Q 1 F Y 2 1 Post Earnings R e v i e w

Cost Optimization Remained the Mantra

24th September 2020 Q1 FY21: Post Earnings Summary

Q1FY21 earnings reflected the full impact of the lockdown, recovery expected in 2H

• The overall top-line and bottom-line of companies across the sectors witnessed a depressed trend on account of the lockdown induced by the COVID-19 pandemic, barring some exceptions including pharmaceutical and Consumer sectors

• Low capacity utilization levels in the beginning of the quarter, improved in May and June, providing some relief for the company financials at the quarter-end

• However, phase-wise lifting of the lockdown is expected to facilitate gradual recovery across sectors in 2HFY21 Cost optimization was key to cushion the profitability

• Companies managed to contain discretionary costs such as advertising and travel expenses to reduce the impact on profitability

• Subdued raw material cost like energy and commodity prices lent support to profitability to cover impact of revenue decline Outperformance of Consumer Essentials compared to discretionary sectors

• Essentials, within the consumer space and some respiratory focused pharmaceutical companies outperformed, owing to conservative consumer behavior during the lockdown and the nature of the pandemic disease

• Manufacturing industry and Auto sector remained weak, while the financial sector was hit by higher provisioning Focus on rural economy to boost growth

• Government announced programs like increasing wages under MGNREGA, agriculture-related sops, etc. to boost rural economy

• Rural sector is also likely to be less impacted by the pandemic, compared to urban areas

• Therefore, rural focused sectors like consumer goods and the two-wheeler industry are expected to witness better growth

2 Focus Coverage Companies

Coverage Companies Coverage Companies Coverage Companies Coverage Companies BFSI – Banking Consumer – Essentials IT Oil & Gas HDFC Bank Ltd ICICI Bank Nestle India TCS Ltd Kotak Bank ITC Ltd. HCL Technologies Petronet LNG Ltd BPCL SBI bank HPCL IndusInd Bank Consumer – Personal Care Persistent Systems Auto and Auto Ancillary Karur Vysya Bank Colgate Palmolive India Tata Elxsi Godrej Consumers Sterlite Technologies BFSI – NFBCs / Specialty Finance Ltd. Infibeam Avenues Ltd. Consumer – Durables Pharmaceuticals Ltd. Blue Star Cholamandalam Investments Whirlpool India Dr. Reddy Labs Minda Corporation HDFC AMC Symphony Minda Industries HDFC Ltd. Consumer – Others Lupin Sundaram Fasteners NAM Glenmark Pharma Balkrishna Industries CreditAccess Grameen BFSI – Life Insurance Avenue Supermarts Endurance Technology HDFC Life Cements Alembic Pharma Miscellaneous ICICI Prudential Ultratech Cement Granules India Emmbi Industries SBI Life Ramco Cement Torrent Pharma Solar Industries Max Financial Petrochemical and Chemicals ABB ACC Cement Supreme Petrochemicals UPL Ltd. Aarti Industries

3 Research Contributions

Parvati Rai Research Head BFSI | Consumer | Pharmaceuticals | Chemicals | Cement | Miscellaneous Email: [email protected] ; Ph no +91-22-6696 5413

Harit Shah Lead Analyst IT and Related Sector Email:- [email protected] ; Ph no +91-22-66965555

Praveen Motwani Research Analyst Auto Ancillary | Mid-caps Email:- [email protected] ; Ph n0 +91-22-66965421

Priyanka Baliga Associate Analyst NBFCs | Specialty Finance Email:- [email protected] ; Ph n0 +91-22-66965408

4 Table of Contents: Sectoral Earnings Review

1 BSFI Sector Banking 6-11 NFBCs / Specialty Finance 12-16 Life Insurance 17-25 2 Consumer Sector Essentials 26-33 Personal Care 34-39 Consumer Durables 40-45 Others (Home Improvements | Supermarts) 46-51 3 Cement Sector 52-57 3 IT Sector 58-66 4 Pharmaceutical Sector 67-77 5 Petrochemical and Chemical Sector 78-84 6 Oil & Gas 85-93 7 Auto and Auto Ancillary Sector 94-108 8 Miscellaneous 109-113

5 BFSI Sector

6 Earnings Review | Banking | Summary Key Takeaways

Sector saw a weak performance in the quarter with slowdown in top line growth and contracting NIMs • Sequentially, Loan book declined except HDFC Bank and SBI whose loan book grew marginally, as April and May months were completely shut with limited business activity. On YoY, only HDFC Bank was able to record growth of 20.9% in loan book while ICICI and SBI posted single digit YoY growth • Deposit mobilization remained resilient despite slowdown; having high CASA share with 56.7%. Average CASA ratio stood at 43.1% in the coverage • In terms of Net Interest Income (NII), all the banks under our coverage posted double-digit growth (YoY) for the quarter, whereas NIMs contracted for all banks except SBI due to decline in lending rates and lower loan volumes. • For FY21, we expect pressure on Net Interest Margins (NIM), given the drastic decline in lending rates on new loans (~120bps fall in MCLR since January 2020), increase in liquidity (LCR of all banks are above the regulatory minimum) which will be partially offset by recent cut in deposit rates (25bps to 75bps) across all banks With ending of Moratorium-2, stress on assets will be visible on books • Private banks are still safe bet with lower percentages. As a percentage of loan book, Moratorium-2 stood at 9.0%, 17.5%, 9.7%,9.1% and 9.7% for HDFC Bank, ICICI Bank, Axis Bank, SBI and Kotak Mahindra Bank, respectively. Nearly 90% of Moratorium-2 loan of total loans rolled over Moratorium-1 • Moratorium in segments like CV, agriculture, real estate, telecom, power is higher than the aggregate percentage • Gross slippages for most of the banks under our coverage remained high, still the GNPA ratio at the end of the quarter declined mainly due to clean up exercise and recoveries. ICICI’s (5.46%) and SBI’s (5.4%) GNPA remained high, whereas HDFC Bank’s asset quality remained best at 1.36%in Q1FY21

7 Earnings Review | Banking | Coverage: Results Summary (1/2)

Companies Net Interest Income Asset Quality / Provisioning Outlook / Strategy

• NII up 17.8% YoY to INR 15,665 Cr., • Excluding Agriculture loan portfolio, NIM flat at 4.3%. GNPA increased 10bps to 1.2%. • GNPA to rise to the tune of ~2% HDFC Bank • Other income fell 18.0% YoY/ led • Made higher provisions of INR 3,892 driven by higher slippages in by lockdown Cr up 48.9% YoY (+2.8% QoQ) in-line consumer and agriculture loans with estimates

• While GNPA is highest among peers, • NIMs decline is led by higher • Bank has completed fund raising improving gradually from last 2 years ICICI Bank liquidity in the B/S of INR 15,000 Cr. ; add 170bps to • Total Covid-19 provisions at 1.3% of CET I ratio of 13.4% as on June 2020 advances

• Despite a 1.9% YoY dip in loan • Bank prudently focused on the growth and 30bps QoQ NIM • As moratorium is higher for SME viability of borrowers before granting Kotak Mahindra Bank contraction to 4.4%, NII growth loans, we believe the GNPA is likely moratorium under phase-2, which led held strong at 17% YoY to increase in the near-term to some accounts turning NPA

• The cumulative value of provisions • Bank raised INR 10,000 Cr. in • Stable and granular deposit aggregates to over INR 6,898 Cr equity capital in Aug’20, which will franchise based on average implying 1.56% of standard loans increase its CAR to 18.5% from Axis Bank balances bolstered NII • On an aggregated basis, the 17.3%. • Total income fell by 1.4% YoY/11.3% provision coverage ratio stands at • Strengthens its B/S to withstand QoQ 104% of GNPA any shocks that may arise in future

8 Earnings Review | Banking | Coverage: Results Summary (2/2)

Companies Net Interest Income Asset Quality / Provisioning Outlook / Strategy

• Slippage ratio at 0.6% remains low. • Robust improvement in domestic • Bank has stated corporate • Notably SMA 1-2 book (8bps) has also NIMs to 3.2% (+23bps YoY, 30bps recoveries of ~INR 11,000 cr. in come down by 75% QoQ and 83% YoY SBI QoQ) FY21, led by steel and power • Provision coverage (ex-written off • Cost of funds declining 54bps on accounts in addition to recovery accounts) is 67% and within that QoQ basis from Dewan housing. corporate PCR is 83.2%

• Moratorium loans declined to 16% in • Plans to infuse INR 33 bn in equity • Q1FY21 earnings were broadly IndusInd Bank June-20 from 50% in Mar-20 due to capital, which will increase its CAR impacted by higher provisions increased payments. to 16.6% from 15.3% as at Q1FY21

• Asset quality may come under • Driven by higher liquidity, NII fell • ~41% of its portfolio under Karur Vysya Bank stress once the moratorium is for Q1FY21 moratorium lifted

• Collection efficiency is expected to • Gross NPA down by 27 bps YoY at be over 90% in coming months • NII up 15% YoY to INR 18.1 bn and 1.43% • Various initiatives (micro home NIM contracted 235 bps YoY at • Aggregate provisioning of INR 17.7 bn loans, new vertical of EEB) focused Bandhan Bank 8.15% where it has provided INR 8.5 bn on MSME segment are expected • Non-interest income up 16.8% YoY provisions for the quarter to perform, as bank has observed at INR 3.9 bn • Collection efficiency was at 76% as on demand despite COVID-19 Jun’20 pandemic

9 Earnings Review | Banking | Coverage: Performance Overview (1/2)

CASA for Kotak Bank at highest among all private banks

IndusInd Karur Vysya Bandhan Particulars (INR Cr) HDFC Bank ICICI Bank Kotak Bank Axis Bank SBI Bank Bank Bank Bank

Net Interest Income 15,665 9,280 3,724 6,985 26,642 3,309 562 1,812

Pre-Provision Profit 12,829 10,776 2,624 5,844 16,521 2,861 474 1,584

Provisions 3,892 7,594 962 4,416 12,501 2,259 338 849

Net Profit 6,659 2,599 1,244 1,112 4,189 461 106 550

Advances 10,03,299 6,31,215 2,03,998 5,61,341 22,98,346 1,98,069 46,131 69,749

Deposits 11,89,387 8,01,622 2,61,524 6,28,150 34,19,363 2,11,265 60,065 60,610

CASA (%) 40.1% 42.5% 56.7% 41.0% 43.8% 40.0% 33.2% 37.1%

NIM (%) 4.3% 3.7% 4.4% 3.4% 3.2% 4.3% 3.4% 8.2%

Cost to Income (%) 35.0% 30.1% 41.7% 38.9% 52.2% 40.7% 46.1% 27.9%

GNPA (%) 1.4% 5.5% 2.7% 4.7% 5.4% 2.5% 8.3% 1.4%

NNPA (%) 0.3% 1.2% 0.9% 1.2% 1.9% 0.9% 3.4% 0.5%

PCR (%) 149.0% 78.6% 68.4% 75.0% 86.3% 67.1% 72.7% 66.6%

Source: Company, KRChoksey Research

10 Earnings Review | Banking | Coverage: Performance Overview (2/2)

Net Profit remained under pressure for most private banks except ICICI Bank

IndusInd Bandhan Karur Vyasa Particulars (INR Cr) HDFC Bank ICICI Bank Kotak Bank Axis Bank SBI Bank Bank Bank Change (%) QoQ YoY QoQ YoY QoQ YoY QoQ YoY QoQ YoY QoQ YoY QoQ YoY QoQ YoY

Net Interest Income 3.0% 17.8% 4.0% 19.9% 4.6% 17.8% 2.6% 19.5% 17.0% 16.1% 2.4% 16.4% 7.8% 15.0% -4.9% -3.8%

Pre-Provision Profit -1.0% 15.1% 45.8% 71.4% -3.7% 9.4% -0.1% -0.8% 5.0% 24.7% 0.9% 10.4% 4.2% 16.9% -5.2% 6.5%

Provisions 2.8% 48.9% 27.3% 117.2% -8.2% 203.7% -42.9% 15.8% -7.4% 36.1% -7.4% 424.6% 2.6% 577.3% -21.4% 2.3%

Net Profit -3.9% 19.6% 112.8% 36.2% -1.7% -8.5% -180.1% -18.8% 17.0% 81.2% 52.6% -67.8% 6.3% -31.6% 26.0% 44.7%

Advances 1.0% 20.9% -2.2% 6.5% -7.2% -1.9% -1.8% 12.9% -1.2% 7.7% -4.2% 2.4% 1.0% 20.9% 0.1% -6.2%

Deposits 3.7% 24.6% 4.0% 21.3% -0.5% 12.3% -1.9% 16.2% 5.5% 16.0% 4.6% 5.3% 6.2% 35.3% 1.7% -2.7%

(in Bps)

CASA (%) -206 44 -261 -273 50 600 200 101 -137 -123 -38 -316 24 102 182 343

NIM (%) -1 -12 -18 8 -32 -8 -15 0 5 23 3 23 2 -235 -10 -13

Cost to Income (%) -360 -400 -1381 -1354 -436 -476 -685 -38 -418 -496 -257 -178 -232 -95 -60 -178

GNPA (%) 10 -4 -7 -103 45 51 -14 -53 -71 -209 8 38 -5 -27 -34 -83

NNPA (%) -3 -10 -18 -54 16 14 -33 -81 -37 -121 -5 -37 -10 -11 -48 -150

PCR (%) 4656 5428 290 451 -60 140 600 1300 270 698 376 1457 -580 -70 384 1369 Source: Company, KRChoksey Research

11 Earnings Review | Specialty Finance | Summary Key Takeaways

Sector saw a subdued performance in the quarter • Q1FY21 was first full quarter which captured the effect of nationwide lockdown that lasted for 60+ days, followed by multiple ongoing state-wide lockdown. This temporary closure of business has resulted in lower business acquisition and constraints on recovery of overdues from customers • Cholamandalam’s total disbursements for the quarter was ~67.6% lower on QoQ / 58.1% on YoY basis attributed to lockdown. Vehicle Finance (VF) reported a decline of 53% YoY with disbursements of INR 3,231 Cr. in Q1FY21; the disbursements were predominantly in Tractors, Two-wheelers, construction equipment and Used business segments • HDFC AMC’s Q1FY21 numbers reflected weakness on top-line, supposedly to continue for the next few quarters as the ground numbers from the COVID-19 crisis are still not encouraging. Closing Total AUM remained flat on YoY basis; whereas market share declined by 30bps Increasing use of digital footprint • On a positive note, most NBFCs have increased digital footprint amid lockdown to acquire customers and offer better services to their customers. Cholamandalam Investment and Finance Ltd has launched process transformation initiatives for its Vehicle Finance and LAP business. Bajaj Allianz Life Insurance is extensively using WhatsApp services with its ML and NPL capabilities to serve its customers. More than 5 lakh customers have used WhatsApp service in Q1FY21 • During the quarter, the NBFCs have used Video KYC, webinars etc. to offer doorstep consumer services amid lockdown • As per recent developments on unlock, 75+ cities should reach to pre-COVID volumes by October 2020, 40-75 cities by November 2020, 10-40 cities by January 2020 and top-10 cities by March 2021. Accordingly, in our view, it will take a couple of quarters for the sector to resume its historical growth trajectory and accordingly, we are cautious on performance of Q2.

12 Earnings Review | Specialty Finance | Coverage: Results Summary (1/2)

Companies Net Interest Income Asset Quality / Provisioning Outlook / Strategy

• Q1FY21 revenues declined by 8.0% on QoQ basis, whereas up by • This contingency provision together • Based on muted performance in 14.5% YoY to INR 6,648 Cr. with existing Expected Credit Loss Q1FY21, we are revising our Bajaj Finance Ltd. provision of INR 623 Cr. provides estimates downwards (FY21 – 2.8% • Net Interest Income was at INR combined provisioning coverage of / 3.5% / 27.4% in NII/PAT/Advances 4,151 Cr. down by 11.3% QoQ, 13.7% on the moratorium book Growth) however up by 12.4% YoY.

• Amid crisis, the Company • INR 1,450 Cr. provided as contingency enhanced its digital capabilities • Revenue for Q1FY21 rose by 15.6% provision for Covid-19 in Q1FY21. Total YoY / 6.7% QoQ at INR 14,190 Cr. contingent provision stood at INR • BAGIC and BALIC recruited agents Bajaj Finserv Ltd. and POSP personnel (together ~4K • Total operating expenses fell 5.3% 2,350 Cr. as on June 30, 2020 agents hired in Q1FY21). Overall, QoQ but remained flat YoY • Solvency ratio was 280% (regulatory the group managed the crisis well requirement of 150%) for BAGIC amid uncertainties

• Asset quality for Stage 3 Assets had • Management has indicated slow • NII increased 13.8% YoY to INR improved to 3.3% (3.8% in Q4 FY20) recovery in heavy, light CV and Cholamandalam 940 Cr. in Q1 FY21 (up 3.3% QoQ) Investment and with PCR 41.6% (36.2% in Q1 FY20) construction equipment segment • PPOP grew 7.5% YoY/up 3.8% QoQ Finance Company • Total ECL provision stood at INR 1,437 • The increase in demand from rural to INR 637 Cr, led by increase in Ltd. Cr. in Q1 FY21 compared to INR 983 economy and a good Rabi harvest asset under management Cr. in Q1 FY20 offered cushion to Company

13 Earnings Review | Specialty Finance | Coverage: Results Summary (2/2)

Companies Net Interest Income Asset Quality / Provisioning Outlook / Strategy

• The company’s market share in • AMC is leveraging on its robust • Revenue declined 18.4% YoY to Closing AUM declined to 14.0% (down digital platforms of distributors INR 411 Cr. in Q1FY21 mainly due 70bps YoY). In Q1FY21, the share of HDFC AMC to weak market conditions and equity funds declined to 39.4% (vs • In Q1FY21, 91.4% of the transactions increased proportion of liquid 47.7% in Q1FY21). The monthly flow of were electronic compared to fund flows (low margin fees) SIP for June-20 also declined sharply ~69.3% in FY20. This will lead to by 18.6% YoY to INR 960 Cr. reduction in operating expenses

• Interest Income fell by 1.6% QoQ, • GNPAs is equivalent to 1.87% of the • Raised INR 14,000 Cr. through • Non-interest income rose by loan portfolio. The NPA of the combination of equity and NCD to HDFC Ltd. 118.8% QoQ on account of stake individual portfolio stood at 0.92% strengthen its balance sheet sale in HDFC Life Insurance to the while that of Non individual portfolio • Focus on affordable housing tune of INR 1,241.2 Cr stood at 4.70% market will drive growth

• Relaxations during COVID-19 • Standalone NII up 26% YoY to INR • GNPA was stable at 1.62% unlock phases and seasonal CreditAccess 3 bn and other income grew by demand in second half of the year Grameen Ltd. • Additional provisioning for quarter 73% YoY stood at INR 1.4 bn to support advances growth for FY21

14 Earnings Review | NBFC | Coverage: Performance Overview (1/2)

Bajaj Finance Bajaj Finserv Cholamandala Nippon Asset CreditAccess Particulars (INR Cr) HDFC AMC HDFC Ltd. Ltd. Ltd. m Investments Management Grameen Net Interest Income / 4,152 11,795 940 411 2,974 233 383 Revenue Other Income 2 2 43 80 2,229 103 3.9

Employee Cost 538 994 156 53 160 72 97 Other Operating 619 6,553 190 42 236 53 24 Expenses Pre-Provision Profit 2,995 4,250 637 NA 4,806 NA 256

Provisions 1,686 1,682 56 NA 1,199 NA 155

Net Profit 962 1,922 431 302 3,052 156 72 Asset Under 138,055 138,055 63,501 357,500 531,555 180,061 11,724 Management Cost to Income (%) 27.9% 64.0% 35.2% 35.9% 9.0% 127.5% 34.0%

Source: Company, KRChoksey Research

15 Earnings Review | NBFC | Coverage: Performance Overview (2/2)

Bajaj Finserv outperformed its peers in Net Interest Income/Revenue growth

Bajaj Finance Bajaj Finserv Cholamandala Nippon Asset CreditAccess Particulars (INR Cr) HDFC AMC HDFC Ltd. Ltd. Ltd. m Investments Management Grameen Change (%) QoQ YoY QoQ YoY QoQ YoY QoQ YoY QoQ YoY QoQ YoY QoQ YoY* Net Interest Income / -11.3% 12.4% 9.8% 15.4% 3.3% 13.8% -13.6% -18.4% -9.9% 8.6% -15.1% -28.3% 29.7% 55.3% Revenue Operating Expenses -20.3% -10.5% -5.3% 0.7% -21.5% -1.2% -9.0% -12.6% 12.2% 3.8% 11.1% -24.1% 17.0% 47.1%

Pre-Provision Profit -7.3% 24.7% 53.3% 56.2% 3.8% 7.5% NA NA 21.2% -1.4% NA NA 31.3% 56.5%

Provisions -13.7% 206.1% -15.1% 260.6% -89.9% -48.7% NA NA -5.9% 34.7% NA NA 11.6% 902.6%

Net Profit 1.5% -19.5% 255.9% 32.2% 910.2% 37.0% 21.0% 3.6% 36.7% -4.7% 3,698.5% 24.3% 149.5% -24.6% Asset Under -6.2% 7.1% -6.2% 7.1% 4.9% 10.4% 12.0% 0.22% 4.8% 11.7% 0.8% 11.4% -2.3% 53.9% Management (in Bps)

Change in PAT Margin 136 -611 948 170 1872 437 2101 1563 481 -121 6,547 2,834 921 -1921

Cost to Income (%) -313 -712 -1,023 -939 -436 -194 303 451 -20 -50 5,356 1,143 -570 -440

Source: Company, KRChoksey Research * Q1FY20 figures based on CAGL standalone performance, hence not comparable for YoY basis.

