INDIA DAILY

August 8, 2019 India 7-Aug 1-day 1-mo 3-mo Sensex 36,691 (0.8) (5.2) (2.9) Nifty 10,856 (0.8) (6.1) (4.4) Contents Global/Regional indices Dow Jones 26,007 (0.1) (3.0) 0.2 Daily Alerts Nasdaq Composite 7,863 0.4 (2.9) (1.0) Results FTSE 7,199 0.4 (4.6) (1.0) HCL Technologies: Strong revenue growth Nikkei 20,500 (0.1) (4.8) (5.1) Hang Seng 25,997 0.1 (8.2) (10.4)

Adani Ports and SEZ: Contained outperformance continues KOSPI 1,917 0.4 (7.1) (11.6)

Value traded – India Pidilite Industries: Growth moderates, margin outlook improves further Cash (NSE+BSE) 363 346 356

Mahindra & Mahindra: Cost-cutting actions protect margins Derivatives (NSE) 15,359 10,483 9,818 Deri. open interest 3,427 2,992 3,268 Tata Steel: Weak quarter; margins under pressure:

Cipla: Domestic drags performance Forex/money market

Change, basis points

Siemens: Running into rough weather 7-Aug 1-day 1-mo 3-mo

Rs/US$ 71.2 25 256 145 HPCL: Muted results 10yr govt bond, % 6.7 - (22) (88) KEC International: Steady on execution, weak on order inflows Net investment (US$ mn) 6-Aug MTD CYTD (1,157 FIIs (264) 8,247 JK Lakshmi Cement: Record margins led by strong prices ) Results, Change in Reco MFs 407 - 3,408 Top movers – 3mo basis Lemon Tree Hotels: Looking beyond Change, % Sector alerts Best performers 7-Aug 1-day 1-mo 3-mo TGBL IN Equity 269 (0.4) 2.2 35.1 Automobiles & Components: State-wise demand trends in 1QFY20 DABUR IN Equity 431 (0.3) 7.3 17.3

NEST IN Equity 11,777 (0.5) (0.2) 14.4 Banks: Lending rates soften UNSP IN Equity 599 1.1 3.1 13.7 Economy alerts BHARTI IN Equity 366 (0.6) 2.7 12.8 Worst performers Economy: RBI MPC: Growth remains the primary focus IDEA IN Equity 5 (5.3) (53.3) (62.6)

RCAPT IN Equity 49 (3.2) (19.7) (57.4)

JPA IN Equity 2 (5.9) (11.1) (51.5)

NOTIFICATION RELI IN Equity 51 0.8 1.3 (49.1)

We are dropping coverage of India Cements (M.cap: US$350 mn, AVD:US$3 mn) on YES IN Equity 87 1.8 (6.8) (46.0) account of diminished investor interest.

[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. ADD HCL Technologies (HCLT) IT Services AUGUST 07, 2019 RESULT Coverage view: Cautious

Strong revenue growth. HCLT reported strong 4.2% qoq c/c revenue growth led by Price (`): 1,023 large deal ramp-up. Margin contracted sharply due to seasonal costs, investments in Fair Value (`): 1,175 IBM products and decline in ERD margins. Broader direction of business has improved BSE-30: 36,691 with balanced growth across offerings and robust growth in engineering services. We have reservations in products business investment but find it adequately priced in. Fair value changes marginally on the back of currency assumptions.

Company data and valuation summary HCL Technologies Stock data Forecasts/Valuations 2019 2020E 2021E 52-week range (Rs) (high,low) 1,188-920 EPS (Rs) 73.2 73.0 81.8 Market Cap. (Rs bn) 1,387.0 EPS growth (%) 17.5 (0.4) 12.1 Shareholding pattern (%) P/E (X) 14.0 14.0 12.5 Promoters 60.0 Sales (Rs bn) 604.3 690.6 768.4 FIIs 28.7 Net profits (Rs bn) 100.9 98.4 111.1 MFs 4.5 EBITDA (Rs bn) 139.3 157.7 177.0 Price performance (%) 1M 3M 12M EV/EBITDA (X) 9.4 8.4 7.5 Absolute 0.6 (9.6) 5.6 ROE (%) 25.6 22.1 22.0 Rel. to BSE-30 8.4 (5.7) 8.4 Div. Yield (%) 0.8 3.0 3.2

Xerox and other large deals drive strong 4.2% growth; EBIT margin contracts sharply HCLT reported c/c revenue growth of 4.2% on sequential basis and 17.1% on yoy comparison. Organic revenue growth stood at 3.7% qoq and 14% yoy, much above our estimate. Revenue growth was led by 18% qoq growth in the manufacturing vertical, courtesy Xerox large deal ramp-up. The key driver of revenue outperformance was lower-than-expected ramp-down from a couple of financial services and one manufacturing client. Revenues declined in financial services; HCLT is more vulnerable than peers due to higher contribution from stressed capital market clients. EBIT margin declined 180 bps qoq and 260 bps yoy. The decline was on account of rupee appreciation, large deal transition costs and costs associated with infrastructure creation for consummation of acquired select products of IBM. Net profit of Rs22.2 bn declined 13.6% qoq and 7.6% yoy due to higher-than-expected tax rate and sharp margin contraction.

Surprisingly conservative revenue growth guidance HCLT requires flat organic revenue growth in the remaining three quarters to achieve mid-point of the growth guidance. To put it differently, HCLT has guided 14-16% c/c revenue growth (8-10% organic) for FY2020E. Growth in 1QFY20 was 17%, which will accelerate to 18.2% in 2QFY20, after completion of acquisition of select products of IBM. We reckon that part of the caution could be due to potential ramp-down from a large financial service client and a few large deals that have ramped up faster and reached steady state. Large deal wins continue to be strong and will power growth in FY2020E.

EBIT margin—sharp decline across segments HCLT has changed segment reporting to IT Services and Business, ERS and Products & Platforms from Applications, IMS and BPO earlier. EBIT margin declined across all key offerings in the Kawaljeet Saluja quarter, a surprise and can be explained by 15 bps headwind from rupee appreciation, 20 bps headwind from higher visa costs, 50 bps impact from investments for consummation of IBM products’ acquisition and 110 bps headwind in ERS segment (detailed later). We note that HCLT Sathishkumar S has been underinvested in core IT services and took remedial measures in the past three quarters. This has led to margin pressure (not a surprise for us) even as it helped improve overall growth profile and has started lending a bit more comfort on sustainability. HCLT has guided 18.5-19.5% EBIT margin for FY2020E, achievable in our view despite a weak start at 17.1% to the year. The company expects margins to be in the guided range from the next quarter.

[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. HCL Technologies IT Services

Not a perfect company, but a good stock

HCLT model does have it challenges. We are disappointed with investments in products business. The company still has some ground to make in digital competencies. On the whole, the stock at 12X FY2021E earnings is extremely attractive and worth an investment. We bake in revised INR/USD assumption of our economist and higher tax rate implications of the IBM acquisition. These result in 3-8% cut in FY2021-22E EPS. Fair value stands at Rs1,175/ share valuing the company at unchanged 14X FY2021E earnings.

A large part of the earnings cut can be attributed to increase in tax rate to 24% from 21- 22% earlier. The increase in tax rate is largely non-cash. Essentially HCLT gets an advantage of tax deductibility on amortization of goodwill. However, in corporate books, goodwill is never amortized. This ends up creating permanent difference between company books of accounts and income tax ones. HCLT has created deferred tax liability despite this being a permanent difference.

IBM products acquisitions—the balance sheet impact

HCLT has paid out US$813 mn of the agreed US$1,775 mn purchase consideration for seven products of IBM. The installment of US$813 mn will be paid out in June 2020. The deal also has an earn-out clause equating to US$150 mn over three installments. The present value of this purchase consideration stands at US$1,736 mn.

Five of the seven products that were acquired by HCLT were part of the earlier IPR agreement. Unamortized present value of IPR stood at US$427 mn. The purchase price comprising price paid, fair value of earn-out, remaining consideration and unamortized value of IPR stood at US$2.162 bn. HCLT has allocated US$903 mn to customer relationship that will be amortized in proportion of estimated revenue over a period of 10 years. US$352 mn been allocated to technology/ IP, which will be amortized over a period of 7-10 years based on product life. The company also allocated US$918 mn to goodwill.

Despite the payment of the first installment, HCLT is a net cash balance company.

Thinking further about the seeming revenue growth and margin trade-off

HCLT’s 1QFY20 margin profile had several one-offs and upfront investments. The first reason for weak margin was investments in people, infrastructure, systems and processes to integrate select IBM products acquisition. While the expenses will flow through the P&L for the entire June 2019 quarter, consummation of the acquisition and consequently revenues will start flowing through only from September 2019 quarter. This creates a mismatch and will impact margins by over 50 bps in June 2019 quarter. EBIT margin will pick up in the subsequent quarters to be in the 18.5-19.5% band.

We do note that HCLT’s EBIT margin guidance at 18.5-19.5% is 100 bps lower than FY2019 band. The company had lowered band, which we attribute to (1) investments in digital competencies and (2) large deal transition costs.

HCLT, in our view, was underinvested in digital competencies. While this aided margins in the past, impact on revenue growth was visible with negligible growth in applications services. The company has stepped up investments in digital and started using acquisitions to catch up. These efforts have started showing in mode 2 growth and uptick in applications growth. This is in our view is positive even as there are margin implications for the same.

A noisy quarter—ER&D margin contracts by 740 bps sequentially; higher tax rate

EBIT margin of ER&D services declined sharply to 16% from 23.4% in the previous quarter. Sharp margin contraction was on account of a few factors—(1) a large revenue write-off, (2) higher cost structure in new deals due to increased subcontractor usage for niche skills and (3) investments for sustainable growth. In our view, these headwinds can persist in the medium term resulting in a meaningful delay in margin recovery.

KOTAK INSTITUTIONAL EQUITIES RESEARCH 3 IT Services HCL Technologies

Revenue outperformance from large deal ramp-up, strong products business & less drag

Revenue growth of 4.2% was well ahead of our expectations and was on three accounts detailed below.

 Large deal ramp-up. Xerox deal won in March 2019 quarter ramped up in the quarter ahead of schedule providing a boost to revenues visible in high 18% sequential growth in manufacturing vertical.

 Strong show in products segment. Products and platforms posted strong 7% sequential growth in c/c on the back of seasonal strength in the business.

 Lesser drag from stressed accounts. At the beginning of the quarter, HCLT expected revenue decline in two large financial services clients and a client in the manufacturing vertical. Revenues from both the accounts in financial services came better than expected. Revenues from one of the clients stabilized while decline in the other was lesser than anticipated.

Key highlights from earnings call

 HCLT retains revenue and margin guidance. HCLT maintained constant-currency revenue growth guidance of 14%-16% for FY2020E. The guidance bakes in 6% contribution to growth from acquisitions from 7% earlier. Organic growth guidance has been increased to 8-10% from 7-9% on the back of strong organic growth in 1QFY20. The company retained margin guidance band of 18.5%-19.5% for FY2020E.

 Margin outlook. HCLT expects margins in the next quarter to be in the guided range of 18.5-19.5%. Margins will be aided by contribution from IBM products acquisition, which has higher margins (~30%). Margins will be highest in 3QFY20E and will moderate in 4QFY20E in line with seasonality of the products business.

 Momentum in large deals will drive strong organic growth. Strong organic growth in the past three quarters was due to ramp-up of mega deals with Nokia, Broadcom and Xerox. The company was confident of its ability to continue winning mega deals on a regular basis. HCLT signed 12 transformational deals in the quarter led by financial services, manufacturing and retail verticals. The company reported a strong deal pipeline.

 Client metrics. US$100 mn client bucket increased by 2 to 12 while US$50 mn bucket was flat at 29 sequentially. On yoy basis, number of US$100 mn clients was up by 3, while number of US$50 mn clients declined by 3.

 Geography-wise commentary. (1) US—strong growth was led by ramp-up of large deal wins, (2) Europe—weak revenue growth in the quarter was due to completion of large projects, and (3) RoW—HCLT expects growth to accelerate in the next few quarters.

 Financial services. HCLT reported that growth in financial services was strong excluding two clients in the capital markets segment. Out of the two, revenues have stabilized and can grow modestly in one of the accounts. HCLT expects weakness to continue in the other account. The company indicated that momentum of large deal wins was higher in financial services. These can provide impetus to revenue growth in 2HFY20E.

 Products and platforms segment. All standalone HCL products and platforms such as HCL Software—the new business division for IBM’s software products, Actian and IP partnership with DXC will be reported under products and platforms segment. The segment does not include organic IP embedded in IT services and ER&D services.

4 KOTAK INSTITUTIONAL EQUITIES RESEARCH HCL Technologies IT Services

 Mode 2 margins. HCLT reported that gross margins in Mode 2 business are higher than company average, but higher investments in the business have led to lower margins at the EBIT level. The company expects improvement in margins as Mode 2 business scales up. HCLT has strong differentiated offerings in its Mode 2 business and reported that conviction of winning large digital engagements has increased. The business is still in investment mode and will take time to deliver on margin improvement.

 Commentary on IMS. HCL has strong capabilities in hybrid cloud. Rising adoption of hybrid cloud provides good opportunities in IMS and has helped HCLT gain market share. The company is quite selective in its choice of clients and is focused on maintaining margin profile of deals close to company average. IMS deals usually have annual reductions as a part of the deal construct. IMS deals run the risk of having to deliver higher productivity gains to clients during renewals or even in the middle of a deal in large client relationships.

 Attrition. Quarterly annualized attrition increased 400 bps qoq to 29.5%. On yoy basis attrition was up 160 bps.

 Payout. Board has declared a dividend of Rs2/share for the quarter.

Exhibit 1: HCL Technologies’ June 2019 quarter financial performance under US GAAP (Rs mn)

% chg. 1QFY20 1QFY20E 1QFY19 4QFY19 KIE yoy qoq FY2020E FY2019 % chg. Revenues (US$ mn) 2,364 2,301 2,055 2,278 2.7 15.0 3.8 9,962 8,632 15.4 Revenues 164,250 160,145 138,780 159,900 2.6 18.4 2.7 690,628 604,277 14.3 Cost of Revenues (109,200) (106,801) (91,056) (104,210) 2.2 19.9 4.8 (443,686) (392,982) 12.9 Gross profit 55,050 53,343 47,724 55,690 3.2 15.3 (1.1) 246,941 211,295 16.9 SG&A expenses (21,050) (19,125) (15,463) (19,720) 10.1 36.1 6.7 (89,198) (71,999) 23.9 EBITDA 34,000 34,218 32,262 35,970 (0.6) 5.4 (5.5) 157,744 139,296 13.2 Depreciation (5,950) (5,911) (4,965) (5,580) 0.7 19.8 6.6 (30,023) (21,467) 39.9 EBIT 28,050 28,307 27,297 30,390 (0.9) 2.8 (7.7) 127,720 117,829 8.4 Other Income 1,280 1,410 2,961 1,520 2,374 8,042 (70.5) PBT 29,330 29,717 30,258 31,910 (1.3) (3.1) (8.1) 130,095 125,871 3.4 Provision for Tax (7,050) (6,389) (6,227) (6,150) 10.3 13.2 14.6 (31,354) (24,804) 26.4 PAT before share of earnings in affiliates 22,280 23,328 24,031 25,760 (4.5) (7.3) (13.5) 98,740 101,068 (2.3) Share of income (loss) of equity investees — — — — — — Minority Interest (80) (76) — (80) (304) (214) 42.2 Net Income (before extraordinaries) 22,200 23,252 24,031 25,680 (4.5) (7.6) (13.6) 98,436 100,854 (2.4) EPS (Rs/share) 16.4 17.1 17.2 18.9 (4.3) (4.9) (13.5) 73.0 73.2 (0.4) No of shares outstanding 1,357 1,358 1,396 1,357 1,357 1,357 Segmental revenues - new (US$ mn) IT and Business Services 1,780 1,539 1,727 15.7 3.1 7,183 6,443 11.5 Engineering and R&D Services 399 355 378 12.4 5.6 1,627 1,477 10.2 Products & Platforms 184 160 173 15.0 6.5 1,152 712 61.7 Margins (%) Gross Profit margin 33.5 33.3 34.4 34.8 35.8 35.0 SG&A as % of revenues 12.8 11.9 11.1 12.3 12.9 11.9 EBITDA Margin 20.7 21.4 23.2 22.5 22.8 23.1 EBIT Margin 17.1 17.7 19.7 19.0 18.5 19.5 NPM 13.5 14.5 17.3 16.1 14.3 16.7

Source: Company, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 5 IT Services HCL Technologies

Exhibit 2: Key changes to estimates, March fiscal year-ends, 2020-22E (Rs mn)

New Old Change (%) US$ mn 2020E 2021E 2022E 2020E 2021E 2022E 2020E 2021E 2022E Revenues 9,962 10,822 11,629 9,937 10,786 11,620 0.3 0.3 0.1 Revenue growth yoy (%) 15.4 8.6 7.5 15.1 8.6 7.7

EBITDA 2,275 2,492 2,634 2,309 2,442 2,622 (1.4) 2.1 0.4 EBIT 1,842 2,014 2,161 1,879 1,999 2,164 (2.0) 0.8 (0.1) Net Income 1,420 1,564 1,707 1,507 1,594 1,751 (5.8) (1.9) (2.5)

EBITDA margin (%) 22.8 23.0 22.6 23.2 22.6 22.6 EBIT 18.5 18.6 18.6 18.9 18.5 18.6 Re/ US$ rate 69.3 71.0 72.0 71.1 72.0 72.0

EPS Rs/ share 73.0 81.8 90.5 78.9 84.5 92.7 (7.6) (3.1) (2.3)

Source: Kotak Institutional Equities estimates

Exhibit 3: Revenue growth across geographies, verticals and service lines (Jun-19 quarter)

Revenues Growth (%) Contribution to C/C growth (%) (US$ mn) qoq yoy revenues (%) qoq yoy Total revenues 2,364 3.8 15.0 100 4.2 17.0 Geographical split of revenues US 1,600 11.7 20.8 67.7 11.7 21.3 Europe 612 (9.5) 6.0 25.9 (8.1) 11.3 ROW 149 (11.7) (3.4) 6.3 (10.6) 1.6 Vertical split of revenues Financial services 480 (0.2) (1.9) 20.3 0.5 0.9 Manufacturing (new classification) 470 18.0 25.1 19.9 18.4 28.3 Technology&Services 447 4.9 19.5 18.9 5.0 20.0 Retail & CPG 225 (1.4) 20.1 9.5 (1.4) 22.1 Telecom, media, publishing, entertainment 189 (3.5) 26.1 8.0 (2.7) 28.2 Life sciences 303 2.2 15.0 12.8 2.4 16.0 Energy-utilities-public sector 248 (1.8) 15.0 10.5 (0.2) 18.0 Service line split of revenues (new classification) IT and Business Services 1,780 3.1 15.7 75.3 3.6 18.1 Engineering and R&D Services 399 5.6 12.4 16.9 5.6 13.3 Products & Platforms 184 6.5 15.0 7.8 7.0 15.2

Note (1) Manufacturing (including hitech) vertical has been segregated as manufacturing and technology & services verticals from 1QFY19

Source: Company, Kotak Institutional Equities

Exhibit 4: Segmental revenue mix, revenue growth and margins

Revenue Revenue mix EBIT margin QoQ growth Jun-19 quarter (US$ mn) (%) (%) (in c/c) IT and Business Services 1,779 75.3 16.6 3.6 Engineering and R&D Services 400 16.9 16.0 5.6 Products & Platforms 184 7.8 24.1 7.0 Total 2,363 100.0 17.1 4.2

Source: Company, Kotak Institutional Equities

6 KOTAK INSTITUTIONAL EQUITIES RESEARCH HCL Technologies IT Services

Exhibit 5: Mode 1-2-3 revenue and margin metrics on quarterly basis

Jun-18 Sep-18 Dec-18 Mar-19 Jun-19 Revenues (US$ mn) Mode 1 1,506 1,511 1,561 1,606 1,662 Mode 2 321 336 377 431 444 Mode 3 226 250 262 241 258 Total 2,055 2,099 2,202 2,278 2,364 Revenue mix (%) Mode 1 73.3 72.0 70.9 70.5 70.3 Mode 2 15.6 16.0 17.1 18.9 18.8 Mode 3 11.0 11.9 11.9 10.6 10.9 Total 99.9 99.9 99.9 100.0 100.0 EBIT margin (%) Mode 1 19.9 21.2 20.7 20.5 17.8 Mode 2 14.8 10.8 12.3 13.1 13.2 Mode 3 25.2 24.4 23 18.8 19 Total 19.7 19.9 19.7 19 17.1 Growth (qoq c/c %) Mode 1 0.5 1.4 3.9 2.5 4.1 Mode 2 8.2 5.3 13.1 14.3 3.6 Mode 3 11.7 10.4 6.2 (7.6) 6.5 Total 2.7 3.0 5.6 3.3 4.2

Source: Company

Exhibit 6: Weak growth in financial services due to softness in a couple of capital market accounts

Financial services 25

19.2 20

13.4 14.2 15 10.6 9.4 9.3 8.3 8.8 10 7.7 5.6 4.6 2.9 5 2.0 2.3 0.1 0.5 (1.4) 0

-5

Jun-15

Jun-16

Jun-17

Jun-18

Jun-19

Sep-15

Sep-16

Sep-17

Sep-18

Dec-15

Dec-16

Dec-17

Dec-18

Mar-16

Mar-17

Mar-18 Mar-19

Source: Company, Kotak Institutional Equities

KOTAK INSTITUTIONAL EQUITIES RESEARCH 7 IT Services HCL Technologies

Exhibit 7: Strong revenue growth pickup in 4QFY19 in application services

Application Services (yoy c/c %) 9 8.4 8 7

6

5 4 3

2

1

0

Jun-15

Jun-16

Jun-17

Jun-18

Sep-15

Sep-16

Sep-17

Sep-18

Dec-15

Dec-16

Dec-17

Dec-18

Mar-16

Mar-17 Mar-18 Mar-19

Source: Company, Kotak Institutional Equities

Exhibit 8: Attrition rate has further increased in the quarter

Consolidated attrition (%, quarterly annualized) 40

35

29.5 30

25

20

15

10

Jun-11

Jun-12

Jun-13

Jun-14

Jun-15

Jun-16

Jun-17

Jun-18

Jun-19

Dec-11

Dec-12

Dec-13

Dec-14

Dec-15

Dec-16

Dec-17 Dec-18

Source: Company, Kotak Institutional Equities

8 KOTAK INSTITUTIONAL EQUITIES RESEARCH HCL Technologies IT Services

Exhibit 9: EBIT margin will pick up in 2QFY20 aided by IBM acquisitions after sharp decline in 1QFY20

EBIT margins (%) 25

23

21

19

17 17.1

15

Jun-12

Jun-13

Jun-14

Jun-15

Jun-16

Jun-17

Jun-18

Jun-19

Dec-12

Dec-13

Dec-14

Dec-15

Dec-16 Dec-17 Dec-18

Source: Company, Kotak Institutional Equities

Exhibit 10: SG&A expenses increased 40 bps due to investments related to IBM products acquisition

SG&A as % of revenues 18

16

14 12.8

12

10

Jun-09

Jun-10

Jun-11

Jun-12

Jun-13

Jun-14

Jun-15

Jun-16

Jun-17

Jun-18

Jun-19

Dec-09

Dec-10

Dec-11

Dec-12

Dec-13

Dec-14

Dec-15

Dec-16

Dec-17 Dec-18

Source: Company, Kotak Institutional Equities

KOTAK INSTITUTIONAL EQUITIES RESEARCH 9 IT Services HCL Technologies

Exhibit 11: Acquisitions and investments announced by HCL Tech in the past 3-4 years

Date Target Country Business Description Consideration (mn) Sales (mn) HCL Technologies Digital consulting firm specialising in customer experience strategy, business transformation 1 Mar-19 Strong-Bridge Envision US $45.0 $45.0 and change management. 7 products from IBM portfolio in areas of security, marketing and commerce. HCLT had 2 Dec-18 Enterprise software products of IBM US $1,775.0 $650.0 strategic IP partnerships with IBM for 5 of the products. 3 Jun-18 H&D International Group Germany Integrated IT and engineering service provider in German automotive industry $35.0 $86.3 4 Jun-18 IP deal NA IP partnership with Cisco $177.0 NA Hybrid data management, analytics and integration company. HCLT will own 80% of the 5 Apr-18 Actian Corporation US $330.0 $107.1 company with 19.5% with a private equity player 6 Apr-18 C3i Solutions (Telerx Marketing, Inc.) US Multi-channel customer engagement services for the life sciences and CPG vertials $65.0 $199.0 7 Jan-18 3 IP partnerships US 3 IP partnerships- One with IBM, one with DXC and one with undisclosed global tech firm $300.0 $105.0 Extended IP partnership to include Notes, Domino, Smart Cloud Notes, Verse and Sametime 8 Oct-17 Strategic IP partnership with IBM (6) US $60.0 $30.0 products 9 Sep-17 Datawave UK Data management platform NA NA 10 Jul-17 Strategic IP partnership with IBM (5) US Extended IP partnership to cover marketing automation area $140.0 $30-35 11 Apr-17 Urban Fulfillment Services LLC US Mortgage BPO provider wih 350 resources in US $30.0 $48.0 12 Apr-17 Strategic IP partnership with IBM (4) US Extended partnership to cover Information management and Database management systems $80.0 ~$25 Extended partnership to cover Application security, B2B data transformation, testing 13 Jan-17 Strategic IP partnership with IBM (3) US $155.0 $50.0 automation and Mainframe management tools 14 Oct-16 Strategic IP partnership with IBM (2) US Extended IP partnership to cover API/web service enablement of mainframes $55.0 $15.0 15 Oct-16 Butler America Aerospace US Provider of engineering and design services to US aerospace and defense customers $85.0 $85.4 16 Jun-16 Strategic IP partnership with IBM (1) US To invest in and grow workload automation and DevOps software of a global tech major $350.0 $100.0 17 Apr-16 Geometric (share swap deal) India PLM and engineering services $195.0 $135.0 18 Feb-16 Volvo IT AB Sweden External IT services arm of Volvo $134.9 $190.0 19 Jan-16 Point to Point (P2P) UK Workplace engineering services $10.0 $11.5 20 Nov-15 Arrangement with CSC US To operate and expand the existing Core Banking business of CSC $53.4 NA 21 Oct-15 Powerteam LLC US Professional services for Microsoft Dynamics CRM $41.4 $37.00 22 Oct-15 C2SiS India Engineering services firm $1.9 NA 23 Aug-15 Trygstad Technical Services Inc US Turnkey solutions for a large ISV $9.9 NA Total $4,125+ $1,945+

Notes: (1) Geometric acquisition is a share-swap deal (2) HCLT has paid about US$330 mn for Strategic IP partnership and balance US$225 mn would be paid over CY2017. (3) For other acquisitions, the consideration is agreed amount and it includes earnouts.

Source: Company, Kotak Institutional Equities

10 KOTAK INSTITUTIONAL EQUITIES RESEARCH HCL Technologies IT Services

Exhibit 12: HCLT: Quarterly metrics

Sep-16 Dec-16 Mar-17 Jun-17 Sep-17 Dec-17 Mar-18 Jun-18 Sep-18 Dec-18 Mar-19 Jun-19 Revenues (US$ mn) 1,722 1,745 1,817 1,884 1,928 1,988 2,038 2,055 2,099 2,202 2,278 2,364 Revenues (Rs mn) 115,190 118,140 120,530 121,490 124,340 128,080 131,790 138,780 148,610 156,990 159,900 164,250 Exchange rate 66.9 67.7 66.3 64.5 64.5 64.4 64.7 67.5 70.8 71.3 70.2 69.5 Geographical mix US 61.9 61.9 62.6 62.8 62.4 63.5 61.6 64.5 65.8 64.4 62.9 67.7 Europe 29.3 29.6 27.7 27.4 29.1 28.7 30.0 28.1 26.8 28.2 29.7 25.9 Asia Pacific 8.8 8.5 9.7 9.8 8.5 7.9 8.5 7.5 7.4 7.3 7.4 6.3 Revenues by Mode1-2-3 classification Mode 1 73.3 72.0 70.9 70.5 70.3 Mode 2 15.6 16.0 17.1 18.9 18.8 Mode 3 11.0 11.9 11.9 10.6 10.9 Revenues by segments (new classification) IT and Business Services 74.9 75.8 75.3 Engineering and R&D Services 17.3 16.6 16.9 Products & Platforms 7.8 7.6 7.8 Revenues by service offering Application services 37.8 37.5 36.8 36.3 35.9 35.3 34.7 34.0 33.1 32.0 32.6 Engineering and R&D services 17.8 18.6 20.5 21.5 22.0 24.2 24.1 24.5 25.5 25.5 23.9 Discontinued Infrastructure services 40.3 39.8 38.8 38.6 38.5 36.7 37.3 36.2 36.0 37.5 38.9 BPO services 4.1 4.0 3.9 3.6 3.6 3.7 3.9 5.2 5.4 5.0 4.5 Revenue by contract type Time and Material 38.7 36.8 38.4 40.2 60.4 60.8 61.6 38.0 38.2 36.7 36.3 36.5 Fixed price 61.3 63.2 61.6 59.8 39.6 39.2 38.4 62.0 61.8 63.3 63.7 63.5 Revenue by vertical (new classification) Financial services 24.1 24.3 24.2 24.9 25.0 24.6 25.0 23.8 23.0 21.6 21.1 20.3 Manufacturing (old classification) 32.2 33.9 34.6 34.9 35.4 36.5 36.0 Manufacturing (new classification) 20.7 20.9 19.9 19.2 18.3 18.0 17.7 17.5 19.9 Technology & Services 14.2 14.5 16.7 16.8 18.2 18.2 18.7 18.7 18.9 Retail & CPG 10.4 9.4 9.2 9.5 9.3 9.6 9.6 9.1 10.0 10.2 10.0 9.5 Telecom, media, publishing, entertainment 9.4 8.9 8.4 7.9 7.9 7.4 7.4 7.3 7.2 9.2 8.6 8.0 Life sciences 12.6 12.0 11.5 11.8 11.7 11.7 11.5 12.8 12.9 13.0 13.0 12.8 Energy-utilities-public sector 10.9 11.2 11.7 11.1 10.6 10.2 10.6 10.5 10.7 9.7 11.1 10.5 Others 0.4 0.4 0.3 — — — Number of million dollar clients (LTM) 100 Million dollar + 8 8 8 8 9 9 8 9 9 10 10 12 50 Million dollar + 20 24 25 25 25 25 28 32 31 29 29 29 10 Million dollar + 146 148 153 154 157 156 160 162 165 164 166 172 5 Million dollar + 235 241 246 249 259 261 264 267 269 276 283 293 1 Million dollar + 494 496 506 508 536 552 561 571 575 597 623 633 Client contrubution to revenue Top 5 clients 13.8 14.2 14.7 14.4 15.1 15.8 16.3 17.0 17.3 17.4 17.0 17.0 Top 10 clients 21.6 21.7 22.1 22.4 22.9 23.5 23.8 24.6 24.8 24.8 24.1 24.6 Top 20 clients 31.8 31.9 32.9 33.0 33.2 33.5 33.7 34.2 34.2 34.1 33.4 34.2 Utilization (consol) Blended utilization 85.3 84.6 85.7 86.0 86.0 85.8 85.9 85.5 86.7 86.6 85.4 Discontinued Manpower details Consolidated manpower 109,795 111,092 115,973 117,781 119,040 119,291 120,081 124,121 127,875 132,328 137,965 143,900 Total gross addition 9,083 8,467 10,605 9,462 8,645 7,113 8,476 12,558 11,683 13,191 14,249 16,332 Total net addition 1,827.0 1,297.0 4,881.0 1,808.0 1,259.0 251.0 790.0 4,040.0 3,754.0 4,453.0 5,637.0 5,935.0 Attrition - IT services (%) 18.6 17.9 16.9 16.2 15.7 15.2 15.5 16.3 17.1 17.8 17.7 17.3 Attrition - consol quarterly annualized (%) 26.7 26.0 20.2 26.2 25.0 23.0 25.7 27.9 25.2 26.9 25.5 29.5

Source: Company, Kotak Institutional Equities

KOTAK INSTITUTIONAL EQUITIES RESEARCH 11 IT Services HCL Technologies

Exhibit 13: Condensed consolidated US GAAP financials for HCL Technologies, June/March fiscal year-ends, 2015-22E (Rs mn)

2015 2016 2017 2018 2019 2020E 2021E 2022E Profit model Revenues 370,620 311,360 467,220 505,700 604,277 690,628 768,383 837,356 EBITDA 86,947 66,900 103,087 114,392 139,296 157,744 176,961 189,634 Depreciation (incl amortization of intangibles) (4,505) (4,451) (8,349) (14,529) (21,467) (30,023) (33,972) (34,010) Other income 9,114 7,978 9,339 11,101 8,042 2,374 4,521 7,638 Pretax profits 91,556 70,428 104,077 110,964 125,871 130,095 147,509 163,263 Tax (19,074) (14,786) (19,516) (23,167) (24,804) (31,354) (36,140) (39,999) Profit after tax 72,483 55,641 84,562 87,797 101,068 98,740 111,370 123,263 Diluted earnings per share (Rs) 51.3 39.4 59.2 62.6 73.2 73.0 81.8 90.5 Balance sheet Total equity 242,116 278,180 344,011 364,401 423,045 468,957 539,354 617,901 Deferred taxation liability 784 1,061 — 341 2,257 2,235 2,289 2,322 Total borrowings 4,584 9,734 5,593 4,326 40,371 39,980 40,947 41,527 Minority interest 6 2,115 1,786 — 4,599 4,554 4,664 4,730 Other non-current liabilities 11,783 11,576 9,513 12,197 13,319 15,063 16,668 18,085 Current liabilities 90,058 95,106 115,095 98,118 112,899 186,663 134,596 143,318 Total liabilities and equity 349,329 397,773 475,998 479,383 596,489 717,453 738,519 827,882 Cash 107,805 113,184 119,105 73,437 92,887 93,623 97,309 172,627 Other current assets 115,661 131,361 142,333 146,226 185,590 212,018 235,889 257,063 Goodwill and intangible assets 50,905 64,206 117,965 142,598 179,226 283,271 270,550 256,488 Tangible fixed assets 37,363 43,239 48,325 51,323 58,753 63,872 65,344 67,731 Investments 7,604 6,985 13,481 28,660 26,934 9,248 9,471 9,605 Other non-current assets 29,992 38,796 34,788 37,138 53,100 55,421 59,956 64,367 Total assets 349,329 397,773 475,998 479,383 596,489 717,453 738,519 827,882 Free cash flow Operating cash flow, excl. working capital 67,092 53,975 84,125 89,566 109,306 126,736 140,821 149,635 Working capital changes (10,661) (14,689) 240 (13,842) (28,279) (17,085) (13,005) (13,401) Capital expenditure (12,111) (7,311) (12,077) (10,140) (27,349) (18,787) (14,329) (17,581) Acquisitions — (11,787) (30,762) (44,567) (37,224) (60,294) (64,273) — Other income 9,114 7,978 9,339 11,082 8,042 2,374 4,521 7,638 Free cash flow 53,435 28,165 50,865 32,098 24,496 32,945 53,735 126,292 Key assumption and ratios (%) US$ revenue growth (b) 11.1 6.4 11.9 12.4 10.1 18.9 8.7 7.9 EBITDA margin 23.5 21.5 22.1 22.6 23.1 22.8 23.0 22.6 EBIT margin 22.2 20.1 20.3 19.7 19.5 18.5 18.6 18.6

Notes: (a) Financial year changed to March-end from June-end in FY2016. (b) Growth rate on like-to-like basis adjusted for change in financial year.

Source: Company, Kotak Institutional Equities estimates

12 KOTAK INSTITUTIONAL EQUITIES RESEARCH REDUCE Adani Ports and SEZ (ADSEZ) Transportation AUGUST 08, 2019 RESULT Coverage view: Attractive

Contained outperformance continues. Beyond the weakness in container volumes, Price (`): 372 1QFY20 was strong on overall port-level metrics. In spite of such weakness, ADSEZ Fair Value (`): 390 outperformed the sector across all key cargo classes. The related beat was driven by BSE-30: 36,691 uptick in volumes in Dhamra and in major port terminals, making the return to 70% EBITDA margin even more commendable. The slowdown in demand would test the ability of the west coast terminals to retain the recent price increase taken. We revise fair value to Rs390 (from Rs398) to incorporate AR2019 and weak SEZ income booked.

Company data and valuation summary Adani Port and SEZ Stock data Forecasts/Valuations 2019 2020E 2021E 52-week range (Rs) (high,low) 431-292 EPS (Rs) 19.6 22.1 24.7 Market Cap. (Rs bn) 770.9 EPS growth (%) 6.0 12.6 11.7 Shareholding pattern (%) P/E (X) 19.0 16.9 15.1 Promoters 62.3 Sales (Rs bn) 109.3 123.7 137.6 FIIs 21.8 Net profits (Rs bn) 40.6 45.7 51.1 MFs 2.1 EBITDA (Rs bn) 65.9 77.4 84.3 Price performance (%) 1M 3M 12M EV/EBITDA (X) 14.9 12.4 11.0 Absolute (7.5) 0.1 (0.0) ROE (%) 17.8 17.5 17.2 Rel. to BSE-30 (0.4) 4.4 2.6 Div. Yield (%) 0.4 1.3 1.2

1QFY2020: bulk drives volume growth; EBITDA margin improves to 70%

Adani Ports reported surprised positively on key port-level metrics, largely driven by uptick in volumes, Dhamra and major port terminals. With container volumes growing a modest 7% yoy, we find the port EBITDA margin print of 70%+ commendable and reflective of sustained focus on cost control. Adjusted for the normalization in offtake from Adani Power, overall volumes grew ~10% yoy, ahead of the 8% yoy growth in overall India port volumes. Such outperformance was spread across container (up 8% yoy), coal (up 10%) and other cargo classes (up 13%). Overall consolidated results were in line with our estimates as the beat in port business got negated by the miss on non-port EBITDA and a higher tax rate.

Benefits of deleveraging yet not seen

We would have expected ADSEZ to benefit from reduction in debt levels on the back of the said reversal of the Rs20 bn of other financial assets lent to related entities in FY2019. We however note stiff interest cost (up 10% qoq) for the quarter against the static other income (flat qoq). ADSEZ’s balance sheet continues to fund losses of port assets having negative net-worth. For Vizag, Kandla and Goa port assets, such funding amounts to Rs3.5 bn investment, Rs20 bn of loans and quarterly run-rate of Rs1 bn+ of loss funding. ADSEZ shared plans to further invest in capex of Dhamra port and expects the 50 mn ton capacity getting established in the year. We note that ADSEZ has put in Rs42 bn or so in the asset over the past four years, more than doubling its capital employed. Other terminals requiring capex are Hazira, Kattupalli, Mundra, Vizhinjam and Myanmar. Some relief may come in the form of loans given to Adani Petroleum Terminals getting repaid, now that Total has invested Rs4.5 bn for a 50% shareholding. Aditya Mongia

Marginally revise estimates and lower fair value to Rs390 from Rs398 Teena Virmani We end up marginally increasing our estimates for port operations both on volumes and EBITDA margin to account 1QFY2020 beat. The current slowdown has led to ADSEZ reducing its volume growth guidance to 10% from 12%, similar to our revised estimate. We also increase port EBITDA margin to ~70% levels. Cut in SEZ income estimates yields a cut in overall estimates. We marginally lower our fair value to Rs390 from Rs398. Retain REDUCE on limited upside.

[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. Transportation Adani Ports and SEZ

Exhibit 1: ADSEZ reported a strong operating performance; port volumes grew 18% on low base and EBITDA margin improved to 70% Adani Port and SEZ, consolidated - 1QFY20 – reported key numbers (Rs mn)

% change 1QFY20 1QFY20E 1QFY19 4QFY19 vs est. yoy qoq FY2019 FY2018 % change FY2020E FY2019 % change Net operating income 27,945 29,741 24,110 30,825 (6) 16 (9) 109,254 113,230 (4) 123,739 109,254 13 Operating expenses (6,693) (5,803) (8,331) 15 (20) (27,608) (31,995) - (27,608) Employee costs (1,325) (1,189) (1,620) 11 (18) (5,298) (4,473) - (5,298) Admin and other exp. (1,497) (1,234) (1,553) 21 (4) (5,674) (5,307) - (5,674) Total expenditure (9,515) (11,016) (8,226) (11,504) (14) 16 (17) (38,580) (41,776) (8) (46,364) (38,580) 20 EBITDA 18,430 18,725 15,884 19,321 (2) 16 (5) 70,675 71,454 (1) 77,375 70,675 9 Other income 4,225 3,082 2,928 4,102 37 44 3 13,623 10,109 35 15,186 13,623 11 Interest expense (4,573) (3,852) (3,206) (4,078) 19 43 12 (14,283) (12,574) 14 (17,070) (14,283) 20 Depreciation (3,907) (3,975) (3,225) (3,561) (2) 21 10 (13,735) (11,884) 16 (16,259) (13,735) 18 PBT 14,175 13,980 12,381 15,785 1 14 (10) 56,280 57,106 (1) 59,233 56,280 5 Tax expense (3,333) (2,796) (2,250) (2,692) 19 (10,815) (15,442) (30) (13,391) (10,815) 24 PAT 10,842 11,184 10,131 13,093 (3) 7 (17) 45,466 41,664 9 45,841 45,466 1 Extraordinary items (556) - (3,158) 49 (5,018) (4,765) (932) (5,018) Share of minority interest (63) (108) (67) (284) (541) (163) (129) (541) Reported PAT 10,224 11,076 6,907 12,859 48 (20) 39,907 36,736 9 44,780 39,907 12 Other comprehensive income - - (0) 140 154 94 64 - 154 Total comprehensive income 10,224 11,076 6,907 12,999 48 (21) 40,061 36,830 9 44,780 40,061 12

Reported port volume (mn tonnes) 57 55 48 54 3 18 5 208 180 16 230 208 11 Reported port revenue 24,255 22,794 19,660 23,825 6 23 2 88,954 73,940 20 102,086 88,954 15 Reported port EBITDA 17,090 15,728 13,800 14,920 9 24 15 60,520 52,070 16 70,857 60,520 17 Port EBITDA margin (%) 70.5 69.0 70.2 62.6 68.0 70.4 69.4 68.0

Key ratios (%) Operating exp./ sales 23.9 24.1 27.0 25.3 28.3 25.3 Employee costs/ sales 4.7 4.9 5.3 4.8 4.0 4.8 Admin and other exp./ sales 5.4 5.1 5.0 5.2 4.7 5.2 EBITDA margin 66.0 63.0 65.9 62.7 64.7 63.1 62.5 64.7 PBT margin 50.7 47.0 51.4 51.2 51.5 50.4 47.9 51.5 PAT margin 38.8 37.6 42.0 42.5 41.6 36.8 37.0 41.6 Effective tax rate 23.5 20.0 18.2 17.1 19.2 27.0 22.6 19.2 EPS (Rs) 5.2 5.3 4.9 6.2 21.7 20.0 22.1 21.7

Source: Company, Kotak Institutional Equities estimates

Exhibit 2: Dhamra port and ‘Others’ ( include newer and smaller ports in the ADSEZ portfolio) contributed significantly to yoy volume growth; Mundra port volumes largely grew on back of 4mn ton yoy increase in coal volumes from Adani Power Quarterly trajectory of volumes of Adani’s port assets, March fiscal year-ends, 1QFY16-1QFY20 (mn tons)

1QFY16 2QFY16 3QFY16 4QFY16 1QFY17 2QFY17 3QFY17 4QFY17 1QFY18 2QFY18 3QFY18 4QFY18 1QFY19 2QFY19 3QFY19 4QFY19 1QFY20 Yoy (%) Mundra Port 29.9 27.0 26.1 26.0 28.9 28.3 27.8 28.6 30.2 29.3 32.4 29.8 32.0 35.0 34.4 36.1 37.0 16 Dahej port 2.5 1.5 2.4 1.8 1.5 2.0 1.1 1.9 1.6 1.7 2.1 1.6 2.2 2.2 2.6 2.2 1.6 (26) Hazira port 2.9 2.9 3.3 3.2 3.4 4.0 3.9 4.0 4.0 4.1 4.3 4.5 4.6 5.4 4.9 4.7 5.5 20 Dhamra port 3.2 3.8 3.8 3.9 5.4 5.2 5.4 5.5 5.3 5.0 5.4 5.8 4.4 4.6 5.9 5.7 6.3 42 Others 1.0 1.3 2.4 2.7 3.2 3.6 2.8 2.5 2.9 3.0 3.8 3.7 4.9 5.0 5.5 5.8 6.6 33 Total 39.5 36.5 38.0 37.5 42.4 43.0 41.0 42.3 44.0 43.0 48.0 45.4 48.1 52.2 53.3 54.5 56.9 18 YoY(%) 16.8 3.8 (2.3) 3.2 7.3 17.9 8.0 12.8 3.8 (0.0) 17.1 7.2 9.3 21.3 11.0 20.1 18.4

Source: Company, Kotak Institutional Equities

2 KOTAK INSTITUTIONAL EQUITIES RESEARCH Adani Ports and SEZ Transportation

Exhibit 3: Container share of business is declining Evolution of cargo handling composition for Adani Ports, March fiscal year-ends, 2015-19 (%)

Coal Container Crude Others 47 50 43 41 41 41 41 41 41 41 41 45 39 37 40 35 32 35 33 33 33 32 33 33 35 30 29 36 30 25 20 15 15 15 15 15 14 14 14 14 13 14 15 10 12 12 13 13 13 12 5 10 10 11 11 11 0

Source: Company, Kotak Institutional Equities

Exhibit 4: Outperformance for ADSEZ's portfolio is driven largely by container segment; bulk needs to take over Volume CAGR of ADSEZ's container and non-container cargo versus market, March fiscal year-ends, 2016-22E (%)

FY2016-19 FY2019-22E

Container Liquid and bulk All cargo Container Liquid and bulk All cargo

30.0 30.0

25.0 25.0 20.3 20.0 20.0

15.0 15.0 10.7 9.9 9.7 8.7 8.6 9.6 10.0 6.7 10.0 6.2 5.5 6.2 6.6 5.0 5.0

- -

Total

Total

Others

Others

Market

Market

Market

Market

Market

Market

Adani Ports Adani

Adani Ports Adani

Adani Ports Adani

Adani Ports Adani

Adani Ports Adani Adani Ports Adani

Source: Company, Ministry of Shipping, Kotak Institutional Equities

KOTAK INSTITUTIONAL EQUITIES RESEARCH 15 Transportation Adani Ports and SEZ

Exhibit 5: ADSEZ has started market-performing on the west coast Market share of Adani Ports' portfolio in west coast container market, March fiscal year-ends, 2014-19 (%)

ADSEZ's west coast market share (%)

50.0

48.4 48.1 46.0 47.4

42.0 42.1

38.0 38.9 37.9

34.0

30.0 2014 2015 2016 2017 2018 2019

Source: Ministry of Shipping, Kotak Institutional Equities estimates

Exhibit 6: Volumes estimates for Mundra and other related ports, March fiscal year-ends, 2014-22E

2014 2015 2016 2017 2018 2019 2020E 2021E 2022E Volumes (mn tons) Mundra port Bulk 47 52 46 42 39 43 44 45 46 Coal 36 39 34 31 27 30 31 31 32 Other bulk 10 13 11 11 12 13 13 14 15 Crude / POL / Liquid 23 22 26 28 28 34 37 39 41 Container ('000 TEUs) 2,642 2,913 3,238 3,459 4,117 4,561 4,895 5,348 5,759 Container (mn tons) 35 38 40 46 55 61 65 71 77 Mundra volumes 105 111 112 116 122 138 146 156 164 Other port assets Dahej port 8 12 8 6 7 9 10 10 12 Hazira port 4 7 12 15 17 20 22 26 28 Mormugao port — 1 2 2 1 4 5 5 5 Vizag port — 1 1 1 - 1 2 2 2 Kandla port — 0 4 4 4 6 6 7 7 Dhamra port 14 15 15 21 21 21 27 31 37 Ennore + Kattupalli port — — — 5 7 10 13 15 17 Vizhingam — — — — — — — 3 4 Total of key ports 131 149 153 171 179 208 230 254 275

