INDIA DAILY

April 16, 2020 India 15-Apr 1-day 1-mo 3-mo Sensex 30,380 (1.0) (3.2) (27.6) Nifty 8,925 (0.8) (3.0) (27.8) Contents Global/Regional indices Dow Jones 23,504 (1.9) 16.4 (19.8) Daily Alerts Nasdaq Composite 8,393 (1.4) 21.6 (10.3) Results FTSE 5,598 (3.3) 8.7 (26.4) Wipro: Tougher test awaits Nikkei 19,312 (1.3) 13.6 (19.3) Hang Seng 24,145 (1.2) 4.7 (16.4) Change in Reco KOSPI 1,831 (1.4) 3.3 (18.0)

Zee Entertainment Enterprises: And again, one step forward, two back Value traded – India Company alerts Cash (NSE+BSE) 687 526 463 13,81 Derivatives (NSE) 11,099 8,084 Tata Motors: Tough CY2020 but company will remain afloat 0 Sector alerts Deri. open interest 2,042 2,854 3,862 Banks: Hands tied Economy alerts Forex/money market Change, basis points Economy: 'Normal' monsoons on the cards 15-Apr 1-day 1-mo 3-mo

Economy: WPI inflation softens; focus on growth Rs/US$ 76.6 12 231 560

10yr govt bond, % 6.9 (5) 10 (20)

Net investment (US$ mn)

13-Apr MTD CYTD

FIIs (139) 219 (6,384)

MFs (154) (619) 4,782

Top movers

Change, %

Best performers 15-Apr 1-day 1-mo 3-mo

DRRD IN Equity 3,808 1.6 34.7 29.6

DIVI IN Equity 2,395 2.3 26.6 26.1

CDH IN Equity 339 (4.1) 36.0 25.5

CIPLA IN Equity 592 (0.1) 49.8 23.7

HUVR IN Equity 2,488 6.0 28.1 21.4

Worst performers

IHFL IN Equity 92 (2.2) (40.3) (70.2)

IIB IN Equity 424 3.3 (36.1) (69.4)

EDEL IN Equity 35 (1.6) (44.6) (66.5)

RBK IN Equity 121 2.5 (26.0) (65.2)

TTMT IN Equity 73 (1.8) (12.1) (63.1)

[email protected] Contact: +91 22 6218 6427

For Private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES’ RATING SYSTEM AND OTHER DISCLOSURES. REFER TO THE END OF THIS MATERIAL. REDUCE Wipro (WPRO) IT Services APRIL 16, 2020 RESULT Sector view: Cautious Tougher test awaits. Wipro’s revenue growth of 0.4% met our estimate, while margin CMP (`): 187 decline disappointed. FCF generation declined sharply partly on account of higher receivables. Tough FY2021 awaits the industry courtesy Covid-19; Wipro has the additional Fair Value (`): 195 challenge of dealing with CEO change and energizing a multi-year underperforming BSE-30: 30,380 ship. We do not expect any quick fixes and expect underperformance to continue. We cut estimates further; expect steeper revenue contraction in FY2021E and only marginal recovery in FY2022E. REDUCE stays; we cut our FV to Rs195 from Rs200.

Wipro Stock data Forecasts/valuations 2020 2021E 2022E 52-week range (Rs) (high,low) 302-159 EPS (Rs) 16.6 15.8 17.1 Mcap (bn) (Rs/US$) 1,066/14 EPS growth (%) 11.1 (5.0) 8.3 ADTV-3M (mn) (Rs/US$) 984/13 P/E (X) 11.2 11.8 10.9 Shareholding pattern (%) P/B (X) 2.0 1.7 1.6 Promoters 74.0 EV/EBITDA (X) 6.5 6.4 5.6 FIIs 10.9 RoE (%) 17.3 15.1 14.9 MFs/BFIs 1.3/5.8 Div. yield (%) 0.8 1.1 4.6 Price performance (%) 1M 3M 12M Sales (Rs bn) 615 597 622 Absolute (5) (25) (35) EBITDA (Rs bn) 127 117 124 Rel. to BSE-30 6 4 (17) Net profits (Rs bn) 97 90 97 0.7-0.8% revenue impact due to Covid-19; EBIT margin declines 80 bps on higher staff costs Wipro reported in-line sequential c/c and yoy revenue growth of 0.4% and 2.6% in March 2020 quarter. Revenues declined 1% in reported terms to US$2,074 mn. Service discontinuity due to inability of employees to work from home and project cancellations/ ramp down attributed to Covid-19 impacted March-20 quarter revenues by US$14-US$16 mn (0.7-0.8% of revenues). Four of the seven verticals— banking, consumer, communications and manufacturing reported qoq revenue decline while healthcare and technology grew by 2.3% and 3.2% sequentially. From a service line standpoint, BPO declined 5.3% qoq while other service lines were flat or reported marginal growth. IT services EBIT margin declined 80 bps qoq to 17.6% missing our estimates by 120 bps even as Rupee depreciation (+40 bps margin tailwind), higher utilization (+320 bps qoq) and reduced S&M and travel expenses provided tailwind to margins. IT services employee costs increased 140 bps, adversely impacting margins in the quarter. Net income at Rs23.3 bn declined 5.3% qoq and 6.3% yoy due to miss at EBIT level. FCF generation at 37% of net income was weak in the quarter due to advance payment of employee wages i.e. March 31 vs the usual first day of next month. DSO increased by 2 to 88 yoy as collections in March declined due to a few glitches Long list of headwinds—pricing pressure, higher credit days, discretionary spending cuts Wipro highlighted a list of concerns that were expected—instances of clients reducing budgets, cutting discretionary spends, pricing discounts, restructuring existing IT spends and even extended payment terms. Retail, airlines, hospitality, airports, oil and auto have faced higher impact. Combined, these verticals could account for ~20% of revenues. The company did not quantify the impact of the above factors. Wipro suspended its long practice of providing quarterly revenue guidance. We forecast sequential revenue decline of 6.5% in June 2020 and 1.9% in September 2020 quarters. We forecast revenue decline of 4.3% in FY2021E in c/c. Kawaljeet Saluja

Twin challenges—external environment and internal execution; Cautious view stays FY2021E will be a challenging year for the industry. Wipro has the additional challenge of Sathishkumar S dealing with a CEO change. The new CEO, when announced, will have the unenviable task of fixing execution, tightening performance management systems, fine-tuning of strategy and building up mega-deal engine. This is a tough assignment even in a healthy environment; leave alone in a possible recessionary scenario. We do not expect any quick fix solutions. Expect revenue decline of 4.3% in c/c in FY2021E, EBIT margin decline of 150 bps and EPS decline of 5%. Maintain REDUCE with a FV of Rs195 valuing the company at ~11X FY2022E earnings [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. Wipro IT Services

The stock may seem inexpensive but multiples are fair for a company that has barely grown even in a healthy demand environment.

Suspends guidance; a good move

Wipro suspended quarterly revenue guidance. We believe this is a sensible move. With fast- paced changes to spending and pricing, it will be difficult to gauge revenue stream for any business manager. Rather than anchor the business around a guidance number, the current situation demands flexibility to deal with customer demands, and be nimble on execution.

Here is Wipro’s statement on guidance, “Due to the uncertainty around the course of the Covid-19 pandemic, we do not have visibility into the extent to which it will disrupt our operations, and we have decided to not provide revenue guidance for the quarter ending June 30, 2020. We anticipate that we will resume providing revenue guidance when we have increased certainty of both demand and supply side factors”

Free cash flow impacted due to payment of salary in advance and high DSO

FCF/ net income was down to 37% from the usual range. The decline was due to—(1) payment of employee salaries on March 31 as compared to the usual April 1. This reduced the payables and impacted cash conversion to the extent of 30% of net profit, (2) increase in receivable collection cycle by 2 days on yoy comparison. This was due to technical glitches due to sudden lockdown impacting collections. We expect weak operating and free cash generation in FY2021 as the company (and the industry) may agree to customer demand of a longer credit cycle temporarily. We model a nine-day increase in DSO (including unbilled revenues) in FY2021E.

Payout ratio to be maintained

Wipro will continue to use buyback as the primary form of payout to shareholders. Expect miniscule dividend payout (Rs1/ share). The company is eligible to announce next buyback in September 2020.

Search for new CEO on; a challenging assignment

Search for new CEO after Abidali Neemuchwala resigned in the month of January 2019. Wipro will look at both external and internal candidates for the post. Wipro’s growth turnaround thread requires additional focus on a few important areas—(1) performance management systems have scope for further tightening, (2) focus on fewer verticals. Wipro has lost relevance in some of the verticals. While it is imperative to keep the existing relationships going, allocation of growth funds can be directed towards core verticals, (3) mega-deals are a critical growth driver. Wipro has announced deals sporadically in the past as compared to competition. The company has the full service suite to offer but may have been constrained by sales/ large deals team execution. At a broader level a new CEO would have the tough task of taking Wipro out of the vicious cycle of slower growth feeding through talent management to wallet share of clients spending budget. Energizing the organization will be the key priority of any new CEO.

KOTAK INSTITUTIONAL EQUITIES RESEARCH 3 IT Services Wipro

Dealt well with supply constraints; bleak outlook on near-term demand Wipro indicted that it took early steps in preparing workforce for the Covid-19 pandemic. Wipro enabled WFH mode for employees in global locations affected by Covid-19 in early March. Wipro started enabling WFH for India employees from March 15 aggressively and obtained client approvals for WFH, procured laptops and set up technology infrastructure to enable WFH before the lockdown was put in place. Till date, 93% of Wipro’s employees have been approved for WFH by clients with 90% of employees working in WFH mode. SLAs were not significantly affected due to BCP measures. Overall the company seems to have managed supply continuity well.

However the demand environment poses a huge challenge. Wipro indicated that the impact on demand could be at par or worse than GFC. Wipro has faced instances of clients reducing budgets, cutting discretionary spends, asking for pricing discounts as well as restructuring existing IT spends. Retail, airlines, hospitality, airports, oil and auto have faced higher impact. In spite of the challenges Wipro management put up a brave face and was confident of gaining share in clients’ spends from changes in clients’ sourcing strategy and post Covid-19 digital spends. However, Wipro faces quite a few challenges that put the company at a disadvantage vis-à-vis industry leaders. Wipro is vulnerable due to—(1) sales execution challenges, (2) the company is in the midst of multiple turnaround attempts, not a good position to be in a challenging environment. We hope for the announcement of a new CEO soon and (3) weak large deal capability.

High focus on controlling costs

With an uncertain revenue environment, Wipro has increased focus on managing costs. Wipro’s CEO indicated that all options including hiring freeze, lower wage hike, reduction in discretionary spends and even furloughing of employees are on the table depending on the magnitude and impact of the crisis on business. Cost management will be tough noting aggressive cost rationalization programs undertaken in the past which leave fewer low- hanging fruits to work with and weak revenue growth. Rupee depreciation, lesser travel and facilities’ expense and lower variable compensation will provide some tailwind to margins.

BPO less amenable to WFH; declines 5.3% qoq

Wipro reported 5.3% decline in BPO revenues. We believe BPO has been impacted due to relatively lower amenability to WFH. Impact can be mitigated in the next few weeks as India plans to relax lockdown measures post April 20. Specifically IT and ITES companies have been allowed to operate with 50% strength (guidelines can be tightened in more affected states/districts/UTs) under the guidelines providing some relief to the industry. Higher push for automation from clients poses a challenge for BPO revenues in the medium term as it can lead to cannibalization of revenues.

A few positives as usual

Wipro’s results always carry a few positives despite muted performance and outlook. We list the major ones below:

Benign attrition. Wipro’s attrition rate has dropped to 12.6% from 16.6% in Mar-19. However low attrition may turn into a liability in an environment of revenue decline. Natural churn of employees reduces and may require proactive efforts to right size the organization

Increase in US$100 mn clients. Wipro has added 5 clients to US$100 mn bucket in FY2020 increasing the number of US$100 clients to 15 helped by better account management practices. However this has not percolated to lower client buckets. Number of clients in US$75 mn and US$50 mn has barely increased.

Higher utilization. Utilization (including trainees) increased 400 bps qoq to 82.4%.

Digital. Revenue contribution of digital increased to 41.2%, an increase of 140 bps qoq and 640 bps yoy.

4 KOTAK INSTITUTIONAL EQUITIES RESEARCH Wipro IT Services

FY2020 performance roundup

Wipro delivered modest 3.9% revenue growth in constant currency in FY2020. Consumer vertical reported strong 8.1% growth while performance of other verticals was unimpressive. Service-line wise BPO led with strong 10.1% growth. Applications and engineering practices disappointed with muted 1.6% and 1.8% growth respectively. Top client revenues declined 12% in the year. On profitability, EBIT margin was broadly flat at 17.9%. Net income increased by 8% to Rs97.2 bn. EPS growth was higher at 11.2% due to buyback induced share count reduction. FCF declined 17.9% to Rs78.4 bn and was 80.7% of net income and was affected by weak FCF in 4QFY20. DSO increased by 2 to 88.

Key highlights from earnings call

 Covid-19 impact on 4QFY20. Wipro indicated strong order book, project ramp up and deal closure across the company in January and February. Covid-19 impacted business from March leading to supply and demand issues.

 Covid-19 supply crisis has been managed well. Wipro activated Covid-19 management taskforce led by the COO and including heads of various departments including HR, CHRO and facilities management head. Safety and wellbeing of employees was the primary focus. Wipro initiated WFH for employees in Covid-19 affected global locations by early March. Wipro started enabling WFH for India employees from March 15 on a war footing and obtained client approvals for WFH, moved massive number of desktops to employee homes, acquired laptops and data cards and created additional capacity in cloud, VPN to enable WFH. 93% of Wipro’s employees are currently approved for WFH by clients. 90% of employees are working in WFH mode. Wipro indicated that managers are conducting daily standup calls to track employee welfare and productivity. The SLA response on projects has been stable. Wipro has also helped enable WFH for client employees.

 Bleak near-term outlook. Wipro indicated that the current operating environment is tough. Wipro has faced instances of clients reducing budgets, cutting discretionary spends, asking for pricing discounts as well as restructuring existing spends. Vertical-wise retail, airlines, hospitality, airports, oil, auto segment of manufacturing are experiencing an immediate and deeper impact. Wipro’s strategy in such tough times is to stay close to clients and offer services focused on efficiency like IT modernizing, cloud, automation, analytics etc. Defending and gaining share will be a key priority. Wipro hopes to gain market share from consolidation opportunities arising from the crisis. Experience from past recession can be leveraged in the current environment. To control costs Wipro will make trade-offs on hiring, salary hikes, subcontractor expenses and control discretionary expenditure.

 Weak FCF generation. Wipro indicated that FCF in the quarter would have increased by 30% if not for advancement of salary to staff to March 31 instead of April 1. DSO increased by 2 yoy because of teething BCP issues which delayed collections. Wipro highlighted strong collections in the first couple of weeks in April and was confident of resolving collections inefficiencies in the Jun-20 quarter.

 Impact on clients. Wipro indicated that the current predicament is at least as bad as GFC although the magnitude of the impact is difficult to predict due to several uncertainties. Wipro indicated that the impact on IT spends and pricing discounts can be permanent for a few clients who are under severe stress due to the Covid-19 crisis. Wipro expects the disruptions to be temporary for most clients. Wipro has enabled WFH and collaborative working for clients’ employees. Wipro believes that the crisis will accelerate transition to cloud. Companies that have undertaken digital transformation programs are in a better shape to handle the crisis compared to companies slow on digital transformation. Clients are planning for medium to long term response to deal with fallout from the pandemic. Wipro expects conversations with clients on IT spending and sourcing strategy to mature over the next couple of quarters.

KOTAK INSTITUTIONAL EQUITIES RESEARCH 5 IT Services Wipro

 Less impacted verticals. Telecom (surge in use of bandwidth, higher consumption of media & entertainment, utilities, some segments of banking (quick response on fiscal stimulus) and logistics (investing in new supply chain management systems) seem to be less impacted verticals.

 Confident of maintaining or gaining share. Wipro believes that the company can defend or even gain market share in clients’ IT spends owing to a few factors— (1) clients may prefer Wipro due to high service quality and strong BCP execution, (2) Wipro has relevant offerings- investments around digital, cloud, consulting, client mining, HOLMES, data and cybersecurity platforms which are aligned to clients’ strategy, and (3) Wipro’s ability to provide reliable, robust outcomes to customers matters a lot more during the crisis. Wipro has also been proactive in taking horizontal and vertical focused solutions in dealing with the Covid-19 impact to clients.

 Impact of Covid-19 on consumer BU. Wipro indicated that within consumer BU, travel, transport and hospitality, affordable fashion retail, home improvement retail, departmental stores and restaurant chains were affected. Wipro expects hyper demand for grocery to normalize or reduce in a month. Wipro indicated pent up demand for e- commerce and last mile delivery, enabling curb side pickup, store traffic monitoring, adoption of social distancing protocols, implementing adaptive/dynamic pricing can provide opportunities. Stalled transformation programs, cuts in discretionary spends have been a common phenomenon across the vertical. Wipro expects overall IT spend to decline despite increased demand in niche areas.

 Covid-19 impact on financial vertical. Wipro indicated that technology spending will be affected by impact of low/ negative interest rates. Discretionary spending can be stalled by BFSI clients and can have an impact in the medium term. Vendor consolidation, efficiency programs in run services are opportunities for Wipro. The company is working very closely with clients and has been fairly successful in satisfying SLAs.

 CEO succession update. Wipro CEO indicated that he will continue services for Wipro until successor comes on board. The company is on track to find a suitable successor for CEO position. Wipro expects to announce new CEO during the quarter.

 Dividend. Wipro did not declare a final dividend in the quarter. The company has declared dividend of Rs1/ share for FY2020.

6 KOTAK INSTITUTIONAL EQUITIES RESEARCH Wipro IT Services

Exhibit 1: Wipro 4QFY20 results (IFRS) (Rs mn)

% chg. 4QFY20 4QFY20E 4QFY19 3QFY20 KIE yoy qoq FY2020 FY2019 % chg. FY2021E % chg. IT services revenues (US$ mn) 2,074 2,085 2,076 2,095 (0.5) (0.1) (1.0) 8,256 8,120 1.7 7,817 (5.3) - IT Services 152,960 152,409 145,865 151,006 0.4 4.9 1.3 594,041 568,253 4.5 577,001 (2.9) - India State Run Enterprise 2,341 1,755 1,787 1,847 33.4 31.0 26.7 8,400 8,544 (1.7) 8,685 3.4 - IT Products 2,792 2,814 2,759 2,576 (0.8) 1.2 8.4 11,010 12,312 (10.6) 11,230 2.0 - reconciling items 10 — (32) 3 1,094 (49) — Total revenues 158,103 156,977 150,379 155,432 0.7 5.1 1.7 614,545 589,060 4.3 596,916 (2.9) Operating Income 26,391 28,577 27,320 27,234 (7.6) (3.4) (3.1) 105,730 99,910 5.8 94,297 (10.8) - IT Services 26,925 28,619 28,077 27,732 (5.9) (4.1) (2.9) 106,541 102,503 3.9 94,391 (11.4) - India State Run Enterprise (481) — (775) (528) — (1,829) — - IT Products 116 (42) (93) (140) (224.7) (182.9) (2,103) (1,047) 100.9 (93) (95.6) - reconciling items (169) — 111 170 1,292 283 —

Other income/ (expense) 3,254 4,252 4,698 3,526 (23.5) (30.7) (7.7) 16,753 15,548 7.8 20,554 22.7 Extraordinaries — PBT 29,645 32,828 32,018 30,760 (9.7) (7.4) (3.6) 122,483 115,458 6.1 114,851 (6.2) Income taxes (6,206) (6,890) (7,064) (6,164) (9.9) (12.1) 0.7 (24,799) (25,242) (1.8) (24,321) (1.9) PAT 23,439 25,938 24,954 24,596 (9.6) (6.1) (4.7) 97,684 90,216 8.3 90,531 (7.3) Equity in earnings of affiliates 13 — (17) 34 — (43) — Minority interest (191) (71) (104) (71) (495) (142) (545) Net income 23,261 25,867 24,833 24,559 (10.1) (6.3) (5.3) 97,218 90,031 8.0 90,017 (7.4) EPS (Rs/share) 4.1 4.5 4.1 4.3 (10.0) (1.0) (5.1) 16.6 15.0 11.2 15.8 (5.0) Operating margin IT Services 17.6 18.8 19.2 18.4 17.9 18.0 16.4 India State Run Enterprise (0.2) — (0.4) (0.3) — (0.2) — IT Products 4.2 (1.5) (3.4) (5.4) (19.1) (8.5) (0.8) Net Income Margin 14.7 16.5 16.5 15.8 14.1 14.7 14.5 Tax rates (%) 20.9 21.0 22.1 20.0 20.2 21.9 21.2

Notes: (1) Wipro carved out India State Run Enterprises (ISRE) from IT Services segment into a separate segment effective quarter ended December 31, 2018. Financials have been adjusted for the reclassification (2) YoY revenue growth is adjusted for divestment of Workday and Cornerstone business

Source: Company, Kotak Institutional Equities estimates

Exhibit 2: Wipro: Key changes to FY2021-23E estimates

New Old Change (%) Rs mn 2021E 2022E 2023E 2021E 2022E 2023E 2021E 2022E 2023E IT Services revenues (US$ mn) 7,817 8,128 8,372 7,889 8,153 8,256 (0.9) (0.3) 1.4 Revenue growth (%) (5.3) 4.0 3.0 (4.6) 3.3 1.3 IT services c/c revenue growth (%) (4.3) 4.0 3.0 IT services organic c/c revenue growth (%) (4.8) 4.0 3.0

Rupee/ US$ rate 73.8 74.0 74.0 73.8 74.0 74.0 (0.0) —— EBITDA margin (%) 20.3 20.6 20.6 20.1 20.6 20.2 EBIT margin (%) 16.4 16.7 16.6 16.3 16.7 16.3 EPS (Rs/share) 15.8 17.1 18.2 16.0 17.4 17.8 (1.1) (1.6) 2.3

Source: Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 7 IT Services Wipro

Exhibit 3: Growth rates across verticals, geographies and service lines (Mar 2020)

Growth (%) Contribution to C/C growth (%) Mar-20 QoQ YoY revenues (%) QoQ YoY Revenues (US$ mn) 2,074 (1.0) 0.4 100.0 0.4 2.6 Service line split of revenues Cloud and infrastructure services 535 (1.2) 2.1 25.8 (0.1) 4.1 Data, Analytics and AI 149 (0.9) (0.9) 7.2 0.7 1.5 Digital operations and Platforms 303 (5.7) (2.2) 14.6 (5.3) (1.5) Industrial & Engineering services 160 1.3 2.2 7.7 2.2 3.6 Modern application Services 927 0.3 0.1 44.7 2.4 3.2 Vertical split of revenues Communications 114 (3.6) (2.8) 5.5 (0.2) 2.0 Consumer 348 (1.4) 4.3 16.8 (0.1) 6.4 Energy, Natural Resources & Utilities 265 (2.1) 0.2 12.8 1.3 4.9 Finance Solutions 630 (2.3) (3.4) 30.4 (0.9) (1.3) Healthcare, Life Sciences & Services 280 1.9 2.9 13.5 2.3 3.6 Manufacturing 170 (2.0) 2.5 8.2 (1.3) 4.2 Technology 265 2.7 2.4 12.8 3.2 3.5 Geographical split of revenues US 1,226 (1.2) 2.3 59.1 (0.7) 3.1 Europe 500 0.7 (2.2) 24.1 3.4 1.9 RoW 348 (2.8) (2.6) 16.8 0.4 2.2 Customer concentration Top customer 62 (1.0) (19.0) 3.0 Top 5 customers 253 (1.8) (11.0) 12.2 Top 10 customers 400 (0.5) (5.5) 19.3 Non top 10 1,673 (1.1) 1.3 80.7

Notes: (1) YoY growth rates are adjusted for impact of divestment of Workday and Cornerstone business

Source: Company, Kotak Institutional Equities

8 KOTAK INSTITUTIONAL EQUITIES RESEARCH Wipro IT Services

Exhibit 4: Growth rates across verticals, geographies and service lines, FY2020

Growth (%) Contribution to Growth (%) FY2020 YoY revenues (%) C/C, YoY Revenues (US$ mn) 8,256 2.5 100.0 3.9 Service line split of revenues Cloud and infrastructure services 2,130 3.9 25.8 5.2 Data, Analytics and AI 603 2.4 7.3 3.8 Digital operations and Platforms 1,222 9.6 14.8 10.1 Industrial & Engineering services 627 1.0 7.6 1.8 Modern application Services 3,674 (0.2) 44.5 1.6 Vertical split of revenues Communications 471 0.9 5.7 3.5 Consumer 1,346 6.8 16.3 8.1 Energy, Natural Resources & Utilities 1,065 2.4 12.9 5.4 Finance Solutions 2,559 2.6 31.0 4.0 Healthcare, Life Sciences & Services 1,090 2.3 13.2 2.8 Manufacturing 669 1.1 8.1 2.5 Technology 1,057 (1.3) 12.8 (0.6) Geographical split of revenues US 4,879 7.3 59.1 7.6 Europe 1,981 (4.3) 24.0 (1.3) RoW 1,395 (3.0) 16.9 (0.4) Customer concentration Top customer 264 (12.1) 3.2 Top 5 customers 1,057 2.5 12.8 Top 10 customers 1,626 2.7 19.7 Non top 10 6,630 1.4 80.3 Notes: (1) YoY growth rates are adjusted for impact of divestment of Workday and Cornerstone business except for client concentration metrics

Source: Company, Kotak Institutional Equities

Exhibit 5: Revenue decline in top accounts, especially in largest client continues

