 12,490 13,250 16,550 15,610 17,940 17,650 18,650 18,020 15 CASA 12,070 16,340 18,340 19,840 20,210 22,740 22,370 22,490 21,960 9 CASA ratio (%) 32.6 34.6 32.1 28.5 25.5 25.2 24.5 22.4 20.9 -461 bps CASA+retail TD 55.1 48.6 48.4 52.0 57.6 48.4 50.2 TD 24,910 30,850 38,870 38,930 47,760 59,200 66,140 73,910 74,730 56 Retail 14,000 9,650 NA 14,000 18,100 24,080 30,270 26,070 30,750 Institutional 10,910 21,200 NA 24,930 29,660 35,120 35,870 47,840 43,980 CD 9,829 8,320 10,530 10,790 11,160 8,120 2,820 3,850 8,240 Total deposits 36,980 47,190 57,210 69,560 79,130 90,060 91,330 100,250 104,930 33

Notes: (1) Retail TD as per RBI classification from 2QFY20, not comparable to prior quarter numbers.

Source: Company, Kotak Institutional Equities

54 KOTAK INSTITUTIONAL EQUITIES RESEARCH Equitas Holdings Banks

Exhibit 9: Higher share of chunky deposits in TDs, granular mix for CASA Deposit mix by ticket size, December 2019 (%)

Value Slabs Term Deposits CASA Deposits

Rs>100 mn,

>Rs100 mn, 53 Rs10-100 mn, 18

Rs0.1-1 mn, 26

Rs20-100 mn, 10 Rs1-10 mn, 26

Source: Company, Kotak Institutional Equities

Better cost ratios driven by lower non-staff costs

Cost-income ratio was down ~200 bps qoq to 68% (down 120 bps yoy) as muted growth in non-employee expenses offset strong growth in employees expenses. Operating expenses increased 17% yoy in 3QFY20 mainly led by 37% growth in employee expenses while growth in other expenses witnessed a marginal decline. Strong growth in employee head count and annual salary increment of led to higher employee costs. The company added ~250 employees during the quarter (~1,600 yoy). Further, the company has received RBI approval to add 12 new branches, 86 business correspondents and convert 142 asset centers to banking outlets. We forecast cost to income ratio to moderate to ~62% by FY2022E (~70% in FY2019) with a ~20% CAGR in operating expenses over FY2019-22E. Transition to a bank is broadly complete and incremental investment in business expansion will be low.

Exhibit 10: Cost ratios will decline over the medium term Cost-income and cost-assets ratios, March fiscal year-ends, 2014-22E

(%) Cost-income (LHS) Cost-assets (RHS) (%) 100 10.0

80 8.8

60 7.2 7.6 6.7 6.7 6.3 6.2 6.1 40 5.9 6.4 5.7 5.3 20 5.2

55 54 53 63 80 70 69 65 62

0 4.0

2015 2017 2018 2014 2016 2019

2020E 2022E 2021E

Source: Company, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 55 Banks Equitas Holdings

Margin expansion led by lower cost of funds

Calculated NIM for the SFB expanded by ~30 bps qoq to 8.9% in 3QFY20 driven by a decline in cost of funds while yields were stable qoq. Cost of funds (calculated) was down ~30 bps qoq to ~8% while yield on advances was stable at 18.6%.

We expect NIM to remain stable over FY2020-21E led by favorable cost of funds trajectory offsetting lower yields as the company skews the product mix further towards less-riskier products.

Exhibit 11: Change in estimates (moved to Ind-AS) Old and new estimates, March fiscal year-ends, 2020-22E (Rs mn)

New estimates Old estimates Change (%) 2020E 2021E 2022E 2020E 2021E 2022E 2020E 2021E 2022E AUM 163,871 217,212 273,786 157,639 205,979 258,480 4 5 6 Net interest income 15,807 21,045 26,245 16,057 20,340 24,175 (2) 3 9 NIM (%) 8.8 8.7 8.1 8.8 8.0 7.0 Non-interest income 1,647 2,549 3,121 2,171 4,089 5,072 (24) (38) (38) Operating cost 12,037 15,226 18,146 11,622 14,614 17,397 4 4 4 Staff cost 7,229 9,042 11,034 6,724 8,435 10,294 8 7 7 Non-staff cost 4,808 6,185 7,112 4,898 6,179 7,103 (2) 0 0 Provisions 1,485 3,539 4,564 2,100 3,768 4,483 (29) (6) 2 Profit before tax 3,964 4,839 6,655 4,544 6,057 7,367 (13) (20) (10) Tax 1,238 1,239 1,704 1,384 1,550 1,886 (11) (20) (10) Profit after tax 2,726 3,600 4,952 3,160 4,506 5,481 (14) (20) (10)

Source: Company, Kotak Institutional Equities estimates

56 KOTAK INSTITUTIONAL EQUITIES RESEARCH Equitas Holdings Banks

Exhibit 12: Summary of key growth rates and ratios March fiscal year-ends, 2017-22E (%)

2017 2018 2019 2020E 2021E 2022E Growth rates (%) Net loan 20 28 50 39 33 26 Net fixed assets 427 0 (12) 9 5 (43) Current assets 7 28 13 20 20 20 Total assets 45 43 19 37 35 31 Deposits 150 70 53 48 39 Net interest income 42 10 28 34 33 25 Loan loss provisions 74 67 (41) 48 138 29 Total other income 44 14 29 21 35 24 Operating expenses 71 46 13 19 26 19 Employee expenses 69 31 7 30 25 22 PPoP 15 (39) 94 26 54 34 Profit after tax (5) (80) 588 26 32 38 Yield and margin metrics (%) Yield on loans 19.6 18.5 19.0 18.2 17.6 17.2 Yield on investments 8.0 4.6 7.3 7.0 7.0 7.0 Yield on earning assets 16.4 13.6 15.0 15.3 14.9 14.3 Cost of funds 12.3 7.8 8.2 7.7 7.1 6.9 Interest on deposits — 6.9 6.7 7.0 6.5 6.3 Spread on earnings assets 4.1 5.8 6.7 7.7 7.9 7.4 Spread on loans 7.3 10.7 10.7 10.5 10.5 10.3 Key ratios (%) Interest income/total income 85 83 82 91 89 89 Operating expenses/total income 63 80 70 69 65 62 Operating expenses/assets 6.7 7.2 6.7 6.3 5.9 5.3 Operating expenses/AUM 9.1 11.4 10.1 8.5 8.0 7.4 Tax rate 37 37 37 25 26 26 Deposit break-up Current 1 8 6 4 3 3 Savings 16 26 22 17 16 15 Term 82 65 72 80 81 82 Asset quality (%) Gross NPL 3.4 2.7 2.5 2.8 2.8 2.9 Net NPL 1.7 1.4 1.4 1.6 1.5 1.5 Dupont analysis (%) Net interest income 9.1 7.5 7.9 8.3 8.2 7.7 Other income 1.6 1.6 1.7 0.9 1.0 0.9 Loan loss provisions 1.1 1.4 0.7 0.8 1.4 1.3 Operating expenses 6.7 7.2 6.7 6.3 5.9 5.3 Tax rate 37 39 35 31 26 26 RoA 1.8 0.3 1.4 1.4 1.4 1.4 Average assets/average equity 5.1 5.5 6.3 6.9 8.0 9.4 RoE 9.3 1.4 9.1 9.9 11.2 13.6

Notes: (1) Ind-AS numbers for FY2020-22E.

Source: Company, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 57 Banks Equitas Holdings

Exhibit 13: Summary of income statement and balance sheet March fiscal year-ends, 2017-22E (Rs mn)

2017 2018 2019 2020E 2021E 2022E Income statement Net interest income 8,382 9,255 11,848 15,838 21,056 26,245 Non-interest income 1,423 1,925 2,596 1,647 2,549 3,121 Operating expenses 6,150 8,949 10,119 12,037 15,226 18,146 Provisions 1,029 1,718 1,006 1,485 3,539 4,564 Profit before tax 2,516 513 3,319 3,964 4,839 6,655 Tax 922 198 1,156 1,238 1,239 1,704 Net profit 1,594 314 2,164 2,726 3,600 4,952 Balance sheet Cash and bank balances 10,651 11,940 12,610 15,132 18,158 21,790 Net investments 16,260 38,569 23,450 27,030 44,268 75,054 Net loans and advances 60,979 78,001 117,200 163,466 217,212 273,786 Fixed assets 3,288 3,304 2,920 3,182 3,331 1,899 Total assets 94,426 134,948 160,630 219,404 295,595 387,593 Deposits 18,850 47,190 80,160 122,576 181,155 251,300 Borrowings 46,572 58,877 47,860 57,432 68,918 82,702 Other liabilities 4,932 3,314 3,954 4,547 5,229 6,013 Total liabilities 72,120 112,185 135,640 189,187 261,779 348,825 Paid-up capital 3,378 3,404 3,420 3,420 3,420 3,420 Reserves & surplus 18,928 19,359 21,570 26,796 30,397 35,348 Total shareholder's equity 22,306 22,763 24,990 30,216 33,817 38,768

Notes: (1) Ind-AS numbers for FY2020-22E.

Source: Company, Kotak Institutional Equities estimates

58 KOTAK INSTITUTIONAL EQUITIES RESEARCH ADD Bajaj Finserv (BJFIN) Diversified Financials JANUARY 30, 2020 RESULT, CHANGE IN RECO. Sector view: Neutral

General muted; steady progress in life. High loss ratio in motor OD and crop business CMP (`): 9,640 and increase in impaired investment marred 3QFY20 performance of Bajaj General. Fair Value (`): 10,200 The life business is showing gradual improvements with a more balanced product mix, BSE-30: 40,914 ramp-up in institutional business and improvement in persistency, though may continue to be less profitable as compared to large peers in the medium term. We are tweaking estimates, downgrade rating to ADD from BUY; retain FV of Rs10,200.

Bajaj Finserv Stock data Forecasts/valuations 2020E 2021E 2022E 52-week range (Rs) (high,low) 9,950-5,851 EPS (Rs) 303.8 393.8 474.8 Mcap (bn) (Rs/US$) 1,535/21.5 EPS growth (%) 50.2 29.6 20.6 ADTV-3M (mn) (Rs/US$) 2,199/31 P/E (X) 31.7 24.5 20.3 QUICK NUMBERS Shareholding pattern (%) P/B (X) 4.6 3.9 3.3 Promoters 60.7 BVPS (Rs) 2,118.2 2,485.3 2,927.6  Consolidated PAT FIIs 8.5 RoE (%) 16.8 17.1 17.5 up 32% yoy MFs/BFIs 3.6/2.5 Div. yield (%) 0.1 0.1 0.1 Price performance (%) 1M 3M 12M NII (Rs bn) 173 219 268  Combined ratio up Absolute 2 19 54 PPOP (Rs bn) 130 165 202 Rel. to BSE-30 4 17 34 Net profits (Rs bn) 48 63 76 90 bps qoq/940 bps yoy to 103.6% in Steady improvements at Bajaj Life general insurance business Bajaj Life continues to deliver steady improvements in its operating performance. The company has worked on balancing its product portfolio by adding high-margin non-par products and  Individual APE up reducing ULIPs to 51% from 61% yoy (% of individual APE). The company recently launched an 27% yoy in life individual protection product, which still remains low, while group protection was up 37%, insurance business comprising 60% from MFI, 25% from Bajaj Finance and 15% from Axis Bank. The partnership with Axis Bank will ramp up from 1QFY21 as the company starts business from its branches. Business sourced through the institutional channel was up 76% yoy, even as Axis Bank still remains negligible. The company has reported persistency improvements across buckets.

Trying times for Bajaj General

Bajaj General had a challenging quarter with 10% ex-crop premium growth and higher claims ratio in motor OD and crop segments. Ex-crop, combined ratio increased to ~101-102% (overall combined ratio of 103.6%, as compared to 94.2% in 3QFY19). Heightened competition and floods in Maharashtra and Madhya Pradesh led to increase in claims ratio in motor OD to 73% from 59% yoy. Claims ratio in crop business remained high at 111.5% in 3QFY20, driving up Nischint Chawathe overall claims ratio to 72.6% (68.9% ex-crop) for the quarter. The company has outstanding downgraded debt of Rs7.13 bn (4% of AUMS), which included addition of a private bank M B Mahesh, CFA (Rs1.53 bn) in 3QFY20.

Downgrade to ADD post the rally Dipanjan Ghosh We retain our fair value of Rs10,200 for Bajaj Finserv. Bajaj Finance, valued at our RGM-based fair value, adds 74% to the SoTP. We value the general insurance business at 4.5X book, similar to the valuation multiple assigned to ICICI Lombard. We value Bajaj Life at 1.5X EV, significantly Venkat Madasu lower than its peers, as we expect its operating RoEV to remain at 11-12%. The stock remains most sensitive to trends in Bajaj Finance and the latter’s stock performance. Ashlesh Sonje

[email protected] Contact: +91 22 6218 6427

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

Exhibit 1: Bajaj Finance adds significant value to Bajaj Finserv SoTP for Bajaj Finserv, December 2021E

Value per Share in Value Share Value share SOTP (Rs mn) (%) (Rs mn) (Rs) (%) Comments Bajaj Allianz Life Insurance 272,380 74 186,645 1,179 12 1.5X EV Bajaj Allianz General 348,856 74 239,050 1,510 15 4.5X book Bajaj Finance 2,344,534 53 1,188,848 7,510 74 KIE FV Total 1,614,543 10,199 100

Source: Company, Kotak Institutional Equities estimates

Exhibit 2: Bajaj Finserv – consolidated earnings March fiscal year-ends, 3QFY19-3QFY20 (Rs mn)

3QFY19 4QFY19 1QFY20 2QFY20 3QFY20 YoY (%) QoQ (%) Standalone 77 18 5 3,450 32 (58) (99) Bajaj Life 1,123 1,119 620 2,070 38,490 3,327 1,759 Bajaj General Insurance 2,236 830 2,104 2,937 1,906 (15) (35) Consolidated PAT 8,505 8,387 8,453 12,038 11,256 32 (6)

Source: Company, Kotak Institutional Equities

Bajaj Life Insurance: strong growth in non-par business

 Individual APE up 20% yoy. Bajaj Allianz Life Insurance reported gross written premium of Rs25.5 bn, up 20% yoy driven by strong 27% yoy growth in individual business. Group new business premium was up 16% yoy while renewal premium grew 20% yoy to Rs11 bn. PAT was up 27% yoy to Rs1.4 bn in 3QFY20. Strong growth in individual business, new distribution partnerships and introduction of new retail protection products will drive profitability over the next few quarters.

 Persistency ratios have improved. Bajaj reported improvement in persistency for the second consecutive quarter across all buckets. 13th month persistency increased to 80% in 9MFY20 from 78% in 1HFY20 and 79% in FY2019. Additionally, persistency ratios showed significant improvement in higher buckets also.

 Business from non-agency channels has increased. Management continues focus on increasing the share of non-agency channels. Agency share fell to 60% in 3QFY20 (59% in 9MFY20) from 69% in FY2019 and is expected to decline further. Institutional and proprietary sales channels grew 76% in 3QFY20 and remain key focus areas along with bancassurance. Management expects the lower-cost non-agency channels to be a key driver of profitability going forward.

 New bancassurance partnership with Axis Bank will drive premium growth. The company has recently engaged in a partnership with Axis Bank as a bancassurance partner. The partnership is currently in pilot stage and both companies are focused on integration of systems and processes. The overall premium originated from this channel is still low (Rs1.7 bn of group business) and business momentum will gradually pick up pace in FY2021E as the company starts business through its branches.

60 KOTAK INSTITUTIONAL EQUITIES RESEARCH Bajaj Finserv Diversified Financials

 Focus on achieving an optimum product mix; new retail protection product will drive margin improvement. Bajaj Life reported product mix of 51% ULIP and 32% traditional products in 3QFY20. Share of ULIPs has dropped over the past few quarter from peak levels led by slowdown in capital markets and focus on product diversification (down from 61% in 3QFY19; up 200 bps qoq). While the share of non-par products in individual APE has increased to 18% in 3QFY20 from 6% in 2QFY19, it remains lower than other peers. The company has launched a new retail protection product in 3QFY20 which will augment growth in the non-par individual segment. Within group, the share of protection new business premium has continued to see an increase from 35% in FY2018 to 46% in FY2019 and further increase to 58% in 9MFY20. Management continues to focus on improving the share of protection business and has highlighted that the share of retail protection, which is currently only a small part of the overall new business, will see this increase in FY2021E.

 VNB growth on track. The company does not disclose VNB growth on a quarterly basis. However, management guided that VNB growth will be strong in FY2020E on the back of change in product mix towards increasing share of high-yielding non-par business. Management expects higher volumes in 4QFY20E to offset expense over-runs.

 Overall downgraded investment exposure at Rs12 bn. The outstanding downgraded investment (debt) exposure for Bajaj Life is Rs12 bn of which Rs4.6 bn is non-performing and the company has provisions worth Rs3.4 bn for these impaired assets (~75% coverage).

 Improving momentum in the medium term. Bajaj Life has reported strong APE growth over the past few years, inching up its market share to 2.4% in 9MFY20 from 2% in FY2017. With increasing share of protection business (6% of APE in FY2019) and non-par savings (18% of individual APE in 3QFY20, up from 4% in 2QFY19), VNB margins will likely expand (-1% in FY2018 and 7% in FY2019). Improving persistency across all buckets also augurs well. We currently build in ~12% operating RoEV, which can improve significantly if the company continues to enjoy all the tailwinds. The company has focused on diversification of channel and products to drive profitability and business momentum over the medium term. Increasing share of non-par business will drive growth in VNB margins while addition of a major bancassurance partner (Axis Bank) will likely drive premium growth.

Exhibit 3: Bajaj Life Insurance – quarterly summary March fiscal year-ends, 3QFY19-3QFY20 (Rs mn)

3QFY18 4QFY18 1QFY19 2QFY19 3QFY19 4QFY19 1QFY20 2QFY20 3QFY20 YoY(%) QoQ (%) Gross business premium 17,392 26,700 13,614 20,825 21,232 32,900 18,367 22,356 25,519 20 14 New business premium 9,333 13,744 7,076 11,980 11,608 18,180 10,000 12,222 13,901 20 14 Individual APE 3,648 4,742 2,829 3,459 4,241 6,890 3,322 4,502 5,387 27 20 Group APE 5,685 9,002 4,247 8,521 7,367 11,090 6,678 7,720 8,514 16 10 Renewal premium 7,956 12,760 6,409 8,693 9,523 14,718 8,227 10,005 11,412 20 14 AUMs (Rs bn) 524 520 532 539 547 566 579 583 608 11 4

Source: Company, Kotak Institutional Equities

KOTAK INSTITUTIONAL EQUITIES RESEARCH 61 Diversified Financials Bajaj Finserv

Exhibit 4: Robust traction in individual business APE for Bajaj Life, March fiscal year-ends, 3QFY18-3QFY20

Individual APE- LHS Group APE LHS (Rs bn) Individual APE (yoy)- RHS Group APE yoy- RHS (%) 15 60

12 45

9 30 7 5 6 15 5 4 11 5 10 4 9 3 9 3 9 3 3 7 8 3 6 7 0 4

0 (15)

2QFY18

3QFY18

4QFY18

1QFY19

2QFY19

3QFY19

4QFY19

1QFY20 2QFY20 3QFY20

Source: Company, Kotak Institutional Equities

Exhibit 5: Rs19 bn of downgraded debt in life and general insurance Exposure to downgraded investment (debt), March fiscal year-ends, 2QFY20-3QFY20

Provision to Provision to Exposure Performing Non-performing Provision total exposure non-performing (Rs mn) (Rs mn) (Rs mn) (Rs mn) (%) (%) 2QFY20 Bajaj Life insurance Par 3,917 3,327 590 349 9 59 Non-par 1,662 1,515 147 88 5 60 ULIP 4,014 2,832 1,182 903 22 76 Shared 4,780 2,124 2,656 2,094 44 79 Overall 14,373 9,798 4,575 3,434 24 75 Bajaj General insurance Overall 5,605 3,887 1,718 1,231 22 72 3QFY20 Bajaj Life insurance Par 3,879 3,288 591 349 9 59 Non-par 1,346 1,199 147 88 7 60 ULIP 1,925 743 1,182 903 47 76 Shared 4,621 1,965 2,656 2,094 45 79 Overall 11,771 7,195 4,576 3,434 29 75 Bajaj General insurance Overall 7,134 5,905 1,229 742 10 60

Source: Company, Kotak Institutional Equities

62 KOTAK INSTITUTIONAL EQUITIES RESEARCH Bajaj Finserv Diversified Financials

Exhibit 6: Persistency has improved across all buckets Persistency, March fiscal year-ends, 2018-20 (%)

13th month 25th month 37th month 49th month 100

80

60

40 77 78 79 79 78 80 73 72 70 71 64 66 68 66 58 58 58 53 53 50 54 50 49 45 4944 46 47 47 20 42 38 43

0 FY2018 1QFY19 1HFY19 9MFY19 FY2019 1QFY20 1HFY20 9MFY20

Source: Company, Kotak Institutional Equities

Exhibit 7: APE market share has improved for Bajaj Life; marginal decline in 9MFY20 reflects higher volumes for LIC APE market share of life insurance players, March fiscal year-ends, 2012-19, 9MFY20 (%)

2012 2013 2014 2015 2016 2017 2018 2019 9MFY20 Bajaj Life 2.6 2.7 2.2 2.0 1.8 2.0 2.3 2.5 2.4 Birla SL 2.4 2.2 1.8 1.8 1.6 1.7 1.6 2.4 2.1 HDFC Life 5.3 6.3 4.9 6.9 6.9 6.5 7.2 7.1 7.6 ICICI Prudential Life 5.7 6.7 6.4 10.0 9.8 10.3 10.2 9.0 8.1 Kotak Life 1.0 1.0 1.0 1.5 2.0 2.1 2.3 2.3 1.9 Max Life 2.9 3.0 3.5 4.2 4.1 4.2 4.4 4.8 4.3 SBI Life 4.6 5.1 5.8 7.1 8.6 10.0 10.9 11.6 12.0 Tata AIA Life 1.2 0.6 0.5 0.5 1.2 1.7 1.9 2.8 2.8 Total private players 35.1 36.6 35.6 45.7 46.5 48.5 51.0 52.8 50.0

Source: IRDAI, LIC Council, Kotak Institutional Equities

KOTAK INSTITUTIONAL EQUITIES RESEARCH 63 Diversified Financials Bajaj Finserv

Exhibit 8: Share of non-participating business increased in Exhibit 9: Protection dominates group business 3QFY20 Group new business premium mix, March fiscal year-ends, 3QFY18- Individual new business premium mix, March fiscal year-ends, 3QFY20 (%) 3QFY18-3QFY20 (%) Group protection Group others Linked Participating Non-participating 100 100 5 5 5 4 7 20 16 17 17 18 80 42 39 39 42 42 40 42 23 45 80 27 51 35 35 32 24 22 34 32 60 60

40 80 40 61 61 72 58 58 58 60 55 58 68 49 60 61 61 60 61 20 49 51 20

0

0

2QFY18

3QFY18

4QFY18

1QFY19

2QFY19

3QFY19

4QFY19

1QFY20 2QFY20

3QFY20

3QFY18

4QFY18

1QFY19

2QFY19

3QFY19

4QFY19

1QFY20 2QFY20 3QFY20 Source: Company Source: Company

Exhibit 10: Low operating RoEV for Bajaj Allianz Life RoEV movement, March fiscal year-ends, 2017-22E (Rs bn)

2017 2018 2019 2020E 2021E 2022E Comments Opening Embedded value (EV) 98.8 112.7 118.6 129.9 146.9 166.4 Methodology changes 0.3 0.6 0.0 0.0 0.0 0.0 Assumption change 0.0 0.0 1.8 1.0 1.0 1.0 Persistency improvement VNB (before over-run) 1.7 2.2 3.5 4.7 5.5 6.5 Acquisition expense overrun (2.2) (2.4) (1.9) (1.7) (1.5) (1.2) We expect expense overruns to remain high Expected return in force 6.7 7.7 9.5 10.4 11.8 13.3 Unwinding at 8% Closing EV 113 119 130 147 166 189 EVOP 7 9 13 16 18 21 RoEV (%) 14 5 9 13 13 13 Operating RoEV (%) 8 8 11 12 12 12

Source: Company, Kotak Institutional Equities estimates

Exhibit 11: We expect Bajaj Life to deliver pre-overrun margin of ~18% VNB margins, March fiscal year-ends, 2017-22E (Rs bn)

2017 2018 2019 2020E 2021E 2022E Comments APE 12.9 17.8 22.3 26.3 30.7 35.9 We assume over 17-18% APE growth VNB 1.7 2.2 3.5 4.7 5.5 6.5 VNB margins pre overrun (%) 12.9 12.5 16.0 18.0 18.0 18.0 VNB post overrun (0.5) (0.2) 1.5 3.0 4.0 5.3 VNB margins post overrun (%) (4.2) (1.0) 6.9 11.5 13.1 14.7 Post over-run margin at 12-15%

Source: Company, Kotak Institutional Equities estimates

Bajaj General Insurance: claims ratio increased

 Muted growth overall premium excluding crop business. Bajaj General Insurance reported 20% yoy growth in net earned premium in 3QFY20. Gross written premium was up 20% yoy (ex-crop insurance GWP was muted at 10% yoy) during 3QFY20. While crop business contributed mostly to premium growth in 9MFY20, its contribution, according to the management, will be lower from here. The company aggressively pushed crop

64 KOTAK INSTITUTIONAL EQUITIES RESEARCH Bajaj Finserv Diversified Financials

insurance during the Kharif season but has relatively reduced it during the ongoing rabi season.

 Higher claims from crop and motor OD drive rise in combined ratio. Combined ratio remained high at 103.6% (102.7% in 2QFY20 and 103.1% in 1QFY20); ~101- 102% excluding crop business. Claims ratio increased sharply in the crop and motor OD business owing to floods in Madhya Pradesh and Maharashtra on the back of prolonged monsoon. Claims ratio in the crop business increased to 111.5% in 3QFY20 (109.9% in 9MFY20) from 105.2% in 2QFY20; claims ratio ex-crop was 68.9% as compared to 66.5% in 3QFY19. Additionally, investment in technology initiatives drive marginally higher operating expense ratio compared to normalized levels.

 Business through broker channels increased in 3QFY20. Share of business generated through broker channel has increased to 48% in 3QFY20 (excluding crop) from 45% in 2QFY20 and 43% in FY2019. The share of business originated through bancassurance channel increased at a strong pace of 26% yoy.

 Growth in retail motor segment slowed down to 11% yoy in 3QFY20. Growth in motor (retail) premium was muted at 11% yoy in 3QFY20 compared to 12-25% over the past four quarters.

 Steady growth in retail health business. Bajaj General Insurance has delivered a strong growth of 68% yoy in retail health segment in 3QFY20 (up 36% yoy in 1HFY20) with the mix of retail heath increasing to 7%.

 Group health will gain momentum over medium term. Growth in group health dropped 25% yoy in 3QFY20. Management guided that growth in this segment will pick pace going ahead as the company has entered into contracts with various companies.

 Claims ratio fluctuates in crop business. Claims ratio was high from the crop business at 111.5% in 3QFY20 (109.9% in 9MFY20). While higher losses drove deterioration in the crop business, management guided that over a longer time horizon, loss ratios from the crop business are within comfortable range.

 Others. Bajaj General Insurance has Rs7 bn exposure to downgraded debt out of which Rs1.2 bn is non-performing and the company has 60% coverage on these investments.