Source: Company, Kotak Institutional Equities estimates

16 KOTAK INSTITUTIONAL EQUITIES RESEARCH Adani Ports and SEZ Transportation

Exhibit 7: We arrive at fair value SoTP of Rs395 for Adani Ports End-Mar-2020E DCF-based SoTP valuation of Adani Ports & SEZ

Entity EV (Rs mn) Net debt Implied equity value Stake (%) Equity Value of stake Value/share Method Mundra Port (excl. SEZ) 256,150 84,199 171,951 100% 171,951 83 FCFF SEZ 100,349 — 100,349 100% 100,349 48 FCFF CT3 (incl. CT-3 extension) 59,994 67,152 (7,158) 50% (3,579) (2) FCFF CT4 20,795 21,291 (496) 50% (248) (0) FCFF Dahej 53,704 (1,263) 54,966 74% 40,675 20 FCFF Dhamra 130,676 33,234 97,442 100% 97,442 47 FCFF Hazira 93,960 5,759 88,201 100% 88,201 43 FCFF Vizhinjam 21,923 16,997 4,926 100% 4,926 2 1X equity Kandla 6,009 13,083 (7,073) 100% (7,073) (3) FCFF Murmugao 7,216 4,282 2,935 100% 2,935 1 FCFF Vizag (809) 4,317 (5,127) 100% (5,127) (2) FCFF Ennore 10,277 8,357 1,920 100% 1,920 1 FCFF Kattupalli 35,381 8,088 27,294 97% 26,475 13 FCFF Adani Logistics 49,809 2,903 46,906 100% 46,906 23 12X EV/EBIDTA Adani Yangon 2,401 2,741 (340) 100% (340) (0) FCFF Adani Harbour (marine revenues) 212,209 (27,367) 239,575 100% 239,575 116 14X EV/EBITDA Total 804,988 389

Source: Company, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 17 Transportation Adani Ports and SEZ

Exhibit 8: Consolidated financials of Adani Ports & SEZ, March fiscal year-ends, 2013-22E (Rs mn)

2013 2014 2015 2016 2017 2018 2019 2020E 2021E 2022E Income statement Net sales 35,766 48,240 61,520 71,087 84,394 113,230 109,254 123,739 137,586 155,103 Total operating costs (12,007) (19,036) (22,497) (24,843) (30,247) (42,608) (43,339) (46,364) (53,273) (60,326) EBITDA 23,760 29,204 39,023 46,243 54,147 70,621 65,916 77,375 84,313 94,777 Other income 2,644 6,836 6,856 7,327 10,401 10,109 13,623 15,186 14,597 13,697 Depreciation (4,220) (6,495) (9,117) (10,630) (11,602) (11,884) (13,735) (16,259) (18,350) (19,449) Financial charges (5,418) (9,768) (11,751) (11,746) (11,157) (14,954) (13,852) (17,070) (16,343) (13,953) Pre-tax profit 16,766 19,777 25,012 31,194 41,789 53,893 51,952 59,233 64,217 75,072 Taxation (1,231) (2,367) (12,715) (2,828) (2,866) (15,442) (10,815) (13,391) (12,842) (14,562) Adjusted PAT (before exceptional items) 15,535 17,410 12,297 28,366 38,922 38,451 41,138 45,841 51,375 60,510 Extraordinary items 697 - - - - (1,552) (690) (932) (1,851) - Minority interest - - - 413 100 (163) (545) (129) (311) (517) Share of profit from associates - (14) (102) 193 93 - (1) - - - Reported PAT post-minority interest 16,232 17,396 12,196 28,972 39,115 36,736 39,902 44,780 49,213 59,993 Adjusted EPS (Rs) 7.5 8.4 5.9 13.7 18.8 18.6 19.9 22.1 24.8 29.2 Balance sheet Shareholders funds 63,963 87,681 107,679 135,055 175,260 210,688 245,382 277,800 315,797 362,903 Share capital 4,035 4,168 4,168 4,142 4,142 4,142 4,142 4,142 4,142 4,142 Reserves and surplus 59,928 83,513 103,511 130,913 171,118 206,546 241,240 273,658 311,655 358,762 Loan funds 115,858 128,895 177,313 189,535 214,860 214,322 271,879 250,515 232,718 200,025 Deferred tax liability (net) 5,286 6,744 8,590 (12,015) (17,759) (11,681) (8,124) (9,701) (11,333) (13,098) Total sources of funds 191,720 232,093 302,359 313,814 373,754 414,824 511,237 537,518 556,400 569,565 Total fixed assets 146,065 160,893 195,361 236,427 264,023 298,907 326,079 340,953 335,081 332,567 Investments 2,619 1,038 25,997 5,452 26,114 10,789 7,793 7,793 7,793 7,793 Cash and bank balance 8,306 4,694 8,940 12,782 19,768 29,677 59,673 59,560 73,300 75,048 Net current assests excl cash 34,730 65,468 72,061 59,153 63,850 75,451 117,692 129,212 140,225 154,157 Total application of funds 191,720 232,093 302,359 313,814 373,754 414,824 511,237 537,518 556,400 569,565 Cash flows Cash flow from operations 13,791 11,319 30,651 23,805 40,019 56,081 60,294 49,954 56,976 64,518 Capex (38,367) (12,460) (12,460) (21,248) (36,875) (27,322) (29,405) (31,133) (12,478) (16,934) Free cash flows (24,523) 297 18,361 2,703 3,148 29,104 31,427 18,820 44,498 47,583 Cash flow from financing activities 42,111 7,725 (2,366) 21,704 (13,247) (18,890) 23,133 (34,120) (45,354) (59,533) Cash generated /utilised 9,004 (6,056) 3,353 3,978 978 (1,267) 39,186 (113) 13,741 1,748 Net cash at start of year 3,747 7,558 1,502 4,452 8,430 9,502 8,235 47,421 47,307 61,048 Net cash at end of year (excl. other cash) 12,752 1,502 4,855 8,430 9,408 8,235 47,421 47,307 61,048 62,796

Growth (%) Revenue growth 9.4 34.9 27.5 15.6 18.7 34.2 (3.5) 13.3 11.2 12.7 EBITDA growth 15.0 22.9 33.6 18.5 17.1 30.4 (6.7) 17.4 9.0 12.4 Recurring PAT growth 42.2 12.1 (29.4) 130.7 37.2 (1.2) 7.0 11.4 12.1 17.8 Key ratios EBITDA margin (%) 66.4 60.5 63.4 65.1 64.2 62.4 60.3 62.5 61.3 61.1 Recurring PAT margin (%) 43.4 36.1 20.0 39.9 46.1 34.0 37.7 37.0 37.3 39.0 Effective tax rate (%) 7.3 12.0 50.8 9.1 6.9 28.7 20.8 22.6 20.0 19.4 Net debt to equity (X) 1.7 1.4 1.6 1.3 1.1 0.9 0.9 0.7 0.5 0.3 BVPS (Rs) 32 42 52 65 85 102 118 134 152 175 RoE (%) 27.7 22.9 12.5 23.9 25.2 19.8 17.8 17.5 17.2 17.7 RoCE (%) 8.3 9.4 5.5 10.5 12.4 14.9 11.3 11.7 12.1 13.4

Source: Company, Kotak Institutional Equities estimates

18 KOTAK INSTITUTIONAL EQUITIES RESEARCH REDUCE Pidilite Industries (PIDI) Speciality Chemicals AUGUST 08, 2019 RESULT Coverage view: Neutral

Growth moderates, margin outlook improves further. PIDI’s numbers were decent Price (`): 1,290 in context of growth moderation in the sector but a tad short of expectations due to a Fair Value (`): 1,120 price cut of 2%. The management indicated that demand environment remains BSE-30: 36,691 challenging. Profitability outlook has improved further thanks to continued downward trend in RM prices. Overall, we are set for some growth moderation in FY2020E and margin expansion to near-peak levels. There is a lot to like but, at 48X FY2021E PE, valuations are expensive. Retain REDUCE with revised fair value of Rs1,120 (Rs1,025).

Company data and valuation summary PIDILITE Industries Stock data Forecasts/Valuations 2019 2020E 2021E 52-week range (Rs) (high,low) 1,324-895 EPS (Rs) 17.7 23.2 26.9 Market Cap. (Rs bn) 655.2 EPS growth (%) (3.7) 30.6 15.9 Shareholding pattern (%) P/E (X) 72.8 55.7 48.0 Promoters 69.8 Sales (Rs bn) 70.8 79.0 89.7 FIIs 11.7 Net profits (Rs bn) 9.0 11.8 13.6 MFs 4.6 EBITDA (Rs bn) 13.7 17.5 20.1 Price performance (%) 1M 3M 12M EV/EBITDA (X) 47.0 36.4 31.5 Absolute 6.9 9.4 16.8 ROE (%) 23.3 26.2 26.1 Rel. to BSE-30 15.2 14.2 19.9 Div. Yield (%) 0.5 0.6 0.7

1QFY20—decent earnings print in context of growth moderation

PIDI’s revenue grew 10% (KIE 12%) and EBITDA grew 16% (KIE 20%), a tad below expectation due to the impact of price reduction of 2% on sales and margin. India CBP volume/mix growth at 6% was in line with our expectation. Domestic subsidiaries’ topline declined 1% yoy (from 20%+ growth trajectory) due to subdued demand in construction chemicals (waterproofing).

Consolidated revenues grew 10% yoy to Rs20.2 bn led by 11% growth in standalone revenues and 5% growth in subsidiaries. India CBP revenues grew 9.5% (6% volume/mix + 3.5% pricing) while industrial products grew 14% (12% volume/mix + 2% pricing). International subsidiaries grew 11% in c/c terms led by robust double-digit growth in Bangladesh, Sri Lanka and US. A sharp 15-17% decline in waterproofing services business (NINA Percept) and floor adhesives (CIPY PU) led to 1% decline in aggregate topline of domestic subsidiaries.

On profitability front, GM/EBITDA margin expanded 85/120 bps yoy to 51.4%/ 22%. Margins were a tad lower than our expectations and that seen in the previous benign-RM cycle (Exhibit 7) largely due the impact of a 2% price cut at portfolio level. Employee expenses were 18% yoy (on top of 18% increase in FY2019; attributable to investments in talent pertaining to new businesses and gradual transition from promoter family-to-professional). Other costs increase was restricted to 3%. Impact of Ind AS 116 was negligible. Net profit grew 23% yoy.

Key RM prices continue to trend down; expect further expansion in margins Rohit Chordia PIDI’s GM expanded 110 bps qoq to 51.4% (+ 85 bps yoy; up 420 bps from 3Q) led by easing RM prices and price increase taken in 2Q-3QFY19 partly offset by some price reduction in 1Q. We expect further improvement in margin given favorable RM price trends: (1) VAM (a key RM) Jaykumar Doshi spot price is US$870/t as against consumption cost of US$980/t in 1Q, and (2) tailwinds in the residual RM basket. We model 260/290 bps expansion in GM/ EBITDA margin in FY2020E. Aniket Sethi We like the story but await better entry point given expensive valuations

We raise FY2020-22E EPS by 2-4% as we model lower RM prices. We like PIDI for its dominant positioning in a high-growth segment, and track record of expanding product portfolio and developing end-markets. Our FV of Rs1,120 (Rs1,025) bakes in a long-term (22-year) explicit FCF CAGR of about 14%, terminal growth of 6.25% and WACC of 11%

[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. Speciality Chemicals Pidilite Industries

Conference call takeaways

 Demand environment. The management indicated that the demand environment is challenging. Weakness is more pronounced in the construction chemicals (includes waterproofing) and construction adhesives segments on account of a slowdown in the real estate sector. The management refrained from commenting on demand in the current quarter, so far.

 Board grants in-principle approval to forge JVs in new areas. Pidilite board has accorded an in-principle approval for forging JVs in the business areas of technical mortars, epoxy grouts and wall technologies, which will help the company, expand its product range in related adjacencies. Without revealing specifics, the management indicated that these JVs would help the company launch new products in the Consumer and Bazaar segment (CBP, PIDI’s B2C business). We note PIDI has a track record of successful JVs (ICA-Pidilite for wood coatings and a JV with Jowat, a leading supplier of industrial adhesives in Europe), acquisitions (NINA Percept in waterproofing services, CIPY Polyurethane in floor tiling/adhesives) and tie-ups (WD-40).

 Weakness in waterproofing— Waterproofing subsidiaries Nina and Percept reported 17% decline in revenues to Rs634 mn. Nina and Percept predominantly cater to residential real estate, commercial real estate and infrastructure projects and bulk of their business comes from new constructions. Slowdown in these segments has significantly impacted growth of waterproofing subsidiaries. Besides this, PIDI’s waterproofing business comprises of a products portfolio (predominantly Dr Fixit). We note that Asian Paints has called out excellent growth in its waterproofing business and other paint companies are also pushing their waterproofing products in the distribution. While it is not possible to asses growth of PIDI’s waterproofing products (it is a part of CBP segment along with adhesives and sealants and it not disclosed separately), we do not rule some deceleration in growth given rising competition from paint companies. We believe that the dealer-network of paints may have an edge over hardware stores in sales of waterproofing products.

 RM tailwinds, pricing and profitability outlook. Average cost of VAM (consumption cost) in 3QFY19, 4QFY19 and 1QFY20 stood at US$1,300+/t, US$1,100/t and US$980/t, respectively. At present, VAM spot price is about US$870/t. Rest of the RM basket (monomers and other crude-derivatives) is also trending down. Given this, PIDI management hinted at further expansion in gross margin notwithstanding price reduction on select products to pass on some RM benefit (average price cut at portfolio level was 2%). The management indicated that it may reinvest a part of GM tailwind into A&P.

 Other highlights—(1) A&P spends stood at Rs750 (3.7% of revenues) in 1QFY20 as against 3.2% of revenues in FY2019, (2) Industrial products segment reported healthy growth of about 14% partly due to good growth in pigments. It is partly attributable to reduction in manufacturing of some of these categories in China, (3) Capex would be in the range of 2-3% of revenues in FY2020E.

 Subsidiary performance. International subsidiaries posted 11% yoy growth in c/c revenues for the quarter. EBITDA was up 135% to Rs87 mn. Domestic subsidiaries reported 1% decline in revenues to Rs1.65 bn and 1% growth in EBITDA to Rs176 mn. Please refer to exhibit 4 and 5 for commentary on performance of select domestic and international subsidiaries.

20 KOTAK INSTITUTIONAL EQUITIES RESEARCH Pidilite Industries Speciality Chemicals

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

% chg. 1QFY20 1QFY20E 1QFY19 4QFY19 KIE Est yoy qoq FY2020E FY2019 % chg. Net operating revenue 20,168 20,605 18,341 16,389 (2) 10 23 78,961 70,787 12 Material cost (9,805) (9,923) (9,074) (8,148) (1) 8 20 (37,926) (35,866) 6 Gross profit 10,363 10,682 9,267 8,241 (3) 12 26 41,035 34,922 18 Gross margin (%) 51.4 51.8 50.5 50.3 -46 bps 85 bps 110 bps 52.0 49.3 263 bps Employee cost (2,436) (2,365) (2,071) (2,171) 3 18 12 (9,480) (8,367) 13 Other expenditure (3,490) (3,717) (3,379) (3,282) (6) 3 6 (14,035) (12,891) 9 Total expenditure (15,731) (16,005) (14,524) (13,602) (2) 8 16 (61,441) (57,123) 8 EBITDA 4,437 4,600 3,817 2,788 (4) 16 59 17,519 13,664 28 EBITDA margin (%) 22.0 22.3 20.8 17.0 -33 bps 119 bps 499 bps 22.2 19.3 288 bps Other income 399 730 321 562 (45) 24 (29) 1,689 1,466 15 Interest (73) (65) (73) (66) 13 1 12 (236) (261) (9) Depreciation (377) (355) (301) (390) 6 25 (3) (1,555) (1,327) 17 Pretax profits 4,385 4,910 3,764 2,895 (11) 17 51 17,417 13,543 29 Tax (1,444) (1,615) (1,361) (960) (11) 6 50 (5,644) (4,661) 21 Share of Profit/ (Loss) of associates 3 10 4 15 (71) (31) (80) 30 27 10 Minority Interest (15) (20) (21) (17) (25) (29) (13) (38) (35) 10 Recurring PAT 2,929 3,285 2,387 1,932 (11) 23 52 11,764 8,874 33 Extraordinary items - - - 419 - 375 Net profit (reported) 2,929 3,285 2,387 2,351 (11) 23 25 11,764 9,249 27 Recurring EPS 5.8 6.5 4.7 3.8 (11) 23 52 23.2 17.5 33 Income tax rate (%) 32.9 32.9 36.1 33.2 3 bps -322 bps -23 bps 32.4 34.4 -202 bps Costs as a % of net operating revenues Material cost 48.6 48.2 49.5 49.7 45 bps -86 bps -111 bps 48.0 50.7 -264 bps Employee cost 12.1 11.5 11.3 13.2 60 bps 78 bps -117 bps 12.0 11.8 18 bps Other expenditure 17.3 18.0 18.4 20.0 -74 bps -113 bps -273 bps 17.8 18.2 -44 bps

Segment results Revenues Consumer & Bazaar products 17,364 15,941 13,645 9 27 60,705 Industrial products 2,935 2,576 2,923 14 0 10,656 Others 225 162 142 39 59 661 Less: intersegment (356) (338) (320) 5 11 (1,234) Total segment revenue 20,168 18,341 16,389 10 23 70,787 Segment PBIT Consumer & Bazaar products 4,625 4,030 3,010 15 54 14,313 Industrial products 453 379 432 19 5 1,541 Others (14) (33) (19) (59) (28) (90) Total segment EBIT 5,064 4,376 3,423 16 48 15,764 Segment PBIT margins (%) Consumer & Bazaar products 26.6 25.3 22.1 135 bps 457 bps 24 Industrial products 15.4 14.7 14.8 69 bps 64 bps 14 Others (6.0) (20.3) (13.4) NM 734 bps (14) Capital employed Consumer & Bazaar products 20,351 20,124 20,991 1 (3) 20,991 Industrial products 3,531 3,267 3,680 8 (4) 3,680 Others 706 357 627 98 13 627 Unallocated corporate 21,869 16,464 18,255 33 20 18,255 Total capital employed 46,457 40,213 43,552 16 7 43,552

Source: Company, Kotak Institutional Equities

KOTAK INSTITUTIONAL EQUITIES RESEARCH 21 Speciality Chemicals Pidilite Industries

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

(% change) 1QFY20 1QFY20E 1QFY19 4QFY19 KIE Est yoy qoq FY2020E FY2019 (% chg.) Net operating revenue 17,791 17,896 16,083 13,787 (1) 11 29 68,199 60,947 12 Material cost (8,616) (8,500) (7,968) (6,720) 1 8 28 (32,599) (30,644) 6 Gross profit 9,174 9,395 8,115 7,067 (2) 13 30 35,600 30,302 17 Gross margin (%) 51.6 52.5 50.5 51.3 -94 bps 111 bps 31 bps 52.2 49.7 248 bps Employee cost (1,987) (1,894) (1,661) (1,708) 5 20 16 (7,570) (6,635) 14 Other expenditure (3,008) (3,166) (2,878) (2,740) (5) 5 10 (11,764) (10,748) 9 Total expenditure (13,611) (13,560) (12,507) (11,168) 0 9 22 (51,933) (48,028) 8 EBITDA 4,180 4,336 3,576 2,619 (4) 17 60 16,266 12,919 26 EBITDA margin (%) 23.5 24.2 22.2 19.0 -74 bps 125 bps 449 bps 23.9 21.2 265 bps Other income 390 700 645 525 (44) (40) (26) 1,807 1,915 (6) Interest (27) (20) (20) (19) 36 35 46 (118) (71) 65 Depreciation (281) (280) (229) (298) 0 22 (6) (1,195) (998) 20 Pretax profits 4,262 4,736 3,972 2,828 (10) 7 51 16,760 13,765 22 Tax (1,387) (1,563) (1,302) (924) (11) 6 50 (5,447) (4,499) 21 Recurring PAT 2,876 3,173 2,669 1,903 (9) 8 51 11,313 9,266 22 Extraordinary items - - - 529 - 529 Net profit (reported) 2,876 3,173 2,669 2,432 (9) 8 18 11,313 9,794 16 Recurring PAT post MI 2,876 3,173 2,669 1,903 (9) 8 51 11,313 9,266 22 Recurring EPS 5.7 6.2 5.3 3.7 (9) 8 51 22.3 18.2 22 Income tax rate (%) 32.5 33.0 32.8 27.5 -47 bps -26 bps 499 bps 32.5 31.5 102 bps Costs as a % of net operating revenue Material cost 48.4 47.5 49.5 48.7 93 bps -112 bps -32 bps 47.8 50.3 -249 bps Employee cost 11.2 10.6 10.3 12.4 58 bps 83 bps -123 bps 11.1 10.9 21 bps Other expenditure 16.9 17.7 17.9 19.9 -79 bps -99 bps -297 bps 17.2 17.6 -39 bps

Segment results Revenues Consumer & Bazaar products 14,987 15,325 13,683 11,042 (2) 10 36 57,238 50,864 13 Industrial products 2,935 2,756 2,576 2,923 6 14 0 11,531 10,656 8 Others 225 176 162 142 28 39 59 742 661 12 Less: intersegment (356) (362) (338) (320) (2) 5 11 (1,313) (1,234) 6 Total segment revenue 17,791 17,896 16,083 13,787 (1) 11 29 68,199 60,947 12 Segment PBIT Consumer & Bazaar products 4,493 - 4,219 2,931 6 53 14,501 Industrial products 453 - 379 432 19 5 1,541 Others (14) - (33) (19) (59) (28) (90) Total segment EBIT 4,932 - 4,565 3,344 8 47 15,952 Segment PBIT margins (%) Consumer & Bazaar products 30.0 - 30.8 26.5 -86 bps 343 bps 28.5 Industrial products 15.4 - 14.7 14.8 69 bps 64 bps 14.5 Others (6.0) - (20.3) (13.4) NM 734 bps (13.6) Capital employed Consumer & Bazaar products 11,596 - 11,385 12,149 2 (5) 12,149 Industrial products 3,531 - 3,267 3,680 8 (4) 3,680 Others 706 - 357 627 98 13 627 Unallocated corporate 28,954 - 23,311 25,412 24 14 25,412 Total capital employed 44,786 - 38,320 41,867 17 7 41,867

Source: Company, Kotak Institutional Equities

Exhibit 3: Key changes to earnings model, Pidilite Industries

Revised Earlier Change (%) 2020E 2021E 2022E 2020E 2021E 2022E 2020E 2021E 2022E Revenues (Rs mn) 78,961 89,698 102,497 79,188 90,080 102,515 (0.3) (0.4) (0.0) Revenue growth (%) 11.5 13.6 14.3 11.9 13.8 13.8 EBITDA (Rs mn) 17,519 20,069 23,114 16,919 19,694 22,748 3.5 1.9 1.6 EBITDA (%) 22.2 22.4 22.6 21.4 21.9 22.2 82 bps 51 bps 36 bps PAT (Rs mn) 11,764 13,640 15,908 11,365 13,374 15,650 3.5 2.0 1.7 EPS (Rs/share) 23.2 26.9 31.3 22.4 26.3 30.8 3.5 2.0 1.7

Source: Company, Kotak Institutional Equities estimates

22 KOTAK INSTITUTIONAL EQUITIES RESEARCH Pidilite Industries Speciality Chemicals

Exhibit 4: Performance of international business (Rs mn)

1QFY20 1QFY19 % chg. Comments Revenues North America 315 281 12 Healthy growth due to favourable trends and growth of key customers South America 210 198 6 Bangladesh 326 274 19 Strong growth momentum; commissioned new facility Sri Lanka 80 68 18 Strong growth momentum Thailand 137 136 1 Competitive pressure and challenging market conditions Egypt 80 81 (1) Competitive pressure and challenging market conditions UAE 263 227 16 Others 18 21 (14) Total 1,429 1,284 11 EBITDA North America 33 15 120 South America 3 (5) Bangladesh 54 52 4 Sri Lanka 1 (4) Thailand 4 8 (50) Egypt (1) (4) UAE (10) (23) Others 3 (3) Total 87 37 135 EBITDA margin (%) North America 10.5 5.3 513 bps South America 1.4 (2.5) 395 bps Margins impacted by higher SG&A expenses as Pidilite opened second Bangladesh 16.6 19.0 -242 bps manafacturing facility in the country Sri Lanka 1.3 (5.9) 713 bps Thailand 2.9 5.9 -297 bps Egypt (1.3) (4.9) 368 bps UAE (3.8) (10.1) 632 bps Total 6.1 2.9 320 bps

Notes: (1) Performance in constant currency terms.

Source: Company, Kotak Institutional Equities

KOTAK INSTITUTIONAL EQUITIES RESEARCH 23 Speciality Chemicals Pidilite Industries

Exhibit 5: Performance of domestic subsidiaries (Rs mn)

1QFY20 1QFY19 % chg. Comments Revenues Nina Percept 634 765 (17) Challenging market conditions Reported growth higher as select products were transferred from the parent (standalone) last year. Like-for-like sales growth after excluding these products is ICA - Pidilite 534 371 44 18% yoy Cipy Polyurethane 318 374 (15) Others 168 160 5 Total 1,654 1,670 (1.0) EBITDA Nina Percept 63 101 (38) ICA - Pidilite 54 19 184 Cipy Polyurethane 36 39 (8) Others 23 15 53 Total 176 174 1.1 EBITDA margin (%) Nina Percept 9.9 13.2 -327 bps ICA - Pidilite 10.1 5.1 499 bps Margin improvement pertaining to scale-led operating leverage and forex gains Cipy Polyurethane 11.3 10.4 89 bps Others 13.7 9.4 431 bps Total 10.6 10.4 22 bps

Source: Company, Kotak Institutional Equities

Exhibit 6: VAM spot price is US$870 as against Pidi’s consumption cost of US$980 in 1QFY20

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

52 60 80,000 38 34 40 60,000 22 15 19 20 40,000 (6) (2) (4) (5) (12) (9) 0 (22) 20,000 (31) (20)

0 (40)

1QFY16

2QFY16

3QFY16

4QFY16

1QFY17

2QFY17

3QFY17

4QFY17

1QFY18

2QFY18

3QFY18

4QFY18

1QFY19

2QFY19

3QFY19

4QFY19

1QFY20 2QFY20E

Source: Bloomberg, Kotak Institutional Equities

24 KOTAK INSTITUTIONAL EQUITIES RESEARCH Pidilite Industries Speciality Chemicals

Exhibit 7: We see room for further expansion in Pidilite’s gross margins Trends in RM prices Pidilite’s gross margin

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

80,000.0 55.0

70,000.0 53.0

60,000.0 51.0

50,000.0 49.0

40,000.0 47.0

30,000.0 45.0

20,000.0 43.0

1QFY13

2QFY13

3QFY13

4QFY13

1QFY14

2QFY14

3QFY14

4QFY14

1QFY15

2QFY15

3QFY15

4QFY15

1QFY16

2QFY16

3QFY16

4QFY16

1QFY17

2QFY17

3QFY17

4QFY17

1QFY18

2QFY18

3QFY18

4QFY18

1QFY19

2QFY19

3QFY19

4QFY19 1QFY20

2QFY20E

Source: Bloomberg, Kotak Institutional Equities

Exhibit 8: Consolidated gross margins improved 110 bps qoq but was down 90 bps yoy (%)

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

49.447.2 48 46.8

46 44.1 44.2 44

42

2QFY15

3QFY15

4QFY15

1QFY16

2QFY16

3QFY16

4QFY16

1QFY17

2QFY17

3QFY17

4QFY17

1QFY18

2QFY18

3QFY18

4QFY18

1QFY19

2QFY19

3QFY19

4QFY19 1QFY20

Source: Company, Kotak Institutional Equities

KOTAK INSTITUTIONAL EQUITIES RESEARCH 25 Speciality Chemicals Pidilite Industries

Exhibit 9: CBP revenues grew 9% yoy Exhibit 10: Industrial products revenues grew 14% yoy

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

(5) (15)

1QFY15

2QFY15

3QFY15

4QFY15

1QFY16

2QFY16

3QFY16

4QFY16

1QFY17

2QFY17

3QFY17

4QFY17

1QFY18

2QFY18

3QFY18

4QFY18

1QFY19

2QFY19

3QFY19

4QFY19

1QFY20

1QFY15

2QFY15

3QFY15

4QFY15

1QFY16

2QFY16

3QFY16

4QFY16

1QFY17

2QFY17

3QFY17

4QFY17

1QFY18

2QFY18

3QFY18

4QFY18

1QFY19

2QFY19

3QFY19

4QFY19 1QFY20

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

Exhibit 11: CBP volume growth was muted at 6% yoy Consumer Bazaar Products volume + mix growth trends, yoy (%)

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

(5)

3QFY15

4QFY15

1QFY16

2QFY16

3QFY16

4QFY16

1QFY17

2QFY17

3QFY17

4QFY17

1QFY18

2QFY18

3QFY18

4QFY18

1QFY19

2QFY19

3QFY19 4QFY19 1QFY20

Source: Bloomberg, Kotak Institutional Equities

26 KOTAK INSTITUTIONAL EQUITIES RESEARCH Pidilite Industries Speciality Chemicals

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

2014 2015 2016 2017 2018 2019 2020E 2021E 2022E Profit model Net sales 42,606 48,204 53,612 56,168 60,784 70,787 78,961 89,698 102,497 Other operating income 226 237 0 0 0 0 0 0 0 Net operating revenues 42,832 48,441 53,612 56,168 60,784 70,787 78,961 89,698 102,497 EBITDA 6,715 7,708 11,735 12,598 13,412 13,682 17,519 20,069 23,114 Other income 449 455 778 1,123 1,484 1,466 1,689 2,138 2,609 Interest (163) (156) (133) (139) (155) (261) (236) (226) (225) Depreciation (812) (1,178) (1,005) (1,151) (1,199) (1,327) (1,555) (1,649) (1,794) Pretax profits 6,188 6,828 11,376 12,430 13,542 13,560 17,417 20,332 23,705 Tax (1,653) (1,694) (3,335) (3,851) (4,392) (4,661) (5,644) (6,683) (7,786) Less: Minority interest (3) (10) (44) (32) (37) (35) (38) (42) (46) Add: Share of profit in associate 30 50 32 53 46 27 30 33 36 Recurring PAT 4,563 5,175 8,028 8,600 9,159 8,892 11,764 13,640 15,908 Extraordinary items (65) (49) - - 465 375.20 - - - Reported net profit 4,498 5,126 8,028 8,600 9,624 9,267 11,764 13,640 15,908 Recurring earnings per share (Rs) 8.9 10.1 15.7 16.8 18.0 17.5 23.2 26.9 31.3 Balance sheet Total equity 19,526 22,706 26,380 34,709 35,740 41,481 48,248 56,131 65,065 Total borrowings 459 584 800 975 1,226 1,111 1,025 1,025 1,025 Deferred tax liabilities (net) 537 566 753 877 1,048 1,094 1,094 1,094 1,094 Minority interest 42 51 434 1,273 1,751 2,072 2,033 1,991 1,945 Total liabilities and equity 20,565 23,907 28,367 37,835 39,765 45,757 52,401 60,242 69,129 Net fixed assets (Incl CWIP) 11,872 14,403 12,955 14,230 15,699 16,897 16,829 17,599 18,684 Investments 2,603 3,699 7,055 14,431 12,459 15,477 15,477 15,477 15,477 Cash 1,772 760 1,318 999 1,636 1,904 7,562 13,174 19,261 Net current assets (excl cash) 4,318 5,045 7,039 8,175 9,970 11,478 12,533 13,992 15,708 Total assets 20,565 23,907 28,367 37,835 39,765 45,757 52,401 60,242 69,129 Free cash flow Operating cash flow (excl working capital) 5,452 6,113 9,015 9,336 9,738 10,239 11,875 13,386 15,328 Working capital (1,514) (593) (375) (1,399) (1,774) (1,791) (1,055) (1,459) (1,716) Capital expenditure (1,894) (4,091) (1,997) (2,301) (2,724) (2,431) (1,487) (2,418) (2,879) Free cash flow 2,045 1,429 6,643 5,636 5,240 6,017 9,334 9,509 10,734 Key assumptions, growth (%) Net operating revenue growth 16.5 13.1 10.7 4.8 8.2 16.5 11.5 13.6 14.3 EBITDA growth 13.2 14.8 52.3 7.4 6.5 2.0 28.0 14.6 15.2 EPS growth 8.1 13.4 55.1 7.1 7.5 (3.0) 32.3 15.9 16.6 EBITDA margin (%) 15.7 15.9 21.9 22.4 22.1 19.3 22.2 22.4 22.6 Gross margin (%) 44.9 44.9 51.8 53.0 52.5 49.3 52.0 51.8 51.9 A&SP (% of sales) 4.3 4.0 3.6 3.4 3.5 3.2 2.9 2.9 2.9 Tax rate (% of PBT) 26.7 24.8 29.3 31.0 32.4 34.4 32.4 32.9 32.8 Ratios (%) ROE (%) 25.2 24.3 32.8 28.1 26.0 23.0 26.2 26.2 26.3 ROCE (%) 30.1 29.0 40.6 34.1 30.7 28.0 31.6 31.8 32.1

Source: Company, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 27 BUY Mahindra & Mahindra (MM) Automobiles & Components AUGUST 07, 2019 RESULT Coverage view: Neutral

Cost-cutting actions protect margins. M&M + MVML reported 1QFY20 EBITDA of Price (`): 518 `17.9 bn (-15% yoy), which was 4% above our estimates led by lower other expenses Fair Value (`): 800 and better-than-expected margin in the tractor segment. EBITDA margin declined by BSE-30: 36,691 180 bps yoy to 14.0% (KIE: 13.6%) due to weakness in volumes. Reasonable valuations and strong growth outlook for tractors in the medium term drive our BUY rating. SoTP- based FV reduced to ₹800 (from ₹860 earlier) due to reduction in value of subsidiaries.

Company data and valuation summary Mahindra & Mahindra Stock data Forecasts/Valuations 2019 2020E 2021E 52-week range (Rs) (high,low) 993-515 EPS (Rs) 47.6 42.9 45.9 Market Cap. (Rs bn) 644.3 EPS growth (%) 25.4 (10.0) 7.0 Shareholding pattern (%) P/E (X) 10.9 12.1 11.3 Promoters 20.4 Sales (Rs bn) 528.5 565.0 618.5 FIIs 34.7 Net profits (Rs bn) 54.2 48.8 52.2 MFs 10.0 EBITDA (Rs bn) 75.3 76.1 83.3 Price performance (%) 1M 3M 12M EV/EBITDA (X) 8.2 7.9 7.1 Absolute (19.3) (18.5) (44.1) ROE (%) 16.5 13.0 12.4 Rel. to BSE-30 (13.1) (15.0) (42.6) Div. Yield (%) 1.8 1.7 1.8

1QFY20 EBITDA 4% above estimates led by cost-cutting initiatives

 M&M + MVML reported 1QFY20 EBITDA of `17.9 bn (down 15% yoy), which was 4% ahead of our estimates led by lower other expenses and better-than-expected EBIT margin in the tractor segment. Revenues declined by 4% yoy (KIE: -5% yoy) led largely by higher ASPs offset by 10% yoy decline in volumes this quarter. In 1QFY20, automotive volumes declined by 6% yoy led by successful launch of XUV300, which offset the decline in other models while tractor segment volumes declined by 14% yoy due to a weak demand scenario. EBITDA margin came in at 14% (down 180 bps yoy but up 50 bps qoq), which was 40 bps ahead of our estimates led by lower-than-expected other expenses. Gross margin improved by 40 bps qoq due to a higher tractor mix and benign raw material prices. Tractor revenues formed 34% of total revenues in 1QFY20 versus 23% in 4QFY19. Staff costs rose by 4% yoy while other expenses increased by 3% yoy in 1QFY20.

 In terms of segments, EBIT margin in the auto segment was 6.5% (down 290 bps yoy and down 230 bps qoq), which was in line with our estimate of 6.5%—this reflects negative operating leverage. EBIT margin in the tractor segment declined by 160 bps yoy to 19.3% (KIE: 18%) led by negative operating leverage and higher discounts in the market due to higher inventory levels. Adjusted net profit came in at `8.9 bn (down 29% yoy), which was 8% below our estimates due to lower other income and higher effective tax rate assuming zero long-term capital gains tax rate on sales of shares by the company during the quarter. The company booked a one-time gain of `13.7 bn related to gain on sale of shares from Hitesh Goel M&M benefit trust to investor.

 For 1QFY20, M&M consolidated EBIT declined by 38% yoy led by 83% yoy decline in the Nishit Jalan automotive segment and 87% yoy decline in financial services EBIT.

Margin to remain under pressure in FY2020-21E; maintain BUY on cheap valuations Rishi Vora We have maintained our FY2020-22E EPS estimates. We expect automotive volumes to remain under pressure over the medium term due to regulatory cost pressures. Maintain BUY rating on attractive valuations; SoTP-based fair value reduced to `800 (from `860 earlier) due to reduction in value of subsidiaries.

[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. Mahindra & Mahindra Automobiles & Components

Conference call highlights

 Flattish growth for tractor industry for FY2020; focus on cost reduction. The company pegged flattish yoy tractor industry growth rate in FY2020E. The company highlighted that the domestic tractor industry fell by 14-15% yoy in first four months of FY2020. The company expects the domestic tractor industry to grow at 6-8% for the remaining eight months implying flattish yoy growth for FY2020. Dealer inventory levels for the company in the tractor segment are higher by 2,000-3,000 units than normal levels. Market share in the domestic tractor industry stood at 42.9% in 1QFY20. Monsoon picked up during the month of July and deficit as of today stood around 6-7% of the long-term average. The company highlighted that a pickup in monsoon poses upside risk to domestic tractor industry growth estimates. The company had taken slight price increase in 1QFY20.

 PV industry growth outlook remains highly uncertain. The company refrained from guiding volume growth for the industry due to uncertainty surrounding the PV industry. As per the company, the factors that impacted the PV demand are (1) regulatory, insurance and road cost increase impacted demand sentiment in 1QFY20, (2) tighter financing norms for automotive industry, especially by NBFCs segment due to which 10- 15% of customer did not get financing, (3) LTV ratio has come down from 90% to 80% and (4) non-transmission of rates has also negatively impacted the consumer demand in 1QFY20. However, the company expects some pre-buy in 2HFY20. The company highlighted that only ‘single-digit dealers’ have been closed for M&M during 1QFY20. The company has also taken price increase in the automotive segment in 1QFY20. Dealer inventory levels for the company in the automotive segment are also higher by 2,000- 3,000 units than normal levels.

 Expect commodity prices to remain benign in FY2020. The company highlighted that commodity price were benign in 1QFY20, resulting in 50 bps qoq positive impact on gross margins during the quarter. The company expects commodity prices to remain soft in 2QFY20 as well.

 GST rate cut for limited period might help the industry. The company highlighted that GST rate cut by 10% will be very difficult given the current fiscal account of the central government. However, the industry is looking for GST rate cut for a limited period in order to revive the demand in the near term.

 Ssangyong performance update. Ssangyong profitability got impacted by weak domestic and export demands in 2QCY19. Sales volume fell by 3% yoy, leading to operating loss of 49.1 bn won in 2QCY19 due to negative operating leverage. The company will focus on cost reduction given slowdown in Korean and select global markets. The company will continue to spend on marketing in order to gain market share in the domestic market and select exports market. Ssangyong has been generating cash profits for the past two-three years. The company will continue to invest in product launches going forward.

 Upbeat on electric vehicle segment. M&M is quite positive on electric vehicles. As of today, the company has 5,000 vehicles on ground. As per the company, electric three- wheelers and shared electric cars are affordable.

 Update on overseas subsidiaries performance. The company highlighted that half of the losses in subsidiaries in FY2019 were due to one-offs. Mahindra USA: Losses in Mahindra USA were due to inventory correction taken up the company. Dealer stock has come down by 25% and loss were down by 50% yoy in 1QFY19.The company expects to achieve breakeven in 4QFY20. Peugeot Motorcycle: Peugeot has developed electric scooter, which will be delivered to France this week. The company expects to be EBITDA positive by next year.

KOTAK INSTITUTIONAL EQUITIES RESEARCH 29 Automobiles & Components Mahindra & Mahindra

 Other key points. (1) The company expects sub-compact SUV to have higher petrol mix under BS-VI regime. As of now, diesel mix in compact SUV segment is around 74% (mainly led by Brezza). As per the company, large SUVs will continue to have diesel engine, (2) 74% of XUV300 sales is diesel and (3) depreciation expense was higher yoy in 1QFY20 due to full amortization related to three new product launches (Alturas G4, Marazzo and XUV300) during FY2019.

Exhibit 1: 1QFY20 EBITDA was 4% above estimates led by cost-cutting initiatives Interim results of M&M+MVML, March fiscal year-ends (` mn)

(% chg.) 1QFY20 1QFY20E 1QFY19 4QFY19 1QFY20E 1QFY19 4QFY19 FY2020E FY2019 Yoy (%) FY2021E FY2020E Yoy (%) Volumes (units) 218,039 218,039 240,885 235,557 (9.5) (7.4) 948,603 939,033 1.0 981,748 948,603 3.5 Net realization (Rs) 587,302 582,617 554,524 586,180 0.8 5.9 0.2 595,616 562,794 5.8 629,971 595,616 5.8 Net sales 128,055 127,033 133,577 138,079 0.8 (4.1) (7.3) 565,003 528,482 6.9 618,473 565,003 9.5 Raw materials (86,971) (86,383) (90,036) (94,286) 0.7 (3.4) (7.8) (384,202) (359,977) 6.7 (425,200) (384,202) 10.7 Staff costs (8,679) (7,600) (8,380) (7,568) 14.2 3.6 14.7 (36,770) (32,830) 12.0 (38,608) (36,770) 5.0 Other expenses (14,469) (15,792) (14,061) (17,547) (8.4) 2.9 (17.5) (67,922) (60,375) 12.5 (71,318) (67,922) 5.0 Total expenses (110,119) (109,775) (112,476) (119,401) 0.3 (2.1) (7.8) (488,894) (453,181) 7.9 (535,126) (488,894) 9.5 EBITDA 17,936 17,258 21,101 18,678 3.9 (15.0) (4.0) 76,110 75,301 1.1 83,347 76,110 9.5 Other income 1,919 2,700 1,930 2,473 (28.9) (0.6) (22.4) 18,003 16,303 10.4 18,503 18,003 2.8 Interest expense (302) (300) (431) (304) 0.6 (30.0) (0.7) (1,302) (1,467) (11.2) (1,056) (1,302) (18.9) Depreciation expense (5,839) (5,800) (4,295) (5,696) 0.7 36.0 2.5 (23,141) (20,030) 15.5 (26,252) (23,141) 13.4 Extraordinary income/exp 13,671 — 245 (1,047) 13,671 (227) — 13,671 Profit before tax 27,384 13,858 18,550 14,103 97.6 47.6 94.2 83,340 69,879 19.3 74,542 83,340 (10.6) Tax expense (4,787) (4,158) (5,978) (4,411) 15.1 (19.9) 8.5 (20,901) (15,867) 31.7 (22,363) (20,901) 7.0 Profit after tax 22,597 9,701 12,572 9,692 132.9 79.7 133.1 62,440 54,012 15.6 52,179 62,440 (16.4) Adj PAT 8,927 9,701 12,572 10,426 (8.0) (29.0) (14.4) 48,769 55,305 (11.8) 52,179 48,769 7.0 Adj EPS 7.8 8.5 11.0 9.2 (8.0) (29.0) (14.4) 42.9 48.6 (11.8) 45.9 42.9 7.0 Raw material cost as % of net sales 67.9 68.0 67.4 68.3 68.0 68.1 68.8 68.0 Staff cost as % of net sales 6.8 6.0 6.3 5.5 6.5 6.2 6.2 6.5 Other expenses as % of net sales 11.3 12.4 10.5 12.7 12.0 11.4 11.5 12.0 Gross margin (%) 32.1 32.0 32.6 31.7 32.0 31.9 31.3 32.0 EBITDA margin (%) 14.0 13.6 15.8 13.5 13.5 14.2 13.5 13.5 Tax rate (%) 17.5 30.0 32.2 31.3 25.1 22.7 30.0 25.1 Volumes (units) Automotive division 131,689 131,689 140,101 174,679 (6.0) (24.6) 618,167 608,597 1.6 624,877 618,167 1.1 Tractors 86,350 86,350 100,784 60,878 (14.3) 41.8 330,436 330,436 — 356,871 330,436 8.0 Total volumes 218,039 218,039 240,885 235,557 (9.5) (7.4) 948,603 939,033 1.0 981,748 948,603 3.5 Volume mix (%) Automotive division 60.4 60.4 58.2 74.2 65.2 64.8 63.6 65.2 Tractors 39.6 39.6 41.8 25.8 34.8 35.2 36.4 34.8 Total volumes 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Segmental break up Revenue break up Automotive 79,858 77,061 80,326 102,217 3.6 (0.6) (21.9) 375,345 346,152 8.4 410,370 375,345 9.3 Farm Equipment 43,822 45,473 50,069 32,059 (3.6) (12.5) 36.7 174,988 168,747 3.7 192,259 174,988 9.9 Others (including eliminations) 5,229 4,500 4,055 3,803 14,671 13,584 15,844 14,671 EBIT Automotive 5,180 5,009 7,575 9,002 3.4 (31.6) (42.5) 30,028 27,823 7.9 32,830 30,028 9.3 Farm Equipment 8,447 8,185 10,454 5,187 3.2 (19.2) 62.9 31,498 32,651 (3.5) 34,607 31,498 9.9 EBIT margin (%) Automotive 6.5 6.5 9.4 8.8 8.0 8.0 8.0 8.0 Farm Equipment 19.3 18.0 20.9 16.2 18.0 19.3 18.0 18.0 Average selling prices (Rs) Automotive 606,414 585,172 573,341 585,172 3.6 5.8 3.6 607,190 568,770 6.8 656,721 607,190 8.2 Farm Equipment 507,489 526,607 496,793 526,607 (3.6) 2.2 (3.6) 529,567 510,678 3.7 538,735 529,567 1.7

Source: Company, Kotak Institutional Equities estimates

30 KOTAK INSTITUTIONAL EQUITIES RESEARCH Mahindra & Mahindra Automobiles & Components

Exhibit 2: Automotive segment EBIT declined by 83% yoy led by steep losses in Ssangyong Motors Interim consolidated quarterly results, March fiscal year-ends (` mn, %)

1QFY20 1QFY19 4QFY19 Yoy (%) QoQ (%) Revenues (Rs mn) Automotive segment 135,478 161,282 140,542 (16.0) (3.6) Farm equipment 60,779 45,218 66,573 34.4 (8.7) Financial Services 28,220 28,084 24,448 0.5 15.4 Hospitality 6,125 6,557 4,871 (6.6) 25.7 Real estate 1,196 2,452 1,577 (51.2) (24.1) Others 35,051 35,373 29,936 (0.9) 17.1 Total 266,850 278,965 267,946 (4.3) (0.4) Less: Inter-segment revenue 6,439 7,377 7,331 (12.7) (12.2) Consolidated revenues 260,410 271,588 260,615 (4.1) (0.1) EBIT (excluding exceptional) Automotive segment 1,121 6,754 6,824 (83.4) (83.6) Farm equipment 7,664 1,308 9,507 486.1 (19.4) Financial Services 1,303 10,152 4,963 (87.2) (73.8) Hospitality 215 401 (91) Real estate 111 165 197 (32.9) (43.9) Others 1,062 (401) 551 Consolidated EBIT 11,474 18,379 21,952 (37.6) (47.7)

Source: Company, Kotak Institutional Equities estimates

Exhibit 3: Introduction of XUV300 has led to improvement in volume mix in 1QFY20 Model-wise volumes of M&M, 1QFY17-1QFY20 (units, %)

1QFY17 2QFY17 3QFY17 4QFY17 1QFY18 2QFY18 3QFY18 4QFY18 1QFY19 2QFY19 3QFY19 4QFY19 1QFY20 Volumes (units) Bolero 13,903 14,514 19,190 21,721 19,480 21,742 18,835 25,311 22,822 19,635 17,636 23,991 16,375 Scorpio 11,956 11,300 11,906 14,155 12,498 15,035 10,415 15,986 11,455 11,423 10,199 14,760 10,477 Xylo 1,521 1,831 1,396 1,840 1,691 2,131 1,351 2,146 1,465 1,783 863 1,140 1,066 XUV500 7,373 7,127 5,397 6,997 5,690 8,594 5,345 5,784 8,482 6,746 4,329 6,381 3,832 Quanto/NuvoSport 1,145 696 375 201 137 71 42 4 1 1 — — — Rexton/Alturas G4 21 13 83 4 3 1 18 64 6 37 357 1,072 484 TUV300 5,552 7,309 6,183 7,197 6,450 7,360 6,717 8,491 5,803 5,803 4,174 3,444 3,853 KUV100 13,086 8,268 5,751 8,593 5,579 4,263 7,471 8,229 4,509 3,635 2,051 1,502 786 Jeeps, Gio and Maximo 4,215 3,937 3,292 4,861 4,207 6,245 4,600 6,127 5,729 6,878 4,778 6,161 4,056 Marazzo — — — — — — — — — 4,591 10,403 9,136 4,279 XUV300 — — — — — — — — — — 9,532 14,082 Domestic utilitiy vehicles 58,772 54,995 53,573 65,569 55,735 65,442 54,794 72,142 60,272 60,532 54,790 77,119 59,290 Volume Mix (%) Bolero 23.7 26.4 35.8 33.1 35.0 33.2 34.4 35.1 37.9 32.4 32.2 31.1 27.6 Scorpio 20.3 20.5 22.2 21.6 22.4 23.0 19.0 22.2 19.0 18.9 18.6 19.1 17.7 Xylo 2.6 3.3 2.6 2.8 3.0 3.3 2.5 3.0 2.4 2.9 1.6 1.5 1.8 XUV500 12.5 13.0 10.1 10.7 10.2 13.1 9.8 8.0 14.1 11.1 7.9 8.3 6.5 Quanto/NuvoSport 1.9 1.3 0.7 0.3 0.2 0.1 0.1 0.0 0.0 0.0 — — — Rexton 0.0 0.0 0.2 0.0 0.0 0.0 0.0 0.1 0.0 0.1 0.7 1.4 0.8 TUV300 9.4 13.3 11.5 11.0 11.6 11.2 12.3 11.8 9.6 9.6 7.6 4.5 6.5 KUV100 22.3 15.0 10.7 13.1 10.0 6.5 13.6 11.4 7.5 6.0 3.7 1.9 1.3 Jeeps, Hard Tops 7.2 7.2 6.1 7.4 7.5 9.5 8.4 8.5 9.5 11.4 8.7 8.0 6.8 Marazzo — — — — — — — — — 7.6 19.0 11.8 7.2 XUV300 — — — — — — — — — — — 12.4 23.8 Domestic utilitiy vehicles 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0

Source: Company, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 31 Automobiles & Components Mahindra & Mahindra

Exhibit 4: We expect overall volume to grow at a CAGR of 5% over FY2019-22E Volume assumptions, March fiscal year-ends, 2012-22E (units)

2012 2013 2014 2015 2016 2017 2018 2019 2020E 2021E 2022E Volumes (units) Bolero 104,064 117,665 107,178 100,553 81,559 69,328 85,368 84,144 72,000 72,000 79,200 Scorpio 50,985 50,168 50,950 51,553 48,087 49,317 53,934 47,837 44,000 44,000 46,200 Xylo 27,691 25,067 13,970 8,472 7,274 6,588 7,319 5,251 3,500 3,500 3,500 XUV500 13,819 45,418 30,007 34,418 36,320 26,894 25,413 25,938 16,000 16,000 16,000 Quanto/Nuvo Sport — 16,434 7,415 1,939 1,815 2,417 254 2 — — — Rexton — 1,783 1,843 1,010 228 121 86 — — — — Jeeps, Hard Tops 5,602 7,199 8,058 8,804 6,525 5,935 6,981 6,095 4,800 5,040 5,292 TUV300 — — — — 24,189 26,241 29,018 19,224 17,000 17,000 15,000 KUV100 Petrol — — — — 6,395 17,000 14,000 7,000 2,000 2,000 5,000 KUV100 Diesel 7,816 18,698 11,542 4,697 500 450 405 Verito/Alturas G4 17,895 15,348 9,734 3,184 3,393 3,219 725 2,904 2,000 2,000 2,000 Marazzo — — — — — — — 24,130 24,000 25,200 26,460 XUV300 — — — — — — — 9,532 60,000 63,000 66,150 Exports 29,176 32,457 29,660 30,196 36,033 37,241 28,221 38,595 42,455 46,700 53,705 Passenger vehicles 249,232 311,539 258,815 240,129 259,633 262,999 262,861 275,349 288,255 296,890 318,912 Yoy growth (%) 25.0 (16.9) (7.2) 8.1 1.3 (0.1) 4.8 4.7 3.0 7.4 MTBL 13,818 11,902 8,161 8,915 12,130 14,341 17,228 19,249 19,249 17,324 19,923 Pick ups 73,134 102,885 123,715 129,800 140,219 150,381 184,649 214,530 214,530 214,530 246,710 Maxximo and Gio 79,539 71,348 53,872 29,157 27,141 26,598 29,790 32,769 32,769 32,769 37,684 3 wheelers 67,440 65,510 62,614 56,764 54,975 52,306 54,625 66,699 63,364 63,364 66,532 Tractors 235,452 223,885 267,634 234,025 213,591 262,992 319,623 330,436 330,436 356,871 399,695 Total volumes 718,615 787,069 774,811 698,790 707,689 769,617 868,776 939,032 948,603 981,748 1,089,456 Yoy growth (%) 9.5 (1.6) (9.8) 1.3 8.8 12.9 8.1 1.0 3.5 11.0

Source: Company, Kotak Institutional Equities estimates

Exhibit 5: We value M&M at `800/share SoTP, March fiscal year-ends (units)

Value per EPS Multiple share (Rs/share) (X) (Rs) Comment M&M standalone + MVML 38.4 14.0 538 Based on 14X March 2021 less dividend income from subs Subsidiaries 261 Tech Mahindra 131 Based on KIE target price of Rs730/share M&M Financial Services Ltd 72 Based on KIE target price of Rs350/share Ssangyong Motors 21 Based on 6X CY2019E EBITDA Mahindra Logistics 12 Based on KIE target price of Rs400/share Mahindra CIE Automotive Ltd 10 Based on KIE target price of Rs215/share Mahindra Holidays 10 Based on current market price Mahindra Lifespace Developers Ltd 6 Based on current market price SOTP-based value 800

Notes: (a) The subsidiaries have been valued at a holding company discount of 20%.