4 qtr CQGR Mar-17 Jun-17 Sep-17 Dec-17 Mar-18 Jun-18 Sep-18 Dec-18 Mar-19 Jun-19 Sep-19 Dec-19 Mar-20 (%) Revenue(US$ mn) Top client 57 56 63 63 73 74 74 76 77 75 66 63 62 (5.1) Top 5 clients 195 203 221 227 246 237 245 266 284 281 262 258 253 (2.9) Top 10 clients 330 344 362 359 380 372 384 403 423 422 406 402 400 (1.4) ex- Top 10 clients 1,624 1,589 1,607 1,614 1,640 1,617 1,626 1,643 1,652 1,617 1,643 1,693 1,673 0.3 Growth (qoq %) Top client 6.4 (1.1) 12.4 0.2 15.1 1.2 1.0 1.8 1.4 (1.8) (13.1) (4.1) (1.0) Top 5 clients 2.7 3.9 8.7 2.9 8.6 (3.9) 3.6 8.5 6.9 (1.1) (6.8) (1.8) (1.8) Top 10 clients 2.7 4.2 5.3 (0.9) 5.7 (2.0) 3.2 5.0 5.0 (0.3) (3.9) (0.9) (0.5) ex- Top 10 clients 2.7 (2.2) 1.1 0.4 1.6 (1.4) 0.5 1.1 0.5 (2.1) 1.6 3.0 (1.1) Client buckets US$ 100 mn+ 9 9 9 9 8 8 9 10 10 13 13 14 15 US$ 75 mn+ 18 18 16 17 20 19 19 19 22 23 23 22 22 US$ 50 mn+ 34 36 39 41 39 40 39 41 41 41 41 41 40 Notes (1) IT services segment has been reclassifed and does not include India PSU and India govt. business from Jun-17 quarter

Source: Company, Kotak Institutional Equities

KOTAK INSTITUTIONAL EQUITIES RESEARCH 9 IT Services Wipro

Exhibit 6: Vertical-wise margin performance (Mar 2020)

Mar-20 EBIT Change (bps) C/C growth Contribution margin (%) QoQ YoY QoQ YoY to revenues (%) Banking Financial Services & Insurance 17.4 (25) (351) (0.9) (1.3) 30.4 Communications 15.7 (128) (292) (0.2) 2.0 5.5 Consumer 17.7 (86) (222) (0.1) 6.4 16.8 Energy, Natural Resources & Utilities 19.2 324 428 1.3 4.9 12.8 Healthcare, Life Sciences & Services 14.8 251 356 2.3 3.6 13.5 Manufacturing 18.7 (45) (87) (1.3) 4.2 8.2 Technology 20.0 (113) 385 3.2 3.5 12.8 Notes (a) YoY revenue growth is adjusted for divestment of Workday and Cornerstone business

Source: Companies, Kotak Institutional Equities

Exhibit 7: Sharp decline in BFSI revenue growth in FY2020 due to client specific issues and industry- wide slowdown in technology spends

BFSI c/c yoy growth (%) 20 17.5 16.0 15.9 14.5 14.5 14.4 15

10.8 11.2

10 7.8 8.1 5.5 5.9 4.3 5 2.8 1.0

0 (1.3) Jun-16 Jun-17 Jun-18 Jun-19 Sep-16 Sep-17 Sep-18 Sep-19 Dec-16 Dec-17 Dec-18 Dec-19 (5) Mar-17 Mar-18 Mar-19 Mar-20

Source: Company, Kotak Institutional Equities

10 KOTAK INSTITUTIONAL EQUITIES RESEARCH Wipro IT Services

Exhibit 8: Revenue growth moderates in consumer BU likely due to Covid-19 impact

Consumer BU c/c yoy growth (%) 16 14.8

14 12.1 12 10 10 7.7 7.7 8 6.1 6.9 5.6 4.8 6 4.5 6.4 3.7 2.9 4 2.2 1.4 2 0.5 0 Jun-16 Jun-17 Jun-18 Jun-19 Sep-16 Sep-17 Sep-18 Sep-19 Dec-16 Dec-17 Dec-18 Dec-19 Mar-17 Mar-18 Mar-19 Mar-20

Source: Company, Kotak Institutional Equities

Exhibit 9: Weak free cash generation due to advancement of salary payments and higher receivables

FCF/ net profit (%) 140 125 118.2 117.5 113.0 120 98.8 101.0 100 84.0 80

60 68.2 55 40 37.3 20 7.8 - Jun-18 Jun-19 Sep-17 Sep-18 Sep-19 Dec-17 Dec-18 Dec-19 Mar-18 Mar-19 Mar-20

Source: Company, Kotak Institutional Equities

KOTAK INSTITUTIONAL EQUITIES RESEARCH 11 IT Services Wipro

Exhibit 10: Operating cash flows as a % of net income decreases to 60.5%

OCF/ net profit (%) 180 154.0 160 142.0 135.9 134.0 140 120.4 124.5 120 106.8 98.6 100

80 79.1 60 60.5 40 41.6 20 0 Jun-18 Jun-19 Sep-17 Sep-18 Sep-19 Dec-17 Dec-18 Dec-19 Mar-18 Mar-19 Mar-20

Source: Company, Kotak Institutional Equities

Exhibit 11: EBIT margin declines 50 bps qoq to 17.6%

IT services adjusted EBIT margin (%) 25

23

21

19

17 17.6

15 Jun-13 Jun-14 Jun-15 Jun-16 Jun-17 Jun-18 Jun-19 Sep-13 Sep-14 Sep-15 Sep-16 Sep-17 Sep-18 Sep-19 Dec-13 Dec-14 Dec-15 Dec-16 Dec-17 Dec-18 Dec-19 Mar-14 Mar-15 Mar-16 Mar-17 Mar-18 Mar-19 Mar-20

Source: Company, Kotak Institutional Equities

12 KOTAK INSTITUTIONAL EQUITIES RESEARCH Wipro IT Services

Exhibit 12: Subcontracting costs have been managed well

Subcontracting costs as a % of revenue 18 17 16 15

14 14.4 13 12 11 10 9 8 Jun-13 Jun-14 Jun-15 Jun-16 Jun-17 Jun-18 Jun-19 Sep-13 Sep-14 Sep-15 Sep-16 Sep-17 Sep-18 Sep-19 Dec-13 Dec-14 Dec-15 Dec-16 Dec-17 Dec-18 Dec-19 Mar-14 Mar-15 Mar-16 Mar-17 Mar-18 Mar-19 Mar-20

Source: Company, Kotak Institutional Equities

Exhibit 13: Sharp fall in attrition rate in the last couple of quarters

25

22

19

16

13 12.6 10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Jan-19 Jan-20 Sep-10 Sep-11 Sep-12 Sep-13 Sep-14 Sep-15 Sep-16 Sep-17 Sep-18 Sep-19 May-11 May-12 May-13 May-14 May-15 May-16 May-17 May-18 May-19

Source: Company, Kotak Institutional Equities

KOTAK INSTITUTIONAL EQUITIES RESEARCH 13 IT Services Wipro

Exhibit 14: Sales and marketing expense as a % of revenues at multi-quarter lows

S&M as a% of IT services revenues 9 8.3 7.9 7.9 7.8 7.5 7.5 7.5 7.6 8 7.0 7.2 7.2 6.6 7 6 5 4 3 2 1 0 Jun-17 Jun-18 Jun-19 Sep-17 Sep-18 Sep-19 Dec-17 Dec-18 Dec-19 Mar-18 Mar-19 Mar-20

Notes: (1) S&M spends adjusted for impairment of HPS receivables

Source: Company, Kotak Institutional Equities

Exhibit 15: Wipro: Trends in G&A expenses

8 G&A as a % of IT services revenues 6.8 7 6.1 6.1 5.8 6 5.4 5.4 5.4 5.5 5.0 5.0 4.8 4.6 5

4

3

2

1

0 Jun-17 Jun-18 Jun-19 Sep-17 Sep-18 Sep-19 Dec-17 Dec-18 Dec-19 Mar-18 Mar-19 Mar-20 Notes: (1) G&A spends adjusted for write-off of receivables due to client bankruptcies in Dec-17 and Mar-18 and payment to settle dispute with National Grid in Sep-18

Source: Company, Kotak Institutional Equities

14 KOTAK INSTITUTIONAL EQUITIES RESEARCH Wipro IT Services

Exhibit 16: Wipro: operating metrics

Mar-18 Jun-18 Sep-18 Dec-18 Mar-19 Jun-19 Sep-19 Dec-19 Mar-20 IT services revenues (US$ mn) 2,062 2,027 2,041 2,047 IT services revenues (US$ mn)- Ex ISRE 2,019 1,989 2,010 2,047 2,076 2,039 2,049 2,095 2,074 Service line split of revenues (%) - new Global Infrastructure Services 28.8 27.4 26.5 Wipro Analytics 7.0 7.1 7.8 Business Process Services 12.1 12.1 12.7 Product Engineering 7.3 7.3 7.3 Application Services 44.8 46.1 45.7 Digital revenues 26.7 28.0 31.3 33.2 34.8 37.4 39.6 39.8 41.2 Service line split of revenues (%) - new - Ex-ISRE Cloud and Infrastructure services 27.6 26.3 25.6 25.0 25.2 25.7 25.7 25.8 25.8 Data analytics and AI 6.9 7.5 7.2 7.2 7.4 7.3 7.2 7.2 Digital Operations and Platforms 12.4 12.4 12.9 14.7 14.9 14.7 14.7 15.3 14.6 Industrial & Engineering Services 7.7 7.7 7.5 7.6 7.6 7.5 7.5 7.7 Modern Application Services 45.5 46.7 46.3 45.6 45.1 44.6 44.8 44.2 44.7 Service line split of revenues (%) - old - Ex-ISRE Global Infrastructure Services 27.6 26.3 25.6 25.0 25.2 Wipro Analytics 7.1 7.2 7.8 7.6 7.6 Business Process Services 12.4 12.4 12.9 14.7 14.9 Product Engineering 7.4 7.4 7.4 7.1 7.2 Application Services 45.5 46.7 46.3 45.6 45.1 Vertical split of revenues (%) - new classification Communications 5.8 5.6 5.7 Consumer 15.6 16.0 16.3 Energy, Natural Resources & Utilities 12.5 12.5 12.6 Finance Solutions 29.2 30.0 30.7 Healthcare, Life Sciences & Services 13.9 13.4 12.8 Manufacturing 8.7 8.3 8.2 Technology 14.3 14.2 13.7 Vertical split of revenues (%) - new classification- Ex-ISRE Communications 5.9 5.7 5.8 5.8 5.7 5.9 5.7 5.7 5.5 Consumer 15.0 15.3 15.7 15.6 16.2 15.6 16.0 16.9 16.8 Energy, Natural Resources & Utilities 12.7 12.7 12.8 13.0 12.8 12.8 12.9 12.9 12.8 Finance Solutions 28.7 29.8 30.5 31.4 31.5 31.6 31.3 30.9 30.4 Healthcare, Life Sciences & Services 14.2 13.6 13.0 13.1 13.2 13.2 13.0 13.1 13.5 Manufacturing 8.9 8.4 8.3 8.1 8.0 7.9 8.1 8.2 8.2 Technology 14.6 14.5 13.9 13.0 12.6 13.0 13.0 12.3 12.8 Geographical split of revenues (%) US 52.7 54.9 55.2 Europe 27.0 25.6 25.3 India and Middle east business 9.4 8.6 8.1 APAC & other emerging markets 10.9 10.9 11.4 ROW Geographical split of revenues (%)- Ex ISRE US 53.8 56.0 56.1 57.1 58.2 58.7 59.6 59.2 59.1 Europe 27.5 26.1 25.7 25.5 24.6 24.6 23.5 23.7 24.1 ROW 18.7 17.9 18.2 17.4 17.2 16.7 16.9 17.1 16.8

Source: Company, Kotak Institutional Equities

KOTAK INSTITUTIONAL EQUITIES RESEARCH 15 IT Services Wipro

Exhibit 17: Wipro: Operating metrics …continued

Mar-18 Jun-18 Sep-18 Dec-18 Mar-19 Jun-19 Sep-19 Dec-19 Mar-20 Client metrics Customer size distribution (TTM) Million dollar clients of which 631 624 612 > US$100 mn 8 8 9 >US$75 mn 20 19 19 >US$50 mn 39 40 39 >US$20 mn 95 91 93 >US$10 mn 171 173 180 >US$5 mn 277 278 274 >US$3 mn 369 368 358 >US$1 mn 631 624 612 Repeat business (%) 97.4 99.5 98.6 New client additions 58 75 76 Total active customers 1,248 1,254 1,193 Customer concentration (%) Top customer 3.5 3.7 3.6 Top 5 customers 11.9 11.7 12.1 Top 10 customers 18.4 18.3 18.8 Employees (IT services) 179,042 179,735 175,346 Client metrics- Ex ISRE Customer size distribution (TTM) Million dollar clients of which 595 595 584 578 571 564 569 572 > US$100 mn 8 8 9 10 10 13 13 14 15 >US$75 mn 20 19 19 19 22 23 23 22 22 >US$50 mn 39 40 39 41 41 41 41 41 40 >US$20 mn 94 91 92 99 96 92 92 96 96 >US$10 mn 171 171 177 171 172 166 165 169 166 >US$5 mn 268 268 265 269 262 259 261 260 260 >US$3 mn 357 359 348 339 339 340 341 344 341 >US$1 mn 595 595 584 578 571 564 569 572 574 Repeat business (%) 97.4 99.5 98.6 97.9 97.6 99.4 98.4 97.6 97.0 New client additions 57 75 76 57 63 41 57 77 65 Total active customers 1,178 1,184 1,131 1,132 1,115 1,060 1,027 1,070 1,074 Customer concentration (%)- Ex ISRE Top customer 3.6 3.7 3.7 3.7 3.7 3.7 3.2 3.0 3.0 Top 5 customers 12.2 11.9 12.2 13.0 13.7 13.8 12.8 12.3 12.2 Top 10 customers 18.8 18.7 19.1 19.7 20.4 20.7 19.8 19.2 19.3 Employees (IT services) 159,923 160,846 171,451 172,379 171,425 174,850 181,453 187,318 182,886 Utilization (%) Global IT Services excl IFOX-Gross (a) (b) 73.1 74.5 74.4 73.4 75.4 73.9 71.4 70.2 73.4 Global IT Services excl IFOX-Net 82.4 83.9 83.2 81.9 84.1 82.8 79.9 78.5 82.4 Attrition (%) Global IT Services - Voluntary - Qtrly annualized 17.5 17.7 18.3 17.5 16.6 17.9 16.0 12.5 12.6 Revenues by project type (%) Fixed price 58.7 58.9 58.9 59.8 60.0 61.6 61.9 62.6 63.2 Time and material 41.3 41.1 41.1 40.2 40.0 38.4 38.1 37.4 36.8 Onsite-offshore revenue split (%) Onsite 52.7 52.9 52.8 52.2 51.5 52.3 53.3 53.2 51.8 Offshore 47.3 47.1 47.2 47.8 48.5 47.7 46.7 46.8 48.2

Notes: (1) Wipro has carved out India State Run Enterprises (ISRE) from IT Services segment. New IT segment classification excludes India PSU and India govt. business

Source: Company, Kotak Institutional Equities

16 KOTAK INSTITUTIONAL EQUITIES RESEARCH Wipro IT Services

Exhibit 18: Profit model, balance sheet, cash model of Wipro Limited, March fiscal year-ends, 2016-2023E (Rs mn)

2016 2017 2018 2019 2020E 2021E 2022E 2023E Profit model Revenues 516,307 558,261 546,359 590,607 614,545 596,916 621,621 639,904 Cost of revenues (including depreciation) (356,723) (391,434) (385,575) (412,853) (436,085) (435,776) (449,332) (463,344) Gross profit 159,584 166,827 160,784 177,754 178,460 161,140 172,289 176,560 SG&A expenses (including depreciation) (62,561) (72,950) (76,490) (80,641) (72,730) (66,843) (71,886) (73,178) EBIT 97,023 93,877 84,294 97,113 105,730 94,297 100,403 103,382 Other income 17,698 16,477 18,169 18,346 16,753 20,554 24,881 31,382 Pre-tax profits 114,721 110,354 102,463 115,459 122,483 114,851 125,284 134,764 Provision for tax (25,305) (25,213) (22,390) (25,242) (24,799) (24,321) (27,246) (30,066) PAT 89,416 85,141 80,073 90,217 97,684 90,531 98,038 104,698 Equity in earnings of affiliates, minority interest (net) (492) (248) 8 (185) (466) (514) (567) (625) PAT from continuing operations 88,924 84,893 80,081 90,032 97,218 90,017 97,471 104,072 EPS (Rs) 13.5 13.1 12.7 15.0 16.6 15.8 17.1 18.2 Balance Sheet Shareholders funds 466,078 520,304 482,936 568,116 557,458 633,748 672,881 715,184 Borrowings 17,361 19,611 45,268 28,368 17,478 12,638 12,638 12,638 Minority interest 2,224 2,391 2,410 2,637 1,875 2,420 3,018 3,677 Other liabilities 20,697 21,667 22,731 19,700 23,858 23,858 23,858 23,858 Total liabilities 506,360 563,973 553,345 618,821 600,669 672,664 712,396 755,357 Net fixed assets 64,952 69,794 64,443 70,601 97,868 99,576 98,946 100,352 Goodwill & intangibles 117,832 141,718 135,697 130,742 147,374 143,847 140,320 136,793 Cash and bank balances 306,339 351,843 301,687 386,161 343,436 336,364 388,402 434,533 Net current assets excluding cash (14,402) (31,387) (17,913) (17,556) (24,627) 56,740 47,842 46,229 Other assets 31,639 32,005 69,431 48,873 36,618 36,137 36,886 37,449 Total assets 506,360 563,973 553,345 618,821 600,669 672,664 712,396 755,357 Cashflow statement Operating profit before working capital changes 111,823 119,261 105,289 116,396 127,829 117,084 124,208 128,169 Tax paid (26,935) (25,476) (28,105) (25,149) (6,384) (24,321) (27,246) (30,066) Change in working capital/other adjustments (6,151) 4,541 (936) 27,165 (23,855) (7,654) 8,182 1,083 Capital expenditure (13,172) (19,646) (20,699) (20,841) (22,227) (20,968) (19,649) (22,667) Acquisitions (39,373) (29,374) (6,816) 25,838 (2,544) — — — Other income 17,086 9,843 14,956 15,728 19,603 20,554 24,881 31,382 Free cash flow 43,278 59,149 63,689 139,137 92,422 84,697 110,376 107,901 Margins and ratios Consolidated gross profit margin (%) 30.9 29.9 29.4 30.1 29.0 27.0 27.7 27.6 Consolidated EBIT margin (%) 18.8 16.8 15.4 16.4 17.2 15.8 16.2 16.2 IT services EBIT margin (%) 20.5 17.4 15.8 17.1 17.9 16.4 16.7 16.6 RoAE (%) 20.3 17.2 16.0 17.1 17.3 15.1 14.9 15.0 RoACE (%) 17.3 14.7 13.1 14.4 15.0 12.5 12.0 11.6

Source: Company, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 17 REDUCE Zee Entertainment Enterprises (Z) Media APRIL 16, 2020 CHANGE IN RECO. Sector view: Attractive

And again, one step forward, two back. We fail to explain Zee’s decision to commit CMP (`): 134 Rs5.2 bn (Rs12.47 bn including vendor financing) in an extremely challenging Fair Value (`): 145 environment to a business (SugarBox) that has very different capital intensity and risk BSE-30: 30,380 and return profile. The Covid-19 impact and SugarBox investment lead to an EPS cut of 23-30% for FY2021-22E. We downgrade the stock to REDUCE from ADD in view of continued capital allocation/ governance concerns. Revise fair value to Rs145 (from Rs340), valuing the stock at 9X FY2022E earnings.

Zee Entertainment Enterprises Stock data Forecasts/valuations 2020 2021E 2022E 52-week range (Rs) (high,low) 440-114 EPS (Rs) 17.9 13.1 16.2 Mcap (bn) (Rs/US$) 129/1.7 EPS growth (%) 8.6 (27.1) 24.4 ADTV-3M (mn) (Rs/US$) 3,500/46 P/E (X) 7.5 10.2 8.2 Shareholding pattern (%) P/B (X) 1.3 1.3 1.2 Promoters 4.9 EV/EBITDA (X) 4.9 6.1 4.7 FIIs 67.4 RoE (%) 18.5 12.6 14.6 MFs/BFIs 5.1/6.9 Div. yield (%) 3.4 4.1 4.1 Price performance (%) 1M 3M 12M Sales (Rs bn) 80 76 89 Absolute (20) (52) (68) EBITDA (Rs bn) 23 19 24 Rel. to BSE-30 (17) (34) (58) Net profits (Rs bn) 17 13 16

Broad contours of investments in SugarBox and our key concerns

Zee proposes to invest Rs5.22 bn in its 80% subsidiary, SugarBox, over two years and offer corporate and performance guarantees to help SugarBox secure vendor financing and finalize contracts. SugarBox would invest Rs12.47 bn (Rs5.2 bn from Zee + vendor financing) to set up its local wifi at public places (especially railway/metro trains and stations) where consumers can access various apps (especially ZEE5) on its platform without using mobile internet. SugarBox would be a free service for consumers and it would receive fixed fee/revenue share from apps.

In our view, this is an ambitious capital-intensive project with several risks: (1) evolution of technology (such as 5G deployment) can weaken SugarBox’s use case over time, (2) consumer adoption and onboarding of leading apps could be difficult for various reasons (detailed on page 3), (3) product and employee profile do not inspire confidence, and (4) capex would be upfront and economics would evolve over time. Break-even time/return ratios could disappoint in case of cost overruns, monetization challenges and other unanticipated developments. We believe Zee would have done well to avoid this commitment or roped in a PE/VC for funding.

Stark disconnect between investor expectations and management decisions/actions

Following the promoter stake sale in Nov 2019, minority investors expected Zee management to reconstitute the board and address governance and balance sheet concerns. Zee management has done little to address investor concerns, which have been, on the contrary, aggravated by director resignations, director appointments (later rolled back) and MCA enquiry. Zee’s plan to invest in SugarBox compounds its list of woes. The need of the hour is to strengthen the balance sheet, focus on the core business and step up investments in OTT.

Baking in Covid-19 impact; Downgrade to REDUCE from AD and cut FV to Rs145 from Rs340 Jaykumar Doshi We bake in direct/indirect impact of Covid-19 and SugarBox investment and cut FY2021-22E earnings estimates by 23-30%. We model 40%/11% decline in ad revenues in 1Q/FY2021E. We downgrade the stock to REDUCE from ADD. The stock is inexpensive but it is difficult to stay constructive in view of continued capital allocation/ governance concerns (we expected these issues to wane post promoter stake sale). The stock would languish up until corrective [email protected] measures are taken. 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. Zee Entertainment Enterprises Media

Further details about SugarBox

 Investment details. Zee board has approved an investment of Rs5.22 bn in its 80% subsidiary, Margo Networks (‘SugarBox’); shareholder approval not needed per management. This investment would allow SugarBox to scale up (details below). Zee has not yet finalized and disclosed incremental shareholding that this investment would fetch (valuation of SugarBox not finalized, yet). Zee management indicated that this investment would significantly dilute stake of SugarBox’s founders who currently own 20% of the company. However, milestone-linked earn-outs would help founders increase stake over time (details not disclosed). SugarBox’s FY2020E revenues were about Rs4.7 mn. We note that Zee had acquired 80% stake in SugarBox in April 2017 for Rs750 mn

 Brief profile of SugarBox—SugarBox is a start-up operating in the CDN (content distribution network) space and it provides hyper-local content distribution services at public places, rural areas, hospitals, etc. Consumers can use streaming, ecommerce, payment apps available on SugarBox platform (one-stop shop app) without accessing mobile internet while they are at any SugarBox zone (or ‘POI’: places of interest) such as metro/railway trains, stations, hospitals, Gram Panchayats, etc. SugarBox recently launched services at Hyderabad and Chennai metro. At present, SugarBox platform only supports the ZEE5 app. At present, about 22,000 users use these services daily.

 Business plan. SugarBox has been awarded a few tenders/contracts such as Indian railways (RailTel), Mumbai Subarban, Navi Mumbai Municipal Business, Kolkata Metro, etc. It plans to execute these projects over the next 2-3 years. These projects would require aggregate funding of Rs12.47 bn of which Rs5.22 bn would be funded by Zee and remaining Rs7.25 bn would be funded through vendor financing/debt (and perhaps internal accruals). This funding would be used for capex (mostly hardware), royalty (space charge+ revenue share), marketing expense and operating expense. In the medium term, SugarBox also plans to onboard ecommerce, payment and other OTT apps on its platform.

 Monetization model, break-even time and 2-year targets. SugarBox platform would be completely free for its users. SugarBox’s source of income would be fees from apps available on its platform. The commercial arrangement could be fixed fee (minimum guarantee) + revenue share. The company envisages scaling up to 8,300 POIs and network reach of 27 mn by June 2022 (from 250 POIs and reach of 0.7 mn as of Feb 2020). As per management’s forecast, investment break-even period is four years; details not disclosed.

 Scope of the railway project. The railway project would cover 7,700 rakes (intercity + suburban + metros), 500 buses and 6,077 stations and entail deployment of 75,000 servers. Per management estimate, the underlying railway services are used by about 25 mn daily commuters and 300 mn monthly unique commuters— potential target audience for SugarBox. Per management, most of these are 5-yr or 10-yr exclusive contracts.

KOTAK INSTITUTIONAL EQUITIES RESEARCH 19 Media Zee Entertainment Enterprises

Key risks and concerns

1. Technology evolution is a key risk— Long-term relevance of SugarBox ecosystem hinges on a number of factors: (1) mobile data tariffs. Attractiveness of Sugarbox is inversely related to mobile internet tariffs. SugarBox may benefit in the near term from likely increase in mobile tariffs. However, if per GB cost of mobile data falls again in the medium-to-long term, SugarBox’s attractiveness could reduce, (2) mobile internet speed. Deployment of 5G in the medium-to-long term could drive improvement in mobile data speeds thus reducing the need for SugarBox at least in metros/urban markets, (3) video compression techniques are rapidly evolving and OTT platforms are getting better at delivering a seamless streaming experience over patchy mobile networks. Given these trends, we believe it is a bit risky to take the 5-10 year view that SugarBox seems to be taking.

