INDIA DAILY

July 9, 2019 India 8-Jul 1-day 1-mo 3-mo Sensex 38,721 (2.0) (2.3) (0.6) Nifty 11,559 (2.1) (2.6) (1.0) Contents Global/Regional indices Dow Jones 26,806 (0.4) 3.2 2.5 Daily Alerts Nasdaq Composite 8,098 (0.8) 4.6 2.4 Company alerts FTSE 7,549 (0.1) 3.0 1.7 Bajaj Auto: Annual report analysis Nikkei 21,667 0.6 3.7 (0.6) Hang Seng 28,332 (1.5) 5.1 (6.1)  Key takeaways from annual report KOSPI 2,066 0.1 (0.3) (6.7)

 Fine-tune FY2020-21E EPS estimates; maintain REDUCE rating Value traded – India Cash (NSE+BSE) 343 324 357 Sobha: Strong sales momentum Derivatives (NSE) 11,615 9,431 7,968

 Sales volume continues to remain upbeat, change in sales mix pulls Deri. open interest 3,221 3,014 3,332 realizations

 Maintain ADD with revised fair value of Rs580/share Forex/money market

Sector alerts Change, basis points 8-Jul 1-day 1-mo 3-mo

Banks: Still more room to converge Rs/US$ 68.6 (6) (96) (70)  Remain positive on banks that have a higher share of corporate NPLs over 10yr govt bond, % 6.9 (10) (33) (82) retail Net investment (US$ mn) 5-Jul MTD CYTD  Gradual shift in focus towards book value as compared to adjusted book FIIs 87 (368) 10,971 value MFs 28 (4) 1,261

 A lot of positives underway, which we believe augur well for banks Top movers – 3mo basis

Change, %

Best performers 8-Jul 1-day 1-mo 3-mo

TGBL IN Equity 264 (1.1) 2.5 25.4

TTAN IN Equity 1,252 (2.0) (1.3) 14.0

SBIN IN Equity 355 (4.1) 3.9 12.9

HPCL IN Equity 283 (1.5) (9.1) 10.5

BHARTI IN Equity 356 (2.3) (0.2) 10.4

Worst performers

RCAPT IN Equity 61 (1.9) (39.0) (67.4)

YES IN Equity 93 5.7 (33.4) (65.6)

RELI IN Equity 50 (2.2) (32.4) (61.7)

RPWR IN Equity 4 (3.6) (35.0) (59.4)

JPA IN Equity 3 (8.5) (37.2) (53.4)

[email protected] Contact: +91 22 6218 6427

For Private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES’ RATING SYSTEM AND OTHER DISCLOSURES. REFER TO THE END OF THIS MATERIAL. REDUCE Bajaj Auto (BJAUT) Automobiles & Components JULY 08, 2019 UPDATE Coverage view: Neutral

Annual report analysis. Bajaj Auto’s annual report analysis highlights the success of Price (`): 2,780 the company’s aggressive pricing strategy in order to gain market share in the motorcycle Fair Value (`): 2,700 segment. However, the company’s EBITDA margin took a hit due to an inferior product BSE-30: 38,721 mix and higher discounts in 2HFY19. Entering the electric scooter market is a good opportunity for the company but shift to electric vehicles in the three-wheeler segment could be a risk for the company’s margin going ahead. Maintain REDUCE.

Company data and valuation summary Bajaj Auto Stock data Forecasts/Valuations 2019 2020E 2021E 52-week range (Rs) (high,low) 3,195-2,420 EPS (Rs) 153.3 155.0 171.8 Market Cap. (Rs bn) 804.4 EPS growth (%) 8.4 1.1 10.8 Shareholding pattern (%) P/E (X) 18.1 17.9 16.2 Promoters 51.2 Sales (Rs bn) 302.5 319.8 355.9 FIIs 15.6 Net profits (Rs bn) 44.4 44.9 49.7 MFs 2.2 EBITDA (Rs bn) 49.8 49.7 55.2 Price performance (%) 1M 3M 12M EV/EBITDA (X) 12.6 12.3 10.7 Absolute (6.1) (2.6) (8.0) ROE (%) 22.9 19.6 19.6 Rel. to BSE-30 (4.0) (2.6) (15.2) Div. Yield (%) 2.2 2.2 2.5

Key takeaways from annual report

 Bajaj Auto’s revenues increased by 20% yoy in FY2019 led by strong volume growth in the economy bike segment. The company’s strategy to focus on the economy segment resulted in a market share gain of 670 bps, led by aggressive pricing of CT100 and Platina models. The company also improved market share in the premium segment from 28% in FY2018 to 32.3% in FY2019, due to (1) 40% yoy increase in Pulsar volumes and (2) 14% yoy increase in KTM volumes. Overall, the company gained 350 bps yoy market share in the domestic motorcycle segment in FY2019. However, EBITDA margin of the company declined by 270 bps yoy in FY2019. R&D as a percent of sales stood at 1.5% in FY2019.

 The company’s volumes grew by 8% yoy in the three-wheeler segment led by (1) 34% yoy growth in the goods segment and (2) 6% yoy growth in the passenger segment. The company sold 282,406 vehicles in petrol and alternate fuel versions and had 86% market share in this segment in FY2019. We believe that a significant portion of three- wheelers in the petrol and alternate fuel segments will shift to electric by FY2030. The company makes 20-25% of the EBITDA margin in the three-wheeler segment, which might be at risk in the medium term.

 The company reported 22% yoy revenue growth in the export segment led by (1) 22% yoy growth in export motorcycle volumes and (2) 43% yoy growth in export three-wheelers in FY2019. Hitesh Goel  The company has increased its production capacity to 6.33 mn units in FY2019 from 6.24 mn units in FY2018 led by increase in production capacity in three-wheelers due to increased Nishit Jalan demand in both domestic and international markets.

 In CY2018, KTM Industries achieved record revenues of EUR1,560 mn (+2% yoy growth) led Rishi Vora by 10% yoy growth in sales volume.

Fine-tune FY2020-21E EPS estimates; maintain REDUCE rating

We have fine-tuned our FY2020-21E estimates. Maintain REDUCE; fair value revised to `2,700 based on 14X March 2021E core EPS + ₹240/share for KTM stake + ₹718/share value of cash and cash equivalents.

[email protected] Contact: +91 22 6218 6427

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

Gains in domestic market share due to competitive pricing

The domestic motorcycle industry grew by only 8% yoy in FY2019 despite strong sales in 1HFY19 due to (1) increase in prices owing to mandatory insurance cover of five years as well as introduction of stricter safety regulations and (2) weak festive sales. The economy market share in the domestic motorcycle industry volumes increased from 25% in FY2018 to 29% in FY2019, led by (1) aggressive pricing strategy adopted by Bajaj Auto and (2) increasing number of first-time motorcycle buyers in the economy segment. However, executive and premium segments struggled to capture market shares due to steep increase in prices.

Bajaj Auto’s revenues increased by 20% yoy in FY2019 led by strong volume growth in the economy bike segment. The company’s strategy to focus on the economy segment resulted in a market share gain of 670 bps, led by aggressive pricing of CT100 and Platina models. The company also improved market share in the premium segment from 28% in FY2018 to 32.3% in FY2019, due to (1) 40% yoy increase in Pulsar volumes and (2) 14% yoy increase in KTM volumes. Overall, the company gained 350 bps yoy market share in the domestic motorcycle segment in FY2019. However, we would like to highlight that even after outperforming the industry in the domestic motorcycle segment, EBITDA margin of the company declined by 270 bps yoy as a result of a weak product mix in FY2019.

The company will be launching its first electric scooter under the URBANITE brand in next six to nine months. We believe the company has good opportunity to enter the scooter segment and leverage the first-mover advantage in the electric scooter segment.

Exhibit 1: Bajaj Auto gained 250 bps yoy market share in the domestic motorcycle segment in FY2019 Domestic motorcycle market share of major two-wheeler players, March fiscal year-ends, 2015-19 (%)

Market share (%) 2015 2016 2017 2018 2019 Economy bike segment market share Hero 53.5 48.1 55.1 59.5 55.8 Honda — — — — — Bajaj 24.7 35.7 32.5 28.5 35.2 TVS 20.7 15.8 12.5 12.1 9.0 Others 1.2 0.4 — — — Total - Economy segment 100.0 100.0 100.0 100.0 100.0 Executive bike segment market share Hero 66.3 71.3 69.5 69.4 72.1 Honda 22.5 21.4 20.8 23.6 21.8 Bajaj 8.4 3.9 5.1 3.2 2.1 TVS 0.6 1.1 2.6 2.0 3.0 Others 2.3 2.2 2.1 1.8 1.0 Total - Executive segment 100.0 100.0 100.0 100.0 100.0 Premium bike segment market share Hero 8.0 5.8 4.3 2.5 1.4 Honda 13.1 9.0 11.4 14.0 13.2 Bajaj 34.9 35.5 32.6 28.0 32.3 TVS 10.2 11.7 11.7 13.8 14.6 Royal Enfield 16.3 22.3 25.8 27.7 25.0 Others 17.6 15.7 14.1 14.1 13.6 Total - Premium segment 100.0 100.0 100.0 100.0 100.0 Total motorcycles market share Hero 52.9 52.4 51.3 51.5 50.7 Honda 16.3 14.0 13.8 15.5 13.5 Bajaj 16.5 17.7 17.7 15.2 18.7 TVS 6.3 6.7 7.0 7.3 7.4 Others 4.9 4.6 4.3 4.2 3.7 Total - motorcycles 100.0 100.0 100.0 100.0 100.0

Source: SIAM, Kotak Institutional Equities

KOTAK INSTITUTIONAL EQUITIES RESEARCH 3 Automobiles & Components Bajaj Auto

Domestic three-wheeler market growth aided by goods segment

The company’s volumes grew by 8% yoy in the three-wheeler segment led by (1) 34% yoy growth in the goods segment and (2) 6% yoy growth in the passenger segment. However, the company’s market share declined by 510 bps yoy in FY2019. In the small and large diesel category, the company’s market share stood at 80% and 26%, respectively in FY2019. Overall in the diesel category, the company’s market share stood at 37% in FY2019. The company sold 282,406 vehicles in petrol and alternate fuel versions and had 86% market share in this segment in FY2019. We believe that a significant portion of three-wheelers in the petrol and alternate fuel segments will shift to electric by FY2030. The company makes 20-25% of the EBITDA margin in the three-wheeler segment, which might be at risk in the medium term.

The company successfully launched its QUTE quadricycle in four states namely, Gujarat, Odisha, Rajasthan and Kerala and clocked in sales volume of 627 units in FY2019.

Exhibit 2: Bajaj Auto remains the largest player in domestic three-wheeler market in FY2019 Domestic three-wheeler market share of major three-wheeler players, March fiscal year-ends, 2015-19 (%)

2015 2016 2017 2018 2019 Passenger three-wheeler market share Atul Auto Limited 5.2 5.1 4.6 3.8 4.3 Bajaj Auto Ltd 54.2 57.5 59.7 67.0 64.3 Mahindra & Mahindra Ltd 7.9 8.1 7.9 7.1 8.5 Piaggio Vehicles Pvt Ltd 27.4 24.8 24.0 18.6 19.6 Scooters India Ltd 1.3 1.1 0.8 0.3 0.3 TVS Motors 4.1 3.5 3.1 3.2 2.9 Total - passenger three-wheelers 100.0 100.0 100.0 100.0 100.0 Goods three-wheeler market share Atul Auto Limited 17.8 20.6 16.6 16.4 15.3 Bajaj Auto Ltd — 1.4 12.0 19.3 23.8 Mahindra & Mahindra Ltd 22.8 19.9 18.7 15.2 14.1 Piaggio Vehicles Pvt Ltd 53.4 53.4 49.8 47.9 44.8 Scooters India Ltd 6.0 4.8 3.0 1.2 1.9 Total - goods three-wheelers 100.0 100.0 100.0 100.0 100.0 Total three-wheelers market share Atul Auto Limited 8.2 8.5 7.7 6.6 6.3 Bajaj Auto Ltd 47.7 51.4 53.3 62.0 56.9 Mahindra & Mahindra Ltd 11.5 11.1 11.0 9.2 9.5 Piaggio Vehicles Pvt Ltd 34.9 32.5 31.8 25.6 24.2 Scooters India Ltd 2.3 1.9 1.3 0.5 0.6 TVS Motors 3.6 3.1 2.6 2.8 2.4 Total - Premium segment 100.0 100.0 100.0 100.0 100.0

Source: SIAM, Kotak Institutional Equities

Strong growth across geographies in the exports market

The company reported 22% yoy revenue growth in the export segment led by (1) 22% yoy growth in export motorcycle volumes and (2) 43% yoy growth in the export three-wheeler segment in FY2019. Growth in the export motorcycle segment was led by (1) strong growth in African countries (+40% yoy) like Nigeria and Congo along with entry into new markets like Benin, (2) strong growth in ASEAN region (+34% yoy) aided by growth in the Philippines and in new markets like Malaysia, (3) stable growth in South Asia and Middle East region (+10% yoy) led by recovery in Egypt and impressive economy growth in Bangladesh and (4) 5% yoy decline in Latin America due to economic turmoil in Argentina and political uncertainties in Mexico. Growth in three-wheeler markets was driven by (1) recovery in traditional markets led by Egypt and Nigeria and (2) strong growth in new markets like Cambodia, Iraq, Myanmar and Nepal.

4 KOTAK INSTITUTIONAL EQUITIES RESEARCH Bajaj Auto Automobiles & Components

Exhibit 3: Export revenues grew by 22% yoy in FY2019 Geographical mix of exports, March fiscal year-ends, 2018-19 (` mn, %)

2018 2019 Growth yoy (%) Geographical export revenue Africa 39,782 55,672 39.9 ASEAN 9,703 13,030 34.3 Latin America 17,465 16,583 (5.1) South Asia and Middle East 30,079 33,166 10.3 Total 97,030 118,450 22.1 Geographical export revenue mix Africa 41.0 47.0 ASEAN 10.0 11.0 Latin America 18.0 14.0 South Asia and Middle East 31.0 28.0 Total 100.0 100.0

Source: SIAM, Kotak Institutional Equities

Exhibit 4: Bajaj Auto has more than 50% export market share in the motorcycle segment in FY2019 Export two-wheeler & three-wheeler market share of major players, March fiscal year-ends, 2015-19 (%)

2015 2016 2017 2018 2019 Exports two-wheeler market share Hero 8.1 8.5 7.7 7.3 6.3 Honda 7.7 8.1 12.1 12.4 11.6 Bajaj 61.9 58.8 52.2 49.5 51.7 TVS 13.2 14.4 15.6 17.5 19.0 Others 9.1 10.2 12.4 13.3 11.4 Total two-wheeler 100.0 100.0 100.0 100.0 100.0 Exports three-wheeler market share Atul Auto Limited 0.5 0.5 1.1 1.1 1.3 Bajaj Auto Ltd 89.8 90.6 89.0 89.1 88.5 Mahindra & Mahindra Ltd 0.4 0.6 1.1 0.5 0.1 Piaggio Vehicles Pvt Ltd 0.9 0.4 0.7 1.0 0.9 Scooters India Ltd 8.5 7.9 8.2 8.2 9.2 Total - goods three-wheelers 100.0 100.0 100.0 100.0 100.0

Source: SIAM, Kotak Institutional Equities

Bajaj Auto increases capacity for three-wheelers in FY2019

The company has increased its production capacity to 6.33 mn units in FY2019 from 6.24 mn units in FY2018 led by increase in production capacity in three-wheelers due to increased demand in both domestic and international markets. The company increased its three-wheeler capacity at the Waluj plant from 840,000 in FY2018 to 930,000 in FY2019. Capacity utilization for the two-wheeler segment stood at 62.8% and capacity utilization for the three-wheeler segment stood at 83.5%.

KOTAK INSTITUTIONAL EQUITIES RESEARCH 5 Automobiles & Components Bajaj Auto

Exhibit 5: The company increased the capacity of three-wheeler segment in FY2019 Details of plant-wise capacity expansion, March fiscal year-ends, 2018-19 (units)

Plant Products manufactured 2018 2019 Waluj Boxer, CT, Platina, Discover, V 2,400,000 2,400,000 Waluj Passenger Carrier, Good Carrier and QUTE 840,000 930,000 Chakan Pulsar, Avenger, KTM, Dominar 1,200,000 1,200,000 Pantnagar CT, Platina, Discover, V, Pulsar 800,000 800,000 Total 5,240,000 5,330,000

Source: Company, Kotak Institutional Equities

Exhibit 6: Capacity utilization of two-wheeler segment stood at 78.4% in FY2019 Details of capacity utilization, March fiscal year-ends, 2018-19 (units)

2015 2016 2017 2018 2019 Bajaj Auto two-wheeler segment capacity utilization Production (mn units) 3.3 3.3 3.2 3.4 4.2 Capacity (mn units) 4.6 4.6 4.6 5.4 5.4 Capacity utilization (%) 72.7 72.7 69.8 62.8 78.4 Bajaj Auto three-wheeler segment capacity utilization Production ('000 units) 524.4 527.0 445.6 627.2 776.7 Capacity ('000 units) 660.0 660.0 660.0 840.0 930.0 Capacity utilization (%) 79.4 79.8 67.5 74.7 83.5

Source: Company, Kotak Institutional Equities

EBITDA margin deteriorates in FY2019 due to increase in competitive intensity

EBITDA margin declined by 270 bps yoy in FY2019 due to increase in raw material cost to sales by 310 bps yoy. The decline in gross margin was largely due to pricing pressure in the domestic motorcycle segment and a weaker product mix. Employee cost as a percentage of sales was flattish during FY2019. R&D as a percentage of sales in FY2019 stood at 1.5% in FY2019.

Working capital for the company improved marginally to 42 days in FY2019 versus 49 days in FY2018. Creditor days came down to 47 days in FY2019 versus 48 days in FY2018 and inventory days declined to 58 days in FY2019 from 74 days in FY2018 mainly due to sharp inventory correction during year-end. However, the company’s debtor days increased to 31 days in FY2019 from 22 days in FY2018 mainly in order to support dealers due to a weak retail demand scenario in 2HFY19.

Exhibit 7: R&D to sales ratio remained stable at 1.5% in FY2019 R&D expense, March fiscal year-ends, 2015-19 (` mn, %)

2015 2016 2017 2018 2019 R&D (in Rs mn) 3,614 3,352 3,676 3,727 4,564 Net sales (in Rs mn) 211,039 221,517 213,735 247,003 295,673 R&D as a % of sales 1.7 1.5 1.7 1.5 1.5

Source: Company, Kotak Institutional Equities

6 KOTAK INSTITUTIONAL EQUITIES RESEARCH Bajaj Auto Automobiles & Components

Exhibit 8: EBITDA margin declined by 270 bps yoy in FY2019 Details of other expenses, March fiscal year-ends, 2015-19 (%)

2015 2016 2017 2018 2019 Revenue growth (%) 7.0 5.0 (3.5) 15.6 19.7 Raw materials % of net sales 68.7 66.7 67.2 69.0 72.1 Yoy change (%) 7.1 1.4 (2.9) 19.1 25.4 Packing and forwarding % of net sales 1.8 1.6 1.4 1.6 1.9 Yoy change (%) 21.8 (11.3) (16.6) 33.2 42.2 Employee costs % of net sales 4.2 4.1 4.7 4.3 4.2 Yoy change (%) 23.5 2.2 8.7 7.2 17.4 Power and fuel % of net sales 0.5 0.5 0.5 0.4 0.4 Yoy change (%) 8.0 5.2 (20.1) 3.9 14.7 Publicity and sales promotion % of net sales 1.5 2.0 1.8 1.8 1.6 Yoy change (%) 22.6 35.1 (9.0) 10.6 10.9 Discount and commissions % of net sales 0.4 0.2 0.2 0.4 0.3 Yoy change (%) 28.0 (51.2) 28.4 100.3 (23.0) Repair and maintenance % of net sales 0.9 0.9 0.8 0.6 0.5 Yoy change (%) 38.1 (1.6) (7.7) (14.8) (2.1) Consumable stores % of net sales 0.6 0.6 0.5 0.5 0.5 Yoy change (%) 5.4 0.1 (13.0) 2.7 34.8 Others % of net sales 2.3 2.3 2.5 2.2 1.9 Yoy change (%) 15.7 2.1 6.4 1.9 8.5 EBITDA margin 19.0 21.2 20.3 19.2 16.5

Source: Company, Kotak Institutional Equities

Exhibit 9: Debtor days increased from 22 days in FY2018 to 31 days in FY2019 Details on working capital days, March fiscal year-ends, 2015-19 (` mn, %)

Creditor days Debtor days Inventory days 80

70

60

50

40

30

20

10

- 2015 2016 2017 2018 2019

Source: Company, Kotak Institutional Equities

Salary of key personnel remained stable at 0.9% of PBT in FY2019 versus 0.8% of the PBT in FY2018. Key personnel include Rajiv Bajaj (MD), Rahul Bajaj (Chairman), Pradeep Shrivastava (ED) and Rakesh Sharma (ED).

KOTAK INSTITUTIONAL EQUITIES RESEARCH 7 Automobiles & Components Bajaj Auto

Exhibit 10: Salary of key personnel as a % of PBT stood at 0.9% in FY2019 Key personnel salary details, March fiscal year-ends, 2015-19 (` mn, %)

2015 2016 2017 2018 2019 Salary of key personnels 401 422 499 441 559 PBT 49,162 55,474 53,355 58,146 63,612 Salary of key personnels as a % of PBT 0.8 0.8 0.9 0.8 0.9

Source: Company, Kotak Institutional Equities

India becomes the biggest market for KTM in CY2018

In CY2018, KTM Industries achieved record revenues of EUR1,560 mn (+2% yoy growth) led by 10% yoy growth in sales volume. Sales volume growth was led by (1) 22% yoy growth in Europe, (2) 10% yoy growth in India and (3) 9% yoy growth in the US. Strong volume growth was due to new launches of the KTM Duke 790 and the first HUSQVARNA Road Motor cycles. EBIT increased to EUR161.2 mn (+22% yoy) and PAT increased to EUR114 mn (+36% yoy) in CY2018.

Exhibit 11: KTM Industries revenues increased by 2% yoy in CY2018 KTM key financial summary, calendar year-ends, 2014-18 (EUR mn)

2014 2015 2016 2017 2018 KTM Financials (EUR mn) Volumes (in units) 158,760 183,170 203,423 238,408 261,454 Net sales 1,086 1,224 1,343 1,533 1,560 ASPs (EUR per vehicle) 6,842 6,680 6,602 6,430 5,965 EBITDA 148 178 198 219 253 EBIT 93 113 122 133 161 PAT 55 65 89 84 114

Source: Company, Kotak Institutional Equities

Exhibit 12: We have fine-tuned our FY2019-21E estimates Earnings revision table, March fiscal year-ends, 2020-22E (₹ mn, %)

New estimates Old estimates % change 2020E 2021E 2022E 2020E 2021E 2022E 2020E 2021E 2022E Domestic two-wheelers 2,650,838 2,769,118 3,121,866 2,650,838 2,769,118 3,121,866 — — — Domestic three-wheelers 372,384 372,384 389,903 372,384 372,384 389,903 — — — Export two-wheelers 1,865,108 2,051,619 2,297,813 1,865,108 2,051,619 2,297,813 — — — Export three-wheelers 364,018 400,420 448,470 364,018 400,420 448,470 — — — Total volumes (units) 5,252,349 5,593,541 6,258,053 5,252,349 5,593,541 6,258,053 — — — Average net realization 60,891 63,631 64,039 60,856 63,596 64,039 0.1 0.1 — Net sales (incl. operating income) 319,821 355,925 400,758 319,636 355,725 400,758 0.1 0.1 — EBITDA 49,687 55,166 61,677 50,052 54,802 61,677 (0.7) 0.7 — EBITDA margin (%) 15.5 15.5 15.4 15.7 15.4 15.4 Profit after tax 44,862 49,706 55,267 45,722 50,235 55,267 (1.9) (1.1) — EPS (Rs/share) 155.0 171.8 191.0 158.0 173.6 191.0 (1.9) (1.1) —

Source: Company, Kotak Institutional Equities

8 KOTAK INSTITUTIONAL EQUITIES RESEARCH Bajaj Auto Automobiles & Components

Exhibit 13: We expect the company to deliver 8% EPS CAGR over FY2019-22E Profit model, balance sheet and cash flow statement, March fiscal year-ends, 2013-22E (` mn)

2013 2014 2015 2016 2017 2018 2019 2020E 2021E 2022E Profit model (Rs mn) Net sales 204,684 205,147 216,120 225,865 217,636 252,189 302,500 319,821 355,925 400,758 EBITDA 41,064 44,710 41,166 47,820 44,223 48,374 49,820 49,687 55,166 61,677 Other income 3,244 3,412 10,736 10,736 12,220 12,933 16,493 18,074 19,914 21,763 Interest (5) (5) (65) (11) (14) (13) (45) — — — Depreciation (1,640) (1,796) (2,674) (3,072) (3,073) (3,148) (2,657) (2,743) (3,043) (3,343) Profit before tax 42,662 46,321 49,162 55,474 53,355 58,146 63,612 65,018 72,037 80,097 Extra-ordinary items — — (3,403) — — (320) 3,420 — — — Taxes (12,227) (13,887) (12,711) (16,177) (15,080) (17,145) (20,280) (20,155) (22,332) (24,830) Net profit 30,436 32,433 33,049 39,298 38,276 40,681 46,752 44,862 49,706 55,267 Adjusted net profit 30,436 32,433 36,452 39,298 38,276 40,905 44,366 44,862 49,706 55,267 Adjusted earnings per share (Rs) 105.2 112.1 126.0 135.8 132.3 141.3 153.3 155.0 171.8 191.0 Balance sheet (Rs mn) Equity 79,020 96,080 106,922 132,666 170,341 191,039 217,799 241,127 266,974 295,713 Deferred tax liability 1,151 1,432 1,416 2,028 3,136 3,234 5,427 5,427 5,427 5,427 Total borrowings 2,105 1,466 1,699 — — — — — — — Current liabilities 42,511 48,498 45,587 30,172 34,671 43,922 50,578 36,986 40,052 43,895 Total liabilities 124,786 147,476 155,623 164,865 208,149 238,195 273,804 283,540 312,453 345,034 Net fixed assets 20,277 20,386 20,190 21,383 20,440 19,349 18,120 20,376 22,333 23,990 Investments 64,305 85,496 91,533 90,379 135,088 163,656 179,366 201,366 223,366 245,366 Cash 5,589 4,955 5,862 8,595 2,937 7,780 9,228 6,096 5,763 8,257 Other current assets 33,913 35,524 36,507 43,615 49,239 47,411 67,090 55,701 60,990 67,421 Miscellaneous expenditure 703 1,115 1,532 893 447 — — — — — Total assets 124,786 147,476 155,623 164,865 208,149 238,195 273,804 283,540 312,453 345,034 Free cash flow (Rs mn) Operating cash flow excl. working capital 26,557 31,419 27,611 30,816 30,859 32,157 31,925 40,585 44,900 49,713 Working capital changes (5,213) 4,039 (6,138) 5,753 2,533 10,451 (7,030) (2,203) (2,224) (2,588) Capital expenditure (5,082) (2,201) (2,697) (2,651) (1,994) (1,826) (1,635) (5,000) (5,000) (5,000) Free cash flow 16,262 33,257 18,777 33,917 31,398 40,782 23,260 33,382 37,676 42,125 Ratios Gross margin (%) 29.6 32.4 31.3 33.3 32.8 31.0 27.9 27.2 26.7 26.1 EBITDA margin (%) 20.1 21.8 19.0 21.2 20.3 19.2 16.5 15.5 15.5 15.4 PAT margin (%) 14.9 15.8 16.9 17.4 17.6 16.2 14.7 14.0 14.0 13.8 Debt/equity (X) 0.0 0.0 0.0 — — — — — — — Net debt/equity (X) (0.0) (0.0) (0.0) (0.1) (0.0) (0.0) (0.0) (0.0) (0.0) (0.0) Book Value (Rs/share) 273.0 332.0 369.5 458.4 588.6 660.1 752.6 833.2 922.5 1,021.8 RoAE (%) 43.2 36.5 32.1 32.3 24.8 22.1 22.4 19.1 19.2 19.3

Source: Company, Kotak Institutional Equities

KOTAK INSTITUTIONAL EQUITIES RESEARCH 9 ADD Sobha (SOBHA) Real Estate JULY 09, 2019 UPDATE Coverage view: Neutral

Strong sales momentum. Sobha continues to deliver robust operational performance Price (`): 551 with 11% yoy growth in sales volume in 1QFY20. Sales value grew by 8% yoy with Fair Value (`): 580 sales in Bengaluru (70%) being supplemented by sales in Gurgaon as well as GIFT city. BSE-30: 38,721 Sobha is expected to launch eight projects with attributable sales area of 4.19 mn sq. ft across different cities in FY2020. We continue to remain positive on Sobha’s operations and growth in the residential business. Maintain ADD with revised fair value of Rs580/share (from Rs530/share) as we factor value from new launches in FY2020.

Company data and valuation summary Sobha Developers Stock data Forecasts/Valuations 2019 2020E 2021E 52-week range (Rs) (high,low) 587-380 EPS (Rs) 31.3 35.9 39.9 Market Cap. (Rs bn) 52.2 EPS growth (%) 36.3 14.7 11.3 Shareholding pattern (%) P/E (X) 17.6 15.4 13.8 Promoters 56.0 Sales (Rs bn) 34.4 38.5 40.3 FIIs 24.6 Net profits (Rs bn) 3.0 3.4 3.8 MFs 13.0 EBITDA (Rs bn) 6.7 7.0 7.4 Price performance (%) 1M 3M 12M EV/EBITDA (X) 11.1 10.9 9.8 Absolute 0.7 10.3 11.8 ROE (%) 11.9 14.4 14.3 Rel. to BSE-30 3.0 10.2 3.0 Div. Yield (%) 1.3 1.3 1.3

Sales volume continues to remain upbeat, change in sales mix pulls realizations

Sobha sold 1.06 mn sq ft (+10.8% yoy, -5.8% qoq) of area in 1QFY20 for a value of Rs7.8 bn (value of Sobha’s share of sales was Rs6.6 bn) providing a healthy start to the year FY2020 and maintaining quarterly sales of ~1 mn sq. ft for the seventh straight quarter. We highlight cumulative sales in FY2019 stood at 4 mn sq. ft improving 11.2% yoy from 3.63 mn sq. ft in FY2018.

Blended average realization declined 8% yoy to Rs7,312 per sq. ft (Rs8,151 per sq. ft in 4QFY19) reflective of the change in sales mix across cities. Correspondingly, Sobha’s share of realization declined by 2.5% yoy to Rs6,211/ sq. ft in 1QFY20 due to the impact of product mix in sales.

Dominance of Bengaluru in overall sales continued even as its share in overall sales declined to 70% in 1QFY20 compared to 74% in 4QFY19 and 64% in 1QFY19. Interestingly, Gurgaon (6% in 1QFY20) becomes a distant second highest contributor to overall sales in 1QFY20.

During the quarter, the company launched Sobha Nasera, a super luxury apartment project in Pune, with saleable area of 0.51 mn sq. ft. Sobha Verdure, with sellable area of 0.1 mn sq. ft, was launched in Coimbatore in 1QFY20 taking the total area launched during the quarter to 0.61 mn sq. ft. against targeted launches of 4.19 mn sq. ft spread across eight projects over the next 12-18 months. As part of its geographical expansion plan, the company also entered into a JDA for residential development in Hyderabad

Maintain ADD with revised fair value of Rs580/share Murtuza Arsiwalla

We maintain our ADD rating with fair value of Rs580/share (from Rs530/share) as the company continues to demonstrate strong sales momentum along with strong show in launch activity. Samrat Verma The revision in our fair value estimate incorporates the benefit of project launches of 4.19 mn sq. ft (0.6 mn sq ft launched in 1QFY20). Aggressive launch activity is key to faster monetization of the extant residential portfolio as well as the large land bank. Incrementally, steps taken to monetize the large land bank with book value of Rs26 bn will augur well for stock performance.