Source: Company, Kotak Institutional Equities estimates

32 KOTAK INSTITUTIONAL EQUITIES RESEARCH Mahindra & Mahindra Automobiles & Components

Exhibit 6: We expect M&M’s EPS to grow by 4% CAGR over FY2019-22E M&M+MVML profit model, balance sheet and cash flow, March fiscal year-ends, 2012-22E (` mn)

2012 2013 2014 2015 2016 2017 2018 2019 2020E 2021E 2022E Volumes 718,615 787,069 774,811 698,790 707,689 769,617 868,776 939,032 948,603 981,748 1,089,456 Avg realization 436,689 487,335 500,988 529,025 549,505 537,643 547,637 562,795 595,616 629,971 634,825 Net sales 313,811 383,566 388,171 369,677 388,879 413,779 475,774 528,482 565,003 618,473 691,614 Raw materials 223,947 273,971 269,199 257,269 265,013 280,192 316,280 359,977 384,202 425,200 472,373 Staff costs 17,946 19,977 23,108 24,936 25,720 29,920 31,630 32,830 36,770 38,608 43,241 Other expenses 30,306 36,326 43,383 41,440 45,683 49,625 57,429 60,375 67,922 71,318 79,876 Total expenses 272,199 330,274 335,690 323,645 336,416 359,737 405,339 453,182 488,894 535,126 595,490 EBITDA 41,613 53,292 52,481 46,033 52,463 54,042 70,435 75,301 76,110 83,347 96,125 Other income 4,735 5,697 6,648 8,201 7,845 12,064 9,517 16,303 18,003 18,503 20,503 Interest expense 2,874 2,964 3,611 3,039 2,653 2,426 1,882 1,467 1,302 1,056 781 Depreciation 6,699 8,178 9,760 10,980 12,047 16,745 16,254 20,030 23,141 26,252 29,363 Extraordinary income 1,083 906 528 3,357 60 5,485 4,336 (227) 13,671 — — Profit before tax 37,858 48,753 46,286 43,572 45,667 52,420 66,152 69,879 83,340 74,542 86,484 Tax expenses 7,887 12,410 7,235 9,339 12,230 13,181 19,920 15,867 20,901 22,363 25,945 Profit after tax 29,970 36,343 39,051 34,233 33,438 39,239 46,232 54,012 62,440 52,179 60,539 Adj profit after tax 28,888 35,437 38,523 30,876 33,394 35,400 43,197 54,171 48,769 52,179 60,539 EPS FD 25.4 31.1 33.9 27.1 29.3 31.1 38.0 47.6 42.9 45.9 53.2 EPS FD ex subs dividends 24.5 30.2 31.9 24.1 26.3 26.5 33.9 39.7 35.8 38.4 45.4 Ratios (%) EBITDA margin (%) 13.3 13.9 13.5 12.5 13.5 13.1 14.8 14.2 13.5 13.5 13.9 Gross margin (%) 28.6 28.6 30.6 30.4 31.9 32.3 33.5 31.9 32.0 31.3 31.7 Raw material cost as % of sales 71.4 71.4 69.4 69.6 68.1 67.7 66.5 68.2 68.0 68.8 68.3 Staff cost as % of sales 5.7 5.2 6.0 6.7 6.6 7.2 6.6 6.2 6.5 6.2 6.3 Other expenses as % of sales 9.7 9.5 11.2 11.2 11.7 12.0 12.1 11.4 12.0 11.5 11.5 Effective tax rate (%) 20.8 25.5 15.6 21.4 26.8 25.1 30.1 22.7 25.1 30.0 30.0

Source: Company, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 33 BUY Tata Steel (TATA) Metals & Mining AUGUST 08, 2019 RESULT Coverage view: Attractive

Weak quarter; margins under pressure: TATA’s 1QFY20 adjusted EBITDA was 4% Price (`): 382 below estimate with margin miss at both, domestic and Europe businesses. Weak steel Fair Value (`): 560 spreads and sluggish domestic demand should keep margins under pressure but we see BSE-30: 36,691 it bottoming out in 2QFY20E. TATA suffered a setback on SEA division divestment plan but remains committed to exit. We cut EBITDA by 12-3% for FY2020-21E, fair value to Rs560 (from Rs614) and maintain BUY on attractive valuations.

Company data and valuation summary Tata Steel Stock data Forecasts/Valuations 2019 2020E 2021E 52-week range (Rs) (high,low) 648-376 EPS (Rs) 90.3 45.2 65.8 Market Cap. (Rs bn) 433.4 EPS growth (%) 30.0 (50.0) 45.6 Shareholding pattern (%) P/E (X) 4.2 8.5 5.8 Promoters 33.1 Sales (Rs bn) 1,576.7 1,553.8 1,600.3 FIIs 15.7 Net profits (Rs bn) 103.5 51.8 80.5 MFs 13.2 EBITDA (Rs bn) 293.8 225.0 252.6 Price performance (%) 1M 3M 12M EV/EBITDA (X) 4.7 5.7 4.7 Absolute (20.2) (28.0) (33.4) ROE (%) 16.5 7.6 10.7 Rel. to BSE-30 (14.0) (24.9) (31.6) Div. Yield (%) 2.6 2.6 2.6

1QFY20— margins impacted by weak steel spreads and sluggish domestic demand TATA’s adjusted consolidated EBITDA of Rs52 bn (-18% yoy, -26% qoq) was 4% lower than our estimate of R s54.4 bn.  Standalone – weak demand and high costs. Volumes at 3 mn tons were +1% yoy with weak domestic demand resulting in higher exports. Export volumes increased by 82% yoy (partly due to Bhushan consolidation) and formed 8% of total mix versus 5% in 1QFY19. Realization at Rs53,460/ton was flat qoq (-3% yoy) with benefits from contracted volumes. Costs at Rs40,488/ton was +7% yoy and 3% qoq adjusting for IND AS 116 impact of Rs1.7bn. Adjusted EBITDA at Rs12,574/ton (-26% yoy, -9% qoq) suffered from higher costs.  Europe. EBITDA/ton declined to US$4/ton in 1QFY20 (US$101/ton in 1QFY19, US$66/ton in 4QFY19) due to weak spreads led by a sharp increase in iron ore prices and stagnant steel prices. Volumes declined by 8% yoy due to planned shutdowns and unplanned outages.  Bhushan Steel. EBITDA declined 2% qoq to Rs7.7 bn due to 25% sequential decline in volumes while EBITDA/ton increased to Rs9,000 (+31% qoq) led by higher realizations but expect price and margins to face headwinds in near-term.

Margins to see further pressure but expect it to bottom out in 2QFY20E

Management guided that weak domestic demand is resulting in higher exports and expects Rs3,000/ton qoq decline in steel realization in 2QFY20E. We expect only marginal cost offset with US$5/ton decline in coking coal. Europe spreads should also remain under pressure given high cost iron ore inventory. However, with sharp correction in iron ore (-20%) and coking coal

(-15%) in the last two weeks, we expect margins to bottom out in 2QFY20E. Sumangal Nevatia

Maintain BUY with revised fair value of Rs560 (Rs614 earlier)

TATA announced that its divestment deal for SEA (South-East Asia) division is called off and it Prayatn Mahajan has entered into a fresh MOU with Synergy Fund for the divestment. We have cut EBITDA by 12% for FY2020E (lower domestic steel prices, lower spreads in Europe) and 3% for FY2021E (partially lower Europe margins). With lower earnings and lower value to SEA division, we revise our fair value to Rs560 (from Rs614) earlier. Maintain BUY rating given attractive valuation at 5X EV/EBITDA FY2021E (20% below mean), strong growth visibility and improving balance sheet.

[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. Tata Steel Metals & Mining

Exhibit 1: Interim results of Tata Steel (consolidated), March fiscal year-ends (Rs mn)

(% chg.) 1QFY20 1QFY20E 1QFY19 4QFY19 KIE yoy qoq FY2020E FY2019 (%chg) Net sales 359,471 379,354 354,941 424,239 (5) 1 (15) 1,553,782 1,576,690 (1) Expenditure (307,422) (324,956) (291,413) (354,106) (5) 5 (13) (1,328,799) (1,282,857) 4 Consumption of raw materials (137,621) (163,117) (124,185) (177,749) (644,904) (607,804) Staff Cost (48,994) (42,681) (47,394) (46,510) (190,193) (187,589) Other Expenditure (120,807) (119,158) (119,834) (129,847) (493,702) (487,464) EBITDA 52,049 54,397 63,527 70,133 (4) (18) (26) 224,983 293,833 (23) Other income 2,511 4,923 3,528 4,899 10,458 14,206 Interest (18,064) (19,506) (16,578) (19,378) (83,649) (76,601) Depreciation (20,828) (18,898) (17,476) (18,805) (78,313) (73,418) Pretax profits 15,667 20,916 33,002 36,849 (25) (53) (57) 73,478 158,020 (54) Extraordinaries 1,880 - (3,286) 5,115 - (1,210) Deferred tax (1,735) (8,638) 8,925 (6,834) 7,147 97 Current tax (9,504) - (19,885) (12,157) (32,864) (67,281) Net income 6,309 12,278 18,756 22,973 (49) (66) (73) 47,761 89,626 (47) Minority interest 100 - 173 775 4,000 10,962 Share of profit from associates 522 - 472 562 - 2,247 PAT after minority interest 6,931 12,278 19,401 24,309 (44) (64) (71) 51,761 102,834 (50) Adjusted PAT 5,051 12,278 22,687 19,194 (59) (78) (74) 51,761 103,530 (50) Ratios (45) EBITDA margin (%) 14.5 14.3 17.9 16.5 14.5 18.6 ETR (%) 71.7 41.3 33.2 51.5 35.0 42.5 Adjusted EPS (Rs) 4.4 4.4 4.4 4.4 4.4 4.4

Source: Company, Kotak Institutional Equities estimates

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

(% chg.) 1QFY20 1QFY20E 1QFY19 4QFY19 KIE yoy qoq FY2020E FY2019 (%chg) Net sales 160,913 160,919 164,055 191,296 (0) (2) (16) 702,968 706,109 (0) Expenditure (123,065) (121,276) (113,335) (141,841) 1 9 (13) (488,419) (472,255) 3 Consumption of raw materials (47,279) (55,494) (42,928) (67,046) (15) 10 (29) (229,899) (210,938) Staff Cost (13,523) (12,820) (12,820) (11,587) 5 5 17 (54,012) (51,311) Other Expenditure (62,263) (52,962) (57,588) (63,208) 18 8 (1) (204,508) (210,006) EBITDA 37,849 39,643 50,719 49,455 (5) (25) (23) 214,549 233,855 (8) Other income 1,778 5,380 5,060 5,380 (67) (65) (67) 20,303 24,051 Interest (7,231) (6,543) (6,834) (6,543) 11 6 11 (28,131) (28,236) Depreciation (9,677) (9,529) (9,867) (9,529) 2 (2) 2 (38,749) (38,030) Pretax profits 22,719 28,950 39,079 38,762 (22) (42) (41) 167,972 191,640 (12) Extraordinaries 1,313 - (3,347) (110) (139) (1,291) - (1,142) Tax (8,642) (9,843) (12,550) (13,741) (12) (31) (37) (33,786) (56,941) Net income 15,390 19,107 23,182 24,911 (19) (34) (38) 134,186 133,557 0 Adjusted net income 15,390 19,107 23,182 24,911 (19) (34) (38) 112,396 105,332 Ratios EBITDA margin (%) 23.5 24.6 30.9 25.9 27.4 29.1 ETR (%) 36.0 34.0 35.1 35.6 23.1 35.1 EPS (Rs) 12.3 16.7 23.1 21.8 56.9 88.0 Per ton analysis (Rs/ton) Realisations 53,460 51,540 55,237 53,434 4 (3) 0 55,178 55,599 (1) EBITDA 12,574 13,216 17,077 13,814 (5) (26) (9) 15,130 16,191 (7) Steel sales (mn tons) 3.0 3.0 3.0 3.6 0 1 (16) 12.7 12.7 0

Source: Company, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 35 Metals & Mining Tata Steel

Changes in our estimate

Exhibit 9 highlights key changes in our estimate.

We cut our FY2020-21E EBITDA estimates by 12-3% primarily due to :

 Lower EBITDA/ton due to lower domestic premiums: higher exports and lower domestic demand shall result in lower domestic premiums in FY20. We cut our EBITDA/ton estimates by 6% in FY2021. However, we maintain our HRC price forecasts.

 We cut our Europe EBITDA/ton estimate by 54%-16% in FY2020-22E factoring the sharp increase in iron ore costs

This has resulted in 29-6% lower EPS in FY2020-21E.

Other result and conference call highlights

 South East Asia deal called off - a minor setback: Tata Steel has announced that it has called off the deal to sell 70% stake in its Southeast Asia steel business to China's state-owned HBIS Group. While the press release mentioned that failure to get state approval in China as the reason however, the current slowdown in steel cycle appears to have played a role in the deal being called off. We see this as a minor setback for Tata Steel and calculate a negative impact of Rs21/share on our fair value.

Tata Steel was to sell a 70% stake in its South East Asia business to HBIS for $327 million in cash. With US$150mn of debt, the deal valued the South East Asia business at an EV of US$617mn. We valued the remaining 30% stake in SEA at Rs8/share in our SOTP implying an EV as per the deal.

 MoU with synergy Metals: The board has approved the signing of a MOU with Synergy Metals and Mining Fund to divest 70% of our stake in Tata Steel Thailand in a 70:30 partnership for the Thailand Business.

 Bhushan Steel. EBITDA declined 2% qoq to Rs7.8 bn due to 25% qoq decline in volumes amid sluggish demand in domestic and international markets. Increase in realizations by 6% qoq led to an increase in EBITDA/ton by 31% qoq to Rs9,000/ton. TATA expects to achieve exit run-rate of 5mtpa production from BSL by end FY2020E.

 Management commentary on steel prices and costs. The management expects steel prices to decline by Rs3,000/ton over the average realization of 1QFY19 given the recent weakness in domestic and international prices. Steel prices have remained in the range of US$490-510 in June-July. The company highlighted that the impact of current prices shall be reflected in the next two quarters. Coking coal cost for Tata Steel will be lower by US$5-7/ton in 2QFY19 while iron ore cost at Europe is likely to remain at US$107/ton in 2QFY19.

 Guidance on steel volumes. The company highlighted weakness in domestic markets on account of low demand from the auto sector. The company expects to increase exports in the coming few quarters in order to avoid holding inventory. The company was able to replace poor demand from autos with other segment and expects the demand to pick up from 3QFY19 with the onset of the festive season. The management expects FY2019 steel volumes for standalone steel operations to increase by 1 mt (12.6 mn tons in FY19) to 13.6 mtpa in FY2020 due to ramp up of Bhushan steel and Usha Martin plants

 Capex spends. Total capex spends for 1QFY20 stood at Rs22.5 bn mainly towards KPO-II expansion. To keep leverage under control, management has reduced capex guidance by Rs25bn for FY2020E and now expects to spend Rs80bn in the current year. We note that this does not delay the timeline of KPO II expansion and the CRM mill complex is expected to commission in FY2021E.

36 KOTAK INSTITUTIONAL EQUITIES RESEARCH Tata Steel Metals & Mining

 Net debt increases due to IND-AS 115 and Usha Martin acquisition; TATA’s gross debt increased by Rs66 bn to Rs106 bn on account of recognition of lease obligations as per IndAS 116 (Rs28.4 bn) and acquisition of UML's steel business (Rs40bn). The company has cash reserves of Rs35 bn—the total net-debt was Rs103 bn excluding Rs23 of hybrid perpetual securities.

 Deleveraging: The company has maintained its US$1bn or Rs70bn deleveraging target for FY2020E and expects to release working capital by Rs15 bn in the current year.

Exhibit 3: Interim results of Tata Steel International operations, 1QFY18 - 1QFY20 (Rs mn)

1QFY18 2QFY18 3QFY18 4QFY18 1QFY19 2QFY19 3QFY19 4QFY19 1QFY20 International operations Revenues 165,862 182,432 178,508 174,241 190,886 256,421 216,800 232,943 198,558 EBITDA 20,077 13,454 10,688 15,900 12,808 29,234 21,664 20,678 14,201 - Tata Steel Europe Revenues 140,790 150,060 146,930 162,079 164,290 159,290 158,500 165,680 144,950 EBITDA 12,530 7,530 6,320 11,542 16,660 11,110 9,470 11,960 620 - Others Revenues 5,122 8,132 6,658 (14,148) 556 67,501 32,580 67,263 53,608 EBITDA 7,327 4,574 2,528 3,408 (4,952) 17,004 12,094 8,718 13,581

Source: Company, Kotak Institutional Equities estimates

Exhibit 4: Tata Steel Europe EBITDA/ton quarterly trend, 1QFY18 - 1QFY20

1QFY18 2QFY18 3QFY18 4QFY18 1QFY19 2QFY19 3QFY19 4QFY19 1QFY20 Tata Steel Europe Deliveries (mn tons) 2.4 2.6 2.4 2.6 2.5 2.3 2.4 2.6 2 Turnover (US$ mn) 2,183 2,334 2,270 2,518 2,451 2,273 2,199 2,352 2,085 Adjusted EBITDA (US$ mn) 194 117 98 179 249 159 131 170 9 Adjusted EBITDA/ton (US$) 81 45 40 70 101 70 56 66 4 Tata Steel Europe (Rs mn) Revenues 140,790 150,060 146,930 162,079 164,290 159,290 158,500 165,680 144,950 EBITDA 12,530 7,530 6,320 11,542 16,660 11,110 9,470 11,960 620

Source: Company, Kotak Institutional Equities estimates

Exhibit 5: Tata Steel India, Quarterly analysis of cost-structure and profitability, 1QFY18 -1QFY20 (Rs/ton, US$/ton)

1QFY18 2QFY18 3QFY18 4QFY18 1QFY19 2QFY19 3QFY19 4QFY19 1QFY20 Tata Steel India (Rs/ton) Realization (Rs/ ton) 47,166 46,172 47,260 53,732 55,237 56,296 57,824 53,434 53,460 Raw material cost 13,009 17,692 14,336 14,233 14,454 16,340 16,500 18,728 15,707 Employee cost 4,210 3,620 3,475 4,652 4,316 4,332 4,421 3,236 4,493 Other expenditure 19,160 13,901 15,425 18,976 19,390 16,769 21,586 17,656 20,685 Total Cost 36,379 35,213 33,235 37,860 38,160 37,440 42,507 39,620 40,885 EBITDA/ ton (Rs/ ton) 10,786 10,959 14,025 15,872 17,077 18,856 15,318 13,814 12,574

Source: Company, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 37 Metals & Mining Tata Steel

Exhibit 6: Tata Steel's net debt increased by Rs82 bn qoq to Rs1,054 bn in 1QFY20 Tata steel group quarterly net debt trend, 4QFY14 - 1QFY20 (Rs bn)

Net debt (Rs bn)

1150 1,054 1050 972 950

850

750

650

550

4QFY14

1QFY15

2QFY15

3QFY15

4QFY15

1QFY16

2QFY16

3QFY16

4QFY16

1QFY17

2QFY17

3QFY17

4QFY17

1QFY18

2QFY18

3QFY18

4QFY18

1QFY19

2QFY19

3QFY19

4QFY19 1QFY20

Source: Company, Kotak Institutional Equities estimates

Exhibit 7: Tata Steel BSL EBITDA/ton quarterly trend, 1QFY19 - 1QFY20

1QFY19 2QFY19 3QFY19 4QFY19 1QFY20 %yoy %qoq International operations Revenues 44,205 56,511 46,522 51,364 41,244 (7) (20) EBITDA 8,200 11,730 10,080 7,860 7,740 (6) (2) Volumes 0.9 1.1 0.9 1.1 0.9 1 (25) EBITDA/Ton 9,639 10,289 10,957 6,895 9,000 (7) 31

Source: Company, Kotak Institutional Equities estimates

Exhibit 8: Leverage ratios will improve with recovery in EBITDA aided by capacity ramp ups and increasing cost efficiencies Tata Steel consolidated leverage details, March fiscal year ends (Rs mn), FY2017-22E (X)

2017 2018 2019 2020E 2021E 2022E Existing EBITDA (Rs mn) 170,078 214,332 293,833 224,983 252,593 285,620 Net debt (Rs mn) 744,767 715,753 972,070 940,472 900,804 851,394 Net debt/ EBITDA (X) 4.4 3.3 3.3 4.2 3.6 3.0

Source: Company, Kotak Institutional Equities estimates

38 KOTAK INSTITUTIONAL EQUITIES RESEARCH Tata Steel Metals & Mining

Exhibit 9 : Tata Steel, changes in estimates, March fiscal year ends, FY2020-2022E

Revised estimates Old estimates Change (%) 2020E 2021E 2022E 2020E 2021E 2022E 2020E 2021E 2022E Earnings (consolidated) Net sales 1,553,782 1,600,256 1,620,230 1,587,018 1,607,058 1,625,748 (2) (0) (0) EBITDA 224,983 252,593 285,620 255,894 259,394 291,138 (12) (3) (2) Adj. PAT 51,761 80,516 104,288 72,503 85,587 107,874 (29) (6) (3) EPS (Rs) 45.2 65.8 85.2 63.3 69.9 88.1 (29) (6) (3) Volumes India (mn tons) 12.7 17.8 18.5 12.7 17.8 18.5 - - - Europe (mn tons) 9.6 9.6 9.6 9.6 9.6 9.6 - - - SEA 2.6 2.6 2.6 2.6 2.6 2.6 - - - Pricing HRC prices - China (US$/ton) 510 512 517 510 512 517 - - - Re/US$ rate 69.3 71.0 72.0 69.3 71.0 72.0 - - - Tata Steel India Net sales 665,824 936,708 965,905 676,462 936,708 965,905 (2) - - EBITDA 148,958 215,937 244,837 157,936 215,937 244,837 (6) - - Adj. PAT 68,595 100,171 117,164 75,280 100,841 117,164 (9) (1) - EBITDA/ton 11,692 12,131 13,234 12,397 12,131 13,234 (6) - - Re/US$ rate 69.3 71.0 72.0 69.3 71.0 72.0 - - - Tata Steel Europe Net sales 8,539 8,797 8,558 8,802 8,893 8,634 (3) (1) (1) EBITDA 228 510 571 491 606 648 (54) (16) (12) EBITDA/ton 24 53 60 51 63 68 (54) (16) (12) TATA Steel SEA EBITDA/ton 21 23 25 21 23 25 - - -

Source: Kotak Institutional Equities estimates

Exhibit 10: Tata Steel, Key assumptions, March fiscal-year ends, FY2017- 2022E (Rs mn)

2017 2018 2019 2020E 2021E 2022E Tata Steel (India) Average HRC Price (US$/ton) 506 618 663 603 618 624 Crude Steel capacity (mn tons) 12.7 12.7 12.7 12.9 18.6 18.6 Volume (mn tons) 11.0 12.2 12.7 12.7 17.8 18.5 EBITDA margin (%) 24.7 26.5 29.1 22.4 23.1 25.3 EBITDA/ton (US$/ton) 161 201 231 169 171 184 Europe Average HRC Price (US$/ton) 781 902 964 891 918 893 Volume (mn tons) 10 10 10 10 10 10 EBITDA/ton (US$/ton) 71 55 81 24 53 60

Source: Company, Kotak Institutional Equities estimates

Exhibit 11: Tata Steel, valuation, March fiscal year-ends, March 2021E basis (Rs mn)

EBITDA Multiple Enterprise value Net Debt Equity Value Equity Value FY20 21E (Rs mn) (X) (Rs mn) (Rs mn) (Rs mn) (Rs/share) India 215,937 6.0 1,295,619 732,804 562,815 460 Europe 36,239 4.0 144,956 168,000 (23,044) (19) Total Enterprise Value 252,175 5.7 1,440,575 900,804 539,770 441 Add: 75% of KPO Phase II CWIP 125,700 103 Add: Value of investments 3,637 3 South East Asia 16,100 13 Arrived market capitalization 685,208 560 Fair Value (Rs) 560

Source: Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 39 Metals & Mining Tata Steel

Exhibit 12: Tata Steel (consolidated), Profit model, balance sheet and cash flow model, March fiscal year-ends, 2017-2022E (Rs mn)

2017 2018 2,019 2020E 2021E 2022E Profit model (Rs mn) Net sales 1,122,994 1,227,937 1,576,690 1,553,782 1,600,256 1,620,230 EBITDA 170,078 214,332 293,833 224,983 252,593 285,620 Other income 5,275 8,811 14,206 10,458 15,958 18,419 Interest (50,722) (54,547) (76,601) (83,649) (73,928) (74,156) Depreciation (56,729) (57,417) (73,418) (78,313) (78,444) (78,672) Profit before tax 67,902 111,179 158,020 73,478 116,179 151,212 Extraordinaries (43,242) 95,991 (1,210) — — — Taxes (27,780) (33,905) (67,184) (25,717) (40,663) (52,924) Profit after tax (3,120) 173,265 89,626 47,761 75,516 98,288 Minority interest (722) (43,085) 10,962 4,000 5,000 6,000 Share in profit/(loss) of associates 77 2,391 2,247 - - - Reported net income (3,766) 132,571 102,834 51,761 80,516 104,288 Adjusted net income 40,200 79,665 103,530 51,761 80,516 104,288 Fully diluted EPS (Rs) 41 70 90 45 66 85 Balance sheet (Rs mn) Equity 355,443 585,956 666,501 704,480 806,270 895,824 Deferred tax liability 100,301 105,699 124,599 117,452 108,777 103,993 Total Borrowings 850,709 944,221 1,030,733 990,733 950,733 910,733 Current liabilities 410,863 406,416 431,807 449,504 457,462 463,168 Minority interest 16,017 9,365 23,645 19,645 14,645 8,645 Other Non Current Liabilities - 45,922 58,540 58,540 58,540 58,540 Total liabilities 1,733,332 2,097,579 2,335,824 2,340,353 2,396,426 2,440,902 Net fixed assets 885,118 903,228 1,184,510 1,145,918 1,107,911 1,070,104 Capital work in progress 157,841 166,144 186,412 236,412 316,412 383,812 Goodwill 34,947 57,821 59,909 59,909 59,909 59,909 Investments 125,367 178,995 57,382 67,882 69,562 69,562 Deferred tax assets 8,859 10,358 8,090 8,090 8,090 8,090 Cash 49,211 79,379 33,414 25,012 24,680 34,090 Other current assets 471,989 449,279 489,825 480,848 493,580 499,053 Other Non current assets - 252,377 316,283 316,283 316,283 316,283 Total assets 1,733,332 2,097,579 2,335,824 2,340,354 2,396,426 2,440,902 Free cash flow (Rs mn) Operating cash flow excl. working capital 112,319 125,190 159,173 118,927 145,285 172,176 Working capital changes (48,907) (92,755) 25,905 26,674 (4,775) 234 Capital expenditure (74,269) (72,995) (86,243) (89,722) (120,437) (108,265) Free cash flow (10,858) (40,560) 98,835 55,880 20,074 64,144 Ratios EBITDA margin (%) 15.1 17.5 18.6 14.5 15.8 17.6 EBIT margin (%) 10.1 12.8 14.0 9.4 10.9 12.8 Debt/equity (X) 2.4 1.6 1.5 1.4 1.2 1.0 Net debt/equity (X) 2.1 1.2 1.5 1.3 1.1 1.0 Net debt/EBITDA (X) 4.4 3.3 3.3 4.2 3.6 3.0 RoAE (%) 10.4 16.9 16.5 7.6 10.7 12.3 RoACE (%) 7.2 8.9 10.7 7.3 8.2 9.2

Source: Company, Kotak Institutional Equities estimates

40 KOTAK INSTITUTIONAL EQUITIES RESEARCH BUY Cipla (CIPLA) Pharmaceuticals AUGUST 07, 2019 RESULT Coverage view: Neutral Domestic drags performance. Cipla’s revenues missed our estimates by ~6%, with domestic formulations declining 12% yoy, as the trade generics business declined Price (`): 518 ~50% due to distributor realignment. The US was strong led by Sensipar, resulting in Fair Value (`): 570 EBITDA and PAT exceeding our estimates by ~13% and ~24%, respectively. Given the BSE-30: 36,691 challenges in the domestic segment, we expect FY2020 domestic growth to slip to 4-5%, leading to sharp ~14% cut to our FY2020E EPS, and ~5% cut to FY2021E EPS. BUY with a revised fair value of `570/share (vs `600/share earlier).

Company data and valuation summary Cipla Stock data Forecasts/Valuations 2019 2020E 2021E 52-week range (Rs) (high,low) 678-476 EPS (Rs) 19.0 23.2 31.9 Market Cap. (Rs bn) 417.7 EPS growth (%) 8.2 22.5 37.0 Shareholding pattern (%) P/E (X) 27.3 22.3 16.3 Promoters 36.7 Sales (Rs bn) 163.6 169.5 189.4 FIIs 26.7 Net profits (Rs bn) 15.3 18.7 25.7 MFs 10.3 EBITDA (Rs bn) 31.0 34.5 43.8 Price performance (%) 1M 3M 12M EV/EBITDA (X) 14.0 12.1 9.4 Absolute (5.8) (7.1) (17.7) ROE (%) 10.2 11.7 13.7 Rel. to BSE-30 1.5 (3.1) (15.5) Div. Yield (%) 0.6 0.9 1.3

Domestic trade generics business collapses given realignment of distributor network Cipla’s 1QFY20 domestic revenues declined by ~12% yoy (-18% vs KIE) as the company realigned its distributor network in the trade generics segment to counter challenges from increasing cross-territory sales by the channel, leading to ~`2 bn impact (-50% yoy), with prescription business also impacted by ~`600 mn sales deferment to 2QFY19. While trade generics segment should converge to pre-FY2019 quarterly run-rate by 2QFY20, and move back to growth trajectory from 3QFY19, a lot is dependent on execution, and with the prescription business also lagging peers, FY2020 domestic growth will likely fall to 4-5%. The US was strong in the quarter, declining US$2 mn qoq (+US$25 mn vs KIE) given continued benefit from Sensipar semi-exclusivity. South Africa exceeded our estimates by ~8%, while RoW missed by 37%, impacted by US$14 mn deferral in supplies. EU sales increased 50% yoy (43% vs KIE), led by market share gains in Advair generic in key markets. Given the strong Sensipar sales as well as product mix (lower trade generics), gross margins expanded 370 bps qoq (+500 bps vs KIE) to 70%. EBITDA margins expanded 90 bps qoq to 22.7% (~19% adjusted for Sensipar) with EBITDA exceeding our estimates by ~13%. Given the strong EBITDA performance, PAT exceeded our estimates by ~24%. Net debt further declined to ~Rs7 bn. ProVentil approval critical for FY2020, though, pipeline emerging from FY2021 Cipla has received several interesting approvals over the past few quarters, including injectable products such as medroxyprogesterone, isoproterenol and testosterone cyp., as well as non- steriles such as albendazole, metoprolol and voltaren gel. While voltaren and albendazole have started to taper off, new launches such as medroxy and ProVentil should help grow the base portfolio from 2HFY20. While we expect Sensipar to also decline from 2QFY20, we expect FY2021 to maintain launch momentum given partner launches for CiproDex, and Truvada/Atripla, with FY2022 likely to have generic Advair as well as Abraxane launches. Cipla is also building its specialty pipeline through the proposed acquisition of Avenue Therapeutics, which will give it access to tramadol inj. (NDA filing in 4QCY19), which we believe can Chirag Talati, CFA generate >US$100 mn peak sales. The company has also in-licensed (1) tizanidine patch for spastiticy (pre-Phase III), (2) CTP354 for spasticity (early stage), (3) inhaled itraconazole for treatment of ABPA (early stage), and (4) recently also acquired Zemdri (IV plazomicin). Kumar Gaurav BUY with fair value of `570/share Given the disappointments in the domestic segment, we cut our FY2020 EPS by 14%, and FY2021 EPS by 5% (Rs26 EPS excluding exclusivities). We cut our fair value to `570/share, reflecting the cut to FY2021 EPS.

[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. Pharmaceuticals Cipla

Exhibit 1: Cipla interim results March fiscal year-ends (` mn)

(% chg.) 1QFY20 1QFY20E 1QFY19 4QFY19 1QFY20E 1QFY19 4QFY19 FY2020E FY2019 (% chg.) FY2021E Sales 39,890 42,312 39,390 44,040 (5.7) 1.3 (9.4) 169,417 163,624 3.5 189,337 Raw material (11,963) (14,809) (14,239) (14,858) (19.2) (16.0) (19.5) (57,064) (57,845) (1.3) (62,127) Staff cost (7,561) (7,675) (7,140) (7,125) (1.5) 5.9 6.1 (30,565) (28,565) 7.0 (32,704) R&D costs (2,610) (3,250) (2,757) (3,127) (19.7) (5.3) (16.5) (12,074) (12,108) (0.3) (12,962) Other expenditure (8,709) (8,549) (7,990) (9,320) 1.9 9.0 (6.6) (35,314) (34,133) 3.5 (37,786) Total expenditure (30,844) (34,284) (32,126) (34,429) (10.0) (4.0) (10.4) (135,018) (132,651) 1.8 (145,580) EBITDA 9,046 8,029 7,264 9,611 12.7 24.5 (5.9) 34,400 30,973 11.1 43,758 Depreciation (2,680) (3,150) (2,410) (5,103) (14.9) 11.2 (47.5) (10,638) (13,263) (11,294) Interest (521) (475) (351) (448) 9.7 48.5 16.4 (1,272) (1,684) (935) Other income / exceptionals 784 750 1,701 954 4.5 (53.9) (17.8) 3,200 4,766 3,200 Pretax profits 6,629 5,154 6,204 5,014 28.6 6.9 32.2 25,690 20,791 23.6 34,729 Tax (1,922) (1,288) (1,737) (1,278) (6,936) (5,695) (9,029) Minority interest/associates 75 (11) (11) (64) (50) 181 (50) Net income 4,782 3,854 4,456 3,672 24.1 7.3 30.2 18,704 15,277 22.4 25,649 Adjusted EPS (Rs) 6.0 4.8 5.6 4.6 24.1 7.3 30.2 23.4 19.1 22.4 32.1 Tax rate (%) 29.0 25.0 28.0 25.5 27.0 27.4 26.0 Segment wise sales (Rs mn) Domestic (reported) 13,550 16,521 15,440 15,000 (18.0) (12.2) (9.7) 65,624 62,720 4.6 72,715 Exports 24,720 24,860 23,040 27,820 (0.6) 7.3 (11.1) 99,879 94,987 5.1 112,708 - US 11,190 9,383 6,700 11,430 19.3 67.0 (2.1) 38,182 34,216 11.6 48,257 - South Africa 5,320 4,915 5,750 5,130 8.2 (7.5) 3.7 22,687 20,927 8.4 23,328 - Africa and GA 1,590 2,600 2,560 3,100 (38.8) (37.9) (48.7) 7,653 9,342 (18.1) 8,035 - Europe 2,010 1,407 1,340 2,360 42.9 50.0 (14.8) 7,526 6,299 19.5 7,588 - RoW 2,790 4,456 4,690 4,060 (37.4) (40.5) (31.3) 16,352 17,213 (5.0) 17,497 - Export API 1,820 2,100 2,000 1,740 (13.3) (9.0) 4.6 7,479 6,990 7.0 8,003 Total 38,270 41,381 38,480 42,820 (7.5) (0.5) (10.6) 165,503 157,707 4.9 185,423 Other operating income 1,620 932 910 1,220 73.9 78.1 32.8 3,914 5,917 (33.8) 3,914 Net sales 39,890 42,312 39,390 44,040 (5.7) 1.3 (9.4) 169,417 163,624 3.5 189,337 Margins (%) Gross margin 70.0 65.0 63.9 66.3 66.3 64.6 67.2 Staff cost to sales 19.0 18.1 18.1 16.2 18.0 17.5 17.3 R&D as % of sales 6.5 7.7 7.0 7.1 7.1 7.4 6.8 Other expenditure to sales 21.8 20.2 20.3 21.2 20.8 20.9 20.0 EBITDA margin 22.7 19.0 18.4 21.8 20.3 18.9 23.1

Source: Company, Kotak Institutional Equities

Exhibit 2: Cipla changes to estimates March fiscal year-ends, 2019-21E (Rs mn)

New estimates Old estimates Changes (%) 2020E 2021E 2020E 2021E 2020E 2021E Sales 169,417 189,337 178,921 197,065 (5.3) (3.9) Gross profits 112,353 127,211 118,025 130,103 (4.8) (2.2) EBITDA 34,400 43,758 38,462 45,011 (10.6) (2.8) PAT 18,704 25,649 21,733 27,012 (13.9) (5.0) EPS 23.2 31.9 27.0 33.6 (13.9) (5.2)

Source: Company, Kotak Institutional Equities estimates

42 KOTAK INSTITUTIONAL EQUITIES RESEARCH Cipla Pharmaceuticals

Exhibit 3: Cipla – US revenues to grow ~70% over FY2018-22E March fiscal year-ends, 2015-22E (US$ mn)

2015 2016 2017 2018 2019E 2020E 2021E 2022E Invagen base business 0 0 205 195 171 168 164 160 Invagen launches 0 0 33 40 41 45 51 51 Cipla own launches 2 2 12 32 159 183 170 208 Cipla base business (incl. partner) 0 0 0 10 14 23 50 71 Cipla B2B including profit share 144 310 161 142 108 106 208 126 US inhalers 0 0 0 0 0 26 37 85 Total US sales 145 312 410 418 492 551 680 702 yoy growth (%) 13.1 115.1 31.4 2.0 17.7 11.9 23.4 3.3 Cipla + Invagen base business as a % of sales 79.3 32.4 75.1 68.5 47.8 42.9 37.6 38.3 Partner key launches as a % of sales 6.9 59.6 7.1 6.7 4.3 3.9 18.4 6.8 Cipla + Invagen key launches as % of sales 1.0 0.5 10.8 17.2 40.7 41.4 32.5 36.9 Dymista as a % of sales 12.8 7.5 6.9 7.6 7.2 7.1 6.0 5.9 Inhalers as a % of sales 0.0 0.0 0.0 0.0 0.0 4.7 5.4 12.1

Source: Company, Kotak Institutional Equities

Exhibit 4: Cipla - revenues by segments March fiscal year-ends, 2014-22E (Rs mn)

2014 2015 2016 2017 2018 2019 2020E 2021E 2022E Net revenues 101,004 113,454 136,098 146,302 152,193 163,624 169,417 189,337 201,576 Domestic sales 39,740 46,830 50,220 55,300 58,710 62,720 65,624 72,715 79,619 Export formulations 48,145 53,757 76,890 81,550 82,414 87,997 92,400 104,705 109,394 South Africa 13,187 15,883 15,690 18,270 20,465 20,927 22,687 23,328 24,382 Africa and global access 11,185 12,863 14,792 14,053 13,025 9,342 7,653 8,035 8,437 RoW 10,652 11,592 19,298 17,557 16,838 17,213 16,352 17,497 19,247 US 7,437 9,069 21,050 26,240 25,890 34,216 38,182 48,257 49,835 Europe 5,684 4,351 6,060 5,430 6,197 6,299 7,526 7,588 7,493 Bulk exports 8,344 7,006 7,380 5,270 6,249 6,990 7,479 8,003 8,563 Others 4,774 5,861 1,608 4,182 4,819 5,917 3,914 3,914 4,000 Growth % Domestic sales 9 18 7 10 6 7 5 11 9 Export formulations 22 12 43 6 1 7 5 13 4 South Africa 116 20 (1) 16 12 2 8 3 5 Africa and global access 39 15 15 (5) (7) (28) (18) 5 5 RoW 18 9 66 (9) (4) 2 (5) 7 10 US (32) 22 132 25 (1) 32 12 26 3 Europe 8 (23) 39 (10) 14 2 19 1 (1) Bulk exports 28 (16) 5 (29) 19 12 7 7 7 % of sales Domestic sales 39 41 37 38 39 38 39 38 39 Export formulations 48 47 56 56 54 54 55 55 54 South Africa 13 14 12 12 13 13 13 12 12 Africa and global access 11 11 11 10 9 6 5 4 4 RoW 11 10 14 12 11 11 10 9 10 US 7 8 15 18 17 21 23 25 25 Europe 6 4 4 4 4 4 4 4 4 Bulk exports 8 6 5 4 4 4 4 4 4 Others 5 5 1 3 3 4 2 2 2

Source: Company, Kotak Institutional Equities

KOTAK INSTITUTIONAL EQUITIES RESEARCH 43 Pharmaceuticals Cipla

Exhibit 5: Cipla profit and loss, balance sheet, cash model March fiscal year-ends, 2013-22E (Rs mn)

2013 2014 2015 2016 2017 2018 2019 2020E 2021E 2022E Net revenues 82,793 101,004 113,454 136,098 146,302 152,193 163,624 169,417 189,337 201,576 Gross Profit 53,267 62,256 71,557 85,199 93,131 97,808 105,779 112,353 127,211 135,509 Staff costs (10,360) (15,430) (19,737) (24,340) (26,338) (26,901) (28,565) (30,565) (32,704) (35,157) R&D expenses (3,638) (5,450) (7,034) (8,846) (10,741) (10,415) (12,108) (12,074) (12,962) (12,240) Other expenses (17,290) (20,046) (23,170) (27,257) (31,294) (32,229) (34,133) (35,314) (37,786) (40,620) EBITDA 21,979 21,331 21,617 24,755 24,758 28,264 30,973 34,400 43,758 47,492 Depreciation & amortisation (3,305) (3,726) (5,047) (7,159) (13,229) (13,228) (13,263) (10,638) (11,294) (12,855) EBIT 18,674 17,604 16,570 17,596 11,529 15,036 17,710 23,762 32,464 34,637 Net Interest (339) (1,457) (1,683) (2,062) (1,594) (1,142) (1,684) (1,272) (935) (656)

Other income 2,557 2,531 1,403 2,170 2,287 2,774 4,766 3,200 3,200 3,200 Profit before tax 20,892 18,677 16,290 17,704 12,222 16,667 20,791 25,690 34,729 37,181 Tax & Deferred Tax (5,443) (4,634) (4,000) (3,779) (1,798) (2,501) (5,695) (6,936) (9,029) (9,667) Net Income 15,449 13,884 11,808 13,504 10,064 14,105 15,277 18,704 25,649 27,464 EPS (Rs) 19.2 17.3 14.7 16.8 12.5 17.5 19.0 23.2 31.8 34.1

Balance sheet Equity 90,187 100,999 109,820 120,149 129,637 145,816 153,443 168,032 188,038 209,460 Total borrowings 9,669 12,283 17,018 51,991 41,126 40,980 43,162 36,662 30,162 23,662 Other liabilities 16,732 20,750 30,338 41,419 38,938 41,809 43,028 46,434 48,301 49,979 Total liabilities 116,588 134,032 157,175 213,558 209,701 228,606 239,633 251,128 266,501 283,101 Net fixed assets 48,748 77,519 81,261 125,052 121,471 120,465 115,387 109,749 116,355 110,500 Investments 8,871 8,136 7,156 9,483 9,922 11,160 13,160 13,160 13,160 13,160 Cash 22,598 4,866 9,543 14,532 14,477 20,678 27,446 38,108 37,811 54,073 Other current assets 45,242 51,648 66,372 73,974 73,752 87,463 96,800 103,271 112,335 118,528 Total assets 116,588 134,032 157,175 213,558 209,701 228,606 239,633 251,128 266,501 283,101 Cashflow statement Operating profit before working capital 23,792 24,157 22,843 27,258 26,019 29,681 33,479 36,278 45,973 49,986 Tax paid (4,617) (5,619) (3,923) (5,077) (4,503) (7,220) (5,932) (6,936) (9,029) (9,667) Change in working capital (5,198) (5,619) (7,186) (4,242) 2,307 (7,833) (10,635) (3,065) (7,198) (4,515) Capital expenditure (6,201) (5,666) (6,262) (10,769) (11,360) (8,162) (7,063) (5,000) (17,900) (7,000) Free cash flow 6,404 7,254 5,472 7,170 12,464 6,466 13,311 21,277 23,746 28,804

Margins and ratios Gross profit margin (%) 64.3 61.6 63.1 62.6 63.7 64.3 64.6 66.3 67.2 67.2 EBITDA margin (%) 26.5 21.1 19.1 18.2 16.9 18.6 18.9 20.3 23.1 23.6 Tax rate (%) 25.2 18.5 14.4 13.0 8.4 11.0 12.7 15.2 18.3 18.4 RoAE (%) 18.5 14.5 11.2 11.7 8.1 10.2 10.2 11.6 14.4 13.8 RoACE (%) 19.8 14.2 11.1 10.1 6.3 7.8 7.7 10.3 13.8 14.3

Source: Company, Kotak Institutional Equities

44 KOTAK INSTITUTIONAL EQUITIES RESEARCH SELL Siemens (SIEM) Capital Goods AUGUST 07, 2019 RESULT Coverage view: Neutral

Running into rough weather. After a strong uptick in execution over 1HFY19, Price (`): 1,101 Siemens reported an operationally weak 3QFY19. A low order inflow print yields an Fair Value (`): 1,040 almost flattish yoy order backlog, limiting growth prospects for FY2020. In a weakening BSE-30: 36,691 demand environment, management cited liquidity issues leading to a slowdown in execution and delay in order finalization across its client base. We cut estimates by 8-11% and lower our fair value to Rs1,040 (from Rs1,085) net of roll-forward. SELL.