Exhibit 12: Bajaj General Insurance - quarterly summary March fiscal year-ends, 3QFY19-3QFY20 (Rs mn)

3QFY18 4QFY18 1QFY19 2QFY19 3QFY19 4QFY19 1QFY20 2QFY20 3QFY20 YoY(%) QoQ (%) Gross written premium 18,924 27,641 24,294 27,184 25,470 34,020 28,433 42,793 30,550 20 (29) Net earned premium 14,861 16,499 16,121 16,794 18,009 19,170 19,464 21,312 21,563 20 1 PAT 2,617 1,866 2,911 1,821 2,236 830 2,104 2,937 1,906 (15) (35) Combined ratio (%) 92 93 90 97 94 104 103 103 104 940 bps 90 bps Claims ratio 62 68 66 68 64 76 73 75 73 830 bps -240 bps

Source: Company, Kotak Institutional Equities

KOTAK INSTITUTIONAL EQUITIES RESEARCH 65 Diversified Financials Bajaj Finserv

Exhibit 13: Crop business drives strong growth in premium for Bajaj General insurance Gross premium for Bajaj General, March fiscal year-ends, 3QFY18-3QFY20

GWP- LHS GWP (ex crop)- LHS GWP (yoy)- RHS GWP (ex crop) yoy- RHS (Rs bn) (%) 120 60

96 45

72 30

48 43 15 34 28 31 28 24 27 25 24 19 0 27 27 18 21 24 22 24 26 25

0 (15)

3QFY18

4QFY18

1QFY19

2QFY19

3QFY19

4QFY19

1QFY20 2QFY20 3QFY20

Source: Company, Kotak Institutional Equities

66 KOTAK INSTITUTIONAL EQUITIES RESEARCH Bajaj Finserv Diversified Financials

Exhibit 14: Strong growth in crop business for Bajaj General in 9MFY20 Gross premium mix for Bajaj General Insurance, March fiscal year-ends, December 2018-December 2019

Dec-18 Jan-19 Feb-19 Mar-19 Apr-19 May-19 Jun-19 Jul-19 Aug-19 Sep-19 Oct-19 Nov-19 Dec-19 9MFY20 9MFY19 9MFY18 Gross direct premium income (Rs mn) Fire 798 1,394 655 887 1,945 968 786 1,160 613 695 1,146 648 812 8,772 6,526 5,814 Marine 91 259 86 113 284 105 205 153 111 78 169 111 87 1,303 1,151 967 Motor 4,273 4,302 3,858 5,331 3,883 3,944 4,174 4,193 4,280 5,232 5,276 4,546 4,468 39,996 35,079 29,839 Motor OD 1,863 1,868 1,655 2,069 1,673 1,689 1,712 1,616 1,762 1,758 2,229 1,794 1,916 16,147 15,436 15,639 Motor TP 2,411 2,433 2,203 3,262 2,211 2,255 2,463 2,576 2,518 3,474 3,048 2,753 2,552 23,849 19,643 14,200 Engineering 121 148 74 116 153 102 110 117 185 138 105 99 156 1,164 1,075 876 Health 2,476 1,892 1,411 1,623 3,597 1,648 1,456 1,534 1,461 2,179 2,283 1,467 1,968 17,592 18,438 10,339 Retail health 527 551 577 914 424 439 479 548 558 548 523 538 626 4,684 4,047 3,516 Group health 899 1,309 705 613 1,792 803 833 883 789 1,518 1,149 839 846 9,452 9,657 5,802 Aviation 7 191 6 1 13 11 1 4 5 1 12 16 26 89 38 33 Liability 292 365 118 125 379 151 653 585 110 207 122 159 393 2,759 2,491 1,890 PA 245 242 240 274 216 204 295 220 242 223 222 256 249 2,127 1,845 1,419 Other 1,687 7,836 647 1,742 643 831 1,476 1,429 6,200 11,276 689 595 4,397 27,535 10,010 15,748 Crop insurance 1,243 7,248 155 1,107 83 158 948 876 5,672 10,746 20 12 3,885 22,401 6,106 12,551 Total 9,989 16,630 7,095 10,212 11,112 7,963 9,155 9,394 13,208 20,029 10,024 7,898 12,555 101,337 76,654 66,923 % of total Fire 8 8 9 9 18 12 9 12 5 3 11 8 6 9 9 9 Marine 1 2 1 1 3 1 2 2 1 0 2 1 1 1 2 1 Motor 43 26 54 52 35 50 46 45 32 26 53 58 36 39 46 45 Motor OD 19 11 23 20 15 21 19 17 13 9 22 23 15 16 20 23 Motor TP 24 15 31 32 20 28 27 27 19 17 30 35 20 24 26 21 Engineering 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 Health 25 11 20 16 32 21 16 16 11 11 23 19 16 17 24 15 Retail health 5 3 8 9 4 6 5 6 4 3 5 7 5 5 5 5 Group health 9 8 10 6 16 10 9 9 6 8 11 11 7 9 13 9 Aviation 0 1 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Liability 3 2 2 1 3 2 7 6 1 1 1 2 3 3 3 3 PA 2 1 3 3 2 3 3 2 2 1 2 3 2 2 2 2 Other 17 47 9 17 6 10 16 15 47 56 7 8 35 27 13 24 Crop insurance 12 44 2 11 1 2 10 9 43 54 0 0 31 22 8 19 YoY growth (%) Fire 15 19 51 12 73 58 26 32 14 17 49 10 2 34 12 Marine 24 10 20 12 24 10 10 16 31 (9) 21 3 (4) 13 19 Motor 21 24 16 9 21 12 9 12 8 35 13 15 5 14 18 Motor OD (0) 4 2 (3) 7 4 2 3 1 9 10 3 3 5 (1) Motor TP 45 45 30 18 33 18 15 18 14 53 16 24 6 21 38 Engineering 27 43 (12) 10 27 16 (1) 67 (7) 2 21 (32) 29 8 23 Health 116 9 40 (14) (21) 37 (10) 7 (27) 11 52 (13) (21) (5) 78 Retail health 15 14 15 14 19 16 12 14 16 6 17 25 19 16 15 Group health 46 13 59 33 18 40 (19) 5 (42) 15 22 (28) (6) (2) 66 Aviation 289 5,051 27 333 24 57 (32) 1,950 (23) (62) 310 3,925 269 134 17 Liability 22 36 1 (6) 18 13 (1) 15 (27) 47 (11) 8 35 11 32 PA 44 55 42 25 10 28 26 27 31 (10) 23 14 1 15 30 Other 37 23 100 414 32 67 341 226 49 740 15 31 161 175 (36) Crop insurance 35 23 (1,373) 80 42 (1,802) 883 50 1,112 (593) 8 212 267 (51) Total 39 23 28 21 8 26 20 27 17 139 24 8 26 32 15

Source: Company, Kotak Institutional Equities

Exhibit 15: Claims ratio for crop business increased to >110% in 3QFY20 Segment-wise claims ratio, March fiscal year-ends, 3QFY19-3QFY20 (%)

YoY YoY YoY 2QFY19 3QFY19 2QFY20 3QFY20 (bps) 9MFY19 9MFY20 (bps) (bps) FY2019 Fire 305 40 116 13 -2700 bps 80 75 -560 bps -1090 bps 74 Marine cargo 95 67 94 42 -2500 bps 91 70 -2030 bps -1820 bps 94 Motor OD 56 59 65 73 1360 bps 58 68 990 bps 790 bps 60 Motor TP 66 66 66 67 110 bps 69 66 -220 bps -410 bps 65 Overal motor 61 63 65 70 660 bps 64 67 350 bps 180 bps 62 Engineering 74 29 91 8 -2090 bps 54 47 -720 bps -1190 bps 44 Personal accident 49 31 49 66 3430 bps 46 55 890 bps -390 bps 50 Health 91 89 89 86 -320 bps 87 87 -80 bps 30 bps 90 Crop (14) (53) 105 112 NM (27) 110 NM NM 75 Overall 68 64 75 73 830 bps 66 74 750 bps 690 bps 69 Overall (excluding crop) 71 67 72 69 240 bps 69 71 180 bps 130 bps 68

Source: Company, Kotak Institutional Equities

KOTAK INSTITUTIONAL EQUITIES RESEARCH 67 Diversified Financials Bajaj Finserv

Exhibit 16: Business through broker channels increased in Exhibit 17: Share of motor business at 47% 3QFY20 Product mix for Bajaj General insurance, March fiscal year-ends, 2016- Channel mix for Bajaj General insurance, March fiscal year-ends, 19, 1QFY20-3QFY20 (%) 2016-19, 2QFY20-3QFY20 (%) Retail health Group health Agri Brokers Direct business Motor Others Prop., liability, engg. Individual agents Corporate agents-others Corporate agents-banks Crop 100 100 16 13 14 15 10 14 13 13 21 6 19 20 9 80 10 8 8 9 80 5 12 40 13 11 8 32 7 3 12 9 60 46 44 44 47 60 21 22 19 20 9 56 42 3 40 7 9 10 40 40 11 16 20 13 4 13 5 20 19 6 42 15 16 10 20 36 37 6 7 9 7 32 27 7 0 6 6 5 5 6 5 2016 2017 2018 2019 1QFY20 2QFY20 3QFY20 0 2017 2018 2019 2QFY20 3QFY20 Source: Company Source: Company

Exhibit 18: Bajaj General insurance – key ratios and growth rates Bajaj General insurance, March fiscal year-ends, 2017-22E (%)

2017 2018 2019 2020E 2021E 2022E YoY growth Net premium income 17 36 16 22 20 18 Premium earned- net 17 23 16 22 20 18 Claims 14 16 21 39 11 18 Net commission paid (62) 793 22 (51) 200 18 Operating expenses 19 4 18 12 29 18 Investment income 21 6 4 24 12 22 PBT 40 26 (15) (10) 21 23 Tax 69 23 (14) (30) 21 23 PAT 29 27 (15) (0) 21 23 Key ratios Claims ratio 66 55 57 65 60 60 Commission ratio 1 5 5 2 5 5 Operating expenses ratio 28 21 22 20 22 22 Combined ratio 99 93 97 102 100 100 Yield on investment 10 9 7 7 7 7 Tax rate 32 32 32 25 25 25 RoE 23 23 16 14 15 16

Source: Company, Kotak Institutional Equities estimates

68 KOTAK INSTITUTIONAL EQUITIES RESEARCH Bajaj Finserv Diversified Financials

Exhibit 19: Bajaj General insurance – financial summary Bajaj General insurance, March fiscal year-ends, 2017-22E (Rs mn)

2017 2018 2019 2020E 2021E 2022E Income statement Net premium income 49,370 67,325 78,054 95,226 114,271 134,840 Premium earned- net 49,370 60,586 70,098 85,520 102,623 121,096 Claims 34,762 40,426 49,026 68,206 75,551 89,150 Net commission paid 356 3,180 3,875 1,905 5,714 6,742 Operating expenses 13,828 14,391 17,016 19,045 24,568 28,991 Investment income 10,357 10,941 11,340 14,025 15,751 19,229 PBT 10,781 13,530 11,521 10,389 12,541 15,442 Tax 3,503 4,317 3,721 2,597 3,135 3,860 PAT 7,278 9,214 7,800 7,791 9,406 11,581 Balance sheet Shareholders funds 35,346 44,664 51,640 59,431 68,838 80,419 Paid-up capital 1,103 1,102 1,102 1,102 1,102 1,102 Reserves 34,243 43,561 50,538 58,329 67,735 79,317 Total liabilities 121,229 124,713 131,402 167,388 212,514 268,761 Current liabilities 91,612 88,175 131,402 167,388 212,514 268,760 Investments 108,290 148,229 177,257 206,979 249,571 299,829 Fixed assets 2,887 3,123 3,123 3,123 3,123 3,123 Other current assets 45,398 18,025 2,662 16,718 28,658 46,227 Total assets 156,575 169,376 183,042 226,820 281,351 349,180

Source: Company, Kotak Institutional Equities estimates

Exhibit 20: Bajaj Finserv – key ratios and growth rates Bajaj Finserv, March fiscal year-ends, 2017-22E (%)

2017 2018 2019 2020E 2021E 2022E YoY growth Total income 43 15 30 27 20 20 Premium 10 49 21 (13) 15 15 Investment income 205 (78) 25 376 14 19 Expenses 46 15 29 27 18 20 PBT 31 18 34 27 27 21 PAT (post minority interest) 30 5 21 50 30 21 EPS 30 5 21 50 30 21 Loan book 33 40 42 33 28 29 Investments 14 6 18 41 22 21 Total assets 21 25 29 20 22 24 Policyholders funds 11 27 11 (16) 6 7 Shareholders funds 18 29 16 42 17 18 Key ratios PBT margin 18 19 19 19 20 20 Debt-equity (X) 3.1 3.2 4.2 3.8 4.2 4.7 RoA 3.2 2.9 2.9 3.3 3.6 3.5 RoE 17.3 14.6 14.5 16.8 17.1 17.5

Source: Company, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 69 Diversified Financials Bajaj Finserv

Exhibit 21: Bajaj Finserv – financial summary Bajaj Finserv, March fiscal year-ends, 2017-22E (Rs mn)

2017 2018 2019 2020E 2021E 2022E Income statement Total income 285,596 328,627 426,056 540,903 649,293 780,371 Interest income 101,313 137,363 187,763 270,080 339,379 420,494 Bajaj Finance 99,774 127,444 184,851 266,460 335,501 416,266 Others 1,539 9,918 2,912 3,620 3,878 4,228 Insurance premium 110,591 164,255 198,573 173,486 199,337 228,470 Investment income 71,813 15,885 19,781 94,113 107,075 127,545 Other income 1,879 11,124 19,939 3,224 3,501 3,862 Expenses 233,749 267,652 344,522 437,547 517,853 621,746 Interest expenses 38,037 27,448 38,018 97,458 120,201 152,883 Provisions 8,182 10,349 16,887 27,049 33,556 43,183 Operating expenses 52,627 117,271 165,619 102,442 125,891 149,531 Commission expenses 1,820 12,815 16,928 3,367 7,405 8,688 Depreciation 15 1,599 2,261 15 15 15 Benefits paid 96,760 80,642 75,444 177,387 199,685 230,430 Change in reserve 36,308 17,528 29,366 29,829 31,100 37,016 PBT 51,847 60,987 81,547 103,357 131,440 158,625 Tax 14,744 19,224 27,809 27,536 32,553 39,320 PAT 37,103 41,764 53,738 75,820 98,887 119,305 Minority interest 11,779 15,261 21,548 27,469 36,214 43,748 PAT post minority interest 25,324 26,503 32,190 48,351 62,672 75,557 Shares (mn) 159 159 159 159 159 159 EPS (Rs) 159.1 166.5 202.3 303.8 393.8 474.8 BVPS (Rs) 995 1287 1493 2118 2485 2928 Balance sheet Fixed assets 9,456 9,724 11,804 12,501 13,518 14,677 Loan book 568,320 793,717 1,128,738 1,504,995 1,927,441 2,492,380 Total assets 1,289,304 1,615,620 2,085,487 2,502,678 3,057,742 3,787,280 Borrowings 492,500 656,947 997,544 1,277,249 1,654,487 2,167,591 Policyholders funds 406,027 515,178 573,226 484,345 515,445 552,461 Total liabilities 1,059,016 1,303,047 1,719,751 1,999,703 2,466,079 3,088,649 Shareholders funds 158,280 204,829 237,659 337,098 395,508 465,893 Equity capital 7,956 796 796 796 796 796 Reserves 150,324 204,034 236,864 336,302 394,713 465,098 Minority interest 72,008 107,744 128,077 165,877 196,155 232,738

Source: Company, Kotak Institutional Equities estimates

70 KOTAK INSTITUTIONAL EQUITIES RESEARCH REDUCE Bajaj Auto (BJAUT) Automobiles & Components JANUARY 30, 2020 RESULT, CHANGE IN RECO. Sector view: Neutral

Better-placed than other two-wheeler stocks for FY2021E. Bajaj Auto reported CMP (`): 3,146 3QFY20 EBITDA of Rs13.7 bn (+18% yoy), which was 5% above our estimates led by Fair Value (`): 3,150 better gross margin and cost control. We remain concerned on the slowdown in the BSE-30: 40,914 domestic two-wheeler industry in FY2021E, led by sharp rise in regulatory costs, but believe Bajaj Auto is better-placed due to strong growth outlook in the export business. Upgrade to REDUCE (from SELL), fair value revised to Rs3,150 (from Rs2,925 earlier).

Bajaj Auto Stock data Forecasts/valuations 2020E 2021E 2022E 52-week range (Rs) (high,low) 3,289-2,400 EPS (Rs) 178.5 183.1 214.0 Mcap (bn) (Rs/US$) 911/12.8 EPS growth (%) 16.4 2.6 16.9 ADTV-3M (mn) (Rs/US$) 1,157/16 P/E (X) 17.6 17.2 14.7 Shareholding pattern (%) P/B (X) 3.7 3.3 3.0 Promoters 53.5 EV/EBITDA (X) 13.5 12.6 10.2 FIIs 14.1 RoE (%) 22.3 20.5 21.5 MFs/BFIs 2.7/6.4 Div. yield (%) 2.3 2.3 2.7 Price performance (%) 1M 3M 12M Sales (Rs bn) 312 337 386 Absolute (3) (2) 26 EBITDA (Rs bn) 53 55 65 Rel. to BSE-30 (2) (4) 9 Net profits (Rs bn) 52 53 62

3QFY20 results: EBITDA 5% above our expectations

 Bajaj Auto reported 3QFY20 EBITDA of Rs13.7 bn (+18% yoy), which was 5% above our estimates led by better-than-expected gross margins and lower-than-expected other expenses. Revenues increased by 3% yoy led by (1) 8% yoy improvement in net ASPs and (2) 5% yoy decline in volumes. Net realizations declined by 3% sequentially (2% below our estimates) led by (1) lower mix of 3W segment in the overall mix (-170 bps qoq), (2) higher mix of economy motorcycle segment (+120 bps qoq) and (3) higher discounting in 3QFY20. Domestic ASPs increased by 20% yoy mainly due to (1) cost push by the company on account of implementation of stricter safety norms (ABS), (2) decline in economy motorcycles segment mix (-520 bps yoy) and (3) increase in 3W segment mix (+80 bps yoy).

 EBITDA margin came in at 17.9% (+230 bps yoy and +130 bps qoq), which was 130 bps above our estimates due to (1) better-than-expected gross margins led by lower raw material prices, (2) lower-than-expected other expenses led by lower advertise expense and (3) depreciation of INR against USD. Yoy improvement in EBITDA margin was led by (1) lower commodity prices and better mix (+155 bps impact) and (2) INR depreciation (+75 bps impact). Gross margin improved by 60 bps qoq due to lower commodity prices. The company reported net profit of Rs12.6 bn (+15% yoy), which was 4% above our estimates due to outperformance at EBITDA level in 3QFY20.

Revise FY2020-22E EPS estimates upwards by 3-6%; upgrade to REDUCE (from SELL earlier)

We have increased our FY2020-22E EPS estimates by 3-6% due to 80-140 bps increase in our EBITDA margin estimates partly offset by 2% cut in our volume estimates, mostly led by weakness Hitesh Goel in the domestic motorcycle industry and the export three-wheeler industry. We expect domestic motorcycle industry volumes to decline by 5% yoy in FY2021E due to steep increase in cost of ownership in the two-wheeler segment led by BS-VI emission norms. We expect demand to Rishi Vora revive only from FY2022E onwards. Upgrade to REDUCE (from SELL earlier) as strong growth in exports business of Bajaj Auto will likely offset weakness in domestic business in FY2021E. Fair value revised to Rs3,150 (from Rs2,925 earlier) based on 15X December 2021E core EPS (from September 2021E earlier) + Rs139/share for KTM stake + Rs728/share value of cash and cash equivalents.

[email protected] Contact: +91 22 6218 6427

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

Conference call key takeaways

 Domestic two-wheeler segment. Domestic motorcycle volumes declined by 16% yoy led by (1) 88% yoy decline in the executive segment as Discover model failed to attract customer demand, (2) 21% yoy decline in the economy segment and (3) flattish growth in the premium segment. Bajaj Auto’s market share stood at 20% in the domestic market in 3QFY20 (-40 bps yoy) led by market share gains in the premium motorcycle segment, which was offset by market share loss in the economy and executive bike segments. In retail terms, volumes continue to decline in 3QFY20. The company refrained from giving any guidance for domestic two-wheeler industry growth; however, the company expects the industry to remain under pressure due to BS-VI cost increase. Dealer inventory stood around 5 weeks (normal levels are around 6 weeks).

 Domestic three-wheeler segment. The company indicated that domestic goods three- wheeler market will continue to grow as certain models in the van segment have been discontinued, which has created void in the segment. The company recorded market share of 59.4% in 3QFY20. RE brand continues to have dominant market share of 89% in the small three-wheeler segment. In the goods carrier segment, the company recorded growth of 11% as against an industry decline of 3%, resulting in market share of 26% in 3QFY20.

 Two-wheeler export segment. Export motorcycle volumes grew by 12% yoy driven by (1) 15% yoy growth in Africa driven by Nigeria, Congo, Uganda and Ethiopia, (2) flattish yoy growth in SAME and ASEAN regions led by strong growth in Sri Lanka and Egypt, partly offset by slowdown in Bangladesh and (3) 37% yoy growth in LatAm partly due to low base in 3QFY20. The company highlighted that Nigeria, Eastern Africa and Philippines continue to do well in the exports market. Overall, the company expects the two-wheeler export business to remain steady in FY2021E.

 Three-wheeler export segment. In exports market, volumes decline by 13% due to lower sales in Egypt. Three-wheeler export segment (excluding Egypt) grew by 26% yoy in 3QFY20. There have been no dispatches to Egypt market over the past six months; however, the company has slowly ramped up its volumes from January onwards. The company expects to export 3,000-4,000 units per month to Egypt.

 New launches continue to do well. In August 2019, the company launched new Pulsar 125cc and has sold over 68,000 units in 3QFY20 (13% market share in the 125cc segment). CT sold over 137,000 units of which the new CT 110, launched in June 2019, sold over 76,000 units in 3QFY20. Platina sold over 159,000 units of which the new Platina 110 H, launched in June 2019, sold over 46,000 units in 3QFY20. The company highlighted that new launches will be subdued until April 2020 as the company’s focus will be on transition from BS-IV to BS-VI. Post April 2020, the company will launch a variety of models—Dominar, Pulsar, Huvqvarna and higher cc KTM brand going ahead.

 Other key points. (1) The company has launched EFI compliant CT and Platina bikes in January with price increase of ~Rs6,500 (ex-showroom Mumbai), (2) exports revenues stood at Rs30.3 bn in 3QFY20 versus Rs30.2 bn in 3QFY19, (3) spares revenues stood at Rs7.7 bn in 2QFY20 versus Rs8.5 bn in 2QFY19, (4) for Bajaj Auto, financing mix stood at around 60% as on 3QFY20, (5) the company will take price increase in domestic two- wheeler and three-wheeler segments in 4QFY20, (6) the company expects headwinds from commodity prices led by steep increase in prices of precious metals, aluminum and steel, (7) tax rate for the full year will be around 24-25% and (8) realization per USD was ~ 71.3 in 3QFY20 as against ~ 70.6 in 2QFY20 and ~ 68.5 in FY2019.

72 KOTAK INSTITUTIONAL EQUITIES RESEARCH Bajaj Auto Automobiles & Components

Exhibit 1: 3QFY20 EBITDA was 5% above our estimates due to better-than-expected GM and lower-than-expected other expenses Interim result of Bajaj Auto, March fiscal year-ends (Rs mn)

(% chg.) 3QFY20 3QFY20E 3QFY19 2QFY20 3QFY20E 3QFY19 2QFY20 9MFY20 9MFY19 Yoy chg (%) FY2020E FY2019 Yoy chg (%) Volumes (units) 1,202,486 1,202,486 1,259,828 1,173,591 (4.6) 2.5 3,623,251 3,825,913 (5.3) 4,850,685 5,019,503 (3.4) Net realisations 61,842 63,202 57,493 63,900 (2.2) 7.6 (3.2) 62,101 58,397 62,762 58,905 Net sales 74,364 76,000 72,431 74,992 (2.2) 2.7 (0.8) 225,006 223,421 304,438 295,673 Operating income 2,032 2,100 1,663 2,081 (3.2) 22.2 (2.3) 6,022 5,685 8,061 7,903 Net sales (including op income) 76,397 78,100 74,094 77,073 (2.2) 3.1 (0.9) 231,028 229,106 0.8 312,499 303,576 2.9 Inc/dec in stock (1,774) — 453 2,284 (1,733) (428) 411 564 Raw materials (51,649) (55,100) (54,424) (56,654) (3.0) (1.0) (1.7) (161,697) (164,325) (221,703) (218,541) Staff costs (3,482) (3,400) (3,169) (3,384) 2.4 9.9 2.9 (10,471) (9,428) (13,809) (12,554) Other expenses (5,820) (6,600) (5,393) (6,539) (11.8) 7.9 (11.0) (18,692) (15,834) (24,618) (21,120) Total expenses (62,725) (65,100) (62,533) (64,293) (3.6) 0.3 (2.4) (192,593) (190,015) (259,720) (251,651) EBITDA 13,672 13,000 11,561 12,781 5.2 18.3 7.0 38,435 39,091 (1.7) 52,779 51,925 1.6 Other income 3,662 3,934 4,700 3,934 (6.9) (22.1) (6.9) 12,009 11,273 17,694 14,389 Interest expense (5) (12) (36) (12) (23) (42) (27—) (45) Depreciation expense (617) (613) (634) (613) 0.6 (2.7) 0.6 (1,832) (2,049) (2,515) (2,657) Profit before tax before exceptional 16,713 16,309 15,591 16,089 2.5 7.2 3.9 48,590 48,273 67,931 63,612 Extraordinary income/(expense) — — — — — — — 3,420 Profit before tax 16,713 16,309 15,591 16,089 2.5 7.2 3.9 48,590 48,273 0.7 67,931 67,032 1.3 Tax expense (4,097) (4,175) (4,572) (2,065) (1.9) (10.4) 98.4 (10,693) (14,577) (16,310) (20,280) Profit after tax 12,616 12,134 11,019 14,024 4.0 14.5 (10.0) 37,897 33,696 51,621 46,752 Adj. PAT 12,616 12,134 11,019 14,024 4.0 14.5 (10.0) 37,897 33,696 12.5 51,621 44,358 16.4 Raw material cost as % of net sales 69.9 70.6 72.8 70.5 70.7 71.9 70.8 71.8 Staff cost as % of net sales 4.6 4.4 4.3 4.4 4.5 4.1 4.4 4.1 Other expenses as % of net sales 7.6 8.5 7.3 8.5 8.1 6.9 7.9 7.0 EBITDA margin (%) 17.9 16.6 15.6 16.6 16.6 17.1 16.9 17.1 No of shares 289 289 289 289 289 289 289 289 EPS 43.6 41.9 38.1 48.5 130.9 116.4 178.4 153.3 Tax rate (%) 24.5 25.6 29.3 12.8 22.0 30.2 24.0 31.9 Revenue breakdown (Rs mn) Export revenues 30,374 30,230 31,080 0.5 (2.3) 93,154 94,260 (1.2) Export ASPs (Rs/unit) 53,972 57,612 57,079 (6.3) (5.4) 56,208 59,005 (4.7) Domestic revenues 43,990 42,201 43,912 4.2 0.2 131,853 129,161 2.1 Domestic ASPs (Rs/unit) 68,766 57,407 69,804 19.8 (1.5) 67,068 57,961 15.7 Volume breakdown (units) Economy 296,444 376,376 275,325 (21.2) 7.7 879,375 1,047,705 (16.1) 1,179,968 1,368,980 (13.8) Executive 3,132 25,272 8,119 (87.6) (61.4) 29,210 113,293 (74.2) 33,447 133,786 (75.0) Premium 243,402 242,445 237,906 0.4 2.3 766,679 770,228 (0.5) 1,059,325 1,038,554 2.0 Domestic motorcycle 542,978 644,093 521,350 (15.7) 4.1 1,675,264 1,931,226 (13.3) 2,272,739 2,541,320 (10.6) Platina 159,395 195,093 141,241 (18.3) 12.9 485,120 431,542 12.4 645,584 626,781 3.0 CT 137,049 181,283 134,084 (24.4) 2.2 394,255 616,163 (36.0) 534,383 742,199 (28.0) Discover/V15 3,132 25,272 8,119 (87.6) (61.4) 29,210 113,293 (74.2) 33,447 133,786 (75.0) Pemium bikes (Pulsar, Avenger, KTM) 243,402 242,445 237,906 0.4 2.3 766,679 770,228 (0.5) 1,059,325 1,038,554 2.0 Export motorcycle 484,183 434,291 462,890 11.5 4.6 1,418,764 1,303,664 8.8 1,865,108 1,695,553 10.0 Total motorcycle 1,027,161 1,078,384 984,240 (4.7) 4.4 3,094,028 3,234,890 (4.4) 4,137,848 4,236,873 (2.3) Domestic 3 wheelers 96,736 91,018 107,730 6.3 (10.2) 290,683 297,195 (2.2) 387,137 399,453 (3.1) Export 3 wheelers 78,589 90,426 81,621 (13.1) (3.7) 238,540 293,828 (18.8) 325,700 383,177 (15.0) 3 wheelers 175,325 181,444 189,351 (3.4) (7.4) 529,223 591,023 (10.5) 712,837 782,630 (8.9) Total volumes 1,202,486 1,259,828 1,173,591 (4.6) 2.5 3,623,251 3,825,913 (5.3) 4,850,685 5,019,503 (3.4) Volume mix (%) Economy 24.7 29.9 23.5 24.3 27.4 24.3 27.3 Executive 0.3 2.0 0.7 0.8 3.0 0.7 2.7 Premium 20.2 19.2 20.3 21.2 20.1 21.8 20.7 Domestic motorcycle 45.2 51.1 44.4 46.2 50.5 46.9 50.6 Platina 13.3 15.5 12.0 13.4 11.3 13.3 12.5 CT 11.4 14.4 11.4 10.9 16.1 11.0 14.8 Discover/V15 0.3 2.0 0.7 0.8 3.0 0.7 2.7 Pemium bikes (Pulsar, Avenger, KTM) 20.2 19.2 20.3 21.2 20.1 21.8 20.7 Export motorcycle 40.3 34.5 39.4 39.2 34.1 38.5 33.8 Total motorcycle 85.4 85.6 83.9 85.4 84.6 85.3 84.4 Domestic 3 wheelers 8.0 7.2 9.2 8.0 7.8 8.0 8.0 Export 3 wheelers 6.5 7.2 7.0 6.6 7.7 6.7 7.6 3 wheelers 14.6 14.4 16.1 14.6 15.4 14.7 15.6 Total volumes 100.0 100.0 100.0 100.0 100.0 100.0 100.0

Source: Company, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 73 Automobiles & Components Bajaj Auto

Exhibit 2: Strong yoy growth in Pulsar exports (+30% yoy) and Boxer and CT exports (+14% yoy) in 3QFY20 Volume mix of two-wheeler exports, 3QFY17-3QFY20 (units, %)

3QFY17 4QFY17 1QFY18 2QFY18 3QFY18 4QFY18 1QFY19 2QFY19 3QFY19 4QFY19 1QFY20 2QFY20 3QFY20 Export volumes (units) Platina 15,270 14,772 14,791 13,542 12,612 13,567 11,823 15,421 17,808 13,906 13,068 15,015 9,864 Boxer 109,926 112,936 136,114 140,804 173,678 186,474 230,654 214,696 246,352 216,498 275,874 252,255 280,036 CT 51,556 49,044 53,302 43,230 48,300 52,474 54,224 71,072 62,981 69,456 63,818 57,956 71,782 Discover/V series 33,264 38,476 40,367 36,280 37,421 29,986 37,019 31,887 39,391 32,648 43,897 37,652 36,893 Pulsar 67,570 59,728 78,515 72,558 67,904 63,953 76,353 87,563 56,849 42,718 60,234 86,882 74,094 KTM/Avenger/Others 11,948 12,522 26,063 28,310 12,164 12,348 25,657 13,004 10,910 16,663 14,800 13,130 11,514 Total volumes 289,534 287,478 349,152 334,724 352,079 358,802 435,730 433,643 434,291 391,889 471,691 462,890 484,183 Volume mix %) Platina 5.3 5.1 4.2 4.0 3.6 3.8 2.7 3.6 4.1 3.5 2.8 3.2 2.0 Boxer 38.0 39.3 39.0 42.1 49.3 52.0 52.9 49.5 56.7 55.2 58.5 54.5 57.8 CT 17.8 17.1 15.3 12.9 13.7 14.6 12.4 16.4 14.5 17.7 13.5 12.5 14.8 Discover 11.5 13.4 11.6 10.8 10.6 8.4 8.5 7.4 9.1 8.3 9.3 8.1 7.6 Pulsar 23.3 20.8 22.5 21.7 19.3 17.8 17.5 20.2 13.1 10.9 12.8 18.8 15.3 KTM/Avenger/Others 4.1 4.4 7.5 8.5 3.5 3.4 5.9 3.0 2.5 4.3 3.1 2.8 2.4 Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0