16 Earnings Review | Life Insurance | Summary Key Takeaways (1/2)

New Business Premium (NBP) saw decline in Q1FY21; August data shows signs of normalcy and recovery • In line with our Q1FY21 expectations, SBI Life performed relatively better than peers in new business premium collection with 3% YoY decline compared to 33.2% YoY decline reported by HDFC Life, followed by ICICI PruLife with a decline of 29.7% YoY • Renewal premium growth was highest for SBI Life at 29% YoY followed by HDFC Life (up 24% YoY), while ICICI PruLife reported flat growth • SBI Life stood as a market leader amongst private insurers with ~24% market share in NBP, while HDFC Life and ICICI PruLife market share stood at ~21% and ~12% respectively in Q1FY21 • In August, Life Insurance Corporation of India (LIC) saw a 15.2% YoY growth while private life insurers saw 13.7% YoY growth HDFC Life Insurance saw a 44.7% YoY increase in NBP, while SBI Life saw a 26% YoY growth, however, ICICI Prudential Life Insurance saw a 14.5% YoY decline in NBP

Solvency ratio improves QoQ with equity market bouncing back ; Solvency ratio highest for SBI Life • The solvency position of all the insurers improved QoQ with favourable momentum in the equity market • SBI Life leads the pack with strong capital position at 239% among its peers, followed by ICICI PruLife at 205% and HDFC Life at 195% • HDFC Life has raised subordinate debt of INR 600 Cr. This is expected to improve the current solvency ratio by ~15% which will take solvency ratio to ~210%

17 Earnings Review | Life Insurance | Summary Key Takeaways (2/2)

Double digit decline in Value of New Business (VNB) for all insurers due to lower business volume; VNB margin expansion highest for ICICI PruLife • Absolute VNB was the highest for HDFC life. However, the decline was the highest for HDFC Life at 42.8% YoY, followed by ICICI PruLife at 35% YoY and lowest for SBI Life at 27.3% • VNB margin expanded the highest for ICICI PruLife by 340 bps to 24.4% mainly due to protection Annualized Premium Equivalent (APE) growth. SBI Life margin expanded by 80 bps YoY to 18.7% while that of HDFC Life contracted by 548 bps to 24.3% • Protection APE mix stood at 26% for ICICI PruLife, HDFC Life at 18% , SBI Life at 13% in total APE

Product mix mainly shifting away from ULIPs towards non-par/annuity and protection • ICICI PruLife dominated by ULIPs which stood at 44% (but declined significantly from 65% in last quarter) while non-linked savings stood at 26% • Similarly for SBI Life, the product mix has shifted from ULIPs contributing 48% (vs 66% in Q1FY20) on APE basis to non-par savings contributing 18% to total APE (vs 3% in Q1FY20) • HDFC Life has been shifting away from its non-par savings which stood at 28% of Individual APE (~63% in Q1FY20) and increase in par products at 30% of individual APE (~6% in Q1FY20)

Direct and online channels gaining traction in the distribution front • All insurers witnessed a pick-up in the Direct, Online and web aggregator channel on the back of zero non-face to face interaction during lockdown which have reduced overall opex cost including commission expenses

18 Earnings Review | Life Insurance | Coverage: Results Summary (1/3)

Company Premium/APE performance Product mix/Market share • Gross Written Premium (GWP) declined by 10.3% YoY/down 44.8% QoQ due • Shifting away from its non-par savings which stood at 28% of to decline in New Business Premium (NBP) by 33.2% YoY (down 48.5% Individual APE (~63% in Q1FY20) and increase in par products QoQ) mainly due to fall in single premium at 30% of individual APE (~6% in Q1FY20) • Renewal premium increased by 24.1% YoY/ down 41.4% QoQ • Individual protection business grew 50% YoY, however credit HDFC Life • Reported PAT of INR 451 Cr. up by 6.2% YoY/(+ 44.7% QoQ) driven by life protection witnessed 74% YoY decline due to poor lending operational efficiencies as opex improved to 11.5% in Q1FY21 as compared which led to overall protection business decline by 48% YoY to 13.4% in Q1FY20 • Protection mix in total APE stood at 18% vs 22% in Q1FY20 • Market share (NBP basis) among private players at ~21% in Q1FY21 • GWP declined 9.2% YoY/down 46.0% QoQ, led by decline in New Business • Significant decline in ULIPs share from 65% share in Q4FY20 to Premium (NBP) by 29.7% YoY/61.8% QoQ 44% in Q1FY21. ULIP APE declined by 65.7% YoY while Non- • Renewal premium grew 2.4% YoY/ down 35.7% QoQ linked saving business and group business achieved a growth • Reported PAT of INR 288 Cr. with muted growth of 1.1% YoY/ (+60.9% of 14.2% YoY and 44.1% YoY respectively. ICICI PruLife QoQ). The cost to Total Weighted Received Premium (TWRP) ratio stood • The protection business growth was flat as credit life business at 14.8% in Q1FY21 compared to 17.0% in Q1FY20 was affected; however, the protection mix improved from • Market share (on NBP basis) among private players declined to ~11% as on 14.6% of overall APE in Q1FY20 to 26.0% of APE in Q1FY21 with 30th June 2020 (vs ~14% last quarter) growth both in retail as well as credit lines.

• GWP increased moderately by 14.2% YoY/ (down 35.9% QoQ) backed by • The product mix has shifted from ULIPs contributing 48% (vs renewal premium which increased 29.5% YoY (down 21.6% QoQ), offset by 66% in Q1FY20) on APE basis to non-par savings contributed a marginal decline in NBP by 3.0% YoY (down 19.6% QoQ) mainly led by First 18% to total APE (vs 3% in Q1FY20). Year Premium • Individual savings declined by 38.7% YoY • Reported PAT of INR 391 Cr. up by 5.1% YoY. Total Cost ratio decreased to • Protection segment based on APE basis declined by 24%YoY SBI Life 10.1% in Q1FY21, from 11.2% in Q1FY20 mainly led by decline in commission basis to INR 160 Cr in Q1FY21. Its share in the total APE expenses ratio to 3.1% (Q1FY21) from 3.8% (Q1FY20) however improved to ~13% in Q1FY21 as against 11% in Q1FY20 • Market share stood at 23.9% among private players, highest amongst peers on NBP basis. As a result, Total APE declined 31.7% YoY/ down 52.8% QoQ to INR 1,270 Cr • GWP grew by 3.8% YoY/down 53.2% QoQ mainly led by growth in renewal • Individual protection APE grew by 103% YoY to INR 105 Cr premium which increased by 6.4% YoY/ down 53.5% QoQ. while group protection APE grew by 32% YoY to INR 82 Cr. • New Business Premium declined 1.3% YoY (down 52.4% QoQ) to INR 899 Cr • The share of protection mix stood at 25% (15% in Q1FY20) Max Life due to decline in First Year premium partially offset by growth in single • Product mix stood for Par/ Protection/ Non Par/ ULIP stood at premium 22%/ 25%/ 18%/ 35% respectively • Market share (NBP basis) flat at ~6% among private players (Q1FY21)

19 Earnings Review | Life Insurance | Coverage: Results Summary (2/3)

Company VNB/Margin Performance Persistency/Solvency/AUM • Value of new business declined by 42.8% YoY/down 42.9% QoQ • The company witnessed deterioration in its key parameters. 13th month due to impact of lower protection APE growth persistency deteriorated ~180 bps YoY to 87% in Q1FY21 while 61st month • Value of New business margin contracted by 548 bps YoY to 24.3% persistency ratio contracted by 110bps YoY to 54.40% mainly due to impact of lower APE (INR 153 Cr) and negative • Solvency ratio improved 600bps QoQ at 190% aided by strong PAT & HDFC Life fixed cost absorption (INR 47 Cr which impacted VNB margin to favourable market momentum. the tune of 3.9%) • AUM size stood at INR 1,39,975 Cr. up by 8.0%YoY/up 10% QoQ basis. • Going forward, the increase in high margin protection and annuity • Debt: Equity mix in AUM stood in the ratio of 68:32 business shall aid margin expansion

• Value of new business declined 35% YoY/(down 57.2% QoQ) to INR • 13th month persistency fell ~110 bps YoY to 81.1% in Q1FY21 on account of 201 Cr. in Q1FY21 grace period offered to the policy holders while 61st month persistency • Value of New business margin expanded by 340 bps YoY to 24.4% ratio improved by 240bps YoY to 60.8%. in Q1FY21 due to increase in protection mix • Solvency ratio contracted by 1160 bps YoY to 205% which is still well ICICI PruLife • The company maintains its stance of doubling the VNB in the next above the regulatory requirement of 150%. 3-5 years. This will be driven by improved product mix and topline • AUM size stood at INR 1,70,006 Cr. up by 3.6%YoY/+ 11.1% QoQ basis. growth as the economy returns to normalcy • Debt: Equity mix in AUM stood in the ratio of 57:43

• Value of new business declined by 27.3% on YoY mainly due to • 61st month persistency ratio improved by 687 bps YoY to 63.1% however, negative impact on business volume and improvement in 13th month persistency deteriorated ~291 bps YoY to 81.6% in Q1FY21 protection mix which improved to ~13% in Q1FY21 as against 11% in • Solvency ratio improved to 239% in Q1FY21 as compared to 195% in Q1FY20 Q4FY20 as equity market performance improved. • Value of New business margin expanded by 80 bps YoY to 18.7% in • AUM size stood at INR 1,75,350 Cr. up by 19.3%YoY/9.4% QoQ basis. SBI Life Q1FY21 mainly due to increased mix of protection and non-par • Debt: Equity mix in AUM stood in the ratio of 76:24 resulting in favourable mix which improved VNB margin by +6.2% offset by change in operating assumptions (1.2%) and change in economic assumptions (4.2%)

• Value of new business declined by 15.7%YoY (down 64.8% QoQ). • 13th month persistency declined 100 bps YoY to 82% in Q1FY21 while 61st • Value of New business margin contracted by 247 bps YoY/down month persistency ratio remained flat at 52.0% 569 bps QoQ to 17.1% in Q1FY21 due to lower interest rates and • Solvency ratio declined significantly to 212% (vs 225% in Q1FY20) which Max Life higher cost overrun due to lower volumes and business mix shift was well above the regulatory requirement of 150% • AUM size stood at INR 73,239 Cr. up by 14.7%YoY/+7% QoQ basis. • More than 95% of debt investments is in sovereign papers and AAA rated securities

20 Earnings Review | Life Insurance | Coverage: Results Summary (3/3)

Companies Channel mix Industry Outlook / Strategy • Channel mix on NBP basis for Q1FY21 is 59% for bancassurance • The company is witnessing good traction in its business on channel, 12% for agency channel, 5% for brokers and 24% for MoM basis with strong traction in Individual protection direct which reflects increasing trend towards direct channel products and better renewal collection HDFC Life which was ~22% in Q4FY20 • The company proposes to raise subordinate debt of INR • Through its direct channel, it is also focusing on customers 600 Cr , which should help improve the current solvency less than 30 years of age ratio by ~15%.

• Channel mix on APE basis for Q1FY21 is 40% for bancassurance • ICICI PruLife has entered partnership with IDFC bank as a channel, 25% for agency channel, 12% for Direct, ~8% for banca partner during the quarter partnership distributions and 15% for group • The company will be focusing on its protection/annuity ICICI PruLife • There is a significant shift from banca channel to group segment over the near term as these products have been channel witnessed during lockdown due to higher non-face generating good demand interactions

• The company will focus less on guaranteed products till it • Channel mix on NBP basis for Q1FY21 is 41% (~57% in Q1FY20) can reprice it higher again which will assist in maintaining for bancassurance channel (~22,000 branches), 14% (~18% in margin Q1FY20) for agency channel and 45% (~25% in Q1FY20) for • Management guided that the share of protection mix will SBI Life other channels which shows increased traction in alternate improve further going ahead on the back of new products channels such as Direct, Online and web aggregator channel in the non-ROP limited pay segment, traction in business from the agency channel and likely higher pricing.

• Channel mix on APE basis for Q1FY21 was ~56% for Axis Bank, • Max Life is looking for strategic partners to strengthen its 37% for proprietary channel, 6% for other bancassurance bancassurance channel Max Life (excluding Axis Bank) and 1% for others (50/33/16/1 in Q1FY20)

21 Earnings Review | Life Insurance | Coverage: Performance Overview (1/2)

SBI Life is larger compared to its peers in terms of AUM and Total Premium

Particulars (INR Cr.) HDFC Life ICICI Prudential SBI Life Max Life

New Business Premium (Individual + Group) 2,623 1,607 3,059 899

Renewal Premium (Individual+ Group) 3,239 4,140 4,585 1,852

Total Premium 5,863 5,747 7,643 2,751

Profit After Tax 451 288 391 138*

Asset Under Management (AUM) 1,39,975 1,70,006 1,75,350 73,239

Value of New Business (VNB) 291 201 240 113

Annualized Premium Equivalent (EV) 1,198 823 1,270 661

Key Financial Ratios (%)

Solvency Ratio 190% 205% 239% 212%

Persistency Ratio

13th Month 87.0% 81.1% 81.6% 82.0%

61st Month 54.4% 60.8% 63.1% 52.0%

VNB Margin 24.3% 24.4% 18.7% 17.1%

*Max Life discloses PBT Source: Company Data, KRChoksey Research

22 Earnings Review | Life Insurance | Coverage: Performance Overview (2/2)

SBI Life outperformed its peers in AUM and Total Premium growth

In INR Cr. HDFC Life ICICI Pru SBI Life Max Life

Key Financial & Actuarial Metrics YoY QoQ YoY QoQ YoY QoQ YoY QoQ

New Business Premium (Ind. + Grp.) -33.2% -48.45% -29.7% -61.8% -3.04% -19.62% -1.3% -52.4%

Renewal Premium (Ind. + Grp.) 24.1% -41.4% 2.4% -35.7% 29.52% -43.62% 6.4% -53.5%

Total Premium -10.3% -44.8% -9.2% -46.0% 14.18% -35.97% 3.8% -53.2%

Profit After Tax 6.2% 44.7% 1.1% 60.9% 5.11% -26.34% NM -43.0%

Assets Under Management (AUM) 8.0% 10.0% 3.6% 11.1% 19.33% 9.35% 14.7% 7.0%

Value of new business (VNB) -42.8% -42.9% -35.0% -57.2% -27.3% -55.56% -15.7% -64.8%

Total APE -29.9% -43.1% -44.0% -58.3% -31.7% -52.79% -3.5% -53.1% Key Financial Ratios

Solvency Ratio (300 bps) 600 bps (1,160 bps) 1,110 bps 2,200 bps 4400bps (1,300bps) 500 bps

Persistency Ratio

13th Month (180 bps) (140 bps) (110 bps) (810 bps) (291 bps) (274bps ) (100bps) (100 bps)

61st Month (110 bps) (20 bps) 240 bps 60 bps 687 bps 370bps - - Value of New Business Margin (548 bps) 9 bps 340 bps 61 bps 80 bps (137bps) (247bps) (569 bps) (VNB margin) %

Source: Company Data, KRChoksey Research

23 Earnings Review | Our Top Sector Picks and Recommendations

HDFC Bank, ICICI Bank and Bandhan Bank are our top picks

Recommendation Market Cap. CMP Target Price (INR) Upside P/ BV (x) Stocks Revised Old INR Mn. INR New Old % 5 Yr. Avg. FY22 E

HDFC Bank BUY BUY 5,772,515 1,049 1,427 1,427 36.0% 3.99 2.67

ICICI Bank BUY BUY 2,437,605 354 495 448 40.0% 2.37 1.71

Kotak Mahindra Bank ACCUMULATE ACCUMULATE 2,530,417 1,279 1,458 1,279 14.0% 6.02 3.08

Axis Bank BUY BUY 1,291,378 422 612 557 45.0% 2.07 1.23

SBI BUY BUY 1,643,467 184 262 262 42.3% 1.04 0.66

IndusInd Bank ACCUMULATE ACCUMULATE 399,296 528 659 521 24.8% 2.12 0.96

Karur Vysya Bank BUY BUY 26,213 33 42 42 28.0% 0.91 0.42

Bandhan Bank BUY BUY 421,188 268 431 307 60.8% 4.581 2.80

Note: 1) 3 year average P/BV Source: Company, KRChoksey Research

24 Earnings Review | Our Top Sector Picks and Recommendations

HDFC Ltd., Bajaj Finserv and CreditAccess Grameen are our top picks

Recommendation Market Cap. CMP Target Price (INR) Upside P/ BV (x) Stocks Revised Old INR Mn. INR New Old % 5 Yr. Avg. FY22 E

Bajaj Finance BUY BUY 1,951,026 3,238 4,095 3,532 26.5% 5.62 4.97

Bajaj Finserv BUY BUY 897,534 5,640 8,203 7,282 45.4% 5.25 2.48

Cholamandalam Investments ACCUMULATE HOLD 187,689 229 248 223 8.3% 2.67 1.84

HDFC AMC BUY BUY 471,586 2,215 3,020 2,970 36.3% 18.97 9.83

HDFC Ltd. BUY BUY 2,990,658 1,667 2,403 2,377 44.2% 4.36 2.88

NAM UR UR 160,824 263 - - - 6.58 5.95

CreditAccess Grameen BUY BUY 99,588 700 843 684 20.4% 2.721 1.87

Note: UR – Under Review ; 1) 3 year average P/BV

HDFC Life and SBI Life are our top picks Recommendation Market Cap. CMP Target Price (INR) Upside P/ EV (x) Stocks Revised Old INR Mn. INR New Old % 5 Yr. Avg. FY22 E HDFC Life BUY BUY 11,70,364 580 704 600 21.3% 5.4 4.2 ICICI Prudential BUY BUY 5,86,771 409 509 443 24.5% 2.3 2.3 SBI Life BUY BUY 8,33,000 833 996 867 19.6% 3.0 3.3 Max Financial HOLD HOLD 1,58,253 588 619 494 5.0% 2.0 1.3

Source: Company, KRChoksey Research

25 Consumer Sector

26 Earnings Review | Essentials | Summary Key Takeaways

Essentials (Food & Hygiene) outperformed other discretionary businesses and out-of-home consumption • Britannia reported the highest revenue growth of 26.7% YoY growth while flat growth of Nestle India was due to the delay in resolving supply disruption faced by the company. Both Hindustan Unilever and ITC displayed positive growth in the Food & refreshment segment, however the growth was higher for HUL mainly due to merger impact of GSKCH. The discretionary segment such as cigarette and hotel segment for ITC; and Beauty & Personal care segment for HUL were majorly impacted • However, with lockdown and travel restriction easing, we see a push from out-of-home consumption and discretionary products Pressure on operating margin highest for ITC, while others leverage on reducing discretionary spends • Britannia & Nestle reported expansion in EBITDA margin due to reduction in other expenses and rationalization of discretionary and Ad spends. However, both Hindustan Unilever & ITC reported contraction in operating margins on a YoY basis • Going forward, while we expect the companies to resume advertising to push consumption targeted more towards discounts and samples, however certain cost savings such as right-sizing of staff and digitalization of operations are likely to be permanent leading to margin expansion Recovery in capacity utilization to aid normalization of operations; Ramping up capacities to suit demand • Capacity utilization, which suffered in March and April due to lockdown, improved in May and June. Most of the companies are operating at pre-COVID levels currently. HUL has ramped up the capacity for sanitizers by 100x and for hand wash by 5x • Britannia will be launching salty snacks in the next 4-6 months to cash in on the surge of in-house consumption Shift towards value packs and low-price products and innovations for COVID-19 world • Both ITC and HUL have launched several products in the food and hygiene space in value packs to cater to rural market • ITC launched Savlon Hand Sanitizer Sachet, while HUL launched pouch packs of Horlicks and Boost. Even in the food space, Britannia has launched INR 5 layer cake

27 Earnings Review | Essentials | Coverage: Results Summary (1/4)

Companies Revenue Performance

• Britannia reported revenue growth of 26.7% YoY (+19.3% QoQ) at INR 3,421 Cr due to higher market Britannia Industries demand for biscuits driven by increased home consumption in the wake of COVID-19.

• Nestle India reported flat revenue growth YoY (down 8.3% QoQ) Higher in-home consumption boosted the sales of EVERYDAY Dairy Whitener, Nestlé a+ Milk, , NESCAFÉ Classic and NESCAFÉ Sunrise, all of Nestle India which performed well this quarter. MAGGI also witnessed solid growth towards the end of the quarter after initial supply constraints

• Total revenue declined by 17.4% YoY/down 16.8% QoQ to INR 9,502 Cr due to disruption in lockdown. The revenue decline was mainly due to decline in cigarette segment and hotel segment partly offset by ITC Ltd. revenue growth in FMCG and Agri segment

• HUL reported revenue growth of 4.4% YoY (+17.2% QoQ) at INR 10,560 Cr. mainly due to growth in Food & refreshment segment offset by weak performance in Home care segment and Beauty & Personal care Hindustan Unilever segment

• Tata Consumer Products reported healthy revenue growth of 13.4% YoY (+ 12.8% QoQ) at INR 2,714 Cr with volume growth across all segments • Within Branded segment (~90% of overall revenue), domestic beverage segment (~41% revenue) Tata Consumer Products witnessed growth of 11% YoY, Branded India food business (~24% revenue) grew 19% YoY and Branded international beverage segment (~35% revenue) grew 15% YoY. Non-branded segment mix (~10% of revenue) grew 9% YoY

28 Earnings Review | Essentials | Coverage: Results Summary (2/4)

Companies Margin Performance

• EBITDA margin expanded 634bps YoY/+512 bps QoQ to 21.0% in Q1FY21. The company witnessed moderate cost inflation in the prices of key raw materials. Other expenses to sales stood at 16.7% in Britannia Industries Q1FY21 compared to 21.3% in Q1FY20 and 19.6% in Q4FY20 on the back of cost efficiencies

• Gross margin was impacted due to higher cost of raw material particularly milk prices. • Overall, EBITDA margin expanded by 76bps YoY to 24.5% (+65 bps QoQ) mainly due to decline in other Nestle India expenses due to reduction in marketing spend and other overheads.

• Gross margin stood at 52.3% in Q1FY21 as compared to 64.0% in Q1FY20 mainly due to higher raw material cost, majorly tobacco leaves; and increase in excise duty as a result of hike in NCCD taken in budget. ITC Ltd. • EBITDA margin contracted 1184bps YoY (down 860 bps QoQ) to 27.9% mainly due to negative operating leverage on segment such as Hotel, Paperboard and cigarette segment due to unfavourable product mix, offset by improved performance in FMCG segment. • Gross margin contracted by 222 bps YoY/190 bps QoQ due to higher cost of raw materials mainly crude oil, tea, palm oil, tomato paste and skimmed milk powder. • EBITDA margin contracted 113 bps YoY to 25% in Q1FY21 due to increase in employee cost (due to Hindustan Unilever GSKCH merger) and other expenses, offset by decline in advertising/promotion expenses as percentage of sales.