Company data and valuation summary Siemens Stock data Forecasts/Valuations 2019 2020E 2021E 52-week range (Rs) (high,low) 1,367-841 EPS (Rs) 29.1 32.6 38.4 Market Cap. (Rs bn) 392.2 EPS growth (%) 16.1 11.7 17.9 Shareholding pattern (%) P/E (X) 37.8 33.8 28.7 Promoters 75.0 Sales (Rs bn) 138.2 157.7 181.8 FIIs 2.3 Net profits (Rs bn) 10.4 11.6 13.7 MFs 5.1 EBITDA (Rs bn) 15.3 17.1 19.8 Price performance (%) 1M 3M 12M EV/EBITDA (X) 22.6 19.8 16.6 Absolute (12.6) (1.8) 6.9 ROE (%) 12.0 12.4 13.4 Rel. to BSE-30 (5.8) 2.4 9.8 Div. Yield (%) 0.7 0.8 1.0

3QFY19 results—weak on execution and ordering; steady on margin

Siemens reported 3QFY19 revenues of Rs32 bn, up 4% yoy, 8% below estimates. All the three large segments reported flattish to low-single-digit growth, impacted by sustained weakness in power transmission (gas & power or GP), growth moderation in power distribution (smart infrastructure or SI) and slowdown in the automotive segment (digital industry or DI). Select sectors that continue to support demand include food and beverages, hospitals, data centers and airports. Siemens reported EBITDA of Rs3.6 bn, up 17% yoy. EBITDA margin at 11.1% benefitted from absence of expenses related to rationalization of operations in DI and POC businesses and from absence of forex losses. Two other factors in inventory write-down in POC segment and high segment profit in the Others segment nullified each other. Net profit for the quarter at Rs2.5 bn improved 21% yoy, partly boosted by higher-than-expected other income. Order inflow for the quarter stood at Rs30 bn, up 6% yoy. Implied order backlog at Rs132 bn was up 2% yoy.

Reorganized segment structure to bring focus in a weakening demand environment

Siemens has shifted to the new segmental structure on basis of end-market applications. Smart infrastructure and digital industries will cumulatively contribute 46% of revenues, larger than 38% share for gas & power segment. Smart infrastructure requires lower import content and greater share of solutions over product offerings. Digital industries (20% share), on the other hand, provide an opportunity to improve service revenues through analytics on top of the Mindsphere platform licensed out to customers by the parent Siemens AG. Such renewed focus would help win new businesses as both public and private sector clients defer ordering and execution. Siemens highlighted issues related to liquidity leading to clients deferring offtake. Aditya Mongia

Cut estimates by 8% and revise fair value to Rs1,040; retain SELL

We cut our FY2021 estimates by ~8% on a combination of weaker order inflows (4%) and Teena Virmani margin cuts (4%). We thus increase fair value to Rs1,040 (Rs1,085 earlier) including roll- forward. SELL rating stays on expensive valuations.

[email protected] Contact: +91 22 6218 6427

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

Exhibit 1: Siemens report weak print on execution and order inflows Siemens (standalone) 3QFY19 - key numbers, September fiscal year-ends (Rs mn)

% change 3QFY19 3QFY19E 3QFY18 2QFY19 vs est. yoy qoq 9MFY19 9MFY18 yoy (%) FY2019E FY2018 yoy (%) Sales 31,096 33,941 29,644 34,614 (8) 5 (10) 93,052 84,907 10 134,345 122,927 9 Other operating income 888 955 1,086 882 (18) 1 2,499 2,952 (15) 3,819 4,324 (12) Net operating income 31,984 34,896 30,730 35,496 (8) 4 (10) 95,551 87,859 9 138,164 127,251 9 Expenses (28,447) (31,084) (27,707) (31,396) (8) 3 (9) (84,849) (78,884) 8 (122,886) (114,090) 8 Stock (99) 1,175 153 2,433 2,481 — 921 Raw material (20,802) (21,563) (24,561) (4) (15) (66,186) (61,457) 8 (93,504) (86,785) 8 Employee (3,973) (3,799) (4,235) 5 (6) (12,596) (10,850) 16 (16,303) (14,487) 13 Other Exp (3,573) (3,520) (2,753) 2 30 (8,500) (9,058) (6) (13,079) (13,739) (5) EBITDA 3,537 3,812 3,023 4,100 (7) 17 (14) 10,702 8,975 19 15,278 13,161 16 Other income 825 753 692 830 2,532 2,036 2,996 2,800 EBIDT 4,362 4,566 3,715 4,930 13,234 11,011 18,274 15,961 Interest (2) (21) (4) (24) (28) (32) (82) (82) Depreciation (512) (559) (500) (571) (1,615) (1,460) (2,235) (1,967) PBT 3,848 3,986 3,211 4,335 (3) 20 (11) 11,591 9,519 22 15,956 13,912 15 Tax (1,367) (1,391) (1,167) (1,532) (4,027) (3,373) (5,576) (4,973) 12 Net profit 2,481 2,595 2,044 2,803 (4) 21 (11) 7,564 6,146 23 10,380 8,939 16 Extraordinary items — — — — — — — — RPAT 2,481 2,595 2,044 2,803 (4) 21 (11) 7,564 6,146 23 10,380 8,939 16

Key ratios (%) Raw material/Sales 65.3 66.3 68.8 66.7 67.1 67.7 67.5 Employee expenses/Sales 12.4 12.4 11.9 13.2 12.3 11.8 11.4 Other expenses/Sales 11.2 11.5 7.8 8.9 10.3 9.5 10.8 EBITDA margin 11.1 10.9 9.8 11.6 11.2 10.2 11.1 10.3 Tax rate 35.5 34.9 36.3 35.3 34.7 35.4 34.9 35.7 PAT margin 7.8 7.4 6.7 7.9 7.9 7.0 7.5 7.0 EPS (Rs) 7.0 7.3 5.7 7.9 (4) 21 (11) 21.2 17.3 29.1 25.1 16

Order details Order booking 30,230 28,407 36,350 6 (17) 100,490 90,213 11 — 127,400 Order backlog 130,958 127,936 131,824 2 (1) 130,958 127,936 2 — 123,520

Source: Company, Kotak Institutional Equities estimates

46 KOTAK INSTITUTIONAL EQUITIES RESEARCH Siemens Capital Goods

Exhibit 2: In 9MFY19, segments such as mobility and digital industry have shown healthy growth Segmental revenues and margins of Siemens for 3QFY19, September fiscal year-ends (Rs mn)

% change 3QFY19 3QFY18 2QFY19 yoy qoq 9MFY19 9MFY18 yoy (%) FY2019E FY2018 yoy (%) Revenues Gas and Power 11,314 11,436 12,588 (1) (10) 34,238 33,675 2 49,113 48,258 2 Smart infrastructure 9,218 9,106 9,958 1 (7) 26,954 25,851 4 39,671 37,962 5 Mobility 2,490 2,132 3,380 17 (26) 7,615 6,262 22 11,877 9,814 21 Digital industry 6,278 5,931 7,009 6 (10) 19,685 16,776 17 26,954 23,699 14 Portfolio of companies 2,951 2,275 3,004 30 (2) 8,097 5,981 35 12,122 9,335 30 Others 329 347 331 (5) (1) 879 1,041 (16) 1,189 1,336 (11) Total 32,580 31,227 36,270 4 (10) 97,468 89,586 9 140,925 130,404 8 Less: Intersegmental (596) (497) (774) (1,918) (1,727) (2,761) (3,153) Total revenues 31,984 30,730 35,496 4 (10) 95,550 87,859 9 138,164 127,251 9

EBIT Gas and Power 1,543 997 1,603 55 (4) 5,146 3,664 40 6,871 5,184 33 Smart infrastructure 717 877 1,000 (18) (28) 2,488 2,171 15 3,658 3,024 21 Mobility 297 161 610 84 (51) 749 432 73 1,184 985 20 Digital industry 421 414 505 2 (17) 1,087 1,078 1 1,610 1,521 6 Portfolio of companies (173) (19) (203) 811 (15) (612) (93) 558 (612) 118 (619) Others 220 93 14 137 1,471 227 263 (14) 331 362 (9) Total 3,025 2,523 3,529 20 (14) 9,085 7,515 21 13,042 11,194 17 Add other income 825 692 830 2,532 2,036 2,996 2,800 7 Less Finance cost (2) (4) (24) (27) (31) (82) (82) 0

Total PBT 3,848 3,211 4,335 20 (11) 11,644 9,582 22 15,956 13,912 15

EBIT margin (%) Gas and Power 13.6 8.7 12.7 15.0 10.9 14.2 10.7 Smart infrastructure 7.8 9.6 10.0 9.2 8.4 9.6 8.0 Mobility 11.9 7.6 18.0 9.8 6.9 12.1 10.0 Digital industry 6.7 7.0 7.2 5.5 6.4 6.8 6.4 Portfolio of companies (5.9) (0.8) (6.8) (7.6) (1.6) (6.6) 1.3 Others 66.9 26.8 4.2 25.8 25.3 24.8 27.1 Total 9.5 8.2 9.9 9.5 8.6 9.4 8.8

Source: Company, Kotak Institutional Equities estimates

Exhibit 3: Revenue visibility remains low at less than one year on forward sales due to lack of large multi-year orders Order booking, order backlog & visibility trend for Siemens, September fiscal year-ends, 1QFY12-3QFY19

Order booking (Rs bn, LHS) Order backlog (Rs bn, LHS) Visibility (X, RHS) 175 1.8 1.6 150 1.4 125 1.2 100 1.0

75 0.8 0.6 50 0.4 25 0.2

0 0.0

1QFY13 3QFY13 1QFY14 3QFY14 1QFY15 3QFY15 1QFY16 3QFY16 1QFY17 3QFY12 3QFY17 1QFY18 3QFY18 1QFY19 3QFY19 1QFY12

Source: Company, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 47 Capital Goods Siemens

Exhibit 4: Illustration of Siemens' recast of segments into new structure from 3QFY19 onwards, September fiscal year-ends

Source: Company, Kotak Institutional Equities

Exhibit 5: MEIS/SEIS benefit in other operating income led to EBITDA margin uptick in FY2018; adjusted for all one-offs we can still see some improvement Trend in other operating income as % of revenues and adjusted EBITDA margin, September fiscal year-ends, 2014-1HFY19 (%)

Reported EBITDA margin (%) 4.0 Other operating income as % of total revenues 3.4 EBITDA margin excluding other operating income (%) 3.5 EBITDA margin excluding other operating income, forex gain and one-off 3.0 employee expense (%) 2.6 2.6 2.5 12 11.2 2.5 2.2 10.3 2.0 9.4 9.5 10 9.3 2.0 8.2 8.6 7.7 7.3 8 6.7 1.5 5.6 6 4.4 1.0 4 0.5 2 - 0 2014 2015 2016 2017 2018 9MFY19 2014 2015 2016 2017 2018 9MFY19

Source: Company, Kotak Institutional Equities estimates

Exhibit 6: We cut our estimates for execution and margin, yielding a combined 8% cut in estimate for FY2021 Change in estimates for Siemens, September fiscal year-ends, 2018-21E (Rs mn)

New estimates Old estimates Revision (%) 2018 2019E 2020E 2021E 2019E 2020E 2021E 2019E 2020E 2021E Revenues 127,251 138,164 157,674 181,770 142,405 163,831 188,908 (3) (4) (4) EBITDA 13,161 15,278 17,085 19,774 16,074 19,037 21,590 (5) (10) (8) EBITDA margin (%) 10.3 11.1 10.8 10.9 11.3 11.6 11.4 PAT 8,939 10,380 11,599 13,680 10,910 12,911 14,942 (5) (10) (8) EPS (Rs) 25.1 29.1 32.6 38.4 30.6 36.3 42.0 (5) (10) (8) Growth (%) Revenues 16 9 14 15 12 15 15 EBITDA 25 16 12 16 22 18 13 PAT 27 16 12 18 22 18 16

Source: Company, Kotak Institutional Equities estimates

48 KOTAK INSTITUTIONAL EQUITIES RESEARCH Siemens Capital Goods

Exhibit 7: Siemens’ (standalone) financials, September fiscal year-ends, 2012-21E (Rs mn)

2012 2013 2014 2015 2016 2017 2018 2019E 2020E 2021E Income statement Sales 129,199 113,526 106,625 105,124 108,095 110,148 127,251 138,164 157,674 181,770 Expenses (120,286) (109,319) (100,683) (95,363) (97,891) (99,636) (114,090) (122,886) (140,589) (161,996) RM (98,478) (85,368) (75,542) (70,814) (71,812) (73,505) (85,864) (93,504) (106,707) (123,015) Other expenses (9,849) (10,427) (11,023) (10,607) (11,940) (12,205) (13,739) (13,079) (16,259) (18,851) Employee expenses (11,959) (13,524) (14,118) (13,942) (14,139) (13,926) (14,487) (16,303) (17,623) (20,129) EBITDA 8,913 4,207 5,942 9,761 10,204 10,512 13,161 15,278 17,085 19,774 Other income 575 345 1,039 1,604 1,644 2,547 2,800 2,996 3,105 3,651 Interest (270) (189) (82) (73) (91) (77) (82) (82) (82) (82) Depreciation (2,010) (2,502) (2,291) (2,156) (2,264) (1,966) (1,967) (2,235) (2,278) (2,314) PBT 7,208 1,861 4,608 9,137 9,493 11,016 13,912 15,956 17,830 21,029 Tax (2,379) (246) (2,403) (5,131) (3,146) (3,982) (4,973) (5,576) (6,231) (7,349) Net profit 4,830 1,615 2,205 4,006 6,347 7,034 8,939 10,380 11,599 13,680 Extraordinary items (1,399) 325 3,827 7,828 22,824 4,302 — — — — RPAT 3,430 1,940 6,032 11,834 29,171 11,336 8,939 10,380 11,599 13,680 EPS (Rs) 13.6 4.5 6.2 11.2 17.8 19.8 25.1 29.1 32.6 38.4 Balance sheet Equity share capital 704 712 712 712 712 712 712 712 712 712 Reserves & surplus 38,922 39,591 43,044 50,554 65,107 76,335 82,342 89,239 96,945 106,034 Shareholders funds 39,626 40,303 43,756 51,266 65,819 77,047 83,054 89,951 97,657 106,746 Loan funds — — — — — — — — — — Total sources of funds 39,626 40,303 43,756 51,266 65,819 77,047 83,054 89,951 97,657 106,746 Gross block 24,356 26,852 28,114 28,802 27,757 16,348 18,420 20,920 23,420 25,920 Accumulated depreciation (10,234) (13,063) (14,558) (15,269) (15,802) (4,083) (5,948) (8,183) (10,461) (12,776) Net block 14,122 13,789 13,556 13,533 11,955 12,265 12,472 12,737 12,959 13,144 CWIP 850 889 409 321 791 1,430 624 624 624 624 Net fixed assets 14,972 14,678 13,965 13,854 12,746 13,695 13,096 13,361 13,583 13,768 Cash balances 9,768 6,038 11,210 20,959 35,094 40,713 36,457 46,399 54,742 64,220 Investments 410 432 82 1,764 1,647 1,629 1,592 1,592 1,592 1,592 Net current assets excl. cash 11,300 14,858 14,762 11,515 13,079 18,569 29,244 25,934 25,076 24,502 Net deferred tax assets 3,176 4,297 3,739 3,175 3,253 2,442 2,665 2,665 2,665 2,665 Total assets 39,626 40,303 43,756 51,266 65,819 77,047 83,054 89,951 97,657 106,746 Cash flow statement Cash flow from operations 433 1,018 6,078 6,204 5,082 5,538 422 13,011 11,712 13,000 Capex (3,785) (1,874) 2,305 (2,188) (2,874) 3,289 (1,788) (2,500) (2,500) (2,500) Free cash flow (3,352) (856) 8,383 4,016 2,208 8,827 (1,366) 10,511 9,212 10,500 Cash flow from financing activities (2,593) (2,844) (2,204) (2,703) (16,121) (2,598) (3,054) (3,566) (3,975) (4,673) Net cash generated (2,116) (3,681) 5,512 10,077 (8,308) 16,416 (2,889) 10,276 8,677 9,812 Cash balance at start of year 11,625 9,767 6,038 11,210 20,959 12,278 28,349 25,133 35,074 43,417 Cash balance at end of year 9,767 6,038 11,210 20,959 12,316 28,349 25,133 35,074 43,417 52,895

Growth (%) Revenue growth 6.7 (12.1) (6.1) (1.4) 2.8 1.9 15.5 8.6 14.1 15.3 EBITDA growth (34.0) (52.8) 41.2 64.3 4.5 3.0 25.2 16.1 11.8 15.7 Recurring PAT growth (42.9) (66.6) 36.5 81.7 58.5 10.8 27.1 16.1 11.7 17.9 Key ratios (%) EBITDA margin 6.9 3.7 5.6 9.3 9.4 9.5 10.3 11.1 10.8 10.9 PAT margin 3.7 1.4 2.1 3.8 5.9 6.4 7.0 7.5 7.4 7.5 RoE 12.4 4.0 5.2 8.4 10.8 9.8 11.2 12.0 12.4 13.4 RoCE 12.0 3.6 5.2 8.4 10.7 9.8 11.1 11.9 12.3 13.3

Source: Company, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 49 SELL HPCL (HPCL) Oil, Gas & Consumable Fuels AUGUST 07, 2019 RESULT Coverage view: Attractive

Muted results. HPCL’s results were below our expectations reflecting modestly lower Price (`): 244 underlying refining margins and sharper-than-expected sequential decline in marketing Fair Value (`): 220 margins. We reiterate SELL with an unchanged fair value of `220, given our concerns BSE-30: 36,691 from (1) a bleak refining outlook, (2) anticipated negative impact from sharply higher fuel oil yield (~10%) post implementation of IMO 2020 regulations for marine fuels and (3) elevated capex, which may act as a drag on cashflows and return ratios.

Company data and valuation summary Hindustan Petroleum Stock data Forecasts/Valuations 2019 2020E 2021E 52-week range (Rs) (high,low) 334-163 EPS (Rs) 39.7 28.0 28.7 Market Cap. (Rs bn) 372.5 EPS growth (%) (4.8) (29.6) 2.8 Shareholding pattern (%) P/E (X) 6.2 8.7 8.5 Promoters 0.0 Sales (Rs bn) 2,752.0 2,566.3 2,716.6 FIIs 18.6 Net profits (Rs bn) 60.5 42.6 43.8 MFs 12.1 EBITDA (Rs bn) 114.4 86.4 93.0 Price performance (%) 1M 3M 12M EV/EBITDA (X) 5.6 8.1 8.1 Absolute (15.0) (14.2) (15.3) ROE (%) 23.2 14.6 13.9 Rel. to BSE-30 (8.4) (10.5) (13.0) Div. Yield (%) 6.5 4.6 4.7

Weak refining and sharper-than-expected decline in marketing margins impact 1QFY20 results HPCL’s normalized EBITDA, adjusted for inventory loss, was 10% below our estimate at ₹21.8 bn reflecting lower-than-expected refining and marketing margins, which were partially offset by lower operating expenses. Reported EBITDA was modestly higher versus our expectation at ₹16.4 bn, including lower-than-estimated inventory loss of ₹5.4 bn. Reported net income at ₹8.1 bn (EPS of ₹5.3) was further boosted by higher other income including forex-related gain of `1.9 bn. Debt moderated to ₹204.3 bn as on June 30, 2019 from ₹272.4 bn a quarter ago.  Muted normalized refining margins at US$3.3/bbl. Inventory-adjusted refining contribution increased to ₹6.7 bn from ₹5.2 bn in 4QFY19, led by sequential increase in normalized margins to US$3.3/bbl, lower versus our assumption of US$3.6/bbl. Reported refining margin was sharply lower at US$0.8/bbl, including US$2.6/bbl of inventory loss (₹5.2 bn). Throughput declined 15% qoq to 3.9 mn tons amid shutdown of both refineries. HPCL’s distillate yield moderated to 70% from 75.9% in 4QFY19 amid shutdowns and higher off- take of HS crude, which increased to 67% from 60.4% in the previous quarter.  Sharper-than-expected moderation in marketing margins. Inventory-adjusted implied marketing contribution fell sharply to `52 bn from `78.8 bn in 4QFY19, led by a sharp 34% qoq decline in realized marketing margins to `5,165/ton, 9% below our expectation. Reported marketing EBITDA included modest ₹200 mn of inventory loss on products.  2% growth in domestic volumes; 3.5% growth in auto fuels. HPCL’s domestic volumes increased 2% yoy at 9.8 mn tons; exports jumped to 0.3 mn tons from 0.1 mn tons in 4QFY19. HPCL’s diesel and gasoline sales volumes grew at 1.7% yoy and 8.6% yoy, respectively, both being slower than the underlying growth in domestic consumption. Pipeline throughput moderated 4.8% qoq to 5.3 mn tons.

Fine-tune estimates; reiterate SELL given bleak refining outlook and HPCL’s higher FO yield Tarun Lakhotia We revise our standalone EPS estimates for HPCL to `28 (-0.3%) in FY2020 and `28.7 (-4%) in FY2021, updating our model for (1) FY2019 AR, (2) stronger INR-USD exchange rate Hemang Khanna assumption and (3) other minor changes. We reiterate SELL rating on the stock with an unchanged fair value of `220 given our concerns from (1) bleak refining outlook, (2) HPCL’s higher FO yield and (3) elevated capex. We expect HPCL’s refining margins trajectory to underperform other domestic refiners post implementation of IMO 2020 regulations for marine fuels from January 2020, given its relatively higher ~10% yield of fuel oil, which is expected to be in large surplus in global markets and hence, trade at a significant discount to crude oil.

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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. HPCL Oil, Gas & Consumable Fuels

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

(% chg.) yoy 1QFY20 1QFY20E 1QFY19 4QFY19 1QFY20E 1QFY19 4QFY19 FY2020E FY2019 (% chg.) Net sales 709,889 646,241 676,289 679,381 9.8 5.0 4.5 2,566,282 2,751,968 (6.7) Increase/(decrease) in stock 749 — 19,342 34,177 — 21,665 Raw materials (145,702) (146,431) (163,514) (157,649) (0.5) (10.9) (7.6) (654,932) (696,098) (5.9) Product purchase (511,618) (445,392) (456,750) (462,742) 14.9 12.0 10.6 (1,659,965) (1,804,740) (8.0) Staff cost (8,125) (7,128) (7,353) (7,310) 14.0 10.5 11.2 (31,223) (29,385) 6.3 Other expenditure (28,754) (31,556) (36,107) (34,195) (8.9) (20.4) (15.9) (133,720) (128,990) 3.7 Total expenditure (693,450) (630,507) (644,382) (627,719) 10.0 7.6 10.5 (2,479,840) (2,637,548) (6.0) EBITDA 16,439 15,733 31,907 51,662 4.5 (48.5) (68.2) 86,442 114,420 (24.5) Other income 6,165 4,431 3,056 5,225 39.1 101.7 18.0 18,640 16,352 14.0 Interest (2,063) (1,744) (1,909) (1,872) 18.3 8.1 10.2 (7,507) (7,259) 3.4 Depreciation (8,151) (7,871) (7,064) (8,285) 3.5 15.4 (1.6) (32,642) (30,126) 8.4 Pretax profits 12,390 10,549 25,990 46,731 17.5 (52.3) (73.5) 64,933 93,387 (30.5) Extraordinaries — ——— — — Current tax (3,363) (2,410) (7,589) (14,101) (17,147) (27,277) Deferred tax (918) (1,124) (1,209) (2,727) (5,173) (5,620) Net income 8,109 7,015 17,192 29,903 15.6 (52.8) (72.9) 42,612 60,491 (29.6) Adjusted net income 8,109 7,015 17,192 29,903 15.6 (52.8) (72.9) 42,612 60,491 (29.6) Adjusted EPS (Rs) 5.3 4.6 11.3 19.6 28.0 39.7 Other comprehensive income (203) (151) 523 (558) Total comprehensive income 7,906 17,041 30,427 59,933 Tax rate (%) 34.6 33.5 33.9 36.0 34.4 35.2

Other details Crude throughput (mn tons) 3.9 4.0 4.5 4.6 (2.0) (13.3) (14.8) 18.4 18.4 0.0 Domestic sales volume (mn tons) 9.8 9.7 9.6 10.0 0.9 1.9 (2.1) 40.3 37.9 6.3 Export sales volume (mn tons) 0.3 0.1 0.1 0.1 170.0 237.5 237.5 0.8 0.8 Pipeline throughput (mn tons) 5.3 5.5 5.5 5.6 (3.0) (2.0) (4.8) 22.6 21.5 4.9 Reported refining margin (US$/bbl) 0.8 2.0 7.2 4.5 4.8 5.0 Normalized refining margin (US$/bbl) 3.3 3.6 3.7 2.1 (7.1) (10.1) 59.9 5.4 4.2 26.9 Implied marketing margin (Rs/ton) 5,156 5,650 4,960 7,821 (8.7) 4.0 (34.1) 5,030 5,668 (11.2) Adventitious gains/(loss) on refining (5,160) (3,178) 7,700 5,720 (5,160) 7,410 Adventitious gain/(loss) on marketing (200) (5,291) 11,350 3,440 (200) 6,250 Net over-recovery/(under-recovery) — ——— — — Exchange gain/(loss) 1,937 827 (5,377) 2,480 1,937 (5,794)

Source: Company, Kotak Institutional Equities estimates

Exhibit 2: Normalized results were below our estimates driven by lower margins across refining and marketing segments Calculation of normalized profitability

1QFY18 2QFY18 3QFY18 4QFY18 1QFY19 2QFY19 3QFY19 4QFY19 1QFY20 1QFY20E Gross contribution 50.8 60.9 66.0 70.6 75.4 65.8 38.5 93.2 53.3 54.4 Operating expenses (34.5) (31.8) (34.5) (41.3) (43.5) (44.6) (28.8) (41.5) (36.9) (38.7) Reported EBITDA 16.3 29.1 31.6 29.2 31.9 21.2 9.6 51.7 16.4 15.7 Add: net under-recovery —————————— Add: forex-related loss/(gain) ——— 0.8 5.4 8.9 (6.0) (2.5) —— Add: inventory/adventitious loss/(gain) 15.8 (7.9) (14.8) (1.6) (19.1) (12.8) 34.7 (9.2) 5.4 8.5 Normalized EBITDA 32.0 21.1 16.8 28.5 18.2 17.3 38.3 40.0 21.8 24.2 Other income 4.6 5.0 2.0 3.4 3.1 4.1 3.9 5.2 4.2 3.6 Interest expense 1.4 1.6 0.9 1.8 1.9 2.0 1.5 1.9 2.1 1.7 Depreciation 6.7 6.8 6.8 7.3 7.1 7.4 7.4 8.3 8.2 7.9 Normalized PBT 28.5 17.8 11.1 22.9 12.3 12.1 33.4 35.1 15.8 18.2 Effective tax 9.7 6.0 3.8 7.8 4.2 4.1 11.4 11.9 5.4 6.2 Reported net income 9.2 17.3 19.5 17.5 17.2 10.9 2.5 29.9 8.1 7.0 Normalized net income 18.8 11.7 7.3 15.1 8.1 8.0 22.0 23.2 10.4 12.0 Normalized EPS (Rs) 12.3 7.7 4.8 9.9 5.3 5.2 14.5 15.2 6.8 7.9

Source: Company, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 51 Oil, Gas & Consumable Fuels HPCL

Exhibit 3: Normalized refining margins were muted at US$3.3/bbl; marketing margins declined 34% qoq, lower than our expectation Calculation of segment-wise profitability

1QFY18 2QFY18 3QFY18 4QFY18 1QFY19 2QFY19 3QFY19 4QFY19 1QFY20 1QFY20E Segment-wise contribution Gross contribution 50.8 60.9 66.0 70.6 75.4 65.8 38.5 93.2 53.3 54.4 Add: net under-recovery — — — — — — — — — — Add: one-off provision/charges — — — — — — — — — — Add: adventitious loss/(gain) 15.8 (7.9) (14.8) (1.6) (19.1) (12.8) 34.7 (9.2) 5.4 8.5 Normalized gross contribution 66.5 53.0 51.3 69.0 56.3 53.0 73.1 84.0 58.7 62.9 Refining segment 18.5 12.0 12.9 14.3 8.1 6.5 24.3 5.2 6.7 7.3 Marketing and other segments 48.0 40.9 38.3 54.6 48.2 46.6 48.9 78.8 52.0 55.6 Blended marketing margins (Rs/ton) 5,184 4,689 4,062 5,782 4,960 5,093 5,016 7,795 5,156 5,650 Reported refining margins (US$/bbl) 5.9 7.6 9.0 7.1 7.2 4.8 3.7 4.5 0.8 2.0 Normalized refining margins (US$/bbl) 8.7 5.6 6.1 6.6 3.7 2.7 10.0 2.1 3.3 3.6 Crude throughput (mn tons) 4.5 4.6 4.5 4.6 4.5 4.8 4.6 4.6 3.9 4.0 Domestic sales (mn tons) 9.2 8.4 9.2 9.4 9.6 8.8 9.4 10.0 9.8 9.7 Export sales (mn tons) 0.1 0.4 0.2 0.1 0.1 0.3 0.3 0.1 0.3 0.1 Exchange rate (Rs/US$) 64.5 64.3 64.7 64.4 67.0 70.1 72.1 72.1 69.5 69.5

Source: Company, Kotak Institutional Equities estimates

Exhibit 4: HPCL's adjusted refining margins were at a discount to Singapore complex margins Refining margin performance, 1QFY16 onwards (US$/bbl)

(US$/bbl) HPCL's inventory-adjusted margins [LHS] Reuters Singapore complex [LHS] 12 11.4 10.0 10 8.7 8.5 8.3 8.1 8.1 8.07.8 8 7.2 6.7 7.0 6.7 6.4 6.4 6.6 6.26.2 6.1 6.0 6.1 5.6 6 5.1 5.1 4.2 4.3 3.9 3.7 4 3.6 3.2 3.3 3.5 2.7 2.1 2

0

1QFY16

2QFY16

3QFY16

4QFY16

1QFY17

2QFY17

3QFY17

4QFY17

1QFY18

2QFY18

3QFY18

4QFY18

1QFY19

2QFY19

3QFY19 4QFY19 1QFY20

Source: Company, Reuters, Kotak Institutional Equities

52 KOTAK INSTITUTIONAL EQUITIES RESEARCH HPCL Oil, Gas & Consumable Fuels

Exhibit 5: HPCL's adjusted refining margins turn premium to Singapore complex in quarters of sharp decline in crude prices due to delayed change in product pricing Refining margin performance versus end-period crude price movement, 1QFY16 onwards (US$/bbl)

Premium/(discount) of HPCL's inventory-adjusted margins over Singapore complex [LHS] (US$/bbl) End-period crude movement [RHS] (US$/bbl) 6 5.7 30

4 3.4 20 2.1 2.3 2 10 0.1 0.2 0 0 (0.4) (0.1) (2) (1.0) (1.1) (1.1) (10) (1.3) (1.6) (2.3) (2.9) (2.7) (4) (3.4) (20)

(6) (30)

1QFY16

2QFY16

3QFY16

4QFY16

1QFY17

2QFY17

3QFY17

4QFY17

1QFY18

2QFY18

3QFY18

4QFY18

1QFY19

2QFY19

3QFY19 4QFY19 1QFY20

Source: Company, Reuters, Kotak Institutional Equities estimates

Exhibit 6: HPCL's auto fuels volumes growth modestly lag growth in domestic consumption Growth in auto fuels volumes across industry, 1QFY18 onwards

(%) BPCL HPCL IOCL Consumption 14

12

10

8

6

4

2

0 1QFY18 2QFY18 3QFY18 4QFY18 1QFY19 2QFY19 3QFY19 4QFY19 1QFY20

Source: Companies, PPAC, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 53 Oil, Gas & Consumable Fuels HPCL

Exhibit 7: Singapore complex margins have moderated from recent highs Singapore complex refining margins, January 2018 onwards (US$/bbl)

(US$/bbl) Reuters Singapore refining margins 12

10

8

6

4

2

0

2-Jul-18

1-Jul-19

1-Jan-18

4-Jun-18

3-Jun-19

8-Oct-18

9-Apr-18

8-Apr-19

3-Dec-18

16-Jul-18

30-Jul-18

5-Nov-18

15-Jul-19

29-Jul-19

7-May-18

6-May-19

15-Jan-18

29-Jan-18

14-Jan-19

28-Jan-19

18-Jun-18

17-Jun-19

12-Feb-18

26-Feb-18

22-Oct-18

11-Feb-19

25-Feb-19

23-Apr-18

10-Sep-18

24-Sep-18

22-Apr-19

17-Dec-18

31-Dec-18

19-Nov-18

12-Mar-18

26-Mar-18

11-Mar-19

25-Mar-19

13-Aug-18

27-Aug-18 21-May-18 20-May-19

Source: Reuters, Kotak Institutional Equities estimates

Exhibit 8: Marketing margins on auto fuels have jumped sharply over the past two months; uncertainty prevails though Gross margins on diesel and gasoline, January 2017 onwards (Rs/liter)

(Rs/liter) Gross marketing margin on diesel Gross marketing margin on gasoline 9 7.9 8 7 6.6 5.7 6 5.0 5 4.0 3.7 4 3.4 8.3 3.5 3.3 3.1 3.1 2.7 2.7 2.7 2.8 2.9 2.7 2.7 3 2.4 2.6 2.6 2.6 6.5 2.5 2.1 2.1 1.8 4.5 4.6 4.5 4.4 2 1.2 4.1 3.8 1.4 3.6 3.2 3.6 2.7 2.6 2.7 2.7 2.5 3.1 2.6 2.9 3.0 0.8 1 2.5 2.4 2.3 2.2 2.5 2.2 2.0 2.0 1.3 0.8 1.3 0.2 0

(1) (0.0)

Jul-17

Jul-18

Jul-19

Jan-17

Jan-18

Jan-19

Jun-17

Jun-18

Jun-19

Oct-17

Oct-18

Feb-17

Feb-18

Feb-19

Apr-17

Sep-17

Apr-18

Sep-18

Apr-19

Dec-17

Dec-18

Nov-17

Nov-18

Mar-17

Mar-18

Mar-19

Aug-17

Aug-18

May-17 May-18 May-19

Source: Company, PPAC, Kotak Institutional Equities estimates

54 KOTAK INSTITUTIONAL EQUITIES RESEARCH HPCL Oil, Gas & Consumable Fuels

Exhibit 9: HPCL has a significantly higher fuel oil yield versus other OMCs OMCs’ fuel oil yields, March fiscal year-ends, 2017-19 (%)

(%) FY2017 FY2018 FY2019 12

10

8

6

4

2

0 HPCL BPCL IOCL

Source: Companies, MoPNG, Kotak Institutional Equities estimates

Exhibit 10: Key assumptions of HPCL, March fiscal year-ends, 2014-22E (Rs mn)

2014 2015 2016 2017 2018 2019 2020E 2021E 2022E Refining assumptions Exchange rate (Rs/US$) 60.5 61.2 65.4 67.1 64.5 69.9 69.3 71.0 72.0 Effective tariff protection (%) 2.6 2.5 2.6 2.6 2.7 2.8 2.9 2.9 2.9 Crude throughput (mn tons) 15.5 16.2 17.2 17.8 18.3 18.4 18.4 18.4 18.4 Net refining margin (US$/bbl) 3.4 2.8 6.7 6.2 7.4 5.0 4.8 5.1 5.3 Refining EBITDA (Rs bn) 12.0 8.2 41.0 39.5 48.7 22.5 19.9 22.4 24.6 Marketing assumptions Sales volume (mn tons) 31.4 32.6 34.0 35.2 38.2 39.9 41.5 43.3 45.1 Marketing margin on auto fuels (Rs/liter) — — 1.9 1.8 1.8 2.8 2.0 2.0 2.0 Subsidy under-recoveries (Rs bn) (4.8) (5.0) (0.1) — — — — — — Implied marketing EBITDA (Rs bn) 40.3 48.5 38.4 66.3 58.0 91.9 66.6 70.6 74.5

Source: Company, Kotak Institutional Equities estimates

Exhibit 11: Earnings sensitivity of HPCL to refining margins and marketing margins (Rs mn)

Fiscal 2020E Fiscal 2021E Downside Base Case Upside Downside Base Case Upside Refining margins Refining margins (US$/bbl) 3.8 4.8 5.8 4.1 5.1 6.1 Net profits (Rs mn) 36,453 42,612 48,771 37,481 43,791 50,102 EPS (Rs) 23.9 28.0 32.0 24.6 28.7 32.9 % upside/(downside) (14.5) 14.5 (14.4) 14.4 Marketing margins Auto fuels margins (Rs/liter) 1.5 2.0 2.5 1.5 2.0 2.5 Net profits (Rs mn) 31,849 42,612 53,375 32,556 43,791 55,027 EPS (Rs) 20.9 28.0 35.0 21.4 28.7 36.1 % upside/(downside) (25.3) 25.3 (25.7) 25.7

Source: Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 55 Oil, Gas & Consumable Fuels HPCL

Exhibit 12: We compute fair value of Rs220 for HPCL Fair valuation of HPCL (Rs/share)

P/B based valuation EV/EBITDA based valuation Refining and marketing business (Rs bn) Refining and marketing business (Rs bn) March 2020E book value 304 March 2021E standalone EBITDA 93 Less: investments valued separately 67 EV/EBITDA (X) 5.5 March 2020E adjusted book value 236 EV of refining and marketing business (Rs bn) 511 March 2020E adjusted BVPS (Rs) 155 EV of refining and marketing business (Rs) (A) 335 P/B multiple (X) 1.0 Investments (Rs bn) Value of refining and marketing business (Rs) (A) 155 HMEL 79 Investments (Rs bn) MRPL 16 HMEL 79 Oil India 3 MRPL 16 Other equity 5 Oil India 3 Value of investments (Rs bn) 103 Other equity 5 Value of investments (Rs) (B) 68 Value of investments (Rs bn) 103 Net debt (Rs bn) 279 Value of investments (Rs) (B) 68 Net debt (Rs) (C) 183 Total equity value (A) + (B) 223 Total equity value (A) + (B) - (C) 221

Source: Kotak Institutional Equities estimates

56 KOTAK INSTITUTIONAL EQUITIES RESEARCH HPCL Oil, Gas & Consumable Fuels

Exhibit 13: Profit model, balance sheet, cash model of HPCL, March fiscal year-ends, 2014-22E (Rs mn)

2014 2015 2016 2017 2018 2019 2020E 2021E 2022E Profit model (Rs mn) Net sales 2,232,448 2,055,868 1,777,006 1,870,237 2,193,326 2,751,974 2,566,282 2,716,633 2,852,172 EBITDA 52,377 56,666 79,393 110,990 106,719 114,420 86,442 92,987 99,085 Other income 9,745 11,684 11,442 15,147 18,495 16,352 18,640 16,976 16,748 Interest (13,364) (7,066) (6,536) (5,357) (5,667) (7,259) (7,507) (7,377) (9,926) Depreciation (22,019) (19,788) (26,532) (25,353) (27,528) (30,126) (32,642) (35,867) (38,490) Pretax profits 26,739 41,497 57,766 95,428 92,019 93,387 64,933 66,719 67,418 Extraordinary items — — — (5,219) — — — — — Current tax (7,640) (12,257) (14,336) (22,362) (25,710) (27,277) (17,147) (18,371) (14,131) Deferred tax (1,178) (1,952) (7,373) (6,283) (2,739) (5,620) (5,173) (4,557) (9,034) Prior-period adjustment (584) 45 1,204 525 — — — — — Adjusted net profits 17,338 27,333 37,262 65,650 63,571 60,491 42,612 43,791 44,252 Earnings per share (Rs) 11.4 17.9 24.4 43.1 41.7 39.7 28.0 28.7 29.0

Balance sheet (Rs mn) Total equity 150,122 160,221 179,698 203,474 239,482 281,748 303,813 326,488 349,402 Deferred tax liability 39,084 41,036 49,194 58,956 65,692 71,648 76,821 81,378 90,412 Total borrowings 321,646 203,353 211,675 212,497 209,909 272,397 327,397 382,897 391,897 Currrent liabilities 264,930 270,896 255,227 309,712 352,989 411,716 404,163 415,897 426,356 Total liabilities and equity 775,781 675,506 695,793 784,639 868,072 1,037,509 1,112,194 1,206,660 1,258,067 Cash 347 171 238 337 11,941 956 1,301 1,007 924 Current assets 361,857 237,549 240,166 295,693 325,509 413,614 404,091 415,501 424,980 Total fixed assets 304,978 325,373 349,603 379,424 419,571 504,752 591,866 678,466 723,727 Investments 108,599 112,415 105,786 109,186 111,051 118,186 114,936 111,686 108,436 Total assets 775,781 675,506 695,793 784,639 868,072 1,037,509 1,112,194 1,206,660 1,258,067

Free cash flow (Rs mn) Operating cash flow, excl. working capital 39,134 46,279 75,478 88,488 95,781 117,169 57,299 60,411 69,458 Working capital changes 21,121 124,486 (14,397) 6,120 9,817 (24,776) 1,971 323 980 Capital expenditure (41,358) (41,762) (47,100) (58,890) (66,901) (112,571) (115,267) (115,638) (78,181) Investments (1,581) 3,063 1,484 1,368 (14,170) (8,231) 3,250 3,250 3,250 Other income 4,906 4,688 4,715 4,473 7,159 6,125 18,640 16,976 16,748 Free cash flow 22,223 136,753 20,180 41,560 31,686 (22,285) (34,107) (34,678) 12,256

Ratios (%) Debt/equity 170.0 101.0 92.5 81.0 68.8 77.1 86.0 93.9 89.1 Net debt/equity 169.8 101.0 92.4 80.8 64.9 76.8 85.7 93.6 88.9 RoAE 9.6 14.0 17.3 25.3 22.4 18.4 11.6 11.1 10.4 RoACE 5.3 7.0 9.5 15.0 13.6 11.4 7.1 6.5 6.3

Key assumptions Crude throughput (mn tons) 15.5 16.2 17.2 17.8 18.3 18.4 18.4 18.4 18.4 Effective tariff protection (%) 2.6 2.5 2.6 2.6 2.7 2.8 2.9 2.9 2.9 Net refining margin (US$/bbl) 3.4 2.8 6.7 6.2 7.4 5.0 4.8 5.1 5.3 Sales volume (mn tons) 31.4 32.6 34.0 35.2 38.2 39.9 41.5 43.3 45.1 Marketing margin on auto fuels (Rs/liter) — — 1.9 1.8 1.8 2.8 2.0 2.0 2.0 Subsidy under-recoveries (Rs mn) (4,818) (4,958) (78) — — — — — — Adventitious gain/(loss) (Rs mn) 7,770 (20,090) (12,300) 23,000 2,720 6,250 (200) — —

Source: Company, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 57 BUY KEC International (KECI) Capital Goods AUGUST 07, 2019 RESULT Coverage view: Neutral

Steady on execution, weak on order inflows. KEC’s reported 1QFY20 print was Price (`): 293 healthy on execution and margin. It was weak on order inflows (delay in order Fair Value (`): 330 finalization) and interest cost (higher working capital build-up, higher cost of debt, one- BSE-30: 36,691 off cost). FY2020 should still be a much better year for ordering in India with both state and TBCB projects boosting the current order pipeline. We cut our estimates by 3-9% and fair value to Rs330 (from Rs340). BUY.

Company data and valuation summary KEC International Stock data Forecasts/Valuations 2019 2020E 2021E 52-week range (Rs) (high,low) 341-230 EPS (Rs) 18.9 22.2 26.4 Market Cap. (Rs bn) 75.3 EPS growth (%) 5.7 17.2 19.2 Shareholding pattern (%) P/E (X) 15.5 13.2 11.1 Promoters 51.3 Sales (Rs bn) 110.0 127.1 145.7 FIIs 6.6 Net profits (Rs bn) 4.9 5.7 6.8 MFs 22.1 EBITDA (Rs bn) 11.5 13.3 15.3 Price performance (%) 1M 3M 12M EV/EBITDA (X) 7.9 7.1 5.8 Absolute (11.4) (0.8) (7.9) ROE (%) 21.9 21.2 21.0 Rel. to BSE-30 (4.6) 3.5 (5.4) Div. Yield (%) 0.8 0.8 1.0

Steady execution seen in 1QFY20; however, order inflow and interest expense disappoint KEC reported 1QFY20 revenues of Rs24 bn, up 15% yoy led by 25% yoy jump in T&D execution and 67% yoy jump in the railways segment. Civil segment revenue growth was impacted by slowdown in order inflows and manpower shortage owing to elections. Cable segment revenue growth got impacted by lower commodity prices. KEC reported EBITDA margin of 10.4%, up 10 bps yoy and in line with our estimate. Interest was marginally ahead of estimate on higher interest rates in both domestic and overseas markets and one-time cost on repayment of high- cost overseas loan. The company thus reported PAT of Rs886 mn, down 4% yoy and 12% below estimate. Ordering declined 59% yoy due to delays in order finalization leading to a modest 5% growth in backlog. Strong L1 order pipeline suggests a strong recovery is in the offing. Management maintains revenue growth and margin guidance, concerned on order inflow The management maintained their guidance on 15-20% growth in revenues for FY2020 driven by strong order backlog in the T&D segment, continued traction in railways and expectations of incremental order inflows in the civil segment. We build in the lower end of the growth guidance to factor in delays in order finalization both from domestic and international markets. KEC is currently L1 in orders worth Rs35 bn and expect an inflow of Rs160-170 bn in FY2020. Inflows in T&D segment would be driven by green energy corridor and TBCB projects as well as from international geographies such as Bangladesh, Nepal, Africa, Far East and Brazil. In railways, it would be largely RoBs, track laying as the level 2 signaling projects have been delayed so far. KEC maintained 10.5% margin guidance while increasing guidance for interest cost to 2.7% as against earlier guidance of 2.5%. Debt has come down led by repayment of high-cost loan while acceptances have moved up as they are substituted for debt till the lending market improves. Aditya Mongia Cut estimates by 3%/9% and lower fair value to Rs330 net of roll-forward We cut estimates for FY2020/21 by 3/9% on lower order inflow estimates (railways focused by Teena Virmani T&D and civil) and higher interest expense (defer improvement in debtors to FY2021). We broadly retain our margin estimate at 10.5% net of operating leverage benefits, better product mix and absence of forex gains. Our unchanged 12X P/E multiple yields a Rs330 per share fair value after roll-forward. The key risk to our estimate of 20% PAT CAGR over FY2019-21 emanates from further deterioration in working capital and cost of debt. We expect a strong backlog and good ordering pipeline to help mitigate risks on revenue growth and EBITDA.