Source: SIAM, Kotak Institutional Equities

Exhibit 3: Bajaj Auto has lost 40 bps market share on a yoy share basis in the domestic motorcycle segment in 3QFY20 Domestic motorcycle market share of major two-wheeler players, 3QFY17-3QFY20 (%)

3QFY17 4QFY17 1QFY18 2QFY18 3QFY18 4QFY18 1QFY19 2QFY19 3QFY19 4QFY19 1QFY20 2QFY20 3QFY20 Economy Bajaj Auto 33.2 25.5 25.3 32.0 31.8 24.1 31.8 37.2 37.4 33.8 33.4 32.4 36.1 Hero Motocorp 54.1 65.3 59.8 56.0 56.5 65.8 58.1 52.7 53.1 60.3 60.6 61.9 59.0 Executive Bajaj Auto 5.4 5.0 3.8 3.0 2.8 5.2 3.0 2.1 1.7 1.2 1.1 0.6 0.3 Hero Motocorp 71.0 72.9 69.3 69.0 69.6 69.6 71.0 72.0 72.3 73.5 69.1 68.3 72.8 HMSI 19.8 19.5 24.2 24.1 23.8 22.4 23.7 22.8 20.7 19.2 23.9 26.2 22.8 Premium Bajaj Auto 31.0 31.5 26.1 31.3 28.3 28.3 28.3 30.0 33.1 38.5 36.7 35.7 37.9 Hero Motocorp 3.9 5.0 3.8 3.0 1.9 1.2 1.2 1.5 1.9 0.9 1.3 2.5 1.9 HMSI 11.1 12.8 15.9 14.5 11.8 13.9 16.0 14.9 12.6 8.6 12.8 13.9 8.5 Royal Enfield 28.3 27.8 26.3 25.0 31.3 28.7 25.5 24.2 25.8 24.5 22.4 22.9 27.1 Total Bajaj Auto 18.5 16.1 14.0 16.9 16.4 15.3 16.3 18.6 20.4 20.0 18.4 17.9 20.0 Hero Motocorp 50.5 54.7 52.4 50.5 50.8 52.4 51.3 50.4 49.8 51.4 50.9 51.4 51.8 HMSI 12.8 13.4 16.5 15.7 14.7 15.0 15.8 14.4 12.2 11.0 14.7 15.7 12.5

Source: SIAM, Kotak Institutional Equities

Exhibit 4: We have increased our FY2020-22E EPS estimates by 3-6% due to improvement in EBITDA margin assumptions Earnings estimates revision, March fiscal year-ends, 2020-22E (Rs mn, units)

New estimates Old estimates % change 2020E 2021E 2022E 2020E 2021E 2022E 2020E 2021E 2022E Domestic two-wheelers 2,272,739 2,101,776 2,412,026 2,318,769 2,205,172 2,534,543 (2.0) (4.7) (4.8) Domestic three-wheelers 387,137 368,880 396,630 401,890 382,895 411,767 (3.7) (3.7) (3.7) Export two-wheelers 1,865,108 2,144,875 2,466,606 1,865,108 2,088,921 2,339,592 — 2.7 5.4 Export three-wheelers 325,700 374,556 419,502 344,859 396,588 436,247 (5.6) (5.6) (3.8) Total volumes (units) 4,850,685 4,990,086 5,694,764 4,930,627 5,073,577 5,722,149 (1.6) (1.6) (0.5) Average net realization 64,424 67,501 67,797 63,624 67,618 68,508 1.3 (0.2) (1.0) Net sales (incl. operating income) 312,499 336,837 386,085 313,704 343,065 392,013 (0.4) (1.8) (1.5) EBITDA 52,779 54,571 64,855 50,649 50,738 62,700 4.2 7.6 3.4 EBITDA margin (%) 16.9 16.2 16.8 16.1 14.8 16.0 Profit after tax 51,621 52,975 61,936 49,371 50,100 60,319 4.6 5.7 2.7 EPS (Rs/share) 178.4 183.1 214.0 170.6 173.1 208.4 4.6 5.7 2.7

Source: Company, Kotak Institutional Equities estimates

74 KOTAK INSTITUTIONAL EQUITIES RESEARCH Bajaj Auto Automobiles & Components

Exhibit 5: Bajaj Auto’s total volumes are expected to grow at 4% CAGR over FY2019-22E Bajaj Auto volume projections, March fiscal year-ends, 2013-22E (units, %)

2013 2014 2015 2016 2017 2018 2019 2020E 2021E 2022E Sales volume (units) Motorcycles 3,757,105 3,422,403 3,291,315 3,358,252 3,179,521 3,369,334 4,236,873 4,137,848 4,246,651 4,878,631 Domestic 2,463,874 2,099,230 1,770,009 1,898,957 1,960,980 1,974,577 2,541,320 2,272,739 2,101,776 2,412,026 Platina 484,600 465,111 486,568 275,276 383,542 435,180 626,781 645,584 581,026 668,180 CT100 — — 29,189 590,067 452,712 466,897 742,199 534,383 480,945 553,087 Discover 1,311,843 992,176 557,942 238,098 303,032 244,315 133,786 33,447 33,447 33,447 Pulsar/Avenger/KTM 667,431 641,943 696,310 795,516 821,694 828,185 1,038,554 1,059,325 1,006,359 1,157,313 Export two-wheelers 1,293,231 1,323,173 1,521,306 1,459,295 1,218,541 1,394,757 1,695,553 1,865,108 2,144,875 2,466,606 Total two-wheelers 3,757,105 3,422,403 3,291,315 3,358,252 3,179,521 3,369,334 4,236,873 4,137,848 4,246,651 4,878,631 RE 60 — — — 334 2,000 — — — — — Domestic three-wheelers 226,131 186,912 234,345 256,320 253,147 369,637 399,453 387,137 368,880 396,630 Passenger three-wheelers 223,287 186,856 234,345 254,995 239,985 346,846 368,825 365,137 346,880 374,630 Goods three-wheelers 2,844 56 — 1,325 13,162 22,791 30,628 22,000 22,000 22,000 Export three-wheelers 253,926 260,762 285,541 280,000 191,236 267,820 383,177 325,700 374,556 419,502 Total three-wheelers 480,057 447,674 519,886 536,320 444,383 637,457 782,630 712,837 743,435 816,132 Total vehicles 4,237,162 3,870,077 3,811,201 3,894,906 3,625,904 4,006,791 5,019,503 4,850,685 4,990,086 5,694,764 Growth (yoy %) Motorcycles (2.0) (8.9) (3.8) 2.0 (5.3) 6.0 25.7 (2.3) 2.6 14.9 Domestic (4.0) (14.8) (15.7) 7.3 3.3 0.7 28.7 (10.6) (7.5) 14.8 Platina (9.5) (4.0) 4.6 (43.4) 39.3 13.5 44.0 3.0 (10.0) 15.0 CT100 — — — — (23.3) 3.1 59.0 (28.0) (10.0) 15.0 Discover (0.3) (24.4) (43.8) (57.3) 27.3 (19.4) (45.2) (75.0) — - Pulsar/Avenger/KTM (6.7) (3.8) 8.5 14.2 3.3 0.8 25.4 2.0 (5.0) 15.0 Export two-wheelers 2.0 2.3 15.0 (4.1) (16.5) 14.5 21.6 10.0 15.0 15.0 Total two-wheelers (2.0) (8.9) (3.8) 2.0 (5.3) 6.0 25.7 (2.3) 2.6 14.9 Domestic three-wheelers 11.4 (17.3) 25.4 9.4 (1.2) 46.0 8.1 (3.1) (4.7) 7.5 Export three-wheelers (18.7) 2.7 9.5 (1.9) (31.7) 40.0 43.1 (15.0) 15.0 12.0 Total three-wheelers (6.8) (6.7) 16.1 3.2 (17.1) 43.4 22.8 (8.9) 4.3 9.8 Total vehicles (2.6) (8.7) (1.5) 2.2 (6.9) 10.5 25.3 (3.4) 2.9 14.1

Source: Company, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 75 Automobiles & Components Bajaj Auto

Exhibit 6: We expect Bajaj Auto’s earnings to grow at 12% CAGR over FY2019-22E Bajaj Auto – financial summary, March fiscal year-ends, 2013-22E (Rs mn)

2013 2014 2015 2016 2017 2018 2019 2020E 2021E 2022E Profit model (Rs mn) Net sales 204,684 205,147 216,120 225,865 217,636 252,189 303,576 312,499 336,837 386,085 EBITDA 41,064 44,710 41,166 47,820 44,223 48,374 51,925 52,779 54,571 64,855 Other income 3,244 3,412 10,736 10,736 12,220 12,933 14,389 17,694 18,852 20,791 Interest (5) (5) (65) (11) (14) (13) (45) (27—) — — Depreciation (1,640) (1,796) (2,674) (3,072) (3,073) (3,148) (2,657) (2,515) (2,790) (3,065) Profit before tax 42,662 46,321 49,162 55,474 53,355 58,146 63,612 67,931 70,634 82,581 Extra-ordinary items — — (3,403) — — (320) 3,420 — — — Taxes (12,227) (13,887) (12,711) (16,177) (15,080) (17,145) (20,280) (16,310) (17,658) (20,645) Net profit 30,436 32,433 33,049 39,298 38,276 40,681 46,752 51,621 52,975 61,936 Adjusted net profit 30,436 32,433 36,452 39,298 38,276 40,905 44,366 51,621 52,975 61,936 Adjusted earnings per share (Rs) 105.2 112.1 126.0 135.8 132.3 141.3 153.3 178.4 183.1 214.0 Balance sheet (Rs mn) Equity 79,020 96,080 106,922 132,666 170,341 191,039 217,799 244,656 272,203 304,410 Deferred tax liability 1,151 1,432 1,416 2,028 3,136 3,234 5,427 5,427 5,427 5,427 Total borrowings 2,105 1,466 1,699 — — — — — — — Current liabilities 42,511 48,498 45,587 30,172 34,671 43,922 50,578 35,672 37,928 41,769 Total liabilities 124,786 147,476 155,623 164,865 208,149 238,195 273,804 285,755 315,558 351,605 Net fixed assets 20,277 20,386 20,190 21,383 20,440 19,349 18,120 20,605 22,815 24,750 Investments 64,305 85,496 91,533 90,379 135,088 163,656 179,366 201,366 223,366 245,366 Cash 5,589 4,955 5,862 8,595 2,937 7,780 9,228 9,321 11,056 16,333 Other current assets 33,913 35,524 36,507 43,615 49,239 47,411 67,090 54,463 58,320 65,156 Miscellaneous expenditure 703 1,115 1,532 893 447 — — — — — Total assets 124,786 147,476 155,623 164,865 208,149 238,195 273,804 285,755 315,558 351,605 Free cash flow (Rs mn) Operating cash flow excl. working capital 26,557 31,419 27,611 30,816 30,859 32,157 31,925 46,102 46,672 54,547 Working capital changes (5,213) 4,039 (6,138) 5,753 2,533 10,451 (7,030) (2,279) (1,601) (2,995) Capital expenditure (5,082) (2,201) (2,697) (2,651) (1,994) (1,826) (1,635) (5,000) (5,000) (5,000) Free cash flow 16,262 33,257 18,777 33,917 31,398 40,782 23,260 38,823 40,071 46,552 Ratios Gross margin (%) 29.6 32.4 31.3 33.3 32.8 31.0 28.2 29.2 28.1 28.2 EBITDA margin (%) 20.1 21.8 19.0 21.2 20.3 19.2 17.1 16.9 16.2 16.8 PAT margin (%) 14.9 15.8 16.9 17.4 17.6 16.2 14.6 16.5 15.7 16.0 Book Value (Rs/share) 273.0 332.0 369.5 458.4 588.6 660.1 752.6 845.4 940.6 1,051.9 RoAE (%) 43.2 36.5 32.1 32.3 24.8 22.1 22.4 21.8 20.1 21.1

Source: Company, Kotak Institutional Equities estimates

76 KOTAK INSTITUTIONAL EQUITIES RESEARCH ADD Aurobindo Pharma (ARBP) Pharmaceuticals JANUARY 30, 2020 UPDATE Sector view: Neutral

Unit-VII receives an OAI. ARBP announced that Unit-VII has been accorded an OAI CMP (`): 480 status by the US FDA. This follows a Sep 2019 inspection, which had seven observations. Fair Value (`): 500 The OAI does not come as a surprise, and while earnings impact is not material, Unit-VII BSE-30: 40,914 is the fourth facility to receive an OAI or a warning letter. Status update for Unit-IV sterile facility is now a critical event for ARBP, though we believe the probability of an OAI is now high, considering the importance, given that 47 ANDAs are pending approval from the facility, making it a critical facility for the US FDA. ADD.

Aurobindo Pharma Stock data Forecasts/valuations 2020E 2021E 2022E 52-week range (Rs) (high,low) 838-389 EPS (Rs) 49.8 55.8 57.5 Mcap (bn) (Rs/US$) 282/4 EPS growth (%) 23.0 12.1 3.0 ADTV-3M (mn) (Rs/US$) 1,753/25 P/E (X) 9.6 8.6 8.4 Shareholding pattern (%) P/B (X) 1.7 1.5 1.3 Promoters 51.9 EV/EBITDA (X) 7.2 6.1 5.6 FIIs 22.0 RoE (%) 17.7 16.9 15.2 MFs/BFIs 12.7/0.4 Div. yield (%) 1.3 1.6 1.9 Price performance (%) 1M 3M 12M Sales (Rs bn) 240 300 300 Absolute 3 4 (38) EBITDA (Rs bn) 52 62 64 Rel. to BSE-30 5 2 (46) Net profits (Rs bn) 29 33 34

Unit-VII receives an OAI ARBP announced that its Unit-VII formulations facility for oral solids has received an OAI (official action indicated) status by the US FDA. The OAI status follows a Sep 2019 inspection that had resulted in seven observations mainly centered around (1) inadequate OOS testing and frequent invalidations, (2) inadequate hold time studies, and (3) inadequate documentation, particularly pertaining to batch record and investigation reports. The OAI does not come as a surprise given that OOS testing has been a key area of focus for the US FDA, with ‘investigation deficiencies’ being the highest cited category in 483’s issued globally over FY2016-18. Unit-VII is a critical facility for ARBP’s current US business, accounting for ~20% of US sales, though it is increasingly less relevant for future growth, with the facility having only 33 ANDAs pending approval (including 14 tentative, several of which are PEPFAR filings), and most new oral products now filed from Unit-X (cleared in April 2019) and Eugia (cleared in June 2018).

Unit XI under warning letter, Units I, VII and XI with OAI – Unit-IV outcome uncertain Unit-IV is ARBP's key sterile facility, expected to account for ~US$200 mn or ~15% of FY2020E sales, and has the largest number of filings pending approval for ARBP at 47 ANDAs (of total 153 pending ANDAs). Along with Unit-VII, the two sites combined accounts for ~35% of ARBP’s US revenues, and 79 ANDAs pending approval (including tentative approvals). Post the OAI on Cipla’s Goa unit, we believe the outcome on ARBP’s Unit-IV sterile unit is now tricky to call, as Unit-IV had similar observations as Goa on aseptic filling and microbiology. While the actual outcome will be dependent on the proposed SOPs, we believe the probability for an OAI status for Unit-4 is high, considering the quantum of excursions in some of the specified areas, and particularly, given the large number of ANDAs pending approval from the facility (47 ANDAs), Chirag Talati, CFA which makes it a critical facility for the US FDA.

Growth profile slowing – valuations provide comfort Kumar Gaurav ARBP is trading at relatively inexpensive valuations of ~6X FY2021E EV/EBITDA, and 9X FY2021E P/E, trading at no-growth multiple. While the risk of an import alert for Unit-IV has subsided with time, our estimates could see further 10-15% cut, should Unit-IV escalate into a warning letter. We tweak our numbers downwards by 2-3% for FY2018-22E to take into account Unit-VII OAI, and as we incorporate delays to Sandoz deal closure. ADD.

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Exhibit 1: Aurobindo Pharma – US sales summary March fiscal year ends, 2015-22E (Rs mn)

2015 2016 2017 2018 2019 2020E 2021E 2022E US consolidated sales (US$ mn) 776 945 1,020 1,154 1,266 1,728 2,456 2,379 Base + other launches 456 477 512 532 582 679 655 655 Key oral products 83 111 100 181 168 165 179 194 Injectables 67 96 148 155 210 307 291 343 OTC/Natrol 30 95 105 130 160 168 176 185 Controlled substances 55 77 69 66 66 41 38 37 Third party 85 90 86 90 81 73 65 59 Sandoz dermatology 48 235 215 Sandoz OSD 121 680 546 Spectrum 125 136 143 YoY growth (%) US 38 22 8 13 10 36 42 (3) Base + other launches 22.6 4.5 7.4 3.8 9.4 16.8 (3.6) 0.1 Key oral products 3.4 34.0 (9.4) 80.5 (7.3) (1.6) 8.3 8.4 Injectables 55.8 42.6 55.0 4.9 35.3 46.0 (5.2) 18.0 OTC/Natrol 216.7 10.0 24.4 23.1 5.0 5.0 5.0 Controlled substances NM 39.6 (10.2) (4.3) (0.4) (37.9) (6.9) (2.0) Third party 41.7 5.9 (5.0) 5.0 (10.0) (10.0) (10.0) (10.0) Sandoz dermatology 389.4 (8.7) Sandoz OSD 459.4 (19.6) Spectrum 9.1 5.2 % of US sales Base + other launches 59 50 50 46 46 39 27 28 Key oral products 11 12 10 16 13 10 7 8 Injectables 9 10 15 13 17 18 12 14 OTC/Natrol 4 10 10 11 13 10 7 8 Controlled substances 7 8 7 6 5 2 2 2 Third party 11 10 8 8 6 4 3 2 Sandoz dermatology 3 10 9 Sandoz OSD 7 28 23 Spectrum 7 6 6

Source: Company, Kotak Institutional Equities estimates

Exhibit 2: Aurobindo Pharma – ANDAs pending approval by facility # of ANDAs

Site Details Final approval Tentative approval Under review Total Unit III Oral formulations 115 10 2 127 Unit IV Injectables and opthalmics 63 0 47 110 Unit VIB Cephalosporins oral 11 0 1 12 Unit VII (SEZ) Oral formulations 137 14 18 169 Unit X Oral formulations 7 2 42 51 Unit XII Penicillin oral and injectables 20 0 0 20 Aurolife USA Oral formulations 21 0 12 33 Auronext Penem injectables 2 0 0 2 Eugia Oral and injectable formulations 7 1 19 27 APL Healthcare Oral formulations 0 0 12 12 Others 6 0 0 6 Total 389 26 153 569

Source: Company

78 KOTAK INSTITUTIONAL EQUITIES RESEARCH Aurobindo Pharma Pharmaceuticals

Exhibit 3: Aurobindo Pharma – profit and loss, balance sheet, cash flow model March fiscal year-ends, 2014-22E (Rs mn)

2014 2015 2016 2017 2018 2019 2020E 2021E 2022E Net revenues 80,998 121,205 138,961 150,899 164,998 195,636 239,629 299,562 299,970 Gross profit 44,938 66,149 77,386 86,556 97,471 108,509 138,536 164,424 169,156 Staff costs (8,024) (13,023) (15,508) (17,678) (21,308) (25,849) (32,551) (37,402) (40,020) R&D expenses (2,717) (3,601) (4,770) (5,430) (6,662) (8,716) (10,304) (13,181) (13,199) Other expenses (12,860) (23,889) (25,051) (29,106) (31,615) (34,425) (43,408) (51,693) (51,970) EBITDA 21,337 25,636 32,056 34,343 37,885 39,519 52,273 62,148 63,967 Depreciation & amortisation (3,125) (3,326) (3,926) (4,276) (5,580) (6,680) (11,217) (14,147) (14,847) EBIT 18,211 22,310 28,130 30,067 32,306 32,840 41,056 48,002 49,120 Net Interest (1,071) (843) (927) (667) (777) (1,627) (2,585) (5,677) (5,505) Other income 216 808 682 538 1,020 1,157 750 750 750 Exceptional items (includes FX gains/losses) (2,031) (596) (660) 621 — (965) (250) (250) (250) Profit before tax 15,325 21,679 27,225 30,608 32,579 30,914 38,767 42,874 44,165 Tax & deferred Tax (3,635) (5,966) (7,444) (7,596) (8,183) (7,269) (9,692) (10,290) (10,600) Less: minority interest 38 45 39 5 3 2 2 2 2 Net income 11,729 15,758 19,820 23,017 24,399 23,647 29,078 32,587 33,568 EPS (Rs) 20.1 27.0 33.9 39.4 41.8 40.5 49.8 55.8 57.5 Balance sheet Equity 37,758 51,817 71,163 93,740 116,822 138,924 164,368 192,596 220,932 Total borrowings 36,339 38,636 47,020 33,641 44,825 67,532 136,032 132,032 128,032 Other liabilities 20,801 38,692 38,811 35,113 49,404 58,089 73,463 90,999 87,168 Total liabilities 94,898 129,145 156,993 162,494 211,052 264,544 373,863 415,627 436,132 Net fixed assets 30,314 41,253 52,635 62,919 81,037 101,433 170,216 166,070 161,223 Investments 198 1 1 2,459 3,115 3,602 3,602 3,602 3,602 Cash 1,786 4,888 8,344 5,135 12,616 19,572 39,867 32,156 50,023 Other current assets 62,601 83,003 96,013 91,982 114,283 139,937 160,178 213,799 221,283 Total assets 94,898 129,145 156,993 162,494 211,052 264,544 373,863 415,627 436,131 Cashflow statement Operating profit before working capital 20,476 25,741 32,337 34,413 37,762 39,021 49,986 57,023 59,014 Tax paid (3,440) (4,956) (7,358) (7,737) (6,986) (7,698) (9,692) (10,290) (10,600) Change in working capital (10,574) (8,417) (7,383) 6,110 (11,231) (15,103) (4,867) (36,085) (11,315) Capital expenditure (3,905) (7,683) (15,682) (16,942) (13,229) (14,257) (80,000) (10,000) (10,000) Free cash flow 2,558 4,685 1,914 15,844 6,316 1,964 (44,572) 648 27,099 Margins and ratios Gross profit margin (%) 55.5 54.6 55.7 57.4 59.1 55.5 57.8 54.9 56.4 EBITDA margin (%) 26.3 21.2 23.1 22.8 23.0 20.2 21.8 20.7 21.3 Tax rate (%) 23.7 27.5 27.3 26.0 26.0 22.0 25.0 24.0 24.0 RoAE (%) 36.7 35.2 32.2 27.9 23.2 18.5 19.2 18.3 16.2 RoACE (%) 21.3 20.5 20.9 19.2 17.4 15.1 13.8 13.2 12.6

Source: Company, Kotak Institutional Equities

KOTAK INSTITUTIONAL EQUITIES RESEARCH 79 CAUTIOUS Consumer Staples India JANUARY 30, 2020 UPDATE BSE-30: 40,914

Month in review—Dec 2019. The KIE consumer universe outperformed the broader markets, up 3% over the past one month. On the in-market activity front, key highlights are some price hikes in dairy products; pricing and promotions were largely stable in other categories. Commodity prices were stable for agri with inflationary oil commodities (crude has already come off since). The sector remains expensive despite recent underperformance; top picks: JUBI, ITC, CLGT and MRCO.

Pricing and promotions—price increases in select F&B categories (dairy, MFD and baby food)

Refer to Exhibit 2 for pricing activity.

 Home care. We have not witnessed any major pricing action/incremental promotional activity in detergents, dish wash and home care categories. HUVR has increased price of 1 kg SKU of Rin detergent by 3%; free grammage on bulk packs (4+2, 3+1, etc.) of Surf Excel and Ariel continue.

 Personal care. Key pricing actions—(1) HUVR has cut price of Dove daily shine shampoo (80 ml SKU) by 11% to Rs55 (from Rs62). We note that HUVR took a price cut of 5-6% in personal wash segment across key brands (Lifebuoy, Lux, Dove and Pears), (2) GSK-CH has increased price of Sensodyne Rapid relief toothpaste by 7% to Rs160 (80 gm SKU). Patanjali has increased price of Dant Kanti toothpaste to Rs80 from Rs75 (200 gm SKU), and (3) in hair oils category, Dabur has cut price of 100 ml SKU of Dabur Vatika coconut hair oil to Rs39 from Rs42, pricing it at par with Marico’s Parachute. We note that Marico has rolled out discounts of about 5-10% or free grammage on select SKUs of parachute coconut oil, Nihar naturals and Nihar Shanti Amla hair oil in the month of January 2020.

 Food/beverages. (1) Dairy—Nestle and Amul have increased milk prices by 3-5% across variants (Amul Taaza, Amul Gold, Nestle Slim and Nestle Toned A+). Nestle has also increased price of milk powder by 5% and curd by 11%. Britannia has increased price of cheese block by 6% and Parag Milk Foods has increased price of Go Cheese by 4% (16% cumulative over the past 2-3 months), (2) Society tea has increased price by 6%, (3) Nestle has increased price of Cerelac baby cereal by 3-4%, (4) GSK-CH has increased price of select MFD variants by 1-3%. Zydus has increased price of Complan by 7% and Danone has increased price of Protinex by 10%, (5) HUVR has increased price of Kissan Sauce and Jam by 3-8%, and (6) Britannia has increased price of Bourbon by 7% and ITC has increased price of B Natural orange juice by 5%.

RM trends—stable agri with inflationary pressure in oil commodities Rohit Chordia Refer to Exhibit 3 for detailed RM inflation impact.

 Agri-inputs. Apart from a few commodities, there was no major movement in the agri- Jaykumar Doshi space in the month of December. Arabica coffee prices rose 10% mom amid expectations of a global deficit in coffee year 2019-20. India tea prices were flat for the month while global prices saw a small decline. Liquid milk prices did not see any further increase in the month. Aniket Sethi Cocoa was down 3% mom with sugar prices falling 2% mom. Wheat, barley and maize prices were flat compared to the previous month. Wheat production in the country is expected to touch record highs (10%+ output growth) aided by rise in rabi crop acreage and expected increase in yields.

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

 Oil commodities basket. Crude prices were up 5% mom in the month of December. However, priced have come off post that on the back of (1) easing tensions in the Middle East region and (2) demand concerns following the outbreak of coronavirus in China (largest importer of oil). Palm oil and PFAD continued to rise (up 14-18% mom) with key producers, Indonesia and Malaysia, planning to increase bio-diesel content in automotive fuels, which could constrain supply. Rice bran oil prices were up 7% mom with both groundnut and sunflower oils also seeing a 6% mom price increase. Copra prices jumped 3% mom and are up 14% in the past six months. Some deflationary pressure was seen in menthe oil (down 4% mom) and castor oil (down 3% mom).

 Other commodities. Gold price were flat in the month of December (up 15% in the past six months). HDPE prices were flat for the month and are down 23% yoy.

 Who benefits? (1) Lower menthe oil prices benefit Emami the most followed by Colgate, HUVR and Dabur, and (2) lower sugar prices benefit Nestle, GSK-CH, ITC, Britannia and Dabur.

 Who gets impacted? (1) PFAD inflation to hurt HUVR, GCPL and JYL, (2) higher crude prices to hurt HUL, GCPL, JYL, APNT and PIDI, and (3) higher copra prices negatively impact Marico and Dabur.

Sector (KIE consumer universe) outperformed the broader markets

Our overall consumer coverage universe outperformed the broader markets over the past month posting gains of 3% while the broader market was down 2%.

Key stocks that outperformed were – TGBL (up 19% mom), JUBI (up 13% mom), BRGR (up 11% mom), GSK-CH and UNSP (up 7% mom each) and HUVR (up 6% mom). Key underperformers were ITC (down 2% mom), Bajaj Consumer (down 2% mom), GCPL and TTAN (down 1% mom each).

On a 12-month basis, the sector is underperforming the broader markets posting 11% absolute gain (16% ex-ITC) versus 15% gain for the broader markets. Our preferred picks – JUBI, ITC, CLGT and MRCO.

KOTAK INSTITUTIONAL EQUITIES RESEARCH 81 India Consumer Staples

New launches/re-launches

 Colgate has launched a couple of new toothbrushes. One is a new variant (neem) of its Zigzag series. It has a promotional price of Rs99 for four toothbrushes. Second is a slim soft advanced toothbrush with ultra-soft bristles.

 Colgate launches a new charcoal variant toothpaste. This is not the first charcoal product that Colgate has introduced in recent times. The company also sells a charcoal variant of its Colgate Total.

 Amul has launched two new milk shakes. One is a double chocolate variant, priced at Rs30 for 180 ml. They have also launched a dark chocolate floured milk shake.

 Colgate Palmolive has launched a luminous oil shampoo. It contains a blend of essentials with camellia and rose extracts, which provide nourishment to hair. The product is priced at Rs199 for 350 ml.

 Radico Khaitan launches Jaisalmer Indian Craft Gin in Indian retail market. Radico Khaitan has brought Jaisalmer Indian Craft Gin to the Indian retail market recently, after launching it successfully in over 16 countries and select duty-free outlets worldwide. With its launch, the company has not only tapped into a new segment, but also forayed into a new and emerging category of craft gin in the Indian domestic market. It has also set up a new state-of-the-art gin production plant at its mother distillery in Rampur in 2017 to expand this category.

 Dettol launches After Wash laundry sanitizer. The product conditions clothes by eliminating odour-causing bacteria. It is suitable for fabrics and clothes and can be used with any washing machine detergent or washing powder. The product is priced at Rs290 for 960 ml.

 Cremica introduces Opera Cottage Style Potato Crisps in eight flavors. Cremica has launched Opera Cottage Style Potato Crisps in eight flavours—Barbeque, Cheese Jalapeno, Chipotle, Wasabi, Peri Peri, Salt and Pepper, Sriracha and Italian Herbs. They are available in 55g packs priced at Rs60 and are available at select premium stores.

 Himalaya launches henna for hair. It contains nine unique herbs and is free of harmful synthetic chemicals. It is priced at Rs75 for 120 grams.