• EBITDA grew 37.6% YoY/ +56.5% QoQ to INR 483 Cr while EBITDA margin expanded 496bps YoY to 17.8% due to higher sales, gross margin improvement and rationalization of discretionary expenses Tata Consumer Products • Overall Branded segment’s EBIT (~19% margin) grew 56% YoY majorly contributed by domestic beverage business

29 Earnings Review | Essentials | Coverage: Results Summary (3/4)

Companies Industry Outlook / Strategy • The expansion in margins is likely to continue in FY21, driven by benign raw material and rationalization in ASP spend Britannia Industries • Distribution expansion especially in the Hindi heartland to further drive volumes in the medium term • The company has planned fresh capex of INR 700 crores over the next 3 years for bakery products • The company delivered strong performance in the ‘e-commerce’ channel which grew by 122% this quarter and Nestle India now contributes 3.6% to domestic sales

• Significant gap in duty would continue to impact cigarette volume growth going forward. • Biscuits saw continued strength in demand in the first two weeks of July, but the momentum has now ITC Ltd. slowed down industry-wide • As per management, the hotel sector will see near term pressure, however it holds immense potential in view of the robust long-term economic and tourism prospects of the country • GSKCH merger completed on June 25 and is expected to derive significant synergies going forward. • Skimmed Milk Powder prices have softened. Trend in vegetable oils is upwards as of now. The company is also looking to pass on the increase in crude oil prices to consumers while taking a gradual increase in tea Hindustan Unilever prices. • The company has ramped up production of essential products such as hand wash, sanitizer and floor cleaners. For sanitizers it has ramped up capacity by 100x and for hand wash by 5x. • In the near term, focus is on to strengthen the front end and back end integration of food and beverage business in terms of logistics, warehousing. In the long term, it will branch out and play out in multiple categories to become a true blue FMCG company • The company has accelerated digitalization and adopted technologies such as blockchain and traceability. Tata Consumer Products The Company is in process of building end to end digitalization across supply chain and distribution partners and ERP integration by Q4FY21 • The integration of Consumer business of TCPL and Indian beverage business is progressing well and realization of synergies of merger is underway. On track to realize initial synergy estimates of 2-3% of combined India branded revenues over 18-24 months

30 Earnings Review | Essentials | Coverage: Results Summary (4/4)

Companies New Launches/Market Share

• The company also launched ‘Winkin Cow Lassi’ and a layer cake pack of INR.5 Britannia Industries • Britannia gained market share driven by aggressive execution, early mover in starting factories vs peers and getting back distribution to pre-COVID levels

• Cigarette segment: Gold Flake Luxury filter in the Longs segment, and Navy Cut Deluxe Filter, Gold Flake Indie Mint and Capstan Fresh in the regular size filter segment were launched during the quarter • Within the FMCG segment, the company launched eight variants of frozen foods and the range was extended to 70+ cities. Aashirvaad Svasti Lassi was launched within the Dairy business while 2 innovative ITC Ltd. immunity drinks was launched within the “B Natural” range of juices • Within the health and hygiene segment, ‘Savlon Surface Disinfectant Spray’, ‘Savlon Hexa’ hand sanitizing liquid, ‘Savlon Germ Protection Wipes’, Savlon Hand Sanitizer Sachet, and ‘Savlon Hexa advanced’ Soap. ‘Nimwash’ - Vegetables and Fruit Wash Liquid was also launched

• Immunity boosting Horlicks with added Zinc was launched during the quarter. The company also launched pouch packs of Horlicks and Boost • Also launched 50 innovative product in health and hygiene segment like Lifebuoy germ spray, sanitizers, Hindustan Unilever domex disinfectant spray • Domex’s credentials of destroying Coronavirus in 60 seconds is picking up well with consumers • HUL has witnessed volume/value market share gains in 80% of its portfolio

• Good Earth’s range of Fruit & herbal, Green and Black teas launched in UK along with the Original and flavoured Kombucha Tata Consumer Products • All American Classic S’mores coffee launched as part of the Flavors of America line. • Starbucks has launched Mobile Order & Pay feature, partnering with TATA Digital

31 Earnings Review | Essentials | Coverage: Performance Overview (1/2)

ITC has a better margin profile compared to its peers due to high margin cigarette business

Particulars (INR Cr) Britannia Nestle India ITC Ltd. Hindustan Unilever Tata Consumer

Sales 3,421 3,051 9,502 10,560 2,714 Total Expenditure 2,704 2,303 6,855 7,916 2,231 EBITDA 717 748 2,647 2,644 483 EBITDA Margin (%) 21.0% 24.5% 27.9% 25.0% 17.8% Depreciation 48 92 398 242 62 EBIT 669 655 2,248 2,402 421 Interest Expense 26 41 17 29 17 Other income 94 38 897 156 33 Exceptional items 0 0 0 -118 63 PBT 737 652 3,128 2,529 436 Tax 194 166 786 530 110 Share of Associates/Minorities 0 0 0 0 -62 PAT 546 487 2,343 1,881 328 PAT Margin 16.0% 16.0% 24.7% 17.8% 12.1% Adj. PAT 546 487 2,343 1,999 264 Adj. PAT Margin 16.0% 16.0% 24.7% 18.9% 9.7% EPS 22.7 50.5 1.91 8.0 3.6 Adj. EPS 22.7 50.5 1.91 8.5 2.9

Source: Company, KRChoksey Research

32 Earnings Review | Essentials | Coverage: Performance Overview (2/2)

Britannia outperformed its peers in topline growth owing to the nature of its product offerings

Particulars (INR Cr) Britannia Nestle India ITC Ltd. Hindustan Unilever Tata Consumer

Change (%) QoQ YoY QoQ YoY QoQ YoY QoQ YoY QoQ YoY

Sales 19.3% 26.7% -8.3% 1.7% -16.8% -17.4% 17.2% 4.4% 12.8% 13.4%

Total Expenditure 12.0% 17.3% -9.0% 0.6% -5.5% -1.2% 14.0% 6.0% 6.4% 9.3%

EBITDA 57.8% 81.7% -5.8% 4.9% -36.4% -42.0% 28.0% -0.1% 56.5% 37.6%

Change in EBITDA Margin (bps) 512 bps 634 bps 65 bps 76 bps -860 bps -1,184 bps 212 bps -113bps 496 bps 312 bps

Depreciation -1.1% 7.1% 1.2% -1.8% 1.4% 10.9% -5.1% 13.1% -3.3% 7.5%

EBIT 64.9% 91.2% -6.7% 5.9% -40.4% -46.6% 32.7% -1.3% 72.2% 43.5%

Interest Expense -5.1% 153.6% -0.4% 27.3% 14.0% 10.3% 11.5% 20.8% -7.6% -7.2%

Other income 19.2% 38.9% -11.5% -47.7% 18.7% 44.6% -41.4% 6.1% 49.2% -1.1%

Exceptional items NA NA NA NA NA NA 103.4% -1785.7% -123.9% NM

PBT 61.2% 88.2% -7.3% -1.0% -30.7% -35.0% 23.4% -1.1% 76.2% 41.7%

Tax 128.9% 35.9% -7.1% -25.1% 9.9% -52.0% 12% -34.4% 230.8% 8.0%

PAT 45.6% 117.4% -7.4% 11.1% -38.3% -26.2% 23.8% 7.2% NM 88.6%

Change in PAT Margin (bps) 288 bps 665 bps 15 bps 136 bps -859 bps -294 bps 96 bps 46bps NM 481 bps

Source: Company, KRChoksey Research

33 Earnings Review | Personal Care | Summary Key Takeaways

Top-line impacted due to decline in discretionary business, partially offset by healthy growth in Essentials • Godrej Consumers performed better than Colgate and Emami on the back of growth in its Household Insecticides & Hygiene business. Colgate’s decline in sales mainly due to impact on toothbrush sales being discretionary in nature, while Emami’s hair oil and male grooming range was severely impacted partially offset by growth in its healthcare and pain management business • Most of the companies reported improvement in sales with demand stepping up in discretionary products due to lockdown easing. For instance, Emami Ltd reported double-digit growth in July led by Healthcare portfolio

Operating margin to improve on the back of cost rationalization measures; advertising cost expected to step up • While most of the companies have maintained profitability in Q1FY21 on the back of reduced discretionary spends, we expect a step up in advertising cost in Q2FY21 to push consumption • In addition, few cost measures undertaken during lockdown such as administrative costs, are expected to remain permanent in nature, which will aid margin going forward. No significant capex has been announced by the companies

Positioning of health and hygiene as a lifestyle category; New launches for post-COVID-19 world • Most of the companies revamped their portfolio to make it health and hygiene centric. Taking the opportunity for increased awareness about healthy living, products such as disinfectants, sanitizers, sprays and immunity building products are likely to be a part of consumer lifestyle • For instance, Godrej consumer launched 45 products while Emami launched about a dozen products in the health and hygiene space

34 Earnings Review | Personal Care | Coverage: Results Summary (1/3)

Companies Revenue and Segment-wise Performance

• Colgate Palmolive India saw a decline of 4.1% YoY /down 2.9% QoQ in its revenues due to lockdown impact Colgate • Palmolive Toothpaste segment (~80% revenue) declined in volume basis, but grew in value terms due to removal of promotional offers • The sales of toothbrush was impacted on account of its discretionary nature

• Slight revenue decline in YoY terms but grew +8.1% QoQ, driven by Household Insecticides (HI) and Hygiene business • HI benefited due to channel filling, share gain from the unorganized market and higher consumer focus towards health • Domestic sales (~54% of total sales) grew 5% YoY while volume grew at 3% YoY . Godrej • Indonesian business grew 5% YoY; US, Africa and the Middle East (GAUM) declined 23% YoY on constant currency basis Consumers mainly due to lockdown • Segment-wise, household insecticides business, (including Goodknight) and incense sticks(~85% of revenue) reported a growth of 9% YoY • Soaps delivered a sales decline of 2% YoY while hair colour too reported a significant decline at 18% YoY

• Emami Ltd.’s revenue declined by 25.8% YoY (down 9.6% QoQ) . Performance in April and May 2020 was affected by the lockdown. • Domestic sales were down by 26% YoY due to volume decline of ~28% YoY, while international sales were down by 18% YoY • Healthcare, Pain management and Boroplus range grew by 23%, 15% and 28% YoY, respectively while Navratna, Kesh King and Emami Ltd Male grooming range declined by 41%, 33% and 70% YoY, respectively • Sachet sales contributed in the range of 32-33% in Q1FY21. Within healthcare portfolio, Chawanprash and honey sales increased by 7x and 5x in Q1FY21 compared to same period previous year. • Sales improved in June with domestic segment growing 8% YoY, compared to same period last year • The recovery witnessed in June continued in July with double-digit growth led by Healthcare portfolio

35 Earnings Review | Personal Care | : Result Summary (2/3)

Companies Margin Performance

• Gross margin improved by 28bps YoY to 66.1% (+148 bps QoQ) mainly due to decline in cost of raw materials which stood at ~23% of sales (vs 29% of sales in 1QFY20) Colgate • EBITDA margin expanded by 196 bps YoY (+506 bps QoQ) as Advertisement spend as a percentage of sales reduced to 10.9% Palmolive during the quarter (14.5% in Q4FY20/ 13.9% in Q1FY20) and cost rationalization leading to lower other expenses • Net Profit margin for the quarter expanded by 346bps YoY to 19.0% (flat QoQ) due to lower taxation rate at 25.7% vs 35.7% in Q1FY20

• Gross margin dipped by 297bps YoY to 52.1% driven by an adverse product mix, raw material inflation (palm oil) and lower sales of high margin product like hair colour. • The company expects gross margin to improve led by favourable category mix and pricing action in Q2FY21 Godrej • EBITDA margin expanded 94bps YoY to 20.3% in Q1FY21 mainly due to decline in other expenses which stood at 22.7% of sales Consumers (26.7% in Q1FY20/ 25.2% in Q4FY20) • Net Profit margin for the quarter contracted by 39 bps YoY (+ 629 bps QoQ) to 17.0% on the back of deferred tax benefit last year

• Gross margin expanded by 231 bps YoY (+132 bps QoQ) to 66.5% led by lower raw material cost which stood at 20.3% of sales (25.1% in Q1FY20 and 33.6% in Q4FY20) • EBITDA margin expanded by 487 bps YoY/ +705 bps QoQ to 25.6% due to sharp decline in advertisement spends (down 53.7% YoY; down 749 bps as a % sales). This was partially offset by higher staff cost (16.2% of sales vs 11.9% in Q1FY20) and other Emami Ltd operating expenses (12.3% of sales vs 11.7% in Q1FY20) • Savings in other expenses will sustain in the next few quarters led by cost saving measures undertaken by the company • PAT margin expanded by 221 bps YoY/+406 bps QoQ to 8.2% due to lower taxation rate of 18.9% vs 30.7% in Q1FY20 • Expected tax rate for FY21 expected to be in the range of 19-20%

36 Earnings Review | Personal Care | : Result Summary (3/3)

Companies Industry/Outlook/ Strategy New Launches/Market share • The company launched innovative products such as Palmolive • Colgate launched brand new range of toothbrushes, Hand sanitizer in April which received good response ‘Colgate Gentle’ designed with Dentists and is endorsed Colgate • The company is focusing on strengthening its brand through by the Indian Dental Association Palmolive impactful campaigns and driving innovation

• Rural growth was ahead of urban growth. Growth is expected to • GCPL launched 45 new products in its hygiene portfolio be driven by the rural market (~30% of sales) and will continue to drive penetration through • Demand has sequentially improved since May in the GAUM region. innovative launches • No significant capex expected in the near term • The company is focusing to drive the soap segment Godrej • There has been an impact on illegal incense sticks (Household through new launches (Protekt brand) Consumers Insecticides) because of supply chain issues and higher import • Household Insecticides is being introduced in Africa duty • Inventory at distributor level at the end of the quarter was at a lower level than the past 18-24 months average • Advertising spends is expected to step up in the Q2FY21 • The company would be focusing more on its healthcare range • During the quarter, 12 new launches were announced, (Zandu) and has even brought on board Mr. Gul Raj Bhatia from and they contributed 5% to domestic sales – with recently Sanitizer contributing 3% and other launches • Ad spends as a % of sales for FY21 is expected to stand at 17-18%, contributing the remaining 2% similar to FY20. • Emami has identified 20-30 new products under Zandu • The company has estimated cost savings of ~ INR 500 mn for FY21. and will launch them in the near future • Credit days have reduced from 14-15 days to 4-5 days • New launches are expected to generate Rs1.3-1.5bn and Emami Ltd • Promoter pledge currently stands at 55% led by sale of Emami contribute 5-5.5% to domestic sales in FY21 cement business. Promoter-level debt of Rs11.3bn will be bought down to zero by the end of March 2021. • The management stated that it doesn’t see any acquisition opportunity at this point of time and expected capex will be ~INR 80 Cr.

37 Earnings Review | Personal Care | Coverage: Performance Overview (1/2)

Margin highest for Colgate Palmolive due to better control over expenses.

Particulars (INR Cr) Colgate Palmolive India Godrej Consumer Emami Ltd.

Sales 1041 2,327 481 Total Expenditure 733 1,854 358 EBITDA 308 473 123 EBITDA Margin (%) 29.6% 20.3% 25.5% Depreciation 45 51 75 EBIT 263 423 48 Interest Expense 2 48 5 Other income 6 22 7 Exceptional items 0 13 0 PBT 267 410 50 Tax 69 15 9 Share of Associates/Minorities 0 0 -1 PAT 198 395 40 PAT Margin 19.0% 17.0% 8.2% Adj. PAT 198 382 40 Adj. PAT Margin 19.0% 16.4% 8.2% EPS 7.3 3.9 0.9 Adj. EPS 7.3 3.7 0.9

Source: Company, KRChoksey Research

38 Earnings Review | Personal Care | Coverage: Performance Overview (2/2)

Overall Colgate Palmolive performed relatively better than peers

Particulars Colgate Palmolive India Godrej Consumer Emami Ltd.

Change (%) QoQ YoY QoQ YoY QoQ YoY

Sales -2.9% -4.1% 8.1% -0.9% -9.6% -25.8%

Total Expenditure -9.4% -6.7% 10.5% -2.1% -17.5% -30.3%

EBITDA 17.2% 2.7% -0.7% 3.9% 24.8% -8.3%

Change in EBITDA Margin (bps) 506 bps 196 bps -179bps 94bps 705 bps 487 bps

Depreciation -1.7% -9.0% -4.6% 7.1% -12.3% -10.6%

EBIT 21.2% 5.1% -0.2% 3.5% 262.6% -4.5%

Interest Expense 0.5% -13.9% -21.4% -12.2% -53.8% -41.7%

Other income -68.0% -58.6% -55.7% 1.8% 95.0% 8.0%

Exceptional items - - NM NM - -

PBT 13.9% 1.6% 21.4% 9.2% 97.8% -12.9%

Tax 127.4% -26.7% -86.3% -145.2% NM -46.4%

Share of Associates/Minorities - - - - NM NM

PAT -2.9% 17.2% 71.8% -3.1% 78.7% 1.5%

Change in PAT Margin (bps) -1bps 346 bps 629 bps -39 bps 406 bps 221 bps

Source: Company, KRChoksey Research

39 Earnings Review | Consumer Durables | Summary Key Takeaways

Shutdown impacts revenue growth in Q1FY21; improvement in sales expected with upcoming festive season • Whirlpool, Blue Star and Symphony reported a decline between 45%-65% YoY due to lockdown and discretionary nature of its products. However, we expect consumer’s focus on equipping homes with home and kitchen appliances such as dishwashers, washing machines and vacuum cleaners to drive convenience of home chores is expected to drive demand and normalize by Q4FY21. • Most consumer durables majors have claimed that their sales are almost at pre-COVID-19 levels. In addition, upcoming festive season is likely to push demand for consumer durable products.

Small towns and rural market growth higher than urban; Online sales gathering pace • With per capita income of consumers in the rural market going up with lower incidence of COVID-19, good monsoons and increased spends by Government, the rural market has been witnessing positive consumer sentiments compared to urban counterpart. • With malls remaining shut, the companies have adopted online video demonstrations and online sales/e-commerce which is gaining traction among consumers

New product launches cater to the COVID-19 world and health hygiene • The new launches by the companies are focused towards health and hygiene. Whirlpool of India launched new range of washing machine (in-built water heater) with focus on sanitization of clothes, while Blue Star will soon launch its new range of central air conditioning solutions claiming capability of killing the COVID-19 virus.

40 Earnings Review | Consumer Durables | Coverage: Results Summary (1/3)

Companies Revenue

• Blue Star reported revenue decline of 60.3% YoY (down 51.8% QoQ) at INR 626 Cr in Q1FY21 (typically the strongest quarter) mainly due to challenges faced during lockdown in the light of COVID-19

Blue Star • Decline was witnessed across all segments mainly Electro-Mechanical Projects and Commercial Air Conditioning Systems segment (~50% of revenue) and Unitary Products revenue (~44% of revenue) Professional Electronics and Industrial Systems Business (~6% of revenue) registered moderate revenue decline

• Whirlpool reported revenue of INR 1,027 Cr, decline of 48.0% YoY (down 24.1% QoQ) on account of lockdown due to Whirlpool of India COVID-19 which impacted the production and sales of the company.

• Symphony Q1FY21 revenue down sharply by 47% YoY and (-38.15% QoQ) to INR 154 Cr, due to substantial decline in sales in India and Mexico due to COVID-19.

Geographical segment wise performance Symphony • Domestic business revenue declined by 77% YoY to INR 34 Cr and ROW revenue dropped by 16.66% YoY to INR 120 Cr, business of subsidiaries is also affected due to COVID-19 • ROW accounted for 78% of the consolidated revenue in Q1FY21.

41 Earnings Review | Consumer Durables | Coverage: Results Summary (2/3)

Companies Margin

• EBITDA margin contracted 707bps YoY/down 266bps QoQ to 0.2% in Q1FY21 while EBITDA declined 98.8% YoY/down 96.4% QoQ to INR 1 Cr. Finance cost increased by 125.3% YoY due to additional borrowings taken • Blue Star raised INR 350 crores during the quarter through issuance of non-convertible debentures to fund Blue Star working capital • Other income declined by 60% YoY mainly due to receipt of industrial promotion subsidy for the manufacturing facility at Wada received last year. The company report a net loss of INR 20 Cr • Electro-mechanical Project & CACS reported a negative margin due to provisions made for doubtful receivables and potential credit loss in addition to negative operating leverage

• Gross margin declined by 277 bps to 33.2% due to increase in change in inventories • EBITDA margin declined by 1,078 bps YoY to 4.5% as there was no aggressive cost cutting done as can be witnessed in other expenses which increased 19.9% to sales as compared to 14.8% in Q1FY20 Whirlpool of India • PAT margin declined by 823 bps YoY/ down 529 bps QoQ to 1.5% due to decline in other income by 48.3% YoY and increase in interest expenses by 64.7% YoY In addition, the share of loss from Elica JV was INR 0.7 Cr as compared to INR 1.8 Cr in Q1FY20

• Gross margin declined 658 bps YoY and (-883 bps QOQ) to 39%, on account of adverse mix of products, higher sales of spare components and increase in local purchase insist of imports which led to higher cost during the quarter Symphony • EBITDA (Incl. OI*) margin reported at 2% compared to 17% in corresponding quarter last year, this was due to higher labour costs, increase in freight expenses, lower operating leverage and lower gross profit • Profit after tax came in at INR 2 Cr compared to INR 33 Cr in Q1FY20, while net profit margin reported at 1.33%. Decline in profitability was led by poor operating performance and sharp decline in revenue

42 Earnings Review | Consumer Durables | Coverage: Results Summary (3/3)

Companies Industry Outlook/Strategy New Launches/Market share • The company stated that demand is growing on month to • Blue star’s overall market share stood at 12.5% in FY20. month basis and it is expected to normalise by Q4FY21. • For its water purifier business the company has set a market • Growing investments by both public and private sectors in share target of 2.5% in FY21 given the concerns on health and digitisation and healthcare segments are expected to immunity provide opportunities for the Professional Electronics and • Company will soon launch its new range of central air Blue Star Industrial Systems business conditioning solutions claiming capability of killing the • The commercial buildings sector which contributes a major COVID-19 virus; along with a plan to scale up retrofit part of the revenue is expected to take longer to recover. solutions Infrastructure and industrial sectors are expected to recover relatively faster

• Convenience of home chores with consumer’s focus back • In July, Whirlpool India launched new range of washing to homes and intent of making their home equipped with machine with in-built water heater at price starting from INR Whirlpool all appliances to drive convenience is expected to drive 18,000 of India demand for Whirlpool India • Whirlpool of India has also launched campaigns such as ‘Sanitize What You Wear’ that throws light on sanitizing clothes using its newly launched washing machine with in-built water heater • Management stated that uncertainties about the • In FY20, Symphony launched new models across its products performance in FY21 exists and expects overall decline in portfolio in Residential, Commercial and Centralised air cooling current financial year compare to last year system Symphony • Symphony has initiated certain measures and strategies to • Company launched a unique digital campaign in late March to offset the current situation and which may yield benefit promote online to offline sales. This strategy will help in once the normalcy returns reducing the negative impact of COVID-19 on sales in remaining period of FY21

43 Earnings Review| Consumer Durables |Coverage: Performance Overview (1/2)

Whirlpool margin was higher compared to Blue Star and Symphony

Particulars (INR Cr) Blue Star Whirlpool of India Symphony

Sales 626 1,027 154 Total Expenditure 625 980 159 EBITDA 1 47 -5 EBITDA Margin (%) 0.2% 4.5% -3.25% Depreciation 21 28 5 EBIT -20 18 -10 Interest Expense 19 14 2 Other income 9 7 8 Exceptional items 0 0 0 PBT -29 25 -4 Tax -10 9 -6 Share of Associates/Minorities 0 -1 0 PAT -20 16 2 PAT Margin -3.1% 1.5% 1.30% Adj. PAT -20 16 2 Adj. PAT Margin -3.1% 1.5% 1.30% EPS -2.0 1.2 0.22 Adj. EPS -2.0 1.2 0.22

Source: Company, KRChoksey Research

44 Earnings Review| Consumer Durables|Coverage: Performance Overview(2/2)

Performance of all the companies under consumer durables was severely impacted

Particulars (INR Cr) Blue Star Whirlpool of India Symphony

Change (%) QoQ YoY QoQ YoY QoQ YoY

Sales -51.8% -60.3% -24.1% -48.0% -38.15% -47.26%

Total Expenditure -50.5% -57.2% -19.4% -41.4% -22.82% -37.40%

EBITDA -96.4% -98.8% -66.0% -84.6% -111.63% -113.16%

Change in EBITDA Margin (bps) -266 bps -707 bps -558 bps -1,078 bps -2052bps -1667bps

Depreciation -11.8% 2.9% -20.7% -7.1% -16.67% -16.67%

EBIT -243.4% -120.7% -81.9% -93.3% -127.03% -131.25%

Interest Expense 168.7% 125.3% -7.5% 64.7% -61.90% -33.33%

Other income 35.6% -60.2% -44.7% -48.3% -33.33% -33.33%

Exceptional items NM NM - - - -

PBT -339.0% -127.3% -78.9% -91.5% -107.27% -109.76%

Tax -341.0% -129.3% -72.6% -91.7% -154.55% -175.00%

Share of Associates/Minorities -44.2% -79.3% NM NM - -

PAT NM NM -82.9% -91.8% -95.00% -93.94%

Change in PAT Margin (bps) NM NM -529 bps -823 bps -1477bps -1000bps

Source: Company, KRChoksey Research

45 Earnings Review | Others | Summary Key Takeaways

Rural/ Semi urban region to drive demand vs their urban counterparts • We expect the paint industry to post strong volume growth mainly by the repainting demand and construction in the coming quarters. The growth is expected to be led mainly by rural and semi-urban region (~40-50% of revenue mix) which would grow faster compared to urban due to favorable base, relatively lesser Covid impact and increased government spends. Demand from Tier3 and Tier 4 cities are already back to pre-COVID-19 levels for Asian Paints and Berger Paints

Expect recovery going ahead driven by festive season from H2FY21 • Progressive unlocking in metros / tier-1 cities and the upcoming festival season to continue to support demand recovery in the coming quarter. The third quarter is usually a strong quarter for majority paint companies as around 27-30% of the annual sales is contributed by this quarter.