[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. KEC International Capital Goods

Exhibit 1: Topline growth was led by strong execution in T&D and railways; improvement in ordering to scale up revenues across all segments going forward 1QFY20 – key numbers for KEC (consolidated), March fiscal year-ends (Rs mn)

% change 1QFY20 1QFY20E 1QFY19 4QFY19 vs est. yoy qoq FY2019 FY2018 % change FY2020E FY2019 % change Total operating income 24,125 24,827 21,043 38,412 (3) 15 (37) 110,005 100,580 9 127,091 110,005 16 Expenses (21,611) (22,270) (18,880) (34,421) (3) 14 (37) (98,506) (90,518) 9 (113,747) (98,506) 15 Raw material cost (17,266) (14,724) (27,844) 17 (38) (80,578) (73,764) 9 (92,776) (80,578) 15 Employee expenses (2,217) (2,034) (2,109) 9 5 (8,322) (7,984) 4 (10,627) (8,322) 28 Other expenses (2,520) (1,583) (2,505) 59 1 (8,954) (9,819) (9) (10,345) (8,954) 16 EBITDA 2,513 2,557 2,163 3,990 (2) 16 (37) 11,499 10,062 14 13,343 11,499 16 Other income 27 63 110 63 (57) (75) (57) 226 404 (44) 95 226 (58) Interest (795) (767) (648) (846) 4 23 (6) (3,119) (2,466) 26 (3,374) (3,119) 8 Depreciation (366) (305) (298) (261) 20 23 41 (1,171) (1,097) 7 (1,305) (1,171) 11 PBT 1,379 1,548 1,327 2,948 (11) 4 (53) 7,435 6,902 8 8,759 7,435 18 Tax (493) (541) (474) (1,009) (9) 4 (51) (2,571) (2,298) 12 (3,057) (2,571) 19 Net profit 886 1,007 853 1,939 (12) 4 (54) 4,864 4,604 6 5,702 4,864 17

Key ratios (%) Raw material cost/ Sales 69.9 72.5 77.6 73.8 72.3 73.0 73.8 Employee expenses/ Sales 9.2 9.7 5.5 7.6 7.9 8.4 7.6 Other expenses/ Sales 10.4 7.5 6.5 8.1 9.8 8.1 8.1 EBITDA margin 10.4 10.3 10.3 10.4 10.5 10.0 10.5 10.5 PBT margin 5.7 6.2 6.3 7.7 6.8 6.9 6.9 6.8 Tax rate 35.7 34.9 35.7 34.2 34.6 33.3 34.9 34.6 PAT margin 3.7 4.1 4.1 5.0 4.4 4.6 4.5 4.4 EPS (Rs) 3.4 3.9 3.3 7.5 18.9 17.9 22.2 18.9

Order details Order inflows 11,150 27,480 34,260 (59) (67) 128,510 150,980 (15) 155,754 128,510 21 Order backlog 190,160 181,910 190,740 5 (0) 190,740 172,980 10 218,360 190,740 14

Source: Company, Kotak Institutional Equities estimates

Exhibit 2: T&D and railways execution was strong while civil segment was impacted by lower inflows Segment-wise adjusted revenues for KEC (consolidated) in 1QFY20, March fiscal year-ends (Rs mn)

% change 1QFY20 1QFY19 4QFY19 yoy qoq FY2019 FY2018 % change FY2020E FY2019 % change T&D total 15,990 12,770 27,530 25 (42) 73,060 78,200 (7) 91,886 73,060 26 Cables 2,630 2,590 3,490 2 (25) 11,830 10,090 17 8,180 11,830 (31) Railway 5,220 3,130 6,330 67 (18) 19,180 8,440 127 21,777 19,180 14 Other segments and eliminations 280 2,560 1,070 (89) (74) 5,950 4,230 41 6,290 5,950 6 Total revenues 24,120 21,050 38,420 15 (37) 110,020 100,960 9 128,134 110,020 16 Revenue contribution (%) T&D total 66.3 60.7 71.7 66.4 77.5 71.7 66.4 Cables 10.9 12.3 9.1 10.8 10.0 6.4 10.8 Railway 21.6 14.9 16.5 17.4 8.4 17.0 17.4 Other segments and eliminations 1.2 12.2 2.8 5.4 4.2 4.9 5.4

Source: Company, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 59 Capital Goods KEC International

Exhibit 3: Visibility on trailing revenues for KEC International, March fiscal year-ends, 2009-19 (number of years)

(years) Visibility on trailing revenues 2.0 1.7 1.7 1.7

1.6 1.5 1.5 1.5 1.4 1.4 1.3 1.2 1.1 1.1

0.8

0.4

- 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Source: Company, Kotak Institutional Equities

Exhibit 4: 1QFY20 EBITDA margin at 10.4%, in line with management guidance Trends in EBITDA margin over the past few quarters, March fiscal year-ends, 1QFY14-1QFY20 (%)

Gross margin EBITDA margin 35 12

31 10

8 27 6 23 4 19 2

15 0

1QFY14

3QFY14

1QFY15

3QFY15

1QFY16

3QFY16

1QFY17

3QFY17

1QFY18

3QFY18

1QFY19

3QFY19

1QFY20

1QFY14

3QFY14

1QFY15

3QFY15

1QFY16

3QFY16

1QFY17

3QFY17

1QFY18

3QFY18

1QFY19 3QFY19 1QFY20

Source: Company, Kotak Institutional Equities

60 KOTAK INSTITUTIONAL EQUITIES RESEARCH KEC International Capital Goods

Exhibit 5: Higher interest rates and one-time interest component led to yoy higher interest cost as % of sales; management pegs it at 2.7% of sales in FY2020 Interest cost as percentage of sales for KEC, March fiscal year-ends, 1QFY14-1QFY20 (%)

5 4.2 4.1 3.8 3.9 4 3.6 3.8 3.4 3.4 3.4 3.3 3.4 3.2 3.3 3.1 3.1 3.1 3.2 2.9 3 2.8 2.8 2.5 2.2 2.3 2.2 2 1.7

1

0

1QFY14

2QFY14

3QFY14

4QFY14

1QFY15

2QFY15

3QFY15

4QFY15

1QFY16

2QFY16

3QFY16

4QFY16

1QFY17

2QFY17

3QFY17

4QFY17

1QFY18

2QFY18

3QFY18

4QFY18

1QFY19

2QFY19

3QFY19 4QFY19 1QFY20

Source: Company, Kotak Institutional Equities

Exhibit 6: Order backlog, up 5% yoy in 1QFY20 Trends in order inflows and backlog of KEC, March fiscal year-ends, 1QFY14-1QFY20 (Rs bn)

Order inflows Order backlog 70 240

60 200 50 160 40 120 30 80 20

10 40

0 0

1QFY14

3QFY14

1QFY15

3QFY15

1QFY16

3QFY16

1QFY17

3QFY17

1QFY18

3QFY18

1QFY19

3QFY19

1QFY20

1QFY14

3QFY14

1QFY15

3QFY15

1QFY16

3QFY16

1QFY17

3QFY17

1QFY18

3QFY18

1QFY19

3QFY19 1QFY20

Source: Company, Kotak Institutional Equities

KOTAK INSTITUTIONAL EQUITIES RESEARCH 61 Capital Goods KEC International

Exhibit 7: Geographical and segmental breakup of backlog and inflow, March fiscal year-ends

1QFY20-end backlog (Rs190 bn) 1QFY20 order inflows (Rs11 bn) Civil/solar Railways 9% Railways 0% 25%

Transmission & Distribution Cables Water 46% 3% 32%

Cables Transmission 2% & Distribution Transmission 70% - SAE 13%

Source: Company, Kotak Institutional Equities

Exhibit 8: Net debt (incl. acceptances) of KEC International, March fiscal year-ends, 2014-22E (Rs bn)

(Rs bn) Net debt 34 33 33 33 32 32 31 30 30 30 30 29 29 29 28 28 27 26 25 24 2014 2015 2016 2017 2018 2019 2020E 2021E 2022E

Source: Company, Kotak Institutional Equities

62 KOTAK INSTITUTIONAL EQUITIES RESEARCH KEC International Capital Goods

Exhibit 9: We arrive at a justified one-year forward P/E multiple of ~12X for KEC International Justified multiple framework for KEC International, March fiscal year-ends

Key inputs Inputs for growth and terminal phase Inputs for cash conversion Growth phase revenue CAGR (%) 10.5 PAT margin (%) 5.3 Growth phase PAT CAGR (%) 14.3 Interest rate (%) 11.8 No. of years in initial growth phase (Growth_years) 5.0 Marginal tax rate (%) 34.9 Terminal growth rate (Tg, %) 5.0 Gross FATR (X) 7.2 Cost of equity (COE, %) 13.0 Average asset life (years) 14.1 Steady state capital structure - debt mix (%) 50.0 Adjusted working capital as days of sales 128

Component of justified multiple calculation Formula Calculation One-year forward exit multiple on FCFE in terminal year 1 / (COE - Tg) 12.5 Terminal phase cash conversion ratio FCFE / PAT 0.70 One-year forward P/E multiple in terminal year 8.8 Discount factor for terminal year multiple to target year 1 / ((1+COE)^ growth years) 0.54 1 * ( (1 + growth CAGR) ^ Bump up the multiple by the PAT jump over the growth years 1.8 (growth years-1)) * (1+Tg) Justified one-year forward P/E multiple for terminal value component 8.5 Value of growth period Value of growth period in terms of FCFE 4.5 FCFE multiple * cash Value of growth period in terms of P/E 3.1 conversion Justified one-year forward P/E multiple 11.7

Source: Company, Kotak Institutional Equities estimates

Exhibit 10: Sensitivity of justified P/E multiple for KEC, March fiscal year-ends

Sensitivity of justified target P/E multiple PAT CAGR in initial high-growth period (%) 12 10 12 14 16 18 3 9.6 9.9 10.2 10.5 10.8 4 10.0 10.4 10.9 11.4 11.8

5 10.4 11.0 11.6 12.3 13.0 growth

business business 6 10.7 11.5 12.3 13.2 14.1

No. No. of years of 7 11.1 12.0 13.0 14.1 15.4

Source: Kotak Institutional Equities estimates

Exhibit 11: Consolidated estimates for KEC International, March fiscal year-ends, 2019-21E (Rs mn)

Revised estimates Previous estimates % change 2019 2020E 2021E 2020E 2021E 2020E 2021E Order inflows 128,510 155,754 172,760 167,285 185,797 (7) (7) Yoy growth (%) (14.9) 21.2 10.9 30.2 11.1 Order backlog 190,740 218,360 244,180 229,661 260,227 (5) (6) Revenues 110,005 127,091 145,745 127,319 153,966 (0) (5) Yoy growth (%) 9.4 15.5 14.7 15.7 20.9 EBITDA 11,499 13,343 15,298 13,355 16,177 (0) (5) EBITDA margin (%) 10.5 10.5 10.5 10.5 10.5 0 bps -1 bps Interest cost (3,119) (3,374) (3,598) (3,224) (3,490) 5 3 Net PAT 4,864 5,702 6,796 5,906 7,462 (3) (9) EPS (Rs) 18.9 22.2 26.4 23.0 29.0 (3) (9) Yoy growth (%) 5.6 17.2 19.2 21.4 26.4

Receivables (days of sales) 276 276 266 276 276

Source: Company, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 63 Capital Goods KEC International

Exhibit 12: Key segmental financials of KEC (consolidated), March fiscal year-ends, 2012-22E (Rs mn)

2012 2013 2014 2015 2016 2017 2018 2019 2020E 2021E 2022E Total Order inflows 65,870 78,770 84,905 82,230 87,140 123,580 150,980 128,510 155,754 172,760 190,502 Yoy growth (%) 19.2 19.6 7.8 (3.2) 6.0 41.8 22.2 (14.9) 21.2 10.9 10.3 Revenues 58,147 69,795 79,018 84,678 85,178 85,844 100,580 110,005 127,091 145,745 166,107 Yoy growth (%) 30.0 20.0 13.2 7.2 0.9 2.7 15.1 9.9 15.5 14.7 14.0 Order backlog 85,720 94,700 102,000 95,080 94,868 126,310 172,980 190,740 218,360 244,180 267,211 Bill to book ratio (%) 52.4 55.8 57.6 59.2 61.6 56.0 50.0 46.8 47.7 48.2 49.3 EBITDA 4,654 3,814 4,933 5,118 6,923 8,179 10,062 11,499 13,343 15,298 17,442 EBITDA margin (%) 8.0 5.5 6.2 6.0 8.1 9.5 10.0 10.5 10.5 10.5 10.5 T&D total Inflows 47,873 57,506 59,544 55,916 63,612 76,620 81,529 70,295 92,761 102,037 112,241 Inflows growth (%) 3.9 20.1 3.5 (6.1) 13.8 20.4 6.4 (13.8) 32.0 10.0 10.0 Revenues 41,480 49,980 61,160 64,840 62,800 60,300 67,950 64,293 81,171 88,984 101,125 Backlog 70,033 77,559 80,784 71,310 70,868 90,943 103,788 115,461 127,052 140,106 151,222 Bill to book ratio (%) 47.4 50.6 57.0 59.6 60.9 55.2 51.6 46.3 50.2 50.0 51.5 EBITDA 3,510 2,706 4,280 5,384 5,649 6,217 7,297 7,183 8,853 9,705 11,029 EBITDA margin (%) 8.5 5.4 7.0 8.3 9.0 10.3 10.7 11.2 10.9 10.9 10.9 Cables Inflows 5,927 5,104 8,567 11,512 9,585 9,886 10,569 9,539 10,493 11,332 12,125 Inflows growth (%) 9.0 (13.9) 67.8 30.0 (16.7) 3.1 20.0 10.0 10.0 8.0 7.0 Revenues 5,710 5,520 6,310 9,070 10,260 10,540 10,090 11,830 8,180 10,667 11,633 Backlog 1,457 1,042 2,448 5,705 4,725 1,263 3,460 3,741 6,054 6,720 7,212 Bill to book ratio (%) 79.7 84.1 65.7 65.0 67.1 72.1 85.3 91.0 91.0 91.0 91.0 EBITDA 114 (110) (316) (272) 205 527 706 946 654 853 931 EBITDA margin (%) 2.0 (2.0) (5.0) (3.0) 2.0 5.0 7.0 8.0 8.0 8.0 8.0 Railways Inflows 1,179 3,627 2,375 2,467 2,614 14,830 39,255 26,885 27,403 31,514 35,295 Inflows growth (%) (65.7) 207.7 (34.5) (25.0) 6.0 467.3 164.7 (31.5) 1.9 15.0 12.0 Revenues 1,640 2,700 1,690 1,330 2,100 4,460 8,440 19,180 21,777 24,458 27,580 Backlog 3,429 4,356 4,488 4,754 5,669 15,157 41,515 48,698 54,324 61,380 69,095 Bill to book ratio (%) 36.6 51.5 30.5 23.2 34.6 34.1 24.3 34.9 34.9 34.9 34.9 EBITDA — — (51) (40) 126 312 760 1,918 2,221 2,544 2,868 EBITDA margin (%) — — (3.0) (3.0) 6.0 7.0 9.0 10.0 10.2 10.4 10.4 Civil/solar Inflows 3,137 2,464 4,411 — 1,743 6,179 4,529 11,266 13,519 15,141 16,958 Inflows growth (%) 912.1 (21.5) 79.0 (20.0) 254.5 15.0 80.0 20.0 12.0 12.0 Revenues 190 1,270 1,310 1,410 1,960 2,380 4,230 5,950 6,290 10,710 13,646 Backlog 3,257 4,451 5,712 3,803 2,268 6,316 5,189 4,682 11,910 16,341 19,653 Bill to book ratio (%) 10.1 28.3 19.7 24.7 41.9 44.4 49.3 55.0 55.0 55.0 55.0 EBITDA — — (39) (42) 59 143 381 565 610 1,060 1,351 EBITDA margin (%) — — (3.0) (3.0) 3.0 6.0 9.0 9.5 9.7 9.9 9.9 SAE Inflows 7,753 10,069 10,009 12,335 9,585 16,065 15,098 10,526 11,578 12,736 13,882 Inflows growth (%) — 29.9 — — (22.3) 67.6 (6.0) (30.3) 10.0 10.0 9.0 Revenues 9,130 10,320 8,540 8,030 8,300 10,020 10,250 9,655 10,715 12,122 13,486 Backlog 7,543 7,292 8,568 9,508 11,339 12,631 19,028 18,157 19,020 19,634 20,030 Bill to book ratio (%) 71.3 82.1 69.5 54.5 58.0 51.7 50.8 39.7 44.7 47.7 50.7 EBITDA 1,096 1,290 837 80 415 902 923 917 1,039 1,176 1,308 EBITDA margin (%) 12.0 12.5 9.8 1.0 5.0 9.0 9.0 9.5 9.7 9.7 9.7

Source: Company, Kotak Institutional Equities estimates

64 KOTAK INSTITUTIONAL EQUITIES RESEARCH KEC International Capital Goods

Exhibit 13: Key financials for KEC (consolidated), March fiscal year-ends, 2012-22E (Rs mn)

2012 2013 2014 2015 2016 2017 2018 2019 2020E 2021E 2022E Income statement Total operating income 58,147 69,795 79,018 84,678 85,178 85,844 100,580 110,005 127,091 145,745 166,107 Total operating costs (53,493) (65,981) (74,085) (79,560) (78,255) (77,665) (90,518) (98,506) (113,747) (130,447) (148,666) Raw materials consumed (43,173) (53,301) (59,594) (64,527) (61,798) (59,489) (72,716) (81,230) (92,776) (106,394) (121,258) Employee expenses (4,284) (4,829) (5,661) (5,865) (6,392) (7,327) (7,984) (8,322) (10,627) (12,190) (13,887) Operating and other expenses (6,037) (7,852) (8,831) (9,168) (10,064) (10,849) (9,819) (8,954) (10,345) (11,863) (13,520) EBITDA 4,654 3,814 4,933 5,118 6,923 8,179 10,062 11,499 13,343 15,298 17,442 Other income 12 160 138 1,462 103 289 404 226 95 167 434 Interest expense (1,448) (1,944) (2,633) (3,089) (2,794) (2,536) (2,466) (3,119) (3,374) (3,598) (3,842) Depreciation (479) (561) (705) (881) (1,318) (1,297) (1,097) (1,171) (1,305) (1,429) (1,559) PBT 2,739 1,470 1,733 2,611 2,914 4,634 6,902 7,435 8,759 10,438 12,475 Taxes paid (971) (818) (883) (1,001) (1,436) (1,587) (2,298) (2,571) (3,057) (3,642) (4,353) Net PAT 1,768 652 850 1,610 1,478 3,048 4,604 4,864 5,702 6,796 8,121 Earnings per share (Rs) 6.9 2.5 3.3 6.3 5.8 11.9 17.9 18.9 22.2 26.4 31.6

Balance sheet Shareholders funds 11,078 11,472 11,916 13,298 12,904 15,864 19,974 24,351 29,337 35,278 42,378 Equity share capital 514 514 514 514 514 514 514 514 514 514 514 Reserves & surplus 10,564 10,958 11,402 12,784 12,390 15,349 19,460 23,837 28,822 34,764 41,864 Loan funds 12,392 16,690 21,273 21,894 32,212 20,957 17,663 18,394 18,394 18,394 18,394 Deferred tax liability 513 621 514 527 1,034 1,240 1,007 1,183 1,183 1,183 1,183 Total source of funds 23,983 28,783 33,702 35,719 46,150 38,060 38,645 43,929 48,914 54,856 61,956 Net fixed assets 9,348 10,114 9,922 8,811 10,109 9,216 9,983 9,860 10,305 10,626 10,993 Goodwill on consolidation 3,209 3,424 3,778 3,943 1,952 1,910 1,920 2,037 2,037 2,037 2,037 Cash balances 2,102 1,556 1,440 2,063 853 2,080 2,313 2,762 (399) 4,563 6,290 Net current assets excluding cash 9,324 13,689 18,562 20,902 32,982 23,550 24,036 29,138 36,839 37,497 42,504 Total application of funds 23,983 28,783 33,702 35,719 46,150 38,060 38,645 43,929 48,914 54,856 61,956

Cash flow statement Operating profit before working capital changes 3,695 3,157 4,188 5,579 5,590 6,881 8,168 9,154 10,381 11,822 13,523 Change in working capital/other adjustments 2,126 (4,365) (4,873) (2,340) (12,080) 9,432 (486) (5,101) (7,701) (658) (5,007) Net cash flow from operating activites 5,821 (1,209) (686) 3,239 (6,490) 16,312 7,682 4,053 2,680 11,164 8,516 Cash (used)/realised in investing activities (1,815) (1,542) (866) 65 (879) (1,412) (963) (905) (1,750) (1,750) (1,925) Free cash flow (OCF + net capex) 4,006 (2,751) (1,552) 3,305 (7,115) 15,950 5,808 2,887 930 9,414 6,591 Cash (used)/realised in financing activities (3,858) 2,098 1,725 (2,695) 5,652 (13,880) (6,253) (2,876) (4,091) (4,452) (4,863) Cash generated/utilised 164 (546) (116) 623 (1,210) 1,227 233 449 (3,161) 4,962 1,728 Net cash at end of year 1,777 1,556 1,440 2,063 853 2,080 2,313 2,762 (399) 4,563 6,290

Key ratios EBITDA margin (%) 8.0 5.5 6.2 6.0 8.1 9.5 10.0 10.5 10.5 10.5 10.5 PAT margin (%) 3.0 0.9 1.1 1.9 1.7 3.6 4.6 4.4 4.5 4.7 4.9 Effective tax rate (%) 35.5 55.6 51.0 38.3 49.3 34.2 33.3 34.6 34.9 34.9 34.9 Net debt to equity 0.9 1.3 1.7 1.5 2.4 1.2 0.8 0.6 0.6 0.4 0.3 Return on Equity (%) 17.2 5.8 7.3 12.8 11.3 21.2 25.7 21.9 21.2 21.0 20.9 ROCE (%) 11.2 5.7 6.9 10.1 7.1 11.2 16.3 16.7 17.0 17.6 18.2 Book value per share (Rs) 43.1 44.6 46.3 51.7 50.2 61.7 77.7 94.7 114.1 137.2 164.8

Source: Company, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 65 ADD JK Lakshmi Cement (JKLC) Construction Materials AUGUST 07, 2019 RESULT Coverage view: Cautious Record margins led by strong prices. JKLC’s 1QFY20 EBITDA was above our estimate on strong realizations. Cement price hikes have started reversing on weak demand and Price (`): 330 expect margins to correct. Commissioning of the thermal power plant and the grinding Fair Value (`): 355 unit should aid in cost control in FY2020-21E. Strong prices and low capex should help BSE-30: 36,691 deleverage in FY2020-21E and expect capacity expansion to be announced in FY2021E. We revise fair value to Rs355 (Rs432 earlier) on higher net debt and maintain ADD.

Company data and valuation summary JK Lakshmi Cement Stock data Forecasts/Valuations 2019 2020E 2021E 52-week range (Rs) (high,low) 396-250 EPS (Rs) 4.0 24.4 31.9 Market Cap. (Rs bn) 38.9 EPS growth (%) (28.6) 502.1 31.0 Shareholding pattern (%) P/E (X) 81.7 13.6 10.3 Promoters 45.9 Sales (Rs bn) 43.2 47.8 50.8 FIIs 9.0 Net profits (Rs bn) 0.5 2.9 3.8 MFs 16.9 EBITDA (Rs bn) 4.5 7.5 8.6 Price performance (%) 1M 3M 12M EV/EBITDA (X) 11.5 6.5 5.3 Absolute (2.8) (10.2) 3.1 ROE (%) 3.3 17.8 19.7 Rel. to BSE-30 4.7 (6.4) 5.8 Div. Yield (%) 0.2 0.6 0.6

1QFY20—realizations jumpstart and volumes support JKLC’s 1QFY20 earnings were much above our estimates—the company reported revenues of Rs10.4 bn (+13% yoy, -11% qoq), EBITDA of Rs1.7 bn (+81% yoy, +29% qoq) and net income of Rs696 mn (+406% yoy, +61% qoq), against our estimates of Rs9.8 bn, Rs1.4 bn and Rs509 mn. Cement volumes increased 2% yoy to 2.3 mn tons (-21% qoq) despite muted growth reported by peers in the regions. EBITDA/ton increased 78% yoy to Rs729/ton (+63% qoq) on (1) a sharp increase in realizations of Rs4,472/ton (+11% yoy, +12% qoq) while costs increased to Rs3,743/ton (+3%yoy, +6% qoq) on account of high power and fuel costs (+2% yoy, +10% qoq) on account of usage of high-cost inventories. Moreover, other expenses saw a sharp rise on account of a one-time consulting fee and donations made during the quarter. The company’s subsidiary, Udaipur Cement Works reported EBITDA of Rs386 mn (+479% yoy, +92% qoq) and net profit of Rs138 mn (net loss of Rs42 mn and Rs136 mn in 4QFY19 and 1QFY19, respectively). The plant is in ramp-up/stabilization phase and the company expects it to cash break-even from FY2020.

FY2020—asset sweating along with debottlenecking shall support deleveraging The management highlighted that its primary focus was on deleveraging its balance sheet through improving operational cash flows in FY2020. The 20 MW captive power plant at Durg and 0.8 mtpa grinding unit at Odisha should commission in 2QFY20E. We expect cost efficiencies from 2HFY20E to partially offset price moderations. JKLC’s net debt/EBITDA reduced from 4.8X in FY2018 to 3.9X in FY2019. With limited capex and strong prices, we see further deleveraging to 1.2X by FY2021E. Sumangal Nevatia Revise fair value to Rs355 (Rs432 earlier), maintain ADD rating

We have cut EBITDA by 6-3% and EPS by 7-4% for FY2020-22E led by 0-1% cut in our price Murtuza Arsiwalla estimates factoring the recent correction in cement prices while we keep volumes unchanged. We increase our net debt estimate for FY2021E as we reclassify the current portion of long- term borrowing under debt as detailed in the annual report. With higher debt and lower Prayatn Mahajan earnings, our fair value reduces to Rs355 (Rs432 earlier) at an unchanged 6X EV/EBITDA March 2021E. The stock trades at inexpensive 6.5X/5.3X FY2020/21EV/EBITDA. Maintain ADD.

[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. JK Lakshmi Cement Construction Materials

Exhibit 1: JK Lakshmi's EBITDA/ton at record highs due to strong realizations; volumes increased 2% yoy in 1QFY20 Quarterly results for JK Lakshmi Cement (standalone), March fiscal year-ends, 2019-20E (Rs mn)

Change (%) 1QFY20 1QFY20E 1QFY19 4QFY19 KIE yoy qoq FY2020E FY2019 (% chg) Net sales 10,419 9,801 9,234 11,725 6 13 (11) 43,206 38,823 11 Total Costs (8,721) (8,341) (8,296) (10,412) 5 5 (16) (36,188) (34,674) Raw materials (2,367) (2,586) (2,206) (3,392) (8) 7 (30) (9,720) (9,688) Employee costs (773) (654) (632) (654) 18 22 18 (2,780) (2,598) Power costs (2,233) (1,954) (2,150) (2,563) 14 4 (13) (9,755) (9,198) Freight costs (2,130) (2,104) (2,456) (2,759) 1 (13) (23) (10,110) (9,533) Other costs (1,218) (1,044) (852) (1,044) 17 43 17 (3,823) (3,656) EBITDA 1,698 1,460 939 1,312 16 81 29 7,018 4,150 69 EBITDA (%) 16.3 14.9 10.2 11.2 16.2 10.7 Other income 59 124 110 166 (53) (46) (64) 788 563 Interest (399) (458) (451) (458) (13) (12) (13) (1,513) (1,874) Depreciation (453) (451) (446) (446) 0 2 1 (1,813) (1,794) PBT 905 676 152 574 34 496 58 4,480 1,044 Tax (209) (167) (14) (142) 25 NM NM (1,254) (249) PAT 696 509 138 433 37 406 61 3,226 795 306 Extraordinaries (302) — — — — — Reported PAT 394 509 138 433 (23) 186 (9) 3,226 795 EPS (Rs) 3.3 4.3 1.2 3.7 27.4 6.8 Sales (mn tons) 2.3 2.2 2.3 2.9 4 2 (21) 10.1 9.3 9 Realization (Rs/ton) 4,472 4,373 4,038 3,988 2 11 12 4,261 4,170 2 Cost (Rs/ton) (3,743) (3,722) (3,627) (3,542) 1 3 6 (3,569) (3,724) (4) Raw materials (1,016) (1,154) (965) (1,154) (12) 5 (12) (958) (1,041) Employee costs (332) (292) (276) (222) 14 20 49 (274) (279) Power & fuel costs (958) (872) (940) (872) 10 2 10 (962) (988) Freight costs (914) (939) (1,074) (939) (3) (15) (3) (997) (1,024) Other costs (523) (466) (372) (355) 12 40 47 (377) (393) Profitability (Rs/ton) 729 652 410 446 12 78 63 692 446 55 Tax rate (%) 23.1 24.7 9.4 24.7 28.0 23.8

Source: Company, Kotak Institutional Equities estimates

Changes in our estimates

Exhibit 5 highlights key changes in our estimates.

We have cut EBITDA by 6-3% and EPS by 7-4% for FY2020-22E led by 0-1% cut in our price estimates factoring the recent cut in East prices while we keep volumes unchanged. We increase our net debt estimate for FY2021E to Rs10.6 bn versus Rs9.9 bn earlier as we reclassify the current portion of long-term borrowing under debt against earlier as other current liabilities as detailed in the annual report. Lower earnings and higher net debt result in a lower revised fair value of Rs355 (from Rs432) at an unchanged 6X EV/EBITDA March 2021E.

Other highlights, key takeaways from the earnings call

 Power plant commissioned, grinding unit on the way. The company commissioned the 20 MW thermal power plant at Durg during the quarter. The company expects the full impact on cost savings to realize in 12 months post stabilization.

The 0.8 mn ton grinding unit in Odisha is likely to start trial runs in October 2019. The commissioning of the grinding unit got delayed due to cyclones in Odisha in May 2019.

 Udaipur Cement Works is ramping up fast. The company expects it to be PBT positive this year and expects to achieve a profitability of Rs400-Rs500/ton. The company remains hopeful of ramping up the asset as it enjoys a sales tax incentive of Rs100/ton. JKLC sourced 0.1 mn tons of clinker from UCW during the quarter. JKLC continues to work closely with UCW to generate cost efficiencies for both the companies.

KOTAK INSTITUTIONAL EQUITIES RESEARCH 67 Construction Materials JK Lakshmi Cement

 Capex guidance at Rs0.3 bn. The company has given a capex guidance of Rs0.3 bn towards the remaining portion of FY2020. Management highlighted that it will soon evaluate clinker expansion as its clinker plants are operating at rated capacity. The sustenance capex is only Rs0.3-Rs0.4 bn per year.

 Price guidance. The company had taken a price increase of Rs25-30/bag in the months of April and May. The company also hinted at price moderation in the months of July and August given the seasonal weakness in demand due to monsoons.

 Costs guidance. On cost savings, (1) the completion of thermal power plant can save close to Rs60-70/ton of costs from FY2020E, (2) logistics costs are expected to decline through measures such as lead distance reduction, use of GPS-fitted trucks and payment on actual distance travelled suggested by BCG, and (3) fuel cost savings from a sharp decline in pet coke prices shall be realized from 3QFY20E.

We note the commissioning of the grinding unit in Odisha will aid profitability led by (1) lower freight costs, and (2) higher pricing in coastal Odisha.

During the quarter, the cost of slag moderated sharply from its peak in 4QFY19 which led to further cost savings in material costs. The company expects the price volatility to go down during the year.

 Volume guidance. The company highlighted that going forward it aims to sell less clinker and more of blended cement, which will allow it to increase its volume in FY2020E. Further debottlenecking at Durg will help increase volumes further. The company maintains its guidance of volume growth of 8-10% during the year.

Exhibit 2: Udaipur Cement Works expected to achieve cash break-even in FY2020 Quarterly results for Udaipur Cement Works (subsidiary), March fiscal year-ends, 2018-20E (Rs mn)

Change (%) 1QFY20 1QFY19 4QFY19 yoy qoq FY2020E FY2019 (% chg) Net sales 2,017 1,290 1,977 56 2 5,998 5,793 4 Raw materials (941) (315) (1,041) (2,093) (2,024) Employee costs (85) (72) (70) (319) (301) Power costs (386) (445) (408) (1,608) (1,676) Freight costs (116) (281) (164) (902) (941) Other costs (104) (112) (93) (535) (452) EBITDA 386 67 201 479 92 540 399 35 EBITDA (%) 19.1 5.2 10.2 9.0 6.9 Other income 1 — 4 11 12 Interest (165) (169) (173) (685) (685) Depreciation (84) (84) (83) (341) (339) PBT 138 (186) (51) (475) (614) Tax — 50 9 48 — PAT 138 (136) (42) NM NM (428) (614) (30) Extraordinaries — 27 3 — 37 Reported PAT 138 (109) (39) (428) (577) (26)

Source: Company, Kotak Institutional Equities estimates

68 KOTAK INSTITUTIONAL EQUITIES RESEARCH JK Lakshmi Cement Construction Materials

Exhibit 3: JK Lakshmi’s EBITDA/ton increased 78% yoy due to a 11% qoq increase in realization Quarterly realizations and EBITDA/ton of JK Lakshmi Cement, 4QFY15- 1QFY20 (Rs/ton)

Cost (Rs/ton) EBITDA (Rs/ton) 4,500

4,000 729

505

427

410

455

431

446

448 527

3,500 545

380

380

452

317

557

306 403

3,000

3,743

3,632

3,627

3,604

3,572 3,572

3,572 3,572

3,542

3,530

3,417

3,305

3,303

3,271 3,271

3,261 3,257 3,257

2,500 3,214

3,127 3,127 3,049

2,000

1QFY16

2QFY16

3QFY16

4QFY16

1QFY17

2QFY17

3QFY17

4QFY17

1QFY18

2QFY18

3QFY18

4QFY18

1QFY19

2QFY19

3QFY19 4QFY19 1QFY20

Source: Company, Kotak Institutional Equities estimates

Exhibit 4: JK Lakshmi's volumes increased 2% yoy in 1QFY20 due to improved asset sweating Quarterly volumes of JK Lakshmi Cement, 4QFY15- 1QFY20 (Rs/ton)

3.5 Volumes (mn tons) (LHS) Growth yoy (%) (RHS) 50%

3.0 40%

2.5 32% 30% 2.0 20% 1.5 10% 1.0

0.5 0%

- -10%

4QFY15

1QFY16

2QFY16

3QFY16

4QFY16

1QFY17

2QFY17

3QFY17

4QFY17

1QFY18

2QFY18

3QFY18

4QFY18

1QFY19

2QFY19

3QFY19 4QFY19 1QFY20

Source: Company, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 69 Construction Materials JK Lakshmi Cement

Exhibit 5: JK Lakshmi Cement, changes in estimates, March fiscal year-ends, 2020-22E

Revised estimate Previous estimate Change (%) 2020E 2021E 2022E 2020E 2021E 2022E 2020E 2021E 2022E Volume and realizations (mn tons, Rs/ton) Cement sales - standalone (mn tons) 10.1 10.4 10.8 10.1 10.4 10.8 — — — Cement sales - Udaipur Cement (mn tons) 1.3 1.3 1.3 1.3 1.3 1.3 — — — Realization (Rs/ton) 4,256 4,405 4,537 4,288 4,421 4,554 (1) (0) (0) EBITDA (Rs/ton) 692 762 782 707 754 784 (2) 1 (0) Earnings estimates (Consolidated) (Rs mn) Revenues 47,750 50,811 53,861 48,202 51,080 54,083 (1) (1) (0) EBITDA 7,545 8,594 9,188 8,023 8,835 9,506 (6) (3) (3) PAT 2,865 3,755 4,408 3,089 3,909 4,669 (7) (4) (6) EPS 24.4 31.9 37.5 26.2 33.2 39.7 (7) (4) (6)

Source: Company, Kotak Institutional Equities estimates

Exhibit 6: JK Lakshmi Cement, assumptions, March fiscal year-ends, 2017-22E (mn tons, Rs mn)

Change yoy 2017 2018 2019 2020E 2021E 2022E 2019 2020E 2021E 2022E Standalone capacity (mn tons) 10.0 10.9 10.9 11.7 11.7 11.7 — 7 — — Udaipur cement capacity (mn tons) 0.6 1.4 1.4 1.4 1.4 1.4 — — — — Total capacity ( mn tons) 10.6 12.3 12.3 13.1 13.1 13.1 — 7 — — Utilization (%) 75 78 89 87 89 92 Standalone volumes (mn tons) 7.5 8.5 9.7 10.1 10.4 10.8 13 5 3 3 Udaipur cement volumes (mn tons) 0.3 0.9 1.3 1.3 1.3 1.3 40 (5) — — Total volumes ( mn tons) 7.8 9.5 11.0 11.4 11.7 12.0 16 4 3 3 Growth (%) (97.2) 21.6 16.0 3.8 2.7 2.7 Standalone realization (Rs/ton) 3,891 4,000 4,015 4,256 4,405 4,537 0 6 3 3 Growth (%) 2.8 0.4 6.0 3.5 3.0 EBITDA (Rs/ton) 4,341 4,462 8,487 8,996 9,311 9,590 90 6 3 3 Growth (%) 18.1 2.8 90.2 6.0 3.5 3.0 Revenues (Rs mn) 29,216 37,484 43,163 47,750 50,811 53,861 15 11 6 6 EBITDA (Rs mn) 3,697 4,318 4,536 7,545 8,594 9,188 5 66 14 7 PAT (Rs mn) 818 667 476 2,865 3,755 4,408 (29) 502 31 17 Net debt (Rs mn) 19,586 20,710 17,488 14,075 10,639 8,381 (16) (20) (24) (21)

Source: Company, Kotak Institutional Equities estimates

Exhibit 7: Our fair value of Rs355/share is based on 6X FY2021E EBITDA JK Lakshmi Cement, valuation details, March 2021E fiscal year-ends

EBITDA Multiple EV Net Debt Equity Value Rs mn (X) Rs mn Rs mn Rs mn Rs/share Valuation Standalone EBITDA (Rs mn) 7,962 6 47,772 4,643 43,129 368 Udaipur Cement Works 645 6 3,935 5,614 (1,494) (13) Equity value (Rs mn) 51,275 9,639 41,636 355 TP (Rs/share) 355

Source: Company, Kotak Institutional Equities estimates

70 KOTAK INSTITUTIONAL EQUITIES RESEARCH JK Lakshmi Cement Construction Materials

Exhibit 8: JK Lakshmi Cement, financial summary (consolidated), March fiscal year-ends, 2017-22E (Rs mn)

2017 2018 2019 2020E 2021E 2022E Profit model (Rs mn) Net sales 29,216 37,484 43,163 47,750 50,811 53,861 EBITDA 3,697 4,318 4,536 7,545 8,594 9,188 Other income 1,251 690 581 805 1,071 1,425 Interest (2,444) (2,637) (2,555) (2,193) (2,242) (2,242) Depreciation (1,750) (2,073) (2,110) (2,131) (2,174) (2,230) Pretax profits 755 298 452 4,025 5,250 6,141 Tax 78 249 (82) (1,207) (1,533) (1,757) Net profit before minority 833 547 370 2,818 3,717 4,384 Less: Minority interest 15 (120) (107) (47) (38) (24) Net profit after minority 818 667 476 2,865 3,755 4,408 Extraordinary items 40 (4) 37 — — — Reported net income 858 662 512 2,865 3,755 4,408 Earnings per share (Rs) 6.9 5.7 4.0 24.4 31.9 37.5 Balance sheet (Rs mn) Equity 589 589 589 589 589 589 Reserves and surplus 13,421 13,847 14,257 16,793 20,228 24,330 Minority interest 132 13 (76) (123) (161) (185) Borrowings 24,825 25,465 21,348 21,348 21,348 21,348 Other Non Current Liabilities — 2,998 3,565 3,565 3,565 3,565 Currrent liabilities 12,860 8,100 10,973 11,448 11,547 11,895 Total liabilities and equity 51,827 51,011 50,656 53,619 57,115 61,541 Gross block 54,185 56,972 57,300 57,850 58,900 59,950 Net fixed assets 34,853 35,568 33,786 32,205 31,081 29,902 Capital work in progress 3,071 2,283 4,166 4,611 5,611 8,611 Goodwill 705 705 723 723 723 723 Cash 102 125 194 3,557 6,994 9,252 Current assets 7,871 6,023 6,240 6,927 7,110 7,458 Investments 5,224 4,728 3,774 3,823 3,823 3,823 Other Non Current Assets — 1,580 1,773 1,772 1,772 1,772 Total assets 51,827 51,011 50,656 53,619 57,115 61,541 Free cash flow (Rs mn) Operating cash flow, excl. working capital 2,519 1,503 1,943 4,902 5,853 6,590 Working capital 3,587 749 3,018 (213) (84) 1 Capital expenditure (4,918) (1,738) (2,089) (995) (2,050) (4,050) Free cash flow 1,189 514 2,872 3,695 3,719 2,540 Ratios EBITDA margin (%) 12.7 11.5 10.5 15.8 16.9 17.1 PAT margin (%) 2.8 1.8 1.1 6.0 7.4 8.2 Net debt/equity (X) 1.4 1.4 1.2 0.8 0.5 0.3 Book value per share (Rs) 119 123 126 148 177 212 Net debt/EBITDA (X) 5.3 4.8 3.9 1.9 1.2 0.9 RoAE (%) 5.9 4.7 3.3 17.8 19.7 19.3 RoACE (%) 6.4 12.0 5.9 11.2 12.4 12.3 CRoCI (%) 7.9 10.3 7.6 11.2 12.5 13.1

Source: Company, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 71 BUY Lemon Tree Hotels (LEMONTRE) Hotels & Restaurants AUGUST 08, 2019 RESULT, CHANGE IN RECO. Coverage view: Attractive

Looking beyond. Lemon Tree reported weak numbers on the back of lowered Price (`): 57 economic activity and general elections during 1QFY20, further impacted by a partial Fair Value (`): 75 shutdown for improvement of key properties in Delhi. However, commissioning of new BSE-30: 36,691 hotels and stabilization of recently commissioned properties coupled with the recent stock correction prompt us to re-visit our stance. Upgrade to BUY (from ADD) with revised fair value of Rs75/share (from Rs86/share).

Company data and valuation summary Lemon Tree Hotels Stock data Forecasts/Valuations 2019 2020E 2021E 52-week range (Rs) (high,low) 91-56 EPS (Rs) 0.3 1.1 2.3 Market Cap. (Rs bn) 45.1 EPS growth (%) 50.7 297.3 115.9 Shareholding pattern (%) P/E (X) 209.2 52.7 24.4 Promoters 30.9 Sales (Rs bn) 5.5 7.7 9.6 FIIs 13.5 Net profits (Rs bn) 0.2 0.9 1.8 MFs 8.9 EBITDA (Rs bn) 1.7 2.9 4.2 Price performance (%) 1M 3M 12M EV/EBITDA (X) 33.0 18.6 12.7 Absolute (13.8) (22.0) (19.7) ROE (%) 2.5 9.3 18.3 Rel. to BSE-30 (7.9) (18.6) (18.1) Div. Yield (%) 0.0 0.0 1.7

Election period, lowered economic activity weighs on occupancy and room rates

Lemon Tree reported 150 bps sequential improvement in occupancy at 78% and 9% qoq reduction in ADR to Rs4,002/day owing to (1) general elections, (2) overall weakness in the economy, and (3) partial shut-down of properties in New Delhi in 1QFY20. Consequently, revenues at Rs1.4 bn (KIE Rs1.5 bn) declined 6% qoq, while EBITDA was at Rs448 mn (post Ind- AS 116 adjustments) (KIE Rs517 mn). EBITDA margins came in at 32% in 1QFY20 compared to 27% in 1QFY19 and 32.5% in 4QFY19 though comparable EBITDA margins were lower at 27% in 1QFY20. Lemon Tree has delivered across parameters, recent performance notwithstanding

Lemon Tree has commissioned 6 hotels with 737 keys over the past two years, improved ADR to Rs4,180/day from Rs3,450/day and overall margins have increased to 31% from 28% in FY2017. During this period, Lemon Tree has increased its inventory of owned (and rented) operational properties from 2,855 keys as of March 2017 to 3,570 keys in March 2019, while the pipeline of under-construction properties has declined to 1,240 keys from 1,525 keys (as of March 2018).

On the managed properties front, Lemon Tree has increased operational inventory from 843 keys as of March 2017 to 1,841 keys at present, with the under-construction pipeline having increased from 1,671 keys as of March 2018 to 2,149 keys at present. Incrementally, the company is looking to conclude the acquisition of Keys which has a portfolio of 936 keys of owned properties and another 975 keys of managed properties. Recent price correction offers attractive entry point, upgrade to BUY

Recent weakness in earnings performance, coupled with delays in project execution as well as Murtuza Arsiwalla promoter pledge during the quarter has weighed on stock performance. However, we view these changes as transitionary—while the long-term story on improvement in ADR as well as commissioning of a large project pipeline with a 669 key hotel in Mumbai likely to be Samrat Verma commissioned by November 2021 will continue to drive earnings performance. Lemon Tree now trades 17X EV/EBITDA on FY2021E earnings, and 10X EV/EBITDA on stabilized earnings from current pipeline of projects by FY2023E. Consequently we upgrade Lemon Tree to BUY (from ADD) with a revised fair value of Rs75/share (from Rs86/share).

[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. Lemon Tree Hotels Hotels & Restaurants

The downward revision factors in delay in commissioning of projects and lowered expectation of ARR improvement. The downward revision in earnings estimates and fair value factors in a lowered expectation on ARR to Rs4,430 (from Rs4,730) for FY2020E and Rs5,157 (from Rs5,417) for FY2021E as well as Ind-AS 116 related adjustments to depreciation, lease rent as well as interest expense leading to a 4% downward revision in PAT for FY2020 and FY2021E and 7% reduction in PAT for FY2022E.