 Cif launches a couple of cleaning products. The first one is a perfect shine mould stain remover, priced at Rs599 for 435 ml. The second one is a bathroom lime scale remover cleaner, priced at Rs499. It contains a fresh fragrance.

 Dove launches a new shampoo. The variant is called ‘Pro-age’ and is part of the nutritive solutions range. The shampoo is a problem solution for brittle hair and is priced at Rs850 for 400 ml.

 Vaseline launched two new creams. Vaseline has launched an all-purpose cream containing glycerine and Vitamin E, priced at Rs62 for 40 grams. They have also launched a multi-purpose dry skin repair cream, priced at Rs180 for 80 grams.

 Nivea launches body oil. It helps in forming skin, reducing stretch marks and also toning and nourishing skin. The product is priced at Rs799 for 200 ml.

 L’Oreal launches a hair paste. This hair paste (like a gel) delivers long-lasting hold providing outstanding texture. The product is priced at Rs795 for 200 ml.

82 KOTAK INSTITUTIONAL EQUITIES RESEARCH Consumer Staples India

 Cavinkare launches two new creams. The two creams are offered under the Fairever brands – Fairever Next and Fairever Naturals fairness cream. Fairever Next provides an instant glow and even toned skin and is priced at Rs60 for 15 grams. Fairever Naturals Fairness Cream is a fairness cream with no bleach formula, providing natural looking lighter complexion. It is priced at Rs125 for 80 grams.

 Cornitos launches wheat flour tortilla wraps for making Mexican snacks. Cornitos, the flagship brand of Greendot Health Foods, has launched wheat flour tortilla wraps for consumers looking to make flavourful Mexican snacks with ease. The product is imported from Europe and is soft, ultra-thin, easy to roll and cut. The 270 gm pack will be priced at Rs190.

 Bonn Launches Cracker Biscuit Range. The Bonn Group of Industries has unveiled cracker biscuits in three flavours under the premium Americana range – Mexican Veggie Cracker, Multigrain Cracker and Cheese Cracker. The products have been launched in the states of Haryana, Punjab and Delhi NCR. They are available in three different packs – 120 gram, 66 gram and 90 gram packs worth Rs25, Rs10 and Rs10, respectively.

 Café Coffee Day launches Moodelicious range, comprising six cappuccinos. CCD has launched a range of Moodelicious Cappuccinos. It comprises six cappuccinos (Cappuccino Surprise, Cappuccino Crush, Cappuccino Unwind, Cappuccino Mischief, Cappuccino Recharge and Cappuccino Awsm), and are available at all CCD outlets across India.

 Other launches. (1) Yardley has launched English Rose hand and body lotion containing natural floral extracts. The product is priced at Rs290 for 350ml. (2) Glade (by SC Johnson) has launched a new gel based air freshener which can be hanged. (3) Vicco has launched a new saunf (fennel) flavoured toothpaste. It is priced at Rs90 for 160 grams. (4) GCPL has launched a new sandalwood variant under the No 1 brand. (5) Dabur has launched a new juice variant with the goodness of aloe vera.

Other news-flow

 FMCG likely to grow 9-10% in 2020: Nielsen. India’s FMCG market is expected to grow 9-10% in CY2020, matching the value growth levels of CY2019, according to market researcher Nielsen. They said that the rural growth has bottomed out and demand will stabilize. Growth slowed to 9.7% growth last year from 13.5% in 2018. It fell to its slowest in at least three years to 6.6% in the December quarter from 15.7% a year ago. “A mix of macroeconomic factors and channel and zone factors driven by manufacturers, coupled with consolidation of smaller players, have been instrumental in the slowdown,” said Prasun Basu, South Asia zone president, Nielsen Global Connect.

 CCI orders probe against Asian Paints for unfair business practices. CCI has ordered a probe against Asian Paints for alleged abuse of the dominant position in certain southern territories. The investigation has been ordered on a complaint filed by JSW Paints, a unit of the Sajjan Jindal-owned JSW Group.

 Hallmarking now a must for gold jewelers. The Centre is making hallmarking of gold jewelry and artifacts mandatory. But it will give a year’s time to jewelers and retailers to register themselves with the Bureau of Indian Standards (BIS) and clear their old stock.

 Amul objects to the proposal of industry to import SMP at zero duty. Amul has objected to the proposal mooted by an industry association to import 50,000 tons of skimmed milk powder (SMP) at zero duty. In a representation to the government, it said that any such move will hurt the dairy farmers.

KOTAK INSTITUTIONAL EQUITIES RESEARCH 83 India Consumer Staples

 Cycle Pure Agarbathies launches online personalization service for its incense sticks. Cycle Pure Agarbathies has launched a personalization service on its online platform to increase consumer engagement. The feature will enable its online customers to shop for bespoke incense sticks or agarbatti—a popular daily consumption FMCG product in the country with custom attributes such as length of the stick and fragrance.

 FMCG companies assure price parity to GT distributors. Major FMCG companies have met distributors in India and assured them of bringing parity of price, pack size and offers between products being supplied to general trade and modern sales channels, such as, large departmental store chains and e-commerce. Around 4 lakh distributors across India had threatened to de-stock FMCG products in November, alleging discrimination by consumer goods companies between general trade and modern trade/e-commerce platforms.

 Parle Products expects uptick in demand by January. Parle Products expects consumer demand to bounce back from January even as the biscuit maker expects to take a price hike early next year amid increasing raw material prices. The company also said that they are seeing a revival in demand since the last month or two and a cut in corporate taxes has helped companies spend more on consumer promotions.

 Liquor makers seek government’s support to increase exports. An industry body representing liquor manufacturers has sought government's support to increase exports of alcoholic beverages. In a letter to Commerce and Industry Minister Piyush Goyal, Confederation of Indian Alcoholic Beverage Companies (CIABC) Director General Vinod Giri said in FY2019, exports of alcoholic beverages stood at Rs22 bn, while imports were Rs54 bn. They have said that the ministry should not give major duty concessions to regions like the EU as it will aggravate the trade imbalance beyond redemption.

 India could limit duty-free alcohol to 1 bottle per passenger. The Commerce Ministry has recommended restricting the purchase of tax-free alcohol to one bottle at duty-free stores as part of steps to reduce import of non-essential goods. The ministry has recommended that purchase of cigarette cartons at duty-free shops should also be prohibited.

84 KOTAK INSTITUTIONAL EQUITIES RESEARCH India Consumer Staples

Exhibit 1: A snapshot of new launches (continued)

Source: Company, Kotak Institutional Equities

6 KOTAK INSTITUTIONAL EQUITIES RESEARCH India Consumer Staples

Exhibit 2: KIE Consumer Pricing monitor

MRP (Rs) Normalised price in Rs (adjusted for grammage changes) Change (%) Category/Brand/SKU Company Dec-19 Norm Wt Jan-19 Feb-19 Mar-19 Apr-19 May-19 Jun-19 Jul-19 Aug-19 Sep-19 Oct-19 Nov-19 Dec-19 1M 3M 6M 1Y Soaps Dove Moisturising Cream 3*100gm HUVR 155 100g 57 57 57 57 57 57 57 57 57 57 52 52 — (10) (10) (10) Dove Moisturising Cream 75gm HUVR 49 100g 65 65 65 65 65 65 65 65 65 65 65 65 — — — — Hamam 150gm HUVR 44 100g 29 29 29 29 29 29 29 29 29 29 29 29 — — — — Lifebuoy Total 125gm HUVR 20 100g 24 24 24 24 24 24 16 16 16 16 16 16 — — (33) (33) Lifebuoy Total 3*90gm HUVR 54 100g 24 24 24 19 19 19 19 19 19 19 20 20 — 4 4 (17) Lux Creamy White 125gm HUVR 50 100g 40 40 40 40 40 40 40 40 40 40 40 40 — — — — Pears Pure Gentle 3*125gm HUVR 164 100g 44 44 44 44 44 44 44 44 44 44 44 44 — — — — Fiama Di Wills Mild Dew 3*115gm ITC 180 100g 52 52 52 52 52 52 52 52 52 52 52 52 — — — — Cinthol Original 4*100gm GCPL 135 100g 33 33 33 33 33 34 34 34 34 34 34 34 — — — 3 Cinthol Soap Lime Fresh 4*75gm GCPL 75 100g 25 25 25 25 25 25 25 25 25 25 25 25 — — — — Godrej No 1 Lime & Aloevera (3+1) *100gm GCPL 68 100g 16 16 16 16 16 18 17 17 17 17 17 17 — — (6) 6— Godrej No 1 Saffron & Milk Cream (3+1) *150gm GCPL 102 100g 17 17 17 17 17 17 17 17 17 17 17 17 — — — — Ayush Purifying Turmeric Soap - 100 g HUVR 30 100g 30 30 30 30 30 30 30 30 30 30 30 30 — — — — Dettol soap Original 125 g Reckitt B. 50 100g 40 40 40 40 40 40 40 40 40 40 40 40 — — — — Santoor soap Sandal & Turmeric 4*100 g Wipro Cons 96 100g 26 26 26 26 26 26 26 26 26 26 24 24 — (8) (8) (8) Patanjali soap Neem Kanti 75 g Patanjali 15 100g 20 20 20 20 20 20 20 20 20 20 20 20 — — — — Margo soap Original neem 2*100 gm Jyothy Labs 60 100g 28 28 28 28 28 30 30 30 30 30 30 30 — — — 7

Shower Gels/Facewash/Handwash/Bodywash Facewashes Pears Pure & Gentle 60gm HUVR 140 100g 208 208 208 225 225 225 233 233 233 233 233 233 — — 4 12 Lakme Blush and Glow Strawberry gel 50ml HUVR 105 100ml 210 210 210 210 210 210 210 210 210 210 210 210 — — — 0 Lakme Face Clnsr Deep Pore Cleanser 120ml HUVR 230 100ml 192 192 192 192 192 192 192 192 192 192 192 192 — — — — Dove Beauty Moisture 50gm HUVR 160 100g 270 270 280 280 280 280 320 320 320 320 320 320 — — 14 19 Ponds Face Wash Daily 100G HUVR 149 100g 140 140 140 140 140 140 150 150 150 150 149 149 — (1) 6 6 Fair & Lovely Fairness 50gm HUVR 63 100g 120 120 120 120 120 120 126 126 126 126 126 126 — — 5 5 Olay Cleanser Total Effects Anti Ageing 100gm P&G 269 100g 269 269 269 269 269 269 269 269 269 269 269 269 — — — — Himalaya Face Wash - Purifying Neem 100 ml Himalaya 120 100ml 120 120 120 120 120 120 120 120 120 120 120 120 — — — — Clean & Clear Natural Bright 100ml J&J 117 100ml 117 117 117 117 117 120 120 120 120 120 117 117 — (3) (3) — Garnier- Power White, Double Action 100ml L'Oreal 180 100ml 180 180 180 180 180 180 180 180 180 180 180 180 — — — —

Handwash Lifebuoy Total 10 Pump 190ml HUVR 99 100ml 43 43 43 43 43 43 43 43 43 43 52 52 — 21 21 21 Dettol - Germ Protection, Original Pump 200ml Reckitt B. 99 100ml 50 50 50 50 50 50 50 50 50 50 50 50 — — — — Godrej Protekt Masterblaster Pump 300ml GCPL 89 100ml 30 30 30 30 30 30 30 30 30 30 30 30 — — — — Savlon Double Strength Pump 220ml ITC 95 100ml 36 36 40 40 40 40 40 40 48 48 48 48 — — 20 31 Lifebuoy Total 10 Refill 750ml HUVR 119 100ml 23 23 23 23 23 23 23 23 23 23 16 16 — (32) (32) (32) Dettol - Germ Protection, Original Refill 750ml Reckitt B. 109 100ml 15 15 15 15 15 15 15 15 15 15 15 15 — — — — Godrej Protekt Masterblaster Refill 750ml GCPL 115 100ml 13 13 15 15 15 15 15 15 15 15 15 15 — — — 16 Savlon Double Strength Pump Refill 750ml ITC 99 100ml 13 13 13 13 13 13 13 13 13 13 13 13 — — — —

Bodywash/ Shower Gels Palmolive Absolute Relaxing 250ml Colgate P. 190 100ml 72 72 72 72 72 72 72 72 76 76 76 76 — — 6 6 Fiama Di Wills Lemongrass & Jojoba (Clr Sprng) 250ml ITC 199 100ml 80 80 80 80 80 80 80 80 80 80 80 80 — — — — Lux Velvet Touch Moisturising 235ml HUVR 99 100ml 42 42 42 42 42 42 42 42 42 42 42 42 — — — — Pears Pure & Gentle 250M HUVR 135 100ml 72 72 72 72 72 72 72 72 54 54 54 54 — — (25) (25) Cinthol Cool wave head to toe 190ml GCPL 150 100ml 75 75 75 75 75 79 79 79 79 79 79 79 — — — 5 Dove Deeply Nourishing 190ml HUVR 115 100ml 74 74 74 74 74 74 74 74 61 61 61 61 — — (18) (18) Nivea - Lemon & Oil 250ml Nivea 199 100ml 78 78 80 80 80 80 80 80 80 80 80 80 — — — 2—

Detergents Detergent Bars Wheel Active 120gm HUVR 5 100g 4 4 4 4 4 4 4 4 4 4 4 4 — — — — Rin Advance 75gm HUVR 5 100g 7 7 7 7 7 7 7 7 7 7 7 7 — — — — Rin Advance 140gm HUVR 10 100g 7 7 7 7 7 7 7 7 7 7 7 7 — 4 4 4 Rin Advance 250gm HUVR 17 100g 7 7 7 7 7 7 7 7 7 7 7 7 — — — — Surf Excel Bar 95 gm HUVR 10 100g 10 10 10 10 10 10 10 10 10 10 10 11 5 5 5 5 Surf Excel 250gm HUVR 25 100g 11 11 11 11 11 11 11 11 11 11 10 10 — (7) (7) (7) Surf Excel Det Bar 400gm HUVR 50 100g 13 13 13 13 13 13 13 13 13 13 13 13 — — — — Sunlight 150gm HUVR 20 100g 13 13 13 13 13 13 13 13 13 13 13 13 — — — —

Source: Kotak Institutional Equities

86 KOTAK INSTITUTIONAL EQUITIES RESEARCH Consumer Staples India

Exhibit 2: KIE Consumer Pricing monitor (continued)

MRP (Rs) Normalised price in Rs (adjusted for grammage changes) Change (%) Category/Brand/SKU Dec-19 Norm Wt Jan-19 Feb-19 Mar-19 Apr-19 May-19 Jun-19 Jul-19 Aug-19 Sep-19 Oct-19 Nov-19 Dec-19 1M 3M 6M 1Y Detergent Powders Wheel Active Lemon & Jasmine 1Kg HUVR 53 100g 5 5 5 5 5 5 5 5 5 5 5 5 — — — — Ghadi detergent 3Kg Ghari 162 100g 5 5 5 5 5 5 5 5 5 5 5 5 — — — — Rin Advance 1Kg HUVR 77 100g 8 8 8 8 8 8 8 8 8 8 8 8 3 3 3 3 Rin Advance 4Kg HUVR 338 100g 8 8 8 8 8 8 8 8 8 8 8 8 — — — 2 Tide Plus 1Kg P&G 106 100g 10 10 11 11 11 11 11 11 11 11 11 11 — — — 4 Surf Excel Easy Wash 1.5Kg HUVR 180 100g 12 12 12 12 12 12 12 12 12 12 12 12 — — — 3 Henko Stain Champion 1Kg Jyothy Labs 112 100g 11 11 11 11 11 11 11 11 11 11 11 11 — — — — Surf Excel Quickwash 1Kg HUVR 180 100g 17 17 18 18 18 18 18 18 18 18 18 18 — — — 6 Ariel Complete 1.5Kg P&G 280 100g 25 25 26 26 26 18 18 18 18 18 19 19 — 4 4 (25) Rin Matic 1Kg HUVR 115 100g 12 12 12 12 12 12 12 12 12 12 12 12 — — — — Henko Lintelligent Matic - Top Load 1Kg Jyothy Labs 225 100g 22 22 23 23 23 23 23 23 23 23 23 23 — — — 1 Henko Lintelligent Matic - Front Load 1Kg Jyothy Labs 250 100g 21 21 25 25 25 25 25 25 25 25 25 25 — — — 18 Surf Excel Matic Top Load 1Kg HUVR 225 100g 23 23 23 23 23 23 23 23 23 23 23 23 — — — — Surf Excel Matic Front Load 1Kg HUVR 250 100g 25 25 25 25 25 25 25 25 25 25 25 25 — — — — Ariel Matic Top Load 1 Kg P&G 199 100g 20 20 20 20 20 20 20 20 20 20 20 20 — — — — Ariel Matic Front Load 1 Kg P&G 219 100g 22 22 22 22 22 22 22 22 22 22 22 22 — — — —

Liquid detergents/Fabric Conditioners/Dishwash/ Floor Cleaners Fabric Conditioners/Liquid detergents Surf Excel Liquid Matic Top Load 1L HUVR 209 100ml 20 20 20 21 21 21 21 21 21 21 21 21 — — — 5 Surf Excel Liquid Matic Front Load 1L HUVR 235 100ml 23 23 23 24 24 24 24 24 24 24 24 24 — — — 4 Ariel Matic Liquid Detergent 750ml P&G 225 100ml 35 35 35 35 35 35 35 35 23 23 23 23 — — (35) (35) Ujala Supreme 250ml Jyothy Labs 65 100ml 26 26 26 26 26 26 26 26 26 26 26 26 — — — — Comfort Fabric Conditioner Anti Bacterial 200ml HUVR 56 100ml 25 25 25 25 25 25 25 25 25 25 25 25 — — — — Ala Liquid Bleach Fabric Whitener 200ml HUVR 29 100ml 14 14 14 14 14 14 14 14 14 14 15 15 — 4 4 7 Ezee Detergent Liquid 500gm GCPL 90 100g 18 18 18 18 18 18 18 18 18 18 18 18 — — — —

Dishwashing Bar/Gels/Powder Vim Drop Dishwash Green Lime 500ml HUVR 120 100ml 22 22 22 22 22 22 22 22 22 22 24 24 — 9 9 9 Pril Dishwash Liquid - Lime Green 500ml Jyothy Labs 107 100ml 21 21 21 21 21 21 21 21 21 21 21 21 — — — — Dettol Dish/slab Gel, Lemon Splash 400ml Reckitt B. 131 100ml 33 33 33 33 33 33 33 33 33 33 33 33 — — — — Giffy D/W Liquid - Green Lime & Active salt 500ml Wipro Cons 119 100ml 21 21 21 21 21 21 21 21 24 24 24 24 — — 13 13 Vim Utensil Bar 300gm HUVR 20 100g 7 7 7 7 7 7 7 7 7 7 7 7 — — — — Pril Dishwash Bar - Lime 3*400gm Jyothy Labs 102 100g 8 8 8 8 8 8 8 8 9 9 9 9 — — 3 3 Exo Dish Wash Bar- Touch & Shine 700gm Jyothy Labs 65 100g 9 9 9 9 9 9 9 9 9 9 9 9 — — — 3

Floor Cleaners/Other Cleaners Harpic toilet cleaner Original 1L Reckitt B. 168 100ml 16 16 16 16 17 17 17 17 17 17 17 17 — — — 5 Domex Floor Cleaner Thick 500ml HUVR 95 100ml 18 18 18 18 18 19 19 19 19 19 19 19 — — — 7 Sanifresh Toilet Cleaner Shine 1L Dabur 154 100ml 14 14 14 15 15 15 15 15 15 15 15 15 — — — 10

Oral Care Toothpaste Colgate Cdc 150gm Colgate P. 65 100g 43 43 43 43 43 43 43 43 43 43 43 43 — — — — Colgate Cibaca 175gm Colgate P. 50 100g 29 29 29 29 29 29 29 29 29 29 29 29 — — — — Colgate Active Salt 100gm Colgate P. 52 100g 49 49 49 49 49 49 52 52 52 52 52 52 — — 6 6 Colgate Herbal 200G Colgate P. 98 100g 47 47 47 47 47 47 47 47 49 49 49 49 — — 5 5 Colgate Maxfresh Blue 150gm Colgate P. 92 100g 61 61 61 61 61 61 61 61 61 61 61 61 — — — — Colgate Sensitive Pro Relief 70gm Colgate P. 115 100g 164 164 164 164 164 164 164 164 164 164 164 164 — — — — Colgate Sensitive 80gm Colgate P. 99 100g 124 124 124 124 124 124 124 124 124 124 124 124 — — — — Colgate Total Adv Health 120gm Colgate P. 97 100g 77 77 77 77 77 77 81 81 81 81 81 81 — — 5 5 Colgate Toothpaste Strawberry Barbie 80gm Colgate P. 86 100g 103 103 103 103 103 103 103 103 103 103 108 108 — 5 5 5 Pepsodent 2 In 1 150gm HUVR 97 100g 63 63 65 65 65 65 65 65 65 65 65 65 — — — 3 Pepsodent Germicheck 200gm HUVR 85 100g 41 41 41 41 41 41 41 41 43 43 43 43 — — 4 4 Pepsodent Gum Care 140gm HUVR 98 100g 70 70 70 70 70 70 70 70 70 70 70 70 — — — — Pepsodent Exp Prot Complete 150gm HUVR 114 100g 81 81 81 81 81 81 81 81 81 81 81 81 — — — — Close Up Red 150gm HUVR 82 100g 55 55 55 55 55 55 55 55 55 55 55 55 — — — — Babool 180gm Dabur 45 100g 23 23 23 23 23 23 23 23 25 25 25 25 — — 10 10 Dabur Red 200gm Dabur 95 100g 48 48 48 48 48 48 48 48 48 48 48 48 — — — — Meswak 200gm Dabur 96 100g 48 48 48 48 48 48 48 48 48 48 48 48 — — — — Sensodyne Fresh Gel 75gm GSK CH 105 100g 140 140 140 140 140 140 140 140 140 140 140 140 — — — — Sensodyne Toothpaste Rapid Relief 80gm GSK CH 160 100g 188 188 188 188 188 188 188 188 188 188 188 200 7 7 7 7 Lever Ayush Anti-cavity clove oil 150gm HUVR 80 100g 50 50 50 50 50 50 50 50 50 50 53 53 — 7 7 7 Colgate Swarna Vedshakti Natural 200gm Colgate P. 92 100g 45 45 45 46 46 46 46 46 46 46 46 46 — — — 3 Patanjali Dant Kanti 200gm Patanjali 80 100g 38 38 38 38 38 38 38 38 38 38 38 40 7 7 7 7 Vicco Vajradanti 200gm Vicco 115 100g 55 55 55 55 55 55 55 55 58 58 58 58 — — 5 5 Himalaya complete care 100gm Himalaya 50 100g 48 48 48 48 48 50 50 50 50 50 50 50 — — — 4

Toothpowders Colgate 200gm Colgate P. 75 100g 35 35 35 35 35 35 35 35 35 35 38 38 — 9 9 4 Dabur Lal Dant Manjan 100gm Dabur 68 100g 43 43 43 43 43 43 43 43 45 45 45 45 — — 6 6

Mouthwashes Colgate Plax Complete Care 250ml Colgate P. 120 100ml 48 48 48 48 48 48 48 48 48 48 48 48 — — — — Colgate Plax Freshmint 250ml Colgate P. 120 100ml 48 48 48 48 48 48 48 48 48 48 48 48 — — — —

Source: Kotak Institutional Equities

KOTAK INSTITUTIONAL EQUITIES RESEARCH 87 India Consumer Staples

Exhibit 2: KIE Consumer Pricing monitor (continued)

MRP (Rs) Normalised price in Rs (adjusted for grammage changes) Change (%) Category/Brand/SKU Dec-19 Norm Wt Jan-19 Feb-19 Mar-19 Apr-19 May-19 Jun-19 Jul-19 Aug-19 Sep-19 Oct-19 Nov-19 Dec-19 1M 3M 6M 1Y Shampoo bottles Clear Active Care Anti Dandruff 80ml HUVR 65 100ml 81 81 81 81 81 81 81 81 81 81 81 81 — — — — Clinic Plus Anti Dandruff 80ml HUVR 45 100ml 56 56 56 56 56 56 56 56 56 56 56 56 — — — — Dove Dandruff Care 80ml HUVR 68 100ml 85 85 85 85 85 85 85 85 85 85 85 85 — — — — Patanjali Kesh Kanti Anti-Dandruff 200ml Patanjali 110 100ml 55 55 55 55 55 55 55 55 55 55 55 55 — — — —

Tresemme Hair Fall Defense 185ml HUVR 105 100ml 55 55 55 55 55 55 55 55 55 55 55 55 — — — — Head & Shoulders Anti Hair Fall 170ml P&G 145 100ml 81 81 81 81 81 81 81 81 81 81 81 81 — — — — Pantene Hair Fall Control 340ml P&G 220 100ml 65 65 65 65 65 65 65 65 65 65 65 65 — — — —

Clinic Plus Shmp Strong & Long 80ml HUVR 45 100ml 50 50 50 50 50 50 50 50 50 50 50 50 — — — — Dove Daily Shine 80ml HUVR 55 100ml 78 78 78 78 78 78 78 78 78 78 78 69 (11) (11) (11) (11) Sunsilk Black Shine 80ml HUVR 50 100ml 63 63 63 63 63 63 63 63 63 63 63 63 — — — — Head & Shoulders Smooth & Silky 180ml P&G 145 100ml 81 81 81 81 81 81 81 81 81 81 81 81 — — — — Pantene Long Black 180ml P&G 115 100ml 64 64 64 64 64 64 64 64 64 64 64 64 — — — — Dabur Shmp Vatika Black Shine Amla 180ml Dabur 108 100ml 60 60 60 60 60 60 60 60 60 60 60 60 — — — — Loreal Paris Total Repair 5 175ml L'oreal 135 100ml 77 77 77 77 77 77 77 77 77 77 77 77 — — — — Himalaya Protein- Gentle Daily Care 200ml Himalaya 130 100ml 64 64 64 64 64 64 65 65 65 65 65 65 — — 2 2 Patanjali Kesh Kanti Natural Cleanser 200ml Patanjali 75 100ml 38 38 38 38 38 38 38 38 38 38 38 38 — — — —

Skin Creams/Lotions/Talcs Face Creams/Fairness Creams/Facial Cleanser Fair & Lovely Advanced Multi Vitamin 50gm HUVR 98 100g 190 196 196 196 196 196 196 196 196 196 196 196 — — — 3 DABUR Gulabari Premium Rose water 120ml Dabur 199 100g 38 38 38 38 38 38 38 38 38 38 38 38 — — — — Nivea Crème 100ml Nivea 45 100ml 129 129 129 129 129 129 129 129 129 129 149 149 — 16 16 16 Nivea Soft Light Moisturiser 100ml Nivea 149 100ml 150 150 150 150 150 160 160 160 160 160 160 160 — — — 7 Ponds Light Light Moisturiser 150ml HUVR 160 100ml 133 133 133 133 133 133 133 133 133 133 133 133 — — — — Fair & Handsome Whitening Cream, Laser 12 15g Emami 55 100g 333 333 333 367 367 367 367 367 367 367 367 367 — — — 10

Anti-Ageing/Special Creams Ponds Age Miracle Day Cream 50g HUVR 669 100g 1,298 1,298 1,298 1,298 1,298 1,298 1,338 1,338 1,338 1,338 1,338 1,338 — — 3 3 Olay Age Protect Anti Ageing Cream 40gm Olay 329 100g 823 823 823 823 823 823 823 823 823 823 823 823 — — — — Olay Skin Total Effect Normal Cream 50gm Olay 849 100g 1,698 1,698 1,698 1,698 1,698 1,698 1,698 1,698 1,698 1,698 1,698 1,698 — — — —

Body Lotions Lakme Peach Milk Moisture 200ml HUVR 325 100ml 155 155 155 155 155 163 163 163 163 163 163 163 — — — 5 Dove Go Fresh Normal Skin 400ml HUVR 430 100ml 108 108 108 108 108 108 108 108 108 108 108 108 — — — — Ponds Drm Flower / Triple Vitamin 100ml HUVR 87 100ml 87 87 87 87 87 87 87 87 87 87 87 87 — — — — Vaseline Healthy White 100ml HUVR 95 100ml 115 115 115 115 115 115 115 115 95 95 95 95 — — (17) (17)

Talcs Navratna Cool, Active Deo 100gm Emami 82 100g 68 68 68 72 72 72 72 72 72 72 82 82 — 14 14 21 AXE Talc Dark Temptation 100gm HUVR 70 100g 65 65 65 65 65 65 70 70 70 70 70 70 — — 8 8 Ponds Talc Dream Flower Pink 100gm HUVR 85 100g 80 80 80 80 80 80 80 80 85 85 85 85 — — 6 6 Cinthol Talc Original 100gm GCPL 55 100g 55 55 55 55 55 55 55 55 55 55 55 55 — — — —

Deodorants / Air Freshners Deodorants Axe Dark Temptation 150ml HUVR 200 100ml 127 133 133 133 133 133 133 133 133 133 133 133 — — — 5 Axe Deo Pulse 150ml HUVR 200 100ml 127 127 127 133 133 133 133 133 133 133 133 133 — — — 5 Cinthol Deo Spray Dive 150ml GCPL 195 100ml 130 130 130 130 130 130 130 130 130 130 130 130 — — — — Set Wet Deospray Rave 150ml Marico 149 100ml 99 99 99 99 99 99 99 99 99 99 99 99 — — — — Fogg Fresh Spicy Block 150ml Vini 275 100ml 183 183 183 183 183 183 183 183 183 183 183 183 — — — — Engage Deo Spray - Urge 150ml ITC 190 100ml 127 127 127 127 127 127 127 127 127 127 127 127 — — — — Wild Stone Deo Red 150ml McNROE 199 100ml 133 133 133 133 133 133 133 133 133 133 133 133 — — — —

Air Fresheners Aer Freshner Car Cool Surf Blue Bx 45ml GCPL 379 100ml 842 842 842 842 842 842 842 842 842 842 842 842 — — — — Aer Freshner Cool Surf Blue Cn 240ml GCPL 149 100ml 50 50 50 50 50 50 50 50 62 62 62 62 — — 25 25 Godrej aer Pocket Bathroom Fragrance 10gm GCPL 55 55 55 55 55 55 55 55 55 55 55 55 55 — — — — Odonil Zipper Bathroom Air Freshener 10gm Dabur 52 50 52 52 52 52 52 52 52 52 52 52 52 — — — 4 Odonil Room Spray Home Freshener 200gm Dabur 149 100g 70 75 75 75 75 75 75 75 75 75 75 75 — — — 6