Downtrading and poor industrial segment demand does not paint a pretty picture in the sales mix • Economic range of products (putty, waterproofing, entry level products) likely to grow faster compared to premium category (wallpaper, luxury painting) in the medium term, though the companies has been witnessing slight improvement in the premium category only from August. The industrial segment also continues to be impacted especially owing to the slowdown in auto.

Cost control measures and low raw materials to improve margin • Benign raw material cost and various other cost rationalization measures on advertisement, logistics, rent etc undertaken by the companies during lockdown is likely to aid margin going forward.

46 Earnings Review | Others | Coverage: Results Summary (1/3)

Companies Revenue Margin • Revenue decreased 42.7% YoY / 37.0% QoQ mainly due to • Gross margin expanded by 110bps to 44.7% due to softening of raw decline in volumes in April which was a complete material cost. However, Employee expense increased significantly washout, followed by a gradual recovery in May a to 12.4% of sales (vs ~7% in Q1FY20 & Q4FY20) due to policy changes double-digit volume growth (+14%) in June. Domestic regarding gratuity and increased headcount. Management clarified decorative revenue declined 44% YoY due to mix that it is a one-time impact and would be ~7% to sales going ahead. Asian Paints change, volume decline around 35% • EBITDA margin contracted by 611bps YoY to 16.6%. EBITDA declined • International business portfolio performed well, 58.2% YoY to INR 484 Cr. PAT margin declined 537 bps YoY to 7.5% supported by favorable conditions in markets in Middle • Management expects RM price volatility a key watch out although East and Africa though key Asian markets of Nepal and no significant rise is expected but RM prices may increase as Bangladesh were impacted by the pandemic lockdown demand rises • Revenues declined 46% YoY led by ~48% YoY drop in the • Gross margin in Q1FY21 fell 266 bps QoQ (flat YoY) due to product revenue of domestic business (~87% of sales) mainly mix, unfavorable currency and higher cost of inventory offset by due to lockdown impact in April 2020 sales. However, decline in raw materials Berger saw ~90% sales recovery in May 2020 and • EBITDA margin declined 788 bps YoY/ down 549 bps QoQ to 9.9% reported double digit volume/value growth in June 2020 due to negative operating leverage on account of higher fixed cost. Berger supported by easing of lockdown Management has indicated improved profitability in the coming Paints • Nepal was severely impacted by lockdown as it had only quarters backed by favorable product mix, benign raw material 10 working days in the quarter and is still recovering cost and various other cost rationalization measures post lockdown easing. However, Poland subsidiary Bolix SA witnessed an improved topline performance • Protective coatings contributed ~9-9.5% while powder coatings contributed less than 2% to the business • Standalone Revenue from operations decreased by • Gross profit margin stood at 13.7% (16.1% in Q1FY20/ 13.2% in QFY20) 33.7% YoY (down 38.1% QoQ) to INR 3,833 Cr on account mainly due to sale of low margin essential items as the company Avenue of less number of stores opened for restricted hours had halted the sale of higher margin non-essential items (as per Supermarts and lower footfalls due to restrictive movement of government directives) such as Apparels & General Merchandise people with strict social distancing rules observed in the • EBITDA declined 81.7% YoY (down 73.9% QoQ) to INR 109 Cr stores on the back of COVID-19 however, EBITDA margin contracted 749bps (down 390 bps QoQ)

47 Earnings Review | Others | Coverage: Results Summary (3/3)

Companies Industry Outlook / Strategy • Management expects downtrading from super luxury segment in exteriors to premium and value for money segment is likely to challenge sales growth and margins going ahead • Management believes that repainting and maintenance activities would gain traction as people are now spending more time at home. Also, people are spending money for waterproofing, hence this business is witnessing good Asian Paints response. However, discretionary spends like high end wallpaper and textures would see a setback • No significant capex has been planned for FY21E • Metros constitute 40-50% of total painting demand for the company. Tier 2,3,4 cities are showing improvement with better demand conditions than metros and Tier 1. Demand in Tier 3 and 4 cities are back to pre-Covid-19 levels

• The company witnessed improvement in demand as well as sales post the easing of lockdown in May & June from Tier 3 and 4 cities. However, demand from metro regions and Tier 1 cities remains impacted due to extended/intermediary lockdowns. Expected capex is INR 120-130 Cr for FY21 Berger Paints • The company expects rural demand to sustain led by measures taken by the government • The management expects strong demand revival, going forward, supported by festive demand, easing restriction in urban clusters (drivers of its premium products) • Management stated that Future revenues remain uncertain as store operations and duration of operation per day continues to remain inconsistent across cities due to strict lockdowns enforced by local authorities from time to time. In addition, in certain cities authorities are also insisting on selling only essential products • Discretionary consumption continues to be under pressure, especially in the Non-FMCG categories which is Avenue Supermarts impacting gross margins negatively • The Dmart Ready online sales have grown well and the company is making attempts to scale it up in a meaningful manner

48 Earnings Review | Others | Coverage: Performance Overview (1/2)

Asian Paints enjoys higher margin compared to Berger Paints

Particulars (INR Cr) Asian Paints Berger Paints Avenue Supermarts

Sales 2,923 931 3,833 Total Expenditure 2,438 839 3,724 EBITDA 484 92 109 EBITDA Margin (%) 16.6% 9.9% 2.8% Depreciation 191 50 86 EBIT 293 42 23 Interest Expense 20 12 8 Other income 47 8 51 Exceptional items 0 0 0 PBT 320 37 67 Tax 86 18 17 Share of Associates/Minorities -15 -5 0 PAT 218 15 50 PAT Margin 7.5% 1.6% 1.3% Adj. PAT 218 15 50 Adj. PAT Margin 7.5% 1.6% 1.3% EPS 2.28 0.16 0.76 Adj. EPS 2.28 0.16 0.76

Source: Company, KRChoksey Research

49 Earnings Review | Others | Coverage: Performance Overview (2/2)

The performance of all the companies was negatively impacted due to discretionary nature of business

Particulars Asian Paints Berger Paints Avenue Supermarts

Change (%) QoQ YoY QoQ YoY QoQ YoY

Sales -37.0% -42.7% -31.3% -45.8% -38.1% -33.7%

Total Expenditure -35.4% -38.2% -26.8% -40.6% -35.5% -28.2%

EBITDA -43.7% -58.2% -55.8% -69.8% -73.9% -81.7%

Change in EBITDA Margin (bps) -198 bps -611 bps -549 bps -788 bps -390bps -749bps

Depreciation -1.7% -0.3% 2.1% 9.0% -9.2% 14.8%

EBIT -55.9% -69.7% -73.8% -83.9% -92.9% -95.6%

Interest Expense -21.6% -24.5% -11.9% 24.6% -39.3% -55.0%

Other income -15.6% -35.9% -53.0% -64.2% 44.3% 330.0%

Exceptional items NA NA NA NA NA NA

PBT -54.0% -68.4% -77.0% -86.3% -80.8% -87.1%

Tax -60.7% -75.5% -68.6% -81.3% -71.2% -90.6%

Share of Associates/Minorities 7.2% 136.4% NM NM NA NA

PAT -52.7% -66.7% -85.6% -91.7% -82.7% -85.2%

Change in PAT Margin (bps) -249 bps -537 bps -599 bps -872 bps -333bps -451bps

Source: Company, KRChoksey Research

50 Earnings Review | Our Top Sector Picks and Recommendations

Our top picks are ITC Ltd, Hindustan Unilever, Nestle India and Britannia Industries

Recommendation Market Cap. CMP Target Price (INR) Upside PE (x) Stocks Revised Old INR Mn. INR New Old % 5 Yr. Avg. FY22 E

Britannia Industries BUY BUY 8,69,976 3,625 4,356 4,041 20.2% 57.7 45.6

Nestle India BUY ACCUMULATE 14,75,141 15,366 19,088 19,088 24.2% 71.9 56.9

ITC Ltd. BUY BUY 21,20,370 173 228 228 32.2% 31.3 11.1

Hindustan Unilever BUY BUY 48,23,493 2,053 2,556 2,540 24.5% 58.9 52.5

Tata Consumer Products UR UR 4,55,053 494 - - - 40.7 46.9

Colgate Palmolive India ACCUMULATE ACCUMULATE 3,68,288 1,354 1,507 1,483 11.3% 46.5 39.1

Godrej Consumers REDUCE ACCUMULATE 6,93,836 679 663 597 -2.4% 52.0 37.9

Emami Ltd. UR UR 1,66,663 367 - - - 75.2 28.3

Blue Star HOLD ACCUMULATE 61,915 645 652 515 1.1% 46.0 35.9

Whirlpool India UR UR 2,60,551 2,053 - - - 52.0 43.1

Symphony ACCUMULATE ACCUMULATE 59202 858 922 966 13.0% 68 28

Asian Paints ACCUMULATE ACCUMULATE 18,66,741 1,947 1,985 1,877 0.3% 61.9 53.9

Berger Paints UR UR 5,54,247 571 UR UR - 64.9 59.8

Avenue Supermarts UR UR 13,31,834 2,055 UR UR - 116.6 70.4

Note: UR – Under Review Source: Company, KRChoksey Research

51 Cement Sector

52 Earnings Review | Cement | Summary Key Takeaways

Sharpest Volume decline in two decades • Our Cement coverage saw revenue decline of 32.0% YoY (-27.8% QoQ) in Q1FY21 led by approximate volume decline of 29.6% YoY (- 30.3% QoQ). • Nationwide lockdown & halting of construction activity across the nation affected the demand, sale & distribution of cement. Plants were working at lower utilizations & availability of the workers was also a challenge during the quarter. • For the fiscal year, cement volume is expected to decline 12-14% due to Covid-19 disruption. Demand recovery to be faster in north eastern estates with higher government expenditure with election around the corner • North-eastern region was not much affected with Covid-19, and demand to remain almost flat for the region. Eastern India (Bihar, West Bengal & Assam) has seen comparatively lesser outbreak of COVID-19, thus limited disruption. • Moreover, with election due in these states, over 12-24 months, higher government spend is seen. Western India has been hit hardest, so this region will take time to recover. Northern states to see volume decline of 5-10% for the fiscal. A similar trend to be seen for the Southern states. Eastern & Central states cement demand least affected (~5%), including states of Bihar, WB, Jharkhand, Orissa, Chhattisgarh, and MP. Eastern Indian states to drive upcoming demand in the subsequent quarters. • Capacity utilization which stood at 66% last year for the entire sector, is expected to fall to 55-57% for FY21. Cost cutting & stable realization improves EBITDA margin marginally • Though EBITDA declined YoY by 29.6% YoY (-18.7% QoQ), EBITDA margin improved by 89bps YoY (+288bps QoQ) with various cost reduction exercises & favorable fuel prices. PAT margin was lower on YoY/QoQ basis with contraction of 45bps/1,134bps • Realizations were stable with increase of 3.6% QoQ (-3.5% YoY) while EBITDA/t for coverage universe improved by 16.6% QoQ (flat YoY).

53 Earnings Review | Cement | Coverage: Results Summary

Companies Revenue Margin Industry Outlook / Strategy

• Consolidated cement sale volume declined • Improvement in EBITDA margin YoY despite 22.1% YoY (-31.7% QoQ) to 14.7 Mn T. lower Gross Profit margin (-140bps/-202bps • Leader in cement manufacturing Disruption in operations was on account of YoY/QoQ) & higher employee cost was due to with highest installed capacity in the suspension of operations across the lower energy cost, lower logistics cost & lower country. Ultratech Cement company’s facilities w.e.f. 23/03/2020, in other expenses. • Capacity addition in West Bengal and the wake of the COVID-19 pandemic. • Net Profit margin for the quarter declined to Bihar. Operations were resumed in a phased 10.4% in Q1FY21 vs 11.2% in Q1FY20 & 30.2% in • Debt repayment with divestment of manner from 20/04/2020. Q4FY20. non-core businesses.

• Cement sale volume stood at 19.37 Lakhs • On QoQ basis, EBITDA margin improved • Expansion in Eastern regions to put Tonnes vs 27.03 Lakhs Tonnes (down 28.3% significantly by 487bps. EBITDA margin decline pressure on margins. YoY). The company's sale was disrupted by YoY was due to higher RM cost, higher employee • Cashflow to be monitored with the lockdown imposed by the state/central cost & higher other expenses. The performance higher capex & low demand Ramco Cement government due to COVID-19. improved on QoQ basis by benefiting from better environment. inventory management and lower power & fuel • Leveraged balance sheet. cost, transportation & handling charges and other expenses. • Volume declined 18.6% yoy due to • EBITDA margin contracted on account of higher • Home market of northern India on nationwide lockdowns. Realization was up employee cost & higher freight cost YoY. On QoQ strong footing but Increasing by mere 0.6% yoy (down 1.9% yoy). basis EBITDA margin contracted 320 bps from exposure to the eastern region is 30.9% in Q4FY20. expected to result in margin decline. Shree Cement • Net Profit margin for the quarter expanded 179 • The eastern region is witnessing bps YoY to 13.3% (down 240 bps QoQ). Effective capacity expansion by various tax rate was higher for the quarter at 25.4% (vs players which is expected to lead to 23.9% in Q1FY20). Depreciation declined 30.0% YoY a competition in gaining market while Other Income rose 143%. share. • Revenue declined 37.3% YoY (down 25.7% • EBITDA margin improvement was mainly on • Capacity addition of 5.9 MTPA QoQ), attributed to shutting down of account of lower power cost at 18.1% of revenue augurs well. An additional cement company’s plants with nationwide (vs 20.1% in 2QCY19) & lower logistics cost at 23.8% grinding of 1.1mtpa at the existing ACC Cement* lockdown. Company commenced its of revenue (vs 25.6% in 2QCY20). location at Sindri. These plants are operations from April-20 in a phased • ETR was higher for the quarter at 33.0% vs 32.4% in expected to be operational within manner. while RMX revenue declined 2QCY19). Finance cost declined while next 3 years which will support 83.0% YoY (-84.0% QoQ, 2% of revenue). Depreciation rose 10.8% YoY (+3.0% QoQ). volume growth.

54 Earnings Review | Cement | Coverage: Performance Overview

Operationally prudent first quarter of FY21

Particulars (INR Cr) Ultratech Cement Ramco Cement Shree Cement ACC Cement

Sales 7,634 1,042 2,480 2,602 Total Expenditure 5,559 782 1,792 2,077 EBITDA 2,075 260 688 525 EBITDA Margin (%) 27.2% 25.0% 27.7% 20.2% Depreciation 646 84 300 163 EBIT 1,428 176 388 363 Interest Expense 393 30 72 13 Other income 279 10 126 51 Exceptional items 157 0 0 0 PBT 1,157 156 443 401 Tax 360 46 112 132 Share of Associates/Minorities -1.1 0 0.8 2.2 PAT 797 110 330 271 PAT Margin 10.4% 10.5% 13.3% 10.4% Adj. PAT 797 114 330 271 Adj. PAT Margin 10.4% 11.0% 13.3% 10.4% EPS 27.6 4.7 91.4 14.4 Adj. EPS 27.6 91.4 14.4

Source: Company, KRChoksey Research

55 Earnings Review | Cement | Coverage: Performance Overview

Revenue declines in proportion to volume due to COVID-19 disruptions

Particulars (INR Cr) Ultratech Cement Ramco Cement Shree Cement ACC Cement

Change (%) QoQ YoY QoQ YoY QoQ YoY QoQ YoY

Sales -29.0% -33.1% -25.0 -24.7% -27.4% -24.9% -25.7% -37.3% Total Expenditure -33.0% -34.3% -29.6% -23.7% -24.0% -23.9% -28.8% -38.3% EBITDA -15.1% -29.7% -6.9% -27.6% -34.9% -27.4% -10.4% -32.9% Change in EBITDA Margin (bps) 444 131 487 -101 -320 -95 344 132 Depreciation -3.9% -6.1% 1.4% 11.4% -35.4% -29.9% 3.0% 10.8%

EBIT -19.3% -36.8% -10.4% -38.1% -34.5% -25.3% -15.4% -43.0%

Interest Expense -22.1% -21.8% 38.6% 212.4% -3.1% 3.5% 23.3% -34.3%

Other income 40.9% 107.8% -11.3% 23.7% 28.8% 143.3% -8.3% -4.1%

Exceptional items NM NM NM NM NM NM NM NM

PBT -20.9% -38.9% -16.2% -44.0% -28.2% -11.8% -15.4% -40.1%

Tax -120.3% -41.1% 16.5% -46.5% 40.9% -6.2% -13.7% -39.1%

Share of Associates/Minorities NM NM NM NM 4.2% -71.3% NM NM

PAT -75.4% -37.8% -25.0% -42.9% -38.5% -13.2% -16.1% -40.5%

Change in PAT Margin (bps) -1,973 -79 0 -335 -240 179 119 -57

Source: Company, KRChoksey Research

56 Earnings Review | Our Top Sector Picks and Recommendations

UltraTech, The & ACC trading at substantial discount to LT average on FY22 PE

Recommendation Market Cap. CMP Target Price (INR) Upside PE (x) Stocks Revised Old INR Cr. INR New Old % 5 Yr. Avg. FY22 E

Ultratech Cement BUY ACCUMULATE 1,11,664 3,869 4,496 3,966 16.2% 41.8 24.5

Ramco Cement HOLD ACCUMULATE 17,060 724 751 702 3.7% 28.8 23.8

Shree Cement HOLD ACCUMULATE 66,861 18,952 22,710 20,260 2.4% 55.2 48.9

ACC Cement ACCUMULATE BUY 25,468 1,355 1,535 1,415 13.3% 32.2 18.7

Source: Bloomberg, KRChoksey Research

57 IT Sector

58 Earnings Review | IT | Summary Key Takeaways

Top-line under pressure, but 2H to witness return to growth • Revenue for the IT firms under our coverage declined 2-7% QoQ in USD terms (2-8% QoQ decline in CC terms), which was largely along expected lines with the notable exception of Persistent Systems, which saw a healthy 3.1% QoQ USD revenue growth, and Infosys, which reported a lower-than-expected 2% CC QoQ revenue dip (2.4% QoQ USD revenue decline) • Owing to the COVID-19 pandemic, ~20% of the revenue decline in Q1FY21 was impacted by supply-side issues (time to shift employees to a WFH model), with the balance 75-80% due to demand-side issues across verticals • Among the top-tier IT stocks, Infosys reported a stand-out performance, clocking just 2% QoQ CC revenue decline vs 6-8% decline for its top-tier peers Tata Consultancy Services (TCS), HCL Technologies, Wipro and Tech Mahindra, and margin performance was also superior, with the IT major clocking nearly 150bps QoQ EBIT margin expansion vs -57bps QoQ to +146bps QoQ range for peers

Resilience in operating margins across-the-board • EBIT margin performance for most of the IT firms in our coverage universe was fairly resilient despite the severe impact of the pandemic, with all bar TCS and Tata Elxsi reporting better-than-expected profitability • Key margin drivers included operational efficiency, cutting variable salaries, lower travel cost and currency Impetus on cash conservation • Cash flow was a key theme in Q1FY21, given the need to conserve cash in an uncertain global environment, and have leeway to invest as and when demand returns; most IT firms reported healthy operating cash flow • All the IT firms under our coverage alluded to sequential revenue growth returning from 2QFY21 onward, as major countries emerge from lockdown and restart their economies, along with further rise in digital and cloud spend post the pandemic is likely to drive growth/ recovery from 2Q onward • However, the situation remains fluid and the pandemic is far from over; thus, recovery needs to be viewed with a hint of caution

59 Earnings Review | IT | Coverage: Results Summary (1/2)

Companies Revenue Margin Industry Outlook / Strategy • Retail and Manufacturing verticals • EBIT margin of 22.7% in Q1FY21 rose • Infosys resumed giving guidance, remained under pressure (-10.2% and - 149bps QoQ, led by cost cutting with FY21 revenue growth guidance 8.3% QoQ in USD terms, respectively), measures, with short term and of 0-2% YoY in cc terms and operating Infosys while Hi-tech (+7.9% QoQ) and Life temporary cuts done on discretionary margin in the range of 21-23% Sciences (+2% QoQ) showed resilience expenses including travel, branding and marketing expenses • Life Sciences and Healthcare grew • EBIT margin decline of 149bps QoQ in • Overall, slowdown in the global 13.8% YoY 1FY21, due to decline in sales and economy makes the outlook • Other verticals posted YoY declines - lower resource utilization uncertain, with the IT major alluding TCS BFSI (4.9%), Retail (12.9%), to 3QFY21 INR revenue likely to be at Communications (3.6%), Manufacturing similar levels of 3QFY20 (7.1%) and Technology and Services (4%)

• All verticals, except Healthcare posted • EBIT margin was 20.5% in 1QFY2, • The management expects slow declines on QoQ basis down 57bps QoQ owing to lower recovery in manufacturing, media, HCL • Service mix improved with Mode 2 and revenue, higher amortization of IBM retail and travel, while it expects Technologies Mode 3, which together contributed products and incremental R&D cost quick rebound in BFSI, e-commerce, 36.5% to total revenue (29.5% in and retail, as infrastructure 4QFY20) upgradation will be priority for them • Q1FY21 results in line with our revenue • EBITDA margin remained stable on • Management expects margin estimates QoQ to 14.3% indicating margin expansion in the near-term, which will Tech • Communication segment contributed pressures, which we believe is further by aided by growth recovery Mahindra highest to the tune of ~40% of total primarily on lower revenue in Network Services, Retail online, revenues Healthcare and Hi-tech • All verticals reported CC degrowth on • Operating margin of 18.1% in Q1FY21; • The appointment of a new CEO, YoY - BFSI (6.9%), Communications up 127bps qoq (82bps yoy) due to the Thierry Delaporte from Capgemini (16.9%), Consumer (2.5%), Energy (1.7%), decline in the employee benefit has driven new hope for improved Wipro Health (2.1%), Manufacturing (2.0%), expenses and Subcontracting/ performances going forward and Technology (1.4%) technical fees coupled with rupee depreciation