[email protected] Contact: +91 22 6218 6427

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

Exhibit 1: Sales in Bengaluru continue to dominate sales mix for Sobha Sobha: Attributable sales (mn sq.ft), sales value (Rs mn) and realizations (Rs/sq. ft), March fiscal year-ends, 1QFY17-1QFY20

1QFY17 2QFY17 3QFY17 4QFY17 1QFY18 2QFY18 3QFY18 4QFY18 1QFY19 2QFY19 3QFY19 4QFY19 1QFY20 Area sold (mn sq. ft) 0.81 0.86 0.61 0.72 0.82 0.86 0.93 1.02 0.96 1.03 0.91 1.13 1.06 Bangalore 0.61 0.64 0.50 0.51 0.59 0.61 0.64 0.75 0.61 0.70 0.61 0.84 0.74 Thrissur 0.05 0.01 0.01 0.00 0.01 0.02 0.02 0.01 0.03 0.02 0.02 0.01 0.02 Coimbatore 0.01 0.01 0.01 0.01 0.02 0.01 0.01 0.03 0.03 0.05 0.02 0.02 0.01 Pune 0.01 0.02 0.01 0.01 (0.01) 0.01 — 0.01 0.00 0.00 0.01 — 0.02 Mysore 0.03 0.02 0.01 0.02 0.01 0.02 0.02 0.01 0.05 0.06 0.05 0.02 0.05 Gurgaon 0.06 0.05 0.02 0.10 0.12 0.08 0.08 0.08 0.10 0.13 0.05 0.07 0.07 Chennai 0.03 0.06 0.03 0.06 0.03 0.03 0.03 0.02 0.05 0.04 0.03 0.05 0.05 Kozhikode 0.01 0.00 0.00 0.02 0.01 0.02 0.01 0.00 0.01 0.01 0.00 0.02 0.02 Kochi 0.00 0.05 0.01 0.01 0.03 0.06 0.11 0.12 0.08 0.01 0.12 0.11 0.05 Gift City — — — — — — — — — — — — 0.03

Realisation (Rs/sq. ft) 5,805 6,056 6,082 6,979 6,902 6,883 6,541 6,457 6,372 5,977 6,604 6,301 6,211 Sales value (Rs mn) 4,698 5,182 3,732 5,048 5,627 5,927 6,105 6,558 6,118 6,166 6,002 7,115 6,606 Collections (Rs mn) 3,731 4,129 3,880 4,856 5,738 4,338 4,874 5,980 5,030 5,396 5,583 5,767 —

Source: Companies, Company, Kotak Institutional Equities

Exhibit 2: We estimate projects outside Bangalore to contribute more meaningfully over the next two years Sobha: Sales and contribution from different cities, March fiscal year-ends, 2017-19 (mn sq. ft)

Contribution (%) 2017 2018 2019 2017 2018 2019 Area sold (mn sq. ft) 3.00 3.63 4.03 Bangalore 2.26 2.60 2.77 75 72 69 Thrissur 0.08 0.06 0.07 3 2 2 Coimbatore 0.03 0.07 0.11 1 2 3 Pune 0.05 0.00 0.01 2 — — Mysore 0.08 0.07 0.18 3 2 4 Gurgaon 0.23 0.36 0.35 8 10 9 Chennai 0.18 0.10 0.18 6 3 4 Kozhikode 0.03 0.05 0.04 1 1 1 Kochi 0.07 0.32 0.32 2 9 8 Gift City — — 0.01 — — —

Realisation (Rs/sq. ft) 6,216 6,680 6,303 Sales value (Rs mn) 18,660 24,217 25,401 Collections (Rs mn) 16,596 20,930 21,776

Source: Company, Kotak Institutional Equities

KOTAK INSTITUTIONAL EQUITIES RESEARCH 11 Real Estate Sobha

Exhibit 3: Residential portfolio accounts for 43% of the NAV of Sobha, while EPC business accounts for another 18% SOTP value of Sobha based on March 2021E

Value Inventory / Area Receivables Cost GCF Project (Rs mn) (Rs/share) (%) (mn sq. ft) (Rs/sq. ft) (Rs mn) (Rs mn) (Rs mn) (Rs mn) Residential 32,406 342 43 14 6,788 91,693 48,115 75,791 64,018 Land 25,844 272 35 200 129 25,844 EPC 13,623 144 18 Commercial 3,021 32 4 Total 74,894 790 100 Net debt 19,909 210 27 Equity Value 54,985 580 73

Source: Company, Kotak Institutional Equities

Exhibit 4: Improving sales to drive revenue recognition Sobha: Profit model, balance sheet, cash model, March fiscal year-ends, FY2016-22E (Rs mn)

2016 2017 2018 2019E 2020E 2021E 2022E Profit model Net sales 19,566 22,462 27,870 34,421 38,486 40,316 41,740 EBITDA 4,429 4,198 5,197 6,733 6,994 7,368 7,520 Other income 343 386 496 735 551 612 622 Interest (1,637) (1,497) (1,978) (2,362) (1,762) (1,606) (1,422) Depreciation (597) (638) (544) (623) (641) (652) (662) Pre-tax profits 2,538 2,449 3,171 4,483 5,143 5,723 6,058 Tax (1,188) (970) (764) (987) (1,743) (1,940) (2,054) Deferred taxation — — (238) (525) — — — Net income 1,350 1,479 2,169 2,971 3,399 3,783 4,004 Adjusted net income 1,383 1,607 2,173 2,963 3,399 3,783 4,004 Earnings per share (Rs) 22.5 16.8 22.9 31.3 35.9 39.9 42.2 Balance sheet Total equity 25,648 26,445 27,699 22,291 24,913 27,919 31,146 Gross debt 21,803 22,219 23,313 24,679 26,381 20,182 21,024 Non-current liabilities 2,523 2,446 2,706 121 121 121 121 Current liabilities 30,713 37,820 36,531 60,306 57,575 55,511 54,149 Total liabilities and equity 80,687 88,930 90,249 107,397 108,990 103,733 106,440 Fixed assets 6,181 5,952 6,103 6,774 6,869 6,968 7,073 Non-current financial assets 1,167 681 1,650 1,394 1,504 1,473 1,470 Other non-current assets /taxes 4,078 4,179 4,348 6,129 6,038 5,744 5,741 Current assets 69,262 78,118 78,147 93,100 94,579 89,548 92,155 Total assets 80,687 88,930 90,248 107,397 108,990 103,733 106,440 Ratios (%) Debt/equity 85 84 84 111 106 72 68 Net debt/equity 80 78 80 103 97 71 54 RoE (%) 8.1 5.7 7.4 11.3 14.4 14.3 13.6 RoCE (%) 3.9 2.5 3.9 5.8 6.2 6.8 7.2 Book value per share (Rs) 262 275 292 235 263 295 329

Source: Company, Kotak Institutional Equities estimates

12 KOTAK INSTITUTIONAL EQUITIES RESEARCH ATTRACTIVE Banks India JULY 08, 2019 UPDATE BSE-30: 38,721

Still more room to converge. We maintain an unchanged positive outlook, despite strong outperformance by banks with corporate NPLs over banks with retail NPLs. We believe that the contraction of premium between the two could extend a little longer (beyond the long-term average) while a structural change is visible in a few banks, driven by the strength of their franchise. We remain selective in our choice of banks, preferring SBI and ICICI Bank as our top ideas, given the risks that these banks typically pose.

Remain positive on banks that have a higher share of corporate NPLs over retail

We maintain our positive view on banks that are getting out of the corporate NPL cycle as QUICK NUMBERS compared to banks that focused more on the retail cycle in the past few years. FY2019 was the first year where the gross and net NPL ratios declined in a decade. Slippages have come off  Retail banks at 2.6X sharply in the corporate sector in FY2019 and incremental stress visibility is more company- of corporate banks specific as compared to sector-related issues in the past. on PBR basis; 30% outperformance We are less worried that the reduction in premium (PBR between these two sets of banks) by ~30% from peak levels suggests that this rally is complete. We believe that we are likely to move from a peak of 3.8X a bit more favorably towards the other end as well, as we have seen in the past. We believe  GNPL declined in that the cyclical recovery, especially on RoE expansion led by lower credit costs, is already FY2019 by >200 bps underway. If the recovery environment is a bit more favorable, it is quite likely that the RoEs of suggesting these banks with corporate NPLs can be superior as well. Any retail NPLs would be offset by higher reduction from corporate NPL resulting in further improvement in headline ratios and corporate NPL this would result in relatively lower credit costs as well. Among these banks, we like ICICI Bank recovery is and SBI. Further, we believe that there is a structural change in the business model for ICICI underway Bank as well. We would avoid Yes Bank (SELL) as the bank is still working through its stressed  RoE normalization is loans and Axis Bank (REDUCE) where the valuations are closer to fair value. emerging as the Gradual shift in focus towards book value as compared to adjusted book value next theme to remain positive We believe that we would see focus shifting towards reported book value as compared to adjusted book value. The rationale behind this—(1) stressed loans are now fully reflected and reasonably well provided for, (2) gross and net NPL decline would be led by resolution that may not require huge markdown of net worth, which implies valuation on adjusted book value (70% mark down of net NPLs from net worth) would not reflect the correct picture as we would be penalizing balance sheet that have a higher leverage, such as for public banks, and (3) dilution in book value appears to be complete and we have seen 0-90% reduction in net worth in the current cycle. The recent capital infusion can now be used for growth.

A lot of positives underway, which we believe augur well for banks M B Mahesh, CFA

There are a few very interesting developments that are now emerging, which we think are important for our medium-term view. It is still too hard to bring out a long-term view as a large Nischint Chawathe share of public banks still dominate lending and a large share of investments are from the government. (1) Rating agencies have become stringent leading to higher number of downgrades even for ‘investment grade’ companies. (2) Auditors are monitoring the accounts a lot more Dipanjan Ghosh closely than before. (3) The IBC code has created an environment where banks have better control over erring promoters. It is also resulting in a consolidation in the sector with the companies with stronger balance sheets increasing share in their respective sectors. (4) Promoters are looking Shrey Singh to raise capital or recycle capital a lot faster as the threat of losing companies is quite high. (5) CRILC data is available on a closer-to-real time basis, which gives greater comfort to lending.

[email protected] Contact: +91 22 6218 6427

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

PREMIUM HAS MOVED CLOSER TO LONG-TERM AVERAGES The valuation premium for banks with corporate NPLs has come off from a peak of ~3.8X to 2.6X, a reduction of 30%. After several false starts, there is more evidence to remain positive despite this premium moving closer to long-term averages. Impaired ratios are clean and have started to decline for the first time this decade. The peak dilution in book value, if any, appears to be complete as RoE normalization is underway.

Expect the premiums to contract more than the long-term average; a strong economic cycle is needed to move closer to FY2008 levels

In the past 12 months, we have seen ~30% reduction in premium between banks with corporate NPLs (referred to as corporate banks from here) as compared to banks with retail NPLs (referred to as retail banks from here) as we see in Exhibit 1. This has brought in questions from investors on whether we are closer to the end of this rally. On an overall basis, retail banks trade at a significant multiple (~2.5X of corporate banks on PBR basis) to corporate banks. We are now using the book value as compared to adjusted book value as it would be a better representation of the underlying changes that we are currently witnessing at this point of the cycle.

Retail banks have had a strong outperformance post FY2014, on account of strong book value compounding led by lower NPLs, faster growth and the ability to raise capital at significantly expensive multiples. This was well-justified considering the pain for corporate banks, which have had to report losses to clean their respective balance sheets during this period. The lack of visibility of improvement in NPLs made it challenging to identify the turning point for these banks.

We believe that this current outperformance has more legs to play out even from today. There are several structural changes in a few banks and cyclical reasons to still remain positive, in our view. This is not to say that the multiples of retail banks have to come off necessarily but it is more driven by valuation expansion of the corporate banks over retail banks. Some retail banks trade at higher multiples owing to dominance in select product classes or geographies (ex. AU Small Finance Bank, Bandhan Bank). We believe that the RoEs of major corporate banks like SBI, ICICI Bank and Axis Bank will converge with those of retail banks at ~15-17% over FY2019-22E. In the absence of visible stimulus or exogenous factors to which corporate banks’ return ratios are susceptible over the medium term, the possibility of re-ratings on these companies is significant. On the other hand, retail banks are vulnerable to NIM pressure and uptick in credit cost on the back of deterioration of asset quality in select segments (ex. MSME, MFI, unsecured loans), over the medium term.

14 KOTAK INSTITUTIONAL EQUITIES RESEARCH Banks India

Exhibit 1: Retail banks under coverage trade at 2.6X of corporate banks Price to book (rolling one year-forward) premium of retail banks over corporate banks, March fiscal year-ends, July 2003-July 2019 (X)

4.0

3.5

3.0

2.5

2.0

1.5

Jul-03

Jul-04

Jul-05

Jul-06

Jul-07

Jul-08

Jul-09

Jul-10

Jul-11

Jul-12

Jul-13

Jul-14

Jul-15

Jul-16

Jul-17 Jul-18 Jul-19 Notes: (a) Corporate banks for this comparison are Axis Bank, Bank of Baroda, Canara, Federal Bank, ICICI Bank, J&K Bank, Karur Vysya Bank, Punjab National Bank, State Bank of India, Union Bank and Yes Bank while retail banks are AU SFB, Bandhan Bank, City Union Bank, Equitas Holdings, HDFC Bank, IndusInd Bank, RBL Bank and Ujjivan Financial Services

Source: Bloomberg, Company, Kotak Institutional Equities Several false starts in the past decade with one of the longest NPL cycles in recent history make it a challenge to remain convinced

These banks have outperformed strongly, twice in the last decade, only to see valuations expanding subsequently. (1) We saw a strong contraction between August 2013 and December 2014 by ~40% (2.2X from 3.7X premium), on an expectation that a change in government would help clean up balance-sheet pain that was caused by the previous corporate credit cycle. However, there was an underestimation of the problem as the impact of a lot of restructuring done in the previous few years started to show as higher slippages and the economy started to show strong signs of stress emerging on the corporate side and (2) February 2016 and November 2016 saw the premiums decline by ~20% after the RBI got stringent on NPL recognition. RBI had introduced a few more tools like SDR to aid faster recovery. Here again, banks started reporting the balance of stress as NPLs from what these banks did in the past through instruments like SDR, S4A and 5:25.

KOTAK INSTITUTIONAL EQUITIES RESEARCH 15 India Banks

Exhibit 2: Banks under coverage trade at 2.6X one-year forward book Adjusted price to book for banks under coverage, March fiscal year-ends, July 2003-July 2019 (X)

5

4

3

2

1

-

Jul-03

Jul-04

Jul-05

Jul-06

Jul-07

Jul-08

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Jul-11

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Jul-16

Jul-17 Jul-18 Jul-19

Source: Bloomberg, Company, Kotak Institutional Equities

Exhibit 3: Corporate banks have rallied strongly in FY2019 Exhibit 4: A subdued performance for retail banks PBR for corporate banks, March fiscal year-ends, July 2003-July 2019 PBR for retail banks, March fiscal year-ends, July 2003-July 2019 (X) (X) APBR PBR APBR PBR 6.0 3.0

4.8 2.4

3.6 1.8

2.4 1.2

1.2 0.6

-

-

Jul-03

Jul-04

Jul-05

Jul-06

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Jul-09

Jul-10

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Jul-14

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Jul-17 Jul-18

Jul-19

Jul-03

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Jul-16

Jul-17 Jul-18 Jul-19 Source: Bloomberg, Company, Kotak Institutional Equities Source: Bloomberg, Company, Kotak Institutional Equities

16 KOTAK INSTITUTIONAL EQUITIES RESEARCH Banks India

Exhibit 5: Valuations of key financial companies March fiscal year-ends, 2019-21E

Fair Value Price (Rs) Market cap. EPS (Rs) PER (X) ABVPS (Rs) APBR (X) RoE (%) Reco. (Rs) 8-Jul-19 (US$ bn) 2019 2020E 2021E 2019 2020E 2021E 2019 2020E 2021E 2019 2020E 2021E 2019 2020E 2021E Public banks Bank of Baroda ADD 145 125 7 2 21 25 76.2 6.0 5.0 137 122 156 0.9 1.0 0.8 0.9 14.5 14.2 Canara Bank ADD 315 270 3 5 53 72 NA 5.1 3.7 212 328 420 1.3 0.8 0.6 1.0 10.4 12.7 PNB ADD 105 73 5 (22) 9 14 (3.4) 7.7 5.3 46 61 78 1.6 1.2 0.9 (25.3) 9.9 12.7 SBI BUY 410 355 46 1 37 51 NA 9.7 6.9 159 214 279 2.2 1.7 1.3 0.4 13.8 16.6 Union Bank ADD 105 77 2 (17) 9 21 (4.6) 8.6 3.6 63 74 117 1.2 1.0 0.7 (12.5) 6.3 13.7 Old private banks City Union Bank ADD 215 200 2 9 11 12 21.5 18.7 16.7 61 68 77 3.3 2.9 2.6 15.2 15.3 15.1 Federal Bank BUY 130 105 3 6 9 10 16.8 11.8 10.1 62 67 74 1.7 1.6 1.4 9.8 12.7 13.4 J&K Bank BUY 90 40 0 8 10 17 4.7 4.1 2.3 81 120 139 0.5 0.3 0.3 7.3 7.8 12.7 Karur Vysya Bank ADD 85 69 1 3 4 9 26.2 17.7 8.0 61 65 73 1.1 1.1 1.0 3.3 4.8 10.1 New private banks Axis Bank REDUCE 730 783 30 18 46 55 43.1 17.0 14.1 231 283 336 3.4 2.8 2.3 7.2 16.4 16.7 Bandhan SELL 475 532 9 16 18 24 32.5 28.9 22.5 93 100 123 5.7 5.3 4.3 19.0 21.4 20.7 DCB Bank BUY 230 224 1 11 13 17 21.3 16.8 13.4 89 100 114 2.5 2.2 2.0 12.0 13.5 14.9 HDFC Bank ADD 2,400 2,410 96 77 90 109 31.1 26.9 22.2 540 607 690 4.5 4.0 3.5 16.5 15.4 16.5 ICICI Bank BUY 460 426 40 5 25 31 81.6 17.1 13.6 150 174 201 2.8 2.4 2.1 3.2 14.0 15.7 IndusInd Bank ADD 1,750 1,476 13 54 78 100 27.4 18.9 14.7 405 507 586 3.6 2.9 2.5 13.5 17.5 17.5 RBL SELL 560 627 4 20 30 37 30.9 21.1 17.2 171 194 222 3.7 3.2 2.8 12.2 15.7 16.8 Yes Bank SELL 170 93 3 7 4 12 12.5 22.9 7.6 103 96 112 0.9 1.0 0.8 6.5 3.5 10.0 Small Finance Banks AU SFB SELL 500 680 3 13 16 23 NA 41.3 29.5 101 139 162 6.7 4.9 4.2 14.0 13.2 14.8 Equitas BUY 180 117 1 6 10 13 NA 11.8 9.0 70 78 91 1.7 1.5 1.3 9.1 12.8 14.5 Ujjivan ADD 375 274 0 16 23 30 NA 11.7 9.1 159 178 203 1.7 1.5 1.3 10.7 13.7 15.6 Non-banks Bharat Financial Inclusion NA - 898 2 62 69 91 14.5 12.9 9.9 283 357 452 3.2 2.5 2.0 24.9 21.7 22.4 Bajaj Finserv REDUCE 7,250 7,593 18 242 307 384 31.4 24.7 19.8 1,536 1,829 2,194 4.9 4.2 3.5 17.5 18.3 19.1 Bajaj Finance SELL 2,500 3,413 29 69 92 122 49.3 37.3 28.0 341 422 530 10.0 8.1 6.4 22.5 24.0 25.6 Cholamandalam ADD 295 276 3 15 18 21 18.2 15.6 13.1 76 93 111 3.6 3.0 2.5 21.1 20.5 20.3 HDFC ADD 2,175 2,260 57 56 62 71 40.4 36.2 31.7 447 485 529 5.1 4.7 4.3 13.4 13.4 14.0 HDFC core 1,250 31 42 50 57 29.5 25.2 21.9 320 358 402 3.9 3.5 3.1 13.6 15.0 15.3 LIC Hsg Fin ADD 550 551 4 48 57 67 11.4 9.6 8.2 322 376 437 1.7 1.5 1.3 15.9 16.6 16.9 L&T Finance Holdings REDUCE 140 121 4 18 13 15 6.8 9.5 8.3 102 79 92 1.2 1.5 1.3 19.3 18.0 17.2 Mahindra Finance ADD 500 389 3 25 31 36 15.4 12.4 10.9 160 181 206 2.4 2.1 1.9 15.2 16.7 16.9 Magma Fincorp BUY 150 116 0 11 13 15 10.3 9.2 7.5 95 108 121 1.2 1.1 1.0 12.8 11.6 12.8 Muthoot Finance ADD 625 602 4 49 54 60 12.2 11.2 10.1 244 283 326 2.5 2.1 1.8 22.4 20.3 19.6 PNBHF REDUCE 700 788 2 71 69 77 11.1 11.4 10.2 439 476 535 1.8 1.7 1.5 16.9 14.5 14.4 Shriram City Union Finance ADD 1,900 1,480 1 150 156 189 9.9 9.5 7.8 891 1,019 1,166 1.7 1.5 1.3 16.6 15.1 16.0 Shriram Transport BUY 1,425 1,033 3 113 129 145 9.1 8.0 7.1 676 767 881 1.5 1.3 1.2 17.4 17.1 16.8

Source: Bloomberg, Company, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 17 India Banks

Exhibit 6: Price performance of key financial companies

Price (Rs) Change in price (%) Relative performance to sensex (%) 52 week price (Rs) % change 8-Jul-19 1 month 3 month 6 month 12 month Ytd 1 month 3 month 6 month 12 month Ytd High Low from high Public banks Bank of Baroda 125 2.8 (4.1) 0.6 7.9 4.9 4.9 (4.2) (6.5) (0.7) (2.3) 158 91 (20.9) Canara Bank 270 2.7 (1.4) (6.2) 9.0 (1.9) 4.8 (1.4) (12.9) 0.4 (8.6) 302 205 (10.7) Punjab National Bank 73 (8.1) (21.8) (10.9) (5.4) (6.8) (5.7) (21.8) (17.2) (12.9) (13.2) 100 58 (27.1) SBI 355 3.9 13.6 16.4 38.1 20.1 6.0 13.5 8.1 27.2 11.8 374 247 (4.9) Union Bank of India 77 4.3 (16.5) (18.5) (5.2) (10.3) 6.4 (16.5) (24.3) (12.7) (16.4) 100 61 (23.3) Old private banks City Union Bank 200 (7.3) 0.1 3.1 17.3 2.6 (4.9) 0.0 (4.2) 8.0 (4.4) 221 157 (9.3) DCB 224 (7.1) 12.9 26.0 32.5 32.1 (4.8) 12.8 17.1 22.0 23.1 245 140 (8.6) Federal Bank 105 (0.8) 8.2 10.3 29.0 12.7 1.5 8.1 2.5 18.8 5.0 110 67 (4.8) J&K Bank 40 (33.3) (33.1) 6.3 (21.6) 5.0 (30.4) (33.1) (1.2) (27.8) (2.2) 66 33 (40.0) Karur Vysya Bank 69 (11.1) (12.4) (25.2) (24.0) (22.3) (8.6) (12.4) (30.5) (30.0) (27.6) 101 63 (31.5) New private banks Axis Bank 783 (2.6) 3.8 20.3 52.4 26.3 (0.3) 3.7 11.8 40.4 17.7 828 514 (5.4) Bandhan Bank 532 (4.9) (2.8) 11.5 (2.3) (3.3) (2.6) (2.8) 3.6 (10.0) (10.0) 742 368 (28.3) HDFC Bank 2,410 (1.6) 5.3 14.6 13.9 13.6 0.7 5.2 6.5 4.9 5.8 2,503 1,884 (3.7) ICICI Bank 426 2.2 10.0 12.0 57.7 18.3 4.4 10.0 4.1 45.2 10.2 444 257 (4.1) IndusInd Bank 1,476 (4.9) (15.7) (6.5) (24.7) (7.7) (2.6) (15.8) (13.1) (30.6) (14.0) 2,038 1,333 (27.6) RBL 627 (6.2) (4.4) 11.0 11.4 8.9 (35.9) (67.5) (74.4) (84.8) (75.2) 717 438 (12.5) Yes Bank 93 (33.4) (64.2) (51.6) (73.6) (48.8) (30.5) (64.2) (55.0) (75.7) (52.3) 404 86 (76.9) Small Finance Banks AU 680 (3.6) 16.8 9.2 0.1 9.4 (1.3) 16.7 1.5 (7.8) 1.9 745 501 (8.7) Equitas Finance 117 (15.3) (11.4) (3.3) (16.4) (6.4) (12.8) (11.4) (10.1) (23.0) (12.8) 163 78 (28.2) Ujjivan 274 (23.5) (15.1) (3.8) (27.7) (1.3) (20.8) (15.1) (10.6) (33.4) (8.1) 407 167 (32.7) Non-banks Bharat Financial Inclusion 898 (8.2) (18.5) (10.3) (24.0) (11.3) (5.8) (18.6) (16.6) (30.0) (17.4) 1,249 824 (28.1) Bajaj Auto Finance 3,413 (2.7) 12.9 34.5 45.5 29.0 (0.5) 12.8 25.0 34.0 20.2 3,762 1,912 (9.3) Bajaj Finserv 7,593 (7.4) 3.3 17.8 25.3 17.2 (5.1) 3.3 9.5 15.4 9.2 8,580 4,955 (11.5) Cholamandalam 276 (6.5) (6.1) 15.2 (7.0) 9.7 (4.1) (6.1) 7.0 (14.3) 2.2 324 208 (14.7) HDFC 2,260 2.2 10.0 15.4 17.9 14.8 4.4 9.9 7.2 8.6 6.9 2,301 1,645 (1.8) IIFL Holdings 147 (13.9) (32.1) (35.8) (53.5) (38.6) (11.4) (32.1) (40.3) (57.2) (42.8) 358 136 (59.0) LIC Housing Finance 551 (1.0) 0.1 14.5 13.7 12.7 1.2 0.0 6.4 4.7 4.9 587 388 (6.2) L&T Finance Holdings 121 (3.0) (18.5) (18.3) (19.1) (20.6) (35.9) (67.5) (74.4) (84.8) (75.2) 190 106 (36.1) MMFS 389 (6.2) (5.7) (15.8) (14.4) (17.9) (3.9) (5.8) (21.7) (21.2) (23.5) 527 343 (26.2) Magma Fincorp 116 (11.3) (5.1) 7.9 (28.3) 5.6 (8.8) (5.2) 0.3 (34.0) (1.6) 165 81 (29.6) Muthoot Finance 602 (2.2) (1.9) 16.4 48.8 16.6 0.0 (2.0) 8.2 37.0 8.6 657 356 (8.4) PNB Housing 788 (2.4) (13.3) (12.5) (33.0) (14.7) (0.1) (13.3) (18.7) (38.3) (20.5) 1,429 675 (44.8) PFC 128 (5.1) 7.1 17.1 71.8 18.8 (5.1) 7.1 17.1 71.8 18.8 139 68 (8.1) Rural Electrification Corp. 160 5.8 6.8 31.9 53.8 31.4 7.9 6.7 22.6 41.7 22.4 170 89 (5.4) Shriram City Union Finance 1,480 (5.9) (15.9) (6.5) (23.0) (6.9) (3.6) (15.9) (13.1) (29.1) (13.3) 2,065 1,301 (28.3) Shriram Transport 1,033 (5.5) (16.8) (13.4) (7.1) (16.7) (3.2) (16.9) (19.6) (14.5) (22.4) 1,477 902 (30.1)

Source: Bloomberg, Company, Kotak Institutional Equities

RoE gap between retail and corporate banks will converge over medium term

RoE gap between corporate and private banks will converge over the medium term at normalized RoE levels of 15-17% by FY2022E. We saw a similar RoE gap reduction during FY2004-06 (post recovery in the last corporate cycle). RoE improvement for corporate banks will be interplay of (1) NIM expansion on the back of improvement in yields, (2) sharp reduction in credit cost, (3) marginal drop in cost-ratios and (4) revival in treasury income. RoEs for retail banks will be broadly stable around 16-17% during the same period. While RoE gap reduction will occur at a swift pace, the pace of reduction in valuation multiples is slightly slower.