Home Insecticides Coils/Machine/Mats GK Mosquto Coil Low Smoke 12Hrs - 10 Coils GCPL 34 33 33 33 34 34 34 34 34 34 34 34 34 — — — 3 Goodknight (GK) Machine Activ Combi GCPL 85 85 85 85 85 85 85 85 85 85 85 85 85 — — — — Goodknight (GK) Mat Silver Power 30P GCPL 60 60 60 60 60 60 60 60 60 60 60 60 60 — — — — Mortein PowerGard 12 Hrs 10 Coils Reckitt B. 32 32 32 32 32 32 32 32 32 32 32 32 32 — — — — GK Activ + Liquid Ref - Lavender 45 ml (45 nights) GCPL 72 72 72 72 72 72 72 72 72 72 72 72 72 — — — — All Out Floral Refill - Power Plus 45 ml (45 nights) SC Johnson 72 72 72 72 72 72 72 72 72 72 72 72 72 — — — — Maxo Mosquito Repellent liquid 45 ml (45 nights) Jyothy Labs 67 67 67 67 67 67 67 67 67 67 67 67 67 — — — —

Sprays/Aerosols Hit Spray Cockroach Champion 320ml GCPL 172 100ml 50 50 50 50 50 50 50 50 54 54 54 54 — — 8 8

Creams/Lotions Good Knight Cool Gel 50gm GCPL 45 90 90 90 90 90 90 90 90 90 90 90 90 — — — — Odomos Mosquito Cream Natural 50gm Dabur 50 100g 96 96 100 100 100 100 100 100 100 100 100 100 — — 0 4

Source: Kotak Institutional Equities

88 KOTAK INSTITUTIONAL EQUITIES RESEARCH Consumer Staples India

Exhibit 2: KIE Consumer Pricing monitor (continued)

MRP (Rs) Normalised price in Rs (adjusted for grammage changes) Change (%) Category/Brand/SKU Dec-19 Norm Wt Jan-19 Feb-19 Mar-19 Apr-19 May-19 Jun-19 Jul-19 Aug-19 Sep-19 Oct-19 Nov-19 Dec-19 1M 3M 6M 1Y Hair Oils Coconut Oils Parachute coconut oil 100ml Marico 39 100ml 39 39 39 39 39 39 39 39 39 39 39 39 — — — — Parachute coconut oil 250ml Marico 105 100ml 42 42 42 42 42 42 42 42 42 42 42 42 — — — — Dabur Vatika hair oil 75ml Dabur 39 100ml 56 56 56 56 56 56 56 56 56 56 56 52 (7) (7) (7) (7) Dabur Anmol Gold 175ml Dabur 65 100ml 38 38 38 38 38 37 37 37 37 37 37 37 — — 0 (3) Patanjali Coconut Oil 200ml Patanjali 72 100ml 36 36 36 36 36 36 36 36 36 36 36 36 — — — —

Perfumed Hair Oils Parachute Advansed hot oil 190ml Marico 110 100ml 58 58 58 58 58 58 58 58 58 58 58 58 — — — — Parachute Advansed 80ml Marico 55 100ml 73 73 73 73 73 73 73 73 73 73 73 73 — — — — Parachute Jasmine 200ml Marico 83 100ml 46 46 46 46 46 46 46 46 42 42 42 42 — — (10) (10) Hair & Care 100ml Marico 60 100ml 60 60 60 60 60 60 60 60 60 60 60 60 — — — — Shanti Badam Amla 190ml Marico 50 100ml 26 26 26 26 26 26 26 26 26 26 26 26 — — — — Dabur Amla hair oil 100ml Dabur 44 100ml 49 49 49 49 49 49 49 49 49 49 49 49 — — — — Dabur Almond Hair Oil- Damage Free Hair Dabur 65 100ml 63 63 63 63 63 63 63 63 63 63 65 65 — 3 3 3 Bajaj Almond hair oil 100ml Bajaj Corp 65 100ml 63 63 63 65 65 65 65 65 65 65 65 65 — — — 3 Navratna Cooling oil 100ml Emami 75 100ml 75 75 75 75 75 75 75 75 75 75 75 75 — — — — Patanjali Kesh Kanti 120ml Patanjali 130 100ml 108 108 108 108 108 108 108 108 108 108 108 108 — — — — Bajaj Coco Jasmine 180ml Bajaj Corp 75 100ml 42 42 42 42 42 42 42 42 42 42 42 42 — — — —

Mens Grooming Gillette Guard Razor P&G 23 1 pc 23 23 23 23 23 23 23 23 23 23 23 23 — — — — Gillette Guard Cartridge pack (6 pcs) P&G 50 1 pc 8 8 8 8 8 8 8 8 8 8 8 8 — — — — Gillette Vector Plus Razor P&G 60 1 pc 60 60 60 60 60 60 60 60 60 60 60 60 — — — — Gillette Vector Plus Cartridge pack (6 pcs) P&G 150 1 pc 25 25 25 25 25 25 25 25 25 25 25 25 — — — — Gillette Mach 3 Razor P&G 250 1 pc 250 250 250 250 250 250 250 250 250 250 250 250 — — — 0 Gillette Mach 3 Cartridge pack (4 pcs) P&G 475 1 pc 112 119 119 119 119 119 119 119 119 119 119 119 — — — 6 Gillette Fusion Razor P&G 350 1 pc 350 350 350 350 350 350 350 350 350 350 350 350 — — — — Gillette Fusion Cartridge pack (4 pcs) P&G 900 1 pc 225 225 225 225 225 225 225 225 225 225 225 225 — — — — Gillette Foam - Classic Regular 418gm P&G 199 100g 48 48 48 48 48 48 48 48 48 48 48 48 — — — — Godrej Shaving Cream Lime Fresh 60 gm GCPL 65 100g 108 108 108 108 108 108 108 108 108 108 108 108 — — — —

Feminine hygiene Whisper Sanitary Pads- Ultra Clean XL+ Wings (15 pcs) P&G 165 1 pc 11 11 11 11 11 11 11 11 11 11 11 11 — — 3 3 Whisper - Choice Wings Regular P&G 78 1 pc 4 4 4 4 4 4 4 4 4 4 4 4 — — — — Whisper - Choice Ultra Wings XL P&G 123 1 pc 6 6 6 6 6 6 6 6 6 6 6 6 — — 4 4 Stayfree SPs- Dry-Max All Night Ultra Xl Wings (14 pcs) J&J 175 1 pc 12 12 12 12 12 12 12 12 12 12 13 13 — 2 2 2 Sofy Sanitary Pads - Body Fit Antibacteria, XL (15 pcs) Unicharm 125 1 pc 8 8 8 8 8 8 8 8 8 8 8 8 — — — — Carefree Sanitary Pads - Regular (10pcs) J&J 80 1 pc 7 7 7 7 7 7 7 7 7 7 7 8 8 8 8 8

Baby Diapers Pampers Diaper Pants - L (44 pcs) P&G 699 1 pc 15 15 15 15 15 15 15 15 16 16 16 16 — 0 5 5 Mamypoko Diaper Pants- L (44 pcs) Unicharm 699 1 pc 15 15 15 15 15 15 15 15 16 16 16 16 — 0 5 5 Huggies Diaper Pants- L (46 pcs) HUVR 699 1 pc 15 15 15 15 15 15 15 15 15 15 15 15 — — — —

Source: Kotak Institutional Equities

KOTAK INSTITUTIONAL EQUITIES RESEARCH 89 India Consumer Staples

Exhibit 2: KIE Consumer Pricing monitor (continued)

MRP (Rs) Normalised price in Rs (adjusted for grammage changes) Change (%) Category/Brand/SKU Dec-19 Norm Wt Jan-19 Feb-19 Mar-19 Apr-19 May-19 Jun-19 Jul-19 Aug-19 Sep-19 Oct-19 Nov-19 Dec-19 1M 3M 6M 1Y Edible Oils Saffola Kardi Oil - 1L Marico 200 100ml 20 20 20 20 20 20 20 20 20 20 20 20 — — — — Saffola Tasty Blend - 1L Marico 135 100ml 14 14 14 14 14 14 14 14 14 14 14 14 — — — — Saffola Gold - 1L Marico 159 100ml 16 16 16 16 16 16 16 16 16 16 16 16 — — — — Saffola Active - 1L Marico 125 100ml 14 14 14 14 14 14 14 14 13 13 13 13 — — (7) (7) Sundrop Heart - 1L Agrotech 210 100ml 21 21 21 21 21 21 21 21 21 21 21 21 — — — — Sundrop Nutrilite - 1L Agrotech 135 100ml 14 14 14 14 14 14 14 14 14 14 14 14 — — — 0 Sundrop Superlite Advanced -1L Agrotech 195 100ml 16 16 16 16 16 16 16 16 16 16 16 16 — — — — Sundrop Goldlite -1L Marico 140 100ml 14 14 14 14 14 14 14 14 14 14 14 14 — — — — Fortune Vivo- 1L Adani Wilmar 150 100ml 15 15 15 15 15 15 15 15 15 15 15 15 — — — — Emami Rice bran oil- 1L Emami 110 100ml 11 11 11 11 11 11 11 11 11 11 11 11 — — — —

Tea/ Coffee Tea Red Label Ctc 1kg HUVR 430 100g 43 43 43 43 43 43 43 43 43 43 43 43 — — — — Society Tea 1kg Amar Tea 440 100g 42 42 42 42 42 42 42 42 42 42 42 44 6 6 6 6 Red Label Natural Care Box 500gm HUVR 260 100g 52 52 52 52 52 52 52 52 52 52 52 52 — — — 0 Tajmahal Ctc Box 250gm HUVR 150 100g 57 57 57 57 57 58 58 58 58 58 60 60 — 3 3 6 Agni Ctc Leaves 1kg TGBL 220 100g 22 22 22 22 22 22 22 22 22 22 22 22 — — 0 — Tata Ctc Gold 1kg TGBL 457 100g 44 44 44 44 44 44 44 44 46 46 46 46 — — 4 4 Wagh Bakri Leaf Tea - Premium 1kg pouch Wagh Bakri 415 100g 41 41 41 41 41 41 42 42 42 42 42 42 — — 1 1

Iced Tea Lipton Instant Mix Ice Tea Lemon Pp 500gm HUVR 130 100g 52 52 52 52 52 52 52 52 52 52 52 52 — — — — Nestea Ice Tea Lemon 500gm Nestle 165 100g 33 33 33 33 33 33 33 33 33 33 33 33 — — — —

Coffee Bru Gold Jar 100gm HUVR 275 100g 245 245 265 265 275 275 275 275 275 275 275 275 — — 0 12 Bru Instant Jar 100gm HUVR 180 100g 165 165 175 175 175 175 180 180 180 180 180 180 — — 3 9 Nescafe Classic Box 200gm Nestle 475 100g 230 230 230 230 238 238 238 238 238 238 238 238 — — — 3 Nescafe Classic 50gm Nestle 140 100g 270 270 280 280 280 280 280 280 280 280 280 280 — — — 4 Sunrise Premium Jar 50gm Nestle 90 100g 170 170 170 180 180 180 180 180 180 180 180 180 — — — 6

Dairy Milk/Condensed Milk/ Milk Powder Nestle Condmilk Milkmaid 400gm Nestle 119 100g 28 28 29 29 29 29 30 30 30 30 30 30 — — 2 5 Nestle Milk Slim 1L Nestle 89 100ml 8 8 8 8 8 8 8 8 9 9 9 9 5 5 11 11 Nestle Milk Toned A+ 1L Nestle 83 100ml 8 8 8 8 8 8 8 8 8 8 8 8 5 11 11 11 Amul Taaza 1L Amul 64 100ml 6 6 6 6 6 6 6 6 6 6 6 6 3 3 7 7 Amul Gold 1L Amul 68 100ml 6 6 6 6 6 6 7 7 7 7 7 7 3 3 6 6 Amul Lite 1L Amul 75 100ml 7 7 7 7 7 7 7 7 7 7 8 8 — 4 4 4 Everyday Milk powder Dairy Whitener Pouch 400gm Nestle 200 100g 42 42 44 44 44 44 46 46 48 48 48 50 5 5 14 18

Yoghurt/Dahi Nestle Dahi Slim 200gm Nestle 39 100g 18 18 18 18 18 18 18 18 18 18 18 20 11 11 11 11 Britannia Dahi Daily Fresh 150gm Britannia 20 100g 13 13 13 13 13 13 13 13 13 13 13 13 — — — — Britannia Dahi Low Fat 200gm Britannia 35 100g 15 15 15 15 15 15 15 15 15 15 18 18 — 17 17 17

Butter/Cheese Britannia Cheese Block 400gm Britannia 275 100g 63 63 63 63 63 63 65 65 65 65 65 69 6 6 10 10 Britannia Cheese Spread Classic 180gm Britannia 120 100g 47 47 47 47 47 47 47 47 47 47 67 67 — 41 41 41 Amul Butter 500gm Amul 235 100g 45 45 45 45 45 45 45 45 45 45 47 47 — 4 4 4 Amul Lite Butter 500gm Amul 145 100g 29 29 29 29 29 29 29 29 29 29 29 29 — — — — Nutrilite Butter 500gm Zydus Cadila 180 100g 36 36 36 36 36 36 36 36 36 36 36 36 — — — — Amul cheese slice plain 200 gm Amul 122 59 59 59 59 59 59 59 59 59 59 61 61 — 3 3 3 Go cheese slice 200 gm Parag milk 145 63 63 63 63 63 63 63 63 63 63 70 73 4 16 16 16 Britannia cheese slice 200 gm Britannia 145 60 60 60 60 60 65 73 73 73 73 73 73 — 0 12 21

Cakes/ Desert Mixes Britannia Cake Fruity Fun 60gm Britannia 15 100g 25 25 25 25 25 25 25 25 25 25 25 25 — — — —

Source: Kotak Institutional Equities

90 KOTAK INSTITUTIONAL EQUITIES RESEARCH Consumer Staples India

Exhibit 2: KIE Consumer Pricing monitor (continued)

MRP (Rs) Normalised price in Rs (adjusted for grammage changes) Change (%) Dec-19 Norm Wt Jan-19 Feb-19 Mar-19 Apr-19 May-19 Jun-19 Jul-19 Aug-19 Sep-19 Oct-19 Nov-19 Dec-19 1M 3M 6M 1Y Health Drinks/ Juices/ Health Supplements/ OTCs Health Drinks Horlicks Chocolate Jar 500gm GSK CH 215 100g 42 42 42 42 42 43 43 43 43 43 43 43 — — — 3 Horlicks Protein+ Chocolate, 400gm Jar GSK CH 520 100g 130 130 130 130 130 130 130 130 130 130 130 130 — — — 0 Horlicks Standard Jar 500gm GSK CH 242 100g 47 47 47 47 47 47 47 47 47 47 48 48 — 3 3 3 Bournvita Chocolate 500gm Jar Mondelez 217 100g 43 43 43 43 43 43 43 43 43 43 43 43 — — — 0 Complan Chocolate 500gm Jar Zydus Wellness 299 100g 60 62 62 62 62 62 62 62 56 56 56 60 7 7 (4) (0) Horlicks Mother's Vanilla 500 gm Jar GSK CH 525 100g 100 100 103 103 103 103 103 103 103 103 103 105 2 2 2 5 Horlicks Womens Chocolate Jar 330gm GSK CH 299 100g 74 74 74 74 74 74 74 74 74 74 74 75 1 1 1 1 Boost Jar 450gm GSK CH 230 100g 50 51 51 51 51 51 51 51 51 51 51 51 — — — 3 Horlicks Growth+ Vanilla, 400gm Jar GSK CH 535 100g 130 130 130 130 130 130 130 130 130 130 130 134 3 3 3 3 Protinex- Chocolate 400gm Danone 585 100g 130 134 134 134 134 134 134 134 134 134 134 146 9 9 9 13 Pediasure- Complete & Balanced 400gm Abbott 520 100g 130 130 130 130 130 130 130 130 130 130 130 130 — — — —

Juices Real fruit power Orange 1L (Conc + added sugar) Dabur 105 100ml 10 10 10 11 11 11 11 11 11 11 11 11 — — — 6 Real Activ 100% Orange 1L (from Conc | No added sugar) Dabur 130 100ml 12 13 13 13 13 13 13 13 13 13 13 13 — — — 8 Tropicana- Orange, 1 L (Conc + added sugar) Pepsi Co. 110 100ml 10 11 11 11 11 11 11 11 11 11 11 11 — — — 11 Tropicana 100% Orange 1L (from Conc; no added sugar) Pepsi Co. 135 100ml 13 14 14 14 14 14 14 14 14 14 14 14 — — — 4 B Natural Juice- Orange 1L (No Conc; incl added sugar) ITC 110 100ml 10 10 10 10 10 11 11 11 11 11 11 11 5 5 5 11 B Natural 100% pomegranate 1L (No Conc; no added sugar) ITC 199 100ml 20 20 20 20 20 20 20 20 20 20 20 20 — — — — Real Fruit power pomegranate 1L (Conc + added sugar) Dabur 110 100ml 11 11 11 11 11 11 11 11 11 11 11 11 — — — 1 Paper Boat drink- Aamras 1L Hector Bev. 120 100ml 10 11 11 11 11 11 11 11 11 11 12 12 — 9 9 21

Health Supplements/OTCs Dabur Chyawanprash 1kg Dabur 325 100g 31 31 31 31 33 33 33 33 33 33 33 33 — — — 5 Dabur Digestive Hajmola Regular 120 P Dabur 35 35 35 35 35 35 35 35 35 35 35 35 35 — — — — Dabur Glucose-D Jar 1kg Dabur 190 100g 17 17 17 17 17 17 19 19 19 19 19 19 — — 12 3 Dabur Honey 500gm Dabur 199 100g 31 31 31 31 31 31 31 31 31 31 31 31 — — — — Patanjali Honey 500gm Patanjali 135 100g 27 29 29 29 29 29 29 29 29 29 29 29 — — — 7

Soft drinks (excl. juices) Pepsi bottle 750ml Pepsi Co 40 100ml 5 5 5 5 5 6 6 6 6 6 6 5 (16) (16) (16) 0 Pepsi bottle 2.25L Pepsi Co 90 100ml 4 4 4 4 4 4 4 4 4 4 4 4 — — — — Coca Cola bottle 750ml Coca-Cola 40 100ml 5 5 5 5 5 5 5 5 5 5 5 5 — — — — Coca Cola bottle 1.75L Coca-Cola 80 100ml 5 5 5 5 5 5 5 5 5 5 5 5 — — — 0 Thums up bottle 750ml Coca-Cola 40 100ml 5 5 5 5 5 5 5 5 5 5 5 5 — — — — Sprite bottle 750ml Coca-Cola 40 100ml 5 5 5 5 5 5 5 5 5 5 5 5 — — — — Sprite bottle 1.75L Coca-Cola 80 100ml 5 5 5 5 5 5 5 5 5 5 5 5 — — — 0 Maaza bottle 600ml Coca-Cola 38 100ml 6 6 6 6 6 6 6 6 6 6 6 6 — — — 0 Tropicana Mango Slice 600ml Pepsi Co 35 100ml 6 6 6 6 6 6 6 6 6 6 6 6 — — 0 (5) Frooti bottle 300ml Parle Agro 20 100ml 7 7 7 7 7 7 7 7 7 7 7 7 — — — — 7 Up Nimbooz 350ml Pepsi Co 20 100ml 7 7 7 7 7 6 6 6 6 6 6 6 — — 0 (20)

Baby Food Cerelac Babycereal Rice S1 300gm Nestle 177 100g 57 57 59 59 59 59 59 59 59 59 59 59 — — — 4 Cerelac Babycereal Wheat S1 300gm Nestle 175 100g 56 56 56 58 58 58 58 58 58 58 58 58 — — — 4 Cerelac Babycereal Mltgrn 5 Fruit 300G Nestle 252 100g 80 80 82 82 82 82 82 82 82 82 82 84 3 3 3 5 Cerelac Babycereal Multigrain Dal Veg 300gm Nestle 252 100g 77 77 81 81 81 81 81 81 81 81 81 84 4 4 4 10 Cerelac Babycereal Mixed Fruit 300G Nestle 242 100g 76 76 78 78 78 78 78 78 78 78 78 81 3 3 3 6 Lactogen Babycereal Nan 1 Frml 400gm Nestle 595 100g 140 140 140 140 140 145 145 145 145 145 149 149 — 3 3 6 Lactogen Babycereal No1 Rf 400G Nestle 325 100g 76 79 79 79 79 79 80 80 80 80 81 81 — 2 4 8

Source: Kotak Institutional Equities

KOTAK INSTITUTIONAL EQUITIES RESEARCH 91 India Consumer Staples

Exhibit 2: KIE Consumer Pricing monitor (continued)

MRP (Rs) Normalised price in Rs (adjusted for grammage changes) Change (%) Category/Brand/SKU Dec-19 Norm Wt Jan-19 Feb-19 Mar-19 Apr-19 May-19 Jun-19 Jul-19 Aug-19 Sep-19 Oct-19 Nov-19 Dec-19 1M 3M 6M 1Y Biscuits/Atta CreamBiscuits Sunfeast Dark Fantasy Chocolate 100gm ITC 30 100g 40 40 40 40 40 40 40 40 40 40 40 40 — — — — Britannia Cream Jim Jam 150gm Britannia 35 100g 23 23 23 23 23 23 23 23 23 23 23 23 — — — — Britannia Cream Pure magic vanilla 150gm Britannia 30 100g 30 30 30 30 30 30 30 30 30 30 30 30 — — — — Britannia Cream Treat Bourbon 150gm Britannia 30 100g 19 19 19 19 19 19 19 19 19 19 19 20 7 7 7 7 Sunfeast Cream Bourbon 150gm ITC 28 100g 17 17 17 17 17 17 19 19 19 19 19 19 — — 8 8 Parle Cream Hide & Seek Bourbon 100gm Parle 30 100g 25 25 25 25 25 25 30 30 30 30 30 30 — — 20 20 Parle Crm Bis Bourbon Kream 150gm Parle 30 100g 17 17 17 20 20 20 20 20 20 20 20 20 — — — 20 Oreo Choco Creme Biscuits 120gm Mondelez 30 100g 24 25 25 25 25 25 25 25 25 25 25 25 — — — 3 Britannia Tiger Cream Biscuits - Chocolate 43gm Britannia 5 100g 12 12 12 12 12 12 12 12 12 12 12 12 — — — — Sunfeast Special-bounce Cream Biscuits 60gm ITC 10 100g 12 12 12 12 12 12 12 12 17 17 17 17 — 0 38 38

Cookies/Healthy biscuits Sunfeast Mom's Magic Cookie Butter 150gm ITC 20 100g 13 13 13 13 13 13 13 13 13 13 13 13 — — — — Britannia Good Day Butter 150gm Britannia 20 100g 15 15 15 15 15 15 13 13 13 13 13 13 — — (9) (9) Britannia Cookies Good Day Cashew 100gm Britannia 20 100g 20 20 20 20 20 20 20 20 20 20 20 20 — — — — Britannia NutriChoice Digestive 100gm Britannia 20 100g 20 20 20 20 20 20 20 20 20 20 20 20 — — — 0 Sunfeast Farmlite - Oats & Almonds 75gm ITC 25 100g 33 33 33 33 33 33 33 33 33 33 33 33 — — — —

Marie/Glucose/Salted/Nice Biscuits Sunfeast Marie Light 100gm ITC 10 100g 12 12 12 12 12 12 12 12 12 12 12 12 — — — — Britannia Vita Marie Gold 150gm Britannia 20 100g 13 13 13 13 13 13 13 13 13 13 13 13 — — — — Parle Makesmith Marie 100gm Parle 10 100g 11 11 11 11 11 11 11 11 11 11 11 11 — — — — Sunfeast Bisccuits Glucose 80gm ITC 5 100g 6 6 6 6 6 6 6 6 6 6 6 6 — — — — Britannia Tiger 124gm Britannia 10 100g 8 8 8 8 8 8 8 8 8 8 8 8 — — — — Parle Glucose 130gm Parle 10 100g 8 8 8 8 8 8 8 8 8 8 8 8 — — — — Sunfeast Snacky Salted 80gm ITC 10 100g 16 16 16 16 16 16 16 16 16 16 16 16 — — — — Parle Salted Krackjack 80gm Parle 10 100g 13 13 13 13 13 13 13 13 13 13 13 13 — — — — Parle Salted Monaco Classic 80gm Parle 10 100g 13 13 13 13 13 13 13 13 13 13 13 13 — — — — Britannia 50-50 Maska Chaska 50gm Britannia 10 100g 20 20 20 20 20 20 20 20 20 20 20 20 — — — — Sunfeast Plain Nice 150gm ITC 25 100g 17 17 17 17 17 17 17 17 17 17 17 17 — — — — Britannia Nice Time 150gm Britannia 25 100g 17 17 17 17 17 17 17 17 17 17 17 17 — — — —

Breakfast snacks Marico Saffola Oats 1Kg Marico 190 100g 19 19 19 19 19 19 19 19 19 19 19 19 — — — 3 Kelloggs Corn Flakes Original 475gm Kelloggs 180 100g 38 38 38 38 38 38 38 38 38 38 38 38 — — — 0 Bagrrys Muesli - Crunchy 500gm Bagrrys India 305 100g 61 61 61 61 64 64 64 64 64 64 64 64 — — — 5 Quaker Oats 1kg Pepsi Co. 190 100g 19 19 19 19 19 19 19 19 19 19 19 19 — — — 2

Atta Aashirvaad Atta Multigrain 5kg ITC 305 100g 6 6 6 6 6 6 6 6 6 6 6 6 — — 3 7 Aashirvaad Atta Whole Wheat 5kg ITC 245 100g 5 5 5 5 5 5 5 5 5 5 5 5 — — — 4

Soups/Sauces/Spreads Ketchup/Sauces/Spreads Maggi Ketchup Tomato 1kg Nestle 147 100g 15 15 15 15 15 15 15 15 15 15 15 15 — — — — Maggi Sauce Tomato 1kg Nestle 152 100g 14 14 14 14 14 14 15 15 15 15 15 15 — — 7 7 Kissan Ketchup Fresh Tomato Bt 1kg HUVR 140 100g 13 13 13 13 13 13 13 13 13 13 13 14 8 8 8 8 Kissan Sauce no onion no garlic 1K HUVR 160 100g 15 15 15 15 15 15 16 16 16 16 16 16 3 3 9 9

Spreads/Jams Nutella Hazelnut Spread with Cocoa 160gm Jar Ferrero 200 125 125 125 125 125 125 125 125 125 125 125 125 — — — — Kissan Jam Mixed Fruit 200gm HUVR 65 100g 31 31 31 31 31 31 31 31 31 31 31 33 5 5 5 5 Sundrop Peanut Butter Creamy 508gm Jar Agro tech 215 42 42 42 42 42 42 42 42 42 42 42 42 — — — — Soups Knorr Classic Thick Tomato 53gm HUVR 55 100g 90 90 90 90 90 90 90 90 104 104 104 104 — — 15 15 Knorr Sweet Corn Vegetable 44gm HUVR 55 100g 125 125 125 125 125 125 125 125 125 125 125 125 — — — —

Chocolate bars Nestle Kit Kat 76.8gm Nestle 60 100g 78 78 81 81 81 81 81 81 81 81 81 81 — — — 4 Nestle Munch Home Pk 72gm Nestle 60 100g 83 83 83 83 83 83 83 83 83 83 83 83 — — — — Nestle Milk 19.8gm Nestle 10 100g 51 51 51 51 51 51 51 51 51 51 51 51 — — — — Nestle Bar One 22gm Nestle 10 100g 45 45 45 45 45 45 45 45 45 45 45 45 — — — — Nestle Munch crunchiest ever 20.1g Nestle 10 100g 50 50 50 50 50 50 50 50 50 50 50 50 — — — — Cadbury Dairy Milk 12gm Mondelez 10 100g 76 76 76 76 76 76 76 76 76 76 76 76 — — — — Cadbury Dairy Milk Silk 60gm Mondelez 65 100g 108 117 117 117 117 117 117 117 117 117 117 117 — — — 8 Cadbury 5 Star 19.5gm Mondelez 10 100g 51 51 51 51 51 51 51 51 51 51 51 51 — — — — Cadbury Perk 28gm Mondelez 10 100g 36 36 36 36 36 36 36 36 36 36 36 36 — — — — Kinder Joy 20gm Ferrero 40 100g 200 200 200 200 200 200 200 200 200 200 200 200 — — — — Ferrero Rocher 16pcs 200gm box Ferrero 499 100g 250 250 250 250 250 250 250 250 250 250 250 250 — — — —

Noodles Noodles Maggi Masala 70gm Nestle 12 100g 17 17 17 17 17 17 17 17 17 17 17 17 — — — — Maggi Masala 140gm Nestle 23 100g 16 16 16 16 16 16 16 16 16 16 16 16 — — — — Maggi Masala 280gm Nestle 45 100g 16 16 16 16 16 16 16 16 16 16 16 16 — — — — Maggi oats noodles 290gm Nestle 98 100g 32 33 33 33 33 33 33 33 34 34 34 34 — — 3 7 Maggi Chicken 284gm Nestle 56 100g 19 19 20 20 20 20 20 20 20 20 20 20 — — 0 2 Maggi Cuppa Mania Yo Masala 70gm Nestle 45 100g 57 57 57 57 57 57 57 57 64 64 64 64 — — 13 13 Maggi Atta masala 290gm Nestle 78 100g 25 26 26 26 27 27 27 27 27 27 27 27 — — — 8 Sunfeast Yippee Magic Masala 70gm ITC 10 100g 17 17 17 17 17 17 17 17 17 17 17 17 — — — 17 Sunfeast Yippee Mood Masala 65gm ITC 12 100g 23 23 23 23 23 23 23 23 23 23 18 18 — (20) (20) (20) Knorr Soupy Mast Masala Pp 75gm HUVR 15 100g 20 20 20 20 20 20 20 20 20 20 20 20 — — — —