2. Product and employee profile does not inspire confidence. A quick glance through LinkedIn profiles of SugarBox employees and compensation of the top 10 employees does not give us confidence. We note that average compensation of the top 9 employees (excluding CEO and CTO) was Rs2.1 mn per annum in FY2019; it makes us wonder if the company has invested adequately in talent and whether it has the ability to attract good talent. Total employee count as of March 2019 was 77. For SugarBox to deliver on its vision, it would need a good tech team to support seamless experience across devices and to support different platforms. A quick look at SugarBox App also doesn’t inspire confidence (Zee first invested in the company three years back and the first version of SugarBox app was launched two years back). We do not have enough confidence in Zee’s tech capabilities (ZEE5 app significantly lags peers) and we do not know enough about SugarBox leadership to take a leap of faith.

3. Onboarding of other apps looks difficult. At present, SugarBox platform carries only the ZEE5 app. The management intends to onboard ecommerce, payment and other OTT apps and to support a host of activities (shopping, banking and streaming). It looks difficult to us as (1) ecommerce and payment app consume little bandwidth. Given this and due to data security risks, we believe that consumers may not prefer SugarBox for transactions and ecommerce/payment may not be too keen to come on board, (2) leading OTT apps such as Hotstar, Netflix, Prime Video, Jio and YouTube may have reservations to engage with SugarBox. Licensing restrictions and data security concerns would not allow OTT players (especially global players) to share data with SugarBox for offline consumption. In our view, it is unlikely that any large OTT app would partner with SugarBox till the time it scales up in a big way.

4. Adoption level could be low. Even as we appreciate the scale and potential of the railways project (25 mn daily commuters, 300 mn monthly unique commuters), we believe SugarBox adoption could be low (say 15-20% of daily commuters) due to multiple reasons (1) SugarBox may only become a repository of free and catch-up content (live TV not supported; premium available to ZEE5 subscribers only) of ZEE5 if other OTT apps do not partner, (2) avid consumers of video content often tend to use the ‘available offline’ option offered by OTT apps to download content to be consumed during a journey, and (3) not all commuters have smartphones and/or are tech savvy. We note that SugarBox garners 27K DAUs on Hyderabad metro out of 400K daily commuters (i.e. 7% adoption rate)

5. Monetization challenges. SugarBox expects minimum guarantee and/or revenue share from apps. In our view, it won’t be easy for OTT apps to adequately monetize this offline viewership on the SugarBox platform in absence of third party audit of viewership data. Further, monetization potential for apps would be a function of quality of consumer base of SugarBox.

20 KOTAK INSTITUTIONAL EQUITIES RESEARCH Zee Entertainment Enterprises Media

6. Other challenges. SugarBox could face several other foreseen challenges given the nature of its projects. For instance, (1) railway property is often damaged and stolen from trains. Managing and protecting hardware assets across thousands of trains won’t be easy, (2) cost overruns— operating and marketing costs could exceed initial estimates.

Free cash flow guidance likely to be missed Just a quarter ago, Zee management guided that cash generation in FY2021E would be more than 50% of net profit. Covid-19 and Zee’s decision to invest in SugarBox puts that guidance at risk (see Exhibit 5).

A quick resolution of BS concerns would help allay investor concerns

We reiterate our thoughts on key balance sheet concerns

 Inventories stood at Rs43 bn (+12% HoH, +59% yoy) as at end-1HFY20. We expect it to further increase to Rs50 bn+ by end-FY2020E as Zee procures content against outstanding advances/deposits of Rs8.4 bn (Sep-19) given for content procurement. FY2020E would be the fourth year of elevated investments in movies—we estimate aggregate gross spends of about Rs58-60 bn on movies over FY2017-20E. Per management, a large chunk of inventory increase over the past 12 months pertains to content procured for regional movie channels that are yet to be launched (or were launched recently) and hence amortization of the associated inventory would hit the P&L in FY2021E. In our view, Zee management should consider (1) carrying out an independent evaluation of its movie library and write-off inventory pertaining to procurement inefficiency, and (2) revise amortization policy to full amortization of movie rights in less than three years (against about five years as of now).

 Receivables stood at Rs24.2 bn (+32% HoH, +29% yoy) as at end-1HFY20. Receivables from Dish TV (erstwhile related-party) and Siti Networks (related-party) increased to Rs7.5 bn as at Dec 2019 (versus Rs7 bn as at Sep 2019, Rs5 bn as at Mar 2019 and Rs900 mn as at end-FY2018) including long overdue receivables. We note that outgoing directors have raised concerns around this line item in their resignation letters. Zee management has guided to recovery of these overdue receivables over the next 12-24 months. We recommend expedited recovery of receivables from these two parties or some write-off of the same.

 Advances/deposits. Zee has given unsecured interest-free deposits of Rs6.4 bn (Sep-19) and an advance of Rs2 bn (Sep-19) to aggregators/agencies for content procurement. We recommend that the company recover these advances and/or procure content at the earliest. Any such advances in future should be accompanied by additional disclosures about aggregators/agencies/production houses.

 Cash and cash treasury investments stood at Rs17.7 bn as at 3QFY20 (down from Rs23.5 bn as at end-FY2019 and Rs17.6 bn as at June 2019 despite strong EBITDA growth). We note that Zee’s treasury investments comprise of (1) offshore investments (Posiedon and Actinum) of about Rs6 bn, and (2) about Rs2 of ICDs. In our view, Zee management should unwind offshore investments and ICDs (as long promised) or write-off the same by end-FY2020E.

Further reconstitution of board is required

We note that two independent directors (Surendra Singh and Aparajita Jain) appointed in Nov 2019 resigned in March 2020 perhaps due to critical feedback and lack of support from large shareholders. Subsequently, Zee appointed Piyush Pandey (Executive Chairman, Ogilvy and Mather India), a respected name in the advertising industry. While this is a comforting development, we feel further reconstitution of board is required. Inclusion of eminent individuals, who inspire investor confidence and can contribute towards Zee’s TV-to-digital transition, would help rebuild investor confidence.

KOTAK INSTITUTIONAL EQUITIES RESEARCH 21 Media Zee Entertainment Enterprises

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

Revised Previous % change 2020E 2021E 2022E 2020E 2021E 2022E 2020E 2021E 2022E Consolidated Ad revenues 46,770 41,626 51,200 48,478 54,295 62,439 (3.5) (23.3) (18.0) Subscription revenues 27,880 29,295 32,171 27,678 28,655 31,703 0.7 2.2 1.5 Other operating revenues 5,009 5,382 6,012 5,259 5,560 5,880 (4.8) (3.2) 2.2 Total revenues 79,659 76,303 89,382 81,415 88,510 100,022 (2.2) (13.8) (10.6) Direct costs 33,328 35,752 40,866 33,830 38,032 43,310 (1.5) (6.0) (5.6) Employee cost 8,210 7,717 8,875 8,264 9,091 10,182 (0.7) (15.1) (12.8) SG&A expenses 14,660 13,741 15,465 14,826 15,515 17,335 (1.1) (11.4) (10.8) Total expenditure 56,198 57,210 65,206 56,920 62,638 70,826 (1.3) (8.7) (7.9) EBITDA 23,461 19,093 24,176 24,495 25,872 29,196 (4.2) (26.2) (17.2) PAT 15,378 12,058 15,363 15,855 17,181 19,916 (3.0) (29.8) (22.9) Adj PAT (excl. RPS impact) 17,211 12,542 15,605 16,553 17,697 20,129 4.0 (29.1) (22.5) EPS (Rs) 16.0 12.6 16.0 16.5 17.9 20.7 (3.0) (29.8) (22.9) Adj EPS (Rs) (excl. RPS impact) 17.9 13.1 16.2 17.2 18.4 21.0 4.0 (29.1) (22.5)

Key assumptions Ad revenue growth (%) (a) (7.1) (11.0) 23.0 (3.8) 12.0 15.0 Domestic subscription growth (%) (a) 28.3 6.0 11.0 27.0 4.0 12.0 International subscription growth (%) (a) (17.0) (2.0) — (16) —— EBITDA margin (%) 29.5 25.0 27.0 30.1 29.2 29.2

Source: Company, Kotak Institutional Equities estimates

Exhibit 2: App usage with and without SugarBox

Source: Company

22 KOTAK INSTITUTIONAL EQUITIES RESEARCH Zee Entertainment Enterprises Media

Exhibit 3: App usage with and without SugarBox

Source: Company

Exhibit 4: SugarBox: Scale and scope of the project

Source: Company

KOTAK INSTITUTIONAL EQUITIES RESEARCH 23 Media Zee Entertainment Enterprises

Exhibit 5: Zee: Back-of-the-envelope working of FCF potential, March fiscal year-end, 2021E (Rs mn)

Comments Revenues 76,303 KIE estimates - Advertising revenues 41,626 - Subscription revenues 29,295 - Other operating 5,382

EBIT 16,356 Depreciation 2,737 EBITDA 19,093 KIE estimate: EBITDA margin of 25% Add: movie amortization expense 11,000 Non-cash expenses included in progamming costs Cash EBITDA 30,093 Less: taxes paid (4,253) At 26% of EBIT Underlying OCF before W-cap changes 25,840 W-cap (increase)/decrease (1,000)

Operating cash flow 24,840

Gross investment in movies (movie capex) (10,000) Expected to be marginally lower than movie amortization expense Other maintenance capex (2,000) SugarBox capex (4,000) FCF excluding other income/finance costs and pre-RPS Free cash flow (pre-RPS payout) 8,840 redemption and pre-dividend payout RPS redemption and RPS dividend payout (5,000) Includes DDT Add: Other income 1,000 FCF post RPS payouts (incl other income) 4,840 Net profit 12,174 FCF post RPS payout as % of net profit 40

Source: Company, Kotak Institutional Equities estimates

Exhibit 6: Zee: Break-up of cash and cash equivalents, March fiscal year-end, 2020E (Rs mn)

Comments Offshore investments (Posiedon and Zee management has indicated that it would take 12 months Actinum) 6,000 to unwind these long-pending offshore investments ICDs 2,000 KIE estimate: illiquid in our view Cash, CDs and liquid investments 6,500 Cash at hand Total cash and cash equivalents 14,500

Source: Company, Kotak Institutional Equities estimates

24 KOTAK INSTITUTIONAL EQUITIES RESEARCH Zee Entertainment Enterprises Media

Exhibit 7: Zee network's weighted viewership was down 260 bps yoy in 4QFY20 Weighted viewership share of Zee network in Hindi and regional genres

Zee 30 28.1 28.4 28.3 27.7 27.6 27.4 28 27.2 27.0 26.5 26.4 25.3 25.7 26 25.1 24.9 24.5 24.0 24

22

20 1QFY17 2QFY17 3QFY17 4QFY17 1QFY18 2QFY18 3QFY18 4QFY18 1QFY19 2QFY19 3QFY19 4QFY19 1QFY20 2QFY20 3QFY20 4QFY20

Notes: (1) Above market share working is based on Zee network's quarterly viewership share in its key genres (Hindi Gec, Hindi movies Hindi FTA GEC+movies and regional GECs) and it uses ad market size of respective genre as weight (2) The above calculation does not cover English, music, regional movies and niche genres that collectively account for less than 10-12% of Zee's domestic ad revenues. Zee's domestic/international ad revenue is 94%/6%.

Source: BARC, Kotak Institutional Equities estimates

Exhibit 8: Trends in inventory of Zee Entertainment, March fiscal year-ends, FY2011-1HFY20 (Rs mn)

Inventory (Rs bn) 45 43.1 38.5 40

35

30 26.3 25

20 16.8 13.2 15 11.7 11.9 8.7 10 7.3 5.4 5

0 2011 2012 2013 2014 2015 2016 2017 2018 2019 Sep-19

Source: Company, Kotak Institutional Equities

KOTAK INSTITUTIONAL EQUITIES RESEARCH 25 Media Zee Entertainment Enterprises

Exhibit 9: Trends in gross investments in movies of Zee, March fiscal year-ends, FY2011E-1HFY20E (Rs mn)

20.0 18.7

16.0 15.0

12.0 10.0 8.6 8.0

4.3 4.5 3.5 4.0 4.0 3.3 2.2

0.0 2011 2012 2013 2014 2015 2016 2017 2018 2019 1H20

Source: Company, Kotak Institutional Equities estimates

Exhibit 10: Zee's net cash and cash equivalents, March fiscal year-ends (Rs bn)

50.0

39.7 40.0 32.4 30.0 23.1 20.0 20.6 17.6 20.0 16.1 14.4 14.8 12.7 12.4 10.0

0.0 2011 2012 2013 2014 2015 2016 2017 2018 2019 Jun-19 Sep-19

Source: Company, Kotak Institutional Equities

26 KOTAK INSTITUTIONAL EQUITIES RESEARCH Zee Entertainment Enterprises Media

Exhibit 11: Receivables and receivable days, March fiscal year-ends, FY2015-1HFY20 (Rs bn)

Receivables (LHS, Rs bn) Receivable days (RHS, #) 30 120.0 107

25 100.0 83.9 84.1 79.9 82.6 24.2 74.1 20 80.0

18.3 15 60.0 15.4 13.2 13.1 10 40.0 10.7

5 20.0

0 - 2015 2016 2017 2018 2019 Sep-19

Source: Company, Kotak Institutional Equities

Exhibit 12: Key metrics of OTT players in India

August 2019 August 2018 MAUs DAUs Average time spent MAUs DAUs Average time spent (mn) (mn) (mins per user per day) (mn) (mn) (mins per user per day) Hotstar (a) 110-120 25-28 35-40 75-100 14-18 35-40 SONY LIV 30-35 5-7 35-40 20-30 3-5 20-25 Voot 20-25 7-9 45-50 30-40 4-6 35-40 Airtel TV 20-25 4-6 25-30 15-20 5-7 25-30 ZEE5 20-25 4-6 28-33 15-20 2-3 20-25 Prime Video 55-60 10-13 35-40 25-35 5-7 40-45 Netflix 40-45 10-13 60-70 10-15 4-5 40-45 Sun NXT 0-1 0-0.5 NA 2-5 0-0.5 35-40 JioCinema 13-15 2-3 20-25 8-15 2-3 25-30 JioTV Live 45-50 9-12 25-30 40-50 8-10 25-30 Facebook 270-290 190-210 35-40 200-220 140-160 30-40 Youtube 325-350 245-265 60-70 220-240 170-190 50-60 Vodafone Play 5-7 0.5-1.5 12-17 3-7 0.5-1.5 NA Notes: (a) Hotstar's MAUs and DAUs on non-cricket days. It is 30-50% higher on key cricketing days (especially IPL). (b) Above metrics includes Android, iOS as well as web users.

Source: Industry interactions, Kotak Institutional Equities

KOTAK INSTITUTIONAL EQUITIES RESEARCH 27 Media Zee Entertainment Enterprises

Exhibit 13: Hindi genre- BARC ratings market share, 1-Apr-17 to 03-Apr-20 (Week 14, 2017 to Week 13, 2020) (%)

1QFY18 2QFY18 3QFY18 4QFY18 1QFY19 2QFY19 3QFY19 4QFY19 1QFY20 2QFY20 3QFY20 4QFY20 Hindi GEC (Urban + Rural)- Viewership share in the top 7 channels (%) Star Plus 21.5 18.9 16.3 15.9 17.6 18.8 20.0 19.5 20.5 20.5 19.3 18.1 Colors (TV18) 17.3 18.1 19.9 19.1 17.9 18.5 16.7 18.0 16.4 15.0 16.6 18.8 Zee TV 17.4 20.1 20.9 19.1 21.2 19.3 20.1 19.3 18.6 18.5 17.6 16.1 Sony TV 12.3 13.8 13.4 14.9 13.0 15.4 16.2 17.2 15.4 16.2 15.5 14.2 Sony SAB 14.5 12.3 12.5 13.2 13.9 13.7 12.1 11.9 15.0 16.7 18.3 19.8 &TV (Zee) 5.4 6.4 6.0 5.6 5.0 4.9 4.6 4.9 4.5 4.0 4.0 4.7 Life Ok (Star Bharat) 11.6 10.5 11.0 12.2 11.4 9.5 10.3 9.2 9.5 9.0 8.7 8.3 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

Zee Network 22.8 26.4 26.9 24.7 26.2 24.2 24.7 24.2 23.1 22.5 21.6 20.8

Hindi movies (Urban + Rural)- Viewership share in the top 6 channels (%) Sony Max 27.2 26.8 28.2 27.6 27.9 28.5 25.8 25.2 23.8 22.6 23.3 23.4 Star Gold 20.2 20.2 19.1 19.9 19.8 18.5 20.1 19.8 21.5 20.8 20.8 19.9 Zee Cinema 22.1 20.8 20.7 20.3 20.8 21.9 22.2 21.1 22.1 21.5 20.4 21.1 Movies OK 10.8 12.0 11.7 11.3 11.2 10.8 11.5 12.4 12.6 12.8 13.4 13.3 & Pictures 11.5 11.4 11.3 11.2 11.8 11.1 11.8 12.1 11.6 12.8 12.2 12.9 Sony Max 2 8.2 8.8 9.1 9.6 8.5 9.1 8.6 9.3 8.4 9.5 9.9 9.4 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

Zee Network 33.7 32.2 32.0 31.5 32.5 33.0 34.0 33.2 33.7 34.3 32.6 33.9

FTA Hindi GEC (Urban + Rural)- Viewership share in the top 8 channels (%) Star Bharat 4.1 10.9 10.7 8.9 8.7 9.9 6.9 0.0 0.0 0.0 0.0 Zee Anmol 19.7 25.0 21.1 21.5 23.3 21.2 22.5 18.3 3.4 5.0 3.8 3.7 Sony PAL 23.9 19.3 18.6 19.2 18.2 16.9 16.0 12.5 7.6 7.9 6.4 5.5 Colors Rishtey 21.2 18.3 13.5 13.2 17.1 13.8 11.0 11.6 3.5 4.9 7.3 6.4 Star Utsav 15.4 10.7 15.7 16.6 14.9 18.3 19.0 15.8 6.2 8.3 8.0 8.0 Zee Big Magic 7.9 7.9 7.0 7.1 8.1 7.8 8.0 11.3 32.9 24.2 21.1 20.0 Dangal TV 4.9 8.1 9.2 9.6 7.9 11.5 12.2 21.4 43.3 46.2 51.1 50.2 DD National 6.9 6.5 4.0 2.2 1.6 1.8 1.5 2.2 3.1 3.4 2.4 6.1 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

Zee Network 27.6 32.9 28.1 28.6 31.5 29.0 30.5 29.6 36.2 29.3 24.9 23.7

FTA Hindi movies (Urban + Rural)- Viewership share in the top 4 channels (%) Sony Wah 29.9 29.7 27.2 29.2 29.2 29.7 29.8 25.6 34.3 27.1 25.7 28.5 Rishtey Cineplex 24.5 26.0 27.2 27.3 26.0 24.6 27.1 30.8 32.3 38.8 39.1 39.0 Zee Anmol Cinema 23.8 21.7 22.6 21.9 21.4 21.5 20.1 21.7 14.3 12.7 15.7 15.9 Star Utsav movies 21.8 22.7 23.0 21.5 23.4 24.2 23.0 21.8 19.1 21.5 19.5 16.5 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 Notes: (a) Top 5-8 channels (relevant channels) in each genre are considered for market share calculation. (b) Life Ok was rebranded as Star Bharat (Free-to-Air channel) on 28th August 2017. We have split its ratings in 50:50 (Paid/FTA) ratio for market share calculation of Paid and FTA Hindi GEC groups starting 28th Aug 2017.

Source: BARC, Kotak Institutional Equities

28 KOTAK INSTITUTIONAL EQUITIES RESEARCH Zee Entertainment Enterprises Media

Exhibit 14: Regional genres- BARC ratings market share, 1-Apr-17 to 03-Apr-20 (Week 14, 2017 to Week 13, 2020) (%)

1QFY18 2QFY18 3QFY18 4QFY18 1QFY19 2QFY19 3QFY19 4QFY19 1QFY20 2QFY20 3QFY20 4QFY20 Tamil GEC (Urban + Rural)- Viewership share in the top 6 channels (%) Sun TV 55.9 49.2 51.5 49.3 45.5 44.2 41.5 40.2 39.6 41.1 44.2 45.8 STAR Vijay 16.5 24.0 21.4 19.9 20.7 21.5 21.8 22.7 23.5 25.7 22.6 20.8 Zee Tamil 13.2 13.9 15.2 17.6 19.6 20.9 22.7 22.1 22.5 19.6 20.3 19.1 Polimer 4.7 3.7 3.6 3.2 3.1 2.5 2.1 2.1 1.7 1.4 1.3 1.3 Kalaignar TV 3.1 2.8 3.4 3.3 2.4 2.2 2.0 3.9 3.9 3.5 3.5 4.0 Jaya TV 3.9 3.8 2.4 2.3 2.2 2.3 2.3 1.6 1.3 1.8 1.7 2.8 Colors Tamil 1.5 3.7 3.1 3.8 3.4 3.3 3.0 2.8 3.1 Sun Life 2.8 2.5 2.4 2.8 2.9 3.2 3.8 4.0 4.1 3.9 3.5 3.1 Total of top 8 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0

Telugu GEC (Urban + Rural)- Viewership share in the top 4 channels (%) Zee Telugu 24.3 22.9 24.6 24.0 26.8 25.1 24.8 24.9 23.6 21.1 20.9 21.8 Star Maa TV 22.2 27.7 24.5 25.7 27.8 30.1 31.9 31.0 33.4 36.3 36.6 33.8 Gemini TV (Sun) 29.4 25.6 24.4 24.8 22.4 22.0 21.6 19.6 20.5 19.9 19.6 21.2 ETV Telugu 24.1 23.8 26.4 25.6 23.0 22.8 21.8 24.5 22.5 22.7 22.8 23.2 Total of Top 4 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0

Kannada GEC (Urban + Rural)- Viewership share in the top 5 channels (%) Colors Kannada 34.4 35.0 34.8 35.0 33.9 33.5 32.4 31.2 28.1 23.9 24.7 19.1 Colors Super 8.0 8.4 11.4 10.3 8.0 8.9 10.7 9.2 10.2 9.6 7.4 6.4 Zee Kannada 25.6 24.5 22.3 24.7 25.0 29.2 29.6 31.3 32.1 35.9 38.1 39.5 Udaya TV (Sun) 13.6 16.4 18.7 18.0 18.8 17.0 16.1 16.7 16.9 16.9 15.6 18.2 Star Suvarna 18.3 15.6 12.8 12.0 14.4 11.3 11.1 11.7 12.7 13.7 14.3 16.8 Total of Top 5 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0

Malayalam GEC (Urban + Rural)- Viewership share in the top 4 channels (%) Star Asianet 54.9 51.9 43.7 48.1 52.8 52.7 49.7 46.9 43.9 46.0 49.1 49.6 Surya TV (Sun) 15.5 20.1 20.3 18.4 16.6 16.8 14.2 12.4 12.6 11.2 11.0 12.3 Mazhavil Manorama 18.2 16.7 21.3 16.9 15.5 15.8 15.0 17.3 17.8 16.0 15.3 14.4 Flowers TV 11.4 11.3 14.8 16.6 15.1 14.7 17.0 19.3 19.8 18.3 14.2 12.9 Zee Keralam 4.0 4.1 5.9 8.5 10.4 10.8 Total of Top 4 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0

Telugu movie channels (Urban + Rural)- Viewership share in the top 4 channels (%) Gemini movies (Sun) 35.6 32.2 31.9 33.1 28.4 32.2 31.7 31.3 27.1 29.7 27.9 29.8 Zee Cinemalu 18.9 21.7 21.8 23.1 26.0 24.6 25.3 25.8 28.7 27.2 26.5 27.4 Star MAA movies 29.2 32.4 30.2 28.3 31.8 27.7 27.6 28.6 32.7 30.3 32.5 30.0 ETV cinema 16.2 13.6 16.1 15.5 13.7 15.5 15.3 14.3 11.5 12.9 13.1 12.8 Total of Top 4 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0

Marathi GEC (Urban + Rural)- Viewership share in the top 6 channels (%) Zee Marathi 59.8 56.7 55.7 49.8 51.7 51.1 54.5 56.2 53.8 53.6 48.3 41.3 Colors Marathi 17.5 16.6 17.5 20.9 20.2 20.6 20.1 22.3 26.3 24.9 27.2 29.4 Star Pravah 14.8 15.5 17.8 20.1 18.6 19.3 19.2 15.5 14.5 15.7 19.2 23.2 Zee Yuva 7.9 11.1 9.0 9.2 9.5 8.9 6.3 6.1 5.5 5.8 5.3 6.0 Fakt Marathi 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Maiboli 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Total of top 6 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0

Bangla GEC (Urban + Rural)- Viewership share in the top 4 channels (%) Star Jalsha 55.7 57.1 55.3 47.7 44.8 38.3 38.9 37.6 35.9 37.2 39.1 42.3 Zee Bangla 32.1 31.7 31.7 38.8 41.0 46.1 45.7 49.1 48.4 47.1 45.4 42.1 Colors Bangla 5.1 6.1 8.2 9.3 8.3 8.9 8.4 7.2 7.1 7.4 7.9 7.8 Sony Aath 7.0 5.2 4.8 4.3 5.8 6.6 7.1 6.1 8.6 8.3 7.6 7.8 Total of Top 4 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0

Oriya GEC (Urban + Rural)- Viewership share in the top 4 channels (%) Sarthak TV 48.4 51.3 49.2 45.2 47.0 47.7 46.7 39.1 37.0 38.0 41.1 40.7 Tarang TV 35.3 34.0 37.4 41.1 37.8 36.4 40.5 46.6 48.6 47.3 43.6 41.1 Odisha TV 8.4 8.7 7.8 7.4 8.2 10.2 7.9 10.7 9.7 8.3 7.7 10.0 Colors Oriya 7.9 6.1 5.6 6.4 7.1 5.6 4.8 3.6 4.7 6.3 7.6 8.2 Total of Top 4 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0

Notes: (1) Top 5-7 channels (relevant channels) in each genre are considered for market share calculation.