18 KOTAK INSTITUTIONAL EQUITIES RESEARCH Banks India

Exhibit 7: Drop in credit cost and improvement in margins will drive RoA improvement for corporate banks RoA, March fiscal year-ends, 2001-22E (%)

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020E 2021E 2022E Corporate Banks Axis 1.0 1.1 1.1 1.3 1.1 1.1 1.1 1.2 1.4 1.5 1.6 1.6 1.7 1.7 1.7 1.7 0.6 0.0 0.6 1.4 1.5 1.5 BOB 0.5 0.9 1.0 1.2 0.8 0.8 0.8 0.9 1.1 1.2 1.3 1.2 0.9 0.8 0.5 (0.8) 0.2 (0.3) 0.1 0.8 0.8 0.9 Canara 0.5 1.1 1.3 1.5 1.1 1.1 1.0 0.9 1.0 1.2 1.3 0.9 0.7 0.5 0.5 (0.5) 0.2 (0.7) 0.1 0.5 0.7 0.8 FB 0.7 0.9 0.9 1.0 0.6 1.2 1.3 1.3 1.4 1.1 1.2 1.4 1.3 1.2 1.3 0.5 0.8 0.7 0.8 1.0 1.0 1.0 ICICI 1.1 1.4 1.4 1.2 1.0 1.1 1.0 1.1 1.3 1.4 1.6 1.7 1.8 1.4 1.4 1.1 0.4 1.5 1.7 1.8 J&K bank 1.4 2.0 2.2 2.1 0.5 0.7 1.0 1.2 1.2 1.3 1.3 1.5 1.6 1.6 0.7 0.5 (2.0) 0.2 0.5 0.5 0.8 0.7 KVB 4.0 2.4 1.4 1.6 1.6 1.6 1.5 1.7 1.7 1.5 1.3 0.9 0.9 1.0 1.0 0.5 0.3 0.4 0.8 1.2 PNB 0.8 0.8 1.1 1.2 1.2 1.1 1.0 1.1 1.4 1.4 1.3 1.2 1.0 0.6 0.5 (0.8) 0.2 (1.7) (1.3) 0.6 0.8 0.8 SBI 0.6 0.7 0.9 0.9 1.0 0.9 0.9 1.0 1.1 0.9 0.7 0.9 1.0 0.6 0.7 0.5 0.4 (0.2) 0.0 0.8 1.1 1.1 Union 0.4 0.8 1.2 1.3 1.1 0.8 0.9 1.2 1.2 1.2 1.0 0.7 0.8 0.5 0.5 0.3 0.1 (1.1) (0.6) 0.3 0.7 0.9 Yes (0.6) 2.0 1.2 1.4 1.5 1.6 1.5 1.5 1.5 1.6 1.6 1.7 1.8 1.6 0.5 0.3 0.8 1.3 Total 0.8 1.1 1.2 1.1 1.0 0.9 1.1 1.1 1.1 1.1 1.1 1.1 0.9 0.9 0.3 0.5 (0.2) 0.0 0.9 1.1 1.1 Retail Banks AU (1.7) (1.3) 0.6 0.8 0.8 Bandhan 0.5 0.4 (0.2) 0.0 0.8 1.1 1.1 CUBK 1.3 1.4 1.4 2.0 1.4 1.5 1.5 1.6 1.5 1.5 1.6 1.7 1.6 1.4 1.5 1.5 1.5 1.6 1.6 1.6 1.5 1.5 DCB 0.8 0.8 0.8 0.4 (3.2) (2.0) 0.2 0.6 (1.3) (1.3) 0.3 0.7 1.0 1.3 1.3 1.1 0.9 0.9 1.0 1.0 1.1 1.1 Equitas 1.8 0.3 1.4 1.8 1.8 1.9 HDFC 1.5 1.5 1.4 1.4 1.4 1.4 1.4 1.4 1.4 1.5 1.6 1.7 1.8 1.9 1.9 1.8 1.8 1.8 1.8 1.8 1.9 1.9 IIB 0.5 0.5 0.9 2.1 1.4 0.2 0.7 0.3 0.6 1.1 1.4 1.6 1.6 1.8 1.8 1.8 1.8 1.8 1.3 1.8 1.8 1.7 RBL 0.7 1.1 1.3 1.1 (1.1) 0.1 0.3 1.3 1.9 1.0 0.2 1.2 0.9 0.6 0.9 0.9 1.0 1.1 1.2 1.4 1.3 1.4 Ujjivan 0.1 1.6 1.7 1.7 1.7 Total 1.2 1.2 1.5 1.1 1.0 1.2 1.2 1.2 1.3 1.5 1.6 1.8 1.8 1.8 1.8 1.9 1.8 1.8 1.8 1.9 1.9

Source: Company, Kotak Institutional Equities estimates

Exhibit 8: RoE normalization in the horizon for most corporate banks RoE, March fiscal year-ends, 2001-22E (%)

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020E 2021E 2022E Corporate Banks Axis 31.9 29.3 25.1 24.8 17.9 18.4 21.0 17.6 19.1 19.2 19.3 20.3 18.5 17.4 17.8 16.8 6.4 0.5 7.2 16.4 16.7 17.1 BOB 8.3 17.2 20.1 21.5 13.2 12.7 12.7 16.0 21.4 24.7 25.5 21.7 15.7 13.8 9.2 (14.4) 3.4 (5.8) 0.9 14.5 14.2 15.3 Canara 10.5 23.6 26.7 28.5 19.5 20.3 16.3 15.0 18.3 22.5 23.2 15.4 12.1 8.9 8.8 (8.9) 3.4 (12.2) 1.0 10.4 12.7 13.8 FB 15.7 19.0 21.4 23.1 13.1 22.6 21.2 13.6 12.1 10.3 12.0 14.4 13.9 12.6 13.7 6.0 9.8 8.3 9.8 12.7 13.4 14.7 ICICI 18.3 22.5 19.5 14.6 13.4 11.7 7.8 8.0 9.7 11.2 13.1 14.0 14.7 11.4 10.9 8.3 3.2 14.0 15.7 17.1 J&K bank 27.3 32.7 31.3 28.7 7.1 10.2 14.4 16.8 16.7 18.2 19.0 21.2 23.6 22.3 8.6 6.6 (27.0) 3.4 7.3 7.8 12.7 12.7 KVB 44.7 25.3 14.3 16.6 16.5 18.5 18.6 22.6 22.3 20.8 19.0 13.4 12.0 12.9 12.6 6.1 3.3 4.8 10.1 14.9 PNB 21.9 21.0 25.0 26.4 22.5 17.0 16.0 19.6 25.7 26.4 24.4 21.1 16.5 10.2 8.5 (13.3) 3.6 (32.5) (25.3) 9.9 12.7 11.4 SBI 12.5 17.0 19.2 19.7 19.4 17.0 15.4 16.8 17.1 14.8 12.6 15.7 15.4 10.0 10.6 7.3 6.3 (3.2) 0.4 13.8 16.6 15.7 Union 10.1 21.4 30.1 30.5 25.2 18.7 19.2 26.8 27.2 26.2 20.9 14.9 15.0 10.4 10.1 7.0 2.7 (23.7) (12.5) 6.3 13.7 17.0 Yes (3.5) 14.1 13.7 19.0 20.6 20.3 21.1 23.1 24.8 25.0 21.3 19.9 18.6 17.7 6.5 3.5 10.0 15.1 Total 18.4 22.8 22.4 18.6 16.2 15.1 15.4 15.3 15.6 15.7 16.0 15.1 12.3 11.9 4.7 6.4 (3.3) 0.1 12.6 15.0 15.5 Retail Banks AU 13.7 14.0 13.2 14.8 17.5 Bandhan 11.2 28.6 19.5 19.0 21.4 20.7 21.3 CUBK 19.2 21.8 21.7 31.0 20.9 21.4 22.0 21.8 19.9 20.6 23.5 24.9 22.3 18.9 16.7 15.5 15.2 15.3 15.2 15.3 15.1 15.5 DCB 12.0 11.8 13.2 7.2 (75.3) (54.6) 3.2 8.1 (15.2) (14.6) 3.9 8.0 11.6 14.8 14.5 11.9 10.8 10.9 12.0 13.5 14.9 16.2 Equitas 9.3 1.4 9.1 12.8 14.5 16.5 HDFC 25.2 20.8 18.5 20.6 18.5 17.7 19.5 17.7 16.9 16.1 16.7 18.7 20.3 21.3 19.4 18.3 17.9 17.9 16.5 15.4 16.5 17.4 IIB 9.0 11.1 19.1 47.5 32.8 5.7 17.0 8.7 14.3 22.4 20.8 20.1 18.3 18.0 19.7 17.1 15.7 17.1 13.5 17.5 17.5 17.8 RBL 16.8 23.6 26.9 18.2 (19.4) 1.2 2.9 7.2 9.2 5.5 0.8 5.9 6.8 5.1 9.8 11.2 12.2 11.5 12.2 15.7 16.8 18.3 Ujjivan 0.4 10.7 13.7 15.6 17.7 Total 17.0 17.6 23.4 15.2 14.1 18.0 16.0 15.0 15.4 16.4 18.2 19.3 19.8 18.7 17.7 17.7 16.7 15.7 15.9 16.8 17.7

Source: Company, Kotak Institutional Equities estimates

Valuations are attractive for the return ratios that these corporate banks are likely to generate in the medium term. We have seen a strong expansion in multiples of banks, especially when there is greater comfort on growth, return ratios, consistency in performance and lower asset quality concerns. We believe that we are entering into one such period for Axis Bank, ICICI Bank and SBI.

KOTAK INSTITUTIONAL EQUITIES RESEARCH 19 India Banks

Exhibit 9: Valuation framework gives a strong positive outcome for corporate over retail banks PBR (adjusted) and RoE for banks, March fiscal year-ends, 2020-21E

18.0 Bandhan IndusInd HDFCB 15.0 CUBK RBL DCB Axis AU 12.0 Equitas Ujjivan Federal ICICI (standalone) RoE (%) RoE 9.0 BoB SBI 6.0 Canara KVB Yes 3.0

- 0.5 1.3 2.1 2.9 3.7 4.5 P/ABV (X) Note: (1) We have taken average of RoE for FY2019-20E.

Source: Company, Kotak Institutional Equities estimates

The adjusted book value is probably losing its relevance from here

We do believe that we have returned to a point where the adjusted book value will be less relevant and the reported book value is a lot more useful. The concept of adjusted book value is relevant when the reported NPLs are lower than the forecasted underlying stress in the system as the net worth is yet to capture this deterioration. The adjusted book value (reducing forward estimates of net worth by 70% of net NPLs) gives a better perspective of the underlying valuation. However, as the NPLs peak led by healthy coverage ratio, the valuation ratios would appear expensive as compared to price to book value.

Exhibit 10: Adjusted book discount has started to drop Adjusted book value discount to book value for corporate banks, March fiscal year-ends, July 2003-July 2019 (X)

45

36

27

18

9

-

Jul-03

Jul-04

Jul-05

Jul-06

Jul-07

Jul-08

Jul-09

Jul-10

Jul-11

Jul-12

Jul-13

Jul-14

Jul-15

Jul-16

Jul-17 Jul-18 Jul-19

Source: Bloomberg, Company, Kotak Institutional Equities

20 KOTAK INSTITUTIONAL EQUITIES RESEARCH Banks India

The peak of book value dilution is behind all banks

Exhibit 11 shows the pain that public banks have had to gone through in the current cycle. The book value/share has eroded quite significantly over the past five years. Two contributing factors: (1) dilution below book in recent years and (2) large provisioning for bad loans resulting in steep losses.

On the back of high NPLs, the government had to significantly increase its ownership as the ability to raise capital in public markets was quite limited. The government has proposed for a further capital infusion in these banks for FY2020 suggesting that there would be further erosion, albeit negligible, as the losses would significantly reduce and most of it would be used to improve capital adequacy ratios for these banks.

Exhibit 11: Book value per share deterioration has been quite sharp in this cycle Book value per share across public banks, March fiscal year-ends (%)

100 90 87 87 78 74 71 80 71 71 69 67 64 63 60 60 52 52 35 40 26 18 20 13

0

Uco

IDBI

Dena

Vijaya

Union

United

Canara

Syndicate

Allahabad

Corporation

Andhra Bank

Bank Indiaof

Bank Barodaof

Indian Overseas

Oriental bank of…

PunjabSindBank

Bank Maharashtraof Central bank of India PunjabNational Bank Notes: (a) Peak levels for most PSU banks occurred around FY2014-16 although for some PSU banks it could be different years. We have considered peak levels at years in the range of FY2011-18 for our calculations.

Source: Company, Kotak Institutional Equities

KOTAK INSTITUTIONAL EQUITIES RESEARCH 21 India Banks

Exhibit 12: Steep drop in market price of PSU banks over past five years Share price performance across private and PSU banks, March fiscal year-ends, 2004-19 (Rs)

CAGR (%) 2004 2008 2019 2004-19 2008-19 2014-19 PSU banks Allahabad Bank 32 77 55 4 (3) (10) Andhra Bank 51 74 28 (4) (8) (15) Bank of Baroda 49 57 129 7 8 (2) Bank of India 59 253 104 4 (8) (15) Bank of Maharashtra 50 14 NA (11) (19) Canara Bank 141 219 291 5 3 3 Central Bank of India 74 36 NA (6) (6) Corporation Bank 56 56 29 (4) (6) (12) Dena Bank 29 51 13 (5) (12) (27) IDBI Bank 58 89 47 (1) (6) (7) Indian Bank 164 280 5 20 Indian Overseas Bank 56 135 14 (9) (18) (22) Oriental Bank of Commerce 301 177 116 (6) (4) (12) Punjab and Sind Bank 31 NA NA (7) Punjab National Bank 67 102 96 2 (1) (8) State Bank of India 57 160 321 12 7 11 Syndicate Bank 40 75 43 1 (5) (15) UCO Bank 22 37 19 (1) (6) (24) Union Bank of India 53 141 96 4 (3) (7) United Bank of India 11 NA NA (19) Vijaya Bank 61 50 46 (2) (1) 3 Private banks Axis Bank 29 158 777 24 16 22 Bandhan Bank 526 NA NA NA City Union Bank 4 17 205 30 25 36 DCB Bank 85 205 NA 8 27 Dhanlaxmi bank 20 63 17 (1) (11) (14) Federal Bank 9 22 96 17 15 15 HDFC Bank 76 266 2,319 26 22 25 ICICI Bank 54 140 401 14 10 12 IndusInd Bank 40 79 1,780 29 33 29 Jammu and Kashmir Bank 50 68 54 1 (2) (19) Karnataka Bank 40 151 134 8 (1) 7 Karur Vysya Bank 12 32 71 12 8 2 Kotak Mahindra Bank 20 156 1,335 32 22 28 Lakshmi Vilas Bank 22 50 71 8 3 7 RBL Bank 680 NA NA NA South Indian Bank 5 10 17 8 5 (4) Yes Bank 34 275 NA 21 27

Source: Company, Kotak Institutional Equities

22 KOTAK INSTITUTIONAL EQUITIES RESEARCH Banks India

Exhibit 13: Significant erosion in book value per share for most PSU banks over past five years BPS CAGR across private and PSU banks, March fiscal year-ends, 2004-19 (%) 30 2004-19 2008-19 2014-19

15

0

-15

-30

-45

FB

SIB

SBI

BoI

IoB

Yes

RBL

KBL

J&K

IDBI

BoB

Axis

PNB

KVB

DCB

OBC

ICICI

Dena

HDFC

CUBK

Indian

Canara

Andhra

Indusind

Allahabad

Corporation

Central bank Central Bank of of BankMaha

Punjab Punjab Sind and

Source: Company, Kotak Institutional Equities

Exhibit 14: Another Rs700 bn would be infused in FY2020E, giving boost to lending activities Capital infusion and earnings for PSU banks, March fiscal year-ends, 2011-19 (Rs bn)

Capital infused PAT 1,500 1,201

1,000 900

413 459 470 500 342 343 250 251 157 141 145 125 70 - (2) (205) (500) (473)

(1,000) (853) 2011 2012 2013 2014 2015 2016 2017 2018 2019 Notes: (1) We have accounted for net worth erosion for Dena and Vijaya Bank into losses for FY2019.

Source: Company, Kotak Institutional Equities

KOTAK INSTITUTIONAL EQUITIES RESEARCH 23 India Banks

ASSET QUALITY TO SHOW IMPROVEMENT DESPITE A FEW CHALLENGES AHEAD FY2019 marked the first year of asset quality improvement after nearly a decade with a decline of ~220 bps to 9.3%. Recovery of bad loans has started to improve meaningfully suggesting that the trend on NPL ratios is likely to remain positive for the next few years as the cyclical recovery in asset quality is underway. We believe the credit costs would significantly move closer to normalized or below normalized levels in this period.

Gross NPLs have begun a cyclical decline; credit costs to ease sharply

We believe that the gross and net NPL ratios for Indian banks would continue to decline over the next few years as the peak of NPL recognition is behind. The pace of decline would be hard to project as we are still seeing early and definite trends of (1) reduction in slippages to NPLs, (2) better recovery trends but still hard to forecast given the lumpiness of these NPLs and (3) write-offs, which is a function of profitability and capital buffer for most banks.

RBI’s latest financial stability report broadly reiterates our view that the stress levels in the sector appear to be showing stable signs with no further deterioration in the underlying numbers. (1) Gross NPLs decreased to 9% in FY2019 from ~12% of loans in FY2018 driven by a drop in corporate slippages and improvement in recoveries and higher write-offs, (2) restructured loans are <0.4% of loans (down 50 bps yoy), (3) strong improvement in asset quality for public banks with stressed loans (GNPL + restructured) declining 350 bps yoy to 13%, (4) gross NPLs in the corporate sector have dropped at a steep pace to 18% (down 500 bps yoy). Corporate GNPLs are expected to decline further on the back of a pickup in pace of recoveries in FY2020E, (5) net NPLs dropped sharply for PSU banks as most of the infused capital (from GOI) was utilized for improving coverage ratios and (6) stable trends in delinquency across most retail asset classes.

Asset quality of retail banks was broadly stable and we see marginal improvement for MFIs driven by robust decline in MFI GNPLs. Overall stressed assets dropped 250 bps for Axis Bank to 9%, 300 bps for ICICI Bank to 11% and 450 bps yoy for SBI to 8%. With the exceptions of select accounts in infrastructure space, we did not see incremental stress arising from any new sector.

Exhibit 15: Gross NPL have started to decline Gross and net NPL ratios of Indian banks, March fiscal year-ends, 2001-19 (%)

Gross NPL Ratio Net NPL Ratio Restructured loans 15.0

11.4 11.5 12.0 10.4 9.6 9.3 8.8 9.0 7.2 7.5 6.2 6.5 6.1 5.5 5.5 4.9 6.0 4.4 4.6 4.4 3.8 4.0 3.8 3.5 3.2 2.9 2.6 3.1 2.2 2.3 2.3 2.4 2.5 2.1 2.5 2.5 3.0 1.4 1.7 1.2 1.0 1.0 1.1 1.1 1.1 0.9 0.4

-

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018 2019

Source: RBI, Company, Kotak Institutional Equities

24 KOTAK INSTITUTIONAL EQUITIES RESEARCH Banks India

Exhibit 16: Stressed loans declined across sectors; infrastructure is driving the bulk of the decline Break-up of stressed loans in the corporate sector, March fiscal year-ends, 2018-19 (%)

Source: RBI, Kotak Institutional Equities

Exhibit 17: Overall asset quality improves for PSU banks across most sectors barring some spike in GNPL levels in agricultural loans GNPL to total advances sector wise, March fiscal year-ends, 2014-19 (%)

Agri and allied Industry Services Personal loans Total 2014 2015 2016 2017 2018 2019 2014 2015 2016 2017 2018 2019 2014 2015 2016 2017 2018 2019 2014 2015 2016 2017 2018 2019 2014 2015 2016 2017 2018 2019 Allahabad 7.5 6.6 5.9 4.9 6.0 12.1 7.0 7.8 16.3 26.1 36.3 34.3 9.0 6.7 10.4 8.2 8.4 9.9 3.9 2.0 2.1 2.0 2.3 5.1 7.2 7.0 11.9 15.2 17.6 18.9 Andhra 2.8 5.3 4.4 4.2 4.1 4.6 6.6 7.0 14.0 20.4 31.0 39.8 4.6 2.3 1.7 10.4 8.8 7.3 1.8 2.6 1.8 1.4 1.8 2.2 NA 5.3 8.4 12.3 17.1 19.2 BoB 5.1 5.3 10.7 11.3 12.7 10.1 5.0 7.2 19.1 19.8 21.3 15.0 2.0 2.9 8.1 6.7 9.5 7.8 2.0 2.9 8.1 6.7 9.5 7.8 3.6 4.6 11.9 11.7 12.3 9.6 BoI 2.0 5.1 6.7 10.8 14.0 20.8 3.8 9.2 19.7 25.9 34.4 25.8 2.8 5.3 6.7 12.4 14.3 18.6 0.8 1.1 2.0 10.5 5.1 12.0 NA 6.8 12.7 19.3 23.5 21.3 BoMH 6.1 6.1 8.1 12.1 16.5 19.1 3.7 6.0 13.9 31.6 41.6 29.8 2.3 8.3 7.8 12.6 11.2 12.3 1.7 2.0 3.5 4.0 6.2 3.9 3.2 6.3 9.3 16.9 19.5 16.4 Canara 2.0 2.4 3.2 3.7 4.6 5.4 3.4 5.8 13.5 14.0 18.9 17.5 1.7 2.6 10.3 10.6 1.6 1.2 0.5 0.5 0.8 0.7 0.7 0.2 2.5 3.9 9.4 9.6 11.8 8.8 Central 4.6 4.6 5.6 7.7 7.4 9.7 8.4 7.8 13.0 27.3 39.5 35.6 9.1 8.7 10.7 15.7 15.3 16.3 3.9 3.5 4.2 5.6 3.8 4.8 6.9 6.4 9.6 17.8 21.5 19.3 Corporation 4.2 3.7 4.5 5.2 9.0 12.6 7.0 9.8 21.4 25.6 40.1 49.2 4.5 5.0 9.1 14.9 14.0 13.4 1.3 2.8 5.0 8.2 6.0 12.3 4.8 6.5 13.0 16.5 26.6 26.6 Dena 4.3 7.1 8.7 12.9 16.2 NA 4.5 8.1 19.7 32.9 44.0 NA 4.4 6.6 14.1 12.6 19.1 NA 2.0 4.6 4.9 8.7 9.3 NA NA 6.3 11.3 18.2 23.7 NA IDBI 11.2 9.2 7.5 8.7 7.5 11.6 6.3 7.8 15.7 33.0 45.4 50.4 4.2 7.8 6.2 12.1 17.1 14.4 1.4 1.9 2.2 1.3 1.3 1.2 4.9 5.9 10.6 20.6 27.8 27.5 Indian 1.9 1.9 2.7 2.4 2.0 2.2 5.1 7.3 12.9 11.9 11.8 10.0 3.8 4.2 3.8 6.4 6.4 4.3 2.3 2.1 2.1 2.1 1.9 4.0 3.7 4.4 6.7 7.5 7.4 7.1 IOB 4.0 7.7 8.3 11.8 11.7 11.0 6.6 11.1 24.5 34.2 46.8 41.0 3.7 4.4 10.7 20.0 25.6 19.0 2.1 4.8 13.6 8.4 1.7 2.5 4.8 8.1 17.4 22.4 25.3 22.0 OBC 5.8 5.7 6.5 7.5 13.3 16.3 6.4 8.5 20.4 34.2 40.8 31.1 2.2 3.1 4.9 7.0 9.6 6.8 2.1 2.2 4.5 3.8 6.9 1.3 4.2 5.2 9.6 13.7 17.6 12.7 PNB 4.7 5.4 6.0 8.5 11.0 11.9 7.2 8.9 25.3 24.9 33.9 26.4 3.1 5.2 7.1 6.4 14.2 14.1 4.8 4.9 3.3 3.4 4.6 3.7 5.2 6.5 12.9 12.5 18.4 15.5 SBI 8.1 8.8 7.8 5.6 11.1 10.7 3.9 4.7 9.7 10.8 17.8 11.6 5.2 2.8 2.7 4.1 5.6 5.1 1.3 0.8 0.7 0.5 1.2 1.0 4.0 4.0 6.5 6.9 10.9 7.5 Syndicate 3.7 4.8 5.1 7.0 11.0 14.3 3.6 4.5 13.4 16.0 22.2 20.6 1.7 1.3 2.4 3.8 7.2 8.4 2.2 2.9 5.3 5.8 3.2 3.6 2.6 3.1 6.7 8.5 11.5 11.4 UCO 6.8 8.1 8.4 11.1 14.7 21.1 5.9 9.5 19.8 25.4 57.5 54.8 6.0 8.2 14.0 8.3 11.8 11.7 5.3 6.7 14.2 9.0 6.8 4.8 6.0 8.8 16.6 18.6 29.2 27.7 Union 6.1 4.5 6.4 7.0 6.1 8.2 4.6 6.9 13.2 15.8 34.1 31.1 3.3 4.0 4.3 7.4 14.0 14.6 2.6 2.3 2.6 2.9 2.4 2.6 4.1 5.0 8.7 11.2 15.7 15.0 United 13.2 15.4 11.9 11.3 9.4 8.4 12.9 11.6 20.5 24.3 49.4 36.6 9.1 7.9 9.9 12.6 13.7 8.6 4.5 3.3 3.2 3.2 2.8 2.0 10.7 9.7 13.5 15.7 24.3 16.8 Vijaya 3.1 2.8 4.1 4.3 3.6 NA 2.1 4.0 13.9 14.4 7.1 NA 1.6 2.0 5.6 0.9 2.6 NA 2.9 0.6 0.4 2.9 0.8 NA 2.4 2.8 6.6 6.6 5.5 NA Total 5.7 5.9 6.5 7.3 9.5 10.8 4.9 6.8 14.9 18.5 25.7 21.0 3.6 4.1 6.1 7.8 10.3 10.2 2.2 2.3 3.3 3.3 3.6 3.0 4.3 5.2 9.7 11.7 15.2 12.8

Note: 1) Only advances under the above four categories have been taken into consideration and does not take into effect the impact of overall net advances. 2) Numbers for SBI post 2017 are for the consolidated entity.

Source: Company, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 25 India Banks

Exhibit 18: Improvement in asset quality for corporate banks GNPL ratio, March fiscal year-ends, 2003-22E (%)

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020E 2021E 2022E Corporate Banks Axis 0.8 1.1 1.2 1.1 1.0 1.2 1.3 1.4 1.7 5.2 7.5 5.8 4.9 4.1 3.4 BOB 10.9 10.3 7.7 3.9 2.5 1.8 1.3 1.4 1.4 1.5 2.4 2.9 3.7 10.0 10.5 12.3 9.6 7.2 5.1 4.3 Canara 6.1 6.6 3.9 2.2 1.5 1.2 1.6 1.5 1.5 1.7 2.6 2.5 3.9 9.4 9.6 11.8 8.5 6.3 4.9 3.6 FB 2.4 2.6 3.0 3.5 3.3 3.4 2.5 2.0 2.8 2.3 3.0 2.9 3.0 3.1 3.1 ICICI 3.3 4.3 4.9 4.3 3.5 3.2 3.0 3.7 5.7 8.5 9.5 7.1 5.0 3.9 3.3 J&K bank 3.1 3.0 2.7 2.2 2.9 2.5 2.6 1.9 1.9 1.5 1.6 1.6 5.9 8.2 10.9 10.0 9.0 5.3 3.0 1.6 KVB 5.1 3.9 2.8 2.0 1.9 1.7 1.3 1.3 1.0 0.8 1.8 1.3 3.5 6.3 8.4 6.8 5.5 4.1 PNB 11.6 9.4 5.9 4.0 3.4 2.5 1.6 1.7 1.8 2.9 4.2 5.1 6.3 12.9 12.5 18.4 15.5 13.4 11.4 9.5 SBI 7.2 5.5 4.4 3.8 Union 2.2 2.0 2.2 2.4 3.0 2.9 4.0 4.9 8.5 10.9 15.2 14.2 12.1 10.0 8.1 Yes 0.1 0.7 0.3 0.2 0.2 0.2 0.3 0.4 0.8 1.5 1.3 3.2 6.2 5.9 5.1 Total 10.5 8.4 6.7 4.3 3.4 3.1 3.1 2.9 3.2 3.6 4.0 4.4 4.5 7.9 8.7 13.0 9.4 7.3 5.9 4.9 Retail Banks AU 0.5 1.3 1.0 0.7 1.8 2.0 2.0 1.9 1.8 1.7 Bandhan 0.5 1.3 2.0 1.9 2.0 1.9 CUBK 1.8 1.8 1.3 1.2 1.0 1.1 1.8 1.8 2.3 2.7 2.9 2.8 2.9 2.9 3.0 DCB 5.3 1.5 8.9 8.7 5.9 4.4 3.2 1.7 1.8 1.5 1.6 1.8 1.8 1.8 1.8 1.8 Equitas 0.1 0.1 0.2 2.5 0.8 0.9 1.6 2.3 2.9 HDFC 2.2 1.9 1.7 1.3 1.4 1.4 1.9 1.4 1.0 1.0 1.0 1.0 0.9 0.9 1.1 1.3 1.4 1.4 1.4 1.5 IIB 3.3 3.5 2.9 3.1 3.0 1.6 1.2 1.0 1.0 1.0 1.1 0.8 0.9 0.9 1.2 2.0 1.8 1.8 1.7 RBL 6.0 2.1 2.3 1.1 0.8 0.4 0.8 0.8 1.0 1.2 1.4 1.4 1.5 1.5 1.6 Ujjivan 0.1 0.1 0.2 0.3 3.5 0.9 1.1 1.3 1.4 Total 8.8 7.0 5.4 4.1 2.9 2.4 2.8 2.3 2.1 2.3 2.2 2.6 2.8 4.0 4.7 5.9 5.4 4.7 3.9 3.4

Source: Company, Kotak Institutional Equities estimates

Exhibit 19: Sharp drop in NNPL ratio for most banks NNPL ratio, March fiscal year-ends, 2003-22E (%)

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020E 2021E 2022E Corporate Banks Axis 0.4 0.4 0.4 0.3 0.3 0.4 0.4 0.5 0.7 2.3 3.8 2.3 1.8 1.3 1.0 BOB 3.7 2.9 1.4 0.9 0.6 0.5 0.3 0.3 0.3 0.5 1.3 1.5 1.9 5.1 4.7 5.5 3.3 1.8 1.0 (0.1) Canara 3.6 2.9 1.9 1.1 0.9 0.8 1.1 1.1 1.1 1.5 2.2 2.0 2.6 6.4 6.3 7.5 5.4 3.3 2.5 1.2 FB 0.2 0.3 0.5 0.6 0.5 1.0 0.7 0.7 1.6 1.3 1.7 1.5 1.5 1.5 1.5 ICICI 1.5 2.1 2.1 1.1 0.7 0.8 1.0 1.6 3.0 5.4 5.4 2.3 1.2 0.7 0.6 J&K bank 1.6 1.5 1.4 0.9 1.1 1.1 1.4 0.3 0.2 0.1 0.1 0.2 2.8 4.3 5.0 4.9 4.9 0.7 - - KVB 1.6 0.8 0.2 0.2 0.2 0.2 0.1 0.3 0.4 0.4 0.8 0.6 2.5 4.2 4.6 3.4 2.5 1.1 PNB 3.8 1.0 0.2 0.3 0.8 0.6 0.2 0.5 0.8 1.5 2.3 2.8 4.0 8.6 7.8 11.2 6.6 5.6 5.0 4.6 SBI 3.0 1.9 1.1 1.0 Union 0.2 0.3 0.8 1.2 1.7 1.6 2.3 2.7 5.2 6.6 8.4 6.8 5.9 3.5 2.9 Yes 0.1 0.3 0.1 0.0 0.0 0.0 0.0 0.1 0.3 0.8 0.6 1.9 3.6 2.7 1.5 Total 4.3 2.7 1.9 1.2 1.1 1.2 1.2 1.1 1.1 1.3 1.6 2.0 2.1 4.3 4.6 6.0 3.6 2.5 1.7 1.2 Retail Banks AU 0.3 0.6 0.5 0.4 1.2 1.3 1.3 0.8 0.5 0.3 Bandhan 0.4 0.6 0.6 0.6 0.7 0.6 CUBK 1.0 1.1 0.6 0.5 0.4 0.6 1.2 1.3 1.5 1.7 1.7 1.8 1.8 1.8 1.9 DCB 1.6 0.7 3.9 3.1 1.0 0.6 0.7 0.9 1.0 0.8 0.8 0.7 0.7 0.7 0.7 0.7 Equitas 0.0 0.0 0.1 0.8 0.6 0.5 1.2 1.8 2.4 HDFC 0.4 0.2 0.2 0.4 0.4 0.5 0.6 0.3 0.2 0.2 0.2 0.3 0.2 0.3 0.3 0.4 0.4 0.5 0.4 0.4 IIB 2.7 2.7 2.1 2.5 2.3 1.1 0.5 0.3 0.3 0.3 0.3 0.3 0.4 0.4 0.5 1.2 1.0 0.9 0.8 RBL 1.0 0.7 1.0 0.4 0.2 0.1 0.3 0.3 0.6 0.6 0.8 0.7 0.8 0.8 1.0 Ujjivan 0.0 0.0 0.0 0.1 0.7 0.3 0.3 0.4 0.4 Total 3.6 2.2 2.1 1.4 0.9 0.5 0.6 0.6 0.6 0.8 0.8 1.1 1.1 1.8 2.1 2.4 1.9 1.6 1.1 0.9

Source: Company, Kotak Institutional Equities estimates

26 KOTAK INSTITUTIONAL EQUITIES RESEARCH Banks India

This has been a relatively longer cycle than envisaged earlier

One of the key observations is that this cycle has taken a long period to end. Exhibits 20 and 21 are from the recent publications from the RBI on the financial cycle and its impact on NPLs. This cycle probably peaked somewhere in FY2008 and started to slow down till FY2014. The NPL cycle, on the other hand, started nearly as soon as we saw a completion of the peak of cycle and the increase accelerated after FY2014. FY2019 marked the decline of this NPL cycle. Overall, it has been a ~15-year credit cycle for India in the previous cycle.

Exhibit 20: Relationship between financial and NPL cycles is Exhibit 21: The bottom for the previous cycle came in 2018 visible Trend in financial cycle, March fiscal year-ends, 1996-2018 Financial cycle and NPL, March fiscal year-ends, 1996-2018

Source: RBI working papers Source: RBI working papers

Slippages have declined sharply in FY2019; expect this trend to continue

With the close of the corporate NPL cycle, we expect the slippage trend for Indian banks to meaningfully decline in the medium term. FY2019 saw a decline in this ratio by ~50% to 3.5% as compared to ~7% in FY2018 and ~6% average since FY2016. A large part of this increase can be attributed to the corporate sector where the gross NPLs touched ~40-45% for various public banks. We note that FY2019 saw the impact of IL&FS in the books of the banks and despite that we have seen a decline in the slippage ratio.

Exhibit 22: Slippages have declined to ~3.5% in FY2019, the lowest since FY2016 Slippages across banks, March fiscal year-ends, 2000-21E (%)

8 7.1 6.3 6 5.1 5 4.4 3.8 3.5 3.4 3.2 3.1 3.0 3.1 3.0 3 2.7 2.3 2.1 2.2 2.2 1.9 1.7 1.7 1.3 1.3 2

0

2000 2001 2003 2004 2007 2008 2010 2011 2014 2017 2018 2002 2005 2006 2009 2012 2013 2015 2016

2020E 2021E 2019E

Source: RBI, Company, Kotak Institutional Equities

KOTAK INSTITUTIONAL EQUITIES RESEARCH 27 India Banks

Stress moving towards select corporate as compared to sector-specific issues

We believe that the stress that is likely to be reported by banks would be a lot more company-specific issues as compared to sector-specific that we have seen in recent years. Indian banks have reported large stress in the infrastructure, steel and other sectors but this risk is gradually dissipating. FY2019 saw the NPL of IL&FS and yet, the overall stress reported by banks had declined yoy. The stress today is primarily in NBFCs and real estate. Banks have not been too aggressively lending to real estate and their primary exposure is primarily in construction of residential real estate or lease rental discounting in the corporate real estate space. On the other hand, banks are gradually reducing their exposure to NBFCs through asset swaps. NBFC risks, in our view, are probably going to get limited to a few names.

Few structural and cyclical trends visible to remain positive on recent changes

We see few key big positives emerging today that give comfort that the corporate asset quality would continue to show improvement in the medium term. There has been a fair amount of progress by the regulators to reduce the stress that eventually gets reported at the end of the cycle. The outcome of these new regulations is best tested towards the end of the next cycle.