Exhibit 1: Improvement in EBITDA margins should be seen in the context of adjustment due to Ind-AS 116 Quarterly results for Lemon Tree Hotels (Consolidated), March fiscal year-ends, 2018-2020E (Rs mn)

Change (%) 1QFY20 1QFY20E 1QFY19 4QFY19 KIE yoy qoq 2020E 2019 (% chg) Net sales 1,409 1,572 1,279 1,505 (10) 10 (6) 7,251 5,495 32 F&B (124) (136) (119) (134) (762) (498) Employee costs (337) (328) (292) (319) (1,442) (1,205) Power and fuel costs (148) (149) (136) (126) (618) (527) Other expenses (353) (442) (384) (437) (1,638) (1,577) Total expenses (962) (1,055) (931) (1,016) (4,460) (3,807) EBITDA 448 517 348 489 (13) 29 (8) 2,791 1,688 65 EBITDA (%) 31.8 32.9 27.2 32.5 38.5 30.7 Other income 13 35 19 40 262 145 Depreciation (172) (156) (131) (143) (663) (541) EBIT 289 396 236 386 2,390 1,292 Interest (300) (248) (197) (238) (1,300) (847) PBT (12) 148 40 148 (108) (130) (108) 1,090 445 Tax (7) (52) (20) (120) (230) (203) PAT (19) 96 19 28 (120) (198) (167) 860 242 256 Extraordinaries — — — 314 — 314 Share of profit from Associates (2) 5 3 (6) — 8 Non-controlling interest 4 (8) — (12) (41) (35) Adjusted PAT (17) 93 23 10 (118) (173) (260) 819 215 281 Operational details (Owned + Leased) Keys (#) 3,975 3,873 3,278 3,570 3 21 11 4,154 3,570 16 ADR (Rs/day) 4,002 4,211 3,899 4,405 (5) 3 (9) 4,430 4,180 6 Occupancy (%) 78 74 77 76 5 1 2 76 76 - RevPAR (Rs/day) 3,103 3,116 2,955 3,416 (0) 5 (9) 3,464 3,190 9

Source: Company, Kotak Institutional Equities estimates

Other highlights from the earnings call

 Impact of Ind-AS 116. Due to application of Ind-AS 116 retrospectively, prior period differential for operating leases has been adjusted into retained earnings. Consequently for 1QFY20, lease rent and other expenses have been re-stated downwards by Rs75 mn leading to an improvement in EBITDA margin to 32.4% from 27.1% (before adjustment). Interest expense and depreciation has been re-stated upwards by Rs115 mn leading to net decline in PBT by Rs39 mn reducing tax liability for the quarter by Rs9 mn.

 Geographical performance. Lemon Tree’s performance in Gurugram and Hyderabad was better compared to both Bengaluru and Delhi. Improvement in performance was driven by both, an increase in occupancy (7-11% yoy) as well as an increase in hotel level EBITDAR margin. We highlight that LTH has large inventory of rooms moving from infant to toddler and from toddler to adult stage in Gurugram and Hyderabad respectively and hence will continue to report improving metrics over the next few years. LTH in Delhi has its entire inventory running for over three years (and hence stabilized) reported the highest EBITDAR/room across all regions due to highest ADR.

 Decline in occupancy in Delhi. Occupancy in Delhi declined 373 bps to 80.8% in 1QFY20 from 84.5% in 1QFY19 due to closure of one-sixth rooms for renovation at LTP located at Delhi Airport. Also, closure of other services bars, banquet halls at the hotel led to a decline in F&B revenues during the quarter which led to hotel level EBITDAR/room declining to Rs0.17 mn from Rs0.21 mn in 1QFY19. Restoration of the services at the hotel is expected from September 2019.

KOTAK INSTITUTIONAL EQUITIES RESEARCH 73 Hotels & Restaurants Lemon Tree Hotels

 Operational performance. Lemon Tree has increased its owned/leased operational keys to 3,975 keys in June 2019 from 3,278 keys in June 2018. Increase in 303 keys was due to commissioning of LTH at Mumbai airport while another 394 keys were from hotels in Pune, Chandigarh and Dehradun. EBITDA from old hotels increased from Rs350 mn to Rs361 mn and PBT from Rs43 mn to Rs49 mn in 1QFY20. While new hotels which are still under stabilization contributed revenue of Rs92 mn, EBITDA of Rs24 mn and negative PBT of Rs23 mn.

Exhibit 2: Commissioning of Udaipur hotel has been delayed to capture additional footfalls seen during winters Upcoming hotels pipeline for Lemon Tree Hotels, March fiscal year-ends, 4QFY18-1QFY20

Keys Ownership City (#) (%) Commissioning timeline Owned hotels 4QFY18 1QFY19 2QFY19 3QFY19 4QFY19 1QFY20 Lemon Tree Premier Pune 201 58.0 Dec-18 Dec-18 Dec-18 Commissoned Commissoned Commissoned Lemon Tree Premier Mumbai 303 100.0 Jan-19 Jan-19 Jan-19 Apr-19 Jun-19 Commissoned Lemon Tree Premier Kolkata 142 58.0 Apr-19 Apr-19 Apr-19 May-19 Oct-19 Oct-19 Lemon Tree Premier Udaipur 139 58.0 Apr-19 Apr-19 Oct-19 Oct-19 Oct-19 Oct-19 Lemon Tree Vembanand Lake Resort Kerala 10 100.0 Oct-20 Oct-20 Oct-20 Oct-20 Oct-21 Oct-21 Lemon Tree Mountain Resort Shimla 69 100.0 Dec-20 Dec-20 Dec-20 Dec-20 Apr-21 Apr-21 On licensed land Lemon Tree Premier Mumbai 577 58.0 Mar-21 Mar-21 Mar-21 Mar-21 Nov-21 Nov-21 Total 937

Source: Company, Kotak Institutional Equities

74 KOTAK INSTITUTIONAL EQUITIES RESEARCH Lemon Tree Hotels Hotels & Restaurants

Exhibit 3: Hotels under management contracts have experienced delays due to involvement of third party owners Upcoming management contract pipeline for Lemon Tree Hotels, March fiscal year-ends, 4QFY18-1QFY20

Keys City (#) Tenure Est. opening Managed rooms to be operational in FY2020 4QFY18 1QFY19 2QFY19 3QFY19 4QFY19 1QFY20 Lemon Tree Hotel Rishikesh 66 12 Feb-19 Feb-19 Mar-19 Jun-19 Aug-19 Nov-19 Lemon Tree Hotel Thimpu 27 10 — — Mar-19 Jun-19 Dec-19 Dec-19 Lemon Tree Hotel Mumbai 70 15 — — Jun-19 Jun-19 Dec-19 Jan-20 Lemon Tree Hotel Dubai 114 10 — — Jun-19 Sep-19 Sep-19 Nov-19 Red Fox Hotel Vijaywada 90 15 — — Jun-20 Aug-19 Sep-19 Dec-19 Lemon Tree Hotel Shirdi 59 12 Jan-19 Jan-19 Oct-19 Sep-19 Sep-19 Jan-20 Red Fox hotel Neelkanth 80 12 Feb-19 Feb-19 Dec-18 Nov-19 Dec-19 Jan-20 Lemon Tree Premier Dwarka 108 15 Mar-19 Mar-19 Apr-19 Oct-19 Dec-19 Dec-19 Lemon Tree Premier Coorg 63 15 Oct-19 Oct-19 Oct-19 Jan-20 Jan-20 Mar-20 2020E 677 Managed rooms to be operational in FY2021 Serviced Suites Mansesar 260 10 Apr-20 Apr-20 Apr-20 Apr-20 Sep-20 Sep-20 Lemon Tree Hotel Gulmarg 35 10 Mar-19 Mar-19 Apr-19 Sep-19 Apr-20 Apr-20 Lemon Tree Hotel Jhansi 60 12 Jul-19 Jul-19 Jul-19 Jan-20 Apr-20 Apr-20 Lemon Tree Hotel Aligarh 68 12 Jul-19 Jul-19 Nov-19 Jan-20 Sep-20 Sep-20 Lemon Tree Premier Dindy 50 10 — — — Jan-20 Apr-20 Sep-20 Lemon Tree Hotel Rishikesh 102 12 Jan-19 Jan-19 Oct-19 Feb-20 Jun-20 Nov-20 Lemon Tree Hotel Sonamarg 40 10 Apr-20 Apr-20 Apr-20 Apr-20 Sep-20 Sep-20 Lemon Tree Resort Mussoorie 40 12 Apr-19 Apr-19 Oct-19 Apr-20 Apr-20 Apr-20 Lemon Tree Hotel Thimpu 38 10 Oct-20 Oct-20 Oct-20 Apr-20 Oct-20 Oct-20 Lemon Tree Premier Bhubaneshwar 76 10 — — — Apr-20 Apr-20 Apr-20 Lemon Tree Hotel Bokaro 70 10 Mar-19 Mar-19 Oct-19 Sep-20 Sep-20 Sep-20 Lemon Tree Hotel Gwalior 104 15 — Jul-19 Jan-20 Sep-20 Sep-20 Sep-20 Lemon Tree Hotel Ranthambore 60 10 — — Apr-20 Aug-20 Aug-20 Aug-20 Lemon Tree Hotel Ludhiana 60 10 Dec-20 Dec-20 Dec-20 Dec-20 Dec-20 Dec-20 Lemon Tree Premier Vijaywada 120 15 Jan-21 Jan-21 Mar-21 Mar-21 Mar-21 Sep-20 2021E 1183 Managed rooms to be operational in FY2022 Lemon Tree Hotel Kathmandu 75 12 Apr-20 Apr-20 Apr-20 Apr-21 Apr-21 Apr-21 Lemon Tree Hotel Trivandrum 100 10 Jan-21 Jan-21 Jan-21 Sep-21 Sep-21 Sep-21 2022E 175 Total 2,035

Source: Company, Kotak Institutional Equities

Exhibit 4: Increase in depreciation and interest expense led to improved cash flow due to reduced tax liability Impact of Ind-AS 116 on consolidated 1QFY20 results for Lemon Tree Hotels, March fiscal year-ends Before Ind AS Ind AS 116 After Ind AS 116 impact 116 impact Lease rent 81 (63) 17 Other expenses 348 (12) 336 Net EBITDA (incl. other income) 385 75 460 Interest expense 226 83 309 Depreciation 140 32 172 PBT 26 (39) (14) Tax 16 (9) 7 PAT 9 (3) (21)

Cash profit 149 9 159

Source: Company, Kotak Institutional Equities

KOTAK INSTITUTIONAL EQUITIES RESEARCH 75 Hotels & Restaurants Lemon Tree Hotels

Exhibit 5: Stabilization of hotels over the next few years is likely to result in margin expansion Key assumptions for Lemon Tree Hotels, March fiscal year-ends, 2013-2022E

2013 2014 2015 2016 2017 2018 2019 2020E 2021E 2022E Keys (#) (a) 1,920 2,537 2,727 2,788 2,855 3,277 3,570 4,154 4,164 4,810 Occupancy (%) 63 64 68 76 77 76 76 78 79 79 ARR (Rs/day) 3,202 2,782 2,919 3,100 3,449 3,896 4,180 4,430 5,117 5,675 RevPaR (Rs/day) 2,004 1,783 1,984 2,343 2,648 2,955 3,190 3,464 4,058 4,500 EBITDA margin (%) 17 11 17 27 28 28 31 38 45 48

Note: (a) Includes keys only from owned or leased hotels

Source: Company, Kotak Institutional Equities estimates

Exhibit 6: Movement of inventory from infant to toddler significantly improves the return profile Age-wise classification of inventory (owned/leased) for Lemon Tree hotels, March fiscal year-ends, 2017-2019

2017 2018 2019 Infant hotels (less than 1 year old) Number of hotels — 4 2 Number of rooms — 422 292 Occupancy (%) — 66 36 ADR (Rs) — 3,422 4,200 EBITDAR/room (Rs mn) — 0.15 0.11 Margin (%) — 15 40 ROCE (%) — (1) 1 Toddler hotels (1-3 years old) Number of hotels 3 3 7 Number of rooms 106 128 551 Occupancy (%) 52 62 70 ADR (Rs) 5,302 5,274 4,082 EBITDAR/room (Rs mn) 0.32 0.49 0.49 Margin (%) 32 36 33 ROCE (%) 6 6 4 Adult hotels (more than 3 years old) Number of hotels 21 21 21 Number of rooms 2,727 2,727 2,727 Occupancy (%) 78 78 79 ADR (Rs) 3,411 3,900 4,197 EBITDAR/room (Rs mn) 0.62 0.67 0.72 Margin (%) 43 44 44

ROCE (%) 11 12 13

Source: Company, Kotak Institutional Equities

76 KOTAK INSTITUTIONAL EQUITIES RESEARCH Lemon Tree Hotels Hotels & Restaurants

Exhibit 7: Gurugram operates at lower occupancy and profitability compared to other regions Region-wise classification of inventory for Lemon Tree hotels, March fiscal year-ends, 2017-2019

Chg. (bps) 1QFY20 1QFY19 4QFY19 1QFY19 4QFY19 Occupancy (%) Delhi 80.8 84.5 86.8 (370) (600) Gurugram 79.5 72.1 79.2 740 30 Hyderabad 88.2 77.2 83.1 1,100 510 Bengaluru 83.1 82.6 79.2 50 390 Hotel level EBITDAR margin (%) Delhi 40 45.1 46.5 (510) (650) Gurugram 34.4 29.8 39.3 460 (490) Hyderabad 49.2 42.7 47.8 650 140 Bengaluru 46.2 44.8 48.7 140 (250) ADR (Rs) Chg. (%) Delhi 4,339 4,148 4,901 4.6 (11.5) Gurugram 3,972 3,967 4,272 0.1 (7.0) Hyderabad 4,005 3,762 4,178 6.5 (4.1) Bengaluru 4,299 4,196 4,770 2.5 (9.9) Hotel level EBITDAR/room (Rs mn) Delhi 0.17 0.21 0.24 (19.0) (29.2) Gurugram 0.14 0.11 0.18 27.3 (22.2) Hyderabad 0.21 0.16 0.2 31.3 5.0 Bengaluru 0.2 0.19 0.22 5.3 (9.1)

Source: Company, Kotak Institutional Equities

Exhibit 8: Lemon Tree is trading at EV/EBITDA of 16X and P/E of 24X on FY2021E Key financial ratios and trading multiples for Lemon Tree Hotels, March fiscal year-ends, 2017-2022E

2017 2018 2019 2020E 2021E 2022E At CMP of Rs57/share EV/EBITDA (X) 53 46 32 27 17 13 P/E (X) (542) 316 210 55 25 18 P/B (X) 6 6 5 5 4 4 Growth (%) Revenue 12.0 17.6 13.5 31.9 25.3 20.1 EBITDA 15.0 17.0 23.9 65.4 45.5 29.9 PAT NM NM 72.9 255.7 130.8 41.3 Margins (%) EBITDA 28.2 28.1 30.7 38.5 44.7 48.4 PAT (1.7) 2.9 4.4 11.9 21.8 25.7 Return ratios (%) RoAE (1.0) 1.7 2.5 8.9 17.5 21.8 RoACE 3.8 4.5 5.5 9.2 14.1 18.7

Source: Company, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 77 Hotels & Restaurants Lemon Tree Hotels

Exhibit 9: Lemon Tree Hotels (Consolidated), Financial Summary, March fiscal year ends, FY2013-2021E

2013 2014 2015 2016 2017 2018 2019 2020E 2021E 2022E Profit model Net sales 2,148 2,217 2,904 3,680 4,119 4,843 5,495 7,251 9,085 10,909 EBITDA 375 233 507 1,012 1,164 1,362 1,688 2,791 4,061 5,276 Depreciation (237) (310) (517) (523) (510) (526) (541) (663) (696) (935) EBIT 137 (76) (10) 489 654 836 1,147 2,128 3,365 4,342 Interest (478) (488) (725) (720) (776) (784) (847) (1,300) (1,189) (1,192) Other income 115 208 134 58 98 126 145 262 537 692 Pre-tax profits (226) (356) (601) (173) (25) 178 445 1,090 2,713 3,842 Tax 26 (37) (32) (125) (47) (38) (203) (230) (729) (1,038) Net income (200) (393) (632) (298) (72) 140 242 860 1,984 2,804 Adjusted net income (200) (393) (632) (298) (82) 142 215 819 1,765 2,463 Earnings per share (Rs) (1.6) (3.1) (0.8) (0.4) (0.1) 0.2 0.3 1.0 2.2 3.1 Balance sheet Total equity 8,379 7,992 8,102 8,099 8,086 8,148 8,750 9,569 10,587 11,962 Minority interests 2,094 2,895 4,223 4,277 4,284 4,286 4,322 4,363 4,582 4,923 Total borrowings 4,561 5,589 5,710 6,248 7,987 10,110 11,360 13,659 12,466 9,272 Deferred tax liability 49 3 (4) 69 68 43 - 43 43 43 Current liabilities 735 840 926 1,366 1,694 1,994 3,287 2,292 2,418 3,353 Total liabilities and equity 15,818 17,319 18,958 20,059 22,117 24,582 27,718 29,926 30,094 29,553 Net fixed assets 8,124 11,534 12,346 12,301 14,097 14,513 16,038 20,604 19,908 23,297 CWIP 3,086 1,371 1,688 2,606 3,527 5,676 6,639 2,019 3,171— — Goodwill — 88 — — 67 — — — — — Current assets 2,748 3,942 4,612 5,095 4,362 4,247 4,693 7,154 6,867 6,108 Investments 1,860 384 312 58 63 146 349 148 148 148 Total assets 15,818 17,319 18,958 20,059 22,117 24,582 27,718 29,926 30,094 29,553 Free cash flow Operating cash flow excl. working capital (150) (164) (327) 291 454 644 783 1,522 2,680 3,739 Working capital changes (61) (265) (875) (297) 134 (236) 951 250 (46) 772 Capital expenditure (974) (2,489) (1,621) (1,319) (2,343) (2,430) (3,028) (610) (1,152) (1,152) Free cash flow (1,186) (2,919) (2,824) (1,326) (1,755) (2,021) (1,295) 1,163 1,482 3,359 Ratios (%) Net debt/equity 0.5 0.6 0.7 0.8 1.0 1.2 1.3 1.0 0.8 0.6 RoE (%) (2.4) (4.8) (7.9) (3.7) (1.0) 1.7 2.5 8.9 17.5 21.8 RoCE (%) 1.7 0.8 0.7 3.0 3.8 4.5 5.5 9.2 14.1 18.7

Source: Company, Kotak Institutional Equities estimates

78 KOTAK INSTITUTIONAL EQUITIES RESEARCH NEUTRAL Automobiles & Components India AUGUST 07, 2019 UPDATE BSE-30: 36,691

State-wise demand trends in 1QFY20. Our analysis of state-wise demand trends for 1QFY20 reflects that—(1) weakness in PV and two-wheeler segments is seen across all states due to dealer inventory correction, (2) weak freight rates led to slowdown in the MHCV segment but South India is resilient, (3) scooter volume mix declined by 190 bps yoy in 1QFY20 and (4) Bajaj Auto in the two-wheeler segment, Hyundai Motors in the passenger vehicle segment and Ashok Leyland in MHCV and LCV segments posted maximum gain in market share in 1QFY20.

Passenger vehicles: double-digit yoy volume decline across most major markets in 1QFY20

 Industry volumes declined by 23% yoy with declines across several major states led by inventory correction by major OEMs. In particular, volumes in Gujarat, Kerala and West Bengal declined by 35-36% yoy while there was 20-29% yoy decline in markets such as Maharashtra, Karnataka, UP (including Uttarakhand), Delhi, Punjab and Tamil Nadu.

 Maruti lost 220 bps market share on a yoy basis in 1QFY20 driven largely by share loss in Maharashtra, Karnataka, Gujarat, UP, Delhi and Kerala markets. Hyundai Motors gained 310 bps yoy market share led by the launch of new compact SUV, Venue, in 1QFY20. M&M continues to gain market share on yoy basis in 1QFY20 due to success of XUV300.

Two-wheelers: cost pressures and inventory correction lead to double-digit decline in 1QFY20

 Industry volumes declined by 12% yoy in 1QFY20 led largely by cost pressures, inventory correction and weak retail demand. Volumes in Punjab and Gujarat declined by 31% yoy in 1QFY20. West Bengal, Kerala and Maharashtra markets declined by 18-22% yoy. Only Bihar in key states registered 8% yoy volume growth in 1QFY20.

 Scooter mix in two-wheeler volumes declined to 30.2% in 1QFY20 (32.1% in 1QFY19); we note that scooter mix increased yoy in Southern states despite already higher mix. Scooter mix declined by more than 300 bps yoy in North and West regions in 1QFY20.

 Bajaj Auto gained 170 bps market share yoy in the domestic two-wheeler industry in 1QFY20 led by market share gains in economy and premium motorcycle segments. Honda lost market share by 300 bps yoy due to temporary weakness in the scooter segment and yoy decline in the company’s motorcycle volumes in 1QFY20.

 Royal Enfield volumes declined by 21% yoy in 1QFY20 led by price increases due to implementation of ABS norms. RE volumes declined by 21-56% yoy in Delhi (-56% yoy), Gujarat (-44% yoy), Tamil Nadu (-36% yoy), Telangana (-28% yoy), Kerala (-27% yoy), Hitesh Goel Maharashtra (-25% yoy) and Punjab (-21% yoy). We note that there has been volume growth yoy in markets such as UP, Bihar and Haryana in 1QFY20, which could be due to network expansion (setting up of small format stores in hinterland). Nishit Jalan

MHCV: industry volumes decline by 16% yoy in 1QFY20; Ashok Leyland gains market share Rishi Vora  MHCV volumes declined by 16% yoy in 1QFY20 due to 25% yoy decline in North region and 18-19% yoy decline in East and West regions. Volumes declined by only 2% yoy in Southern region in 1QFY20. We believe weak freight rates (rather than revised axle norms) has led to demand pressures in the MHCV segment as Southern region continues to outperform. Ashok Leyland gained 390 bps market share on a yoy basis in 1QFY20 mostly led by strong growth in Southern region, where the company has higher market share. Tata Motors lost 430 bps yoy market share in 1QFY20. [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. India Automobiles & Components

Exhibit 1: Volumes declined by 23% yoy in 1QFY20 led by double-digit volume across all the key states Passenger vehicle volumes and growth in key states and regions, March fiscal year-ends, 2018-20 (units, %)

Volumes (units) Volume mix (%) Yoy growth (%) 1QFY19 1QFY20 FY2018 FY2019 FYTD20 FYTD19 1QFY19 2QFY19 3QFY19 4QFY19 1QFY20 FYTD20 FYTD19 Key states Maharashtra 90,281 64,075 372,662 353,166 9.5 10.4 8.1 (12.6) (3.1) (11.0) (29.0) (29.0) 8.1 UP + Uttaranchal 93,187 74,898 338,422 351,250 11.1 10.7 25.6 (1.8) (2.9) (2.3) (19.6) (19.6) 25.6 Gujarat 74,480 47,590 285,547 282,900 7.1 8.5 20.7 (9.5) (3.5) (7.2) (36.1) (36.1) 20.7 Kerala 65,242 42,120 252,019 250,596 6.3 7.5 24.0 (16.0) 3.2 (4.2) (35.4) (35.4) 24.0 AP + Telengana 58,863 51,423 216,199 236,255 7.6 6.8 25.1 6.0 5.0 3.6 (12.6) (12.6) 25.1 Karnataka 59,478 45,484 224,966 225,539 6.8 6.8 13.4 (2.7) (2.8) (5.8) (23.5) (23.5) 13.4 Tamil Nadu 58,754 44,796 285,547 217,917 6.7 6.7 13.8 (4.8) (2.1) (8.5) (23.8) (23.8) 13.8 Delhi 53,447 40,871 202,025 193,850 6.1 6.1 7.9 (10.6) (8.2) (5.1) (23.5) (23.5) 7.9 Haryana 48,831 41,408 174,586 187,762 6.2 5.6 22.1 4.6 (2.4) 6.8 (15.2) (15.2) 22.1 Rajasthan 43,247 37,230 161,192 171,241 5.5 5.0 19.5 (1.0) 3.9 4.4 (13.9) (13.9) 19.5 Madhya Pradesh 35,099 30,000 124,031 135,238 4.5 4.0 32.6 0.9 2.9 4.1 (14.5) (14.5) 32.6 Punjab 27,906 21,938 109,844 111,135 3.3 3.2 24.3 (0.6) (6.8) (6.6) (21.4) (21.4) 24.3 West Bengal 28,502 18,223 105,817 102,992 2.7 3.3 22.4 (0.1) (6.2) (22.5) (36.1) (36.1) 22.4 Regional performance North 258,608 210,155 953,336 983,303 31.2 29.7 20.4 (1.0) (3.1) (1.7) (18.7) (18.7) 20.4 East 107,497 82,980 398,786 417,269 12.3 12.3 26.8 4.2 0.7 (8.9) (22.8) (22.8) 26.8 West 261,552 194,089 1,012,488 1,017,635 28.9 30.0 17.7 (7.4) (0.9) (4.3) (25.8) (25.8) 17.7 South 244,253 185,463 919,804 937,299 27.6 28.0 19.0 (5.3) 0.9 (3.8) (24.1) (24.1) 19.0 Overall India 871,910 672,687 3,284,414 3,355,506 19.9 (3.7) (0.9) (3.9) (22.8) (22.8) 19.9

Source: SIAM, Kotak Institutional Equities

Exhibit 2: Maruti has lost market share by 220 bps yoy in 1QFY20; Hyundai and M&M have gained market share aided by new launches Market share of passenger vehicle OEMs in India and key states, March fiscal year-ends, 2018-20 (%)

1QFY19 1QFY20 FY2019 FY2018 1QFY19 1QFY20 FY2019 FY2018 1QFY19 1QFY20 FY2019 FY2018 Overall Karnataka Delhi Maruti 52.6 49.4 51.1 50.0 Maruti 50.3 41.1 47.0 48.1 Maruti 54.5 52.9 53.2 50.9 Hyundai 15.7 18.8 16.2 16.3 Hyundai 15.9 19.9 16.8 15.6 Hyundai 14.5 15.9 14.6 14.9 M&M 7.0 8.4 7.5 7.6 M&M 4.6 5.5 5.2 5.2 M&M 3.3 4.9 4.1 4.4 Tata Motors 6.6 5.5 6.8 6.4 Tata Motors 6.7 11.0 6.9 6.6 Tata Motors 5.0 3.7 5.8 5.7 Honda 4.9 4.9 5.5 5.2 Honda 4.7 2.9 5.4 5.1 Honda 7.0 7.8 7.3 7.8 Toyota 4.5 4.9 4.5 4.3 Toyota 6.9 8.2 7.4 7.2 Toyota 5.3 5.0 5.1 5.0 Renault 2.4 2.6 2.4 3.1 Renault 3.6 4.2 3.9 4.0 Renault 1.5 1.2 1.3 1.9

Maharashtra Gujarat AP + Telengana Maruti 54.2 47.9 52.1 51.4 Maruti 53.9 44.3 52.0 51.3 Maruti 46.9 47.5 47.0 45.8 Hyundai 14.7 20.8 15.9 16.1 Hyundai 20.3 26.1 21.7 22.0 Hyundai 17.0 18.9 16.9 17.5 M&M 4.6 6.2 5.0 4.9 M&M 4.1 6.2 4.5 4.5 M&M 8.0 7.8 8.3 7.7 Tata Motors 8.3 5.3 8.0 7.3 Tata Motors 4.5 4.5 4.5 4.1 Tata Motors 7.4 4.1 6.7 7.1 Honda 5.0 5.3 5.8 5.9 Honda 5.9 7.5 7.2 6.0 Honda 5.3 3.6 5.5 5.4 Toyota 5.0 5.6 4.7 4.5 Toyota 3.0 3.4 2.8 2.8 Toyota 6.3 6.3 6.7 5.5 Renault 1.5 2.3 1.7 2.1 Renault 1.7 1.8 1.6 2.2 Renault 2.5 5.6 2.3 2.8

UP + Uttaranchal Tamil Nadu Kerala Maruti 51.1 52.1 50.6 48.8 Maruti 48.3 48.8 44.9 44.2 Maruti 58.9 51.3 54.3 54.4 Hyundai 14.5 16.7 14.5 14.4 Hyundai 13.2 17.3 14.5 14.3 Hyundai 10.9 14.3 11.7 12.8 M&M 11.1 12.6 11.4 12.9 M&M 5.0 5.7 6.0 5.6 M&M 4.8 2.6 5.6 4.5 Tata Motors 7.8 6.4 8.3 7.5 Tata Motors 7.1 4.0 6.4 7.6 Tata Motors 4.8 6.0 6.0 4.8 Honda 4.7 4.6 5.0 4.6 Honda 6.6 6.7 7.6 6.9 Honda 5.4 6.9 6.7 6.1 Toyota 3.2 3.4 3.0 2.8 Toyota 6.0 6.8 6.7 6.2 Toyota 6.0 7.3 6.3 6.3 Renault 3.0 0.8 3.0 4.0 Renault 3.6 1.0 3.6 4.0 Renault 2.1 2.9 2.4 3.0

Source: SIAM, Kotak Institutional Equities

80 KOTAK INSTITUTIONAL EQUITIES RESEARCH Automobiles & Components India

Exhibit 3: Volume declined by 12% yoy in 1QFY20 led by 18-31% decline in Maharashtra, Punjab, Kerala, Gujarat and West Bengal Two-wheeler volumes, yoy growth and scooter mix in key states and regions, March fiscal year-ends, 2018-20 (units, %)

Volumes (units) Volume mix (%) Yoy growth (%) 1QFY19 1QFY20 FY2018 FY2019 FYTD20 FYTD19 1QFY19 2QFY19 3QFY19 4QFY19 1QFY20 FYTD20 FYTD19 Key states UP + Uttaranchal 966,913 916,235 2,915,113 3,186,031 18.3 17.1 19.1 7.6 7.5 1.7 (5.2) (5.2) 19.1 Maharashtra 446,664 364,503 2,026,261 1,895,920 7.3 7.9 9.5 (1.9) 1.5 (29.8) (18.4) (18.4) 9.5 AP + Telengana 486,255 449,847 1,757,947 1,895,974 9.0 8.6 12.6 12.6 7.9 (1.9) (7.5) (7.5) 12.6 Tamil Nadu 463,203 394,325 1,672,924 1,833,958 7.9 8.2 15.3 11.9 10.1 2.3 (14.9) (14.9) 15.3 Gujarat 355,859 245,945 1,383,903 1,306,542 4.9 6.3 13.0 3.7 (8.3) (30.7) (30.9) (30.9) 13.0 Madhya Pradesh 335,200 328,169 1,127,140 1,308,328 6.6 5.9 31.3 10.5 30.0 (4.4) (2.1) (2.1) 31.3 Karnataka 331,001 305,619 1,235,280 1,306,500 6.1 5.8 6.0 12.9 10.0 (5.1) (7.7) (7.7) 6.0 Rajasthan 280,340 265,271 1,114,821 1,189,691 5.3 4.9 10.5 (3.0) 21.9 0.0 (5.4) (5.4) 10.5 Bihar 317,918 344,004 951,141 1,048,865 6.9 5.6 15.8 15.5 16.7 (5.4) 8.2 8.2 15.8 West Bengal 324,849 253,948 988,044 990,358 5.1 5.7 32.9 (32.3) 18.4 (11.3) (21.8) (21.8) 32.9 Kerala 203,719 164,334 751,904 732,050 3.3 3.6 11.2 (4.7) (6.8) (10.1) (19.3) (19.3) 11.2 Punjab 174,449 121,111 679,085 709,495 2.4 3.1 11.2 6.6 9.4 (11.3) (30.6) (30.6) 11.2 Regional performance North 1,470,635 1,308,431 4,875,834 5,187,319 26.1 26.0 15.0 7.6 6.2 (4.0) (11.0) (11.0) 15.0 East 1,150,973 1,035,752 3,626,868 3,845,875 20.7 20.3 24.3 (1.8) 12.7 (10.1) (10.0) (10.0) 24.3 West 1,551,384 1,339,880 6,202,372 6,281,118 26.8 27.4 15.5 1.6 8.8 (18.6) (13.6) (13.6) 15.5 South 1,491,739 1,323,422 5,454,784 5,801,388 26.4 26.3 11.3 9.8 6.9 (2.3) (11.3) (11.3) 11.3 Overall India 5,664,731 5,007,485 20,159,858 21,115,700 15.9 4.6 8.4 (9.1) (11.6) (11.6) 15.9

Source: SIAM, Kotak Institutional Equities

Exhibit 4: Scooter mix declined by 190 bps yoy in 1QFY20 led by lower mix in North, East and Western regions Scooter mix in key states and regions, March fiscal year-ends, 2018-20 (%)

Scooter mix (%) 1QFY18 2QFY18 3QFY18 4QFY18 1QFY19 2QFY19 3QFY19 4QFY19 1QFY20 FY2019 FY2018 Key states UP + Uttaranchal 16.8 22.2 20.2 16.2 15.3 20.0 20.2 12.2 12.4 16.8 18.7 Maharashtra 45.1 43.4 41.6 40.4 44.6 42.9 42.9 43.7 46.7 43.4 42.5 AP + Telengana 34.7 34.2 33.2 32.6 35.9 32.3 32.7 31.0 35.9 33.0 33.7 Tamil Nadu 44.4 41.5 43.0 44.8 44.5 44.9 46.7 45.8 45.3 45.4 43.4 Gujarat 47.1 43.7 40.7 39.4 45.7 41.4 38.1 37.2 42.7 41.1 42.7 Madhya Pradesh 22.1 23.8 23.4 18.7 18.9 21.1 17.7 15.8 15.2 18.6 22.1 Karnataka 45.5 43.9 45.0 42.9 46.3 43.5 48.5 46.7 49.8 46.0 44.2 Rajasthan 23.0 23.0 21.6 23.3 22.9 21.8 18.3 17.0 19.3 20.2 22.7 Bihar 7.7 9.7 10.4 7.8 6.7 9.8 10.3 5.8 5.8 8.0 8.8 West Bengal 28.1 25.1 25.6 29.7 26.1 20.8 25.7 25.4 26.7 24.8 27.0 Kerala 66.6 63.4 64.1 63.4 64.4 63.9 64.4 63.7 65.2 64.1 64.3 Punjab 50.5 42.9 43.1 43.0 48.4 39.3 33.6 36.7 48.3 39.6 44.7 Regional performance North 27.0 30.6 27.9 24.2 24.4 27.8 25.7 19.3 21.3 24.5 27.5 East 23.0 25.1 24.8 23.5 22.5 22.8 25.3 20.2 21.5 22.7 24.1 West 36.0 34.9 33.6 32.5 34.1 33.0 30.2 29.4 30.6 31.8 34.2 South 44.6 42.8 43.3 42.9 44.8 42.7 44.8 43.4 45.6 43.8 43.4 Overall India 33.5 34.4 33.0 32.0 32.1 32.9 31.7 29.6 30.2 31.7 33.2

Source: SIAM, Kotak Institutional Equities

KOTAK INSTITUTIONAL EQUITIES RESEARCH 81 India Automobiles & Components

Exhibit 5: Bajaj has gained 170 bps market share yoy in 1QFY20; HMSI has lost share by 300 bps yoy in 1QFY20 Market share of two-wheeler OEMs in Indian and key states, March fiscal year-ends, 2018-20 (%)

1QFY19 1QFY20 FY2019 FY2018 1QFY19 1QFY20 FY2019 FY2018 1QFY19 1QFY20 FY2019 FY2018 Overall Maharashtra Gujarat Hero 36.3 36.0 36.0 36.6 Hero 23.2 18.4 25.1 25.2 Hero 28.7 27.8 34.6 34.4 Honda 29.8 26.8 26.1 28.6 Honda 44.6 41.4 38.8 41.9 Honda 48.8 43.0 39.6 43.3 TVS 13.0 14.2 14.8 14.3 TVS 12.0 14.8 14.0 13.4 TVS 5.8 8.5 7.0 6.6 Bajaj 10.5 12.2 12.0 9.8 Bajaj 7.8 9.6 8.9 8.3 Bajaj 7.4 8.9 9.0 6.8 Royal Enfield 3.9 3.5 3.8 4.0 Royal Enfield 3.4 3.2 3.2 3.7 Royal Enfield 2.5 2.1 2.2 2.7 Yamaha 3.4 3.4 3.6 3.8 Yamaha 2.8 2.7 2.9 3.0 Yamaha 1.8 2.2 1.9 2.0 UP + Uttaranchal AP + Telengana West Bengal Hero 55.3 55.8 53.2 51.0 Hero 28.2 24.8 28.3 30.9 Hero 36.1 31.2 34.8 39.5 Honda 16.1 13.4 15.0 18.2 Honda 37.7 35.0 30.5 32.1 Honda 27.6 24.4 24.8 25.6 TVS 13.6 12.8 14.6 15.4 TVS 12.6 13.7 17.7 16.9 TVS 15.4 19.8 16.3 14.1 Bajaj 10.5 13.1 12.1 10.4 Bajaj 11.1 15.0 12.7 10.4 Bajaj 8.2 10.2 9.6 8.1 Royal Enfield 3.1 3.5 3.5 3.1 Royal Enfield 3.3 2.7 3.1 3.2 Royal Enfield 2.4 2.6 3.0 2.7 Yamaha 0.8 0.6 0.9 1.2 Yamaha 3.3 3.2 3.4 3.4 Yamaha 8.2 9.2 9.4 8.3 Tamil Nadu Karnataka Rajasthan Hero 19.0 17.0 19.6 19.3 Hero 19.9 17.0 19.9 22.1 Hero 50.9 52.9 51.8 53.8 Honda 30.5 29.8 26.2 27.9 Honda 38.4 36.7 34.1 34.6 Honda 23.1 20.3 18.8 20.8 TVS 22.7 21.8 24.7 26.1 TVS 15.3 18.4 18.1 18.7 TVS 10.3 10.6 12.4 11.9 Bajaj 11.5 14.2 12.8 10.3 Bajaj 12.0 12.2 13.1 10.7 Bajaj 11.6 12.5 12.7 8.8 Royal Enfield 4.6 3.4 3.8 4.7 Royal Enfield 3.9 3.4 3.5 4.2 Royal Enfield 2.4 2.0 2.3 2.2 Yamaha 8.1 9.0 9.0 8.8 Yamaha 3.6 3.5 3.5 3.8 Yamaha 0.7 0.6 0.7 1.1

Source: SIAM, Kotak Institutional Equities

82 KOTAK INSTITUTIONAL EQUITIES RESEARCH Automobiles & Components India

Exhibit 6: Royal Enfield volumes have declined by 21% yoy in 1QFY20 with double-digit volume decline in most of the key states Volumes and market share of Royal Enfield across major states, March fiscal year-ends, 2018-20 (units, %)

1QFY18 2QFY18 3QFY18 4QFY18 1QFY19 2QFY19 3QFY19 4QFY19 1QFY20 FY2019 FY2018 Volumes (units) Kerala 19,108 24,264 23,524 23,891 23,855 21,735 17,957 18,042 17,416 81,589 90,787 Tamil Nadu 19,038 21,049 15,991 22,985 21,131 21,249 10,013 17,762 13,501 70,155 79,063 Uttar Pradesh 15,842 18,397 19,783 22,824 26,000 20,054 21,354 28,790 29,039 96,198 76,846 Maharashtra 17,964 16,827 19,592 20,309 15,318 14,931 16,733 12,853 11,523 59,835 74,692 Delhi 12,706 12,889 13,460 15,710 15,040 13,352 13,837 7,756 6,678 49,985 54,765 Karnataka 14,444 13,620 11,313 13,050 12,786 12,562 10,257 10,140 10,491 45,745 52,427 Punjab 10,421 10,857 11,040 13,512 10,987 11,493 12,652 12,747 8,700 47,879 45,830 Bihar 5,595 6,370 7,798 7,964 9,736 9,321 8,842 8,765 9,437 36,664 27,727 Telangana 6,690 7,628 7,235 8,065 8,709 8,441 7,368 7,127 6,309 31,645 29,618 Gujarat 8,533 9,477 9,607 9,423 9,053 7,251 7,239 5,298 5,093 28,841 37,040 West Bengal 5,789 6,903 7,273 7,150 7,928 6,937 8,252 6,841 6,638 29,958 27,115 Andhra Pradesh 5,915 6,717 6,463 7,485 7,391 7,682 5,727 6,097 5,978 26,897 26,580 Rajasthan 4,711 6,015 6,696 6,599 6,595 6,400 7,769 6,154 5,303 26,918 24,021 Madhya Pradesh 4,234 5,045 5,811 6,345 6,379 6,129 7,361 6,838 6,122 26,707 21,435 Haryana 5,112 5,203 5,924 7,235 6,320 6,432 5,945 8,657 6,804 27,354 23,474 Orissa 3,689 4,079 5,322 5,744 6,250 5,514 6,099 5,780 5,534 23,643 18,834 Others 18,985 23,479 23,843 22,932 25,596 25,476 23,515 19,721 19,139 94,308 89,239 Total 178,776 198,819 200,675 221,223 219,074 204,959 190,920 189,368 173,705 804,321 799,493 Yoy (%) Kerala 24.5 26.4 21.3 8.5 24.8 (10.4) (23.7) (24.5) (27.0) (10.1) Tamil Nadu 42.8 28.7 (12.2) 29.3 11.0 1.0 (37.4) (22.7) (36.1) (11.3) Uttar Pradesh 52.3 60.6 59.9 68.5 64.1 9.0 7.9 26.1 11.7 25.2 Maharashtra (3.4) (16.2) (5.6) 5.6 (14.7) (11.3) (14.6) (36.7) (24.8) (19.9) Delhi 24.2 16.7 17.7 29.5 18.4 3.6 2.8 (50.6) (55.6) (8.7) Karnataka 7.0 (9.0) (21.7) (8.7) (11.5) (7.8) (9.3) (22.3) (17.9) (12.7) Punjab 22.4 20.8 12.8 29.5 5.4 5.9 14.6 (5.7) (20.8) 4.5 Bihar 34.0 30.0 78.8 65.0 74.0 46.3 13.4 10.1 (3.1) 32.2 Telangana 34.9 27.8 8.8 19.5 30.2 10.7 1.8 (11.6) (27.6) 6.8 Gujarat 24.0 21.4 15.6 16.0 6.1 (23.5) (24.6) (43.8) (43.7) (22.1) West Bengal 31.6 31.7 41.3 39.3 36.9 0.5 13.5 (4.3) (16.3) 10.5 Andhra Pradesh 34.7 30.3 20.8 39.7 25.0 14.4 (11.4) (18.5) (19.1) 1.2 Rajasthan 10.4 29.6 30.9 41.7 40.0 6.4 16.0 (6.7) (19.6) 12.1 Madhya Pradesh 46.9 45.6 45.5 61.9 50.7 21.5 26.7 7.8 (4.0) 24.6 Haryana 35.7 12.1 35.5 58.2 23.6 23.6 0.4 19.7 7.7 16.5 Orissa 28.3 42.8 88.3 65.9 69.4 35.2 14.6 0.6 (11.5) 25.5 Others 36.1 43.5 33.4 35.2 34.8 8.5 (1.4) (14.0) (25.2) 5.7 Total 25.5 21.9 17.8 27.7 22.5 3.1 (4.9) (14.4) (20.7) 0.6

Source: SIAM, Kotak Institutional Equities

KOTAK INSTITUTIONAL EQUITIES RESEARCH 83 India Automobiles & Components

Exhibit 7: MHCVs volume declined by 16% yoy in 1QFY20 led by 35-38% yoy decline in Uttar Pradesh and Rajasthan MHCV volumes and growth in key states and regions, March fiscal year-ends, 2018-20 (units, %)

Volumes (units) Volume mix (%) Yoy growth (%) 1QFY19 1QFY20 FY2018 FY2019 FYTD20 FYTD19 1QFY19 2QFY19 3QFY19 4QFY19 1QFY20 FYTD20 FYTD19 Key states Maharashtra 9,130 8,584 43,644 45,306 11.6 10.3 58.8 53.9 (29.9) (15.5) (6.0) (6.0) 58.8 Uttar Pradesh 8,386 5,198 31,493 32,780 7.0 9.5 112.6 19.3 (22.7) (23.1) (38.0) (38.0) 112.6 Gujarat 6,744 6,075 18,311 29,811 8.2 7.6 168.3 99.9 25.2 28.5 (9.9) (9.9) 168.3 Tamil Nadu 7,631 7,977 22,670 32,314 10.8 8.6 97.6 39.9 6.2 41.6 4.5 4.5 97.6 Rajasthan 6,371 4,169 30,795 29,088 5.6 7.2 64.6 (3.4) (29.9) (13.9) (34.6) (34.6) 64.6 Haryana 7,646 5,836 28,124 27,958 7.9 8.6 67.9 (4.1) (23.1) (14.0) (23.7) (23.7) 67.9 West Bengal 6,024 4,753 20,169 23,176 6.4 6.8 111.4 21.3 (15.4) (4.7) (21.1) (21.1) 111.4 Andhra Pradesh 4,606 3,663 21,331 24,283 4.9 5.2 54.9 50.2 15.1 (14.7) (20.5) (20.5) 54.9 Orissa 3,620 3,364 12,146 15,542 4.5 4.1 73.7 40.7 17.7 1.4 (7.1) (7.1) 73.7 Madhya Pradesh 2,315 2,265 15,339 12,769 3.1 2.6 50.7 (12.3) (38.0) (21.4) (2.2) (2.2) 50.7 Karnataka 4,388 4,722 18,111 20,402 6.4 4.9 48.0 30.6 (12.1) 2.3 7.6 7.6 48.0 Delhi 2,062 2,032 14,282 10,523 2.7 2.3 17.4 (25.7) (40.1) (31.2) (1.5) (1.5) 17.4 Regional performance North 23,555 17,645 92,777 90,849 23.8 26.6 78.0 0.4 (24.3) (19.6) (25.1) (25.1) 78.0 East 16,951 13,748 53,611 69,269 18.5 19.1 116.5 36.9 5.1 4.5 (18.9) (18.9) 116.5 West 28,430 23,427 119,702 133,305 31.6 32.1 86.1 35.7 (18.4) (6.9) (17.6) (17.6) 86.1 South 19,763 19,342 75,051 92,500 26.1 22.3 64.8 38.4 2.5 10.7 (2.1) (2.1) 64.8 Overall India 88,699 74,162 341,141 385,923 83.5 26.5 (12.1) (4.4) (16.4) (16.4) 83.5

Source: SIAM, Kotak Institutional Equities

Exhibit 8: Ashok Leyland gained 390 bps market share yoy in 1QFY20; Tata Motors and M&M have lost market share yoy in 1QFY20 Market share of MHCV OEMs in India and key states, March fiscal year-ends, 2018-20 (%)

1QFY19 1QFY20 FY2019 FY2018 1QFY19 1QFY20 FY2019 FY2018 1QFY19 1QFY20 FY2019 FY2018 Overall Rajasthan West Bengal Tata Motors 53.5 49.2 50.7 49.3 Tata Motors 66.3 60.9 63.8 61.5 Tata Motors 64.8 66.0 62.7 65.9 Ashok Leyland 30.3 34.2 34.2 34.2 Ashok Leyland 28.4 29.6 29.5 31.7 Ashok Leyland 26.0 25.0 28.1 26.3 Eicher 10.4 10.9 10.5 11.4 Eicher 2.9 5.5 4.6 4.4 Eicher 3.7 5.2 5.0 3.6 Mahindra 4.1 3.2 3.1 3.2 Mahindra 1.8 2.7 1.4 1.9 Mahindra 4.9 3.0 3.6 3.3 SML Isuzu 1.8 2.4 1.4 2.0 SML Isuzu 0.6 1.3 0.5 0.6 SML Isuzu 0.6 0.8 0.6 0.9 Maharashtra Haryana Andhra Pradesh Tata Motors 42.2 42.3 38.8 44.1 Tata Motors 65.9 52.9 59.6 65.9 Tata Motors 27.8 25.6 25.8 21.8 Ashok Leyland 35.2 39.6 39.5 35.5 Ashok Leyland 14.5 26.7 20.5 10.7 Ashok Leyland 55.1 54.8 62.0 67.0 Eicher 16.4 14.9 17.4 16.2 Eicher 13.3 15.2 14.4 16.1 Eicher 9.9 10.1 6.8 7.9 Mahindra 5.7 2.7 3.8 3.5 Mahindra 4.6 3.2 3.6 3.2 Mahindra 5.1 6.3 4.5 2.2 SML Isuzu 0.5 0.6 0.5 0.7 SML Isuzu 1.8 1.9 1.9 4.1 SML Isuzu 2.1 3.1 1.0 1.0 Tamil Nadu Gujarat Uttar Pradesh Tata Motors 20.0 22.7 20.8 18.4 Tata Motors 53.5 47.9 53.0 42.9 Tata Motors 67.7 63.5 66.0 62.7 Ashok Leyland 61.8 61.4 65.3 65.3 Ashok Leyland 25.8 32.2 27.7 30.1 Ashok Leyland 16.8 18.5 19.7 20.9 Eicher 11.4 10.5 10.1 11.6 Eicher 11.8 14.1 12.6 17.5 Eicher 9.8 12.9 10.7 12.0 Mahindra 3.6 2.4 1.7 2.1 Mahindra 8.1 4.8 6.2 8.6 Mahindra 4.0 1.6 1.9 1.9 SML Isuzu 3.2 3.0 2.1 2.5 SML Isuzu 0.9 1.0 0.6 0.9 SML Isuzu 1.6 3.5 1.6 2.6

Source: SIAM, Kotak Institutional Equities

84 KOTAK INSTITUTIONAL EQUITIES RESEARCH Automobiles & Components India

Exhibit 9: LCVs volume declined by 2% yoy in 1QFY20 led by 11-21% yoy volume decline in Kerala, Karnataka and Assam LCV volumes and growth in key states and regions, March fiscal year-ends, 2018-20 (units, %)

Volumes (units) Volume mix (%) Yoy growth (%) 1QFY19 1QFY20 FY2018 FY2019 FYTD20 FYTD19 1QFY19 2QFY19 3QFY19 4QFY19 1QFY20 FYTD20 FYTD19 Key states Maharashtra 14,349 14,816 69,817 73,275 11.1 10.6 16.1 18.7 (0.5) (7.4) 3.3 3.3 16.1 Uttar Pradesh 14,413 14,692 49,257 63,464 11.0 10.6 47.6 32.2 31.3 13.5 1.9 1.9 47.6 Tamil Nadu 12,676 12,491 39,893 54,831 9.3 9.3 49.5 48.1 34.8 23.2 (1.5) (1.5) 49.5 Gujarat 10,001 9,281 31,639 46,504 6.9 7.4 55.5 53.9 50.7 32.6 (7.2) (7.2) 55.5 Karnataka 10,618 9,449 37,837 45,116 7.1 7.8 49.5 36.8 11.0 (4.1) (11.0) (11.0) 49.5 Andhra Pradesh 8,250 7,563 31,504 34,785 5.7 6.1 22.6 8.4 11.1 2.7 (8.3) (8.3) 22.6 West Bengal 6,795 6,484 24,857 29,130 4.8 5.0 37.5 22.4 12.8 3.3 (4.6) (4.6) 37.5 Rajasthan 6,366 7,333 26,071 28,543 5.5 4.7 1.5 5.9 22.6 8.9 15.2 15.2 1.5 Assam 6,959 6,180 23,625 26,757 4.6 5.1 49.8 19.4 5.0 (6.6) (11.2) (11.2) 49.8 Kerala 6,420 5,074 20,464 25,124 3.8 4.7 47.1 15.0 23.8 10.7 (21.0) (21.0) 47.1 Madhya Pradesh 4,426 5,481 20,223 25,016 4.1 3.3 25.4 23.1 38.3 12.7 23.8 23.8 25.4 Haryana 5,493 5,531 20,501 24,462 4.1 4.0 32.3 25.7 12.5 12.4 0.7 0.7 32.3 Regional performance North 32,341 32,809 117,208 143,361 24.5 23.8 29.1 30.2 24.5 10.9 1.4 1.4 29.1 East 23,891 22,651 88,878 100,960 16.9 17.6 37.5 23.9 8.3 (4.4) (5.2) (5.2) 37.5 West 38,899 40,476 160,865 191,778 30.3 28.7 25.5 25.4 21.1 8.9 4.1 4.1 25.5 South 40,589 37,809 141,266 177,195 28.3 29.9 41.4 40.6 18.7 8.8 (6.8) (6.8) 41.4 Overall India 135,720 133,745 508,217 613,294 32.9 30.5 19.0 7.0 (1.5) (1.5) 32.9

Source: SIAM, Kotak Institutional Equities

Exhibit 10: Ashok Leyland has gained 170 bps market share yoy in 1QFY20; M&M, Eicher and Tata Motors have lost share yoy in 1QFY20 Market share of LCV OEMs in India and key states, March fiscal year-ends, 2018-20 (%)

1QFY19 1QFY20 FY2019 FY2018 1QFY19 1QFY20 FY2019 FY2018 1QFY19 1QFY20 FY2019 FY2018 Overall Tamil Nadu Gujarat M&M 39.3 38.7 39.8 40.5 M&M 25.0 22.3 25.0 26.9 M&M 42.7 44.2 42.6 52.8 Tata Motors 42.9 41.9 42.3 41.0 Tata Motors 44.8 45.0 47.8 42.6 Tata Motors 44.7 42.9 44.0 32.3 Ashok Leyland 8.3 10.0 8.9 8.3 Ashok Leyland 17.8 21.1 18.1 19.6 Ashok Leyland 5.4 6.0 6.1 5.7 Eicher 3.6 3.2 3.5 3.3 Eicher 5.6 4.7 4.1 4.4 Eicher 4.2 3.6 3.4 3.8 Force Motors 3.8 3.9 3.5 4.4 Force Motors 3.1 3.7 2.6 3.8 Force Motors 1.8 2.5 1.9 2.6 Maharashtra Karnataka Rajasthan M&M 37.5 41.4 40.7 39.3 M&M 31.2 30.0 32.3 31.9 M&M 50.3 53.1 53.4 52.4 Tata Motors 43.1 36.5 39.5 44.3 Tata Motors 41.9 38.2 42.0 41.2 Tata Motors 36.5 34.4 34.8 36.4 Ashok Leyland 9.0 10.9 10.1 7.6 Ashok Leyland 15.6 20.5 17.2 15.1 Ashok Leyland 3.0 3.0 2.8 2.6 Eicher 4.2 3.5 4.2 3.3 Eicher 4.4 3.9 3.0 3.0 Eicher 2.2 1.9 1.9 1.6 Force Motors 4.7 6.0 4.0 3.4 Force Motors 4.2 3.7 3.5 6.5 Force Motors 5.5 5.2 5.2 5.2 Uttar Pradesh Andhra Pradesh West Bengal M&M 40.1 36.4 40.0 41.6 M&M 47.2 44.3 51.6 49.1 M&M 38.0 35.0 37.2 38.5 Tata Motors 47.4 49.8 47.8 43.3 Tata Motors 21.1 17.6 18.9 19.4 Tata Motors 56.4 59.5 56.8 56.0 Ashok Leyland 4.2 5.4 3.7 4.2 Ashok Leyland 25.2 30.9 23.3 26.2 Ashok Leyland 2.8 2.1 2.4 2.2 Eicher 3.2 3.1 3.4 3.6 Eicher 3.0 1.8 2.2 1.7 Eicher 0.7 1.2 0.8 0.8 Force Motors 3.6 3.3 3.7 5.1 Force Motors 1.4 2.1 1.7 1.4 Force Motors 1.3 1.9 1.6 1.9

Source: SIAM, Kotak Institutional Equities

KOTAK INSTITUTIONAL EQUITIES RESEARCH 85 ATTRACTIVE Banks India AUGUST 08, 2019 UPDATE BSE-30: 36,691

Lending rates soften. As per RBI’s release on system-wide lending and deposit rates, fresh lending rates decreased 20 bps mom in June 2019 to 9.7% led by a 30 bps decrease for private banks. Term deposits have stabilized around 6.8% though we expect rates to decline from current levels. Gap between outstanding loan and fresh loan rates was up 20 bps mom at 75 bps. With decrease in repo rate by 35 bps in August 2019 and drop in MCLR rates by some banks in recent months, we wait to see if this leg of transmission has any negative outcomes on NIM.