60 Earnings Review | IT | Coverage: Results Summary (2/2)

Companies Revenue Margin Industry Outlook / Strategy • BFSI remains the key vertical with • Absolute EBITDA increased by 21.3% • While near-term margin pressure 31.8% revenue share, followed by YoY in Q1FY21 (up 14.9% QoQ), driven could be seen owing to transition Persistent Healthcare with 19.7% share. Rest by lower employee cost as a costs in large deals, this can be Systems comprised of Tech Cos. and percentage of revenues. recouped with revenue growth Emerging verticals to the tune of 48.5%. • Company continues to diversify • Expansion in EBITDA margin was on • Focus is on continued vertical away from automotive vertical, account of lower operating expenses diversification, along with higher with non-automotive verticals at 75.7% of revenue (vs 79.4% in offshore business to tide over travel contributing around 58% to EPD 1QFY20) which was due to lower restrictions and manage margins revenue in Q1FY21 other expenditure at 10.4% of revenue • Management believes this has now Tata Elxsi • Europe business, which contributes (vs 16.3% in 1QFY20) and declined 30% bottomed out, and European ~36% to topline de-grew 7.5% QoQ YoY countries are managing the pandemic better with reopening of many borders

• STL revenue declined by 38.81% YoY • EBITDA margin (Ex OI) fell 870 bps • Management believes H2FY21 to be and (-24.7% QoQ) impacted by and (-473bps QoQ) to 13.89% owing to much better than H2Fy20 on account Sterlite COVID-19 related shutdown and lower operating leverage and lower of healthy order book and visibility of Technologies delay in execution of projects. executions of project and higher fixed demand. Current order book stood at cost INR 103120 Mn • Revenue declined attributed to • The operating margin contracted 259 • The company expects to process lockdown in April and May bps on yoy due to lower revenue payment transactions worth INR 750 • The company reported payment which was partially offset by cost bn in FY21 excluding aviation, travel & TPV of INR 142 bn (-16% qoq) and optimization measures undertaken in tourism and hotel traffic Infibeam Avenues payment transactions of 36 mn (- Q1FY21 10% qoq); attributed to cancellations in travel & hospitality as well as entertainment sector

61 Earnings Review | IT | Coverage: Performance Overview (1/4)

Infosys and TCS continues to enjoy higher margins among Large IT companies

Particulars (INR Cr) Infosys TCS HCL Technologies Tech Mahindra Wipro

Sales 23,665 38,322 17,842 9,106 14,913

Total Expenditure 18,300 28,297 13,085 7,806 11,604

EBITDA 5,365 10,025 4,757 1,301 3,309

EBITDA Margin (%) 22.7% 26.2% 26.7% 14.3% 22.2%

Depreciation 756 977 1,065 383 615

EBIT 6,121 9,048 3,692 917 2,694

Interest Expense 48 - 125 50 130

Other income 475 456 295 416 528

PBT 5,792 9,504 3,862 1,283 3,095

Tax 1,520 2,455 927 328 684

Share of Associates/Minorities 39 410 - 17 31

PAT 4,233 7,008 2,935 972 2,411

PAT Margin 17.9% 18.3% 16.4% 10.7% 16.2%

EPS 9.97 18.68 10.80 11.07 4.19

Source: Company, KRChoksey Research

62 Earnings Review | IT | Coverage: Performance Overview (2/4)

Tata Elxsi and Persistent fared well

Particulars (INR Cr) Persistent Systems Tata Elxsi Sterlite Technologies Infibeam Avenues

Sales 991 401 876.2 103

Total Expenditure 846 319 754.52 72

EBITDA 146 93 121.70 31

EBITDA Margin (%) 14.7% 23.1% 13.89% 30.2%

Depreciation 44 11 74.19 24

EBIT 102 82 47.5 7

Interest Expense 2 1 50.05 1

Other income 21 13 9.5 3

Exceptional items - - - -

PBT 122 94 6.97 15

Tax 32 25 4.12 3

Share of Associates/Minorities - - - 5

PAT 90 69 2.26 12

PAT Margin 9.10% 17.2% 0.25% 11.4%

EPS 11.78 11.06 0.15 0.18

Source: Company, KRChoksey Research

63 Earnings Review | IT | Coverage: Performance Overview (3/4)

While TCS struggled, other large caps played well in Q1

Particulars (INR Cr) Infosys TCS HCL Technologies Tech Mahindra Wipro

Change (%) QoQ YoY QoQ YoY QoQ YoY QoQ YoY QoQ YoY

Sales 1.7% 8.5% -4.1% 0.4% -4.0% 8.6% -4.0% 5.2% -5.1% 1.3%

Total Expenditure -0.2% 5.6% -2.3% 0.6% -4.7% 1.8% -4.1% 6.4% -7.1% 0.7%

EBITDA 7.8% 18.8% -8.7% -0.1% -2.1% 33.2% -3.5% -1.0% 2.8% 9.1%

Change in EBITDA Margin (bps) 147 224 -132 -14 53 493 8 -91 170 158

Depreciation 0.9% 11.0% 2.7% 19.6% 6.9% 44.9% -3.8% 19.3% 6.1% 24.2%

EBIT 8.9% 20.0% -9.7% -1.9% -4.4% 30.2% -3.4% -7.6% 2.1% 6.2%

Interest Expense - - - - 0.8% 43.7% -5.5% 10.8% -21.4% -18.0%

Other income -22.6% -35.5% -6.4% -67.8% 100.7% 61.2% 45.9% 21.9% 7.6% -24.0%

Exceptional items ------

PBT 5.4% 12.1% -9.6% -10.7% -0.6% 31.8% 32.9% 0.2% 4.4% 0.8%

Tax 30.9% 11.4% 1.5% -1.2% 30.0% 32.2% 37.0% -1.3% 10.2% 2.1%

Share of Associates/Minorities 178.6% 875.0% -6.8% 86.4% - - -78.5% 63.7% 138.5% -

PAT -2.0% 11.5% -12.9% -13.8% -7.5% 31.6% 20.9% 1.4% 2.8% 0.4%

Change in PAT Margin (bps) -68 47 -186 -301 -62 287 221 41 124 -15

Source: Company, KRChoksey Research

64 Earnings Review | IT | Coverage: Performance Overview (4/4)

Sequentially, most mid-cap IT stocks struggled to maintain margins amid unfavorable macro

Particulars (INR Cr) Persistent Systems Tata Elxsi Sterlite Technologies Infibeam Avenues

Change (%) QoQ YoY QoQ YoY QoQ YoY QoQ YoY

Sales 7.02% 19.1% -8.7% 10.7% -24.47% -38.81% -24.5% -44.7%

Total Expenditure 5.8% 18.8% -6.6% 5.4% -20.08% -31.94% -29.5% -51.5%

EBITDA 14.9% 21.3% -14.6% 32.7% -43.67% -62.37% -9.4% -18.0%

Change in EBITDA Margin (bps) 100 30 -160 384 -473 -870 502 983

Depreciation 3.8% 12.9% 0.3% 3.6% -3.42% 8.56% -2.9% 20.6%

EBIT 20.4% 25.3% -16.3% 37.8% -65.88% -81.38% -25.2% -59.2%

Interest Expense 25.0% -21.1% -4.0% 4.9% -15.61% 8.15% -3.2% -26.6%

Other income -27.7% -29.3% 0.4% 11.1% -8.37% 9.04% -51.6% 9.5%

PBT 7.9% 11.1% -14.4% 33.9% -92.28% -96.80% -54.7% -57.8%

Tax 9.6% 17.2% -9.4% 17.2% -68.60% -94.38 -40.8% -50.4%

Share of Associates/Minorities ------42.6% -64.2%

PAT 7.4% 9.1% -16.1% 41.2% -97% -98% -57.1% -59.2%

Change in PAT Margin (bps) 10 -80 -151 371 -624 -919 -871 -408

Source: Company, KRChoksey Research

65 Earnings Review | Our Top Sector Picks and Recommendations

Infosys and TCS are our top picks

Recommendation Market Cap. CMP Target Price (INR) Upside PE (x) Stocks Revised Old INR Mn. INR New Old % 5 Yr. Avg. FY22 E

Infosys ACCUMULATE ACCUMULATE 4,343,944 980 1,085 1,010 10.7% 27.4 20.2

TCS HOLD HOLD 9,234,806 2,324 2,309 2,309 -0.6% 21.77 23.8

HCL Technologies BUY BUY 2,211,637 795 893 730 12.3% 15.5 15.1

Tech Mahindra ACCUMULATE ACCUMULATE 765,922 758 820 725 8.2% 16.1 14.7

Wipro SELL SELL 1,796,632 314 265 265 -15.7% 18.4 16.7

Persistent Systems ACCUMULATE ACCUMULATE 93,697 1,226 1,340 1,010 9.3% 24.6 20.0

Tata Elxsi ACCUMULATE ACCUMULATE 74,801 1,199 1,308 1,064 9.1% 25.0 23.0

Sterlite Technologies BUY BUY 57748 145 161 128 11% 21 11

Infibeam Avenues BUY BUY 48,957 74 91 72 15.9% 60.5 23.4

Source: Company, KRChoksey Research

66 Pharmaceutical Sector

67 Earnings Review | Pharma | Muted domestic growth, export outperforms

Mixed quarter for Pharma sector • First quarter of FY21 was a mixed bag for the pharma sector, as Indian Pharma Market (IPM) reported a decline in revenue in domestic market • Exports were up by almost 9.5% YoY (in dollar terms). Companies in our coverage reported improvement in EBITDA margin because of various cost saving initiatives as well as less expenditure on travelling, R&D & promotional activities. Global demand for potential COVID-19 drugs drives export growth; domestic market down due to lower demand for acute therapies • The export of Pharmaceuticals from India grew 22.0% YoY in rupee terms (9.5% YoY in dollar terms) during Q1FY21, as per Pharmexcil. Pharma sector exported products worth USD 2018.21 mn as against USD 1835.5 million in Q1FY20. This was primarily driven by higher export of hydroxychloroquine (HCQ), paracetamol & antivirals for the use in COVID-19 treatment as the Indian companies enjoy a sizable market share in these products. • As per the AIOCD data for the domestic market, growth in the IPM for Q1FY21 was negative with an overall decline of 5.9%. This de- growth can be attributed to the supply chain disruption due to COVID-19 with imposition of lockdown as well as the fall in the sales for acute therapies, namely, anti-infectives, gastrointestinal and pain/fever medications. • From our coverage, performance of Dr. Reddy’s & Cipla was affected due to acute portfolio & pre-buying witnessed in chronic portfolio in previous quarter. Dr Reddy’s declined 7.1%, Cipla declined 6.3% and Sun Pharma declined 2.5%. Overall muted revenue growth; cost savings improved EBITDA margins • Our coverage stocks reported an aggregate growth of 5.6% YoY (flat QoQ) in sales during Q1FY21. • EBITDA improved 17.7% YoY (+22.5% QoQ) with margin improvement of 238bps YoY (+433bps QoQ). On YoY basis, Alembic Pharma (+667bps), Dr. Reddy’s (+611bps) & Glenmark Pharma (+567) led EBITDA margin improvement

68 Earnings Review | Pharma | Coverage: Results Summary (1/4)

Companies Revenue Margin Outlook

• Domestic business moderated due to acute • Better product mix helps Gross Margin improvement; • Revenue/PAT to grow at therapies; lack of one-time contribution in the US operational efficiency lifts EBITDA margin. a CAGR of 8.5%/21.5%, dragged US business. • EBITDA margin was flat at 23.2% in Q1FY21 (from 23.0% respectively, over FY20- • Closure of hospitals & clinics (mostly acute in Q1FY20). Though, on the sequential basis, EBITDA 22E because of US Sun Pharma diseases) in the domestic market led to a moderate margin expanded by 487 bps. Specialty segment and growth of 3.2% YoY (up 1.0% QoQ, ~32% of revenue). • Excluding the exceptional items of INR 36.3 bn (and strong performance in US business declined 27.5% YoY (-21.2% QoQ, 29% of its minority interest of INR 8.3 bn), company reported the domestic market revenue) primarily due to absence of one-time Adj Net Profit of INR 1,146 Cr with a Net Profit Margin specially in Chronic opportunity which was present in 1QFY20. of 15.3% for the quarter. segment.

• Strong growth in the PSAI business (+88% YoY) offset the weak performance in India (-10% YoY), US • EBITDA margin expanded by 611 bps YoY to 25.3% in • Sustained launch (mere +5.9% YoY growth due to lower Rx and Q1FY21 (from 19.2% last year), with improvement in momentum in the US Hospital sales) and Russia (-18% YoY) due to GPM on account of favorable product mix & benefit of (~25 new launches in Dr. Reddy Labs lockdowns. ROW (+57% YoY) and EU (+48% YoY) forex, lower employee cost, and lower Selling & FY21). surprised positively. Q1FY21 includes ~20-day Other expenses. Net Profit Margin contracted 410bps • Integration of integration of Wockhardt’s India business (annual YoY (-412bps QoQ). Wockhardt portfolio. revenue of ~INR 5.0 bn). DRRD expects the momentum in the API business to continue. • EBITDA margin expanded 145 bps YoY to 24.1% in • Revenue beat with broad based growth Q1FY21 (from 22.7% in last year). On sequential basis, • Revenue/PAT to grow at • Growth of 15.9% YoY in domestic market was led by EBITDA margin expanded 965 bps QoQ from 14.5% in a CAGR of 9.1%/37.9%, strong growth in the prescription business (+9.0% Q4FY20. Strong improvement in EBITDA margin QoQ respectively, over FY20- YoY) on the back of traction in chronic therapies was on account of lower cost of material & lower 22E. despite lock down challenges. other expenses on account of cost saving measures. • Approval for another Cipla • Emerging Markets sales rose 63.8% YoY driven by • Net Profit Margin for the quarter expanded 131 bps promising ANDA, Advair high demand and base effect from last year. YoY to 13.3% (up 768 bps QoQ). On YoY basis, Diskus of GSK (having • SAGA region (18% of sales) grew 10.4% YoY (-7.5% expansion in Net Profit Margin was on account of an addressable market QoQ) led by (+24% YoY in local currency) growth in lower effective tax rate & 11.7% YoY decline in finance of USD 2.9 bn) is SA private business & 6.0% YoY (local currency) in cost. On QoQ basis, NPM improvement was on expected soon. tender business. account of EBITDA margin improvement & lower finance cost.

69 Earnings Review | Pharma | Coverage: Results Summary (2/4)

Companies Revenue Margin Outlook • Lower US sales due to seasonality & metformin recall; India affected due to lockdown • India sales declined 1.7% YoY due to lockdown which primarily affected its acute therapies. • Revenue/PAT to grow at • North America declined 21.1% YoY due to lower • EBITDA margin contracted by 542 bps YoY to 13.8% in a CAGR of 9.0%/21.1%, sales of seasonal products like oseltamivir, recall of Q1FY21 (from 19.3% last year). On a sequential basis respectively, over FY20- Metformin & lower sales of Azithromycin, apart EBITDA margin improved nominally by 18 bps QoQ. 22E. Lupin from COVID impact. Higher material cost at 36.5% of revenue in Q1FY21 (vs • Launch of Albuterol • EMEA de-grew 4.0% YoY while Growth Markets 34.1% in Q1FY20) & higher employee cost at 22.5% of Sulfate in Aug-20, ramp- declined 5.8% YoY. revenue (vs 18.6% in Q1FY20) resulted in EBITDA up in Levothyroxine & • ROW declined 46.0% YoY (down 17.3% QoQ, 1% of margin contraction. Metformin sales coming revenue). back. • API revenue, however, rose 17.2% YoY (up 24.5% QoQ, 12% % of revenue).

• Operating cost control leads to beat in EBITDA/PAT from our estimates • Other expenses declined to 23.4.0% of revenue in • Muted growth in the core geographies of India & • Revenue/PAT to grow at Q1FY21 (vs 29.5%/29.0% in 1QFY20/4QFY20) due to the US a CAGR of 7.6%/22.8%, savings in indirect costs & SG&A expenses even • Domestic market growth of mere 3.7% YoY (33% of respectively, over FY20- though employee cost was on higher side at 21.7% of revenue) due to pandemic. 22E. Glenmark Pharma revenue (vs 21.0%/18.9% in 1QFY20/4QFY20), resulting • The US market with growth of 1.6% YoY (~32% of • To launch ~10 products in EBITDA margin expansion of +567bps/+356bps revenue) continues to face price erosion issues in in the US in FY21. YoY/QoQ. the derma portfolio & Q1FY21 witnessed • Fund raising in 2HFY20 • One-time gain of INR 28 Cr (on account of gain from competition in Mupirocin. for ICHNOS. transfer of intimate hygiene brand VWash and reimbursement of onetime costs) helped PAT margin improvement.

70 Earnings Review | Pharma | Coverage: Results Summary (3/4)

Companies Revenue Margin Industry Outlook / Strategy • Cadila Healthcare posted a muted Revenue • GPM improved 167bps YoY (-78bps QoQ) • Revenue/PAT to grow at a CAGR of due to decline of 12.5% YoY in the domestic primarily on account of growth (+18.7% 6.9%/13.4%, respectively, over FY20- business (-7.1% QoQ, 23% of revenue) on YoY) in the US business resulting in higher 22E. account of COVID-19 led disruption in the US contribution at 46% of revenue in Cadila business & portfolio being inclined towards Q1FY21 (vs 40% in Q1FY20) & better • US outlook, increased R&D spend Healthcare acute therapies. product mix. Expansion in GPM and cost towards biologics/vaccine & expected savings in other expenses led to launch of biologics in the RoW improvement in EBITDA margin, despite markets. higher employee cost. • Growth led by US business; further • Better product mix improves GPM; • Revenue/PAT to grow at a CAGR of supported by growth in antiretrovirals. partially offset by higher employee & other 12.1%/15.8%, respectively, over FY20- • Growth of 15.6% YoY in the US formulation costs 22E. business (52% of sales) • GPM improved 158 bps YoY to 59.4% (flat • Growth in ARV business is due to continued on QoQ basis) with better product mix & • New launches in the US (~50 transition of patients from TLE lower material cost. Improvement in GPM launches/year over next 2-3 years) & Aurobindo (tenofovir/lamivudine/efavirenz) based was offset by higher employee cost & debt reduction. Pharma treatment to TLD higher other cost. EBITDA margin (tenofovir/lamivudine/dolutegravir) for HIV improved nominally. Adj Net Profit Margin treatment. saw an improvement of 126bps YoY (- • Decline in the European business YoY/QoQ 43bps QoQ) to 13.2% (vs 11.9% in Q1FY20) was on account of stocking in the previous on the back of lower Finance cost at INR quarter (+26.0%/11.9% YoY/QoQ in 4QFY20). 21.1 Cr (vs INR 49.9 Cr in Q1FY20, -36% YoY).

• Broad based growth; India declined due to • GPM contraction of 364bps/332bps • Revenue/PAT to grow at a CAGR of lockdown restrictions. YoY/QoQ to 74.8% due to higher 13.4%/4.8%, respectively, over FY20- • Growth in revenue was led by the US contribution of API at 20% (18% in Q1FY20 & 22E. Formulation which grew by 72.8% YoY on 13% in Q4FY20) & de-growth in the the back of continued momentum in sartan domestic business (-5.6%/-10.5% YoY/QoQ) • New product introductions in the US, Alembic Pharma busines. which resulted domestic contribution new products filed from recently • Domestic revenue decreased 5.6% YoY due declining to 23% (compared to 34% in commercialized Aleor JV, and to industry-wide slowdown in Indian Q1FY20 & 28% in Q4FY20). EBITDA margin improvement in the revenue mix with Pharma Market (IPM) in the months of April improvement of 667bps YoY (+323ps QoQ) contribution from general and onco & May, though recovery was in the month was primarily on account of operating injectables. of June. leverage with higher revenue.

71 Earnings Review | Pharma | Coverage: Results Summary (4/4)

Companies Revenue Margin Industry Outlook / Strategy • Increase in market share of the base • GPM expansion of 918bps YoY to 59.5% in • Revenue/PAT to grow at a CAGR of business, and higher contribution from PFI Q1FY21 mainly due to increase in FD, PFI 15.6%/20.3%, respectively, over FY20- and FD sales. Contribution from FD sales and margin expansion in API owing 22E. increased to 52% in Q1FY21 (from 48% in to prices increases. • New product launches in the US from Q1FY20) & PFI increased to 19% (from 16% in • EBITDA margin expanded to 25.0% in GPI and rising contribution from FD Q1FY20). Q1FY21 (+503bps YoY), and expanded with focus on higher value and higher Granules India • API sales were flat YoY (-0.4%) but grew 830bps on QoQ basis. Expansion in EBITDA margin business segments of FD. strongly on QoQ basis at 19.4% (29% of margin was led by GPM. EBITDA margin improvement in the revenue), PFI sales grew 42.0% YoY (+76.6% range of 22%-24% over FY21/22 for QoQ, 19% of revenue) & FD revenue rose Granules India. 35.2% YoY (+12.1% QoQ, 52% of revenue).

• Domestic market growth outperformed the • GPM higher by 162bps YoY and by 111bps • Debt reduction guidance of INR 10.0 industry due to the chronic portfolio. QoQ with better product mix towards high bn in FY21 • US sales were weak due to reduced margin products. • Remediation at Indrad & Dahej prescription and lack of approvals. • EBITDA margin expanded 539 bps YoY to facilities • Growth in Brazil was relatively stronger in 32.1% in Q1FY21 (from 26.8% last year), with • Performance in Germany & Brazil Torrent Pharma constant currency terms, though currency GPM improvement, lower employee cost headwinds impacted reported growth. & lower other expenses. On sequential basis, EBITDA expanded 399 bps QoQ primarily due to lower other expenses.