 CRILC is playing the same role as credit information bureaus did for retail loans. RBI has started to release data on the early warning indicators frequently. This data captures the SMA (0-2) on a weekly basis. Banks report them and there is a fairly strong information moving across lenders that gives them early warning indicators to act on a stressed loan. As of date, the early warning indicators look comfortable, moving towards company-specific issues as compared to sector-specific. Exhibits 23 and 24 show a broadly comfortable trend on the early warning indicators for the large corporate segment. The SMA-2 book for banks is ~0.7% and the distribution of the same is broadly similar across public and private banks.

. RBI has insisted early stress needs to be dealt early as well. In the past cycles, there has been a tendency of banks to believe that the promoters would be best- positioned to resolve their stressed financials. However, in recent years, several measures have been taken to make all stakeholders responsible to resolve stress. One of the recent modified measures includes signing an inter creditor agreement within 30 days of default and ensuring that the lenders are on board for a possible resolution on the account within 180 days after signing the agreement. In theory, this appears to be a sound outcome, as the stress can be identified earlier.

Exhibit 23: SMA portfolio of large borrowers looks comfortable Exhibit 24: SMA-2 ratio for large borrowers at 0.7% March fiscal year-ends, 2018-19 (%) March fiscal year-ends, 2018-19 (%)

Source: RBI, Kotak Institutional Equities Source: RBI, Kotak Institutional Equities

28 KOTAK INSTITUTIONAL EQUITIES RESEARCH Banks India

We do note several pockets of risks emerging, which could potentially have a negative impact on banks. However, it is quite likely that the overall impact of (1) slowdown in retail resulting in gradual increase in NPLs in this portfolio, (2) NBFCs, (3) real estate and (4) impact of stringent opinion from rating agencies will still be favouring corporate banks over retail banks.

 RBI is insisting on more number of eyes looking at corporate.

. Rating agencies have become a lot more active than before. The exhibit below shows that the rating agencies have become a lot more stringent as fallout of the IL&FS crisis. However, this is not reflecting as much in the books of banks. Most of the downgrades have been to NBFCs where they still have a strong rating (except Dewan Housing Finance) and are actively looking to cut back lending or shrink their asset book.

Exhibit 25: FY2019-20 has seen a fairly large number of rating withdrawals and downgrades Review of accepted ratings of corporate debt securities (maturity ≥ 1 year), March fiscal year-ends, 2010-20

Upgraded Downgraded Reaffirmed Rating Watch Withdrawn / suspended Total Number Amount Number Amount Number Amount Number Amount Number Amount Number Amount Year/Month (#) (Rs bn) (#) (Rs bn) (#) (Rs bn) (#) (Rs bn) (#) (Rs bn) (#) (Rs bn) 2010-11 743 1,574 310 282 3,605 41,997 100 387 518 873 5,276 45,113 2011-12 696 1,015 650 1,355 3,935 37,366 45 328 717 819 6,043 40,884 2012-13 463 286 904 2,193 3,827 39,168 57 229 637 1,072 5,888 42,948 2013-14 225 466 231 1,024 1,788 50,150 21 121 358 616 2,623 52,377 2014-15 464 1,874 206 1,032 1,930 59,471 50 607 451 658 3,101 63,644 2015-16 347 973 352 4,120 1,747 66,344 54 534 450 1,184 2,950 73,154 2016-17 368 793 189 1,776 2,647 90,575 59 504 600 2,613 3,863 96,262 2017-18 360 1,549 331 3,035 3,591 1,07,725 134 2,025 894 2,500 5,310 1,16,833 2018-19 711 3,142 892 9,136 5,489 1,22,520 494 11,244 1,101 4,758 8,687 1,50,790 2019-20 20 230 311 2,710 259 6,294 138 2,272 114 343 842 11,746 Apr-19 4 212 148 1,868 62 716 136 2,263 29 25 379 5,084 May-19 16 18 163 843 197 5,578 2 9 85 218 463 6,662

Source: SEBI, Kotak Institutional Equities

. Auditors have become extremely careful in recent quarters. Post the IL&FS crisis, we have seen auditors becoming a lot more stringent in their opinion of the financial statements. In our view, this is a very positive outcome as it helps early identification of stress, if any, especially at the group level.

. Banks to monitor their large exposure framework. Under this guideline, the sum of all exposure values of a bank to a counterparty or a group of connected counterparties is defined as a large exposure, if >10% of the bank’s eligible capital base (Tier-1). The sum of all the exposure values of a bank to a single counterparty must not be >20% tier-1 (25% on exceptional basis). The sum of all the exposure values of a bank to a group of connected counterparties must not be >25% of the bank’s available eligible capital base at all times.

. Large borrowers have to access bond market while companies have to move towards term financing, even for working capital. RBI has insisted that companies have to access the bond market a lot more for their financing requirements, especially on project financing. On the other hand, the RBI has directed that banks to reduce the composition of cash credit as a form of working capital and increase the composition of term financing. The primary objective is to ensure that the companies are forced to manage their cash flows better and also reduce the possible diversion of funds from short-term lending products to long-term financing.

KOTAK INSTITUTIONAL EQUITIES RESEARCH 29 India Banks

. IBC framework could result in promoters losing ownership quickly. Even though the IBC process of resolution has been slow, it has resulted in a certain amount of fear that the promoters could lose ownership of a company rather quickly. IBC allows not only financial creditors but also operational creditors and employees to take a company to the IBC process. The loss of ownership is a significant development, in our view, as it could help improve borrower behaviour, especially that of the large companies.

 Consolidation among public banks and higher share of private banks is a positive outcome to the next cycle. One of the challenges that we have seen in the current cycle is that the resolutions have not come in as fast as one expected it to be despite it being in the best interest for all banks. Ability to build consensus has been quite poor despite there being a common promoter ownership in public banks. Apart from this, we have also seen a fair amount of frauds in lending in the current cycle. We see two distinct trends emerging in this cycle, which could potentially lower the risk of NPLs caused by non-business factors in the next cycle: (a) consolidation theme has picked up in public banks and (b) share of private banks are on the rise as well. In our view, these two trends should result in lowering the risk of poor underwriting in the next cycle.

 Consolidation is being seen even among companies as well. We note that the current NPL cycle is resulting in significant consolidation among the corporate segment. Cement, steel and infrastructure (power) is showing trends where companies with stronger balance sheet have made acquisitions of stressed projects. In our view, this is a good outcome as the stronger balance sheets would be able to withstand the stress in the next cycle better than the medium-sized companies.

Credit to GDP or credit to GDP gaps is a lot more favourable for India today

We broadly think that the credit growth or consumption has significantly slackened in recent years, an outcome of NPLs that the sector has seen since FY2008. However, we have come back to a point where these banks are in a position to shift focus towards lending. There is scope for improvement, in our view, especially when we look at the credit-to-GDP ratio and or credit-to-GDP gap in the past decade. It is still a bit challenging to see where this growth is likely to emerge as there is no visibility of capex cycle in the horizon, especially in the corporate sector, but we do believe that the banking system is better equipped than it has been in the past to lend more money.

30 KOTAK INSTITUTIONAL EQUITIES RESEARCH Banks India

Exhibit 26: Credit to GDP ratio has declined for India over the past few years Credit-to-GDP gap across countries, calendar year-ends, 1994-2018 (%)

1994 2004 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Norway 155 182 220 223 225 227 226 223 235 253 250 245 Switzerland 188 195 198 212 211 219 225 224 225 231 238 241 Sweden 152 159 221 232 222 232 233 238 234 229 235 242 Denmark 143 177 241 255 241 251 248 248 236 235 228 225 Netherland 176 222 224 242 239 243 240 233 242 235 230 280 Belgium 108 156 197 200 191 201 211 204 212 223 225 218 Canada 149 155 171 181 179 180 188 191 198 208 213 214 China 92 131 127 146 148 151 167 179 190 206 211 213 Australia 111 153 187 187 179 176 179 184 196 203 199 198 Korea 134 146 179 180 177 181 186 185 189 192 193 194 France 127 137 160 165 166 174 176 176 182 184 191 193 Finland 145 127 162 170 169 170 178 176 189 191 186 180 Singapore 101 133 127 125 129 135 151 160 165 170 171 175 Portugal 93 187 215 213 217 226 232 216 206 193 182 174 New Zealand 112 149 195 189 181 174 177 171 171 172 174 173 UK 118 160 196 196 187 185 180 172 166 165 169 170 Japan 217 171 169 171 164 164 163 161 158 156 160 156 Euro area - 135 159 164 162 166 165 162 168 164 163 162 Spain 77 144 211 215 214 215 204 194 186 172 166 156 USA 117 146 167 164 156 151 149 149 148 149 151 151 Chile 69 106 113 109 102 110 117 126 136 144 144 137 Malaysia 107 133 111 121 119 119 126 129 135 137 137 135 Greece 34 68 114 117 130 130 131 130 129 128 125 116 Thailand 120 101 93 93 97 107 109 117 120 120 117 116 Italy 72 89 126 125 126 126 126 124 122 117 115 113 Israel 90 121 125 123 123 121 116 112 112 110 110 112 Germany 108 129 118 119 111 109 110 109 108 107 107 107 Czech Republic 90 61 76 81 82 85 92 96 93 88 91 88 Hungary 45 74 138 131 123 124 121 111 103 98 91 84 Turkey 21 21 48 51 58 61 64 71 78 79 86 86 Poland 25 48 75 70 72 76 77 79 83 84 85 82 South Africa 49 57 78 73 69 69 71 71 71 74 72 71 Brazil - 49 58 60 63 65 69 71 72 75 70 68 Russia - 32 58 54 50 50 55 61 68 71 65 65 Columbia - 43 43 45 49 49 52 56 62 66 65 63 Saudi Arabia 29 32 49 51 45 41 40 46 51 65 64 59 India 28 38 59 59 59 61 62 62 60 61 58 58 Mexico 46 25 31 30 30 31 32 35 37 41 41 42 Indonesia 53 24 26 24 27 31 35 38 39 40 39 39 Argentina 29 34 21 19 18 18 19 20 17 18 18 21

Source: BIS

KOTAK INSTITUTIONAL EQUITIES RESEARCH 31 India Banks

Exhibit 27: Credit to GDP gap is favourable today as compared to FY2012 Credit-to-GDP gap across countries, calendar year-ends, 2012-2QCY18 (% points)

Country 2012 2013 2014 2015 2016 2017 1QCY18 2QCY18 Argentina (1.3) 0.7 (0.7) 2.0 2.2 5.2 5.4 7.8 Australia (12.6) (7.8) (3.6) 3.0 (0.4) (8.0) (7.9) (9.4) Brazil 6.8 7.9 4.5 6.8 (0.4) (3.2) (3.7) (5.0) Canada 6.8 7.8 5.1 15.3 13.0 9.3 7.9 7.5 China 13.5 20.2 19.5 27.3 17.1 6.7 15.5 12.3 Euro area (3.8) (8.9) (9.1) (9.9) (10.1) (13.4) (13.2) (12.7) France 7.9 2.5 4.4 3.3 4.9 4.7 3.3 3.2 Germany (10.1) (7.3) (8.7) (6.8) (5.0) (2.1) (2.1) (0.5) Greece 7.6 0.2 (5.9) (11.1) (14.9) (22.4) (25.5) (26.3) Hong Kong SAR 22.2 33.2 38.6 24.5 21.1 30.6 29.8 22.7 India 1.6 (0.1) (3.3) (3.8) (8.1) (8.6) (6.4) (8.0) Indonesia 10.4 13.2 12.2 11.3 9.4 6.8 6.0 6.6 Italy 1.5 (4.5) (8.9) (13.9) (16.3) (16.6) (16.9) (17.5) Japan 1.3 2.0 2.1 0.1 4.3 6.6 6.1 7.3 Korea 3.2 1.4 2.2 1.7 (0.2) (2.4) (1.8) (0.1) Malaysia (0.4) 5.8 7.7 11.4 9.7 4.1 4.8 5.0 New Zealand (18.2) (20.9) (20.9) (18.1) (14.8) (15.7) (15.3) (14.4) Russia (3.8) (0.1) 8.6 7.2 (2.6) (6.9) (7.5) (7.4) Saudi Arabia (8.8) (3.4) 0.3 11.3 9.8 3.0 1.0 (0.6) Singapore 14.4 21.4 23.3 19.6 15.1 13.5 10.9 5.4 South Africa (2.9) (3.3) (3.9) (0.7) (3.1) (3.5) (3.1) (3.2) Spain (16.3) (28.5) (38.8) (47.0) (49.6) (50.8) (50.6) (49.0) Sweden 7.0 3.4 (1.5) (6.4) (12.8) (10.7) (5.0) (5.7) Switzerland 15.2 9.4 5.9 5.5 11.1 9.3 9.2 12.7 Thailand 9.0 15.5 16.1 15.1 10.3 6.1 5.5 5.4 Turkey 9.7 13.3 10.8 9.7 9.8 5.0 4.1 5.7 United Kingdom (17.5) (24.4) (30.3) (28.1) (20.0) (17.1) (15.2) (14.7) United States (15.3) (15.0) (14.1) (12.7) (9.3) (7.1) (7.6) (6.6)

Notes: The credit-to-GDP gap is defined as the difference between the credit-to-GDP ratio and its long-run trend.

Source: BIS

32 KOTAK INSTITUTIONAL EQUITIES RESEARCH Banks India

Exhibit 28: Steep decline in slippages for corporate banks in FY2020E Slippage ratio, March fiscal year-ends, 2003-22E (%)

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020E 2021E 2022E Corporate Banks Axis 1.0 1.7 2.2 1.4 1.2 1.2 1.2 1.2 2.6 5.8 9.0 3.2 1.5 1.5 1.5 BOB 2.1 3.0 2.3 1.3 1.3 1.2 0.9 1.2 1.1 1.5 2.4 2.1 2.1 6.5 3.5 6.3 3.2 1.5 1.4 2.4 Canara 3.7 4.7 2.8 2.3 1.6 1.4 2.2 2.4 2.1 2.2 2.5 3.5 3.6 7.5 3.6 7.2 4.1 1.8 1.5 1.5 FB 1.7 3.0 3.3 3.2 2.1 2.1 1.2 1.8 3.6 1.8 2.7 1.9 1.8 1.7 1.6 ICICI 1.9 2.2 2.9 1.6 1.4 1.4 1.6 2.4 4.3 7.7 6.4 2.5 1.4 1.4 1.5 J&K bank 1.3 1.8 1.6 1.3 1.6 1.3 2.1 0.9 1.2 1.2 1.3 1.0 5.3 5.1 6.2 5.7 4.9 1.5 1.5 1.5 KVB 1.1 0.9 1.1 0.4 1.0 0.8 0.5 1.8 3.1 3.3 5.0 5.5 2.5 1.8 1.8 PNB 4.5 2.6 1.5 1.5 2.8 2.0 1.4 1.8 2.3 2.8 2.9 3.5 4.8 11.1 5.4 10.6 4.6 2.0 1.8 1.8 SBI 1.7 1.5 1.5 1.5 Union 1.2 1.6 1.8 2.5 2.5 2.2 2.6 2.5 5.1 5.0 6.5 4.7 1.8 1.8 1.8 Yes 0.2 0.9 0.9 0.2 0.2 0.6 0.8 0.7 1.2 2.7 6.0 3.9 5.0 1.5 1.4 Total 3.9 3.3 2.2 1.7 1.7 1.8 2.1 2.1 2.2 2.4 2.7 2.9 2.6 5.6 4.1 8.4 2.8 1.7 1.5 1.6 Retail Banks AU 1.1 1.7 1.3 1.0 1.9 3.1 3.4 2.3 2.3 2.3 Bandhan 0.8 2.1 2.6 2.0 2.0 2.0 CUBK 1.7 1.9 1.9 1.7 1.5 1.8 2.9 2.6 2.3 2.2 2.2 2.2 2.0 1.8 1.8 DCB 1.8 3.7 8.0 5.6 1.4 1.5 1.4 1.4 2.1 2.1 2.0 2.2 2.0 2.0 2.0 2.0 Equitas 0.1 0.1 0.3 2.4 5.0 1.0 1.0 1.0 1.0 HDFC 1.6 0.9 1.5 2.2 2.2 2.6 5.4 2.6 1.1 1.0 1.0 1.9 1.6 1.6 1.5 2.3 2.2 1.6 1.6 1.6 IIB 9.3 3.7 1.2 2.5 1.4 1.7 1.4 0.9 1.1 1.5 1.4 1.6 1.2 1.6 2.1 3.7 1.8 1.8 1.8 RBL 1.0 0.8 1.8 0.4 0.9 1.0 1.0 0.5 1.4 2.5 1.9 1.7 1.9 1.9 1.9 Ujjivan 0.2 0.2 0.4 0.4 9.5 1.1 1.2 1.2 1.2 Total 4.7 5.7 3.2 3.6 3.4 3.2 4.9 4.1 3.1 2.8 2.5 3.4 2.9 4.0 3.4 4.8 3.5 1.9 1.8 1.8

Source: Company, Kotak Institutional Equities estimates

Banks with a higher share of retail loans to see a rise in NPL

For retail banks, with progress in corporate recoveries, focus has shifted to retail, MFI and MSME loans. While most private banks witnessed negligible stress in this book, the pace of growth is worrying given the slowdown in a macro environment. We have seen a strong growth in retail loans in recent years and it is quite challenging to predict the timing of this cycle. We don’t see new concerns emerging for banks as yet but we are seeing a slowdown in loan growth, partly a function of the underlying opportunity in various retail asset classes.

Increase in ticket size and association of borrowers with multiple lenders in the MFI book, as highlighted in our past reports, remains a key monitorable. Within the MSME segment, banks have witnessed elevated stress in the low and high ticket sized segments. Rise in NPLs in mudra loans remains a key concern while PSB 59Minute loans are yet to witness a rise in stress levels.

KOTAK INSTITUTIONAL EQUITIES RESEARCH 33 India Banks

Exhibit 29: India’s retail credit to GDP ratio has remained unchanged over the past decade Retail credit to GDP ratio across countries, calendar year-ends, 2007-17 (%)

Change (% points) Country 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2007-17 Argentina 5 5 5 5 5 6 6 6 6 6 7 2 Australia 108 106 111 110 107 108 111 114 120 122 121 13 Brazil 18 20 22 23 24 25 26 28 28 28 27 10 Canada 79 82 93 92 91 93 93 93 98 101 100 22 China 19 18 24 27 28 30 33 36 39 44 48 30 France 47 49 53 54 55 55 56 56 56 57 59 12 Germany 61 60 62 59 57 56 55 54 53 53 53 (8) Greece 51 56 58 61 64 65 65 63 62 60 56 5 Hong Kong SAR 51 51 56 59 59 61 63 66 67 68 71 19 India 11 10 9 9 9 9 9 9 10 10 11 0 Indonesia 12 12 12 14 15 16 17 17 17 17 17 5 Ireland 98 108 117 112 106 99 93 81 56 53 48 (50) Italy 38 39 43 44 44 44 44 43 42 41 41 3 Japan 59 60 63 61 60 59 59 58 57 57 57 (2) Korea 72 74 77 77 80 81 82 84 88 93 95 23 Malaysia 52 50 59 60 61 64 68 69 71 70 67 15 New Zealand 91 92 93 90 87 88 88 88 90 92 92 1 Portugal 87 89 92 91 91 90 86 82 77 72 69 (18) Russia 11 12 11 10 11 14 17 18 16 15 16 5 Singapore 39 42 46 47 52 57 59 60 58 59 59 20 South Africa 42 41 40 39 40 39 37 37 34 33 33 Spain 81 82 84 84 82 81 77 73 68 65 61 (20) Switzerland 106 104 110 112 114 117 119 121 124 126 128 22 Thailand 45 45 51 52 59 63 66 69 71 70 69 24 United Kingdom 92 93 96 93 90 89 87 85 85 86 86 (6) United States 99 96 97 92 87 84 82 80 78 78 78 (21)

Source: BIS

Exhibit 30: Mixed trends in NPLs across retail loans NPL in the retail loans for key private banks, March fiscal year-ends, 2015-19 (%) 2015 2016 2017 2018 2019 Axis 0.6 0.7 0.9 1.2 0.8 HDFC 1.1 0.1 0.7 0.7 0.9 ICICI 1.3 1.1 1.0 1.2 1.3 IndusInd 5.6 4.0 3.5 2.4 NA SBI 0.8 0.7 0.5 1.2 1.0

Source: Company, Kotak Institutional Equities

Recoveries still have a lot of scope for reduction in gross NPL for banks

FY2019 saw a sharp increase in the total amount recovered (see Exhibit 31) from bad loans while upgradation (see Exhibit 32) has largely remained at similar levels to what we have seen in recent years. A few reasons: (1) Banks have a reasonably improved their coverage on these bad loans, which is making it a lot more easier to work through the bad problems through one-time settlement or change in ownership through the IBC process or outside. (2) Distressed funds have emerged, mostly from outside India, and actively working with some of the existing stressed companies or through partnership with a stronger promoter for a change in ownership.

34 KOTAK INSTITUTIONAL EQUITIES RESEARCH Banks India

Exhibit 31: Recovery from loans had a strong performance in FY2019 Recovery trends in public banks, March fiscal year-ends, 2011-19

Recovery (LHS) Recovery ratio (RHS) (Rs bn) (%) 1,000 2.0

800 1.6

600 1.2

400 0.8

200 0.4

- 0.0 2011 2012 2013 2014 2015 2016 2017 2018 2019

Source: Companies, Kotak Institutional Equities

Exhibit 32: Greater preference towards settlement/ownership as upgradation has not changed much Upgradation of bad loans, March fiscal year-ends, 2011-19

Upgradation (LHS) Upgradation ratio (RHS) (Rs bn) (%) 500 1.0

400 0.8

300 0.6

200 0.4

100 0.2

- 0.0 2011 2012 2013 2014 2015 2016 2017 2018 2019

Source: Company, Kotak Institutional Equities

Resolution is starting to take a bigger shape through the IBC framework, though slow

The process of resolution of cases under IBC has been subdued owing to (1) ongoing delays in implementation, (2) disputes between lenders and bidders and (3) pending cases against bidders. While recovery by financial creditors is high at ~40-45% on overall basis, it is higher for cases under NCLT 1 and 2 (~50%). Additionally, recovery rates differ across sectors with haircut being lower in iron and steel sector compared to power and other sectors. Adjusted haircut on cases is in the range of 30-40%.

KOTAK INSTITUTIONAL EQUITIES RESEARCH 35 India Banks

Exhibit 33: Resolved cases had 57% haircut till 2019 Key data points regarding claims admitted under IBC, March fiscal year ends, 3QFY18-4QFY19 (Rs mn) Realisation Realisation by FCs as % by Total of their FCs as % admitted Realisation claims of claims of FCs Liquidation value by FCs admitted liquidation 3QFY18 55,243 14,296 18,558 34 130 4QFY18 44,050 14,270 30,700 70 215 1QFY19 762,391 180,844 428,854 56 237 2QFY19 422,697 95,413 110,790 26 116 3QFY19 84,473 29,536 73,027 86 247 4QFY19 380,545 57,830 91,070 24 157 Total 1,749,399 392,188 753,000 43 192

Source: IBBI, Kotak Institutional Equities

Exhibit 34: Considerable time taken for completion of IBC cases March fiscal year ends, 1QFY19-4QFY19 (#)

1QFY19 2QFY19 3QFY19 4QFY19 Admitted 977 1,198 1,484 1,858 Closed on appeal/review 91 118 142 152 Closed by Withdrawal under section 12A NA NA 63 91 Closed on resolution 34 52 79 94 Closed on liquidation 136 212 302 378 Ongoing CIRP 716 816 898 1,143 >270 days 186 238 275 362 >180 days and <=270 days 116 158 166 186 >90 days and <=180 days 183 211 202 247 <=90 days 231 209 255 348

Source: IBBI, Kotak Institutional Equities

Exhibit 35: Sectoral break-up of cases under IBC March fiscal year-end, 2019 (#)

As of 4QFY19 Closed Ongoing Total (#) (% of total) (#) (% of total) (#) (% of total) Manufacturing 324 45.3 448 39.2 772 41.6 Food, Beverages & Tobacco Products 30 4.2 63 5.5 93 5.0 Chemicals & Chemical Products 30 4.2 45 3.9 75 4.0 Electrical Machinery & Apparatus 27 3.8 43 3.8 70 3.8 Fabricated Metal Products 23 3.2 27 2.4 50 2.7 Machinery & Equipment 38 5.3 45 3.9 83 4.5 Textiles, Leather & Apparel Products 52 7.3 75 6.6 127 6.8 Wood, Rubber, Plastic & Paper Products 33 4.6 47 4.1 80 4.3 Basic Metals 67 9.4 73 6.4 140 7.5 Others 24 3.4 30 2.6 54 2.9 Real Estate, Renting & Business Activities 128 17.9 231 20.2 359 19.3 Construction 59 8.3 143 12.5 202 10.9 Wholesale & Retail Trade 81 11.3 99 8.7 180 9.7 Hotels & Restaurants 19 2.7 33 2.9 52 2.8 Electricity & Others 12 1.7 35 3.1 47 2.5 Transport, Storage & Communications 20 2.8 30 2.6 50 2.7 Others 72 10.1 124 10.8 196 10.5 Total 715 100 1,143 1,858

Source: IBBI, Kotak Institutional Equities

36 KOTAK INSTITUTIONAL EQUITIES RESEARCH Banks India

Sharp drop in credit cost will boost earnings for corporate banks as coverage ratio has moved up well

For the sector as a whole, we expect a sharp normalisation of credit costs from FY2020 largely on the back of improvement in NPL ratios (see Exhibit 36). Credit cost will decline ~150-300 bps for Axis, ICICI and SBI over FY2019-22E driven by robust improvement in asset quality. Most corporate banks have increased coverage ratio (see Exhibit 37) to 60- 70% (marginally lower for PSU banks, excluding SBI). Haircut on cases resolved under IBC is ~50% and such incremental provisions will be ageing-related. In the absence of sharp rise in retail or MSME slippages, credit cost will be muted over medium term for corporate banks.

Exhibit 36: Sharp improvement in credit cost for corporate banks going ahead Credit cost, March fiscal year-ends, 2001-22E (%)

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020E 2021E 2022E Corporate Banks Axis 0.6 3.8 1.7 3.1 0.1 0.9 0.7 1.0 1.3 1.5 0.9 0.7 1.0 1.0 0.9 1.5 3.3 4.0 2.4 0.9 0.9 0.8 BOB 1.9 1.7 1.3 2.7 1.2 0.7 0.6 0.7 0.3 0.7 0.6 0.9 1.2 1.0 1.1 3.3 2.2 3.4 2.7 1.2 0.9 0.9 Canara 1.6 1.3 1.5 2.7 1.6 1.1 0.7 0.9 0.7 1.0 0.6 0.7 1.1 1.0 1.3 3.1 2.1 3.9 3.1 1.3 1.0 0.9 FB 2.3 3.1 2.9 3.0 1.7 1.5 0.9 1.3 1.7 1.7 1.7 0.9 0.7 0.4 0.4 1.1 0.9 0.9 0.8 0.6 0.7 0.7 ICICI 3.6 0.8 (0.2) 0.7 1.3 1.3 1.7 2.2 1.0 0.4 0.6 0.8 0.9 2.7 3.2 3.0 3.6 0.9 0.7 0.7 J&K bank 0.6 0.8 0.2 0.3 0.4 0.8 0.8 0.3 0.5 0.8 0.6 0.5 0.6 0.3 2.2 2.0 5.0 2.0 1.4 1.5 0.8 0.8 KVB 1.3 0.4 0.3 0.4 0.4 0.0 0.2 0.3 0.1 0.2 0.6 0.7 1.6 0.8 1.6 2.8 2.8 2.3 1.4 0.8 PNB 1.3 2.1 2.3 2.8 0.5 0.1 0.9 0.5 0.8 0.8 1.1 1.2 1.4 1.8 2.3 4.4 2.9 6.5 3.8 1.4 1.0 1.0 SBI 1.4 1.9 2.2 2.5 0.7 0.2 0.7 0.7 0.6 0.9 1.4 1.5 1.3 1.4 1.6 2.2 2.3 3.8 2.6 1.3 1.1 1.1 Union 1.5 1.7 1.8 2.4 0.7 0.5 0.8 1.0 0.8 0.8 1.0 1.4 1.0 1.2 1.2 1.5 2.4 4.4 3.8 2.2 1.5 1.5 Yes - - - 0.3 0.8 0.7 0.3 0.1 0.5 0.5 0.6 0.6 0.6 0.7 2.2 1.8 1.0 0.8 Total 1.8 2.3 2.3 0.7 0.5 0.8 0.8 0.9 1.1 1.1 1.1 1.1 1.2 1.4 2.5 2.5 3.8 3.0 1.3 1.0 1.0 Retail Banks AU 1.0 0.7 1.0 1.0 1.0 Bandhan 0.5 0.5 1.4 2.2 1.5 1.5 1.5 CUBK 1.2 2.6 2.3 2.6 1.3 1.4 0.7 0.7 0.8 0.9 0.9 0.8 0.9 1.1 0.9 1.1 1.1 1.2 0.9 0.9 0.9 0.9 DCB 0.9 1.7 - 0.9 4.6 - 0.7 1.5 4.0 3.4 1.3 0.6 0.3 0.5 0.7 0.6 0.8 0.7 0.6 0.7 0.7 0.7 Equitas 1.5 2.2 1.0 2.0 2.4 2.0 HDFC 1.3 1.5 1.0 1.2 0.8 1.6 2.1 2.2 2.1 1.7 1.0 1.1 0.8 0.7 0.6 0.6 0.7 0.9 1.0 1.0 1.0 0.9 IIB - 3.3 4.2 2.4 0.8 1.1 0.6 0.6 0.9 0.8 0.8 0.6 0.6 0.8 0.7 0.8 1.1 0.8 2.0 1.2 0.9 0.9 RBL 0.8 2.9 1.0 1.7 1.0 1.3 0.5 0.8 (0.4) 0.6 0.1 0.6 0.4 0.6 0.3 0.6 0.8 0.9 1.1 1.2 1.2 1.2 Ujjivan 4.1 0.4 1.0 1.4 1.5 Total 2.3 1.9 1.6 1.1 1.4 1.7 1.8 1.9 1.6 1.0 1.0 0.8 0.7 0.6 0.7 0.8 1.0 1.1 1.0 1.0 1.0

Source: Company, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 37 India Banks

Exhibit 37: Coverage (excluding technical write-off) is >60% for most corporate banks PCR ratio, March fiscal year-ends, 2003-22E (%)

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020E 2021E 2022E Corporate Banks Axis 50 64 68 74 74 70 66 67 57 57 52 62 65 69 73 BOB 69 74 83 78 76 75 76 75 75 65 47 49 50 52 58 58 68 77 83 101 Canara 41 56 53 51 38 29 30 31 26 16 16 21 33 34 37 40 41 52 53 70 FB 91 88 84 83 85 72 70 65 43 46 44 50 50 51 52 ICICI 54 53 59 76 80 77 69 59 51 40 48 71 78 82 83 J&K bank 50 52 49 64 61 58 49 86 90 90 91 87 55 50 59 54 48 50 60 69 KVB 69 80 92 91 87 87 94 75 62 50 59 58 30 38 50 55 59 75 PNB 69 90 97 93 79 75 89 69 53 49 46 47 40 37 41 44 62 63 61 56 SBI 62 69 77 77 Union 92 83 64 50 44 47 44 47 42 44 51 58 58 70 69 Yes 20 52 78 89 79 93 85 72 62 47 50 43 44 57 73 Total 55 65 63 62 58 54 52 59 58 59 54 50 49 43 46 49 61 65 71 74 Retail Banks AU 50 50 53 40 35 37 37 58 69 79 Bandhan 29 54 72 68 67 72 CUBK 46 40 58 57 56 44 33 31 37 40 45 39 41 41 41 DCB 70 57 58 66 84 87 77 47 43 51 51 60 63 62 60 62 Equitas 75 70 72 67 25 43 26 20 17 HDFC 84 92 86 70 69 67 68 78 83 82 80 73 74 70 69 70 71 68 72 75 IIB 18 24 27 20 26 30 60 73 73 70 70 63 59 58 56 81 47 50 54 RBL 84 68 59 68 75 73 61 65 40 47 45 51 51 50 43 Ujjivan 81 74 74 51 81 72 70 67 74 Total 49 62 51 56 63 75 71 69 62 57 57 51 52 46 48 54 61 59 68 68

Source: Company, Kotak Institutional Equities estimates We believe that FY2020 onwards would see lower levels of write-offs for corporate banks as compared to retail banks unlike what we have seen in the past (see Exhibit 38). Write-offs have enabled the banks to report a cleaner balance sheet albeit at a huge financial cost as it has required a lot of capital infusion on the other side. To some extent, this exhibit below also fails to capture the entire picture as banks have (a) started to see higher recovery from these written-off loans, which is captured through a higher NIM or non-interest income and (b) used it to lower their tax outgo as it gives an additional tax credit.