Source: BARC, Kotak Institutional Equities

KOTAK INSTITUTIONAL EQUITIES RESEARCH 29 Media Zee Entertainment Enterprises

Exhibit 15: Consolidated financial summary of Zee Entertainment, March fiscal year-ends, 2016-22E (Rs mn)

2016 2017 2018 2019 2020E 2021E 2022E Profit model (Rs mn) Total revenues 58,514 64,332 66,857 79,339 79,659 76,303 89,382 EBITDA 15,094 19,260 20,761 25,639 23,461 19,093 24,176 Other income 2,016 2,240 2,795 2,515 2,758 1,328 1,364 Interest (123) (161) (1,448) (1,305) (785) (800) (1,050) Depreciation (840) (1,152) (1,821) (2,347) (2,578) (2,686) (3,415) Pretax profits 16,147 20,187 20,287 24,501 22,856 16,935 21,074 Extraordinary items (331) 12,234 2,955 (218) (1,106) — — Taxes (5,528) (6,805) (8,409) (8,673) (5,655) (4,403) (5,479) Minority interest (22) 5 25 23 10 10 10 RPS dividends (incl tax) (1,457) (1,211) (1,211) (969) (727) (484) (242) PAT 8,810 22,205 13,580 14,701 15,378 12,058 15,363 Adj PAT (pre-exceptional; excl RPS impact) 10,482 13,386 14,428 15,852 17,211 12,542 15,605 EPS (Rs) 9.2 23.1 14.1 15.3 16.0 12.6 16.0 Adj EPS (Rs) - (excl RPS impact) 10.9 13.9 15.0 16.5 17.9 13.1 16.2

Balance sheet (Rs mn) Total Equity 42,145 66,567 75,617 89,239 96,446 102,143 111,146 Preference capital 20,169 0 0 0 0 0 0 Minority interest 85 10 141 143 143 143 143 Total borrowings 9 19,088 15,254 11,133 7,422 3,711 2,500 Currrent liabilities 16,532 14,702 20,284 28,814 24,230 22,164 24,739 Total capital 62,408 85,665 91,012 100,515 104,011 105,998 113,789 Cash and cash eq 21,346 40,935 33,264 23,798 14,574 11,669 15,512 Inventories 13,160 16,843 26,278 38,505 48,505 48,505 48,505 Receivables 13,245 13,059 15,365 18,274 21,388 18,815 20,815 Loans and advances 12,972 14,156 13,114 24,744 20,244 21,764 23,302 Other current assets 2,127 3,429 7,026 7,982 8,382 8,782 9,182 Net fixed assets 14,960 9,721 14,125 14,155 13,276 16,590 19,175 Investments 576 1,321 2,124 1,872 1,872 1,872 1,872 Deferred tax assets 556 903 0 0 0 0 0 Total assets 62,408 85,665 91,012 100,516 104,011 105,998 113,789

Free cash flow (Rs mn) Operating cash flow, excl. W-cap, ex-taxes 15,713 19,170 22,390 27,802 20,047 19,103 24,351 Working capital (2,632) (5,670) (8,551) (17,151) (13,598) (1,413) (1,364) Taxes paid (5,827) (6,810) (8,295) (9,299) (5,655) (4,403) (5,479) Capital expenditure (4,064) (2,768) (4,605) (2,823) (1,700) (6,000) (6,000) Other income (net) 1,003 1,001 1,107 956 1,973 528 314 Free cash flow (prior to RPS dividends) 4,193 4,923 2,046 (515) 1,067 7,816 11,822 RPS redemption + RPS dividend payout (excl DDT) (1,457) (1,211) (5,045) (5,090) (4,438) (4,196) (3,953) Free cash flow to equity holders 2,736 3,712 (2,999) (5,605) (3,370) 3,620 7,869

Key assumptions / metrics Ad revenue growth (%) 28.9 9.2 14.5 19.8 (7.1) (11.0) 23.0 Domestic subscription revenue growth (%) 14.5 11.7 11.8 17.4 28.3 6.0 11.0 Overseas subscription revenue growth (%) 15.7 3.0 (2.8) (0.7) (17.0) (2.0) - Content cost as % of revenue 42.2 40.9 35.3 36.1 39.1 43.9 43.1 Effective tax rate (%) 34.2 33.7 41.5 35.4 24.7 26.0 26.0 EBITDA margin (%) 25.8 29.9 31.1 32.3 29.5 25.0 27.0 ROAE 22.7 40.9 19.1 17.8 16.6 12.1 14.4 ROACE 21.6 20.5 15.7 21.1 20.7 14.8 17.8

Source: Company, Kotak Institutional Equities estimates

30 KOTAK INSTITUTIONAL EQUITIES RESEARCH BUY Tata Motors (TTMT) Automobiles & Components APRIL 15, 2020 UPDATE Sector view: Neutral

Tough CY2020 but company will remain afloat. We believe Tata Motors will resort CMP (`): 73 to aggressive cost cutting and capex reduction to tide over the crises over the next 12 Fair Value (`): 130 months. The company has committed credit lines from banks to keep JLR afloat. As of BSE-30: 30,380 now, JLR is trading at bankruptcy valuations. We maintain BUY rating on the stock as we believe JLR will be able to remain afloat despite the likelihoods of a global recession. We revise our fair value to Rs130 (from Rs215 earlier).

Tata Motors Stock data Forecasts/valuations 2020 2021E 2022E 52-week range (Rs) (high,low) 239-64 EPS (Rs) (8.7) (19.7) 6.4 Mcap (bn) (Rs/US$) 268/3.3 EPS growth (%) (60.4) (128.0) 132.2 ADTV-3M (mn) (Rs/US$) 7,750/102 P/E (X) (8.6) (3.8) 11.7 Shareholding pattern (%) P/B (X) 0.4 0.5 0.5 Promoters 42.4 EV/EBITDA (X) 4.2 5.3 3.2 FIIs 28.9 RoE (%) (5.2) (13.0) 4.3 MFs/BFIs 7.3/7.7 Div. yield (%) 0.0 0.0 0.0 Price performance (%) 1M 3M 12M Sales (Rs bn) 2,590 2,448 2,943 Absolute (17) (63) (68) EBITDA (Rs bn) 220 205 338 Rel. to BSE-30 (8) (49) (60) Net profits (Rs bn) (31) (76) 24

FY2021E – tough year ahead for Tata Motors but liquidity remains adequate

Given the current economic slowdown due to Covid-19, we expect global auto volumes to remain under pressure in CY2020E, which will put pressure on JLR volumes as well. We expect JLR to generate negative cash flow of GBP1.8 bn in FY2021-22E. However, we expect the company to initiate cost savings of GBP1.1 bn under project Charge+ by focusing on material cost reduction, leveraging profitable portfolios and lowering warrant costs and some further cut in non-essential capex. The company will need to invest in development of new products and technologies in order to remain competitive in global markets and meet new CO2 emission norms in various geographies. JLR’s total liquidity stood at GBP5.8 bn, including GBP3.9 bn of cash and GBP1.9 bn of committed revolving credit facility (RCF) at the end of December 31, 2019. Over the next two years, the company has to pay ~GBP1 bn as principal repayment (refer to Exhibit 1). We expect net debt/EBITDA to increase from 1X in FY2020E to 2.1X in FY2021E. Overall, in terms of liquidity JLR remains well capitalized over the next two years.

We expect cash outflow of Rs39 bn in the standalone entity over FY2021-22E due to weak CV volumes. Additionally, there is a principal payment due of Rs144 bn over the next two years as well (refer to Exhibit 1). Again, Tata Motors had a cash equivalent of Rs87 bn (includes proceeds of preferential allotment amounting to Rs39 bn by Tata Sons) and undrawn RCF of Rs15 bn. Tata Sons will further infuse Rs26 bn in FY2021E increasing their stake in the company to 46.4%. We believe the company will be able to raise additional funds through the ECB route backed by strong parent support to tide over the crisis.

Valuation remains attractive given steep price correction over past three months Hitesh Goel The stock price has corrected by 63% over the past three months. The value of the standalone entity as per our calculations stands at Rs49 per share based on 1X March 2022E BVPS, which Rishi Vora includes losses from the PV business as well. Tata Motors will hive off its PV business into a separate subsidiary and will eventually look for a strategic alliance that provides access to products, architectures, new-age technologies and capital. This will result in further unlocking of value for Tata Motors’ standalone CV business. At CMP, implied P/E multiple for the JLR business comes out to be 1-1.5X March 2022E EPS, which we believe is cheap. Maintain BUY.

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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. Automobiles & Components Tata Motors

JLR volumes to remain under pressure in FY2021E

We expect JLR volumes to remain under pressure in FY2021E mainly led by the pandemic resulting in a global recession. We expect JLR volumes to decline by 10% yoy in FY2020E and expect further decline of 7-8% yoy in FY2021E led by (1) 10% yoy decline in North America, EU and UK regions and (2) 5% yoy decline in China given that the Chinese economy is slowly reviving as the number of new coronavirus cases has shrunk. As a result, we expect EBITDA margin decline by 40 bps yoy in FY2021E led by negative operating leverage on account of lower volumes, partly offset by cost savings under project Charge+. However, we expect a strong recovery going into FY2022E as global growth revives with 18% yoy volume growth and sharp 280 bps yoy expansion in EBITDA margin.

Domestic CV cycle may see a delayed recovery

The domestic M&HCV industry declined by ~43% yoy in FY2020 led by (1) weak freight demand owing to slowdown in the domestic economy, (2) inventory correction by major OEMs (however, retail sales have been much better than wholesales on a yoy basis in FY2020E) and (3) ~90% yoy decline in March 2020 volumes due to plant shutdowns across India because of the pandemic. We expect the M&HCV industry to further decline by 9-10% yoy in FY2021E due to (1) 8-15% price increase owing to BS-VI transition and (2) pandemic- related weakness continuing till 2QFY21. However, we expect M&HCV volumes to increase by 35% yoy in FY2022E led by (1) pent-up demand, (2) pick-up in the economic activity and (3) low base effects. We expect the LCV industry to decline by double digit in FY2021E mainly due to >15% price increase on account of the BS-VI transition. As a result, we expect Tata Motors CV domestic volumes to decline in line with the industry in FY2021E and CV volumes reviving in FY2022E. We expect the standalone entity to continue to incur losses over FY2020-22E.

Cut our FY2021-22E consolidated EBITDA estimates by 16-40%; retain BUY

We have cut our FY2021-22E consolidated EBITDA estimates by 16-40% led by (1) 19-43% cut in JLR EBITDA assumptions due to steep cut in volumes assumptions, (2) 9-18% cut in standalone volume assumptions and (3) 120-220 bps cut in standalone EBITDA margin. Maintain BUY with a revised SoTP-based fair value of Rs130 (versus Rs215 earlier). We value the standalone entity at 1X March 2022E BVPS estimate and JLR at 7X March 2022E EPS estimates (from 8X December 2021E EPS earlier).

Exhibit 1: JLR has debt repayment of ~GBP1 bn over the next two years; standalone entity has to repay Rs144 bn over CY2020-21E Tata Motors debt schedule, calendar year-ends, as of December 31, 2019 (Rs bn, GBP mn)

2020 2021 2022 2023 2024 2025 2026 2027 JLR principal repayment schedule (GBP mn) Bonds 381 300 400 781 555 — 427 381 Others Loans —— 152 — 427 609 427 — UKEF facility 146 125 125 125 104 ——— Fleet buyback inventory facility 100 ——————— Total prinicipal repayment 627 425 677 906 1,086 609 854 381 2020 2021 2022 2023 2024 >2025 Tata Motors repayment schedule (Rs bn) Long term debt 36 31 23 20 29 45 Short term debt 77 ————— Total prinicipal repayment 113 31 23 20 29 45

Source: Company, Kotak Institutional Equities estimates

32 KOTAK INSTITUTIONAL EQUITIES RESEARCH Tata Motors Automobiles & Components

Exhibit 2: We have cut our JLR FY2020-22E EBITDA by 14-43% led by cut in volume estimates due to Covid-19 Tata Motors EPS estimate change, March fiscal year-ends, 2020-22E (Rs mn, GBP mn)

New estimates Old estimates % change 2020E 2021E 2022E 2020E 2021E 2022E 2020E 2021E 2022E Standalone (Rs mn) Volumes (units) 473,377 413,957 526,025 521,780 502,147 579,122 (9.3) (17.6) (9.2) Net sales 426,932 415,644 543,401 485,357 501,476 594,745 (12.0) (17.1) (8.6) EBITDA (3,990) (799) 23,737 8,967 9,828 33,045 (144.5) (108.1) (28.2) EBITDA margin (%) (0.9) (0.2) 4.4 1.8 2.0 5.6 Adjusted net profit (40,404) (41,534) (17,356) (24,865) (29,814) (6,380) JLR UK P&L (GBP mn) Volumes (units) 460,002 415,500 494,600 500,002 530,900 540,900 (8.0) (21.7) (8.6) Average realization 49,537 47,822 48,366 48,361 47,264 48,098 2.4 1.2 0.6 Net sales 22,787 19,870 23,922 24,180 25,093 26,016 (5.8) (20.8) (8.1) Of which hedged forex losses (582) (300) — (562) (313) (144) EBITDA 2,186 1,819 2,862 2,533 3,170 3,525 (13.7) (42.6) (18.8) EBITDA margin (%) 9.6 9.2 12.0 10.5 12.6 13.6 Reported net profit 89 (383) 405 113 608 746 (21.0) (163.0) (45.7) China JV (GBP mn) Volumes (units) 50,152 57,037 64,992 67,759 80,147 82,654 (26.0) (28.8) (21.4) Net sales 1,111 1,264 1,440 1,502 1,865 1,943 (26.0) (32.2) (25.9) EBITDA (181) 33 53 (142) 49 147 27.5 (31.5) (64.2) EBITDA margin (%) (16.3) 2.6 3.7 (9.4) 2.6 7.6 Net profit (276) (136) (129) (250) (125) (63) Consolidated (Rs mn) Net sales 2,590,205 2,448,436 2,943,310 2,769,501 2,980,831 3,154,976 (6.5) (17.9) (6.7) EBITDA 219,766 204,562 337,724 263,238 340,165 402,967 (16.5) (39.9) (16.2) EBITDA margin (%) 8.5 8.4 11.5 9.5 11.4 12.8 Adjusted net profit (31,145) (75,563) 24,324 (12,364) 29,621 69,464 151.9 (355.1) (65.0) EPS (8.7) (19.7) 6.4 (3.4) 7.7 18.1 151.9 (355.1) (65.0) GBPINR 88.0 95.0 95.0 88.0 93.0 93.0 — 2.2 2.2

Source: Company, Kotak Institutional Equities estimates

Exhibit 3: We value the company at Rs130 per share on SoTP basis Tata Motors SoTP, March fiscal year-ends, 2021-22E (Rs per share)

Multiple Value Value per share (X) (Rs mn) (Rs) Comments Standalone business (Rs mn) Standalone Book value 49 Based on March 2022 JLR JLR UK net profit 38,491 7.0 269,439 70 based on March 2022 EPS JLR China JV valuation 4 based on 6X March 2022 EV/EBITDA Total standalone + JLR 123 Value of Tata Motors Finance 6 1X P/BV on March 2021E SOTP-based value 129 Fair value 130

Source: Company, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 33 Automobiles & Components Tata Motors

Exhibit 4: We expect volumes to remain under pressure in FY2021E due to global growth concerns on account of Covid-19 Geography-wise wholesale volume mix (includes China JV), March fiscal year-ends, 2017-22E (units, %) 2017 2018 2019 2020E 2021E 2022E Geography N.A 132,000 136,447 133,237 139,899 125,909 141,018 UK 115,000 114,074 118,734 100,000 90,000 99,000 Europe (excl Russia and UK) 137,000 126,313 119,248 100,000 90,000 99,000 Russia 6,000 6,000 5,000 2,500 2,375 2,613 China 125,004 153,825 97,596 90,152 85,644 98,491 Asia Pac (excl China) 32,791 34,431 34,431 29,266 26,339 28,973 Rest of World 53,009 62,420 57,060 48,337 52,269 90,497 Total Volumes 600,804 633,510 565,306 510,154 472,537 559,592 Yoy growth (%) 10.4 5.4 (10.8) (9.8) (7.4) 18.4 Geographical mix (%) N.A 22.0 21.5 23.6 27.4 26.6 25.2 UK 19.1 18.0 21.0 19.6 19.0 17.7 Europe (excl Russia and UK) 22.8 19.9 21.1 19.6 19.0 17.7 Russia 1.0 0.9 0.9 0.5 0.5 0.5 China 20.8 24.3 17.3 17.7 18.1 17.6 Asia Pac (excl China) 5.5 5.4 6.1 5.7 5.6 5.2 Rest of World 8.8 9.9 10.1 9.5 11.1 16.2 Total Volumes 100.0 100.0 100.0 100.0 100.0 100.0

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

Source: Company, Kotak Institutional Equities estimates

34 KOTAK INSTITUTIONAL EQUITIES RESEARCH Tata Motors Automobiles & Components

Exhibit 5: New models and ramp-up of recent launches will be the key for JLR over the next three years JLR wholesale model-wise volume mix assumptions (includes China JV), March fiscal year-ends, 2017-22E (units, %) 2017 2018 2019 2020E 2021E 2022E Model XF 35,054 41,654 24,469 13,652 11,087 12,450 XJ 10,100 9,000 4,204 3,000 3,000 3,300 XK —————— F type 10,900 9,200 7,700 3,000 3,000 3,000 Small Jaguar 46,700 32,108 30,657 22,000 23,000 24,200 F Pace 76,000 69,500 50,885 35,000 32,000 35,200 I-Pace/E-Pace — 14,800 59,533 53,000 47,700 61,605 Jaguar 178,754 176,262 177,448 129,652 119,787 139,755 Defender 600 — 4 2 20,000 40,000 Discovery 37,600 52,000 37,635 35,000 25,000 30,000 Freelander —— 7 ——— Discovery Sport 124,873 118,173 84,416 73,000 66,000 79,900 Range Rover 56,300 54,900 57,051 55,000 42,500 45,000 RRSport 87,500 76,600 82,600 80,000 72,000 80,000 Evoque 115,177 96,277 65,377 87,500 83,250 92,938 Range Rover Velar — 59,200 60,766 50,000 44,000 52,000 Land Rover 422,050 457,150 387,856 380,502 352,750 419,838 Total Volumes 600,804 633,412 565,304 510,154 472,537 559,592 Model mix (%) XF 5.8 6.6 4.3 2.7 2.3 2.2 XJ 1.7 1.4 0.7 0.6 0.6 0.6 XK —————— F type 1.8 1.5 1.4 0.6 0.6 0.5 Small Jaguar 7.8 5.1 5.4 4.3 4.9 4.3 F Pace 12.6 11.0 9.0 6.9 6.8 6.3 I-Pace/E-Pace — 2.3 10.5 10.4 10.1 11.0 Defender ———— 4.2 7.1 Discovery 6.3 8.2 6.7 6.9 5.3 5.4 Freelander —————— Discovery Sport 20.8 18.7 14.9 14.3 14.0 14.3 Range Rover 9.4 8.7 10.1 10.8 9.0 8.0 RRSport 14.6 12.1 14.6 15.7 15.2 14.3 Evoque 19.2 15.2 11.6 17.2 17.6 16.6 Velar — 9.3 10.7 9.8 9.3 9.3 Total Volumes 100.0 100.0 100.0 100.0 100.0 100.0

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

Source: Company, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 35 Automobiles & Components Tata Motors

Exhibit 6: We expect standalone volumes to recover post FY2021E; MHCV volumes will likely decline by 10-11% yoy in FY2021E Tata Motors standalone volume assumptions, March fiscal year-ends, 2011-22E (units1

2011 2012 2013 2014 2015 2016 2017 2018 2019 2020E 2021E 2022E M&HCVs 209,522 221,298 152,505 122,498 142,737 176,493 175,262 190,367 224,940 124,446 110,732 152,994 M&HCVs-domestic 192,127 207,014 143,381 110,225 127,011 156,961 148,901 168,013 195,712 111,752 100,577 140,808 M&HCVs-exports 17,395 14,284 9,124 12,273 15,726 19,532 26,361 22,354 29,228 12,694 10,155 12,186 LCVs 287,463 363,756 428,643 298,799 221,818 205,231 209,767 259,066 294,837 216,254 183,816 238,961 LCVs-domestic 77,558 95,791 113,520 85,140 59,598 59,078 54,488 103,410 124,602 87,820 74,647 97,041 Ace 177,096 227,179 280,242 183,059 131,533 111,981 121,821 127,912 148,378 111,283 94,591 122,968 LCVs-exports 32,809 40,786 34,881 30,600 30,687 34,172 33,458 27,744 21,857 17,151 14,578 18,952 UVs 43,063 56,464 48,617 32,400 25,617 19,364 20,197 53,071 80,095 60,452 54,407 62,568 UVs-domestic 42,297 55,744 47,454 31,268 24,609 18,621 18,757 51,891 78,756 59,381 53,443 61,459 UVs-exports 766 720 1,163 1,132 1,008 743 1,440 1,180 1,339 1,071 964 1,108 Passenger vehicles 263,274 265,254 180,355 112,894 111,982 111,072 137,096 136,548 132,069 72,225 65,003 71,503 Passenger vehicles-domestic 185,767 183,439 120,845 85,648 92,569 86,796 126,908 133,579 131,011 71,816 64,634 71,098 Passenger vehicles-exports 7,075 7,288 5,663 5,707 2,512 3,264 2,597 1,118 682 409 368 405 Small car 70,432 74,527 53,847 21,539 16,901 21,012 7,591 1,851 376 — — — Total domestic sales 745,277 843,694 759,289 516,879 452,221 454,449 478,466 586,656 678,835 442,052 387,892 493,374 Total export sales 58,045 63,078 50,831 49,712 49,933 57,711 63,856 52,396 53,106 31,325 26,066 32,651 Total vehicle sales 803,322 906,772 810,120.0 566,591 502,154 512,160 542,322 639,052 731,941 473,377 413,957 526,025 Volume growth (yoy %) M&HCVs 24.8 5.6 (31.1) (19.7) 16.5 23.6 (0.7) 8.6 18.2 (44.7) (11.0) 38.2 M&HCVs-domestic 23.8 7.7 (30.7) (23.1) 15.2 23.6 (5.1) 12.8 16.5 (42.9) (10.0) 40.0 M&HCVs-exports 37.1 (17.9) (36.1) 34.5 28.1 24.2 35.0 (15.2) 30.8 (56.6) (20.0) 20.0 LCVs 23.0 26.5 17.8 (30.3) (25.8) (7.5) 2.2 23.5 13.8 (26.7) (15.0) 30.0 LCVs-domestic (10.1) 23.5 18.5 (25.0) (30.0) (0.9) (7.8) 89.8 20.5 (29.5) (15.0) 30.0 Ace 34.0 28.3 23.4 (34.7) (28.1) (14.9) 8.8 5.0 16.0 (25.0) (15.0) 30.0 LCVs-exports 115.6 24.3 (14.5) (12.3) 0.3 11.4 (2.1) (17.1) (21.2) (21.5) (15.0) 30.0 UVs 26.2 31.1 (13.9) (33.4) (20.9) (24.4) 4.3 162.8 50.9 (24.5) (10.0) 15.0 UVs-domestic 26.1 31.8 (14.9) (34.1) (21.3) (24.3) 0.7 176.6 51.8 (24.6) (10.0) 15.0 UVs-exports 29.2 (6.0) 61.5 (2.7) (11.0) (26.3) 93.8 (18.1) 13.5 (20.0) (10.0) 15.0 Passenger vehicles 27.2 0.8 (32.0) (37.4) (0.8) (0.8) 23.4 (0.4) (3.3) (45.3) (10.0) 10.0 Passenger vehicles-domestic 8.6 (1.3) (34.1) (29.1) 8.1 (6.2) 46.2 5.3 (1.9) (45.2) (10.0) 10.0 Passenger vehicles-exports 25.5 3.0 (22.3) 0.8 (56.0) 29.9 (20.4) (57.0) (39.0) (40.0) (10.0) 10.0 Small car 132.1 5.8 (27.7) (60.0) (21.5) 24.3 (63.9) (75.6) (79.7) (100.0) NA NA Total domestic sales 22.5 13.2 (10.0) (31.9) (12.5) 0.5 5.3 22.6 15.7 (34.9) (12.3) 27.2 Total export sales 70.0 8.7 (19.4) (2.2) 0.4 15.6 10.6 (17.9) 1.4 (41.0) (16.8) 25.3 Total vehicle sales 25.0 12.9 (10.7) (30.1) (11.4) 2.0 5.9 17.8 14.5 (35.3) (12.6) 27.1

Source: Company, Kotak Institutional Equities estimates

Exhibit 7: We expect JLR’s EBITDA margin to improve over FY2020-22E led by cost-cutting initiatives Jaguar Land Rover income statement (excluding China JV), March fiscal year-ends, 2011-22E (GBP mn)

2011 2012 2013 2014 2015 2016 2017 2018 2019 2020E 2021E 2022E Volumes (000s) 244 314 372 430 467 509 535 545 508 460 416 495 Sales 9,871 13,512 15,784 19,386 22,106 22,286 24,339 25,786 24,214 22,787 19,870 23,922 Of which realzied forex losses — — — — 240 78 (1,320) (1,389) (870) (582) (300) — Realizations per vehicle 40,520 42,972 42,422 45,083 47,387 43,759 45,510 47,296 47,677 49,537 47,822 48,366 Cost of sales 8,286 11,373 13,254 15,910 18,129 18,821 21,143 22,880 22,060 20,200 17,611 20,620 Materials 6,178 8,733 9,904 11,904 13,347 13,562 15,071 16,328 15,670 14,584 12,618 15,190 Labor 789 1,011 1,333 1,654 1,977 2,321 2,490 2,722 2,820 2,566 2,346 2,614 Manufacturing costs and SG&A 1,319 1,629 2,017 2,352 2,805 2,938 3,582 3,830 3,570 3,050 2,647 2,815 D&A 396 466 622 875 1,051 1,418 1,656 2,075 2,164 1,900 2,020 2,140 Product dev 119 149 198 236 253 318 368 406 421 401 440 440 EBIT 1,069 1,524 1,710 2,365 2,673 1,729 1,172 425 (431) 286 (201) 722 EBITDA 1,465 1,989 2,331 3,240 3,724 3,147 2,828 2,500 1,733 2,186 1,819 2,862 Other income 36 38 71 153 143 128 379 420 205 — — — Interest 23 69 (3) 147 87 52 35 52 76 147 182 182 PBT 1,082 1,492 1,784 2,371 2,729 1,805 1,516 793 (302) 139 (383) 540 Tax 79 26 460 622 576 293 331 398 (308) 9 — 135 Forex gains/(losses) (33) (14) (108) 137 (216) (136) (102) 467 (3,330) (41) — — PAT 1,036 1,481 1,216 1,886 1,937 1,376 1,083 862 (3,324) 89 (383) 405 EBITDA margin (%) 14.8 14.7 14.8 16.7 16.8 14.1 11.6 9.7 7.2 9.6 9.2 12.0 EBIT margin - including China JV profit (%) 10.8 11.3 10.8 12.2 12.1 8.0 5.5 2.6 (1.8) 0.7 (1.4) 2.7