72 Earnings Review | Pharma | Coverage: Performance Overview (1/4)

Alembic Pharma & Granules reports highest revenue growth; Sun & Lupin reports YoY/QoQ decline in Q1FY21

Particulars (INR Cr) Sun Pharma Dr. Reddy’s Labs Cipla Lupin Glenmark Pharma

Sales 7,585 4,427 4,346 3,528 2,345 Total Expenditure 5,821 3,305 3,297 3,040 1,867 EBITDA 1,764 1,121 1,049 488 478 EBITDA Margin (%) 23.3% 25.3% 24.1% 13.8% 20.4% Depreciation 496 292 269 215 113 EBIT 1,268 829 780 273 365 Interest Expense 52 23.3 46 44.3 93.7 Other income 153.8 87.1 65.5 43.3 58.5 Exceptional items 3633.3 0 0 0 -28 PBT -2,184 893 799 273 358 Tax 246 306 228 164 104 Share of Associates/Minorities -767.1 7.7 -17.3 -1.24 0 PAT -1,656 595 578 107 254 PAT Margin -21.8% 13.4% 13.3% 3.0% 10.8% Adj. PAT 1,146 595 578 107 226 Adj. PAT Margin 15.1% 13.4% 13.3% 3.0% 9.6% EPS -6.9 35.8 7.2 2.4 9.0 Adj. EPS 8.2 35.8 7.2 2.4 8.0

Source: Company, KRChoksey Research

73 Earnings Review | Pharma | Coverage: Performance Overview (2/4)

EBITDA margin improvement across the coverage universe in Q1FY21

Particulars (INR Cr) Cadila Healthcare Aurobindo Pharma Alembic Pharma Granules India Torrent Pharma

Sales 3,640 5,925 1,341 7,356 2,056 Total Expenditure 2,825 4,667 934 5,520 1,395 EBITDA 815 1,257 407 1,836 661 EBITDA Margin (%) 22.4% 21.2% 30.4% 25.0% 32.1% Depreciation 177 256 42 341 161 EBIT 639 1,002 366 1,495 500 Interest Expense 68 21 7 60 102 Other income 22.5 115.6 0.3 56.3 4 Exceptional items 0 0 0 0 0 PBT 593 1,084 360 1,492 402 Tax 123.5 303.7 66.8 377.4 81 Share of Associates/Minorities -15.9 0.1 8.7 0 0 PAT 454 781 302 1,115 321 PAT Margin 12.5% 13.2% 22.5% 15.2% 15.6% Adj. PAT 454 781 302 1,115 321 Adj. PAT Margin 12.5% 13.2% 22.5% 15.2% 15.6% EPS 4.4 13.3 16.0 4.4 19.0 Adj. EPS 4.4 13.3 16.0 4.4 19.0

Source: Company, KRChoksey Research

74 Earnings Review | Pharma | Coverage: Performance Overview (3/4)

SUNP, DRL & Lupin posted decline in net income for the quarter, Lupin’s EBITDA margin contracts

Particulars Sun Pharma Dr. Reddy’s Labs Cipla Lupin Glenmark Pharma Change (%) QoQ YoY QoQ YoY QoQ YoY QoQ YoY QoQ YoY Sales -7.3% -9.4% -0.5% 14.7% -0.7% 9.0% -8.3% -9.0% -15.3% 0.9% Total Expenditure -12.9% -9.7% -5.5% 6.1% -11.9% 6.9% -8.5% -2.9% -18.9% -5.8% EBITDA 17.2% -8.5% 18.0% 51.2% 65.5% 15.9% -7.1% -34.6% 2.7% 39.8% Change in EBITDA Margin (bps) 487 23 398bps 611bps 965bps 145bps 18bps -542bps 356bps 567bps Depreciation -13.8% 8.5% 6.6% 1.1% -22.2% 0.4% 0.2% -14.2% -10.3% 24.8% EBIT 36.4% -13.8% 22.8% 83.1% 171.0% 22.5% -12.1% -44.9% 7.5% 45.3% Interest Expense 0.3% -50.1% 1.3% -21.8% -13.2% -11.7% -58.8% -47.6% -4.8% 0.8% Other income 50.4% -27.8% 18.3% -79.7% -29.8% -16.5% -79.3% -35.0% 32.5% 49.0% Exceptional items 1,294 NM NM NM NM NM NM NM NM NM PBT -478.2% -232.6% 23.0% 4.7% 143.7% 20.6% -45.0% -43.1% 12.5% 81.1% Tax 196.0% 68.4% NM 58.7% 166.1% 18.5% 56.4% -23.7% 6.1% 104.9% Share of Associates/Minorities NM NM NM NM NM NM NM NM NM NM RPAT -514.1% -219.3% -23.9% -12.1% 135.0% 20.9% -72.6% -64.7% 15.3% 73.0% Change in PAT Margin (bps) NM NM -412bps -410bps 768bps 131bps -710bps -479bps 287bps 451bps

Source: Company, KRChoksey Research

75 Earnings Review | Pharma | Coverage: Performance Overview (4/4)

Alembic Pharma reports highest margin improvement, followed by Torrent Pharma

Particulars Cadila Healthcare Aurobindo Pharma Alembic Pharma Granules India Torrent Pharma Change (%) QoQ YoY QoQ YoY QoQ YoY QoQ YoY QoQ YoY Sales -3.0% 4.1% -3.8% 8.8% 11.1% 41.4% 22.6% 23.6% 5.7% 1.7% Total Expenditure -4.6% -1.4% -3.6% 8.6% 6.2% 29.0% 10.4% 15.8% -0.2% -5.8% EBITDA 3.1% 29.0% -4.5% 9.7% 24.4% 81.1% 83.7% 54.8% 20.6% 22.2% Change in EBITDA Margin (bps) 131bps 433bps -15bps 17bps 323bps 667bps 830bps 503bps 399bps 539bps Depreciation -1.0% 3.0% 9.9% 6.1% -6.0% 17.2% -12.6% 18.9% -4.2% 0.6% EBIT 4.2% 38.7% -7.6% 10.6% 29.1% 93.1% 145.2% 66.2% 31.6% 31.2% Interest Expense -17.9% -24.0% -33.8% -57.8% -13.9% 33.9% -9.4% -13.4% 0.0% -16.4% Other income -49.2% -0.4% 254.7% 632.5% -64.0% NM -75.0% 203.6% -73.3% -80.0% Exceptional items NM NM NM NM NM NM NM NM NM NM PBT 13.7% 50.6% 0.6% 25.6% 35.3% 131.9% 9.1% 75.6% 37.2% 44.1% Tax 13.8% 56.1% 32.9% 33.3% 7.5% 85.7% -14.9% 38.8% -485.2% 28.6% Share of Associates/M.I NM NM NM NM NM NM NM NM NM NM RPAT 15.8% 49.5% -8.1% 22.8% 34.0% 143.7% 20.7% 33.9% 2.2% 48.6% Change in PAT Margin (bps) 203bps 379bps -62bps 150bps 384bps 944bps -24bps 117bps -52bps 493bps

Source: Company, KRChoksey Research

76 Earnings Review | Our Top Sector Picks and Recommendations

Cipla, Glenmark & Sun Pharma trading at significant discount on FY22E compared to historical average

Recommendation Market Cap. CMP Target Price (INR) Upside PE (x) Stocks Revised Old INR Cr. INR New Old % 5 Yr. Avg. FY22 E

Sun Pharma BUY BUY 1,20,646 503 619 550 23.1% 38.5 20.3

Dr. Reddy Labs ACCUMULATE ACCUMULATE 84,891 5,108 5418 4552 6.1% 30.7 25.9

Cipla BUY BUY 61,875 767 894 700 16.5% 35.0 21.0

Lupin HOLD HOLD 46,060 1,017 1040 979 2.3% 62.2 24.9

Glenmark Pharma BUY BUY 13,285 471 576 548 22.4% 24.4 11.9

Cadila Healthcare ACCUMULATE ACCUMULATE 39,311 384 413 391 7.6% 23.7 17.7

Aurobindo Pharma BUY BUY 45,712 780 1,027 894 31.6% 18.3 11.8

Alembic Pharma BUY BUY 17,244 915 1,135 883 24.1% 23.3 18.9

Granules India ACCUMULTE BUY 8,976 363 390 314 7.3% 18.8 17.7

Torrent Pharma UR UR 45,023 2,661 UR UR NA 36.7 38.3

Note: UR – Under Review Source: Bloomberg, KRChoksey Research Research

77 Petrochemicals and Chemical Sector

78 Earnings Review | Petrochemical & Chemical | Summary Key Takeaways

Higher disruption in demand for specialty chemical companies than agrochemicals; fewer operating days & subdued utilization led to volume decline • In Q1FY21 performance of agrochemical companies was better than chemical/petrochemical counterparts. Chemical companies were operating at lower capacities as well as the shutdown affected the operations of their customers, leading to decrease in demand thereby in volumes. In addition, procurement of raw material and distribution added to the sectors woes. • On the contrary, being essential service providers, agrochemical companies faced less interruptions (mostly in initial part of the lockdown in terms of distribution & transportation) & were supported by good monsoon in respective geographies. Agrochemical margins intact; margin contraction in specialty companies • From our coverage, UPL though saw a decline of 0.9% YoY (-28.7% ) in revenue, lower material cost helped in improving margins by 679bps/630bps YoY/QoQ. • Aarti Industries saw EBITDA margin contraction of 467bps/93bps YoY/QoQ while Supreme Petrochem saw a contraction of 988bps/700bps. In case of RIL, margin in petrochemical business was impacted due to weak domestic demand and higher share of exports which impacted margin as compared to regional benchmarks. Valuation & Outlook • On the back of good monsoon we foresee the demand of agrochemical companies to be intact. • Specialty chemical companies are now seeing uptrend in demand from user industries with ease in various restrictions and resumption of normal operation will lead to higher utilization levels. • Within petrochemical segment, RIL is increasing its focus on essential sectors such as health & hygiene segment, food and beverage packaging and agriculture demand-led products.

79 Earnings Review | Petrochemical & Chemical | Coverage: Results Summary

Companies Revenue Margin Industry Outlook / Strategy • Consolidated revenues declined • EBITDA margin improved by 544 bps • Within petrochemical business, by 42.0% YoY, down 33.4% QoQ YoY mainly due to Digital service with weakness in demand from largely impacted by poor segment on the back of hike in tariff core sectors, RIL is increasing its performance in Petrochemical rates which increased by 15% YoY focus on essential sectors such as and Refining business partially • Margin in petrochemical business health & hygiene segment, food offset by increase in digital was impacted due to weak domestic and beverage packaging and services demand and higher share of exports agriculture demand led products • The fall in O2C business was due which impacted margin as compared • Reliance Retail recent acquisition Reliance Industries to sharp decline of 57.6% in to regional benchmarks. of ’s retail and average Brent crude price. • EBITDA margin reduction in crude logistic business augurs well for its Retail business also witnessed refining business was moderate due retail business in terms of scaling 17% decline in revenues due to to optimized crude procurement, up its business lockdown and restrictions in relatively higher utilization, cost store operations management and agile product placement

• COVID-19 severely affected • GPM contracted due to rise in • High spread between styrene volumes; fall in domestic material cost as a percentage of monomer & polystyrene with volume greater than export revenue. Lower GPM & negative lower crude prices bodes well for volume. operating leverage resulted in the company. • Domestic volume shrunk to 38% negative EBITDA. Employee cost rose • Resumption of economic activity of the volume in Q1FY20. On slightly. Other expenses declined to revive domestic demand. Supreme exports front, the company 36.9% YoY but as a percentage of • Capex plan & focus on value-added Petrochemicals performed well. Including revenue rose to 9.5% in Q1FY21 (vs products to drive growth & exports, the company could sell 5.7% in Q1FY20). improve margin going forward. only 53% of the total volumes in Q1FY20. Currently operating at 70% utilization levels.

80 Earnings Review | Petrochemical & Chemical | Coverage: Results Summary

Companies Revenue Margin Industry Outlook / Strategy • Flat YoY Revenue growth due to • With lower material costs, • Robust proprietary pipeline; to also stagnant volume with pre-buying company was able to improve benefit from exciting opportunities in the US in Q4FY20 (at trade GPM/EBITDA margin by arising from products going off-patent in channel level) owing to supply 785bps/679bps YoY. EBITDA next few years chain led fears, while prices margin was further supported by • UPL has 38 early stage & 14 late stage were slightly down (-1.0% YoY). better portfolio mix & reduced proprietary active ingredients in its travel cost on account of Covid-19. pipeline having peak sales valued at USD UPL Ltd. 1.0 - 1.5 bn with projects reaching sales maturity progressively in 5 to 8 years. Including the existing off-patent active ingredient & new mixtures/formulations, UPL’s total pipeline is well positioned to yield USD 2–2.5 billion in the 5-8 years.

• Lower volume in specialty • EBIT margin of specialty chemical • Capex guidance for FY21 remains at INR chemical segment with reduced segment contracted 10.0-12.0 bn. Out of the total capex, INR capacity utilization & shutting 717bps/208bps YoY/QoQ basis 1.5 bn is earmarked for NCB expansion, down of customer plants while that of Pharma segment INR 1.35 bn towards long term contracts:, • Specialty chemicals plants expanded 679 bps/619 bps INR 1.0 bn/year for pharma over FY21-22 utilization at 50% in April-20 YoY/QoQ, resulting in overall EBIT each, INR 2.5 bn towards maintenance, which increased to 80% in June- contraction of 468bps/54bps while INR 5.0 bn towards new products Aarti Industries 20. YoY/QoQ. and de-bottlenecking exercise. • GPM improvement with lower • Commissioning of Chlorination complex material cost. Despite (~INR 2.0bn) is expected in 2QFY20. improvement in GPM, EBITDA margin contracted on account of higher employee cost & higher other expenses.

81 Earnings Review | Petrochemical & Chemical | Coverage: Perf. Overview

Supreme Petrochem EBITDA for Q1FY21 turns negative

Particulars (INR Cr) Reliance Industries Supreme Petrochem UPL Ltd. Aarti Industries

Sales 88,253 292 7,833 937 Total Expenditure 71,378 296 6,001 755 EBITDA 16,875 -3 1,832 182 EBITDA Margin (%) 19.1% -1.1% 23.4% 19.4% Depreciation 6,308 9.4 522 52 EBIT 10,567 -13 1,310 130 Interest Expense 6,735 1.87 551 25.3 Other income 4,388 1.78 67 0.2 Exceptional items 4,966 0 25 0 PBT 8,220 -13 801 105 Tax 260 -0.8 143 21.7 Share of Associates/Minorities 307 NM 97 1.3 PAT 13,233 -11.88 551 81.9 PAT Margin 15.0% -4.1% 7.0% 8.7% Adj. PAT 8,267 -11.88 576 81.9 Adj. PAT Margin 9.4% -4.1% 7.4% 8.7% EPS 20.5 -1.3 7.2 4.7 Adj. EPS 12.8 -1.3 7.5 4.7

Source: Company, KRChoksey Research

82 Earnings Review | Petrochemical & Chemical | Coverage: Perf. Overview

Within chemicals, UPL performed better than peers backed by agrochemical demand

Particulars Reliance Industries Supreme Petrochem UPL Ltd. Aarti Industries

Change (%) QoQ YoY QoQ YoY QoQ YoY QoQ YoY Sales -35.3% -44.1% -55.9% -62.1% -29.7% -0.9% 12.9% -9.7% Total Expenditure -37.6% -47.7% -52.6% -57.9% -35.0% -9.0% -11.9% -4.2% EBITDA -23.4% -21.9% -108.1% -104.7% -3.8% 39.6% -16.9% -27.2% Change in EBITDA Margin (bps) 298 544 -700 -988 630 679 -93 -467 Depreciation -0.4% 25.9% 0.9% 10.9% -12.3% 17.0% 5.5% 20.3% EBIT -32.7% -36.4% -141.9% -121.1% 0.1% 51.3% -23.4% -37.2% Interest Expense 11.1% 31.8% 3.5% 41.9% 194.7% 38.4% -25.5% -18.3% Other income 13.1% 54.2% -28.2% -59.7% 219.0% 71.8% -47.6% -91.1% Exceptional items NM NM 0 0 -85.4% -65.3% -22.9% -41.2% PBT -39.2% -42.7% -141.3% -120.2% -17.6% 84.1% -22.9% -41.2% Tax -90.3% -93.8% -110.7% -103.3% NM NM -15.7% 40.5% Share of Associates/Minorities NM NM NM NM -80.3% 36.4% NM NM PAT 108.5% 31.0% -150.6% -130.1% -10.7% 93.3% -25.8% -40.7% Change in PAT Margin (bps) 1034 860 -761 -919 150 343 152 457

Source: Company, KRChoksey Research

83 Earnings Review | Our Top Sector Picks and Recommendations

UPL trading at significant discount to FY22 compared to long-term average

Recommendation Market Cap. CMP Target Price (INR) Upside PE (x) Stocks Revised Old INR Cr. INR New Old % 5 Yr. Avg. FY22 E

Reliance Industries BUY BUY 14,12,421 2,231 2,394 1,907 7.3% 16.8 21.2

Supreme Petrochemicals ACCUMULATE BUY 2,223 236 249 212 5.3% 23.5 19.5

UPL Ltd. BUY BUY 40,729 532 622 614 16.8% 24.5 11.5

Aarti Industries BUY BUY 17,896 1,029 1,194 1,194 16.1% 26.6 23.2

Source: Bloomberg, KRChoksey Research

84 Oil and Gas

85 Earnings Review | Oil & Gas | Summary Key Takeaways

Lockdown impacted sales Volume; Gross Margin improvement led by lower LNG price • CNG Segment: o IGL has 555 stations with Compression capacity of 87.62 lakh kg per day through which it provides CNG to 11.28 lakh vehicles as of Q1FY21, with an average sale of 33.67 lakh kg per day in FY20

o IGL had introduced prepaid card for its customers in order to promote digital payments at Delhi and NCR region. Also company conducted joint promotion activities with Maruti, Bajaj, Mahindra, Ford and Hyundai at the CNG stations. o Total CNG stations operational by MGL are 256 stations out of which 184 stations are with Oil marketing companies (OMC). OMC earns a

commission of ~INR 3.5/kg of gas sold. MGL’s market share in CNG stood at ~35-40% o In , BEST had planned to add 500 CNG buses last year. Due to lockdown they could add only 350 buses. Remaining 150 BEST buses will be on road by October. With the addition of these buses total BEST buses fleet will reach to 2350

o MGL’s capacity utilization for CNG station was at 50% of pre-covid levels and it’s improving gradually, August utilization was at 65% of normal. CNG selling price in Mumbai was INR at 48.9/kg as of June 30, 2020. • PNG – Domestic and Commercial & Industrial connection: o IGL increased it’s steel and MDPE pipeline network from 13029 kms in Q1FY20 to 14833 kms in Q1FY21. Company have total 13.87 lakh connections in domestic and commercial in Delhi & other geographical areas as on June 30, 2020. PNG continued to be focus area of the company during lockdown, In Q1FY21 company able to connected with 6096 new connections

o To further expand in commercial segments, IGL executed Gas sale agreements with Industrial customers in Karnal GA which would facilitate increase in consumption of NG volumes o MGL’s restaurant segment has reached ~55-60% of pre-covid levels. 5 star hotels have reached to ~40-45% of Pre-covid levels. While,

Domestic PNG sales volume growth of 7% YoY (up 2.2% QoQ) to 39 SCM Million in Q1FY21

86 Earnings Review | Oil & Gas | Coverage: Results Summary (1/4)

Companies Revenue and Segment-wise Performance • Net Revenue for the quarter came in at INR 639 cr, down 59.5% YoY (-58.9% QoQ) mainly due to lower volume sales across all segments on account of COVID-19 related nationwide lockdown Segment-wise Performance: • Segment Contribution: Indraprastha o Q1 FY21: CNG 59%; Residential 17%; Commercial/Industrial 17%; and Sale to other CGD companies 7%; Gas Ltd o Q1 FY20: CNG 71%; Residential 5%; Commercial/Industrial 12%; and Sale to other CGD companies 12% • Q1 FY21 Performance o CNG volume down 66% YoY to 105 Million KGS, PNG Industrial/Commercial Volume down 40% YoY to 41 Million SCM and Natural Gas Volume down 62% YoY to 17 Million SCM in Q1FY21. While PNG Domestic volume growth of 39% YoY to 43 Million SCM. The Covid-19 related lockdowns, reduction in travel and less industrial activity affected the total sales of IGL • Revenue declined 66.6% YoY (-63.1% QoQ) at INR 277.5 Cr. led by COVID-19 related nationwide lockdown Segment-wise Performance: • Segment Contribution: o Q1 FY21: CNG 43%; Residential 39%; and Commercial/Industrial 18% Mahanagar Gas o Q1 FY20: CNG 73%; Residential 13%; and Commercial/Industrial 14% Ltd • Q1 FY21 Performance o CNG volume down 77.8% YoY to 43.7 SCM Million, PNG Industrial/Commercial Volume down 49.3% YoY to 18.6 SCM Million and PNG Domestic volume growth of 7% YoY to 39 SCM Million. The Covid-19 related lockdowns and reduction in travel led to a sharp 62% YoY volume dip during the quarter . • Net revenue was reported at INR 48,836 Mn, down 43.3% YoY (-43% QoQ) mainly due to lower capacity utilization in Q1FY21 on account of COVID-19 related nationwide lockdown. Total volume processed stood at 190 TBTU (-16% YoY, -13% QoQ) Petronet LNG • Q1 FY21 Performance Ltd o Dahej terminal operated at a capacity utilization of ~81% and processed 181 TBTU as against 206 TBTU in the previous quarter. Kochi terminal operated at a capacity utilization of ~7% processed 9 TBTU for Q1FY21 as against 13 TBTU in the previous quarter • Net revenue came in at INR 3,79,993 Mn, down 50.2% YoY (-45% QoQ) mainly due to lower petroleum products demand. Domestic sales stood at 7.53 MMT ( -32.2% YoY) BPCL • Q1 FY21 Performance o Refinery throughput was at 5.14 MMT; down 31% YoY ( -38.7% QoQ). Lower refinery throughput and revenue from operations which was mainly due to lower demand of petroleum products

87 Earnings Review | Oil & Gas | Coverage: Results Summary (2/4)

Companies Revenue and Segment-wise Performance • Net Revenue for the quarter came in at INR 37,782 cr, down 46.8% YoY (-43% QoQ) mainly due to lower demand of petroleum products on account of COVID-19 related nationwide lockdown Segment-wise Performance: • Segment Contribution: o Q1 FY21: Domestic sales volume of 7.24 MMT; and Export sales Volumes of 0.38 MMT HPCL o Q1 FY20: Domestic sales volume of 9.82 MMT; and Export sales Volumes of 0.27 MMT • Q1 FY21 Performance o HPCL reported domestic sales volume down of 26.3% YoY (-21.7% QoQ) to 7.24 MMT. While Export sales reported at 0.38 MMT, which is up 40.7% YoY (+18.8% QoQ). During the quarter, the sales of domestic packed LPG increased by 24.7% while retail MS and HSD reduced by 37% and 32.4% respectively compared to same period last year. Lubes were ~85% of normal for HPCL (i.e. 15% impacted on volumes , while industry had impacted by ~30%).