Exhibit 38: Write-offs have still been quite high for public banks in FY2019 Write-off loans for public banks, March fiscal year-ends, 2011-19

Write-off (LHS) Write-off ratio (RHS) (Rs bn) (%) 2,000 4.0

1,600 3.2

1,200 2.4

800 1.6

400 0.8

- 0.0 2011 2012 2013 2014 2015 2016 2017 2018 2019

Source: Companies, Kotak Institutional Equities

38 KOTAK INSTITUTIONAL EQUITIES RESEARCH Banks India

OPERATING PROFIT GROWTH SIMILAR TO THAT OF RETAIL BANKS Led by lower income de-recognition, better growth in interest-earning assets as well as some change in asset composition, we believe that these corporate banks are relatively better-positioned as well. Non-interest income could see an additional support coming from written-off assets. Cost ratios are comfortable resulting in strong recovery in operating profits.

A combination of positive factors to aid similar growth in operating profits

We believe that the operating profit growth is likely to be similar for retail and corporate banks. Growth could be different given the nature of ownership or balance sheet composition but there are several tailwinds for corporate banks while there is a headwind for retail-oriented banks.

Operating profit growth to be at ~15-18% CAGR for the sector in FY2019-21. We are building ~15% CAGR for FY2019-21E for both the corporate and retail banks. The corporate banks have the tailwind of (1) better recovery of NIM, (2) higher non-interest income led by support coming from written-off asset pool that they have built over the past few years and (3) a lot of investments is going on the technology side for all private banks and leading public banks and this should keep the cost ratios at comfortable levels, in our view. There is likely to be increased investment in human resources as well, especially as banks target lower ticket-size accounts like SME and retail loans. However, part of it would be compensated through better yield on assets as well.

NIM has multiple levers working across various banks in the medium term

. NIM expansion likely for most corporate banks. Most corporate banks will witness NIM expansion going ahead on the back of (1) drop in interest reversals, (2) revival in loan growth and faster growth in interest earning assets, (3) one-off interest recognition from select accounts resolved under various resolution schemes and (4) increase in share of higher-yielding retail/SME loans in overall loan mix. However, most banks would also witness moderate increase in cost of funds as the pace of growth in deposits would have to accelerate from current levels resulting in higher dependence in term deposits. Overall, NIM will increase ~20-30 bps for most corporate banks over FY2019-22E.

a) NIM improvement during corporate recovery cycle is swift. NIM improved ~20-100 for most corporate banks during the last corporate recovery cycle from FY2003-07 though it was partly aided by their lower CD ratio in their balance sheets. The improvement was sharper for private banks like Axis and ICICI Bank. We witness strong uptick in margins during the recovery phase leading to improvement in return ratios (additional support from drop in credit cost). NIM for most corporate banks in FY2018-19 were lower than historical average compared to ~ 40 bps premiums for most retail banks. With gradual recovery in yields for most corporate banks and increasing penetration in various retail segment, the gap between NIM commanded by retail over corporate banks will gradually reduce.

. NIM compression for most retail banks. NIM will decline for retail banks on the back of (1) partial slowdown in retail loan growth (fresh sanction/enquiries have decline significantly for segment based on our discussion with TransUnion CIBIL), (2) moderation in unsecured loan growth (down to ~25% in May 2019 from ~35% in March 2018) and (3) pricing pressure in most retail segments owing to increase in competition. Yields will shrink ~20-30 bps for retail banks over FY2018-22E driving ~10-20 bps NIM compression over the same period.

KOTAK INSTITUTIONAL EQUITIES RESEARCH 39 India Banks

. NIM compressed for regional retail banks in FY2019. Most regional banks and SFBs witnessed decline in margins in FY2019. Margin compression was mostly driven by increase in cost of funds on the back of rise in retail TD rates. Amid muted deposit growth, most of these banks resorted to rise in rates to attract new depositors. Rise in NIM pressure will lead to decline in cost of funds for most of these banks over medium-term. Cost of funds for AU, Bandhan, Equitas, Ujjivan and City Union will decline ~20-70 bps over FY2019-22E.

Exhibit 39: Drop in interest reversals will lead to improvement in yields for corporate banks Yields on advances, March fiscal year-ends, 2001-2022E (%)

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020E 2021E 2022E Corporate Banks Axis 11.4 10.6 11.7 9.3 7.8 8.1 9.1 9.8 10.6 8.6 8.4 9.9 10.5 10.3 10.1 9.7 9.3 8.4 8.8 9.5 9.6 9.6 BOB 11.3 10.0 8.9 7.9 7.3 7.3 8.3 8.8 8.9 7.9 8.0 8.7 8.4 7.7 7.5 7.3 7.2 7.2 7.7 9.2 8.2 8.1 Canara 11.4 10.3 9.8 8.7 7.9 7.8 8.4 9.6 10.4 9.1 9.0 10.6 10.3 10.5 10.2 9.6 8.9 8.0 8.5 8.7 8.8 8.9 FB 12.6 12.7 11.6 10.3 9.4 8.9 9.6 10.8 12.4 11.6 10.8 12.0 11.3 11.4 11.5 10.4 10.0 9.1 9.0 9.3 9.4 9.6 ICICI 11.6 9.9 8.7 8.3 9.4 10.7 10.0 8.7 8.2 9.4 10.0 10.0 9.8 9.5 8.8 8.4 8.7 9.1 9.3 9.5 J&K bank 10.5 11.4 10.5 9.5 8.4 8.5 8.6 10.4 11.5 10.6 10.7 11.5 11.9 11.7 11.3 10.6 9.6 9.3 9.6 9.7 9.8 9.8 KVB 18.1 9.8 8.9 8.9 9.9 10.4 11.5 11.2 10.8 12.2 12.3 12.2 12.0 11.5 11.0 10.3 9.8 9.6 9.5 9.5 PNB 11.2 10.6 10.0 8.9 7.9 7.9 8.9 9.7 10.6 9.8 9.8 10.6 10.6 9.8 9.5 8.7 7.9 7.5 7.9 8.1 8.3 8.5 SBI 10.5 9.4 8.7 7.6 7.2 7.6 8.3 9.3 9.7 8.6 8.6 10.0 9.5 9.1 9.0 8.4 7.9 8.1 7.8 8.4 8.5 8.6 Union 12.2 11.2 10.0 8.8 8.3 8.0 8.8 9.8 10.4 9.0 8.9 9.7 9.9 9.9 9.9 9.0 8.3 7.9 8.1 8.4 8.7 9.3 Yes 6.1 8.6 9.7 11.8 13.6 10.2 10.6 12.2 12.7 12.7 12.2 11.2 10.7 9.2 10.3 9.7 9.7 9.8 Total 13.5 13.4 10.3 8.7 8.0 8.0 9.0 9.4 8.4 7.9 8.9 9.0 8.7 8.7 8.4 8.0 8.0 7.8 8.2 8.1 8.3 Retail Banks AU 9.5 12.2 12.7 12.9 12.7 Bandhan 13.0 21.3 16.4 16.5 16.0 14.6 14.4 CUBK 13.7 12.6 11.6 11.5 10.4 10.7 10.5 12.2 12.9 12.1 12.0 13.0 13.2 13.3 12.7 12.1 11.5 11.0 10.5 10.4 10.3 10.1 DCB 11.5 10.9 8.9 8.5 8.0 9.1 10.0 12.8 13.5 10.7 10.4 11.2 12.0 11.8 11.8 11.6 11.5 10.7 11.2 11.3 11.3 11.5 Equitas 21.0 20.1 19.1 18.9 17.8 16.9 HDFC 12.3 10.9 8.4 7.4 7.4 8.9 10.6 12.6 15.0 10.8 10.6 11.9 12.3 11.7 11.1 10.8 10.2 10.3 10.5 10.3 10.1 10.0 IIB 9.4 8.7 8.6 10.6 9.7 9.3 10.2 11.9 12.6 11.6 12.1 13.8 14.1 13.3 12.5 11.8 11.4 10.6 11.0 11.1 10.8 10.8 RBL 14.3 13.9 13.1 11.7 10.3 10.2 10.6 10.8 11.2 9.7 8.7 11.5 11.7 11.4 11.6 10.9 10.4 9.8 10.7 11.2 11.1 11.1 Ujjivan 19.5 18.5 19.4 18.8 18.1 Total 10.3 8.8 8.6 8.2 9.1 10.5 12.5 14.5 10.9 10.8 12.2 12.7 12.1 11.5 11.4 10.9 10.7 11.0 10.9 10.8 10.7

Source: Company, Kotak Institutional Equities estimates

Exhibit 40: Elevated deposit rates will put pressure on cost of funds Cost of funds, March fiscal year-ends, 2001-2022E (%)

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020E 2021E 2022E Corporate Banks Axis 9.5 8.2 7.1 5.0 4.2 4.5 5.2 5.3 6.1 4.5 4.5 5.9 6.3 5.9 5.7 5.6 5.4 4.8 5.1 5.4 5.5 5.5 BOB 6.9 6.7 6.0 4.9 4.3 4.1 4.7 5.4 5.4 4.7 4.5 5.2 5.2 4.9 4.7 5.0 4.6 4.4 4.6 5.7 5.1 5.0 Canara 6.7 7.1 6.2 5.2 4.6 4.6 5.4 6.7 6.8 5.9 5.5 7.1 7.3 7.4 7.2 6.8 6.0 5.3 5.4 5.5 5.6 5.7 FB 9.0 8.7 7.4 6.1 4.6 4.8 5.2 6.6 6.6 6.4 5.6 7.3 7.2 7.4 7.3 6.8 6.1 5.4 5.4 5.7 5.7 5.9 ICICI 8.6 6.9 5.2 5.3 6.3 7.3 7.0 5.7 5.3 6.2 6.2 5.9 5.8 5.6 5.4 4.7 4.7 5.0 5.1 5.2 J&K bank 6.8 7.3 6.3 5.2 4.6 4.5 4.5 5.8 6.2 5.3 5.1 5.9 6.3 6.0 6.3 5.9 5.7 4.8 4.9 4.9 5.0 5.2 KVB 12.6 6.0 5.1 5.0 5.9 6.7 7.3 6.8 6.4 7.9 8.0 8.5 8.3 7.3 6.6 5.9 5.7 5.6 5.7 5.7 PNB 7.1 7.0 6.0 4.8 4.4 4.1 4.4 5.3 6.1 5.2 4.9 6.0 6.3 5.8 5.7 5.5 5.0 4.8 4.8 5.0 5.1 5.3 SBI 7.2 7.3 6.8 5.7 4.9 4.9 4.7 5.6 5.8 5.3 4.9 5.6 5.8 5.8 5.7 5.7 5.2 5.3 4.8 5.1 5.1 5.2 Union 7.3 6.9 6.4 5.5 4.8 4.7 5.2 6.1 6.1 5.5 5.1 6.2 6.6 7.0 6.9 6.6 6.0 5.4 5.2 5.0 5.2 5.3 Yes 2.3 4.6 6.4 7.9 8.4 6.1 6.6 8.1 8.0 7.9 7.6 6.9 6.5 5.5 6.5 6.4 6.3 6.2 Total 7.4 7.5 5.8 4.9 4.8 5.2 6.2 6.3 5.4 5.1 6.0 6.2 6.1 6.0 5.8 5.4 5.1 5.0 5.3 5.3 5.3 Retail Banks AU 7.3 7.4 7.2 7.0 6.8 Bandhan 5.5 7.6 6.1 5.5 6.0 5.6 5.3 CUBK 8.6 8.5 7.6 6.8 5.9 5.4 5.5 7.0 7.6 7.2 6.7 8.0 8.3 8.2 8.1 7.5 6.7 6.0 5.8 5.9 6.0 5.9 DCB 9.2 7.9 7.4 5.7 5.1 5.2 5.5 6.7 7.5 6.0 5.8 6.9 7.2 7.1 7.2 7.1 6.8 6.0 6.5 6.5 6.5 6.7 Equitas 12.3 7.8 8.2 7.3 6.9 6.8 HDFC 6.3 6.3 5.2 3.9 3.3 3.7 4.5 5.2 6.7 4.6 4.5 5.9 6.3 6.1 5.7 5.7 5.3 4.9 5.2 5.5 5.4 5.4 IIB 7.6 6.4 6.0 5.8 5.1 5.7 6.9 7.8 8.0 6.4 6.1 8.0 8.2 7.7 7.3 6.6 6.2 5.8 6.2 6.2 6.1 6.1 RBL 8.4 7.6 7.0 6.2 5.0 4.7 4.7 5.2 6.1 5.6 5.0 6.9 7.3 7.6 7.0 6.5 6.4 5.7 6.1 6.4 6.4 6.4 Ujjivan 8.6 7.6 8.0 7.8 7.6 Total 6.8 5.9 4.9 4.2 4.4 5.2 5.9 7.1 5.1 5.0 6.5 6.8 6.6 6.2 6.2 5.7 5.2 5.5 5.8 5.8 5.7

Source: Company, Kotak Institutional Equities estimates

40 KOTAK INSTITUTIONAL EQUITIES RESEARCH Banks India

Exhibit 41: NIM improvement in the horizon for corporate banks NIM, March fiscal year-ends, 2001-2022E (%)

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020E 2021E 2022E Corporate Banks Axis 1.2 1.7 2.0 2.7 2.5 2.6 2.7 2.9 3.0 3.1 3.2 3.1 3.2 3.4 3.5 3.6 3.5 3.1 3.2 3.3 3.3 3.3 BOB 3.3 3.0 3.1 3.2 3.3 3.2 2.9 2.6 2.6 2.4 2.9 2.6 2.3 2.0 2.0 1.9 2.1 2.3 2.6 3.0 2.6 2.6 Canara 3.3 2.8 3.1 3.1 3.1 3.0 2.8 2.1 2.5 2.4 2.7 2.2 2.1 2.1 2.0 1.9 1.8 2.2 2.4 2.3 2.3 2.3 FB 3.1 3.1 3.2 3.2 3.3 3.3 3.3 3.2 3.8 3.5 3.8 3.6 3.1 3.2 3.2 3.1 3.2 3.0 3.0 3.0 3.0 2.9 ICICI 1.4 1.6 2.2 2.4 2.4 2.1 2.4 2.4 2.6 2.7 3.0 3.2 3.4 3.5 3.4 3.2 3.3 3.4 3.4 3.5 J&K bank 3.2 3.4 3.5 3.4 2.7 2.7 2.9 2.7 2.9 2.9 3.4 3.4 3.6 3.7 3.6 3.8 3.4 3.6 3.8 4.0 3.9 3.8 KVB 5.8 4.7 3.6 3.5 3.6 3.0 2.7 3.0 3.2 2.9 2.8 2.7 2.9 3.4 3.6 3.7 3.6 3.5 3.3 3.3 PNB 3.7 3.6 4.2 4.0 3.7 3.4 3.5 3.2 3.2 3.3 3.6 3.3 3.3 3.2 3.0 2.5 2.3 2.1 2.4 2.5 2.7 2.7 SBI 3.2 2.9 2.9 3.0 3.2 2.6 3.0 2.8 2.6 2.5 3.0 3.6 3.2 3.1 3.0 2.8 2.7 2.6 2.7 2.9 3.0 2.9 Union 3.5 3.4 3.3 3.3 3.3 2.9 2.9 2.7 2.8 2.4 3.0 2.8 2.7 2.4 2.4 2.2 2.2 2.1 2.2 2.5 2.6 3.0 Yes 3.0 3.3 2.3 2.5 2.7 2.8 2.7 2.6 2.7 2.8 3.0 3.2 3.3 3.1 3.0 2.5 2.6 2.8 Total 3.0 3.1 3.0 3.1 3.0 2.9 2.6 2.7 2.6 3.0 3.1 2.9 2.8 2.8 2.7 2.6 2.6 2.7 2.9 2.9 2.9 Retail Banks AU 6.9 5.4 5.1 4.8 4.5 Bandhan 6.5 9.8 8.3 9.1 8.5 7.5 7.3 CUBK 3.3 2.8 2.9 3.5 3.5 3.9 3.7 3.4 3.0 2.8 3.3 3.1 3.1 3.3 3.2 3.5 3.7 4.0 3.9 3.9 3.7 3.7 DCB 2.6 2.3 1.8 2.1 1.5 1.9 2.8 3.0 3.1 2.5 2.9 3.0 3.0 3.2 3.7 3.7 3.9 3.8 3.6 3.6 3.5 3.5 Equitas 9.7 7.9 8.2 9.3 8.7 8.1 HDFC 4.1 3.5 3.3 3.9 3.8 4.3 4.7 4.9 4.9 4.3 4.4 4.5 4.6 4.4 4.4 4.4 4.4 4.4 4.4 4.3 4.2 4.0 IIB 2.0 1.8 2.0 2.8 2.9 2.1 1.5 1.5 1.9 3.0 3.6 3.4 3.5 3.8 3.7 3.8 4.0 4.0 3.8 4.1 4.1 4.2 RBL 3.6 3.3 3.0 3.1 3.3 3.4 3.3 4.4 4.1 3.2 3.7 3.7 2.6 2.3 2.5 2.5 2.9 3.3 3.7 3.7 3.6 3.6 Ujjivan 9.4 7.6 9.7 10.6 11.1 Total 2.9 2.8 3.4 3.4 3.7 4.1 4.2 4.4 4.0 4.2 4.3 4.3 4.2 4.2 4.4 4.5 4.4 4.5 4.5 4.4 4.3

Source: Company, Kotak Institutional Equities estimates

Muted deposit growth for most banks

 Muted growth in deposits. Deposit growth is muted at ~10% yoy for the overall industry. The pace of growth is higher for retail banks owing to (1) impact of low base for small finance banks, (2) strong presence of regional banks in select geographies (ex. Bandhan Bank in West Bengal) and (3) dominant position of HDFC Bank and IndusInd Bank. Pace of deposit growth for private corporate banks will be higher than industry average at ~15% while that of PSU banks (excluding SBI) will be muted.

 CASA ratio of corporate banks superior than last cycle. CASA ratio of most corporate banks is high at 45-50% (except some PSU banks). CASA + retail TD is higher than 60% for most of these banks. CASA ratio was significantly lower during the last corporate cycle thereby nullifying scope of swift recovery in margins. Most corporate banks now operate at marginally higher CASA ratio than other retail banks thereby providing relative cost of funds advantage.

KOTAK INSTITUTIONAL EQUITIES RESEARCH 41 India Banks

Exhibit 42: Deposit growth will be moderate for most banks Deposit growth, March fiscal year-ends, 2002-22E (%)

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020E 2021E 2022E Corporate Banks Axis 35.1 38.1 23.5 51.3 26.5 46.5 49.1 33.9 20.4 33.9 16.3 14.8 11.2 14.8 11.0 15.8 9.5 20.9 16.0 15.4 15.0 BOB 14.5 7.4 9.9 11.5 15.2 33.4 21.7 26.5 25.3 26.7 26.0 23.1 20.0 8.6 (7.0) 4.8 (1.7) 8.0 56.1 7.1 8.0 Canara 8.4 12.6 19.8 12.2 20.5 21.9 8.2 21.3 25.6 25.1 11.5 8.8 18.2 12.6 1.3 3.2 6.0 14.2 9.1 11.7 11.7 FB 15.7 23.5 23.1 12.7 17.7 20.7 20.1 24.3 12.0 19.3 13.8 17.7 3.7 18.6 11.8 23.4 14.7 20.5 16.9 17.9 17.6 ICICI 41.4 46.6 65.4 39.6 6.0 (10.7) (7.5) 11.7 13.3 14.5 13.4 8.9 16.6 16.3 14.5 16.4 17.1 16.6 16.1 J&K bank 15.6 13.7 27.2 16.0 8.5 7.3 13.5 15.4 12.8 20.0 19.4 20.4 8.0 (5.2) 5.5 4.4 10.4 12.0 11.2 15.5 15.4 KVB 15.4 12.9 13.6 23.3 34.4 20.3 27.6 28.3 29.9 20.4 13.2 2.1 12.1 7.2 5.9 5.2 13.9 14.5 14.2 PNB 14.2 18.2 16.0 17.3 16.0 16.9 19.0 26.0 18.9 25.5 21.3 3.2 15.3 11.1 10.3 12.4 3.3 5.3 0.5 0.5 0.5 SBI 11.4 9.4 7.6 15.2 3.5 14.6 23.4 38.1 8.4 16.1 11.7 15.2 15.9 13.1 9.8 18.1 32.4 7.6 9.5 11.1 11.1 Union 14.1 12.5 13.0 22.3 19.8 15.0 21.9 33.5 22.6 19.1 10.1 18.3 12.9 6.4 8.2 9.7 8.7 1.8 8.9 8.8 8.8 Yes 338.9 182.5 61.5 21.8 65.7 71.4 7.0 36.2 10.8 22.9 22.5 27.9 40.5 13.4 (1.0) (5.0) 12.0 Total 12.5 21.8 14.2 19.2 17.5 23.1 19.1 24.6 13.7 21.3 15.1 14.7 15.4 11.3 7.4 13.4 17.1 9.7 13.9 10.3 10.9 Retail Banks AU 145.1 55.6 49.6 45.6 Bandhan 92.2 45.8 27.6 60.5 48.8 48.3 CUBK 22.5 17.4 22.8 8.7 13.6 33.6 36.7 27.7 25.3 25.6 26.5 24.3 8.4 9.3 12.8 10.9 9.1 17.0 17.4 15.7 15.7 DCB 7.6 (0.9) 22.3 (13.0) (19.8) 41.3 37.6 (23.5) 3.0 17.2 12.9 32.0 23.5 22.1 18.4 29.2 24.5 18.4 25.5 22.9 20.1 Equitas 150.3 69.9 81.5 36.0 30.0 HDFC 51.4 26.7 35.9 19.6 53.5 22.4 47.5 41.7 17.2 24.6 18.3 20.1 24.0 22.7 21.2 17.8 22.5 17.0 18.6 18.1 17.7 IIB 16.9 2.4 30.3 17.1 14.4 17.6 7.9 16.1 20.8 28.7 23.3 27.7 11.8 22.5 25.4 36.1 19.8 28.5 36.1 27.4 26.2 RBL 13.5 6.3 11.3 9.6 11.5 0.3 25.6 18.7 21.3 28.8 132.1 76.0 39.1 47.4 42.4 42.1 26.9 33.0 33.3 30.2 26.1 Ujjivan 91.2 78.4 43.4 30.3 Total 32.4 16.3 32.1 15.3 36.8 22.5 39.1 34.2 17.7 25.0 20.1 22.4 21.8 22.7 24.1 22.5 24.1 21.0 24.6 22.5 22.0

Source: Company, Kotak Institutional Equities estimates

Exhibit 43: CASA ratio for corporate banks is better than that observed in previous cycle CASA ratio, March fiscal year-ends, 2001-22E (%)

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020E 2021E 2022E Corporate Banks Axis 15.4 16.5 23.0 38.1 38.0 40.0 39.9 45.7 43.1 46.7 41.1 41.5 44.4 45.0 44.8 47.3 51.4 53.8 44.4 44.9 45.2 45.5 BOB 33.0 33.0 33.7 36.4 36.5 37.9 33.2 31.2 29.6 29.6 28.7 26.9 25.3 25.7 26.4 26.4 32.2 35.8 35.0 32.9 33.4 33.9 Canara 34.9 33.8 34.8 33.8 33.9 33.3 31.5 31.5 30.1 29.1 28.3 24.3 24.2 24.5 24.0 25.7 30.2 31.8 29.2 28.7 28.2 27.7 FB 23.5 22.7 21.1 23.1 24.5 25.0 25.2 25.1 24.5 26.2 26.9 27.5 27.2 31.2 30.4 32.9 32.8 33.7 32.9 32.1 32.1 32.1 ICICI 15.5 23.0 24.3 22.7 21.8 26.1 28.7 41.7 45.1 43.5 41.9 42.9 45.5 45.8 50.4 51.7 49.6 47.9 46.8 45.9 J&K bank 30.8 34.0 33.4 30.3 32.0 34.2 39.8 39.2 38.1 40.7 40.5 40.7 39.2 39.1 41.8 44.1 51.7 50.9 50.7 50.4 49.7 49.0 KVB 21.5 22.9 24.4 26.9 27.7 25.6 21.9 23.5 23.3 19.2 19.2 20.5 22.0 23.3 27.7 29.1 29.9 30.5 31.1 31.7 PNB 44.3 44.3 46.9 45.9 46.3 49.0 46.2 43.0 38.8 40.8 38.5 35.3 39.2 38.3 36.7 37.2 41.8 41.0 42.2 41.3 40.5 39.6 SBI 36.3 36.5 37.3 40.8 41.3 47.6 48.5 47.0 41.6 47.3 49.4 44.8 44.8 42.9 41.3 42.6 44.6 44.5 44.6 44.8 45.0 45.2 Union 41.5 41.1 36.2 35.8 32.7 32.4 34.5 34.9 30.1 31.7 31.8 31.3 31.0 29.5 29.2 32.4 34.0 34.1 36.1 36.1 36.1 36.1 Yes 1.4 10.7 5.8 8.5 8.7 10.5 10.3 15.0 18.9 22.0 23.1 28.1 36.3 36.5 33.1 32.1 31.1 30.1 Total 36.4 36.3 35.3 37.4 37.3 39.0 37.7 38.1 35.9 39.7 39.5 36.6 36.9 36.3 35.9 37.5 41.4 42.4 41.4 40.8 40.8 40.8 Retail Banks AU 26.9 18.5 19.5 20.5 21.5 Bandhan 21.6 29.4 34.3 40.8 35.0 32.5 31.0 CUBK 23.7 21.3 20.7 20.5 21.9 22.9 24.3 20.9 18.9 21.9 19.6 18.2 16.8 17.8 19.2 20.4 23.4 24.2 25.2 25.0 25.5 26.0 DCB 13.7 15.4 17.0 18.8 22.7 32.1 28.3 24.3 31.0 35.4 35.2 32.1 27.2 25.0 23.4 23.4 24.3 24.3 24.0 24.5 25.5 27.0 Equitas 17.5 34.6 28.3 25.0 25.5 26.1 HDFC 40.8 40.7 43.0 54.7 60.6 55.4 57.7 54.5 44.4 52.0 52.7 48.4 47.4 44.8 44.0 43.2 48.0 43.5 42.4 41.4 40.9 40.4 IIB 11.1 13.0 12.2 11.2 10.7 12.9 14.9 15.7 19.2 23.7 27.2 27.3 29.3 32.5 34.1 35.2 36.9 44.0 43.1 44.0 44.9 45.8 RBL 23.3 23.4 22.3 26.2 28.5 38.3 37.8 38.3 33.5 36.1 34.5 21.5 19.7 20.4 18.5 18.6 22.0 24.3 25.0 26.2 27.5 28.7 Ujjivan 3.7 10.8 11.5 12.9 14.8 Total 26.7 29.1 31.7 39.3 44.1 44.7 46.7 45.8 39.7 46.5 47.2 43.3 42.3 40.9 40.5 39.7 43.5 41.2 40.2 39.3 38.9 38.6

Source: Company, Kotak Institutional Equities estimates

42 KOTAK INSTITUTIONAL EQUITIES RESEARCH Banks India

Exhibit 44: CD ratio for most retail banks is >90% CD ratio, March fiscal year-ends, 2001-22E (%)

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020E 2021E 2022E Corporate Banks Axis 53.0 43.6 42.3 44.7 49.2 55.6 62.7 68.1 69.5 73.8 75.3 77.1 78.0 81.9 87.2 94.6 90.0 96.9 90.2 88.5 86.9 85.3 BOB 50.8 54.5 53.3 48.8 53.4 64.0 66.9 70.2 74.8 72.6 74.9 74.7 69.3 69.8 69.3 66.9 63.7 72.3 73.4 72.6 73.2 73.9 Canara 47.1 51.7 56.1 55.2 62.3 68.0 69.2 69.6 74.0 72.2 72.0 71.1 68.1 71.6 69.7 67.7 69.1 72.7 71.4 73.3 74.0 74.6 FB 63.3 58.5 56.8 57.1 58.1 65.6 69.0 73.0 69.5 74.7 74.3 77.2 76.5 72.7 72.4 73.4 75.1 82.1 81.7 82.6 82.6 82.6 ICICI 110.6 91.2 91.6 88.5 85.0 92.3 100.0 89.7 95.9 99.3 99.2 102.0 107.2 103.3 94.7 91.3 89.8 89.8 89.7 90.5 J&K bank 42.6 49.8 54.6 49.8 53.2 61.7 67.8 66.0 63.4 61.9 58.6 62.0 61.0 66.9 67.8 72.3 68.7 71.1 73.9 76.6 76.6 76.6 KVB 65.3 68.1 69.2 73.3 75.4 75.1 68.9 70.0 72.1 74.6 76.3 77.7 80.8 78.0 76.2 78.7 81.1 79.6 79.6 79.6 PNB 49.9 53.6 53.1 53.7 58.6 62.4 69.1 71.8 73.8 74.8 77.4 77.4 78.8 77.4 75.9 74.6 67.5 67.5 67.8 69.8 73.2 76.8 SBI 46.8 44.7 46.5 49.6 55.1 68.9 77.5 77.6 73.1 78.6 81.0 83.1 86.9 86.8 82.4 84.6 76.8 71.5 75.1 76.4 76.4 76.4 Union 50.2 53.7 57.0 58.2 64.9 72.0 73.2 71.6 69.6 70.2 74.6 79.8 78.9 77.0 80.7 78.0 76.2 70.7 71.4 72.7 74.1 75.5 Yes 114.8 82.7 76.5 71.0 76.7 82.8 74.8 77.3 70.2 75.0 82.9 87.9 92.6 101.4 106.1 96.5 96.5 90.4 Total 48.2 48.7 54.9 55.2 60.9 70.3 74.6 76.4 75.8 76.5 78.5 80.1 80.3 81.0 80.4 81.2 76.4 76.0 77.4 77.9 78.3 78.7 Retail Banks AU 168.0 117.5 103.4 90.9 82.0 Bandhan 102.9 72.5 87.7 91.7 108.0 93.4 79.7 CUBK 54.8 51.2 52.3 54.3 65.0 72.5 70.8 70.6 68.8 66.4 71.7 74.3 75.1 73.1 74.6 77.5 79.1 84.8 85.0 84.6 85.4 86.2 DCB 59.8 61.2 68.0 54.5 51.4 59.8 60.2 67.0 70.5 72.3 76.1 83.4 78.7 78.8 83.0 86.6 82.0 84.7 82.9 80.7 79.9 77.8 Equitas 323.5 165.3 146.2 107.7 103.9 100.5 HDFC 39.8 38.6 52.5 58.4 70.3 62.8 68.7 62.9 69.2 75.2 76.7 79.2 80.9 82.5 81.1 85.0 86.2 83.5 88.8 88.0 87.2 86.4 IIB 59.9 66.4 62.2 69.8 68.6 62.0 62.8 67.2 71.3 76.9 76.1 82.8 81.9 91.1 92.8 95.1 89.3 95.6 95.7 104.2 99.8 97.2 RBL 46.1 44.8 48.6 48.4 54.1 56.1 60.5 53.2 61.3 73.8 93.3 87.2 76.4 84.8 84.5 87.2 85.1 91.7 93.0 91.1 88.8 88.8 Ujjivan 199.1 145.4 118.0 107.3 102.8 Total 49.6 49.3 56.2 60.2 68.1 62.9 67.3 64.0 69.5 74.9 76.5 79.9 81.1 83.7 83.1 88.7 87.8 87.0 90.9 92.0 89.9 88.0

Source: Company, Kotak Institutional Equities estimates

Revival in non-interest income will support revenues

 Non-interest income will grow at ~15% CAGR over FY2019-22E for corporate banks. Revival in treasury gains, increase in retail fee income and spike in fees from sale of third-party products will drive growth in non-interest income. Most corporate banks reported decline in non-interest income in FY2019 (impact of high base owing to stake sale by SBI and ICICI in FY2018) and muted growth in FY2018. Drop in treasury gains (excluding one-off impact of stake sale by select companies in subsidiaries) and muted growth in fee income led to drop in non-interest income. Slowdown in growth of fee income was driven by (1) shrinkage in corporate fee income, (2) drop in MF commissions and (3) subdued loan processing charges on account of muted loan growth for corporate banks. Spike in retail fees, however, provided marginal support.