Source: Kotak Institutional Equities

92 KOTAK INSTITUTIONAL EQUITIES RESEARCH Consumer Staples India

Exhibit 3: Monthly raw material trends for December 2019

% chg - local currency % chg - currency Adj. No Commodity Unit Current MoM 3M 6M YoY MoM 3M 6M YoY Companies impacted Agri Commodities 1 Tea - India Avg. Rs/Kg 138 (0) (8) (9) (4) (0) (8) (9) (4) HUL, TGBL 2 Tea - World Avg. USD/MT 2,580 (1) (0) 0 (2) (2) (1) 3 (2) HUL, TGBL 3 Tea - Mombassa/Kenya USD/Kg 3 (2) (0) 1 (4) (3) (0) 3 (3) HUL, TGBL 4 Coffee Arabica - Intl. US cents/Pound 164 10 20 19 26 10 20 22 26 HUL, Nestle, TGBL 5 Coffee Robusta - Intl. US cents/Pound 83 1 5 4 2 0 5 6 3 HUL, Nestle, TGBL 6 Sugar - domestic Rs/Quintal 3,586 (2) (3) 0 7 (2) (3) 0 7 HUL, Nestle, GSKCHL, ITC, Dabur, Britannia 7 Wheat Rs/Quintal 2,855 — 0 (2) 6 — 0 (2) 6 ITC, Nestle, GSKCHL, Britannia 8 Barley Rs/Quintal 2,128 (0) 12 16 12 (0) 12 16 12 GSKCHL 9 Maize (corn) USD/MT 167 0 6 (14) (0) (0) 6 (12) 0 Colgate, HUL, Dabur (Sorbitol) 10 Liquid Milk - domestic Rs/Ltr 47 — (2) 4 38 — (2) 4 38 Nestle, GSKCHL, Jubilant Foodworks, Britannia 11 Milk Powder - domestic Rs/Kg 351 (1) (4) 9 35 (1) (4) 9 35 Nestle, GSKCHL, Britannia 12 Cocoa Bean USD/MT 2,519 (3) 6 1 9 (3) 5 4 10 Nestle Oil Commodities 13 Crude Oil - Brent USD/Barrel 66 5 6 4 17 4 5 7 17 HUL, GCPL, Jyothy Labs, Asian Paints, Pidilite 14 Palm oil Rs/MT 72,957 14 31 44 46 14 31 44 46 HUL, GCPL, Jyothy Labs 15 PFAD USD/MT 600 18 36 55 80 18 36 59 81 HUL, GCPL, Jyothy Labs 16 Light liquid paraffin (LLP) Rs/Ltr 46 6 4 (0) (9) 6 4 (0) (9) Marico, Dabur, Bajaj Corp 17 Copra Rs/Quintal 10,648 3 (1) 14 (0) 3 (1) 14 (0) Marico, Dabur 18 Coconut oil Rs/Quintal 14,802 1 (1) 14 1 1 (1) 14 1 Marico, Dabur 19 Rice Bran oil Rs/10Kg 684 7 9 20 14 7 9 20 14 Marico 20 Kardi oil/ Safflower oil Rs/MT 2,003 2 28 28 27 2 28 28 27 Marico 21 Sunflower oil Rs/MT 83,429 6 4 13 16 6 4 13 16 Marico 22 Groundnut oil Rs/MT 107,738 6 6 3 10 6 6 3 10 Marico 23 Linseed oil Rs/MT 90,024 7 8 11 1 7 8 11 1 Marico, Dabur, Bajaj Corp, Asian Paints 24 Castor oil Rs/MT 89,286 (3) (21) (21) (19) (3) (21) (21) (19) Marico, Dabur, Bajaj Corp, Asian Paints 25 Mentha oil Rs/Kg 1,397 (4) 1 (17) (28) -4— 1 (17) (28) Emami, Colgate, HUL, Dabur Chemicals/Paints/Other Commodities 26 Caustic soda Rs/ 50Kg 1,589 21 3 (14) (18) 21 3 (14) (18) HUL, GCPL, Jyothy Labs 27 Soda ash Rs/ 50Kg 1,228 0 (1) (4) (4) 0 (1) (4) (4) HUL, GCPL, Jyothy Labs 28 LAB Rs/Kg 105 1 (0) (0) (5) 1 (0) (0) (5) HUL, Jyothy Labs 29 HDPE - domestic Rs/Kg 85 (0) (9) (8) (23) (0) (9) (8) (23) All companies 30 PAN Rs/Kg 77 — — — (2) — — — (2) Asian Paints 31 PENTA Rs/Kg 115 — — — — — — — — Asian Paints 32 Tio2 Anatese Rs/Kg 163 (2) (3) (5) (3) (2) (3) (5) (3) Asian Paints 33 Tio2 Rutile Rs/Kg 185 — (1) (16) (14) — (1) (16) (14) Asian Paints 34 Tio2 Dupont Rs/Kg 254 (1) (4) (6) (8) (1) (4) (6) (8) Asian Paints 35 Turpentine oil Rs/Ltr 119 4 1 (5) 17 4 1 (5) 17 Asian Paints 36 Formaldehyde Rs/Kg 21 (5) (13) (19) (22) (5) (13) (19) (22) Asian Paints 37 Acrylic acid Rs/Kg 119 — — — (2) — — — (2) Asian Paints 38 Vinyl Acetate - Domestic Rs/Kg 69 9 (8) 10 — 9 (8) 10 — Asian Paints 39 Vinyl Acetate - China US$/MT 849 (7) (8) (13) (27) (7) (8) (11) (27) Pidilite, Asian Paints 40 Styrene - domestic Rs/Kg 69 4 (8) (10) (16) 4 (8) (10) (16) Asian Paints 41 Gold Rs/10gm 38,085 (0) 0 15 22 (0) 0 15 22 Titan, Jewellery companies 42 Diamond price index USD/Carrat 115 (0) (1) (5) (5) (1) (1) (2) (4) Titan, Jewellery companies

Source: Kotak Institutional Equities

KOTAK INSTITUTIONAL EQUITIES RESEARCH 93 India Consumer Staples

Exhibit 4: KIE Consumer universe valuation summary

Upside / FV 30-Jan-20 (downside) Mkt cap. EPS (Rs) EPS growth (%) PER (x) EPS Sales Company Rating (Rs) Price (Rs) (%) (Rs bn) (US$ m) 2019 2020E 2021E 2019 2020E 2021E 2019 2020E 2021E CAGR - (2019-21E), % Asian Paints REDUCE 1,825 1,805 1 1,731 24,181 22.5 28.9 34.2 9.7 28.5 18.2 80.2 62.4 52.8 23.3 9.9 Bajaj Consumer Care BUY 350 228 54 34 469 15.0 16.0 16.4 5.0 6.5 2.2 15.1 14.2 13.9 4.4 7.3 Berger SELL 410 570 (28) 554 7,731 5.1 7.6 8.5 7.9 48.5 11.9 111.3 75.0 67.0 28.9 11.5 Britannia Industries REDUCE 3,050 3,211 (5) 771 10,762 48.3 58.5 68.4 15.4 21.1 16.9 66.5 54.9 46.9 19.0 9.6 Colgate-Palmolive (India) ADD 1,600 1,396 15 380 5,303 26.8 30.1 35.6 12.5 12.5 18.5 52.2 46.4 39.2 15.4 8.1 Dabur India REDUCE 440 479 (8) 843 11,778 8.1 9.5 11.0 4.6 16.9 15.7 58.9 50.4 43.5 16.3 9.8 GlaxoSmithKline Consumer RS - 8,943 NM 376 5,253 233.7 296.1 332.9 40.4 26.7 12.4 38.3 30.2 26.9 19.4 11.0 Godrej Consumer Products REDUCE 720 684 5 699 9,756 14.5 15.4 17.7 2.0 6.2 15.3 47.2 44.5 38.6 10.6 6.2 Hindustan Unilever REDUCE 1,850 2,058 (10) 4,454 62,209 28.1 33.9 40.7 18.4 20.6 20.1 73.3 60.8 50.6 20.3 9.9 ITC BUY 320 234 37 2,861 39,955 10.1 12.2 13.6 13.3 20.7 11.8 23.2 19.2 17.2 16.2 8.6 Jubilant Foodworks ADD 1,900 1,832 4 242 3,376 24.1 26.9 38.2 65.6 11.6 42.1 76.1 68.1 48.0 25.9 15.7 Jyothy Laboratories ADD 200 151 32 55 767 5.6 6.2 7.0 25.6 10.6 13.6 27.1 24.5 21.6 12.0 9.8 Kansai Nerolac REDUCE 545 512 6 276 3,854 8.7 11.5 12.8 (9.5) 32.0 12.1 59.0 44.7 39.9 21.7 6.7 Marico ADD 385 338 14 436 6,087 7.2 8.2 9.3 14.3 13.6 13.8 46.8 41.2 36.3 13.7 7.8 Nestle India SELL 13,200 15,521 (15) 1,497 20,901 166.7 205.8 238.5 31.2 23.5 15.9 93.1 75.4 65.1 19.6 11.8 Page Industries REDUCE 22,900 24,425 (6) 272 3,805 353.2 434.0 527.1 13.5 22.9 21.5 69.2 56.3 46.3 22.2 13.0 Pidilite Industries REDUCE 1,280 1,521 (16) 780 10,890 17.5 24.2 28.0 (3.0) 38.3 15.8 86.9 62.8 54.3 26.5 9.0 S H Kelkar BUY 145 113 29 16 228 6.1 5.7 7.5 (17.3) (6.4) 31.7 18.4 19.7 14.9 11.1 9.5 Tata Global Beverages ADD 335 382 (12) 241 3,364 7.0 9.0 10.5 (4.8) 29.0 16.5 54.6 42.3 36.3 22.6 6.4 Titan Co. REDUCE 1,175 1,179 (0) 1,047 14,622 16.8 19.1 25.2 33.9 13.7 31.8 70.3 61.8 46.9 22.5 15.7 United Breweries ADD 1,400 1,256 11 332 4,638 21.3 18.7 29.3 42.7 (12.1) 56.2 58.9 67.0 42.9 17.2 10.7 United Spirits REDUCE 670 635 6 461 6,439 9.4 13.7 16.7 24.0 44.8 22.5 67.3 46.5 37.9 33.2 7.4 Varun Beverages BUY 770 755 2 218 3,042 10.1 14.9 24.0 39.3 46.8 61.2 74.4 50.7 31.4 53.8 31.1 KIE universe 18,574 259,409 17.0 20.9 17.3 52.3 43.2 36.9 19.0 10.4 KIE universe (ex-ITC) 15,495 216,412 19.0 20.9 20.1 67.0 55.4 46.2 20.5 10.8

Price performance (%) EV/EBITDA (x) EV/Sales (x) FCF yield (%) Dividend yield (%) 1-mo 3-mo 6-mo 1-yr 2019 2020E 2021E 2019 2020E 2021E 2019 2020E 2021E 2020E 2021E Asian Paints 0 (1) 20 30 48.8 39.6 34.5 8.9 8.2 7.2 0.6 1.6 1.9 0.8 1.0 Bajaj Consumer Care (2) (7) (15) (35) 11.4 11.0 10.7 3.4 3.2 2.9 5.3 6.7 6.7 4.4 4.4 Berger 11 14 71 80 62.8 48.3 42.4 9.1 8.2 7.3 1.0 1.5 1.7 0.5 0.6 Britannia Industries 5 (2) 23 0 44.0 40.7 35.2 6.9 6.4 5.7 1.0 1.5 1.9 0.6 0.8 Colgate-Palmolive (India) (5) (9) 19 10 30.5 29.2 25.1 8.4 8.0 7.2 1.8 2.6 2.7 1.9 2.1 Dabur India 3 4 13 11 48.2 41.7 36.3 9.8 9.0 8.0 1.6 2.0 2.0 0.9 1.1 GlaxoSmithKline Consumer 7 (3) 22 24 29.4 25.3 21.9 7.0 6.2 5.4 1.9 2.5 3.2 1.3 1.5 Godrej Consumer Products (1) (7) 14 (1) 34.0 30.4 26.5 7.1 6.9 6.1 2.1 2.6 2.7 0.9 1.1 Hindustan Unilever 6 (5) 20 19 50.8 41.7 35.9 11.5 10.6 9.4 1.1 1.6 1.9 1.2 1.3 ITC (2) (10) (13) (15) 15.5 13.9 12.3 5.8 5.3 4.8 3.5 4.7 5.3 2.8 3.2 Jubilant Foodworks 13 17 53 53 39.6 25.3 20.6 6.7 5.9 5.0 1.2 1.1 1.1 0.3 0.5 Jyothy Laboratories 1 (14) (1) (18) 19.9 16.9 14.9 3.1 2.8 2.5 4.7 4.2 4.6 2.3 2.6 Kansai Nerolac 0 (6) 18 18 36.8 29.5 26.2 5.3 5.0 4.5 (1.8) 1.9 1.8 0.8 0.9 Marico (1) (9) (7) (8) 33.6 27.9 24.7 5.9 5.6 5.0 2.0 2.7 2.6 1.6 1.9 Nestle India 5 4 37 38 54.7 50.5 43.8 13.0 11.8 10.4 1.3 1.6 1.9 2.1 1.1 Page Industries 3 (1) 35 6 44.2 38.5 32.4 9.6 8.6 7.4 0.7 1.7 1.7 0.8 1.0 Pidilite Industries 8 11 24 37 56.1 46.2 40.3 10.8 10.0 8.9 0.8 1.5 1.5 0.5 0.6 S H Kelkar 2 (11) (0) (32) 14.8 12.1 9.8 1.9 1.9 1.7 (2.0) 4.6 3.8 1.8 2.4 Tata Global Beverages 19 31 53 87 30.0 24.5 21.7 3.3 3.0 2.8 (1.0) 1.7 1.9 0.8 0.9 Titan Co. (1) (10) 9 22 48.5 40.5 31.9 5.2 4.6 3.9 0.9 1.1 1.2 0.5 0.6 United Breweries (2) (1) (10) (12) 29.2 34.5 24.7 5.1 4.7 4.1 0.6 1.3 2.1 0.2 0.3 United Spirits 7 4 12 15 37.8 29.0 24.7 5.4 5.0 4.5 1.6 1.3 2.4 0.3 0.4 Varun Beverages 5 22 19 40 24.3 17.8 13.8 4.8 3.5 2.8 0.6 (4.1) 4.1 — — KIE FMCG universe 3 (3) 13 11 34.9 30.1 26.0 7.7 7.1 6.2 1.4 2.1 2.5 1.2 1.4 KIE universe (ex-ITC) 2 (3) 18 16 44.1 37.2 31.8 8.1 7.4 6.5 1.1 1.6 2.0 1.2 1.3 Sensex (2) 2 9 15

Source: Bloomberg, Company, Kotak Institutional Equities estimates

94 KOTAK INSTITUTIONAL EQUITIES RESEARCH Consumer Staples India

Exhibit 5: P/E multiples are fairly high for the earnings profile Exhibit 6: P/E multiples are fairly high for the earnings profile One-year forward PE (based on consensus estimates) One-year forward PE (based on consensus estimates)

Nestle Dabur Asian Paints Marico Titan ITC HUL GCPL Colgate GSK Consumer 80 70

70 60

60 50

50 40

40 30

30 20

20 10

10 -

Dec-09

Dec-10

Dec-11

Dec-12

Dec-13

Dec-14

Dec-15

Dec-16

Dec-17

Dec-18

Dec-19

Dec-09

Dec-10

Dec-11

Dec-12

Dec-13

Dec-14

Dec-15

Dec-16

Dec-17 Dec-18 Dec-19

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

Exhibit 7: Consumer sector P/E rich at 38X Exhibit 8: Consumer sector (ex-ITC) is trading at 48X One-year forward P/ E based on consensus estimates (X) One-year forward P/E based on consensus estimates (X)

50 65 45 55 40 35 45 30 35 25 20 25 15 15 10

5 5

Dec-99

Dec-01

Dec-03

Dec-05

Dec-07

Dec-09

Dec-11

Dec-13

Dec-15

Dec-17

Dec-19

Dec-99

Dec-01

Dec-03

Dec-05

Dec-07

Dec-09

Dec-11

Dec-13

Dec-15

Dec-17 Dec-19

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

KOTAK INSTITUTIONAL EQUITIES RESEARCH 95 India Consumer Staples

Exhibit 9: Most FMCG stocks continue to trade at expensive valuations One-year forward PE based on consensus estimates (X)

HUL ITC Nestle Colgate GSKCHL APNT GCPL Marico Dabur Titan TGBL Britannia Pidilite Sector Average P/E (X) 3-Yr 48.1 25.9 49.0 39.9 28.8 49.8 44.1 44.0 41.8 50.0 27.7 52.6 48.5 39.5 5-Yr 46.3 26.8 53.3 41.1 32.3 48.3 40.7 41.8 40.2 47.1 25.9 46.9 43.8 38.9 10-Yr 38.1 26.6 47.2 36.4 30.6 39.8 34.3 34.3 34.2 38.2 25.0 35.1 34.3 34.0 Current P/E 47.9 18.0 59.1 42.3 28.1 51.6 39.0 36.4 44.3 53.8 30.6 54.5 50.9 37.5 Current Prem/Disct to Avg (%) Prem/Disc to 3-Yr Avg (0) (30) 21 6 (2) 4 (12) (17) 6 8 11 4 5 (5) Prem/Disc to 5-Yr Avg 4 (33) 11 3 (13) 7 (4) (13) 10 14 18 16 16 (4) Prem/Disc to 10-Yr Avg 26 (32) 25 16 (8) 30 14 6 30 41 22 55 48 10 5-year P/E variables (X) Median 47.2 27.0 51.5 41.2 31.0 48.0 40.1 42.3 39.3 46.8 24.6 45.2 44.1 38.9 Average 46.3 26.8 53.3 41.1 32.3 48.3 40.7 41.8 40.2 47.1 25.9 46.9 43.8 38.9 STD 4.9 3.6 8.2 2.8 4.7 4.3 6.0 4.4 4.0 8.3 5.7 9.6 7.4 19.0 Max 57.6 34.1 75.5 46.3 40.2 58.1 58.1 49.8 51.4 65.7 41.7 66.4 58.5 44.9 +1 STD 51.2 30.4 61.5 43.9 37.0 52.7 46.7 46.2 44.2 55.4 31.6 56.5 51.2 41.1 Min 36.6 18.0 41.9 35.3 25.4 39.0 32.3 32.6 33.5 28.4 17.6 30.5 33.0 33.8 -1 STD 41.4 23.2 45.1 38.3 27.6 44.0 34.6 37.5 36.1 38.8 20.1 37.3 36.4 36.7 Difference versus current P/E (%) Median 2 (33) 15 3 (9) 8 (3) (14) 13 15 24 21 15 (4) Average P/E 4 (33) 11 3 (13) 7 (4) (13) 10 14 18 16 16 (4) Max (17) (47) (22) (9) (30) (11) (33) (27) (14) (18) (27) (18) (13) (16) +1 STD (6) (41) (4) (4) (24) (2) (16) (21) 0 (3) (3) (4) (1) (9) Min 31 - 41 20 10 32 21 12 32 89 74 78 55 11 -1 STD 16 (22) 31 11 2 17 13 (3) 23 39 52 46 40 2

Source: Bloomberg, Company, Kotak Institutional Equities

Exhibit 10: Relative valuation (to Sensex) One-year forward Premium to Sensex based on consensus estimates (X)

HUL ITC Nestle Colgate GSKCHL APNT GCPL Marico Dabur Titan TGBL Britannia Pidilite Sector Average Relative P/E (X) 3-Yr 2.2 1.2 2.3 1.8 1.3 2.3 2.0 2.0 1.9 2.3 1.3 2.4 2.2 1.8 5-Yr 2.2 1.3 2.6 2.0 1.6 2.3 1.9 2.0 1.9 2.2 1.2 2.2 2.1 1.9 10-Yr 2.0 1.5 2.6 2.0 1.7 2.1 1.8 1.8 1.8 2.0 1.4 1.8 1.8 1.8 Current Relative P/E 2.4 0.9 3.0 2.1 1.4 2.6 2.0 1.8 2.2 2.7 1.5 2.7 2.6 1.9 Current Prem/Disct to Avg (%) Prem/Disc to 3-Yr Avg 8 (24) 30 15 6 13 (4) (10) 15 17 21 12 14 3 Prem/Disc to 5-Yr Avg 9 (29) 16 7 (10) 12 1 (9) 15 20 25 22 22 1 Prem/Disc to 10-Yr Avg 18 (38) 16 8 (16) 22 6 (1) 21 33 13 49 41 2 5-year relative P/E variable (X) Median 2.2 1.3 2.5 2.0 1.4 2.3 1.9 2.0 1.9 2.2 1.2 2.2 2.0 1.8 Average 2.2 1.3 2.6 2.0 1.6 2.3 1.9 2.0 1.9 2.2 1.2 2.2 2.1 1.9 STD 0.2 0.2 0.5 0.2 0.3 0.2 0.2 0.2 0.2 0.4 0.2 0.4 0.3 0.1 Max 2.7 1.5 3.4 2.4 2.1 2.9 2.4 2.3 2.3 3.1 1.7 3.0 2.8 2.0 +1 STD 2.4 1.5 3.0 2.2 1.9 2.5 2.1 2.2 2.1 2.6 1.4 2.6 2.4 2.0 Min 1.8 0.9 1.8 1.6 1.1 1.9 1.5 1.5 1.6 1.5 0.9 1.4 1.6 1.7 -1 STD 2.0 1.1 2.1 1.8 1.2 2.1 1.7 1.8 1.7 1.9 1.0 1.8 1.8 1.8 Difference versus current relative P/E (%) Median 9 (31) 20 8 (3) 13 2 (9) 17 20 27 26 25 2 Average P/E 9 (29) 16 7 (10) 12 1 (9) 15 20 25 22 22 1 Max (10) (41) (13) (12) (34) (9) (19) (22) (5) (14) (12) (9) (10) (8) +1 STD (1) (38) (2) (3) (25) 2 (9) (17) 4 3 7 3 7 (4) Min 34 - 65 30 23 37 30 23 39 80 67 98 58 11 -1 STD 20 (18) 41 21 13 24 13 1 29 44 51 49 43 6

Source: Bloomberg, Company, Kotak Institutional Equities

96 KOTAK INSTITUTIONAL EQUITIES RESEARCH December 2019 : Results calendar 97

Mon Tue Wed Thu Fri Sat Sun 27-Jan 28-Jan 29-Jan 30-Jan 31-Jan 1-Feb 2-Feb Dr Reddy's Laboratories Cummins India Bajaj Finance Bajaj Auto Aditya Birla Capital Amara Raja Batteries HDFC JK Lakshmi Cement Bajaj Finserv Bajaj Holding & Investment AIA Engineering Karur Vysya Bank Interglobe Aviation Mahindra & Mahindra Financial Crompton Greaves Consumer Bharat Electronics Bank of India Sobha Torrent Pharmaceuticals Maruti Suzuki Escorts Bharti Infratel Bharti Infratel United Spirits TeamLease Services Godrej Consumer Products Carborundum Universal Castrol India IDFC First Bank Colgate-Palmolive (India) Coromandel International Jubilant Foodw orks Dabur India Hindustan Unilever Orient Cement Equitas Holdings Indian Hotels Co. Pidilite Industries IOCL ITC Quess Corp. Jagran Prakashan Jubilant Life Science SIS Laurus Labs Kansai Nerolac Tata Pow er LIC Housing Finance Narayana Hrudayalaya The Ramco Cement Marico Pow er Grid Shriram City Union Finance State Bank of India Tata Motors Tech Mahindra Timken Vedanta 3-Feb 4-Feb 5-Feb 6-Feb 7-Feb 8-Feb 9-Feb Dr Lal Pathlabs Adani Port and SEZ Adani Enterprises Adani Pow er ACC J K Cement GlaxoSmithkline Pharmaceuticals Bharti Airtel Adani Gas Aditya Birla Fashion Alkem Laboratories Mahindra & Mahindra Godrej Properties Exide Industries Ajanta Pharma Aurobindo Pharma Ashoka Buildcon Honeyw ell Automation JSW Energy Apollo Tyres Bata India Britannia Industries MRPL Mahindra Logistics Berger Paints Dalmia Bharat Container Corporation Shriram Transport Oracle Financial Services Bosch Eicher Motors Emami SRF Piramal Enterprises Brigade Enterprises Endurance Technologies KEC International Tata Chemicals Punjab National Bank Cadila Healthcare GlaxoSmithkline Consumer Mahanagar Gas Ujjivan Financial Services REC Cipla Gujarat Pipavav Port NHPC Tata Global Beverages Divi's Laboratories Hero Motocorp NTPC Thermax DLF Indraprastha Gas S H Kelkar and Company Titan Company Godrej Agrovet Lupin Tata Steel India Daily Summary Daily Summary India TVS Motor Gujarat Gas Metropolis Healthcare UPL HPCL Mphasis Varun Beverages Indiabulls Housing NMDC Voltas Jyothy Labs SKF Whirlpool Max Financial Services Sun Pharmaceuticals TCNS Clothing Trent United Brew eries 10-Feb 11-Feb 12-Feb 13-Feb 14-Feb 15-Feb 16-Feb Bharat Forge 3M India ABB Apollo Hospitals Muthoot Finance GAIL (India) Aster DM Healthcare Hindalco Industries Gillette India SAIL KOTAK INSTITUTIONAL EQUITIES RESEARCH EQUITIES INSTITUTIONAL KOTAK Grasim Industries Astral Poly Technik Info Edge Lemon Tree Hotels Shree Cement Kalpataru Pow er Transmission BHEL Ipca Laboratories Page Industries Motherson Sumi Systems CESC NBCC Varroc Engineering -

MRF P&G Hygiene National Aluminium Co. PI Industries January 31, 2020 Oil India Petronet LNG Rajesh Exports Union Bank

Source: BSE, NSE, Kotak Institutional Equities

KOTAK INSTITUTIONAL EQUITIES RESEARCH 97 Kotak Institutional Equities: Valuation summary of KIE Universe stocks India Daily Summary Daily Summary India

Fair O/S ADVT

KOTAK INSTITUTIONAL EQUITIES RESEARCH EQUITIES INSTITUTIONAL KOTAK Price (Rs) Value Upside Mkt cap. shares EPS (Rs) EPS growth (%) P/E (X) EV/EBITDA (X) P/B (X) RoE (%) Dividend yield (%) 3mo Company Rating 30-Jan-20 (Rs) (%) (Rs bn) (US$ bn) (mn) 2020E 2021E 2022E 2020E 2021E 2022E 2020E 2021E 2022E 2020E 2021E 2022E 2020E 2021E 2022E 2020E 2021E 2022E 2020E 2021E 2022E (US$ mn) Automobiles & Components Amara Raja Batteries ADD 783 800 2 134 1.9 171 42 45 51 46.7 8.9 13.0 19 17.3 15.3 11.2 9.8 8.5 3.5 3.1 2.7 19.8 18.8 18.7 1.3 1.4 1.6 7.9 Apollo Tyres ADD 171 175 2 98 1.4 572 10.4 11.0 14.7 (27.7) 6.2 33.4 16.6 15.6 11.7 7.9 7.1 5.7 0.9 0.9 0.9 5.8 5.9 7.5 1.7 1.7 1.7 6.5 Ashok Leyland BUY 83 95 14 245 3.4 2,936 3.9 3.3 7.0 (43.7) (15.4) 110.9 21.3 25.2 11.9 13.1 12.8 7.1 2.7 2.6 2.2 13.3 10.5 20.0 1.4 1.2 2.5 23 Bajaj Auto REDUCE 3,146 3,150 0 910 13 289 178 183 214 16.4 2.6 16.9 17.6 17.2 14.7 13.5 12.6 10.2 3.7 3.3 3.0 22 20 21 2.3 2.3 2.7 16.2 Balkrishna Industries REDUCE 1,087 850 (22) 210 2.9 193 42 44 50 5.3 4.8 14.9 26.0 24.8 21.6 16.0 13.9 11.6 4.0 3.6 3.2 16.3 15.2 15.6 0.8 0.9 1.0 10.2 Bharat Forge SELL 499 375 (25) 232 3.3 466 17 18 24 (25.0) 9.1 32.6 30.0 27.5 20.7 16.3 15.5 12.7 4.0 3.7 3.3 13.8 13.9 16.6 1.1 1.2 1.2 11.5 CEAT REDUCE 1,000 960 (4) 40 0.6 40 59 63 81 (4.9) 8.1 28.8 17.1 15.8 12.3 9.1 8.4 7.2 1.4 1.3 1.2 8.3 8.4 10.0 1.2 1.2 1.2 2.1 Eicher Motors SELL 20,340 17,000 (16) 555 7.8 27 755 717 973 (7.5) (5.0) 35.8 27.0 28.4 20.9 20.3 20.1 15.5 6.3 5.4 4.5 26 21 24 0.1 —— 44 Endurance Technologies SELL 1,094 915 (16) 154 2.2 141 47 52 62 30.3 10.4 18.8 23 21.0 17.7 11.7 10.4 8.6 4.9 4.1 3.5 21 19.6 19.5 0.7 0.8 1.0 0.4 Escorts BUY 818 1,080 32 73 1.4 89 54 63 75 (1.6) 16.9 19.7 15.3 13.1 10.9 10.5 8.8 6.9 2.1 1.9 1.6 13.9 14.4 15.1 1.0 1.1 1.4 20.0

Exide Industries SELL 200 180 (10) 170 2.4 850 9.7 10.4 11.3 7.2 7.5 8.3 20.6 19.2 17.7 11.6 10.5 9.4 2.6 2.4 2.3 13.2 13.2 13.3 1.8 2.0 2.0 6.3 -