Source: Company, Kotak Institutional Equities estimates

36 KOTAK INSTITUTIONAL EQUITIES RESEARCH Tata Motors Automobiles & Components

Exhibit 8: Standalone business will incur losses over the next two years due to steep volume decline 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 543,066 447,657 342,881 362,947 428,455 443,163 578,965 692,028 426,932 415,644 543,401 EBITDA 41,776 17,180 (9,112) (12,375) 29,466 13,577 23,907 51,548 (3,990) (799) 23,737 Other income 2,104 17,046 18,669 18,814 14,023 9,811 24,925 25,547 14,141 10,597 12,699 Interest (8,550) (10,041) (13,375) (16,117) (15,920) (15,690) (17,444) (17,936) (19,505) (16,896) (17,346) Depreciaton (16,067) (18,176) (20,703) (26,032) (23,292) (30,371) (31,019) (30,986) (31,923) (34,436) (36,446) Profit before tax 19,263 6,008 (24,521) (35,710) 4,276 (22,674) 369 28,172 (41,278) (41,534) (17,356) 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 (40,097) (41,534) (17,356) Adjusted net profit 16,519 (3,031) (27,276) (52,240) 3,088 (23,652) (2,970) 23,343 (40,404) (41,534) (17,356) Adjusted Diluted EPS (Rs) 4.9 (0.9) (8.0) (15.4) 0.9 (7.0) (0.9) 6.9 (11.2) (10.8) (4.5) 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 189,913 187,118 185,328 142,188 225,829 204,834 194,918 214,833 204,166 196,869 179,513 Deferred tax liability 21,054 19,639 431 — 714 1,476 1,546 2,059 2,059 2,059 2,059 Total borrowings 158,806 167,990 150,528 211,344 164,733 193,570 184,638 186,396 186,396 186,396 196,396 Current liabilities 169,073 142,871 154,619 139,462 168,692 182,111 204,229 199,016 164,319 169,763 186,153 Total liabilities 545,193 523,998 497,344 499,432 566,760 588,783 592,123 609,096 564,135 562,745 571,780 Net fixed assets 190,562 202,085 215,956 218,240 267,623 280,439 268,004 285,734 298,811 294,375 287,929 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 5,015 9,636 10,323 Other current assets 128,702 115,790 94,542 101,872 121,619 132,120 148,530 141,622 103,390 101,815 116,608 Miscellaneous expenditure 2,584 2,150 ————————— Total assets 545,193 523,998 497,344 499,432 566,760 588,783 592,123 609,096 564,135 562,745 571,780 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 10,922 9,798 36,435 Working capital changes (3,135) 5,028 34,583 (15,171) (7,759) (931) 515 3,079 3,535 7,019 1,598 Capital expenditure (28,355) (25,884) (30,941) (30,548) (32,492) (34,965) (27,948) (47,532) (45,000) (30,000) (30,000) Free cash flow (6,642) (21,394) (23,805) (71,140) (26,321) (39,795) (7,593) (8,153) (50,048) (30,079) (9,313) Ratios Gross margin (%) 26.9 26.4 24.4 25.5 32.1 29.3 26.3 26.9 26.2 24.7 26.9 EBITDA margin (%) 7.7 3.8 (2.7) (3.4) 6.9 3.1 4.1 7.4 (0.9) (0.2) 4.4 EBIT margin (%) 4.7 (0.2) (8.7) (10.6) 1.4 (3.8) (1.2) 3.0 (8.4) (8.5) (2.3) Debt/equity (X) 0.8 0.9 0.8 1.4 0.7 0.9 0.9 0.8 0.9 0.9 1.0 Net debt/equity (X) 0.7 0.8 0.8 1.4 0.6 0.8 0.8 0.7 0.9 0.9 1.0 RoAE (%) 8.3 (1.6) (14.2) (30.7) 1.6 (10.6) (1.4) 11.0 (18.7) (20.0) (8.9) Book value/share (X) 57.8 57.0 56.5 43.8 68.5 62.3 59.4 65.3 58.8 53.4 48.9

Source: Company, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 37 Automobiles & Components Tata Motors

Exhibit 9: We expect consolidated EBITDA to grow at 10% CAGR over FY2019-22E 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 2,590,205 2,448,436 2,943,310 EBITDA 223,112 245,473 348,377 392,387 383,075 334,988 302,724 255,702 219,766 204,562 337,724 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) (68,244) (73,239) (77,264) Depreciaton (56,254) (75,693) (110,782) (133,886) (167,108) (179,050) (215,536) (235,906) (202,123) (232,336) (245,746) Profit before tax 143,654 142,362 198,544 218,873 175,930 121,103 79,946 (8,137) (20,602) (71,014) 44,714 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) 2,615 — (13,219) Minority Interest + Associate income (574) 301 (1,132) (734) 4,786 13,908 21,758 1,075 (13,158) (7,466) (7,170) Net profit 135,165 98,926 139,910 139,863 115,793 74,544 89,889 (288,262) (31,145) (78,479) 24,324 Adjusted net profit 143,480 104,953 149,764 141,710 140,064 94,112 67,766 (18,335) (31,145) (75,563) 24,324 Adjusted EPS (Rs) 42.3 30.9 44.1 41.7 41.2 27.7 20.0 (5.4) (8.7) (19.7) 6.4 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 325,152 381,331 649,597 556,181 782,732 573,827 947,487 595,003 593,698 552,372 576,696 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 1,061,753 1,151,833 1,158,819 1,212,119 Current liabilities 626,116 764,078 917,596 1,070,091 1,099,398 1,354,613 1,403,213 1,388,255 1,419,290 1,375,149 1,548,261 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 3,193,178 3,116,180 3,367,937 Net fixed assets 562,125 694,836 973,754 1,124,226 1,323,909 1,289,696 1,613,309 1,423,705 1,548,181 1,621,345 1,681,099 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 182,381 211,127 297,118 462,120 496,934 511,190 492,777 415,872 490,021 344,368 382,383 Other current assets 574,691 662,701 748,986 717,389 797,630 876,956 1,144,765 1,156,567 1,079,173 1,074,664 1,228,652 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 3,193,178 3,116,180 3,367,937 Free cash flow (Rs mn) Operating cash flow excl. working capital 206,644 221,302 303,768 388,547 365,864 269,450 317,730 261,030 240,243 231,032 348,355 Working capital changes (22,801) (680) 57,744 (36,718) 13,132 32,542 (64,337) (72,123) 108,428 (39,632) 19,125 Capital expenditure (138,756) (187,570) (269,252) (315,396) (314,442) (304,135) (350,486) (352,363) (326,600) (305,500) (305,500) Free cash flow (including finance business debt) 11,351 (13,508) 30,554 (26,637) 7,397 (55,506) (151,200) (233,506) (46,173) (187,339) (15,285) Ratios EBITDA margin (%) 13.5 13.0 15.0 14.9 14.0 12.4 10.4 8.5 8.5 8.4 11.5 Debt/equity (X) 1.4 1.4 0.9 1.3 0.9 1.4 0.9 1.8 1.9 2.1 2.1 Net debt/equity (X) 0.9 0.8 0.5 0.5 0.3 0.5 0.4 1.1 1.1 1.5 1.4 Book value (Rs per share) 84.2 98.8 171.6 144.9 230.3 169.0 280.7 175.0 165.0 144.3 150.7 ROAE (%) 54.8 29.2 28.7 23.3 20.7 13.7 8.8 (2.4) (5.2) (13.0) 4.3

Source: Company, Kotak Institutional Equities estimates

38 KOTAK INSTITUTIONAL EQUITIES RESEARCH ATTRACTIVE Banks India APRIL 16, 2020 UPDATE BSE-30: 30,380

Hands tied. With the Covid-19 pandemic leading to lower GDP growth for FY2021, we see further downsides to our loan growth estimates and believe that low single digit growth cannot be ruled out. Nearly all engines of growth have stalled and lenders are likely to remain cautious in the interim. We are less optimistic on indirect growth coming through government spending as they are less focused on capital expenditure and more focused on bridging the current income gap.

Lower GDP growth to lead to lower loan growth

We see a high probability of low single digit loan growth in FY2021 and a slow recovery in QUICK NUMBERS FY2022 post revisions to GDP estimates (~0.4% and inflation expected at 3% for FY2021). The relationship between nominal growth to loan growth has been at <1X in the past decade. Loan  Expect loan growth growth demand is likely to be led by negative outcomes such as worsening working capital in a low single digit cycles, moratoriums/restructuring or slower pre-payments. growth

Loan growth has very few positive drivers at this point  Government capex/total We break loan growth post 2009 in four different phases (see Exhibits 2-4): (1) investment led expenditure is cycle growth leading to better growth in corporate as well as SME and subsequently, in retail (2) post 2012 when the investment cycle stopped leading to sharp reduction in loan growth in below 15% corporate and SME while retail continued in all asset products. This was a period led by strong compared to >25% contribution from retail oriented banks and NBFCs, (3) post demonetization, housing/LAP a decade back started to slowdown, post IL&FS auto started to slowdown and led by personal loans and MSME, (4) post the Covid-19 pandemic, all unsecured and MSME products are likely to have slowed down.

Risk taking ability is likely to have significantly diminished for all lending institutions

We were building an argument that the corporate NPL heavy banks which dominated the banking system led by public banks and Axis/ICICI Bank were gradually looking to step in the place that was getting vacated by NBFCs. Post the Covid-19 episode, we see all lending institutions to scale back risk taking capabilities as the scars of the previous corporate NPL cycle is still fresh. Banks have been cautious while lending to the manufacturing space and preferring the services side of the economy. This led to superior growth for private banks and NBFCs in recent years but this is likely to have been impacted as well. Anecdotal discussion suggests M B Mahesh, CFA tightening of underwriting policies by lenders which is likely to result in lower credit growth. Suvodeep Rakshit Government spending has steadily moved away from capital expenditure which has not helped

A line of thought has been that a step up in government spending would offset the temporary Nischint Chawathe slack in demand from private sector. As capacity utilization picks up pace, we should see demand for loans. However, the relationship to build this argument looks challenging given the Venkat Madasu shift in government expenditure away from capital expenditure. The pace of loan growth increased during 2000-2010, coinciding with the governments increased spends on budgetary Dipanjan Ghosh capital expenditure (Exhibit 5). However, with the government is focusing back on revenue expenditure post-GFC and the NPA crisis, credit growth has seen a steady decline. Following Covid-19 spread, government expenditure will be (1) constrained in the near term due to revenue stress, and (2) focused on supporting consumption. With consumption likely remaining the primary driver of growth, private sector investment cycle remaining muted, and government expenditure mix skewed towards revenue spends, we do not expect much impetus for credit [email protected] growth, especially industrial sector credit growth. Contact: +91 22 6218 6427

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

Exhibit 1: Loan growth likely to be subdued with a sharp downward revision to GDP growth Growth rates for nominal GDP and bank credit, March fiscal year-ends, 2005-2012 (%)

Credit Nominal GDP Credit growth/nominal Bank credit/ Bank credit growth Nominal GDP growth GDP growth GDP (Rs bn) (%) (Rs bn) (%) (X) (%) 2000 4,008 17.2 18,473 10.7 1.6 21.7 2001 4,692 17.0 19,920 7.8 2.2 23.6 2002 5,367 14.4 21,677 8.8 1.6 24.8 2003 6,169 14.9 23,382 7.9 1.9 26.4 2004 7,644 23.9 26,222 12.1 2.0 29.2 2005 10,460 36.8 29,715 13.3 2.8 35.2 2006 14,439 38.0 33,905 14.1 2.7 42.6 2007 18,419 27.6 39,533 16.6 1.7 46.6 2008 22,474 22.0 45,821 15.9 1.4 49.0 2009 26,474 17.8 56,301 22.9 0.8 47.0 2010 30,885 16.7 64,778 15.1 1.1 47.7 2011 37,495 21.4 77,841 20.2 1.1 48.2 2012 43,793 16.8 87,360 12.2 1.4 50.1 2013 49,642 13.4 99,513 13.9 1.0 49.9 2014 56,572 13.2 112,335 12.9 1.0 50.4 2015 61,023 8.6 124,680 11.0 0.8 48.9 2016 66,500 9.0 137,640 10.4 0.9 48.3 2017 71,347 7.3 153,624 11.6 0.6 46.4 2018 77,223 8.2 170,950 11.3 0.7 45.2 2019 86,749 12.3 190,102 11.2 1.1 45.6 2020E 93,074 6.3 208,192 9.5 0.7 44.7 2021E 100,791 1.3 211,086 1.4 0.9 47.7 2022E 110,156 8.9 231,139 9.5 0.9 47.7 Average (X) FY2000-2020 1.4 Average (X) FY2010-2020 0.9

Source: Bloomberg, CEIC, RBI, Kotak Institutional Equities estimates

40 KOTAK INSTITUTIONAL EQUITIES RESEARCH Banks India

Exhibit 2: Share of personal loans has increased gradually since 2014 from ~18% to ~28% Sector-wise split of bank credit, March fiscal year-ends, 2009-2019, 11MFY20 (%)

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 11MFY20 Agriculture & Allied 13.0 13.7 13.1 12.7 12.1 12.0 12.8 13.5 14.0 13.4 12.9 13.0 Priority Sector 35.8 35.9 34.4 33.1 31.6 33.1 33.5 34.0 34.3 33.2 31.7 30.2 Agriculture & Allied 13.0 13.7 13.1 12.7 12.1 12.0 12.8 13.5 14.0 13.3 12.8 12.8 SME 11.9 12.3 12.1 11.6 11.5 12.8 13.3 12.9 12.7 13.0 12.4 12.3 Manufacturing 6.5 6.8 5.7 5.5 5.8 6.3 6.3 5.7 5.2 4.9 4.3 4.2 Services 5.4 5.5 6.3 6.1 5.7 6.5 7.0 7.3 7.5 8.1 8.0 8.1 Housing 7.6 7.2 6.5 6.2 5.5 5.5 5.4 5.2 5.2 4.9 5.0 5.2 Weaker Sections 5.4 5.8 5.4 5.4 5.6 7.0 6.7 7.3 7.8 7.4 7.7 7.9

Industry 40.5 43.1 43.8 45.2 45.8 45.5 44.3 41.7 37.8 35.1 33.4 31.3 Mining & Quarrying 0.5 0.6 0.7 0.8 0.7 0.6 0.6 0.6 0.5 0.5 0.5 0.5 Food processing 2.1 2.2 2.1 2.2 2.4 2.6 2.9 2.3 2.1 2.0 1.8 1.7 Textiles 3.9 4.0 4.0 3.7 3.8 3.7 3.4 3.1 2.8 2.7 2.4 2.1 Rubber, Plastic others 0.5 0.5 0.7 0.7 0.6 0.7 0.6 0.6 0.6 0.6 0.5 0.5 Glass & Glassware 0.2 0.2 0.1 0.1 0.2 0.2 0.1 0.1 0.1 0.1 0.1 0.1 Cement 0.7 0.8 0.8 0.9 0.9 1.0 0.9 0.8 0.8 0.7 0.6 0.6 Basic metals 4.9 5.4 5.8 6.1 6.5 6.5 6.4 6.4 5.9 5.4 4.3 3.7 Construction 1.5 1.5 1.2 1.1 1.1 1.1 1.2 1.1 1.2 1.2 1.2 1.2 Infrastructure 10.4 12.5 14.2 14.7 15.0 15.1 15.4 14.7 12.8 11.6 12.2 11.4 Power 4.8 6.2 7.3 7.7 8.5 8.8 9.3 8.9 7.4 6.8 6.6 6.0 Telecom 1.9 2.0 2.5 2.2 1.8 1.6 1.5 1.4 1.2 1.1 1.3 1.6 Roads 1.8 2.4 2.5 2.6 2.7 2.9 2.8 2.7 2.5 2.2 2.2 2.1 Other Infrastructure 1.9 1.9 1.9 2.2 1.9 1.9 1.8 1.8 1.6 1.6 2.1 1.7 Services 24.8 23.9 24.2 23.7 23.7 24.2 23.5 23.5 25.4 26.7 28.0 27.3 Transport 1.5 1.7 1.9 1.8 1.6 1.7 1.5 1.5 1.6 1.6 1.6 1.6 Professional Services 1.7 1.4 1.2 1.1 1.2 1.4 1.4 1.6 1.9 2.0 2.0 1.9 Trade 5.5 5.4 5.0 5.2 5.7 5.9 6.1 5.8 6.0 6.1 6.1 6.0 Real Estate 3.6 3.0 2.6 2.6 2.6 2.8 2.8 2.7 2.6 2.4 2.3 2.6 NBFCs 3.8 3.7 5.0 5.3 5.3 5.3 5.2 5.4 5.5 6.5 7.4 7.9 Personal Loans 21.6 19.3 19.0 18.4 18.4 18.3 19.4 21.3 22.8 24.8 25.7 28.4 Housing 10.7 9.9 9.7 9.4 9.4 9.7 10.5 11.4 12.1 12.7 13.4 14.9 Credit card 1.1 0.7 0.5 0.5 0.5 0.4 0.5 0.6 0.7 0.9 1.0 1.2 Education 1.1 1.2 1.2 1.2 1.1 1.1 1.1 1.0 1.0 0.9 0.8 0.7 Vehicle 2.4 2.1 2.0 2.1 2.3 1.9 2.1 2.3 2.4 2.5 2.3 2.5 Other Personal Loans 4.1 3.4 4.0 3.7 3.6 3.6 3.9 4.5 5.3 6.6 7.0 8.0

Source: RBI, Kotak Institutional Equities

KOTAK INSTITUTIONAL EQUITIES RESEARCH 41 India Banks

Exhibit 3: Industrial credit growth in second half of last decade was much lower than in the first half Sector-wise growth in bank credit, March fiscal year-ends, 2010-2019, 11MFY20 (%)

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 11MFY20 Agriculture & Allied 22.9 16.2 13.3 7.7 12.9 15.0 15.3 12.4 3.8 7.9 5.8 Priority Sector 17.1 16.2 12.1 8.2 18.8 9.9 10.7 9.4 4.8 7.3 0.3 Agriculture & Allied 22.9 16.2 13.3 7.7 12.9 15.0 15.2 12.3 3.1 8.2 5.4 SME 20.8 19.1 12.3 12.5 25.9 13.1 5.9 6.4 10.5 7.1 6.7 Manufacturing 22.1 2.4 12.2 20.0 22.5 9.1 (2.3) (0.5) 0.9 0.7 (0.4) Services 19.2 39.7 12.5 5.8 29.4 16.9 13.3 11.8 17.1 11.0 10.7 Housing 10.5 10.5 10.7 0.3 13.0 6.7 6.2 7.6 2.0 15.2 6.3 Weaker Sections 26.9 11.7 18.1 17.1 41.2 4.9 17.9 16.2 2.6 16.4 14.1

Industry 24.4 23.0 20.3 14.9 12.8 5.6 2.7 (1.9) 0.7 6.9 0.7 Mining & Quarrying 27.0 40.9 27.6 6.6 3.5 0.3 8.5 (11.6) 19.8 1.1 0.2 Food processing 22.1 17.6 22.1 24.5 24.6 17.3 (12.5) (3.0) 6.7 1.1 (3.1) Textiles 18.2 20.4 9.4 14.9 10.2 (0.1) 1.9 (4.6) 6.9 (3.0) (6.6) Rubber, Plastic others 14.9 65.9 15.7 4.1 18.8 1.9 (1.1) 4.8 8.2 8.1 7.8 Glass & Glassware 13.9 13.4 14.8 18.5 16.9 1.5 0.6 (10.8) 6.5 17.0 (14.9) Cement 28.6 19.8 24.9 24.0 17.6 3.9 (3.1) (0.1) (3.1) 5.9 2.9 Basic metals 26.5 31.6 22.4 19.7 14.9 6.8 7.9 1.2 (1.2) (10.7) (10.0) Construction 14.8 (1.7) 11.9 7.3 19.9 18.8 0.3 10.3 9.5 10.4 8.4 Infrastructure 40.7 37.8 20.5 15.7 14.6 10.5 4.4 (6.1) (1.7) 18.5 3.3 Power 50.9 42.4 23.9 25.5 17.1 14.5 4.0 (9.4) (1.1) 9.5 (2.8) Telecom 18.0 57.8 0.5 (6.8) 0.5 4.2 (0.7) (6.8) (0.6) 36.7 54.3 Roads 56.3 23.6 22.1 18.2 20.2 6.9 5.2 1.4 (7.5) 12.2 (1.6) Other Infrastructure 22.7 20.7 32.2 0.5 9.1 2.9 9.2 (0.1) 3.7 53.5 0.6 Services 12.5 22.6 14.4 13.1 16.1 5.7 9.1 16.9 13.8 17.8 6.9 Transport 33.6 33.3 9.1 4.2 16.0 (0.8) 8.9 10.7 9.8 14.2 5.3 Professional Services (1.9) 4.2 5.0 18.8 41.2 6.0 23.9 31.6 12.9 10.4 (2.9) Trade 13.9 13.1 21.1 22.4 18.1 12.2 4.2 12.3 9.1 13.1 6.7 Real Estate (0.3) 5.8 15.6 11.9 21.6 8.6 6.7 4.5 0.1 8.9 15.1 NBFCs 14.8 62.3 23.9 14.1 12.9 6.1 13.2 10.9 26.9 29.2 22.3 Personal Loans 4.1 19.5 12.9 13.6 12.5 15.5 19.4 16.4 17.8 16.4 17.0 Housing 7.7 19.3 12.3 13.2 17.9 16.7 18.8 15.2 13.3 19.0 17.1 Credit card (28.1) (10.2) 12.9 21.9 (0.2) 22.6 23.7 38.4 31.6 28.6 33.0 Education 29.0 16.7 16.4 9.8 9.2 5.5 7.7 2.7 (0.5) (2.5) (3.4) Vehicle 2.9 14.5 22.2 24.5 (4.3) 17.2 22.7 11.5 11.3 6.5 10.3 Other Personal Loans (1.2) 42.0 8.1 11.1 12.6 18.3 25.2 27.0 35.3 19.4 20.6

Source: RBI, Kotak Institutional Equities

42 KOTAK INSTITUTIONAL EQUITIES RESEARCH Banks India

Exhibit 4: Housing loans and loans to NBFCs have supported bank credit growth in the past few years Sector-wise split of incremental bank credit, March fiscal year-ends, 2010-2019, 11MFY20 (%)

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Agriculture & Allied 17.7 10.4 10.5 7.4 11.5 21.1 21.5 20.0 6.4 8.6 Priority Sector 36.5 27.4 25.1 20.5 43.9 38.2 39.6 38.3 19.8 19.7 Agriculture & Allied 17.7 10.4 10.5 7.4 11.5 21.1 21.5 19.8 5.2 8.8 SME 14.7 11.0 9.0 11.0 22.0 19.6 8.7 9.9 15.9 7.5 Manufacturing 8.5 0.8 4.2 8.3 9.7 6.7 (1.6) (0.3) 0.6 0.3 Services 6.1 10.3 4.8 2.7 12.4 12.8 10.3 10.2 15.3 7.2 Housing 4.7 3.5 4.2 0.1 5.3 4.3 3.7 4.8 1.2 6.0 Weaker Sections 8.6 3.2 5.9 7.0 17.1 4.0 13.3 14.1 2.4 9.9

Industry 58.7 46.6 53.7 50.6 43.4 29.8 13.4 (9.2) 3.2 19.7 Mining & Quarrying 0.9 1.1 1.2 0.4 0.2 0.0 0.6 (0.8) 1.1 0.0 Food processing 2.7 1.8 2.8 4.0 4.4 5.3 (3.9) (0.8) 1.7 0.2 Textiles 4.3 3.8 2.2 4.2 2.8 (0.1) 0.7 (1.7) 2.3 (0.7) Rubber, Plastic others 0.5 1.6 0.7 0.2 0.9 0.1 (0.1) 0.3 0.5 0.4 Glass & Glassware 0.1 0.1 0.1 0.2 0.2 0.0 0.0 (0.2) 0.1 0.2 Cement 1.3 0.8 1.2 1.6 1.2 0.4 (0.3) (0.0) (0.3) 0.3 Basic metals 7.8 8.0 7.9 9.0 7.1 5.2 5.6 0.9 (0.8) (4.7) Construction 1.3 (0.1) 0.8 0.6 1.6 2.5 0.0 1.4 1.3 1.0 Infrastructure 25.1 22.2 17.6 17.3 16.2 18.6 7.4 (10.7) (2.6) 17.5 Power 14.5 12.3 10.5 14.8 10.8 14.9 4.1 (9.9) (1.0) 5.2 Telecom 2.1 5.3 0.1 (1.1) 0.1 0.8 (0.1) (1.1) (0.1) 3.3 Roads 6.0 2.7 3.3 3.5 4.0 2.3 1.6 0.4 (2.3) 2.1 Other Infrastructure 2.5 1.9 3.8 0.1 1.3 0.6 1.8 (0.0) 0.7 6.8 Services 18.4 25.3 21.0 23.3 28.1 16.0 23.5 47.7 41.8 38.6 Transport 3.0 2.7 1.0 0.6 1.9 (0.2) 1.5 2.0 1.8 1.8 Professional Services (0.2) 0.3 0.4 1.6 3.5 1.0 3.7 6.0 3.0 1.7 Trade 4.6 3.3 6.4 8.8 7.5 8.4 2.8 8.5 6.6 6.5 Real Estate (0.1) 0.8 2.5 2.3 4.1 2.8 2.1 1.5 0.0 1.7 NBFCs 3.3 10.9 7.2 5.6 5.1 3.8 7.5 7.0 17.7 15.3 Personal Loans 5.3 17.6 14.8 18.8 17.0 33.1 41.5 41.6 48.6 33.0 Housing 4.9 9.0 7.3 9.3 12.4 19.0 21.7 20.7 19.3 19.6 Credit card (1.8) (0.3) 0.4 0.8 (0.0) 1.2 1.3 2.6 2.8 2.1 Education 1.9 1.0 1.2 0.9 0.8 0.7 0.9 0.3 (0.1) (0.2) Vehicle 0.4 1.4 2.7 3.8 (0.7) 3.9 5.2 3.2 3.2 1.3 Other Personal Loans (0.3) 6.7 2.0 3.1 3.4 7.7 11.0 14.6 22.3 10.5

Source: RBI, Kotak Institutional Equities

KOTAK INSTITUTIONAL EQUITIES RESEARCH 43 India Banks

Exhibit 5: Credit growth has seen sharp pick up in 2000-10 as government focused on capital expenditure Average growth in bank credit and central govt capex share in total expenditure, March fiscal year-ends (%)

Credit growth Govt capex/Total exp 45 43 41 38

36 33

26 27 24 21 20 20 19 17 18 18 16 16 16 15 13 12 13 10 9

0 1971-75 1976-80 1981-85 1986-90 1991-95 1996-00 2001-05 2006-10 2011-15 2016-20

Source: CEIC, Kotak Institutional Equities

44 KOTAK INSTITUTIONAL EQUITIES RESEARCH INDIA Economy Monsoon APRIL 16, 2020 UPDATE BSE-30: 30,380

‘Normal’ monsoons on the cards. The IMD expects the June-September monsoon at 100% of LPA, with the probabilities skewed towards the positive side. The projections will provide comfort to the governments as they formulate policy to fight the economic impact of Covid-19. The MPC will also take comfort on the food inflation front and we continue to see scope for additional 50 bps of repo rate cut, along with focus on unconventional measure to support the economy and markets.