 Significant contribution of fees to overall non-interest income for retail banks. Share of fee income to overall non-interest income is higher for retail banks. For small finance banks, sale of PSLC is another significant contributor of non-interest income. In the absence of strong traction in fee income, overall non-interest income growth will drop to ~18-20% over FY2019-22E for retail banks from ~25% over FY2016-18.

KOTAK INSTITUTIONAL EQUITIES RESEARCH 43 India Banks

Exhibit 45: Revival in treasury gains will drive growth in non-interest income for corporate banks Non-interest income yoy growth, March fiscal year-ends, 2002-22E (%)

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020E 2021E 2022E Corporate Banks Axis 155.0 (1.3) 31.6 (23.0) 75.5 38.8 78.7 60.0 36.2 17.4 17.0 20.9 13.0 13.0 12.0 24.8 (6.2) 19.7 12.6 11.5 10.9 BOB 39.1 21.7 35.7 (24.1) (8.7) 14.9 49.8 29.8 5.4 0.1 21.8 6.1 22.9 (1.4) 13.6 35.2 (1.5) (8.5) 54.8 15.9 14.9 Canara 55.6 3.5 33.2 (34.2) 6.4 9.7 52.7 0.1 23.7 (1.6) 4.1 7.7 24.7 15.7 7.1 55.0 (8.1) (5.3) 21.0 15.0 7.2 FB 76.1 6.3 27.2 (28.8) 8.9 30.9 30.8 30.4 3.0 (2.7) 3.0 24.8 4.4 26.6 (10.5) 37.6 7.1 16.6 2.0 20.8 16.0 ICICI 3.1 16.5 52.0 26.5 29.3 (13.7) (1.7) (11.1) 12.9 11.2 24.9 16.8 25.8 27.3 (10.7) (16.7) 16.2 14.6 14.3 J&K bank 218.3 11.7 5.0 (68.1) 38.5 36.8 34.5 0.0 69.9 (12.4) (8.4) 44.8 (19.3) 52.2 (15.1) (2.2) 0.5 64.1 (18.0) (0.3) (0.9) KVB (40.1) 40.8 6.6 (1.2) 33.0 67.3 (6.9) 7.0 32.5 29.2 24.7 2.9 21.7 10.7 15.0 7.0 11.9 13.5 13.0 PNB 25.6 27.9 49.3 (10.2) (9.4) 13.9 15.4 53.5 16.3 1.3 16.3 0.5 8.4 28.7 1.9 49.2 (0.8) (16.9) 11.2 9.4 9.3 SBI 7.5 37.5 32.6 (6.5) (8.1) 3.3 28.6 46.1 17.9 5.7 (9.3) 11.7 15.7 21.7 24.7 25.9 25.8 (17.5) 20.7 13.0 13.9 Union 60.2 65.2 0.8 (7.9) (18.5) 34.9 46.4 19.5 34.0 3.2 20.1 4.2 10.6 24.9 3.1 36.7 0.5 (10.3) 8.9 8.9 8.6 Yes 101.1 79.8 21.1 31.7 8.3 37.5 46.7 36.9 18.9 32.5 51.1 27.5 (12.2) (9.3) 24.7 24.6 Total 28.6 61.7 25.3 (9.3) 8.4 16.1 34.6 21.8 15.2 2.0 5.5 11.8 17.3 18.1 17.5 31.5 6.8 (10.7) 17.7 13.5 13.0 Retail Banks AU 19.1 9.9 25.9 26.6 Bandhan 71.6 50.5 19.4 19.8 19.7 CUBK 75.8 4.5 23.5 (49.7) 18.2 37.6 56.4 45.4 16.0 9.7 31.6 32.1 10.1 34.2 1.5 18.0 10.0 (3.3) 16.8 15.3 15.0 DCB 96.4 (9.7) 10.9 (2.8) (14.0) 42.8 58.4 (33.9) (10.5) 4.3 (8.4) 13.9 18.5 19.5 33.0 13.2 24.4 12.9 20.0 20.8 20.3 Equitas 35.2 34.9 (0.6) 58.1 25.5 HDFC 79.6 39.7 5.8 44.5 58.0 35.0 50.4 44.2 15.7 13.9 33.4 18.5 15.6 13.6 19.5 14.4 23.8 15.8 19.1 17.1 16.9 IIB 55.8 39.3 34.6 (27.5) (24.8) 59.6 (1.3) 53.1 21.3 28.9 41.8 34.7 38.7 34.8 29.4 26.5 13.9 18.9 15.0 19.5 19.6 RBL 0.6 (1.1) 41.9 (57.3) 26.2 (24.5) 83.2 76.9 (15.6) 40.5 261.4 88.3 106.4 54.6 21.6 54.0 41.4 35.0 30.4 26.5 25.3 Ujjivan 50.0 34.2 19.5 21.4 Total 72.5 29.4 16.2 8.0 31.5 38.5 43.3 40.3 15.5 15.4 35.1 21.2 20.4 19.0 23.8 25.5 20.2 18.4 18.6 18.7 18.3

Source: Company, Kotak Institutional Equities estimates

Exhibit 46: Marginal decline in share of non-interest income to overall revenues going ahead Share of non-interest income to overall revenues, March fiscal year-ends, 2001-22E (%)

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020E 2021E 2022E Corporate Banks Axis 62.4 67.7 56.0 48.9 36.3 40.4 39.3 41.2 44.0 44.1 41.4 40.3 40.4 38.3 37.0 35.8 39.3 37.1 37.7 36.4 35.4 34.6 BOB 28.3 35.6 37.6 41.1 31.9 27.0 26.6 34.4 34.2 32.1 24.2 24.9 24.3 27.2 25.0 28.2 33.3 30.0 24.6 25.9 27.5 28.1 Canara 32.8 44.0 39.5 42.5 29.1 27.8 27.3 39.5 32.9 33.5 26.7 27.6 28.6 30.5 32.0 33.3 43.4 36.3 31.2 33.6 35.1 34.0 FB 34.6 44.4 40.8 41.4 29.7 27.8 29.2 30.9 28.1 27.3 22.8 21.4 25.2 23.7 27.0 23.9 26.2 24.4 24.4 21.4 21.9 21.9 ICICI 69.1 65.2 55.0 54.4 50.7 54.7 47.6 48.0 42.4 41.1 37.6 38.8 39.0 41.9 47.3 43.1 34.9 34.8 34.5 33.4 J&K bank 18.5 36.6 35.2 32.7 13.9 16.7 19.2 23.2 19.7 27.1 19.1 15.4 17.3 12.7 18.3 15.7 16.4 14.7 19.4 14.3 13.0 11.7 KVB 44.2 21.3 30.6 29.9 25.6 30.1 39.3 30.4 25.6 27.6 28.1 30.5 28.4 28.4 27.4 28.1 29.0 30.3 31.3 31.1 PNB 27.6 29.9 28.6 34.0 29.5 24.5 23.9 25.5 31.0 29.5 23.4 23.9 22.1 22.1 26.2 28.2 37.4 37.3 30.1 31.1 31.1 32.1 SBI 31.7 31.5 36.5 40.5 35.1 32.0 31.0 33.8 37.8 38.7 32.7 24.9 26.6 27.4 29.1 33.1 36.4 37.3 29.4 30.5 30.0 30.6 Union 20.4 27.2 35.5 32.4 27.1 20.8 24.2 29.5 27.9 32.0 24.7 26.5 25.3 26.4 29.4 30.4 35.8 34.9 30.5 28.3 27.6 25.1 Yes 50.1 53.9 53.9 51.7 46.2 42.2 33.3 34.7 36.2 38.8 37.0 37.3 40.9 40.3 31.9 32.3 38.1 41.4 Total 30.3 34.2 40.2 42.0 35.4 33.9 33.6 38.1 37.6 37.7 31.3 28.4 28.8 29.7 31.0 33.6 38.4 36.9 30.8 31.1 31.2 31.2 Retail Banks AU 26.6 1.8 1.8 0.5 0.6 50.8 29.2 25.6 20.7 19.6 19.2 Bandhan 13.8 14.6 18.9 19.1 15.9 14.5 13.6 CUBK 35.5 48.6 44.8 40.9 23.2 22.0 24.5 29.3 33.8 34.0 27.3 29.3 30.5 28.4 33.4 29.5 28.8 27.1 24.2 24.6 25.1 25.0 DCB 35.9 51.7 54.8 50.1 57.2 51.6 49.0 49.4 37.8 43.2 37.2 31.1 29.2 27.3 24.6 26.2 23.8 23.8 23.4 23.5 23.9 23.6 Equitas 14.5 17.2 18.0 13.3 16.5 17.3 HDFC 26.8 34.6 36.2 27.1 29.3 30.6 29.0 30.4 30.7 31.2 29.1 31.0 30.2 30.0 28.7 28.0 27.1 27.5 26.8 27.3 27.9 28.6 IIB 42.7 53.2 58.3 52.3 37.7 37.6 52.7 49.8 49.8 38.4 34.1 37.3 37.9 39.5 42.7 42.2 40.8 38.8 39.0 34.4 33.1 32.3 RBL 31.4 30.0 29.6 34.7 15.9 17.6 12.5 13.9 19.8 18.3 16.3 26.4 32.9 43.3 42.0 37.5 38.2 37.7 36.2 36.3 36.6 37.0 Ujjivan 21.5 23.9 21.9 20.6 20.7 Total 32.2 41.4 42.8 35.3 31.9 31.7 31.7 32.3 32.3 32.2 29.7 31.6 31.0 31.2 30.8 29.4 29.2 28.9 28.2 27.5 27.5 27.7

Source: Company, Kotak Institutional Equities estimates

44 KOTAK INSTITUTIONAL EQUITIES RESEARCH Banks India

Exhibit 47: Share of fee income to overall non-interest income will increase over medium term Fee income to other income, March fiscal year-ends, 2001-22E (%)

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020E 2021E 2022E Corporate Banks Axis 52.9 23.5 35.0 33.8 79.5 67.0 76.9 72.9 75.0 65.0 72.5 80.1 76.7 72.8 73.2 71.6 60.1 70.5 67.4 67.1 67.3 68.0 BOB 39.8 29.4 27.2 20.0 26.3 30.3 34.5 26.3 28.0 32.0 36.3 35.8 34.6 32.2 33.7 30.0 23.2 26.8 32.7 30.6 30.4 30.4 Canara 35.2 22.6 24.3 19.3 31.7 31.3 31.4 32.3 27.6 25.3 26.9 27.2 25.3 23.9 20.4 18.8 15.8 17.3 17.8 16.5 16.2 17.1 FB 36.4 20.5 21.2 19.9 31.0 30.3 27.4 22.9 19.7 19.8 48.4 47.3 45.9 48.1 43.4 52.8 53.2 54.9 59.3 68.0 66.4 67.5 ICICI 26.8 35.2 54.2 55.7 63.6 63.6 74.0 64.6 83.0 72.4 65.4 60.5 57.3 48.7 41.2 50.5 82.6 82.0 82.6 83.6 J&K bank 27.2 10.9 12.1 13.6 51.4 54.0 49.3 34.0 34.0 25.0 34.9 47.5 36.7 42.3 29.6 40.6 36.3 40.8 27.9 37.4 41.3 45.9 KVB 37.5 69.2 52.0 63.9 78.8 74.9 52.9 63.5 73.5 64.9 61.5 59.5 68.4 65.0 61.4 68.6 68.0 66.9 65.4 64.2 PNB 53.9 44.4 38.4 29.6 41.3 49.6 56.1 55.4 44.9 47.2 56.6 56.5 55.5 56.4 46.6 46.5 36.1 31.4 51.1 50.5 51.3 52.1 SBI 67.8 67.5 51.9 41.0 49.8 61.1 71.1 68.1 60.0 64.4 73.1 84.2 71.6 68.0 58.3 51.2 45.9 51.6 63.4 61.4 59.8 57.8 Union 38.9 25.9 17.3 18.7 23.1 34.9 32.5 24.4 21.3 17.8 17.9 14.9 14.3 15.8 11.1 11.3 9.4 10.5 13.4 11.1 11.4 11.8 Yes 42.9 42.0 55.6 56.9 51.7 65.9 94.2 89.6 85.6 73.2 96.6 90.7 78.1 79.2 79.2 69.1 70.1 71.3 Total 56.3 46.4 36.9 32.7 45.9 53.0 59.9 57.1 55.7 54.5 64.2 66.2 60.3 57.3 53.0 49.0 41.7 47.5 59.0 56.9 56.5 56.4 Retail Banks AU 98.6 59.8 27.0 5.6 0.1 12.1 43.3 43.6 51.6 53.3 54.7 Bandhan 97.0 77.9 57.3 56.4 56.6 57.2 57.8 CUBK 44.7 26.0 27.9 24.9 44.6 35.1 25.7 20.5 17.1 18.1 19.3 16.7 15.1 13.3 10.6 10.9 9.1 9.3 57.1 56.2 56.0 56.0 DCB 41.3 24.4 33.2 30.5 39.5 49.2 51.9 46.5 63.9 61.7 58.9 76.6 76.3 72.9 72.0 63.7 66.4 70.6 68.5 65.7 62.5 60.3 Equitas 78.1 70.1 87.9 85.4 88.9 89.4 HDFC 72.3 49.4 50.8 65.1 85.0 93.0 85.2 75.1 74.7 74.3 83.0 74.6 75.4 72.4 73.2 72.2 71.7 74.9 78.3 73.9 74.8 76.0 IIB 44.6 19.1 10.8 6.6 12.9 21.6 22.9 24.3 15.4 35.0 36.0 69.5 69.5 61.9 66.4 67.7 69.4 71.8 71.3 73.2 72.3 71.3 RBL 22.7 23.2 26.4 18.2 47.1 33.0 46.8 40.3 30.5 37.3 27.6 11.7 13.6 11.9 9.1 70.1 65.0 67.6 80.8 80.5 80.9 82.0 Ujjivan 36.8 39.9 39.9 45.5 48.1 Total 56.9 35.4 35.6 38.6 63.2 79.3 72.1 66.3 65.6 67.5 74.1 71.8 71.7 67.3 67.7 69.8 66.9 70.9 74.7 72.3 72.9 73.6

Source: Company, Kotak Institutional Equities estimates

Exhibit 48: Improvement in margins will drive revenues for corporate banks Revenue growth, March fiscal year-ends, 2002-22E (%)

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020E 2021E 2022E Corporate Banks Axis 135 19 51 4 58 43 70 50 36 25 20 21 19 17 16 14 (1) 18 17 14 14 BOB 10 15 24 (2) 8 17 16 31 12 33 18 9 10 7 1 14 9 12 47 9 12 Canara 16 15 24 (4) 12 12 6 20 21 23 1 4 17 10 3 19 10 10 12 10 11 FB 37 15 25 (1) 16 25 24 43 6 17 10 6 11 12 1 26 15 17 17 18 16 ICICI 9 38 54 36 20 (1) (2) 0 16 22 21 16 17 13 (2) 3 17 16 18 J&K bank 61 16 13 (25) 15 19 11 18 23 24 14 29 10 6 (1) (7) 12 25 11 10 10 KVB 25 (2) 9 16 13 28 20 27 23 27 15 11 22 15 12 4 7 10 14 PNB 16 34 26 3 9 17 8 26 22 28 14 8 9 8 (5) 12 (1) 3 8 9 6 SBI 8 19 20 8 1 7 18 31 15 25 19 5 12 14 10 14 23 5 16 15 11 Union 20 26 11 10 6 16 20 27 17 34 12 9 6 12 (0) 16 3 3 17 12 19 Yes 101 88 36 44 37 32 41 28 25 32 37 30 11 (10) 6 14 Total 14 37 20 8 13 17 19 23 15 23 16 10 14 13 9 15 11 7 17 13 13 Retail Banks AU 36 36 32 29 Bandhan 33 49 43 32 28 CUBK 29 13 35 (11) 24 24 31 26 15 37 22 27 18 14 15 21 17 8 15 13 15 DCB 37 (15) 21 (15) (5) 51 57 (14) (22) 21 10 21 26 33 25 25 25 15 19 19 22 Equitas 14 29 34 27 20 HDFC 39 34 41 34 51 42 44 43 14 22 25 21 16 19 22 18 22 19 17 15 14 IIB 25 27 50 0 (24) 14 4 53 57 45 30 32 33 25 31 31 20 18 30 24 23 RBL 6 0 21 (7) 14 6 65 24 (9) 58 123 51 57 59 36 51 43 40 30 25 24 Ujjivan 35 46 27 21 Total 34 25 41 20 32 39 40 40 16 25 27 23 20 21 30 26 21 21 22 19 18

Source: Company, Kotak Institutional Equities estimates

Focus on productivity will drive improvement in cost ratios

 Investment in branch expansion will be lower for corporate banks. Most corporate banks (especially PSU banks) will focus on improvement in productivity of existing branch infrastructure. As such, investment in branch expansion will be limited to new age private banks and retail banks. Most corporate banks have pan India presence and will focus on asset generation from existing infrastructure. Additionally, most banks will invest in digital technologies and alternate channels to drive growth.

KOTAK INSTITUTIONAL EQUITIES RESEARCH 45 India Banks

 ~400-500 bps improvement in cost-income for most banks. Productivity improvement of existing infrastructure, muted growth in operating expenses and revival in revenue growth will lead to decline in cost-to-income ratio for most corporate banks. Cost-income improvement for small finance banks will be sharper than other as investment in transition to a bank is broadly complete and operating leverage will drive improvement in cost-ratios at a swift pace. For other retail banks, the pace of improvement will be moderate/ slightly lower than most corporate banks.

Exhibit 49: Muted growth in operating expenses for public corporate banks Growth in operating expenses, March fiscal year-ends, 2002-22E (%)

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020E 2021E 2022E Corporate Banks Axis 61 56 30 39 40 49 77 33 30 29 26 15 14 16 10 21 15 13 11 11 10 BOB 9 5 15 11 13 7 17 20 7 21 11 15 19 8 16 4 9 11 58 7 7 Canara (5) 10 9 23 0 9 9 10 13 27 6 10 18 19 3 14 12 9 8 8 8 FB 9 16 27 11 16 11 27 22 7 24 17 21 22 13 14 18 11 13 8 15 11 ICICI 35 52 49 28 22 (14) (17) 13 19 15 14 12 10 16 6 15 11 11 11 J&K bank 42 11 13 10 7 8 8 17 23 31 6 23 19 20 10 11 16 25 14 9 9 KVB 51 9 2 10 12 19 35 24 26 41 33 9 14 3 11 14 14 10 9 PNB (4) 14 15 37 (7) 10 6 19 13 34 10 17 14 12 (5) (6) 44 (15) 11 10 10 SBI (13) 10 21 12 9 1 7 24 30 13 13 12 22 8 8 11 29 16 0 5 12 Union (5) 5 10 12 12 5 9 38 13 58 1 13 22 12 3 2 3 8 14 12 12 Yes 134 141 54 21 19 36 37 43 31 31 30 40 25 20 4 7 4 Total (7) 24 20 21 13 11 14 14 15 21 13 14 19 12 8 11 21 12 9 8 10 Retail Banks AU 44 32 27 24 Bandhan 66 28 38 41 33 28 CUBK 14 6 13 39 12 28 21 28 19 30 29 34 28 6 10 24 10 17 16 13 13 DCB 14 20 35 26 5 (2) 40 0 (17) 7 15 12 16 24 24 28 24 9 14 15 19 Equitas 46 13 11 19 17 HDFC 35 38 40 34 56 43 55 48 4 24 30 21 7 16 21 16 15 15 20 9 9 IIB 17 24 84 22 19 9 17 36 35 37 33 31 24 31 28 30 17 15 20 28 28 RBL (82) 157 165 10 5 37 (7) 12 16 170 34 60 89 41 28 38 42 36 24 27 22 Ujjivan 54 39 23 17 Total 24 32 46 31 42 34 48 43 6 26 31 23 11 19 30 22 19 18 21 15 15

Source: Company, Kotak Institutional Equities estimates

Exhibit 50: Improvement in cost ratios in horizon for corporate banks Cost-income ratio, March fiscal year-ends, 2001-22E (%)

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020E 2021E 2022E Corporate Banks Axis 49.3 33.7 44.1 37.9 50.7 45.0 47.1 49.0 43.4 41.4 42.7 44.7 42.6 40.8 40.7 38.5 41.0 47.3 45.4 43.4 41.9 40.7 BOB 54.2 53.5 49.0 45.4 59.7 57.4 51.0 55.0 51.5 47.7 41.6 39.4 41.6 45.2 46.4 54.0 52.8 50.4 47.8 51.2 50.8 49.0 Canara 59.6 49.0 46.7 41.0 52.6 47.3 46.3 47.8 43.6 40.7 42.0 44.0 46.6 47.2 51.1 51.2 48.8 50.0 49.7 47.6 46.7 45.6 FB 48.3 38.5 38.7 39.3 43.9 43.9 39.3 40.4 34.5 34.9 36.9 39.4 44.9 49.3 50.0 56.7 53.4 51.7 50.0 46.3 45.1 43.1 ICICI 55.1 49.1 54.2 52.7 49.7 50.6 44.1 37.6 42.2 43.0 40.6 38.3 36.8 34.7 35.8 38.8 43.6 41.7 40.0 37.6 J&K bank 37.7 33.3 31.8 31.8 46.6 43.3 39.2 38.2 37.8 37.6 39.8 36.9 35.3 38.2 43.4 48.1 56.9 58.9 59.1 60.3 60.0 59.6 KVB 34.3 41.6 46.1 43.3 41.3 41.0 38.1 42.9 41.8 42.7 47.3 54.7 53.9 50.3 45.0 44.4 48.6 51.7 51.5 49.3 PNB 66.4 55.0 47.0 43.2 57.1 48.9 45.9 45.0 42.5 39.4 41.3 39.7 42.8 45.1 46.7 46.8 39.2 56.8 47.0 48.6 49.0 50.9 SBI 67.7 54.4 50.5 51.2 53.0 57.3 54.2 49.1 46.6 52.6 47.6 45.2 48.5 52.7 49.8 49.1 47.8 50.2 55.7 48.1 44.0 44.1 Union 66.6 52.7 43.9 43.8 48.9 48.3 43.8 41.3 44.6 44.8 50.7 45.3 46.9 53.7 54.6 57.1 54.6 51.0 50.8 49.7 49.9 46.8 Yes 110.1 50.5 60.5 49.8 44.2 36.7 36.3 37.7 38.4 39.4 41.3 40.9 41.7 40.2 43.5 50.5 51.3 46.5 Total 52.2 47.0 46.9 52.7 52.7 49.7 48.0 44.5 44.6 44.1 43.0 44.5 46.7 46.0 45.7 44.1 48.0 50.1 47.0 44.8 43.9 Retail Banks AU 56.7 60.0 58.3 56.0 53.7 Bandhan 56.9 36.3 35.0 32.6 32.1 32.3 32.5 CUBK 40.0 35.4 33.2 27.6 43.4 39.1 40.6 37.5 38.1 39.3 37.5 39.6 41.7 45.2 41.9 40.1 40.9 38.5 41.7 42.2 41.9 41.0 DCB 52.8 44.2 62.2 69.1 102.5 ### 73.6 65.6 76.3 80.6 71.4 74.6 68.6 62.9 58.8 58.4 60.0 59.8 56.9 54.3 52.3 50.9 Equitas 62.7 80.1 70.1 57.7 54.0 52.6 HDFC 44.8 43.4 44.8 44.6 44.7 46.1 46.3 49.9 51.7 47.3 48.1 49.7 49.6 45.6 44.6 44.3 43.4 41.0 39.7 40.7 38.7 37.0 IIB 29.1 27.2 26.7 32.7 39.7 62.8 60.0 67.2 59.8 51.1 48.2 49.4 48.8 45.7 48.1 47.0 46.7 45.7 44.2 40.7 42.1 44.0 RBL 62.6 10.5 27.0 59.3 69.8 64.3 83.0 46.7 42.1 53.6 92.0 55.1 58.4 70.3 62.5 58.6 53.4 53.0 51.3 48.7 49.1 48.1 Ujjivan 67.0 76.4 72.4 70.1 67.8 Total 39.0 41.3 42.7 46.6 50.1 48.6 51.3 52.4 48.0 48.4 49.7 49.5 46.2 45.6 45.6 44.0 43.2 42.0 41.9 40.7 39.9

Source: Company, Kotak Institutional Equities estimates

46 KOTAK INSTITUTIONAL EQUITIES RESEARCH Banks India

Exhibit 51: Business expansion has slowed down for public corporate banks Branches, March fiscal year-ends, 2006-22E (#)

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020E 2021E 2022E Corporate Banks Axis 671 835 1,035 1,390 1,622 1,947 2,402 2,589 2,904 3,304 3,703 4,003 4,303 4,650 4,950 2,904 3,304 BOB 2,853 2,926 3,148 3,364 3,904 4,276 4,874 5,190 5,330 5,422 5,467 5,553 5,703 5,853 6,003 5,330 5,422 Canara 2,678 2,733 3,046 3,257 3,600 3,728 4,755 5,682 5,849 6,083 6,204 6,315 6,465 6,565 6,665 5,849 6,083 FB 603 612 672 743 950 1,103 1,174 1,247 1,252 1,252 1,252 1,252 1,322 1,392 1,462 1,252 1,252 ICICI 1,308 1,419 1,741 2,529 2,752 3,100 3,753 4,050 4,450 4,850 4,867 5,217 5,567 5,574 5,924 4,450 4,850 J&K bank 508 533 536 548 603 685 781 821 861 865 909 949 989 1,020 1,060 861 865 KVB 288 312 335 369 451 553 572 629 667 711 790 840 890 878 928 667 711 PNB 4,540 4,668 5,014 5,189 5,670 5,873 6,200 6,559 6,759 6,937 6,983 6,989 6,889 6,789 6,689 6,759 6,937 SBI 10,270 11,448 12,496 13,542 14,097 14,816 15,869 16,333 16,784 17,170 22,414 22,010 22,230 22,452 22,677 16,784 17,170 Union 2,361 2,558 2,805 3,016 3,201 3,511 3,871 4,081 4,200 4,282 4,301 4,292 4,367 4,442 4,517 4,200 4,282 Yes 67 117 150 214 356 430 560 630 860 1,000 1,100 1,120 1,120 1,120 1,120 860 1,000 Total 26,147 28,161 30,978 34,161 37,206 40,022 44,811 47,811 49,916 51,876 57,990 58,540 59,845 60,735 61,995 49,916 51,876 Retail Banks AU 75 113 82 177 220 231 291 301 377 408 508 608 708 291 301 Bandhan 656 840 936 986 1,266 1,346 1,426 656 840 CUBK 197 208 222 246 300 375 425 475 525 550 600 650 700 750 800 525 550 DCB 80 80 83 83 84 94 130 154 198 262 318 333 373 413 443 198 262 Equitas 293 335 367 433 505 549 610 597 598 637 681 499 549 610 HDFC 761 1,412 1,725 1,986 2,544 3,062 3,403 4,014 4,520 4,715 4,787 5,137 5,487 5,803 6,153 4,520 4,715 IIB 180 180 210 300 400 500 602 801 1,000 1,200 1,400 1,658 1,858 2,058 2,258 1,000 1,200 RBL 81 86 88 87 108 124 172 183 201 239 265 285 315 384 414 201 239 Ujjivan 350 423 423 188 187 474 624 760 873 423 188 Total 1,299 1,966 2,403 3,108 3,853 4,699 5,735 6,786 8,363 8,905 9,467 10,529 11,768 12,803 13,574 8,363 8,905

Source: Company, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 47 June 2019 : Results calendar India Daily Summary Daily Summary India

Mon Tue Wed Thu Fri Sat Sun KOTAK INSTITUTIONAL EQUITIES RESEARCH EQUITIES INSTITUTIONAL KOTAK 8-Jul 9-Jul 10-Jul 11-Jul 12-Jul 13-Jul 14-Jul TCS IndusInd Bank Avenue Supermarts Infosys 15-Jul 16-Jul 17-Jul 18-Jul 19-Jul 20-Jul 21-Jul Bajaj Consumer Care DCB Bank Mindtree ACC Bandhan Bank Amara Raja Batteries Federal Bank Wipro Colgate-Palmolive (India) Dabur India HDFC Bank Yes Bank L&T Infotech ICICI Lombard L&T Finance Holdings L&T Technology Mahindra CIE Automotive RBL Bank -

22-Jul 23-Jul 24-Jul 25-Jul 26-Jul 27-Jul 28-Jul July 9, 9, July 2019 Coromandel International HDFC Standard Life Asian Paints Ambuja Cements ABB ICICI Bank GlaxoSmithkline Pharmaceuticals Hindustan Unilever ICICI Prudential Life Bajaj Finserv Bajaj Auto Kotak Mahindra Bank Mahindra & Mahindra Financial Jubilant Foodw orks Bajaj Finance Bajaj Holding & Investment

United Spirits SBI Life Insurance Shriram Transport Biocon JSW Steel TVS Motor SKF GRUH Finance Mphasis PVR Tata Motors 29-Jul 30-Jul 31-Jul 1-Aug 2-Aug 3-Aug 4-Aug Dr Reddy's Laboratories Axis Bank Godrej Consumer Products Exide Industries J K Cement Kansai Nerolac Cholamandalam GlaxoSmithkline Consumer HDFC Orient Cement Hero Motocorp Magma Fincorp Tech Mahindra Marico 5-Aug 6-Aug 7-Aug 8-Aug 9-Aug 10-Aug 11-Aug Berger Paints Aditya Birla Fashion The Ramco Cement Endurance Technologies Britannia Industries Hexaw are Technologies Shree Cement 12-Aug 13-Aug 14-Aug 15-Aug 16-Aug 17-Aug 18-Aug Motherson Sumi Systems Apollo Hospitals Timken Bosch Info Edge 19-Aug 20-Aug 21-Aug 22-Aug 23-Aug 24-Aug 25-Aug P&G Hygiene Gillette India

Source: Company, Bloomberg, Kotak Institutional Equities estimates

48 KOTAK INSTITUTIONAL EQUITIES RESEARCH 48

Kotak Institutional Equities: Valuation summary of KIE Universe stocks 49 Fair O/S ADVT