Hero Motocorp SELL 2,482 2,500 1 496 6.9 200 158 144 196 (6.7) (8.6) 35.3 15.7 17.2 12.7 9.4 10.2 7.3 3.4 3.2 2.9 23 19.1 24 3.2 2.9 3.9 27 January 31, 2020 Mahindra CIE Automotive ADD 174 170 (2) 66 0.9 378 11.9 13.5 15.9 (18.2) 14.0 17.8 14.7 12.9 10.9 7.7 6.6 5.5 1.4 1.3 1.1 10.0 10.3 10.9 ——— 1.0 Mahindra & Mahindra BUY 568 820 44 706 9.9 1,138 40 42 47 (16.0) 5.9 10.8 14.2 13.4 12.1 9.9 9.0 8.0 1.6 1.5 1.4 12.2 11.6 11.7 1.4 1.5 1.7 28 Maruti Suzuki SELL 7,020 5,800 (17) 2,121 29.7 302 203 234 296 (18.2) 14.9 27.0 35 30 24 20.0 16.2 12.1 4.2 3.8 3.4 12.7 13.3 15.3 0.7 0.8 1.1 88

Motherson Sumi Systems SELL 139 110 (21) 439 6.1 3,158 5.4 7.0 8.0 6.2 29.2 14.6 25.6 19.8 17.3 9.3 7.1 6.1 3.6 3.2 2.9 14.9 17.2 17.5 1.1 1.3 1.5 18.3 MRF SELL 69,819 54,000 (23) 296 4.1 4 2,750 3,051 3,749 3.1 10.9 22.9 25 22.9 18.6 11.7 10.3 8.3 2.5 2.2 2.0 10.2 10.3 11.4 0.1 0.1 0.1 5.9 Schaeffler India REDUCE 4,640 3,800 (18) 145 2.0 31 120 150 186 (16.8) 25.0 24.0 39 31 25 21.2 17.8 14.3 4.8 4.2 3.6 13.0 14.3 15.5 ——— 0.5 SKF REDUCE 2,090 1,950 (7) 103 1.4 49 66 79 95 0.5 20.4 19.4 32 26 22 22.8 18.9 15.2 5.3 4.6 3.9 16.7 17.4 17.8 0.6 0.7 0.8 0.5 Tata Motors BUY 186 215 15 632 8.6 3,598 (3.4) 7.7 18.1 36.3 325.1 134.5 NM 24.1 10.3 4.7 3.6 3.0 1.1 1.0 0.9 NM 4.5 9.7 ——— 99 Timken SELL 961 825 (14) 72 1.0 75 29 34 40 45.6 17.0 18.9 33 29 24 19.6 16.6 13.7 4.7 4.0 3.5 15.0 15.2 15.5 0.1 0.1 0.1 0.6 TVS Motor SELL 470 315 (33) 223 3.1 475 13.8 12.8 20.8 (2.4) (6.9) 62.0 34 37 23 16.1 16.4 11.8 5.8 5.3 4.6 18.3 15.2 22 1.0 0.8 1.3 11.4 Varroc Engineering BUY 471 520 10 63 0.9 135 20 32 42 (41.5) 63.6 31.5 24.1 14.8 11.2 8.0 6.3 4.9 1.9 1.7 1.5 8.0 11.7 13.6 ——— 0.4

Automobiles & Components Neutral 8,184 114.6 (7.1) 20.5 33.6 26.2 21.7 16.3 10.4 8.7 7.0 2.8 2.5 2.3 10.7 11.7 14.0 1.1 1.1 1.3 428 Banks AU Small Finance Bank SELL 1,048 625 (40) 318 4.5 302 24.4 28.5 36.2 86.7 17.0 27.0 43 37 29 ——— 7.2 6.0 5.0 19.0 17.1 18.2 0.0 —— 8.8 Axis Bank REDUCE 731 740 1 2,061 28.8 2,806 17.5 49 62 (3.9) 183.2 25.1 42 14.8 11.8 ——— 2.7 2.3 2.0 6.4 15.1 16.6 0.2 1.0 1.3 92 Bandhan Bank REDUCE 438 540 23 705 9.9 1,610 20.3 25.4 31.2 24.0 25.2 23.0 21.6 17.2 14.0 ——— 4.5 3.6 2.8 23.9 23 22 0.0 0.0 0.0 18.8 Bank of Baroda ADD 93 105 13 430 6.0 4,582 0.8 23.4 27 (50.0) 2,763.0 13.9 114 4.0 3.5 ——— 1.0 0.8 0.7 0.7 15.5 15.6 0.2 5.0 5.7 38 City Union Bank ADD 234 225 (4) 172 2.4 735 10.6 12.1 14.1 14.0 14.0 16.7 22 19.4 16.6 ——— 3.4 3.0 2.7 15.1 15.3 15.8 0.8 0.9 1.1 2.4 DCB Bank BUY 174 230 32 54 0.8 310 12.8 16.9 22.2 22.1 32.0 30.8 13.6 10.3 7.9 ——— 1.8 1.5 1.3 13.0 15.2 17.2 0.7 0.9 1.2 2.2 Equitas Holdings BUY 113 160 41 39 0.5 342 8.0 10.5 14.5 26.0 32.1 37.5 14.2 10.8 7.8 ——— 1.4 1.2 1.1 9.9 11.2 13.6 ——— 7.4 Federal Bank BUY 93 120 29 185 2.6 1,985 8.4 9.9 12.6 33.6 18.8 26.3 11.1 9.4 7.4 ——— 1.4 1.3 1.1 12.0 12.9 14.7 2.0 2.4 3.0 14.7 HDFC Bank ADD 1,226 1,350 10 6,715 93.9 5,447 48 56 67 24.9 16.6 18.5 25 22 18 ——— 4.0 3.5 3.1 16.5 16.9 17.5 0.8 0.9 1.1 109 ICICI Bank BUY 532 615 16 3,443 48.2 6,447 18.4 32 38 287.4 73.1 18.8 29 16.7 14.1 ——— 3.2 2.7 2.4 10.5 16.4 17.1 0.7 1.2 1.4 173 IndusInd Bank ADD 1,232 1,600 30 854 11.9 712 73 104 121 34.0 42.3 15.4 17 11.8 10.2 ——— 2.4 2.1 1.8 16.6 18.1 17.9 0.8 1.2 1.3 92 Karur Vysya Bank BUY 47 80 69 38 0.5 799 3.8 7 14 44.3 96.0 82.1 12 6.3 3.5 ——— 0.7 0.7 0.6 4.7 8.7 14.6 2.0 4.1 7.5 0.7 Punjab National Bank NR 60 NR — 404 5.6 7,067 6 8 10 129.2 25.9 19.6 9 7.5 6.3 ——— 0.9 0.9 0.7 8.7 10.4 9.9 0.0 0.0 0.0 19.2 RBL Bank ADD 322 375 16 157 2.2 509 9.5 32 41 (53.3) 233.4 30.0 34 10.2 7.8 ——— 1.6 1.5 1.3 5.3 14.0 16.0 0.4 1.3 1.7 69 State Bank of India BUY 311 400 29 2,773 38.8 8,925 27 45 54 2,650.6 70.1 18.5 12 6.9 5.8 ——— 1.6 1.2 1.0 10.2 15.3 15.5 0.1 0.1 0.1 169 Ujjivan Financial Services NR 370 NR — 45 0.6 121 25.1 30 40 52.3 20.1 32.0 15 12.3 9.3 ——— 2.1 1.8 1.6 14.6 15.4 17.6 0.6 0.8 1.2 12.1 Ujjivan Small Finance Bank ADD 55 55 (1) 96 1.3 1,714 2 4 6 17.7 150.6 56.8 34 13.6 8.7 ——— 3.3 2.7 2.1 12.1 21 26 0.1 0.3 0.7 0.0 Union Bank RS 51 —— 173 2.4 3,756 (2) 11 16 87.8 662.6 35.6 NM 4.4 3.3 ——— 0.8 0.6 0.5 NM 13.6 13.5 0.0 3.4 4.6 8.9 YES Bank SELL 39 40 2 100 1.4 2,546 (11.6) (4) 10 (255.6) 64.2 351.6 NM NM 3.7 ——— 0.6 0.6 0.5 NM NM 10.2 0.0 0.0 0.0 206 Banks Attractive 18,970 265.4 189.1 83.5 23.6 23 12.3 9.9 2.0 1.6 1.4 8.7 13.3 14.3 0.5 0.9 1.1 1,071

Source: Company, Bloomberg, Kotak Institutional Equities estimates

98 KOTAK INSTITUTIONAL EQUITIES RESEARCH 98

Kotak Institutional Equities: Valuation summary of KIE Universe stocks

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

Company Rating 30-Jan-20 (Rs) (%) (Rs bn) (US$ bn) (mn) 2020E 2021E 2022E 2020E 2021E 2022E 2020E 2021E 2022E 2020E 2021E 2022E 2020E 2021E 2022E 2020E 2021E 2022E 2020E 2021E 2022E (US$ mn) Building Products Astral Poly Technik SELL 1,203 680 (43) 181 2.5 150 19.5 23 26 19.0 16.8 15.3 62 53 46 34.5 30.3 26.3 11.6 9.6 8.0 21 19.9 19.1 0.1 0.1 0.1 3.0 Building Products Cautious 181 2.5 48.8 16.8 15.3 62 53 46 34.5 30.3 26.3 11.7 9.7 8.1 18.8 18.2 17.5 0.1 0.1 0.1 3.0 Capital goods ABB SELL 1,332 940 (29) 282 3.9 212 18 24 31 49.7 33.8 29.2 74 55 43 43.7 35.1 27.4 6.4 5.7 5.0 9.0 10.8 12.3 0.4 0.5 0.6 1.6 Ashoka Buildcon BUY 115 180 57 32 0.4 281 12.4 13.3 15.0 4.3 7.5 12.9 9.3 8.6 7.6 7.2 6.6 5.8 1.3 1.1 1.0 14.8 14.1 14.2 1.7 1.8 2.1 1.3 Bharat Electronics BUY 101 113 12 245 3.4 2,437 6.2 7.5 7.0 (20.2) 20.9 (6.9) 16.3 13.5 14.5 9.8 8.5 8.1 2.5 2.3 2.1 15.7 17.6 15.2 2.7 3.3 3.0 13.3 BHEL SELL 44 46 6 153 2.1 3,482 1.8 2.2 4.0 (49.8) 26.6 79.4 25 19.8 11.1 9.0 7.3 5.1 0.5 0.5 0.5 1.9 2.4 4.3 1.9 2.2 3.6 12.9 Carborundum Universal ADD 340 325 (4) 64 0.9 189 14.1 16.9 19.4 7.9 19.4 15.0 24 20 17.5 14.2 11.7 10.0 3.4 3.1 2.8 14.8 16.0 16.6 1.2 1.5 1.7 0.3 Cochin Shipyard BUY 375 600 60 49 0.7 132 44 48 38 21.1 7.9 (19.8) 8.5 7.8 9.8 3.2 4.7 4.5 1.3 1.2 1.1 16.5 15.9 11.6 2.9 3.2 3.5 1.4 Cummins India REDUCE 585 590 1 162 2.3 277 27 29 32 1.0 8.1 11.7 22 20 18.2 21.7 19.3 17.1 3.7 3.5 3.3 17.4 17.7 18.7 2.3 2.6 2.9 7.3 Dilip Buildcon BUY 404 645 60 55 0.8 137 39 45 54 (30.0) 15.2 19.7 10.4 9.0 7.5 5.2 4.8 3.9 1.5 1.3 1.1 15.4 15.2 15.5 0.2 0.2 0.3 1.9 IRB Infrastructure BUY 110 137 24 39 0.5 351 25 19 14 3.4 (24.0) (26.8) 4.4 5.8 7.9 7.3 7.4 7.2 0.5 0.5 0.5 13.1 9.1 6.2 2.5 2.2 1.8 2.6 Kalpataru Power Transmission BUY 436 625 43 67 0.9 153 35 40 50 16.2 12.3 26.6 12.3 11.0 8.7 5.8 4.8 3.9 1.9 1.6 1.4 16.2 15.8 17.3 0.9 1.0 1.2 0.7 KEC International BUY 348 322 (7) 89 1.3 257 24.0 27 31 26.6 13.2 14.4 14.5 12.8 11.2 8.1 7.1 6.3 3.0 2.5 2.1 23 21 20 0.7 0.8 1.0 1.5 L&T BUY 1,370 1,550 13 1,923 26.9 1,403 70 68 86 13.8 (3.0) 27.6 19.6 20 15.9 18.6 15.9 13.6 3.2 2.7 2.4 16.9 14.3 16.0 0.8 2.9 2.0 64 Sadbhav Engineering BUY 128 167 30 22 0.3 172 11.4 14.1 15.7 4.7 24.3 11.1 11.3 9.1 8.2 7.1 6.2 5.5 1.0 0.9 0.8 9.2 10.5 10.6 — — — 0.4 Siemens SELL 1,510 1,260 (17) 538 7.5 356 36 42 48 18.9 15.6 14.0 42 36 32 29.7 26.0 22.5 5.4 4.9 4.5 13.6 14.4 14.9 0.7 0.8 0.9 15.4 Thermax BUY 1,050 1,150 10 125 1.8 113 29 42 50 (20.2) 42.4 18.7 36 25 21 22.8 19.7 16.7 22.8 19.7 16.7 10.6 13.8 14.7 0.7 0.9 1.0 1.1 Capital goods Neutral 3,847 53.8 3.4 4.8 19.7 21 19.7 16.5 2.5 2.3 2.1 12.3 11.5 12.6 1.0 2.1 1.8 1,071 Commercial & Professional Services SIS REDUCE 538 870 62 79 1.1 75 37 41 48 27.5 11.9 16.0 14.7 13.1 11.3 15.9 13.5 11.6 2.7 2.3 1.9 19.9 18.8 18.5 0.6 0.7 0.8 0.3 TeamLease Services SELL 2,525 2,300 (9) 43 0.6 17 68 89 112 18.6 29.8 26.9 37 28 22 32.4 24.4 18.6 6.6 5.3 4.3 19.5 21 21 — — — 1.0 Commercial & Professional Services Cautious 122 1.7 24.7 17.3 19.6 31 27 22 19.2 15.9 13.3 5.7 4.7 4.0 18.2 17.8 17.8 0.2 0.2 0.3 1.3 Commodity Chemicals Asian Paints REDUCE 1,805 1,825 1 1,731 24.2 959 28.9 34.2 40.5 28.5 18.2 18.3 62 53 45 39.6 34.5 29.7 16.2 14.5 12.9 27 29 31 0.8 1.0 1.2 30 Berger Paints SELL 570 410 (28) 553 7.7 971 7.6 8.5 10.0 48.5 11.9 17.3 75 67 57 48.3 42.4 36.4 19.2 16.6 14.3 28 27 27 0.5 0.6 0.6 15.7 Kansai Nerolac REDUCE 512 545 6 276 3.9 539 11.5 12.8 15.2 32.0 12.1 18.0 45 40 34 29.5 26.2 22.2 7.3 6.6 5.9 17.1 17.4 18.5 0.8 0.9 1.0 1.9 Tata Chemicals BUY 758 720 (5) 193 2.7 255 43.9 47.5 50.7 2.4 8.0 6.9 17.2 16.0 14.9 7.4 6.6 6.0 1.5 1.4 1.3 8.8 9.0 9.0 1.6 1.7 1.8 7.9 Commodity Chemicals Neutral 2,754 38.5 24.5 14.4 15.8 52 46 40 31.0 27.4 23.9 9.1 8.3 7.5 17.3 18.0 19.0 0.8 0.9 1.1 56 Construction Materials ACC REDUCE 1,532 1,500 (2) 288 4.0 188 79.9 81.4 86.0 50.1 1.9 5.7 19.2 18.8 17.8 9.9 9.6 8.8 2.5 2.3 2.1 13.6 12.6 12.2 1.3 1.3 1.4 14.9

Ambuja Cements REDUCE 210 200 (5) 417 5.8 1,986 10.9 11.9 13.1 50.5 8.9 9.5 19.2 17.6 16.1 6.7 6.0 5.0 1.7 1.6 1.5 9.3 9.4 9.5 0.7 0.7 0.7 8.7 Daily Summary India Dalmia Bharat ADD 878 1,050 20 169 2.4 192 17.1 22.7 34.5 7.5 33.1 51.7 51 39 25 9.0 8.1 6.6 1.5 1.5 1.4 3.0 3.9 5.7 — — — 2.5 Grasim Industries ADD 791 950 20 520 7.3 657 81.4 85.4 97.3 30.1 4.9 14.0 9.7 9.3 8.1 5.2 4.1 3.1 0.9 0.8 0.7 9.2 8.9 9.3 0.9 0.9 0.9 24 J K Cement ADD 1,382 1,275 (8) 107 1.5 77 78.4 98.7 124.8 129.9 25.8 26.4 17.6 14.0 11.1 11.4 9.2 8.0 3.3 2.8 2.2 21 22 22 0.7 0.7 0.7 1.4 JK Lakshmi Cement REDUCE 356 325 (9) 42 0.6 118 19.2 23.9 28.4 374.8 24.2 19.2 18.5 14.9 12.5 7.2 6.3 5.8 2.5 2.2 1.9 14.3 15.6 16.1 0.6 0.6 0.6 1.0 Orient Cement ADD 81 90 11 17 0.2 205 4.7 6.2 6.8 102.0 32.0 9.8 17.3 13.1 11.9 7.2 6.1 5.2 1.5 1.4 1.3 8.9 11.1 11.4 2.5 2.5 2.5 0.2 Shree Cement SELL 23,485 15,200 (35) 847 11.9 36 431.6 542.9 672.6 33.5 25.8 23.9 54 43 35 22.6 19.4 16.4 6.4 5.7 4.9 13.6 13.8 15.1 0.3 0.3 0.3 7.7 UltraTech Cement SELL 4,486 3,800 (15) 1,295 18.1 289 140.9 169.5 201.7 54.1 20.3 18.9 32 26 22 13.9 12.3 10.9 3.5 3.1 2.7 11.4 12.3 13.0 0.3 0.3 0.3 34 Construction Materials Cautious 3,702 51.8 46.5 13.0 16.6 23 21 17.7 9.3 8.0 6.7 2.3 2.1 1.9 9.7 10.0 10.5 0.5 0.5 0.5 95

Source: Company, Bloomberg, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH EQUITIES INSTITUTIONAL KOTAK

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January January 2020 31,

KOTAK INSTITUTIONAL EQUITIES RESEARCH 99

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

KOTAK INSTITUTIONAL EQUITIES RESEARCH EQUITIES INSTITUTIONAL KOTAK Company Rating 30-Jan-20 (Rs) (%) (Rs bn) (US$ bn) (mn) 2020E 2021E 2022E 2020E 2021E 2022E 2020E 2021E 2022E 2020E 2021E 2022E 2020E 2021E 2022E 2020E 2021E 2022E 2020E 2021E 2022E (US$ mn) Consumer Durables & Apparel Crompton Greaves Consumer SELL 267 210 (21) 168 2.3 627 7.1 8.4 9.5 19.1 18.3 13.6 38 32 28 24 20 18 11.8 9.4 7.6 35 33 30 0.9 0.9 0.0 6.1 Havells India SELL 607 520 (14) 380 5.3 625 13.2 17.1 20.4 4.8 29.4 19.8 46 36 30 29 22 19 8.1 7.1 6.3 18.5 21 22 0.8 1.0 1.2 13.9 Page Industries REDUCE 24,425 22,900 (6) 272 3.8 11 434 527 629 22.9 21.5 19.3 56 46 39 39 32 28 28.7 22.2 17.7 56 54 51 0.8 1.0 1.2 10.1 Polycab BUY 976 700 (28) 145 2.0 149 37 44 49 9.0 19.1 11.3 27 22 20 15 13 11 3.9 3.4 3.0 16.6 16.3 15.7 0.4 0.4 0.5 4.8 TCNS Clothing Co. ADD 594 770 30 37 0.5 65 9 12 16 (54.3) 31.7 26.0 63 48 38 15 12 10.1 5.4 4.8 4.2 9.2 10.7 11.9 1.4 2.0 2.1 0.2 Vardhman Textiles ADD 1,039 1,000 (4) 60 0.8 56 92 120 130 (28.9) 30.0 8.5 11.3 8.7 8.0 7.7 6.1 5.4 1.0 0.9 0.8 9.0 11.0 11.0 2.9 2.9 2.9 0.2 Voltas SELL 699 500 (28) 231 3.2 331 16.9 20.7 24.2 7.8 22.3 16.7 41 34 29 31 27 23 5.1 4.6 4.1 13.0 14.3 14.9 0.5 0.6 0.7 11.8 Whirlpool SELL 2,447 1,260 (49) 310 4.3 127 38 44 52 17.9 16.8 18.6 65 55 47 40 34 30 12.4 10.8 9.7 21 21 22 0.3 0.5 0.9 3.2 Consumer Durables & Apparel Cautious 1,603 22.4 2.6 23.3 41 33 29 25 20 18 6.6 5.8 16.0 17.4 17.8 0.7 0.9 50 Consumer Staples Bajaj Consumer Care BUY 228 350 54 34 0.5 148 16.0 16.4 18.4 6.5 2.2 12.6 14.2 13.9 12.4 11.1 10.7 9.4 6.4 5.7 5.0 48 43 43 4.4 4.4 4.8 0.7

Britannia Industries REDUCE 3,211 3,050 (5) 772 10.8 240 58 68 82 21.1 16.9 20.6 55 47 39 41 35 30 17.1 13.9 11.3 32 32 32 0.6 0.8 0.9 16.3 -

Colgate-Palmolive (India) ADD 1,396 1,600 15 380 5.3 272 30 36 41 12.5 18.5 14.6 46 39 34 29.2 25.1 22.1 25.8 25.4 24.9 56 65 74 1.9 2.1 2.4 14.7 January 2020 31, Dabur India REDUCE 479 440 (8) 846 11.8 1,766 9.5 11.0 12.0 16.8 15.5 9.7 50 44 40 42 36 32 13.2 11.8 10.7 28 28 28 0.9 1.1 1.4 11.7 GlaxoSmithKline Consumer RS 8,943 — — 376 5.3 42 294 333 376 26 13.1 13.0 30 27 24 25 22 19 7.9 6.9 5.9 28 27 27 1.3 1.5 1.6 2.4

Godrej Consumer Products REDUCE 684 720 5 699 9.8 1,022 15.4 17.7 20.6 6.2 15.3 16.2 44 39 33 30 26 23 8.2 7.4 6.6 20.0 20 21 0.9 1.1 1.2 9.2 Hindustan Unilever REDUCE 2,058 1,850 (10) 4,455 62.3 2,160 34 41 47 20.6 20.1 14.8 61 50 44 42 36 32 48.7 38.9 31.2 87 86 79 1.2 1.3 1.5 39 ITC BUY 234 320 37 2,877 40.2 12,300 12.2 13.6 15.0 20.0 11.8 10.2 19.2 17.2 15.6 13.6 12.0 10.8 4.5 4.2 3.8 22 23 25 2.8 3.2 3.6 40 Jyothy Laboratories ADD 151 200 32 56 0.8 367 6.2 7.0 8.1 10.6 13.6 15.4 24 22 18.7 17.0 15.0 13.0 3.9 3.7 3.4 16.6 17.6 18.9 2.3 2.6 3.0 0.8 Marico ADD 338 385 14 436 6.1 1,290 8.2 9.3 10.7 13.6 13.8 14.8 41 36 32 28 25 22 13.6 12.7 11.7 34 36 38 1.6 1.9 2.1 9.9 Nestle India SELL 15,521 13,200 (15) 1,496 20.9 96 206 239 281 23.5 15.9 17.8 75 65 55 51 44 38 78.4 65.9 55.8 71 110 109 2.1 1.1 1.3 15.6 Tata Global Beverages ADD 382 335 (12) 241 3.4 631 9.0 10.5 11.6 29.0 16.5 9.9 42 36 33 24 22 20 3.1 3.0 2.8 7.6 8.4 8.8 0.8 0.9 1.1 26 United Breweries ADD 1,256 1,400 11 332 4.6 264 18.7 29.2 36.9 (12.1) 56.2 26.3 67 43 34 34 25 20 9.2 7.7 6.4 14.6 19.6 21 0.2 0.3 0.5 10.0 United Spirits REDUCE 635 670 6 461 6.4 727 13.7 16.7 20.7 44.8 22.5 23.6 46 38 31 29 25 21 11.8 7.8 5.7 28 25 21 0.3 0.4 0.5 14.9 Consumer Staples Cautious 13,678 191.3 19.6 16.2 13.8 39 34 30 27 24 21 11.1 9.8 8.7 28 29 29 1.5 1.6 1.8 213 Diversified Financials Bajaj Finance REDUCE 4,364 3,850 (12) 2,626 36.7 599 101 135 163 46 33 21 43 32 27 — — — 7.8 6.4 5.3 23 22 22 0.2 0.3 0.4 78 Bajaj Finserv ADD 9,640 10,200 6 1,534 21.5 159 304 394 475 50 30 21 32 24 20 — — — 4.6 3.9 3.3 16.8 17.1 17.5 0.1 0.1 0.1 31 Cholamandalam ADD 327 340 4 256 3.6 782 17.9 22.0 25.8 18 23.0 17.4 18.3 14.9 12.7 — — — 3.6 2.9 2.5 21 21 21 0.6 0.7 0.9 8.6 HDFC BUY 2,415 2,680 11 4,176 58.4 1,721 107 72 85 88.2 (33) 17.4 23 33 28 — — — 4.7 4.4 4.0 22 13.7 14.8 1.7 1.1 1.3 108 IIFL Wealth REDUCE 1,304 1,200 (8) 114 1.6 85 34.7 45.6 66.8 (23) 31.4 46.5 38 29 19.5 — — — 3.8 3.7 3.5 10.1 13.0 18.4 2.0 2.3 3.3 0.5 L&T Finance Holdings REDUCE 117 115 (2) 234 3.3 1,999 9 13 16 (15.7) 35 27.8 12.4 9.2 7.2 — — — 1.6 1.4 1.2 13.2 15.7 17.4 1.1 1.2 1.4 17.9 LIC Housing Finance ADD 441 450 2 223 3.1 505 53.1 65.0 74.0 15 22.5 13.7 8.3 6.8 6.0 — — — 1.4 1.1 1.0 15.4 16.6 16.5 2.0 2.4 2.8 19.9 Mahindra & Mahindra Financial ADD 369 405 10 228 3.2 615 24.5 32.5 40.6 (3) 32.5 24.8 15.0 11.3 9.1 — — — 2.1 1.9 1.7 13.2 15.8 17.5 1.7 2.3 2.8 10.2 Muthoot Finance ADD 773 740 (4) 310 4.3 401 64 72 81 29.4 12 13.0 12.1 10.8 9.6 — — — 2.7 2.3 1.9 24 23 22 2.0 2.2 2.5 11.7 PNB Housing Finance NR 443 — — 74 1.0 169 66.9 77.6 88.6 (6) 16.0 14.2 6.6 5.7 5.0 — — — 0.9 0.8 0.7 14.1 14.6 14.8 1.7 1.9 2.2 7.3 Shriram City Union Finance BUY 1,353 1,900 40 89 1.2 66 171 197 237 14.4 15 20.4 7.9 6.9 5.7 — — — 1.3 1.1 1.0 16.5 16.4 17.1 1.6 1.8 2.2 0.2 Shriram Transport BUY 1,044 1,475 41 237 3.3 227 126.6 146.5 164.1 12 15.7 12.0 8.2 7.1 6.4 — — — 1.4 1.2 1.0 16.9 17.0 16.5 1.7 2.1 2.4 14.1 Diversified Financials Neutral 10,099 141.3 43.8 1.6 18.7 23 22 18.8 2.9 2.6 2.3 12.9 11.7 12.3 1.0 0.9 1.0 307