Probability skewed towards normal monsoon

The Indian Meteorological Department (IMD) forecasts the southwest monsoon at 100% of QUICK NUMBERS Long Period Average (LPA) with a model error of (+/-)5%. With the exception of last year, quantitatively, the IMD has generally overestimated the monsoon outcome over the past few  Southwest monsoon years (Exhibit 1). The first estimate for southwest monsoon in FY2020 was at 96% of LPA. By likely to be 100% of end of the season (June-September), monsoon was around 110% of LPA. Probability of a LPA according to normal monsoon are skewed on the upside, the IMD has ascribed 9% probability of excess IMD rainfall, 21% probability of above-normal monsoon, 41% probability of normal monsoon, 20% probability of below-normal monsoon, and 9% probability of deficient monsoon in FY2021  71% probability of (Exhibit 2). We note that this is the first stage forecast and that the second stage forecast will be normal rainfall, released either in the last week of May or the first week of June. The release will also have 20% probability of separate forecasts for the monthly (July and August) rainfall over the country as a whole and below-normal seasonal (June-September) rainfall over the four broad geographical regions of India. rainfall, 9% probability of El Nino conditions exist in the neutral zone; La Nina remains a possibility deficient rainfall The IMD notes that both El Nino conditions (usually negative for monsoon) and Indian Ocean Dipole conditions are currently in a neutral phase and that some climate models indicate that these are likely to persist during the monsoon season. The Southern Oscillation Index (SOI) also has been in the weak El Nino zone over the past few months (Exhibit 3). However, a few other models also suggest the possibility of development of La Nina conditions over the Pacific Ocean (positive for monsoon). The IMD however notes that these projections are prone to uncertainty.

MPC likely to cut the repo rate by 50 bps; focus on unconventional measures to remain

While projections of ‘normal’ rainfall would bode well for the agriculture sector’s outlook, there are certain other important factors. Before the outbreak of Covid-19, rural demand had been weak owing to agrarian distress as record production levels depressed farm prices (Exhibits 4 and 5). There has been some recovery in farm prices, but these were mostly due to the supply disruptions caused by the floods owing to the uneven rainfall distribution (Exhibit 6). This led to a delay in the arrival of the kharif output, causing a spike in prices of certain vegetables and Suvodeep Rakshit pushing inflation above the RBI’s comfort zone of 4%. Good agricultural output accompanied with stable prices, equal distribution of rainfall, and containment of Covid-19 will be key factors Upasna Bhardwaj for supporting of rural demand. Central and state governments need to ensure that rabi crop procurement, and kharif sowing and harvesting are not affected due to the Covid-19 spread. Avijit Puri The IMD’s forecast of normal rainfall will also provide comfort to the MPC in terms of inflation and explore various options to tackle the widening negative output gap. We continue to see room for further monetary accommodation (50 bps of repo rate cut) along with focus on transmission of liquidity. We believe that the RBI soon needs to undertake unconventional measures to provide support to the economy, financial markets, and firms coming under stress due to Covid-19. [email protected] Contact: +91 22 6218 6427

For Private Circulation Only. India Economy

Exhibit 1: IMD generally overestimates the extent of rainfall with the exception of last year Comparison of actual and forecast rainfall deviation from normal, March fiscal year-ends (%)

Forecast Actual 120

110

100

90

80

70

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020 2021

Notes: (a) Below 90% indicates deficient rainfall

Source: IMD, Kotak Economics Research

Exhibit 2: Probability of normal rainfall skewed towards the positive side Climatological and forecast probabilities for monsoon in 2020 (%)

Probability - IMD Climatological probability 45 41 40

35

30 33 25 20 20 16 17 15 21 16 17 9 10

5 9 0 Deficient (less than Below normal (90- Normal (96-104) Above normal (104- Excess (more than 90) 96) 110) 110) Notes: (a) Climatological probabilities refer to the observed data over a hundred years.

Source: IMD, Kotak Economics Research

46 KOTAK ECONOMIC RESEARCH Economy India

Exhibit 3: El Nino conditions in the neutral zone currently Trend in Southern Oscillations Index (X, 3M MA)

30 La Nina Phase 25 20 15 10 5 0 (5) (10) (15) (20) El Nino Phase (25) Sep-06 Sep-07 Sep-08 Sep-09 Sep-10 Sep-11 Sep-12 Sep-13 Sep-14 Sep-15 Sep-16 Sep-17 Sep-18 Sep-19 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 Mar-16 Mar-17 Mar-18 Mar-19 Mar-20

Source: Bloomberg, Kotak Economics Research

Exhibit 4: Food grains and horticulture production at a high in 2020 Production of key food items, March fiscal year-ends (mn tons)

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Food grains 234 218 244 259 257 265 252 252 275 285 285 292 Rice 99 89 96 105 105 107 105 104 110 113 116 117 Wheat 81 81 87 95 94 96 87 92 99 100 104 106 Coarse cereals 40 34 43 42 40 43 43 39 44 47 43 45 Jowar 777656545534 Bajra 9 7 10 10 9 9 9 8 10 9 9 9 Maize 20 17 22 22 22 24 24 23 26 29 28 28 Pulses 15 15 18 17 18 19 17 16 23 25 22 23 Oilseeds 28 25 32 30 31 33 28 25 31 31 32 34 Soyabeans 10 10 13 12 15 12 10 9 13 11 13 14 Groundnuts 7 5 8 7 5 10 7 7 7 9 7 8 Rapeseed & mustard 778788678899 Cotton (mn bales) 22 24 33 35 34 36 35 30 33 33 28 35 Sugar cane 285 292 342 361 341 352 362 348 306 380 405 354 Fruits 68 72 75 79 84 89 87 90 93 97 98 96 Vegetables 129 134 147 154 160 163 169 169 178 180 183 188 Flowers 1.0 1.0 1.0 1.7 1.7 1.8 1.7 1.7 1.7 1.8 2.3 2.2

Source: CEIC, Kotak Economics Research

KOTAK ECONOMIC RESEARCH 47 India Economy

Exhibit 5: Low prices has been one of the primary causes of farm distress Nominal and real crop GVA growth, March fiscal year-ends (%)

Nominal crop GVA growth Real crop GVA growth 25

20

15

10

5

0 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

(5) 2020E

Source: CEIC, Kotak Economics Research

Exhibit 6: Consumer prices now rising at a faster pace compared to wholesale prices Trend in WPI and CPI food inflation (%) and the difference in WPI and CPI food inflation (3MMA, %)

Diff. WPI - CPI food inflation (3M MA) WPI food inflation CPI food inflation 13

11

9

7

5

3

1

(1) Jul-15 Jul-16 Jul-17 Jul-18 Jul-19 Jan-16 Jan-17 Jan-18 Jan-19 Jan-20

(3) Sep-15 Sep-16 Sep-17 Sep-18 Sep-19 Nov-15 Nov-16 Nov-17 Nov-18 Nov-19 Mar-16 Mar-17 Mar-18 Mar-19 Mar-20 May-16 May-17 May-18 May-19 (5)

(7)

Source: CEIC, Kotak Economics Research

48 KOTAK ECONOMIC RESEARCH INDIA Economy Inflation APRIL 15, 2020 UPDATE BSE-30: 30,380

WPI inflation softens; focus on growth. Lower food prices have led to the recent decline in WPI and CPI inflation. Even as CPI inflation is likely to remain above 5% in the near term, we expect the MPC to focus on the favorable medium-term trajectory and provide the policy push required to tackle the Covid-19-related shock. Since we expect growth to weaken further, we restate our call of another 50 bps of repo rate cut along with focus on unconventional measures to support the economy and financial markets.

WPI inflation moderates to a four-month low

March WPI inflation moderated sharply to 1% as against 2.26% in February owing to fading QUICK NUMBERS momentum and favourable base effects (Exhibit 1). The moderation was led by lower food inflation of 4.9% (7.8% in February) and lower fuel inflation of (-)1.8% (3.4% in February)  March WPI inflation (Exhibit 2). Vegetables (11.9% from 30%), cereals (2.7% from 5.2%), and eggs, meat and fish at 1% (4.2% from 6.9%) led the decline in food inflation (Exhibit 3). On a sequential basis, WPI inflation fell by (-)0.9% mom led by a (-)3.1% fall in fuel and power prices and a (-)2.1% fall in  Core WPI inflation food prices. Sequential declines were seen across vegetables ((-)7.4%), cereals ((-)2.4%), eggs, at (-)0.8% meat and fish ((-)4.5%), fruits ((-)1.1%), and pulses ((-)1%). Price of milk, however, went up by 1.1%. Owing to the sharp decline in oil prices, sequential declines were observed across ATF  Expect MPC to cut ((-)18.5%), naphtha ((-)13.3%), HSD ((-)5.3%), kerosene ((-)5.1%), petrol ((-)4.3%), furnace oil the repo rate by 50 ((-)3.9%), and LPG((-)2.6%). Sequential increase of 7.1% was observed across petroleum coke. bps, focus on Overall, we expect WPI inflation to trend towards 2.5% by March 2021 and average 1.6% in unconventional FY2021 (1.7% in FY2020) (Exhibit 4). Similar to CPI inflation, WPI inflation was computed with measures a low response rate and hence could be subjected to revisions.

Core manufactured products inflation remains weak

Core WPI inflation (manufactured products excluding food products) fell by (-)0.8% in March, same as in February. On a sequential basis, core WPI went up marginally by 0.1% mom, perhaps due to supply-chain disruption witnessed in certain industries owing to the spread of Covid-19. Sequential increases were witnessed across electrical equipment (0.9%), motor vehicles, trailers and semi-trailers (0.5%), furniture (2.1%), and pharmaceuticals, chemical and botanical products (0.2%). Among the heavyweights, prices of ‘basic metals’ fell by (-)0.4% mom and those of ‘chemicals and chemical products’ fell by (-)0.2%. Global growth concerns owing to Covid-19-related lockdowns continue to exert pressure on commodity prices (Exhibit 5). We expect core WPI inflation to average 0.8% in FY2021 ((-)0.5% in FY2020).

MPC to focus on unconventional policy measures to aid the economy

The moderation in both WPI and CPI inflation is likely to provide comfort to the MPC to explore Upasna Bhardwaj various options to tackle the widening negative output gap. Even though the CPI inflation remains above 5% and is likely to remain so in the near term owing to supply-chain disruptions, Suvodeep Rakshit we expect the MPC to focus on the favorable medium-term inflation trajectory and provide the necessary policy impulse required to tackle the Covid-19-related stress in the economy. We Avijit Puri expect CPI inflation to trend towards 3.5% by March 2021 and average 4% in FY2021 (4.8% in FY2020). Given the restrictions on economic activity, we expect FY2021 GDP growth at 0.4% (see our report on April 13, 2020: Covid-19: Planning the next phase). We therefore continue to see room for further monetary accommodation (50 bps of repo rate cut) along with focus on transmission of liquidity. We also believe that the MPC would continue to undertake unconventional measures to provide support to the economy and the financial markets.

[email protected] Contact: +91 22 6218 6427

For Private Circulation Only. India Economy

Exhibit 1: Fading momentum and favorable base effects resulted in lower WPI inflation Trend in momentum, base effect, and monthly change in WPI inflation (%)

Momentum Base effect Monthly change in WPI inflation 2.5 2.0 1.5 1.0 0.5 0.0 (0.5) (1.0) (1.5) (2.0) Jun-17 Jun-18 Jun-19 Sep-17 Sep-18 Sep-19 Dec-17 Dec-18 Dec-19 Mar-18 Mar-19 Mar-20 Notes: (a) Momentum is mom growth while base effect is 12-m prior mom change with signs reversed.

Source: CEIC, Kotak Economics Research

Exhibit 2: March WPI inflation moderated to 1% due to lower food and fuel prices Contribution of key items to WPI inflation (%) Primary food articles Primary non-food articles Minerals Crude and natural gas Fuel and power Manufactured products WPI inflation 6

4

2

0

(2)

(4) Jun-16 Jun-17 Jun-18 Jun-19 Sep-16 Sep-17 Sep-18 Sep-19 Dec-16 Dec-17 Dec-18 Dec-19 Mar-16 Mar-17 Mar-18 Mar-19 Mar-20

Source: CEIC, Kotak Economics Research

50 KOTAK ECONOMIC RESEARCH Economy India

Exhibit 3: Prices of vegetables and cereals have been moderating Trend in components of food inflation (%) Foodgrains Fruits & vegetables 14 Milk, eggs, meat & fish Other primary food articles Primary food articles 12 10 8 6 4 2 0 (2) (4) (6) Jun-16 Jun-17 Jun-18 Jun-19 Sep-16 Sep-17 Sep-18 Sep-19 Dec-16 Dec-17 Dec-18 Dec-19 Mar-16 Mar-17 Mar-18 Mar-19 Mar-20

Source: CEIC, Kotak Economics Research

Exhibit 4: We expect WPI inflation to trend towards 2.5% by March 2021 WPI inflation (yoy change), 2015-21E (%)

WPI inflation Core WPI inflation 8

6

4 Mar 2021: 2.5% 2

0

(2)

(4) Mar 2021: 1.6% (6)

(8) Jun-15 Jun-16 Jun-17 Jun-18 Jun-19 Jun-20 Sep-15 Sep-16 Sep-17 Sep-18 Sep-19 Sep-20 Dec-15 Dec-16 Dec-17 Dec-18 Dec-19 Dec-20 Mar-16 Mar-17 Mar-18 Mar-19 Mar-20 Mar-21

Source: CEIC, Kotak Economics Research estimates

KOTAK ECONOMIC RESEARCH 51 India Economy

Exhibit 5: Commodity prices continue to fall on concerns about global growth Trend in CRB commodities index (X)

CRB Commodities Index 210 200 190 180 170 160 150 140 130 120

110

Jul-18

Jul-19

Jan-19

Jan-20

Jun-18

Jun-19

Oct-18

Feb-19

Oct-19

Feb-20

Apr-18

Sep-18

Apr-19

Sep-19

Apr-20

Dec-18

Dec-19

Nov-18

Nov-19

Mar-18

Mar-19

Mar-20

Aug-18

Aug-19 May-18 May-19

Source: Bloomberg, Kotak Economics Research

52 KOTAK ECONOMIC RESEARCH March 2020: Results calendar 53

Mon Tue Wed Thu Fri Sat Sun 13-Apr 14-Apr 15-Apr 16-Apr 17-Apr 18-Apr 19-Apr Wipro TCS HDFC Bank

20-Apr 21-Apr 22-Apr 23-Apr 24-Apr 25-Apr 26-Apr Infosys ACC ICICI Prudential Life 27-Apr 28-Apr 29-Apr 30-Apr 1-May 2-May 3-May

4-May 5-May 6-May 7-May 8-May 9-May 10-May

11-May 12-May 13-May 14-May 15-May 16-May 17-May Dr Reddy's Laboratories

18-May 19-May 20-May 21-May 22-May 23-May 24-May

25-May 26-May 27-May 28-May 29-May 30-May 31-May

Source: BSE, NSE, Kotak Institutional Equities India Daily SummaryIndia KOTAK INSTITUTIONAL EQUITIES RESEARCH INSTITUTIONALKOTAK EQUITIES -

April 16, 2020 April

KOTAK ECONOMIC RESEARCH 53 Kotak Institutional Equities: Valuation summary of KIE Universe stocks India Daily SummaryIndia

Fair O/S ADVT

KOTAK INSTITUTIONAL EQUITIES RESEARCH INSTITUTIONALKOTAK EQUITIES 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 15-Apr-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 511 650 27 87 1.1 171 36 37 43 28.3 1.9 17.4 14 13.8 11.8 7.8 7.1 5.9 2.3 2.1 1.8 17.5 15.8 16.4 1.8 1.8 2.1 7.0 Apollo Tyres ADD 88 180 104 50 0.7 572 10.2 10.3 14.9 (29.0) 1.3 44.4 8.7 8.6 5.9 5.5 5.1 3.9 0.5 0.5 0.4 5.7 5.6 7.7 3.4 3.4 3.4 7.0 Ashok Leyland BUY 47 90 93 137 1.8 2,936 1.0 1.2 5.1 (86.2) 29.3 309.3 48.5 37.5 9.2 13.2 11.2 4.6 1.6 1.6 1.4 3.4 4.3 16.2 0.7 0.8 3.3 26 Bajaj Auto BUY 2,335 3,100 33 676 9 289 172 170 200 12.3 (1.2) 17.5 13.6 13.7 11.7 9.5 9.1 7.1 3.0 2.6 2.3 22 20 21 5.0 2.9 3.4 24 Balkrishna Industries SELL 872 1,030 18 169 2.2 193 50 53 59 25.6 6.0 11.4 17.5 16.5 14.8 11.5 9.4 7.9 3.3 2.9 2.6 19.6 18.7 18.7 2.3 2.5 2.8 13.0 Bharat Forge SELL 237 365 54 110 1.4 466 13 16 22 (41.6) 21.6 40.4 18.3 15.1 10.7 10.3 9.0 7.0 1.9 1.8 1.6 10.9 12.4 15.8 2.3 2.5 2.5 9.5 CEAT REDUCE 780 960 23 32 0.4 40 59 63 81 (4.9) 8.1 28.8 13.3 12.3 9.6 7.8 7.3 6.3 1.1 1.0 0.9 8.3 8.4 10.0 1.5 1.5 1.5 1.3 Eicher Motors ADD 13,315 19,500 46 364 4.7 27 770 747 979 (5.6) (2.9) 31.0 17.3 17.8 13.6 12.7 11.9 9.3 4.1 3.5 2.9 26 21 23 0.2 —— 45 Endurance Technologies BUY 595 850 43 84 1.1 141 40 40 50 11.1 (1.6) 26.3 15 15.0 11.9 7.1 6.6 5.1 2.8 2.4 2.0 18.6 15.9 17.2 1.0 1.1 1.4 0.5 Escorts BUY 715 1,080 51 64 1.1 89 54 63 75 (1.6) 16.9 19.7 13.3 11.4 9.5 9.1 7.6 5.9 1.9 1.6 1.4 13.9 14.3 15.0 1.1 1.3 1.6 37

Exide Industries BUY 140 165 17 119 1.6 850 9.6 8.2 10.2 6.6 (14.6) 23.5 14.6 17.1 13.8 8.3 9.1 7.6 1.9 1.8 1.6 13.2 10.6 12.3 2.5 2.8 2.8 6.2 -

Hero Motocorp ADD 1,824 2,150 18 364 4.8 200 167 141 166 (1.2) (15.7) 17.4 10.9 12.9 11.0 6.6 7.6 6.1 2.5 2.4 2.2 25 18.9 21 5.0 5.0 5.5 31 April 16, 2020 Mahindra CIE Automotive ADD 75 150 99 29 0.4 378 9.4 11.0 12.7 (34.9) 16.1 15.7 8.0 6.9 6.0 4.2 3.9 3.0 0.6 0.6 0.5 8.0 8.6 9.1 ——— 0.3 Mahindra & Mahindra BUY 353 815 131 439 5.7 1,138 32 32 41 (32.5) (1.1) 27.9 11.0 11.1 8.7 6.8 6.6 5.2 1.0 1.0 0.9 9.9 9.0 10.7 1.8 1.8 2.3 29 Maruti Suzuki SELL 5,094 4,900 (4) 1,539 20.1 302 188 199 264 (24.3) 6.1 32.6 27 26 19 14.6 12.7 8.9 3.1 2.8 2.5 11.8 11.5 13.9 0.9 1.0 1.3 94

Motherson Sumi Systems SELL 71 105 48 225 2.9 3,158 4.2 5.9 7.0 (16.9) 38.3 18.9 16.8 12.1 10.2 6.0 4.3 3.5 1.9 1.6 1.4 11.7 14.2 14.4 1.8 2.1 2.5 19.6 MRF SELL 57,418 62,000 8 244 3.2 4 2,523 2,915 3,674 (5.4) 15.5 26.0 23 19.7 15.6 9.2 8.5 6.6 2.0 1.9 1.7 9.4 9.9 11.2 0.1 0.1 0.1 10.2 Schaeffler India SELL 3,466 3,900 13 108 1.4 31 118 134 171 (18.3) 14.0 27.3 29 26 20 15.8 14.2 11.2 3.7 3.2 2.8 13.0 13.3 14.8 ——— 0.4 SKF REDUCE 1,398 1,950 40 69 0.9 49 66 79 95 0.5 20.4 19.4 21 18 15 14.8 12.1 9.6 3.5 3.0 2.6 16.7 17.2 17.6 0.9 0.9 1.0 0.5 Tata Motors BUY 73 130 78 262 3.2 3,598 (8.7) (19.7) 6.4 (60.4) (128.0) 132.2 NM NM 11.5 4.2 5.3 3.2 0.4 0.5 0.5 NM NM 4.3 ——— 101 Timken SELL 817 825 1 61 0.8 75 31 32 39 57.4 3.8 20.9 26 25 21 16.5 14.3 11.6 3.9 3.4 3.0 16.1 14.4 15.1 0.1 0.1 0.2 0.7

TVS Motor SELL 276 240 (13) 131 1.7 475 12.0 9.0 16.6 (14.8) (24.8) 83.2 23 31 17 11.3 12.9 8.7 3.5 3.3 2.9 16.2 11.1 18.3 1.3 0.8 1.5 11.1 Varroc Engineering BUY 137 540 294 18 0.2 135 15 29 46 (54.0) 88.2 58.7 8.9 4.7 3.0 4.0 2.8 1.8 0.6 0.5 0.4 6.4 10.9 15.0 ——— 0.4 Automobiles & Components Neutral 5,381 70.4 (21.9) (13.8) 83.6 20.5 23.8 12.9 7.7 7.5 5.3 1.9 1.8 1.6 9.2 7.5 12.4 1.8 1.6 1.9 476 Banks AU Small Finance Bank SELL 502 625 24 153 2.0 302 24.4 28.5 36.2 86.7 17.0 27.0 21 18 14 ——— 3.4 2.9 2.4 19.0 17.1 18.2 0.0 —— 12.7 Axis Bank BUY 417 620 49 1,177 15.4 2,806 13.6 40 46 (25.3) 193.7 15.3 31 10.5 9.1 ——— 1.5 1.4 1.2 5.0 12.5 13.0 0.3 1.4 1.7 134 Bandhan Bank REDUCE 187 540 189 301 3.9 1,610 20.3 25.4 31.2 24.0 25.2 23.0 9.2 7.4 6.0 ——— 1.9 1.5 1.2 23.9 23 22 0.0 0.0 0.0 31 Bank of Baroda ADD 49 105 115 226 3.0 4,582 0.8 23.4 27 (50.0) 2,763.0 13.9 60 2.1 1.8 ——— 0.5 0.4 0.4 0.7 15.5 15.6 0.3 9.6 10.9 23 City Union Bank ADD 129 240 86 95 1.2 735 10.0 11.8 13.5 8.1 17.3 14.3 13 11.0 9.6 ——— 1.9 1.7 1.5 14.4 15.0 15.2 1.4 1.6 1.9 3.1 DCB Bank BUY 87 230 166 27 0.4 310 12.8 16.9 22.2 22.1 32.0 30.8 6.7 5.1 3.9 ——— 0.9 0.8 0.6 13.0 15.2 17.2 1.4 1.9 2.4 1.6 Equitas Holdings BUY 39 160 311 13 0.2 342 8.0 10.5 14.5 26.0 32.1 37.5 4.9 3.7 2.7 ——— 0.5 0.4 0.4 9.9 11.2 13.6 ——— 6.6 Federal Bank BUY 41 120 190 82 1.1 1,985 8.2 9.9 12.5 31.2 20.9 26.3 5.0 4.2 3.3 ——— 0.6 0.6 0.5 11.8 12.9 14.7 4.4 5.4 6.8 14.2 HDFC Bank BUY 863 1,050 22 4,734 61.8 5,447 48 50 56 24.5 4.3 10.5 18 17 16 ——— 2.8 2.5 2.2 16.5 15.2 14.9 1.1 1.1 1.2 195 ICICI Bank BUY 327 490 50 2,119 27.7 6,447 17.1 27 30 227.4 56.2 13.6 19 12.3 10.8 ——— 2.0 1.7 1.6 9.8 13.9 14.2 1.0 1.6 1.9 178 IndusInd Bank ADD 424 600 41 294 3.8 712 58 29 76 6.7 (51.2) 166.6 7 14.9 5.6 ——— 0.8 0.8 0.7 13.4 5.3 13.2 1.9 0.9 2.5 149 Karur Vysya Bank BUY 27 80 199 22 0.3 799 3.4 7 13 27.2 104.1 95.1 8 3.9 2.0 ——— 0.4 0.4 0.3 4.1 8.0 14.5 3.1 6.7 13.0 0.6 Punjab National Bank NR 31 —— 210 2.7 4,604 2 6 10 110.2 149.0 80.1 14 5.7 3.1 ——— 0.7 0.5 0.4 2.4 7.0 10.2 0.0 0.0 0.0 13.5 RBL Bank BUY 121 300 149 61 0.8 509 9.3 11 20 (54.5) 19.1 79.9 13 10.9 6.1 ——— 0.6 0.6 0.6 5.1 5.1 8.6 1.0 1.2 2.2 46 State Bank of India BUY 182 420 130 1,627 21.3 8,925 24 45 55 2,356.7 87.9 23.3 8 4.1 3.3 ——— 0.9 0.7 0.6 9.2 15.2 16.0 0.1 0.1 0.1 211 Ujjivan Financial Services BUY 154 490 219 19 0.2 121 26.9 34 44 117.0 24.9 31.6 6 4.6 3.5 ——— 0.9 0.7 0.6 15.7 17.0 19.3 2.0 2.7 3.9 8.5 Ujjivan Small Finance Bank SELL 28 45 60 48 0.6 1,714 2 3 3 48.2 33.3 26.9 14 10.3 8.1 ——— 1.7 1.5 1.3 15.1 14.9 16.7 1.5 1.9 2.5 0.0 Union Bank RS 29 —— 99 1.3 3,423 0 11 15 101.2 5,126.7 36.8 142 2.7 2.0 ——— 0.4 0.3 0.3 0.2 13.2 13.2 0.0 5.5 7.6 1.9 YES Bank RS 25 — (100) 307 4.0 12,546 (18.7) (3) 0 (352.2) 85.3 101.2 NM NM 716.2 ——— 4.1 13.1 6.4 NM NM 0.4 0.0 0.0 0.0 86 Banks Attractive 11,741 153.3 90.4 139.9 27.6 21 8.8 6.9 1.3 1.0 0.9 5.9 11.7 13.2 0.8 1.3 1.5 1,133