QUICK NUMBERS Weighted average term deposit rates still sticky despite pressure to cut lending rates

As per the latest data by RBI, term deposit rates were broadly flat mom in June 2019 at 6.8%  Weighted average (up ~10 bps yoy). Term deposit rates had seen strong upward movement from November 2017 term deposits rates to March 2018 by 20 bps to 6.7% but were flat thereafter with a marginal 15 bps rise until flat mom at 6.8% September 2018 to 6.8% and additional ~10 bps thereafter (Exhibit 1). Wholesale deposit cost (as measured by CD rates) has declined by ~100 bps in July 2019 after declining by 45 bps in  Fresh loans lending 1QFY20. Average term deposit rates are broadly similar to term deposit rates (1-2 years) offered rates down 20 bps by most banks today; slightly lower than rates offered by SFBs. Deposit rates have remained mom in June 2019 stable in recent times as banks have found it challenging to pass through rate cuts.  Weighted average Lending rates have started to decline lending rates up 20 bps yoy (flat mom) Fresh lending rates declined 20 bps mom in June 2019 to 9.7% led by a decline in policy rates. This was driven by 30 bps mom decrease in fresh lending rates of private banks to 10.3% while it dropped ~5 bps mom for PSU banks to 9.3%. Weighted average lending rates were flat mom (up 20 bps yoy) at 10.4%; broadly flat over the past nine months. MCLR rates have remained stable for private banks over the past three months while PSU banks have witnessed decline of ~10 bps since May 2019 (Exhibit 5). Focus would be on rate of translation of decline in repo rates to lending yields. However, a swift change in MCLR rates is less likely given the stickiness of lending yields relative to policy rates and with deposit rates remaining stable.

Gap between outstanding lending rates and fresh loans at 75 bps

The gap between outstanding and fresh lending rates was up 20 bps mom in June 2019 to 75 bps. The gap has been broadly in the range of ~50-70 bps since July 2018. Spreads for private banks increased 25 bps mom to 85 bps in June 2019 while that of PSU banks was up by 10 bps M B Mahesh, CFA mom to 75 bps. The gradual decline in yields has led to a situation where spreads between bank funding and bond rates have gradually started to converge (Exhibit 11). Nischint Chawathe Lending yields to decline further going ahead

The gap between weighted average lending rates and fresh lending rates has inched up to 75 Dipanjan Ghosh bps after declining to 55 bps in May 2019. Fresh lending rates are likely to decline further from here onwards due to (1) a decline in policy rates (2) most banks focusing on higher share of low yielding retail products and (3) lending to better rated corporates. Term deposit rates have Shrey Singh broadly stabilized post recording strong increase in FY2019. With gradual revival in lending from PSU banks and weaker loan growth at ~12%, private banks will gradually soften growth trends leading to reduction in CD ratio (operate at >90% CD ratio). This will reduce pressure on Venkat Madasu private banks to borrow at higher rates as passing the benefit was challenging.

[email protected] Contact: +91 22 6218 6427

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

Exhibit 1: Deposit rates flat mom in June 2019 Weighted average term deposit rates, March fiscal year ends, June 2014 – June 2019 (%)

Repo (month end) Commercial Banks Public Sector Banks Private Sector Banks 9.5

8.7

7.9

7.1

6.3

5.5 Jun-14 Jun-15 Jun-16 Jun-17 Jun-18 Jun-19 Sep-14 Sep-15 Sep-16 Sep-17 Sep-18 Dec-14 Dec-15 Dec-16 Dec-17 Dec-18 Mar-15 Mar-16 Mar-17 Mar-18 Mar-19

Source: RBI, Kotak Institutional Equities

Exhibit 2: CD rates declined by 105 bps over the past one month CD rates, March fiscal year ends, August 2015 – August 2019 (%)

9.0

8.2

7.4

6.6

5.8

5.0 Feb-16 Feb-17 Feb-18 Feb-19 Nov-15 Nov-16 Nov-17 Nov-18 Aug-15 Aug-16 Aug-17 Aug-18 Aug-19 May-16 May-17 May-18 May-19

Source: Bloomberg, Kotak Institutional Equities

KOTAK INSTITUTIONAL EQUITIES RESEARCH 87 India Banks

Exhibit 3: Private bank operate at >90% CD ratio; strong increase since FY2018 CD ratio for select banks, March fiscal year ends, 2011 – 2019 (%)

CD ratio (%) 2011 2012 2013 2014 2015 2016 2017 2018 2019 PSU banks under PCA Central Bank of India 72 75 76 74 74 68 47 53 49 Dena Bank 70 73 68 70 68 70 64 62 58 IDBI Bank 87 86 86 84 80 81 71 69 65 Indian Overseas Bank 77 79 79 77 70 72 66 61 60 UCO Bank 68 75 74 75 69 61 59 59 50 United Bank of India 69 71 68 59 61 58 52 48 50 Total 75 78 77 75 72 70 60 59 55 Growth (bps) 257 (64) (209) (323) (217) (973) (70) (423) PSU banks Andhra Bank 78 79 79 76 81 75 70 72 72 Bank of Baroda 75 75 69 70 69 67 64 72 73 Bank of India 71 78 76 78 76 70 68 66 65 Bank of Maharashtra 70 73 80 76 81 77 69 62 59 Canara Bank 72 71 68 72 70 68 69 73 71 Indian Bank 71 75 74 75 74 72 70 75 75 Oriental Bank of Commerce 69 72 73 72 71 71 72 66 68 Punjab and Sind Bank 71 73 73 68 74 70 68 65 70 Punjab National Bank 77 79 82 81 81 81 68 68 68 State Bank of India 80 82 85 86 82 83 72 71 75 Syndicate Bank 79 78 80 82 79 77 77 77 79 Union Bank of India 75 80 79 77 81 78 77 71 71 Vijaya Bank 67 70 72 66 69 71 71 74 74 Total 76 78 78 78 77 76 70 71 72 Growth (bps) 201 60 (3) (82) (115) (576) 8 152 PSU banks 76 78 78 78 76 75 69 69 70 Growth (bps) 211 37 (37) (121) (127) (630) 6 81 Private banks Axis Bank 75 77 78 83 88 96 92 97 90 City Union Bank 72 74 75 73 75 78 79 85 85 DCB Bank 76 83 79 79 83 87 82 85 83 Dhanalakshmi Bank 71 73 67 64 61 60 56 56 59 Federal Bank 74 78 77 73 73 74 76 82 82 HDFC Bank 77 81 83 86 85 89 86 83 89 ICICI Bank 96 99 99 102 107 103 95 91 90 IndusInd Bank 76 83 82 91 93 95 89 96 96 Jammu and Kashmir Bank 59 62 61 67 68 72 69 71 74 Karnataka Bank 63 66 70 70 69 67 65 75 80 Karur Vysya Bank 72 75 76 78 81 78 76 79 81 Kotak Mahindra Bank 141 138 130 121 118 104 106 107 98 Lakshmi Vilas Bank 72 70 73 68 73 77 78 77 69 RBL Bank 93 87 76 85 85 87 85 92 93 South Indian Bank 69 75 72 76 72 74 70 76 76 Yes Bank 75 77 70 75 83 88 93 101 106 Total 81 84 84 87 89 92 88 90 90 Growth (bps) 298 9 276 240 231 (337) 145 16 Grand total 77 79 79 79 79 79 73 74 75 Growth (bps) 229 35 21 (43) (21) (536) 92 106

Notes: (a) Data for SBI includes deposits and advances of its associates excluding Bharatiya Mahila Bank from FY2011-2016.

Source: RBI, Kotak Institutional Equities

88 KOTAK INSTITUTIONAL EQUITIES RESEARCH Banks India

Exhibit 4: Fresh lending rates down 20 bps mom in June 2019 Weighted fresh lending rates, March fiscal year ends, June 2015 – June 2019 (%)

Public Sector Banks Private Sector Banks Foreign Banks Scheduled Commercial Banks 13

12

11

10

9

8

Jun-15

Jun-16

Jun-17

Jun-18

Jun-19

Sep-15

Sep-16

Sep-17

Sep-18

Dec-15

Dec-16

Dec-17

Dec-18

Mar-16

Mar-17

Mar-18 Mar-19

Source: RBI, Kotak Institutional Equities

Exhibit 5: MCLR rates flat mom for private banks; down 5 bps mom for PSU banks in July 2019 One year median MCLR rate for private and public banks, July 2016 – July 2019 (%)

Private banks Public banks 10.2

9.8

9.4

9.0

8.6

8.2

Jul-16

Jul-17

Jul-18

Jul-19

Jan-17

Jan-18

Jan-19

Oct-16

Oct-17

Oct-18

Apr-17

Apr-18 Apr-19

Source: RBI, Kotak Institutional Equities

KOTAK INSTITUTIONAL EQUITIES RESEARCH 89 India Banks

Exhibit 6: MCLR rates were higher yoy for most private banks in August 2019 MCLR rate across banks, August 2018 – August 2019 (%)

(bps change) (Aug-18 to Jul-18 Aug-18 Sep-18 Oct-18 Nov-18 Dec-18 Jan-19 Feb-19 Mar-19 Apr-19 May-19 Jun-19 Jul-19 Aug-19 Aug-19) Public sector banks Allahabad 8.45 8.45 8.50 8.50 8.55 8.65 8.75 8.75 8.75 8.65 8.60 8.60 8.60 8.60 0.15 Andhra 8.55 8.70 8.70 8.70 8.70 8.70 8.70 8.75 8.75 8.75 8.75 8.75 8.70 8.70 - BoB 8.50 8.50 8.55 8.55 8.65 8.65 8.65 8.75 8.65 8.65 8.70 8.70 8.60 8.60 0.10 BoI 8.50 8.55 8.60 8.60 8.65 8.70 8.70 8.70 8.65 8.65 8.70 8.70 8.60 8.60 0.05 BoMH 8.75 8.75 8.80 8.75 8.75 8.75 8.75 8.75 8.75 8.75 8.70 8.70 8.60 8.60 (0.15) Canara 8.50 8.60 8.65 8.70 8.70 8.70 8.70 8.70 8.70 8.70 8.70 8.70 8.60 8.60 - Central 8.50 8.85 8.60 8.60 8.60 8.60 8.60 8.65 8.65 8.60 8.55 8.55 8.50 8.50 (0.35) Corporation 8.85 8.50 8.95 8.95 8.95 8.95 8.95 8.95 8.95 8.90 8.90 8.90 8.85 8.85 0.35 IDBI 8.75 8.85 8.85 8.85 8.95 8.95 8.95 9.05 9.05 9.05 9.00 9.00 8.95 8.95 0.10 Indian 8.60 8.60 8.60 8.60 8.70 8.75 8.75 8.75 8.65 8.75 8.65 8.65 8.60 8.60 - IOB 8.50 8.65 8.70 8.70 8.70 8.75 8.80 8.80 8.80 8.80 8.65 8.65 8.65 8.65 - OBC 8.65 8.65 8.65 8.75 8.75 8.75 8.75 8.75 8.75 8.75 8.75 8.75 8.65 8.65 - PNB 8.45 8.45 8.45 8.45 8.50 8.50 8.50 8.55 8.45 8.45 8.45 8.45 8.40 8.40 (0.05) PSB 8.65 8.70 8.80 8.80 8.80 8.80 8.85 8.85 8.85 8.85 8.75 8.75 8.70 8.70 - SBI 8.25 8.25 8.45 8.50 8.50 8.55 8.55 8.55 8.55 8.50 8.45 8.45 8.40 8.40 0.15 Syndicate 8.65 8.65 8.80 8.80 8.80 8.75 8.75 8.75 8.65 8.65 8.65 8.65 8.60 8.60 (0.05) UCO 8.55 8.55 8.65 8.65 8.65 8.70 8.70 8.70 8.70 8.70 8.65 8.65 8.65 8.65 0.10 Union 8.45 8.55 8.55 8.55 8.65 8.70 8.70 8.70 8.60 8.60 8.60 8.60 8.55 8.55 - United Bank 8.80 8.80 8.85 8.85 8.85 8.85 8.85 8.85 8.85 8.85 8.10 8.10 8.70 8.70 (0.10) Old private banks CUBK 9.05 9.05 9.05 9.25 9.25 9.25 9.25 9.25 9.25 9.25 9.25 9.25 9.25 9.25 0.20 FB 9.15 9.20 9.20 9.20 9.20 9.20 9.20 9.20 9.20 9.20 9.15 9.15 9.15 9.15 (0.05) J&K 8.80 8.80 8.85 8.85 8.90 9.00 9.00 9.00 9.00 9.00 8.95 8.95 8.85 8.85 0.05 KVB 9.30 9.55 9.55 9.55 9.65 9.65 9.65 9.65 9.65 9.65 9.65 9.65 9.55 9.55 - New private banks Axis 8.60 8.60 8.70 8.70 8.75 8.80 8.85 8.90 8.90 8.90 8.90 8.80 8.70 8.70 0.10 Bandhan 10.38 10.38 10.50 10.45 10.55 10.55 10.45 10.45 10.45 10.45 10.11 10.11 10.11 10.11 (0.27) DCB 9.97 10.40 10.40 10.62 10.74 10.84 10.84 10.84 10.84 10.84 10.84 10.84 10.84 10.84 0.44 HDFC 8.40 8.40 8.60 8.65 8.70 8.70 8.75 8.75 8.75 8.75 8.50 8.70 8.70 8.70 0.30 ICICI 8.40 8.40 8.55 8.65 8.70 8.80 8.80 8.80 8.80 8.75 8.75 8.75 8.65 8.65 0.25 IDFC 8.90 8.90 9.10 9.20 9.20 9.20 9.30 9.25 9.25 9.25 9.50 9.50 9.50 9.50 0.60 IndusInd 9.55 9.60 9.65 9.65 9.70 9.75 9.80 9.90 9.90 9.90 9.85 9.85 9.75 9.75 0.15 Karnataka 8.90 8.90 8.90 8.95 8.95 8.95 9.10 9.15 9.45 9.45 9.40 9.40 9.40 9.40 0.50 Kotak 8.95 8.95 8.95 9.05 9.00 9.00 9.00 9.05 9.00 8.90 8.90 8.90 8.85 8.85 (0.10) LVB 9.70 9.70 10.05 9.80 9.80 9.80 9.80 9.90 9.90 9.90 10.05 10.00 10.00 10.00 0.30 RBL 9.70 9.75 9.90 9.90 10.00 10.15 10.25 10.25 10.25 10.25 10.15 10.15 10.10 10.10 0.35 SIB 9.25 9.25 9.35 9.35 9.35 9.45 9.45 9.45 9.45 9.45 9.50 9.50 9.50 9.50 0.25 Yes 9.45 9.55 9.70 9.70 9.80 9.85 9.85 9.80 9.70 9.70 9.70 9.70 9.70 9.70 0.15 Small finance banks AU 12.65 12.50 12.40 12.70 12.45 12.55 12.55 12.50 12.35 12.35 11.85 11.85 11.70 11.70 (0.80) Equitas 15.40 15.15 15.35 15.95 15.90 16.10 16.15 16.00 16.25 16.25 15.30 15.50 15.60 15.60 0.45 Ujjivan 15.00 15.65 15.80 15.80 16.10 16.20 16.00 15.70 15.40 17.20 17.20 17.40 17.00 17.00 1.35

Source: Company, Public documents, Kotak Institutional Equities

Exhibit 7: Spread between lending and deposit rates has been flat around 350 bps over the past year Spread between outstanding lending and deposit rates for SCBs, June 2014 – June 2019 (%)

PSU Private Foreign SCBs 5.5

4.9

4.3

3.7

3.1

2.5

Jun-14 Jun-17 Jun-19 Jun-15 Jun-16 Jun-18

Dec-14 Dec-17 Dec-15 Dec-16 Dec-18

Source: RBI, Kotak Institutional Equities

90 KOTAK INSTITUTIONAL EQUITIES RESEARCH Banks India

Exhibit 8: The spread between fresh and outstanding lending rates increased 20 bps mom Average outstanding and fresh lending rates for all SCBs, June 2017 – June 2019 (%)

Outstanding WALR Fresh WALR Spread between fresh and outstanding WALR (RHS)

11.5 0.0

11.0 -0.3

10.5 -0.6 10.0

-0.9 9.5

9.0 -1.2

Jul-17

Jul-18

Jan-18

Jan-19

Jun-17

Jun-18

Jun-19

Oct-17

Feb-18

Oct-18

Feb-19

Sep-17

Apr-18

Sep-18

Apr-19

Dec-17

Dec-18

Nov-17

Nov-18

Mar-18

Mar-19

Aug-17

Aug-18 May-18 May-19

Source: RBI, Kotak Institutional Equities

Exhibit 9: Private banks – spread between fresh and outstanding lending rates up 25 bps mom Average outstanding and fresh lending rates for private banks, March fiscal year ends, June 2017 – June 2019 (%)

Outstanding WALR Fresh loans WALR Spread between ourstanding and fresh WALR (RHS)

11.5 0.0

11.0 (0.4)

10.5 (0.8)

10.0 (1.2)

9.5 (1.6)

9.0 (2.0)

Jul-17

Jul-18

Jan-18

Jan-19

Jun-17

Jun-18

Jun-19

Oct-17

Oct-18

Feb-18

Feb-19

Sep-17

Apr-18

Sep-18

Apr-19

Dec-17

Dec-18

Nov-17

Nov-18

Mar-18

Mar-19

Aug-17

Aug-18

May-18 May-19

Source: RBI, Kotak Institutional Equities

KOTAK INSTITUTIONAL EQUITIES RESEARCH 91 India Banks

Exhibit 10: Public banks – spread between outstanding and fresh lending rates up 10 bps Mom Average outstanding and fresh lending rates for PSU banks, March fiscal year ends, June 2017 – June 2019 (%)

Outstanding WALR Fresh loans WALR Spread between outstanding and fresh WALR (RHS) 11.5 0.0

10.9 (0.4)

10.3 (0.8)

9.7 (1.2)

9.1 (1.6)

8.5 (2.0)

Jul-17

Jul-18

Jan-18

Jan-19

Jun-17

Jun-18

Jun-19

Oct-17

Oct-18

Feb-18

Feb-19

Sep-17

Apr-18

Sep-18

Apr-19

Dec-17

Dec-18

Nov-17

Nov-18

Mar-18

Mar-19

Aug-17

Aug-18

May-18 May-19

Source: RBI, Kotak Institutional Equities

Exhibit 11: Market borrowing rates have dropped from peak levels observed during 2HFY18 Minimum MCLR for private and PSU banks compared with AAA/AA/A yields, March fiscal year-ends, June 2016 - June 2019 (%)

Min MCLR (Pvt.) Min MCLR (PSU) AAA yield AA yield A yield

11.0

10.2

9.4

8.6

7.8

7.0

Jun-16

Jun-17

Jun-18

Jun-19

Oct-16

Oct-17

Oct-18

Feb-17

Feb-18 Feb-19

Source: RBI, Kotak Institutional Equities

92 KOTAK INSTITUTIONAL EQUITIES RESEARCH INDIA Economy Monetary Policy AUGUST 07, 2019 UPDATE BSE-30: 36,691

RBI MPC: Growth remains the primary focus. Even with the surprise move of 35 bps repo rate cut (rather than 25/50 bps), we retain our call for further 25-50 bps of rate cut. The RBI remains firmly focused on growth as inflation outlook remains benign. The RBI will likely need to revise lower its FY2020 GDP growth estimate of 6.9%, which will necessitate further support through policy rates. However, for effective transmission, the RBI will likely need to outline a medium-term outlook of adequate liquidity.

MPC cuts the repo rate by 35 bps to 5.4%

The MPC, expectedly, cut the repo rate, but unexpectedly cut it by 35 bps to 5.4% and QUICK NUMBERS maintained its stance at ‘accommodative’. Four members voted for 35 bps cut while two members voted for 25 bps cut. Certain other decisions of note are: (1) lowering risk weights to  MPC cuts repo rate 100% for consumer credit, including personal loans but excluding credit card receivables, by 35 bps to 5.4% against 125% or higher earlier, (2) raising a bank’s exposure limit to a single NBFC to 20% of Tier-I capital of the bank, and (3) allowing bank lending to registered NBFCs (other than MFIs)  MPC revises down for on-lending to agriculture (investment credit) up to Rs1 mn, micro and small enterprises up to FY2020E GDP Rs2 mn, and housing up to Rs2 mn per borrower to be classified as priority sector lending. growth to 6.9% from 7% MPC’s primary concern is on growth outlook  We expect 25-50 bps The MPC clearly outlined that “Addressing growth concerns by boosting aggregate demand, of cumulative repo especially private investment, assumes the highest priority at this juncture while remaining rate cuts through consistent with the inflation mandate”. The MPC revised down its FY2020 growth expectations rest of FY2020 to 6.9% with downside risks (earlier 7%, Kotak: 6.3%); 5.8-6.6% in 1HFY20 (6.4-6.7% earlier), 7.3-7.5% in 2HFY20 (7.2-7.5% earlier) and 1QFY20 at 7.4%. The MPC will likely need to revise lower its GDP growth estimate given (1) negligible space for fiscal stimulus, (2) transmission to lending rates will likely be shallow and gradual, and (3) global growth will remain under pressure. Given our lower growth estimate, we continue to see room for further monetary easing.

Not much worry on inflation front

Even though the MPC expects food inflation and uneven rainfall distribution imparting upside risks to inflation, it draws some comfort from the core inflation outlook and moderation in household inflation expectations in keeping headline inflation within the targeted level over the 12-month horizon. The MPC now expects 2QFY20 CPI inflation at 3.1% (3.0-3.1% for 1HFY20 earlier) and 2HFY20 inflation at 3.5-3.7% (3.4-3.7% earlier), with risks broadly balanced (same as earlier). 1QFY21 CPI inflation estimated at 3.6%. Suvodeep Rakshit

Expect another 25-50 bps of rate cuts Upasna Bhardwaj While the policy statement was dominated by concerns on growth outlook, the MPC’s GDP revision remained marginal. We see significant downside risk to the RBI’s revised FY2020 growth estimate (especially in 2HFY20). Given weak aggregate demand conditions, we see core inflation Nischint Chawathe remaining tepid and would offset the uptrend in food inflation. Weak domestic and global growth prospects, benign crude price outlook and policy easing by DM central banks will provide the MPC room to further ease repo rate by 25-50 bps through rest of FY2020. We remain wary Avijit Puri on the financial market stability amid increasing risks through trade/currency wars, which may keep MPC cautious on aggressive easing. Besides, we continue to note that medium-term visibility of adequate liquidity remains key for smoother transmission and needs immediate attention (for details refer to our report Limited space for growth stimulus, August 6).

[email protected] Contact: +91 22 6218 6427

For Private Circulation Only. India Economy

Scope for further increase in bank lending to NBFCs

With a view towards enhancing credit flow to the NBFC sector, RBI has increased limits on banks’ exposure to single NBFCs and permitted banks to on-lend through NBFCs.

 Banks permitted to on-lend through NBFCs to boost liquidity for NBFCs. The RBI has permitted, subject to certain conditions, bank lending to registered NBFCs (other than MFIs) for on-lending to agriculture (investment credit) up to Rs1 mn, micro and small enterprises up to Rs2 mn and housing up to Rs2 mn per borrower (up from Rs1 mn at present) to be classified as priority sector lending. Currently, banks take resort to four ways for meeting their PSL requirements—(1) originate PSL loans, (2) buyout loans from NBFCs, (3) buy PSLC certificates and (4) lending to NBFCs for on-lending to select priority sector segments. Most private and PSU banks do not meet PSL requirement solely from self-origination of these loans. PSLC certificates, in particular, have increased significantly in the past few years. While permission to on-lend through NBFCs will boost credit flow to NBFCs, we await detailed clarification on type of loans that meet the abovementioned criteria. For example, we require increased visibility on whether individual lending for buying a vehicle for business purposes will be classified under micro and small enterprise segment.

 Relaxation of banks’ exposure to a single NBFC. Under the revised guidelines on large exposure framework (LEF) that came into effect from April 1, 2019, a bank’s exposure to a single NBFC is restricted to 15% of its tier-I capital. As a step towards harmonization of the counterparty exposure limit to a single NBFC with that of the general limit, the RBI has decided to raise a bank’s exposure limit to a single NBFC to 20% of tier-I capital of the bank.

Push towards consumer credit

 Relaxation in risk weight for consumer credit except credit card receivables. Under the standardized approach for credit risk management, consumer credit, including personal loans and credit card receivables have a risk weight of 125% or higher, if warranted by the external rating of the counterparty. The RBI has decided to reduce the risk weight for consumer credit, including personal loans, but excluding credit card receivables, to 100%. Final guideline in this regard will be issues by the end of August 2019. The risk weight on these loans was increased to 125% in FY2004-05 owing to gradual increase in stress in this segment. Risk weight of 100% is above global standards (~75%). The timing of this introduction is quite surprising given the current slowdown that we are experiencing but we don’t see this as a major source of risk addition on the back of this move, especially in products such as unsecured personal loans. Most PSU banks have increased retail lending in recent quarters while corporate credit is muted. It is quite possible that some of the smaller ticket loans that are part of the retail would stand to benefit.

94 KOTAK ECONOMIC RESEARCH June 2019 : Results calendar 95

Mon Tue Wed Thu Fri Sat Sun 5-Aug 6-Aug 7-Aug 8-Aug 9-Aug 10-Aug 11-Aug Berger Paints Aditya Birla Fashion Adani Port and SEZ Adani Transmission BHEL Balkrishna Industries Dilip Buildcon Central Bank of India Adani Pow er Coffee Day Enterprises BPCL Divi's Laboratories Indian Hotels Co. Indiabulls Housing Aster DM Healthcare City Union Bank Britannia Industries NTPC Indian Bank JK Lakshmi Cement Aurobindo Pharma Emami Cadila Healthcare SRF JSW Energy Cipla Endurance Technologies GAIL (India) Torrent Pow er Max Financial Services Cummins India Godrej Properties Hindalco Industries Pidilite Industries HCL Technologies Gujarat Pipavav Port MRF Rural Electrification Corp. HPCL HCG Natco Pharma Titan Company India Cements Hexaw are Technologies Narayana Hrudayalaya KEC International Mahanagar Gas NHPC Lemon Tree Hotels NBCC Oil India Lupin Page Industries SAIL Mahindra & Mahindra Tata Chemicals S H Kelkar and Company Oracle Financial Services TCNS Clothing Co. Shree Cement Rajesh Exports Thermax Sobha The Ramco Cement UltraTech Cement Sun TV Netw ork Siemens Varroc Engineering Tata Steel Voltas 12-Aug 13-Aug 14-Aug 15-Aug 16-Aug 17-Aug 18-Aug AIA Engineering 3M India Brigade Enterprises Alkem Laboratories Apollo Hospitals CESC Century Textile Ashoka Buildcon Edelw eiss Financial Services Graphite India Bharat Forge Gatew ay Distriparks Motherson Sumi Systems Bosch GIC Muthoot Finance Coal India GMR Infrastructure Reliance Pow er Glenmark Pharmaceuticals Grasim Industries Sunteck Realty Godrej Industries HEG Timken Kaveri Seed IDBI

Whirlpool Dr Lal Pathlabs Indraprastha Gas Daily Summary India National Aluminium Co. IIFL Holdings Info Edge Jindal Steel and Pow er ONGC Reliance Capital PFC Sadbhav Engineering Reliance Infrastructure Sun Pharmaceuticals Vardhman Textiles WABCO India

KOTAK INSTITUTIONAL EQUITIES RESEARCH EQUITIES INSTITUTIONAL KOTAK 19-Aug 20-Aug 21-Aug 22-Aug 23-Aug 24-Aug 25-Aug P&G Hygiene Gillette India

Source: Company, Bloomberg, Kotak Institutional Equities estimates -

August 8, 2019 August 8,

KOTAK ECONOMIC RESEARCH 95 Kotak Institutional Equities: Valuation summary of KIE Universe stocks India Daily Summary Daily Summary India

Fair O/S ADVT

KOTAK INSTITUTIONAL EQUITIES RESEARCH EQUITIES INSTITUTIONAL KOTAK Price (Rs) Value Upside Mkt cap. shares EPS (Rs) EPS growth (%) P/E (X) EV/EBITDA (X) P/B (X) RoE (%) Dividend yield (%) 3mo Company Rating 7-Aug-19 (Rs) (%) (Rs bn) (US$ bn) (mn) 2019 2020E 2021E 2019 2020E 2021E 2019 2020E 2021E 2019 2020E 2021E 2019 2020E 2021E 2019 2020E 2021E 2019 2020E 2021E (US$ mn) Automobiles & Components Amara Raja Batteries ADD 645 630 (2) 110 1.6 171 28 33 37 2.6 17 10.8 23 19.5 17.6 11.6 9.8 8.7 3.3 3.0 2.6 15.4 16.0 15.8 1.1 1.3 1.4 6.0 Apollo Tyres BUY 150 190 27 86 1.2 572 14.3 13.3 16 7.0 (7.3) 18 10.5 11.3 9.6 6.7 6.5 5.6 0.9 0.8 0.8 8.3 7.4 8.2 2.0 2.0 2.0 9.6 Ashok Leyland BUY 61 120 96 180 2.5 2,936 7.0 6.5 5.4 16 (6.4) (17.2) 8.8 9.4 11.3 5.4 5.7 6.6 2.2 1.9 1.7 26 21 15.7 5.1 3.2 2.6 29 Bajaj Auto REDUCE 2,605 2,500 (4) 754 11 289 153 151 162 8.4 (1.3) 7.3 17.0 17.2 16.0 11.2 11.6 10.4 3.5 3.1 2.8 23 19.1 18.6 2.3 2.3 2.5 22 Balkrishna Industries BUY 724 870 20 140 2.0 193 40 42 48 6.0 6.7 14.4 18.3 17.1 15.0 9.7 9.2 8.1 3.0 2.7 2.3 17.5 16.5 16.6 1.1 1.2 1.3 7.2 Bharat Forge SELL 406 460 13 189 2.7 466 22 24 25 37 7.5 6.0 18.3 17.0 16.1 10.8 9.9 9.2 3.5 3.1 2.7 21 19.2 17.8 0.6 1.4 1.5 9.2 CEAT ADD 832 900 8 34 0.5 40 62 70 72 (5.0) 14.4 2.7 13.5 11.8 11.5 7.5 7.5 6.8 1.2 1.1 1.0 9.3 9.9 9.4 1.4 1.4 1.4 7.2 Eicher Motors SELL 16,457 14,000 (15) 449 6.3 27 816 755 757 1.9 (7.5) 0.4 20 22 22 14 14 14 6.3 5.2 4.4 36 26 22 0.2 0.2 — 32 Endurance Technologies SELL 920 900 (2) 129 1.8 141 36 42 49 24 16 17 25 22 18.7 11.5 9.7 8.2 5.0 4.2 3.6 19.3 19.3 19.0 0.6 0.8 0.9 0.7

Escorts BUY 459 910 98 41 0.8 89 54 49 61 40 (10.4) 24 8.4 9.4 7.6 5.6 6.1 4.4 1.4 1.2 1.1 16.0 12.8 14.1 0.5 1.6 2.0 19.0 -

Exide Industries SELL 178 180 1 151 2.1 850 9.0 10.1 11.0 10.1 11.8 9.1 19.7 17.6 16.1 10.7 9.2 8.4 2.5 2.3 2.2 13.5 13.8 13.9 1.4 2.0 2.3 4.8 2019 August 8, Hero Motocorp SELL 2,505 2,170 (13) 500 7.1 200 169 154 154 (8.5) (9.2) 0.2 14.8 16.3 16.2 8.9 8.7 8.8 3.9 3.4 3.2 27 22 20 3.8 3.1 3.1 29 Mahindra CIE Automotive ADD 177 215 22 67 0.9 378 14.5 13.5 15 48 (6.8) 11.1 12.2 13.1 11.8 7.2 7.0 6.1 1.6 1.4 1.2 13.7 11.2 11.2 ——— 0.3

Mahindra & Mahindra BUY 518 800 54 644 9.1 1,138 48 43 46 25 (10.0) 7.0 10.9 12.1 11.3 8.2 7.9 7.1 1.7 1.5 1.3 16.5 13.0 12.4 1.8 1.7 1.8 30 Maruti Suzuki REDUCE 5,775 5,200 (10) 1,745 24.6 302 248 210 234 (2.9) (15.2) 11.0 23 27 25 13 13 11.3 3.8 3.4 3.1 17.1 13.1 13.3 1.4 0.9 1.0 83 Motherson Sumi Systems SELL 97 110 13 308 4.3 3,158 5.1 6.0 7.3 (6.3) 17 23 19.1 16.4 13.3 7.2 6.4 5.0 2.8 2.5 2.2 15.5 16.2 17.7 1.6 1.6 1.9 16.9 MRF REDUCE 53,846 50,000 (7) 228 3.2 4 2,667 3,070 3,336 (0.1) 15 8.7 20 17.5 16.1 9.1 7.7 6.7 2.1 1.9 1.7 11.0 11.3 11.1 0.1 0.1 0.1 4.8 Schaeffler India REDUCE 4,424 4,200 (5) 138 2.0 31 144 135 159 14.9 (6.0) 18 31 33 28 18 17 14 5.1 4.5 3.9 17.9 14.6 14.9 ——— 0.5 SKF ADD 1,822 1,900 4 94 1.3 49 65 71 84 13.5 8.5 18 28 26 22 18 17 14 5.5 4.6 3.9 19.8 17.8 18.0 0.7 0.7 0.8 0.6 Tata Motors BUY 117 205 75 399 5.2 3,396 (5.4) 8.0 16 (127) 248 102 NM 14.7 7.3 3.5 3.4 2.9 0.7 0.6 0.6 NM 4.4 8.3 ——— 59

Timken SELL 636 620 (2) 48 0.7 75 20 24 28 46 22 16 32 26 23 16 14 11.6 3.6 3.2 2.8 14.6 12.7 13.0 0.1 0.1 0.2 0.6 TVS Motor SELL 370 300 (19) 176 2.5 475 14.1 14.7 16 1.1 4.1 6.2 26 25 24 13 11.9 11.1 5.2 4.6 4.1 22 19.5 18.4 0.9 1.2 1.3 10.6 Varroc Engineering BUY 430 870 102 58 0.8 135 33 37 58 (0.2) 11.8 55 12.9 11.5 7.4 7.4 6.1 4.3 1.9 1.6 1.4 14.5 14.2 18.3 ——— 0.5 Automobiles & Components Neutral 6,666 93.9 (16.0) 9.0 15 19.8 18.2 15.8 8.0 7.5 6.5 2.5 2.3 2.0 12.6 12.4 12.9 1.5 1.3 1.4 383 Banks AU Small Finance Bank SELL 660 525 (20) 193 2.7 302 13.1 19 25 28 46 29 51 35 27 ——— 6.5 4.7 4.0 14.0 15.2 15.5 0.1 —— 2.5 Axis Bank REDUCE 660 700 6 1,729 24.4 2,617 18 37 55 1,593 106 46 36 17.6 12.1 ——— 2.9 2.4 2.1 7.2 13.6 17.1 0.2 0.6 1.2 102 Bandhan Bank SELL 477 500 5 569 8.0 1,610 16 19 25 45 19 29 29 25 19.1 ——— 5.2 4.7 3.8 19.0 22 22 0.0 0.0 0.0 6.3 Bank of Baroda ADD 98 135 38 375 5.3 3,853 1.6 18 24 118 1,004 33 60 5.4 4.1 ——— 0.7 0.8 0.6 0.9 12.5 13.4 — 3.7 4.9 45 Canara Bank ADD 225 300 33 170 2.4 753 4.6 50 69 108 995 37 49 4.5 3.3 ——— 1.1 0.8 0.6 1.0 10.0 12.3 ——— 23 City Union Bank ADD 198 215 9 145 2.1 735 9.3 10.7 12.0 4.4 15 11.7 21 18.5 16.5 ——— 3.3 2.9 2.6 15.2 15.3 15.1 0.3 1.0 1.1 2.1 DCB Bank ADD 190 250 32 59 0.8 310 10.5 12.9 16 32 23 27 18.0 14.7 11.6 ——— 2.1 1.9 1.7 12.0 13.1 14.7 0.5 0.6 0.8 6.6 Equitas Holdings BUY 105 180 72 36 0.5 342 6.3 8.8 12.7 585 38 45 16.6 12.0 8.3 ——— 1.5 1.4 1.2 9.1 11.3 14.4 ——— 5.3 Federal Bank BUY 87 130 50 173 2.4 1,985 6.3 8.6 10.4 41 37 21 13.9 10.1 8.4 ——— 1.4 1.3 1.2 9.8 12.3 13.5 1.6 2.2 2.7 20.0 HDFC Bank ADD 2,184 2,500 14 5,972 84.3 2,723 77 91 108 14.9 18 18 28 24 20 ——— 4.0 3.6 3.2 16.5 15.7 16.3 0.7 0.8 1.0 110 ICICI Bank BUY 408 515 26 2,636 37.2 6,447 4.7 24 30 (50.5) 404 27 86 17.1 13.4 ——— 3.0 2.4 2.1 3.4 13.5 15.4 0.2 1.2 1.5 111 IndusInd Bank ADD 1,426 1,750 23 988 14.0 723 54 77 104 (10) 43 35 27 18.6 13.8 ——— 3.5 2.8 2.4 13.5 17.2 18.1 0.5 0.7 1.0 107 J&K Bank NR 45 - (100) 25 0.4 557 8.3 9.0 13.3 129 8.3 47 5.4 5.0 3.4 ——— 0.6 0.5 0.4 7.3 7.4 10.1 0.0 4.0 5.9 0.9 Karur Vysya Bank BUY 57 80 40 46 0.6 799 2.6 3.9 7.9 (45) 49 102 22 14.5 7.2 ——— 0.9 0.9 0.8 3.3 4.8 9.2 1.1 1.7 3.6 1.0 Punjab National Bank ADD 64 100 56 295 4.2 4,604 (22) 9.7 14.2 51 145 46 NM 6.6 4.5 ——— 1.4 1.0 0.7 NM 10.2 13.2 ——— 35 RBL Bank REDUCE 363 550 51 156 2.2 427 20 24 30 34 16 26 17.9 15.4 12.2 ——— 2.1 2.0 1.8 12.2 12.6 14.2 0.7 0.9 1.1 29 State Bank of India BUY 290 390 35 2,587 36.5 8,925 1.0 31 48 113 3,116 55 300 9.3 6.0 ——— 1.8 1.4 1.1 0.4 11.8 15.9 0.0 0.1 0.1 126 Ujjivan Financial Services ADD 279 375 35 34 0.5 121 16 24 30 2,667 44 27 16.9 11.8 9.3 ——— 1.8 1.6 1.4 10.8 13.9 15.5 0.5 0.8 1.1 10.8 Union Bank ADD 64 90 42 112 1.6 1,763 (17) 4.8 19 63 128 303 NM 13.3 3.3 ——— 1.0 0.9 0.7 NM 3.4 12.7 0.0 1.1 4.5 11.8 YES Bank SELL 87 70 (19) 201 2.8 2,315 7.4 -1.6 7.5 (59.5) (122) 561 11.7 NM 11.6 ——— 0.8 1.0 0.9 6.5 NM 6.4 3.1 (0.5) 2.3 176 Banks Attractive 16,501 232.9 373 267 40 56 15.3 10.9 2.0 1.8 1.5 3.6 11.5 14.2 0.4 0.7 1.0 930