88 Earnings Review | Oil & Gas | Coverage: Results Summary (3/4)

Companies Margin Performance • Gross Margin /SCM stood at INR 13.7/ scm up 224 bps YoY and (+93 bps QoQ), led by lower natural gas price which is down 25% YoY (-17% QoQ) to INR 12.09/scm in Q1FY21 • EBITDA margin contracted 968 bps YoY (-1120 bps QoQ) to 13.1%due to increase in employee cost and other Indraprastha Gas Ltd expenses as proportion of sales • PAT margin was at 5.5%, down 1004 bps YoY (-1322 bps QoQ) due to lower sales volume and higher depreciation expenses • Gross Margin /SCM stood at INR 16.1/ scm up 94 bps YoY and (+78 bps QoQ), led by lower natural gas price which is down 24% YoY (-24% QoQ) to INR 9.7/scm in Q1FY21

• EBITDA margin contracted 600 bps YoY (-496 bps QoQ) to 30.6% in Q1FY21 due to increase in employee cost as Mahanagar Gas Ltd proportion to revenue • Net Profit margin contracted 519 bps YoY (-698 QoQ) to 17.3% due to lower sales volume and higher depreciation cost • EBITDA margin for the quarter expanded 675 bps YoY to 18.6% (up 1049 bps QoQ) driven by decrease in raw material price by 756 bps YoY and 823 bps QoQ as proportion of sales Petronet LNG Ltd • Other income stood at INR 684 Mn, down 34.5% YoY (-21% QoQ) due to lower interest on investment • Net Profit margin for the quarter expanded 371bps YoY to 10.2% (+588bps QoQ) from 11.9% in Q1FY20 on the back of lower finance cost and depreciation also declined sequentially • Gross Margin expanded 1246 bps YoY to 23.1% (up 1337 bps QoQ) driven by decrease in raw material price by 1344 bps YoY and 1590 bps QoQ as proportion of sales BPCL • EBITDA margin expanded 730bps YoY to 11.2% on significant decline in operating expenses. Adoption of cost efficient and innovative methods aided bottom-line as PAT grew 25.4% YoY. • Gross Margin expanded 1317 bps YoY to 20.7% (up 1380 bps QoQ) driven by decrease in raw material price by 1317 bps YoY and 1380 bps QoQ as proportion of sales HPCL • EBITDA margin expanded 921 bps YoY to 11.5% (up 1203 bps) on significant decline in other expenses and better operating performance. PAT grew by 156.7% YoY to INR 2253 cr. Despite lower sales volume, better results on margin and profitability front due to better marketing segment performance and inventory gains

89 Earnings Review | Oil & Gas | Coverage: Results Summary (4/4)

Companies Outlook / Strategy • Started sale of CNG at eight OMCs outlets & four DODO stations in Rewari and sale of PNG to Domestic households • Company have been authorized for Meerut, Muzaffarnagar & Shamli GA in the 9th round of bidding by PNGRB in which Company have commissioned eight CNG stations. In the 10th round of bidding, IGL has been also authorized for Kaithal, Kanpur (except Indraprastha Gas Ltd area already authodized), Fatehpur & Hamirpur and Ajmer, Pali & Rajsamand areas, out of these areas CNG sale has started in Kaithal and Kanpur, Fatehpur & Hamirpur GA • Improve CNG infrastructure in Delhi & NCR to meet the additional demand in view of conversion of private cars and improvement in public transport system • BEST had planned to add 500 CNG buses last year. Due to lockdown they could add only 350 buses. Remaining 150 BEST buses will be on road by October. With the addition of these buses total BEST buses fleet will reach to 2350 Mahanagar Gas Ltd • Capex target for FY21 is INR 550-600 cr, Out of which INR 120 cr capex will be spent in Raigad area • MGL is facing contract labor shortage for project work, resulting into lower capacity utilizations. Managemet expects this to normalise in next 3-4 months • Kochi-Mangalore pipeline expected to be commissioned by end-August 2020, it’s been delayed by one month due to some issues in Chandragiri river. Capacity utilization would be 30-35% once the pipeline is commissioned • For FY21, capex will be INR 348 cr with INR 130 cr for Small scale LNG and INR 70 cr for new corporate office Petronet LNG Ltd • PLNG has signed an MoU with to set up five LNG dispensing stations along the Delhi-Mumbai highway. IGL has three such stations on the same highway, taking the total to eight • Industrial demand in Mangalore is around 0.8–1.2mmtpa and further growth could come from CGDs. PLNG expects overall demand from CGD sector in country to double after the incubation period of the 9–10th CGD round is over • The execution of Propylene Derivatives Petrochemical Project (PDPP) at Kochi has been delayed further to 2HFY21 (earlier, 1QFY21) as the licensing process has been pushed forward due to COVID-19 BPCL • FY21 Capex guidance has been revised from INR 125 bn to INR 80.76 bn, which includes refining INR 23.15 bn, marketing INR 35.8 bn, petrochemicals INR 8.37 bn, investments in exploration INR 8 bn, investments in Gas INR 3.5 bn and others INR 1.9 bn • Divestment process is on track and would conclude by Mar-21 • HPCL’s core GRM is likely to improve by H2FY21 as the excess inventory gets absorbed. Demand for petroleum fuels is likely to revive with easing of lockdown and pick-up in business and public activities • Capex for FY21 will be at INR 115 bn vs INR 150 bn in FY20, Which includes INR 70/45 bn capex for refining and marketing, respectively. Mumbai and Vizag refinery expansion is in advanced stage and expect completion in next calendar year.The HPCL company already spent INR 18.5bn over April-July20. • During the quarter, 231 new retail outlets were commissioned taking the total retail outlet network to 16,707 as of June 2020. Going forward, we expect additional demand could drive from new addition once situation back to normalcy • Debt as on July end stood at INR 310 bn vs INR 430 bn as on Q4FY20

90 Earnings Review | Oil & Gas | Coverage: Performance Overview (1/2)

MGL has a better margin profile compared with IGL

Profit & Loss Account CGD Energy OMC (INR Mn) IGL MGL PLNG BPCL HPCL Revenue from Operations (Net Revenue) 6,386 2,618 48,836 3,79,993 3,77,820 Expenses: COGS 2,991 988 38,365 2,92,079 2,99,650 Gross Profit 3,395 1,629 10,470 87,914 78,170 Gross Margin (%) 53.2% 62.2% 21.4% 23.1% 20.7% Employee benefit expenses 314 246 360 10,035 8,705 Other expenses 2,246 583 1011 35,280 25,853 EBITDA 834 800 9,099 42,599 43,613 EBITDA Margin (%) 13.1% 30.6% 18.6% 11.2% 11.5% Depreciation and amortization expenses 682 423 1936 10,728 8,831 EBIT 153 377 7,164 31,871 34,782 Finance Cost 24 15 881 6,911 3,339 Other income 306 245 684 5,370 5,334 Profit/Loss before exceptional items 435 607 6,966 30,330 36,776 Share of profit of associates & JVs 59 0 -204 478 -5,579 Exceptional item 0 0 0 0 0 Profit before Tax (PBT) 494 607 6,762 30,808 31,197 Total Tax expense 143 155 1,764 8,930 8,671 PAT before Non-controlling interest 352 453 4,998 21,877 22,527 Non-Controlling interest 0 0 0 1,524 0 PAT after Non-controlling interest 352 453 4,998 20,354 22,527 PAT Margin (%) 5.5% 17.3% 10.2% 5.4% 6.0% Diluted EPS 0.5 4.6 3.3 10.4 14.8

Source: Company, KRChoksey Research Research

91 Earnings Review | Oil & Gas | Coverage: Performance Overview (2/2)

Petronet PAT margin expansion led by better operating performance

Particulars IGL MGL PLNG BPCL HPCL Change % YoY QoQ YoY QoQ YoY QoQ YoY QoQ YoY QoQ Revenue from Operations (Net Revenue) -59.5% -58.9% -65.4% -61.9% -43.3% -43.0% -50.2% -45.0% -46.8% -43.0% Expenses: COGS -67.6% -63.8% -71.7% -66.9% -48.3% -48.4% -57.2% -53.1% -54.4% -51.4% Gross Profit -48.1% -53.3% -60.2% -58.0% -78.1% -77.9% 7.9% 30.5% 46.2% 71.2% Gross Margin (%) 1164 638 821 573 -3402 -3378 1246 1337 1317 1380 Employee benefit expenses -14.4% -10.3% 0.9% 37.4% 22.8% 24.5% -2.3% -0.7% 6.4% 2.4% Other expenses -13.4% -28.6% -46.0% -53.8% -28.8% -75.0% -14.7% -44.1% -9.9% -36.0% EBITDA -76.7% -77.9% -71.1% -67.2% -11.1% 30.5% 42.9% - 163.3% - EBITDA Margin (%) -968 -1120 -600 -496 675 1049 730 - 921 - Depreciation and amortisation expenses 12.7% 4.1% 13.6% -3.9% 1.9% -0.3% 9.8% 2.8% 6.5% 5.9% EBIT -94.9% -95.1% -84.3% -81.1% -14.1% 42.3% 59.0% - 320.6% - Finance Cost 45.4% -11.2% 11.7% -26.4% -12.3% -14.9% 22.1% 0.2% 51.0% -4.7% Other income -13.5% -2.0% 20.6% -9.1% -34.5% -20.9% -1.2% 33.9% -10.4% 31.6% Profit/Loss before exceptional items -86.9% -87.2% -76.5% -73.0% -16.9% 43.3% 53.0% - 206.2% - Share of profit of associates & JVs -82.4% -87.8% NA NA NA NA -87.8% -81.8% -655.0% 2.3% Exceptional item NA NA NA NA NA NA NA NA NA NA Profit before Tax (PBT) -86.5% -87.3% -76.5% -73.0% -19.5% 35.1% 29.7% - 139.7% - Total Tax expense -88.1% -85.4% -82.5% -73.4% -36.5% 38.6% 55.2% - 104.5% - PAT before Minority interest -85.6% -87.9% -73.4% -72.8% -11.1% 33.9% 21.6% - 156.7% - Minority interest NA NA NA NA NA NA -13.4% 447.8% NA NA PAT after Minority interest -85.6% -87.9% -73.4% -72.8% -11.1% 33.9% 25.4% - 156.7% - PAT Margin (%) -1004 -1322 -519 -698 371 588 323 - 473 - Diluted EPS -85.7% -88.0% -73.4% -72.9% -11.2% 33.7% 25.3% - 156.6% -

Source: Company, KRChoksey Research Research

92 Earnings Review | Our Top Sector Picks and Recommendations

Our top picks are IGL, MGL, Petronet LNG and HPCL Recommendation Market Cap. CMP Target Price (INR) Upside PE (x) Stocks Revised Old INR Mn. INR New Old % 5 Yr. Avg. FY22 E

Indraprastha Gas Ltd BUY BUY 2,75,405 407 503 503 23.6% 22.3 25

Mahanagar Gas Ltd BUY ACCUMULATE 81,516 843 1,042 1,306 23.7% 20.4 13

Petronet LNG Ltd BUY BUY 3,19,575 215 319 319 48.6% 20.6 14

BPCL ACCUMULATE ACCUMULATE 8,28,438 387 437 407 12.9% 12.3 9.5

HPCL BUY ACCUMULATE 2,68,650 178 224 249 26.0% 8.2 10

Source: Bloomberg, KRChoksey Research Research Note: Prices are taken as of 23rd September 2020

93 Auto and Auto Ancillary Sector

94 Earnings Review | Auto | Summary Key Takeaways

Green-Shoots in Passenger vehicles and Two-Wheelers, while Commercial Vehicle remain challenging • As per SIAM, In July-20, Industry Passenger Vehicle (PV) sales declined by 3.9% YoY at 182,779 units while 2-Wheelers (2-W) registered a decline of 15.2% YoY which was significantly better than preceding months wherein in Q1FY21, PV sales were down 63% YoY while that of 2-W were down by 60.5% YoY. • CV segment performance will remain challenging due to high axle norms, delayed infrastructure projects. We expect the announcement impending scrappage policy to bring relief to CV segment 3-Wheelers to be impacted as people shun shared mobility and public transport • Industry 3-wheelers performance continues to remain laggard as it witnessed a decline of 77.2% YoY in July-20, hardly improving compared to its performance in Q1FY21 where the volumes declined 87.6% YoY • This can be attributed to public transport and shared mobility being impacted due to social distancing which will in turn drive demand for personal vehicles such as entry level passenger vehicles and 2-Wheelers • Bajaj Auto reported a decline of 71.1% YoY in 3-Wheelers during the month of July-20, which indicates that recovery is expected to take a bit longer. Gearing up new launches to bolster sales ahead of festive season; Rural recovery expected to boost domestic demand • Rural market led by good monsoon and robust crop output is expected to show strong growth as compared to urban region . • This will drive the demand for Tractor, Small Commercial Vehicles and Motorcycle sales which will benefit Eicher Motors and Bajaj Auto. • Urban demand is expected to recover by H2FY21 gradually, which will manifest during festive season .

95 Earnings Review | Auto | Coverage: Results Summary (1/4)

Companies Revenue Performance

• Revenue declined 47.9% YoY/ down 48.8% QoQ, driven by 81.8% YoY volume decline in Tata Motor Standalone and 44.8% YoY decline in JLR business owing to lockdown • Tata Motor Standalone sales were down by 80% YoY while that of JLR declined by 44% YoY. Tata Motors • Within domestic business, volumes were down on YoY basis: M&HCV -92.1%, ILCV -92.1%, SCV & Pick Ups -85.4% and CV Passenger -97.2%. Domestic PV volumes were down 60.6% . • Currently, Indian CV plants are at ~20% utilization levels presently, with PV utilization levels at ~60-70% which shows demand recovery in PV business while CV still affected • Revenue stood at INR 41,065 mn, declining 79.2% YoY/ down 77.4% QoQ due to 81.0% YoY/ down 80.1% QoQ decline in volumes to 76,599 units. • Average Selling Price increased 9.4% YoY/+3.6% QoQ due to better product mix on account of higher sales of Utility vehicles and Maruti Suzuki export sales. • Domestic sales was down 82.1% YoY while export sales declined 66% YoY. • The outlook appears favorable as inquiries are currently at 85-90% of pre-COVID levels as percentage of inquiries are higher for hatchbacks (65% in Q1FY21 vs. 55% on average earlier) • Revenue declined 61.0% YoY/ down 55.4% QoQ. The volumes fell by 64.5% YoY/down 55.3% QoQ due to lockdown witnessed during the earlier part of the quarter. Bajaj Auto • Realizations increased by 9.8% YoY due to better export realizations and a higher sales of BS VI vehicles • The demand for 3Wheelers is affected as shared mobility and public transport has been impacted due to COVID precautions • Eicher Motors reported consolidated revenue from operations of INR 818 Cr (in line with our estimates of INR 800 Cr) a decline of 65.7% YoY (down 62.9% QoQ). While the earlier part of the quarter was impacted due to lockdown, the company witnessed recovery towards the end of June 20. Total volumes of Royal Enfield motorcycles declined by 67.8%YoY at 52,433 vehicles due to Eicher Motors lockdown owing to COVID-19 • Average price realization increased by 6.8% YoY/+15.2% QoQ due to higher mix of BS-VI motorcycles

• Standalone revenue declined 89% YoY and (down 83% QoQ) to INR 6509 Mn. The overall volumes fell by 90% YoY to 3814 units, impacted by COVID-19 shutdown Ashok Leyland • M&HCV total volumes were down by 96% YoY to 1021 units, while total volumes of LCV segment declined of 78% to 2793 units • Average selling price increased 19% YoY / 13.3% QoQ due to better product mix with non-vehicle sales and BSVI price hike

96 Earnings Review | Auto | Coverage: Results Summary (2/4)

Companies Margin Performance • EBITDA margins were at 2.0%, down 289 bps YoY/ down 181 bps. • JLR cost and cash savings programme Project Charge+ continued to deliver significantly during the quarter. • Total savings during the quarter was £1.2 billion (£500 million in structural cost, £400 million in inventory, £300 million in Tata Motors investment reductions). India programme delivered INR 1,020 crore in cash savings in Q1FY21. The company maintains its stance of achieving INR 6,000 crore cash savings target in FY21E. • Consolidated loss after tax was at INR 8,438 crore, with JLR PBT loss at £413 million and standalone loss at INR 2,191 crore • EBITDA loss of INR 863 Cr due to negative operating leverage on account of higher fixed cost and raw material cost in Q1FY21 (one-off mark down of inventory value). The raw material cost is expected to normalize in the coming quarters. Maruti Suzuki • MSIL reported a loss of INR 249 Cr which was partially cushioned by higher other income on account of fair value gains on investments. • Focus on cost controls related to material cost through localization and fixed cost is likely to aid margin going forward. • Gross margins improved by 460bps YoY/ 130 bps QoQ to 32.9% in Q1FY21. This can be attributed to higher USD-INR realization and improved mix skewed towards exports and higher segment bikes such as KTM and Pulsar. Bajaj Auto • EBITDA declined by 65.9% YoY while margins stood at 13.8% lower by 198 bps YoY due to low operating leverage. The overall decline in EBITDA was partially offset by cost savings and favourable currency. • PAT margin improved 3 bps YoY/ down 707 bps QoQ to 13.4% due to lower taxation rate • Absolute EBITDA declined 99.4% YoY (down 99.1% QoQ) to INR 4 Cr while EBITDA margin contracted 2,533bps YoY/down 1,911bps QoQ to 0.5% due to negative operating leverage • In its Joint venture business, VECV continued to be affected by demand slowdown in commercial vehicle space. VECV sold Eicher Motors 2,129 trucks and buses registering a decline of 84% YoY (lower than industry level decline of ~95% YoY). Eicher Motor’s loss from JV stood at INR 65 Cr compared to profit of INR 21 Cr in Q1FY20 • Overall, Net Profit reported a loss of INR 55 Cr with Net Profit Margin at (-ve) 6.7% as compared to profit of INR 452 Cr in Q1FY20 and net profit margin of 19% • Gross profit margin came in at 36%, on better business mix during the quarter and more towards the non-commercial vehicle revenue • EBITDA loss of INR 3332 Mn compare to EBITDA of INR 5370 Mn in Q1FY20 and EBTIDA margin came in at negative 51.2% Ashok Leyland due to unfavourable operating leverage. • AL reported Net loss of INR 389 Cr compare to profit of INR 230.20 Cr in Q1FY20, led by sharp decline in revenue and poor operating performance

97 Earnings Review | Auto | Coverage: Results Summary (3/4)

Companies Industry Outlook / Strategy • Total lifetime savings under Project Charge+ stood at £4.7 billion. The company raised targeted savings by £1 billion to £6 Billion (earlier £5 Billion) to be achieved through material cost, VME and other overheads which will aid margin Tata Motors • Capex (Indian operations): INR 492 crore for Q1FY21; FY21E capex guidance at INR 1,500 crore. Capex (JLR): £548 million for Q1FY21; FY21E capex guidance: £2.5 billion • JLR inventory is at ~90 days of sales as of June vs. ideal levels of 55 days. • Demand has returned to ~85% of pre-COVID levels. Currently, the company manufactures 4000+ units/day across its Haryana and Gujarat (single shift) plants. As the Gujarat plant starts with the second shift in mid-Aug20, Maruti will produce an incremental 900 units per day. Maruti Suzuki • Maruti is benefitting from its entry level portfolio as customers are turning towards the use of personal mobility in the current environment. The company is exploring further export opportunities • Present MSIL inventory level is at ~80,000 units i.e. ~25 days of sales • While Q1 was impacted by Covid-19 related lockdowns, end-demand in domestic 2W is improving swiftly (80- 90% of normal). Domestic 3Ws may take longer to come back to normal (currently at 20% of normal) Bajaj Auto • Export volumes are also improving vs Q1FY21 (2W at 85%, 3W at 75% of normal). SE Asia, LATAM and Middle-east markets are leading recovery, while ASEAN and Africa regions are slightly behind. • Eicher Motors has signed a definitive agreement for the integration of Volvo India buses into VECV (Volvo Eicher Commercial Vehicles) for INR 100 Cr. The final business transfer is expected to be closed within the next two months. The transfer will be only for its business and assets and no debt will be transferred • The company has started getting bookings for bike nearly at pre-COVID level. Most of the dealers are operational Eicher Motors • The supply chain got impacted due to lockdown in Pune , Aurangabad and some parts of Chennai. Now supply chains are improving and getting better. The company is not sourcing anything from China • The company is currently operating at 40-45% capacity; new models to be launched in September-20. • The company has planned a new launch in Royal Enfield almost every quarter. The company received good response for its BS-VI vehicles specially from fleet owners and truck owners • Q1FY21 was an exceptional quarter with April and May almost a washout. However, demand has seen a gradual recovery in July and August. AL is currently operating at 35% capacity utilization and expects to ramp it up further going forward. • ICV and Tippers are showing good amount of traction and demand from the cement sector is expected to pick up going Ashok Leyland forward • Management expects good pent-up demand going forward and sees much better volumes in Q3FY21 and Q4FY21 as the economy will move toward normalcy

98 Earnings Review | Auto | Coverage: Results Summary (4/4)

Companies New Launches/Market share • Indian PV market share improved substantially to 9.5% as of Q1FY21 vs. 4.8% as of FY20 due to the “New Forever Range” including the newly launched Altroz. Market share in MHCV up 1,440 bps as compared with FY20. Encouraging response to EVs, 289 EVs sold during the quarter. Tata Motors • New Defender wholesale volumes were at 7,900 units, with order book at 30,000 units. . The Defender is expected to drive volumes and expected annual volumes are over 100k units • On 13th August, Tata Motors launched India’s first 47.5-tonne multi-axle tipper truck for surface transport of coal and construction goods, priced at INR 52.81 lakh • Overall, share of diesel engine cars in the industry fell to 20.6% in Q1FY21 vs. 29.5% in Q1FY20, which benefitted Maruti as it exited the segment Maruti Suzuki • The share of second car buying and first-time buyers has risen to ~50% (from 45% in 4QFY20) • Maruti has new models in the pipeline and presently the plans are to launch them as soon as opportunities arise. • On 3rd August, the company launched 2020 S-Cross petrol version at INR 8.39 lakh (ex-showroom) • Pulsar’s share in Company’s domestic motorcycle mix has increased to 50% in Q1FY21 vs. ~40% in Q4FY20 • Increased its market share in the sports segment (59.0% in Q1FY21 vs. 44.7% in FY20). KTM has also been doing well and the management expects KTM to cross 5-digit sales number this year. Bajaj Auto • BSVI electric injections have been launched for Husqvarna and Platina models • In August, Bajaj Auto launched an upgraded version of premium motorcycle KTM 250 DUKE priced at INR 2.09 lakh. The bike comes with an advanced 'Supermoto' mode that can be activated at the push of a button. • The company’s market share fell from 22% to 20% in Q1FY21. The company is continuously expanding its network in Q1FY21 and added 38 stores and internationally it added 5 exclusive stores and 32 multi brand outlets • The company launched contactless sales platform during the quarter which is doing well • Witnessed a surge in its website count of number of visits from 2.5 mn in pre-covid-19 level to 5 mn currently Eicher Motors • Interceptor was the best-selling bike in middleweight segment in June-20 in UK. Exports are doing well which was around 2.5-5% of the company’s sales. It is targeting to bring it to 20% of sales. • VECV’s market share increased from 30% to 36% level due to supply issues at competitors end and the share gain could be temporary • AL's new LCV platform 'Phoenix will be launched within the 60-90days and is expected to increase the addressable LCV market. The management is confident of market share gain in both ICVs and LCV on the back of very goo interest from Ashok Leyland fleet owners • AL launched its modular platform 'AVTR' during Q1FY21 and has received excellent feedback and is see good interest from fleet operators

99 Earnings Review | Auto | Coverage: Performance Overview (1/2)

Margin highest for Bajaj Auto due to favourable currency and better cost rationalization.