Source: Company, Bloomberg, Kotak Institutional Equities estimates

54 KOTAK ECONOMIC RESEARCH 54

Kotak Institutional Equities: Valuation summary of KIE Universe stocks

55 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 15-Apr-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 909 765 (16) 137 1.8 151 19.4 22 27 48.5 14.7 19.4 47 41 34 27.6 23.4 19.3 8.8 7.3 6.1 21 19.6 19.4 0.1 0.1 0.1 2.2 Building Products Cautious 137 1.8 49.5 14.7 19.4 47 41 34 27.6 23.4 19.3 8.8 7.3 6.1 18.8 17.9 17.8 0.1 0.1 0.1 2.2 Capital goods ABB SELL 916 900 (2) 194 2.5 212 18 20 25 46.3 12.6 27.3 52 46 36 33.5 29.0 23.0 5.5 5.1 4.7 9.9 11.5 13.5 0.6 0.7 0.8 1.1 Ashoka Buildcon BUY 52 155 200 15 0.2 281 12.9 11.9 13.2 8.6 (7.9) 11.2 4.0 4.4 3.9 4.0 3.7 3.2 0.6 0.5 0.5 15.3 12.6 12.7 3.9 3.6 4.0 0.9 Bharat Electronics BUY 70 113 62 170 2.2 2,437 6.2 7.5 7.0 (20.2) 20.9 (6.9) 11.3 9.3 10.0 6.6 5.7 5.3 1.7 1.6 1.5 15.7 17.6 15.2 3.9 4.7 4.4 15.4 BHEL REDUCE 21 41 93 75 1.0 3,482 2.7 2.6 3.8 (24.0) (2.6) 48.7 8.1 8.3 5.6 1.5 1.7 1.4 0.2 0.2 0.2 2.9 2.8 4.1 6.0 5.4 7.2 9.3 Carborundum Universal ADD 216 345 59 41 0.5 189 13.7 16.3 19.0 4.7 19.2 16.1 15.8 13.2 11.4 9.6 7.6 6.4 2.2 2.0 1.8 14.4 15.6 16.3 1.9 2.3 2.6 0.4 Cochin Shipyard BUY 256 615 140 34 0.4 132 48 56 50 30.6 17.6 (10.8) 5.4 4.6 5.1 (0.7) 0.1 1.5 0.9 0.8 0.7 17.7 18.3 14.6 4.6 5.5 5.3 1.8 Cummins India BUY 375 520 39 104 1.4 277 26 26 29 (0.2) (2.6) 12.2 14.3 14.7 13.1 13.6 13.7 12.1 2.4 2.3 2.1 17.2 15.8 16.8 3.5 3.4 3.8 8.4 Dilip Buildcon BUY 260 580 123 36 0.5 137 36 41 51 (35.6) 14.8 24.9 7.3 6.3 5.1 4.3 3.9 2.8 1.0 0.8 0.7 14.2 14.2 15.2 0.2 0.3 0.4 1.2 IRB Infrastructure BUY 71 154 117 25 0.3 351 22 16 16 (7.1) (29.8) 3.8 3.2 4.5 4.3 5.6 6.5 6.5 0.4 0.3 0.3 11.9 7.7 7.5 3.9 3.5 2.1 3.0 Kalpataru Power Transmission BUY 175 591 237 27 0.4 153 34 38 46 12.8 10.5 22.5 5.1 4.6 3.8 3.3 2.7 2.0 0.8 0.7 0.6 15.7 15.2 16.2 2.1 2.3 2.8 0.6 KEC International BUY 164 399 143 42 0.6 257 24.6 28 33 30.2 14.4 17.9 6.7 5.8 4.9 4.5 3.7 3.1 1.4 1.2 1.0 23 22 21 1.6 1.8 2.2 1.4 L&T BUY 880 1,270 44 1,235 16.1 1,403 69 62 79 12.0 (9.2) 26.6 12.8 14.1 11.1 14.8 13.3 11.6 2.0 1.7 1.6 16.6 13.3 14.8 1.2 4.2 2.8 71 Sadbhav Engineering BUY 28 137 396 5 0.1 172 7.2 11.7 13.6 (33.4) 61.1 16.3 3.8 2.4 2.0 3.8 2.0 1.6 0.2 0.2 0.2 5.9 9.0 9.6 ——— 0.6 Siemens SELL 1,193 1,200 1 425 5.6 356 35 40 46 14.1 15.2 13.9 34 30 26 23.5 20.5 17.8 4.3 3.9 3.6 13.1 13.8 14.3 0.8 0.9 1.1 9.6 Thermax BUY 705 870 23 84 1.1 113 24 29 36 (33.9) 18.5 24.8 29 24 19.5 17.7 19.2 15.3 17.7 19.2 15.3 8.8 9.9 11.5 1.0 1.2 1.5 1.7 Capital goods Neutral 2,511 32.8 2.7 (0.7) 19.5 13.6 13.7 11.4 1.7 1.5 1.4 12.3 10.9 12.0 1.6 3.2 2.6 1,133 Commercial & Professional Services SIS REDUCE 399 870 118 58 0.8 75 37 41 48 27.5 11.9 16.0 10.9 9.7 8.4 11.8 10.0 8.5 2.0 1.7 1.4 19.9 18.8 18.5 0.8 0.9 1.1 0.5 TeamLease Services SELL 1,638 2,300 40 28 0.4 17 68 89 112 18.6 29.8 26.9 24 18.5 14.6 20.5 15.2 11.2 4.3 3.5 2.8 19.5 21 21 ——— 0.9 Commercial & Professional Services Cautious 86 1.1 24.7 17.3 19.6 22 18.9 15.8 13.6 11.1 9.1 4.0 3.4 2.8 18.2 17.8 17.8 0.3 0.3 0.4 1.4 Commodity Chemicals Asian Paints REDUCE 1,718 1,825 6 1,648 21.5 959 28.9 34.2 40.5 28.5 18.2 18.3 59 50 42 37.7 32.8 28.2 15.4 13.8 12.3 27 29 31 0.8 1.0 1.2 49 Berger Paints SELL 513 430 (16) 498 6.5 971 7.5 8.6 10.2 46.6 14.6 19.1 68 60 50 44.1 37.6 31.8 17.3 14.9 12.8 27 27 28 0.5 0.6 0.7 10.7 Kansai Nerolac BUY 350 485 39 189 2.5 539 10.2 9.7 13.6 17.2 (4.5) 40.6 34 36 26 23.1 22.6 16.5 5.0 4.7 4.2 15.3 13.4 17.3 1.0 1.0 1.4 2.1 Tata Chemicals ADD 240 345 44 61 0.8 255 33.0 37.1 40.5 (23.1) 12.4 9.3 7.3 6.5 5.9 2.9 2.5 2.2 0.5 0.5 0.4 6.7 7.1 7.4 3.8 4.3 4.7 9.4 Commodity Chemicals Neutral 2,396 31.3 16.0 14.1 19.0 49 43 36 28.7 25.4 21.7 7.9 7.3 6.6 16.2 17.0 18.4 0.8 1.0 1.2 71 Construction Materials ACC BUY 1,138 1,425 25 214 2.8 188 72.3 68.5 76.0 35.8 (5.3) 11.1 15.7 16.6 15.0 7.0 7.3 6.5 1.9 1.8 1.7 12.3 10.9 11.4 1.2 3.0 3.3 17.3 Ambuja Cements BUY 169 190 13 335 4.4 1,986 10.6 10.4 11.7 49.1 (1.7) 12.5 15.9 16.2 14.4 5.3 5.3 4.5 1.4 1.3 1.2 9.0 8.3 8.6 0.9 0.9 0.9 12.3 Dalmia Bharat BUY 537 1,000 86 104 1.4 192 17.2 11.4 30.2 8.6 (34.0) 165.0 31 47 17.8 5.8 5.8 4.3 0.9 0.9 0.9 3.1 2.0 5.1 ——— 1.6

Grasim Industries BUY 535 865 62 352 4.6 657 74.4 71.4 90.1 18.9 (4.0) 26.1 7.2 7.5 5.9 4.7 4.0 3.1 0.6 0.5 0.5 8.4 7.5 8.8 1.3 1.3 1.3 23 Daily SummaryIndia J K Cement BUY 1,082 1,500 39 84 1.1 77 82.3 78.6 115.5 141.3 (4.5) 46.9 13.1 13.8 9.4 8.3 7.8 6.1 2.6 2.2 1.8 21 17.3 21 0.9 0.9 0.9 1.6 JK Lakshmi Cement BUY 200 300 50 24 0.3 118 19.2 19.7 27.0 374.8 2.4 37.5 10.4 10.2 7.4 4.7 4.5 3.9 1.4 1.3 1.1 14.3 13.0 15.7 1.0 1.0 1.0 1.0 Orient Cement BUY 48 65 35 10 0.1 205 4.7 4.3 5.7 102.0 (8.9) 34.3 10.2 11.2 8.4 5.5 5.2 4.2 0.9 0.9 0.8 8.9 7.8 10.0 4.2 4.2 4.2 0.2 Shree Cement REDUCE 18,139 16,600 (8) 654 8.5 36 450.4 514.6 698.0 39.3 14.3 35.6 40 35 26 17.0 15.5 12.3 5.0 4.5 3.9 14.3 13.4 16.2 0.6 0.6 0.6 16.4 UltraTech Cement BUY 3,600 3,750 4 1,039 13.6 289 140.9 148.4 201.7 54.1 5.3 35.9 26 24 17.8 11.5 11.0 8.9 2.8 2.5 2.2 11.4 10.9 13.2 0.3 0.3 0.3 33 Construction Materials Cautious 2,815 36.8 41.6 (0.0) 29.9 18.4 18.4 14.1 7.6 7.0 5.6 1.7 1.6 1.5 9.4 8.7 10.3 0.7 0.8 0.8 106

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

April 16, 2020 April

KOTAK ECONOMIC RESEARCH 55 Kotak Institutional Equities: Valuation summary of KIE Universe stocks India Daily SummaryIndia 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 INSTITUTIONALKOTAK EQUITIES Company Rating 15-Apr-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 219 210 (4) 137 1.8 627 7.1 8.4 9.5 19.1 18.3 13.6 31 26 23 19 16 14 9.7 7.7 6.2 35 33 30 1.1 1.1 0.0 3.9 Havells India SELL 560 520 (7) 350 4.6 625 13.2 17.1 20.4 4.8 29.4 19.8 42 33 27 27 21 17 7.4 6.6 5.8 18.5 21 22 0.8 1.1 1.3 17.6 Page Industries REDUCE 16,841 22,000 31 188 2.5 11 363 449 539 2.9 23.6 20.0 46 37 31 30 26 22 21.0 16.7 13.6 48 50 48 1.0 1.3 1.6 11.6 Polycab BUY 738 700 (5) 110 1.4 149 37 44 49 9.0 19.1 11.3 20 16.9 15.2 11 9 8 3.0 2.6 2.2 16.6 16.3 15.7 0.5 0.6 0.7 4.5 TCNS Clothing Co. ADD 370 380 3 23 0.3 65 11 10 16 (47.7) (7.0) 62.8 34 37 23 11 12 8.6 3.7 3.5 3.1 11.0 9.7 14.6 - - - 0.2 Vardhman Textiles ADD 643 1,000 56 37 0.5 56 92 120 130 (28.9) 30.0 8.5 7.0 5.4 5.0 5.6 4.3 3.7 0.6 0.6 0.5 9.0 11.0 11.0 4.7 4.7 4.7 0.2 Voltas SELL 516 500 (3) 171 2.2 331 16.9 20.7 24.2 7.8 22.3 16.7 30 25 21 22 19 16 3.8 3.4 3.0 13.0 14.3 14.9 0.7 0.8 0.9 13.0 Whirlpool SELL 1,771 1,260 (29) 225 2.9 127 38 44 52 17.9 16.8 18.6 47 40 34 28 24 21 9.0 7.8 7.0 21 21 22 0.4 0.7 1.2 2.8 Consumer Durables & Apparel Cautious 1,240 16.2 0.8 22.9 32 26 23 19 16 14 5.1 4.5 15.8 17.2 17.7 0.9 1.1 54 Consumer Staples Bajaj Consumer Care BUY 140 280 100 21 0.3 148 15.3 15.8 17.7 1.6 3.3 12.1 9.2 8.9 7.9 6.9 6.6 5.8 4.0 3.5 3.1 46 42 42 7.1 7.9 8.6 0.7

Britannia Industries REDUCE 2,837 2,900 2 682 8.9 240 59 68 79 22.7 14.3 16.2 48 42 36 35 31 27 15.1 12.2 10.1 32 32 30 0.7 1.0 1.2 22 -

Colgate-Palmolive (India) ADD 1,388 1,600 15 378 4.9 272 30 36 41 12.5 18.5 14.6 46 39 34 29.1 25.0 22.0 25.6 25.3 24.8 56 65 74 1.9 2.2 2.4 12.2 April 16, 2020 Dabur India REDUCE 503 440 (12) 889 11.6 1,766 9.5 11.0 12.0 16.8 15.5 9.7 53 46 42 44 38 33 13.8 12.4 11.2 28 28 28 0.9 1.1 1.3 18.9 GlaxoSmithKline Consumer RS 10,733 —— 451 5.9 42 297 315 365 27 6.0 15.9 36 34 29 31 29 25 9.5 8.3 7.3 28 26 26 1.1 1.2 1.4 4.4

Godrej Consumer Products BUY 572 615 8 584 7.6 1,022 15.2 16.6 20.0 5.0 9.1 20.4 38 34 29 26 24 20 6.9 6.3 5.7 19.8 19.1 21 1.1 1.3 1.5 15.4 Hindustan Unilever BUY 2,488 2,250 (10) 5,385 70.3 2,160 33 38 45 18.6 12.9 18.5 75 66 56 52 47 40 59.7 50.4 42.9 87 83 83 1.0 1.3 1.7 91 ITC BUY 189 255 35 2,328 30.4 12,300 11.5 11.3 12.5 12.8 (1.8) 10.8 16.5 16.8 15.2 11.2 11.9 10.6 3.7 3.6 3.5 22 21 23 3.4 5.3 5.9 70 Jyothy Laboratories ADD 112 170 52 41 0.5 367 5.8 6.5 7.4 4.7 11.9 13.0 19.1 17.1 15.1 13.3 12.0 10.6 2.9 2.8 2.6 15.8 16.7 17.8 3.1 3.6 4.0 0.8 Marico BUY 303 350 15 391 5.1 1,290 8.2 8.4 9.8 13.8 2.6 15.9 37 36 31 25 25 21 12.2 11.8 11.2 34 33 37 1.8 2.1 2.3 12.7 Nestle India SELL 17,326 14,000 (19) 1,670 21.8 96 204 238 278 22.6 16.6 16.6 85 73 62 59 51 44 86.5 70.3 57.9 70 107 102 2.0 1.1 1.3 27 Tata Consumer Products ADD 316 400 27 289 3.8 631 8.8 10.3 11.5 25.1 18.2 11.1 36 31 27 30 26 24 2.6 2.5 2.4 7.4 8.3 8.8 1.0 1.1 1.3 27

United Breweries ADD 914 1,430 56 242 3.2 264 17.9 25.5 32.6 (15.8) 42.2 27.8 51 36 28 26 19 16 6.8 5.8 4.9 14.0 17.4 18.9 0.2 0.4 0.5 7.2 United Spirits BUY 562 660 17 409 5.3 727 13.1 15.2 20.3 38.9 15.7 34.1 43 37 28 27 24 19 10.6 7.1 5.1 27 23 22 0.4 0.4 0.5 24 Varun Beverages BUY 567 870 53 164 2.1 289 16.2 16.6 32.6 51.9 2.2 96.2 35 34 17.4 14 13 9 4.9 4.3 3.5 17.6 13.3 22 0.1 0.2 0.4 3.0 Consumer Staples Cautious 13,924 181.9 15.8 7.0 16.2 41 38 33 29 27 24 11.3 10.4 9.5 27 27 29 1.5 1.9 2.2 338 Diversified Financials Bajaj Finance BUY 2,182 2,700 24 1,313 17.2 599 97 83 136 39 (14) 65 23 26 16.0 ——— 3.9 3.5 2.9 22 14.0 19.8 0.4 0.4 0.6 146 Bajaj Finserv BUY 4,599 7,150 55 732 9.6 159 293 275 414 45 (6) 51 15.7 16.7 11.1 ——— 2.2 2.0 1.8 16.3 12.5 16.8 0.3 0.3 0.3 46 Cholamandalam ADD 154 375 144 124 1.6 820 17.3 23.1 25.7 14 33.7 11.4 8.9 6.7 6.0 ——— 1.5 1.3 1.1 19.1 20 18.9 1.2 1.7 1.8 10.9 HDFC BUY 1,596 2,200 38 2,765 36.1 1,721 103 69 78 81.3 (34) 14.0 15.4 23 20 ——— 3.1 2.9 2.7 22 13.0 13.8 2.4 1.6 1.8 149 IIFL Wealth REDUCE 984 1,200 22 86 1.1 85 34.0 35.9 58.2 (25) 5.8 62.1 29 27 16.9 ——— 2.8 2.8 2.7 9.9 10.3 16.2 2.6 2.4 3.8 1.1 L&T Finance Holdings REDUCE 54 115 113 108 1.4 1,999 9 13 16 (15.7) 35 27.8 5.7 4.3 3.3 ——— 0.7 0.6 0.5 13.2 15.7 17.4 2.3 2.7 3.0 14.7 LIC Housing Finance ADD 248 475 91 125 1.6 505 53.2 72.1 83.1 16 35.6 15.2 4.7 3.4 3.0 ——— 0.8 0.7 0.6 15.4 18.2 18.1 3.5 4.8 5.5 28 Mahindra & Mahindra Financial ADD 156 405 160 96 1.3 615 24.7 31.2 38.1 (2) 26.2 22.4 6.3 5.0 4.1 ——— 0.9 0.8 0.7 13.3 15.2 16.6 4.1 5.1 6.3 12.6 Muthoot Finance ADD 691 860 24 277 3.6 401 72 73 83 46.9 1 12.9 9.6 9.5 8.4 ——— 2.3 2.0 1.7 27 23 22 2.5 2.5 2.9 28 PNB Housing Finance NR 177 —— 30 0.4 169 66.9 77.6 88.6 (6) 16.0 14.2 2.6 2.3 2.0 ——— 0.4 0.3 0.3 14.1 14.6 14.8 4.2 4.8 5.5 4.8 Shriram City Union Finance BUY 750 1,975 163 49 0.6 66 171 182 204 13.9 6 12.3 4.4 4.1 3.7 ——— 0.7 0.6 0.6 16.4 15.2 15.0 2.9 3.1 3.5 0.2 Shriram Transport BUY 663 1,525 130 150 2.0 227 136.4 132.2 157.8 21 (3.1) 19.4 4.9 5.0 4.2 ——— 0.9 0.8 0.7 18.1 15.3 16.0 2.9 3.0 3.6 36 Diversified Financials Neutral 5,856 76.5 42.0 (10.0) 26.5 13.3 14.8 11.7 1.7 1.5 1.4 12.7 10.4 11.7 1.8 1.4 1.7 476

Source: Company, Bloomberg, Kotak Institutional Equities estimates

56 KOTAK ECONOMIC RESEARCH 56

Kotak Institutional Equities: Valuation summary of KIE Universe stocks

57 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 15-Apr-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 504 820 63 67 0.9 133 84 101 114 (7) 19.9 12.3 6.0 5.0 4.4 5.3 4.7 4.2 0.5 0.5 0.4 8.9 9.9 10.3 2.3 2.4 2.5 3.5 JSW Energy ADD 41 80 97 67 0.9 1,640 6.4 5.7 5.2 53 (10) (8.5) 6.4 7.1 7.8 4.0 3.3 2.5 0.5 0.5 0.5 8.5 7.0 6.0 ——— 0.8 NHPC ADD 22 27 22 223 2.9 10,045 3.4 3.4 3.7 34.3 2 6.8 6.5 6.4 6.0 5.9 6.3 5.8 0.7 0.7 0.6 10.8 10.5 10.6 7.7 6.9 7.5 4.8 NTPC BUY 90 160 78 890 11.6 9,895 12.3 14.4 15.5 9.4 16.9 7.9 7.3 6.3 5.8 8.7 7.5 6.0 0.8 0.7 0.7 10.9 11.8 11.7 4.1 4.8 5.2 31 Power Grid BUY 160 235 47 835 10.9 5,232 20.2 23 25 6 13.5 11.1 7.9 7.0 6.3 6.7 6.2 5.8 1.3 1.2 1.0 17.0 17.4 17.5 4.4 5.0 5.6 43 Tata Power BUY 35 60 71 95 1.2 2,705 3.6 4.8 6.7 71 32 40.7 9.7 7.3 5.2 7.0 6.5 5.9 0.5 0.5 0.5 5.7 7.0 9.1 ——— 6.5 Electric Utilities Attractive 2,176 28.4 12.2 13.5 9.9 7.4 6.5 6.0 0.8 0.8 0.7 11.4 11.9 12.1 4.2 4.7 5.1 90 Fertilizers & Agricultural Chemicals Bayer Cropscience SELL 3,794 3,000 (21) 171 2.2 45 103.8 119.4 138.3 32.3 15.1 15.8 37 32 27 27 23 19 6.8 5.8 5.0 19.6 19.7 19.7 0.5 0.6 0.7 1.4 Dhanuka Agritech SELL 460 470 2 22 0.3 48 28.0 30.3 33.4 18.1 8.5 10.1 16.4 15.2 13.8 13.0 11.4 9.9 2.9 2.5 2.2 19.1 17.9 17.1 1.2 1.3 1.5 0.4 Godrej Agrovet SELL 386 470 22 74 1.0 192 11.8 16.4 19.9 2.9 39.2 21 33 24 19 18 13 11 3.3 3.0 2.6 10.5 13.3 14.3 0.9 1.1 1.3 1.3 Rallis India ADD 207 230 11 40 0.5 195 10.9 12.5 14.4 29.4 14.8 14.8 19.0 16.5 14.4 13.2 11.2 9.6 2.8 2.5 2.2 15.6 16.0 16.4 1.3 1.5 1.6 2.2 UPL SELL 351 510 45 268 3.5 765 28.6 40.1 45.8 51.3 40.2 14.1 12 8.7 7.7 7.3 6.0 5.2 1.7 1.5 1.3 14.2 17.8 17.9 2.3 3.2 3.7 29 Fertilizers & Agricultural Chemicals Attractive 768 10.0 39.0 32.2 15.6 21 16 13.4 10.8 8.9 7.7 3.0 2.6 2.3 14.5 16.8 17.0 1.2 1.6 1.9 38 Gas Utilities GAIL (India) BUY 87 150 73 391 5.1 4,510 11.5 9.8 11.4 (17.9) (14.5) 16.7 7.6 8.8 7.6 5.5 6.3 5.4 0.9 0.8 0.8 11.5 9.4 10.4 7.5 4.6 5.2 23 GSPL SELL 200 225 13 113 1.5 564 17.0 14.2 13.1 20.4 (16.1) (7.9) 11.8 14.0 15.2 5.2 5.7 5.8 1.7 1.5 1.4 15.4 11.5 9.7 1.3 1.1 1.3 2.0 Indraprastha Gas SELL 453 365 (19) 317 4.1 700 17.3 19.7 22.1 43.7 13.8 12.2 26.2 23.1 20.5 19.6 16.7 14.5 6.4 5.4 4.6 27 25 24 0.9 1.0 1.3 21 Mahanagar Gas ADD 941 1,300 38 93 1.2 99 76.8 84.0 89.4 36.7 9.4 6.5 12.3 11.2 10.5 7.8 6.8 6.1 3.3 2.8 2.5 29 27 25 3.5 4.0 4.8 15.3 Petronet LNG BUY 210 300 43 315 4.1 1,500 16.8 17.8 22.3 11.7 6.1 25.3 12.5 11.8 9.4 7.1 6.6 5.3 2.8 2.6 2.4 24 23 27 4.8 5.5 7.4 10.6 Gas Utilities Attractive 1,229 16.0 (1.2) (4.8) 15.6 11.6 12.2 10.5 7.4 7.6 6.5 1.7 1.6 1.5 14.9 13.2 14.1 4.2 3.5 4.4 72 Health Care Services Apollo Hospitals BUY 1,361 1,820 34 189 2.5 139 23.6 23 49 39 (2) 112 57.6 58.7 27.7 14.4 16.3 11.9 5.4 5.1 4.6 9.6 8.9 17.4 0.6 0.7 1.4 22 Aster DM Healthcare NR 101 —— 51 0.7 505 6.9 8.8 10.6 4 27.5 21 14.7 11.5 9.5 6.0 5.2 4.5 1.9 1.6 1.4 13.3 15.0 15.8 ——— 0.9 Dr Lal Pathlabs SELL 1,497 1,080 (28) 125 1.6 83 31.5 36.6 42.1 31.9 16.2 15.2 47.6 41.0 35.5 31.1 26.6 22.8 11.1 9.3 7.9 25 25 24 0.6 0.7 0.8 4.1 HCG BUY 70 190 172 6 0.1 85 (8.0) (5.4) (5.2) (130) 33 3 NM NM NM 7.2 6.1 5.4 1.2 1.3 1.5 NM NM NM ——— 0.1 Metropolis Healthcare ADD 1,258 1,230 (2) 64 0.8 50 31.3 30.4 42.1 30.8 (3.1) 39 40.2 41.4 29.9 25.0 24.8 18.7 12.3 10.3 8.5 34 27 31 0.7 0.7 1.0 5.1 Narayana Hrudayalaya BUY 280 380 36 57 0.7 204 4.0 3.0 10.6 37.6 (24) 250 70.3 92.6 26.4 18.0 18.9 11.1 4.9 4.7 4.0 7.3 5.2 16.2 ——— 3.0 Health Care Services Attractive 492 6.4 21 12 58 44.3 39.7 25.2 13.9 13.5 10.6 5.1 4.7 4.1 11.6 11.8 16.4 0.5 0.5 0.9 36 Hotels & Restaurants Jubilant Foodworks ADD 1,421 1,900 34 188 2.5 132 27 38 52 12 42.1 36 52.9 37.2 27.4 19.0 15.1 12.0 15.1 11.4 8.7 28 35 36 0.4 0.7 1.1 29 Lemon Tree Hotels BUY 18 70 297 14 0.2 789 0.8 1.7 2.1 13 121 24 23.4 10.6 8.5 9.5 6.5 4.7 1.5 1.4 1.3 6.6 13.5 15.4 — 3.0 4.3 0.7 Hotels & Restaurants Attractive 202 2.6 12 54 34 48.5 31.5 23.5 16.7 12.7 10.0 9.3 7.5 6.1 19.1 24 26 0.4 0.9 1.4 29