Source: Company, Bloomberg, Kotak Institutional Equities estimates

100 100 KOTAK INSTITUTIONAL EQUITIES RESEARCH

Kotak Institutional Equities: Valuation summary of KIE Universe stocks

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

Company Rating 30-Jan-20 (Rs) (%) (Rs bn) (US$ bn) (mn) 2020E 2021E 2022E 2020E 2021E 2022E 2020E 2021E 2022E 2020E 2021E 2022E 2020E 2021E 2022E 2020E 2021E 2022E 2020E 2021E 2022E (US$ mn) Electric Utilities CESC BUY 719 840 17 95 1.3 133 87 104 114 (3) 18.4 9.9 8.2 6.9 6.3 5.3 4.8 4.3 0.7 0.7 0.6 9.2 10.1 10.3 2.0 2.1 2.1 3.5 JSW Energy ADD 64 80 24 106 1.5 1,640 5.9 5.9 5.7 41 0 (3.8) 11.0 10.9 11.4 5.1 4.4 3.7 0.8 0.8 0.7 7.8 7.3 6.5 — — — 0.9 NHPC ADD 25 27 7 253 3.5 10,045 3.1 3.3 3.5 24.1 5 7.1 8.0 7.7 7.2 6.2 6.4 5.9 0.8 0.8 0.7 10.1 10.2 10.5 7.0 7.3 7.8 2.6 NTPC BUY 114 160 41 1,125 15.7 9,895 12.4 13.6 15.6 10.9 9.5 14.2 9.1 8.3 7.3 9.5 7.8 6.6 1.0 0.9 0.8 11.1 11.3 11.9 3.3 3.6 4.1 15.1 Power Grid BUY 194 235 21 1,017 14.2 5,232 21.4 23 25 13 7.3 11.1 9.1 8.5 7.6 7.1 6.7 6.3 1.5 1.4 1.3 18.0 17.4 17.4 3.9 4.1 4.6 28 Tata Power BUY 60 72 19 163 2.3 2,705 3.6 5.4 7.2 72 48 33.4 16.6 11.2 8.4 7.8 7.5 6.9 0.9 0.9 0.8 5.7 7.9 9.7 — — — 7.1 Electric Utilities Attractive 2,759 38.6 14.1 9.5 12.5 9.3 8.5 7.5 1.1 1.0 0.9 11.6 11.8 12.2 3.5 3.7 4.2 57 Fertilizers & Agricultural Chemicals Bayer Cropscience SELL 4,132 2,700 (35) 186 2.6 34 82.9 100.0 114.4 19.6 20.7 14.4 50 41 36 40 34 29 6.8 6.0 5.4 14.3 15.5 15.7 0.4 0.5 0.6 0.8 Dhanuka Agritech ADD 523 350 (33) 25 0.3 48 24.2 25.9 28.3 2.4 6.9 9.2 21.6 20.2 18.5 16.4 14.5 12.9 3.4 3.0 2.7 16.8 15.9 15.4 0.9 1.0 1.1 0.3 Godrej Agrovet SELL 567 450 (21) 109 1.5 192 12.4 17.0 20.3 8.6 37.0 19 46 33 28 24 19 16 4.8 4.3 3.9 11.1 13.7 14.6 0.6 0.8 0.9 0.7 PI Industries SELL 1,526 1,280 (16) 211 2.9 138 37.2 46.1 56.1 25.3 24 22 41 33 27 28 22 18 7.8 6.6 5.6 21 22 22 0.4 0.5 0.7 2.7 Rallis India ADD 230 230 0 45 0.6 195 10.9 12.5 14.4 29.4 14.8 14.8 21.1 18.3 16.0 14.6 12.4 10.6 3.1 2.8 2.5 15.6 16.0 16.4 1.2 1.3 1.4 1.4 UPL SELL 544 520 (4) 416 5.8 765 28.4 39.8 45.1 14.5 40.1 13.3 19 13.7 12.1 9.7 7.8 6.8 2.6 2.3 2.0 14.8 17.9 17.9 1.3 2.1 2.3 24 Fertilizers & Agricultural Chemicals Attractive 990 13.9 19.0 30.3 14.9 27 21 18.3 13.7 11.1 9.8 3.9 3.5 3.1 14.4 16.5 16.7 0.8 1.2 1.4 30 Gas Utilities GAIL (India) BUY 123 175 42 556 7.8 4,510 13.5 14.8 15.9 (3.2) 9.9 7.4 9.1 8.3 7.7 6.5 5.8 5.2 1.2 1.1 1.0 13.3 13.5 13.4 3.6 4.1 4.5 19.7 GSPL SELL 255 200 (21) 144 2.0 564 17.7 16.2 14.9 25.8 (8.6) (7.8) 14.4 15.7 17.0 6.8 7.1 7.4 2.1 1.9 1.8 16.1 12.9 10.8 1.0 1.0 1.2 1.9 Indraprastha Gas SELL 518 320 (38) 362 5.1 700 16.6 18.5 20.9 38.0 11.5 13.0 31.2 27.9 24.7 23.1 20.3 17.7 7.3 6.3 5.5 26 24 24 0.8 0.9 1.1 14.6 Mahanagar Gas ADD 1,237 1,080 (13) 122 1.7 99 74.5 78.9 81.8 32.7 5.8 3.7 16.6 15.7 15.1 10.8 10.1 9.5 4.4 3.9 3.6 29 27 25 2.2 2.9 3.3 13.3 Petronet LNG BUY 270 320 19 404 5.7 1,500 18.5 21.0 23.3 22.8 14.0 10.7 14.6 12.8 11.6 8.5 7.4 6.6 3.5 3.2 2.9 28 26 26 3.1 3.9 4.8 9.8 Gas Utilities Attractive 1,589 22.2 12.6 7.1 7.5 13.3 12.4 11.5 8.8 7.9 7.1 2.2 2.0 1.8 16.3 15.9 15.7 2.5 2.9 3.4 59 Health Care Services Apollo Hospitals ADD 1,691 1,700 1 235 3.3 139 27.2 35 49 61 27 43 62.1 48.9 34.3 16.6 16.5 14.2 6.6 6.1 5.5 11.0 13.0 17.0 0.6 0.7 1.0 16.9 Aster DM Healthcare BUY 168 240 43 85 1.2 505 6.6 9.1 10.8 (1) 38.7 18 25.4 18.3 15.5 8.5 7.3 6.4 3.1 2.7 2.3 12.8 15.6 16.0 — — — 0.8 Dr Lal Pathlabs SELL 1,721 1,060 (38) 143 2.0 83 31.8 37.5 43.2 33.5 17.6 15.2 54.1 46.0 39.9 36.0 30.2 26.0 12.7 10.6 8.9 26 25 24 0.5 0.5 0.6 2.8 HCG BUY 115 205 78 10 0.1 85 (7.1) (4.3) (3.4) (104) 39 21 NM NM NM 8.9 7.5 6.4 1.9 2.1 2.2 NM NM NM — — — 0.1 Metropolis Healthcare SELL 1,654 1,100 (33) 83 1.2 50 30.9 37.5 43.3 29.1 21.4 15 53.5 44.1 38.2 32.3 27.1 23.7 15.6 12.3 9.9 33 31 29 0.4 0.5 0.5 0.9 Narayana Hrudayalaya BUY 376 390 4 77 1.1 204 6.8 9.3 11.7 135.4 36 26 55.2 40.6 32.2 19.2 16.1 13.7 6.3 5.5 4.7 12.1 14.4 15.6 — — — 2.4 Health Care Services Attractive 633 8.9 32 32 27 52.3 39.7 31.4 16.7 15.0 13.1 6.5 5.8 5.1 12.5 14.6 16.2 0.4 0.4 0.6 24 Hotels & Restaurants Jubilant Foodworks ADD 1,832 1,900 4 242 3.4 132 27 38 52 12 42.1 36 68.1 48.0 35.3 24.8 19.8 15.9 19.5 14.7 11.2 28 35 36 0.3 0.5 0.9 18.9 Daily Summary India Lemon Tree Hotels BUY 55 70 27 44 0.6 789 1.0 1.8 2.2 44 83 23 57.2 31.3 25.5 19.7 13.6 10.4 4.6 4.2 3.8 8.3 14.0 15.7 — 1.0 1.4 1.1 Hotels & Restaurants Attractive 286 4.0 17 50 33 66.0 44.1 33.1 23.5 18.1 14.4 13.0 10.6 8.6 19.7 24 26 0.3 0.6 1.0 19.9 Insurance HDFC Life Insurance ADD 600 615 2 1,212 17.0 2,009 7.2 8.4 9.8 12.6 17.9 16.1 83.8 71.1 61 — — — 19.3 17.4 15.6 24 26 27 0.3 0.4 0.4 42 ICICI Lombard SELL 1,328 825 (38) 603 8.4 454 26.8 33.4 38.9 16 25 16 49.5 39.7 34 — — — 9.7 8.2 7.0 21 22 22 0.4 0.6 0.6 10.4 ICICI Prudential Life BUY 522 610 17 749 10.5 1,436 8.2 9.0 10.3 4 9.0 15.3 63.4 58.1 50 — — — 9.6 8.5 7.5 16.1 15.5 15.7 0.3 0.3 0.3 19.4 Max Financial Services ADD 500 550 10 135 1.9 417 6.9 9.9 14.4 275 44 45 72.8 50.5 35 — — — — — — 13.7 17.9 23 0.5 0.7 1.0 15.9 SBI Life Insurance REDUCE 998 1,030 3 998 14.0 1,000 13.7 16.1 17.7 3.5 17.5 9.4 72.7 61.9 57 — — — 11.6 10.0 8.7 17.1 17.4 16.5 0.2 0.3 0.3 43 Insurance Attractive 3,698 51.7 13.5 18.8 16.2 67.2 56.6 49 11.9 10.4 9.1 17.7 18.4 18.7 0.2 0.2 0.3 131

KOTAK INSTITUTIONAL EQUITIES RESEARCH EQUITIES INSTITUTIONAL KOTAK Source: Company, Bloomberg, Kotak Institutional Equities estimates

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January January 2020 31,

KOTAK INSTITUTIONAL EQUITIES RESEARCH 101

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

KOTAK INSTITUTIONAL EQUITIES RESEARCH EQUITIES INSTITUTIONAL KOTAK Company Rating 30-Jan-20 (Rs) (%) (Rs bn) (US$ bn) (mn) 2020E 2021E 2022E 2020E 2021E 2022E 2020E 2021E 2022E 2020E 2021E 2022E 2020E 2021E 2022E 2020E 2021E 2022E 2020E 2021E 2022E (US$ mn) Internet Software & Services Info Edge SELL 2,825 2,130 (25) 346 4.8 122.0 34.3 42.2 50.7 32.7 23.2 20.1 82.4 66.9 55.7 72.1 57.8 47.8 13.2 11.6 10.1 16.9 18.4 19.4 0.3 0.4 0.4 16.8 Just Dial REDUCE 582 570 (2) 38 0.5 64.8 40.0 40.9 42.4 25.4 2.2 3.5 14.5 14.2 13.7 8.4 7.1 6.2 3.1 2.6 2.2 23 19.7 17.4 0.7 0.7 0.7 20 Internet Software & Services Attractive 384 5.4 29.8 15.2 14.4 56.6 49.2 43.0 48.4 40.9 35.7 10.0 8.7 7.5 17.6 17.6 17.5 0.3 0.4 0.5 37 IT Services HCL Technologies ADD 608 650 7 1,650 23.1 2,702 39.9 43.5 48.0 9.0 8.9 10.4 15.2 14.0 12.7 9.6 8.6 7.5 3.4 2.9 2.5 24 22 21 2.5 2.7 2.7 27 Hexaware Technologies REDUCE 363 375 3 108 1.5 302 21.5 24.5 27.7 11.4 14.0 12.8 16.9 14.8 13.1 12.4 10.5 8.9 4.0 3.5 3.0 25 25 25 2.2 2.8 2.8 2.8 Infosys ADD 781 865 11 3,325 46.5 4,256 38.7 42.5 47.3 9.3 9.9 11.3 20.2 18.4 16.5 14.0 12.3 11.0 5.3 4.9 4.6 26 28 29 2.8 3.3 3.8 99 L&T Infotech ADD 1,950 2,060 6 339 4.7 175 84.5 102.1 120.6 (2) 20.8 18.2 23.1 19.1 16.2 15.8 13.0 10.9 6.0 5.0 4.2 28 29 28 1.5 1.7 1.9 4.2 Mindtree REDUCE 888 830 (7) 146 2.0 165 38.5 55.6 63.9 (16) 44 15 23.1 16.0 13.9 12.7 9.4 7.9 4.4 3.7 3.2 19.1 25 25 3.4 1.9 2.2 9.7 Mphasis REDUCE 919 925 1 171 2.4 186 59.7 64.2 69.0 6 7.5 7.4 15.4 14.3 13.3 9.5 8.6 7.7 3.0 2.8 2.6 20 20 20 3.3 3.7 3.9 2.7

TCS REDUCE 2,138 2,020 (6) 8,022 112.2 3,752 87.1 95.1 104.3 5 9.2 9.6 24.5 22.5 20.5 17.7 15.8 14.2 8.3 7.7 7.1 35 36 36 2.9 2.9 3.2 106 -

Tech Mahindra ADD 791 860 9 702 9.8 880 46.1 53.8 62.3 (3.4) 16.8 15.7 17.2 14.7 12.7 10.6 8.5 7.2 3.1 2.7 2.4 18.9 19.7 20 2.1 2.3 2.6 25 January January 2020 31, Wipro REDUCE 241 265 10 1,375 19.2 5,827 17.2 18.9 20.7 14.8 10.2 9.4 14.0 12.7 11.6 8.6 7.4 6.5 2.5 2.1 1.9 17.9 18.0 17.4 0.6 0.8 3.5 10.6 IT Services Cautious 15,839 221.6 4.5 10.1 10.6 20.3 18.5 16.7 13.9 12.2 10.9 5.2 4.7 4.2 26 25 25 2.6 2.7 3.2 286 Media

DB Corp. REDUCE 139 135 (3) 24 0.3 175 18.0 18.7 18.6 14.6 4.1 (0.5) 7.7 7.4 7.4 4.0 3.7 3.8 1.3 1.3 1.3 16.9 17.4 17.4 9.0 10.8 12.3 0.2 Jagran Prakashan REDUCE 70 57 (18) 21 0.3 296 8.7 9.7 10.6 (1.4) 12 NA 8.1 7.2 NA 3.5 3.3 NA 1.1 1.1 NA 13.6 15.1 16.6 12.9 12.9 12.9 0.6 PVR REDUCE 1,973 1,850 (6) 101 1.4 51 43.0 59.8 69.1 (0) 39 15 45.9 33.0 28.6 15.8 13.6 11.7 5.2 4.6 4.0 13.9 14.8 15.0 0.2 0.3 0.4 10.8 Sun TV Network REDUCE 486 510 5 192 2.7 394 37.7 41.1 43.5 4 9.0 5.9 12.9 11.8 11.2 9.0 8.1 7.3 3.0 2.6 2.3 25 24 22 2.6 3.1 3.5 15.4 Zee Entertainment Enterprises ADD 268 340 27 257 3.6 960 17.2 18.4 21.0 4.4 6.9 13.7 15.5 14.5 12.8 10.0 9.1 7.9 2.7 2.4 2.1 17.8 17.3 17.6 1.7 2.1 2.1 98 Media Attractive 595 8.3 4.8 9.6 9.5 15.1 13.8 12.6 9.3 8.4 7.5 2.7 2.5 2.2 18.1 18.0 17.8 2.4 2.8 3.0 125 Metals & Mining Hindalco Industries BUY 193 240 24 434 6.1 2,224 21.5 25.4 28.2 (13.1) 18.4 11 9.0 7.6 6.9 5.4 4.8 4.1 0.7 0.6 0.6 8.0 8.7 8.9 0.6 0.6 0.6 25

Hindustan Zinc REDUCE 195 210 8 823 11.5 4,225 16.4 16.9 18.4 (13.1) 3.3 9.0 11.9 11.5 10.6 7.3 7.1 6.5 2.7 3.0 3.3 22 24 29 10.3 10.3 10.3 2.2

Jindal Steel and Power BUY 176 210 20 179 2.5 1,016 2.7 12.8 21.3 259 367 66 64.1 13.7 8.3 6.8 5.8 4.9 0.5 0.5 0.5 0.9 3.9 6.2 — — — 57 JSW Steel ADD 257 290 13 621 8.7 2,402 8.7 21.6 28.8 (72.8) 150 32.9 29.7 11.9 8.9 9.5 6.7 5.5 1.7 1.5 1.3 5.8 13.3 15.7 1.6 1.6 1.6 30 National Aluminium Co. SELL 44 35 (20) 82 1.1 1,866 1.0 2.3 2.2 (89) 134 (3.0) 45.2 19.3 19.9 10.3 7.3 9.0 0.8 0.8 0.8 1.7 4.1 4.0 2.2 5.2 5.0 5.6 NMDC ADD 120 140 16 369 5.2 3,062 16.6 17.9 15.7 12.5 7.9 (12) 7.3 6.7 7.7 5.0 4.7 5.4 1.3 1.2 1.1 18.8 18.8 15.5 6.9 7.4 6.5 12.9 Tata Steel BUY 449 600 34 510 7.1 1,146 33.6 75.3 95.8 (63) 124 27 13.3 6.0 4.7 6.6 5.1 4.3 0.7 0.7 0.6 5.7 12.3 13.7 2.2 2.2 2.2 102 Vedanta BUY 141 180 28 524 7.3 3,717 13.2 18.8 21.3 (14) 43 13.0 10.7 7.5 6.6 5.4 4.8 4.4 0.9 0.9 0.9 7.9 11.5 13.1 12.8 12.8 12.8 32 Metals & Mining Attractive 3,542 49.5 (34.9) 47.6 15.9 12.6 8.6 7.4 6.5 5.5 4.9 1.1 1.0 0.9 8.5 11.8 12.8 5.7 5.9 5.8 49 Source: Company, Bloomberg, Kotak Institutional Equities estimates

102 102 KOTAK INSTITUTIONAL EQUITIES RESEARCH

Kotak Institutional Equities: Valuation summary of KIE Universe stocks

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

Company Rating 30-Jan-20 (Rs) (%) (Rs bn) (US$ bn) (mn) 2020E 2021E 2022E 2020E 2021E 2022E 2020E 2021E 2022E 2020E 2021E 2022E 2020E 2021E 2022E 2020E 2021E 2022E 2020E 2021E 2022E (US$ mn) Oil, Gas & Consumable Fuels BPCL SELL 470 420 (11) 1,019 14.3 1,967 32 39 40 (10.5) 18.9 3.8 14.5 12.2 11.7 10.4 9.0 8.6 2.3 2.2 2.0 16.8 18.6 18.0 4.0 4.3 4.4 49.6 Coal India BUY 188 285 52 1,158 16.2 6,163 27 31 31 (3) 14.3 (2.2) 6.8 6.0 6.1 6.1 5.2 5.0 4.6 4.3 4.2 65.3 74.4 69.7 13.3 13.3 13.3 19.8 HPCL SELL 240 285 19 366 5.1 1,524 31 33 32 (23.0) 7.0 (1.0) 7.9 7.3 7.4 8.1 7.9 7.8 1.2 1.1 1.0 15.8 15.6 14.3 5.1 5.5 5.4 17.5 IOCL SELL 117 130 11 1,103 15.4 9,181 13.6 15.8 15.9 (24.5) 16.1 0.8 8.6 7.4 7.4 5.6 5.3 5.2 0.9 0.9 0.9 11.2 12.4 11.9 6.1 6.6 6.7 25.0 Oil India BUY 138 210 52 150 2.1 1,084 30 27 29 (1) (9.4) 4.4 4.6 5.1 4.8 2.7 2.7 2.5 0.5 0.5 0.5 11.4 9.8 9.7 8.7 7.9 8.3 2.2 ONGC BUY 116 170 47 1,454 20.3 12,580 22 21 22 (8) (4.7) 7.4 5.3 5.6 5.2 3.0 2.9 2.6 0.6 0.5 0.5 11.1 10.0 10.0 6.5 6.7 6.9 17.7 Reliance Industries BUY 1,444 1,850 28 8,557 119.7 5,927 76 93 107 14.9 22.8 15.4 19.0 15.5 13.4 12.4 9.5 7.9 2.0 1.8 1.6 11.0 12.2 12.6 0.5 0.5 0.5 187.1 Oil, Gas & Consumable Fuels Attractive 13,807 193.1 (3.0) 12.6 8.0 11.9 10.6 9.8 7.7 6.7 6.0 1.5 1.4 1.3 12.6 13.1 12.9 3.1 3.2 3.2 319.0 Pharmaceuticals Aurobindo Pharma ADD 480 500 4 281 3.9 584 50 56 57 23.0 12 3.0 9.6 8.6 8.4 7.2 6.1 5.6 1.7 1.5 1.3 17.7 16.9 15.2 1.3 1.6 1.9 24.5 Biocon SELL 295 200 (32) 354 5.0 1,202 7.5 9.0 10.1 24 20 12.1 39 33 29 19.3 14.7 13.0 4.5 4.1 3.7 12.3 12.3 12.5 0.9 1.1 1.2 15.8 Cipla BUY 451 570 26 364 5.1 806 22.5 28 34 18.6 26 19 20 15.9 13.4 10.7 8.9 7.2 2.2 2.0 1.8 11.3 12.3 13.1 1.0 1.3 1.6 20.4 Dr Reddy's Laboratories REDUCE 3,155 2,800 (11) 524 7.3 166 110 139 185 11 26 32.6 29 22.7 17.1 12.7 12.1 9.3 3.4 3.0 2.7 12.0 13.4 15.5 0.6 0.8 1.0 28.0 Laurus Labs BUY 436 430 (1) 47 0.7 106 19.8 27.8 33 80.3 41 17 22 15.7 13.4 11.1 8.8 7.5 2.6 2.2 1.9 12.6 14.3 14.3 — — — 0.8 Lupin ADD 728 840 15 330 4.6 450 26 36 51 25.3 38 40 28 20 14.4 10.6 8.4 6.4 2.0 1.8 1.6 7.8 9.1 11.4 0.7 0.7 1.0 15.9 Sun Pharmaceuticals ADD 442 480 9 1,061 14.8 2,406 19.0 23.8 26 17.5 25 10 23 19 17.0 12.6 10.0 8.3 2.3 2.1 1.9 10.5 11.3 11.7 0.9 1.1 1.2 37.4 Torrent Pharmaceuticals ADD 1,936 2,250 16 328 4.6 169 55 69 86 113.0 25 26 35 28 22 16.0 13.4 11.5 6.2 5.5 4.7 17.7 19.4 20.9 1.2 1.3 1.4 6.8 Pharmaceuticals Neutral 3,288 46.0 23.0 24 17 23 19 15.9 11.8 9.8 8.2 2.6 2.3 2.1 11.4 12.6 13.1 0.9 1.1 1.3 149.7 Real Estate Brigade Enterprises BUY 228 235 3 47 0.7 204 17.7 14 16 51 (18) 10 12.9 15.7 14.3 8.8 6.7 5.5 1.9 1.7 1.6 15.6 11.4 11.5 1.1 1.1 1.1 0.4 DLF ADD 255 215 (16) 630 8.8 2,475 7.7 12.3 15.3 30 58 25 33 20.8 16.6 32.5 26.3 20.5 1.7 1.6 1.5 5.4 7.9 9.2 0.8 0.8 0.8 34.1 Embassy Office Parks REIT ADD 415 410 (1) 321 4.5 772 12.7 15.6 18.0 7,843 23 15 33 27 23 20.8 18.2 16.2 1.4 1.5 1.6 4.3 5.5 6.6 5.6 6.4 7.3 3.0 Godrej Properties SELL 1,088 700 (36) 274 3.8 252 15.8 16.3 13.0 43.1 3 (20.1) 69 67 84 53.9 69.3 302.5 5.5 5.1 4.8 10.7 7.9 5.9 — — — 3.8 Oberoi Realty ADD 555 560 1 202 2.8 364 22 48 49 (4.1) 120.7 2 25.7 11.7 11.4 17.7 9.3 8.3 2.3 1.9 1.7 9.4 18.1 15.8 0.4 0.4 0.4 2.5 Prestige Estates Projects ADD 375 410 9 141 2.0 378 15.4 15.7 16 76.8 2 3 24 24 23.2 9.1 8.6 8.1 2.7 2.5 2.3 12.4 11.2 10.5 0.4 0.4 0.4 2.8 Sobha ADD 440 515 17 42 0.6 95 39 29 32 25 (25.6) 11.7 11.3 15.2 13.6 7.2 8.9 8.8 1.7 1.5 1.4 15.5 10.5 10.8 1.6 1.6 1.6 1.3 Sunteck Realty REDUCE 398 400 0 58 0.8 140 23.6 32.3 44 45.5 37 35 17 12.3 9.1 12.4 8.7 6.4 1.8 1.6 1.3 11.1 13.5 15.7 0.3 0.3 0.3 1.3 Real Estate Neutral 1,714 24.0 49.1 40.0 14.2 30 21 18.7 18.7 15.5 13.8 2.0 1.9 1.8 6.6 8.7 9.4 1.5 1.6 1.8 49.2 Retailing Aditya Birla Fashion and Retail BUY 230 230 0 178 2.5 773 1.8 2.8 4.6 (57.5) 58.0 65.7 130 82 50 15.1 13.0 11.4 11.3 10.0 8.3 9.1 12.9 18.2 — — — 1.8 Avenue Supermarts SELL 2,051 1,400 (32) 1,288 18.0 626 22.0 28 36 52.1 25.9 29.8 93 74 57 59 45 35 18.2 14.6 11.6 21.7 21.9 22.7 — — — 18.5

Titan Company REDUCE 1,179 1,175 (0) 1,047 14.6 888 19.1 25 32 13.3 31.8 27.0 62 47 37 41 32 26 14.7 12.2 10.0 25.6 28.5 29.9 0.5 0.6 0.8 39.3 Daily Summary India Retailing Cautious 2,512 35.1 18.0 30.6 30.2 78 60 46 41 33 27 15.9 13.1 10.6 20.3 21.9 23.1 0.2 0.3 0.3 59.6 Speciality Chemicals Castrol India SELL 130 130 0 128 1.8 989 8.0 8.5 8.8 12.1 5.7 4.3 16.2 15.3 14.7 10.8 10.5 9.9 10.1 9.2 8.4 65.1 62.8 59.7 4.4 4.6 4.8 4.2 Pidilite Industries REDUCE 1,521 1,425 (6) 773 10.8 508 24.8 28 33 40.1 14.0 17.2 61 54 46 45 39 34 15.7 13.4 11.4 27.9 26.9 26.9 0.5 0.6 0.8 12.6 S H Kelkar and Company BUY 113 145 29 16 0.2 141 5.7 7.5 8.8 (6.4) 31.7 16.2 19.7 14.9 12.9 11.8 9.6 8.5 1.9 1.8 1.6 9.4 12.1 13.1 1.8 2.4 3.1 0.1 SRF BUY 3,802 3,600 (5) 219 3.1 57 139 175 199 24.7 25.4 13.6 27.3 21.7 19.1 15.9 13.2 11.5 4.5 3.8 3.2 17.8 19.0 18.3 0.4 0.4 0.5 14.4 Speciality Chemicals Neutral 1,136 15.9 25.6 15.3 12.9 39 34 29.7 25.3 22.1 19.5 9.6 8.2 7.1 24.7 24.5 23.9 1.0 1.1 1.2 31.4 Source: Company, Bloomberg, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH EQUITIES INSTITUTIONAL KOTAK

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January January 2020 31,

KOTAK INSTITUTIONAL EQUITIES RESEARCH 103

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

KOTAK INSTITUTIONAL EQUITIES RESEARCH EQUITIES INSTITUTIONAL KOTAK Company Rating 30-Jan-20 (Rs) (%) (Rs bn) (US$ bn) (mn) 2020E 2021E 2022E 2020E 2021E 2022E 2020E 2021E 2022E 2020E 2021E 2022E 2020E 2021E 2022E 2020E 2021E 2022E 2020E 2021E 2022E (US$ mn) Telecommunication Services Bharti Airtel BUY 490 570 16 2,672 37.4 5,131 (5.5) 3.7 9.7 NM NM NM NM 133.9 50.5 10.6 8.0 6.8 3.8 3.9 3.9 NM 2.9 7.7 0.8 1.2 1.2 124.3 Bharti Infratel REDUCE 246 225 (9) 455 6.4 1,850 15.8 16.4 18.8 20.5 3.6 14.8 15.6 15.0 13.1 7.8 7.2 6.3 3.2 3.1 3.0 20.4 21.2 23.4 5.0 5.1 5.9 47.4 Vodafone Idea RS 5 — — 149 2.1 28,736 (22.3) (4.0) (6.2) NM NM NM NM NM NM 19.7 9.7 8.9 0.6 1.3 (2.4) NM NM NM — — — 35 Tata Communications ADD 419 500 19 119 1.7 285 11.0 14.0 17.9 38.0 26.5 28.0 38.0 30.0 23.5 6.9 6.3 5.7 227.3 27.1 12.8 NM 162 74.1 1.8 1.8 1.8 1.4 Telecommunication Services Cautious 3,396 47.5 NM 61.5 36.4 NM NM NM 11.3 8.2 7.2 3.3 3.7 4.5 NM NM NM 1.3 1.6 1.7 208.4 Transportation Adani Ports and SEZ BUY 378 475 26 768 10.7 2,032 23.4 24.1 28.0 17.1 3.1 16.1 16.2 15.7 13.5 12.6 10.9 9.5 3.0 2.6 2.3 18.9 17.8 18.0 4.0 1.1 1.3 23.8 Container Corp. SELL 573 510 (11) 349 4.9 609 17.4 21.3 27.8 6.7 22.4 30.6 33 27 21 19.1 15.9 12.4 3.3 3.1 2.9 10.2 12.0 14.7 0.2 1.6 2.1 10.5 Gateway Distriparks BUY 140 162 16 15 0.2 109 3.9 6.0 9.2 (42.8) 55.9 51.7 36.0 23.1 15.2 8.1 6.7 5.6 1.0 0.9 0.9 2.9 4.1 6.0 2.1 2.1 2.1 0.5 Gujarat Pipavav Port BUY 88 124 41 43 0.6 483 5.1 5.9 7.5 20.1 15.0 27.2 17.2 15.0 11.8 8.0 7.0 6.1 2.1 2.1 2.1 12.2 13.9 17.6 5.1 5.9 7.4 0.6 InterGlobe Aviation REDUCE 1,419 1,535 8 546 7.6 383 70.0 97.8 115.1 1,615.5 39.8 17.7 20 15 12.3 5.1 3.8 3.0 5.6 4.2 3.2 32.1 32.8 29.4 — 0.7 0.8 35

Mahindra Logistics ADD 417 398 (4) 30 0.4 71 12.1 14.9 18.3 (3.8) 23.7 22.4 35 28 23 17.1 13.7 11.1 5.3 4.6 4.0 16.3 17.6 18.7 — — — 0.2 -

Transportation Attractive 1,751 24.5 59.0 17.3 19.1 20 17 14.1 9.9 8.1 6.8 3.5 3.0 2.6 17.7 18.0 18.4 2.0 1.2 1.4 70 January 2020 31, KIE universe 121,059 1693.5 12.7 31.2 17.5 23 17.8 15.2 11.4 9.7 8.5 2.7 2.4 2.2 11.6 13.6 14.4 1.6 1.8 2.0

Notes:

(a) We have used adjusted book values for banking companies. (b) 2020 means calendar year 2019, similarly for 2021 and 2022 for these particular companies. (c) Exchange rate (Rs/US$)= 71.49

Source: Company, Bloomberg, Kotak Institutional Equities estimates

104 104 KOTAK INSTITUTIONAL EQUITIES RESEARCH

India Daily Summary - January 31, 2020

India of of the following , if, any, noare longer in effect for this stock Asof December 2019 31, fair value KOTAK INSTITUTIONAL EQUITIES RESEARCH , any, if for this stock,because is there notsufficient a

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SELL e next months.12 1.0% 22.3%

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- than 15% returns over the next months.12 1.5% 20.3% month horizon basis. 5 REDUCE - - 15% returns over the next 12 months. 5% returns over th The information is not available fo - -

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Kotak SecuritiesKotak has suspended coverage of this company. ADD 2.5% 27.7%

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Fair Value estimates

0% 40% 30% 20% 10% 70% 60% 50% Source:Kotak Institutional Equities Kotak Institutional Equities Research Equities KotakInstitutional coverage universe Distributionof ratings/investment banking relationships fundamental basis for determining an investment rating or and shouldnot be relied upon. = NA AvailableNot or Applicable.Not = NM Meaningful.Not NR = Rated.Not and/or Kotak Securities policies in circumstances when S Kotak involving this company and in certain other circumstances. CS = Coverage Suspended. = NC CoverNot = RatingRS Suspended. Other definitions Other Coverage view. designations: ratings/identifiers Other ADD. REDUCE. SELL. Our Our Ratings System notdoes take into account short strictly be in acco Ratings other and definitions/identifiers ratings of Definitions BUY.

105 Economy

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