Price (Rs) Value Upside Mkt cap. shares EPS (Rs) EPS growth (%) P/E (X) EV/EBITDA (X) P/B (X) RoE (%) Dividend yield (%) 3mo Company Rating 8-Jul-19 (Rs) (%) (Rs bn) (US$ bn) (mn) 2019 2020E 2021E 2019 2020E 2021E 2019 2020E 2021E 2019 2020E 2021E 2019 2020E 2021E 2019 2020E 2021E 2019 2020E 2021E (US$ mn) Automobiles & Components Amara Raja Batteries ADD 636 665 5 109 1.6 171 28 33 39 2.6 18 17 22 19.0 16.3 11.4 9.7 8.2 3.3 2.9 2.6 15.4 16.1 16.8 1.1 1.3 1.5 5.5 Apollo Tyres BUY 188 270 44 107 1.6 572 14.3 18 22 7.0 25 21 13.1 10.5 8.7 7.7 6.7 5.7 1.1 1.0 0.9 8.3 9.8 10.9 1.7 1.6 1.6 9.8 Ashok Leyland BUY 85 130 53 249 3.6 2,936 7.0 7.6 7.7 16 8.9 1.1 12.2 11.2 11.1 6.8 5.9 6.1 3.0 2.6 2.2 26 25 21 3.6 2.7 2.7 30 Bajaj Auto REDUCE 2,780 2,700 (3) 804 12 289 153 155 172 8.4 1.1 10.8 18.1 17.9 16.2 13 12 10.7 3.7 3.3 3.0 23 19.6 19.6 2.2 2.2 2.5 21 Balkrishna Industries BUY 718 870 21 139 2.0 193 40 42 48 6.0 6.7 14.4 18.1 17.0 14.8 9.6 9.2 8.0 3.0 2.6 2.3 17.5 16.5 16.6 1.1 1.2 1.3 7.6 Bharat Forge SELL 449 460 2 209 3.0 466 22 24 26 37 7.6 7.3 20 18.8 17.5 11.8 10.8 9.9 3.9 3.4 3.0 21 19.2 18.0 0.6 1.2 1.3 9.1 CEAT ADD 904 1,080 19 37 0.5 40 62 74 82 (5.0) 20 11.7 14.7 12.3 11.0 7.9 7.9 7.2 1.3 1.2 1.1 9.3 10.3 10.6 1.3 1.3 1.3 9.1 Eicher Motors SELL 19,033 16,200 (15) 519 7.6 27 816 877 888 1.9 7.6 1.3 23 22 21 16 15 14 7.3 5.9 4.9 36 30 25 0.2 0.2 — 29 Endurance Technologies SELL 1,016 900 (11) 143 2.1 141 36 42 49 24 17 17 28 24 21 13 10.6 9.0 5.6 4.7 3.9 19.3 19.4 19.1 0.5 0.7 0.8 0.8 Escorts BUY 519 1,000 93 46 0.9 89 54 61 67 40 11.5 10.7 9.5 8.6 7.7 6.3 5.1 4.3 1.5 1.3 1.2 16.0 15.6 15.1 0.5 1.8 1.9 18.7 Exide Industries SELL 199 210 5 169 2.5 850 9.0 10.0 11.1 10.1 10.4 10.8 22 20.0 18.0 11.9 10.6 9.6 2.8 2.6 2.4 13.5 13.6 13.9 1.2 1.8 2.0 5.5 Hero Motocorp SELL 2,380 2,400 1 475 6.9 200 169 170 179 (8.5) 0.1 5.2 14.0 14.0 13.3 8.4 7.9 7.3 3.7 3.3 3.0 27 25 24 4.0 3.6 3.8 27 Mahindra CIE Automotive ADD 220 245 11 83 1.2 378 14.5 15 17 48 4.8 11.3 15.2 14.5 13.0 8.7 7.9 6.9 1.9 1.7 1.5 13.7 12.6 12.3 ——— 0.4 Mahindra & Mahindra BUY 636 930 46 790 11.5 1,138 48 48 50 25 — 5.8 13.4 13.4 12.6 10.1 8.9 8.2 2.1 1.9 1.7 16.5 14.6 13.9 1.5 1.5 1.6 32 Maruti Suzuki REDUCE 6,039 6,000 (1) 1,824 26.6 302 248 248 285 (2.9) (0.2) 14.8 24 24 21 13 12 10.0 4.0 3.6 3.2 17.1 15.4 15.8 1.0 1.0 1.2 88 Motherson Sumi Systems SELL 118 110 (7) 373 5.4 3,158 5.1 6.0 7.3 (6.3) 17 23 23 19.8 16.1 8.5 7.5 5.9 3.4 3.0 2.7 15.5 16.2 17.7 1.3 1.3 1.5 18.8 MRF REDUCE 54,543 50,000 (8) 231 3.4 4 2,667 3,070 3,336 (0.1) 15 8.7 20 17.8 16.3 9.2 7.8 6.8 2.1 1.9 1.7 11.0 11.3 11.1 0.1 0.1 0.1 5.5 Schaeffler India REDUCE 4,719 5,000 6 148 2.1 31 144 159 188 14.9 10.4 18 33 30 25 19 16 14 5.5 4.7 4.0 17.9 16.9 17.1 ——— 0.3 SKF ADD 1,947 2,000 3 100 1.5 51 65 78 91 13.5 19 17 30 25 21 19 17 14 5.9 4.8 4.1 19.8 19.2 19.2 0.6 0.7 0.9 0.7 Tata Motors BUY 155 270 75 525 7.1 3,396 (5.4) 18 27 (127) NM 45 NM 8.4 5.8 4.0 3.0 2.6 0.9 0.8 0.7 NM 9.9 12.8 ——— 75 Timken SELL 693 620 (11) 52 0.8 75 20 24 28 46 22 16 35 29 25 17 15 13 3.9 3.4 3.0 14.6 12.7 13.0 0.1 0.1 0.1 0.6 TVS Motor SELL 411 350 (15) 195 2.8 475 14.1 16 19 1.1 12.5 18.6 29 26 22 15 13 11.6 5.8 5.1 4.4 22 21 22 0.8 1.2 1.4 10.3 Varroc Engineering BUY 461 870 89 62 0.9 135 33 37 58 (0.2) 11.8 55 13.8 12.3 7.9 7.7 6.4 4.5 2.0 1.7 1.5 14.5 14.2 18.3 ——— 0.6 Automobiles & Components Neutral 7,391 107.3 (16.0) 29 16 22 17.0 14.6 8.8 7.4 6.4 2.8 2.5 2.2 12.6 14.5 15.0 1.3 1.3 1.4 405 Banks AU Small Finance Bank SELL 680 500 (27) 199 2.9 292 13.1 16 23 28 26 40 52 41 29 ——— 6.7 4.9 4.2 14.0 13.2 14.8 0.1 ——— Axis Bank REDUCE 783 730 (7) 2,051 29.9 2,572 18 45 55 1,593 148 23 43 17.4 14.2 ——— 3.4 2.8 2.3 7.2 16.1 16.6 0.1 0.3 0.4 94 Bandhan Bank SELL 532 475 (11) 634 9.2 1,193 16 20 25 45 20 28 33 27 21 ——— 5.7 5.5 4.6 19.0 23 23 0.6 0.7 0.9 0.0 Bank of Baroda ADD 125 145 16 479 7.0 2,652 1.6 21 25 118 1,171 20 76 6.0 5.0 ——— 0.9 1.0 0.8 0.9 14.5 14.2 — 3.3 4.0 45 Canara Bank ADD 270 315 17 203 3.0 753 4.6 53 72 108 1,046 36 59 5.1 3.7 ——— 1.3 0.8 0.6 1.0 10.4 12.7 ——— 23 City Union Bank ADD 200 215 7 147 2.1 735 9.3 10.7 12.0 4.4 15 11.7 22 18.7 16.7 ——— 3.3 2.9 2.6 15.2 15.3 15.1 0.2 1.0 1.1 2.3 DCB Bank BUY 224 230 3 69 1.0 310 10.5 13.3 17 32 27 25 21 16.8 13.4 ——— 2.5 2.2 2.0 12.0 13.5 14.9 0.4 0.6 0.7 7.7 Equitas Holdings BUY 117 180 54 40 0.6 342 6.3 10.0 13.0 585 57 30 18.5 11.8 9.0 ——— 1.7 1.5 1.3 9.1 12.8 14.5 ——— 4.9 India Daily Summary Daily Summary India Federal Bank BUY 105 130 24 209 3.0 1,985 6.3 8.9 10.4 41 42 16 16.8 11.8 10.1 ——— 1.7 1.6 1.4 9.8 12.7 13.4 1.3 1.9 2.2 19.2 HDFC Bank ADD 2,410 2,400 (0) 6,575 95.7 2,723 77 93 112 14.9 21 20 31 26 22 ——— 4.5 4.0 3.5 16.5 16.0 16.9 0.6 0.8 0.9 117 ICICI Bank BUY 426 460 8 2,747 40.0 6,447 5.2 25 31 (45.6) 378 25 82 17.1 13.6 ——— 2.8 2.4 2.1 3.2 14.0 15.7 0.2 1.2 1.5 105 IndusInd Bank ADD 1,476 1,750 19 890 13.0 614 54 77 99 (10) 44 28 27 19.1 14.8 ——— 3.6 2.9 2.5 13.5 17.3 17.4 0.5 0.7 0.9 94 J&K Bank BUY 40 90 127 22 0.3 557 8.3 9.6 17 129 15 76 4.7 4.1 2.3 ——— 0.5 0.3 0.3 7.3 7.8 12.7 0.0 4.9 8.6 1.2 Karur Vysya Bank ADD 69 85 23 56 0.8 799 2.6 4.2 7.7 (45) 59 83 26 16.5 9.0 ——— 1.1 1.0 0.9 3.3 5.1 8.9 0.9 1.5 2.9 1.5 Punjab National Bank ADD 73 105 44 335 4.9 4,604 (22) 9.4 13.7 51 143 46 NM 7.7 5.3 ——— 1.6 1.2 0.9 NM 9.9 12.7 ——— 37

KOTAK INSTITUTIONAL EQUITIES RESEARCH EQUITIES INSTITUTIONAL KOTAK RBL Bank SELL 627 560 (11) 268 3.9 427 20 28 35 34 40 22 31 22 18.0 ——— 3.7 3.3 2.9 12.2 15.0 16.1 0.4 0.6 0.7 15.5 State Bank of India BUY 355 410 15 3,171 46.2 8,925 1.0 37 52 113 3,736 41 368 9.6 6.8 ——— 2.2 1.6 1.2 0.4 13.9 16.9 0.0 0.1 0.2 118 Ujjivan Financial Services ADD 274 375 37 33 0.5 121 16 23 30 2,650 43 29 16.7 11.7 9.1 ——— 1.7 1.5 1.3 10.7 13.7 15.6 0.5 0.8 1.1 10.7 Union Bank ADD 77 105 36 136 2.0 1,763 (17) 6.3 20 63 137 211 NM 12.3 3.9 ——— 1.2 1.1 0.7 NM 4.4 12.8 0.0 1.2 3.8 12.4 YES Bank SELL 93 170 83 216 3.1 2,315 7.4 4.1 12.3 (59.5) (45) 203 12.5 23 7.6 ——— 0.9 1.0 0.8 6.5 3.5 10.0 2.9 1.1 3.5 171 Banks Attractive 18,481 269.1 373 307 33 63 15.4 11.7 2.3 2.0 1.7 3.6 12.6 14.6 0.4 0.7 0.9 880 -

Source: Company, Bloomberg, Kotak Institutional Equities estimates 9, July 2019

KOTAK INSTITUTIONAL EQUITIES RESEARCH 49

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

KOTAK INSTITUTIONAL EQUITIES RESEARCH EQUITIES INSTITUTIONAL KOTAK Company Rating 8-Jul-19 (Rs) (%) (Rs bn) (US$ bn) (mn) 2019 2020E 2021E 2019 2020E 2021E 2019 2020E 2021E 2019 2020E 2021E 2019 2020E 2021E 2019 2020E 2021E 2019 2020E 2021E (US$ mn) Building Products Astral Poly Technik SELL 1,290 720 (44) 155 2.2 120 16 21 25 11.8 27 18 79 62 53 40 33 28 12 10 8.6 17.1 17.8 17.8 0.1 0.1 0.1 1.1 Building Products Cautious 155 2.2 11.8 27 18 79 62 53 40 33 28 12 10 8.6 15.3 16.5 16.4 0.1 0.1 0.1 1.1 Capital goods ABB SELL 1,482 1,125 (24) 314 4.6 212 24 27 33 22 13.7 22 61 54 44 65 44 33 7.8 7.0 6.3 13.4 13.7 14.9 0.3 0.4 0.4 2.9 Ashoka Buildcon BUY 132 225 70 37 0.5 281 11.8 11.8 12.4 41 (0.4) 5.3 11.2 11.2 10.7 8.5 8.0 7.4 1.7 1.5 1.3 16.1 14.1 13.3 1.2 1.4 1.5 0.7 Bharat Electronics BUY 101 100 (1) 247 3.6 2,437 7.7 5.8 5.2 31.8 (24.4) (11.6) 13.1 17.3 19.6 8.2 9.3 9.4 2.7 2.6 2.4 22 15.1 12.6 3.4 2.0 1.8 16.5 BHEL REDUCE 67 67 (1) 234 3.4 3,482 3.5 2.9 4.2 51 (17.0) 44 19.3 23 16.1 8.6 6.9 4.8 0.7 0.7 0.7 3.8 3.2 4.5 3.0 2.1 2.8 15.0 Carborundum Universal SELL 346 310 (10) 65 1.0 189 13.1 16 18 14.8 21 15 26 22 19.0 15 12 10.3 3.8 3.4 3.1 15.1 16.5 17.0 0.8 1.4 1.6 0.6 Cochin Shipyard BUY 376 580 54 49 0.7 132 37 39 42 23 6.0 7.4 10.3 9.7 9.0 4.5 3.4 4.9 1.5 1.3 1.2 14.6 14.6 14.2 3.5 2.8 3.1 0.4 Cummins India SELL 750 660 (12) 208 3.0 277 26 29 33 9.1 9.2 14.4 28 26 23 23 21 18 5.0 4.7 4.4 18.0 18.7 20 2.3 2.1 2.4 4.4

Dilip Buildcon BUY 430 735 71 59 0.9 137 56 47 57 20 (15.2) 22 7.7 9.1 7.5 5.8 4.9 4.6 1.8 1.5 1.3 27 18.3 18.6 0.2 0.2 0.2 3.4

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IRB Infrastructure BUY 92 205 123 32 0.5 351 24 20 14.3 7.2 (17.2) (28.5) 3.8 4.6 6.4 5.9 5.8 6.3 0.5 0.5 0.4 14.2 10.7 7.2 3.9 4.3 4.1 7.2 9, 2019 July Kalpataru Power Transmission BUY 490 570 16 75 1.1 153 30 37 45 66 23 21 16.1 13.1 10.8 7.2 5.8 4.6 2.4 2.1 1.8 16.1 17.0 17.6 0.6 0.7 0.8 0.9 KEC International BUY 322 340 5 83 1.2 257 19 23 29 5.7 21 26 17.0 14.0 11.1 8.4 7.2 6.1 3.4 2.8 2.3 22 22 23 0.9 0.8 1.0 1.9 L&T BUY 1,490 1,500 1 2,090 30.4 1,403 61 68 80 19 10.9 17 24 22 18.7 20 17 17 3.8 3.4 3.1 16.3 16.3 17.2 1.2 1.6 1.8 64

Sadbhav Engineering REDUCE 204 270 32 35 0.5 172 10.9 12.3 17 (15.7) 13.7 40.1 18.8 16.5 11.8 11.5 9.4 7.7 1.7 1.6 1.4 9.5 9.9 12.6 — — — 0.7 Siemens SELL 1,247 1,085 (13) 444 6.5 356 31 36 42 22 18 16 41 34 30 25 20 17 4.9 4.5 4.1 12.6 13.6 14.4 0.7 0.8 0.9 8.9 Thermax ADD 1,020 1,100 8 122 1.8 113 28 36 44 37 27 24 36 28 23 26 21 17 26 21 17 11.1 12.8 14.4 0.7 0.8 1.0 1.7 Capital goods Neutral 4,095 59.6 22 4.1 15 23 22 18.8 2.9 2.7 2.5 12.9 12.4 13.1 1.3 1.4 1.6 880

Commercial & Professional Services

SIS REDUCE 867 825 (5) 64 0.9 75 29 35 42 28 22 21 30 25 20 18 14 11.8 5.2 4.4 3.7 18.8 19.1 19.4 0.3 0.4 0.4 0.3 TeamLease Services SELL 2,997 2,030 (32) 51 0.7 17 58 73 95 33 27 31 52 41 31 53 40 31 9.5 7.7 6.2 20 21 22 — — — 0.7 Commercial & Professional Services Cautious 115 1.7 32 23 24 37 30 24 25 19 16 6.4 5.3 4.4 17.5 18.0 18.5 0.2 0.2 0.2 1.0 Commodity Chemicals Asian Paints REDUCE 1,340 1,225 (9) 1,286 18.7 959 23 26 32 2.7 18 21 60 51 42 36 30 25 14 12 11 24 25 27 0.8 1.0 1.2 28 Tata Chemicals BUY 592 700 18 151 2.2 255 43 49 54 (9) 13.1 10.4 13.8 12.2 11.0 6.5 5.3 4.6 1.2 1.1 1.1 9.3 9.7 10.0 2.1 2.3 2.5 8.9 Commodity Chemicals Neutral 1,436 20.9 (1.5) 16 17 44 38 32 25 21 18 6.6 6.1 5.6 14.9 15.9 17.1 0.9 1.1 1.3 37 Construction Materials ACC SELL 1,502 1,400 (7) 282 4.1 188 53 65 73 9.3 21 13.0 28 23 21 15 12 10.9 2.7 2.5 2.3 10.1 11.1 11.6 0.9 1.1 1.2 18.1 Ambuja Cements REDUCE 205 192 (7) 408 5.9 1,986 7.3 9.9 11.5 (2.4) 36 16 28 21 17.9 10.1 7.7 6.6 1.8 1.7 1.6 6.7 8.5 9.1 0.7 0.7 0.7 10.0 Dalmia Bharat ADD 1,078 1,225 24 191 2.8 192 14.4 32 43 4.1 120 37 69 31 23 11.6 9.6 8.2 1.8 1.7 1.6 2.6 5.6 7.2 — — — 1.7 Grasim Industries ADD 888 1,020 15 584 8.5 657 63 81 104 36 30 28 14.2 10.9 8.5 10.3 6.1 4.7 1.0 1.0 0.9 7.3 9.2 10.7 0.8 0.8 0.8 22 India Cements REDUCE 95 116 22 30 0.4 310 2.2 8.6 9.7 (31.4) 283 13.2 43 11.1 9.8 9.9 5.8 5.4 0.6 0.5 0.5 1.3 5.0 5.4 0.8 0.8 0.8 12.1 J K Cement ADD 988 1,100 11 76 1.1 77 34 74 84 (21) 116 13.4 29 13.4 11.8 12 9.1 7.2 2.8 2.4 2.0 11.3 19.5 18.8 1.0 1.0 1.0 1.3 JK Lakshmi Cement ADD 332 432 30 39 0.6 118 4.1 26 33 (28) 544 27 81 12.7 10.0 12 6.5 5.5 2.6 2.2 1.8 3.3 19.0 20 0.2 0.6 0.6 0.5 Orient Cement ADD 103 106 3 21 0.3 205 2.3 7.7 10.8 7.5 230 41 44 13.4 9.5 10.6 6.8 5.9 2.0 1.8 1.6 4.6 14.2 17.8 1.5 1.9 1.9 0.5 Shree Cement SELL 20,815 14,750 (29) 725 10.6 35 323 465 602 (19) 44 30 64 45 35 27 19 15 7.6 6.6 5.7 12.2 15.7 17.6 0.3 0.3 0.3 9.1 UltraTech Cement SELL 4,392 2,960 (33) 1,206 17.6 275 102 137 170 13.9 35 23 43 32 26 20 16 14 4.3 3.8 3.4 10.4 12.7 13.9 0.3 0.3 0.3 38 Construction Materials Cautious 3,562 51.9 11.5 41 24 32 23 18.2 14 9.7 8.0 2.4 2.2 2.0 7.6 9.8 11.0 0.5 0.5 0.5 113

Source: Company, Bloomberg, Kotak Institutional Equities estimates

50 KOTAK INSTITUTIONAL EQUITIES RESEARCH

50

Kotak Institutional Equities: Valuation summary of KIE Universe stocks

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

Company Rating 8-Jul-19 (Rs) (%) (Rs bn) (US$ bn) (mn) 2019 2020E 2021E 2019 2020E 2021E 2019 2020E 2021E 2019 2020E 2021E 2019 2020E 2021E 2019 2020E 2021E 2019 2020E 2021E (US$ mn) Consumer Durables & Apparel Crompton Greaves Consumer SELL 233 200 (14) 146 2.1 627 5.9 7.1 8.4 15 20 18 39 33 28 25 21 18 13 10 8.2 40 35 33 0.9 1.1 1.1 2.2 Havells India SELL 750 520 (31) 469 6.8 625 12.6 16 19 13.5 25 20 60 48 40 39 31 25 11 9.8 8.6 19.8 22 23 0.6 0.7 0.9 15.5 Page Industries REDUCE 19,934 21,300 7 222 3.2 11 353 410 495 13.5 16 21 56 49 40 36 31 26 29 25 20 49 54 54 1.7 1.1 1.3 12.4 TCNS Clothing Co. ADD 760 770 1 47 0.7 65 21 19 23 34 (6.8) 21 37 40 33 25 21 16 7.9 6.4 5.2 25 17.9 17.5 — — — 0.4 Vardhman Textiles ADD 1,040 1,230 18 60 0.9 56 129 119 136 25.6 (8.4) 15.0 8.0 8.8 7.6 6.9 6.5 5.4 1.1 1.0 0.9 13.9 11.5 12.1 1.9 2.9 2.9 0.3 Voltas SELL 604 480 (20) 200 2.9 331 16 17 21 (9.1) 7.1 23 38 36 29 33 26 23 4.9 4.4 4.0 13.0 12.9 14.3 0.5 0.6 0.7 15.0 Whirlpool SELL 1,559 1,220 (22) 198 2.9 127 32 38 44 16 18 17 49 41 35 29 25 21 9.2 7.9 6.9 21 21 21 0.3 0.5 0.9 1.3 Consumer Durables & Apparel Cautious 1,341 19.5 12.7 11.3 40 36 30 27 23 19 7.2 6.4 18.0 17.7 18.5 0.8 0.8 47 Consumer Staples Bajaj Consumer Care BUY 320 410 28 47 0.7 148 15 17 19 5.0 16 11.9 21 18.4 16.5 16 14 13 10 10 10 46 54 60 4.4 4.4 5.0 0.5 Britannia Industries REDUCE 2,781 2,800 1 668 9.7 240 48 59 70 15 22 19 58 47 40 38 31 26 16 13 11 30 30 29 0.5 0.7 0.9 18.3 Colgate-Palmolive (India) ADD 1,172 1,310 12 319 4.6 272 27 30 35 12.5 13.4 15 44 39 33 26 22 20 22 22 22 49 57 66 2.0 2.2 2.6 6.7 Dabur India REDUCE 401 370 (8) 709 10.3 1,766 8.1 9.5 10.9 4.6 16 16 49 42 37 40 34 30 13 11 9.8 25 28 28 0.7 1.1 1.4 14.6 GlaxoSmithKline Consumer RS 7,672 — — 323 4.7 42 234 242 273 40 3.5 12.9 33 32 28 25 22 19 7.9 7.1 6.4 26 24 24 1.4 1.5 1.7 1.7 Godrej Consumer Products REDUCE 652 635 (3) 667 9.7 1,022 14.4 16 19 1.0 12.9 16 45 40 35 32 28 24 9.2 8.2 7.3 22 22 22 1.4 1.0 1.1 13.5 Hindustan Unilever REDUCE 1,754 1,575 (10) 3,796 55.3 2,160 28 32 37 18 15 14.9 62 54 47 43 37 32 49 43 37 83 85 84 1.3 1.4 1.5 32 ITC ADD 277 335 21 3,401 49.5 12,288 10.2 11.1 12.3 14.0 8.7 11.1 27 25 23 18 16 15 5.9 5.5 5.2 19.5 21 22 2.1 2.3 2.7 54 Jyothy Laboratories ADD 164 200 22 60 0.9 367 5.6 6.0 6.7 27 7.9 11.4 29 27 24 22 19 17 4.5 4.2 4.0 16.6 16.1 16.9 1.8 2.1 2.4 1.1 Marico ADD 371 380 2 479 7.0 1,290 7.3 8.5 10.0 17 16 17 51 44 37 37 31 26 16 15 13 34 35 38 1.3 1.5 1.7 10.8 Nestle India REDUCE 11,801 10,700 (9) 1,138 16.6 96 167 196 224 31 17 14.8 71 60 53 42 36 32 31 29 26 45 49 52 1.0 1.2 1.3 11.2 Tata Global Beverages ADD 264 240 (9) 166 2.4 631 7.0 8.4 9.4 (4.8) 20 12.4 38 31 28 21 19 17 2.3 2.2 2.1 6.1 7.1 7.6 0.9 1.1 1.3 13.2 United Breweries REDUCE 1,376 1,335 (3) 364 5.3 264 21 26 33 43 24 25 65 52 41 32 27 22 11 9.6 8.1 19.2 20 21 0.2 0.3 0.5 8.9 United Spirits REDUCE 581 550 (5) 422 6.1 727 9.4 12.3 16 24 31 26 62 47 37 35 29 24 13 9.2 6.2 24 23 19.9 0.0 0.3 0.4 12.9 Consumer Staples Cautious 12,735 185.4 16 13.0 14.4 43 39 34 29 25 22 11 10 9.3 26 27 28 1.3 1.5 1.7 202 Diversified Financials Bajaj Finance SELL 3,413 2,500 (27) 1,979 28.8 577 69 92 122 60 32 33 49 37 28 — — — 10.0 8.1 6.4 22 24 26 0.2 0.3 0.4 67 Bajaj Finserv REDUCE 7,593 7,250 (5) 1,208 17.6 159 202 286 366 21 41 28 38 27 21 — — — 5.1 4.3 3.6 14.5 17.5 18.9 0.2 0.2 0.2 23 Bharat Financial Inclusion NA 898 — — 126 1.8 140 63 68 86 93 8.1 27 14.2 13.2 10.4 — — — 3.2 2.5 2.0 25 21 21 — — — 16.8 Cholamandalam ADD 276 295 7 216 3.1 782 15 18 21 29 17 19 18.2 15.6 13.1 — — — 3.6 3.0 2.5 21 20 20 2.4 0.7 0.8 6.1 HDFC ADD 2,260 2,175 (4) 3,893 56.7 1,721 56 62 71 (14) 11.5 14.1 40 36 32 — — — 5.1 4.7 4.3 13.6 13.4 14.0 0.9 1.0 1.2 96 IIFL Holdings REDUCE 147 185 26 47 0.7 318 19 14.8 18 (22.5) (24.0) 19 7.5 9.9 8.3 — — — 1.3 1.2 1.1 17.5 12.3 13.5 4.4 3.6 4.3 0.6 L&T Finance Holdings REDUCE 121 140 16 242 3.5 1,999 11.2 12.8 14.6 74 14.6 14.3 10.9 9.5 8.3 — — — 1.8 1.5 1.3 18.0 17.5 17.2 0.8 1.0 1.2 13.8 LIC Housing Finance ADD 551 550 (0) 278 4.0 505 48 57 67 21.4 19 17 11.4 9.6 8.2 — — — 1.7 1.5 1.3 15.9 16.6 16.9 1.4 1.6 1.9 12.6

Magma Fincorp BUY 116 150 29 31 0.5 269 11.3 12.6 15 12.9 11.4 23 10.3 9.2 7.5 — — — 1.1 1.0 0.9 12.8 11.6 12.8 0.7 0.5 1.3 1.3 Daily Summary India Mahindra & Mahindra Financial ADD 389 500 29 240 3.5 615 25 31 36 45 24 13.8 15.4 12.4 10.9 — — — 2.4 2.1 1.9 15.2 16.7 16.9 1.7 2.1 2.4 12.1 Muthoot Finance ADD 602 625 4 241 3.5 401 49 54 60 10.8 8.7 11.4 12.2 11.2 10.1 — — — 2.5 2.1 1.8 22.4 20 19.6 2.0 2.1 2.4 8.3 PNB Housing Finance REDUCE 788 700 (11) 132 1.9 168 71 69 77 9.7 (2.9) 11.5 11.1 11.4 10.2 — — — 1.8 1.7 1.5 16.9 14.5 14.4 1.1 0.4 0.4 7.8 Shriram City Union Finance ADD 1,480 1,900 28 98 1.4 66 150 156 189 39 4.3 21 9.9 9.5 7.8 — — — 1.7 1.5 1.3 16.6 15.1 16.0 1.5 1.3 1.6 0.6 Shriram Transport BUY 1,033 1,425 38 234 3.4 227 113 128 145 4.2 13.6 12.8 9.1 8.0 7.1 — — — 1.5 1.3 1.2 17.4 17.1 16.7 1.2 1.7 2.1 33 Diversified Financials Neutral 8,967 130.5 12.8 18 19 28 23 19.7 4.1 3.6 3.2 14.9 15.4 16.1 0.8 0.8 1.0 299

KOTAK INSTITUTIONAL EQUITIES RESEARCH EQUITIES INSTITUTIONAL KOTAK

Source: Company, Bloomberg, Kotak Institutional Equities estimates

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July 9, 9, 2019 July

KOTAK INSTITUTIONAL EQUITIES RESEARCH 51

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

KOTAK INSTITUTIONAL EQUITIES RESEARCH EQUITIES INSTITUTIONAL KOTAK Company Rating 8-Jul-19 (Rs) (%) (Rs bn) (US$ bn) (mn) 2019 2020E 2021E 2019 2020E 2021E 2019 2020E 2021E 2019 2020E 2021E 2019 2020E 2021E 2019 2020E 2021E 2019 2020E 2021E (US$ mn) Electric Utilities CESC BUY 769 830 8 102 1.5 133 90 104 114 34.6 14.8 9.7 8.5 7.4 6.8 6.5 5.6 5.2 0.8 0.8 0.7 9.9 10.8 10.9 1.7 1.7 1.8 4.6 JSW Energy REDUCE 70 65 (7) 115 1.7 1,640 4.2 6.2 5.8 36 49 -7.4 16.8 11.3 12.2 6.3 4.9 4.4 1.0 0.9 0.8 6.0 8.3 7.1 — — — 0.7 NHPC ADD 24 27 13 240 3.5 10,260 2.5 2.9 3.1 3.7 17 5.1 9.4 8.1 7.7 7.8 7.0 6.9 0.8 0.8 0.7 8.5 9.4 9.5 6.0 6.3 6.6 1.2 NTPC BUY 130 165 27 1,282 18.7 9,895 11.2 11.5 13.2 7.4 2.2 14.8 11.5 11.3 9.8 11.5 9.6 7.9 1.2 1.1 1.0 10.6 10.2 11.0 4.7 2.7 3.0 23 Power Grid BUY 201 235 17 1,053 15.3 5,232 19 21 23 20 8.5 11.2 10.6 9.8 8.8 7.2 7.4 6.9 1.8 1.6 1.5 17.5 17.3 17.4 4.1 3.6 4.0 21 Tata Power BUY 69 85 24 186 2.7 2,705 2.1 5.0 6.8 (60.5) 138 34 33 13.6 10.2 10.1 8.7 8.6 1.1 1.0 0.9 3.6 7.8 9.6 — — — 7.6 Electric Utilities Attractive 2,978 43.4 9.0 10.6 12.3 11.4 10.3 9.2 1.3 1.2 1.1 11.0 11.3 11.7 4.0 3.0 3.3 57 Fertilizers & Agricultural Chemicals Bayer Cropscience SELL 3,402 3,000 (12) 117 1.7 34 69 96 114 (20.8) 38 19 49 36 30 30 22 18 6.2 5.5 4.8 13.0 16.3 17.1 0.5 0.6 0.7 0.4 Dhanuka Agritech ADD 411 435 6 20 0.3 48 24 25 27 (8.0) 4.1 10.7 17.4 16.7 15.1 13 10.7 9.2 3.0 2.7 2.4 17.7 17.1 16.6 0.3 1.2 1.3 0.2

Godrej Agrovet ADD 494 540 9 95 1.4 192 11.5 14.7 18 (0.5) 28 25 43 34 27 21 17 14 4.6 4.2 3.7 11.8 13.0 14.4 0.9 0.7 0.9 0.7 -

PI Industries ADD 1,126 1,165 3 155 2.3 138 30 39 47 11.6 32 19 38 29 24 27 21 17 6.8 5.7 4.8 19.5 22 21 0.4 0.5 0.6 2.3 9, 2019 July Rallis India ADD 153 160 4 30 0.4 195 8.4 9.8 10.6 (2.2) 16 8.9 18.2 15.7 14.4 11.9 10.8 9.3 2.3 2.1 1.9 13.2 14.1 14.0 1.6 1.8 2.0 0.5 UPL SELL 662 520 (21) 506 7.4 761 25 38 43 (12.9) 52 14.5 27 17.6 15.4 19 10.2 8.7 3.4 3.1 2.7 15.9 18.6 18.9 0.8 1.3 1.8 38 Fertilizers & Agricultural Chemicals Attractive 922 13.4 (9.4) 43 16 30 21 18.4 20 12 10.2 4.0 3.6 3.2 13.3 17.0 17.2 0.7 1.0 1.4 42

Gas Utilities GAIL (India) BUY 302 440 46 681 9.9 2,255 28 31 33 37 10.1 7.2 10.8 9.8 9.2 7.1 6.2 5.7 1.5 1.4 1.3 14.9 15.0 14.6 2.7 3.1 3.5 25 GSPL SELL 183 170 (7) 103 1.5 564 14.1 13.8 13.3 19 (1.8) (4.2) 13.0 13.2 13.8 5.4 5.2 5.0 1.8 1.6 1.5 14.7 12.9 11.2 1.1 1.1 1.1 1.2 Indraprastha Gas SELL 297 260 (12) 208 3.0 700 12.0 14.1 16 17 18 12.4 25 21 18.7 16 14 11.8 5.0 4.4 3.8 22 22 22 0.8 1.0 1.3 9.0