Particulars (INR Cr) Tata Motors Maruti Suzuki Bajaj Auto Eicher Motors Ashok Leyland

No of vehicles (Nos) 99,114 76,599 4,43,103 52,433 3814 Sales 31,983 4,107 3,079 818 650.9 Total Expenditure 38,777 5,771 2,736 814 984.1 EBITDA 636 (863) 408 4 (333.2)

EBITDA Margin (%) 2.0% -21.0% 13.9% 0.5% (51.2%) Depreciation 5,599 783 64 98 163.7 EBIT (4,964) (1,647) 345 (94) (496.9) Interest Expense 1,877 17 1 5 76.8 Other income 607 1,318 338 114 25.6 Exceptional items (3) - - - 16.7 PBT (6,184) (346) 549 (51) (549.8) Tax 2,201 (96) 154 5 (161.0) Share of Associates/Minorities (66) - - (65) - PAT (8,438) (249) 396 (55) (388.8) PAT Margin -26.4% -6.1% 13.4% -6.7% (60%) EPS (23.5) (8.3) 13.7 (2.0) (1.32)

Source: Company, KRChoksey Research

100 Earnings Review | Auto | Coverage: Performance Overview (2/2)

Volumes of all segments was negatively impacted leading to significant decline in revenue/profitability

Particulars Tata Motors Maruti Suzuki Bajaj Auto Ashok Leyland Eicher Motors

Change (%) QoQ YoY QoQ YoY QoQ YoY QoQ YoY QoQ YoY

No of vehicles (53.1%) (62.7%) (49.1%) (80.1%) (55.3%) (64.5%) (85%) (90%) (67.8%) (67.8%)

Sales (48.8%) (47.9%) (77.4%) (79.2%) (54.8%) (60.3%) (83.1%) (88.5%) (62.9%) (65.7%)

Total Expenditure (44.3%) (40.7%) (67.0%) (69.1%) (51.4%) (58.7%) (73.1%) (80.9%) (54.1%) (53.9%)

EBITDA (73.2%) (78.8%) NM NM (67.4%) (65.9%) (282.1%) (162.1%) (99.1%) (99.4%)

Change in EBITDA Margin (bps) (181bps) (289bps) NM NM (510bps) (197bps) NM NM -1911bps -2533bps

Depreciation (3.7%) 9.5% (4.8%) (14.7%) 0.8% 6.1% (12.8%) (0.6%) (9.8%) 12.1%

EBIT NM NM NM NM (71.0%) (69.7%) NM (233.5%) NM NM

Interest Expense (3.9%) 9.7% (38.9%) (68.4%) 4.4% 75.9% 132.1% 512.3% (8.0%) 9.0%

Other income 7.5% (27.5%) 49.7% 57.6% (21.0%) 0.1% (25.6%) 21.6% (20.2%) (5.1%)

Exceptional items NA NA NM NM NA NA NA (91.7%) NA NA

PBT NM NM NM NM (68.9%) (62.5%) 662.6% (252.4%) NM NM

Tax NM NM (133.9%) (120.3%) (62.6%) (66.1%) 989.4% (223.4%) (96.8%) (97.9%)

Share of Associates/Minorities NM NM ------NM NM

PAT NM NM NM NM (70.8%) (60.9%) 578.3% (268.9%) NM NM

Change in PAT Margin (bps) NM NM NM NM (707bps) 3bps NM NM NM NM

Source: Company, KRChoksey Research

101 Earnings Review | Auto Ancillary | Summary Key Takeaways

Government push for localization for making India an auto component manufacturing hub • The Department of Promotion of Industry and Internal Trade (DPIIT) has proposed short- and-long-term measures to turn India into a manufacturing hub for auto components such as Production Linked Incentive (PLI) scheme, evaluating local content and aim is to target 5% of the global auto component trade and a four-fold increase in exports which will be a positive for auto ancillary companies.

Tapping opportunities in the defence sector post government’s push for localization in defence equipments • The defence ministry on 9 August issued a list of 101 items on which an imports embargo will be imposed with certain timelines. While 69 items on the list were given the import embargo deadline of December 2020, the timeline for the remaining items stretches until December 2025. India’s automotive and auto parts companies are looking to tap opportunities in the defence sector to offset sluggish demand for automobiles in the domestic market amid the coronavirus crisis. Bharat Forge is expected to gain the most from this opportunity as it is looking to expand further in defence space and setting up a capacity to make up to 150 artillery guns per year.

Demand for tyres strong in Agriculture segment across geographies • Favourable monsoons and prospects of a better farm yield have increased the demand off-highway tyres from the agriculture sector across the globe. Balkrishna Industries performance is expected to remain resilient as compared to mainstream tyres

102

Earnings Review | Auto Ancillary | Coverage: Results Summary (1/2)

Companies Revenue • MCL revenue declined by 69.5% YoY and (-66.82% QOQ) to INR 1779.6 Mn, led by lower industry volumes and COVID-19 impact. Minda Corporation • Domestic auto industry declined by 78.40% as against the volumes recorded in Q1FY20. • Compare to industry, MCL revenue declined 69.5% YoY which is lower than the Industry on account of lower degrowth in aftermarket and exports • Revenue for Q1FY21 declined 71% YoY and (down 68.8% QoQ) to INR 4171.10 Mn led by I) Extended lockdown II) Low scale of operation in Q1Fy21. Minda Industries • Performance was impacted due to significant decline in 2w/4w industry volumes by 78%/84% YoY.

• Sundram Fasteners total standalone revenue from operation declined by 70% YoY and (down 62% QoQ) to INR 2678.8 Mn. Decline in performance was mainly due to I) 78.4% decline in domestic automobile industry II) Sundaram Fasteners Impacted by COVID-19 shutdown

• Balkrishna Industries reported total revenue from operations of INR 929 Cr, decline of 22.2% YoY (down 31.6% QoQ) owing to sales volume decline of 25.7% YoY/ down 34.3% QoQ at 38,096 units. Balkrishna Industries • Volume decline was partially offset by increase in ASP which grew 4.8% YoY/ +4.1% QoQ. • Volume picked up mainly in May and June. The monthly run rate is gaining momentum and is visible in July and August • For Q1FY21, Bharat Forge reported standalone revenue from operations of INR 4,270 mn, a decline of 68.3% YoY (down 51.5% QoQ). The performance was impacted due to lockdown that last for nearly 2 months in the quarter Bharat Forge and company operated at merely 20% capacity in Q1FY21 • Domestic revenue declined 72.3% YoY (down 58.4% QoQ) to INR 1,541 mn owing to lockdown. Export revenue declined 65.6% YoY / down 47.1% QoQ to INR 2,592 mn, largely driven by America and Europe • Endurance Technologies Q1FY21 revenue declined sharply by 68.41% YoY and (-62.23% QoQ) to INR 6031.12 Mn, decline in topline was mainly on account of lockdown which impacted domestic and overseas operations. Endurance Technology • The quarter saw a drop of 72.3% in the number of two wheeler sold by OEMs. The drop was much sharper at 78%, in terms of the number of two-wheeler produced in domestic market.

103 Earnings Review | Auto Ancillary | Coverage: Results Summary (1/2)

Companies Margin

• Gross profit margin came in at 37.77%, impacted due to adverse product mix and sharp decline in revenue. • Minda Corporation reported Q1FY21 consolidated EBITDA loss of INR 203 Mn compare to EBITDA of INR 666.8 Mn in Minda Q1FY20. EBITDA margin came in at negative 11.42% compare to positive EBITDA margin of 11.42% in corresponding quarter Corporation last year. EBITDA margin declined on account of negative operating leverage in both the segments and higher fixed cost. • MCL reported net loss of INR 354 Mn in Q1FY21 as compare to net profit of 212 Mn in corresponding quarter last year. • Q1Fy21 consolidated EBITDA loss of INR 714.90 Mn compare to positive EBITDA of INR 1722 Mn While EBITDA margin came in at negative 17.14% compare to positive EBITDA margin of 11.96% in corresponding quarter last year. Decline in EBITDA Minda Industries margin was on account of lower operating leverage. • Net loss for the quarter was INR 1183.30 Mn compare to profit of INR 534.80 Mn in corresponding quarter last year, due to sharp decline in revenue and poor operating performance. • Sundram Fasteners reported Q1FY21 standalone EBITDA of INR 54 Mn compare to EBITDA of INR 1758 Mn in Q1FY20 while EBITDA margin came in at ~2% compare to EBITDA margin of 18.59% in corresponding quarter last year. Decline in EBITDA Sundaram was on account of I) Higher fixed cost due shutdown II) Unfavourable operating leverage. Fasteners • SFL reported net loss of INR 234.80 Mn compare to profit of INR 931.10 Mn led by poor operating performance and sharp decline in revenue. • EBITDA decreased by 13.9% YoY/down 38.1% QoQ to INR 231 Cr due to lower revenue. EBITDA margin expanded 239 bps Balkrishna YoY/down 262 bps QoQ to 24.8% due to lower COGS. Industries • PAT declined 30.9% YoY/down 52.7% QoQ to INR 122 Cr owing to lower other income which declined 30.9% YoY/down 52.7% QoQ and higher depreciation. PAT margin declined 165 bps YoY/down 586 bps QoQ to 13.1%. • The Company reported Absolute EBITDA loss of INR 28 mn in Q1FY21 vs EBITDA of INR 1,103 mn in previous quarter and INR 3,495 mn in same quarter previous year. Consequently, EBITDA margin contracted to -0.7% vs. 12.5% in Q4FY20 and Bharat Forge 26.0% in Q1FY20 due to negative operating leverage • The company expects to continue to post sequential improvement in coming quarters and return to previous margin levels by downsizing cost and controlling capex spends • EBITDA for Q1FY21 declined by 87.48% YoY and (down 82.04% QoQ) to INR 427.26 Mn, while EBITDA margin declined Endurance 1080bps YoY and (-781bps QOQ) to 7.08% led by higher cost and lower operating leverage. Technology • ETL reported net loss of INR 249.29 as compare to net profit of INR 1656 Mn in corresponding quarter last year.

104 Earnings Review | Auto Ancillary | Coverage: Results Summary (1/2)

Companies Industry Outlook / Strategy

• Company is witnessing good amount of traction in 2W & tractor segment. Tractor are growing at 2x their FY18 volume run rate even the company is struggling to meet component requirements. Minda Corporation • Exports market also showing steady sign of recovery. • CV segment is still under stress and Aftermarket sales accounted for 20% of revenue in Q1FY21.

• Management stated that, the rural demand is likely to sustain with sharp recovery in demand for two-wheeler, tractors and farm equipment YoY on account of good monsoon which augurs well for the Kharif plantation. Minda Industries • Company is also optimistic on preference for personal mobility due to COVID-19 which will ensure demand outlook in auto sector. • Tractor and passenger vehicle have done well in Q1FY21, management expects same momentum in Q2FY21. For Q2FY21 only laggard could be commercial vehicle, Expecting better Q2 on sequential basis. Sundaram Fasteners • Exports have recovered; expect better performance from Exports in coming quarters.

• The demand is strong in Agriculture segment across geographies which will lead to Balkrishna Industries gaining market share. Non-Agriculture segment is moving slow, on-account of low commodity prices and end user Balkrishna Industries demand however, company expects gradual uptick as economic activity increases across the globe

• The Indian government recent announcement to restrict the import of 101 defence equipment's under the Make in India platform enhance the order procurement visibility for BFL’s artillery guns Bharat Forge • On the Aerospace the company has already set the target to reach INR 1000cr by FY2023 from current INR 400cr. • Going forward, the management expect domestic revenues to be flat as compared to Q2FY20 while the exports will be lower than levels witnessed in Q2FY20 • OEMs are now witnessing demand pick-up and product is expected to return to pre-COVID levels. Management Endurance Technology states that sales trends/ forecasts suggest a rebound in Europe's passenger car sales.

105 Earnings Review | Auto Ancillary | Coverage: Performance Overview

Minda Sundaram Balkrishna Endurance Particulars (INR Cr) Minda Industries Bharat Forge Corporation Fasteners Industries Technology Sales 1,77.96 4,17.11 276.70 929 4,270 603.10 Total Expenditure 1,98.28 4,88.6 271.38 698 3,262 560.40 EBITDA (20.32) (71.490) 5.4 231 (28) 42.70 EBITDA Margin (%) (11.41%) (17.14%) 2.01% 24.8% - 0.7% 7.1% Depreciation 20.31 68.21 36.48 100 808 85.60 EBIT (40.63) (1,39.7) (31.13) 131 (837) (42.80) Interest Expense 7.66 19.58 7.91 2 299 4.2 Other income 8.87 3.73 7.64 33 420 10.9 Exceptional items 0 0 0 - - - PBT (39.42) (1,55.55) (31.40) 162 (716) (36.1) Tax (8.91) (36.81) -7.9 40 (153) (11.2) Share of (5.83) (32.83) - - 0 Associates/Minorities PAT (35.4) (1,18.33) (23.48) 122 (563) (24.9) PAT Margin NM NM NM 13.1% -13.2% (4.1%) Adj. PAT (35.4) (1,183.30) (23.48) 122 (563) (24.9) Adj. PAT Margin NM NM NM 13.1% -13.2% (4.1%) EPS (1.59) (4.51) (1.12) 6.29 (1.21) (1.8) Adj. EPS (1.59) (4.51) (1.12) 6.29 (1.21) (1.8)

106 Earnings Review | Auto Ancillary | Coverage: Performance Overview

Endurance Particulars (INR Cr) Minda Corp. Minda Ind. Sundaram Fast. Balkrishna Ind. Bharat Forge Tech. Change (%) QoQ YoY QoQ YoY QoQ YoY QoQ YoY QoQ YoY QoQ YoY

Sales (66.82%) (69.53%) (68.8%) (71.0%) (62%) (71%) (31.6%) (22.2%) (51.5%) (68.3%) (62.2) (68.4)

Total Expenditure (60.13%) (61.68%) (59.9%) (61.5%) (55%) (65%) (29.1%) (24.6%) (44.5%) (38.5%) (58.8) (64.3)

EBITDA (152.10%) (130.47%) (158.6%) (141.5%) (95%) (97%) (38.1%) (13.9%) (102.6%) (100.8%) (82.0) (87.5) Change in EBITDA Margin NM NM NM NM NM NM (262 bps) 239 bps (1318bps) (2662bps) NM NM (bps) Depreciation (8.39%) (4.60%) (16.5%) (4.2%) 2% 12% 1.4% 18.4% (4.6%) (8.8%) (30.4) (7.7)

EBIT (196.36%) (189.51%) (341.7%) (226.0%) (138%) (122%) (52.2%) (28.7%) (426.8%) (132.1%) (137.3) (112.5)

Interest Expense (30.49%) (27.05%) (6.7%) (17.8%) (28%) (18%) 28.0% 35.2% (27.9%) (22.9%) 62.6 (28.5)

Other income (45.01%) 24.40% (76.6%) (46.1%) 114% 601% (49.8%) (53.5%) 33.3% 4.6% (37.8) 60

Exceptional items NM NM NM NM NM NM NM NM NM NM NM 0

PBT (279.67%) (193.81%) (689.7%) (284.9%) (150%) (123%) (52.2%) (36.2%) (8.6%) (127.3%) (127.8) (114.5)

Tax (226.74%) (164.10%) (377.6%) (233.0%) 148% 119% (50.7%) (48.2%) 205.9% (117.4%) (148.8) (113.3)

Share of NM NM NM NM NM NM NM NM NA NA NM NM Associates/Minorities

PAT (315.03%) (217.42%) (1721.0%) (321.3%) (150%) (125%) (52.7%) (30.9%) (23.2%) (132.3%) (123.3) (115.1)

Change in PAT Margin (bps) NM NM NM NM NM NM (586 bps) (165 bps) (487bps) (2612bps) NM NM

107 Earnings Review | Our Top Sector Picks and Recommendations

Our top picks remain Bajaj Auto, Sundaram Fasterners and Minda Corporation

Recommendation Market Cap. CMP Target Price (INR) Upside PE (x) Stocks Revised Old INR Mn. INR New Old % 5 Yr. Avg. FY22 E

Tata Motors ACCUMULATE ACCUMULATE 4,05,895 131 133 104 1.2% 13.1 16.2

Maruti Suzuki ACCUMULATE ACCUMULATE 19,63,393 6,501 7,182 5,569 10.5% 29.8 28.6

Bajaj Auto ACCUMULATE ACCUMULATE 8,64,206 2,986 3,410 3,051 14.2% 19.3 16.2

Ashok Leyland BUY BUY 214255 73 85 72 16.4% 27 16

Eicher Motors UR UR 5,66,966 2,077 UR UR - 41.8 26.6

Minda Corporation BUY BUY 15890 70 92 92 31.4% 21 11

Minda Industries ACCUMULATE BUY 88346 326 377 323 15.6% 27 25

Sundaram Fasteners BUY BUY 85050 405 526 415 29.9% 25 23

Balkrishna Industries ACCUMULATE ACCUMULATE 2,60,318 1,349 1,417 1,349 5.0% 27.5 24.3

Bharat Forge HOLD HOLD 2,08,139 447 465 504 4.0% 33.3 31.4

Endurance Technology UR UR 148540 1061 - - 34 26

Note: UR – Under Review Source: Company, KRChoksey Research

108 Miscellaneous

109 Earnings Review | Miscellaneous | Coverage: Results Summary

Companies Revenue Margin Industry Outlook / Strategy • Emmbi reported 25% YoY decline in volume EBITDA contraction due to higher employee • Exports performed well & have a in Q1FY21 on account of reduced operating cost/other expenses with low revenue: GPM in strong orderbook. days in the initial period of lockdown and the Q1FY21 stood at 41.5% due to lower material cost • Going forward, management expects exodus of laborers to their native places at & muted revenue base. Contraction in EBITDA improvement in EBITDA margin with the end of the quarter. margin to 11.6% in Q1FY21 can be attributed to reduced R&D cost, low Emmbi • Though performance of exports was better, higher employee cost & higher other expenses travelling/admin expenses & domestic packaging was worst affected due due to expense incurred for COVID-19 related increased efficiency. to arrest of economic activity in the country precautions. • Avana which focuses on B2C segment (especially from FMCG segment). is continuing to expand and is expected to clock in INR 100 Cr in FY21. • Explosives sales volume declined by 24.0% • GPM improves YoY with lower cost; higher • Global and domestic economic YoY to 70,287 MT while realization declined employee and other expenses put pressure on slowdown as well as external by 7.0% YoY to INR 34,238/MT (vs INR EBITDA margin. factors resulted in the lower volume 36,969/MT). Exports and overseas revenue • Higher employee cost & higher other off-take and lower realizations in contribution in Q1FY21 rose to 42.2% of expenses resulted in EBITDA margin recent quarters. We expect Solar revenue and saw a growth of 6.0% YoY contraction of 137 bps YoY (up 233 bps QoQ) company to show improvement (+19.2% QoQ). Housing and Infra declined by to 18.7% in Q1FY21. from 2HFY21 onwards & are 49.3% YoY (-34.1% QoQ, 22% of revenue) optimistic of international business as most of the countries are nearing breakeven levels. • Total revenue declined due to nationwide • EBITDA margin of 2.4% in Q2CY20 was down • ABB India bagged an order to lockdown due to the COVID-19 pandemic. 480 bps yoy (up 143 bps qoq). execute the country's largest Company’s facilities are working on 50-60% • Net profit from continued operations came at process automation and safety of the capacities. INR 16.8 Cr for the quarter; down 76% yoy; system projects in the Agrochemical • Electrification and Motion businesses (~35% down 74.6% qoq with margin of 1.7% for the sector from Deccan Fine Chemicals. of revenue) de-grew 51.3% yoy (down 42.6% quarter. The company didn't divulge the ABB qoq), Motion business (~39% of revenue) de- details about the value of this order. grew 34.7% yoy (down 30.7% qoq), Robotics This mission critical automation and and Discrete Automation (~2.4% of revenue) safety system controls over 100 de-grew 63.6% yoy (down 42.2% qoq) while reactors at the largest multi-product Industrial Automation business (~23% of plant, at their SEZ (special economic revenue) declined 37.3% yoy (down 19.1% zone) facility in Tuni, Andhra qoq). Pradesh.

110 Earnings Review | Miscellaneous | Coverage: Performance Overview

Net profit margins under pressure for Emmbi & ABB

Particulars (INR Cr) Emmbi Industries Solar Industries ABB

Sales 51 491 986 Total Expenditure 50 399 962 EBITDA 5.9 91.9 23.4 EBITDA Margin (%) 11.6% 18.7% 2.4% Depreciation 1.75 22.8 24.9 EBIT 4.2 69.1 -1.5 Interest Expense 2.9 12.3 3.8 Other income 0.03 3.9 26.6 Exceptional items 0 0 -2 PBT 1.3 60.7 23.4 Tax 0.2 16.8 6.7 Share of Associates/Minorities 0 0 0 PAT 1.1 42.1 16.8 PAT Margin 2.1% 8.6% 1.7% Adj. PAT 1.1 42.1 16.8 Adj. PAT Margin 2.1% 8.6% 1.7% EPS 0.6 4.6 0.8 Adj. EPS 0.6 4.6 0.8

Source: Company, KRChoksey Research

111 Earnings Review | Miscellaneous | Coverage: Performance Overview

Resilient EBITDA margin despite sharp revenue decline

Particulars Emmbi Industries Solar Industries ABB

Change (%) QoQ YoY QoQ YoY QoQ YoY

Sales -32.0% -24.1% -10.3% -20.8% -35.2% -42.9%

Total Expenditure -30.1% -20.4% -12.8% -19.4% -36.2% -39.9%

EBITDA 31.1% -36.0% 2.5% -26.2% 61.7% -81.1%

Change in EBITDA Margin (bps) 15bps -216bps 233bps -137bps 143bps -480bps

Depreciation 2.6% 1.3% 2.9% 16.8% -8.0% 13.1%

EBIT -39.5% -44.6% 2.3% -34.2% NM NM

Interest Expense -6.4% 3.3% -14.7% 1.7% 10.6% -60.8%

Other income -66.2% -19.4% -80.5% 32.3% -41.9% 30.7%

Exceptional items NA NA NA NA NM NM

PBT -66.2% -72.5% -16.8% -38.5% -73.0% -79.2%

Tax 105.8% -81.1% -15.5% -32.6% -67.7% -84.5%

Share of Associates/Minorities NA NA NA NA NA NA

PAT -71.7% -69.2% -15.7% -40.8% -74.6% -76.0%

Change in PAT Margin (bps) -293bps -305bps -55bps -290 -259bps -239bps

Source: Company, KRChoksey Research

112 Earnings Review | Our Top Sector Picks and Recommendations

Emmbi Industries strong upside potential

Recommendation Market Cap. CMP Target Price (INR) Upside PE (x) Stocks Revised Old INR Cr. INR New Old % 5 Yr. Avg. FY22 E

Emmbi Industries BUY BUY 139 79 96 96 21.8% 17.9 6.6

Solar Industries HOLD HOLD 9,327 1,036 1,071 998 3.3% 40.6 28.5

ABB HOLD HOLD 19,366 884 894 873 1.1% 82.2 42.5

Source: Bloomberg, KRChoksey Research

113 Disclaimer

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114 Thank You

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