Insurance Daily SummaryIndia HDFC Life Insurance ADD 472 590 25 952 12.4 2,009 7.2 8.4 9.8 12.6 17.9 16.1 65.9 55.9 48 ——— 15.2 13.7 12.3 24 26 27 0.4 0.4 0.5 32 ICICI Lombard SELL 1,153 825 (28) 524 6.8 454 26.8 33.4 38.9 16 25 16 43.0 34.5 30 ——— 8.4 7.1 6.0 21 22 22 0.5 0.6 0.7 10.0 ICICI Prudential Life BUY 329 580 76 472 6.2 1,436 8.2 9.0 10.3 4 9.0 15.3 40.0 36.7 32 ——— 6.0 5.3 4.7 16.1 15.5 15.7 0.4 0.5 0.5 16.8 Max Financial Services ADD 396 550 39 107 1.4 417 6.9 9.9 14.4 275 44 45 57.6 40.0 28 —————— 13.7 17.9 23 0.6 0.9 1.3 22 SBI Life Insurance ADD 701 1,010 44 701 9.2 1,000 13.7 16.1 17.7 3.5 17.5 9.4 51.0 43.4 40 ——— 8.1 7.0 6.1 17.1 17.4 16.5 0.3 0.4 0.4 13.2 Insurance Attractive 2,756 36.0 13.5 18.8 16.2 50.1 42.2 36 8.9 7.8 6.8 17.7 18.4 18.7 0.3 0.3 0.4 93

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

April 16, 2020 April

KOTAK ECONOMIC RESEARCH 57 Kotak Institutional Equities: Valuation summary of KIE Universe stocks India Daily SummaryIndia 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 INSTITUTIONALKOTAK EQUITIES Company Rating 15-Apr-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 2,362 2,470 5 289 3.8 122.0 31.0 39.7 48.7 20.0 28.0 22.7 76.2 59.5 48.5 64.4 48.5 39.0 10.9 9.7 8.5 15.3 17.3 18.7 0.4 0.4 0.5 12.9 Just Dial BUY 316 460 45 21 0.3 64.8 40.7 35.3 36.6 27.6 (13.4) 3.8 7.8 9.0 8.6 2.0 1.4 0.4 1.7 1.4 1.2 24 17.2 15.4 1.3 1.1 1.2 16.4 Internet Software & Services Attractive 310 4.0 23.0 11.0 16.6 48.3 43.5 37.3 40.2 34.2 28.9 8.0 7.0 6.2 16.6 16.2 16.5 0.4 0.5 0.6 29 IT Services HCL Technologies ADD 479 520 9 1,299 17.0 2,702 39.7 35.9 39.7 8.4 (9.5) 10.4 12.1 13.3 12.1 7.5 7.8 7.1 2.7 2.3 2.2 24 18.7 18.8 3.2 3.2 5.0 37 Hexaware Technologies REDUCE 290 260 (10) 86 1.1 302 21.2 19.7 21.0 9.9 (7.0) 6.5 13.7 14.7 13.8 9.9 10.5 9.2 3.2 2.9 2.7 25 21 20 2.9 4.1 4.1 2.0 Infosys BUY 639 675 6 2,722 35.5 4,256 38.2 36.6 40.3 7.9 (4.1) 10.0 16.7 17.4 15.9 11.5 11.4 10.3 4.4 4.1 3.8 26 24 25 3.4 4.1 4.7 89 L&T Infotech ADD 1,471 1,625 11 256 3.3 175 83.5 81.4 101.7 (3) (2.6) 24.9 17.6 18.1 14.5 11.7 11.1 9.3 4.5 4.0 3.4 28 23 26 2.0 2.1 2.4 3.8 Mindtree REDUCE 772 725 (6) 127 1.7 165 38.7 46.3 53.0 (16) 20 15 20.0 16.7 14.6 10.8 9.4 8.0 3.8 3.3 2.9 19.1 21 21 3.9 1.8 2.1 12.7 Mphasis REDUCE 671 690 3 125 1.6 186 60.2 54.5 58.0 7 (9.4) 6.5 11.2 12.3 11.6 6.6 6.8 6.3 2.2 2.1 2.0 20 17.4 17.7 4.5 6.0 6.7 4.1 TCS REDUCE 1,735 1,740 0 6,511 85.0 3,752 86.4 84.4 92.8 4 (2.3) 9.9 20.1 20.6 18.7 14.2 14.1 12.6 6.7 6.1 5.6 34 31 31 3.5 3.4 3.7 101

Tech Mahindra BUY 539 680 26 469 6.1 880 47.1 45.1 53.1 (1.3) (4.3) 17.8 11.4 11.9 10.1 6.8 6.2 5.0 2.1 1.9 1.7 19.3 16.6 17.6 3.0 2.9 3.2 27 -

Wipro REDUCE 187 195 5 1,066 13.9 5,848 16.6 15.8 17.1 11.1 (5.0) 8.3 11.2 11.8 10.9 6.5 6.4 5.6 2.0 1.7 1.6 17.3 15.1 14.9 0.8 1.1 4.6 12.7 April 16, 2020 IT Services Cautious 12,662 165.4 3.5 (4.4) 10.5 16.4 17.2 15.5 11.0 11.0 9.8 4.2 3.8 3.5 25 22 22 3.2 3.3 4.1 289 Media DB Corp. REDUCE 82 135 64 14 0.2 175 18.0 18.7 18.6 14.6 4.1 (0.5) 4.6 4.4 4.4 2.2 2.0 2.0 0.8 0.8 0.8 16.9 17.4 17.4 15.2 18.2 20.6 0.1

Jagran Prakashan REDUCE 47 60 26 13 0.2 296 8.7 9.9 10.7 (0.9) 14 NA 5.4 4.8 NA 2.0 1.8 NA 0.7 0.7 NA 13.7 15.4 16.7 19.0 19.0 19.0 0.3 PVR BUY 1,078 1,625 51 55 0.7 51 32.7 -32.7 59.3 (24) (200) 281 33.0 NM 18.2 10.3 33.7 7.7 2.9 3.2 2.8 10.7 NM 16.2 0.3 (0.3) 0.5 19.0 Sun TV Network REDUCE 349 525 50 138 1.8 394 37.8 41.4 43.8 4 9.5 5.7 9.2 8.4 8.0 6.2 5.5 5.0 2.3 2.1 1.9 26 26 25 5.7 6.4 7.0 13.9 Zee Entertainment Enterprises REDUCE 134 145 8 128 1.7 960 17.9 13.1 16.2 8.6 (27.1) 24.4 7.5 10.2 8.2 4.9 6.1 4.7 1.3 1.3 1.2 18.5 12.6 14.6 3.4 4.1 4.1 46 Media Attractive 349 4.6 5.3 (15.5) 26.8 8.8 10.5 8.2 5.4 6.1 4.7 1.6 1.6 1.5 18.6 15.0 17.6 4.9 5.5 6.0 79 Metals & Mining

Hindalco Industries BUY 115 225 95 259 3.4 2,224 21.3 10.3 19.8 (13.6) (51.6) 92 5.4 11.1 5.8 4.5 5.9 4.3 0.4 0.4 0.4 7.9 3.6 6.7 1.0 1.0 1.0 22 Hindustan Zinc BUY 170 190 12 720 9.4 4,225 15.1 10.6 14.1 (20.1) (29.5) 33.1 11.3 16.1 12.1 6.4 8.2 6.2 2.1 2.1 2.1 18.8 13.2 17.6 8.8 6.2 8.3 1.5 Jindal Steel and Power BUY 88 200 127 90 1.2 1,016 (1.2) 9.5 14.4 32 908 52 NM 9.3 6.1 6.1 5.1 4.6 0.3 0.3 0.3 NM 2.9 4.3 ——— 42 JSW Steel ADD 171 225 31 414 5.4 2,402 6.8 0.5 17.1 (78.7) (93) 3,470.0 25.3 357.1 10.0 8.3 9.7 6.1 1.1 1.2 1.1 4.6 0.3 11.1 2.5 2.5 2.5 28 National Aluminium Co. SELL 30 24 (21) 56 0.7 1,866 0.4 0.3 1.8 (95) (23) 430.1 70.4 91.4 17.2 6.3 9.0 6.5 0.5 0.5 0.5 0.8 0.6 3.1 2.7 1.1 5.8 4.9 NMDC ADD 82 105 27 252 3.3 3,062 15.5 11.7 10.6 5.2 (24.7) (9) 5.3 7.1 7.8 3.5 4.7 5.2 0.9 0.9 0.8 17.7 12.5 10.7 9.4 7.1 6.4 13.1 Tata Steel BUY 285 430 51 324 4.2 1,146 (8.9) 6.0 71.4 (110) 167 1,088 NM 47.4 4.0 7.9 8.0 4.5 0.5 0.5 0.5 NM 1.1 12.4 3.5 3.5 3.5 78 Vedanta BUY 79 110 40 292 3.8 3,717 9.3 5.3 13.1 (39) (43) 150.0 8.5 15.0 6.0 4.8 6.1 4.4 0.4 0.5 0.4 5.4 3.0 7.5 12.7 12.7 12.7 31 Metals & Mining Attractive 2,407 31.4 (53.9) (28.6) 133.7 12.1 17.0 7.3 6.0 7.0 5.0 0.7 0.7 0.7 6.0 4.2 9.3 6.2 5.2 5.9 41

Source: Company, Bloomberg, Kotak Institutional Equities estimates

58 KOTAK ECONOMIC RESEARCH 58

Kotak Institutional Equities: Valuation summary of KIE Universe stocks

59 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 15-Apr-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 BUY 354 490 38 768 10.0 1,967 23 34 36 (35.6) 45.0 4.9 15.1 10.4 10.0 9.4 7.7 7.2 1.8 1.7 1.5 12.2 16.5 16.0 4.0 5.0 5.2 46.2 Coal India BUY 147 280 91 905 11.8 6,163 28 30 28 0 6.6 (8.4) 5.2 4.9 5.3 4.3 3.5 3.5 2.7 2.3 2.0 58.7 51.4 40.8 10.2 13.6 13.6 33.5 HPCL BUY 208 250 20 318 4.1 1,524 23 26 26 (43.2) 16.9 0.2 9.2 7.9 7.9 8.7 8.7 8.8 1.1 1.0 0.9 11.8 12.9 12.0 4.3 5.1 5.1 16.9 IOCL BUY 83 130 56 783 10.2 9,181 9.5 15.2 15.5 (46.9) 59.7 2.0 8.7 5.5 5.4 4.8 4.2 4.0 0.7 0.6 0.6 7.9 12.1 11.8 6.2 9.2 9.3 31.4 Oil India BUY 89 110 24 96 1.3 1,084 22 9 14 (27) (57.3) 47.3 4.0 9.4 6.4 2.0 3.6 2.9 0.3 0.3 0.3 8.4 3.5 5.0 10.1 4.3 6.3 5.7 ONGC BUY 74 90 21 935 12.2 12,580 18 7 12 (24) (62.5) 81.2 4.2 11.1 6.1 2.5 3.8 2.9 0.4 0.4 0.3 9.2 3.3 5.8 9.4 3.7 6.4 37.1 Reliance Industries BUY 1,150 1,700 48 6,815 89.0 5,927 71 81 100 7.7 13.8 23.7 16.2 14.2 11.5 10.9 9.2 7.2 1.6 1.5 1.3 10.4 10.8 12.0 0.6 0.6 0.7 289.3 Oil, Gas & Consumable Fuels Attractive 10,620 138.7 (15.4) (0.6) 17.6 10.5 10.6 9.0 6.8 6.7 5.7 1.2 1.1 1.0 11.0 10.2 11.1 3.0 3.1 3.4 460.1 Pharmaceuticals Aurobindo Pharma ADD 515 520 1 302 3.9 584 47 45 51 16.4 (4) 13.2 10.9 11.4 10.0 7.2 7.1 5.9 1.8 1.6 1.4 16.9 14.3 14.3 1.2 1.5 1.7 42.0 Biocon SELL 337 200 (41) 404 5.3 1,202 7.5 9.0 10.1 24 20 12.1 45 37 33 22.1 16.8 14.8 5.1 4.6 4.2 12.3 12.3 12.5 0.8 0.9 1.0 21.0 Cipla BUY 592 600 1 478 6.2 806 20.6 27 33 8.8 32 20 29 21.8 18.1 14.5 12.1 10.1 2.9 2.6 2.3 10.4 12.0 12.9 0.7 1.0 1.2 35.5 Dr Reddy's Laboratories REDUCE 3,808 2,800 (26) 633 8.3 166 110 139 185 11 26 32.6 35 27.4 20.6 15.4 14.7 11.4 4.1 3.7 3.2 12.0 13.4 15.5 0.5 0.6 0.9 45.0 Laurus Labs BUY 401 500 25 43 0.6 107 23.5 34.0 37 114.8 44 8 17 11.8 11.0 9.8 7.4 6.5 2.4 2.0 1.7 14.9 16.7 15.3 ——— 1.1 Lupin BUY 810 840 4 367 4.8 450 19 34 48 (9.6) 79 42 43 24 16.8 14.4 10.7 8.1 2.7 2.4 2.2 6.2 10.2 12.9 0.6 0.6 0.9 26.1 Sun Pharmaceuticals ADD 449 480 7 1,078 14.1 2,406 19.1 23.2 25 18.3 22 8 24 19 17.9 13.2 10.4 8.9 2.4 2.1 1.9 10.6 11.1 11.4 0.8 1.0 1.1 53.7 Torrent Pharmaceuticals ADD 2,296 2,250 (2) 389 5.1 169 55 69 86 113.0 25 26 42 33 27 18.8 15.9 13.7 7.4 6.5 5.6 17.7 19.4 20.9 1.0 1.1 1.2 14.9 Pharmaceuticals Neutral 3,692 48.2 18.2 22 18 27 22 18.5 13.7 11.6 9.7 3.0 2.7 2.4 11.2 12.4 13.1 0.8 0.9 1.1 239.3 Real Estate Brigade Enterprises BUY 137 280 104 28 0.4 204 8.3 10 18 (29) 17 82 16.5 14.1 7.8 11.7 7.9 4.9 1.2 1.2 1.0 7.7 8.5 14.1 1.8 1.8 1.8 0.6 DLF BUY 140 230 64 347 4.5 2,475 4.5 6.9 10.6 (24) 51 54 31 20.4 13.3 29.1 33.0 19.4 1.0 0.9 0.9 3.2 4.6 6.8 1.4 1.4 1.4 26.1 Embassy Office Parks REIT ADD 369 450 22 285 3.7 772 11.9 15.5 18.2 151 30 18 31 24 20 17.4 14.4 12.9 1.3 1.4 1.4 4.1 5.6 6.9 6.3 8.1 9.3 2.8 Godrej Properties SELL 655 700 7 165 2.2 252 11.3 10.6 19.3 2.4 (7) 82.6 58 62 34 56.6 82.3 37.6 3.4 3.2 2.9 7.8 5.3 9.1 ——— 4.2 Oberoi Realty ADD 310 575 85 113 1.5 364 22 34 38 (4.0) 55.5 12 14.4 9.2 8.2 13.6 8.2 7.1 1.3 1.1 1.0 9.4 13.1 13.1 0.6 0.6 0.6 3.0 Prestige Estates Projects ADD 174 410 135 70 0.9 378 13.9 13.9 14 59.9 (0) 2 13 13 12.3 6.3 6.1 5.7 1.3 1.2 1.1 11.3 10.1 9.5 0.9 0.9 0.9 2.2 Sobha BUY 193 465 141 18 0.2 95 30 35 44 (5) 19.4 22.9 6.5 5.5 4.4 4.7 3.7 3.4 0.8 0.7 0.6 12.1 13.1 14.4 3.6 3.6 3.6 1.5 Sunteck Realty REDUCE 198 400 102 29 0.4 140 12.5 35.6 34 (22.7) 184 (6) 16 5.6 5.9 11.9 3.6 3.7 0.9 0.8 0.7 6.0 15.4 12.7 0.5 0.5 0.5 0.9 Real Estate Neutral 1,055 13.8 11.1 39.7 29.0 25 18 13.7 14.7 12.0 9.9 1.2 1.2 1.2 5.0 6.8 8.4 2.4 2.9 3.2 41.3 Retailing Aditya Birla Fashion and Retail BUY 146 180 24 113 1.5 773 (0.8) (4.2) 3.4 (120.0) (409.5) 180.4 NM NM 43 12.6 16.0 9.2 8.2 10.8 8.6 NM NM 22.4 ——— 2.8 Avenue Supermarts SELL 2,181 1,460 (33) 1,413 18.5 628 22.6 24 39 56.5 6.1 60.5 96 91 57 62 60 37 12.2 11.1 9.3 16.9 13.0 17.8 ——— 29.0 Titan Company BUY 952 1,260 32 845 11.0 888 16.1 16 26 (4.3) (3.7) 67.8 59 61 37 36 38 24 12.3 11.2 9.5 22.1 19.1 28.1 0.6 0.8 1.1 43.8 Retailing Cautious 2,371 31.0 2.5 (6.5) 94.5 85 91 47 41 43 27 12.2 11.1 9.3 14.3 12.2 19.9 0.2 0.3 0.4 75.6

Speciality Chemicals Daily SummaryIndia Castrol India BUY 113 180 59 112 1.5 989 8.4 9.4 10.1 16.8 12.0 8.2 13.5 12.1 11.2 8.9 7.9 7.3 8.2 7.2 6.4 65.3 63.5 60.9 4.9 6.6 7.3 4.0 Pidilite Industries REDUCE 1,475 1,425 (3) 749 9.8 508 24.8 28 33 40.1 14.0 17.2 59 52 44 44 38 33 15.3 13.0 11.1 27.9 26.9 26.9 0.6 0.6 0.8 17.3 S H Kelkar and Company BUY 77 140 82 11 0.1 141 5.1 7.1 8.1 (16.0) 37.8 15.0 15.0 10.9 9.5 8.8 7.2 6.3 1.3 1.3 1.2 8.7 11.9 12.9 2.6 3.6 4.5 0.1 SRF ADD 3,337 3,900 17 192 2.5 57 144 174 207 28.6 21.2 18.8 23.2 19.2 16.1 14.5 11.8 9.9 3.8 3.3 2.8 18.1 18.4 18.6 0.4 0.5 0.6 15.0 Speciality Chemicals Neutral 1,064 13.9 27.7 16.0 15.1 36 31 26.7 23.6 20.2 17.5 8.8 7.6 6.5 24.8 24.7 24.4 1.0 1.3 1.5 36.5

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

April 16, 2020 April

KOTAK ECONOMIC RESEARCH 59 Kotak Institutional Equities: Valuation summary of KIE Universe stocks India Daily SummaryIndia 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 INSTITUTIONALKOTAK EQUITIES Company Rating 15-Apr-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 511 600 18 2,785 36.4 5,455 (5.5) 6.0 13.5 NM NM NM NM 84.8 37.9 10.6 7.9 6.6 3.4 3.5 3.3 NM 4.1 9.0 0.8 1.2 1.2 121.8 Bharti Infratel BUY 174 185 6 321 4.2 1,850 15.3 15.7 17.8 16.9 2.4 13.1 11.3 11.1 9.8 5.5 5.1 4.6 2.1 2.1 2.0 19.0 18.8 20.9 5.6 7.0 7.9 23.5 Vodafone Idea RS 4 —— 122 1.6 28,736 (22.3) (4.0) (6.2) NM NM NM NM NM NM 19.3 9.5 8.7 0.5 1.1 (2.0) NM NM NM ——— 28 Tata Communications BUY 356 425 19 102 1.3 285 10.0 7.9 15.1 35.5 (21.2) 90.1 35.5 45.0 23.7 6.4 6.5 5.5 421.4 42.4 15.5 NM 171 96.1 2.1 2.1 2.1 1.1 Telecommunication Services Cautious 3,330 43.5 NM 64.9 47.3 NM NM NM 11.0 7.9 6.8 2.8 3.1 3.6 NM NM NM 1.2 1.7 1.7 174.1 Transportation Adani Ports and SEZ BUY 269 410 52 546 7.1 2,032 25.2 21.5 25.0 26.3 (14.7) 16.3 10.7 12.5 10.7 9.8 9.3 7.9 2.2 1.9 1.7 20.6 16.2 16.6 4.9 1.6 1.6 17.7 Container Corp. BUY 384 400 4 234 3.1 609 16.6 19.3 24.3 1.5 16.5 26.0 23 20 16 12.3 10.9 8.6 2.2 2.1 2.0 9.7 10.9 12.9 0.7 2.2 2.7 8.7 Gateway Distriparks BUY 90 162 81 10 0.1 109 3.9 6.0 9.2 (42.8) 55.9 51.7 23.1 14.8 9.8 6.0 4.9 3.9 0.6 0.6 0.6 2.9 4.1 6.0 3.3 3.3 3.3 0.2 GMR Infrastructure BUY 17 26 53 103 1.3 6,036 (3.1) (1.8) (0.8) (25.4) 40.9 55.9 NM NM NM 15.1 17.4 15.9 (3.8) (6.1) (4.7) 106.6 55.8 25.2 ——— 6.8 Gujarat Pipavav Port BUY 56 117 109 27 0.4 483 6.2 5.7 7.2 44.9 (8.2) 26.7 9.1 9.9 7.8 4.8 4.2 3.6 1.3 1.3 1.3 14.7 13.4 16.9 9.6 8.9 11.2 0.4

InterGlobe Aviation SELL 1,008 900 (11) 388 5.1 383 8.9 (16.4) 66.4 117.0 (285.5) 504.3 114 NM 15.2 4.7 5.7 2— 5.1 5.6 2— 4.7 NM 31.6 — 0.0 0.7 32 -

Mahindra Logistics ADD 278 395 42 20 0.3 71 10.5 15.4 18.6 (16.4) 47.0 20.7 27 18 15 12.0 8.8 7.2 3.6 3.1 2.7 14.3 18.5 19.2 ——— 0.3 April 16, 2020 Transportation Attractive 1,327 17.3 22.8 (19.1) 124.3 26 33 14.6 9.1 9.2 6.5 3.0 2.7 2.4 11.2 8.3 16.4 2.4 1.3 1.6 66 KIE universe 92,897 1213.4 (1.9) 21.7 28.2 21 17.0 13.3 10.1 9.7 8.0 2.1 1.9 1.7 10.1 11.2 13.0 1.9 2.1 2.4

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$)= 76.56

Source: Company, Bloomberg, Kotak Institutional Equities estimates

60 KOTAK ECONOMIC RESEARCH 60

Disclosures

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

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SELL 1.5%

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Fair Value estimates 0% 40% 30% 20% 10% 70% 60% 50% Source: Kotak Institutional Equities Kotak Institutional Equities Research coverage universe coverage Research Equities Institutional Kotak Distribution of ratings/investment banking relationships and should not beand should relied upon. Not NA = or NotAvailable Applicable. = NM Meaningful. Not and/or Kotak circumstances in policies Securities when Kotak Securities affiliates or an its advisory acting in capacity is i this companyinvolving and in certain other circumstances. CoverageCS = Suspended. Not NC = Covered. Suspended. Rating RS = fundamental for determining an basis investment rating or Otherdefinitions Coverage view. designations: Otherratings/identifiers = Rated.Not NR REDUCE. REDUCE. SELL. Our SystemOur Ratings not t does accordance bestrictly in with the System Rating at times. all Ratings and other definitions/identifiers other and Ratings Definitions ratings of BUY. ADD.

61 Disclosures

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