Source: Company, Bloomberg, Kotak Institutional Equities estimates

96 KOTAK ECONOMIC RESEARCH 96

Kotak Institutional Equities: Valuation summary of KIE Universe stocks

97 Fair O/S ADVT P/B (X) RoE (%) Dividend yield (%)

Price (Rs) Value Upside Mkt cap. shares EPS (Rs) EPS growth (%) P/E (X) EV/EBITDA (X) 3mo Company Rating 7-Aug-19 (Rs) (%) (Rs bn) (US$ bn) (mn) 2019 2020E 2021E 2019 2020E 2021E 2019 2020E 2021E 2019 2020E 2021E 2019 2020E 2021E 2019 2020E 2021E 2019 2020E 2021E (US$ mn) Building Products Astral Poly Technik SELL 1,211 720 (41) 146 2.1 120 16 21 25 11.8 28 19 74 58 49 38 29 25 11 9.6 8.1 17.1 18.0 18.0 0.1 0.1 0.1 1.1 Building Products Cautious 146 2.1 11.8 28 19 75 58 49 38 29 25 11 9.6 8.1 15.3 16.5 16.6 0.1 0.1 0.1 1.1 Capital goods ABB SELL 1,391 1,145 (18) 295 4.2 212 24 27 32 22 10.2 22 58 52 43 61 42 32 7.4 6.6 5.9 13.4 13.3 14.5 0.3 0.4 0.5 2.6 Ashoka Buildcon BUY 127 225 77 36 0.5 281 11.8 11.8 12.4 41 (0.4) 5.3 10.7 10.8 10.2 8.2 7.7 7.1 1.6 1.4 1.3 16.1 14.1 13.3 1.3 1.5 1.5 0.7 Bharat Electronics BUY 95 116 22 231 3.3 2,437 7.7 6.3 6.0 31.8 (19.0) (5.1) 12.3 15.1 15.9 7.7 8.4 7.8 2.5 2.3 2.2 22 16.0 14.1 3.6 2.9 2.8 19.1 BHEL REDUCE 58 67 16 200 2.8 3,482 3.5 2.9 4.2 51 (17.0) 44 16.5 19.8 13.8 7.0 4.9 3.2 0.6 0.6 0.6 3.8 3.2 4.5 3.5 2.5 3.2 12.2 Carborundum Universal SELL 294 300 2 56 0.8 189 13.1 14.6 17 14.8 11.2 14.9 22 20 17.6 13 11.0 9.3 3.2 2.9 2.7 15.1 15.2 15.8 0.9 1.5 1.7 0.5 Cochin Shipyard BUY 350 580 66 46 0.6 132 37 39 42 23 6.0 7.4 9.6 9.0 8.4 3.9 2.9 4.5 1.4 1.3 1.1 14.6 14.6 14.2 3.7 3.0 3.3 0.4 Cummins India SELL 653 660 1 181 2.6 277 26 29 33 9.1 9.2 14.4 25 23 19.8 20 18 15 4.4 4.1 3.8 18.0 18.7 20 2.6 2.4 2.8 4.1 Dilip Buildcon BUY 394 665 69 54 0.8 137 56 46 53 20 (17.6) 15 7.1 8.6 7.5 5.5 4.5 4.3 1.7 1.4 1.2 27 17.9 17.3 0.3 0.2 0.2 2.9 IRB Infrastructure BUY 95 205 116 33 0.5 351 24 21 22 7.2 (14.9) 6.7 3.9 4.6 4.3 6.0 5.6 5.5 0.5 0.5 0.4 14.2 11.0 10.8 3.7 4.1 3.8 5.6 Kalpataru Power Transmission BUY 475 575 21 73 1.0 153 30 38 43 66 24 13.4 15.6 12.6 11.1 7.2 6.0 4.9 2.3 2.0 1.7 16.1 17.2 16.7 0.6 0.7 0.8 0.8 KEC International BUY 293 330 13 75 1.1 257 19 22 26 5.7 17 19 15.5 13.2 11.1 7.9 7.1 5.8 3.1 2.6 2.1 22 21 21 0.8 0.8 1.0 1.7 L&T BUY 1,360 1,545 14 1,908 26.9 1,403 61 72 76 19 17 6.1 22 18.9 17.8 19 17 15 3.4 2.7 2.4 16.3 15.9 14.4 1.2 1.5 1.7 69 Sadbhav Engineering REDUCE 131 270 106 22 0.3 172 10.9 12.3 17 (15.7) 13.7 40.1 12.1 10.6 7.6 8.6 6.6 5.5 1.1 1.0 0.9 9.5 9.9 12.6 — — — 0.9 Siemens SELL 1,101 1,040 (6) 392 5.5 356 29 33 38 16 11.7 18 38 34 29 23 20 17 4.4 4.0 3.7 12.0 12.4 13.4 0.7 0.8 1.0 8.8 Thermax ADD 1,048 1,180 13 125 1.8 113 37 34 44 79 (6.7) 29 28 30 24 27 21 17 27 21 17 14.5 12.3 14.4 0.7 0.8 1.0 1.7 Capital goods Neutral 3,727 52.6 22 6.2 10.6 20 19.3 17.4 2.6 2.3 2.1 13.0 11.9 12.1 1.4 1.5 1.7 930 Commercial & Professional Services SIS REDUCE 826 870 5 61 0.9 75 29 37 41 28 27 11.9 29 22 20 17 12 10.3 4.9 4.1 3.5 18.8 19.9 18.8 0.3 0.4 0.4 0.5 TeamLease Services SELL 2,685 2,300 (14) 46 0.6 17 58 68 89 33 19 30 47 39 30 47 35 26 8.5 7.0 5.7 20 19.5 21 — — — 0.7 Commercial & Professional Services Cautious 106 1.5 32 25 17 34 27 23 24 17 14 6.0 5.0 4.1 17.5 18.2 17.8 0.2 0.2 0.3 1.1 Commodity Chemicals Asian Paints REDUCE 1,559 1,350 (13) 1,496 21.1 959 23 28 33 2.7 26 17 69 55 47 42 31 27 16 14 13 24 27 28 0.7 0.9 1.1 31 Tata Chemicals BUY 564 700 24 144 2.0 255 43 49 54 (9) 13.1 10.4 13.1 11.6 10.5 6.2 5.0 4.4 1.2 1.1 1.0 9.3 9.7 10.0 2.2 2.4 2.6 8.1 Commodity Chemicals Neutral 1,639 23.1 (1.5) 22 15 50 41 36 29 22 19 7.5 6.9 6.3 14.9 16.6 17.5 0.8 1.0 1.2 40 Construction Materials ACC REDUCE 1,557 1,450 (7) 292 4.1 188 53 78 76 9.3 47 (2.9) 29 19.9 21 15 10.6 10.8 2.8 2.5 2.3 10.1 13.3 11.8 0.9 1.3 1.2 18.2 Ambuja Cements REDUCE 205 196 (4) 407 5.7 1,986 7.3 11.2 11.7 (2.4) 54 5.1 28 18.3 17.5 10.1 6.7 6.3 1.8 1.7 1.6 6.7 9.5 9.2 0.7 0.7 0.7 9.1

Dalmia Bharat ADD 1,078 1,225 21 195 2.7 192 14.4 34 43 4.1 135 29 70 30 23 11.8 9.2 8.1 1.8 1.7 1.6 2.6 5.9 7.2 — — — 1.4 Daily Summary India Grasim Industries ADD 738 1,020 38 485 6.8 657 63 81 104 36 30 28 11.8 9.1 7.1 9.5 5.6 4.2 0.9 0.8 0.7 7.3 9.2 10.7 0.9 0.9 0.9 20 J K Cement ADD 972 1,140 17 75 1.1 77 34 76 93 (21) 123 22.0 28 12.8 10.5 13 8.7 7.1 2.8 2.4 2.0 11.3 20 21 1.0 1.0 1.0 1.0 JK Lakshmi Cement ADD 330 355 7 39 0.5 118 4.0 24 32 (29) 502 31 82 13.6 10.3 11.5 6.5 5.3 2.6 2.2 1.9 3.3 17.8 19.7 0.2 0.6 0.6 0.4 Orient Cement ADD 91 112 23 19 0.3 205 2.3 8.1 10.9 207.4 248 35 39 11.3 8.3 10.0 6.1 5.3 1.8 1.6 1.4 4.6 14.9 17.8 1.6 2.2 2.2 0.4 Shree Cement SELL 20,150 14,750 (27) 702 9.9 35 323 465 602 (19) 44 30 62 43 33 26 18 15 7.3 6.4 5.5 12.2 15.7 17.6 0.3 0.3 0.3 8.4 UltraTech Cement SELL 4,342 2,960 (32) 1,192 16.8 275 102 137 170 13.9 35 23 43 32 26 20 16 14 4.3 3.8 3.3 10.4 12.7 13.9 0.3 0.3 0.3 30 Construction Materials Cautious 3,433 48.5 12.5 46 21 31 21 17.3 14 9.2 7.6 2.3 2.1 1.9 7.6 10.1 11.0 0.5 0.5 0.5 99

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

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August 8, 2019 August8,

KOTAK ECONOMIC RESEARCH 97

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

KOTAK INSTITUTIONAL EQUITIES RESEARCH EQUITIES INSTITUTIONAL KOTAK Company Rating 7-Aug-19 (Rs) (%) (Rs bn) (US$ bn) (mn) 2019 2020E 2021E 2019 2020E 2021E 2019 2020E 2021E 2019 2020E 2021E 2019 2020E 2021E 2019 2020E 2021E 2019 2020E 2021E (US$ mn) Consumer Durables & Apparel Crompton Greaves Consumer SELL 228 210 (8) 143 2.0 627 5.9 7.1 8.4 15 19 18 38 32 27 24 20 17 13 10 8.0 40 35 33 0.9 1.1 1.1 2.4 Havells India SELL 645 520 (19) 403 5.7 625 12.6 13.2 17 13.5 4.8 29 51 49 38 33 31 24 9.5 8.6 7.6 19.8 18.5 21 0.7 0.7 0.9 16.8 Page Industries REDUCE 18,265 21,300 17 204 2.9 11 353 410 495 13.5 16 21 52 45 37 33 29 24 26 23 18 49 54 54 1.9 1.1 1.4 10.8 TCNS Clothing Co. ADD 679 770 13 42 0.6 66 21 19 23 34 (6.8) 21 33 35 29 23 18 15 7.1 5.7 4.6 25 17.9 17.5 — — — 0.2 Vardhman Textiles ADD 925 1,230 33 53 0.8 56 129 119 136 25.6 (8.4) 15.0 7.1 7.8 6.8 6.3 5.9 4.9 0.9 0.9 0.8 13.9 11.5 12.1 2.2 3.2 3.2 0.4 Voltas SELL 606 480 (21) 201 2.8 331 16 17 21 (9.1) 7.1 23 39 36 29 33 26 23 4.9 4.4 4.0 13.0 12.9 14.3 0.5 0.6 0.7 14.6 Whirlpool SELL 1,523 1,220 (20) 193 2.7 127 32 38 44 16 18 17 47 40 34 28 24 21 9.0 7.7 6.7 21 21 21 0.3 0.5 0.9 1.1 Consumer Durables & Apparel Cautious 1,239 17.5 12.7 6.4 37 35 29 25 22 18 6.7 5.9 18.0 17.0 18.2 0.9 0.9 46 Consumer Staples Bajaj Consumer Care BUY 260 390 50 38 0.5 148 15 16 18 5.0 8.2 11.9 17.3 16.0 14.3 13 12 11 8 8 9 46 52 60 5.4 5.4 6.1 0.4

Britannia Industries REDUCE 2,541 2,800 10 611 8.6 240 48 55 66 15 15.0 19 53 46 38 35 30 25 14 12 9.9 30 28 28 0.6 0.8 1.0 16.1 -

Colgate-Palmolive (India) ADD 1,201 1,310 9 327 4.6 272 27 29 34 12.5 9.4 16 45 41 35 26 23 20 23 23 23 49 55 65 1.9 2.2 2.5 7.8 2019 August8, Dabur India REDUCE 431 390 (9) 761 10.7 1,766 8.1 9.3 10.7 4.6 14.8 14.4 53 46 40 43 37 32 14 12 11 25 27 28 0.6 1.0 1.3 14.6 GlaxoSmithKline Consumer RS 7,649 — — 322 4.5 42 234 255 287 40 9.3 12.4 33 30 27 25 21 18 7.9 7.0 6.3 26 25 25 1.4 1.5 1.7 1.7

Godrej Consumer Products REDUCE 635 600 (5) 649 9.2 1,022 14.5 16 18 1.9 8.6 17 44 40 34 32 28 24 8.9 7.8 6.9 22 21 21 1.5 1.0 1.2 10.4 Hindustan Unilever REDUCE 1,777 1,625 (9) 3,847 54.3 2,160 28 33 38 18 18 14.9 63 53 46 44 35 31 50 43 36 83 87 84 1.2 1.4 1.5 30 ITC ADD 254 315 24 3,113 43.9 12,300 10.2 11.0 12.2 14.0 8.6 10.9 25 23 21 16 15 13 5.4 5.0 4.7 19.5 21 22 2.3 2.6 2.9 50 Jyothy Laboratories ADD 156 190 22 57 0.8 367 5.6 5.9 6.7 26 5.2 13.6 28 27 23 21 18 16 4.3 4.1 3.9 16.6 15.8 17.0 1.9 2.2 2.6 0.8 Marico ADD 379 400 6 489 6.9 1,290 7.3 8.4 9.7 17 14.5 15 52 45 39 38 31 26 16 15 14 34 35 37 1.3 1.5 1.7 10.3 Nestle India REDUCE 11,777 10,700 (9) 1,136 16.0 96 167 190 216 31 14.2 13.2 71 62 55 41 37 32 31 60 50 45 66 100 1.0 2.6 1.2 10.4 Tata Global Beverages ADD 269 275 2 170 2.4 631 7.0 8.2 9.4 (4.8) 18 13.9 39 33 29 21 18 16 2.3 2.2 2.1 6.1 6.9 7.6 0.9 1.1 1.3 12.3

United Breweries REDUCE 1,393 1,335 (4) 368 5.2 264 21 26 33 43 24 25 65 53 42 32 27 23 12 9.7 8.2 19.2 20 21 0.2 0.3 0.5 7.9 United Spirits REDUCE 599 590 (2) 435 6.1 727 9.4 13.2 16 24 40 24 64 45 36 36 27 23 14 9.9 6.8 24 25 22 0.0 0.3 0.4 13.3 Consumer Staples Cautious 12,492 176.3 16 12.9 14.1 43 38 33 28 25 21 11 10 9.2 26 27 28 1.4 1.7 1.8 188 Diversified Financials Bajaj Finance SELL 3,266 2,650 (19) 1,894 26.7 577 69 90 115 60 30 27 47 36 28 — — — 9.6 7.8 6.3 22 24 24 0.2 0.3 0.4 99 Bajaj Finserv REDUCE 7,152 7,500 5 1,138 16.1 159 202 272 344 21 34 27 35 26 21 — — — 4.8 4.1 3.4 14.5 16.8 18.0 0.2 0.2 0.2 34 Cholamandalam ADD 272 295 8 213 3.0 782 15 17 20 29 14.6 17 17.9 15.7 13.4 — — — 3.5 2.9 2.5 21 20 19.8 2.4 0.7 0.8 5.8 HDFC ADD 2,175 2,325 7 3,753 53.0 1,721 57 70 69 (4) 23 (1.7) 38 31 32 — — — 4.8 4.4 4.1 13.7 14.8 13.5 1.0 1.2 1.2 101 IIFL Finance REDUCE 116 185 59 37 0.5 318 19 14.8 18 (22.5) (24.0) 19 6.0 7.8 6.6 — — — 1.0 0.9 0.8 17.5 12.3 13.5 5.6 4.6 5.5 0.4 L&T Finance Holdings REDUCE 96 120 25 192 2.7 1,999 11.2 12.8 14.0 74 14.2 10.0 8.6 7.5 6.9 — — — 1.4 1.2 1.1 18.0 17.5 16.6 1.0 1.3 1.5 14.4 LIC Housing Finance ADD 493 525 6 249 3.5 505 46 53 64 6.0 14.6 22 10.7 9.4 7.7 — — — 1.7 1.5 1.3 16.6 15.3 16.4 1.5 1.8 2.1 13.6 Magma Fincorp BUY 70 125 79 19 0.3 269 11.3 9.8 12.6 12.9 (13.5) 29 6.2 7.1 5.6 — — — 0.7 0.6 0.6 12.9 9.2 10.8 1.1 0.7 1.8 1.0 Mahindra & Mahindra Financial ADD 296 350 18 183 2.6 615 25 26 31 45 0.9 21 11.7 11.6 9.6 — — — 1.8 1.7 1.5 15.2 13.7 15.0 2.2 2.2 2.7 13.0 Muthoot Finance ADD 627 625 (0) 251 3.5 401 49 54 60 10.8 8.7 11.4 12.7 11.7 10.5 — — — 2.6 2.2 1.9 22.4 20 19.6 1.9 2.0 2.3 8.3 PNB Housing Finance REDUCE 704 700 (1) 118 1.7 169 71 67 78 9.7 (6.0) 16 9.9 10.5 9.1 — — — 1.6 1.5 1.3 16.9 14.1 14.6 1.3 1.0 1.2 6.2 Shriram City Union Finance BUY 1,400 1,825 30 92 1.3 66 150 156 178 39 3.9 14.5 9.3 9.0 7.8 — — — 1.6 1.4 1.2 16.6 15.0 15.1 1.6 1.4 1.6 0.5 Shriram Transport BUY 998 1,415 42 226 3.2 227 113 127 137 4.2 12.0 7.9 8.8 7.9 7.3 — — — 1.5 1.3 1.1 17.4 16.8 15.9 1.2 1.8 2.1 35 Diversified Financials Neutral 8,366 118.1 10.4 18 12.6 27 22 20.0 2.9 2.6 2.3 10.8 11.4 11.5 0.8 0.9 1.0 332

Source: Company, Bloomberg, Kotak Institutional Equities estimates

98 KOTAK ECONOMIC RESEARCH

98

Kotak Institutional Equities: Valuation summary of KIE Universe stocks

99 Fair O/S ADVT Mkt cap. EPS (Rs) EPS growth (%) P/E (X) EV/EBITDA (X) P/B (X) RoE (%) Dividend yield (%) Price (Rs) Value Upside shares 3mo Company Rating 7-Aug-19 (Rs) (%) (Rs bn) (US$ bn) (mn) 2019 2020E 2021E 2019 2020E 2021E 2019 2020E 2021E 2019 2020E 2021E 2019 2020E 2021E 2019 2020E 2021E 2019 2020E 2021E (US$ mn) Electric Utilities CESC BUY 744 830 12 99 1.4 133 90 104 114 34.6 14.8 9.7 8.2 7.2 6.5 6.4 5.5 5.1 0.8 0.7 0.7 9.9 10.8 10.9 1.7 1.8 1.8 4.2 JSW Energy REDUCE 70 65 (7) 115 1.6 1,640 4.2 6.2 5.8 36 49 (7.4) 16.8 11.3 12.2 6.3 5.0 4.4 1.0 0.9 0.8 6.0 8.3 7.1 — — — 0.7 NHPC ADD 22 27 21 225 3.2 10,045 2.5 2.9 3.1 3.7 17 5.1 8.8 7.6 7.2 7.5 6.7 6.6 0.7 0.7 0.7 8.5 9.4 9.5 6.4 6.7 7.1 1.0 NTPC BUY 123 165 34 1,217 17.2 9,895 11.2 11.5 13.2 7.4 2.2 14.8 11.0 10.7 9.3 11.2 9.4 7.8 1.1 1.1 1.0 10.6 10.2 11.0 4.9 2.8 3.2 25 Power Grid BUY 199 235 18 1,040 14.7 5,232 19 21 23 20 8.5 11.2 10.5 9.6 8.7 7.2 7.3 6.8 1.8 1.6 1.4 17.5 17.3 17.4 4.2 3.6 4.0 21 Tata Power BUY 59 77 30 160 2.3 2,705 2.1 4.9 5.3 (60.5) 132 8.6 28 12.1 11.1 9.7 8.2 8.0 1.0 0.9 0.8 3.6 7.6 7.7 3— — — 6.6 Electric Utilities Attractive 2,855 40.3 9.0 10.4 11.1 10.9 9.9 8.9 1.2 1.1 1.0 11.0 11.2 11.6 4.4 3.1 3.5 59 Fertilizers & Agricultural Chemicals Bayer Cropscience SELL 3,078 2,700 (12) 106 1.5 34 69 83 100 (20.8) 20 21 44 37 31 27 22 18 5.6 5.1 4.5 13.0 14.3 15.5 0.6 0.5 0.7 0.4 Dhanuka Agritech ADD 337 420 25 16 0.2 48 24 23 26 (8.0) (3.7) 15 14.3 14.8 12.9 10.9 9.4 7.8 2.5 2.2 2.0 17.7 15.9 16.2 0.4 1.4 1.6 0.2 Godrej Agrovet ADD 429 485 13 82 1.2 192 11.5 13.4 17 (0.5) 17 26 37 32 25 19 16 13 4.0 3.6 3.2 11.8 12.0 13.5 1.0 0.8 1.0 0.5 PI Industries ADD 1,074 1,150 7 148 2.1 138 30 38 46 11.6 27 22 36 28 23 26 20 16 6.5 5.5 4.6 19.5 21 21 0.4 0.5 0.6 2.5 Rallis India ADD 157 170 9 30 0.4 195 8.4 9.6 10.7 (2.2) 14.3 11.1 18.6 16.3 14.6 11.7 11.2 9.8 2.4 2.2 2.0 13.2 13.9 14.1 1.6 1.8 1.9 0.4 UPL SELL 533 520 (2) 407 5.7 761 25 29 40 (12.9) 17 38 21 18.4 13.3 16 9.6 7.5 2.8 2.5 2.2 15.9 14.5 17.9 1.0 1.4 2.1 44 Fertilizers & Agricultural Chemicals Attractive 790 11.1 (9.4) 18 31 26 22 16.8 18 11.5 9.1 3.5 3.1 2.8 13.3 14.2 16.4 0.8 1.0 1.5 48 Gas Utilities GAIL (India) BUY 122 220 80 550 7.8 4,510 14.0 15 16 37 10.1 7.2 8.7 7.9 7.4 5.8 5.1 4.6 1.2 1.1 1.0 14.9 15.0 14.6 3.3 3.9 4.3 22 GSPL SELL 217 190 (12) 122 1.7 564 14.1 14.7 13.6 19 4.5 (7.9) 15.4 14.7 16.0 6.6 6.1 6.2 2.1 1.9 1.7 14.7 13.7 11.3 0.9 1.0 0.9 1.3 Indraprastha Gas SELL 310 260 (16) 217 3.1 700 12.0 14.1 16 17 18 12.4 26 22 19.5 17 14 12 5.3 4.5 4.0 22 22 22 0.8 1.0 1.2 9.0 Mahanagar Gas ADD 811 950 17 80 1.1 99 56 61 64 16 8.2 4.7 14.4 13.3 12.7 8.6 7.6 7.1 3.3 3.0 2.7 25 23 22 2.5 3.0 3.5 4.3 Petronet LNG BUY 235 300 27 353 5.0 1,500 15 18 20 8.3 18 12.0 15.7 13.3 11.8 9.9 8.0 7.0 3.5 3.1 2.8 22 25 25 4.2 3.4 4.2 9.6 Gas Utilities Attractive 1,323 18.7 24 12.9 7.5 12.4 11.0 10.2 7.7 6.6 6.0 2.0 1.8 1.6 16.0 16.3 15.9 2.9 3.0 3.4 46 Health Care Services Apollo Hospitals ADD 1,316 1,365 4 183 2.6 139 17 26 34 101 55 29 78 50 39 20 18 15 5.5 5.2 4.8 7.2 10.7 12.8 0.5 0.7 0.9 12.7 Aster DM Healthcare BUY 113 240 113 57 0.8 505 6.6 7.7 11.6 140 17 49 17.0 14.6 9.8 9.2 7.8 6.1 1.8 1.6 1.4 11.1 11.5 15.3 — — — 1.5 Dr Lal Pathlabs SELL 1,085 925 (15) 90 1.3 83 24 27 32 17 13.8 18 45 40 34 28 25 21 9.6 8.2 7.0 23 22 22 0.6 0.6 0.7 1.4 HCG BUY 105 245 133 9 0.1 85 (3.5) (1.8) 0.5 (322) 47 126 NM NM 218 12 11.0 9.1 1.6 1.7 1.7 NM NM 0.8 — — — 0.0 Narayana Hrudayalaya BUY 210 265 26 43 0.6 204 1.9 4.5 7.5 (25) 139 64 111 46 28 18 15 11.4 4.0 3.7 3.3 3.7 8.3 12.2 — — — 0.4 Health Care Services Attractive 383 5.4 58 36 39 49 36 26 17 14 12.0 4.2 3.9 3.5 8.5 10.7 13.4 0.3 0.5 0.6 16.1 Hotels & Restaurants

Coffee Day Enterprises NR 81 — — 17 0.2 211 2.9 3.5 8.1 (12.5) 19 132 28 23 10.0 10.2 5.1 5.0 0.7 0.4 0.4 2.5 2.0 3.6 — — — 0.4 Daily Summary India Jubilant Foodworks BUY 1,160 1,360 17 153 2.2 132 24 27 37 66 10.9 38 48 43 31 24 14 11.5 12 12 9.4 29 28 34 0.4 0.5 0.8 23 Lemon Tree Hotels BUY 57 75 32 45 0.6 789 0.3 1.0 2.2 51 281 116 209 55 25 33 20 13 5.1 4.7 4.2 2.5 8.9 17.5 — — 1.4 0.5 Hotels & Restaurants Attractive 215 3.0 45 27 64 54 42 26 19 11.7 9.6 4.6 3.1 2.8 8.6 7.4 11.1 0.3 0.4 0.8 24 Insurance HDFC Life Insurance ADD 518 525 1 1,045 14.8 2,009 6.4 7.4 8.5 15 16 14.6 81 70 61 — — — 18 17 15 25 25 26 0.3 0.4 0.4 17.3 ICICI Lombard SELL 1,168 775 (34) 531 7.5 454 23 28 34 22 22 23 51 42 34 — — — 10.0 8.5 7.1 21 22 23 0.4 0.5 0.6 17.6 ICICI Prudential Life BUY 397 520 31 571 8.1 1,436 8.1 8.9 9.3 (28) 10.4 4.5 49 44 43 — — — 8.3 7.2 6.4 17.3 17.4 15.9 0.7 0.4 0.4 11.2 Max Financial Services BUY 395 550 39 106 1.5 417 1.8 5.5 7.2 (65.8) 202 31 215 71 54 — — — 2.5 11.1 13.5 0.0 0.5 0.6 3.7 SBI Life Insurance BUY 787 900 14 787 11.1 1,000 13.3 15 18 15 17 14.8 59 51 44 — — — 11 9.0 7.7 19.0 19.1 18.7 0.3 0.3 0.4 10.9 KOTAK INSTITUTIONAL EQUITIES RESEARCH EQUITIES INSTITUTIONAL KOTAK Insurance Attractive 3,040 42.9 (0.4) 20 14.9 62 52 45 11 9.7 8.5 17.8 18.6 18.6 0.3 0.3 0.3 61 Source: Company, Bloomberg, Kotak Institutional Equities estimates

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August 8, 2019 August8,

KOTAK ECONOMIC RESEARCH 99

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

KOTAK INSTITUTIONAL EQUITIES RESEARCH EQUITIES INSTITUTIONAL KOTAK Company Rating 7-Aug-19 (Rs) (%) (Rs bn) (US$ bn) (mn) 2019 2020E 2021E 2019 2020E 2021E 2019 2020E 2021E 2019 2020E 2021E 2019 2020E 2021E 2019 2020E 2021E 2019 2020E 2021E (US$ mn) Internet Software & Services Info Edge REDUCE 2,153 1,870 (13) 263 3.7 122.0 26 31 37 14.7 20 20 83 69 58 73 52 43 11 10 9.0 14.2 15.4 16.6 0.2 0.4 0.4 6.5 Just Dial SELL 711 615 (13) 46 0.6 64.8 32 31 33 50 (1.5) 6.0 22 23 21 14 12 11.2 4.6 3.9 3.4 21 18.7 17.0 0.0 0.4 0.5 45 Internet Software & Services Attractive 309 4.4 25 11.5 15 59 53 46 49 38 33 9.3 8.2 7.2 15.7 15.5 15.7 0.1 0.4 0.4 52 IT Services HCL Technologies ADD 1,023 1,175 15 1,387 19.6 1,349 73 73 82 18 -0.4 12.1 14.0 14.0 12.5 9.4 8.4 7.5 3.3 2.9 2.6 26 22 22 0.8 3.0 3.2 26 Hexaware Technologies REDUCE 357 345 (3) 106 1.5 302 19 21 24 17 8.0 16 18.5 17.1 14.7 13 12 10.4 4.5 4.1 3.6 27 25 26 2.4 2.8 2.8 4.8 Infosys ADD 776 775 (0) 3,388 47.8 4,260 35 37 41 9.5 4.7 11.9 22 21 18.7 15 15 13 5.2 5.3 5.0 24 25 28 3.9 2.8 3.4 88 L&T Infotech ADD 1,600 1,750 9 278 3.9 176 86 84 99 36 (2.9) 17 18.5 19.1 16.2 14 14 11.1 5.7 4.9 4.2 35 28 28 1.6 1.9 2.1 4.5 Mindtree REDUCE 745 725 (3) 123 1.7 165 46 37 49 33 (20.3) 33 16.3 20 15.3 10.5 10.3 7.9 3.7 3.3 2.9 25 17.2 20 1.7 1.5 2.0 16.1 Mphasis REDUCE 963 910 (6) 179 2.5 186 56 61 65 28 8.1 6.9 17.2 15.9 14.9 12 10.1 9.1 3.5 3.1 2.9 20 21 20 2.8 3.1 3.5 3.3

TCS REDUCE 2,213 1,940 (12) 8,306 117.2 3,752 83 90 98 23 7.8 9.9 27 25 22 20 18 16 9.2 8.2 7.6 35 35 35 1.4 2.4 2.9 84 -

Tech Mahindra ADD 674 730 8 598 8.4 880 48 44 50 11.9 (7.5) 14.0 14.1 15.3 13.4 8.3 8.8 7.5 3.0 2.6 2.4 22 18.2 18.6 2.1 2.4 2.7 31 2019 August8, Wipro REDUCE 263 260 (1) 1,585 22.4 5,803 15.0 16 18 18 8.9 10.6 17.6 16.1 14.6 11.1 10.8 9.4 2.8 2.8 2.4 17.2 17.0 17.4 0.6 0.6 0.8 25 IT Services Cautious 15,950 225.1 16 2.6 11.0 21 21 18.8 15 14 12 5.5 5.2 4.7 26 25 25 1.8 2.4 2.8 282

Media DB Corp. REDUCE 157 180 15 27 0.4 175 16 18 20 (11.0) 14.7 12.1 10.0 8.7 7.8 5.3 4.4 3.9 1.5 1.6 1.6 14.6 17.8 20 6.4 8.0 9.6 0.2 DishTV REDUCE 23 30 32 42 0.6 1,925 0.9 0.6 1.1 -28.3 (25.8) 75 26 35 20 0.0 2.7 2.3 6.1 4.3 NM 19.8 25 — — — 12.8 Jagran Prakashan REDUCE 68 110 62 20 0.3 296 8.9 11.1 13.0 (8.1) 25 17 7.7 6.1 5.2 2.8 2.3 1.9 1.1 1.1 1.0 13.4 17.6 20 7.4 13.2 13.2 0.2 PVR RS 1,470 — — 69 1.0 48 37 51 65 38 37 28 40 29 23 15 11.5 9.7 5.7 4.9 4.1 15.5 18.3 19.8 0.3 0.3 0.4 10.6 Sun TV Network REDUCE 444 575 30 175 2.5 394 36 36 40 26 (0.4) 10.6 12.2 12.3 11.1 7.9 7.7 6.8 3.3 3.0 2.7 29 25 25 3.4 3.9 4.5 15.9 Zee Entertainment Enterprises REDUCE 328 365 11 315 4.4 960 17 18 20 9.9 10.0 12.5 19.9 18.1 16.1 11.4 10.7 9.4 3.5 3.2 2.8 19.2 18.7 18.8 1.1 1.4 1.7 70

Media Attractive 648 9.1 9.6 7.3 14.9 16.6 15.5 13.5 8.1 7.1 6.3 3.4 3.0 2.7 20 19.5 20.0 2.0 2.5 2.9 109 Metals & Mining Hindalco Industries BUY 176 245 39 396 5.6 2,224 25 22 26 13.0 (12.2) 18 7.1 8.1 6.9 5.0 5.2 4.5 0.7 0.6 0.6 9.8 8.1 8.8 0.7 0.7 0.7 21 Hindustan Zinc REDUCE 208 210 1 880 12.4 4,225 19 18 18 (12.4) (3.0) 0.8 11.1 11.4 11.3 6.7 6.8 6.7 2.6 2.8 3.1 23 24 26 9.6 9.6 9.6 2.7 Jindal Steel and Power REDUCE 102 150 47 104 1.5 968 (1.7) 2.7 7.0 80 258.8 154 NM 37 14.7 6.2 6.1 5.5 0.3 0.3 0.3 NM 0.8 2.0 — — — 27 JSW Steel REDUCE 212 225 6 513 7.2 2,402 32 14.9 23 18 (53) 54 6.7 14.2 9.2 4.9 7.2 6.0 1.5 1.4 1.2 24 10.0 14.1 2.0 2.0 2.0 24 National Aluminium Co. BUY 43 60 39 80 1.1 1,866 9.3 5.3 5.0 81 (42.9) (5.7) 4.6 8.1 8.6 1.5 2.7 2.7 0.8 0.7 0.7 16.5 9.3 8.6 13.4 7.4 7.0 5.0 NMDC REDUCE 102 112 10 311 4.4 3,062 14.7 15 12.3 26 5 (20.7) 6.9 6.6 8.3 4.0 3.8 4.6 1.2 1.1 1.0 17.9 17.5 12.8 5.4 6.1 4.8 7.2 Tata Steel BUY 382 560 47 433 6.1 1,146 90 45 66 30 (50.0) 46 4.2 8.5 5.8 4.7 5.7 4.7 0.7 0.6 0.6 16.5 7.6 10.7 2.6 2.6 2.6 69 Vedanta BUY 137 200 46 508 7.2 3,717 15 22 24 (28.9) 44 8.9 8.9 6.2 5.7 5.1 4.7 4.7 0.8 0.8 0.8 9.1 13.2 14.4 13.8 14.6 14.6 26 Metals & Mining Attractive 3,226 45.5 7.2 (17.9) 16 7.5 9.1 7.8 5.0 5.5 5.1 1.0 1.0 0.9 13.4 10.6 11.6 6.4 6.4 6.3 44 Source: Company, Bloomberg, Kotak Institutional Equities estimates

100 100 KOTAK ECONOMIC RESEARCH

Kotak Institutional Equities: Valuation summary of KIE Universe stocks

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

Company Rating 7-Aug-19 (Rs) (%) (Rs bn) (US$ bn) (mn) 2019 2020E 2021E 2019 2020E 2021E 2019 2020E 2021E 2019 2020E 2021E 2019 2020E 2021E 2019 2020E 2021E 2019 2020E 2021E (US$ mn) Oil, Gas & Consumable Fuels BPCL SELL 331 310 (6) 718 10.1 1,967 36 32 34 (10) (11.6) 5.8 9.1 10.3 9.8 7.1 7.9 7.3 1.8 1.6 1.5 20 16.4 16.0 4.4 3.9 4.1 30 Coal India BUY 206 290 41 1,270 17.9 6,163 28 31 31 151 10.0 0.5 7.3 6.6 6.6 4.7 5.2 4.7 4.8 4.6 4.4 69 71 68 6.4 12.1 12.1 23 HPCL SELL 244 220 (10) 372 5.3 1,524 40 28 29 (5) (29.6) 2.8 6.2 8.7 8.5 5.6 8.1 8.1 1.3 1.2 1.1 23 14.6 13.9 6.5 4.6 4.7 24 IOCL SELL 129 130 1 1,214 17.1 9,181 18 15 16 (12) (14.9) 3.1 7.2 8.4 8.2 4.7 5.1 5.1 1.1 1.0 1.0 15.5 12.5 12.1 7.0 4.9 4.8 29 Oil India BUY 151 240 59 164 2.3 1,084 30 33 33 22.0 8.6 (0.2) 5.0 4.6 4.6 3.1 2.9 2.9 0.6 0.6 0.5 11.7 12.4 11.7 6.6 9.7 9.7 3.9 ONGC BUY 131 210 61 1,642 23.2 12,580 24 25 25 38 3.5 (0.9) 5.4 5.3 5.3 3.2 2.9 2.7 0.7 0.6 0.6 13.0 12.7 11.7 5.4 6.5 6.5 25 Reliance Industries SELL 1,109 1,125 1 6,575 92.8 5,927 66 74 84 11.7 11.8 14.5 16.8 15.0 13.1 10.6 9.7 8.3 1.7 1.5 1.4 11.5 10.8 11.2 0.6 0.6 0.7 166 Oil, Gas & Consumable Fuels Attractive 11,957 168.8 19 1.8 5.8 10.0 9.8 9.2 6.4 6.3 5.8 1.4 1.3 1.2 14.1 13.2 12.9 3.0 3.5 3.5 302 Pharmaceuticals Aurobindo Pharma ADD 555 680 23 325 4.6 584 42 53 59 0.2 25 11.4 13.3 10.6 9.5 9.3 7.4 6.8 2.3 2.0 1.7 19.2 18.6 17.5 0.9 1.1 1.3 28 Biocon SELL 225 185 (18) 270 3.8 1,202 6.1 7.7 9.0 96 26 18 37 29 25 19 15 13 4.0 3.7 3.3 11.8 13.1 13.2 0.3 1.2 1.4 15.0 Cipla BUY 518 570 10 418 5.9 806 19 23 32 8.2 23 37 27 22 16.3 14 12 9.4 2.7 2.5 2.2 10.2 11.7 13.7 0.6 0.9 1.3 14.8 Dr Reddy's Laboratories REDUCE 2,557 2,450 (4) 425 6.0 166 113 146 141 92 29 (3.3) 23 17.5 18.1 14 13 8.8 3.0 2.6 2.4 12.4 11.2 13.0 0.9 0.8 1.0 27 Laurus Labs BUY 323 400 24 34 0.5 106 11.0 18 27 (30.9) 66 46 29 17.7 12.1 13 9.6 7.4 2.2 1.9 1.7 7.6 11.6 13.8 — — — 0.2 Lupin ADD 782 840 7 354 5.0 450 21 30 41 (45) 42 39 37 26 18.9 14 11.1 8.7 2.6 2.4 2.1 6.9 9.3 11.3 0.3 0.6 0.8 18.2 Sun Pharmaceuticals ADD 421 460 9 1,010 14.3 2,406 16 20 24 6.3 23 23 26 21 17.2 14 10.7 8.7 2.4 2.2 2.0 9.8 11.0 11.5 0.5 0.9 1.2 46 Torrent Pharmaceuticals BUY 1,703 1,840 8 288 4.1 169 26 54 70 -35.7 110 30 66 31 24 16 14 11.7 6.1 5.5 4.8 9.2 17.5 19.8 1.1 1.4 1.5 8.2 Pharmaceuticals Neutral 3,124 44.1 2.8 27 25 27 21 16.8 14 11.0 8.9 2.8 2.5 2.2 10.5 12.0 13.3 0.6 0.9 1.2 157 Real Estate Brigade Enterprises BUY 272 290 6 37 0.5 136 18 22 28 59 27 26 15.5 12.2 9.7 9.7 8.5 6.6 1.7 1.5 1.3 10.8 13.2 14.7 0.9 0.9 0.9 0.3 DLF ADD 166 200 21 388 5.5 2,475 5.9 7.7 12.6 (76) 29.3 64 28 22 13.2 23 22 18 1.1 1.1 1.0 3.8 5.4 8.1 0.0 1.2 1.2 25 Embassy Office Parks REIT ADD 361 365 1 279 3.9 772 0.2 14.8 18 (97) 9,197 20 2,266 24 20 21 19 16 36 1.2 1.3 2.8 5.0 6.2 — 6.3 7.2 2.2 Godrej Properties SELL 919 670 (27) 232 3.3 229 11.0 17 17 2 57 (4.4) 83 53 55 144 53 69 8.5 7.3 6.5 10.8 14.9 12.5 — — — 6.9 Oberoi Realty ADD 550 570 4 200 2.8 364 22 24 44 24 8 81 24 23 12.6 19 16 10.0 2.5 2.3 1.9 11.6 10.5 16.6 0.4 0.4 0.4 3.5 Prestige Estates Projects ADD 279 320 15 105 1.5 375 8.7 13.8 21 (12) 59 53 32 20 13.2 13 10.9 8.6 2.5 2.2 1.9 7.3 11.7 15.7 0.5 0.5 0.5 1.1 Sobha ADD 502 580 16 48 0.7 95 31 36 40 36 14.7 11 16.1 14.0 12.6 10.4 10.2 9.1 2.1 1.9 1.7 11.9 14.4 14.3 1.4 1.4 1.4 2.6 Sunteck Realty REDUCE 408 428 5 60 0.8 140 16 27 33 6.0 65 25 25 15.3 12.3 17 10.4 7.2 2.0 1.8 1.6 8.3 12.4 13.7 0.2 0.2 0.2 1.9 Real Estate Neutral 1,347 19.0 (41) 53 44 35 23 15.9 20 17 14 1.7 1.6 1.5 4.9 7.0 9.4 0.2 1.9 2.0 44 Retailing Aditya Birla Fashion and Retail BUY 202 230 14 156 2.2 773 4.2 1.8 2.8 173 -57.5 58 49 114 72 31 14 11.7 11 10.0 8.8 25 9.1 12.9 — — — 1.7

Avenue Supermarts SELL 1,434 1,010 (30) 895 12.6 624 14.5 20 26 11.9 37 29 99 72 56 55 40 31 16 13 11 17.6 19.9 21 — — — 9.6 Daily Summary India Titan Company REDUCE 1,028 1,000 (3) 913 12.9 888 17 20 25 32 18 28 61 52 40 42 33 26 15 13 11 27 27 28 0.5 0.6 0.7 46 Retailing Cautious 1,965 27.7 32 15 30 72 63 48 46 31 25 15 13 10 21 20 22 0.2 0.3 0.3 57 Speciality Chemicals Castrol India SELL 119 115 (3) 118 1.7 989 7.2 7.3 7.6 4.2 1.8 4.4 16.6 16.3 15.6 10.9 9.9 9.4 10 9.8 9.5 65 61 62 4.2 4.8 5.0 2.3 Pidilite Industries REDUCE 1,290 1,120 (13) 655 9.2 508 18 23 27 (3.7) 31 16 73 56 48 47 36 31 16 14 12 23 26 26 0.5 0.6 0.7 11.4 S H Kelkar and Company BUY 112 190 70 16 0.2 145 6.1 7.6 9.0 (17.3) 24 19 18.2 14.7 12.4 14 10.9 9.1 1.9 1.7 1.6 10.3 12.2 13.3 1.6 1.8 2.5 0.2 SRF BUY 2,879 3,400 18 165 2.3 57 112 144 181 39 29 25 26 19.9 15.9 14 11.7 9.6 4.0 3.4 2.9 16.7 18.4 19.5 0.4 0.5 0.6 17.6 Speciality Chemicals Neutral 954 13.5 7.1 21 16 41 34 29 25 20 18 9.3 8.1 7.0 23 24 24 1.0 1.2 1.3 32

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

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August 8, 2019 August8,

KOTAK ECONOMIC RESEARCH 101

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

KOTAK INSTITUTIONAL EQUITIES RESEARCH EQUITIES INSTITUTIONAL KOTAK Company Rating 7-Aug-19 (Rs) (%) (Rs bn) (US$ bn) (mn) 2019 2020E 2021E 2019 2020E 2021E 2019 2020E 2021E 2019 2020E 2021E 2019 2020E 2021E 2019 2020E 2021E 2019 2020E 2021E (US$ mn) Telecommunication Services Bharti Airtel ADD 366 370 1 1,878 26.5 5,131 (6.3) (8.3) (2.6) NM NM NM NM NM NM 11.6 8.1 6.8 2.0 2.2 2.3 NM NM NM 0.7 1.6 1.6 36 Bharti Infratel REDUCE 246 270 10 454 6.4 1,850 13.1 14.2 16 (4.6) 8.0 14.1 18.7 17.3 15.2 7.6 7.5 6.8 3.1 3.3 3.2 15.4 18.5 21 6.3 4.5 5.3 9.3 Vodafone Idea ADD 5 8 50 154 2.2 28,736 (19.1) (1.4) (4.9) NM NM NM NM NM NM 32 17 12 0.1 0.2 0.2 NM NM NM — — — 18.3 Tata Communications ADD 470 550 17 134 1.9 285 (10.3) 1.3 6.9 NM 113 413 NM 352 69 8.9 7.9 7.2 NM NM 383 NM NM NM 1.4 1.6 1.6 2.3 Telecommunication Services Cautious 2,620 37.0 NM (11.8) 27 NM NM NM 13 9.1 7.7 1.8 1.4 1.6 NM NM NM 1.5 2.0 2.1 66 Transportation Adani Ports and SEZ REDUCE 372 390 5 771 10.9 2,071 20 22 25 6.0 12.6 11.7 19.0 16.9 15.1 15 12 11.0 3.1 2.8 2.4 17.8 17.5 17.2 0.4 1.3 1.2 23 Container Corp. SELL 483 472 (2) 295 4.2 609 16 17 20 12.1 1.2 23 30 29 24 21 16 13 2.8 2.7 2.6 10.1 9.5 11.1 1.8 1.5 1.8 6.0 Gateway Distriparks BUY 103 180 75 11 0.2 109 6.8 6.9 9.1 (11.1) 2 32 15.2 14.9 11.3 23 7.5 6.3 0.8 0.8 0.7 6.3 5.5 6.7 4.4 2.9 2.9 0.2 Gujarat Pipavav Port BUY 76 119 57 37 0.5 483 4.3 5.3 6.4 3.6 25 20 17.8 14.3 11.9 8.1 6.9 5.9 1.8 1.8 1.8 10.2 12.6 14.9 5.0 6.1 7.3 0.3

InterGlobe Aviation REDUCE 1,499 1,535 2 577 8.1 383 4 70 98 (93) 1,616 40 367 21 15.3 NM 5.5 4.1 8.3 5.9 4.4 2.2 32 33 — 0.2 0.7 57 -

Mahindra Logistics REDUCE 364 400 10 26 0.4 71 12.5 13.6 16 27 8.8 19 29 27 22 17 14 10.9 5.2 4.6 3.9 19.5 18.2 18.8 — — — 1.1 2019 August8, Transportation Attractive 1,716 24.2 (24) 56 22 31 19.8 16.2 21 9.6 7.8 3.8 3.3 2.8 12.2 16.6 17.6 0.6 1.1 1.2 87 KIE universe 106,738 1506.4 11.6 24 19 23 18.8 15.8 10.8 9.8 8.6 2.6 2.4 2.2 11.3 12.6 13.7 1.5 1.8 2.0

Notes: (a) We have used adjusted book values for banking companies. (b) 2019 means calendar year 2018, similarly for 2020 and 2021 for these particular companies. (c) Exchange rate (Rs/US$)= 70.85

Source: Company, Bloomberg, Kotak Institutional Equities estimates

102 102 KOTAK ECONOMIC RESEARCH

Disclosures

of of the following As of June 30, 2019 , if, any, noare longer in effect for this stock fair value KOTAK INSTITUTIONAL EQUITIES RESEARCH , any, if for this stock,because is there notsufficient a

fair valuefair ng in an advisory capacity in a merger or strategic transaction

.

months.

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 deliver 5-15% returns 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 30/06/2019 Kotak Institutional Equities Investment Research had investment ratings on 204 equity securities. r r display is not or applicable. . The previous investment and rating

fair valuefair

SELL 0.0% 20.6%

term volatility in stock prices related to movements in the market.Hence, a particular Ratingmay not , if, any,have been suspended temporarily.Such suspension is in compliance with applicable regulation(s) - this company.

all times. fair valuefair +5% returns over the next 12 months.

- 0.5% 23.5% month horizon basis. 5 - REDUCE - 15% returns over the next 12 months. 5% returns over the next months.12 The information is not available fo - -

Kotak SecuritiesKotak has suspended coverage of this company. ADD 3.4% 29.9%

are also on12 a Kotak SecuritiesKotak Research has suspended the investment and rating

The information is not meaningful and is therefore excluded

Kotak SecuritiesKotak does not cover

The investment and rating

The coverage view represents each analyst’s fundamental overall outlook on the Sector.The coverage viewwill consist of one

estimates Attractive, Neutral, Cautious. BUY 3.4% 26.0% We expect this stock to deliver

We expect this stock to deliver 5 We expect this to stock deliver < We expect this to stock deliver more than 15% returns over the next 12

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

103 Disclosures

Corporate Office Overseas Affiliates Kotak Securities Ltd. Kotak Mahindra (UK) Ltd Kotak Mahindra Inc 27 BKC, Plot No. C-27, “G Block” 8th Floor, Portsoken House 369 Lexington Avenue Bandra Kurla Complex, Bandra (E) 155-157 Minories 28th Floor, New York Mumbai 400 051, India London EC3N 1LS NY 10017, USA Tel: +91-22-43360000 Tel: +44-20-7977-6900 Tel:+1 212 600 8856

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This report is distributed in Singapore by Kotak Mahindra (UK) Limited (Singapore Branch) to institutional investors, accredited investors or expert investors only as defined under the Securities and Futures Act. Recipients of this analysis / report are to contact Kotak Mahindra (UK) Limited (Singapore Branch) (16 Raffles Quay, #35-02/03, Hong Leong Building, Singapore 048581) in respect of any matters arising from, or in connection with, this analysis / report. Kotak Mahindra (UK) Limited (Singapore Branch) is regulated by the Monetary Authority of Singapore. Kotak Securities Limited and its affiliates are a full-service, integrated investment banking, investment management, brokerage and financing group. We along with our affiliates are leading underwriter of securities and participants in virtually all securities trading markets in India. 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