Mahanagar Gas ADD 792 950 20 78 1.1 99 56 61 64 16 8.2 4.7 14.1 13.0 12.5 8.4 7.4 6.9 3.3 2.9 2.6 25 23 22 2.5 3.1 3.6 4.5 Petronet LNG BUY 246 270 10 369 5.4 1,500 15 17 19 8.3 14.7 10.6 16.4 14.3 12.9 10.4 8.7 7.7 3.7 3.3 3.0 22 24 24 4.1 3.2 3.9 8.3 Gas Utilities Attractive 1,440 21.0 24 11.7 7.5 13.5 12.1 11.3 8.4 7.3 6.6 2.2 2.0 1.8 16.0 16.2 15.8 2.6 2.7 3.1 47 Health Care Services Apollo Hospitals ADD 1,303 1,365 5 181 2.6 139 17 26 34 101 55 29 77 49 38 20 18 15 5.4 5.1 4.7 7.2 10.7 12.8 0.5 0.7 0.9 12.2 Aster DM Healthcare BUY 118 240 104 60 0.9 505 6.6 7.7 11.6 140 17 49 17.8 15.2 10.2 9.5 8.0 6.3 1.9 1.7 1.5 11.1 11.5 15.3 — — — 1.5 Dr Lal Pathlabs SELL 1,119 925 (17) 93 1.4 83 24 27 32 17 13.8 18 47 41 35 29 25 21 9.9 8.4 7.2 23 22 22 0.5 0.6 0.7 1.5 HCG BUY 141 245 74 12 0.2 85 (3.5) (1.8) 0.5 (322) 47 126 NM NM 292 15 13 10.9 2.2 2.3 2.2 NM NM 0.8 — — — 0.1 Narayana Hrudayalaya BUY 233 265 14 48 0.7 204 1.9 4.5 7.5 (25) 139 64 123 51 31 20 16 12 4.4 4.1 3.6 3.7 8.3 12.2 — — — 0.4 Health Care Services Attractive 394 5.7 58 36 39 51 37 27 17 15 12 4.3 4.0 3.6 8.5 10.7 13.4 0.3 0.5 0.6 15.7 Hotels & Restaurants Coffee Day Enterprises NR 225 — — 48 0.7 211 2.9 3.5 8.1 (12.5) 19 132 77 65 28 16 9.2 8.8 1.9 1.0 1.0 2.5 2.0 3.6 — — — 0.5 Jubilant Foodworks BUY 1,245 1,410 13 164 2.4 132 24 30 41 66 26 35 52 41 30 26 21 16 13 10 8.1 29 28 30 0.4 0.4 0.6 23 Lemon Tree Hotels ADD 66 86 30 52 0.8 789 0.3 1.1 2.3 51 297 116 242 61 28 37 21 14 5.9 5.4 4.9 2.5 9.3 18.3 — — 1.4 0.8 Hotels & Restaurants Attractive 264 3.8 45 40 60 66 47 29 23 16 13 5.7 3.6 3.3 8.6 7.7 11.3 0.2 0.2 0.6 24 Insurance HDFC Life Insurance ADD 463 450 (3) 934 13.6 2,008 6.4 7.4 8.5 15 16 14.6 73 63 55 — — — 16 15 13 25 25 26 0.4 0.4 0.5 15.8 ICICI Lombard SELL 1,069 750 (30) 486 7.1 454 23 28 35 22 23 22 46 38 31 — — — 9.1 7.8 6.6 21 22 23 0.6 0.7 0.8 19.5 ICICI Prudential Life BUY 381 500 31 548 8.0 1,436 6.7 7.5 8.8 (40) 11.7 17 57 51 43 — — — 7.5 6.7 5.9 13.9 13.9 14.5 0.3 0.3 0.0 10.5 Max Financial Services BUY 400 530 32 108 1.6 269 1.8 5.4 5.3 (65.8) 197 -3.5 218 74 76 — — — 2.5 7.2 6.6 0.0 0.5 0.5 3.6 SBI Life Insurance BUY 759 800 5 759 11.1 1,000 13.3 15 18 15 17 14.8 57 49 43 — — — 10 8.7 7.4 19.0 19.1 18.7 0.3 0.3 0.4 9.7 Insurance Attractive 2,834 41.3 (4.4) 19 16 61 51 44 10 9.0 7.9 16.8 17.6 18.0 0.2 0.3 0.3 59 Source: Company, Bloomberg, Kotak Institutional Equities estimates

52 KOTAK INSTITUTIONAL EQUITIES RESEARCH

52

Kotak Institutional Equities: Valuation summary of KIE Universe stocks

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

Company Rating 8-Jul-19 (Rs) (%) (Rs bn) (US$ bn) (mn) 2019 2020E 2021E 2019 2020E 2021E 2019 2020E 2021E 2019 2020E 2021E 2019 2020E 2021E 2019 2020E 2021E 2019 2020E 2021E (US$ mn) Internet Software & Services Info Edge REDUCE 2,237 1,870 (16) 273 4.0 122.0 26 31 37 14.7 20 20 87 72 60 76 54 44 12 11 9.4 14.2 15.4 16.6 0.2 0.3 0.4 7.1 Just Dial REDUCE 772 590 (24) 50 0.7 64.8 32 31 33 50 (1.9) 5.4 24 25 23 16 16 14 5.0 4.2 3.7 21 18.6 16.8 0.0 0.4 0.4 45 Internet Software & Services Attractive 323 4.7 25 11.4 15 62 56 48 52 42 36 9.7 8.6 7.6 15.7 15.4 15.7 0.1 0.4 0.4 52 IT Services HCL Technologies ADD 1,039 1,200 15 1,409 20.5 1,377 73 79 84 18 7.8 7.0 14.2 13.2 12.3 9.6 8.1 7.6 3.4 2.9 2.5 26 24 22 0.8 3.0 3.2 32 Hexaware Technologies REDUCE 358 345 (4) 107 1.6 302 19 21 24 17 8.0 16 18.6 17.2 14.7 13 12 10.4 4.5 4.1 3.6 27 25 26 2.4 2.8 2.8 5.9 Infosys ADD 718 750 5 3,133 45.6 4,353 35 38 43 9.5 6.9 13.3 20 19.0 16.7 14 13 11.7 4.8 4.9 4.5 24 25 28 4.3 3.1 3.3 90 L&T Infotech ADD 1,632 1,940 19 283 4.1 176 86 93 106 36 7.0 15.0 18.9 17.6 15.3 14 13 10.8 5.9 4.9 4.1 35 30 29 1.5 1.8 2.0 4.9 Mindtree REDUCE 769 930 21 126 1.8 165 46 46 58 33 1.4 25 16.8 16.6 13.3 10.9 9.7 7.7 3.8 3.3 2.9 25 22 23 1.7 1.8 2.3 19.8 Mphasis REDUCE 966 930 (4) 180 2.6 191 56 63 66 28 12.8 4.2 17.2 15.3 14.6 13 10.5 9.8 3.5 3.1 2.9 20 21 20 2.8 3.1 3.5 3.1 TCS REDUCE 2,175 1,940 (11) 8,163 118.8 3,790 83 93 101 23 12.1 8.9 26 23 21 19 17 16 9.0 8.4 7.9 35 37 38 1.4 3.0 3.3 93 Tech Mahindra ADD 680 850 25 604 8.8 901 48 54 61 11.9 12.1 13.1 14.3 12.7 11.2 8.3 7.5 6.4 3.0 2.7 2.4 22 22 23 2.1 2.1 2.4 32 Wipro REDUCE 267 270 1 1,611 23.5 6,021 15.0 18 19 18 17 9.9 17.8 15.2 13.9 11.4 10.3 9.0 2.8 2.8 2.3 17.2 18.2 18.2 0.6 0.6 0.7 33 IT Services Cautious 15,616 227.3 16 8.5 9.9 21 19.3 17.6 15 13 12 5.4 5.1 4.6 26 27 26 1.9 2.7 2.9 313 Media DB Corp. ADD 190 210 11 33 0.5 175 16 20 23 (11.0) 30 14.4 12.1 9.3 8.1 6.4 5.1 4.5 1.8 1.9 1.8 14.6 19.9 23 5.3 6.6 7.9 0.2 DishTV REDUCE 28 33 17 52 0.8 1,925 3.1 0.8 1.3 160 (74.0) 59 9.1 35 22 3.0 3.1 2.7 10 7.7 5.4 83 25 29 — — — 10.3 Jagran Prakashan REDUCE 106 110 4 31 0.5 296 8.9 11.1 13.0 (8.1) 25 17 12.0 9.6 8.2 5.0 4.1 3.5 1.7 1.7 1.6 13.4 17.6 20 4.7 8.5 8.5 0.3 PVR RS 1,619 — — 76 1.1 48 37 51 65 38 37 28 44 32 25 16 12 10.5 6.3 5.4 4.5 15.5 18.3 19.8 0.2 0.3 0.4 9.9 Sun TV Network REDUCE 472 575 22 186 2.7 394 36 36 40 26 (0.4) 10.6 13.0 13.0 11.8 8.5 8.2 7.3 3.5 3.1 2.8 29 25 25 3.2 3.7 4.2 17.9 Zee Entertainment Enterprises REDUCE 335 365 9 321 4.7 960 17 18 20 9.9 10.0 12.5 20 18.4 16.4 11.6 11.0 9.6 3.6 3.3 2.9 19.2 18.7 18.8 1.0 1.3 1.6 65 Media Attractive 700 10.2 22 -1.8 15.0 16.1 16.4 14.3 8.0 7.6 6.7 3.6 3.3 2.9 22 19.8 20 1.8 2.3 2.7 103 Metals & Mining Hindalco Industries BUY 198 245 24 444 6.5 2,224 25 22 26 13.0 (12.2) 18 8.0 9.1 7.7 5.3 5.5 4.8 0.8 0.7 0.7 9.8 8.1 8.8 0.6 0.6 0.6 22 Hindustan Zinc REDUCE 229 220 (4) 969 14.1 4,225 19 19 19 (12.4) (1.5) 1.2 12.2 12.4 12.2 7.5 7.3 7.2 2.9 3.1 3.3 23 24 26 8.7 8.7 8.7 2.7 Jindal Steel and Power REDUCE 135 150 11 131 1.9 968 (1.7) 2.7 7.0 80 258.8 154 NM 49 19.4 6.5 6.5 5.8 0.4 0.4 0.4 NM 0.8 2.0 — — — 28 JSW Steel REDUCE 262 255 (3) 634 9.2 2,400 32 16 23 18 (49) 43 8.2 16.3 11.4 5.8 8.1 6.9 1.8 1.7 1.5 24 10.7 14.0 1.6 1.6 1.6 26 National Aluminium Co. BUY 48 60 26 89 1.3 1,866 9.3 5.3 5.0 81 (42.9) (5.7) 5.1 9.0 9.6 1.8 3.2 3.3 0.8 0.8 0.8 16.5 9.3 8.6 12.0 6.7 6.3 5.6 NMDC REDUCE 107 106 (1) 327 4.8 3,062 14.7 14.3 11.2 26 (3) (21.4) 7.3 7.5 9.5 4.2 4.4 5.4 1.3 1.2 1.1 17.9 16.2 11.8 5.2 5.4 4.2 6.8 Tata Steel ADD 468 515 10 532 7.7 1,146 91 66 71 31 (27.6) 7.7 5.1 7.1 6.6 5.1 5.5 5.3 0.8 0.7 0.7 16.7 10.9 11.4 2.1 2.1 2.1 78 Vedanta BUY 162 225 39 602 8.8 3,717 15 26 27 (28.9) 70 2.9 10.6 6.2 6.0 5.5 4.5 4.6 1.0 0.9 0.9 9.1 15.4 15.4 11.6 12.3 12.3 26 Metals & Mining Attractive 3,728 54.3 7.5 (9.0) 8.8 8.6 9.4 8.7 5.5 5.7 5.5 1.2 1.1 1.0 13.4 11.6 12.0 5.5 5.5 5.4 58

Source: Company, Bloomberg, Kotak Institutional Equities estimates Daily Summary India

KOTAK INSTITUTIONAL EQUITIES RESEARCH EQUITIES INSTITUTIONAL KOTAK

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July 9, 9, 2019 July

KOTAK INSTITUTIONAL EQUITIES RESEARCH 53

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

KOTAK INSTITUTIONAL EQUITIES RESEARCH EQUITIES INSTITUTIONAL KOTAK Company Rating 8-Jul-19 (Rs) (%) (Rs bn) (US$ bn) (mn) 2019 2020E 2021E 2019 2020E 2021E 2019 2020E 2021E 2019 2020E 2021E 2019 2020E 2021E 2019 2020E 2021E 2019 2020E 2021E (US$ mn) Oil, Gas & Consumable Fuels BPCL SELL 361 310 (14) 783 11.4 1,967 36 32 34 (10) (11.6) 5.8 10.0 11.3 10.6 7.6 8.5 7.9 1.9 1.8 1.6 20 16.4 16.0 4.0 3.6 3.8 36 Coal India BUY 232 290 25 1,432 20.9 6,163 28 31 31 151 10.0 0.5 8.2 7.5 7.4 5.5 5.9 5.4 5.4 5.2 5.0 69 71 68 5.6 10.8 10.8 28 HPCL SELL 283 220 (22) 431 6.3 1,524 40 28 30 (5) (29.3) 7.2 7.1 10.1 9.4 6.1 8.7 8.5 1.5 1.4 1.3 23 14.6 14.5 5.6 4.0 4.3 29 IOCL SELL 144 135 (6) 1,356 19.7 9,442 18 15 16 (12) (15.8) 5.7 8.0 9.5 9.0 5.1 5.7 5.6 1.3 1.1 1.1 15.5 12.4 12.3 6.2 4.2 4.4 25 Oil India BUY 167 240 44 181 2.6 1,084 30 33 33 22.0 8.6 (0.2) 5.5 5.1 5.1 3.4 3.2 3.2 0.7 0.6 0.6 11.7 12.4 11.7 6.0 8.8 8.8 3.6 ONGC BUY 152 210 38 1,917 27.9 12,580 24 25 25 38 3.5 (0.9) 6.4 6.1 6.2 3.5 3.3 3.0 0.8 0.8 0.7 13.0 12.7 11.7 4.6 5.6 5.6 31 Reliance Industries SELL 1,252 1,100 (12) 7,421 108.0 5,926 66 75 87 11.7 14.3 16 19.0 16.6 14.3 10.3 8.9 7.5 1.9 1.7 1.6 10.4 9.8 10.3 0.5 0.5 0.6 181 Oil, Gas & Consumable Fuels Attractive 13,522 196.9 19 2.5 6.8 11.3 11.0 10.3 6.6 6.4 5.8 1.6 1.5 1.3 14.1 13.3 13.1 2.6 3.1 3.1 332 Pharmaceuticals Aurobindo Pharma ADD 587 760 30 344 5.0 584 40 61 63 (3.1) 50 3.8 14.5 9.7 9.3 9.8 7.3 6.8 2.5 2.0 1.7 18.5 21 18.1 0.9 1.1 1.3 30

Biocon SELL 240 185 (23) 288 4.2 1,202 6.1 7.2 8.8 96 18 22 40 33 27 21 17 14 4.3 3.9 3.5 11.8 12.3 12.9 0.9 1.0 1.3 16.1 -

Cipla BUY 538 600 11 434 6.3 805 19 27 34 8.3 42 24 28 20.0 16.1 15 11.3 9.2 2.8 2.5 2.3 10.2 13.4 14.1 0.7 1.0 1.3 18.9 9, 2019 July Dr Reddy's Laboratories REDUCE 2,596 2,450 (6) 431 6.3 166 113 160 153 92 41 -4.5 23 16.2 16.9 14 11.1 8.2 3.1 2.6 2.3 14.1 16.3 13.8 0.8 0.8 0.9 29 Laurus Labs BUY 341 430 26 36 0.5 106 11.0 20 28 (30.9) 79 43 31 17.3 12.2 13 9.2 7.3 2.3 2.0 1.7 7.6 12.5 14.4 — — — 0.3 Lupin ADD 734 840 14 332 4.8 450 21 30 41 (45) 42 39 35 25 17.8 13 10.4 8.2 2.4 2.2 2.0 6.9 9.3 11.3 0.3 0.6 0.8 22

Sun Pharmaceuticals ADD 367 460 25 881 12.8 2,406 16 20 24 6.3 23 23 23 18.5 15.0 12 9.1 7.3 2.1 1.9 1.7 9.8 11.0 11.5 0.6 1.1 1.3 41 Torrent Pharmaceuticals ADD 1,534 1,840 20 260 3.8 169 26 54 71 -35.7 110 32 60 28 21 14 13 10.8 5.5 4.9 4.3 9.2 17.5 20 1.3 1.5 1.7 7.1 Pharmaceuticals Neutral 3,006 43.8 4.1 39 17 25 18.2 15.6 13 10.1 8.3 2.7 2.4 2.1 10.7 13.1 13.6 0.7 1.0 1.2 163 Real Estate

Brigade Enterprises BUY 271 290 7 37 0.5 136 18 22 28 59 27 26 15.4 12.1 9.6 9.7 8.5 6.6 1.7 1.5 1.3 10.8 13.2 14.7 0.9 0.9 0.9 0.3 DLF ADD 182 200 10 426 6.2 2,207 5.9 8.4 11.1 (76) 41.2 33 31 22 16.4 25 20 17 1.2 1.2 1.1 3.8 5.4 6.9 1.1 1.1 1.1 38 Embassy Office Parks REIT ADD 373 365 (2) 288 4.2 22,904 0.2 14.8 18 (97) 9,197 20 2,338 25 21 22 19 17 37 1.3 1.3 2.8 5.0 6.2 — 6.1 7.0 0.0 Godrej Properties NR 889 - (100) 224 3.3 229 11.0 17 17 2 57 -4.4 81 51 54 140 51 67 8.3 7.1 6.3 10.8 14.9 12.5 — — — 8.9 Oberoi Realty ADD 553 570 3 201 2.9 364 22 29 41 24 27 42 25 19.3 13.6 19 16 10.4 2.5 2.2 1.9 11.6 12.2 15.2 0.4 0.4 0.4 4.0 Prestige Estates Projects ADD 256 320 25 96 1.4 375 8.7 13.8 21 (12) 59 53 29 18.5 12.1 12 10.4 8.2 2.3 2.1 1.8 7.3 11.7 15.7 0.6 0.6 0.6 1.8 Sobha ADD 551 580 5 52 0.8 95 31 36 40 36 14.7 11 17.6 15.4 13.8 11.1 10.9 9.8 2.3 2.1 1.9 11.9 14.4 14.3 1.3 1.3 1.3 2.8 Sunteck Realty REDUCE 438 428 (2) 64 0.9 140 16 27 33 6.0 65 25 27 16.4 13.2 18 11.2 7.9 2.2 1.9 1.7 8.3 12.4 13.7 0.2 0.2 0.2 2.3 Real Estate Neutral 1,389 20.2 (41) 56 29 36 23 18.0 21 17 14 1.8 1.7 1.6 4.9 7.3 8.9 0.5 1.8 1.9 58 Retailing Aditya Birla Fashion and Retail BUY 210 220 5 162 2.4 773 4.2 2.8 4.1 173 -33.3 48 51 76 51 32 25 21 11 9.9 8.3 25 13.9 17.5 — — — 1.8 Avenue Supermarts SELL 1,393 965 (31) 869 12.7 624 14.5 20 26 11.9 37 31 96 70 54 53 40 31 16 13 10 17.6 19.9 21 — — — 0.0 Titan Company REDUCE 1,252 1,000 (20) 1,112 16.2 888 17 22 26 32 28 22 74 58 48 52 40 32 18 15 13 27 28 29 0.4 0.5 0.6 37 Retailing Cautious 2,144 31.2 32 24 27 79 64 50 50 38 30 16 14 11 21 21 22 0.2 0.2 0.3 38 Speciality Chemicals Castrol India SELL 126 145 15 124 1.8 989 7.2 7.7 8.1 4.2 7.7 5.4 17.5 16.3 15.5 11.6 9.8 9.3 11 9.8 8.9 65 63 60 4.0 4.4 4.6 2.3 Pidilite Industries REDUCE 1,200 1,025 (15) 609 8.9 508 18 22 26 (3.9) 26 18 68 54 46 44 35 30 15 13 11 23 25 26 0.5 0.7 0.8 11.6 S H Kelkar and Company BUY 128 190 49 18 0.3 145 6.1 7.6 9.0 (17.3) 24 19 21 16.9 14.2 16 12 10.1 2.1 2.0 1.8 10.3 12.2 13.3 1.4 1.6 2.2 0.3 SRF BUY 2,881 2,850 (1) 166 2.4 57 112 141 165 39 26 17 26 20 17.4 14 12.0 10.3 4.0 3.4 2.9 16.7 18.1 18.1 0.4 0.5 0.6 15.1 Speciality Chemicals Neutral 918 13.4 7.0 21 14.3 39 33 28 24 20 17 8.9 7.8 6.7 23 24 24 1.0 1.2 1.3 29 Source: Company, Bloomberg, Kotak Institutional Equities estimates

54 KOTAK INSTITUTIONAL EQUITIES RESEARCH

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Kotak Institutional Equities: Valuation summary of KIE Universe stocks

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

Company Rating 8-Jul-19 (Rs) (%) (Rs bn) (US$ bn) (mn) 2019 2020E 2021E 2019 2020E 2021E 2019 2020E 2021E 2019 2020E 2021E 2019 2020E 2021E 2019 2020E 2021E 2019 2020E 2021E (US$ mn) Telecommunication Services Bharti Airtel ADD 357 380 7 1,829 26.6 3,997 (6.3) (6.8) (1.7) NM NM NM NM NM NM 11.5 9.5 7.9 2.0 2.1 2.2 NM NM NM 0.7 1.7 1.7 39 Bharti Infratel REDUCE 263 275 5 486 7.1 1,850 13.1 13.0 14.6 (4.6) (0.8) 12.2 20 20 18.0 8.2 8.3 7.5 3.3 3.6 3.4 15.4 17.1 19.5 5.9 3.9 4.5 11.8 Vodafone Idea ADD 11 16 40 329 4.8 8,736 (19.1) (0.6) (4.0) NM NM NM NM NM NM 36 12 9.4 0.2 0.4 0.5 NM NM NM — — — 19.3 Tata Communications ADD 454 615 35 129 1.9 285 (10.3) (0.1) 3.3 NM 99 3,040 NM NM 139 8.7 7.9 7.3 NM NM -312.1 NM 1.8 NM 1.4 1.7 1.7 2.4 Telecommunication Services Cautious 2,773 40.4 NM 6.6 34 NM NM NM 13 9.8 8.2 1.9 1.5 1.6 NM NM NM 1.4 1.8 1.9 72 Transportation Adani Ports and SEZ REDUCE 398 398 0 824 12.0 2,071 22 23 26 17 8.2 11.8 18.3 17.0 15.2 15 13 11.0 3.4 2.9 2.6 19.7 18.5 18.1 0.5 1.3 1.3 24 Container Corp. SELL 554 495 (11) 338 4.9 609 16 18 22 12.1 8.2 22 34 31 26 24 18 15 3.3 3.1 2.9 10.1 10.1 11.6 1.5 1.7 1.7 5.7 Gateway Distriparks BUY 125 180 44 14 0.2 109 6.8 6.9 9.1 (11.1) 2 32 18.5 18.1 13.7 26 8.5 7.1 1.0 1.0 0.9 6.3 5.5 6.7 3.6 2.4 2.4 0.3 Gujarat Pipavav Port BUY 81 119 47 39 0.6 483 4.3 5.3 6.4 3.6 25 20 19.1 15.3 12.7 8.8 7.5 6.4 1.9 1.9 1.9 10.2 12.6 14.9 4.7 5.7 6.8 0.4 InterGlobe Aviation REDUCE 1,571 1,575 0 604 8.8 383 4 70 98 (93) 1,612 41 385 22 16.0 NM 14 9.0 8.7 6.2 4.6 2.2 32 33 — 0.2 0.6 50 Mahindra Logistics REDUCE 467 500 7 33 0.5 71 12.5 16 20 26 28 27 37 29 23 22 17 13 6.7 5.7 4.7 19.5 21 22 — — — 1.1 Transportation Attractive 1,852 27.0 (18) 51 22 31 20 16.7 22 13 10.7 4.1 3.5 3.0 13.2 17.1 18.1 0.6 1.1 1.2 82 KIE universe 113,079 1645.9 12.0 30 18 24 18.8 16.0 11.1 9.9 8.8 2.8 2.5 2.3 11.5 13.5 14.4 1.4 1.7 1.9

Notes: (a) We have used adjusted book values for banking companies. (b) 2019 means calendar year 2018, similarly for 2020 and 2021 for these particular companies. (c) Exchange rate (Rs/US$)= 68.69

Source: Company, Bloomberg, Kotak Institutional Equities estimates India Daily Summary Daily Summary India

KOTAK INSTITUTIONAL EQUITIES RESEARCH EQUITIES INSTITUTIONAL KOTAK

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July 9, 9, 2019 July

KOTAK INSTITUTIONAL EQUITIES RESEARCH 55 Disclosures n a merger or strategic transaction any, noare longer in effect for this stock Asof March 2019 31, , if, fair value , any, if for this stock,because is there notsufficient a

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Percentageof companies covered by Kotak Equities,Institutional within the specified category. Percentageof companies within each category whichfor Kotak Institutional Equities and or its affiliates has provided investment banking services within the previousmonths. 12 The * above categories are defined as expectfollows: this = Buy We stock to deliver more than 15% returns theover next months; 12 Add = expectWe this stock to deliver 5-15% returns over the next months; 12 Reduce =expectWe this stock to deliver -5-+5% returns over the next months; 12 =Sell expectWe this stock to deliver lessthan -5% returns over the next months. 12 targetOur prices are also on a 12-month horizon Thesebasis. ratings are used illustratively to comply with applicableregulations. As of 31/03/2019 Kotak InstitutionalEquities Investment Research had investmentratings on 204 equity securities. luded

pended temporarily.Such suspension is in compliance with applicable regulation(s) r r display is not or applicable. months. . The previous investment and rating

SELL 0.0% fair valuefair

20.6%

term volatility in stock prices related to movements in the market.Hence, a particular Ratingmay not , if, any,have been sus - h analyst’s fundamental overall outlook on the Sector.The coverage viewwill consist of one of the following fair valuefair 0.5% +5% returns over the next 12 months. 22.5%

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

take into account short ADD 28.9% 3.4% Kotak SecuritiesKotak has suspended coverage of this company.

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

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Kotak SecuritiesKotak does not cover this company.

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Attractive, Neutral, Cautious. BUY 4.4% 27.9% is company and in certain other circumstances. We expect this stock to deliver

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

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

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

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We and our affiliates, officers, directors, and employees, including persons involved in the preparation or issuance of this material, may from time to time have "long" or "short" positions in, act as principal in, and buy or sell the securities or derivatives thereof of companies mentioned herein. Kotak Securities Limited and its non US affiliates may, to the extent permissible under applicable laws, have acted on or used this research to the extent that it relates to non US issuers, prior to or immediately following its publication. Foreign currency denominated securities are subject to fluctuations in exchange rates that could have an adverse effect on the value or price of or income derived from the investment. In addition, investors in securities such as ADRs, the value of which are influenced by foreign currencies affectively assume currency risk. In addition options involve risks and are not suitable for all investors. Please ensure that you have read and understood the current derivatives risk disclosure document before entering into any derivative transactions. Kotak Securities Limited established in 1994, is a subsidiary of Kotak Mahindra Bank Limited. Kotak Securities is one of India's largest brokerage and distribution house. Kotak Securities Limited is a corporate trading and clearing member of Bombay Stock Exchange Limited (BSE), National Stock Exchange of India Limited (NSE), Metropolitan Stock Exchange of India Limited (MSE), National Commodity and Derivatives Exchange (NCDEX) and Multi Commodity Exchange(MCX). Our businesses include stock broking, services rendered in connection with distribution of primary market issues and financial products like mutual funds and fixed deposits, depository services and Portfolio Management. Kotak Securities Limited is also a depository participant with National Securities Depository Limited (NSDL) and Central Depository Services (India) Limited (CDSL). Kotak Securities Limited is also registered with Insurance Regulatory and Development Authority as Corporate Agent for Kotak Mahindra Old Mutual Life Insurance Limited and is also a Mutual Fund Advisor registered with Association of Mutual Funds in India (AMFI). Kotak Securities Limited is registered as a Research Analyst under SEBI (Research Analyst) Regulations, 2014. We hereby declare that our activities were neither suspended nor we have defaulted with any stock exchange authority with whom we are registered in last five years. However SEBI, Exchanges and Depositories have conducted the routine inspection and based on their observations have issued advise letters or levied minor penalty on KSL for certain operational deviations. We have not been debarred from doing business by any Stock Exchange / SEBI or any other authorities; nor has our certificate of registration been cancelled by SEBI at any point of time. We offer our research services to primarily institutional investors and their employees, directors, fund managers, advisors who are registered with us Details of Associates are available on website i.e. www.kotak.com Research Analyst has served as an officer, director or employee of subject company(ies): No We or our associates may have received compensation from the subject company(ies) in the past 12 months. We or our associates have managed or co-managed public offering of securities for the subject company(ies) in the past 12 months. YES. Visit our website for more details We or our associates may have received compensation for investment banking or merchant banking or brokerage services from the subject company(ies) in the past 12 months. We or our associates may have received any compensation for products or services other than investment banking or merchant banking or brokerage services from the subject company(ies) in the past 12 months. We or our associates may have received compensation or other benefits from the subject company(ies) or third party in connection with the research report. Our associates may have financial interest in the subject company(ies). Research Analyst or his/her relative's financial interest in the subject company(ies): No Kotak Securities Limited has financial interest in the subject company(ies) at the end of the month immediately preceding the date of publication of Research Report: Bajaj Auto - YES Nature of Financial interest: Holding equity shares or derivatives of the subject company. Our associates may have actual/beneficial ownership of 1% or more securities of the subject company(ies) at the end of the month immediately preceding the date of publication of Research Report. Research Analyst or his/her relatives has actual/beneficial ownership of 1% or more securities of the subject company(ies) at the end of the month immediately preceding the date of publication of Research Report: No Kotak Securities Limited has actual/beneficial ownership of 1% or more securities of the subject company(ies) at the end of the month immediately preceding the date of publication of Research Report: No Subject company(ies) may have been client during twelve months preceding the date of distribution of the research report. A graph of daily closing prices of securities is available at https://www.moneycontrol.com/india/stockpricequote/ and http://economictimes.indiatimes.com/markets/stocks/stock-quotes. (Choose a company from the list on the browser and select the"three years" icon in the price chart). Kotak Securities Limited. Registered Office: 27 BKC, C 27, G Block, Bandra Kurla Complex, Bandra (E), Mumbai 400051. CIN: U99999MH1994PLC134051, Telephone No.: +22 43360000, Fax No.: +22 67132430. Website: www.kotak.com / www.kotaksecurities.com. Correspondence Address: Infinity IT Park, Bldg. No 21, Opp. Film City Road, A K Vaidya Marg, Malad (East), Mumbai 400097. Telephone No: 42856825. SEBI Registration No: INZ000200137(Member of NSE, BSE & MSE) AMFI ARN 0164, PMS INP000000258 and Research Analyst INH000000586. NSDL/CDSL: IN-DP-NSDL-23-97. Compliance Officer Details: Mr. Manoj Agarwal. Call: 022 - 4285 8484, or Email: [email protected]. Investments in securities market are subject to market risks, read all the related documents carefully before investing. In case you require any clarification or have any concern, kindly write to us at below email ids: Level 1: For Trading related queries, contact our customer service at ‘[email protected]’ and for demat account related queries contact us at [email protected] or call us on: Toll free numbers 18002099191 / 1800222299 and 18002099292 Level 2: If you do not receive a satisfactory response at Level 1 within 3 working days, you may write to us at [email protected] or call us on 022-42858445 and if you feel you are still unheard, write to our customer service HOD at [email protected] or call us on 022-42858208. Level 3: If you still have not received a satisfactory response at Level 2 within 3 working days, you may contact our Compliance Officer (Name: Mr. Manoj Agarwal) at [email protected] or call on 91- (022) 4285 8484. Level 4: If you have not received a satisfactory response at Level 3 within 7 working days, you may also approach CEO (Mr. Kamlesh Rao) at [email protected] or call on 91-(022) 4285 8301. First Cut notes published on this site are for information purposes only. They represent early notations and responses by analysts to recent events. Data in the notes may not have been verified by us and investors should not act upon any data or views in these notes. Most First Cut notes, but not necessarily all, will be followed by final research reports on the subject. There could be variance between the First cut note and the final research note on any subject, in which case the contents of the final research note would prevail. We accept no liability for the contents of the First Cut Notes. For further disclosure please view https://kie.kotak.com/kinsite/index.php